r

SP CI L TT NTION drected to the cautonary notce on ths page that pnb-

shed rungs of the ureau do not have the force and effect
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed case
Treasury Department : : :
ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn 1940-1
NU RY- UN , 1940
7
IN T IS ISSU
Pafe
Introductory Notes .... |f I.W W RSft v U,
Contents TIPD prr
Rungs Nos. 10127-10304
oard of Ta ppeas . . . LOOMNGTON 1-9
Income Ta
Part I ( . Interna Revenue Code and 1939 ct
. 1938 ct)
Part n (1937 and 193 cts) 95-101
Part ID (1935 and 1934 or Pror cts) .... 105-188
mpoyment Ta es 189-219
Msceaneous Ta es
state and Gft Ta es 220-235
Capta Stock Ta es 23 -24
Saes Ta es ( coho, etc.) 247-2 8
Msceaneous Rungs 2 9-323
Inde 325-335
Tbe rungs reported n the Interna Revenue uetn arc for the nformaton of ta payer and ther connse as
bowng the trend of offca opnon n the admnstraton of the oreau ot Interna Revenue the rung other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
sty nterpretaton of the aw whch has not been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury
state of facts upon whch a partcuar case rests. It s especay to be noted that the sam
eery be reached n another case uness a the matera facts arc dentca wth those of the reported case. s t s
not aways feasbe to f
to the entre
rungs pu
Offcers
bed n another case uness a the matera facts arc dentca wth those of the reported case. s t s
asbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
case s dentca wth the reported case. s bearng out ths dstncton, t may be observed that the
hed from tme to tme may appear to reverse rungs prevousy pubshed.
I of the ureau of Interna Revenue are especay cautu
merey on the bass of smarty to a pubshed rung, and shoud base ther |udgment ou the appcaton of a per-
of the aw and Treasury Decsons to a tbe facts n each case. These rungs shoud be used as
the reguatons and Treasury Decsons prevousy
the Pocy of the ureau of Interna Revenue
of the Chef Connse for the ureau of Interna
a rung or decson upon a nove queston or upon a queston n regard
to whch there e sts no prevousy pubshed rung or decson, or for other reasons, are of such mportance aa
to be of genera nterest. It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke, modfy,
revok
amend, or affect n any manner whatever any pubshed rung or decson. In many nstances opnon , of tha
n|e for the ureau of Interna Revenue are not of genera nterest because they announce
ng or no new constructon of the revenue aws hut smpy nopy rungs aready made pubc to certan
Chef Counse for the ureau of Interna
stuatons of fact whch are wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons.
Therefore, the r
Interna Revenue
or empoyee of the ureau of Interna Reveoue as a precedent n tbe
specfcay
Chef Courts ... _._ _

numbers assgned to the pubshed .opnons of the Chef Counse for the ureau of
arc not consecutve. No unpubshed rung or decson w be cted
edent
have
5
cay ndcated, a pubshed rungs and decsons
f Counse for the ureau of nterna Revenue. /
or reed upon by any offcer
of other cases. Uness otherwss
consderaton and approva of the
UNIT D ST T S GO RNM NT PRINTING O IC : W S INGTON : 1940
ar sae by the Superntendent of Documents, Washngton, D. C - - - - See bach of tte for prces
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The Interna Revenue uetn servce for 1940 w consst of weeky
buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treasury
decsons) pertanng to Interna Revenue matters. The semannua
cumuatve buetns w contan a rungs and decsons (ncudng
Treasury decsons) pubshed durng the prevous s months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 3 per year foregn, 4.25. Snge
copes of the weeky uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns
1 to 5, ncusve), 50 cents per copy Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents No. 2, 25 cents
No. 3, 30 cents No. 4, 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to obtan the Interna Revenue uetn servce for
the years 1922 to 1939, ncusve, may do so at prces as foows:
Cumuatve uetn.

Prce.
Year.
rst
months.
Second
months.
(cents)
1922 ---
1-1
1-2
40, 30
II-
11-2
30,40
1924,
III-
III- 2
50, 50
40, 35
40, 30
40, 40
1925
I - 1
I - 2
-2
-
I-1
I-2
1928
vn-
II-2
35, 50
1929 . .- -
III-
IU-2
50, 55
1 930
I -
1 -2
50, 50
-
I-1
II-1
-2
I-2
II-2
05,30
.SO, 30
30, 50
III-1
III-2
50, 0
1S3 -
I -1
-1
I -2
-2
50, 50
55, 45
0, 50
0, 50
1937
1937- 1
1937- 2
1938
1938- 1
1938- 2

1939-1:
Part _--
1939-2
0
50
1
Port 9
1940-1
30

prces as foows: Dgest No. 13 (1922-1924), 0 cents Dgest No. 17

(1925), 25 cents Dgest No. 21 (192 ), 15 cents Dgest No. 22 (1925-
1927), 35 cents: and Dgest (ncome ta rungs ony, pr, 1919, to
December, 1930, ncusve), 1.50.
nqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of
Offce, Washngton, D. C
cnts, Government Prntng
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn 1940-1, n addton to
a decs ons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans opnons of the
Chef Counse, and rungs and decsons pertanng to ncome, estate,
gft, saes, capta stock, e cess profts, empoyment, soca securty, and
msceaneous ta es, as ndcated on the tte page of ths uetn, pub-
shed n the weeky uetns (1940, Nos. 1 to 2 , ncusve) for the
perod anuary 1 to une 30, 1940. It aso contans a cumuatve st
of announcements reatng to decsons of the Unted States oard of
Ta ppeas pubshed n the Interna Revenue uetn Servce from
anuary 1 to une 30, 1940.
Income Ta rungs are prnted n three parts. The rungs n
Part I are prnted as Part I, (Interna Revenue Code and Revenue
ct of 1939) and (Revenue ct of 1938), the aw headngs
/correspondng wth the sectons of the Code and 1939 and 1938 cts,
respectvey, and the reguatons headngs correspondng wth the
secton headngs of Reguatons 103 and the artce headngs of
Reguatons 101. Rungs under the Revenue cts of 1937 and 193
are prnted as Part II, the aw headngs correspondng wth the
secton headngs of those cts and the reguatons headngs corre-
spondng wth the .artce headngs of Reguatons 94. Rungs
under the Revenue cts of 1935 and 1934 or pror cts are prnted
as Part III, the aw headngs correspondng wth the secton head-
ngs of the Revenue ct of 1934 and the reguatons headngs cor-
respondng wth the artce headngs of Reguatons 8 .
Rungs under Ttes III and I of the Soca Securty ct and
under Subchapters and C, Chapter 9, of the Interna Revenue
Code n force pror to anuary 1, 1940, arc pubshed under artce
headngs of Reguatons 91 and 90, respectvey rungs under Sub-
chapters and C, Chapter 9, of the Code n force on and after anuary
1, 1940, are pubshed under the secton headngs of Reguatons 10
and 107, respectvey rungs under the Carrers Ta ng ct of 1937
and under Subchapter , Chapter 9, of the Interna Revenue Code
are pubshed under the artce headngs of Reguatons 100 and
rungs under Tte III of the Revenue ct of 193 Ta on Un|ust
nrchment are coded under the sectons of that ct and the artce
headngs of Reguatons 95.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. coho Ta Unt.
. T. . oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
C. T. Ta es on mpoyment by Carrers.
D. C. Treasury Department crcuar.
( I)
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I
. T state Ta Dvson.
G. C. M. Genera Counse s, ssstant Genera Counse s, or Ch Counse s
memorandum.
I. R. . Interna Revenue uetn.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accord-
ng to conte t.
Mm.- Mmeographed etter.
MS. Msceaneous Dvson.
O. or L. O. Soctor s aw opnon.
O. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
P. T. Processng Ta Dvson.
S. T. Saes Ta Dvson.
S. Sver Ta Dvson.
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
S. S. T. Ta es on mpoyment by others than Carrers.
T. Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
The practce of promugatng Treasury decsons that embody
court decsons reatng to the nterna revenue has been dscontnued.
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD O T PP LS D CISIONS.
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 192 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta deter-
mned by the Commssoner to be due but dsaowed by the oard,
provded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 192 ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Unted States
Court of ppeas for the Dstrct of Coumba however, as to dec-
sons rendered on and after une 7, 1932, pettons for revew must be
fed wthn three months after the decson s rendered. In order
that ta payers and the genera pubc may be nformed as to whether
or not the Commssoner has acquesced n a decson of the oard of
Ta ppeas dsaowng a ta determned by the Commssoner to be
due, announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacqucsced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Decsons so ac-
quesced n shoud be reed upon by offcers and empoyees of the
ureau of Interna Revenue as precedents n the dsposton of other
cases before the ureau.
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CONT NTS
ng.
Treasury decsons:
4958
4950
4900
49S7.III
4871
4972
4973
4974
Court decsons:
1431
1432 _
1433
1434
1423
143
1437
1438
1439
1440
144
1442...
1443
1444
1445
144
1447
1448
1449..
1450
1451
1452
1453
1451
145S
145
1457
1458
Chef Counse s
21718
217 8
21799
218 0
21890
21915
2192
219
219 8
21993
22034
220 9
22113
oard of Ta ppeas:
1205
1542
9832
71 37
71903
Rung No.
1940-1-10134
1940-2-10137
1940-2-1013
19IO-3-10142
1910-4-10152
1940- -101 0
1940-8-10184
1940-10-10195
1940-11-10203
1940-12-10210
1940-14-10224
1940-20-102(50
1940-21-10257
1940-22-10274
1940-22-10289
1940-24-10294
1940-25-10299
1940-1-10128
1940-3-10143
1940-3-1014
1940-4-10150
1940-4-10149
194O-5-10157
1940-5-1015
1940-8-101 8
1940-7-10173
1940-7-10175
1940-7-1017
1940-8-10182
1940-10-10193
1940-11-10199
1940-11-10200
1940-11-10201
1940-11-10202
1940-13-1021
1940-14-10220
1940-15-10229
1940-15-10230
1940-17-10241
1940-19-10253
1940-19-10254
1940 20-10258
1940 23-10281
1940-23-10283
1940-25-10303
1940-17-10210
1940-4-10148
1940-2-10138
194O-2-10139
1940-8-10179
1940-18-1024
1940-13-10213
1940-25-10298
19W-11-10198
1940-1 -10237
1940-19-10251
1040-18-10247
1940-25-10297
1940-24-10289
1940-24-10293
1940-2 -10302
1940-8-10177
1940-13-10212
1940-8-10177
1940-8-10177
1940-13-10212
1940-13-10212
1940-25-10295
Pafo.
74
33
n
382
49
2n
27
13
220
271
43
M
174
23
47

2 9
13
151
237
127
118
18
U1
15
109
22,1
m
349
244
1 ,. ,
1 2
178
187
138
.r,
IIS
134
1 8
172
175
2
108
2 8
123
07
110
2
158
159
181
85
IIS
157
180
7
150
90
100
242
12.1
2
2
2
2
3
2
5
Rung.
oardofTfu ppeas Con.
783 3
79850
80052
81417
83178.
83179.
83180.
83181.
85040.
8517 .
85389.
8577 .
85880.
899 1.
85 4.
8 105.
8 77 .
87138.
87354.
87378.
87 38.
87799.
880 7.
88103.
88290.
8800 .
8801 .
88772.
88773.
88978.
89143.
89 0 .
89703.
89854.
89942.
90002.
90078.
90079.
90174.
90248.
90305.
90354.
90452.
904 .
904S .
90487.
90592..
90 24.
90 72.
90749.
90750.
90751.
9084 .
908 1.
91010.
91102.
91284.
91398.
91412.
91415.
91494.
9149 .
91501.
91543.
91 18.
91 8 .
91793.
Rung No.
Page.
1940-15-1022

1940-1 -10234
5
1940-3-10140

1940-9-10185
M
194O-O-101 4
8
1940- -101 4
9
1940- -101 4
9
1910- -101 4
9
1940-2 -10300

1940-14-10217
9
1940-22-10248
2
1940-18-10244
8.7
1940-2 -10300

1940-3-10140
3
1940-4-1014
8
1940-8-10177

1940-17-10238
,7
1940-22-102 8
.
1940-2-10135

1910-17-10238
,7
1940-19-10250
1
1940-17-10238
7
1910-12-10204

1940-1-10127

1940-22-102 8
2
194O-12-102O4
4,
1940-17-10238
,7
1940-2 -1 100
4
1940-2 -10300
4
1910-22-102 8
5
1940-12-10204
7
194O-24-10285

1940-2-10135
1.2
1940-9-10185
4
19411-9-1018
8
1940-9-10185
8,4
194O-3-I0I40
7
1940-9-10185
4
1940-9-10185
4
1940-1 -10234
7
1940-1-10127

1940-1-10127
2
1940-12-10204
8
1910-14-10217
1,2,3.
5, 7,8
1940-9-10185
2.
1940-14-10217
1,2,3,
.7,8
1940-14-10217
1.2,1,
5, 7.8
1940-14-10217
3
1940-14-10217
2,
1U40-1-10127
2
1910-1 -10234
7,3
1940-1 -10234
7,8
1940-1 -10234
7,8
8
1940-0-101 1
19 M-10127
4
19411-0-101 4
7
1940-7-10171
7
1940-11-1019
8
1940-7-10171

1940-15-10225
7
1940-1-10127
2
1940-22-102 8
3
1940-1-10127
3
f 1940-15-10225
,
( 1940-25-10295
,
1940-17-10218
2
1940-13-10212
4
1940-24-10285
4
1940-8-10177
7
1940-14-10217
5
( )
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3
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I
Rung.
Rung No.
Page.
Rung.
Rung No.
oard of Ta ppeas
Contnued.
91840.
9184
91958
91977
92052
92115.
92177
92212
92225
92289
92331
9230
92387
92414
92429
92435
92489
925 2.
92575
92588
92000
92 04
927 5
92801
92881
92S82
92883
93013
9302
93041
93077
93134
93148
931 4
93208
93209
93210
93211
93231
93232
93248
93257
93330
93331
93332
93333
93334
93335
93404
M O
93575
83018
937 8
93809
93810
93811
93812
93822
93854.
93855
9385
93857
93894
93914
93915
9391
93917
93918
93919
93920
94017
94088
9-1248
94401
94442
94443
94985
95082
1940-14-10217
1940-12-10204
1940-24-10285
1940-15-10225
1940-17-10238
1940-22-102 8
1940-21-102 1
1940-7-10171
1940-12-10204
1940-10-10190
1940- -101 4
1940-4-1014
1940- -101 4
1940-5-10153
1940-13-10212
1940-10-10190
1940-5-10153
1940-2-10135
1940-17-10238
1940-4-1014
1940-25-10295
1940-2-10135
1940-5-10153
1940- -101 4
194O-3-10140
1040-3-10140
1940-3-10140
1940-5-10153
1940-17-10238
1940-13-10212
1940-8-10177
1940-5-10153
1940-15-10225
1940-25-10295
1040-1-10140
1940-19-10250
1940-19-10250
1940-19-10250
1940-19-10250
1940-7-10171
1940-7-10171
1940-13-10212
1940-9-10185
1940-14-10217
1940-7-10171
194O-7-10171
1940-7-10171
1940-7-10171
1940-7-10171
1940-19-10250
1940-17-10238
1940-18-10244
1940-14-10217
1940-18-10244
1940-1 -10234
1940-1 -10234
194O-1 -10234
1940-1 -10234
1940-9-10185
1940-22-102 8
1940-22-102 8
1940-22-102 8
194O-22-102 8
1040-10-10190
1940-10-10190
1940-10-10190
1940-10-10190
1910-10-19190
1940-10-10190
1940-10-10190
1940-10-10190
1940-22-102 8
1940-10-10190
1940-8-10177
1940-4-1014
1940-25-10295
1940-25-10295
1940-5-10153
194O-17-10238
194O-17-10238
1040-2 -10300
4
8
1,4,5,0
1
3
2,7
3.4
2
7
2
8
1
8
7
5
5
5,0
1
3
4
0
2
,7
,8

3
3
3
4.8

5
8
1,2, ,7
2,7
2,7
2,7
2,4
4
2
3,4

4
4
3
1
4
7,8
3
5,0
,9
3

5
5
5

I
4
1
3
1,4
3
2

8
2
e

7
7
5,7
3
3
0
oard of Ta ppeas
Contnued.
05298
05300
95871
95880
95922
9509
9 0 1
9 1 4
9 315
9 331
9 358
9 470
9 741
9 742
78 ,
97232 ,
97247
973
075
Offce decsons (I. T.):
3311
3342
3343
3344 ,
3345
334
3347
3348
3340
3350
3351
3352
3353
3354
3355
335
3357 ,
3358 ,
3359
33 0
33 1
33 2
33 3
33 4.
33 5
33
33 7
33 8.
3309
3370.
3371
3372
3373
3374
3375
337
3377
3378
3379
3380
3381 ,
3382
3383
3384
3385
338
3387
Offce decsons (S. S. T.)
381
382
383 .
384
385.
38
387
388
389
390
391
392
393
1040-2 -10300
1940-2 -10300
1940-25-10295
1040-23-1027
1940-13-10212
1940-8-10177
1940-0-10185
1940-15-10225
1040-10-10250
1940-4-1014
1040-25-10295
1940-22-102 8
1940-5-10153
1040-5-10153
1940-18-10244
1940-15-10225
1940-25-10295
1940-21-102 1
194O-2O-1025
1940-1-10130
1940-3-10141
1940-4 10147
1010-5-10154
1940-5-10155
19-10-0-101 5
1910- -101 0
1040- -101 7
194O- -10170
1940-7-10172
1040-8-10178
1040-8-10180
1010-9-1018
1910-9-10187
1940-10-10191
104O-11-10197
1040-12-10205
1040-12-10200
1940-12-10207
1940-12-10208
1940-13-10214
1940-14-10218
1910-14-10219
1940-15-1022
1910-15-10227
194O-15-10228
1940-1 -1023
1010-17-10239
1940-17-10243
1940-18-10245
1940-10-10252
1940-2O-10257
1940-21-102 2
1940-21-102 3
1940-21-1112 4
1940-21-102 5
19MI-22-10273
1940-22-10270
1940-23-10277
1940-23-10378
1910-23-10280
1940-24-1028
1940-24-10287
1940-24-10288
1940-21-10290
1040-25-1020
1040-2 -10301
1940-1-10133
1340-4-10151
1040-5-10158
1040-0-101 9
1940 12 10209
1940-13-10215
194O-20-10259
1940-21-102
1940-22-10271
1940-23-10282
1940-24-10291
1940-24-10292
1040-20-10304
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II
s( .T.):
14
19
e
17
Offce decsons (S. T.):
895
888
807
889
899
900
ODcedecsons (M.S.):
221
222
223
224
No. Page
1940-3-10144
221
1940-5-10159
234
1940-17-10242
232
1910-22-10272
231
1940-7-10174
257
1940-8-10183
252
1940-9-10188
25
1040-10-10192
255
1940-15-10231
251
1940-19-10255
247
1940-1-10132
300
1940-5-10103
301
1940-10-10191
302
1940-14-10223
303
1940-18-10248
30t
1940-23-10284
305
Rung.
Rung No.
1940-1-10131
30
1940-5-101 1
30
194O-9-10189
30
1940-14-10222
307
1940-18-10249
307
1910-22-10275
307
1940-15-10232
2Sd
1940-5-101 2
52
1940-23-10279
2
1940-1-10129
189
1940-8-10181
203
1910-14-10221
198
1940-1 -10235
14
1940-12-10211
308
1940-15-10233
288
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CONT NTS O CUMUL TI ULL TINS (I. T.) 1 o 5 S. T. O 1920 ND 1921: INT R-
N L R NU 1-1, 1-2. 11-1. II 2. I 1, III-2. I -1. I -2, -, -2. I-1. I-2. II-I. -2, III 1,
1II-2.I -1.I -2. -. -2. I-1. I-2, II-1, II-2, III 1, LI-2. I -1. I -2, -1. -2. 1937-1.
1937-2. 1938-1, 193S-2. 1339-1 (P RT 1 ND P RT 2), 1939-2, 1940-1.
Cumuatve uetn.
Rung Nos.
Income Ta :
December, 1919 (No. 1)
anuarv- une, 1920 (No. 2)
uy-December, 1920 (No. 3)
anuarv- une, 1921 (No. 4)
uv-Dccember, 1921 (No. 5) -
Saes Ta :
1920 (S. T. 1-20)..-
anuarv- une, 1921 ---
uy-December, 1921
Interna Revenue uetn:
anuarv- une, 1922 (No. 1-1).-
uv-Decembcr, 1922 (No. 1-2)
anuarv- une, 1923 (No. II-)
uv-December, 1923 (No. 11-2)
anuary- une, 1924 (No. I 1)-
uy-December, 1924 (No. I-2)
anuarv- une, 1925 (No. I -1)
uy-December, 1925 (No. I -2)
anuarv- une, 192 (No. -)
uv-D ecember, 192 (No. -2)
anuarv- une, 1927 (No. I-1)
uy-December, 1927 (No. I-2)
anuarv- une, 1928 (No. II-1)
uv-D ecember, 1928 (No. II-2)
anuarv- une, 1929 (No. III-1)
uv-Decembcr, 1929 (No. III-2)
anuarv- une, 1930 (No. I -1)
uv-Dccember, 1930 (No. I -2)
anuarv- une, 1931 (No. -)
uv-December, 1931 (No. -2)
anuarv- une, 1932 (No. I-1)
uv-Decembcr, 1932 (No. I-2)
anuarv- une, 1933 (No. II-1)
uv-December, 1933 (No. II-2)
anuarv- une, 1934 (No. III-1)..
uy-December, 1934 (No. III-2)
anuary- une, 1935 (No. I -1)
uv-December, 1935 (No. I -2)
anuarv- une, 193 (No. -1)
uy-December, 193 (No. -2)..
anuarv- une, 1937 (1937-1)
uv-December, 1937 (1937-2)
anuarv- une, 1938 (1938-1)..-
uv-December, 1938 (1938-2)
anuarv- une, 1939 (1939-1 Part 1 and Part 2)
uv-December, 1939 (1939-2) --.
anuarv- une, 1940 (1940-1).
1- 55
5 -1033
1034-13 8
13 9-1710
1711-199
1-112
113-2 5
2 -35
1-383
384- 5
-95
957-127
1277-1 41
1 42-1949
1950-2251
2252-2523
2524-2813
2814-302
3027-3291
3292-3557
3558-3784
3785-4052
4053-4248
4249-4487
4488-4083
4 84-4887
4888-5124
512,5-5338
5339-5531
5532-59 1
59 2- 2 2
2 3- 581
582- 871
872-7224
7225-75 3
75 4-7884
7885-8149
8150-8459
84 0-8792
8793-9118
9119 9424
9425-9 54
9 55-989
9897-1012
10127-10304
(vm)
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O RD O T PP LS.
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T UNIT D ST T S O RD O T
PP LS PU LIS D IN T INT RN L R NU UL-
L TIN S R IC ROM NU RY 1, 1940, TO UN 30, 1940,
INCLUSI .
nnouncements reatng to the acquescence or nonacqueseonce of the Commssoner In
decsons of the Unted States oard of Ta ppeas, as pubshed n tho weeky Interna
Revenue uetns from December 22, 1924, to December 31, 1931, Incusve, are prnted n
Cumuatve uetn -2, pages 1-10 . Those prnted n weeky uetns from anuary 1,1932,
to December 31.1939, ncusve, are pubshed n Cumuatve uetn 1939-2, pages 1-73. The
st beow, therefore, contans ony such announcements pubshed n the weeky uetns from
anuary 1,1940, to une 30, 1940, ncusve.
1940-2 -10300
The Commssoner acquesces n the foowng decsons of the
Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Page.
bbott, ohn, e ecutor of estate of Rchard .
Traser 1
en, Laura, estate of
nderson, ohn, transferee of estate of rank O.
urrdge
pe rewng Co., Inc
ugustus, zabeth G
.
aker, Inc., mert
enaga et us., rthur .
ack Motor Co., Tne
ondhoders Commttee 4.
rggs- an Co
rookman, Murray.
c.
Carter, Shrey, estate of
Cavett et a., ., e ecutors of estate of W.
aes
T.
91958
89703
93334
91977
9 001
923
94401
87 38
97232
90452
9048
90487
925 2
95871
93917
93208
41
40
40
40
40
40
3
41
40
40
41
40
40
228
721
944
1109
1200
554
838
300
881
894
557
749
1244
cquescence reates ony to the oard s mathematca formua for apportonment of the dvdend credt
between the estate and the dstrbutees.
1 state ta decson.
1 Nonacquescence pubshed n Cumuatve uetn 1938-1, page 35, wthdrawn.
cquescence does not reate to Issue respectng bases for deprecaton of pettoners assets.
cquescence s ony as to the Issue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
by them aganst the purchase of stock n the Loca edera Savngs and Loan ssocaton nto whch the
bundng and oan assocaton was converted, represent ncome In 1935 sub|ect to norma ta and surta
Rung No. 10300 Incudes a acquescence and nonacquescenoe notces pubshed n the Interna
Revenue uetn servce from anuary 1,1940, to une 30,1940.
(1)
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cqu escences Cont n ued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Caborne et a., ustn Legh, e ecutors of the
estate of Laura en 1
Coumba O Gas Co.2
Comb5 Lumber Co
Cooedge, Norman
Cooper, ugene ., admnstrator of the estate of
Lews . Cooper
Cooper, Lews ., estate of
Crawford Musc Corporaton
D.
Daas Tte Guaranty Co.1
Dashe, C. R.
Davson- oseph Campau Reaty Co., Inc
Dean, Mason L.
usts, ugustus . .
.
erree, C. .7
rst Mortgage onds 8
cschmann, Raou II
oreman, rank C
rend, enry, estate of
rend et a., Mton ., trustees of estate of enry
rend
G.
G. . R. O Corporaton
Gardner, . Ws9
George ros. Co
Gmore, een, estate of, transferee of estate of
rank O. urrdge
Graff, verett D
Grm, Cfford D.
89703
90 24
91.143
922S9
94088
94088
85389
88290
904
7505
973
1205
9832
71 37
1542
90452
9048
90487
90305
93915
90 72
91415
90 72
91415
92 04
92115
93248
93231
92212
93919
40
41
41
40
40
40
40
40
3
41
35
30
32
40
40
40
40
40
40
41
41
40
40
40
aes, George . 93210 40
aes, Mrs. Oncta 93209 40
aes, r., W. T. 93211 40
aes, W. T., estate of11 93208 40
stnte ta decson.
1 cquescence does not reate to ssue pertanng to aocaton of cost of equpment on the property n
queston.
3 cquescence reates ony to the ssue whether or not pettoner s an nsurance company as that term
s used n secton 701 (c)2 of the Revenue ct of 1934.
Nonacquescence pubshed n Cumuatve uetn 1937-2, page 3 , wthdrawn.
Pror nonacquescence pubshed n Cumuatve uetn 1937-2, page 3f, wthdrawn.
8 Pror nonacquescence pubshed n Cumuatve uetn I -2, page 30 (193.5), wthdrawn.
7 Nonacquescence pubshed n Cumuatve uetn I -2, page 30 (1935), wthdrawn.
1 cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
Oft ta decson.
10 cquescence reates ony to the ssue, If the benefcares of a certan trust be treated as donees, were
the gfts made to them gfts of present nterests or future nterests
u cquescence s ony as to the ssue, Do certan dvdends decared and credted on the stock of the
Loca udng and Loan ssocaton and made avaabe to the pettoners n anuary, 1935, but apped
b| them aganst the purchase of stock n the Loca edera Savngs and Loan ssocaton nto whch the
budng and oan assocaton was converted, represent ncome n 1935 sub|ect to norma ta and surta
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3
cquesc e nces Cont nued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
ggns, ugene
ooper, ames P., estate of 2
ooper, Mathde ., admnstratr of estate of
ames P. ooper 1 1
uey Php ardware Co
umme-Ross bre Corporaton
yde, Suffok erks, Marguerte
ohnston, . dward.
.
aufmann, oe W
aufmann, Mdred __
eer, Charotte
esser O Gas Co...
nowes, dwn C.
Legg, Mdred Sheppard, estate of
M.
MacConau|they, arry
Macon, Dubn Savannah Raroad Co_
Marborough ouse, Inc., et a.
Marborough Investment Co.4.
Mart-he, Louse, transferee of estate of rank O.
urrdge
Martn, Thomas W
McCormac, Gertrude ., trustee for . . Mc-
Cormac, r
McCormac, r., . . (trust)
Morton, rthur
Mott, Dee urey
N.
Norweb, mery May odcn _
80052
859 1
8577
8577
92801
93077
81417
93257
937 8
95082
95083
9302
93041
91495
89942
92052
90592
90452
9048
90487
90452
9048
90487
93333
9391
93920
93920
91494
71903
92575
39
41
41
40
40
40
41
41
41
41
41
40
40
41
40
40
40
40
40
40
40
41
35
41
40
41
41
38
Patton, T. 93918
Pttsburg Cannera, Ine - 935 0
Punkett, Theodore R 94017
Pupn, Mchae L, estate of 17 92177
1 state ta decson.
cquescence reates ony to the determnaton of the vaue of the stock of Wam . ooper Sons
Co. on ugust 3, 1933.
cquescence on the foowng ssue s as to resut ony: In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded the rent due under a ong-term ease,
the essee havng mproved the premses wth an offce budng whch woud become the essor s property
on forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve
for uncoected rents
cquescence does not reate to ssue respectng bases for deprecaton of pettoners assets.
1 Nonacquescenoe pubshed n Cumuatve uetn 1937-1, page 43, wthdrawn.
Gft ta decson.
Pror nonacquescenoe pubshed n Cumuatve uetn 1939-1, (Part 1), page GO, wthdrawn.
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4
cqt|bscbnces Contnued.
Docket
No.
oard of Ta ppeas.
oume.
R.
Rosenstock, nna, ndvduay and as e ecutr of
estate of Isaac M. Rosenstock 1
Rosenstock, Isaac M., estate of1
Ross, ndrew .
Rotorte Corporaton _
Rowey, dward G., transferee of estate of rank
O. urrdge
S.
Safe Depost Trust Co. of atmore, e ecutor of
estate of Mdred Sheppard Legg 1
Seavey arshem rokerage Co
Shenandoah aey Natona ank (Shrey Carter
estate)
Sherman, Dors ond34
Smon, ose, estate of 1
Smon et a., ose P., e ecutors
Smth, Chares G
Smth, arvara Pubs, admnstratr of estate of
Mchae I. Pupn 1 5
Smvth, r., rancs G., transferee of estate of rank
(). urrdge
Smyth, erbert C, transferee of estate of rank O.
urrdge
Smyth, erbert C, admnstrator of the estate of
een Gmore, transferee of estate of rank O.
urrdge
Spor, Sr., Cvpran .. estate of 1
Sprngford, erbert
Staey, ugustus .3
Staey, mma L.
Stern , son L. S.I
Suffok erks, Marguerte yde 7 -
Sutana O Corporaton (Deaware)
Swastka O Gas Co
Terhune, Wesey .
Thatcher, Lester ., transferee of estate of rank
O. urrdge
Traser, Rchard ., estate of 8
91 8
91 8
9 470
88 0
93332
89942
91 18
93917
95300
91840
91840
93914
92177
93331
93232
93231
925SS
97247
88772
88773
93134
81417
93257
90078
41
41
41
40
40
40
41
40
41
40
111
40
38
10
40
40
40
41
11
11
40
40
40
908 1
40
797
93894
40
749
93335
40
944
91958
41
228
SUS20
40
1240
state ta decson.
Un|ust enrchment ta decson.
3 Gft ta decson.
cquescence reates ony to the year 1039.
s Pror nonacqucscence pubshed n Cumuatve uetn 1939-1, fPart 1), nape 00, wthdrawn.
9 cquescence reates ony to the ssue, Is the pettoner ta abe on the ncome of a trust whch was
created for the support and mantenance of hs wfe and mnor chd
T cquescence on the foowng ssue s as to resut ony: In determnng the net ncome of a trust cur-
renty dstrbutabe to the benefcares, shoud there be ncuded t he rent due under a ong-term ease the
essee havng mproved the premses wth an offce budng whch woud become the essor -- property on
forfeture, the trust on the accrua bass havng accrued the rent but aso havng charged t to a reserve for
uncoected rents
4 cquescence reates ony to tho oard s mathematca formua for apportonment of the dvdend credt
between the estate and tho dstrbutees.
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5
cqt|escences Contnued.
oard of Ta ppeas.
Ta payer.
Docket
No.
U.
oume.
Page.
Unted States dety Guaranty Co..
91398
40
1010
W.
87354
39
9 2
92435
40
1248
79850
3
314
Wof, dth
92429
41
1231
Wood, Orrn G.
92489
40
904
Y.
78345
84
48
The Commssoner does NOT acquesce n the foowng decsons of
the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume. Page.
bbott, ohn, e ecutor of estate of Rchard .
Traser -
abama sphatc Lmestone Co
en, r., et a., ona
en, r., et a ., ona, e ecutors
en, . Wadegh, estate of.
en, ohn
en et a., ctor
ng, Noyes, ., estate of4
.
e et a., Maude ., e ecutors of estate of Ida .
Whte -
emhemer Co., S. . M.
ngham, Mary Ly ( ager), estate of
ondhoders Commttee 7.
onfs, . G., estate of
onfs Trust, . G.
91958
91793
93809
93811
93811
93812
93810
8713
93575
88978
94985
90452
9048
90487
91501
93148
41
41
41
41
41
41
40
40
40
40
228
324
20
191
25
249
823
881
1079
1085
Nonacquescence pubshed In Cumuatve uetn 1937-2, page , wthdrawn.
Gft ta decson.
cquescence reates ony to the ssues nvovng (1) the vauaton of 388 shares of rown Paper M
stock, and (2) the queston whether the renqushment of a power to prevent future amendments to a trust
Instrument consttutes a compete gft.
1 cquescence reates ony to ths Issue: Was the e change of certan certfcates of ownershp n a trust
for underyng portfoo stock represented thore by an e change of dfferent assets, resutng n a capta oss
Prevous nonacquescence pubshed n Cumuatve uetn -2, page 51 (193 ), wthdrawn wth respect
to ths ssue ony.
Nonacquescence reates ony to that part of the oard s opnon whch hods, wthout supportng ev-
dence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
state ta decson.
7 Nonacquescence reates to Issue pertanng to bases for deprecaton of pettoner s assets.
1 Prevous acquescence pubshed n Interna Revenue uetn 1940-15, page 1, wthdrawn.
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Nonacqt|escences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
onfs et a., een G., e ecutors of estate of . G.
onfs 1
ranch, Caude R
rdgeport Cty Trust Co. et a., The, e ecutors of
estate of Noves . ng 2
uck, sworth
urnett, O. L
c.
Carng odng Co_
Caspersen, reda R
Cavett et a., ., e ecutors of estate of W. T. aes .
Chamberan, Park
Chase Natona ank of the Cty of New York,
The, trustee under agreements wth mercan
Depostor Corporaton
Coona Trust Co. et a., e ecutors
Coumba O Gas Co.4
Corporate Investment Co
Corpus Chrst Termna Co .
Cushman, Louse C, transferee of estate of Mary
W. Cushman 2
Cushman, Mary W., estate of 2.
D.
Daas Tte Guaranty Co.s
Deerng, rank C, estate of
Deerng et a., oseph Godfrey, e ecutors of the
estate of rank C. Deerng
Deaware Termna Corporaton
Denhom Mc ay Co
Denver Natona ank et a., trustees u/w . G.
onfs 1
Durkhemcr, S.
.
mhrst, Dorothy Whtney.
rb et a., rthur L., e ecutors of estate of Ges W.
Mead 9
wng, Sherman
91501
94248
8713
93330
90248
8 77
87378
88 1
927 5
93208
880 7
93854
93855
9385
93857
93 48
90 24
783 3
88103
92881
928S2
92883
904
9599
9599
8 105
89 0
93148
95209
85040
85880
95298
975
93013
40
40
41
41
40
41
40
40
41
41
41
41
40
38
40
40
40
40
40
40
39
40
41
41
41
10
1 Prevous acquescence pubshed n Interna Revenue uetn 1940-15, page 1, wthdrawn.
1 state ta decson.
N onacqueseeuce s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca edera
Pavngs and Loan ssocaton, whch s admtted to be Income, ta abe as ordnary ncome or as capta
gan
Nonacquesccnce reates to ssue pertanng to aocaton of cost of equpment on the pro|erty n queston.
1 Nonacquesccnce reates ony to the ssue nvovng the ta abty of an amount of WO.OOO transferred
from Premum reserve account to Undvded profts account pursuant to resouton of the board
of drectors on uy 5, 193-1.
Gft ta decson.
G
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2
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1
3
-
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1
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2

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2

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7
Nonacquescences Contnued
Ta payer.
.
onds 1 - --
rst Trust 4 Depost Co. et a., guardans
ower et u ., ohn O
razer, rederc
G.
Gardner, . Ws
Goodman, dwn
Greene, . Crawford, guardan of estate of ce .
Lester 1
Grote et u ., en
.
aes, George .4
aes, Mrs. Oneta
aes, r., W. T.4
aes, W. T., estate of4
artford-Connectcut Trust Co., The, e tr. of
estate of Mary W. Cushman
ercues Motor Corporaton
offman, atherne M
offman, W. W -
offman et u ., W. W
ooper, ames P., estate of 4
ooper, Mathde ., admnstratr of estate of
ames P. ooper 44
ughes Too Co. -
.
ohnson et a., Thomas M., trustees
onas, Louse
.
ogg, Cornea . W., e ecutr of estate of
rederck R. eogg 5
eogg, rederck R., estate of4
enan et a., Wam R., r., trustees u/w Mary
Ly ( ager) ngham
yce, . S., estate of
yce, M. P., admnstrator
napp, George O
Docket
No.
oard of Ta ppeas.
oume
90452
9048
90487
90749
90750
90751
911 2
91412
92115
87799
93404
9 315
94442
94443
93210
93209
93211
93208
92882
92225
9 741
90742
92414
8577
8577
90002
8 77
87378
88 1
91010
89143
89143
O- .N.-,
90174
90174
91099
40
41
40
41
11
11
11
41
40
40
40
40
41
41
40
11
40
40
40
40
41
11
40
Nonacquescence reates to ssue pertanng to bases for deprecaton of pettoner s assets.
1 Gft ta decson.
Nonacquescence reates ony to the ssue, n the case of a gft of reeurtes n trust, shoud the trust be
treated as the donee, resutng n ony one e cuson, or shoud the benefcares be treated as donees, resut-
ng u one e cuson for each benefcary
1 Nonacquescence s ony as to the ssue, Is the cash receved by pettoners n 1935 from the Loca edera
avngsand Loan ssocaton, whch s admtted to be ncome, ta abe as ordnary ncome or as capta gan
state ta decson.
Nonacquescence reates ony to the ssue. Was the sum of 132,3 15.73, representng the net proceeds of
certan fe nsurance poces assgned by the decedent to a certan trust, pro ery ncudbe n the gross
estate ard, If so, may the sum of 40,000 be e cuded under the provsons of secton 302( ) of the Rev-
enue ct of 182
G
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2
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1
3
-
0
1
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2
2

0
4
:
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2

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8
8
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8
Nonacquescences Contnued
Ta payer.
Lester, ce ., an ncompetent, estate of 1.
Lpe, Gordon C
Lpe, Suzanne
Lpe, r., Ward C
M.
Marborough ouse, Inc., et a. .
orou
Marborough Investment Co.1.
McGovern, Inc., Patrck
Mead, Ges W.f estate of 1.
Mchgan Sca Co
Mueer Co., C. ...
N.
Natona ank of Commerce of San ntono, Te ..
Nebraska rdge Suppy Lumber Co
Newport Industres, Inc
P.
Pamer, Careton
Phoen State ank Trust Co., trustee under
deed of trust from Mary W. Cushman, as
trustee and transferee
Prouty, Ove .
Reaty Operators, Inc
Rhodes et a., ugh D., admnstrators of estate of
Mame D. Rhodes
Rhodes, Mame D., estate of
Rubnsten, Wton 1
Rust, r., et a., . L., e ecutors of estate of . L.
Rust
Rust, . L., estate of
S.
Sherman, Dors ond 14..
Sobe, Inc., N
Spor Co., Inc., C.
Sten, Nathan
Stern, son L. S.s
Docket
No.
93404
9 315
90750
00751
90749
90452
9048
90487
90452
9048
90487
9184
975
9 78
859 4
9 331
931 4
9084
92331
89854
92SS3
9 1 4
92387
91284
91284
95922
95880
95880
95300
93822
90354
83178
93134
oard of Ta ppeas.
oume.
41
41
10
40
40
11
11
40
40
40
40
40
40
41
40
41
41
-11
41
11
11
111
40
40
40
1 Gft ta decson.
Nonacqucsccncc reates to Issue pertanng to bases for deprecaton of pettoner s assets.
1 state ta decson.
Nonacquesccnoe reates ony to the year 193 .
Nonacquescence reates ony to tn ssue, where termnaton of a trust coud occur ony at the eecton
of the Rrantor wth concurrence of attorneys who represented two persons ntcrcstoU n the trust, Is the
nterest of the attorneys a substanta adverse nterest
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9
Nonacquesoences Contnued.
Docket
No
oard of Ta ppeas.
oume.
Page.
Straus, redrch
Straus, Meer
Straus, Mortz
Swope, Lorenzo W., estate of
T.
Thompson, Mary ., e ecutr of estate of Wam
G. Thompson 1
Thompson, Wam G., estate of1
Trco Securtes Corporaton
Trascr, Rchard ., estate of2
W.
Waker, Wam T. -
Whte, Ida ., estate of
Wood, Orrn G.
83181
S3 ISO
83179
93 48
90358
9 358
8517
91958
92 00
93575
92489
40
41
41
41
11
11
40
41
40
847
213
901
901
30
228
7 2
525
904
1 state ta d
1 Nonacquksccnce reates ony to that part of the oard s opnon whch hods, wthout supportng
evdence, that gans on the sae of corpus of the estate consttuted ncome avaabe for dstrbuton to the
benefcares.
1 Gft ta decson.
Nonacqucscence reates ony to the Issue, s the vaue of fe nsurance |wces obe determned by the
t to purchase smar contracts as determned by the Commssoner, or s the vaue mted to the cash
r vaue as contended by pettoner
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INCOM T RULINGS. P RT I.
. INT RN L R NU COD ND R NU CT O 1039.
C PT R 1. INCOM T .
SU C PT R . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
( so Secton 113(a).) 1940-12-10205
The transfer of securtes by the M Company to a penson trust
for the beneft of ts empoyees resuted n ta abe ncome to the
company to the e tent that the far market vaue of the securtes at
the tme of transfer e ceeded the cost or other bass thereof to the
company. The bass for determnng gan or oss upon the sae of
such securtes by the trustee w be the far market vaue of the
securtes at the tme of the transfer to the trust.
dvce s requested whether the transfer of securtes by the M
Company to a penson trust for the beneft of ts empoyees, the market
vaue of the securtes at the tme of transfer beng n e cess of cost
or other bass, resuted n ta abe ncome to the company to the e tent
of the dfference between such market vaue and the cost or other
bass| aso, whether ncome w accrue to the trust n the event the
securtes are sod by the trustee for an amount n e cess of the bass
at whch they were contrbuted to the trust.
In the opnon of ths offce, the M Company derved ta abe ncome
upon the transfer of securtes to a penson trust for the beneft of ts
empoyees to the e tent that the far market vaue of the securtes
at the tme of transfer e ceeded the cost or other bass thereof to the
company. (See generay secton 19.22(a)-1 of Reguatons 103 and
G. C. M. 1 51, C. . -2, 130 (193 ).)
The bass for determnng gan or oss upon the sae of such secur-
tes by the trustee w be the far market vaue of the securtes at the
tme of the transfer to the trust.
The amount receved by the M Company from a foregn purchas-
ng commsson (actng as agent for a foregn country) upon e ecu-
ton of an agreement between the company and the purchasng
commsson does not consttute ta abe ncome to the company at
that tme.
I. T. 3357
INT RN L R NU COD .
1940- -10170
I. T. 3349
(11)
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19.22(a)-2.
12
dvce s requested as to the proper treatment for edera ncome
ta purposes of an amount receved by the M Company from a
foregn purchasng commsson (actng as agent for a foregn coun-
try) upon the e ecuton of an agreement negotated between that
company and the commsson, reatve to the purchase and sae of
a certan product, for the manufacture of whch the M Company w
be requred to construct a new unt at ts pant.
The agreement rectes that to assst n the fnancng of the erecton
of the new pant the foregn purchasng commsson has ent to the
M Company the sum of doars, evdenced by the M Company s
nonnegotabe promssory note to the sad commsson, of even date
therewth, payabe n 10 years or upon termnaton of the agreement
(by canceaton or otherwse), whchever sha frst occur. The
agreement, however, contans certan provsons reatve to payment
by the purchasng commsson to the M Company, upon termnaton
or canceaton of the agreement, of certan sums of money whch,
f not otherwse pad to the M Company, may be offset aganst the
obgaton represented by the company s note.
It s hed, upon the bass of the facts presented, that the amount
of doars receved by the M Company upon e ecuton of the con-
tract, whch amount was advanced by the purchasng commsson,
does not consttute ta abe ncome to the M Company at that tme.
Secton 19.22(a)-: What ncuded n gross ncome.
INT RN L R NU COD .
Meage aowance of member of State egsature. (See I. T. 33 8,
page 29 )
Secton 19.22(a)-2: Compensaton for persona 1940-24-1028
servces. I. T. 3382
( so Secton 23(a), Secton 19.23 (a)-1, and
Secton 23(c), Secton 19.23(c)-.)
INT RN L R NU COD .
Where the Phadepha ncome ta on saares, wages, comms-
sons, and other compensaton earned after anuary 1, 1940, s pad
by the empoyer wthout deducton therefor from the empoyee s
compensaton, the amount thereof consttutes addtona compen-
saton and, as such, s ncudbe n the gross ncome of the empoyee
for edera ncome ta purposes and may be deducted by the em-
poyer as a busness e pense. The amount of ta thus assumed
and pad by the empoyer for the empoyee s deductbe by the
empoyee as a ta under secton 23(c) of the Interna Revenue Code.
dvce s requested concernng the proper treatment for edera
ncome ta purposes of the amount of the ta mposed by the cty of
Phadepha on saares, wages, commssons, and other compensaton
earned after anuary 1, 1940, where the ta s assumed and pad by
the empoyer n addton to the empoyee s reguar compensaton.
The ta s mposed under an ncome ta ordnance passed by the
cty counc of Phadepha and approved by ts actng mayor on
December 13. 1939, pursuant to authorty granted by an enabng act
enacted by the Pennsyvana State Legsature on ugust 5, 1932
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13 5 19.22(a)-3
(P. L. 45, tra Sesson, 1932). The pertnent provsons of the
ordnance are set forth n L T. 3370 (page 32, ths uetn). s n-
dcated n that rung, the ta es mposed by the ordnance (secton
2) of per cent on saares, wages, commssons, and other com-
pensaton earned after anuary 1, 1940, are deductbe by the em-
poyees whether pad by them or wthhed by ther empoyers from
ther saares, wages, commssons, or other compensaton. Whe
the empoyer n the nstant case dd not wthhod the amount of the
ta (as requred under secton 4 of the ordnance), but assumed and
pad the ta wthout deducton from the empoyee s reguar compen-
saton, the ta so assumed and pad by the empoyer s, nevertheess,
the ta of the empoyee.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not ma-
tera here. Secton 19.23(c)- of Reguatons 103 states that n
genera ta es are deductbe ony by the person upon whom they are
mposed.
In vew of the foregong, the amount of the ta assumed and pad
bv the empoyer n the nstant case s not deductbe by the empover
s a ta under secton 23(c), supra. (I. T. 3154, C. . 1938-1, 118.)
owever, snce the assumpton and payment of the ta by the em-
poyer wthout deducton from the empoyee s reguar compensaton
manfesty was as addtona compensaton for persona servces
actuay rendered, the amount thereof s deductbe by the empoyer
nnder secton 23(a) of the Code as a part of hs ordnary and neces-
sary busness e penses. (I. T. 3154, supra.)
Consstenty, the amount of the ta thus assumed and pad by
the empoyer for the empoyee as addtona compensaton to the em-
poyee s ncudbe as such n the empoyee s gross ncome under
secton 22(a) of the Code. (I. T. 3154, supra Od Coony Trust Co.
. Commssoner, 279 U. S., 71 , Ct. D. 80, C. . III-2, 222 (1929),
and decsons cted theren.) urthermore, the amount of the ta
thus assumed and pad by the empoyer for the empoyee s deductbe
by the empovee as a ta under secton 23(c), supra. (I. T. 3370,
sapra Mm. 4595, C. . 1937-1, 3.) The ta n ths case s ds-
tngushabe n ths respect from the ta es nvoved n Od Coony
Trust Co. v. Commssoner, supra, and I. T. 3154, supra, whch were
nondeductbe for edera ncome ta purposes under e press statu-
tory provsons.
Secton 19.22 (a)-3: Compensaton pad other 1940-10-10195
than n cash. T. D. 49 5
TITL 2 INT RN L R NU . CII PT R I, SU C PT R , P RTS 3, 9, ND
19. INCOM T .
Reguatons 103, 101, 04, 8 , and 77, amended. Compensaton
pad other than n cash.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.22 (a)-3 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. , artce 22(a)-3 of Reguatons 101
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19.22(a)-3.
14
Part 9, Tte 2 , Code of edera Reguatons, 1939 Sup. , artce
22(a)-3 of Reguatons 94, as amended by Treasury Decson 4724,
approved anuary 18, 1937 C. . 1937-1, 58 Part 3, Tte 2 , Code
of edera Reguatons , artce 22(a)-3 of Reguatons 8 , as
amended by such Treasury Decson 4724, and artce 53 of Regua-
tons 77, as amended by such Treasury Decson 4724, are amended
by strkng out the fourth sentence n such secton and n each of such
artces readng as foows:
If vng quarters such as camps are furnshed to empoyees for the convenence
of the empoyer, the ratabe vaue need not be added to the cash compensaton
of the empoyees, but f a person receves as compensaton for servces rendered
a saary and n addton thereto vng quarters, the vaue to such person of
the quarters furnshed consttutes ncome sub|ect to tu .
and by substtutng n eu thereof the foowng two sentences:
If a person receves as compensaton for servces rendered a saary and n
addton thereto vng quarters or meas, the vaue to such person of the
quarters and meas so furnshed consttutes ncome sub|ect to ta . If, however,
vng quarters or meas are furnshed to empoyees for the convenence of the
empoyer, the vaue thereof need not be computed and added to the compensaton
otherwse receved by the empoyees.
(Ths Treasury decson s prescrbed pursuant to sectons 22(a)
and 2 of the Interna Revenue Code (53 Stat, Part 1) and of sec-
tons 22(a) and 02 of the Revenue cts of 1938, 193 , 1034, and 1932
(52 Stat., 457, 480, 49 Stat., 1 57, 1 73, 48 Stat., 8 , 700, 47 Stat.,
178,191 2 U. S. C, 22, 2, and Sup.).)
Gtnr T. evepno,
C ommssoner of Interna Revenue.
pproved ebruary 29, 1940.
. Moruenthau, r.,
Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 1, 1940, 10.40 a. m.)
Secton 19.22(a)-3: Compensaton pad other 1940-1 -10235
than n cash. Mm. 5023
Ta abty of compensaton other than n cash vng quarters
furnshed empoyees.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 22, 191,0.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
1. Treasury Decson 49 5, approved ebruary 29, 1940 (page 13,
ths uetn), amends artce 53 of Reguatons 77, as amended by
Treasury Decson 4724, approved anuary 18,1937 C. . 1937-1, 58 ,
artces 22(a)-3 of Reguatons 8 and 94, as amended by such Treas-
ury Decson 4724, artce 22(a)-3 of Reguatons 101, and secton
19.22(a)-3 of Reguatons 103, by strkng out the fourth sentence n
each of such artces and such secton, whch reads as foows:
If vng quarters such as enmps are furnshed to empoyees for the convenence
of the empoyer, the ratabe vaue need not he added to the cash compensaton of
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15
19.22(a)-3.
the empoyees, but f a person receves as compensaton for servces rendered a
saary and n addton thereto vng quarters, the vaue to such person of the
quarters furnshed consttutes ncome sub|ect to ta .
and substtutng n eu thereof the foowng two sentences:
If a person receves as compensaton for servces rendered a saary and n add-
ton thereto vng quarters or meas, the vaue to such person of the quarters
and meas so furnshed consttutes ncome sub|ect to ta . If, however, vng
quarters or meas are furnshed to empoyees for the convenence of the empoyer,
the vaue thereof need not be computed and added to the compensaton otherwse
receved by the empoyees.
2. The purpose of the foregong amendments of the severa regu-
atons mentoned s to carfy the poston of the ureau on the
queston as to the crcumstances under whch the vaue of vng
quarters or meas furnshed to empoyees by ther empoyer s to be
ncuded n the gross ncome of the empoyees. cept as ndcated
beow, f vng quarters or meas are furnshed to an empoyee, the
vaue thereof to hm consttutes ncome sub|ect to ta and must,
therefore, be ncuded n hs gross ncome as compensaton. If, how-
ever, the vng quarters or meas furnshed are not compensatory or
are furnshed for the convenence of the empoyer, the vaue thereof
need not be added to the compensaton otherwse receved by the
empoyee.
3. s a genera rue, the test of convenence of the empoyer
s satsfed f vng quarters or meas are furnshed to an empoyee
who s requred to accept such quarters and meas n order to perform
propery hs dutes. or e ampe, f an empoyee s sub|ect to m-
medate servce at any tme durng the 24 hou-s of the day and,
therefore, can not obtan quarters or meas esewhere wthout ma-
tera nterference wth hs dutes and on that account s requred by
the empoyer to accept quarters or meas furnshed by the empoyer,
the vaue thereof need not be ncuded n the gross ncome of the
empoyee. (See O. D. 915, C. . 4, 85 (1921).)
4. The renta vaue of vng quarters furnshed by a State to ts
Governor need not be added to the compensaton otherwse receved
by hm for the performance of hs offca dutes.
5. or e ampes of crcumstances under whch vng quarters or
aowances therefor are not compensatory see the ffth sentence of
secton 19.22(a)-3 of Reguatons 103 and the correspondng sentence
of pror reguatons, G. C. M. 14710 (C. . I -1, 44 (1935)), and
G. C. M. 1483 (C. . I -1, 45 (1935)), reatng to edera foregn
servce empoyees. or further e ampes of crcumstances under
whch t has been hed that quarters were furnshed for the con-
venence of the empoyer and the vaue thereof need not be ncuded
n the gross ncome of the empoyees, see O. D. 814 (C. . 4, 84
(1921)), reatng to fshermen and canners, and I. T. 2253 (C. .
-, 32 (192 )), reatng to househod servants.
. Inqures regardng ths mmeograph shoud refer to the number
thereof and the symbos IT: TM.
Gut T. everng,
C ommssoner.
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19.22(a)-7
1
Secton 19.22 (a) -7: Gross ncome of farmers. 1940-23-10277
( so Secton 143, Secton 19.143-1.) I. T. 3379
INT RN L R NU COD ND R NU CTS O 193 ND 1038.
mounts receved under the So Conservaton and Domestc
otment ct, as amended, the Prce d|ustment ct of 1038,
secton 303 of the grcutura d|ustment ct, as amended, and
the Sugar ct of 1937 consttute ta abe ncome to the recpents
for edera ncome ta purposes. Payments made under those cts
to nonresdent aen owners of and ocated n the Unted States
are sub|ect to deducton and wthhodng of ta at the source at
the rate of 5 per cent when made to nonresdent aen resdents of
Canada and at the rate of 10 per cent when made to a other non-
resdent aens.
dvce s requested as to the ta abty of, and the appcaton of
secton 143(b) of the Interna Revenue Code and secton 143(b) of
the Revenue cts of 193 and 1938 to, payments made under the
So Conservaton and Domestc otment ct, as amended (Pubc,
No. 4 1, Seventy-fourth Congress), the Prce d|ustment ct of
1938 (Tte of Pubc Resouton No. 122, Seventy-ffth Congress),
ecton 303 of the grcutura d|ustment ct, as amended (Pubc,
No. 430, Seventy-ffth Congress), and the Sugar ct of 1937 (Pubc,
No. 414, Seventy-ffth Congress).
Payments under the So Conservaton and Domestc otment
ct, as amended, accrue to persons who, as andowners, tenants, or
sharecroppers, compy wth certan requrements concernng acreages
devoted to so-depetng or so-conservng crops or perform certan
so-budng practces on farms ocated n the contnenta Unted
States or n the Terrtores of the Unted States.
Under the Prce d|ustment ct of 1938, payments are made to
wheat, cotton, corn, and rce producers whose acreage panted to any
such commodty for harvest on the farm n 1939 was not n e cess of
the farm acreage aotment estabshed for that commodty under
the 1939 agrcutura conservaton program. Smar payments wth
respect to 1940 crops are to be made pursuant to secton 303 of the
grcutura d|ustment ct of 1938, as amended.
Payments under the Sugar ct of 1937 are made to producers of
sugar beets and sugar cane who do not empoy chd abor, who pay
the wages for farm abor determned by the Secretary of grcuture
to be far and reasonabe, who hod ther marketngs wthn the farm
proportonate share, who carry out such farmng practces as are
determned by the Secretary of grcuture to be so-conservng,
and, n the case of producers who are aso processors of sugar beets
and sugar cane, who pay for such sugar beets and sugar cane a prce
determned bv the Secretary of grcuture to be far and reasonabe.
In I. T. 27 7 (C. . III-1, 35 (1934)) t was hed that the renta
or beneft payments made to producers under the provsons of the
grcutura d|ustment ct for the reducton n acreage, or the
reducton n producton for market of any basc agrcutura com-
modty specfed n secton 11 of the ct, as amended, consttute ta -
abe ncome to the recpents for edera ncome ta purposes. It
was aso hed n I. T. 2992 (C. . -2, 75 (193 )) that payments or
grants made to agrcutura producers pursuant to the provsons of
the ct entted n ct to provde for the protecton of and re-
sources aganst so eroson, and for other purposes (Pubc, No.
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17
13.22(b) (2)-2.
4 , Seventy-fourth Congress), as amended by the So Conservaton
and Domestc otment ct, supra, consttute ta abe ncome to the
recpents for edera ncome ta purposes.
mounts receved by persons who, as andowners, tenants, or share-
croppers, compy wth the requrements concernng acreage devoted
to so-depetng or so-conservng crops or perform certan so-
budng practces, who pant wheat, cotton, corn, and rce for harvest
n an acreage not n e cess of the farm acreage aotment estabshed
for the commodty under the 1939 and 1940 agrcutura conservaton
program, who hod ther marketngs of sugar beets and sugar cane
wthn the farm proportonate share (whe not empoyng chd
abor and whe payng the wages for farm abor determned by the
Secretary of grcuture to be far and reasonabe) and, n the case
of producers who are aso processors of sugar beets and sugar cane,
who pay for such sugar beets and sugar cane a prce determned by
the Secretary of grcuture to be far and reasonabe, consttute
payments smar, for edera ncome ta purposes, to the payments
consdered n I. T. 27 7, supra, and I. T. 2992, supra. ence, t s
hed that the amounts receved under the cts cted n the frst
paragraph of ths rung consttute ta abe ncome to the recpents
for edera ncome ta purposes.
Under secton 143(b) of the Interna evenue Code and secton
143(b) of the Revenue cts of 193 and 1938, a dsbursng offcers
and empoyees of the Unted States are requred to deduct and wth-
hod ncome ta at the rate of 10 per cent (the rate of 10 per cent
has been reduced to 5 per cent n the case of resdents of Canada
under the terms of the ta conventon between the Unted States
and Canada) from payments to nonresdent aens of nterest (e -
cept nterest on deposts wth persons carryng on the bankng bus-
ness pad to persons not engaged n busness n the Unted States
and not havng an offce or pace of busness theren), dvdends, rent,
saares, wages, premums, annutes, compensatons, remuneratons,
emouments, or other f ed or determnabe annua or perodca gans,
profts, and ncome from sources wthn the Unted States.
The amounts receved under the above cts by nonresdent aen
owners of and ocated n the Unted States consttute f ed or de-
termnabe annua or perodca ncome from sources wthn the
Unted States. (See sectons 119(a)4, 143(b), and 211(a) of the
Interna Revenue Code and the Revenue cts of 193 and 1938
cf. I. T. 297 , C. . -1, 138 (193 ).) Such payments, therefore,
are sub|ect to deducton and wthhodng of ta at the source at the
rate of 5 per cent when made to nonresdent aen resdents of
Canada and at the rate of 10 per cent when made to a other non-
resdent aens.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
Secton 19.22(b) (2)-2: nnutes.
INT RN L R NU COD .
Treatment of annuty contracts and payments thereon n connecton
wth severa trusts (not quafed under secton 1 5) mantaned for
the beneft of empoyees. (See I. T. 334 , page 2.)
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19.22(b) (2)-2.
18
Secton 19.22(b) (2)-2: nnutes. 1940-14-10218
I. T. 33 2
INT RN L R NU COD .
mounts deducted from the saares of muncpa empoyees and
pad nto the muncpa empoyees annuty and beneft fund of the
cty of R, State of Inos, pursuant to the act of the Genera ssem-
by of the State of Inos, approved une 29, 1921, as amended,
shoud be ncuded n the gross ncome of the empoyees for edera
ncome ta purposes.
dvce s requested wth respect to the ncuson n gross ncome of
the amounts deducted from the saares of muncpa empoyees and
pad nto the muncpa empoyees annuty and beneft fund of the
cty of R, State of Inos (herenafter referred to as the fund), pur-
suant to the act of the Genera ssemby of the State of Inos,
approved une 29, 1921| as amended.
In support of the poston that such amounts shoud not be ncuded
n gross ncome, the case of ughes v. Traeger (2 4 111., 12,10 N. .,
431) s cted. In that case the Supreme Court of Inos construed the
act of the genera assemby of that State, approved May 31, 1911,
provdng for the deducton of a specfed amount from the saares
and wages of certan muncpa empoyees for the estabshment and
mantenance of a penson fund for such empoyees. The court stated
that the amounts deducted dd not become the property of the em-
poyee and coud not be controed or dsposed of by hm. owever,
the act of May 31, 1911, was superseded as to ctes of over 200,000
nhabtants by an act, approved une 29, 1921, entted n act to
provde for the creaton, settng apart, mantenance, and admnstra-
ton of a muncpa empoyees annuty and beneft fund n ctes hav-
ng a popuaton e ceedng 200,000 nhabtants, and was ater repeaed
by an act approved ebruary 21, 1931. (See Laws of Inos, 1921,
pagp 205, and Laws of Inos, 1931, page 85 .)
The act of une 29, 1921, as amended, provdes n part as foows:
Sec. 1 . (c) ach such deducton from saary and correspondng contrbuton
by the cty sha be aocated to the account of and credted to the future entrant
for whose beneft t s made for age and servce annuty purposes.

(e-e) ach amount credted to any future entrant In accordance
wth the foregong provson of ths secton sha be mproved to the credt of
such future entrant by nterest at the rate of four (4) per cent per annum durng
a tme thereafter that such future entrant sha be n the servce, unt such
future entrant sha attan an age of s ty-fve ( 5) years.

Skc. 39. (a) 1. ny muncpa empoyee, wthout regard to the perod of tme
he sha have served, who sha resgn or be dscharged from the servce after the
1st day n the month of anuary of the frst year after the year n whch ths act
sh come n force and effect n such cty, and before he sha become ffty-fve
(55) years of age, and any muncpa empoyee, who sha have served ess than
ten (10) years, who sha resgn or be dscharged from the servce after the 1st
day n the month of anuary of the frst year after the year n whch ths act
sha come n force and effect n such cty and before he sha have become s ty
(00) years of age, sha have a rght to have refunded to hm the entre amount
whch sha have accumuated to hs credt for age and servce annuty and
wdow s annuty purposes on (he date of such resgnaton or dscharge from the
servce from amounts deducted from hs saary n accordance wth the provsons
of ths act.
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19
19.2(2b-))2(2.
The act of May 31,1911, dd not contan provsons smar to those
quoted. Therefore, even f t be conceded that the Inos Supreme
Court n the case of ughes v. Traeger, supra, ad down a rue of
property whch woud be controng n the determnaton of a sm-
ar queston under the act of May 31, 1911, t s the opnon of ths
offce that the decson of the court n that case woud not of necessty
be foowed by the Unted States courts n cases arsng under the
act approved une 29,1921, the pertnent provsons of whch are ma-
teray dfferent from those of the prpr act.
Ths offce s aso of the opnon that the rghts of the benefcares
under the fund are not dstngushabe from the rghts of benefcares
under the Cv Servce Retrement ct and smar egsaton. The
ureau has consstenty hed that deductons made from saares of
cv servce empoyees to be apped to the purchase of retrement
annutes are to be ncuded n the gross ncome of such empoyees.
(See T. D. 3112, C. . 4, 7 (1921).) smar concuson was
reached wth respect to amounts wthhed from the saares of mer-
can foregn servce offcers (I. T. 21C2, C. . I -1, 29 (1925)).
In vew of the foregong, t s hed that the gross amount of the
saares of the muncpa empoyees of the cty of R, State of Inos,
wthout dmnuton for the amounts deducted therefrom and pad nto
the fund, are to be ncuded n the gross ncome of the empoyees for
edera ncome ta purposes. It foows, therefore, that the amounts
refunded to the empoyees from the fund n the event that they do
not become egbe for annutes are not to be treated as compensa-
ton for such purposes.
Wth regard to the ta abty of retrement annutes receved by
the empoyees, t s hed that such annutes are ta abe to the e tent
provded n secton 22(b) 2 of the Interna Revenue Code.
Wth respect to annutes pad from the fund to benefcares of
the empoyees, t s hed that such annuty payments are ta abe to
the benefcares on the same bass as to the retred empoyees.
Secton- 19.22(b) (2)-2: nnutes. 1940-15-1022
I. T. 33 4
INT RN L R NU COD .
Treatment for edera ncome ta purposes of annutes receved
n 1939 by retred muncpa empoyees.
dvce s requested reatve to the ta abty for edera ncome
ta purposes of annuty payments receved n 1939 by a retred em-
poyee of the cty of S.
The queston arses under secton 22(b)2 of the Interna Revenue
Code, reatng to annutes, whch secton provdes n part as foows:
mounts receved as an annuty under an annuty or endowment
contract sha be ncuded n gross ncome e cept that there sha be e cuded
from gross ncome the e cess of the amount receved n the ta abe year over
an amount equa to 3 per centum of the aggregate premums or consderaton
pad for such annuty unt the aggregate amount e cuded from
gross ncome under ths chapter or pror ncome ta aws n respect to such
annuty equas the aggregate premums or consderaton pad for such
annuty.
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19.22(b) (2)-2.)
20
Smar provsons are contaned n the Revenue cts of 1934, 193G,
and 1938.
In the present case the empoyee retred n 1934 and receves an
annuty of 2,000. The amount of the annuty receved by hm n
1934 and 1935 equaed the amount of 4,000 whch he had pad nto
the retrement fund. The queston presented s whether the retred
empoyee, a snge person, shoud ncude n gross ncome for 1939
the fu amount of the annuty of 2,000, or whether for the year
1939 he shoud ncude ony 3- per cent of 4,000, the consderaton
pad by hm for the annuty, and ony 3 per cent of 4,000 for each
year thereafter unt the tota consderaton pad by hm has been
e cuded from gross ncome n 1939 and subsequent years.
Pror to the year 1939 a retred muncpa empoyee dd not ncude
any part of such an annuty n hs edera ncome ta returns. It s
contended, however, that because no part of the retred empoyee s
annuty was e cuded from gross ncome for the years pror to 1939
on account of the statutory provsons contaned n secton 22(b)2
of the Revenue cts of 1934, 193C, and 1938, 3 per cent of 4,000, or
120, shoud be ncuded n gross ncome for edera ncome ta
purposes for 1939, and 1,880 e cuded that a ke amount ( 120)
shoud be ncuded n gross ncome for 1940 that n 1941, 1,7 0
(the remander of the tota consderaton not prevousy e cuded)
w be ncudbe n gross ncome and that thereafter a tota of
2,000 w be requred to be ncuded n gross ncome each year.
The evdent ntent of the above-quoted provsons of aw s to
provde that unt the capta nvested, that s, the amounts contrb-
uted to the retrement fund by an annutant (the empoyee n the
nstant case) are recovered, t can not be sad that the annutant s
recevng ncome other than the ncome of 3 per cent upon the capta
nvested by hm, and for that reason t s provded that any amount
n e cess of the estmated return (3 per cent) on the amount nvested
sha be e cuded from gross ncome unt the aggregate amount so
e cuded equas the aggregate premums or consderaton pad for
the annuty. It s apparent n the nstant case that the empoyee,
who retred n 1934 and had pad nto the retrement fund 4,000,
and had, from 1934 up to and ncudng 1938, receved 2,000 a year,
has recovered ta -free the entre amount pad by hm nto the retre-
ment fund. Therefore, t s hed, under the facts presented, that
the tota amount of 2,000 receved by the retred empoyee n 1939
shoud be ncuded n gross ncome for edera ncome ta purposes
for that year.
In the case of an empoyee who retred n 1937, hs annuty to
become effectve on anuary 1,1938, the resut s dfferent. In such a
case, the provsons of secton 22(b)2 of the Interna Revenue Code
shoud be apped n the foowng manner: In 1939 and subsequent
years, the empoyee recevng the annuty of 2,000 must ncude n
gross ncome the ta abe porton of hs annuty. In determnng
such ta abe porton, t shoud be consdered that n the year 1938
he receved as ncome an amount equa to 3 per cent of the aggregate
premums or consderaton pad for hs annuty, or 120, wth the
resut that 1,880 was e cuded from gross ncome for that year.
Then for 1939 he shoud return for edera ncome ta purposes 3 per
cent of the consderaton pad, that s. 120, and e cude from gross
ncome 1,880 of the annuty of 2,000 receved by hm n that year.
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21
19.22(b) (4)-4.
On s ch bass, 3,7 0 of the consderaton pad for the annuty w
have been recovered n 1938 and 1939. or the year 1940, 1,700 s
ncudbe n gross ncome, the retred empoyee havng aready re-
covered a but 240 of the tota consderaton of 4,000 pad by hm
for the annuty. It s apparent that had the empoyee retred n
193 , the annuty to become effectve on anuary 1, 1937, t woud
be for the year 1939 that he woud ncude n gross ncome 1,7 0
and, further, that f he had retred n 1935 and hs annuty became
effectve on anuary 1, 193 , the tota amount of 2,000 woud be
ncudbe n gross ncome for 1939.
Secton 19.22(b) (4)-4: Interest upon Unted 1940-4-10147
States obgatons. I. T. 3343
INT RN L R NU COD .
empton of nterest (ncrement n vaue) on Unted States sav-
ngs bonds n the ease of an ndvdua who keops hs accounts and
makes hs edera ncome ta returns ou the cash recepts and ds-
bursements bass.
Where an ndvdua ctzen or resdent aen of the Unted States,
reguary empoyng the cash recepts and dsbursements bass n
makng edera ncome ta returns, purchases each year, durng a
perod of 10 years, Unted States savngs bonds n an amount not n
e cess of 5,000 (purchase prce) whch mature 10 years from date
of ssue and surrenders them for redempton at maturty, the nterest
(ncrement n vaue) receved therefrom, L e., on such bonds of a
prncpa amount (purchase prce) not n e cess of 5,000, s then
ncome and s whoy e empt from ncome ta aton, ncudng ed-
era surta , e cess-profts ta , and war-profts ta , provded he cams
no e empton from any edera surta , e cess-profts ta , or war-
profts ta wth respect to any nterest receved (actuay or construc-
tvey) n the same ta abe year on account of other bonds whch were
ssued under the authorty of the Second Lberty ond ct, as
amended. (See I. T. 2958, C. . -1, 120 (193 ) I. T. 32 2, C. .
1939-1 (Part 1), 9 and I. T. 3324, C. . 1939-2, 135.)
In the case of the death of such ta payer, however, nterest accrued
but not receved up to the date of hs death s ncome for the ta abe
year or perod n whch fas the date of hs death, as we as any nter-
est receved by hm durng that ta abe perod. (Secton 42, Interna
Revenue Code.) The nterest (ncrement n vaue) accrued on un-
redeemed Unted States savngs bonds s shown n a tabe of redemp-
ton vaues thereon. (Cf. G. C. M. 15875, C. . I -2, 100 (1935).)
s nterest on Unted States savngs bonds to the e tent that t s on
an amount of such bonds the prncpa (purchase prce) of whch
does not e ceed n the aggregate 5,000 (and provded no e empton
from edera surta , e cess-profts ta , or war-profts ta , s camed
for the ta abe perod wth respect to nterest on account of other
bonds whch were ssued under the authorty of the Second Lberty
ond ct, as amended), beng w-hoy e empt from ncome ta aton,
sha be e cuded from hs gross ncome and net ncome. (Sectons
21 and 22(b)4, Interna Revenue Code.) The baance, f any, of hs
nterest on Unted States savngs bonds, beng not e empt from ed-
era surta (or from any edera e cess-profts or war-profts ta es
then mposed), sha be mcuded n hs gross ncome and net ncome
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I 19.22(d)- .
22
(sectons 21 and 22(b)4, supra), but, nasmuch as nterest on Unted
States savngs bonds s e empt, wthout mt, from norma ta , a
credt for the amount of such nterest ncuded n hs gross ncome
and net ncome sha be aowed, for the purpose of the norma ta
ony, aganst hs net ncome. (Secton 25 (a) 1, Interna Revenue
Code.)
Whether or not the nterest on Unted States savngs bonds s whoy
e empt, there must be submtted n the ta payer s edera ncome ta
return a statement showng the number and amount of such obga-
tons owned by hm and the ncome therefrom, n such form and wth
such nformaton as the Commssoner may requre. (Secton 22(b)4,
supra.)
Secton 19.22(b) (4)-4: Interest upon Unted 1940-10-10191
States obgatons. I. T. 3355
INT RN L R NU COD .
Interest upon bonds ssued under the provsons of secton 15c
of the Tennessee aey uthorty ct of 1933, whch was added by
the ct of uy 2 , 1939, s sub|ect to edera ncome ta .
dvce s requested as to the status, for edera ncome ta pur-
poses, of nterest upon bonds of the Tennessee aey uthorty,
ssued under secton 15c of the ct of uy 2 , 1939 (Pubc, No. 224,
Seventy-s th Congress, chapter 3 , frst sesson), whch amended
the Tennessee aev uthorty ct of 1933 (48 Stat,, 58), as
amended by the ct of ugust 31,1935 (49 Stat., 1075).
Secton 5c of the Tennessee aey uthorty ct of 1933, whch
was added by the ct of uy 2 1939, supra, authorzes the ssuance
by the Tennessee aey uthorty, wth the approva of the Secre-
tary of the Treasury, of bonds not to e ceed n the aggregate
01,500,000.
Under secton 22(b)4 of the Interna Revenue Code, reatng to
ta -free nterest, t s provded that nterest upon obgatons of a
corporaton organzed under an ct of Congress, f such corporaton
s an nstrumentaty of the Unted States, sha be e empt from
ta aton ony f and to the e tent provded for n the cts authorz-
ng the ssue thereof. There s no provson n the ct of uy 2 ,
1939, whereby the nterest upon bonds ssued under the provsons of
secton 15c of the Tennessee aey uthorty ct of 1933, as
amended, s e empt from edera ncome ta . It foows, there-
fore, that the nterest upon such bonds s sub|ect to edera ncome
ta .
S CTION 22(d) ( M ND D Y S CTION 219. R NU
CT O 1939). GROSS INCOM : IN NTORI S
IN C RT IN INDUSTRI S.
Secton 19.22(d)-: Inventores under eectve 1940-2-10137
method. T. D. 4959
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 9, SU -
P RT SU C PT R , P RT 4 5, SU P RT . INCOM T .
Reguatons reatng to eectve method of takng Inventores for
years begnnng subsequent to December 31, 1938.
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23
5 19.22(d)- .
Treasury Department,
Offce or Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to conform Reguatons 101 (Part 9, Subpart , Tte 2 ,
Code of edera Reguatons), as made appcabe to tbe Interna
Revenue Code (53 Stat., Part 1) by Treasury Decson 4885, approved
ebruary 11,1939 C. . 1939-1 (Part 1), 39 (Part 4 5, Subpart 13,
Tte 2 , Code of edera Reguatons), to secton 219 of the Revenue
ct of 1939 (Pubc, No. 155, Seventy-s th Congress, frst sesson)
amendng secton 22(d) of the Interna Revenue Code, such regua-
tons are amended as foows:
(1) The foowng s nserted mmedatey precedng artce
22(d)- (secton 9.22(d)-, Tte 2 , Code of edera Reguatons),
as made appcabe to the Interna Revenue Code:
Secton 219. Inventores (Revenue ct of 1930).
Sec. 219. Inventores.
(a) mendment to Code, Secton 22(d) of the Interna Revenue
Code (reatng to nventores n certan ndustres) s amended to read
as foows:
(d) (1) ta payer may use the foowng method (whether or not
such method has been prescrbed under subsecton (c)) n nventoryng
goods specfed n the appcaton requred under paragraph (2) :
( ) Inventory them at cost
( ) Treat those remanng on hand at the cose of the ta abe
year as beng: rst, those ncuded n the openng nventory of the
ta abe year (n the order of acquston) to the e tent thereof,
and second, those acqured n the ta abe year and
(C) Treat those ncuded n the openng nventory of the ta -
abe year n whch such method s frst used as havng been ac-
qured at the same tme and determne ther cost by the average
cost method.
(2) The method descrbed n paragraph (1) may be used
( ) Ony n nventoryng goods (requred under subsecton (c)
to be nventored) specfed n an appcaton to use such method
fed at such tme and n such manner as the Commssoner may
prescrbe and
( ) Ony f the ta payer estabshes to the satsfacton of the
Commssoner that the ta payer has used no procedure other than
that specfed n subparagraphs ( ) and (C) of paragraph (1) n
nventoryng (to ascertan ncome, proft, or oss, for credt pur-
poses, or for the purpose of reports to sharehoders, partners, or
other propretors, or to benefcares) such goods for any perod
begnnng wth or durng the frst ta abe year for whch the
method descrbed n paragraph (1) s to be used.
(3) The change to, and the use of, such method sha be n accord-
ance wth such reguatons as the Commssoner, wth the approva of
the Secretary, may prescrbe as necessary n order that the use of such
method may ceary refect ncome.
(4) In determnng ncome for the ta abe year precedng the
ta abe year for whch such method s frst used, the cosng nventory
of such precedng year of the goods specfed n such appcaton sha
be at cost.
(5) If a ta payer, havng comped wth paragraph (2), uses the
method descrbed n paragraph (1) for any ta abe year, then such
method sha be used n a subsequent ta abe years uness
( ) Wth the approva of the Commssoner a change to a df-
ferent method s authorzed or
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19.22(d)-.
24
( ) The Commssoner determnes that the ta payer has used
for any perod begnnng wth or durng any subsequent ta abe
year some procedure other than that specfed n subparagraph
( ) of paragraph (1) n nventoryng (for ascertanng ncome,
proft, or oss, for credt purposes, or for the purpose of reports to
sharehoders, partners, or other propretors, or to benefcares)
the goods specfed n the appcaton, and requres a change to a
method dfferent from that prescrbed n paragraph (1) begnnng
wth such subsequent ta abe year or any ta abe year thereafter.
In ether of the above cases, the change to, and the use of, the df-
ferent method sha be n accordance wth such reguatons as the
Commssoner, wth the approva of the Secretary, may prescrbe aa
necessary n order that the use of such method may ceary refect
Income.
(b) Ta abe Years to Whch ppcabe. The amendment made
by subsecton (a) sha be appcabe to ta abe years begnnng after
December 31, 1938.
(c) mendment to 1938 ct. Secton 22(d) of the Revenue ct of
1938 (reatng to nventores In certan Industres) s amended to
read as foows:
(d) If the Inventory method descrbed n secton 22(d)(1), ts
amended, of the Interna Revenue Code s used for the frst ta abe
year begnnng after December 31, 1938, then, n determnng ncome
for the precedng ta abe year, the cosng nventory of such year of
the goods specfed n the appcaton under secton 22(d)(2), as
amended, of such Code sha be at cost.
(2) rtce 22(c)- secton 9.22(c)-, Tte 2 , Code of edera
Reguatons s amended by nsertng at the end thereof the words,
( ut see artce 22(d)-.)
(3) rtce 22(c)-2 secton 9.22(c)-2, Tte 2 , Code of edera
Reguatons s amended by nsertng at the end of the frst sentence
e cept ns to those goods nventored under the eectve method authorzed by
secton 22(d),
so that the sentence so amended w read as foows:
In respect of norma goods, whchever bass s adopted must be apped wth
reasonabe consstency to the entre nventory e cept as to those goods nven-
tored under the eectve method authorzed by secton 22(d).
(4) rtce 22(c)-2 s further amended by nsertng n eu of the
s th sentence of the fourth paragraph thereof the foowng
sentence:
ut see secton 22(d) as to nventores under eectve method.
(5) rtce 22(c)-7 secton 9.22(c)-7, Tte 2 , Code of edera
Reguatons s amended by nsertng n eu of the ast sentence
thereof the foowng sentence:
See secton 22(d) as to nventores under eectve method.
( ) rtces 22(d)- to 22(d)-4 sectons 9.22(d)- to 9.22(d)-4,
Tte 2 , Code of edera Reguatons , ncusve, are strcken out
and there s substtuted n eu thereof the foowng:
rt. 22(d)-1 secton 9.22(d)-, Tte 2 , Code of edera Reguatons, 1939
Sup. . Inventores under eectve method. ny ta payer permtted or requred to
take Inventores pursuant to the provsons of secton 22(c) of the Interna Reve-
nue Code, and pursuant to the provsons of artces 22(c)- to 22(c)-8 of these
reguatons sectons 9.22(c)- to 9.22(c)-8, Tte 2 , Code of edera Regua-
tons may eect wth respect to those goods specfed n hs appcaton and
of the fourth
words,
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25
19.22(d)- .
propery sub|ect to nventory to compute hs openng and cosng nventores n
accordance wth the method provded by secton 22(d) of the Code as amended
by secton 219 of the Revenue ct of 1939. Under ths eectve nventory method,
the ta payer s permtted to treat those goods remanng on hand at the cose
of the ta abe year as beng:
rst, those ncuded n the openng nventory of the ta abe year, n the
order of acquston and to the e tent thereof, and
Second, those acqured durng the ta abe year.
Ths eectve nventory method s not dependent upon the character of the busness
n whch the ta payer s engaged, or upon the dentty or want of dentty
through commngng of any of the goods on hand, and may be adopted by the
ta payer as of the cose of any ta abe year begnnng after December 31, 1938.
If the eectve nventory method s used by a ta payer who reguary and
consstenty, n a manner smar to hedgng on a futures market, matches pur-
chases wth saes, then frm purchase and saes contracts (. e., those not egay
sub|ect to canceaton by ether party) entered nto at f ed prces on or before
the date of the nventory may be ncuded n purchases or saes, as the case may
be, for the purpose of determnng the cost of goods sod and the resutng proft
or oss, provded that ths practce s reguary and consstenty adhered to by the
ta p yer and that, n the opnon of the Commssoner, ncome s ceary refected
thereby.
bt. 22(d)-2 secton 9.22fd)-2. Tte 2 . Code of edera Reguatons, 1939
Sup. . Requrements ncdent to adopton and use of eectve method. The adop-
ton and use of the eectve nventory method s. by statute and by these regu-
atons, made sub|ect to the foowng requrements:
(1) The ta payer sha fe pursuant to these reguatons an appcaton to
use such method specfyng wth partcuarty the goods to whch t s to be
apped
(2) The nventory sha be taken at cost regardess of market vaues
) Goods of the specfed type ncuded n the openng nventory of the ta -
abe year for whch the method s frst used sha be consdered as havng been
acqured at the same tme and at a unt cost equa to the actua cost of the
aggregate dvded by the number of unts on hand, such actua cost of the
aggregate beng determned pursuant to the nventory method empoyed by the
ta payer under the reguatons appcabe to the precedng ta abe year
(4) Goods of the specfed type on hand as of the cose of the ta abe year n
e cess of what were on hand as of the begnnng of the ta abe year sha be
ncuded n the cosng nventory, regardess of dentfcaton wth specfc
nvoces, at costs determned as foows:
(a) y reference to the actua cost of the goods most recenty purchased
or produced:
( ) y reference to the actua cost of the goods purchased or produced
durng the ta abe year n the order of acquston :
(r) y appcaton of an average unt cost equa to the aggregate cost of
a of the goods purchased or produced throughout the ta abe year dvded
by the tota number of unts so purchased or produced, the goods refected
n such nventory ncrease beng consdered for the purposes of secton
22(d) as havng been acqured a at the same tme or
(d) Pursuant to any other proper method whch, n the opnon of the
Commssoner, ceary refects ncome.
Whchever of the severa methods of vaung the nventory ncrease s adopted
by the ta payer and approved by the Commssoner In accordance wt these
reguatons sha be consstenty adhered to n a subsequent ta abe years so
ong as the eectve nventory method s used by the ta payer
ampe 1: Suppose that the ta payer adopts the eectve nventory method for
the ta abe year 1939 wth an openng nventory of 10 unts at 10 cents per unt,
that t makes 1939 purchases of 10 unts as foows:
anuary 1 11 11
pr 2 12 24
uy 3 13 39
October 4 14 5
25220 40 -2
Totas: 10 130
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19.22(d)- .
2
and that t has a 1939 cosng nventory of 15 unts. Ths cosng nventory, de-
pendng upon the ta payers method of vaung nventory ncreases, w be
computed as foows:
(o) Most recent purchases
10 10
4 14 (October)
1 13 ( uy)
Totas: 15
or
( ) In order of acquston
10 10
1 11 ( anuary)
2 12 ( pr)
2 13 ( uy)
Totas: 15
or
(c) t an annua average
10 10 100
5 13 (130/10) 5
Totas: 15 1 5
ampe 2: Suppose, n addton to the facts stated n e ampe 1, that there s
a 1940 cosng nventory of 13 unts. Ths cosng nventory, beng determned
whoy by reference to the openng nventory, and beng taken n the order of
acquston, and dependng upon the ta payer s method of vaung ts nventory
ncrease for the precedng ta abe year, w be computed as foows:
(o) In case the ncrease was taken as most recent purchases
10 10 (from 1938) 100
1 13 ( uy, 1939) 13
2 14 (October, 1939) 28
Totas: 13 141
or
( ) In case the ncrease was taken n order of acquston
10 10 (from 1938) 100
1 11 ( anuary, 1939) 11
2 12 ( pr, 1939) 24
Totas: 13 135
or
(c) In case ncrease was taken on bass of an average
10 10 (from 1938) 100
3 13 (from 1939) 39
Totas: 13 139
(5) The ta payer sha estabsh to the satsfacton of the Commssoner
that the ta payer has not, n the ta abe year for whch the eectve nventory
method s frst used or n any subsequent ta abe year, used n determnng
ncome, proft, or oss, for credt purposes, or for the purpose of reports to
sharehoders, partners, or other propretors, or to benefcares, any nventory
method other than that referred to n artce 22(d)- secton 9.22(d)-, Tte
2 , Code of edera Reguatons, 1939 Sup. or at varance wth the requrement
referred to n paragraph (3) of ths artce, the ta payer s use of market vaue
n eu of cost not beng consdered at varance wth ths requrement
( ) Goods of the specfed type on hand as of the cose of the ta abe year
precedng the ta abe year for whch ths nventory method s frst used,
whether such precedng ta abe year began before or after December 31, 1938,
sha be ncuded n the ta payer s nventory for such precedng ta abe year
at cost
100
5
13
1 9
100
11
24
2
1 1
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27
19.22(d)- .
(7) The eectve nventory method, once adopted by the ta payer wth the
approva of the Commssoner, sha be adhered to n a subsequent ta abe
years uness
(a) change to a dfferent method s approved by the Commssoner or
(Z) The Commssoner determnes that the ta payer has used n ascer-
tanng ncome, proft, or oss, for credt purposes, or for the purpose of
reports to sharehoders, partners, or other propretors, or to benefcares,
and for years subsequent to hs adopton of the eectve nventory method,
an nventory method at varance wth that referred to n artce 22(d)-
and requres of the ta payer a change to a dfferent method for such sub-
sequent ta abe year or any ta abe year thereafter
(8) The ta payer sha mantan such accountng records as w enabe the
Commssoner ready to verfy the ta payer s nventory computatons as we
as hs compance wth these severa requrements.
bt. 22(d)-3 secton 9.22(d)-3, Tte 2t, Code of edera Reguatons, 1939
Sup. . Tme and manner of makng eecton. The eectve nventory method may
1 adopted and used ony f the ta payer fes wth hs return for the ta abe
year as of the cose of whch the method s frst to be used (or, f such return
s fed pror to the nneteth day after the approva of these reguatons, then
at any tme pror to the e praton of such nneteth day), n trpcate on orm
70 (revsed), aud pursuant to the nstructons prnted thereon and to the re-
qnrements of these reguatons, a statement of hs eecton to use such nventory
method. Such statement sha be accompaned by an anayss of a nventores
of the ta payer as of the begnnng and as of the end of the ta abe year for
whch the eectve method s proposed frst to be used, and aso as of the begn-
nng of the precedng ta abe year. In the case of a manufacturer, ths anayss
sha show n deta the manner n whch costs are convputed wth respect to raw
materas, goods n process, and fnshed goods, segregatng the products
(whether n process or fnshed goods nto natura groups on the bass of
ether (1) smarty n factory processes through whch they pass, or (2) sm-
arty of raw materas used, or (3) smarty n stye, shape, or use of fnshed
products. ach group of products sha be ceary descrbed.
The ta payer sha submt for the consderaton of the Commssoner n con-
necton wth the ta payer s adopton or use of the eectve nventory method
such other detaed nformaton wth respect to hs busness or accountng sys-
tem as may be at any tme requested by the Commssoner.
s a condton to the ta payer s use of the eectve nventory method, the
Commssoner may requre that the method be used wth respect to goods other
than those specfed n the ta payer s statement of eecton f, n the opnon of
the Commssoner, the use of such method wth respect to such other goods s
essenta to a cear refecton of ncome.
Whether or not the ta payer s appcaton for the ndopton and use of the
eectve nventory method shoud be approved, and whether or not such method,
once adopted, may be contnued, and the proprety of a computatons nc-
denta to the use of such method w be determned by the Commssoner n
connecton wth the e amnaton of the ta payer s returns.
kt. 22(d)-4 secton 9.22(d) , Tte 2 , Code of edera Reguatons, 1939
Sup. . d|ustments to be made bu ta payer. ta payer may not change to the
eectve method of takng nventores uness, at the tme he fes hs appcaton
for the adopton of such method, he agrees to such ad|ustments ncdent to the
change to or from such method, or ncdent to the use of such method, n the
nventores of pror ta abe years or otherwse, as the Commssoner upon the
e amnaton of the ta payer s returns may deem necessary n order that the
true ncome of the ta payer w be ceary refected for the years nvoved.
bt. 22(d)-5 secton 9.22 (d)-5, Tte 2 , Code of edera Reguatons, 1939
Sup. . Revocaton of eecton, n eecton made to adopt and use the eectve
nventory method s rrevocabe, and the method once adopted sha be used n
a subsequent ta abe years, uness the use of another method be requred by
the Commssoner, or authorzed by hm pursuant to a wrtten appcaton
therefor fed wth hm as provded n artce -11-2 of these reguatons secton
9.41-2, Tte 2 , Code of edera Reguatons .
bt. 22(d)-C secton 9.22(d)- , Tte 2 . Code of edera Reguatons, 1939
Sup. . Change from eectve nventory method. If the ta payer s granted per-
msson by the Commssoner to dscontnue the use of the eectve method of
takng nventores, and thereafter to pursue some other method, or f the ta -
payer s requred by the Commssoner to dscontnue the use of the eectve
method by reason of the ta payer s faure to conform to the requrements
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19.23(a)- .
28
detaed n artce 22(d)-2, the nventory of the specfed goods for the frst ta -
abe year affected by the change and for each ta abe year thereafter sha be
taken
(a) In conformty wth the method used by the ta payer under secton
22(c) In nventoryng goods not ncuded n hs eectve nventory compu-
tatons or
( ) If the eectve nventory method was used by the ta payer wth
respect to a of hs goods sub|ect to nventory, then n conformty wth the
nventory method used by the ta payer pror to hs adopton of the eectve
nventory method or
(c) If the ta payer had not used nventores pror to hs adopton of the
eectve nventory method and had no goods currenty sub|ect to nventory-
by a method other than the eectve method, then n conformty wth such
nventory method as may be seected by the ta payer and approved by the
Commssoner as resutng n a cear refecton of ncome or
(d) In any event, n conformty wth any nventory method to whch the
ta payer may change pursuant to appcaton approved by the Commssoner.
(Ths Treasury decson s ssued under the authorty of secton
22(d) of the Interna Revenue Code (53 Stat., Part 1) as amended
by secton 219 of the Revenue ct of 1939 (Pubc, No. 155, Seventy-
s th Congress, frst sesson) and secton 2 of the sad Interna
Revenue Code,)
ohn L. Suvan,
ctng Commssoner of Interna Revenue.
pproved December 28, 1939.
ohn W. anes,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 29, 1939, 12.44 p. m.)
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
Secton 19.23(a)-: usness e penses. 1940-21-102 2
I. T. 3373
INT RN L R NU COD .
The cost of hemets, rubber coats, and rubber boots requred to
be purchased and worn by cty fremen, and the cost of rubber coats
and rubber boots requred to be purchased and worn by cty poce-
. men, consttute aowabe deductons for edera ncome ta
purposes.
dvce s requested whether the cost of hemets, rubber coats, and
rubber boots requred to be purchased and worn by fremen, and the
cost of rubber coats and rubber boots requred to be purchased and
worn by pocemen, a empoyees of the cty of R, are aowabe
deductons for edera ncome ta purposes.
The ureau hods that where certan artces of wearng appare are
specfcay requred by the ta payer s busness, beng used soey n
hs busness, and such artces are not adaptabe to genera or con-
tnued wear to the e tent that they may be sad to repace the wearer s
reguar cothng, the cost thereof s a deductbe busness e pense.
(See G. C. M. 19 2, C. . 1938-1, 118, and G. C. M. 19790, C. .
1938-1, 118.) Ths rue appes to hemets, rubber coats, and rubber
boots purchased and worn by fremen and pocemen n the empoy
of the cty of R. The cost of such artces s, therefore, an aowabe
deducton for edera ncome ta purposes.
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29
19.23(a)-2.
Secton 19.23(a)-2: usness e penses. 194( -23-10278
L T.3380
INT RN L R NU COD .
Traveng e penses ncurred by teachers on sabbatca eave, who
receve compensaton whe engaged n the requred traveng and
who must report reatve to ther trave, are deductbe for edera
ncome ta purposes.
dvce s requested whether traveng e penses ncurred by teach-
ers durng sabbatca eave are deductbe for edera ncome ta
purposes.
The traveng referred to s requred of teachers bv the board of
educaton. ach month a report must be sent n by the teacher
showng the paces vsted by hm and the amount of tme spent n
each pace. Not more than 30 days are aowed for traveng n any
one State. monthy saary s pad to the teacher durng sabbatca
eave, whch eave s permtted after seven years of contnuous
teachng.
Secton 23(a) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons the ord-
nary and necessary e penses pad or ncurred durng the ta abe
year, ncudng traveng e penses whe away from home n pursut
of the ndvdua s trade or busness. It s accordngy hed that
traveng e penses ncurred by teachers on sabbatca eave, who
receve compensaton whe engaged n requred traveng and who
must report reatve to ther trave, are deductbe for edera ncome
ta purposes.
Secton 19.23(a)-: usness e penses.
INT RN L R NU COD .
Ctv of Phadepha empovee s ta pad by the empoyer for the
empoyee. (See I. T. 3382, page 12.)
Secton 19.23(a)-2: Traveng e penses. 1940-17-10239
( so Secton 22(a), Secton 19.22(a)-.) I. T. 33 8
INT RN L R NU COD .
ote e penses ncurred by a member of the State egsature of
the State of R whe away from home performng hs egsatve
dutes durng the sesson of the State egsature are deductbe n
determnng hs net ncome for edera ncome ta purposes. The
meage aowance receved by hm shoud be ncuded n gross
ncome and the actua e pense ncurred n trave to perform hs
egsatve dutes s deductbe.
dvce s requested whether a member of the egsature of the State
of R may deduct from hs gross ncome the hote e penses ncurred
by hm whe away from home durng the perod the State egsature
s n sesson, and whether hs meage aowance shoud be ncuded
n gross ncome. It appears that the State egsature meets nfre-
quenty and s n sesson for a very short tme.
It s hed that a member of the egsature of the State of R, who
s away from home whe he s engaged n the performance of egs-
atve dutes n the State capta, may deduct hs hote e penses n-
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19.23(c)- .
30
curred durng such perod. It s aso hed that hs meage aowance
shoud be ncuded n gross ncome and that hs actua e pense of
trave to perform hs egsatve dutes may be deducted.
Secton 19.23(a)- : Compensaton for persona servces.
INT RN L R NU COD .
Deductbty of contrbutons to severa trusts (not quafed under
secton 1 5) mantaned for the beneft of empoyees. (See 1. T.
334 , page 2.)
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST.
Secton 19.23(b)-: Interest. 1940-20-102 0
T. D. 49 9
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 10.
INCOM T .
mendng secton 19.23(b)- of Reguatons 103 reatve to the
deductbty of Maryand and Pennsyvana ground rents.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The ast sentence of the second paragraph of secton 19.83(b) 1
of Reguatons 103 Part 19, Tte 2 , Code of edera Reguatons,
1940 Sup. s hereby amended to read as, foows:
Payments of Maryand or Pennsyvana ground rents are deductbe as nterest
f the ground rent s redeemabe, but are treated as rent If the ground rent
Is rredeemabe and n such case are deductbe ony to the e tent they con-
sttute a proper busness e pense.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23 and 2 of the Interna Revenue Code (53 Stat., 12, 32).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved May , 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 7, 1940, 3.14 p. m.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
Secton 19.23(c)-: Ta es. 1910-12-1020
L T.3358
INT RN L R NU COD .
The cost of the stamps whch are requred by the aws of the
8t :te of New ampshre to be purchased and aff ed to packages of
tobacco products s an aowabe deducton as a ta n the return of
the dstrbutor or deaer purchasng and aff ng the stamps.
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31
19.23(0-1.
dvce s requested reatve to the deductbty for edera ncome
ta purposes of the ta mposed on tobacco products by the Sate of
New ampshre n 1939.
The aw under whch the ta s mposed s contaned n chapter 1 7,
sectons 1 to 19, ncusve, approved une 7,1939, as amended by chap-
ter 180, approved une 14, 1939, of the New ampshre Pubc cts
and ont Resoutons of the Legsature of 1939.
Under the provsons of those statutes, any person n the State of
New ampshre who s engaged n the busness of seng tobacco
products must secure a cense. Wth the e cepton of certan non-
resdents engaged n the busness of seng and shppng tobacco
products nto the State, stamps are sod ony to censed dstrbutors
and censed deaers. It s cear that under the State aw the ta s
mposed upon the dstrbutors or deaers who, n purchasng and aff -
ng the stamps, pay the ta .
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(e)- of Reguatons 103, ssued under the
Interna Revenue Code, states that n genera ta es are deductbe ony
by the person upon whom they are mposed.
It s hed that for edera ncome ta purposes the cost of the stamps
whch are requred by the aws of the State of New ampshre to be
purchased and aff ed to packages of tobacco products s an aowabe
deducton as a ta n the return of the dstrbutor or deaer purchasng
and aff ng the stamps. The cost of the stamps, however, may not
be deducted separatey as a ta f t s ncuded as a part of the busness
e pense of the dstrbutor or deaer, or s otherwse used to reduce hs
net ncome. To the purchaser or consumer of the tobacco products,
the cost of the stamps s merey addtona cost of the artce purchased.
Secton 19.23(c)-1: Ta es. 1940-15-10227
I. T. 33 5
INT RN L R NU COD .
mounts deposted n parkng meters n the Dstrct of Coumba
are not aowabe deductons as ta es under secton 23(c) of the
Interna terenne Code. If, however, amounts deposted n the
meters represent e pendtures n connecton wth the ta payer s
trade or busness, such amounts may be deducted as a busness
e pense.
dvce s requested whether the amounts deposted by ta payers n
parkng meters n the Dstrct of Coumba consttute aowabe
deductons as ta es for edera ncome ta purposes.
Secton 11 of the ct of pr 4,1938 (52 Stat., 15 ,192), provdes:
Sec. 11. The Commssoners of the Dstrct of Coumba are hereby author-
zed and empowered, n ther dscreton, to secure and to nsta e permentay,
at no e pense to the sad Dstrct, mechanca parkng meters or devces on the
streets, avenues, roads, hghways, and other pubc spaces n the Dstrct of
Coumba under the |ursdcton and contro of sad Commssoners, such nsta-
atons to be mted to a near footage not to e ceed the tota of the permeters
of four normay szed squares n such Dstrct and sad Commssoners are
authorzed and empowered to make and enforce rues and reguatons for the
contro of the parkng of vehces on such streets, avenues, roads, hghways, and
other pubc spaces, and as an ad to such reguaton and contro of the park-
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19.23(c)- .
32
ng of vehces the Commssoners may prescrbe fees for the prvege of park-
ng vehces where sad meters or devces are nstaed.
The Commssoners are further authorzed and empowered to pay the pur-
chase prce and cost of nstaaton of the sad meters or devces from the fees
coected, whch are hereby approprated for such purpose, for the fsca years
1938 and 1939, and thereafter such meters or devces sha become the prop-
erty of sad Dstrct, and a fees coected sha be pad to the coector of ta es
for depost n the Treasury of the Unted States to the credt of the revenues of
sad Dstrct.
The queston whether a partcuar charge s to be regarded as a
ta depends upon ts rea nature. In 2 Rung Case Law, page 17,
the genera rue dstngushng ta aton from reguatons s stated n
the foowng anguage:
4. Ta aton dstngushed from reguaton. Some governments derve a
consderabe revenue from a |udcous e ercse of the power of reguaton but
snce a ta s a charge mposed for the purpose of rasng revenue, a charge
prmary mposed for the purpose of reguaton s not a ta , and s not sub.ect
to the consttutona mtatons upon the power of ta aton. If the
prmary purpose oS the egsature n mposng such a charge s to reguate the
occupaton or the act, the charge s not a ta , even f It produces revenue for
the pubc.
In the nstant case the staute ceary shows that the fee prescrbed
s for reguatory purposes and s not for the purpose of rasng reve-
nue. ccordngy, t s hed that amounts deposted by ta payers n
parkng meters n the Dstrct of Coumba are not aowabe deduc-
tons as ta es under secton 23(c) of the Interna Revenue Code. If,
however, amounts deposted n the meters represent e pendtures n
connecton wth the ta payer s trade or busness, such amounts may
be deducted as a busness e pense.
Secton 19.23(c)-1: Ta es. 1940-18-10245
I. T. 3370
INT RN L R NU COD .
Deductbty for edera ncome ta purposes of ncome ta es
mposed by the cty of Phadepha.
dvce s requested concernng the deductbty for edera ncome
ta purposes of ncome ta es mposed by the cty of Phadepha.
Under authorty granted by an enabng act enacted by the Penn-
syvana State Legsature on ugust 15. 1932, the cty counc of
Phadepha passed an ncome ta ordnance approved by the actng
mayor on December 13, 1939. The pertnent provsons of the ord-
nance are quoted beow:
Sec. 2. Imposton of ta . n annua ta for genera revenue purposes of
1 per centum s hereby mposed on (a) saares, wages, commssons and
other compensaton earned after anuary 1, 1940, by resdents of Pha-
depha and on ( ) saares, wages, commssons and other compensaton earned
after anuary 1, 1940, by nonresdents of Phadepha for work done or servces
performed or rendered n Phadepha and on (c) the net profts earned after
anuary 1, 1039, of busnesses, professons or other actvtes conducted by such
resdents, and on (rf) the net profts earned after anuary 1, 1939, of busnesses,
professons or other actvtes conducted n Phadepha by nonresdents.

Sec. 4. Coecton at source.- ach empoyer wthn the cty of Phadepha
who empoys one or more persons ou a saary, wage, commsson or other com-
pensaton bass sha deduct, monthy or more often than monthy, at the tme
of the payment thereof, the ta of 1 per centum of saares, wages, com-
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33
I 19.23(c)- .
mssons or other compensaton due by te sad empoyer to the sad em-
poyee and sha, on or before the 15th day of the month ne t foowng the sad
deducton make a return and pay to the recever of ta es the amount of ta
so deducted.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera.
In accordance wth the provsons of the Interna Revenue Code
referred to above, t s hed that ncome ta es pad by an ndvdua
ta payer or wthhed by hs empoyer from hs saary, wages, com-
mssons, or compensaton under the Phadepha ncome, ta ord-
nance approved December 13, 1039, are deductbe as ta es n hs
edera ncome ta return for the vear n whch pad by hm or
wthhed by the empoyer. (See-1. T. 1273, C. . 1-1, 125 (1922).)
ta payer dervng net profts earned after anuary 1, 1939, from
busnesses, professons or other actvtes and empoyng the
accrua method of accountng, whose returns are made on the caendar
year bass, may cam a deducton for the Phadepha ncome ta as
an accrued abty as of December 31, 1939, the end of hs ta abe
year. owever, a ta payer dervng such profts and empoyng the
accrua method of accountng, whose returns are made on the fsca
year bass, s not entted to the beneft of such deducton for hs fsca
year ended n 1939 because the ta can not be hed to have accrued
pror to December 13. 1939, the date the Phadepha ncome ta
ordnance was approved. (See O. D. 505, C. . 2, 121 (1920).)
Therefore, a ta payer empoyng the accrua method of accountng
who derves ncome from busnesses, professons or other actvtes
and makes hs return on the fsca year bass may cam as a deducton
for hs ta abe year endng n 1910 the Phadepha ncome ta es wth
respect to the ncome earned durng the perod anuary 1,1939, to the
cose of hs fsca year n 1939, as we as such ta es for hs fsca year
endng n 1940. (See I. T. 2281, C. . -, 58 (192 ), and G. C. M.
8553, C. . I -2, 109 (1930).) If the ta es are deducted as a bus-
ness e pense or otherwse used to reduce hs net ncome, they may not
be deducted separatey as ta es.
Secton 19.23(c)-1: Ta es. 1940-20-10257
I. T. 3372
INT RN , R NU COD .
The cost of the stamps whch are requred by the aws of the
cty of New York and the State of New York to be purchased and
aff ed to packages of cgarettes s an aowabe deducton as a ta
n the return of the deaer purchasng and aff ng the stamps.
dvce s requested as to the deductbty for edera ncome ta
purposes of the cgarette ta es mposed by the cty of New York
and the State of New York.
The aw under whch the ta es are mposed by the cty of New
York s contaned n No. 23 of the Loca Laws of the Cty of New
York for the year 1938, approved une 30, 1938, as amended. The
aw s entted oca aw To amend the admnstratve code of
the cty of New York, n reaton to rasng revenue for the purposo
of reevng the peope of the cty of New York from the hardshps
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19.23(c)- .
and sufferng caused by unempoyment and the effects thereof on
the pubc heath and -wefare, by mposng a ta upon saes of
cgarettes n the cty of New York, to enabe such cty to defray the
cost of grantng unempoyment work and home reef. The pro-
vsons of the aw pertnent to the present queston are contaned n
Tte T, sectons T41-1.0, T41-2.0, T41-3.0, subsecton a, T41 .0 and
T41-9.0, as amended. Secton T41-2.0 of the aw provdes n sub-
secton a that the ta sha be pad upon every sae of cgarettes at
reta, and n subsecton c that a deaers sha be abe to the cty
as ta payers for the payment of the ta and sha pay the ta by
purchasng stamps from the treasurer.
The aw under whch the ta es are mposed by the State of New
York s contaned n chapter 470 of the Laws of New York, 1939,
entted n act to amend the ta aw, by mposng, temporary, a
ta upon saes of cgarettes, provdng for the appcaton of the
revenues from such source, and makng an appropraton for the
department of ta aton and fnance. The aw was approved May 17,
1939, but the ta mposed thereby dd not become effectve unt
uy 1, 1939. The pertnent provsons of the aw are contaned In
rtce , sectons 470, 471, 47 , and 481. Secton 471 of the New
York State cgarette ta aw provdes that the ta s mposed and
sha be pad on a cgarettes possessed n the State by any person
for sae on and after uy 1, 1939. It s aso provded that the ta es
sha be mposed upon ony one sae of the same package of cgarettes
n New York.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed.
or edera ncome ta purposes, the cost of the stamps whch are
requred by the aws of the cty of New York and the State of New
York to be purchased and aff ed to packages of cgarettes s an
aowabe deducton as a ta n the return of the deaer purchasng
and aff ng the stamps. The cost of the stamps, however, may not
be deducted separatey as a ta f t s ncuded as a part of the
busness e pense of the deaer or s otherwse used to reduce hs net
ncome. To the purchaser or consumer of the cgarettes, the cost of
the stamps s merey addtona cost of the artce purchased.
Secton 19.23(c)-1: Ta es. 1940-21-102 3
I. T. 3374
INT RN L R NU COD .
Rea and persona property ta es In the State of Washngton
accrue for the year 1939 and subsequent years as of anuary 1 of
each year.
dvce s requested reatve to the deductbty by ta payers who
keep ther accounts on the accrua bass of property ta es mposed
by the State of Washngton for 1939 and subsequent years.
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35 19.23(0-1.
I. T. 3224 (C. . 938-2, 144) hods (syabus):
Rea and persona property ta es assessed n the State of Washngton for
the year 1937 shoud be accrued for edera Income ta purposes us of March
1, 37, n accordance wth G. C. M. 0( C7 (C. . III-2. 94 (1 29)). Rea and
persona pro erty ta es assessed n the State of Washngton for the year UYM
shoud be accrued as of anuary 1, 193S, n accordance wth the aw as changed
by chapter 122, Laws of Washngton, 1037.
The aw of the State of Washngton reatng to ta es on rea and
persona property was changed n 1939 (Laws of Washngton,
Twenty-s th Sesson, chapters 13 and 20 ), but an e amnaton of
those provsons of aw dscoses that they do not affect the bass of
the rung pubshed as I. T. 3224, supra. Inasmuch as the changes
n the e stng aw made by chapters 13 and 20 , Laws of Washng-
ton, 1939, do not affect the concuson reached n I. T. 3224 that prop-
erty ta es n the State of Washngton for the year 1938 shoud be
accrued as of anuary 1, 1938, such accrua date ( anuary 1) s
appcabe to 1939 and subsequent years.
though the ta es assessed as of anuary 1, 1939, are, under sec-
ton 2, chapter 13 , Laws of Washngton, 1939, known and desg-
nated as ta es of the year 1940, they are nevertheess generay
accruabe as of anuary 1, 1939.
Secton 19.23(c)-: Ta es. 1940-21-102 4
I. T. 3375
INT RN L R NU COD .
The cost of stamps requred by the aws of the State of Te as to
be purchased and aff ed to packages of cgarettes s an aowabe
deducton as a ta n the return of the frst seer wthn the State
purchasng and aff ng the stamps.
dvce s requested as to the deductbty for edera ncome ta
purposes of cgarette ta es mposed pursuant to Te as Laws of 1933,
chapter 241, as amended.
The aw under whch the ta es are mposed s contaned n artce
7017c of ernon s Cv Statutes of the State of Te as, nnotated.
The pertnent provsons of aw are contaned n secton 1, subdv-
sons (a), (e), (m), (n), (o), and (p) secton 2, paragraph 1 sec-
ton 3, paragraphs 2 and 3 secton 3 and secton 9(a).
Under secton 2 of the Te as cgarette ta act, t s provded that
the ta es sha be pad ony once by the person makng the frst
sae of the cgarettes n Te as. Under secton (m) of the act,
the term dstrbutor ncudes every person n the State of Te as
who manufactures or produces cgarettes, or who shps, transports, or
mports nto the State, or n any manner acqures or possesses cga-
rettes, and makes a frst sae of the same n the State. Dstrbu-
tor aso ncudes every person n the State who n any manner ac-
qures or possesses unstamped cgarettes for the purpose of makng
a frst sae of the cgarettes wthn the. State.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23 (c)- of Reguatons 103, reatng to the
Interna Revenue Code, states that n genera ta es are deductbe
ony by the person upon whom they are mposed.
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19.23(c)- .
3
rom an e amnaton of the State aw, t s evdent that the per-
son who pays the ta by aff ng the stamps requred by the act s
the ta payer and s the ony one who s entted to a deducton for
such payment for edera ncome ta purposes. The ta s pad but
once, that s by the person makng the frst sae of cgarettes wthn
the State. The act defnes the person makng the frst sae as the
dstrbutor.
or edera ncome ta purposes, therefore, the cost of the stamps
s an aowabe deducton as a ta n the return of the frst seer
wthn the State of cgarettes to whch he has aff ed the stamps as
requred by the State aw. The amount pad for the stamps may
not be deducted separatey as a ta f t s ncuded as a part of the
busness e pense pf the ta payer or s otherwse used to reduce hs
net ncome. Wth respect to the purchaser or consumer of cgarettes,
the addtona amount pad for the cgarettes because of the stamp
ta pad by the frst seer s merey addtona cost of the artce
purchased.
Secton 19.23 (c)-1: Ta es. 1940-21-102 5
I. T. 337
INT RN L R NU COD .
Ta es Imposed under the Dstrct of Coumba Income Ta ct,
approved uy 2 , 1939, are deductbe for edera ncome ta pur-
poses n the year n whch pad or accrued.
dvce s requested as to the deductbty for edera ncome ta
purposes of the Dstrct of Coumba ncome ta .
The aw under whch the ta s mposed s contaned n Tte II
of Pubc, No. 225, chapter 307, Seventy-s th Congress, frst sesson,
entted n ct to provde revenue for the Dstrct of Coumba,
and for other purposes, and was approved uy 2 1939. The pert-
nent provsons of the aw are contaned n secton 1 and secton
2 (a), (b), and (c).
Secton 23(c) of the Interna evenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23 (c)- of Reguatons 103, reatng to the In-
terna Revenue Code, states that n genera ta es are deductbe ony
by the person upon whom they are mposed.
It s hed that the Dstrct of Coumba ncome ta s deductbe
for edera ncome ta purposes n the year n whch t s actuay
pad bv a ta payer who empoys the cash recepts and dsbursements
method of accountng. ta payer empoyng the accrua method
of accountng shoud deduct the Dstrct of Coumba ncome ta n
the year n whch t accrues.
Secton 19.23 (c) -1: Ta es. 1940-22-10270
I. T. 3378
INT RN L R NU COD .
The manufacturers e cse ta on gasone Imposed by secton
3412 of the Interna Revenue Code s deductbe for edera ncome
ta purposes by the manufacturer, producer, or Importer.
The ta on gasone mposed by the aw of the Terrtory of
awa s deductbe by the dstrbutor.
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37
19.23(c)- .
dvce s requested concernng the deductbty for edera ncome
ta purposes of the manufacturers e cse ta on gasone mposed by
secton 3412 of the Interna Revenue Code and the ta on gasone
mposed by the aw of the Terrtory of awa.
secton 3412 of the Interna Revenue Code reads n part as foows:
(a) There sha be Imposed on gasone sod by the producer or Importer
thereof, or by any producer of gasone, a ta of 1 cent a gaon, e cept that
under reguatons prescrbed by the Commssoner wth the approva of the
Secretary the ta sha not appy n the case of saes to a producer of gasone.
(b) If a producer or mporter uses (otherwse than n the producton of gaso-
ne) gasone sod to hm free of ta , or produced or mported by hm, such
use sha for the purposes of ths chapter Chapter 29 be consdered a sae.
ny person to whom gasone s sod ta -free under ths secton sha be consd-
ered the producer of such gasone.
Secton 23(c) of the Interna Revenue Code provdes that n com-
putng net ncome there sha be aowed as deductons ta es pad or
accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 19.23(c)- of Reguatons 103, reatng to the n-
come ta under the Interna Revenue Code, states that n genera
ta es are deductbe ony by the person upon whom they are mposed.
The manufacturers e cse ta on gasone mposed by secton 3112
of the Interna Revenue Code s ceary mposed upon the manu-
facturer, producer, or mporter, and s, therefore, deductbe by hm
for edera ncome ta purposes. (See Mn. 3988, C. . I-2, 2o
(1932).) The ta s not deductbe from gross ncome n the return
of the consumer even though the amount thereof s passed on to hm.
The aw under whch the ta on gasone s mposed by the Terr-
tory of awa s found n chapter 4 of the Laws of the Terrtory
of awa, Reguar Sesson of 1939, effectve as of uy 1, 1939, and
reads n part as foows:
Sec. 2013. Dstrbutors to pay certan cense ta s. (a) very dstrbutor
sha, n addton to any other ta es provded by aw, pay a cense ta to the
treasurer of 4 cents for each gaon of qud fue refned, manufac-
tured, produced or compounded by such dstrbutor and sod or used by hm n
the Terrtory, or mported by such dstrbutor, or acqured by hm from per-
sons not censed dstrbutors, and sod or used by hm n the Terrtory .
No provson s made for refund of any porton of the ta pad
wth respect to the sae of gasone (ncuded n the term qud
fue ).
Under the above-quoted provsons of awaan aw, the ta of 4
cents requred to be pad on each gaon of gasone s a cense ta
mposed upon and payabe by the dstrbutor. The ta s. therefore,
deductbe by hm for edera ncome ta purposes. The amount of
such ta , whch s ncuded as a part of the cost of the gasone, s not
deductbe by the consumer.
Secton 19.23(c)-: Ta es.
INT RN L R NU COD .
Cty of Phadepha empoyee s ta pad by the empoyer for the
empoyee. (See I. T. 3382, page 12.)
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19.23(m)-.
38
Secton 19.23 (c) -1: Ta es. 1940-24-10287
L T. 3383
INT RN L R NU COD .
The stamp ta , effectve une 1, 1939, mposed upon the sae
of tobacco products In Rhode Isand s a ta upon the sae by the
dstrbutor or deaer and s deductbe by hm as a ta under sec-
ton 23(c) of the Interna Revenue Code.
dvce s requested as to who s entted to deduct for edera n-
come ta purposes the ta mposed upon the sae of tobacco products
n Rhode Isand. The ta s mposed by chapter 3 of the 1939 Ses-
son Laws of the State of Rhode Isand and Provdence Pantatons
entted n act mposng a ta upon the sae of tobacco products,
effectve une 1, 1939.
Secton 1 of the act provdes that whenever used n the act, the
word dstrbutor sha mean any person engaged n the State n
manufacturng, mportng, or procurng tobacco products for sae
to deaers n the State any person who purchases tobacco products
for the purpose of resae n the State, provded at east 75 per cent
of a tobacco products sod s purchased drecty from the manufac-
turers thereof and any person engaged n operatng 50 or more ma-
chnes for vendng tobacco products who sha se drect to the
consumer by means of such machnes.
Secton of the act mposes a ta on a tobacco products sod
or hed for sae n the State by any person, the payment thereof
to be evdenced by stamps aff ed to the packages contanng the
tobacco products. Secton 11 of the act provdes that each
dstrbutor sha aff , or cause to be aff ed, to each package of
tobacco products sod or dstrbuted by hm stamps of the proper
denomnatons.
Under the provsons of the act n queston, t s hed that the ta
thereby mposed s a ta upon the sae of tobacco products by the
dstrbutor or deaer, and for edera ncome ta purposes the ta
s deductbe by hm under secton 23(c) of the Interna Revenue
Code. When added to the sae prce of the tobacco products, the
ta s merey an addtona cost to the purchaser or consumer and
s not deductbe by hm.
S CTION 23(m). D DUCTIONS ROM GROSS
INCOM : D PL TION.
Secton 19.23(m)-: Depeton of mnes, o and 1940-2-1013
gas wes, other natura deposts and tmber T. D. 49 0
.deprecaton of mprovements.
TITL 2 INT RN L R NU . C PT R I, SU C PT R , P RT 0
SU C PT R , P RT 4 5, SU P RT . INCOM T .
mendng Reguatons 101 as made appcabe to the Interna
Revenue Code by Treasury Decson 4885 fC. . 1939-1 (Part 1),
31) n so far as snch reguatons prescrbe rues reatve to the
aowance of depeton and deprecaton deductons under sec-
tons 2.3 (m) and 114 of the Interna Revenue Code.
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39
19.23(m)-.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Reguatons 101 Part 9, Tte 2 , Code of edera Reguatons,
1939 Sup. , as made appcabe to the Interna Revenue Code by
Treasury Decson 4885, approved ebruary 11, 1939 C. . 1939-1
(Part 1), 39 Part 4 5, Subpart of such Tte 2 , n so far ua
they prescrbe rues reatve to the aowance of depeton and do-
recaton deductons under sectons 23 (m) and 114 of the Interna
fvenue Code, are hereby amended as foows:
(1) The second, thrd, and fourth paragraphs of artce 23(m)-
secton 9.23(m)- are amended to read as foows:
Under such provsons, the owner of an economc nterest n mnera deposts
or standng tmber s aowed annua depeton deductons. n economc
nterest s possessed n every case n whch the ta payer has acqured, by
nvestment, any nterest n mnera n pace or standng tmber and secures,
by any form of ega reatonshp, ncome derved from the severance and sae
of the mnera or tmber, to whch he must ook for a return of hs capta.
Lut a person who has no capta nvestment n the mnera depost or standng
mber docs not possess an economc nterest merey because, through a con-
tractua reaton to the owner, he possesses a mere economc adrantage derved
from producton. Thus, an agreement between the owner of an economc
nterest and another enttng the atter to purchase the product upon produc-
ton or to share n the net ncome derved from the nterest of such owner
does not convey a depetabe economc nterest.
The ad|usted bass of deprecabe property s returnabe through annua
deprecaton deductons. Deprecaton and depeton deductons on the prop-
erty of a corporaton are aowed to the corporaton and not to Its share-
hoders. ( ut see artce 115-0 secton 9.115- .) The prncpes governng
the apportonment of deprecaton n the case of property hed by one person
for fe wth remander to another person and n the case of property hed
In trust are aso appcabe to depeton. (See artce 23(1)-1 secton
9.23(1)-1 .)
(2) The frst sentence of artce 23(m)-(c) secton 9.23(m)-
1(c) s amended to read as foows:
The term mnera depost refers to mneras n pace.
(3) rtce 23(m)-(e) secton 9.23(m)-(e) , defnng the term
u operatng profts, s strcken out.
(4) The desgnaton of artce 23(m)-(/) secton 9.23(m)-(/)
s changed to (e).
(5) The desgnaton of artce 23(m)-( 7) secton 9.23(m)-( )
s changed to (/), and such artce s further amended to read as
foows:
(f) Gross ncome from the property, as used n secton 114(b) (3) and (4)
and artces 23(m)- to 23(m)-28 sectons 9.23(m)- to 9.23(m)-28 , ncusve,
means the amount for whch the ta payer ses the crude mnera product of the
property n the mmedate vcnty of the mne or we, but, f the product s trans-
ported or processed (other than by the processes e cepted beow) before sae, t
means the representatve market or fed prce (as of the date of sae) cf crude
mnera product of ke knd and grade before such transportaton or processng.
If there s no such representatve market or fed prce (as of the date of sae),
then there sha be used n eu thereof the representatve market or fed prce of
the frst marketabe product resutng from any process or processes (or, If the
product In ts crude state s merey transported, the prce for whch sod) mnus
the costs and proportonate profts attrbutabe to the transportaton and the
processes not sted beow. The processes e cepted are as foows:
(1) In the case of coa ceanng, breakng, szng, and oadng at the mne
for shpment
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19.23(m)-.
40
(2) In the case of suphur pumpng to vats, coong, breakng, and oadng
at the mn for shpment
(8) In the case of ron ore and ores whch are customary sod In the
form of the crude mnera product sortng or concentratng to brng to
shppng grade, and oadng at the mne for shpment and
(4) In the case of ead, znc, copper, god, or sver ores and ores whch
are not customary sod n the form of the crude mnera product crushng,
concentratng (by gravty or fotaton), and other processes to the e tent to
whch they do not benefcate the product n greater degree (n reaton to the
crude mnera product on the one hand and the refned product on the other)
than crushng and concentratng (by gravty or fotaton).
In case any of the e cepted processes are not apped n the mmedate vcnty
of the mnng dstrct n whch the mne s ocated, costs ncurred for transporta-
ton to the processng ocaton and, f transported by ta payer, the proportonate
profts attrbutabe to trausporaton shoud be subtracted from the sae prce of
the product to determne gross ncome from the property.
In the ease of o and gas, f the crude mnera product s not sod on the
property but s manufactured or converted nto a refned product or s trans-
ported from the property pror to the sae, then the gross ncome from the
property sha be assumed to be equvaent to the market or fed prce of the
o or gas before converson or transportaton.
In a cases there sha be e cuded n determnng the gross ncome from the
property an amount equa to any rents or royates whch were pad or ncurred
by the ta payer n respect of the property and are not otherwse e cuded from
the gross ncome from the property. If royates n the form of bonus pay-
ments have been pad n respect of the property n the ta abe year or any pror
years or f advanced royates have been pad n respect of the property n any
ta abe year endng pror to December 31, 1939, the amount e cuded from
gross ncome from the property for the current ta abe year on account of such
payments sha be an amount equa to that part of such payments whch s aoca-
be to the product sod durng the ta abe year. If advanced royates have been
pad n respect of the property n any ta abe year endng on or after December
31. 1939, the amount e cuded from gross ncome from the property for the
current ta abe year on account of such payments sha be an amount equa to the
deducton for such ta abe year taken on account of such payments pursuant to
artce 23(m)-10(e) secton 9.23(m)-10(e) .
( ) The desgnaton of artce 23(m)-(h) secton 9.23(m)-( )
s changed to (g), and (g) wherever appearng n the te t thereof s
changed to (/).
(7) The desgnaton of artce 23(m)-( ) secton 9.23(m)-()
s changed to ( ), and (g) appearng n the te t thereof s changed
to (/).
(8) The desgnaton of artce 23(m)-( ) secton 9.23(m)-O )
s changed to ( ), and the frst sentence thereof s further amended to
read as foows:
The property, as used n secton 114(b) (2), (3), and (4), and artces
23(m)- to 23(m)-19 sectons 9.23(m)- to 9.23(m)-19 , ncusve, means the
nterest owned by the ta payer n any mnera property.
(9) The second sentence of the frst paragraph of artce 23(m)-3
secton 9.23(m)-3 s amended to read as foows:
The vaue must be equtaby apportoned between the owners of the economc
nterests theren.
(10) The reference to ( ) appearng n the ast sentence of the thrd
paragraph of artce 23(m)-3 secton 9.23(m)-3 s changed to (g).
(11) The references to (g) and (h) appearng n artce 23(m)-4
secton 9 23(m)-4 are changed to (/) and (g), respectvey.
(12) The references to (g) and (h) appearng n the ast sentence of
the frst paragraph of artce 23(m)-5 secton 9.23(m)-5 are changed
to (/) and ((7), respectvey.
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41
19.23(m)-.
(13) rtce 23(m)- secton 9.23(m)- s amended to read as
foows:
bt. 23(m)- Sec. 9.23(m)-C . Determnaton of cost of deposts. In any
case n whch a depeton or deprecaton deducton s computed on the bass of
the cost or prce at whch any nterest n any mnera property was acqured,
the ta payer w be requred to show that the cost or prce at whch such
nterest was bought was f ed for the purpose of a bona fde purchase and sae,
by whch the nterest passed n fact as we as n form to an owner other than
the vendor. No fcttous or nfated cost or prce w be permtted to form the
bass of any cacuaton of a depeton or deprecaton deducton, and n de-
termnng whether the prce or cost at whch any purchase or sae was made
represented the actua market vaue of the nterest sod, due weght w be
gven to the reatonshp or connecton e stng between the person seng the
nterest and the buyer thereof.
(14) The second, thrd, and fourth sentences of artce 23(m)-7()
secton 9.23(m)-7( ) are amended as foows:
The factors essenta n the case of a mnera deposts are (1) the tota
e pected proft, (2) the rate at whch ths proft w be obtaned, and (3) the
rate of nterest commensurate wth the rsk for the partcuar depost. In case
of o and gas propertes the addtona factors are ( ) the tota quantty of o
and gas n terms of the prncpa or customary unt (or unts) pad for n the
product marketed, ( ) the quantty of o and gas e pected to be recovered
durng each operatng perod, (C) the average quaty or grade of the o and
gas reserves, (D) the aocaton of the tota e pected proft to the severa
processes or operatons necessary for the preparaton of the o and gas for
market, ( ) the probabe operatng fe of the depost n years, ( ) the de-
veopment cost, and (G) the operatng cost. In order to estmate the tota
e pected proft from the operaton of mnes t s necessary to determne the
quantty, quaty, and recoverabe mnera content of the deveoped, probabe,
and prospectve ore reserves n a cases.
(15) rtce 23(m)-7 (e) and (/) secton 9.23(m)-7 (e) and (/)
s amended to read as foows:
(e) The vaue of each mnera depost s measured by the e pected gross ncome
(the number of unts of mnera recoverabe n marketabe form mutped by
the estmated market prce per unt) ess the estmated operatng cost, reduced
to a present vaue as of the date as of whch the vauaton s made at the rate of
nterest commensurate wth the rsk for the operatng fe, and further reduced
by the vaue at that date of the deprecabe assets and of the capta addtons,
f any, necessary to reaze the profts. The deRree of rsk s generay owest In
caws where the factors of vauaton are fuy supported by the operatng record
of the mnera property pror to the date as of whch the vauaton s made
reatvey hgher rsks attach to apprasas upon any other bass.
(f) If. for the purpose of the equtabe apportonment of depeton among the
severa owners of economc nterests, the vaue of any mnera property must be
ascertaned as of any specfc date for the determnaton of the bass for depeton,
the vaues of the severa nterests theren may be determned separatey, but,
when determned as of the same date, sha together never e ceed the vaue at
that date of the mnera property n fee smpe.
(1 ) rtce 23(m)-10 secton 9.23(m)-10 s amended to read as
foows:
rt. 23(m)-10 Sec. 9.23(m)-10 . Depeton d|ustments of accounts based
on bonus or advanced royaty. (a) If a bonus n addton to royates s receved
upon the grant of rghts n mnera property, there sha be aowed to the payee
as a depeton deducton n respect of the bonus an amount equa to that propor-
ton of the bass for depeton as provded n secton 114(b) (1) or (2) whch
the amount of the bonus bears to the sum of the bonus and the royates e pected
to be receved. Such aowance sha be deducted from the payee s bass for
depeton, and the remander Is recoverabe through depeton deductons on the
bass of royates thereafter receved. In the case of the payor any payment
made for the acquston of an economc nterest n a mnera depost or standng
tmber consttutes a capta nvestment n the property recoverabe ony through
the depeton aowance.
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19.23(m)-.
42
( ) If the owner of operatng rghts In mnera property for a term of years
s requred to e tract and pay for, annuay, a specfed number of tons, or other
agreed unts of measurement, of such mnera, or to pay, annuay, a specfed
sum of money whch sha be apped n payment of the purchase prce or royaty
per unt of such mnera whenever the same sha thereafter be e tracted and
removed from the premses, the payee sha treat an amount equa to that part
of the bass for depeton aocabe to the number of unts so pad for n advance
of e tracton as an aowabe deducton from the gross ncome of the year n
whch such payment or payments sha be made but no deducton for depeton
by such payee sha be camed or aowed n any subsequent year on account of
the e tracton or remova n such year of any mnera so pad for n advance and
for whch deducton has once been made.
(c) If for any reason any grant of mnera rghts e pres or termnates or
s abandoned before the mnera whch has been pad for In advance has been
e tracted and removed, the grantor sha ad|ust hs capta account by restorng
thereto the depeton deductons made n pror years on account of royates on
mnera pad for but not removed, and a correspondng amount must be returned
as ncome for the year n whch such e praton, termnaton, or abandonment
occurs.
(d) In eu of the treatment provded for n paragraphs (a) and (h) above
the owner of an economc nterest n o and gas wes may take as a depeton
deducton n respect of any bonus or advanced royaty from the property for the
ta abe year 27M per cent of the amount thereof and the owner of an economc
nterest n suphur mnes, meta mnes, and coa mnes may take as a depeton
deducton n respect of any bonus or advanced royaty from the property for
the ta abe year begnnng after December 31, 1938, for whch he frst makes
return n respect of the property (and for subsequent ta abe years n case an
eecton to have depeton computed on a percentage bass has been e ercsed n
the proper return) 23 per cent, 15 per cent, and 5 per cent, respectvey, of the
amount thereof but the deducton sha not n any case e ceed 50 per cent of
the net ncome of the ta payer (computed wthout aowance for depeton)
from the property.
(e) If a essee or other owner of operatng rghts In one or more mnera
propertes s requred to pay royates on a specfed number of unts of mnera
annuay, whether or not e tracted wthn the year, and may appy any amounts
pad on account of unts not e tracted wthn the year aganst the royaty on
mnera thereafter e tracted, he may at hs opton treat the advanced royates
so pad or accrued n ether one of the foowng manners:
(1) s deductons from gross ncome for the year the advanced royates
are pad or accrue or
(2) s deductons from gross ncome for the year the mnera product n
respect of whch the advanced royates were pad s sod.
The opton contaned In ths paragraph sha appy ony to advanced royates
pad or neerued n ta abe years endng on or after December 31, 1930. very
ta payer must make an eecton as to the treatment of a such advanced
royates n hs return for the frst ta abe year endng on or after December
31, IWTO, n whch such amounts are pad or accrue. ta payer w be con-
sdered to have made an eecton n accordance wth the manner n whch such
tems are treated n the return. faure to deduct any such tems for the
year pad or accrued w consttute an eecton to have a such tems treated
n accordance wth paragraph (c (2) above. ny eecton made under ths
artce secton s bndng for a subsequent years and the ta payer must
treat a advanced royates pad or accrued n such subsequent years In the
same manner.
(17) rtce 23(m)-12(a) (2) secton 9.23(m)-12(a) (2) s
amended to read as foows:
(2) The nature of the ta payer s nterest n the property, accompaned by a
certfed copy of the nstrument or Instruments by whch t was acqured
(18) The references to (g) and (h) n artce 23(m)-13(a) (1)
and (2) secton 9.23(m)-13(a) (1) and (2) are changed to (/) and
(g), respectvey.
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43
19.23(m)-10.
(19) The frst sentence of artce 23(m)-17(a) secton 9.23(m)-
17(a) s amended to read as foows:
The Interna Revenue Code provdes that deductons for deprecaton of
mprovements ou mnng property may be taken accordng to the pecuar
condtons n each case.
(20) The frst sentence of artce 23(m)-18 secton 9.23(m)-18
s amended to read as foows:
Ta payers operatng o or gas propertes w, n addton to and apart from
the deducton aowabe for depeton as herenbefore provded, be permtted to
deduct a reasonabe aowance for deprecaton of physca property, such as
machnery, toos, equpment, ppes, etc., so far as not n confct wth the opton
e ercsed by the ta payer under artce 23(m)-1 secton S).23(m)-1 .
(21) The thrd sentence of artce 23(m)-20 secton 9.23(m)-20
s amended to read as foows:
The apportonment of deductons between the severa owners of economc
nterests n tmber propertes w be made as specfed n artce 23(m)-7
secton 9.23(m)-7 .
(22) The ast paragraph of artce 23(m)-25 secton 9.23 (m)-25
s amended to read as foows:
If, for the purpose of the equtabe apportonment of depeton among the
severa owners of. economc nterests, the vaue of any tmber property must be
ascertaned as of any specfc date for the determnaton of the bass for depe-
ton, the vaues of the severa nterests theren may be determned separatey,
but, when determned as of the same date, sha together never e ceed the vaue
at that date of the tmber property n fee smpe.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23(m), 2, and 114 of the Interna Revenue Code (53 Stat.,
14,32.45).)
ohn L. Suvan,
ctng Commssoner of Interna Revenue.
pproved anuary 3,1940.
erbert . Gaston,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 4, 1940, 10.03 a. m.)
Secton 19.23 (m)-10: Depeton d|ustments of 1940-14-10224
accounts based on bonus or advanced royaty. T. D. 49 8
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 19.
INCOM T .
mendng secton 19.23(m)-10(a) of Reguatons 103 so as to per-
mt amortzaton of cost of unproductve o and gas easehods n
ta abe years begnnng pror to anuary 1, 1940.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 18.23(m)-10(a) of Reguatons 103 Part 19, Tte 2 , Code
of edera Reguatons, 1940 Sup. s hereby amended by addng at
the end thereof a new sentence readng as foows:
owever, a ta payer who for any ta abe year begnnng pror to anuary 1.
1940, woud, e cept for the provsons of the precedng sentence, have been per-
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19.24-4. 44
mtted to amortze the cost of unproductve easehods w be permtted to do so
for such ta abe year.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 23 (m), 2, and 114 of the Interna Revenue Code (53 Stat.,
14, 32, 45).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 25, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 2 , 1940, 2.54 p. m.)
S CTION 23(o). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
Secton 19.23(o)-: Contrbutons or gfts by ndvduas.
INT RN L R NU COD .
ase for determnng the 15 per cent mtaton where ta payer de-
rves a net ong-term capta gan or sustans a net ong-term capta
oss and computes hs ta under secton 117(c). (See I. T. 3345,
page 54.)
S CTION 24. IT MS NOT D DUCTI L .
Secton 19.24-4: mounts aocabe to e empt 1940-9-1018G
ncome, other than nterest. L T. 3353
INT RN L R NU COD .
State ncome ta es pad In 1939 ou compensaton receved n
1938 by offcers or empoyees of a State, or any potca subdvson
thereof, or any agency or nstrumentaty of any one or more of the
foregong, whch, under the provsons of the Pubc Saary Ta
ct of 1939, s not sub|ect to edera ncome ta , are not deductbe
from gross ncome by such offcers and empoyees n ther 1939 ed-
era ncome ta returns.
dvce s requested whether that part of the State ncome ta pad
n 1939, whch was appcabe to the saary receved n 1938 by an
offcer or empoyee, as such, of a State or any potca subdvson
thereof, or any agency or nstrumentaty of any one or more of the
foregong, s deductbe from gross ncome n the 1939 ncome ta
return fed by such offcer or empoyee.
Secton 24 of the Interna Revenue Code reads n part as foows:
Sec. 24. Items Not DrwTCTr.L .
(a) Genera R e. In computng net ncome no deducton sha n any case
be aowed n respect of

