fc|g INT RI LL R NU

fa Z LL TIN
(C M rr . T I ULLIT1 1955-1
.r.ua.ry- une 1955
n ths ssue _
ndng Lst -v
Introducton 1
oreword 2
Ta Court of the Unted States, The. ___ 3_8
Speca nnouncement g
Part I. Rungs and Decsons Under the Interna
Revenue Code of 195 11-203
Part II. Rungs and Decsons Under the Interna
Revenue Code of 1 939 and Reated Pubc Laws... 205-563
Part III coho Ta Rungs and Decsons:
Subpart . .Rungs and Decsons Under the
Interna evenue Code of 195 5G5-607
Subpart . Rungs and Decsons Under the
Interna e venue Code of 1939 608
Subpart C. Rungs and Decsons Under the
edera c bo dmnstraton ct or Reated
Laws 609-617
Part T . Legsaton a-110 Treates:
Subpart . Legsaton... 619-623
Subpart . To- c Conventons 62 -679
Subpart C. C ommttee Reports 680-693
Part . dmnstra-tv e and Msceaneous Matters. 695-722
Inde 723-7 9
UNIT D ST T S
If S I N t ON 10 S
foe a hv t r- SuDerr ten ent of Documents, U. S. Government Prntng Offce
sUogt 2S, .c. - Prce 2 (Parer)
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D POSIT D Y T
UNIT D ST T S O M RIC
INDING LIST
Court Decsons:
1773
1771.
1775
1778
1777
1778
1779
1780
17
17S2.
1753
17
ITS.
_ 13 -
cvcnue Rutnps:
6 -601 (correcton) .
85-1
65-2.
M
65-
65-5.
SS-6
S5-7
.
5-
65-10
15-11
-12.
65-13
66-1
66-15
65-f
65-17
65-18
65-19
65-20
65-21
65-22
65-23
65-2
6 25
65-26
65-27
85-S
65-29
6-a
65-.T2.....
M
85-3
65-35
55-3
55-37
M
u-
65- 1
65- 2
65- 5..
65- 7..
ML.
S-61
M
MI
2 3
291
116
uo
6 7
6 8
e
536
620
117
no
376
178
26
211
282
291
331
09
99
518
075
7
212
259
285
302
361
386
388
75
96
516
5 0
198
275
283
283
338
350
359
13
30
76
557
128
226
286
3 0
3 7
3 9
03
670
698
610
617
129
3
126
239
2S1
31
606
61
62
528
633
837
Revenue Runps-
55-56
65-57
65-58
65-59
55-60
65-61
65-62
65-63
65-6
65-65
85-6
65-67
65-68
65-69
85-70
65-71
65-72
65-73
65-7
65-75
65-76
85-77
65-78
65-79
65-80
85-81
65-82
55-83
85-8
88-85
65-86
85-87
85-88
65-S9
65-90
85-91
85-92
65-93
65-9
65-95
65-90
85-97
65-08
85-99
65-100
65-101
65-102 ,
65-103 ,
65-10
66-105
65-106
85-107
85-108
65-109
65-110
65-111... .
65-112
65-113
65-11
66-115
65-116... .
68-117
85-118
65-119
65-120
65-121
65-122
55-123
65-12
85-125
65-126
Contnued
6 9
SU
97
88
17
n
212
227
228
277
282
387
.ST.
61
60
U
206
286
230
238
232
339
387
870
887
3 C
820
831
15
33
112
2 1
28
3 8
3 1
300
.11
1
80
188
612
62 I
531
665
566
S 9
31
6
9
102
127
1 0
361
280
333
8
81
673
57.-,
576
233
320
352
382
382
390
1 1
82
618
636
(III)
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71 592 30
y
INDING LIST Contnued
maae Rungs Contnued
ML
::-- ..
k-s.
..
Page
27
320
.M7
831
352
3f.S
37.1
3 U
ma
06
2
M
71

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I
21
3d
( .
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72
80
21 )
131
25
312
120
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119
626
17S
5
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IS
21
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205
230
271
320
M
9
55

53
6 3
657
558
129
n
55R
597
101
607
21
139
232
290
3 3
172
381
398
IS
673
13
561
670
67
575
877
695
699
600
17
25
0
Revenue Rungs Contnued
65-369
55-370
65-371
55-372
65-373
55-37
65-375
65-376
65-377
65-378
65-379
65-380
65-381
65-382
65-383
65-38
55-385
65-386
65-387
85-388
65-389
65-390
85-391
65-392
65-393
65-39
65-395
55-396
65-397
65-398
65-399
85- 00
85-101
85- 02
65-103
85- 0
85- 05
65- 06
85- 07
65- 08
85- 09
65- 10
65- 11
65- 12
65- 13
85- 1
65- 15
55- 16
65- 17
85- 18
65- 19
85- 20
65- 21
65- 22
65- 23
65- 2
65- 25
65- 26
Treasury Decsons:
6116
6117
ns
6119
Page
M
122
131
89
363
370
88
121
20
-17
I
161
1
689
79
M
100
120
131
2:1:
271
290
808
22
8
88
5
622
. ,25
535
572
690
611
618
600
615
28
7:
77
113
120
297
303
818
321
383
12
16
3
115
88
527
639
II
1
2
1:1
us
101
678
698
115
823
6120
6121
6122
6123
612
6125
6126
6127
6128
6129
6130
6131
6132
6133
613
9 (Narcotcs).. -
1(1
I
515
719
M
61
108
123
OO
0.5
721
112
3:5
60
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I
INDING LIST Contnued
Treates:
Canada
edera Repubc o Germany
apan
ecutvc Orders:
10289
10583
10585
10580
10602
10606
10007
Page
62

65
( If,
17
696
I.M
1 3

Procamaton 3082 _..
Pubc Laws:
1
18
70 (Sept. 1, 105 )
IR-Crcuar:
65-23 (Rev. Ru. 55-17 )...
News Reeases:
IR-oy (Rev. Ru. 55-371)
IR-U (Rev. Ru. 55-262)
Tage
L 7
f. )
(-
1 1
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1 1
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INDING LIST O PR IOUSLY PU LIS D RULINGS
CURR NTLY M NTION D
Prevous rung
cton
. R. R. 229, C. . 3, 35 (1920).
G. C. M. 10 86, C. . I-1, 1
(1932).
G. C. M. 23623, C. . 19 3, 313.
L T. 1557, C. . II-, 172
(1923).
I. T. 1776, C. . II-2, 151
(1923).
I. T. 1936, C. . III-, 122
(192 ).
I. T. 2 05, C. . II-1, 72
(1928).
I. T. 3 72, C. . 19 1-1, 252...
I. T. 3827, C. . 19 6-2, 57
I. T. 3910, C. . 19 8-1, 15
I. T. 017, C. . 1950-2, 12
I. T. 058, C. . 1951-2, 22...
L. O. 101 , C. . 2, 88 (1920).
Mm. 1 8, C. . III-1, 87
(193 ).
Mm. 6136, C. . 19 7-1, 58..
Mm. 6583, C. . 1951-1, 97..
0. D. 667, C. . 3, 52 (1920)..
0. D. 7 5, C. . 3, 355 (1920)..
0. D. 823, C. . , 77 (1921).
0. D. 9 5, C. . , (1921).
0. D. 1031, C. . 5, 1 1 (1921)..
Rev. Ru. 25. C. . 1953-1. 31
Rev. Ru. 117, C. . 1953-1,
Cted
mpfed.
Modfed..
Cted
Cted
Cted
Modfed
Modfed
Modfed
Revoked
mpfed
Modfed
Cted
Modfed
Current revenue rung
98
Rev. Ru. 119, C. . 1953-2,
95.
Rev. Ru. 108, C. . 1953-2, 19.
Rev. Ru. 177, C. D. 1953-2,
3 1.
Rev. Ru. 199, C. . 1953-2,
225.
Rev. Ru. 291, C. . 1953-2, 2
Rev. Ru. 5 -63, C. . 195 -1,
33
Rev. Ru. 5 -185, C. . 195 -1,
0 .3
Rev. Ru. 5 -329, I. R. .
195 -33, 12.
Rev. Ru. 5 -352, I. R. .
195 -3 , 2 .
Rev. Ru. 5 -366, I. R. .
195 -35, 9.
Rev. Ru. 5 -392, I. R. .
195 -37, 52.
Rev. Ru. 5 -576, I. R. .
195 - 9, 21.
Modfed
Suppemented
Cted
Cted
Cted
Modfed
Cted
Modfed
mpfed
Modfed
mpfed
mpfed
Superseded
Superseded
Modfed
Modfed
mpfed
Modfed
mpfed
Superseded...
Modfed.....
( II)
Rev. Ru. 55-257, p. 28.
Rev. Ru. 55-273, p. 221.
Rev. Ru. 55- 35, p. 286.
Rev. Ru. 55-227, p. 551.
Rev. Ru. 55-275, p. 295.
Rev. Ru. 55-250, p. 270.
Rev. Ru. 55-227, p. 551.
55-29 , p. 368.
55-170, p. 3 2.
55-138, p. 223.
55- 88, p. 2 1.
55-139, p. 277.
55-357, p. 13.
55- 07, p. 77.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
Rev. Ru.
55- 60,
55- 31,
55-117,
55-257,
55-317,
55-119,
55-110,
55- 1,
55-153,
37.
76.
233.
28.
329.
352.
280.
598.
199.
Rev. Ru. 55-136, p. 213.
Rev. Ru
Rev. Ru
55- 12, p. 259.
55-318, p. 509.
Rev. Ru. 55- 6, p. 09.
Rev. Ru. 55-171, p. 80.
Rev. Ru. 55-220, p. 2 7.
Rev. Ru. 55-217, p. 60 .
Rev. Ru. 55- 98, p. 52 .
Rev. Ru. 55-217, p. 60 .
Rev. Ru. 55- 22, p. 198.
Rev. Ru. 55-169, p. 612.
Rev. Ru. 55-302, p. 577.
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III
INDING LIST O PR IOUSLY PU LIS D RULINGS
CURR NTLY M NTION D Contnued
Prevous rung
cton
Current revenue rung
Rev. Ru. 5 -608, I. R. .
Modfed
Rev.
Ru. 55- 26, p. 68.
195 -51, 5.
Rev. Ru. 5 -G25, I. R. .
Modfed
Rev.
Ru. 55-212, p. 299.
195 -52, 13.
Rev. Ru. 55-56, I. R. . 1955-
Modfed
Rev.
Ru. 55-3 6, p. 607.
5, 26.
Rev. Ru. 55-72, I. R. . 1955-
Superseded...
Rev.
Ru. 55- 72, p. 206.
7, 11.
S. M. 31 1 , C. . I -2, 183
Modfed
Rev.
Ru. 55-119, p. 352.
(1925).
S. R. 5128, C. . I -2, 156
Cted
Rev.
Ru. 55-389, p. 276.
(1925).
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R I TIONS
The foowng abbrevatons n current use and formery used w
appear m matera pubshed n the uetn.
, ,C, etc. The names of ndvduas.
. T. coho and tobacco ta rung.
. T. . oard of Ta ppeas.
C . Cumuatve uetn.
C. . R. Code of edera Reguatons.
Ct. D. Court Decson.
D. C. Treasury Department crcuar.
. O. ecutve Order.
. T. state gft ta rung.
m. T. mpoyment ta rung.
. . . . edera coho dmnstraton ct.
G. C. M. Chef Counse s memorandum (formery Genera Coun-
se s memorandum).
I. R. . Interna Revenue uetn.
IR-Mm. Pubshed IR-mmeograph.
I. T. Income Ta Rung.
/, , Y, Z, etc. The names of corporatons, paces, or busnesses
accordng to conte t.
M. T. Msceaneous ta rung.
Mm. Pubshed mmeograph.
O. D. Offce Decson.
P. L. Pubc Daw.
P. S. Penson, proft-sharng, stock bonus, or annuty pan rung.
Rev. Proc. Revenue Procedure.
Rev. Ru. Revenue Rung.
S. T. Saes ta rung.
S. P. R. Statement of Procedura Rues.
Stat. Statutes at Drge.
T. C The Ta Court of the Unted States Reports.
T. D. Treasury Decson.
U. S. C. Unted States Code.
at and y used to represent certan numbers and when used wth the
word doars represent sums of money.
(I )
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INTRODUCTION
The Interna Revenue uetn s the authortatve nstrument of
the Commssoner of Interna Revenue for the announcement of off-
ca Interna Revenue rungs, and for the pubcaton of Treasury
Decsons, ecutve Orders, egsaton, and court decsons pertan-
ng to Interna Revenue matters.
It s the pocy of the Servce to pubsh n the uetn a sub-
stantve ana procedura rungs of mportance or genera nterest, the
pubcaton of whch s consdered necessary to promote a unform
appcaton of the aws admnstered by the Servce. It s aso the
pocy to pubsh a rungs whch revoke, modfy, amend, or affect
any pubshed rung. Rungs reatng soey to matters of nterna
management are not pubshed. The rungs are prepared n the
varous dvsons of the Natona Offce, ncudng the Offce of the
Chef Counse for the Interna Revenue Servce. pubshed
rungs have receved the consderaton and approva of the Chef
Counse.
Revenue Rungs reported n the uetn do not have the force and
effect of Treasury Department Reguatons (ncudng Treasury Dec-
sons), but are pubshed to provde precedents to be used n the ds-
poston of other cases, and may be cted and reed upon for ths
purpose. owever, snce each pubshed rung represents the con-
cuson of the Servce as to the appcaton of the aw to the entre
state of facts nvoved, Revenue offcers and others concerned are
cautoned aganst reachng the same concuson n other cases uness
the facts and crcumstances are substantay the same. In appyng
rungs pubshed n the uetn, personne of the Servce w, of
course, consder the effect of subsequent egsaton, reguatons, court
decsons, and rungs.
ach rung s desgnated as a Revenue Rung and shoud be
cted by reference to the uetn and page where reported. Thus,
Revenue Rung No. 55-80 shoud be cted as Rev. Ru. 55-80, C. .
1955-1, . Rungs are keyed to the appcabe sectons of the
Interna Revenue Code and reguatons.
Interna Revenue Cumuatve uetn 1955-1 contans a rungs,
decsons, and egsaton pertanng to Interna Revenue matters
pubshed n the weeky Interna Revenue uetns 1 to 26, ncu-
sve, for the perod anuary 1 to une 30, 1955. It aso contans a
cumuatve st of announcements reatng to decsons of The Ta
Court of the Unted States pubshed n those uetns.
(1)
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OR WORD
The Interna Revenue uetn s prepared n s parts. Part I
ncudes rungs and decsons whch are based on the appcaton of
provsons of the Interna Revenue Code of 195 and, uness otherwse
stated n the rung or decson, are pubshed wthout consderaton
as to any appcaton of the provsons of the Interna Revenue Code of
1939 or reated pubc aws. Part II ncudes rungs and decsons
whch are based on the appcaton of provsons of the Interna Reve-
nue Code of 1939 and reated pubc aws and, uness otherwse noted
theren, are pubshed wthout consderaton as to any appcaton of
the provsons of the Interna Revenue Code of 195 . Part III con-
tans rungs and decsons pertanng to the varous acoho ta es.
Ths part s subdvded nto three subparts accordng to matters ssued
under the Interna Revenue Code of 195 (Subpart ), the Interna
Revenue Code of 1939 (Subpart ), and the edera coho dmn-
straton ct (Subpart C). Part I contans ta egsaton and
treates, ncudng reated Commttee and Conference Reports. Ths
part s subdvded nto three subparts accordng to egsaton (Sub-
part ), ta conventons, Treasury Decsons and Revenue Rungs
ssued wth respect thereto (Subpart ), and Commttee Reports
(Subpart C). Part s devoted to admnstratve and msceaneous
matters. The weeky Interna Revenue uetns contaned Part I,
consstng of some tems of genera nterest. Other than the dsbar-
ment st, whch has been ncorporated n Part of ths uetn,
those tems are not reproduced heren.
(2)
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T T COURT O T UNIT D ST T S
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T T COURT O T UNIT D
ST T S PU LIS D IN T INT RN L R NU
ULL TIN ROM NU RY 1, 1955, TO UN 30, 1955,
LNCLUSI
It s the pocy of the Interna Revenue Servce to announce n the
Interna Revenue uetn at the earest practcabe date the deter-
mnaton of the Commssoner to acquesce or not to acquesce n a
decson of The Ta Court of the Unted States whch dsaows a
defcency n ta determned by the Commssoner to be due. Notce
that the Commssoner had acquesced or nonacquesced n a decson
of The Ta Court reates ony to the ssue or ssues decded adversey
to the Government. ctons of acquescences n adverse decsons
shoud be reed on by Revenue offcers and others concerned as con-
cusons of the Servce ony as to the appcaton of the aw to the
facts n the partcuar case. Cauton shoud be e ercsed n e tendng
the appcaton of the decson to smar cases uness the facts and cr-
cumstances-are substantay the same, and consderaton shoud be
gven to the effect of new egsaton, reguatons, and rungs as we
as subsequent court decsons and actons thereon. cquescence n a
decson means acceptance by the Servce of the concuson reached
and does not necessary mean acceptance and approva of any or a
of the reasons assgned by the Court for ts concusons. No announce-
ments are made n the uetn wth respect to memorandum opnons
of The Ta Court.
The Commssoner C UI SC S n the foowng decsons:
Ta payer
Docket No.
Report
oume Page

arthoomew, rederck Cec, a mnor, estate of

arthoomew, Mycent, guardan of estate of red-
erck Cec arthoomew, a mnor
ear m Co
ernsten, dward, e ecutor of estate of Wam
ernsten .
ernsten, Wam, et a., estate of
our, se S____................................
200
297 3
1976
356 1
1 Nonaeqaescence pubshed In Cumuatve uetn 1(1 5, g, Is wthdrawn.
(3)

18
22
23
3 9
35
136
237
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cquescences Contnued
Ta payer
radford, . C, et u .
rookyn Unon Gas Co.8.
Docket No.
C
Campanar, Chrstopher C, ct a., e ecutors of estate
of Nna M. Campanar 5
Campanar, Nna M., estate of 6
Carnege Center Co., The
Caruso, Dorothy
Centra Outdoor dvertsng Co., Inc
Chang sao Lang
Country Cub states, Inc..
Crawford County Prntng and Pubshng Co
Crawford County Prntng and Pubshng Co., a
dssoved corporaton
D
Daggtt, Dcoss. ., et n
Davs, arod S., estate of
Davs, Mary, e ecutr of estate of arod S. Davs.
Drksmeyer, Lafavette
Dttmar, Martn M., et u
Drachman, .da
Drachnan, anchon
Drachman, Rchard M
arrer, Mame
arrer, W. G., estate of (termnated).
eagans, rank T., et u
eagans Pant Co
sher, Wson ohn1
ort Wharf Ice Co
uerton, George I
uton ag Cotton Ms.
Gaynor News Co., Inc
Grard Trust Corn change ank.
Godberger, Norman S., estate of
Godsmth, bert
Goodman, , et u
Goodman Inc.,
Greenbros, Inc
Greenspon, nna
Greenspon, Lous
Greenspon, Lous, transferee
Greenspon Inc., Lous
35000
30895
123380
20176
38
30353
6810
23 6
3978
898
22369
33509
e port
oume Tape
38570
2:
G005
22
3607
2:
5 2
23
32977
1
32976
1
93
32975
2 5 0
2 539

15
358 7
36075

23
3 13
23
5937
23
38572
22
3796
22
5215
22
36015
22
35388
18
1831
22
2715
271

23
9636
23
39 0

39 05
1
23
39 03
1
39 06

22
22
22
23
22
2::
22
17
Unted States oard of Ta ppeas.
cqnesccnee In ths case has been wthdrawn and nonaeqnescenee substtuted therefor In I. R. .
19M-37. 7.
Nonaeqnescenee pubshed n Cumuatve uetn -2, 82 (1831), s wthdrawn.
state ta decson.
Nonacquesccnee pubshed n Cumuatve uetn 19 7-1, . Is wthdrawn.
cquescence reates to ssues nvovng amounts e pended by a professona muscan for forma
cothng, accessores, and mantenance thereof, and for e penses coverng entertanment In the coarse of em-
poyment aso. It reates to the determnaton of the far market vaue of hote room accommodatons fur-
nshed n eu of a hgher money saary.
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cqdescences Contnued
Ta payer

enshaw, Pau ., et u
enshaw, Water ., et u
ooks, eanette, ndependent e ecutr and survvng
wfe of estate of Pat . ooks ..
ooks, Pat ., estate of
urey, .
urey, . ., et u
I
Imburga, rank.

son, Leon R., et u . ..

osyn, George R
osyn, George R., et u .
ey, Dane S. W
Docket No.
Lake ose Groves, Inc.
Larsen, Leonard, et u ..
L mont Corporaton
Lndau, Mram C
Loew Co
M
Marcus, rances (formery rances Lumentha)
M Lane Cub, Inc
Mer, dward .3
Moore, R. ., former ndependent e ecutor of estate
of W. (3k. arrer
Morre, ohn dgery, estate of
N
Natona ank of Topeka, ans., admnstrator wth
the w anne ed of ohn dgery Morre estate ..
8530
8529
5676
1210
1211
38559
5371
38212
3821
38213
37 3
31896
37097
37759
3 2
36885
Report
oume Paso
23
22
22
22
2
23
2:|
20
23
211
21
2:
35733
22
23
37
6759
85083
2 539
103776
15
3
103776
3
35786
22
35787
35785
170
502
1256
1002
1101
1 26
CS2
136
599
185
. II
80
82
33
830
277
051
651
North, Ida Rngng, estate of, fducary of estate of
ohn Rngng
North, ohn Rngng, e ecutor of estate of Ida Rng-
ng North, fducary of estate of ohn Rngng
North, ohn Rngng, e ecutor of estate of ohn
_ Rngng
North, ohn Rngng, fducary of estate of ohn
Rngng.. ... . .
1307
t r.to I St tef oard of Ta ppeas.
cquescence reates to the Issue of the separabty of compensaton receved for servces rendered as
S r se to trustees under a w and compensaton receved as a trustee under such w. to determne whether
U compensaton for the former meets the 80 percent requrement and enttes the tapayer to the beneft
sec 107(a) of the v. t. Code.
narnu.scence pubshed In Cumuatve uetn 1038-2, 51, Is wthdrawn.
1 Nonacquescence pubshed In Cumuatve uetn 19 1-1, 17, Is wthdrawn.
G
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cqcescences Contnued
Ta payer
Docket No.
Report
o ump Tape
O ren, Martn Thomas, et u
Paoozz, ce Spaudng .
Parser, me Poak
Pasadena Cty Lnes, Inc...
Poak, acob
Poak, acob and seba
Poak s ruta Works, Inc_
Potson, Mchae
R
Ray s Cothes, Inc.
Red, oseph, et u
Rngng, ohn, estate of
Rockand O Co., transferee of estate of ohn Rngng.
Ruwtch, Lee
S
Showe, ack, et u .
Sberman, rances..
Sberman, oseph
Sberman, Samue...
Smth, Wedon D. 3.
Smoky Mountans everage Co
Snvey, ohn ., Sr., transferee of Lake ose Groves,
Inc
SoRee, . W., estate of
SoRee, . W., r., et a., e ecutors of estate of . W.
SoRee
SoRee, se
SoRee, Mabe Ruth
Stewart, Wam Rhneander, estate of
Stewart, Wam Rhneander, r., et a., e ecutors of
Wam Rhneander Stewart estate ,5-
Strauss, Leon, et u .
10SG 8
65 3
0222
2 12
6220
6221
30131
6219
2002
1759
5093
509
5095
38571
:c,7N7
3578
15 3
8153
S15
7886
7888
7887
27569
21778
26761
31896
36 11
36218
39789
67776
15 9
7
23
21
23
2
22
22
23
22
22
23
22
17
22
20
22
31
22
561
182
953
31
953
I2
1332
31
1307
1053
95
12 0
135
12 9
13t
. ,
201
1 0
Unted States oard ot Ta ppeas.
NonMquosoence pubshed In Cumuatve uetn 1SM2-2, 30, Is wthdrawn.
11 Gft ta decson.
cquescence reates to the determnaton of the ta payer s net Income for the years 1936 through 19 3
aso, to the determnaton of the marta status whch woud entte the ta payer to the marta e empton
tor such years.
cquescence reates to the deductbty of attorney s fees from proceeds of settement payment of
former empoyer In 19 6 pror to aocaton under sec. 107(d) of the 1939 Code. Nonacquescence pubshed
In Cumuatve uetn 1951-2, 5. s wthdrawn, wth respect to ths ssue.
w state ta decson.
11 Nonacquescence pubshed n Cumuatve uetn 1 -1, 38 (1935), Is wthdrawn.
See Rev. Ru. 56-170, pape M2.
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cqt|escences Contnued
Ta payer
T
Tronnstne, dee, e ecutr of estate of Norman S
Godberper
Tunnngey, Mevn
W
Water, Inc., ohn W
Webb, Larry ., et u
Report
Docket No.
ourac
Page
35388
18
1233
135
22
1108
002
23
550
79 8
23
1035
The Commssoner docs NOT C UI SC n the foowng
decsons:
Ta payer
dams, Chares .1
tas O Refnng Corp.
Docket No.
8827

rdgeport ydrauc Co.

Caukns, George Peck s.
C rrtese, Cara
Crsto, oe
ashon Park, Inc
son, Leon R., et u .5.
patrck, Lan
Lo ue, Php .

L
Report
oume Pape
39
f 0929 1
0930 1/
3322
108 22
0633
0632
3705
5371
37233
1o95
22
1
22
21
22
22
22
387
552
215
65C
293
600
1101
6
0
Unted States oard of Ta ppeas.
1 cquescence pubshed In Cumuatve uetn 1939-1,1, wth respect to the Incuson In Income of the
ctfTfrenee between the far market vaue and the prce at whch the ta payer acqured shares of capta
stock of a corporaton through the e ercse of rghts granted under an opton agreement, Is wthdrawn and
nor|tequtescence Is substtuted therefor.
1 cquescence pubshed In Cumuatve uetn 10 , b, as to whether amounts receved on ccumua-
tve Investment Certfcates In e cess of amounts pad n, consttute capta gan rather than ordnary
Income, s wthdrawn. See Rev. Ru. 5-136, page 213, ths uetn.
N eoacqucscence reates to whether under secton 107(a) of the 1939 Code, ong-term compensaton re-
fftved n IMS may be aocated between the ta payer and wfo n years pror to 19 8, despte the fact that
tbey fed separate returns for such years.
cquescence pubshed In Cumuatve uetn 19M-2, , reatve to the ssue of the stock opton granted
on anuary 18. 10 5. whch gave propretary nterest In a corporaton and dd not resut In ta abe com-
pensaton, s wthdrawn.
6 050 5 2
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8
Nonacquescences Contnued
Tapayer
Docket No.
M
Maher, en|amn, et u .s
Mammoth Coa Co., The...
Mer, Mary
N
North mercan Mortgage Co.
T
Pennroad Corporaton ffated Companes
Peters, Isabe
It
Rosenberg, braham, et u .
S
Schwartz, yme, et u

argason, ema
5231
32205
0031
15708
33309
0813
37719
-15571
1700
Repot
o ume Page
22
22
22
IS
21
21
22
11 SO
571
293
18
1087
55
717
100
Unted States oard ot Ta ppeas.
Nonacqueseence reates to the Issue of whether compensaton receved n 19 8 and aocated to pror
years 19 2 through 19 7, so as to recompute the 19 8 ta under secton 107 a) of the t 30Code. may befurtho
aocated to the pettoner s wfe, despte the fact that they had fed separate returns for such pror years.
6 In order to conform to the decson n the case of Ward f urn, Inc.. 20 T. C. 7 ). armed (19511
21 ed. (M S15, acquescence pubshed n Cumuatve uetn I - , (11130), reatve to a foregn e -
change transacton n whch doars acqured n repayment of oans were reconverted to guders at a proft
due to a more favorabe rate of e change, s wthdrawn.
cquescence pubshed In Cumuatve uetn 11153-2, 8, as to whether the dference between the far
market vaue and the opton prce of corporate capta stock, was compensaton for persona servces ta abe
as ncome In the year the ta payer e ercsed the opton and receved the stock, s wthdrawn and noo
acquescence s substtuted therefor.
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SP CI L NNOUNC M NT
The pubcaton of Revenue Rung 5 -501 n Cumuatve uetn
195 -2, begnnng on page 197, faed to refect one of the two correc-
tons announced on page 6 of Interna Revenue uetn 195 - 8,
dated ovember 29, 195 . ccordngy, that correcton s repeated n
ths pubcaton to ca partcuar attenton to the error and to suggest
that a pen and nk or penced notaton be made on page 205 of Cumu-
atve uetn 195 2, as foows:
The words, the prncpa of the Od onds but not n e cess of
shoud be added after the words, s n e cess of on the seventh ne
of the frst paragraph begnnng on page 205.
s so corrected, the paragraph shoud read as foows:
The gan or oss reazed upon the e change of the Od onds, ncudng those
acqured subsequent to December 11, 19 1, w represent capta gan or capta
oss under the provsons of secton 117 of the Code. owever, n cases where
the Od onds were acqured pror to December 11, 19 1, nterest ncome w be
reazed to the e tent that the far market vaue of the assets receved n the
e change s n e cess of the prncpa of the Od onds but not n e cess of such
prncpa and the nterest accrued and unpad on the Od onds snce the date
of the recovery. In cases where Od onds were acqured subsequent to Decem-
ber 11, 19 1, nterest ncome w be reazed to the e tent that the far market
tane of the assets receved n the e change s n e cess of the prncpa of the
Od onds but not n e cess of such prncpa and the nterest accrued and unpad
em such bonds snce the date of ther acquston.
(9)
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P RT I
RULINGS ND D CISIONS UND R T INT RN L
R NU COD O 195
Rungs and decsons pubshed n Part I of the Interna Revenue
uetn are based on the appcaton of provsons of the Interna
Revenue Code of 195 and, uness otherwse stated n the rungs or
decsons, are pubshed wthout consderaton as to any appcaton
of the provsons of the Interna Revenue Code of 1939 or reated
pubc aws.
SU TITL . INCOM T S
C PT R 1. NORM L T S ND SURT S
SU C PT R . COMPUT TION O T L INCOM
P RT L D INITION O GROSS INCOM , D UST D GROSS INCOM , ND
T L INCOM
S CTION 61. GROSS INCOM D IN D
( so Secton 102.) Rev. Ru. 55-26
( so Part II, Sectons 22(a), 23(a) Regua-
tons 118, Sectons 39.22(a)-, 39.23(a)-.)
Where a ta payer purchases an nsurance pocy whch, n ac-
cordance wth ts terms, woud remburse the ta payer, to the e -
tent specfed In the pocy, for certan busness overhead e penses
Incurred by hn durng proonged perods of dsabty due to n|ury
or sckness, any proceeds derved under the terms of such pocy
consttute and are ncudbe n gross ncome under the provsons
of secton 61 of the Interna Revenue Code of 105 or secton 22(a)
of the Interna Revenue Code of 11)39. ny premums pad on such
pocy consttute busness e penses and are deductbe from gross
ncome under the provsons of secton 162 of the 195 Code or
secton 23(a) of the 1939 Code.
dvce has been requested whether any proceeds derved from a
professona overhead e pense dsabty pocy, whch pocy s for
the purpose of rembursng the hoders thereof for busness overhead
e penses ncurred by them durng proonged perods of dsabty due
to n|ury or sckness, s e cudabe from gross ncome. dvce has
aso been requested whether the nsurance premums pad woud
be nondeductbe from gross ncome as an e pendture attrbutabe to
ta e empt ncome.
():
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161. 12
Ta payer purchased an nsurance pocy under the terms of whch
he woud be rembursed for overhead e penses ncurred by hm wth
respect to hs occupaton durng proonged perods of dsabty. The
pocy provdes that f certan specfed n|ures or sckness, drecty
and ndependenty of a other casses, sha whoy and contnuousy
dsabe the nsured and prevent hm from performng any and every
duty pertanng to hs occupaton for a perod of more than days,
the company w pay certan specfed monthy e penses actuay n-
curred by the nsured up to an amount not e ceedng the mtaton
specfed n the pocy for the perod of such contnuous dsabty, not
e ceedng a perod of 8a months.
The pocy further provdes that no ndemnty sha be pad for the
frst days of any perod of dsabty uness such dsabty contnues
for more than sad days, nor for any perod of dsabty pror to the
frst date of medca treatment by a censed physcan or surgeon,
other than the nsured. The e pense benefts payabe under the pocy
6ha be the monthy e penses actuay ncurred by the nsured n the
operaton of hs offce or, n the event of |ont occupancy, the nsured s
porton of such e penses and sha be mted n the manner set forth
n the pocy. Such e penses sha ncude rent, eectrcty, heat,
water, aundry, deprecaton, empoyees saares and such other f ed
e penses as are norma and customary n the conduct and operaton of
the nsured s offce but sha not ncude saary, fees, drawng account
or any other remuneraton for the nsured or any other member of the
nsured s professon hred by or workng wth the nsured, or the cost
of pharmaceutca products.
The actua questons presented are whether any nsurance proceeds
receved by the ta payer, n accordance wth the terms of the above
pocy, are e cudabe from hs gross ncome and whether the nsurance
fremums pad woud be nondeductbe under secton 2 (a) (5) of the
nterna evenue Code of 1939 as an e pendture attrbutabe to ta
e empt ncome.
Gross ncome as defned under secton 22(a) of the Interna Revenue
Code of 1939 and secton 61 of the Interna Revenue Code of 195 ,
means a ncome from whatever source derved, uness e empt from
ta by aw. In genera, ncome s the gan derved from capta, from
abor, or both combned.
Insurance poces ssued to provde rembursement for overhead
e penses n cases of proonged dsabty of the nsured do not come
wthn the purvew of compensaton for persona sckness or n|ury.
Such nsurance poces are ssued strcty for busness purposes and
n no way compensate the nsured for n|ures or sckness wthn the
meanng of secton 22(b) (5) of the 1939 Code. The proceeds of such
poces are n the nature of the proceeds of a Use and Occupancy
Contract, whch nsures aganst actua oss sustaned of net profts,
and the proceeds of whch are ncome n the same manner that the
profts for whch they are substtuted woud have been. See secton
39.112(f)-(c)(8) of Reguatons 118,
Secton 23(a) of the 1939 Code and secton 162 of the 195 Code
provde that there sha be aowed as a deducton a the ordnary and
necessary e penses pad or ncurred durng a ta abe year n carryng
on any trade or busness. Secton 39.23(a) (1) of Reguatons 118, n
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103.) 1
P RT III. IT MS SP CI IC LLY CLUD D ROM GROSS INCOMC
S CTION 102. GI TS ND IN RIT NC S
( so Part II, Secton 22(b) Reguatons Rev. Ru. 55- 22
118, Secton 39.22(b) (3)-.)
The Interna Revenue Servce w foow the decson n Chares
Scha et u . v. Commssoner, 17 ed. (2d) 893, and other cted
decsons, n decdng n other cases whether payments to retred
mnsters or rabbs under smar crcumstances represent ta abe
compensaton for past servces or gfts e cudabe from gross ncome
under secton 102 of the 105 Code.
dvce has been requested whether the Interna Revenue Servce
w contnue to tgate ssues smar to those nvoved n Chares
Scha et u . v. Commssoner, 17 ed. (2d) 893 ndrew Mutch v.
Commssoner, 209 ed. (2d) 390 avanagh v. braham M. ersh-
man et a., 210 ed. (2) 65 and Wam S. bernethy et a. v. Com-
mssoner, 211 ed. (2d) 651, a nvovng the queston whether pay-
ments on an annua or monthy bass to a retred mnster or rabb, au-
thorzed for an ndefnte perod by hs congregaton at or about the
tme of hs retrement, were ta abe as addtona compensaton for
past servces or consttuted gfts e empt under secton 22(b) (3) of the
1939 Code. The same probem arses under secton 102 of the 1951
Code, whch e cudes gfts from gross ncome.
In the cted cases the payments were not made n accordance wth
any enforceabe agreement, estabshed pan, or past practce the
recpent dd not undertake to perform any further servces for
the congregaton and was not e pected to do so there was a far coser
persona reatonshp between the recpent and the congregaton
than s found n ay empoyment reatonshps and the avaabe
evdence ndcated that the amount pad was determned n the ght
of the fnanca poston of the congregaton and the needs of the
recpent, who had been adequatey compensated for hs past servces.
The decsons n the cted cases, to the effect that the amounts
nvoved were e empt gfts rather than ta abe ncome, are accepted
by the Servce on ther partcuar facts. In other cases nvovng
payments to retred mnsters or rabbs under smar crcumstances
the amounts pad w accordngy be treated as gfts e cudabe
from gross ncome under secton 102 of the 195 Code.
S CTION 103. INT R ST ON C RT IN GO RNM NT L
O LIG TIONS
( so Part II, Secton 22(b) Reguatons Rev. Ru. 55-150
118, Secton 39.22(b) ( )-.)
The Genesee aey Regona Market uthorty, created by the
Legsature of the State of New York pursuant to Chapter 20, 1951
Laws of New York, effectve March 31,1951, s a potca subdvson
of a State wthn the meanng of secton 103(a) (1) of the Interna
Revenue Code of 195 and secton 22(b) ( ) of the Interna Revenue
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8105. 16
pans wthn the meanng of secton 105 of the Code. Consequenty,
the wages receved by such an empoyee for a perod durng whch
he s absent from work on account of persona n|ures or sckness are
e cudabe from hs gross ncome to the e tent provded n secton
105 (d) of the Code. If the absence s, n fact, due to persona n|ury
or ness, the manner n whch the absence s refected n the records
of the empoyng agency w not be determnatve of the rght of the
empoyee to the heneft of the e cuson under such secton.
Rev. Ru. 55-2 5
To the e tent of a weeky rate of 100, wages or payments n eu
of wages receved by an offcer or ensted man as a member of the
rmed orces for a perod durng whch he s confned as a patent
n a hospta on account of persona n|ures or sckness are e cudabe
from gross ncome under secton 105(d) of the Interna Revenue
Code of 195 , even though such member may be convaescng and
dong ght work n the operaton of the hospta to whch he s
confned.
Rev. Ru. 55-263
The term sckness as used In secton 105(d) of the Interna
Revenue Code of 195 does not Incude the condton of pregnancy.
owever, an empoyee who s absent from work on account of sck-
ness durng a perod of pregnancy may, to the e tent provded n
secton 105(d), e cude from her gross ncome amounts receved for
the perod of absence, even though the sckness s caused by her
pregnancy.
dvce has been requested whether the provsons of secton 105(d)
of the Interna Revenue Code of 195 are appcabe to the compen-
saton receved under an accdent and heath pan by an empoyee
who s absent from work durng pregnancy.
Secton 105 of the 195 Code, reatng to amounts receved under
accdent and heath pans, provdes n part as foows:
(a) mounts ttrbutabe to mpoyer Contrbutons. cept as other-
wse provded n ths secton, amounts receved by an empoyee through accdent
or heath nsurance for persona n|ures or sckness sha be ncuded n gross
ncome to the e tent such amounts (1) are attrbutabe to contrbutons by the
empoyer whch were not ncudbe n the gross ncome of the empoye, or
(2) are pad by the empoyer.

(d) Wage Contnuaton Pans. Gross Income does not ncude amounts
referred to n subsecton (a) f such amounts consttute wages or payments In
eu of wages for a perod durng whch the empoyee s absent from work on
account of persona n|ures or sckness but ths subsecton shn not appy to
the e tent that such amounts e ceed a weeky rate of 100. In the case of a
perod durng whch the empoyee s absent from work on account of sckness,
the precedng sentence sha not appy to amounts attrbutabe to the frst 7
caendar days n such perod uness the empoyee s hosptazed on account of
sckness for at east one day durng such perod. If such amounts are not
pad on the bass of a weeky pay perod, the Secretary or hs deegate sha
by reguatons prescrbe the method of determnng the weeky rate at whch
such amounts are pad.
mounts receved under an accdent or heath pan for empoyees
are to be treated as amounts receved through accdent or heath n-
surance for the purpose of secton 105 of the Code and the provsons
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151. 18
thereof, s hereby desgnated as the date of termnaton of combatant
actvtes n the zone comprsed of the area descrbed n ecutve
Order No. 10195 of December 20, 1950, (15 . R. 9177) C. .
1951-1, 6 .
Dwght D. senhower.
The Whte ouse,
anuary 1,1955.
( ed wth the Dvson of the edera Regster anuary 3,1955,10: 6 a. m.)
P RT . D DUCTIONS OR P RSON L MPTIONS
S CTION 151. LLOW NC O D DUCTIONS
OR P RSON L MPTIONS
( so Part II, Secton 25 Reguatons 118, Rev. Ru.55-325
Secton 39.25-2.)
spouse cannot quafy as a dependent under secton 151 of the
195 Code and an e empton s not aowabe on a separate return
for a spouse who has gross ncome n any amount wthn the mean-
ng of such secton.
The Interna Revenue Servce has receved nqures reatve to
whether an ndvdua may cam hs spouse as a dependent on hs
separate edera ncome ta return under the provsons of secton
151 of the Interna Revenue Code of 195 . The nqures ndcate
that the wrters thereof nterpret the above secton of the Code to
mean that a ta payer s aowed a deducton of C00 for hs wfe as
an e empton and an addtona deducton of 600 for her as a de-
pendent and further that the ta payer may cam hs wfe as a de-
pendent even though she has ncome of her own and fes a separate
return.
Secton 151 (b) of the Code provdes, n part, as foows:
n e empton of 600 for the ta payer and an addtona e emp-
ton of 600 for the spouse of the ta payer f a separate return s made by the
ta payer, and f the spouse, for the caendar year n whch the ta abe year
of the ta payer begns, has no gross ncome and s not the dependent of another
ta payer.
Under the provsons of secton 25(b) (1) ( ) of the Interna Rev-
enue Code of 1939, whch are substantay the same as secton 151 (b)
of the Code of 195 , an e empton was not aowabe on a separate re-
turn for the spouse of the ta payer f the spouse had gross ncome of
any amount or was the dependent of another ta payer.
The Report of the Commttee on nance, Unted States Senate,
No. 1622, ghty-thrd Congress, on . R. 8300 (Interna Revenue
Code of 195 ), 192, states wth respect to secton 151 of the Code n
part as foows:
Subsecton (b) corresponds to secton 25(b)(1)( ) of the 1939 Code
No substantve changes are made n these provsons.
Secton 152 of the 195 Code defnes a dependent and adds to the
st of ndvduas egbe as dependents any ndvdua who s a mem-
ber of the ta payer s househod and whose prncpa abode for the
ta abe year of the ta payer s the home of the ta payer. That sec-
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I 152. 20
woud have been entted to cam her as a dependent. Consequenty,
any one of the brothers coud cam a deducton for the e empton of
the mother provded a wrtten decaraton from each of the other
brothers s attached to hs edera ncome ta return. ven though
and D together contrbuted more than one-haf the support of ther
mother, f wshed to cam hs mother as a dependent, he woud be
requred to attach wrtten decaratons from and C as we as from
D to hs ncome ta return, snce each of those three contrbuted more
than 10 percent of the tota support of ther mother.
In e ampe (2) above O, , and / are persons each of whom, e cept
for the fact that nether contrbuted more than haf of the 1,500, coud
cam as a, dependent for a ta abe year begnnng n 195 . The
three together contrbuted 6 percent of the 1,500, and, thus, each s
a member of the group to be consdered for the purpose of secton
152(c) of the Code. G and / are the ony members of such group who
can meet a the requrements of secton 152(c) of the Code and ether
one coud cam as a dependent for hs ta abe year begnnng n
195 provded he attached to hs ncome ta return a wrtten decara-
ton sgned by the other, and furnshed the other nformaton requred
by the return wth respect to a the contrbutons to . Inasmuch as
II dd not contrbute more than 10 percent of support, she woud
not be entted to cam as a dependent for a ta abe year begnnng
n 195 nor woud she be requred to fe a wrtten decaraton wth
respect to her contrbutons to . contrbuted over 10 percent of
the support of n 195 but he does not otherwse quafy as a member
of the group for the purpose of the mutpe support agreement under
secton 152(c) of the Code.
The member of a group of contrbutors who cams the dependency
deducton for an ndvdua under the mutpe support agreement
provsons of secton 152(c) of the Code must attach to hs ncome
ta return for the year of the deducton a wrtten decaraton from
each of the other persons who contrbuted more than 10 percent of
the support of such ndvdua and who, but for the faure to con-
trbute more than haf of the support of the ndvdua, woud have
been entted to cam the dependency e empton. The wrtten dec-
araton requred may be made on orm 2120, Mutpe Support
greement, whch contans a statement of the fact of contrbuton
and a waver of the cam for dependency e empton. Copes of
orm 2120 w be supped by Dstrct Drectors to persons who re-
quest such forms. ny decaraton made other than on orm 2120
sha conform to the substance of orm 2120. The ta payer camng
the e empton shoud be prepared to furnsh other nformaton, when
requred, whch w substantate hs rght to cam such e empton.
Such nformaton may ncude a statement showng the names of a
contrbutors (whether members of the group descrbed n secton
152(c) of the Code or not) and the amount contrbuted by each to the
6upport of the dependent camed.
Ths rung w be appcabe ony for the perod pror to the
promugaton of reguatons prescrbed by the Commssoner, wth
the approva of the Secretary, n whch w be set forth rues wth
respect to secton 152(c) of the Code.
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162. 22
dence estabshng that the ta payer furnshed more than haf of the
support of a cadet or mdshpman and that the other requrements
of secton 151(e) of the Code are met, an e empton for a dependent
s not aowabe.
P RT I. IT MIZ D D DUCTIONS OR INDI IDU LS ND CORPOR TIONS
S CTION 162. TR D OR USIN SS P NS S
Rev. Ru. 55-307
pendtures for nto catng quor purchased n the State of
Okahoma, or purchased esewhere and brought nto that State, for
busness promoton and entertanment purposes, are not deductbe
busness e penses. In vew of the strngent mtatons mposed upon
the mportaton of quor, and upon the transportaton and sae or
other dstrbuton thereof wthn the State, by 37 Okahoma Statutes
nnotated, Sectons 1, 31, 38, 50.1, 50.2 and 82, an ndvdua or
corporaton purchasng nto catng quor n Okahoma, or mport-
ng the same, for other than the mted purposes permtted theren,
must be consdered to have been a partcpant n a transacton pro-
scrbed by statute, n orgnay obtanng such quor. Certan Ona-
homa court decsons to the effect that the possesson of quor n
certan amounts for persona use or the dstrbuton of quor for
soca purposes s not, n tsef, n contraventon of such statute are
therefore not regarded as determnatve. Payments whch frustrate
sharpy defned State poces evdenced by a govern-
menta deca-aton proscrbng partcuar types of conduct are not
deductbe for edera ncome ta purposes. See the dscusson n
Thomas . Ly, et u . v. Commssoner, 3 3 U. S. 90, Ct. D. 17 1,
C. . 1952-1,16, and I. T. 096, C. . 1952-2,91.
( so Part II, Secton 23(a) (1) Reguatons Rev. Ru. 55-265
118, Secton 39.23 (a)-.)
contrbuton by a ta payer engaged n a trade or busness n a
ocaty to a commttee organzed for the purpose of brngng a
natona potca conventon to such ocaty consttutes an aowabe
deducton for edera ncome ta purposes as an ordnary and neces-
sary busness e pense under the provsons of secton 162(a) of the
Interna Revenue Code of 195 , provded such contrbuton s made
wth a reasonabe e pectaton of a fnanca return commensurate wth
the amount of the contrbuton.
Deductbty of nsurance pocy premums pad by a ta payer for
the purpose o rembursng hm for busness overhead e penses n-
curred by hm durng proonged perod of nabty to work because
of n|ury or sckness. See Rev. Ru. 55-26 , page 11.
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km. 2
In genera the term deaer ncudes every person who ses tangbe
persona property at reta, or who offers for sae at reta, or has n hs
possesson for sae at reta, or for use or consumpton, or dstrbuton,
or storage to be used or consumed n the State, tangbe persona
property.
Snce the Lousana saes ta s eved upon saes at reta persons
engaged n seng tangbe property at reta are not sub|ect to the
ta . The saes ta s mposed on and payabe by the purchaser wth
the retaer as a computng and coectng agent for the State.
ccordngy, t s hed that the saes ta mposed by the State of
Lousana, ct No. 75, cts of the State of Lousana, reguar sesson
1936, revsed by secton 302, chapter 2, tte 7, Lousana Revsed Stat-
utes of 1950, pad wth respect to property purchased for use n the
purchaser s trade or busness s aowabe as a deducton to the pur-
chaser under secton 16 (a) of the Interna Revenue Code of 195 .
Such ta may not be captazed e cept as provded n secton 266 of
the 195 Code.
In the event the purchaser s an ndvdua engaged n a trade or
busness whch does not consst of the performance of servces as an
empoyee, the Lousana saes ta pad on property used n such trade
or busness s deductbe from gross ncome under secton 62 of the
195 Code n determnng ad|usted gross ncome.
In the case of purchasers other than ndvduas where the Lousana
saes ta s attrbutabe to a trade or busness t s deductbe from
gross ncome n computng ta abe ncome.
( so Part II, Secton 23(c) Reguatons 118, Rev. Ru. 55-326
Secton 39.23(c)-.)
The ta mposed by the State of Lousana, Secton 8 1, Chapter 8,
Tte 7, Lousana Revsed Statutes of 1950, on the prvege of seng,
usng, consumng, handng, or dstrbutng cgarettes, payment of
whch must be evdenced by stamps aff ed to the contaners, s de-
ductbe for edera ncome ta purposes under secton 16 (a) of the
Interna Revenue Code of 195 oy the whoesae or reta deaer or
other person recevng unstamped goods who purchases, aff es, and
cances the cgarette stamps. The ta s not a reta saes ta mposed
on persons seng tangbe persona property at reta wthn the
meanng of secton 16 (c) of the Code and s not deductbe by the
consumer or purchaser of stamped cgarettes. Insofar as the utmate
consumer or purchaser of stamped cgarettes s concerned the ta
represents an addtona cost of the artce.
Deductbty of rea property ta es, mposed by secton 5719.01
of the Revsed Code of Oho, effectve October 13, 1953. See Rev.
Ru. 55-152, page 67.
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170. 26 I
Rev. Ru. 55- 05
queston has arsen wth respect to whether the faure to reaze
antcpated nterest on bonds or other obgatons (havng f ed
maturty dates at whch nterest or ncrements n vaue cease) whch
are nadvertenty hed past ther maturty dates resuts n a deductbe
oss for edera ncome ta purposes for the year n whch such bonds
were redeemed. It s we setted that dsappontment n e pectatons
of proft and mere essenng of ncome form no bass for a deductbe
oss. or e ampe, see Warren Servce Corporaton v. Commssoner,
39 . T. . 856, affrmed (reversed and remanded on another ssue),
110 ed. (2d) 723, wheren t was hed that the ta payer suffered
no deductbe oss because of ts nabty to reet property on terms
as advantageous as those emboded n a canceed ease. See aso
Water M. art v. Commssoner, 313 U. S. 28, Ct. D. 1502, C. .
19 1-1,319 rank . Ncoa v. Commssoner, 1 . T. . 87 Pamer
utcheson et u . v. Commssoner, 17 T. C. 1 , acquescence, C. .
1951-2, 2. Thus, the faure to reaze antcpated nterest for the
perod from the date of maturty to date of redempton does not
resut n a oss whch s deductbe under the provsons of secton
165 or any other provsons of the Interna Revenue Code of 195 .
S CTION 170. C RIT L , TC.,
CONTRI UTIONS ND GI TS
Rev. Ru. 55-1
ta payer pedges 30 percent of bs ad|usted gross Income to an
organzed nonproft charty fund-rasng foundaton and satsfes
such pedge by deverng to the foundaton two separate checks, one
of whch s n m amount equa to 10 percent of hs ad|usted gross
ncome and drawn payabe to a specfc organzaton of the type
desgnated n secton 170(b) (1) ( ) of the Interna Revenue Code of
11)5 . The foundaton acts merey as transfer agent of ths check
and devers t drecty and uncondtonay to the organzaton
to whose order t s drawn. ed: the ta payer s entted to the spe-
ca deducton for contrbutons n an amount not n e cess of 10
percent of ad|usted gross ncome provded under secton 170(b)
(1) ( ) n addton to the deducton for contrbutons n an amount
not n e cess of 20 percent of ad|usted gross ncome provded
under secton 170(b)(1)( ) of the Code. The foregong has ap-
pcaton under the crcumstances stated ony f the fund-rasng
foundaton provdes for such satsfacton of pedges and transfer
of checks.
dvce has been requested whether a ta payer who desgnates a
porton of the satsfacton of a pedge, made to an organzed non-
proft charty fund-rasng foundaton, n an amount equa to 10 per-
cent of hs ad|usted gross ncome by means of a check drawn payabe
to a specfc organzaton of a type specfed n secton 170(b) (1) ( )
of the Interna Revenue Code of 195 , s entted to the speca deduc-
ton for contrbutons n an amount not n e cess of 10 percent of
ad|usted gross ncome provded under such secton 170(b) (1) ( ) n
addton to the deducton n an amount not n e cess of 20 percent
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170. 28
n an amount not n e cess of 10 percent of ad|usted gross ncome
provded under secton 170(b)(1)( ) n addton to the deducton
for contrbutons n an amount not n e cess of 20 percent of ad|usted
gross ncome provded under secton 170(b)(1)( ) of the Code.
The foregong has appcaton under the crcumstances stated ony
f the fund-rasng foundaton provdes for such satsfacton of
pedges and transfer of checks.
Cams for deductons sub|ect to the speca mtaton of secton
170(b)(1)( ) of the Code must be substantated, when requred by
the Commssoner by a statement from the organzaton to whch the
contrbuton or gft was made showng whether the organzaton s
of the type referred to n such secton 170(b) (1) ( ), the name and
address of the contrbutor or donor, the amount of the contrbuton or
gft and the date of the actua payment thereof, and by such other
nformaton as the Commssoner may deem necessary.
( so Part II, Secton 23 (o) Reguatons 118, ev. u. 55-151
Secton 39.23(o)-.)
ta payer ncurs traveng e penses n connecton wth the per-
formance of hs offca dutes as an uncompensated offcer and mem-
ber of an organzaton e empt from edera ncome ta under
secton 501(c) ( ) of the Interna Revenue Code of 195 (sec. 101 (8)
of the Interna Revenue Code of 1939). ed, snce the organzaton
s not one to whch contrbutons are deductbe wthn the meanng
of secton 170 of the 195 Code (sec. 23(o) of the 1939 Code), any
amounts e pended by the ta payer for such traveng e penses are
not deductbe as chartabe contrbutons for edera ncome ta
purposes. Compare Rev. Ru. 55- , page 291, ths uetn.
Rev. Ru. 55-219
museum, whch s a corporaton, mantans a reguar facuty and
currcuum and a reguary enroed body of students or pups at the
pace where ts educatona actvtes are reguary carred on. Con-
trbutons to the museums have been hed to be chartabe contrbutons
under secton 170 of the Interna Revenue Code of 195 . ed, the mu-
seum s an educatona organzaton wthn the meanng of secton
170(b) (1) ( ) () of the Code of 195 . ccordngy, contrbutons
made thereto by ndvduas w be deductbe n computng ther ta -
abe ncome not ony to the e tent of the genera mtaton of 20
percent of ad|usted gross ncome under secton 170(b)(1)( ), but
aso to the e tent of the speca mtaton of 10 percent of ad|usted
gross ncome under secton 170(b) (1) ( ) of the Code of 195 .
Rev. Ru. 55-268
rehabtaton center for handcapped ndvduas provdes spe-
ca treatment for patents under a doctor s prescrpton. It has be-
come necessary to begn a drve for funds to erect a new budng sut-
abe for housng such rehabtaton center. ed, contrbutons made
to the rehabtaton center to provde for a budng for use n th
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266. 30
It s deemed that the above method s an ndrect means of subsdz-
ng the dssemnaton of the terature produced by the M organza-
ton and consttutes n effect a contrbuton to the atter organzaton
n support of ts own purposes rather than a contrbuton to the recp-
ents of the terature.
ccordngy, t s hed that payments to the M organzaton, or any
other organzaton of the character descrbed n secton 501(c) ( ) of
the 195 Code, for the purpose of subsdzng the dssemnaton of ts
terature to organzatons of the character descrbed n secton 501 (c)
(3) of the 195 Code are not deductbe as chartabe contrbutons for
edera ncome ta purposes.
( so Part II, Secton 120 eguatons 118, Rev. Ru. 55-308
Secton 39.120-1.)
The term ncome ta pad, as contaned n secton 170(b) (1) (C)
of the Interna Revenue Code of 195 (secton 120 of the 1939 Code),
reatng to the unmted deducton for chartabe contrbutons for
certan ndvduas, does not ncude a ncome ta es pad, whether to
the edera Government a State or foregn country. Snce the n-
come ta referred to n ths secton must be determned wthout regard
to chapter 2 of the Interna Revenue Code of 195 , reatng to ta on
6ef-empoyment ncome, t s hed that the ony ncome ta contem-
pated by such secton s edera ncome ta .
P RT II. DDITION L IT MIZ D D DUCTIONS OR INDI IDU LS
S CTION 213. M DIC L, D NT L, TC., P NS S
Deductbty as medca e penses under secton 213 of the Interna
Revenue Code of 195 , of certan e pendtures made by ta payers for
transportaton, trave, speca educaton, medca nsurance, heath
nsttutes, ar condtoners, speca constructon and equpment, speca
cothng, food and beverages, and other hygenc artces for purposes
of heath. See Rev. Ru. 55-261, page 307.
P RT I . IT MS NOT D DUCTI L
S CTION 263. C PIT L P NDITUR S
Costs ncurred n deepenng an e stng we or constructng a new
we as a resut of a perod of drought. See Rev. Ru. 55-367, page 25.
S CTION 266. C RRYING C RG S
No deducton aowabe for ta es chargeabe to capta account.
See Rev. Ru. 55-267, page 23.
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31
355.
SU C PT R C CORPOR T DISTRI UTIONS ND
D USTM NTS
P RT I. DISTRI UTIONS T CORPOR TIONS
SU P RT . CTS ON R CIPI NTS
S CTION 301. DISTRI UTIONS O PROP RTY
Dstrbutons by a corporaton to ts stockhoders of stock of a
controed corporaton. See Rev. Ru. 55-103, beow.
SU P RT C. D INITIONS CONSTRUCTI OWN RS IP O STOC
S CTION 316. DI ID ND D IN D
Dstrbuton of stock by a corporaton as a dvdend. See Rev. Ru.
55-103, beow.
P RT III. CORPOR T ORG NIZ TIONS ND R ORG NIZ TIONS
SU P RT . CTS ON S R OLD RS ND S CURITY OLD RS
S CTION 35 . C NG S O STOC ND S CURITI S
IN C RT IN R ORG NIZ TIONS
The effects on sharehoders as a resut of e changes between two
corporatons n pursuance of a pan of reorganzaton. See Rev. Ru.
55- 5, page 3 .
The effects on sharehoders as a resut of e changes between two
corporatons n pursuance of a pan of reorganzaton. See Rev. Ru.
55-59, page 35.
S CTION 355. DISTRI UTION O STOC ND
S CURITI S O CONTROLL D CORPOR TION
( so Sectons 301, 316.) Rev. Ru. 55-103
Corporaton ownng 80 percent of the stock of Corporaton Y,
proposes to dstrbute ts Y. stock to tbe stockhoders of , ust
pror to the sae of a the stock of to Z Corporaton. ed, the
dstrbuton of such stock w be used prncpay as a devce for
the dstrbuton of earnngs and profts of the Corporaton and,
therefore, the nonrecognton provson of secton 355 of the
Interna Revenue Code of 105 w not appy. ed further, tbe
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355. 32
ta abty of the dstrbuton shoud be determned under secton
301 and secton 316 of such Code.
dvce has been requested wth respect to the ta consequences of
a proposed transacton under the crcumstances set forth beow.
The Corporaton s engaged n the manufacture of paper prod-
ucts. It aso owns 80 percent of the stock of Y, a foregn corporaton,
whch operates a umber busness. The Y Corporaton s stock has
greaty apprecated n vaue and consttutes a arge proporton of the
tota asset vaue of Corporaton. The Corporaton has common
stock of 120a doars and an earned surpus of 100 doars. or the
1 ast severa years, the Corporaton has suffered severe operatng
osses and ts stockhoders have receved no dvdends. or that
reason the stockhoders of have voted to qudate and start ds-
souton proceedngs on a specfed date, uness negotatons to se
ther stock have been competed on or before such date.
The Z Corporaton s nterested n buyng a of the outstandng
common stock of Corporaton and has made an offer to purchase
such stock whch has not yet been acted upon by or ts stockhoders
owever, the Z Corporaton s offer does not contempate payment for
the vaue of the Y Corporaton s stock as an asset of Corporaton.
Snce the Z Corporaton has no nterest n Y stock hed by Corpo-
raton, the atter corporaton proposes to dstrbute ths stock to ts
sharehoders, pror to the competon of the sae negotatons.
Secton 355(a) of the Interna Revenue Code of 195 states that,
f a the requrements of that secton are satsfed, the dstrbuton
by a corporaton of the stock of a controed corporaton to ts share-
hoders w not resut n the recognton of any gan or oss to a share-
hoder upon recept of the stock. owever, one of the requrements of
secton 355 (a) (1) s that:
( ) The transacton was not used prncpay as a devce for the
dstrbuton of the earnngs and profts of the dstrbutng corporaton
or the controed corporaton or both (but the mere fact that subsequent
to the dstrbuton stock or securtes n one or more of such corporatons
are sod or e changed by a or some of the dstrbutees (other than
pursuant to an arrangement negotated or agreed upon pror to such
dstrbuton) sha not be construed to mean that the transacton was
used prncpay as such a devce), .
In the nstant case, subsequent to the proposed dstrbuton of Y
stock by , the stock of Corporaton may be sod by the present
stockhoders pursuant to an arrangement negotated mmedatey
pror to the dstrbuton. The sae of stock of the dstrbutng corpo-
raton mmedatey subsequent to a dstrbuton of stock of a controed
corporaton, when negotatons for such a sae are aready n process,
s generay consdered suffcent evdence that the dstrbuton of
stock was used prncpay as a devce for the dstrbuton of earnngs
and profts of the dstrbutng corporaton. The purpose of the re-
qurement that the transacton not be used prncpay as a devce for
the dstrbuton of earnngs and profts s to mt the appcaton of
secton 355 of such Code to those cases n whch the dstrbuton of
stock of the controed corporaton effects ony a read|ustment of con-
tnung nterests n property under modfed corporate forms.
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33 362.
In the nstant case, the purpose n dstrbutng the Y stock s to
factate the sae of stock of Corporaton. No contnung nterest
n on the part of any of the present stockhoders s contempated.
The dstrbuton of the Y stock s merey a devce to gve to the
stockhoders certan assets for whch the prospectve purchaser of
ther stock s unwng to pay. Therefore, t s an arrangement for
dstrbutng the earnngs and profts of Corporaton and secton
355 of the Code s not appcabe to such a transacton.
ccordngy, t s hed that the amount and ta abty of the ds-
trbuton of the stock of Y Corporaton to the stockhoders of Cor-
poraton w be determned n accordance wth the provsons of sec-
ton 301(c) (1) of the Interna Revenue Code of 195 . The porton
of the dstrbuton consttutng a dvdend w be determned under
the provsons of secton 316 of such Code.
S CTION 358. SIS TO DISTRI UT S
The treatment of the bass to stockhoders of ther stock n e change
pursuant to a reorganzaton. See Rev. Ru. 55- 5, page 3 .
ass to stockhoders of stock receved n e change for stock pur-
suant to a reorganzaton. See Rev. Ru. 55-59, page 35.
SU P RT C CTS ON CORPOR TION
S CTION 361. NONR COGNITION O G IN OR LOSS
TO CORPOR TIONS
The e changes of property between two domestc corporatons n
pursuance of a pan of reorganzaton. See Rev. Ru. 55- 5, page 3 .
change of property between two corporatons n pursuance of a
pan of reorganzaton. See Rev. Ru. 55-59, page 35.
S CTION 362. SIS TO CORPOR TIONS
Property acqured by a corporaton n connecton wth a reorganza-
ton. See Rev. R u. 55- 5, page 3 .
Property acqured by a corporaton n connecton wth a reorgan-
zaton. See Rev. R u. 55-59, page 35.
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1367. 3
SU P RT D. SP CI L RUL ) D INITIONS
S CTION 367. OR IGN CORPOR TIONS
( so Sectons 35 ,358,361,362,368,381, Rev. Ru. 55- 5
1223.)
Where a pan of reorganzaton Is proposed for bona fde busness
reasons provdng for a statutory merger of two domestc corpora-
tons whch are whoy owned subsdares of a foregn corporaton.
It Is not necessary to estabsh pror to the merger that such trans-
acton s not n pursuance of a pan of ta avodance under secton
867 of the Interna Revenue Code of 195 . The heren descrbed
transacton consttutes a nonta abe reorganzaton wthn the
purvew of secton 368(a) (1) ( ) of such Code.
dvce has been requested wth respect to the ta consequences of
a proposed reorganzaton under the foowng crcumstances.
and Y are both mercan corporatons engaged n the busness of
manufacturng and seng agrcutura mpements and are ocated
n dfferent States. oth corporatons have both preferred and com-
mon stock outstandng. Y Corporaton hods about 10 percent of ts
ssued common stock n ts treasury.
oth and Y are whoy owned subsdares of Z Corporaton, a
Canadan corporaton.
To promote greater busness effcency and economy n management
of and Y Corporatons, a pan of reorganzaton and agreement of
merger s proposed whereby the Corporaton w acqure the bus-
ness and assets of the Y Corporaton through a statutory merger n
compance wth the statutes of the respectve States n whch they
are ncorporated. Upon competon of the merger, Y Corporaton
w cease as a separate corporate entty, whe the Corporaton w
be the survvng and contnung corporaton.
Under the pan the artces of ncorporaton of w be amended
to provde for an ncrease n ts authorzed common stock, and newy
ssued common stock of w be e changed for a of the common and
preferred stock of Y. The treasury shares hed by Y w be canceed
and the name of the survvng corporaton w be changed.
The questons presented are (1) whether, under the provsons of
secton 367 of the Interna Revenue Code of 195 , t s necessary to
estabsh n advance of the transacton that the e changes to be made
are not n pursuance of a pan havng as one of ts prncpa purposes
the avodance of edera ncome ta es and (2) whether the transfers,
e changes, and the termnaton of Y s corporate e stence w resut
n recognton of gan or oss to any of the partes nvoved.
Wth respect to the frst queston, secton 367 of the Interna Rev-
enue Code of 195 , whch reates to foregn corporatons, reads n
part as foows:
In determnng the e tent to whch gan sha be recognzed In the case of
any of the e changes descrbed In secton 35 , 355, or 361, a foregn
corporaton sha not be consdered as a corporaton uness, before such e change,
t has been estabshed to the satsfacton of the Secretary or hs deegate that
such e change s not n pursuance of a pan havng as one of ts prncpa
purposes the avodance of edera ncome ta es .
In the nstant case the pan of reorganzaton as proposed provdes
for the merger of two domestc corporatons a of the stock of whch
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35
3C8.
s owned by the same foregn corporaton. owever, f a of the
stock of both corporatons were owned by an ndvdua (nstead of
a corporaton) ths woud not prevent the transacton from beng a
reorganzaton under the terms of secton 368 of the Code. It s there-
fore not necessary to estabsh pror to the merger that t s not n
pursuance of a pan havng as one of ts prncpafpurposes the avod-
ance of edera ncome ta wthn the meanng of secton 367 of the
Code, nasmuch as the transacton has the same effect whether or
not the foregn corporaton s consdered as a corporaton.
In the nstant case, the merger meets the provsons of secton
368(a)(1)( ) of the Interna Revenue Code. oth corporatons
are n the same busness and the purpose of the transacton s to pro-
mote greater busness effcency and economy n management. There-
fore, no gan or oss w be recognzed to ether corporaton or to
ther stockhoder as a resut of the merger. The bass of the assets
of the Y Corporaton acqured by the Corporaton w be the same
as the cost or other bass n the hands of Y| and the bass to the stock-
hoder of Y Corporaton of the stock of Corporaton receved w
be the same as the bass of the stock e changed. In determnng the
hodng perod of the new shares, there w be ncuded the perod
for whch the shares e changed were hed. The undstrbuted earn-
ngs and profts of Y Corporaton w be deemed to have been receved
by the Corporaton as of the date of the transfer.
S CTION 368. D INITION R L TING TO CORPOR T
R ORG NIZ TIONS
( so Sectons 35 , 358, 361, 362, 381.) Rev. Ru. 55-59
nonstatutory merger between two corporatons under certan
crcumstances for bona fde busness reasons w consttute a re-
organzaton wthn the purvew of secton 368(a)(1)(C) of the
Interna Revenue Code of 195 and, therefore, a nonta abe e change
as to each corporaton and Us sharehoders under sectons 361 aud
35 of such Code.
dvce has been requested wth respect to the ta consequences of
a proposed reorganzaton under the foowng crcumstances.
The Corporaton s engaged n the busness of manufacturng
and seng certan products. Its authorzed capta conssts of 2,500
shares of common stock of whch 1, 50 shares are outstandng n the
hands of the pubc and 50 shares are hed n the treasury of the cor-
poraton. Of the treasury stock 35 shares are reserved for optons
granted to offcers and e ecutves of the corporaton.
The Y Corporaton s engaged n the same busness as Corpora-
ton. Its authorzed capta conssts of 100 shares of preferred stock
and 500 shares of common stock. None of the preferred stock has
ever been ssued. Of the authorzed common stock 2 0 shares are
outstandng not ncudng 15 shares whch have been reserved for the
purpose of Y s restrcted stock opton pan for key empoyees. The
corporaton has outstandng 750a doars prncpa amount of snkng
fund debenture bonds.
Pursuant to an agreement between the respectve corporatons, the
Corporaton w acqure the property and assets of the Y Corpora-
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368. 36
ton n e change soey for votng stock of the Corporaton, and
the assumpton by of the abtes of Y, ncudng the outstandng
debenture bonds. urthermore, the Corporaton w change ts
name to -Y Corporaton recassfy ts stock so as to provde for
1,500 authorzed shares of votng common stock, havng a dfferent par
vaue ssue 300 shares of new common stock n e change for the 1,500
shares of ts od common stock outstandng, the e change beng on a
pro rata bass and make certan other ncdenta changes n s art-
ces of ncorporaton.
The Corporaton w ssue to the Y Corporaton 350 shares of
ts new common stock, and w assume the abtes of Y Corporaton
n e change for the property and assets of Y Corporaton whch w
be acqured by . Upon the recept by Y of the stock of the
Corporaton, the atter corporaton w dstrbute such stock to ts
stockhoders n e change for the stock of Y Corporaton hed by them
n the rato provded by the pan of reorganzaton. The Corpora-
ton n ssung ts new common stock to ts own stockhoders and to
the stockhoders of Y Corporaton w ssue scrp certfcates repre-
sentng fractona shares whch w be e changeabe for fu shares.
Such scrp certfcates w become vod after a specfed date f they
are not theretofore surrendered. Upon consummaton of the trans-
acton the Y Corporaton w be qudated and dssoved.
The purpose of the transacton s to advance the nterests of the
sad corporatons by presentng a strengthened organzaton n a
hghy compettve ndustry through a broadened ne of products,
ower unt costs, and a combnaton of successfu managera taent.
Secton 368 of the Interna Revenue Code of 195 provdes, n part,
as foows:
(a) Reorganzaton.
(1) In genera the term reorganzaton means
(C) the acquson by one corporaton, n e change soey for a or a
part of ts votng stock (or n e change soey for a or a part of the
votng stock of a corporaton whch s n contro of the acqurng cor-
poraton), of substantay a of the propertes of another corporaton,
but n determnng whether the e change s soey for stock the assump-
ton by the acqurng corporaton of a abty of the other, or the fact
that property acqured s sub|ect to a abty, sha be dsregarded

