This method of computing the income is applicable to the sales of both personal and real property, provided of course, that the conditions of the sales are such as to entitle the taxpayer to the benefits of this provision of the Law.

Gain or Loss from Exchange of Property. The gain or loss derived from the exchange of property for other property should be determined in accord with the provisions of Sections 202 and 203 of the Revenue Act of 1924. The same basis should be used in computing the gain or loss derived from the exchange of property as is used in computing the gain or loss derived from the sale of property. The Law further provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property received. The provision in the 1924 Act for using the "fair market value" of the property received is the same as was provided in the 1918 Revenue Act. In the 1921 Act, the term "readily realizable market value" was used instead of "fair market value". Thus, in an exchange of a farm for a city residence, the gain to be reported by the taxpayer would be the difference between

(a) the cost of farm if purchased after February 28, 1913,

or

(b) the fair market value of farm on March 1, 1913, if purchased previous to that date

and the fair market value of the city property received.

Under the present Law, no gain or loss is to be recognized when property is exchanged under the following conditions:

(b) (1) No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment, or if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.

(2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

(3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

(5) If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsory or involuntarily converted

into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.

(Section 203-1924 Act)

* *

Dividends. (a) The term "dividend" when used in this title ★ means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.

(b) For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 204.

(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

(d) If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 204, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this paragraph shall also apply to distributions from depletion reserves based on the discovery value of mines.

(e) Any distribution made by a corporation, which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 or the Revenue Act of 1921, out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or section 218 of the Revenue Act of 1921, shall be exempt from tax to the distributees.

(f) A stock dividend shall not be subject to tax, but if before or after the distribution of any such dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

(g) As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. (Section 201-1924 Act)

In general, any distribution of profits by a domestic or foreign corporation to shareholders constitutes a dividend and must be included in gross income by the individual receiving it. Of course, any distribution of profits accumulated prior to March 1, 1913 need not be included in gross income because such profits are not taxable. The dividends received by an individual from a corporation which must itself pay an income tax on its income, are subject only to the surtax. Even though the dividends received by an individual may not be subject to the normal tax, such dividends must be included in gross income and then taken as a credit in the computation of the normal tax.

Sources of Dividend as to Year. Under the new Law, dividends are presumed to be from profits as long as any profits exist. In other words, a corporation cannot declare a dividend and specify that it is a liquidating dividend and thereby be exempt from the income tax so long as there are any profits from which dividends might be declared. It is also presumed that any dividend declared is from profits earned since February 28, 1913, until all such profits have been distributed. As may readily be surmised, the purpose of this is to prevent the declaration of dividends by corporations which had a surplus accumulated prior to February 28, 1913, and making them exempt from the tax by stating that these dividends are from profits earned prior to the passing of the Sixteenth Amendment. Under the present Law, the dividends are taxable at the rate of tax of the year when received regardless of the year in which the profits were earned.

Liquidating Dividend. As stated previously, a dividend can be considered as a liquidating dividend only when all profits of the corporation have been distributed. When liquidating dividends are distributed, if they are in amount greater than the original cost of the interest of the stockholder in the corporation, this excess is considered as a profit subject to the tax. illustrate: If D. C. Brown buys 10 shares of stock for $1,000.00 in the City Milling Machine Company, and later this corporation dissolves and pays D. C. Brown $1,200.00 for his stock, the amount received in excess of cost is taxable income and Mr. Brown must report an income of $200.00 from this transaction.

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✓Dividend from Depletion Reserve. In the case of a corporation which has a depletion reserve, a dividend can be paid and charged to this reserve only when the surplus and other reserves of the corporation have been exhausted. Such a dividend, when paid, is not considered subject to the tax unless it is in excess of the cost of the stock which the recipient holds.

Miscellaneous Types of Dividends. Dividends received from private banks organized as corporations are subject to the tax. Dividends from paid-up insurance policies are treated the same as other dividends from corporations. Taxes paid by a

bank on its stock for the owners of the stock are considered as a dividend to the owners. Dividends paid from surplus created by the appreciation of assets are not considered as taxable.