(5) ny amount otherwse aowabe as a deducton whch s aocabe to one
or more casses of ncome other than nterest (whether or not any amount of
ncome of that cass or casses s receved or accrued) whoy e empt from the
ta es mposed by ths chapter.
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45
19.25-4.
It s the opnon of the ureau that secton 24(a)5 of the Interna
Revenue Code prohbts the deducton of any amount of ncome tu
pad to a State by an ndvdua whch s aocabe to compensaton
for persona servces, f such compensaton may not be ta ed on ac-
count of the provsons of sectons 201, 202 or 203 of the Pubc Saary
Ta ct of 1939.
In vew of the foregong, t s hed that State ncome ta es pad n
1939 wth respect to compensaton receved n 1938 by offcers or em-
poyees of a State, or any potca subdvson thereof, or any agency
or nstrumentaty of any one or more of the foregong, whch, under
the provsons of the Pubc Saary Ta ct of 1939, s not sub|ect
to edera ncome ta , are not deductbe from gross ncome n ther
1939 edera ncome ta returns.
S CTION 25 CR DITS O INDI IDU L
G INST N T INCOM .
Secton 19.25-2: arned ncome credt.
INT RN L R NU COD .
ase for determnng the earned ncome credt where ta payer de-
rves a net ong-term capta gan or sustans a net ong-term capta
oss and computes hs ta under secton 117(c). (See I. T. 3345,
page 54.)
Secton 19.25-4: Persona e empton of head 1940-12-10207
of famy. I. T. 3359
INT RN L R NU COD .
rst cousns by bood and cousns of esser degree are not cosey
connected by bood reatonshp wthn the meanng of secton
19.25-4 of Reguatons 103, reatng to the persona e empton of
the head of a famy.
dvce s requested whether frst and second cousns by bood are
a cosey connected by bood reatonshp wthn the meanng of sec-
ton 19.25-4 of Reguatons 103, reatng to the persona e empton
of the head of a famy.
Secton 19.25-4 of Reguatons 103, supra, reads n part as foows:
Persona e empton of head of famy. head of a famy s an ndvdua
who actuay supports and mantans n one househod one or more ndvduas
who are cosey connected wth hm by bood reatonshp, reatonshp by mar-
rage, or by adopton, and whose rght to e ercse famy contro and provde for
these dependent ndvduas s based upon some mora or ega obgaton.
It s hed that frst cousns by bood are not cosey connected
by bood reatonshp wthn the meanng of secton 19.25- of Regu-
atons 103, supra. It foows that cousns of esser degree are not
cosey connected by bood reatonshp wthn the meanng of that
secton of the reguatons.
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19.41-1.1 4
P IIT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 41. G N R L RUL .
Secton 19.41-1: Computaton of net ncome. 1940-5-10154
I. T. 3344
INT RN L R NU COD .
The foowng rates of e change are accepted hy the ureau of In-
terna Revenue as the current or market rates of e change prevang
as of December 30,1939:
Country or cty.
rgentna
ustraa
egum
raz
rtsh Inda
Canada
Che.
Chna (Shangha)
Coomba
Cuba
Denmark
ngand
nand
rance
Germany
Oreece
ong ong ._
ungary
Itay
Monetary unt
Peso
Pound
ega
Mres 1
It u pee
Doar
Peso1 .
Yuan
Peso
Peso
rono
Pound
Markka
ranc
Rechsmark.
Drachma
Doar
Pengo
Lra
aue n
terms of
Unted
States
money.
297733
15312.1
1 7281
f.0580
300878
RSOItO
051740
07 441
, W
880000
152075
950944
018200
022417
4IIMII
007081
24 233
17.T012
050471
Country or cty.
apan
Mevco
Netherands
New Zeaand
Norway
Panama
Peru
Phppne Isands-
Portuga _.
Rumana.. ___
South frca
Span
Strats Settements.
Sweden
Swtzerand __
Uruguay. .__
enezuea
Yugosava
Monetary unt.
Yen
Peso
Guder.
Pound..
rone...
aboa..
So.
Peso
scudo..
Leu
round..
Peseta..
Doar..
rona...
ranc. _
Peso
ovar.
Dnar...
Offca rate.
Controed rate.
Secton 19.41-1: Computaton of net ncome.
INT RN L R NU COD .
1940-17-10243
I. T. 33C9
Method to be used by pubshers of perodcas who keep ther
accounts and fe ther returns on the accrua bass n reportng
ncome and deductons wth respect to prepad subscrptons where
the subscrpton perod e tends beyond the ta abe year n whch the
subscrpton ncome s receved.
dvce s requested regardng the proper method to be used by
pubshers of perodcas who keep ther accounts and fe ther re-
turns on the accrua bass n reportng ncome and deductons wth
respect to prepad subscrptons where the subscrpton perod e tends
beyond the ta abe year n whch the subscrpton ncome s receved.
There are two methods empoyed by pubshers wth respect to such
ncome. y the frst method, the pubsher reports a of the ncome
receved from prepad subscrptons, whch cover perods e tendng
beyond the ta abe year, for the year of recept of the ncome. y
the second method, the pubsher reports an aquot part of the sub-
scrpton ncome for each year of the subscrpton perod.
It s hed that where a pubsher of perodcas has, over a perod
of years, foowed consstenty ether of the two methods outned
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47
19.44-5.
above, he may contnue to fe hs returns on such bass, he w not
be requred to change to the other bass, and hs net ncome for the
past years w not be redetermned on such other bass. owever,
f the pubsher uses the second method of reportng subscrpton n-
come, a e penses ncurred durng the year n whch the subscrptons
are obtaned, whch are appcabe to the obtanng of the subscrptons,
or to the subscrptons themseves, sha be spread aocaby over the
subscrpton perods n the same manner as the subscrpton ncome.
S CTION 44. INST LLM NT SIS.
Secton 19.44-5: Gan or oss upon dspos- 1940-22-102 9
ton of nstament obgatons. T. D. 4972
TITL 2 INT RN L R NU . C PT R I, SU C PT R . P RTS 3, 9, ND
19. INCOM T .
Reguatons 103,101, nnd 94, amended. Gan or oss upon dspos-
ton of nstament obgatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 19.44-5 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. , artce 44-5 of Reguatons 101,
as amended by Treasury Decson 4899, approved May 9, 1939 C. .
1939-1 (Part 1), 78 Part 9, Tte 2 , Code of edera Reguatons,
1939 Sup. , and artce 44-5 of Reguatons 94, as amended by Treas-
ury Decson 4899 Part 3, Tte 2 , Code of edera Reguatons and
1939 Sup. , are amended by substtutng for the ast sentence of the
ne t to the ast paragraph, whch reads as foows:
The bond on orm 1132 may be (1) e ecuted by a surety company hodng
a certfcate of authorty from the Secretary of the Treasury as an acceptabe
surety on edera bonds, or (2) secured by depost of bonds or notes of the
Unted States, or the nstament obgatons, n such amounts as the Comms-
soner may deem necessary to nsure coecton of the ta .
the foowng:
corporaton w not be accepted as a surety on such bond uness the corpora-
ton hods a certfcate of authorty from the Secretary of the Treasury as an
acceptabe surety on edera bonds. In eu of surety or suretes there may be
deposted bonds or notes of the Unted States.
(Ths Treasury decson s prescrbed pursuant to sectons 44(d)
and 2 of the Interna Revenue Code (53 Stat., 25, 32) sectons 44(d)
and 2 of the Revenue cts of 1938 and 193 (52 Stat., 473, 480,
49 Stat., 1 7, 1 73 2 U. S. C, 44, 2 Sup.) and secton 112 of the
Revenue ct of 192 , as amended by the ct of ebruary 4, 1935 (44
Stat., 122, 49 Stat., 22 U. S. C, 15, and Sup.).)
Guy T. everng,
Commssoner of Interna Revenue.
pproved May 22, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
(fed wth the Dvson of the edera Regster May 23, 1940, 11.2 a. m.)
G
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19.51-4.
48
P RT . R TURNS ND P YM NT O T .
S CTION 51. INDI IDU L R TURNS.
Secton 19.51-4: erfcaton of returns. 1940-24-10288
L T. 3-384
INT RN L R NU COD .
Persons commssoned under the ct of Congress approved pr
25, 1935 ( 4 ) Stat., 1 2), to admnster oaths reatng to cams
aganst or appcatons to the Unted States of offcers and em-
poyees under the Nava stabshment may not admnster oaths
on edera ncome ta returns.
Nava offcers authorzed to admnster oaths for the purposes
of the Nava Servce may not admnster oaths on edera ncome
ta returns of cvan empoyees of (he Nava stabshment.
dvce s requested whether, tnder the provsons of the ct of
Congress approved pr 25, 1935 (49 Stat., 1 2), chef cerks at-
tached to fed servces of the Nava stabshment are authorzed
to admnster oaths on edera ncome ta returns of the cvan and
nava personne of that estabshment. dvce s aso requested
whether nava offcers may propery admnster oaths on edera
ncome ta returns of cvan empoyees of the Nava stabshment.
The above-mentoned ct of Congress authorzes certan desg-
nated personne of the Nava stabshment to admnster any oath
requred or authorzed by any aw of the Unted States, or regua-
ton promugated thereunder, reatng to any cam aganst or app-
caton to the Unted States of offcers and empoyees of the Nava
stabshment. The authorty conferred by the ct n queston s
restrcted specfcay to cams aganst or appcatons to the Unted
States. edera ncome ta returns do not consttute ether cams
or appcatons of the above descrpton.
Int. T. 2228 (C. . I -2, 104 (1925)) the ureau hed that the
authorty of an rmy offcer commssoned to admnster oaths, beng
mted and not genera, does not come wthn the purvew of secton
1002(d) of the Revenue ct of 1924, reatng to the admnstraton
of oaths requred by that ct. The ureau reguatons wth respect
to verfcaton of ncome ta returns are substantay dentca wth
the provsons n secton 1002(d), supra. (See second sentence n
secton 19.51-4, Reguatons 103.) Therefore, the poston taken n
I. T. 2228, supra, s appcabe n construng such reguatons.
On the bass of the foregong, snce the authorty granted under
the ct of pr 25, 1935, referred to above, s mtecf and not gen-
era, the persons commssoned thereunder to admnster oaths may
not admnster oaths on edera ncome ta returns.
Wth regard to the queston whether nava offcers authorzed to
admnster oaths may acknowedge edera ncome ta returns of
cvan empoyees of the Nava stabshment, the answer s aso
n the negatve. The ureau construes the phrase persons n the
nava or mtary servce of the Unted States, contaned n secton
19.51-4 of Reguatons 103, to mean ony the commssoned, non-
commssoned, and ensted personne of the nava and mtary
servces.
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49
19.55(b)-5.
S CTION 55. PU LICITY O R TURNS.
Secton 19.55(b)-5: Inspecton of orgna 1940-4-10152
returns. T. D. 49 2
TITL 2 INT RN L R NU . C PT R I, P RT 458, SU P RT .
INSP CTION O R TURNS.
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
stock ta returns and returns of empoyment ta on empoyers.
Treasury Department,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 458.203. Pursuant to the provsons of sectons 55(a), 351,
and 503 of the Revenue ct of 193 , secton 358 of the Revenue ct of
193 as amended by the Revenue ct of 1937, sectons 55(a), 409,
01(e), and 02(c) of the Revenue ct of 1938, secton 905(c) of the
Soca Securty ct, and sectons 55(a), 1204, and 1 04(c) of the In-
terna Revenue Code, ncome, profts, and capta stock ta returns
made under the Revenue ct of 193 , under the Revenue ct of 193
as amended by the Revenue ct of 1937, under the Revenue ct of
1938, and under the Interna Revenue Code, and returns of empoy-
ment ta under Tte I of the Soca Securty ct and Subchapter C
of Chapter 9 of the Interna Revenue Code, may be nspected by the
Commttee on ducaton and Labor, Unted States Senate, or any duy
authorzed subcommttee thereof, for the purpose of, and to the e tent
necessary n the nvestgaton whch such commttee or subcommttee
s authorzed to make by Senate Resouton 2 , Seventy-fourth Con-
gress, second sesson, passed une , 193 . The nspecton of returns
heren authorzed may be by such commttee or subcommttee or by or
through such e amners or agents as such commttee or subcommttee
may desgnate or appont. Upon wrtten notce by the charman of
such commttee or subcommttee to the Secretary of the Treasury, gv-
ng the names and addresses of the ta payers whose returns t s
necessary to nspect and the ta abe perods covered by the returns,
the Secretary and any offcer or empoyee of the Treasury Department
sha furnsh such commttee or subcommttee wth any data reatng
to or contaned n any such return, or sha make such return avaabe
for nspecton by such commttee or subcommttee or by such e -
amners or agents as such commttee or subcommttee may desgnate
or appont, n the offce of the Commssoner of Interna Revenue.
ny nformaton thus obtaned by such commttee or subcommttee
whch s reevant or pertnent to the purpose of the nvestgaton, may
be submtted by such commttee or subcommttee to the Unted States
Senate.
. MORG NT U, r.,
Secretary of the Treasury.
pproved anuary 10,1940.
rankn D. Roosevet.
The Whte ouse.
( ed wth the Dvson of the edera Regster anuary 13, 1940, 12.10 p. m.)
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101.
50
CUTI ORD R UT ORIZ TION O COMMITT ON DUC TION ND
L OR, UNIT D ST T S S N T . TO INSP CT INCOM , PRO ITS, ND
C PIT L STOC T R TURNS ND R TURNS O MPLOYM NT T ON
MPLOY RS.
y vrtue of and pursuant to the authorty vested n me by sectons
55(a), 331, and 503 of the Revenue ct of 193 49 Stat., 1 48), secton
3r 8 of the Revenue ct of 193 as amended by the Revenue ct of
1937 (50 Stat., 813, 817), sectons 55(a), 409, 01(e), and 02(c) of the
Revenue ct of 1938 (5 2 Stat., 447, 478, 5 4, 5 , 5 8), sectons 55(a),
1204, and 1 04(c) of the Interna Revenue Code (53 Stat., Part 1), and
secton 905 of the Soca Securty ct (49 Stat., 20, 41), t s hereby
ordered that ncome, profts, and capta stock ta returns made under
the Revenue ct of 193 , under the Revenue ct of 193 as amended
by the Revenue ct of 1837, under the Revenue ct of 1938, and under
the Interna Revenue Code, and returns of empoyment ta on em-
poyers under Tte I of the Soca Securty ct and under Sub-
chapter C of Chapter 9 of the Interna Revenue Code sha be open
to nspecton by the Commttee on ducaton and Labor, Unted States
Senate, or any duy authorzed subcommttee thereof, whch com-
mttee or subcommttee s authorzed by Senate Resouton 2 ,
Seventy-fourth Congress, second sesson, passed une , 193 , to make
an nvestgaton of voatons of the rghts of free speech and assemby
and undue nterference wth the rght of abor to organze and bargan
coectvey such nspecton to be n accordance and upon compance
wth the rues and reguatons prescrbed by the Secretary of the Treas-
ury n the Treasury decson reatng to the nspecton of returns by
that commttee, or any duy authorzed subcommttee thereof, approved
by me ths date.
rankn D. Roosevet.
The Whte ouse,
anuary 10,1940.
(831S)
( ed wth the Dvson of the edera Regster anuary 13, 1S40, 12.10 p. u.)
SU C PT R C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101. MPTIONS ROM T
ON CORPOR TIONS.
1940-12-10208
I. T. 33 0
INT RN L R NU COD .
edera savngs and oan assocatons meet the requrements of
secton 101(15) of the Interna Revenue Code and are entted to
e empton from edera ncome ta aton.
dvce s requested whether edera savngs and oan assocatons
are entted to e empton under secton 101(15) of the Interna Reve-
nue Code.
That secton provdes that corporatons organzed under ct of
Congress sha be e empt from ta aton under Chapter 1 (Income Ta )
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18.114-1.
of the Interna Revenue Code, f such corporatons are nstrumenta-
tes of the Unted States and f, under such ct, as amended and sup-
pemented, such corporatons are e empt from edera ncome ta es.
Subsecton (a) of secton 5 of the ome Owners Loan ct of 1933
(48 Stat., 128) authorzes the edera ome Loan ank oard, under
such rues and reguatons as t may prescrbe, to provde for the organ-
zaton, ncorporaton, e amnaton, operaton, and reguaton of asso-
catons to be known as edera savngs and oan assocatons, and
to ssue charters therefor. Subsecton (h) of secton 5 of the ome
Owners Loan ct of 1933 provdes, among other thngs, that such
assocatons ( edera savngs and oan assocatons), ncudng ther
franchses, capta, reserves, and surpus, and ther oans and ncome,
sha be e empt from a ta aton mposed by the Unted Statea
Secton 5(k) of the ome Owners Loan ct of 1933, as amended,
provdes, among other thngs, that when desgnated by the Secretary
of the Treasury, any edera savngs and oan assocaton may e
empoyed as fsca agent of the Government under such reguatons as
may be prescrbed by the Secretary, and that such an assocaton may
act as agent for any other nstrumentaty of the Unted States when
desgnated for that purpose by such nstrumentaty of the Unted
States. The Secretary of the Treasury has desgnated edera savngs
pnd oan assocatons as fsca agents of the Unted States for certan
purposes. In S. S. T. 2 (C. . 1937-1, 409) the ureau hed that
edera savngs and oan assocatons are nstrumentates of the
Unted States.
In vew of the foregong, t s hed that edera savngs and oan
assocatons meet the requrements of secton 101(15) of the Interna
Revenue Code and are entted to e empton from edera ncome
ta aton.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 113(a). D UST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D)
O PROP RTY.
INT RN L R NU COD .
Sae by trustee of securtes transferred by an empoyer company to
a penson trust. (See I. T. 3357, page 11.)
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
Sectto 19.114 1: ass for aowance of depre-
caton and depeton.
INT RN L R NU COD .
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
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19.11 -1.
52
S CTION 11 . CLUSIONS ROM GROSS INCOM .
Secton 19.11 -1: Income of foregn governments, 19-40-5-101 2
ambassadors, and consus. Mn. 49 7 (Rev.)
empton from edera Income ta of compensaton receved (or
servces rendered n the Unted States by certan foregn consus
statoned n the Unted States and certan empoyees of foregn
consuates n the Unted States.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 18, 19 f.
Coectors of Interna Revenue. Interna Revenue gents n Charge,
and Other Offcers and mpoyees of the ureau of Interna
Re ven ue Concerned:
In vew of the certfcaton made by the Secretary of State under
secton 11 (h) of the Interna Revenue Code, the offca compensa-
ton for servces rendered wthn the Unted States of foregn con-
suar offcers statoned n the Unted States (who are not ctzens of
the Unted States) and the empoyees of foregn consuates n the
Unted States (who are not ctzens of the Unted States) of the fo-
owng countres s e empt from edera ncome ta :
bana, rgentna, ustraa, ova, raz. ugara. Canada,
Che, Chna, Coomba, Cuba, Czechosovaka, Denmark, Domncan
Repubc, Savador, cuador, gypt, nand, rance. Germany,
Great rtan and Northern Ireand, Greece, Guatemaa, at, on-
duras. ungary, Inda, Iraq, Iran, Ireand, Itay, apan. Latva,
Lbera, Lthuana, Me co, Morocco, Netherands, Netherands Indes,
New Zeaand, Ncaragua, Norway, Panama, Peru, Poand, Portuga,
Rumana, Sam, Span, Sweden, Swtzerand, Turkey, Unon of South
frca, Unon of Sovet Socast Repubcs, Uruguay, enezuea,
Yugosava.
In vew of the certfcaton referred to above, the offca compen-
saton for servces rendered wthn the Unted States of foregn
consuar offcers statoned n the Unted States (who are not ctzens
of the Unted States) of the foowng countres (but not the em-
poyees of ther consuates n the Unted States) s e empt from
edera ncome ta :
egum, Costa Rca, stona, Paraguay.
Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: TM.
Gt|y T. everng,
Commssoner.
Secton 19.11 -1: Income of foregn govern- 1940-23-10279
ments, ambassadors, and consus. Mm. 49 7 (Rev.)
empton from edera ncome ta of compensaton receved
for servces rendered n the Unted States by certan foregn
consus statoned n the Unted States and certan empoyees of
foregn consuates n the Unted States.
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53
19.117-2
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, May 10, 1040.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Offcers and mpoyees of the ureau of Interna
Revenue Concerned:
In vew of the certfcaton made by the Secretary of State under
secton 11 (h) of the Interna Revenue Code, the offca compensa-
ton for servces rendered wthn the Unted States of foregn con-
suar offcers statoned n the Unted States (who are not ctzens of
the Unted States) and the empoyees of foregn consuates n the
Unted States (who are not ctzens of the Unted States) of the
foowng countres s e empt from edera ncome ta :
bana, rgentna, ustraa, egum, ova, raz, ugara,
Canada, Che, Chna, Coomba, Cuba, Czechosovaka, Denmark,
Domncan Repubc, Savador, cuador, gypt, nand, rance,
Germanv, Great rtan and Northern Ireand, Greece, Guatemaa,
at, onduras, ungary, Inda, Iraq, Iran, Ireand, Itay, apan,
Latva, Lbera, Lthuana, Me co, Morocco, Netherands, Nether-
ands Indes, New Zeaand, Ncaragua, Norway, Panama, Peru,
Poand, Portuga, Rumana, Sam, Span, Sweden, Swtzerand,
Turkey, LTnon of South frca, Unon of Sovet Socast Repubcs,
Uruguay, enezuea, Yugosava.
In vew of the certfcaton referred to above, the offca compen-
saton for servces rendered wthn the Unted States of foregn
consuar offcers statoned n the Unted States (who are not ctzens
of the Unted States) of the foowng countres (but not the em-
poyees of ther consuates n the Unted States) s e empt from
edera ncome ta :
Costa Rca, stona, Paraguay.
Correspondence reatng to the provsons of ths mmeograph
shoud refer to ts number and the symbos IT: TM.
Guy T. everng,
C ommssoner.
S CTION 117. C PIT L G INS ND LOSS S.
Secton 19.117-2: Percentage of capta gan or 1940-15-10228
oss taken nto account: Net oss carry-over. I. T. 33
( so Secton 1 2, Secton 19.1 2-1.)
nterna revenue code.
or the purpose of determnng the amount of a net short-term
capto oss whch may be carred forward under secton 117(e)
of the Interna Revenue Code n the case of an estate or trust,
the term net ncome, whch s prescrbed as the mtaton on
the amount whch may be carred forward, s the net ncome after
deducton of dstrbutons to the benefcares, as provded by sec-
ton 1 2(b) of the Code.
dvce s requested reatve to the amount of the net short-term
capta oss sustaned n the caendar year 1938 whch may be carred
forward to the caendar year 1939 n the case of the M Trust.
The return of the M Trust for the caendar year 1938 shows a gross
ncome of 200a doars after deducton of a net ong-term capta
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19.117-3.
54
oss of doars, and ncome of 150|| doars after certan aowabe
deductons, not ncudng dstrbutons to benefcares. The amount
shown as dstrbutabe to the benefcares s doars, so that
the return refected a net oss of doars. In addton to the deduc-
tons camed, the trust had a net short-term capta oss of 100a do-
ars whch was not aowabe as a deducton.
Secton 117(e) of the Interna Revenue Code, as amended by sec-
ton 212 of the Revenue ct of 1939, provdes n part that f a ta -
payer (other than a corporaton) sustans n any ta abe year begn-
nng after December 31, 1937, a net short-term capta oss, such oss
(n an amount not n e cess of the net ncome for such year) sha be
treated n the succeedng ta abe year as a short-term capta oss,
wth an e cepton not here matera. The queston presented s,
therefore, whether the net short-term capta oss of IOO| doars
sustaned by the M Trust n the caendar year 1938 may be carred
forward as a short-term capta oss for the caendar year 1939. s
secton 117(e) of the Interna Revenue Code, as amended, mts
the amount of the net short-term capta oss whch may be carred
forward to an amount not n e cess of the net ncome for the par-
tcuar year, t s necessary to determne the net ncome of the trust
for 1938.
Secton 19.142-1 of Reguatons 103, n defnng net. ncome for
the purpose of the requrement for the fng of a return by an estate
or trust, provdes n paragraph (b) that the net ncome sha be as
computed under secton 1 2. Secton 1 2(b) of the Interna Revenue
Code provdes that there sha be aowed as an addtona deducton
n computng the net ncome of the estate or trust the amount of the
ncome of the estate or trust for ts ta abe year whch s to be
dstrbuted currenty by the fducary to the benefcares.
It s the opnon of the ureau that the term net ncome shoud
be defned n the same manner for purposes of secton 117, secton
142, and secton 1 2. It s hed, therefore, that for the purpose of
determnng the amount of a net short-term capta oss whch may
be carred forward under secton 117(e) of the Interna Revenue
Code n the case of an estate or trust, the term net ncome, whch
s prescrbed as the mtaton on the amount whch may be carred
forward, s the net ncome after deducton of the dstrbutons to
the benefcares, as provded by secton 1 2(b).
In the case presented, nasmuch as the M Trust had no net ncome
for 1938 after deducton of the dstrbutons to the benefcares, the
trust s not entted to carry forward to 1939 any part of the net
short-term capta oss sustaned n 1938.
Secton 19.117-3: ternatve ta n case of net 1940-5-10155
ong-tenn capta gan or oss. I. T. 3345
( so Secton 23(a), Secton 19.23(o)- Secton 25,
Secton 19.25-2.)
INT RN L R NU COD .
Where a ta payer derves a net ong-term capta gan and com-
putes hs ta under secton 117(c), reatng to aternatve tn es,
the bnsc for determnng the 15 per cent mtaton on the chartabe
contrbutons deducton provded by secton 23(o) and the earned
ncome credt provded by secton 2o(a)3 s net ncome.
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55
19.117-3.
Where a ta payer sustans a net ong-term capta Iors and com-
putes hs ta under secton 117(c)2, the base for determnng the
chartabe contrbutons deducton s ordnnry net ncome, that s
net ncome pus the amount of the net ong-term capta oss, and
the base for determnng the earned ncome credt s ordnnry net
ncome as ad|usted for the chartabe contrbutons deducton.
dvce s requested wth respect to certan questons nvovng the
appcabty of the Supreme Court decson n evcnng v. ss
(293 U. S., 144. Ct. D. 884, C. . III-2, 191 (1934)) and Unted
States v. Pea ants (305 U. S., 357, Ct. D. 1379, C. . 1939-1 (Part 1),
239)) to smar cases arsng under the Interna evenue Code. The
of the Code, whch pace a mt on aowabe deductons for contrbu-
tons and earned net ncome credt, such mtaton n both cases beng
based on net ncome.
The prncpa provson of aw nvoved s secton 117(c) of the
Interna Revenue Code, whch reads as foows:
(c) ternatve Ta es.
(1) Is case of net ong-term capta gan. If for any ta abe year a ta -
payer (other than a corporaton) derves a net ong-term capta gan, there sha
be eved, coected, and pad, n eu of the ta mposed by sectons 11 and 12,
a ta determned as foows, f and ony f such ta s ess than the ta mposed
by such sectons:
parta ta sha frst be computed upon the net ncome reduced by the
amount of the net ong-term capta gan, at the rates and n the manner as f
ths subsecton had not been enacted, and the tota ta sha be the parta
ta pus 30 per centum of the net ong-term capta gan.
(2) In case of net ong-term capta oss. If for any ta abe year a ta -
payer (other than a corporaton) sustans a net ong-term capta oss, there sha
be eved, coected, and pad, n eu of the tn mposed by sectons 11 and 12, a
ta determned as foows, f and ony f such ta s greater than the ta mposed
by such sectons:
parta tu sha frst be computed upon the net ncome ncreased by the
amount of the net ong-terra capta oss, at the rates and n the manner as f
ths subsecton had not been enacted, and the tota ta sha be the parta ta
mnus 30 per centum of the ong-term capta oss.
In everng v. ss, supra, the Supreme Court hed that the ta -
payer was entted to ncude capta net gan n net ncome n deter-
mnng the base for computng the 15 per cent deducton aowabe for
chartabe contrbutons under secton 23(n) of the Revenue ct of
1928, athough the ta payer eected to be ta ed on capta net gan at a
fat rate of 2y2 per cent under the Revenue ct of 1928. The conten-
ton of the Government n that case was that the base for the deducton
shoud be ordnary net ncome after e cudng a tems of capta
gan and capta oss. The Court ponted out n ts opnon that the
base upon whch the ta was computed was the net ncome, . e.,
gross ncome mnus statutory deductons.
In Unted States v. Peasants, supra, whch arose under the Revenue
ct of 1932, the Court hed that where a ta payer sustaned a capta
net oss the base of the ta was the ordnary net ncome and that
contrbutons were aowabe under secton 23(n) of the Revenue
ct of 1932 to the e tent of 15 per cent of such ordnary ncome. s
ponted out n the atter case, there s nothng to the contrary n
the ss case.
questons have arsen by reason
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19.119-2.
5
The genera effect of the Peasants case was gven consderaton n
I. T. 3271 (C. . 1939-1 (Part 1), 105). In that case t s stated n
part as foows:
The effect of the Supreme Court decson n the Peasants case s very smar
under the Revenue cts of 1932 and 1938, and may be summarzed as foows:
In cases where the speca ta provded by secton 101(b) of the Revenue ct
of 1932 and by secton 117(c)2 of the Revenue ct of 1938 appcabe, the
15 per cent ma mum deducton whch may be taken for chartabe contrbu-
tons under secton 23(u) of the Revenue ct of 1932 and secton 23(o) of
the Revenue ct of 1938 s based upon the same net ncome upon whch
the speca ta s n fact computed and pad.
It s the opnon of ths offce that n every case where there s a net
ong-term capta gan the ta s computed on net ncome. If the
ta s computed under secton 117(c) 1 of the Interna Revenue Code,
t s computed upon both the ordnary net ncome and the net ong-
term capta gan, the two added together beng the same as the net
ncome. It foows that the base for measurng the chartabe con-
trbutons where there s a net ong-term capta gan s net ncome,
regardess of whether the ta s computed under secton 117 (c)
or under sectons 11 and 12 of the Code.
Where there s a net ong-term capta oss, the stuaton s dfferent.
The ta s not computed on the net ncome of the ta payer, but s
computed on ordnary ncome and such ta s reduced by 30 per cent
of the net ong-term capta oss. It woud be mpossbe n some cases,
where there s a net ong-term capta oss, to use as a base of the ta
the so-caed net ncome for the reason that the ta payer may not
have any statutory net ncome, and thus woud not be aowed a deduc-
ton for any contrbutons athough he woud be sub|ect to ta . Inas-
much as the ncome upon whch the ta s computed n such cases s
the ordnary ncome (from whch there s e cuded the net ong-term
capta oss), such ordnary ncome s the base for computng the 15 per
cent mtaton on contrbutons as we as the earned ncome credt.
It s therefore concuded that where a ta payer derves a net ong-
term capta gan and computes hs ta under secton 117(c) 1, reatng
to aternatve ta es, the base for determnng the 15 per cent mtaton
on the chartabe contrbutons deducton provded by secton 23(o)
and the earned ncome credt provded by secton 23(a)3 s net
ncome. On the other hand, where the ta payer sustans a net ong-
term capta oss and computes hs ta under secton 117(c)2, the base
for determnng the chartabe contrbutons deducton s ordnary
net ncome, that s, net ncome pus the amount of the net ong-
term capta oss, and the base for determnng the earned ncome credt
s ordnary net ncome as ad|usted for the chartabe contrbutons
deducton.
S CTION 119. INCOM ROM SOURC S WIT IN
UNIT D ST T S.
Secton 19.119-2: Interest.
INT RN L R NU COD .
Interest aowed and ncuded n |udgment for damages recovered
by nonresdent aens. (See G. C. M. 219 8, page 7.)
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57
10.131-1.
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
The ta mposed by the Me can statute known as the Law of
Ta aton on cess Profts s a ta on e cess profts wthn the
scope of secton 131 of the Interna Revenue Code. The M Com-
pany, a domestc corporaton whch keeps ts books on the accrua
bass and pad such ta to Me co n 1940 for the caendar year 1939,
may cam credt for such ta accrued to Me co In the caendar
year 1939 aganst the ta due the Unted States for that year, sub-
|ect to the mtaton contaned n secton 131(b) of the Code. or
ta abe years begnnng anuary 1, 1940, and thereafter, the credt
s not avaabe as an offset to the ta Imposed under secton 102
of the Interna Revenue Code.
dvce s requested whether ta es pad n 1940 by the M Company,
pursuant to a recent Me can aw known as the Law of Ta aton
on cess Profts, consttute a proper credt aganst the 1939 ed-
era ncome ta abty of that company.
The ta payer s ncorporated under the aws of the State of Te as,
but ts operatons are confned to the cty of R, State of S, Me co.
It keeps ts books on the accrua bass and fes ts ncome ta returns
on the caendar year bass.
The Me can statute referred to was made effectve on December 28,
1939, under a decree ssued by the Presdent of Me co. rtce
13(b) of the Me can aw provdes that the profts sub|ect to cacua-
ton of e cess profts are the profts decared for the ncome ta ess
the amount of such ta . rtce 2 of the aw provdes that e cess
proft s any proft obtaned over and above 15 per cent of the net
worth as shown by the books of the company, or over 20 per cent of
the profts where there s no net worth shown on the books.
Secton 131 of the Interna Revenue Code provdes n part as
foows:
(a) owance of credt. If the ta payer sgnfes In hs return hs desre
to have the benefts of ths secton, the ta Imposed by ths chapter sha be
credted wth:
(1) Ctzen and domestc corporaton.- In the case of a ctzen of the Unted
States and of a domestc corporaton, the amount of any ncome, war-profts,
and e cess-profts ta es pad or accrued durng the ta abe year to any foregn
country or to any possesson of the Unted States .
(Secton 131(a) was amended by the Revenue ct of 1939, effectve
for ta abe years begnnng after December 31, 1939, to nsert the
words e cept the ta mposed under f octon 102 after the word
chapter. )
Secton 131(b) of the Code paces certan mtatons on the amount
of such credt.
It s hed that the ta mposed by the Me can statute, known as
the Law of Ta aton on cess Profts, s a ta on e cess profts
wthn the scope of secton 131, supra. ccordngy, the M Company,
25220 40 8
Secton 19.131-1: nayss of credt for
ta es.
1940-23-10280
I. T. 3381
INT RN L R NU COD .
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19.143-4.
58
a domestc corporaton, payng such ta to Me co n 1940 for the
caendar year 1939 may, under the provsons of secton 131, supra,
cam credt for such ta accrued to Me co n the caendar year
1939 aganst the ta due the Unted States for that year, sub|ect to
the mtatons contaned n secton 131(b). or ta abe years be-
gnnng anuary 1,1940, and thereafter, the credt s not avaabe as
an offset to the ta mposed under secton 102 of the Interna evenue
Code. (See sectons 21 (a) and 229 of the Revenue ct of 1939.)
S CTION 143. WIT OLDING O T T SOURC .
Secton 19.143-1: Wthhodng ta at source.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
Where Interest-bearng promssory notes were ssued by the M
Company to hoders of 10-year debenture bonds n e change for
nterest coupons coverng a 5-year perod, the fng of ownershp
certfcates w not be requred unt payments on the prncpa
amounts of the notes are made, and the hoders of notes w not
be requred to ncude the amounts thereof as ncome unt such
payments are receved. ny nterest pad on the promssory notes
pror to payment of the prncpa of the notes shoud be reported
as ncome for the year of recept.
dvce s requested wth respect to the fng of ownershp certf-
cates n connecton wth the ssuance of notes n eu of debenture
coupons under the foowng crcumstances, and whether the notes
shoud be treated as ncome n the year of recept.
The M Company, a corporaton, has outstandng 10-year debenture
bonds (wth nterest coupons attached) maturng n 1947 and bearng
nterest at per cent per annum payabe semannuay. The com-
pany s cash poston was so reduced on September 1,1939, that proms-
sory notes bearng nterest payabe annuay from September 1, 1940,
to September 1, 1944, were ssued to the hoders of the debentures n
e change for ther nterest coupons. These debentures are not sted
on any e change, and no saes thereof have been made wthn the
past two years, but there have been offers to se at a prce as ow as
20 per cent of ther par or face vaue.
It appears that at the tme the notes n queston were ssued ony
the nterest coupons due on September 1,1939, represented an e stng
obgaton, and that the transacton, nstead of effectng a substanta
satsfacton of a rea and e stng obgaton, smpy amounted to a
SUPPL M NT D. R TURNS ND P YM NT O T .
INT RN L R NU COD .
Secton 19.143-4: Ownershp certfcates for
bond nterest.
INT RN L R NU COD .
1940-3-10141
I. T. 3342
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59
19.147-3.
substtuton of notes for coupons payabe for tbe most part n future
years. The notes and coupons represented unearned nterest, and thus
the transacton consttuted, n effect, merey an e tenson of tme for
the payment of nterest coupons maturng n the future rather than
advance payment of such coupons. The notes had no far market
vaue when receved by the hoders of the debenture bonds.
Under the facts n ths case, t s hed that ownershp certfcates
shoud not be fed unt payments on the prncpa amounts of the
romssory notes are made, and that the hoders of the notes w not
e requred to ncude the amounts thereof as ncome unt such pay-
ments are receved. (See generay aron Wof son v. Reneche, 72
ed. (2d), 59 . . Merren v. Commssoner, 18 . T. ., 15 , ac-
quescence, C. . I -2, 40 (1930), affrmed on another ssue, 51 ed.
(2d), 44 Care D. Schemmer v. Unted States, 94 ed. (2d), 771
George . Menger et a., Trustees, v. Unted States, 21 ed. Supp..
9 4 and Great Southern Lfe Insurance Co. v. Commssoner, 8o
. T. ., 828, acquescence, 0. . 1938-1,13.)
ny nterest pad on the promssory notes pror to payment of the
prncpa of the notes shoud be reported as ncome for the year 01
recept.
S CTION 147. IN ORM TION T SOURC .
Secton 19.147-3: Cases where no return of 1940-9-10187
nformaton requred. I. T. 8354
INT RN L R NU COD .
mounts pad to rura ma carrers as equpment mantenance
need not be reported In returns of Informaton on orm 1009.
Secton 19.147-3(fc) of Reguatons 103 s not to be regarded as
reevng such empoyees from reportng these amounts as gross
Income In ther edera Income ta returns, even though they are
entted to deduct the e pendtures actuay made.
dvce s requested whether amounts (n addton to saares) pad
to rura ma carrers as equpment mantenance shoud be reported
n returns of nformaton on orm 1099.
Secton 19.147-3 of Reguatons 103 provdes n part as foows:
Cases Where no Rett|bn of Informaton Requred. Payments of the foowng
character, athough over 1,000, need not be reported n returns of nformaton
on orm 1099:

(fc) mounts pad by the Unted States to persons n ts servce (cv, mtary,
or nava), as an aowance for traveng e penses, ncudng an aowance for
meas and odgng, as, for e ampe, a per dem aowance n eu of subsstence,
aDd amounts pad as rembursements for traveng e penses.
mounts pad to rura ma carrers for equpment mantenance are
regarded as beng n the nature of traveng e penses. Therefore, n
accordance wth the provsons of secton 19.147-3 (k) of Reguatons
103, supra, such amounts need not be reported on orm 1099. The
foregong reguaton s not to be regarded, however, as reevng the
recpent empoyees from reportng such amounts as gross ncome n
ther edera ncome ta returns, even though they are entted to
deduct the e pendtures actuay made.
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19.148-4.
0
S CTION 148. IN ORM TION Y CORPOR TIONS.
Secton 19.148-4: Informaton respectng com- 1940-2 -10301
pensaton of offcers and empoyees n e cess I. T. 3387
of 75,000.
INT RN L R NU COD .
s the tota saary and commssons pad by the M Company to ,
Its presdent, durng the year 1939 e ceeded 75,000, the corporaton
s requred to fe Schedue - as a part of ts 1939 ucome ta
return, regardess of the fact that the commssons were gross n-
come of a busness carred on by under a saes agency contract
wth the corporaton dstnct from hs contract as presdent.
dvce s requested whether the M Company shoud fe Schedue
- (compensaton of offcers and empoyees n e cess of 75,000) n
connecton wth ts ncome ta return for the caendar year 1939 and
dscose theren the compensaton pad to ts presdent, .
The M Company s engaged n the nvestment busness and ssues
and ses to the pubc certfcates of partcpaton as a part of ts
busness operatons. s presdent of the corporaton and n 1939
receved a substanta saary n that capacty, whch, however, was
ess than 75,000. In 1938 a contract was entered nto between the
M Company and , separate and dstnct from s contract as pres-
dent of the company, for the seng of the certfcates of partcpaton
on a commsson bass. deveoped the seng of these certfcates
nto an e tensve busness. The e penses of ths busness were pad
out of the commssons whch nured to under the terms of the
above-mentoned agreement. Durng the year 1939 the gross com-
mssons receved by e ceeded 100,000, out of whch the e penses
of the busness were pad. Inasmuch as the tota amount pad to
(saary and commssons) by the M Company e ceeded 75,000, but
hs saary was ess than that amount, the queston s presented
whether Schedue - must be fed.
Secton 148(f) of the Interna Revenue Code, as amended, provdes
n part as foows:
(f) Compensaton of offcers and empoyees. Under reguatons prescrbed by
the Commssoner wth the approva of the Secretary, every corporaton sub|ect
to ta aton under ths chapter sha, n ts return, submt a st of the names
of a offcers and empoyees of such corporaton and the respectve amounts
pad to them durng the ta abe year of the corporaton by the corporaton as
saary, commsson, bonus, or other compensaton for persona servces rendered,
f the aggregate amount so pad to the ndvdua s In e cess of 75,000.
Secton 19.148-4 of Reguatons 103, reatng to secton 148(f) of
the Code, reads n part as foows:
very corporaton sub|ect to ta aton under chapter 1 whch durng any
ta abe year begnnng after December 31, 1938, has pad to any offcer or
empoyee of the corporaton, saary, commsson, bonus, or other compensaton
for persona servces rendered, n an aggregate amount n e cess of 75,000 (In
whatever form pad), sha u respect of each such ta abe year, make and fe,
n dupcate, Schedue -, as a part of Its ncome ta return, n accordance wth
the nstructons contaned n the prescrbed return.
In the present case was an offcer of the M Company durng the
year 1939 and durng that year the corporaton pad to hm saary
and commssons for persona servces rendered n an aggregate
amount n e cess of 75,000. It s hed, therefore, that the M Com-
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19.1 2-1.
pany s requred to fe Schedue - as a part of ts 1939 ncome ta
return and dscose theren the nformaton prescrbed wth respect
to the saary and commsson pad to durng that year.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
Secton 19.1 2-1: Income of estates and trusts.
INT RN L R NU COD .
Net short-term capta oss carry-over. (See I. T. 33 , page 53.)
Secton 19.1 2-1: Income of estates and trusts. 1940-1 -1023
I. T. 33 7
INT RN L R NU COD .
The Income of the trust, created under the w of , for the
perod from the begnnng of the ta abe year to the date wthn
that year when a benefcary reaches the age of 30 years, and then
becomes entted to hs share of the trust Income wthout restrc-
ton, s ta abe to the benefcary.
dvce s requested whether certan ncome of a trust created
under the w of , deceased, s ta abe to the trust or to the
benefcares.
Under the w of . a trust was created for the beneft of the
testator s chdren and ther ssue. The chdren of the testator are
now deceased and ther survvng ssue are the benefcares of the
trust. The share of trust ncome of a benefcary who has reached
the age of 30 years s payabe to such benefcary wthout restrcton.
The trustees are drected pror to the tme a benefcary reaches the
age of 80 years to appy ony so much of the ncome of the trust for
the mantenance ana support of the benefcary as the trustees n ther
uncontroed dscreton sha deem best. That part of a benefcary s
share of trust ncome accumuated pror to hs reachng the age of 30
years s to be pad to the benefcary upon hs attanng such age.
of the grandchdren of the testator have reached the age of 30
years e cept one who w become 30 years od n une, 1940, and
one who w become 30 years od n May, 1941.
Inqury s made whether, where a benefcary reaches the age of 30
years durng a ta abe year, the ncome of the trust for the perod
from the begnnng of the ta abe year to the date the benefcary
reaches the age of 30 years whch has not been apped to the mante-
nance and support of the benefcary shoud be ta ed to the bene-
fcary of the trust.
It s the opnon of ths offce that where a benefcary reaches the
age of 30 years durng a ta abe year he s ta abe on hs share of
the ncome of the trust for the entre ta abe year, snce, upon reach-
ng that age, he s entted to hs share of the ncome of the trust
wthout restrcton, and such share shoud ncude any accumuated
ncome for that year up to the tme he became 30 years of age, at
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19.1 5-1-1
2
whch tme such ncome becomes currenty dstrbutabe wthn the
meanng of secton 1 2(b) of the Interna Revenue Code. (Contra,
Roebng v. Commssoner, 78 ed. (2d), 444, and Spreckes v.
Commssoner, 101 ed. (2d), 721.)
S CTION 1 5. MPLOY S TRUSTS.
Secton 19.1 5-1: mpoyees trusts. 1940- -101 5
( so Secton 22(b), Secton 19.22(b) (2)-2, I. T. 334
and Secton 23(a), Secton 19.23 (a)- .)
INT RN L R NU COD .
Status for edera ncome ta purposes of three trusts created
by the M Company for the beneft of certan empoyees of the com-
pany, and treatment of varous transactons n connecton wth the
operaton of the trusts.
dvce s requested whether the M Company penson trusts Nos. 1,
2, and 3, whch are operated for the beneft of certan of ts empoyees,
are penson trusts wthn the meanng of secton 1 5 of the Interna
Revenue Code. dvce s aso requested as to the edera ncome
ta abty of the M Company and the empoyees nvoved arsng
from the varous transactons n connecton wth the operaton of the
trusts.
The trust nstruments creatng the trusts n queston were e ecuted
by and between the M Company, a corporaton, and the N Natona
ank| trustee. The trusts cover 0 empoyees, a of whom are key
men n the operaton of the busness. The dvson of empoyees
nto groups under penson trusts Nos. 1, 2, and 3 s based upon ther
reatve mportance to the corporaton. Trust No. 1 covers 50 em-
poyees seected by the corporaton (4 of whom are eectve offcers)
trust No. 2 covers 9 empoyees seected by the corporaton (4 of whom
are eectve offcers) and trust No. 3 covers one ndvdua, the pres-
dent (eectve offcer) of the corporaton. The corporaton empoys
appro matey 25,000 persons and t s stated that the corporaton at
the present tme can not afford to ncude a empoyees n the penson
trusts. The trust nstruments are a smar n ther provsons. In
penson trust No. 1 the corporaton pays a sum equa to per cent of
the annua saary of the empoyee mto the trust fund, 50 per cent of
whch represents the contrbuton of the corporaton and 50 per cent
the contrbuton of the empoyee. In penson trust No. 2 the payment
of the corporaton s per cent of the annua saary of the empoyee
and represents a contrbuton by the corporaton and by the empoyee
to the trust fund n the same proportons as n penson trust No. 1.
In penson trust No. 3 the soe benefcary s the presdent of the cor-
poraton. The corporaton contrbutes doars each year to that
trust fund but the soe benefcary, the presdent, does not contrbute
thereto.
The purposes of the trusts so created are stated to be (1) to provde
fnanca protecton for the empoyee after attanng the age of 5,
and (2) to provde fnanca protecton for the ob|ects of the em-
poyee s bounty after death. It s provded that the tota contrbu-
tons made to the trust sha be nvested n a fe nsurance contract
and/or annuty contract ssued on the fe of such empoyee. The
corporaton s annua contrbuton to the trustee under the trusts as
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19.1 5-1.
now consttuted s appro matey a doars. Provson s made that
under no crcumstances sha any contrbuton of the corporaton or
of the empoyee ever revert or nure to the beneft of the corporaton.
If an empoyee resgns or s dscharged pror to fve years from
the date he became a party to the trust agreement, he w have no
rght or nterest as to contrbutons made for hs beneft by the cor-
poraton and w be entted ony to the funds contrbuted by hm
or any nsurance pocy on hs fe, the premums for whch have been
ad by hs contrbutons. In the event of resgnaton or dscharge
y an empoyee after fve years from the date he became a party to
the trust agreement, he w be entted to receve any funds n the
penson premum account earmarked n hs name and representng
contrbutons by the corporaton, and any nsurance pocy on hs fe,
the premums for whch have been pad from contrbutons made by
the corporaton. In penson trust No. 3 for the beneft of the pres-
dent, f hs empoyment s dscontnued at the nstance of the corpo-
raton, he w be entted to a benefts thereunder and the nsurance
poces on hs fe w be devered to hm free and cear from the
terms of the trust agreement, but f hs empoyment s dscontnued
at hs own nstance wth the ntent of acceptng a poston wth an-
other company, he w be entted to no benefts under the agreement.
Secton 1 5 of the Interna Revenue Code provdes n part that:
Sec. 1 5. mpoyees Trusts.
(a) empton feom Ta . trust formng part of a stock bonus, penson,
or proft-sharng pan of an empoyer for the e cusve beneft of some or a of
hs empoyees
(1) f contrbutons are made to the trust by such empoyer, or empoyees,
or both, for the purpose of dstrbutng to such empoyees the earnngs
and prncpa of the fund accumuated by the trust n accordance wth such
pan, and
(2) f under the trust nstrument t s mpossbe, at any tme pror to
the satsfacton of a abtes wt respect to empoyees under the trust,
for any part of the corpus or ncome to be (wthn the ta abe year or
thereafter) used for, or dverted to, purposes other than for the e cusve
beneft of hs empoyees,
sha not be ta abe under secton 1 1, but the amount actuay dstrbuted or
made avaabe to any dstrbutee sha be ta abe to hm n the year n whch
so dstrbuted or made avaabe to the e tent that t e ceeds the amounts pad
n by hm.
rtce 1 5-1 (a) of Reguatons 101 provdes that:
Pans and trusts for empoyees. stock bonus, penson, or proft-sharng
pan of an empoyer for the e cusve beneft of some or a of hs empoyees
s a defnte wrtten program and arrangement sgned by such empoyer and
communcated to such empoyees, soey desgned and apped to enabe a or a
arge percentage of the tota number of the empoyer s cerks and workmen
(as dstngushed from persons n postons of authorty) to share n the capta
or profts of such empoyer s trade or busness or to provde for the vehood
of such empoyees upon ther retrement from empoyment. trust formng
part of a stock bonus, penson, or proft-sharng pan s a trust formed and
avaed of soey to ad n the proper e ecuton of one of the pans defned n
the precedng sentence. Ths phrase does not ncude devces for payng profts
or saares to sharehoders or offcers, but a trust, apped wthout dscrmna-
ton to a the empoyees and offcers of an empoyer as one group, may be
wthn ts meanng.
Under the facts presented, t s hed:
(1) The trusts under consderaton are not suffcenty broad n
ther appcaton to empoyees of the corporaton to consttute pen-
son trusts wthn the meanng of secton 1 5 of the Interna Revenue
Code.
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19.1 5-1.
4
(2) Contrbutons to the trust, whether made by the company or
by the empoyees, are not ta abe ncome to the trust.
(3) Contrbutons made by the company to the trust are deductbe
by the corporaton to the e tent that such contrbutons when added
to the stpuated saares of the empoyees consttute reasonabe com-
pensaton for the servces rendered.
(4) To the e tent that the corporaton s share of such contrbutons
s apped toward the payment of premums on fe nsurance poces
coverng the ves of empoyees, such amounts consttute addtona
ncome to the empoyees and shoud be ncuded n ther returns for
the year or years m whch pad. In G. C. M. 8432 (C. . I -2, 114
(1930)) t s stated n part as foows:
It must be noted that generay the premums pad by corporatons on In-
dvdua fe Insurance poces taken out by or on behaf of ther offcers and
coverng ther ves consttute addtona ncome to the offcers and shoud be
ncuded n ther returns for the year or years n whch pad.
(5) To the e tent that the corporaton s share of such contrbutons
s apped toward the purchase of retrement annuty contracts for the
beneft of empoyees, such amounts are not consdered as havng been
receved by the empoyees n the year or years n whch such payments
are so apped, and are not, therefore, requred to be ncuded n ther
returns for those years. Upon retrement the entre amount of each
annuty payment w be ta abe ncome to the empoyee f he made
no contrbuton toward the. purchase of the retrement annuty. If he
made contrbutons, he w be ta ed on the annuty payments n the
manner and to the e tent provded n secton 22(b)2 of the Interna
Revenue Code and artce 22(b) (2)-2 of Reguatons 101.
( ) amounts receved by empoyees upon resgnaton or ds-
charge after fve years representng the corporaton s share of con-
trbutons are to be ncuded n the empoyees returns for the year or
years n whch receved. If, upon such termnaton of servce, an
annuty contract havng a cash surrender vaue s assgned to an
empoyee, he reazes no ta abe ncome upon the assgnment of the
annuty contract. owever, f the empoyee actuay e ercses hs
rght to receve the cash surrender vaue of the annuty contract, he
then reazes ncome to the e tent that the amount receved e ceeds
the amount pad n by hm.
Secton 19.1 5-1: mpoyees trusts. 1940-7-10172
I. T. 3350
INT RN L R NU COD ND TRIOR R NU CTS.
Under secton 1 5 of the Interna Revenue Code, as amended, pro-
fessona partnershps, composed of attorneys, physcans, etc., are
entted to the same prveges ns corporatons n the estabshment
of penson trusts for the beneft of the bona fde empoyees of such
partnershps. owever, a genera partner, as such, s not an
empoyee of the partnershp and s precuded from partcpaton n
the benefts of a trust such as s contempated by secton 1 5 of
the Interna Revenue Code, as amended, and smar provsons
of pror Revenue cts.
dvce s requested whether professona partnershps, composed
of attorneys, physcans, etc., have the same rghts as corporatons,
under secton 1 5 of the Interna Revenue Code, as amended, to estab-
sh penson trusts for ther empoyees and, f so, whether such pen-
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5
5 19.1 5-1.
son trusts may ncude the partners as benefcares as we as those
who are strcty empoyees.
Secton 1 5 of the Interna Revenue Code, as amended, provdes
that a trust formng part of a stock bonus, penson, or proft-sharng
pan of an empoyer for the e cusve beneft of some or a of hs
empoyees sha not be ta abe under secton 1 1 of the Code (the
secton mposng the ta on estates and trusts) f (1) contrbutons
are made to the trust by such empoyer, or empoyees, or both, for
the purpose of dstrbutng to uch empoyees the earnngs and prn-
cpa of the fund accumuated by the trust n accordance wth such
pan, and (2) f under the trust nstrument t s mpossbe, at any
tme pror to the satsfacton of a abtes wth respect to em-
poyees under the trust, for any part of the corpus or ncome to be
(wthn the ta abe year or thereafter) used for, or dverted to, pur-
poses other than for the e cusve beneft of such empoyees.
rtce 1 5-1 of Reguatons 101, promugated under the Revenue
ct of 1938, whch s made appcabe to secton 1 5 of the Code by
Treasury Decson 4885 (C. . 1939-1 (Part 1), 39 ), provdes n part
as foows:
bt. 1C5-1. mpoyees trusts. (a) Pans and trusts for empoyees. stock
bonus, penson, or proft-sharng pan of an empoyer for the e cusve beneft
of some or a of hs empoyees Is a defnte wrtten program and arrangement
sgned by such empoyer and communcated to such empoyees, soey desgned
and apped to enabe a or a arge percentage of the tota number of the
empoyer s cerks and workmen (as dstngushed from persons In postons
of authorty) to share n the capta or profts of such empoyer s trade or
busness or to provde for the vehood of such empoyees upon ther retre-
ment from empoyment trust formng part of a stock bonus, penson, or
proft-sharng pan s a trust formed and avaed of soey to ad n the
proper e ecuton of one of the pans defned In the precedng sentence. Ths
phrase does not Incude devces for payng profts or saares to sharehoders
or offcers, but a trust, apped wthout dscrmnaton to a the empoyees and
offcers of an empoyer as one group, may be wthn Its meanng.
rom the foregong, t appears that such professona partner-
shps are entted to the same prveges as corporatons n the estab-
shment of penson trusts for the beneft of the bona fde empoyees
of the partnershps. owever, t s the vew of the ureau that a
genera partner, as such, s not an empoyee of the partnershp and
13 precuded, under the provsons of secton 1 5 of the Interna Rev-
enue Code, as amended, from partcpatng n the benefts of a trust
such as s contempated by that secton and by smar provsons of
pror Revenue cts.
Secton 19.1 5-1: mpoyees trusts. 1940-24-10294
T. D. 4973
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RTS 9 ND
19. INCOM T .
mendng artce 1 5-1 of Reguatons 101, and secton 19.1 5-1
of Reguatons 103, reatng to empoyees trusts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
Paragraph (a) of artce 1 5-1 of Reguatons 101 secton 9.1 5-1,
Tte 2 , Code o edera Reguatons, 1939 Sup. and paragraph (a)
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19.211-2.

of secton 19.1 5-1 of Reguatons 103 Part 19, Tte 2 , Code of
edera Reguatons, 1940 Sup. are each amended to read as foows:
(a) Pans and trusts for empoyees. stock bonus, penson, or proft-
sharng pan of an empoyer for the e cusve beneft of some or a of hs em-
poyees s a defnte wrtten program and arrangement communcated to such
empoyees, soey desgned and apped to enabe such empoyees to share n the
capta or profts of such empoyer s trade or busness or to provde for the ve-
hood of such empoyees upon ther retrement from empoyment. trust
formng part of a stock bonus, penson, or proft-sharng pan s a trust formed
and avaed of soey to ad n the proper e ecuton of one of the pans defned
n the precedng sentence. Ths phrase Incudes ony trusts created for the e -
cusve beneft of empoyees, and does not Incude devces for dstrbutng profts
to sharehoders. the surroundng and attendng crcumstances and the
detas of the pan w be ndcatve of whether t s a bona fde stock bonus,
penson, or proft-sharng pan for the e cusve beneft of empoyees wthn the
meanng of secton 1 5.
(Ths Treasury decson s ssued under the authorty contaned n
sectons 2 and 1 5 of the Revenue ct of 1938 (52 Stat., 480, 518
2 U. S. C, Sup. 2, 1 5) and sectons 2 and 1 5 of the Interna
Revenue Code (53 Stat., 32, 7).)
Gut T. everng,
Commssoner of Interna Revenue.
pproved une 3, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster une 5, 1940, 10.25 a. m.)
SUPPL M NT . NONR SID NT LI N INDI IDU LS.
S CTION 211. T ON NONR SID NT
LI N INDI IDU LS.
Secton 19.211-2: Defnton. 1940-25-1029
I. T. 338
INT RN L R NU COD .
, a sub|ect of a foregn country who entered the Unted States n
October, 1938, on a temporary vsa whch has been renewed from tme
to tme durng the contnuance of the war, has the status of a non-
resdent aen.
dvce s requested whether the e tenson of s temporary vsa
from tme to tme through the R mbassy and the fact that due to
war condtons abroad does not ntend to depart from the Unted
States unt such condtons are over have any effect on s status as
a nonresdent aen for edera ncome ta purposes. e entered the
Unted States n October, 1938.
It s stated n secton 19.211-2 of Reguatons 103, promugated
under the Interna Revenue Code, whch s appcabe to ta abe 3 ears
begnnng after December 31, 1938, that an aen whose resdence s
not wthn the Unted States s a nonresdent aen. n aen actu-
ay present n the Unted States who s not a transent s a resdent
for edera ncome ta purposes. Whether an aen s a transent s
determned by hs ntentons wth regard to the ength and nature of
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7
19.211-7.
Ms stay. mere foatng ntenton, ndefnte as to tme, to return to
another country s not suffcent to consttute hm a transent. If he
ves n the Unted States and has no defnte ntenton as to hs stay,
he s a resdent. n aen whose stay n the Unted States s mted
to a defnte perod by the mmgraton aws s not a resdent of the
Unted States wthn the meanng of secton 19.211-2 n the absence
of e ceptona crcumstances.
Inasmuch as s n the Unted States on a temporary vsa, ssued
by the ureau of Immgraton, whch has been renewed from tme
to tme durng the contnuance of the war, and hs ntenton s to
return to a foregn country as soon as war condtons w permt,
hs status s that of a nonresdent aen. Under the crcumstances o
ths case, e ceptona crcumstances do not e st wthn the meanng
of the reguatons so as to warrant s cassfcaton as a resdent or
the Unted States. The rung s, of course, appcabe ony to the
ta payer s present status.
Secton 19.211-7: Ta aton of nonresdent 1940-19-10251
aen ndvduas. G. CM.219 8
( so Secton 119 Secton 19.119-2.)
INT RN L R NU COD .
Where nonresdent aens obtaned a |udgment of 52 doars
aganst the M Company, 2 a doars thereof representng the
prncpa amount of the damages recovered and 89 doars
representng nterest aowed from the dates of saes of certan
property to the date of |udgment, the prncpa amount of the
|udgment Is not sub|ect to edera Income ta . The 89 doars
nterest aowed by the court from the dates of saes to the date
of |udgment, and the 9w doars nterest whch accrued on the
|udgment from date of rendton to date of payment, are ta abe
under secton 211(a) of the Interna Revenue Code.
n opnon s requested whether, under the crcumstances heren
set forth, any part of the payments receved by certan nonresdent
aen ndvduas as the resut of a |udgment s sub|ect to edera
ncome ta .
In anuary, 1940, a |udgment obtaned by the nonresdent aen
ndvduas aganst the M Company was pad. The amount receved,
namey, 74a doars, conssted of 5a doars pad pursuant to the
|udgment entered n 1938 and 9a doars accrued nterest on the |udg-
ment to the date of payment. The acton was one for fraud aganst
the M Company as ther agent n nducng pantffs (the nonresdent
aens) to se certan ands for an amount ess than ther true vaue.
The |udgment tsef conssted of two tems 2 a doars, whch may
be termed the prncpa amount of the |udgment, as t represented
the dfference between the vaue of the ands at the tme of the severa
saes and the amount receved therefor by the pantffs, and 39
doars, nterest computed from the dates of the saes to the date of
the |udgment.
The recpents fe returns on the cash recepts and dsbursements
bass. They are nonresdent aens not engaged n trade or busness
n the Unted States and not havng an offce or pace of busness
theren.
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19.211-7.
8
Secton 211 (a) 1( ) of the Interna Revenue Code provdes n part
as foows:
Impostkm of ta . There sha be eved, coected, and pad for each ta abe
year, n Ueu of the ta mposed by sectons 11 and 12, upon the amount receved,
by every nonresdent aen ndvdua not engaged n trade or busness wthn
the Unted States and not havng an offce or pace of busness theren, from
sources wthn the Unted States as nterest (e cept nterest on deposts wth per-
sons carryng on the bankng busness), dvdends, rents, saares, wages, pre-
mums, annutes, compensatons, remuneratons, emouments, or other f ed or
determnabe annua or perodca gans, profts, and ncome, a ta of 10 per
centum of such amount . Itacs supped.
Secton 119(a) of the Interna Revenue Code provdes n part as
foows:
Gross ncome from sources n Unted States. The foowng tems of gross
Income sha be treated as ncome from sources wthn the Unted States:
(1) Interest. Interest from the Unted States, any Terrtory, any potca
subdvson of a Terrtory, or the Dstrct of Coumba, and nterest on bonds,
notes or other nterest-bearng obgaton of resdents, corporate or otherwse,
not ncudng . Itacs supped.
It s the opnon of ths offce that the prncpa amount of the |udg-
ment, 2 a doars (. e., such porton of the |udgment as represented
the dfference between the vaue of the ands when the owners were
frauduenty nduced to se and the amounts receved by them at that
tme), does not consttute f ed or determnabe annua or perodca
gans, profts, and ncome wthn the meanng of secton 211(a)
(1)( ) of the Interna Revenue Code and s not sub|ect to edera
ncome ta when receved by the nonresdent aen ndvduas.
Wth respect to the amount of 39a doars, whch was computed from
the dates of the saes to the date upon whch |udgment was entered,
the proper treatment of that amount presents the foowng ssues:
(1) Is the 39a doars nterest, or s t but a part of a tota |udgment
for pecunary damages, the parts of whch are nseparabe for ta pur-
Soses (2) s such amount ncome from sources wthn the Unted
tates as defned n secton 119(a), supra. These two matters are ds-
cussed nfra.
(1) The decree of the court n the nstant case formay provded
for the payment of nterest by the defendant. The 39a doars was
pad n accordance wth the decree. Moreover, that amount s n sub-
stance nterest, based upon the foowng reasonng: Saes of the
propertes actuay were consummated n pror years. These saes
gave rse to a cause of acton aganst the wrongdong fducary for
tre amount of the dfference (2 a doars) between the vaue of the
propertes at the tme of the saes and the sums then receved by the
pantffs. s ndcated above, t appears that the 2G.r doars was
not the recept of annua or perodca gans, profts, and ncome con-
tempated by secton 211(a). ut the addtona sum of 39a doars,
computed by the court upon an annua bass and at a certan per cent
on the 2 ,7 doars, consttutes compensaton for the use of money
to whch the pantffs equtaby became entted when the fraud was
consummated. Compensaton tor the use of money s merey another
name for nterest. To concude that the 39a doars s an nseparabe
part of a tota |udgment for damages to the pantffs woud gnore
both the form and the substance of the decree. The substance of the
decree s that the pantffs frst became entted to resttuton n
damages, not when the |udgment was entered but when the fraud
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3 70.
was commtted, and that the pantffs are beng awarded a separate
sum as compensaton for the deay n payment of the damages. c-
cordngy, t s concuded that the 39a doars s nterest n the sense
n whch that term normay s used.
(2) The amount of 39a doars appears to consttute nterest on
nterest-bearng obgatons of resdents, corporate or other-
wse, wthn the meanng of secton 119(a), supra, and, hence, s n-
come from sources wthn the Unted States. (See evermg v.
Stockhom nskda ank, 293 U. S., 84, Ct. D. 887, C. . III-2,
299 (1934).) Coroary to the pantffs rght to resttuton n dam-
ages was a abty or obgaton on the part of the fducary.
Such an obgaton s smar to the Government s obgaton to refund
ta es egay or erroneousy coected, whch was the type of obga-
ton nvoved n the Stockhoms nskda ank case. The court s
decree n the nstant case recognzed and enforced such obgaton.
That t mght be, and actuay was, an nterest-bearng obgaton
was-aso determned by the court s decree. In ths respect, the decree
was anaogous to the e press statutory drecton to pay nterest on
the ta refunds nvoved n the Stockhoms nskda ank case,
supra.
It foows from the foregong that the 9 doars nterest whch
accrued on the |udgment to the date of payment s aso nterest n-
come from sources wthn the Unted States and s sub|ect to ta
under secton 211(a), supra.
It s the opnon o ths offce, therefore, that the part of the |udg-
ment termed the prncpa amount s not sub|ect to edera n-
come ta , but the 39a doars nterest aowed by the court from the
dates of saes to the date of the |udgment, and 9 doars nterest
accrued from the date of the |udgment to date of payment, are ta -
abe under secton 211(a) of the Interna Revenue Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
SU C PT R . LI N OR T S.
S CTION 3 70. PROP RTY SU CT TO LI N.
1940-G-101
I. T. 3347
INT RN L R NU COD .
The en of and O, mortgagees, on rea estate mortgaged by
does not e tend to the rents and profts fowng from the property.
n assgnment of the rents by the mortgagor to the mortgagees to
be apped to back nterest s nferor to a edera ta en recorded
pror to the assgnment.
dvce s requested reatve to the prorty of a edera ta en
for unpad ncome ta es, nterest, and penates assessed aganst
over an assgnment to the mortgagees of the rents coected from rea
estate mortgaged by .
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I 3 70.
70
In 1932 a edera ta en was fed aganst n the cerk s offce
of County, N. Y., n whch county are ocated certan propertes
beongng to . and C are mortgagees of these propertes under
mortgages recorded pror to the recordng of the ta en. There s
now due on the mortgages 18a: doars pus back nterest n the amount
of appro matey 5 doars. Durng the ast severa years, under
an ora arrangement wth , the rents have been coected and the
sum of doars has been pad each month to the coector of nterna
revenue to qudate n part s ndebtedness. On ebruary 1, 1939,
made a wrtten assgnment of rents to and C, the amounts co-
ected to be apped to back nterest and current nterest. The ques-
ton arses whether monthy payments to the coector of nterna
revenue after the assgnment consttute a preference unfar to the
mortgagees on the ground that the rghts of the Government are
nferor to those of the mortgagees.
It s the opnon of ths offce that even though the mortgage above-
mentoned was recorded before the fng of the edera notce of- ta
en, the en of the mortgage apped ony to the rea estate and not
to the rents and profts. It dd not cover and was not good as to the
atter. In ountze v. Omaha ote Co. (107 U. S.,378), the Supreme
Court sad:
In the case of a mortgage, the and Is In the nature of a pedge: and
R Is ony the and tsef the specfc thng whch Is pedged. The rents and
profts are not pedged they beong to the tenant n possesson, whether the
mortgagor or a thrd person camng under hm. The takng of the
rents and profts pror to the sae does not In|ure the mortgagee, for the smpe
reason that they do not beong to hm.
The rue s stated n Tffany s Rea Property, voume 3, second ed-
ton, secton 13, as foows: mortgagor who s n possesson of
the and s entted to receve and appy to hs own use the rents and
profts of the and and ths s so, even when the mortgage e pressy
ncudes rents and profts. In Gman v. Inos Msssspp
Teephone Co. (91 U. S., 03), the court sad that possesson draws
after t the rght to receve and appy the ncome, as f no mortgage
e sted and n mercan rdge Co. v. edebach (94 U. S., 798),
athough rents, ssues, and profts had been pedged by the mortgagor
to the payment of nterest on mortgage bonds, and defaut occurred,
nevertheess a |udgment credtor of the mortgagor prevaed over the
mortgage trustees wth respect to the rght to receve such ncome,
the court hodng that unt possesson was taken under the mortgage
or a recever apponted, the mortgagor was owner to a the word,
and entted to a the proft made.
The foregong rue was apped n reedman s Savng cf Trust Co.
v. Shepherd (127 U. S., 494). There the mortgagor had assgned a
ease of the mortgaged premses to one, Shepherd, and thereafter
pedged or assgned accrued rents to a credtor of Shepherd. In a
contest between the credtor and the mortgagee as to the rght to such
rents (subsequent to the mortgagor s defaut and before the mortgagee
took possesson of the premses), the credtor prevaed. The court
sad that even though the ncome were e pressy pedged as securty
for the mortgage debt, the mortgagee woud not be entted to t as
aganst a thrd party camant pror to takng possesson of the
property after the mortgagor s defaut.
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71 3 70.
In more y. Symonds (183 Mass., 321, 7 N. ., 314), there was
nvoved a sut by a mortgagor s trustee n bankruptcy aganst a
mortgagee to recover rents coected by the mortgagee after the
mortgagor s bankruptcy under an ora agreement by the mortgagor
before bankruptcy to pay over to the mortgagee the rents as they
accrued unt the atter was rembursed for money advanced for ta es
and mprovements. The trustee prevaed, the court hodng that
such a transfer of rents (after bankruptcy) was vod for the reason
that tte to the rents was then vested n the trustee n bankruptcy,
and that a mere agreement for such transfer before bankruptcy,
whether ora or n wrtng, made no dfference. The court sad n
part:
and t Is doubtfu whether a notce gven by a mortgagee to tenants
that they are to pay ther rent to hm, or any other net on hs part not amount-
ng to an entry or equvaent to takng possesson by hm, can defeat the rght
of a mortgagor, or those camng under hm, to take the rents and profts of
the mortgaged rea estate. ( ed v. Swan, 10 Mete, 112, 114.) Under the
facts found n ths case, the defendant stands no better under the agreement.
There was no assgnment of the rents, or even an order to the tenants to pay
to hm. efore any en can arse at aw n favor of the defendant,
t s not enough that there s an e press promse to pay from a partcuar
fund, but there must be some postve act of appropraton on the part of the
debtor, whereby he ceases to contro the fund, and the credtor, wthout hs ad
or consent, can coect the same, and appy t n payment of hs debt.
The court hed further that the defendant had no equtabe en, by
vrtue of the agreement, on the rents as they accrued, and that he was
not otherwse entted to reef n equty.
The same genera rue that a mortgagee acqures no rght to the
rents of mortgaged property, even by an assgnment of rents n the
mortgage, n the absence of entry and possesson and/or the securng
of the appontment of a recever of the rents and profts n hs behaf
under the mortgage, has been apped by the New York courts and
appears to be the accepted rue n that State. (New York Lfe Insur-
ance Co. v. uton Deveopment Corporaton, 2 5 N. Y., 348, 193
N. ., 1 9 Woman s ospta v. S ty-Seventh Street Reaty Co..
Inc., 240 pp. Dv., 33, 2 8 N. Y. Supp., 725 Dme Savngs ank of
rookyn v. o , 147 Msc., 24, 2 4 N. Y. Supp., 2 2 One- undred
orty- ght Reaty Co., Inc., v. Conrad et at., 125 Msc., 142, 210
. Y. Supp., 400 Rhneander v. Rchards, 184 pp. Dv., 7, 171
N. Y. Supp., 43 Coney v. ne, 181 pp. Dv., 75, 1 9 N. Y. Supp.,
1 2 Suvan v. Rosson, 223 N. Y., 217. 119 N ., 405 arrs v.
Lesster et a., 35 pp. Dv., 4 2, 54 N. Y. Supp., 8 4, appea dsmssed
n 159 N. Y., 533, 53 N. ., 112 .)
The foregong cases dscose that certan quafcatons upon the gen-
era rue have been recognzed by the New York courts, as where
there s an absoute and unquafed assgnment of rents ncorporated
n or separate from the mortgage ceary ntended to operate n
praesent or mmedatey upon defaut, or where a pror mortgagee
takes an assgnment of rents after defaut and before a subsequent
mortgagee takes steps to recover them, but the facts submtted n the
present case do not brng t wthn the appcaton of any of the
ad|udcated quafcatons to the usua rue. In Coney v. ne, supra,
the court sad t s a omatc that the assgnee of a nonnegotabe
chose n acton can obtan no greater rght than hs assgnor had
and n the present case a edera statutory en had attached to the
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3 90.
72
eases and to the assgnor s (ta payer s) rght to the rents under them
before the e ecuton of the assgnment to the mortgagees.
In the nstant case, by the fng of ts notce of ta en n 1932,
the Government acqured a en upon a property and rghts to
property, whether rea or persona, beongng to such person, that
s, beongng to . (Secton 318 , R. S., as amended now sectons
3 70 to 3 77, ncusve, Interna Revenue Code.) t the tme the
Government acqured ts en, the mortgagees appear to have had no
ega cam or preference of any knd to the rents of the mortgaged
property, for there seems to have been no egay recognzabe ap-
propraton of the rents to them, and when they dd take an assgn-
ment of the rents on ebruary 1, 1939, they necessary took that
assgnment sub|ect to the Government s pror en. Such en there-
fore attached to a contracts or eases for the payment of rent to
, and to hs rght to receve rent thereunder, and the coector
coud have dstraned and eved thereon to secure qudaton of
the unsatsfed ta abty. (Sectons 3187 and 3188, R. S., as
amended now sectons 3 90, 3 91, and 3 92, Interna Revenue Code.)
subsequent assgnment by the mortgagor to the mortgagees of
the contracts or eases for rent woud ceary have been nferor
to the Government s pror en thereon for ta es, and a fortor, a
subsequent assgnment of rents coud stand n no better poston.
The assgnment was merey a transfer of rents sub|ect to e stng
equtes or ens wthout otherwse affectng the mortgagor s pos-
sesson of the property and hs rghts n and to the property pror
to actua entry and takng over of possesson by the mortgagees.
It has been hed that a en for ta es s superor to a mortgage
or deed of trust e ecuted subsequent to a demand for payment
and embraces every speces of property sub|ect to ownershp. ack-
ock v. Unted States, 208 L S., 75.) It foows that a en for
ta es s superor to a subsequent assgnment of eases or rents.
It s hed under the facts presented that the rghts of the Govern-
ment under the ta en are superor to those of the mortgagees
under the assgnment.
SU C PT R C DISTR INT.
P RT I. DISTR INT ON P RSON L PROP RTY.
S CTION 3 90. UT ORITY TO DISTR IN.
1940-11-10197
L T.335
INT RN L R NU COD .
partnershp checkng account In a bank Is not sub|ect to ds-
trant to satsfy a ta assessed aganst an Indvdua partner.
owever, the Government s ta en attaches to the ta payer s n-
terest n the partnershp tsef, and that nterest may be eved
upon and sod n effectng satsfacton of the ta payer s outstandng
ta abty.
dvce s requested whether a partnershp checkng account n a
bank s sub|ect to dstrant to satsfy a ta assessed aganst an
ndvdua partner.
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73
15 3 90.
oowng servce of a notce of evy on the M ank coverng un-
pad ncome ta n the amount of 10a doars due from , the ta -
payer, for the year 1938 and assessed n March, 1939, t was dscovered
that the hank was not n possesson of any property or rghts to
property beongng to ndvduay. owever t has been ascer-
taned that the N Company, a partnershp of whch s a member,
has a checkng account n the M ank, whch account contaned 1 a
doars as of the date evy was made. Ths s a partnershp account
and checks drawn thereon requre two sgnatures, namey, and .
Secton 3 70 of the Interna Revenue Code, entted Property
sub|ect to en, formery secton 318 , R. S., as amended, provdes as
foows:
If any person abe to pay any ta negects or refuses to pay the same after
demand, the amount sha be a en n favor of the Unted States
upon a property and rghts to property, whether rea or persona, beongng
to such person.
Secton 3 90 of the Interna Revenue Code, entted uthorty
to dstran, formery secton 3187, R. S., as amended, provdes as
foows:
If any person abe to pay any ta es negects or refuses to pay the same
wthn 10 days after notce and demand, t sha be awfu for the coector
or hs deputy to coect the sad ta es, wth such nterest and other addtona
amounts as are requred by aw, by dstrant and sae, n the manner provded
n ths subchapter, of the goods, chattes, or effects, ncudng stocks, securtes,
bank accounts, and evdences of debt, of the person denquent as aforesad.
Secton 3 92 of the Interna Revenue Code, entted Levy, for-
mery secton 3188, R. S., provdes as foows:
In case of negect or refusa under secton 3 90, the coector may evy, or
by warrant may authorze a deputy coector to evy, upon a property and
rghts to property, e cept such as are e empt by the precedng secton, beong-
ng to such person, or on whch the en provded n secton 3 70 e sts, for
the payment of the sum due, wth nterest and penaty for nonpayment, and
aso of such further sum as sha be suffcent for the fees, costs, and e penses
of such evy.
Under the provsons of aw quoted above, the Government s ta
en attaches to a property and rghts to property beongng to the
ta payer, , and the coector or hs deputy may evy on such prop-
erty and rghts to property. The queston then arses whether the
partnershp checkng account, or any part thereof, s ncuded wthn
such evabe property.
In the opnon of ths offce, the answer s n the negatve for the
reason that the partnershp checkng account s an asset and property
of the partnershp and not an asset or property of the ndvdua
partner (see Unted States et a. v. aufman, Trustee, etc., 2 7 U. S.,
408, T. D. 3 89, C. . I -1, 248 (1925)), and because t s conceded
aw that one partner may not pay hs ndvdua debts out of partner-
shp assets wthout the consent of the other partner or partners, as to
do so woud be takng the money of one person to pay the debts of
another Gaagher s ppea. 114 Pa. St., 353, 7 t., 237). In
other words, the Government s rghts must be worked out through
the partner s nterest n the partnershp tsef or n ts assets, snce
the partner has no severabe nterest n any partcuar partnershp
asset n spece of whch he can ava hmsef n hs own rght for the
payment of hs prvate obgatons and debts.
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3798.
74
In the bankruptcy case of Unted States v. aufman, supra, n-
vovng the dstrbuton of the assets of a partnershp and of ts
mrtners, the equtabe rue of marshang assets was apped, and
t was hed that the Unted States was not entted to prorty of
payment out of partnershp assets for a ta due from an ndvdua
partner, e cept to the e tent of the share of such partner, f any, n
the surpus remanng after the payment of partnershp debts.
(Idem, Unted States v. ack, 8 Pet., 271.) It was aso hed n the
aufman case that the en created n favor of the Government for
unpad ta es by secton 318 , R. S., as amended (now secton 3 70,
Interna Revenue Code), supra, ncudes ony the property of the
person owng the ta , and n the case of a partner owng an ndvdua
ta , t e tends ony to hs nterest n the surpus of the partnershp
property.
It must be borne n mnd, however, that the equtabe rue as to
marshang assets appes ony where the admnstraton or dstrbu-
ton of the assets s wthn the contro of a court, as n an nsovency
or bankruptcy proceedng, and that t has no appcaton to acts
done by a partner or partnershp whe n the fu contro of hs or
ts property. Case v. eauregard, 99 U. S., 119 Gaagher s ppea,
supra.) Snce a sovent and operatng partnershp may have certan
vauabe ntangbe property rghts, such as good w, t s apparent
that a partner s dsposabe nterest n a partnershp may have a vaue
much n e cess of what the partner s nterest woud be n the surpus
remanng after the payment of partnershp debts n a qudaton
case nvovng a marshang of assets.
In the nstant case the Government s ta en attaches to the ta -
payer s nterest n the partnershp tsef (such nterest beng property
of the ta payer), and that nterest may be eved upon and sod n
effectng satsfacton of the ta payer s outstandng ta abty.
(See the statutes quoted supra see aso Case v. eauregard, supra.)
C PT R 38. MISC LL N OUS PRO ISIONS.
S CTION 3798 ( M ND D Y S CTION 40 , R NU
CT O 1939). MPTION O INSOL NT N S
ROM T .
1940-1-10134
T. D.4958
TITL 28 INT RN L R NU . C PT R I, SU C PT R D, P RT 4 4 .
INSOL NT N S.
Reguatons reatng to assessment and coecton of ta es of
nsovent banks and trust companes. Treasury Decson 4882
C. . 1939-1 (Part 1), 154 revoked.1
1 Sortons 484 .0 to 484 .14 are ssued under the authorty contaned n secton 3701
(53 Stat., Part 1 Rev. Stat, 3447: 2 U. S. C, 1891) and nterpret secton 3798 8
Stat. Part 1) secton 408 (Pubc, No. I , Seventy-s th Congress, frst sesson) :
secton 22 (20 Stat, 85) and secton 818 (52 Stat, 79 13 U. S. O, Sup. I , 570).
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75
3798.
Treasurt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Tabe of Contents.
Secton.
4 4 .0. Introductory.
4 4 .1. ffect of statutory amendments.
4 4 .2. anks and trust companes covered.
4 4 3. Defntons.
4 4 .4. Scope of secton generay.
4 4 .5. Segregated or transferred assets.
4 4 . . Unsegregated assets.
4 4 .7. arnngs.
4 4 .8. batement and refund.
4 4 .9. stabshment of mmunty.
4 4 .10. Procedure durng mmunty.
4 4 .11. Termnaton of mmunty.
4 4 .12. Coecton of ta after termnaton of mmunty.
4 4 .13. Soca Securty ta es.
4 4 .14. ffectve date of reguatons.
Secton 4 4 .0. Introductory. .-Secton 3798 of the Interna Rev-
enue Code, approved ebruary 10, 1939 (53 Stat., Part 1 (reenactng
secton 22 of the ct of March 1, 1879, as amended by secton 818 of
the Revenue ct of 1938, 52 Stat., 579 12 U. S. C, Sup. I , 570)),
reads as foows:
Sec. 3798. empton of Insovent anks rom Ta .
(a) Whenever and after any bank or trust company, a substanta
porton of the busness of whch conssts of recevng deposts nnd
makng oans and dscounts, has ceased to do busness by reason of
nsovency or bankruptcy, no ta sha be assessed or coected, or pad
nto the Treasury of the Unted States on account of such bank, or
trust company, whch sha dmnsh the assets thereof necessary for
the fu payment of a ts depostors and such ta sha be abated from
such natona banks as are found by the Comptroer of the Currency
to be nsovent and the Commssoner of Interna Revenue, when the
facts sha appear to hm, s authorzed to remt so much of the sad
ta aganst any such nsovent banks and trust companes organzed
under State aw as sha be found to affect the cams of ther depostors.
(b) Whenever any bank or trust company, a substanta porton of
the busness of whch conssts of recevng deposts and makng oans
and dscounts, has been reeased or dscharged from Its abty to ts
depostors for any part of ther cams aganst t, and such depostors
have accepted, n eu thereof, a en upon subsequent earnngs of such
bank or trust company, or cams aganst assets segregated by such
bank or trust company or aganst assets transferred from t to an
ndvdua or corporate trustee or agent, no ta sha be assessed or
coected, or pad nto the Treasury of the Unted States on account of
such bank, or trust company, such ndvdua or corporate trustee or
such agent, whch sha dmnsh the assets thereof whch are ava-
abe for the payment of such depostor cams and whch are necessary
for the fu payment thereof.
(c) ny such ta so coected sha be deemed to be erroneousy co-
ected, and sha be refunded sub|ect to a provsons and mtatons
of aw, so far as appcabe, reatng to the refundng of ta es, but
ta so abated or refunded after May 28, 1938, sha be reassessed when-
ever t sha appear that payment of the ta w not dmnsh the assets
as aforesad. The runnng of the statute of mtatons on the makng
of assessment and coecton sha be suspended durng, and for nnety
days beyond, the perod for whch, pursuant to ths secton, assessment
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379S.
7
or coecton may not be made, and a ta whch has been abated may
be reassessed and coected durng the tme wthn whch, had there
been no abatement, coecton mght have been made.
(d) Ths secton sha not appy to any ta mposed by Subchapter
1 or Subchapter C1 of Chapter 0.
Secton 40 of the Revenue ct of 1939 (Pubc, No. 155, Seventy-
e th Congress, frst sesson) reads as foows:
Sew. 40 . Insovent anks.
(a) Secton 8798(c) of the Interna Revenue Code s amended to
read as foows:
(c) (1) ny such ta coected, whether coected before, on, or
after the date of enactment o the Revenue ct of 1938, sha be deemed
to be erroneousy coected, and sha be refunded sub|ect to a prov-
sons and mtatons of aw, so far as appcabe, reatng to the refund-
ng of ta es.
(2) ny ta , the assessment, coecton, or payment of whch s
barred under subsecton (a) of ths secton, or any such ta whch
has been abated or remtted after May 28, 1938, sha be assessed or
reassessed whenever It ha appear that payment of the ta w not
dmnsh the assets as aforesad.
(3) ny ta , the assessment, coecton, or payment of whch Is
barred under subsecton (b) of ths secton or any such ta whch
has been refunded after May 28, 1938, sha be assessed or reassessed
after fu payment of such cams of depostors to the e tent of the
remanng assets segregated or transferred as descrbed n subsec-
ton (b).
(4) The runnng of the statute of mtatons on the makng of
assessment and coecton sha be suspended, durng, and for nnety
days beyond, the perod for whch, pursuant to ths secton, assessment
or coecton may not be made, and a ta may be reassessed as provded
n paragraphs (2) and (3) of ths subsecton, and coected, durng the
tme wthn whch, had there been no abatement, coecton mght have
been made.
(b) The term agent as used n 3798(b) of the Interna Revenue
Code sha be deemed to Incude a corporaton actng as a qudatng
agent.
(c) The amendments made by ths secton sha be effectve as of
the date of enactment of the Revenue ct of 1938.
Pursuant to the authorty contaned n secton 3791 of the Interna
Revenue Code, and other provsons of the nterna revenue aws, the
foowng reguatons are hereby prescrbed:
Secton 4 4 .1. ffect of statutory amendments. The amendment of secton
22 of the ct of March 1, 1879, made by secton 818 of the Revenue ct of 1938,
was effectve on May 28, 1938, the date of enactment of the Revenue ct of 1938.
Secton 40 of the Revenue ct of 1939 n substance makes dentca amendments
of subsecton (c) of secton 22, as amended by the Revenue ct of 1938, and sec-
ton 3798(c) of the Interna Revenue Code. The amendments made by secton
40 of the Revenue ct of 1939 are effectve as of May 28, 193a Therefore secton
22, as amended, of the ct of March 1, 1879, and secton 3798 of the Interna
Revenue Code, as amended by secton 40 of the Revenue ct of 1939, n substance
consttute a contnuous secton effectve on May 28, 1938.
Sec. 4 4 .2. anks and trust companes covered. Secton 22 (as amended) of
the ct of March 1, 1879, and secton 3798 of the Interna Revenue Code, both as
amended by secton 40 of the Revenue ct of 1939. n substance appy as a con-
tnuous secton to any natona bank, or bank or trust company organzed under
State aw, a substanta porton of the busness of whch conssts of recevng
deposts and makng oans and dscounts, and whch has
(a) ceased to do busness by reason of nsovency or bankruptcy, or
( ) been reeased or dscharged from Its abty to ts depostors for any
part of ther depost cams, and the depostors have accepted In eu thereof
Repaces the Soca Securty ct n secton 818 of the Revenue ct of 1938.
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77
3798.
a en upon ts subsequent earnngs or cams aganst ts assets ether
(1) segregated and hed by t for beneft of the depostors or (2) transferred
to an ndvdua or corporate trustee or agent who qudates, hods or oper-
ates the assets for the beneft of the depostors.
Sec. 4 4 .3. Defntons. s herenafter used n these reguatons:
(a)(1) The term secton, uness otherwse ndcated by the conte t, means
secton 22 (as amended) of the ct of March 1, 1879, secton 3798 of the Interna
Revenue Code (reenactng such secton 22), and secton 3798 of the Code as
amended by secton 40 of the Revenue ct of 1939, such sectons n substance
consttutng a contnuous secton In effect on and after May 28, 1938. See sec-
ton 4 4 .1 of these reguatons.
(2) Uness otherwse ndcated, the term subsecton means a subdvson
of the secton as defned heren.
( ) The term bank, uness otherwse ndcated by the conte t, means any
natona bank, or bank or trust company organzed under State aw, wthn
the scope of the secton. See secton 4 4 .2 of these reguatons.
(c) The terms statute of mtatons and mtatons mean a appca-
be provsons of aw (ncudng the secton as heren defned) whch mpose,
change, or affect mtatons, condtons, or requrements reatve to the aow-
ance of refunds and abatements, or the assessment or coecton of ta , as
the case may be.
(d) The term segregated assets ncudes transferred or trusteed assets, or
assets set asde or earmarked, and to a or a porton of whch, or the proceeds
of whch, the depostors are absoutey or condtonay entted.
(e) The term effectve date means May 28, 1938.
If) The term Commssoner means the Commssoner of Interna Revenue.
(g) The term coector means coector of nterna revenue.
Sec. 4 4 .4. Scope of secton generay. (a) Purpose. The secton pror
to amendment by the Revenue ct of 1938 was ntended to assst depostors of
a bank whch had ceased to do busness by reason of nsovency to recover
ther deposts, by prohbtng coecton of ta es of the bank whch woud dmn-
sh the assets necessary for payment of ts depostors. y the amendments ke
assstance s gven to depostors of banks whch are n fnanca dffcutes but
whch, n certan condtons, contnue n busness.
( ) Requstes of appcaton. In order that the secton sha operate In a
case where the bank contnues busness It s necessary that the depostors sha
agree to accept, n eu of a or a part of ther depost cams as such, cams
aganst segregated assets, or a en upon subsequent earnngs of the bank, or
both. When such an agreement e sts, no ta dmnshng such assets or earn-
ngs, or both, otherwse avaabe and necessary for payment of depostors,
may be coected therefrom. If, under such an agreement, the depostors have
the rght aso to ook to the unsegregated assets of the bank for recovery, n
whoe or part, the unsegregated assets are kewse, unt they e ceed the amount
of the depostors cams chargeabe thereto, unavaabe for ta coecton.
ny ta of such a bank, or part of any ta , whch s once uncoectbe under
the sectons, can not thereafter be coected e cept from any resdue of segre-
gated assets remanng after cams of depostors aganst such assets have been
pad.
(c) Interest. or the purposes of the secton, depostors cams Incude bona
fde nterest, ether on the deposts as such, or on the cams accepted n eu of
deposts as such.
(d) Lmtatons on mmunty. The secton s not prmary ntended for the
reef of banks as such. It does not prevent ta coecton, from assets not
necessary, or not avaabe, for payment of depostors, from a bank wthn sub-
secton (a), at any tme wthn the statute of mtatons. In other words the
mmunty of such a bank s not compete, but ceases whenever, wthn the
statutory perod for coecton, It becomes possbe to make coecton wthout
dmnshng assets necessary for payment of depostors. In the case of a bank
wthn subsecton (b), any mmunty to whch the bank s entted s absoute
e cept as to segregated assets. ny ta conng wthn such mmunty may
never be coected. Wth respect to segregated assets, such a bank s sub|ect to
the same rue as a bank wthn subsecton (a), that s to say, after cams of
depostors aganst segregated assets have been pad, any surpus s sub|ect, wthn
the statute of mtatons, to coecton of any ta , due at any tme, the coecton
of whch was suspended by the secton. The secton s not for the reef of
credtors other than depostors, athough It may ncdentay operate for ther
beneft. See sectons 4 4 . and 4 4 .11( ) of these reguatons.
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3798.
78
Sec. 4 4 .5. Segregated or transferred assets. (a) Genera. In a case In-
vovng segregated or transferred assets, t s not necessary, for appcaton of
the secton, that the assets sha techncay consttute a trust fund. It s suff-
cent that segregated assets be defntey separated from other assets of the bank
and that transferred assets be defntey separated both from other assets of the
bank and from other assets hed or owned by the trustee or agent to whom
assets of the bank have been transferred that the bank be whoy or partay
reeased from abty for repayment of deposts as such and that the depos-
tors have cams aganst the separated assets. ny e cess of separated assets
over the amount necessary for payment of such depostors w be avaabe for
ta coecton after fu payment of depostors cams under the agreement
aganst such assets. ut see secton 4 4 .(o) of these reguatons.
( ) Corporate transferees. Where the segregated assets are transferred to a
separate corporate trustee or corporate agent, the assets and earnngs therefrom
are wthn the protecton of the secton, unt fu payment of depostors cams
aganst such assets and earnngs, no matter by whom the stock of such corpora-
ton s hed, and no matter whether the assets be qudated or operated or hed
for beneft of the depostors.
Property of a separate corporaton not conveyed to t by the bank pursuant to
an agreement wth depostors, s not wthn the Immunty of the secton, even
though the corporaton s stock Is owned by the bank. Ta due from a separate
corporaton to whch assets of an nsovent bank are conveyed s coectbe,
even though such ta be due to the property so conveyed, e cept n o far as
ta coecton w dmnsh assets conveyed by the bank for beneft of depostors
or the earnngs from such assets to whch the depostors are entted, and whch
are necessary for payment of the depostors cams. Other assets and earnngs
of a separate corporaton are avaabe for coecton of the ta es of such cor-
poraton even though the assets and earnngs of such corporaton f receved
by the bank woud be avaabe for satsfacton of cams of the bank s depostors
and such cams can not otherwse be pad.
Sec. 4 4 . . nsegregated assets. (a) Depostors cams aganst assets.
Cams of depostors, to the e tent that they are to be satsfed out of segre-
gated assets, w not be consdered n determnng the avaabty of unsegre-
gated assets for ta coecton. If depostors have agreed to accept payment out
of segregated assets ony, coecton of ta from unsegregated assets w not
dmnsh the assets avaabe and necessary for payment of the depostors
cams. Thus, t may be possbe to coect ta es from the unsegregated assets
of a bank athough the segregated assets are mmune under the secton.
If the unsegregated assets of the bank are sub|ect to any porton of the
depostors cams, such unsegregated assets w be wthn the Immunty of
the secton ony to the e tent necessary to satsfy the cams to whch such
assets are sub|ect. Ta es w st be coectbe from the unsegregated assets
to the e tent of the amount by whch the tota vaue of such assets e ceeds
the abty to depostors to be satsfed therefrom. Therefore, f, for e ampe,
n the case of a bank havng a ta abty, not prevousy Immune under the
secton, of 50,000, the depost cams aganst the bank are n the amount of
75,000, and the assets avaabe for satsfacton of depost cams amount to
100,000, the 50,000 ta s coectbe to the e tent of the 25,000 e cess of
assets over depost cams. Coecton s not to be postponed unt the fu
amount of the ta s coectbe.
( ) Depostors cams aganst earnngs. ven though under a bona fde
agreement a bank has been reeased from depostors cams as to unsegregated
assets, f a or a porton of ts earnngs are sub|ect to depostors cams, a
assets the earnngs from whch, n whoe or part, are charged wth the pay-
ment of depostors cams, w be Immune from ta coecton. ut see sec-
ton 4 4 .7(a) of these reguatons.
Sec. 4 4 .7. arnngs. (a) vaabty for ta coecton. arnngs of a
bank wthn subsecton ( ), whether from segregated or unsegregated assets,
whch are necessary for, appcabe to, and actuay used for, payment of de-
postors cams under an agreement, are wthn the mmunty of the secton.
If ony a porton or percentage of Income from segregated or unsegregated
assets Is avaabe and necessary for payment of depostors cams, the reman-
ng ncome Is avaabe for ta coecton. arnngs of the bank s frst fsca
year endng after the makng of the agreement not appcabe to payment of
depostors w be assumed to be appcabe for coecton of any ta due pror
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3798.
or subsequent to e ecuton of the agreement. arnngs of subsequent fsca
perods from nnsegregated assets not appcabe to depostors cams w be
assumed to be appcabe to payment of ta es as to whch Immunty under the
secton has not prevousy attached. arnngs from segregated assets are
avaabe for coecton of ta , whether prevousy uncoectbe under the sec-
ton or not, after depostors cams aganst such assets have been pad n fu.
See sectons 4 4 .5(a) and 4 4 .(o) of these reguatons.
( ) Tan computaton. The fact that earnngs of a gven year may be whoy
or party unavaabe under the secton for coecton of ta es does not e empt
the ncome for that year, or any part thereof, from ta abty. The secton
affects coectbty ony, and Is not concerned wth ta abty. ccordngy,
the ta payer s ncome ta return sha correcty compute the ta abty, even
though n the opnon of the ta payer t s Immune from ta coecton under
the secton. The ta sha be determned wth respect to the entre ta abe
ncome and not merey wth respect to the porton of the earnngs out of whch
ta may be coected. s to estabshment of mmunty from ta coecton see
secton 4 4 .9 of these reguatons.
(c) ampe. n agreement, e ecuted n the year 1938 between a bank sub-
|ect to ta under secton 14(d) of the Revenue ct of 1938 and ts depostors,
provdes (1) that certan assets are to be segregated for the beneft of the
depostors who have waved (as cams aganst unsegregated assets of the bank)
a percentage of ther deposts (2) that 00 per cent of the bank s net earnngs
for fsca years begnnng wth the fsca year endng December 81, 1938, from
unsegregated assets, sha be pad to the depostors unt the porton of ther
cams waved wth respect to unsegregated assets of the bank has been pad
and (3) that the unsegregated assets sha not be sub|ect to depostors cams.
The speca cass net Income of the bank for the caendar year 1938 s 10,000,
4,000 produced by the segregated, and ,000 produced by the unsegregated
assets, and that amount, 10,000, aso consttutes ts net earnngs for that year
before deductng edera ncome ta es. Such amount sha be consdered the
net earnngs for the purpose of these reguatons n computng the porton of
the earnngs to be pad to depostors. The bank has an outstandng ta abty
for pror years of 7,000. The ncome ta abty of the bank for 1938 s 1
per cent of 10,000, or 1, 50, makng a tota outstandng ta abty of 8, 50.
The porton of the earnngs of the bank for 1938 remanng after provson for
depostors s 2,400 ( ,000 ess 0 per cent thereof, or 3, 00). It w be as-
sumed that of the tota outstandng ta abty of 8, 50, 2,400 may be assessed
and coected, eavng ,250 to be coected from any e cess of the segregated
assets after cams of depostors aganst such segregated assets have been pad
n fu. No part of the ,250 mmune from coecton from 1938 earnngs may
be coected thereafter from unsegregated assets of the bank or earnngs there-
from, so that e cept for any possbe surpus of the segregated assets the ,250
s uncoectbe.
In the year 1989 the earnngs are agan 10,000, 4,000 from segregated and
,000 from unsegregated assets, as n the prevous year. owever, the return
fed shows ncome of 5,000 and a ta abty of 900. n nvestgaton shows
the true ncome to be 10,000, on whch the ta s 1,800. The fu 1,800 w be
assumed to be coectbe. The 00 dfference between 2,400 (the e cess of
earnngs from unsegregated assets over the amount gong to the depostors),
and the 1,800 ta for 1939, s not avaabe for coecton of the ta for pror
years, whch became mmune as descrbed above, but may be avaabe .for
coecton of ta for subsequent years.
No sgnfcance attaches to the seecton of the years 1938 and 1930 for the
e ampe. The rues Indcated by the e ampe are equay appcabe to subse-
quent or pror years not e cuded by mtatons.
Sec. 4 4 .8. batement and refund. n assessment or coecton, no matter
when made, f contrary to the secton as amended by the Revenue ct of 1938
and the Revenue ct of 1939, s sub|ect to abatement or refund wthn the
appcabe statutory perod of mtatons.
n abatement or refund after May 28, 1938, te effectve date of the amend-
ments, s equay aowabe whether assessment or coecton was erroneous be-
cause contrary to the amended secton, or because, n the case of a bank wthn
subsecton (a), the same ta had been propery abated or refunded, or n the
case of a bank wthn subsecton (b), had been propery refunded, on or before
the effectve date of the amendments, and reassessed or coected after such
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3798.
80
date. See secton 4 4 .12(b) of these reguatons. If there was a pror proper
abatement or refund n the case of a bank wthn subsecton (a), or a proper
refund In the case of a bank wthn subsecton (b), on or before the effectve
date of the amendments, a cam for abatement or refund of the same ta
reassessed or recoected after the effectve date of the amendments may be
aowed even though the second assessment or coecton was otherwse n ac-
cordance wth the amended secton. owever, In the absence of abatement
or refund In the case of a bank wthn subsecton (a), or of a refund n the
case of a bank wthn subsecton (b), on or before the effectve date of the
amendments, the mere fact that the ta was due before the effectve date of
the amendments w not be ground for aowance of a cam.
Coecton from a bank wthn subsecton (b) whch dmnshed assets neces-
sary for payment of depostors, f made pror to agreement wth depostors.
Is not contrary to the amended secton, and affords no ground for refund.
ny abatement or refund s sub|ect to e stng statutory perods of mta-
ton, whch perods are not suspended or e tended by the amended secton. In
order to secure refund of any ta es pad for any ta abe year durng the
perod of mmunty the bank must fe cam therefor.
Seo. 4 4 .9. stabshment of mmunty. The mere aegaton of nsovency,
or that depostors have cams aganst segregated or other assets or earnngs
w not of Itsef secure Immunty from ta coecton. It must be affrmatvey
estabshed to the satsfacton of the Commssoner that coecton of ta w
be contrary to the amended secton. See aso secton 4 4 .10 of these reguatons.
ny cam, by a bank, of mmunty under subsecton (b), sha be supported
by a statement, under oath or affrmaton, whch sha show: (a) the tota of
depostors cams outstandng, and ( ) separatey and n deta, the amount
of each of the foowng, and the amount of depostors cams propery charge-
abe aganst each (1) segregated or transferred assets (2) unsegregated
assets (3) estmated future average annua earnngs aud profts (4) amount
coectbe from sharehoders and (5) any other resources avaabe for pay-
ment of depostors cams. The deta sha show the fu amount of depostors
cams chargeabe aganst each of the Items (1) to (5), Incusve, even though
part or a of the amount chargeabe aganst a partcuar tem s aso charge-
abe aganst some other tem or tems. There sha aso be fed a copy of any
agreement between the bank and Its depostors, and any other agreement or
document bearng on the cam of mmunty under the secton. The statement
sha show the bass, as book, market, etc., of vauaton of the assets.
Seo. 4 4 .10. Procedure durng mmunty. (a) Statements to be fed. s
ong as, pursuant to the secton compete or parta mmunty Is camed, a
bank wthn subsecton (b) sha fe wth each ncome ta return a statement
as requred by secton 4 4 .9 of these reguatons, n dupcate, and sha aso
fe such addtona statements as the Commssoner may requre. Whether or
not addtona statements sha be requred, and the frequency thereof, w
depend on the crcumstances, ncudng the fnanca status and apparent pros-
pects of the bank, and the tme whch s avaabe for assessment and coecton.
If a copy of an agreement or document has once been fed, a copy of the same
agreement or document need not agan be fed wth a subsequent statement,
f t Is shown by the subsequent statement, when and where and wth what
return the copy was fed. In case of amendment a copy of the amendment
must be fed wth Ihe return for the ta abe year n whch the amendment Is
made.
( ) aure to fe. nure of a bank to fe any requred statement w
be treated as Indcatng that the bank s not entted to mmunty under the
secton.
Sec. 4 4 .11. Termnaton of mmunty. (a) Genera. In the case of a bank
wthn subsecton (a) mmunty w end whenever, and to the e tent that,
ta es may be assessed and coected, wthn the appcabe mtaton perods as
e tended by the secton, wthout dmnshng the assets avaabe and necessary
for payment of depostors. Immunty of a bank wthn subsecton (b) s ter-
mnated, as to segregated assets, whenever cams of depostors aganst such
assets have been pad In fu. See secton 4 4 .5 of these reguatons. s to
segregated assets, the termnaton of Immunty s compete, and any baance re-
manng after payment of depostors s avaabe, wthn statutory mtatons,
for coecton of ta due at any tme. owever, ta es of the bank w be co-
ectbe from segregated assets ony to the e tent that the bank has a ega or
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81
3798.
equtabe Interest theren. ssets as to whch there has been a compete convey-
ance for beneft of depostors, and the bank has bona fde been dvested of a
ega and equtabe nterest, are not avaabe for coecton of the bank s ta
abty.
s to unsegregated assets of a bank wthn subsecton (b), mmunty term-
nates ony as to ta es thereafter becomng due. When ta es are once mmune
from coecton, the mmunty as to unsegregated assets s absoute. ut see
the second paragraph of secton 4 4 . (a) of these reguatons.
( ) Genera credtors. Whe the mmunty from ta coecton s for pro-
tecton of depostors, and not for beneft of genera credtors, n some cases the
mmunty w not end unt the assets are suffcent to cover ndebtedness of
credtors generay. Ths stuaton w e st where under appcabe aw the
cams of genera credtors are on a party wth those of depostors, so that to
pay depostors In fu t s necessary to pay a credtors n fu.
(c) Sharehoder abty. In determnng the suffcency of the assets to
satsfy the depostors cams, sharehoders abty to the e tent coectbe
sha be treated as avaabe assets. See secton 4 4 .9 of these reguatons.
d) Depost nsurance. Depost nsurance payabe to depostors sha not
be treated as an asset of the bank and sha be dsregarded n determnng the
suffcency of the assets to meet the cams of depostors.
( ) Notce by bank. bank wthn subsecton (b), upon termnaton of
mmunty wth respect to (1) earnngs, (2) segregated or transferred assets,
or (3) unsegregated assets, sha mmedatey notfy the coector for the ds-
trct n whch the ta payer s returns were fed of such termnaton of mmunty.
See secton 4 4 .10( ) of these reguatons.
f) Payment by bank. s mmunty termnates wth respect to any assets,
t w be the duty of the bank, wthout notce from the coector, to make
payment of ta es coectbe from such assets.
Sec. 4 4 .12. Coecton of ta after termnaton of mmunty. (a) Oen-
era. If, n the case of a bank wthn subsecton (b), segregated assets (n-
cudng earnngs therefrom), n e cess of those necessary for payment of out-
standng deposts become avaabe, such e cess of segregated assets sha be
apped toward satsfacton of accumuated outstandng ta es prevousy mmune
under the secton, and not barred by the statute of mtatons. ut see secton
4 4 .5 of these reguatons. Where suffcent segregated or unsegregated assets
are avaabe, statutory Interest sha be coected wth the ta . When un-
segregated assets or earnngs therefrom prevousy mmune become avaabe
for ta coecton, they w be avaabe ony for coecton of ta es (ncudng
nterest and other addtons) becomng due after Immunty ceases. See e ampe
n secton 4 4 .7(c) of these reguatons.
( ) Ta due before the effectve date of the amendments. In the case of a
bank wthn subsecton (a), the secton does not permt assessment or reassess-
ment or coecton of ta abated or refunded, f the abatement or refund was
n accordance wth the secton pror to the amendments by the Revenue cts
of 1938 and 1939.
In the case of a bank wthn subsecton (b) the secton does not permt
assessment or reassessment of coecton, from segregated or unsegregated
assets, of ta refunded on or before May 28, 1938, f the refund was n ac-
cordance wth the secton pror to the amendments by the Revenue cts of
1938 and 1939.
Wth the e ceptons ndcated by the precedng two paragraphs, ta due
on or before May 28, 1938, and st outstandng on the sad date, s wthn
the provsons of the amended secton and coectbty s determnabe n
accordance wth the amended secton the same as n the case of ta due after
such date. ccordngy, a ta due pror to the effectve date of the amendments
and then coectbe under the secton may not be assessed or coected there-
after f such assessment or coecton woud be contrary to the secton as
amended. See secton 4 4 .8 of these reguatons.
If the statutory perod for assessment or coecton had e pred before the
effectve date of the amendments, the secton does not revve t. ccordngy,
n such stuaton the ta s not coectbe under the amended secton, regardess
of other crcumstances.
Sec. 4 4 .13. Soca securty ta es. These reguatons do not reate to
soca securty ta es, snce the mmunty granted by the amended secton
does not appy to ta es mposed by the Soca Securty ct.
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22(b), rt. 22(b) (2)-2.
82
Sec. 4 4 .14. ffectve date of reguatons. These reguatons are effectve as
of May 28, 1938, the effectve date of the amendments made by secton 818 of
the Revenue ct of 1938, and secton 40 of the Revenue ct of 1939. Treasury
Decson 4S82 (O. . 1939-1 (Part 1), 154) (Part 4 4, Tte 2 , Code of edera
Reguatons), Is hereby revoked as of the date of ts approva.
Gut T. everng,
Commssoner of Interna Revenue.
pproved December 2 , 1939.
ohn W. anes,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 28, 1939, 12.22 p. m.)
. R NU CT O 1938.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
rtce 22(a)-3: Compensaton pad other than n cash.
R NU CT O 1938.
Reguatons 101 amended. (See T. D 49 5, page 13.)
rtce 22(a)-7: Gross ncome of farmers.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes. 1940-2-10138
G. C. M. 2171
R NU CT O 1938.
Certan combned fe nsurance and annuty contracts, caed
Lfe nnuty wth Death eneft contracts, ssued by the M Com-
pany are not fe nsurance or annuty contracts wthn the mean-
ng of secton 22(b)2 of the Revenue ct of 1938, but consttute
contracts for the payment of nterest or earnngs on a certan fund.
G. C. M. G395 (C. . III-1, 7 (1929)) revoked.
n opnon s requested regardng the method of determnng the
amount to be reported by the M Company on orm 1099 wth respect
to amounts pad durng the year 1938 to who hods one o ts
Lfe nnuty wth Death eneft contracts, the provsons of
whch are heren set forth.
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83
22(b), rt. 22(b) (2)-2
Pror to the year 1938 the company ssued a Lfe nnuty wth
Death eneft contract to n the prncpa amount of 25,000, the
purchase prce, 2 ,250, beng dstrbuted as foows:
nnuty consderaton 14,110. 25
Snge premum Lfe nsurance 12,139. 75
Tota purchase prce 2 ,250.00
The contract provded for an annua payment of 875 (Sy2 per cent
of 25,000), to whch amount woud be added such addtona dv-
dends as the company mght decare. The contract provded that the
prncpa sum ( 25,000) woud be pad upon the death of the annutant,
and a further provson permtted the annutant to take as a surrender
vaue ether a part or the whoe of such prncpa sum. The reguar
annua payment was made n 1938 and the annutant, decdng to reduce
hs contract by 50 per cent, took a parta surrender vaue of 12,500.
Inasmuch as the orgna purchase prce was aocated between the
annuty and fe nsurance features of the contract, the purchase prce
of the remanng porton of the contract has been reaocated, pro-
ratng the orgna aocaton n ne wth the percentage of wthdrawa,
as foows:
Prncpa sum 12, 500. CO
nnuty consderaton 7, 055.125
Snge premum Lfe nsurance , 0 9. 875
Reaocated purchase prce 13,125. 00
nnua annuty payment 437. 50
The aggregate of the annua payments made has not yet equaed the
orgna cost of the annuty porton of the contract, eavng what mght
be termed a free baance of 3,025, 7 , and the queston presented s
whether n appyng secton 22(b)2 of the Revenue ct of 1938 n the
ght of G. C. M. 395 (C. . III71 7 (1929)) the 3 per cent mta-
ton shoud be based upon the orgna annuty cost or the orgna
cost reduced to refect the canceaton of one-haf thereof as of the
date the canceaton was effectve.
It s the vew of the ureau that the concuson reached n G. C. M.
395 shoud be modfed by reason of the decson of the oard of Ta
ppeas n the case of Od Coony Trust Co. et a., ecutors of the
WU of verett Morss, v. Commssoner (37 . T. .,, 435), affrmed on
appea by the Crcut Court of ppeas, rst Crcut (102 ed. (2d),
380), and that of the Supreme Court of Oregon n the case of dou v.
sher (154 Ore., 548, 1 Pac. (2d), 423).
In the former case the oard of Ta ppeas hed that the sum
payabe at death under a contract substantay dentca wth the
contract nvoved n the nstant case was not nsurance under poces
taken out by the decedent upon hs own fe wthn the meanng of
secton 302(g) of the Revenue ct of 192 .
In the case of aou v. sher, supra, the Oregon Supreme Court
hed that a contract dentca wth the one here nvoved was not an
annuty contract. The queston before the Oregon court n that case
was the method of treatment, under the Oregon Intangbes Income
Ta ct of 1931, of the perodc payments made pursuant to such a
contract. Ths statute mposed a ta wth respect to the ta payer s
net ncome . The specfc provsons of the statute there
nvoved are substantay dentca wth the provsons of the edera
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8 22(b), rt. 22rb)(2)-2.
84
Income Ta cts here nvoved. (Compare secton 8(2)b, ch. 335,
page 57 , Oregon Laws of 1931, and secton 22(b)2 of the Revenue
ct of 1938 and the correspondng sectons of pror Revenue cts.) In
dsposng of the queston presented the Oregon Supreme Court sad:
It Is practcay Immatera what cognomen we attach to these contracts. The
aw w ook behnd the name of the contracts. We are Incned to the beef that
dscusson of the e act knd of poces or combnaton of poces does not assst In
sovng the probem nvoved. We thnk, however, that the contracts wth the
Penn Mutua Lfe Insurance Co., under whch pantff receved the payments In
queston, are not fe nsurance or annuty contracts wthn the meanng of sec-
ton 8, ch. 335 (page 57 ), Oregon Laws of 1931.