(b) Tarty to a Reorganzaton. the term a party to a reorganza-
ton ncudes
(1) a corporaton resutng from a reorganzaton, and
(2) both corporatons, n the case of a reorganzaton resutng from the
acquston by one corporaton of stock or propertes of another.
Secton 361 of such Code n regard to the effects on corporatons
states, n part:
(a) Genera Rue. No gan or oss sha be recognzed f a corporaton a
party to a reorganzaton e changes property, n pursuance of the pan of re-
organzaton, soey for stock or securtes n another corporaton a party to the
reorganzaton.
s to the effect on sharehoders, secton 35 reads, n part:
(a) Genera Rut .
(1) In genera. No gan or oss sha be recognzed f stock or securtes
n a corporaton a party to a reorganzaton are, In pursuance of the pan
of reorganzaton, e changed soey for stock or securtes n such corpora-
ton or n another corporaton a party to the reorganzaton.
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37 01.
In the nstant case, a requrements of a nonta abe transacton
wthn the meanng of the above sectons of the Code have been met
Therefore, no gan or oss w be recognzed to ether corporaton or
ts stockhoders as a resut of the reorganzaton. The bass of the
assets of Y Corporaton acqured by the Corporaton w be the
same as the cost or other bass n the hands of Y and the bass of the
new stock of Corporaton n the hands of the stockhoders of
Corporaton and n the hands of the stockhoders of Y Corporaton
w be the same as the bass of the od stock e changed therefor. The
undstrbuted earnngs and profts of Y Corporaton w retan ts
character for dvdends n the Corporaton.
Merger of two domestc corporatons whch are whoy owned sub-
sdares of a foregn corporaton. See Rev. Ru. 55- 5, page 3 .
P RT . C RRYO RS
S CTION 381. C RRYO RS IN C RT IN CORPOR T
C UISITIONS
The undstrbuted earnngs and profts acqured by the survvng
corporaton pursuant to the pan of reorganzaton. See Rev. Ru.
55- 5, page 3 .
Status of undstrbuted earnngs and profts acqured by the sur-
vvng corporaton pursuant to the pan of reorganzaton. See Rev.
Ru. 55-59, page 35.
SU C PT R D.-D RR D COMP NS TION, TC.
P RT I. P NSION. PRO IT-S RING. STOC ONUS PL NS. TC.
S CTION 01. U LI I D P NSION, PRO IT-S RING,
STOC ONUS PL NS, TC.
( so Part II, Secton 165 Reguatons 118, Rev. Ru. 55-60
Secton 39.165-1.)
Where an empoyees penson pan, hed to meet the requrements
for quafcaton for ta e empton under secton 165(a) of the
Interna Revenue Code of 1939, contans a provson for mtaton
of benefts for the 25 most hghy compensated empoyees n accord-
ance wth Mmeograph No. 5717, C. . 19 , 321, and has been n
operaton for more than 10 years, a varance n the dstrbutve
shares of partcpants upon bona fde termnaton of the pan because
of adverse busness condtons w not resut n the prohbted
dscrmnaton In favor of empoyees who are offcers, sharehoders,
supervsors, or hghy compensated, nor adversey affect the quaf-
caton of the pan under secton 01(a) of the 195 Code.
Mmeograph 6136, C. . 10 7-1. 58, and P. S. 52 dated ugust 9,
19 5, modfed.
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01.) 38
dvce has been requested whether upon bona fde termnaton of
an empoyees penson pan, because of adverse busness condtons, a
varaton n the dstrbutve shares of partcpants n the pan woud
resut n the prohbted dscrmnaton n favor of empoyees who are
offcers, sharehoders, supervsors, or hghy compensated, and ad-
versey affect the quafcaton of the pan under secton 01 (a) of the
Interna Revenue Code of 195 .
n empoyer estabshed a penson pan of the unt beneft type for
ts empoyees durng 19 3. enefts under the pan were provded by
means of ndvdua eve premum annuty contracts. The pan had
been amended durng 19 to ncude mtatons on benefts for th
25 most hghy compensated empoyees n accordance wth the pro-
vsons of Mmeograph 5717, C. . 19 , 321, and upon consderaton
as to ts quafcaton under secton 165(a) of the Interna Revenue
Code of 1939 was hed to satsfy the requrements for such quafca-
ton. The benefts under the pan were ntegrated wth the Od ge
and Survvors Insurance benefts under the soca securty program.
The pan had been mantaned and operated n accordance wth ts
terms unt 195 when t was termnated because of adverse busness
condtons.
Upon such termnaton t was found that dstrbuton of the ava-
abe assets under the pan, n accordance wth provsons therefor,
woud resut n the respectve partcpants recevng dstrbutons
equa to the foowng percentages of ther tota compensaton:
Percen tagcof
mpoyee tota compentaton
Controng stockhoder 33
Mnorty stockhoder 21
ghy pad nonstockhoder empoyees 17
other empoyees 11
It was aso found that the pan was operated n accordance wth ts
provsons and that the varance n dstrbutons, as ndcated above,
was occasoned by: (1) the oder ages of the stockhoders and hghy
pad empoyees, (2) ntegraton of the benefts under the pan wth
the Od ge and Survvors Insurance benefts under the soca securty
program whch resuted n reatvey greater benefts based on com-
pensaton above 3,600 than on the frst 3,600 of compensaton for
each year of credted servce, and (3) the tact the stockhoders and
hghy compensated empoyees had reatvey ong perods of credted
servce.
Snce the pan had been n operaton for more than 10 years, the
mtatons on benefts for the 25 most hghy compensated empoyees
n accordance wth Mmeograph 5717, supra, are no onger appcabe.
Thus, the ssue s whether the dstrbuton as ndcated above s ds-
crmnatory wthn the purvew of secton 01(a)( ) of the 195
Code (secton 165(a) ( ) of the Interna Revenue Code of 1939) whch
rohbts dscrmnaton n favor of empoyees who are offcers, share-
oders, supervsors, or hghy compensated.
It s recognzed that n a penson pan of the unt beneft or f ed
beneft type contrbutons for the respectve partcpants w vary n
accordance wth such factors as age, years of servce, and nearness to
retrement, and that n ntegrated pans varances w resut when
comparsons are made soey on the bass of assets dstrbutabe under
the pan. Ths, however, s not dscrmnaton wthn the statutory
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39 ( 01.
sense. The varance n dstrbuton s merey a fortutous crcum-
stance resutng from the bona fde termnaton of the pan whch
coud not have been foreseen when the pan was estabshed and whch
resuted from causes beyond the empoyer s contro.
ccordngy, under tre above crcumstances, t s hed that a varance
n the dstrbutve shares of partcpants upon bona fde termnaton,
because of adverse busness condtons, of an empoyees penson pan
whch contans a provson for the mtaton of benefts for the 25
most hghy compensated empoyees and whch has been n operaton
for more than 10 years, w not resut n the prohbted dscrmnaton
n favor of empoyees who are offcers, sharehoders, supervsors, or
hghy compensated, nor adversey affect the quafcaton of the pan
under secton 01 (a) of the 195 Code.
Mmeograph 6136, C. . 19 7-1, 58, and P. S. 52, dated ugust 9,
19 5, to the e tent nconsstent herewth are hereby modfed.
( so Part II, Secton 1G5 Reguatons 118, Rev. Ru. 55 186
Secton 39.165- .)
pan whch Is ntended to quafy under secton 01(a) of the
Interna Revenue Code of 195 must contan an approprate prov-
son for the purpose of grantng fuy vested rghts to partcpants
upon dscontnuance of contrbutons by the empoyer, smar to a
case n whch actua termnaton takes pace.
dvce has been requested as to whether an empoyees proft-sharng
pan must contan a provson for grantng fuy vested rghts to par-
tcpants upon dscontnuance of contrbutons by the empoyer.
Under the provsons of the empoyees proft-sharng pan n the
nstant case, f the board of drectors deems t nadvsabe or mposs-
be for the corporaton to contnue to make contrbutons under the
pan, t sha have the power to dscontnue the corporaton s contr-
butons by an approprate resouton. owever, shoud ths be done,
the other provsons of the pan reman n force and the trust remans
n e stence. The pan further provdes that a partcpant sha for-
fet the amount credted to hm n the trust fund n the event of hs
termnaton of empoyment pror to retrement.
Secton 01(a)( ) of the Interna Revenue Code of 195 (sec.
165(a) ( ) of the 1939 Code) provdes that a trust formng part of a
stock bonus, penson, or proft-sharng pan of an empoyer for the
e cusve beneft of hs empoyees sha consttute a quafed trust
f the contrbutons or benefts provded under the pan do not ds-
crmnate n favor of empoyees who are offcers, sharehoders, persons
hose prncpa dutes consst n supervsng the work of other em-
poyees, or hghy compensated empoyees.
In a proft-sharng pan, uness the partcpants are vested n ther
respectve nterests at the tme of dscontnuance of contrbutons,
dscrmnaton n favor of empoyees who are offcers, sharehoders,
supervsors, or hghy compensated may resut. Such empoyees woud
usuay be the ast to have ther servces termnated and stand to
beneft from the forfetures arsng from severance of empoyment
of other partcpn n ts.
36 050 36
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02. 0
In a penson pan, forfetures arsng from severance of empoy
ment or other reasons must be used to reduce subsequent empoye
contrbutons rather than be aocated among remanng partcpants
owever, f contrbutons are dscontnued there s nothng agans
whch to appy the forfetures.
ccordngy, a pan whch s ntended to quafy under secto
01(a) of the 195 Code (sec. 165(a) of the 1939 Code) must conta
an approprate provson for the purpose of grantng fuy veste
rghts to partcpants upon dscontnuance of contrbutons by tn
empoyer, smar to a case n whch actua termnaton of the pa
ana trust takes pace.
tenson of tme granted n fng annua return requred of a
empoyees trust quafed under secton 01(a) of the Interna
Revenue Code of 195 . See Rev. Ru. 55-371, page 139.
S CTION 02.-T ILITY O N ICI RY O
MPLOY S TRUST
( so Part II, Secton 165 Reguatons 118, Rev. Ru. 55-6:
Secton 39.165-6.)
though a dstrbuton from an empoyees trust meetng the re
qurements of secton 01 of the Interna Revenue Code of 195
made n whoe or n part from funds receved by the trust as nteres
on ta -free securtes, such dstrbuton, when receved or made ava
abe, s ta abe ncome to the dstrbutee n the manner and to th
e tent provded by secton 02(a) of the Code.
( so Secton 72.) Rev. Ru. 55-36
The dstrbuton of a funds of a penson trust to tbe empoyee
partcpants, each of whom has prevousy e ecuted and who there-
after carres out a egay enforceabe agreement to pay over hs
dstrbutve share to a new penson trust whch, ke the former, con-
sttutes a quafed trust under secton 01(a) of the Interna
Revenue Code of 195 , s consdered a transfer of funds from one
such trust to another through the agency of the empoyees, who w
reaze no ta abe ncome from such transactons. The deferment of
ta aton to the partcpants granted wth respect to the empoyer s
contrbutons and any earnngs credted to the partcpants w
accordngy contnue unt such subsequent tme as they may be
dstrbuted or made avaabe to the dstrbutees.
dvce has been requested wth regard to the ta consequences of
dstrbutons from a penson trust whch has been hed to be quafed
under secton 01 (a) of the Interna Revenue Code of 195 and e empt
under secton 501(a) of the Code, upon dscontnuance of the pan,
where funds are dstrbuted to the empoyee partcpants who n turn
pay them over to the trustees of a new pan aso quafed under secton
01(a) of the Code.
savngs and oan assocaton that had been a member of the Retre-
ment und of the edera ome Loan ank System, whch fund had
been hed to meet the requrements of secton 01(a) of the Code,
desred to sever ts connecton wth the System and fund ts penson
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02. 2
however, are not deemed to prevent the partcpant s nterest from
beng made avaabe. See Rev. u. 5 -265, C. . 195 -2, 239
Most cases n whch the ssue arses as to whether a partcpant s
nterest has been made avaabe fa nto two genera casses, namey
(1) penates for wthdrawa, and (2) a pror rrevocabe eecton tc
defer dstrbuton to a f ed or determnabe future tme.
In the penaty type of case a partcpant, who makes a wthdrawa
s requred to dscontnue hs partcpaton n the trust or suffer a for-
feture wth respect to a porton of hs dstrbutabe nterest. Ds-
contnuance of partcpaton s the surrender of a vauabe rght and,
as ong as that remans a condton for wthdrawa of hs nterest,
such nterest s not made avaabe to the partcpant. Compare
Ds C. napp et a. v. Commssoner, 1 . T. . 23, and state o
. M. erry v. Commssoner, . T. . 125 .
In the deferment by pror eecton type of case, f the trust nden-
ture, or the pan of whch t s a part, provdes for an rrevocabe
eecton by the empoyee pror to the tme hs nterest becomes ds-
trbutabe to hm to have dstrbuton of such nterest deferred to a
f ed or determnabe future tme, such as ten years or upon hs pror
retrement, severance of empoyment, death, or dsabty, hs nterest
s not made avaabe pror to such tme or occurrence of any of the
events enumerated. So ong as an empoyee s eecton to defer the
actua recept of a dstrbuton s rrevocabe, t s mmatera whether
the e ercse thereof takes the form of postve acton or merey n-
acton on the part of the empoyee.
oth n the penaty and deferment by pror eecton type of case, a
penaty or perod of deferment whch s nconsequenta acks sub-
stance and s not deemed to prevent the partcpant s nterest from
beng made avaabe at the earest date upon whch he coud have
receved a dstrbuton. What s consequenta and what consttutes
sr.bstance depends upon the facts n a partcuar case, and w be
further ampfed n subsequent rungs.
( so Part II, Secton 1G5 Reguatons 118, ev. Ru. 55- 2
Secton 39.165-6.)
Where an empoyee after 10 years of partcpaton In an empoy-
ees proft-sharng trust, whch s quafed under secton 01(a) of
the Interna Revenue Code of 195 (secton 165(a) of the 1939
Code), may eect to wthdraw a stated percentage of the fu amount
standng to hs credt n the account estabshed for a partcuar
10 year perod ony after the approva of an admnstratve commt-
tee n the case of proved fnanca necessty, such amounts w not be
deemed to be made avaabe under secton 02(a) (1) of the 195
Code.
dvce has been requested whether a partcpant n a quafed em-
poyees proft-sharng trust w be consdered to be n recept of
ncome wnen after 10 years of partcpaton n the trust he may eect
to wthdraw a stated percentage of the amount standng to hs credt
n the account estabshed for a partcuar 10 year perod ony upon the
approva of an admnstratve commttee n the case of proved fnanca
necessty.
The M company estabshed an empoyees proft-sharng pan and
trust whch has been hed to be quafed under secton 165(a) of the
Interna Revenue Code of 1939 (sec 01(a) of the 195 Code). d-
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02.
by reason of a partcpant s rght to eect, wthn a specfed tme,
to receve dstrbuton of trust funds upon competon of 15 years of
servce.
n empoyer estabshed an empoyees proft-sharng pan whch
was hed to be quafed under secton 165(a) of the 1939 Code (secton
01(a) cf the 195 Ode). Under the terms of the trust agreement
whch forms a part of the proft-sharng pan each empoyee had a
severabe and persona trust whch termnated at the end of a perod
of 15 years of partcpaton. The ndvdua empoyee s trust coud
aso be termnated upon hs death or other termnaton of hs servces.
Upon termnaton of a partcuar empoyee s trust for any reason the
funds hed thereunder (or such part wth respect to whch he had a
nonforfetabe rght) woud be dstrbuted to hm n a ump sum.
n amendment to the pan and trust has been e ecuted whereby
a partcpant may receve a dstrbuton from the trust ony upon the
termnaton of hs servces e cept n a case where he may eect to fe
a wrtten decaraton pror to hs competon of 1 years of contnuous
empoyment to have hs trust termnated at the competon of 15 years
of servce. The wrtten decaraton s rrevocabe and no further
eecton may be made after the competon of the 1 th year.
If he shoud fa to fe such an eecton, wthn the tme specfed,
then he may not receve any of the trust funds e cept upon hs death or
other termnaton of hs servces.
Secton 02(a) of the 195 Code provdes that the amount actuay
dstrbuted or made avaabe to any dstrbutee by an empoyees trust,
descrbed n secton 01(a) whch s e empt under secton 501 (a). sha
be ta abe to hm n the year n whch so dstrbuted or made avaabe.
Where tota dstrbutons payabe wth respect to any empoyee are
pad to the dstrbutee wthn 1 ta abe year of the dstrbutee on ac-
count of the empoyee s death or other separaton from the servce, or
on account of the death of the empoyee after separaton from servce,
the amount of such dstrbuton, to the e tent e ceedng the amounts
contrbuted by the empoyee sha be consdered a gan from the sae
or e change of a capta asset hed for more than 6 months.
Revenue Rung 55- 23, page 1 of ths uetn, hods that a par-
tcpant s nterest n an empoyees trust whch meets the quafcatons
of secton 01 (a) of the 195 Code s not made avaabe to hm wthn
the purvew of secton 02(a) of the Code where there are substanta
condtons or restrctons on hs rght of wthdrawa.
On the bass of the above, t s hed that where a partcpant n a
quafed empoyees proft-sharng trust may eect at any tme pror
to the competon of 1 years of contnuous servce to fe a wrtten
decaraton for dstrbuton of hs trust funds upon competon of 15
years of contnuous servce and where he may otherwse receve a
dstrbuton of the trust funds ony upon the termnaton of hs
servces, the trust funds are not made avaabe wthn the purvew
of secton 02(a) of the 195 Code, by reason of the rght to make such
an eecton. Compare Rev. Ru. 5 -265, C. . 195 -2, 239. Where
tota dstrbutons payabe wth respect to an empoyee are pad to the
dstrbutee wthn 1 ta abe year of the dstrbutee on account of the
empoyee s death or other termnaton of servce or death after ter-
mnaton of servce, ong-term capta gan treatment w be accorded
euch a dstrbuton.
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21. 6
the escrow fund w not be deductbe from gross ncome for edera
ncome ta purposes when so deposted. See Mm. 5985, C. . 19 6-
72, and Mm. 6021, C. . 19 6-2, 3.
ccordngy, deposts to a temporary depostory w not be con
sdered as contrbutons or payments to or under a pan quafed unde
secton 01(a) of the 195 Code (secton 165(a) of the 1939 Code)
contrbuton s deemed to be made at the tme the funds are rrev
ocaby turned over to the trustee by the temporary depostory o
agent and s deductbe ony f then pad to an e stng trust whch
part of a quafed penson, proft-sharng, or stock bonus pan, or
the event the trust s not so quafed, f the rghts of the empoyees
the contrbutons are nonforfetabe at the tme so pad. paymen
by the temporary depostory or agent s not consdered to meet tn
requrements of secton 0 (a) of the 195 Code and s not deductbL
thereunder f made to a trust pror to (1) the date the pan s actuay
n effect and (2) the date upon whch t s deemed to meet the requre
ments of secton 01 (a).
Informaton requred to be fed by an ndvdua empoyer support
ng deductons camed for contrbutons to an empoyees trust o
annuty pan on an ndustry-wde or area-wde bass, negotated b|
a abor unon, when the trustees of the pan fe the compete data
requred for a contrbutng empoyers. See Rev. Ru. 55-20
page 300.
P RT II. MISC LL N OUS PRO ISIONS
S CTION 21. MPLOY STOC OPTIONS
( so Part II, Secton 130 Reguatons 118, Rev. Ru. 55-10
Secton 39.130 -2.)
or the purpose of appyng the 10 percent combned votng
power rue contaned n secton 21(d)(1)(C) of the Interna
Revenue Code of 195 an empoyee who s granted a stock opton
by hs corporate empoyer s consdered to be the owner of a stock
owned drecty or ndrecty by hm, hs wfe, father, mother,
brothers and ssters.
dvce has been requested reatve to the e tent to whch the drect
and ndrect ownershp rue contaned n secton 21(d) (1) (C) of the
Interna Revenue Code of 195 appes under the condtons stated
beow.
The ta payer has been granted a stock opton by hs corporate em-
oyer. In addton to stock of the company whch s owned drecty
y the ta payer, hs father, mother, brothers and ssters, certan shares
are hed by varous trusts of whch he or they are the benefcares.
so the ta payer, hs father and mother and some of the trusts own
shares of stock n a foregn corporaton whch n turn owns certan
shares of stock n the corporaton grantng the opton
Secton 21(d) (1) (C) of the Code provdes, n part, as foows:
or the purposes of ths subparagraph
() such ndvdua sha be consdered as ownng the stock owned,
drecty or Indrecty, by or for hs brothers and ssters (whether by
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1 2. 8
195 . Secton states the speca rues for partnershps and part-
ners n the case of ta abe years begnnng after pr 1, 195 .
Sec. 2. ppcaton of Stopgap eguatons.
In accordance wth the provsons of stopgap reguatons promu-
gated by T. D. 6091, C. . 195 -2, 7, the provsons of secton 39. 6-1
of eguatons 118, as amended by T. D. 6099, C. . 195 -2, 113,
contnue n effect, nsofar as they are not nconsstent wth the
provsons of the 195 Code, unt they are superseded by reguatons
ssued under the 195 Code. or certan stuatons wth respect to
whch the 195 Code contans new provsons not covered by or n-
consstent wth secton 39. 6-1 of Reguatons 118, nterm rues are
set forth n the foowng sectons of ths Revenue Rung. Such
rues are temporary and w be superseded by reguatons.
Sec. 3. Changes to 52-53-Week Ta abe Years.
.01 Secton 1(f) of the 195 Code authorzes a ta payer to eect
to compute hs ta abe ncome on the bass of an annua accountng
perod whch vares from 52 to 53 weeks, aways ends on the same
day of the week and ether (a) aways ends on whatever date ths
same day of the week ast occurs n a desgnated caendar month or
(b) aways ends on whatever date ths same day of the week fas
whch s nearest to the ast day of a desgnated caendar month.
.02 The eecton to compute ta abe ncome on the bass of a 52 53-
week ta abe year may be made for ta abe years endng after
ugust 16, 195 , by ta payers who reguary keep ther books of ac-
count on that bass. ta payer w be consdered to compy wth
ths requrement f at the tme he eects a 52-53-week ta abe year
he conforms hs books to that bass and thereafter reguary keeps
hs books of account and reports hs ncome on such bass.
.03 If a ta payer has been reportng ta abe ncome on the bass
of a caendar year or a fsca year endng on the ast day of a caen-
dar month, and eects to change to a 52-53-week ta abe year endng
on a partcuar day wth reference to the end of the same month, ad-
vance approva of the change w not be requred. or e ampe, ad
vance approva w not be requred f a ta payer who has been report-
ng hs ncome on the bass of a ta abe year endng on October 31,
changes to a 52-53-week ta abe year whch w ether aways end
on the ast Saturday n October or w aways end on the Saturday
whch s nearest to the ast day of October. If, however, a change
s made to a 52-53-week ta abe year whch ends wth reference to
the end of a month other than the month on the ast day of whch
hs pror ta abe year ended, the rues referred to n secton 2 or
secton , as the case may be, are appcabe n determnng whether
advance approva s requred. The eecton to change to a ta abe
year of 52-53-weeks sha be ndcated by a statement attached to the
return for the frst ta abe year to whch such eecton s appcabe.
Ths statement sha furnsh fu detas as to the tme the new ta -
abe year w end.
.0 or the purpose of determnng the tme for fng an appca-
ton (where necessary) for approva of a change of annua accountng
perod and for fng the return for the short perod requred to effect
a change to a 52-53-week ta abe year, the short perod sha be treated
as endng wth the ast day of the month whch ends nearest to the
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9 5 2.
ast day of such short perod. or e ampe, f the short perod ends
wthn the perod frora November 2 , 195 , to December 3, 195 , n-
cusve, t sha be treated as endng November SO, 195 . See secton
1(f) (2) ( ) of the 195 Code.
Sc. . Partnershps and Partners.
.01 Ths secton appes to changes by partnershps and partners
to ta abe years begnnng after pr 1,195 and to the adopton by
a newv organzed partnershp of a ta abe year begnnng after that
date. See secton 771(b) (1) of the 195 Code. The rues referred to
n secton 2 appy to changes to ta abe years begnnng before pr
2,195 , n determnng whether advance approva s requred.
.02 partnershp s requred to obtan advance approva of a
change to or the adopton of a ta abe year whch s dfferent from
that of any of ts prncpa partners. dvance approva s not re-
qured where (a) a partnershp changes to or adopts a ta abe year
whch s the same as that of a ts prncpa partners or (b) where
a partnershp and a ts prncpa partners concurrenty change to
or adopt the same ta abe year.
.03 or the purpose of ths secton a prncpa partner s a part-
ner havng an nterest of 5 percent or more n partnershp profts or
capta
.0 partner s requred to obtan advance approva of a change
to a ta abe year whch s not the same as that of every partnershp
n whch he s a prncpa partner. Uness requred by secton 39. 6-1
of Reguatons 118, advance approva s not necessary n the case of
a partner who changes to a ta abe year whch s the same as that of
every partnershp n whch he s a prncpa partner or whch s the
same as that to whch every such partnershp havng a dfferent ta -
abe year concurrenty changes. Uness requred by secton 39. C-1
of Reguatons 118, advance approva s not necessary n the case of
a change of ta abe year by a partner s spouse who s not a prncpa
partner n any partnershp.
.05 The procedure for obtanng advance approva s the same as
that prescrbed n the reguatons referred to n secton 2. Where
advance approva s requred, permsson to change to or to adopt
the desred ta abe year w be granted ony f a busness purpose
therefor s estabshed to the satsfacton of the Commssoner of In-
terna Revenue.
.06 ny newy formed partnershp whch adopts a ta abe year
wth respect to whch advance approva s not requred sha fe wth
ts frst return a statement to the effect that the ta abe year whch
t s adoptng s the same as that of a the prncpa partners, or that
a the prncpa partners are concurrenty changng to the ta abe
year whch t s adoptng. If a partner or an e stng partnershp
changes to a ta abe year wth respect to whch advance approva s
not requred a smar statement sha be fed wth the return for the
short perod resutng from the change of ta abe year. In each such
case the statement sha cte the authorty for the change. Pendng
the ssuance of reguatons under the 195 Code, ths secton of ths
evenue Rung consttutes such authorty.
.07 If, wthout obtanng the approva of the Commssoner of
Interna Revenue, a partner or partnershp has changed to or adopted
an annua accountng perod begnnng after pr 1,195 , and, under
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I 52. 50
the foregong provsons of ths secton, advance approva s requred
for the change or adopton, such annua accountng perod w not be
accepted as a ta abe year unt approva thereof s secured. Under
these crcumstances an appcaton to change to or adopt the desred
ta abe year w be consdered tmey f fed wthn 30 days after
the date of the Interna Revenue uetn n whch ths Revenue
Rung s pubshed.
P RT II. M T ODS O CCOUNTING
SU P RT . T L Y R OR W IC IT MS O GROSS INCOM INCLUD D
S CTION 52. PR P ID INCOM
26 C R 1. 52-1: Prepad ncome n genera. T. D. 613
( so Secton 62 26 C R 1. 62-1.)
TITL 26 INT RN L R NU C PT R I. SU C PT R . P RT 1. INCOM
T T L Y S GINNING T R D C M R 81, 1953
Reguatons prescrbed under sectons 52 and 62 of the Interna
Revenue Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. O.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On anuary 22,1955, a notce of proposed ruemakng wth respect
to sectons 52 and 62 of the Interna Revenue Code of 195 was
pubshed n the edera Regster (20 . R. 515). fter consderaton
of such reevant suggestons as were presented by nterested persons
regardng the proposas, t was determned that no change shoud be
made n the proposed reguatons. ccordngy, the proposed regua-
tons so pubshed are hereby adopted.
Sec. 1. 52 Statutory Provsons Prepad Income.
S C. 52. PR P ID INCOM .
(a) Prepad Income To e arned Oveb Short or Indefnte
Perod.
(1) Short perod. In the case of any prepad ncome to whch
ths secton appes, f the abty descrbed n subsecton (e) (2) s
(at the tme the ncome Is receved) to end before the frst day of
the s th ta abe year after the ta abe year n whch such ncome
s receved, then such Income sha be Incuded In gross ncome for
the ta abe year n whch receved, and for each of the 5 succeedng
ta abe years, to the e tent proper under the method of accountng
used under secton 0 n computng ta abe ncome for such year.
If the abty does not n fact end before the frst day of such
s th ta nbe year, such ncome sha be ncuded n gross ncome
for the ta abe years specfed n the precedng sentence e cept
that wth the consent of the Secretary or hs deegate t sha be
ncuded n gross ncome In such proportons, and for such ta abe
years, as are specfed n such consent.
(2) Indefnte pkrod. In the case of any prepad Income to
whch ths secton appes, f the abty descrbed n subsecton
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51 5 52.
(e) (2) Is (at the tme the Income s receved) of Indefnte duraton,
then such Income sha be ncuded n gross Income for the ta abe
year n whch receved and for each of the 5 succeedng ta abe
yean, consstenty wth the prncpes prescrbed n paragraph (1)
and subsecton (b), under reguatons prescrbed by the Secretary
or hs deegate. Wth the consent of the Secretary or hs deegate
the prepad ncome sha be ncuded n gross Income n such pro-
portons, and for such ta abe years, as are specfed n such consent.
(b) Prepad Income To e arned Oveb Long Perod. In the case
of any prepad ncome to whch ths secton appes, f the abty
descrbed n subsecton (e)(2) s (at the tme the ncome s receved)
to end after the cose of the ffth ta abe year after the ta abe year n
whch such ncome s receved, then
(1) one-s th of the prepad ncome sha be ncuded n gross
ncome for the ta abe year n whch receved, and one-s th sha
be ncuded In gross ncome for each of the 5 succeedng ta abe
years e cept that
(2) wth the consent of the Secretary or hs deegate, the prepad
ncome sha be ncuded n gross ncome n such proportons, and
for such ta abe years, as are specfed In such consent.
(c) Where Ta payers Labty Ceases. In the case of any prepad
ncome to whch ths secton appes
(1) If the abty descrbed n subsecton (e)(2) ends, then so
much of such ncome as was not ncudbe n gross ncome under
subsectons (a) and (b) for precedng ta abe years sha be Incuded
n gross ncome for the ta abe year n whch the abty ends.
(2) If the ta payer des or ceases to e st, then so much of such
ncome as was not ncudbe n gross ncome under subsectons (a)
and (b) for precedng ta abe years sha be ncuded n gross ncome
for the ta abe year n whch such death, or such cessaton of e st-
ence, occurs.
(d) Prepad Income to Whch Ths Secton ppes.
(1) ecton of benefts. Ths secton sha appy to prepad
ncome f and ony f the ta payer makes an eecton under ths
secton wth respect to the trade or busness n connecton wth
whch such ncome s receved. The eecton sha be made n such
manner as the Secretary or hs deegate may by reguatons pre-
scrbe. No eecton may be made wth respect to a trade or busness
f n computng ta abe ncome the cash recepts and dsbursements
method of accountng s used wth respect to such trade or busness.
(2) Scope of eecton. n eecton made under ths secton
sha appy to a prepad ncome receved n connecton wth the
trade or busness wth respect to whch the ta payer has made the
eecton e cept that the ta payer may, to the e tent permtted
under reguatons prescrbed by the Secretary or hs deegate, n-
cude n gross ncome for the ta abe year of recept the entre
amount of any prepad ncome f the abty from whch t arose
s to end wthn 12 months after the date of recept. n eecton
made under ths secton sha not appy to any prepad ncome
receved before the frst ta abe year for whch the eecton s made.
(3) When eecton mat be made.
( ) Wthout consent. ta payer may, wthout the con-
sent of the Secretary or hs deegate, make an eecton under ths
secton for hs frst ta abe year (I) whch begns after Decem-
ber 31, 1953, and ends after the date on whch ths tte Is
enacted, and () n whch he receves prepad ncome n the
trade or busness. Such an eecton sha be made not ater
than the tme prescrbed by ths subtte for fng the return
for such year (ncudng e tensons thereof).
( ) Wth consent. ta payer may, wth the consent of
the Secretary or hs deegate, make an eecton under ths sec-
ton at any tme.
(e) Defntons. or purposes of ths secton
(1) Prepad ncome. The term prepad ncome means any
amount (Incudbe n gross ncome) whch s receved n connec-
ton wth, and s drecty attrbutabe to, a abty whch e tends
beyond the cose of the ta abe year n whch such amount s
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5 52. 52
receved. Such term does not ncude any Income treated as gan
from the sae or other dsposton of a capta asset.
(2) Labty to bendeb sebvces, etc. The term abty
means a abty to render servces, furnsh goods or other property,
or aow the use of property.
(3) Recept of prepad ncome. Prepad Income sha be treated
as receved durng the ta abe year for whch t Is ncudbe n
gross ncome under secton 51 (wthout regard to ths secton).
Sec. 1. 52-1 Prepad Income n Genera. (a) Prepad ncome,
regardess of the method of accountng used by the ta payer, s gen-
eray ncudbe n gross ncome by the ta payer at the tme of recept
f t s sub|ect to hs free and unrestrcted use. owever, n the case
of a ta payer who uses a method of accountng other than the cash
recepts and dsbursements method n computng ta abe ncome, sec-
ton 52 permts the ta payer to eect a method of accountng for
prepad ncome under whch portons of prepad ncome receved n
the ta abe year sha be deferred to subsequent ta abe years. The
genera purpose of secton 52 s to brng ta accountng more cosey
nto harmony wth generay accepted accountng prncpes t s
not ntended to permt, for ta purposes, deferras of ncome not prop-
ery deferred under the ta payer s method of accountng.
(b) Secton 6 provdes that ta abe ncome sha be computed
under the method of accountng on the bass of whch the ta payer
reguary computes hs ncome n keepng hs books. Secton 52 pro-
vdes a specfc method of accountng and, accordngy, the books of
the ta payer must be kept n accordance wth such method f ta abe
ncome s to be computed under the method so eected. No eecton
under secton 52 may be made uness the prepad ncome s deferred
on the reguar books of account whch are used n computng the ta -
ayer s ncome and on the bass of whch the ta payer prepares hs
nanca statements (such as reports to credtors, stockhoders, etc).
If a ta payer coses such books for the ta abe year wthout makng
the necessary entres thereon to record such deferra, and ssues hs
fnanca statements on the bass of the books as so cosed, any such
entres made thereafter w not be deemed to meet the requrements
of the precedng sentence wth respect to such ta abe year however,
ths rue s not appcabe n the case of a ta payer who has cosed hs
books and ssued fnanca statements for the ta abe year before
anuary 2 ,1955, f he makes the necessary entres before makng the
eecton under secton 52(d) (3) ( ) and secton 1. 52-7(b). In the
case of a ta payer (such as a reguated pubc utty defned n secton
1503(c)) whch s requred by the rues of a governmenta agency to
mantan ts books n accordance wth a method of accountng dfferent
from that permtted by secton 52, the method of accountng per-
mtted by secton 52 may be refected n au ary records whch sha
be kept wth, and reconced wth, the ta payer s reguar books. The
deferra of prepad ncome must be refected on the books for a perod
not shorter than that prescrbed for ta purposes. Ths s not to be
construed as preventng the ta payer from deferrrng prepad ncome
on hs books, where proper, over a perod onger than the perod pre-
scrbed by secton 52.
(c) or appcabe defntons, see secton 52(c) and secton
1. 52-8.
Sec. 1. 52-2. Prepad Income to be arned Over Short Perod.
(a) If prepad ncome s attrbutabe to a abty whch w end
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53 52.
before the frst day of the s th ta abe year after the ta abe year
n whch t s receved, the ncome s deemed for purposes of secton
52 to be short-perod prepad ncome. Such ncome sha be n-
cuded n gross ncome, to the e tent propery aocabe under the
ta payer s method of accountng, n the ta ate year n whch receved
and n each of the succeedng ta abe years (not e ceedng fve) over
whch the abty may e tend. The amount propery aocabe to
each of such ta abe years sha be determned n the ght of a the
facts and crcumstances nvoved, ncudng the ta payer s e perence
wth such abtes.
(b) Short-perod prepad ncome need not be aocated equay
oTer the perod, nor must any porton necessary be ncuded n the
ta abe year of recept. proper aocaton under ths secton re-
qures that such ncome be ncuded n gross ncome as the abty
to whch the ncome reates s dschargedor as t s deemed to be ds-
charged on the bass of the ta payer s e perence. (Where e per-
ence s the bass for aocaton, the ta payer must foow the rues pro-
vded n secton 1. 53-3(b).) or e ampe, f the rent for the 5th
year under a 5-year ease s pad at the begnnng of the ease and
the ta payer-essor has eected the benefts of secton 52, and f the
6th year of the ease fas wthn 2 ta abe years of the ta payer,
such rent sha be aocated to each of such 2 ta abe years to the
e tent that the 5th year of the ease fas wthn each such ta abe year.
On the other hand, f the rent for the entre 5 years s receved n
adrance, such rent sha be aocated to the ta abe years covered by
the ease. The precedng sentence may be ustrated by the foowng
e ampe:
ampe. Ta payer , usng the accrua method, whose ta abe
year s a caendar year, eases a budng to for a perod of 8 months
commencng on ebruary 1, 1955, for a tota rent of 8,000 pad
on December 1, 195 . ssumng that has eected the benefts of
secton 52, rent from the ease sha be ncuded n gross ncome as
foows:
mount ncuded
Tcrtff year n grost ncome
195 zero
1955 11, 000
1956 12,000
1957 12, 000
1958 12,000
1959 1,000
Tota 8,000
So part of the short-perod prepad rent s ncudbe n gross ncome
for the year 195 snce no part of the abty was dscharged n that
year.
(c) The determnaton of the perod over whch the abty e tends
s to be made on the bass of the facts known at the tme the ncome
s receved. In order to treat prepad ncome as short-perod prepad
ncome, the ta payer must be abe to ascertan at the tme of recept
of such ncome that the abty w end before the frst day of the
6th ta abe year after the ta abe year n whch the ncome s receved,
(d) If subsequent events e tent the perod of abty, but t s
not e tended beyond the ast day of the 5th ta abe year foowng
the ta abe year of recept of the prepad ncome, the porton of the
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S 52. 5
prepad ncome not prevousy ncudbe n gross ncome sha b
aocated, n accordance wth paragraphs (a) and (b), over the pero
remanng between the tme the subsequent events become known an
the e praton of the abty as changed.
(e) If subsequent events e tend the perod of abty beyond tb
cose of the 5th ta abe year foowng the ta abe year of recept o
the prepad ncome, the porton of the prepad ncome not prevousy
ncudbe n gross ncome sha be aocated rataby over the pero
between the tme the e tended abty becomes known and the cos
of such 5th ta abe year.
(f) If subsequent events shorten the perod of abty2 the porto
of the prepad ncome not prevousy ncudbe n gross ncome sha
be ncuded n gross ncome for the ta abe year n whch the subse
quent events occur f the abty does not e tend beyond that ta ab
year. If the abty does e tend beyond that ta abe year, sue
porton sha be ncuded n gross ncome over the perod remanng
between the tme the subsequent events become known and the e pra
ton of the abty as changed, n accordance wth paragraphs (a
and (b).
(g) In the case of a change n the perod of the abty descrbee
n paragraph (e) of ths secton, a ta payer may request permssor
from the Commssoner to aocate the amount of prepad ncome no
prevousy ncudbe n gross ncome n some manner other than tha
provded n such paragraph. The consent of the Commssoner sha
be requested n accordance wth secton 1. 52-5. Ordnary, per
msson w not be granted to reaocate amounts propery ncudbe
n gross ncome for ta abe years pror to the ta abe year n whcb
the change n the perod of the abty occurs.
(h) or the purposes of the aocaton under ths secton, the ta -
payer may consder each transacton separatey or may aggregate
smar transactons durng the ta abe year n any reasonabe manner
provded the method of aggregaton s consstenty foowed.
Sec. 1. 52-3. Prepad Income to be arned Over Indefnt
Perod. (a) Prepad ncome attrbutabe to a abty, whch on the
bass of the facts known at the tme such ncome s receved e tends
over an ndefnte perod, sha be ncuded n gross ncome n accord-
ance wth the provsons of ths secton. n e ampe of prepad
ncome of ths type s an amount receved by a reta store tor gft
certfcates whch may be redeemed for merchandse at any tme.
There s to be ncuded n gross ncome for the ta abe year of recept
cf an tem of prepad ncome descrbed n ths secton and n gross
ncome for each succeedng ta abe year (not more than 5 years and
not necessary rataby) that porton of such prepad ncome wth
respect to whch the e perence of the ta payer ndcates the abty
w be dscharged durng each such ta abe year. The remander
of the prepad ncome must be accounted for one-s th n the ta abe
year of recept and one-s th n each of the 5 succeedng ta abe years.
(b) The aocaton of ncome to be earned over an ndefnte perod
sha be based upon the ta payer s own e perence, f adequate for a
reasonabe aocaton. Ordnary, the most recent 6 years of e per-
ence wth ths knd of prepad ncome w be consdered adequate for
the purpose of ths paragraph. owever, f the ta payer s e perence
s not adequate, he may use the e perence of other ta payers engaged
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55 52.
n a smar trade or busness f he estabshes to the satsfacton of
te Commssoner that such e perence s representatve of the ta -
payers busness. In such case, f the ta payer attaches to hs return
compete statement of the e perence reed upon, he may use such
e perence n computng ta abe ncome on hs return, sub|ect to
approva by the Commssoner upon subsequent e amnaton of the
return,
(c) The foowng e ampe ustrates the provsons of ths secton:
ampe.
Sae of servce coupons 1,000
perence ndcates that the coupons w be presented n
payment for servces as foows:
5ft percent n the year of sae 500
0 percent n the 1st succeedng year 90
5 percent n the 2nd succeedng year 50
3 percent n the 3rd succeedng year 30
2 percent n the th succeedng year 20
1 percent n the 5th succeedng year 10
Tota 700
mnunt to be accounted or durng the frst 6 years on the bass
of e perence 700
mount sub|ect to pro rata aocaton over the 6-year perod 300
ocated to each year, one-s th of 300 50
Thus, the amovnt of ncome from the sae of servce coupons to be
ncuded n gross ncome for the ta abe year of sae s 500 pus 50,
or 550, and for the frst succeedng year s 90 pus 50, or 1 0, etc.
owever, f any porton of the amount receved represents payment
for coupons whch the e perence of the ta payer ndcates w never
be presented for redempton, such porton may not be deferred be-
yond the ta abe |7ear n whch the amount was receved and sha
be ncuded n gross ncome for such ta abe year. or e ampe, f
saes of coupons had been 1,100 nstead of 1,000 and e perence
ndcated that 100 of such amount woud never be presented for
redempton, the ncome from the sae of servce coupons to be n-
cuded n gross ncome for the ta abe year of sae woud be 500 pus
50 pus 100, or 650.
(u) or the purposes of the aocaton under ths secton, the
ta payer may consder each transacton separatey or may aggregate
smar transactons durng the ta abe year n any reasonabe man-
ner provded the method of aggregaton s consstenty foowed. It
w be necessary for the ta payer to evauate annuay hs past e pe-
rence n arrvng at the proper aocaton of prepad ncome receved
darng that ta abe | ear.
(e) ta payer may not defer prepad ncome reatng to a ab-
ty of ndefnte duraton beyond the 5th ta abe year after the ta -
abe year of recept uness he secures the consent of the Commssoner.
request for such consent sha be submtted n accordance wth the
provsons of secton 1. 52-5.
Sec. 1. 52- . Prepad Income to be arned Over Long Perod.
a) Prepad ncome attrbutabe to a abty whch, based upon the
facts known at the tme the ncome s receved, w end after the
dose of the 5th ta abe year foowng the ta abe year n whch
36 050 56 5
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52. 56
such ncome s receved sha be regarded as ong-perod prepad
ncome . One-s th of such ncome sha be ncuded n gross ncome
for the ta abe year of recept and one-s th for each of the 5 sue-
ceedng ta abe years uness the Commssoner consents to a dfferen
treatment. (See sec. 1. 52-5.) or e ampe, assume that the ta -
payer, reportng ta abe ncome on a caendar year bass, recever
n the 1st year of a 10-year ease commencng on anuary 1, the s
and ast year s rent. The annua renta s 6,000 the amount re-
ceved n the 1st year s 12,000, of whch ony the 6,000 aocabe
to the 10th year s rent s prepad ncome. The 10th year s rent sha
be aocated 1,000 to each of the frst 6 years of the ease, and takr.
nto account the 6,000 rent for each such year, there w be a tota
of 7,000 ncuded n ncome for each of the frst 6 years. In each
of the 7th, 8th, and 9th years ony the 6,000 rent for such year sha
be taken nto ncome. Snce the 10th year s rent was ncuded n
ncome for the frst 6 years, t s not to be ncuded n ncome for the
10th year.
(b) One-s th of the amount of ong-perod prepad ncome sha be
ncuded n gross ncome for the ta abe year of recept. or e ampe,
f a ta payer on the accrua method, on a caendar year bass receves
a renta payment of 60,000 on December 1, 195 , coverng fu pay-
ment on a 6-vear ease commencng on anuary 1,1955, 10,000 of such
ncome s aocabe to 195 , the ta abe year of recept, and a ke
amount to each of the 5 succeedng ta abe years.
(c) Whether amounts receved are short-perod prepad ncome or
ong-perod prepad ncome sha be determned by reference to the
perods to whch such amounts reate. or e ampe, f, n connecton
wth a 10-year ease begnnng anuary 1,1955, the rent for the th and
6th years s receved n 195 , the amount of the rent for the th year
s short-perod prepad ncome and the amount of the rent for the-
6th year s ong-perod prepad ncome. owever, f n such e ampe
the ease were to begn on anuary 1, 1957, the rent for the th year
woud aso be ong perod prepad ncome snce the th year woud
fa more than 5 years after 195 , the year of recept.
Sec. 1. 52-5. Manner of Obtanng Consent for Dfff.rf.nt
Treatment of Prepad Income. ta payer may, wth the consent
of the Commssoner, ncude prepad ncome n gross ncome n such
proportons, and for such ta abe years, as are specfed n the consent.
The request for consent, n the case of prepad ncome to whch sec-
ton 52(a) (2) or 52(b) appes, sha be made to the Commssoner
not ater than 30 days after the cose of the ta abe year n whch such
prepad ncome s receved. In the case of a request for consent
descrbed n secton 52(a)(1), the request sha be made to the
Commssoner not ater than 30 days after the cose of the ta abe year
n whch the change n the perod of the abty became known.
owever, f the perod descrbed above for the fng of the request
e pres ess than 90 days after the promugaton of these reguatons
under secton 52, the ta payer may fe the request for consent not
ater than 90 days after the promugaton of such reguatons. The
request sha contan both a detaed recta of the crcumstances upon
whch the ta payer bases hs request for a method of aocaton df-
ferent from that provded n these reguatons under secton 52 and
a the nformaton necessary for the Commssoner to determne
whether the proposed method of aocaton woud be proper and, f
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57 52.
so, to what ta abe years and n what amounts such aocatons shoud
be made. The request for consent shoud be drected to the Comms-
soner of Interna Revenue, Washngton 25, D. C. Such permsson
w be granted by the Commssoner ony n cases where t s shown
to hs satsfacton that a dfferent method of treatng prepad ncome
s proper.
Sec. 1. 52-0. Treatment of Prepad Income Wheke Ta payer s
Labty Ceases. If the abty of the ta payer ends, then so much
of the prepad ncome as was not ncudbe n gross ncome for pre-
cedns ta abe years sha be ncuded n the gross ncome of the
Ta payer for the ta abe year n whch the abty ends. See sec-
ton 381(c) (7) for rues appcabe to the treatment of prepad ncome
n the case of certan corporate acqustons. If an ndvdua ta -
paver des or a ta payer oter than an ndvdua goes out of e stence,
the amount deferred under secton 52 and not prevousy ncudbe
n hs gross ncome sha, notwthstandng the provsons of secton
51(b), be ncuded n hs gross ncome for the ta abe year n whch
such event occurs. Smary, when a partnershp termnates such
amount sha be ncuded n gross ncome for the year of termnaton
of the partnershp.
Sec. 1. 52-7. ecton of enefts. (a) In genera. (1) n
eecton under secton 52 sha be appcabe to a prepad ncome (of
the trade or busness for whch the eecton s made) whch s receved
n the ta abe year of the eecton and a subsequent ta abe years.
Such eecton sha not appy to any prepad ncome receved before
the ta abe year for whch the eecton s made, even though the
amounts w not be earned unt after such year. The ta payer may
eect to ncude n hs gross ncome for the ta abe year of recept a
prepad ncome wth respect to whch the abty s to end wthn 12
months of ts recept, f he fes a statement to that effect at the tme
he makes hs eecton under secton 52. In such a case ths treatment
sha be consstenty foowed.
(2) n eecton under secton 52 sha be bndng for the ta abe
year for whch made and a subsequent ta abe years uness the con-
sent of the Commssoner s obtaned to change such method of treat-
n prepad ncome. See secton 6 and the reguatons thereunder.
(3) No eecton sha be permtted wth respect to a trade or bus-
ness f the cash recepts and dsbursements method of accountng s
used n computng ta abe ncome or f such method s used, under
a combnaton of methods, n reportng tems of gross ncome for
such trade or busness for ncome ta purposes.
( ) If the ta payer ceary evdences a bona fde ntent to compy
wth the provsons of secton 52 and the reguatons thereunder,
hs eecton under that secton w not be nvadated by:
() s faure to take certan tems of prepad ncome nto
account n accordance wth the provsons of secton 52 and these
reguatons
() s faure correcty to aocate prepad ncome n accord-
ance wth such provsons or
() s mproper deferra of tems to whch secton 52 does
not appy.
_ (b) Manner of wakng eecton not requrng consent. The eec-
ton under secton 52 may be made wthout the consent of the Com-
mssoner f made for the 1st ta abe year begnnng after December
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52. 58
31, 1953 and endng after ugust 16, 195 n whch there s recevec
prepad ncome of the partcuar trade or busness for whch th
eecton s made. The eecton must be made not ater than the tm
prescrbed by aw for fng the return for such ta abe year (ncud
ng e tensons thereof). The eecton sha be made n a statemen
attached to the ta payer s return for the 1st ta abe year to whc
the eecton s appcabe. The statement sha contan the nforma
ton requred by paragraph (t).
(c) ecton requrng consent. (1) If a ta payer does not eed
under paragraph (b) he may eect the benefts of secton 52 for h
2nd ta abe year begnnng after December 31,1953, and endng afte
ugust 16,195 , provded that on or before une 30, 1955, he notfes
the Commssoner of Interna Revenue, Washngton 25, D. C, of hs
ntenton to make such eecton. The notfcaton sha state that th
ta payer has not eected the benefts of secton 52 for hs 1st ta abh
|ear begnnng after December 31, 1953, and endng after ugust 16
195 , but desres to eect the benefts of such secton for the ne t suc-
ceedng ta abe year. The notfcaton sha be n trpcate, sha
dentfy the trade or busness to whch the eecton s to appy, sha
show the name and address of the ta payer and the dstrct n whc
the return of the ta payer s to be fed. In such a case the ta payer
notfcaton w be treated as an eecton to have the benefts of sec
ton 52 appy to such ta abe year and to a subsequent ta abk
years. copy of the notfcaton w be stamped wth the approva
of the Commssoner and returned to the ta payer. Such copy, to-
gether wth a statement contanng the nformaton requred by para-
graph (d) sha be attached to the return for the 1st ta abe year tc
whch the eecton appes.
(2) In the event that a ta payer does not make an eecton unde
paragraph (b) or subparagraph (1) of ths paragraph, he may, af
a ater date, eect the benefts of the provsons of secton 52 on|
f he obtans the consent of the Commssoner. In such a case, a wrt-
ten request for consent sha be made to the Commssoner not ate
than 90 days after the begnnng of the 1st ta abe year for whch
the eecton s appcabe or 90 days after the date of promugaton
of the reguatons under secton 52, whchever s ater. Such request
sha contan the nformaton requred by paragraph (d).
(d) Informaton requred. The statement or request fed under
paragraph (b) or (c) of ths secton sha set forth the foowng:
(1) The name and descrpton of each trade or busness for
whch the eecton s to appy
(2) decaraton that the eecton s ntended to appy to a
prepad ncome of the trade or busness
(3) The method of accountng used by the ta payer n such
trade or busness
( ) descrpton of each type of prepad ncome of such trade
or busness, the proposed method of aocaton, and the bass
therefor
(5) Whether a prevous eecton under the provsons of sec-
ton 52 has been made for such trade or busness and, f so, for
what ta abe years such eecton was n effect and
(6) The name and descrpton of each trade or busness, f
any, for whch the eecton does not appy.
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59 52.
Sec. 1. 52-8. Defntons (a) Prepad ncome. The term pre-
pad ncome means any amount (ncudbe n gross ncome) whch
s receved n connecton wth, and s drecty attrbutabe to, a
abty whch e tends beyond the cose of the ta abe year n whch
such amount s receved. owever, amounts whch represent recepts
for goods or servces or for the use of property to have been provded
or furnshed durng or pror to the ta abe year of recept are not
prepad ncome. The term may ncude, for e ampe, amounts re-
wved n advance for rents and warehouse fees and amounts receved
from the sae of tckets, car tokens, subscrptons, cub dues, and serv-
ce coupons and contracts. Such term docs not ncude any ncome
treated as a gan from the sae or other dsposton of a capta asset.
b) Labt/. The term abty means a abty to render
servces, furnsh goods or other property, or aow the use of property.
or e ampe, an appance servce contract s a abty to render
servces for the purposes of secton 52 f the contract s a separate
transacton for whch a charge s made and whch s entered nto
at the opton of the purchaser. The term does not ncude a abty
under a warranty the consderaton for whch s, n effect, ncuded
n the seng prce of a product.
(c) Recept of prepad ncome. or the purposes of secton 52,
prepad ncome sha be treated as receved durng the ta abe year
for whch t woud be ncudbe n gross ncome under secton 51
and the reguatons thereunder (determned wthout regard to secton
52).
S C. C2. R S R S O . STIM T D r S S, TC.
(n) Genera Rue. In computng tn abe ncome for the ta abe
year, there sha be taken nto account (n the dscreton of the Secre-
tary or hs deegate) a reasonabe addton to each reserve for estmated
e penses to whch ths secton appes.
(b) d|ustments WhekeReseuve ecomes cessve. If t s deter-
mned that the amount of any reserve for estmated e penses to whch
ths secton appes s (as of the cose of the ta abe year) e cessve, then
(under reguatons prescrbed by the Secretary or hs deegate) such
e cess sha be taken nto account n computng ta abe Income for the
ta abe year,
c) stmated penses to Whch Ths Secton ppes
(1) ecton of benefts. Ths secton sha appy to estmated
e penses f and ony f the ta payer makes an eecton under ths
secton wth respect to the trade or busness to whch such e penses
are attrbutabe. The eecton sha be made n such manner as the
Secretary or hs deegate may by reguatons prescrbe. No eecton
may be made wth respect to a trade or busness f n computng
ta abe ncome the cash recepts and dsbursements method of
accountng s used wth respect to such trade or busness.
(2) Scope of eecton. n eecton made under ths secton sha
appy to a estmated e penses attrbutabe to the trade or busness.
(3) When eecton may be made
( ) Wthout consent. ta payer may, wthout the consent
of the Secretary or hs deegate, make an eecton under ths
secton for hs frst ta abe year (1) whch begns after Decem-
ber 31, 1953, and ends after the date on whch ths tte s
enacted, and () for whch there are estmated e penses attrb-
utabe to the trade or busness. Such an eecton sha be made
not ater than the tme prescrbed by aw for fng the return
for such year (ncudng e tensons thereof).
( ) Wth Consent. ta payer may, wth the consent of the
Secretary or hs deegate, make an eecton under ths secton at
an/ tme.
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52. 60
(d) stmated pense Defned
() Genera bue. or purposes of ts secton, the term est-
mated e pense means a deducton aowabe by ths subtte
( ) Part or a of whch woud (hut for ths secton) be
requred to be taken Into account for a subsequent ta abe year
( ) Whch s attrbutabe to the ncome of the ta abe year
or pror ta abe years for whch an eecton under ths secton s
In effect and
(C) Whch the Secretary or hs deegate s satsfed can be
estmated wth reasonabe accuracy.
(2) ceptons. The term estmated e pense does not n-
cude
( ) ny deducton attrbutabe to ncome taken nto account
In computng ta abe ncome for tn abe years precedng the
frst ta abe year for whch the eecton s made
( ) ny deducton attrbutabe to prepad ncome to whch
secton 52 appes by reason of an eecton made under such
secton by the ta payer: or
(C) ny deducton aowabe under secton 160 (reatng to
bad debts).
(e) Speca Rue fob Deductons ttrbutabe to Perod kfore
ecton. ny deducton attrbutabe to ncome taken nto account n
computng ta abe ncome for tn nbe yrars precedng the frst ta abe
year for whch the eecton s made sha be aowabe n the same manner
and to the same e tent as f ths secton had not been enacted.
Sec. 1. 62-1. Reserves for stmatng penses (a) In ger
era. (1) Ordnary, n computng ta abe ncome e penses ar
not deductbe for a ta abe year pror to the ta abe year n whc
pad or ncurred, or pad or accrued, dependng upon the ta payer1
method of accountng. owever, secton 02 permts a ta payer,
the dscreton of the Commssoner, to deduct a reasonabe addton t
a reserve for certan e penses (desgnated as estmated e penses)
whch, n the opnon of the Commssoner, can be estmated wt.
reasonabe accuracy. The genera purpose of secton 62 s to brn
ta accountng more cosey nto harmony wth generay accepte
accountng prncpes t s not ntended to permt ta payers to deduc
an addton to a reserve for estmated e penses n any ta abe yea
uness such treatment woud be proper for such year under the tas
payer s method of accountng. The eecton under secton 02 ma
be made wth respect to any trade or busness of the ta payer provder
that the cash recepts and dsbursements method of accountng s nc
used n computng the ta abe ncome of such trade or busness, am
the eecton sha appy to a estmated e penses of such trade o
busness.
(2) Secton 6 provdes that ta abe ncome sha bs compute
under the method of accountng on the bass of whch the ta paye
reguary computes hs ncome n keepng hs books. Secton 0:
provdes a specfc method of accountng and, accordngy, the book
of the ta payer must be kept n accordance wth such method f ta
abe ncome s to be computed under the method so eected. In com
putng ta abe ncome, no amount sha be taken nto account wt
respect to estmated e penses under secton C2 uness a reserve there
or has been estabshed and s propery recorded on the reguar book
of account whch are used n computng the ta payer s ncome and o
the bass of whch the ta payer prepares hs fnanca statements (suc
as reports to credtors, stockhoders, etc.). If a ta payer coses suc
books for the ta abe year wthout makng the necessary entre
thereon to estabsh and record the reserve, and ssues hs fnanca
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61 52.
statements on the bass of the books as so cosed, any such entres
made thereafter w not be deemed to meet the requrements of the
precedng sentence wth respect to such ta abe year however, ths
rue s not appcabe n the case of a ta payer who has cosed hs
ooks and ssued fnanca statements for the ta abe year before
anuary 2 ,1955, f he makes the necessary entres before makng the
eecton under secton 62(c) (8) ( ) and secton 1. 62- (a). In the
case of a ta pav er (such as a reguated pubc utty defned n secton
1503(c)) whch s requred by the rues of a governmenta agency to
mantan ts books n accordance wth a method of accountng dffer-
ent from that permtted by secton G2, the method of accountng
permtted by secton 62 may be refected n au ary records whch
sha be kept wth, and reconced wth, the ta payer s reguar books.
(3) or appcabe defntons, see secton 62(d) and secton
1. 62-5.
(b) Reasonabe addtons. (1) Whether an addton to a reserve
for estmated e penses s reasonabe sha be determned n each par-
tcuar case n the ght of the pertnent facts known at the cose of
the ta abe year. mong such pertnent facts to be consdered s the
e perence of the ta payer. owever, n cases where the ta payer
has no such e perence or hs e perence s nadequate, the e perence
of a ta payer or group of ta payers n a smar trade or busness
operatng under smar condtons may be used f the ta payer es-
tabshes to the satsfacton of the Commssoner that such e perence
s representatve of the ta payer s busness. In case actua e penses
prove to be more or ess than those estmated n arrvng at an add-
ton to the reserve for pror years, the amount of the e cess or nade-
quacy n the e stng reserve sha be refected n the determnaton of
a reasonabe addton for the current ta abe year.
(2) ta payer camng deductons on account of addtons to
reserves for estmated e penses sha, wth respect to each reserve for
estmated e penses, attach to hs ta return for the ta abe year a state-
ment dscosng a summary of hs e perence wth respect to such
e penses for the ta abe year and the four precedng ta abe years,
Ordnary, the ta payer s e perence for such a perod w be an
acceptabe bass for computng the addton to the reserve. If, how-
ever, the ta payer s e perence does not e tend over such perod, the
statement shoud dscose that fact and gve a summary of the ta -
payer s e perence wth respect to such e penses. Ths statement sha
ncude the foowng nformaton for the ta abe year and each of
such precedng ta abe years: () a descrpton of each e pense, ()
ta abe ncome (oss), () the amount added to the reserve, (v) the
amount charged aganst the reserve, (v) the baance n the reserve
sof the end of the ta abe year, (v) the amount deducted from n-
come for such e penses n ta abe years n whch a reserve was not
mantaned, and (v) the name and amount of the tem to whch the
wperence rato s apped n determnng the amount of the reason-
abe addton, such as credt saes, net saes, gross ncome, etc.
(3) The foowng e ampe w serve to ustrate the provsons
of ths paragraph:
ampe. ta payer, usng an accrua method of accountng, who
ses appances sub|ect to a warranty, eects to deduct addtons to a
reserve for e penses whch he estmates w be necessary to fuf hs
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52.
62
obgaton under the warranty on appances sod durng 195 . The
ta payer has not, pror to the eecton, mantaned such a reserve on
hs nooks. The statement attached to hs return shows:
ppance warranty e penses
Ta abe year
Net saes
Ta abe
ncome
ddton to
reserve
Charges to
reserve
aance n
the reserve
etna e -
penses
1950
100, 000
110,000
125, 000
150, 000
15, 000
16,000
18,000
17, 000
90(
1951
1, 101
1952
1, 5(
1953
1, 55C
195 .
165, 000
20, 000
1 1, 650
700
950
f 70C
80C
Totas
650, 000
6, 50(1
1 Snce te tota of actua e penses for the most recent 5 years e perence amounts to 1 percent of the mos
recent 6 years net saes, a reasonabe addton to the reserve for 1U5 woud be 1 percent o( 165,000 or 1,650,
The amount deductbe n 195 s 2, 50, composed of the addton to the reserve of 1,660 pus 800 actua
e pense attrbutabe to saes of years pror to 195 (aowabe wthout regard to ths secton).
ctua e pense appcabe to 195 saes.
ppcabe to saes of years pror to 195 .
Whe n ths e ampe net saes have been used as a bass upon whch
the addton to the reserve s cacuated, t shoud be understood that
other tems may be appcabe under other crcumstances and there-
fore such tems shoud be substtuted where approprate.
( ) If the ta payer has no e perence wth ths type of e pense, the
statement sha ncude a compete descrpton of the bass used n
computng the addton to the reserve. In any event, the addton to
the reserve s sub|ect to the approva of the Commssoner upon
subsequent e amnaton of the return.
(5) In any case, the statement and accompanyng data sha set
forth for the ta abe year such nformaton as s necessary n order to
estabsh ceary that () the reserve s one for whch an addton s
aowabe under secton 62 n computng ta abe ncome, () the
amount of the addton s reasonabe, and () the amount of the
reserve at the end of the ta abe year s not e cessve. The reserves to
whch secton 62 appes sha be segregated from any reserves whch
may have been estabshed by the ta payer for ta abe years pror to
the ta abe year for whch the eecton under that secton s e ercsed.
Sec. 1. 62-2. d|ustments Where Reserve ecomes cessve.
In any case n whch a reserve for estmated e penses as of the cose of
any ta abe year s determned to be e cessve, such e cess sha be
taken nto account n computng the ta abe ncome for the ta abe
year for whch such determnaton s made. or e ampe, f for the
ta abe year endng December 31, 1056, t s determned by the Com-
mssoner that a reserve (ncudng a camed addton for the year
1956) s e cessve, such e cess sha be taken nto account n computng
ta abe ncome for the year 1956. In any case n whch t s deter-
mned that a partcuar reserve for estmated e penses s no onger
necessary, the amount of the reserve as of the cose of the ta abe year
for whch such determnaton s made sha be taken nto account n
computng the ta abe ncome for such year. Smary, n any case
n whch the use of reserves for estmated e penses s dscontnued,
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63 52.
the baance of each such reserve sha be ncuded n ta abe ncome
for the year of change.
Sec. 1. 62-3. -ecton of enefts. (a) The eecton referred
on secton 1. 62-1 sha appy to a estmated e penses attrbutabe
to the trade or busness to whch the eecton s appcabe both for
the ta abe year for whch the eecton s made and for a subsequent
fc abe years uness a change to a dfferent method s authorzed by
the Commssoner under the provsons of secton 6. owever, the
e ecton does not appy to any estmated e penses whch are attrbut-
abe to prepad ncome deferred at the cose of the ta abe year under
the provsons of secton 52. If the ta payer s engaged n more
ran one trade or busness, he may make a separate eecton wth
espect to each such trade or busness.
(b) In no event sha an eecton under secton 62 be appcabe n
the computaton of ta abe ncome for any ta abe year precedng
the ta abe year for whch such eecton s made. Such an eecton
cannot be made for any ta abe year begnnng before anuary 1,195 ,
or endng before ugust 17,195 .
(c) No eecton sha be permtted wth respect to a trade or busness
f the cash recepts and dsbursements method of accountng s used n
computng ta abe ncome or f, under a combnaton of methods, the
cash recepts and dsbursements method s used n reportng tems
other than tems of gross ncome for ncome ta purposes for such trade
or busness.
(d) If the ta payer ceary evdences a bona fde ntent to compy
wth the provsons of secton 62 and the reguatons thereunder, hs
tecton under that secton w not be nvadated by:
() s faure to take nto account certan estmated e penses
n estabshng hs reserve
() s faure correcty to determne the amount of any such
reserve or addtons thereto, or
(h) s estabshment of a reserve for an e pense to whch
secton 62 does not appy.
Sec.1. 62- . Tme and Mannek ofMakng ecton. (a) Wth-
out consent. The eecton under secton 62 may be made wthout the
consent of the Commssoner f made for the frst ta abe year begn-
nng after December 31, 1953, and endng after ugust 16, 195 , n
whch there are estmated e penses of the partcuar trade or busness
for whch the eecton s made. The eecton must be made not ater
than the tme prescrbed by aw or fng the return for such ta abe
year (ncudng e tensons thereof). The eecton sha be made n a
statement attached to the ta payer s return for the frst ta abe year to
hch the eecton s appcabe. Such statement sha contan the n-
formaton requred by paragraph (c).
(b) Wth consent. (1) If a ta payer does not make the eecton
under paragraph (a) he may eect the benefts of secton 62 for hs
second ta abe year begnnng after December 31, 1953, and endng
fter ugust 16, 195 , provded that on or before une 30, 1955, he
otfes the Commssoner of Interna Revenue, Washngton 25, D. C.,
f hs ntenton to make such eecton. The notfcaton sha state
that the ta payer has not eected the benefts of secton 62 for hs frst
ta abe year begnnng after December 31, 1953, and endng after
ugust 16,195 , but desres to eect the benefts of such secton for the
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5 52.1
re t succeedng ta abe year. The notfcaton sha be n trpcate,
sha dentfy the trade or busness to whch the eecton s to appy,
sha show the name and address of the ta payer and the dstrct n
whch the return of the ta payer s to be fed. In such a case the
ta payer s notfcaton w be treated as an eecton to have the bene-
fts of secton 62 appy to such ta abe year and to a subsequent ta -
abe years. copy of the notfcaton w be stamped wth the ap-
prova of the Commssoner and returned to the ta payer. Such
copy, together wth a statement contanng the nformaton requred
by paragraph (c), sha be attached to the return for the frst ta abe
year to whch the eecton appes.
(2) In the event that a ta payer does not make an eecton under
paragraph (a) or subparagraph (1) of ths paragraph, he may, at a
ater date, eect the benefts of the provsons of secton 62 ony f he
obtans the consent of the Commssoner. In such a case, a wrtten re-
quest for consent sha be made to the Commssoner not ater than 90
days after the begnnng of the frst ta abe year for whch the eecton
s appcabe or 90 days after the date of promugaton of the regua-
tons under secton 62, whchever s ater. Such request sha contan
the nformaton set forth n paragraph (c).
(c) Informaton requred. The statement or request fed under
paragraph (a) or (b) of ths secton sha set forth the foowng:
(1) The name and descrpton of each trade or busness to
whch the eecton s to appy
(2) decaraton that the eecton s ntended to appy to a
estmated e penses of the trade or busness
(3) The method of accountng used by the ta payer n such
trade or busness
( ) descrpton of each type of estmated e penses of such
trade or busness
(5) Whether a prevous eecton under the provsons of secton
62 has been made for such trade or busness and, f so, for what
ta abe years such eecton was n effect: and
(6) The name and descrpton of each trade or busness, f any,
to whch the eecton does not appy.
Sec. 1. 62-5. stmated pense Defned (a) Genera rue.
or purposes of secton 62(a) (whch provdes that there sha be
taken nto account n the dscreton of the Secretary or hs deegate a
reasonabe addton to each reserve for estmated e penses to whch
secton 62 appes), the term estmated e pense means a deducton
whch:
(1) Is aowabe n commutng ta abe ncome
(2) Is attrbutabe to ncome of the ta abe year or of pror
ta abe years for whch an eecton under secton 62 s n effect
( ) In the opnon of the Commssoner can be estmated wth
reasonabe accuracy and
( ) Is a deducton, a part or a of whch woud be requred
e cept for secton 62, to be taken nto account for a subsequent
ta abe year.
(b) ceptons. The term estmated e pense does not ncude
any deducton whch s:
(1) ttrbutabe to ncome taken nto account n computng
ta abe ncome for ta abe years precedng the frst ta abe year
for whch the eecton s made
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65 52.
(2) ttrbutabe to ncome deferred as of the cose of the ta -
abe year under secton 52 or
(3) owabe under secton 166 reatng to bad debts.
(c) Rues for appcaton of paragraphs (a) and (b). (1) st-
mated e penses are those whch are attrbutabe to a transacton or
undertakng n the ta abe year or a pror ta abe year under whch:
() Income s reazed whch s ncudbe n ncome for the
ta abe year or a pror ta abe year and
() The ta payer s under a abty to perform servce, fur-
nsh goods, suppy property, or assume obgatons, whch neces-
state the makng or e pendtures by the ta payer durng a subse-
quent ta abe year.
(-2) penses attrbutabe to ncome of future years are not e -
penses for whch an addton to a reserve under secton 62 s aow-
abe. n e pendture to be made n a year subsequent to the ta abe
year s not attrbutabe to the ncome of the ta abe year or pror ta -
abe years merey because t s ncurred n order to restore operatng
or productve capacty whch has been dmnshed by operatons n the
ta abe year or pror ta abe years.
(3) The foowng e ampes ustrate the appcaton of para-
graphs (a) and (b) : If the ta payer, as an ncentve or nducement
to empoyment, offers vacatons for fathfu servce, amounts to be
e pended for such purpose may be estmated e penses wthn the
meanng of secton 62. Lkewse, f the ta payer, n order to pro-
mote saes or to encourage prompt payment for artces sod, agrees
to keep the product sod n repar for subsequent years or offers cash
dscounts, amounts set asde for these purposes may consttute est-
mated e penses. owever, that term does not ncude e penses for
mantenance and repars uness the ta payer s under a abty to
make repars or ncur mantenance e penses n a subsequent ta abe
year as a condton to the reazaton of ncome n the ta abe year.
or e ampe, f, as a condton to obtanng machnery under a renta
contract, the ta payer s requred to make certan perodc repars n
subsequent ta abe years, an addton to a reserve to meet the costs
thereof may be estmated e penses wthn the meanng of secton 62.
urther, the cost of repars to devery equpment used to fuf an
obgaton under the ta payer s warranty agreement to keep a product
n repar or n servce may be treated as an estmated e pense. On the
other hand, estmated costs of repars and mantenance to the ta -
payer s property may not be consdered estmated e penses to whch
the provsons of secton 62 appy uness such costs are undertaken
pursuant to a abty to another person as a condton to the reaza-
ton of ncome.
( ) Reserves created for genera undetermned contngences, for
ndefnte possbe future osses, for e penses and osses not reasonaby
reated to the ncome of the ta abe year or pror ta abe years, or for
upenses and osses that are beng contested or are n tgaton, can-
not ordnary be estmated wth reasonabe accuracy and may not be
the bass for addtons to reserves for estmated e penses. Wth re-
spect to tems nvovng reated reserves, ony one deducton aganst
ta abe ncome w be aowed. Secton 62 does not have the effect
of convertng nto deductbe e penses amounts whch woud not other-
wse be deductbe n computng ta abe ncome for subsequent ta -
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52.) 66
abe years. The provsons of secton 62 have no appcaton wth
respect to the renegotaton or prce redetermnaton of contracts.
(5) Secton C2 s not appcabe to any tem of deducton for
whch the Code provdes a specfc method of reportng, such as de-
ductons referred to n
() Secton 0 , reatng to contrbutons of an empoyer to an
empoyee s trust or annuty pan and compensaton under a de-
ferred payment pan,
() Secton 61(c), reatng to accrua of rea property ta es,
() Secton 17 , reatng to research and e permenta
e pendtures,
(v) Secton 175, reatng to so and water conservaton
e pendtures,
(v) Secton 615, reatng to e poraton e pendtures, and
(v) Secton 616, reatng to deveopment e pendtures.
(6) ampes of e penses whch ordnary meet the requrements
of ths secton are cash dscounts, product warrantes, saes returns
and aowances, freght aowances, quantty dscounts, vacaton pay,
and sef-nsurance by common carrers for abty for cargo dam-
ages. ampes of e penses whch ordnary do not meet the re-
urements of ths secton are nventory ad|ustments, sef-nsurance
or osses of the ta payer s own property, franchse and other ta es
eved for a perod subsequent to the ta abe year, and fees for pro-
fessona servces not yet rendered.
Sec. 1. 62-6. Speca Rue fok Deductons ttrbutabe to
Perod efore ecton. ny deducton attrbutabe to ncome taken
nto account n computng ta abe ncome for ta abe years precedng
the frst ta abe year for whch the eecton s made sha be aowabe
n the same manner, and to the same e tent, as f secton 62 had not
been enacted. or e ampe, merchandse returned n 195 , attrbutabe
to saes made n 1953 (the year pror to the eecton), w be taken
nto account n 195 as returned saes, even though for 195 the ta -
payer has eected to deduct a reasonabe addton to reserves for est-
mated e penses. See e ampe n secton 1. 62-1 (b) (3).
Sec. 1. 62-7. ampes. The foowng e ampes ustrate the
provsons of the reguatons under secton 62:
ampe (1). ta payer who has eected the benefts of secton
62 ses ar-condtonng unts whch he guarantees for 1 year. Ta -
payer s e perence ndcates that the average cost per unt of fufng
the guarantee s as foows:
Matera and parts . 8.00
Labor 12.00
Operatng overhead . 00
Tota 2 .00
or each unt sod 2 .00 sha be credted to the reserve account. s
e penses are actuay ncurred, the reserve sha be charged wth the
amount f these e penses. In no event w a doube deducton be per-
mtted. t the cose of each ta abe year the reserve sha be ad|usted
to refect changes n the actua cost e perence of the ta payer.
ampe (2). caendar year ta payer who has eected the bene-
fts of secton G2 estmates from past e perence that 1 percent of a
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G7
61.
saes w be returned for credt and that one-haf of the returns
appcabe to any month s saes w be returned durng that month
and one-haf durng the foowng month. Gross saes for the month
of December 195 totaed 1,000,000. Cost of December s saes amount
to 700,000. reasonabe addton to a reserve for saes returns as
of December 31, 1951, s cacuated as foows:
Gross saes for December 1,000,000
Cost of saes for December 700, OOO
Gross proft for December 300, ooo
Reasonabe addton (1 of of 300,000) 1,500
ampe (-5) . ta payer, engaged n the busness of transportng
property for hre, has eected the benefts of secton 02 for the ta abe
year 195 , and has estabshed a proper reserve for cams for property
damaged whe n transt. The reserve for property damage cams
at the begnnng of the ta abe year 1955 carres a credt baance of
15.000. s e perence shows that 1 percent of hs gross revenues
w be pad out to meet cams for property damaged whe n transt.
or the ta abe year 1955 he has gross revenue of 2,000,000.
easonabe addton to ths reserve for the ta abe year 1955 s 1
percent of 2,000,000 or 20,000. n anayss of the reserve for the
year 1955 s as foows:
aance n reserve at begnnng of year 15,000
Cams pad durng the year 17,000
cess of charges over credts (2,000)
Current year s addton aowed as deducton 20,000
aance at end of yenr 18_ ooo
(Ths Treasury Decson s ssued under the authorty contaned n
sees. 6, 52, 62 and 7805 of the Interna Revenue Code of 195 (G8
Stat. 151,152, 158, 917 26 U. S. C. 0, 52, 02 and 7805).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved une 8, 1955.
G. M. umphrey,
Secretary of the Treasury.
( ed wth the Dvson of the edera Regster une 9, 1055, 12:30 p. n.)
SU P RT C T L Y R O W IC D DUCTIONS T N
S CTION 61. G N R L RUL OR T L Y R O
D DUCTION
( so Secton 16 .) Rev. Ru. 55-152
( so Part II, Sectons 23(c), 3 Regua-
tons 118, Sectons 39.23 (c)-, 39. 3-2.)
ffectve for 195 and subsequent years, rea property ta es m-
posed by the State of Oho accrue, for edera ncome ta purposes,
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61. 68
on the frst day of anuary, annuay. See secton 5719.01 of Page s
Oho Revsed Code, nnotated, 195 edton, effectve October 13,
1953. G. C. M. 8218, C. . I -2. 106 (1930) -whch hods, n part,
that rea property ta es mposed by the State of Oho, sha accrue
as of the day precedng the second Monday of pr, s modfed ac-
cordngy wth respect to 195 and subsequent years. urther, as a
resut of the change n the en date of Oho rea property ta es, an
accrua bass ta payer, on a fsca year bass whch ncudes pr
12, 1953, as we as anuary 1, 195 , w have two accrua dates of
rea property ta es for such fsca year. Compare I. T. 0 3, G. .
1951-1, 22.
Rev. u. 55-369
Irrespectve of the ta abe year (or years) n whch retroactve
ncreases n ma pay are frst ncudbe n the gross ncome of a
ta payer, no deducton s accruabe wth respect to amounts of such
pay whch are potentay refundabe by the ta payer to the Post
Offce Department resutng from a proposed downward ad|ustment
of the retroactve ncreases, unt the ta abe year n whch the Cv
eronautcs oard ssues an order whch estabshes ts fna decson
as to the amount, f any, of such downward ad|ustment. or such
purposes, an order by the Cv eronautcs oard does not consttute
ts fna decson as ong as the order s the sub|ect of a bona fde
contest. Compare Rev. Ru. 1C9, C. . 1953-2,139.
( so Part II, Secton 3 Reguatons 118, Rev. Ru. 55- 26
Secton 39. 3-2.)
It was announced n Interna Revenue uetn 1955-6, 6, that
Revenue Rung 5 -608, C. . 195 -2, 8 (reatng to the accrua of
vacaton pay), was amended so that the rung woud be apped
ony to ta abe years endng on or after une 30,1955. The Revenue
Rung was amended to afford ta payers tme to consder ts effect,
partcuary for determnng whether to eect to estabsh reserves
for estmated e penses under secton 02 of the Interna Revenue
Code of 195 . On une 15, 1955, secton 62 was repeaed by Pubc
Law 7 (8 th Cong.), for a ta abe years to whch the 195 Code
appes. In order to afford ta payers a reasonabe tme to consder
the effect of the repea, partcuary for determnng whether the
accrua of vacaton pay w be aowabe under Revenue Rung 5 -
608, supra, such rung w be apped ony to ta abe years endng
after December 31, 1955.
ccordngy, the ast paragraph of Revenue Rung 5 -608, supra,
s hereby amended and as amended w read as foows:
I. T. 3956, supra, s hereby revoked, and G. C. M. 25261, supra, s modfed to
the e tent that t s nconsstent wth the vews e pressed heren. owever,
under the authorty of sectons 3791(b) of the 1939 Code and 7805(b) of the
195 Code, such revocaton and modfcaton w not be appcabe wth respect
to ta abe years endng pror to anuary 1, 1956.
Ths date has been e tended to uy 1, 1950. See nnouncement, I. . . 1035-52, p. 9.
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I 72.
S CTION 62. R S R S OR STIM T D
P NS S, TC.
26 C R 1. 62-1: Reserves for estmated
e penses.
Reguatons under the Interna Revenue Code of 195 . See T. D.
613 , page 12.
SU P RT D. IN NTORI S
S CTION 71. G N R L RUL OR IN NTORI S
( o Part IT, Secton 22 (c) Reguatons 118, Rev. Ru. 55-285
Secton 39.22(c)-2.)
In determnng gross ncome, for edera ncome ta purposes, the
use of nventores refectng the vaue at reta of merchandse on hand
at the begnnng and end of a ta abe year s not permtted. Such
method s not a recognzed method of nventory vauaton ether ac-
cordng to best accountng practce under secton 71 of the Interna
Revenue Code of 195 , or secton 22(c) of the Interna Revenue Code
of 1939 and the reguatons promugated under such 1939 Code
provson. . , ,
The nventory method referred to heren s not the same as the
ureta method descrbed n secton 39.22(c)-8 of Reguatons 118
whch s a recognzed method of appro matng cost of nventory f
propery adopted and consstenty used n determnng gross ncome.
S CTION 72. L ST-IN, IRST-OUT IN NTORI S
Rev. Ru. 55-309
Prce nde es for anuary 1955, pubshed by the ureau of Labor
Statstcs on March 8, 1055, for use by department stores empoy-
ng the reta nventory and the ast-n, frst-out nventory methods.
The foowng prce nde es for anuary 1955, pubshed by the
ureau of Labor Statstcs on March 8, 1955, for use by department
stores empoyng the reta nventory and ast-n, frst-out nventory
methods are accepted by the Interna Revenue Servce pursuant to
Treasury Decson 5605, C. . 19 8-1, 16, and Mmeograph 62 ,
C. . 1918 1, 21, for approprate appcaton to nventores for ta -
abe vears of 12 months ended December o, 19C and anuary 31,
1955. .
Inde es are gven on a natona bass for the store tota, for 20 ma|or
groups of departments, and for two speca group combnatons.
The store tota ncudes a departments n the store, both those sted
n the groups and those not specfcay sted, e cept for candy, foods,
quor, tobacco, and pants and wa paper. Contract departments
are aso e cuded.
ffectve -wth the uy 195 Department Store Inventory 1 rce
Inde es the revson program whch began n 1952 was competed.
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72,
70
The fna change, that of the necessary ad|ustments n the depart-
menta groupngs to make them conform wth the new departmenta-
zaton pan of the Controers Congress of the Natona Reta Dry-
Goods ssocaton, was ncorporated nto the uy 195 nde es.
These ad|ustments were mnor and had practcay no effect on nde
for the 20 departments.
The Controers Congress of the Natona Dry Goods ssocaton
has revsed ts system of numberng the departments n ts Manua
of Departmenta Merchandse Content for Departmentzed Stores.
or ta payers empoyng the new numberng system, tabe II shows
the department or departments to whch each of the 20 group nde es
s appcabe:
Tabe I. ureau of Labor Statstcs, department store nvert ory prce nde es,
by department groups
anuary 1M1-100I
Department groups
an. 105
an 1955
Percent
chance from
anuary 195
to anuary
UN
I. Pece goods
II. Domestcs and draperes
III. Women s and chdren s shoes
I . Men s and boys shoes
. Infants wenr
I. Women s underwear
II. Women s and grs hosery
III. Women s and grs accessores
I . Women s outerwear and grs wear
. Men s cothng
I. Men s furnshngs
II. oys cothng and furnshngs
III. ewerv
I . Notons -
. Toet artces and drugs
I. urnture and beddng
II. oor coverng
III. ousewares
I . Ma|or appances
. adus and teevson sets
Tota. Groups I-
Tota, Groups I-
Store tota
a .1
197.0
213.3
213. 1
170.2
172.5
173.7
170.1
ISO. 1
an.
201.3
203.2
16 .3
161.7
16 .0
211.
192.9
197.7
15 .3
157.0
I S. S
190.6
189.2
am. 7
189.6
215.3
213.0
1711.3
171.6
168.1
172.
177.7
a. 3
197.9
USL 7
163. 6
158.7
166. 1
a7.7
188.9
198 1
1 8.
1 2.
186.9
186.8
186.8
1.7
3.8
0.9
0
0.1
O.S
3.2
1.
1.3
0.
1.7
1.7
0.
1.9
1.3
1.8
2.1
0.2
3.8
9.3
1.0
2.0
1.3
Tabe II. Revsed codng of Controers Congress Departments
Revsed Department Groups Revsed Controers Congress Department
No.
No.
Name
I. Pece goods
II. Domestcs and draperes
III. Women s and chdren s shoes
I . Men s and boys shoes
. Infants wear
I. Women s underwear
II. Women s and grs hosery
III. Women s and grs accessores
11-00 Pece goods
15-00 ousehod te tes
6 11 Curtans, draperes and decora-
tor fabrcs
39-00 Women s and chdren s shoes
63-00 Men s and boys shoes
-12 Infants appare and furnture
36-00 Corsets and brasseres
38-00 Underwear and neggees
37-00 Women s and chdren s hosery
32-00 Neckwear and accessores
33-00 andbags and sma eathers
35-00 Women s and chdren s govca
and mttens
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71
11501.
Tabe II. Revsed codng of Controers Congress Departments Contnued
tt fft Department Groups Revsed Controers Congress Department
No.
Name
N o.
Name
I . Women s outerwear and grs
wear
. Men s cothng
I. Men s furnshngs
II. ovs cothng and furnshng
III. ewery and sverware
I Notons
. Toet artces and drugs
I. urnture and beddng
II. oor coverng
III. ousewares
I . Ma|or appances
. Rado and teevson seta
I. No separate nde computed
3 -00 Mnery
1-00 Coats and suts, women s, msses
and |unors
2-00 Dresses, women s, msses and
unors
5-00 Rousedresses, aprons, and unforms
3-00 ouses and sportswear
6-00 urs
-11 Grs and teen age appare
61-11 Men s cothng
or
51-1 Men s cothng
and
51-26 Men s sport cothng
51-12 Men s furnshngs
or
51-15 Men s furnshngs
and
51-27 Men s casua furnshngs
52-00 oys cothng and furnshngs
2 -00 ewery and sverware
12-00 Patterns
21-00 Notons, aces, trmmngs and
rbbons
25-00 rt needework
31-00 Umbreas
22-00 Toet artces and drug sundres
61-00 urnture and beds
62-00 Orenta rugs
63-00 Domestc foor coverng
65-00 Chna, gassware and gft shop
66-21 ousewares
67-00 Pctures, frames and mrrors
6 -12 Lamps and shades
66-12 Ma|or appances
68-00 Rado, teevson and records
69-00 Panos and musca nstruments
20-00 ooks and statonery
66-22 Wa paper and pant
71-00 ower shop
72-00 utomobe accessores
73-00 Pet accessores and pet shop
7 -00 Toys, sportng goods and cameras
75-00 Luggage
76-00 Candy
77-00 oods and groceres
78-00 resh and smoked meats
79-00 Lquor shop
81-00 Smoke shop
SU C PT R . MPT ORG NIZ TIONS
P RT I. G N R L RUL
S CTION 501. MPTION ROM T ON CORPOR -
TIONS, C RT IN TRUSTS, TC.
Rev. Ru. 55-230
n assocaton was organzed to guard the purty of the breed of
Wesh pones to promote nterest theren and to estabsh, mantan,
36 050 56 6
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501. 72
and pubsh authortatve records, regsters, and transfers of owner-
shp of that breed. Its actvtes consst of regsterng and man-
tanng records of pure bred Wesh pones, recordng transfers of
ownershp, and pubshng terature descrbng the Wesh pony for the
beneft of ts members or others nterested n mprovng or rasng
the breed. Membershp n the assocaton s open to any person, frm
or corporaton nterested n mprovng or rasng pure bred Wesh
pones. Its recepts are derved from membershp fees, regstratons
and transfers. pendtures are for operatng e penses and for
premums for assocaton-sponsored casses at a State far. No part
of the net ncome nures to the beneft of any member. Persons en-
gaged n rasng Wesh pones are consdered vestock producers
engaged n agrcutura pursuts. ed, the assocaton s entted to
e empton from edera ncome ta under the provsons of secton
501(c)(5) of the Interna Revenue Code of 195 as an agrcutura
organzaton.
Rev. Ru. 55-231
The M organzaton was ncorporated for the purpose of (1) mak-
ng known to the word the contents and meanng of certan books
wrtten by a desgnated author who was aso one of the ncorporators
of the organzaton and (2) acqurng property necessary to the opera-
ton and mantenance of centers, readng rooms, ecture has and
camps n furtherance of the dssemnaton of such wrtngs. The prn-
cpa actvty conssts of purchasng books of the desgnated author
and dstrbutng them to brares, educatona nsttutons and the
pubc. pendtures are made prncpay for the purchase of books
wrtten by the desgnated author. ed, that an organzaton whose
prmary purpose s to promote the crcuaton of books of one of ts
ncorporators and whose actvtes consst of purchasng such works
and makng them avaabe for pubc use, s not organzed and oper-
ated e cusvey for educatona purposes wthn the meanng of sec-
ton 501(c) (3) of the Interna Revenue Code of 195 or for any of
the other purposes provded theren.
( so Part II, Secton 101 (8) Reguatons Rev. Ru. 55-311
118, Secton 39.101(8)-1.)
oca assocaton of empoyees, the membershp of whch s mted
to empoyees of the M corporaton, operates a bus for the convenence
of ts members. The ncome of the assocaton s derved from bus
fares and s used to pay for the operaton of the bus. The bus s
operated prmary for the beneft of the members. No part of the
assocaton s earnngs s devoted to chartabe, educatona, or recre-
atona purposes. ed, the assocaton does not quafy for e emp-
ton from edera ncome ta as a oca assocaton of empoyees under
the provsons of secton 501(c) ( ) of the Interna Revenue Code of
195 , whch provson of aw corresponds to secton 101(8) of the
Code of 19o0. There s no other subsecton of secton 501(c) of the
G
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73 613.
135 Code, or of secton 101 of the 1939 Code, under whch the asso-
caton may quafy for e empton.
Rev. u. 55- 06
The M organzaton was ncorporated as a nonproft corporaton
for the purposes of recevng and nvestng funds and property and
for dstrbutng vountary and gratutousy sad funds and property,
together wth the ncome therefrom, soey to, or for the beneft of,
dependent wdows and chdren of pocemen or fremen who ose
ther ves n the ne of duty. The seecton of recpents and the
amounts dstrbutabe to them are determned n the absoute ds-
creton of Ms board of drectors. The organzaton s sources of
fnnds and property are derved from membershp dues, contrbutons,
and ncome from nvestments. cept for dsbursements for neces-
sary admnstratve e penses, such funds and property are e pended
soey for the purposes enumerated above. No part of the funds or
property sha nure to or for the beneft of any member of M. In
the event of dssouton, the funds and property sha be dstrbuted
to the Cty of N. ed, the M organzaton quafes for e empton
from edera ncome ta as a chartabe organzaton under the pro-
vsons of secton 501 (c) (3) of the Interna Revenue Code of 195 .
State nstrumentaty whch quafes for e empton under secton
M(c)(3) of the Interna Revenue Code. See Rev. Ru. 55-319,
page 119.
SU C PT R I.-N TUR L R SOURC S
P RT I. D DUCTIONS
S CTION G. LLOW NC O D DUCTION OR
D PL TION
The decson n the case of Unted States v. Cherokee rck Te
Company, 218 ed. (2d) 2 , does not affect the poston of the Serv-
ce wth respect to ordnary treatment processes n the case of brck and
te cay as set forth n Revenue Rung 5 -109, C. . 195 -1, 62. See
e .Ru. 55-2 , beow.
S CTION 613. P RC NT G D PL TION
( so Secton 611.) Rev. Ru. 55-2
( so Part II, Sectons 23(m), 11 Regua-
tons 118, Sectons 39.23(m)-, 39.11 -1.)
Wth respect to the manufacture of brck and te from brck
and te cay, ordnary treatment processes as set forth n secton
11 (b) ( ) ( ) of the Interna Revenue Code of 1030 (sec. 013(e)
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613. 7
of the Interna Revenue Code of 105 ) do not Incude transformng
the cay nto brck or te by modng machne, by burnng the unts
n kns, and by oadng the burnt brck and te for shpment. The
fact that the Government dd not appy for certorar n the case of
Unted Sates v. Cherokee rek Te Company. 218 ed. (2d) 2 ,
n no way represents an acceptance of the decson by the Interna
Revenue Servce.
dvce has been requested whether the decson of the Unted States
Court of ppeas for the fth Crcut n the case of Unted States v.
Cherokee rck Te Company, 218 ed. (2d) 2 w affect the
poston of the Interna Revenue Servce as set forth n Revenue Rung
5 -109, C. . 195 -1, G2, as to the ordnary treatment processes wth
respect to the manufacture of brck and te from brck and te cay
whch are to be ncuded wthn the meanng of secton 11 (b) ( ) ( )
of the Interna Revenue Code of 1939 and secton 013(c) of the In-
terna Revenue Code of 195 .
In the Cherokee rck Te Company case, affrmng the decson
of the court beow, the Court of ppeas hed that ordnary treatment
process normay apped to cay, n order to obtan the frst com-
mercay marketabe mnera product, ncude transformng the cay
nto brck or te by modng machne, by burnng the unts n kns,
and by oadng the burnt brck and te for shpment.
In Revenue Rung 5 -109, supra, the Interna Revenue Servce con-
sdered the processes nvoved n the manufacture of brck and te
and kndred products from shae and brck and te cay. It was spe-
cfcay hed that processes such as transformng cay nto brck by
e truson or modng machne, burnng unts n kns and oadng for
shpment or storage were not ordnary treatment processes as that
phrase s used n secton 11 (b)( )( ) of the 1939 Code (secton
613(G) ( ) of the 195 Code) to defne the term mnng .
Secton 613(b) (5) ( ) of the 195 Code, secton 11 (b) ( ) ( ) of
the 1939 Code) permts a percentage depeton aowance for mnes
and natura deposts of brck and te cay but not of brck and te
as such. The fact that a partcuar ta payer does not se the cay tc
others for brck but ses ony the competey manufactured brck
cannot transform manufacturng processes nto ordnary treatment
processes.
ccordngy, the Revenue Servce w adhere to the poston set
forth n Revenue Rung 5 -109 as to the processes propery ncudbe
n the term ordnary treatment processes wth respect to the manu-
facture of brck and te from brck and te cay for percentage depe-
ton purposes.
The fact that the Government dd not appy for certorar n the
Cherokee rck Te Company case does not represent an acceptance
of the decson by the Interna Revenue Servce. See aso Revenue
Rung 55-78, page 357, ths uetn, wheren t s hed that furnacng
or heatng n rotary kns, remova from the kns and coong, crushng
and screenng and oadng for shpment, are not ncudbe n the
ordnary treatment processes appcabe to the manufacture of ght-
weght aggregate from shae and sate.
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75 691.
SU C PT R . ST T S, TRUSTS, N ICI RI S, ND
D C D NTS
P RT 1. ST T S, TRUSTS. ND N ICI RI S
SU P RT C ST T S ND TRUSTS W IC M Y CCUMUL T INCOM O
W IC DISTRI UT CORPUS
S CTION 661. D DUCTION OR ST T S ND TRUSTS
CCUMUL TING INCOM OR DISTRI UTING CORPUS
( so Secton 662.) Rev. Ru. 55-286
( so Part II, Secton 162 Reguatons 118,
Secton 39.162-1.)
Under the terms of an rrevocabe trust agreement, the trustee s
requred to set asde a certan porton of the net ncome of the trust
n a separate fund and s authorzed to provde and mantan out of
the fund annutes and/or gfts for the use and beneft of such persons
empoyed by or connected wth the grantor s busness as the trustee
n hs uncontroed dscreton may determne and desgnate as deserv-
ng of the same. ed, payments made out of the fund are deductbe
under secton 661(a) (2) of the Interna Revenue Code of 195 (secton
162(c) of the Interna Revenue Code of 1939) n computng the ta abe
ncome of the trust sub|ect to the mtaton that the amount so deduct-
be when added to amounts otherwse deductbe under secton 661(a)
(1) and (2) of the Interna Revenue Code of 195 (sectons 162 (b)
nd (c) of the 1939 Code) cannot e ceed the dstrbutabe net ncome
of the trust. urther, the amounts so deducted by the trust sha be
ncuded n the gross ncome of the recpents to the e tent provded
n secton 662 of the Interna Revenue Code of 195 (secton 162 (b)
and(c) of the 1939 Code).
S CTION 662. INCLUSION O MOUNTS IN GROSS IN-
COM O N ICI RI S O ST T S ND TRUSTS
CCUMUL TING INCOM OR DISTRI UTING CORPUS
Payments made out of a fund whch has been set asde out of the
net ncome of an rrevocabe trust. See Rev. Ru. 55-286, above.
P RT II. INCOM IN R SP CT O D C D NTS
S CTION 691. R CIPI NTS O INCOM IN R SP CT
O D C D NTS
Rev. Ru. 55-229
ump sum payment to a edera Government empoyee upon
separaton from the servce for accumuated or accrued annua eave
represents saary or compensaton for servces rendered and s n-
cudbe n gross ncome for edera ncome ta purposes. See I. T.
30C9, C. . 19 9-2, 13. The death of such an empoyee and the
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871. 76
recept by hs wdow or other benefcary of such ump sum eave
payment does not change ts nature and dentty. See the ct of
ugust 3, 1950, 6 Stat. 395, 5 U. S. C. 61f, 61g. Therefore, where
such ncome s not propery ncudbe n the gross ncome of the
decedent for the ta abe perod n whch fas the date of the decedent s
death and the rght to receve the amount due s acqured by the wdow
or other benefcary, or by the decedent s estate the ump sum payment
s ncudbe n the gross ncome of the recpent n the ta abe year
receved, under the provsons of secton 091(a) of the Interna
Revenue Code of 195 .
SU C PT R . P RTN RS ND P RTN RS IPS
P RT I. D T RMIN TION O T LI ILITY
S CTION 706. T L Y RS O P RTN R ND
P RTN RS IP
Procedure to be foowed wth respect to changes by partnershps
and partners n the cases of ta abe years begnnng after pr 1,
195 , pendng ssuance of reguatons under the Interna Revenue
Code of 195 . See Rev. Ru. 55-10, page 7.
SU C PT R L. INSUR NC COMP NI S
P RT II. MUTU L INSUR NC COMP NI S (OT R T N LI OR M RIN OR
IR INSUR NC COMP NI S ISSUING P RP TU L POLICI S)
S CTION 822. D T RMIN TION O MUTU L INSUR-
NC COMP NY T L INCOM
Rev. Ru. 55-270
Capta oss deductons taken by mutua nsurance companes to
meet abnorma nsurance osses, provded by secton 822(c) (6) of the
Interna Revenue Code of 195 , must be computed on the bass of
actua osses pad reduced by actua (rather than e pected) rensur-
ance recoveres receved n the ta abe year.
SU C PT R N. T S D ON INCOM ROM SOURC S WIT IN
OR WIT OUT T UNIT D ST T S
P RT II. NONR SID NT LI NS ND OR IGN CORPOR TIONS
SU P RT . NONR SID NT LI N INDI IDU LS
S CTION 871. T ON NONR SID NT LI N
INDI IDU LS
Request by a Unted ngdom bank for data appeang on the Cor-
poraton Income Ta Return, orm 1120, fed by a domestc corpo-
raton. See Rev. Ru. 55-9, page G75.
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77 881.
S CTION 872. GROSS INCOM : CLUSIONS
( so Secton 883.) ev. Ru. 55- 07
( so Part II, Sectons 212, 231 Reguatons
118, Sectons 39.212-2,39.231-3.)
The recproca e empton requrements of sectons 872(b) and 883
of the Interna Revenue Code of 195 (sectons 212(b) and 231(d)
of the Interna Revenue Code of 1939) are not satsfed by enezuea
snce that country now as an ncome ta aw n effect whch provdes
for the mposton of n ta on transportaton companes but does not
grant an e empton to ctzens of the Unted States nonresdent n
that country or to corporatons organzed n the Unted States.
Mmeograph 1 8, C. . III-1, 87 (193 ), whch hods that
enezuea satsfed the equvaent e empton requrements of secton
212(b) and 231(b) of the Revenue ct of 1932, snce at that tme
enezuea mposed no ncome ta , s hereby modfed to the e tent
that t s nconsstent wth the vews e pressed heren.
SU P RT . OR IGN CORPOR TIONS
S CTION 881. T ON OR IGN CORPOR TIONS NOT
NG G D IN USIN SS IN UNIT D ST T S
I so Secton 882.) Rev. Ru. 55-182
( so Part II, Secton 231
Reguatons 118, Secton 39.231-1.)
Canadan mutua nvestment company, composed substantay
of stockhoders who are resdents of the Unted States, operates as
an open-end management nvestment company. It s restrcted to
nvestments whch derve no ncome from sources wthn the Unted
States. It mantans no offce n the Unted Stntes and Its trans-
actons n the Unted Staes are effected ony through a resdent
broker, commsson agent or custodan. ed, such mutua nvest-
ment company consttutes a foregn corporaton not engaged n trade
or busness wthn the Unted States, ta abe under the provsons
of secton 881(a) of the Interna Revenue Code of 195 ony on
amounts receved from sources wthn the Unted States.
dvce has been requested regardng the ta abty of a Canadan
marta nvestment company whch was formed under the Companes
ct of Canada and has e|ected to quafy as a nonresdent owned
nvestment corporaton, pursuant to secton 63( ) of the Canadan
Income Ta ct. In order to retan such cassfcaton, a mnmum
of 95 percent of ts outstandng stock must at a tmes be hed by
stockhoders other than Canadan resdents.
The offer and sae of the nvestment company s shares to resdents
of the Unted States was made pursuant to the rues of the Securtes
and change Commsson and the company s sub|ect to the ap-
pcabe provsons of the Investment Company ct of 19 0.
The company does not dea n ts own stock, t does not have an offce
n the Unted States and ts shares are ssued to nvestors ether
a) through ts offcers or empoyees at ts offce n Canada or (b)
throuch underwrters and deaers n the Unted States and ngand.
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5 881. 78
The common shares ssued are, at the opton of the hoder, sub|ect to
repurchase for canceaton by the company at a prce based on net
asset vaue at the tme of repurchase. The shares of common stock
repurchased are canceed and retred and are not to be ressued or
resod by the company. In accordance wth the provsons of the
Companes ct of Canada the company w notfy the Secretary of
State of Canada, perodcay, of the repurchase for canceaton of
ts common shares and ts authorzed capta w be reduced to refect
the repurchase and canceaton of the shares sub|ect to confrmaton
by the Canadan Secretary of State.
The company s a mutua nvestment company and ts nvestment
portfoo s restrcted at a tmes to securtes of Canadan corpora-
tons, Canadan Government provnca and muncpa obgatons,
Canadan nvestments generay and securtes of corporatons whch
derve no ncome from sources wthn the Unted States. Purchases
and saes of ts portfoo securtes made n Canada or other foregn
countres are made n the estabshed Canadan or other foregn
markets. Purchases and saes of ts portfoo securtes whch are
made wthn the Unted States are, n a cases, effected through an
ndependent broker, commsson agent or custodan. Its ncome s
derved soey from nterest and dvdends and from gans from the
dsposton of securtes and other nvestments n ts nvestment port-
foo.
The offces of the company are mantaned n Canada where a
ma|or decsons wth respect to ts poces are made. reguar
meetngs of the board of drectors ana of the stockhoders are hed n
Canada. n occasona speca meetng of the board of drectors may
be hed wthn the Unted States n order to accommodate those drec-
tors who are Unted States ctzens and resdents.
Secton 881 of the Interna Revenue Code of 195 provdes that a
foregn corporaton not engaged n trade or busness wthn the Unted
States s sub|ect to edera ncome ta ony wth respect to f ed or
determnabe annua or perodca ncome from sources wthn the
Unted States as determned under secton 861 of the Code. See sec-
ton 231 of the Interna Revenue Code of 1939 and secton 39.231-1 (b)
of Reguatons 118. Ta abe ncome does not ncude profts derved
from the effectng of transactons n the Unted States n stocks, secu-
rtes, or commodtes through a resdent broker, commsson agent, or
custodan or profts derved from the sae wthn the Unted States of
persona property or rea property ocated theren. Secton 39.231-
2(c) of Reguatons 118 (appcabe under the Code of 195 by vrtue
of T. D. 6091, C. . 195 -2, 7) states that a foregn corporaton
whch effects transactons n the Unted States n stocks, securtes, or
commodtes (ncudng hedgng transactons) through a resdent
broker, commsson agent, or custodan s not merey by reason of
such transactons consdered as beng engaged n trade or busness
wthn the Unted States whch woud cause t to be cassed as a res-
dent foregn corporaton.
In the case of The Scottsh mercan Investment Co., Ltd., v. Com-
mssoner, 12 T. C. 9, t s hed that a foregn nvestment corporaton
whch made a decsons as to purchase and sae of securtes and
nvestment poces n the home offce n Scotand, handed a transac-
tons n securtes drecty by the home offce through resdent brokers,
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79 ( 9o.
and mantaned an offce n the Unted States ony for the purpose of
mantanng records, coectng dvdends, fng reports to the home
offce, and otherwse performng cerca and routne servces for the
home offce, was not engaged n busness wthn the Unted States.
In vew of the foregong, t s hed that a Canadan mutua nvest-
ment company consttutes a foregn corporaton not engaged n trade
or busness n the Unted States, ta abe under the provsons of sec-
ton 881(a) of the Interna Revenue Code of 195 ony on amounts
receved from sources wthn the Unted States.
Ths rung has no effect upon any queston concernng the ta aton
of the stockhoders of the nvestment company.
S CTION 882. T ON R SID NT
OR IGN CORPOR TIONS
Canadan mutua nvestment company composed substantay of
stockhoders resdent n the Unted States. See Rev. Ru. 55-182,
page 77.
Determnaton of whether a Canadan corporaton has a permanent
estabshment n the Unted States as defned n the ncome ta con-
venton between the Unted States and Canada, page 62 of ths u-
etn. See Rev. Ru. 55-282, page 63 .
S CTION 883. CLUSIONS ROM GROSS INCOM
quvaent e empton requrement wth respect to enezuea. See
Rev. Ru. 55- 07, page 77.
P RT III. INCOM ROM SOURC S WIT OUT T UNIT D ST T S
SU P RT . OR IGN T CR DIT
S CTION 901. T S O OR IGN COUNTRI S ND O
POSS SSIONS O UNIT D ST T S
Rev. Ru. 55-383
Inda satsfes the smar credt requ rement o secton 001(b) (3)
of the Interna Revenue Code of 195 .
The Interna Revenue Servce has been requested to consder whether
Inda s a country whch satsfes the smar credt requrements of
secton 901(b) (3) of the Interna Revenue Code of 195 .
Secton 901(b) (3) of the Interna Revenue Code of 195 provdes
for the aowance of a credt for ncome ta es pad or accrued durng
the ta abe year to any foregn country by an aen resdent of the
Unted States or Puerto Rco provded the foregn country of whch
the aen resdent s a ctzen or sub|ect, n mposng such ta es, aows
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911. 80
a smar credt to ctzens of the Unted States resdng n such
country.
Secton 9 D of the Indan Income Ta Law, as submtted to the
Interna Revenue Servce for consderaton n ths matter, provdes
as foows:
(1) If any person who Is resdent n the ta abe terrtores In any year proves
that, n respect of hs Income whch accrues or arses durng that year wthout
the ta abe terrtores (and whch s not deemed to accrue or arse n the ta abe
terrtores), he has pad n any country, wth whch there s no recproca ar-
rangement for reef or avodance of doube ta aton, ncome ta , by deducton
or otherwse, under the aw n force n that country, he sha be entted to the
deducton from the Indan ncome ta pnynbe by hm of a sntn cacuated on
such douby ta ed ncome at the Indan rate of ta or the rate of ta of the sad
country, whchever s the ower.
Snce secton 9 I) of (he Indan Income Ta Law provdes, sub|ect
to certan condtons and mtatons substantay smar to those n
secton 90 (a) of the Code, for the aowance as a credt aganst ncome
ta es whch accrue or arse wthn the ta abe terrtores of Inda,
of ncome ta es pad to foregn countres by any person who s a res-
dent of such terrtores. Inda satsfes the smar credt requrements
of secton 901 (b) (3) of the Code.
S CTION 902. CR DIT OR CORPOR T STOC OLD R
IN OR IGN CORPOR TION
Rev. Ru. 55-312
Secton 902(d) of the Interna Revenue Code of 195 provdes for
the treatment to be accorded specfed dstrbutons of property re-
ceved by a domestc corporaton from a whoy-owned foregn cor-
poraton, n eu of the genera treatment of property dstrbutons
as provded for n secton 301 of the Code. The term property as
used n secton 301 s defned n secton 317(a) of the Code as spe-
cfcay ncudng money. Consequenty, the term property as
used n secton 902(d) of the Code s deemed to ncude money.
SU P RT . RN D INCOM O CITIZ NS O UNIT D ST T S
S CTION 911. RN D INCOM ROM SOURC S WIT -
OUT T UNIT D ST T S
( so Part II, Secton 11G Reguatons 118, Rev. Ru. 55-171
Secton 39.116-1.)
Income ta abty of Unted States ctzens resdent or physcay
present n foregn countres for ta abe years begnnng on or after
anuary 1, 1951. Rev. u. 2 1, C. . 1053-2, 2, superseded.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to supersede Revenue Rung
291, C. 15. 1953-2, 2 (pubshed aso as a pamphet entted Income
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81 911.
Ta Gudes for Unted States Ctzens broad) and n conformty
wth the Interna Revenue Code of 195 to ncude addtona nfor-
maton for use n provdng assstance and gudance to Unted States
ctzens, resdng or physcay present n foregn countres, n the
preparaton of ther edera ncome ta returns.
Sec, 2. Scot e.
The nformaton set forth heren reates ony to the ta probems
pecuar to Unted States ctzens resdng or physcay present n
foregn countres for ta abe years begnnng on or after anuary 1,
1951, and s ntended to suppement nformaton ssued by the Inter-
na Revenue Servce for ta payers generay. Therefore, n the
preparaton of ther edera ncome ta returns and other forms, such
ctzens shoud foow the nstructons ssued n connecton wth the
forms nsofar as they are appcabe. The gudes set forth n ths
Revenue Rung do NOT appy to (1) ta abe years begnnng pror
to anuary 1, 1951, e cept to the e tent herenafter noted (2) res-
dent aens temporary absent from the Unted States and (3)
ctzens performng cvan or mtary servces for the Unted States
or any agency or nstrumentaty thereof. resdent aen tem-
porary absent from the Unted States s, n genera, ta abe on n-
come derved from a sources. Compensaton for persona servces
performed by a ctzen as an empoyee of the Unted States, or any
agency or nstrumentaty thereof, s requred to be ncuded n gross
ncome regardess of where the servces are performed. ( or edera
ncome ta purposes, the nonapproprated fund actvtes of the
rmed orces, such as the rmy and r orce change Servce,
the Navy change, offcers and ensted men s cubs and other sm-
ary organzed actvtes under the |ursdcton of the rmed orces,
are agences of the Unted States.)
Sec. 3. ppcabty op Ta to Unted States Ctzens broad.
.01 Ta abe years begnnng on or after anuary 1, 195 , and end-
ng after ugust 16, 195 .. The rght of the Unted States to mposo
ncome ta upon ts ctzens, wherever resdent, s based on ctzenshp.
Unted States ctzens resdng or physcay present n foregn coun-
tres are ta abe n the same manner as those resdng wthn the
Unted States, uness they can satsfy the requrements of secton 911
of the Interna Revenue Code of 195 - If the ctzen meets ether
the foregn resdence test or the presence n a foregn country
test provded by secton 911, he s entted to e cude from gross n-
come amounts receved as earned ncome for persona servces ren-
dered outsde the Unted States.
.02 Ta abe years begnnng on or after anuary 1,1951, and fsca
years endng n 195 - Secton 116(a) of the Interna Revenue Code
of 1939, as amended by the Revenue ct of 1951 and the Technca
Changes ct of 1953, s, n substance, dentca wth secton 911 of
the 195 Code, e cept that n the defnton of earned ncome, n a
stuaton where both persona servces and capta are matera n-
come-producng: factors, the mtaton s 20 percent, as contrasted to
SO percent under the present aw.
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| on. 82
Sec. . cuson Under Secton 911(a)(1) ased Upon ona
de Resdence n oregn Countres.
.01 Genera. Unted States ctzen s entted to e cude from
gross ncome under secton 911(a) (1) of the 195 Code, hs earned
ncome (as defned n sec. 7 of ths Revenue Rung) f
(a) e has been a bona fde resdent of a foregn country or coun-
tres for an unnterrupted perod whch ncudes an entre ta abe
year and
(b) Such ncome s
(1) Receved for persona servces rendered outsde the Unted
States
(2) ttrbutabe to such unnterrupted perod and
(3) Not pad by the Unted States or any agency or nstru-
mentaty thereof.
of these requrements must be met by the ctzen n order to cam
the e cuson from gross ncome. or e ampe, a prvatey empoyed
ctzen was a bona fde resdent of a foregn country for an unnter-
rupted perod, as herenafter defned, begnnng ugust 1, 1952, and
endng une 30, 195 , and fes hs returns on the caendar year bass.
e s entted to e cude from gross ncome the amount of compen-
saton receved for persona servces rendered abroad durng such
perod. (These same rues are aso appcabe to ta abe years begn-
nng on or after anuary 1, 1951, whch fa wthn the scope of the
1939 Code. See par. .0 of ths secton for rues appcabe to pror
ta abe years.)
.02 ona fde foregn resence. No specfc rue can be stated for
determnng whether a Unted States ctzen s a bona fde resdent of
a foregn country, snce t nvoves hs ntentons wth respect to the
ength and nature of hs stay. The ntenton of the ta payer to es-
tabsh a bona fde resdence n a foregn country may be evdenced
by words and acts, but where they confct, more emphass w be
paced on the acts than on the words. Generay, a ctzen who goes
to a foregn country for a defnte purpose, whch s of a temporary
nature, and who returns to the Unted .States after t has been accom-
pshed, s not a bona fde resdent of such foregn country. owever,
f hs purpose s of such a nature that an e tended and ndefnte
stay may be necessary for ts accompshment, and to that end he
estabshes resdence n the foregn country, he may be a bona fde
resdent of such foregn country for edera ncome ta purposes.
or e ampe, mercan ctzens who go to foregn countres to work
on constructon pro|ects, whch are obvousy of a temporary nature,
cannot be cassfed as bona fde resdents of such countres for the
purposes of secton 911(a)(1) of the 195 Code, even though they
reman abroad for an entre ta abe year or onger. ( or nformaton
as to whether the earned ncome attrbutabe to such persona serv-
ces rendered abroad s e cudabe under the presence n a foregn
country rue, see sec. 5 of ths Revenue Rung.) owever, ctzens
of the Unted States who are permanenty assgned to foregn dv-
sons of busness concerns and who estabsh and mantan ther res-
dence n a foregn country or countres for a perod of ndefnte
duraton may be cassfed as bona fde resdents of a foregn country
or countres for the purposes of secton 911(a)(1) of the 195 Code,
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83 5 9.
.03 Temporary absence from foregn country. Once bona fde res-
dence n a foregn country or countres has been estabshed, temporary
vsts to the Unted States or esewhere on vacaton or busness trps
w not necessary deprve the ctzen of hs ST TUS as a bona fde
resdent of a foregn country. ( ut see sec. 8 of ths Revenue Rung
or the effect of such trps on source of ncome.) Such absences must
not be unreasonabe n ength, there must be fu ntenton on the part
of the ndvdua to return to hs foregn post, and there must be sub-
stanta evdence that the foregn resdence has not been renqushed.
Long perods of tme spent n the Unted States or any possessons
thereof woud be consdered as evdence that the ctzen had ren-
qushed bona fde resdence n a foregn country.
.0 Prar aw reatng to bo7a fde foregn resdence. or ta -
abe years begnnng on or after anuary 1,1951, whch are sub|ect to
the provsons of the 1939 Code, the aw n effect wth respect to the
e cuson under the bona fde foregn resdence rue was, n sub-
stance, dentca wth such e cuson under secton 911(a) (1) of the
1C5 Code, e cept for the revson from 20 percent to 30 percent re-
gardng the defnton of earned ncome.. (See sec. 7.02 of ths
Revenue Rung.) Under the aw n effect pror to anuary 1, 1951
(and after 19 2), a Unted States ctzen was permtted to e cude
earned ncome from sources outsde the Unted States f he had been
a bona fde resdent of a foregn country or countres durng the
entre ta abe year. Therefore, a ctzen who estabshed resdence
n a foregn country n the course of the ta abe year was not entted
to such e cuson for such ta abe year. owever, f he had been
a bona fde resdent of a foregn country or countres for a perod of
at east two years before the date on whch he ceased to be resdent of
euch foregn country or countres, he coud e cude from gross ncome,
for the year n whch he renqushed hs foregn resdence, earned
ncome from sources outsde the Unted States attrbutabe to that
part of such perod of foregn resdence before the date of renqush-
ment. owever, under secton 116(a)(1) of the 1939 Code, as
amended by the Revenue ct of 1951, a ctzen who was a bona fde
resdent of a foregn country or countres for an unnterrupted perod
whch ncuded an entre ta abe year s entted to e cude from gross
ncome the amount of compensaton receved on or after anuary 1,
1951, for persona servces rendered abroad, attrbutabe to such un-
nterrupted perod. or e ampe, a prvatey empoyed ctzen, who
fes hs returns on the caendar-year bass, was a bona fde resdent of
a foregn country for an unnterrupted perod begnnng uy 1,19 9,
and endng October 31, 1951. Under secton G(a) (1) of the 1939
Code, as amended by the Revenue ct of 1951, the ta payer s entted
to e cude the earned ncome attrbutabe to such perod and receved
on or after anuary 1, 1951, snce hs perod of bona fde foregn
resdence ncudes an entre ta abe year (1950).
Sec. 5. cuson Under Secton 911(a) (2) ased on Presence tn
a oregn Country.
.01 Genera. ctzen of the Unted States may e cude from
gross ncome under secton 911(a) (2) of the 195 Code, amounts con-
sttutng earned ncome (as defned n sec. 7 of ths Revenue Rung)
(a) e s present n a foregn country or countres durng a tota
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911. 8
of at east 510 fu days durng any perod of 18 consecutve months
and
(b) Such earned ncome s
(1) Receved for persona servces rendered outsde the Unted
States
(2) ttrbutabe to such 18-month perod and
(3) Not pad by the Unted States or any agency or nstrumen-
taty thereof.
of these requrements must be met n order for the ctzen to quafy
for the e cuson. The e cuded gross ncome may be attrbutabe to
any 18-consecutve-month perod durng whch the ctzen s n a for-
egn country or countres for 510 fu days. or e ampe, a ctzen of
the Unted States, prvatey empoyed, arrves n a foregn country on
ugust 3, 1953, and remans there contnuousy unt hs departure
therefrom on December 27, 105 , a perod durng whch he s present
n the foregn country 510 fu days. The ctzen may e cude from
gross ncome the earned ncome from sources wthout the Unted
States that s attrbutabe to any 18-consecutve-month perod whch
ncudes the above 510 fu days, notwthstandng that the ctzen was
actuay present n the foregn country for a perod of ess than 18
months. or e ampe, the e cuson woud be appcabe but not m-
ted to the foowng 18-month perods: an 18-month perod whch
commences ugust , 1953, and ends ebruary 3, 1955 an 18-month
perod whch commences une 28, 1953, and ends December 27, 195
or an 18-month perod whch commences uy 1, 1953, and ends
December 31,195 .
.02 Lmtaton on amount e cudabe. The amount e cuded from
gross ncome under the provsons of secton 911(a) (2) of the 195
Code sha not e ceed 20,000 n those cases n whch the 18-month
perod ncudes the entre ta abe year. In those cases n whch the
18-month perod does not ncude the entre ta abe year, the 20,000
annua mtaton sha be prorated n the foowng manner: The
amount e cuded from gross ncome under such secton for such ta abe
year sha not e ceed an amount whch bears the same rato to 20,000
as the number of days n the part of the ta abe year wthn the 18-
month perod bears to the tota number of days n such year. or
e ampe, a ta payer was present n a foregn country 510 fu days
durng the 18-month perod endng une 30, 195 , durng whch the
requrements of secton 911(a)(2) of the 195 Code were satsfed.
Durng the caendar year 1953 he receved 20,000, and durng the
perod anuary 1, 195 , through une 30, 195 , he receved 13,000 as
saary. If the ta payer reported on a caendar year bass, ony 20,000
of the 20,000 receved durng 1953 woud be, e cudabe, and onv
9,917.81 (181/305 of 20,000) woud be e cudabe n 195 . The
baance of 6,000 woud be ncudbe n the ta payer s gross ncome
for 1953 and 3,082.19 for 195 . (There s no mtaton upon the
amount of earned ncome whch may be e cuded from gross ncome
under the bona fde foregn resdence rue.)
.03 Computaton of 510 fu days presence n foregn country. In
computng the mnmum of 510 fu days presence n a foregn country
or countres, a separate perods of such presence durng the 18-month
perod are to be aggregated. or the purpose of secton 911(a) (2) of
the 195 Code, f an ndvdua traves over nternatona waters from
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85 9.
one pace n a foregn country to another pace n the same country, or
to a pace n another foregn country, and f such trave e tends over
a perod of ess than 2 hours and does not nvove trave wthn the
Unted States or any possesson thereof, such ndvdua sha not be
deemed outsde a foregn country durng the perod of such trave.
or e ampe, a ctzen of the Unted States, prvatey empoyed, de-
parts by arcraft from Tokyo, apan, at 11 p. m. on uy 23 and arrves
n Mana, Phppnes, at 8 a. m. on the foowng mornng. The ct-
zen, for the purpose of secton 911(a) (2) of the 195 Code, w not be
deemed outsde a foregn country durng the perod of trave from
Tokyo to Mana, nasmuch as such perod of trave s ess than 2
hours. On the other hand, f a prvatey empoyed ctzen of the
Unted States departs by vesse from Genoa, Itay, on ugust 20 and
arrves n Napes, Itay, on ugust 22, the ctzen, for the purpose of
secton 911(a) (2) of the 195 Code, w be deemed outsde a foregn
country for a perod of 3 days from ugust 20 to ugust 22. The 510
fu days need not be consecutve, but may be nterrupted by perods
dnrng whch the ctzen s not present n a foregn country. Tme
spent n a foregn country n the empoyment of the Unted States
Government w count toward satsfacton of the 510 fu-day requre-
ment, even though amounts pad by such Government are not e cud-
abe from gross ncome. The perod durng whch the ctzen was
present n a foregn country, or countres, pror to anuary 1, 1951,
may be taken nto account n determnng whether such ctzen s pres-
ent n a foregn country or countres durng at east 510 fu days
durng any 18-month perod. owever, the ncome attrbutabe to the
perod pror to anuary 1, 1951, s not e cudabe from gross ncome
f receved before such date, snce the e cuson s appcabe ony to
ta abe years begnnng on or after anuary 1, 1951.
.0 Computaton of 18-month perod. The 18-consecutve-month
perod may be part of a onger perod of presence n a foregn country
and need not commence wth the ctzen s day of arrva theren or
termnate wth the day of hs departure therefrom. or e ampe, a
ctzen who arrves n a foregn country on anuary 1,1953 and fnay
departs therefrom on ebruary 1 , 1955, may not be present n such
country for 510 fu days durng the 18-month perod commencng
wth anuary 1,1953, and endng wth the cose of une 30, 195 , be-
cause of hs vsts to the Unted States durng such perod. owever,
he may satsfy the 510 fu-day requrement durng the 18-month
perod commencng wth ebruary 15,1953, and endng wth the cose
of ugust 1 ,195 . In such event, the e cuson w appy to ncome
attrbutabe to the atter perod, but not to ncome attrbutabe to the
perod commencng wth anuary 1, 1953, and endng wth the cose
of ebruary 1 , 1053. The e cuson s appcabe as ong as there s
a contnung perod throughout whch the ctzen satsfes the requre-
ment of 510 fu days presence n a foregn country or countres dur-
ng an 18-month perod.
.05 Defntons. The term fu day means a contnuous perod
o/f hours commencng from mdnght and endng wth the foowng
mdncht The term 18 consecutve months means any 18-month
perod commencng wth the begnnng of any day of any month and
endng wth the cose of the day precedng the correspondng day n
the succeedng eghteenth month or f there s no such correspondng
da rththec ose of the ast day of the succeedng eghteenth month.
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911. 86
or e ampe, the perod uy 3, 1953, through anuary 2, 1955, and
the perod uy 1, 1953, through December 31, 195 , woud both be
perods of 18 consecutve months. The term foregn country n-
cudes ony terrtory under the soveregnty of a government other
than that of the Unted States t does not ncude the terrtores
( awa and aska) or the possessons of the Unted States.
.06 Pror aw reatng to presence n a foregn country. The
e cuson under the presence n a foregn country rue.s appcabe
ony to ta abe years begnnng on or after anuary 1, 1951. Under
the aw n effect for ta abe years begnnng on or after that date and
endng before anuary 1, 1953, there was no mtaton upon the
amount of earned ncome receved durng such perod whch coud
he e cuded from gross ncome under the presence n a foregn
country rue. owever, for ta abe years endng after December 31,
1952, but ony wth respect to amounts receved after such date, the
amount e cuded from gross ncome under such rue, as under pres-
ent aw, coud not e ceed 20,000 n those cases n whch the 18-month
perod ncuded the entre ta abe year. In those cases n whch the
18-month perod dd not ncude the entre ta abe year, the 20,000
annua mtaton was sub|ect to the same proraton e paned n sec-
ton 5.02 of ths Revenue Rung. speca rue was appcabe to a
fsca year begnnng n 1952 and endng n 1953. ( or ta abe years
begnnng before anuary 1, 1951, a ctzen was entted to e cude
earned ncome from sources outsde the Unted States ony f he coud
estabsh that he was a bona fde foregn resdent.)
Sec. 6. Income Derved rom Possessons of the Unted States.
Income derved from possessons of the Unted States may, under
certan crcumstances, be e cuded from gross ncome n accordance
wth the provsons of secton 931 and secton 933 and, n some rare
nstances, under secton 911 of the 195 Code. Generay, secton 911
of the 1951 Code has no appcaton to ctzens of the Unted States
performng persona servces or engaged n a trade or busness wthn
the possessons. owever, a ctzen who has quafed for the foregn
resdence or presence n a foregn country e cuson under secton
911 of the 1951 Code may e cude earned ncome attrbutabe to a
perod he s temporary present n a possesson durng such quafy-
ng perod. or e ampe: prvatey empoyed ctzen arrved n
raz on December 31, 1952, and remaned there contnuousy unt
May 26, 195 , a perod durng whch he quafed for the presence
n a foregn country e cuson. (See sec. 5 of ths Revenue Rung.)
On May 26, 195 , he eft raz for a temporary assgnment n the
Panama Cana Zone, a possesson of the Unted States, where he
remaned unt uy 15, 195 , when he returned to the Unted States
for a permanent assgnment. The ctzen may e cude from gross
ncome under the presence n a foregn country rue, the earned
ncome attrbutabe to the perod begnnng anuary 1,1953, and end-
ng une 30, 195 , sub|ect to the mtaton of 20,000, snce he was
present n a foregn country for 510 fu days durng such 18-month
perod and such ncome was for persona servces rendered outsde
the Unted States. e may not e cude, under ths rue, the earned
ncome attrbutabe to the perod uy 1 to uy 15, 195 , snce he
dd not quafy for the presence n a foregn country e cuson for
an 18-month perod whch ncuded such perod. ( owever, such
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87 9.
ncome may, tnder certan crcumstances.be e cudbe under the pro-
vsons of sec. 931 of the 195 Code.) or purposes of secton 911,
some of the more mportant possessons of the Unted States are the
Panama Cana Zone, Guam, mercan Samoa, Wake, Mdway Isand,
Puerto Rco, and the rgn Isands.
Sec. 7. arned Income.
.01 Compensaton for persona servces rendered. The term
earned ncome means wages, saares, professona fees, and other
amounts receved as compensaton for persona servces actuay
rendered. It does not ncude such ncome as dvdends, other ds-
trbutons of corporate earnngs or profts, gambng gans, nterest,
rents, or gans or profts from deang n rea or persona property.
or e ampe, where a ctzen performs persona servces for a cor-
poraton n whch he owns stock, earned ncome means ony such
I orton of any ncome receved from the corporaton whch repre-
sents a reasonabe aowance as compensaton for the persona servces
actuay rendered. The entre amount receved as professona fees
by a ctzen engaged n a professona occupaton, such as a doctor or
awyer, may be treated as earned ncome even though he empoys
assstants n the performance of the servces, f the patents or cents
are those of the ctzen and ook to hm as the person responsbe for
the servces rendered, and capta s not a matera ncome-producng
factor.
.02 Proft from trade or busness. If a ctzen s engaged n a trade
or busness, ether as soe propretor or as a member of a partnershp,
n whch both persona servces and capta are matera ncome-pro-
ducng factors, a reasonabe aowance as compensaton for the per-
sona servces actuay rendered by hm sha be consdered to be
earned ncome, but the amount whch may be treated as earned
ncome from such trade or busness may not e ceed 30 percent of hs
share of the net profts therefrom. To ustrate: ctzen quafyng
for the foregn resdence e cuson operates a reta saes outet n a
foregn country. Snce capta s a matera ncome-producng factor
n the busness, not more than 39 percent of the net profts from the
busness may be treated as earned ncome and e cuded. The
baance of the profts must be ncuded n gross ncome for edera
ncome ta purposes. ( or ta abe years begnnng before anuary
1, 195 , and for short ta abe years begnnng n 195 and endng
before ugust 17, 195 , not more than 20 percent of the net profts-
from such trade or busness coud be treated as earned ncome. )
Sec 8. .Source of Income.
or the purpose of secton 911 of the 195 Code, the pace where per-
sona servces are performed s consdered to be the source of the
ncome for such servces, rrespectve of the pace where payment s
made. Therefore, f earned ncome s attrbutabe to a perod n
vhch the ctzen satsfes ether the foregn resdence test or the
presence n a foregn country test, the amounts of such ncome
receved for persona servces rendered outsde the Unted States may
be e cuded from gross ncome, sub|ect to the mtatons set forth n
secton 5 02 of ths Tevenue Rung, even though receved wthn
the Unted States. Compensaton for persona servces rendered
8M050 6 -T
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5 9 .) 88
wthn the Unted States s ta abe and s not e cudabe from gro-
ncome, regardess of the pace where payment s made. or e ampe
a Unted States ctzen who s a bona rde resdent of a foregn country
returns to the Unted States on a busness trp. The compensaton fo
the servces rendered whe n the Unted States s ta abe and n
cudbe n gross ncome, even though payment for such servces ma|
be receved by the ta payer after hs return to the foregn country.
Sec. 9. Income Receved n oregn Currency.
The ncome reported on a edera ncome ta return must be e -
pressed n terms of Unted States doars. Where ncome s actuay
or constructvey receved n foregn currency, the computaton n
terms of Unted States doars must be based on the rate of e change
at the tme of recept by the ctzen, or when credted to hs account
n the foregn country, even though not actuay converted nto Unted
States currency at that tme. (In the case of bocked foregn ncome,
tee sec. 10 of ths Revenue ng.)
Sec. 10. ocked oregn Income.
Generay, a ncome (other than that e cudabe by aw) of Unted
States ctzens from sources wthn a foregn country or countres,
whether n terms of Unted States doars or foregn currences, s
ncudbe n gross ncome for edera ncome ta purposes, notwth-
standng the fact that under the aws or reguatons of the foregn
country or countres converson of such foregn ncome nto Unted
States doars, or nto other money or property whch s ready con-
vertbe nto Unted States currency, may be bocked. The ctzen
must ncude the bocked ncome n hs gross ncome when such ncome
s ether actuay or constructvey receved or s credted to hs account
n the foregn country, uness he takes armatve acton to eect to
defer the reportng of such ncome unt t ceases to be bocked. If he
wshes to make such eecton and defer the ncome ta es otherwse due
on such ncome he must compy wth the procedura requrements of
the Interna Revenue Servce reatng to bocked foregn ncome,
ncudng the fng, wth hs reguar return, of a tentatve return
refectng such bocked ncome, but on whch no ta s computed. De-
tas of the requrements are pubshed n the Interna Revenue u-
etns. See Mmeograph G 75, C. . 1950-1, 50, as amended bv
Mmeograph 6 9 , C. . 1950-1, 5 , and Mmeograph 058 , C. .
1951-1, 19. Income ceases to be bocked and s ncudbe n gross
ncome when t s convertbe, or has been converted, nto Unted States
doars or nto other money or property whch s convertbe nto
Unted States currency or the ctzen uses the ncome for hs persona
e pendtures or dsposes of t by way of gft, bequest, devse or
nhertance, or n some other manner.
Sec. 11. ng of Income Ta Returns.
.01 Gross ncome. ctzen of the Unted States, wherever res-
dent, who has gross ncome of 600 or more (other than ncome e -
cuded by aw) durng the ta abe year must e an ncome ta return,
regardess of hs marta status, the number of hs dependents, or the
amount of hs deductons. or e ampe, a ctzen who quafes for the
foregn resdence e cuson fes hs return on a caendar-year bass.
or the year 195 he receved a saary of 10,000 for servces performed
n a foregn country, dvdends of 500 from a foregn corporaton,
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89 9.
and nterest of 200 from nvestments n foregn countres. The ct-
zen must te a return for such year snce he had gross ncome of 600
or more e cusve of the saary of 10,000 e cudabe under the pro-
vsons of secton 911 (a) (1) of the 195 Code. sef-empoyed ct-
zen not meetng the above requrements may nevertheess be requred
to te a return for purposes of the sef-empoyment ta f he s engaged
n a trade or busness as defned n secton 1 02 of the 195 Code, and
has net earnngs of 00 or more from sef-empoyment. (See sec.
12.01 of ths Revenue Rung.)
.02 Deductons. n|T e penses, osses, and other deductons whch
are attrbutabe to ncome propery e cuded under secton 911 are not
aowabe as deductons n a edera ncome ta return. or e ampe,
a saesman resdng and traveng abroad, who propery e cuded from
gross ncome under secton 911 of the 195 Code ncome earned abroad,
may not deduct n hs edera ncome ta return traveng and other
e penses ncurred by hm n earnng such e cuded ncome. penses,
osses, and other deductons whch cannot be dentfed as beng attrb-
utabe e cusvey to ether ncudbe or e cudabe ncome but are
attrbutabe to both must be aocated or apportoned.
.03 Income ta es pad to foregn countres. If a ctzen s requred
to ncude n bs orm 10 0 Indvdua Income Ta Return, ncome
from foregn sources on whch ncome ta es to a foregn country or
countres are pad or accrued, he may cam credt for such foregn
ncome ta es aganst hs Unted States ncome ta n accordance wth
the provsons of secton 901 of the Interna Revenue Code, provded he
does not cam the standard deducton or compute hs ta by the use of
the optona ta tabe ncuded n the nstructons for orm 10 0. The
foregn ta credt shoud be camed on the ne provded therefor
(ne 9 of the 195 orm 10 0) at the bottom of page 3 of the return.
The method of computng the foregn ta credt aowabe under sec-
ton 901 of the 195 Code s e paned on orm 1116, whch must be
fed wth the ncome ta return by every ta payer camng credt
under that secton. If credt s camed nnder secton 901 of the 195
Code and a redetermnaton of the ta payer s foregn ncome ta
abty dscoses that he has overpad or underpad such ta , he
shoud mmedatey notfy the Commssoner of Interna Revenue n
order that approprate ad|ustment may be made of the foregn ta
credt camed on hs edera ncome ta return. s an aternatve
to camng the foregn ncome ta as a drect credt aganst hs Unted
States ncome ta , the ta payer may cam the amount of ncome ta es
gd to a foregn country or countres as a deducton on page 3 of
orm 10 0 n computng hs ta abe ncome, provded he temzes hs
deductons. In most cases, however, t w be to the ta payers advan-
tage to cam foregn ncome ta es as a credt aganst the edera ta
under secton 001 of the 195 Code. Ta payers who cam the foregn
ncome ta es ether as a credt or as a deducton may not aso have the
beneft of the standard deducton.
.01 Where rght to e empton not yet estabshed. If a ctzen
empoyed abroad has not been there ong enough to quafy for e emp-
ton under ether the foregn resdence rue or the presence n a
foregn countrv rue at the tme hs ncome ta return s due to be
fed e must ether ncude the compensaton n hs gross ncome and
M., pvr7pr ta due thereon, or obtan an e tenson of tme for the
of hs return. (See par. .06 of ths secton.) If he eects to n-
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911. 90
eude the compensaton n hs gross ncome, he may, after he has met
the statutory requrements for e empton and wthn the statutory
perod, fe an amended return or a cam on orm 8 3 for refund or
credt of any ta thus overpad. or e ampe, a ctzen was a bona
fde resdent of a foregn country from November 1, 1953, through
anuary 31,1955, durng whch perod he performed persona servces
abroad. e woud be requred to ncude n hs 1953 return, ted on
the caendar year bass, a ncome for the year, ncudng the earned
ncome receved durng the perod November 1,1953, through Decem-
ber 31, 1953, snce he had not met the requrements of secton 911(a)(1)
of the 195 Code as of the due date for the fng of such return. ow-
ever, snce the requrements of that secton woud be met as of Decem-
ber 31, 195 , he woud then be entted to a refund or credt of any
overpayment of ta resutng from the e cuson of the earned n-
come receved durng the perod November 1, 1953, through Decem-
ber 31, 1953, and a cam on orm 8 3, Cam for batement, or Re-
fund, or an amended return shoud then be fed.
.05 Due date for fng return . Ctzens of the Unted States who,
on pr 15, are resdng or traveng outsde of the Unted States and
who fe ther returns on the caendar year bass are automatcay
aowed an e tenson of tme unt une 15 for fng the return for
the precedng ta abe year. Smary, an e tenson of 2 months s
granted to fsca-year ta payers. ta payer who takes advantage of
ths e tenson must attach to hs return a statement showng that he
was resdng or traveng outsde the Unted States on the due date
( pr 15, for caendar-year ta payers), and he must pay nterest at
the rate of 6 percent per annum on the unpad ta , f any, from the
due date unt pad.
.06 tensons of tme for fng returns. n e tenson of tme for
fng ncome ta returns may be granted for more than 6 months n
the case of ctzens of the Unted States who are abroad. ctzen
desrng an e tenson of tme, n addton to the 2 months auto-
matcay granted, for fng hs return unt after the competon of
the quafyng perod under secton 911 of the 195 Code shoud make
appcaton therefor wth the dstrct drector of nterna revenue
wth whom the return s requred to be fed. The appcaton must
be n wrtng, propery sgned by the ta payer or hs duy authorzed
agent, and must be made before the due date for fng the return wth
respect to whch the e tenson s requested. The appcaton shoud
set forth the facts reed upon to |ustfy the e tenson of tme re-
quested and shoud ncude a statement as to the earest date the
ta payer e pects to be n a poston to determne whether he w be
entted to the e cuson provded by secton 911 of the 195 Code.
Sec. 12. Sef-empoyment Ta
.01 Ta abe years endng on or before December 31,195 . In gen-
era, a ctzen of the Unted States, wherever resdent, who derves
ncome durng the ta abe year from a trade or busness carred on
by hm or from a partnershp of whch he s a member s sub|ect to
the sef-empoyment ta . Such ctzen s requred to fe a return
on orm 10 0 for the purpose of reportng the sef-empoyment ta
f he has net earnngs from sef-empoyment of 00 or more, even
though he may not have suffcent ncome to requre the rng of an
ncome ta return. or sef-empoyment ta purposes, earned n-
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91 911.
come whch quates for ether the bona fde foregn resdence
e cuson or the presence n a foregn country e cuson s not to
be taken nto account n computng net earnngs from sef-empoy-
ment. schedue for the computaton of the ta s provded on page 3
ot separate Schedue C of the ncome ta return ( orm 10 0), and
nstructons for ts competon are shown on page of the Schedue.
Net earnngs from sef-empoyment s the gross ncome derved
by an ndvdua from any trade or busness carred on by hm, ess
the aowabe deductons attrbutabe to such trade or busness, pus
hs share of sef-empoyment net earnngs (or oss) from a partnershp
of whch he s a member. The deductons for persona e emptons
are not aowabe n determnng the net earnngs from sef-empoy-
ment. The term trade or busness as used heren ncudes a sef-
empoyment actvtes of the ctzen e cept those specfcay e cuded
by aw. Some of the sef-empoyment actvtes so e cuded by aw
for ta abe years endng before anuary 1, 1955, are the practce of
certan professons, such as the medca, accountng and ega pro-
fessons or servces as a mnster or member of a regous order
or farmng. or a st of e cuded actvtes and ncome, see -
CLUSIONS on page of separate Schedue C ( orm 10 0).
.02 Ta abe years endng after December 31, 195k- The Soca
Securty mendments of 195 brngs certan sef-empoyed ndvd-
uas, prevousy e cuded, wthn the soca securty system. These
changes are effectve for ta abe years endng after December 31,
195 . ctzen who s a Chrstan Scence practtoner, archtect,
accountant, funera drector, engneer, mnster, member of a regous
order, or a fanner and reports hs ncome on the bass of a fsca year
-gnnnq n 105 and endng n 1055 shoud communcate wth the
dstrct drector of nterna revenue wth whom he fes hs return for
detaed nformaton regardng the changes n the aw whch affect
hs abty for sef-empoyment ta .
Sec. 13. Decaraton of stmated Ta .
.01 Who must fe. very ctzen of the Unted States who, for ta -
abe years begnnng on or after anuary 1, 1955, e pects to receve
more than 100 of gross ncome durng the ta abe year from sources
other than wages sub|ect to wthhodng must fe a decaraton of
estmated ta on orm 10 0- S f hs gross ncome from a sources
(e cusve of ncome e empt from ta ) s reasonaby e pected to
e ceed the sum of G00 mutped by the number of e emptons to
whch he s entted, pus 00. ctzen who e pects no more than
100 of gross ncome durng the ta abe year from sources other than
ages sub|ect to wthhodng s requred to fe a decaraton f hs
gross ncome s reasonaby e pected to e ceed 5,000 n the case of a
ang e ndvdua or a marred person fng a separate decaraton,
10,000 for a person who quafes as a head of househod or survvng
wdow or wdower, and 5,000 n the case of a marred person who fes
a |ont decaraton and the tota ncome of both husband and wfe can
rt-asonaMv be e pected to e ceed 10,000. Specfc nstructons for
the preparaton and fng of the decaraton are prnted on orm
1W0- S and wth the e ceptons mentoned heren, shoud be fo-
ded by ctzens outsde the Unted States. .
(P Due date for -fng decaratons. The decaraton s requred
to be fed on or before the 15th day of the th month of the ta abe.
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911. 92
year for whch t s made. owever, a ctzen traveng or resdng
n a foregn country on the due date for tng the decaraton s
aowed an e tenson of tme to and ncudng the 15th day of the 6th
month of the ta abe year ( une 15, for caendar-year ta payers) for
fng the decaraton and payment, wthout nterest, of a nsta-
ments of estmated ta then due.
Sec. 1 . Where Returns and Decaratons Shoud e ed.
Income ta returns and decaratons of estmated ta shoud be fed
wth the dstrct drector of nterna revenue for the dstrct n whch
the ta payers ega resdence or prncpa pace of busness n the
Unted States s ocated, or f he has no ega resdence or pace of
busness n the Unted States, wth the Dstrct Drector of Interna
Revenue, atmore 2, Maryand, U. S. .
Sec. 15. Penates.
Ctzens of the Unted States resdng or present n foregn countres
are abe, to the same e tent as ta payers wthn the Unted States, for
a the penates and addtons to the ta mposed by aw, ncudng
penates and addtons to the ta n respect of decaratons and pay-
ments of estmated ta .
Sec. 1C. Where orms May e Obtaned.
Necessary forms for the fng of returns, decaratons, and/or cams
for refund may be obtaned from any dstrct drector of nterna
revenue and from most Unted States embasses and consuates.
Sec. 17. Correspondence.
ny ta payer desrng addtona nformaton concernng ths
Revenue Rung or nformaton reatng to the aw or reguatons
appcabe to ta abe years for whch no return has been ted, may
address a communcaton to the Commssoner of Interna Revenue,
ttenton: ssstant Commssoner (Technca), Washngton 25,
D. C. ta payer desrng nformaton reatng to a ta abe year for
whch a return has been fed shoud communcate wth the Dstrct
Drector of Interna Revenue wth whom hs ncome ta return was
fed.
Sec. 18. ffect on Other Documents.
Revenue Rung 291, C. . 1953-2, 2, s superseded by ths Revenue
Rung.
( so Part II, Secton 11G Reguatons 118, Rev. Ru. 55-2 6
Secton 39.116-1.)
The dvson of ncome on the communty property bass does not
ater the e empt character of ncome entted to e empton under
secton 011(a) of the Interna Revenue Code of 195 . If the bona
fde resdence requrements of secton 911(a)(1) or the physca
presence requrements of secton (a) (2) of the Code are met by
the spouse who earns the ncome and the ncome quafes as earned
ncome wthn the meanng of secton 911(b) of the Code, such n-
come (sub|ect to any mtatons of the appcabe secton of the
Code) s e empt from ta aton on the Indvdua ncome ta re-
turns of the husband and wfe fng separate returns n a com-
munty property State regardess of whether the other spouse meets
the requrements specfed n secton 911(a) of the Code.
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63 o.
dvce has been requested reatve to the appcaton of secton
911(a) of the Interna Revenue Code of 195 (sec. 110(a) of the 1939
Code) to the wfe s share of ncome earned by her husband wthout
the Unted States, where the partes are domced n a communty
property State wthn the Unted States and fe separate returns on
the communty property bass.
Secton 911(a) of the Code provdes wth certan e ceptons not
here pertnent for the statutory e cuson from gross ncome of
earned ncome from sources wthout the Unted States n the case of
a Unted States ctzen who s a bona fde resdent of a foregn country
or who durng any perod of IS consecutve months s present n a
foregn country or countres durng at east 510 fu days n such
perod.
The specfc questons presented reate to whether the wfe s
requred to ncude n her ta abe ncome one-haf of the ncome of
her husband from foregn sources n the foowng cases:
(1) usband and wfe are ctzens of the Unted States dom-
ced n a communty property State n the Unted States. us-
band accepted work n a foregn country wth the wfe remanng
n the communty property State. usband remaned n such
foregn country for the perod requred to quafy under secton
911(a) (2) of the Code and hs ncome quafes as earned ncome
under secton 911(b) of the Code. The communty property
system was n effect n the foregn country n whch the husband
was empoyed.
(2) The same stuaton as above e cept that the foregn country
n whch the husband worked was not sub|ect to communty
property aws.
(3) usband quafes as a bona fde resdent of a foregn coun-
try under secton 911(a) (1) of the Code. s wfe and famy
contnue to ve n a communty property State n the Unted
States and the marta domce contnues n such State.
The dvson of ncome on the communty property bass does not
ater the e empt character of ncome entted to e empton under
secton 911 (a) of the Code. See Revenue Rung 5 -16, C. . 195 -1,
157. If the bona fde resdence requrements of secton 911(a) (1) or
the physca presence requrements of secton 911(a)(2) of the In-
terna evenue Code of 195 are met by the spouse who earns the
ncome and the ncome quafes as earned ncome wthn the meanng
of secton 911 (b) of the Code, such ncome sub|ect to any mtatons
of the appcabe secton of the Code s e empt from ta aton on
te ndvdua ncome ta returns of the husband and wfe fng
separate returns n a communty property State regardess of
wether the other spouse meets the requrements specfed n secton
P(a) of the Code. Whether the communty property system s
f effect n the foregn country where the ncome s earned s m-
matera.
ccordngy, n each of the stuatons presented, the wfe may
( chde from gross ncome on her separate return her share of the
ncome earned bv her husband wthout the Unted States whch s
e cudabe from gross ncome under the appcabe provsons of
acton 911(a) of the Code. owever, wth respect to that porton
of the earned ncome of the husband whch s not e empt under the
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031. 9
provsons of 911(a) of the Code, the wfe must ncude n gross
ncome on her separate return her share of such earned ncome.
( so Secton 931.) Rev. Ru. 55-3S
( so Part II, Sectons 116, 251 (|) Regua-
tons 118, Secton 39.116-1.)
ndergarten and nursery schoos organzed and operated or
Unted States bases or nstaatons ocated n foregn countres or
possessons of the Unted States when operated on a permssve bass
rather than under offca nstructons or reguatons and the suppor
of whch s furnshed by the parents of the pups are not agences
or nstrumentates of the Unted States wtnn the meanng of sec-
ton 911(a) or 931 () of the Interna Revenue Code of 195 (sectons
116(a) or 251 (|) of the 1939 Code). ccordngy Unted States
ctzens who receve compensaton from such organzatons are en-
tted to the benefts accorded by secton 911(a)(1) or secton
911(a)(2) or secton 931 of the Code wth respect to such ncome,
provded the provsons of the appcabe secton of the Code are
otherwse met. Compare Rev. Ru. 5 -612, C. . 195 -2,169.
SU P RT C W ST RN MISP R TR D CORPOR TIONS
S CTION 921. D INITION O W ST RN MISP R
TR D CORPOR TIONS
Rev. Ru. 55-105
The Interna Revenue Servce has no comprehensve st of a the
countres ncudbe n the geographca terrtores referred to n sec-
ton 921 of the Interna Revenue Code of 195 , reatng to Western
emsphere trade corporatons. The rgn Isands, Puerto Rco,
the Greater ntes, the Lesser ntes, the ahamas and the sands
off the coast of enezuea, n addton to the numerous sands n the
West Indes, are consdered to be Western emsphere trade corpora-
ton countres. See I. T. 37 8, C. . 19 5, 152, and I. T. 067, C. ,
1951-52, 55.) owever, nether ermuda nor the akand Isands
are consdered to be Western emsphere trade corporaton countres.
See I. T. 3990, C. . 1950-1, 57. aska, beng a terrtory of the
Unted States and therefore an ntegra part of ths country, s not a
country n North merca wthn the contempaton of ths secton.
SU P RT D. POSS SSIONS O T UNIT D ST T S
S CTION 931. INCOM ROM SOURC S WIT IN POSS S-
SIONS O T UNIT D ST T S
Compensaton receved by a Unted States ctzen, from kndergar-
ten and nursery schoos operated on Unted States bases or nstaa-
tons ocated n possessons of the Unted States whch are operated on
a permssve bass rather than under offca nstructons or reguatons.
See Rev. Ru. 55-38 , above.
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95 o20.
SU C PT R O. G IN OR LOSS ON DISPOSITION O PROP RTY
P T II. SIS RUL S O G N R L PPLIC TION
S CTION 1020. L CTION IN R SP CT O D PR CI -
TION, TC., LLOW D OR 1952
20C R, 1.1020-1: ecton as to amounts T. D. 6125
aowed n respect of deprecaton, etc.,
before 1952.
TITL 26 INT RN L R NU . C PT R I, 8U C PT , P RT I. INCOM
T T L I S OINNINU T R D C M R 31. 1953
Reguatons prescrbed under secton 1020 of the Interna Revenue
Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On December 1 ,195 , a notce of proposed ruemakng wth respect
to secton 1020 of the Interna Revenue Code of 195 (Pubc Law 591,
83d Cong., approved ugust 1C, 195 ) was pubshed n the edera
Regster (19 . R. 8537). No protests were receved. The regua-
tons so pubshed have been modfed and are hereby adopted as set
forth beow:
Sec. 1.1020. Statutory Provsons ecton n Respect of Deprecaton,
tc., owed efore 1052.
S C. 3020. L CTION IN R SP CT O D PR CI TION, TC.,,
LLOW D OR 11)52. I
ny person may eect to have subparagraph ( ) of secton 1010(a) (2)
appy n respect of perods snce ebruary 2S, 1013, and before anuary 1,
11 52. Such an eecton sha be made n such manner as I be Secretary
or hs deegate may by reguatons prescrbe and sha bo Irrevocabe
when made, e cept that an eecton made on or before December 31,
1952. may be revoked at any tme before anuary 1, 1055. revocaton
of an eecton sha be made n such manner as the Secretary or bs
deegate may by reguatons prescrbe, and no eecton may be made by
any person after he has so revoked an eecton. The eecton sha appy
n res ect of a property hed by the poson makng the eecton at any
tme on or before December 31, 1052, and n respect of a perods snce
ebruary 28, 11)13, and before anuary 1, 1052. durng whch such per-
son hed such property or for whch ad|ustments must be made under
secton 1010(b). n eecton or a revocaton of an eecton by a trans-
feror, donor, or grantor made after the date of the transfer, gft or
grant of property sha not a Toct the bass of such property n the hands
of the transferee, donee, or grantee. No eecton may be made under ths
Secton after December 31, 105 .
Sec. 1.1020-1. ecton- as to mounts owed n- Respect of Deprecaton,
tc., efore 1052. (a) In genera. (1) ny person may eect to have the
d|nsfments to the cost or other bass of property under secton 1010(a) (2) de-
termned n accordance wth subparagraph ( ) of such secton by tng a state-
ment of eecton n accordance wth the requrements set forth n paragraph (b),
Mow v eecton made after 1052 sha be rrevocabe when made. ny eec-
ton nade after 1 52 sha appy wth respect to a property hed by the person
raknr the eecton at any tme on or before December 31, 1052. and sha appy
to a perods snce ebruary 28, 1913, and before anuary 1, 1052, durng whch
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1020.1 96
such person hod such property or for whch ad|ustments must be made Tnder
secton 101G(b). or rues wth respect to an eecton made on or before
December 31, 1052, see paragraph (c) of ths secton.
(2) n eecton by a partner on hs own behaf s not an eecton for the
partnershp of whch he s a member. separate eecton must be made on
behaf of the partnershp. See secton 703(b) (reatng to eectons of the
partnershp). n eecton on behaf of the partnershp appes ony wth respect
to the partnershp, and does not appy to the separate property of the partners.
smar rue appes wth respect to eectons by trusts and benefcares of
trusts. These rues aso appy wth respect to a revocaton of an eecton where
such eecton was made on or before December 31, 1052.
(b) Res appcabe to makng of cUcton. The foowng rues are app-
cabe to be mkng of an eecton under secton 1020:
(1) orm of eecton. The eecton sha be n the form of a statement n
wrtng, sha state the name an address of the ta payer makng the eec-
ton, and sha contan a statement that such ta payer eects to have the
provsons of secton 1016(a)(2)( ) appy n respect of a perods snce
erna y 28, 1013, and before anuary 1, 1052.
(2) Sgnature. The statement sha be sgned by the ta payer makng
the eecton, f an ndvdua, or, f the ta payer makng the eecton s not
an ndvdua, the statement sha be sgned by the person or persons re-
qured to sgn the ucome return of such ta payer.
(3) ng. The statement must be fed on or before December 31, 105 ,
In the offce of the dstrct drector of nterna revenue for the dstrct n
whch the ncome return for the year of the eecton s requred to be fed.
or rues as to when tmey mang w he treated as tmey fng of the
statement see secton 7502.
) ng of dupcate. copy of the statement of eecton must be fed
wth the frst return, amended return, or cam for refund fed on or after
the date on whch the eecton s made.
(c) ecton made on or before December St, 1052 n eecton made on or
before December 31, 1052, n accordance wth the provsons of secton 113(d)
of the Interna Revenue Code of 1030, may be revoked by fng on or before
December 31, 105 , n the same offce n whch the eecton was fed, a statement
of revocaton sgned n the same manner as the eecton. Such statement made
by any person s rrevocabe when made wth respect to such person, and no new
eecton may thereafter be made by such person. copy of the revocaton most
be fed wth the frst return, amended return or cam for refund, fed after the
date of the revocaton. or addtona rues wth respect to eecton made on or
before December 31, 1052, see sectons 30.113(b) (1)-1 and 30.113(d)- of Regu-
atons IIS (20 C , 1053 revson, t. 30).
(d) adty of eectons or revocaton of eectons. n eecton or revocaton
of an eecton whch conforms n substance to the provsons of ths secton w
not e deemed nvad soey because t was fed before the date the reguatons
under secton 1020 were promugated.
(e) ffect of eecton. or rues reatng to the effect of an eecton under
ths secton see secton 1010(a) (2) and the reguatons thereunder.
(These reguatons are ssued under the authorty contaned n sees.
1020 and 7805 of the Interna Revenue Code of 195 (68 Stat, 302,
917 26U.S. C. 1020,7805).)
ustn . Wnke,
ctng Commssoner of Interna Revenue.
pproved March 8,1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 10, 1955, 8: 8 a. m.)
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97 1235.
SU C PT R P.-C PIT L G INS ND LOSS S
RT III. G N R L RUL S OR D T RMINING C PIT L G INS ND LOSS S
S CTION 1223. OLDING P RIOD O PROP RTY
The perod of new shares of the survvng corporaton n e change
for de od shares pursuant to a reorganzaton. See Rev. Ru. 55- 5,
page C .
P RT I . SP CI L RUL S OR D T RMINING C PIT L G INS ND LOSS S
S CTION 1235. S L OR C NG O P T NTS
( so Part II, Secton 22(a) Reguatons 118, Rev. Ru. 55-58
Secton 39.22(a)-1.
Many requests have been receved for reconsderaton of Mmeo-
graph 6 90, C. . 1950-1, 9, reatng to the treatment of amounts
receved by nventors from the assgnment of a patent, or the e cusve
rght to make, use and se a patented artce under a cense agree-
ment, where such amounts are not sub|ect to the provsons of secton
1233 of the Interna Revenue Code of 195 .
Mmeograph 6 90, supra, hods that, effectve for ta abe years
begnnng after May 31, 1950, payments receved by nventors from
the assgnment of a patent or the cense of the e cusve rght to make,
use and se a patented artce under an agreement whereby payments
are measured by producton, sae, or use by the transferee, or are
payabe perodcay over a perod generay cotermnous wth the
transferee s use of the patent, consttute ordnary ncome.
carefu study of the probem has been made, takng nto consdera-
ton, among other thngs, recent court decsons whch support the
poston taken by the Interna Revenue Servce n 1950. See ock
v. Unted States, 200 ed. (2d) 03, certorar dened, 3 5 U. S. 935
and roderck v. Neae, 201 ed. (2d) G21. ccordngy, t s con-
cuded that Mmeograph 6 90, supra, shoud not be dsturbed. In
reachng ths concuson, the Revenue Servce has consdered the
decsons n dward C. Myers v. Commssoner, 6 T. C. 258 Com-
mssoner v. Ceanese Corp. of merca, 1 0 ed. (2d) 339 and en
v. Werner. 190 P ed. (2d) 8 0.
though secton 1235 of the Interna Revenue Code of 195 specf-
cay provdes that, wth specfed e ceptons, such payments receved
n 19o and subsequent years w receve capta gans treatment n
the hands of the nventor, ths provson of the 195 Code s appca-
be onv to amounts receved n ta abe years begnnng after Decem-
ber 31 1953 and therefore does not appy to amounts receved n
ta abe years begnnng after May 31, 1950, and before an-
ccordngy, e cept as secton 1235 of the Interna Revenue Code
of 195 appes, the Interna Revenue Servce w contnue to treat
a m-dnar-v ncome the payments receved by nventors durng ta -
ab arsegnnnff after May 31, 1950, from such transfers.
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M02.1 98
C PT R 2. T ON S L - MPLOYM NT INCOM
S CTION 1 02. D INITIONS
( so Part II, Secton 81 Reguatons 118, Rev. Ru. 55-172
Secton 39. 81-1.)
Income derved from sources wthout the Unted States by an mer-
can ctzen engaged n a trade or busness ns a scentfc consutant,
s Incudbe n computng net earnngs from sef-empoyment for pur-
poses of the Sef- mpoyment Contrbutons ct, sub|ect to the prov-
sons of secton 911 of the Interna Revenue Code of 195 .
queston has been rased whether ncome derved from sources
wthout the Unted States by an mercan ctzen engaged n a trade
or busness as a scentfc consutant s ncudbe n computng net
earnngs from sef-empoyment for purposes of the Sef- mpoyment
Contrbutons ct (chapter 2, subtte , Interna Revenue Code of
195 ).
In the nstant case, an mercan ctzen s engaged n carryng
on scentfc research as an ndependent contractor n a foregn
country.
Secton 1 02(a) of the Sef- mpoyment Contrbutons ct de-
fnes net earnngs from sef-empoyment, n part, as foows:
The term net earnngs from sef-empoyment means the gross ncome de-
rved by an Indvdua from any trade or busness carred on by such Indvdua.
ess the deductons aowed by ths subtte Subtte , of the Code whch are
attrbutabe to such trade or busness,
It s hed that ncome derved from sources wthout the Unted
States by an mercan ctzen engaged n a trade or busness as a
scentfc consutant s ncudbe n computng net earnngs from sef-
empoyment for purposes of the Sef- mpoyment Contrbutons ct,
sub|ect to the provsons of secton 911 of the 195 Code. See Rev.
Ru. 55-171, page 80.
( so Secton 3121.) Rev. Ru. 55-328
( so Part II, Sectons 81, 1 26
Reguatons 118, Secton 39. 81-3,
Reguatons 128, Secton 08.20 .)
The owner of a cemetery entered nto a contract wth an n-
dvdua to perform servcps as se ton of the cemetery for a 6-
months perod. The ndvdua agreed to furnsh a abor and
mantan the cemetery to the satsfacton of the owner for a ump-
sum payment. ed, (1) the ndvdua s not an empoyee of the
cemetery owner wth respect to hs servces as se ton nnd (2) the
ncome derved by hm for such servces shoud be consdered n
computng net earnngs from sef-empoyment for purposes of the
Sef- mpoyment Contrbutons ct.
n nqury has been receved reatve to the status, for purposes of
the edera Insurance Contrbutons ct (chapter 21, subtte C,
Interna Revenue Code of 195 ) and the Sef- mpoyment Contrbu-
tons ct (chapter 2, subtte , Interna Revenue Code of 195 ) of a
cemetery se ton under the crcumstances descrbed beow.
The cemetery s owned and operated by a corporaton whch entered
nto a contract wth an ndvdua to perform servces as se ton of the
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09 ( 1 02.
cemetery or a r -montns perod. Under the terms of the contract,
the se ton agreed, to mantan the cemetery to the satsfacton of the
corporaton and. to furnsh a abor necessary for ts mantenance.
The corporaton agreed to compensate the se ton on a ump-sum bass
or the 6-months perod. The contract specfcay provded that the
se ton s engaged as an ndependent contractor.
The se ton determnes hs own routne, works when he chooses, and
receves no nstructons n the performance of hs servces. s dutes
consst of mowng grass, takng care of the graves, and mantanng
a waks and avenues. e has compete contro over the ndvduas
who assst hm and a edera Insurance Contrbutons ct ta es and
ncome ta on ther wages are wthhed and pad by hm. e nstas
a memora footngs, furnshes the materas for the footngs, and
receves a revenue therefrom. e uses hs own pckup truck and
Land toos.
Secton 3121(d) of the edera Insurance Contrbutons ct as
amended provdes, among other thngs, that the term empoyee
means any ndvdua who, under the usua common aw rues app-
cabe n determnng the empoyer-empoyee reatonshp, has the
status of an empoyee. The gudes for determnng, under the usua
common aw rues, whether an empoyer-empoyee reatonshp e sts
are found n secton 03.20 (c) of Reguatons 128, appcabe to the
provsons of the Interna Revenue Code of 195 by vrtue of T. D.
G091, C. . 195 -2, 7, unt superseded by reguatons ssued under
the 195 Code.
The determnaton whether an empoyer and empoyee reatonshp
e sts depends upon the partcuar facts of each case. If the reaton-
shp of empoyer and empoyee e sts, the desgnaton or descrpton
of the reatonshp by the partes as anythng other than that of em-
poyer and empoyee s mmatera. Thus, f the facts show that such
reatonshp e sts, t s of no consequence that the empoyee s des, -
nated as an ndependent contractor. In the nstant cafe, however, tho
facts substantate the desgnaton n the contract of the se ton as an
ndependent contractor. The se ton entered nto the contract wth
the corporaton to mantan the cemetery to the satsfacton of the
corporaton for a specfed amount. e agreed to furnsh a abor
necessary to mantan the cemetery and receved no nstructons n
the performance of hs servces. e determned hs own routne and
worked when he chose. It s, therefore, hed that the se ton s not
an empoyee of the corporaton wth respect to such servces for
edera Insurance Contrbutons ct purposes.
.Snce the ndvdua s not an empoyee for edera Insurance
Contrbutons ct purposes, the queston arses as to whether hs
actvtes as a se ton of the cemetery consttute a trade or busness,
for purposes of the Sef- mpoyment Contrbutons ct, and whether
the ncome derved therefrom s sub|ect to the ta mposed under that
ct.
Secton 1 02(c) of the Sef- mpoyment Contrbutons ct pro-
vdes that the term trade or busness, when used wth reference to
sef-empoyment ncome or net earnngs from sef-empoyment, sha
have the same meanng as when used n secton 1G2 of the Interna
Revenue Code, wth certan e ceptons not here matera.
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1 02. 100
s a genera rue, u person who s reguary engaged n an occu-
aton or professon for proft, whch consttutes, n whoe or n part,
s vehood, and who s not an empoyee for purposes of the edera
Insurance Contrbutons ct, s engaged n a trade or busness.
Under the crcumstances stated heren, t s concuded that the
ndvdua s engaged n a trade or busness wth respect to hs
servces as se ton of the cemetery and the ncome he derves from such
servces shoud be ncuded n computng net earnngs from sef-
empoyment.

