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(7) If the property (other than stock or securities in a corporation à party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;

(8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by, a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;

(9) If the property consists of stock or securities distributed after December 31, 1923, to a taxpayer in connection with a transaction described in subdivision (c) of section 203, the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed;

(10) If the property was required as the result of a compulsory or involuntary conversion described in paragraph (5) of subdivision (b) of section 203, the basis shall be the same as in the case of the property so converted, decreased in the amount of any money received by the taxpayer which was not expended in accordance with the provisions of law (applicable to the year in which such conversion was made) determining the taxable status of the gain or loss upon such conversion, and increased in the amount of gain or decreased in the amount of loss to the taxpayer recognized upon such conversion under the law applicable to the year in which such conversion was made;

(11) If substantially identical property was acquired after December 31, 1920, in place of stock or securities which were sold or disposed of and in respect of which loss was not allowed as a deduction under paragraph (5) of subdivision (a) of section 214 or paragraph (4) of subdivision (a) of section 234 of this Act or the Revenue Act of 1921, the basis in the case of the property so acquired shall be the basis in the case of the stock or securities so sold or disposed of, except that if the purchase price was in excess of the sale price such basis shall be increased in the amount of the difference, or if the repurchase price was less than the sale price such basis shall be decreased in the amount of the difference.

(b) The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property (or, in the case of such property as is described in paragraph (1), (4), or (5), of subdivision (a), the basis as therein provided), or (B) the fair market value of such property as of March 1, 1913, whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

(c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter; but such depletion allowance based on discovery value shall not exceed 50 per centum of the net income (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value.

(Section 204—1924 Act) To illustrate the application of the provisions of the preceding section of the Revenue Act, the following propositions are stated and discussed.

Proposition A L. M. Greig owns real estate which he purchased January 1, 1913 for $8,500.00. On March 1, 1913 the real estate had a fair market value of $10,000.00. During the current year he sells the property to F. E. Moore for $14,000.00. What is the amount of Greig's taxable income?

Solution Having acquired the property previous to March 1, 1913, Mr. Greig should use, as a basis for determining his gain or loss on the transaction, the fair market value of the property on March 1, 1913. [ Section 204 (6) ] The Law provides that in a transaction of this type the taxpayer may use the cost of the property or the fair market value of the property as of March 1, 1913 whichever is the greater. Since the real estate owned by Mr. Greig was purchased for $8,500.00 on January 1, 1913 and had a fair market value of $10,000.00 on March 1, 1913, it will be seen that the fair market value on the latter date is the greater, hence should be used in determining the gain or loss resulting from the sale. The fair market value on March 1, 1913 being $10,000.00 and the selling price during the year being $14,000.00, Mr. Greig should report a profit of $4,000.00.

Proposition B What would be the effect upon Greig's taxable income if he had acquired the property on April 1, 1920 at the same purchase price?

Solution If Mr. Greig had acquired the property on April 1, 1920 paying $8,500.00 for it, this value should be used as a basis for determining the gain or loss resulting from the sale. [ Section 204 (a)). The Law provides that when property is acquired after February 28, 1913 the cost thereof shall be used as a basis in determining the gain or loss from the sale or other disposition of the property. Therefore, under these conditions, Greig's taxable income would be the difference between the cost on April 1, 1920, $8,500.00, and the selling price during the current year, $14,000.00, hence his taxable income from this transaction will amount to $5,500.00.

Proposition C What would be the effect upon Greig's taxable income if he had acquired the property by gift on January 1, 1912? On January 1, 1918? On January 1, 1924?

Solution If Greig had acquired the property by gift on January 1, 1912 he should use the fair market value as on March 1, 1913 as the basis for determining the gain or loss resulting from the sale. [Section 204 (6)). Since the value on this date was $10,000.00 and the selling price in the current year $14,000.00, his taxable income, therefore, amounts to $4,000.00.

If the property had been acquired by gift on January 1, 1918 he should use the fair market value of the property at time of acquisition as a basis in determining the gain or loss resulting from the sale. [ Section 204 (a-4) ). Since the market value on that date is not stated in the proposition, it will be necessary to determine this before the taxable income can be computed.

If the property had been acquired by gift on January 1, 1924, Mr. Greig should use, as a basis in determining his gain or loss, the same value as would have been required of the last preceding owner by whom the property was not acquired by gift. [ Section 204(a-2) ). Thus, if the last preceding owner had acquired the property through purchase any time after February 28, 1913, the cost of the property to that owner would be the proper basis for Mr. Greig to use in determining his gain or loss. If the property had been acquired by the last preceding owner previous to March 1, 1913, Mr. Greig should use as a basis the fair market value of the property as on March 1, 1913 in computing his gain or loss.