Under the provsons of these favorabe contracts evdencng the Investments,
the pantff receved a cash Income whch eft hs prncpa unmpared. The
recepts were ncome to hm n every sense of the word. e had the beneft of
the protecton of the State and ts aws, and t s entrey approprate that he
shoud contrbute by a ta upon the recepts n queston.
Under the contracts n the nstant case the nsurer agrees to pay a
stated sum per annum. owever, ths sum s based on the presumed
nterest to be earned on the net premum and s ncreased by such dv-
dends as may be aotted by the company out of ts surpus earnngs.
Therefore, the sum payabe under the contracts s not f ed n any rea
sense but s contngent upon the earnngs of the company. These
perodc payments do not e haust the capta or consderaton for the
contract. On the contrary, a sum equa to the consderaton s payabe
to the fe benefcary on reasonabe demand durng hs fe, or to a
person named by hm on hs death. urthermore, the fe benefcary
under ths contract does not surrender any substanta rghts when he
renqushes hs contract for the surrender vaue thereof, as s the case
of the nsured under an ordnary fe nsurance contract. Ths s so
for the reason that the consderaton for the contract does not change
notwthstandng an ncrease n age of the fe benefcary. or these
reasons t s beeved that the surrender vaue of such contract s un-
quafedy sub|ect to the demand of the fe benefcary to the same
e tent that a savngs bank depost s sub|ect to the demand of the
depostor.
Consderng the substance of the obgaton of the company ssung
the contracts and the rghts of the benefcares thereunder, t s the
opnon of ths offce that the contracts n queston are contracts for
the payment of the nterest or earnngs on a certan fund, and are not
fe nsurance or annuty contracts wthn the meanng of the prov-
sons of the Revenue ct of 1938 referred to heren and the corre-
spondng provsons of pror Revenue cts.
The nformaton returns, orm 1099, requred to be fed by nsur-
ance companes showng amounts pad to benefcares under the con-
tracts n queston shoud, therefore, show the entre amount of the
perodc payments receved by the benefcares thereunder.
In reachng the above concuson ths offce has gven consderaton
to the recent decson of the Unted States Crcut Court of ppeas
for the Thrd Crcut n the case of odne v. Commssoner (103 ed.
(2d), 982), certorar dened October 9, 1939. In that case the court
concuded that the amount receved upon the surrender of a contract of
the type here nvoved was receved under a fe nsurance
or annuty contract wthn the meanng of secton 22(b) 2 of the
Revenue ct of 1932 and that the resutnggan was ta abe as ord-
nary ncome. though the Od Coony Trust Co. case, supra, n-
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85 22(b), rt. 22(b) (4)-.
voved the status of a smar contract for edera estate ta purposes,
t s beeved that the decsons must be taken as representng confct-
ng vews by the two courts wth respect to the nature of these con-
tracts. Ths offce s of the opnon that the decson n the Od Coony
Trust Co. case represents the sounder constructon of such contracts
and shoud be foowed rather than the decson n the odne case.
G, C. M. 395 (C. . III-1, 7 (1929)) s revoked.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 22(b) (4)-: Interest upon State 1940-13-10213
obgatons. G. C. M. 21890
R NU CT O 1938.
There nterest-bearng State bonds were purchased by at a
dscount and, pursuant to provsons contaned n the bonds, they
were redeemed n 1938 at a premum and accrued nterest pror to
maturty, the accrued nterest and the dscount receved upon re-
dempton of the bonds consttute nterest upon the obgatons of a
State and are e empt from edera ncome ta under secton 22(b)4
of the Revenue ct of 1038. owever, the premum receved s not
Interest wthn the meanng of that secton but s a part of the
amount receved n e change for the bonds under secton 117(f)
of that ct.
n opnon s requested whether , the ta payer, who purchased
nterest-bearng State bonds at a dscount, the bonds provdng that
they are redeemabe at 104 and nterest on 30 days notce reazed
ta abe ncome upon the redempton of the bonds before maturty
pursuant to the terms thereof. The bonds n queston were redeemed
n 1938.
The ta payer contends that the amount of the dscount and premum
s part of the nterest n ths case, and, therefore, represents nonta abe
ncome under secton 22(b)4 of the Revenue ct of 1938, whch pro-
vdes for the e cuson from gross ncome and e empts from edera
ncome ta nterest upon the obgatons of a State.
In addton to the return of the cost upon redempton of the bonds,
the ta payer receved (1) accrued nterest, (2) dscount, and (3)
premum. The queston presented s whether such tems consttute
nterest upon the obgatons of a State.
Interest means the u amount whch one has contracted to pay for the
use of borrowed money. (Od Coony Raroad Co. v. Commssoner,
284 U. S., 552 see aso a Rver ectrc Lght Co. v. Commssoner,
23 . T. ., 1 8). The court and the oard of Ta ppeas n the
foregong cases dened the Commssoner s contenton that premum
receved by the ssung corporaton on the sae of ts bonds reduced the
effectve rate of nterest and consequenty reduced the aowabe
deducton from gross ncome of nterest on ndebtedness.
In the nstant case, the amount desgnated u nterest on the bonds
(cassfed as (1) above) whch had accrued at the date of redempton
ceary comes wthn the purvew of secton 22(b)4 and s nonta abe
ncome.
The amount desgnated dscount (cassfed as (2) above) may be
subdvded nto two casses, namey, earned dscount and unearned
dscount or, amortzed and unamortzed dscount, respectvey, were
a prvate ssung corporaton nvoved.
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122(b), rt. 22(b)(4)- .
8
The amount of dscount receved at maturty on Treasury bs
(T. D. 427 , 0. . III-2, 83 (1929)), on nonnterest-bearng State
bonds (G. C. M. 10452, C. . I-1, 18 (1932)), and on nterest-bear-
ng muncpa obgatons (I. T. 2 29, C. . I-1, 20 (1932)) s hed
to be nonta abe ncome, and each purchaser of the bond before
maturty s entted to apporton the amount of dscount at whch the
obgaton was ssued accordng to the perod of hs hodng. The
earned dscount n the present case s, therefore, nonta abe ncome
to the ta payer.
The courts have consdered the nature of dscount n cases nvovng
prvate corporatons and have hed t to be n the nature of deferred
nterest whch may be amortzed, for ncome ta purposes, over the
fe of the bonds by deductng the annua proporton thereof from the
ssung corporaton s gross ncome each year as accrued nterest.
(Western Maryand Raway Co. v. Commssoner, 83 . (2d), 95:
Chcago R. I. b P. Ry. Co. v. Commssoner, 13 . T. ., 988, affrmed
on ths pont, 47 . (2d) 990, certorar dened, 284 U. S., 18 ever-
ng v. Unon Pacfo Raroad Co., 293 U. S., 282.) On retrement of
such a bond ssue before maturty, the unamortzed dscount s de-
ductbe from gross ncome. (Great Western Power Co. of Caforna
v. Commssoner, 297 U. S., 543: San oaqun Lght Power Corpora-
ton v. McLaughn, 5 . (2d), 77 everng v. Unon Puho
Servce Co., 75 . (2d), 723.) u t the tme of redempton the bond-
hoder s pad the par vaue of the bond so that he s n effect pad
for the use of the money he ent the amount of the dscount (both
amortzed and unamortzed) . (San oaqum Lght Power
Corf oraton v. McLaughn, supra everng v. Unon Pubc Servce
Co., supra.) The nature of dscount on the purchase of bonds s not
atered by the fact that part of t may be receved by the purchaser
before the maturty of the bond ssue. Whenever pad, t s st n the
nature of deferred nterest or the amount whch one has con-
tracted to pay for the use of borrowed money. It s the opnon of
ths offce, therefore, that the unearned dscount receved by on the
redempton of the bonds s the same character of ncome as the earned
dscount and s, consequenty, nonta abe ncome.
Whe some cases have treated premum and dscount the same for
deducton purposes (ncudng San oaqun Lght Power Corf ora-
ton v. McLaughn, supra, and everng v. Unon Pubc Servce
Co., supra), there was no necessty n those cases, as there s here, to
nqure whether there were any dfferentatng characterstcs between
the two. Nevertheess, there s a vta dstncton n the nature of the
two whch has been recognzed n a case where one prvate corporaton
purchases the assets of another and assumes ts abtes. In such a
case, the successor corporaton s not permtted to deduct from ts gross
ncome the unamortzed dscount on the bonds of the predecessor
corporaton, but t may deduct a premum pad to retre such bonds,
athough the bond ndenture tsef provded for such redempton.
The reason underyng ths dfferentaton s set out n mercan Gas
ectrc Co. v. Unted States (17 . Supp., 151), wheren the court
bad n part:
The rght to a deducton on account of Its bonds havng been sod at a dscount
orgnated wth the rgnan Company the Issung corporaton tsef. It came
nto e stence when the bonds were sod, but we have hed that ths rght dd not
pass to a successor company whch acqured the property of the frst corporaton
by purchase or transfer and assumed ts abtes. On the other hand, the rght
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87
23(e), rt. 23(e)-.
to the deducton by reason of havng redeemed the bonds at a premum was not
brought nto e stence by the rgnan Company. The rght to ca the bonds at
a specfed prce was one that ran wth the bonds and beonged to any party who
assumed ther payment. It was an entrey dfferent rght from that whch arose
by reason of havng ssued the bonds at a dscount.
The rght to cam a deducton on account of havng redeemed the bonds at
a prce above par dd not come nto e stence unt the bonds were so redeemed
and, as we thnk, beonged to the corporaton makng the payment.
It s the opnon of ths offce that the premum pad to upon
redempton of the bonds by the State s not nterest wthn the
meanng of secton 22(b)4, snce t s not an amount whch one
has contracted to pay for the use of borrowed money. ad the
bonds not been redeemed pror to maturty, the ta payer woud have
receved no premum. It was pad by reason of the acton of the
State n cang the bonds before maturty and not as a sum for the
use of the money. Its payment n such case was for the renqush-
ment of the obgaton so that no further nterest need be pad
thereon rather than for the use of the borrowed money. To ncrease
the stpuated nterest n the bond contract, ncudng the dscount,
by the amount of the premum to ascertan the amount of the
nterest e empted by secton 22(b)4, supra, on the theory that
the premum must necessary be consdered to arrve at the effec-
tve rate of nterest woud be contrary to the ordnary meanng
of the word nterest as used n the statute. (Od Coony Raroad
Co. v. Commssoner, supra.)
Secton 117(f) of the Revenue ct of 1938 provdes as foows:
Retrement or onds, tc. or the purposes of ths tte, amounts receved
by the hoder upon the retrement of bonds, debentures, notes, or certfcates
or other evdences of ndebtedness ssued by any corporaton (ncudng those
ssued by a government or potca subdvson thereof), wth nterest coupons
or n regstered form, sha be consdered as amounts receved n e change
therefor.
The bonds n the present case fa under secton 117(f), supra.
The premum must, therefore, be consdered as an amount receved
n e change and, consequenty, ta abe as a capta gan rather than
as ordnary ncome.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 23(e). D DUCTIONS ROM GROSS INCOM :
LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 1940-8-10178
( so Secton 23(g), rtce 23(g)-.) I. T. 3351
R NU CT O 1938.
Where bank stock was determned to be worthess In a ta nbe
year pror to the year 1S138, and the stockhoders, who keep ther
accounts and fe ther returns on the cash recepts and dsburse-
ments bass, pad ther statutory abty (so-caed doube ab-
ty) n the year 1938, such payments consttute osses to whch
secton 23(e) of the Revenue ct of 1938 appes and not osses
wthn the purvew of secton 23(g) and secton 23(g)2 of that
ct
dvce s requested whether payments n 1938 of ther statutory
abty (so-caed doube abty) by bank stockhoders, who keep
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25, rt. 25-3.
83
ther accounts and fe ther returns on the cash recepts and dsburse-
ments bass, consttute osses to whch secton 23(e) of the Revenue
ct of 1938 appes or osses wthn the purvew of secton 23(g) 1
and secton 23(g) 2 of that ct.
The nqury reates to the stock of the M Trust Co. whch became
worthess n 1934. Deductons on account of such worthessness have
been aowed n edera ncome ta returns for 1934 under secton
23(e) of the Revenue ct of 1934.
Secton 23 of the Revenue ct of 1938 reads n part as foows:
Sec. 23. Deductons bom Gross Income.
In computng net Income there sha be aowed as deductons:

(e) Losses by Indvduas. In the ease of an Indvdua, osses sustaned
durng the ta abe year and not compensated for by nsurance or otherwse
(1) If Incurred n trade or busness or
(2) f ncurred In any transacton entered Into for proft, though not con-
nected wth the trade or busness .

(g) Capta Losses
(1) Lmtaton. Losses from saes or e changes of capta assets sha be
aowed ony to the e tent provded n secton 117.
(2) Sbcubtes eecomno wobthess. If any securtes (as defned n para-
graph (3) of ths subsecton) become worthess durng the ta abe year and are
capta assets, the oss resutng therefrom sha, for the purposes of ts tte,
be consdered as a oss from the sae or e change, on the ast day of such
ta abe year, of capta assets.
It s hed that where bank stock was determned to be worthess n
a ta abe year pror to the year 1938. payments n 1938 of ther statu-
tory abty (so-caed doube abty) by stockhoders, who keep
ther accounts and fe ther returns on the cash recepts and dsburse-
ments bass, consttute osses to whch secton 23(e) of the Revenue
ct of 1938 appes and not osses wthn the purvew of secton
23(g) 1 and secton 23(g)2 of that ct. (See I. T. 2843, C. . T -1,
77 (1935).)
S CTION 23(g). D DUCTIONS ROM GROSS
INCOM : C PIT L LOSS S.
rtce 23(g)-: Capta osses.
R NU CT O 1938.
Payments of statutory abty by bank stockhoders where stock
became worthess n pror ta abe year. (See I. T. 3351, page 87.)
S CTION 25. CR DITS O INDI IDU L
G INST N T INCOM .
rtce 25-3: mount of persona e empton aowabe.
R NU CT O 1938.
Ctzen of Unted States entted to benefts of secton 251. (See
I. T. 33 3, page 92.)
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80
181, rt. 131-1.
P RT I . CCOUNTING P RIODS ND M T ttDS O
CCOUNTING.
S CTION 44. INST LLM NT SIS.
rtce 44-5: Gan or oss upon dsposton of
nstament obgatons.
R NU CT O 1038.
Reguatons 101 amended. (See T. D. 4972, page 47.)
P RT R TURNS ND P YM NT O T .
S CTION 55. PU LICITY O R TURNS.
R NU CT O 1938.
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
rtock ta returns and returns of empoyment ta on empoyers. (See
T. D. 49 2, page 49.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of depredaton
and depeton.
R NU CT O 5088.
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S
ND POSS SSIONS O UNIT D ST T S.
rtce 131 1: nayss of credt for ta es.
R NU CT O 1938.
L T. 3288 (C. . 1939-1 (Part 1), 139) modfed. (See I. T. 3385,
page 103.)
28220 40 4
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S 102, rt. 1 2-1. 90
SUPPL M NT D. R TURNS ND P YM NT O T .
I f
S CTION 143. WIT OLDING O T T SOURC .
rtce 143-1: Wthhodng ta at source.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
rtce 1 2-1: Income of estates and trusts. 1940-25-10297
G. C. M. 22034
R NU CT O 1938.
Dstrbutons of ncome, ncudng gans on the sae of capta
assets, to benefcares of the estate of by the e ecutor of the
estate durng the perod of admnstraton of the estate, the w
makng no provson for dstrbutons of ncome durng the perod
of admnstraton, the State aw not provdng for such dstrbuton,
and the ncome beng suffcent to cover the dstrbutons n queston,
are deductbe by the estate for edera ncome ta purposes as
ncome propery pad under the provsons of secton 2(c) of
the Revenue ct of 1038. Such ncome s ta abe to the benef-
cares. Dstrbutons of ncome by the e ecutor durng the perod
of admnstraton of the estate to testamentary trustees arc not
deductbe by the estate for edera ncome ta purposes as ncome
propery pad to any egatee, her, or benefcary under the pro-
vsons of secton 1 2(c) of the Revenue ct of 15)38. Such ncome
Is ta abe to the estate.
dvce s requested whether n the case of the estate of , whch
was n process of admnstraton durng the year 1938, the ncome,
ncudng gans on the sae of capta assets reazed and dstrbuted
by the e ecutor n the year 1938, s ta abe to the estate or to the
dstrbutees.
ded testate on pr , 1938, a resdent of the State of Ca-
forna. fter provdng for severa specfc bequests and the payment
of hs debts, the testator drected that the resdue of the estate be
dvded nto a specfed number of equa parts and dstrbuted to cer-
tan named persons. Durng the perod from pr , 1938, to De-
cember 31, 1938, the estate had a net ta abe ncome of 17a doars,
ncudng capta gans of 13a doars derved from the sae of corpus
of the estate. On November , 1938, the probate court ordered a
payment of 55. doars to resduary egatees, the order e pressy
provdng that 17a doars be pad out of ncome and the baance out
of corpus. Payments were made by checks dated November , 1938,
and on the ncome ta return fed for the estate a deducton was
camed for the amount of the payments from ncome. s w made
no provson for the dstrbuton of ncome durng the perod of ad-
mnstraton. urthermore, wth the e cepton of secton 1000 of the
Probate Code of Caforna, whch permts any her, devsee, or
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91
1 5, rt. 1 5-1.
egatee to petton for a dstrbuton after four months, the code of
the State s sent regardng the dstrbuton of ncome of an estate
durng admnstraton.
Secton 1 2(c) of the Revenue ct of 1938 provdes n part as
foows:
In the case of Income receved by estates of deceased persons durng the perod
of admnstraton or settement of the estate there sha be aowed as
an addtona deducton n computng the net ncome of the estate the
amount of the ncome of the estate for Its ta abe year, whch s prop-
ery pad or credted durng such year to any egatee, her, or benefcary, but
the amount so aowed as a deducton sha be ncuded In computng the net
Income of the egatee, her, or benefcary.
In G. C. M. 459 (C. . II-2,133 (1928)) t was hed (syabus):
Where a w s sent as to the dsposton of ncome receved durng the
perod of admnstraton, the aws of the partcuar State nvoved must be
consdered n order to determne whether current ncome or gan on saes of
property may be propery pad or credted to resduary or other egatees
durng any gven ta abe year.
It was stated n the ast paragraph of that memorandum that Un-
ess the w or the aws of the State make such payment or credt
mproper the amount pad or credted s deductbe n computng the
net ncome of the estate.
Under the facts n the present case, t s the opnon of ths offce
that the dstrbutons drecty to the benefcares of ncome, ncud-
ng capta gans, by the e ecutor of the estate of durng the perod
of admnstraton of the estate are deductbe by the estate for ed-
era ncome ta purposes as ncome propery pad under the prov-
sons of secton 1 2(c) of the Revenue ct of 193S. Such ncome s
ta abe to the benefcares.
The w of not ony drects that portons of the resduary estate
be pad drecty to certan named benefcares but t drects that a
part of such estate be pad to certan named persons n trust for the
beneft of others. Wth respect to the dstrbuton of estate ncome
to trustees, t was hed n Wege et a. v. Commssoner, 9 ed. (2d),
3S7, that the resdue of an estate, ncudng ncome, s receved by a
testamentary trustee as a bequest or devse of trust corpus and, there-
fore, the payment of such ncome s not deductbe by an estate under
the provsons of secton 102(c) of the Revenue ct of 1928.
ppyng the rue ad down n the Wege case, supra, the dstr-
butons of ncome to testamentary trustees by the e ecutor of the
estate of durng the perod of admnstraton are not deductbe by
the estate for edera ncome ta purposes as ncome propery pad
to any egatee, her, or benefcary under the provsons of secton
1 2(c) of the Revenue ct of 1938. Such ncome s ta abe to the
estate.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 1 5. MPLOY S TRUSTS.
rtce 1 5-1: mpoyees trusts.
R NU CT O 1938.
Partnershps of attorneys, physcans,etc. (SeeI. T. 3350,page 4.)
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251, rt. 251-1.
92
rtce 1 5-1: mpoyees trusts.
,, R NU CT OP 1938.
Reguatons 101 amended. (See T. D. 4973, page 5.)
SUPPL M NT . POSS SSIONS O T UNIT D ST T S.
S CTION 251. INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S.
rtce 251-1: Ctzens of the Unted States 1940-14-10219
and domestc corporatons dervng ncome I. T. 33 3
from sources wthn a possesson of the
Unted States.
( so Secton 25, rtce 25-3.)
R NU CT O 1938.
Where no benefts are conferred by secton 2 1 of the Revenue
ct of 1038, the ta payer s entted to fe hs edera ncome ta
return and compute the ta thereon wthout regard to that secton.
I. T. 3327 (C. . 1939-2, 173) revoked.
Reconsderaton as been gven to I. T. 3327 (C. . 1939-2, 173),
n whch t was hed that the provsons of secton 251(f) of the
Revenue ct of 1938 precude the aowance to a ctzen of the Unted
States entted to the benefts of secton 251 of a persona e emp-
ton of more than 1,000, and that a ta payer entted to the bene-
fts of secton 251 of the Revenue ct of 1938 may not wave such
benefts n order to obtan credt for the persona e empton pre-
scrbed n secton 25(b) of that ct.
In the case on whch I. T. 3327, supra, was based, the ta payer s
ncome for two months of the year met the rec|urements of secton
251 of the Revenue ct of 1938, and he was entted to the beneft of
e empton from edera ncome ta on hs saary for that perod. If
he had reported hs entre ncome for the year receved from sources
both wthn and wthout the Unted States as ta abe ncome and
camed the fu persona e empton aowed by secton 25(b) of the
Revenue ct of 1938, the ta woud have been ess than the ta due
by camng the benefts of secton 251.
Secton 251 of the Revenue ct of 1938 provdes n part as foows:
(a) Genera Rue. In the case of ctzens of the Unted States or domestc
corporatons, satsfyng the foowng condtons, gross ncome means ony gross
ncome from sources wthn the Unted States
(1) If 80 per centum or more of the gross ncome of such ctzen or
domestc corporaton (computed wthout the beneft of ths secton), for the
3-year perod mmedatey precedng the cose of the ta abe year (or for
such part of such perod mmedatey precedng the cose of such ta abe
year as may be appcabe) was derved from sources wthu a possesson
of the Unted States and

(3) If, n case of such ctzen, 50 per centum or more of hs gross n-
come (computed wthout the beneft of ths secton) for such perod or
such part thereof was derved from the actve conduct of a trade or bus-
ness wthn a possesson of the Unted States ether on hs own account
or as an empoyee or agent of another.

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5 251, rt. 251-2.
(f) Credts ganst Net Income. ctzen of the Unted States entted to
the benefts of ths secton sha be aowed a persona e empton of ony 1,C00
and sha not be aowed the credt for dependents provded In secton 2o(u) (2).
The rung pubshed as I. T. 8327 was based on the concuson
that the provsons of secton 251(f), supra, are mandator -. That
concuson -was reached by a tera nterpretaton of the statute, . e.,
f a ctzen satsfes the condtons of secton 251(a), then he s
entted to the benefts of the secton and, hence, s entted to a
persona e empton of ony 1,000. It shoud be noted, however, that
n order for secton 251(f) to appy, the ctzen must be entted to
the benefts of the secton. To satsfy the condtons of sec-
ton 251(a) s not necessary to become entted to benefts. In
order for secton 251(f) to appy, t may propery be sad that the
ta payer must be entted to some actua beneft by reason of the
provsons of secton 251. ven a tera nterpretaton of the secton
does not compe the concuson that because a ta payer satsfes the
condtons of secton 251(a) he becomes sub|ect to the provsons of
secton 251(f). though secton 251(a) provdes that gross ncome
means ony gross ncome from sources wthn the Unted States as to
ctzens satsfyng certan condtons, and upon ts face permts of no
eecton, secton 251(f) ndcates that secton 251(a) s ntended to
confer benefts, and where no benefts are thereby conferred, t s
reasonabe to concude that secton 251(a) does not necessary
operate.
Upon reconsderaton of the queston, t s hed that where no
benefts are conferred by secton 251 of the Revenue ct of 1938, the
ta payer s entted to fe hs edera ncome ta return and compute
the ta thereon wthout regard to that secton. ccordngv,
I. T. 3327 (C. . 1939-2, 173) s revoked.
rtce 251-2: Income receved wthn the 1940- -101 7
Unted States. I. T. 3348
R NU CT O 1938.
Pay due offcers of the Unted States rmy actuay In the
Phppne Isands does not become ncome receved wthn the
Unted States merey because, Instead of beng pad to the offcer
In the Phppne Isands, t s, for convenence, upon order of the
payee, transmtted drect by the fnance offcer n the Phppne
Isands to a bank or nsurance company n the Unted States to be
credted to the account of the payee.
dvce s requested whether, under the crcumstances heren set
forth, certan portons of the pay of , an offcer n the Unted States
rmy statoned n the Phppne Isands, shoud be treated as havng
been receved wthn the Unted States for the purposes of secton
251 of the Revenue ct of 1938.
s gross ncome for 1938 conssted of a saary of 48.r doars for
servces rendered n the Phppne Isands to the Unted Sates
rmy. The saary was payabe n the Phppnes n monthy nsta-
ments. Under the reguatons of the War Department, the ta payer
was entted to have hs saary, or any part thereof, pad by check
of the dsbursng offcer to a desgnated bank n the Unted States
to be credted to hs account, or to have any specfed porton pad
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18.
94
by check drect to nsurance concerns to cover nsurance premums.
In accordance wth the ta payer s request, the Unted States Govern-
ment remtted 2 doars per month, or a tota of 24.r doars durng
1938, of hs saary to nsurance concerns n the Unted States for the
ta payer s account and doars per month to the M Natona
ank at the cty of R, ansas, for the ta payer s account. The
baance of the ta payer s saary was pad to hm n the Phppnes.
The monthy amounts remtted to the bank for the ta payer s account
were covered by checks drawn n the Phppnes. The checks were
maed by the dsbursng offcer of the Unted States rmy n the
Phppnes drect to the bank n the Unted States. The ta payer
dd not ndorse the checks nor have physca possesson of them.
Transactons of the nature referred to above are authorzed by
rmy reguatons for the convenence of the Government and offcers
concerned. Payments of ths nature are made by oca fnance offcers
or vouchers e ecuted by the offcer beng pad. Ths procedure has
been authorzed and foowed by the War Department for many years
at a statons n the Unted States and n foregn countres for the
convenence of the rmy personne.
In the nstant case, the ta payer coud have taken the cash n the
Phppnes and forwarded a check to the bank n the Unted States.
e was n the Phppnes when the money was earned and when the
payments were made, and the dsbursng offcer was aso n the Php-
pnes. s a matter of convenence for the ta payer and the Govern-
ment, the procedure adopted by the War Department was used. The
ta payer, under the procedure, authorzed the dsbursng offcer to
forward the check to the desgnated bank or to other persons. The
dsbursng offcer was carryng out hs duty of payng the offcer s
saary n accordance wth the rmy reguatons whch have been
approved by the Comptroer Genera of the Unted States. Whe
t s true that, the dsbursng offcer may not be regarded as the agent
of the rmy offcer wthn the ordnary ega concept of agency, as
between prvate persons, hs acts n the performance of hs offca
dutes wth respect to the payment of the offcer s saary amounted,
n effect, to acts of an agent n that t was the offca duty of the
dsbursng offcer to pay the saary n the manner drected by the
offcer under authorty of the rmy reguatons.
It s hed that the pay of offcers n the Unted States rmy actuay
n the Phppne Isands does not become ncome receved wthn the
Unted States merey because, upon order of the payee, t s trans-
mtted by the fnance offcer n the Phppne Isands to a bank or
nsurance company n the Unted States to be credted to the account
of the payee.
TITL . MISC LL N OUS PRO ISIONS.
S CTION 818. T S O INSOL NT N S.
R NU CT OP 1938.
Reguatons reatng to assessment and coecton of ta es of nso-
vent banks and trust companes. Treasury Decson 4882 (C. .
1939-1 (Part 1), 154) revoked. (See T. D. 4958, page 74.)
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95
14, rt. 14-1.
INCOM T RULINGS. P RT II.
R NU CTS O 1937 ND 193 .
SU TITL . G N R L PRO ISIONS.
P RT UR T S O T .
CTION 14. SURT ON UNDISTRI UT D PRO ITS.
btct e 14-1: Surta on undstrbuted profts 1940-13-10214
of corporatons. I. T. 33 1
R NU CT O 103 .
corporaton In computng Its ad|usted net Income for 193
and 1937 Is entted to a credt under secton 14(a) 1( ) of the
Revenue ct of 193 for the amount receved as nterest on bonds
of the ome Owners Loan Corporaton Issued under the ome
Owners Loan ct of 1033, as amended. L T. 2873 (O. . I -1, 51
(1935)) not appcabe.
dvce s requested whether I. T. 2873 (C. . I -1, 51 (1935)).
wheren t was hed that nterest on obgatons of the ome Owners
Loan Corporaton ssued under the ome Owners Loan ct of 1933,
as amended, s not e empt from surta , s appcabe n determnng,
under secton 14 of the Revenue ct of 193 , the undstrbuted profts
surta abty of a corporaton.
Secton 14 of the Revenue ct of 193 provdes n part as foows:
(a) Defntons. s used In ths tte
(1) The term ad|usted net Income means the net ncome mnus the
ram of

( ) The credt provded In secton 2 (a), reatng to nterest on certan
obgatons of the Unted States and Government corporatons.
Secton 2 of the ct, whch reates to credts of corporatons,
provdes n part as foows:
In the case of a corporaton the foowng credts sha be aowed to the
e tent provded n the varous sectons mposng ta
(a) Interest on obgatons of the Unted States and ts nstrumentates.
The amount receved as nterest upon obgatons of the Unted States or of
corporatons organzed under ct of Congress whch s aowed to an ndvdua
as a credt for purposes of norma ta by secton 25(a) (1) or (2).
Secton 25 of the ct, whch reates to credts of ndvduas
aganst net ncome, provdes n part as foows:
(a) Credts for norma taw ony. There sha be aowed for the purpose
of the norma ta , but not for the surta , the foowng credts aganst the
net Income:
(1) Interest on Unted States obgatons. The amount receved as Interest
upon obgatons of the Unted States whch s ncuded n gross ncome under
ecton 22.
(2) Interest on obgatons of nstrumentates of the Unted States. The
amount receved as nterest on obgatons of a corporaton organzed under
ct of Congress, f ( ) such corporaton Is an Instrumentaty of the Unted
States and ( ) such nterest s ncuded n gross ncome under secton 22
and (C) under the ct authorzng the ssue thereof, as amended and suppe-
mented, such nterest s e empt from norma ta .
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22(a), rt. 22(a)-7.
0
Secton 4( ) rtf the ome Owners Loan ct of 1933 (48 Stat,
128) drected the edera ome Loan ank oard to create a
corporaton to be known as the ome Owners Loan Corporaton,
whch sha be an nstrumentaty of the Unted States .
Secton 4(c) of the ome Owners Loan ct of 1933, supra, au-
thorzes the ome Owners Loan Corporaton to ssue bonds, and
provdes that:
The bonds Issued by the Corporaton under ths subsecton sha
be e empt, both as to prncpa and nterest, from n ta aton (e cept sur-
ta es, estate, nhertance, and gft ta es) now or hereafter mposed by the
Unted States or any Dstrct, Terrtory, dependency or possesson thereof, or
by any State, county, muncpaty, or oca ta ng authorty.
In computng the ad|usted net ncome of a corporaton for the
purpose of the surta on undstrbuted profts mposed by secton 14
of the Revenue ct of 193 , the corporaton s entted under secton
2 (a) of that ct to the same credt aowed an ndvdua under
secton 25(a) (1) and (2) of a nterest on bonds of the ome
Owners Loan Corporaton whch, under the ome Owners Loan ct
of 1933, as amended, authorzng the ssue thereof, s e empt from
norma ta .
In vew of the foregong, t s hed that a corporaton n computng
ts ad|usted net ncome for the ta abe years 193 and 1937 s
entted to a credt under secton 14(a)( ) of the Revenue ct
of 193 for the amount receved as nterest on bonds of the ome
Owners Loan Corporaton, rrespectve of the provsons of the
ome Owners Loan ct of 1933, as amended, whch does not e -
empt the nterest on such bonds from surta es. The rung pub-
shed as I. T. 2873, supra, s, therefore, not appcabe n determnng,
under secton 14 of the Revenue ct of 193 , the undstrbuted profts
surta abty of a corporaton.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
rtce 22(a)-3: Compensaton pad other than n cash.
R NU CT O 193 .
Reguatons 94 amended. (See T. D. 49 5, page 13.)
rtce 22(a)-7: Gross ncome of farmers.
R NU CT O 1938.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
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97 1 t| o( ).
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 44. INST LLM NT SIS.
rtc|: 44-5: Gan or oss upon dsposton of
nstament obgatons.
R NU CT O 1938.
Reguatons 94 amended. (See T. D. 4972, page 47.)
P RT W-R TURNS ND P YM NT O T .
S CTION 55. PU LICITY O R TURNS.
R NU CT O 193 .
Reguatons governng the nspecton by the Commttee on duca-
ton and Labor, Unted States Senate, of ncome, profts, and capta
tock ta returns and returns of empoyment ta on empoyers. (See
T. D. 49 2, page 49.)
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101(1 ). MPTIONS ROM T
ON CORPOR TIONS.
1940-17-10240
G. CM. 21323
R NU CTS O 1934 ND 193 .
Contrbutons by the M Company to the mpoyees eneft sso-
caton, composed of empoyees of the M Company, do not consttute
amounts coected from a member, and the assocaton s not en-
tted to e empton from edera Income ta aton under the prov-
sons of secton 101(1 ) of the Revenue cts of 1934 and 193 where
ess than 85 per cent of the ncome of the assocaton conssted of
amounts coected from members.
n opnon s requested whether the mpoyees eneft ssocaton
of the M Company s entted to e empton from edera ncome ta -
aton under the provsons of secton 101(1 ) of the Revenue cts of
1934 and 193 . That secton provdes for the e empton from ncome
ta of
ountary empoyees benefcary assocatons provdng for the payment of
fe, sck, accdent, or other benefts to the members of such assocaton or ther
dependents, It ( ) no part of ther net earnngs nures (other than through such
payments) to the beneft of any prvate sharehoder or ndvdua and ( ) S5
per centum or more of the ncome conssts of amounts coected from members
for the soe purpose of makng such payments and meetng e penses.
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5 101(1 ).
OS
The mpoyees eneft ssocaton s a vountary, ncorporated
assocaton, organzed under the aws of the State of R, to admnster
a fund wthout proft and at the owest possbe cost to ts empoyee
members, and to pay dsabty benefts to them n case of sckness and
accdent, and death benefts to ther desgnated benefcares n case of
death (e cept a accdents, dsabtes, and death cams compensated
under the workmen s compensaton aws or the workmen s occupatona
dseases act). In the reguatons of the assocaton t s stated that
the mpoyees eneft ssocaton conssts of the M Company and
affated companes operatng n the Unted States and Canada and
such empoyees of those companes as eect to |on theren. The regu-
atons provde that egnnng anuary 1,193 , the M Company w
contrbute to the fund an amount equa to twenty per cent (20 ) of
a contrbutons pad by members. The management and contro of
the assocaton are f ed n a board of trustees, the trustees beng
chosen one-haf by the M Company and one-haf by the empoyee
members. The company s defned as meanng the M Company
and affated companes operatng n the Unted States and Canada,
Durng the ta abe years 1935, 193 , and 1937, the assocaton s
ncome was derved from the foowng sources:
1938
1938
1937
Contrbutons by empoyee members
Doar .
1, 037.r
:
50

Doar .
1. 4R4
144|
292
97
I
Doar .
2.3241
180
4 4
7
12
Interest
Contrbuton bv the M Company
Profts on saes of securtes
Dvdends
Tota
1. 275
1,083. 75
1. ff S
1, 98. 30
. 7
2. 53 95
85 per cent of ncome equas
It s the contenton of the assocaton that the M Company s a
member of the assocaton wthn the meanng of secton 101(10),
supra, and that the amounts pad n by that company shoud be con-
sdered as amounts coected from members wthn the meanng of
that secton and added to contrbutons by empoyee members for the
purpose of appyng the 85 per cent mtaton.
Secton 101(1 ) had ts ncepton as secton 103(1 ) of the Revenue
ct of 1928. The wordng was dentca n the Revenue ct of 1928
and a subsequent Revenue cts. The report of the Commttee on
Ways and Means on the revenue b of 1928 ( . R. Report No. 2,
December 7, 1927), at page 17, reads n part as foows:
ountary empoyees benefcary assocatons provdng for the payment of
fe, sck, accdent or other benefts to members and ther dependents are com-
mon to-day and t appears desrabe to provde specfcay for ther e empton
from the ordnary corporaton ta . Consequenty, It s provded n secton
103(15) that such assocatons sha be e empt f they provde for the payment
of fe, sck, accdent, or other benefts to members of the assocaton or ther
dependents, and f no part of ther net earnngs nures to the beneft of any
prvate sharehoder or ndvdua and f S5 per centum or more of the net ncome
s coected from the members for the purpose of payng e penses and meetng
osses.
The Commttee on nance of the Senate made a carfyng amend-
ment to the above paragraph, whch dd not, however, change the
purpose of the ouse b. (Senate Report No. 9 0, Seventeth
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99
111, rt. 114-1.
Congress, frst sesson, page 25 (1928).) (Seesecton, 101 (1 ),supra,
for the mnor dfferences n the anguage above quoted and the
anguage of the provson as fnay approved.)
It s the opnon of ths offce that the anguage used by the com-
mttees of both the ouse and Senate and the eventua wordng of
secton 101(1 ) show that Congress was assocatng the word mem-
bers wth empoyee members, that s, wth those ndvduas who
were to receve payment of fe, sck, accdent, or other benefts.
ad Congress ntended that the word members shoud appy to
empoyers aso, the word empoyers coud easy have been nserted.
urthermore, the wordng of secton 101(1 ), supra, eads to the
concuson that the same nterpretaton must be gven to members
throughout the entre secton.
In the present case there s no bass for hodng that the M Com-
pany, the empoyer, s a member of the assocaton wthn the
meanng of secton 101(1 ), supra. No benefts are ever payabe to
the company, but the empoyees of the company, who |on the assoca-
ton, receve the benefts of the assocaton as a matter of rght. They
are the ony members thereof.
It s, therefore, the opnon of ths offce that the contrbutons made
by the M Company to the mpoyees eneft ssocaton do not con-
sttute amounts coected from a member under secton 101(1 ),
supra. Such amounts, however, consttute a part of the ncome of the
assocaton wthn the meanng of that secton and must be ncuded n
determnng whether 85 per cent or more of the ncome of the
assocaton conssts of amounts coected from ts members. (See
generay ppea of Phadepha and Readng eef ssocaton,
4 . T. ., 713.)
The evdence n the-nstant case shows that durng each of the
ta abe years 1935, 193 , and 1937 ess than 85 per cent of the ncome
of the assocaton conssted of amounts coected from ts members.
Therefore, the mpoyees eneft ssocaton of the M Company s
not entted to e empton under secton 101(1 ) of the Revenue cts
of 1934 and 193 .
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114-1: ass for aowance of deprecaton
and depeton.
R NU CT O 1038.
Deveopment e penses n computng depeton based on a percent-
age of ncome n the case of o and gas wes. (See G. C. M. 2192 ,
page 157.)
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11 .
100
S CTION 11 . CLUSIONS ROM GROSS INCOM .
1940-24-10289
G. C. M. 220 5
R NU CT O 193 .
ctzen of the Unted States must be absent from the Unted
States for more than s caendar months to come wthn the e emp-
ton provded by secton 11 (a) of the Revenue ct of 19315. rac-
tona parts of months from severa trps may not be added to make
whoe caendar months, snce whoe caendar months must consst
of consecutve days of absence from the Unted States n any one
trp.
G. C. M. 121G7 (C. . II-2, 12 (1933)) modfed.
n opnon s requested whether n 1037 , a ctzen of the Unted
States, was a bona fde nonresdent of the Unted States for more
than s months durng the ta abe year wthn the meanng of
secton 11 (a) of the Revenue ct of 193 , whch provdes n part
as foows:
In addton to the tems specfed n secton 22(b), the foowng tems sha
not be ncuded In gross ncome and sha be e empt from ta aton under ths
tte:
(a) arned ncome from sources cthout Unted States. In the case of an
Indvdua ctzsn of the Unted States, a bona fde nonresdent of the Unted
States for more than s months durug the ta abe year, amounts receved
from sources wthout the Unted States f such amounts woud con-
sttute earned ncome as defned n secton 25(a) If receved from sources
wthn the Unted States .
The ta payer ( ) cams e empton under secton 11 (a), supra,
for certan portons of hs 1937 ncome as representng earnngs from
sources wthout the Unted States. e contends that be was a bona
fde nonresdent of the Unted States for more than s months
durng the ta abe year because of four absences from the Unted
States consstng of two trps to urope and two trps to Canada.
In computng the tme e was absent from the Unted States, the
ta payer has added the hours and mnutes of each perod of hs
absence. The aggregate tme of hs absence so computed e ceeds
months by 22 hours and 30 mnutes.
The specfc nqury presented n the nstant case reates to the
proper bass upon whch the -month statutory perod shoud be
computed.
Ths offce has hed that mere physca absence from the Unted
States s suffcent to consttute a ta payer a bona fde nonresdent
of the Unted States for the purposes of the e empton. (S. M.
544 , C. . -, 49 (192 ).) It has aso been hed that the absence
need not be contnuous, but may be made up of severa trps where
the perods of absence from the Unted States amount n the aggre-
gate to more than s months durng the ta abe year. (G. C. M.
9S48, C. . -2, 178 (1931).)
s prevousy ponted out, the ta payer has added hours and
mnutes of hs absence from the Unted States durng the ta abe
year n order to brng hmsef wthn the e empton provded by
secton 11 (a), supra. To crme wthn that e empton, t s neces-
sary for the ta payer to be absent from the Unted States for more
than s months durng the ta abe year. edera courts, as we as
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101
f 11 .
State courts, have consstenty hed that where the term month
s empoyed n statutes (and t does not appear to have been used
here n a dfferent sense), t denotes a caendar month, that s, a
perod termnatng wth the day of the succeedng month numer-
cay correspondng to the day of ts begnnng, ess one. (Guaranty
Trust Safe Depost Co. v. Green Cove Sprngs Merose Raroad
Con 139 U. S., 137 In re Custer, 5 ed. (2d), 718 Segeschffer v.
Penn Mut. Lfe Ins. Co. et a, 248 ed., 22 Saos v. Swft, 25 a.
pp., 148 102 S. ., 8 9.)
Ths offce s, therefore, of the opnon that to come wthn the
e empton provded by secton 11 (a) a ta payer must be absent
from the Unted States for more than s caendar months. Where
severa trps are made by a ta payer n any one year, ony fu ca-
endar months of absence from the Unted States are to be recog-
nzed n computng tme under the statute n queston. or e ampe,
f a ta payer eaves the Unted States on March 10 and returns on
pr 17, ne w be deemed to have been absent from the Unted
States for one caendar month for purposes of secton 11 (a). On
the other hand, f a ta payer eaves the Unted States on March 10
and returns on pr 5, the perod of hs absence beng ess than a
caendar month may not be used n computng the number of whoe
caendar months such ta payer was absent from the Unted States
for the purposes of the e empton provded n secton 11 (a).
Under ths vew, fractona parts of months from severa trps may
not be added to make whoe caendar months, snce whoe caendar
months must consst of consecutve days of absence from the Unted
States n any one trp.
In the nstant case. , the ta payer, took four trps durng the
ta abe year 1987. e saed to urope on May and returned on
une 8, whch perod s to be treated as a whoe caendar month for
the purposes of the e empton. The second trp e tendng from
une 1 to November 8 consttutes ony four fu caendar months.
The perod of absence from October 1 to November 8 s a frac-
tona part of a caendar month and s not, therefore, to be recog-
nzed n the computaton. The ta payer s thrd and fourth trps,
whch were to Canada and whch e tended from November 2 to
November 28 and from December 1 to December 18, respectvey,
may not be recognzed for the same reason. It foows that was
absent from the Unted States durng th3 ta abe year 1937 for fve
whoe caendar months. ccordngy, he was not a bona fde non-
resdent of the Unted States for more than s months durng the
ta abe year and so fas to come wthn the e empton provded
by secton 11 (a), supra.
G. C. M. 121 7 (0. . II-2, 12 (1933)), whch nvoves e emp-
ton under secton 11 (a) of the Revenue ct of 1928, and whch s
not consstent wth the concuson reached heren, s modfed
accordngy.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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131, rt. 131-1.
102
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
rtce 131-1: nayss of credt for ta es. 1940-19-10252
I. T. 3371
R NU CT O 193 .
The ta mposed by the Netherands upon dstrbuton by a
corporaton of ts profts, Wet op de dvdend-en tantenebeastng
1917, s aowabe as a credt under secton 131(f) of the evenue
ct of 193 .
dvce s requested whether the ta mposed by the Netherands
upon dstrbuton by a corporaton of ts profts, Wet op de dv-
dend-en tantemebeastng 1917, s an aowabe credt under secton
131(f) of the Revenue ct of 193 , whch provdes n part as foows:
(f) Ta es of foregn subsdary. or the purposes of ths secton a domestc
corporaton whch owns a ma|orty of the votng stock of a foregn corpora-
ton from whch t receves dvdends n any ta abe year sha be deemed to
have pad the same proporton of any ncome, war-profts, or e cess-profts
ta es pad by such foregn corporaton to any foregn country or to any pos-
sesson of the Unted Stutes, upon or wth respect to the accumuated profts
of such foregn corporaton from whch such dvdends were pad, whch the
amount of such dvdends bears to the amount of such accumuated profts:
Provded, That the amount of ta deemed to have been pad under ths sub-
secton sha n no case e ceed the same proporton of the ta aganst whch
credt s taken whch the amount of such dvdends bears to the amount of the
entre net ncome of the domestc corporaton n whch such dvdends are
ncuded.
In oume II of Ta aton of oregn and Natona nterprses,
pubshed by the League of Natons n 1933, the ta system n the
Netherands s dscussed. Part I contans a genera descrpton of
the ncome-ta and property-ta system. The foowng statements
are made n the pubcaton referred to:
The ta on dvdends and tantemes referred to on page 334 as Wet op
de dvdend-en tantemebeastng 1917 s prncpay eved upon the net
profts of Netherands share companes, even f derved from rea property
stuated n the Netherands profts, however, are ta ed ony on dstrbuton.
(Page 332.)
oregn enterprses whch receve profts dstrbuted by Netherands com-
panes are not themseves abe to the ta on dvdends and
tantemes. (Page 355.)
It w be remembered that dvdends dstrbuted by companes the fsca
domce of whch s n the Netherands are abe to the ta on dvdends
and tantemes, whch ta s pad by the company dstrbutng the dvdends,
that company havng no cam for ta aganst the persons to whom these
dvdends accrue. (Page 35 .)
It s hed that the Netherands ta n queston s an ncome ta
wthn the meanng of secton 131(f) of the Revenue ct of 193 .
In the case of a domestc corporaton ownng the ma|orty of the
votng stock of a Netherands company whch has pad the ta , the
computaton of the credt to whch the domestc corporaton s en-
tted shoud be made under secton 131(f) of that ct.
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103
5 131, rt. 131-1.
rtce 131-1: nayss of credt for ta es. 1940-24-10290
L T. 8385
R NU CTS O 103 ND 1938.
The ta Imposed under artce 20 of the Me can aw, Ley de
Impuesto sobre a Renta, upon Interest Is an Income ta , and
credt therefor Is aowabe under secton 131 of the Revenue ct
of 193 .
L T. 8288 (C. . 1939-1 (Part 1), 189) modfed.
dvce s requested whether the ta mposed under artce 20 of
the Me can aw, Ley de Impuesto sobre a Renta, upon nterest
s an ncome ta , credt for whch s aowabe under secton 131 of
the Revenue ct of 193 , reatng to credts for ncome ta es mposed
by foregn countres, or whether L T. 3288 (C. . 1939-1 (Part 1),
139) appes.
The rung pubshed as I. T. 8288, supra, was based upon the ta
mposed by artces 20 and 21 of the Me can aw under consderaton
wth respect to the tota revenue of dstrbutors and essors of moton
pcture ms. It was hed that snce the bass for the ta s tota
revenue, the ta s n the nature of an e cse ta based on the gross
recepts of the ta payer and credt therefor s not aowabe under
secton 131 of the Revenue ct of 1938. The syabus of L T. 3288,
supra, reads as foows:
The ta Imposed under artces 20 and 21 of the Me can aw, Ley de
Impuesto sobre a Renta s not an Income ta , and credt therefor Is not
aowabe under secton 131 of the Revenue ct of 1938. The amount of such
ta , however, Is aowabe as a deducton under secton 23(c) of that ct.
The concudng paragraph of I. T. 8288, supra, contans smar
anguage.
The foowng s an e cerpt from artce 20 of the Me can aw
referred to above:
Ta payers who, normay or occasonay, receve Income from any of the
foowng sources, are ncuded under ths schedue:
I. Smpe or compound nterest on oans of a knds.
II. Interest on amounts owng as purchase or sae prce.
When the seer s abe for the ta under schedue I, Income under ths
secton from transactons of hs busness, and entered n hs books, sha not
be ta abe under ths schedue.
IIL Interest on advances on account of the prce of property or rghts of a
knd , wth the e cepton set forth n the precedng secton, f the purchaser
pays ths ta under schedue I.
I . Interest earned on current accounts.
rtce 21 of the same Me can aw provdes n part as foows:
Income ta abe under ths schedue sha be computed n ts entrety e cept
In the case of the easng of busnesses (artce 20, Secton I), when the
deductons authorzed by the reguatons sha be appcabe and the ta sha
be payabe on the tota amount of such ncome, n accordance wth the foowng
tarff
Then foows the schedue of the graduated ta rates dependng
upon the amount of the ncome.
I. T. 3288, supra, does not appy to a casses of ta es mposed
under artce 20, supra. That artce mposes ta es on varous types
of recepts or profts. ccordngy, a separate determnaton must
be made n each case to ascertan whether the ta meets the mercan
concept of an ncome ta .
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1 5.
104
Ta es mposed on nterest under artce 20 may, generay, be
camed as a credt aganst edera ncome ta . (See I. T. 2 20,
C. . I-1, 44 (1932).) s the ta whch s the sub|ect of the
present nqury s a ta on the nterest referred to n artce 20, such
ta s an ncome ta , and credt therefor s aowabe under secton
131 of the Revenue ct of 193 .
In vew of the foregong, the ast paragraph and syabus of I. T.
3288, supra, are modfed to read as foows:
The ta of 5 per cent mposed under artces 20 and 21 of the Me can aw,
Ley de Impuesto sobre a Renta, upon the tota revenue derved from the
e potaton of movng pcture ms s not an ncome ta , and credt therefor s
not aowabe under secton 131 of the Revenue ct of 1938. The amount of
such ta , however, Is aowabe as a deducton under secton 23(c) of that ct.
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 143. WIT OLDING O T T SOURC .
rtce 143-1: Wthhodng ta at source.
R NU CT O 1038.
Payments by the Unted States under certan cts of Congress
to nonresdent aen owners of and ocated n the Unted States.
(See I. T. 3379, page 1 .)
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 5. MPLOY S TRUSTS.
R NU . CT O 193 .
Partnershps of attorneys, physcans, etc. (See I. T. 3350, page 4.)
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105
5 22(a), rt. 22(a)- .
INCOM T RULINGS. P RT I.
R NU CTS O 1935 ND 1934 OR PRIOR CTS.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
htce 22(a)-: What ncuded n gross ncome. 1940-11-10199
Ct. D. 1444
INCOM T R NU CT O 1034 D CISION OP SUPR M COURT.
1. Irrevocabe Short Term Trust Income: Grantor Treated as
Owner of Corpus ppcabty op Secton Defnng Gross
Income.
n Indvdua estabshed an rrevocabe short term trust, re-
tanng substantay the same domnon and contro over the corpus
as he had before,, the trust nstrument provdng that the net ncome
was to be hed for the e cusve beneft of hs wfe and pad over
to her n hs absoute dscreton, and that on termnaton of the
trust the entre corpus was to go to hm and a accrued or unds-
trbuted net ncome and any proceeds from the nvestment of such
net ncome treated as property owned absoutey by the wfe.
ed: That the grantor contnued to be the owner of the corpus for
purposes of secton 22(a) of the Revenue ct of 1934, and the
ncome therefrom was ta abe to hm. Labty under secton
22(a) Is not forecosed by reason of the fact that Congress made
specfc provson n secton 1 for revocabe trusts but faed to
adopt the Treasury recommendaton that smar specfc treatment
shoud be accorded ncome from short term trusts. Such choce,
whe reevant to the scope of secton 1 , can not be sad to have
subtracted from secton 22(a) what was aready there.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (105 . (2d), 58 ), reversng memorandum opnon
of the Unted States oard of Ta ppeas (1938), reversed.
Supreme Court of the Unted States.
Guy T. cverng, Commssoner of Interna Revenue, pettoner, v. George
. Cfford, r.
309 U. S., 331.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ghth Crcut
ebruary 2 , 1940.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
In 1934 respondent decared hmsef trustee of certan securtes whch he
owned. net ncome from the trust was to be hed for the e cusve bene-
ft of respondent s wfe. The trust was for a term of fve years, e cept that
t woud termnate earer on the death of ether respondent or hs wfe. On
termnaton of the trust the entre corpus was to go to respondent, whe a
accrued or undstrbuted net ncome and any proceeds from the Investment
of such net ncome was to be treated as property owned absoutey by the
Wfe. Durng the contnuance of the trust respondent was to pay over to hs
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I 22(a), rt. 22(a)- .
10
Wfe the whoe or such part of the net Income as he n hs absoute dscreton
mght determne. nd durng that perod he had fu power (a) to e ercse a
otng powers Incdent to the trusteed shares of stock ( ) to se, e -
change, mortgage, or pedge any of the securtes under the decaraton of
trust whether as part of the corpus or prncpa thereof or as Investments
r proceeds and any Income therefrom, upon such terms and for such consdera-
ton as respondent In hs absoute dscreton may deem fttng ) (o) to
tnvest any cash or money In the trust estate or any Income therefrom
y oans, secured or unsecured, by deposts In banks, or by purchase of se-
curtes or other persona property wthout restrcton because of ther
specuatve character or rate of return or any aws pertanng to the
Investment of trust funds (d) to coect a Income (e) to compromse, ete.,
any cams hed by hm as trustee (/) to hod any property n the trust estate In
the names of other persons or In my own name as an ndvdua e cept as
otherwse provded. traordnary cash dvdends, stock dvdends, proceeds
from the sae of une ercsed subscrpton rghts, or any enhancement, reazed
Or not, In the vaue of the securtes were to be treated as prncpa, not ncome.
n e cupatory cause purported to protect hm from a osses e cept those
Occasoned by hs own wfu and deberate breach of dutes as trustee.
nd fnay It was provded that nether the prncpa nor any future or accrued
ncome shoud be abe for the debts of the wfe and that the wfe coud not
transfer, encumber, or antcpate any Interest n the trust or any ncome there-
from pror to actua payment thereof to her.
It was stpuated that whe the ta effects of ths trust were consdered
by respondent they were not the soe consderaton Invoved n hs decson
to set It up, as by ths and other gfts he Intended to gve securty and eco-
nomc ndependence to hs wfe and chdren. It was aso stpuated that
respondent s wfe had substanta Income of her own from other sources that
there was no restrcton on her use of the trust Income, a of whch Income was
aced In her persona checkng account, Intermnged wth her other funds,
nd e pended by her on hersef, her chdren and reatves that the trust was
not desgned to reeve respondent from abty for famy or househod
e penses and that after e ecuton of the trust he pad arge sums from hs
persona funds for such purposes.
Respondent pad a edera gft ta on ths transfer. Durng the year 1934
a ncome from the trust was dstrbuted to the wfe who ncuded It n her
Indvdua return for that year. The Commssoner, however, determned a
defcency n respondent s return for that year on the theory that ncome from
the trust was ta abe to hm. The oard of Ta ppeas sustaned that
redetermnaton (88 . T. ., 1532). The crcut court of appeas reversed
(105 . (2d), 58 ). We granted certorar because of the mportance to the
revenue of the use of such short term trusts n the reducton of surta es.
Secton 22(a) of the Revenue ct of 1934 ( 48 Stat., C80) ncudes among
gross ncome a gans, profts, and ncome derved from pro-
fessons, vocatons, trades, busnesses, commerce, or saes, or deangs n
property, whether rea or persona, growng out of the ownershp or use of or
nterest In such property aso from nterest, rent, dvdends, securtes, or the
transacton of any busness carred on for gan or proft, or gans or profts
and ncome derved from any source whatever. The broad weep of ths
anguage ndcates the purpose of Congress to use the fu measure of ts ta ng
power wthn those defnabe categores. (Cf. everng v. Mdand Mutua
Lfe Insurance Co., 300 U. S., 21 Ct. D. 120 , C. . 1937-1, 178 .) nonce our
constructon of the statute shoud be consonant wth that purpose. Technca
consderatons, ncetes of the aw of trusts or conveyances, or the ega para-
phernaa whch nventve genus may construct as a refuge from surta es
Shoud not obscure the basc ssue. That ssue s whether the grantor after
the trust has been estabshed may st be treated, under ths statutory scheme,
as the owner of the corpus. (See ar v. Commssoner, 800 U. S., 5, 12 T. D.
4141, C. . II-1, 1R0 (1928) .) In absence of more precse standards or
gudes supped by statute or approprate reguatons,1 the answer to that
queston must depend on an anayss of the terms of the trust and a the cr-
We have not consdered here artce fO-t of Treasury Repnntnns 80 pronnhrated
under secton f of the 1034 ct and In 1980 amended (T. D. 4020 C. . -1, 140
(193 ) ) so as to rest on secton 22(a) aso, snce the ta queston arose pror to that
amendment.
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107
22(a), rt. 22(a)- .
cumstances attendant on ts creaton and operaton. nd where the grantor Is
the trustee and the benefcares are members of hs famy group, speca
scrutny of the arrangement s necessary est what s n reaty but one eco-
nomc unt be mutped nto two or more by devces whch, though vad
under State aw, are not concusve so far as secton 22(a) s concerned.
In ths case we can not concude as a matter of aw that respondent ceased
to be the owner of the corpus after the trust was created. ather, the short
duraton of the trust, the fact that the wfe was the benefcary, and the reten-
ton of contro over the corpus by respondent a ead rresstby to the con-
cuson that respondent contnued to be the owner for purposes of secton 12(a).
So far as hs domnon and contro were concerned t seems cear that the
trust dd not effect any substanta change. In substance hs contro over the
corpus was In a essenta respects the same after the trust was created, as
before. The wde powers whch he retaned ncuded for n practca purposes
most of the contro whch he as an ndvdua woud have. There were, we
may assume, e ceptons, such as hs dsabty to make a gft of the corpus
to others durng the term of the trust and to make oans to hmsef. ut
ths duton n hs contro woud seem to be nsgnfcant and mmatera,
snce contro over nvestment remaned. If t be sad that such contro s the
type of domnon e ercsed by any trustee, the answer s smpe. We have
at best a temporary reaocaton of ncome wthn an ntmate famy group.
Snce the ncome remans n the famy and snce the husband retans contro
over the nvestment, he has rather compete assurance that the trust w not
effect any substanta change n hs economc poston. It s hard to magne
that respondent fat hmsef the poorer after ths trust had been e ecuted or,
f he dd, that t had any ratona foundaton n fact. or as a resut of the
terms of the trust and the ntmacy of the fama reatonshp respondent re-
taned the substance of fu en|oyment of a the rghts whch prevousy ha
had n the property. That mght not be true f ony strcty ega rghts were
consdered. ut when the benefts fowng to hm ndrecty through the
wfe are added to the ega rghts he retaned, the aggregate may be sad to
be a far equvaent of what he prevousy had. To e cude from the aggregate
those ndrect benefts woud be to deprve secton 22(a) of consderabe vtaty
and to treat as mmatera what may be hghy reevant consderatons n the
creaton of such famy trusts. or where the head of the househod has ncome
n e cess of norma needs, t may we make but tte dfference to hm
(e cept ncome-ta -wse) where portons of that ncome are routed so ong
Ss t stays n the famy group. In those crcumstances the a-mportant
factor mght be retenton by hm of contro over the prncpa. Wth that con-
tro n hs hands he woud keep drect command over a that he needed to
reman n substantay the same fnanca stuaton as before. Our pont
here s that no one fact s normay decsve but that a consderatons and
crcumstances of the knd we have mentoned are reevant to the queston of
ownershp and are approprate foundatons for fndngs on that ssue. Thus,
where, as In ths case, the benefts drecty or Indrecty retaned bend so m-
perceptby wth the norma concepts of fu ownershp, we can not say that
the trers of fact commtted reversbe error when they found that the hus-
band was the owner of the corpus for the purposes of secton 22(a). To hod
otherwse woud be to treat the wfe as a compete stranger to et mere
formasm obscure the norma consequences of famy sodarty and to force
concepts of ownershp to be fashoned out of ega ncetes whch may have
tte or no sgnfcance n such househod arrangements.
The bunde of rghts whch he retaned was so substanta that respondent
can not be heard to compan that he s the vctm of despotc power when
for the purpose of ta aton he Is treated as owner atogether. (See Dupont
v. Commssoner, 289 U. S., 85, 89 Ct. D. 87, C. . II-1, 259 (1933) .)
We shoud add that abty under secton 22(a) s not forecosed by reasou
of the fact that Congress made specfc provson n secton 1 for revocabe
trusts, but faed to adopt the Treasury recommendaton n 1934 ( evcrng v.
Wood, U. S., Ct. D. 1445, page 1 2. ths uetn , that smar specfc
treatment shoud be accorded ncome from short term trusts. Such choce,
whe reevant to the scope of secton 1 , everng v. Wood, supra, can not
be sad to have substracted from secton 22(a) what was aready there.
ee Tan. The ackground of the Revenue ct of 1937 (5 Unv. Chc. L. Rev., 41).
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22(a), rt. 22(a)- .
108
Rather, on ths evdence t must be assumed that the choce was between a
generazed treatment under secton 22(a) or specfc treatment under a separate
provson (such as was accorded revocabe trusts under secton 10 ) not be-
tween ta ng or not ta ng grantors of short term trusts. In vew of the broad
and sweepng anguage of secton 22(a), a specfc provson coverng short
term trusts mght we do no more than to carve out of secton 22(a) a defned
group of cases to whch a rue of thumb woud be apped. The faure of
Congress to adopt any such rue of thumb for that type of trust must be taken
to do no more than to eave to the trers of fact the nta determnaton of
whether or not on the facts of each case the grantor remans the owner for
purposes of secton 22(a).
In vew of ths resut we need not e amne the contenton that the trust
devce fas wthn the rue of Luca v. ar (281 U. S., I) and urnet v.
Letnnger (285 U. S., 13 ), reatng to the assgnment of future ncome or that
respondent Is abe under secton 1 , ta ng grantors on the Income of
revocabe trusts.
The |udgment of the crcut court of appeas s reversed and that of the
oard of Ta ppeas s affrmed.
It s so ordered.
rtce 22(a)-: What ncuded n gross ncome. 1940-23-10281
Ct. D. 14
INCOM T R NU CT O 1982 D CISION OP SUPR M COURT.
L Income Deterred Payment Sae or On. and Gas Propertes
Reservaton or Interest n the ee Ta abty or Gross
Proceeds rom Producton.
corporaton In 1081 entered Into a wrtten contract provdng
for the conveyance to pettoners of certan royaty Interests, fee
Interests, and deferred o payments n propertes In Okahoma, for
an agreed consderaton payabe. party n cash and party from
one-haf of the proceeds whch mght be derved from o and gas
produced from the propertes and from the sae of fee tte to any
or a of the and conveyed. The propertes were thereupon con-
veyed to pettoners, and durng 1932 one-haf of the gross pro-
ceeds derved from the producton and sae of o was dstrbuted
to the corporaton, pursuant to the contract. ed: The transac-
ton s In effect a sae wth a reservaton of an Interest In the fee
as addtona securty for the deferred payments, the corporaton
s not dependent entrey upon the producton of o for the de-
ferred payments, and the pettoners, as purchasers and owners of
the propertes, are therefore ta abe upon the gross proceeds
derved from the o producton, notwthstandng the arrangement
to pay over one-haf of such proceeds to the corporaton.
2. Case Dstngushed.
Thomat v. Perkns (801 U. S., 055, Ot D. 1237, a . 1037-1, 1 2)
dstngushed.
8. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Tenth
Crcut (1039) (107 . (2d), 450), affrmng memorandum opnon
of the Unted States oard of Ta ppeas (1938), affrmed.
s to the dsadvantage of a pecfc statutory formua over more generazed treatment
see oume I, Report. Income Ta Codfcaton Commttee (103 ), a eounttoe apponted
by the Chanceor of the chequer In 1927 In dscussng revocabe settements the
commttee stated, page 298 :
Ths and the three foowng causes reproduce ecton 20 of the nance ct, 1922,
an enactment whch has been the sub|ect of much tgaton. Is unsatsfactory In many
respects, and Is pany nadequate to fuf the apparent Intenton to prevent avodance
of abty to ta by revocabe dspostons of Income or other devces. Wo thnk tb
matter one whch s worthy of the attenton of Parament.
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109
22(a), rt. 22(a)-.
Supreme Court of the Unted States.
Steve nderson, pettoner, v. uy T. everng, Commssoner of Interna
Revenue.
L. . Prchard, pettoner, v. uy T. everng, Commssoner of Interna
Revenue.
0 S. Ct., 9. 2.
On wrts of certorar to the Unted States Crcut Court of ppeas for the Tenth Crcut.
May 20, 1940.
OPINION.
Mr. ustce Mt|bphy devered the opnon of the Court.
Okahoma Cty Co. n 1931 owned certan royaty nterests, fee nterests,
and deferred o payments n propertes n Okahoma. Durng that year t
entered nto a wrtten contract wth pettoner Prtchnrd provdng for the
conveyance to hm of these nterests for the agreed consderaton of 1GO,000,
payabe ffty thousand n cash and one hundred ten thousand from one-haf of
the proceeds receved by hm whch mght be derved from o and gas produced
from the propertes and from the sae of fee tte to any or a of the and
conveyed. Interest at the rate of per cent per annum was to be pad from
the proceeds of producton and of saes upon the unpad baance. Okahoma
Company was to have n addton a frst en and cam aganst that one-haf
of a o and gas producton and fee nterest from whch the 110,000
Is payabe, the en and cam not n any way to affect the one-haf nterest
n a o and gas producton and fee Interest or the revenue therefrom
whch t s to have and receve under ths agreement. The pro-
ceeds derved from the o and gas produced and from saes of the fee nterests
were to be pad drecty to Prtchard who was to depost one-haf of them at a
desgnated bank, at ntervas of 90 days, to the credt of Okahoma Company.
The agreement rected that Okahoma Company desred to se a of ts
rght, tte and nterest of whatsoever nature n the descrbed propertes, and
provded that a copy of the agreement and a reease be paced n escrow for
devery to Prtchard upon payment n fu of the 110,0 .0 and nterest. Im-
medatey upon the e ecuton of the contract the propertes were conveyed to
Prtchard wthout reservaton.1 In enterng nto the agreement Prtchard acted
not ony for hmsef but aso for pettoner nderson, each of them havng a
45 per cent nterest.
The gross proceeds derved from the producton and sae of o from the
propertes durng 932 amounted to some 81,000. Prtchard, upon recevng
ths sum, dstrbuted one-haf to Okahoma Company pursuant to the contract.
The queston for decson s whether the proceeds tus pad over to Okahoma
Company shoud be ncuded n the gross Income of pettoners for the ta year
1932. The rung of the oard of Ta ppeas aganst pettoners was affrmed
by the crcut court of appeas. (107 (2d), 459.) ecause of an asserted
confct wth the appcabe decsons of ths Court, we granted certorar.
(March 4, 1040.)
It s setted that the same basc Issue determnes both to whom ncome
derved from the producton of o and gas s ta abe and to whom a deducton
or depeton s aowabe. That ssue s, who has a capta nvestment n the
o and gas n pace and what s the e tent of hs nterest. ( everng v.
1 Pettoners state that the nstruments of transfer of those propertes were absoute
and unquafed assgnments and conveyances and that there was no reservaton of any
sort of nterest, much ess any ega nterest, spected n those assgnments and
conveyances.
The remanng 10 per cent nterest was acqured for one Oson, whose case was oon-
Rotdated wth those of Prtchard nnr nderson, and dsposed of n the same opnon
beow, hut who has not sought revew here.
The record does not ndcate what porton of the gross proceeds was derved from the
producton and sae of o and gas and what porton, f any, was derved from saes of
tees and from royates on eases. The Commssoner n determnng defcences aganst
Pettoners, however, added 11,270. 9 to the gross ncome of each wth the e panaton
that ths amount represented In-o payments receved In connecton wth the Patterson
Okahoma Company dea not reports by pettoners. Respondent, n vew of ths
e panaton by the Commssoner and the omsson from the record of any dscosure of
the method of computng the 11,2711.. 19 addton to gross Income, accepts pettoners state-
ment that the onv ncome from the propertes here n dspute s from o producton.
eveuue ct of 1832 (ch. 209, 47 Stat., 1 9).
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5 22(a), rt. 22(a)- .
110
ankne O Co,, 803 U. S., 3 2, 3 7 Ct. D. 1323, O. . 1938-1, 30 everng
. O Donne, 303 U. S., 370 Ct. D. 1340, C. . 1938-1, 497 everng v. be
O Co.. 303 tT. S., 372 Ct. D. 1322, C. . 1938-1, 293 Thomas v. Perkns, 301
U. S., 55, 1, 3 Ct. D. 1237, C. . 1937-1, 1 2 everng v. Twn e O
Syndcate, 293 U. S., 812, 321 Ct. D. 905, C. . I -1, 253 (1935) Pamer v.
ender, 287 U. S., 551 Ct. D. 41, C. . II-1, 235 (1935) . Compare everng
. Cfford, No. 383, October Term, 1039 Ct. D. 1444, page 105, ths uetn .)
O and gas reserves ke other mneras n pace, are recognzed as wastng
assets. The producton of o and gas, ke the mnng of ore, s treated as an
Income-producng operaton, not as a converson of capta Investment as upon
a sae, and Is sad to resembe a manufacturng busness carred on by the use
of the so. ( urnet v. arme, 287 U. S., 103, 10 -107 Ct. D. 11, C. . I-2,
210 (1932) ankers Coa Co. v. urnet, 287 U. S., 308 Ct. D. 18, C. . II-1,
272 (1C33) Unted States v. wabk Mnng Co., 247 U. S., 11 T on aum-
bach v. Sargent nd Co., 242 U. S., 503, 521, 522 Strattot s Independence v.
owbert, 231 U. S., 399, 414.) The depeton effected by producton Is kened
to the deprecaton of machnery or the usng up of raw materas n manu-
facturng. (Unted States v. Ludey, 274 U. S., 295, 302-303 T. D. 404 , C. .
I-2, 157 (1927) Lynch v. uorth-Stephens Co., 2 7 U. S., 3G4, 870 T. D.
8 90, C. . I -1, 1 2 (1925) . Compare on aumbach v. Sargent Land Co.,
supra, at 524-525.) The deducton s therefore permtted as an act of grace
and s ntended as compensaton for the capta assets consumed In the produc-
ton of Income through the severance of the mneras. ( cverng v. ankne
O Co., 303 U. S., 8 2, 3 -3 7.) The grantng of an arbtrary deducton, n
the Interests of convenence, of a percentage of the gross ncome derved from
the severance of o and gas, merey emphaszes the underyng theory of the
aowance as a ta -free return of the capta consumed n the producton of
gross ncome through severance. ( everng v. Twn e O Syndcate, 293
U. S., 312, 821 Unted States v. Dakota-Montana O Co., 288 U. S.. 459, 4 7
Ct. D. 55, C. . II-1, 243 (1933) .)
The soe owner and operator of o propertes ceary has a capta Invest-
ment In the o n pace, If anyone has, and so s ta abe on the gross proceeds
of producton and s granted a deducton from gross ncome as compensaton
for the consumpton of hs capta. (See urnet v. arme, upra. at 107-108
cverng v. Cfford, No. 883, October Term, 1939.) y an outrght sae of
hs nterest for cash, such an owner converts the form of hs capta nvestment,
severs hs connecton wth the producton of o and gas and the ncome
derved from producton, and thus renders nappcabe to hs stuaton the
reasons for the depeton aowance. The words gross ncome from the
property, as used In the statute governng the aowance for depeton, mean
gross ncome receved from the operaton of the o and gas wes- by one who
has a capta nvestment theren, not ncome from the sae of the o and gas
propertes themseves. ( everng v. be O Land Co., 803 U. S., 372,
875-37 .)
Other stuatons, fang between the two mentoned, have been put on one
de or the other as the cases arose. The hoder of the royaty nterest that
Is, a rght to receve a specfed percentage of a o and gas produced durng
the term of the ease s deemed to have an economc nterest n the o
n pace whch s depcted by severance. (Pamer v. ender, 287 U. S., 551, 557
Murphy O Co. v. urnet, 287 U. S., 299 Ct. D. 19, C. . II-1, 231 (1933)
urnet v. arme, 287 U. S., 103. See Lynch v. worth-Stephens Co., 2 7
D. S., 3 4.) Cash bonus payments, when ncuded n a royaty ease, are re-
garded as advance royates, and are gven the same ta consequences. ( urnet
v. arme, 287 U. S., 103 Murphy O Co. v. urnet, 287 U. S., 299 ankers
Pocahontas Coa Co. v. urnet. 287 U. S., 308. Compare everng v. be
O Land Co.. 303 U. S., 372, 375.) share n the net profts derved from de-
veopment and operaton, on the contrary, does not entte the hoder of such
nterest to a depeton aowance even though contnued producton Is essenta
to the reazaton of such profts. ( everng v. O Donne, 303 U. S., 370
everng v. be O Co., 303 U. S., 372.) Smary, the hoder of a favor-
abe contract to purchase wet gas at the mouth of the we Is dened a depe-
ton aowance on the dfference between the contract prce and the far market
vaue. ( everng v. ankne, O Co., 303 U. S.. 3 2.) Such an nterest has
been characterzed by us as a mere economc advantage derved from produc-
ton, through a contractua reaton to the owner. ( everng v. ankne
O Co., supra, at 3 7.)
Thomas v. Perkns (301 . S., 55), reed upon by pettoners, presented
the ssue whether the rght to o payments that Is, the rght to a specfed
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22(a), rt. 22(a)--
sum of money, payabe out of a specfed percentage of the o, or the proceeds
receved from the sae of such o, f, as and when produced shoud be treated
for ta purposes ke the rght to o royates or ke the rght to cash payments
upon a sae. In that case, the assgnment of ease provded for payments n
o ony wthout the reservaton of a royaty nterest. The queston was
whether the assgnees gross ncome shoud ncude moneys pad to the assgn-
ors by purchasers of the o. We stated (page ( OS)) : The grantng causa
n the assgnment woud be suffcent, f standng aone, to transfer a the o
to the assgnee. It does not specfcay e cept or e cude any part of the o.
ut t s quafed by other parts of the nstrument. The provsons for pay-
ment to assgnors n o ony, the absence of any obgaton of the assgnee
to pay n o or n money, and the faure of assgnors to take any securty
by way of en or otherwse unmstakaby show that they ntended to wthhod
from the operaton of the grant one-fourth of the o to be produced and saved
up to an amount suffcent when sod to yed . 395,000. Under these crcum-
stances, the moneys receved by the assgnors from the sae of the o were
deemed not to be ncome to the assgnees. (See aso Pamer v. ender, 287
T . S., 551.)
The hoder of an o payment rght, as an orgna proposton, mght be
regarded as havng no capta nvestment n the o and gas n pace. The
vaue of the rght, even though dependent upon the e tent of the o reserves,
s f ed at the moment of creaton and does not vary drecty wth the severance
of the mnera from the so. In ths sense t resembes the rght to cash
payments more cosey than the rght to royaty payments. Yet t does depend
upon the producton of o, ordnary can be reazed upon ony over a perod
of years, and permts of a smpe and convenent aocaton between essor
and essee of both the gross ncome derved from producton and the aowance
for depeton. (Compare urnet v. Uarmc, 287 U. S., 103, 10G-107.) ccord-
ngy, ths Court n Thomas v. Perkns decded that the provson n the ease
for payments soey out of o producton shoud be regarded as a reservaton
from the grantng canse of an amount of o suffcent to make the agreed
payments, and shoud be gven the same ta consequences as a provson for
o royates. The decson dd not turn upon the partcuar nstrument
nvoved, or upon the formates of the conveyancer s art, but rested upon the
practca consequences of the provson for payments of that type. (See Pamer
v. ender, 287 U. S., 551, 555-557 urnet v. artne, 287 U. S., 103, 111.)
The Government mantans that the present case s dstngushabe from
Thomas v. Perkns for the reason that the bass for decson there was that
ownershp of suffcent o to make the payments had not been conveyed to the
assgnee but remaned n the assgnor. It asserts that the terms of the con-
tract and the nstruments of conveyance here negatve any ntenton on the
part of the partes to wthhod from the operaton of the grant an amount
of o equa to the o payments. The foowng factors, among others, are
reed upon as supportng ths contenton: (1) the contract contans no quafy-
ng anguage reservng from the grant any nterest n the o and gas n pace
(2) the deferred payments of 110,000 were payabe n cash and not drecty
n o (3) the deferred payments drew Interest unt pad (4) Okahoma
Company had a frst en and cam aganst one-haf of the o and gas produc-
ton and fee nterest (5) pettoner Prtchard had the rght to se the fee
Interest covered by the contract and dscharge the deferred payments out of
the proceeds of such sae rather than out of the proceeds of the o and gas
producton.
Severa of the dstnctons urged upon us by the Government are wthout
substance. The economc consequences of the transacton are not materay
affected by the crcumstance that the provson for o payments s not phrased
In terms of a reservaton from the conveyance to Okahoma Company of an
nterest n the o and gas n pace. nd the fact that the payments to Oka-
homa Company are n cash rather than drecty n o s of no moment n
determnng the ssues presented for decson. Compare, however. Genera
Uttes Cr v. everng (29(3 U. S.. 200 TCt. D. 1055, C. . -1, 214 (193 ) ).
Smary, the retenton of a en, f t were construed as a en ony upon the
o and ga producton, and nothng more,1 woud not make Okahoma Company
any the ess dependent upon such producton for payment of the amounts
reserved.
The en here appears to cover both the o and gas producton and the fee Interest from
whch the deferred payments were to be derved.
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22(a), rt. 22(a)-13.
112
The reservaton of an nterest n the fee, In addton to the nterest n the
o producton, however, materay affects the transacton. Okahoma Company
Is not dependent entrey upon the producton of o for the deferred payments
they may be derved from saes of the fee tte to the and conveyed. It s
cear that payments derved from such saes woud not be sub|ect to an aow-
ance for depeton of the o reserves, for no o woud thereby have been
severed from the ground an aowance for depcton upon the proceeds of such
a sae woud resut, contrary to the purpose of Congress, n a doube deducton
frst, to Okahoma Company second, to the vendee-owner upon the producton
of o. ( everng v. Twn e O Syndcate, 293 T . S., 312, 321.) We are of
opnon that the reservaton of ths addtona type of securty for the deferred
payments serves to dstngush ths case from Thomas v. Perkns. It Is smar
to the reservaton n a ease of o payment rghts together wth a persona
guarantee by the essee that such payments sha at a events equa the specfed
sum. In ether case, t s true, some of the payments receved may come d-
recty out of the o produced. ut our decson n Thomas v. Perkns does not
requre that payments reserved to the transferor of o propertes sha for ta
purposes be treated dstrbutvey, and not as a whoe, dependng upon the
source from whch each doar s derved. n e tenson of that decson to
cover the case at bar woud create addtona, and n our opnon unnecessary,
dffcutes to the aocaton for ncome ta purposes of such payments and of
the aowance for depeton between transferor and transferee. In the nterests
of a workabe rue, Thomas v. Perkns must not be e tended beyond the stua-
ton n whch, as a matter of substance, wthout regard to formates of con-
veyancng, the reserved payments are to be derved soey from the producton
of o and gas. The deferred payments reserved by Okahoma Company, ac-
cordngy, must be treated as payments receved upon a sae to pettoners, not
as ncome derved from the consumpton of ts capta Investment n the
reserves through severance of o and gas.
Pettoners, as purchasers and owners of the propertes, are therefore ta -
abe upon the gross proceeds derved from the o producton, notwthstandng
the arrangement to pay over such proceeds to Okahoma Company. (See
everng v. Cfford, No. 883, October Term, 1939 Renecke v. mth, 289 D. 8.,
172, 177 Ot. D. 4, C. . II-1, 25 (1933) Od Coony Trust Co. v. Com-
mssoner, 279 U. S., 71 Ct, D. 80, O. . III-2, 222 (1929) .)
ffrmed.
rtce 22(a)-3: Compensaton pad other than n cash.
Reguatons 8 and 77 amended. (See T. D. 49 5, page 13.)
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
L Gboss Income Lease Improvements by Lessee Reazaton
of Ta abe Gan to Lessor Upon orfeture.
On uy 1, 1015, and wth budng thereon was eased for a term
of 99 years, the ease provdng that, under certan condtons, the
essee mght remove any budng, and that upon termnaton of the
ease the and wth a budngs and mprovements shoud be sur-
rendered. In 1029 the essee demoshed the e stng budng and
erected a new one havng a usefu fe of not more than 50 years.
uy 1, 1933, the ease was canceed for defaut n payment of rent
and ta es, and the essor reganed possesson. IT ed: That the
essor reazed ta abe gan In 1933 from the forfeture of the ease-
hod. In the amount of the stpuated net far market vaue of the
new budng as of uy 1, 1933. The defnton of gross Income n
secton 22(a) of the Revenue ct of 1032 s broad enough to embrace
such gan. It Is not necessary to recognton of ta abe gan that
the Improvement begettng the gan shoud be severabe from the
orgna capta.
R NU CTS O 1932 ND 1934.
rtce 22(a)-13: Improvements by essees.
1940-15-10229
Ct. D. 1450
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113
22(a), rt. 22(a)-13.
2. Decson Reversed. , r.,,
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (105 . (2d), 442), affrmng an unreported decson
of the Unted States oard of Ta ppeas (1038), reversed.
3. Decson Overbted n Prncpe.
Mer v. Gcarn (C. C. ., Nnth Crcut, 1919) (258 ed., 225)
overrued n prncpe.
4. Decsons Dstngushed.
ewtt Reaty Co. v. Commssoner (C. C. ., Second Crcut,
1935) (7 . (2d), 880) and M. . att Co. v. Unted States (1938)
(305 U. S., 207 Ct. D. 1373, C. . 1939-1 (Part 1), 221 ) ds-
tngushed.
Supbeme Court cf the Unted Statks.
On|f T. everng, Commssoner of Interna Revenue, pettoner, v. Chares .
ruun.
309 U. S., 4 1.
On wrt of certorar to the Unted State Crcut Court of ppeas for the ghth Crcut.
March 25, 1940.
opnon.
Mr. ustce Roberts devered the opnon of the Court.
The controversy had ts orgn n the pettoner s asserton that the respond-
ent reazed ta abe gan from the forfeture of a easehod, the tenant havng
erected a new budng upon the premses. The court beow hed that no
ncome had been reazed.1 Inconsstency of the decsons on the sub|ect ed ua
to grant certorar.
The oard of Ta ppeas made no Independent fndngs. The cause was
submtted upon a stpuaton of facts. rom ths t appears that on uy 1,
1915, the respondent, as owner, eased a ot of and and the budng thereon
for a term of 99 years.
The ease provded that the essee mght, at any tme, upon gvng bond to
secure rentas accrung In the two ensung years, remove or tear down any
budng on the and, provded that no budng shoud be removed or torn down
after the ease became forfeted, or durng the ast 3 4 years of the term.
The essee was to surrender the and, upon termnaton of the ease, wth a
budngs and Improvements thereon.
In 1929 the tenant demoshed and removed the e stng budng and con-
structed a new one whch had a usefu fe of not more than 50 years. uy 1,
1933, the ease was canceed for defaut n payment of rent and ta es and the
respondent reganed possesson of the and and budng.
The partes stpuated that as at sad date, uy 1, 1933, the budng whch
had been erected upon sad premses by the essee had a far market vaue of
4,245. 8 and that the unamortzed cost of the od budng, whch was
removed from the premses n 1929 to make way for the new budng, was
12,811.43, thus eavng a net far market vaue as at uy 1, 1933, of
51,434.25, for the aforesad new budng erected upon the premses by the
essee.
On the bass of these facts, the pettoner determned that n 1933 the
respondent reazed a net gan of 51,434.25. The oard overrued hs deter-
mnaton and the Crcut Court of ppeas affrmed the oard s decson.
The course of admnstratve practce and |udca decson n respect of the
queston presented has not been, unform. In 1917 the Treasury rued that the
ad|usted vaue of mprovements nstaed upon eased premses s ncome to the
essor upon the termnaton of the ease. The rung was ncorporated n two
succeedng edtons of the Treasury reguatons. In 1919 the Crcut Court
of ppeas for the Nnth Crcut hed n Mer v. Ocarn (258 ed., 225) that
the reguaton was nvad as the gan, f ta abe at a, must be ta ed as ot
the year when the mprovements were competed.4
everno v. ruun (105 . (2d). 442).
Treasury Decson 2-142 (19 Treas. Dec. Int. Rev., 25).
Reguatons 33 (1918 ed.), artce 4, paragraph 50 Reguatons 45 (2d 1919 ee.)..
artce 48.
Tu Court dened certorar (250 U. S., 807)
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22(a), rt. 22(a)-13.
114
The reguatons were accordngy amended to Impose a ta upon the gan
In the year of competon of the Improvements, measured by ther antcpated
aue at the termnaton of the ease and dscounted for the duraton of the
ease. Subsequenty the reguatons permtted the essor to spread the depre-
cated vaue of the mprovements over the remanng fe of the ease, report-
ng an aquot part each year, wth provson that, upon premature termnaton,
ta shoud be mposed upon the e cess of the then vaue of the mprove-
ments over the amount theretofore returned.
In 1935 the Crcut Court of ppeas for the Second Crcut decded In
ewtt Reaty Co. v. Commssoner (7 . (2d), 880) that a andord receved
Do ta abe ncome n a year, durng the term of the ease, n whch hs tenant
erected a budng on the eased and. The court, whe recognzng that the
essor need not receve money to be ta abe, based Its decson that no ta abe
gan was reazed n that case on the fact that the mprovement was not
portabe or detachabe from the and, and f removed woud be worthess e cept
as brcks, ron, and mortar. It sad (page 884) : The queston as we vew It
Is whether the vaue receved s emboded n somethng separatey dsposabe,
or whether t s so merged In the and as to become fnancay a part of It,
somethng whch, though t Increases ts vaue, has no vaue of Its own when
torn away.
Ths decson Invadated the reguatons then In force.
In 1938 ths Court decded If. . att Co. v. Unted States (305 U. S., 2 7
Ct D. 1373, C. . 1939-1 (Part 1), 221 ). There, n connecton wth the e ecu-
ton of a ease, andord and tenant mutuay agreed that each shoud make
certan mprovements to the demsed premses and that those made by the tenant
I houd become and reman the property of the andord. The Commssoner
vaued the mprovements as of the date they were made, aowed deprecaton
thereon to the termnaton of the easehod, dvded the deprecated vaue by the
I number of years the ease had to run, and found the andord ta abe for each
fear s aquot porton thereof. s acton was sustaned by the Court of Cams.
ffhe udgment was reversed on the ground that the added vaue coud not be
Consdered renta accrung over the perod of the ease that the facts found by
the Court of Cams dd not support the concuson of the Commssoner as to
the vaue to be attrbuted to the mprovements after a use throughout the term
Of the ease and that, In the crcumstances dscosed, any enhancement In the
vaue of the reaty n the ta year was not ncome reazed by the essor wthn
the evenue ct.
The crcumstances of the Instant case dfferentate t from the att and
ewtt cases but the pettoner s contenton that gan was reazed when the
tespondent, through forfeture of the ease, obtaned untrammeed tte, posses-
son and contro of the premses, wth the added Increment of vaue added by the
new budng, runs counter to the decson n the Mer case and to the reason-
ng n the ewtt case.
The respondent Inssts that the reaty, a capta asset at the date of the
e ecuton of the ease, remaned such throughout the term and after ts e pra-
ton that mprovements aff ed to the so became part of the reaty ndstn-
fushaby bended n the capta asset that such Improvements can not be sepa-
ratey vaued or treated as receved In e change for the mprovements whch
were on the and at the date of the e ecuton of the ease that they are, there-
fore, In the same category as mprovements added by the respondent to hs and,
or accruas of vaue due to e traneous and adventtous crcumstances. Such
added vaue, t Is argued, can be consdered capta gan ony upon the owner s
dsposton of the asset The poston Is that the economc gan consequent upon
the enhanced vaue of the recaptured asset Is not gan derved from cupta or
reazed wthn the meanng of the s teenth amendment and may not, therefore,
be ta ed wthout apportonment.
We hod that the pettoner was rght In assessng the gan as reazed In 1933.
We mght rest our decson upon the narrow ssue presented by the terms of
the stpuaton. It does not appear what knd of a budng was erected by the
tenant, or whether the budng was ready removabe from the and. It s not
stated whether the dfference In the vaue between the budng removed and
that erected n Its pace accuratey refects an ncrease n the vaue of and an
Treasury Decson 3082 (C. . 8, 109) Retaatons 45 (1920 cd.). artce 48 Regua-
tons 02. . and 9. artce 48 Reguatons 80. 94, and 101, artce 22(a)-13.
The ewtt case was foowed n genbcrg v. Unted States (21 . Supp., 403),
Stapes v. Unted States (21 . Supp., 737), and ngsh v. tgood (21 . Supp., 41).
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115
22(b), rt. 22(b) (2)-2.
budng consdered as a snge estate n and. On the facts stpuated, wthout
more, we shoud not be warranted n hodng that the presumpton of the cor-
rectness of the Commssoner s determnaton has been overborne.
The respondent nssts, however, that the stpuaton was ntended to assert
that the sum of 31,434.25 was the measure of the resutng enhancement n
vaue of the rea estate at the date of the canceaton of the ease. The pet-
toner seems not to contest ths vew. ven upon ths assumpton we thnk that
gan n the amount named was reazed by the respondent n the year of
repossesson.
The respondent can not successfuy contend that the defnton of gross n-
come n secton 22(a) of the Revenue ct of 11)32 s not broad enough to
embrace the gan n queston. That defnton foows cosey the s teenth
amendment. ssentay the respondent s poston s that the amendment does
not permt the ta aton of such gan wthout apportonment amongst the States.
e rees upon what was sad In evctt Reaty Co. v. Commssoner, supra,
and upon e pressons found n the decsons of ths Court deang wth the
ta abty of stock dvdends to the effect that gan derved from capta must
be somethng of e changeabe vaue proceedng from property, severed from the
capta, however nvested or empoyed, and receved by the recpent for hs
separate use, beneft, and dsposa. e emphaszes the necessty that the gan
be separate from the capta and separatey dsposabe. These e pressons,
however, were used to carfy the dstncton between an ordnary dvdend and
a stock dvdend. They were meant to show that n the case of a stock dv-
dend, the stockhoder s nterest n the corporate assets after recept of the dv-
dend was the same as and nseverabe from that whch he owned before the
dvdend was decared. We thnk they are not controng here.
Whe t s true that economc gan s not aways ta abe as ncome, t s
setted that the reazaton of gan need not be n cash derved from the sae
of an asset. Gan may occur as a resut of e change of property, payment of
the ta payer s ndebtedness, reef from a abty, or other proft reazed from
the competon of a transacton. The fact that the gan s a porton of the
vaue of property receved by the ta payer n the transacton does not negatve
ts reazaton.
ere, as a resut of a busness transacton, the respondent receved back hs
and wth a new budng on t, whch added an ascertanabe amount to ts
vaue. It s not necessary to recognton of ta abe gan that he shoud be abe
to sever the mprovement begettng the gan from hs orgna capta. If that
were necessary, no ncome coud arse from the e change of property whereas
such gan has aways been recognzed as reazed ta abe gan.
udgment reversed.
The Chef ustce concurs n the resut n vew of the terms of the stpuaton
of facts.
Mr. ustce McReynods took no part n the decson of ths case.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 22(b) (2)-2: nnutes.
R NU CTS O 192 ND 1028.
G. C. M. 395 (C. . III-1, 7 (1929)) revoked. (See G. C. M
2171 , page 82.)
Ch. 209, 47 Stat.. 1 9, 178.
Ste sner v. Macombcr 52 . 8.. 189. 207 T. D. 3010. C. . 3, 25 (1920) 1) Unte
Utc v. Phe Us (2.17 . 8., 15 , 100 Ct D. 19. C. . 5. 37 (1921)1).
Cunan v. Waker (2 2 . S.. 134 Ct. D. 32. C. . II-. 51 (1023)1) Uarr v Unte
State, (208 U. S.. 53 T. D. 3755, C. . I -2, 11 (1925) ) Od Coony Trust Co v
Commssoner (279 . S 71 Cr. D. 80. C. . III-2. 222 (1922))) Unted States v
rby Lumber Co (28 U. S.. 1 Ct. D. 420. C. . -2. 350 (1931)1) heverno v mer.
nn Chce Co. (291 U. S., 42 ICt. D. 809. C. . III-1, 2 5 (1934) ) Unted States v
ender (303 U. S., 5 4 Ct. D. 1328, C. . 1938-1. 285 ).
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5 22(b), rt. 22(b) (2)-2.
11
rtce 22(b) (2)-2: nnutes.
1940-4-10148
G. C. M. 21
R NU CT O 1934.
Where the proceeds of a snge premum endowment pocy are
payabe at maturty In 120 equa monthy nstaments, the nsta-
ments receved consttute annuty payments and are ta abe In
accordance w th artce 22(b) (2)-2, Reguatons 80.
I. T. 2380 (C. . I-2, 32 (1927)) dstngushed.
n opnon s requested as to the proper treatment for edera
ncome ta purposes of the proceeds of an endowment pocy ssued
on the fe of , payabe n 120 equa nstaments, under the crcum-
stances heren set forth.
The pocy was ssued as a snge premum endowment pocy
payabe as foows:
In monthy nstaments, 120 stpuated, as provded n opton 1 heren, to
. the nsured s wfe, f vng, otherwse the whoe or the commuted vaue of
any unpad nstaments to be pad n one sum to hs chdren, C, D, , and .
equay, or to the survvors or survvor of them, f vng, otherwse n accord-
ance wth the optona methods of settement.
The foowng ndorsement appears on the face of the pocy:
In the event of the death of the sad pror to maturty of the pocy, the
proceeds are to be payabe to the nsured at the end of the endowment perod
n monthy nstaments, 120 stpuated, as provded In opton 1 heren, f
vng, otherwse the commuted vaue of any unpad nstaments to be pad to
the nsured s chdren, C, D, , and , equay, or to the survvors or sur-
vvor of them, If vng, otherwse n accordance wth the optona methods of
settement.
Durng the year 1935 the pocy matured and n that year the com-
pany began makng monthy payments to n accordance wth the
above-quoted ndorsement. The queston has been rased whether the
amount of 11a doars, whch s the e cess of the payments to become
due n the future on the pocy pus the dvdend accumuaton thereon
over the premum pad, shoud be treated as ta abe ncome to the
nsured n the vear 1935 under the concusons reached n I. T. 2380
(C. . I-2, 32 (1927)), ssued under the Revenue cts of 1924 and
192 and reatng to the method of determnng ncome derved upon
the maturty of certan endowment nsurance poces where the n-
sured survved the endowment perod. That rdng, n effect, hed
that the settements under the poces there nvoved resuted n the
constructve recept of the proceeds of the poces at the maturty
dates and the renvestment of such proceeds n accordance wth the
terms of settement.
Pror to the enactment of the Rsvenue ct of 1934, amounts receved
under a fe nsurance endowment or annuty contract were e cuded
from gross ncome unt the annutant had receved an aggregate
amount of payments equa to the tota amount pad for the annuty.
(See secton 22(b)2 of the Revenue ct of 1932 and the correspond-
ng provsons of earer Revenue cts.) owever, n the Revenue
ct of 1934, secton 22(b)2, Congress provded as foows wth
respect to annutes:
(b) cusons from gross ncome The foowng tems sha not be ncuded
n gross ncome and sha bo e empt from ta aton under ths tte:

(2) nnutes, etc. mounts receved (other than amounts pad by reason
of the death of the nsured and nterest payments on such amounts and other
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117
15 22(b). rt. 22(b) (2) -2.
than amounts receved as annutes) under a fe nsurance or endowment con-
tract, but f such amounts (when added to amounts receved before the ta abe
year under such contract) e ceed the aggregate premums or consderaton pad
I whether or not pad durng the ta abe year) then the e cess sha be ncuded
n gross ncome. mounts receved as an annuty under an annuty or en-
dowment contract sha be ncuded n gross ncome e cept that there sha be
e cuded from gross ncome the e cess of the amount receved n the ta abe
year over an amount equa to 3 per centum of the aggregate premums or con-
sderaton pad for such annuty (whether or not pad durng such year), unt
the aggregate amount e cuded from gross ncome under ths tte or pror
ncome ta aws n respect of such annuty equas the aggregate premums or
consderaton pad for such annuty.
rtce 22(b) (2)-, Reguatons 8 , promugated under the Revenue
ct of 1934, provdes as foows:
rt. 22(b) (2)-. Lfe nsurance ndowment contracts mounts pad other
than by reason of the death of the nsured. mounts receved under a fe
nsurance or endowment pocy (other than amounts pad by reason of the death
of the nsured, nterest payments on such amounts, and amouuts receved as
annutes) are not ta abe unt the aggregate of the amounts so receved (when
added to the amounts receved before the ta abe year under such pocy) e -
ceeds the aggregate premums or consderaton pad, whether or not pad durng
the ta abe year.
rtce 22(b) (2)-2 of Reguatons 8 provdes n part that:
mounts receved as an annuty under an annuty or endowment contract
Incude amounts receved n perodca nstaments, whether annuay, sem-
annuay, quartery, monthy, or otherwse, and whether for a f ed perod, such
as a term of years, or for an ndefnte perod, such as for fe, or for fe and
a guaranteed f ed perod, and whch nstaments are payabe or may be payabe
over a perod onger than one year. If an annuty s payabe n annua nsta-
ments, there sha be ncuded n gross ncome ony such porton of the amounts
receved n any ta abe year as s equa to 3 per cent of the aggregate premums
or consderaton pad for such annuty, whether or not pad durng such year.
s soon as the aggregate of the amounts receved and e cuded from
gross ncome equas the aggregate premums or consderaton pad for such
annuty, the entre amount receved thereafter n each ta abe year must be
Incuded n gross ncome.
The change n the aw and reguatons n regard to annutes,
especay n specfyng annutes under an endowment contract, ap-
pears to govern the present case. (See artce 22(b) (2)-2, Regua-
tons S . supra.) In ths case the pocy matured as an endowment
pavabe n 120 equa monthy nstaments. It s the opnon of ths
offce that such nstaments are receved as an annuty under an
endowment contract wthn the meanng of the statute.,
n annuty has been defned as a stated sum payabe perodcay at
stated tmes durng fe, or a specfed number of years, under an
obgaton to make the payments n consderaton of a gross sum pad
for such obgaton, whch gross sum s e hausted n the makng of
the perodc payments. (See generay So. Op. 1 0, C. . III-2, 0
(1924), and cases cted theren aso Report No. Senate Com-
mttee on nance, reatng to secton 22(b)2 of the Revenue ct of
1934, C. . 1939-1 (Part 2) . 04.) The perodc payments to n the
present case meet ths defnton of an annuty.
Snce secton 22(b)2 of the Revenue ct of 1934 does not requre
the ta payer to return for the year 1935 more than 3 per cent of the
consderaton pad for the annuty, there s no bass for the appca-
ton of the prncpes of constructve recept emboded n I. T. 2380,
supra, whch was promugated under the Revenue cts of 1924 and
192 . The aw as changed n the Revenue ct of 1934 and subse-
quent Revenue cts wth respect to the ta aton of. annutes w not
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23(a), rt. 23(a)- .
118
permt the genera appcaton of the constructve recept theory em-
boded n I. T. 2380, supra. ccordngy, that rung s not ap-
pcabe to the present case arsng under the Revenue ct of 1934.
It s the opnon of ths offce that artce 22(b) (2)-2 of Regua-
tons 8 s appcabe to the nstant case, and that the nstaments
receved under the annuty contract shoud be reported for edera
ncome ta purposes n accordance wth the provsons of that artce.
. P. Wenched,
Chef Counse, ureau of Interna Revenue.
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
rtce 23(a)-: usness e penses. 1940-4-10149
( so Secton 23(b), rtce 23(b)-.) Ct. D. 1435
INCOM T R NU CT O 1028 D CISION OP SUPR M COURT.
1. Gross Income Deductons Payments Made as Compensaton
for Loan of Stock Ordnary penses Interest on Indebt-
edness.
The ta payer, benefca owner of a substanta porton of the
toek of the Company, In 1929 borrowed from the T Company a
suffcent number of shares of stock of the Company to dscharge
an obgaton Incurred by hm n 1919, when he had borrowed from
another corporaton, under agreement to return n knd, such stock
whch he had sod to e ecutves of the Company n order that
they mght have a fnanca nterest n the company the ta payer
havng agreed to make the sae to the e ecutves because the com-
pany had been advsed that t coud not egay do so. Pursuant to
agreement made when the 1929 oan was negotated, the ta payer
n 1931 pad to the T Company an amount equvaent to the dv-
dends receved from the Company on the borrowed shares and
the amount of edera ncome ta es mposed upon the Y Company
by reason of such payments. ed: That, n computng the ta -
payer net ncome for 1931, such payments were not deductbe as
ordnary e penses nor as nterest on ndebtedness under sectou
23 (a) or (b) of the Revenue ct of 1928.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1939) (103 . (2d), 257), reversng the udgment of the
Dstrct Court of the Unted States, Dstrct of Deaware (1938)
(22 . Supp., 589), reversed.
Supreme Court of the Unted States.
ear . Deputy and the Susse Trust Co., a Corporaton of the State of Deaware,
as dmnstratr and dmnstrator of the state of I vrd P. Deputy,
Deceased, Late Coector of Interna Rcccnue, pettoner, v. Perre S. du Pont.
0 S. Ct., 3 3.
On wrt of certorar to the Unted States Crcut Court of ppeas for Us Thrd Crcut.
anuary 8, 1940.1
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Ths case presents the queston of whether respondent n computng hs ta abe
not ncome for the year 1931 may deduct payments of 47,711.5 made by hm
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119
23(a), rt. 23(a)-
In that year to the Deaware Reaty Investment Co. (herenafter caed the
Deaware company). The deducton Is sought ether under secton 23(a) of the
Revenue ct of 1928 (45 Stat, 791) as ordnary and necessary e penses pad or
ncurred durng the ta abe year n carryng on the trade or busness
of respondent or under secton 23(b) as nterest pad or accrued
wthn the ta abe year on Indebtedness. The Commssoner dsaowed the
deducton and determned a defcency, whch respondent pad and now seeks to
recover. It s agreed that f the deducton s aowed, respondent s entted to
|udgment for 172,301. 4. The |udgment of the dstrct court aganst respondent
(22 P. Supp., 589) was reversed by the crcut court of appeas (103 . (2d), 257).
We granted certorar been use of the asserted Inconsstency of that rung wth
Wech v. cverng (290 U. S., I Ct. D. 755. C. . II-2, 112 (1933) ), whch
construed the meanng of the words ordnary and necessary e penses and
wth urnet v. Cark (287 U. S., 410 Ct. D. 020, C. . II-1, 175 (1933) ), whch
mted such deductons to osses drecty connected wth the ta payer s busness.
Respondent s cam to the deducton arose out of the foowng transactons,
brefy summarzed. Respondent was benefca owner of about 1 per cent of
the stock of . I. du Pont de Nemours Co. (herenafter caed the du Pont
company). In 1919 the du Pont company consttuted a new e ecutve commttee
composed of nne young men. )r busness reasons, t thought t desrabe
that these men have a fnanca nterest n the company. eged ega dffcu-
tes stood n the way of the du Pont company seng them the 9,000 shares
desred.1 ccordngy, respondent undertook to se them 1,000 shares each.
ut snce he dd not have ready avaabe that amount from hs own hodngs,
he borrowed 9,000 shares of the du Pont company from Chrstana Securtes
Co.. under an agreement whereby he agreed to return the stock oaned n knd
wthn 10 years and n the nterm to pay to the ender a dvdends decared
and pad on the shares so oaned.1 Respondent thereupon sod the shares to the
nne e ecutves, the purchase prce beng furnshed by the du Pont company.
In October, 1929, when the 10-year perod was about to e pre, respondent dd
not have avaabe the number of shares whch ho was obgated to return to
Chrstana Securtes Co. Therefore, he arranged for a oan from the Dea-
ware company of the number of shares necessary to dscharge that obgaton.
Under a contract wth that company, respondent agreed to return n knd the
number of shares oaned (pus any ncrease by stock dvdend or otherwse)
s stated by the dstrct court, counse advsed that the du Tont company coud Issue
stock ony for money pad, abor performed, or rea or persona property acqured and
that f the stock were to bo ssued for cash, t must frst be offered to e stng stock-
hoders. ccordng to the fndngs the du Pont company dd not have f.nun shares of ts
stock, other than unssued stuck: that stock was not then sted on the New York Stock
change and the over-the-counter market was qute nactve. Nne thousand shares
coud not have been purchased on ths market wthout substantay rasng the prce per
share.
Respondent had avaabe ony 74 shares. e had a reversonary Interest In two trusts
whch hed 24.000 shares. nd he was the owner of 20.125 shares of common stock of
Chrstana Securtes Co. out of a tota of 75.000 shares ssued and outstandng. That
company was then the owner of 183,000 shares of common stock of the du Pont company
oat of a tota of 088,542 shares Issued and outstandng.
Supra, note 2.
s securty respondent gave Chrstana Securtes Co. 3,800 shares of ts capta stock.
dvdends on that stock were to be pad to respondent.
s These saes were made at the prce of 320 a share, that beng appro matey ther
book vaue. The du Pont company oaned to each of the nne e ecutves the ne essary
funds to purchase hs 1,000 shares. They pad respondent 2,880,000 n cash for the
t .000 shares. ccordng to respondent s bref, he turned over ths sum through transac-
tons n Genera Motors stock whch utmatey yeded hm a great proft. (See du Pont
v. Commssoner, 37 . T. ., 1198.)
y March, 1021, the stock of the du Pont company had decned In vaue and the
bargan made by the e ecutves had become a dsadvantageous one. Respondent thereupon
offered to turn over 400 shares of the Chrstana Securtes Co. (of a net vaue of
1 0,000) to be hed by the du Pont company as addtona coatera on the oan made
to these e ecutves, respondent to have the rght to redeem those 400 shares by payment
of 1 0,000 on maturty of the oan, that payment. If made, to be apped to the oan. If
respondent faed to redeem those shares, they were to become the property of the e ecu-
tve on payment of ther oans. Meanwhe dvdends on the 400 snares up to 8,000 per
annum were to go to the e e uvps. rh haunce to respondent who was. however, to return
hs porton to the e ecutves If he dd not redeem the stock. Ths offer was accepted by
the e ecutves. Respondent when he pro w sed t. stnted that he dd so as a arge stock-
hoder, and. perhaps, the one to be most benefted by the recovery n vaue of the company s
shares. e aso stated that he wanted the e ecutves to be free of worry over the
tme pended outcome of the stock purchase pnn.
Due to stock dvdends and spt-ups respondent was obgated to return to Chrstana
Securtes Co. 142.212 shares to repace the 9.000 shares whch he had borrowed.
Respondent was not a stockhoder of the Deaware company, athough It appears that
bs brother was one of ts e ecutve offcers.
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523(a), rt. 2 0(0-1.
120
wthn 10 yea : to pay to the Deaware company an amonnt equvaent to a
dvdends deefar d and pad on the borrowed shares unt returned and to
remburse the Deaware company for a ta es accrung aganst t by reason
of the agreement.
Pursuant to that agreement respondent pad the Deaware company n 1931,
the sum of 5 7, 48, beng an amount equvaent to the dvdends receved by
hm durng that perod from the du Pont company on the borrowed shares and
the sum of 80,0 3.5 , beng the amount of the edera ncome ta mposed
upon the ender by reason of the foregong payments whch t had receved
from respondent. These are the e pendtures camed as a deducton n the
present sut.
The dstrct court concuded, on the bass of respondent s arge and dversfed
nvestment hodngs and hs wde fnanca and busness nterests, that hs
busness was prmary that of conservng and enhancng hs estate. The
pettoners chaenge that concuson, assertng that respondent s actvtes n
connecton wth conservng and enhancng hs estate dd not consttute a
trade or busness wthn the meanng of secton 23(a) of the ct.
ut as we vew the case t Is unnecessary for us to pass on that contenton
and to make the decate dssecton of admnstratve practce whch that woud
enta. or we are of the opnon that the deductons are not permtted ether
Wthn the rue of urnet v. Cark or Wech v. everng, supra, even though
we were to assume that the actvtes of respondent consttuted a busness, as
found by the dstrct court
There Is no ntmaton n the record that the transactons whereby the stock
was borrowed were not n good fath or were entered nto for any reason
e cept a bona fde busness purpose. Nor s there any suggeston that the
transactons were cast n that form for purposes of ta avodance. nd t s
true that as respects the dvdends receved by respondent and pad over to
the Deaware company, he was tte more than a condut. ut aowance of
deductons from gross ncome does not turn on genera equtabe consderatons.
It depends upon egsatve grace and ony as there s cear provson therefor
can any partcuar deducton be aowed. (.New Coona Ice Co., Inc., v.
rverng, 292 U. S., 435, 440 Ct. D. 841, C. . I-1, 104 (1034) .) nd
when t comes to constructon of the statutory provson under whch the
deducton Is sought, the genera rue that popuar or receved mport of words
furnshes the fefeTa rue for the nterpretaton of pubc aws, Maard r.
Laurence (1 ow., 251, 2 1), s appcabe.
y those standards the camed deducton fas for two reasons. In the
frst pace, the payments n queston do not meet the test enuncated n orn-
hauser v. Unted States (27C D. S., 145 T. D. 4222, O. . I1-2, 2 7 (1928) ).
snce they pro matey resut not from the ta payer s busness but from the
busness of the du Pont company. The orgna transactons had ther orgn
n an effort by that company to Increase the effcency of ts management by
eng ts stock to certan of ts key e ecutves. The respondent undertook
to furnsh the necessary stock Ony after the company had been advsed that
It coud not egay do so. In that posture of the case these payments are no
more deductbe than were the payments made by the stockhoder n urnet
. Cark, supra, as a resut of hs Indorsements of the obgatons of hs cor-
poraton. Those payments were dsaowed as deductons from hs gross ncome
though they arose out of transactons whch were ntended to preserve hs n-
vestment n the corporaton. Smar payments were dsaowed n Dnton v.
ower (287 U. S.. 404). ence, the fact that the transacton out of whch
the carryng charges here n queston arose mght beneft respondent does not
brng It wthn the ambt of hs aeged busness of conservng and enhancng
hs estate. The we estabshed decsons of ths Court do not permt any such
bendng of the corporaton s busness wth the busness of Its stockhoders.
ccordngy, the payments made under the 1919 agreement woud certany not
be deductbe. nd the fact that a new and dfferent ar angement was made
n 1929 wth the Deaware company does not ater the concuson, for t s
the orgn of the abty out of whch the e pense accrues whch s matera.
Otherwse carryng charges on any short sae whether or not reated to the
busness of the ta payer woud be aowabe as deductbe e penses. That can
not be f the noton of pro mate resut Impct n the statutory words
e penses pad or ncurred n carryng on any trade or busness s
to have any vtaty.
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121
23(a), rt. 23(a)-.
In the second pace, these payments were not ordnary ones for the conduct
of the knd of busness n whch, we assume arguendo, respondent was engaged.
The dstrct court hed that they were beyond the norm of genera and
accepted busness practce and were In fact so e traordnary as to occur n
the res of ordnary busness men not at a and n the fe of the respondent
but once. 8 Certany there are no norms of conduct to whch we have been
referred or of whch we are cognzant whch woud brng these payments
wthn the meanng of ordnary e penses for conservng and enhancng an
estate. We do not doubt the correctness of the dstrct court s fndng that
respondent embarked on ths program to the end that hs benefca stock
ownershp In the du Pont company mght be conserved and enhanced. ut
that does not make the cost to hm an ordnary e pense wthn the meanng
of the ct. Ordnary has the connotaton of norma, usua, or customary.
To be sure, an e pense may be ordnary though It happen but once n the ta -
payer s fetme. (Cf. ornhauser v. Unted States, supra.) Yet the transac-
ton whch gves rse to t must be of common or frequent occurrence n the
type of busness nvoved. (Wech v. Itererng, supra, 114.) ence, the fact
that a partcuar e pense woud be an ordnary or common one n the course
of one busness and so deductbe under secton 28fa) does not necessary
make t such n connecton wth another busness. Thus, t has been hed that
one who was an actve trader n securtes mght take as deductons carryng
charges on short saes snce seng short was common n that busness.9 ut
the carryng charges on respondent s short sae n ths case can not be accorded
the same prvege under secton 23(a). The record does not show that
respondent was n the busness of tradng n securtes. Nor does t show
that a stockhoder engaged n conservng and enhancng hs estate ordnary
makes short saes or smary asssts hs corporaton n fnancng stock pur-
chase pans for the beneft of ts e ecutves. s stated n Wech v. ercrng,
supra, pages 113-114 . What s ordnary, though there must aways
be a stran of constancy wthn t. s none the ess a varabe affected by tme
and | ace and crcumstance. One of the e tremey reevant crcumstances
s the nature and scope of the partcuar busness out of whch the e pense
n queston accrued. The fact that an obgaton to pay has arsen s not
suffcent. It s the knd of transacton out of whch the obgaton arose and
ts normacy n the partcuar busness whch are cruca and controng.
Revew of the many decded cases s of tte ad snce each turns on ts
speca facts. ut the prncpe s cear. nd on appcaton of that prncpe
tf. these facts, t seems evdent that the payments n queston can not be paced
n the category of those tems of e pense whch a conservator of an estate, a
custodan of a portfoo, a supervsor of a group of nvestments, a manager of
wde fnanca and busness nterests, or a substanta stockhoder n a corpora-
ton engaged n conservng and enhancng hs estate woud ordnary ncur.
We can not assume that they are embraced wuhn the norma overhead or
operatng costs of such actvtes. There s no evdence that stockhoders or
nvestors, n furtherance of enhancng and conservng ther estates, ordnary
or fp-quenty end such assstance to empoyee stock purchase pans of ther
corporatons. nd n absence of such evdence there s no bass for an assump-
ton, n e perence or common knowedge, that these payments are to be paced
In the same category as typcay ordnary e penses of such actvtes, e. g.,
renta of safe depost bo es, cost of nvestment counse or of nvestment servces,
saares of secretares and the ke. Rather these payments seem to us to
represent most e traordnary e penses for that type of actvty. Therefore,
the cam for deducton fas, as dd the cam of an offcer of a corporaton
who pad ts debts to strengthen hs own standng and credt. (Wech v. I e-
terng, supra.) nd the fact that the payments mght have been neeessary
h the sense that consummaton of the transacton wth the Deaware company
was benefca to respondent s estate s of no ad. or Congress has not decree
22 . Supp.. r 8n, 537.
Dart v. Commngonrr (74 . (2d), 845). Cf. Trrhe v. Cnmm noner (2f n. T. .,
44. affd 71 . (2d), 1017), where such carryng charges were dsaowed as deductons.
The oard of Ta ppeas sad, page 45. We have ony the stpuated facts and there
Is no suggeston n those facts that the decedent was engaged In the busness of makng
hort saes or In deang In securtes generay.
252208 40 5
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23(b), rt. 23(b)- .
122
that n necessary e penses may be deducted. Though pany necessary they
can not be aowed uness they are aso ordnary. (Wech v. crerng, supra.)
We concude then on ths phase of the case that as the dstrct court, on a
correct nterpretaton of the ct, found that these payments dd not pro matey
resut from, and were not ordnary e penses for the conduct of, respondent s
aeged busness, It was error for the crcut court of appeas to reverse the
udgment for pettoners. (McCaughn v. Rea state Land Tte t Trust Co.,
297 U. S., 0 .)
There remans respondent s contenton that these payments are deductbe
under secton 23(b) as nterest pad or accrued on Indebtedness.
Ceary respondent owed an obgaton to the Deaware company. ut athough
an ndebtedness s an obgaton, an obgaton Is not necessary an ndebted-
ness wthn the meanng of secton 23(b). Nor are a carryng charges
nterest. In Od Coony Raroad Co. v. Commssoner (284 U. S., 552 Ct. D.
45 , C. . I-1, 274 (1932) ) ths Court had before t the meanng of the word
nterest as used n the comparabe provson of the 1921 ct (42 Stat., 227).
It sad, page 5 0, as respects nterest, the usua mport of the
term s the amount whch one has contracted to pay for the use of borrowed
money. It there re|ected the contenton that t meant effectve nterest
wthn the theory of accountng or that Congress used the word havng n mnd
any concept other than the usua, ordnary and everyday meanng of the term.
(Page 5 1.) It refused to assume that the Congress used the term wth
reference to some esoterc concept derved from subte and theoretc anayss.
(Page 5 1.)
We kewse refuse to make that assumpton here. It Is not enough, as urged
by respondent, that nterest or ndebtedness n ther orgna cassca
conte t may have permtted ths broader meanng.10 We are deang wth
the conte t of a Revenue ct and words whch have to-day a we-known
meanng. In the busness word nterest on ndebtedness means compen-
saton for the use or forbearance of money. In absence of cear evdence to
the contrary, we assume that Congress has used these words n that sense.
In sum, we can not sacrfce the pan, obvous and ratona meanng of the
statute even for the e gency of a hard case. (See Ltmch v. hcorth-
Stephens Co., 2 7 U. S., 3 4, 370 T. D. 3 90, C. . I -1,1 2 (1925) .)
Pettoners throughout have referred to these payments by respondent ns
beng capta n nature. (Cf. onwt Teer d Co. v. Commssoner, 53 .
(2d). 381 utton v. Commssoner, 39 . (2d), 4.19 Ct. D. 249, C. . I -2. 353
(1930) ng v. Ueverng, 7 P. (2d), 941.) What approprate treatment may
be accorded these tems of cost under other provsons of the ct we do not
undertake to say, as that ssue s not here.
The |udgment of the crcut court of appeas s reversed and that of the
dstrct court s fffrmed.
It s so ordered.
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST.
rtce 23(b)-1: Interest.
R NU CT O 1028.
Payments made as compensaton for oan of stock. (See Ct. D.
1435, page 118.)
Respondent refers to the mutnum In Roman aw. Lede s Sohm a Insttutes of
Roman Law (2d. ed.), page 31)5 are, The Law of Contracts, page 73.
11 Ths makes rreevant other nes of authorty cted by respondent where nterest
In a dfferent conte t has been used to descrbe damages or compensaton for the detenton
or use of money or of property. See Unted States v. orth Carona (13 U. 8., 211, 210)
New York Genera usness Law. secton 370, whch provdes, The rate of Interest upon
the oan or forbearance of any money, goods, or thngs, In acton sha be s
doars upon oue hundred doars, for one year, .
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123
23(c), rt. 23(c)-.
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
rtce 23(c)-1: Ta es. 1940-2 -10302
G. C. M. 22113
R NU CT O 1034.
Deductbty of New ersey rea property ta es where a con-
veyauce s made after the annua assessment of such ta es.
n opnon s requested as to the e tent of the appcaton of the
decson of the Crcut Court of ppeas for the Thrd Crcut n
Commssoner v. Mnne M. Coward (110 . (2d), 725, Ct. D. 1458
beow ), reatng to the deducton for edera ncome ta purposes
of New |ersey rea property ta es n cases where there s a con-
veyance of reaty subsequent to the annua assessment of such ta es.
The court n the Coward case hed that as between grantor and
grantee n such cases there shoud be an apportoned deducton for
edera ncome ta purposes under secton 23(c) of the Revenue
ct of 1934. It hed that the purchaser of reaty n New ersey s
entted to deduct that proporton of the ta es for the entre caendar
year whch the ength of tme he owned the property durng such
year bears to the entre caendar year, even though assessment there-
for had been made whe the seer hed the property.
Snce the concuson reached by the court n the Coward case s
based upon statutes pecuar to New ersey, the appcaton of that
decson w be confned to cases nvovng New ersey rea property
ta es. The ureau poston reatng to the genera queston of ac-
crua of such ta es, set forth n G. C. M. 15305 (C. . I -2, 80
(1935)), s not dsturbed by the decson n the Coward case, snce
the court s rung s appcabe ony where there has been a con-
veyance of the assessed reaty.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
rtce 23(c)-: Ta es. 1940-20-10303
Ct. D. 1458
ncome ta revenue act of 1934 decson of court.
Deducton Ta es Pad ob cckued Wthn Ta abe Yeab Ta es
on Rea state New e|sey Law.
ta payer who pad 1934 rea estate ta es to the State of New
ersey on propertes acqured on October 10, 1933, and anuary 8,
1934. s entted, under secton 23(c) of the Revenue ct of 1034,
to a deducton from gross ncome n the amount of ta es so pad,
e cept as to eght three hundred and s ty-ffths of the ta pad
on the property acqured on anuary 8, 1034, such fractona part
not beng deductbe In vew of the oca aw whch provded, as
to themseves aone, for apportonment of ta es between seer and
buyer on the bass of the tme property was hed by each durng
the caendar year. though under the oca aw rea estate ta es
are assessed on October 1 of each year to the owner thereof wth
reference to the amount then owned, such ta es consttute a a-
bty n rem the pree stence of whch dots not deprve a purchaser
who ater dscharges t of the beneft of a deducton for edera
ncome ta purposes.
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23(c), rt. 23(c)-.
124
Unted States Crcut Court op ppeas fob the Trd Cr tcrr.
Commssoner of Interna Revenue, pettoner, v. Mnne 31. Coward, respondent.
110 . (2d), 723.
Petton for revew from te Unted States oard of Ta ppeas.
efore nes, C- rk, and ones, Crcut udges.
ebruary 23, 1010.
OPINION.
Cautc, Crcut udge: The controversy at bar centers about the ong standng
provson for te deducton from gross ncome of ta es pad or accrued wthn
the ta abe year (2 U. S. C. ., secton 23(c)). The enactment s smpe:
ts appcaton s. n our crcumstance, an thng but smpe. We must strugge
frst, wth the perpe ng ntrcaces of the New ersey scheme of rea estate
ta aton, and second, n order to apprase the pertnent edera decsons wth
the equay perpe ng dverstes e stng between that and other oca ta
systems. (See Pau, The ffect on edera Ta aton of Loca Rues of Property,
Seected Studes n dera Ta aton, 1, 23-24.)
On October 1 of each year a property n the State of New ersey Is assessed
to the owner thereof wth reference to the amount then owned.1 In the year
1933, that property ncuded two parces of mproved ncome producng rea
estate owned by one . ut wthn a few months respondent had acqured
(presumaby by purchase) these parces from , one on October 1 , 1933, the
other on anuary 8, 1934. Then on anuary 10, 1934, the st of assessments
whch had been n the course of preparaton snce the 1st of October prevous
was fed wth the county board of ta aton. ThereDon the board consdered
the revson of assessments and the amount of revenue to be rased durng the
current year (1934) for schoo, State, and oca, purposes. It f ed the oca
ta rate on March 10, 1934, and by pr 1, 1934, a revsed and corrected dup-
cate st of assessments certfed as a true (and pubc) record of the ta es
assessed was devered to the coector. Meanwhe however, and on ebruary
1, 1934, the frst nstament of the 1934 ta es had become payabe (the amount
beng estmated wth reference to the ta es for the prevous year). The second
nstament (kewse estmated) became payabe on May 1, 1934, and the thrd
and fourth (ad|usted to the estmates so as to tota the by then determned
amount of the 1934 ta ) on ugust and November 1, 1931, respectvey. Re-
spondent pad each nstament of the 1934 ta on her propertes wthout deay.
If she had not done so, a en for them woud have attached on December 1,
1934.
rom ths weter of chronoogy, the Commssoner deduces that respondent,
who keeps her books on the cash bass, s not entted to deduct from her gross
ncome for 1934 the rea estate ta es pad by her n 1934. s he reasons, the
sums pad were not ta es at a, but, rather part of the cost of the two parces.
The argument s founded on precedent rather than prncpe, and proceeds
syogsteay as foows. Ma|or premse: one who purchases rea estate upon
whch oca ta es have accrued may not deduct the ater payment of those ta es
as ta es pad. Mnor premse: New ersey rea estate ta es had aready
accrued (at the date of assessment, October 1, 1933) on respondent s propertes
by the tme she acqured them (October 1 , 1933, anuary 8, 1934). Concu-
son: Respondent s not entted to her deducton.
The oard denes the mnor premse and hence reaches an opposte con-
cuson. Yet n dong so t does not ook behnd the mseadng termnoogy
of accrua empoyed n bot premses. s a consequence a concerned succumb
to the nfuence of a ne of cases whch, we thnk, are competey besde the
2 Cum. Supp. (1024) Conp. Stat., secton 208-COd (20 ).
2 Cum. Supp. (n 4) Comp. Stat.. ecton 0 M d ( () ).
2 Cmn Supp. (1024) Comp. Stat., secton L S-Ofd (507).
2 Cum. Snp. (1P24) Comp. Stat., secton 20.3-ORd (50: ).
2 Cum. Supp. (1024) Comp. Stat., secton 208-fOd (.104).
2 Cum. Supp. (1 24) Comp Stat., secton 20 -O d (508).
Cum. Supp. (19 . 4 Comp. Stat., secton 20S OGd (50 ).
P. L. 10: 3. ch. 200. 710.
2 Cum. Supp. (1924) Comp. Stat., secton 20S. 44a (0).
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125
23(c), rt. 23(c)-.
pont. These have to do wth the nterpretaton of the word accrued. That
Interpretaton, as Is e pressy provded by statute (20 U. S. C. ., 48), es
n the fed of accountancy on the accrua bass. The decsons are accordngy
drected to the partcuar pont of tme when accounts payabe (ncudng ta es)
may be sted on the ta payer s books offsettng accounts recevabe so as to
farv refect the ta paver s net Income. (See Unted States v. nderson, 2 9
C. S., 422 (T. D. 3823, C. . -, 179 (192 ) 3 Pau Mortens, Law of edera
Income Ta aton 23, 33.) ere, on the other hand, the word under constructon
s ta es not accrued. We must determne whether a gven payment Is a
forced contrbuton to the e pense of government, or whether t s somethng
ese a vountary capta e pendture, for e ampe. Its souton must e n a
cose anayss of the transacton of payment. It can not, n our |udgment, be
soved by any rue of thumb that a property owner s payment Is not one of a
ta on hs property because a pror owner (on the accrua bass) mght have been
permtted to accrue t. or that permsson to accrue may depend on technca
e gences of accountng uttery foregn to the ater owner s economc poston
n actuay makng the payment. That beng so, our decson may be nether
framed wthn the Commssoner s syogsm, nor guded by the accrua bass
cases.
Turnng then, to the decsons whch have actuay come to grps wth the
probem at bar, we fnd them suggestng two and ony two types of trans-
actons where rea estate ta es are not ta es wthn the meanng of the
statute. In the frst, property s sod and the buyer promses the seer to pay
certan ta es on the property. There, by e press contract, the payment of
ta es s part of the consderaton for the sae, and not a payment qua ta es.
ak Corporaton v. Commssoner, CO . (2d), 201 (C. C. . 7).) It Is aso
possbe that such a contract mght be mped n fact f the seer were per-
sonay abe for the ta , for t woud be dffcut otherwse to account for the
buyer s munfcence n payng t. (See Wash McGure Co. v. Commssoner, 97
. (2d), 983 (C. C. . ).) The second transacton s the purchase of prop-
erty to whch a ta en has attached. That property has n a sense two
owners, the seer, and, through the en, the State. ence Its fu acquston
entas two payments, the nomna purchase prce, and the ta es represented by
the en. oth have been treated ake as capta e pendtures.10 Where, on
the other hand, the ta payment fas nto nether of these two categores
where t nether dscharges (by contract, e press or mped) the persona
abty of another, nor what was orgnay a ta en on another s property
the deducton has been permtted. (Commssoner v. Pestschecff, 100 . (2d),
2 (C. C. . ) Ct. D. 1410, C. . 1939-2, 200 .)
Tested by these authortes, respondent s payment to the New ersey ta co-
ector In 1934 s ceary one of ta es. There Is no ndcaton of any e press
contract for ther payment, Mr. , from whom she purchased, was not personay
abe for them,u and the property was not sub|ect to any en for then when
she acqured t Indeed no such en was possbe unt a year or so after tte
passed to her (see mpress Mfg. Co. v. Newark, 109 N. . L., 131, 133, 1 0 ., 388,
389). Those authortes, however, do not dea wth the New ersey ta system and
are not n strctness, appcabe for t. It s necessary, then, to consder the
effect of one of the features of that system whch s not stressed n the cases
arsng from other States.
Respondent s two parces were, n theory, aready abe for the 1934 ta es
when she purchased them. That Is to say, nothng whch occurred after the
assessment of October 1, 1933, coud ater the fact that the and tsef must
utmatey yed those ta es ether drecty through the eventua forecosure of a
ta en, or ndrecty through the medum of ts then or subsequent owner s
pocketbook. If, for Instance, the and assumed a ta e empt status on October
2, 1933, t woud, nevertheess, bear ts fu share of 1934 ta .11 The presence of
-.. mwUmrr (OR . (2d), 0R (C. C. . f ). certorar dened. 805 D. S C2,
t, 3Z rtneS 30G r S 18 tCt 1400. C. . 1030-2. 10811 : rherng v. Mssour
SR fc tMM tmt ffts v SW
1 0 .. 832) : orough of Wrghtstown v. Savaton rmy (07 N. . L,., 80, M ., OT)
cS v. MonMe TovmMp (84 N. . L..48. W.|W/| -ff
91 ., 1009) Unted States v. Mayor and Counc of oooken, W. . 29 (2a) 9.S2,
940) and fe. Ytmno Men s Chrstan ssocaton y. OrawetZ . Msc.. 404. 128
80) Lanoport . amberger Seashore ome (01 N. . L., 330. 10.2 ., . .S), nn tte or
oy nges v. ort Lee (80 N. . L., 545. 77 .. 1035).
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23(c), rt. 23(c)-. 12
ths abty n rem may we afford a bass for accrung the ta n the account-
ng sense. ut does ts prce stence deprve the purchaser who ater dscharges
t of hs ncome ta deducton
We thnk not. New ersey statute provdes that n the absence of an e press
agreement to the contrary the buyer of rea estate may hod the seer abe
for such proporton of the current year s ta es as the tme between anuary 1
and the date of the deed bears to the fu caendar year (2 Cum. Supp. (1929)
Comp. Stat., secton 2G3-C d (514)). Ths statute does not affect the en for
unpad ta es the crystazaton of the and s abty n rem. So the fact that
the property has been assessed pror to sae, does not n the eyes of the New
ersey Legsature, mean that the ta resutng from that assessment s to be
borne by the seer. It s aways borne by the and n the frst nstance. ut as
between buyer and seer t s apportoned on the bass of the caendar year.
In other words, t s consdered far that the owner of aud n any gven year
sha be caed upon to contrbute to the year s revenues ony a sum commen-
surate wth the ength of tme the and has been hed In that year e cept of
course, n the rare case of the pror owner s nsovency. Such a contrbuton s,
n our |udgment, a ta n every sense of the word. nd that, wth the e cepton
of eght three hundred s ty-ffths of the ta on the parce acqured on auuary
8, 1934, s what respondent pad here.
We may say that any other concuson tends to work a hardshp on the ta -
payer hardy contempated by the broad anguage of the statute. In ths cass
of cases too great an nsstence upon assessment or, ndeed, upon the en when
t reates back to the tme of assessment, w often ead to puzzng anomaes.
If a Ihe property n one State were to change hands mmedatey after assess-
ment, ta es eved on that assessment woud, presumaby, be pad by the new
owners. The ta es so coected woud be used by the State to defray the e penses
of government. Yet shoud none of the nhabtants of that State he permtted
a edera ncome ta deducton for ta es pad nay, we observe that
respondent s ta abe ncome for 1934 was for the most part derved from her rea
estate. Wth the e cepton, agan, of eght three hundred s ty-ffths of the
ta on the parce acqured anuary 8, 1934 that parce yeded respondent no
ncome for the frst eght days of the ta year one can not magne a cearer
economc case for the deducton.
s Indcated by our reasonng, however, respondent shoud not be permtted
to deduct a sma fracton (eght three hundred s ty-ffths) of the ta on one of
her hodngs. Indeed for aught that appears n the record she coud proceed
under the New ersey apportonment statute and recover that sum. It foows
that a sght error was commtted n aowng respondent to deduct the fu
amount camed n her return for ta es. The cause Is accordngy remanded
to the oard of Ta ppeas for further proceedngs In conformty wth the
vews e pressed In ths opnon.
u Genera Counse s memorandum so hods, sayng:
(he ureau has never taken the poston that In so far as the accrua of
rea property ta es s concerned the owner must be personay abe for such ta es

In the norma course of events the owner of rea property n New ersey on October
1 of anv Rven year w pay the ta es eved as of thnt date. Ths s suffcent for the
purpose of accrua. (G. C. M. 15305. C. . I -2 (1935), 80-83.)
Ths rung s not n harmony wth the theory, generay announced, that rea estate
ta es accrue In the absence of persona abty at the tme the ta en takes efrWt
(see eMmme v. Commssoner, 39 . T. ., 989, 993, and eases there cted (Income ta_
Thomson et a. v. Unted States, 8 . (2d), 175 (estate ta ). arborne v. Comm sn,, rr
40 . T. ., 721, 732 (estate ta ). Peopes Water rf Oas Co. v. Cty of Yaneouver 1
(2d), 909 (C. C. . 9) ( accrued used n contract)), tnke many |ursdctons how
ever, the attachment of the ta en occurs n New ersey as the ast rather than the
frst step n the ta cyce. Snce there s no use accrung ta es whch nre nrendv -
tnquent. the Genera Counse s faure to foow the genera theory s ready uners tuv
abe. s poston, on the other hand, s open to the practca ob|ecton that no ew
ersey ta payer knows what amount to accrue between October 1 (date of assessment Tw
December 31 (the end of the edera ta year) ( s, Deductons for ccrued Tas |
Ta Mag., 1471). ut f the accrua date Is shfted hack to the tme the amount of tn
has been f ed, two nstaments w have aready become denquent. We recte th
demma n order to reemphasze the dvergence n approach and prncpe between v.2.
accrua bass cases aDd the case at bar. e
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127
23(e), rt. 23(e)-.
S CTION 23(e). D DUCTIONS ROM GROSS
INCOM : LOSS S Y INDI IDU LS.
rtce 23(e)-: Losses by ndvduas. 1940-4-10150
Ct. D. 1434
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
1. Gross Income Deducton Loss on Sae of Stock by Ind-
vdua to Whoy Owned Corporaton.
ta payer, whoy ownng a corporaton and drectng Its trans-
actons whch were restrcted argey to operatons n buyng
securtes from or seng them to the ta payer, s not entted,
under secton 23(e) of the Revenue ct of 1932, to deduct a oss
arsng n 1932 from the sae of securtes to the corporaton at a
prce ess than ther cost to hm.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (102 . (2d), 45 ), reversed.
Supreme Court of the Unted States.
oseph T. ggns, Coector of Interna Revenue for the Thrd Dstrct of New
York, pettoner, v. ohn Thomas Smth.
0 S. Ct, 305.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
anuary 8, 1940.
opnon.
Mr. ustce Reed devered the opnon of the Court.
Certorar was aowed1 from the udgment of the Crcut Court of ppeas
for the Second Crcut on account of an asserted confct between the decson
beow and that of the Crcut Court of ppeas for the Seventh Crcut n
Commssoner v. rffths.
The ssue consdered here s whether a ta payer under the crcumstances
of ths case Is entted to -deduct a oss arsng from the sae of securtes
to a corporaton whoy owned by the ta payer. The statute Invoved s secton
23(e) of the Revenue ct of 1932.
The Innsfa Corporaton was whoy owned by the ta payer, Mr. Smth.
It was organzed n 192 under the aws of New ersey. The offcers and
drectors of the corporaton were subordnates of the ta payer. Its trans-
actons were carred on under hs drecton and were restrcted argey to
operatons n buyng securtes from or seng them to the ta payer. Whe
Its accounts were kept competey separate from those of the ta payer, there
s no doubt that Innsfa was hs corporate sef. s deangs by a corporaton
offered opportuntes for ncome and estate ta savngs, Innsfa was created
to gan these advantages for ts stockhoder. One of ts frst acts was to
take over an opton beongng to the ta payer for the acquston by e change
308 U. S.. .
102 . (2d). 4.r .
103 . (2d), 110. affrmed nom. rffths v. CommUsoner (308 U. S., ), No. 49
October term 1039. decded December 18, 1939.
M7 Stat., 1C9, 179-180:
Sec 23. Deductons from Onoss Income.
In computng net ncome there shn be aowed as deductons :
(e) Lowes oy ndvduas. Sub|ect to the mtatons provded In subsecton (r) of
ths secton, In the case of an ndvdua, osses sustaned durng the ta abe year and
not compensated for by nsurance or otherwse
(1) f ncurred n trade or busness: or
(2) f ncurred n any transacton entered nto for proft, though not connected wth
the trade or busness .
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23(e), rt. 23(e)- .
12S
of a bock of Chryser common stock. Through mutua transactons In buyng
and seng securtes, and recevng dvdends, the baance of accounts be-
tween Innsfa and the ta payer resuted, on December 2(), 1932, n an n-
debtedness from hm to Innsfa of neary 70,000. On that date, as a parta
payment on ths ndebtedness, a number of shares of stock were sod to the
corporaton by the ta payer at market. The securtes sod had cost the
ta payer more than the prce charged to the corporaton, and n carryng out
the transacton the ta payer had In mnd the ta consequences to hmsef.
In computng hs net ta abe ncome for 1032, the ta payer deducted as a
oss the dfference between the cost of these securtes and ther sae prce
to hs whoy owned corporaton. The Commssoner of Interna Revenue
rued aganst the cam, whereupon respondent pad the ta and brought
ths sut for refund n the Unted States Dstrct Court for the Southern
Dstrct of New York. The case was tred before a |ury and the verdct
was adverse to the ta payers cam that the purported saes of these secur-
tes to Innsfa marked the reazaton of oss on ther purchase. On appea
the |udgment was reversed and the case remanded to the dstrct court for
a new tra. It was the opnon of the court of appeas that the facts as
detaed above, as a mutter of aw, estabshed the transfer of the securtes
to Innsfa as an event determnng oss.
Under secton 23(e) deductons are permtted for osses sustaned durng
the ta abe year. The oss s sustaned when reazed by a competed transac-
ton determnng ts amount. In ths case the |ury was nstructed to fnd
whether these saes by the ta payer to Innsfa were actua transfers of prop-
erty out of Mr. Smth and nto somethng that e sted sepaate and apart
from hm or whether they were to be regarded as smpy a transfer by
Mr. Smth s eft hand, beng hs ndvdua hand, nto hs rght hand, beng
hs corporate hand, so that n truth and fact there was no transfer at a.
The |ury ag .eed the atter stuaton e sted. There was suffcent evdence of
the ta payer s contnued domnaton and contro of the securtes, through stock
ownershp n the Innsfa Corporaton, to support ths verdct, even though
ownershp n the securtes hnd passed to the corporaton n whch the ta payer
was the soe stockhoder. Indeed ths domnaton and contro s so obvous
n a whoy owned corporaton as to requre a peremptory nstructon that no
oss In the statutory sense coud occur upon a sae by a ta payer to such
an entty.
It s cear an actua corporaton e sted. Numerous transactons were car-
red on by t over a perod of years. It pad ta es, State and Natona,
franchse and ncome. ut the e stence of an actua corporaton s ony
one ncdent necessary to compete an actua sae to t under the Revenue ct.
Tte, we sha assume, passed to Innsfa but the ta payer retaned the
contro. Through the corporate forms he mght manpuate as he chose the
e ercse of sharehoder s rghts n the varous corporatons, ssuers of the
securtes, and command the dsposton of the securtes themseves. There
s not enough of substance n such a sae nay to determne a oss.
The Government urges that the prncpe underyng Gregory v. Teverng
fnds e presson n the rue cang for a reastc approach to ta stuatons.
s so broad and unchaenged a prncpe furnshes ony a genera drecton,
t s of tte vaue n the souton of ta probems. If, on the other hand,
the Gregory case s vewed as a precedent for the dsregard of a transfer of
assets wthout a busness purpose but soey to reduce ta abty, t gves
support to the natura concuson that transactons, whch do not vary con-
tro or change the fow of economc benefts, are to be dsmssed from con-
sderaton. There s no uson about the payment of a ta e acton. ach
ta , accordng to a egsatve pan, rases funds to carry on government. The
purpose here s to ta earnngs and profts ess e penses and osses. If one or
the other factor n any cacuaton s unrea, t dstorts the abty of the par-
tcuar ta payer to the detrment or advantage of the entre ta payng group.
The ta payer ctes urnet v. Commonweath Improvement Co. as a precedent
for treatng the ta payer and hs soey owned corporaton as separate enttes.
urnett v. uff (2S8 . R.. 150. f).
3 U S 415 IC t D. C. . I -1. 103 (1035)1.
Tf Ztvnc v. Whte (301 U. S. 332. 537 ICr. I 1232, C. . 1937-1, 224 ).
287 U. S.. 415 ICt. D. 22. C. . II-1. 277 (1033) .
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129
23(e), rt. 23(e)-.
In that case the corporaton sod stock to the soe stockhoder, the estate of
P. . . Wdener. The transacton showed a book proft and the corporaton
sought a rung that a sae to ts soe stockhoder coud not resut n a ta -
abe proft. Ths Court concuded otherwse and hed the dentty of cor-
poraton and ta payer dstnct for purposes of ta aton. In the Common-
weath Improvement Co. case, the ta payer, for reasons satsfactory to tsef
vountary had chosen to empoy the corporaton n ts operatons. ta -
payer s free to adopt such organzaton for hs affars as he may choose and
havng eected to do some busness as a corporaton, he must accept the ta
dsadvantages.1
On the other hand, the Government may not be requred to acquesce n
the ta payer s eecton of that form for dong busness whch s most ad-
vantageous to hm. The Government may ook at actuates and upon de-
termnaton that the form empoyed for dong busness or carryng out the
chaenged ta event s unrea or a sham may sustan or dsregard the effect
of the fcton as best serves the purposes of the ta statute. To hod other-
wse woud permt the schemes of ta payers to supersede egsaton n the de-
termnaton of the tme and manner of ta aton. It s command of ncome and
ts benefts whch marks the rea owner of property.
Such a concuson, urges the respondent, s nconsstent wth the pror nter-
pretatons of the ncome ta aws and consequenty unfar to hm. e ponts
to the decsons of four courts of appeas whch have hed osses determned
by saes to controed corporatons aowabe and further cas attenton to
the fact that the oard of Ta ppeas has consstenty reached the same con-
cuson.14 ut ths |udca and admnstratve constructon has no sgnfcance
for the respondent. The ureau of Interna Revenue has nsstenty urged
nce ebruary IS, 1930, the date of the oard of Ta ppeas decson n
one v. erernff, that a transfer from a ta payer to a controed corporaton
was neffectve to cose a transacton for the determnaton of oss. very
case cted by respondent n the courts of appeas and before the oard of Ta
ppeas found the Government supportng that contenton. The oard s rung
n the ones case was standng unreversed at the tme of the transacton here
nvoved, December 29, 1932. It was ony after the transactons here nvoved
and after the reversa of the oard n the ones case on pr 23, 1934, or ths
Court s refusa of certorar on October 8, 1934, that the oard of Ta ppeas
and the courts of appeas, over Government protests, rued n ne wth the
opnon of the Court of ppeas of the Dstrct of Coumba n the ones case.
If the ureau s stand n the ones case represented a change n admnstratve
practce, there can be no doubt that the change operated vady at east from
1930 on.1 fter the ones defeat the Government sought reef n Congress
and after the |udgment In Commssoner v. Grffth , supra, certorar here on
a confct n prncpe between crcuts. Certany there was no acquescence
by the Government whch woud |ustfy the ta payer n reyng upon pror
nterpretatons of the aw.
See aro en v. oard of Supervsors (282 U. S., 10) : oton v. owers (287 T . S.,
404) : urnet v. Cark (287 U. S., 410 Ct. D. 20. C. . II-1. 175 (1033) 1).
MCf. dcard v. Che Copper Co. (270 U. S., 452, 400 T. 1 . 3S57, C. . -, 410
(192C) ).
Lucas v. ar (281 U. S., I) : Corss v. owers (281 T . S., 370 Ct. D. 188, C. .
I -1, 254 (1030) ) Grffths v. Commssoner (308 U. S., , No. 40, October term 1930,
decded December 18, 1930).
ones v. ererng (71 . (2d), 214) ( pr 23, 1034. reversng 18 . T. ., 1225,
decded ebruary 18, 1930), certorar dened. October 8. 1034 (203 U. S., 583) Comms-
soner v. drdye (70 . (2d). 29) (November 4, 1935, affrmng OT. a., 1322
934)
memo:
T. (2d), 1301 ( pr 18, 1038. affrmng . T. . memorandum
decded uy 31. 1934) Commssoner v. Uc reery (83 . (2d), 8171 (May : 103
affrmng . T. . memorandum opnon of une 19. 103 )) : oster v. Commssoner (9U
-- -morandum opnon of December 23,
1(135) Commssoner v. ohnson (104 . (2d), 140) ( une 1, 103O. nUrmns 37 . T. .,
155, decded anuary 21. 1938), affrmed by an equay dvded Court (30S U. S.. ),
No. 317. October term 1030, decded December 11. 1030.
Davd Stetrart v. Commssoner (17 . T. , 004) Corrado t Gaard, Inc., v. Com-
mssoner (22 . T. ., 847) dward Securtes Corporaton v. Commssoner (30 . T. .,
818) Raph ochstettcr v. Commssoner (34 . T. ., 701) ohn Thomas Smth v.
Commssoner, supra (40 . T. ., 387).
18 . T. ., 1225, a rehearng affrmed May 20, 1032, unpubshed.
everng v. Irsftre O Co. (308 T . S., ), No. 1, October term 1939, decded
November . 1039.
Cf. Sanford v. Commssoner (308 U. S., ), No. 34, October term 1939. decded
Notembcr . 1939.