( so Part II, Secton 81 Reguatons 118, Iev. u. 55-385

Secton 39. 81-1.)
n ndvdua s empoyed as a professor by a State unversty.
s sdene actvtes, sepnrate and apart from hs servces for the
unversty, the Indvdua s engaged n wrtng books and gvng
ectures for proft. ed, the royates and other ncome receved
by the ndvdua from th- sdene actvtes are ncudbe n com-
putng net earnngs from sef-empoyment for purposes of the Sef-
mpoyment Contrbutons ct of 5 .
n nqury has been receved whether royates and other ncome
receved hy a professor empoyed by a State unversty, who wrtes
books and gves ectures as sdene actvtes, may be ncudbe n
computng net earnngs from sef-empoyment under the Sef- m-
oyment Contrbutons ct of 105 (chapter 2, subtte , Interna
evenue Code of 195 ).
In the nstant case, a professor, empoyed by a State unversty to
perform fu-tme teachng servces at te unversty, s engaged n
sdene actvtes nvovng pubc ecturng and the wrtng of sev-
era books. One of hs books s a coege te tbook whch he revses
from tme to tme under contract wth the pubsher another s a
aboratory manua whch he has devsed for the use of students at
the unversty where he teaches and whch he ses drect to them. e
receves royates from the pubsher from the sae of hs te tbook.
Durng the past year, the pubsher made hm an advance on hs roy-
ates wth respect to the preparaton of a current revson of the
te tbook. though the books and ectures are n the genera fed
of educaton, they are the resut of hs own ntatve and are not
nstgated pursuant to hs empoyment contract wth the unversty.
so, athough the amounts whch he receves from these sdene
actvtes vary from year to year, they e ceed the mnmum requre-
ment of 00 per year for sef-empoyment ta purposes.
Secton 1 02 of the ct provdes n part:
(a) Net arnngs rom Sef- mpoyment. The term net earnngs from
sef-empoyment means the gross ncome derved by an ndvdua from any trade
or busness carred on by such ndvdua, ess the deductons aowed by ths
subtte Subtte whch are attrbutabe to such trade or busness,
(c) Trade ob usness. The term trade or busness , when used wth refer-
ence to sef-empoyment ncome or net earnngs from sef-empoyment, sha
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101 1 02.
toethe same meanng as when used n secton 1G2, e cept that such
Una shaU not ncude