The Sale of Stocks. When a number of shares of stock are held by the taxpayer which he has purchased at different times and prices he should, if possible, at the time of sale, determine the original cost price of the stock sold. This, of course, can be done only if it is possible for him to determine when the particular share sold was purchased. If it is impossible for him to do this, it will be assumed that the first shares sold were the first shares purchased and the profit subject to the tax will be the difference between the cost and selling price thereof. When stock is received as a bonus at the time other stocks or bonds are purchased, if possible, the cost should be allocated between the bonus stock and the stock or the bonds purchased. If it is impossible to make this allocation, no income need be reported until both the stock or bonds purchased and the stock or bonds received as a bonus are sold. At the time of sale, the difference between the total sales price and the original cost should be reported as income. When stock rights are received by stockholders, the value thereof need not be reported for taxation purposes until sold, in which case, the entire sales price is taxable.

Sale of Patents and Copyrights. When patents and copyrights are sold, the difference between the cost and the selling price constitutes income subject to the tax. If the patent or copyright was obtained prior to March 1, 1913, the profit subject to the tax is the difference between the market price of the patent or copyright on March 1, 1913 and the selling price. This is in accordance with the method of determining profit derived from the sale of any property owned prior to March 1, 1913. If in previous returns depreciation has been claimed on patents and copyrights, this depreciation must be subtracted from the original cost in determining the profit subject to tax at the time of sale. To illustrate: If a patent is purchased for $1,000.00 on January 1, 1916, and $100.00 is claimed as depreciation on the patent each year, and the patent is sold on January 1, 1921 for $800.00, the profit subject to the tax is the difference between $500.00, the book value of the patent, and the selling price.

Sale of Good Will. Good will is not to be considered in determining income subject to tax unless the business or a part of it to which the good will attaches is sold. In this case, the cost of the assets including the good will should be used as a basis in the determination of gain or loss unless acquired previous to March 1, 1913, in which case, the fair market value should be used as the basis. Good will may be acquired through purchase or it may be established or built up through expenditures which have been currently deducted. It does not make any difference whether or not a value is placed upon the good will and this value set up on the books. The fact that the good will may have been built up through expenditures but not set up on the books will have no bearing in the determination of the taxable gain. If specific payment was not made for good will acquired after February 28, 1913 no loss can be claimed but a profit may be realized through the sale thereof. The burden of proof is on the taxpayer to establish the cost of the good will sold if acquired since February 28, 1913 or the fair market value as on March 1, 1913 if acquired previous to that date.

Installment Sales. In the case of property sold under contract providing for payment in installments, gains or profits may be reported in the year in which the installment payments are received. This applies both to sales of personal property and sales of real estate on an installment plan. There is nothing in the Regulations to prevent a taxpayer from including in gross income the full amount of gain or profit expected to be realized from the sale of personal property or real estate on a deferred payment or installment basis. However, under certain Regulations prescribed by the Treasury Department, a taxpayer may base his income on installments actually received in each taxable year. The taxpayer will usually benefit by reporting his profits from installment sales in the year in which the installments are received. In sales where there is a substantial initial payment, usually considered to be a payment of more than 25% of the sale price, the entire profit to be realized on the sale is considered as earned in the year when the sale is made and such profit must be returned as gross income in the return for that year. If, however, less than 25% of the sales price is collected at the time of the sale, the profit may be distributed over the life of the contract and be reported for tax purposes in the year in which the payments are made.

The following rules are prescribed by the Treasury Department in order that a uniformly applicable rule may be established in computing the gain to be reported from the sale of either personal property or real estate on an installment basis and in which the initial payment is relatively small or less than 25% of the sale price.

(a) Rule Applicable to Sales of Personal Property

In the sale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. · Such income may be ascertained by taking as profit that proportion of the total cash collections received in the taxable year from installment sales (such collections being allocated to the year against the sales of which they apply), which the annual gross profit to be realized on the total installment sales made during each year bears to the gross contract price of all such sales made during that respective year.

(b) Rule Applicable to Sales of Real Estate In the sale of real estate on the installment plan whether or not title remains in the vendor, whether there is immediate transfer of title when a small initial payment is made, or whether conveyance is not to be made until after all or a substantial portion of the agreed installments have been paid, the installment obligations assumed by the buyer are not ordinarily to be regarded as having a readily realizable market value and the vendor may report as his income from such transactions in any year that proportion of each payment actually received in that year which the gross profit to be realized when the property is paid for bears to the gross contract price.

To illustrate the application of these rules, let us assume that a furniture dealer sells furniture on July 1 for $500.00 which cost $400.00. It is agreed that this furniture will be paid for in twenty equal installments of $25.00 each. The total profit to be realized amounts to $100.00. This is 20% of the gross contract price, hence 20%, or $5.00, out of each installment received during the year, should be reported as income for that year. If, therefore, during the current year six payments are received amounting to a total of $150.00, the taxpayer should report 20%, or $30.00, as income for the year.

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