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23(e), rt. 23(e)- .
130
Respondent makes the further pont that the pnssage of secton 24(a)0 of
the Revenue ct of 1334 whch e pcty forbds any deducton for osses
determned by saes to corporatons controed by the ta payer s convncng
proof that the aw was formery otherwse. Ths does not foow. t most
t s evdence that a ater Congress construed the 1032 ct to recognze sepa-
rabe ta abe denttes between the ta payer and hs whoy owned corporaton.
s the new provson goes much further than the former decsons n dsre-
gardng transfers between members of the famy t may we have been passed
to e tend as we as carfy the e stng rue. The suggeston s not suffcenty
persuasve to gve vtaty to a fute transfer.
The ta payer has preserved two ob|ectons to the dstrct udge s rungs
on the evdence. e cams that evdence as to transactons between the ta -
payer and the corporaton whch took pace pror to the sae here nvoved
was remote and hghy pre|udca. We thnk t apparent that ths evdence
was entrey reevant to the present ssue: the hstory of the ta payer s rea-
tons wth the corporaton shed consderabe ght on the actua effect of the
sae n queston. The second contenton s that the dstrct |udge charged the
|ury to gve ess effect to the book entres of Smth and the corporaton than
they were entted to under the appcabe book entry statute. The aeged
departure from the statute has but dubous support n the record, restng on
a snge statement of the |udge fted from ts conte t as part of an e tended
cooquy wth counse. In the crcumstances there s no mert n the cam of
pre|udce to the ta payer.
The |udgment of the crcut court of appeas s reversed and that of the
dstrct court affrmed.
Reversed.
utce 23(e)-: Losses by ndvduas. 1940-1 -10237
G. C. M. 219G
R NU CTS O 1932 ND 1934.
Tn vew of the decson n Commssoner v. eckman Wnthrop
(08 ed. (2d), 74), G. C. M. 14207 (C. R I -1, OS (193.3)),
reatng to the ta abe year n whch the stockhoders of the M
Company sustaned a oss due to qudaton of that corporaton,
s revoked.
Recommended that nonacquescence n IScecman Wnthrop v. Com-
mssoner (38 . T. ., 314, nonacquescence. C. . 1937-2, 53) be
wthdrawn.
dvce s requested whether, n vew of the decson of the Crcut
Court of ppeas for the Second Crcut n Commssoner v. Ieekman
Wnthrop (98 ed. (2d),74), G. C. M. 14207 (C. . I -1,(58 (1935))
shoud be revoked.
G. C. M. 14207, supra, nvoved the queston whether stockhoders
of the M Company who sustaned osses upon the qudaton of that
company coud deduct such osses n the year 1932 or n the year 1934.
The facts upon whch the rung was based are as foows:
In 1932 the assets of the M Company conssted of bonds of another company
and cash. Pursuant to the pan of qudaton, the stockhoders n that year
surrendered ther stock and receved from the corporaton the bonds of the
17 48 Stat., fso. r,m :
Sue. 24. Itkms Not Dedcctbk.
(a) Genera rue. In computng net ucome no deducton sha n any case be aowed
n respect of

(0) Loss from saes or e changes of property, drecty or ndrecty. ( ) between
members of a famy, or ( ) e cept n the case of dstrbutons n qudaton, between
an Indvdua an a corporaton n whch such ndvdua owns, drecty or ndrecty, more
than 50 per centum n vaue of the outstandng stock. or the purpose of (hs para-
graph (( ) an ndvdua sha e consdered as ownng the stock owned, drecty or
ndrecty, by hs famy: and (D) the famy of an ndvdua sha Incude ony hs
brothers and ssters (whether by the whoe or haf bood), spouse, ancestors, and nea
descendants.
49 Stat., 1501 (28 . S. C, secton 093).
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131
23(1), rt. 23()- .
other company together wth partcpaton certfcates enttng the stockhoders
to proportonate nterests n fna dstrbuton. It was estmated that the amount
of cents per share woud be pad to hoders of the partcpaton certfcates
and that amount was pad on anuary , 1934.
It was concuded that the stockhoders coud not deduct ther osses
unt the year 1934 notwthstandng the fact that cash of ony a few
cents per share (ess than 1 per cent of the company s assets) repre-
sented the ony remanng asset of the M Company after the surrender
of stock by the stockhoders n 1932 and the dstrbuton to them by
the M Company of bonds of another corporaton and partcpaton
certfcates enttng the stockhoders to a further, cash dstrbuton
whch was accuratey determnabe n 1932.
In Commssoner v. eecman Wnthrop, upra, nvovng ke
facts, the Crcut Court of ppeas for the Second Crcut, n affrm-
ng the decson of the oard of Ta ppeas ( eek nan Wnthrop v.
Commssoner, 3 . T. ., 314, nonacquescenee, C. . 1937-2, 5 ),
hed that the oss was sustaned n 1932 and was deductbe for that
year. Under the partcuar facts nvoved, ths offce s of the opnon
that the decson of the court, affrmng the decson of the oard,
s correct.
The decson n the Wnthrop case s dstngushabe from the dec-
son of the Court of Cams n Dresser et a. v. Unted States (55 ed.
(2d), 499, certorar dened, 287 U. S., 35, Ct. D. 503, C, . I-1,
2 7 (1932)). The corporaton n that case had remanng, after the
nta dstrbuton, vauabe tangbe assets, the amount of whch was
not then determnabe.
In vew of the foregong, G. C. M. 14207, supra, s revoked, and t s
recommended that nonacquescenee n the decson of the oard n
cekman Wnthrop v. Commssoner, supra, be wthdrawn. (See
page 5, ths uetn.)
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 23(1). D DUCTIONS ROM GROSS
INCOM : D PR CI TION.
btce 23()- : Obsoescence. 1940-5-1015
Ct. D. 1437
INCOM T R NU CT O 1928 D CISION O SOI R M COURT.
1. Deducton Obso|sscence Storage or Property Not Needed
n usness.
company whch acqured two tte search pants as the resut of a
statutory consodaton or merger of tte companes s not entted to
a deducton for obsoescence of one of the pants whch t stored n
order to effect economes of operaton. More than nonuse or dsuse
s necessary to estabsh obsoescence wthn the meanng of secton
23(k) of the evenue ct of 192S and artce 20 of Reguatons 74
obsoescence connotes functona deprecaton and requres that the
operatve cause of the present or growng useessness arse from
e terna forces whch make t desrabe or mperatve that the
property he repaced. The pant was dscarded ony as a pro mate
resut of the company s vountary acton n acqurng e cess capacty.
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23(1), rt. 23()- .)
132
2. Sut C, m for Refund ass.
In a sut for refund of ta es based soey upon a cam for deduc-
ton on account of obsoescence under secton 23(k) of the Revenue
ct of 1928, the pettoner s precuded from changng the bass of ts
cam to osses sustaned under secton 23(f), In the absence of a
proper amendment or of facts estabshng a waver by the Govern-
ment.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1939) (102 . (2d), 582), amrmed.
Supreme Court of the Unted States.
The Rea state-Land Tte d Trust Co., pettoner, v. The Unted States of
merca.
309 U. S., 13.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
anuary 15, 1040.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Pettoner, a Pennsyvana corporaton, was formed n October, 1927, as a
resut of a statutory consodaton or merger of three companes. Two of the
consttuent companes owned tte search pants whch were among the assets
acqured by pettoner as a resut of the consodaton. Whe It was known that
two tte pants woud be acqured on the consodaton, there was at that tme
no defnte pan for ther dsposton. ut an Immedate nvestgaton was made
and t was decded to store one of the pants In order to effect economes of opera-
ton. -That was done substantay smutaneousy wth the consummaton of the
consodaton. bout two months thereafter t was decded that the pant
retaned n use was adequate and that the one n storage woud not be needed.
though for a bref perod some sght use appears to have been made of the
stored pant,1 t was not kept up to date by the addton of current recordngs.
s a resut t had ony a savage vaue by October 31, 1928. Meanwhe, nego-
tatons for ts sae had been unsuccessfu.
In ths acton pettoner seeks a refund of ncome ta es for the fsca year
ended October 31, 1928, based on the refusa of the coector of nterna revenue
to aow a deducton for obsoescence of ths pant. It had been carred on the
books of the consttuent company at 275,000 and was brought nto the consoda-
ton at S03,000. The dstrct court, however, found that ts vaue on March 1,
1913, was . 1,000,000 on October 31, 1928, 125,000 makng an actua oss of
875,000. whch that court aowed as a deducton for obsoescence for the ta abe
year 192S. It accordngy aowed a refund. That |udgment was reversed by the
crcut court of appeas (102 P. (2d), 582). We granted certorar because of
the asserted conct of that decson wth Crooks v. ansas Cty Tte Trust
Co. (40 . (2d), 92.8).
Secton 23(k) of the Revenue ct of 1928 (45 Stat., 791) aows as a deducton
from gross ncome a reasonabe aowance for the e hauston, wear and tear
of property used In the trade or busness, ncudng a reasonabe aowance for
obsoescence. dmttedy, f the deducton s aowed under ths provson t
must be for obsoescence, as there has been no e hauston, wear or tear of the
tte pant wthn the meanng of the ct. Now t s true that n the popuar
sense a thng whch s obsoete s one whch s no onger used, a meanng whch
gves coor to pettoner s cam for deducton snce there s no queston that the
tte pant here nvoved s no onger utzed to any degree whatsoever. ut the
term aowance for obsoescence, as used n the ct and n the Treasury regua-
tons, has a narrower or more technca meanng than that derved from the
common, dctonary defnton of obsoete. The Treasury reguatons1 state the
1 vdence of use subsequent to th consodaton or morscr Is qute tenuous, the ony
specfc Instances occurrng mmedatey pror to the actua consummaton of the con-
sodaton on October 31. 1027
Treasury Reguatons 74, artce 20G. promugated under the Revenue ct of 1028,
provdes n fu :
Wth res oct to physca property the whoe or any porton of whch In ceary shown
by the ta payer s beng affected by economc mndtons that w resut n Its beng
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133
23(1), rt. 23(1)- .
crcumstances nnder whch an aowance for obsoescence of physca property
may be aowed, vz, where such property s beng affected by economc cond-
tons that w resut In Its beng abandoned at a future date pror to the end of
ts norma usefu fe, so that deprecaton deductons aone are Insuffcent to
return the cost (or other bass) at the end of ts economc term of usefuness.
Ths Court, wthout undertakng a comprehensve defnton, has hed that ob-
soescence for purposes of the Revenue cts may arse from changes n the art,
shftng of busness centers, oss of trade, nadequacy, supersesson, prohbtory
aws and other thngs whch, apart from physca deteroraton, operate to cause
pant eements or the pant as a whoe to suffer dmnuton In vaue, (Unted
State Cartrdge Co. v. Unted States, 281 I . S., 511, 51G. See aso urnet v.
agara as rewng Co., 282 U. S., 0-18, 54.) Such specfc e ampes ustrate
the type of economc condtons whose effect on physca property s recognzed
as obsoescence by the Treasury reguatons. Others coud be mentoned whch
smary cause or contrbute to the reentess march of physca property to the
unk pe. ut n genera, obsoescence under the ct connotes functona de-
precaton, as t does n accountng and engneerng termnoogy. More than
odum- or dsuse s necessary to estabsh t. To be sure, reasons of economy
may cause a management to dscard a tte pant ether where It has become
outmoded by Improved devces or where It Is acqured as a dupcate and
therefore s useess. ut not every decson of management to abandon factes
or to dscontnue ther use gves rse to a cam for obsoescence. or obsoescence
under the ct requres that the operatve cause of the present or growng use-
essness arse from e terna forces whch make t desrabe or Imperatve that the
property be repaced. What those operatve causes may be w be dependent
on a wde varety of factua stuatons. New and modern methods appear
to have been one of the rea causes of abandonment of the tte pant n Crooks v.
ansas Cty Tte d Trust Co., supra. Suffce t here to say that no such e terna
causes are present, for the record shows tte more than the desre of a manage-
ment to emnate one pant whch was a needess dupcaton of another but
whch functonay was adequate. The fact that fewer empoyees were requred
to operate the one retaned than the one dscarded s nconcusve here. or
ths s not the case of acquston of a new pant to take the pace of one outmoded
or ess effcent. Rather the concuson s rresstbe that the pant was dscarded
ony as a pro mate resut of pettoner s vountary acton n acqurng e cess
capacty.
In vew of ths concuson, we do not reach respondent s further ob|ectons to
aowance of ths cam on grounds of obsoescence.
ut pettoner contends that n any event t has abandoned the pant and hence
s entted to a deducton under secton 23(f) of the 1028 ct whch aows a
corporaton to deduct osses sustaned durng the ta abe year and not com-
pensated for by nsurance or otherwse. Whether pettoner has satsfed those
requrements we do not decde, for ts cam for refund was based e cusvey
and soey on the ground that t was entted to an aownnce for obsoescence.
ence, n the absence of a waver by the Government (Tueker v. e ander, 275
. S., 228), or a proper amendment, pettoner s precuded n ths sut from
restng ts cam on another ground. (Unted States v. et d Tarrant Mfg. Co.,
3 U. S.. 2 9 Ct. D. 33 , C. . -, 431 (1931) .) There has been no amend-
ment and there are no facts estabshng a waver.
ccordngy, the |udgment of the crcut court of appeas s affrmed.
Mr. ustce Roberts and Mr. ustce Reed took no part n the consderaton
or decson of ths case.
handoned at a future date pror to the end of Its norma usefu fe, so that deprecaton
deetons aone are Insuffcent to return the cost (or other bass) at the end of ts
rrmnmc term of usefuness, a reasonabe deducton for obsoescence. In addton to
TpDreo-ton may be aowed In accordance wth the tacts obtanng wth respect to each
hem or property concernng whch a cam for obsoescence s made. No deducton for
woescencp w be permtted merey because, n the opnon of a ta payer, the property
mv become obsoete at some ater date. Ths aowance w be confned to such porton
f the property on whch obsoescence Is defntey shown to be sustaned and can not be
heM an.. ab e to an entre property uness a portons thereof are affected by the cond-
tons to whch obsoescence Is found to be due. See aso ureau of Interna Revenue
U er dvaIcedry cTOuntn: (3rd ed. 1033). ch. 10: atfed ccountng 0827),
th Saers, Deprecaton Prncpes and ppcatons (3rd cd 1030), eh. 4 eater,
Deprecaton (1924) Transactons, mer. Soc. C. .. voume 81, page 152 (1917)
Mrston ce. ngneerng auaton (103 1. pages 83 8.)
2 Pau ft Mertens, . w of edera Income Ta aton, secton 0.114.
ccordng to pettoner s own wtnesses, the dscarded pant was a more compete
rant than anv other pant n the cty and t had a background whch went a the
Ira| back to Wam Penn.
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43, rt. 43-2.
134
P RT I . CCOUNTING P RIODS ND M T ODS OP
CCOUNTING.
S CTION 43. P RIOD OR W IC D DUCTIONS
ND CR DITS T N.
rtce 43-2: When charges deductbe. 1940-15-10230
Ct. D. 1451
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
1. Deducton Loss Contract of Guaranty Payment by Note.
The ta payer, wth other stockhoders of a bank whch merged
wth another n 1920, e ecuted a contract of guaranty, and n 1931,
at the request of the bank that the guaranty be put nto bankabe
form, gave notes to the bank, wth coatera. In 1932 the bank
caed upon the ta payer to make fna settement of hs obgatons,
and he accordngy made hs note to the bank, and receved back
notes prevousy gven or ndorsed by hm. ed: That the ta -
payer, who kept hs accounts upon a cash bass, was not entted to
a deducton n 1932 under secton 23(e) of the Revenue ct of 1932
for a oss upon hs contract of guaranty, snce nether the sub-
sttuton of hs own note nor the gvng of coatera consttuted
a payment n cash or ts equvaent.
2. oard of Ta ppeas ndngs of act Lega ffect Re-
vewabe by Coubt.
The ega effect t f an entre transacton dscosed by fndngs of
the oard of Ta ppeas, n the appcaton of secton 23(e) of the
Revenue ct of 1932, as to the deducton of oss sustaned durng
the ta abe year, s revewabe by the crcut court of appeas, and
ts decson s revewabe by ths Court.
3. Decson oowed.
ckert v. urnet (1931) (283 U. S., 140 Ct. D. 325, C. . -,
241 ) foowed.
4. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ourth
Crcut (1939) (10 . (2d), 330), reversng unreported decson
of the Unted States oard of Ta ppeas (1938), reversed.
Supreme Coubt of the Unted States.
Guy T. ererng, Commssoner of Interna Revenue, pettoner, v. uan Prce.
0 S. Ct., 73.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ourth Crcut.
March 25, 1940.
OPINION.
Mr. Chef ustce ughes devered the opnon of the Court
Respondent n hs ncome ta return for 1932 camed a deducton for a oss
upon a contract of guaranty. The oard of Ta ppeas sustaned the Com-
mssoner n refusng to aow the deducton, and the crcut court of appeas
reversed. (10 . (2d), 33 .) ecause of an aeged confct wth ckert v.
urnet (283 U. S., 140 Ct. D. 325, C. . -, 241 (1931) ), enkns v. t good
(C. C. . 2) (101 . (2d), 17), and errs v. Commssoner (C. C. . 2)
(102 . (2d), 985), we granted certorar. anuary 15, 1940.
The facts as found may be thus summarzed: In 1929 the tantc ank
Trust Co. of Greensboro, N. C, was merged wth the North Carona ank
Trust Co. The atter accepted condtonay certan assets of the tantc
ank caed assets, and certan other assets, caed assets, were
pedged to that bauk wth authorty to charge aganst them any osses whch
mght be estabshed n reazng upon the assets. Respondent and three
other stockhoders of the tantc ank e ecuted an agreement of guaranty,
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135
I 43, rt. 43-2.
to the effect that If the North Carona ank faed to reaze a certan sum
from the assets wthn two years they woud make up the defcency n
an amount not e ceedng 500,000. The agreement provded that any sum
reazed from the assets were to be apped frst to any osses occurrng
n the assets and then to the rembursement of the four guarantors. The
perod for reazng upon the assets was e tended unt September, 1932.
In une, 1931, the North Carona ank advsed the guarantors that the
assets were not n such shape that the bank coud use them to the e -
tent necessary for bankng purposes and requested the guarantors to put ther
guaranty nto a bankabe form so that t coud be used by the bank to obtan
credt. Respondent accordngy gave to the bank hs note for 125,000 and
ndorsed the note of C. W. God, another guarantor, for a ke amount and as-
sgned certan securtes to the bank as coatera for the payment of hs guaran-
ty. The bank agreed that respondent s utmate abty shoud not e ceed
250,000. t the end of 1031, the guaranty agreement was st n effect. The
assets were st n the process of coecton. No demand had been made
upon respondent. Whe t was known that there woud be some oss to the
guarantors, t was not defntey known n 1931 what the oss woud be, and the
guarantors had reason to beeve that there woud be a substanta remburse-
ment from the assets of any osses.
In the eary part of 1932, fnanca condtons beng worse, the bank con-
cuded that t woud have to coect upon the guaranty and caed upon
respondent to make a fna settement of hs obgatons. ccordngy, n
March, 1932, respondent made hs note to the bank for_ 250,000 and receved
back the two notes. The oard of Ta ppeas found that both respondent
and the bank consdered ths to be a fna payment of the two notes whch had
een gven under the guaranty. The bank retaned the same coatera for the
250,000 note that t had prevousy hed, and n December, 1932, respondent
substtuted therefor certan securtes of hs own.
Respondent camed a oss n 1932 In the amount of 125,000, that s, for hs
one-haf of the guaranty. e dd not then cam a oss on the other one-haf
because he st had a cam aganst the estate of God (who had ded n 1932)
for rembursement. or that one-haf, representng God s part of the guaranty,
respondent camed a oss n 1933 and that deducton s not here nvoved.
Respondent kept hs accounts upon a cash bass. The oard of Ta p-
peas rued that respondent was not entted to the deducton of 125,000 n
1932, upon the ground that he made no outay of cash n the purported pay-
ment : he had satsfed hs abty as guarantor by a shftng of the form of
hs abty. s oss woud be deductbe n the year n whch he pays the
note.
Respondent nssts ntay that the transacton n 1932 was consdered by
the partes as consttutng a payment of respondent s abty under the
guaranty, and that ths payment s a fact found by the oard of Ta ppeas
and s not open to revew. ut the fndngs of the oard dscose the entre
transacton, and Its ega effect n the appcaton of secton 23(e) of the
Revenue ct of 1932, as to the deducton of osses sustaned durng the ta abe
year, was revewabe by the crcut court of appeas. Its decson on that pont
s revewabe here.
oth the Commssoner and the oard of Ta ppeas reed upon our
decson n ckert v. urnet, supra. In that case, the ta payer s return was
ot the cash bass, and the queston was as to a cam of deducton for the
year 1925. The ta payer and hs partner were |ont ndorsers of notes ssued
by a corporaton they had formed. In 1925, n settement of ther abty for
an ascertaned amount, they made a ont note for the amount due to the
bank that hed the corporaton s pnper, receved the od notes, marked pad,
and destroyed them. We affrmed the rung that the deducton shoud not
be aowed.
The court beow consdered that decson as defnte authorty ony for the
houng that a oss of the sort set forth was not deductbe under the bad
debt provson of the statute. That ndeed was sated n the opnon as
the ta payer s cam. ut the ta payer had aso prosened here as an ater-
natve ground the theory of a oss sustaned durng the ta abe year, a ground
whch the oard of Ta ppeas had consdered and hed to be untenabe.
(17 . T. ., 2 3. 2 5, 2 .) nd the Government argued both questons.
The Government dd not contend that the ta payer mght not at some tme
be entted to a deducton ether on account of a bad debt or for a busness
oss the soe queston In dspute was whether he was entted to the deduc-
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44, rt. 44-1.
13
ton n 1925, the year In whch hs note was gven, or n the ater year n
whch the ta payer s abty on the uote s actuay qudated by payment.
The reasonng of ths Court was broad enough to cover both aspects of the
case. We sad:
or the purpose of a return upon a cash bass, there was no oss n 1925.
s happy stated by the oard of Ta ppeas, the pettoner merey
e changed hs note under whch he was prmary abe for the corporaton s
notes under whch he was secondary abe, wthout any outay of cash or
property havng a cash vaue. deducton may be permssbe n the ta abe
year n whch the pettoner pays cash. The pettoner says that t was
defntey ascertaned n 1025 that the pettoner woud sustan the osses n
queston. So t was, f the pettoner utmatey pays hs note.
We thnk that ths decson s controng n the Instant case. s the return
was on the cash bass, there coud be no deducton n the year 1932, uness
the substtuton of respondent s note n that year consttuted a payment In
cash or ts equvaent. There was no cash payment and under the doctrne
of the ckert case the gvng of the ta payer s own note was not the equvaent
of cash to entte the ta payer to the deducton.
Respondent urges that hs note was secured, but the coatera was not pay-
ment, t was gven to secure respondent s promse to pay, and f that promse
to pay was not suffcent to warrant the deducton unt the promse was made
good by actua payment, the gvng of securty for performance dd not trans-
form the promse nto the payment requred to consttute a deductbe oss
n the ta abe year. .(See enkns v. tyood, 101 P. (2d), 17, 19.)
The |udgment of the crcut court of appeas s reversed and the decson
of the oard of Ta ppeas s affrmed.
It s so ordered.
Mr. ustce McReynods took no part n the decson of ths case.
INCOM T R NU CT OP 1032 D CISION O SUPR M COURT.
1. Income Wn N and to Whom Ta abe Dsregard of Corpo-
raton ormed as Condut Through Whch Income ready
Reazed by Ta payeb Was to he Pad to m n nnua
Instaments.
The pettoner n 1931 sod at a oss certan stock purchased n
192 , and was aowed a deducton therefor n that year. In 1933
he concuded negotatons for settement of a cam for fraud
aganst the seer n connecton wth the 1920 sae, by an arrange-
ment under whch he was to reacqure the shares, convey them to a
newy created corporaton whoy controed by hm, whch corpo-
raton n turn was to transfer the stock back to the seer for the
orgna purchase prce, such sum to be pad by the corporaton to
pettoner n annua nstaments over a perod of 40 years. The
essentas of ths scheme were carred out the transfer of the
shares to the seer beng made wthout reveang to hm the
e stence of the new corporaton, the pettoner gvng a persona
reease of a cams aganst the seer and personay recevng
the tota amount pad, whch he then turned over to the corpo-
raton. IrUI: That the pettoner havng been aowed a deducton
for the oss attrbutabe to the orgna transacton, and havng
recouped such oss through set enent of hs cam, the amount
of the settement was ta abe ncome to hm when pad n 1933,
notwthstandng the arrangement for Instament payments to hm
through the condut corporaton, and he s not entted to the
benefts of secton 44 of the Revenue ct of 1932.
S CTION 44. INST LLM NT SIS.
rtck 44-1: Sae of persona property on
nstament pan.
1940-1-10128
Ct. D. 1431
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137
44, rt. 44-1.
2. Decson ffbmkd.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (1039) (103 . (2(1), 110), reversng decson of the Unted
States oard of Ta ppeas (1938) (37 . T. ., 314), affrmed.
Supreme Court of the Unted States.
George T . Grffths, pettoner, v. Guy T. cverng, Commssoner of Interna
Revenue.
308 U. S., 3)5.
On wrt of certorar to the Crcut Court of ppeas for the Seventh Crcut.
December IS, 1039.
OPINION.
Mr. ustce rankfurter devered the opnon of the Court.
The case s here to revew a decson of the Crcut Court of ppeas for
the Seventh Crcut (103 . (2d), 110) reversng an order of the oard uf Ta
ppeas (37 . T. ., 314) whch had overrued a defcency assesr m nt by
the Commssoner of Interna Revenue n pettoner s ncome ta return for
1933. We granted certorar (308 U. S., ), because of an aeged confct
between the decson beow and that of the Crcut Court of ppeas for the
Second Crcut n Smth v. ggns (102 . (2d), 4.t ) (No. 140 ths term).
The facts are undsputed, and, for purposes of our decson, may be thus
abrdged: In 1920 Grffths, the pettoner, pad one Lay 100,000 for some stock.
The nvestment was unproftabe, and the upshot of a compcated seres of
transactons was aowance to Grffths by the Commssoner of a deductbe
oss of 92,500 for the year 1931 resutng from a sae of the stock by Grffths
to a famy corporaton. Thereafter, n 1932, Grffths Rot wnd of the fact
that Lay had defrauded hm n the 192 sae. Negotatons were begun for a
settement of Grffths cam aganst Lay, and by anuary, 1933, Grffths
awyer had devsed an arrangement for such a settement. The gst of the
arrangement was ths: Grffths was to reacqure the shares, convey them
to a corporaton newy created for the purpose of furtherng the scheme
and whoy controed by Grffths, whch n turn was to transfer the stock
hack to Lay for 100,000 to be pad by hm, and that sum was to be pad
over by the corporaton to Grffths n annua nstaments for 40 years, wth
nterest on the deferred payments.1 The essentas of ths scheme were
carred out. Its purpose to dsguse by ntervenng eaboratons what n
fact was a rescsson of the orgna purchase by Grffths for : U )0 was
made more manfest by these facts: Grffths personay reacqured and trans-
ferred the shares to Lay wthout reveang the e stence of the new cor-
poraton, gave Lay a persona reease of a cams aganst hm, and personay
receved from Lay the 100,000 whch he then turned over to the corporaton.
On these fndngs the Commssoner rued that Grffths, havng been aowed
a deducton for oss attrbutabe to the stock purchased from Lay and havng
now recouped that oss through settement of hs cam aganst Lay, was sub-
|ect to ta for the amount of the settement n 1933. We thnk the Comms-
soner was rght, and that the Crcut Court of ppeas propery reversed
(he oard of Ta ppeas.
The facts eave tte scope for ega e pcaton. Grffths had a cam for
fraud aganst Lay whch, when satsfed, wped out the oss for whch he had
receved an earer deducton. ad satsfacton of the cam come to hm wth-
out any condut, t woud have ndsputaby been hs ncome. The cam havng
been recognzed by Lay and cast nto a form reazabe by Grffths, a awyer s
Ingenuty devsed a techncay eegant arrangement whereby an ntrcate out-
ward appearance was gven to the smpe sae from Grffths to Lay and the
passage of money from Lay to Grffths. That was the cru of the busness to
Grffths, and that s the cru of the busness to us.
Of the tota sum pad, n,000 was to be apped by the corporaton n payment of a
persona ndebtedness owed by Grffths. Ths sum. of course, was ceary ncome to
pettoner. The remander was to be pad n nstaments by the corporaton to Grffths.
Pettoner contends that these Instaments aone are ta abe to hm as they are pad,
under the provsons of secton 44 of the Revenue ct of 1932 (ch. 12U9. 47 Stat., 1 9).
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138
We can not too often reterate that ta aton s not so much concerned wth
the refnements of tte as t s wth actua command over the property ta ed
the actua beneft for whch the ta s pad. (Corss v. owers, 281 U. S., 37 ,
878 Ct. D. 188, C. . I -1, 254 (1930) .) nd t makes no dfference that
such command may be e ercsed through specfc retenton of ega tte or
the creaton of a new equtabe but controed nterest, or the mantenance of
effectve beneft through the nterposton of a subservent agency. (Cf. Greg-
ory v. everng, 293 U. S., 4 5 Ct. D. 911, C. . I -1, 193 (1935) .)
gven resut at the end of a straght path, ths Court sad n Mnnesota Tea
Co. v. everng (302 U. S., 09, 13 Ct. D. 1305, O. . 1938-1, 288 ), s not
made a dfferent resut because reached by foowng a devous path. Legs-
atve words are not Inert, and derve vtaty from the obvous purposes at
whch they are amed, partcuary n the provsons of a ta aw ke those
governng nstament saes n secton 44 of the Revenue ct of 1932. Ta es
can not be escaped by antcpatory arrangements and contracts however sk-
fuy devsed by whch the fruts are attrbuted to a dfferent tree
from that on whch they grew. (Lucas v. ar, 281 U. S., I, 115.) What
Lay save, Grffths n reaty got, and on that he must be ta ed. The |udgment
Is affrmed.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101(1 ). MPTIONS ROM T
ON CORPOR TIONS.
R NU CT OP 1934.
Contrbutons by a corporaton to an empoyees beneft assocaton
composed of empoyees of te corporaton. (See G. C. M. 21323
page 97.)
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 111. D T RMIN TION O MOUNT O , ND
R COGNITION O , G IN OR LOSS.
rtce 111-1: Computaton of gan or oss. 1940-13-1021
Ct. D. 1448
INCOM T R NU CT O 028 D CISION O COURT.
1. Gan or Loss ass March 1, 1913, aue op Cemetery Prop-
erty Reta Saes Ony One ement n Dktebmn.no ab
Market aue Tota ass of Separate Sa|.es Can Not ceed
aue of Unsod Property n 1913.
In determnng the gan derved n 1931 from saes of cemetery
property acqured pror to March 1, 1913, reta saes of bura space
made pror to or durng the basc year are not concusve evdence
of the far market vaue of space unsod and avaabe n that year,
but consttute ony one eement to be consdered and weghed n
the ght of a other factors pertnent to the determnaton of vaue.
The tota of the bass for a of the separate saes n subsequent years
can not e ceed the vaue of the unsod and n 1913, and t s there-
fore mmatera whether the bass appcabe to the footage sod n
1931 be determned drecty or whether the vaue of the entre un-
sod and n 1013 be frst determned and then an aocaton made
to the space sod n 1931.
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139
I, rt. 111-1.
2. oard of Ta ppeas Determnaton of aue ndng
Concusve Upon Revew When Supported by Substanta
vdence.
It s wthn the dscreton of the oard of Ta ppeas to f an
ndependent fndng of the far market vaue of property as of March
1, 1913, after consderng a the evdence pertnent to the queston
of vauaton. Such a fndng, when supported by substanta ev-
dence, s n accordance wth aw and s concusve upon revew by
the court.
3. Decson ffrmed per curam.
Decson affrmed by per curam opnon of the Supreme Court on
ebruary 5, 1940.1
Unted States Crcut Court of ppeas for the Seventh Crcut.
Uontrose Cemetery Co., a Corporaton, pettoner, v. Commssoner of Interna
Revenue, respondent.
105 . (2d), 238.
Petton for revew of decson of the Unted States oard of Ta ppeas.
efore Sparks, Ma|or, and erner, Crcut udges.
une 21, 1939.
OPINION.
erner, Crcut udge: Ths petton for revew nvoves ncome ta es mposed
upon gans made n 1031 from the sae of bura space. The cemetery ots sod
n 1931 had been acqured pror to 1913 at a cost admttedy ess than the far
market vaue thereof on March 1, 1913, and the controversy here s over the
proper vaue of the unad|usted bass to be used n determnng the recognzed
gan n 1931.
The Commssoner of Interna Revenue (herenafter referred to as the Com-
mssoner ) f ed the vaue at 21.5 cents per square foot. The ta payer f heren-
after aso referred to as Montrose ) appeaed to the Unted States oard of
Ta ppeas (herenafter referred to as the oard ), whch determned the
vaue at 23 cents per square foot.
In 1902 one rcher, Chcago undertaker, founded the Montrose Cemetery Co.
and for 18 years unt hs death n 1920 personay managed and controed ts
operatons. In 1902 rcher purchased an 80.02-acre tract of and n the north-
west part of the cty of Chcago for the sum of 75,000, whch he mmedatey
transferred to Montrose n e change for ts entre capta sock of 300,000. In
1912 Montrose purchased an ad|acent tract of 19.485 acres for . 23,500 and a 20-
acre tract n 1918 for 20,000.
The ast two tracts of and are not consdered n ths case, because as yet they
have not been dedcated to cemetery purposes. owever, t shoud be noted that
the acquston vaues of these tracts dd not vary very much. In ths connecton,
the oheman Natona Cemetery, across the street from the Montrose Cemetery,
acqured 0.125 acres n 1902 for 00,000 and refused to buy 0 acres n 1910 for
55,000. The evdence ndcates that durng a these years the vaue of and
unmproved for cemetery purposes was around 1,200 an acre or 2.75 cents a square
foot.
y March 1, 1913 Montrose had made capta e pendtures n the sum of
77,19 .88 for budngs, furnture and f tures, horses, wagons, and toos. These
addtona capta assets were ndspensabe to the operaton of the cemetery, and
enabed t to compete wth the other 39 cemeteres n the Chcago area. Ths, of
course, factated the sae and ncreased the vaue of the unsod graves, Montrose s
man asset, mosty unreazabe on March 1, 1913.
Ths unreazabe asset on the basc date conssted of an avaabe net area
of 2,214,78 square feet of bura grounds. Of ths area 932,4 square feet were n
1 The Chef ustce on the date Indcated announced the foowng order :
No. 370, Montrose Cemetery Co., pettoner, v. Commssoner of Interna Revenue. On
wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
Per curam : s t appears that the oard of Ta ppeas receved and consdered the
evdence pertnent to the queston of the vauaton of the cemetery ots on March 1, 1913,
we fnd no ground for dsturbng ts rung. The |udgment of the crcut court of appeas
Is affrmed.
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111, rt. 111-1.
140
Improved sectons, the mprovement cost of whch s not dscosed by the record,
and 1,282,320 square feet were to be found n unmproved sectons. It s m-
portant to add that, of the 14,993. 7 square feet of bura space sod n 1931,
4,498.10 square feet were from the mproved area In 1913 and 10,495.57 were
from the unmproved area In 1913.
On the vauaton date 932,4 square feet of bura space were mproved, but
the record faed to revea the cost of mprovement. The record, however, does
dscose fgures as to the subsequent mprovements of the unmproved area n
1913. Montrose made saes of space from and unmproved n 1913 after havng
e pended ony about 8 cents per square foot for mprovements thereto. rom
1913 to 1931 4.99 cents per square foot was e pended, and counse for Montrose
uses ths fgure n hs bref, to mprove the and unmproved as of March 1,
1913, to saabe condton n 1931. In addton, subsequent Improvements costng
8.1 cents were made, whch benefted the area Improved and unmproved at the
basc date.
In ths connecton, uswe, presdent of Montrose snce 1928, testfed that
25 cents per square foot woud meet the tota cost of mprovng and mantanng
the entre cemetery throughout Its entre fe, startng from the raw and,
gradng out road , puttng n sewers, makng tte and water nes, and pro-
vdng for a reasonabe amount of work on trees, shrubbery and awns. Lght-
foot, caed by the Commssoner, was even more conservatve, stntng that
In hs opnon the cost of mprovng each square foot of acreage from raw
and to a saabe condton and mantenance thereof to the day of the sae of
that ast grave was 30 to 35 cents.
We are mndfu that deveopment and mantenance go on over the entre fe
of a cemetery, so that on any gven date, e. g., say March 1, 1913, t s safe to
concude that the tota 25 cents had not been e pended as to every square foot
of area. In fact, some of the footage mght have been mproved and sod at a
ower fgure than 25 cents. or nstance, to take the 10,495.57 square feet of
bura space here n queston, unmproved n 1913 but saabe and sod n 1931,
the record reveas that the converson cost from raw and to saabe and was
4.99 cents per square foot. Yet, t mght be sad that upon the fna accountng,
when the ast grave has been sod, the tota cost of Improvement spread equay
over every square foot of the cemetery woud come to 25 cents or 30 to 35
cents.
round 1913 statstcs n the record ndcated that In the future Montrose
ccud hope to se appro matey 31,000 square feet of bura ground each year.
It was then competng favoraby wth 39 other cemeteres n the cty, the
popuaton was ncreasng, and t was accessbe to the pubc by cty street car
nes. In the basc year bura space n genera sod for 88.2 cents per square
foot. In partcuar, ots and seect graves sod between 1 and 1.13 per square
foot, and saes of common graves occurred at 52.95 cents per square foot. In
1904, n comparson, the reta sae prces were 33.07 cents, 32.45 cents to 93.75
cents, and 47.55 cents, respectvey. On the other hand, n 1931, reta sae
prces were 2.49, 2.41 to 2. 0, and 1.31, respectvey.
ccordng to uswe, the far market reta sae prces on the basc date.
In hs opnon, ncuded the 2.75 cents gven above as cost of the raw and, the
5 cents as cost of the entre Improvement and mantenance of the cemetery,
and a proft. Schrade, caed by Montrose, thnkng the same way, stated that
the reta sae prces refected varous ad|ustment such as those made for and
costs, ratabe dstrbuton of operatng cost, dscounts for tme requred to se
the graves, and a proft.
uswe and Schrade based ther far market vaue opnons on the reta
ees pror to and durng the basc year of 1913. Yet, snce Montrose sod
ura space to utmate users ony, and not for specuaton, t s cear that n
1913, and uswe and Schrade so admtted, there was n fact no reta market
for the baance of the footage then avaabe and unsod. It s undsputed
that many years woud pass before the ots coud be sod. In fact, the bura
apace n queston, athough avaabe n 1913, was not n pubc demand unt
931. In 1913, as n any gven year, the demand for cemetery ots was mted
by actua deaths and prospectve deaths n the communty.
In addton to seng bura space, Montrose performed varous ncdenta
ervces n 1913, from whch ncome was derved. Such servces conssted
nter aa of provdng perpetua care for graves, makng crematons and nter-
ments, settng a foundatons for stone work, seng pants and shrubbery, and
rentng the use of the chape. Pror to 1913, e ceptng the year 1910, the
Income from these sources surpassed the e penses, and n 1913 the ncome
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141
111, rt. 111-1.
margn was 3,84 .07. Moreover, n 1913, the net ncome of the cemetery was
S31.902.-48. prospectve buyer at ths tme coud reasonaby have e pected
uure earnngs around 30,000 annuay.
It shoud be noted n passng that f an ncome of 30,000 Is captazed at
per cent, a present vauaton of 000,000 based on prospectve net earnngs,
s reached. Ths vauaton s equvaent to a square foot vaue of about 27
cents. uswe and Schrade for te ta payer testfed that the far market
vaue was over 2,000,000 or over 1 per square foot. ppyng the 5 per cent
return on capta nvested, we see that an nvestment of 2,000,000 shoud receve
over 100,000 ncome annuay, whch Is grossy out of ne wth the 30,000
annua ncome a prospectve buyer of the cemetery coud e pect.
In ts ta return for 1931, Montrose used an unad|usted bass of appro -
matey 1.89 per square foot. That s, t vaued the footage sod n 1931 at
S28.3S1. . It determned that ots were worth 2 per square foot, seect
graves 1, and snge graves around 40 cents. These vaues had been used by
t n ts ta returns for the years 1917 through 1921.
It shoud be noted that n the eary ncome ta returns a bass of 8.58 cents
per square foot was used. Moreover, about 1920 Montrose had three retro-
spectve apprasas made as of 1913 for ta purposes. ach appraser gave as
bs opnon that the far market vaue on March 1, 1913, was 15 cents per square
foot for unmproved and and 25 cents for mproved and. urthermore, n
ts capta stock ta returns from 1910 to 1924 the ta payer reported the far
vaue of ts and at a hgh of 31 ,048.95, |ustfyng these reports on the ogca
ground that the tota unearned proft on future saes of unsod cemetery and
on March 1, 1913, was an unreazabe asset at that tme, reazabe ony
through the sae of ots at reta e tendng over a perod of upwards of 50
years.
The Commssoner refused to accept Montrose s ta fgures and n hs de-
fcency assessment determned that the entre cemetery and had a far market
vaue of 21.5 cents per square foot on March 1, 1913. Montrose appeaed to
the oard and contended for a vaue of 94 cents per square foot, usng a
weghted average vaue whch paced separate weght on the mproved and
unmproved footage.
Montrose s opnon wtnesses testfed that the far market vaue of the net
saabe and n the cemetery was over 2,000,000 or between 1 and 1.0 per
square foot uswe, who had no persona knowedge of the physca cond-
ton of the cemetery n 1913, dd not pace separate vaues on the mproved and
nnmproved acreage. Schrade, who was famar wth the unsod acreage In
3913. stated the mproved porton was worth between 1 and 1. , and the
nnmproved porton 75 cents. These opnons measured the vaue of the unsod
and n 1913 by reta saes of and sod pror to and durng 1913.
Commssoner s three opnon wtnesses were not famar wth the cemetery
n queston n 1913. Thomas gave a vaue of 235,000 for a of Montrose s
assets wthout pacng separate vaues thereon. Rchards testfed to a vaue
of 334, 91 or 15.1 cents per square foot, and Loekwood a vaue of 332,000
or 15 cents per square foot. These opnons measured the vaue of the unsod
and n 1013 by an anayss of saes, e penses, earnngs, and reated matters.
Upon ths evdence, the oard made ts fndng that the far market vaue
of the footage n queston was 3,448.54 or 23 cents per square foot. Montrose
now contends nter aa that the oard erred n ts determnaton, because
t dd not foow the command of mhurst Cemetery Co. v. Commssoner
(300 U. S., 37 Ct. D. 1202, C. . 1937-1, 209 ), whch, t s camed, compes
tse appcaton of an e cusve method for determnng the far market vaue
n cemetery cases, namey, that reta saes of bura space sod pror to or
durng the basc year of 1913 are concusve evdence of the vaue of the
bura space unsod and avaabe n that year. Wth ths contenton we are
nnabe to agree, as a factors havng to do wth the determnaton of vaues
must be consdered. the factors must be weghed n the ght of the
othpr facts deveoped and be gven ony such weght as may seem |ust and
reasonabe.
efore specfcay consderng Montrose s assgnment of errors, t woud be
proper to descrbe what methods of determnng vaue were actuay used.
The methods used by Montrose and Commssoner dd not fa to gve due weght to
the fact that on March 1, 1D13. the Tnsod nnd was n mproved and unmproved sec-
tons. The methods used treated a the unsod and as mproved, nnd deducted a certan
cost per square foot as the cost necessary to brng the unmproved area up to the same
tate of mprovement as the Improved area.
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111, rt. 111-1.
142
The Commssoner, Rchards, and Lockwood vaued the unsod ots and graves
n 1913 on the present-vaue method usng oskod s formua wth Interest
rate at 4 per cent and rsk rate at 8 per cent. In accord wth the present-
vaue method, the average seng prce to be receved for the unsod and
(based on the reta prces of the sod and) and the tme requred to se
the unsod and are frst antcpated. The unsod and mutped by the aver-
age prce per square foot then gves the tota e pected amount to be receved
for the unsod and over the perod of tme In queston (the e pected fe of
the cemetery). Ths unreazed amount s then dscounted to present vaue
by the use of oskod s formua. In addton, Lockwood aso apped the
reproductve apprasa method or the cost of reproducng the cemetery as t
was on March 1, 1913.
Montrose s contentons and the opnons of ts wtnesses measure the far
market vaue of the unsod ots and graves n 1913 by the reta sae of ots
and graves sod on or about the basc date. In fact, t s nssted that the
mhurst case makes reta saes the soe determnator of vaue. The Com-
mssoner, on the other hand, refuses to accept reta saes e cept n so far
as they are used n estmatng the antcpated seng prce of the unsod ots,
and nssts that the ony comparabe sae whch coud be used as a measure
of the vaue of the unsod cemetery and woud be the sae of an entre ceme-
tery smar to the one n queston. In summary, what we have here s smpy
ths: Montrose makes the seng prce the determnator of vaue: the Com-
mssoner makes the seng prce, ess dscount for years requred to reaze
the seng prce, the determnator of vaue.
The oard crtczed each sde, n effect statng that the use of the present-
vaue method aone, or the use of reta saes aone, Is not ustfed. The
oard acted on a the evdence furnshed to t and ts decson ndcates, and
we beeve correcty, that vaue after a s a queston of fact to be determned
from a the evdence. In answer to Montrose, the oard reasoned, and we
beeve ts ogc s ndsputabe, that the Supreme Court of the Unted States
dd not sancton, nor dd t prescrbe, any e cusve method for determnns
far market vaue n cemetery cases. To us t s eementary that to confer
concusveness upon evdence of reta saes n cemetery cases s to nvade
unnecessary the fed of admnstratve autonomy.
The far market vaue s a prce at whch a wng seer and a wng
buyer w trade, both havng a reasonabe knowedge of the facts. In ascer-
tanng any partcuar vaue, the purpose for whch the vauaton s made s
controng. In the nstant case the purpose of the vauaton s to provde
Montrose and the Commssoner wth a substtute ta bass, so that gan or
oss on saes of cemetery ots after 1913 can be determned.
Ordnary, the cost of the entre cemetery when acqured s the unad|usted
ta bass used n the determnaton of gan or oss from saes of bura space
theren. ere the cemetery property was acqured pror to 1913, at a cost
ess than the far market vaue thereof on March 1, 1913. In such a case
the far market vaue on March 1, 1913, Is made the statutory substtute In
pace of the usua cost bass. Such a vauaton manfesty does not contem-
pate a sae n 1913 to a buyer who ntended to use the bura space hmsef.
Pany, f Montrose had purchased the cemetery on March 1, 1913, for 2.75
cents per square foot, the unad|usted bass for the cemetery space sod n 1931
woud have been 2.75 cents per square foot and not the prce of reta saes
of comparabe and smar bura ground n 1913. Therefore, snce the vau-
aton here s to fnd a ta bass n pace of the usua cost bass, the task
Is as foows: the oard has the ob of determnng what Montrose, who
ntends to se after 1913, woud reasonaby pay for the bura space of
14,99 .f7 square feet n queston, or the entre cemetery for that matter, as
t stood on March 1, 1913.
Obvousy no buyer woud have purchased ether the partcuar footage In
queston, or the entre cemetery In 1913, at the reta prce per square foot at
whch cemetery space was seng pror to and durng 1913. e woud reasonaby
foresee that one must wat many years for a return of hs money and woud
therefore offer ess. Cemetery space can not be used for any other purpose
than for bura, and the demand for space Is mted by actua deaths and pros-
pectve deaths n the communty. In other words, the suppy of avaabe
cemetery space beng greater than the demand n the Chcago area, the stua-
ton s one of restrcted, rather than genera, market.
It s for ths reason that the prce of reta saes, ordnary the best evdence
of vaue n stuatons commandng a genera market, can not be accepted as
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143
U 111, rt. 111-1.
satsfactory. Counse for Montrose woud have ns go further, e nssts that
the mhurst case, supra, compes the oard to accept the reta prce as (he
soe determnator of vaue. We have shown that the crcumstances of ths
cemetery case make the reta prce as evdence of vaue unsatsfactory, uness
a dscountng s provded for the tme eement, the perod of hodng before
a market can be had.
The weakness of the prce of reta saes s obvous from facts and cr-
cumstances other than those aready shown. The cost of acqurng the raw
and n 1902 was around 2.75 cents a square foot. Montrose set a vaue n
1913 of 94 cents a square foot. Stated u another way. the and cost 75,000
n 19D2, and n 1913 a vaue of over 2,000,000 was camed. The partcuar
footage nvoved, . e., 14,t93. 7 square feet, cost 112.23 n (02. In 1013 a
vaue of 14,097.47 s asserted, such vaue beng based e cusvey on the prce
of reta saes pror to and durng 1913.
The e traordnary rse must have been due soey to the change n ts use
from raw and to cemetery and, for the record shows that the vaue of raw
and remaned constant from 1902 to 1013. Ths dfference between the cost
of 2.75 cents and the camed vaue of 94 cents seems nconsstent wth test-
mony of Montrose s wtnesses that set 25 cents a square foot as the converson
cost from raw and to saabe cemetery and. On ths testmony the vaue n
1913 a other thngs beng equa, mght be coser to 27.75 cents per square
foot than to 94 cents per square foot
Comparng Montrose s and Commssoner s method of determnng far market
vaue, t woud seem that Montrose s undscounted seng prce s ess equtabe
and ess ndcatve of vaue than the Commssoner s dscounted seng prce.
The vaue n 1913 of a cemetery ot mght very we be 91 cents per square
foot to a user n 1913, but the vaue of that same ot n 1013 to Montrose,
who ntended to se that ot to a user n the future, was not an undscounted
94 cents per square foot. To us It foows that the undscounted reta prce
s not satsfactory, and surey not concusve, evdence of the far market
vaue.
Ths does not mean to mpy, however, that the dscounted reta prce of
cemetery space sod pror to or at the basc date s concusve evdence of
the vaue of the baance of cemetery space unsod on the basc date. aue
at any partcuar tme s a fact. Ths fact s deduced from the appcaton
of |udgment and dscreton to a great many other facts and crcumstances,
and, as vaues are fuctuatng and changeabe, t s not easy to ay down a
genera and satsfactory rue appcabe n n cases. or ths reason any
contenton that a partcuar evdence s concusve of vaue can not stand.
The vaue reached w never be more than an appro maton, but t shoud
refect the oard s appcaton of ts |udgment to a the facts of the partcuar
case.
It s aso nssted that the oard dd not appy a correct prncpe of aw
to the facts found, and the argument s made that the correct prncpe of
aw to the facts found nvoves a determnaton based on reta saes, wth
counse statng that the oard dd not e pan the prncpe of aw used,
as t dd . n deta n the mhurst case. We have gven ths contenton
consderabe thought. We are convnced that the oard s decson s n
accordance wth the aw (Tte 20, IT. S. C. ., secton 041(c)). and that
the oard dd appv the correct rue of aw to the facts found ( creng v.
Rankn, 295 T . S., 123, 131 Ct. D. 9 , C. . IY-1, 1 0 (1935) ).
In ts mhurst decson, the oard brefy stated that the ta payer s vaua-
ton, whch was based on the reta saes prce, was reasonabe and shoud be
aowed, addng that ths prce was substanta evdence of the far market
vaue. In the oard s present decson, t refused to accept any partcuar
evdence as concusve. In essence, the oard n ths case consdered a the
evdence submtted and a the methods of vauaton advocated by the wt-
nesses, and then commented on ths evdence and on the methods used. If
Its decson means anythng, t means that the oard weghed a the evdence,
and that t vewed the methods of vauaton used by the wtnesses ns gudes
or cheers on ts |udgment and dscreton, n determnng the far market vaue
on March 1, 1913.
Reta saes consttute ony one eement to be taken nto consderaton n
the determnaton of the far market vaue of the cemetery and, and the use
of the reta prce method aone s not |ustfed. The same consderaton s
appcabe to the eement of tme requred to se the cemetery and and the
present-vaue method whch s ba ed thereon. ong wth the tme eement
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111, rt. 111-1.
144
and the reta seng prce there shoud be taken Into consderaton the cost
of acquston of the cemetery, the ocaton, age, sze and topography, the state
of deveopment, the e stence of competng cemeteres, the type of centee,
the trend of popuaton served, annua net earnngs, and other rented matters.
Consderaton of a the evdence bearng on the vaue s compance wth the
aw. The oard In ts decson ceary ndcated, and the oard s correct,
that vaue at any partcuar tme s a fact whch can ony be deduced propery
by |udgng and weghng a the pertnent evdence n the case.
We beeve aso that the oard s fndng of 23 cents as the vaue per square
foot meets the substanta evdence test. though we mght have found a
dfferent vaue had we been |udge and wegher of the facts, ths Is not the
test. Snce the determnaton of vaue nvoves a queston of dscreton, and
the e act vaue Is not n the evdence of the case, we can apprecate that no
two |udges of the same facts woud agree. t any rate, mathematca pre-
cson s mpossbe and It s gospe that the vaue reached can never be more
than an appro maton. We, of course, are bound by the rue that where there
Is substanta evdence to support the oard s fndng upon a queston of fact,
Its decson of such a queston s concusve upon revew. ( mhurst Cemetery
Co. v. Commssoner, supra Pamer v. Commssoner, 302 U. S., 3, 70 Ct. D.
1284, C. . 1987-2, 251 cverng v. natona Grocery Co., 304 U. S., 282,
294 Ct. D. 1341, C. . 1938-1, 279 .)
That there s substanta evdence to support the admnstratve fndng can
not be dsputed. The record ceary ponts to a vaue between 15 cents and
80 cents per square foot. methods of vauaton descrbed and used n the
record, e cept Montrose s undsoounted saes method, ndcate vaues rangng
from 15 cents to 30 cents. Thus, the present-vaue method gave a vaue of
15 cents, and It Is to be noted that some consderaton was gven to reta
saes. The reproductve apprasa aso Indcated a vaue of 15 cents, and
captazng net earnngs In 1912 or 1913 at 5 per cent woud have gven a vaue
between 25 cents and 30 cents.
There were other facts and crcumstances pontng to the same resut. or
Instance, the orgna transacton, n whch the raw and worth 75,000 was
e changed for the capta stock at 300,000, gave a vaue Increment over cost
of 225,000 at once. In addton, the capta stock returns showed a vaue
beow 20 cents, and the etters to the Commssoner, contanng three retro-
spectve apprasas, vaued the unmproved and at 15 cents and the mproved
and at 25 cents. Ths bref revew of the evdence, whch Is adequatey
descrbed In the statement of facts above, eads to the concuson that the
oard s fndng of 23 cents per square foot Is adequatey supported by the
evdence.
Counse for Montrose presses the argument that the Issue here Is the March 1,
1913, far market vaue of the 14,993.07 square feet of and sod In 1931 and not
the far market vaue of the baance of the cemetery and amountng to 2,214,78
square feet on hand March 1, 1913. We do not dsagree, yet we fa to see why
he rases ths contenton. s we have read the record, the bass appcabe to
the space sod n 1931 was found. The evdence by both sdes was drected
toward the ascertanment of the ta bass of the and sod In 1931, and the oard
acted on ths evdence.
Let us assume that the cemetery was acqured on March 1, 1913. Then the
acquston cost woud be aocated propery to portons of the cemetery and sod
In subsequent saes. Snce u the nstant case we are seekng a ta bass In
pace of the usua cost bass descrbed n the hypothetca case, we are under the
Impresson that the same treatment shoud be accorded n both cases. Montrose
does not suffer n|ury f n the nstant case the bass for the tota unsod acreage
Is frst found and aocaton made ater as saes therefrom are made.
Moreover, the tota of the bass for a of the separate saes of bura space
can not e ceed the vaue of the unsod and n 1913. It woud seem mmatera,
therefore, whether the bass appcabe to the footage sod n 1931 was deter-
mned drecty, or whether the vaue of the entre unsod and n 1913 wTas frst
determned and then an aocaton made to the space sod n 1931. The bass
does not vary, no matter whch way s used.
One other contenton requres consderaton. Counse for Montrose says, We
have read and reread the decson of the oard but we can not
fgure out from ts decson how t arrved at 0.23 . We mantan that
from the evdence n ths record the ony fndngs that the oard coud make
were 0.15 per square foot, 0.94 per square foot or 0.9987 per square foot and
nothng ese because those vauatons were the ony vauatons that the oard
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145
111, rt. 111-1.
bad before It . In effect, ths argument s another form of the brnnder
contenton that the oard apped au ncorrect prncpe of aw In arrvng at
ts decson.
We have aready answered the contenton n our dscusson above. In add-
ton, the court n everng v. Rankn, supra, pages 132-133, stated that even
f the oard s decson had been based on an erroneous rue of aw, that woud
not have |ustfed ts reversa, f the fndngs of fact, governed by the correct
rae of aw, were suffcent to snstnn the decson and had substanta support
n the evdence. We have aready shown that ths quoted statement s ap-
pcabe here. Nor do we know of any ega prncpe that compes the oard to
accept the e act vauatons made by the nterested pares. Surey there can be
no dspute on the proposton that the oard n the e ercse of ts |udgment
and n the weghng of the evdence may f an ndependent vaue.
It s true that the oard dd not revea n ts opnon how t arrved at ts
concuson that the vaue was 23 cents per square foot. though omsson n
ths regard s not ground for reversa I oerng v. an , n, supra, 132, 133),
we do beeve that the crtcsm s |ustfed. Our system of aw ordnary
accords admnstratve fndngs the same respect as that gven |ury verdcts,
and rghty so. Yet, the oard, a body of e perts n ta matters, usuay acts as
a |udca trbuna, and often renders opnons |ustfyng the decsons reached
theren. or ths reason, more can be e pected of t. To dscose how the
oard arrved at ts concuson s not e pectng too much from t.
We fuy apprecate counse s wrath n ths regard. We, too, have notced how
carefuy and thoroughy the oard stated the facts and how t commented on
he evdence nnd the methods of vauatons. Omsson of the way t arrved at
ts concuson, after such competeness, s ground for suspcon. We, moreover,
attach no such sacrosanctty to the process by whch a ta vaue s reached.
Counse aso suggests that the oard had f ed the vaue by captazng earn-
ngs. Ths suggeston probaby has ts brth n the suspcon engendered from
the omsson to state the method upon whch t arrved at ts concuson, as t
can not be taken from readng the oard s opnon. owever that may be,
n a case where the admnstratve fndngs are warranted by the evdence, oven
f the oard had consdered earnng power as a bass of vauaton, ths woud
not have been decared mproper, for ordnary earnng power s a very reabo
gude n the determnaton of vaue.
The decson of the oard s affrmed.
rtce 111-1: Computaton of gan or oss. 1940-14-10220
Ct. D. 14 9
INCOM T R NU CT O 1934 D CI ION O COURT.
1. Gan ob Loss Sae of Capta ssets Gor.n Content of Do-
ar Not a actor n Determnng Gan of oss.
The reducton made n the statutory god content of the doar
In 1933 s not a sgnfcant factor In determnng ta abe gan
derved n 193T from the sae of capta assets acqured durng the
perod 1931 to 1033. Such gan s to be measured by the dfference
between the cost n doars and the seng prce n doars.
2. Certorar Dened.
Petton for certorar dened on ebruary 20, 19 0.
Unted States Crcut Court of ppeas for the Seventh Crcttt.
George . ates, pantff-appeant, v. Unted States of merca, defendant-
appeee.
108 . (2d), 407.
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of Inos,
astern Dvson.
December 22, 1939.
opnon.
Tkeanor, Crcut udge: Ths acton was brought n the dstrct court to
recover a refund of 7,134.17 whch appeant cams was erroneousy and 11-
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111, rt. 111-1.
14
egay coected from hm as Income ta for the caendar year of 1935. Ths
appea Is from a |udgment u favor of the appeee.
The utmate queston Is whether the pantff-appeant reazed a ta abe
gan from a sae n 1035 of certan securtes whch he had purchased durng
the perod of 1931 to 1933.
It Is unquestoned that ta payer purchased the securtes n queston for
134,4 4.01 and sod them n 1935 for 175,482.80 and that there was an ap-
parent proft of 24,515.79, whch was 0 per cent of 40,859. 5, the dfference
stated n doars between the purchase and saes prce of the securtes oss a
capta assets oss of 159.20. Pantff-appeant pad a ta of 7,134.17 on ths
returned ta abe gan.
The ta payer s cam to recover s based upon the camed consequence of the
egsatve change n the statutory god content of the doar, whch change
occurred between the dates of purchase and sae of the securtes. The con-
sequences reed upon by pantff are ceary Indcated by hs foowng
propostons of aw:
(1) The reazed gan theory of ncome s based upon a comparson of cost
In money wth seng prce In the same money or ts equvaent and changes n
the purchasng power of that money are dsregarded.
(2) Where new money supersedes the cost money after a purchase Is made by
an nvestor and the use of the od money s prohbted, there s no way In whch
a ta abe gan can be reazed.
(3) The ony bass provded for comparng purchase prces wth seng prces
In ths case s the god content of the od doar and the god content of the new
doar, and f that bass s used the appeant has not reazed a ta abe gan but
has suffered a oss.
We fnd nothng n the decsons of the Supreme Court to support the pan-
tffs proposton that the ncome consstng of gan from a sae of capta assets
must be determned by a comparson of cost n money wth seng prce n the
same money or ts equvaent, as dstngushed from a comparson of cost In
money wth seng prce In money. It s true, as stated by pantff, that the
Supreme Court frequenty has decared that gan In the money vaue of property
s not ncome wthn the consttutona meanng of that term unt transacton
has occurred whch makes the gan, as such, avaabe to the ta payer and
separabe from the money cost. ut we fnd no statements of the Court whch
go beyond the statutory method of determnng reazed gan. The statutory
defnton of gan s the e cess of the amount reazed therefrom over the ad-
usted bass (of cost) and the oss s the e cess of the ad|usted bass over the
amount reazed and the amount reazed from the sae or other dsposton
of property sha be the sum of any money receved pus the far market vaue
of the property (other than money) receved. 1
We are of the opnon that |udca decsons and statutory enactments nether
recognze, nor, by Impcaton, attach any sgnfcance to the statutory god
content of the doar as a factor n the determnaton of gan from the sae of
capta assets. The standard unt of computaton s the money doar, an abstract
or dea unt of account. Ths standard unt of money has not changed n money
.vaue throughout the e stence of our monetary system. There have been changes
from tme to tme n the form of the physca representatves of money, but awfu
money n the Unted States has been the same snce the ct of Congress of pr
2, 1702, provded that The money of account of the Unted States sha be e -
pressed n doars or unts, dmes or tenths, cents or hundredths, and ms or
thousandths, a dme beng the tenth part of a doar, a cent the hundredths part
of a doar, a m the thousandths part of a doar .
The Lega Tender Cases, supra note 2, hed that Congress had the power to
make paper money ega tender for the dscharge of money obgatons whch
had been assumed pror to the ssue of paper money. It was argued that the unt
of money vaue must possess Intrnsc vaue and that the paper doars, unke
the god con doar, possessed no Intrnsc vaue. The Supreme Court answered
the foregong contenton as foows: The Lega Tender cts do not attempt to
1 U. S. C. ., Tte 20. secton 111(b).
.. we w | notrp brefy an nrenment presented In support of the poston that
the unt of money vaue must possess ntrnsc vaue. The conage cts f ts
unt as a d )nr : but the god or sver thng we ca a doar ts. In no sense, a standard
of : doar. It s a representatve of t. (Leya Tender Cage . 12 Wa., 407,
r,3.)
Ch. 10, 1 Stat., 240. secton 20, 17. S. C. .. Tte 81, secton 371.
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147
111, rt. 111-1.
make paper a standard of vaue. We do not rest ther vadty upon the asserton
that ther emsson s conage, or any reguaton of the vaue of money nor do
we assert that Congress may make anythng whch has no vaue money. What
we do assert s, that Congress has power to enact that the Government s promses
to pay money sha be, for the tme beng, equvaent n vaue to the representa-
tve of vaue determned by the conage cts, or to mutpes thereof. (Page 553.)
It was ponted out n Norman v. . O. It. Co. that the Lega Tender cts
eft n crcuaton two knds of money, both awfu and avaabe, and con-
tracts for payment of god, one of these knds, were not dsturbed. Snce
there were n use after the passage of the Lega Tender cts two forms of money
authorzed by aw, metac and paper, and snce both were made ega tender
n payment of obgatons, t foows that a contract to pay n god was not
affected by the egsatve ct whch made paper money ega tender. ut ths
resuted from the contnuance by aw of the two forms of money each of whch
was ega tender and each of whch was crcuatng as awfu money of the
Unted States, and not from any |udca recognton that paper money, doar for
doar, was not equvaent n vaue to spece money.
In Deutsche ank v. umphrey the pantff had deposted money payabe on
demaud n a German bank n Germany. The money was not pad on demand
and a sut was fed. s stated by the Court the debt was a debt of German
marks and the queston rased on appea was whether the courts beow were
correct n hodng that the marks shoud be transated nto doars at the rate
of e change e stng when the demand was made. The Supreme Court stated that
the abty of the bank was f ed at a certan number of marks both by the terms
of the contract and by the German aw, and the Court assumed that t was
f ed n marks ony, not at the e trnsc vaue that those marks then had n com-
modtes or n the currency of another country. nd the Court added: n
obgaton n terms of the currency of a country takes the rsk of currency
fuctuatons and whether credtor or debtor profts by the change the aw takes no
account of t. Obvousy, n fact a doar or a mark may have dfferent
vaues at dfferent tmes but to the aw that estabshes t t s aways the same.
If the debt had been due here and the vaue of doars had dropped before sut
was brought the pantff coud recover no more doars on that account.
foregn debtor shoud be no worse off.
Pantff seeks to avod the force of the foregong statement of the Supreme
Court and nssts that the queston of capta gan presents an entrey dfferent
queston from that whch s presented when partes enter nto a contract whch
by ts terms s to be setted n the currency of a partcuar country and pantff
further states that n case of such a contract t s hed by the courts that the pares
have agreed to take ther chances on the changes of the currency of the country,
and, consequenty, t s hed that marks are marks and francs are francs and
doars are doars, no matter what changes may occur to affect ther vaue or
ther purchasng power, or how such changes may be made.
ut we see no way for pantff to avod the adverse force of hs own con-
structon of the reasonng and hodng n Deutsche ank v. umphrey. of
pantff s transactons were made n reference to the currency of the Unted States
and we can not fnd any bass for pantff s cam to a greater protecton aganst
tatutory changes n our aws reatng to money than one has who s the owner
of a note or bond and statutory changes have occurred between the dates of
e ecuton and maturty of the note or bond.
The recent decsons of the Unted States Supreme Court n Norman v. . t 0.
R. Co., supra, Nortz v. Unted States and Perry v. Unted States7 have estab-
shed concusvey that under our present monetary system there can be no
egay recognzed nequvaency of vaue between doars of what pantff cas
cost money and seng prce money. Pantff s proposton that the
reazed gan theory of ncome s based upon a comparson of cost In money
wth seng prce n the same money or Its equvaent s n a sense true but
the proposton gnores the equvaency, doar for doar, of cost and seng prce
money. In Perry v. Unted States, supra, the pantff was the hoder of an
obgaton of the Unted States for 10,000, known as ourth berty oans,
4 per cent god bond. The bond provded The prncpa and nterest hereof
2f4 r. S.. 240.
272 T . S.. 517. 519.
294 r. S., 317.
291 U. S 330.
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112(a), rt. 112(a)- .
148
r.ro payabe n Unted States god con of the present standard of vaue. It wu
the eonenton of the pantff that he was entted to receve n payment of the
bond 10,000 god doars each contanng 25.8 grans of god .9 fne or ts equva-
ent n god by weght, ether n the form of god con or unconed god, or. In
the aternatve, 1 ,931.25 n ega tender currency. The Unted States refused
to redeem the bond e cept by payment of 10,000 n ega tender currency nnd the
pantff sued to recover damages In the sum of 1 ,931.25, the vaue of defend-
ant s obgaton. The Supreme Court hed that the |ont resouton of une 5,
1933, nsofar as t attempted to overrde the obgaton created by the bond
n sut went beyond the congressona power but the Court further hed that
despte the breach of the obgaton of the bond by the Unted States the facts
aeged n pantff s petton dd not show a cause of acton for actua damages.
The foregong resut was requred, as ponted out by the Court, because the recent
monetary egsaton had created a domestc economy In respect to god, and
a snge monetary system wth an estabshed party n a currency and cons,
under whch 10,000 n the form of currency woud be equvaent n vaue to
10,000 of what pantff denomnates od money, whether god con money
or currency money.
y reason of the fact that god cons no onger crcuate as a medum of
e change and snce no prvate ctzen can awfuy possess god cons or god
buon, and snce, wth a few mmatera e ceptons, the ony thng that one
can do wth god or god con s to turn t n to the Unted States Treasury
and receve n e change an equvaent n currency, the equvaency beng deter-
mned on the bass of the present statutory content of the doar, It must foow
that n aw the seng prce n doars of pantff s securtes was equvaent to
the same number of doars n any one of the forms of what pantff cas cost
money.
The foowng hypothetca stuaton suggested by defendant Iustrates the
dffcuty of pantffs poston: If the ta payer had borrowed the doars ( 134,-
4 4.01) necessary to buy the securtes n queston In 1933 and pror years
and had not dscharged hs obgaton unt after he sod the securtes n 1985
the ta payer coud have used 134,4 4.01 to dscharge hs obgaton and woud
have had the e cess of 41,018.85. nd It s cear, as a matter of aw, that hs
credtor who receved the ta payer s promse to pay at a tme pror to the
changng of the god content of the doar woud have been requred to accept
n dscharge of the obgaton 134,4 4.01 of the so-caed new money, athough
the obgaton represented what pantff cas cost money.
The |udgment of the dstrct court s affrmed.
S CTION 112(a). R COGNITION O G IN OR
LOSS: G N R L RUL .
rtce 112(a)-: Saes or e changes. 1940-25-10298
G. C. M. 21915
R NU CT O 1928.
, who acqured S2|/ shares n the SI Trust for S doars, each
share representng a fractona Interest n a unt consstng of a
certan number of shares n each of 2 corporatons pus a propor-
tonate part of a reserve fund, wth prvege of convertng the trust
certfcates nto the underyng stocks, sustaned a recognzabe oss
when she e ercsed the rght of converson and receved h eu of
her trust certfcates stocks n the 2 corporatons to the vaue of
32a doars and 8r doars n cash, the cash coverng odd ots n con-
formtv wth the converson pan.
G. C. M. 10235 (C. . I-1, 8 (1932)) revoked.
n opnon s requested whether the oss sustaned by on the
converson of 82y shares of the M Trust (an nvestment trust) nto
See dscusson n ornan v. . f O. R. Co. orte v. Unted States and Perry v. Unte
States, supra.
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149
5 112(a), rt. 112(a)- .
the underyng stocks hed by the trust s recognzabe for purposes of
the edera ncome ta under the crcumstances heren set forth.
The nqury s made wth speca reference to G. C. M. 10235 (C. .
I 1, C8 (193:2)). wheren t was hed that no gan or oss resuted
for ncome ta purposes n a smar transacton.
Pror to uy , 1931, (herenafter referred to as the ta payer)
purchased 82y shares of the M Trust, a f ed nvestment trust created
dy an agreement, dated anuary , 102 ), between the N Company
(herenafter referred to as the depostor) and the O Trust Co. as
trustee. The cost of these shares was 12o doars. The trust fund
was composed of shares of stock n 2 corporatons. The certfcates
whch the ta payer receved provded that each share represented
1/4000 nterest n (1) a stock unt consstng of 4 shares of stock of
each of 2 specfed companes, and (2) the proporton of the reserve
fund whch mght be hed by the trustee from tme to tme. The
certfcate further provded as foows:
The bearer of any such certfcate or certfcates representng an aggregate of
1 shares of the M Trust or any mutpe thereof at hs opton, and upon the
e praton of such tme as the trustee sha wth reasonabe dgence requre
for the transfer of the shares of stock nvoved, upon rembursng the trustee
for ts actua e penses n connecton wth the transfer and upon such surrender
to the trustee of such certfcates wth a unmatured coupons, sha be entted
to receve such part of the deposted property hed by the trustee on the date
of surrender (not then dstrbutabe wth respect to matured coupons) as sha
bear the same proporton to a such deposted property (not then dstrbutabe
wth respect to matured coupons) as the number of shares of the M Trust
represented by such certfcate or certfcates sha bear to the tota number of
shares of the M Trust then outstandng. ny fractona nterest n securtes
or other property s to be ad|usted n cash as provded n the agreement pro-
vded, however, that f the number of M Trust shares represented by such
certfcate or certfcates sha not be eveny dvsbe by 10// the depostor sha
have the opton to purchase the certfcate or certfcates representng such
part of the stock unt and any cash and other property deverabe therewth
by payng to such bearer a sum equa to such cash and the market vaue of
such part of the stock unt and other property (as n the agreement defned).
On December , 1931, the ta payer surrendered her trust certfcates
and receved from the trustee shares of stock n the 2 corporatons
havng an aggregate market vaue of 32.r doars. She aso receved
8a: doars h cash coverng fractona shares. The ta payer deducted
n her return for the year 1931 a oss of the dfference between the
cost to her of the 82y shares of the trust and the vaue of the property
receved upon ther surrender to the trustee. Ths deducton was
dsaowed by the Commssoner upon the theory advanced n G. C. M.
10235, supra, that the surrender of certfcates of benefca nterest
n such an nvestment trust for a pro rata share of the underyng
corporate stocks representng the corpus of the trust was a merger
of the ega wth the equtabe tte and, therefore, dd not consttute
a sae, e change, or other dsposton of property whch consttuted a
ta abe transacton nvovng gan or oss for edera ncome ta
purposes.
The oard of Ta ppeas hed wth respect to a smar trust,
contrary to G. C. M. 10235, supra, that a oss upon the e change
of the trust shares for the corporate stock woud be recognzed.
(Du os Young v. Commssoner, 34 . T. ., 48, nonacquescence,
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112(a), rt. 112(a)-.
150
C. . -2, 51 (193 ).) The oard reached the same concuson n
Commssoner v. Tew (memorandum opnon dated anuary 9, 1940),
whch decson was affrmed by the Crcut Court of ppeas for the
S th Crcut (108 . (2d), 570). The court stated n part that:
We agree wth the oard, however, that the respondent receved n ths
transacton somethng dfferent from the property rght whch she surrendered.
She had possessed an undvded nterest In the entre bock of stocks owned
by the trust, whch was sub|ect to change by the trustee. She receved certan
ndvdua securtes. The trust was separate enough from the
respondent so that t was a ta abe entty . It owned the stocks,
and respondent had ony an nterest n them hence respondent s ownershp
of the certfcate was totay dfferent from her ownershp of ndvdua segre-
gated shares of stock.
Whe the respondent had an equtabe Interest In a stock owned by the
trust, she dd not have an e cusve benefca nterest theren, for she shared
her nterest wth a other certfcate hoders. Moreover, when the respondent
termnated the trust reatonshp, she surrendered her Interest n the other
shares remanng In the trust. The transacton thus effected a substanta
change In her property nterest and consttuted an e change wthn
secton 112(a) of the Revenue ct of 1928.
The court reached the concuson that n the partcuar trust n-
voved the ta payer, when she surrendered her certfcates of bene-
fca nterest and receved her pro rata share of the stocks consttut-
ng the corpus of the trust, receved somethng essentay dfferent
from what she had prevousy owned. Ths offce concurs n the
decson of the court.
Snce the concuson reached n G. C. M. 10235, supra, s contrary
to the decson n Tew v. Commssoner, supra, G. C. M. 10235 s
hereby revoked. It s aso recommended that the nonacquescence n
the decson of the oard of Ta ppeas n Du os Young v. Com-
mssoner, supra, be wthdrawn.
. P. Wenc-e,,
Chef Counse, ureau of Interna Revenue.
rtce 112(a)-: Saes or e changes. 1940-18-10247
G. C. M. 21998
R NU CTS O 192 ND 102S.
In vew of the fact that the concuson reached n G. O. M. 8038
(C. . I -1, 105 (1930)), that there was a sae of an equtabe In-
terest n certan property n the transacton there nvoved, s con-
trarv to the prncpe ad down n evertrg v. . rf R. Lazunt
Co. (308 U. S., 252, Ct. D. 1430, C. . 1939-2, 20S), that rung s
revoked.
The opnon of the Unted States Supreme Court n evermg v.
. R. Lazarus Co. (308 U. S., 252), affrmng the decson of the
Unted States Crcut Court of ppeas, S th Crcut (101 . (2d).
728), whch affrmed the decson of the oard of Ta ppeas (32
. T. ., G33), was pubshed as Court Decson 1430, C. . 1939-2,
208. The syabus reads n part as foows:
corporaton occuped and used n ts busness three budngs, the ega
tte to two of whch, and an assgnment of a 99-year ease to the thrd, were n
a bank as trustee for certan and-trust certfcate hoders. t the tme of the
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151
112(g), rt. 112(g)-2.
transfer of the propertes to the trustee bank, In 192S, a throo budngs were
eased back to the corporaton by the trustee for 90 years, wth opton to renew
and purchase. ed. That the oard of Ta ppeas |ustfaby concuded, from
a consderaton of a the evdence, that the transacton between the corporaton
and the trustee, n wrtten form a transfer of ownershp wth a ease back, was
n reaty a mortgage oan secured by the property nvoved, and that, n com-
putng ts net ta abe ncome for 1930 and 1931, the corporaton was entted to
the statutory aowance for deprecaton of budngs.
On facts substantay smar to those n eve-rng v. . R.
Lazarus Co.. supra, ths offce hed, nter aa, n G. C. M. 8098
(C. . I 1,105 (1930)) that a sae of an equtabe nterest n certan
property resuted. Snce that concuson s contrary to the prncpe
ad down n everng v. . R. Lazarus Co., supra, G. C. M.
8098, supra, s revoked. (See aso Commssoner v. The LI. .
Neghbors Reaty Co. (81 . (2d), 173).)
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 112(p). R COGNITION O G IN OR LOSS:
D INITION O R ORG NIZ TION.
rtce 112(d)-2: Defnton of terms. 1940-3-10143
Ct. D. 1432
ncome ta revenue act of 1928 decson of streme court.
1. Reorganzaton Transfer of t. Pkopertes of One Company
fob Cash and onds of nother Company.
Pursuant to a contract between the Company, the pettoner
(ts soe stockhoder), and the Y Company, whereby t was agreed
that a the propertes owned, and to be owned, by the Company
shoud be transferred to the Y Company for cash and bonds of the
atter payabe seray over a perod of years, the pettoner turned
over to the Company certan propertes owned by hm ndvdu-
ay n e change for an ncreased ssue of the Company s stock,
the transfer agreed upon was then made, and the Company was
dssoved. ed: That the transacton dd not amount to a reor-
ganzaton wthn the meanng of secton 112() of the Revenue ct
of 1928, nasmuch as the transferor, by recevng bonds as parta
consderaton for the transfer, dd not retan any propretary Inter-
est n the enterprse but became merey a credtor of the transferee
the term of the obgatons, whether ong term bonds or short term
notes, not beng matera.
2. Cross Petton Necessty for ng n Order to ave dverse
udgment Revewed.
The Court can not afford reef to the respondent from the porton
of the |udgment beow whch was adverse to hm, snce he dd not
fe a cross petton askng for revew. respondent or an appeee
may urge any matter appearng n the record n support of a
|udgment, but he may not attack t even on grounds asserted n
the court beow, n an effort to have the Court reverse t, when he
hmsef has not sought revew of the whoe |udgment, or of that
porton whch was adverse to hm.
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (1939) (103 . (2d), 20), affrmed.
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112(g), rt. 112(g)-2.
152
Supreme Court of the Unted States.
. L. LeTuUc, pettoner, v. rank Scofed, Unted States Coector of Interna
Revenue for the rst Dstrct of Te as.
308 U. S., 415.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
anuary 2, 1940.
OPINION.
Sr. ustce Robkuts devered the opnon of the Court.
We took ths case because the petton for certorar aeged that the crcut
court of appeas had based Its decson on a pont not presented or argued by
the tgants, whch the pettoner had never had an opportunty to meet by
the producton of evdence.
The Guf Coast Irrgaton Co. was the owner of rrgaton propertes. Pet-
toner was ts soe stockhoder. e personay owned certan ands and other
rrgaton propertes. November 4, 1931, the Irrgaton company, the Guf Coast
Water Co., and the pettoner, entered n o an agreement whch rected that the
pettoner owned a of the stock of the Irrgaton company descrbed the
company s propertes, and stated that, pror to conveyance to be made pursuant
to the contract, the Irrgaton company woud be the owner of certan other
ands and rrgaton propertes. These other auds and propertes were those
whch the pettoner ndvduay owned. The contrnet caed for a conveyance
of a the propertes owned, and to be owned, by the Irrgaton company for
. )0,000 In cas and 750,000 n bonds of the Water company, payabe seray
over the perod anuary 1, 1033, to anuary 1, 1944. The pettoner |oned n
ths agreement as a guarantor of the tte of the Irrgaton company and for
the purpose of covenantng that he woud not personay enter nto the rrgaton
busness wthn a f ed area durng a specfed perod after the e ecuton of
the contract. Three days ater, at a specn meetng of stockhoders of the
Irrgaton company, the proposed reorganzaton was approved, the mnutes
statng that the ta payer, desrng aso to reorganze hs nterest n the
propertes, had consented to be a party to the reorganzaton. The capta
stock of the Irrgaton company was ncreased and thereupon the ta payer sub-
scrbed for the new stock and pnd for t by conveyance of hs ndvdua
propertes.
The contract between the two corporatons was carred out November IS, wth
the resut that the Water company became owner of a the propertes then
owned by the Irrgaton cotrnfrny ncudng the property theretofore owned by
the pettoner ndvduay. f nhf pcnty a of ts assets, ncudng the bonds
receved from the Wafer company, were dstrbuted to the pettoner. The com-
pany was then dssoved. The pettoner and hs wfe fed a ta return ns
members of a communty n whch they reported no gan as a resut of the
recept of the qudatng dvdend from the Irrgaton company. The atter
reported no gan for the ta abe year n vrtue of Its recept of bonds and cash
from the Water company. The Commssoner of Interna Revenue assessed
addtona ta es aganst the communty, as ndvdua ta payers, by reason of
the recept of the qudatng dvdend, and aganst the pettoner as transferee
of the Irrgaton company s assets n vrtue of the gan reazed by the company
o| the sae of ts property. The ta was pad and cams for refund were fed.
Pettoner s wfe havng ded he brought sut ndvduay and as her e ecutor
and representatve n the communty property aganst the respondent to recover
the amount of the addtona ta es so assessed. e aeged that the transacton
consttuted a ta -e empt reorganzaton as defned by the Revenue ct.1 The
respondent traversed the aegatons of the compants and the causes were
consodated and tred by the dstrct court wthout a ury. The respondent s
contenton that the transacton amounted merey to a sae of assets by the
pettoner and the Irrgaton company and dd not fa wthn the statutory
Secton 2() of tbe Revenue ct of 1928 (ch. 852. 43 Stat.. 791, 818).
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153
112(g), rt. 112(g)-2.
defnton of a ta -free reorganzaton was overrued by the dstrct court aud
|udgment was entered for the pettoner.
The respondent appeaed, assertng error on the part of the dstrct court n
matters not now matera aud aso assgnng as error the court s hodng that
the transacton consttuted a nonta abe reorganzaton.
The crcut court of appeas concuded that, as the Water company acqured
substantay a the propertes of the Irrgaton company, there was a merger
of the atter wthn the tera anguage of the statute, but hed that, n the ght
rf the constructon ths Court has put upon the statute, the transacton woud not
be a reorganzaton uness the transferor retaned a defnte and substanta
nterest n the affars of the transferee. It thought ths requrement was sats-
fed by the takng of the bonds of the Water company, and, therefore, agreed
wth the dstrct court that a reorganzaton had been consummated. It added,
however, We fnd a reason for reversng the |udgment whch has not been
argued. dvertng to the fact that the transfer of the pettoner s ndvdua
propertes to the Irrgaton company was for the purpose of ncudng them n
the atter s assets to be transferred n the proposed reorganzaton, the court
sad the statute dd not e tend to the reorganzaton of an ndvdua s busness
or affars, and the transacton was a reorganzaton wthn the meanng of the
Revenue ct as respects the corporaton s assets owned on November 4, 1931,
but not as respects the pettoner s ndvdua propertes ncuded n the sae.
It concuded: Ony so much of the consderaton as represents the prce of the
propertes and busness of the Irrgaton company s entted to be protected
from ta aton as arsng from a reorganzaton. It does not appear what the
proper apportonment s. The burden was upon LeTue to show not ony that
he had been egay ta ed, but how much of what was coected from hm was
ega. The atter he dd not do. The evdence does not support the |udgment
for the fu amount pad by hm. It s accordngy reversed, that further
proceedngs may be had consstent herewth.
The pettoner sought certorar assertng that the crcut court of appeas had
departed from the usua and accepted course of |udca proceedngs by decdng
the cause upon a ground not presented or argued and hence hr.d deprved the
pettoner of hs day n court. The respondent, though he had contended beow
that the transacton n queston dd not amount to a ta -free statutory re-
organzaton, dd not fe a cross petton askng for a revew of that part of the
|udgment e emptng from ta aton gan to the Irrgaton company arsng from
the transfer of ts assets owned by t on and pror to November 4, 1931, and the
part of the qudatng dvdend attrbutabe thereto.
We fnd t unnecessary to consder pettoner s contenton that the crcut
court of ap eas erred n decdng the case on a ground not rased by the pead-
ngs, not before the tra court, not suggested or argued n the crcut court of
appeas, and one as to whch the pettoner had never had the opportunty to
present hs evdence, snce we are of opnon that the transacton dd not amount
to a reorganzaton and that, therefore, the pettoner can not compan, as the
|ndgment must be affrmed on the ground that no ta -free reorganzaton was
effected wthn the meanng of the statute.
Secton 112() provdes, so far as matera:
(1) The term reorganzaton means ( ) a merger or consodaton (n-
cudng the acquston by one corporaton of at east a ma|orty of the votng
stock aud at east a ma|orty of the tota number of shares of a other casses
df stock of another corporaton, or substantay a the propertes of another
corporaton), .
s the court beow propery stated, the secton s not to be read teray, as
denomnatng the transfer of a the assets of one company for what amounts
to a cash consderaton gven by the other a reorganzaton. We have hed that
where the consderaton conssts of cash and short term notes the transfer
does not amount to a reorganzaton wthn the true meanng of the statute,
but s a sae upon whch gan or oss must be reckoned. We have sad that the
statute was not satsfed uness the transferor retaned a substanta stake In
103 . (2d), 20.
Pneas Ice Cod Storage Co. v. Commssoner (287 U. S., 4 2 Ct D. 30, C. .
III, 1 1 (1933) ).
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5 112(g), rt. 112(g)-2.1
154
the enterprse and such a stake was thought to be retaned where a arge
proporton of the consderaton was n common stock of the transferee, or
where the transferor took cash and the entre ssue of preferred stock of the
transferee corporaton. nd, where the consderaton s represented by a sub-
stanta proporton of stock, and the baance n bonds, the tota consderaton
receved s e empt from ta under secton 112(b)4 and 112(g).
In appyng our decson n the Pneas case (supra) the courts have gen-
eray hed that recept of ong term bonds as dstngushed from short term
notes consttutes the retenton of an nterest n the purchasng corporaton.
There has naturay been some dffcuty n cassfyng the securtes nvoved
In varous cases.
We are of opnon that the term of the obgatons s not matera. Where
the consderaton s whoy n the transferee s bonds, or part cash and part
such bonds, we thnk t can not be sad that the transferor retans any propre-
tary nterest n the enterprse. On the contrary, he becomes a credtor of
the transferee and we do not thnk that the fact referred to by the crcut
court of appeas, that the bonds were secured soey by the assets transferred
and that, upon defaut, the bondhoder woud retake ony the property sod,
changes hs status from that of a credtor to one havng a propretary stake,
wthn the purvew of the statute.
We concude that the crcut court of nppeas was n error n hodng that,
as respects any of the property transferred to the Water company, the trans-
acton was other than a sae or e change upon whch gan or oss must be
reckoned n accordance wth the provsons of the Revenue ct deang wth
the recognton of gan or oss upon a sae or e change.
ad the respondent sought and been granted certorar the pettoner s ta
abty woud, n the vew we have e pressed, be substantay ncreased over
the amount found due by the crcut court of appeas. Snce the respondent
has not drawn nto queston so much of the |udgment as e empts from ta a-
ton gan to the Irrgaton company arsng from transfer of ts assets owned
by t on and pror to November 4, 1931, and the part of the qudatng dvdend
attrbutabe thereto, we can not afford hm reef from that porton of the
|udgment whch was adverse to hm.
respondent or an appeee may urge any matter appearng n the record
n support of a |udgment, but he may not attack t even on grounds asserted
n the court beow, n an effort to have ths Court reverse t, when he hmsef
has not sought revew of the whoe |udgment, or of that porton whch s
adverse to hm.
The |udgment of the crcut court of appeas s affrmed and the cause s
remanded to the dstrct court wth drectons to proceed n accordance wth
the opnon and mandate of the crcut court of appeas.
So ordered.
everng v. Mnnesota Tea Co. (29 U. S., 378 Ct. D. 1000, C. . -1. 189 (1930)1).
everng v. Neson (29 . S.. 374 Ct. D. 1002. C. . -1. 274 (1930) ).
45 Stat., 810, 818. (See everng . Watts, 29 U. S., 387 Ct. D. 10 3, C. . -1,
27 (193 ) ).
Worcester Sat Co. v. Commssoner (75 . (2d). 251): Lentha v. Commssoner
80 . (2d. 411, 413) umam v. Commssoner (8 (2d), 77 Ct. U. 1245. C. .
937-2, 281 ) Commssoner v. tseman (89 . (2d), 458) Commssoner . Preund
(08 . (2d), 201) Commssoner v. Tyng (10 . (2d), 55) L. . Strn . Commt
tonrr (C. C. . 2) (decdnd November . 1939).
Langnes v. Green (282 U. S., 531, 535-537) : everng v. owran (302 T . S.. 238. 245
Ct. D. 1292, C. . 1938-1, 300 ) Tcone ank v. Sprague (303 D. 8., 40 , 410. note 3)
The Stephen Morgan (94 U. S., 599) : Mount Peasant v. erktcth (100 U. S.. 14
27) Unted States v. ackfeathcr (15) t S.. 180. 18 ) : Landram v. ordan (203 D S
5 , 2) othtce v. Unted States (254 U. S., 231, 233) Unted States v. mercan
Raway press Co. (2 3 U. S.. 425. 435) Morey Constructon ( o. v. Maryand Casuatu
Co. (300 U S 185, 191).
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155
112(g), rt. 112(g)-2.
rtce 112(g)-2: Defnton of terms. 1940- -101 8
Ct. D. 1438
ncome ta revenue act op 1928 decson of court.
Gan or Loss Reorganzaton Transf ok Corporate ssets for
Cash and Stock Opton greement for Sae of Stock.
corporaton transferred ts assets and busness n consdera-
ton of cash and shares of stock n a new corporaton, and, pursuant
to an opton agreement e ecuted pror to the recept of the stock,
receved cash therefor soon after ts assets were transferred.
the cash receved was dstrbuted among the stockhoders and the
corporaton was then ocay dssoved. ed: That, under the par-
tcuar facts, the transferor corporaton acqured no substanta
nterest n the new corporaton, hence there was no consodaton
or merger wthn the meanng of secton 112() of the Revenue ct
of 192S, and gan s to be recognzed from the transacton.
Unted States Crcut Court of ppeas for the S th Crcut.
The anner Machne Co. v. C. . Routzahn, Coector of Interna Revenue.
107 . (2d), 147.
ppea from the Unted States Dstrct Court for the Northern Dstrct of Oho, astern
Dvson.
November 9, 1939.
opnon.
en. Crcut udge: ppea from a |udgment dsmssng appeant s pet-
ton for refund of ncome ta es pad for the perod from anuary 1, 1928, to
uy 12, 1928. ury tra was waved, and the facts are stpuated. The soe
queston s whether dsposton of appeant s assets and busness on uy 12,
1928, was made pursuant to a pan of reorganzaton, merger, or consodaton,
to whch appeant was a party, as contended by appeant, or whether, as
urged by appeee, t was an outrght sae. If appeant s contenton s correct,
no gan s recognzed n the transacton under secton 112(b)4 of the Revenue
ct of 1928 ( 45 Stat.. 791).
ppeant, a manufacturer of rubber machnery and equpment, was an Oho
corporaton wth stock outstandng of 104 shares preferred and 15,000 shares
common. The ma|orty stockhoders of the corporaton agreed wth one rancs
nnn, a promoter, that unn shoud purchase appeant s assets and busness
for 500,000 cash and 4,000 shares of common stock of the Natona Rubber
Machnery Co., a corporaton to be organzed to take over the busness and
assets of appeant and three other corporatons.
The new corporaton was to be organzed wth an ssue of 152,000 shares of
common stock and 1,300,000 frst mortgage bonds. Certan of the common
stock was to be used for the converson of the bonds and to be sod to the
underwrters and promoter, and 50,000 shares were to be dstrbuted among
the four corporatons transferrng ther assets to the new corporaton. The
abtes of appeant, totang 42,230.97, were to be assumed by the new cor-
poraton. Under the transfer agreement, appeant coud not se the shares of
the Natona Rubber Machnery Co. to any other than hoders of shares In the
new corporaton for a year and a haf from the date of ssue.
The new corporaton was organzed n accordance wth the pan outned
above. unn assgned hs contracts wth the four corporatons to the new
corporaton, and a nstruments of conveyance and transfer were e ecuted by
appeant n accordance wth the contract. The transfer was competed, and
appeant receved 500,000 n cash and 4,000 shares n the new corporaton.
It dstrbuted the cash among ts stockhoders on uy 18. On uy 12 the
4,000 shares had been devered to a bank n escrow to be sod under a 0-day
opton agreement wth the underwrter, whch was accepted on behaf of appe-
ant on uy 5. The consderaton pnd for the opton was 2,000. On Sep-
tember 10. 928, the underwrter pad the escrow agent an addtona 94,000
under the terms of the opton, and ths amount was devered to appeant, whch
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112(g), rt. 112(g)-2.
15
at once dstrbuted the money among the stockhoders. The ega dssouton
of appeant corporaton foowed on October 1, 1928.
The case arses under the Revenue ct of 1028, the matera sectons of
whch are prnted n the margn.1
If, as contended by appeant, the transacton was made pursuant to a pan
of reorganzaton, merger or consodaton, no gan s recognzed n the trans-
acton under secton 112(b)4. The dstrct court hed upon the authorty of
crcrng v. Mnnesota Tea Co. (29 U. S., 378 Ct. D. 10 0, C. . -1, 189
(1030) ). that no such substanta nterest n the acqurng corporaton was
receved by appeant as woud brng t wthn the meanng of cousodaton
or merger as defned n secton 112(), and that secton 112(b)4 therefore dd
not appy.
We agree wth the dstrct court that ths transacton was not a consoda-
ton or merger wthn the defnton of the statute. In the Mnnesota Tea
Co. case, whe the Supreme Court states that the statute covers stuatons
outsde of strct merger or consodaton, t reaffrms the mtaton ad down
n Pneas Ice d Cod Storage Co. v. Commssoner (287 U. S., 4 2, 470 Ct. D.
30, C. . II-1, 1 1 (1933) ), that the mere purchase for money of the
assets of one company by another s beyond the evdent purpose of the prov-
son, and has no rea sembance to a merger or consodaton.
In substance, the nstant case presents nothng but the purchase of appe-
ant s assets. It s true that n addton to cash, stock was receved but the
purpose to reduce that stock to cash was ceary shown by the gvng of the
opton to the underwrter for the sae of the stock pror to the recept thereof.
ppeant n effect dscounted the stock for cash. The two corporatons n
fact dd not contempate a reorganzaton, merger or consodaton. ppeant,
n the etter sent to the stockhoders for the purpose of e panng the trans-
acton, stated Tour company havng sod a of ts assets and busness on
uy 12, 1928, s now n process of fna qudaton and dssouton. In the
petton for refund appeant ponts out that t s n process of qudaton.
ppeant dd not wsh to retan any nterest whatever n the new corporaton.
ppeant rees upon Mer v. Commssoner (84 ed. (2d), 415) (C. C. . ),
but ths case s not controng here. s nterpreted n the Mnnesota Tea Co.
and the Pneas Ice Cod Storage Co. cases, supra, the statute embraces
crcumstances dffcut to demt. It foows that cases arsng under ths
statute w necessary be decded upon ther pecuar facts. The Supreme
Court, n the Mnnesota Tea Co. case, went on to say that the nterest whch
woud permt a ta payer to cam e empton under ths status must be
defnte and matera t must represent a substanta part of the vaue of
the thng transferred. Ths s necessary n order that the resut accompshed
may genuney partake of the nature of merger or consodaton. ere the
nterest n the new corporaton was of the vaue of 9 ,000 as compared wth
500,000 cash receved. We do not consder that ths nterest, of whch the
corporaton mmedatey desred to dvest tsef, was so substanta a part of
1 Secton 112(a) : I pon the sne or e change of property the entre amount of the gan
or oss, determned under secton 111, sha be recognzed, e cept as herenafter provded
In ths secton.
Secton 112(b)4: No gan or oss sha be recognzed If a corporaton a party to a
reorganzaton e changes property, n pursuance of the pan of reorganzaton, soey for
tock or securtes n another corporaton a party to the reorganzaton.
Secton 112(d) : If an e change woud be wthn the provsons of subsecton (b)(4)
of ths secton f t were not for the fact that the property receved In e change conssts
not ony of stock or securtes permtted by such paragraph to be receved wthout the
recognton of gan, but aso ot other property or money, then
(1) If the corporaton recevng such other property or money dstrbutes It In
pursuance of the pan of reorganzaton, no gan to the corporaton shn be recognzed
from the e change, but
(2) If the corporaton recevng such other property or money does not dstrbute
t n pursuance of the pan of reorganzaton, the gan, f any, to the corporaton
sha be recognzed, but n an amount not n e cess of the sum of such money and
the far market vaue of such other property so receved, whch s not so dstrbuted.
Secton 112(1) : s used n ths secton and sectons 113 and 11 )
( The term reorganzaton means ( ) a merger or consodaton (ncudng the
acquston by one corporaton of at east a ma|orty of the votng stock and at east a
ma|orty of the tota number of shares of a other casses of stock of another corporaton,
or substantay a the propertes of nnother corporaton), or ( ) the transfer by a cor-
poraton of a or a part of ts assets to another corporaton If mmedatey after the
transfer the transferor or Its stockhoders or both are n contro of the corporaton to
whch the assets are transferred, or (C) a recaptazaton, or (D) a mere change n
dentty, form, or pace of organzaton, however effected.
(2) The term a party to a reorganzaton ncudes a corporaton resutng from a
reorganzaton and ncudes both corporatons In the case of an acquston by one cor-
poraton of at east a ma|orty of the votng stock and at east a ma|orty of the tota
number of shares of a other casses of stock of another corporaton.
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157
114, rt. 114-M
the vaue of the new corporaton that any genune merger or consodaton
e sted n the transacton.
The Commssoner dd not err n takng nto consderaton the entre seng
prce In ta ng the profts.
The |udgment s affrmed.
S CTION 114. SIS OR D PR CI TION
ND D PL TION.
rtce 114 1: ass for aowance of depre- 1940-11-10198
caton and depeton. G. C. M. 2192G
R NU CT O 192 ND SU S U NT R NU CTS.
The concuson reached n G. C. M. 2315 (O. . I-2, 21 (1027)),
that o and gas operators who had eected to deduct deveopment
e pendtures n computng net ncome must treat such e pendtures
as deductons n computng the mtaton (50 per cent of the net n-
come) on the depeton aowance, s propery appcabe under the
Revenue ct of 192C as we as under subsequent Revenue cts.
n opnon s requested whether, n vew of the decsons of the
Supreme Court of the Unted States n everng v. W/shre O
Co., Inc. (308 U. S., 90, Ct. D. 1424, C. . 1939-2, 213), and n . .
. O Co. v. everng (308 U. S., 104, Ct. D. 1423, C. . 1939-2,
212), G. C. M. 2315 (C. . I-2, 21 (1927) ) s sound n hodng that
o and gas operators, who had eected to deduct deveopment e -
pendtures n computng net ncome, must treat such e pendtures
as deductons n computng the mtaton (50 per cent of the net
ncome) on the depeton aowance under the Revenue ct of 192 .
Whe the above-cted cases dd not nvove years controed by
the Revenue ct of 192 , the reasonng empoyed by the Court n
sustanng the practce frst estabshed by G. C. M. 2315, supra, as
apped to years controed by the Revenue cts of 1928 and 1932,
confrms such practce for years controed by the Revenue ct of
192 .
The Court hed that the contrary practce estabshed under the
reguatons pertanng to the Revenue cts of 1921 and 1924 had
not. b subsequent reenactments of the pertnent statutory provson
wtnout change, evoved nto setted aw beyond the power of the
Commssoner to change by reguatory acton. fter revewng the
evouton of the reguatons bearng upon the pont, the Court con-
cuded that t s apparent that the demtaton mped n the per-
msson to deduct operatng e penses present under the earer
reguatons dsappeared from the 192 reguatons n case of o and
gas wes. (See footnote 10.) so that part of the te t of the
decson to whch such footnote pertans ponts out that the earer
provson of the reguatons upon whch the pror contrary practce
had been based was emnated from the reguatons under the
Revenue ct of 192 , and that the Commssoner undertook under
that ct to reverse the practce. It thus appears that the Court
recognzed a proper change n the reguatons and n practce under
the Revenue ct of 192 .
avng estabshed the proposton that the treatment of such de-
veopment e pendtures n computng the net ncome mtaton on
the percentage depeton aowance was sub|ect to reguatory change,
and havng ponted out that reguatory changes were n fact made
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131, rt. 131- .
158
under the Revenue ct of 192 as we as under the Revenue ct of
1928, the Court then consdered the queston as to whether such
changes were retroactve n character. Upon ths pont the Court
stated that such reguatory changes were not retroactve n character
merey by reason of the fact that they affected years n whch ta -
payers were bound to e pense deveopment costs by reason of an
eecton e ercsed n some pror perod. The Court then ponted
out, n effect, that n any event Treasury Decson 4025 (C. . I 1,
75 (1927)), whch durng 1927 permtted the e ercse of a new eec-
ton for years begnnng wth the year 1925, and G. C. M. 2315,
supra, whch at the same tme gave notce of the change n the prac-
tce n queston, eft the ta payer wthout |ust ground for compant
that t was nequtabe to reverse the practce after bndng hm by
hs eecton. s both the new eecton and the notce of the change
n practce were announced pror to the enactment of the Revenue
ct of 1928 and were made effectve begnnng wth the year 1925,
the frst year controed by the Revenue ct of 192 , such reasonng
supports the appcabty of G. C. M. 2315, supra, to years controed
by the Revenue ct of 192 as we as to ater years.
or the reasons stated, t s the opnon of ths offce that G. C. M.
2315, supra, shoud be apped to a years begnnng wth the year
1925.
. P. Wenchu,
Chef Counse, ureau of Interna Revenue.
S CTION 11 . CLUSIONS ROM GROSS INCOM .
R NU CT OP 1928.
G. C. M. 121 7 (C. . II-2,12 (1933)) modfed. (See G. C. M.
220 5, page 100.)
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
rtce 131- : When credt for ta es may 1940-2-10139
be taken. G. C. M. 21788
R NU CT O 192 ND PRIOR R NU CTS.
The decson of the oard of Ta ppeas In Unversa Wndng
Co. v. Commssoner (39 . T. ., 1) 2, acquescence, page 5, ths
uetn) shoud be apped wth respect to the accrua of rtsh
ta es arsng under the rtsh Income Ta Law as changed by the
nance ct of 192 . The prncpes outned n G. C. M. 10 13
(C. . I-1, 173 (1932)) and n Coumban Carbon Co. v. Comms-
soner (25 . T. ., 45 , acquescence, C. . I-1, 2 (1932)) shoud
be apped ony wth respect to rtsh ncome ta es mposed uuder
the rtsh aw before ts change by the nance ct of 1928.
G. C. M. 10 13 modfed.
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159
1 2, rt. 1 2-1.
In G. C. M. 10 13 t was hed that:
rtsh ncome ta es assessabe for the rtsh year of assessment, pr -
pr 5, regardess of whether such ta es are based on the average ncome of a
3-year perod or on the ncome of the precedng year, accrue on the frst day of the
rtsh ta year of assessment, for t appears that abty for the payment of the
rtsh ta es Is dependent upon whether the ta payer contnues n busness durng
the year of assessment.
In vew of the decson of the oard of Ta ppeas n Unversa
Wndng Co. v. Commssoner (39 . T. ., 9 2, acquescence, page 5,
ths uetn), the prncpe enuncated n G. C. M. 10 13, supra,
shoud be apped ony n cases where the rtsh ncome ta es were
mposed under the rtsh aw e stng pror to the enactment of the
rtsh nance ct of 192 . In the Unversa Wndng Co. case t s
ponted out that the nance ct of 192 accompshed the foowng
changes n the rtsh aw:
(1) It aboshed the 3-year average proft provson and substtuted the fu
amount of profts or gans or ncome of the year precedng assessment.
(2) It made the ta payer sub|ect to ta even f he made no proft or had no
gans durng the year of assessment
(3) If the ta payer dscontnued busness, It rendered hm abe for a ncome
ta es chargeabe to hm whether hs accountng perod was concurrent wth or
dfferent from the year of assessment, pr to pr 5.
The oard aso ponted out that for the year n whch the busness
s dscontnued the assessment s based on the actua profts from the
th of pr of that year to the date of dscontnuance.
In vew of the foregong, the rung enuncated by the oard n the
Unversa Wndng Co. case shoud be apped wth respect to the
accrua of rtsh ta es arsng under the rtsh ncome ta aw as
changed by the nance ct of 192 . s ndcated above, the prn-
cpes outned n G. C. M. 10 13, supra, and n the Coumban Carbon
Co. case shoud be apped ony wth respect to rtsh ncome ta es
mposed under the rtsh aw before ts change by the nance ct
of 192 . G. C. M. 10 13, supra, s modfed accordngy.
. P. We che,
Chef Counse, ureau of Interna Revenue.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 1 2. N T INCOM .
rtce 1 2-1: Income of estates and trusts. 1940-8-10179
G. C. M. 21799
R NU CTS O 1020 ND 1028.
Where under the terms of a trust nstrument payments of ncome
to a certan benefcary were to be made on anuary 2 and uy 2
of each year provded the benefcary was vng on those dates, the
ncome of the trust for the ast haf of the year whch was ds-
trbutabe on anuary 2 of the foowng year was ta abe to the
trust.
G. C. M. 8724 (C. . -2, 197 (1931)) and G. C. M. 15401 (O. .
I -2, 242 (1935)) revoked. Recommended that nonaequoscences
In usts v. Commssoner (30 . T. ., 820, nonacquescence, C. .
I -2, 30 (1935)) and Dean v. Commssoner (35 . T. ., 839,
nonacquescence, C. . 1937-2, 3 ) be wthdrawn, and that the
Commssoner acquesce n those cases. Recommended that I. T.
2595 (C. . -2, 353 (1931)) be revoked.
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102, rt. 1 2-1.
1G0
Ths offce has reconsdered G. C. M. 15401 (C. . T -2, 242
(1935)), whch modfed G. C. M. 8724 (C. . -2, 197 (1931)), n
vew of the decson of the Crcut Court of ppeas for the Tenth
Crcut n Commssoner v. Dean (102 . (2d), 99), affrmng Dean
v. Commssoner (35 . T. ., 839, nonacquescence, C. . 1937-2, 3 ).
G. C. M. 15401 nvoved trust ncome payabe by the trustee on
anuary 2 and uy 2 of each year to a certan benefcary (or
benefcares) of a trust who, under the terms of the trust, was re-
qured to be vng at the tme f ed for payment n order to receve
such ncome. The trustee contended that the ncome for the ast
haf of the year, that s, for the perod ended December 31, whch
was dstrbutabe on anuary 2, was ta abe to the trust, and that
the ncome of the trust dstrbutabe on uy 2 was ta abe to the
benefcary. Ths offce hed that the entre ncome was currenty
dstrbutabe to the benefcary wthn the meanng of the appcabe
ta statutes, and, therefore, was ncome ta abe to the benefcary
that the benefcary dd not become entted to such ncome unt the
tme f ed for payment and that such ncome was ta abe to the
benefcary n the year n whch t was receved by such benefcary.
The rung contaned n G. C. M. 15401, supra, was contrary to the
decson n ugustus . usts v. Commssoner (30 . T. ., 820),
nvovng trust ncome payabe on une 15 and December 15 of each
year, wheren t was hed that that part of the trust ncome whch
accrued between December 15 and December 31 each year was ncome
accumuated n trust for the beneft of unascertaned persons, and,
therefore, was ncome ta abe to the trust. In G. C. M. 15401 t
was recommended that the acquescence n the usts case (C. .
III-2, 7 (1934)) be wthdrawn, and, consequenty, nonacquescence
was pubshed n C. . I -2, 30 (1935).
The pertnent provsons of the Revenue ct of 192 , under whch
the orgna rung (G. C. M. 8724) was made, read as foows:
ST T S ND TRUSTS.
Sec. 219. (a) The ta mposed by Parts I and II of ths tte sha appy to the
Income of estates or of any knd of property hed n trust, ncudng
(1) Income accumuated n trust for the benet of unborn or unascertaned
persons or persons wth contngent nterests, and ncome accumuated or hed for
future dstrbuton under the terms of the w or trust
(2) Income whch s to be dstrbuted currenty by the fducary to the
benefcares,

(b) cept as otherwse provded n subdvsons (g) and (h), the ta
sha be computed upon the net ncome of the estate or trust, and sha be pad
by the fducary. The net ncome of the estate or trust sha be computed n the
same manner and on the same bass as provded n secton 212, e cept that