(1 the performance of servce by an ndvdua as an empoyee .
dmttedy, the reatonshp between the unversty and the profes-
sor s t at of empover and empoyee under the common aw rues
used, for edera empoyment ta purposes, n arrvng at such a
determnaton. See S. S. T. 3 1, C. 13. 1938-2, 297. Ths s true even
though, for edera empoyment ta purposes, such servces are e -
cepted from empoyment 5 by sectons 3121(b)(7) and 3306(c)(7)
of the edera Insurance Contrbutons ct and the edera Unem-
poyment Ta ct (chapters 21 and 23, respectvey, subtte C, Inter-
na Revenue Code of 195 ). Therefore, the servces of the ndvdua
as a professor for the unversty are e cuded from the term trade
or busness, by vrtue of secton 1 02(c) (2) of the ct. owever,
the sdene actvtes engaged n by the professor are entrey separate
from hs servces for the unversty and wth respect to such actvtes
he s not an empoyee.
Whether or not an ndvdua s engaged n a trade or busness
depends upon the facts n the partcuar case. s a genera rue, a
person -who s reguary engaged n an occupaton or professon for
proft whch consttutes n whoe or n part hs vehood, and who s
nor regarded as an empoyee for edera Insurance Contrbutons
ct purposes, s engaged n a trade or busness for sef-empoyment
ta purposes. If an ndvdua wrtes ony one book as a sdene and
never revses t, he woud not be consdered to be reguary engaged
n an occupaton or professon and hs royates therefrom woud not
be consdered net earnngs from sef-empoyment. owever, where
an ndvdua prepares new edtons of the book from tme to tme,
wrtes other books and materas, and ectures professonay, such
actvtes refect the conduct of a trade or busness, and, f t s not one
of the e cuded professons of secton 1 02(c) of the Sef- mpoyment
Contrbutons ct, the ncome from t s ncudbe n computng net
earnngs from se-empoyment, sub|ect to the mtatons of secton
1 )2(b) of the ct.
Iu the nstant case, t s hed that the sdene actvtes of the pro-
fessor consttute a trade or busness for purposes of the Sef- mpoy-
ment Contrbutons ct. To the e tent that the ncome from those
actvtes does not e ceed the mtatons of 3,G00 (for 195 ) and
1,200 (for any ta abe year endng after 195 ), after consderng the
amount of any wages pad to hm durng the year, as set forth n
. Wfon 1 02(b) of that ct, the royates and other ncome receved by
Mm from those sdene actvtes are to be taken nto account n com-
putng hs net earnngs from sef-empoyment for such purposes.
Income derved from the operaton of a watch repar department
wthn a |ewery store. See Rev. Ru. 55-2 8, page 117.
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1 1. 102
C PT R 3. WIT OLDING O T ON NONR SID NT
LI NS ND OR IGN CORPOR TIONS ND T - R
CO N NT ONDS
SU C PT R . NONR SID NT LI NS ND OR IGN
CORPOR TIONS
S CTION 1 11. WIT OLDING O T ON
NONR SID NT LI NS
( so Part II, Secton 1 3 Reguatons 118, Rev. Ru. 55-106
Secton 39.1 3-3.)
Letters of notfcaton of e empton from wthhodng ta , whch
are fed by nonresdent aens wth a wthhodng agent as an au-
thorzaton for the payment of ncome wthout wthhodng of
Unted States ncome ta at source, pursuant to a ta conventon
between the Unted States and the country of resdence of the non-
resdent aen, sha be fed wth the wthhodng agent for each
successve three-caeudnr-year perod durng whch the ncome s
pad.
dvce has been requested whether a etter of notfcaton of e -
empton from wthhodng of Unted States ncome ta fed wth a
wthhodng agent by a nonresdent aen pursuant to a ta conventon
s requred to be renewed and fed every three caendar years.
Secton 1 1 of the Interna Revenue Code of 195 requres that
a persons, n whatever capacty actng, havng the contro #or pay-
ment of certan tems of ncome, to the e tent that such tems const-
tute gross ncome from sources wthn the Unted States, of any
nonresdent aen ndvdua, sha deduct and wthhod from such
tems a ta equa to 30 percent thereof.
Pursuant to recproca ncome ta , conventons between the Unted
States and varous foregn countres, certan tems of ncome are e -
empt from Unted States ta and the wthhodng rate on certan
other tems of ncome s ess than 30 percent thereof. In order to stop
the wthhodng of Unted States ncome ta at source on e empt
ncome, t s necessary for the nonresdent aen to fe wth the wth-
hodng agent a etter of notfcaton of e empton. See, for e ampe,
Treasury Decson 5199, C. . 19 C-1, 13 , secton 7. 18, wth regard
to reguatons prescrbed for the conventon between the Unted States
and rance. These etters of notfcaton of e empton are used n
the pace of forms prescrbed n reguatons governng some
conventons.
Where forms are prescrbed, as n the admnstraton of the con-
venton between te Unted States and the ngdom of Denmark,
Treasury Decson 5692, C. . 19 9-1,10 . t s requred that they be
fed for each 3-caendar-year perod. owever, t s not stated
whether the etters of e empton prescrbed n Treasury Decson
5 99, supra, and n some other cases, cover an ndefnte perod of
e empton or must be renewed every 3 years as n the case of the forms.
It w be noted that after the use of forms became genera under
ater conventons, reguatons prescrbng the use of etters nstead
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103 ( 1 2.
of forms foowed the pattern estabshed wth respect to forms gen-
eray and made the same provsons as to the effectve perod app-
cabe to both. In ths regard, Treasury Decson 5897, C. . 1952-1,
S5, prescrbng wthhodng reguatons under the conventon between
the Unted States and the Repubc of Ireand, provdes that the etter
of notfcaton there prescrbed, n secton 7.1002(b), must be renewed
for each 3-cnendar-year perod.
ccordngy, t s hed that etters of notfcaton of e empton
from wthhodng ta , used where forms are not prescrbed, fed wth
a wthhodng agent, by a nonresdent aen, as an authorzaton for
the payment of ncome wthout wthhodng of Unted States ncome
ta at source, pursuant to a ta conventon, sha be renewed and fed
wth the wthhodng agent for each successve 3-caendar-year perod
durng whch the ncome s payabe.
Reease of e cess ta wthhed, and e empton from, or reducton
n rate of, wthhodng of ta at source n the case of resdents of the
edera Repubc of Germany, as affected by the ncome ta conven-
ton between the Unted States and the edera Repubc of Germany.
SeeT.D. 6122, page 6 1.
Reease of e cess ta wthhed, and e empton from, or reducton n
rate of, wthhodng ta at source n the case of resdents of apan,
as affected by the ncome ta conventon between the Unted States
and apan. SeeT.D. 6130, page 665.
arnngs of a penson trust derved by a resdent trustee of a Unted
State subsdary of a Canadan corporaton. See Rev. Ru. 55-200,
page 633.
S CTION 1 2.-WIT OLDING O T ON
OR IGN CORPOR TIONS
Reease of e cess ta wthhed, and e empton from, or reducton n
rate of, wthhodng of ta at source n the case of German companes,
as affected by the ncome ta conventon between the Unted States
and the edera Repubc of Germany. See T. D. 6122, page 6 1.
Reease of e cess ta wthhed, and e empton from, or reducton n
rate of, wthhodng of ta at source n the case of apanese corpora-
tons, as affected by the ncome ta conventon between the Unted
States and apan. See T. D. 6130, page 665.
W050
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1 71. 10
C PT R . RUL S PPLIC L TO R CO RY O
C SSI PRO ITS ON GO RNM NT CONTR CTS
SU C PT R . R CO RY O C SSI TRO ITS ON
GO RNM NT CONTR CTS
S CTION 1 71. R CO RY O C SSI PRO ITS ON
GO RNM NT CONTR CTS
( so Secton 1 81.) Rev. Ru. 55-173
( so Part II, Secton 380G.)
Contracts or pubcontracts sub|ect to renegotaton under the Renego-
taton ct of 11)51, 05 Stat. 7, 50 . S. C. 1211-1233, C. 15. 1951-1, ISO,
as amended and e tended by Pubc aw 7Gt, approved September 1,
11)5 , pase 620 of ths uetn, 68 Stat. 1116, 50 pp. U. S. C. 1519, are
e empt from tbe proft-mtaton provsons of the nson ct, 8 Stat.
503, 505, 3 U. S. C. , as amended. Contracts or subcontracts e -
empted from renegotaton under secton 106(a) (8) of the Renegotaton
ct of 1051, supra, or whch otherwse are not sub|ect to renegotaton,
are sub|ect to the proft-mtaton provsons of the nson ct, supra,
f they are for the constructon and/or manufacture of any compete
nava vesse or rmy or Navy arcraft, or any porton thereof, and are
otherwse wthn the scope of such provsons.
dvce has been requested as to whether the e empton from rene-
gotaton of certan contracts nnd subcontracts under the provsons
of secton 10G(a) (8) of the Renegotaton ct of 1951, G5 Stat. 7, 50
U. S. C. 1211-1233, C. . 1951-1,180, as amended and e tended by Pub-
c Law 76 , approved September 1, 195 , 68 Stat. 1116, 50 pp.
IT. S. C. 1519, w cause the prot-mtaton provsons (sec. 3) of the
nson ct, 8 Stat. 503, 505, 3 U. S. C. 9 , as amended, whch
were suspended n certan cases under the provsons of secton 102(d)
of the Renegotaton ct of 1951, supra, to be appcabe wth respect
to such contracts and subcontracts.
Secton 106 of the Renegotaton ct of 1951, as amended, supra,
provdes n part as foows:
(a) Mandatory emptons. The provsons of ths tte sha not appy to
(8) any contract or subcontract for the makng or furnshng of a standard
commerca artce, uness the oard makes a specfc Sdng that compettve
condtons affectng the sae of such artce are such as w not reasonaby pre-
vent e cessve profts. Ths paragraph sha appy to any such contract or sub-
contract ony f (1) the contractor or subcontractor tes, at such tme nnd n
such form and deta as the oard sha by reguatons prescrbe, such nforma-
ton and data as may be requred by the oard under ts reguatons for the
purpose of enabng t to reach a decson wth respect to the makng of a specfc
fndng under ths paragraph, and (2) wt bn a perod of s mouths after the
date of fng of such nformaton and data, the oard fas to make a specfc
fndng that compettve condtons affectng the sae of such artce are such
as w not reasonaby prevent e cessve profts, or (3) wthn such s -month
perod, the oard makes a specfc fndng that compettve condtons affectng
the sae of such artce are such as w reasonaby prevent e cessve profts.
ny contractor or subcontractor may wave the e empton provded n ths
paragraph wth respect to recepts or accruas n any fsca year by ncudng a
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105 81.
statement to steh effect n the fnanca statement fed y snc contractor or
tvbcontractor for sucb fsca year pursuant to secton 105(e) (1).
Under secton 5(b) of Pubc Law 76 , supra, secton 10G (a) (8) of
(he Renegotaton ct of 1951, as amended, supra, sha appy to con-
tracts wth the Departments and subcontracts ony to the e tent of the
amounts receved or accrued by a contractor or subcontractor after
December 31, 1953.
Under the Renegotaton ct of 10 8, G2 Stat. 259, 50 U. S. C. 1193,
0. . 19 8-1, 238, and the Renegotaton ct of 1950, 6 Stat. 75 ,
C. . 1950-2, 2 8, a nson ct contracts entered nto after May 21,
19 8, and a subcontracts thereunder generay are e empt from the
ront-mtaton provsons of the nson ct, e cept those whch
ave been e empted from renegotaton by the Secretary of Defense
(or hs deegate) as authorzed n subsectons (d) and (g) of the
Renegotaton ct of 19 8, supra. See I. T. 022, C. . 1950-2, 1 7.
Secton 102(d) of the Renegotaton ct of 1951, supra, provdes
that the proft-mtaton provsons of the nson ct sha not appy
to any contract or subcontract f any of the recepts or accruas there-
from are sub|ect to Tte 1 of that Renegotaton ct. Pubc Law
76 , supra, e tended and amended the Renegotaton ct of 1951 wth-
out change as to such suspenson or e empton provsons. Under the
provsons of secton 1 of Pubc Law 76 , supra, renegotaton w
not be appcabe to recepts or accruas attrbutabe to performance
after December 31, 195 .
ccordngy, based on the foregong provsons, t s hed that con-
tracts or subcontracts sub|ect to renegotaton under the Renegota-
ton ct of 1951, supra, as amended and e tended, are e empt from
the proft-mtaton provsons of the nson ct. Contracts and
subcontracts e empted from renegotaton under secton 106(a)(8)
of the Renegotaton ct of 1951, supra, or whch otherwse are not
sub|ect to renegotaton, are sub|ect to the proft-mtaton provsons
of the nson ct f they are for the constructon and/or manufacture
of any compete nava vesse or rmy or Navy arcraft, or any porton
thereof, and are otherwse wthn the scope of such provsons.
SU C PT R . MITIG TION O CT O R N GOTI TION O
GO RNM NT CONTR CTS
S CTION 1 81. MITIG TION O CT O R N GO-
TI TION O GO RNM NT CONTR CTS
ffect of nson ct, 8 Stat. 503 at 505,3 U. S. C. 9 , as amended,
on contracts and subcontracts sub|ect to or e empted from renegota-
ton under the Renegotaton ct of 1951, 65 Stat. 7, 51 U. S. C. 5,
C. . 1951-1, 180, as amended and e tended. See Rev. Ru. 55-173,
page 10 .
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106
C PT R 5. T ON TR NS RS TO OID INCOM
T
S CTION 1 91. IMPOSITION O T
26 C R 1.1 91-1: Imposton of ta . T. D. G127
( so Sectons 1 92,1 93,1 9 26 C R
1.1 92-1, 1.1 93-1, 1.1 9 -1.)
TITL 2G INT RN L R NU . C PT R I, SU C PT R . P RT 1
INCOM T T L T RS GINNING T R D C M R 31, 1053
Reguatons prescrbed under chapter 5 of the Interna Revenue
Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and
Others Concerned:
On anuary 28, 1955, notce of proposed ruemakng wth respect
to reguatons under chapter 5 (reatng to ta on transfers to avod
ncome ta ) of the Interna Revenue Code of 195 (Pubc Law 591,
83d Cong., approved ugust 16, 195 ), was pubshed n the edera
Regster (20 . R. 619). No comments regardng the reguatons
proposed were receved durng the oO-day perod prescrbed n such
notce, and the reguatons as so pubshed are hereby adopted.
ta on transfers to avod ncome ta
Sec. 1.1 91, Statutory Provsons Imposton of Ta .
S C. 1 91. IMPOSITION O T .
There Is hereby Imposed on the transfer of stock or securtes by a
ctzen or resdent of the Unted States, or by a domestc corporaton
or partnershp, or by a trust whch s not a foregn trust, to a foregn
corporaton as pad-n surpus or ns a contrbuton to capta, or to a
foregn trust, or to a foregn partnershp, an e cse ta equa to 27
percent of the e cess of
(1) The vaue of the stock or securtes so transferred, over
(2) Its ad|usted bass (or determnng gan) n the hands of the
transferor.
Sec 1.1 91-1. Imposton of Ta . Secton 1 91 mposes an e cse
ta upon transfers of stock or securtes by a ctzen or resdent of the
Unted States, or by a domestc corporaton or partnershp, or by a
trust whch s not a foregn trust, to a foregn corporaton as pad-n
surpus or as a contrbuton to capta, or to a foregn trust, or to
a foregn partnershp. The ta s n an amount equa to 27y2 percent
of the e cess of (a) the vaue of the stock or securtes so transferred
over (b) ts ad|usted bass, as provded n secton 1011, for deter-
mnng gan n the hands of the transferor.
Sec. 1.1 92. Statutory Provsons Nonta abe Transfers,
sec. 1 92. nonta abe transfers.
The ta mposed by secton 1 91 sha not appy
(1) If the transferee s an organzaton e empt from Income ta
under part I of subchapter of chapter 1 (other than an organzaton
descrbed In secton 01(a)) or
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107 f 1 91.
(2) If before tte transfer It hns been estabshed to the satsfacton
of the Secretary or bs deegate that such transfer s not n pursuance
of a pan havng as one of ts prncpa purposes the avodance of edera
ncome ta es.
Sec. 1.1 92-1. Nonta abe Transfers. (a) The ta mposed by
secton 1 91 does not appy:
(1) If the transferee s an organzaton (other than an organ-
zaton descrbed n secton 01(a)) e empt from ncome ta under
the provsons of sectons 501 to 50 , ncusve or
(2) If before the transfer t has been estabshed to the satsfac-
ton of the Commssoner of Interna Revenue that the transfer s
not n pursuance of a pan havng as one of ts prncpa purposes
the avodance of edera ncome ta es.
(b) Whether a transfer of stock or securtes s n pursuance of a
pan havng as one of ts prncpa purposes the avodance of edera
ncome ta es s a queston to be determned from the facts and crcum-
stances of each partcuar case. In any such case where a transferor
desres to estabsh that the transfer s not n pursuance of such a pan,
a statement of the facts reatng to the pan under whch the transfer
s to be made or was made, together wth a copy of the pan f n wrt-
ng, sha be forwarded to the Commssoner of Interna Revenue,
Washngton 25, D. C, for a rung. Ths statement sha contan, or
be verfed by, a wrtten decaraton that t s made under the penates
of per|ury. etter notfyng the transferor of the Commssoner s
determnaton w be maed to the transferor.
Sec. 1.1 93. Statutory Provsons Defnton or oregn Trust.
S C. 1 93. D INITION O OR IGN T UST
trust sha be consdered a foregn trust wthn the meanng of ths
chapter f, assumng a subsequent sae by the trustee, outsde the Unted
States and for cnsb, of the property so transferred, the proft, f any,
n such sae woud not be ncuded n the gross ncome of the trust
under ths subtte.
Sec. 1.1 93-1 Defnton of oregn Trust. (a) trust s to be
consdered a foregn trust wthn the meanng of chapter 5 f, assum-
ng a subsequent sae by the trustee, outsde the Unted States and for
cash, of the property transferred to the trust, the proft, f any, from
such sae (beng ncome from sources wthout the Unted States
under the provsons of sectons 8G1 to 86 , ncusve) woud not be
ncuded n the gross ncome of the trust under subtte .
(b) domestc corporaton or partnershp s one organzed or
created n the Unted States, ncudng ony the States, the Terrtores
of aska and awa, and the Dstrct of Coumba, or under the
aw of the Unted States or of any State or Terrtory and a foregn
corporaton or partnershp s one whch s not domestc.
Sec. 1.1 9 . Statutory Provsons Payment and Coecton.
sec. 1 0 . aysent and coecton.
(a) Tme foc Payment. The ta mposed by secton 1 91 sha, wth-
out as-sessnu-t or notce and demand, be due and payabe by the trans-
feror at the tme of the transfer, and sha be assessed, coected, and pad
under reguatons prescrbed by the Secretary or hs deegate.
(b) batement or efund. Under reguatons prescrbed by the Sec-
retary or hs deegate, the ta may be abated, remtted, or refunded f
after the transfer t has been estabshed to the satsfacton of the Secre-
tary or hs deegate that such transfer was not n pursuance of a pan
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1 91. 108
havng ns one of ts prncpa purposes the avodance of edera ncome
ta es,
Sec. 1.1 9 -1. Rf.tt| ns Payment and Coecton of Ta . (a)
Returns and payment. very person makng a transfer descrbed n
secton 1 91 sha make a return to the dstrct drector on the day on
whch the transfer s made and, uness the transfer s nonta abe un-
der secton 1 92, pay the ta due on such transfer. Ths return, whch
sha contan, or be verfed by, a wrtten decaraton that t s mare
under the penates of per|ury, sha be made on orm 92G and sha
be fed wth the dstrct drector to whom the transferor s return of
ncome s requred to be made. The return sha set forth n deta
the foowng nformaton:
(1) Name and address of transferor, and pace of organzaton
or creaton, f a corporaton, partnershp, or trust.
(2) Name and address of transferee, pace of organzaton or
creaton, and whether the transferee s a foregn corporaton, a
foregn trust, or a foregn partnershp. If the transferee s a
foregn trust or a foregn partnershp, the name and address of
the fducary and each benefcary, n the case of a trust, or of each.
partner, n the case of a partnershp, must be shown.
(3) Descrpton and amount of stock or securtes transferred,
the date of transfer, and a compete statement showng a the
facts reatng to the transfer, accompaned by a copy of the pan
under whch the transfer was made.
( ) The far market vaue of the stock or securtes transferred
as of the date of transfer, and the ad|usted bass provded n sec-
ton 1011 for determnng gan n the hands of the transferor.
(5) Whether the transfer was made n pursuance of a pan
submtted to and approved by the Commssoner of Interna Rev-
enue as not havng as one of ts prncpa purposes the avodance
of edera ncome ta es. If the pan has been so approved, a
copy of the Commssoner s etter approvng the pan sha accom-
pany the return.
(6) Such other nformaton as may be requred by the return
form.
(b) Certfcate. (1) If the transferee of the stock or securtes,
the transfer of whch s reported n the return, s a foregn organza-
ton meetng the tests of e empton from ncome ta provded n sec-
tons 501 to 50 , ncusve, and the transferor on that account cams
that no abty for ta s mposed by secton 1 91, such transferor
must fe wth orm 920 a certfcate estabshng the e empton of
the transferee under sectons 501 to 50 , ncusve. Ths certfcate,
whch sha contan, or he verfed by, a wrtten decaraton that t s
made under the penates of per|ury, sha contan compete nforma-
ton showng the character of the transferee, the purpose for whch
t was organzed, ts actua actvtes, the source 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 rght to e empton. To such certfcate sha be attached a
copy of the charter or artces of ncorporaton, the by-aws of the
organzaton, and the atest fnanca statement showng the assets,
abtes, recepts, and dsbursements of the organzaton.
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109 9 .
( 2 ) If the transferee s a foregn organzaton whch has been hed
to be e empt from ncome ta under sectons 501 to 50 , ncusve (or
correspondng provsons of pror aw), a copy of the Commssoner s
etter so hodng sha be fed wth orm 926 n eu of the above
certfcate and attachments.
(c) ssessment and coecton. The determnaton, assessment,
unt coecton of the ta and the e amnaton of returns and cams
ted pursuant to chapter 5 w be made under such procedure as may
e prescrbed from tme to tme by the Commssoner.
Sec. 1.1 9 -2. ffectve Date. Chapter 5 of the Interna Reve-
nue Code of 195 (sees. 1 91 through 1 9 ) and the reguatons pe-
scrbed thereunder appy wth respect to transfers occurrng after
December .31, 195 . (See sec. 7851(a)(1)( ).) Chapter 7 of the
Interna Revenue Code of 1939 (sees. 1250 through 125 ) and the
reguatons appcabe thereto appy wth respect to transfers occur-
rng pror to anuary 1, 1955.
(Ths Treasury Decson s ssued under the authorty contaned
n sec. 7805 of the Interna Revenue Code of 195 (68 Stat. 917).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 15, 1955.
M. I . o-so r,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 17, 1055, 8: 9 a. m.)
S CTION 1 92.-NONT I3L TR NS RS
26 C R 1.1 92-1: Nonta abe transfers.
Reguatons under chapter 5 of the Interna Revenue Code of 195
reatng to transfers of stock and securtes to foregn enterprses to
avod ncome ta . See T. D. G127, page 106.
S CTION 1 93. D INITIONS O OR IGN TRUST
26 C R 1.1 93-1: Defnton of foregn trust.
Reguatons under chapter 5 of the Interna Revenue Code of 195
reatng to transfers of stock and securtes to foregn enterprses to
avod ncome ta . See T. D. 6127, page 106.
S CTION 1 9 .-P YM NT ND COLL CTION
26 C R 1.1 9 -1: Returns payment and coec-
ton of ta .
Reguatons under chapter 5 of the Interna Revenue Code of 195
reatng to transfers of stock and securtes to foregn enterprses to
avod ncome ta . See T. D. 6127, page 106.
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S 2031. 110
C PT R 6. CONSOLID T D R TURNS
SU C PT R . R TURNS ND P YM NT O T
S CTION 1501. PRI IL G TO IL CONSOLID T D
R TURNS
tenson of tme for fng a short ta abe year return of a subsd-
ary corporaton. See Rev. Ru. 55-108, page 1 0.
tenson of tme for fng consodaton returns. See Rev. Ru.
55-17 , page 1 1.
SU TITL . ST T ND GI T T S
C PT R 11. ST T T
SU C PT R .- ST T O CITIZ NS OR R SID NTS
P RT III. GROSS ST T
S CTION 2031. D INITION O GROSS ST T
( so Sectons 2032, 2512.) Rev. Ru. 55-71
( so Part II, Sectons 811, 1005 Regua-
tons 105, Secton 81.10 Reguatons 108,
Secton 80.19.)
The edera e cse ta on |ewery, furs, and reated artces of
persona property s a reevant factor whch shoud be consdered
n determnng the far market vaue of such property for edera
estate am gft ta purposes.
dvce has been requested whether the edera e cse ta on |ewery,
furs and reated artces of persona property shoud be consdered n
determnng (he far market vaue of such property for edera
estate and gft ta purposes.
Sectons 2031, 2032, and 2512 of the Interna Revenue Code of 105
(sectons 811 and 1005 of the Interna Revenue Code of 1039) requre
that the property to be ncuded n the decedent s gross estate, or made
the sub|ect of a gft, sha be ta ed on the bass of the vaue of the
property at the tme of the death of the decedent, the optona vaua-
ton date, f so eected, or the date of gft.
Secton 81.10 of state Ta Reguatons 105 and secton 86.19 of
Gft Ta Reguatons 108, made appcabe here by Treasury Decson
6091, C. . 195 -2, 7, provde that the vaue of property ncud-
be n the decedent s gross estate or made the sub|ect of a gft, s ts
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I 2031.
far market vaue as of the appcabe vauaton date or at the tme
of the gft. Those sectons defne far market vaue as the prce at
whch the property woud change hands between a wng buyer and
8 wng seer when the former s not under any compuson to buy
and the atter s not under any compuson to se. The reguatons
farther provde that a reevant facte and eements of vaue as of the
appcabe vauaton date shoud be consdered.
Whe the determnaton of far market vaue s a queston of fact,
the queston of whch crteron or standard shoud be used n determn-
ng the vaue of property for estate or gft ta purposes s a queston
of aw. See Madeene D. Powers v. Commssoner, 312 U. S. 259,
Ct. D. 1 89, C. . 19 1-1, 8.
In Rose Pubcker v. Commssoner, 206 ed. (2d) 250, certorar
dened, 3 6 U. S. 92 , t was hed that where |ewery was purchased at
reta by a ta payer and made the sub|ect of gfts, the edera e cse
ta shoud be ncuded n ascertanng the vaue of the |ewery for
edera gft ta purposes. The court stated that n vew of the
rreconcabe confct of testmony of the e pert wtnesses, the cost of
the |ewery, ncudng that part of the donor s cost of the gfts whch
represented the edera e cse ta , was consdered as the best evdence
of vaue. To the same effect, see nthony D. Dute v. Commssoner,
200 ed. (2d) 82, certorar dened, 3 5 U. S. 906, and state of rank
M. Goud v. Commssoner, 1 T. C. 1 .
In orence Guggenhem v. Rasqun, 312 U. S. 25 , Ct. D. 1 87,
C. . 19 1-1, 5, t was hed that the vaue of snge premum fe
nsurance poces, whch were rrevocaby assgned smutaneousy
wth ssuance, s cost to the donor rather than ther cash surrender
vaue at the tme of the transfer. The Court stated, Presump-
tvey the vaue of these poces at the date of the gft was the amount
whch the nsured had e pended to acqure them. Cost s cogent
evdence of vaue. nd here t s the ony suggested crteron whch
refects the vaue to the owner . Cost n ths stuaton s not
market prce n the norma sense of the term. ut the absence of
market prce s no barrer to vauaton. See aso state of Rchard
C. DuPont v. Commssoner, 18 T. C. 113 , wheren the Ta Court
hed that, for estate ta purposes, the proper measure of the vaue of
certan nsurance poces, owned by the decedent on the fe of hs
father, was the repacement cost thereof or, n the absence of such
repacement cost, the respectve nterpoated termna reserve vaue
thereof.
The e stence of the edera e cse ta on |ewery, furs, and other re-
ated artces of persona property sod by deaers, s an tem whch
w tend to ncrease the amount at whch an ndvdua or an estate
woud be wng to se such property. It s an eement whch affects
the genera market for that type of property.
In vew of the foregong, t s hed that the edera e cse ta on
|ewery, furs, and reated artces of persona property s a reevant
factor whch shoud be consdered n determnng the far market
vaue of such property for edera estate and gft ta purposes.
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2033. 112
S CTION 2032. LT RN T LU TION
auaton of |ewery, furs, and reated artces of persona property
n edera estate ta returns. See Rev. Ru. 55-71, page 110.
S CTION 2033. PROP RTY IN W IC T D C D NT
D N INT R ST
( so Part II, Secton 811(a) Reguatons 105, Rev. Ru. 55-87
Secton 81.13.)
The ump sum payabe under Tte II of the Soca Securty ct,
as amended, to the wdow or wdower of the deceased or to any per-
son or persons equtaby entted thereto s not ncudbe n the
decedent s gross estate for edera estate ta purposes.
dvce has been requested whether the ump sum payment receved
by the e ecutors or admnstrators of the estate pursuant to secton
202() of the Soca Securty ct, as amended, Pubc Law 269,
ghty-thrd Congress, approved ugust 1 , 1953, 67 Stat. 580, 2
U. S. C. 02 (), s ncudbe n the decedent s gross estate for edera
estate ta purposes.
Secton 2033 of the Interna Revenue Code of 195 (secton 811(a)
of the 1939 Code) provdes as foows:
The vaue of the gross estate sha ncude the vaue of a property (e cept
rea property stuated outsde of the Unted States) to the e tent of the nterest
theren of the decedent at the tme of hs death.
Secton 202 () of the Soca Securty ct, as amended, provdes n
part as foows:
Upon the death, after ugust 1950, of an Indvdua who ded a fuy or cur-
renty nsured ndvdua, an amount equa to three tmes such ndvdua s
prmary nsurance amount sha be pad n a ump sum to the person. If any,
determned by the dmnstrator to be the wdow or wdower of the deceased and
to have been vng wth the deceased at the tme of death. If there Is no such
person, or f such person des before recevng payment, then such amount sha
be pad to any person or persons equtaby entted thereto, to the e tent and n
the proportons that he or she sha have pad the e penses of bura of such
nsured ndvdua. .
amnaton of the nature of the payments under the above-quoted
secton of the Soca Securty ct dscoses that the decedent had no
contro over the desgnaton of the benefcary or the amount of the
payment snce these are f ed by the statute. urthermore, the dece-
dent had no property nterest n the edera Od ge and Survvors
Insurance Trust und from whch the payment s made.
In vew of the foregong, t s hed that the ump sum death payment
receved by the e ecutors or admnstrators of the estate of the dece-
dent under Tte II of the Soca Securty ct, as amended, does not
consttute property of the decedent at the tme of hs death wthn
the meanng of secton 2033 of the Interna Revenue Code of 195 .
ccordngy, the ump sum death payment s not ncudbe n the de-
cedent s gross estate for edera estate ta purposes. Compare . T.
10, C. . 1937-2, 09, and . T. 18, C. . 19 0-2,285.
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113 2503(b).
C PT R 12. GI T T
SU C PT R .-D T RMIN TION O T LI ILITY
S CTION 2503. T L GI TS
( so Part IT, Secton 1003(b) Reguatons Rev. Ru. 55- 08
103, Secton 86.11.)
Where a pocy of nsurance, whch grants to the owner the usua
ncdents of ownershp, ncudng the ght to change the benefcary
and the rght to surrender the pocy for ts cash vaue, f any, s
transferred or assgned to a donee as absoute owner, and the donee,
or hs guardan, s not estrcted n any manner from e ercsng a
ega ncdents of ownershp n the pocy, by pror endorsement or
otherwse, a gft of the pocy and subsequent payment of premums
thereon 1 t the door w consttute gfts of present nterests for the
purpose of determnng the gft ta e cuson authorzed by secton
2303(b) of the Interna Revenue Code of ) - .
dvce has been requested n vew of the decson n Nashve Trust
Company v. Commssoner, Ta Court Memorandum Opnon entered
November 15, 19 3, whether gfts of fe nsurance poces, whch
have no mmedate cash vaue, are gfts of present or future nterests
for edera gft ta purposes.
The Nashve Trust Company case nvoved gfts of nsurance
poces havng no cash vaues, the poces havng been assgned m-
medatey after ther ssuance. efore assgnng the poces the
donor had e ecuted settement optons whch, by the terms thereof,
mted the nterests of the donees to future nterests and n the audt
of the gft ta return the camed e cusons were dsaowed. The
donor hed a petton wth The Ta Court of the Unted States. In
sustanng the Commssoner s determnaton that the gfts were of
future nterests, the Ta Court commented upon the fact that the
poces had no cash or oan vaues. owever, as the gfts were of
future nterests by reason of the terms of the settement optons e er-
csed by the donor pror to the assgnments, t s not beeved the
decson can be consdered as authorty for hodng that a gft of an
nsurance pocy s a gft of a future nterest uness t has a cash vaue.
Secton 80.11 of Gft Ta Reguatons 108, defnes the term future
nterests as foows:
uture nterests s a ega term, and ncudes reversons, remanders, and
fther nterests or estates, whether vested or contngent, and whether or not
supported by a partcuar nterest or estate, whch are mted to commence n
use, possesson, or en|oyment at some future date or tme. The term has no
reference to such contractua rghts as e st n a bond, note (though bearng
w nterest unt maturty), or n a pocy of fe nsurance, the obgatons of
whch are to be dscharged by payment n the future. ut a future nterest or
nterests n such contractua obgatons may be created by the mtatons con-
taned n a trust or other Instrument of transfer empoyed n effectng a gft.
Under the reguatons a gft of an nsurance pocy havng no cash
vaue s not a gft of a future nterest merey because the pocy has
no cash vaue. owever, a gft of an nsurance pocy, whether or
not t has a cash vaue, may or may not be a gft of a future nterest,
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3121. 11
dependng upon whether, by the terms of the gft, the nterests of the
donee n the pocy are n some manner restrcted. Compare Nashve
Trust Company v. Commssoner, supra.
ccordngy, t s hed that where a pocy of nsurance, whch
grants to the owner the usua ncdents of ownershp, ncudng the
rght to change the benefcary and the rght to surrender the pocy
for ts cash vaue, f any, s transferred or assgned to a donee as
absoute owner, and the donee, or hs guardan, s not restrcted n
any manner from e ercsng a ega ncdents of ownershp n the
pocy, by pror endorsement or otherwse, a gft of the pocy and
subsequent payment of premums thereon by the donor w consttute
gfts of present nterests for the purpose of determnng the gft ta
e cuson authorzed by secton 2503(b) of the Interna Revenue
Code of 195 .
SU C PT R .-TR NS RS
S CTION 2512. LU TION O GI TS
auaton of |ewery, furs, and reated artces of persona property
n edera gft ta returns. See ev. u. 55-71, page 110.
SU TITL C MPLOYM NT T S
C PT R 21. D R L INSUR NC CONTRI UTIONS
CT
SU C PT R C.-G N R L PRO ISIONS
S CTION 3121. D INITIONS
( so Secton 3102.) ev. u. 55-203
( so Part II, Sectons 1 26,1022 Reguatons
128, Secton 08.220 Reguatons 120, Sec-
ton 00.300.)
mounts pad pursuant to secton 10(c) of the ar Labor Stand-
ards ct, as amended effectve anuary 2 ), 0, on account of un-
pad mnmum wages or unpad overtme compensaton consttute
wages for purposes of edera empoyment ta es and ncome ta
wthhodng. The empoyee ta under secton 8101 of the edera
Insurance Contrbutons rt and the ncome ta requred to be co-
ected at source under secton 3 02 of the Interna Revenue Code
of shoud be deducted by the empoyer at the tme the wages
are pad over to the Government for dstrbuton to the empoyees.
Such ta es, and the empoyer ta under secton 8111 of the edera
Insurance Contrbutons ct shoud be reported n the current quar-
tery return Ded by the empoyer.
n nqury has been receved reatve to the ta abty and treatment
for purposes of the edera Insurance Contrbutons ct and Co-
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115 3121.
oton of Income Ta at Source on Wages (chapters 21 and 2 , re-
spectvey, subtte C, Interna Revenue Code of 195 ) of wages re-
covered pursuant to secton 16(c) of the ar Labor Standards ct,
as amended effectve anuary 25,1950, 29 U. S. C. 216 (c).
Secton 16(c) of the ar Labor Standards ct, as amended, au-
thorzes the dmnstrator of the Wage and our Dvson, U. S.
Department of Labor, to brng an acton n court aganst an empoyer
on behaf of one or more empoyees to recover unpad mnmum wages
and unpad overtme compensaton due empoyees. The sums thus
recovered are hed n a speca depost account and are pad, on the
order of the dmnstrator, drecty to the empoyee or empoyees
affected. The names of the empoyers who pad the |udgments are
furnshed to the Dstrct Drector of Interna Revenue n order that
empoyment ta returns may be secured.
mounts pad by empoyers pursuant to secton 16(c), supra, on
account of unpad mnmum wages or unpad overtme compensaton
are pad n consderaton of servces performed for the empoyer and
consttute wages for purposes of edera empoyment ta es and n-
come ta wthhodng. The edera Insurance Contrbutons ct
ernpovee ta and the ncome ta requred to be coected at source
shoud be deducted and wthhed at tho tme the empoyer turns the
money over to the Government for dstrbuton to the ndvduas n-
voved. Such ta es, together wth the empoyer ta mposed by the
edera Insurance Contrbutons ct, shoud be reported n the m-
poyer s uartery edera Ta Return, orm 9 1, for the quarter
durng whch the ta es were deducted and wthhed and shoud he
pad to the Government n the usua manner. The empoyer shoud
furnsh the empoyee a Wthhodng Ta Statement, orm W-2,
showng the amount of the payment attrbutabe to hs servces and
the amount of the edera ncome ta wthhed. Where other wages
are pad to the empoyee durng the caendar year, the wages pad
pursuant to secton 16(c) shoud be ncuded n the tota wages re-
ported n the wthhodng statement. See S. S. T. 393, C. . 19 0-1,
213, wth respect to payments made to empoyees pursuant to secton
16(b) of the ar Labor Standards ct of 1938.
( so Secton 3 01.) Rev. Ru. 55-232
( so Part II, Sectons 1 26,1621 Regua-
tons 128, Secton 08.226 Reguatons
120, Secton 0G.207.)
The cash vaue of awards earned by saesmen through ther efforts
to ncrease saes for ther empoyer consttutes addtona wages to
the saesmen for purposes of edera empoyment ta es and the
wthhodng of ncome ta , even though te awards are made to
the wves of the saesmen.
queston has been rased whether the cash vaue of awards made
to saesmen s wves by the saesmen s empoyer, as a resut of efforts
of the saesmen to make addtona saes durng a saes promoton
campagn, consttutes addtona wages for purposes of the edera
Insurance Contrbutons ct and Coecton of Income Ta at Source
on Wages (chapters 21 and 2 respectvey, subtte C, Interna Reve-
nue Code of 195 ).
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3121. 116
In S. S. T. 29, C. . -2, 17 (1936), t s hed that for edera
empoyment tu purposes przes awarded to saesmen as wnners of
contests conducted by ther empoyer consttute addtona wages.
or purposes of the edera Insurance Contrbutons ct and ncome
ta wthhodng, wages consst of a remuneraton for servces per-
formed by an empoyee for hs empoyer, ncudng the cash vaue of
a remuneraton pad n any medum other than cash, wth certan
e ceptons not here matera.
It s hed that the cash vaue of awards earned by saesmen through
ther efforts to ncrease saes for ther empoyer consttutes addtona
wages for purpose of the edera Insurance Contrbutons ct and
ncome ta wthhodng, rrespectve of the fact that such awards,
athough earned by the saesmen, are ssued to the saesmen s wves
by the empoyer.
( so Part II, Secton 1 26 Reguatons 128, Rev. Ru. 55-233
Secton 08.20-1.)
n Indvdua entered Into an agreement wth an organzaton
to perform servces on ts behaf as an organzer of forum-type
dnner cubs. The ndvdua seects the ctes n whch he estab-
shes cubs, determnes the hep requred, and engages, pays, and
drects such hep. e s not requred to gve preference to the
organzaton s affars, to work a specfed number of hours, to estab-
sh a mnmum number of cubs, or to furnsh reports, other than a
report on the number of members secured. e receves a com-
msson based on the membershp of each cub estabshed by hm.
e s not aowed a drawng account and he s not rembursed for
e penses. ed, the ndvdua s not an empoyee of the organ-
zaton for edera empoyment ta purposes.
rung has been requested whether an ndvdua who organzes
forum-type dnner cubs on behaf of an organzaton, under the
crcumstances descrbed beow, s an empoyee of the organzaton for
purposes of the edera Insurance Contrbutons ct (chapter 21,
subtte C, Interna Revenue Code of 195 ).
n organzaton whose purposes generay are to promote soca
contacts among busness and professona eaders and to keep the
pubc at arge nformed on modern pubc and prvate probems of
government, busness, ndustry, fnance and the professons through
addresses by natona eaders, engaged an ndvdua to perform serv-
ces as an organzer of forum-type dnner cubs. Under the organ-
zaton s operatona procedure, cubs are organzed from coast to coast
dnners are arranged monthy, e cept durng the summer, for the cub
members and natonay known ndvduas are obtaned as guest
speakers at such dnners. Under the terms of an agreement between
the partes, the organzer receves a porton of the membershp fee
for eac person who becomes a member durng the cub s frst fsca
year. e has no fnanca nterest n a cub estabshed by hm after
that perod. e seects the ctes n whch he estabshes the cubs
and s not requred to confne hs actvtes to anv specfed terrtory.
Shoud he be unabe to organze a group suffcenty arge to oe
accepted by the organzaton, he woud be obged to refund a fee
payments and a e penses ncurred n such effort woud be borne by
hm. e s not requred to work any specfed number of hours per
day or week, or to furnsh any reports other than to advse the organ-
zaton of the number of members secured after the organzaton of a
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117 3121.
cub s competed. e s not obgated to estabsh a mnmum number
of cubs and s furnshed no eads by the organzaton concernng
members, or paces where cubs mght be organzed. If needed, he
engages hepers and they are sub|ect to hs drecton and contro and
are pad by hm. e performs no other servces for the organzaton
and s not requred to gve preference to hs servces on the organ-
aton s behaf. The arrangement may be termnated by ether party
at any tme for any reason.
Secton 3121(d) of the edera Insurance Contrbutons ct pro-
rdes, among other thngs, that the term empoyee means any nd-
vdua who under the usua common aw rues appcabe n deter-
mnng the empoyer-empoyee reatonshp has the status of an
empoyee. Whether an ndvdua s an empoyee under the usua
mnon aw rues depends upon the partcuar facts n each case.
The gudes for determnng, under the usua common aw rues,
whether an empoyer-empoyee reatonshp e sts are found n secton
08.20 (c) of Reguatons 128, appcabe to the provsons of the
Interna Revenue Code of 195 by vrtue of T. D. 6091, C. . 195 -2,
7, unt superseded by reguatons ssued under the 195 Code.
In the nstant case, t s determned that the organzaton for whch
the ndvdua performs servces as an organzer of forum-type dnner
ubs nether e ercses nor has the rght to e ercse such contro over
t e ndvdua n the performance of hs servces as s necessary under
the usua common aw rues to estabsh the reatonshp of empoyer
am empoyee for edera empoyment ta purposes.
( so Part IT, Secton 1120 Reguatons 128, Rev. Ru. 55-2 7
Secton 08.21 .)
Servces of cvan empo rees of State Natona Guards and unts
hereof are e cepted from empoyment as servces performed n the
empoy of a State under secton 3121(b)(7) of the edera Insur-
ance Contrbutons ct (chapter 21, subtte C, Interna Revenue Code
of 105 ). ccordngy, the ta es mposed by the ct are not ap-
pcabe to the remuneraton for such servces. Ths rung s aso
appcabe under the provsons of secton 1 20(b) (8) of the Interna
Revenue Code of 1939.
ffectve as of anuary 1, 1951, secton 218(b)(5) of the Soca
Securty ct, as amended by the Soca Securty mendments of
195 , provdes that certan cvan empoyees of State Natona
Guard unts sha be deemed to be empoyees of the State for purposes
of coverage under Tte II of that ct. The matter of coverage of
State empoyees pursuant to a vountary agreement under secton 218,
upra, s wthn the |ursdcton of the Secretary of eath, duca-
ton and Wefare, Washngton, D. C. uestons reatng to such
aatters shoud be addressed to that Department.
( so Secton 1 02.) Rev. Ru. 55-2 8
( so Part II, Sectons 81,1 20 Regua-
tons 118, Secton 39. 81-3, Regua-
tons 128, Secton 08.20 .)
n Indvdua conductng a watch repar busness n a ewery
ttore, payng the |eweer a percentage of recepts as rent for space
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5 3121. 118
occuped, furnshng a hs own equpment, toos, nstruments and
materas requred n the conduct of such busness, reguatng hs
own workng hours, f ng hs own prces for hs work, and dong a
repar work n accordance wth hs own methods, s not an empoyee
of the |eweer for edera empoyment ta purposes.
Income derved from such actvty shoud be consdered n com-
putng net earnngs from sef-empoyment for purposes of the Sef-
mpoyment Contrbutons ct
n nqury has been receved reatve to the status, for purposes of
the edera Insurance Contrbutons ct (chapter 21, subtte C,
Interna Revenue Code of 1951) and the Sef- mpoyment Contrbu-
tons ct (chapter 2, subtte , Interna Revenue Code of 195 ) of
a watch reparman performng servces under the crcumstances de-
scrbed beow.
In order to provde a facty for watch repar n hs |ewery store,
entered nto an agreement wth , a watch reparman, whereby he
Moud furnsh the space n hs store to operate such facty n re-
turn for 0 percent of the proceeds from s work. furnshes a
abor, toos (ncudng a workbench), suppes, and parts necessary
n the busness of watch repar, deas drecty wth the customer and
determnes the fees to be charged. has compete contro over the
tme to So taken n competng a repar and s responsbe for a work
done by hm, t beng understood that any guarantee made by hm
Moud not be bndng upon the |ewery store. In nstances where ho
may b caed upon to repar a watch for the store, he determnes the
vaue of hs work and the transacton s handed as a reguar repar.
ther or may dever the repared artce to the customer and
coect for the work. or the purpose of mantanng a correct ac-
countng system, assurng each party of hs share of the proceeds, a
mones coected are handed through the store, recevng hs share
of the proceeds sem-monthy n accordance wth the agreement.
determnes hs hours of work and receves no nstructons from as
to how the work shoud be done.
Secton 3121(d) of the edera Insurance Contrbutons ct, as
amended, provdes, among other thngs, that the term empoyee
means any ndvdua who, under the usua common aw rues app-
cabe n determnng the empoyer-empoyee reatonshp, has the
status of an empoyee. The gudes for determnng, under the usua
common aw rues, whether an empoyer-empoyee reatonshp e sts
are found n secton 08.201(c) ot Reguatons 128, appcabe to the
provsons of the Interna Revenue Code of 195 by vrtue of Treas-
ury Decson 0091, C. . 195 -2, 7, unt superseded by reguatons
ssued under the 1951 Code.
Whether an ndvdua s an ndependent contractor or an empoyee
s argey a queston to be determned upon consderaton of the partc-
uar facts n each case. In the nstant case, t s determned that _,
the |eweer, nether e ercses nor has the rght to e ercse such contro
over / , the watch reparman, n the performance of hs servces as s
necessary under the usua common aw rues to estabsh the reaton-
shp of empoyer and empoyee for edera empoyment ta purposes.
Snce s not an empoyee wth respect to hs servces as a Mrateh
reparman, the queston resoves tsef nto whether such actvtes con-
sttute a trade or busness for purposes of the Sef- mpoyment
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119 3121.
Contrbutons ct and whether the ncome derved therefrom s sub-
|ect to the ta mposed under the ct.
Secton 1 02(c) of the Sef- mpoyment Contrbutons ct pro-
vdes that the term trade or busness, when used wth reference
to se-empoyment ncome or net earnngs from sef-empoyment,
sha have the same meanng as when used n secton 162 of the In-
terna Revenue Code, wth certan e ceptons not here matera.
s a genera rue, a person who s reguary engaged n an occupa-
ton or professon for proft, whch consttutes, n whoe or n part,
hs vehood, and who s not an empoyee for purposes of the edera
Insurance Contrbutons ct, s engaged n a trade or busness.
Under the crcumstances stated heren, t s concuded that s en-
paged n a trade or busness wth respect to hs servces as a watch
reparman and the ncome derved therefrom s ncudbe n comput-
ng net earnngs from sef-empoyment.
( so Secton 501.) Rev. u. 55-319
( so Part , Secton 1 26 Reguatons 128,
Secton 08.21 .)
whoy-owned State Instrumentaty may In some crcumstances
quafy for e empton from edera Income ta under secton
501 (c) (3) of the Interna Revenue Code of 195 .
Coverage under the Soca Securty ct of empoyees of a whoy-
owned State nstrumentaty may be effected ony pursuant to a
compact under secton 218 of the Soca Securty ct. The waver
procedure provded n secton 3121 (k) of the edera Insurance
Contrbutons ct s not appcabe to a whoy-owned State nstru-
mentaty rrespectve of whether the partcuar nstrumentaty s
e empt under secton 501(c) (3) of the Code.
n nqury has been receved whether (.1) a whoy-owned State
nstrumentaty may aso quafy for e empton from edera ncome
ta under secton 501(c) (3) of tne Interna Revenue Code of 195 and
(2), f so, whether the waver procedure provded n secton 3121(k)
of the edera Insurance Contrbutons ct (chapter 21, subtte C,
Interna Revenue Code of 195 ) s appcabe n effectng coverage for
ts empoyees under the Soca Securty ct.
It s hed that where an organzaton desres to have the beneft of
a partcuar ta feature e tended to ts empoyees, such as the e cep-
ton provded by secton 03 of the Code, whch depends on e empton
under secton 501 (a) of an empoyer descrbed n secton 501 (c) (3),
and the partcuar organzaton meets the statutory requrements for
e empton under secton 501 (c) (3) of the Code t may be granted
e empton thereunder, regardess of the fact that t aso quafes as a
whoy-owned State nstrumentaty and, as such, woud not be sub|ect
to edera ncome ta .
It does not foow, however, that coverage under the Soca Securty
ct may be effected for empoyees of such an organzaton by the
water procedure provded by secton 3121 (k) of the edera In-
surance Contrbutons ct.
Secton 3121(b) (8) ( ) of the ct, as amended by the Soca Secur-
ty mendments of 195 , e cepts from empoyment servce per-
formed n the empoy of an organzaton e empt from ncome ta
6 050 9
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3121. 120
under secton 501 (c) (3) of the Code. owever, such an organzaton
may wave ts e cepton as to certan empoyees by compyng wth
the provsons of secton 3121 (k) of the ct.
Secton 3121(b) (7) of the ct e cepts from empoyment servce
performed n the empoy of a State, or any potca subdvson
thereof, or any nstrumentaty of any one or more of the foregong,
whch s whoy owned by one or more States or potca subdv-
sons. Secton 218 of the Soca Securty ct, as amended, 2,
S. C. 18, provdes for the coverage of empoyees of whoy-owned
State organzatons f the State and the Department of eath, du-
caton, and Wefare enter nto a compact provdng for such coverage.
To secure coverage under the Soca Securty ct of empoyees of
an organzaton e empt under secton 501(c) (3) of the Code, secton
3121(k) of the edera Insurance Contrbutons ct requres the con-
sent of the partcuar organzaton and two-thrds of ts empoyees
but to secure coverage for a whoy-owned State nstrumentaty, sec-
ton 218 of the Soca Securty ct requres the consent of the State,
rather than that of the partcuar nstrumentaty.
In vew of the Congressona purpose behnd secton 218 of the
Soca Securty ct of aowng State governments, rather than a
partcuar State nstrumentaty, dscreton n determnng whch
State empoyees shoud be covered under the Soca Securty ct,
t s hed that empoyees of whoy-owned State nstrumentates
may secure soca securty coverage ony by the procedure outned n
secton 218 of the Soca Securty ct. See Senate Report No. 1669
on Soca Securty ct mendments of 1950, C. . 1950-2, 302, at 307,
and 32 . Therefore, the waver procedure provded n secton
3121 (k) of the edera Insurance Contrbutons ct s not appcabe
to a whoy-owned State nstrumentaty rrespectve of whether the
partcuar nstrumentaty aso quafes for e empton under secton
501(c)(3) of the Code.
ev. u. 55-386
n Indvdua performs servces of a domestc nature In the pr-
vate nonfarm home of the empoyer and, n addton, servces at hs
pace of busness. ed, the ta es Imposed under the edera Insur-
ance Contrbutons ct shoud be computed on the tota wages
pad to the empoyee provded the Indvdua meets the 50 a
quarter test wth respect to the domestc servces. The ncuded
and e cuded servce rue contaned n secton 3121(c) of the ct
Is not appcabe.
n nqury has been receved reatve to the procedure whch shoud
be foowed n computng the ta es mposed under the edera In-
surance Contrbutons ct (chapter 21, subtte C, Interna Revenue
Code of 195 ) on wages pad by an empoyer to an empoyee who
performs servces of a domestc nature n the prvate nonfarm home
of the empoyer and, n addton, servces at hs pace of busness
aso, whether the ncuded and e cuded servce rue contaned n
secton 3121 (c) of the ct s appcabe to ths empoyment.
Under secton 3121(a) of the ct the term wages means a
remuneraton for empoyment, ncudng the cash vaue of a remu-
neraton pad n any medum other than cash e cept that such term
sha not ncude
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121 ( 3121.
(1) that part of tbe remuneraton whch, after remuneraton (other than
remuneraton referred, to In the succeedng paragraphs of ths subsecton) equa
to 20O wth respect to empoyment has been pad to an ndvdua by an em-
p)o durng any caendar year, s pad to such ndvdua by such empoyer
durng such caendar year.