Stock Dividends. In the case of Towne vs. Eisner, it was held by the U. S. Supreme Court that stock dividends were not taxed under the Revenue Act of 1913, which did not expressly refer to them, and in the case of Macomber vs. Eisner the Supreme Court held that stock dividends were not taxable under the Revenue Act of 1916, although it expressly so provided.

Under the 1921 Act, a stock dividend was not subject to tax, unless the corporation proceeded to cancel or redonate its stock in such manner as to make the distribution essentially equivalent to the distribution of a taxable dividend, in which case, the amount received was treated as a taxable dividend to the extent of the earnings or profits accumulated after February 28, 1913. The provision with reference to stock dividends in the 1924 Act is the same as in the 1921 Act.

Gross Income of Farmers. The income of a farmer usually arises from the sale of live stock and farm products which he has raised or which has been purchased for sale. A farmer may report his income on either a cash or accrual basis. If he makes his return on a basis of cash receipts and cash disbursements, it will not be necessary to take an inventory to determine the profits. His gross income for the taxable year will include the following:

I. The amount received from the sale of live stock or produce which was raised during the taxable year or prior years. The profits from the sale of any live stock or other items which were purchased.

2.

3. Gross income from all other sources.

The total income received from the sale of live stock and farm products is to be considered income for the year in which the sale is made. If instead of selling live stock or farm products for cash, a barter or exchange is made for merchandise or other property, the income will be the value of the merchandise or property received. In other words, if a farmer exchanges a team of horses for a Ford automobile, he should report, as income, the value of the automobile.

When live stock and farm products are purchased, instead of being raised, and later sold, the amount of income to be reported will be the difference between the cost and the selling price.

If he makes his return on an accrual basis, it will be necessary to take an inventory at the end of each year. The gross profits will be ascertained by adding to the inventory at the end of the year the amount received from the sale of live stock and products and miscellaneous receipts for hire of teams, machinery, and the like, during the year and deducting from the sum the inventory at the beginning of the year plus the cost of live stock and products purchased during the year.

Because of the difficulty of ascertaining actual cost of live stock and other farm products, farmers who render their returns upon an inventory basis may, at their option, value their inventories according to the "farm-price method" which provides for the valuation of inventories at market price less cost of marketing. If the use of the "farm-price method" of valuing inventories for any taxable year involves a change in method of pricing inventories from that employed in prior years, the opening inventory for the taxable year in which the change is made should be brought in at the same value as the closing inventory for the preceding taxable year.

Machinery, farm equipment or other capital assets are not to be included in the inventory. In the sale of such assets, any excess over the cost thereof less the amount of depreciation previously claimed and allowed as a deduction shall be included in gross income. Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent. Proceeds of insurance, such as hail and fire insurance, on growing crops should be included in gross income to the amount received in cash or its equivalent for the crop injured or destroyed. A farmer need not include in his gross income the value of the rent of the farm house occupied by his family or farm products consumed by his family.

A person operating a farm for pleasure, which involves a continual loss, is not regarded as a farmer, and is not permitted to deduct such loss from his gross income. Consequently, if such a taxpayer should, in certain years, have an income in excess of the expenses, only the excess should be reported as gross income since the expenses cannot be claimed as deductions in the return.

Miscellaneous Income. No attempt has been made in the preceding discussion to name or outline all of the various items of income which are taxable. The general rule is that all income of every kind and from every source, including compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, gains, profits, and income, is taxable unless specifically excluded by statute. Income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets.

The following specific items of income, which may be described as somewhat unusual, are typical of the numerous sources of taxable income:

(a) Income received from life insurance or annuities paid under an annuity contract to the extent that the amount received exceeds the amount of premiums paid and provided it is received during the life of the insured.

(b) Income derived from a contract entered into with a city or other political subdivision of a state.