(2) There sha be aowed as an addtona deducton n computng the net
ncome of the estate or trust the amount of the ncome of the estate or trust
for Its ta abe year whch s to be dstrbuted currenty by the fducary to the
benefcares, but the amount so aowed as a deducton sha be
ncuded n computng the net ncome of the benefcares whether dstrbuted to
them or not.
(The correspondng provsons of other Revenue cts are substan-
tay the same.)
In the Dean case the trust nstrument provded for payment of
10,000 each year to a benefcary, such payment to be made on an-
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1 1
1 2, rt. 1 2-1.
uary 3 of each year. Te payments coud be made ony out of trust
ncome and ony f the benefcary was vng at the tme f ed for
payment. The Crcut Court of ppeas for the Tenth Crcut, after
referrng to the appcabe statutes, sad:
It thus s the duty of the trustee to ncude n the fducary
return the gross ncome of the trust estate, but he s aowed to deduct there-
from the amount he s requred to currenty dstrbute to the benefcary, and
the benefcary s abe for the ta on the amount currenty dstrbutabe to
hm. If no amount s currenty payabe the trustee s not entted to any deduc-
ton and the benefcary s not abe for ta on any part of the ncome. It s
ony where an amount s presenty payabe that the fducary s entted to a
deducton and the benefcary s ta abe. ( ererng v. ntcrworth, 290 U. S.,
3 5, 54 S. Ct., 221, 78 L. d., 3 . ) reuer v. everng, supra.) ut actua pay-
ment s not essenta n order for the benefcary to become abe for the ta
on the amount dstrbutabe to hm. The test under the ct Is whether he has
a present vested rght to receve the dstrbuton. If so, the statute commands
that t e treated as hs ncome and he becomes abe for the ta on t
( reuer v. everng, supra.)
ere, the trustees and the respondent made ther respectve returns on the
bass of the caendar year. It, therefore, was the duty of the trustees to ncude
n the fducary return the ncome of the trust estate at the end of each caendar
year. ut the Commssoner contends that the tem of 10,000 now n queston
was currenty dstrbutabe at the end of the caendar year that the fducary
shoud have camed a deducton n that amount and that t was ta abe to re-
spondent and was propery ncuded n computng hs net ncome, even though
not actuay pad to hm unt ater. Under the pan terms of the trust as
construed by the courts of Mssour, the trustees were not authorzed to pay any
snm to respondent at the end of the caendar year. They had no authorty
whatever to pay hn any amount unt the cose of the admnstratve year.
nd the payment authorzed at that tme coud be made ony out of net ncome.
If there was net ncome at the end of the caendar year but due to ntervenng
changes none e sted at the cose of the admnstratve year, no payment coud
be made. Lkewse, n the event of the death of respondent ntermedate the
two dates he coud not receve and recept for the dstrbuton and hs estate
woud not become entted to t. Pany, respondent dd not have a present
vested rght to the money at the end of the caendar year. e had ony a
prospectve contngent rght whch coud not rpen nto a present vested rght
before the cose of the admnstratve year. though ony three days Intervened
between the dates on whch the respectve years ended, the ncome was not cur-
renty dstrbutabe at the cose of the caendar year. It was hed at that tme
for the beneft of unascertaned persons or persons wth contngent nterests
t was hed for persons whose dentty coud not be ascertaned unt the end
of the admnstratve year.
Under the prncpe ad down n the decson n the Dean case, the
ncome of the nstant trust for the ast haf of the year whch s
dstrbutabe on anuary 2 s ta abe to the trust and not to the
benefcary snce, under the terms of the trust nstrument, such ncome
was not currenty dstrbutabe to the benefcary at the cose of the
ta abe year.
G. CM. 15401, supra, and G. C. M. 8724, supra, are accordngy
revoked. It s recommended that the nonacquescences n the usts
and Dean cases be wthdrawn and that the Commssoner acquesce n
those cases. It s further recommended that I. T. 2595 (C. . -2,
353 (1931)), whch foowed G. C. M. 8724, supra, be revoked.
. P. We che,
Chef Counse ureau of Interna Revenue.
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1 , rt. 1 -1. 1 2
rtce 1 2-1: Income of estates and trusts. 1940- -10180
I. T. 3352
R NU CT O 1918.
In vew of G. C. M. 21799 (page 159, ths uetn), I. T. 2595
(C. . -2, 353 (1931)) s revoked.
S CTION 1 5. MPLOY S TRUSTS.
R NU CT O 1934 ND RIOR R NU CTS.
Partnershps of attorneys, physcans, etc. (See L T. 3350. page 4.)
S CTION 1 . R OC L TRUSTS.
rtce 1 -1: Trusts, wth respect to the 1940-11-10200
corpus of whch, the grantor s regarded Ct. D. 1445
as remanng n substance the owner.
INCOM T R NU CT O 1934 D CISION O SLTR M COURT.
1. Irrevocabe Short Tkt.m Trust Income Nor Ta abe to
Grantor Under Secton 1 of the Revenue ct of 1934.
n rrevocabe short term trust, the net ncome of whch was
to be pad to the wfe of the grantor and the corpus to go to hm
upon termnaton of the trust, does not fa wthn the provsons of
secton 1GC of the Revenue ct of 1934, and the trust ncome s not
ta abe to the grantor under that secton.
2. Peadng Waver Rght to Cam eneft of Secton
pressy Waved n Lower Court.
The pettoner n hs bref before the ower court havng e -
pressy waved reance upon any secton other than secton 1 ,
can not be aowed the beneft of the broader provsons of secton
22(a).
3. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (104 . (2d), 1013). afrmng decson of the Unted
States oard of Ta ppeas (1 38) (37 . T. ., 10 5), affrmed.
Supreme Court of the Unted States.
Guy T. everng, Comm soncr of Interna Revenue, pettoner, v. Meredth
Wood.
309 U. S., 344.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut
ebruary 2 , 1940.
OPINION.
Sr. ustce Dougas devered the opnon of the Court.
Ths case, ke everng v. Cfford ( U. S., Ct. D. 1444, page 105, ths
uetn ) s here on certorar, the probems n the two cases beng the same n
certan essenta respects. In pr, 1931, respondent, who owned 25 shares
of stock of ook-of-the-Montb Cub, Inc., made hmsef trustee of those shares
under an agreement whch was to e pre n three years1 or earer on the death
1 In 1932 the term was e tended to fve years from pr, 1931.
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1 , rt. 1 -1.
of ether hm or hs wfe. y the trust he was to hod, Invest, and renvest
the shares, to coect the net ncome therefrom and to pay t to hs wfe.
e had the power to retan the stock or to se t or any part thereof
at such tme and on such terms as he shoud deem proper. It was
provded that hs power of nvestment or renvestment of any of the property
or moneys hed n trust was not to he restrcted by any aw governng nvest-
ments by trustees. e was aso gven power to f and determne the vaue
of the property for a purposes of the trust and to determne whether any
property or money receved or hed n trust sha be treated as capta or
ncome, and the mode n whch any e pense ncdenta to the e ecuton of
the trust s to be borne as between capta and ncome, wth the provso,
however, that stock dvdends and subscrpton rghts shoud be treated as prn-
cpa. e was prohbted from recevng any commssons wth respect to
prncpa or ncome and an e cupatory cause purported to protect hm aganst
any oss e cept that occasoned by hs wfu msconduct. e had the power
to appont a substtute trustee. On termnaton of the trust a property then
hed n trust was to go to hm. The trust contaned no power of revocaton nor
any power to revest n the grantor at any tme, pror to the date of termnaton,
tte to any part of the corpus.
Durng 1934 respondent pad over to hs wfe 8,750, whch was the entre
ncome from the trust for that year. She ncuded t n her Income ta return.
The Commssoner, beng of the opnon that the ncome was ta abe to respond-
ent, determned a defcency n hs 19.34 return. Respondent appeaed to the
oard of Ta ppeas whch hed that pettoner was n error (37 . T. .,
10 5). The crcut court of appeas afrmed (104 . (2d), 1013) on the au-
thortv of Unted Sates v. rst Natona ank of rmngham (74 .
(2d), 3 0).
Pettoner mantans that the trust Income Is ta abe to respondent ether
nnder secton 1 or secton 22(a) of the Revenue ct of 1934 ( 48 Stat, 80)
or both.
y secton 10 the ncome from a trust s ta abe to the grantor where at
any tme the power to revest n the grantor tte to any part of the corpus of the
trust s vested n hm or n any person not havng a substanta adverse
nterest n the dsposton of such part of the corpus or the ncome therefrom. 4
Pettoner has not undertaken to estabsh that under New York aw, whch
governs ths trust, respondent had the power to revoke t pror to the end of the
term. ut n hs contenton that the trust here nvoved s covered by secton
1 , pettoner ponts out that there s no practca dfference between a revocabe
trust and one certan to be termnated soon. nd he argues that t woud not
be sensbe to mpute to Congress a purpose to mpose the ta when the grantor
has an e ecutory power to revest tte n hmsef but to wthhod the ta when
the grantor, by provsons n the trust deed, has aready e ercsed that power.
Our dffcuty es not n an nabty to see the smarty of those stuatons
bat n beng abe to say that Congress treated them the same under secton
1 . power to revest or revoke may n economc fact be the equvaent of
a reverson. ut at east n the aw of estates they are by no means synony-
mous. or, generay speakng, the power to revest or to revoke an e stng
estate s dscretonary wth the donee donor a reverson s the resdue eft
In the grantor on determnaton of a partcuar estate. (See Tffany, Rea
Property (2d ed.), secton 129 et seq., secton 31 ct seq.) Congress seems to
have drawn secton 1 wth that dstncton n mnd, for mere reversons are
not specfcay mentoned. Whether as a matter of pocy such nce dstnctons
shoud be perpetuated n a ta aw by seectng one type of trust but not the
other for speca treatment s not for us. We have ony the responsbty of
Is rght to se was sub|ect to a coatera agreement, not matera here, wth one
Scherman. grantng Scherman a preemptve rght In case respondent decded to se.
No substtute trustee was, however, apponted, respondent contnung to act as trustee
unt termnaton of the trust n 103 .
Secton 1C0 reads In fu:
Where at any tme the power to revest n the grantor tte to any part of the corpus of
the trust s vested
(1) In the grantor, ether aone or n con|uncton wth any person not havng a sub-
rtanta adverse Interest In the dsposton of such part of the corpus or the ncome there-
from, or
(2) n any person not havng a substanta adverse nterest In the dsposton of such
of the corpus or the ncome therefrom,
the ncome of such part of the trust sha be ncuded In computng the net Income of
the grantor.
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1 4
carryng out the congressona mandate. nd where Congress has drawn a
dstncton, however nce, t s not proper for us to obterate t. That seems
to ns to be the case here. Whether wsey or not, Congress confned secton
1 to trusts where there was a power to revest. The probem of nter-
pretaton under secton 1 s therefore qute dfferent from that under secton
22(a). The former s narrowy confned to a speca cass the atter by broad,
sweepng anguage s u-ncusve. ( cverng v. Cfford, supra Ct. D. 1444,
page 105, ths uetn .) ccordngy, the wde range for defnton and specf-
caton under the atter s ackng under secton 1 . nd so far as secton 1
s concerned no apparent or urkng ambguty requres or permts us to dvue
a broader purpose than that e pressed. The egsatve hstory corroborates
ths concuson. When the 1934 ct was before the ouse commttee, the
Treasury recommended that ncome from short term trusts and from revocabe
trusts shoud be ta abe to the creator. The Congress adopted the atter by
an approprate amendment to secton 1 but t dd not seect the former for
speca treatment. When such cear choce of deas has been made n the
draftng of a specfc provson of the aw, ts anguage must be taken at
ts face vaue. Secton 1 s therefore not appcabe to ths trust snce
respondent s gven no power to reca the corpus. e or hs estate gets t at
the end of the term, on the death of hs wfe, or on hs own death whchever
Is the earest.
or a whoy dfferent reason, pettoner s argument based on secton 22(a)
must fa. The oard of Ta ppeas purported to pace ts decson soey on
secton 1 and secton 1 7 of the ct. Pettoner n hs assgnments of error
specfcay mentoned ony secton 10 and secton 1 7, not secton 22(a). In
s bref before the crcut court of appeas pettoner e pressy waved re-
ance upon any secton other than secton 1 . Though pettoner n hs pet-
ton for certorar reed on secton 22(a), respondent n opposton thereto
took the poston that that pont was not avaabe to pettoner here as t was
not rased beow. In vew of these facts, especay the e press waver beow,
we do not thnk that pettoner shoud be aowed to add here for the frst
tme another strng to hs bow. s we have ndcated, the ssues under secton
1 and secton 22(a) are not cotermnous. Though both dea wth concepts
of ownershp, the range of nqury under the atter s broad, under the former
confned. To open here for the frst tme and n face of the e press dscamer
an nqury nto the broader fed s not ony to deprve ths Court of the assst-
ance of a decson beow but to permt a shft to ground whch the ta payer
had every reason to thnk was abandoned n the earer stages of ths tgaton.
(See urnet v. Commonweath Improvement Co., 287 U. S., 41 , 418 TCt. D. 22.
C. . II-1, 277 (1933) .) It s not apparent why a ess strct rue Is
necessary n order adequatey to protect the revenue.
ffrmed.
Mr. ustce Robeets concurs n the resut.
Revenue revson, 1034, hearngs before the Commttee on Ways and Means. ouse of
Representatves, Seventy-thrd Congress, second Resson, page 151. The recommendaton
read : The ncome from short-term trusts and trusts whch are revocabe by the creator
at the e praton of a short perod after notce by hm shoud be made ta abe to the creator
of the trust.
Conference Report No. 1385, ouse of Representatves, Seventy-thrd Congress, second
sesson, page 24 :
I nder e stng aw. the ncome from a revocabe trust Is ta abe to the grantor ony
where such grantor (or a person not havng a substanta adverse nterest n the trust)
has the power wthn the ta abe year to revest n the grantor tte to any part of the
corpus of the trust. Tnder the terms of some trusts, the power to revoke can not be
e ercsed wthn the ta abe year, e cept upon advance notce devered to the trustee
durng the precedng ta abe year. If ths notce Is not gven wthn the precedng ta abe
year, the courts have hed that the grantor s not requred under e stng aw to ncude
the trust Income for the ta abe year In hs return. The Senate amendments requre the
Income from trusts of ths type to be reported by the grantor. The ouse recedes.
rtce 10 -1 of Treasury Reguatons 8 , orgnay promugated under secton 1 .
was not promugated under secton 22(a) unt 193 (T. D. 4 20 C. . -1, 140
(198 ) ), two years after the ta abty here In Issue occurred. ence we do not have
a case of reance by the Government on a reguaton whch durng the ta abe year In
queston rested on two egs, one of whch was secton 22(a).
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1 7, rt, 1 7-1.
S CTION 1 7. INCOM OR N IT
O GR NTOR.
rtce 1 7-1: Trusts n the ncome of whch 1940-7-10173
the grantor retans an nterest. Ct. D. 14 9
INCOM T R NU CT O 1932 D CISION O SUPR M COURT.
L Income Trust Monthy Payments to Wfe Ta abe to
usband.
Pror to dvorce and n settement of a sut for separate mante-
nance, a property and amony settement was agreed upon between
husband and wfe whereby a certan amount of trust ncome was
to be pad monthy to the wfe for fe, the baance to the husband
for hs fe, wth provson for dsposton of the trust corpus and
ncome upon the death of ether or both. The dvorce decree con-
frmed the property and amony settement. ed: That the
amounts dstrbuted to the wfe under the trust are not regarded as
ncome of the wfe but as pad n dscharge of the husband s ob-
gaton to support her, and hence are to be ncuded n hs ta abe
ncome.
2. Decson ppcabe.
The prncpe nvoved n Dougas v. Wcvts (1935) (290 U. S.,
1 Ct. D. 1041, C. . I -2, 250 (1935) ) s appcabe n the absence
of cear and convncng proof that oca aw and the amony trust
have gven the dvorced husband a fu dscharge and eave no
contnung obgaton however contngent.
3. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, ghth
Crcut (1939) (103 . (2d), 702), reversed.
Supreme Court of the Unted States.
Guy T. emng, Comm oner of Interna Revenue, pettoner, v. . . . tch.
309 U. S., 149.
On wrt of certorar to the Unted States Crcut Court of ppeas for the ghth Crcut
anuary 29, 1940.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Pettoner camed that an amount of 7,128 dstrbuted n 1933 under a so-
caed amony trust to respondent s dvorced wfe shoud have been ncuded
n respondent s ta abe ncome for that year. The oard of Ta ppeas agreed
and found a defcency (37 . T. ., 1330). The crcut court of appeas re-
versed, one |udge dssentng (103 . (2d), 702). We granted certorar because
f the asserted faure of that court correcty to appy the prncpe nvoved n
Dougas v. Wcnts (290 U. S., 1).
The so-caed amony trust n queston was created a few years before the
dvorce, whe respondent and hs wfe were separated, and n settement of
a sut brought by her for separate mantenance. Certan premses (a har
tonc factory and a ong term ease thereon) were transferred to a trustee to
hod tte, coect rents an after deducton of e penses to pay the wfe 000
a month durng her fe and the baance to respondent for hs fe.1 On the
Respondent and hs wfe separated n 1017. In 1 f0 respondent purchased a home for
hs wfe, furnshed t for her, and gave her an automobe. In the same year . W. tch
Co. was ncorporated and acqured the assets of a predecessor partnershp n e change for
2.000 of ts shares. Of these shares 1.800 were ssued to respondent and 10 to hs wfe.
She was aso an offcer and drector of the company, wth a monthy saary of 00.
When the separate mantenance sut was setted n 1 I2:1, respondent eased certan
premses, owned by hm, to the . W. tch Co. for 99 years, at an annua renta of
12,000. These premses and that ease were transferred to the trustee. Upon creaton
of the trust the wfe ceased to be an offcer and drector of . W. tch Co. and receved
no further saary from t.
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1
death of ether respondent or hs wfe the deceased s share of the ncome was
to be pad to ther chdren. The trust was to contnue at east 15 years. Ch
the death of both respondent and hs wfe the prncpa wns to be pad over
to ther chdren. The trust was rrevocabe. nd whe respondent covenanted
to pay off certan encumbrances on the trust property, he dd not underwrte
n whoe or n part the 00 monthy payments to hs wfe.
In 1925 she fed sut for a dvorce n an Iowa court. property settement
was agreed upon whch ncuded the trust agreement and, n addton, provded
for a transfer to her by respondent of certan shares of stock and cash.3 The
dvorce decree confrmed the property and amony settement.4
The genera rue s cear. mounts pad to a dvorced wfe under a decree
for amony are not regarded as ncome of the wfe but as pad n dscbarge
of the genera obgaton to support, whch s made specfc by the decree.
(Dougas v. WUcus, supra, page 8.) It s pan that there the amony trust,
whch was approved by the dvorce decree, was merey securty for a contnung
obgaton of the ta payer to support hs dvorced wfe. That was made evdent
not ony by hs agreement to make up any defcences n the 15,000 annua
sura to be pad her under the trust. It was aso confrmed by the power of
the Mnnesota dvorce court subsequenty to ater and revse ts decree and
the provsons made theren for the wfe s beneft. Lkewse consstent wth
th use of the amony trust as a securty devce was the provson that on
death of the dvorced wfe the corpus of the trust was to be transferred back
to to ta payer. Respondent nssts that n the nstant case there s no con-
tnung obgaton to whch the ncome of the amony trust s apped but rather
that the property and amony settement approved by the Iowa court effected
an absoute dscharge of any duty or obgaton on hs part to support hs
dvorced wfe. It s true that there s no covenant or guarantee to make up
any defcency n the monthy payment to hs dvorced wfe, as there was n the
Dougas case. nd unke that amony trust, the nstant one, though grantng
I e ta payer a partcpaton n the ncome, rrevocaby aenates the corpus.
Other ndca of the use of ths amony trust as a securty devce for any
contnung obgaton of respondent are aeged to be absent by reason of the
ack of power. In the Iowa court to modfy the decree confrmng the property
and amony settement.
The Iowa statute provdes: When a dvorce s decreed, the court may make
such order n reaton to the chdren, property, partes, and the mantenance
of the partes as sha be rght. Subsequent changes may be made by t n
those respects when crcumstances render them e pedent. 5
dmttedy the court under that statute has the power to modfy provsons
n the orgna decree for the contnued support and mantenance of the wfe.
nd tUkewse seems we setted by a ong ne of Iowa cases that where the
orgna decree makes no provson for amony, there s no power subsequenty
to modfy the decree so as to provde t.T nd, respondent contends, where
amony Is aowed n a ump sum or a property settement s ratfed by the
decree, the court retans no power to modfy.
Span v. Span (177 In., 249) and McCoy v. McCoy (191 a., 973), on whch
respondent and the crcut court of appeas pace reance are not n pont snce
those dvorce decrees, unke the nstant one, made no provson for amony.
In Span v. Span, supra, the Supreme Court of Iowa specfcay reserved the
queston of the power to modfy a dvorce decree nvovng a property sette-
ment. s to that t sad (pages 200-2 1) : s to an award n gross, or a d-
vson of the property, based upon an equtabe apportonment of the property
No queston of mnor chdren s here nvoved, the youngest of the four chdren
bavns become of age n 1027.
S hundred shares of stock of . W. tch Co. and 23.500.
4 It s therefore, ordered, ad|udged and decreed, that the pantff, tte S. tch, be,
and she s hereby, dvorced from the defendant, red W. tch, absoutey that
the trust agreement whch s referred to n the defendant s answer as havng been entered
nto between these partes on or about the 23d day of pr. 1023, he. and the
same s herebv ratfed and confrmed by the court nd that the property and amony
getement made bv the partes be, and It s hereby confrmed by the court.
1 Secton 10481. Iowa Code.
See Cor v. Cor (217 a., 812) : unger v. unr|er (21 a., 3 ) Roquette v. rquette
(21 a.. 000) Toneu v Tonen (213 Ta.. 398) : Mnnnon v. Iforroon (208 a., 1384).
.Span v. Span (177 a.. 2- 0 : McCoy v. McCoy (101 a., 973) and/taker v. Innrttaker
(223 a., 4 2) Duva v. Duva (215 a., 24) Dockaon y. Dockton (202 a., 489).
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of ether of the partes at the tme the dvorce s grunted, we have o occason
to speak, for that matter s not n the case.
Lkewse arsh v. arsh (190 a., 493), cted beow and urged here n
support of respondent s contenton, s of tte ad, for n spte of a strong con-
currng opnon that the court had no power to modfy an aowance of gross
or permanent amony, the ma|orty apped the statute and concuded
(page 501) Whatever the e tent of the power of the court may be to make
such ncrease, t s aways sow to e ercse such power, e cept n the presence
of e traordnary crcumstances, such as are not present here. To be sure,
there s the foowng strong statement n raft v. raft (193 a., G02, 07) :
We are ncned to the vew that, where amony s aowed n a ump sum,
as permanent amony, or where there s a dvson of the rea property of
the partes, as permanent amony, the statute does not authorze a change
theren, e cept for such reasons as woud |ustfy the settng asde or changng
of a decree n any other case that the party awarded permanent amony s
not entted to permanent amony and support both . nd n Carr
v. Carr (185 a., 1205), that court stated, page 1211: mony s aowed
n eu of dower and the pror duty of support, and a revew of the decree
awardng or refusng same can be had ony for such fraud or mstake as woud
authorze the settng asde or modfcaton of any other decree. In that case
the dvorce decree requred the husband, nter aa, to convey certan rea
estate to a trustee for the e cusve beneft of the wfe to be hed n trust for
fve years, durng whch tme the Income was to be pad over to the wfe and
at the end thereof the trustee, on demand, was to convey the property to
her. Meanwhe, the trustee had the power to se the property at not ess
than 100 an acre. Shorty before the e praton of the 5-year perod, the
dvorced husband fed a cross-petton n the dvorce sut askng for a modfca-
ton of the trust n order to protect hs former wfe from her own e travagance
and her ne perence n busness affars. pparenty the reef asked was
not based on the Iowa statute gvng the court power to make subsequent
changes n the dvorce decree when crcumstances render them e pedent.
or the court stated that the modfcaton of the decree was sought on the
grounds (1) that the donor of the trust was entted to have t carred out n
accordance wth ts terms and the rea purpose for whch t was created
and (2) that, n the aternatve, he was entted to have a guardan of the
property apponted.
owever that may be, much of the weght whch respondent accords raft
v. raft and Carr v. Carr, supra, seems to have been dsspated by McNary v.
Mcfary (20 a., 942). In that case the Supreme Court of Iowa had squarey
before t the queston of whether or not under the foregong statute a decree
of permanent amony awardng persona and rea property to the wfe coud
be atered. The court after statng that It knew of no case where such a
decree had been subsequenty modfed, added (page 94 ) : Ths queston s
not argued by the partes, and we fnd t unnecessary to make a pronounce-
ment thereon. nd, sgnfcanty, t proceeded to appy the statute and fnd-
ng that ts condtons had not been satsfed, t dened the reef asked by the
dvorced husband.
On ths statement of the Iowa authortes we can ony specuate as to the
power of the Iowa court to modfy amony awarded n a ump sum or a prop-
erty settement ratfed by a dvorce decree. To be sure, raft v. raft, supra,
nvoved some features common to the nstant case, snce the wfe was to receve
the ncome of 4,000 to be paced n trust by the husband or, unt he paced t
In trust, 5 per cent on that amount. ut the refusa to modfy that decree
was not paced squarey, or even argey, on the ack of power to do so but on
other crcumstances. urthermore, the uncertanty created by McNary v. Mc
ary, supra, makes perhaps for even greater uncertanty where an amony
trust of the knd here nvoved s concerned. t east respondent has not estab-
shed a necessary dentty n treatment of transfers of persona or rea property
on the one hand and aowance of ncome out of ths knd of amony trust on
the other. ven on the authorty of raft v. raft, supra, respondent has not
ceary shown that In Iowa dvorce aw the court has ost a |ursdcton to
ater or revse the amount of ncome payabe to the wfe from an enterprse
whch has been paced n trust. or a that we know t mght retan the
power to reaocate the Income from that property even though t acked the
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1 S
power to add to or subtract from the corpus or to tap other sources of Income.1
If It dd have such power, then t coud be snd that a decree approvng an
amony trust of the knd here nvoved merey paced upon the pree stng
duty of the husband a partcuar and specfed sancton. In that event, the
case woud be tte dfferent from one where the husband was drected to make
specfed payments to the dvorced wfe. nd we see no reason why the rue
of Dougas v. Wcuts, supra, shoud not then appy.
nough has been sad to show that respondent has not sustaned the burden
of estabshng that hs case fas outsde the genera rue e pressed n Dougas
v. Wcuts, supra. If we were to concude that ths case s an e cepton o
that rue we woud be actng argey on con|ecture as to Iowa aw. That we
can not do. or f such a resut s to obtan, t must be bottomed on cear and
convncng proof, and not on mere nferences and vague con|ectures, that oca
aw and the amony trust have gven the dvorced husband a fu dscharge and
eave no contnung obgaton however contngent. Ony n that event can
ncome to the wfe from an amony trust be treated under the Revenue cts
the same as ncome accrung from property after a debtor has transferred that
property to hs credtor n fu satsfacton of hs obgaton uness of course
Congress decdes otherwse.
The |udgment of the crcut court of appeas s reversed.
Mr. ustce Reed concurs n the resut.
Mr. ustce McReynods s of the opnon that the |udgment beow shoud
be affrmed.
INCOM T R NU CT O 10:4 D CISION OP COURT.
1. Trust Income fob eneft of Grantor Insurance Premums
Pad from Trust Income.
The ta payer estabshed two trusts the Income from whch was
to be used to pay the premums on Insurance poces coverng the
fe of her husband and of whch she was the soe benefcary. She
aone had the rght to oan or cash surrender vaues and to change
the benefcary, e cept that under one pocy te nsured aso had
such rghts. The frst trust was sub|ect to termnaton, under cer-
tan condtons, upon wrtten notce by the husband, by the ta -
payer, or by ther daughter, In whch events the accumuated
ncome was to go to the husband or to the daughter and the corpus
to the ta payer, or to her husband, or to the daughter. Under the
second trust the nsurance was made payabe to the trustee nstead
of to the ta payer, and ony the husband had the rght to ter-
mnate. In whch event the accumuated ncome was to go to the
husband and corpus to the wfe. The trusts were not otherwse
revocabe. ed: That, n contempaton of aw, the trust Income
remaned n substance that of the grantor, used to purchase prop-
erty for hersef, and was therefore ta abe to her under secton
1 7 of the Revenue ct of 1934, even though the accumuated n-
come was to be the property of the husband f the trusts were
termnated durng hs fetme.
2. Decson oowed.
Dougas v. Wcuts (29 U. S., 1 Ct. D. 1041, C. . I -2,
250 (1935) ) foowed.
3. Decson Reversed.
Decson of the Unted States oard of Ta ppeas (1938) (38
. T. ., 419) reversed.
4. Reheamng Dened.
Petton for rehearng dened ebruary 5, 1940.
rtce 1 7-1: Trusts n the ncome of whch
the grantor retans an nterest.
1940-17-10241
Ct. D. 1452
Cf. Shaw . Shao (59 III. pp., 2 8).
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1 9
15 1 7, rt. 1 7-1.
UsrTTD States Cbcutt Court of ppeas foe the Seventh Crcut.
Commssoner of Interna Revenue, pettoner, v. opha P. O. Morton,
respondent.
108 P. (2d), 1005.
Petton for revew of decson of the Unted States oard of Ta ppeas.
efore vans, Sparks, and Trk.vnor, Crcut udges.
anuary 12, 1040.
OPINION.
Sparks, Crcut udge: Ths petton for revew of a decson of the oard
of Ta ppeas presents the queston whether or not the Income for the year
1934 of two trusts was ta abe to the grantor. The oard hed that the
ncome of the trusts was not to be ncuded n computng the grantor s gross
ncome because power to revoke the trusts was n a person havng an nterest
adverse to that of the grantor so that secton 1 0 of the Revenue ct of 1934
was not appcabe, and the Income was not hed for or dstrbutabe to the
grantor wthn the meanng of secton 1 7 of the same ct.
The facts were stpuated by the partes. etween the years 1925 and 1931,
the husband of the ta payer took out a seres of eght poces nsurng hs
fe for 275,000. The ta payer was desgnated as benefcary of a of the
poces n case of hs death, and the poces aso provded that she aone had
the rght to the oan or cash surrender vaue of each, and the rght to change
the benefcary.
In ebruary, 1933, the ta payer entered nto a trust agreement wth the
ankers Trust Co. of New York Cty, for the purpose of creatng a trust fund,
the ncome of whch was to be used to pay the premums on the eght poces
on the fe of her husband. Under the terms of ths agreement, the Trust com-
pany was to act as trustee, and the trust was to termnate upon the death of
the ast survvor of her husband, her daughter, and hersef. It was aso sub-
|ect to termnaton by the husband by devery to the trustee of a wrtten
memorandum statng that he ntended to termnate on the ne t succeedng 1st
of anuary, foowed by devery by hm on that date to the trustee of a second
wrtten memorandum that he was thereby termnatng t. Upon such termna-
ton, the trustee was obgated to dever to the husband a accumuated
ncome of the trust estate and a nvestments and renvestments thereof, and
to the ta payer-grantor a the remander of the trust estate f she were then
vng, and f not. the entre trust estate was to be devered to the husband.
If the trust had not been termnated pror to the death of the husband, and
f t contnued for three years foowng hs death, then the grantor was en-
tted to termnate t at any tme thereafter, by wrtten notce to the trustee,
and after her death, the daughter was to be entted to termnate by wrtten
notce to the trustee. If the trust were termnated by the grantor, the trustee
was to dever a accumuated ncome together wth the nvestments thereof
to the daughter, and the remander of the trust estate to the ta payer. If t
were not termnated unt after the death of the grantor, then the entre trust
estate was to be devered to the daughter. The trust was not otherwse rev-
ocabe. To carry out the terms of ths agreement the ta payer devered to
the trustee certan stocks and bonds, the ncome of whch aggregated 12,171
for the year 1934.
In March, 1934, the husband created a trust smar n a respects to that
created by the ta payer e cept that the postons of the husband and wfe n
ther reaton to t were reversed. Ths trust was aso Intended to provde for
payment of premums on two poces of fe nsurance, ths tme, on the fe
of the ta payer, aggregatng 150,000, and payabe upon her death to her hus-
band, the assured under the poces nvoved n the trust n sut.
In ugust, 1934, the ta payer and the Manhattan Trust Co. entered nto a
trust agreement to provde a fund for the payment of premums on another
pocy nsurng the fe of the ta payer s husband, ths one for 50,000, then
payabe to the ta payer as benefcary. The terms of ths trust agreement
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1 7, rt. 1 7-1.
170
dffered n severa respects from the one entered Into between ta payer and
the ankers Trust the year before. It provded that the ta payer was to have
the pocy modfed by havng t made payabe to the trustee nstead of to her-
sef after payment of premums and the retenton of such remander of the
ncome as seemed advsabe to nsure payment of subsequent premums, the
trustee was to pay the baance of the ncome to the ta payer the ta payer
and/or her husband, the nsured, were entted to any cash surrender or oan
vaue of the pocy, and they reserved to themseves the rght to borrow on,
assgn or pedge the pocy, and to change the benefcary thereof, and to any
other optons whch mght e st under the pocy the trustee was authorzed
to coect the proceeds of the pocy upon Its maturty by the death of the n-
sured, whch proceeds were to be pad over to the ta payer, f she were then
vng, and f not, then to her daughter, f vng, or to the ssue of the
daughter, f any, f the daughter predeceased the ta payer, and f no Issue,
then the proceeds were to be equay dvded between Prnceton Unversty,
and the trustees of the Morton rboretum the trust was sub|ect to termna-
ton at any tme by devery of an nstrument n wrtng by the husband to
the trustee, whch was thereupon to dever to the husband any ncome of the
trust estate then on hand, and to the grantor, the prncpa of the estate and
the nsurance pocy f not so termnated by acton of the husband, the trust
was to contnue durng hs fe, and unt fve years after hs death, uness
both the ta payer and ther daughter predeceased hm, n whch event, the
trust was to termnate upon hs death upon termnaton after hs death, the
same dsposton was to be made of the trust estate as was to be made If the
trust were termnated durng hs fe, e cept that the person entted to receve
the prncpa was aso to receve the ncome. The trust was revocabe ony as
provded by the Instrument tsef. To carry out Its provsons, the ta payer
devered to the trustee certan stocks and bonds, the ncome of whch was
e pected to amount to about 2,400, appro matey the amount necessary to
cover the 2,228 annua premum due on the pocy and pay the e penses of
admnsterng the trust.
Durng the ta year In queston, the trustee coected dvdends and Interest
from the stocks and bonds In the frst trust estate amountng to 12,171, and
n addton t aso receved capta net gans of 21,88 , of whch 7,288 was
sub|ect to ncome ta . Durng that year It e pended 8,203 for premums on
the eght Insurance poces retaned 250 for ts own fees and pad 25.5
for ncome ta es for the year 1933. The baance was accumuated In accordance
wth the provsons of the trust agreement
The Commssoner contended before the oard and before ths court that the
Income from the two trusts shoud be ta ed to the grantor ether under the
provson of secton 1 of the Revenue ct of 1934, or secton 1 7 of the
same ct.1 The oard rued aganst the Commssoner as to the appcabty
of each secton. It hed that because the husband was entted to receve the
corpus of the trust estate n the event that the ta payer predeceased hm, and
because he was entted to receve the accumuated Income upon termnaton
of the trusts durng hs fetme, he dd have a substanta adverse nterest.
Sep. 1 f. Revocabe Trusts.
Where at any tme the power to revest In the grantor tte to any part of the corpus
of the trust Is vested
(1) In the grantor, ether aone or n con|uncton wth any person not havng a sub-
stanta adverse nterest n the dsposton of such part of the corpus or the ncome
therefrom, or
(2) n any person not havng a substanta adverse nterest n the dsposton of such
part of the torpus or the ncome therefrom, then the ncome of such part of the trust
sha be ncuded n computng the net Income of the grantor.
Sec. 1 7. Incomh for eneft of Grantor.
(a) Where any part nf the ncome of a trust
(1) s, or n the dscreton of the grantor or of any person not havng a substanta
adverse Interest In the dsposton of such part of the ncome may be, hed or accumuated
for future dstrbuton to the grantor or
(2) may. n the dscreton of the prantor or of any person not havng a snbatanta
adverse nterest n the dsposton of such part of the ncome, be dstrbuted to the
grantor or
(3) s. or n the dscreton of the grantor or of any person not havng a substanta
adverse nterest n the dsposton of such part of the Income may be, apped to the
payment of premums upon poces of nsurance on the fe of the grantor (e cept poces
of nsurance rrevocaby pyabe for the purposes reatng to the so-caea
chartabe contrbuton deducton) then such part of the Income of the trust sha be
ncuded n computng the net ncome of the grantor.
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171
1 7, rt. 1 7-1.
even though that nterest was contngent n nature, and that, therefore, the
grantor coud not be ta ed for the ncome of the trust.
It s obvous that the ncome of these trusts was devoted soey to the
grantor s own uses. She was the soe benefcary of the eght poces nvoved
n the frst trust she aone had the rght to change e benefcary she
aone was entted to ther cash surrender or oan vaue. Wth respect to the
second trust, her tte was somewhat ess drect, hut the pocy was, n fact,
payabe to her. even though ndrecty through the medum of the trustee
whch was obgated by the terms of the trust to pay the proceeds to her upon
coecton, f she were then vng, and f she were not. t was her dsposton
of the proceeds whch was to contro, by the terms of the trust agreement.
Thus, athough by the provsons of the two trust agreements, the ta payer
dvested hersef of the contro of the trust estate and of ts ncome, the fact
remans that that ncome was e pended soey for her own purposes, and the
property upon whch t was e pended, namey, the nsurance poces, beonged
tc ber and her aone, and, n the case of the eght covered by the frst trust,
even before ther maturty by the death of the nsured.
Secton 1 7 has been construed to make possbe the ta aton of trusts to
the grantor where the ncome was to be devoted to the dscharge of an obga-
ton of the grantor, whether such obgaton was mposed by operaton of aw
or by contract. (See Dougas v. Wcuts, 2 U. S., 1 everng v. umentha,
28 U. S., 552, reversng 70 . (2d), 507 everng v. Schwetzer, 29 U. S.,
551, reversng 75 . (2d), 702.) In the Wcuts case, the trust was rrevocabe.
owever, the Court dd not consder that fact controng. In determnng
that the grantor was ta abe on the ncome of the trust there nvoved, the
Court sad : We do not regard the provsons of the statutes as to the ta a-
ton of trusts, fducares and benefcares as ntended to appy to
cases where the ncome of the trust woud otherwse reman, by vrtue of the
nature and purpose of the trust, attrbutabe to the creator of the trust and
accordngy ta abe to hm. These provsons have approprate reference to
cases where the ncome of the trust s no onger to be regarded as that of the
settor, and we fnd no warrant for a constructon whch woud precude the
ayng of the ta aganst the one who through the dscharge of hs obgaton
en|oys the beneft of the ncome as though he had personay receved t.
Nor are the provsons of the statutes defnng nstances n whch
the grantor remans ta abe, as n case of certan reservatons for hs beneft
or provsons for the payment of premums upon poces of nsurance on bs
fe, to be regarded as e cudng nstances not specfed, where n contempa-
ton of aw the ncome remans n substance that of the grantor. No such
t euson s e pressed and we see no ground for mpyng t.
In vew of ths rung we are of the opnon that even though a tera nter-
pretaton of secton 107 mght tend to estabsh the mmunty of the grantor
from the ta , no such tera nterpretaton s to be accorded the secton. Look-
ng to the practca facts, we rnd that here the buk of the ncome dd reman,
n contempaton of aw, n substance, that of the grantor, used to purchase
property for hersef. We thnk t coud hardy be argued, In vew of the
teachng of the Wcuts case, that f the ta payer created a trust for the
purpose of payng nstaments provded for by contract on the purchase of
- house or any other property, tte to whch was taken n the name of or
for the beneft of the grantor, the ncome woud not be ta abe to the grantor.
We see no dfference n prncpe between the property rghts nvoved n the
house and n the nsurance poces.
It s aso to be noted that the reversonary Interest n the corpus of the
estate remaned In the ta payer, and even though the accumuated ncome was
to be the property of the husband, we thnk such segregaton of Income was
not enough to render the ta payer mmune from ta aton. (See Du Pont v.
Commssoner, 289 U. S., 085 Ct. D. 87, C. . II-1, 259 (1983) .)
We therefore hod that the decson of the oard of Ta ppeas must be,
and t s hereby reversed.
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1G7, rt. 1 7-1.
172
rtce 1 7-1: Trusts n the ncome of whch 194O-19-10253
the grantor retans an nterest. Ct. D. 1453
INCOM T R NU CTS O 192S ND 19.12 D CISION O SUPR M COURT.
1. Income Weeky Payments Under Separaton greement
Irrevocabe Trust for Mantenance and Support Trust
Income Not Ta abe to usband Loca Law.
n agreement made between husband and wfe n contempaton
of dvorce provded for certan weeky payments to the wfe for a
perod of 10 years, and for payment to her of ncome from an rrev-
ocabe 10-year trust created for her mantenance nnd support, and
aso for the transfer of the trust property to the wfe outrght at
the e praton of the 10-year perod. The dvorce decree, obtaned
n Nevada, ordered, ad|udged, and decreed that the agreement be
approved, and the trust was thereupon created. Icd: (1) That the
agreement to make weeky payments to the wfe s a contnung
persona obgaton fang wthn the rue of Dougas v. Wcuts
(290 U. S., 1 Ct. D. 1041, C. . I -2, 250 (1935) ), and s entrey
ndependent of the trust athough emboded n the same separaton
agreement and (2) that the trust ncome s not ta abe to the
husband, snce the oca aw and the trust have gven hm pro tanto
a fu dscharge from hs duty to support hs dvorced wfe and
eave no contnung obgaton, contngent or otherwse.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (105 . (2d), 903), reversng memorandum opnon
of the Unted States oard of Ta ppeas (1938), affrmed.
Suprf.me Court of the Unted States.
Ouy T. eve/rng, Commssoner of Interna Revenue, pettoner, v. fred C.
uer.
0 S. Ct., 784.
On wrt of certorar to fp Unted States Crcut Court of peas for the Second Crcut
pr 22, 1940.
OPINION.
Mr. ustce Dougas devered the opnon of the Court
Ths case rases te queston of the crcumstances under whch ncome pad
to the ta payer s dvorced wfe under a trust, the provsons of whch have been
approved n the dvorce decree, s ta abe to hm. We granted certorar
because of the asserted msappcaton by the crcut court of appeas of the
rue of Dougas v. Wcuts (29 U. S., 1) to these facts.
On uy 25, 1930, respondent and hs wfe, resdng n Connectcut, entered
nto an agreement n contempaton of dvorce whch provded, nfer aa, for
the creaton by hm of a trust of 0,380 shares of cass common stock of the
uer rush Co. The trust was rrevocabe and was to contnue for 10 years.
Dnng that perod a trust ncome was to be used for the mantenance and
support of the wfe, or n case of her pror decease, then for the chdren or
n case of ther pror decease, then for the hers of the wfe or as she shoud
provde n her w. t the e praton of te 10-year perod the trust property
was to e transferred to her outrght. The agreement provded for other prop-
erty settements, for contro and custody of the chdren, and for waver by
respondent and hs wfe of a cams aganst each other arsng out of the
marta reaton. It aso contaned an agreement on the part of respondent
to pay the wfe 40 per week for fve years, and, f at the end of that perod hs
annua net ncome e ceeded by the amount of the weeky payments the sum
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173
1 7, rt. 1 7-1.
of 0,000, to contnue Ihose weeky payments for an addtona fve years or
for such porton thereof as hs annua net ncome e ceeded the above sum.
The wfe repared to Reno, Nevada, and obtaned a dvorce decree on Novem-
ber 12, 1930, whch ordered, ad|udged, and decreed that sad agreement
entered nto between the pantff and the defendant on or about the 25th day
of uy, 1930, be and the same hereby s approved. On December 22, 19:10,
respondent created the trust provded for n the agreement.1 The corporate
trustee thereunder receved from the Puer rush Co. a the dvdends and
ncome from the trusteed shares durng 1931, 1932, and 1 33 and dsbursed them
a for the beneft of the dvorced wfe. On the faure of respondent to ncude
those amounts n hs ta returns for the years n queston, the Commssoner
assessed defcences. The decsons of the oard of Ta ppeas (37 . T. .,
1333), ststanng the . ctou of the Commssoner, were reversed by the crcut
court of appeas. (105 . (2d), 903.)
I. There can be no doubt but that respondent s ta abe on the 40 weeky
payment to the wfe. That s a contnung persona obgaton fang wthn
the rue of Dougas v. Wcuts, supra, as a resut of whch those payments
are ta abe to hm, not to the wfe. (Goud v. Goud. 245 U. S., 151.) ut
that fact does not make the ncome from the trust aso ta abe to hm. -
though the provsons for the weeky payments and for the trust agreement
were emboded n the same separaton agreement, they were not so nter-
reated or nterdependent ns to make the trust a securty for the weeky pay-
ments. unctonay they were as ndependent of each other as were the
other property settements from ether of them.
II. Pettoner does no: chaenge the concuson of the crcut court of
appeas that, so far ar- the trust agreement s concerned, the Nevada court
retaned no power to ater or modfy the dvorce decree. It seems to be
admtted that under Nevada aw the wfe s aowance once made s fna
(Sweeney v. Sweeney, 42 Nev., 431), uness the decree tsef e pressy reserves
the power to modfy t (Lews v. Lews, 53 Nev., 398), or uness the decree
approves a settement whch n turn provdes for a modfcaton ( sctne v.
Second udca Dstrct Court, 57 Nev., 2 9). ere no such power was reserved
n the decree or n the trust agreement approved by the decree. Nor dd re-
spondent underwrte the prncpa or ncome from the trust or any part there-
of or make any commtments, contngent or otherwse, respectng them, beyond
hs promse to transfer the securtes to n trustee. ut pettoner argues that
the rue of Dougas v. Wcuts, supra, shoud nonetheess appy snce the decree
recognzed the husband s pree stng duty to support and defned that duty
as coe tensve wth what the partes had themseves arranged, and snce the
husband smpy carved out future ncome from property whch he then owned
and devoted t n advance to the dscharge of hs obgaton.
We take a dfferent vew. If respondent had not paced the shares of stock
n trust but had transferred them outrght to hs wfe as part of the property
settement, there seems to be no doubt that ncome subsequenty accrued and
pad thereon woud be ta abe to the wfe, not to hm. Under the present
statutory scheme that case woud be no dfferent from one where any debtor,
vountary or under the compuson of a court decree, transfers securtes,, a
farm, an offce budng, or the ke, to hs credtor n whoe or parta payment
of hs debt. Certany t coud not be camed that ncome thereafter accrung
from the transferred property must be ncuded n the debtor s ncome ta
The trust agreement provded that he was to transfer the 0,380 shares of stork on the
books of the company from hmsef personay to hmsef as trustee and then to dever the
certfcate for such shares to the cor oratc trustee. Ths was done. so In accordance
th the provsons of the trust respondent e ecuted a dvdend order aganst the shares
drectng the uer rush Co. to pay a dvdends to the corporate trustee. Respondent
ws the founder of the company and durng the years n queston was ts presdent, t had
outstandng ony one cass of votng stock, vz, cass common. The amount outstandng
durng these years vared between 172.000 and 18 .000 shares. Respondent owned 0.380
hares whch together wth the 0,380 shares under the trust consttuted more than a
ma|orty of that cass of stock. y terms of the trust respondent retaned e cusve
rotng power of the trusteed shares durng the term of the trust. If he ded before ts
termnaton, the votng power woud pass to the wfe. Durng that perod power to se
the stock was vested onty In hm. the wfe, and the corporate trustee and coud be
e ercsed ony In case a three agreed n wrtng. In case of such a sae, those three had
the power to nvest and renvest the proceeds. They aso were gven the power to ds-
bnrse, wthhod, and accumuate the prncpa of the trust at ther soe dscreton, such
power over the Income beng vested In the wfe and the corporate trustee.
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1 7, rt. 1 7-1.
174
return. If the debtor retaned no rght or nterest n and to the property,
he woud cease to be the owner for purposes of the edera Revenue cts.
(See everng v. Cfford, 309 U. S., .) To hod that a dfferent resut
necessary obtans where the transfer s made or the trust s created as
part of a property settement attendant on a dvorce woud be to hod that
for purposes of the edera ncome ta the marta obgaton of the husband
to support hs wfe can not be dscharged. ut whether or not t can be
depends on State aw. or other purposes, oca aw determnes the status
of the partes and ther property after a decree dssovng the matrmona
bonds. (See arrett v. ang, 111 U. S., 523.) nd whe the edera n-
come ta s to be gven a unform constructon of natona appcaton, Congress
frequenty has made t dependent on State aw. (See Thomas v. Perkns, 301
U. S., 55, 59 Ct, D. 1237, C. . 1937-1, 2 2 and cases cted.) In the nstant
stuaton, an nqury nto State aw seems nescapabe. or the provsons n
the Revenue cts1 and reguatons concernng the nondeductbty of famy
e penses and of amony do not umnate the probem beyond m-
pyng the necessty for an e amnaton of oca aw to determne the marta
status and the obgatons whch have survved a dvorce. The Nevada cases
te us that under such a decree as was entered here the obgaton to support
was pro tanto dscharged and ended. nd the trust agreement contans no
contractua undertakng by respondent, contngent or otherwse, for support
of the wfe. ence we can ony concude that respondent s persona obgaton
s not a contnung one but has been dscharged pro tanto. To hod that
t was not woud be to fnd substanta dfferences between ths Irrevocabe
trust and an outrght transfer of the shares to the wfe, where n terms of
oca dvorce aw we can see ony attenuated ones. Ths s nofto mpy that
Congress acks authorty to desgn a dfferent statutory scheme appyng un-
form standards for the ta aton of ncome of the so-caed amony trusts.
somewhat comparabe statute ta ng to the grantor ncome from a trust
apped to the payment of premums upon nsurance poces on hs fe was
uphed n urnet v. Wes (289 U. S., 70 Ct. I). 88, C. . II-1, 2 1 (1933) ).
ut the reach of congressona power s one thng an nterpretaton of a
edera Revenue ct based on oca dvorce aw, qute another.
or the reasons wo have stated, t seems cear that oca aw and the trust
have gven the respondent pro tanto a fu dscharge from hs duty to support hs
dvorced wfe and eave no contnung obgaton, contngent or otherwse.
ence under everng v. tch (309 U. S., ) ncome to the wfe from ths
trust s to be treated the same as ncome accrung from property after a
debtor has transferred that property to hs credtor n fu satsfacton of hs
obgaton.
III. One other observaton s pertnent. Though the dvorce decree e tn-
gushes the husband s pree stng duty to support the wfe, and though no pro-
vson of the trust agreement paces such obgaton on hm, that agreement may
nevertheess eave hm wth suffcent nterest n or contro over the trust as to
make hm the owner of the corpus for purposes of the edera ncome ta .
( everng v. Cfford, supra.)
s we have seen, respondent dd retan consderabe contro over the trusteed
shares. ut that was not the bass for the assessment of the defcency by the
Commssoner. It was not passed upon by the oard of Ta ppeas or the Cr-
cut Court of ppeas. It was not ncuded n the petton for certorar among
the errors to be urged or the reasons for grantng the wrt. Nor dd pettoner
bref or argue the pont here. ence we do not pass on the appcabty of the
rue of vrerng v. Cfford, supra, to these facts. (Cf. everng v. Wood 309
U. S., .)
ffrmed.
Revenue ct of 1928 (4f Stat., 701), secton 24(a). The same provson appears n
secton 24 of te 1032 rt (47 Stat., 109).
Treasury Reputatons 74. artces 83. 281, promugated under the 1928 ct The
same provsons appear n Treasury Reguatons 77, artces 83, 281, promugated under
the 1932 ct.
See Pau. ve Tears wth Dou/aa v. Wcuta (53 arv. L. Rev., 1).
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1 7, rt. 1 7-1-
ktc e 1 7-1: Trusts n the ncome of whch 1940-19-10254
the grantor retans an nterest. Ct. D. 1454
INCOM T R NU CT OP 1928 D CISION O SITR M COURT.
1. Income Irrevocabe mony Trust for Mantenance and
Sutport Guaranteed Payment of onds Trust Income Ta -
abe to usband Loca Law urden of Proof.
separaton agreement made between husband and wfe whe
dvorce sut was pendng n New York, whch agreement provded for
payment to the wfe of ncome from an rrevocabe trust created for
her support and mantenance, and aso for certan other payments to
her annuay for fe, was approved and affrmed by the dvorce de-
cree and made part of the |udgment. The trust agreement contaned
an e press persona obgaton of the husband to guarantee the pay-
ment of prncpa and nterest on certan bonds ncuded n trust
corpus. ed: (1) That the ncome from the guaranteed bonds was
ta abe to the husband, as the trust agreement was, n effect, securty
for hs contnung obgaton whch woud be dscharged, at east
pro tanto, as ncome from the bonds was receved, and he therefore
benefted by such payments and (2) that ncome from trust prop-
erty other than the bonds was aso ta abe to the husband, as he has
faed to estabsh by cear and convncng proof that the oca aw
and the amony trust have gven hm a fu dscharge or that the
New York court acks power to add to hs persona obgatons under
certan crcumstances, as, for e ampe, f the trust securtes shoud
prove worthess.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (105 P. (2d), 900), reversng decson of the Unted
States oard of Ta ppeas (1937) (3 . T. ., 5 3), reversed.
Supreme Ccurt of the Unted States.
Guy T. ererng, Commssoner of Interna Revenue, pettoner, v. Stephen .
Leonard.
0 S. Ct., 780.
0a wrt of certorar to the Unted Stntes Crcut Court of ppeas for the Second Crcut.
pr 22, 1940.
opnon.
Mr. ustce Dougas devered the opnon of the Court.
Ths case nvoves the queston of the ta abty to the grantor under the
Revenue ct of 1928 (45 Stat., 791) of ncome from a so-caed amony trust
whch s payabe to hs dvorced wfe. We granted certorar because of the
probabe confct of the decson beow wth Dougas v. Weuts (29 U. S., 1
Ct. D. 1041, C. . I -2, 250 (1935) ) and ererng v. tch (309 U. S., ).
In 1928 respondent s wfe nsttuted sut n New York for an absoute dvorce.
On une 4, 1929, whe that sut was pendng, respondent and hs wfe entered
nto a separaton agreement and, together wth a corporate trustee, e ecuted a
trust agreement. Under the atter respondent contrbuted securtes and cash
of 50,000, whch ncuded 400,000 prncpa amount of per cent frst mort-
gage bonds of an o company. Respondent guaranteed the payment when due
of the prncpa and Interest on those bonds and on notce of any defaut n
the payment of any nterest on or prncpa of them, he agreed to substtute
cash or securtes wth a market vaue equa to the prncpa, and cash suf-
fcent to cover any accrued nterest.1 The trust was Irrevocabe2 e cept that
(1) t coud be amended by respondent and hs wfe 3 and (2) resmndent re-
No e tenson of the tme of payment of prncpa or nterest on these bonds was to be
made wthout the consent of the we and wthout the e tenson of the guarantee of
respondent or hs persona representatve.
cept on dscontnuance or dsmssa of the dvorce acton.
It was so amended three tmes but n respects not mntera here.
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17
taned a mted power of substtuton as respects certan bank stock whch was
part of the corpus. The trustee agreed to use reasonabe efforts to consut
wth respondent wth respect to the character of the nvestments though
t was not bound to foow hs advce. Respondent retaned no rght to ether
the corpus or the ncome, or any part thereof, e cept as ndcated above. The
net ncome was to be pad as foows: 5,000 a year to each of three chdren
the remanng amount to the wfe durng her fe for her mantenance and sup-
port, and n her soe dscreton for the support, mantenance and educaton of
the chdren. On death of the wfe, the corpus was to be hed for the chdren.
The separaton agreement ncorporated the trust agreement by reference
stated that the wfe s ncome from the trust and from other property receved
from the husband woud aggregate 30,000 a year provded that respondent
woud pay hs wfe an addtona 35,000 each year durng her fe so that her
aggregate net ncome for the mantenance and support of hersef and the ch-
dren woud appro mate 5,000 a year, and woud further pay any e traord-
nary medca or surgca e penses ncurred by the wfe or on behaf of the
chdren unt they attaned the age of 25 years stated that n the event that
respondent s abty to pay the above 35,000 became mpared, he mght appy
to any court of competent |ursdcton for a reducton of hs obgaton to not
ess than 10,000 a year made other property settements provded for care
and custody of the chdren reeased dower, etc.
The decree of dvorce became fna n October, 1929. It approved and affrmed
and made a part of the |udgment heren the separaton agreement (whch as
we have sad ncorporated the trust agreement) provdng for the support and
mantenance of the pantff, and n addton drected respondent to pay her
35,000 a year for the rest of her fe. rom une 4, 1929, to December 31, 1929,
the trustee receved 1 ,191.34 as dvdends and nterest from the trust prop-
erty. It dstrbuted 5,200 to the wfe and 2,083.33 to each of the three chdren,
eavng an undstrbuted baance for that perod of about 4,700. Respondent
dd not ncude any of that ncome n hs return for 1929. The Commssoner
determned a defcency. The oard of Ta ppeas hed that ony the amounts
actuay dstrbuted to respondent s wfe and mnor chdren were ta abe to
hm. (3 . T. ., 5 3.) The crcut court of appeas reversed, hodng that re-
spondent, though ta abe on ncome payabe to hs mnor chdren, was not ta -
abe on ncome payabe to the wfe. (105 . (2d), 900.)
ere, as n the crcut court of appeas, t was urged by the pettoner that
ths amony trust was merey securty for respondent s contnung obgaton
to support hs wfe and, therefore, that the trust ncome payabe to her was ta -
abe to hm under the rue of Dougas v. Wcuts, supra. In support of that
poston t was urged, nter aa, that under New York aw respondent s obga-
ton was not dscharged snce the New York court retaned the power to modfy
the decree and that the promse by respondent to pay the wfe 35,000 (or n
no event ess than 10,000) a year converted the trust nto at east parta se-
curty for the tota aowance to her. In ether of such events the rue of Doug-
as v. Wcuts, supra, woud appy. (See everng v. tch, supra.) The cr-
cut court of appeas, however, decded these two questons adversey to pet-
toner. ut there s one matter not touched on by that court whch we thnk
s determnatve of one phase of the case.
The trust agreement contans an e press persona obgaton of respondent
n the form of a guarantee of payment of the prncpa and nterest on 400,000
of the per cent bonds whch were part of the trust corpus. To be sure, that
persona obgaton was contngent. ut we do not deem that to be matera.
We recenty stated n everng v. tch, supra, that under ths statutory
scheme escape from the rue of Dougas v. W tts, supra, may be had ony on
cear and convncng proof that oca aw and the amony trust have gven
the dvorced husband a fu dscharge and eave no contnung obgaton how-
ever contngent. Whatever may be the correct vew on the other aspects of
the case, the guarantee was such a contnung obgaton. The fact that the
wfe or other benefcares ooked prmary to the trust and ony secondary
to respondent for payment of 24,000 annuay, the fact that respondent s
obgaton mght be enforceabe by the trustee, the fact that respondent mght
never have to make good on hs promse are besde the pont. The e stence
uf whoy contngent obgatons, whether contractua or otherwse, s adequate
to support the resuts reached n Dnu/as v. Wcuts, supra. or n that, case
t was manfest that at the tme of the creaton and approva of the trust the
dvorce court mght never e ercse ts reserved power to revse or ater the
decree and the husband mght never have to make good on hs promse to make
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1 7, rt. 1 7-1.
np defcences n the estmated trust ncome. Lkewse n the Instant case,
t can not be sad that the dvorce decree and the amony trust gave respondent
an absoute dscharge from hs pror obgaton. So far as the guarantee aone
s concerned, they permtted hs pree stng uncondtona duty to be trans-
formed nto a mted contngent one. ut nonetheess they paced a specfc
and adequate sancton on that duty, so that respondent s persona obgaton
woud not be fuy dscharged at east unt compete payment of the prncpa
and nterest on the per cent bonds had been made. Tms n effect, f not n
form, the trust agreement was securty for hs contnung obgaton whch
woud be dscharged at east pro tanto as ncome from those bonds was receved
by the trustee. ence the case n substance s the same as those where pur-
suant to contract or arrangement an obgaton s dscharged by another for the
ta pavor s beneft (see Od Coony Trust Co. v. Commssoner, 279 U. S., 71
Ct. D. 80, C. . III-2, 222 (1929) Unted States v. oston d Mane Raroad,
279 U. S., 732) or where the ta payer creates a trust, the ncome of whch s ap-
ped to the dscharge of hs debt. (See crerng v. umentha, 29 U. S., 552.)
ere, as there, the ta payer receved a beneft by the payments. The cataogue
of benefts s not depeted when prmary obgatons are dscharged. or these
reasons that porton of the trust ncome whch was receved from the guaran-
teed bonds was ceary ta abe to respondent.
pparenty, however, a porton of that ncome was receved from other trust
property. ut we thnk that was aso ta abe to respondent though for
another reason.
s we have seen the dvorce decree approved, affrmed and made part of the
|udgment the separaton agreement provdng for the support and mante-
nance of the wfe. er mantenance and support were secured not ony by
the trust agreement and other property settements but aso by the persona
obgaton of the husband to contrbute an annua sum. The crcut court of
appeas hed that under New York aw the terms of the trust woud not be
changed uness the wfe can dsaffrm t for fraud, overreachng, or the ke,
ctng Gausha v. Gausha (11 N. Y., 35, 138 N. Y., 272) Can v. Can (188
. D., 780) amn v. amn (224 . D., 1 S). If the case was here on
appcaton of oca aw under the rue of re Raroad Co. v. Tompkns (304
C. S., 4), we woud not be ncned to dsturb that fndng. ut t s not.
ere respondent s seekng to escape one of the norma ncdents of the edera
ncome ta . or that purpose he nvokes the ad of New York aw. In
everng v. tch, supra, we stated that where the dvorced husband desres
to avod the genera rue e pressed n Dougas v. Wcuts, supra, he carres
a dstnct burden of estabshng not by mere nference and con|ecture but by
cear and convncng proof that oca aw and the amony trust have gven
hm a fu dscharge. We do not thnk that respondent has sustaned that
burden.
s stated by the crcut court of appeas, t does seem cear that mere property
settements, though ncorporated nto the decree, may not be modfed pursuant
to the reserved statutory powers of the court, contaned n N. Y. Cv I rac. ct
sectons 1155,1170. (See Can v. Can, supra Godfsh v. Godfsh, 103 . D., 8
Schntzcr v. uerger, 237 . D., 22.) Nevertheess these settements may be
remade by the court not ony where an ordnary contract may be set asde but
aso where they are unfar, nequtabe and un|ust. ( amn v. amn, supra.
Cf. Trre v. Trre, 232 N. Y., 224.) s stated by the court n the amn case
(224 . D. at page 171) the requrement s that such contracts be not ony free
from tant of actua fraud or coercon but aso far and reasonaby suffcent
havng regard to the staton n fe and crcumstances of the partes. More
mportant to ths case, however, are unkcr v. nnkcr (230 . D., 41) and
oahan v. oahan (234 . D., 572). They make t pan that the covenants of
a separaton agreement are not an nsuperabe obstace to obtanng reef by
modfcaton of the aowances. ( oahan v. oahan, supra, 574. Cf. Sever-
ance y. Severance, 2 0 N. Y., 432.) The reserved power apparenty may be
e ercsed where the provson n the separate agreement, approved by the decree,
s for support and mantenance ( unkcr v. unkcr and oahan v. oahan,
supra) but not where t s n settement of cams of ownershp to specfed
property. (Godfsh v. Godfsh and Schntzcr v. uerger, supra). The prov-
sons of the separaton agreement and the trust agreement here n queston spe-
cfcay reate to and were desgned to afford support and mantenance for the
wfe. Unke the purpose of the trust agreement n Schntzcr v. uerger, supra,
the purpose here apparenty was not to compose any controverses over the
securtes. We need not decde whether the court retaned the power to requre
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275, rt. 275-1. 178
respondent to make addtona payments to the wfe n ease, say, a the secur-
tes n trust turned out to be worthess. we do hod s that respondent has
not shown by cear and convncng proof that the court acks the power to
add to hs persona obgatons n any such crcumstances.
Reversed.
Mr. ustce R:ed concurs n the resut for the reasons stated n the dssent In
everny v. uer, decded to-day, No. 427, October term, 1939.
The Chef ustce, Mr. ustce McReynods, and Mr. ustce Roberts are of
the opnon that the |udgment of the crcut court of appeas shoud be affrmed.
SUPPL M NT L. SS SSM NT ND COLL CTION O D ICI NCI S.
S CTION 275. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION.
rtce 275-1: Perod of mtaton upon 1940-11-10201
assessment of ta . Ct. D. 144
INCOM T R NU CTS O 192 , 1032, ND 1034 D CISION O SUPR M
COURT.
1. ducary Return enue Perod of Lmtaton Upon ssess-
ment ppcabty of Statute Prescrbng Lmtaton
Perod Where Corporaton Makes No Return.
Where a trust company whch created and managed a fund for
the beneft of ts cents fed a fducary return for 1932 on orm
1041, settng forth a nformatbn necessary to the cacuaton of
any ta that mght be due, and attachng a st of the benefcares
of the fund and ther shares of the ncome, such return was the
return of the ta n respect of whch the abty arses and
governed venue of the proceedng for revew under secton 1002(a)
of the Revenue ct of 192 , as amended, and was aso a return of
the ta mposed, under the terms of secton 275(a) of the Revenue
ct of 1932, so that the 2-year perod of mtatons appes and the
assessment, after such perod, of a defcency aganst the fund as
an assocaton was barred. Secton 275(c) of the Revenue ct
of 1932, provdng a 4-year perod for assessment, s nappcabe.
That secton was adopted to set a perod of mtatons where no
return s fed by the assocaton but returns are fed ony by the
members, and was ntended to mpose a perod of mtaton where
one had not theretofore e sted.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd
Crcut (1939) (100 . (2d), 139), reversng unreported decson of
the Unted States oard of Ta ppeas (1938), reversed.
Supreme Court of the Unted States.
Germantorn Trust Co., Trustee of the crmantoum Trust Co. ond Investment
und, pettoner, v. Commssoner of Interna Revenue.
309 U. S., 304.
On wrt of certorar to te I nod States Crcut Court of ppeas for the Thrd Crcut.
ebruary 2 , 1910.
opnon.
Mr. ustce Rotr|tTs devered the opnon of the Court.
Ths case nvoves the constructon and appcaton of provsons of the Reve-
nue ct of 1920, as amended by that of 1934, and of the Revenue ct of 1932,
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179
275, rt. 275-1.
reatng to the venue of proceedngs to revew a decson of the oard of Ta
ppeas and settng mtatons upon the assessment of ncome ta .
The pettoner s a trust company, dong a genera busness as such, ncudng
admnsterng trust estates and actng as agent for the custody, handng, and
management of ts cents nvestments. In 1930 t created, by an approprate
nstrument, a fund to afford those for whom t acted the advantage of n-
vestng sma amounts n securtes at mnmum e pense and wth opportunty
of ready qudaton. The fund has snce been managed accordng to the terms
of the agreement. In the course of admnstraton the pettoner has pad to
the partcpants ther respectve shares of ncome from the nvested prncpa,
and has fed fducary returns of ncome on Treasury orm 1041, ntended for
use by trustees.
March 15, 1033, the pettoner, as trustee, fed such a return, for the caendar
year 1932, wth the coector of nterna revenue for the frst dstrct of
Pennsyvana, at Phadepha. The return accuratey set forth the gross n-
come, the deductons, and the net ncome, n short a nformaton necessary
to the cacuaton of any ta whch mght be due, and attached a st of the
benefcares of the fund, and ther shares of the ncome. No corporaton In-
come ta return was fed on Treasury orm 1120. The partcpants n the
fund, who were requred to make ndvdua returns for the year 1932, ncuded
n ther respectve returns, fed on or before March 15, 1933, ther shares of
ncome.
September 17. 193 , pursuant to the recommendaton of a Treasury agent
that the fund be ta ed as a corporaton,1 the respondent prepared from the
orm 1041 return, a substtute corporaton return on orm 1120, coverng the
year 1932, and, on ebruary 27, 1937, gave notce of a consequent defcency
of ta .
The pettoner carred the matter to the oard of Ta ppeas for redeter-
mnaton, assertng that t was ta abe as a trust and not as an assocaton
and that assessment and coecton of the asserted defcency was barred by
the e praton of two years from the date ts return was fed. The oard
hed the assessment barred.
The respondent pettoned the Unted States Court of ppeas for the Thrd
Crcut to revew the oard s decson. That court hed that the venue pro-
vson of secton 1002(a) of the Revenue ct of 192 , as amended by secton
519 of the Revenue ct of 1934,2 empowered t to entertan the petton, and
that the assessment of a defcency was not barred by sectons 275 and 27 of
the Revenue ct of 1932, the appcabe secton, n ts vew, beng 27 T(c). 1
The pettoner sought certorar on the ground that the crcut court of appeas
decson that the fducary return t had fed was a return whch governed
venue under secton 1002, as amended, but no return wthn the meanng of
secton 275(c), confcts wth a decson of the Crcut Court of ppeas for the
Second Crcut. ecause of the confct we granted certorar.
Secton (a)2 of the Revenue ct of 1932 (47 Stat.. 1 9, 289) : The term corpo-
raton ncudes assocatons . (See Morrssey . Commssoner, 290 U. S., 344
tCt. D. 1004. C. . -1. 204 (1933) .)
Secton 1002(a) : cept as provded In subdvson (b) reatng to venue by stp-
uaton , such decson may do evewed by the crcut court of appeas for the crcut n
whch s ocated the coector s offce to whch was made the return of the ta n rtufcct of
hch the abty arses or, f no return was made, then by the Court of ppeas of the
Dstrct of Coumba. Itacs supped. (44 Stat., 9, 110 48 Stat., 080, 700 2
U. S. C, 041(b).)
Sec. 275. Pekod of Lmtaton Upon ssessment and Coecton.
cept as provded n secton 270
(a) Genera ce. The amount of ncome ta es mposed by ths tte sha be assessed
wthn two years after the return was fed, and no proceedng n court wthout assessment
for the coecton of such ta es sha be begun after the e praton of such perod.
(c) Corporaton and Sharehoder. If a corporaton makes no return of the ta m-
posed by ths tte, but each of the sharehoders ncudes n hs return hs dstrbutve share
of the net ncome of the corporaton, then the ta of the corporaton sha be assessed
wthn four years after the ast date on whch any such sharehoder s return was fed.
Itacs supped.
Sec. 27 . Same ceptons.
(a) ase Return or No Return. In the case of a fase or frauduent return wth
Intent to evade ta or of a faure to fe a return the ta may be assessed, or a proceedng
In court for the coecton of such ta may be begun wthout assessment, at any tme.
(Revenue ct of 1932, 47 Stat.. 1 9. 237.)
4Commssoner v. Oermantoton Trust Co., Trustee (10 . (2d), 139).
Commssoner v. Roosevet Son Inv. und (89 . (2d), 700).
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275. rt, 275-1.
180
Pettoner and respondent agree that the court beow was rght n hodng
the return n queston was such a return as f ed the venue of the petton
for revew n the Thrd Crcut, where the return was fed. We concur n
ths vew.
The pettoner contends that the fducary return fed on orm 1041 was a
return wthn the meanng of secton 275(a), whch mts the tme for
assessment to two years after the fng of the return. The respondent nssts
that the return was no return of the ta wthn the meanng of secton
275(c), and, therefore, the 4-year mtaton specfed n that secton appes.
s the notce of defcency was gven more than two years after the fng
of the fducary return, and wthn four years of the fng of the ast return
by any partcpant In the fund, decson turns upon whch subsecton governs.
We hod that the return was a return wthn the meanng of secton 275(a)
and that the pettoner can not be hed to have made no return so as to brng
the case wthn secton 275(c).
rst. We are of opnon that f the return fed by the pettoner was such
as to create venue of the proceedng for revew n the court beow, t was aso
a return under the terms of secton 275(a), so that the 2-year perod of
mtatons mposed by that secton s appcabe.
The return was a fducary return. It s admtted that the pettoner n
respect of the fund was a fducary and was bound to fe such a return. It
contaned a of the data from whch a ta coud be computed and assessed
athough t dd not purport to state any amount due as ta . Secton 1002(a),
as amended, supra, confers venue upon the crcut court for the crcut n whch
was made the return of the ta n respect of whch the abty arses.
Secton 275(a) provdes that the amount of ta must be assessed wthn two
years after the return was fed. Secton 275(c) f es a perod of four years
for assessment f a corporaton makes no return of the ta mposed by ths
tte, but each sharehoder returns hs dstrbutve share of the net ncome.
We thnk the anguage of the sectons s such that t can not be sad the
fducary return fed by the pettoner was a return of the ta n respect of
whch the abty arses but was no return of the ta mposed by the statute.
The respondent urges that the two sectons have separate ams that the
venue provson was nserted for the convenence of ta payers, so that they
shoud not be compeed to tgate n courts far from ther domce, whereas
the mtaton sectons have nothng to do wth the desgnaton of a forum.
Concedng that ths s true, t remans that, f the return n queston compes
wth the one descrpton, t equay compes wth the other. We fnd no
adequate reason for attrbutng a dfferent meanng to the two phrases.
Second. Secton 275(c) s nappcabe. Sectons 275 and 270 set up a com-
pete scheme of mtatons on assessment of ncome ta es. Secton 275(a)
mposes a mtaton of two years after the fng of the return. Secton 27 (a)
provdes that there sha be no perod of mtatons f a fase return, or no
return, be fed. If the statute went no further, and f the respondent s pos-
ton s correct that, n ths case, the ta payer was a corporaton and fed no
return as such, then there woud be no perod of mtatons whatever. Ths
was the stuaton under the Revenue ct of 1924.
The egsatve hstory demonstrates that secton 275(c) was adopted to set
a perod of mtatons where no return s ted by the assocaton but returns
are fed ony by the members. In other words, subsecton (c) was adopted to
mt, rather than to enarge, the tme for assessment n such a case.
The respondent s contenton s that where a fducary, n good fath, makes
what t deems the approprate return, whch dscoses a of the data from
whch the ta , treated as one Imposed upon an assocaton (cassfed as a cor-
poraton under the statute), can be computed, such a return s to be deemed
no return. We thnk ths vew nadmssbe.
Revenue ct of 1032 (47 Stat.. Ifo, 214).
Revenue ct of 1924, sectons 227(a) and 278(a) (43 Stat.. 253, 29f ).
The provson was Mst nserted as secton 277(a)5 of e Revenue ct of 102G (44
Stat., 9, f 8). The commttee reports on the secton, construed n connecton wth te
course of the M n Congress, sustan, rather than negatve, the vew that the serton waa
Intended to mpose a perod of mtaton where one had not theretofore e sted. (Se
II. Rcpt. No. 1, S ty-nnth Congress, frst sesson, page 11 S. Rept. No. 52. S ty-nnth
Congress. st sesson, page 28. Compare earngs. Commttee on Ways and Means of the
ouse, Seventy-thrd Congress, frst sesson, page 14 .)
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181
292.
It can not be sad that the pettoner, whether treated as a corporaton or
not, made no return of the ta mposed by the statute. Its return may have
been Incompete n that t faed to compute a ta , but ths defect fas short of
renderng t no return whatever.
The |udgment s reversed.
SUPPL M NT M. INT R ST ND DDITIONS TO T T .
S CTION 292. INT R ST ON D ICI NCI S.
( so Secton 298.) 1940-18-1024
G. C. M. 21800
R NU CT O 1032.
Interest assessabe on defcences n cases of bankruptcy and
recevershp.
n opnon s requested as to the amount of nterest to be coected
from the trustee n bankruptcy of the M Company n connecton wth
the Government s cam for unpad e cess profts ta es fed n the
bankruptcy case.
The facts, so far as pertnent, are that a petton for reorganzaton
of the M Company was fed under secton 77 of the Natona ank-
ruptcy ct on September , 1935, and the court, after rectng the
approva of the petton, apponted a trustee of a the assets of the
M Company. Thereafter, a defcency for 1933 e cess profts ta es
wth nterest was assessed. On December , 1939, the trustee n
bankruptcy was prepared to pay the cam n fu and the queston
arose as to the correct amount of nterest to be ncuded. The queston
partcuary nvoved s whether nterest accrued on the nterest
assessed wth the defcency.
efore answerng ths specfc queston, t seems advsabe to con-
sder the genera queston as to the amount of nterest due on ta es n
a case where there s an ad|udcaton of bankruptcy of a ta payer n
a bankruptcy proceedng or the appontment of a recever for a ta -
payer n a recevershp proceedng before any court of the Unted
btates or of any State or Terrtory or of the Dstrct of Coumba.
Ths memorandum s mted to two casses of such cases (1) where
the ad|udcaton of bankruptcy or appontment of a recever occurs
before the assessment n ordnary course of the amount of the de-
fcency and nterest, and (2) where the ad|udcaton of bankruptcy
or appontment of a recever occurs after the assessment of the amount
of the defcency and nterest. Cass (2) must be further subdvded
nto cases (a) where the ad|udcaton of bankruptcy or appontment
of a recever occurs before the date of notce and demand by the
coector, and (b) where the ad|udcaton of bankruptcy or appont-
ment of a recever occurs after the date of notce and demand by the
Zeerbach Paper Co. Y. everng (293 U. S., 172. 1R0 Ct. D. 880. C. . III-2 341
(1934)1) Commssoner . Stetson Co. 4. S . (2d), 553) Unted States v. Tn/hast
( 9 . (2d), 718) Mabe evator Co. (2 . T. ., 517) braham Werbeovsku (8
. T. ., 442, 44 ) . t. Stearns (1 . T. ., 889) . R. rewer (17 . T ., 704).
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292.
182
coector. The appcabe provsons of the Revenue ct of 1932
whch contro ths case (see secton 21 (b) of the Natona Industra
Recover 7 ct, 48 Stat., 195), the correspondng provsons of sub-
sequent Revenue cts, and the Interna Revenue Code w be con-
sdered. Wherever reference s made n ths memorandum to nterest,
t means nterest at the rate of per cent per annum, snce that s
the rate appcabe to ncome, estate, and gft ta es after October 24,
1933. (See secton 404 of the Revenue ct of 1935, secton 821 of the
Revenue ct of 1938, and secton 3794 of the Interna Revenue Code.)
These provsons, as we as those ater to be cted, are made appcabe
to e cess profts ta es by vrtue of secton 21 (b), supra, secton
702(b) of the Revenue ct of 1934, secton 10 (c) of the Revenue ct
of 1935, secton 02(c) of the Revenue ct of 1938, and secton 03
of the Interna Revenue Code.
Cass (1) Where the ad|udcaton of bankruptcy or appontment
of a recever occurs before the assessment n the ordnary course (see
secton 272(a) of the Revenue cts of 1932, 1934, 193 , 1938, and the
Interna Revenue Code) of the amount of the defcency and nterest.
Secton 274(a) of the Revenue cts of 1932, 1934, 193 , 1938, and
the Interna Revenue Code provdes n part as foows:
Immedate assessment. Upon the ad|udcaton of bankruptcy of any ta -
payer n any bankruptcy proceedng or the appontment of a recever for any
ta payer n any recevershp proceedng any defcency (together wth
a nterest, addtona amounts, or addtons to the ta provded for by aw)
determned by the Commssoner n respect to a ta mposed by ths tte
chapter n the Code upon such ta payer sha, despte the restrctons mposed
by secton 272(a) upon assessments be mmedatey assessed f such defcency
has not theretofore been nssessed n accordance wth aw. Cams for
the defcency and such nterest, addtona amounts and addtons to the ta
may be presented, for ad|udcaton n accordance wth aw, to the court before
whch the bankruptcy or recevershp proceedng s pendng, despte the pendency
of proceedngs for the redetermnaton of the defcency n pursuance of a
petton to the oard but no petton for any such redetermnaton sha be fed
wth the oard after the ad|udcaton n bankruptcy or the appontment of
the recever.
Pror to assessment nterest accrues on the amount of the defcency
at the rate of per centum per annum from the date prescrbed for
the payment of the ta (or, f the ta s pad n nstaments, from
the date prescrbed for the payment of the frst nstament) to the
date the defcency s assessed, or, n the case of a waver under secton
272(d), to the thrteth day after the fng of such waver or to the
date the defcency s assessed whchever s the earer. (Secton 292
of the Revenue cts of 1932, 1934, 193 , 1938, and the Interna Reve-
nue Code.)
In the ordnary case (omttng those nvovng bankruptcy or re-
cevershp for the tme beng) t s provded n part n secton 294(b)
of the Revenue cts of 1932, 1934, 193 , and 1938 and the Interna
Revenue Code that :
Defcency. Where a defcency, or any nterest assessed In con-
necton therewth under secton 292 s not pad n fu wthn 10 days
from the date of notce and demand from the coector, there sha be coected as
part of the ta , nterest upon the unpad amount from the date of
such notce and demand unt t s pad .
The term unpad amount n secton 294(b), supra, ceary refers
to the amount of the assessment (whch ncudes ta and nterest)
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292.
whch s not pad n fu wthn 10 days from the date of the notce
and the demand. (See secton 292, supra, whch provdes that the
Interest upon the amount determned as a defcency sha be assessed
at the same tme as the defcency, sha be pad upon notce and de-
mand from the coector, and sha be coected as a part of the
ta . ) Thus, secton 294(b), supra, requres that nterest be
coected on the amount of the unpad assessed ta and nterest from
the date of the notce and demand unt pad.
It s mportant to note at ths pont that, ordnary, an assessment
of the amount of the defcency and nterest thereon can not be made
u unt such notce of defcency has been maed to the ta payer, nor
unt the e praton of such 90-day perod, nor, f a petton has been
fed wth the oard, unt the decson of the oard has become fna.
(Secton 272(a), supra.) One of the e ceptons made to ths rue s
n cases reatng to bankruptcy and recevershp where an assessment
must be made mmedatey. (Secton 274(a), supra.) Ths e cepton
to the rue was enacted n 192 because of the fact that durng the
pendency of a bankruptcy or recevershp proceedng the assets of the
debtor-ta payer coud not be dstraned upon even f the Comms-
soner succeeded before the oard of Ta ppeas n a petton for
redetermnaton of the amount of the defcency fed before the
ad|udcaton of bankruptcy or the appontment of a recever. (Senate
Report No. 52, S ty-nnth Congress, frst sesson, Revenue ct of
192 .) In any event, the statute provdes that n such cases a cam
for the defcency and nterest may be presented to and aowed by the
court n whch the proceedng s pendng, and that no petton for a
redetermnaton of the defcency sha be fed wth the oard after
ad|udcaton of bankruptcy or the appontment of a recever.
It thus appears that wth respect to assessments made n accord-
ance wth secton 274(a), supra, the statute does not contempate
the ssuance of a notce and demand for payment pursuant to sec-
ton 294(b), supra. Ths s made cear not ony by consderaton
of the purpose of secton 274(a), supra, but by the partcuar word-
ng of that secton. The frst part of secton 274(a) requres that
an assessment be mmedatey made of any defcency (together
wth a nterest provded for by aw) determned by
the Commssoner . In the atter part of the secton t
s provded not that cams for the assessment be presented to the
court but that cams for the defcency and such nterest
may be presented. Itacs supped. The term such nterest
refers back to the phrase a nterest provded for by
aw, whch nterest, where assessment was not made aganst the ta -
payer pror to hs ad|udcaton, represented the nterest accrung
aganst the ta payer n accordance wth the provson of aw app-
cabe pror to assessment. (See secton 292, supra.) It s beeved,
therefore, that the Government s cam n such cases shoud not ony
ncude the amount of the defcency, but the amount of nterest ac-
crung thereon (as provded for by aw) as of the date of the ta -
payers ad|udcaton, and that the subsequent assessment of the ta ,
athough requred for admnstratve purposes, shoud not be regarded
as termnatng the runnng of such nterest, snce, n accordance wth
the statute, the amount of the defcency and the amount of nterest
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292.
184
due thereon are eft to the court for ad|udcaton n accordance
wth aw.
fter termnaton of the proceedng, however, a dfferent rue
appes by vrtue of secton 298 of the Revenue cts of 1932, 1934,
193 , 1938, and the Interna Revenue Code, whch provdes:
If the unpad porton of the cam aowed In a bankruptcy or recevershp
proceedng, as provded n secton 274, s not pad n fu wthn 10 daya from
the date of notce and demand from the coector, then there sha be coected
as n part of such amount nterest upon the unpad porton thereof
from the date of such notce and demand unt payment.
The term unpad porton, as used n secton 298, supra, ceary
ncudes the entre amount (both ta and nterest) of the cam
aowed by the court whch s not pad n fu wthn 10 days from
the date of notce and demand.
It s the opnon of ths offce, therefore, that where there s an
ad|udcaton of bankruptcy or appontment of a recever for a
ta payer before an assessment of the amount of the defcency and
nterest s made n ordnary course, the nterest whch accrues s
at the rate of per cent per annum ony on the prncpa amount
of the ta durng the pendency of the bankruptcy or recevershp
proceedng, and that the statute does not authorze the coecton
of nterest on nterest unt after the ssuance of notce and demand
foowng the termnaton of such proceedng, and then ony to the
e tent of any porton of the Government s cam (ncudng nterest)
aowed n such proceedng whch s unpad, and wth respect to
whch the ta payer fas to make payment, wthn 10 days after
the ssuance of such notce.
Cass (2) Where the ad|udcaton of bankruptcy or appontment
of a recever occurs after the assessment n due course of the amount
of the defcency and nterest.
s can be seen from the dscusson n the frst part of ths memo-
randum, n the ordnary case (omttng those nvovng bankruptcy
or recevershp for the tme beng) nterest accrues on the amount
of the unpad assessed ta and nterest from the date of notce and
demand unt pad. (Secton 294(b), supra.) That ths rue (a-
though at a dfferent rate of nterest) was appcabe to estates n
bankruptcy or recevershp, among others, s shown by secton 294(c)
of the Revenue cts of 1932, 1934, and 193 , whch reads as foows:
ducares. or any perod an estate s hed by a fducary apponted by
order of any court of competent |ursdcton or by w, there sha be coected
nterest at the rate of 0 per centum per annum n eu of the nterest provded
n subsectons (a) and (b) of ths secton.
Secton (a) of the Revenue ct of 1932, secton 801 (a) of
the Revenue ct of 1934, and secton 1001 (a) of the Revenue ct
of 193 defne the term fducary to mean, among others, trustee,
recever, or any person actng n any fducary capacty for any per-
son. (See aso Mm. 449 , C. . -2, 530 (193 ).)
Secton 294(e) referred to above was omtted from the Revenue
ct of 1938. Ths acton s e paned as foows by the report of
the Commttee on Ways and Means:
Secton 204(c) of the Revenue ct of 193 s not retaned n ths b, snce
t s ceary surpusage. Pror to the enactment of secton 404 of the Revenue
ct of 1935, reducng the rates of nterest on unpad ta es from 1 per cent
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185
298.
per month to per cent per annum, the matter emnated provded, a speca
rue n the case of estates hed by fducares apwntcd by courts of competent
|ursdcton or by w. Now that a unpad ta es bear nterest at the rate
of per cent per annum, there s no further need for contnung the matter
emnated, and the nterest rate n such cases s governed by other provsons
of secton 294. ( . R. Report No. 1800, Seventy-ffth Congress, thrd sesson.)
s n cass (1) dscussed .above, a dfferent rue appes after ter-
mnaton of the proceedng by vrtue of secton 298, supra, whch
provdes for nterest on the unpad porton of the cam aowed by
the court whch s not pad n fu wthn 10 days from the date of
notce and demand.
It s, therefore, the opnon of ths offce that where there s an
ad|udcaton of bankruptcy or appontment of a recever for a ta -
payer after an assessment of the amount of the defcency and n-
terest, the nterest whch accrues s at the rate of per cent per
annum on the amount of the unpad assessed ta and nterest from
the date of the notce and demand unt the termnaton of the bank-
ruptcy or recevershp proceedng. fter the termnaton of the
proceedng, that porton of the Government s cam aowed n such
proceedng whch s unpad, and wth respect to whch the ta payer
fas to make payment wthn 10 days after the ssuance of notce
and demand, draws nterest from the date of such notce and demand
unt payment.
Wth reference to subdvsons (a) and (b) of cass (2) mentoned
n the frst part of ths memorandum, t s beeved to be mmatera
whether the date of the notce and demand for the assessment (ta
pus nterest) precedes or foows the date of the ad|udcaton of
bankruptcy or appontment of a recever. s heretofore ponted
out, where an assessment has been made pror to an ad|udcaton
n bankruptcy or appontment of a recever, secton 294, subdvsons
(b) and (c), of the Revenue cts of 1932, 1934, and 193 , and sec-
ton 294(b) of the Revenue ct of 1938 contnue to govern the ac-
crua of nterest and the rate thereof, e cept as atered by secton
298. supra, after the termnaton of the proceedng.
The nstant case fas wthn cass (1) above dscussed, snce the
ad|udcaton of bankruptcy occurred before the assessment n ord-
nary course of the amount of the defcency and nterest.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
S CTION 298. N RUPTCY ND R C I RS IPS.
R NU CT O 1932.
Interest assessabe on defcences n cases of bankruptcy and re-
cevershp. (See G. C. M. 218 0, page 181.)
25220 40 7
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322, rt. 322-7.
18
SUPPL M NT O. O RP YM NTS.
S CTION 322. R UNDS ND CR DITS.
rtce 322-7: Lmtatons upon the credtng
and refundng of ta es pad.
1940-5-10157
Ct. D. 143
INCOM T R NU CT OP 1D34 D CISION O COURT.
1. oard of Ta ppeas mendment of Petton Substtuton
of New Cause of cton for Orgna Cam Statute op
Lmtatons.
tmey petton to the oard of Ta ppeas, based upon a
specfc ground, can not be amended after the e praton of two
years from the date of payment of the ta by substtutng for such
ground an entrey dfferent cam. The amendment consttutes a
new cause of acton whch, by tsef, woud have been barred by the
statute of mtatons, and can not reate back to the fng of the
orgna petton so as to brng t wthn the statutory perod.
2. Decsons ppcabe.
Unted States v. ndrews (1938) (302 U. S., 517 Ct. D. 1390,
C. . 1938-1, 322 ) and Unted States v. arbutt O Co. (1938)
(302 U. 8., 528 Ct. D. 1301, C. . 1938-1, 370 ) are appcabe to
appeas fed wth the oard of Ta ppeas.
3. Decson Reversed.
Decson of the Unted Stntes oard of Ta ppeas (1937) (35
. T. ., 1178) reversed.
4. Certorar Dened.
Petton for certorar dened November , 1939.
Unted States Crcut Court of ppeas for the Thrd Crcut.
Commssoner of Interna Revenue, pettoner, v. dward . Reck, respondent.
104 ed. (2d), 294.
On petton for revew of the decson of the Unted States oard of Ta ppeas.
efore ubtngton and ggs, Crcut udges, and Dcknson, Dstrct udge.
Dcknson, Dstrct udge: The Commssoner of Interna Revenue eved a
ta for the year 1932 upon the respondent ta payer, based upon ncome receved
durng that year. The Commssoner on a defcency assessment ncuded n
the ta payer s ta abe ncome what the ta payer camed to be the ncome of
what s known to ths record as an nsurance trust. The ta payer pad the
assessed ta on March 15, 1933, and the defcency assessment on September 5,
1934. e then appeaed to the oard of Ta ppeas, companng of an over-
assessment because of the ncuson of the nsurance trust ncome n the ta -
payer s ta abe ncome and asked for a refund of the overpayment. Ths cam
was fed pr 19, 1935. The ta payer had kewse ncuded n hs return of
hs 1933 ncome a deducton because of a oss suffered through the worthessness
of shares of stock n the Damond Natona ank. The Commssoner conceded
(e fact of the oss but refused the deducton because of hs hodng that the
oss had been ncurred n 1932 nnd hence coud not be deducted from the
1933 ncome.
In the course of the appea to the oard above mentoned, the ta payer
became convnced that hs cam to a deducton because of the nsurance trust
ncome was baseess and woud not be, as t was not, aowed by the oard. e
accordngy asked and was granted by the oard eave to amend hs cam by
substtutng for the nsurance trust ncome deducton a deducton for the bank
stock oss. Ths amendment was aowed September 28, 193 . The sgnfcance
anuary 17, 1939.
opnon.
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1S7
110 , rt. 1341.
of ths Is that the orgna cam was fed pr 19, 1935, wthn two years of the
payment of the ta . The amended cam was not made unt September 28,
193 , more than two years after the payment. If, however, the aowance of
the amendment was proper, the bank oss cam woud reate back to the nsur-
ance trust cam and both woud be wthn the two years. The prncpe s too
we setted to requre the ctaton of authortes to support t, that an amend-
ment w not be aowed f t ntroduces a new cause of acton whch as an
ndependent proceedng woud be barred by a statute of mtatons. The rea
(|aeston thus becomes, as formuated n the opnon of the oard, what con-
sttutes a cause of acton n cases nvovng the determnaton of the ncome ta
abty of ta payers.
The oard has favored us wth a cosey reasoned opnon n the dscusson of
the sub|ect to whch nothng coud be proftaby added. The oard however dd
not have the beneft of the rung of the Supreme Court n the cases of ndrews v.
Unted States (17 ed. Supp., 980) and Garbutt O Co. v. Unted States (89 . R.
(2d), 749), snce reported n 302 U. S., 517, and bd., 528.
The revew before us thus comes down to the queston of whether these cases,
or ether of them, are decsve of the queston rued by the oard.
dstncton has been made, referred to n the opnon of the oard and
stressed by appeee, between cams made to the Commssoner and appeas to
the oard. Nether of the cted cases was of the oard of ppeas type. They
nonetheess seem decsve of the queston before us. The amended ct forbds an
order of refund uness there s a fndng by the oard that the ta was pad
wthn two years before the fng of the cam or the fng of the petton. The
cted cases rue that an untmey cam can not be brought wthn the 2-year
mtaton by cang t an amendment of a cam fed n tme uness the amend-
ment was propery aowed and that t s not propery aowed f based on a
new and unreated ground, whch by tsef aone woud be barred by the statute.
It has kewse been urged upon us that no tmey ob|ecton was made to the
amendment and that the pettoner s thus n the poston by au untmey ob|ec-
ton, of seekng to rase the queston of an untmey cam. There s n conse-
quence sad to have been a waver of the deay In presentng the cam fnay
made. The cted cases however dea wth ths very pont. Compance wth
procedura reguatons may be waved but a statutory mtaton may not be.
There s that n the stuaton of ths ta payer whch has appeang force but
there must be compance wth the statute.
The cted cases requre us to hod that the petton to revew the order of the
oard of Ta ppeas be aowed and the order be reversed.
TITL I. G N R L DMINISTR TI PRO ISIONS.
S CTION 110 (R NU CT O 192 ). IN L
D T RMIN TIONS ND SS SSM NTS.
rtce 1341 (Reguatons 9): na determna- 1940-11-10202
ton and assessment of ta or penaty. Ct. D. 1447
ncome ta revenue act of 192 decson of supreme court.
1. oabo of Ta ppeas ndngs op act vdence oard s
ndngs to be ccepted upon Revew.
Where there was substanta evdence to support the concuson of
the oard of Ta ppeas that the Commssoner had adequatedy
sustaned the burden of showng fraud or mafeasance or msrep-
resentaton of fact whch affected a cosng agreement and propery
set asde that agreement, the court beow shoud have accepted such
fndng and may not substtute ts |udgment of facts for that of the
oard.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, Thrd Cr-
cut (1939) (105 . (2d), 552), vacatng decson of the Unted
States oard of Ta ppeas (193 ) (34 . T. ., 59), reversed.
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110 , rt. 1341.
188
Supreme Court op the Unted States.
Ouy T. cverng, Commssoner of Interna Revenue, pettoner, t. ohn ehoe.
309 U. S., 277.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
ebruary 20, 1040.
OPINION.
Mr. ustce McReynods devered the opnon of the Court.
Respondent ehoe, n 192 , made an ncome ta return for 1925 and pad
the nmount computed thereon. In 1927, after nqury concernng hs affar ,
the Commssoner assessed and coected an addtona sum. Respondent waved
appea to the oard of Ta ppeas and became party to a cosng agreement
under secton 110 (b), Revenue ct 192 ,1 approved by the Secretary of the
Treasury anuary 27, 1928.
In 1932 the Commssoner undertook to set asde ths agreement and made
a defcency assessment of more than 200,000, aso a 50 per cent penaty.
Respondent appeaed to the oard of Ta ppeas where he mantaned there
was no adequate proof to support the assessment The oard hed the Com-
mssoner had adequatey sustaned the burden of showng fraud or mafeasance
or msrepresentaton of fact, and dd not err n settng the agreement asda.
The matter then went to the Crcut Court of ppeas, Thrd Crcut, whch
rued there was no adequate evdence to support the concuson and |udgment
of the oard. The facts are much dscussed n a ma|orty and dssentng
opnon (105 ed. (2d), 552). nother narraton of them seems unnecessary.
Under the rue often announced, the functon of the oard of Ta ppeas
s to wegh the evdence and decare the resut as to matters propery before t
Upon revew the court may not substtute ts |udgment of the facts for that
of the oard. When there s substanta evdence to support the concuson
of the atter ths must be accepted. ( cverng v. Rankn, 295 U. S., 123, 131
ret. D. 0 , C. . I -1, 100 (1935) Genera Uttes Co. v. vverng, 29
U. S., 200, 20 Ct. D. 1055, C. . -1, 214 (103 ) mhurst Cemetery Co.
v. Commssoner, 300 U. S., 37, 40 Ct. D. 1202, C. . 1937-1, 209 .)
ere, upon evdence whch we thnk s substanta (the dssentng member
of the court beow hed the same vew), the oard found fraud n fact whch
affected the cosng agreement, and that the Commssoner propery set the
contract asde. The court beow shoud have accepted ths fndng of fact.
s t faed so to do the chaenged |udgment must be reversed. The rung
of the oard s affrmed.
Reversed.
anuary 2 . 102 (ch. 27. 44 Stat., P.. 113)
Sbc. 110 . (b) If after a determnaton and assessment In any case the ta pnver has
pad n whoe any ta or penaty, or accepted any abatement, credt, or refund based on
such determnaton and assessment, and an agreement s made n wrtng between the ta -
payer and the Commssoner, wth the approva of the Secretary, that such determnaton
and assessment sha be fna and concusve, then (e cept upon a showng of fraud or ma-
feasance or msrepresentaton of fact materay affectng the determnaton or assessment
thus made) (1) the case sha not be reopened or the determnaton and assessment mod-
fed by any offcer, empoyee, or agent of the Unted States, and (2) no sut, acton, or
proceedng to annu, modfy, or set asde such determnaton or assessment sha he enter-
taned by any court of the Unted States.
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MPLOYM NT T S.
INT RN L R NU COD .
C PT R 9, SU C PT R . MPLOYM NT Y OT RS T N
C RRI RS.
Secton 142 : Defntons.
Reguatons 91, rtce 4: Who are empoyers.
Change n status of empoyer under communty property aw of
Te as (See S. S. T. 881, page 214.)
Secton 1403: Recepts for empoyees. 1940-1-10129
Reguatons 10 , Secton 402.30 : Statements Mm. 4992
for empoyees.
Recepts for empoyees requred by secton 1403 of the edera
Insurance Contrbutons ct, as amended, wth respect to wages
pad after December 81, 1939.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, December 12,1939.
Coectors of Interna Revenue and Others Concerned:
Secton 1403 of the edera Insurance Contrbutons ct (Sub-
chapter , Chapter 9, of the Interna Revenue Code), added by
ecton 03 of the Soca Securty ct mendments of 1939, provdes
as foows:
Sec. 1403. Recepts for mpoyees.
(a) Requrement. very empoyer sha furnsh to each of hs empoyees
a wrtten statement or statements, n a form sutabe for retenton by the
empoyee, showng the wages pad by hm to the empoyee after December 31,
1939. ach statement sha cover a caendar year, or one, two, three, or four
caendar quarters, whether or not wthn the same caendar year, and sha
8how the name of the empoyer, the name of the empoyee, the perod covered
by the statement, the tota amount of wages pad wthn such perod, and the
amount of the ta mposed by secton 1400 wth respect to such wages. ach
statement sha be furnshed to the empoyee not ater than the ast day of
the second caendar month foowng the perod covered by the statement,
e cept that. If the empoyee eaves the empoy at the empoyer, the fna state-
ment sha be furnshed on the day on whch the ast payment of wages s made
to the empoyee. The empoyer may, at hs opton, furnsh such a statement
to any empoyee at the tme of each payment of wages to the empoyee durng
any caendar quarter, In eu of a statement coverng such quarter and, n
such case, the statement may show the date of payment of the wages, n eu
of the perod covered by the statement.
(189)
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Regs. 10 , 402.30 .
190
(b) Penaty for aure to urnsh. ny empoyer who wfuy fas
to furnsh a statement to an empoyee n the manner, at the tme, and showng
the nformaton, requred under subsecton (a), sha for each such faure be
sub|ect to a cv penaty of not more than 5.
The ureau of Interna Revenue s recevng numerous nqures
reatve to the form and content of the statements whch are requred
by the above-quoted provsons to be furnshed by empoyers to em-
graph s to set forth the answers to certan questons whch appear to
be of genera nterest. Such questons, and the answers thereto, are
as foows:
ueston 1: In what form shoud the statement be made
nswer: No partcuar form s prescrbed for the statement requred
to be furnshed by the empoyer to the empoyee. If a statement, n
a form sutabe for retenton by the empoyee, s prepared by the em-
poyer to show ceary a the nformaton caed for by secton 1403(a)
and s furnshed at the tme or tmes specfed theren, the statement
may be n any form. Such statement may be furnshed, for e ampe,
on the empoyee s pay enveope, on a detachabe stub attached to the
empoyee s pay check, or on a separate sheet of paper.
ueston 2: May the empoyer omt the empoyee s name from the
statement f the empoyee s requred to wrte hs name on the state-
ment after t s furnshed to hm
nswer: The statement must be compete when furnshed to the em-
poyee, and the empoyee s name must be a part of the statement when
t s so furnshed.
ueston 3: May the empoyee s account number or pay-ro number
be shown on the statement, nstead of the empoyee s name
nswer: No. The empoyee s name must be shown on the state-
ment. (See, however, the answer to queston 8.)
ueston 4: What amount of empoyee s ta shoud be shown on the
statement f the empoyer (a) coects as empoyees ta more or ess
than 1 per cent of the tota wages shown on the statement, because of
the necessty of ncreasng or decreasng fractons of cents at the tme
of each coecton of such ta (b) erroneousy coects more or ess
than the correct amount of empoyees ta or (c) pays the empoyees
ta to the coector wthout coectng the amount thereof from the
empoyee
nswer: The statement shoud show the amount coected from the
empoyee by the empoyer as empoyees ta durng the perod covered
by the statement (ncudng, wth respect to the ta on each payment
of wages, the ncrease of a fracton of a cent, f any, to 1 cent f the
fracton s one-haf or more, or e cudng the fracton of a cent, f any,
f the fracton s ess than one-haf). If, by reason of an error made
durng such perod or pror thereto, the amount coected s greater
or ess than the amount of empoyees ta whch shoud have been co-
ected wth respect to the wages shown on the statement, the statement
shoud aso show the correct amount of empoyees ta wth respect to
such wages. In any case, however, n whch t s the practce of the
empoyer to pay the empoyees ta wthout coectng t from the
empoyee, the statement shoud show the amount of empoyees ta
whch, f such were not the practce of the empoyer, shoud have been
deducted at the tme the wages were pad.
The purpose of ths mmeo-
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191
Regs. 10 , 402.30 .
ueston 5: If an empoyee receves remuneraton n e cess of
3,000 for servces performed durng a caendar year, shoud the state-
ment or statements furnshed to the empoyee show the tota amount
of remuneraton pad, or ony the 3,000 whch s ta abe
nswer: Ony the ta abe wages, n the amount of 3,000, shoud
be shown on such statement or statements.
In preparng each statement requred by secton 1403(a), t w be
necessary for the empoyer to show ony that part of an empoyee s
remuneraton whch consttutes wages for empoyment, as those
terms are denned n secton 142 of the edera Insurance Contrbu-
tons ct, as amended. The term wages, as so defned, does not
ncude remuneraton n e cess of the frst 3,000 pad to an empoyee
by an empoyer wth respect to empoyment durng any caendar
year. Reguatons reatng n part to the meanng of the terms
wages and empoyment are n preparaton and may be obtaned
at a ater date from coectors of nterna revenue.
ueston : May the amount of empoyees ta shown on the state-
ment be dentfed by ome short desgnaton, such as . I. C.
(that s, edera nsurance contrbutons)
nswer: The amount of empoyees ta shown on the statement
shoud be dentfed so that t w be ceary dstngushabe from
any other deductons from the empoyee s wages. If a short desgna-
ton such as . I. C. s used, care shoud be taken that such desgna-
ton s used to dentfy ony the empoyees ta .
ueston 7: Is t permssbe to show the ast date covered by a
pay ro, rather than the date of payment of the wages or the perod
covered by the statement
nswer: Ths s not permssbe uness the empoyer furnshes a
statement at the tme of each payment of wages to the empoyee and
the wages are pad on the ast date covered by the pay ro.
Secton 1403(a) requres that the empoyer sha show the perod
covered by the statement uness a statement s furnshed to the em-
poyee at the tme of each payment of wages. If the statement s so
furnshed, the empoyer may, at hs opton, show the date of payment
of the wages, rather than the perod covered by the statement.
ueston 8: May the empoyer ncude n the statement nformaton
n addton to that requred by secton 1403(a)
nswer: If the statement otherwse meets the requrements of sec-
ton 1403(a), there s no ob|ecton to the ncuson n the statement of
addtona nformaton, such as the empoyee s account number or
pay-ro number or amounts deducted other than as empoyees ta ,
provded that such addtona nformaton s ceary dstngushabe
from the requred nformaton.
Correspondence reatng to ths mmeograph shoud refer to ts
number and to the symbos C: .
Gut T. everwq,
Commtsoner.
pproved December 12, 1939.
erbert . Gaston,
ctng Secretary of the Treasury.
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Regs 10 , 402.204.
192
Secton 142 : Defntons. 1940-2O-1O259
Reguatons 10 , Secton 402.204: Who are S. S. T. 387
empoyees.
shermen performng servces on fshng schooners owned by
the M Company, for whch they receve a ay or share of the
proceeds of the catch from the fshng voyage, are empoyees of the
M Company wthn the moanng of Subchapter , Chapter 9, of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
The queston s presented whether fshermen performng servces on
fshng schooners owned by the M Company are empoyees of that
company wthn the meanng of Subchapter , Chapter 9, of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
The M Company owns severa fshng schooners and operates them
on a ay bass. The company engages an ndvdua wth proper
quafcatons as captan or master. The captan n turn engages a
crew to operate the vesse. The members of the crew sgn no agree-
ments but the owner and the captan sgn an agreement wth the
shermen s Unon whch recognzes the ay bass upon whch the
voyage s conducted and paces certan restrctons upon the conduct
of the owner and captan n reference to the crew. The owner e er-
cses no contro over who sha be engaged as members of the crew,
ths matter and other detas beng eft to the captan.
Wth the e cepton of the captan, engneer, and purser, the mem-
bers of the crew are compensated on a straght share bass and receve
no other remuneraton for ther servces. The engneer receves O
doars per trp regardess of the fnanca outcome of the voyage,
and the purser receves a bonus of 10a doars per trp, whch
amount s contrbuted by the other members of the crew from ther
shares. The captan receves a commsson, n addton to hs share
of the catch, based upon the owner s share of the ncome from the
fshng voyage. The captan and members of the crew (other than
the engneer) are |onty abe for any osses resutng from a voyage.
In such a case t s customary for the oss to be deducted from the
crew members shares of the profts of the ne t voyage.
The catch of fsh from a partcuar voyage s usuay sod through
the Y sh change, and after certan fees are deducted by the
e change, the captan receves the net proceeds or the net stock.
rom the net stock are deducted certan specfed e penses, such
as fue o, ghts, etc. One-fourth of the amount remanng after
such e penses are deducted s turned over to the M Company (owner)
as ts share, ess 5 per cent of such amount, whch consttutes the
captan s commsson. rom the remanng three-fourths of the pro-
ceeds of the voyage, the e penses of food, bat, etc., are deducted.
The remander s then dvded equay among the members of the
crew, ncudng the captan.
Secton 142 (b), Subchapter , Chapter 9, of the Interna Revenue
Code, as amended, provdes n part as foows:
The term empoyment means any servce performed after De-
cember 31. 19.S9, by an empoyee for te person empoyng hm ( )
on or n connecton wth an mercan vesse under a contract of servce whch
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193
Regs. 10 , 402.204.
s entered nto wthn the Unted States or (urng the performance of whch the
vesse touches at a port n the Unted States, f the empoyee s empoyed on
md n connecton wth such vesse when outsde the Unted States, e cept

(14) Servce performed hy an ndvdua n (or as an offcer or member of
the crew of a vesse whe t s engaged n) the catchng, takng, harvestng,
cutvatng, or farmng of any knd of fsh, shefsh, Crustacea, sponges, sea-
weeds, or other aquatc forms of anma and vegetabe fe (ncudng servce
performed by any such ndvdua as an ordnary ncdent to any such actvty),
e cept ( ) servce performed In connecton wth the catchng or takng of
Ramon or habut, for commerca purposes, and ( ) servce performed on or
n connecton wth a vesse of more than 10 net tons (determned n the manner
provded for determnng the regster tonnage of merchant vesses under the
aws of the Unted States) .
Secton 142 (g), Subchapter , Chapter 9, of the Code, as amended,
provdes as foows:
mercan vesse. The term mercan vesse means any vesse documented
or numbered under the aws of the Unted States and ncudes any vesse whch Is
nether documented or numbered under the aws of the Unted States nor docu-
mented under the aws of any foregn country, f ts crew Is empoyed soey
by one or more ctzens or resdents of the Unted States or corporatons organ-
zed under the aws of the Unted States or of any State.
The vesses operated by the M Company are mercan vesses
wthn the meanng of secton 142 (g), supra, and are more than 10
net tons each. The contracts for the servces of the fshermen operat-
ng the M Company s vesses were entered nto wthn the Unted
States.
common method of compensatng a fsherman s to aow hm
a share of the profts of the voyage. It s we setted that agreements
by whch seamen engaged n a fshng voyage are to receve for ther
servces such a share or ay are contracts of hrng, and the shares
or ays so agreed upon are n the nature of wages, to recover
whch actons may be mantaned at the end of the voyage. (Unted
States v. Lafn, 24 . (2d), 83 Unted States v. Peterson, 28 . (2d),
29 Lews v. Chadboume, 92 m. Dec., 558 ourne v. Smth, 3 ed.
Cas., No. 1701, p. 1010.) ccordngy, t s hed that the offcers and
members of the crews of the fshng schooners owned by the M Com-
pany are empoyees for purposes of the ta es mposed under Sub-
chapter , Chapter 9, of the Interna Revenue Code, as amended by
the Soca Securty ct mendments of 1939, wth respect to ther
servces performed subsequent to December 31, 1939.
The queston remans whether the owner or the captan of each
vesse s the empoyer of the fshermen for purposes of the ta es m-
posed by the edera Insurance Contrbutons ct. The answer to
ths queston depends on the facts of the partcuar case. (See The
Norand, 101 ed. (2d), 9 7.) In the absence of a drect contractua
reatonshp between the owner of the vesse and the crew, the deter-
mnng eement s whether the captan or master of the shp s the
agent of the owner of the vesse or whether he s the owner pro hoc
vce (for ths occason). In the former case, the crew, as we as
the master or captan, woud be the empoyees of the owner n the
atter case, the crew woud be the empoyees of the master or captan
and not of the owner of the vesse. (See The Norand, supra.)
Under the facts presented n the nstant case, the captans or
masters of the M Company s schooners are actng as agents of the
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Regs. 10 , 402.204.
194
owner n engagng the crews and conductng the voyages. Conse-
quenty, the members of the crews, together wth the captans or
masters, are empoyees of the M Company, the owner of the vesses,
for the purposes of the ta es mposed by Subchapter , Chapter 9,
of the Interna Revenue Code, as amended. (See S. S. T. 33G, C. C
1938-2, 295, and The Norand, supra.)
The entre compensaton of each offcer and member of the crew, n-
cudng the captan s commsson, the O doars pad to the engneer,
the purser s bonus of O doars, and each ndvdua s ay or
share receved for servces performed after December 31, 1939, s con-
sdered wages for the purposes of the ta es mposed under Sub-
chapter , Chapter 9, of the Interna Revenue Code, as amended.
urthermore, the far cash vaue of the board deducted from the
proceeds of the sae of the catch of fsh and the odgng furnshed
the fshermen shoud be ncuded as wages. (See S. S. T. 38 ,
page 211.)
Secton 142G: Defntons. 1940-21-1O28
Reguatons 10G, Secton 402.204: Who are S. S. T. 388
empoyees.
( so Subchapter C ( edera Unempoyment
Ta ct). Secton 1 07 Reguatons 107,
Secton 403.204.)
fnd the ndvduas whom e engages to nssst hm n the
constructon of houses for the M Company are empoyees of that
company for purposes of Subchapters and C, Chapter 0, of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
The queston s presented whether and the ndvduas whom he
engages to assst hm n the constructon of houses for the M Com-
pany are empoyees of that company for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended by
the Soca Securty ct mendments of 1939.
. who operates as an ndvdua and who does not mantan an
offce or pace of busness, enters nto wrtten contracts wth the
M Company to furnsh the abor necessary for the constructon of
houses. Under the contracts, the company agrees to pay the costs
of constructon, ncudng the costs of a abor, matera and sup-
pes, budng permts, nsurance, etc. owever, furnshes a
toos and equpment used n the constructon of the houses, per-
forms persona servces as a carpenter and mechanc for whch he
s pad a stpuated amount per hour, acts as superntendent and
foreman, and engages other ndvduas to assst hm. The company
has the rght to seect, approve, or dscharge any such ndvdua.
Upon the competon of a house, s pad an amount equa to per
cent of the tota cost thereof, such amount beng n addton to the
compensaton whch he receves for servces performed as carpenter
and mechanc.
s not responsbe for fauts or defects of constructon or for
wastefu operatons. company representatve frequenty vsts
the house and keeps n touch wth the progress of constructon. t
the end of each week, presents a statement of the amount e pended
by hm, ncudng the pay ro, to the company for payment. s
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195
egs. 10 . 402.204.
Sven a check to cover such costs and pays the assstants, athough
e s not personay abe for ther wages.
Upon a consderaton of the above facts, t s hed that and
the ndvduas engaged to assst hm n the constructon of the
houses are empoyees of the M Company for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended by
the Soca Securty ct mendments of 1939.
Secton 142 : Defntons. . 194O-23-10282
Reguatons 10 , Secton 402.204: Who are S. S. T. 390
empoyees.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.204.)
, who s engaged In seng bura ots and mausoeum space
for the M Cemetery Co., and the ndvduas whom he engages to
assst hm are not empoyees of that company for purposes of
Subchapters and C, Chapter 9, of the Interna Revenue Code,
as amended by the Soca Securty ct mendments of 1939.
The queston s presented whether , who s engaged under con-
tract to se bura ots and mausoeum space for the M Cemetery
Co., and the ndvduas whom he engages to assst hm are em-
poyees of that company for purposes of Subchapters and C,
Chapter 9, of the Interna Revenue Code, as amended by the Soca
Securty ct mendments of 1939.
The contract provdes that t sha be n effect for a defnte perod
and that sha devote hs entre tme and hs best efforts to the
sae of bura ots and mausoeum space for such sums of money and
such prces as may from tme to tme be determned by the compan .
or hs servces receves certan specfed commssons. e s re-
qured to keep compete and accurate books of account and the com-
pany has the rght to e amne such records and have thorn audted
or nspected at such tmes as ts drectors sha desre. Under the
terms of the contract, the company pays the e penses of for offce
rent and offce suppes not to e ceed Z doars per month. Durng
the contnuance of the contract, must make dgent effort to co-
ect any and a sums due and payabe to the company for the sae
and/or purchase of bura ots and mausoeum space.
s not furnshed wth statements of rues, drectons, or poces of
the company. e s not requred to conform to f ed hours of servce,
to canvass an assgned terrtory wthn any partcuar tme or wth
specfed frequency, to foow prescrbed schedues, to ca on partcu-
ar customers or prospects whose names are furnshed by the company,
to submt reports, other than monthy reports of saes and coectons,
to perform servces other than those specfed n the contract, or to
attend saes meetngs or conferences. e s not sub|ect to any n-
structons or restrctons of the company n the conduct of hs seng
actvtes. does not have a drawng account nor are advances
aganst unearned commssons made to hm. s servces may be
termnated ony upon a breach of contract. e engages other n-
dvduas to assst hm, over whose actvtes the company has no
contro. The saes contracts sgned by are not sub|ect to approva
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Regs. 10 , 402.204.
19
by the company and hs decson s fna as to the credt rsks and
terms of payment.
The term empoyment s defned n secton 1420(b), Chapter 9,
of the Interna Revenue Code, as amended, to mean any servce, of
whatever nature, performed after December 31, 1939, by an empoyee
for the person empoyng hm . Secton 402.204, Regua-
tons 10 , promugated under secton 142 (b), supra, provdes n
part as foows:
very ndvdua s an empoyee f the reatonshp between hm and the
person for whom he performs servces s the ega reatonshp of empoyer and
empoyee.
Generay such reatonshp e sts when the person for whom servces are
performed has the rght to contro and drect the ndvdua who performs
the servces, not ony as to the resut to be accompshed by the work but aso
as to the detas and means by whch that resut s accompshed. That s, an
empoyee s sub|ect to the w and contro of the empoyer not ony as to
what sha be done but how t sha be done. In ths connecton, t s not
necessary that the empoyer actuay drect or contro the manner n whch the
servces are performed t s suffcent f he has the rght to do so. The rght
to dscharge s aso an mportant factor ndcatng that the person possessng
that rght s an empoyer. Other factors characterstc of an empoyer, but
not necessary present n every case, are the furnshng of toos and the
furnshng of a pace to work, to the ndvdua who performs the servces. In
genera, f an ndvdua s sub|ect to the contro or drecton of another
merey as to the resut to be accompshed by the work and not as to the
means and methods for accompshng the resut, he s an ndependent con-
tractor. n ndvdua performng servces as an ndependent contractor s
not as to such servces an empoyee.
Whether the reatonshp of empoyer and empoyee e sts w n doubtfu
cases be determned upon an e amnaton of the partcuar facts of each case.
In vew of the above provsons of the reguatons and under
the partcuar facts n ths case, t s hed that the M Cemetery Co.
does not e ercse, or have the rght to e ercse, over the serv-
ces of and the ndvduas whom he engages to assst hm the
degree of contro necessary to estabsh the ega reatonshp of em-
poyer and empoyee. ccordngy, and the ndvduas whom he
engages to assst hm are not empoyees of the M Cemetery Co. for
purposes of Subchapters and C, Chapter 9, of the Interna Reve-
nue Code, as amended by the Soca Securty ct mendments of
1939.
Sfcton 142 : Defntons. 1940-24-1O291
Reguatons 100, Secton 402.204: Who are S. S. T. 391
empoyees.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1007 Reguatons 107,
Secton 403.204.)
, a taor who performs servces n hs home n the manufacture
of men s cothng for merchant taors s an empoyee of such
merchant taors for purposes of Subchapters and C, Chapter
9, of the Interna Revenue Code, as amended by the Soca Securty
ct mendmeuts of 1039.
The queston s presented wdether, for empoyment ta purposes,
s an empoyee of certan merchant taors (whoesaers and retaers
of cothng) for whom he performs servces.
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197
Regs. 10 , 402.204.
vsts the premses of certan merchant taors for the purpose
of securng orders for the manufacture of competed garments.
When a merchant taor has work for hm to do, he s gven the
necessary matera and an order for the garments, settng forth the
prce to be pad and the specfcatons therefor. usuay returns
to hs home, where he competes the garments. In some nstances the
merchant taor mantans an equpped shop where s prv-
eged to perform hs servces and where other taors n fact carry
on smar manufacturng operatons. Upon devery of the com-
peted artces to the merchant taor, s pad a f ed prce per
pece (as agreed upon) f the garments do not vary from specfca-
tons n any ma|or respect. Mnor changes are made by the mer-
chant taor n hs own shop. The merchant taor furnshes the
matera for any ma|or ateratons whch are made by . s equp-
ment n hs home conssts of a sewng machne, an eectrc ron, shears,
needes, etc. t tmes, when the amount of work |ustfes such acton,
he engages a member of hs famy to assst hm. does not man-
tan an equpped shop whch s open to the genera pubc.
In the nstant case, t s evdent that s not engaged n an nde-
pendent busness. The merchant taor ether drects and contros,
or has the rght to drect and contro, the manner n whch such serv-
ces are performed. On the bass of the above, t s hed that and
any assstants engaged by hm wth the e press or mped consent of
the severa merchant taors are empoyees of such merchant
taors for purposes of Subchapters and C, Chapter 9, of the
Interna Revenue Code, as amended. (See S. S. T. 137, C. . 1937-1,
378.)
Secton 142 : Defntons. 1940-24-10292
Refatons 10 , Secton 402.204: Who are S. S. T. 892
empoyees.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.204.)
, a taor who operates a busness estabshment of hs own, offer-
ng hs servces to the genera pubc n the manufacture and repar
of men s cothng, Is not, wth respect to manufacturng operatons
performed for varous merchant taors, an empoyee for purposes
of Subchapters and C, Chapter 9, of the Interna Revenue Code,
as amended by the Soca Securty ct mendments of 1939.
dvce s requested whether, for empoyment ta purposes, s an
empoyee of certan merchant taors (whoesaers and retaers of
cothng) wth respect to operatons performed by hm n the
manufacture of mers cothng.
mantans a busness estabshment of hs own where he engages
the manufacture and repar of cothng for the genera pubc. The
equpment owned by hm and utzed n the operatons ncudes sew-
ng machnes, ceanng and pressng equpment, etc. empoys sev-
era assstants for the manufacturng and repar work and a messenger
who vsts the premses of a number of merchant taors for the
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Regs. 10 , 402.20 -1
193
ng the prces per pece whch the merchant taor s vrng to pay
and the specfcatons of the garments. The messenger coects the
orders, together wth the matera for manufacture, and devers them
to . fter the garments are competed, the messenger devers them
to the merchant taors and s pad therefor f the garments are
accordng to the specfcatons. Garments not meetng specfcatons
are returned to for ateraton at hs own e pense. s at berty
to re|ect any order at hs dscreton.
In S. S. t. 391 (page 19 , ths uetn) t was hed that , a taor
who performs servces n hs home, n the manufacture of men s
cothng for merchant taors, s an empoyee of such merchant
taors for purposes of Subchapters and C, Chapter 9, of the
Interna Revenue Code, as amended. In the nstant case, athough
must foow the specfcatons furnshed by the merchant taors
he has much wder ndependence of acton. e s at berty to re|ect
any order tendered and means or methods of manufacture are vested
entrey n hm. urther, he mantans a pace of busness open to
the genera pubc, owns a substanta amount of equpment, and, n
genera, carres on e tensve ndependent manufacturng operatons,
whch factors were not present n S. S. T. 391.
On the bass of the presented facts, t s hed that s not an
empoyee for purposes of Subchapters and C, Chapter 9, of the In-
terna Revenue Code, as amended, of the varous merchant taors
for whom the manufacturng operatons are performed. (See S. S. T.
153, C. . 1937-1, 390.)
Secton 142 : Defntons. 1940-14-10221
Reguatons 10 , Secton 402.20 : cepted Mm. 5019
servces n genera.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.20 .)
stabshment of e empton of certan organzatons under secton
101 of the Interna Revenue Code for purposes of determnng the
e tent of abty for the ta es mposed under Subchapters and
C, Chapter 0, Interna Revenue Code ( edera Insurance Contrbu-
tons ct and edera Unempoyment Ta ct, respectvey), as
amended by the Soca Securty ct mendments of 1939.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 1 ,10 /).
Coectors of Interna Revenue, Interna Revenue gents n Charge
and Others Concerned:
1. Certan of the provsons of secton 101 of the Interna Revenue
Code, as amended, reatng to e empton from edera ncome ta ,
correspond to provsons whereby certan servces performed on or
after anuary 1, 1940, are e cepted from empoyment as defned
n sectons 142 (b) and 1 07(c) of Subchapters and C of Chapter
9 of the Interna Revenue Code ( edera Insurance Contrbutons
ct and edera Unempoyment Ta ct, respectvey), as amended
by sectons 0 and 14, respectvey, of the Soca Securty ct
mendments of 1939. The edera empoyment ta es are not app-
cabe wth respect to remuneraton for such e cepted servces.
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199
Regs. 10 , 402.20 .
2. The pertnent provsons of sectons 142 (b) and 1 07(c), supra,
are as foows:
The term empoyment means any servce performed after Decem-
ber 31, 1939, e cept
(8) Servce performed n the empoy of a corporaton, communty chest,
fond, or foundaton, organzed and operated e cusvey for regous, cbartab ,
scentfc, terary, or educatona purposes, or for the preventon of cruety to
chdren or anmas, no part of the net earnngs of whch nures to the beneft
of any prvate sharehoder or ndvdua, and no substanta part of the actv-
tes of whch s carryng on propaganda, or otherwse attemptng, to nfuence
egsaton Ths paragraph corresponds to secton 101( ) of the Interna
Revenue Code.

(10) ( ) Servce performed In any caendar quarter In the empoy of any
organzaton e empt from ncome ta under secton 101 of te Interna
Revenue Code , f
(1) the remuneraton for such servce doe not e ceed 45, or
() such servce s n connecton wth the coecton of dues or premums
for a fraterna benefcary socety, order, or assocaton, and Is performed
away from the home offce, or s rtuastc servce n connecton wth any
such socety, order, or assocaton, or The socetes, orders, or assocatons
referred to n ths subparagraph are the organzatons descrbed In secton
101(3) of the Interna Revenue Code.
() such servce s performed by a student who Is enroed and Is
reguary attendng casses at a schoo, coege, or unversty
(R) Servce performed n the empoy of an agrcutura or hortcutura
organzaton e empt from Income ta under secton 101(1) of the Interna
Revenue Code
(C) Servce performed n the empoy of a vountary empoyees benefcary
assocaton provdng for the payment of fe, sck, accdent, or other benefts
to the members of such assocaton or ther dependents, f (I) no part of ts
net earnngs nures (other than through such payments) to the beneft of any
prvate sharehoder or Indvdua, and () 85 per centum or more of the
ncome conssts of amounts coected from members for the soe purpose of
makng such payments and meetng e penses Ths subparagraph corresponds
to secton 101(1 ) of the Interna Revenue Code.
(D) Servce performed n the empoy of a vountary empoyees benefcary
assocaton provdng for the payment of fe, sck, accdent, or other benefts
to the members of such assocaton or ther dependents or ther desgnated
benefcares, f (I) admsson to membershp n such assocaton Is mted to
ndvduas who are offcers or empoyees of the Unted States Government, and
() no part of the net earnngs of such assocaton nures (other than through
such payments) to the beneft of any prvate sharehoder or Indvdua Ths
subparagraph corresponds to secton 101(19) of the Interna Revenue Code,
added by secton 217 of the Revenue ct of 1939.