(1) k) remuneraton pad n any medum other than cash to an empoyee
ot domestc servce n a prvate home of the empoyer
( ) cash remuneraton pad by an empoyer n any caendar quarter to an
empoyee for domestc servce n a prvate home of the empoyer, f the cash
remuneraton pad n such quarter by the empoyer to the empoyee for such
servce s ess than 50.
efore determnng whether wages pad to a domestc servant are
sub|ect to the edera empoyment ta es, t s necessary to consder
whether 50 n cash was pad to the servant for the domestc servce
performed durng a caendar quarter. Where an empoyee meets the
50 a quarter test for servces of a domestc nature n the prvate non-
farm home of an empoyer and aso receves ta abe wages from the
same empoyer for servces of a busness nature, the ta es mposed
under the ct shoud be computed wth respect to a wages pad by
the empoyer for servces of a busness nature and wth respect to the
cash wages pad for servces of a domestc nature, sub|ect to the m-
taton provded by secton 3121(a) (1) of the ct. owever, f the
50 a quarter test s not met wth respect to the servces of a domestc
nature, no abty for the ta es under the ct s ncurred wth respect
to such servces and the remuneraton pad therefor shoud not be
ncuded n computng ta abe wages under the ct.
Secton 3121 (c) of the ct provdes, n part:
f the servces performed durng one-haf or more of any pay perod
by an empoyee for the person empoyng hm consttute empoyment, a the
servces of such empoyee for such perod sha be deemed to be empoyment
but f the servces performed durng more than one-haf of any such pay perod
by an empoyee for the person empoyng hm do not consttute empoyment,
then none of the servces of such empoyee for such perod sha be deemed to be
empoyment. s used n ths subsecton, the term pay perod means a perod
(of not more than 31 consecutve days) for whch a payment of remuneraton s
onnary made to the empoyee by the person empoyng hm.
The ncuded and e cuded servce rue contaned n secton 3121(c)
of the ct s appcabe ony n those nstances where the reatonshp
of empoyer and empoyee e sts and a porton of the servces per-
formed by an empoyee for the person empoyng hm durng a pay
perod consttutes enpoyment and the remander does not const-
tute empoyment. Domestc servces n the prvate nonfarm home
of the empoyer consttute empoyment even though by reason of
secton 3121(a) (7) ( ), supra, certan remuneraton therefor s not
ta abe as wages. Therefore, snce both the busness servces and
the domestc servces of an empoyee for hs empoyer consttute em-
poyment, the ncuded and e cuded servce rue has no appcaton.
form 9 1, mpoyer s uartery edera Ta eturn, s the regu-
ar ta and nformaton return prescrbed for use by empoyers of
busness empoyees. orm 9 2, mpoyer s uartery Ta eturn for
ousehod mpoyees, s the form prescrbed for use by every em-
poyer n reportng wages pad by hm for domestc servce n a
prvate home not on a farm operated for proft. Ta abe wages of
busness empoyees shoud not be reported by an empoyer on orm
9 2, but an empoyer who fes orm 9 1 for busness empoyees may
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3121(d). 122
ncude hs domestc empoyees on such form f he so desres by fo-
owng the speca nstructons whch appear on orm 9 1, or he may
report hs domestc empoyees on a separate orm 9 2. If the em-
poyer has ony one empoyee and ta abe wages are pad to ths
empoyee for both busness and domestc servces, the empoyer may
combne the wages for each type of servce and report a of the em-
poyee s ta abe wages on orm 9 1. See Secton 08.601, Reguatons
128, appcabe to the provsons of the 195 Code by vrtue of T. D.
6091, C. . 195 -2 7. Where the empoyer eects to combne the
wages, and the servces performed by the empoyee are predomnanty
of a domestc nature, the etter shoud be nserted at the e treme
rght-hand sde of coumn 20 of the return, orm 9 1, opposte the
empoyee s name.
Indvdua performng servces as se ton of cemetery. See Rev.
u. 55-328, page 98.
S CTION 3121. D INITIONS
( so Part II, Secton 1 26, Reguatons 128, Rev. Ru. 55-370
Secton 08.20 )
n ndvdua performs automobe repar servces n the repar
department of an automobe saes company. e works reguar
hours and s pad on a percentage bass. e has no nvestment In
the repar department. The company furnshes a factes, n-
cudng materas and pant, checks a estmates and repar orders,
and ssues Instructons reatve to amount to be charged. ed,
the Indvdua s an empoyee of the company for edera
empoyment ta purposes.
The Interna Revenue Servce has been requested to determne the
status, for purposes of the edera Insurance Contrbutons ct
(chapter 21, subtte C, Interna Revenue Code of 195 ), of an nd-
vdua who performs automobe repar servces n a repar department
of an automobe saes company.
The company ses automobes and trucks and operates a repar
department n connecton wth ts saes department. or severa years
the company engaged the ndvdua as an automobe body and fender
man n the repar department, durng whch tme he was pad 60 per-
cent of the abor charges. Later he worked as foreman of the depart-
ment on a weeky saary bass. t a tmes the company consdered
hm to be ts empoyee. owever, durng 195 the company advsed
the ndvdua that he woud no onger be carred on the payro
that f he wshed to contnue workng n the estabshment he coud
make estmates and repar vehces, for whch he woud be charged
0 percent of hs weeky recepts to defray costs of rent, uttes, and
shop factes and that the 0 percent charge woud be deducted
from the recepts for competed work. The company agreed to
furnsh a materas and pants and the ndvdua agreed to pay hs
own ta es and keep hs own books.
The ndvdua contnued to perform the same repar servces and
he observed reguar workng hours The company checked a est-
mates and repar orders, nstructed the worker as to the amount he
was aowed to charge for a |ob, advsed when to use new or used parts,
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123 3 01.
and set the date for the competon of the |ob. The ndvdua per-
formed hs servces n the company s pace of busness on a fu-tme
bass, had no nvestment n the repar shop, and furnshed ony sma
band toos for hs work. e operated under the company s name,
dd not hod hmsef out to the pubc as avaabe to do work of a
muar or reated nature, and dd not perform servces for others.
Secton 3121(d) of the edera Insurance Contrbutons ct pro-
vdes, among other thngs, that the term empoyee means any nd-
vdua who, under the usua common aw rues appcabe n deter-
mnng the empoyer-empoyee reatonshp, has the status of an
empoyee.
Whether a person s an ndependent contractor or an empoyee s
argey a queston to be determned upon the partcuar facts or each
case. The gudes for determnng, under the usua common aw rues,
whether an empoyer-empoyee reatonshp e sts are found n secton
08.20 (c) of Reguatons 128, appcabe to the provsons of the
Interna Revenue Code of 195 by vrtue of Treasury Decson 6091,
C. . 195 2, 7, unt superseded by reguatons ssued under the
195 Code.
Under the crcumstances stated, t s apparent that the company
has the rght to e ercse such contro over the ndvdua n the per-
formance of hs servces as w assure the company a reasonabe n-
come from the arrangement. The fact that the ndvdua s remu-
neraton s on a percentage bass s mmatera. ccordngy, t s hed
that, for edera empoyment ta purposes, the reatonshp between
the company and the ndvdua s that of empoyer and empoyee,
both pror and subsequent to the date on whch he was notfed that
hs name woud no onger be carred on the company s payro.
C PT R 2 . COLL CTION O INCOM T T SOURC
ON W G S
S CTION 3 01. D INITIONS
26 C R 06.207: Wages. T. D. 6128
( so Secton 6001 26 C R 06.607.)
( so Part II, Sectons 1621, 3603
Reguatons 120, Sectons 06.207,
06.607.)
TITL 2 INT RN L, R NU . C PT R I, SU C PT R n, P RT 06.
COLL CTION O INCOM T T SOURC ON W G S PPLIC L ON NU
T NU RY 1. 195
Reguatons 120 amended to provde rues for wthhodng on
payments under secton 105(d) of the Interna Revenue Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 26, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On September 2 , 195 , a notce of proposed ruemakng reatng
to Reguatons 120 (26 C R (1939) pt. 06) was pubshed n th
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3 01. 12
edera egster (19 . R. 61 ) n order to provde rues for -wth-
hodng on payments sub|ect to secton 105 (d) of the Interna Revenue
Code of 195 . Reguatons 120 were made appcabe to the Interna
Revenue Code of 195 by Treasury Decson 6091 C. . 195 -2, 7 ,
whch was sgned on ugust 16, 195 . fter consderaton of the
reevant suggestons presented by nterested partes regardng the
roposed rues, the foowng amendments to Reguatons 120 are
ereby adopted:
Paragraph 1. Secton 06.207 s hereby amended by nsertng at the
end thereof the foowng new paragraph:
Sec. 06,207. Wages.
() Compensaton for persona n|ures or sckness amounts pad after
1053 ND OR 11)50 UND R W O CONTINU TION PL NS. (1) mOUTtS pad by
empoyer for whom servces are performed. () Wthhodng s not requred
upon amounts pad after December 31, 1053, and before anuary 1, 1956, to an
empoyee by hs empoyer under a wage contnuaton pan for a perod durng
whch the empoyee s absent from work on account of persona n|ures or
sckness, f such amounts are e cudabe from the gross ncome of the empoyee
under secton 105(d) of the Interna Revenue Code of 195 and the records
mantaned by the empoyer n accordance wth the provsons of secton
00.607(a)
(a) Separatey show the amounts of such payments and dstngush such
amounts from a other payments, and
(6) stabsh the facts necessary to show that the empoyee s entted
to the e cuson provded by secton 105(d) of the Interna Revenue Code
of 195 , ether by means of a wrtten statement from the empoyee as to
the n|ury, ness, or hosptazaton, or by any other nformaton whch
the empoyer beeves to be accurate and whch he Is wng to accept for
purposes of payments under the wage contnuaton pan,
() or the purpose of secton 00.501, reatng to the requrement of recepts
for empoyees, amounts pad after December 31, 1953, and before anuary 1, 1956,
whch are e cudabe from gross ncome under the provsons of secton 105(d)
of the Interna Revenue Code of 195 sha be ncuded n the tota wages re-
qured to be shown on orm W-2. The amount of any such wages on whch the
empoyer, n reance on secton 105(d) of the Interna Revenue Code of 195 ,
does not wthhod must be shown separatey, and propery dentfed, on orm
W-2 n such manner that t may be read on each copy of the form.
( ) See secton 06.607 for genera requrements reatng to the keepng of
records by empoyers.
(2) mounts pad by person other than empoyer for hom servces are per-
formed. Wthhodng s not requred upon any amounts pad after December 31,
1953, and before anuary 1, 1956, to an empoyee for a perod durng whch the
empoyee s absent from work on account of persona n|ures or sckness, whether
or not such amounts are e cudabe from the gross ncome of the empoyee, If
such amounts are pad through accdent or heath nsurance or under an accdent
or heath pan by a person who s not the empoyer for whom the empoyee
performs servces but who Is regarded as an empoyer under secton 06.205(c).
or e ampe, no wthhodng s requred n connecton wth accdent or heath
benefts pad by an nsurance company under an accdent or heath pocy, by
a separate trust under an accdent or heath pan, or by a State agency from
a sckness and dsabty fund mantaned under State aw.
Par. 2. Secton 06.607(a) s hereby amended by nsertng at the
end thereof the foowng new subparagraph:
Sec. 00.607. Records. (a) Records of empoyers.
( ) or addtona record-keepng requrements n the case of payments under
secton 105(d) of the Interna Revenue Code of 195 , see secton 06.207U).
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 1 29 and 3791 (53 Stat. 178, 67 26 U. S. C. 1 29, 3791)
and secton 1627 (57 Stat. 138 26 U. S. C. 1627) of the Interna
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125 2 1
cthhms Coda of 1939 and secton 7805 (68 Stat. 917 26 U. S. C.
1805) of the Interna Revenue Code of 195 .)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 25, 1955.
Davd W. enda,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 25, 1955, :02 p. m.)
Cash vaue of awards earned by empoyee saesmen. See Rev. Ru.
5 -232, page 115.
S CTION 3 02. INCOM T COLL CT D T SOURC
Wages pad under the ar Labor Standards ct. See Rev. Ru.
55-203, page 11 .
C PT R 32. M NU CTUR RS CIS T S
SU C PT R D. R CR TION L UIPM NT
P RT III. IR RMS
S CTION 181. IMPOSITION O T
Labty to the manufacturer s e cse ta by reason of the sae
of frearms assembed from component parts by other than the
manufacturer of such parts. See Rev. Ru. 55-3 2, page 562.
C PT R 33. CILITI S ND S R IC S
SU C PT R .- DMISSIONS ND DU S
P RT II. CLU DU S
S CTION 2 1. IMPOSITION O T
LI M M RS IPS
ppcaton of the cub dues ta on fe membershps to certan
casses of honorary members. See Rev. Ru. 55-198, page 510.
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1 321.) 126
SU C PT R C TR NSPORT TION
P RT I. P RSONS
S CTION 261. IMPOSITION O T
( so Part II, Secton 3 69 Reguatons 2, Rev. Ru. 55- 09
Secton 130.5 .)
resdent of the Unted States drves hs automobe from a pont
n the Unted States to Whtehorse, Yukon Terrtory, Canada, On
the return trp, n order to avod traveng over the same route, he
purchases a tcket n Canada for transportaton va raroad and
steamshp from Whtehorse to ancouver, rtsh Coumba, Canada.
Ths |ourney crosses a porton of aska. ed, snce the payment
made n Canada s for a trp whch begns and ends outsde the Unted
States, the ta on the transportaton of persons, mposed by secton
261 of the Interna Revenue Code of 195 (secton 3 69 of the 1939
Code), s not appcabe to such payment even though the person
purchasng such transportaton s a resdent of the Unted States.
C PT R 3 . DOCUM NT RY ST MP T S
SU C PT R . S L S OR TR NS RS O C PIT L STOC ND
C RTI IC TIONS O IND T DN SS O CORPOR TION
P RT I. S L S OR T NS RS O C PIT L STOC ND SIMIL R INT R STS
S CTION 321. TR NS RS O C PIT L STOC -
IMPOSITION O T
Rev. Ru. 55- 6
The rues on secton 1802 of the Interna Revenue Code of 1939
contaned In Reguatons 71 shoud be apped to secton 321 of the
Interna Revenue Code of 195 unt the reguatons are ssued under
secton 321.
dvce has been requested reatve to the computaton of the docu-
mentary stamp ta on saes and transfers of capta stock under sec-
ton 321(1) of the Interna Revenue Code of 195 on and after an-
uary 1,1955. the effectve date of such secton, n vew of the dfference
n wordng between that secton and secton 1802(b), the correspond-
ng secton of the Interna Revenue Code of 1939.
Under the provsons of secton 1802(b) of the 1939 Code a stamp
ta was mposed on saes and transfers of capta stock at specfed
rates on each 100 of the par vaue or fracton thereof of the certf-
cates sod or transferred. The methods of computng the ta mposed
by secton 1802(b) on the sae or transfer of snares or certfcates of
stock are stated n secton 113.32 of Reguatons 71.
Treasury Decson 6091, C. . 195 -2, 7, approved ugust 16,195 ,
prescrbng stopgap reguatons under the Interna Revenue Code of
195 , provdes, n part:
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127 591.
M reguatons (ncudng a Treasury Decsons) appcabe under
n| provson of. aw n effect on the date of enactment of the 195 Code, to
the e tent such provson of aw s repeaed by the Code, are hereby prescrbed
tto and made appcabe to the provsons of the Code correspondng to the
provson of aw so repeaed nsofar as any such reguaton s not uconsstent
v the Code. Such reguatons sha become effectve as reguatons under
the varous provsons of the Code ns of the dates the correspondng provsons
ot aw are repeaed by the Code, unt superseded by reguatons ssued under
the Code.
The reports on the 195 Code submtted by the commttees of both
houses ot Congress state that any changes n the e cse ta statutes
under the new Code woud be structura rather than substantve. In
vew of the foregong, the rues on secton 1802 of the 1939 Code con-
taned n Reguatons 71 shoud be apped to secton 321 of the
195 Code unt the reguatons are ssued under secton 321.
C PT R 38. IMPORT T S
SU C PT R . OL OM RG RIN
S CTION 591. IMPOSITION O T
( so Sectons 803, 871.) Rev. Ru. 55-107
Interm procedure for aff ng adhesve stamps to packages or
bo es of whte phosphorus matches and Imported oeomargarne,
and to contracts or memoranda In the case of cotton futures.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to provde an nterm pro-
cedure for aff ng adhesve stamps to packages or bo es of whte pos-
phorus matches and mported oeomargarne, and to contracts or
memoranda n the case of cotton futures, as evdence of the payment of
the nterna revenue ta es mposed by aw.
Sec. 2. ackground.
Secton 801 of the Interna Revenue Code of 195 mposes a ta at
the rate of 2 cents per hundred on whte phosphorus matches, and sec-
ton 803 provdes that ths ta sha be represented by adhesve stamps.
Secton 591 mposes a ta of 15 cents per pound on a oeomargarne
mported from foregn countres, and states ths ta w be represented
by coupon stamps. Secton 851 mposes an e cse ta of 2 cents for
each pound of cotton nvoved n any contract of sae of such cotton for
future devery, sub|ect to certan e emptons, and secton 871 pro-
vdes that ths ta sha be pad by means of stamps. It s not antc-
pated that there w be many, f any, cases whch w requre the
mposton of these ta es. Under the crcumstances, t s not con-
tempated that speca nterna revenue stamps w be provded for use
n evdencng the payment of the ta es n these 3 nstances.
Sec. 3. Procedure.
Unt further notce, any orders for stamps for use n ta payng the
artces and the transactons mentoned heren w be fed by Dstrct
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5 5801. 128
Drectors by furnshng documentary nterna revenue stamps n the
approprate denomnatons. Upon presentaton of a requston, ta -
Dayers w be advsed by etter that no speca types of stamps have
een provded, and that the documentary stamps shoud be aff ed to
the packages, bo es or contracts and canceed n the manne set forth n
the reguatons on documentary stamp ta es.
I
C PT R 39. R GUL TORY T S
SU C PT R . W IT P OSP ORUS M TC S
S CTION 803. ST MPS
Interm procedure for aff ng adhesve stamps to packages or bo es
of whte phosphorus matches. See Rev. Ru. 55-107, page 127.
SU C PT R D. COTTON UTUR S
P RT III. DMINISTR TI PRO ISIONS
S CTION 871. M T OD O P YM NT
Interm procedure for aff ng adhesve stamps to contracts or mem-
oranda n the case of cotton futures. See Rev. Ru. 55-107, page 127.
C PT R 53. M C IN GUNS ND C RT IN OT R
IR RMS
SU C PT R . T S
P RT I. SP CI L (OCCUP TION L) T S
S CTION 5801. T
Reguatons 88, Secton 319.36: Rates of ta . Rev. Ru. 55-33
( so edera rearms ct, Secton 3 Secton
315. 0, Reguatons 131.)
Labty to speca (occupatona) ta Imposed under secton 5S01
of the Interna Revenue Code of 19u woud not be ncurred by a
censed deaer under the edera rearms ct for transmttng
orders for frearms to a bona fde manufacturer of frearms.
dvce has been requested whether frearms deaers censed under
the edera rearms ct must pay speca (occupatona) ta under
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129 58 8.
secton 5801 of the Interna Revenue Code of 195 f they receve a
commsson for referrng orders for frearms to manufacturers.
In the nstant case, the deaer has no actve part n the saes transac-
ton other than the referra of the sae to the manufacturer for whch
he receves a commsson.
. censed deaer under the edera rearms ct woud not ncur
a n ty to the speca (occupatona) ta mposed under secton 5801
of the Interna Revenue Code of 195 for transmttng an order for
a frearm to a bona fde manufacturer of frearms, notwthstandng the
fact such deaer receves a commsson for the servce rendered
person actng n ths capacty woud be consdered as an agent or
fnder and the functon he performs may be conducted under the
speca (occupatona) ta stamp ssued to the manufacturer to whom
the sae s referred.
SU C PT R .-G N R L PRO ISIONS
S CTION 58 8. D INITIONS
esu aton-s 88, Secton 319.5a: ny other Rev. Ru. 55-
weapon.
( so Sectons 319.20, 319.27.)
The foowng types of gadget guns have been e amned by the
Interna Revenue Servce for the purpose of determnng whether
they come wthn the purvew of secton 58 8(5) of the Interna
Revenue Code of 195 , and are cassfed as foows: the nucke-
duster, the rench pache st Revover, and the Pepperbo , a
of whch empoy the mutpe rotatng barre prncpe of desgn, are
entted to e cepton as a psto or revover under secton 58 8(1)
of the Interna Revenue Code of 195 and sectons 319.26 and 319.27
of Reguatons 88. ccordngy, these weapons are e empt from the
requrements of chapter 53 of the Code.
The Chcago Pam Protector s nether a psto nor a revover but
a devce capabe of beng conceaed on the person from whch a shot
can be dscharged through the energy of an e posve. ccordngy,
t comes wthn the category of any other weapon as defned n
secton 58 8(5) of the Interna Revenue Code of 195 and secton
319.5a of Reguatons 88, as added by Treasury Decson 609 , C. .
195 -2, , and s therefore a frearm sub|ect to the requrements of
chapter 53 of the Code.
Rzgttatovs 88, Secton 319.12: rearm. Rev. Ru. 55-3 1
The Interna Revenue Servce has had the occason to e amne
a 20 gau e gun havng two barres pontng n opposte drectons,
each of whch s threaded to a center pece contanng a frng mecha-
nsm. The center pece s ftted wth two sp bot frng pns, each
capabe of frng a she from ony one of the barres. The overa
ength of the weapon s appro matey 11 nches, each barre havng
a ength of / nches wth nsde measurements of 3 nches. The
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319.27.) 130
gun s oaded by unscrewng the barre and nsertng a she n the
breech end. The center secton contanng the frng mechansm
s appro matey 3 nches n ength and s encased n a meta grp.
Ostensby, the devce was desgned to fre 20 gauge tear gas cartrdges.
owever, t has been estabshed that the devce s aso capabe of
chamberng and repeatedy frng, wthout apparent structura dam-
age, 20 gauge f ed shotgun shes. ed, snce the above-descrbed
gun s a weapon or devce capabe of beng conceaed on the person,
t s a frearm wthn the purvew of the Natona rearms ct, as
amended (Chapter 53 of the Interna evenue Code of 195 ). See
specfcay sectons 58 8(1) and 58 8(5) of such code.
Reguatons 88, Secton 319.26: Psto.
Cassfcaton of gadget guns under secton 58 8 of the Interna
Revenue Code of 195 . See Rev. Ru. 55- , page 129.
Reguatons 88, Secton 319.27: Revover.
Cassfcaton of gadget guns under secton 58 8 of the Interna
Revenue Code of 195 . See Rev. Ru. 55- , page 129.
SU TITL . PROC DUR ND DMINISTR TION
C PT R 61. IN ORM TION ND R TURNS
SU C PT R . R TURNS ND R CORDS
P RT I. R CORDS, ST T M NTS. ND SP CI L R TURNS
S CTION 6001. NOTIC OR R GUL TIONS R UIRING
R CORDS, ST T M NTS, ND SP CI L R TURNS
26 C R 06.607: Records.
Reguatons 120, amended to provde rues for wthhodng durng
195 and 1955 on payments under wage contnuaton pans. See
T.D. 6128, page 123.
P RT II. T R TURNS OR ST T M NTS
SU P RT . INCOM T R TURNS
S CTION 6012. P RSONS R UIR D TO M
R TURNS O INCOM
Rev. Ru. 55-287
trust contnues n e stence for edera ncome ta purposes dur-
ng the perod wthn whch the trustee s aowed by the aws of the
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131 6012 (b).
State n whch the trust s beng admnstered to dstrbute the assets
of the trust to the dstrbutees upon the termnaton of the trust.
orm 10 1, Unted States ducary Income Ta Return, shoud be
fed for each year that the trust so contnues n e stence and has
ta abe ncome, or gross ncome of 600 or over, regardess of the
amount of ta abe ncome.
S CTION G012. P RSONS R UIR D TO M
R TURNS O INCOM
( so Part II, Secton 51 Reguatons 118, Rev. Ru. 55-387
Secton 39.51-1.)
egay apponted guardan of a ta payer who has dsnppeared
must fe the requred edera ncome ta returns for such mssng
person for the ta abe year n whch he dsappeared and for any
subsequent ta abe years durng whch he contnues n the status
of a mssng person, t. c, unt found or decared dead by a court
under the provsons of the pertnent State aws. The fact that the
ta payer s spouse s apponted as hs guardan does not precude the
fng of a |ont return by the spouse for hersef and as guardan for
ber mssng husband (ta payer).
dvce has been requested reatve to the requrements for fng
edera ncome ta returns n a case where a ta payer has dsappeared
and hs spouse s apponted as hs ega guardan.
The facts n the nstant case dscose that the ta payer dsappeared
whe on a fght n hs prvatey owned pane over a sparsey setted
coasta regon n the southern part of the Unted States durng the
ta abe year and has not been heard from or otherwse accounted
for snce hs dsappearance. Durng the porton of the ta abe year
pror to the date of hs dsappearance he was n recept of ta abe
ncome and ta abe ncome w contnue to accrue to hs beneft
thereafter. t the tme, of the fght the ta payer r.nd hs spouse were
vng together as man and wfe. The wfe was apponted ega
guardan to act for her husband unt the termnaton of such mssng
status.
Secton 6012(b) provdes n part that:
(2) Pebsons rND a DIS ILITY. If an ndvdua s unabe to make a
return requred under subsecton (a) or secton C015(a), the return of
swh ndvdua sha be made by a duy authorzed agent, hs commttee,
guardan, fducary or other person charged wth the care of the person or
property of such ndvdua.
In ths respect the above-quoted provson of the 105 Code s
substanta v the same as the provson of secton 51 (c) of the Interna
Revenue Code of 1939.
The aw of the State n whch the mssng spouse resded provdes
for the presumpton of death of an ndvdua after an une paned
absence of 7 years. Thus, where such a person s not heard from or
seen or where no evdence of hs death s presented before the e pra-
ton of that perod he s presumed to be ave. Compare I. T. 3750,
C. . 19 5, 126. Snce such ndvdua s unabe to make a return, a
return shoud be made by hs guardan under the provsons of the
above secton of the Code. It foows that where the guardan s aso
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I 6015. 132
the spouse of the mssng ta payer an eecton may be made to fe a
|ont return. Satsfactory evdence of the appontment of the guardan
shoud be fed wth the return.
In vew of the foregong, t s hed that the egay apponted
fuardan of a ta payer who has dsappeared must fe the requred
edera ncome ta returns for such mssng ta payer for the ta abe
year n whch he dsappeared and for any subsequent ta abe years
durng whch the ta payer contnues n the status of a mssng person,
. e., unt found or decared dead by a court under the provsons of
the pertnent State aws. The fact that the ta payer s spouse s ap-
ponted as hs guardan does not precude the fng of a |ont return
by the spouse for hersef and as guardan for her mssng husband
(ta payer).
S CTION 6015. D CL R TION O STIM T D T
Y INDI IDU LS
ev. Ru. 55-318 a
nswers to certan questons pertanng to the Decaratons of
stmated Ta , orm 10 0- S, and carfcaton of nstructons
wth respect to such decaraton.
The purpose of ths Revenue Rung s to provde answers to some
of the questons whch have been rased regardng the fng of decara-
tons and payment of estmated ncome ta by ndvduas and to
carfy the nstructons pertanng to the Decaraton of stmated
Ta , orm 10 0- S, for the year 1955.
ttenton s caed to the statement made n paragraph 9 of the
nstructons on orm 10 0- S reatve to the nonmposton of the
charge for underpayment where the amount pad on or before the
nstament date equas 90 percent of the ta computed on the actua
ta abe ncome receved for the months n the ta abe year endng
before the month n whch the nstament date fas. It s possbe
to construe the anguage used n ths paragraph to mean that, n
determnng whether the charge shoud be mposed, 90 percent of the
ta so computed s to be treated as f t were the entre estmated ta
but such nterpretaton s not correct. The correct nterpretaton
s made cear n paragraph of the answer to queston 2.
New rues are provded by the Interna Revenue Code of 195 whch
w govern whether you are requred to fe a decaraton of estmated
ta , orm 10 0- S for 1955, on or before pr 15, 1955, or on or
before a subsequent nstament date. Such rues are contaned n the
nstructons on orm 10 0- S. Probems affectng certan casses of
ta payers, as we as probems whch may be encountered by ta pay-
ers generay, are dscussed n the foowng questons and answers:
PRO L MS CTING T P Y RS G N R LLY
1. . What factors shoud I take nto account n computng the
amount of estmated ta to be shown on my decaraton
. You may compute your estmated ta by takng nto account
the amount of gross ncome whch you can reasonaby e pect to report
ased on IRS Pubcaton No. 1SG, dated March 30 1955.
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133 6015.
for 1955, and the amount of your estmated aowabe deductons and
credts for that year. You shoud determne these estmates of n-
come, deductons, and credts upon the bass of facts and crcumstances
e stng at the tme prescrbed for fng your decaraton. You are
aso permtted to use any of the methods of computaton descrbed
n the answer to queston 2. These methods take nto account your
ta abty for ast year, or your ncome and deductons for ast year,
or the amount of your ta abe ncome receved n the current year
durng the months precedng the month n whch the nstament date
fas.
2. . Is t true that I w not be sub|ect to any charge for under-
payment of my estmated ta for 1955 f I fe a decaraton showng
as my estmated ta for that year the amount of my ta for 195 , and
make proper nstament payments on that bass
. Yes. No charge for underpayment of an nstament s made
f the tota amount of a payments made on or before the ast date
prescrbed for the payment of the nstament equas or e ceeds any
of the amounts under the foowng four methods:
(1) The amount whch you woud have been requred to pay
on or before the nstament date f your estmated ta was the
ta shown on your return for 195 (f your return for 195 showed
a abty for ta and covered a ta abe year of 12 months)
(2) The amount whch you woud have been requred to pay on
or before the nstament date f your estmated ta was an amount
determned by computng a ta on the bass of the facts shown on
|-our return for 195 and the aw appcabe to that year but
usng n the computaton the rates appcabe for 1955 and the
persona e emptons to whch you are entted for 1955 n eu of
the rates and e emptons appcabe for 195
(3) The amount whch you woud have been requred to pay on
or before the nstament date f your estmated ta was an amount
determned by computng 70 percent (66 percent n the case of
farmers) of a ta computed on your ta abe ncome for the
months n 1955 precedng the month n whch the nstament date
fas. or the purpose of ths computaton your ta abe ncome
s paced on an annua bass by usng the method descrbed n
the answer to queston 3.
( ) The amount determned by computng 90 percent of a ta ,
at the rates appcabe to 1955, on the bass of your actua ta abe
ncome for the months n 1955 precedng the month n whch the
nstament date fas as f such months consttuted a ta abe year.
(Ths method requres payment on or before the nstament date
of 90 percent of such ta .)
If you use ether the frst or second method as a bass for determnng
and payng your estmated ta , you may not ad|ust these amounts by
emnatng the porton of the ta whch s attrbutabe to capta gans
or other non-recurrng tems of ncome receved n 195 .
If you use ether the thrd or fourth method as a bass for deter-
mnng and payng your estmated ta , t w usuay be necessary for
yon to make amended decaratons and ad|ust the amount of your
nstament payments at subsequent nstament dates snce the amount
of vour ta abe ncome to be used n computatons under these methods
w usuay change between nstament dates.
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6015. 13
3. . ow do I pace my ta abe ncome for months precedng the
month n whch the nstament date fas on an annua bass for the
purpose of makng the computaton requred by the thrd method ds-
cussed n the answer to queston 2
. The foowng method shoud be used n the case of a ta abe
year o 12 months:
(1) Mutpy by 12 the amount of your ta abe ncome com-
puted wthout deducton of persona e emptons for the months
n your ta abe year whch precede the month n whch the n-
stament date fas
(2) Dvde the resutng amount by the number of months n
your ta abe year whch precede the month n whch the nsta-
ment date fas and
(3) Subtract from such amount your aowabe deductons for
persona e emptons (determned as of the nstament date).
. . My ncome s derved from a busness whch I operate and
n whch the producton, purchase, or sae of merchandse s an ncome-
producng factor. I use the accrua method of accountng for report-
ng ncome. If I use the fourth method dscussed n the answer to
queston 2 for the purpose of determnng my estmated ta , must I
take nventores and determne the amount of accrued tems so that
actua ta abe ncome for the months precedng the month n whch
the nstament date fas can be determned
. If you use ths method, t w be necessary for you to estabsh
the amounts of your nventores and accruas at the end of the month
precedng the month n whch the nstament date fas.
5. . I own and operate a reta hardware store and empoy 10
persons. It s my custom to dstrbute year-end bonuses to my em-
poyees but the sze of the bonuses s not determned unt the ast
month of the ta abe year. I ntend to use the fourth method ds-
cussed n the answer to queston 2 for determnng and payng my
estmated ta . May I take nto account as a deducton n determnng
my actua ta abe ncome for the months whch precede the month n
whch the pr 15 nstament date fas a proportonate part of the
year-end bonus to empoyees
. No. Deductons are not aowabe unt pad or accrued, de-
pendng on the method of accountng used by the ta payer.
6. . I now dscover that the estmated ta shown on my orgna
decaraton, fed pr 15, and the payments made on pr, une,
and September 15 are nsuffcent n amount to prevent e stence of
underpayments as of such nstament dates. None of the reef pro-
vsons dscussed n the answer to queston 2 w appy to reeve me
from the mposton of the addton to the ta for such underpayments.
W the fng of an amended decaraton, or a fna return n eu of
such amended decaraton, on anuary 15, together wth payment of
any ta shown to be due on such amended decaraton or fna return,
reeve me of such mposton
. No. owever, payment on anuary 15 w termnate the perod
of tme for whch the addton to the ta s to be computed.
7. . I ntend to use the fourth method dscussed n the answer to
queston 2 n computng my estmated ta for 1955 to be shown on my
orm 1010- S to be fed on pr 15. If I fe an amended orm
10 0- S on or before any of the subsequent nstament dates must
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135 6015.
Insethe same method n computng the estmated ta to be shown on
such amended decaraton
. So. The fact that you orgnay used one of the avaabe
methods n computng your estmated ta does not prevent you from
aterusnc any of the other methods.
8. . I ow s the amount of an underpayment determned
. The amount of any underpayment of any nstament s aways
determned by subtractng () the amount actuay pad n respect of
such nstament from () the amount requred to be pad on or before
the nstament date. 2 he amount of the underpayment s never de-
termned by subtractng the amount actuay pad from the amount
computed under any of the methods dsmssed n the answer to ques-
ton 2. owever, no penaty w be mposed f any of these methods
appes. The amount requred to be pad s determned by dvdng
To percent (66 percent n the case of farmers) of the ta whch s
shown on your orm 10 0 return for 1955 by the number of nsta-
ment dates n your ta abe year. The amount actuay pad n respect
of the nstament ncudes amounts pad on pror nstaments n
e cess of the amounts requred to be pad by such pror nstament
dates.
To ustrate the foregong, assume that a ta payer (other than a
farmer) who reports a ta abty of 10,000 on hs fna return, has
pad a tota of -20,000 estmated ta n equa nstaments of 5,000
durng the year. There s an underpayment of estmated ta as of
each nstament date computed as foows:
Ta abty 10, 000
70 percent of ra abty 28, 000
One-qarter of 70 percent 7,000
I ednct nstament payment 5,000
Underpayment on each nstament date 2,000
If, n ths e ampe, the ta payer, nstead of payng hs estmated ta
n equa nstaments, pad 10,000 on pr 15 and 10,000 on une 15,
there woud not be an underpayment on ether of those dates but there
woud be an underpayment of 1,000 on September 15 and an under-
payment of 7,000 on anuary 15 computed as foows:
Requred Under-
nsam.n. to be pad Pad payment
pr 15 _ 7,000 10,000
une 15 7,000 10,000
S pt. 15 7,000 6, 000 1,000
an. 15 7,000 0 7,000
mount pad n pror astft.mcn s In e cess or amounts equred to be pad.
9. . Does the amount actuay pad n respect of an nstament n-
cude amounts of ncome ta wthhed at source on wages
. Yes. The tota amount of the credt for ta wthhed at source
on wages s consdered to be a payment of estmated ta and, n gen-
era, an equa part of such amount s consdered to have been pad on
rach nstament date. or e ampe, f 1,000 ta has been wthhed
from the wages of a ta payer who makes hs return on the bass of the
caendar year, one-fourth of such amount or 250 s consdered to
tare been pad n respect of each nstament. owever, f the ta -
snow se o
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6015. 136
payer can estabsh dates and amounts of the actua wthhodng, t
actua amount wthhed durng each nstament perod w be cor
sdered as a payment n respect of that nstament In the abov
e ampe, f the ta payer can estabsh that 800 of the 1,000 wa
wthhed durng the frst three months of the ta abe year, such 80
w be consdered as a payment on the nstament due pr 15.
10. . ow s the addton to the ta computed n the case of a
underpayment
. The amount of addton to the ta s computed at the rate of s
percent a year on the amount of the underpayment for the perod fro
the nstament date when the underpayment arses unt the date pa
or the date prescrbed for fng the orm 10 0 return for the ta ab
year, whchever date s the earer.
11. . If I shoud move from the dstrct n whch I fed m
orgna decaraton on orm 10 0- S, where shoud I make nsta
ment payments and fe amendments to my orgna decaraton
. If you move from the dstrct n whch you fed your orgns
decaraton, you shoud contnue to make nstament payments o
fe amendments of ths decaraton wth the Dstrct Drector wt
whom you fed your orgna decaraton. Provson s made for yo
to show on your orm 10 0 return the Dstrct Drector s offce t
whch you pad the amounts camed as a credt on account of est
muted ta pad.
PRO L MS CTING M M RS O P RTN RS IPS
12. . I am a member of a partnershp n whch profts and osse
are shared accordng to a rato prescrbed n the partnershp agree
ment. oth the partnershp return and my return are made on th
bass of a caendar year. What amount, f any, of the ncome of th
partnershp shoud I take nto account for the purpose of fng
decaraton of estmated ta on pr 15
. You shoud take nto account your dstrbutve share of the part
nershp s estmated ncome for 1955. s n the case of a other nd
vdua ta payers, you are entted to use any method of computato
descrbed n the answer to queston 2. owever, f you use the thn
or fourth method descrbed n the answer to that queston, you mus
take nto account n determnng the amount of your ta abe ncom
for the months precedng the month n whch the nstament dat
fas your dstrbutve share of the partnershp ncome for sue
months, whether or not actuay dstrbuted to you n those months.
13. . ssume the same set of crcumstances as n the precedn
queston, e cept that I receve guaranteed payments under the partner
shp agreement. What then do I take nto account for the purpose o
determnng the amount of my estmated ta
. Guaranteed payments, to the e tent determned wthout regan
to the ncome of the partnershp, are ncuded n gross ncome of th
partner. ccordngy, you shoud take nto account the tota amoun
of guaranteed payments to whch you are entted pus any othe
amount of the partnershp earnngs to whch you are aso entted.
1 . . I am a partner n a aw frm and I receve a guaranteed pay
ment each month determned wthout regard to the ncome of tn
partnershp. oth the partnershp return and my return are made o
a caendar-year bass. The partnershp agreement provdes that an
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137 6015.
earnngs n e cess of guaranteed payments sha be aocated to the
Tarous partners durng the ast month of the year. It further pro-
rdes that the aocaton s to be made by the senor partner after
takng nto consderaton each partner s work durng the year. ow
cm I use the fourth method dscussed n the answer to queston 2 to
determne the amount of my estmated ta to be decared and pad
by pr 15
. In order for any ta payer to use ths method wth certanty, he
must estabsh hs actua ta abe ncome for the months n hs ta abe
year precedng the month n whch the nstament date fas. Your
actua ta abe ncome w ncude both the amount of guaranteed pay-
ments and your dstrbutve share of the partnershp earnngs for the
months that precede the month n whch the nstament date fas,
whether or not your share was actuay dstrbuted to you n those
months. If, pror to the nstament date, the partnershp n good
fath furnshes the partners wth nformaton enabng them to deter-
mne ther dstrbutve shares of partnershp earnngs for such months,
you w be abe to use the fourth method wth certanty by takng nto
account your dstrbutve share so determned of the actua partner-
shp earnngs for such months and a your other ncome for those
months, even though the partnershp may ater reconsder and f a
dfferent percentage aocaton of partnershp earnngs for the year.
If, pror to the nstament date, the partnershp does not furnsh you
fth nformaton that w enabe you to determne your dstrbutve
share of the partnershp earnngs for such months, you w be unabe
to use the fourth method wth certanty that your nstament payment
w be n an amount suffcent to reeve you from a possbe addton
to the ta for underpayment. Under such crcumstances, you may
fnd t desrabe to use the frst or second method dscussed n the
answer to queston 2.
15. . The partnershp of whch I am a member reports ncome on
the bass of a fsca year endng une 30 whe my returns are made on
the bass of a caendar year. I do not ntend to use any of the methods
dscussed n queston 2 for the purpose of determnng my estmated
ta . What porton of the partnershp earnngs for the fsca year
endng une 30, 1955, and for the fsca year endng une 30, 1956,
shoud I take nto account for the purpose of determnng the amount
of my estmated ta for 1955
. You shoud take nto account n connecton wth your decara-
ton of estmated ta due pr 15,1955, a of your estmated dstrbu-
tve share of the partnershp earnngs for the fsca year endng une
30,1955, snce ths amount w be propery reportabe by you n your
orm 10 0 return for 1955. No part of the partnershp earnngs for
the fsca year endng une 30, 1956, shoud be taken nto account n
determnng the amount of your estmated ta for 1955.
16. . ssume the same crcumstances as n queston 15 e cept that
I ntend to use the fourth method dscussed n the answer to queston 2
m determnng and payng my estmated ta . What porton of the
Partnershp earnngs for the fsca year endng une 30,1955, shoud
I take nto account n determnng the amount of each nstament
payment
. You shoud take nto account n determnng the amount of the
pr 15 nstament your dstrbutve share of the partnershp earn-
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6033. 138
ngs for the perod uy 1,195 , to March 31, 1955 for the une 1
nstament, your dstrbutve share of the partnershp earnngs fo
Serod uy 1, 195 , to May 31, 1955 and for the September 15 an
anuary 15 nstaments, your dstrbutve share of the partnersh
earnngs for the perod uy 1,195 , to une 30,1955. (Note that
determnng the amount of an nstament, you shoud take nto ac
count the tota amount pad on pror nstaments.)
17. . ssume the same crcumstances as n queston 16, e cept tha
the partnershp uses a fsca year endng anuary 31. What porto
of the partnershp earnngs for the fsca year endng anuary 31,1952
shoud I take nto account n determnng the amount of the pr 1
nstament payment
. You shoud take nto account n determnng the amount of t
pr 15 nstament payment your dstrbutve share of the partner
shp earnngs for the perod ebruary 1,195 to anuary 31,1955.
PRO L MS CTING N ICI RI S O ST T S ND TRUST
18. . I am the benefcary of a trust. ow shoud I take nt
account dstrbutons of ncome from the trust n computng my est
mated ta
. You may use any of the methods dscussed n the answer t
queston 2 n computng your estmated ta . or the purpose of usn|
ether of the methods based on actua ta abe ncome, you must tak
nto account your dstrbutabe share of the trust ncome (whethe
or not actuay dstrbuted) for the months precedng the month
whch the nstament date fas f the trust s one whch s requre
to dstrbute ncome to you currenty. If the trust s not requre
to dstrbute ncome to you currenty, you w be requred to tak
nto account ony the amounts actuay dstrbuted to you durng sue
months.
Where you report ncome on a caendar-year bass and the trus
reports on a fsca-year bass, portons of the trust ncome shoud b
taken nto account n determnng your ncome at the same tme a
ncome from a partnershp. See the answers to questons 15, 10
and 17.
Reguatons w be ssued under sectons 0015, 6073, 6153, and 665
of the Interna Revenue Code of 1951. The opportunty to commen
on the proposed constructon of these sectons, provded by the d
mnstratve Procedure ct, w be avaabe when the reguaton
are pubshed as a notce of proposed ruemakng.
P RT III. IN ORM TION R TURNS
SU P RT . IN ORM TION CONC RNING P RSONS SU CT TO SP CI L
PRO ISIONS
S CTION 6033. R TURNS Y MPT ORG NIZ TIONS
( so Part II, Secton 5 Reguatons 118, Rev. Ru. 55-13
Secton 39.5 -1)
edera credt unons are recognzed as nstrumentates of th
Unted States wthn the meanng of secton 501(c) (1) of the Interna
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139 60C5.
Revenue Code of 195 (see. 101(15) of the 1939 Code). They are,
hower, requred to fe annua nformaton returns on orm 990
snce they are not -whoy owned by the Unted States or any agency
or nstrumentatv thereof wthn the ntendment of secton 6033(a)
of the 195 Code (sec. 5 (f) of the 1939 Code).
The ureau of edera Credt Unons, Department of eath,
, ducaton, and Wefare, perodcay furnshes the Interna Revenue
Servce sts of edera credt unons whch have been chartered by t
group rung and suppements thereto have been ssued hodng the
chartered edera credt unons ncuded n the sts to be entted to
e empton from edera ncome ta as nstrumentates of the Unted
States wthn the meanng of secton 501(c) (1) of the Code of 195 ,
whch corresponds to secton 101(15) of the Code of 1939. s pro-
vded n these rungs, the edera credt unons ncuded n the sts
are requred to fe annua nformaton returns on orm 990.
Rev. Ru. 55-371
( so Secton 01.)
Secton 6033 of the Interna Revenue Code of 195 provdes, n
effect, that every organzaton, wth certan e ceptons, e empt from
ta aton under secton 501(a) of the Code, sha fe an annua return
statng specfcay the tems of gross ncome, recepts, dsbursements,
and other nformaton. These returns are requred to be fed on or
before the 15th day of the 5th month foowng the cose of the annua
accountng perod.
Pursuant to the authorty contaned n secton 6081(a) of the Code,
empoyees trusts quafed under secton 01(a) of the Code and e -
empt under secton 501(a), wth annua accountng perods begnnng
after December 31, 1953, and endng on or before May 31, 1955, are
granted an e tenson of tme unt November 15, 1955, n whch to
fe orm 990-P, U. S. Return of mpoyees Trust Descrbed n
Secton 01(a) and empt Under Secton 501(a) of the Interna
Revenue Code of 195
P ST I . SIGNING ND RI YING O R TURNS ND OT R DOCUM NTS
S CTION 6065. RI IC TION O R TURNS
Rev. Ru. 55-1 9
If a return s prepared for a ta payer by a person (s) or a frm (n-
cudng partnershps, corporatons, etc.), the ndvdua or frm
responsbe for such preparaton sha compete the statement of ver-
fcaton provded on the ncome return forms n the foowng manner:
(a) f the person, (or persons) responsbe for the preparaton
of the return s an ndvdua actng n hs own capacty, the
statement of verfcaton sha be sgned by such ndvdua
awd on IR New Reease No. IR-109, dated March 28,1055.
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5 6072. 1 0
(b) f a frm s responsbe for the preparaton of the return,
the statement of verfcaton sha be sgned wth the frm name.
owever, f the frm name s stamped or typed, t shoud be fo-
owed by the sgnature of a person authorzed to sgn the verfca-
ton on behaf of the frm. The frm may authorze any offcer,
member, or empoyee to sgn the verfcaton.
Such verfcaton s not requred f the actua preparaton of the
return s a reguar and usua ncdent of the empoyment of one reg-
uary and contnuousy empoyed for fu tme by the person for
whom the return s made (such as a cerk, secretary, bookkeeper, etc.).
P RT . TIM OR ILING R TURNS ND OT R DOCUM NTS
S CTION 6072. TIM OR ILING INCOM T
R TURNS
( so Secton 1501.) Rev. Ru. 55-103
( so Part II, Secton 53 Reguatons 118,
Secton 39.53-1.)
The Dstrct Drector of Interna Revenue may prescrbe a date for
fng the short ta abe year return of a dssoved subsdary corpora-
ton to correspond wth the due date of the return of the common
parent corporaton where the short perod return of the subsdary
s not denquent and where the subsdary may eect to or Is
requred to be ncuded n a consodated return. The amount of
ta pad upon the bass of the return of the subsdary w be con-
sdered as havng been pad by the common parent corporaton.
dvce has been requested whether a subsdary corporaton on the
caendar year bass whch was dssoved and merged nto ts parent
corporaton on March 31,195 , and whch had been granted a 6-months
e tenson of tme to December 15,195 , n whch to te ts short perod
return may (1) receve a further e tenson of tme n whch to n
ts return, or (2) f the return s fed on December 15, 195 , whethe
the subsdary s requred to be ncuded n a consodated return fo
the caendar year 195 .
In the nstant case, the subsdary fed a tentatve return on une 15
195 , and that date pad one-haf of ts estmated ta , and pad th
baance on September 15,195 .
Secton 39.53-1( ) of Reguatons 118, promugated under secto
53 of the Interna Revenue Code of 1939 whch s the counterpart o
secton 6081 of the 195 Code, provdes that n the case of any retur
for a fractona part of a year, the Dstrct Drector of Interna
Revenue may, upon a showng by the ta payer of unusua crcum
stances, prescrbe a ater tme for the fng of the return. The tern
unusua crcumstances s construed to ncude the stuaton where
subsdary has been merged nto the common parent before the end o
the ta abe year of the parent and t s not known at that tme whethe
a consodated return w be fed by the affated group.
Secton 1501 of the Interna Revenue Code of 195 provdes tha
n the case of a corporaton whch s a member of an affated grou
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1 1
0081.
for fractona part of the year, the consodated return sha ncude
the ncome o such corporaton for such part of the year as t s a
member c-f the affated group. If the affated group has and eects
to e ercse the prvege of makng a consodated return, the prvege
must be e ercsed at the tme of makng the return of the common
parent corporaton. In the case of a caendar year ta payer, the
return sha he fed on or before March 15, or such ater tme as s
prescrbed by the Dstrct Drector.
ccordngy, the Dstrct Drector may prescrbe a date for fng
the short ta abe year return of a dssoved subsdary corporaton
/ to correspond wth the due date of the return of the common parent
/ n a case where the return of the subsdary s not denquent and where
the subsdary may eect to or s requred to be ncuded n a con-
s dated return. The amount of ta pad upon the bass of the return
of the subsdary w be consdered as havng been pad by the common
parent corporaton
P RT I. T NSION O TIM OR ILING R TURNS
S CTION 6081. T NSION O TIM OR ILING
R TURNS
( so Secton 1501.) Rev. Ru. 55-17
The tme for fng consodated returns for ta abe years endng
on or after December 31,105 , but before une 30, 1955, s e tended
to September 15,I860.
1. Pursuant to the authorty contaned n secton 6081(a) of the
Interna Revenue Code of 195 , the tme for fng the return for a
usabe year endng on or after December 31, 195 , but before une
30, 1955, by a corporaton whch s a member of an affated group
havng the prvege of makng a consodated return for such ta -
abe year under secton 1501 of the Interna Revenue Code of 195
s hereby e tended to September 15,1955.
2. Requests for an addtona e tenson of tme for fng such
return beyond that set forth n paragraph 1, to whch a ta payer may
be entted under secton 6081 (a) or (b), shoud be addressed to the
Dstrct Drector of Interna Revenue for the dstrct n whch the
consodated return w be fed.
3. The e tenson of tme granted n paragraph (1) of ths Revenue
Rung sha not be construed as an e tenson of tme for payment of
ta nor as a waver of abty for nterest on any amount of ta due
tad unpad as provded by aw.
Rev. Ru. 55-262 f
ducares of estates and trusts are hereby granted an e tenson of
tme up to and ncudng May 16, 1955, for fng nonta abe returns
Orfrnny hnatd as IR-Crcuar No. 5-23. dated March 1 .10R5.
tOrgcaU| ssued aa I News Reease No. I -111, dated pr 13, 1955.
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6103(a). 1 2
on orm 10 1, U. S. ducary Income Ta Return, for ta abe year
endng on December 31, 195 . Tbs e tenson appes ony f th
return contans, or has attached to t, a statement that the bene
fcares or other dstrbutees of the estate or trust were apprsed o
or before pr 15, 1955, of ther dstrbutve shares of ncome o
the estate or trust.
Date nterest w commence to run on addtona ta due to th
change n aw provded by secton 7851(a)(1)(D). See Rev. Ru
55-22, page 198.
SU C PT R . MISC LL N OUS PRO ISIONS
S CTION 6103. PU LICITY O R TURNS ND LISTS 0:
T P Y RS
26 C R 301.6103 (a)-101: Inspecton of returns T. D. 613
by commttees o Congress other than those
enumerated n secton 6103(d) of the Interna
Revenue Code of 195 .
TITL 26 INT RN L R NU , 195 . C PT R I. SU C PT R , P RT 301.
PROC DUR ND DMINISTR TION
Inspecton of certan returns by commttees of Congress other
than those ennumerated In secton 6103(d) of the Interna Revenue
Code of 195 .
Treasury Department,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Othe
Concerned:
Sec. 301.6103(a)-101. Inspecton of Returns by Commttees
Congress Other Than Those numerated n Secton 6103(d)
the Interna Revenue Code of 195 . (a) (1) Pursuant to the pr
vsons of secton 6103(a) of the Interna Revenue Code of 195 (68
Stat. 753 26 U. S. C. 6103(a)), any return wth respect to ncom
estate, or gft ta mposed by the Interna Revenue Code of 195 shn
be open to nspecton by any commttee of the Congress, or any su
commttee of a commttee of the Congress, specay authorzed
nspect such returns by an ecutve order ssued under the afo
mentoned statutory provsons on or after the date of the approv
of ths Treasury Decson. Such nspecton sha be sub|ect to t
condtons and restrctons mposed by the ecutve order and t
rues and reguatons herenafter prescrbed.
(2) Ony such of the aforementoned returns as are specfed n
resouton adopted by the commttee n accordance wth the rues
the approprate house of the Congress then appcabe to the report
of a measure or recommendaton from such commttee sha be op
to nspecton. Such resouton sha set forth the names and address
of the ta payers whose returns t s necessary to nspect and the ta
abe perods covered by the returns. The nspecton of retur
authorzed n ths secton may be made by the commttee of the Co
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1 3 6103(a).
pes, or tbe subcommttee of a commttee of the Congress, authorzed
sprovded n subparagraph (1) of ths paragraph, actng drecty as
commttee or as a subcommttee, or by or through such e amners or
agents as such commttee or subcommttee may desgnate or appont n
ts wrtten request herenafter mentoned. Upon wrtten request by
the charman of such commttee or of such subcommttee to the Secre-
tary of the Treasury, gvng the names and addresses of the ta payers
whose returns t s desred to nspect and the ta abe perods covered
by the returns and statng that the resouton herenbefore mentoned
wth respect to the nspecton of such returns has been duy adopted
by such commttee or by the commttee under whch such subcommttee
functons, the Secretary or any offcer or empoyee of the Department
of the Treasury, wth the approva of the Secretary, sha furnsh
such commttee or subcommttee wth any data reatng to or con-
taned n any such return or sha make such return avaabe for
nspecton by such commttee or subcommttee or by the e amners
or agents desgnated or apponted by such commttee or subcommttee.
Such data sha be furnshed, or such return sha be made avaabe
for nspecton, n an offce of the Interna Revenue Servce. ny n-
formaton thus obtaned by such commttee or subcommttee sha be
hed confdenta: Provded, however, That any porton thereof ree-
vant or pertnent to the purpose of the nvestgaton may be submtted
by the nvestgatng commttee to the approprate house of the
Congress.
(3) Ths secton sha not be appcabe to any commttee author-
zed by secton 6103(d) of the Interna Revenue Code of 195 to
nspect returns.
(b) ecause ths Treasury Decson consttutes a genera statement
of pocy and estabshes a rue of Departmenta practce and pro-
cedure, t s found that t s unnecessary to ssue ths Treasury De-
cson wth notce and pubc procedure thereon under secton (a)
of the dmnstratve Procedure ct, approved une 11, 19 6, or
sub|ect to the effectve date mtaton of secton (c) of that ct.
(c) Ths Treasury Decson sha be effectve upon ts fng for
pubcaton n the edera Regster.
pproved: May 3,1955,
Dwght D. senhower,
The Whte ouse.
G. M. uMrR r,
Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May 3,1955,5: 02 p. m.)
CUTI ORD R 10606
( so Part II.)
Inspecton of ncome, e cess-profts, decared vaue e cess-profts,
capta-stock, estate, and gft ta returns by the Senate Commttee
on Government Operatons.
y vrtue of the authorty vested n me by sectons 55(a), 508, 603,
729(a), and 120 of the Interna Revenue Code of 1939 (53 Stat. 29,
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6103(a). 1
111, 171 5 Stat. 989,1008 55 Stat. 722 26 U. S. C. 55(a), 508, 603,
729(a), and 120 ), and by secton 6103(a) of the Interna Revenue
Code of 195 (68 Stat. 753 26 U. S. C. 6103(a)), t s hereby ordered
that any ncome, e cess-profts, decared vaue e cess-profts, capta
stock, estate, or gft ta return for the years 19 5 to 195 , ncusve,
sha, durng the ghty-fourth Congress, be open to nspecton by the
Senate Commttee on Government Operatons, or any duy authorzed
subcommttee thereof, n connecton wth ts studes of the operaton
of Government actvtes at a eves wth a vew to determnng ts
economy and effcency, n accordance and upon compance wth the
rues and reguatons prescrbed by the Secretary of the Treasury n
the Treasury Decsons, reatng to the nspecton of returns by cer-
tan commttees of the Congress, approved by me ths date.
Ths ecutve order sha be effectve upon ts fng for pubcaton
n the edera Regster.
DwG T D. senhower.
The Whte ouse,
May 3,1955.
( ed wth the Dvson of the edera Regster May 3,1955, 5: 02 p. m.)
CUTI ORD R 10607
( so Part II.)
Inspecton of ncome, e cess-profts, decared-vaue e cess-profts,
capta-stock, estate, and gft ta returns by the Commttee on Gov-
ernment Operatons, ouse of Representatves.
y vrtue of the authorty vested n me by sectons 55(a), 508, 603
729(a), and 120 of the Interna Revenue Code of 1939 (53 Stat. 29
111, 171 5 Stat. 989,1008 55 Stat. 722: 26 U. S. C. 55(a), 508, 603,
729(a), and 120 ), and by secton 6103(a) of the Interna Revenue
Code of 195 (68 Stat. 753 26 U. S. C. 6103(a)), t s hereby ordered
that any ncome, e cess-profts, decared-vaue e cess-profts, capta-
stock, estate, or gft ta return for any perod to and ncudng 105
sha, durng the ghty-fourth Congress, be open to nspectonby the
Commttee on Government Operatons, ouse of Representatves, o
any duy authorzed subcommttee thereof, n connecton wth ts
studes of the operaton of Government actvtes at a eves wth
vew to determnng the economy and effcency of the Government
such nspecton to be n accordance and upon compance wth the rues
and reguatons prescrbed by the Secretary of the Treasury n the
two Treasury Decsons, reatng to the nspecton of returns by com-
mttees of the Congress, approved by me ths date.
Ths order sha be effectve upon ts fng for pubcaton n the
edera Regster.
Dwght D. senhower.
The Whte ouse,
May 3,1955.
( ed wth the Dvson of the edera Regster May 3,1955,5: 02 p. m.)
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1 5 6201.
C PT R 63. SS SSM NT
SU C PT R IN G N R L
S CTION 6201. SS SSM NT UT ORITY
6 C R 301 201-1: ssessment authorty. T. D. 6119
( so Sectons 6301, 6 02, 6 0 26 C R
301.6301-1, 301 02-1, 301.6 0 -1.)
TITL 2C INT RN L R NU . C PT R I, SU C PT R , P RT 301
Reguatons under chapters 63, 6 , and 65 nf the Interna Revenue
Code or 195 , reatng to assessment, coecton, abatements, credts,
and refunds.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washnffton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On December 11,195 , there was pubshed n the edera Regster
(19 . R. 8 57) a notce of proposed rue makng regardng regua-
tons under chapter 63, reatng to assessment, chapter 6 (e cept sec-
ton 6316), reatng to coecton, and chapter 65. reatng to abate-
ments, credts, and refunds, of the Interna Revenue Code of 195 .
On December 15,195 , a correcton notce makng four changes n the
proposed reguatons was pubshed n the edera Regster (19 . R.
8580). fter consderaton of a reevant matter presented by n-
terested partes regardng the rues proposed, the foowng regua-
tons are hereby adopted.
ssessment
n genera
ee.
301.6201 Statutory provsons assessment authorty.
301.62O1-1 ssessment authorty.
301.6202 Statutory provsons estabshment by reguatons of mode or tme
of assessment.
3)1.6203 Statutory provsons method of assessment.
301.6203-1 Method of assessment.
301.620 Statutory provsons suppementa assessments.
301.62O -1 Suppementa assessment.
301.6205 Statutory provsons speca rues appcabe to certan empoy-
ment ta es.
301.620-5-1 Speca rues appcabe to certan empoyment ta es.
30L6206 Statutory provsons cross references.
D ICI NCY P OC DU S
301.6211 Statutory provsons defnton of a defcency.
3M .6211-1 Defcency defned.
301.6212 Statutory provsons notce of defcency.
301.6212-1 Notce of defcency.
301.6213 Statutory provsons restrctons appcabe to defcences petton
to Ta Court.
301.6213-1 Restrctons appcabe to defcences: petton to Ta Court.
30L621 Statutory provsons determnatons by Ta Court.
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6201. 1 6
Sec.
301.6215 Statutory provsons assessment of defcency found by Ta Court
301.6215-1 ssessment of defcency found by Ta Court.
301.6210 Statutory provsons cross references.
Coecton
genera provsons
301.6301 Statutory provsons coecton authorty.
301.6301-1 Coecton authorty.
301.6302 Statutory provsons mode or tme of coecton.
301.6302-1 Use of edera reserve banks and authorzed commerca banks n
connecton wth the payment of certan empoyment and e cse
ta es.
301.6303 Statutory provsons notce and demand for ta .
301.6303-1 Notce and demand for ta .
301.030 Statutory provsons coecton under the Tarff ct.
R C IPT O P YM NT
301.6311 Statutory provsons payment by check or money order.
301.6311-1 Payment by check or money order.
301.6312 Statutory provsons payment by Unted States notes and certf-
cates of ndebtedness.
301.6312-1 Treasury certfcates of ndebtedness. Treasury notes, and Treasury
bs acceptabe n payment of nterna revenue ta es or stamps.
301.6312-2 Certan Treasury savngs notes acceptabe In payment of certan
nterna revenue ta es.
301.6313 Statutory provsons fractona parts of a cent.
301.6313-1 ractona parts of a cent.
301.031 Statutory provsons recept for ta es.
301.631 -1 ecept for ta es.
301.6315 Statutory provsons payments of estmated ncome ta .
301.6315-1 Payments of estmated ncome ta .
301.6316 Statutory provsons payment by foregn currency.
LI N OR T S
301.6321 Statutory provsons en for ta es.
301.6321-1 I.en for ta es.
301.6322 Statutory provsons perod of en.
301.6323 Statutory provsons vadty aganst mortgagees, pedgees, pur-
chasers, and |udgment credtors.
301.6323 1 adty of en aganst mortgagees, pedgees, purchasers, and |udg-
ment credtors.
301.632 Stntutory provsons: speca ens for estate and gft ta es.
301.632 -1 Speca ens for estate and gft ta es persona abty of trans-
fen es and others.
301.6325 Statutory provsons reease of en or parta dscbarge of property.
301.6325-1 tcense of en or parta dscharge of property.
301.6320 Statutory provsons cross references.
S IZUR O P OP RTT OR COLL CTION O T S
301.6331 Statutory provsons evy and dstrant,
301.6331-1 Levy and dstrant.
301.6332 Statutory provsons surrender of property sub|ect to evy.
301.6332-1 Surrender of property sub|ect to evy.
301.6333 Statutory provsons producton of books.
30I.6333-1 Producton of books.
301.633 Statutory provsons property e empt from evy.
301.033 -1 Property e empt from evy.
301.6335 Statutory provsons sae of sezed property.
301.6335-1 Sae of sezed property.
301.6336 Stntutory provsons sae of pershabe goods.
301.6330-1 Sae of pershabe goods.
301.6337 Statutory provsons redempton of property.
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1 7
6201.
3 1.G33T-1
an.sm
30 .6338-1
301.5339
3M.6339-1
Redempton of property.
Statutory provsons certfcate of sae deed of rea property.
Certfcate of sae deed of rea property.
Statutory provsons ega effect of certfcate of sae of persona
property and deed of rea property.
Lega effect of certfcate of sae of persona property and deed of
rea property.
301.63 0 Statutory provsons records of sae.
301.63 O-1 Records of sae.
301.63 1 Statutory provsons e pense of evy and sae.
301.63 1-1 pense of evy and sae.
301.63 2 Statutory provsons appcaton of proceeds of evy.
301.63 2-1 ppcaton of proceeds of evy.
301.63 3 Statutory provsons authorty to reease evy.
301.63 3-1 uthorty to reease evy.
301.63 Statutory provsons cross references.
batements, Credts, and Refunds
procedure n genera
301.8 01 Statutory provsons amounts treated as overpayments.
301.6 01-1 mounts treated as overpayments.
301.6 02 Statutory provsons authorty to make credts or refunds.
301.6 02-1 uthorty to make credts or refunds.
301.6 02-2 Cams for credt or refund.
301.6 O2-3 Speca rues appcabe to Income ta .
3U1.0 O2- Payments n e cess of amounts shown on return.
301.6 02-5 Cam for payment of udgment obtaned aganst dstrct drector.
301.6 02-6 Cam for payment of |udgment obtaned n Unted States dstrct
court aganst the Unted States.
301.6 02-7 Cam for payment of |udgment obtaned n the Court of Cams
aganst the Unted States.
301.6 03 Statutory provsons overpayment of nstament.
301.6 03-1 Overpayment of nstament.
301.6 0 Statutory provsons abatements.
30L6 0 -1 batements.
301.6 05 Statutory provsons reports of refunds and credts.
301.6 05-1 Reports of refunds and credts.
301.6 06 Statutory provsons prohbton of admnstratve revew of de-
csons.
301.6 07 Statutory provsons date of aowance of refund or credt.
301.6 07-1 Date of aowance of refund or credt.
RUL S O SP CI L PPLIC TION
301.6 11 Statutory provsons tentatve carryback ad|ustments.
301.6 11-1 Tentatve carryback ad|ustments.
301.6 12 Statutory provsons foor stock refunds.
301.6 12-1 oor stocks refunds.
301.6 13 Statutory provsons speca rues appcabe to certan empoyment
ta es.
301.6 13-1 Speca rues appcabe to certan empoyment ta es.
901.6 1 Statutory provsons ncome ta wthhed.
301.6 1 -1 Income ta wthhed.
301.6 15 Statutory provsons credts or refunds to persons who coected cer-
tan ta es.
301.6 15-1 Credts or refunds to persons who coected certan ta es
301.6 16 Statutory provsons certan ta es on saes and servces.
301.6 16-1 Certan ta es on saes and servces.
301.6 17 Statutory provsons coconut and pam o.
301.6 17-1 Coconut and pam o.
301.6 18 Statutory provsons sugar.
301.6 18-1 Sugar.
301.6 19 Statutory provsons e cse ta on wagerng.
301.6 10-1 cse ta on wagerng.
301.6 20 Statutory provsons cross references.
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6201. 1 8
CTI D T ND L T D PRO ISIONS
Sec.
301.7851 Statutory provsons appcabty of revenue aws.
uthorty : 301.6201 to 301.7851 Issued under sec. 7805, 68 Stat 917 2(
. S. O. 7805.
ssessment
n genera
Sec. 301.6201. Statutory Provsons ssessment uthorty.
Sec. 6201. ssessment authorty.
(a) uthorty of Secretary or deegate. The Secretary or hs deegate Is
authorzed and requred to make the nqures, determnatons, and assessments
of a ta es (ncudng Interest, addtona amounts, addtons to the ta , and
assessabe penates) mposed by ths tte, or accrung under any former nterna
revenue aw, whch have not been duy pad by stamp at the tme and n the
manner provded by aw. Such authorty sha e tend to and ncude th(
foowng:
(1) Ta es shown on return. The Secretary or hs deegate sha assess at
ta es determned by the ta payer or by the Secretary or hs deegate as to whcfc
returns or sts are made under ths tte.
(2) Unpad ta es payabe by stamp.
( ) Omtted stamps. Whenever any artce upon whch a ta s requred
to be pad by means of a stamp s sod or removed for sae or use by the mnnu
facturer thereof or whenever any transacton or act upon whch a ta s requrec
to be pad by means of a stamp occurs wthout the use of the proper stamp,
sha be the duty of the Secretary or hs deegate, upon such nformaton as h(
can obtan, to estmate the amount of ta whch has been omtted to be pac
and to make assessment therefor upon the person or persons the Secretary o
hs deegate determnes to be abe for such ta .
( ) Check or money order not duy pad. In any case n whch a check o
money order receved under authorty of secton 6311 as payment for stamps U
not duy pad, the unpad amount may be mmedatey assessed as f t were s
ta mposed by ths tte, due at the tme of such recept, from the person whe
tendered such check or money order.
(3) rroneous ncome ta prepayment credts. If on any return or cam fo
refund of ncome ta es under subtte there s an overstatement of the em
for ncome ta wthhed at the source, or of the amount pad as estmated ncomt
ta , the amount so overstated whch s aowed aganst the ta shown on th
return or whch s aowed as a credt or refund may be assessed by the Secretar|
or hs deegate n the same manner as In the case of a mathematca error appear
ng upon the return.
(b) stmated ncome ta . No unpad amount of estmated ta under sector
6153 or 615 sha be assessed.
(c) Compensaton of chd. ny ncome ta under chapter 1 assessed agan
a chd, to the e tent attrbutabe to amounts ncudbe n the gross ncome o
the chd, and not of the parent, soey by reason of secton 73 (a), sha, f no
pad by the chd, for a purposes be consdered as havng aso been proper|
assessed aganst the parent.
(d) Defcency proceedngs. or speca rues appcabe to defcences o
Income, estate, and gft ta es, see subchapter .
Sec. 301.0201-1. ssessment uthorty (a) In genera. The Dstrct D
rector s authorzed and requred to make a nqures necessary to the deter
mnatons and assessments of a ta es mposed by the Interna Revenue Code o
105 or any pror nterna revenue aw. e s further authorzed and requrec
to make the determnatons and the assessments of such ta es. owever, cer
tan nqures and determnatons are, by drecton of the Commssoner, mad(
by other offcas, such as ssstant Regona Commssoners. The term ta es
ncudes nterest, addtona amounts, addtons to the ta es, and assessab
penates. The authorty of the Dstrct Drector to make assessments ncudes
the foowng:
(1) Ta es shown on return. The Dstrct Drector sha assess a ta es deter
mned by the ta payer or by the Dstrct Drector and dscosed on a return o
st.
(2) Unpad ta es payabe by stamp, () If wthout the use of the prope
stamp:
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f 6201.
(a) ny artce n-pon whch a ta Is requred to be pad by means of a stamp a
sod ot removed or sae or use by the manufacturer thereof, or
ny transacton or act upon whch a ta Is requred to be pad by means
ot a stamp occurs
Use Dstrct Drector, upon such nformaton as he can obtan, must estmate the
amount ot the ta whch has not been pad and must make assessment therefor
oprathe person the Dstrct Drector determnes to be abe for the ta . IIow-
er, tw Dstrct Drector may not assess any ta whch s payabe by stamp
uness the ta payer fas to pay such ta at the tme and n the manner provded
b| aw or reguatons.
(u) If a ta payer gves a check or money order as payment for stamps but
the check or money order s not pad upon presentment, then the Dstrct D-
rector sha assess tre amount of the check or money order aganst the ta payer
as f t were a ta due at the tme the check or money order was receved by
the Dstrct Drector.
(3) rroneous ncome ta prepayment credts. If the amount of Income ta
wthhed or the amount of estmated ncome ta pad Is overstated by a ta payer
on a return or on a cam for refund, the amount so overstated whch s aowed
aganst the ta shown on the return or whch s aowed as a credt or refund
sha be assessed by the Dstrct Drector n the same manner as In the case of a
mathematca error on the return. See secton 6213(b)(1), reatng to e cep-
tons to restrctons on assessment.
(6) stmated ncome ta . The Dstrct Drector sha not assess any amount
of estmated Income ta requred to be pad under secton 6153 or 615 whch Is
unpad.
c) Compensaton of chd. ny ncome ta assessed aganst a chd, to the
e tent of the amount attrbutabe to Income ncuded n the gross Income of the
d soey by reason of secton 73(a) or the correspondng provson of pror
taw. If not pad by the chd, sha, for the purposes of the ncome ta mposed
by chapter 1 (or the correspondng provsons of pror aw), be consdered as
havng aso been propery assessed aganst the parent. In any ease n whch
the earnngs of the chd are ncnded n the gross ncome of the chd soey
by reason of secton 73(a) or the correspondng provson of pror aw, the
parent s abty s an amount equa to the amount by whch the ta assessed
aganst the chd (and not pad by hm) has been ncreased by reason of the
ncuson of such earnngs n the gross ncome of the chd. Thus, If for the
caendar year 195 the chd has ncome of 1,000 from Investments and of 3,000
for servces rendered, and the atter amount s ncudbe n the gross ncome
of the chd under secton 73(a) and the chd has no wfe or dependents, the ta
abty determned under secton 3 s 625. If the chd had ony the nvest-
ment Income of 1,000, hs ta abty woud be 62. If the ta of 025 s
assessed aganst the chd, the dfference between 623 and 62, or 563, s the
amount of such ta whch Is consdered to have been propery assessed aganst
the parent. If not pad by the chd.
Sec. 301.6202. Statutory Provsons stabshment by Reguatons of
Mode or Tme of ssessment.
Sec. 6202. stabshment by reguatons of mode or tme of assessment.
If the mode or tme for the assessment of any nterna revenue ta (ncudng
Interest, addtona amounts, addtons to the ta , and assessabe penates) s
not otherwse provded for, the Secretary or hs deegate may estabsh the
ume by reguatons.
Sec. 301.C203. Statutory Provsons Method of ssessment.
Sfc. 6203. Method of assesment.
The assessment sha be made by recordng the abty of the ta payer n the
offce of the Secretary or hs deegate n accordance wth rues or reguatons
Prescrbed by the Secretary or hs deegate. Upon request of the ta payer, the
Secretary or hs deegate sha furnsh the ta payer a copy of the record of the
assessment,
Sec. 301.6203-1. Method of ssessment.
The Dstrct Drector sha appont one or more assessment offcers, and the
assessment sha be made by an assessment offcer sgnng the summary record
of assessment. The summary record, through supportng records, sha provde
Identfcaton of the ta payer, the character of the abty assessed, the ta abe
Perod If appcabe, and the amount of the assessment. The amount of the
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62C 150
assessment sha In the case of ta shown on a return by the ta payer, be t
amount so shown, and n a other cases the amount of the assessment sha I
the amount shown on the supportng st or record. The date of the assessme
s the date the summary record s sgned by an assessment offcer. If the ta:
payer requests a copy of the record of assessment, the Dstrct Drector sa
furnsh the ta payer a copy of the pertnent parts of the assessment whch s
forth the name of the ta payer, the date of assessment, the character of t
abty assessed, the ta abe perod, f appcabe, and the amounts assesse
Skc. 301.020 . Statutory Provson Suppementa ssessments.
skc. 020 . suppementa assessment.
(a) Genera rue. The Secretary or hs deegate may, at any tme wthn t
perod prescrbed for assessment, make a suppementa assessment whenever
Is ascertaned that any assessment s mperfect or ncompete n any nnterh
respect.
(b) Restrctons on assessment. or restrctons on assessment of defcenos
n ncome, estate, and gft ta es, see secton 6213.
Sec. 301.020 -1. Suppementa ssessment. If any assessment s ncompet
or ncorrect n any matera respect, the Dstrct Drector, sub|ect to the restr
tons wth respect to the assessment of defcences n ncome, estate, and gf
ta es, and sub|ect to the appcabe perod of mtaton, may make a suppk
menta assessment for the purpose of correctng or competng the orgns
assessment.
Seo. 301.0205. Statutory Provsons Speca Rues ppcabe to Cehta:
mpoyment Ta es.
Sec. 0205. Speca rttes appcabe to certan empoyment ta es.
(a) d|ustment of ta .
(1) Genera rue. If ess than the correct amount of ta mposed by secto
3101. 3111. 3201, 3221, or 3 02 s pad wth respect to any payment of wages o
compensaton, proper ad|ustments, wth respect to both the ta and the anoun
to he deducted, sha be made, wthout nterest, n such manner and at such tme:
as the Secretary or hs deegate may by reguatons prescrbe.
(2) ntct States as empoyer. or purposes of ths subsecton, In the case o
remuneraton receved from the Unted States or a whoy owned nstrumentat
thereof durng any caendar year, each head of a edera agency or nstrumen
taty who makes a return pursuant to secton 3122 and each agent, desgnated
by the head of a edera agency or nstrumentaty, who makes a return pur
suant to such secton sha be deemed a separate empoyer.
(b) Underpayments. If ess than the correct amount of ta mposed by secton
3101, 3111, 3201, 3221, or 3 02 s pad or deducted wth respect to any payment
of wages or compensaton and the underpayment cannot be ad|usted under sub
secton (a) of ths secton, the amount of the underpayment sha be assessed
and coected n such manner and at such tmes (sub|ect to the statute of mta-
tons propery appcabe thereto) as the Secretary or hs deegate may by regu-
atons prescrbe.
Sec 301.0205-1. Speca Ru.es ppcabe to Certan mpoyment Ta es.
or reguatons under ths secton, see the mpoyment Ta Reguatons (Pt. 31
of ths chapter).
Sec 301.0200. Statutory Provsons Cross References.
Sec. 0200. Cross references.
(1) or prohbton of suts to restran assessment of any ta , see secton
7 21.
(2) or prohbton of assessment of ta es aganst nsovent banks, see sec-
ton 7507.
(3) or assessment where property suh|ect to ta has been sod n a dstrant
proceedng wthout the ta havng been assessed pror to such sae, see sec-
ton 03 2.
( ) or assessment n case of sae or remova of tobacco, snuff, cgars, and
cgarettes wthout the use of proper stamps, see secton 5703(d).
(5) or assessment n case of dsted sprts removed from pace where ds-
stod and not deposted n bonded warehouse, see secton 5006(c).
(0) or assessment n case of certan sprts sub|ect to e cessve eakage, see
secton 5003(b).
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151 6201.
) or assessment of defcences In producton of dsted sprts, see sec-
ton m (e) (1).
(8) or perod of mtaton upon assessment, see chapter 66.
W) or assessment tnder the provsons of the Tarff ct of 1030 of the ta es
mposed by secton 501 (b), and subchapters , , C, D, and of chapter 38, see
sectons o and 601, respectvey,
D ICI NCY PROC DUR S
Sec. 301.G211. Statutory Provsons Defnton of a Defcency.
Sec. 6211. Defntto | of a defcency.
(a) In genera. or purposes of ths tte In the case of Income, estate, and
ft ta es, mposed by subttes and , the term defcency means the amount
by whch the ta mposed by subttes or e ceeds the e cess of:
(1) The sum of:
( ) The amount shown as the ta by the ta payer upon hs return, f a return
was made by the ta payer and an amount was shown as the ta by the ta payer
thereon, pus
( ) The amounts prevousy assessed (or coected wthout assessment) as a
defcency, over:
(2) the amount of rebates, as defned n subsecton (b) (2), made.
(b) Rues for appcaton of subsecton (a). or purposes of ths secton:
(1) The ta mposed by chapter 1 and the ta shown on the return sha both
be determned wthout regard to payments on account of estmated ta , wthout
regard to the credt under secton 31, and wthout regard to so much of the credt
under secton 32 as e ceeds 2 percent of the nterest on obgatons descrbed n
secton 1 01.
(2) The term rebate means so much of an abatement, credt, refund, or other
repayment, as was made on the ground that the ta mposed by subttes or
was ess than the e cess of the amount specfed n subsecton (a) (1) over the
rebates prevousy made.
(3) The computaton by the Secretary or hs deegate, pursuant to secton
001 , of the ta mposed by chapter 1 sha be consdered as havng been made
by the ta payer and the ta so computed consdered as shown by the ta payer
upon hs return.
Sec. 301.6211-1 Defcency Defned. (a) In the case of the Income ta Im-
posed y subtte , the estate ta mposed by chapter 11, or the gft ta mposed
by chapter 12, the term defcency means the e cess of the ta (ncome, estate,
or gft ta , as the case may be) over the sum of the amount shown as such ta
by the ta payer upon hs return and the amounts prevousy assessed (or coected
wthout assessment) as a defcency but such sum sha frst be reduced by the
amount of rebates made. If no return s made, or f the return (e cept a return
of ncome ta on orm 10 0 pursuant to secton 601 ) does not show any ta ,
for the purpose of the defnton the amount shown as the ta by the ta payer
upon hs return sha be consdered as zero. ccordngy, n any such case.
If no defcences wth respect to the ta have been assessed, or coected wthout
ass Rsment, and no rebates wth respect to the ta have been made, the defcency
s the amount of the ta mposed by subtte , chapter 11, or chapter 12. dd-
tona ta shown on an amended return, so-caed, fed after the due date
of the return, s a defcency wthn the meanng of the Interna evenue Code.
b) or purposes of the defnton, the ncome ta mposed by subtte and
the ncome ta shown on the return sha both be determned wthout regard
to the credt provded n secton 31 for ncome ta wthhed at the source and
wthout regard to so much of the credt provded n secton 32 for ncome ta es
wthhed at the source as e ceeds 2 percent of the nterest on ta -free covenant
bonds descrbed n secton 1 51. Payments on account of estmated ncome ta ,
ke other payments of ta by the ta payer, sha kewse be dsregarded n
the determnaton of a defcency.
(c) The computaton by the Dstrct Drector, pursuant to secton 601 (a),
of the ncome ta Imposed by subtte sha be consdered as havng been made
by the ta payer and the ta so computed sha be consdered as the ta shown
by the ta payer upon hs return.
(d) If so much of the credt camed on the return for Income ta es wthhed
t the source as e ceeds 2 percent of the nterest on ta -free covenant bonds s
UOW 5C 11
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6201. 152
greater than the amount of such credt aowabe, the unpad porton of the ta
attrbutabe to such dfference w be coected not as a defcency but as an
underpayment of the ta shown on the return.
(e) Ths secton may be ustrated by the foowng e ampes:
ampe (1). The amount of ncome ta shown by the ta payer upon hs return
for the caendar year 195 was 1,600. The ta payer had no amounts prevousy
assessed (or coected wthout assessment) as a defcency. e camed a credt
In the amount of 2,050 for ta wthhed at source on wages under secton 3 02
and a refund of 50 (not a rebate under sec. 6211) was made to hm as an ovtr-
payment of ta for the ta abe year. It s ater determned that the correct
ta for the ta abe year Is 1,850.
defcency of 250 Is determned as foows:
Ta mposed by subtte 1,850
Ta shown on return 1,600
Ta prevousy assessed (or coected wthout assessment) as a
defcency None
Tota 1,600
mount of rebates made None
aance 1,600
Defcency 250
ampe (2). The ta payer made a return for the caendar year 195 showng
a ta of 1,250 before any credts for ta wthhed at the source. e camed a
credt n the amount of 800 for ta wthhed at source on wages under secton
3 02 and G0 for ta pad at source under secton 1 51 upon nterest on bonds
contanng a ta -free covenant. The ta payer had no amounts prevousy assessed
(or coected wthout assessment) as a defcency. The Dstrct Drector deter-
mnes that the 2 percent ta pad at the source on ta -free covenant bonds Is 0
Instead of 00 as camed by the ta payer and that the ta mposed by subtte
s 1,300 (tota ta 1, 00 ess 0 pad at source on ta -free covenant bonds).
defcency n the amount of 170 Is determned as foows:
Ta mposed by subtte ( 1, 00 mnus 0) 1,360
Ta shown on return ( 1,250 mnus 60) 1,190
Ta prevousy assessed (or coected wthout assessment) as a
defcency None
Tota 1,190
mount of rebates made None
aance 1,190
Defcency 170
(f) s used n secton 6211, the term rebate means so much of an abate-
ment, credt, refund, or other repayment as Is made on the ground that the ta
Imposed by subtte or s ess than the e cess of (1) the amount shown as
the ta by the ta payer upon hs return ncreased by the amount prevousy
assessed (or coected wthout assessment) as a defcency over (2) the amount
of rebates prevousy made. or e ampe, assume that the amount of ncome
ta shown by the ta payer upon hs return for the ta abe year s 000 and the
amount camed as a credt under secton 31 for Income ta wthhed at the
source s 900. If the Dstrct Drector determnes that the ta mposed by
subtte s 600 and makes a refund of 300, no part of such refund consttutes
a rebate snce the refund Is not made on the ground that the ta Imposed
by subtte s ess than the ta shown on the return. If, however, the Dstrct
Drector determnes that the ta mposed by subtte s 500 and refunds 00,
the amount of 100 of such refund woud contstute a rebate snce t s made
on the ground that the ta Imposed by subtte ( 500) Is ess than the ta
shown on the return ( 600). The amount of such rebate ( 100) woud be taken
Into account n arrvng at the amount of any defcency subsequenty determned.
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153 6201.
Sk.301.6212. Stat ttobt Provsons Notce of Defcency.
Sec 6212. Nottck or defcency.
U) In genera. If the Secretary or hs deegate determnes that there Is a
defcency n respect of any ta mposed by subttes or , he Is authorzed to
send notce of such defcency to the ta payer by regstered ma,
(b) ddress for notce of defcency.
(1) Income and, gft tares. In the absence of notce to the Secretary or hs
deegate under secton 6903 of the e stence of a fducary reatonshp, notce of a
defcency n respect of a ta mposed by chapter 1 or 12, If maed to the ta -
payer at hs ast known address, sha be suffcent for purposes of such chapter
and ths chapter even f such ta payer s deceased, or s under a ega dsabty,
or, n the case of a corporaton, has termnated ts e stence.
(2) ont ncome ta return. In the case of a |ont ncome ta return fed by
husband and wfe, such notce of defcency may be a snge |ont notce, e cept
that f the Secretary or hs deegate has been notfed by ether spouse that sep-
arate resdences have been estabshed, then, n eu of the snge |ont notce, a
dupcate orgna of the |ont notce sha be sent by regstered ma to each
spouse at hs ast known address.
(3) state ta . In the absence of notce to the Secretary or hs deegate under
secton 6903 of the e stence of a fducary reatonshp, notce of a defcency n
respect of a ta mposed by chapter 11, f addressed n the name of the decedent
or other person sub|ect to abty and maed to hs ast known address, sha be
suffcent for purposes of chapter 11 and of ths chapter.
(c) urther defcency etters restrcted.
(1) Genera rue. If the Secretary or hs deegate has maed to the ta payer
a notce of defcency as provded n subsecton (a), and the ta payer fes a
petton wth the Ta Court wthn the tme prescrbed n secton 6213(a), the
Secretary or hs deegate sha have no rght to determne any addtona defcency
of ncome ta for the same ta abe year, of gft ta for the same caendar year,
or of estate ta n respect of the ta abe estate of the same decedent, e cept
n the case of fraud, and e cept as provded n secton 621 (a) (reatng to
asserton of greater defcences before the Ta Court), n secton 6213(b)(1)
(reatng to mathematca errors), or n secton 6861(c) (reatng to the makng
of |eopardy assessments).
(2) Cross references. or assessment as a defcency notwthstandng the
prohbton of further defcency etters, n the case of:
( ) Defcency attrbutabe to change of eecton to take standard deducton
where ta payer and hs spouse made separate returns, see secton 1 (b).
( ) Defcency attrbutabe to gan on nvountary converson, see secton
1033(a)(3) (C) and (D).
(C) Defcency attrbutabe to gan on sae or e change of persona resdence,
see secton 103 (|).
(I ) Defcency attrbutabe to war oss recoveres where pror beneft rue s
eected, see secton 1335.
Sec. 301.6212-1. Notce of Defcency (a) Genera rue. It a Dstrct D-
rector (or an ssstant Regona Commssoner, ppeate) determnes that there
s a defcency n respect of ncome, estate, or gft ta mposed by subtte or
, he s authorzed to notfy the ta payer of the defcency by regstered ma.
(b) ddress for notce of defcency (1) Income and gft ta es. Uness the
Dstrct Drector for the dstrct n whch the return n queston was fed has
been notfed under the provsons of secton 6903 as to the e stence of a fducary
reatonshp, notce of a defcency n respect of ncome ta or of gft ta sha
be suffcent f maed to the ta payer at hs ast known address, even though
such ta payer s deceased, or s under a ega dsabty, or, n the case of a cor-
poraton, has termnated ts e stence.
(2) ont ncome ta returns. If a ont ncome ta return has been fed
by husband and wfe, the Dstrct Drector (or ssstant Regona Comms-
soner, ppeate) may, uness the Dstrct Drector for the dstrct n whch
such |ont return was fed has been notfed by ether spouse that a separate
resdence has been estabshed, send ether a ont or separate notce of defcency
to the ta payers at ther ast known address. If, however, the proper dstrct
Drector has been so notfed, a separate notce of defcency, that s, a dupcate
orgna of the ont notce, must be sent by regstered ma to each SP U at
or her ast known address. The notce of separate resdences shoud be aaaressea
to the Dstrct Drector for the dstrct In whch the |ont return was mea.
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6201. 15
I (3) state ta . In the absence of notce, under the provsons of secton 69C
as to the e stence of a fducary reatonshp, to the Dstrct Drector for th
dstrct In whch the estate ta return was fed, notce of a defcency n respe
of the estate ta mposed by chapter 11 of subtte sha be suffcent If ac
dressed In the name of the decedent or other person sub|ect to abty and nae
to hs ast known address.
(c) urther defcency etters restrcted. If the Dstrct Drector (or ssstar
Regona Commssoner, ppeate) mas to the ta payer notce of a defcency
and the ta payer fes a petton wth the Ta Court wthn the prescrbed perk
no addtona defcency may be determned wth respect to ncome ta for tb
same ta abe year, gft ta for the same caendar year, or estate ta wth respet
to the ta abe estate of the same decedent. Ths restrcton sha not appy
the case of fraud, asserton of greater defcences before the Ta Court as pr
vded n secton 621 (a), mathematca errors as provded n secton 6213(b) (
or |eopardy assessments as provded n secton 6861(c).
Sec. 301.6213. Statutory Provsons Restrctons ppcabe to D
fcences Petton to Ta Court.
Sec. 6213. Restrctons appcabe to defcences petton to ta cm R
(a) Tme for fng petton and restrcton on assessment. Wthn 90 day
or 150 days If the notce s addressed to a persou outsde the States of the Uno
and the Dstrct of Coumba, after the notce of defcency authorzed n secto
6212 s maed (not countng Saturday, Sunday, or a ega hoday n the Dstr
of Coumba as the ast day), the ta payer may fe a petton wth the Ta Cou
for a redetermnaton of the defcency. cept as otherwse provded n secto
6861 no assessment of a defcency n respect of any ta mposed by subtte c
and no evy or proceedng n court for ts coecton sha be made, begun, c
prosecuted unt such notce has been maed to the ta payer, nor unt the e prt
ton of such 90-day or 150-day perod, as the case may be, nor, f a petton ha
been fed wth the Ta Court, unt the decson of the Ta Court has becoru
fna. Notwthstandng the provsons of secton 7 21(a), the makng of sue
assessment or the begnnng of such proceedng or evy durng the tme sue
prohbton Is n force may be en|oned by a proceedng In the proper court,
(b) ceptons to restrctons on assessment.
(1) Mathematca errors. If the ta payer s notfed that, on account of
mathematca error appearng upon the return, an amount of ta n e cess of ths
shown upon the return s due, and that an assessment of the ta has been or w
be made on the bass of what woud have been the correct amount of ta bv
for the mathematca error, such notce sha not be consdered as a notce c
defcency for the purposes of subsecton (a) (prohbtng assessment and co
ecton unt notce of the defcency has been maed), or of secton 6212(c) (1
(restrctng further defcency etters), or secton 6512(a) (prohbtng credts c
refunds after petton to the Ta Court), and the ta payer sha have no rgt:
to fe a petton wth the Ta Court based on such notce, nor sha such asses:
ment or coecton be prohbted by the provsons of subsecton (a) of th
secton.
(2) ssessments arsng out of tentatve carryback ad|ustments. If the Seor
tary or hs deegate determnes that the amount apped, credted, or refunde
under secton 6 11 s n e cess of the overassessment attrbutabe to the carr|
back wth respect to whch such amount was apped, credted, or refunded, h
may assess the amount of the e cess as a defcency as If t were due to a mat h
matca error appearng on the return.
(3) ssessment of amount pad. ny amount pad as a ta or n respect c
a ta may be assessed upon the recept of such payment notwthstandng th
provsons of subsecton (a). In any case where such amount s pad after th
mang of a notce of defcency under secton 6212, such payment sha not d
prve the Ta Court of |ursdcton over such defcency determned under se
ton 6211 wthout regard to such assessment.
(c) aure to fe petton. If the ta payer does not fe a petton wth th
Ta Court wthn the tme prescrbed n subsecton (a), the defcency, notc
of whch has been maed to the ta payer, sha be assessed, and sha be pa
upon notce and demand from the Secretary or hs deegate.
(d) Waver of restrctons. The ta payer sha at any tme (whether or rtn
a notce of defcency has been Issued) have the rght, by a sgned notce n wrtn
fed wth the Secretary or hs deegate, to wave the restrctons provded n sut
secton (a) on the assessment and coecton of the whoe or any part of th
defcency.
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155 6201.
t) Cross references. (3) or assessment as f a mathematca error on the
Mara, n the case of erroneous cams for ncome ta prepayment credts, see
secton 201.(.a) (3).
(2) or assessments wthout regard to restrctons mposed by ths secton n
toe case ot
( ) Recovery of foregn ncome ta es, see secton 905(c).
( ) Itecovery of foregn estate ta , see secton 2016.
S . 301.(3213-1. Restrctons ppcabe to Defcences Petton to Ta
Cot|bt (a) Tme for fng petton and restrctons on assessment (1) Tme
or fng petton. Wthn 90 days after notce of the defcency Is maed (or
wthn oO days after mang n the case of such notce addressed to a person
outsde the States of the Unon and the Dstrct of Coumba), as provded n
secton 6212, a petton may be fed wth the Ta Court of the Unted States for
a redetermnaton of the defcency. In determnng such 90-day or 150-day
perod, Saturday, Sunday, or a ega hoday n the Dstrct of Coumba s not
counted as the 90th or 150th day. The term States of the Unon referred to
n ths paragraph does not ncude the Terrtores of aska and awa.
(2) .Restrcton on assessment. cept as otherwse provded by ths secton,
by secton 6861(a) (reatng to |eopardy assessments of ncome, estate, and
gft ta es), by secton 6871(a) (reatng to mmedate assessment of cams for
ncome, estate, and gft ta es n bankruptcy and recevershp cases), or by
secton 7 S5 (n case ta payer pettons for a revew of a Ta Court decson
wthout fng bond), no assessment of a defcency n respect of a ta mposed
by subtte or and no evy or proceedng In court for ts coecton sha be
made unt notce of defcency has been maed to the ta payer, nor unt the
e praton of the 90-day or 150-day perod wthn whch a petton may be fed
wth the Ta Court, nor, f a petton has been fed wth the Ta Court, unt
the decson of the Ta Court has become fna. s to the date on whch a
decson of the Ta Court becomes fna, see secton 7 81. Notwthstandng the
provsons of secton 7 21(a), the makng of an assessment or the begnnng of
a proceedng or evy whch s forbdden by ths paragraph may be en|oned by
a proceedng n the proper court.
(b) ceptons to restrctons on assessment of defcences (1) Mathemat-
ca errors. If a ta payer Is notfed of an addtona amount of ta due on
account of a mathematca error appearng upon the return, such notce Is not
deemed a notce of defcency, and the ta payer has no rght to fe a petton
wth the Ta Court upon the bass of such notce, nor s the assessment of such
addtona amount prohbted by secton 6213(a).
(2) Tentatve carryback ad|ustments. (I) If the Dstrct Drector deter-
mnes that any amount apped, credted, or refunded under secton 6 11(b) wth
respect to an appcaton for a tentatve carryback ad|ustment s n e cess of the
overassessment propery attrbutabe to the carryback upon whch such app-
caton was based, he may assess the amount of the e cess as a defcency as
If such defcency were due to a mathematca error appearng on the return.
That s, the Dstrct Drector may assess an amount equa to the e cess, and
such amount may be coected, wthout regard to the restrctons on assessment
and coecton mposed by secton 6213(a). Thus, the Dstrct Drector, for
e ampe, may assess such amount wthout regard to whether he has maed the
ta payer a pror notce of defcency. ther before or after assessng such an
amount, the Dstrct Drector w notfy the ta payer that he has made, or .v
make, such assessment. Such notce w not consttute a notce of defcency,
and the ta payer may not fe a petton wth the Ta Court of the Unted
States based on such notce. owever, the ta payer wthn the appcabe
perod of mtaton may fe a reguar cam for credt or refund based on the
carryback, f be has not aready fed such a cam, and may mantan a sut
based on such cam f t s dsaowed or f t s not acted upon by the Interna
erenne Servce wthn 6 months from the date the cam was fed.
() The method provded n subdvson (I) of ths paragraph to recover
any amount apped, credted, or refunded n respect of an appcaton for a
tentatve carryback ad|ustment whch the Dstrct Drector ater determnes
shoud not have been so apped, credted, or refunded s not an e cusve method.
Two other methods are avaabe to recover such amount: (a) y way of a
defcency notce under secton 6212 or (6) by a sut to recover an erroneous
refund under secton 7 05. The Dstrct Drector, n hs dscreton, may proceed
by way of any one or more of the three avaabe methods to recover any
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6201. 156
amount whch he determnes was mpropery apped, credted, or refunded In
respect of an appcaton for a tentatve carryback ad|ustment.
(3) ssessment of amount pad. ny payment made after the mang of a
notce of defcency whch s made by the ta payer as a payment wth respect to
the proposed defcency may be assessed wthout regard to the restrctons on
assessment and coecton mposed by secton 6213(a) even though the ta -
payer has not fed a waver of restrctons on assessment as provded n
secton 6213(d). payment of a or part of the defcency asserted n the
notce together wth the assessment of the amount so pad w not affect the
|ursdcton of the Ta Court. If any payment s made before the mang of
a notce of defcency, the Dstrct Drector s not prohbted by secton 6213(a)
from assessng such amount, and the Dstrct Drector may assess such amount
f he deems such acton to be proper. If the Dstrct Drector assesses such
amount, the assessment s taken Into account n determnng whether or not
there s a defcency for whch a notce of defcency must be ssued. Thus, f
such a payment satsfes the ta payer s ta abty, no notce of defcency w
be maed and the Ta Court w have no |ursdcton over the matter. In any
case n whch there s a controversy as to the correct amount of the ta abty,
the assessment of any amount pursuant to the provsons of secton 6213(b) (3)
sha n no way be consdered to be the acceptance of an offer by the ta payer
to sette such controversy.
( ) eopardy. If the Dstrct Drector beeves that the assessment or coec-
ton of a defcency w be |eopardzed by deay, such defcency sha be assessed
mmedatey, as provded n secton 6861(a).
(c) aure to fe petton. If no petton s fed wth the Ta Court wthn
the perod prescrbed n secton 6213(a), the Dstrct Drector sha assess the
amount determned as the defcency and of whch the ta payer was notfed by
regstered ma and the ta payer sha pay the same upon notce and demand
therefor. In such case the Dstrct Drector w not be precuded from deter-
mnng a further defcency and notfyng the ta payer thereof by regstered
ma. If a petton s fed wth the Ta Court the ta payer shoud notfy
the Dstrct Drector who ssued the notce of defcency that the petton has
been fed n order to prevent an assessment of the amount determned to be
the defcency.
(d) Waver of restrctons. The ta payer may at any tme by a sgned notce
n wrtng fed wth the Dstrct Drector wave the restrctons on the assess-
ment and coecton of the whoe or any part of the defcency. The notce
must n a cases be fed wth the Dstrct Drector or other authorzed offca
under whose |ursdcton the audt or other consderaton of the return n ques-
ton s beng conducted. The fng of such notce wth the Ta Court does not
consttute fng wth the Dstrct Drector wthn the meanng of the Interna-
tona Revenue Code. fter such waver has been acted upon by the Dstrct
Drector and the assessment has been made n accordance wth ts terms,
the waver cannot be wthdrawn.
Sec. 301.621 . Statutory Pbovsons Determnatons by Ta Couet.
Sec. 621 . Determnatons by ta court.
(a) ursdcton as to ncrease of defcency, addtona amounts, or addtons
to the ta . The Ta Court sha have |ursdcton to redetermne the correct
amount of the defcency even f the amount so redetermned s greater than the
amount of the defcency, notce of whch has been maed to the ta payer, and
to determne whether any addtona amount, or addton to the ta shoud be
assessed, f cam therefor s asserted by the Secretary or hs deegate at or before
the hearng or a rehearng.
(b) ursdcton over other years. The Ta Court n redetermnng a def-
cency of ncome ta for any ta abe year or of gft ta for any caendar year
sha consder such facts wth reaton to the ta es for other years as may be
necessary correcty to redetermne the amount of such defcency, but In so
dong sha have no |ursdcton to determne whether or not the ta for any
other years has been overpad or underpad.
(c) na decsons of Ta Court. or purposes of ths chapter and sub-
ttes or the date on whch a decson of the Ta Court becomes fna sha
be determned accordng to the provsons of secton 7 81. t
Sec. 301.6215. Statutobt Pbovso s ssessment of Defcency ound by
Ta Coubt.
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157 6201.
Sec. 6215. ssessment of defcency found by ta court.
W Genera rue. If the ta payer fes a petton wth the Ta Court, the
este amount redetermned as the defcency by the decson of the Ta Court
nch has become fna sna be assessed and sha be pad upon notce and
demand tom the Secretary or hs deegate. No part of the amount determned
u a defcency by the Secretary or hs deegate but dsaowed as such by the
dwaon ot the Ta Court whch has become fna sha be assessed or be
wUerted hy evy or by proceedng n court wth or wthout assessment.
(b) Cross references. (1) or assessment or coecton of the amount of
the defcency determned by the Ta Court pendng appeate court revew, see
secton 7 85.
(2) or dsmssa of petton by Ta Court as affrmaton of defcency as
determned by the Secretary or hs deegate, see secton 7 59(d).
(3) or decson of Ta Court that ta s barred by mtaton as ts decson
that there s no defcency, see secton 7 59(e).
( ) or assessment of damages awarded by Ta Court for nsttutng pro-
ceedngs merey for deay, see secton 6673.
(5) or treatment of certan defcences as havng been pad, n connecton
wth sae of surpus war-but vesses, see secton 9(b)(8) of the Merchant
Shp Saes ct of 19 6 (60 Stat. 8 50 U. S. C. pp. 17 2).
(6) or rues appcabe to Ta Court proceedngs, see generay subchapter
C of chapter 76.
(7) or proraton of defcency to nstaments, see secton 6152(c).
(8) or e tenson of tme for payng amount determned as defcency, see
secton 0161(b).
Sec. 301.6215-1. ssessment of Defcency ound by Ta Court. Where
a petton has been fed wth the Ta Court, the entre amount redetermned
as the defcency by the decson of the Ta Court whch has become fna
sha be assessed by the Dstrct Drector and the unpad porton of the amount
so assessed sha be pad by the ta payer upon notce and demand therefor.
Sec. 301.6216. Statutory Provsons Cross References.
Sec. 6216. Cross references.
(1) or procedures reatng to bankruptcy and recevershp, see subchapter
of chapter 70.
(2) or procedures reatng to eopardy assessments, see subchapter of
chapter 70.
(3) or procedures reatng to cams aganst transferees and fducares, see
chapter 71.
Coecton
genera provsons
Sec. 301.6301. Statutory Provsons Coecton uthorty.
Sec. 6301. Coecton authorty.
The Secretary or hs deegate sha coect the ta es Imposed by the Interna
revenue aws.
Sec. 301.6301-1. Coecton uthorty. The ta es mposed by the Interna
revenue aws sha be coected by Dstrct Drectors of Interna revenue. See,
however, secton 630 , reatng to the coecton of certan ta es under the
provsons of the Tarff ct of 1930.
Sec. 301.6302. Statutory Provsons Mode or Tme of Coecton.
Sec. 6302. Mode or tme of coecton.
(a) stabshment by reguatons. If the mode or tme for coectng any ta
Is not provded for by ths tte, the Secretary or hs deegate may estabsh the
same by reguatons.
(b) Dscretonary method. Whether or not the method of coectng any ta
Imposed by chapters 21, 31, 32, 33, sectons 501(a) or 511 of chapter 37, or
sectons 701 or 721 of chapter 39 s specfcay provded for by ths tte, any
ne) ta may, nnder reguatons prescrbed by the Secretary or hs deegate, be
coected by means of returns, stamps, coupons, tckets, books, or such other
reasonabe devces or methods as may be necessary or hepfu n securng a
compete and proper coecton of the ta .
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6201. 158
(c) 17 6 0/ Government depostares. The Secretary or hs deegate may
authorze edera Reserve banks, and Incorporated banks or trust companes
whch are depostares or fnanca agents of the Unted States, to receve any
ta Imposed under the Interna revenue aws, n such manner, at such tmes,
and under such condtons as he may prescrbe and he sha prescrbe the
manner, tmes, and condtons under whch the recept of such ta by such banks
and trust companes s to be treated as payment of such ta to the Secretary
or hs deegate.
Seo. 301.6302-1. Use or edera Reserve anks and uthorzed Commer-
ca anks n Connecton Wth the Payment op Certan mpoyment and
cse Ta es. or reguatons under ths secton
(a) Wth respect to empoyment ta es under the edera Insurance Contr-
butons ct and the ncome ta wthhed at source on wages, see secton
81.6302 (c)-1 of ths chapter
(b) Wth respect to the empoyer ta and the empoyee ta under the Raroad
Retrement Ta ct, see secton 3L6302(c)-2 of ths chapter and
(c) Wth respect to certan e cse ta es, see secton 0.6151-1, secton
2.6011-1, and secton 6.6011-1 of ths chapter.
Sec. 301.6303. Statutory Provsons Notce and Demand for Ta .
Sec. 6303. Notce and demand fob ta .
(a) Genera rue. Where t s not otherwse provded by ths tte, the Secre-
tary or hs deegate sha, as soon as practcabe, and wthn 60 days, after the
makng of an assessment of a ta pursuant to secton 6203, gve notce to each
person abe for the unpad ta , statng the amount and demandng payment
thereof. Such notce sha be eft at the dweng or usua pace of busness of
euch person, or sha be sent by ma to such person s ast known address.
(b) ssessment pror to ast date for payment. cept where the Secretary
or hs deegate beeves coecton woud be eopardzed by deay, f any ta s
assessed pror to the ast date prescrbed for payment of such ta , payment of
such ta sha not be demanded under subsecton (a) unt after such date.
Sec. 301.6303-1. Notce and Demand fob Ta (a) Genera rue. Where
It s not otherwse provded by the Code, the dstrct drector sha, after tbe
makng of an assessment of a ta pursuant to secton 6203, gve notce to each
person abe for the unpad ta , statng the amount and demandng payment
thereof. Such notce sha be gven as soon as possbe and wthn 60 days.
owever, the faure to gve notce wthn 60 days does not Invadate the notce.
Such notce sha be eft at the dweng or usua pace of busness of such per-
son, or sha be sent by ma to such person s ast known address.
(b) ssessment pror to ast date for payment. If any ta s assessed pror
to the ast date prescrbed for payment of such ta , the Dstrct Drector w
not demand that such ta be pad before such ast date, e cept where the
Dstrct Drector beeves coecton woud be eopardzed by deay.
Sec. 301.630 . Statutory Provsons Coecton Under the Tarff ct.
Sec. 630 . Coecton under the tarff act.
or coecton under the provsons of the Tarff ct of 1930 of the ta es m-
posed by secton 501(b), and subchapters , , C, D, and of chapter 38, see
sectons 50 and 601, respectvey.
recept of payment
Sec. 301.6311. Statutory Provsons Payment by Check or Monet Order,
Sec. 6311. Payment by check or money ordeb.
(a) uthorty to receve. It sha be awfu for the Secretary or hs deegate
to receve for nterna revenue ta es, or In payment for Interna revenue stamps,
checks or money orders, to the e tent and under the condtons provded In
reguatons prescrbed by the Secretary or hs deegate.
(b) Check or money order unpad.
(1) Utmate abty. If a check or money order so receved s not duy pad,
the person by whom such check or money order has been tendered sha reman
abe for the payment of the ta or for the stamps, and for a ega penates
and addtons, to the same e tent as f such check or money order had not been
tendered.
(2) Labty of banks and others. If any certfed, treasurer s, or casher s
check or any money order so receved s not duy pad, the Unted States sha.
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159 6201.
a addton to Its rgnt to e act payment from the party orgnay ndebted
thereor.have a. en for the amount of such check upon a the assets of the bank
or trost company on -whch drawn or for the amount of such money order upon
the assets of tne ssuer thereof and such amount sha be pad out of such
sets In preference to any other cams whatsoever aganst such bank or ssuer
e cept the necessary costs and e penses of admnstraton and the remburse-
ment of the Unted States for the amount e pended n the redempton of the
crcuatng notes of such bank.
Sec. 301.6311-1. Payment by Check ob Money Obdeb (a) uthorty to re-
wre (1) In genera. (1) Dstrct Drectors may accept checks drawn on any
ank or trust company ncorporated under the aws of the Unted States or under
the aws of any State, Terrtory, or possesson of the Unted States or money or-
ders n payment for nterna revenue ta es, provded such checks or money orders
re coectbe n Unted States currency at par. Dstrct Drectors may accept
such checks or money orders n payment for Interna revenue stamps, or for the
prepayment of the ta es on wnes as authorzed by the Wne Reguatons
prescrbed under chapter 51 (pt. 2 0 of ths chapter), to the e tent and under
the condtons prescrbed n subparagraph (2) of ths paragraph. cheek
or money order s payabe at par ony f the fu amount thereof s payabe
wthout any deducton for e change or other charges. s used n ths secton,
the term money order means: (a) Unted States posta, bank, e press, or
teesraph money order (b) money order Issued by a domestc budng and
oan assocaton (as defned n secton 7701 (a) (19)) or by a smar assocaton
ncorporated under the aws of a possesson of the Unted States (c) a money
order ssued by such other organzaton as the Commssoner may desgnate and
d) a money order descrbed n subdvson () of ths subparagraph n cases
theren descrbed. owever, the Dstrct Drector may refuse to accept any
persona check whenever he has good reason to beeve that such check w not
be honored upon presentment.
() n mercan ctzen resdng n a country wth whch the Unted States
mantans drect e change of money orders on a domestc bass may pay hs
ta by posta money order of such country. Such countres presenty are:
ntgua, the ahamas, arbados, ermuda, rtsh Guana, rtsh onduras,
rtsh rgn Isands, Canada, Cana Zone, Cuba, Domnca, Grenada, amaca,
Montserrat, Nevs, St. tts, St. Luca, St. ncent, and Trndad and Tobago.
() If one check or money order s remtted to cover two or more persons
ta es, the remttance shoud be accompaned by a etter of transmtta ceary
dentfyng
(a) ach person whose ta s to be pad by the remttance
(6) The amount of the payment on account of each such person and
(c) The knd of ta pad.
(2) Payment for nterna revenue stamps prepayment of tcne ta . The
Dstrct Drector may accept checks and money orders descrbed n subpara-
graph (1) of ths paragraph n payment for nterna revenue stamps other than
stamps for ta es mposed under subchapter of chapter 39 (reatng to sver
buon), stamps for ta es Imposed under chapter 3 (reatng to documentary
stamps), stamps for ta es on dsted sprts mposed under chapter 51, ncud-
ng the rectfcaton ta , and stamps for ta es mposed under chapter 52 (reatng
to tobacco and manufactures), and n prepayment of the ta es on wnes as
authorzed by the Wne Reguatons prescrbed under chapter 51 (pt. 2 0 of ths
chapter). The Dstrct Drector may accept n payment for such ta es certfed,
cashers or treasurers checks drawn on any bank or trust company ncorporated
under the aws of the Unted States or under the aws of any State, Terrtory,
or possesson of the Unted States or money orders descrbed n subparagraph
(1 of ths paragraph. owever, f an appcaton has been submtted by a
person desrng to tender persona checks for such ta es or n prepayment of
wne ta es, and the appcaton has been approved by the Dstrct Drector, the
Dstrct Drector may accept such persona checks as are descrbed n sub-
dvson (I) of subparagraph (1) of ths paragraph. The appcaton sha be
made to the Dstrct Drector and sha contan the appcant s name, address,
frm name (f any), such fnanca nformaton as w enabe the Dstrct
Dm-tor to determne the amount of the credt to be e tended to the appcant,
and the appro mate vaue of stamps to be purchased or the amount of wne
ta es to be prepad durng the perod f ed by the Dstrct Drector. The Ds-
trct Drector s authorzed to approve or dsapprove such appcaton and, f
te appcaton s approved, to f the ma mum amount of the vaue of the
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G201. 160
Interna revenue stamps or of the prepayment of the ta es on wnes for whch
persona checks w be accepted and to prescrbe such other mtatons and
condtons as he deems approprate. The Dstrct Drector may, for good cause,
dscontnue at any tme the acceptance of persona checks under the provsons
of ths subparagraph.
(b) Checks or money order not pad (1) Utmate abty. The person
who tenders any check (whether certfed or uncertfed, casher s, treasurer s, or
other form of check) or money order n payment for ta es or stamps Is not
reeased from hs abty unt the check or money order Is pad and, f the
check or money order s not duy pad, he sha aso be abe for a ega pena-
tes and addtons, to the same e tent as f such check or money order had not
been tendered. or the penaty n case a check or money order s not duy
pad, see secton 6657 and the reguatons thereunder. or assessment of the
amount of a check or money order not duy pad, see secton 6201 (a) (2) ( )
and the reguatons thereunder.
(2) Labty of banks and others. If any certfed treasurer s or casher s
check or money order s not duy pad, the Unted States sha have a en for
the amount of such check upon a assets of the bank or trust company on whch
drawn or for the amount of such money order upon the assets of the ssuer
thereof. The unpad amount sha be pad out of such assets n preference to
any other cams aganst such bank or Issuer e cept the necessary costs and
e penses of admnstraton and the rembursement of the Unted States for the
amount e pended n the redempton of the crcuatng notes of such bank. In
addton, the Government has the rght to e act payment from the person re-
qured to make the payment.
Sec. 301.6312. Statutory Provsons Payment by Unted States Notes and
Certfcates op Indebtedness.
, Sec. 6312. Payment by unted states notes and certfcates of ndebtedness
(a) Genera rue. It sha be awfu for the Secretary or hs deegate to re-
ceve, at par wth an ad|ustment for accrued nterest, Treasury bs, notes and
certfcates of ndebtedness ssued by the Unted States n payment of any nterna
revenue ta es, or n payment for nterna revenue stamps, to the e tent and
under the condtons provded In reguatons prescrbed by the Secretary or
hs deegate.
(b) Cross references. (1) or authorty to receve sver certfcates, see
secton 5 of the act of une 19,193 ( 8 Stat. 1178 31 U. S. C. 05a).
(2) or fu ega tender status of a cons and currences of the Unted
States, see secton 3(b)(1) of the grcutura d|ustment ct, as amended
( 8 Stat. 52,113 31 U. S. C. 62).
(3) or authorty to receve obgatons under the Second Lberty ond ct,
see secton 20(b) of that act, as amended (56 Stat. 189 31 U. S. C. 75 b).
Sec. 301.6312-1. Treasury Certfcates of Indebtedness, Treasury Notes,
and Treasury s cceptabe n Payment of Interna Revenue Ta es or
Stamps. (a) Treasury certfcates of ndebtedness. Treasury notes or
Treasury bs of any seres (not Incudng nterm recepts ssued
by edera reserve banks n eu of defntve certfcates, notes, or
bs) may be tendered at or before maturty n payment of nterna revenue
ta es due on the date (or n payment for stamps purchased on the date),
on whch the certfcates, notes, or bs mature, or n payment of nterna
revenue ta es due on a specfed pror date, but ony f such certfcates, notes,
or bs, accordng to the e press terms of ther ssue, are made acceptabe n
payment of such ta es or for the purchase of stamps. If the ta es for whch
the certfcates, notes, or bs are tendered n payment become due, or the
stamps are purchased, on the same date as that on whch such certfcates, notes,
or bs mature, they w be accepted at par pus accrued nterest, f any, pay-
abe wth the prncpa (not represented by coupons attached) n payment of
such ta es or stamps. If the ta es for whch the certfcates, notes, or bs
are tendered n payment become due, or the stamps are purchased, on a date
pror to that on whch the certfcates, notes, or bs mature, they w be
accepted at the vaue specfed n the terms under whch such certfcates, notes,
or bs were ssued. nterest coupons attached to Treasury certfcates of
ndebtedness or Treasury notes sha be detached by the ta payer before such
certfcates or notes are tendered n payment of ta es or stamps.
(b) Recepts gven by a Dstrct Drector for Treasury certfcates of ndebted-
ness, Treasury notes, or Treasury bs receved n payment of Interna revenue
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161 C201.
tUMottor stamps as provded n ths secton sha contan an adequate descrp-
ton of such certfcates, notes, or bs, and a statement of the vaue, ncudng
rcmed nterest, t any, payabe wth te prncpa (not represented by coupons
trucked , at whcb accepted, and sha show that the certfcates, notes, or
Ws art tendered by the ta payer and receved by the Dstrct Drector, sub|ect
to no condton, quafcaton, or reservaton whatsoever, n payment of an amount
of ta es or tor stamps no greater than such vaue. ny certfcate, note, or b
offered n payment of nterna revenue ta es or for stamps sub|ect to any cond-
ton, quafcaton, or reservaton, or for any greater amount than the vaue at
whch acceptabe n payment of ta es or stamps, as specfed n the terms under
whch such certfcate, note, or b was ssued, sha not be deemed to be duy
tendered and sha be returned to the ta payer.
(e) or the purpose of savng ta payers the e pense of transmttng Treasury
certfcates of ndebtedness. Treasury notes, or Treasury bs to the offce of
the Dstrct Drector n whose dstrct the ta es are payabe, or stamps are to
be purchased, ta payers desrng to pay ta es, or purchase stamps, wth such
cr foates, notes, or bs acceptabe n payment of ta es or for the purchase
of stamps may depost such certfcates, notes, or bs wth a edera reserve
hank or branch. In such cases, the edera reserve bank or branch sha ssue
a recept n the name of the Dstrct Drector, descrbng the certfcates, notes,
or bs by par or doar face amount and statng on the face of the recept that
the certfcates, notes, or bs represented thereby are hed by the bank or branch
for redempton at the vaue specfed n the terms under whch the certfcates,
notes, or bs were ssued, and for appcaton of the proceeds n payment of
ta es due or for the purchase of stamps on a specfed date by the ta payer named
theren.
Sec. 801.6312-2. Certan Treasury Savngs Notes cceptabe n Payment op
Cebtan Interna Revenue Ta es. ccordng to the e press terms of ther
ssue, the foowng seres of Treasury savngs notes are presenty acceptabe In
payment of ncome ta es (current and back, persona and corporaton ta es,
nd e cess profts ta es) and estate and gft ta es (current and back):
(a) Treasury Savngs Notes, Seres ,
(b) Treasury Savngs Notes, Seres ,
(c) Treasury Savngs Notes, Seres C.
Sec. 301.6313. Statutory Provsons ractona Parts or a Cent.
Sec. 6313. ractona parts of a cent.
In the payment of any ta mposed by ths tte not payabe by stamp, a frac-
tona part of a cent sha be dsregarded uness t amounts to one-haf cent or
more, n whch case t sha be ncreased to 1 cent.
Sec. 301.6313-1. ractona Parts of a Cent. In the payment of any ta not
payabe by stamp, a fractona part of a cent sha be dsregarded uness t
amounts to one-haf cent or more, n whch case t sha be ncreased to one cent.
ractona parts of a cent sha not be dsregarded In the computaton of ta es.
Sec. 301.631 . Statutory Provsons Recept fob Ta es.
Sec. C31 . Recept fob ta es.
(a) Genera rue. The Secretary or hs deegate sha, upon request, gve
recepts for a sums coected by hm, e ceptng ony when the same are n pay-
ment for stamps sod and devered but no recepts sha be ssued In eu of a
stamp representng a ta .
b) Dupcate recepts for payment of estate ta es. The Secretary or hs
deegate sha, upon request, gve to the person payng the ta under chapter 11
(reatng to the estate ta ) dupcate recepts, ether of whch sha be suffcent
evdence of such payment, and sha entte the e ecutor to be credted and
aowed the amount thereof by any court havng |ursdcton to audt or sette hs
accounts.
t) Cross references. (1) or recept requred to be furnshed by empoyer
to empoyee wth respect to empoyment ta es, see secton 6051.
(2) or recept of dscharge of e ecutor from persona abty, see secton
220 .
Sec. 301.631 -1. Recept fob Ta es (a) In genera. The Dstrct Drector
sha ssue a recept for each ta payment made n cash (other than a payment
for stamps sod and devered). In the case of payments made by check, the
canceed check s usuay a suffcent recept. owever, upon request, the Dstrct
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6201.1 162
Drector sha ssue a recept for such payment (other than a payment for
stamps sod and devered). No recept sha be Issued n eu of a stamp repre-
sentng a ta , whether the payment s n cash or otherwse.
(b) Dupcate recept for payment of estate ta es. Upon request, the Dstrct
Drector w Issue dupcate recepts to the person payng the estate ta , ether
of whch w be suffcent evdence of such payment and entte the e ecutor
to be credted wth the amount by any court havng |ursdcton to audt or sette
hs accounts. or defnton of the term e ecutor, see secton 2203.
Sec. 301.6315. Statutory Provsons Payments of stmated Income Ta .
Sec. 6315. Payments of estmated ncome ta .
Payment of the estmated ncome ta , or any Instament thereof, sha be
consdered payment on account of the ncome ta es mposed by subtte for
the ta abe year.
Sec. 301.6315-1. Payments of stmated Income Ta . The payment of any
Instament of the estmated ncome ta (see sectons 6015 and 6016) sha be con-
sdered payment on account of the ncome ta for the ta abe year for whch
the estmate s made. The aggregate amount of the payments of estmated ta
shoud be entered upon the ncome ta return for such ta abe year as payments
to be apped aganst the ta shown on such return.
Sec. 301.6316. Statutory Provsons Payment by oregn Currency.
Sec. 6316. Payment by foregn currency.
The Secretary or hs deegate s authorzed n hs dscreton to aow payment
of ta es n the currency of a foregn country under such crcumstances and sub-
|ect to such condtons as the Secretary or hs deegate may by reguatons pre-
scrbe.
en for ta es
Sec 301.6321. Statutory Provsons Len for Ta es.
Sec 6321. Len for ta es.
If any person abe to pay any ta negects or refuses to pay the same after
demand, the amount (ncudng any nterest, addtona amount, addton to ta ,
or assessabe penaty, together wth any costs that may accrue n addton
thereto) 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.
Sec. 301.6321-1. Len for Ta es. If any person abe to pay any ta neg-
ects or refuses to pay the same after demand, the amount (ncudng any
nterest, addtona amount, addton to ta , or assessabe penaty, together wth,
any costs that may accrue n addton thereto) sha be a en n favor of the
Unted States upon a property and rghts to property, whether rea or persona,
tangbe or ntangbe, beongng to such person. The en attaches to a property
and rghts to property beongng to such person at any tme durng the perod of
the en, ncudng any property or rghts to property acqured by such person
after the en arses. or the speca en for estate and gft ta es, see secton
632 and secton 301.632 -1.
Sec. 301.0322. Statutory Provsons Perod of Lten.
Sec 6322. Perod of en.
Uness another date Is specfcay f ed by aw, the en mposed by secton
6321 sha arse at the tme the assessment s made and sha contnue unt the
abty for the amount so assessed s satsfed or becomes unenforceabe by
reason of apse of tme.
Sec 301.G323. Statutory Provsons adty ganst Mortgagees, Pedgees,
Purchasers, and udgment Credtors.
Sec 6323. adty aganst mortgagees, pedgees, purchasers, and |udgment
credtors.
(a) Invadty of en wthout notce. cept as otherwse provded In sub-
secton (c), the en mposed by secton 6321 sha not be vad as aganst any
mortgagee, pedgee, purchaser, or |udgment credtor unt notce thereof has been
fed by the Secretary or hs deegate.
(1) Under State or terrtora aws. In the offce desgnated by the aw of the
State or Terrtory n whch the property sub|ect to the en s stuated, whenever
the State or Terrtory has by aw desgnated an offce wthn the State or Terr-
tory for the fng of such notce or
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163 6201.
(2) Wth cerc of dstrct court. In the offce of the cerk of the Unted States
dstrct court for the |udca dstrct In whch the property suh|ect to the en s
stuated, whenever the State or Terrtory has not by aw desgnated an offce
wthn the State or Terrtory for the fng of such notce or
(3) Wth cerk of dstrct court for Dstrct of Coumba. In the offce of the
cerk of the Unted States Dstrct Court for the Dstrct of Coumba, f the
property sub|ect to the en s stuated In the Dstrct of Coumba.
(b) orm of notce. If the notce fed pursuant to subsecton (a) (1) s n
soch form as woud be vad f fed wth the cerk of the Unted States dstrct
court pursuant to subsecton (a) (2), such notce sha be vad notwthstandng
any aw of the State or Terrtory regardng the form or content of a notce of
en.
(c) cepton n case of securtes.
(1) cepton. ven though notce of a en provded n secton C321 has been
fed n the manner prescrbed In subsecton (a) of ths secton, the en sha not
be vad wth respect to a securty, as defned n paragraph (2) of ths subsec-
ton, as aganst any mortgagee, pedgee, or purchaser of such securty, for an
adequate and fu consderaton n money or money s worth, If at the tme of such
mortgage, pedge, or purchase such mortgagee, pedgee, or purchaser s wthout
notce or knowedge of the e stence of such en.
(2) Defnton of securty. s used n ths subsecton, the term securty
means any bond, debenture, note, or certfcate or other evdence of ndebtedness,
ssued by any corporaton (ncudng one ssued by a government or potca
aubdvson thereof), wth nterest coupons or n regstered form, share of
stock, votng trust certfcate, or any certfcate of nterest or partcpaton n,
certfcate of depost or recept for, temporary or nterm certfcate for, or war-
rant or rght to subscrbe to or purchase, any of the foregong negotabe Instru-
ment or money.
d) Dscosure of amount of outstandng en. If a notce of en has been fed
nnder subsecton (a), the Secretary or hs deegate s authorzed to provde by
raes or reguatons the e tent to whch, and the condtons under whch, n-
formaton as to the amount of the outstandng obgaton secured by the en may
be dscosed.
Sec. 301.6323-1. adty of Len ganst Mortgagees, Pedgees, Purchasers,
asd udgment Cbedtors. (a) Invadty of en wthout notce (1) ng of
notce. The en mposed by secton 6321 sha not be vad as aganst any mort-
gagee, pedgee, purchaser, or udgment credtor unt notce of en has been
fed. (See, however, secton 6323(c) and paragraph (b) of ths secton, reatng
to the crcumstances under whch the en Is not vad wth respect to a securty
even though notce thereof s duy fed.) The pace for the fng of the notce
of en s
() The offce desgnated by the aw of the State or Terrtory n whch the
property sub|ect to the en s stuated, whenever the State or Terrtory has
desgnated an offce wthn the State or Terrtory for the fng of such notce
() The offce of the cerk of the Unted States dstrct court for the |udca
dstrct n whch the property sub|ect to the en s stuated, whenever the State
or Terrtory has not by aw desgnated an offce wthn the State or Terrtory
for the fng of such notce or
() The offce of the cerk of the Unted States Dstrct Court for the Dstrct
of Coumba f the property sub|ect to the en s stuated n the Dstrct of
Coomba.
(2) Meanng of terms. (1) s used n secton 6323 and ths secton
(a) The term purchaser means a person who, for a vauabe present con-
sderaton, acqures property or an nterest n property.
16) The term |udgment credtor means a person who has obtaned a vad
nd|nnent n a court of record and of competent |ursdcton for the recovery
of specfcay desgnated property or for a certan sum of money and, n the
case of a |udgment for the recovery of a certan sum of money, who has a per-
fected en under such |udgment on the property nvoved. The term |udgment
does not ncude an nchoate en, such as an attachment en, uness and unt
rcch en has rpened nto a udgment. Unted States v. Securty Trust and
oengs ank (1950) 3 0 U. S. 7. Nor does the term |udgment ncude the
determnaton of a quas- udca body or of an ndvdua actng n a quas-
|ndca capacty, such as, for e ampe, the acton of State ta ng authortes.
nted States v. Gbert ssocates (1953) 3 5 U. S. 361 and Unted States v.
Cty of ec rtan (195 ) 3 7 U. S. 81,
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6201. 16
(II) The determnaton whether a person Is a mortgagee, pedgee, purchaser,
or |udgment credtor, entted to the protecton of secton 6323(a), sha be made
by reference to the reates and the facts n a gven case rather than to the tech-
nca form or termnoogy used to desgnate such person. Thus, a person who
Is In fact and n aw a mortgagee, pedgee, or purchaser w be entted as such
to the protecton of secton 6323(a) even though such person s otherwse desg-
nated under the aw of a State, such as the Unform Commerca Code.
(3) orm of notce. The form to be used for fng the notce of en sha be
orm 668, Notce of edera Ta Len under Interna Revenue Laws. Such
notce, fed n the ofce desgnated by the aw of a State or Terrtory, sha be
vad notwthstandng any aw of the State or Terrtory regardng the form or
content of a notce of en. or e ampe, the omsson from the notce of en of a
descrpton of the property sub|ect to the en w not affect the vadty thereof,
even though the aw of the State or Terrtory requres that the notce of en
contan a descrpton of the property sub|ect to the en.
(b) cepton n case of securtet (1) cepton. ven though a notce of
en provded for n secton 6321 has been fed n the manner prescrbed n
secton 6323(a), the en sha not be vad wth respect to a securty, as defned
In secton 6323(c) (2), as aganst any mortgagee, pedgee, or purchaser of such
securty, for an adequate and fu consderaton In money or money s worth, f
at the tme of such mortgage, pedge, or purchase such mortgagee, pedgee, or
purchaser s wthout notce or knowedge of the e stence of such en. n
adequate and fu consderaton n money or money s worth, as used n secton
6323(c), means that the consderaton must have been an adequate and fu
equvaent reducbe to a money vaue. purchase of property made n the
ordnary course of busness (that s, a transacton whch s bona fde and made at
arm s ength) w be consdered as made for an adequate and fu consderaton
n money or money s worth. renqushng or promsed renqushment of
dower, curtesy, or of a statutory estate created n eu of dower or curtesy, or of
other marta rghts s not a consderaton n money or money s worth. Nor Is
ove and affecton, promse of marrage, or any other consderaton not reducbe
to a money vaue a consderaton n money or money s worth.
(2) Defnton of securty. s used n secton 6323(c), the term securty
means: ny bond, debenture, note or certfcate or other evdence of ndebted-
ness, ssued by any corporaton (Incudng one Issued by a government or
potca subdvson theroof), wth nterest coupons or n regstered form, share
of stock, votng trust certfcate, or any certfcate of nterest or partcpaton n,
certfcate of depost or recept for, temporary or nterm certfcate for, or
warrant or rght to subscrbe to or purchase, any of the foregong negotabe
nstrument or money.
(c) Dscosure of amount of outstandng en. (1) If a notce of en has been
fed, the Dstrct Drector to whom the assessment whch gave rse to the en
s charged s authorbed to dscose Informaton as to the amount of the out-
standng obgaton secured by the en to any person who has a proper nterest
In determnng the amount of the outstandng obgaton. ny person desrng
such nformaton shoud present to the Dstrct Drector a wrtten request.
Such request shoud ceary descrbe the property sub|ect to the en, dentfy the
appcabe en, and gve the reasons for requestng such nformaton. ny per-
son who has a rght n the property or ntends to obtan a rght n the property
by purchase or otherwse w, upon satsfactory proof of such rght or of the
Intenton to obtan such rght, be consdered to have a proper nterest.
(2) If the Dstrct Drector determnes that the appcant s entted to the
Informaton requested, he w dscose to such appcant the tota amount of the
outstandng obgaton secured by the en.
(3) Tho Commssoner may dscose the amount of any outstandng obgaton
secured by the en If he determnes such acton Is warranted under the facts
and crcumstances n the partcuar case.
( ) The provsons of ths paragraph appy to any notce of en fed under
secton 6323 or correspondng provsons of pror nterna revenue aws.
(d) ppcaton of secton 632S to ens mposed under secton 8670 of the
Interna Revenue Code of 1939. In the case of any en arsng under secton
3670 of the Interna Revenue Code of 1039 or the correspondng provsons of
pror aw (reatng to the genera ta en) whch s In effect on anuary 1,
1955, the provsons of secton 6323 sha be appcabe to such en on and after
such date n eu of the provsons of secton 3672 of the Interna Revenue Code
of 1939 or the correspondng provsons of pror aw.
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163 6201.
8ec 301.032 Statt tobt Pbovbo.nb Speca Lens for state and Gft
Ta es.
Sec. 632 . Speca ens fob estate and gft ta es.
(a) Lens for estate ta . cept as otherwse provded In subsecton (c)
(reatng to transfers of securtes).
(1) Upon gross estate. Uness the estate ta mposed by chapter 11 s sooner
pad n fu, t sha be a en for 10 years upon the gross estate of the decedent,
e cept that such part of the gross estate as Is used for the payment of charges
aganst the estate and e penses of ts admnstraton, aowed by any court
havng |ursdcton thereof, sha be dvested of such en.
(2) abty of transferees and others. If the estate ta Imposed by chapter
11 s not pad when due, then the spouse, transferee, trustee (e cept the trustee
of an empoyee s trust whch meets the requrements of secton 01(a)), sur-
vvng tenant, person In possesson of the property by reason of the e ercse,
none ercse, or reease of a power of appontment, or benefcary, who receves,
or has on the date of the decedents death, property ncuded n the gross estate
under sectons 203 to 20 2, Incusve, to the e tent of the vaue, at the tme of
the decedent s death, of such property, sha be personay abe for such ta .
ny part of such property transferred by (or transferred by a transferee of)
such spouse, transferee, trustee, survvng tenant, person n possesson of
property by reason of the e ercse, none ercse, or reease of a power of appont-
ment, or benefcary, to a bona fde purchaser, mortgagee, or pedgee, for an
adequate and fu consderaton n money or money s worth sha be dvested
of the en provded In paragraph (1) and a ke en sha then attach to a
the property of such spouse, transferee, trustee, survvng tenant, person n pos-
sesson, benefcary, or transferee of any such person, e cept any part transferred
to a bona fde purchaser, mortgagee, or pedgee for an adequate and fu con-
sderaton n money or money s worth.
(3) Contnuance after dscharge of e ecutor. The provsons of secton 220
(reatng to dscharge of e ecutor from persona abty) sha not operate as a
reease of any part of the gross estate from the en for any defcency that may
thereafter be determned to be due, uness such part of the gross estate (or any
nterest theren) has been transferred to a bona fde purchaser, mortgagee, or
pedgee for an adequate and fu consderaton n money, or money s worth, n
whch case such part (or such nterest) sha not be sub|ect to a en or to any
cam or demand for any such defcency, but the en sha attach to the consd-
eraton receved from such purchaser, mortgagee, or pedgee by the hers,
egatees, devsees, or dstrbutees.
(b) Len for gft ta . cept as otherwse provded n subsecton (c) (reat-
ng to transfers of securtes), the gft ta mposed by chapter 12 sha be a
en upon a gfts made durng the caendar year, for 10 years from the tme the
gfts are made. If the ta s not pad when due, the donee of any gft sha be
personay abe for such ta to the e tent of the vaue of such gft. ny part
of the property comprsed In the gft transferred by the donee (or by a trans-
feree of the donee) to a bona fde purchaser, mortgagee, or pedgee for an ade-
quate and fu consderaton n money or money s worth sha be dvested of the
en heren mposed and the en, to the e tent of the vaue of such gft, sha
attach to a the property (ncudng after-acqured property) of the donee (or
the transferee) e cept any part transferred to a bona fde purchaser, mortgagee,
or pedpee for an adequate and fu consderaton n money or money s worth.
(c) cepton n case of securtes. The en Imposed by subsecton (a) or (b)
sha not be vad wth respect to a securty, as defned n secton 6323(c) (2), as
azanst any mortgagee, pedgee, or purchaser of any such securty, for an ade-
quate and fu consderaton n money or money s worth, f at the tme of such
mortgage, pedge, or purchase such mortgagee, pedgee, or purchaser Is wthout
notce or knowedge of the e stence of such en.
Sec. 301.632 -1. Speca Lens for state and Gft Ta es Persona La-
ttrrr of Transferees and Others. (a) state ta . (1) The en Imposed by
secton 632 (a) attaches at the date of the decedent s death to every part of the
gross estate, whether or not the property comes nto the possesson of the duy
quafed e ecutor or admnstrator. It attaches to the e tent of the ta shown to
be due by the return and of any defcency n ta found to be due upon revew and
audt If the estate ta s not pad when due, then the spouse, transferee, trus-
tee (e cept the trustee of an empoyee s trust whch meets the requrements of
ecton 01(a)), survvng tenant, person n possesson of the property by reason
of the e ercse, none ercse, or reease of a power of appontment, or benefcary,
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6201. 166
who receves, or has on the date of the decedent s death, property ncuded n the
gross estate under sectons 203 to 20 2, ncusve, sha be personay abe for
such ta to the e tent of the vaue, at the tme of the decedent s death, of such
property.
(2) Uness the ta Is pad n fu, and e cept as otherwse provded n secton
632 (c) (reatng to transfers of securtes), the en upon the entre property
consttutng the gross estate contnues for a perod of 10 years after the dece-
dent s death, e cept that such en sha be dvested wth respect to :
(1) Such porton of the gross estate as s used for the payment of charges
aganst the estate and e penses of ts admnstraton aowed by any court hav-
ng |ursdcton thereof
() Such property as s transferred to a bona fde purchaser, mortgagee, or
pedgee, for an adequate and fu consderaton n money or money s worth, by
the spouse, transferee, trustee, survvng tenant, person n possesson of the
property by reason of the e ercse, none ercse, or reease of a power of ap-
pontment, or benefcary, who receves, or has on the date of the decedent s
death, property ncuded n the gross estate under sectons 203 to 20 2, ncusve
(or the correspondng provsons of the Interna Revenue Code of 1939), or such
property as s transferred by the transferee of such person. In such case, a ke
en attaches to a the property of such spouse, transferee, trustee, survvng
tenant, person n possesson, benefcary, or transferee of any such person, e -
cept such part thereof as may be transferred to a bona fde purchaser, mortgagee,
or pedgee for an adequate and fu consderaton n money or money s worth.
See paragraph (b) (1) of secton 301.6323-1 for the meanng of the term an ade-
quate and fu consderaton n money or money s worth
() Such porton of the gross estate (or any nterest theren) as has been
transferred to a bona fde purchaser, mortgagee, or pedgee for an adequate and
fu consderaton n money or money s worth, f paymeut s made of the fu
amount of ta determned by the Dstrct Drector pursuant to a request of the
e ecutor for dscharge from persona abty as authorzed by secton 220
(reatng to dscharge of e ecutor from persona abty), but there s subst-
tuted a ke en upon the consderaton receved from such purchaser, mort-
gagee, or pedgee by the hers, egatees, devsees, or dstrbutees and
(v) Such property as to whch the Dstrct Drector has ssued a certfcate
reeasng the en pursuant to secton 6325.
(b) Len for gft ta . cept as provded n secton 632 (c) (reatng to
securtes), a en attaches upon a gfts made durng the caendar year for the
amount of the ta mposed upon the gfts made durng such year. The en
e tends for a perod of 10 years from the tme the gfts were made, uness the
ta s sooner pad. If the ta s not pad when due, the donee of any gft becomes
personay abe for the ta to the e tent of the vaue of hs gft. ny part
of the property comprsed n the gft whch s transferred by the donee (or by
a transferee of the donee) to a bona fde purchaser, mortgagee, or pedgee, for
an adequate and fu consderaton n money or money s worth, s dvested of
the en, but a ke en to the e tent of the vaue of such gft attaches to a the
property (ncudng after-acqured property) of the donee (or the transferee),
e cept any part transferred to a bona fde purchaser, mortgagee, or pedgee,
for an adequate and fu consderaton n money or money s worth. See para-
graph (b) (1) of secton 301.6323-1 for the meanng of the term an adequate
and fu consderaton n money or money s worth.
(c) ppcaton of en mposed by secton 6321. The genera en under sec-
ton 6321 and the speca en under subsecton (a) or (b) of secton 632 for
the estate or gft ta are not e cusve of each other, but are cumuatve. ach
en w arse when the condtons precedent to te creaton of such en are met
and w contnue n accordance wth the provsons appcabe to the partcuar
en. Thus, the speca en may e st wthout the genera en beng n force,
or the genera eu may e st wthout the speca en beng n force, or the
genera en and the speca en may e st smutaneousy, dependng upon the
facts and pertnent statutory provsons appcabe to the respectve ens.
(d) ppcaton of secton 682b to estate and gft ta ens mposed under the
Interna Revenue Code of 19S9. In the case of any en arsng under secton
827 or 1009 of the Interna Revenue Code of 1939 (reatng to ens for estate
and gft ta es, respectvey) whch s n effect on anuary 1, 1955, the provsons
of secton 632 sha be appcabe to such en on and after such date n eu of
the provsons of secton 827 or 1009 of the 1939 Code,
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1(57 6201.
Sec. 301.6323. Statutory Pbovsons Reease of Len or Pabta Dscharge
PeOP TY.
Sec. 6325. Reease of en ob parta dscharge of property.
(a) Reease of en. Sub|ect to such rues or reguatons as the Secretary or
hs deegate may prescrbe, the Secretary or hs deegate may ssue a certfcate
of reease of any en Imposed wth respect to any nterna revenue ta f
(1) Labty satsfed or unenforceabe. The Secretary or hs deegate fnds
that the abty for the amount assessed, together wth a nterest n respect
thereof, has been fuy satsfed, has become egay unenforceabe, or, n the case
of the estate ta mposed by chapter 11 or the gft ta mposed by chapter 12,
has been fuy satsfed or provded for or
(2) ond accepted. There s furnshed to the Secretary or hs deegate and
accepted by hm a bond that s condtoned upon the payment of the amount
assessed, together wth a nterest n respect thereof, wthn the tme prescrbed
byaw (ncudng any e tenson of such tme), and that s n accordance wth
seen requrements reatng to terms, condtons, and form of the bond and suretes
thereon, as may be specfed by such rues or reguatons.
(b) Parta dscharge of property.
(1) Property doube the amount of the abty. Sub|ect to such rues or
reguatons as the Secretary or hs deegate may prescrbe, the Secretary or
hs deegate may ssue a certfcate of dscharge of any part of the propery
sub|ect to any en mposed under ths chapter f the Secretary or hs deegate
fnds that the far market vaue of that part of such property remanng sub|ect
to the en s at east doube the amount of the unsatsfed abty secured by
such en and the amount of a other ens upon such property whch have
prorty to such en.
(2) Part payment or nterest of Unted States vaueess. Sub|ect to such rues
or reguatons as the Secretary or hs deegate may prescrbe, the Secretary or
hs deegate may ssue a certfcate of dscharge of any part of the property
sub|ect to the en f
( ) There s pad over to the Secretary or hs deegate n part satsfacton
of the abty secured by the en an amount determned by the Secretary or
hs deegate, whch sha not be ess than the vaue, as determned by the Secre-
tary or hs deegate, of the nterest of the Unted States n the part to be so
dscharged, or
( ) The Secretary or hs deegate determnes at any tme that the nterest
of the Unted States n the part to be so dscharged has no vaue.
In determnng the vaue of the nterest of the Unted States n the part to be so
dscharged, the Secretary or hs deegate sha gve consderaton to the far
market vaue of such part and to such ens thereon as have prorty to the eu
of the Unted States.
(c) ffect of certfcate of reease or parta dscharge. certfcate of reease
or of parta dscharge ssued under ths secton sha be hed concusve that
the en upon the property covered by the certfcate s e tngushed.
(d) Cross references. (1) or snge bond compyng wth the requrements
of both subsecton (a) (2) and secton 6165, see secton 7102.
(2) or other provsons reatng to bonds, see generay chapter 73.
(3) or provsons reatng .to suts to enforce en, see secton 7 03.
( ) or provsons reatng to suts to cear tte to reaty, see secton 7 2 .
Sec 301.6325-1. Reease of Len ob Parta Dscharge of Property (a)
Reease of en (1) Labty satsfed or unenforceabe. The Dstrct Drector
to whom s charged an assessment n respect of any nterna revenue ta sha
ssue a certfcate of reease of any en mposed wth respect to such ta ,
whenever he fnds that the abty for the amount assessed (together wth
a Interest n respect thereof) has been satsfed or has become unenforceabe as
a matter of aw (and not merey uncoectbe or unenforceabe as a matter of
fact). Ta abtes frequenty are unenforceabe In fact for the tme beng,
due to the temporary nonpossesson by the ta payer of dscoverabe property
or property rghts. In a cases the abty for the payment of the ta con-
tnues unt satsfacton of the ta In fu or unt the e praton of the statutory
perod for coecton, ncudng such e tenson of the perod for coecton as
may be agreed upon In wrtng by the ta payer and the Dstrct Drector. The
form to be used by the Dstrct Drector s orm 600, Certfcate of Reease of
edera Ta Len.
M 060 -
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6201.1 168
(2) state or (ft ta abty fuy satsfed or provded for. (1) If the
Dstrct Drector determnes tha . the ta abty for estate or gft ta has been
fuy satsfed, he may ssue hs certfcate reeasng any or a property from
the en mposed thereon. If the Dstrct Drector determnes that the ta ab-
ty for estute or gft ta has been adequatey provded for, he may ssue hs
certfcate reeasng partcuar tems of property from the en. The Issuance
of such a certfcate s a matter restng wthn the dscreton of the Dstrct
Drector, and a certfcate w be Issued ony n case there s actua need therefor.
The prmary purpose of such reease s not to evdence payment or satsfacton
of the ta , but to permt the transfer of property free from the en n case It s
necessary to cear tte. The ta w be consdered fuy satsfed ony when
Investgaton has been competed and payment of the ta , ncudng any defcency
determned, has been made.
(11) n appcaton for a reease of the pn for estate or gft ta shoud be
fed wth the Dstrct Drector charged wth the assessment n respect of the
ta . It shoud be made n wrtng under penates of per|ury and shoud e pau
the crcumstances that requre the reease, and shoud fuy descrbe the par-
tcuar tems for whch the reease s desred. In the case of an estate ta
en, the appcaton shoud show the appcant s reatonshp to the estate,
such as e ecutor, her, devsee, egatee, benefcary, transferee, or purchaser. If
the estate or gft ta return has not been ted, a statement under penates of
per|ury may be requred showng (a) the vaue of the property to be reeased,
(b) the bass for such vauaton, (c) n the case of the estate ta , the appro -
mate vaue of the gross estate and the appro mate vaue of the tota rea prop-
erty Incuded n the gross estate, and ((/) n th_- case of the gft ta , the tota
amount of gfts made durng the caendar year and the pror caendar years
subsequent to the enactment of the Itevenue ct of 1932 and the appro mate
vaue of a rea estate sub|ect to the gft ta en, and (e) If the property s to
be sod or otherwse transferred, the name and address of the purchaser or trans-
feree and the consderaton, f any, pad or to be pad by hm.
(3) ond accepted. The Dstrct Drector may, n hs dscreton, Issue a
certfcate of reease of any ta en f he s furnshed and accepts a bond that s
condtoned upon the payment of the amount assessed (together wth a nterest
n respect thereof), wthn the tme agreed upon n the bond, but not ater than
6 mouths before the e praton of the statutory perod for coecton, ncudng
any perod for coecton agreed upon n wrtng by the Dstrct Drector and
the ta payer. or provsons reatng to bonds, see sectons 7101 and 7102 and
the reguatons thereunder.
(b) Dscharge of specfc property from the en (1) Property doube the
amount of the abty. () The Dstrct Drector may, n hs dscreton, ssue
a certfcate of dscharge of any part of the property sub|ect to any ta en f
he determnes that the far market vaue of that part of the property remanng
sub|ect to the en s at east doube the sum of the amount of the unsatsfed
abty secured by such en and of the amount of a other ens upon such
property whch have prorty to such en. In genera, far market vaue s that
amount whch one ready and wng but not compeed to buy woud pay to
nnother ready and wng but not compeed to se the property. The form to
be used by the Dstrct Drector s orm 609- , Certfcate of Dscharge of
Property from edera Ta Len. or nformaton requred to be submtted
n an appcaton for a certfcate of dscharge, see subparagraph ( ) of ths
paragraph.
() The foowng e ampe ustrates a case n whch a certfcate of dscharge
may not be gven under ths subparagraph:
ampe: The edera ta abty secured by a en Is 1,000. The far mar-
ket vaue of a property whch nfter the dscharge w contnue to be sub|ect
to the edera ta en s 10,000. There s a pror mortgage on the property
of 5,000, ncudng nterest, and the property s sub|ect to a pror en of 100
for rea estate ta es. ccordngy, the ta payer s equty In the property over
and above the amount of the mortgage and rea estate ta es s ,000, or neary
fve tmes the amount requred to pay the assessed ta on whch the edera ta
en s based. Nevertheess, a dscharge under ths subparagraph Is not per-
mssbe. In the ustraton, the sum of the amount of the edera ta abty
( 1,000) and of the amount of the pror mortgage and the en for rea estate
ta es ( r ,000 100 5,100) s 6,100. Doube ths sum s 12,200, but the far
market vaue of the remanng property s ony 10,000. ence, a dscharge of
the property s not permssbe under ths subparagraph, snce the Code requres
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169 6201.
that the far market vaue of the remanng property be at east doube the sum
of two amounts, one amount beng the outstandng edera ta abty and the
other amount beng a pror ens upon such property. In order that the dscbarge
may be Issued, t. woud t e necessary that the remanng property be worth not
fas than 12 0O.
(2) Port payment. The Dstrct Drector may, In hs dscreton, ssue a cer-
tfcate o dscharge of any part of the property sub|ect to the en f there s
pad over to hm n part satsfacton of the abty secured by the en an amount
ermme hy hm to be not ess than the vaue of the nterest of the Unted
States n the property to be so dscharged. In determnng the amount to be
pad, the Dstrct Drector w take nto consderaton a the facts and crcum-
stances of the case, ncudng the e penses to whch the Government has been
put n the matter. In no case sha the amount to be pad be ess than the vaue
of the nterest of the Unted States n the property wth respect to whch the
certfcate of dscharge s to be ssued, as such vaue has been determned by
the Dstrct Drector n the ght of the far market vaue of the property and
the amount of a ens and encumberances thereon havng prorty over the
edera ta en. The form to be used by the Dstrct Drector s orm 669- ,
Certfcate of Dscharge of Property from edera Ta Len. or Informaton
requred to be submtted n an appcaton for a certfcate of dscharge, see sub-
paragraph ( ) of ths paragraph.
(3) Interest of Unted States vaueess. The Dstrct Drector may, n hs
dscreton, ssue a certfcate of dscharge of any part of the property sub|ect
to the en f he determnes that the Interest of the Unted States n the property
to be so dscharged has no vaue. The form to be used by the Dstrct Drector
s orm 669-C, Certfcate of Dscharge of Property from edera Ta Len.
or nformaton requred to be submtted n an appcaton for a certfcate of
dscbarge, see subparagraph ( ) of ths paragraph.
( ) ppcaton for certfcate of dscharge. ny person desrng a certfcate
of dscharge of property from a edera ta en sha submt to the Dstrct
Drector to whom the assessment s charged a wrtten appcaton n trpcate,
under penates of per|ury, requestng that the certfcate be ssued. The app-
caton sha contan the foowng nformaton:
() cear descrpton of the property wth respect to whch the dscharge Is
desred and, where appcabe, of the property remanng sub|ect to the en
( ) The reason the dscharge s sought
() descrpton of the edera ta en n respect of whch the certfcate
of dscharge s sought, Incudng the amount, nature of the ta , the dates of
assessment, and, f appcabe, an approprate reference to the regstry and the
page and voume of the book n whch the notce of edera ta en s fed, n-
de ed, or recorded, and the date of the fng of the notce
(v) statement In numbered paragraphs of a facts matera to the appca-
ton, ncudng the amount, character, and dates (both of e ecuton and of record)
ef an encumbrances of record pror to the edera en, wth an approprate
reference to the regstry and the page and voume of the book n whch each such
encumbrance s recorded
( ) The amounts, character, and dates of e ecuton of any unrecorded encum-
brances beeved to be pror to the edera ta en, Incudng Informaton as
to how and when such encumbrances arose
( ) In support of the appcaton, the appcant must furnsh proof suffcent
to estabsh the far market vaue of the property wth respect to whch the ds-
charge s sought, and where appcabe, proof suffcent to estabsh the far mar-
ket vaue of the property whch w reman sub|ect to the en and
(v) ny other Informaton whch n the opnon of the appcant mght have
bearng upon the determnaton to be made.
ppcatons submtted under subparagraph (1) or (3) of ths paragraph do not
requre the submsson of any 6um of money for the dscharge of the property
from a ta en. Snce the amount to be pad for the ssuance, under subpara-
graph (2) ot ths paragraph, of a certfcate of dscharge of property from a
edera ta en s a matter for the determnaton of the Dstrct Drector after
consderaton ot the facts and aw nvoved, no sum of money or check shoud
be snhmttct wfrh the appcaton. The Dstrct Drector sha cause a thorough
n . . . toh made as to the proof and accuracy of a matera statements
hmstaton toh M vm mpeton of mc nvestgaton the Dstrct
Dtector wU nfake bs determnaton and advse the appcant of the decson
reached.
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6201. 170
(c) ffect of certfcate of reease or dscharge of specfc property. cert-
cate of reease of en or a certfcate dschargng specfc property from the en
ssued under secton 6325 sha be concusve that the en upon the property cov-
ered by the certfcate Is e tngushed.
Sec. 301.6326. Statutobt pbotsons cr.oss references.
Sec. 6326. Cross befebences. (1) or en In case of ta on dsted sprts,
see secton 500 .
(2) or e cuson of ta abty from dscharge In bankruptcy, see secton
17 of the ankruptcy ct, as amended (52 Stat. 851 11 U. S. C. 35).
(3) or mt on amount aowed In bankruptcy proceedngs on debts owng
to the Unted States, see secton 57(|) of the ankruptcy ct, as amended (52
Stat. 807 11 U. S. C. 93).
( ) or recognton of ta ens In proceedngs under the ankruptcy ct, see
secton 67 (b) and (c) of that act, as amended (52 Stat. 876-877 11 U. S. C. 107).
(5) or coecton of ta es In connecton wth wage earners pans In bank-
ruptcy courts, see secton 680 of the ankruptcy ct, as added by the act of
une 22,1938 (52 Stat. 938 11 U. S. C. 1080).
(6) or provsons permttng the Unted States to be made party defendant n
a proceedng n a State court for the forecosure of a en upon rea estate where
the Unted States may have a cam upon the premses nvoved, see secton 2 10
of Tte 28 of the Unted States Code.
(7) or prorty of en of the Unted States n case of Insovency, see R. S.
3 66 (31 U. S. C. 191).
sezure of pbopebtt fob coecton of ta es
Sec. 301.6331. Statdtobt Pbovsons Levt and Dstrant.
Sec. 6331. Levy and dstbant.
(a) uthorty of Secretary or Deegate. If any person abe to pay any ta
negects or refuses to pay the same wthn 10 days after notce and demand. It
sha be awfu for the Secretary or hs deegate to coect such ta (and such
further sum as sha be suffcent to cover the e penses of the evy) by evy upon
a property and rghts to property (e cept such property as s e empt under.
secton 633 ) beongng to such person or on whch there Is a eD provded n ths
chapter for the payment of such ta . Levy may be made upon the accrued saary
or wages of any offcer, empoyee, or eected offca, of the Unted States, the
Dstrct of Coumba, or any agency or nstrumentaty of the Unted States or
the Dstrct of Coumba, by servng a notce of evy on the empoyer (as defned
n secton 3 01 (d)) of such offcer, empoyee, or eected offca. If the Secretary
or hs deegate makes a fndng that the coecton of such ta s n |eopardy,
notce and demand for Immedate payment of such ta may be made by the
Secretary or hs deegate and, upon faure or refusa to pay such ta , coecton
thereof by evy sha be awfu wthout regard to the 10-day perod provded In
ths secton.
(b) Sezure and sae of property. The term evy as used In ths tte In-
cudes the power of dstrant and sezure by any means. In any case n whch
the Secretary or hs deegate may evy upon property or rghts to property, he
may seze and se such property or rghts to property (whether rea or persona,
tangbe or ntangbe).
(c) Successve sezures. Whenever any property or rght to property upon
whch evy has been made by vrtue of subsecton (a) s not suffcent to satsfy
the cam of the Unted States for whch evy Is made, the Secretary or hs
deegate may, thereafter, and as often as may be uecessary, proceed to evy n
ke manner upon any other property abe to evy of the person aganst whom
such cam e sts, unt the amount due from hm, together wth a e penses
s fuy pad.
(d) Cross references. (1) or provsons reatng to eopardy, see subchapter
of chapter 70.
(2) or proceedngs appcabe to sae of sezed property, see secton 6335.
Sec. 301.6331-1. Levy and Dstrant (a) uthorty to evy (1) In genera.
If any person abe to pay any ta negects or refuses to pay such ta wthn
10 days after notce and demand, the Dstrct Drector to whom the assessment:
s charged or, upon hs request, any other Dstrct Drector may proceed to coect
the ta by evy upon any property, or rghts to property, whether rea or persona.
tangbe or ntangbe, beongng to such person or on whch there s a en pro-
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171 6201.
Medby secton 6321 or 632 (or the correspondng provson of pror aw) for
the payment of snch ta . t used n secton 6331 and ths secton, the term ta
Wades any nterest, addtona amount, addton to ta , or assessabe penaty,
together wth any costs and e penses that may accrue n addton thereto. or
e empton of certan property from evy, see secton 633 and the reguatons
thereunder. Property sub|ect to a edera ta en, whch has been sod or other-
wse transferred by the ta payer, may be sezed n the hands of the transferee
or ot any subsequent transferee. Levy may be made by servng a notce of evy
on any person n possesson of, or obgated wth respect to, property or rghts
tn property sub|ect to evy, such as, for e ampe, recevabes, bank accounts,
evdences of debt, securtes, and accrued saares, wages, commssons, and
other compensaton.
(2) eopardy cases. If the Dstrct Drector fnds that the coecton of any
ta s n |eopardy, he may make notce and demand for mmedate payment of
such ta and, upon faure or refusa to pay such ta , coecton thereof by evy
sha be awfu wthout regard to the 10-day perod provded n secton 6331 (a).
(3) ankruptcy or recevershp cases. Durng a bankruptcy proceedng or a
recevershp proceedng n ether a edera or a State court, the assets of the
ta payer are n genera under the contro of the court n whch such proceedng s
pendng. Ta es cannot be coected by evy upon assets n the custody of a court,
whether or not such custody s ncdent to a bankruptcy or recevershp proceed-
ng, e cept where the proceedng has progresseC to such a pont that the evy
woud not nterfere wth the work of the court or where the court grants perms-
son to evy. ny assets whch under appcabe prevsons of aw are not under
the contro of the court may be eved upon, for e ampe, property e empt from
court custody under State aw or the bankrupt s earnngs and property acqured
after the date of bankruptcy. owever, evy upon such property s not manda-
tory and the Government may rey upon payment of ta es n the proceedng.
( ) Certan types of compensaton () edera empoyees. Levy may be
made upon the accrued saary or wages of any offcer or empoyee (Incudng
members of the rmed orces), or eected or apponted offca, of the Unted
States, the Dstrct of Coumba, or any agency or nstrumentaty of ether, by
servng a notce of evy on the empoyer of the denquent ta payer. s used n
ths subdvson, the term empoyer means (a) the offcer or empoyee of the
Unted States, the Dstrct of Coumba, or of the agency or nstrumentaty of
the Unted States or the Dstrct of Coumba, who has contro of the payment
of the wages, or (6) any other offcer or empoyee desgnated by the head of the
branch, department, agency, or nstrumentaty of the Unted States or of the
Dstrct of Coumba as the party upon whom servce of the notce of evy may
be made. If the head of such branch, department, agency, or nstrumentaty
desgnates an offcer or empoyee other than one who has contro of the payment
of the wages, as the party upon whom servce of the notce of evy may be made,
such head sha prompty notfy the Commssoner of the name and address
of each offcer or empoyee so desgnated and the scope or e tent of hs authorty
as such desgnee.
() State and muncpa empoyees. ccrued saares, wages, or other com-
pensaton of any offcer, empoyee, or eected or apponted offca of a State
or Terrtory, or of any agency, nstrumentaty, or potca subdvson thereof,
are aso sub|ect to evy to enforce coecton of any edera ta .
() Seamen. Notwthstandng the provsons of secton 12 of the Seamen s
ct of 1915 (38 Stat. 1169 6 U. S. C. 601), accrued wages of seamen, appren-
tce seamen, or fshermen empoyed on fshng vesses are sub|ect to evy. See
secton 633 (c).
(b) Successve sezures. Whenever any property or rghts to property upon
whch a evy has been made are not suffcent to satsfy the cam of the
Unted States for whch the evy s made, the Dstrct Drector may thereafter,
and as often as may be necessary, proceed to evy n ke manner upon any other
property or rghts to property sub|ect to evy of the person aganst whom such
cam e sts or on whch there s a en mposed by secton 6321 or 632 (or the
correspondng provson of pror aw) for the payment of such cam unt the
amount due from such person, together wth a costs and e penses, s fuy pad.
Sec. 301.6332. Statutoby Provsons Subbendeb or Pbopebty Sub|ect to
Levy.
Sec. 6332. Sotrewdeb of pbopebty sub|ect to evy.
(a) Requrement. ny person n possesson of (or obgated wth respect to)
property or rghts to property sub|ect to evy upon whch a evy has been made
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5 6201.) 172
sha, upon demand of the Secretary or hs deegate, surrender such property or
rghts (or dscharge such obgaton) to the Secretary or hs deegate, e cept
such part of the property or rghts as s, at the tme of such demand, sub|ect
to an attachment or e ecuton under any |udca process.
(b) Penaty for voaton. ny person who fas or refuses to surrender as
requred by subsecton (a) any property or rghts to property, sub|ect to evy,
upon demand by the Secretary or hs deegate, sha be abe n hs own person
and estate to the Unted Stntes n a sum equa to the vaue of the property or
rghts not so surrendered, but not e ceedng the amount of the ta es for the
coecton of whch such evy has been made, together wth costs and nterest on
such sum at the rate of 6 percent per annum from the date of such evy.
(c) Person defned. The term person, as used n subsecton (a), ncudes
an offcer-or empoyee of a corporaton or n member or empoyee of a partner-
shp, who as such offcer, empoyee, or member s under a duty to surrender the
property or rghts to property, or to dscharge the obgaton.
Sec. 301.6332-1. Surrender of Property Sub|ect to Levy. (a) Requre-
ment. ny. person n possesson of (or obgated wth respect to) property or
rghts to property sub|ect to evy upon whch a evy has been made sha, upon
demand of the Dstrct Drector, surrender such property or rghts (or dscharge
such obgaton) to the dstrct drector, e cept such part of the property or rrht
as s, at the tme of such demand, sub|ect to an attachment or e ecuton under
any |udca process.
(b) Penaty for voaton. ny person who fas or refuses, upon demand of
the Dstrct Drector, to surrender any property or rghts to property sub|ect to
evy, as requred by secton 6332(a), sha be abe n bs own person and estate
to the Unted States n a sum equa to the vaue of the property or rghts not
so surrendered, but not e ceedng the amount of the ta es for the coecton of
whch such evy has been made, together wth costs md nterest on such sum
at the rate of 0 percent per annum from the date of such evy.
(c) Person defned. The term person, as used n secton 6332(a) and ths
secton, ncudes an offcer or empoyee of a corporaton or a member or em-
poyee of a partnershp, who as such offcer, empoyee, or member s under a duty
to surrender the property or rghts to property or to dscharge the obgaton.
Thus, s the ense of a evy upon the saary or wages of an offcer, empoyee, or
eected or apponted offca, of the Unted States, the Dstrct of Coumba, or
any agency or nstrumentaty of ether, the term person Incudes the offcer or
empoyee of the Unted States, of the Dstrct of Coumba, or of such agency or
nstrumentaty, who as such offcer or empoyee s under a duty to dscharge the
obgaton. s to the offcer or empoyee who s under such duty, see
301.0331-1 (a) ( ) (1).
Sec. .101.6333. Statutory Provsons Producton of ooks.
Sec. t333. Producton of books.
If a evy has been made or s about to be made on any property, or rght to
property, any person havng custody or contro of any books or records, contan-
ng evdence or statements reatng to the property or rght to property sub|ect
to evy, sha, upon demand of the Secretary or hs deegate, e hbt such books
or records to the Secretary or hs deegate.
Sec 301.6333-1. Producton of ooks. If a evy has been made or hs about
to be made on any property or rghts to property, any person, havug custody or
contro of any books or records contanng evdence or statements reatng to the
property or rghts to property sub|ect to evy, sha, upon demand of the nterna
revenue offcer who has made or s about to make the evy, e hbt such books or
records to such offcer.
Sec. 301.633 . Statutory Provsons Property empt rom Levy.
Sec. 633 . Property e empt from evy.
(a) numeraton. There sha be e empt from evy
(1) Wearng appare and schoo boohs. Such tems of wearng appare and
such schoo books as are necessary for the ta payer or for members of hs
famy
(2) ue, provsons, furnture, and persona effects. If the ta payer s the
head of a famy, so much of the fue, provsons, furnture, and persona effects
n hs househod, and of the arms for persona use, vestock, and poutry of the
ta payer, as does not e ceed 500 n vaue
(3) ooks and toos of a trade, busness, or professon. So many of the books
and toos necessary for the trade, busness, or professon of the ta payer as do
not e ceed n the aggregate 250 n vaue.
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173 6201.
( ) pprasa. The offcer sezng property of the type descrbed In subsecton
() sha apprase and set asde to the owner the amount of such property
decared to be e empt. If the ta payer ob|ects at the tme of the sezure to the
TOta ton f ed by the offcer makng the sezure, the Secretary or hs deegate
sta summon three dsnterested ndvduas who sha make the vauaton,
(c) So other property e empt. Notwthstandng any other aw of the Unted
States, no property or rghts to property sha be e empt from evy other than
the property specfcay made e empt by subsecton (a).
Sec. 301.633 -1. Property empt rom Levt. (a) numeraton. There
sha be e empt from evy
(1) Wearng appare and schoo books. Such tems of wearng appare and
such schoo books as are necessary for the ta payer or for members of hs
famy. pensve tems of wearng appare, such as furs, whch are u ures
and are not necessary for the ta payer or for members of hs famy, are not
e empt from evy.
(2) ue, provsons, furnture, and persona effects. If the ta payer s the
head of a famy, so much of the fue, provsons, furnture, and persona effects
n hs househod, and of the arms for persona use, vestock, and poutry of the
ta ayer, as does not e ceed 500 n vaue.
(S) ooks and toos of a trade, busness, or professon. So many of the boobs
and toos necessary for the trade, busness, or professon of the ta payer as do
not e ceed In the aggregate 250 n vaue.
(b) pprasa. The Interna revenue offcer sezng property of the type
descrbed In secton 633 (a) sha apprase and set asde to the owner the
amount of such property decared to be e empt. If the ta payer ob|ects at the
tme of the sezure to the vauaton f ed by the offcer makng the sezure, such
offcer sha summon three dsnterested ndvduas who sha make the
vauaton.
(c) No other property e empt. No property or rghts to property are e empt
from evy other than the property specfcay e empted by secton 633 (a).
No provson of a State aw may e empt property or rghts to property from
evy for the coecton of any edera ta . Thus, property e empt from e ecu-
ton under State persona or homestead e empton aws s, nevertheess, sub|ect
to evy by the Unted States for coecton of ts ta es.
Sec. 301.6335. Statutory Provsons Sae of Sezed Peopebty.
Sec. 6335. Sae of Sezed Property.
(a) Notce of sezure. s soon as practcabe after sezure of property, notce
n wrtng sha be gven by the Secretary or hs deegate to the owner of the
property (or, n the case of persona property, the possessor thereof), or sha
be eft at hs usua pace of abode or busness f he has such wthn the nterna
revtnue dstrct where the sezure s made. If the owner cannot be ready
ocated, or has no dweng or pace of busness wthn such dstrct, the notce
may be maed to hs ast known address. Such notce sha specfy the sum
demanded and sha contan, n the case of persona property, an account of the
property sezed and, In the case of rea property, a descrpton wth reasonabe
certanty of the property sezed.
(b) Notce of sae. The Secretary or hs deegate sha as soon as practcabe
after the sezure of the property gve notce to the owner, n the same manner
as that prescrbed n subsecton (a), and sha cause a notfcaton to be pub-
shed In some newspaper wthn the county wheren such sezure s made, or,
f there be no newspaper pubshed n such county, sha post such notce at
the post offce nearest the pace where the sezure s made, and n not ess
than two other pubc paces. Such notce sha specfy the property to be sod,
and the tme, pace, manner, and condtons of the sae thereof. Whenever evy
s made wthout regard to the 10-day perod provded n secton 6331(a), pubc
notce of sae of the property sezed sha not be made wthn such 10-day perod
uness secton 6336 (reatng to sae of pershabe goods) s appcabe.
(c) ae of ndvsbe property. If any property abe to evy Is not dvsbe,
k as to enabe the Secretary or hs deegate by sae of a part thereof to rase
the whoe amount of the ta and e penses, the whoe of such property sha
be sod.
(d) Tme and pace of sae. The tme of sae sha not be ess than 10 days
nor more than 0 days from the tme of gvng pubc notce under subsecton
(b). The pace of sae sha be wthn the county n whch the property a
aezed, e cept by speca order of the Secretary or hs deegate.
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6201. 17
(e) Manner and condtons of gae.
(1) Mnmum prce. efore the sae the Secretary or hs deegate sha de-
termne a mnmum prce for whch the property sha be sod, and f no
person offers for such property at the sae, the amount of the mnmum prce,
the property sha be decared to be purchased at such prce for the Unted
States otherwse the property sha be decared to be sod to the hghest bdder.
In determnng the mnmum prce, the Secretary or hs deegate sha take nto
account the e pense of makng the evy and sae.
(2) ddtona rues appcabe to sae. The Secretary or hs deegate sha
by reguatons prescrbe the manner and other condtons of the sae of prop-
erty sezed by evy. If one or more aternatve methods or condtons are per-
mtted by reguatons, the Secretary or hs deegate sha seect the aterna-
tves appcabe to the sae. Such reguatons sha provde:
( ) That the sae sha not be conducted In any manner other than
() y pubc aucton, or
() y pubc sae under seaed bds.
( ) In the case of the sezure of severa Items of property, whether such
Items sha be offered separatey, n groups, or n the aggregate and whether
such property sha be offered both separatey (or n groups) and n the aggre-
gate, and sod under whchever method produces the hghest aggregate amount.
(C) Whether the announcement of the mnmum prce determned by the
Secretary or hs deegate may be deayed unt the recept of the hghest bd.
(D) Whether payment n fu sha be requred at the tme of acceptance
of a bd, or whether a part of such payment may be deferred for such perod
(not to e ceed 1 month) as may be determned by the Secretary or hs deegate
to be approprate.
( ) The e tent to whch methods (ncudng advertsng) n addton to those
prescrbed n subsecton (b) may be used n gvng notce of the sae.
( ) Under what crcumstances the Secretary or hs deegate may ad|ourn
the sae from tme to tme (but such ad|ournments sha not be for a perod
to e ceed In a 1 month).
(3) Payment of amount bd. If payment n fu Is requred at the tme of
acceptance of a bd and s not then and there pad, the Secretary or hs deegate
sha forthwth proceed to agan se the property n the manner provded n
ths subsecton. If the condtons of the sae permt part of the payment to be
deferred, and f such part s not pad wthn the prescrbed perod, sut may be
Insttuted aganst the purchaser for the purchase prce or such part thereof as
has not been pad, together wth nterest at the rate of 6 percent per annum
from the date of the sae or, n the dscreton of the Secretary or hs deegate,
the sae may be decared by the Secretary or hs deegate to be nu and vod
for faure to make fu payment of the purchase prce and the property may
agan be advertsed and sod as provded n subsectons (b) and (c) and ths
subsecton. In the event of such readvertsement and sae any new purchaser
sha receve such property or rghts to property, free and cear of any cam
or rght of the former defautng purchaser, of any nature whatsoever, and the
amount pad upon the bd prce by such defautng purchaser sha be forfeted.
(f) Stay of sae of sezed property pendng Ta Court decson. or re-
strctons on sae of sezed property pendng Ta Court decson, see secton
0803(b)(3).
Sec. 301.C335-1.1 Sae of Sezeo Property. (a) Notce of sezure. s soon
as practcabe after sezure of property, the nterna revenue offcer sezng the
property sha gve notce n wrtng to the owner of the property (or, n the
case of persona property, to the possessor thereof). The wrtten notce sha
be devered to the owner (or to the possessor, n the case of persona property)
or eft at hs usua pace of abode or busness f he has such wthn the Interna
revenue dstrct where the sezure s made. If the owner cannot be ready
ocated, or has no dweng or pace of busness wthn such dstrct, the notce
may be maed to hs ast known address. Such notce sha specfy the sum
demanded and sha contan. In the case of persona property, a st suffcent
to dentfy the property sezed and, n the case of rea property, a descrpton
wth reasonabe certanty of the property sezed.
(b) Notce of sae. (1) s soon as practcabe after sezure of the property,
the Dstrct Drector sha gve notce of sae n wrtng to the owner. Such
notce sha be devered to the owner or eft at hs usua pace of abode or
1 Ths secton has the effect of supersedng Commssoner s Reorganzaton Order No. 33,
C. . 195 -2. 73 .
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175 6201.
busness f be has such, -wthn the nterna revenue dstrct where the sezure
Is made. If the owner cannot be ready ocated, or has no dweng or pace of
busness wthn such dstrct, the notce may be maed to hs ast known address.
e notce sha specfy the property to be sod, and the tme, pace, manner, and
condtons of the sae thereof, and sha e pressy state that ony the rght,
tte, and nterest of the denquent ta payer n and to such property s to be
offered for sae. The notce sha aso be pubshed n some newspaper wthn
the county -wheren such sezure s made. owever, f there s no newspaper
pubshed n such county, such notce sha be posted at the post offce nearest
the pace where the sezure s made, and n not ess than two other pubc paces.
(2) The dstrct drector may use other methods of gvng notce of sae
and of advertsng sezed property n addton to those referred to n subpara-
graph (1) when he beeves that the nature of the property to be sod s such
that a wder or more specazed advertsng coverage w enhance the poss-
bty of obtanng a hgher prce for the property.
(3) Whenever evy s made wthout regard to the 10-day perod provded n
secton 6331(a) (reatng to cases n whch coecton s n eopardy), a pubc
notce of sae of the property sezed sha not be made wthn such 10-day perod
uness secton 6336 (reatng to pershabe goods) s appcabe.
(c) Tme, pace, manner, and condtons of sae. The tme, pace, manner,
and condtons of the sae of property sezed by evy sha be as foows:
(1) Tme and pace of sae. The tme of sae sha not be ess than 10 days
nor more than 0 days from the tme of gvng pubc notce under secton
6335(b) (see par. (b) of ths secton). The pace of sae sha be wthn the
county n whch the property s sezed, e cept that f t appears to the Dstrct
Drector under whose supervson the sezure was made that substantay
hgher bds may be obtaned for the property f the sae s hed at a pace
outsde such county, he may order that the sae be hed n such other pace.
The sae sha be hed at the tme and pace stated In the notce of sae.
(2) d|ournment of sae. When t appears to the Dstrct Drector that an
ad|ournment of the sae w best serve the Interest of the Unted States or that
of the ta payer, the Dstrct Drector may ad|ourn, or cause the nterna revenue
offcer conductng the sae to ad|ourn, the sae from tme to tme, but the date
of the sae sha not be ater than one month after the date f ed n the orgna
notce of sae.
( 3) Mnmum prce. The Dstrct Drector sha determne a mnmum prce,
takng nto account the e penses of evy and sae, for whch the property sha be
od. If no person offers for such property at the sae the amount of the mn-
mum prce, the property sha be decared purchased at such prce for the Unted
States otherwse, the property sha be decared to be sod to the hghest
bdder. The nterna revenue offcer conductng the sae sha ether announce
the mnmum prce before the sae begns or defer announcement of the mn-
mum prce unt after the recept of the hghest bd, and, f the hghest bd s
greater than the mnmum prce, no announcement of the mnmum prce sha
be made.
( ) Offerng of property (1) Sae of ndvsbe property. If any property
eved upon s not dvsbe, so as to enabe the Dstrct Drector by sae of a part
thereof to rase the whoe amount of the ta and e penses of evy and sae, the
whoe of such property sha be sod. or appcaton of surpus proceeds of
aae. see secton 63 2(b).
() Separatey, n groups, or n the aggregate. The sezed property may be
offered for sate
(a) s separate Items, or
(6) s groups of Items, or
(c) In the aggregate, or
(d) oth as separate Items (or In groups) and n the aggregate. In such
cases, the property sha be sod under the method whch produces the hghest
aggregate amount.
The Dstrct Drector sha seect whchever of the foregong methods of of-
ferng the property for sae as, n hs opnon, s most feasbe under a the
facts and crcumstances of the case, e cept that f the property to be sod n-
cudes both rea and persona property, ony the persona property may be
grouped for the purpose of offerng such property for sae. owever, rea and
persona property may be offered for sae In the aggregate, provded the rea
property, as separate tems, and the persona property as a group, or as groups,
or as separate tems, are frst offered separatey.
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6201. 176
(111) Condton of tte and of property. Ony the rght, tte, and Interest
of the denquent ta payer n and to the property sezed sha be offered for sae,
and such nterest sha be offered sub|ect to any pror outstandng mortgages, en-
cumbrances, or other ens n favor of thrd partes whch are vad as aganst
the denquent ta payer and are superor to the en of the Unted States.
sezed property sha be offered for sae as s and where Is and wthout re-
course aganst the Unted States. No guaranty or warranty, e press or m-
ped, sha be made by the Interna revenue offcer offerng the property for sae,
as to the vadty of the tte, quaty, quantty, weght, sze, or condton of any
of the property, or ts ftness for any use or purpose. No cam sha be con-
sdered for aowance or ad|ustment or for rescsson of the sae based upon
faure of the property to conform wth any representaton, e press or mped.
(v) Terms of payment. The property sha be offered for sae upon whch-
ever of the foowng terms s f ed by the Dstrct Drector n the pubc notce of
sae:
(a) Payment n fu upon acceptance of the hghest bd, wthout regard to the
amount of such bd, or
(6) If the aggregate prce of a property purchased by a successfu bdder at
the sae s more than 200, an nta payment of 200 or 20 percent of the pur-
chase prce, whchever s the greater, and payment of the baance (Incudng
a costs ncurred for the protecton or preservaton of the property subsequent
to the sae and pror to fna payment) wthn a specfed perod, not to e ceed
one month from the date of the sae.
(5) Method of tae. The Dstrct Drector sha se the property ether
() t pubc aucton, at whch open compettve bds sha be receved, or
() t pubc sae under seaed bds. The foowng rues, In addton to the
other rues provded n ths paragraph, sha be appcabe to pubc sae under
seaed bds:
(a) Invtaton to bdders. ds sha be socted through a pubc notce of
sae.
(6) orm for use by bdders. bd sha be submtted on a form whch w
furnshed by the Dstrct Drector upon request. The form sha be competed
n accordance wth the nstructons thereon.
(c) Remttance wth bd. If the tota bd s 200 or ess, the fu amount of
the bd sha be submtted therewth. If the tota bd s more than 200, 20 per-
cent of such bd or 200, whchever s greater, sha be submtted therewth.
(In the case of aternatve bds submtted by the same bdder for tems of
property offered separatey, or n groups, or n the aggregate, the bdder sha
remt the fu amount of the hghest aternatve bd submtted, f that bd Is
200 or ess. If the hghest aternatve bd submtted s more than 200, the
bdder sha remt 20 percent of the hghest aternatve bd or 200, whchever
Is greater.) Such remttance sha be by a certfed, casher s or treasurer s
check drawn on any bank or trust company Incorporated under the aws of the
Unted States or under the aws of any State, Terrtory, or possesson of the
.Unted States, or by a Unted States posta, bank, e press, or teegraph money
order.
(d) Tme for recevng and openng bds. ach bd sha be submtted n a
securey seaed enveope. The bdder sha ndcate n the upper eft hand corner
of the enveope hs name and address and the tme and pace of sae as announced
n the pubc notce of sae. bd w not be consdered uness t s receved
by the nterna revenue offcer conductng the sae pror to the openng of the
bds. The bds w be opened at the tme and pace stated n the notce of
sae, or at the tme f ed n the announcement of the ad|ournment of the sae.
(e) Consderaton of bds. The pubc notce of sae sha specfy whether
the property s to be sod separatey, by groups, or n the aggregate or by a
combnaton of these methods, as provded n subparagraph ( ) () of ths para-
graph. If the notce specfes an aternatve method, bdders may submt bds
under one or more of the aternatves. In case of error n the e tenson of
prces n any bd, the unt prce w govern. The nterna revenue offcer con-
ductng the sae sha have the rght to wave any technca defects n a bd.
In the event two or more hghest bds are equa n amount, the nterna revenue
offcer conductng the sae sha determne the successfu bdder by drawng ots.
fter the openng, e amnaton, and consderaton of a bds, the nterna reve-
nue offcer conductng the sae sha announce the amount of the hghest bd
or bds and the name of the successfu bdder or bdders. ny remttance sub-
mtted n connecton wth an unsuccessfu bd sha be returned at the concuson
of the sae.
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177 6201.
(/) Wtthdraco o/ bds. bd may be wthdrawn on wrtten or teegraphc
rcqnest receved from the bdder pror to the tme f ed for openng the bds.
technca defect n a bd confers no rght on the bdder for the wthdrawa of
s bd after t bas been opened.
(6) Payment of bd prce. payments for property sod under ths secton
ha be made by cash or by a certfed, casher s, or treasurer s check drawn on
uy bant or trust company ncorporated under the aws of the Unted States or
under the aws of any State, Terrtory, or possesson of the Unted States, or
by a Unted States posta, bank, e press, or teegraph money order. If pay-
ment n fu s requred upon acceptance of the hghest bd, the payment sha
be made at such tme. If deferred payment s permtted, the nta payment
sha be made upon acceptance of the bd, and the baance sha be pad on or
before the date f ed for payment thereof. ny remttance submtted wth a
raeeessfu seaed bd sba be apped toward the purchase prce.
(7) Devery and remova of persona property. Responsbty of the Unted
States for the protecton or preservaton of sezed persona property sha cease
mmedatey upon acceptance of the hghest bd. The rsk of oss s on the
purchaser of persona property upon acceptance of hs bd. Possesson of any
persona property sha not be devered to the purchaser unt the purchase prce
has been pad n fu. If payment of part of the purchase prce for persona
property s deferred, the Unted States w retan possesson of such property
as securty for the payment of the baance of the purchase prce and, as agent
for the purchaser, w cause the property to be cared for unt the purchase
prce has been pad n fu or the sae Is decared nu and vod for faure to
make fu payment of the purchase prce. In such case, a charges and e penses
ncurred n carng for the property after the acceptance of the bd sha be
borne by the purchaser.
(8) Defaut n payment. If payment n fu Is requred upon acceptance of
the bd and s not then and there pad, the nterna revenue offcer conductng
the sae sha forthwth proceed agan to se the property n the manner pro-
Tded n secton 6335(e) and the reguatons thereunder. If the condtons of
the sae permt part of the payment to be deferred, and such part s not pad
wthn the prescrbed perod, sut may be nsttuted aganst the purchaser for
the purchase prce or such part thereof as has not been pad, together wth
nterest at the rate of 6 percent per annum from the date of the sae or, n the
dscreton of the Dstrct Drector, the sae may be decared by the Dstrct
Drector to be nu and vod for faure to make fu payment of the purchase
prce and the property may agan be advertsed and sod as provded n sub-
sectons (b), (c), and (e) of secton 6335 and the reguatons thereunder. In
the event of such readvertsement and sae, any new purchaser sha receve such
pro erty or rghts to property free and cear of any cam or rght of the former
defautng purchaser, of any nature whatsoever, and the amount pad upon
the bd prce by such defautng purchaser sha be forfeted to the Unted
States.
(9) Stay of tae of sezed property pendng Ta Court decson. or restrc-
tons on sae of sezed property pendng Ta Court decson, see secton 6803(b)
(3) and the reguatons thereunder.
Sec. 301.6336. Statutory Provsons Sae of Pershabe Goods.
Sec. 6336. Sae or pershabe goods.
If the Secretary or hs deegate determnes that any property sezed s abe
to persh or become greaty reduced n prce or vaue by keepng, or that such
property cannot be kept wthout great e pense, he sha apprase the vaue of
such property and
(1) Return to owner. If the owner of the property can be ready found, the
Secretary or hs deegate sha gve hm notce of such determnaton of the
apprased vaue of the property. The property sha be returned to the owner f,
wthn such tme as may be specfed n the notce, the owner
( ) Pays to the Secretary or hs deegate an amount equa to the apprased
vaue, or
( ) Gves bond n such form, wth such suretes, and n such amount as the
Secretary or hs deegate sha prescrbe, to pay the apprased amount at such
hme as the Secretary or hs deegate determnes to be approprate n the
dreumstances.
(2) Immedate sae. If the owner does not pay such amount or furnsh such
bond n accordance wth ths secton, the Secretary or hs deegate sha as soon
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I 6201. 178
as practcabe make pubc sae of the property n accordance wth such regua-
tons as may be prescrbed by the Secretary or hs deegate.
Sec. 301.6336-1. Sae or Pebshabe Goods (a) pprasa of certan sezed
property. If the Dstrct Drector determnes that any property sezed by evy s
abe to persh or become greaty reduced n prce or vaue by keepng, or that
such property cannot be kept wthout great e pense, he sha apprase the
vaue of such property and return t to the owner f the owner compes wth
the condtons prescrbed n paragraph (b) of ths secton or, f the owner does
not compy wth such condtons, dspose of the property In accordance wth
paragraph (c) of ths secton.
(b) Return to o ener. If the owner of the property can be ready found,
the dstrct drector sha gve hm wrtten notce of hs determnaton of the
apprased vaue of the property. owever, f the Dstrct Drector determnes
that the crcumstances requre mmedate acton, he may gve the owner an ora
notce of hs determnaton of the apprased vaue of the property, whch notce
sha be confrmed n wrtng pror to sae. The property sha be returned to
the owner f, wthn the tme specfed n the notce, the owner
(1) Pays to the Dstrct Drector an amount equa to the apprased vaue, or
(2) Gves an acceptabe bond as prescrbed by secton 7101 and the regua-
tons thereunder. Such bond sha be n an amount not ess than the apprased
vaue of the property and sha be condtoned upon the payment of such amount
at such tme as the Dstrct Drector determnes to be approprate n the
crcumstances.
(c) Immedate sae. If the owner does not pay the amount of the apprased
vaue of the sezed property wthn the tme specfed n the notce, or furnsh
bond as provded n paragraph (b) wthn such tme, the Dstrct Drector sha
as soon as practcabe make pubc sae of the property In accordance wth the
foowng terms and condtons
(1) Notce of sae. If the owner can ready be found, a notce sha be gven
to hm. notce of sae aso sha be posted n two pubc paces n the county
n whch the property s to be sod. The notce sha specfy the tme and pace
of sae, the property to be sod, and the manner and condtons of sae. The
Dstrct Drector may gve such other notce and In such other manner as he
deems advsabe under the crcumstances.
(2) Sae. The property sha be sod at pubc aucton to the hghest bdder.
(3) Terms. The purchase prce sha be pad n fu upon acceptance of the
hghest bd. The payment sha be made n cash, or by a certfed, casher s, or
treasurer s check drawn on any bank or trust company Incorporated under the
aws of the Unted States or under the aws of any State, Terrtory, or posses-
son of the Unted States, or by a Unted States posta, bank, e press, or teegraph
money order.
Sec. 301.6337. Statutory Provsons Redempton or Property.
Sec. 6337. Redempton of property.
(a) efore sae. ny person whose property has been eved upon sha have
the rght to pay the amount due, together wth the e penses of the proceedng,
f any, to the Secretary or hs deegate at any tme pror to the sae thereof,
and upon such payment the Secretary or hs deegate sha restore such property
to hm, and a further proceedngs n connecton wth the evy on such property
sha cease from the tme of such payment.
(I)) Redempton of rea estate after sae.
(1) Perod. The owners of any rea property sod as provded n secton
6335, ther hers, e ecutors, or admnstrators, or any person havng any nterest
theren, or a en thereon, or any person n ther behaf, sha be permtted to
redeem the property sod, or any partcuar tract of such property, at any tme
wthn 1 year after the sae theerof.
(2) Prce Such property or tract of property sha be permtted to be re-
deemed upon payment to the purchaser, or In case he cannot be found n the
county n whch the property to be redeemed Is stuated, then to the Secretary or
hs deegate, for the use of the purchaser, hs hers, or assgns, the amount pad
by such purchaser and Interest thereon at the rate of 20 percent per annum.
(c) Record. When any ands sod are redeemed as provded In ths secton,
the Secretary or hs deegate sha cause entry of the fact to be made upon the
record mentoned n secton 63 0, and such entry sha be evdence of such
redempton.
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179 6201.
Sre. 301.6337 1. Redumpton of Property (a) efore sae. ny person
whose property has been eved upon sha have the rght to pay the amount due,
together wth costs and e penses of the proceedng, f any, to the Dstrct Drector
t any tme pror to the sae of the property. Upon such payment the Dstrct
Drector sha restore such property to the owner and a further proceedngs n
connecton wth the evy on such property sha cease from the tme of such
payment.
(b) Redempton of rea estate after sae (1) Perod. The owner of any
rea estate sod as provded n secton 6335, hs hers, e ecutors, or admnstra-
tors, or any person havng any nterest theren, or a en thereon, or any person
n ther behaf, sha be permtted to redeem the property sod, or any partcuar
tract of such property, at any tme wthn one year after the sae thereof.
(2) Prce. Such property or tract of property may be redeemed upon pay-
ment to the purchaser, or n case he cannot be found In the county n whch
the property to be redeemed s stuated, then to the Dstrct Drector for the
nterna revenue dstrct In whch the property s stuated, for the use of the
purchaser, hs hers, or assgns, the amount pad by such purchaser and nterest
thereon at the rate of 20 percent per annum. In case rea and persona property
(or severa tracts of rea property) are purchased n the aggregate, the redemp-
ton prce of Ue rea property (or of each of the severa tracts) sha be deter-
mned on the bass of the rato, as of the tme of sae, of the vaue of the rea
property (or tract) to the vaue of the tota property purchased. or ths purpose
the mnmum prce or the hghest bd prce, whchever s hgher, offered for the
property separatey or n groups sha be treated as the vaue.
(c) Record. When any rea property s redeemed, the Dstrct Drector sha
cause entry of the fact to be made upon the record of sae kept n accordance
wth secton 63 0, and such entry sha be evdence of such redempton. The
party who redeems the property sha notfy the Dstrct Drector of the nterna
revenue dstrct n whch the property s stuated of the date of such redempton
and of the transfer of the certfcate of sae, the amount of the redempton prce,
an- the nama of the party to whom such redempton prce was pad.
Sec. 301.6338. Statutory Provsons Certfcate of Sae Deed of Rea
Pbofektt.
Sec 6338. Certfcate of Sae Deed of Rea Property.
(a) Certfcate of sae. In the case of property sod as provded n secton
6335, the Secretary or hs deegate sha gve to the purchaser a certfcate of
sae upon payment n fu of the purchase prce. In the case of rea property,
each certfcate sha set forth the rea property purchased, for whose ta es the
same was sod, the name of the purchaser, and the prce pad therefor.
(b) Deed to rea property. In the case of any rea property sod as provded
In secton 6335 and not redeemed n the manner and wthn the tme provded n
secton 6337, the Secretary or hs deegate sha e ecute (n accordance wth the
aws of the State n whch such rea property s stuated pertanng to saes of
rea property under e ecuton) to the purchaser of such rea property at such
sae, upon hs surrender of the certfcate of sae, a deed of the rea property so
purchased by hm, rectng the facts set forth n the certfcate.
(c) Rea property purchased oy Unted States. If rea property s decared
purchased by the Unted States at a sae pursuant to secton 6335, the Secretary
or hs deegate sha at the proper tme e ecute a deed therefor after ts prepara-
ton and the endorsement of approva as to ts form by the Unted States dstrct
attorney for the dstrct In whch the property s stuated, and the Secretary or
hs deegate sha, wthout deay, cause the deed to be duy recorded n the proper
regstry of deeds.
S c. 301.6338-1. Certfcate of Sae Deed of Rea Property (a) Certfcate
of sae. In the case of property sod as provded n secton 6335 (reatng to
sae of sezed property), the Dstrct Drector sha gve to the purchaser a
certfcate of sae upon payment n fu of the purchase prce. certfcate of
sae of rea property sha set forth the rea property purchased, for whose ta es
the same was sod, the name of the purchaser, and the prce pad therefor.
(b) Deed to rea property In the case of any rea property sod as provded
In secton 6335 and not redeemed In the manner and wthn the tme prescrbed
In secton 6337, the Dstrct Drector sha e ecute (In accordance wth the aws
of the State n whch the rea property Is stuated pertanng to saes of rea
property under e ecuton) to the purchaser of such rea property at the sae or
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6201. 180
hs assgns, upon surrender of the certfcate of sae, a deed of the rea property
so purchased, rectng the facts set forth n the certfcate.
(c) Deed to rea property purchased by the Unted States. If rea property
s decared purchased by the Unted States at a sae pursuant to secton 6335,
the Dstrct Drector sha at the proper tme e ecute a deed therefor after ts
preparaton and the endorsement of approva as to the form by the Unted States
dstrct attorney for the dstrct n whch the property s stuated, and the
Dstrct Drector sha, wthout deay, cause the deed to be duy recorded n the
proper regstry of deeds.
Sec. 301.6339. Statutory Provsons Lega ffect of Certfcate of Sae
of Persona Property and Deed of Rea Property.
Sec 6339. Lega effect of certfcate of sae of persona property and
deed of rea property.
(a) Certfcate of sae of property other than rea property. In a cases of
sae pursuant to secton 6335 of property (other than rea property), the certf-
cate of such sae
(1) s evdence. Sha be prma face evdence of the rght of the offcer to
make such sae, and concusve evdence of the reguarty of hs proceedngs n
makng the sae and
(2) s conveyances. Sha transfer to the purchaser a rght, tte, and
nterest of the party denquent n and to the property sod and
(3) s authorty for transfer of corporate stock. If such property conssts of
stocks, sha be notce, when receved, to any corporaton, company, or assocaton
of such transfer, and sha be authorty to such corporaton, company, or assoca-
ton to record the transfer on ts books and records n the same manner as f the
stocks were transferred or assgned by the party hodng the same, In eu of
any orgna or pror certfcate, whch sha be vod, whether canceed or not
and
( ) s recepts. If the sub|ect of sae s securtes or other evdences of debt,
sha be a good and vad recept to the person hodng the same, as aganst any
person hodng or camng to hod possesson of such securtes or other evdences
of debt and
(5) s authorty for transfer of tte to motor vehce. If such property
conssts of a motor vehce, sha be notce, when receved, to any pubc offca
charged wth the regstraton of tte to motor vehces, of such transfer and
sha be authorty to such offca to record the transfer on hs books and records
n the same manner as f the certfcate of tte to such motor vehce were
transferred or assgned by the party hodng the same, n eu of any orgna
or pror certfcate, whch sha be vod, whether canceed or not.
(b) Deed of rea property. In the case of the sae of rea property pursuant
to secton 6335
(1) Deed as evdence. The deed of sae gven pursuant to secton 6338 sha
be prma face evdence of the facts theren stated and
(2) Deed of conveyance of tte. If the proceedngs of the Secretary or hs
deegate as set forth have been substantay n accordance wth the provsons
of aw, such deed sha be consdered and operate as a conveyance of a the
rght, tte, and nterest the party denquent had n and to the rea property thus
sod at the tme the en of the Unted States attached thereo.
Sec. 301.0339-1. Lega ffect of Certfcate of Sae of Persona Property
and Deed of Rea Property (a) Certfcate of sae of property other than rea
property. In a cases of sae pursuant to secton 633 of property (other than
rea property), the certfcate of such sae
(1) s evdence. Sha be prma face evdence of the rght of the offcer to
make such sae, and concusve evdence of the reguarty of hs proceedngs n
makng the sae and
(2) s conveyance. Sha transfer to the purchaser a rght, tte, and nterest
of the party denquent n and to the property sod and
(3) s authorty for transfer of corporate stock. If such property conssts
of corporate stocks, sha be notce, when receved, to any corporaton, company,
or assocaton of such transfer, and sha be authorty to such corporaton, com-
pany, or assocaton to record the transfer on ts books and records n te same
manner as f the stocks were transferred or assgned by the party hodng the
stock certfcate, n eu of any orgna or pror certfcate, whch sha be vod,
whether canceed or not and
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181 f 6201.
( ) t recept . If the sub|ect of sae Is securtes or other evdences of debt,
sha be a good and vad recept to the person hodng the certfcate of sae as
pnst any person hodng or camng to hod possesson of such securtes or
otter evdences of debt and
(5) authorty for transfer of tte to motor vehce. If such property con-
sts of a motor vehce, sha be notce, when receved, to any pubc offca
charged wth the regstraton of tte to motor vehces, of such transfer and sha
be authorty to sach offca to record the transfer on hs books and records n
the same manner as f the certfcate of -Ite to such motor vehce were trans-
ferred or assgned by the party hodng the certfcate of tte. In eu of any
orgna or pror certfcate, whch sha be nu and vod, whether canceed or
DOt.
(b) Deed to rea property. In the case of the sae of rea property pursuant
to secton 6:535
(1) Deed as evdence. The deed of sae gven pursuant to secton 6338 sha
be prma face evdence of the facts theren stated and
(2) Deed as conveyance of tte. If the proceedngs of the Dstrct Drector
as set forth have been substantay In accordance wth the provsons of aw,
rach deed sha be consdered and operate as a conveyance of a the rght, tte,
and nterest the party denquent had In and to the rea property thus sod at the
tme the en of the Unted States attached thereto.
S c. 301.63 0. Statutory Provsons ecobds of Sae.
Sec. 63 0. ecobds of sae.
(a) Requrement. The Secretary or hs deegate sha, for each Interna
revenue dstrct, keep a record of a saes of rea property under secton 6335
and of redemptons of such property. The record sha set forth the ta for
whch any such sae was made, the dates of sezure and sae, the name of the
party assessed and a proceedngs n makng such sae, the amount of e penses,
the names of the purchasers, and the date of the deed.
(b) Copy as evdence. copy of such record, or any part thereof, certfed
by the Secretary or hs deegate sha be evdence In any court of the truth
of the facts theren stated.
Sec. 301.63 0-1. Records of Sae (a) Requrement. Such Dstrct Drector
sha keep a record of a saes under secton 6335 of rea property stuated wthn
hs dstrct and of redemptons of such property. The records sha set forth
the ta for whch any such sae was made, the dates of sezure and sae,
the name of the party assessed and a proceedngs n makng such sae, the
amount of e penses, the names of the purchasers, the date of the deed, and, n
the case of redempton of the property, (2) the date of such redempton and
of the transfer of the certfcate of sae, the amount of the redempton prce,
and the name of the party to whom such redempton prce was pad.
(b) Copy as evdence. copy of such record, or any part thereof, certfed
by the Dstrct Drector sha be evdence n any court of the truth of the facts
theren stated.
Sec. 301.63 1. Statutory. Provsons pense of Levy and Sae.
Sc. 63 1. pense of evy and sae.
The Secretary or hs deegate sha determne the e penses to be aowed n
a cases of evy and sae.
Sec. 301.63 1-1. pense of Levy and Sae. The Dstrct Drector sha
determne the e penses to be aowed In a cases of evy and sae. Such e penses
sha ncude the e penses of protecton and preservaton of the property durng
the perod subsequent to the evy, as we as the actua e penses ncurred n
connecton wth the sae thereof. In case rea and persona property (or severa
tracts of rea property) are sod n the aggregate, the Dstrct Drector sha
propery apporton the e penses to the rea property (or to each tract).
Src. 301.63 2. Statutohy Provsons ppcaton of Proceeds of Levy,
Sec. 63 2. ppcaton of proceeds of evy.
(a) Coecton of abty. ny money reazed by proceedngs under ths
fvbehapter (whether by sezure, by surrender under secton 6332, or by sae of
eked property) sha be apped as foows:
(1) pense of evy and sae. rst, aganst the e penses of the proceedngs
under ths subchapter
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I 6201.1 182
(2) Specfc ta abty on sezed property. If the property sezed and sod
s sub|ect to a ta mposed by any nterna revenue aw wheh has not been
pad, the amount remanng after appyng paragraph (1) sha then be apped
aganst such ta abty (and, f such ta was not prevousy assessed, t sha
then be assessed)
(3) Labty of denquent ta payer. The amount, f any, remanng after
appyng paragraphs (1) and (2) sha then be apped aganst the abty n
respect of whch the evy was made.
(b) Surpus proceeds. ny surpus proceeds remanng after the appcaton
of subsecton (a) sha, upon appcaton and satsfactory proof n support there-
of, be credted or refunded by the Secretary or hs deegate to the person or
persons egay entted thereto.
Sec. 301.63 2-1. ppcaton of Proceeds of Levy (a) Coecton of ab-
ty. ny money reazed by proceedngs under subchapter D of chapter 6 of
the Interna Revenue Code (whether by sezure, by surrender under sec. 6332,
or by sae of sezed property), sha be apped as foows:
(1) pense of evy and sae. rst, aganst the e penses of the proceedngs
as aowabe under secton 63 1
(2) Specfc ta abty on sezed property. If the property sezed and sod
s sub|ect to a ta Imposed by any nterna revenue aw whch has not been
pad, the amount remanng after appyng subparagraph (1) sha then be
apped aganst such ta abty (and, f such ta was not prevousy assessed,
t sha then be assessed)
(3) Labty of denquent ta payer. The amount, f any, remanng after
appyng subparagraphs (1) and (2) of ths paragraph sha then be apped
aganst the abty n respect of whch the evy was made.
(b) Surpus proceeds. ny surpus proceeds remanng after the appcaton
of paragraph (a) of ths secton sha, upon appcaton and satsfactory proof
n support thereof, be credted, or refunded by the Dstrct Drector to the
person or persons egay entted thereto. The denquent ta payer s the
person entted to the surpus proceeds uness another person estabshes a
superor cam thereto.
Sec. 301.63 3. Statutory Provsons uthorty to Reease Levy.
Sec 63 3. uthorty tc reease evy.
It sha he awfu for the Secretary or hs deegate, under reguatons pre-
scrbed by the Secretary or hs deegate, to reease the evy upon a or part
of the property or rghts to property eved upon where the Secretary or hs
deegate determnes that such acton w factate the coecton of the abty,
but such reease sha not operate to prevent any subsequent evy.
Sec 301.63 3-1. uthorty to Reease Levy (a) uthorty. The Dstrct
Drector may reease the evy upon a or part of the property or rghts to prop-
erty eved upon, f the denquent ta payer compes wth such of the cond-
tons under paragraph (b) of ths secton as the Dstrct Drector may requre
and f the Dstrct Drector determnes that such acton w factate the
coecton of the abty. The reease sha not operate to prevent any sub-
sequent evy.
(b) Condtons for reease. The Dstrct Drector may reease the evy as
authorzed under paragraph (a) of ths secton, f
(1) scrow arrangement. The denquent ta payer offers, and there s ac-
cepted by the Dstrct Drector, a satsfactory arrangement pacng property n
escrow to secure the payment of the abty (ncudng the e penses of evy)
whch s the bass of the evy.
(2) ond. The denquent ta payer devers an acceptabe bond to the Ds-
trct Drector condtoned upon the payment of the abty (ncudng the e -
penses of evy) whch s the bass of the evy. Such bond sha be n the form
as provded n secton 7101 and the reguatons thereunder.
(3) Payment of amount of Unted States nterest n the property. There s
pad to the Dstrct Drector an amount determned by hm to be equa to the
nterest of the Unted States n the sezed property or the part of the sezed
property to be reeased.
( ) ssgnment of saares and tcages. The denquent ta payer e ecutes
an agreement drectng hs empoyer to pay to the Dstrct Drector amounts
deducted from the empoyee s wages on a reguar, contnung, or perodc bass,
n such manner and n such amount as s agreed upon wth the Dstrct Drector,
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183 6201.
oM the fu amount of the abty s satsfed, and such agreement s accepted
by the empoyer.
(5) Instament payment arrangement. The denquent ta payer makes
Mtsfactory arrangements wth the Dstrct Drector to pay the amount of the
a ty n Instaments.
(6t tenson of statute of mtatons. The denquent ta payer e ecutes
an agreement to e tend the statute of mtatons In accordance wth secton
65CC (a)(2) and the reguatons thereunder.
Sec. 301.63 . Statutory Provsons Cross References.
Sec 3 . Cross references.
(a) Length of perod. or perod wthn whch evy may be begun In case
of-
(1) Income, estate, and gft ta es, see sectons 6502 (a) and 6503(a) (1).
(2) mpoyment and msceaneous e cse ta es, see secton 6502(a).
(b) Denquent coecton offcers. or dstrant proceedngs aganst den-
onent nterna revenue offcers, see secton 7803(d).
(c) Other references. or provsons reatng to-
ut Stamps, marks and brands, see secton 6807.
2) dmnstraton of rea estate acqured by the Unted States, see secton
7506.
T M NTS, CR DITS, ND R UNDS
PROC DUR IN G N R L
Sec. 301.6 01 Statutory Provsons mounts Treated as Overpayments.
Sec 6 01. mounts treated as overpayments.
(a) ssessment and coecton after mtaton perod. The term overpay-
ment ncudes that part of the amount of the payment of any nterna revenue
ta whch s assessed or coected after the e praton of the perod of mtaton
proptry appcabe thereto.
tb) cessve wthhodng. If the amount aowabe as a credt under secton
31 (reatng to credt for ta wthhed at the source under ch. 2 ) e ceeds the
ta es mposed by chapter 1 aganst whch such credt s aowabe, the amount
of such e cess sha be consdered an overpayment.
(c) u- trn re no a abty. n amount pad as ta sha not be consd-
ered not to consttute an overpayment soey by reason of the fact that there was
bo ta abty n respect of whch such amount was pad.
Skc. .01.0 01-1. mounts Treated as Overpayments. (a) The term over-
payment ncudes:
(1) ny payment of any nterna revenue ta whch s assessed or coected
after the e praton of the perod of mtaton appcabe thereto.
(2) ny amount aowabe for a ta abe year as a credt under secton 31
(reatng to credt for ncome ta wthhed at source on wages) whch e ceeds
the correct ncome ta mposed by chapter 1 for such year.
(b) n amount pad as ta sha not be consdered not to consttute an over-
payment soey by reason of the fact that there was no ta abty n respect
of whch such amount was pad.
Sec. 301.0 02. Statutory Provsons uthorty to Make Credts ob Refunds.
Sec. 6 I2. uthorty to make credts or refunds.
a) Genera rue. In the case of any overpayment, the Secretary or hs
det gate. wthn the appcabe perod of mtatons, may credt the amount of
fuch overpayment, ncudng any nterest aowed thereon, aganst any abty
n resr ft of an nterna revenue ta on the part of the person who made the
overpayment and sha refund any baance to such person.
(b) Credts aganut estmated ta . The Secretary or hs deegate s author-
zed to prescrbe reguatons provdng for the credtng aganst the estmated
Income ta for any ta abe year of the amount determned by the ta payer or
the Secretary (or hs deegate) to be an overpayment of the ncome ta for a
precedng ta abe year.
Sec. 301.6 02-1. uthorty to Make Credts or Refunds. The Commssoner,
Wto fhe appcabe perod of mtatons, may credt any overpayment of u ,
SOO|O 50 13
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6201.
1S
Incudng Interest thereon, aganst any outstandng abty for any ta (or for
any nterest, addtona amount, addton to the ta , or assessabe penaty) owed
by the person makng the overpayment, and the baance, If any, sha be refunded
to such person by the Commssoner.
Sec. 301.6 02-2. Cams fob Credt ob Refund (a) Requrement that cam e
fed. (1) Credts or refunds of overpayments may not be aowed or made after
the e praton of the statutory perod of mtaton propery appcabe uness,
before the e praton of such perod, a cam therefor has been fed by the
ta payer. urthermore, under secton 7 22, a cv acton for refund may not
be nsttuted uness a cam has been fed wthn the propery appcabe perod
of mtaton.
(2) The cam, together wth approprate supportng evdence, must be fed
In the offce of the Dstrct Drector for the nterna revenue dstrct n whch
the ta was pad. s to nterest In the case of credts or refunds, see secton
CG11. See secton 7502 for provsons treatng tmey mang as tmey fng and
secton 7503 for tme for fng cam when the ast day fas on Saturday,
Sunday, or a ega hoday.
(b) Grounds set forth n cam. (1) No refund or credt w be aowed after
the e praton of the statutory perod of mtaton appcabe to the fng of a
cam therefor e cept upon one or more of the grounds set forth n a cam fed
before the e praton of such perod. The cam must set forth n deta each
ground upon whch a credt or refund Is camed and facts suffcent to apprase
the Commssoner of the e act bass thereof. The statement of the grounds and
facts must be verfed by a wrtten decaraton that t s made under the penates
of per|ury. cam whch does not compy wth ths paragraph w not be
consdered for any purpose as a cam for refund or credt.
(2) The Dstrct Drector has no authorty to refund on equtabe grounds
penates or other amounts egay coected.
(c) orm for fng cam. Cams by the ta payer for the refundng of over-
payments of ta es, nterest, penates, and addtons to ta sha be made on
orm 8 3. or speca rues appcabe to ncome ta es, see secton 301.6 02-3.
(d) Separate cams for separate ta abe perods. In the case of Income,
gft, and edera unempoyment ta es, a separate cam sha be made for each
type of ta for each ta abe year or perod.
(e) Proof of representatve capacty. If a return s fed by an ndvdua
and, after hs death, a refund cam s fed by hs ega representatve, certfed
copes of the etters testamentary, etters of admnstraton, or other smar
evdence must be anne ed to the cam, to show the authorty of the ega repre-
sentatve to fe the cam. If an e ecutor, admnstrator, guardan, trustee,
recever, or other fducary fes a return and thereafter a refund cam s fed
by the same fducary, documentary evdence to estabsh the ega authorty of
the fducary need not accompany the cam, provded a statement Is made n the
cam showng that the return was fed by the fducary and that the atter s
st actng. In such cases, If a refund s to be pad, etters testamentary,
etters of admnstraton, or other evdence may he requred, but shoud he sub-
mtted ony upon the recept of a specfc request therefor. If a cam s fed
by a fducary other than the one by whom the return was fed, the necessary
documentary evdence shoud accompany the cam. cam may be e ecuted
by an agent of the person assessed, but n such case a power of attorney must
accompfny the cam.
(f) ang of refund check. Checks n payment of cams aowed w be
drawn n the names of the persons entted to the money and may be sent to
such persons In care of an attorney or apent who has fed a power of attorney
specfcay authorzng hm to receve such checks. The Dstrct Drector may,
however, send any such check drect to the camant. In ths connecton, see
secton 3 77 of the Revsed Statutes (31 U. S. C. 203).
Sec. 301.6 02-3. Speca Rc es ppcabe to Income Ta . (a) In the case
of ncome ta , cams for refund may not ony be made on orm 8 3 but may
aso he made on orm 10 0, orm 10 0 , orm 10 0 , orm 10 0N , orm
OON -a, or an amended return.
(b) propery e ecuted ncome ta return on orm 10 0, orm 10 0 , orm
10 0N . or orm 10 0 -a sha, at the eecton of the ta payer, consttute a
cam for refund or credt wthn the meanng of secton 6 02 and secton 6511
for the amount of the overpayment dscosed by such return. or purposes o
secton 6511, such cam sha be consdered as fed on the date on whch such
return s consdered as fed. n eecton to treat the return as a cam for
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185 G201.
refund or credt sha be evdenced by a statement on the return settng forth the
mount determned as an overpayment and advsng whether such amount sha
be refunded to the ta payer or sha be apped as a credt aganst the ta payer s
estmated ncome ta for the ta abe year mmedatey succeedng the ta abe
fear fot whch such return s fed. If the ta payer eects to have a or part
of the overpayment shown by hs return apped to hs estmated ncome ta for
hs succeedng ta abe year, no Interest sha be aowed on such porton of the
overpayment credted and such amount sha be apped as a payment on ac-
count of the estmated ncome ta for such year or the nstaments thereof.
c The fng of a propery e ecuted ncome ta return on orm 10 0 sha
consttute an eecton by the ta payer to have the return treated as a cam for
refund, and such return sha consttute a cam for refund wthn the meanng
of secton 6 02 and secton (5511 for the amount of the overpayment shown by
the Dstrct Drector s computaton of the ta on the bass of the return. or
purposes of secton 6511, such cam sha be consdered as fed on the date on
whch such return s consdered fed.
(d) In any case n whch a ta payer eects to have an overpayment refunded
to hm he may not thereafter change hs eecton to have the overpayment ap-
ped as a payment on account of hs estmated ncome ta .
Sec. 301.(5 02- . Payments n cess of mounts Shown on Retubn. In
wrtan cases, the ta payer s payments n respect of hs ta abty, made before
he Sng of hs return, may e ceed the amount of ta shown on the return. or
e ampe, such payments may arse n the case of the ncome ta when the est-
cated ta or the credt for ncome ta wthhed at the source on wages e ceeds
the amount of ta shown on the return, or where a corporaton obtans an
e tenson of tme for fng ts return and makes nstament payments based on
ts estmate of ts ta abty whch e ceed the ta abty shown on the return
mbse uenty fed. In any case In whch the Dstrct Drector determnes that
the payments by the ta payer (made wthn the perod prescrbed for payment
and before the fng of the return) are n e cess of the amount of ta shown on
the return, he may make credt or refund of such overpayment wthout awatng
e amnaton of the competed return and wthout awatng fng of a cam for
refund. owever, the provsons of sectons 301.6 02-2 and 301.6 02-3 are ap-
pcabe to such overpayment, and ta payers shoud submt cams for refund
(f the ncome ta return Is not tsef a cam for refund, as provded In
sec. 301.6 02-3) to protect themseves n the event the Dstrct Drector fas to
make such determnaton and credt or refund. The provsons of secton 6 05
(reatng to reports of refunds of more than 100,000 to the ont Commttee on
Interna Revenue Ta aton) are not appcabe to the overpayments descrbed
n ths secton caused by tmey payments of ta whch e ceed the amount of
ta shown on a tmey return.
Sze. 301.6 02-5. Cam fob Payment of udgment Obtaned ganst Ds-
tbc-t Deectob. (a) cam for the amount of a |udgment aganst a Dstrct
rector for the recovery of ta es, penates, or other sums shoud be made on a
propery e ecuted orm 8 3, and fed drecty wth the Commssoner of In-
terna Revenue, Washngton 25, D. C. The cam must be verfed by a wrtten
decaraton that t s made under the penates of per|ury. Two certfed copes
of the fna |udgment and a certfcate of probabe cause shoud be attached to
the cam. If the payment of court costs Is camed, an temzed b of the
court costs pad, recepted by the cerk of the court, shoud aso accompany the
cam. Wth respect to the certfcate of probabe cause, 28 U. S. C. 2000
provdes:
S C. 2006. CUTION G INST NU O IC S.
ecuton sha not Issue aganst a revenue offcer on a fna |udgment
n any proceedng aganst hm for any of hs acts, or for the recovery of any
money e acted by or pad to hm and subsequenty pad Into the Treasury, n
performng bs offca dutes, If the court certfes that:
(1) Probabe cause e sted or
(2) The offcer acted under the drectons of the Secretary of the Treasury
or other proper Government offcer.
When such certfcate has been Issued, the amount of the |udgment sha be pad
wt of the proper appropraton by the Treasury.
tt the case was appeaed, two certfed copes of the mandate of the appeate
court shoud aso be attached to the cam. |udgment w not be pad unt the
Perod for appea has e pred uness a stpuaton, sgned by both partes to the
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| 6201. 186
sut, wavng the rght to appea, has heen fed wth the cerk of the court, and trw
certfed copes of such waver are furnshed to the Commssoner.
(b) If the |udgment debtor sha have aready pad the amount recovere
aganst hm, the cam shoud be made n bs name, accompaned by two certtt
copes of the fna udgment, and an Itemzed b of the court costs pad.
certfcate of the cerk of the court In whch the |udgment was recovered (o
other satsfactory evdence) showng that the |udgment has been satsfe
and specfyng the e act sum pad n Its satsfacton, shoud accompany th
cam.
Sec. 301.6 02-6. Cam for Payment of udgment Obtaned n Uht
States Dstrct Coubt ganst the Unted States. cam for the paymer
of a |udgment rendered by a Unted States dstrct court aganst the Unte
States representng ta es, penates, or other sums shoud be made on a proper 1
e ecuted orm 8 3 and fed drecty wth the Commssoner of Interna Revenm
Washngton 25, D. C. The cam must be verfed by a wrtten decaraton th:
It s made under the penates of per|ury. Two certfed copes of the tns
udgment shoud be attached to the cam. If the |udgment specfcay provdf
for the recovery of costs, an temzed b of such court costs pad, recepte
by the cerk of the court, shoud aso accompany the cam. If the ease wa
appeaed, two certfed copes of the mandate of the appeate court shou
aso be attached to the cam. |udgment w not be pad unt the pero
for appea has e pred uness a stpuaton, sgned by both partes to the su
wavng the rght to appea, has been fed wth the cerk of the court, and tw
certfed copes of such waver are furnshed to the Commssoner.
Sec. 301.6 02-7. Cam fob Payment of cdgment Obtaned n the CotT T c
Cams ganst the Unted States. cam for the payment of a udgmer
rendered by the Unted States Court of Cams aganst the Unted States repr
sentng ta es, penates, or other sums shoud be made on a propery e ecute
orm 8 3 and fed drecty wth the Commssoner of Interna Revenne, Wast
ngton 25, D. O. The cam must be verfed by a wrtten decaraton that t I
made under the penates of per|ury. The cam sha be accompaned hv
certfcate of udgment ssued by the cerk of the court and two copes of th
prnted opnon of the Court, f an opnon was rendered. |udgment -w no
be pad unt the perod for appea has e pred uness a stpuaton, sgned b
both partes to th sut, wavng the rght to appea, has been fed wth t
cerk of the court, and two certfed copes of such waver are furnshed t th
Commssoner.
Sec. 301.6 03. Statutory Provsons Overpayment of Instament.
Sec. 6 03. Overpayment of nstament.
In the case of a ta payabe n nstaments, If the ta payer has pad as a
Instament of the ta more than the amount determned to be the correct amoun
of such nstament, the overpayment sha be credted aganst the unpn
nstaments, f any. If the amount aready pad, whether or not on the bas
of nstaments, e ceeds the amount determned to be the correct amount c
the ta , the overpayment sha be credted or refunded as provded In sect n
6 02.
Sec. 301.6 03-1. Overpayment of Instament. If any Instament of ta
s overpad, the overpayment sha frst be apped aganst any outstandn
nstaments of such ta . If the overpayment e ceeds the correct amount of ta
due, the overpayment sha be credted or refunded as provded In secton G 0
and the reguatons thereunder.
Sec. 301.6 0 . Statutory Provsons batements.
Sec. 6 0 . batements.
(a) Genera rue. The Secretary or hs deegate Is authorzed to abate th
unpad porton of the assessment of any ta or any abty In respect thereo
whch
(1) Is e cessve n amount, or
(2) Is assessed after the e praton of the perod of mtaton proper
appcabe thereto, or
(3) Is erroneousy or egay assessed.
(b) No cnm for abatement of ncome, estate, and gft ta es. No cam fo
abatement sha be fed by a ta payer n respect of an assessment of any tn
mposed under subtte or .
(c) Sma ta baances. The Secretary or hs deegate s authorzed to aba t.
the unpad porton of the assessment of any ta , or any abty n respect there
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187 6201.
of, f the Secretary or hs deegate determnes under unform rues prescrbed
by the Secretary or hs deegate that the admnstraton and coecton costs
nvoved woud not warrant coecton of the amount due.
Sec. 301.6 0 -1. batements, (a) The Dstrct Drector may abate any
assessment, or unpad porton thereof, f the assessment s n e cess of the
correct ta abty, f the assessment s made subsequent to the e praton of
the perod of mtatons appcabe thereto, or f the assessment has been erron-
eousy or egay made.
b) No cam for abatement may be fed wth respect to ncome, estate, or
f|ft ta .
(c) cept n case of ncome, estate, or gft ta , f more than the correct amount
of ta , nte-est, addtona amount, addton to the ta , or assessabe penaty
s assessed but not pad to the Dstrct Drector, the person aganst whom the
assessment s made may fe a cam for abatement of such overassessment. ach
cam for abatement under ths secton sha be made on orm 8 3 and sha be
ted wth the Dstrct Drector for the nterna revenue dstrct n whch the
tar was assessed. orm 8 3 sha be made In accordance wth the nstructons
reatng to such form.
(d) The Commssoner may ssue unform nstructons to Dstrct Drectors
authorzng them, to the e tent permtted n such nstructons to abate amounts
the coecton of whch s not warranted because of the admnstraton and co-
ecton costs.
Sec. 301.6 05. Statutory Provsons Reports or Refunds and Credts.
Sec 6 05. Reports of refunds and credts.
(a) y Treasury to ont Commttee. No refund or credt of any Income, war
profts, e cess profts, estate, or gft ta n e cess of 100,000 sha be made unt
after the e praton of 30 days from the date upon whch a report gvng the
name of the person to whom the refund or credt s to be made, the amount of
soch refund or credt, and a summary of the facts and the decson of the Secre-
tary or hs deegate, s submtted to the ont Commttee on Interna Revenue
Ta aton.
b) y ont Commttee to Congress. report to Congress sha be made an-
nuay by such commttee of such refunds and credts, ncudng the names of
a persons and corporatons to whom amounts are credted or payments are made,
together wth the amounts credted or pad to each.
(c) Tentatve ad|ustments. ny credt or refund aowed or made under sec-
ton 6 11 sha be made wthout regard to the provsons of subsecton (a) of
ths secton. In any such case, f the credt or refund, reduced by any defcency
n snob, ta thereafter assessed and by defcences n any other ta resutng from
ad|ustments refected n the determnaton of the credt or refund, s n e cess
of 100,000, there sha be submtted to such commttee a report contanng the
matter specfed n subsecton (a) at such tme after the makng of the credt or
refund as tht Secretary or hs deegate sha determne the correct amount of
tbe ta .
Sec. 301.6 05-1. Reports of Refunds and Credts. Secton 6 05 requres that
report be made to the ont Commttee on Interna Revenue Ta aton of pro-
posed refunds or credts of any ncome, war profts, e cess profts, estate, or gft
ta n e cess of 100,000.
Sec. 301.6 06. Statutory Provsons Prohbton of dmnstratve Re-
vew or Decsonb.
Sec. 6 06. Prohbton of admnstratve revew of decsons.
In the absence of fraud or mstake n mathematca cacuaton, the fndngs of
art n and the decson of the Secretary or hs deegate upon the merts of any
cam presented under or authorzed by the nterna revenue aws and the aow-
ance or nonaowance by the Secretary or hs deegate of Interest on any credt
or refund under the nterna revenue aws sha not, e cept as provded In sub-
chapters C and D of chapter 76 (reatng to the Ta Court), be sub|ect to revew
T any other admnstratve or accountng offcer, empoyee, or agent of the
Lnted States.
Sec. 301.6 07. Statutory Provsons Date of owance of Refund ob
CS DIT.
8rc. 6 07. Date of aowance of refund or credt.
The date on whch the Secretary or hs deegate frst authorzes the schedung
of an overassessment n respect of any nterna revenue ta shn be consdered
u the date of aowance of refund or credt n respect of such ta .
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6201. 188
Sec. 301.6 07-1. Date or owance of Refund oe Credt. The date on
whch the Dstrct Drector, or an authorzed certfyng offcer desgnated by
hm, frst certfes the aowance of an overassessnent n respect of any Interna
revenue ta sha be consdered as the date of aowance of refund or credt
n respect of such ta .
UI. S of speca appcaton
Sec. 301.6 11 Statutory Provsons Tentatve Carryback d|ustments.
Sec. 6 11. Tentatve carryback ad|ustments.
(a) ppcaton for ad|ustment. ta payer may fe an appcaton for a ten-
tatve carryback ad|ustment of the ta for the pror ta abe year affected by a
net operatng oss carryback, provded n secton 172(b), from any ta abe year.
The appcaton sha be verfed n the manner prescrbed by secton 6065 n tbe
case of a return of such ta payer, and sha be fed, on or after the date of fng
of the return for the ta abe year of the net operatng oss from whch the carry-
back resuts and wthn a perod of 12 months from the end of such ta abe year,
n the manner and form requred by reguatons prescrbed by the Secretary or
hs deegate. The appcaton sha set forth n such deta and wth such sup-
portng data and e panaton as such reguatons sha requre
(1) The amount of the net operatng oss
(2) The amount of the ta prevousy determned for the pror ta abe year
affected by such carryback, the ta prevousy determned beng ascertaned n
accordance wth the method prescrbed n secton 131 (a)
(3) The amount of decrease n such ta , attrbutabe to such carryback, such
decrease beng determned by appyng the carryback n the manner provded
by aw to the Items on the bass of whch such ta was determned
( ) The unpad amount of such ta , not ncudng any amount requred to be
shown under paragraph (5)
(5) The amount, wth respect to the ta for the ta abe year Immedatey
precedng the ta abe year of such oss, as to whch an e tenson of tme for
payment under secton 616 s n effect and
(6) Such other nformaton for purposes of carryng out the provsons of
ths secton as may be requred by such reguatons.
n appcaton under ths subsecton sha not consttute a cam for credt or
refund.
(b) owance of ad|ustments. Wthn a perod of 90 days from the date on
whch an appcaton for a tentatve carryback ad|ustment s fed under sub-
secton (a), or from the ast day of the month n whch fas the ast date pre-
served by aw (ncudng any e tenson of tme granted the ta payer) for
fng the return for the ta abe year of the net operatng oss from whch such
carryback resuts, whchever s the ater, the Secretary or hs deegate sha
make, to the e tent he deems practcabe n such perod, a mted e amnaton
of the appcaton, to dscover omssons and errors of computaton theren,
anc1. sha determne the amount of the decrease n the ta attrbutabe to such
carryback upon the bass of the appcaton and the e amnaton, e cept that
the Secretary or hs deegate may dsaow, wthout further acton, any app-
caton whc he fnds contans errors of computaton whch he deems cannot
be corrected by hm wthn such 90-day perod or matera omssons. Such
decrease sha be apped aganst any unpad amount of the ta decreased
(Incudng any amount of such ta as to whch an e tenson of tme under
secton 610 s n effect) and any remander sha be credted aganst any
unsatsfed amount of any ta for the ta abe year mmedatey precedng the
ta abe year of the net operatng oss the tme for payment of whch ta s
e tended under secton 61G . ny remander sha, wthn such 90-day perod,
be ether credted aganst any ta or nstament thereof then due from the
ta payer, or refunded to the ta payer.
(c) Consodated returns. If the corporaton seekng a tentatve carryback
ad|ustment under ths secton, made or was requred to make a consodated
return, ether for the ta abe year wthn whch the net operatng oss arses,
or for the precedng ta abe year affected by such oss, the provsons of ths
secton sha appy ony to such e tent and sub|ect to such condtons, mtatons,
and e ceptons as the Secretary or hs deegate may by reguatons prescrbe.
Sec. 301.6 11-1. Tentatve Carhtback d|ustments. or reguatons under
ths secton, see the Income Ta Reguatons (pt. 1 of ths chapter).
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189 ( 6201.
Src. 301.6 12. Statt|tobt Pkovsons oob Stocks Refunds.
Sec. 6 12. oor stocks refunds.
(a) Motor vehces.
(1) In genera. Where before pr 1, 1955, any artce sub|ect to the ta
Imposed by secton 061 (a) or (b) has been sod by the manufacturer, producer,
or mporter, and on such date Is hed by a deaer and has not been used and s
ntended for sae, there sha be credted or refunded (wthout nterest) to the
manufacturer, producer, or Importer an amount equa to the dfference between
tw ta pad by such manufacturer, producer, or mporter on hs sae of the
artce and the amount of ta made appcabe to such artce on and after
pr 1,1955.
(2) Defntons. or purposes of ths subsecton
( ) The term deaer ncudes a whoesaer, |obber, dstrbutor, or retaer.
( ) n artce sha be consdered as hed by a deaer f tte thereto has
Passed to such deaer (whether or not devery to hm has been made), and f
fur purposes of consumpton tte to such artce or possesson thereof has not
at any tme been transferred to any person other than a deaer.
3) Refunds to deaers. Under reguatons prescrbed by the Secretary or
Ms deegate, the refund provded by ths subsecton may be made to the deaer
nstead of the manufacturer, producer, or mporter, f the manufacturer, pro-
ducer, or mporter waves any cam for the amount so to be refunded.
(1) Rembursement of deaers. When the credt or refund provded for n
ths subsecton has been aowed to the manufacturer, producer, or mporter, he
sha remt to the deaer to whom was sod the artce n respect of whch the
credt or refund was aowed so much of that amount of the ta correspondng
to the credt or refund as was ncuded n or added to the prce pad or agreed
to he pad by the deaer.
(5) Lmtaton on egbty for credt or refund. No person sha be entted
to credt or refund under ths subsecton uness ( ) he has n hs possesson
such evdence of the nventores wth respect to whch the credt or refund s
tamed as may be requred by reguatons prescrbed under ths subsecton, and
. cam for such credt or refund s fed wth the Secretary or hs deegate
before uy 1,1955.
(b) Gatone.
(1) In genera. Wth respect to any gasone ta abe under secton 08,
ffm whch ta (ncudng foor stocks ta ) at the appcabe rate has been
ad, and whch, on pr 1, 1955, s hed and ntended for sae by any person,
tU-re sha be credted or refunded (wthout Interest) to the producer or mporter
ho pad the ta , sub|ect to such reguatons as may be prescrbed by the Sec-
retary or hs deegate, an amount equa to so much of the dfference between
the ta so pad and the amount of ta made appcabe to such gasone on and
after pr 1, 1955, as has been pad by such producer or mporter to such
person as rembursement for the ta reducton on such gasone, f cam for
fuoh credt or refund s fed wth the Secretary or hs deegate pror to uy 1,
1855. No credt or refund sha be aowabe under ths subsecton wth respect
to gasone n reta stocks hed at the pace where Intended to be sod at reta,
nor wth respect to gasone hed for sae by a producer or mporter of gasone.
(2) Lmtaton on egbty for credt or refund. No producer or mporter
sha be entted to a credt or refund under paragraph (1) uness he has n hs
possesson satsfactory evdence of the nventores wth respect to whch he has
made the rembursements descrbed n such paragraph, and estabshes to the
satsfacton of the Secretary or hs deegate wth respect to the quantty of
yasone as to whch credt or refund s camed under such paragraph that on or
after pr 1, 1955, such quantty of gasone was sod to the utmate consumer
at a prce whch refected the amount of the ta reducton.
(c) Other acs appcabe to certan foor stocks refunds. provsons of
aw. ncudng penates, appcabe n respect of the ta es mposed under sec-
tons 0C1 and 081 sha, nsofar as appcabe and not nconsstent wth sub-
sectons (a) and (b) of ths secton, be appcabe n respect of the credts and
refunds provded for n such subsectons to the same e tent as f such credts or
refunds consttuted overpayments of such ta es.
(d) Sugar. Wth respect to any sugar or artces composed n chef vaue of
ragar upon whch ta mposed under secton 501(b) has been pad and whch,
on une 30, 1957, are hed by the mporter and ntended for sae or other ds-
poston, there sha be refunded (wthout Interest) to such mporter, sub|ect to
web. reguatons as may be prescrbed by the Secretary or hs deegate, an amount
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6201. 190
equa to the ta pad wth respect to such sugar or artces composed In che:
vaue of sugar.
(e) Cross reference. or foor stoc s refunds In case of certan acoho as)
tobacco ta es, see sectons 5063 and 5707.
Sec. 301.6 12-1. oor Stocks Refunds. or reguatons under ths secton
see the Manufacturers and Retaers cse Ta Reguatons (pt 0 of ths
chapter).
Sec. 301.6 13. Statutory Provsons Speca Rues ppcabe to Cebtah
m poy ment Ta es.
Sec. 6 13. Speca rues appcabe to certan empoyment ta es.
(a) d|ustment of ta (1) Genera rue. If more than the correct amouLv
of ta mposed by secton 8101, 3111, 3201, 3221, or 3 02 Is pad wth respect t
any payment of remuneraton, proper ad|ustments, wth respect to both the taa
and the amount to be deducted, sha be made, wthout nterest, n such marne
and at such tmes as the Secretary or bs deegate may by reguatons prescrbe
(2) Unted States as empoyer. or purposes of ths subsecton, n the case o
remuneraton receved from the Unted States or a whoy-owned Instrumentaty
thereof durng any caendar year, each head of a edera agency or nstrnmen
taty who makes a return pursuant to secton 3122 and each agent, desgnated
by the head of a edera agency or nstrumentaty, who makes a return pur
suant to such secton sha be deemed a separate empoyer.
(b) Overpayments of certan empoyment ta es. If more than the correc
amount of ta mposed by secton 3101,3111,3201, 3221, or 3 02 s pad or deducted
wth respect to any payment of remuneraton and the overpayment cannot be
ad|usted under subsecton (a) of ths secton, the amount of the overpaymen
sha be refunded n such manner and at such tmes (sub|ect to the statwt
of mtatons propery appcabe thereto) as the Secretary or hs deegate ma|
by reguatons prescrbe.
(c) Speca refunds (1) In genera. If by reason of an empoyee recevng
wages from more than one empoyer durng a caendar year after the caenda
year 1950 and pror to the caendar year 1955, the wages receved by hm durng
such year e ceed 3,600, the empoyee sha be entted (sub|ect to the provsons
of sec. 31(b)) to a credt or refund of any amount of ta , wth respect to such
wages, mposed by secton 1 00 of the Interna Revenue Code of 1939 and deducted
from the empoyee s wages (whether or not pad to the Secretary or hs deegate),
whch e ceeds the ta wth respect to the frst 3,600 of such wages receved
or f by reason of an empoyee recevng wages from more than one empoyer
durng any caendar year after the caendar year 195 , the wages receved by
hm durng such year e ceed ,200, the empoyee sha be entted (sub|ect to
the provsons of sec. 31(b)) to a credt or refund of any amount of ta , wth
respect to such wages, mposed by secton 3101 and deducted from the empoyee s
wages (whether or not pad to the Secretary or hs deegate), whch e ceeds
the ta wth respect to the frst ,200 of such wages receved.
(2) ppcabty n case of edera and State empoyees and empoyees o)
certan foregn corporatons ( ) edera empoyees. In the case of remunera-
ton receved from the Unted States or a whoy-owned nstrumentaty thereo
durng any caendar year, each head of a edera agency or nstrumentaty
who makes a return pursuant to secton 3122 and each agent, desgnated by the
head of a edera agency or Instrumentaty, who makes a return pursuant tc
such secton sha, for purposes of ths subsecton, be deemed a separate em-
poyer and the term wages Incudes, for purposes of ths subsecton, the
amount, not to e ceed 3,600 for the caendar year 1951, 1952, 1953, or 195 , or
,200 for any caendar year after 195 , determned by each such head or agent
as consttutng wages pad to an empoyee.
( ) State empoyees. or purposes of ths subsecton, n the case of remu-
neraton receved durng any caendar year, the term wages ncudes such
remuneraton for servces covered by an agreement made pursuant to secton
218 of the Soca Securty ct as woud be wages f such servces consttuted
empoyment the term empoyer ncudes a State or any potca subdvson
thereof, or any nstrumentaty of any one or more of the foregong the term
ta or ta mposed by secton 3101 ncudes, In the case of servces covered
by an agreement made pursuant to secton 218 of the Soca Securty ct, an
amount equvaent to the ta whch woud be mposed by secton 3101, f such
servces consttuted empoyment as defned n secton 3121 and the provsons
of ths subsecton sha appy whether or not any amount deducted from the
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191 8201.
empoyee s remuneraton as a resut of an agreement made pursuant to secton
218 of the Soca Securty ct has been pad to the Secretary.
(C) mpoyees of certan foregn corporatons. or purposes of paragraph
(1) of ths subsecton, the term wages ncudes such remuneraton for servces
coTered by an agreement made pursuant to secton 3121(1) as woud be wages
f such servces consttuted empoyment the term empoyer Incudes any
domestc corporaton whch has entered nto an agreement pursuant to secton
3121(1) the term ta or ta mposed by secton 3101, ncudes, n the case
of servces covered by an agreement entered nto pursuant to secton 3121(1),
an amount equvaent to the ta whch woud be Imposed by secton 3101, f
such servces consttuted empoyment as defned n secton 3121 and the prov-
sons of paragraph (1) of ths subsecton sha appy whether or not any amount
deducted from the empoyee s remuneraton as a resut of the agreement entered
nto pursuant to secton 3121(1) has been pad to the Secretary or hs deegate.
(d) Refund or credt of edera unempoyment ta . ny credt aowabe
under secton 3302, to the e tent not prevousy aowed, sha be consdered
n overpayment, but no nterest sha be aowed or pad wth respect to such
overpayment.
(See. 6 13 as amended by sec. 202(a) (1), (b), Soca Securty mendments of
1951
Sec. 301.6 13-1. Speca Rues ppcabe to Certan mpoyment Ta es.
or reguatons under ths secton, see the mpoyment Ta Reguatons (pt 31
of ths chapter).
Sec. 301.6 1 . Statutory Provsons Income Ta Wthhed.
Sec. 6 1 . Income ta wthhed.
In the case of an overpayment of ta Imposed by chapter 2 , or by chapter 3,
refund or credt sha be made to the empoyer or to the wthhodng agent, as
the case may be, ony to the e tent that the amount of such overpayment was not
deducted and wthhed by the empoyer or wthhodng agent.
Sec. 301.6 1 -1. Income Ta Wthhed. or reguatons under ths secton,
Me the Income Ta Reguatons (pt. 1 of ths chapter) and the mpoyment
Ta Reguatons (pt 31 of ths chapter).
Sec 301.6 15. Statutory Provsons Credts or Refunds to Persons Who
Coected Certan Ta es.
Sec. 6 15. Credts or refunds to persons who coected certan ta es.
(a) owance of credts or refunds. Credt or refund of any overpayment of
ta mposed by secton 231(1), 231(2), 231(3), 2 1, 251, 201, 271, or 286
may be aowed to the person who coected the ta and pad It to the Secretary
or hs deegate If such person estabshes under such reguatons as the Secretary
or hs deegate may prescrbe, that he has repad the amount of such ta to the
person from whom he coected t, or obtans the consent of such person to the
aowance of such credt or refund.
(b) Credt on returns. ny person entted to a refund of ta mposed by
secton 231(1), 231(2), 231(3), 2 1, 251, 201, 271, or 2S6 pad, or co-
ected and pad, to the Secretary or hs deegate by hm may, nstead of fng a
cam for refund, take credt therefor aganst ta es mposed by such secton due
upon any subsequent return.
(c) Refund of overcoectons. In case any person requred under secton
231(1), 231 (2), 231 (3), 2 1, 251, 201, 271, or 286 to coect any ta sha
make an overcoecton of such ta , such person sha, upon proper appcaton,
refund such overcoecton to the person entted thereto.
(d) Refund of ta abe payment. ny person makng a refund of any payment
oa whch ta Imposed by secton 231(1), 231(2), 231(3), 2 1, 251, 261,
271, or 2S6 has been coected may repay therewth the amount of ta coected
on sueb payment.
Sec. 301.6 15-1. Cbedt3 or Refunds to Persons Who Coected Certan
Ta es. or reguatons under ths secton, see the actes and Servces cse
Ta Reguatons (pt 2 of ths chapter).
Sec. 301.6 16. Statutory Provsons Certan Ta es on Saes and Servces.
Sec. 6 16. Certan ta es on saes and servces.
(a) Condton to aowance. No credt or refund of any overpayment of ta
Imposed by secton 231 (6) or 281 or by chapter 31 (other than sec. 0 1 (a) (2).
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6201. 192
or (b) (2)) or chapter 32 (e cept an overpayment of ta tnder paragraph (1)
or (3) of subsecton (b) of ths secton) sha be aowed uness the person who
pad the ta estabshes under reguatons prescrbed by the Secretary or hs
deegate
(1) That he has not Incuded the ta n the prce of the artce or servce wth
respect to whch t was mposed or has not coected the amount of the ta from
the vendee or
(2) as repad the amount of the ta to the purchaser (n case of retaers
ta es) or to the utmate purchaser (n the case of manufacturers ta es and the
ta under secton 0 1(a) (1) or (b) (1)) of the artce or servce or, n any case
wthn subsecton (b) (2), has repad or has agreed to repay the amount of the
ta to the utmate vendor of the artce or
(3) as fed wth the Secretary or hs deegate the wrtten consent of such
purchaser, utmate purchaser, or utmate vendor, as the case may be, to the
aowance of the credt or refund or has obtaned the wrtten consent of such
utmate vendor thereto.
(b) Speca cases n whch ta payments consdered overpayments. Under
reguatons prescrbed by the Secretary or hs deegate credt or refund, wthout
nterest, sha be made of the overpayments determned under the foowng
paragraphs:
(1) Prce read|ustments. If the prce of any artce n respect of whch a ta ,
based on such prce, s mposed by chapter 31 or 32, s read|usted by reason of the
return or repossesson of the artce or a coverng or contaner, or by a bona fde
dscount, rebate or aowance, the part of the ta proportonate to the part of
the prce repad or credted to the purchaser sha be deemed to be an over-
payment.
(2) Specfed uses and resaes. The ta pad under subchapter of chapter 31
or chapter 32 n respect of any artce sha be deemed to be an overpayment f
such artce was, by any person
( ) Resod for the e cusve use of any State, Terrtory of the Unted States,
or any potca subdvson of the foregong, or the Dstrct of Coumba, or, n
the case of musca nstruments embraced n secton 151, resod for the use of
any regous or nonproft educatona nsttuton for e cusvey regous or
educatona purposes
( ) Used or resod for use for any of the purposes, but sub|ect to the cond-
tons, provded n secton 222
(C) In the case of a qud ta abe under secton 0 1, sod for use as fue
In a dese-powered hghway vehce or as fue for the propuson of a motor ve-
hce, motorboat, or arpane, f the vendee used such qud otherwse than as
fue n such a vehce, motorboat, or arpane or resod such qud
(D) In the case of ubrcatng os, used or resod for nonubrcatng purposes
( ) In the case of une posed moton pcture fms, used or resod for use n
the makng of newsree moton pcture fms
( ) In the case of artces ta abe under secton 0G(b) (other than spark
pugs, storage batteres, eaf sprngs, cos, tmers, and tre chans), used or
resod for use as repar or repacement parts or accessores for farm equpment
(other than equpment ta abe under sec. 061 (a))
(G) In the case of a communcaton, detecton, or navgaton recever of the
type used n commerca, mtary, or marne nstaatons, resod to the Unted
States for ts e cusve use
( ) In the case of gasone, used n producton of speca motor fues referred
to n secton 0 1(b).
(3) Ta -pad artces used for further manufacture. If the ta mposed by
chapter 2 has been pad wth respect to the sae of
( ) ny artce (other than a tre, Inner tube, or automobe rado or tee-
vson recevng set ta abe under secton 1 1) purchased by a manufacturer or
producer and used by hm as matera n the manufacture or producton of, or
as a component part of. an artce wth respect to whch ta under chapter 32
has been pad, or whch has been sod free of ta by vrtue of secton 220 or
22 . reatng to ta -free saes
( ) ny artce descrbed n sectons 1 2 and 1 3(b) purchased by a mann-
facturer or producer and used by hm as matera n the manufacture or produc-
ton of, or as a component part of, communcaton, detecton, or navgaton
recevers of the type used n commerca, mtary, or marne Instaatons f snen
recevers have been sod by hm to the Unted States for ts e cusve use
such ta sha be deemed an overpayment by such manufacturer or producer.
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5 6201. 19
be pad by the Secretary or hs deegate to the person so usng such manufactured
sugar, or artce manufactured therefrom, the amount of any ta pad under
secton 501(a) wth respect thereto.
(b) portaton. Upon the e portaton from the Unted States to a foregn
country, or the shpment from the Unted States to any possesson of the Unted
States e cept Puerto Rco, of any manufactured sugar, or any artce manu-
factured whoy or party from manufactured sugar, wth respect to whch ta
under the provsons of secton 501(a) has been pad, the amount of such
ta sha be pad by the Secretary or hs deegate to the consgnor named n the
b of adng under whch the artce was e ported or shpped to a possesson, o
to the shpper, or to the manufacturer of the manufactured sugar or of the
artces e ported, f the consgnor waves any cam thereto n favor of such
shpper or manufacturer e cept that no such payment sha be aowed wth
respect to any manufactured sugar, or artce, upon whch, through substtuton
or otherwse, a drawback of any ta pad under secton 501(b) has been or s
to be camed under any provsons of aw made appcabe by secton 0 .
Sec. 301.6 18-1. Suoab. or reguatons under ths secton, see the erna-
tons Reatng to Msceaneous cse Ta es Payabe by Return (pt. 6 of ths
chapter).
Sec. 301.6 19. Statutobt Provsons cse Ta on Wagebno.
Sec. 6 19. cse ta on wagerng.
(a) Credt or refund generay. No overpayment of ta Imposed by chatter
35 sha be credted or refunded (otherwse than under subsec. (b)), n pursuance
of a court decson or otherwse, uness the person who pad the ta estabshes,
n accordance wth reguatons prescrbed by the Secretary or hs deegate, (1)
that he has not coected (whether as a separate charge or otherwse) the amount
of the ta from the person who paced the wager on whch the ta was mposed,
or (2) that he has repad the amount of the ta to the person who paced such
wager, or uness he fes wth the Secretary or hs deegate wrtten consent of
the person who paced such wager to the aowance of the credt or the makng
of the refund. In the case of any ad-off wager, no overpayment of ta m-
posed by chapter 35 sha be so credted or refunded to the person wth whom
such nd-off wager was paced uness he estabshes, n accordance wth regua-
tons prescrbed by the Secretary or hs deegate, that the provsons of the
precedng sentence have been comped wth both wth respect to the person who
paced the ad-off wager wth hm and wth respect to the person who paced
the orgna wager.
(b) Credt or refund on wagers ad-off by ta payer. Where any ta payer
ays off part or a of a wager wth another person who s abe for ta mposed
by chapter 35 on the amount so ad off, a credt aganst such ta sha be
aowed, or a refund sha be made to, the ta payer ayng off such amount
Such credt or refund sha be n an amount whch bears the same rato to the
amount of ta whch such ta payer pad on the orgna wager as the amount
so ad off bears to the amount of the orgna wager. Credt or refund under
ths subsecton sha be aowed or made ony n accordance wth reguatons
prescrbed by the Secretary or hs deegate and no nterest sha be aowed
wth respect to any amount so credted or refunded.
Sec. 301.6 19-1. cse Ta on Wagerng. or reguatons under ths see
ton, see the Wagerng Ta Reguatons (pt. of ths chapter).
Sec 301.6 20. Statutory Provsons Cross References.
Sec 6 20. Cross references.
(1) or mtatons on credts and refunds, see subchapter of chapter 66.
(2) or overpayment arsng out of ad|ustments ncdent to Invountary -
udaton of nventory, see secton 1321.
(3) or overpayment n case of ad|ustments to accrued foregn ta es, see
secton 905(c).
( ) or credt or refund In case of defcency dvdends pad by a persona
hodng company, see secton 5 7.
(5) or refund, credt, or abatement of amounts dsaowed by courts npou
revew of Ta Court decson, see secton 7 86.
(6) or abatement or refund of ta on transfers to avod ncome ta , see
secton 1 9 (b).
(7) or abatement or refund In case of ta on sver buon, see secton S9 .
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6323. 196
C PT R 6 COLL CTION
SU C PT R .-G N R L PRO ISIONS
S CTION 6301. COLL CTION UT ORITY
26 C R 301.6301-1: Coecton authorty.
New reguatons under Subtte of the Interna Revenue Code
of 195 reatng to assessment, coecton, abatement, credt, and
refund. See T. D. 6119, page 1 5.
S CTION 6302. MOD OR TIM O COLL CTION
Rev. Ru. 55-271
Secton 6302 of the Interna Revenue Code of 195 , provdes,
n part, that the Secretary of the Treasury or hs deegate may au-
thorze edera Reserve banks and ncorporated banks or trust com-
panes whch are depostares or fnanca agents of the Unted States
to receve any ta mposed under the nterna revenue aws, n such
manner, at such tmes, and under such condtons as he may prescrbe.
Secton 6656 of the Code provdes for the mposton of a penaty for
the faure of any person requred to make a tmey depost of ta
mposed under the nterna revenue aws, uness such faure s due
to reasonabe cause and not due to wfu negect.
The Interna Revenue Servce s unabe to approve any pan or
method whereby ta es requred to be deposted may be deposted n an
amount ess than the amount of ta es actuay coected. owever,
f at the tme requred by aw, the quartery return s fed and the
correct amount of the ta es due s pad, or has been pad, and t s
ascertaned that the amount of the monthy deposts was not ess
than 99 percent of the ta requred to be deposted n accordance wth
the appcabe reguatons, the penaty provded by secton 6656, supra,
w not be mposed. In the event the defcency n the amount
deposted s n e cess of one percent, the mposton of the penaty w
depend upon whether the faure to depost the fu amount was due
to reasonabe cause and not due to wfu negect.
SU C PT R C LI N OR T S
S CTION 6323. LIDITY G INST MORTG G S,
PL DG S, PURC S RS, ND UDGM NT CR D-
ITORS
26 C R 301.6323-1: adty of en aganst Rev. Ru. 55-13
mortgagees, pedgees, purchasers, and
|udgment credtors.
( so Part II, Secton 3672.)
The statute enacted by the Legsature of the State of New amp-
shre, approved May 11, 1951 (ch. 107, New ampshre Laws, 1951,
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197 6 02.
sec - 8 of ch. 26 , Revsed Laws of New ampshre) s accepted
by the Interna Revenue Servce as egsaton of the nature contem-
pated n secton 6323 of the Interna Revenue Code of 195 (sec. 3672
of the Interna Revenue Code of 1939) authorzng the fng of notces
o edera ta ens n certan offces.
Whenever t becomes necessary, n the State of New ampshre, to
fe a notce of edera ta en, or a certfcate of reease or dscharge
of such a en, Dstrct Drectors of Interna Revenue shoud fe the
same n the offces desgnated n the above-cted statute.
Status of a trustee n bankruptcy as |udgment credtor. See Ct.
D. 17TG, page 5 5.
SU C PT R D. S IZUR O PROP RTY OR COLL CTION O T S
S CTION 6331. L Y ND DISTR INT
26 C R 301.6331-1: Levy and dstrant. Rev. Ru. 55-187
|ont checkng account s sub|ect to evy ony to the e tent of a
ta payer s nterest theren, whch w be determned from the facts
n each case. Where one of the persons n whose name a |ont account
has been estabshed can prove that the funds deposted theren are
hs soe property, no evy can be made on such funds to satsfy an out-
standng ta abty of the other. actors bearng on the queston
of the e tent of a ta payer s nterest n such an account ncude the
nature of the tenancy created under State aw the source of the funds
deposted the ntent of the person openng the |ont account and
whether n actua practce the account was under the contro of one
party even though the other had authorty to wthdraw funds from
the account.
26 C R 301.6331-1: Levy and dstrant.
Notce of evy served or nstrumentaty of a State. See Rev. Ru.
55-227, page 551.
C PT R 63. T M NTS, CR DITS, ND R UNDS
SU C PT R .-PROC DUR IN G N R L
S CTION 6 02. UT ORITY TO M CR DITS OR
R UNDS
26 C R 301.6 02-1: uthorty to make credts
or refunds.
New reguatons under Subtte of the Interna Revenue Code
of 195 reatng to assessment, coecton, abatement, credt, and
refund. See T. D. 6119, page 1 5.
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6601. 198
S CTION 6 0 . T M NTS
26 C R 301.6 0 -1: batements.
New reguatons under Subtte of the Interna Revenue Code
of 195 reatng to assessment, coecton, abatement, credt, and
refund. See T. D. 6119, page 1 5.
C PT R 67. INT R ST
SU C PT R v-INT R ST ON UND RP YM NTS
S CTION 6601. INT R ST ON UND RP YM NT, NON-
P YM NT, OR T NSIONS O TIM OR P YM NT,
O T
( so Secton 6081.) Rev. Ru. 55-22
Interest on an addtona amount of corporate ncome ta made
due and payabe for a ta abe year begnnng n 1953 and endng
after March 31, 105 , because of the provsons of secton
7851(a) (1) (D) of the Interna Revenue Code of 195 , w be com-
puted from ugust 16, 195 , the date of the enactment of the 105
Code, rather than from the orgna due date.
Rev. Ru. 5 -366, C. . 195 -2, 36, ampfed.
dvce has been requested as to the date from whch nterest shoud
be computed on addtona amounts shown to be due on amended
corporaton returns fed to refect the changes n aw referred to u
secton 3.01 of Revenue Rung 5 -366, C. . 195 -2, 36.
Secton 7851(a)(1)(D) of the Interna Revenue Code of 195 ,
whch was enacted ugust 16, 195 , amends the Interna Revenue
Code of 1939 to emnate the reducton of the norma ta rate for
corporatons from 30 percent to 25 percent whch was to take pace
on pr 1, 195 . ccordngy, a corporatons computng ther ta
under the 1939 Code for ta abe years endng after March 31, 195 ,
are requred to compute such ta es wthout regard to such reducton
n the corporaton s norma ta rate.
Revenue Rung 5 -306, supra, states, n part, that any corporaton
whch has made a return for a ta abe year begnnng n 1953 and
endng after March 31,195 , or a short ta abe year begnnng n 195
and endng after March 31, 195 , but before the date of enactment of
the 195-I Code, upon specfed forms, shoud fe an amended return as
prompty as possbe and shoud pay any addtona ta due. No
reference was made n the Revenue Rung to nterest upon such
addtona ta .
ny ta payer whch had fed ts return for a perod n queston,
and pad the ta due under the 1939 Code, had fuy comped wth
the ta ng statute as t e sted, and dd not, pror to the enactment of
the Interna Revenue Code of 195 , owe any ta or wthhod from
the Government any ta then payabe or to whch the Unted States
then had a rght of coecton. In ths connecton, attenton s caed
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199 7122.
to the fact that nterest upon edera ncome ta s not a penaty,
but s ceary ntended to compensate the deay n payment of the
ta the detrment of ts nonpayment, to be contnued durng the
tme o ts nonpayment compensaton, not punshment. Unted
ute v. dward II. Chds, 266 U. S. 30 , T. D. 3671, C. . I -1, 2 1
(19-25
Isot unt the effectve date of enactment of secton 7851(a) (1) (D)
of the 195 Code, coud the addtona amount of ta become actuay
payabe. The effect of that secton, for nterest purposes, s smar
to that of a new mposton of a 5 percent addtona ta whch tsef
coud not be consdered due or payabe pror to date of enactment.
ccordngy, t s hed that nterest on any addtona ta consdered
due as a resut of ths secton, w not commence to run unt ugust
17,195 , the day after the date of enactment of the 195 Code.
SU C PT R .-INT R ST ON O RP YM NTS
S CTION 6611. INT R ST ON O P YM NTS
( so Part II, Secton 3771.) Rev. Ru. 55-272
mounts of manufacturers e cse ta es erroneousy or mstakeny
pad by reta deaers w be regarded as overpayments of ta es
and the statutory nterest authorzed by secton 6611(a) of the
Interna Revenue Code of 195 or by secton 3771(a) of the Code of
1939 w be aowed on refunds of such amounts. The pocy pre-
vousy n effect, whch hed that nterest was not aowabe on refund
cams fed by reta deaers to recover the amounts pad by them as
e cse ta es propery due and payabe by manufacturers, w no
onger be foowed.
C PT R 7 . CLOSING GR M NTS ND
COMPROMIS S
S CTION 7122. COMPROMIS S
( so Part , dmnstratve Matters.) Rev. Ru. 55-153
ursdcton and procedure reatng to offers n compromse of
narcotcs, smokng opum, and marhuana abtes under the n-
terna revenue aws. Revenue Rung 117, C. . 1953-1, 08,
ampfed.
Secton 1. Purpose
The purpose of ths Revenue Rung s to transfer to Dstrct Drec-
tors of Interna Revenue certan dutes, functons, and responsbtes
wth respect to the compromse of narcotcs, smokng opum, and mar-
huana abtes under the Interna Revenue aws.
88 030 56 1
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5 7122. 200
Sec. 2. uthorty
The estabshment of standards prescrbed n ths Revenue Rung
s beng done pursuant to the authortes contaned n Reorganzaton
PanMS o. 26 of 1950, effectve uy 31, 1950 (15 . R. 935, 6 Stat.
1280), Reorganzaton Pan No. 1 of 1952, effectve March 1 , 1952,
Treasury Department Order No. 150-25, dated une 1, 1953, and
Treasury Department Order No. 180, dated November 17, 1953.
Sec. 3. Scope
The provsons of ths Revenue Rung w appy to:
1. ny nterna revenue ta es reatng to narcotcs, smokng
opum, and marhuana
2. ny ad vaorem penates or nterest mposed by aw for
denquency n regstraton or denquency n payment of these
ta es or
3. ny crmna abty ncurred through denquency n reg-
straton or denquency n payment of these ta es.
Sec. . Compromse Cases Investgated
Dstrct Drectors of Interna Revenue w have nvestgatve |urs-
dcton over offers n compromse comng wthn the scope of ths
Revenue Rung, as outned n Secton 3.
Sec. 5. Compromse Cases Not Investgated
.01 No nvestgatons w be conducted by Dstrct Drectors of
offers n compromse of crmna cases whch do not come wthn the
scope of Secton 3 of ths Revenue Rung, e cept upon the specfc
request of the Dstrct Supervsor of Narcotcs. If offers are sub-
mtted as the resut of negotatons by the Dstrct Supervsor of Nar-
cotcs, the Dstrct Drectors w depost and record the remttances
and forward the orgna orms 656 Offers n Compromse or 656-C,
Offers n Compromse (Deferred Instament Payments) to the Na-
tona Offce, ttenton O: : C, wthout orm 879, Schedue of Offers
n Compromse, for transmtta to the Commssoner of Narcotcs.
.02 The procedure descrbed n ths secton w kewse be app-
cabe to any case n whch an offer s made n compromse of cv
abty compromsabe by the Commssoner of Interna Revenue and
of crmna abty compromsabe by the Commssoner of Narcotcs,
who |onty e ercse the authorty to compromse.
Sec. 6. Informa Conference and ppea
The nforma conference procedures and the procedures reatng to
appeas to the ssstant Regona Commssoner ( ppeate), apped
n certan cases, as set forth n Revenue Rung 117, C. . 1953-1, 98,
w not be empoyed or avaabe wth respect to cases comng wthn
the scope of ths Revenue Rung.
Sec. 7. ffect on Other Documents
Revenue Rung 117, C. . 1953-1, 98, s hereby ampfed to the
e tent nconsstent herewth.
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201 26 C R 151.168 (Narcotcs).
N RCOTICS
C R 151.18: Reta deaers. (Narcotcs) T. D. 9
( so. 151.168,151.171 through 151.175,
reotcs Reguatons 5.)
TL 26 INT RN L R NU . C PT R I, SU SC PT R C, P RT 151.
R GUL TIONS UND R T RRISON N RCOTIC L W, S M ND D
Ora prescrptons for narcotc drugs and compounds of narcotc
drugs.
Treasury Department,
Offce of the Commssoner of Interna Revenue,
Offce of the Commssoner of Narcotcs,
Washngton 25, D. C.
To O cers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Narcotc Reguatons 5 (26 C R pt. 151), reatng to narcotcs
sub|ect to the arrson Narcotc Law, and contnued n effect under
appcabe provsons of the Interna Revenue Code of 195 , are
amended as foows, pursuant to the amendment to that Code made
by Pubc Law 729, 83d Congress C. . 195 -2, 599 , approved u-
gust 31,195 :
Paragraph 1. The secton headng and ntroductory matera of
secton 151.18 ( rt. 18) are amended to read as foows:
Sec. 151.18 Reta Deaers. very person who ses narcotc drugs or prepa-
ratons from orgna stamped packages, wth or wthout compoundng, pursuant
to ora or wrtten prescrptons Issued by regstered practtoners n the course
of professona practce ony, s abe to ta as a reta deaer at the rate of 3
per annum n Cass III, wth the foowng e ceptons:

Par. 2. The second sentence of secton 151.18 (b) ( rt. 18) s
amended to read as foows: practtoner who operates a drug
store and n hs capacty as a druggst ses narcotc drugs or prepara-
tons, pursuant to ora or wrtten prescrptons ssued by other pract-
toners, ncurs addtona abty as a reta deaer.
Par. 3. Secton 151.168 ( rt. 168) s amended to read as foows:
Sec. 151.168. Man||eb of ecuton Pbacttoneh.s. prescrptons for
drags and preparatons not specfcay e empt under secton 702 of the Interna
Revenue Code of 195 (see sees. 151.180 to 151.182) and not sub|ect to the ora
prescrpton procedure (see sec. 151.172) sha be dated as of and sgned on the
day when Issued and sha bear the fu name and address of the patent and the
name, address, and regstry number of the practtoner. physcan may sgn a
prescrpton n the same manner as he woud sgn a check or ega document,
u, for nstance, . . Smth, ohn . Smth, or ohn enry Smth. Prescrp-
tons (other than ora prescrptons under sec. 151.172) shoud be wrtten wth
nk or ndebe penc or typewrter f typewrtten, they sha be sgned by the
Practtoner. The duty of propery preparng or teephonng prescrptons, as
the case may be, s upon the practtoner, and he s abe to the penates pro-
Tded by the act n case of faure to nsert or communcate, respectvey, the n-
formaton requred by the aw. prescrpton requred to be n wrtng may be
Prepared by a secretary or agent for the sgnature of a practtoner, but the prac-
ttoner s responsbe n case the prescrpton does not conform n a essenta
respects to the aw and reguatons. correspondng abty rests upon the
druggst who fs a prescrpton not prepared n the form prescrbed by aw and
reguatons.
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26 C R 151.171 (Narcotcs) 202
Par. . Secton 151.171 ( rt. 171) s amended to read as foows:
Sec. 151.171. Parta ng. a genera rue, the parta fng of nar-
cotc prescrptons s not permssbe. If, however, a deaer s unabe to suppy
the fu quantty caed for n a wrtten or ora prescrpton and an emergency
e sts, he may suppy a porton of the drugs caed for by the prescrpton, pro-
vded he makes a sutabe notaton on the face of the wrtten prescrpton (or
wrtten record of the ora prescrpton) of the quantty furnshed and the reason
for not suppyng the fu quantty on the back of the wrtten prescrpton (or
wrtten record of the ora prescrpton) and advses the ssung practtoner
thereof. No further quantty sha be supped e cept upon a new prescrpton.
Par. 5. Secton 151.172 ( rt. 172) s amended to read as foows:
Sec. 151.172. Teephone Oedebs. (a) Where wrtten prescrptons sgned
by the practtoner are requred, the furnshng of narcotcs pursuant to tee-
phone advce of practtoners s prohbted, whether sgned prescrptons cover-
ng such orders are subsequenty receved or not, but n an emergency a druggst
may dever narcotcs through hs responsbe empoyee or agent pursuant to a
teephone order, provded the empoyee or agent s supped wth a propery
prepared sgned prescrpton before devery s made, whch prescrpton sha be
turned over to the druggst and fed by hm as requred by aw.
(b) deaer (druggst) may f an ora prescrpton communcated to hm by
a duy regstered practtoner for such narcotc drugs or compounds of a narcotc
drug whch the Commssoner of Narcotcs has found and by reguatons desg-
nated to possess reatvey tte or no addcton abty, as descrbed n para-
graph (c) of ths secton. In ssung an ora prescrpton, the prescrber sha
furnsh the deaer wth the same nformaton as s requred n the case of a
wrtten prescrpton (see sec. 151.168) e cept for the wrtten sgnature of the
prescrber. The ora prescrpton, ncudng the nformaton requred to be
furnshed by the prescrber, sha prompty be reduced to wrtng by the deaer,
who sha fe and preserve the wrtng n hs narcotc prescrpton fe as de-
scrbed n secton 151.17 . The practtoner s responsbe n case the ora pre-
scrpton does not conform n a essenta respects to the aw and reguatons.
correspondng abty rests upon the druggst who fs an ora prescrpton
not communcated n the form prescrbed by aw and reguatons.
(c) ny nterested agency, assocaton, or manufacturer may submt a recom-
mendaton n wrtng to the Commssoner of Narcotcs for a fndng and desgna-
ton that a specfcay dentfed narcotc drug or compound of a narcotc drug
possesses reatvey tte or no addcton abty, gvng reasons for the recom-
mendaton, or the sad Commssoner may hmsef ntate a proposa for a
prospectve fndng and desgnaton wth respect to a specfcay dentfed nar-
cotc drug or compound of a narcotc drug. The Commssoner of Narcotcs sha
request the offcers, agences, and assocatons desgnated n secton 705(c) (2)
of the Interna Revenue Code of 195 for an e presson of ther vews on the
sub|ect, settng what he consders reasonabe tme mts for ths purpose. fter
consderng such e pressons of vews as sha be receved wthn such tme mts,
he sha ether (1) make the fndng and desgnaton by reguatons, as author-
zed, wth respect to the narcotc drug or compound of a narcotc drug, or (2)
determne that the fndng and desgnaton cannot be made, notfyng the recom-
mendng agency or assocaton accordngy. fter pubcaton of reguatons
makng the requste fndng and desgnaton, the ora prescrpton procedure
descrbed n paragraph (b) of ths secton sha be appcabe to the narcotc
drug or compound of a narcotc drug whch was the sub|ect of the fndng and
desgnaton.
(d) If the Commssoner of Narcotcs sha subsequenty determne that a
narcotc drug or a compound of a narcotc drag, to whch the ora prescrpton
procedure descrbed n paragraph (b) of ths secton has been made appcabe,
possesses a degree of drug addcton abty that. In hs opnon, resuts n
abusve use of such procedure, he sha by reguatons pubsh the determnaton
n the edera Regster. The determnaton sha be fna and, after the e -
praton of a perod of s months from the date of ts pubcaton, the ora
prescrpton procedure descrbed n paragraph (b) of ths secton sha cense
to appy to the partcuar narcotc drug of to the partcuar compound of a
narcotc drug whch s the sub|ect of the determnaton.
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203 26 C R 151.175 (Narcotcs).
Pah. 6. Secton 151. 173 ( rt. 173) s amended to read as foows:
tec. 151.173. orms To e Used. The Government does not furnsh forms for
wrtten prescrptons or for recordng ora prescrptons, and the order forms
whch are supped must not be used as prescrptons. ny form for a wrtten
prescrpton or for recordng an ora prescrpton may be used, provded the
requred data are shown thereon.
Par. 1. Secton 151.17 ( rt. 17 ) s amended to rea as foows:
Sec. 151.17 . ng. Deaers who f prescrptons sha keep the wrtten
prescrptons, and the wrtten records of ora prescrptons, n a separate fe n
each manner as to be ready accessbe to nspecton by nvestgatng offcers
for not ess than two years.
Pak. 8. Secton 151.175 ( rt. 175) s amended to read as foows:
Sec. 151.175. Labes on Contaners. The deaer fng a wrtten or ora pre-
scrpton sha aff to the package a abe showng hs name and regstry num-
ber, the sera number of the prescrpton, the name, address and regstry
number of the practtoner ssung the prescrpton, and the name and address
of the patent. (Sec. 7805, 68 Stat. 917 26 U. S. C. 7805. Interpret or appy
sees. 70 , 705, 72 , 773, as amended by Pubc Law 729, 83d Cong., 68 Stat
550,551,555, 5C7 26 U. S. C. 70 , 705, 72 , 773.)
ecause the amendments made by ths Treasury Decson reeve
restrctons under the stated condtons, t s found unnecessary to
ssue ths Treasury Decson wth notce and pubc procedure thereon
under secton (a) of the dmnstratve Procedure ct, approved
une 11,19 6, or sub|ect to the effectve date mtaton of secton (c)
of that act.
Ths Treasury Decson sha be effectve upon ts fng for pub-
caton n the edera Regster.
T. Coeman ndrews,
Commssoner of Interna Revenue.
. . nsnger,
Commssoner of Narcotcs.
pproved ebruary 17,1955.
. Chapman Rose,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 23, 1955, 8: 9 a. m.)
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P RT II
UNGS ND D CISIONS UND R T INT R-
N L R NU COD O 1939 ND R L T D
PU LIC L WS
Rungs and decsons pubshed n Part II of the Interna Revenue
uetn are based on the appcaton of provsons of the Interna
Revenue Code of 1939 or the reated pubc aws nvoved and, uness
otherwse noted theren, are pubshed wthout consderaton as to
any appcaton of the provsons of the Interna Revenue Code of
195 .
C PT R 1. INCOM T
SU C PT R .-G N R L PRO ISIONS
P RT I. T S O T
S CTION 12. SURT ON INDI IDU LS
Reguatons 118, Secton 39.12- : Surta n Rev. Ru. 55-329
case of head of househod.
wdow, who mantaned a househod whch consttuted the prn-
cpa pace of abode of a granddaughter from the date of brth
unt the end of the ta abe year, quafes as the head of a househod
for edera ncome ta purposes.
dvce has been requested whether an ndvdua ta payer, who
mantaned a househod whch consttuted the prncpa pace of
abode of an nfant granddaughter from the date of brth unt the
end of the ta abe year, quafes as the head of a househod, for ed-
era ncome ta purposes, rrespectve of the fact that the grand-
daughter was camed as a dependent by another ta payer.
In the nstant case an empoyed wdow owns and occupes her own
home. The home s aso occuped by the wdow s son, hs wfe and
baby daughter. The wdow pays the entre cost of mantanng the
house, ncudng uttes, ta es, food, nsurance and upkeep of the
house. The wdow s son and hs wfe both worked durng the ta -
abe year each earnng more than 600, and they fed a |ont ncome
ta return for such year n whch they camed e emptons for them-
seves and the baby.
Secton 12(c) (3) of the Interna Revenue Code of 1939 provdes n
part as foows:
(3) Defnton of ead of ouseod. or the purposes of ths chap-
ter chapter 1 of the Code , an ndvdua sha be consdered a bead of a
(205)
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Regs. 118, 39.15-1. 206
househod If, and ony If, such Indvdua Is not marred at the cose of hs
ta abe year and mantans as hs home a househod whch consttutes for
such ta abe year the prncpa pace of abode, as a member of such house-
hod, of:
( ) son, stepson, daughter, or stepdaughter of the ta payer, or a
descendant of a son or daughter of the ta payer, but f such son, step-
son, daughter, stepdaughter, or descendant Is marred at the cose of
the ta payer s ta abe year, ony f the ta payer s entted to an
e empton for the ta abe year for such person under secton 23(b)