8. Whenever an empoyee performs any of the servces ndcated
n the above-quoted provsons, the appcabty of the empoyment
ta es wth respect to such servces s whoy or party dependent upon
the status under such provsons of the organzaton empoyng hm.
Uness such organzaton has obtaned or requested a rung from the
ureau of Interna Revenue reatve to ts status under the above-
quoted provsons, the correspondng provsons of secton 101 of the
Interna Revenue Code, or correspondng provsons of the severa
evenue cts, such organzaton shoud submt nformaton suffcent
to enabe the ureau to make such a rung. It s the genera practce
of the ureau to consder the status of any such organzaton for n-
come ta purposes before determnng ts status for empoyment ta
purposes. If the organzaton s e empt from ncome ta under pro-
vsons of aw whch correspond to e cepton provsons n sectons
142 (b) and 1 07(c), supra, such e cepton provsons are appcabe
wth respect to servces performed n the empoy of the organzaton.
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Regs. 10 , S 402.20 .
200
Such an organzaton w not be further requred to estabsh that
such e cepton provsons are appcabe uness, subsequent to the date
ts e empt status was determned for ncome ta purposes, t has
changed ts character, purposes, or methods of operaton. ny change
n the character, purposes, or methods of operaton of such an organza-
ton shoud be reported mmedatey to the coector of nterna revenue
for the dstrct n whch the organzaton s ocated, n order that the
effect of such change upon the status of the organzaton may be
determned.
4. If the ureau has not made a rung reatve to the status of an
organzaton of a cass contempated n the above-quoted provsons,
and such organzaton fas to submt nformaton suffcent to enabe
the ureau to make such a rung, the above-quoted e cepton prov-
sons w not be treated as appcabe wth respect to servces per-
formed n the empoy of such organzaton. If such organzaton sub-
mts nformaton suffcent to enabe the ureau to make a rung rea-
tve to ts status, however, such organzaton w ordnary be permt-
ted, durng the perod n whch the ureau s consderng ts status, to
treat such e cepton provsons as appcabe to servces performed n
ts empoy. If the ureau determnes that such provsons are not
appcabe, any underpayment of ta under Subchapter or C of
Chapter 9 of the Code must be corrected. Interest w be coectbe
wth respect to such ta under Subchapter uness the underpayment
of such ta s ad|usted n accordance wth sectons 402.701 to 402.703.
ncusve, of eguatons 10 , reatng to the ta es mposed by Sub-
chapter . Interest w be coectbe wth respect to any such ta
under Subchapter C.
5. n organzaton whch has not submtted nformaton to enabe
the ureau to make a rung reatve to ts status shoud furnsh to
the ureau, or to the coector of nterna revenue for the dstrct
n whch the organzaton s ocated, an affdavt showng the char-
acter of the organzaton, the purpose for whch t was organzed, ts
actua actvtes, the sources of ts ncome and the dsposton of such
ncome, whether or not any of ts ncome s credted to surpus or may
nure to the beneft of any prvate sharehoder or ndvdua, and n
genera a facts reatng to ts operatons whch affect ts status. To
such affdavt shoud be attached a copy of the charter or artces of
ncorporaton or a copy of any other nstrument under whch the or-
ganzaton was created and s operatng, a copy of the by-aws of the
organzaton, and the atest fnanca statement, showng the assets,
abtes, recepts, and dsbursements of the organzaton. The words
prvate sharehoder or ndvdua as used n the above-quoted pro-
vsons refer to ndvduas havng a persona and prvate nterest n
the actvtes of the organzaton. In the case of the partcuar casses
of organzatons sted beow, the foowng addtona nformaton
shoud be emboded n or attached to, and made a part of, the affdavt:
(a) raterna benefcary socetes, orders, or assocatons: (I) The
number of subordnate odges n actve operaton, (II) whether per-
odca meetngs are actuay hed
(b) udng and oan assocatons and cooperatve banks: These
assocatons and banks shoud submt the nformaton requred by
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201
Regs. 10 , 402.20 .
questonnare, orm 1027, copes of whch may be obtaned from any
coector
(c) Corporatons, communty chests, funds, or foundatons: To
what e tent the actvtes of the organzaton nvove carryng on
propaganda, or otherwse attemptng, to nfuence egsaton
(d) ducatona organzatons: In addton to the nformaton
caed for n (c) above, whether any of the sharehoders are pad by
the organzaton, and f so, the reason for each such payment and the
amount thereof
(e) osptas: In addton to the nformaton caed for n (c)
above, whether part-pay or non-pay patents are accepted and whether
the amounts pad by part-pay patents are more than nomna
(/) usness eagues: (I) statement of the servces performed for
members, (II) a statement of the servces performed for nonmembers
(g) Cubs: The ncome receved from the use of the factes by the
genera pubc
(k) enevoent fe nsurance assocatons: (I) The number of
countes n whch the assocaton accepts rsks, (II) copes of the
poces or certfcates of membershp
() Mutua nsurance companes: (I) Copes of the poces or
certfcates of membershp, (II) f any substanta amount of ncome
s camed to be hed for the payment of osses or e penses, a statement
based upon a reabe tabe of oss e perence demonstratng that the
amount so hed for the payment of osses s reasonaby necessary or
n the case of e penses, a statement based upon reabe statstcs
showng that the e penses were ncurred or that n a probabty
they w be ncurred
(|) armers cooperatve assocatons: These assocatons shoud
submt the nformaton requred by questonnare, orm 1028, copes
of whch may be obtaned from any coector
(k) odng companes: (I) The name of the organzaton for
whch t hods tte, (II) the nformaton necessary to estabsh the
e empton, under secton 101 of the Interna Revenue Code, of the
organzaton for whch tte s hed.
. In determnng the status of oca organzatons, such as certan
fraterna benefcary socetes, orders, or assocatons, whch are
dentca to other oca organzatons chartered by and subordnate to
a State, regona, or natona organzaton, the ureau w gve con-
sderaton to the ssuance of rungs coverng a of the subordnate
organzatons upon a request made by the State, regona, or natona
organzaton. Such consderaton w be gven, however, ony f the
State, regona, or natona organzaton estabshes that the subord-
nate organzatons are dentca n character, purposes, and methods
of operaton. ny State, regona, or natona organzaton whch
desres such rungs for ts subordnate organzatons shoud submt
as a part of the nformaton descrbed n paragraph 5 of ths mmeo-
graph, a st showng the name and ocaton of each subordnate
organzaton for whch a rung s sought and a compete statement
of the crcumstances whch estabsh that the subordnate organza-
tons are dentca n character, purposes, and methods of operaton.
7. Inqures reatng to ncome ta abty shoud be addressed
to the ureau for the attenton of IT: P: T. Inqures reatng to
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Regs. 10 , 402.213. 202
empoyment ta abty shoud be addressed to the ureau for the
attenton of C: RR. Correspondence otherwse reatng to the
contents of ths mmeograph shoud refer to the number thereof
and the symbos C: RR.
Gut T. everng,
Commssoner.
Secton 142 : Defntons.
Reguatons 10C, Secton 402.208: grcutura abor.
ermentng, gradng, and bang of cgar eaf wrapper tobacco.
S. S. T. 219 (C. . 1937-2, 412) modfed. (See S. S. T. 382, page 218 )
Secton 142 : Defntons.
Reguatons 10 , Secton 402.213: Unted
States and nstrumentates thereof.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.213.)
rmy post e changes are nstrumentates of, and whoy owned
by, the Unted States wthn the meanng of Subchapters and C
of Chapter 9 of the Interna Revenue Code, as amended by the Soca
Securty ct mendments of 1930, and nether such e changes nor
ther empoyees are sub|ect to the ta es mposed under those
subchapters.
dvce s requested whether ray post e changes are nstrumenta-
tes of the Unted States wthn the meanng of Subchapters and C
of Chapter 9 of the Interna Revenue Code ( edera Insurance Con-
trbutons ct and edera Unempoyment Ta ct, respectvey), as
amended by the Soca Securty ct mendments of 1939 (Pubc, No.
379, Seventy-s th Congress, frst sesson).
In S. S. T. 2 9 (C. . 1938-1, 441) t was hed that rmy post
e changes are nstrumentates of the Unted States wthn the mean-
ng of Ttes III and I of the Soca Securty ct. owever,
S. S. T. 2 9 s not concusve as to the present status of rmy post
e changes, snce, under subparagraph ( ) of sectons 142 (b) and
1 07(c) of the Interna Revenue Code as amended, effectve anuary
1,1940, by sectons G0 and 14, respectvey, of the Soca Securty ct
mendments of 1939, servce performed n the empoy of an nstru-
mentaty of the Unted States s not e cepted from empoyment,
as defned n the sectons referred to, uness the nstrumentaty s ( )
whoy owned by the Unted States, or ( ) e empt from the ta es m-
posed by sectons 1410 and 1 00 of the Interna Revenue Code by vrtue
of any other provson of aw. Snce there s no provson of aw
e emptng rmy post e changes from the ta es mposed by sectons
1410 and 1G00, t s necessary to determne whether such e changes are
whoy owned by the Unted States.
parta descrpton of the organzaton and actvtes of rmy post
e changes s contaned n S. S. T. 2 9, supra. ddtona facts now
submtted reatve to the organzaton, ownershp, and operaton of
such post e changes show that they are whoy owned by the Unted
States wthn the meanng of sectons 142 (b) and 1 07(c) of the
Interna Revenue Code, as amended.
1940-12-10209
S. S. T. 385
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203 Regs. 10 , 402.213.
ccordngy, t s hed that nether such e changes nor ther em-
poyees are sub|ect to the ta es mposed by Subchapters and C o
Chapter 9 of the Interna Revenue Code, as amended.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.213: Unted
States and nstrumentates thereof.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.213 and Soca Securty ct,
Sectons 811 and 907 Reguatons 91 and
90, rtces 11 and 20 (5)-( ).)
ppcabty of the empoyment ta es Imposed by the edera
Insurance Contrbutons ct and the edera Unempoyment Ta
ct wth respect to servces performed on or after anuary 1, 1940,
n the empoy of certan banks and reated organzatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 27, 19 0.
Coectors of Interna Revenue and Others Concerned:
1. The empoyment ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct (formery
Ttes III and I , respectvey, of the Soca Securty ct) are not
appcabe wth respect to servces performed pror to anuary 1,
1940, whch were e cepted from empoyment as that term s
defned vrth respect to servces performed pror to anuary 1, 191f.
Secton 142 (b) of the edera Insurance Contrbutons ct and
secton 1 07(c)5 of the edera Unempoyment Ta ct provde as
foows wth respect to servces performed pror to anuary 1, 1940:
The term empoyment means any servce e cept

Sen-ce performed n the empoy of the Unted States Government or of an
nstrumentaty of the Unted States .
2. arous rungs have been pubshed n Interna Revenue ue-
tns wth respect to the appcabty of the above-quoted provsons
to servces performed n the empoy of a of the banks and reated
organzatons, e cept edera reserve banks,1 whch are herenafter
consdered. Such banks and other organzatons were hed nstru-
mentates of the Unted States for purposes of such provsons.
3. ffectve wth respect to servces performed on or after anuary
1,1940, secton 142 (b) of the edera Insurance Contrbutons ct.
as amended by secton 0 of the Soca Securty ct mendments o
1939, provdes n part as foows:
The term empoyment means any servce e cept

Servce performed n the empoy of the Unted States Government, or of an
nstrumentaty of the Unted States whch s ( ) whoy owned by the Unted
States, or ( ) e empt from the ta mposed by secton 1410 by vrtue of any
other provson of aw .
1940-8-10181
Mm. 5003
1 edera reserve banks are Instrumentates of the Unted States for empoyment ta
purposes. See paragraphs 9 to 12, ncusve, of ths mmeograph.
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Regs. 10 , 402.213.
204
Secton 1 07(c) of the edera Unempoyment Ta ct, as amended
by secton 14 of the Soca Securty ct mendments of 1939, con-
tans smar provsons wth respect to servces performed on or after
anuary 1, 19 f.
4. The rungs stated herenafter wth respect to the status of
banks and reated organzatons under the provsons of sectons
142 (b) and 1 07(c) , as amended (paragraph 3, supra), are ap-
pcabe wth respect to servces performed on or after anuary t
191f. Inasmuch as such banks and organzatons are nstrumen-
tates of the Unted States for empoyment ta purposes, consdera-
ton w be gven prncpay to the queston whether such organza-
tons are whoy owned by the Unted States or are e empt from
empoyment ta es by vrtue of any other provson of aw. In
decdng whether an nstrumentaty s whoy owned by the Unted
States, prmary consderaton s gven to statutory provsons regard-
ng the capta shares of such nstrumentaty, for the proposton s
a omatc that the stockhoders are the owners of a corporaton. The
determnaton that an nstrumentaty s e empt from empoyment
ta es by vrtue of any other provson of aw depends upon spe-
cfc anguage to that effect.
N TION L N S.
. In S. S. T. 1 (C. . -2, 38 (193 )), the ureau of Inter-
na Revenue rued that natona banks are nstrumentates of the
Unted States for soca securty ta purposes, and that nether the
banks nor ther empoyees are sub|ect to such ta es. Ths rung,
whch s appcabe wth respect to servces performed pror to anu-
ary 1, 1940, s based prmary on the fact that such Ibanks are re-
ured for the fsca operatons of the Government. It s necessary,
or purposes of a rung wth respect to servces performed on or
after anuary 1, 1940, to determne whether such t anks ether are
whoy owned by the Unted States or are e empt by vrtue of any
other provson of aw.
. Secton 5 of an ct approved une 3, 18 4 (13 Stat., 100
U. S. C, Tte 12, secton 21), reads n part as foows:
ssocatons for carryng on the busness of bankng under ths chapter may
be formed by any number of natura persons, not ess n any case than fve.
Secton of the ct approved une 3, 18 4 (13 Stat., 101 U. S. C,
Tte 12, secton 22), provdes n part as foows:
The persons untng to form such an assocaton sha, under ther hands,
make an organzaton certfcate, whch sha specfcay state: Thrd.
The amount of capta stock and the number of shares nto whch the same s.
to be dvded.
Secton 12 of the ct approved une 3, 18 4 (13 Stat., 102 U. S. C,
Tte 12, secton 52), provdes n part as foows:
The capta stock of each assocaton sha be dvded nto shares of 100
each, or nto shares of such ess amount as may be provded n the artces of
assocaton, and be deemed persona property, and transferabe on the books
of the assocaton In such manner as may be prescrbed n the by-aws or artces
of assocaton. very person becomng a sharehoder by such transfer sha, n
proporton to hs shares, succeed to a rghts and abtes of the pror hoder
of such shares and no change sha be made n the artces of assocaton by
whch the rghts, remedes, or securty of the e stng credtors of the assoca-
ton sha be mpared.
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205
Regs. 10 , 5 402.213.
Secton 40 of the ct approved une 3, 18 4 (13 Stat., I U. S. C,
Tte 12, secton 2), provdes n part as foows:
The presdent and casher of every natona hankng assocaton sha cause
to be kept at a tmes a fu and correct st of the names and resdences of
a the sharehoders n the assocaton, and the number of shares hed by each,
n the offce where ts busness s transacted.
7. The above-quoted provsons of aw and other provsons reat-
ng to the same sub|ect matter ndcate that Congress, n egsatng
wth respect to natona banks, dd not contempate that such banks
shoud be owned by the Unted States. urthermore, there s no
specfc provson of aw provdng for or authorzng the Unted
States to acqure a propretary nterest n such banks, athough there
s a provson for the Reconstructon nance Corporaton to acqure
preferred shares n certan nstances. See secton 401 of an ct
approved March 9, 1933 (48 Stat., 1 U. S. C. Tte 12, secton 51d),
amendng the edera Reserve ct (38 Stat., 251).
8. There s no specfc provson of aw whch woud serve to
e empt natona banks from the empoyment ta es. It s evdent
from the hearngs before the Commttee on Ways and Means, ouse
of Representatves, and the Commttee on nance, Unted States
Senate, that Congress, n enactng the Soca Securty ct mend-
ments of 1939, ntended that empoyment ta es shoud be appcabe
wth respect to servces performed on or after anuary 1, 1940, n the
empoy of natona banks. ccordngy, the ta es mposed by the
edera Insurance Contrbutons ct and the edera Unempoy-
ment Ta ct are appcabe wth r pect to such servces.
D R L R S R N 8.
9. Secton 15 of the edera Reserve ct (38 Stat., 251 U. S. C,
Tte 12, secton 391), provdes as foows:
The moneys hed n the genera fund of the Treasury, e cept the 5 per centum
fund for the redempton of outstandng natona-bank notes and the funds
provded n ths chapter for the redempton of edera reserve notes may, upon
the drecton of the Secretary of the Treasury, be deposted u edera reserve
banks, whch banks, when requred by the Secretary of the Treasury, sha act
as fsca agents of the Unted States and the revenues of the Government or
any part thereof may be deposted n such banks, and dsbursements may be
made by checks drawn aganst such derosts.
Secton 40 of the grcutura Credt ct of 1923 (42 Stat, 1454
U. S. C, Tte 12, secton 393), provdes as foows:
The edera reserve banks are hereby authorzed to act as depostores for
and fsca agents of any natona agrcutura credt corporaton or edera
ntermedate credt bank.
Secton 8 of an ct approved pr 27, 1934 (48 Stat,, 43 U. S. C,
Tte 12, secton 394), amendng the ome Owners Loan ct of 1933
(48 Stat., 128), provdes as focws:
The edera reserve banks are auth rzed, wth the approva of the Secretary
of the Treasury, to act as depostares, custodans, and fsca agents for the
ome Owners Loan Corporaton.
10. In vew of the foregong provsons of aw, t s hed that
edera reserve banks are nstrumentates of the Unted States for
empoyment ta purposes.
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Rugs. 10 , 402.213.
20
11. Secton 7 of the edera eserve ct (38 Stat., 251 U. S. C, Tte
12, secton 531), provdes as foows:
edera reserve banks, ncudng the capta stock and surpus theren and
the ncome derved therefrom, sha be e empt from edera, State, and oca
ta aton, e cept ta es upon rea estate.
12. ccordngy, the ta es mposed by Ttes III and I of the
Soca Securty ct, the edera Insurance Contrbutons ct, and the
edera Unempoyment Ta ct are not appcabe wth respect to
servces performed ether before or after anuary 1, 1940, n the
empoy of edera reserve banks.
ST T N S M M RS OP T D R L R S R SYST M.
13. In S. S. T. 44 (C. . -2, 388 (193 )), the ureau rued
that State banks whch are members of the edera Reserve System
are nstrumentates of the Unted States for soca securty ta pur-
poses. Nether such banks nor ther empoyees are sub|ect to such
ta es wth respect to servces performed pror to anuary 1, 1940.
Ths rung s based upon the ct of December 23, 1913 (38 Stat.,
259), as amended by the ct of May 7, 1928 (45 Stat., 492), whch
provdes that such hanks, when desgnated for that purpose by the
Secretary of the Treasury, sha be depostares of pubc money and
may be empoyed as fsca agents of the Government.
14. State banks whch are members of the edera Reserve System
are not whoy or party owned by the Unted States, and there s no
statutory authorty for such ownershp. There s no specfc prov-
son of aw whch woud serve to e empt such banks from the em-
poyment ta es. ccordngy, the ta es mposed by the edera
Insurance Contrbutons ct and the edera Unempoyment Ta
ct are appcabe wth respect to servces performed on or after
anuary 1, 1940, n the empoy of such banks.
D R L L ND N S N TION L RM LO N SSOCI TIONS.
15. In S. S. T. 1 (C. . 1937-1, 409), the ureau rued that ed-
era and banks and natona farm oan assocatons are ntrumenta-
tes of the Unted States for soca securty ta purposes. Nether
such organzatons nor ther empoyees are sub|ect to such ta es.
1 . Secton 2 of the edera arm Loan ct (39 Stat., 3 0 U. S.
C. Tte 12, secton 931), provdes n part as foows:
very eera and bank and every natona farm oan assocaton, ncudng
the capta and reserve or surpus theren and the Income derved therefrom,
sha be e empt from edera, State, muncpa, and oca ta aton, .
17. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not ap-
pcabe wth respect to servces performed on or after anuary 1,
1940, n the empoy of such organzatons.
OINT STOC L ND N S.
18. In S. S. T. 1, supra, the ureau rued that |ont stock and
banks are nstrumentates of the Unted States for soca securty
ta purposes. owever, secton 1 of the edera arm Loan ct
(39 Stat., 3 0 U. S. C, Tte 12, secton 813), provdes that
the Government of the Unted States sha not purchase or subscrbe
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207
Regs. 10 , 402.213.
for any of the capta stock of any such bank . urther,
there s no specfc provson of aw whch woud serve to e empt
such banks from the empoyment ta es. ccordngy, the ta es
mposed by the edera Insurance Contrbutons ct and the edera
Unempoyment Ta ct are appcabe wth respect to servces per-
formed on or after anuary 1, 1940, n the empoy of such banks.
The empoyment ta es are aso appcabe wth respect to servces
performed on or after anuary 1, 1940, n the empoy of the estate of
any |ont stock and bank n qudaton for whch a recever has been
apponted. The recever s not an empoyee of such estate for em-
poyment ta purposes. (See S. S. T. 120, C. . 1937-1, 375.)
D R L RM MORTG G CORPOR TION.
19. In S. S. T. 1, supra, the ureau rued that the edera arm
Mortgage Corporaton s an nstrumentaty of the Unted States for
soca securty ta purposes. Secton 12(a) of the edera arm
Mortgage Corporaton ct (48 Stat., 344 U. S. C, Tte 12, secton
1020f), provdes as foows:
The corporaton, ncudng ts franchse, Its capta, reserves, and surpus, and
ts ncome sha be e empt from a ta aton now or hereafter mposed by the
Unted States, by any Terrtory, dependency, or possesson thereof, or by any
State, county, muncpaty, or oca ta ng authorty .
21 ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not ap-
pcabe wth respect to servces performed n the empoy of the
edera arm Mortgage Corporaton.
D R L INT RM DI T CR DIT N S.
21. In S. S. T. 1, supra, the ureau rued that edera ntermedate
credt banks are nstrumentates of the Unted States for soca secu-
rty ta purposes. Secton 205 of the edera arm Loan ct (42 Stat.,
1454 U. S. C, Tte 12, secton 10 1), provdes that or the purpose
of e ercsng the powers conferred by ths subchapter, each edera
ntermedate credt bank sha have a subscrbed capta stock of
5,000,000, whch amount may be ncreased from tme to tme wth
the approva of the Governor of the arm Credt dmnstraton.
Capta stock of such amount sha be dvded nto shares of 5
each and sha be subscrbed, hed, and pad by the Government of the
Unted States. urther, secton 210 of the edera arm Loan ct
(42 Stat., 1454 U. S. C, Tte 12, secton 1111), provdes as foows:
The prveges of ta e empton accorded under secton 20 of ths chapter
sha appy aso to each edera ntermedate credt bank, ncudng ts capta,
reserve, or surpus, .
22. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not ap-
cabe wth respect to servces performed n the empoy of such
nks.
ROnrCTTON CR DIT CORPOR TIONS PRODUCTION CR DIT SSOCI TIONS-
R GION L N S OR COOP R TI S C NTR L N O COOP R -
TI S.
23. In S. S. T. 1, supra, the ureau rued that producton credt
corporatons, producton credt assocatons, regona banks for co-
operatves, and the Centra ank for Cooperatves are nstrumenta -
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Regs. 10 , 402.213.
20S
tes of the Unted States for soca securty ta purposes. Secton G2
of the arm Credt ct of 1933 (48 Stat,, 257 U. S. C, Tte 12, sec-
ton 1138c), provdes n part as foows:
The Centra ank for Cooperatves, and the producton credt corporatons,
producton credt assocatons, and banks for cooperatves, organzed under
ths chapter, and ther obgatons, sha be deemed to be nstrumentates of
the Unted States, . Such banks, assocatons, and corporatons, ther
property, ther franchses, capta, reserves, surpus, and other funds, and ther
Income sha be e empt from a ta aton now or hereafter mposed by the
Unted States or by any State, Terrtora, or oca ta ng authorty .
24. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not
appcabe wth respect to servces performed n the empoy of such
banks, assocatons, and corporatons.
R GION L GRICULTUR L CR DIT CORPOR TIONS.
25. In S. S. T. 1, supra, the ureau rued that regona agr-
cutura credt corporatons are nstrumentates of the Unted States
for soca securty ta purposes. Secton 201(e) of an ct approved
uy 21, 1932 (47 Stat., 711 U. S. C. Tte 12, secton 1148), as
amended ugust 19, 1937 ( 50 Stat., 704), provdes as foows:
The Reconstructon nance Corporaton s authorzed to create n any of the
12 farm credt dstrcts where It may deem the same to be desrabe a regona
agrcutura credt corporaton wth a pad-up capta of not ess than 3,000,000,
to be subscrbed for by the Reconstructon nance Corporaton and pad for
out of the une pended baance of the amounts aocated and made avaabe to
the Secretary of grcuture under secton 002 of Tte 15. Such corporatons
sha be managed by offcers and agents to be apponted by the arm Credt
dmnstraton under such rues and reguatons as t may prescrbe.
e penses ncurred n connecton wth the operaton of such corporatons
ha be supervsed and pad by the Reconstructon nance Corporaton under
such rues and reguatons as ts board of drectors may prescrbe.
2 . ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not
appcabe wth respect to servces performed n the empoy of such
corporatons.
D R L OM LO N N S.
27. In S. S. T. 2 (C. . 1937-1, 409), the ureau hed that edera
home oan banks are nstrumentates of the Unted States for soca
securty ta purposes. Secton 13 of the edera ome Loan ank
ct (47 Stat., 725 U. S. C, Tte 12, secton 1433), provdes n part
as foows:
The bank, Incudng ts franchse, ts capta, reserves, and surpus.
Its advances, and ts ncome, sha be e empt from a ta aton now or hereafter
Imposed by the Unted States, by any Terrtory, dependency, or possesson
thereof, or by any State, county, muncpaty, or oca ta ng authorty
28. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not
appcabe wth respect to servces performed n the empoy of such
banks.
M M RS O T D R L OM LO N N SYST M.
29. In S. S. T. 109 (C. . 1937-1, 421). the ureau rued that bud-
ng and oan assocatons, savngs and oan assocatons, cooperatve
banks, homestead assocatons, nsurance companes, and savngs
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209
Regs. 10 , 402.213.
banks whch are members of the edera ome Loan ank System
are nstrumentates of the Unted States for soca securty ta pur-
poses. Such organzatons are not whoy or party owned by the
Unted States, and there s no specfc provson of aw provdng for
or authorzng the Unted States to acqure a propretary nterest n
such organzatons. There s no provson of aw whch woud serve
to e empt such organzatons from the empoyment ta es.
30. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are appcabe
wth respect to servces performed on or after anuary 1, 1940, n
the empoy of such organzatons.
OM OWN RS LO N CORPOR TION.
31. In S. S. T. 2, supra, the ureau rued that the ome Owners
Loan Corporaton s an nstrumentaty of the Unted States for
soca securty ta purposes. Secton 4(b) of the ome Owners Loan
ct of 1933 (48 Stat,, 128 U. S. C, Tte 12, secton 14 3b), provdes
that The edera ome Loan ank board sha determne the
mnmum amount of capta stock of the ome Owners Loan
Corporaton and s authorzed to ncrease such capta stock from
tme to tme n such amounts as may be necessary, but not to e ceed
n the aggregate 200,000,000. Such stock sha be subscrbed
for by the Secretary of the Treasury on behaf of the Unted
States, . Secton 4(c) of the ome Owners Loan ct of
1933 (48 Stat., 128 U. S. C, Tte 12, secton 14 3c), provdes n
part as foows:
The Corporaton, Incudng ts franchse, ts capta, reserves and
surpus, and Its oans and ncome, sha kewse be e empt from such
ta aton .
32. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not
appcabe wth respect to servces performed n the empoy of the
ome Owners Loan Corporaton.
D R L S INGS ND LO N INSUR NC CORPOR TION.
33. In S. S. T. 2, supra, the ureau rued that the edera Sav-
ngs and Loan Insurance Corporaton s an nstrumentaty of the
Unted States for soca securty ta purposes. Secton 402(c) of the
Natona ousng ct (48 Stat., 124 U. S. C, Tte 12, secton
1725e), provdes as foows:
The Corporaton, ncudng ts franchse, capta, reserves, surpus,
and ncome, sha be e empt from a ta aton now or hereafter mposed by the
Unted States, by any Terrtory, dependency, or possesson thereof, or by any
State, county, muncpaty, or oca ta ng authorty .
34. ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not ap-
pcabe wth respect to servces performed n the empoy of the
edera Savngs and Loan Insurance Corporaton.
D R L CR DIT UNIONS.
35. In S. S. T. 140 (C. . 1937-1, 428), the ureau rued that
edera credt unons organzed pursuant to the edera Credt
Unon ct of une 2 , 1934 (48 Stat., 121 ), are nstrumentates of
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Regs. 10 , 102.227.
210
the Unted States for soca securty ta purposes. Secton 18 of an
ct approved December , 1937 (51 Stat., 4| U. S. C, Tte 12, sec-
ton 17 8), amendng the edera Credt Unon ct (48 Stat., 121 ),
provdes as foows:
The edera credt unons organzed hereunder, ther property, ther fran-
chses, capta, reserves, surpuses, and other funds, and ther ncome sha be
e empt from a ta aton now or hereafter mposed by the Unted States or by
any State, Terrtora, or oca ta ng authorty .
3 . ccordngy, the ta es mposed by the edera Insurance Con-
trbutons ct and the edera Unempoyment Ta ct are not ap-
pcabe wth respect to servces performed n the empoy of such
edera credt unons.
37. The rungs pubshed as S. S. T. 1 , S. S. T. 44, S. S. T. 1,
S. S. T. 2, S. S. T. 109, and S. S. T. 140, and a pubshed rungs
n whch reference s made to any rung so specfed, are hereby
modfed to accord wth the foregong. Mmeograph 4 21, dated
une 30, 1937 (C. . 1937-2, 434). s kewse modfed.
38. Correspondence reatng to ths mmeograph shoud refer to ts
number and to the symbos C: RR.
Gut T. everng,
Commssoner.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.227: Wages.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.227 and Soca Securty ct,
Sectons 811 and 907 Reguatons 91 and
90, rtces 1 and 209.)
mounts pad by the M aseba Cub to cover transportaton,
room, and board of ts payers whe n tranng and whe away
from ts home grounds do not consttute wages wthn the mean-
ng of the edera Insurance Contrbutons ct
The queston s presented whether certan amounts pad by the M
aseba Cub to cover e penses of ts payers consttute wages
wthn the meanng of the edera Insurance Contrbutons ct.
Durng the perod of appro matey four weeks when the payers of
the M aseba Cub are at the tranng camp preparng for the reguar
baseba season, they receve no remuneraton snce ther .saares are
payabe ony for servces performed durng the actua payng season.
The cub furnshes the payers raroad transportaton from ther
homes to the tranng camp. Whe n tranng the payers stay at a
desgnated hote and ther meas are furnshed by the hote or by some
restaurant where an account has been estabshed by the cub, whch
pays the e penses n queston and carres them on ts books as tranng
and trave e pense. The cub aso pays such e penses of the payers
under contract durng the season when the team s payng away from
ts home grounds, but otherwse the payers pay ther own vng
e penses.
It s hed that the amounts pad by the M aseba Cub to cover
transportaton, room, and board of ts payers under the crcumstances
1940-5-10158
S. S. T. 383
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211
Regs. 10 , 402.227.
tated do not consttute u wages wthn the meanng of the edera
Insurance Contrbutons ct. (See artce 1 (c), Reguatons 91.)
The concuson reached heren s appcabe aso under the edera
Unempoyment Ta ct and under Ttes III and I of the Soca
Securty ct.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.227: Wages.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.227.)
The vaue of board and odgng furnshed to the offcers and
members of the crews of vesses operated by the M Steamshp Co.
for servces performed on and after anuary 1, 1940, n connecton
wth the operaton of ts vesses consttutes wages wthn the
meanng of Subchapter , Chapter 9, of the Interna Revenue Code,
as amended by the Soca Securty ct mendments of 1939.
dvce s requested whether the vaue of board and odgng fur-
nshed to the offcers and members of the crews of vesses operated by
the M Steamshp Co. for servces performed on and after anuary 1,
1940, n connecton wth the operaton of ts vesses consttutes
wages wthn the meanng of Subchapter of Chapter 9 of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
The term wages s defned n secton 142 (a), Chapter 9, of the
Interna Revenue Code, as amended, sub|ect to a mtaton not here
appcabe, to mean a remuneraton for empoyment, ncudng the
cash vaue of a remuneraton pad n any medum other than cash.
Secton 402.227, Reguatons 10 , promugated under secton 142 (a),
supra, contans the foowng provsons:
Ordnary, factes or prveges (such as entertanment, medca servces,
or so-caed courtesy dscounts on purchases), furnshed or offered by an em-
poyer to hs empoyees generay, are not consdered as remuneraton for em-
poyment f such factes or prveges are of reatvey sma vaue and are
offered or furnshed by the empoyer merey as a means of promotng the
heath, good w, contentment, or effcency of hs empoyees. The term fac-
tes or prveges, however, does not ordnary ncude the vaue of meas or
odgng furnshed, for e ampe, to restaurant or hote empoyees, or to seamen
or other empoyees aboard vesses, snce generay these tems consttute an
apprecabe part of the tota remuneraton of such empoyees.
In the nstant case the vaue of the board and odgng s not
reatvey sma but consttutes a substanta part of the tota re-
muneraton of the offcers and empoyees so that the board and
odgng can not be sad to consttute factes or prveges whch
may be e cuded from the term wages. In S. S. T. 321 (C. .
1938-2, 323) t was hed that board and odgng furnshed under
the crcumstances there set forth consttute wages and not fac-
tes or prveges under artce 207 of Reguatons 90, promugated
under Tte I of the Soca Securty ct. The concuson there
reached s appcabe n the present case.
It s hed, therefore, that the far vaue of the board and odgng
furnshed to the offcers and members of the crews of vesses oper-
1940-13-10215
S. S. T. 38
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Regs. 10 , 402.227.
212
ated by the M Steamshp Co. for servces performed on and after
anuary 1, 1940, consttute wages for purposes of the ta es m-
posed under Subchapter , Chapter 9, of the Interna Revenue Code,
as amended.
The ureau has paced no specfc vaue on board and odgng
furnshed to offcers and members of crews for the purposes of the
ta es mposed under Subchapter , Chapter 9, of the Interna Rev-
enue Code, as amended, but w recognze that amount whch s
the far and reasonabe vaue of those tems. In computng the
far and reasonabe vaue of board and odgng furnshed to offcers
and members of crews, consderaton shoud be gven to a pertnent
factors, ncudng those factors set forth n S. S. T. 51 (C. . -2,
421 (193 )), whch may be appcabe n the partcuar case.
The concuson reached heren s aso appcabe under Subchap-
ter C, Chapter 9, Interna Revenue Code, as amended.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.227: Wages.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.227.)
Where the M Company pays an empoyee an amount equvaent
to hs reguar saary durng hs absence on account of |ury servce,
and the empoyee ater remburses the company to the e tent of
the pay receved by hm for such ury servce, the amount receved
from the company by the empoyee In e cess of that receved
by hm for |ury servce consttutes wages for purposes of Sub-
chapters and O, Chapter 9, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 1989.
The queston s presented reatve to the amount to be reported as
M wages for empoyment ta purposes where an empoyer, pursuant
to estabshed practce, pays an empoyee an amount equvaent to hs
reguar saary durng hs absence on account of |ury servce and the
empoyee ater remburses the empoyer to the e tent of the pay
receved for such |ury servce.
La S. S. T. 49 (C. . -2, 420 (193 )) t was hed that where a
corporaton vountary pays to ts empoyees the dfference between
ther norma earnngs and the amount actuay receved by them from
the State for the tme they serve as members of the State Natona
Guard, the payments equvaent to ths dfference consttute wages
wthn the meanng of secton 907(b) of Tte I of the Soca Secur-
ty ct and artce 209 of Reguatons 90. S. S..T. 49 s anaogous n
prncpe to the nstant case. It s, therefore, hed that the amount
receved from the M Company by the empoyee n e cess of the
amount receved for |ury servce consttutes wages for purposes of
Subchapters and C. Chapter 9, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 1939.
1940-22-10271
S. S. T. 389
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213
Regs. 10 , 402.227.
Secton 142 : Defntons.
Reguatons 10 , Secton 402.227: Wages.
( so Subchapter C ( edera Unempoyment
Ta ct), Secton 1 07 Reguatons 107,
Secton 403.227.)
Payments of unpad mnmum wages and unpad overtme com-
pensaton made by the M Company to ts empoyees, pursuant to
secton 1 (b) of the ar Labor Standards ct of 1938, consttute
wages for purposes of Subchapters and C, Chapter 9, of the
Interna Revenue Code, as amended by the Soca Securty ct
mendments of 1939.
Payments of qudated damages made by the M Company to
ts empoyees, pursuant to secton 1 (b), supra, do not consttute
wages for empoyment ta purposes.
Inqury s made whether payments made by the M Company to
ts empoyees under secton 1 (b) of the ar Labor Standards ct
of 1938 (52 Stat., 10 0) consttute wages as defned n Sub-
chapters and C, Chapter 9, of the Interna Revenue Code, as
amended by the Soca Securty ct mendments of 1939.
In compance wth secton 1 (b) of the ar Labor Standards
ct of 1938, the M Company restored to ts empoyees certan
amounts of unpad mnmum wages and unpad overtme compensa-
ton. Subsequent to such restoraton certan empoyees of the com-
pany fed cams for qudated damages, as provded for n secton
1 (b), supra, and varous amounts have been pad to the empoyees
as a resut thereof.
Secton 1 (b) of the ar Labor Standards ct of 1938 provdes:
ny empoyer who voates the provsons of secton or secton 7 of ths
ct sha be abe to the empoyee or empoyees affected n the amount of
ther unpad mnmum wages, or ther unpad overtme compensaton, as the
case may be, and n an addtona equa amount as qudated damages.
cton to recover such abty may be mantaned n any court of competent
|ursdcton .
Wth certan e ceptons not here matera, sectons 142 (a) and
1 07(b) of Subchapters and C, Chapter 9, of the Interna Reve-
nue Code, as amended, defne the term wages as a remuneraton
for empoyment, and sectons 142 (b) and 1 07(c) defne the
term empoyment as any servce, of whatever nature, performed
by an empoyee for the person empoyng hm.
In vew of the fact that the payments of unpad mnmum wages
and unpad overtme compensaton made by the M Company to ts
empoyees under secton 1 (b), supra, were made wth respect to
servces performed n an empoyment as above defned, t s hed
that such payments consttute wages for purposes of Subchapters
and C, Chapter 9, of the Interna Revenue Code, as amended.
It s aso hed that the addtona amounts pad by the M Company
to ts empoyees as qudated damages, pursuant to secton 1 (b),
supra, are not remuneraton for empoyment and, therefore, do
not consttute wages for purposes of the above-mentoned sub-
chapters of the Interna Revenue Code.
1910-2 -10304
S. S. T. 393
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Regs. 90, rt. 204.
214
C PT R 9, SU C PT R C T ON MPLOY RS O IG T OR
MOR .
Secton 1 07: Defntons. 1940-1-10133
Reguatons 90, rtce 204: Who are empoyers. S. S. T. 381
( so Subchapter ( edera Insurance Contrbutons ct),
Secton 142G Reguatons 91, rtce 4.)
Where, n the communty property State of Te as, one of the
spouses des and the survvor, wthout admnstraton of the estate,
acqures the property and operates the busness prevousy con-
ducted by the two spouses, a new empoyment begns for pur-
poses of the edera Unempoyment Ta ct.
Pror to ebruary , 1939, and hs wfe, , owned and operated
the M Store as communty property. Upon the death of , ntestate,
on ebruary , 1939, took over and operated the busness unt t
was sod on May , 1939. There were no descendants of and no
admnstraton of the estate was necessary under artce 3 2, ernon s
Cv Statutes of the State of Te as, whch provdes as foows:
Where the husband or wfe des ntestate, or becomes nsane, havng no
chd or chdren, and no separate property, the common property passes to the
survvor, charged wth the debts of the communty and no admnstraton
thereon or guardanshp of the estate sha be necessary.
The queston arses whether the death of and the takng over of
the busness by effected a change n empoyment of the ndvduas
performng servces n connecton wth the busness. If the perod
of operaton by s added to that of the operaton by the communty,
abty for ta under the edera Unempoyment Ta ct woud be
ncurred wth respect to the wages of such ndvduas, snce the
perod of ther empoyment so computed woud be of suffcent dura-
ton to brng the empoyng entty wthn the defnton of
empoyer as defned n secton 1 07(a) of the ct. If, on the
other hand, there was a change of empoyment, on ebruary , 1939,
abty wodd not be ncurred under the edera Unempoyment
Ta ct by ether the communty or by , snce nether of the
perods durng whch each person conducted the busness was 20 weeks
n duraton.
Secton 1 07(a) of the edera Unempoyment Ta ct provdes
as foows:
(a) mpoyer The term empoyer does not ncude any person uness
on each of some 20 days durng the ta abe year, each day beng n a
dfferent caendar week, the tota number of ndvduas who were empoyed
by hm n empoyment for some porton of the day (whether or not at the
same moment of tme) was 8 or more.
In the present case, the operaton of the busness by foowng
the death of was soey on her own account and not n connecton
wth the admnstraton of the estate of the decedent or the wndng
up of the affars of the communty. It s hed, therefore, that a new
empoyment of the ndvduas performng servces n carryng on
the busness began on ebruary , 1939, foowng the death of ,
and that the perod of operaton by shoud not be added to that
of the operaton of the busness by the communty for purposes of
the edera Unempoyment Ta ct. ccordngy, nether the com-
munty nor was an empoyer wthn the meanng of secton
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215
Regs. 107, 403.213.
1 07(a) of the ct durng the year 1939 and abty for the ta
mposed by that ct was not ncurred durng that year by ether the
communty or the survvng spouse. (Cf. S. S. T.354, C. . 1939-1
(Part 1), 294.)
The concuson reached heren s appcabe aso under the edera
Insurance Contrbutons ct and under Ttes III and I of the
Soca Securty ct.
Secton 1 07: Defntons.
Reguatons 107, Secton 403.204: Who are empoyees.
Indvduas performng servces n the constructon of houses.
(See S. S. T. 388, page 194.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.204: Who are empoyees.
Indvduas engaged n seng bura ots and mausoeum space
for the M Cemetery Co. (See S. S. T. 390, page 195.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.204: Who are empoyees.
Indvduas performng servces n the manufacture of cothng for
merchant taors. (See S. S. T. 391, page 19 , and S. S. T. 392,
page 197.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.20 : cepted servces
n genera.
Status for empoyment ta purposes, on and after anuary 1, 1940,
of certan organzatons. (See Mm. 5019, page 198.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.208: grcutura abor.
ermentng, gradng, and bang of cgar eaf wrapper tobacco.
S. S. T. 219 (C. . 1937-2, 412) modfed. (See S. S. T. 382, page
218.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.213: Unted States and
nstrumentates thereof.
Labty after anuary 1, 1940, for empoyment ta es of certan
banks and reated organzatons. (See Mm. 5003, page 203.)
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Regs. W7, 5 403.401. 21
Secton 1 07: Defntons.
Reguatons 107, Secton 403.213: Unted States and
nstrumentates thereof.
rmy post e change. (See S. S. T. 385, page 202.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.227: Wages.
mounts pad by a baseba cub to cover transportaton, room,
and board of ts payers. (See S. S. T. 383, page 210.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.227: Wages.
oard and odgng furnshed to offcers and members of crews of
vesses. (See S. S. T. 38 , page 211.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.227: Wages.
mount pad by the M Company to an empovee whe performng
|ury servce. (See S. S. T. 389, page 212.)
Secton 1 07: Defntons.
Reguatons 107, Secton 403.227: Wages.
Payments made by the M Company to ts empoyees pursuant to
secton 1 (b) of the ar Labor Standards ct of 1938. (See S. S. T.
393, page 213.)
Secton 1 07: Defntons. 1940- -101 9
Reguatons 107, Secton 403.401: Credt S. S. T. 384
aganst ta for contrbutons pad.
Where, pursuant to an eecton or otherwse, an Instrumentaty
of the Unted States referred to n secton 1 0 (b) of the edera
Unempoyment Ta ct, as amended, makes tmey contrbutons
Into a State unempoyment fund, whch contrbutons are e acted
pursuant to the provsons of Stnte aw, such payments consttute
payments requred by a State aw wthn the meanng of secton
1 07(g) of the edera Unempoyment Ta ct, as amended, and,
therefore, the bass for credt aganst the edera unempoyment
ta , provded the State aw s certfed by the Soca Securty oard
for the ta abe year under the provsons of secton 1 03 of the
edera ct, as amended.
The opnon of the ureau has been requested n the foowng
cases:
(1) Under the unempoyment compensaton act of the State of R,
an nstrumentaty of the Unted States referred to n secton 1 0 (b)
of the edera Unempoyment Ta ct, as amended by secton 13 of
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217
Regs. 107, 403.401.
the Soca Securty ct mendments of 1939 (Pubc, No. 379, Sev-
enty-s th Congress, frst sesson), s not sub|ect to ta n the absence
of an eecton to come under the State act. The M Instrumentaty
fed an eecton to come under the State act for a perod of at east
two years, and pursuant thereto makes contrbutons nto the State
unempoyment fund. The unempoyment compensaton act of the
State of R has not been amended to compy wth secton 1 0 (b) of
the edera Unempoyment Ta ct, as amended. re such pay-
ments the bass for credt aganst the edera unempoyment ta
(2) Under the unempoyment compensaton act of the State of S,
an nstrumentaty of the Unted States referred to n secton 1 0 (b)
of the edera Unempoyment Ta ct, as amended, s sub|ect to ta .
Pursuant to such act, the N Instrumentaty makes contrbutons nto
the State unempoyment fund. The unempoyment compensaton act
of the State of S has not been amended to compy wth secton 1 0 (b)
of the edera Unempoyment Ta ct, as amended. re such pay-
ments the bass for credt aganst the edera unempoyment ta
Secton 1 01(a) of the edera Unempoyment Ta ct, as amended
by secton 09 of the Soca Securty ct mendments of 1939,
provdes n part:
(1) The ta payer may, to the e tent provded n ths subsecton and subsec-
ton (c). credt aganst the ta mposed by secton 1C00 the amount of contrbu-
tons pad by hm nto an unempoyment fund mantaned durng the ta abe
year under the unempoyment compensaton aw of a State whch s certfed
for the ta abe year as provded n secton 1G03.
Secton 1 07(g) of the edera Unempoyment Ta ct, as
amended by secton 14 of the Soca Securty ct mendments of
1939, provdes:
Co tebtons. The term contrbutons means payments requred by a
State aw to be made Into an unempoyment fund by any person on account
of havng ndvduas n hs empoy, to the e tent that such payments are made
by hm wthout beng deducted or deductbe from the remuneraton of nd-
vduas n hs empoy.
Secton 1 0 (b) of the edera Unempoyment Ta ct, as amended
by secton 13 of the Soca Securty ct mendments of 1939, pro-
vdes n part:
The egsature of any State may requre any nstrumentaty of the Unted
States (e cept such as are ( ) whoy owned by the Unted States, or ( )
e empt from the ta mposed by secton 1 00 by vrtue of any other pro-
vson of aw), and the ndvduas n ts empoy, to make contrbutons to an
unempoyment fund under a State unempoyment compensaton aw approved
by the oard under secton 1 03 . The permsson granted n ths sub-
secton sha appy (2) ony f such State aw makes provson for
the refund of any contrbutons requred under such aw from an Instrumentaty
nf the Unted States or Its empoyees for any year In the event sad State Is
not certfed by the oard under secton 1 03 wth respect to such year.
Under the provsons of secton 1 01(a) of the edera Unempoy-
ment Ta ct, as amended, at east two thngs must e st n order
to obtan credt aganst the edera unempoyment ta . There must
be (1) contrbutons nto a State unempoyment fund, and (2)
such contrbutons must be made under a State unempoyment
compensaton aw certfed for the ta abe year by the Soca Securty
oard. In secton 1 07(g), supra, the term contrbutons s de-
fned (n part) as payments requred by a State aw.
25220 40 8
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Regs. 91, 90, rt. , 20 (1). 218
In the opnon of ths offce, the queston as to what consttutes
contrbutons nto an unempoyment fund wthn the meanng of
secton 1 07(g), supra, s not dependent upon compance by the
State wth the condtons set forth n secton 1 0 (b), supra.
It s hed that where, pursuant to an eecton or otherwse, an
nstrumentaty of the Unted States referred to n secton 1 0 (b)
of the edera Unempoyment Ta ct, as amended, makes tmey
contrbutons nto a State unempoyment fund, whch contrbutons
are e acted pursuant to the provsons of State aw, such payments
consttute payments requred by a State aw wthn the meanng
of secton 1 07(g) of the edera ct, as amended, and, therefore, the
bass for credt aganst the edera unempoyment ta , provded the
State aw s certfed by the Soca Securty oard for the ta abe
year under the provsons of secton 1 03 of the edera Unempoy-
ment Ta ct, as amended. ccordngy, the payments made by the
M Instrumentaty and the N Instrumentaty nto the unempoyment
funds of the States of R and S, respectvey, consttute the bass for
credt aganst the edera unempoyment ta , provded the State
aw s certfed by the Soca Securty oard for the ta abe year
under the provsons of secton 1 03 of the edera Unempoyment
Ta ct, as amended.
T S UND R SOCI L S CURITY CT.
Sectons 811 and 907: Defntons.
Reguatons 91 and 90, rtces 4 and 204: Who are
empoyers.
Change n status of empoyer under connnuntv property aw of
Te as. (See S. S. T. 381, page 214.)
Sectons 811 and 907: Defntons. 1940-4-10151
Reguatons 91 and 90, rtces and 20 (1) : S. S. T. 382
grcutura abor.
( so Interna Revenue Code, Chapter 9, Subchapter
( edera Insurance Contrbutons ct), Secton
142 Reguatons 10 , Secton 402.208 and Subchap-
ter C ( edera Unempoyment Ta ct), Secton
1 07 Reguatons 107, Secton 403.203.)
Servces performed by empoyees of the M Company on farms
owned by that company n connecton wth the fermentng, gradng,
and bang of cgar eaf wrapper tobacco grown on such farms do
not consttute agrcutura abor wthn the meanng of sectons
811(b) and 907(c) of the Soca Securty ct. S. S. T. 219
(C. . 1937-2, 412) modfed.
The queston s presented whether servces performed by empovees
of the M Company n connecton wth the preparaton of cgar eaf
wrapper tobacco for market consttute agrcutura abor wthn
the meanng of sectons 811 (b) and 907(c) 1 of the Soca Securty
ct, whch e cept agrcutura abor from empoyment.
In S. S. T. 219 (C. . 1937-2, 412) t was hed, nter aa, that
servces performed by empoyees of the M Company n ts warehouses
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219
Regs. 91, 90, rts. 1 , 209.
n connecton wth the fermentng, gradng, and bang of cgar eaf
trapper tobacco grown on farms owned by that company consttute
agrcutura abor wthn the meanng of sectons 811(b) and
W7(c) of the Soca Securty ct. That rung was based upon
he statement of facts set forth theren. Snce the ssuance of that
rung addtona nformaton has been submtted whch dscoses
:hat a consderabe amount of machnery s used n the handng
operatons, that most of the operatons are conducted under controed
enperatures or controed humdtes, or both, and that many of the
ndvduas who work n the warehouses of the M Company are not
:e empoyees who perform servces for the company n the feds n
connecton wth the rasng and harvestng of crops whch actvtes
consttute agrcutura abor. though the products of the M
Company are sod e cusvey at whoesae, such dsposton s not an
soated commerca transacton, as s usuay the case n the whoesae
dsposton of crops by an ordnary farmer, but s a part of the e ten-
sve commerca actvtes engaged n by the M Company. Moreover,
t appears that the customs and practces prevang generay n the
ndustry warrant the concuson that the fermentng, gradng, and
bang of cgar eaf wrapper tobacco are not ncdent to ordnary
fannng operatons as dstngushed from manufacturng or commer-
ca operatons wthn the meanng of artce G of Reguatons 91,
reatng to Tte III, and artce 20 (1) of Reguatons 90, reatng
to Tte I of the Soca Securty ct.
In vew of the foregong, t s hed that servces performed by
empoyees of the M Company n connecton wth the fermentng,
gradng, and bang of cgar eaf wrapper tobacco do not consttute
agrcutura abor wthn the meanng of sectons 811 (b) and
t 07(c) of the Soca Securty ct. ccordngy, S. S. T. 219, supra,
s modfed.
The concuson reached above wth respect to the status of the
servces n queston under Ttes III and I of the Soca Securty
ct s equay appcabe to the status of such servces under the
edera Insurance Contrbutons ct and the edera Unempoyment
Ta ct.
Sectons 811 a d 907: Defntons.
Reguatons 91 and 90, rtces 11 and 20 (5)-( ):
Government empoyees.
Labty after anuary 1, 1940, for empoyment ta es of certan
banks and reated organzatons. (See Mm. 5003, page 203.)
Sectons 811 and 907: Defntons.
Reguatons 91 and 90, rtces 1 and 209: Items ncuded
as wages.
mounts pad by a baseba cub to cover transportaton, room,
and board of ts payers. (See S. S. T. 383, page 210.
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MISC LL N OUS T RULINGS.
ST T T .
INT RN L R NU COD .
S CTION 811(c). ST T T .
Reguatons 80 (1937), rtce 1 : Transfers 1940-11-10203
n contempaton of death. T. D. 49 0
TITL 20 INT RN L R NU . C PT R I, SU C PT R , P RT 80
ST T T . .
rtce 1 , Reguatons 80 (1 )37 dton), amended. Transfers
n contempaton of death.
Treasury Department,
Offce of Commssoner of Interna Revenue,
W ashng tan, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 1 of Reguatons 80, 1937 edton secton 80.1 , Tte 2 ,
Code of edera Reguatons , and that artce as made appcabe to
the Interna Revenue Code by Treasury Decson 4885, approved
ebruary 11,1939 C. . 1939-1 (Part 1), 39 (Part 4 5, Subpart 15.
of such Tte 2 ), s hereby amended by strkng out the second au
thrd paragraphs thereof readng as foows:
transfer n contempaton of death s a dsposton of property prompted
by the thought of death. The phrase contempaton of death as used n the
statute s not mted to contempaton of mmnent death or to an apprehenson
that death s near at hand. Death must be contempated, that s, the motve
whch nduces the transfer must be such that eads to testamentary dsposton.
gft nter vvos whch sprngs from a motve essentay assocated wth fe
rather than wth death s not made n contempaton of death.
s the phrase transfer n contempaton of death s appcabe to many
varyng transactons, the crcumstances of each case must be e amned to
ascertan the motve whch nduced the decedent to make the transfer. If the
transfer resuts from m ed motves, one of whch s the thought of death, the
more compeng motve contros. condton of the mnd or body of the
transferor (whether occasoned by od age or dsease) whch naturay prompts
a testamentary dsposton to a proper ob|ect of hs bounty, w be consdered
a decsve test of contempaton of death n the absence of proof of the e stence
of purposes assocated wth fe as the domnant motve for the transfer.
and substtutng n eu thereof the foowng:
The phrase contempaton of death, as used n the statute, does not nput ,
on the one hand, that genera e pectaton of death such as a persons entertan,
nor, on the other, s ts meanng restrcted to an apprehenson that death s
mmnent or near. transfer n contempaton of death s a dsposton of
property prompted by the thought of death (though t need not be soey so
prompted). transfer s prompted by the thought of death f t s made wth
the purpose of avodng the ta . or as a substtute for a testamentary dsposton
of the property, or for any other motve assocated wth death. The body and
(220)
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221 Regs. 80(1937), rt. 11.
menta condton of the decedent and a other attendant facts and crcumstances
are to be scrutnzed to determne whether or not such thought prompted the
dsposton.
(Ths Treasury decson s ssued under the authorty contaned n
the foowng sectons of aw: Sectons 811, 937, and 3791 (a) 1 of
the Interna Revenue Code (53 Stat., Part 1) secton 302 of the
evenue ct of 192 ( 44 Stat., 70, 2 U. S. C, 411) secton 1101 of
the Revenue ct of 192 (44 Stat., I, 2 U. S. C, 1 91) and secton
403 of the Revenue ct of 1932 (47 Stat., 245, 2 U. S. C, 537).)
T. MOON Y,
ctng Commssoner of Interna Revenue.
pproved March 5,1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 7, 1940,11.03 a. m.)
TITL III. ST T T . (192 )
S CTION 302(|), S DD D Y S CTION 202(a) O T R NU CT
O 1935.
Reguatons 80( 1937), rtce 11: Optona 1940-3-10144
vauaton date. . T. 14
The eecton to vaue property ns of a date or dates subsequent
to the decedent s death, as provded n secton 302(|) of the Rev-
enue ct of 1920, as added by secton 202(a) of the Revenue ct
of 1935, must be e ercsed by the e ecutor n a return on orm
700 fed wthn 15 months after the decedent s death or pror
to the e praton of any e tenson of tme granted pursuant to
Reguatons 80 (1937).
dvce s requested whether the e ecutor or admnstrator, as
the case may be, n the three cases herenafter descrbed s entted to
vaue the property ncuded n the decedent s gross estate as of a
date or dates after the decedent s death, as provded n secton 302(|)
of the Revenue ct of 192 , as added by secton 202(a) of the Revenue
ct of 1935.
Secton 302 (|) of the Revenue ct of 192 , as added by secton
202(a) of the Revenue ct of 1935, provdes n part:
If the e ecutor so eects upon hs return (f fed wthn the tme prescrbed
by aw or prescrbed by the Commssoner n pursuance of aw), the vaue of
the gross estate sha be determned by vaung a the property ncuded
theren on the date of the decedent s death as of the date one yenr after the
decedent s death, e cept that (1) property ncuded n the gross estate on the
date of death and, wthn one year after the decedent s death, dstrbuted by
the e ecutor (or, n the case of property ncuded n the gross estate under sub-
dvson (c), (d), or (f) of ths secton, dstrbuted by the trustee under
the nstrument of transfer), or sod, e changed, or otherwse dsposed of, sha
be ncuded at ts vaue as of the tme of such dstrbuton, sae, e change, or
other dsposton, whchever frst occurs, nstead of ts vaue as of the date
one year after the decedent s death, .
rtce 11 of Reguatons 80 (1937) reads n part as foows:
kt. 11. Optona vauaton date. In genera, the ob|ect of subdvson (|) of
secton 302 s to make provson whereby the amount of ta otherwse payabe
may be essened when, wthn the year foowng the decedent s death, the
gross estate has suffered a shrnkage n ts aggregate vaue.
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Regs. 80(1937), rt. 11. 222
If the decedent ded after ugust 30, 1935, the e ecutor may, by an eecton
upon hs return. orm 70 , f fed wthn the tme prescrbed by aw or pre-
scrbed by the Commssoner n pursuance of aw, have the property whch
was ncuded n the gross estate on the date of the decedent s death vaued
as of the appcabe dates, as foows:
The eecton s avaabe to the e ecutor ony at the tme the return s fed,
and ony f the return s fed wthn 15 months from the decedent s death,
or wthn the perod of an e tenson of tme for fng granted under the
provsons of artce 8 or 9 of these reguatons. The eecton appes to a
the property ncuded n the gross estate on the date of the decedent s death.
It can not be apped ony to a porton of such property. The eecton, f
e ercsed, can not be rescnded.

Under the provsons of secton 304(a) of the Revenue ct of 192 .
as amended, the e ecutor s requred to fe an estate ta return under
oath and n dupcate wth the coector at such tmes and n such
manner as may be requred by reguatons made pursuant to aw.
rtce 3 of Reguatons 80 (1937) provdes that the return on orm
70 must be fed n dupcate wthn 15 months after the date of
death, f the decedent ded on or after ugust 31, 1935. Under the
condtons prescrbed n artces G8 and 9 of Reguatons 80 (1937),
an e tenson of tme for fng an estate ta return may be granted.
The foowng cases are nvoved:
1. ded on pr 23, 1937. The e ecutor was granted an e ten-
son of two months from uy 23. 1938 (due date of return), or unt
September 23, 1938, wthn whch to fe the return. The return was
not fed wth the coector unt September 2 , 1938. It was thus
three days ate.
2. ded on pr 13, 1937, and the, return was thus due on uy
13, 1938. owever, the return was not fed unt anuary 3. 1939.
when the admnstrator camed the rght to have the property vaued
as of a date or dates subsequent to the decedent s death.
3. C ded on pr 20, 1937. The return was fed pr 20. 1938.
but the e ecutor dd not eect to have the property ncuded n the
return vaued as provded n secton 302 (|) of the Revenue ct of
192 . as added by secton 202(a) of the Revenue ct of 1935. ow-
ever, on uy 19, 1938, or one day pror to the due date for the
fng of the return, the e ecutor fed an amended return n whch he
eected to have the property ncuded theren so vaued.
The eecton provded n secton 302(|) of the Revenue ct of
192 , as added by secton 202(a) of the Revenue ct of 1935. am
the appcabe provsons of Reguatons 80 (1937) s e pressy cond-
toned upon the e ecutor or admnstrator fng a return on orm
70 wthn 15 months after the decedent s death, or wthn such e ten-
son of tme for fng the requred return as may have been granted
pursuant to the reguatons. Inasmuch as the requred returns n
cases 1 and 2 (estates of and ) were not fed wthn the pre-
scrbed tme, t s hed that nether the e ecutor of s estate nor
the admnstrator of s estate s entted to have the property of such
estates vaued as provded n secton 302(|) of the Revenue ct of
1920, as added by secton 202(a) of the Revenue ct of 1935. Snce
both the orgna return and the amended return n case 3 (estate of
C) were fed wthn the prescrbed tme, t s hed that the e ecutor
of C s estate propery eected to have the property vaued as provded
n secton 302(|) of the Revenue ct of 192 , as added by secton
202(a) of the Revenue ct of 1935.
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223
Regs. 80, rt. 17.
S CTION 302(c). S M ND D.
Reguatons 80, rtce 17: Transfers cond- 1940-7-10175
tona upon survvorshp. Ct. D. 1440
ST T T R NU CTS O 192 ND 1932 D CISION O SUPR M COURT.
1. Gboss state Transfer n Trust Provson fob Retubn of
Corpus to Donob Upon Contngency Termnabe at Death
Intended to Take ffect n Possesson or n|oyment at ob
fter Death.
n nter vvos transfer of property n trust, wth provson for
return or reverson of the corpus to the donor upon a contngency
termnabe at hs death, comes wthn secton 302(c) of the Revenue
ct of 192 , and that secton as amended by secton 803 of the
Revenue ct of 1932, reatng to transfers ntended to take effect
n possesson or en|oyment at or after death.
2. Decson oowed.
en v. Unted States (1931) (283 U. S., 231 Ct. D. 333, C. .
-, 4 2 (1931) ) foowed.
3. Decsons Overrued.
cvcrng v. St. Lous Unon Trust Co. (1935) (2C U. S., 39 Ct.
D. 1047, C. . I -2, 339 (1935) ) and ecker v. St. Lous Unon
Trust Co. (1935) (29 U. S., 48 Ct. D. 104 , C. . I -2, 337
(1 |35) ) overrued.
4. Decsons Reversed.
Decsons of the Unted States Crcut Courts of ppeas, S th
and Thrd Crcuts (1939) (102 . (2d). 1, and 103 . (2d), 834),
reversed.
5. Decson ffbmed.
Decson of the Unted States Crcut Court of ppeas, Second
Crcut (1939) (104 . (2d), 1011), affrmed.
Supreme Court of the Unted States.
No. 110. u T. everng, Commssoner of Interna Revenue, pettoner, v.
Mary . aock and Centra Unted Natona ank of Ceveand, Trustees.
No. 111. Guy T. everng, Commssoner of Interna Revenue, pettoner, v.
Mary . aock, ecutr , state of enry aock, Deceased.
On wrts of certorar to the Unted States Crcut Court of ppeas for the S th Crcut.
No. 112. Oty T. cvcrng, Commssoner of Interna Revenue, pettoner, v.
S. . Squre, Superntendent of anks of the State of Oho, etc.
No. 183. Water . Rothcnses, Coector of Interna Revenue for the rst
Dstrct of Pennsyvana, pettoner, v. Crag uston, dmnstrator d. b. n.
e. t. a. of the state of George . Uber, Deceased .
On wrt of certorar to the Unted States Crcut Court of ppeas for the Thrd Crcut.
No. 399. Yado G. ryant and Ida ryant, ecutors of the state of Wado C.
ryant, Deceased, pettoners, v. Guy T. everng, Commssoner of Interna
Revenue.
309 U. S., 10 .
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut.
anuary 29, 1940.
OPINION.
Mr. ustce rankfurter devered the opnon of the Court.
These cases rase the same queston, namey, whether transfers of propery
Infer vvos made n trust, the partcuars of whch w ater appear, are wthn
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Regs. 80, rt. 17.
224
the provsons of secton 302(c) of the Revenue ct of 192 .1 They were heard
n successon and may be decded together. In each case the Commssoner of
Interna Revenue ncuded the trust property n the decedent s gross estate. u
Nos. 110, 111, and 112 affectng three benefcares under the same nstrument
hs determnaton was reversed by the oard of Ta ppeas (34 . T. ., 575)
and the oard was affrmed by the Crcut Court of ppeas for the S th
Crcut (102 . (2d), 1). In No. 183, the ta payer pad under protest, success-
fuy sued for recovery n the Dstrct Court for the astern Dstrct of Pennsy-
vana, and hs |udgment was sustaned by the Crcut Court of ppeas for the
Thrd Crcut. (103 . (2d), 834.) In No. 399, the Comm|soner was n pan
successfu before the oard of Ta ppeas (3 . T. ., (59) and the Crcut
Court of ppeas for the Second Crcut affrmed the oard (104 . (2d), 1011).
Nether here nor beow does the ssue turn on the ungossed te t of secton
302(c). In ts enforcement, Treasury and courts ake encounter three recent
decsons of ths Court, en v. Unted States (283 U. S., 231 Ct. D. 333, C. .
-, 4 2 (1931) ), Ievcrng v. St. Lous Trust Co. (29 U. S., 39 Ct. D. 1047,
C. . I -2, 339 (1935) ), and ecker v. St. Lous Trust Co. (bd., 48 Ct D.
104 , C. . I -2, 337 (1935) ). ecause of the dffcutes whch ower courts
have found n appyng the dstnctons made by these cases and the seeruns
dsharmony of ther resuts, when |udged by the controng purposes of the
estate ta aw, we brought the cases here. (308 U. S., bd., bd., )
nvove dspostons of property by way of trust n whch the settement
provdes for return or reverson of the corpus to the donor upon a contngency
termnabe at hs death. Whether the transfer made by the decedent n hs fe-
tme s ntended to take effect n possesson and or en|oyment at or after
hs death by reason of that whch he retaned, s the cru of the probem. We
must put to one sde questons that arse under sectons of the estate ta aw
other than secton 302(c) sectons, that s, reatng to transfers takng pace at
death. Secton 302(c) deas wth property not techncay passng at death but
wth nterests theretofore created. The ta abe event s a transfer nter vvos.
ut the measure of the ta s the vaue of the transferred property at the tme
when death brngs t nto en|oyment.
We turn to the cases whch beget the dffcutes. In en v. Unted States,
supra, decded n 1931, the decedent durng hs fetme had conveyed and to
hs wfe for her fetme, and f she sha de pror to the decease of sad
grantor then and n that event she sha by vrtue hereof take no greater or
other estate n sad ands and the reverson n fee n and to the same sha
n that event reman vested n sad grantor . The nstrument further
provded, Upon condton nnd n the event that sad grantee sha survve the
sad grantor, then and n that case ony the sad grantee sha by vrtue of ths
conveyance take, have, and hod the sad ands n fee smpe, . The
ta payer contended that the decedent had reserved a mere possbty of re-
verter and that such a remote nterest, e tngushabe upon the grantor s
death, was not suffcent to brng the conveyance wthn the reckonng of the
ta abe estate. Ths Court hed otherwse. It re|ected forma dstnctons
pertanng to the aw of rea property as rreevant crtera n ths fed of
ta aton. Nothng s to be ganed, t was sad, by mutpyng words n
respect of the varous ncetes of the art of conveyancng or the aw of con-
tngent and vested remanders. It Is perfecty pan that the death of the
1 fh. 27. 44 Stat., 0, as amended by secton 803 of the Revenue ct of 1 32 (ch. W.
47 Stat., 100, 279) :
The vaue of the cross estate of the decedent sha be determned hy Incudng the
vaue at the tme of hs death of a property, rea or persona, tangbe or ntangbe,
wherever stuated

(c) To the e tent of any nterest theren of whch the decedent has at any tme mnd
a transfer, by trust or otherwse, n contempaton of or ntended to take effect n posse-
son or en|oyment at or after hs death, or of whch he has at any tme made a transfer,
by trust or otherwse, under whch he has retaned for hs fe or for any perod not
ascertanabe wthout reference to hs death or for any perod whch does not n fact
end before hs dea h (1) the possesson or en|oyment of. or the rght to the ncome from,
the property, or (2) the rght, ether aone or In con|uncton wth any person, to desgnate
the persons who sha possess or en|oy the property or the ncome therefrom e cept In
case of a bona fde sae for an adequate and fu consderaton n money or money s worth.
ny transfer of a matera part of hs property n the nature of a fna dsposton or
dstrbuton thereof, made by the decedent wthn two years pror to hs death wthout
such consderaton, sha, uness shown to the contrary, be deemed to have been made
n contempaton of death wthn the meanng of ths tte.
Pettoner s bref. en v. Unted States, pages 11-13.
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225
Regs. 80, rt. 17.
grantor was the ndspensabe and ntended event whch brought the arger
estate nto beng for the grantee and effected ts transmsson from the dead to
the vng, thus satsfyng the terms of the ta ng ct and |ustfyng the ta
mposed. ( en v. Unted State , supra, at 234.)
The nescapabe ratonae of ths decson, rendered by a unanmous Court, was
that the statute ta es not merey those nterests whch are deemed to pass at
death accordng to refned techncates of the aw of property. It aso ta es
nter vro transfers that are too much akn to testamentary dspostons not
to be sub|ected to the same e cse. y brngng nto the gross estate at hs
death that whch the settor gave contngenty upon t, ths Court fastened on
the vta factor. It refused to subordnate the pan purposes of a modern
fsca measure to the whoy unreated orgns of the recondte earnng of
ancent property aw. Surey the en decson was not ntended to encourage
the beef that a change merey n the phrasng of a grant woud serve to create
a |udcay cognzabe dfference n the scope of secton 302(c), athough the
grantor retaned n hmsef the possbty of reganng the transferred property
u n precsey the same contngency. The teachng of the en case s e acty
the opposte.
In 193-| the St. Lous Trust cases came here. ratona appcaton of the
prncpes of the en case to the stuatons now before us cas for scrutny
of the partcuars n the St. Lous cases n order to e tract ther reaton to the
doctrne of the earer decson.
In ererng v. St. Lous Trust Co., supra, the decedent had conveyed
property n trust, the ncome of whch was to be pad to hs daughter durng
her fe, but at her death If the grantor st be vng, the trustee sha
forthwth transfer, pay, and dever the entre estate to the grantor,
to be hs absoutey. ut If the grantor be then not vng then the ncome
was to be devoted to the settor s wfe If she were vng, and upon the death
of both daughter and wfe, f he were not vng, the trust property was to go
to the daughter s chdren, or f she eft none, to the grantor s ne t of kn.
In ecker v. St. Lous Trust Co., supra, the decedent had decared hmsef
trustee of property wth the ncome to be accumuated or, at hs dscreton, to
be pad over to hs daughter durng her fe. The nstrument further pro-
vded that If the sad benefcary shoud de before my death, then ths trust
estate sha thereupon revert to me and become mne mmedatey and abso-
utey, or f I shoud de before her death, then ths property sha
thereupon become hers Immedatey and absoutey .
On the authorty of the en case the Commssoner had ncuded n the
ta abe estates the gfts to whch, In the St. Lous Trust cases, the grantors
death had gven defntve measure. If the wfe had predeceased the settor n
the en case, he woud have been repossessed of hs property. s wfe s
nterests were freed from ths contngency by the husband s pror death, and
because of the effect of hs death ths Court swept the gft nto the gross estate.
So n evervg v. St. Lous Trust Co., the grantor woud have become re-
possessed of the granted corpus had hs daughter predeceased hm. ut he
predeceased her and by that event her nterest rpened to fu domnon. The
s ame anayss appes to the ecker case. In a three stuatons the resut and
effect were the sane. The event whch gave to the benefcares a domnon
over property whch they dd not have pror to the donor s death was an act
of nature outsde the grantor s contro, desgn or voton. (29 U. S., 39,
43.) ut It was no more and no ess fortutous. so far as the grantor s
contro, desgn or voton, was concerned, n the St. Lous Trust cases than
t was n the en case. In none of the three cases dd the domnon over
property whc fnay came to the benefcary fa by vrtue of the grantor s
w, e cept by hs provson that hs own death shoud estabsh such fna
and compete domnon. nd yet a mere dfference n phrasng the crcum-
stance by whch dentc nterests n property were brought nto beng varyng
forms of words n the creaton of the same wordy wordy nterests was
found suffcent to e cude the St. Lous Trust settements from the appcaton
of the en doctrne.
our members of the Court saw no dfference. They reed on the governng
prncpe of secton 302(c) that Congress meant to ncude In the gross estate
Some ndcaton of the Infuence of en v. Unted States upon the ower courts may
be found In Sargent v. Whte (50 . (2d). 410) and Unon Trust Co. v. Unted States
154 P. (2d). 152. certorar dened, 2SG U. S., D47). Cf. Commssoner v. Schtoars (74 .
(2d). 712).
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Regs. 80, rt. 17.1
22
nter vvos gfts whch may be resorted to, as a substtute for a w, n makng
dspostons of property operatve at death. (29 U. S., at 4 .) To effectuate
ths purpose practca consderatons appcabe to ta aton and not the ncetes
of the art of conveyancng were ther touchstone. avng n mnd. sad
the dssenters, the purpose of the statute and the breadth of ts anguage t
wond seem to be of no consequence what partcuar conveyancers devce what
partcuar strng the decedent seected to hod n suspense the utmate dspos-
ton of hs property unt the moment of hs death. In determnng whether a
ta abe transfer becomes compete ony nt death we ook to substance, not to
form . owever we abe the devce t s but a means by whch the
gft s rendered Incompete unt the donor s death. (29 U. S., at 47.) or
the ma|orty n the St. Lous Trust Co. cases, these practcates had ess
sgnfcance than the forma categores of property aw. The grantor s death,
the ma|orty sad, n cvcrug v. St. Lous Trust Co., smpy put an end to
what, at best, was a mere possbty of a reverter by e tngushng t that s
to say, by convertng what was merey possbe nto an utter mpossbty.
(29 U. S., 39, 43.) Ths was precsey the mode of argument whch had been
re|ected n en v. Unted States, supra.
We are now asked to accept a three decsons ns consttutng a coherent
body of aw, and to appy ther dstnctons to the trusts before us.
In Nos. 110, 111 and 112 ( everng v. noek) the decedent n 1919 created
a trust under a separaton agreement, gvng the ncome to hs wfe for fe,
wth ths further provson :
If and when nne Lamson aock sha de and n such event the
wthn trust sha termnate and sad trustee sha pay party of the
frst part f he then be vng any accrued ncome, then remanng In sad trust
fund and sha dever forthwth to party of the frst part, the prn-
cpa of the sad trust fund. If and n the event sad party of the frst part sha
not be vng then and n such event payment and devery over sha be made
to Levtt aock and een aock, respectvey son and daughter of the
party of the frst part, share and share ake .
When the settor ded n 1932, hs dvorced wfe, the fe benefcary, survved
hm. The crcut court of appeas hed that tho trust nstrument had conveyed
the whoe nterest of the decedent, sub|ect ony to a condton subsequent.
whch eft hm nothng e cept a mere possbty of reverter. Commssons
v. aock. 102 . (2d), 1, 8-4.)
In No. 183 (Rnthcnses v. Cassc) the decedent by an ante-nupta agreement
n 1925 conveyed property n trust, the ncome to be pad to hs prospectve wfe
durng her fe, sub|ect to the foowng dsposton of the prncpa:
In trust f the sad Rae Spektor sha de durng the fetme of sad George
. Uber to pay over the prncpa and a accumuated ncome thereof unto the
sad George . Uher n fee, free nnd cear of any trust.
In trust f the sad Rae Spektor after the marrage sha survve the sad
George . Uher to pay over the prncpa and a accumuated ncome unto the
sad Rae Spektor then Rae Uber n fee, free and cear of any trust.
Mrs. Uber outved her husband, who ded n 1934. The crcut court of appeas
doenved ecker v. St. Lous Trust Co. controng aganst the ncuson of the
trust corpus n the gross estate.
nay, n No. 399 ( ryant v. everng), the testator provded for the pay-
ment of trust ncome to hs wfe durng her fe and upon her death to the settor
hmsef f he shoud survve her. The nstrument, whch was e ecuted n 1917,
contnued :
Upon the death of the survvor of sad Ida ryant and the party of the frst
part, uness ths trust sha have been modfed or revoked as herenafter pro-
vded, to convey, transfer, and pay over the prncpa of the trust fund to the
e ecutors or admnstrators of the estate of the party hereto of the frst part.
There was a further provson gvng to the decedent and hs wfe |onty dur-
ng ther ves, and to ether of them after the death of the other, power to modfy,
ater or revoke the nstrument. The wfe survved the husband, who ded n
1930. The oard of Ta ppeas aowed the Commssoner to ncude n the
decedent s gross estate ony the vaue of a vested reversonary nterest whch
(e oard hed e grantor had reserved to hmsef. On appea by the ta payer,
the crcut court of appeas sustaned ths determnaton.
The terms of these grants dffer n deta from one another, as a three dffer
from the formuas of conveyance used n the en and St. Lous Trust cases.
It therefore becomes mportant to nqure whether the technca forms n whch
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227
IRegs. 80, rt. 17.
nterests contngent upon death are cast shoud contro our decson. If so. It
becomes necessary to determne whether the dfferng terms of conveyance now
n ssue appro mate more cosey those used n the en case and are therefore
governed by t, or have a greater verba resembance to those that saved the ta
n the St. Lous Trust cases. Such an essay n ngustc refnement woud st
farther embarrass e stng ntrcaces. It mght demonstrate verba ngenuty,
but t coud hardy strengthen the ratona foundatons of aw. The aw of con-
tngent and vested remanders s fu of casustres. There are great dverstes
among the severa States as to the conveyancng sgnfcance of ke grants some-
tmes n the same State there are confctng nes of decson, one seres gnorng
the other. ttempts by the oard of Ta ppeas and the crcut courts of appea
to admnster secton 302(c) by reference to these dstnctons abundanty us-
trate the nevtabe confuson. One of the cases at bar, No. 399, reveas vvdy
the snares whch nevtaby awat an attempt to base estate ta aw on the
ncetes of the art of conveyancng. In connecton wth the ascertanment of
ts own death dutes, the Supreme Court of rrors of Connectcut defned the
nature of the nterest whch the decedent n that case retaned after hs nter
t ros transfer. ( ryant v. ackett, 118 Conn., 233.) nd yet the nature of that
nterest under Connectcut aw and the scope of the Connectcut court s ad|udca-
ton of that nterest were made the sub|ect of vey controversy before us. The
mportaton of these dstnctons and controverses from the aw of property nto
rhe admnstraton of the estate ta precudes a far and workabe ta system.
ssentay the same nterests, |udged from the pont of vew of weath, w be
ta abe or not, dependng upon eusve and subte casustres whch may have
ther hstorc |ustfcaton but possess no reevance for ta purposes.1 These
nnwtty dverstes of the aw of property derve from medeva concepts as to the
necessty of a contnuous sesn. Dstnctons whch orgnated under a feuda
economy when and domnated soca reatons are pecuary rreevant n the
appcaton of ta measures now so argey drected toward ntangbe weath.
Our rea probem, therefore, s to determne whether we are to adhere to a
harmonzng prncpe n the constructon of secton 302(c), or whether we are
o mutpy gossamer dstnctons between the present cases and the three
earer ones. reed from the dstnctons ntroduced by the St. Lous Trust
cases, the en case furnshes such a harmonzng prncpe. Does, then, the
doctrne of stare decss compe us to accept the dstnctons made n the St.
Lous Trust cases as startng ponts for st fner dstnctons spun out of the
tenuostes of survvng feuda aw We thnk not. We thnk the en case
re|ected the presupposton of such dstnctons for the fsca |udgments whch
secton 302(c) demands.
We recognze that stare decss embodes an mportant soca pocy. It repre-
sents an eement of contnuty n aw, and s rooted n the psychoogc need to
satsfy reasonabe e pectatons. ut stare decss s a prncpe of pocy and
not a mechanca formua of adherence to the atest decson, however recent
and questonabe, when such adherence nvoves coson wth a pror doctrne
more embracng n ts scope, ntrnscay sounder, and verfed by e perence.
or have we n the St. Lous Trust cases rues of decson around whch, by
the accreton of tme and the response of affars, substanta nterests have
estabshed themseves. No such con|uncton of crcumstances requres per-
petuaton of what we must regard as the devatons of the St. Lous Trust
decsons from the en doctrne. We have not before us nterests created or
mantaned n reance on those cases. We do not mean to mpy that the
nevtaby emprc process of construng ta egsaton shoud gve rse to an
See, for e ampe, the attempts by the oard of Ta ppeas to dea wth the pecuar-
tes of New York aw In the fed of vested and contngent remanders. ( zabeth .
Waace, 27 . T. ., 902 Lous C. Rnegner, r., 29 . T. ., 1243.) In both of these
cases mtatons whch woud probnbv have been contngent at common aw
were hed to be vested under the New York statutory rue. (Cf. Commssoner v.
tchvnrz. 74 . (2d), 712 ora M. onneu, 29 . T. .. 45.)
Cf. Lyeth v. oey (305 U. S., 188, 194). See Pau, The ffect on edera Ta aton
nf Loca Rues of Property n Seected Studes n edera Ta aton (2d Seres), pages
23-28 Deveopments n the Law Ta aton, 47 arv. L. Rev., 1209, 123S-1241 Note,
4 ) arv. L. Rev., 402.
See. for e ampe, earne, Contngent Remanders (4th m. d.), pages 3-241 Gray,
Rue ganst Perpetutes (2d d.), pages 99-118 TII odsworth. story of ngsh
Law 81 ef seq. 1 Smes, uture Interests, sectons 04-9 . The confuson apt to be
engendered by |udca forays nto ths fed s we Iustrated by the use of the term
possbty of reverter by the ma|orty n everng v. St. Lous Onon Trust Co.
possbty of reverter Is tradtonay defned as the nterest remanng In a grantor
who has conveyed a determnabe fee. The defnton has not been thought to have any
reaton to the reversonary nterest of a grantor who has transferred ether a vested or
contngent remander n fee. See Gray, Rue ganst Perpetutes (2d d.), sectons 13-51.
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Regs. 80. rt. 17.
228
estoppe aganst the responsbe e ercse of the |udca process. ut t s a
fact that n a the cases before us the settements were made and the settors
ded before the St. Lous Trust decsons.
Nor does want of specfc congressona repudatons of the St. Lous Trust
cases serve as an mped nstructon by Congress to us not to recor|sder, n
the ght of new e perence, whether those decsons, n con|uncton wth the
en case, make for dssonance of doctrne. It woud requre very persuasve
crcumstances enveopng congressona sence to debar ths Court from re-
e amnng ts own doctrnes. To e pan the cause of nonacton by Congress
when Congress tsef sheds no ght s to venture nto specuatve unreates.
Congress may not have had ts attenton drected to an undesrabe decson:
and there s no ndcaton that as to the St. Lous Trust cases t had, even by
any b that found ts way nto a commttee pgeonhoe. Congress may not
have had ts attenton so drected for any number of reasons that may have
moved the Treasury to stay ts hand. ut certany such nacton by the
Treasury can hardy operate as a controng admnstratve practce, through
acquescence, tantamount to an estoppe barrng ree amnaton by ths Court
of dstnctons whch t had drawn. arous consderatons of paramentary
tactcs and strategy mght be suggested as reasons for the nacton of the
Treasury and of Congress, but they woud ony be suffcent to ndcate that we
wak on qucksand when we try to fnd n the absence of correctve egsaton
a controng ega prncpe.
Ths Court, unke the ouse of Lords, has from the begnnng re|ected a
doctrne of dsabty at sef-correcton. Whatever ese may be sad about want
of congressona acton to modfy by egsaton the resut n the St. Lous Trust
cases, t w hardy be urged that the reason was congressona approva of
those dstnctons between the St. Lous Trust and the en cases to whch
four members of ths Court coud not gve assent. y mputng to Congress a
7 We are not unmndfu of amendments to the estate ta aw to whch other derson
of ths Court gave rse. Thus by secton 805 of the Revenue ct of 193 (eh. 90.
49 Stat., 1 48) Congress undd the constructon whch ths Court gave the estnte ta
taw n another connecton by a decson rendered on the same day as were the St. Lous
Trust cases. (Cf. Whte v. Poor, 200 T . S.. OR.) Ths ease arose under secton 302(d
and not secton 302(c). ut, n any event, the fact of congressona acton n deang
wth one probem whe sent on the dfferent probems created by the St. Lous Trust
cases, does not mpy controng acceptance by Congress of those cases.
y the |ont resouton of March 3. 1031 (ch. 454. 4G Stat., 1010), Congress dspaced
the constructon whch ths Court put upon secton 302(c) n those cases wheren t was
hed that the reservaton by a decedent of a fe estate n property conveyed nter vvo ,
dd not consttute a suffcent postponement of the remander to brng It Into the grantors
gross estate. (May v. ener, 281 T . S.. 238 Ct. D. 180, C. . I -1. 382 (193011:
urnet v. Northern Trust Co., 2S3 U. S.. 782 Morsman . urnet, 283 T . S.. 783:
McCormek v. urnet. 283 T . S., 784.) The specuatve arguments that may be drawn
from ad hoc egsaton affectng one set of decsons and the want of such egsaton to
modfy another set of decsons deang wth a somewhat dfferent though cognate probem
are we ustrated by ths remeda amendment. or t may be urged wth consderabe
pausbty that n 1931 Congress had n prncpe aready re|ected the genera atttud
underyng the St. Lous Trust cases, as Iustrated by the fact that n those cases the
ma|orty, n part at east, reed upon the cougressonay dscarded May v. ener
doctrne.
Whatever may be the scope of the doctrne that reennctment of n statute mpedy
enacts a setted |udca constructon paced upon the recnacted statute, that doctrne ha
no reevance to the present probem. Snce the decsons n the St. Lous Trust cases.
Concress has not reenacted secton 302(c). The amendments that Congress made to
other provsons of secton 302 n connecton wth other stuatons than those now before
the Court, were made wthout reenactng secton 302(c). Nor has Congress, under any
ratona canons of egsatve sgnfcance, by ts compaton of nterna revenue aws to
form the Interna Revenue Code of 1039 (53 Stat.. 1), mpedy enacted Into aw a
partcuar decson whch, n the ght of ater e perence, s seen to create confuson nnd
confct n the appcaton of a setted prncpe of nterna revenue egsaton.
ere, unke the stuaton n such cases as yatonn Lead Co. . Unted States (2. 2
U. S., 140, 140-147) and Murphy O Co. v. urnet (287 T . S., 290, 302-303 Ct. D. 19,
C. . II 1, 231 (10331 ). we have no con|uncton of ong unform admnstratve con-
structon and subsequent reonactments of an ambguous statute to gve ground for mpy-
ng egsatve adopton of such constructon. See Prefnce, Interna Reveme Code t53
Stat., I) compare Sme / v. om (285 T . S., 355, 373) and II arner v. Godtra (293
U. S.. 155. 101).
Snce the Treasury has amended ts reguatons n an effort to conform admnstratve
practce to the compusons of the St. Lous Trust eases, t can not be deemed to have
bound tsef by ths change. ( rtce 17. Reguatons So (10.17 d.), page 42.) Cf. state
of Snnfor v. Commssoner of Interna Revenue (308 T . S., (decded November ,
1030)).
London Street Tramway Co.. Ltd., v. London County Counc TffS ( . C. 3751.
ut the rue Is otherwse In the Prvy Counc. Read . shop of Lncon 1802 . . C.
044. 055.) or the roe of precedent In ngsh Inw. see. nter aa, 2 Yorke, Lfe of
Lord Chanceor ardwcke, pages 425. 408: Goodbart, Precedent n ngsh and Con-
tnenta Law. 50 L. . Rev.. 40 odsworth. Case Law. bd.. 180 7,ord Wrght n Went-
mnster Counc v. Southern Ry. Co. 193 ( . C, 511, 502-5 3) en, Law In th
Makng (3d ed.), pages 224 et seq.
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229
Regs. 80, rt. 24.
hypothetca recognton of coherence between the en and the St. Lous Trust
cases, we can not evade our own responsbty for reconsderng, n the ght
of further e perence, the vadty of dstnctons whch ths Court has tsef
created. Our probem then s not that of re|ectng a setted statutory con-
structon. The rea probem s whether a prncpe sha preva over ts ater
msappcatons. Surey we are not bound by reason or by the consderatons
that undere stare decss to persevere n dstnctons taken n the appcaton
of a statute whch, on further e amnaton, appear consonant nether wth the
purposes of the statute nor wth ths Court s own concepton of t. We there-
fore re|ect as untenabe the dverstes taken n the St. Lous Trust cases n
appyng the en doctrne untenabe because they drastcay eat nto the
prncpe whch those cases professed to accept nnd to whch we adhere.
In os. 110, 111, 112 and 183. the |udgments are reversed.
In No. 390, the |udgment s affrmed.
The Chef ustce concurs n the resut upon the ground that each of these
cases s controed by our decson n en v. Unted States (283 U. S., 231).
ST T T R NU CT O 102 , S M ND D D CISION O
SUPR M COURT.
1. Gross state Genera Power of ppontment Loca Law
edera Law.
power of appontment e ercsabe by the donee thereof n favor
of anyone, ncudng her estate or credtors, s a genera power of
appontment wthn the ntent of the edera statute, though the
property may be n trust wth dscretonary power n the trustees
to wthhod prncpa or ncome from any benefcary under certan
crcumstances, and though under the State aw such a power may
be cassfed as speca. Where the edera Revenue cts desgnate
what nterests or rghts, created by State aw, sha be ta ed, the
edera aw must preva no matter what name s gven to the n-
terest or rght by State aw.
2. Decson ffrmed.
Decson of the Unted States Crcut Court of ppeas, Seventh
Crcut (1939) (103 . (2d), 3 ), affrmng decson of the Unted
States oard of Ta ppeas (1937) (30 . T. ., 588), affrmed.
. ar Morgan, ecutor of the state of zabeth 8. Morgan, Deceased,
pettoner, v. Commssoner of Interna Revenue.
300 U. S., 78.
Ou wrt of certorar to the Unted States Crcut Court of ppeas for the Seventh Crcut.
anuary 29, 1040.
Mr. ustce Roberts devered the opnon of the Court.
We took ths case because t rases an mportant queston as to the construc-
ton of the Revenue ct of 302 , secton 302(f), amended by the Revenue ct
of 1932, secton S03(b).1
M4 Stat.. 0. 71 47 Stat., 1 9, 279: 2 U. S. C, secton 411.
Sec. 302. The vaue of the gross estate of the decedent sha be determned by ncudng
the vaue at the tme of hs death of a property, rea or persona, tangbe or ntangbe,
wherever stuated
(f) To the e tent of any property passng under a genera power of appontment
e ercsed by the decedent (1) by w, or (2) by deed e ecuted n contempaton of or
ntended to take effect In possesson or en|oyment at or after hs death, e cept
n case of a bona fde sae for an adequate and fu consderaton n money or money s
worth 1 .
S CTION 302(0, S M ND D.
Reguatons 80, rtce 24: Property pstssng
under genera power of appontment.
1940-7-1017
Ct. D. 1441
Supreme Court of the Unted States.
opnon.
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egs. 80, rt. 24.
230
The queston s to what e tent and n what sense the aw of the decedent s
domce governs In determnng whether a power of appontment e ercsed by
hm s a genera power wthn the meanng of the statute.
The pettoner s the e ecutor of zabeth S. Morgan who was the donee of two
powers of appontment over property hed n two trusts created by her father
by w and by deed. The persons named are, or were, at death, ctzens of
Wsconsn. It s unnecessary to recte the terms of the trusts. Suffce t to
say that under eav:h, property remanng n the trustees hands for zabeth S.
Morgan was gven at her death, to the appontee or appontees named n her
w, wth gfts over n case she faed to appont. Under both trusts, f n
the |udgment of the trustees, property gong to any benefcary woud be ds-
spated for any reason, or nprovdenty handed, the trustees were to wthhod
any part of such property wth drectons for dsposton, n such event, of
what was wthhed. The decedent apponted n favor of her husband.
The Commssoner rued that the vaue of the apponted property shoud be
ncuded n the gross estate and determned a ta defcency. The oard of
Ta ppeas approved hs acton.2 The crcut court of appeas affrmed the
oard s decson.
Under the aw of Wsconsn, the decedent coud have apponted anyone to
receve the trust property, ncudng her estate and her credtors, the pettoner
urges that, by statute and decson, Wsconsn has defned as speca a power
such as she hed.4 The respondent urges that ths s not a correct nterpretaton
of the State aw. We fnd t unnecessary to resove the ssue, snce we hod that
the powers are genera wthn the ntent of the Revenue ct, notwthstandng
they may be cassfed as speca by the aw of Wsconsn.
State aw creates ega nterests and rghts. The edera Revenue cts
desgnate what nterests or rghts, so created, sha be ta ed. Our duty s
to ascertan the meanng of the words used to specfy the thng ta ed. If t
s found n a gven case that an nterest or rght created by oca aw was
the ob|ect ntended to be ta ed, the edera aw must preva no matter what
name s gven to the nterest or rght by State aw.
None of the Revenue cts has defned the phrase genera power of appont-
ment. The dstncton usuay made between a genera and a speca power
es n the crcumstance that, under the former, the donee may appont to
anyone, ncudng hs own estate or hs credtors, thus havng as fu domnon
over the property as f he owned t whereas, under the atter, the donee
may appont ony amongst a restrcted or desgnated cass of persons other
than hmsef.
We shoud e pect, therefore, that Congress had ths dstncton n mnd
wThen t used the ad|ectve genera. The egsatve hstory ndcates that
ths s so. The Treasury reguatons have provded that a power s wthn
the purvew of the statute, f the donee may appont to any person.8
Wth these reguatons outstandng Congress has severa tmes reenacted
secton 302(f), and has thus adopted the admnstratve constructon. That
TOnstructon s n accord wth the opnon of severa edera courts.
3 . T. ., 588.
a 103 . (2(1). 030.
Secton 232 05 : Genera power. power Is genera when t authorzes the aenaton
In fee. by means of a conveyance, w, or charge of the ands embraced n the power, to
anv aenee whatever.
232.00 Speca power. power s speca: (1) When the person or cass of persons
to whom the dsposton of the ands under the power to be made are desgnated. (2)
When the power authorzes the aenaton by means of a conveyance, w, or charge of a
partcuar estate or nterest ess than a fee.
See W of Zrcfe (194 Ws., 428 210 N. W.. 840) Catcher v. Dreut:er (197 Ws.,
98 221 N. W., 401).
urnet v. Iarme (287 U. S., 103. 110 Ct. D. 11. C. . I-2, 210 (1932)1) : anker
Co Co. v. urnet (287 . S., 308. 310) Pamer v. ender (287 . R.. R I. 555 Ct. D.
41. C. . II-1, 235 (1933) ) : Thomas v. Perkns (301 U. S., 055, 59 Ct. D. 1237, C. .
1937-1, 1021) Icner . Meon (304 D. S., 271, 279 (Ct. D. 1345, C. . 1938-1, 349 )
Lyeth v. oey (305 U. S.. 188. 193).
Sugden on Powers (Sn d.). page 304 arwe on Powers (2d d.), page 7.
ouse ept. No. 707. S tv-ffth Congress, second sesson, pages 21-22.
Reguatons 03 (1922 d.), artce 25 Reguatons 08 (1924 d.), artce 24 Regua-
tons 70 (1920 and 19211 ds.), artce 24 Reguatons 80 (1934 d.), artce 24.
dt Phadepha Trust Co. v. McCaughn (31 . (2d), 00): Stratton v. Unted
States (50 . (2d), 4S) Od Coon|/ TY f Co. v. Commssoner (73 . (2d), 970) ohn-
atone v. Commssoner (70 . (2d). 55).
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231
Regs. 80(1937), rt. 44.
The pettoner cams, however, that the decson beow s n confct wth
two by other crcut courts of appea.10 The contenton s based on certan
phrases found n the opnons. We thnk It cear that, n both cases, the courts
e amned the oca aw to ascertan whether a power woud be construed by
the State court to permt the appontment of the donee, hs estate or hs cred-
tors, and on the bass of the answer to that queston determned whether the
power was genera wthn the ntent of the edera ct.
s the decedent n ths case coud have apponted to her estate, or to her
credtors, we hod that she had a genera power wthn the meanng of secton
302(f). Ths concuson s not nconsstent wth authortes on whch the pet-
toner rees, hodng that, n the appcaton of a edera Revenue ct, State
aw contros n determnng the nature of the ega Interest whch the ta payer
had In the property or ncome sought to be reached by the statute.
The pettoner s second poston s that, nasmuch as the trustees had an
unfettered dscreton to wthhod prncpa or ncome from any benefcary, they
coud e ercse ther dscreton as respects any appontee of the decedent. Ths
fact, they say, renders the power a speca one. ssumng that the trustees
coud wthhod the apponted property from an appontee, we thnk the power
must st be hed genera. The quantum or character of the nterest apponted,
or the condtons mposed by the terms of the trust upon ts en|oyment, do not
render the powers n queston speca wthn the purport of secton 302(f). The
mportant consderaton s the breadth of the contro the decedent coud e ercse
over the property, whatever the nature or e tent of the appontee s nterest
The |udgment Is affrmed.
S CTION 303(a), S M ND D Y S CTION 807 O T R NU CT
O 1932, ND S CTIONS 403(a) ND 40 O T R NU CT O 1934.
bgcatons 80 (1937), rtce 44: Transfers 1940-22-10272
for pubc, chartabe, regous, etc., uses. . T. 17
( so Secton 303(b) 3, as amended, and
rtce 54.)
The vaue of property bequeathed to a regous, chartabe,
scentfc, terary, or educatona organzaton whch the egatee
organzaton assgns or surrenders to the decedent s hers pursuant
to a compromse agreement approved by the court s not deductbe
under secton 303(n)3 of the Revenue ct of 192 , as amended, n
determnng the vaue of the net estate of the decedent
dvce s requested whether the vaue of property bequeathed to
a regous, chartabe, scentfc, terary, or educatona organzaton
s deductbe under secton 303(a)3 of the Revenue ct of 192 , as
amended, n determnng the vaue of the net estate of a decedent,
where the egatee organzaton assgns or surrenders a part of such
property pursuant to a compromse agreement settng a controversy
wth the decedent s hers, the agreement beng approved by the
court.
In the present case the decedent, after provdng for annutes to
hs daughters, bequeathed the resdue of hs estate to a regous
organzaton. The daughters contested the w and a compromse
agreement, approved by the court, was entered nto whereby the
regous organzaton receved a esser amount than provded by the
w.
WMtock-Rose v. McCaughn (21 . (2d), 1 4) Le er v. urnet (4 . (2d), 75 ).
npoa . Seaborn (282 U. S., 101 Ct. D. 259, C. . I -2, 202 (1930) ) : reuer v.
ecerng (291 D. 8., 35 Ct. D. 782, C. . III-1, 242 (1934) ) ar . Commssoner
(300 U. S.. 5 Ct D. 1205, C. . 1937-1, 175 ) Lang v. Commssoner (304 . S., 204
Ct D. 1342, C. . 1938-1, 507 .
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Regs. 80(1937). rt. 44. 232
Secton 303(a) of the Revenue ct of 192 , as amended by secton
807 of the Revenue ct of 1932, and sectons 403(a) and 40 of the
Revenue ct of 1934, provdes n part as foows:
or the purpose of the ta the vaue of the net estate sha be
determned
(a) In the ease of a ctzen or resdent of the Unted States, by deductng
from the vaue of the gross estate

(3) The amount of a bequests, egaces, devses, or transfers to or
for the use of any corporaton organzed and operated e cusvey for regous,
chartabe, scentfc, terary, or educatona purposes no part of the
net earnngs of whch nures to the beneft of any prvate stockhoder or
ndvdua .
The Supreme Court of the Unted States n Lyeth v. oey (305
U. S., 188 Ct. D. 1370, C. . 1938-2, 208), n hodng that the vaue
of property receved from the estate of a decedent by an her n com-
promse of hs cam as such her s not ta abe as ncome, but s
wthn the statutory e empton aowed by secton 22(b)3 of the
Revenue ct of 1932, sad n part as foows:
In e emptng from the ncome ta the vaue of property acqured by bequest,
devse, or nhertance, Congress used comprehensve terms embracng a acqu-
stons n the devouton of a decedent s estate. Thus, the acquston
by successon to a decedent s estate whether rea or persona was embraced n
the e empton. urther, by the estate ta , Congress has mposed a ta upon
the transfer of the entre net estate of every person dyng after September 8,
1910, aowng such e emptons as t sees ft n arrvng at the net estate. Con-
gress has not ndcated any ntenton to ta agan the vaue of the property
whch egatees, devsees or hers receve from the decedent s estate.
Where property s bequeathed to a regous, chartabe, etc., organ-
zaton and the egatee organzaton assgns or surrenders a part of
the property pursuant to an agreement wth the decedent s hers set-
tng a controversy affectng the amount of the bequest, the vaue of
the property so assgned or surrendered n favor of the contestng
hers does not pass to the egatee organzaton under the decedent s
w. ccordngy, the vaue of that part of the bequest whch was
so assgned or surrendered by the egatee organzaton s not deduct-
be under secton 303 (a) 3 of the Revenue ct of 192 , as amended,
n determnng the net estate of the decedent.
S CTION 303(a)3, S M ND D Y S CTION 807 O T R NU CT
O 1932 ND S CTIONS 403 ND 40 O T R NU CT O 1934.
Reguatons 80(1937), rtce 44: Tranfers for 1940-17-10242
pubc, chartabe, regous, etc., uses. . T. 1
Where nsurance s recevabe by benefcares other than the
estate and some of the benefcares are pubc, chartabe, regous,
educatona, etc., organzatons, no part of the 40,000 specfc e -
empton, provded for n secton 302(g) of the Revenue ct of
192G, mav be aocated to such organzatons.
. T. 2 (C. . II-2, 280 (1 )33)) revoked.
In . T. 2 (C. . II-2, 280 (1933)) t was hed (syabus) :
Where nsurance s recevabe by benefcares other than the estate and
where some of the benefcares are chartabe organzatons, t s h d that
for the purpose of the chartabe deducton to whch the estate s entted the
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233
Regs. 80(1937), rt. 44.
40,000 statutory e empton shoud be prorated among the benefcares, and the
amount of the nsurance recevabe by such organzatons shoud be reduced by
ther proportonate shares n the e empton.
Secton 302 of the Revenue ct of 192 , as amended by secton 404
of the Revenue ct of 1934, provdes n part as foows:
The vaue of the gross estate of the decedent sha be determned by ncudng
the vaue at the tme of hs death of a property, rea or persona, tangbe or
ntangbe, wherever stuated, e cept rea property stuated outsde the Unted
States
(g) To the e tent of the amount recevabe by the e ecutor as nsurance
under poces taken out by the decedent upon hs own fe and to the e tent
of the e cess owr 40,000 of the amount recevabe by a other benefcares as
nsurance under poces taken out by the decedent upon hs own fe.
The Unted States Crcut Court of ppeas for the Second Crcut
n Commssoner v. Pupn (107 ed. (2d), 745) hed that where a
decedent eft fe nsurance n the amount of 101,122.20, of whch
51,122.20 was payabe to the decedent s daughter and 50,000 was
payabe to an e empt educatona nsttuton, the specfc e empton
of 40,000, provded for n secton 302(g), supra, for nsurance not
payabe to a decedent s estate, shoud be aocated to the nsurance
payabe to the decedent s daughter, nstead of beng prorated between
the daughter and the educatona nsttuton. The court further hed
that the 50,000 nsurance pad to the educatona nsttuton const-
tuted an aowabe deducton under secton 303(a)3 of the Revenue
ct of 192 , as amended. The Unted States Crcut Court of
ppeas for the Thrd Crcut n Mc evy v. Commssoner (82 ed.
(2d), 395) hed to the same effect.
In vew of the foregong, . T. 2 (C. . II-2, 280 (1933)) s
revoked, and t s hed that n such cases no part of the 40,000 specfc
e empton may be aocated to the pubc, chartabe, regous, edu-
catona, etc., benefcares.
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Regs. 79, rt. 13.
234
TITL III. GI T T . (1932)
S CTION 505, S M ND D Y S CTION 517 O T R NU CT O
1934. D DUCTIONS.
Reguatons 79, rtce 13: Chartabe, etc., 1940-5-10159
gfts. . T. 15
created an rrevocabe trust to whch he transferred property
upon the condtons (1) that the ncome therefrom be pad to
for fe, and (2) that upon s death the remander nterest n the
trust fund be used by the trustees for the estabshment and man-
tenance of the M Chartabe und.
ed, the present worth of the remander nterest as of the tme
of the gft Is deductbe under secton 505(a)2( ) of the Revenue
ct of 1932, as amended.
dvce s requested whether a gft of a remander nterest made
under the crcumstances herenafter stated comes wthn the scope of
the deducton aowed for gft ta purposes by secton 505(a)2( )
of the Revenue ct of 1932, as amended.
In 1937, , a ctzen of the Unted States, created an rrevocabe
trust to whch he transferred 5 doars upon the condtons (1) that
the ncome therefrom be pad to hm for fe, and (2) that upon hs
death the remander nterest n the fund be used by the trustees to
formuate and carry out pans for the estabshment of the M Char-
tabe und. Sad fund sha be conducted at a tmes as a nonproft enterprse.
or the purposes hereof, sad trustees may organze a chartabe corporaton
or assocaton, provded such corporaton or assocaton be at a tmes a non-
proft enterprse.
Secton 505(a)2( ) of the Revenue ct of 1932, as amended, reads
n part as foows:
In computng net gfts for any caendar year there sha be aowed as
deductons:
(a) Resdents. In the case of a ctzen or resdent
(2) Chartabe, etc., gfts. The amount of a gfts made durng such year
to or for the use of

( ) a corporaton, or trust, or communty chest, fund, or foundaton, organ-
zed and operated e cusvey for regous, chartabe, scentfc, terary, or
educatona purposes no part of the net earnngs of whch Inures
to the beneft of any prvate sharehoder or ndvdua, and no substanta part
of the actvtes of whch s carryng on propaganda, or otherwse attemptng,
to nfuence egsaton .
rtce 13 of Reguatons 79 (193 edton) whch reates to the
deducton for chartabe, etc., gfts n determnng the amount of net
gfts for gft ta purposes, provdes n part as foows:
If money or other property Is so gven that the ncome s, for the duraton
of a fe or a term of years, to be pad to the donor or other ndvdua, or Is
to be used for a purpose not descrbed n secton 505 (a)(2) or (b), and the
property s then to be devoted e cusvey to some one or more of the uses
descrbed n secton 505 (a) (2) or (b), ony the present worth of the remander
s deductbe. To determne the present worth or vaue of such remander
(that n, ts vaue as of the date of the gft), the amount of the money or the
vaue of the property transferred shoud be mutped by the approprate factor
n coumn 3 of Tabe or , a part of artce 19.
The gft of the remander nterest n the trust fund created bv
s unquestonaby a chartabe gft. The queston arses, how-
ever, whether the gft s wthn the deducton aowed by secton
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235
Regs. 79, rt. 13.
505(a)2( ) of the Revenue ct of 1932, as amended, because t was
not made to an e stng organzaton formed and operated e cu-
svey for chartabe purposes, snce (1) the trust w be operated
n part for a nonchartabe purpose, namey, the payment of the
ncome to for fe, and (2) the chartabe corporaton w not be
estabshed unt after the death of .
mong other thngs, the statute under consderaton mposes the
condton that the donee of a deductbe gft must be organzed and
operated e cusvey for one or more of the purposes specfed
theren. The phraseoogy organzed and operated e cusvey s
descrptve and mts the deducton to gfts to nsttutons comng
wthn that descrpton. It does not mpose a further condton that
the nsttuton whch s to receve the gft must be n e stence and
operatng e cusvey for the specfed purpose at the tme the gft
s made.
Snce the gft of the remander nterest n the present trust fund
s restrcted to a corporaton or assocaton whch w be organzed
and operated e cusvey for a chartabe purpose, t s hed that the
gft s propery deductbe under secton S05(a)2( ) of the Revenue
ct of 1932, as amended. In accordance wth the above-quoted pro-
vsons of artce 13 of Reguatons 79, the amount of the deducton,
however, s mted to the present worth of the remander nterest
as of the tme of the gft.
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Regs. 4(193 ), rts. 21, 44.
23
C PIT L STOC T .
Reguatons G4 (193 ), rtce 21: Defntons.
rtce 44: Orgna decared vaue.
( so rtce 24. Reguatons 4 (1933), and
rtces 41 and 42, Reguatons 4 (1934).)
C PIT L STOC T .
rtce 24 of Reguatons 4 (1933), artces 41(d) and 42(a) of
Reguatons 4 (1934), and artces 21 () and 44(a) of Regua-
tons 4 (193 ), as amended, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
In order to make them conform to the decson of the Unted States
Supreme Court n the case of aggar Company v. everng (308
IT. S., 389 ( anuary 2, 1940) Ct. D. 1433, page 237, ths uetn ).
Reguatons 4 (Capta Stock Ta ), approved ugust 15, 1933, Reg-
uatons 4 (Capta Stock Ta ), approved ugust 27, 1934, and Reg-
uatons 4 (Capta Stock Ta ), approved May , 193 , as amended
by Treasury Decson 4 7, approved uy 18, 193 C. . -2, 312
(193 ) , are amended as foows:
1. The ast sentence of the frst paragraph of artce 24 of Regua-
tons 4 (Capta Stock Ta ), approved ugust 15, 1933, s amended
to read as foows:
Ts vaue once havng been decared may not be changed ether by the corpo-
raton or by the Commssoner after the e praton of the statutory perod (or
any e tenson thereof) wthn whch the return s requred to be fed.
2. rtce 41 (d) of Reguatons 4 (Capta Stock Ta ), approved
ugust 27, 1934, s amended to read as foows:
(d) rst return means the capta stock ta return fed by a corporaton for
ts frst ta abe year.
3. The second sentence of artce 42(a) of Reguatons 4 (Capta
Stock Ta ), approved ugust 27,1934, s amended to read as foows:
treme care shoud be e ercsed by the corporaton n makng ths orgna
decared vaue, for the reason that when the vaue has been decared such vaue
can not be changed, amended, or corrected, ether b| the corporaton or by the
Commssoner after the e praton of the statutory perod (or any e tenson
thereof) wthn whch the return s requred to be fed.
4. rtce 21(/) of Reguatons 4 (Capta Stock Ta ), approved
May , 193 , s amended to read as foows:
( ) The term frst return means the capta stock ta return fed by a
corporaton for ts frst ta abe year under secton 105.
5. rtce 44( ) of Reguatons 4 (Capta Stock Ta ), approved
May , 193 . as amended by Treasury Decson 4 7, approved uy
18, 193 , s amended to read as foows:
(a) In Its frst return a corporaton must decare a defnte and unquafed
vaue for ts capta stock. treme care shoud be e ercsed n makng ths
orgna decared vaue, for the reason that f a return has been fed dscosng
n decared vaue, such vaue can not be changed, amended, or corrected, ether
by the corporaton or by the Commssoner after the e praton of the statutory
1940-22-10274
T.D. 4971
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237
Regs. 4(1933), rt. 24.
perod- (or any e tenson thereof) wthn whch the return s rpqured to be
fed. The mportance of the orgna decared vaue may be seen from the fact
that such orgna decared vaue forms the bass for the computaton of the
ta on capta stock n years subsequent to the frst ta abe year, and const-
tutes a prme factor In determnng the amount of ta mposed on e cess profts
nnder secton 10 of the Revenue ct of 1935.
Ths Treasury decson s prescrbed pursuant to secton 215 of the
Natona Industra Recovery ct, secton 701 of the Revenue ct of
1934, and secton 105 of the Revenue ct of 1935.
Guy T. everng,
Convmssoner of Interna Revenue.
pproved May 17, 19-10.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 20, 1940, 3.40 p. m.)
N TION L INDUSTRI L R CO RY CT (1933). S CTION 215(f).
Reouatons 4 (1933), rtce 24: d|usted 1940-3-10145
decared vaue. Ct. D. 1433
C PIT L STOC T N TION L INDUSTRI L R CO RY CT O 1933
D CISION O SUPR M COURT.
1. mendment of Return Meanng or Tebm rst Return.
The term frst return, as used n secton 21.r (f) of the Natona
Industra Recovery ct of 1933, means a capta stock ta return
for the frst year In whch the ta payer e ercses the prvege of
f ng ts capta stock vaue for ta purposes, and ncudes a tmey
amended return for that year. The term s used to dstngush the
return made for the frst year from the return for any subsequent
year, and does not mean the frst paper fed as a return.
2. Decson Reversed.
Decson of the Unted States Crcut Court of ppeas, fth
Crcut (1939) (104 . (2d), 24), affrmng decson of the Unted
States oard of Ta ppeas (1938) (38 . T. ., 141), reversed.
Supreme Court of the Unted States.
aggar Company, pettoner, v. uy T. everng, Commssoner of Interna
Revenue.
308 U. S., 389.
On wrt of certorar to the Unted States Crcut Court of pponR for the fth Crcut.
anuary 2, 1940.
OPINION.
Mr. ustce Stone devered the opnon of the Court.
Decson n ths case turns on the queston whether a capta stock ta return
fed pursuant to secton 215 of the Natona Industra Recovery ct of 1933
(48 Stat., 195, 207) may be amended wthn the tme f ed for fng the return.
Sectons 215 and 21 of the Natona Industra Recovery ct mpose nter-
reated ta es on domestc corporatons, namey an annua capta stock ta and
an annua ta on profts In e cess of 12 2 per cent of the capta stock, cacuated
on the bass of the vaue of the capta stock as f ed by the corporaton s return
for the frst year n whch the ta s mposed.
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Regs. 4(1933), rt. 24.
238
Secton 215(a) mposes on domestc corporatons an annua ta wth respect
to carryng on or dong busness for any part of the ta abe year at the rate
of 1 for each 1,000 of the ad|usted decared vaue of ts capta stock.
Secton 215(f) provdes that or the frst year endng une 30 n respect of
whch a ta s mposed by ths secton upon any corporaton, the ad|usted
decared vaue sha be the vaue, as decared by the corporaton n ts frst
return under ths secton (whch decaraton of vaue can not be amended),
as of the cose of ts ast ncome-ta ta abe year endng at or pror to the cose
of the year for whch the ta s mposed by ths secton. or any
subsequent year endng une 30, the ad|usted decared vaue n the case of
a domestc corporaton sha be the orgna decared vaue as changed by
certan prescrbed capta ad|ustments occasoned by ncreases and decreases
of capta occurrng after the date as of whch the orgna decared vaue
was decared. Secton 21 (a) mposes an annua ta upon so much of the net
ncome of a corporaton ta abe under secton 215(a) as s n e cess of 12
per cent of the ad|usted decared vaue of ts capta stock as of
the cose of the precedng ncome-ta ta abe year (or as of the date of organ-
zaton f t had no precedng ncome-ta ta abe year) .
It w be observed that by secton 215 (a) and (f) the decared vaue of
capta stock whch s made the bass of computaton of both ta es s not
requred to conform ether to the actua or to the nomna capta of the
ta -payng corporaton and that the decared vaue for the frst ta abe year,
wth the addton or subtracton of specfed tems of subsequent capta gans
or osses s made the bass of the computaton of both ta es n ater years.
The ta payer s thus eft free to decare any vaue of capta stock for ts frst
ta abe year whch t may eect, but snce the decared vaue for the frst year
s a controng factor for the computaton of ta es for ater years, the statute
provdes that the decaraton once made can not be amended. ecause of te
method of computaton, ncrease or decrease n the decared vaue of capta,
and of the correspondng ta , produces, as the case may be, a decrease or an
ncrease n the ta on e cess profts.
In ugust, 1933, pettoner, a Te as corporaton, mstakeny beevng that
t was requred to state the par vaue of ts ssued capta stock u ts ta
return, fed a tmey return for the year endng une 30, 1933, decarng the
vaue of ts entre capta stock to be 120,000 and pad the ta of 120. The
date for fng returns for that year havng been e tended to September 29,
1933 (Treasury Decsons 43 8 C. . II-1, 473 (1933) , 438 (O. . 1I-2, 404
(1933) ), pettoner before that date fed an amended return, decarng the
vaue of ts capta stock to be 250,000. On March 15, 1934, pettoner fed ts
ncome and e cess profts ta return for the caendar year 1933. The Comms-
soner, havng refused to accept the amended capta stock return, gave notce
of a defcency n the e cess profts ta cacuated upon the bass of the capta
stock vaue of 120,000 as decared n pettoner s orgna return.
The oard of Ta ppeas determned that pettoner s capta stock and
e cess profts ta shoud be computed on the bass of 120,000 capta stock vaue as
orgnay stated nstead of 250,000 stock vaue decared n ts amended return,
found a defcency, and entered ts order accordngy. (38 . T. ., 141.) The
Crcut Court of ppeas for the fth Crcut affrmed, hodng that secton 215(f)
by ts terms precuded any amendment of the ta return for the frst year even
though made wthn the tme aowed for fng the return. (104 . (2d), 24.)
We granted certorar October 9, 1939, to resove a confct of the decson beow
wth that of the Court of ppeas for the S th Crcut n Genn v. Oerte Co.
(97 . (2d), 495), and that of the Court of Cams n Phadepha rewng Co.
v. Unted States (27 ed. Supp., 583).
The Commssoner founds hs argument n support of the decson beow upon
a tera readng of the ntroductory sentence of secton 215(f) aready quoted,
whch, he argues, precudes even a tmey amendment of the ta return for
the frst year, and upon the admnstratve and congressona nterpretaton of
the statute. e nssts that the phrase frst return n the cause decared
vaue sha be the vaue as decared by the corporaton n ts frst return under
ths secton (whch decaraton of vaue can not be amended), means the frst
paper fed by the ta payer as a return, and that these words pany forbd any
amendment of the decared vaue of the capta stock, even though made wthn
the tme aowed for fng the return.
In makng these contentons the Commssoner concedes that the amount of
the decared vaue of capta f ed for the frst year s a matter of ndfference
to the Government snce the statute eaves the ta payer free to decare any
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239
Regs. 4(1933), rt. 24.
amount whch ts fancy may choose and that for any reducton n capta stock
ta effected by the decaraton of a ow vaue of the capta stock
there s an accompanyng ncrease n e cess profts ta es. e concedes that
f pettoner had fed but a snge return on the date of fng the amended
return, statng the vaue of the capta stock as 250,000 nstead of 120,000,
the Government woud have been concuded by the ta payer s decaraton and
that t has ong been the practce of the Department, n the cases of other
types of ta to accept an amended return, red wthn the perod aowed for
fng returns, as the return of the ta payer for the ta abe year. e concedes
aso, as he ogcay must, that the argument eads to the concuson that a
mstake n the decaraton of vaue whether of aw or of fact, however serous
and e cusabe, can not be corrected by a tmey amendment of the return.
statutes must be construed n the ght of ther purpose. tera readng
of them whch woud ead to absurd resuts s to be avoded when they can
be gven a reasonabe appcaton consstent wth ther words and wth the
egsatve purpose. ( awa v. ankch, 190 U. S., 197 Unted States v. atz,
271 U. S., 354 Sorrcs v. Unted Staes, 287 U. S., 435, 44 urnet v. Guggen-
hem, 288 U. S., 280, 285 Ct. D. 3( , C. . II-1, 374 (1933) : rmstrong Co.
v. u- name Corporaton, 305 U. 8., 315, 332-333.) ere the purtose of the stat-
ute s unmstakabe. It s to aow the ta payer to f for tsef the amount of the
ta abe base for purposes of computaton of the capta stock ta , but wth
the provso that the amount thus f ed for the frst ta abe year sha be
accepted, wth ony such changes as the statute prescrbes for the purpose of
computng the capta stock and e cess profts ta es n ater years. Congress
thus avoded the necessty of prescrbng a formua for arrvng at the actua
vaue of capta for the purpose of computng e cess profts ta es, whch had
been found productve of much tgaton under earer ta ng cts (see
Senate Report 52, S ty-nnth Congress, frst sesson, pages 11-12 cf. Ray
Consodated Copper Co. v. Unted States, 2 8 U. S., 373, 37 T. D. 3721, C. .
r -1, 333 (1925) ). t the same tme t guarded aganst oss of revenue to
the Government through understatements of capta, by provdng for an
ncrease n e cess profts ta under secton 21 ensung from such understate-
ments.
It s pan that none of these purposes woud have been thwarted and no
nterest of the Government woud have been harmed had the Commssoner, n
conformty to estabshed departmenta practce, accepted the pettoner s
amended decaraton. It s equay pan that by ts re|ecton pettoner has
been dened an opportunty to make a decaraton of capta stock vaue whch
t was the obvous purpose of the statute to gve, and that denn s for no
other reason than that the decaraton appeared n an amended nstead of an
unamended return. We thnk that the words of the statute, fary read n the
ght of the purpose, dscosed by ts own terms, requre no such harsh and
ncongruous resut.
Secton 215 nowhere mentons amendment of returns or amended returns.
It speaks of decared vaue for the frst ta year and provdes that the
decaraton of vaue can not be amended. The decaraton of vaue
s that of the corporaton n ts frst return under ths secton. The frst
return as the conte t shows s the return for the frst ta year of the ta payer
and the characterzaton of the return as frst s obvousy used to ds-
tngush the return made for the frst year f-om the return for any subse-
quent year n whch the ad|usted decared vaue s requred by the same
secton to conform to a formua based on the decared vaue for the frst
year and whch, for that reason, can not be amended.
rst return thus means a return for the frst year n whch the ta payer
e ercses the prvege of f ng ts capta stock vaue for ta purposes, and
ncudes a tmey amended return for that year. tmey amended return
s as much a frst return for the purpose of f ng the capta stock vaue
n contradstncton to returns for subsequent years, as s a snge return fed
by the ta payer for the frst ta year. (Genn v. Oertc Co., supra Pha-
depha rewng Co. v. Unted States, supra see aso, smary construng
he phrase frst return under secton 1 4(1 )4 of the Revenue ct of 1934
(48 Stat., 80, 710), C. . Mead Coa Co. v. Commssoner, 100 . (2d), 388,
390 cf. Pacfc Natona Co. v. Wech, 304 U. S.. 191. 194 Ct. I). 1337, C. .
1938-1, 2741.) Thus rend the statute gves fu effect to ts obvous purposes
and to the evdent meanng of ts words. To construe frst return as
meanng the frst paper fed as a return, as dstngushed from the paper
tontanng a tmey amendment, whch, when fed s commony known as tha
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Regs. 4(1933), rt. 24.
240
return for the year for whch t s fed, s to defeat the purposes of the statute
by dssocatng the phrase from Its conte t and from the egsatve purpose
n voaton of the most eementary prncpes of statutory constructon.
rtce 24 of Treasury Reguatons 4 (1933 ed.), under secton 215(f)
of the Natona Industra Recovery ct, n force when the pettoner fed
ts amended return, dd not ca for any dfferent constructon from that whch
we have ndcated s the correct one. The artce made no menton of the
frst return. It ponted out merey that the orgna decared vaue woud
be the bass of the ta for the frst and ater years, and stated Ths vaue
once havng been decared may not subsequenty be changed ether by the
corporaton or by the Commssoner. Ths evdenty refers to the paren-
thetca cause of secton 215(f) whch decaraton can not be amended
whch phrase concededy does not precude an effectve decaraton of vaue
n a tmey amended return.1
Sectons 215 and 210 of the Natona Industra Recovery ct were reenacted
as sectons 701 and 702 of the 1934 Revenue ct (48 Stat, 80, 7 9, 770). That
ct, secton 703, amended the Natona Industra Recovery ct so as to provde
that the capta stock ta and e cess profts ta Imposed by sectons 215 and 21
of the ct ast mentoned shoud not appy respectvey to any ta payer n any
year e cept the years endng une 30, 1933, and une 30, 1934. The amended
Reguatons 4 (1934 ed.), reatng to sectons 701 and 702 of the Revenue ct
of 1934, are prefaced wth the statement It must constanty be borne n mnd
that these reguatons reate ony to the ta mposed by secton 701 of the
Revenue ct of 1934. Wth respect to the ta Imposed by secton 215 of the
Natona Industra Recovery ct consut Reguatons 4, edton of 1933. Ths
warnng was repeated n Reguatons 4, 193 edton, under the correspondng
sectons 105 and 10 of the 1935 Revenue ct (49 Stat.. 1014, 1017-1019).
Snce the reguatons under the Revenue cts for 1934 and 1935 are thus
made nappcabe to the ta payer s stock return under the Natona Industra
Recovery ct for the year endng une 30, 1933, they are wthout force for
present purposes e cept as they are persuasve commentares on the meanng
of the anguage of secton 215(f) of the Natona Industra Recovery ct
whch was carred forward Into ater Revenue cts. rtce 41(d) of Treasury
Reguatons 4, pubshed under the 1934 ct, decared that rst return means
the frst capta stock ta return fed by a corporaton for ts frst ta abe
year, a defnton whch was contnued In artce 44 of Reguatons 4 (193
ed.), under the correspondng secton 105 of the Revenue ct of 1935. rtce
44 of the atter reguatons for the frst tme Informed ta payers that an effec-
tve decaraton of vaue for the frst ta year coud not be made In a tmey
amended return, sayng, subsequent return decarng a dfferent vaue, even
though fed before the e praton of the prescrbed perod, s therefore not
acceptabe under the statute.
On the argument the Commssoner admtted that ths rung served no ad-
mnstratve or governmenta convenence or purpose apart from compance
wth the supposed command of the statute. There s thus a compete absence
of those reasons whch ordnary ead courts to gve persuasve force to an
admnstratve constructon and whch |ustfy ther acceptance of t In prefer-
ence to ther own. The reguatons have not been consstent n ther nter-
pretaton of the statute and do not embody the resuts of any specazed depart-
menta knowedge or e perence. (Cf. rewster v. Oage, 280 U. S., 327, 33
Ct. D. 148, C. . I -1, 274 (1930) Stanford v. Commssoner of Interna Re-rr-
nue. No. 34. October term, 1939, decded November , 1939 Ct. D. 1420, C. .
1939-2, 340 .) No one, not even the Government, w be pre|udced by ts
re|ecton, and as we have sad the constructon fes In the face of the purposes
of the statute and the pan meanng of ts words. udca obesance to
admnstratve acton can not be pressed so far.
It s sad that Congress, by the change of the anguage of the capta stock
provsons adopted n the 1938 Revenue ct has attrbuted to the earer statute
the same meanng as that ascrbed to t by the admnstratve constructon. It
s famar doctrne that Congress, by rcenactng a secton of the Revenue ct
wthout change, approves and adopts a consstent admnstratve constructon of
1 The Government concedes n ts bref that the parenthetca cause whch decaraton
enn not te amended contnued n the capta stock ta secton, secton 01, of the 1038
Revenue ct (. 2 Stat.. 447, 5t 5), does not precude an effectve decaraton of vaue n a
tmey amended return for the frst ta year. If the phrase frst return n secton
21 (f) had that effect, then the parenthetca phrase concededy prohbtng amendments
In tn returns of ater years woud have been superfuous.
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241
Regs. 4(1933), rt. 24.
t. ut here the argument s that by amendment of the statute, whch woud
precude such a constructon In the future. Congress has aso decared that the
departmenta constructon was that ntended by the earer Congress whch
enacted the statute.
Secton 01 of the 1938 ct (52 Stat., 447, 5 5), n addton to other changes n
(he capta stock and e cess profts ta provsons, prescrbed that the ad|usted
decared vaue shoud be determned wth respect to 3-year perods, begnnng
wth the year endng une 30, 1938, and denomnated the frst year of each perod
a decaraton year. Secton 01(f)2 provded that the decared capta stock
vaue for purposes of the ta sha be the vaue as decared by the corporaton
n ts return for such decaraton year (whch decaraton of vaue can not
be amended). Snce, under the new egsaton, the return for the decaraton
year for each 3-year perod and not that for the frst ta year of the ta payer s
controng, there was no occason for repeatng the phrases frst year and
frst return whch had appeared n the earer egsaton and the new secton
dropped from the statute the words whch had gven rse to the earer admns-
tratve constructon. Ths was ponted out by the ouse commttee report
recommendng the amendment,1 statng that the change woud serve to permt the
ta payer to amend ts decaraton by tmey amendment of the return for the
decaraton year and addng, dena of a opportunty for correcton appears
unduy restrctve.
It must be assumed that Congress was aware through ts commttees of the
change n the reguatons whch n 193 had construed the statute as precudng an
effectve decaraton n a tmey amended return, and of the tgaton then
pendng n ths ease and n cnn v. Oerte, supra, n whch the departmenta con-
structon had been chaenged as unduy restrctve. In the face of the egs-
atve e presson of dssatsfacton wth the earer statute as construed, congres-
sona purpose to decare that such was the ntended meanng s not to be nferred
merey from the fact that the amendment provdng for the future sad nothng
as to the past. If we are to draw nferences t woud seem as probabe that
Congress was content to eave the probems of the past to be soved by the courts
where they were then pendng, rather than to precude ther souton there.
cton so ambguous n ts mpcatons as to the past s wantng n that certanty
and evdent purpose whch woud |ustfy ts acceptance as a egsatve decara-
ton of what an earer Congress had ntended rather than an effort to make cear
that whch had been rendered dubous by unwarranted admnstratve construc-
ton. (Cf. ordan v. Roche, 228 U. S., 43 , 445 everng v. New York Trust Co.,
292 U. S., 455 Ct. D. 840, C. . III-1, 188 (1934) Nobe v. Okahoma Cty,
297 U. S., 481, 492.) Retroactve decaratons of egsatve ntent pre|udca
to those who have acted under an earer statute whose constructon seems cear,
t woud seem, ought not to e Imped more than the egsatve ntenton to
gve retroactve operaton to a new statute. (See assett v. Wech, 303 U. S.,
303, 314 Ct. D. 1317, C. . 1938-1, 490 and cases cted cf. Noe v. Okahoma
Cty, supra.)
Reversed.
The new secton aso aevates the rgd provson of secton 105(f) of the 1935 ct
that the vauaton sha be as decared by the corporaton n ts frst return. rrors
of cacuaton or other errors sometmes occur n frst returns, and dena of n oppor-
tunty for correcton appears unduy restrctve. ccordngy, the word frst as t
appears the second tme n secton 105(f) of the 1035 ct. as amended, s emnated from
the correspondng anguage appearng n bsecton (f)(2) of the new secton. Ths w
serve to gve a corporaton the rght, so ong as t acts wthn the tme aowed for fng
ts return (ncudng the ast day of any e tenson perod) for the year for whch a decara-
ton of vaue Is requred, to fe subsequent returns for that year snowng a dfferent vaua-
ton, the vauaton shown by the ast tmey return beng bndng. (II. Rept. 18(10, Com-
mttee on Ways and Means, Seventy-ffth Congress, thrd sesson, page 2.)
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Regs. 4(1934), rt. 53.
242
TITL . C PIT L STOC ND C SS-PRO ITS
T S. (1934)
S CTION 701. C PIT L STOC T .
Reguatons 4 (1934), rtce 53: Carryng 1940-24-10293
on or dong busness. G. C. M. 220 9
( so Secton 215(b) of the Natona Industra Re-
covery ct and rtce 31 of Reguatons 4 (1933).)
foregn bankng corporaton whose actvtes consst merey of
purchasng and seng securtes n the Unted States through Its
correspondent n the Unted States s not carryng on or dong
busness n the Unted States wthn the meanng of the capta
stock ta provsons of Revenue cts pror to the Revenue ct of
193 . G. C. M. 17517 (C. . -2, 321 (193 )), revoked.
n opnon s requested whether G. C. M. 17517 (C. . -2, 321
(193 )) s affected by the decson of the Unted States Crcut Court
of ppeas for the Second Crcut n Unon Internatonae de Pace-
ments v. Ioey (9 . (2d), 591).
In G. C. M. 17517, supra, t was hed that the M Company, a foregn
bankng corporaton, n purchasng and seng securtes n the Unted
States through ts correspondent n the Unted States, was carryng
on or dong busness n the Unted States wthn the meanng of sec-
ton 215(b) of the Natona Industra Recovery ct and secton
701(b) of the Revenue ct of 1934, and was sub|ect to the capta
stock ta mposed by those cts.
The Unted States Crcut Court of ppeas for the Second Crcut
n Unon Internatonae de Pacements v. oey, supra, hed that the
purchase and sae of securtes n the Unted States by a foregn bank-
ng corporaton through ts New York correspondents dd not con-
sttute dong busness by such corporaton n the Unted States and
that the corporaton was not sub|ect to the capta stock ta mposed
by secton 215(b) of the Natona Industra Recovery ct and secton
701(b) of the Revenue ct of 1934.
Inasmuch as the facts presented n G. C. M. 17517, supra, are not
n any matera respect dfferent from those nvoved n the Unon
Internatonae de Pacements case, t s the opnon of ths offce that
the decson n that case s controng. ccordngy, t s hed that the
M Company (nvoved n G. C. M. 17517, supra) was not carryng on
or dong busness n the Unted States wthn the meanng of secton
215(b) of the Natona Industra Recovery ct and secton 701(b)
of the Revenue ct of 1934, and was, therefore, not abe for capta
stock ta . ccordngy, G. C. M. 17517, supra, s revoked.
Wth respect to such abty under ater Revenue cts t was hed
n G. C. M. 17014 (C. . -2,317 (193 )) that:
Where a foregn corporaton has a capta stock ta ta nbe year endng wthn
an ncome ta ta abe year controed by the Revenue ct of 193 . and such cor-
poraton has no offce or pace of busness wthn the Unted States, and Its ony
actvtes consst of effectng transactons n the Unted States In stocks, securtes,
or commodtes through a resdent broker, commsson agent, or custodan, such
corporaton s e empt from the capta stock ta mposed by secton 105(b) of
the Revenue ct of 1935, as amended.
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Regs. 4(1934), rt. 53.
Where a foregn corporaton has a capta stock ta ta abe year endng wthn
an ncome ta ta abe year controed by the Revenue ct of M4, as amended,
the provsons of secton 211(b) of the Revenue ct of 1 ).3( can not be used as a
test to determne whether the foregn corporaton s carryng on or dong busness
wthn the Unted States.
G. C. M. 17014, supra, shoud not be construed as hodng that a
foregn corporaton whch has a capta stock ta ta abe year endng
wthn an ncome ta ta abe year controed by any Revenue ct
pror to the Revenue ct of 193 s sub|ect to the capta stock ta
where ts actvtes consst merey of effectng transactons n the
Unted States n stocks, securtes, or commodtes through a resdent
broker, commsson agent, or custodan.
The rue ad down n G. C. M. 17014, supra, as to capta stock ta
abty n such a case under secton 105(b) of the Revenue ct of
1935, as amended, s equay appcabe under the Revenue ct of 1938
and the Interna Revenue Code.
. P. Wenche,
Chef Counse, ureau of Interna Revenue.
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5 38 244
CORPOR TION CIS T .
(C PIT L STOC T .)
Secton 38, Revenue ct of 1909. 1940-10-10193
Ct. D. 1443
e cse ta revenue act of 1909 decson of court.
Capta Stock Ta oregn Corporaton ngaged en usness n
Unted States.
foregn bankng corporaton whch contnuousy engaged n busness
actvtes on a arge scae n ths country through bankers, and broker-
age and nvestment houses n New York Cty athough t had no offce
or pace of busness or genera agent n ths country upon whom process
coud be served, was engaged In busness n the Unted States wthn
the meanng of secton 38 of the Revenue ct of 190 ) and therefore
sub|ect to the e cse tn mposed by that secton on the prvege of
carryng on or dong busness n the Unted States.
Court of Cams of the Unted States.
erner andeU-Geseschaft v. The Unted States.
30 . Supp., 490.
December 4, 1939.
OPINION.
Whaey, Chef ustce, devered the opnon of the court.
Pantff brngs ths acton to recover e cse ta es eved on ths foregn
corporaton by the Commssoner of Interna Revenue on the ncome of pan-
tff derved from engagng n busness n the Unted States durng the years
1909, 1910, 1911, 1912, and the frst two months of 1913, under secton 38 of
the Revenue ct of 1909, whch reads as foows:
That every corporaton, |ont-stock company or assocaton, organzed
for proft and havng a capta stock represented by shares, and every nsur-
ance company, now or hereafter organzed under the aws of the Unted
States or of any State or Terrtory of the Unted States or under the cta
of Congress appcabe to aska or the Dstrct of Coumba, or now or
hereafter organzed under the aws of any foregn country and engaged n
busness n any State or Terrtory of the Unted States or n aska or n
the Dstrct of Coumba, sha be sub|ect to pay annuay a speca e cse
ta wth respect to the carryng on or dong busness by such corporaton,
|ont-stock company or assocaton, or nsurance company equvaent to 1 per
centum upon the entre net ncome over and above . ,000 receved by t from
a sources durng such year, e cusve of amounts receved by t as dvdends
upon stock of other corporatons, |ont-stock companes or assocatons, or nsur-
ance companes, sub|ect to the ta hereby mposed or f organzed under the
aws of any foregn country, upon the amount of net ncome over and nbove
5,000 receved by t from busness transacted and capta Invested wthn the
Unted States and ts Terrtores, aska, and the Dstrct of Coumba durng
such year, e cusve of amounts so receved by t as dvdends upon stock of
other corporatons, |ont-stock companes or assocatons, or nsurance com-
panes, sub|ect to the ta hereby mposed.- (30 Stat., 112.)
Ths secton eves a capta stock ta on domestc and foregn corporatons
of 1 per centum upon the entre net ncome over and above 5,000 receved
by t from a sources durng such year and n the case of pantff
corporaton upon the amount of net ncome over and above 5,000 receved
by t from busness transacted and capta nvested wthn the Unted
States . Itacs ours.
The rea queston presented s, under the facts of ths case: Was the pan-
tff engaged n busness wthn the meanng of the foregong statute and
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245
therefore sub|ect to the e cse ta for engagng n busness n ths country
The Commssoner of Interna Revenue found thut pantff was sub|ect to
the ta and dened the cam for refund.
capta stock ta s a ta upon the prvege of dong busness n a cor-
porate capacty and s based on ncome derved from operatng as a corpora-
ton whereas an ncome ta s based on the recept of ncome however derved.
( nt y. Stone Tracy Co., 220 U. S., 107.)
The phrase engaged n busness s a most comprehensve term and embraces
everythng whch a corporaton may be engaged n for proft. When a corpora-
ton s organzed for the purpose of proft-makng actvtes, and engages n such
actvtes, t s sub|ect to the capta stock ta . It s not dened that pantff
engaged n numerous and sundry actvtes n the pursut of proft and gan and
f t were a domestc corporaton there coud be no queston that t was sub|ect
to the ta .
Pantff dd not engage n a snge actvty nor dd t engage n sporadc
actvtes, but, on the contrary, durng the years n queston ts actvtes were
contnuous and nvoved arge sums of money and numerous and sundry transac-
tons, a of whch were for the purpose of gan and proft. Pantff dd not
mantan an offce or pace of busness In the Unted States, ts Terrtores, or
possessons, and dd not have a genera agent n ths country. of ts pur-
chases and saes or other dsposton of securtes, ts coectons, and deposts of
nterest and dvdends, and the safekeepng of securtes were handed by bank-
ers, and brokerage and nvestment houses n New York Cty. No purchases, saes,
or other dsposton of such securtes were made wthout speca nstructons
from the bank n Iern. Pantff mantaned accounts n varous stock broker-
age houses n the cty of New Tork, severa of whch dd a prvate bankng bus-
ness. Pantff oaned moneys to these frms and at tmes borrowed from or
through them, payng and recevng nterest. It mantaned purchasng accounts
and gave ts orders for purchases and saes of securtes. It purchased stock on
|ont account wth another frm and n these transactons contrbuted over
2,000,000. Pantff entered nto a |ont account wth another frm for the pur-
pose of deang n New York Cty bonds. It acted onty wth others n a bankng
group, as read|ustment and syndcate managers, In the unon of two Me can
raway companes, partcpatng n the profts, osses, and commssons. It par-
tcpated n syndcates underwrtng the ssuance of new securtes upon the n-
vtaton of bankng and nvestment houses whch formed these syndcates. Pan-
rff advertsed n ths country for busness, gvng Its home address n ern.
It purchased and pad for, out of ts own funds, a mted partnershp for one of
ts offcers n agarten Co., but the profts earned by agnrten Co., to
whch ths mted partner was entted, were not pad to the mted partner, but
a of these profts were pad drecty to pantff.
corporaton can not enter nto a partnershp and therefore t was necessary
to name one of ts offcers as a partner but, as a matter of fact, and what actuay
occurred was, pantff provded the funds wth whch ths partnershp was pur-
chased and receved a the profts earned by ths partner who was an offcer of
pantff. In substance, pantff was the rea partner but, n form, the offcer of
pantff was named as the partner. agarten Co. receved and pad nterest,
oaned money, entered nto |ont accounts for deang n New York Cty bonds,
acted |onty wth other bankng groups as read|ustment and syndcate managers
n the unon of two Me can raway companes and partcpated n the profts,
osses, and commssons, n the proportons agreed upon, and kept on depost
securtes for pantff s account.
It s apparent from these many proft-makng actvtes through agarten
Co. and the vared nature of these transactons that ths company, n whch
pantff s offcer hed a mted partnershp, was the one through whch pantff
chefy conducted ts busness.
Pantff s soe contenton s that, havng no pace of busness In the Unted
States and no offce or agent n ths country, t s mmatera what amount of
busness t may do through severa bankers, brokerage and nvestment houses or
otherwu.se, and t s not engaged n busness because there s no one n ths
country on whom process may ssue. n e amnaton of the statute shows that
there s no dfference made between a domestc and a foregn corporaton whch
woud gve the atter a dstnct advantage over the former because of the fact
t dd not mantan an offce or agent or have a pace of busness n ths country.
We fee that the ntenton of Congress n evyng ths ta was to requre a
corporaton engaged n busness to pay for the prvege, rrespectve of the fact
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38.
24
of whether or not It mantaned a pace of busness or had an offce or agent n
ths country. It comes down to a queston of the amount of busness done.
snge actvty woud not consttute engagng n busness. ( mery, rd,
Thayer Reaty Co., 237 U. S., 28, 35.)
fut we have no such case here. It s admtted that durng the four years and
two months n queston pantff was contnuousy engaged n busness actvtes
of varous sorts nvovng mons of doars and numerous and frequent trans-
actons wth many frms and bunks.
Pantff many rees on the case of Unon Internatonae de Pacement v.
oey (9 ed. (2d), 591). The opnon was wrtten by Crcut udge Martn
Manton and athough the term engaged n busness s most comprehensve
for ta aton purposes, nevertheess, he hods t s essenta that a foregn corpo-
raton have a pace of busness or a branch offce or an agent or representatve n
ths country on whom process can be served, no matter how numerous and con-
tnuous ts actvtes n seekng gan and proft and how arge and mutfarous
ts nvestments, to sub|ect t to an e cse ta eved on foregn corporatons for the
prvege of dong busness. We do not fee that ths s sne-qua-nonca. The
actvtes of the pantff In the nstant case dffer so wdey from those n the
case decded by udge Manton that there s no parae.
It has been hed that each case shoud stand on ts own facts. In on aum-
oach v. Sargent Land Co. (242 U. S., 503, 51 ), n deang wth former cases, the
Supreme Court sad:
The far test to be derved from a consderaton of a of them s
between a corporaton whch has reduced ts actvtes to the ownng and hodng
of property and the dstrbuton of ts avas and dong ony the acts necessary
to contnue that status, and one whch s st actve and s mantanng ts
organzaton for the purpose of contnued efforts n the pursut of proft and gan
and such actvtes as are essenta to those purposes.
Pantff was not engaged soey n bankng busness, but ts transactons were
more e tensve and vared. (Dank of merca v. Whtney ank, 2 1 U. S., 171.)
There s not before us the queston of servce of process n order to gan urs-
dcton over pantff, but the rght to coect the e cse ta based on the prvege
to corporatons to engage In busness for the purpose of gan or proft.
We fee that the facts ceary show that the contnuous and actve partcpaton
n numerous and frequent transactons and varous busness undertakngs con-
sttuted beng engaged n busness, as defned by the statute, and, therefore,
the pantff can not recover and ts petton s dsmssed. It s so ordered.
Whtakeb, udge Wams, udge LnrmroN, udge and ueen, udge,
concur.
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247
Regs. 4 (1940), 31 .94.
M NU CTUR RS CIS ND IMPORT T S.
INT RN L R NU COD .
S CTION 3443. CR DITS ND R UNDS.
Where an overpayment of manufacturers e cse ta es was made
pror to October 1,1935. no nterest s aowabe on the refund of such
overpayment for any perod pror to October 1, 1035, even though the
refund was not aowed unt after the enactment of the Interna
Revenue Code.
dvce s requested whether nterest on an overpayment of manu-
facturers e cse ta es made pror to October 1, 1935, shoud be com-
puted under secton 3443(c) of the Interna Revenue Code or under
secton 21(c) of the Revenue ct of 1932, as amended by secton
401(c) of the Revenue ct of 1935, where the cam for refund of the
overpayment was not aowed by the Commssoner unt after ebru-
ary 10, 1939, the date on whch the Interna Revenue Code was
enacted.
The enactng provsons of the Interna Revenue Code provde n
part as foows:
Sec. 4. Repea and Savngs Provsons. (a) The Interna Revenue Tte,
s herenafter set forth, s ntended to ncude a genera aws of the Unted
States and parts of such aws, reatng e cusvey to nterna revenue, n force
on the 2d day of anuary 19: 9 (1) of a permanent nature and (2) of a temporary
nature f embraced n sad Interna Revenue Tte. In furtherance of that pur-
pose, a such aws and parts of aws codfed heren, to the e tent they reate
e cusvey to nterna revenue, are repeaed, effectve, e cept as provded n
secton 5, on the day foowng the date of the enactment of ths ct.
(b) Such repea sha not affect any act done or any ryht accrung or accrued,
or any sut or proceedng had or commenced n any cv cause before the sad
repea, but a rghts and abtes under sad nets hn contnue, and may he
enforced n the game manner, as f sad repea had not been made
Itacs supped.
Sec. 5. Contnuance of stno Law. ny provson of aw n force on the
2d day of anuary 1939 correspondng to a provson contaned n the Interna
Revenue Tte sha reman n force unt the correspondng provson under such
Tte takes effect.
Secton 3143(c) of the Interna Revenue Cede provdes as foows:
(c) Interest sha be aowed at the rate of per centum per annum wth
respect to any amount of ta under ths chapter credted or refunded, e cept that
no nterest sha be aowed wth respect to any amount of ta credted or
refunded under the provsons of subsecton (a) hereof.
(Subsecton (a) s not nvoved n ths case.)
Secton 21(c) of the Revenue ct of 1982 was amended by secton
401(c) of the Revenue ct of 1935 to read as foows:
(c) Interest sha be aowed at the rate of per centum per annum wth
respect to any amount of ta under ths tte credted or refunded,
e cept that no nterest sha be aowed for any perod pror to the 1st day of
the second month foowng the date of the enactment of the Revenue ct of 1935.
The Revenue ct of 1935 was enacted on ugust 30, 1935. Conse-
quenty, under secton 21(c) of the Revenue ct of 1932, as amended,
no nterest s aowabe for any perod pror to Octob r 1, 1935. It. s
Reguatons 4 (1940), Secton 31 .94: Credts
and refunds.
1940-19-10255
S. T. 900
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Regs. 4 (1940), 31 .94. 248
contended, however, that the rght to nterest dd not accrue unt the
date on whch the cam for refund was aowed, whch was after the
enactment of the Code, and that nterest shoud be pad under secton
3443 of the Code on the amount refunded.
The ta payer s rght to recover the overpayment of ta n queston
s a substantve rght whch arose when the overpayment of ta was
made. Such rght arose pror to ebruary 10,1939, the date of enact-
ment of the Interna Revenue Code, and was a rght accrung or
accrued wthn the meanng of secton 4(b), supra. y vrtue of
that secton, the ta pa| er s rght to obtan a refund of the overpayment
of ta was to contnue and be enforced, after the effectve date of the
Code, n the same manner as f secton 21(c) of the Revenue ct of
1932, as amended, had not been repeaed. ccordngy, the nterest
to be aowed on such a refund s to be determned by the provsons
of secton 21(c) of the Revenue ct of 1932, as amended, whch for
that purpose contnues to be current aw.
In vew of the foregong, t s hed that no nterest s aowabe on
the refund of such overpayment for any perod pror to October 1,
1935.
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249
Regs. 4 , rt. 41.
TITL I . M NU CTUR RS CIS T S. (1932)
S CTION 0 . UTOMO IL S, TC.
Reguatons 4 , rtce 41: Defnton of 1940-8-10182
parts or accessores. Ct. D. 1442
manufacturers e cse ta revenue act of 1932 decson of court.
Manufacturer or Producer utomobe Parts or ccessores
Use of Dscarded Connectng Rods n Producton of Rods
for Sae.
ta payer who obtans used automobe connectng rods whch
have been worn out and dscarded, dsmantes the same, savages
the usabe parts thereof, and by a seres of mechanca operatons
and processes combnes and assembes such usabe parts wth new
materas to produce connectng rods for sae, Is a manufacturer
or producer of automobe parts and s therefore sub|ect to the ta
mposed by secton 0 (c) of the Revenue ct of 1032.
Unted States Crcut Court of ppeas fob the Seventh Crcut.
Cawson d as, Inc., a Corporaton, pantff-appeant, v. Carter . arrson,
Coector of Interna Revenue n and for the rst Dstrct of Inos, de-
fend m t-a ppccc.
108 . (2d), 991.)
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of Inos,
astern Dvson.
December 13, 1939.
OPINION.
Teeanob, Crcut udge: Ths s an appea from the |udgment of the ds-
trct court dsmssng pantff-appeant s acton for the refund of 54,232.02,
assessed and pad by pantff, as manufacturer s e cse ta es and nterest.
The soe queston presented s whether saes of automobe connectng rods
by pantff were ta abe under the statute whch mposes a ta upon auto-
mobe parts sod by the manufacturer, producer or mporter thereof.
(Note. Subsectons (a) and (b) refer to automobes, automobe trucks, and
motorcyces.)
The ta payer s a corporaton authorzed under the aws of Inos to
manufacture, buy, se, e port and mport, dea n and dea wth a knds of
automobes and automobe accessores, and a other artces ncdent to auto-
mobes . It prepares connectng rods from stee forgngs, for sae
n the trade, and concedes that t s a manufacturer or producer wthn the
ta ng statute, of these connectng rods. It aso prepares rods from used
connectng rods whch have been dscarded and repaced by new rods, but
contends that n respect to these rods t s a reparer and not a manufacturer
or producer.
The rods n queston connect the pston head to the crank shaft, and serve
to transmt the power generated n the cynder to the crank shaft, beng
attached to the crank pn of the atter. There s a rng bearng made of a
babbtt meta, known as the crank shaft hearng, n the arge end of the
connectng rod, such bearng beng ncuded party wthn the cap and party
wthn the shank of the rod. The cap and shank are hed together by bots
1 Revenue ct of 1932 (ch. 209. 47 Stat, 1 9) :
Sec. GOG. Ta on utomobes, etc.
There s hereby mposed upon the foowng artces sod by the manufacturer, pro-
ducer, or mporter, a ta equvaent to the foowng percentages of the prce for whch
so sod:
(c) Parts or accessores (other than tres and nner tubes) for any of the artces
enumerated n subsecton (a) or b), 2 per centum.
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Regs. 4 , rt. 41.
250
and nuts. The smaer end of the rod Is known as the wrst-pn end and
appro matey haf of the rods prepared by pantff durng the ta abe perod
had bronze bushngs n the wrst-pn end. These bushngs are rng bearngs,
and for the rods whch have them they are |ust as mportant and ust as
necessary as the babbtt bearng at the arger, or crank shaft, end of the rod.
The ta payer obtans ts suppy of used rods chefy from |obbers or from
persons known n the trade as |unkes. When pantff receves the second-
hand rods they are unusabe as connectng rods because the babbtt bearngs
and bronze bushngs are worn and n many of the dscarded rods od shms
between the cap and shank must be repaced and the rods reagned. The
frst operaton Is to separate the cap and shank by the remova of two bots
and nuts. Usabe bots and nuts are not repaced n the caps and shanks
from whch they are removed but are thrown Into the genera mass of nuts
and bots, new and od. The shank and cap are separatey paced n a metng
pot where a of the od babbtt meta bearng s removed.
Ths ends the dsmantng process by whch the orgna used rod s reduced.
In form, to two peces of stee whch must be sub|ected to varous operatons,
ncudng machne work, n the process of beng prepared for sae as connectng
rods. ccordng to ta payer s wtness the processes and operatons consst of
grndng operatons, machnng operatons and assembng and combnng of
new wth od materas, a combnng of a materas, and the utzaton of
workmanshp and sk.
When the ta payer buys new forgngs from whch to prepare connectng
rods a forgng may consst of a snge unt or of two unts, one unt formng
a cap and the other the shank. If the forgng s n the form of a snge unt,
a porton of one end s sawed off to form the cap. ach new forgng s desgned
for a connectng rod for the motor of a partcuar make and mode of auto-
mobe and carres an dentfcaton mark and number. In the case of a new
forgng the necessary machne work requred to convert t nto a connectng
rod ncudes borng out the bg end and the sma end, drng the nwessary
bot hoes, performng of necessary mng work, cuttng off the cap f the
forgng s n one pece, and drng o reef hoes.
Ta payer s wtness testfed that when the forgng arrves at the babbttng
stage t undergoes substantay the same process and operatons as the used
rods. These operatons are performed by the same men and by the same
machnes.
The frst step n assembng the parts of the connectng rod conssts of fasten-
ng the cap and arm together but before ths s done some of the babbttng
operatons are performed. fu s apped to the nner surfaces of the sem-
crcuar openngs of the cap and shank to prepare the stee meta for a coatng
of tn, whch n turn acts as a bond for the babbtt meta and the stee cap and
shank. Ths s descrbed by a wtness as a bondng operaton. coatng of
fu s necessary to cause the tn to adhere to the stee and, n the words of
the wtness, that acts as a bond and makes the babbtt meta stck so t
becomes a part of the stee.
oowng the appcaton of the fu the arm and cap are separatey dpped
Into a pot contanng the moten tn then the cap and arm are put nto a ma-
chne wth the proper sze of mod and the moten babbtt meta s poured nto
the bearng openngs. The cap and arm are then sub|ected to a athng, or abras-
ng operaton for the purpose of removng the babbtt meta whch protrudes from
the respectve portons of the bearng rng n the cap and arm. Ths atter
operaton eaves an even surface and the cap and arm are assembed and
fastened together wth the bots and nuts, the bearng portons of the cap
and arm whch are thus brought together formng a perfect crce. n openng
s then dred through the babbtt meta, the openng beng appro matey
10/1000 of an nch smaer than the fnshed dameter of the bore, whch s
attaned by a broachng operaton. O grooves and channes are cut on the nsde
of the babbtt bearng for ong purposes and o hoes are dred through the
babbtt to connect wth o hoes n the stee cap or shauk. The assembed
rod f composed of parts of an od rod. s then paced on a pressng machne
where the od worn bushng s forced out and a new bushng forced n, the
bushng operaton beng requred for about 50 per cent of the connectng rods
prepared from used rods. In the case of connectng rods for ords the bushng
Is grooved on the Insde, the grove competey severng the bushng bearng
Into two parts. Twenty-one dfferent operatons are requred In the preparaton
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251
Regs. 4 . rt. 41.
of a usabe ord rod from a used connectng rod. The assembed rod Is ne t
checked for agnment and twst, a |g machne beng used for ths operaton
and any defect n agnment or twst s corrected.
In the course of announcng ts decson the dstrct court made the foowng
statement:
The court s of the opnon that what the pantff dd and what t s dong
s the manufacturng and producng of connectng rods from scrap. It s true
that the scrap may have sghty greater vaue than some other knds of scrap,
but t s st scrap, and when t s manufactured or produced by the pantff
t has reatvey much greater vaue than n ts scrap condton.
The stuaton here seems to be much ke the stuaton n the worn-out
tre case. Those worn-out tres ook ke tres. These worn-out connectng rods
undoubtedy ook ke connectng rods, and one can recognze that they have
been connectng rods, |ust as one can by ookng at a worn-out tre recognze the
fact that t has besn a tre. ut n each case, the artces are worn out
manufacturng process s, n the opnon of the court, requred to make a
servceabe product and n the case of the connectng rod, the pantff carres
on that manufacturng process.
We beeve that the foregong apty sums up the merts of the ease.
Pantff questons the appcaton of the term scrap to used rods and states
that there s nothng n the evdence from whch t can be determned what
the court meant by the term scrap. ut as reveaed by the foregong
e cerpt from ts memorandum the dstrct court meant by scrap smpy
worn-out connectng rods, automobe parts whch as a resut of use were
unft to perform the functon for whch they had been desgned, and whch
coud not perform ther orgna functon unt they had been remade n respect
to certan essenta aud most characterstc parts. The dstrct court concuded
that the operatons Invoved n ths process consttuted manufacturng or
producng wthn the meanng of the pertnent statutory provson.
Defendant-appeee ctes and recs strongy upon a decson of the Supremo
Court of Canada n Urte Tre Co. v. The ng. The anayss of the facts
aud the reasonng of the court as reveaed n the opnon are strongy per-
suasve that ou the facts of the nstant case the ta payer s a manufacturer or
producer of connectng rods. The egsatve enactment mposed an e cse duty
on tres n whoe or n part of rubber whch were manufactured or pro-
duced n Canada and sod. The busness practce of the Canadan ta payer
was to purchase n buk ots od and worn-out motor vehce tres and put them
through a process of repar, treatment and retreadng, for sae n the trade.
Throughout the process the sde wa of the tre was not dsmanted or de-
stroyed, the numerca dentfcaton of the orgna tre was not destroyed, and
the name of the manufacturer of the orgna tre was ceary marked upon ts
sde was, upon whch the ta payer aso marked a sera number. In the course
of treatment of the od tre the tread was removed and a new tread aff ed
hoes were patched, cement and pastc rubber preparaton utzed. The fna
resut of the treatment was that repars to hoes and bow-outs, the cementng
nsde and wthout, and the new tread, were frmy and permanenty aff ed to
the fabrc and sde was of the orgna tre. The Canadan court sums up
the whoe process as foows:
What the appeant dd was to remove part of the od or worn-out tre and
add to the remnant the pastc rubber preparaton. It woud appear thnt the
poston s the same as f the appeant had purchased an od or worn-out tre
whch had aready been treated by the vendor In the manner descrbed above,
down to and ncudng the cuttng off of the od tread. If then the appeant
had purchased from a thrd party the rubber preparaton and had apped the
atter and contnued wth the subsequent steps, coud t be suggested that the
artce n ts fna condton had not been produced or manufactured by the
appeant The defntons of words manufacture and produce as nouns or
verb , n the standard dctonares, ceary ndcate thnt such proceedngs woud
nsttute the appeant a manufacturer or producer. nd the mere fact that
the appeant has tsef performed the defned operatons on the od tre can
not e cude t from the operaton of the secton.
It s suggested that the od or worn-out tre dd not ose Its den-
tty qua tre and that, therefore, the appeant coud not be sad to have manu-
1937 Canada Law Rep., 3(U.
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Regs. 4 , rt. 41.
252
faetured or produced a tre. owever, when one bears In mnd the varous steps
taken by appeant and partcuary the state of the artce when the tread
was removed, t woud appear that appeant can not be any ess the manufac-
turer of a tre because t started wth somethng that had once been a usabe
tre than f, as suggested n the precedng paragraph, t had commenced wth
two substances purchased from dfferent sources.
s dscosed by the evdence n the nstant case the ta payer purchases the
dscarded connectng rods and by a dsmantng or dsassembng operaton re-
duces them to substantay the same physca condton as that of the new
forgngs when the hoes have been bored In them, preparatory to rebabbttng
and bushng operatons and to the combnng of the cap and arm. t that stage
the used connectng rod has been reduced n form to some of the parts of the
orgna connectng rod and n order to transform t nto a connectng- rod
there must be an assembng of these parts wth other materas whch are |nst
as essenta as the parts savaged from the od connectng rod and t s ony
by an assembng and combnng of the od and new parts and the addton of
new materas by a seres of mechanca operatons that a connectng rod s
produced. urthermore, the mechanca operatons and the processes of com-
bnng od wth new matera requred to make a saabe connectng rod out of
the usabe parts of an od connectng rod do not dffer substantay from those
requred to produce a saabe connectng rod from a fresh forgng, and the ta -
payer concedes that ths process s manufacturng or producng wthn the
Revenue ct.
There s obvous dffcuty n treatng the ta payer as a reparer n vew of
the norma concept of the reaton of a reparer to the repared artce. Ord-
nary a reparer furnshes abor and matera to the owner of some artce for
the purpose of restorng the artce to ts norma condton. The artce remans
the property of the one for whom the servce s performed. If ths ta payer s a
reparer t s a reparer of ts own property, not for the purpose of restorng
ts own property for effcent use n the ordnary operatons of the ta payer s
busness, but for the purpose of preparng the property for sae n the trade.
In the transactons between the ta payer and ts vendees the connectng rods,
whether prepared from new forgngs or from od connectng rods, are treated
as newy and freshy produced automobe accessores. Nether ta payer nor
the trade recognzes that the fnshed connectng rods are repared rods. Looked
at from the standpont of producton nnd dstrbuton n the trade the ta payer
Is performng the functon of a manufacturer rather than a reparer. The
ta payer s producng connectng rods for the trade n a very true sense and not
reparng od connectng rods for owners or users. The fact that the ta payer
coud perform for the owner of used connectng rods a of the mechanca opera-
tons whch It does perform under the facts of ths case, and st propery be
cassfed as a reparer, does not requre a hodng that the ta payer s a re-
parer when t purchases dscarded rods to be used as materas for combnaton
wth other materas of the ta payer, and by means of mechanca operatons
prepares what are, for a practca purposes, new connectng rods for sne n
the trade.
We concude that the dstrct court dd not err n hodng that the ta payer
was a manufacturer or producer of the connectng rods and sub|ect to the ta
mposed by secton 0 of the Revenue ct.
|udgment affrmed.
Reguatons 4 , rtce 41: Defnton of 1940-8-10183
parts or accessores. S. T. 89
( so Secton 02 and rtce 19.)
Persons who manufacture or produce automobe connectng rods
from used or worn-out connectng rods and new matera are man-
ufacturers or producers wthn the meanng of secton 0 of the
Revenue ct of 1032, and are sub|ect to ta under that secton
upon the saes of such connectng rods.
S. T. 0 (C. R. I-2, 47 , (1032)), S. T. 48 (C. R. II-1, 384
(1033)), and S. T. 812 (C. R. I -1, 40 (1035)) modfed.
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253
Regs. 4 , rt. 41.
The Unted States Crcut Court of ppeas for the Seventh Cr-
cut on December 13, 1939, n C awson tfe ah, Inc., v. arrson
(page 249, ths uetn), hed that the corporaton was ta abe as a
manufacturer or producer under secton G0 of the Revenue ct of
1932, wth respect to saes of automobe connectng rods manufac-
tured or produced by t from used automobe connectng rod forg-
ngs and new matera.
The tests apped by the court n reachng the concuson that the
corporaton was the manufacturer or producer of the connectng rods
nvoved are not whoy n accord wth the prncpes announced n
S. T. 00 (C. . I-2, 47 (1932)), reatng to rebut ta meters,
and S. T. 48 (C. . II-1, 384 (1933)) and S. T. 812 (C. .
I -1. 40 (1935)), reatng to retreaded and rebut tres. c-
cordngy, the foregong rungs are modfed to accord wth the
prncpes ad down by the court n the above-entted case.
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Regs. 71(1932), rt. 28.
254
ST MP T S.
INT RN L R NU COD .
S CTION 1802, S M ND D Y S CTION 1 O T R NU CT O
1939. C PIT L STOC ( ND SIMIL R INT R STS).
The entre ssue of new stock to carry out the recaptazaton of
the Corporaton s sub|ect to stamp ta under secton 1802(a)
of the Interna Revenue (. ode, as amended.
dvce s requested whether, under the crcumstances herenafter
stated, the entre ssue of new stock by the M Corporaton s sub|ect
to the stamp ta mposed by secton 1802(a) of the Interna Revenue
Code, as amended by secton 1 of the Revenue ct of 1939.
Secton 1802(a) of the Interm Revenue Code, as amended, m-
poses a stamp ta on each orgna ssue of shares or certfcates of
stock, or of profts, or of nterest n property or accumuatons, by any
corporaton .
rtce 29() of Reguatons 71, made appcabe to the provsons
of the Interna Revenue Code by Treasury Decson 4885 (C. .
1939-1 (Part 1), 39 ), provdes that The ssue by a corporaton of
certfcates of stock n e change for outstandng certfcates of ts own
stock where such e change s effected wthout the capta of the cor-
poraton beng ncreased, ether by transfer of surpus to capta ac-
count or otherwse, s not sub|ect to stamp ta .
In the present case, the M Corporaton, mmedatey pror to ts
recaptazaton, had outstandng 500 shares of capta stock havng a
par vaue of 100 a share or a tota par vaue of 50,000. In carry-
ng out the recaptazaton, the corporaton ssued 500 shares of new-
stock havng a par vaue of 75 a share n e change for the 500 shares
of the 100 par vaue stock outstandng, and transferred 12,500 from
the capta account to capta surpus by reason of the reducton n
par vaue ndcated and the corporaton aso ssued 500 shares of new
stock havng a par vaue of 75 whch t sod at 100 a share, thereby
resutng n an addton of 12,500 to the capta surpus account.
The recaptazaton effected an ncrease n the outstandng capta
stock from 50,000 to 75,000 and a capta surpus of 25,000.
In ths case t s cear that each stockhoder receved an nterest
n the new capta of the M Corporaton measured by the number of
shares hed. Thus, each certfcate of the new stock ssued const-
tuted a new certfcate of nterest n the newy ad|usted capta struc-
ture of the corporaton and, consequenty, was of a knd never before
ssued. Under the crcumstanceo, the entre ssue of 1,000 shares of
new stock by the M Corporaton consttutes an orgna ssue sub|ect
to the stamp ta mposed by secton 1802(a) of the Interna Revenue
Code, as amended.
Reguatons 71 (1932), rtce 28: Issues
sub|ect to ta .
1940-15-10231
S. T. 899
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255
Regs. 71(1932), rt. 2.
S CTION 1804. INSUR NC POLICI S.
Reguatons 71 (1932), rtce 2: Defntons. 1940-10-10192
S. T.898
n nsurance pocy ssued by the M Company, a foregn corpora-
ton, coverng some of the rsks specfed n secton 1804 of the
Interna Revenue Code, whch s n force from the tme the goods
eave the warehouse n a foregn country and contnues n force
after the goods are unoaded from the vesse at the fna port
unt the goods are devered at the destnaton n the Unted
States named n the pocy, s sub|ect to stamp ta .
dvce s requested whether the nsurance pocy herenafter de-
scrbed s sub|ect to the stamp ta mposed by secton 1804 of the
Interna Revenue Code, whch provdes for the mposton of a ta
as foows:
On each pocy of nsurance, or certfcate, bnder, coverng note, memo-
randum, cabegram, etter, or other nstrument by whatever name caed
whereby nsurance s made or renewed upon property wthn the Unted States
(ncudng rents and profts) aganst per by sea or on nand waters or n
transt on and (ncudng transshpments and storage at termn or way
ponts) or by fre, ghtnng, tornado, wndstorm, bombardment, nvason, n-
surrecton or rot, ssued to or for or n the name of a domestc corporaton
or partnershp or an ndvdua resdent of the Unted States by any foregn
corporaton or partnershp or any ndvdua not a resdent of the Unted
States, when such pocy or other nstrument s not sgned or countersgned by
an otcpr or agent of the nsurer n a State, Terrtory, or Dstrct of the
Unted S. ntes wthn whch such nsurer s authorzed to do busness, a ta
of 3 cents on each doar, or fractona part thereof of the premum
- harged .
The pocy was ssued by the M Company, a foregn nsurance
company, wth respect to a cargo shpped by a domestc corporaton
from a foregn port to a specfed destnaton n the Unted States.
The pocy was not sgned or countersgned by an offcer or agent
of the nsurer n a State, Terrtory or Dstrct of the Unted States
wthn whch such nsurer s authorzed to do busness. mong other
rsks, t nsures aganst nsurrecton, bombardment, and rot. One
of the causes of the pocy provdes n part as foows:
Ths nsurance attaches from the tme the goods eave the warehouse and/or
store at the pace named n the pocy for the commencement of the transt
and contnues durng the ordnary course of transt, ncudng customary trans-
shpment f any, unt the goods are dscharged oversde from the overseas
vesse at the fna port. Thereafter the nsurance contnues whst the goods
are n transt and/or awatng transt unt devered to fna warehouse at
the destnaton named n the pocy .
Snce (1) the pocy covers some of the rsks enumerated n sec-
ton 1804 of the Interna Revenue Code, namey, nsurrecton,
bombardment, and rot, (2) the nsurance contnues n force unt
the devery of the nsured goods at the destnaton n the Unted
States named n the pocy so that the nsurance s made or renewed
upon property wthn the Unted States, and (3) the pocy s not
sgned or countersgned by an offcer or agent of the nsurer n a
State, Terrtory, or Dstrct of the Unted States wthn whch such
nsurer s authorzed to do busness (see secton 1804 of the Code,
supra), t s sub|ect to the ta mposed under that secton.
The decson of the Unted States Crcut Court of ppeas for
the Second Crcut n mtorg Tradng Corporaton v. Unted States
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Regs. 71, rt. 94.
25
(103 ed. (2d), 339) does not appy to the nsurance here under con-
sderaton. The decson n that case s mted to nsurance whch
does not e tend beyond the tme the vesse s wthn the 3-me mt
and s beng unoaded. That condton s not present n the nstant
case.
S CTION 3482, S M ND D Y S CTION 1 O T R NU CT O
1939. CON Y NC S.
Reguatons 71, rtce 94: Deeds to a State. 1940-9-10183
S. T. 897
conveynnce of reaty to a oca housng authorty, whch Is an
Instrumentaty of ether a State or a potca subdvson thereof,
s not sub|ect to stamp ta .
dvce s requested whether conveyances of reaty to oca housng
authortes are sub|ect to stamp ta under secton 3482 of the Interna
Revenue Code, as amended by secton 1 of the Revenue ct of 1939.
Secton 3482, as amended, mposes a stamp ta on any Deed, nstru-
ment, or wrtng whereby any ands, tenements, or other
reaty sod sha be granted, assgned, transferred, or otherwse con-
veyed to, or vested n, the purchaser or purchasers when
the consderaton or vaue of the nterest or property conveyed, e cu-
sve of the vaue of any en or encumbrance remanng thereon at
the tme of sae, e ceeds 100 .
Pubc housng authortes are pubc corporate bodes, separate
and dstnct from the State or potca subdvsons thereof. They
are created pursuant to State aw and are authorzed to acqure and
by emnent doman, and to undertake and operate pro|ects for the
cearance of sums and the constructon of dweng accommodatons
for persons of ow ncome.
rtce 94 of Reguatons 71 reads as foows:
Deeds to a State. Deeds conveyng to a State rea estate purchased by t are
not sub|ect to ta .
though artce 94 refers to conveyances to State, t s hed that
the scope of the artce s not mted to a conveyance to the State
tsef but aso ncudes conveyances to a corporate nstrumentaty
of a State or a potca subdvson thereof.
It s hed that a conveyance of reaty to a oca housng authorty,
whch s an nstrumentaty of ether a State or a potca subdvson
thereof, s not sub|ect to stamp ta under secton 3482 of the Interna
Revenue Code, as amended.
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257
TITL 18 O T UNIT D ST T S COD .
S CTION 2 1 (CRIMIN L COD , S CTION 147). O LIG TION O
OT R S CURITY O T UNIT D ST T S D IN D. LSO S C-
TION 2 4 (CRIMIN L COD , S CTION 150).
1940-7-10174
S. T.895
ack and whte reproductons of canceed Unted States nterna
revenue stamps may be made, hed, and dsposed of, provded that
such reproductons are made, hed, and dsposed of as a part of
and n connecton wth the makng, hodng, and dsposton, for
awfu purposes, of the reproductons of the documents to whch
such stamps are attached.
S. T. 882 (C. . 1939-1 (Part 1), 3 2) modfed.
In S. T. 882 (C. . 1939-1 (Part 1), 3 2) t was hed (syabus) :
The reproducton of canceed or uncanceed Unted States revenue stamps,
n whoe or n part, by photographc or photostatc process s prohbted by
secton 150 of the Crmna Code, and s not permssbe under the provsons
of the ct of anuary 27, 103S (52 Stat., ).
The ctng Secretary of the Treasury on anuary 15, 1940, author-
zed the reproducton of canceed Unted States nterna revenue
stamps under certan specfed condtons. (Tte 31, Chapter I ,
Part 402, secton 402.2, Code of edera Reguatons, pubshed n
the edera Regster on anuary 18, 1940, page 220.) Secton 402.2
reads as foows:
Sec. 402.2. Reproductons authorzed. uthorty s hereby gven to make,
hod and dspose of back and whte reproductons of canceed Unted States
nterna revenue stamps, provded that such reproductons are made, hed and
dsposed of as a part of and n connecton wth the makng, hodng, and
dsposton, for awfu purposes, of the reproductons of the documents to whch
such stamps are attached.
In vew of the provsons of the authorzaton above quoted, back
and whte reproductons of canceed Unted States nterna revenue
stamps may be made, hed, and dsposed of, provded that such
reproductons are made, hed, and dsposed of as a part of and n
connecton wth the makng, hodng, and dsposton, for awfu
purposes, of the reproductons of the documents to whch such stamps
are attached.
S. T. 882, supra, s modfed to the e tent that t s nconsstent wth
the foregong.
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Regs. 98, rt. 42.
258
ITUMINOUS CO L CT O 1937.
S CTION 3.
Reguatons 98, rtce 42: ppcaton 1940-23-10283
of ta . Ct. D. 1457
( so rtce 22.)
CIS T ITUMINOUS CO L CT O 1937 D CISION O SUPR M
COURT.
1. Labty to Ta Non-Code Membebs.
Secton 3(b) of the tumnous Coa ct of 1937, mposng a ta
of 19 per cent on the sae or other dsposa of btumnous coa,
appes to producers who are not members of the tumnous Coa
Code but whose saes or other dsposas woud be sub|ect to the
appcaton of the condtons and provsons of such code.
2. Consttutonaty.
The tumnous Coa ct of 1937, provdng for the reguaton
of the sae and dstrbuton of btumnous coa by the Natona
tumnous Coa Commsson, ts purpose beng the stabzaton of
the ndustry and the emnaton of unfar competton, s const-
tutona. Secton 3 (a) and (b) of the ct, mposng e cse ta es
upon the sae or other dsposton .by the producer of btumnous
coa, s not nvad because of the purpose and effect of the ta .
The reguatory provsons of the ct are ceary wthn the power
of Congress under the commerce cause of the Consttuton, and
Congress may snge out for separate treatment a partcuar ndus-
try and thereby remove the penates of the Sherman ct as
respects t the ct does not voate the ffth amendment nor
does t contan an nvad deegaton of egsatve power n f ng
prces or of |udca power n deegatng to an admnstratve
agency the determnaton of the queston whether a partcuar
coa producer fe wthn the terms of the ct.
3. authorty of the natona btumnous coa commsson to
Determne Status of Coa Res udcata.
The Natona tumnous Coa Commsson has authorty to
determne the status of coa, and ts determnaton that appeant s
coa was btumnous as defned n secton 17(b) of the ct,
whch determnaton was affrmed n a sut brought aganst the
. Commsson, s res |udcata n a subsequent sut aganst the co-
ector to en|on coecton of the ta the ssues n the separate
suts beng the same and there beng prvty between the partes
defendant, offcers of the same government.
Supreme Court of thf Unted States.
The Sunshne nthracte Coa Co., appeant, v. omer M. dkns, as Coector
of Interna Revenue for the Dstrct of rkansas.
0 S. Ct., 907.
ppea from the Dstrct Court of the Unted States for the astern Dstrct of rkansas.
May 20. 1940.
OPINION.
Mr. ustce Dougas devered the opnon of the Court.
The abor provsons of the tumnous Coa Conservaton ct of 1935 (49
Stat., 901) were hed unconsttutona by ths Court n Carter v. Carter Coa
Co. (298 U. S., 238). The tumnous Coa ct of 1937 (50 Stat., 72) was
thereupon enacted. It emnated those provsons of the earer ct and made
other substantve and structura changes.1 The basc probem here nvoved
s the consttutonaty of the 37 ct.
1 . Report No. 204, Seventy-fth Congress, frst sesson, pages 2-3.
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259
Regs. 98, rt. 42.
That ct provdes for the reguaton of the sae and dstrbuton of btumnous
coa by the Natona tumnous Coa Commsson wth the cooperaton of
the btumnous coa ndustry. Its am s the stabzaton of the Industry
prmary through prce-f ng and the emnaton of unfar competton. It
s provded n secton 4 that the coa producers, acceptng membershp, sha
be organzed under the tumnous Coa Code. Some 20 dstrct boards of
code members are provded for, whch are to operate as an ad to the Commsson
but sub|ect to ts pervasve surveance and authorty. The statute specfes
n deta the methods of ther organzaton and operaton, the scope of ther
functons, and the |ursdcton of the Commsson over them. The Commsson
s empowered to f mnmum prces for code members n accordance wth
stated standards. Under secton 4, 11(a) each board sha on Its own moton
or when drected by the Commsson propose mnmum prces pursuant to
prescrbed statutory standards. These may be approved, dsapproved, or
modfed by the Commsson as the bass for the coordnaton of mnmum
prces. Somewhat comparabe machnery s provded for such coordnaton
of mnmum prces n common consumng market areas upon a far compet-
tve bass (secton 4, 11(b)), and for estabshment of rues and reguatons
ncdenta to the sae and dstrbuton of coa by code members. (Secton 4,
11(a).) The Commsson s aso gven power by secton 4, 11(c) to estabsh
ma mum prces for code members pursuant to standards prescrbed theren.
The sae, devery, or offer for sae of coa beow the mnmum or above the
ma mum prces estabshed by the Commsson s made a voaton of the
code. (Secton 4, 11(e).) So are numerous practces, specfed n secton 4,
II() as unfar methods of competton. nd contracts for the sae of coa
at prces beow the prescrbed mnmum or above the ma mum are nvad
and unenforceabe. (Secton 4, 11(e).) The Commsson may, after hearng,
revoke the code membershp of any coa producer for wfu voaton of the
code or of any reguaton made thereunder. (Secton 5(b).)
Secton 3(a) mposes an e cse ta of 1 cent per ton of 2,000 pounds upon
the sae or other dsposton by the producer of btumnous coa produced
n the Unted States. Secton 3(b) mposes an addtona 19 per cent ta
(based on sae prce or n certan cases on far market vaue) on saes of
btumnous coa by producers whch woud be sub|ect to the appcaton of
the condtons and provsons of the code provded for n secton 4, or of the
provsons of secton 4- . Producers who are members of the code are
e empt from that ta . s we sha see, the nterpretaton of secton 3(b)
s a sub|ect of controversy. ut f, as the Government contends, the 19
per cent ta s appcabe to saes by nonmembers, there are strong nducements
for |onng the code.
Machnery s provded n secton 4- for obtanng e emptons. producer
who beeves that any commerce n coa s not, or may not be made, sub|ect to
the provsons of secton 4 may fe an appcaton for e empton wth the Com-
msson. Sub|ect to quafcatons not matera here, the fng of such appcaton
n good fath e empts the appcant from any obgaton, duty or abty
mposed by secton 4 pendng acton by the Commsson on the appcaton. The
Commsson sha grant the appcaton or, after notce and opportunty for hear-
ng, sha deny or otherwse dspose of t. n appcant aggreved by such dena
or other dsposton may obtan a revew of the order n the Court of ppeas
for the Dstrct of Coumba or n the Court of ppeas n the crcut where
he resdes or has hs prncpa pace of busness. (Secton (b).) The fndngs
of the Commsson as to the facts, f supported by substanta evdence, are
concusve.
Though we refer throughout to the Commsson t shoud be noted that ts functons
have been admnstered snce uy 1. 1939. by the tumnous Coa Dvson of the Depart-
ment of the Interor. (Reorganzaton Pan No. II. secton 4 (a) and (b), submtted by
the Presdent to the Congress May 9, 1939. Pubc Resouton No. 20, Seventy-s th
Congress, frst sesson, chapter 193, approved une 7, 1939.)
These provsons are now found In secton 3520 of the Interna Revenue Code. (53
Stat.. 430.) The 1 cent ta was apparenty desgned to cover the admnstratve costs of
the ct. See II. Report No. 294, supra note 1, pages 2-3, recommendng a one-haf per
cent ta whch n conference was changed to 1 cent per ton. (II. Report No. 578, Seventy-
ffth Congress, frst sesson, page 5.)
Secton 4, as we have seen, governs the consttuton and operaton of the code. Secton
4- provdes, nfer aa, that the Commsson sha sub|ect coa In ntrastate commerce
to the provsons of secton 4 If It fnds after hearng that transactons n that coa cause
any undue or unreasonabe advantage, preference, or pre|udce as between persons and
ocates In such commerce on the one hand and nterstate coa on the other hand, or any
undue, unreasonabe, or un|ust dscrmnaton aganst nterstate commerce n coa, or n
any manner drecty affect nterstate commerce In coa.
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Regs. 98, rt. 42.)
2 0
ppeant Is essee of coa ands n rkansas and Is engaged In the busness
of mnng and shppng coa. It has not subscrbed to or accepted the pro-
vsons of the tumnous Coa Code provded for n secton 4 of the ct In
ugust, 1937, t fed an appcaton for e empton on the grounds that ts coa
was not btumnous coa as defned n secton 17(b) of the ct. The Commsson
hed a pubc hearng on that appcaton n October, 1937. ppeant appeared,
ntroduced evdence, and was heard on ora argument before the Commsson.
In ugust, 1938, the Commsson handed down an opnon wth fndngs of
fact and concusons of aw and entered an order denyng appeant s appca-
ton for e empton on the grounds that ts coa was btumnous wthn the
meanng of secton 17(b). ppeant obtaned a revew of ths order n the crcut
court of appeas. That court hed that the Commsson had |ursdcton to de-
termne the status of coa camed to be e empt and that the Commsson s
decson was based on substanta evdence. It accordngy affrmed the order.
(Sunshne nthracte Coa Co. v. Natona tumnous Coa Commsson, 105 .
(2d), 559). We dened certorar. (308 U. S., 04.)
In May, 1938, whe the above proceedng was pendng before the Comms-
son, appeee demanded that appeant pay the ta es, penates and nterest
accrung under secton 3(b) of the ct for the perod endng ebruary, 1938
and fed a notce of ta en aganst appeant s property. Thereupon appeant
fed ts compant n ths sut to en|on the coecton of the ta . three- udge
court was convened, whch Issued a temporary n|uncton. pparenty no
further acton was taken n ths case unt after the decson of the crcut
court of appeas n Sunshne nthracte Coa Co. v. Natona tumnous Coa
Commsson, supra, when appeee fed a suppementa answer statng that
the decson n that case was res |udcata as to the status of appeant s coa
under the ct and that the dstrct court had no |ursdcton over that sub|ect
matter. The court beow dened appeant s moton to strke that porton of
the answer. (31 . Supp., 125.) The case was tred. The court hed the ct
to be consttutona and dsmssed the b on the merts. The case s here on
appea (50 Stat., 752 28 U. S. C. ., secton 380(a)).
I. ppeant argues that t s not sub|ect to the 19 per cent ta mposed
by secton 3(b) because that secton does not appy to producers who are not
members of the code. Its argument rests on the constructon of secton 3(b)
and secton 4. s we have seen, the former paces the 19 per cent ta on the
sae or other dsposton of coa whch woud be sub|ect to the appcaton of
the condtons and provsons of the code provded for n secton 4, or of the
provsons of secton 4- . Secton 4 provdes that the provsons of such
code sha appy ony to such code members. ppeant therefore contends
that the ta s not appcabe to ts coa, snce the coa produced by a non-code
producer such as appeant s not sub|ect to the provsons of the code.
ut f the 19 per cent ta s not appcabe to non-code members, t s not
appcabe to anyone snce secton 3(b) e empts code members from that ta .
That constructon woud read the 19 per cent ta out of the ct. The
r ssenta sancton of the ct woud then dsappear and ts effectveness woud
be serousy Impared. That aternatve w not be taken where a construc-
ton s possbe whch w preserve the vtaty of the ct and the utty of
the anguge n queston. (See rmstrong Pant arnsh Works v. Nu- namc
Corporaton, 305 U. S., 315, 333, and cases cted.) Ony a hghy straned con-
structon of secton 3(b) woud ead to the concuson that non-code members
are e empt from the 19 per cent ta . It seems that Congress made a de-
s Secton 17(b) provdes: The term btumnous ro Incudes n btumnous, sem
btumnous, and subbtumnous con and sha e cude gnte, whch s defned as a cnte
coa havng caorfc vaue n rtsh therma unts of ess than 7. 00 per pound and hav-
ng a nntura mosture, content In pace n the mne of 30 per centum or more.
Ths bearng was not restrcted to appeant s appcaton. Other producers n the
same fed Intervened.
The bera notce and opportunty to be heard afforded appeant nre Iustrated by
the foowng: In anuary, 1 3S, the report of the e amner was served on nppeant. In
May, 1938, a proposed report of the Commsson was Issued gvng appeant 30 dnys to
fe e ceptons and brefs and n that event to appy for ora argument. ppeant fed
e ceptons and asked for ora argument. Notce of ora argument was Issued and ora
argument was-had. Thereafter the Commsson ssued Its order denyng the appcaton.
8 It granted, however, a permanent n|uncton aganst coecton of ta es pror to
December 4, 1930, the date on whch ths Court dened a petton for rehearng on the
petton for certorar. (308 II. 8. 38.) ppeee has not appeaed from that part of
the decree. The Court aso granted a stay wth respect to coecton of ta es accrung
after December 4, 1939, pendng fna dsposton of ths appea.
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Regs. 98, rt. 42.
berate choce of words when t sad that the ta apped to the sae or other
dsposton of coa whch woud be sub|ect to secton 4 and secton 4- .
Secton 4 s made e pressy appcabe ony to matters and transactons n or
drecty affectng nterstate commerce n btumnous coa. ence t seems pan
that the ta was ntended to appy ony to those saes by non-code members
whch woud be sub|ect to reguaton under secton 4. ppeant s coa
pany fas n that cass snce practcay ts entre output s sod to purchasers
outsde the State of rkansas. To sustan appeant s poston we woud not
ony have to substtute s for woud be we woud have to overrde the
e press Congressona pan to make the a per cent ta In ad of the regua-
ton of nterstate commerce n btumnous coa. That woud be not ony to
rewrte secton 3(b) but to remake the whoe statutory scheme. Obvousy
such a task s not for the courts.
II. ppeant chaenges the consttutonaty of the ct on the grounds that
the 19 per cent ta s not a ta but a penaty, that Congress acks the power
to f mnmum prces for btumnous coa sod n nterstate commerce, that
there has been an nvad deegaton of egsatve and |udca power, and that
the dvson of btumnous coa nto code and non-code casses s mproper.
Ceary ths ta s not desgned merey for revenue purposes. In purpose and
effect t s prmary a sancton to enforce the reguatory provsons of the ct.
ut that does not mean that the statute s nvad and the ta unenforceabe.
Congress may mpose penates n ad of the e ercse of any of ts enumerated
powers. The power of ta aton, granted to Congress by the Consttuton, may be
utzed as a sancton for the e ercse of another power whch s granted t.
ead oney Cases, 112 U. S., 5S0, 09 . nd see Sonznsky v. Unted Stutcs,
300 . S., 500 Ct D. 1217, C. . 1937-1, 301 .) It s so utzed here.
The reguatory provsons are ceary wthn the power of Congress under
the commerce cause of the Consttuton. These provsons are appcabe ony
to saes or transactons n, or drecty or ntmatey affectng, nterstate com-
merce. The f ng of prces, the proscrpton of unfar trade practces, the
estabshment of marketng rues resectng such saes of btumnous coa con-
sttute reguatons wthn the competence of Congress under the commerce
cause. s stated by Mr. ustce Cardozo n hs dssent n Carter v. Carter
Coa Co., supra, page 32 , To reguate the prce for such transactons
s to reguate commerce tsef, and not aone ts antecedent condtons or
ts utmate consequences. (See Tagg ros, d Moorhcad v. Unted Sates,
280 U. S., 420.) What s true of prces s true of the attachment of other
condtons to the fow of a commodty n nterstate channes. (Muford v.
Smth, 307 U. S., 38 and cases cted.) Snce ths power when t e sts s com-
pete n tsef ( bbons v. Ogdcn, 9 Wheat., 1, 19 ), there can be no queston
but that the provsons of ths ct are an e erton of the paramount edera
power over nterstate commerce. (See Unted States v. Rock Roya Co-opera-
tve. Inc., 307 U. S., 533.)
Nor does the ct voate the ffth amendment. Prce contro s one of the
means avaabe to the States (Nebba v. eo York, 291 U. S., 502) and to the
Congress (Unted States v. Rock Roya Co-operatve. Inc., supra) n ther re-
spectve domans ( adwn v. O. . . Sreg, Inc., 294 U. S., 511) for the pro-
tecton and promoton of the wefare of the economy. ut appeant cams
that ths ct s not an approprate e ercse of the Congressona power. It
urges that the nature and use of btumnous coa n nowse endanger the
heath and moras of the popuace that no queston of conservaton s nvoved
that the s of the ndustry are attrbutabe to overproducton that the n-
crease of prces w cause a further oss of markets and add to the affctons
whch beset the ndustry and that the consumng pubc w be deprved of the
whoesome restrcton of the ant-trust aws. Those matters, however, reate
to questons of pocy, to the wsdom of the egsaton, and to the approprate-
ness of the remedy chosen matters whch are not our concern. If we en-
deavored to apprase them we woud be trespassng on the egsatve doman.
nd f we undertook to narrow the scope of edera nterventon n ths fed,
as suggested by appeant, we woud be bnd to at east 30 years of hstory.
or a generaton there have been varous manfestatons of ncessant demand
. Report, No. 294, supra, note 1, states concernn ths ta (pace 4) : Under sub-
secton (b) n ta of 19 per rent Is apped to coa whch woud be sub|ect to the pro-
vsons n secton 4 or the provsons of secton 4 . Producers who are code members are
e empt from ths ta . Ths ta s ntended to be n ad of the reguaton of nterstate
commerce n coa provded for n sectons 4 and 4 .
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Regs. 98, rt. 42.
2 2
for edera nterventon n the coa ndustry. The nvestgatons precedng
the 1935 and 1937 cts are repete wth an e poston of the condtons whch
have beset that ndustry. Offca11 and prvatea records gve eoquent test-
mony to the statement of Mr. ustce Cardozo n the Carter case (page 330)
that free competton had been degraded nto anarchy n the btumnous
coa ndustry. Overproducton and savage, compettve warfare wasted the
ndustry. Labor and capta ake were the vctms. nanca dstress among
operators and acute poverty among mners prevaed even durng perods of
genera prosperty. Ths hstory of the btumnous coa ndustry s wrtten n
bood as we as n nk.
It was the udgment of Congress that prce f ng and the emnaton of
unfar compettve practces were approprate methods for preventon of the
fnanca run, ow wages, poor workng condtons, strkes, and dsrupton of
the channes of trade whch foowed n the wake of the demorazed prce
structures n ths ndustry. If the strategc character of ths ndustry n oar
economy and the chaotc condtons whch have prevaed n t do not ustfy
egsaton, t s dffcut to magne what woud. To nvadate ths ct we
woud have to deny the e stence of power on the part of Congress under the
commerce cause to dea drecty and specfcay wth those forces whch n Its
udgment shoud not be permtted to dsocate an mportant segment of our
economy and to dsrupt and burden nterstate channes of trade. That step
coud rot be taken wthout pan dsregard of the Consttuton. There are
mts on the powers of the States to act as respects these nterstate ndus-
tres. adwn v. G. . . Sceg, Inc., supra.) If the ndustry actng on
Its own had endeavored to stabze the markets through prce-f ng agree-
ments, t woud have run afou of the Sherman ct. Unted States v. Socony-
acuum O Co., Inc., 309 U. S., .) ut that does not mean that there s a
no man s and between the State and edera domans. Certany what Con-
gress has forbdden by the Sherman ct t can modfy. It may do so, by
pacng the machnery of prce f ng n the hands of pubc agences. It may
snge out for separate treatment, as t has done on varous occasons, a par-
tcuar ndustry and thereby remove the penates of the Sherman ct as
respects t. Congress under the commerce cause s not mpotent to dea wth
what t may consder to be dre consequences of assez fare. It s not power-
ess to take steps n mtgaton of what n ts udgment are abuses of cut-
throat competton. nd t s not mted n ts choce between unrestraned
sef-reguaton on the one hand and rgd prohbtons on the other. The com-
merce cause empowers t to undertake stabzaton of an nterstate ndustry
through a process of prce f ng whch safeguards the pubc nterest by pacng
prce contro n the hands of ts admnstratve representatve. (Unted State
v. Rock Roya Co-operatve, Inc., supra.) That was the choce whch Congress
made here. There s nothng n the Carter case whch stands n the way.
The ma|orty of the Court n that case dd not pass on the prce-f ng features
of the earer ct. The Chef ustce and Mr. ustce Cardozo n separate
mnorty opnons e pressed the vew that the prce-f ng features of the
earer ct were consttutona. We rest on ther concusons for sustanng the
present ct.
Nor does the ct contan an nvad deegaton of egsatve power. Under
ecton 4, 11(c) the Commsson may f ma mum prces when n the pubc
nterest t deems t necessary n order to protect the consumer aganst unrea-
sonaby hgh prces. These ma mum prces must be f ed at a unform
Increase above mnmum prces so that n the aggregate they w yed a
reasonabe return above the weghted average tota cost of the dstrct. nd
no ma mum prce sha be estabshed for any mne whch w not yed a
far return on the far vaue of the property. The mnmum prces to be f ed
must conform to the foowng standards: the weghted average cost for each
mnmum prce area must be computed, the eements of cost beng defned
Natona Resources Commttee, nergy Resources and Natona Pocy (1939). pages
-123, 338-34 , 40.1-423.
earngs on II R. WTO. Seventy-fourth Congress, frst sesson.
Natona Resources Commttee. nergy Resources and Natona Pocy, supra, note 10:
. Report No. 1800, Seventy-fourth Congress, frst sesson, coverng the 1935 ct: S.
Report No. 2 2. II Report No. 294, Seventy ffth Congress, frst sesson, coverng the 1937
ct: ppaachan Coas, Inc., v. Unted States (288 I S 344) Thrd nnua Report
Under the tumnous Coa ct of 1937 11940), pages 4-5.
u amton Wrght. The Case of tumnous Coa (192 ) : ReDort of the fteenth
nnua Meetng of the Natona Coa ssocaton, October, 1934, pages 9-11, 9 97.
See Unted States v. Soeony-Tacuum O Co., Inc., supra, page .
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Regs. 98, rt. 42.
a cassfcaton of the varous szes and grades of coa sha be made whch
refects as neary as possbe the reatve market vaue of the varous knds,
quates, and szes of coa, whch s |ust and equtabe as between producers
wthn the dstrct and whch has due regard to the nterests of the consum-
ng pubc and coordnated mnmum prces sha be estabshed for such C( a
(a) whch refect as neary as possbe the reatve market vaues at ponts of
devery takng nto account specfcay enumerated factors, ( ) whch pre-
serve as neary as may be e stng far compettve opportuntes, (c) whch
are |ust and equtabe as between the dstrcts, and (d) whch, consstenty
wth the process of coordnaton, yed a return to each area appro matng
Its weghted average cost per ton.
The probem of f ng reasonabe prces for btumnous coa can not be df-
ferentated egay from the task of f ng rates under the Interstate Commerce
ct (41 Stat., 484, 49 U. S. C. ., secton 15) and the Packers and Stockyards
ct (42 Stat, 1 , 7 U. S. C. ., secton 211). The atter provde the standard
of |ust and reasonabe to gude the admnstratve body n the rate-makng
process. The vadty of that standard (Tagg ros. t Moorhead v. Unted
States, supra), the approprateness of the crteron of the pubc nterest n
varous conte ts (Neto York Centra Securtes Corporaton v. Unted States,
2S7 U. S., 12, 24 Unted States v. Chemca oundaton, Inc., 272 U. S., 1
vent v. Unted States, 2 U. S., 127), the egaty of the standard of unrea-
sonabe obstructon to navgaton (Unon rdge Co. v. Unted States, 204
D. S., 3 4) a make t cear that there s a vad deegaton of authorty n
ths case. The standards whch Congress has provded here far e ceed n
specfcty others whch have been sustaned. Certany n the hands of e perts
the crtera whch Congress has supped are whoy adequate for carryng out
the genera pocy and purpose of the ct. To requre more woud be to nsst
on a degree of e acttude whch not ony acks ega necessty but whch does
not comport wth the requrements of the admnstratve process. Deegaton
by Congress has ong been recognzed as necessary n order that the e erton
of egsatve power does not become a futty. (Currn v. Waace, 30 U. S.,
1, 15, and cases cted.) ut the effectveness of both the egsatve and admn-
stratve processes woud become endangered f Congress were under the con-
sttutona compuson of fng In the detas beyond the bera prescrpton
here. Then the burdens of mnutae woud be apt to cog the admnstraton
of the aw and deprve the agency of that fe bty and dspatch whch are
ts saent vrtues. or these reasons we hod that the standards wth whch
Congress has supped the Commsson are pany vad. (Unted States v.
Rork Roya Co-operatve, Inc., supra.)
Nor has Congress deegated ts egsatve authorty to the ndustry. The
members of the code functon subordnatey to the Commsson. It, not the
code authortes, determnes the prces. nd t has authorty and surveance
over the actvtes of these authortes. Snce awmakng s not entrusted to
the ndustry, ths statutory scheme s unquestonaby vad. (Currn v. Yaace,
supra, and cases cted.)
ut appeant mantans that the deegaton of authorty to the Commsson
to determne what coa s sub|ect to the ct s unawfu because of uncertanty
n the statutory defnton of btumnous coa. Secton 17(b) defnes the term
btumnous coa as foows:
The term btumnous coa Incudes a btumnous, sembtumnous, and
subbtumnous coa and sha e cude gnte, whch s denned as a gntc
coa havng caorfc vaue n rtsh therma unts of ess than 7, 00 per
pound and havng a natura mosture content n pace n the mne of 30 per
centum or more.
s n the case of the term Interurban eectrc raway n the Raway
abor ct (Sheds v. Utah Idaho Centra Raroad Co., 305 U. S. 177) we
thnk the defnton of btumnous coa s whoy adequate as a standard for
admnstratve acton. The fact that t s not a chemst s or an engneer s
defnton s not fata. The defnton s not devod of meanng. We are unabe
to say that t can not be apped so as to deneate the areas n whch Congress
Intended to make ths system of contro effectve. The fact that many nstances
may occur where ts appcaton may be dffcut s merey to emphasze the
nature of the admnstratve probem and the reason for the grant of attude
hy the Congress. The dffcuty or mpossbty of drawng a statutory ne
s one of the reasons for suppyng merey a statutory gude. (Cf.Pedmont
northern Raway Co. v. Interstate Commerce Commsson, 28 U. S., 299, 812.)
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Regs. 98, rt. 42.
2 4
That gude s suffcenty precse for an Integent determnaton of the utmate
questons of fact by e perts.
Nor s there an nvad deegaton of |udca power. To hod that there was
woud be to turn back the cock on at east a haf century of admnstratve
aw. The queston of whether or not appeant shoud be sub|ected to the
reguatory provsons of the tumnous Coa ct was one whch the Congress
coud decde n the e ercse of ts powers under the commerce cause. In
eu of makng that decson tsef, t coud brng to ts ad the servces of an
admnstratve agency. nd It coud deegate to that agency the determnaton
of the queston of fact whether a partcuar coa producer fe wthn the ct.
(Sheds v. Utah Idaho Centra Raroad Co., supra, page 180.) The fact that
such determnaton nvoved an nterpretaton of the term btumnous coa
s of no more sgnfcance here than was the fact that n the Sheds case a
decson by the Interstate Commerce Commsson of what consttuted an
nterurban eectrc raway was necessary for the utmate fndng as to
the appcabty of the Raway Labor ct to carrers. That probem nvoves
no more than the adequacy of the standard governng the e ercse of the
deegated authorty. urthermore, on ths phase of the case, appeant has
receved a the |udca revew to whch t s entted. s we have seen, t
obtaned a revew under secton (b) of the Commsson s dena of ts app-
caton for e empton. The functons of the courts cease when t Is ascertaned
that the fndngs of the Commsson meet the statutory test. Rochester
Teephone Corporaton v. Unted States, 307 U. S., 125, 14 .)
ppeant contends that the statutory cassfcaton of coa nto code and
non-code casses and the appcaton of the IO | per cent ta to the atter are
mproper under the ffth amendment. Its ob|ecton s not premsed on ack
of due process. Nor coud t be n vew of the eaborate machnery and pro-
cedure for the ct s enforcement whch the Congress has provded. Rather
appeant s ob|ecton s founded on ts cam of dscrmnaton. ut the ffth
amendment, unke the fourteenth, has no equa protecton cause. (Steward
Machne Co. v. Davs, 301 U. S., 548, 584, and cases cted.) nd there s no
requrement of unformty n connecton wth the commerce power. (Currn
v. Waace, supra, page 14.) The ack of smarty n treatment of the two
casses of coa s an ntegra and essenta feature of ths ct. s we have
sad, t s through that devce that Congress sought to obtan an effectve
sancton for the ct s enforcement. Coercon s the very essence of any penaty
e acted for faure of submsson. It s of the essence of the penary power
conferred by the commerce cause that Congress may e ercse ts dscreton
n the use of the power. (Currn v. Waace, supra, page 14.) part of that
dscreton s the seecton of the sancton for the aw s enforcement. Dscrm-
naton consttutonay may be the prce of noncompance. Inqury nto the
hdden motves whch may move Congress to e ercse a power consttutonay
conferred upon t s beyond the competency of courts. (Sonznsky v. Unted
States, supra, pages 513-514. nd see uford v. Smth, supra, page 48.)
III. ppeant contends here, as t dd beow, that Sunshne nthracte Coa
Co. v. Natona tumnous Coa Commsson, supra, s not determnatve of
the present ssues snce that case dd not nvove the assessment of ta es and
snce the Commsson had no authorty to determne the status of appeant s
con.
These contentons are untenabe. In the frst pace, the Commssoner of
Interna Revenue s merey the agency to coect ta es eved under the ct:
he s not the admnstratve agent whom Congress has desgnated to determne
what coa s e empt from the 19 per cent ta . That functon s ntrusted to
the Commsson. y the terms of secton 4- t s the Commsson whch de-
termnes whether an appcaton for e empton shoud be granted or dened.
y the provsons of secton 3(b) t s the Commsson whch certfes to the
Commssoner those who are code members and consequenty e empt from the
19 per cent ta . ence the Commsson determnes the scope of the provsons
of the ct and ther appcabty to varous producers. The Commssoner s
gven no admnstratve functons whatsoever e cept ta coecton. In the
econd pace, the underyng ssue n each of these two suts s the same. In
Sunshne nthracte Coa Co. v. Natona tumnous Coa Commsson, supra,
the queston w|s whether or not appeant s coa was btumnous wthn
the meanng of secton 17(b). When that ssue was decded adversey to
appeant, abty for the 19 per cent ta foowed uness appeant |oned
the code, n whch event t woud be entted to a certfcate from the Com-
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Regs. 98, rt. 42.
msson evdencng Its ta e empton. In the present sut, appeant s seekng
to rase the dentca ssue, snce ts purpose s to en|on coecton of the sef-
same ta .
The resut s cear. Where the Issues n separate suts are the same, the
fact that the partes are not precsey dentca s not necessary fata. s
stated n Chcago. Rock Isand Pacfc Rahcay Co. v. Schendc (270 U. S.,
11, 20), Identty of partes s not a mere matter of form, but of substance.
Partes nomnay the same may be, h ega effect, dfferent, and
partes nomnay dfferent m:y be. n ega effect, the same. |udgment s
res |udcata n a second acton upon the same cam between the same partes
nr those n prvty wth them. Cromwe v. County of Sac, 94 U. S., 351.)
There s prvty between offcers of the same government so that a |udgment
n a sut between a party and a representatve of the Unted States s res
|udcata n retgaton of the same ssue between that party and another offcer
of the Government. (See Tat v. Western Maryand Rahcay Co., 289 U. S.,
20 Ct. D. S3, C. . II-1, 301 (1033) .) The cruca pont s whether or
not n the earer tgaton the representatve of the Unted States had au-
thorty to represent ts nterests n a fna ad|udcaton of the ssue n contro-
versy. (Cf. Gunter v. tantc Coast Lne Raroad Co., 200 U. S., 273, 284-28 ).)
Cases hodng that a |udgment n a sut aganst a coector for unawfu
e acton s not a bar to a subsequent sut by or aganst the Commssoner or
the Unted States (Sage v. Unted States, 250 U. S., 33 ankers Pocahontas
Coa Co. v. urnet, 287 U. S., 308) are not n pont, snce the sut aganst the
roector s persona and ts ncdents, such as the nature of the defenses open
and the aowance of nterest, are dfferent. (Sage v. Unted States, supra,
page 37.) ut here the authorty of the Commsson s cear. There can be
r.o queston that t was authorzed to make the determnaton of the status
of appeant s coa under the ct. It represeuted the Unted States n that
determnaton and the deegaton of that power to the Commsson was vad,
as we have sad. That sut therefore bound the Unted States, as we as the
appeant. Where a sut bnds the Unted States, t bnds ts subordnate
offcas. (Tat v. Western Maryand Rahcay Co., supra.) The suggeston
that the doctrne of res |udcata does not appy uness the court renderng the
|udgment had |ursdcton of the cause s suffcenty answered bv Sto v.
Gotteb (305 U. S.. 1 5) and Trenes v. Sunshne Mnng Co. (308 U. S., ).
s hed n those cases, n genera the prncpes of res |udcata appy to ques-
tons of |ursdcton as we as to other matters whether t be |ursdcton of
the sub|ect matter or of the partes. ccordngy the ower court correcty
hed that t had no |ursdcton to determne whether appeant s coa was
btumnous as defned n the ct. urthermore where, as here, Congress
has created a speca admnstratve procedure for the determnaton of the
status of persons or companes under a reguatory ct and has prescrbed a
procedure whch meets a requrements of due process, that remedy s e -
cusve. (See nnston Manufacturng Co. v. Davs, 301 U. S., 337 Ct. D. 1234,
C. . 1937-1, 485 .)
The decree beow sub|ected appeant to payment of ta es accrued or assessed
aganst t under secton 3(b) after December 4, 1939. To reeve aganst pay-
ment of ta es unt fna termnaton of the tgaton woud be to put a premum
on datory tactcs n a stuaton where under the authorty of Currn v. Waace,
Muford v. Smth, and Unted States v. Rock Roya Co-operatve, Inc., supra,
the sub|ect of the ct was ceary one over whch the |ursdcton of Congress
was compete.
ffrmed.
Mr. ustce McRetnods s of opnon that the ct under revew s beyond
any power granted to Congress and that the udgment beow shoud be reversed.
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2
TITL II. R UNDS O MOUNTS COLL CT D UND R
T GRICULTUR L D USTM NT CT. (193 )
S CTION 902. CONDITIONS ON LLOW NC O R UNDS.
Reguatons 9 , rtce 204: Condtons as to 1940-20-1O25S
ta burden wth respect to amounts of refund Ct. D. 1455
aowabe.
PROC SSING T GRICULTUR L D USTM NT CT R NU CT O
1030 D CISION OP COURT.
1. Cam for Refund Ta Pad by endee as Part of Purchase
Prce Condtons on owance of Refunds Consent op
So IGN TO SUIT.
vendee who, under the terms of contracts made wth processor-
vendors, purchased processed products at prces whch ncuded the
amount of processng ta es pad by the vendors under the gr-
cutura d|ustment ct, s not entted to recover from the Unted
States an amount equvaent to the ta es. Nor s a vendee entted
to recover such equvaent amount, when t was added to the
contract prce, where the contract was entered nto before the
effectve date of the ta and devery of the processed artce was
made after such date and where such contract, by ts terms, re-
qured the addton of an amount equa to the ta whch was
payabe by the vendor to the Unted States. In ether case, the
amounts so pad by the vendee represented ony ncreased amounts
whch t was requred by contract, not by the ta ng statute, to pay,
and were to obtan goods from the processor and not to satsfy
any obgaton whch t owed to the Unted States. Such vendee
s not recognzed by the refundng statute, and as to t the sover-
egn has not consented to sut.
2. Certorar Dened.
Petton for certorar dened pr 1, 1940.
Unted States Crcut Court of ppeas for the Seventh CRcrT.
Oswad aeger akng Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
108 . (2d), 375.
Petton for revew of order of Unted States Processng Ta oard of Revew.
efore vans, Ma|or, and ekner, Crcut udges.
December 7, 1939.
opnon.
erner, Crcut udge: In 1937 the Oswad aeger akng Co. (pettoner)
fed a refund cam for sums aeged to have been pad as processng ta es
under the grcutura d|ustment ct. (48 Stat., 31, 35, 40.) In 1938 the
Commssoner of Interna Revenue re|ected the cam on the ground that pet-
toner was not the ta payer. Pettoner then sought revew of the dsaowance
n the Unted States Processng Ta oard of Revew, the Commssoner moved
to dsmss the petton, and the oard granted the moton. (Tte II of the
Revenue ct of 193 , sectons 901-917 49 Stat., 1747.) The case Is now before
us on petton to revew the decson of the oard. (7 U. S. C, secton 48.)
The facts, shown n the peadngs and e hbts attached thereto and admtted
by the moton to dsmss, are as foows: Pettoner was not a processor, but ts
bakng actvtes requred many purchases of four, corn and hog products, and
sugar from varous mers, packers and manufacturers (the processors). c-
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Regs. 9 , rt. 204.
cordng to the purchase contracts the wheat, corn, hog and sngar beet ta es (the
processng ta es) were ncuded n the prce pad for the processed products.
In other words, n ths case the ta ng statute made the processor abe for
processng ta es. The processor pad the ta . e then passed the burden of
the ta on to hs vendee by contract. The vendee, however, dd not shft the
burden but nstead absorbed t. On anuary , 193 , the Supreme Court
decared the ta ng statute nvad. Unted States v. uter, 297 U. S., 1 Ct D.
1070, C. . -1, 421 (193 ) .) Congress then provded for a refund of any
amount pad by or coected from any camant as ta under the grcutura
d|ustment ct f the camant coud show that he bore the burden of such
amount (Tte II, supra, secton 902.)
On our record the processor can not recover the amounts pad as processng
ta es, for he passed on the ncdence thereof. So hs vendee, bearer of the ta
burden, seeks the refund n hs pace. s e pressed n the words of counse for
pettoner, the theory of recovery advanced states that the rea party n nter-
est Is the pettoner. It bought the four t pad for the four t pad the
processng ta on the wheat from whch the four was med and, t, and t
aone, has suffered from the Imposton of the processng ta es. Re_
gardess of whether the pettoner pad these ta es through the
nstrumentaty of the four mng companes, the fact s that the
pettoner s the ony sufferer f It s dened the return of the ta es
so pad by t.
The ehm for refund nvoved processng ta es amountng to 103,333.02.
These ta es pertaned to a perod of tme between uy 9, |:3 (the effectve
date of the ta ng statute), and anuary , 193 (the date the statute was
nvadated). ccordng to the purchase contracts between the varous proc-
essors and pettoner, the vendee (pettoner) promsed to put the processor n
funds for the payment of the processng ta es n addton to the stated contract
prce, and so the vendee dd.
Of the sum of 103,333.92, the amount of 81,359.49 was pad wth respect to
the purchase of .processed products under contracts made and e ecuted durng
the ta ng perod n queston (hereafter these contracts are referred to as the
new contracts ). On the other hand, the amount of . 21,974.43 was pad wth
respect to the purchase of four under contracts made pror to uy 9, 1933, but
e ecuted thereafter (hereafter these contracts are referred to as od
-ontracts ).
The nvoces reatng to the new contracts provded for one quoted prce, and
ths prce Incuded the contract prce and the amount of the processng ta .
The Invoces reatng to the od contracts showed that the vendee was bed
separatey for the amount of the ta . Under the terms of the contracts, od and
new, the amount of the ta was added to the contract prce, and pettoner pad
a sum equvaent to the contract prce and the ta amount.
In connecton wth the od contracts, t s necessary to study secton 18 of the
ta ng statute. (7 U. S. C, secton 18: 48 Stat.. 41.) Secton 18(a) provdes
that f an od contract does not permt the addton of the ta to the contract
prce, the vendee sha pay so much of the ta as s not permtted to be added
to the contract prce. Secton 18(b) provdes that ta es payabe by the
vendee sha be pad to the vendor, who sha pay the Unted States. Wth
ths e cepton, the ta ng statute makes the processor abe for the ta , and
e pressy states that the processor sha pay the ta . (7 U. S. C, secton 09.)
In ths case the od contracts not ony permtted the addton of the ta to the
contract prce the od contracts requred the addton of the ta thereto, and the
amount of 21,974.43 was added and consequenty pad as part of the purchase
prce. Therefore, secton 18 supra was not operatve, and hence the amount of
21 974.43 was not pad by the pettoner as ta es payabe by the vendee.
The amount of 21,974.43 was pad by the pettoner, |ust as the amount of
181,359.49 was pad, as part of the cost of the processed goods purchased.
nd so we come to the rea queston n ths case. The ta ng statute makes
the processor abe for the processng ta es. The vendee of the processor bears
the burden of the ta . The ta ng statute s consequenty decared nvad.
Is the vendee entted to the refund Pettoner advances the contenton, fuy
e pressed earer n ths opnon, that he s entted to recover the ta money
accordng to what Is |ust and good.
It s eementary that the soveregn may not be sued e cept upon ts consent,
and then ony upon the condtons under whch t has consented to be sued. The
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Regs. 9 , rt. 204.)
2 8
soveregn consented here, but prescrbed certan condtons. (Tte II of the
Revenue ct of 103 , secton 902 7 U. S. C, secton 44.) The refund statute
makes no provson for makng a refund to partcuar persons to whom the bur-
den of the nvad e acton may be found to have been shfted. ( . . Labo-
ratores, Inc., v. Commssoner, 104 . (2d), 5 3 Ct. D. 1418, C. . 1939-2, 39
nnston Mfg. Co. v. Davs, 301 U. S., 337, 350 Ct. D. 1234, C. . 1937-1, 485 .)
In the Laboratores case, wheren we dscussed fuy the refund statute n
queston, we hed that the statute restrcted refunds to persons who had been
abe for and had pad drecty to the Unted States amounts mposed as ta
under the grcutura d|ustment ct. The vendee of the processor n the
Instant case, that s, the pettoner, s not recognzed by the refundng statute,
and as to t the soveregn has not consented to sut.
The record n ths case ceary shows that pettoner dd not pay any amount
to the Unted States as processng ta under the ta ng statute. t most, the
amounts pad by pettoner represented ony ncreased amounts whch t was
requred by contract, not by the ta ng statute, to pay. urthermore, the
amounts were pad by pettoner to obtan goods from the processor, not to
satsfy any obgaton whch t owed the Unted Stah s.
We concude, therefore, that pettoner s contentons ack mert, r.r.d conse-
quenty the decson of the Unted States Processng Ta oard of Revew b
affrmed.
ffrmed.
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MISC LL N OUS RULINGS.
LCO OL T .
1940-25-10299
T. D.4974
Treasury Department Order No. 30.
Treasury Department,
Offce of the Secretary,
Washngton, une 1 , 19 t0.
Secton 1. y vrtue of and pursuant to the authorty conferred
upon me by sectons 2 and 8 of Reorganzaton Pan No. I ( ouse
Document No. 81, Seventy-s th Congress) prepared n accordance
wth the provsons of the Reorganzaton ct of 1939, and trans-
mtted to the Congress by the Presdent on pr 2,1940, by the |ont
resouton of une 4, 1940 (Pubc Resouton No. 75, Seventy-s th
Congress), by secton 3170 of the Interna Revenue Code, and by
secton 1 1 of the Revsed Statutes (U. S. C, Tte 5, secton 22),
Subpart of Part 171 (Msceaneous Reguatons Reated to Lquor)
of Tte 2 of the Code of edera Reguatons s hereby amended by
addng the foowng new sectons at the end thereof to read as
foows:
171.1a. asc Permt and Trade Practce Dvson created. There s hereby
estabshed n the coho Ta Unt n the ureau of Interna Revenue a dv-
son to be known as the asc Permt and Trade Practce Dvson, at the head
of whch sha be an ssstant Deputy Commssoner who sha be apponted by
the Secretary of the Treasury under the provsons of secton 2(c) of the edera
coho dmnstraton ct (49 Stat., 977), and sha perform hs dutes under
the mmedate drecton and supervson of the Deputy Commssoner of Interna
Revenue n Charge of the coho Ta Unt, and under the genera drecton
and supervson of the Commssoner of Interna Revenue and the Secretary of
the Treasury.
171.1b. Transfer of edera coho dmnstraton personne and property.
cept as provded In Treasury Department Order No. 31 of une 12, 1940
(uncodfed),1 reatng to the transfer of certan ega personne and property,
1 Treasury Department Ord r No. 31.
Treasury Department,
Offce of rat Secretary.
Washngton, une , 1940.
y vrtup of and pursuant to the authorty conferred upon me by sectons 2 and 8 of
Reorganzaton Pan No. I ( ouse Document No. 81, Seventy- th Congress) prepared
n accordance wth the provsons of the Reorganzaton ct of 1039, and transmtted to
the Congress by the Presdent on pr 2, 11140, by the ont resouton of une 4. 1940
Pubc Resouton No. 75, Seventy-s th Congress), by secton 3170 of the Interna
Revenue Code, by secton 3930 of the Interna Revenue Code, and bv secton 1 1 of the
Revsed Statutes (U. S. C, Tte 5, secton 22), the foowng order s Issued:
Secton 1. There are hereby transferred to the Lega Dvson of te Treasury Depart-
ment n of the personne, records, books, furnture, and suppes connected wth the ega
actvtes of the edera coho dmnstraton. The transfer of personne under tns
secton shaU be n accordance wth the provsons of secton 10(b) of the Reorganzaton
ct of 1939 (53 Stat., 5 3), and sha b sub|ect to the provsons of secton 8 of Reorgan-
(2 9)
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270
there are hereby transferred to the asc Permt and Trade Practce Dvson of
(e coho Ta Unt a of the personne, records, books, furnture, and suppes
of the edera coho dmnstraton and of the offce of the dmnstrator
thereof (other than the dmnstrator) whch dmnstraton and offce were
aboshed by secton 2 of Reorganzaton Pan No. I: Provded, however. That
such transfer sha be n accordance wth the provsons of secton 10(b) of the
Reorganzaton ct of 1939 ( 53 Stat., 5G3), and sha be sub|ect to the provsons
of secton 8 of Reorganzaton Pan No. III.
Sec. 2. y vrtue of and pursuant to the authorty set out n sec-
ton 1 of ths order, Part 171 of Tte 2 of the Code of edera
Reguatons s hereby further amended by nsertng between Subpart
and Subpart C thereof a new Subpart ( ) to read as foows:
Sbpart ( ) ddtona Dutes op coho, Ta Unt.
171.4a. Deegaton of edera coho dmnstraton functons. cept as
provded n paragraph 171.1a, reatng to the appontment of an ssstant
Deputy Commssoner, and e cept as provded In Treasury Department Order
No. 31 of une 12, 1940 (uncodfed), reatng to certan ega and personne
functons, a functons of the edera coho dmnstraton, and the offce
of the dmnstrator and the offces of the members thereof, are hereby dee-
gated to the Deputy Commssoner of the ureau of Interna Revenue n Charge
of the coho Ta Unt, to be e ercsed by hm under the drecton and super-
vson of the Commssoner of Interna Revenue and the Secretary of the
Treasury through the asc Permt and Trade Practce Dvson, and the offcers
and empoyees thereof: Provded, however. That wth the approva of the Com-
mssoner of Interna Revenue and the Secretary of the Treasury, sad Deputy
Commssoner may e ercse any of such functons through any other dvson
of the coho Ta Unt, and the offcers and empoyees thereof.
171.4b. Pror reguatons adopted. cept as heren, or as may be hereafter,
otherwse provded, a reguatons prescrbed, a orders and nstructons ssued,
and a forms adopted for the enforcement of the aws heretofore admnstered
by the dmnstrator of the edera coho dmnstraton, the edera coho
dmnstraton, and the offcers and empoyees thereof, w contnue n effect as
reguatons, orders, nstructons, and forms of the coho Ta Unt of the
ureau of Interna Revenue. The term dmnstrator wherever used n such
reguatons, orders, nstructons, and forms, sha be hed to mean Deputy
Commssoner of Interna Revenue.
Sec. 3. Ths order sha take effect on the date that secton 2 of
Reorganzaton Pan No. I becomes effectve.
. Moroenthau, r.,
Secretary of the Treasury.
( ed wth the Dvson of the edera Regster une 12, 1940, 11.39 a. m., as
Treasury Order No. 30.)
Izntnn Pan No. III. The provsons of Department Crcuar No. 19 of une 20, 1934. are
hereby made appcabe to a dutes and functons Incdent to the admnstraton of tt
ega actvtes of the edera coho dmnstraton, and to a of the personne, records,
books, furnture, and suppes hereby transferred.
Sue. 2. appontment and other personne functons of the dmnstrator and mem-
bers of the edera coho dmnstraton, whch functons are wthn the purvew of
secton 404 of Reorganzaton Pan No. II (53 Stat.. 143 ) are vested n the Secretary
of the Treasury. The provsons of Treasury Department Order No. 22 of une 80, 1939.
Issued under such secton 404 of Reorganzaton Pan No. II and reatng to submsson
to the dmnstratve ssstant to the Secretary of the Treasury of certan personne
actons enumerated theren for fna approva, are hereby made appcabe to a such
personne actons n connecton wth a personne transferred to the coho Tar Unt
of the ureau of Interna Revenue by Treasury Department Order No. SO of ths date,
and to a such personne actons n connecton wth the personne transferred to tt
Lega Dvson by secton 1 of ths order.
Sec. 3. Ths order sha take effect on the date that secton 2 of Reorganzaton Pan
No. I becomes effectve.
. MO NT O, r.,
eoretary of the Treasury.
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Msc.
INDUSTRI L LCO OL.
1940-12-10210
T. D. 49 7
Revsng specay denatured acoho formua No. 42 n ppend
to Reguatons No. 3.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors, Chemsts n Charge, uthorzed Chemsts,
and Others Concerned:
Pursuant to authorty contaned n sectons 3105(a) and 3124(a)
of the Interna Revenue Code, the formua for specay denatured
acoho formua No. 42 n ppend to Reguatons No. 3, approved
December 29, 1938, s revsed to read as foows:
To every 100 gaons of ethy acoho of not ess than 190 proof add
(a) 80 grams potassum odde U. S. P. and 109 grams red mercurc odde
0. 8. P. or
( ) 7 grams of any one of the foowng:
Pheny mercurc ntrate, C. P.
Pheny mercurc chorde, C. P.
Pheny mercurc benzoate, C. P. or
(c) 95 grams sodum ethy mercurc thosacyate, C. P.
Gut T. everng,
Commssoner of Interna Revenue.
pproved March 8, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 11, 1940, 11.31 a. m.)
Reguatons 3 ( coho), rtce 14 : Genera 1940-5-101G0
provsons governng the use of specay de- T. D. 49 3
natured acoho.
Labeng and sae of rubbng acoho compound ( mendment of
Reguatons No. 3).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Dstrct Supervsors and Others Concerned:
In order further to protect the revenue, and pursuant to the au-
thorty contaned n sectons 3105(a), 3124(a) , and 3111, Interna
Revenue Code, the second paragraph of artce 14 of Reguatons
No. 3, as amended, s hereby amended to read as foows:
Rubbng acoho compound, as referred to n those reguatons, sha mean any
product manufactured wth specay denatured acoho and represented to be
a rubbng acoho compound. The sae of ths product by the manufacturer, or
whoesae druggst, must be made drecty, or through hs empoyees, ony to
whoesae or reta druggsts, and to purchasers who acqure the product for
egtmate e terna use and not for resae, such as hosptas, sanatorums, cncs,
turksh baths, athetc assocatons, physcans, dentsts, veternarans, et cetera.
Ths product may aso be sod by reta druggsts to any of the foregong or n
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272
reta quanttes ony to other persons for e ternn use. Saes to such other
persons by reta druggsts must be made through a regstered pharmacst who
w, at the tme of sae, wrte or stamp across the brand abe n contrastng coors
the words Sod by foowed by hs (the pharmacst) name and the address
of the reta drug store where the sae s made.
manufacturer, whoesae druggst, reta druggst, or any other person sha
not se rubbng acoho compound for use, or for sae for use, for beverage
purposes, nor sha he se such product under crcumstances from whch t
mght reasonaby appear that t Is (he ntenton of the purchaser to procure the
product for use, or for sae for use, for beverage purposes. ny person who sha
se rubbng acoho compound n voaton of these reguatons sha be sub|ect
to a provsons of aw pertanng to acoho that s not denatured, ncudng
those requrng the payment of ta thereon, and the person so seng the rubbng
acoho compound sha be requred to pay such ta and speca ta as a deaer
n quors.
The manufacturer sha package rubbng acoho compound n the bottes n
whch t s to be sod to the utmate consumer. Such bottes sha not e ceed
1 pnt n capacty and sha bear a brand abe and a cauton notce paced thereon
by the manufacturer. No other person sha pace a abe or notce thereon. The
brand abe must contan the foowng nformaton:
1. The brand or trade name of the product, f any.
2. The egend Rubbng coho Compound whch sha be In etters of the
same coor and sze as the brand or trade name.
3. The name and address of the manufacturer. (Where rubbng acoho com-
pound s manufactured and botted under the namo of a deaer for resae, the
manufacturer may pace hs symbo and permt number on the abe n eu of
bs name and address, provded the name and address of the person for whom
manufactured s shown.)
4. The egend Contans 70 per cent absoute acoho by voume.
5. The egend or e terna use ony. If taken nternay serous gastrc ds-
turbances w resut.
The cauton notce, whch sha appear on the back of the botte, sha be
prnted n pan and egbe type of not ess than pont, and must read as foows:
Cauton Notce :
The sae of ths product by the manufacturer, or whoesae druggst, must be
made drecty, or through hs empoyees, ony to whoesae or reta druggsts,
and to purchasers who acqure the product for egtmate e terna use and not
for resae, such as hosptas, sanatorums, cncs, turksh baths, athetc assoca-
tons, physcans, dentsts, veternarans, et cetera. Ths product may aso be
sod by reta druggsts to any of the foregong, or n reta quanttes ony to
other persons for e terna use. Saes to such other persons must be made by a
reta druggst through a regstered pharmacst, who w wrte or stamp across
the brand abe n contrastng coors the words Sod by foowed by hs (the
pharmacst) name and the address of the reta drug store where the sae a
made. Saes for other than e terna use w sub|ect the deaer to speca ta
as a deaer n quors and to the nterna revenue ta on the acoho contaned
n ths compound.
The manufacturer may ncorporate n the brand abe, or n a separate abe
appearng n con|uncton wth the brand abe, any other desred statement, but
such statement sha not obscure or contradct the abeng requred hereby. No
abeng, other than the cauton notce, sha be paced on the back of the botte.
These reguatons sha be effectve as to transactons occurrng subsequent to
the date hereof, e cept that:
(a) The requrements as to pharmacsts sha not take effect unt 30 days after
the effectve date of these reguatons.
(b) ach dstrct supervsor w notfy a permttees n hs dstrct that they
may use present suppy of approved abes unt e hausted, provded that wthn
30 days after the effectve date of these reguatons such abes are suppemented
by the cauton notce prescrbed n these reguatons.
(c) The dstrct supervsor w aso notfy a permttees that, pror to the
e hauston of ther present suppy of approved abes, they must fe wth hm
orm 147f - , n quadrupcate, showng formuae, brand abes, and cauton
notces, or facsmes thereof, for ther rubbng acoho compounds. The dstrct
supervsor w (1) e amne the formuae to ascertan that they are dentca
wth approved formuae now used and (2) e amne the brand abes and cauton
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notces, or facsmes thereof, to determne that they conform wth these regua-
tons. If a requrements have, been comped wth, the dstrct supervsor w
note hs approva on each copy of orm 1479- , return one copy to the permttee,
forward one copy to the Commssoner, furnsh one copy to the chemst n charge,
and retan the remanng copy for hs fes. If the formuae on orm 1479-
are not dentca wth approved formuae now used, the forms w be forwarded
to the Commssoner for consderaton. If the brand abes and cauton notces,
or facsmes thereof, are dsapproved, a copes of orm 1479- , wth attach-
mep s, w be returned to the permttee wth a statement of the reason for
dsapprova.
(d) Stocks of rubbng acoho compound now botted and abeed need not be
reabeed n accordance wth these reguatons and
(c) Stocks of rubbng acoho compound now n the possesson of persons other
than those entted to se the same under the foregong reguatons may be sod
for e terna uses ony.
Nothng n the foregong reguatons sha n any manner ater or
affect the provsons of artce 14 - of Reguatons No. 3, as
amended.
Guy T. everno,
Commssoner of Interna Revenue.
pproved anuary 18, 1940.
. MORG T T , r.,
Secretary of the Treasury.
ed wth the Dvson of the edera Regster anuary 20, 1940, 10.18 a. m.)
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274
TR IC IN CONT IN RS O DISTILL D SPIRITS.
Reguatons 13(1940), Secton 175.3: Defntons. 1940-21-102 7
Secton 175.9: Labes. T. D. 4970
Secton 175.14: Reuse of contaners.
TITL 20 INT RN L R NU . C PT R 1, T RT 175 TR IC IN
CONT IN RS O DISTILL D SPIRITS.
Labeng and reuse of contaners of dsted sprts.
Treasury Department,
Offce of the Secretary,
Washngton, D. C, May 11, 1940.
To Dstrct Supervsors and Others Concerned:
Secton 175.3(to) of Reguatons 13 (Part 175, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
(to) The term age sha have the meanng gven to such term by defn-
ton ( ) of rtce I of Reguatons 5 (27 C R, Part 5), reatng to abeng
and advertsng of dsted sprts, ssued under the edera coho dmn-
straton ct, n effect as of uy 1, 1938, and sha be stated n the manner
provded n secton 39 of rtce III of sad reguatons: Provded, however.
That the actua age may be stated as to whsky wthdrawn pror to pr 1,
1937, from csterns at dsteres regstered under the nterna revenue aws,
and as to such whsky whch, when bended or rectfed, does not contan sprts
other than those wthdrawn pror to pr 1, 1937, from dsteres regstered
under the Interna revenue aws.
Secton 175.3(n) of Reguatons 13 (Part 175, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
(n) The term knd sha have the respectve meanngs gven to such term
by the Standards of dentty for dsted sprts set forth n rtce II of
Reguatons 5 (27 C R. Part 5), reatng to abeng and advertsng of ds-
ted sprts, ssued under the edera coho dmnstraton ct, n effect
as of uy 1, 1938, and theretofore, as to sprts produced n the respectve
perods covered by such reguatons, and sha be stated as to sprts produced
n each such perod n the manner provded n secton 34 of rtce III of sad
reguatons: Provded, hocever, That the actua knd may be stated as to ds-
ted sprts wthdrawn pror to pr 1, 1937, from csterns at dsteres reg-
stered under the nterna revenue aws, and as to a bends thereof, and as
to a such sprts rectfed wthout the addton of sprts other than those
wthdrawn pror to pr 1, 1937, from csterns at dsteres regstered under
the nterna revenue aws.
Secton 175.9 (d) of Reguatons 13 (Part 175, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
(d) If whsky, not bended or rectfed, the age thereof, but ths statement
sha not be requred as to Scotch, Irsh, or Canadan whsky, or whsky
botted n bond. s to whsky wthdrawn on or after pr 1, 1937, from
csterns at dsteres regstered under the nterna revenue aws, and stored
n reused cooperage, the perod of such storage sha be stated n the form
heretofore prescrbed for such statements by Reguatons 5 (27 C R, Part 5),
reatng to abeng and advertsng of dsted sprts, ssued under the edera
coho dmnstraton ct.
Secton 175.9(e) of Reguatons 13 (Part 175, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
(e) If bended or rectfed whsky, the age of the youngest whsky theren,
but ths statement sha not be requred as to Scotch, Irsh, or Canadan
whsky and the respectve percentage, by voume, of whsky or whskes, and
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neutra sprts. s to whsky wthdrawn on or after pr 1, 1937, from
csterns at dsteres regstered under the nterna revenue aws, and stored
n reused cooperage, and used n bendng or rectfcaton, the perod of such
storage sha be stated n the form heretofore prescrbed for such statements by
Reguatons 5 (27 C R, Part 5), reatng to abeng and advertsng of ds-
ted sprts, ssued under the edera coho dmnstraton ct.
Secton 175.14 of Reguatons 13 (Part 175, Tte 2 , Code of
edera Reguatons, 1940 Sup.) s amended to read as foows:
Reuse of contaners. The reuse for packagng dsted sprts for sae at
reta of quor bottes or other authorzed marked contaners, as defned heren,
prohbted: Provded, That bottes or other authorzed contaners of dsted
sprts, whch have not been sod to the consumer or opened, may be returned
to the botter fng the same to reuse, pursuant to authorzaton by the ds-
trct supervsor of the dstrct n whch the botter s ocated, upon the fng
by the botter of an appcaton ( orm 98).
(Ths Treasury decson s prescrbed pursuant to the authorty
conferred by secton 2871 of the Interna Revenue Code.)
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 13, 1940, 2.4 p. m.)
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27
DISTILL D SPIRITS.
INT RN L R NU COD .
1940-8-10184
T. D. 49 4
Mutated or mssng strp stamps.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue, Dstrct Supervsors, and Others
Concerned:
Pursuant to the authorty contaned n secton 2803(d) of the In-
terna Revenue Code, the foowng reguatons are hereby prescrbed :
1. Unopened bottes contanng ta -pad dsted sprts requred
to be stamped under secton 2803(d) of the Interna Revenue Code,
from whch the strp stamps are mssng, or on whch the strp stamp
s mutated to the e tent that the contents of the botte are accessbe
wthout further destructon of the stamp, or on whch the strp stamp
s so mutated that the genuneness thereof can not be determned,
may be restamped pursuant to the foowng procedure:
2. The botte shoud be set asde by the deaer and proper remt-
tance (1 cent for each stamp of one-haf pnt or greater, or one-
quarter cent for each stamp of ess than one-haf pnt) and appca-
ton under oath for the necessary stamps submtted wth orm 428,
Order for stamps Dsted sprts botte strps, n trpcate, to
the dstrct supervsor, coho Ta Unt. Copes of orm 428 may
be obtaned from the dstrct supervsor, coho Ta Unt. The
appcant n every case w state the cause of mutaton or absence
of the stamps and submt evdence that the sprts are ta -pad.
Such evdence may consst of the nvoces coverng the purchase of
the sprts, n addton to other avaabe documents. The dstrct
supervsor w approve the requston, orm 428, f he s satsfed
from the evdence submtted that the ta has been pad on the sprts,
and that the mutaton or absence of the stamps has been e paned.
e w forward the orgna orm 428 and one copy wth the remt-
tance to the proper coector of nterna revenue. The coector w
enter the sera numbers of the stamps ssued and stamp the date of
sae on both copes of orm 428. e w send the stamps and the
copy of orm 428 to the dstrct supervsor, who w dever the
stamps to the appcant, ether by ma or by a representatve of hs
offce, together wth nstructons n regard to aff ng them to the
contaners.
3. When an nterna revenue offcer dscovers an unopened botte
contanng dsted sprts, to whch no strp stamp s aff ed, or on
whch the strp stamp s mutated to the e tent that the contents
of the botte are accessbe wthout further destructon of the stamp,
or on whch the strp stamp s so mutated that the genuneness
thereof can not be determned, the offcer w drect that the botte
be set asde. If the offcer s satsfed that the sprts n the botte
have been ta -pad, and the orgna contents of the botte have not
been repaced or ncreased by the addton of any substance, he sha
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secure an affdavt from the proper person settng forth the reason
for the absence or mutaton of the stamp, accompaned by docu-
mentary evdence, f any, n support thereof. The offcer sha assst
the person n e ecutng an appcaton on orm 428 n order to pro-
cure a strp stamp to be aff ed to the botte, pursuant to the pro-
cedure outned n paragraph 2 hereof. No offer n compromse w
be suggested n such cases.
When the nspector has good reason to beeve that the dsted
sprts have not been ta -pad, or that the orgna contents of the
botte have been repaced or ncreased by the addton of a substance,
he w seze the sprts for forfeture.
4. It w not be necessary to requre the repacement of strp
stamps where an mmatera porton of the stamp s mssng, or
where the strp stamp has dropped off a botte and may be reaff ed
thereto by the deaer. No offer n compromse w be suggested n
such cases.
5. In the case of an opened botte of dsted sprts from whch
a portons of the strp stamp have been removed, there w be no
necessty to requre the restampng of the botte or to suggest an
offer n compromse f the nterna revenue offcer s satsfed the
botte contans a or a part of ts orgna ta -pad contents ony.
. Nothng contaned n these reguatons sha supersede or other-
wse affect the authorty granted and the procedure estabshed by
Treasury Decson 4744, approved une 24, 1937 C. . 1937-2, 573 ,
for obtanng stamps to repace those whch have been ost or
destroyed.
7. Treasury Decson 477 , approved November 12, 1937 C. .
1937-2, 548 , s hereby revoked.
Gut T. evernq,
Commsdoner,
pproved ebruary 15, 1940.
ohn L. Suvan,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 15, 1940, 4.07 p. m.)
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278
PU LIC S L RY T CT O 1939.
1940-1-10130
I. T. 3341
mpoyees of edera and banks are empoyees of agences or
Instrumentates of the Unted States wthn the meanng of sec-
tons 207 and 208 of the Pubc Saary Ta ct of 1939 (Pubc, No.
32, Seventy-s th Congress, frst sesson, C. . 1939-1 (Part 1),
428).
dvce s requested whether empoyees of the edera and banks
are empoyees of agences or nstrumentates of the Unted States
wthn the meanng of sectons 207 and 208 of the Pubc Saary Ta
ct of 1939 (Pubc, No. 32, Seventy-s th Congress, frst sesson,
C. . 1939-1 (Part), 428).
Sectons 207 and 208 of that ct read as foows:
Sec. 207. No coecton of any ta (Incudng nterest, addtons to ta . and
penates) mposed by any State, Terrtory, possesson, or oca ta ng authorty
on the compensaton, receved before anuary 1, 1939, for persona servce as an
offcer or empoyee of the Unted States or any agency or nstrumentaty thereof
whch s e empt from edera ncome ta aton and, f a corporate agency or
nstrumentaty, w one (a) a ma|orty of the stock of whch s owned by or on
behaf of the Unted States, or (b) the power to appont or seect a ma|orty
of the board of drectors of whch s e ercsabe by or on behaf of the Unted
States, sha be made after the date of the enactment of ths ct
Sec. 208. Ths tte sha not appy wth respect to any offcer or empoyee of
a State, or any potca subdvson thereof, or any ageney or nstrumentaty
of any one or more of the foregong, after the Secretary of the Treasury has
determned and procamed that t s the pocy of such State to coect from
any ndvdua any ta , nterest, addtons to ta , or penates, on account of
compensaton receved by such ndvdua pror to anuary 1, 1939, for persona
servce as an offcer or empoyee of the Unted States or any agency or nstru-
mentaty thereof. In makng such determnaton the Secretary of the Treasury
sha dsregard the ta aton of offcers and empoyees of any corporate agency
or nstrumentaty whch s not e empt from edera ncome ta aton, or whch
f so e empt s one (a) a ma|orty of the stock of whch s not owned by or on
behaf of the Unted States and (b) the power to appont or seect a ma|orty
of the board of drectors of whch Is not e ercsabe by or on behaf of the
Unted States.
In order for edera and banks, whch are corporate agences or
nstrumentates, to fa wthn the above-quoted provsons of aw,
t s necessary that they be e empt from edera ncome ta aton, and
(a) a ma|orty of the stock must be owned by or on behaf of the
Unted States, or (b) the power to appont or seect a ma|orty of the
board of drectors must be e ercsabe by or on behaf of the Unted
States. edera and banks are e empt from edera ncome ta aton.
(39 Stat., 380, secton 2 .) The queston remans as to whether they
meet the requrements of ether (a) or (b) above.
Under the provsons of secton 5(a) of the arm Credt ct of
1937 (50 Stat., 703), the 12 dstrcts theretofore desgnated edera
and bank dstrcts were desgnated farm credt dstrcts. Secton 5(b)
of that ct provdes for 12 farm credt boards to functon respec-
tvey n the 12 farm credt dstrcts. ach board s composed of
seven members. Three of the members are known as eected drectors,
no one of whom s desgnated by or on behaf of the Unted States.
Three of the remanng four members are known as dstrct drectors
and the fourth member s known as drector at arge. Two of the
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dstrct drectors and the drector at arge are apponted by the Gov-
ernor of the arm Credt dmnstraton, an offca of the Unted
States Government. The thrd dstrct drector s chosen n accord-
ance wth the provsons of secton 5(d). That secton provdes that
each thrd dstrct drector sha be seected from the three persons
havng the greatest number of votes of natona farm oan assoca-
tons and borrowers through agences n the dstrct. The Governor
of the arm Credt dmnstraton, however, has the power of ap-
pontng from ths seected group. e, therefore, apponts a ma|orty
of the members of each board. Secton 7(b) of that ct provdes
that the members of the farm credt board of each farm credt dstrct
provded for n secton 5(a) sha be e offco the drectors of the ed-
era and bank ocated n that dstrct. The edera and bank ocated
n each farm credt dstrct has seven drectors who are dentca wth
the members of the farm credt board of the dstrct n whch the bank
s ocated. Snce the Governor of the arm Credt dmnstraton
apponts a ma|orty of the members of the farm credt board of each
farm credt dstrct, he apponts a ma|orty of the drectors of the ed-
era and bank of each dstrct. edera and banks, therefore, are
corporate agences or nstrumentates of the Unted States n whch
the power to appont or seect a ma|orty of the board of drectors s
e ercsabe on behaf of the Unted States.
In vew of the foregong, t s hed that the empoyees of edera
and banks are empoyees of agences or nstrumentates of the
Unted States wthn the meanng of sectons 207 and 208 of the Pub-
c Saary Ta ct of 1939.
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280
S CTION 3 O T INSON CT (48 ST T, 503, 5C5), S
M ND D Y CT O UN 25, 193 (49 ST T, 192 ),
ND Y CT O PRIL 3, 1939 (53 ST T, 555, 5 0).
1940-22-10273
L T. 3377
defcency In proft sustaned n the performance of a contract
for arcraft nstruments awarded by the Navy Department under
the nson ct, as amended, s not aowabe as a credt n com-
putng the e cess proft reazed n the performance of a contract
for arcraft nstruments awarded by the War Department under
the ct of pr 3, 1939.
dvce s requested whether a defcency n proft sustaned upon
competon of a contract for arcraft nstruments awarded by the
Navy Department under the nson ct, as amended, s aowabe
as a credt n computng the e cess proft on a competed contract for
arcraft nstruments awarded by the War Department under the ct
of pr 3, 1939.
Secton 17.10 of the reguatons promugated n Treasury Decson
490 (C. . 1939-2, 404) under secton 3 of the nson ct, as
amended, reatng to e cess profts on Navy contracts and subcon-
tracts for nava vesses and nava arcraft, provdes n part as
foows:
(e) Defcency n proft. The term defcency n proft as used n the ct
and n these reguatons reates ony to contracts and subcontracts comng
wthn the scope of the ct whch are for the constructon or manufacture of
any compete nava arcraft or any porton thereof and are competed wthn
an ncome-ta abe year endng after pr 3, 1939. s so used, the term
defcency n proft means the amount by whch 12 per cent of the tota
contract prces of such contracts and subcontracts whch are competed by a
partcuar contractng party wthn the ncome-ta abe year e ceeds the net
proft upon such contracts and subcontracts. defcency n proft sustaned
by a contractng party wth respect to such contracts and subcontracts for the
constructon or manufacture of compete nava arcraft or any porton thereof
end competed wthn any ncome-ta abe year endng after pr 3. 1939, s
aowabe as a credt n computng the contractng party s e cess proft on con-
tracts and subcontracts for the constructon or manufacture of compete nava
arcraft or any porton thereof whch are competed wthn the four ne t suc-
ceedng ncome-ta abe years.
Secton 1G.9 of the reguatons promugated n Treasury Decson
4909 (C. . 1939 2, 422) under secton 14 of the ct of pr 3, 1939.
reatng to e cess profts on rmy contracts for rmy arcraft pro-
vdes n part as foows:
The term defcency n proft as used n the ct and as apped to con-
tracts and subcontracts comng wthn these reguatons means the amount by
whch 12 per cent of the tota contract prces of a such contracts and sub-
contracts entered nto after pr 3, 1939, and competed by a partcuar con-
tractng pary wthn the ncome-ta abe year e ceeds the net proft upon a
such contracts and subcontracts.
net ess or a defcency n proft sustaned by a contractng party for an
ncome-ta abe year s aowabe as a credt n computng the contractng party s
e cess proft on contracts and subcontracts comng wthn these reguatons and
competed durng the four ne t succeedng ncome-ta abo years. Credt for
such a net oss or defcency n proft may be camed n the contractng party s
annua report of proft fed wth the coector of nterna revenue (see secton
1 .15 of these reguatons), but t sha be supported by separate schedues for
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each contract or subcontract nvoved showng tota contract prces , costs of
performance and pertnent facts reatve thereto, together wth a summarzed
computaton of the net oss or defcency n proft.
Secton 1 .1(c) of the reguatons promugated under secton 14 of
the ct of pr 3,1939 (T. D. 4909, supra), provdes that
s used n these reguatons the term contract means an agreement made
by authorty of the Secretary of War for the constructon or manufacture of any
compete arcraft or any porton thereof for the rmy.
Under secton 14 of the ct of pr 3, 1939, and the reguatons
promugated thereunder, the defcency n proft sustaned on a com-
peted contract for arcraft nstruments awarded by the Navy Depart-
ment under the nson ct, as amended, s not aowabe as a credt
n computng the e cess proft reazed upon competon of a contract
for arcraft nstruments awarded by the War Department under the
ct of pr 3, 1939.
28220 40 10
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MISC LL N OUS.
1940-3-10142
T. D. 4901
TITL 28 INT RN L R NU . C PT R I, SU C PT R , P RT 4 8.
Reguatons reatng to sezures of vesses, vehces, and arcraft
In connecton wth contraband frearms covered by secton (b)2.
ct of ugust 9, 1939.1
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 5,19 f.
To Coectors of Interna Revenue and Others Concerned:
Tabe of Contents.
Secton.
408.0. Introductory.
4 8.1. Defntons.
4 8.2. Reports of sezure.
4 8.3. Custody and storage.
4 8.4. pprasement.
408.. . dvertsement.
4 8.C. Requrements as to cam and bond.
4 8.7. Summary forfeture.
4 8.8. Presentaton for |udca acton.
408.9. Pettons for remsson or mtgaton of forfeture.
4 8.10. Tme for tng petton.
4 8.11. andng of petton.
4 8.12. penses: Dsposton of proceeds.
4 8.13. Reease on payment of apprased vaue.
408 14. wards.
408.15. Payments to offcers prohbted.
4 8.1 . ppcaton of Manua.
Secton 4 8.0. Introductory. The ct approved ugust 9, 1939
(f 3 Stat., 1291), provdng for the sezure and forfeture of vesses,
vehces, and arcraft used to transport narcotc drugs, frearms, ana
counterfet cons, obgatons, securtes, and paraphernaa, and for
other purposes, reads as foows:
That (a) t sha be unawfu (1) to transport, carry, or
convey any contraband artce n, upon, or by means of any vesse,
vehce, or arcraft (2) to concea or possess any contraband artce
n or upon any vesse, vehce, or arcraft, or upon the person of anyone
n or upon any vesse, vehce, or arcraft or (3) to use any vesse,
vehce, or arcraft to factate the transportaton, carrage, conveyance,
conceament, recept, possesson, purchase, sae, barter, e change, or
gvng away of any contraband artce.
(b) s used n ths secton, the term contraband artce means
(1) ny narcotc drug whch has been or s possessed wth ntent
to se or offer for sae n voaton of any aws or reguatons of the
Unted States deang therewth, or whch s sod or offered for sae n
voaton thereof, or whch does not bear approprate ta -pad nterna-
revenue stamps as requred by aw or reguatons
(2) ny frearm, wth respect to whch there has been commtted
any voaton of any provson of the Natona rearms ct, as now or
hereafter amended, or any reguaton ssued pursuant thereto or
(3) ny fasey made, forged, atered, or counterfet con or obga-
ton or other securty of the Unted States or of any foregn govern-
ment or any matera or apparatus, or paraphernaa ftted or ntended
1 Sectons 4C8.0 to 4 8.10 are Issued under the authorty contaned n the ct of u|ut
9, 1939 (53 Stat., 1291).
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to be used, or whch sha have been used, In the makng of any such
fasey made, forged, atered, or counterfet con or obgaton or other
securty.
Sec. 2. ny vesse, vehce, or arcraft whch has been or s beng used
In voaton of any provson of secton 1, or n, upon, or by means of
whch any voaton of secton 1 has taken or s takng pace, sha be
sezed and forfeted: Provded, That no vesse, vehce, or arcraft used
by any person as a common carrer In the transacton of busness as such
common carrer sha be forfeted under the provsons of ths ct uness
t sha appear that (1) n the case of a raway car or engne, the
owner, or (2) n the case of any other such vesse, vehce, or arcraft,
the owner or the master of such vesse or the owner or conductor, drver,
pot, or other person In charge of such vehce or arcraft was at the
tme of the aeged ega act a consentng party or prvy thereto: Pro-
vded further. That no vesse, vehce, or arcraft sha be forfeted under
the provsons of ths ct by reason of any act or omsson estabshed
by the owner thereof to have been commtted or omtted by any person
other than such owner whe such vesse, vehce, or arcraft was unaw-
fuy In the possesson of a person who acqured possesson thereof n
voaton of the crmna aws of the Unted States, or of any State.
Sec. 3. The Secretary of the Treasury s empowered to authorze, or
desgnate, offcers, agents, or other persons to carry out the provsons
of ths ct. It sha be the duty of any offcer, agent, or other person
so authorzed or desgnated, or authorzed by aw, whenever he sha
dscover any vesse, vehce, or arcraft whch has been or s beng
used n voaton of any of the provsons of ths ct, or n, upon, or
by means of whch any voaton of ths ct has taken or s takng
pace, to seze such vesse, vehce, or arcraft and to pace t n the
custody of such person as may be authorzed or desgnated for that
purpose by the Secretary of the Treasury, to awat dsposton pursuant
to the provsons of ths ct and any reguatons ssued hereunder.
Sec. 4. provsons of aw reatng to the sezure, summary and
udca forfeture, and condemnaton of vesses and vehces for voa-
ton of the customs aws the dsposton of such vesses and vehces
or the proceeds from the sae thereof the remsson or mtgaton of
such forfetures and the compromse of cams and the award of com-
pensaton to nformers In respect of such forfetures sha appy to
sezures and forfetures ncurred, or aeged to have been ncurred,
under the provsons of ths ct, nsofar as appcabe and not ncon-
sstent wth the provsons hereof: Provded, That such dutes as are
mposed upon the coector of customs or any other person wth respect
to the sezure and forfeture of vesses and vehces under the customs
aws sha be performed wth respect to sezures and forfetures of
vesses, vehces, and arcraft under ths ct by such offcers, agents, or
other persons as may be authorzed or desgnated for that purpose by
the Secretary of the Treasury.
Sec. 5. ny appropraton whch has been or sha hereafter be made
for the enforcement of the customs, narcotcs, counterfetng, or n-
terna-revenue aws, and the provsons of the Natona rearms ct
sha be avaabe for the defrayng of e penses of carryng out the
provsons of ths ct.
Sec. . The provsons of ths ct sha be construed to be suppe-
menta to, and not to mpar n any way, e stng provsons of aw
mposng fnes, penates, or forfetures or provdng for the sezure,
condemnaton, or dsposton of forfeted property or the proceeds
thereof or authorzng the remsson or mtgaton of fnes, penates,
or forfetures.
Sec. 7. When used In ths ct
(a) The term vesse ncudes every descrpton of watercraft or
other contrvance used, or capabe of beng used, as means of transpor-
taton In water, but does not ncude arcraft
(b) The term vehce ncudes every descrpton of carrage or
other contrvance used, or capabe of beng used, as means of transpor-
taton on, beow, or above the and, but does not ncude arcraft
(c) The term arcraft Incudes every descrpton of craft or car-
rage or other contrvance used, or capabe of beng used, as means of
transportaton through the ar
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(d) The term narcotc drug means any narcotc drag, as now or
hereafter defned by the Narcotc Drugs Import and port ct, the
Interna-revenue aws or any amendments thereof, or the reguatons
Issued thereunder or marhuana as now or hereafter defned by the
Marhuana Ta ct of 1937 or the reguatons ssued thereunder
(e) The term frearm means any frearm, as now or hereafter de-
fned hy the Natona rearms ct. or any amendments thereof, or the
reguatons ssued thereunder and
(f) The words obgaton or other securty of the Unted States are
used as now or hereafter defned n secton 147 of the Crmna Code, aa
amended (U. S. C, tte 18. secton 2 1).
Sec. 8. The Secretary of the Treasury sha prescrbe such raes and
reguatons as may be necessary to carry out the provsons of ths ct.
The foowng reguatons are hereby prescrbed under the ct of
ugust 9, 1939, reatve to the sezure and dsposton of vesses,
vehces, and arcraft when engaged n the transportaton, etc , of
contraband frearms wthn the meanng of the Natona rearms ct.
Secton 488.1. Defntons. s used n these reguatons, e cept as otherwse
ndcated by the conte t:
(a) The term ct means the ct of ugust 9. 1939 (53 Stat., 1291).
( ) The term conveyance means a vesse, vehce, or arcraft wthn the
scope of the ct and these reguatons.
(c) The terms sezng offcer, offcer sezng, etc., mean the Comms-
soner of Interna Revenue, the coector or deputy coector of the proper dstrct,
or such other coector, deputy coector or other offcer of nterna revenue as
may be specay authorzed by the Commssoner pursuant to secton 3720 of the
Interna Revenue Code to seze property egay sub|ect to sezure and who has
made sezure of a conveyance or adopted a sezure wthn the scope of these
reguatons.
(d) The term Secretary means the Secretary of the Treasury.
(e) The term Commssoner means the Commssoner of Interna Revenue.
(/) The term coector means the coector of nterna revenue.
(ff) The term Drector means the Drector of the Procurement Dvson of
the Treasury Department.
(h) The term Manua means the Manua of Procedure for orfeture and
Dsposton of Persona Property Sezed by the coho Ta Unt, ssued une,
1937.
(/) The terms defned n the ct sha have the meanngs thereby ascrbed
to them.
Sec. 4 8.2. Reports of sezure. n offcer sezng or adoptng the sezure of a
conveyance sha prompty make a compete wrtten report, n quadrupcate, to
the coector. The report sha show, n so far as feasbe, the foowng data:
The date and pace of sezure, the name and address of the person from whom
sezed, a specfc descrpton of the conveyance, ncudng the make, type, mode,
and year of manufacture, the regstraton and motor and sera numbers, f any,
and the genera condton the name and address of the owner, the names and
addresses of wtnesses, the reasons for and crcumstances of the sezure, a de-
scrpton of the contraband artces, the dsposton made of the contraband
artces, and any other pertnent nformaton. So far as practcabe the descrp-
ton of the conveyance sha be n the form of, and Incude the detas ndcated
by, orm 181. (See Manua.)
The coector sha forward two copes of the report to the Commssoner, and
sha advse of ater deveopments as they occur.
Sec. 4 8.3. Custody and storage. ny conveyance sezed under the provsons
of these reguatons sha be n the custody of the coector for the dstrct
n whch the sezure s made. The sezng offcer sha store the conveyance
n a pace desgnated, ether generay or n the partcuar case, by the coector.
The pace of storage sha be n the |udca dstrct n whch the sezure
occurred. Government storage factes sha be utzed If practcabe. If
the conveyance s stored on prvate premses there sha be secured from the
propretor thereof and forwarded wth the report to the coector a recept
for the conveyance concdng wth the descrpton n the report to the coector.
Conveyances may not be used pror to forfeture and award for offca use.
Sec. 4 8.4. pprasement. The coector sha apprase the conveyance to
determne the vaue at the tme and pace of apprasement, or If there s
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no market for the conveyance at the pace of apprasement, the vaue n the
prncpa market nearest the pace of apprasement. The apprasa may be
based upon the report of the sezng offcer and any other nformaton whch
may be acqured.
Sec. 4 8.5. dvertsement. If the apprased vaue doeR not e ceed 1,000,
the coector sha cause a notce of the sezure and of the ntenton to forfet
aDd se or otherwse dspose of the property to be pubshed once a week for
at east three successve weeks In a newspaper of genera crcuaton n the
udca dstrct n whch the sezure occurred. The notce sha not be nserted
oftener than three tmes, uness the coector s of the opnon that, because
of crcumstances pecuar to the partcuar case, a greater number of nsertons
w be to the advantage of the Government. The notce sha
(1) descrbe the conveyance sezed and show the regstraton and motor
and sera numbers, f any
(2) show the reason for, and tme and pace of, sezure and
(3) tate that any person desrng to cam the conveyance may, wthn
20 days from the date of frst pubcaton of the notce, fe wth the
coector a cam for the conveyance and a bond for costs of udca
condemnaton wth satsfactory suretes n the sum of 250 and that
uness such cam and bond are fed wthn the stated tme the conveyance
w be dsposed of n accordance wth aw. See form of advertsement
on page 8 of Manua whch may be adapted to the purposes of these
reguatons.
Sec. 4 8. . Requrements as to cam and bond. The bond and cam sha
be In trpcate. The bond sha suffcenty Identfy the conveyance, sha run
to the Unted States of merca, have suretes approved by the coector, and
be condtoned that In case of condemnaton of the conveyance the obgor
ha pay a the costs and e penses of the proceedng to obtan the condemna-
ton. ond, orm 175, may be adapted for the purposes of these reguatons.
When a cam and bond are receved by the coector, he sha, f he fnds the
documents n proper form and the suretes satsfactory, proceed n accordance
wth secton 4 8.8 of these reguatons. If the documents are not In sats-
factory form when frst receved by the coector, a reasonabe tme for cor-
recton may be aowed. If correcton Is not made wthn a reasonabe tme
the documents may be treated as nugatory, and the case may proceed as though
they had not been tendered. The fng n proper form of the cam and bond
does not entte the camant to possesson of the conveyance but stops the
summary proceedngs.
Sec. 4 8.7. Summary forfeture. If the apprased vaue does not e ceed
1,000, and the cam and bond mentoned n secton 4 8. are not fed wthn
20 days, the coector sha e ecute, n dupcate, a decaraton of forfeture,
and forward one copy thereof to the Commssoner. The decaraton shoud
ate that t Is made n accordance wth the provsons of secton 09 of the
Tarff ct of 1930 and shoud foow, wth necessary modfcatons, orm 1570.
( ee Manua.) Thereafter the conveyance sha be dsposed of In accordance
wth offca nstructons duy receved by the coector.
Sac. 4 8.8. Presentaton for |udca acton. If the apprased vaue s greater
than 1,000, or If the apprased vaue s not more than 1,000 but a cam and
satsfactory bond have been receved (see secton 4 8. of these reguatons),
the coector sha transmt a copy of the report of the sezng offcer, and a
suppementa report of any pertnent facts and crcumstances addtona to
those dscosed by the sezng offcer s report (see secton 4 8.2 of these regua-
tons), to the Unted States attorney for the |udca dstrct n whch the
sezure was made for Insttuton of condemnaton proceedngs. If the sezure
has been advertsed the report sha Incude copes of the newspapers contan-
ng the advertsements. Immedatey upon reference of a case to the Unted
States attorney, the coector sha notfy the Commssoner. The Commssoner
w, f be deems such acton approprate, request the Drector of Procurement
to petton the court for devery of the vehce for offca use. See Treasury
Decson 4 25 (secton 3), Cumuatve uetn -1 (19.3G), page 492.
8bc. 4 8.9. Pettons for remsson or mtgaton of forfeture. ny person
nterested n any conveyance wthn the scope of these reguatons whch has
been forfeted, ether summary or by court proceedngs, or whch s hed
or forfeture, may wthn the tme prescrbed (see secton 4(58.10 of these regu-
atons) fe a petton for remsson or mtgaton of the forfeture. Such pet-
ton sha be fed n dupcate wth the coector.
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28
The petton sha be addressed to the Secretary and sha be e ecuted and
sworn to by the pettoner. The petton sha state n cear and concse terms
the foowng:
(1) compete descrpton of the conveyance, Incudng regstraton num-
ber and motor and sera numbers, f any, the name of the owner, and of
the person from whom sezed, as we as the date and pace of sezure.
(2) The nterest of the pettoner n the conveyance, whch sha be
estabshed by bs of sae, contracts, mortgages, or other satsfactory docu-
mentary evdence fed wth the petton.
(3) The crcumstances, to be estabshed by satsfactory proof, reed upon
by the pettoner to |ustfy remsson or mtgaton.
Where the forfeture and sae has aready occurred (see secton 4 8.10 of these
reguatons) t must be estabshed by satsfactory proof that the pettoner dd
not know of the sezure pror to the forfeture, and was n such crcumstances
as prevented hm from knowng thereof.
If the conveyance, when sezed, was n possesson of a thrd person whose con-
duct was responsbe for the forfeture, there sha be ncuded evdence showng
how the conveyance came nto the possesson of such person, and evdence of any
nvestgaton made by the pettoner pror to partng wth the conveyance. If
such nvestgaton was not made, the reason for not makng t sha be stated.
Sec. 408.10. Tme for fng petton. petton for remsson or mtgaton of
a forfeture must be seasonaby fed. Where the petton s for restoraton of
the proceeds of sae, t must be fed wthn three months after the date of sae
In the case of a conveyance whch s retaned or awarded for offca use, the
retenton or devery sha be regarded as a sae for the purposes of these
reguatons.
Sec. 4 8.11. andna of petton. Upon recept of a petton n a case whch
has been reported to the Unted States attorney for nsttuton of |udca for-
feture proceedngs, the coector sha forward both copes of the petton to the
Unted States attorney who sha be furnshed wth a Informaton that may be
requested, or that may seem of assstance In the dsposton of the case. The
coector sha notfy the pettoner that the petton has been referred to the
Unted States attorney, and advse that the matter s wthn the |ursdcton of the
Department of ustce. If the case has not been reported to the Unted States
attorney, the coector sha forward to the Commssoner the orgna of the
petton wth a report of any addtona nvestgaton made, and a statement o
the e penses and costs ncurred, the ta es, f any, owng by the pettoner on the
conveyance, and the coector s recommendaton.
Sec 4 8.12. penses: Dsposton of proceeds. penses n connecton wth
a sezure and forfeture wthn the scope of these reguatons sha be pad
from the nterna revenue appropraton. If the conveyance s sod, the net
proceeds, after rembursng the appropraton for a e penses n connectou
wth the sezure and forfeture, sha be deposted as other nterna revenue
recepts. In the event that the conveyance Is transferred to another edera
agency, such agency sha remburse the nterna revenue appropraton for a
e penses ncurred.
If the forfeture and sae be by court proceedngs, the sum recovered after
deductng a approprate charges for marsha s fees, court costs, etc., s payabe
to the coector. When such sum Is receved by the coector he sha ds-
trbute t wthout deay.
Sec. 4 8.13. Reease on payment of apprased vaue. If any person camng
an nterest n any conveyance wthn the scope of these reguatons offers to pay
the apprased vaue thereof (see secton 4 8.4 of these reguatons), and t ap-
pears that the camant has n fact a substanta nterest In the conveyance,
the coector may, sub|ect to the approva of the Secretary, accept the offer
and reease the conveyance upon payment of the money, whch sha be ds-
trbuted n accordance wth secton 4 8.12 of these reguatons.
The offer must be n wrtng, addressed to the Secretary, sgned by the cam-
ant, and submtted n dupcate to the coector. It must e press assent to
forfeture of the conveyance and wave further proceedngs. The offer sha
be supported by such proof of ownershp as n the opnon of the coector Is
necessary. The coector sha forward the offer to the Commssoner and
retan custody of the conveyance, pendng acton on the offer and payment
of the amount of the offer f t s approved.
Sec. 4 8.14. wards. ny person not an offcer of the Unted State who
takes and sezes any conveyance wthn the scope of these reguatons, and re-
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ports the matter to an offcer of nterna revenue or who furnshes nformaton
eadng to the forfeture of such a conveyance, may be awarded compensaton
of 25 per cent of the net amount reazed, but not e ceedng 50,000 n any
case whch sha be pad out of the nterna revenue appropraton. If a for-
feted conveyance s destroyed n eu of sae, or devoted to offca use, com-
pensaton of 25 per cent of the apprased vaue, not to e ceed 50,000 n
ny case, may be awarded and pad. wards may not be pad out of the pro-
ceeds of sae.
When nformaton of the e stence of ega bass for sezure s furnshed
to an nterna revenue offcer n wrtng, the orgna w be forwarded mme-
datey to the Commssoner. The offcer sha retan a copy. If the Informa-
ton Is furnshed oray, a memorandum thereof w be made and kewse
forwarded. owever, approprate acton sha be taken In the case wthout
awatng nstructons from the Commssoner.
The cam of an nformer, or of a detector and sezor, sha be e ecuted n
trpcate on orm No. 211, appropratey amended. The orgna of a cam for
compensaton sha contan the sgnatures of the respectve partes to the cam.
ny number of addtona copes necessary to compete the coector s fes may
be requred. The cam must show the date when, and the crcumstances under
whch, the nformaton was furnshed or the conveyance was detected and
sezed, and fary state a the pertnent facts of the case.
The coector of the dstrct n whch the cam orgnated w attach a
statement showng the foowng facts:
(1) The pace of sezure (2) the date of sezure (8) the statutes on the
voaton of whch the sezure was based (4) a fu descrpton of the con-
veyance and any other property sezed (5) the names of the persons Invoved
In the voaton ( ) the net amount reazed from the forfetures (7) the date
when the amount reazed was deposted, and the amount of the certfcate of
depost (8) the amount pad In compromse. If any, and the date of payment
(9) the amount of e penses payabe from the Interna revenue appropraton
and (10) If the conveyance was reeased upon payment of the apprased vaue,
or the conveyance was devoted to offca use, the apprased vaue, as we as
costs and e penses Incurred, or that woud propery have been Incurred had
the ordnary procedure been foowed.
The coector sha Indcate hs approva or dsapprova of the cam and sha
certfy whether or not the camant was an offcer of the Unted States, and f
an Informer, whether he furnshed the orgna Informaton n the case, and
f a detector and sezor, whether the camant actuay detected and sezed the
conveyance, and In ether case whether any person other than tho camant gave
orgna nformaton n the case.
Cams w be transmtted by the coector to the Commssoner n dupcate.
Where there s a decree or order of court desgnatng the nformer a copy
thereof sha aso be forwarded. In a contested case the coector sha forward
the appcatons of a camants and furnsh a statement of the facts bearng
on the merts of the severa cams together wth hs recommendaton.
Sec. 4 8.15. Payments to offcers prohbted. If any offcer of the Unted States
frecty or ndrecty receves, accepts, or contracts for the recept of, any por-
ton of any award whch may accrue to any person detectng and sezng, or
furnshng nformaton n a case wthn the scope of these reguatons, he w
be guty of a feony, and upon convcton w be abe to a fne of not more
than 10,000, or Imprsonment for not more than two years, or both fne and
Imprsonment and sha be thereafter Inegbe to any offce. ny money or
property so pad may be recovered.
Sec. 4 8.1 . ppcaton of Manua. Wth respect to procedura detas not
e pressy covered by these reguatons, coectors and other offcers may foow
the procedure estabshed by the Manua (see secton 4 8.1 (ft) of these regua-
tons) In so far as appcabe and not nconsstent wth these or any other regua-
tons or any statutory provson, wth such varatons as may be approprate
bt the crcumstances.
erbert . Gaston,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 8, 1940, 12.4 p. m.)
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1940-15-1O233
Doube ta aton Conventon and protoco between the Unted
States of merca and Sweden Sgned at Washngton March 23,
1939 ratfcaton advsed by the Senate of the Unted States ugust
2, 1939 ratfed by the Presdent of the Unted States September
8, 1939 ratfed by Sweden ugust 21, 1939 ratfcatons e changed
at Stockhom November 14, 1939 procamed by the Presdent of
the Unted States December 12, 1939.
Y T PR SID NT O T UNIT D ST T S O M RIC PROCL M TION.
Whereas a conventon between the Unted States of merca and
Sweden for the avodance of doube ta aton and the estabshment
of rues of recproca admnstratve assstance n the case of ncome
and other ta es, and a protoco formng an ntegra part of the sad
conventon, were concuded and sgned by ther respectve Penpoten-
tares at Washngton on the twenty-thrd day of March, one thousand
nne hundred and thrty-nne, the orgna of whch conventon and
protoco beng n the ngsh and Swedsh anguages, are word for
word as foows:
The Presdent of the Unted States of merca and s Ma|esty the ng
of Sweden, beng desrous of avodng doube ta aton and of estabshng rues of
recproca admnstratve assstance In the case of ncome and other ta es,
have decded to concude a conventon and for that purpose have apponted as
ther respectve Penpotentares:
The Presdent of the Unted States of merca:
Sumner Wees, ctng Secretary of State of the Unted States of merca
and
s Ma|esty the ng of Sweden:
W. ostrnu, nvoy traordnary and Mnster Penpotentary at Wash-
ngton
who, havng communcated to one another ther fu powers found In good and
due form, have agreed upon the foowng artces:
rtce I.
The ta es referred to n ths conventon are:
(a) In the case of the Unted States of merca:
(1) The edera ncome ta es, ncudng surta es and e cess-profts ta es.
(2) The edera capta stock ta .
( ) In the case of Sweden :
(1) The Natona ncome and property ta , ncudng surta .
(2) The Natona speca property ta .
(3) The communa ncome ta .
It s mutuay agreed that the present conventon sha aso appy to any
other or addtona ta es mposed by ether contractng State, subsequent to
the date of sgnature of ths conventon, upon substantay the same bases as
the ta es enumerated heren.
The benefts of ths conventon sha accrue ony to ctzens and resdents of
the Unted States of merca, to ctzens and resdents of Sweden and to Unted
States or Swedsh corporatons and other enttes.
btce II.
n enterprse of one of the contractng States Is not sub|ect to ta aton by
the other contractng State n respect of ts ndustra and commerca profu
e cept In respect of steh profts aocabe to ts permanent estabshment n
the atter State. The ncome thus ta ed n the atter State sha be e empt
from ta aton n the former State.
No account sha be taken, n determnng the ta In one of the contractng
States, of the mere purchase of merchandse effected theren by an enterprse
of the other State.
The competent authortes of the two contractng States may ay down rue
by agreement for the apportonment of ndustra and commerca profts.
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RTICL III.
When an enterprse of one of the contractng States, by reason of Its par-
tcpaton n the management or capta of an enterprse of the other con-
tractng State, makes or mposes on the atter n ther commerca or fnanca
reatons condtons dfferent from those whch woud be made wth an Inde-
pendent enterprse, any profts whch shoud normay have appeared n the
aanoe sheet of the atter enterprse but whch have been n ths manner
dverted to the former enterprse may, sub|ect to appcabe measures of appea,
be ncorporated n the ta abe profts of the atter enterprse. In such case
consequent rectfcatons may be made In the accounts of the former enterprse.
rtce I .
Income whch an enterprse of one of the contractng States derves from
the operaton of shps or arcraft regstered In that State s ta abe ony n
the State n whch regstered. Income derved by such an enterprse from the
operaton of shps or arcraft not so regstered sha be sub|ect to the prov-
sons of rtce II.
rtce .
Income of whatever nature derved from rea property, Incudng gans de-
rved from the sae of such property, but not ncudng Interest from mort-
gages or bonds secured by rea property, sha be ta abe ony n the con-
tractng State n whch the rea property s stuated.
rtce I,
Royates from rea property or n respect of the operaton of mnes, quarres,
or other natura resources sha be ta abe ony n the contractng State n
whch such property, mnes, quarres, or other natura resources are stuated.
Other royates and amounts derved from wthn one of the contractng
tates by a resdent or by a corporaton or other entty of the other con-
tractng State as consderaton for the rght to use copyrghts, patents, secret
processes and formuas, trade-marks and other anaogous rghts, sha be
e empt from ta aton n the former State.
rtce II.
1. Dvdends sha be ta abe ony n the contractng State n whch the
sharehoder s resdent or, f the sharehoder s a corporaton or other entty,
n the contractng State n whch such corporaton or other entty s created
or organzed provded, however, that each contractng State reserves the rght
to coect and retan (sub|ect to appcabe provsons of ts revenue aws) the
ta es whch, under ts revenue aws, are deductbe at the source, but not In
e cess of 10 per centum of the amount of such dvdends. or the purposes
of ths artce the natona ncome and property ta mposed by Sweden sha
be deemed to be a ta deducted at the source.
2. Notwthstandng the provsons of rtce II of ths conventon, the
provsons of ths artce may be termnated by ether of the contractng States
at the end of two years from the date upon whch ths conventon enters nto
force or at any tme thereafter, provded at east s months pror notce of
termnaton s gven, such termnaton to become effectve on the 1st day of
anuary foowng the e praton of such -month perod. Ia the event the
provsons of ths artce are termnated, the provsons of
(1) rtce III(2), In so far as they reate to the speca property
ta mposed by Sweden upon shares n a corporaton
(2) rtce I (b)(2), reatng to the aowance of an addtona de-
ducton from ta es on dvdends and
(3) rtce I, n so far as they reate to e change of nformaton
wth respect to dvdends,
w kewse termnate.
rtce III.
Interest on bonds, notes, or oans sha be ta abe ony n the contractng
State n whch the recpent of such nterest s a resdent or, n the case of
t corporaton or other entty, n the State n whch the corporaton or other
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290
entty Is created or organzed provded, however, that each contractng Stat
reserves the rght to coect and retan (sub|ect to appcabe provsons of ts
revenue aws) the ta es whch, under ts revenue aws, are deductbe at the
source.
rtce I .
Gans derved n one of the contractng States from the sae or e change of
capta assets by a resdent or a corporaton or other entty of the other con-
tractng State sha be e empt from ta aton n the former State, provded
such resdent or corporaton or other entty has no permanent estabshment
n the former State.
rtce .
Wages, saares and smar compensaton and pensons pad by one of the
contractng States or by the potca subdvsons or terrtores or possessons
thereof to ndvduas resdng n the other State sha be e empt from ta a-
ton n the atter State.
Prvate pensons and fe annutes derved from wthn one of the con-
tractng States and pad to ndvduas resdng n the other contractng State
sha be e empt from ta aton n the former State.
rtce L
(a) Compensaton for abor or persona servces, ncudng the practce of
the bera professons, sha be ta abe ony n the contractng State n whch
such servces are rendered.
ft) The provsons of paragraph (a) are, however, sub|ect to the foown
e ceptons:
resdent of Sweden sha be e empt from Unted States ta upon com-
pensaton for abor or persona servces performed wthn the Unted States
of merca f he fas wthn ether of the foowng cassfcatons:
1. e s temporary present wthn the Unted States of merca for
a perod or perods not e ceedng a tota of 180 days durng the ta abe
year and hs compensaton s receved for abor or persona servces per-
formed as an empoyee of, or under contract wth, a resdent or corpora-
ton or other entty of Sweden or
2. e s temporary present n the Unted States of merca for a perod
or perods not e ceedng a tota of 90 days durng the ta abe year and
the compensaton receved for such servces does not e ceed 3,000 n the
aggregate.
In such cases Sweden reserves the rght to the ta aton of such Income.
(c) The provsons of paragraph ( ) of ths artce sha appy, mutats
mutands, to a resdent of the Unted States of merca dervng compensa-
ton for persona servces performed wthn Sweden.
( f) The provsons of paragraphs (ft) and (c) of ths artce sha have no
appcaton to the professona earnngs of such ndvduas as actors, artsts,
muscans and professona athetes.
(e) The provsons of ths artce sha have no appcaton to the ncome to
whch rtce reates.
rtce II.
Students or busness apprentces from one contractng State resdng n the
other contractng State e cusvey for purposes of study or for acqurng bus-
ness e perence sha not be ta abe by the atter State In respect of remt-
tances receved by them from wthn the former State for the purposes of ther
mantenance or studes.
rtce III.
In the case of ta es on property or ncrement of property the foowng
provsons sha be appcabe:
(1) If the property conssts of:
(a) Immovabe property and accessores appertanng thereto
(ft) Commerca or ndustra enterprses, ncudng martme shppng
and ar transport undertakngs
the ta may be eved ony n that contractng State whch Is entted tnder
the precedng artces to ta the ncome from such property.
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(2) In the case of a other forms of property, the ta may be eved ony
tat that contractng State where the ta payer has hs resdence or, In the case
of a corporaton or other entty, n the contractng State where the corporaton
or other entty has been created or organzed.
The same prncpes sha appy to the Unted States capta stock ta wth
respect to corporatons of Sweden havng capta or other property n the
Unted States of merca.
btce I .
It Is agreed that doube ta aton sha be avoded In the foowng manner:
(a) Notwthstandng any other provson of ths conventon, the Unted
States of merca In determnng the ncome and e cess-profts ta es, ncudng
a surta es, of Its ctzens or resdents or corporatons, may ncude n the
bass upon whch such ta es are mposed a tems of ncome ta abe under the
revenue aws of the Unted States of merca as though ths conventon had
not come nto effect The Unted States of merca sha, however, deduct the
amount of the ta es specfed n rtce 1( ) (1) and (3) of ths conventon
or other ke ta es from the ncome ta thus computed but not n e cess of
that porton of the ncome ta abty whch the ta payer s net ncome ta abe
In Sweden bears to bs entre net Income.
(b) (1) Notwthstandng any other provson of ths conventon, Sweden, n
determnng the graduated ta on ncome and property of ts resdents or cor-
poratons or other enttes, may ncude n the bass upon whch such ta s
mposed a Items of Income and property sub|ect to such ta under the ta aton
aws of Sweden. Sweden sha, however, deduct from the ta so cacuated
that porton of such ta abty whch the ta payer s ncome and property
e empt from ta aton n Sweden under the provsons of ths conventon bears
to hs entre ncome and property.
(2) There sha aso be aowed by Sweden from ts natona Income and
property ta a deducton offsettng the ta deducted at the source In the Unted
States of merca, amountng to not ess than 5 per centum of the dvdends
from wthn the Unted States of merca and sub|ect to such ta In Sweden.
It Is agreed that the Unted States of merca sha aow a smar credt
(ganst the Unted States ncome ta abty of ctzens of Sweden resdng n
the Unted States of merca.
btce .
Wth a vew to the more effectve Imposton of the ta es to whch the present
conventon reates, each of the contractng States undertakes, sub|ect to rec-
procty, to furnsh such nformaton In the matter of ta aton, whch the author-
tes of the State concerned have at ther dsposa or are n a poston to obtan
under ther own aw, as may be of use to the authortes of the other State n
the assessment of the ta es n queston and to end assstance n the servce
of documents n connecton therewth. Such Informaton and correspondence
reatng to the sub|ect matter of ths artce sha be e changed between the
competent authortes of the contractng States n the ordnary course or on
demand.
rtce I.
1. In accordance wth the precedng artce, the competent authortes of the
Unted States of merca sha forward to the competent authortes of Sweden
as soon as practcabe after the cose of each caendar year the foowng
Informaton reatng to such caendar year:
(a) The names and addresses of a addressees wthn Sweden dervng from
sources wthn the Unted States of merca dvdends, nterest, royates, pen-
sons, annutes, or other f ed or determnabe annua or perodca ncome,
showng the amount of such ncome wth respect to each addressee
(5) ny partcuars whch the competent Unted States authortes may
obtan from banks, savngs banks or other smar nsttutons concernng
assets beongng to ndvduas resdent n Sweden or to Swedsh corporatons
or other enttes
(c) ny partcuars whch the competent Unted States authortes may
obtan from nventores n the case of property passng on death concernng
febts contracted wth ndvduas resdent n Sweden or Swedsh corporatons
or other enttes.
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2. The competent authortes of Sweden sha forward to the competent
authortes of the Unted States of merca as soon as practcabe after th
cose of each caendar year the foowng nformaton reatng to such caendar
year:
(a) The partcuars contaned n the forms devered to the Swedsh author-
tes n connecton wth the payment to Indvduas or corporatons or other
enttes whose addresses are wthn the Unted States of merca of dvdends
on shares n a corporaton or partcpaton certfcates n cooperatve socetes,
and nterest on bonds or other smar securtes
( ) The partcuars contaned n permts accorded to ndvduas resdent n
the Unted States of merca or to Unted States corporatons or other enttes
to enabe them to acqure for busness purposes mmovabe property stuated
n Sweden
(c) ny partcuars whch the centra Swedsh authortes may obtan from
banks, savngs banks or other smar nsttutons concernng assets beongng
to ndvduas resdent n the Unted States of merca or to Unted States
corporatons or other enttes
(d) ny partcuars whch the centra Swedsh authortes may obtan
from nventores n the case of property passng on death, concernng debts
contracted wth ndvduas resdent n the Unted States of merca, or
Unted States corporatons or other enttes
(e) st of the names and addresses of a Unted States ctzens resdent
n the Unted States of merca who have made decaratons to the Centra
Commttee n Stockhom n charge of the ta aton of ta payers not resdent
n Sweden for purposes of the Swedsh ta on ncome and property
(f) Partcuars concernng annutes and pensons, pubc or prvate, pad
to ndvduas resdent n the Unted States of merca.
rtce II.
ach contractng State undertakes, n the case of ctzens or corporatons
or other enttes of the other contractng State, to end assstance and support
n the coecton of the ta es to whch the present conventon reates, together
wth nterest, costs, and addtons to the ta es and fnes not beng of a pena
character. The contractng State makng such coecton sha be responsbe
to the other contractng State for the sums thus coected.
In the case of appcatons for enforcement of ta es, revenue cams of each
of the contractng States whch have been fnay determned sha be accepted
for enforcement by the other contractng State and coected In that State n
accordance wth the aws appcabe to the enforcement and coecton of Its
own ta es. The State to whch appcaton s made sha not be requred to
enforce e ecutory measures for whch there Is no provson n the aw of the
State makng the appcaton.
The appcatons sha be accompaned by such documents as are requred
by the aws of the State makng the appcaton to estabsh that the ta es have
been fnay determned.
If the revenue cam has not been fnay determned the State to whch
appcaton s made may, at the request of the other contractng State, take
such measures of conservancy as are authorzed by the revenue aws of the
former State.
rtce III.
The competent authorty of each of the contractng States sha be entted
to obtan, through dpomatc channes, from the competent authorty of the
other contractng State, partcuars n concrete enses reatve to the appcaton
to ctzens or to corporatons or other enttes of the former State, of the ta es
to whch the present conventon reates. Wth respect to partcuars n other
cases, the competent authorty of each of the contractng States w gve
consderaton to requests from the competent authorty of the other con-
tractng State.
rtce I .
In no case sha the provsons of rtce II, reatng to mutua assstance
In the coecton of ta es, or of rtce III, reatng to partcuars n concrete
cases, be construed so as to mpose upon ether of the contractng State
the obgaton
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(1) to carry out admnstratve measures at varance wth the reguatons
and practce of ether contractng State, or
(2) to suppy partcuars whch are not procurabe under Its own egsaton
or that of the State makng appcaton.
The State to whch appcaton s made for Informaton or assstance sha
compy as soon as possbe wth the request addressed to t. Nevertheess,
such State may refuse to compy wth the request for reasons of pubc pocy
or If compance woud nvove voaton of a busness, ndustra or trade
secret or practce. In such case It sha Inform, as soon as possbe, the State
makng the appcaton.
rtce .
Where a ta payer shows proof that the acton of the revenue authortes
of the contractng States has resuted n doube ta aton n hs case n respect
of any of the ta es to whch the present conventon reates, he sha be entted
to odge a cam wth the State of whch he s a ctzen or, f he s not a
ctzen of ether of the contractng States, wth the State of whch he s a
resdent, or, f the ta payer Is a corporaton or other entty, wth the State
n whch It Is created or organzed. Shoud the cam be uphed, the competent
authorty of such State may come to an agreement wth the competent authorty
of the other State wth a vew to equtabe avodance of the doube ta aton
n queston.
etce I.
The competent authortes of the two contractng States may prescrbe regua-
tons necessary to Interpret and carry out the provsons of ths conventon.
Wth respect to the provsons of ths conventon reatng to e change of n-
formaton, servce of documents and mutua assstance n the coecton of ta es,
auch authortes may, by common agreement, prescrbe rues concernng mat-
ters of procedure, forms of appcaton and repes thereto, converson of cur-
rency, dsposton of amounts coected, mnmum amounts sub|ect to coecton
and reated matters.
rtce II.
The present conventon sha be ratfed, In the case of the Unted States
of merca, by the Presdent, by and wth the advce and consent of the
enate, and n the case of Sweden, by s Ma|esty the ng, wth the consent
of the Rksdag. The ratfcatons sha be e changed at Stockhom.
Ths conventon sha become effectve on the 1st day of anuary foowng
the e change of the Instruments of ratfcaton and sha appy to ncome
reazed and property hed on or after that date. The conventon sha reman
n force for a perod of fve years and ndefntey thereafter but may be
termnated by ether contractng State at the end of the 5-year perod or at
any tme thereafter, provded at east s months pror notce of termnaton
has been gven, the termnaton to become effectve on the 1st day of anuary
foowng the e praton of the -month perod.
In wtness whereof the respectve penpotentares have sgned ths con-
venton and have aff ed ther seas hereto.
Done n dupcate, n the ngsh and Swedsh anguages, both authentc,
at Washngton, ths 23d day of March, 1939.
or the Presdent of the Unted States of merca:
sea Sumner Wees.
or s Ma|esty the ng of Sweden:
sea W. ostrom.
PROTOCOL.
t the moment of sgnng the conventon for the avodance of doube ta aton,
and the estabshment of rues of recproca admnstratve assstance n the
ease of Income and other ta es, ths day concuded between the Unted States of
merca and Sweden, the undersgned penpotentares have agreed that the
foowng provsons sha form an Integra part of the conventon:
1. s used n ths conventon:
( ) The term permanent estabshment Incudes branches, mnes and o
wes, pantatons, factores, workshops, warehouses, offces, agences, nsta-
atons, and other f ed paces of busness of an enterprse but does not ncude
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294
the casua or temporary use of merey storage factes. permanent estab-
shment of a subsdary corporaton sha not be deemed to be a permanent
estabshment of the parent corporaton. When an enterprse of one of the
contractng States carres on busness m the other State through an empoyee
or agent, estabshed there, who has genera authorty to contract for hs
empoyer or prncpa, t sha be deemed to have a permanent estabshment
n the atter State. ut the fact that an enterprse of one of the contractng
States has busness deangs n the other State through a bona fde commsson
agent, broker or custodan sha not be hed to mean that such enterprse has a
permanent estabshment n the atter State.
( ) The term enterprse ncudes every form of undertakng whether car-
red on by an ndvdua, partnershp, corporaton, or any other entty.
(c) The term enterprse of one of the contractng States means, as the
case may be, Unted States enterprse or Swedsh enterprse.
(d) The term Unted States enterprse means an enterprse carred on n
the Unted States of merca by a resdent of the Unted States of merca or
by a Unted States corporaton or other entty the term Unted States cor-
poraton or other entty means a partnershp, corporaton or other entty
created or organzed n the Unted States of merca or under the aw of the
Unted States of merca or of any State or Terrtory of the Unted States of
merca.
(c) The term Swedsh enterprse s defned n the same manner, mutats
mutands, as the term Unted States enterprse.
2. The term corporaton ncudes assocatons, |ont-stock companes, and
Insurance companes.
3. ctzen of one of the contractng States not resdng n ether sha be
deemed, for the purpose of ths conventon, to be a resdent of the contractng
State of whch he s a ctzen.
When doubt arses wth respect to resdence or wth respect to the ta abe
status of corporatons or other enttes, the competent authortes of the two
contractng States may sette the queston by mutua agreement.
4. The provsons of Swedsh aw concernng the ta aton of the undvded
estates of deceased persons sha not appy where the benefcares are drecty
abe to ta aton n the Unted States of merca.
5. The term fe annutes referred to n rtce of ths conventon means
a stated sum payabe perodcay at stated tmes durng fe, or durng a spec-
fed number of years, under an obgaton to make the payments n consdera-
ton of a gross sum pad for such obgaton.
. The Swedsh so-caed fees ta (bevnngsavgft for vssa offentga
foresttnngar) based on gross ncome n so far as t affects such ndvduas
as actors, artsts, muscans and professona athetes sha be deemed to be an
ncome ta for the purposes of rtce I (a).
The credt for ta es provded n rtce I sha have no appcaton to
ta es deducted at the source from dvdends and nterest e cept to the e tent
provded n paragraph (b), (2) of that artce.
In the appcaton of the provsons of ths conventon the benefts of secton
131 of the Unted States Revenue ct of 1938, reatng to credts for foregn
ta es, sha be accorded, but the credt provded for n rtce I (a) sha
not e tend to Unted States e cess-profts ta es nor to the surta mposed on
persona hodng companes.
7. Ctzens of each of the contractng States resdng wthn the other con-
tractng State sha not be sub|ected n the atter State to other or hgher ta es
than are mposed upon the ctzens of such atter State.
8. The provsons of ths conventon sha not be construed to deny or affect
n any manner the rght of dpomatc and consuar offcers to other or add-
tona e emptons now en|oyed or whch may hereafter be granted to such
offcers, nor to deny to ether of the contractng States the rght to sub|ect
to ta aton ts own dpomatc and consuar offcers.
9. The provsons of the present conventon sha not be construed to restrct
n any manner any e empton, deducton, credt or other aowance accorded by
the aws of one of the contractng States n the determnaton of the ta Im-
posed by such State.
10. In the admnstraton of the provsons of ths conventon reatng to e -
change of nformaton, servce of documents, and mutua assstance In coecton
of ta es, fees and costs ncurred n the ordnary course sha be borne by the
State to whch appcaton s made but e traordnary costs Incdent to speca
forms of procedure sha be borne by the appyng State.
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295
Msc.
1L Documents and other communcatons or nformaton contaned theren,
transmtted under the provsons of ths conventon by one of the contractng
States to the other contractng State sha not be pubshed, reveaed or ds-
cosed to any person e cept to the e tent permtted under the aws of the
atter State wth respect to smar documents, communcatons or nformaton.
12. s used wth respect to revenue cams n rtce II of ths conven-
ton the term fnay determned sha be deemed to mean:
(a) In the case of Sweden, cams whch have been fnay estabshed, even
though st open to revson by e ceptona procedure
) In the case of the Unted States of merca, cams whch are no onger
appeaabe, or whch have been determned by decson of a competent trbuna,
whch decson has become fna.
13. s used n ths conventon the term competent authorty or com-
petent authortes means, n the case of the Unted States of merca, the
Secretary of the Treasury and n the case of Sweden, the nance Mnstry.
14. The term Unted States of merca as used n ths conventon n a
geographca sense ncudes ony the States, the Terrtores of aska and
awa, and the Dstrct of Coumba.
15. Shoud any dffcuty or doubt arse as to the nterpretaton or appca-
ton of the present conventon, or ts reatonshp to conventons between one
of the contractng States and any other State, the competent authortes of the
contractng States may sette the queston by mutua agreement.
1 . The present conventon and protoco sha not be deemed to affect the
e change of notes between the Unted States of merca and Sweden pro-
vdng reef from doube ncome ta aton on shppng profts, sgned March
31. 1938.
Done at Washngton, ths 23d day of March, 1939.
seat. Sumner Wf es,
sea W. ostrom.
nd whereas the sad conventon and the sad protoco have been
duy ratfed on both parts and the ratfcatons of the two Govern-
ments were e changed at Stockhom on the 14th day of November,
one thousand nne hundred and thrty-nne
nd whereas, as s provded n rtce II, the sad conventon
sha become effectve on the 1st day of anuary foowng the e -
change of the nstruments of ratfcaton
Now, therefore, be t known that I, rankn D. oosevet, Pres-
dent of the Unted States of merca, have caused the sad conven-
ton and the sad protoco to be made pubc to the end that the same
and every artce, cause and part thereof may be observed and fu-
fed wth good fath by the Unted States of merca and the ctzens
thereof on and from the 1st day of anuary, one thousand nne
hundred and forty.
In testmony whereof, I have hereunder set my hand and caused
the Sea of the Unted States of merca to be aff ed.
Done at the cty of Washngton ths 12th day of December, n the
year of our Lord one thousand nne hundred and thrty-
a nne, and of the Independence of the Unted States of
merca the one hundred and s ty-fourth.
rankn D Roosevet.
y the Presdent:
Corde u,
Secretary of State.
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29
MISC LL N OUS.
1940-15-10232
Mra. 4298 (Rev.)
Symbos for use n correspondence.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 25,1940.
Coectors of Interna Revenue Interna Revenue gents n Charge
Dstrct Supervsors eads of ed Dvsons, Technca Staff
Speca gents n Charge Deputy Commssoners and Other
Offcers and mpoyees of the ureau of Interna Revenue Con-
cerned:
The foowng drectons supersede those contaned n Mmeograph
4298 (revsed), dated November 28, 1938 C. . 1938-2, 508 , and a
other nstructons n confct therewth. Secton 3( ), Part I, of
the Interna Revenue Manua s, aso, amended to conform to the
foowng:
very etter prepared n the ureau n Washngton w bear n
the upper eft-hand corner of the frst page, and mmedatey beow
the wordng ddress repy to, etc., a symbo that w ndcate the
offce of orgn provded, that ths practce w not appy to con-
gressona correspondence, or to etters prepared for the sgnatures
of others than offcas of the ureau.
very etter addressed to the ureau by a fed offce, f t s n
repy to a communcaton from the ureau, w bear, mmedatey
above the body of the etter and near the center of the frst page,
the symbo that appears n the communcaton that s beng answered.
thus ttenton: d:P . If the etter s not n repy to a ureau
communcaton, the symbo of the unt, dvson, or secton of the
ureau concerned w be ndcated n the same manner, provded
there s no queston as to the proper symbo f any doubt e sts, no
symbo whatever w be used.
Where a fed offce uses a system of symbos n conductng ts cor-
respondence, the approprate symbo w be paced n the upper eft-
hand corner of the frst sheet, |ust beow the wordng In repyng
refer to, of each etter addressed to the ureau. The ureau et ter,
f any, repyng to such communcaton w show the fed offce
symbo above the body of the etter n the same manner as s pre-
scrbed n the ne t precedng paragraph.
Cosed, and not wndow, enveopes wth prnted or typewrtten ad-
dress w be used by fed offces n transmttng ma to the ureau.
very such enveope, or other wrapper, w bear n the ower eft-
hand corner of the face thereof the same symbo that s quoted n
the communcaton whch t ncoses. There s no ob|ecton to for-
wardng n one enveope a number of communcatons ntended for
the same unt or dvson of the ureau: n fact, ths s desrabe,
e cept that nstructons contaned n C-Crcuar 1248, dated May
28, 1938, regardng the separaton of soca securty from other ma
for the ccounts and Coectons Unt shoud be comped wth.
Under no crcumstances, however, shoud correspondence pertanng
to the work of one unt be ncosed n an enveope addressed to
another unt.
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Informaton whch w assst fed offcers n determnng the dest-
naton of correspondence that s not n repy to ureau etters may
be obtaned by drectng an nqury to the dmnstratve Dvson,
attenton Communcaton Secton.
Ony one sub|ect w be treated n any one etter.
The foowng represents the organzaton and symbos used:
Offce of the Commssoner.
d - dmnstratve Dvson.
d : C Communcaton Secton.
d : I Prntng and ndng Secton.
d: SL Spnce and Lease Secton.
d: S Suppes and qupment Secton.
P Personne Dvson.
Pub. Re. Pubc Reatons Dvson.
SD Speca Deputy Commssoner.
SD:Tn Tranng Dvson.
TS Technca Staff.
ccounts and Coectons Unt.
C: DC Deputy Commssoner.
C: D ssstant Deputy Commssoner.
C: ecutve ssstant.
C: T Chef mpoyment Ta ctvtes.
C : T Technca asstants.
C: D- Dsbursement ccountng Dvson.
C: Co Coecton ccountng Dvson.
C: P S Coectors Personne, qupment, and Space Dvson.
UDIT DI ISION.
C: ead of Dvson.
C: : udt and d|ustment Secton.
C: : amnng Secton.
C: : es Secton.
C: : : R R ankruptcy Unt.
UL S D R GUL TIONS DI ISION.
C: RR ead of Dvson.
C : RR : 1 Secton 1.
C : RR: 2 Secton 2.
C:RR:3 Secton 3.
S R IC DI ISION.
C : S ead of Dvson.
C: S: es Secton.
C: S: S Stenographc Secton.
CONTROL DI ISION.
C: C ead of Dvson.
C: C: ssessment Secton.
C: C: CC Cams Contro Secton.
coho Ta Unt.
T: DC Deputy Commssoner.
T: L Lega Dvson.
N ORC M NT DI ISION
T: ssstant Deputy Commssoner.
T: amnng Secton.
T: PP Pardon and Paroe Secton.
T: nforcement es Secton.
T:RM Raw Materas Secton.
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298
P RMISSI ND DMINISTR TI .
T: P ssstant Deputy Commssoner.
T: I ed Inspecton Dvson.
T: PS Personne and Suppy Dvson.
T: PR Procedure Dvson.
T: S Statstca Secton.
T: udt Dvson.
T : onded ccounts Secton.
T: T Ta Secton.
T: L Laboratory Dvson.
Offce of the Chef Counse.
GC: ppeas Dvson.
GC: C Cv Dvson.
GC : C: C Compromse Secton.
GC: I Interpretatve Dvson.
Manuscrpt Secton.
GC: L R Legsaton and Reguatons Dvson.
GC: P Pena Dvson.
GC: R Revew Dvson.
GC: R R Reorganzaton Secton.
GC: d dmnstratve Dvson.
Ma and Records Secton.
ngneers and udtors Secton.
Income Ta Unt.
IT Deputy Commssoner.
ssstant Deputy Commssoner.
IT: R: udt Revew Dvson (New York).
IT: R: udt Revew Dvson (Connectcut, Mane, Massachusetts, New
ampshre, New ersey, Pennsyvana, Rhode Isand, ermont).
IT: R : C udt Revew Dvson 0 ( abama, Deaware, Dstrct of Co-
umba, orda, Georga, entucky, Lousana, Maryand, Msssspp, Mssour,
North Carona, Oho, South Carona, Tennessee, rgna, West rgna).
IT:R:D udt Revew Dvson D (Inos, Indana, Iowa, Mchgan, Mn-
nesota, Nebraska, North Dakota, South Dakota, Wsconsn).
IT:R: udt Revew Dvson ( aska, rzona, rkansas, Caforna,
Coorado. awa, Idaho, ansas, Montana, Nevada, New Me co, Okahoma,
Oregon, Te as, Utah, Washngton, Wyomng).
IT: R: : | Speca d|ustment.
CL RING DI ISION.
IT: CI ead of, Dvson.
IT : CI: CC Cams Contro Secton.
IT: CI: D Returns Dstrbuton Secton.
IT: CI: P Provng Secton.
IT: CI: St Statstca Secton.
NGIN RING ND LU TION DI ISION.
IT: ead of Dvson.
IT: : p pprasa Secton.
IT: : NR Natura Resources Secton.
IT: : PU Pubc Uttes Secton.
IT: : Se Securtes Secton.
I LD PROC DUR DI ISION.
IT: ed Procedure Dvson.
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299
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PR CTIC ND PROC DUR DI ISION.
IT: P ead of Dvson.
IT:P: IR ureau Informaton and Rungs Secton.
1T:P:C Coordnatng and dvsory Secton.
IT: P: T Ta payers Rungs Secton.
IT: P: T: 1 Group 1.
IT: P:T:2 Group 2.
IT:P:T:3 Group 3.
R CORDS DI ISIO .
IT: Rec ead of Dvson.
IT: Rec: es Secton.
IT: Rec: W Wthhodng Returns Secton.
S R IC DI ISION.
IT: S Servce Dvson.
T7N U8T NRIC M NT DI I8ION.
IT:U ead of Dvson.
IT :U : R udt and Revew Secton.
IT: U : Conf Conference Secton.
IT: C : I Invadty Cams Secton.
Integence Unt.
81 Chef, Intecence Unt
Msceaneous Ta Unt.
MT: DC Deputy Commssoner.
MT: CST Capta Stock Ta Dvson.
MT: T state Ta Dvson.
MT: PT Processng Ta Dvson.
MT: ST Saes Ta Dvson.
MT: T Tobacco Dvson.
Got T. ever o,
Commssoner.
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Msc.
300
OL OM RG RIN .
1940-1-10132
MS. 221
Schedue of oeomargarne produced and materas used durng the month of
November, 1939, as compared wth November, 19S8.
November,
103 .
Tota producton of uncoored oeomargarne
Tota wthdrawn ta -pad .
Poundt.
27, 743. 1
27, 89, 12
Ingredent schedue of uncoored oeomargarue:
abassu o
Coconut o
Corn o ...
Cottonseed o .
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeo o
Oeo stearne . .
Oeo stock
Pam kerne o
Peanut o
Sat
Soda (benroate of)
Soya bean o
Soya bean stearne
tamn concentrato .
L 057.357
2, 108. 9
84,171
S. 83, 122
71,858
7,097
,307,19
115,957
730,704
227,795
84,130
200,828
1,201.100
10,503
8,039,038
1, 90
Tota...
28, 80,915
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
142,724
29,248
Ingredent schedue of coored oeomargarne:
Coconut o
Coor
Corn o
Cottonseed o-
Cottonseed stearne
Dervatve of gycerne..
Lecthn
Mk..
Neutm ard
Oeo o
Oeo stearne
Oeo stock .
Pam kerne o
Peanut o
Sat
Soda (benzoate of)..
Soya bean o
Soya bean stearne..
tamn c
Tota.
Of the amount produced, 27,025 pounds were reworked.
1 Of the amount produced, 24,1 3 pounds were reworked.
Of the amount produced, 128 pounds were reworked.
Of the amount produced, 77 pounds were reworked.
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301,
Msc.
1940-5-1010.
MS. 222
Schedue of oeomargarne produced and materas ved durng the month of
December, 1939, as compared wth December, 1938.
producton of ancoored oeomargarne-
wthdrawn ta -pad __
Ingredent schedue of uncoored oeomargarne:
abassu o ...
Coconut o .
Com o
Cottonseed o
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeoo
Oeo stearne .
Oeo stock
Pam kerne o
nut o a.....
Pean
Sat.
fbenoate of).
of coored oeomargarne.
Tota wthdrawn ta -pad..
Ingredent schedue of coored oeomargarne:
Coor..
Corn o
Cotton seed o.
Cotton
Dcrvnt
Lecthn
Mk
Neutra ard
Oeoo
Oeo stock
Pam kerne oL.
Peanut o
8 at.
Soda (bencoae of)...
Soya bean o..
tamn t
Tota.
December,
1939.
.Pound .
25, 438,984
559, 111
1,912,842
53,493
8, 7 5, 590
0,257
7, 142
4,958, 870
201,718
WO, 384
23 ,008
78,427
193, 50
1,050, 755
9, 11
7, 54 , 24
1, 342
2 ,594,951
148, 12
25. 499
58,7 9
115
54
13, 181
210
281
77
29.443
4,200
15, 52
95
200
7,702
35
29, 108
1
159, 8 2
December,
1938.
Pound .
I 30, 252, 5 5
29,95 , 07
14, 791
7, 1 0,309
131, 7 3
10, 5 3. 89
74.890
9,714
,804, 222
100, 9 2
994. 400
23 . 979
11 , 09
98 472
231,828
1,238. 503
12,488
4, 174, 33
I, 2S2
31, 5 8. 739
120, 858
34,358
43, 3
153
54
12,85
880
3
25, 978
3, 24
14, 93
719
218
37
. 921
55
23.785
3
133. 385
1 Of the amount produced, 10,425 pounds were reworked.
Of the amount produced, 40,31 pounds were reworked.
Of the amount produced, 1,475 pounds were reworked.
Of the amount produced, 1, 9 pounds were reworked.
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Msc.
302
1940-10-10194
MS. 223
Schedue of oeomargarne produced and materas used durng the month of
anuary, 191/0, as compared wth anuary, 19S9.
anuary,
1 0.
anuary-
1939.
Tota producton of uncoored oeomargarne..
Tota wthdrawn ta -pad.__
Pound).
29,204,4 8
1379,2
Pound .
SO, 199,
DO, 315,
Ingredent schedue of uncoored oeomargarne:
abassu o
utter.
Coconut o .
Corn o
Cottonseed off
Dervatve of
Lecthn...
Mk
Neutnd ard
Oeo o
Oeo stearne
Oeo stock
Pam kerne oU
Peanut o
Sat
Soda (benzoate of)
Soya bean o ...
tamn concentrate..
Tota
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
abassu o
Coconut o
Coor
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeo o
Oeo stearne
Oeo stock
Pam kerne o
Peanut o -
Sat
Soda (bcnoate of.
8oya bean o
tamn concentrato --
Tota.
92,201
4
001, 49
S3, MS
10.0U.129
72,408
7,1 5
, , 278
238.029
1,131,517
2 1,934
119, 17
1 5,727
1,20 .030
11, 39
8.939, 392
1,481
80, 53,803
149, 578
80,011
49,779
100
2 1
81,9 8
0
31
83
29,591
2,871
12, 90
2, 87
1
138
7, 4
3
83,837
3
1 2, 51
Of the amount produced, 20,735 pounds were reworked.
1 Of th amount produced, 29,307 pounds were reworked.
Of the amount produced, 10 pounds were reworked.
4 Of the amount produced, 320 pounds were reworked.
712,28
207.087
118, W4
.871.4 S
75. 3
8.438
8.S2S.7 5
102,7
1.1 ,224
8(8, 029
12 r
121.434
218, 940
1. 289. M7
13,082
4,793.82
1,178
119.3
1
sr.:- -
118
3
13. vs
820
9
27. 31
8,852
21,042
125
1.9M
h-
ss
, m
1
17.257
8
129. M
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Msc.
1940-14-10223
MS. 224
Schedue of oeomargarne produced and matera used durng the month of
ebruary, 9 0, at compared wth ebruary, ) 9.
ebruary,
1940.
CI9398r7
Tota producton of uncoored oeomargarne
Potmdt.
29. 388, 517
Pound .
27. 574, 19
Ingredent schedue of uncoored oeomargarne:
28,444,023
27, 744. 210
abassu o
7 9, 597
4
1, 1 4,91
utter..
1,785.788
88,514
10,187, 859
79.0 2
8,015
5, 723. 102
330.750
1,311.582
259. 3 2
103,092
5,2 2, 189
1.505
9,397,515
77. 35
7,059
, 39.5. 4 7
110.218
1,270, 172
228.5 1
130. 81
43.980
193.885
1, 150.819
11, 133
4, 3 5. W
1,724
Corn o
Cottonseed o
Lecthn
Mk
Oeoo
Oeo stearne
Pam kerne of
Peanut o
152,830
1,221,719
10,323
8. 11.384
1,701
583
Soda rbcnzoateof)
Soya bean o
tamn concentrate
egetabe gum
Tota
30, 45, 357
28.873,3
Tota producton of coored oeomargarne
1 8, 729
12 . 02
Tota wthdrawn ta -pad
29.72U
30.230
Ingredent schedue of coored oeomargarne:
Coconut o
55,328
147
54
12,503
3 0
40
78
38, 145
2, 17
25. 4
L 475
2.3 2
2, 22
32, 705
132
9
14.490
Coor...
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne
349

Mk
2 .9S
4. 379
18.752
Oeoo
Oeo stearne _
Oeo stock
13
1,409
178
77
, -.91
9
29,255
2
Sat
10,008
39
4 ,008
2
Soda rbenzoate of)
oya bean o
Tota
195,092
138. 173
Of the amount produced. 21.741 pounds were reworked.
Of the amount produced. 14,747 pounds were reworked.
Of the amount produced, 30 pounds were reworked.
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Msc.
304
1940-18-1024S
MS. 225
Schedue of oeomargarne produced and materas used durng the month of
March, 1940, as compared wth March, 19S9.
March, 1840.
Tota producton of uncoored oeomargarne..
Tota wthdrawn ta -pad
Ingredent schedue of uncoored oeomargarne:
abassu o
utter
Coconut o
Oom o
Cottonseed o
Dervatve of gycerne
Lecthn
Mk
Neutra ard
Oeo o
Oeo stearne -
Oeo stock
Pam o.- -
Pam kerne o
Peanut o
at -
oda (benzoate of) .
oya bean o
egetabe gum
tamn concentrate.
Tota-
Tota producton of coored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue of coored oeomargarne:
abassu o
Coconut o -
Coor
Corn o
Cottonseed o
Cottonseed stearne
Dervatve of gycerne.
Lecthn
Mk
Neutra ard
Oeo o
Oeo stearne -
Oeo stock
Pam kerne o -
Peanut o.. -
at
oda (benzoate of)
oya bean o -
tamn concentrate
Tota.
Pounds.
28,503, 40
2 ,798,188
S25, 197
00
421,474
8 ,219
013.808
2, 07
7.554
045, 721
297.738
302. SI
242,077
94,095
1,050
14 , 144
07 ,929
10, 100
125, 375
1. 179
1,287
27. 4 1,430
137.958
29.2 9
42,9
7,
110
2
- T
54
28, 19
2,9 5
14,39
400
1,810
11
, 92
40
43,804
2
150,440
I Of the amount produced, 18,70 pounds were reworked.
1 Of the amount produced, 19,10 pounds were reworked.
1 Of the amount produced. 4 pounds were reworked.
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#
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305
Msc.
1940-23-10284
MS. 22
Schedue of oeomargarne produced and materas used durng the month of
pr, 1940, as compared wth pr, 1939.
pr, 1940.
pr, 1939.
Pound.
Pound.
23,229, 37S
27,230,978
Tota wthdrawn ta -pad
27,950,01
23,595,417
Ingredent schedue of uneoored oeomargarne:
abassu o
935,954
3,01 ,302
32,3 4
8,173, 118
77,947
S. 948
5, 208.285
33.9 4
1,21 , 93
312.881
117,440
1,24 ,331
3,407,487
27,239
7. 472, 545
59, 774
5,911
4,541,279
90,9
1,017, 3
235.979
80. 149
125,75
177,709
995.007
9.323
4.895,87
Coconut o ,
Corn o . ._
Cottonseed o _ ...
Dervatve of gycerne
Lecthn.. ...... .
Mk
Oeo o
Oeo stearne . .
Oeo stock . . . .
Peanut o
112,514
1, 129, 257
9. 15
7, 103, 705
500
1,294
Sat
Soda (benzoate of) .
Soya bean o
Soya bean stearne - ....
tamn concentrate
1,311
Tota
28,088,781
24, 390, 2 3
Tota producton of coored oeomargarne
177,184
95, 70
Tota wthdrawn ta -pad
29,955
27,051
Ingredent schedue of coored oeomargarne:
831
8,050
120
3
473
20,2 0
90
4
Coconut o
Coor
Corn o
Cottonseed o
14,881
403
8
3 ,212
3,958
18,275
820
2,120
10,992
291
3
Dervatve of gycerne _
Lecthn
Mk
19,340
3,554
14.204
900
80
4 8
34
, 1
33
28,9 1
1
Oeo o
Oeo stearne
Oeo stock
38
8,032
73
Sat
.I:, 1 - f
Soyabean o
3 ,785
3
tamn concentrate
Tota
190.090
107,034
1 Of the amount produced, 24,432 pounds were reworked.
1 Of the amount produced, 32,112 pounds were reworked.
1 Of the amount produced, 12 pounds were reworked.
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Msc. 30
TO CCO.
1940-1-10131
T.
tatement of manufactured tobacco produced, by causes, durng the month of
October, 1939, as compared wth October, 1938.
1 1 1 II 1 1 ,
October, 1939.
October, 1938
Pug
Pounds.
4,3 9. 593
18.332
373.4 7
.827.380
19, 59,708
Pounds.
4,344,30
444.338
858,3 5
2,151, 433
17, 70.745
Twst
Scrap chewng
Smokng
Tota
28.748.530
24,9 9,190
Note. These fgures ore sub|ect to revson unt pubshed n the Commssoner s annua report
1940-5-101 1
T. 7
Statement of manufactured tobacco produced, by casses, durng the month of
November, 1939, as compared wth November, 1938.

November,
1939.
November.
Pug
Pounds.
S. 8 1, 324
15, 243
,549
.415,282
17, 4 , 79
Pounds.
4,3 .112
414,774
3 2. S3.5
4, 5 3. 401
18,503,408
Twst
Tota
2 , 13,977
28,110,732
Note. These fgures are sub|ect to revson unt pubshed In the Commssoner s annua report.
1940-9-10189
T. 8
Statement of manufactured tobacco produced, by casses, durng the month of
December, 1939, as compared wth December, 1938.
Deoember,
1939.
Pug
Twst
ne-cut chewng..
Scrap chewng
mokng
Tota.
Pounds.
,7 3,223
448,759
323,309
,195. 78
14,420,982
22, 1 1,951
Note. Theae fgures are sub|ect to revson unt pubshed In the Commssoner s annua report.
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1940-14-10222
T. 9
Statement of manufactured tobacco produced, by casses, durng the month of
anuary, 1940, as compared uth anuary, 1939.
aruary,
1940.
anuary.
1939.
ru
Pounds.
3,484. 1 5
399. 495
330. 480
3. 590,9 4
15. 145, 040
Pounds.
3. 418. 751
399, 4
371.902
3.419, ISO
o0, 411
Twst.
ne-cut chewng.
Scrap chewng
Smokng.
Tota
22.970. 141
23, 200, 2C8
Note. These fgures are sub|ect to revson unt pubshed n tbe Commssoner s annua report.
1940-18-10249
T. 70
Statement of manufactured tobacco produced, by casses, durng the month of
ebruary, O. /O, as compared wth ebruary, 19S9.

ebruary,
1940.
ebruary,
1939.
Pug
Pounds.
4, 035,409
481.224
299.909
3. 39(1.970
15,835, 734
Pounds.
4, 145, 49
470, 912
319,040
2, 923. 992
14. 711.479
Twst __
Smokng
Tota
24.04.1, 24
22.570,919
Note. These fpures are sub|ect to revson unt pubshed n the Comnssoner s annua report.
1940-22-10275
T. 71
Statement of manufactured tobacco produced, by casses, durng the month of
March, 19 f, as compared wth March, 1939.
March, 1940.
March, 1939.
Png
Pounds.
3,805,804
453.734
335,070
3. 3 3,0 2
1 ,08 , 939
Pounds.
4, 321. 519
491. 139
423, 113
3. 3 5, 273
17, 451,1 8
Twst
Scrap chewng . . ..
Smokng
Tota
24,044, 09
2 .052, 212
Note. These fgures are sub|ect to revson unt pubshed n tbe Commssoner s annua report.
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308
O RD O T PP LS.
1940-12-10211
UL S O PR CTIC OR T UNIT D ST T S O RD O T
PP LS.
INT ODUCTION.
These revsed rues are promugated pursuant to authorty of secton 907(a)
of the Revenue ct of 1924, as amended by secton 01 of the Revenue ct of
1928, whch provdes n part that The proceedngs of the oard and ts dv-
sons sha be conducted n accordance wth such rues of practce and procedure
(other than rues of evdence) as the oard may prescrbe and n accordance
wth the rues of evdence appcabe In courts of equty of the Dstrct of
Coumba.
Congress n the Revenue cts has enacted provsons reatng to the organza-
ton, |ursdcton, and procedure of the oard of Ta ppeas, and to the acton
of the ureau of Interna Revenue wth respect to the assessment and coecton
of defcences when a petton has been fed wth the oard. Reference Is made
to those statutory provsons In the Revenue cts for procedura requrements
other than those reatng to the conduct of proceedngs before the oard and Its
dvsons to whch these rues of practce are mted. ttenton Is caed to
Tte 2 of the Unted States Code for convenent reference to the Revenue cts
as amended and partcuary to sectons 271, 272, 273, 00, and 45 of Tte 2 .
Ths edton of the rues of practce becomes effectve on March 1,
1940, and takes the pace of the ast revson whch became effectve on uy
1938.
ttenton s caed to the foowng: Many pettons fed wth ths oard
are dsmssed for ack of |ursdcton and for faure to compy wth the raes
of practce. It s therefore of great mportance to pettoners that pettons
be prepared and fed propery n accordance wth statutory requrements and
the provsons of the rues of practce.
Rue L usness oots.
The offce of the oard at Washngton, D. C, w be open each busness day
from 9 o cock a. m. to 4.30 o cock p. m.
Rue 2. dmsson to Practce.
Persons of the foowng casses who are found by the oard, upon consdera-
ton of ther appcatons, to be ctzens of the Unted States, of good mora
character, and to possess the requste quafcatons to represent others, may be
admtted to practce before the oard:
(o) ttorneys at aw who are admtted to practce before the Supreme Court
of the Unted States or the hghest court of any State or Terrtory or of the
Dstrct of Coumba.
( ) Certfed pubc accountants duy quafed under the aws of any State
or Terrtory or of the Dstrct of Coumba.
Corporatons and frms w not be admtted or recognzed.
n appcant for admsson must fe hs appcaton wth the oard on the form
provded. orms w be furnshed upon request to the secretary of the oard.
Such appcaton sha be accompaned by a current certfcate of the cerk of the
court In whch the appcant s admtted to practce to the effect that he has been
so admtted and s n good standng or a current certfcate by the proper State,
Terrtora, or Dstrct authorty to the effect that the appcant Is a certfed
pubc accountant n good standng, duy quafed and entted to practce In such
State or Terrtory or the Dstrct of Coumba.
The oard may deny admsson to, suspend, or dsbar any person who In Its
|udgment does not possess the requste quafcatons to represent others, or who
Is ackng n character, ntegrty, or proper professona conduct. No person sha
be suspended for more than 0 days or dsbarred unt he has been afforded an
opportunty to bo beard. dvson may mmedatey suspend any person for
not more than 00 days for contempt or msconduct durng the course of any
proceedng.
The oard may requre any practtoner before t to furnsh a statement under
oath of the terms and crcumstances of hs empoyment n any proceedng.
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309
Msc.
Rue S. Persona Representaton n Leu or Counse.
ny ndvdua ta payer or member of a ta payer partnershp may appear for
hmsef or such partnershp upon adequate dentfcaton to the oard. ta -
payer corporaton may be represented by a bona fde offcer of the corporaton
upon permsson granted, n ts dscreton, by the oard or the dvson sttng.
Rue 4. orm and Stye or Papers.
papers fed wth the oard sha be ether prnted or typewrtten, and f
typewrtten, sha be on ony one sde of pan whte paper. Ths paper sha
be not more than 8 nches wde and 11 nches ong, and sha wegh not ess
than 1 pounds to the ream. The papers sha be fastened on the eft sde and
at no other pace. They sha not be bound wth stff covers or backs. Copes
sha be egbe but may be on any weght paper. If prnted, they sha be n
10 or 12 pont type, on good ungazed paper, 5 nches wde by 9 nches ong,
wth nsde margn not ess than 1 Inch wde, and wth doube-eaded te t and
snge-eaded quotatons. Ctatons sha be n tacs when prnted, and under-
scored when typewrtten.
The proper capton sha be paced upon a papers fed. If the pettoner
Is an ndvdua, the fu gven name and surname sha be set forth n the
capton. If the pettoner s a marred woman, her gven name sha be used,
not the name of her husband preceded by Mrs. If the pettoner s a fducary,
the name of the estate, trust, or other person for whom he acts, sha be gven
frst, foowed by the name of the fducary. (See rues 5 and (a), and
ppend I, orm No. 2.)
cept as otherwse provded n these rues, a sgned orgna and four con-
formed copes of a papers sha be fed. Whenever any paper s fed n
more than one proceedng (as a moton to consodate proceedngs or n pro-
ceedngs aready consodated), one addtona copy sha be fed for each
addtona proceedng.
The wrtten sgnature, whether of counse or of the pettoner, sha be n
ndvdua and not n frm name, e cept that where the pettoner s a corporaton
the wrtten sgnature sha be by an actve offcer of the corporaton. The name
and mang address of the pettoner or of counse sha be typed or prnted
Immedatey foowng the wrtten sgnature.
Rue 5. Proper Partes.
The proceedng sha be brought by and n the name of the person aganst
whom the Commssoner determned the defcency or abty, as the case
may be , or by and n the fu descrptve name of the fducary egay entted
to nsttute a proceedng on behaf of such person.
In the event of a varance between the name set forth n the notce of
defcency or abty and the correct name, a statement of the reasons for
sneh varance sha be set forth n the petton. (See rues 4, , and 23.)
Rue . Intaton of a Proceedng Petton.
proceedng sha be ntated by fng wth the oard a petton, as provded
In rues 4, 5, and 8, and substantay n accordance wth orm 2, shown n
ppend I. The petton sha be compete n tsef so as fuy to state the
ssues. It sha contan:
(o) capton n the foowng form:
Unted Statfs oard of Ta ppeas
, pettoner, 1
v. Docket No.
Commssoner of Interna Revenue, respondent.
petton.
( ) Proper aegatons showng ursdcton n the oard.
(c) statement of the amount of the defcency or abty, as the case
may be , determned by the Commssoner, the nature of the ta , the perod
for whch determned, and the amount thereof (as neary as may be computed)
In controversy.
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Msc.
310
(d) Cear and concse assgnments of each and every error whch the pet-
toner aeges to have been commtted by the Commssoner n the determnaton
of the defcency. Issues n respect of whch the burden of proof Is by statute
paced upon the Commssoner w not be deemed to be rased by the pettoner
n the absence of assgnments of error n respect thereof. ach assgnment of
error sha be numbered.
(e) Cear and concse numbered statements of the facts upon whch the
pettoner rees as sustanng the assgnments of error, e cept those assgn-
ments of error n respect of whch the burden of proof s by statute paced upon
the Commssoner.
(f) prayer, settng forth reef sought by the pettoner.
(g) The sgnature of the pettoner or that of hs counse. (See rue 4.)
(h) verfcaton by the pettoner provded that where the pettoner s
so|ournng outsde the Unted States or s a nonresdent aen, the petton
may be verfed by a duy apponted attorney n fact, who sha attach to the
petton a copy of the power of attorney under whch he acts and who sha
state n hs verfcaton that he acts pursuant to such power, that such power
has not been revoked that pettoner s absent from the Unted States, and
the grounds of hs knowedge of the facts aeged n the petton. s used heren
the term Unted States ncudes ony the States and the Dstrct of Coumba.
notary pubc s not authorzed to admnster oaths, etc., n matters n
whch he s empoyed as counse. (See Tte 4, ch. 2, D. C. Code, and 2 Op. . G.,
23 .)
The verfcaton sha contan a statement that the fducares sgnng and
verfyng have authorty to act for the ta payer.
Where the pettoner s a corporaton, the person verfyng sha state n hs
verfcaton that he has authorty to act for the corporaton.
The sgnature and the verfcaton to the petton sha be consdered the
certfcate of those performng these acts that there s good ground for the pet-
ton, the proceedng has not been nsttuted merey for deay, and t s not
frvoous.
() copy of the notce of defcency or abty, as the case may be , sha
be appended to the petton. If a statement has accompaned the notce of
defcency, so much thereof as s matera to the ssues set out n the assgnments
of error kewse sha be appended. If the notce of defcency refers to pror
notces from the ureau, whch are necessary to eucdate the determnaton, such
parts thereof as are matera to the ssues set out n the assgnments of error
sha kewse be appended. (See ppend I, orm No. 2.)
Rue 7. ng of Petton.
n orgna and four cear copes of the petton, ether prnted or typewrtten
as provded by rue 4, sha be fPd wth the oard. (See rue 9.) The copes
of the petton sha be conformed to the orgna by the pettoner.
aure to fe a suffcent number of copes, as provded n ths rue, or to
conform to the requrements of rdes 4, 5, and 8, sha be ground for the dsmssa
of the proceedng.
Rue 8. ee foe ng Petton.
The fee for fng a petton wth the oard sha be 10, payabe at the tme
of fng.
Rue 9. ng.
ny document to be fed wth the oard, must be fed at the offce of the oard
In Washngton, D. C, durng busness hours provded, that a dvson hearng a
proceedng may permt documents pertanng thereto to be fed at the hearng.
Rue 11. Docket.
Upon recept of the petton, the proceedng w be docketed and assgned a
number and the partes notfed thereof. Ths number sha be paced by the
partes on a papers thereafter fed n the proceedng.
Rue 12. Servce of the Petton.
Upon fng of a petton and the copes, as prescrbed In rue 7, the de
w serve a copy upon the Commssoner.
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311
Msc.
Rue 14. nswer.
fter servce upon hm of a copy of the petton, the Commssoner sha have
0 days wthn whch to fe an answer or 45 days wthn whch to move n respect
of the petton. The answer sha be so drawn as fuy and competey to advse
the pettoner and the oard of the nature of the defense. It sha contan a
specfc admsson or dena of each matera aegaton of fact contaned n the
petton and a statement of any facts upon whch the Commssoner rees for
defense or for affrmatve reef or to sustan any ssue rased n the petton n
respect of whch ssue the burden of proof s, by statute, paced upon the Com-
mssoner. ach paragraph contaned n the answer sha be numbered to corre-
spond wth the paragraphs of the petton. n orgna and four copes of the
answer sha be fed, of whch the orgna sha be sgned by the Commssoner
or hs counse and the copes conformed by hm.
The cerk w serve one copy of the answer upon the pettoner or hs counse
of record by regstered ma.
Rue 15. Repy.
If the answer of the Commssoner sets forth facts upon whch he rees for
affrmatve reef, or contans a statement of the facts upon whch he rees to
sustan an ssue n respect of whch the burden of proof s paced upon hm by
statute, the pettoner sha, wthn 45 days after a copy of such answer s maed
to hm or hs counse of record by regstered ma, fe a repy whc sha con-
tan a specfc admsson or dena of each matera aegaton of fact contaned
n the answer and sha set forth any facts upon whch he rees for defense.
ach paragraph contaned n the repy sha be numbered to correspond wth
the paragraphs of the answer. n orgna and four copes of the repy sha be
fed, of whch the orgna sha be sgned by the pettoner or hs counse and the
copes conformed by hm.
The oard upon moton of the respondent n whch good cause s shown, or
upon ts own moton, may requre the verfcaton of any repy.
The cerk w serve one copy of the repy upon the Commssoner.
Rue 1C. ondee of Issue.
proceedng sha be deemed at ssue upon the fng of the answer uness a
repy s requred under rue 15, n whch event the proceedng sha be deemed at
ssue upon the fng of the repy.
Rue 17. mended and Suppementa Peadngs.
The pettoner may, as of course, amend hs petton at any tme before answer
s fed. fter answer s fed, a petton may be amended ony by consent of the
Commssoner or on eave of the oard.
motons to amend, made pror to the bearng, must be accompaned by the
proposed amendments or amended peadng.
Upon moton made, the oard may, n ts dscreton, at any tme before the
concuson of the hearng, permt a party to a proceedng to amend the peadngs
to conform to the proof.
When motons to amend are granted at the hearng, the amendment or amended
peadng sha be fed at the hearng or wth the oard wthn such tme as the
dvson may f .
See rues 4 and 19.
Rue 18. Peadngs Genera.
The oard, upon moton of ether party n whch good cause s shown, or upon
ts own moton, may order a further and better statement of the nature of the
cam or defense, or of any matter stated n any peadng. Such a moton fed
by a party ha pont out the defects companed of and the detas desred. If
such order of the oard s not obeyed wthn 15 days or wthn such other tme
as the oard may f , the oard may strke the peadng to whch the moton was
drected or may make such other order as t deems |ust
If no repy s requred by these rues, each and every matera aegaton of
fact set out n the answer sha be deemed to be dened. ny new or affrmatve
matter contaned n the repy sha be deemed to be dened.
Where an answer has been fed, each and every matera aegaton of fact
set out n the petton and not e pressy admtted or dened n the answer, sha
be deemed to be admtted. Where a repy s requred by these rues and a repy
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has been fer, each and every matera aegaton of fact set out n the answer
and not e pressy admtted or dened n the repy sha be deemed to be admtted.
Where no answer s ted or where a repy s requred by these rues, but no
repy Is ted, the adverse party, wthn 45 days after the e praton of the tme
f ed by these rues for tng the answer or the repy, as the case may be (or
wthn 45 days after the promugaton of these rues, whchever sha aow the
greater tme), may te a moton wth the oard cang attenton to the fact that
the peadng has not been fed wthn the specfed tme and certan matera
aegatons of fact have not been dened, and requestng the oard to enter ts
order that those partcuar undened aegatons sha be deemed to be admtted.
The oard w serve a copy of ths moton upon the other party and ssue an
order to show cause, returnabe on or before a day certan. If the above descrbed
moton s not fed wthn the prescrbed tme, the aegatons of the peadng to
whch there was no response sha be deemed to be dened.
Rue 19. Motons. 1
Motons must be tmey. If a moton, other than one reatng to the recept
Of evdence durng tra, s made oray durng tra, the maker thereof sha
prompty reduce t to wrtng and fe It wth the oard uness the dvson drects
otherwse. Motons sha be prepared In the form and stye prescrbed by rue 4.
The cerk w serve a copy of each moton upon the opposte party. Motons
w be acted upon as |ustce may requre and may, n the dscreton of the oard,
be paced upon the caendar for argument. (See aso rue 30( ).) The fng
of a moton sha not consttute cause for postponement of a hearng from the
date set.
Motons for rehearng, reconsderaton, further hearng, and the ke, to be
consdered tmey, sha be made wthn 30 days after promugaton or entry of
the report.
Motons to vacate, correct, or revse a decson of the oard, to be consdered
tmey, sha be made wthn 30 days after entry of the decson.
ub 20. tensons of Tme.
Contnuances, e tensons of tme (e cept for the fng of the petton and
e cept as otherwse provded n these rues), and ad|ournments may be ordered
by the oard on ts own moton or may be granted by t n Its dscreton on mo-
ton of ether party ted n wrtng and showng good and suffcent cause therefor.
uk 21. Dsmssa.
proceedng may be dsmssed for cause upon moton of ether party or of
the oard.
Rue 22. Sebvce.
When t any tme there are two or more counse of record for a pettoner,
servce w be made upon the one whose appearance was frst entered of record,
uness he has otherwse requested by wrtng fed wth the oard, n whch
event servce w be upon such other counse of record as may be desgnated by
Mm. owever, servce upon any counse of record sha be deemed servce upon
the party. If there s no counse of record, servce w be made upon the
pettoner.
Servce may be made upon the Commssoner n person, upon deputes desg-
nated by hm for the purpose of acceptng servce, or upon counse appearng
for the respondent n the proceedng. (See rues 12, 14, and 15.)
Rue 23. Substtuton op Pastes.
In the event of the death of a pettoner or for other cause, the oard may
order the substtuton of the proper partes. In the event of mstake n the name
or tte of a proper party, the oard may order substtuton of the proper name
or tte. (See rue 5.)
Motons for substtuton shoud be accompaned by a proper certfcate of the
court or offca havng custody of the record showng the nterest of the party
substtuted. In the event of a change n the name of a corporaton or other
p pty pettoner, a moton to amend the peadngs to show such change shoud
be fed, accompaned by a copy of the certfcate, decree, or other document,
effectng such change, certfed by the offca havng custody of such document,
uness the partes have agreed to the change and have so ndcated n the record.
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Msc.
Rue 24. Substtuton or Wthdrawa of Counse Notce of ppearance.
Counse of record n any proceedng desrng to wthdraw must gve prompt
rotce of hs wthdrawa to the oard and to hs cent. The oard may, n
ts dscreton, wthhod permsson to counse of record to wthdraw.
Where the petton s not subscrbed by counse, or counse of record has wth-
drawn, counse subsequenty appearng for the pettoner sha mmedatey fe
a notce of appearance, whch sha ncude statements of hs admsson to prac-
tce before the oard and of hs mang address.
Notce of a change n the mang address of counse or pettoner sha be
fed prompty wth the oard, and a separate notce sha be fed for each
docket number nvoved.
Rue 2 . Caendars.
(a) Washngton and crcut caendars. ach proceedng when at ssue w
be paced ether upon the Washngton caendar or upon a crcut caendar, n
accordance wth rue 2 . (See ppend II.)
( ) earng caendars. The cerk, as drected from tme to tme by the char-
man, w prepare hearng caendars.
. (c) Reserve caendar. proceedng whch s at ssue may be paced upon the
reserve caendar for good cause shown, as, for e ampe, to awat the decson of
the Supreme Court n a pendng case.
Rue 2 . Pace of earng Requests and Desgnaton.
The pettoner at the tme of fng the petton sha aso fe a request showng
the name of the pace where he woud prefer the hearng on the merts to be
hed. copy of ths request w be served upon the Commssoner by the cerk
of the oard.
If the pettoner has fed no request, or f the respondent desres that the
hearng on the merts be hed at some pace other than the pace requested by
the pettoner, the respondent sha fe at the tme he fes hs answer, a request
showng the name of the pace preferred by hm. copy w be served upon
the pettoner by the cerk of the oard.
These requests sha not be bound as a part of the petton or answer but
sha be separate therefrom and sha consst of an orgna and four copes.
The oard w determne the pace of hearng, wth due regard to any
request propery fed n the proceedng and n accordance wth the statutory
provson that the tme and pace of tra sha be f ed wth as tte ncon-
venence and e pense to ta payers as Is practcabe, and, n a cases, w
notfy the partes of the pace at whch or n the vcnty of whch the hearng
on the merts w be hed.
Motons for change n desgnaton of the pace of hearng, made after the
notce of the tme of the hearng has been maed, w not be deemed to have
been tmey fed.
In case t s necessary for the oard to hear the partes on matters other
than the merts, such hearng w be hed n Washngton uness good cause
s shown for hodng t esewhere.
(See ppend II for further nformaton to assst n makng requests as to
pace of hearng.)
Rue 27. Notce of earng.
When a proceedng has been paced upon the hearng caendar the cerk
w, not ess than 15 days n advance, notfy the partes of the pace where
and the date when t w be caed.
Rue 28. Ca of Caendar and ssgnment for earng.
The hearng caendar of proceedngs to be heard at Washngton w be
caed at 9.30 a. m. The hearng caendar of proceedngs to be heard esewhere
w be caed at the tme ndcated n the notce of hearng. Proceedngs w
be assgned therefrom for hearng n due course.
Rue 29. aure to ppear.
The une cused absence of a party or hs counse on the day set for the hearng
of any proceedng, w not be the occason for deay. The hearng w proceed
25220 40 11
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314
and the case w be regarded as submtted on the part of the absent party or
partes.
The oard may requre appearance for argument or t may accept brefs n
eu of persona appearance.
Rue 30. Submsson Wthout earng ob ppearance.
(a) Submsson of cases wthout hearng where facts are uncontested. ny
proceedng not requrng a hearng for the submsson of evdence (as, for e am-
pe, where suffcent facts have been admtted, stpuated, or ncuded n the
record n some other way), may be submtted at any tme by notce of the partes
fed wth the oard. The partes need not wat for the proceedng to be ca-
endared and need not appear n person. The charman w then assgn the pro-
ceedng to a dvson for report, whch dvson, upon request of the partes,
w f a tme for fng brefs or for ora argument
( ) contested moton, not predcated upon an ssue of fact, may be sub-
mtted n the same way.
See, however, rue 31.
Rue 31. vdence and the Submsson of vdence.
(a) Rues appcabe. The rues of evdence appcabe n courts of equty of
the Dstrct of Coumba sha govern the admsson or e cuson of evdence.
( ) Stpuatons. The partes by stpuaton n wrtng fed wth the oard
or presented at the hearng, may agree upon any facts nvoved n a proceedng.
compete dupcate of the stpuaton, ncudng a e hbts, sha be fed at
the same tme. Stpuatons fed need not be formay offered to be consdered
n evdence.
(c) Depostons must be offered. Testmony taken by deposton w not be
consdered unt offered and receved n evdence.
(d) Documentary evdence. (1) When books, records, papers, or documents
have been receved n evdence, a copy thereof or of so much thereof as may be
matera or reevant may, n the dscreton of the dvson hodng the hearng,
be substtuted therefor.
(2) fter the decson of the oard n any proceedng has become fna, the
oard may, upon moton, permt the wthdrawa by the party entted thereto
of orgna e hbts, or the oard may, on ts own moton, make such other
dsposton thereof as t deems advsabe.
(e) Not evdence. Statements n the petton, e parte affdavts and brefs
do not consttute evdence.
(f) aure of proof. aure to adduce evdence n support of the matera
facts aeged n the petton and dened by the Commssoner n hs answer w
be ground for dsmssa. Where there s a |onder of ssue on questons of fact,
the provsons of rue 30 do not reeve the party upon whom rests the burden of
proof from propery producng evdence to support the ssues.
Rue 32. ubden of I boof.
The burden of prr of sha be upon the pettoner, e cept as otherwse pro-
vded by statute and e cept that n respect of any new matter peaded n hs
answer, t sha be upon the respondent.
Rue 35. refs.
The partes shoud be prepared to make ora arguments at the concuson of
the hearng or to fe wrtten ctatons of authortes at that tme f the dvson so
drects. The fng of brefs and the makng of ora arguments sha be n accord-
ance wth (he drectons of the member presdng at the hearng. If the dvson
does not drect otherwse, each party sha have 4r days after the day on whch the
hearng was concuded wthn whch to fe a bref and ether party may fe a
repy bref wthn 15 days after the fng of the orgna bref by hs opponent.
fter a bref has been fed, the cerk w serve a copy upou the opposte party,
uness the bref bears a notaton that a copy has aready been served.
If brefs are typewrtten, an orgna and four copes sha be fed f prnted.
20 copes. ach bref sha contan on ts front fyeaf a tabe of contents wth
page references, suppemented by a st of a ctatons, aphabetcay arranged
as to cases cted, together wth references to pages. Ctatons sha be n tacs,
when tanted, and underscored, when typewrtten.
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Mso.
The form of a brefs sha be as foows:
(a) statement of the nature of the ta and how the proceedng comes before
the oard.
( ) The party havng the burden of proof sha set forth compete statements
of the facts based upon the evdence. ach statement sha be numbered, sha
be compete n tsef, and sha consst of a concse statement of the essenta
fact and not a dscusson or argument reatng to the evdence or the aw.
Reference to the pages of the transcrpt or the e hbts reed upon n support
thereof sha be nserted after each separate statement
If the other party dsagrees wth any or a of the statements of fact, he sha
set forth each correcton whch he beeves the evdence requres and sha gve the
-ame numbers to hs statements of fact as appear n hs opponent s bref. s
statement of fact sha be set forth In accordance wth the requrements above
desgnated.
(c) concse statement of the ponts upon whch the party rees.
d) The argument. The argument sha spt forth the ponts of aw reed
upon and any dscusson of the evdence deemed necessary to support the state-
ment of fact.
Rue 40. Transcrpts or Proceedngs.
earngs before the oard or ts dvsons sha be stenographcay reported
and a transcrpt therof sha be made f, n the opnon of the oard or of the
dvson hodng the hearng, a permanent record of the hearng s deemed
necessary. Transcrpts sha be supped to the partes and to the pubc by the
offca reporter at such rates as may be f ed by contract between the oard and
the re|wrter.
Rue 44. Subpenas.
(a) ow gstcd. -The party desrng a subpena must make a tmey appca-
ton therefor, n wrtng.
( ) ppcaton for. The appcaton sha state the name and address of
each wtness requred, the tme and pace at whch and the offcer before whom
he s to appear, and whether he may desgnate some one to appear n hs
pace. n orgna and two conformed copes sha be fed. (See ppend
I, orm No. 3.)
(e) or producton of documents. If evdence other than ora testmony Is
requred, such as documents or wrtten data, the appcaton sha set forth
the specfc matter to be produced and suffcent facts to ndcate that such,
matter s reasonaby necessary to estabsh the cause of acton or defense of
the appcant.
(d) Servce and proof. The oard w not serve subpenas, but w eave
servce to be procured by the party makng the appcaton. Servce may be
made by any ctzen of the Unted States over the age of 21 years and com-
petent to be a wtness, and not a party to or n any way nterested n the
proceedng. Proof of servce may be made by affdavt.
Rue 45. Dhostons.
(a) ppcaton to take. When ether party desres to take a deposton, he
sha fe wth the oard a verfed appcaton and two conformed copes, to-
gether wth an addtona copy for each addtona docket number Invoved. The
oard upon request w furnsh forms for ths purpose. If the space n the
form furnshed by the oard s nadequate for settng forth the reasons n support
of the appcaton n any partcuar case, a substtute form may be used, but the
substtute must contan a of the nformaton caed for on the oard s form.
(See ppend I, orm o. 5.)
( ) Lmtaton on tme for appcaton to take. ppcatons to take depos-
tons must be fed at east 30 days pror to the date set for the hearng of the
proceedng, and such depostons must be competed and fed wth the oard at
east 10 days pror to the hearng: Provded, Such appcatons w not be re-
garded as suffcent ground for the grantng of a contnuance from the date or
pace of the hearng theretofore set, uness the proceedng sha have been at
ssue ess than 0 days and the moton for contnuance sha have been fed not
ess than 20 days pror to sad date of hearng: Provded further. That under
speca crcumstances, and for good cause shown, the oard may otherwse order.
(o) uafcaton of offcer. The offcer before whom depostons are taken must
be one authorzed to admnster oaths under the Revenue ct of 1924. (See sec-
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31
ton OS of the Revenue ct of 1024, as amended by secton 1000 of the Revenue
ct of 192(5 secton 1002(d), Revenue ct of 1924 and secton 1102(d), Revenue
ct of 1920.) In no case sha a deposton he taken before any person wbo has
any offce connecton or busness empoyment wth ether party or hs counse
e cept by consent of the partes and when no other offcer s avaabe, and n
hs certfcate of return to such deposton such offcer sha so certfy.
(r ) Order for takng. Upon recept of such appcaton, the cerk wU serve a
copy thereof on the opposte party, and aow a reasonabe tme for ob|ecton
thereto. Thereafter, the oard w, n ts dscreton, make an order, a copy of
whch w be maed or devered to the partes or ther counse, wheren the
oard w name the wtness whose deposton s to be taken and specfy the tme
when, the pace where, and the offcer before whom the wtness s to testfy, but
such tme, pace, and offcer specfed n the oard s order may or may not be
the same as set forth n the appcaton. The appcant sha thereupon make a
necessary arrangements for the takng of each deposton and sha furnsh the
offcer before whom t Is to be taken wth a copy of the order above mentoned.
(e) y stpuaton. t any tme after ssue s |oned, the partes or ther
counse may, by stpuaton duy sgned and fed, take depostons. In such
cases, the stpuaton sha state the name and address of each wtness, the tme
when and the pace where such depostons w be taken and the name, address,
and offca tte of the offcer before whom t s proposed to take the depostons.
In such cases, no order to take depostons w be ssued, but they sha be taken
and returned by the offcer n accordance wth the rues of the board.
(/) Manner of takng. ach wtness must frst take the oath or affrm. The
questons propounded to hm and hs answers must be recorded verbatm.
Ob|ectons to questons or answers sha be e pcty but brefy and concsey
stated, but no comment, e panaton, or argument of any knd sha be recorded
nether sha there be recorded any comment, e panaton, or argument by e -
amnng counse. ny matter reported In voaton of ths rue may be suffcent
cause for the suppresson of the deposton.
(g) Other tctnesscs to be e cuded. t the request of ether party, a person
whom ether e pects or ntends to ca as a wtness n the same or any reated
proceedng sha be e cuded from the room where the testmony of a wtness s
beng taken. If such person remans n the room or wthn hearng of the e -
amnaton after such request has been made, he sha not thereafter be per-
mtted to testfy e cept by the consent of the party who requested hs e cuson.
(h) Depostons to be sgned. The testmony of the wtness when transcrbed
sha be read to or by hm and sha be sgned by hm. (See ppend I, orm
No. .)
() orm n whch depostons must be returned to the oard. When a depos-
ton s returned to the oard t must show the docket number and the capton
(the names of the partes) of the proceedng as appears n the oard s records,
the pace and date of takng, the name of the wtness, the party by whom caed,
the names of counse present, ndcatng whch party each counse represents,
and (n the body of the deposton) the name of counse e amnng or cross-
e amnng the wtness.
The offcer must so fasten the sheets of the deposton that they can not be
tampered wth. e must spare no pans to return to the oard the e act test-
mony he has taken. e hbts must be carefuy marked so as to be capabe
of dentfcaton, and when practcabe must be attached to the deposton.
The offcer must propery e ecute and attach to the deposton a certfcate of
return n the form prescrbed. (See ppend I, orm No. .)
(/) Return of. The offcer must ncose the orgna depostons and e hbts,
together wth two copes of the de| ostons, n a seaed packet, wth postage or
other transportaton charges prepad, and drect and forward the same to the
Unted States oard of Ta ppeas, Washngton, D. C. In each case, the
orgna of the depostons must be drected and forwarded to the oard. The
offcer may, however, upon wrtten request, dever a copy of the depostons to
cther or to both of the partes, or to ther representatves, n eu of sendng such
copes to the oard as above provded. If one or both of the requred copes are
devered by the offcer takng the depostons, he sha attach to hs return the
wrtten request of the party or partes, or of ther counse to whom such copy or
copes were devered, and sha state In hs certfcate of return the fact of
devery by hm of such copy or copes. If copes of the depostons are devered
by the offcer takng the same, no servce of copes of such depostons upon the
party or hs counse of record w be made by the oard.
(fc) The deposton of any wtness sha not consttute a part of the record
unt receved n evdence. (See rue 31.)
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317
Msc.
Rue 4 . Depostons Upon Wrtten Interrogatores.
Depostons may be taken n the dscreton of the oard upon wrtten Inter-
rogatores n substantay the same manner as provded n rue 45 for depostons
npon ora e amnaton. n orgna and fve copes of the nterrogatores must be
fed wth the appcaton. The cerk w serve one copy of the appcaton and
of the nterrogatores upon the opposte party. If the opposte party desres to
fe ob|ectons or cross-nterrogatores, he must do so wthn 10 days after the
appcaton and nterrogatores have been served upon hm. Cross-nterrogatores
must consst of an orgna and fve copes. The cerk w serve one copy thereof
upon the opposte party who, f he has any ob|ecton thereto, must fe hs ob|ec-
tons wthn 10 days thereafter. No ob|ectons to the nterrogatores or cross-
nterrogatores w be consdered at the hearng uness tmey fed n accordance
wth ths rue.
No person other than the wtness, a stenographc reporter, and the offcer takng
the deposton upon wrtten nterrogatores and cross-nterrogatores sha be
present at the e amnaton of he wtness. Ths fact sha be certfed by the
offcer takng the deposton. That offcer sha propound the nterrogatores and
eross-nterrogatores to the wtness n ther order and cause the testmony to be
reduced to wrtng n the wtness s own words.
Depostons obtaned n foregn countres must be taken upon wrtten nterrog-
atores, e cept as otherwse drected by the oard for cause shown.
Rue O. Computatons by Partes tor ntry of Decson.
Where the oard has promugated or entered ts opnon determnng the
ssues n a proceedng, t may wthhod entry of ts decson for the purpose of
permttng the partes to submt computatons pursuant to the oard s deter-
mnaton of the ssues, showng the correct amount of the defcency or over-
payment to be entered as the decson. If the partes are n agreement as to the
amount of the defcency or overpayment to be entered as the decson pursuant
to the report of the oard, they or ether of them sha fe prompty wth the
oard an orgna and two copes of a computaton showng the amount of the
defcency or overpayment and that there s no dsagreement that the fgures
shown are n accordance wth the decson of the oard. The oard w then
enter ts decson. If, however, the partes are not n agreement as to the
amount of the defcency or overpayment to be entered as the decson, n accord-
ance wth the report of the oard, ether of them may fe wth the oard a
computaton of the defcency or overpayment beeved by hm to be n accordance
wth the report of the oard. The cerk w serve a copy thereof upon the
opposte party, w pace the matter upon the hearng caendar for argument n
due course, and w serve notce of the argument upon both partes. If the
opposte party fas to fe ob|ecton, accompaned by an aternatve computaton,
at east fve days pror to the date of such argument, or any contnuance thereof,
he oard may enter decson n accordance wth the computaton aready sub-
mtted. If n accordance wth ths rue computatons are submtted by the partes
whch dffer as to the amount to be entered as the decson of the oard, the
partes w be afforded an opportunty to be heard n argument thereon on the
date f ed, and the oard w determne the correct defcency or overpayment
and enter ts decson.
ny argument under ths rue w be confned strcty to the consderaton of
he correct computaton of the defcency or overpayment resutng from the report
aready made, and no argument w be heard upon or consderaton gven to the
ssues or matters aready dsposed of by such report or of any new ssues. Ths
rue s not to bo regarded as affordng an opportunty for rehearng or recon-
sderaton.
Rue 51. Costs Preparatons of Record on Revew.
Immedatey after the contents of a record on revew have been setted or
agreed to, the cerk w notfy the pettoner of the costs and charges for the
preparaton, comparson, and certfcaton of sad records such charges to be
determned n accordance wth the provsons of an ct of Congress entted n
ct to provde fees to be charged by cerks of the dstrct courts of the Unted
States, approved ebruary 11, 1925 ( 43 Stat, 857-858 U. S. C, Tte 28, sectons
548-554).
No transcrpt w be certfed and transmtted to the appeate court unt
the costs and charges therefor have been pad.
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318
pettoner for revew who requests the cerk to certfy but not to prepare
documents for transmsson to a Unted States Crcut Court of ppeas or to
the Unted States Court of ppeas for the Dstrct of Coumba sha furnsh
the cerk wth the copes of the documents to be certfed.
Rue 52. Costs Prntng of Record on Revew.
In each proceedng for revew of a decson of the oard by the Unted States
Crcut Court of ppeas for the Second Crcut when revew s sought by the
Commssoner of Interna Revenue, the cerk of the oard sha, mmedatey
after the contents of the record on revew, as requred by rue 35 of the court,
have been setted or agreed upon, make avaabe to the Commssoner, or hs
counse, the record of the oard n the proceedng. The Commssoner sha
cause the record to be prnted. Twenty-fve copes of the prnted record sha
be devered to the cerk of ths oard for certfcaton and for fng wth the
cerk of the crcut court of appeas. The cerk of the oard sha serve three
copes of the prnted record upon counse for the ta payer.
Rue 53. Copes of oard Record ees for urnshng.
pan or a certfed copy of any document, record, entry, or other paper
may be had upon appcaton to the oard, the fee to be charged and coected
therefor to be determned In accordance wth the provsons of the ct of
Congress entted n ct to provde fees to be charged by cerks of the dstrct
courts of the Unted States, approved ebruary 11, 1925 ( 43 Stat., 857-858
U. S. C, Tte 28, sectons 548-554).
Rue 0. ees and Meage.
Tte of the Revenue ct of 192 provdes n part:
Sec. 909. (a) ny wtness summoned or whose deposton s taken under
secton 908 sha receve the same fees and meage as wtnesses n courts of
the Unted States. Such fees and meage and the e penses of takng any such
deposton sha be pad as foows:
(1) In the case of wtnesses for the Commssoner, such payments sha be
made by the Secretary out of any moneys approprated for the coecton of
nterna-revenue ta es, and may be made n advance.
(2) In the case of any other wtnesses, such payments sha be made, sub|ect
to rues prescrbed by the oard, by the party at whose nstance the wtness
appears or the deposton Is taken.
No wtness, other than one for the Commssoner, sha be requred to testfy
In any proceedng before the oard unt he sha have been tendered the fees
and meage to whch he s entted In accordance wth the above provson of
aw.
Rue 1. Computaton of Tme Sundays and odays.
Whenever these rues prescrbe a tme for the performance of any act, Sun-
days and ega hodays n the Dstrct of Coumba sha count |ust as any
other days, e cept that when the tme prescrbed for the performance of an
act e pres on a Sunday or a ega hoday n the Dstrct of Coumba, such
tme sha e tend to and ncude the ne t succeedng day that Is not a Sunday
or such a ega hoday: Provded, That when the tme for performng any act
s prescrbed by statute nothng n these rues sha be deemed to be a ntaton
or e tenson of the statutory tme perod.
Te foowng-named days are ega hodays wthn the Dstrct of Coumba:
New Year s Day, anuary 1 (U. S. C, Tte 5, secton 87).
Inauguraton Day, every fourth year (48 Stat., 879 D. C. Code, Tte 22,
secton 12 ).
Washngton s rthday, ebruary 22 (U. S. C, Tte 5, secton 87).
Decoraton Dav, May 30 (U. S. C, Tte 5, secton 87).
ourth of uy (U. S. C, Tte 5, secton 87).
Labor Day. frst Monday n September (U. S. C, Tte 5, secton 87).
rmstce Day, November 11 (52 Stat., 351).
Thanksgvng Day, day procamed by the Presdent (secton 993, R. S., reatng
to D. C. D. C. Code, Tte 22. secton 12 ).
Chrstmas Day, December 25 (U. S. C, Tte 5, secton 87).
When ega hodays fa on Sunday the ne t day sha be a hoday (22 Stat 1
D. C. Code, Tte 22, secton 12 ).
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319
Rue 2. Speca ssessment.
(a) If some of the ssues rased by the petton Invove secton 327 or sec-
ton 328 of the Revenue ct of 1918 or of 1921 or secton 210 of the Revenue
ct of 1917, as the case may be , and some do not nvove such sectons, the
hearng may, n the dscreton of the oard, on moton, be mted n the frst
nstance to tra of the ssues whch do not nvove such sectons.
( ) hearng may be had n the dscreton of the oard, on moton, mted
to the tra of the ssue whether the pettoner s entted to have ts ta
determned as provded n secton 328 or secton 210, as the case may be .
(c) If the oard decdes that the pettoner s entted to have Its ta deter-
mned as provded n secton 328 or secton 210, as the case may be , the respond-
ent sha wthn 0 days after such decson fe wth the oard an orgna and
two copes of a proposed redetermnaton showng the method of the compu-
aton. If, wthn 20 days after servce by the cerk upon the pettoner of a
copy of such proposed redetermnaton, the partes are unabe to agree upon
the amount of ta , ether party may move, or the oard may upon ts own
moton order, that the proceedng be paced upon the caendar for further
hearng, at whch ether party may submt proof of the correct amount of ta
and defcency or overpayment.
( ) If from the peadngs or otherwse It appears of record before the oard
that the partes agree that pettoner s entted to have Its ta determned as
provded n secton 328 or secton 210, as the case may be , and the ony
ssue s as to the correct amount of the ta so determned, the proceedng w
be paced upon the caendar n due course for hearng, at whch ether party
mny submt proof of the correct amount of the ta and defcency or over-
payment.
Rum 0. ffectve Date.
These rues sha become effectve March 1, 1940, supersedng a pror edtons
and amendments.
PP NDI .
I. orms.
These forms are sub|ect to amendment as crcumstances may render
necessary.
o. 2. Petton.
No. 3. ppcaton for subpena.
No. 5. ppcaton for order to take depostons.
No. . Certfcate on return of depostons.
(Note. Read rue 4 of the rues of practce of the oard and carefuy ob-
serve the requrements thereof as to form, sze, and stye of papers.)
No. 2 -P TITION.
(See rues 4, 5, , 7, and 8.)
Unted Statks oard of Ta ppeas.
, pettoner, 1
v. Docket No.
Commssoner of Interna Revenue, respondent.
petton.
The above-named pettoner hereby pettons for a redetermnaton of the de-
fcency set forth by the Commssoner of Interna Revenue n hs notce of
defcency ( ureau symbos) dated , 19 , and as a bass
of hs proceedng aeges as foows:
1. The pettoner s (set forth whether ndvdua, corporaton, fducary, etc.,
as provded n rue 0) wth prncpa offce (or resdence) at
(Street.)
, The return for the perod here
(Cty.) (State.)
nvoved was fed wth the coector for the dstrct of
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320
2. The notce of defcency (a copy of whch s attached and marked hbt
) was maed to the pettoner on , 19
3. The ta es n controversy are (ncome, profts, estate, or gft) ta es for the
(caendar or fsca year) year 19 and n the amount of doars
(state as e acty as possbe the amount n dspute).
4. The determnaton of ta set forth n the sad notce of defcency Is based
npon the foowng errors: ( numerate specfcay the assgnments of error
In a concse manner and avod peadng facts whch propery beong n the
succeedng paragraph.)
5. The facts upon whch the pettoner rees as the bass of ths proceedng
are as foows: ( ere set forth aegatons of the facts reed upon but not
the evdence n ordery and ogca sequence, wth subparagraphs ettered,
so as fuy to nform the oard of the ssues to be presented and to enabe
the Commssoner to admt or deny each specfc aegaton.)
Wherefore, the pettoner prays that ths oard may hear the proceedng
and ( ere state the reef desred).
(Sgned)
(Pettoner or counse.)
( ost-otce address.)
State of
County of /
, beng duy sworn, says that he s the pet-
toner (f a corporaton, or fducary, state tte of offce or trust of person
verfyng and that he s duy authorzed to verfy the foregong petton) above
named that he has read the foregong petton, or had the same rend to hm,
and s famar wth the statements contaned theren, and that the statements
contaned theren are true, e cept those stated to be upon nformaton and beef,
and that those he beeves to be true.
(Sgned)
Subscrbed and sworn to before me ths day of . 19
(Sgned)
(Offca tte.)
S L
No. 3. PPLIC TION OR SU P N .
, pettoner,
Docket No.
v.
Commssoner of Interna Reroute, respondent.
To the Unted States oard of Ta ppeas:
ppcaton s hereby made for the ssuance of a subpena for the attendance
before
(The Unted States oard of Ta ppeas or the name and offca tte of the
person authorzed to take depostons.)
at on
at o cock m. of the foowng persons whose ora testmony
s desred on behaf of the n the above-
(Pettoner or respondent.)
entted proceedng:
N M . DDR SS.
Dated , 19-
(Sgned)
(Post-offce address)
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No. 5. PPLIC TION O ORD R TO T D POSITIONS.
(See rues 43 and 4 .)
Unted States oard or Ta ppeas. , pettoner, 1
v. f Docket No.
Commssoner of Interna Revenue, respondent.
PPI C TION OR ORD R TO T D POSITIONS.
To the Unted States oard of Ta ppeas:
1. ppcaton s hereby made by the above-named
(Pettoner or respondent.)
for an order to take the deposton of the foowng-named person :
N M OP WITN SS. POST-O IC DDR SS.
(a)
(b)
(c)
(d)
2. It s desred to take the depostons of the persons above named and each
of them for the foowng reasons:
(a) w testfy to the foowng matera matters:
(Set forth brefy the matter upon whch sad wtness w be caed to testfy.)
(b) : w testfy to the foowng matera matters:
(c) w testfy to the foowng matera matters:
(d) w testfy to the foowng matera matters:
3. The reasons why desres to take the
(Pettoner or respondent.)
testmony of the above-named persons rather than have them appear personay
and testfy before the oard are as foows: (State specfcay reasons for each
wtness.)
4. It s desred to take the testmony of
(Names of wtnesses.)
on the day of , 19 , at the hour of o cock m.
( date suffcenty n advance of the day set for hearng of the proceedngs to enabe the
deposton to be competed and fed wth the oard at east 10 days pror to the hearng.)
before n the Cty of
(State name and tte of offca.)
State of at room
(Gve number of room, street
, and name of budng.)
5. That Is a
(Name of offca before whom depostons are to be taken.)
who has no offce connecton or busness enpoy-
(Gve offca tte.)
ment wth the pettoner or hs counse.
Dated , 19
(Sgned)
(Pettoner or counse.)
(Post-offce address.)
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322
State of 1
County of ./
, beng duy sworn, says that the fore-
(Pettoner or counse.)
gong appcaton for order to take depostons Is made n good fath and for
the reasons theren stated and that the same s not made for purposes of deay.
(Sgned)
Subscrbed and sworn to before me ths day of , 19
(Sgned)
(Offca tte.)
S L.
No. -C RTI IC T ON R TURN.
To the Unted States oard of fa ppeas:
I, , the person named n the foregong order
to take depostons, hereby certfy:
1. That I proceeded, on the day of , . D. 19 ,
at the offce of , n the Cty of ,
State of , at o cock, m., under the sad
order and n the presence of and
the counse of the respectve partes, to take the foowng
depostons, vz:
, a wtness produced on behaf
(Pettoner or respondent
, a wtness produced on behaf
of the
(Pettoner or respondent.)
, a wtness produced on behaf
of the
(Pettoner or respondent.)
2. That each wtness was e amned under oath at such tmes and paces
as condtons of ad|ournment requred, and that the testmony of each wtness
(or hs answers to the nterrogatores fed) was taken stenographcay and
reduced to typewrtng by me or under my drecton.
3. That after the testmony of each wtness had been reduced to wrtng the
transcrpt of that testmony was read and sgned by the wtness In my presence
and that each wtness acknowedged before me that hs testmony was In a
respects truy and correcty transcrbed.
4. That, after the sgnng of the deposton n my presence, no ateratons or
changes were made theren.
5. That I have no offce connecton or busness empoyment wth the pet-
toner or hs attorney e cept that of , ob|ecton to whch
(State connecton.)
waved by both partes to the proceedng.
S L
(Sgnature of person takng deposton.)
(Offca tte.)
(Tost-offce address.)
Note. Ths form when propery e ecuted shoud be attached to and bound wth the
transcrpt precedng the fnt page thereof. It shoud then be Incosed In a seaed enveop
an addressed to uted States oard of Ta ppeas, Washngton, D. C.
II. Requests for Pace of earng.
The oard w f the tmes and paces for Its hearngs n order to secure
reasonabe opportunty to ta payers to be heard wth as tte Inconvenence
and e pense to ta payers as s practcabe. (Secton 1000, Revenue ct of
192 , amendng secton 907(e). Revenue ct of 1924.) earngs may be hed
at any pace requested f sutabe accommodatons are avaabe and a suffcent
number of cases are ready for hearng there. parta st of ctes where a
combnaton of these crcumstances has .|ustfed a caendar of hearngs recenty
appears beow. It s pubshed here merey to assst partes In makng requests
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323
Msc.
under rue 2 . The groupng of certan ctes n the st ndcates that f one of
those ctes s requested, t may be necessary to hod the hearng at the other
ery n order to make up a suffcent caendar of hearngs. Lkewse, f
suffcent cases are not ready for hearng n any partcuar cty requested by
ta payers, or f sutabe quarters are not avaabe there, the oard may fnd
t necessary to combne the hearngs requested for that cty and hod them
aong wth the hearngs requested for some other cty n the vcnty.
LIST.
abama:
rmngham.
Mobe.
rkansas: Ltte Rock (aternatve,
Memphs, Tenn.).
Caforna :
Los ngees.
San rancsco.
Coorado: Denver.
Dstrct of Coumba: Washngton.
orda:
acksonve.
Mam.
Tampa (aternatve, Mam).
Georga: tanta.
awa: onouu (aternatve, Los
ngees or San rancsco, Caf.).
Inos: Chcago.
Indana : Indanapos.
Iowa: Des Mones.
entucky: Lousve.
Lousana:
New Oreans.
Shreveport.
Mane: Portand (aternatve, oston,
Mass.).
Massachusetts: oston.
Mchgan:
Detrot.
Grand Rapds.
Mnnesota: St Pau.
Mssour:
ansas Cty.
St. Lous.
Montana: eena.
Nebraska: Omaha.
New York:
uffao.
New York Cty.
Oho:
Cncnnat (aternatve, Coumbus).
Ceveand.
Coumbus (aternatve, Cncnnat).
Okahoma:
Okahoma Cty (aternatve,
Tusa).
Tusa (aternatve, Okahoma
Cty).
Oregon: Portand.
Pennsyvana:
Phadepha (aternatve, Wash-
ngton, D. 0 or New York,
N. Y.).
Pttsburgh.
Tennessee:
uo ve (aternatve, tanta,
Ga.).
Memphs.
Nashve.
Te as:
Daas.
ouston.
Utah : Sat Lake Cty.
Washngton:
Seatte.
Spokane.
West rgna: Chareston.
Wsconsn:
Madson (aternatve, Mwaukee).
Mwaukee.
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IND .
dvances, company s agreement wth foregn commsson for
pant erecton, ta abty
grcutura d|ustment ct, payments to nonresdent aen
andowners, wthhodng
coho:
ormua No. 42, revsed
Rubbng acoho compound, abeng and sae, reguatons
amended
coho Ta Unt, estabshment of asc Permt and Trade
Practce Dvson
mendments:
Code of edera Reguatons
Subpart , Part 171, Tte 2
Sectons 171.1a (added)
Sectons 171.1b (added) -.
Sectons 171.4a (added) -
Sectons 171.4b (added)
Reguatons 3, artce 14 , paragraph 2
tons 13(1940)
on 175.3(m) and (n)
Dn 175.9(d) and (e)
Secton 175.14
Reguatons 4(1933), artce 24
Reguatons 4(1934), artces 41(d) and 42(a)
Reguatons 4(193 ), artces 21(1) and 44(a)
Reguatons 77, artce 53
Reguatons 80(1937), artce 1
Reguatons 8 , artce 22(a)3
Reguatons 94
rtce 22(a)3
rtce 44-5
Reguatons 101
rtce 22 (a) 3
rtces 23(m)-, 23(m)-3 to 23(m)-8, 23(m)-10,
23(m)-12, 23(m)-13, 23(m)-17, 23(m)-18, 23(m)-
20, 23(m)-25
rtce 44-5
rtce 1 5-1
Reguatons 103
Secton 19.22(a)-3
Secton 19.23(b)-
Secton 19.23(m)-10(a)
Secton 19.44-5
Secton 19.1 5-1
Treasury decson 4882, revoked
mortzaton, cost of unproductve o and gas easehods, regu-
atons amended
nnutes:
Contracts
ndowment, nstament payments -
Interest or earnngs on certan fund, nformaton
return
Payments on, empoyees trusts, treatment 1
Rung No
10170
10277
10210
101 0
10299
10299
10299
10299
10299
101 0
102 7
102G7
102 7
10274
10274
10274
10195
10203
10195
10195
102 9
10195
1013
102 9
10294
10195
102 0
10224
102 9
10294
10134
10221
10148
1013S
101 5
Pago.
11
1
271
271
2 9
2 9
2 9
2 9
2 9
271
274
274
274
23
23
23
13
220
13
13
47
13
38
47
05
13
30
43
47
5
74
43
11
82
2
(325)
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328
nnutes Contnued.
Muncpa empoyees
Retred
Saary deductons pad Into annuty fund, gross In-
come
rmy, offcers statoned n Phppnes, pay credted to agency
n Unted States
utomobes, parts or accessores. (See Manufacturers e cse
ta es.)
.
ankruptcy and recevershp cases, nterest, defcenes
anks, nsovent, assessment and coecton of ta es, regu-
atons
asc Permt and Trade Practce Dvson, coho Ta Unt,
estabshment of
tumnous Coa ct of 1937, consttutonaty
onds:
Iomo Owners Loan Corporaton, ad|usted net ncome
computaton
Interest, Tennessee aey uthorty
State, redempton before maturty, dscount and pre-
mums
ureau of Interna Revenue:
asc Permt and Trade Practce Dvson, coho
Ta Unt, estabshment of
Correspondence symbos
usness e penses:
remen and pocemen, cost of speca appare
Loan of stock, payments made as compensaton for
Phadepha empoyee s ncome ta pad by empoyer
Trave e penses of teachers on sabbatca eave
C.
Capta gans and osses:
ternatve ta computaton, bases for chartabe contr-
butons deducton and earned ncome credt
states and trusts, net short-term oss carry-over, net
ncome mtaton
Redempton of State bonds, premums
Capta osses, bank stockhoders, doube abty
Capta stock ta :
d|usted decared vaue, rst return, meanng of term..
Decared vaue, reguatons amended
oregn corporatons
Dong busness n Unted States through bankers,
brokers, etc
Transactons n securtes through correspondent n
Unted States
Cgarette stamp ta es:
New York Cty and State
Te as
Cosng agreements, set asde by Commssoner, fnaty of
oard s fndngs
Code of edera Reguatons, amendments. (See mend-
ments: Code of edera Reguatons.)
Compensaton:
ddtona,, Phadepha empoyee s ncome ta pad by
empoyer
oregn consus and consuate empoyees statoned n
Unted States, e empton
Offcers and empoyees of corporaton, nformaton at
source
Rung No.
1022
10218
101 7
1024
10134
10299
102S3
10214
10191
10213
10299
10232
102 2
10149
1028
10278
10155
10228
10213
10178
10145
10274
10193
244
10293
242
10257
33
102 4
35
10202
187
1028
11
101 2
53
10279
52
10301
0
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327
Compensaton Contnued.
uarters or meas furnshed n addton to saary, regua-
tons amended
ampes
Consus, foregn, consuate empoyees, ncome e empton
Contracts, Navy, defcency n proft, credt n computng proft
on War Department contracts
Contrbutons, chartabe, base for determnng 15 per cent m-
taton, aternatve ta computaton
Conveyances. (See Msceaneous ta es: Stamp ta es.)
Corporatons:
d|usted net ncome, bond nterest, ome Owners Loan
Corporaton
Informaton returns, compensaton pad offcers and em-
poyees
Correspondence symbos, ureau of Interna Revenue
Court decsons:
dkns Sunshne nthracte Coa Co. v
nderson v. everng
anner Machne Co. v. Routzahn
aes v. Unted Staes
erner andes-Geseschaft v. Unted Sates
ruun everng v
ryant v. everng
Cawson as, Inc., v. arrson
Cfford, r. everng v
Commssoner v. Coward
Commssoner Germantown Trust Co. v
Commssoner aeger akng Co. v
Commssoner Montrose Cemetery Co. v
Commssoner Morgan
Commssoner v. Morton
Commssoner v. Rcck
Coward Commssoner v
Deputy e a. v. du Pont
du Pon Deputy e a. v
tch everng v
uer everng v
Germantown Trust Co. v. Commssoner
Grffths v. everng
aggar Co. v. everng
aock everng v
aock e a. everng v
arrson Cawson as, Inc., v
everng nderson v
everng v. ruun
everng ryant v
everng v. Cfford, r
everng v. tch
everng v. uer
everng Grffths v
everng aggar Co. v
everng v. aock
everng v. aock et a
everng v. ehoe
everng v. Leonard
everng v. Prce
everng Prchard v
everng v. Squre
everng v. Wood
ggns v. Smth
uston Rohenses v
Rung No.
10195
10235
13
14
101 2
52
10279
52
10273
280
10155
54
10214
95
10301
0
10232
29
102S3
258
10281
108
101 8
155
10220
145
10193
244
10229
112
1017.3
223
10182
249
10199
105
10303
123
10201
178
10258
2
1021
138
1017
229
10241
1 8
10157
18
10303
123
10149
118
10149
118
10173
1 5
10253
172
10201
178
10128
13
10145
237
10175
223
10175
223
10182
249
10281
108
10229
112
1 f 1 , -
ooo
UI /
1
105
10199
10173
1 5
10253
172
10128
13
10145
237
10175
223
10175
223
10202
187
10254
175
10230
134
10281
108
10175
223
10200
1 2
10150
127
10175
223
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328
Court decsons Contnued.
aeger akng Co. v. Commssoner
ehoe everng v
Leonard everng v
LeTue v. Scofcd
Montrose Cemetery Co. v. Commssoner
Morgan v. Commssoner
Morton Commssoner v
Prce everng v
Prchard v. everng
Rea state-Land Tte Trust Co. v. Unted States
eck Commssoner v
othenss v. uston
Routthan anner Machne Co. v
Scofcd LeTue v
Smth ggns v
Squre everng v
Stnshne nthracte Coa Co. v. dkns
Unted Staes ates v
Unted States erner andes-Gcscschaft v
Unted States Rea state-Land Tte Trust Co. v
Wood everng v
Credt or refund, mtaton on, amendment of petton to oard
substtutng new cause of acton
Credts, foregn ta es:
Great rtan ncome ta , accrua
Me co
cess profts ta es
Ta mposed on nterest
Netherands ta on corporate profts dstrbutons
Credts aganst net ncome:
arned ncome credt, base for determnaton, aternatve
ta computaton
Persona e empton
Ctzen of Unted States entted to benefts of secton
251
ead of famy, cousn reatonshp
Defcences, ta es, nterest, bankruptcy and recevershp
Depeton:
Mnes, o and gas propertes, etc., reguatons amended
O and gas wes, deveopment e penses, deducton
Deveopment e penses, o and gas wes, deducton n com-
putng depeton
Dsted sprts:
Labeng and reuse of contaners, reguatons amended
Mutated or mssng strp stamps, reguatons
Dstrant on partnershp bank account to satsfy partner s ta
assessment
Dstrct of Coumba:
Income ta , deducton
Parkng meter deposts, deducton
Doube ta aton, conventon and protoco, Unted States and
Sweden
.
arned ncome, sources wthout Unted States, -month perod.
mpoyees beneft assocaton, empoyer contrbutng as mem-
ber, e empton ...
| No.
10258
10202
10254
10143
1021
1017
10241
10230
10281
1015
10157
10175
101 8
10143
10150
10175
10283
10220
10193
1015
10200
10157
10139
10280
10290
10252
10155
10219
10207
1024
1013
10198
10198
102 7
10184
10197
102 5
10227
10233
U 289
10240 97
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329
mpoyees trusts:
Contrbutons, nsurance or annuty contracts, treatment-.
Professona partnershps (attorneys, physcans, etc.)
Reguatons amended
mpoyment ta es:
Credts aganst ta , tmey contrbutons by Unted States
nstrumentates
Interna Revenue Code
mpoyees
Indvduas engaged n constructng houses
Indvduas seng bura ots and mausoeum
space
Taors performng servces for merchant
taors
mpoyers
Change n status, communty property, Te as
Who are, survvng spouse, communty property,
Te as
cepted servces
edera servce, army post e change
Martme servce, fshermen, schooners operated
on a ay bass
Labty of banks, etc., after anuary 1, 1940
Recepts, empoyees ta
Status of certan organzatons on and after anuary
1, 1940
Wages, what consttutes
mount pad empoyee whe on |ury servce
oard and odgng to offcers and members of
crews of vesses
Payments under ar Labor Standards ct of
1938
Transportaton, room and board of baseba
payers
Soca Securty ct, e cepted servces, agrcutura abor,
tobacco, processng of
states and trusts:
Income
mounts dstrbutabe after cose of year, to whom
ta abe
Capta gan dstrbutons durng admnstraton perod,
ta abty
Net short-term capta oss carry-over, net ncome
mtaton
state ta :
Deductons, vaue of property surrendered to hers by
regous, etc., organzaton
Gross estate-
Genera power of appontment, oca aw, edera aw.
Optona vauaton, tme mt
Reverson of trust corpus to donor upon contngency
termnabe at hs death
Transfers n contempaton of death, reguatons
amended
Insurance, no part of 40,000 e empton aocabe to char-
tabe, etc., benefcares
change rates, foregn
cse ta , foregn corporaton operatng In Unted States
through bankers, etc
empt corporatons:
mpoyees beneft assocaton, empoyer contrbutng as
member
edera savngs and oan assocatons
25220 10 12
Rung No.
101 5
10172
10294
101 9
102
10282
10291
10292
10133
10133
10209
10259
10181
10129
10221
10271
10215
10304
10158
10151
10179
10180
10297
10228
10272
1017
10144
10175
10203
10242
10154
10193
10240
10208
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330
empt ncome:
Compensaton, resdent foregn consus and consuate
empoyees
arned ncome outsde Unted States sources, -month
perod
Interest, bonds
Tennessee aey uthorty
Unted States savngs
Payments under contract of nterest or earnngs on certan
fund
State bonds redeemed before maturty, dscount and
premum
edera and banks, empoyees compensaton
edera savngs and oan assocatons, e empton
ducary return, fund ater ta ed as corporaton, assessment
mtaton perod
na determnaton and assessment of ta , oard s fndngs of
fact, acceptance on revew
rearms, contraband, etc., sezure of vesses, arcraft, etc.,
transportng, reguatons
remen, cost of speca appare, deducton
oregn consus and consuate empoyees, ncome e empton
oregn corporatons dong busness n Unted States through
bankers, brokers, etc
oregn e change, rates prevang December 30, 1939
oregn nsurance poces. (See Msceaneous ta es: Stamp
ta es.)
G.
Gan or oss:
ass, saes
Cemetery ots acqured pror to March 1, 1913
Securtes transferred by empoyer to penson trust
Converson of nvestment trust certfcates nto underyng
stocks
Instament obgatons, dsposton of, reguatons amended.
Reorganzaton, transfers
Corporate assets for cash and stock, opton agreement
for stock sae
Propertes for cash and bonds
Sae of capta assets, god content of doar as determnng
factor
Transfer of tte to trustee, sae dstngushed
Gasone ta , edera and awaan, deducton
Gft ta , remander nterest n rrevocabe trust, deducton
Great rtan ncome ta , accrua, credt
Ground rents, Maryand and Pennsyvana, deducton, regua-
tons amended
.
awa gasone ta , deducton
ome Owners Loan Corporaton, bond nterest, ad|usted net
ncome computaton
ousng authorty, oca, conveyances to
I.
Income from sources wthn Unted States, nonresdent aens,
Interest ncuded n |udgment for damages
Rung No.
101 2
10279
10289
10191
10147
10138
10213
10130
10208
10201
10202
10142
102 2
101 2
10279
10193
10154
1021
10205
10298
102 9
101 8
10143
10220
10247
10270
10159
10139
102 0
10270
10214
10188
10251
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331
Rung No. Page.
Income from sources wthn Unted States possessons:
rmy pay earned n Phppnes, payment through agency
n Unted States
Ctzen n Unted States possesson, no benefts under sec-
ton 251, return and ta
Informaton at source:
Corporatons, compensaton of offcers and empoyees
Rura ma carrers equpment mantenance aowance
Inspecton of returns, reguatons
Instament obgatons, gan or oss upon dsposton, regua-
tons amended
Instament saes, ncome from settement pad through cor-
porate condut n annua nstaments
Insurance poces, foregn. (See Msceaneous ta es: Stamp
ta es.)
Insurance proceeds, payments under contract of nterest or
earnngs on certan fund
Interest:
ond
ome Owners Loan Corporaton ad|usted net ncome
computaton ..
Tennessee aey uthorty..
Unted States savngs ..
Defcences, bankruptcy and recevershp cases
Ground rents, Maryand, Pennsyvana, deducton, regua-
tons amended
udgment for damages recovered by nonresdent aen
Loan of stock, payments made as compensaton for
Refund after ebruary 10, 1939, of manufacturers e cse
ta es pad pror to October, 1935
State bonds, redeemed before maturty, dscount and pre-
mum ._ _.-
Inventores, eectve method, 1939 and subsequent years, regu-
atons
L.
Leases, mprovements by essee, gan to essor upon forfeture
Lens, edera ta es, rents and profts, mortgaged property,
prorty .. ..
Lmtaton perod, assessment of ta , fducary return fed for
fund ater ta ed as corporaton
Losses:
ank stockhoders, doube abty
Contract of guaranty, payment by note, deducton
Sae of stock to corporaton by prncpa stockhoder
Stockhoders, qudaton of corporaton, when deductbe,.
M.
Manufacturers e cse ta es:
utomobes, parts or accessores, connectng rods made
from used rods and new materas, saes
Overpayment pror October 1, 1935, refund after ebruary
10, 1939, when nterest aowabe
Maryand gTound rents, deducton, reguatons amended
Me co:
cess profts ta es, credt
Ta on nterest, credt
Meage aowance, member of State egsature, gross ncome
Mnes, o wes, etc, depeton deducton, reguatons ameuded..
101 7
10219
10301
10187
10152
102 9
10128
10138
10214
10191
10147
1024
102 0
10251
10149
10255
10213
10137
10229
101
10201
10178
10230
10150
10237
10182
10183
10255
10200
10280
10290
10239
1013
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332
Msceaneous ta es:
Stamp ta es-
Capta stock ssued to effect recaptazaton
Conveyances to oca housng authorty
oregn nsurance poces
Stamps, back and whte reproductons
Muncpa empoyees:
Retred, annuty payments
Saary deductons pad nto annuty fund, gross ncome
N.
Navy:
Contracts, defcency n proft, credt n computng proft
on War Department contracts
Offcers, authorty to admnster oaths on ta returns
Netherands ta on corporate profts dstrbutons, credt
New ampshre tobacco stamp ta es
New ersey property ta es, deducton
New York Cty and State cgarette stamp ta es
Nonresdent aens:
Interest ncuded n |udgment for damages, ta abty
Payments under So Conservaton ct, etc., to andowners,
wthhodng
Temporary vsa e tended for duraton of war, status
Obsoescence, storage of property not needed n busness, de-
ducton
O and gas propertes:
Deferred payment sae, ta abty of gross proceeds
Depeton and deprecaton deductons, reguatons
amended
Deveopment e penses, deducton n computng depeton.
Oeomargarne:
Schedue of producton and materas used
November, 1939 and 1938
December, 1939 and 1938 -- -
anuary, 1940 and 1939
ebruary, 1940 and 1939
March, 1940 and 1939 - -
pr, 1940 and 1939
Ownershp certfcate , promssory notes ssued n eu of deben-
ture coupons, wthhodng
Parkng meter deposts, Dstrct of Coumba, deducton
Partnershps, checkng account, dstrant on to satsfy partner s
ta assessment
Pennsyvana ground rents, deducton, reguatons amended
Penson trusts, securtes transferred by empoyer company, n-
come, gan or oss bass
Persona e empton:
Ctzen of Unted States entted to benefts of secton 251..
ead of famy, cousn reatonshp
Phadepha ncome ta , deducton
Payment by empoyer for empoyee
Pocemen, cost of speca appare, deducton
Prce d|ustment ct of 1938, payments to nonresdent aen
andowners, wthhodng
Processng ta es, cam for refund, ta pad by vendee as part of
purchase prce
Rung No.
10231
10188
10192
10174
10218
10273
10288
10252
1020
10302
10303
10257
10251
10277
1029
1015
10281
1013
10198
10132
101 3
10194
10223
10248
10284
10141
10227
10197
102 0
10205
10219
10207
10245
1028
102 2
10277
10258
G
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333
Property ta es:
New ersey, deducton
Washngton, accrua date
Pubc Saary Ta ct of 1939, empoyees of edera Land
anks
Pubsher s prepad subscrpton ncome and deductons, method
of reportng
-
uarters or meas furnshed n addton to saary, reguatons
amended ..
ampes
R.
Rates of e change, foregn
Refund:
Manufacturers e cse ta es refunded after ebruary 10,
1939, pad pror to October, 1935, nterest
Processng ta , payment by vendee as part of purchase prce
Reguatons:
mendments. (See mendments.)
Dsted sprts, mutated or mssng strp stamps
Insovent banks and trust companes, assessment and co-
ecton of ta es. .. ._ .
Inspecton of returns
Inventores, eectve method, 1939 and subsequent years...
esses, arcraft, etc., transportng frearms, etc., sezure...
Reorganzaton, gan or oss. (See Gan or oss: Reorganza-
ton.)
Returns:
ducary, fund ater ta ed as corporaton, assessment m-
taton perod
Informaton, rura ma carrers equpment mantenance
aowance
Inspecton of, reguatons
erfcaton, authorty to admnster oaths, Navy personne
Rhode Isand tobacco stamp ta es ..
Rura ma carrers, equpment mantenance aowance, nforma-
ton returns
S.
Saes, transfer of tte to trustee, sae dstngushed
Soca Securty ct. See mpoyment ta es.
So Conservaton ct, payments to nonresdent aen and-
owners, wthodng ._
Stamps, nterna revenue, back and whte reproductons
Stamp ta es. (See Msceaneous ta es.)
States:
onds, redempton before maturty, dscount and pre-
mum
Offcers and empoyees
nnuty payments, retred muncpa empoyees
Saary deductons pad nto muncpa empoyees an-
nuty fund, gross ncome
State ncome ta on saares e empt from edera ta ,
deducton
Traveng e penses, meage aowance, member of
State egsature
Ta es. (See Ta es: State.)
Subscrptons, prepad, pubsher s ncome and deductons,
method of reportng
Rung No.
/ 10302
I 10303
102 3
10130
10243
10195
1023.5
10154
10255
10258
10184
10134
10152
10137
10142
10201
10187
10152
10288
10287
10187
10247
10277
10174
10213
1022
10218
1018
10239
10243
G
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1
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2
2

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4
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334
Rung No.
Sugar ct of 1937, payments to nonresdent aen andowners,
wthhodng
Surta , undstrbuted profts, ad|usted net ncome, bond nter-
est, ome Owners Loan Corporaton
Sweden, doube ta aton, conventon and protoco wth Unted
States
Symbos, correspondence, ureau of Interna Revenue
T.
Ta es:
Defcences, nterest, bankruptcy and recevershp cases..
Dstrct of Coumba
Income ta , deducton _
Parkng meter deposts, deducton
oregn, credt for
Great rtan ncome ta , accrua
Me co
cess profts ta
Ta mposed on nterest..
Netherands ta on corporaton profts dstrbutons..
awa gasone ta , deducton
Manufacturers e cse ta on gasone, deducton
State-
Cgarette stamps, deducton
New York Cty and State
Te as.
Income not sub|ect to edera ta , deducton
Income ta , deducton
Phadepha
Payment by empoyer for empoyee
Property ta es:
New ersey, deducton
Washngton, accrua date
Tobacco stamps, deducton
New ampshre
Rhode Isand .
Surta on undstrbuted profts, ad|usted net ncome, bond
nterest, ome Owners Loan Corporaton
Teachers, trave e penses whe on sabbatca eave, deducton.
Tennessee aey uthorty, bond nterest
Te as cgarette stamp ta es
Tobacco:
Stamp ta es
New ampshre
Rhode Isand .. .. .. ..
Statement of manufactured, produced, by casses
October, 1939 and 1938
Novembe, 1939 and 1938
December, 1939 and 1938
anuary, 1940 and 1939
ebruary, 1910 and 1939
March, 1940 and 1939
Trave e penses:
Member of State egsature, deducton
Teachers on sabbatca eave, deducton .
Trust companes, assessment and coecton of ta es, reguatons.
Trusts:
Income
mony settement, grantor s abty
enefcary entted to accumuated ncome durng
year, to whom ta abe
Insurance premums from ncome for beneft of grantor.
1024
102 5
10227
10139
10280
10290
10252
10270
10270
10257
102 4
1018
10245
1028
10302
10303
102 3
1020
10287
10214
10278
10191
102 4
1020
10287
10131
101 1
10189
10222
10249
10275
10239
10278
10134
10173
1023
10241
10277
1
10214
95
10233
288
10232
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335
Rung No.
Page.
Trusts Contnued.
Income Contnued.
Payment under agreement for mantenance and sup-
port, ta abty of husband
Short term trusts, ncome ta abe to grantor
Investment, certfcates converted nto underyng stocks,
gan or oss
U.
Unted States oard of Ta ppeas:
Decsons of, st of acquescences and nonacquescences
ndngs of fact, acceptance on revew
Petton, amendment by substtutng new cause of acton..
Rues of practce, revsed March 1, 1940
Unted States savngs bonds, nterest, e empton
.
esses and arcraft transportng frearms, etc., sezure, regua-
tons
nson ct, e cess proft on nava contracts, defcency n
proft, credt n computng proft on War Department con-
tracts
W.
Washngton property ta , accrua date
Wthhodng ta at source:
Nonresdent aen andowners, payments under So Con-
servaton ct, etc
Promssory notes ssued n eu of debenture coupons,
ownershp certfcates
10253
10254
10199
10200
10298
10300
10202
10157
10211
10147
10142
10273
102 3
10277
10141
172
175
105
1 2
14S
1-9
1S7
ISC.
308
21
282
280
34
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