n Indvdua sha be consdered as mantanng a househod ony If over
haf of the cost of mantanng the househod durng the ta abe year s
furnshed by such ndvdua.
Secton 39.12- of Reguatons 118 provdes that a ta payer sha
be consdered the head of a househod f he s not marred at the cose
of hs ta abe year and mantans as hs home a househod whch con-
sttutes for such ta abe year the prncpa pace of abode, as a member
of such househod, of at east one of the ndvduas specfed n secton
12(c) (3) ( ) of the Interna Revenue Code of 1939.
In the nstant case snce the granddaughter s an unmarred de-
scendant of the wdow s son she meets the specfcaton of the persons
sted n secton 12(c) (3) ( ) of the Code, and the wdow quafes as
the head of a househod rrespectve of the fact that the granddaughter
quafes as a dependent n the |ont return fed by the wdow s son
and daughter-n-aw.
ccordngy, t s hed that a wdow, who mantaned a househod
whch consttuted the prncpa pace of abode of a granddaughter
from the date of brth unt the end of the ta abe year, quafes as
the head of a househod for edera ncome ta purposes.
Snce Revenue Rung 55-72, pubshed n I. R. . 1955-7,11, under
date of ebruary 1 , 1955, may Ibe sub|ect to msnterpretaton to the
e tent that t ndcates that each of the two corporatons nvoved n
the merger referred to theren s entted to fe a return for the short
perod mmedatey precedng the merger t s superseded to read as
foows:
S CTION 15. SURT ON CORPOR TIONS
Reguatons 118, Secton 39.15-1: Surta on Rev. Ru. 55-72
corporatons.
Where a corporaton s merged nto another corporaton durng a
ta abe year, n a statutory merger, such merged corporaton (not the
contnung corporaton), n fng ts edera ncome ta return for
ts short perod mmedatey precedng the merger, s entted to the
fu 25,000 surta e empton aowed by secton 15(b) of the Interna
Revenue Code of 1939, snce there s no provson n the aw for pro-
ratng such e empton where a corporate edera ncome ta return
covers a ta abe year of ess than 12 months.
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207 Regs. 118, 5 39.22 (a)-.
P RT II. COMPUT TION O N T INCOM
S CTION 22(a), G OSS INCOM : G N R L
D INITION
bqt|atonb 118, Secton 39.22(a)-: What Ct Ds 1783
ncuded n gross ncome. /
ncome ta nterna revenue code decson of supreme court
1. Gross Income Puntve Damages fob raud and nttrust
oaton.
Moneys receved as e empary damages for fraud and as the pun-
tve two-thrds porton of trebe damages for voaton of the edera
anttrust aws consttute ta abe ncome under secton 22(a) of the
Interna Revenue Code of 1939.
2. Decson Reversed.
Decson of the Unted States Court of ppeas for the Thrd
Crcut, 211 . 2d 928, affrmng 18 T. C. 860 and 19 T. C. 637,
reversed.
Supreme Court of the Unted States
Commssoner of Interna Revenue, pettoner, v. Genshaw Gass Company and
Wam Godman Theatres, Inc.
On wrt of certorar to the Unted States Court of ppeas for the Thrd Crcut
March 28,1905
Mr. Chef ustce Warren devered the opnon of the Court.
Ths tgaton nvoves two cases wth ndependent factua backgrounds yet
presentng the dentca ssue. The two cases were consodated for argument
before the Court of ppeas for the Thrd Crcut and were heard en banc.
The common queston s whether money receved as e empary damages for
fraud or as the puntve two-thrds porton of a trebe damage anttrust recovery
must be reported by a ta payer as gross ncome under secton 22(a) of the In-
terna Revenue Code of 1939.1 In a snge opnon, 211 . 2d 928, the Court of
ppeas affrmed the Ta Court s separate rungs n favor of the ta payers. 18
T. C. 860, 19 T. C. 637. ecause of the frequent recurrence of the queston and
dfferng nterpretatons by the ower courts of ths Court s decsons bearng
trpon the probem, we granted the Commssoner of Interna Revenue s ensung
petton for certorar. 3 8 U. S. 813.
The facts of the cases were argey stpuated and are not In dspute. So far
as pertnent they are as foows:
Commssoner v. Gcnshaw Gass Co. The Genshaw Gass Company, a Penn-
syvana corporaton, manufactures gass bottes and contaners. It was engaged
n protracted tgaton wth the artford- mpre Company, whch manufactures
machnery of a character used by Genshaw. mong the cams advanced by
Genshaw were demands for e empary damages for fraud and trebe damages
for n|ury to ts busness by reason of artford s voaton of the edera ant-
trust aws. In December, 19 7, the partes concuded a settement of a pendng
tgaton, by whch artford pad Genshaw appro matey 800,000. Through
a method of aocaton whch was approved by the Ta Court, 18 T. C. 860, 870-
872, and whch s no onger n Issue, t was utmatey determned that, of the
tota settement, 32 ,529.9 represented payment of puntve damages for fraud
and anttrust voatons. Genshaw dd not report ths porton of the settement
53 Stat 9. 63 Stat. 7 . 26 U. 8. C. sec. 22(a). .
or the bneet of Gensbnw n cam for damages from fraud, see Shnutee Monn|acmrmg
Ct. t. artford- mpre Co., 822 U. S. 271 aee- tta Gass Co. v. art|ord-hmptre Co.,
122 . 8 238.
Set artford- mpre Co. v. Unted Statu, 323 U. S 380, 32 , U. S. 570.
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Regs. 118, 39.22(a)-. 208
as Income for the ta year Invoved. The Commssoner determned a defcency
camng as ta abe the entre sum ess ony deductbe ega fees. s prevousy
noted, the Ta Court and the Court of ppeas uphed the ta payer.
Commssoner v. Wam Godman Theatres, Inc. Wam Godman Theatres,
Inc., a Deaware corporaton operatng moton pcture houses n Pennsyvana,
sued Loew s, Inc., aegng a voaton of the edera anttrust aws and seekng
trebe damages. fter a hodng that a voaton had occurred, Wam Godman
Theatres, Inc. v. Loew s, Inc., 150 . 2d 738, the case was remanded to the tra
court for a determnaton of damages. It was found that Godman had suffered
a oss of profts equa to 125,000 and was entted to trebe damages n the
sum of 375,000. Wam Godman Theatres, Inc. v. Loew s, Inc., 60 . Supp.
103, affd, 16 . 2d 1021, cert, dened, 33 U. S. 811. Godman reported ony
125,000 of the recovery as gross ncome and camed that the 250,000 baance
consttuted puntve damages and as such was not ta abe. The Ta Court
agreed, 19 T. C. 637, and the Court of ppeas, hearng ths wth the Genshaw
case, affrmed. 211 . 2d 928.
It Is conceded by the respondents that there s no consttutona barrer to the
Imposton of a ta on puntve damages. Our queston Is one of statutory con-
structon: are these payments comprehended by secton 22(a)
The sweepng scope of the controverted statute s ready apparent:
S C. 22. GROSS INCOM .
(a) Genera Defnton. Gross Income Incudes gans, profts, and
ncome derved from saares, wages, or compensaton for persona servce
of whatever knd and n whatever form pad, or from professons,
vocatons, trades, busnesses, commerce, or saes, or deangs n property,
whether rea or persona, growng out of the ownershp or use of or nterest
n 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. ( mphass added.)
Ths Court has frequenty stated that ths anguage was used by Congress
to e ert n ths fed the fu measure of ts ta ng power. everng v. Cf-
ford, 309 U. S. 331, 33 Ct. D. 1 , C. . 19 0-1, 105 everng v. Mdand
Mutua Lfe Ins., Co., 300 U. S. 216, 223 Ct. D. 1206, C. . 1937-1, 17S Dougas
v. Wcuts, 296 U. S. 1, 9 Irwn v. Gavt, 268 U. S. 161, 166 Ct. D. 10 1, C. .
I -2, (250 1935) . Respondents contend that puntve damages, character-
zed as wndfas fowng from the cupabe conduct of thrd partes, are not
wthn the scope of the secton. ut Congress apped no mtatons as to the
source of ta abe recepts, nor restrctve abes as to ther nature. nd the Court
has gven a bera constructon to ths broad phraseoogy n recognton of the
Intenton of Congress to ta a gans e cept those specfcay e empted. Com-
mssoner v. acobson, 336 U. S. 28, 9 Ct. D. 1712, C. . 19 0-1, 0 everng
v. Stockhoms nskda ank, 293 U. S. 8 , 87-91 Ct. D. 887, C. . III-2, 209
(193 ) . Thus, the fortutous gan accrung to a essor by reason of the for-
feture of a essee s mprovements on the rented property was ta ed In everng
v. ruun, 309 U. S. 61 Ct. D. 1 50, C. . 19 0-1, 112 , Cf. Robertson v. Unted
States, 3 3 U. S. 711 Rutkn v. Unted States, 3 3 U. S. 130 Ct D. 17 2, C. .
1952-1, 9 Unted States v. rby Lumber Co., 28 U. S. 1. Ct. D. 20, C. .
-2, 356 (1931) . Such decsons demonstrate that we cannot but ascrbe
content to the catcha provson of secton 22(a), gans or profts and Income
derved from any source whatever. The mportance of that phrase has been
too frequenty recognzed snce ts frst appearance n the Revenue ct of 1913
to say now that t adds nothng to the meanng of gross ncome.
Nor can we accept respondent s contenton that a narrower readng of secton
22(a) s requred bv the Court s characterzaton of ncome n sner v. Ma-
comber, 252 U. S. 189, 207 T. D. 3010, C. . 3, 25 (1920) , as the gan derved
from capta, from abor, or from both combned. The Court was there en-
See note 1, supra.
38 Stat. 11 , 167.
The phrase was derved from Stratton s Independence, Ltd. v. ousbert, 231 U. S. 309,
15, and Doye v. Mtche rat. Co., 2 7 U. S. 179, 185, two cages construng the Revenue
ct of 1909, 36 Stat. 11, 112. oth ta payers were wastng asset corporatons, one
ben engaged n mnng, the other n umberng operatons. The defnton was apped
by the Court to demonstrate a dstncton between a return on capta and a mere con-
verson of capta assets. Doye v. Mtche ros. Co., supra, at 18 . The queston rased
by the nstant case s ceary dstngushabe.
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209 Regs. 118, 39.22(a)-.
deavorng to determne whether the dstrbuton of a corporate stock dvdend
consttuted a reazed gan to the sharehoder, or changed ony the form, not
the essence, of hs capta Investment. Id., at 210. It was hed thnt the ta -
payer had receved nothng out of the company s assets for hs separate use
and beneft. Id., at 211. The dstrbuton, therefore, was hed not a ta abe
event. In that conte t dstngushng gan from capta the defnton served
a usefu purpose. ut It was not meant to provde a touchstone to a future
gross ncome questons. etterng v. ruun, supra, at 68- 69 Unted States
v. rby Lumber Co., supra, at 3.
ere we have Instances of undenabe accessons to weath, ceary reazed,
and over whch the ta payers have compete domnon. The mere fact that
the payments were e tracted from the wrongdoers as punshment for unawfu
conduct cannot detract from ther character as ta abe ncome to the recpents.
Respondents concede, as they must, that the recoveres are ta abe to the e tent
that they compensate for damages actuay ncurred. It woud be an anomay
that coud not be |ustfed In the absence of cear congressona ntent to say
that a recovery for actua damages Is ta abe but not the addtona amount
e tracted as punshment for the same conduct whch caused the In|ury. nd
we fnd no such evdence of ntent to e empt these payments.
It s urged that reeuactment of secton 22(a) wthout change snce the
oard of Ta ppeas hed puntve damages nonta abe n ghand arms
Corp., 2 . T. . 131 , ndcates congressona satsfacton wth that hodng.
Reenactment partcuary wthout the sghtest aff matve ndcaton that
Congress ever had the ghand arms decson before t s an unreabe n-
dcum at best. everng v. Wshre O Co., 308 U. S. 90, 100-101 Ct. D. 1 2 ,
C. R 1939-2, 213 oshand v. everng, 298 U. S. 1, 7 Ct. D. 112 , C. .
-1, 219 (1936) . Moreover, the Commssoner prompty pubshed hs non-
acquescence n ths porton of the ghand arms hodng and has, before and
snce, consstenty mantaned the poston that these recepts are ta abe. It
therefore cannot be sad wth certtude that Congress ntended to carve an
e cepton out of secton 22(a) s pervasve coverage. Nor does the 195 Code s
egsatve hstory, wth ts reteraton of the proposton that statutory gross
ncome s a-ncusve, M gve support to respondent s poston. The defnton
of gross ncome has been smpfed, but no effect upon Its present broad scope was
ntended. Certany puntve damages cannot reasonaby be cassfed as gfts,
ct Commssoner v. acobson, 336 U. S. 28, 7-52, nor do they come under any
other e empton provson In the Code. We woud do voence to the pan
meanng of the statute and restrct a cear egsatve attempt to brng the
ta ng power to bear upon a recepts consttutonay ta abe were we to say
that the payments In queston here are not gross ncome. See everng v. Md-
and Mutua Lfe Ins. Co., supra, at 223.
Reversed.
Mr. ustce Dougas dssents.
Mr. ustce aban took no part n the consderaton or decson of ths
case.
M0 1-1 Cumuatve uetn 16.
The ong hstory of departmenta rungs hodng persona In|ury recoveres nonta abe
on the theory tbat tbey roughy correspond to a return of capta cannot support e empton
of puntve damages foowng In|ury to property. See 2 Cumuatve uetn 71 1-1
( emuatve uetn 02, 03: II-2 Cumuatve uetn 123 105 -1 Cumuatve uetn
178. 180. Damages for persona n|ury are by defnton compensatory ony. Puntve
damage , on the other hand, cannot be consdered a restoraton of capta for ta aton
IDT ns. .
6 Stat. 3 et ttq. Secton 61(a) of the Interna Revenue Code of 105 , 68 Stat. 17,
U tbe successor to sec. 22(a) of the 1939 Code.
. . en. No. 1337, 83d Cong., 2d ess. a18 S. Rep. No. 1622, 83d Cong., 2d Sess. 168.
u In dscus ng sec. 61(a) of the 105 Code, the ouse Report states :
Th secton corresponds to sec. 22(a) of the 1030 Code. Whe the anguage In e st-
h secton 22(a) has been smpfed, the a-ncusve nature of statutory gross Income
has not been affected thereby. Secton 61(a) Is as broad n scope as sec. 22(a).
Secton 61(a) provdes that gross ncome ncudes a Income from whatever source
dn-ved. Ths defnton Is based upon the 16th mendment and the word Income Is used
to ts consttutona sense. . R. Rep. No. 1 7, supra, note 10, at a18.
vrtuay Identca statement appears n S. Rep. No. 1622, supra, note 10, at 168.
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Regs. 118, 39.22(a)-. 210
Reguatons 118, Secton 39.22 (a)-: What Ct D. 178
ncuded n gross ncome.
ncome ta nterna revenue code decson of supreme court
1. Gkoss Income Insder Profts Recovebed bt Investment
COMP NT.
Insder profts recovered by a corporaton from one of Its
drectors and a sharehoder pursuant to the provsons of the Secur-
tes change ct of 193 and the Investment Company ct of 19 0
consttute ta abe ncome to the corporaton under secton 22(a)
of the Interna Revenue ct of 1939.
2. Decson oowed.
Commssoner v. Genshaw Gass Company and Wam Godman
Theaters, Inc. (U. S. Sup. CL decded March 28,1955) foowed.
3. udgment ffrmed.
udgment of the Unted States Court of ppeas for the Second
Crcut, 211 . 2d 522, affrmng 19 T. C. 581, affrmed.
Supreme Court of the Unted States
Genera mercan Investors Company, Inc., pettoner, v. Commssoner of
Interna Revenue
On wrt of certorar to the Unted States Court of ppeas for the Thrd Crcut
March 28, 1955
Mr. Chef ustce Warren devered the opnon of the Court.
The soe queston presented by ths case s whether a payment s ta abe as
gross ncome when receved by a corporaton pursuant to the nsder profts
provsons of the Securtes change ct of 193 and the Investment Compan
ct of 19 0. Sub|ect to e ceptons not presenty reevant, secton 16(b) of the
Securtes change ct provdes that the proft reazed from certan defned
securtes transactons undertaken by a drector or ma|or stockhoder of the
ssung corporaton sha nure to and be recoverabe by the Issuer. Ths
provson s made appcabe to nvestment companes by secton 30(f) of the
Investment Company ct of 19 0. Under these provsons, pettoner, a regs-
tered cosed-end nvestment company, receved payments totang 170,038.0 .
Ths sum represented the profts accrung to one of pettoner s drectors and
a stockhoder through deangs covered by secton 16(b) the money was pad
over to pettoner on demand and wthout obgaton. The payments were not
reported as ncome on pettoner s ta returns. The Commssoner of Interna
Revenue aowed a 13,000 deducton for ega e penses ncurred n recoverng
the amounts due but asserted a defcency for the baance on the ground that
the recepts consttuted ta abe gans under secton 22(a) of the Interna Revenue
Code of 1939. The Ta Court, 19 T. C. 5S1, and the Court of ppeas for the
Second Crcut, 211 . 2d 522, sustaned the Commssoner s determnaton. We
granted certornr, 3 8 U. S. 812, because of an apparent smarty of ssues here
to those nvoved n Commssoner v. Gcnshatc Gass Co., 211 . 2d 928 (C. .
3d Cr.), and the possbe confct between that case and ths.
1 8 Stat. 881. 15 . S. C. sec. 7ga.
5 Sut. 78 . 15 U. S. C. sec. 80a-.
S Stat. ( . 15 . S. C. sec. 78()
5 Stat. 837, 1G U. S. C. sec. S0a-29.
6 S C. 22. GROSS INCOM .
(a) Genera Defnton. Gross ncome Incudes gans, profts, and Income derved
from saares, wages, or compensaton for persona servce of whatever knd and
In whatever form pad, or from professons, vocatons, trades, busnesses, commerce, or
saes, or deangs n property, whether rea or persona, growng out of the ownershp or
use of or nterest n 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 tchacvcr. ( mphass added.) 03 Stat. 0, 53 Stat. 57 ,
26 U. S. C. sec. 22(a).
8 There was. however, no dsagreement among ower courts whch faced the qneston of
the ta abty of a see. t(h) recovery of nsder profts. See Park tTU/ord Dsters
Corp. v. Unted Sates, 107 . Supp. 0 1 omo ectrc Corp., 12 T. C. M. 1.
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211
Regs. 118, 39.22(a)-
We have ths day decded that the recovery of puntve damages for fraud or
anttrust voaton s reportabe as gross ncome wthn the meanng of secton
22(a). Commssoner v. Genshaw ass Co., ante, p. 12. The reasons whch
dctated that resut are equay compeng here. We see no sgnfcant dfference
In the nature of these recepts whch mght make that rung nappcabe. s
n Ocnshatc, the ta payer reazed the money In queston free of any restrctons
as to use. The payments n controversy were nether capta contrbutons nor
gfts. Cf. Te as Pacfc R. Co. v. Unted States, 268 U. S. 285 Ct. D. 95, C. .
I-1, 263 (1932) . There s no ndcaton that Congress ntended to e empt
them from coverage. In accordance wth the egsatve desgn to reach a
gan consttutonay ta abe uness specfcay e cuded, we concude that the
pettoner s abe for the ta and the |udgment s affrmed.
Mr. ustce Dougas concurs In the resut.
Mr. ustce aran took no part n the consderaton or decson of ths case.
Reguatons 118, Secton 39.22 (a)-: What Rev. Ru. 55-2
ncuded n gross ncome.
Unpad accounts recevabe whch represent compensaton for
persona servces transferred by a ta payer to an rrevocabe trust
for the beneft of hs mnor chd are upon coecton ta abe to the
ta payer-grantor and not to the trust.
dvce has been requested whether accounts recevabe transferred
to an rrevocabe trust created for the beneft of a ta payer s mnor
chd are upon coecton ta abe to the grantor or to the trust.
ta payer whose prncpa source of ncome arses from hs pro-
fessona practce as a surgeon created an rrevocabe trust for a mnor
chd to nsure to hm adequate educatona and other opportuntes
and transferred to the trust annua gfts of seected accounts recev-
abe. The trust agreement provdes that the funds receved upon co-
ecton of the accounts recevabe and the ncome therefrom sha be
accumuated unt the benefcary reaches the age of 21 years or enters
coege, whchever may occur frst, whereupon the prncpa and n-
come are to be pad n reguar nstaments. bank s desgnated to
act as trustee and the ta payer retans none of the rghts of admn-
straton or contro.
Secton 39.22 (a)-1 of Reguatons 118 provdes that gross ncome
ncudes n genera compensaton for persona and professona serv-
ces, busness ncome, profts from saes of and deangs n property,
nterest, rent, dvdends, and gans, profts, and ncome derved from
any source whatever uness e empt from ta by aw.
Payments for persona servces are aways due prmary to the per-
son renderng the servces. e remans the owner of the rght or
tte from whch the ncome sprngs. See . D. Saenger et a. v. Com-
mmoner, 69 ed. (2d) 631 dward . Luce et a. v. urnet, 55 ed.
(2d) 751. When such earnngs are assgned the assgnee takes as
representatve of the assgnor and the earnngs contnue to be ta abe
to hm. In Ueverng v. Pau R. G. orst, 311 U. S. 112, Ct. D. 1 72.
C. . 19 0-2, 206, the Supreme Court sad: The power to dspose or
ncome s the equvaent of ownershp of t. The e ercse of that
power to procure the payment of ncome to another s the en|oyment
and hence the reazaton of the ncome by hm. See aso Lucas v.
Guy C. ar, 281 U. S. I and everng v. Gerad . ubank, 311
U. S. 122, Ct D. 1 73, C. . 19 0-2,209.
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Regs. 118, 39.22 (a)-1. 212
ccordngy, t s hed that unpad accounts recevabe whch rep-
resent compensaton for persona servces transferred by a ta payer
to an rrevocabe trust for the beneft of hs mnor chd are upon co-
ecton ta abe to the ta payer-grantor and not to the trust.
muatons 118, Secton 39.22(a)-: What Rev. Ru. 55-11
ncuded n gross ncome.
( so Secton 23(m), Secton 39.23(m)-
Secton 11 , Secton 39.11 -1.)
Loam s an earthy matera composed of sand and cay and s n-
cuded n the term so n pace for purposes of Revenue Rung 78,
C. . 1953-1, 18. Therefore, proceeds from the sae of oam const-
tute ordnary ncome sub|ect to ad|usted bass depeton.
Reguatons 118, Secton 39.22(a)-: What Rev. Ru. 55-62
ncuded n gross ncome.
resdent aen reportng Income on the cash recepts and ds-
bursements bass must ncude n hs gross ncome the gross recepts
from the sae of catte whch he rased for sae n a foregn country
and whch he sod there subsequent to acqurng resdence In the
Unted States.
dvce has been requested whether a resdent aen, reportng n-
come on the cash recepts and dsbursements bass, must ncude n
hs gross ncome the gross recepts from the sae of catte -whch he
rased for sae n a foregn country and whch he sod there subse-
quent to acqurng resdence n the Unted States, or whether the far
market vaue of the catte at the tme he became a resdent of the
Unted States shoud be used as the bass for computng the gan on
the sae.
Resdent aens of the Unted States are, n genera, ta abe the
same as ctzens of the Unted States, that s, on ther entre ncome
derved from a sources, ncudng ncome from sources wthout the
Unted States. See sectons 39.211-1 and 39.212-1 (a) (2) of Regu-
atons 118. ta payer reportng hs ncome on the cash recepts
and dsbursements bass who rases vestock for the purpose of sae
s requred to ncude n hs gross ncome the gross recepts durng
the ta abe year from the sae of vestock whch was rased durng
the ta abe year or pror years. See secton 39.22(a)-7 of Regua-
tons 118.
In the case of a ta payer reportng ncome on the cash recepts
and dsbursements method who rases vestock for sae, an ncrease
n the vaue of such property s not sub|ect to ta unt gan has been
reazed from the ncrease through some dentfabe event such as a
sae or e change of the property. Where catte were rased outsde
the Unted States and sod there subsequent to the date the owner
became a resdent aen of the Unted States, no part of the ncrease
n the vaue of the catte, whch occurred whe the owner was a
nonresdent as to the Unted States, was sub|ect to edera ncome
ta . Therefore, n the case of a ta payer reportng ncome on the
cash recepts and dsbursements bass, the entre amount of the gan
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213 Regs. 118, 39.22(a)-.
from the sae woud be ta abe n the Unted States n the year n
whch the sae was consummated.
ccordngy, t s hed that a resdent aen, reportng ncome on the
cash recepts and dsbursements bass, sha ncude n hs gross ncome
the gross recepts durng the year from the sae of vestock whch
was rased for sae n a foregn country and whch he sod there sub-
sequent to acqurng resdence n the Unted States.
Reguatons 118, Secton 39.22(a)-: What Rev. Ru. 55-132
ncuded n gross ncome.
Payments are authorzed by the War Cams ct of 19 8, 62 Stat.
12 0, 50 U. S. C. 2005, to be made by the Unted States Government
to a ta payer who was a Prsoner of War, as defned n secton 6 (a)
of the ct by reason of any cams fed by hm under the provsons of
secton 6(b) of that ct for the voaton by the enemy government
by whch he was hed prsoner of war of ts obgaton to furnsh hm
the quantty or quaty of food to whch he was entted as a prsoner
of war under the terms of the Geneva Conventon of uy 27, 1929.
so, payments are authorzed by reason of any cams fed by a
ta payer under the provsons of secton 6(d)(2)( ) and secton
6(d)(2)( ) of the War Cams ct, as added by amendments n
1952, 66 Stat. 7, 50 U. S. C. 2005, for voaton by the enemy govern-
ment of the terms of the Geneva Conventon reatng to abor of
prsoners of war and nhumane treatment of such prsoners. ed,
such amounts receved by a Prsoner of War from the Unted States
Government are n the nature of rembursement for the oss of per-
sona rghts and are not ncudbe n the gross ncome of such n-
dvdua for edera ncome ta purposes.
Reguatons 118, Secton 39.22 (a)-1: What Rev. Ru. 55-135
ncuded n gross ncome.
( so Secton 117(f).)
Natona Savngs onds ssued by the Unted States of Me co are
smar n many respects to Unted States Savngs onds, Seres .
The dscount at whch the bonds are orgnay ssued s hed to con-
sttute nterest whch s ta abe as ordnary ncome under secton
22(a) of the Interna Revenue Code of 1939 when reazed upon re-
dempton. The dscount does not represent an amount receved upon
retrement of the bond wthn the meanng of secton 117(f) of the
Code. See Rev. Ru. 55-136, beow.
Reguatons 118, Secton 39.22 (a)-1: What Rev. Ru. 55-136
ncuded n gross ncome.
( so Secton 117(f).)
Secton 117(f) of the Interna Revenue Code of 1939 appes ony
to amounts receved by reason of redempton of bonds. It does
not appy to the amount of Interest (whether pad In the form of ds-
count or not) whch s receved by reason of hodng the bond. Such
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Regs. 118, 39.22(a)-. 21
Interest or Interest-equvaent payments are ta abe as ordnary In-
come under secton 22(a) of the Code.
Revenue Rung 119, C. . 1953-2, 95, modfed.
dvce has been requested whether the Interna Revenue Servce
w contnue to foow the poston taken n Revenue Rung 119, C. .
11)53-2, 95, wth respect to bonds ssued at a dscount pror to anuary
1,1955.
Revenue Rung 119, supra, hods that the dscount at whch a
Tweve Year Doar Savngs ond of the State of Israe s orgnay
ssued consttutes nterest whch s ta abe as ordnary ncome under
sect on 22 (a) of the Interna Revenue Code of 1939 when reazed upon
redempton. It does not represent an amount receved upon retre-
ment of the bond wthn the meanng of secton 117(f) of the Interna
Revenue Code of 1939.
Secton 117(f) of the Code provdes n part as foows:
or the purposes of ths chapter chapter 1 , amounts receved by the
hoder upon the retrement of bonds, debentures, notes, or certfcates or other
evdences of ndebtedness ssued by a corporaton (ncudng those ssued by a
government or potca subdvson thereof), wth nterest coupons or n regs-
tered form, sha be consdered as amounts receved n e change therefor.
Pror to the enactment of secton 117(f) the gan reazed by the
hoder of a bond, upon ts retrement, consttuted ordnary ncome
whereas the gan reazed from an actua sae or e change of a bond to
a thrd party mmedatey pror to retrement consttuted capta
gan. The egsatve hstory n connecton wth the enactment of
secton 117(f) n the 193 Revenue ct ndcates ceary that Congress
was drectng ts attenton soey to treatng the redempton of a bond
the same as a sae or e change of a bond and dd not comtempate cov-
erng the treatment of nta dscount whch under the aw n effect
pror to 193 . was treated as ordnarv ncome. The commttee re-
ports mpy that Congress was thnkng of amounts receved upon
retrement atogether n terms of amounts whch wroud have repre-
sented gan or oss under secton 111 and secton 112 of the Revenue
ct of 193 .
In Commw oner v. George Peck Ca Ucns, 1 ed. (2d) 82, af-
frmng 1 T. C. 056, acquescence, C. . 19 , 5, the court hed that
the e cess of the amount receved by the ta payer, pursuant to a con-
tract wth Investors Syndcate over the aggregate payments made by
hm for ccumuatve Instament Certfcate consttutes capta gan,
and stated that the certfcate n queston was an evdence of ndebt-
edness smar to a bond or debenture and hence fas wthn the
statutory group governed by secton 117(f).
It has been the pocy of the Interna Revenue Servce to restrct
the appcaton of the Caukns case to cases nvovng the dentca
facts. Ths poston has been reconsdered n the ght of the poston
taken n Revenue Rung 119, supra, . e., that the amount receved
upon the redempton of a bond whch represents orgna or nta
dscount consttutes nterest whch s ta abe as ordnary ncome.
There s no ogca bass n fact or n aw to dstngush the dscount
eement n the ccumuatve Instament Certfcate nvoved n the
Caukns case from the orgna dscount eement nvoved ordnary
n the ssuance of any bonds. ccordngy, the acquescence pubshed
n C. . 19 , 5, has been wthdrawn and a nonacquescence has been
pubshed at page 7 of ths uetn.
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215 Regs. 118, 39.22(a)-.
Revenue Rung 119, supra, s modfed to the e tent that t s n-
consstent wth the vews e pressed heren. The provsons of ths
Revenue Rung w not be apped to amounts receved upon redemp-
ton of ccumuatve Instament Certfcates ssued by Investors
Syndcate whch were purchased durng the perod begnnng Decem-
ber 25, 19 , the date acquescence n the Caukns case was announced
and March 1 , 1955, the date ths Revenue Rung s pubshed n the
Interna Revenue uetn.
egcato s 118, Secton 39.22(a)-: What Rev. u. 55-137
ncuded n gross ncome.
Possbe e cess revenues coected by an eectrc power company
pendng settement by court order of the queston of a dsputed n-
crease n servce rates, are ncudbe for edera ncome ta pur-
poses n gross ncome for the ta abe years n whch such e cess
revenues were receved, even though amounts equvaent to the e -
cess were deposted n a speca bank account sub|ect to the |ont
contro of the company and a bondng company under an agreement
by whch the atter became surety on a bond requred by court order
to be posted by the company n order to secure repayment of the e -
cess coectons, f requred upon utmate settement of the dspute.
dvce has been requested as to the edera ncome ta treatment of
possbe e cess revenues coected under bond by an eectrc power
company pendng settement by court order of the queston of a ds-
puted ncrease n the servce rates coected under the foowng cr-
cumstances.
In 1951 ectrc Company fed a new schedue of eectrc serv-
ce rates wth the State reguatory authorty. The State authorty
mmedatey suspended the takng effect of the rates fed, and n 1952
ssued an order that the schedue of rates fed by the Company be ds-
aowed and dsapproved. y the same order, the authorty ordered
the Company to fe new rates hgher than the rates n effect but ess
than the rates dsapproved. The Company fed a b of compant
n court for a stay of enforcement of the order, and after a bond was
ed wth the court, the court granted a stay of the order ssued by the
reguatory authorty and permtted the schedue of rates fed by the
Company n 1951 to become effectve condtoned upon refund by
the Company to ts customers of any amounts coected n e cess of the
amounts coectbe under the schedues ordered by the reguatory
authorty n the event that such schedues are ater determned to be
vad. The Company proceeded to coect from ts customers there-
after n 1952 and n 1953 at the rate permtted by the court. The
surety company whch e ecuted the bond n the Company s behaf
requred the Company to depost n a speca bank account, sub|ect to
the |ont contro of the Company and of an authorzed representatve
of the surety company, amounts equang the coectons from cus-
tomers n e cess of the sums coectbe accordng to the rates ordered
by the reguatory authorty. s of the end of the Company s 1953
ta abe year, the speca account ncuded a of the e cess revenues
coected under bond durng 1952 and 1953, ess the amount of ncome
ta pad on such e cess revenue for the year 1952.
arnngs under a cam of rght and wthout restrcton as to ther
dsposton, even though t may be camed that the recpent s not
3C 050 56 15
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Rege. 118, 39.22(a)-. 216
entted to retan them, and even though the recpent may st b
ad|udged abe to restore ther equvaent, are ta abe ncome n th
year n whch receved. See North mercan O Consodated
urnet, 286 U. S. 17, Ct. D. 99, C. . I-1, 293 (1932) Unte
States v. Lews, 3 0 U. S. 590, Ct. D. 1738, C. . 1951-1,21. The fn|
of a bond as securty for abty to return e cess revenues paces n
restrcton on the use of the moneys coected See Commssoner
rookyn Unon Gas Co., G2 ed. (2) 505, acquescence, page , th
uetn. The fact that a corporaton ndcated n ts account book
an ntenton not to e ercse ts power of absoute domnon over fund
receved by t n satsfacton of |udgment but sub|ect to be returnee
to the |udgment debtor dd not change the status thereof as ta ab
ncome of the corporaton n the year n whch receved. See Com
mssoner v. amtos Land Co., 112 ed. (2d) 6 8, certorar dene
311 U. S. 679. Moreover, the settng up of a separate bank account t
receve amounts equang the e cess revenues coected by agreemen
wth the bondng company, dd not dffer n ega effect from th
depostng of any other assets of the company as coatera to secur
the bond, nor nterfere wth the company s e ercse of the power o
absoute domnon over the fu amounts coected from the cus
tomers.
In vew of the foregong, t s hed that possbe e cess revenues co
ected by the eectrc power company durng the years 1952 and 195
pendng settement by court order of the queston of a dsputed n
crease n servce rates, are ncudbe for edera ncome ta purpose
n gross ncome for the ta abe years n whch such e cess revenue
were receved, even though amounts equvaent to the e cess were de
posted n a speca bank account sub|ect to the |ont contro of th
company and the bondng company under the crcumstances abov
stated.
Reguatons 118, Secton 39.22 (a)-1: What Rev. Ru. 55-15
ncuded n gross ncome.
( so Secton 23(a) Reguatons 118,
Secton 39.23 (a)-1.)
rea estate deveopment company assesses an annua mantenanc
charge aganst the owner of each resdenta ot n ts deveopmen
n an amount not e ceedng a stated amount for each square foot o
ot area for the purpose of creatng a mantenance fund. Th
mantenance charge s secured by a vendor s en upon each ot an.
s payabe n advance on the frst day of anuary of each year. Th
deveopment company agrees to appy the tota of the funds so co
ected, so far as they are suffcent, toward the mantenance of streets
sdewaks, paths, parks, etc. provdng fre and poce protecton am
garbage and rubbsh coecton and dong any other thng necessar
or desrabe n ts opnon to mantan or mprove the property fo
the genera beneft of the owners of ots wthn the deveopment. I
s agreed that the decsons of the deveopment company sha be fna
so ong as such e pendtures are made n good fath. The annua
mantenance charges may be dscontnued after 15 years f a ma|ort
of the ot owners fe an nstrument wth the County Cerk agreen|
to the abandonment of such charges. n annua baance sheet of th
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217 Regs. 118, 39.22(a)-.
mantenance fund w be furnshed to each ot owner. ed, n vew
of the compete contro and supervson whch the deveopment com-
pany has over the mantenance fund, the assessments aganst the
property owners consttute ta abe ncome to the deveopment com-
pany n the year of recept. owever, any dsbursements made for
the mantenance of streets, etc., fre and poce protecton, garbage
and rubbsh coecton, or other ke servces are deductbe as paTd
or accrued, dependng on the method of accountng empoyed by the
deveopment company. The mantenance charges pad by the ot
owner-resdents are not deemed to be assessed by a potca subdv-
son wthn the purvew of secton 23(c) of the Interna Revenue
Code of 1939 and no deducton therefor s otherwse provded for n
any other secton of the Code or the reguatons. No porton of the
amount assessed s deemed to be a capta e pendture n vew of the
genera and ndrect nature of the benefts whch nure to the ot
owners. Thus, such charges are regarded as persona e penses of such
ot owner-resdents and are not deductbe by them for edera n-
come ta purposes. owever, f the property s converted to renta
property the amount of such charges pad by the ot owners woud
be deductbe as ordnary and necessary (renta) busness e penses.
Reguatons 118, Secton 39.22 (a)-1: What Rev. Ru. 55-23
ncuded n gross ncome.
Income reazed from busness transacted by a corporaton
through the nomna agency of one of ts offcers, actng as purported
soe propretor, s ta abe to the corporaton.
dvce has been requested whether a corporaton s ta abe upon the
ncome from busness transactons whch for convenence are con-
ducted n ts behaf n the name of a soe propretor.
domestc corporaton engaged n foregn trade s unabe to make
drect shpments of goods nto the country under the mport regua-
tons of such country. In order to e ecute the orders receved from the
country and to factate dong busness under the mport regua-
tons the corporaton entered nto a contract wth one of ts offcers
n whch he undertook, under the trade name of a soe propretorshp,
to act wthout compensaton of any knd as the shppng agent for the
corporaton. The soe propretorshp has no capta or operatng e -
penses. shpments are fnanced by the corporaton and a work s
performed by the corporaton empoyees. fnanca transactons
are refected n the books of account of the corporaton. The soe
propretor mantans no accountng records and renders no account to
the corporaton e cept to act as a condut for funds beongng to the
corporaton. Under the contract the soe propretor agreed to trans-
fer to the corporaton a profts reazed from the busness transacted
wth the country, whe the corporaton agreed to be soey respon-
sbe for a cams and osses arsng therefrom.
On the facts presented, from whch t s apparent that the purported
soe propretorshp s purey a nomna partcpant n the busness
transactons, t s hed that the ncome and e penses nvoved are those
of the corporaton and are propery to be reported n ts returns rather
than n those of ts offcer.
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Regs. 118, 39.22(a)-. 218
Reguatons 118, Secton 39.22(a)-: What Rev. Ru. 55-2 5
ncuded n gross ncome.
Compensaton receved by members of the rmed orces of the
Unted States for the frst 00 days of the accrued eave standng to
ther credt at the tme of dscharge, whether such eave accrued
ether on or before ugust 31, 19 0, or subsequent thereto, does not
fa wthn the purvew of the ta -e empt payments for eave as
referred to In secton 7 of the rmed orces Leave ct of 10 0. 60
Stat. 963, as amended, 37 U. S. C. 36 Such compensaton const-
tutes actve servce pay and, as such, s ta abe ncome sub|ect to the
e cuson provded for by secton 22(b) (13) of the Interna Reve-
nue Code of 1939. The compensaton, to the e tent ta abe, Is
sub|ect to the wthhodng of ncome ta at source under secton
1622(a) of the Code.
dvce has been requested whether compensaton receved by
member of the rmed orces of the Unted States upon dscharg
for the accrued eave standng to hs credt at that tme consttute
ta abe ncome for edera ncome ta purposes, or s e empt fron
ta under the provsons of secton 7 of the rmed orces Leave c
of 10 G, 60 Stat. 9G3, as amended, 37 U. S. C. 36.
The ta payer, an rmy captan, was honoraby dscharged fron
the servce n 1953 after 2 years of actve servce n the Unted States
t that tme he was pad for 2 days of unused eave accrued durn
the 2-year perod pror to the date of hs dscharge. e questoner
the ncuson of the payment for such eave n the amount of the Tota
wages shown on the Wthhodng Ta Statement, orm W-2, gve
hm by the rmy.
The pertnent provsons of the rmed orces Leave ct of 19 C
supra, as amended, are as foows:

Secton 3.
(b) Notwthstandng any other provson of ths ct or any other aw c
reguaton, no member of the rmed orces (other than a member on term
na eave on September 1, 19 0) sha be permtted tt accumuate or to hav
to hs credt at any tme after ugust 31,19 6, accumuated or accrued eav
aggregatng n e cess of s ty days, e cept that eave actuay taken durn
any fsca year may be charged to eave accrung durng such fsca yea
wthout regard to such s ty-day mtaton: Provded, That no cash settb
ment sha be made for unused or accumuated eave n e cess of s ty da|
upon dscharge or retrement subsequent to ugust 31, 19 0.
Secton .
(c) ny member of the armed forces dscharged after ugust 31, 19
havng unused accrued eave standng to hs credt at tme of dscharge sha
be compensated for such unused eave n cash on the bass of the base an
ongevty pay, and aowances, appcabe to such member on the date
dscharge ncudng for ensted persons the aowances as provded fc
such ensted persons n subsecton (a) of ths secton: Provded, that v
cash settement sha be made to any member (1) dscharged for the purp
of acceptng a commsson or warrant or enterng nto an enstment n h
respectve branch of the armed forces, or (2) eectng to carry over sue
unused eave to a new enstment In hs respectve branch of the armc
forces on the day foowng date of dscharge.
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219 Regs. 118, 39.22(a)-.
Secton 5.

(b) In any case In whch a member of the armed forces on actve duty on
September 1, 19 (other than a member on termna eave on such date)
has to hs credt on ugust 31, 19 6, accumuated or accrued eave aggre-
gatng n e cess of s ty days, such eave n e cess of s ty days sha be
setted and compensated for ony n the manner provded n secton 6 of ths
ct and f appcaton s made to the Secretary not ater than une 30, 1951.

Secton 6 of the ct provdes for the manner n whch eave desg-
nated by secton 5 of the ct sha be setted and compensated for sec-
ton 5 generay reates to eave accumuated by rmed orces mem-
bers dscharged pror to September 1, 19 6, and to eave n e cess of
CO days accumuated as of ugust 31, 19 6.
Secton 7 of the ct provdes that a amounts pad or payabe
tnder secton 6 of ths ct, n cash, bonds, or both, sha not be as-
sgnabe e cept as provded n subsecton (d) of such secton, sha be
e empt from cams of credtors, ncudng any cam of the Unted
States, and sha not be sub|ect to attachment, evy, or sezure by or
tnder any ega or equtabe process whatever. It further provdes
that a such amounts (e cept nterest n the case of bonds) sha be
e empt from ta aton. See D. C. 793, C. . 19 6-2,189.
s stated n Reguatons 118, secton 39.22(a)-, gross ncome n-
cudes, n genera, compensaton for persona and professona servces,
busness ncome, profts from saes of and deangs n property, n-
terest, rent, dvdends and gans, profts, and ncome derved from
any source whatever uness e empt from ta by aw. In the nstant
case the eave for whch the ta payer was compensated comes wthn
the 60 days to whch he was entted as part of hs basc pay for actve
duty. The pay receved was for ess than 60 days eave accumuated
subsequent to ugust 31, 19 6. The ta payer was not dscharged
pror to that date and therefore he was not pad under secton 6 of the
ct and such payment does not come wthn the e empton granted
n secton 7 of the ct.
In vew of the foregong, t s hed that compensaton receved by
members of the armed forces for the frst 60 days of the accrued eave
standng to ther credt at a tme of dscharge after ugust 31, 19 6,
whether such eave accrued ether on or before ugust 31, 19 6, or
subsequent thereto, does not fa wthn the purvew of the ta -e empt
payments for eave as referred to n secton 7 of the rmed orces
Leave ct of 19 6, as amended, supra 37 U. S. C. 36 . Such compen-
saton consttutes actve servce pay and, as such, s ta abe ncome
sub|ect to the e cuson provded for by secton 22(b) (13) of the
Interna Revenue Code of 1939. The compensaton, to the e tent
ta abe, s sub|ect to the wthhodng of ncome ta at source under
secton 1622(a) of the Code.
Rktaton-s 118, Secton 39.22 (a)-1: What n- Rev. u. 55-313
euded n gross ncome.
( so Secton 22(b)(1) Reguatons 118, Sec-
ton 39.22(b) (1)-1.)
death beneft payment receved by a benefcary under the
terms of a snge premum deferred annuty contract where the
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Regs. 118, 39.22(a)-. 220
annutant (the owner) des pror to the due date of the frst annu-
ty payment s not e empt from edera ncome ta as an amount
receved under a fe nsurance contract pad by reason of the death
of the nsured as provded by secton 22(b)(1) of the Interna
Revenue Code of 1939. ny e cess of the cash surrender vaue
over the amount of the consderaton pad for the contract s not
Incudbe n the gross ncome of the annutant. owever, such
e cess consttutes ordnary Income ta abe to the benefcary n
the year receved.
dvce has been requested whether any part of the amount of
death benet payment made to a bonefcary under the terms of a
snge premum deferred annuty contract upon the death of the annu-
taut, the owner of the contract, pror to the due date of the frst
annuty payment s ncudbe n gross ncome of the annutant or o
the benefcary.
In the nstant case the annutant purchased a snge premum de-
ferred annuty contract from an nsurance company. The contract
provdes that upon the death of the annutant pror to the due date
of the frst annuty payment, f the pocy s then n force, the nsur-
ance company sha pay to the benefcary an amount equa to the con-
sderaton pad for the contract or the cash surrender vaue of the
contract upon the date of death of the annutant, whchever s greater.
The contract nvoved n the nstant case does not nvove any
eement of rsk to the nsurance company wth respect to the death
of the annutant. Compare everng v. dyth LeGerse et a.y -
ecutory state of Cece LeGerse, 312 U. S. 531, Ct. D. 1 01, C. .
19 1-1, 30. On the contrary, death of the annutant emnates the
rsk to the company. Therefore, the amount of the death payment
made to the benefcary s not consdered to be an amount pad by
reason of the death of the nsured wthn the -meanng of secton
22(b) (1) of the Interna Revenue Code of 1939.
ccordngy, t s hed that the amount of the death payment made
to the benefcary s not e empt from edera ncome ta , but that
the e cess of the amount of the death beneft payment over the amount
of the consderaton pad for the contract s ncudbe n the gross
ncome of the benefcary n the ta abe year n whch receved. Such
e cess s not ncudbe n the gross ncome of the annutant.
Reguatons 118, Secton 39.22(a)-: What
ncuded n gross ncome.
Corporate dstrbuton n knd where the earnngs and profts of
the corporaton are suffcent to cover the ad|usted cost of the property
dstrbuted but are nsuffcent to cover ts fu market vaue at the
tme of dstrbuton. See Ct. D. 177 , page 2 8 Ct. D. 1775, page 253.
Reguatons 118, Secton 39.22 (a)-1: What
ncuded n gross ncome.
Refund, by nsurer, of empoyees contrbutons to an annuty pan.
See Rev. Ru. 55-1 , page 302.
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221 Regs. 118, 39.22(a)-2.
Reguatons 118, Secton 39.22 (a)-1: What
ncuded n gross ncome.
Payments receved by nventors before anuary 1, 195 , from the
assgnment or e cusve cense of a patent. See Rev. Ru. 55-58,
page. 97.
Reguato s 118, Secton 39.22(a)-: What
ncuded n gross ncome.
Treatment of apprecated property dstrbuted n parta quda-
ton of trust prncpa. See ev. Ru. 55-117, page 233.
Reguatons 118, Secton 39.22(a)-: What
ncuded n gross ncome.
Date on whch nterest on future payment funds hed by a edera
and bank becomes ta abe ncome. See Rev. Ru. 55-25 , page C2G.
Reguatons 118, Secton 39.22 (a)-1: What n-
cuded n gross ncome.
Treatment, for edera ncome ta purposes of amounts receved by
a ta payer, n accordance wth the terms of an nsurance pocy, as
rembursement, for overhead e penses ncurred by the ta payer durng
proonged perods of n|ury or sckness. See Rev. Ru. 55-26 ,
page 11.
Reguatons 118, Secton 39.22(a)-1: What
ncuded n gross ncome.
Interest on 2y2 percent Treasury onds, Investment Seres -1965.
See Per. Ru. 55- 27 , page 279.
Reguatons 118, Secton 39.22(a)-2: Compen- Rev. Ru. 55-273
saton for persona servces.
The commsson retaned by an nsurance saesman n the form
of reduced costs on an nsurance pocy on hs fe and property,
whch was purchased from an nsurance agency or company, const-
tutes ncome to the saesman. The amount of such commsson
retaned s sub|ect to wthhodng of edera Income ta es. G. C. M.
10 S6, C. . I-1, 1 , (1932), ampfed.
dvce has been requested whether the commsson retaned by an
nsurance saesman on an nsurance pocy whch he purchased on hs
fe and property under the foowng crcumstances consttutes n-
come to hm sub|ect to wthhodng of edera ncome ta es.
In the nstant case, an nsurance saesman, as an empoyee of a
genera nsurance agency who s entted to commssons on poces
ach he ses, purchased poces for hs own protecton on hs fe and
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Regs. 118, 39.22(a)-3. 222
roperty through the agency for whch he works at the prce charged
y the agency for such nsurance, ess the saesman s commsson.
Secton 22(a) of the Interna Revenue Code of 1939, provdes n
part as foows:
Gross Income Incudes gans, profts, and Income derved from saares.
wages, or compensaton for persona servce .
G. C. M. 10 86, C. . I-1,1 (1932), hods that a commsson re-
taned by an agent on hs own fe nsurance pocy s ncome accrung
to the agent due to the fact that an empoyer and empoyee reaton-
shp e sted between the agent and the nsurance company and the
company was under contract to pay the agent commssons on a
poces secured by hm.
The prncpes of G. C. M. 10 86, supra, are equay appcabe to
the facts n the nstant case. There s no rea dstncton merey by-
reason of the fact that here the saesman was an empoyee of an nsur-
ance agency rather than a drect empoyee of an nsurance company.
The agency was authorzed to ssue nsurance contracts for nsur-
ance companes, empoyed ts own saesmen and pad them a comms-
son on each pocy they secured. n empoyer and empoyee reaton-
shp e sted between the nsurance agency and ts saesmen and the
saesmen were entted to a commsson as compensaton for poces
sod by them rrespectve of whether such commsson was receved n
cash or n the form of reduced costs on poces taken through the
agency.
so, there may be nsurance saesmen who mght be consdered n-
dependent contractors. These saesmen, ke other nsurance saesmen,
are aso entted to a commsson on each pocy secured by them as
compensaton for ther servces rrespectve of the manner n whch
receved.
ccordngy, t s hed that the commsson retaned by an nsurance
saesman n the form of reduced costs on an nsurance pocy on hs
fe and property, whch he purchased from an nsurance agency or
company, consttutes ncome to the saesman regardess of whether
the saesman s an empoyee or ndependent contractor. The amount
of such retaned commsson s sub|ect to wthhodng of edera
ncome ta es.
Reguatons 118, Secton 39.22(a)-2: Compen-
saton for persona servces.
Treatment of certan grants and feowshps receved by natonas
of the Unted ngdom n ths country on e change vstor vsas. See
Rev. u. 55-211, page 676.
Reguatons 118, Secton 39.22(a)-3: Compen-
saton pad other than n cash.
Premum pad by an empoyer on a combnaton group term fe
nsurance and group annuty contract for hs empoyees. See Rev.
Ru. 55-193, page 266.
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223 Regs. 118, 39.32(a)-7.
Reguatons 118, Secton 39.22(a)- : Compen-
saton pad n notes.
Secondary nterest coupons on muncpa bonds retaned by brokers.
See Rev. Ru. 55-73, page 236.
PIguatons 118, Secton 39.22(a)-5: Gross
ncome from busness.
Gft of property hed for sae n ordnary course of busness. See
Rev. Ru. 55-138, page 223.
Rgcatons 118, Secton 39.22(a)-7: Gross Rev. u. 55-138
ncome of farmers.
( so Sectons 22(a), 23(a), 23(o), 23(q)
Reguatons 118, Sectons 39.22(a)-5, 39.23
(a)-, 39.23 (o)-, 39.23 (q)-.)
The far market vaue of agrcutura or manufactured products
or property hed for sae n the ordnary course of busness whch
s contrbuted, to an organzaton descrbed n secton 23(o) or
secton 23(q) of the Interna Revenue Code of 1939 s not ncudbe
n the gross ncome of the donor for edera ncome ta purposes.
The far market vaue whch may be deducted from gross ncome
sub|ect to the mtatons contaned n secton 23(o) and spcton
23(q) of the Code w be the repacement cost to the donor n hs
most favorabe market There must be an ad|ustment to nventory
effectng the remova of the donated asset and the costs pertanng
thereto fron the openng nventory n the year of the gft. Items of
cost of the current year appcabe to such property are not deduct-
be by the donor, and smar tems whch have been deducted n
pror years must be removed from the amount of the contrbuton
n order to avod a doube deducton.
I. T. 3O10, C. . 19 8-1,15, revoked.
I. T. 3910, C. . 19 8-1,15, has been reconsdered n the ght of the
decsons n Davd G. Whte v. roderck, 10 ed. Supp. 213, Camp-
bey Prothro, 209 . 2d 331, Mame . arrer v. Commssoner, 15
T. C. 277, and se Soee v. Commssoner, 22 T. C. 59.
I. T. 3910, supra, hods (1) that the far market vaue of agrcutura
products contrbuted by a farmer or other producer to an organzaton
descrbed n secton 23(o) or secton 23(q) of the Interna Revenue
Code of 1939 s ncudbe n the gross ncome of the donor (2) that
fch far market vaue may be deducted from gross ncome, sub|ect to
the mtatons contaned n secton 23(o) and secton 23(q) of the
( ode and (3) that e penses of producton are deductbe under
acton 23(a) (1) ( ) of the Code as ordnary and necessary busness
tpenses.
The foregong rung was based upon the decson of the Supreme
Court of the Unted States n everng v. Pau R. G. orst, 311 U. S.
112, Ct, D. 1 72, C. . 19 0-2, 206. In that case the owner of negot-
abe bonds detached nterest coupons therefrom shorty before ther
due date and devered them as a gft to hs son who procured ther
Payment. The Court hed the donor ta abe on the amount receved
by the son. In support of the concuson reached, the Court sad n
part:
though the donor here, by the transfer of the coupons, has precuded any pos-
sbty of hs coectng them hmsef he has nevertheess, by hs act, procured
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Regs. 118, 39.22(a)-7. 22
payment of the Interest, as a vauabe gft to a member of bs famy. Such a use
of hs economc gan, the rght to receve ncome, to procure a satsfacton whch
can be obtaned ony by the e pendture of money or property, woud seem to be
the en|oyment of the ncome whether the satsfacton s the purchase of goods at
the corner grocery, the payment of hs debt there, or such nonmatera satsfac-
tons as may resut from the payment of a campagn or communty chest contrbu-
ton, or a gft to hs favorte sou. The en|oyment of the economc bene-
ft accrung to hm by vrtue of hs acquston of the coupons s reazed as com-
petey as t woud have been f he had coected the Interest n doars and e -
pended them for any of the purposes named.
In the Whte case, the court had under consderaton a chartabe
contrbuton n 10 7 of wheat by a farmer to an organzaton descrbed
n secton 23(o) of the Interna Revenue Code. Ths wheat had been
rased by the ta payer durng 19 6 and 19 7 and a costs ncurred n
rasng, harvestng, and storng the crops of wheat, of whch wheat so
donated was a part, had been aowed as deductons for those years.
The court hed that the ta payer dd not reaze any ta abe ncome or
gan by the donaton and dsposton of the wheat.
In the Prothro case the ta payer, who was a member of a partner-
shp engaged n ranchng, donated to the Young Men s Chrstan
ssocaton by an nstrument n wrtng one hundred head of caves
to be seected by the donee s agent from a arger number. The caves
were kept for sae n the ordnary course of busness of the partnershp
and the e pense of rasng them had been aowed as a deducton.
contract was entered nto, to whch the donee was a party, for the sae
of the entre herd of caves. The caves were kept n a common pasture
unt devery to the purchaser, at whch tme the proportonate part
of the proceeds of sae was pad by the purchaser to the Young Men s
Chrstan ssocaton. The appeate court, affrmng the |udgment
of the ower court, hed that rased vestock do not consttute ta abe
ncome per se, that when the caves were transferred by gft they were
not ncome to the ta payer, and that no ncome was reazed by hm as
a resut of the transacton.
The same prncpe has been apped by the courts to gfts wthn
a famy unt n the arrer and SoRee cases.
In the ght of the above cases t foows that no ncome s reazed
by a farmer or other producer by reason of hs contrbuton of farm
or other products to an organzaton descrbed n secton 23(o) or
secton (q) of the Interna Revenue Code of 1939.
Wthn the mts provded by secton 23(o) and secton 23(q) of
the Interna Revenue Code of 1939 a donor s aowed a deducton for
contrbutons to an organzaton descrbed theren whch, n the case
of property other than money, s the far market vaue of the property
at the tme of the contrbuton or gft. Reguatons 118, secton 39.23
(o)-(g). or ths purpose, the far market vaue w be consdered
to be the amount whch the donor woud have to spend n hs most
favorabe market to mmedatey repace the donated property. Ths
represents the true measure of the detrment he has sustaned by the
contrbuton.
In many nstances, the ta payer has deducted at east some tems
representng cost of the donated property n the years n whch such
costs were pad or ncurred. In other cases nvovng nventorabe
property, such costs have been refected as part of the cost of goods,
thereby, under permssbe accountng methods, provdng n effect
for the deducton of such costs upon sae of the goods. Ths has been
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225 Regs. 118, 39.22(a)-7.
done on the assumpton that such costs have been a part of the costs
ncurred n the busness of the ta payer. When the goods become
the sub|ect of a contrbuton or gft they are n effect removed from
the busness operatons of the ta payer and such costs attrbutabe
thereto shoud kewse be emnated from busness costs. If, for
e ampe, the products or goods were grown or manufactured n the
rear of the contrbuton, such costs aocabe thereto shoud be ds-
aowed. If the cost has been pad or ncurred n an earer year and
s refected n cost of goods carred n openng nventory of the year
n whch the gft s made, t becomes evdent that an nventory ad-
|ustment shoud be made as of the tme of the gft of property ncuded
theren to refect the remova from the busness of the donated asset
and ts cost, thereby counterbaancng the reducton of ncome caused
by the remova of the goods from the ousness.
To aow a donor who s n busness both the chartabe deducton
for property removed from busness and donated to charty and a
deducton for tems of cost of such property woud aow hm, at east
n part, a doube deducton wth respect to the same goods. The a-
owance of such a doube deducton does not propery refect ncome
for ta purposes. Compare Chares Ifed Co. v. ernandez, 292
U. S. 62, Gt. D. 819, C. . III-1, 139 (193 ) Mergott Co. v. Com-
nmoner, 176 ed. (2d) 860. One, who under permssbe account-
ng methods refects n nventory the cost tems of pror years
pertanng to the donated asset, must remove such costs from busness
channes by the ndcated nventory ad|ustment, wth the resut that
no deducton for such costs has ever been made or w be made. That
s, f such costs so refected n nventory tota 500 and the far market
Taue of the donated goods s 1,000 at the tme of the gft, the aow-
abe contrbuton deducton s 1,000, and the nventory ad|ustment
resuts n no further aowance for the 500 cost, thereby emnatng
any possbty of doube deducton.
It foows that smar costs ncurred by one treatng them as de-
ductbe tems when pad or ncurred must reduce the contrbuton
deducton by any such deductons taken n pror years. To hod other-
wse woud make the tota amount deducted respectng a donated
asset varabe dependng upon the accountng method used. Ths
woud ceary be contrary to the we recognzed prncpe that any
permssbe accountng method must ceary refect tems of ncome
and deductons. If one has deducted 500 n costs of the donated
property, the aowance of a contrbuton deducton of the fu 1,000
woud gve hm a tota deducton amountng to 1,500. Thus, whe
the cost of a donated property s mmatera to a contrbuton deduc-
ton measured by ts far market vaue at the date of gft, f tems of
cost of the donated property have been deducted n pror years, the
aowabe contrbuton deducton must be reduced accordngy n
order to avod a doube deducton as respects the same asset.
In vew of the foregong, t s hed that the foowng treatment
shoud be accorded contrbutons or gfts of property, other than
money, to chartabe organzatons mentoned n secton 23 (o) and
cton 23 (q) of the Interna evenue Code:
(1) The far market vaue of agrcutura or manufactured prod-
pets or property hed for sae n the ordnary course of busness whch
s contrbuted to an organzaton descrbed n secton 23 (o) or secton
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Regs. 118, 39.22(a)-21. 226
23 (q) of the Interna Revenue Code of 1939 s not ncudbe n th
gross ncome of the donor for edera ncome ta purposes.
(2) The far market Taue of the donated property as of the date
of the gft w consttute an aowabe deducton under secton 23 ( o)
and secton 23 (q) of the Code sub|ect to the mtatons provdec
theren, and for ths purpose the far market vaue w be the repace
ment cost to the donor n hs most favorabe market.
(3) There must be an ad|ustment to nventory effectng the re
mova of the donated asset and the costs pertanng thereto from th
openng nventorv n the year of the gft. Items of cost of th
current year appcabe to such property are not deductbe by tn
donor, and smar tems whch nave been deducted n pror year-
must be removed from the amount of the contrbuton n order t
avod a doube deducton.
ccordngy, I. T. 3910, C. . 19 8-1,15, s hereby revoked.
eguatons 118, Secton 39.22 (a)-7: Gross Rev. Ru. 55-18S
ncome of farmers.
Where farmers use the accrua bass of accountng for farm ncomt
for edera ncome ta purposes, and use separate Schedue D ( orn
10 0), to compute gan or oss on the sae of anmas born and rase
on the farm, and hed for a perod of more than 12 months for breed
ng purposes, they shoud enter n coumn 6, of such separate schedue
Cost or other bass, of an amount representng nventory vaue o
the anmas at the begnnng of the ta abe year pus any addtona
norma costs ncurred wth respect to such anmas durng the ta
abe year. owever, n such cases, the nventory vaue of such anma
at the begnnng of the ta abe year must be emnated from th
openng nventory for such year. The addtona norma costs n
curred wth respect to such anmas for the ta abe year must b
emnated from the farm e penses for such year.
Reguatons 118, Secton 39.22(a)-21: Trust Rev. Ru. 55-3
ncome ta abe to the grantor as substanta
owner thereof.
Income of a trust Is ta abe to the grantor under secton
39.22(a)-21(c) of Reguatons 118, where the grantor has a re-
versonary nterest n the corpus whch w revert to hs estate
at hs death, f hs fe e pectancy, accordng to approprate
Unted States fe and actuara tabes, Is ess than 10 years or 15
years, whchever s appcabe.
dvce has been requested wth respect to the sgnfcance of th
grantor s fe e pectancy n determnng the ta abty of trust r
come where the grantor has retaned a reversonary nterest n th
corpus or ncome.
Under the provsons of secton 39.22(a)-21(c) of Reguatons 11
ncome of a trust s ta abe to the grantor where the grantor has
reversonary nterest n the corpus or ncome therefrom whch w o
may reasonaby be e pected to take effect n possesson or en|oymen
ether () wthn 10 years commencng wth the date of the transfe
or () wthn 15 years commencng wth the date of the transfer
1 Ths Revenue Rung has been ampfed by Revenue Rung 55-736, I. R. . 55-51, p.
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227 Regs. 118, | 39.22(b) (1)-1.
the ncome s or may be payabe to a benefcary other than a donee
descrbed n secton 23 (o) of the Interna Revenue Code of 1939 and
f any one or more of certan powers of admnstraton over the trust
corpus or ncome are e ercsabe soey by the grantor or spouse, or
both. The above secton aso provdes that where the grantor s re-
versonary nterest s to take effect n possesson or en|oyment by
reason of some event other than the e praton of a specfc term of
years, the trust ncome s nevertheess attrbutabe to hm f such
event s the practca equvaent of the e praton of a perod ess
than 10 or 15 years as the case may be.
ccordngy, t s hed that where the grantor has a fe e pectancy
based on approprate Unted States fe and actuara tabes of ess
than 10 or 15 years, whchever s appcabe, and he estabshes a
trust wth the corpus revertng to hs estate at hs death, the ncome
therefrom s ta abe to the grantor snce the specfc event provded
n the trust nstrument, that s, the fe e pectancy of the grantor,
s the practca equvaent of the e praton of a perod of ess than
10 or 15 years,
S CTION 22(b). GROSS INCOM : CLUSIONS ROM
GROSS INCOM
egcato s 118, Secton 39.22(b) (1)-1: Lfe Rev. Ru. 55-63
nsurance amounts pad by reason of the death
of the nsured.
Payments to benefcares or estates of staff members and mtary
observers ked n the servce of the Unted Natons are e empt from
edera Income ta under secton 22(b)(1)( ) of the Interna
Revenue Code of 1939 where the Unted Natons purchases fe nsur-
ance, stng tsef as benefcary, soey to meet such payments and
s. n effect, ony a condut of the Insurance to such benefcares or
estates.
dvce has been requested whether payments made to the benef-
cares or estates of staff members and mtary observers ked n the
servce of the Unted Natons are e empt from edera ncome ta
under secton 22(b)(1)( ) of the Interna Revenue Code of 1939
where the Unted Natons purchases fe nsurance, stng tsef as
benefcary, soey to meet such payments and s, n effect, ony a con-
dut of the nsurance to the benefcares or estates.
Pursuant to a pocy adopted by the Unted Natons, the benef-
cares of staff members and mtary observers ked n the servce of
the Unted Natons n specfed areas are guaranteed certan death
beneft payments. Soey for the purpose of meetng such payments,
the Unted Natons purchases nsurance on the ves of ts staff mem-
bers and mtary observers, stng tsef as benefcary, and n the
event of ther death the proceeds whch the Unted Natons receves
from the nsurer are pad ether to the benefcares of the decedent or
to hs estate dependng upon the crcumstances nvoved.
Secton 22 (b) (1) of the Code of 1939 provdes n part, as foows:
b) cursons bom Gross Imcome. The foowng tems sha not be n-
cuded n gross ncome and sha be e empt from ta aton under ths chapter
Uaapter 1 of the Code :
(1) Lu Insurance, etc. mcunts receved
( ) under a fe nsurance contract, pad by reasons of the death of
the nsured
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Regs. 118, 39.22(b)()-2. 228
In Raymond . Moore et a. v. Commssoner, 5 . T. . 1073, ac-
quescence, C. . 19 3,17, whch nvoved the purchase of combnaton
fe nsurance and annuty contracts on the ves of certan empoyees
by a trustee for the purpose of makng death beneft payments to the
benefcares of the empoyees, the Unted States oard of Ta ppeas
sad, n consderng the death benefts feature of the poces to deter-
mne the ta abty of the nsured empoyees, that from a practca
standpont the trustee was no more than a condut from the nsurer
to the nsured s benefcares. In substance, each pettoner, nsofar as
the death benefts feature was concerned, stood n the same reaton to
the pocy as f t were taken out by hm upon hs fe, and therefore,
was ta abe on the premum aocabe to the death benefts.
In vew of the foregong, t s hed that payments made to benef-
cares or estates of staff members and mhtary observers ked n
the servce of the Unted Natons are e empt from edera ncome
ta under secton 22(b) (1) ( ) of the Code as the proceeds of fe
nsurance where the Unted Natons purchases fe nsurance, stng
tsef as benefcary, soey to meet such payments and s, n effect,
ony a condut of the nsurance to the benefcares or estates.
Reguatons 118, Secton 39.22(b) (1)-1: Lfe
nsurance amounts pad by reason of the
death of the nsured.
Death benefts derved from a combnaton group term fe nsur-
ance and group annuty contract, the premums on whch were pad
by the empoyer. See Rev. Ru. 55-193, page 266.
Reguatons 118, Secton 39.22(b) (1)-1: Lfe
nsurance amounts pad by reason of the
death of the nsured.
Death beneft payments receved by a benefcary under the terms
of a snge premum deferred annuty contract where the annutant
des pror to the due date of the frst annuty payment. See Rev
Ru. 55-313, page 219.
Reguatons 118, Secton 39.22(b) ()-2: Death Rev. Ru. 55-G
payment by empoyer amounts pad by reason
of the death of an empoyee.
Instament payments made to benefcares of deceased empoyee
partcpants of a penson or proft-sharng pan quafed under
secton 165(a) of the Interna Revenue Code of 1939 are e cudabe
from gross ncome of the benefcary, n an aggregate amount not n
e cess of 5,000, when such payments are specfcay desgnated
as a death payment, pad ony by reason of the death of the em-
poyee and represent amounts n whch the partcpant had a for-
fetabe nterest mmedatey pror to death. Where such
nstament payments represent an amount n whch the partcpant
had a nonforfetabe nterest as we as an amount In whch he
had a forfetabe Interest at the tme of hs death, the benefcary
may e cude from hs gross ncome each year a pro rata porton
of such payments, unt an aggregate of 5,000 s e cuded.
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2129 Regs. 118, 39.22(b) ()-2.
dvce has been requested whether a or a porton of nstament
payments made to benefcares of deceased empoyee partcpants of
a penson or proft-sharng pan quafed under secton 165(a) of the
Interna Revenue Code of 1939 are e cudabe from gross ncome of
the benefcary under secton 22(b) (1) ( ) of the Code.
Secton 22(b) of the Interna Revenue Code of 1939 provdes n
part as foows:
(b) ct.t|sons kom Gross Income. The foowng Items sha not be In-
cuded n gross ncome and sha be e empt from ta aton under ths chapter
chapter 1 of the Code :
(1) Lre nsurance, etc. mounts receved
( ) under a contract of an empoyer provdng for the payment of
such amounts to the benefcares of an empoyee, pad by reason of the
death of the empoyee whether n a snge sum or otherwse
The aggregate of the amounts e cudbe under subparagraph ( ) by
a the benefcares of the empoyee under a such contracts of any one
empoyer may not e ceed 5,000.
Secton 39.22(b) ()-2 of Reguatons 118, reatng to death pay-
ments by an empoyer of amounts pad by reason of the death of an
empoyee, provdes n part, that the e cuson under secton 22(b) (1)
( ) of the Code does not appy to amounts wth respect to whch the
deceased empoyee possessed, mmedatey pror to hs death, a non-
forfetabe rght to receve the amounts whe vng.
Treatment of payments receved attrbutabe to a forfetabe n-
terest and to payments receved attrbutabe to both a forfetabe and
a nonforfetabe nterest s best ustrated by the two foowng
e ampes:
rst, assume (1) the amount payabe s 10,000, (2) the benefcary
eects to take payment n twenty-fve monthy nstaments of 00,
and (3) the empoyee s rght, mmedatey pror to hs death, to re-
ceve the amount whe vng was forfetabe. Under ths assump-
ton the empoyee woud not have been entted to any porton of the
10,000 upon termnaton of servces other than by death. Under the
reguatons the 10,000 s a death payment, the e cudabe porton of
whch s mted by aw to an amount not n e cess of 5,000. In ths
case, the benefcary may e cude from gross ncome the monthy pay-
ments receved or made avaabe under the pan, on account of the
death of the empoyee, unt such payments equa 5,000.
Secondy, assume that the tota payment s 20,000 and the empoyee
had a nonforfetabe nterest, as e paned above, of 1 ,000, and that
6,000 represented the forfetabe porton of the 20,000 payment
whch the benefcary w receve at the rate of 2,000 per year for 10
years. Snce the 20,000 payabe n ths e ampe s comprsed of both
ta abe and nonta abe ncome and the benefcary eects to receve
the aggregate over a perod of years, t s deemed that the tota amount
receved each year conssts of nonta abe ncome (death beneft) and
ta abe ncome. Under these crcumstances the benefcary may e -
cude from hs gross ncome each year, unt 5,000 s e cuded, that
proporton of the tota payments receved n a ta abe year whch
bears the same rato to such tota payments as the amount representng
the forfetabe nterest ( 6,000) bears to the aggregate amount pay-
abe ( 20,000) under the pan. The e cess of the payments receved
each year over the amount e cudabe s ta abe as provded under
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Regs. 118, 39.22(b) ()-2.) 230
secton 22(b) (2) of the Code. Usng the amounts n the foregong
assumpton, t w be noted that 6,000/20,000 or 3/10 2,000, or
C00, s e cudabe each year for 8 years, and that 200 of the 2,000
payment for the nnth year s e cudabe.
Reguatons 118, Secton 39.22(b) ()-2: Death Rev. Ru. 55-7
payment by empoyer mounts pad by
reason of the death of an empoyee.
( so Secton 39.22 (b) (2) -2.)
mounts not In e cess of 5,000, pnd under a group annuty
eontrnct by an nsurance company on behaf of an empoyer to the
benefcares of deceased empoyees, are e cudabe from the gross
ncome of the benefcares under secton 22(b) (1)( ) of the In-
terna Revenue Code of 1939, f under the terms of the contract wth
the empoyee (not rescnded before death) or the provsons of the
pan provdng for such payments, the payment s specfcay
desgnated and ntended as a death payment made ony by reason
of the death of the empoyee. The e cuson s not appcabe, for
nstance, to a payment made upon death from the reserve under a
group auuuty contract whch had been or woud have been apped
to purchase an mmedate or deferred annuty for the empoyee to
whch he woud have had a rght n the event he had separated
from the servce of hs empoyer mmedatey pror to hs death.
dvce has been requested whether the words wefare fund and
trust as used n secton 39.22(b) ()-2(b) of Reguatons 118, re-
atng to the e cuson from gross ncome of amounts up to 5,000
pad to empoyees benefcares by an empoyer, are ustratve of
the means by whch benefts may be pad but not e cusve of other
means of ndrect payment, such as payments made under group an-
nuty contracts.
mounts pad as death benefts under group annuty contracts of
the type here consdered do not e ceed the reserve (or accumuated
premums) wth respect to the annuty benefts beng funded for each
covered empoyee, and are not fe nsurance wthn the purvew of
secton 22(b)(1)( ), but may be e cudabe n an amount not n
e cess of 5,000 under secton 22(b) (1) ( ) f they meet the requre-
ments of that secton.
The e cuson from gross ncome provded by secton 22(b) (1) ( )
of the Interna Revenue Code of 1939, may appy n the case of a
death beneft pad to the benefcary of an empoyee under a group
annuty contract f the payment s made pursuant to an e press con-
tract between the empoyer and the empoyee. Under secton
39.22(b) (1)-2(c) of Reguatons 118 an e press contract s deemed
to e st between an empoyer and an empoyee when there s an estab-
shed pan of the empoyer (or program havng the effect of a pan)
communcated to hs empoyees, whch pan has not been rescnded be-
fore the death of an empoyee. or ths purpose a group annuty
contract, the terms of whch have been communcated to the empoyees
of an empoyer, s deemed to consttute an estabshed pan, and a
payment by an nsurance company under such a contract s deemed to
be made on behaf of the empoyer whose empoyees t covers.
The appcaton of such e cuson, however, s sub|ect to the prov-
sons of secton 39.22(b) ()-2(d) (1) of Reguatons US, whch ds-
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231 Regs. 118, | 39.22(b) ()-2.
tngushes death benefts from amounts whch do not quafy as such,
such as uncoected saary, payments for unused eave, and amounts
pad by or on behaf of an empoyer to the survvor of a deceased re-
tred empoyee as a survvor s annuty, as foows:
(d)(1) The e cuson from gross Income provded by ths secton Is mted
soey to those amounts pad by or on behaf of an empoyer whch, by the terms
of the contTact wth the empoyee or by the provsons of the pan provdng for
such payments, are specfcay desgnated and ntended as a death payment, pad
ony by reason of the death of the empoyee. The e cuson does not appy to
amonnts wth respect to whch the deceased empoyee possessed, mmedatey
pror to hs death, a nonforfetabe rght to receve the amounts whe vng.

It s apparent that a payment to be e cudabe under secton
22(b) (1) ( ) of the Code must be a desgnated amount pad ony by
reason of the death of an empoyee.
In vew of the foregong, t s hed that amounts not n e cess of
5,000, pad under a group annuty contract of the type here consd-
ered by an nsurance company on behaf of an empoyer to the bene-
fcary of a deceased empo| ee, are e cudabe from the gross ncome
of the benefcary under secton 22(b) (1) ( ) of the Interna Revenue
Code, f under the terms of the contract wth the empoyee (not re-
scnded before death) or the provsons of the pan provdng for such
payments, the payment s specfcay desgnated and ntended as a
death payment made ony by reason of the death of the empoyee
The e cuson s not appcabe, for nstance, to a payment made upon
death from the reserve under a group annuty contract whch had been
or woud have been apped to purchase an mmedate or deferred an-
nuty for the empoyee to whch he woud have had a rght n the
event he had separated from the servce of hs empoyer mmedatey
pror to hs death.
Reguatons 118, Secton 39.22(b) ()-2: Death Rev. Ru. 55-228
payment by empoyer amounts pad by reason
of the death of an empoyee.
mounts, not n e cess of 5,000, pad by an empoyer under an
estabshed survvorshp beneft pan to the benefcares of em-
poyees dyng whe empoyed by the ta payer and pror to retre-
ment, meet the requrements of secton 22(b) (1) ( ) of the Interna
Revenue Code of 1939. Such payments are e cudabe from the
gross ncome of the benefcares n accordance wth that secton.
dvce has been requested whether amounts, not n e cess of 5,000,
ad by an empoyer under an estabshed survvorshp pan to the
enefcares of deceased empoyees, are e cudabe from the gross
ncome of the benefcares.
In the case presented, the empoyer has a survvorshp beneft pan
under whch the empoyee, to be egbe for the benefts of the pan,
(1) sha have 20 years of servce wth the empoyer, (2) sha make
a desgnaton of benefcary n accordance wth the pan and (3) sha
de n the actve servce of the empoyer before retrement. The pan
further provdes that the empoyer sha provde a beneft n an amount
equa to twce the annua rate of pay of the deceased empoyee and
88 050 56 16
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Regs. 118, 39.22(b)(2)-. 232
that a benefcary must survve the empoyee n order to receve bene-
fts. The empoyee may desgnate a contngent benefcary to receve
the beneft f the prmary benefcary predeceases the empoyee. The
empoyer reserves the rght at any tme to termnate, wthdraw, or
modfy the pan n whoe or n part, but a beneft whch has once
accrued n consequence of the death of an empoyee w be pad
n accordance wth the terms of the pan on the date of death. The
empoyer may termnate the empoyment of an empoyee as freey and.
wth the same effect as f the pan were not n operaton. No contr-
butons were made by empoyees to the pan.
Secton 39.22(b) ()-2 of eguatons 118 provdes n part that
amounts, not n e cess of 5,000, pad by an empoyer n 1951 and ater
years n pursuance of an e press contract to the estate or to a bene-
fcary of an empoyee, by reason of the empoyee s death, sha be
e cuded from the gross ncome of such benefcary. The e cuson s
mted soey to those amounts pad by or on behaf of an empoyer
whch, by the terms of the contract wth the empoyee or by the pro-
vsons of the pan provdng for such payments, are specfcay
desgnated and ntended as a death payment, pad ony by reason of
the death of the empoyee. The e cuson does not appy to amounts
wth respect to whch the deceased empoyee possessed, mmedatey-
pror to hs death, a nonforfetabe rght to receve the amounts whe
vng. See aso secton 39.1C5-7 of Reguatons 118.
In the nstant case the empoyees nvoved dd not have any Tested
rghts n the pan and the death payments were specfcay desgnated
and ntended as death payments, pad ony by reason of the death of
the empoyees.
In vew of the foregong, t s hed that amounts pad by the em-
poyer under ts estabshed survvorshp beneft pan to the bene-
fcares of empoyees dyng whe empoyed by the ta payer and pror
to retrement meet the requrements of secton 22(b) (1) ( ) of the
Interna Revenue Code of 1939. ccordngy, such amounts, not n
e cess of 5,000, are e cudabe from the gross ncome of the bene-
fcares. If the aggregate amounts pad by the empoyer to two or
more benefcares e ceed 5,000, the 5,000 e cuson sha be appor-
toned among the benefcares n the same proporton that the amount
receved by each benefcary bears to the tota amounts pad by the
empoyer.
Reguatons 118, Secton 39.22 (b) (2)-1: Lfe Rev. Ru. 55-3 9
nsurance endowment contracts amounts
pad other than by reason of the death of
the nsured.
or the purpose of computng the aggregate premums or consdera-
ton pad for an endowment contract under the provsons of secton
22(b) (2) ( ) of the Interna Revenue Code of 1939, any porton of
the tota premum pad -whch s attrbutabe to other benefts, such
as a dsabty ncome beneft, s not to be ncuded as a part of the
tota premum pad for the endowment contract. Compare state of
I onc/ W/a Non v. Commssoner, IS T. C. 205.
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233 Regs. 118, 39.22(b)(3)-.
Reguatons 118, Secton 39.22 (b)(2)-2: nnu- Rev. Ru. 55-388
tes.
( so Secton 1000 Reguatons 108, Secton
865.)
Ta payer pad 30a doars to a chartabe organzaton wth an
agreement on the part of the organzaton to pay an annuty of 2
doars per year to the ta payer and hs spouse and to the survvor
for fe. The annuty payments are to be dvded equay between
ta payer and hs spouse durng ther |ont ves. The present vaue
of the annuty, computed n accordance wth recognzed annuty tabes,
s n e cess of the 30a doars pad therefor. ed, such transacton
consttutes a purchase of an annuty resutng n nether a gan nor a
oss to the ta payers. The 30a doars pad for the contract s con-
sdered to be the consderaton pad for the annuty and payments
receved pursuant to the agreement are sub|ect to ta under the rues
provded for the ta aton of annutes. urther, snce the present
vaue of the annuty, computed n accordance wth recognzed annuty
tabes, s n e cess of the amount pad therefor no chartabe deducton
s aowabe. so, the ta payer has made a gft to hs spouse, wthn
the meanng of secton 1000 of the Code, of that porton of the 30a
doars pad for the annuty aocabe to her, computed n accordance
wth recognzed annuty tabes.
Reguatons 118, Secton 39.22(b) (2)-2: nnu-
tes.
Payments by nsurance company on behaf of empoyer to bene-
fcares of empoyees under group annuty contracts. See Rev. Ru
55-7 , page 230.
Reguatons 118, Secton 39.22(b) (2)-2: n-
nutes.
Ta abty of proceeds of annuty contracts surrendered by bene-
fcary of a partcpant n an empoyees trust e empt under secton
165(a) of the Interna Revenue Code of 1939. See Rev. Ru. 55-298,
page 39 .
Reguatons 118, Secton 39.22(b) (2)-5: m-
poyees annutes.
nnuty benefts derved from a combnaton group term fe nsur-
ance and group annuty contract, the premums on whch were pad
by the empoyer. See Rev. Ru. 55-193, page 2G6.
Reguatons 118, Secton 39.22(b) (3)-: Gfts Rev. Ru. 55-117
and bequests.
( so Sectons 22(a), 113(a) Reguatons 118,
Sectons 39.22(a)-, 39.113(a) (5)-.)
parta dstrbuton In knd, n accordance wth the terms of a
w, of trust prncpa whch has apprecated n vaue, does not re-
sut n ta abe Income. ass of such property to the benefcary
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Regs. 118, 39.22 (b)(3)-. 23
for edera ncome ta purposes w be the vaue of the property
as of the date of death of the decedent as apprased for edera
estate ta purposes or the vaue as apprased at the optona vau-
aton date for such purposes.
dvce has been requested wth respect to the treatment, for edera
ncome ta purposes, of 20 shares of stock to be dstrbuted from the
prncpa of a trust n accordance wth the terms of a w whch set
up such trust.
In the nstant case a trust was formed from the resdue of an estate
as provded n the w of the decedent. The w drects that the net
ncome of the trust be pad to the benefcary unt such benefcary
sha reach a specfed age, at whch tme she s to receve one-fourth
of the corpus or prncpa of the trust as t s vaued at that tme. The
baance of the prncpa s to be retaned n the trust and the net ncome
therefrom dstrbuted to the benefcary for the ne t 5 years at whch
tme the trust w termnate and the benefcary w receve the re-
manng trust prncpa.
The w further provdes that the trustees may, where they are re-
qured to dvde any property nto shares or parts or to dstrbute the
same, make such dvson or dstrbuton n knd or n money, or party
n knd and party n money, and to that end to aot specfc securtes
or other property, rea or persona, or an undvded nterest theren, to
any share or part.
The benefcary of the trust has now attaned the specfed age and
s entted to receve a one-fourth dstrbuton of trust prncpa pres-
enty vaued at 60 doars. The trustees propose to transfer to the
benefcary 20 shares of stock presenty vaued at 15a doars, whch
shares had been ncuded n the decedent s gross estate for edera
estate ta purposes at 1 doars.
Secton 22(b) (3) of the Interna Revenue Code of 1939 provdes
that the vaue of property acqured by gft, bequest, devse, or nhert-
ance sha not be ncuded n gross ncome.
Where certan securtes had apprecated n vaue whe n the hands
of a testamentary trustee, the dstrbuton of such securtes n knd by
the trustee at ther far market vaue n payment of a pecunary
egacy was hed to have resuted n ta abe ncome to the trust. See
Sarah P. Susman v. aton, 15 . Supp. 113, affrmed 83 ed. (2d)
1019, certorar dened, 299 IT. S. 573 Wam . enan r. et a
Trustee v. Commssoner, 111 ed. (2d) 217. In these cases the
transfer of securtes n satsfacton of the pecunary egacy was con-
sdered to consttute a sae or e change whereby the trustee reazed
a gan on the dsposton of the securtes.
The proposed dstrbuton n the nstant case, however, s not n
satsfacton of an obgaton of the trust for a defnte amount of cash
or equvaent vaue n securtes, but s rather n the nature of a parta
dstrbuton of a share of the trust prncpa. ccordngy, there s
no sae or e change nvoved. See O. D. 667, C. . 3, 52 (1920).
In vew of the above, t s hed that nether the trustees nor the
benefcary w reaze ta abe ncome by the dstrbuton and recept
of the stock.
or edera ncome ta purposes the bass of the stock to the bene-
fcary w be the vaue of the property as of the date of death of the
decedent as apprased for edera estate ta purposes or the vaue as
apprased at the optona vauaton date for such purposes.
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235 (Regs. 118, 39.22(b) (3)-,
muatons 118, Secton 39.22(b) (3)-: Gfts Rev. Ru. 55-31
and bequests.
Certan awards specfed beow, admnstered by the mercan
Chemca Socety, are gfts, made n recognton of past achevements
or present abtes, and the amonnts of such awards are e cudabe
from the gross Income of the recpents under secton 22 (b) (3) of the
Interna Revenue Code of 1939.
The mercan Chemca Socety annuay admnsters a number of
awards, shown beow, for scentfc achevement n varous feds of
chemstry research:
mercan Chemca Socety ward for Nucear ppcatons n
Chemstry
mercan Chemca Socety ward n Pure Chemstry
eckman ward n Chemca Instrumentaton
orden ward n the Chemstry of Mk
sher ward n naytca Chemstry
rtzche ward
Garvan Meda (God Meda)
Ipateff Prze:
The enda Company ward n Cood Chemstry
Ly and Company ward n oogca Chemstry
Chares Lathrop Parsons ward
Pau-Lews Laboratores ward n nzyme Chemstry
Precson Scentfc Company ward n Petroeum Chemstry
Presty Meda (God Meda)
Scentfc pparatus Makers ward n Chemca ducaton.
Most of the awards consst of cash together wth an aowance for
traveng e penses to the meetng at whch the awards are presented.
Two awards are granted not oftener than once n every three years.
The awards are non-compettve, the prmary requste for the awards
beng that the recpents must have done outstandng work n, or
have made an outstandng contrbuton to, the partcuar fed of
chemstry for whch the award s desgnated. In some of the awards,
the ony other requrements are resdency n the Unted States or
Canada, and certan age mtatons. No substanta future servces
are requred of the recpents as a condton to recevng the awards.
canddate for an award may be nomnated by any member of the
Socety, a canvassng commttee for award nomnatons operates to
assure that no outstandng canddate s overooked, and a commttee of
e perts n the fed of each award seects the recpent.
Secton 22 (b) (3) of the Interna Revenue Code of 1939 provdes, n
part, that the vaue of property acqured by gft sha be e cuded from
gross ncome. gft s generay defned for edera ncome ta
purposes as a transfer of property from one person to another, for
whch transfer there s no consderaton or compensaton. If there s
consderaton, a vad gft s not effected.
Snce the recpents of the above-descrbed awards are seected by
an award commttee wthout any acton on the recpents part, the
nomnatons made by any member of the Socety are an ad to the
commttee and are not acceptances n behaf of a recpent of an offer
to partcpate n a contest. The awards are made n recognton of
past achevements or present abtes, and are, therefore, wthn the
cass of ta -free gfts referred to n Leroy . Robertson v. Unted
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Regs. 118, 39.22(b) ( )-. 236
States, 3 3 U. S. 711, Ct. D. 17 6, C. . 1952-2, 66. See aso Revenue
Rung 5 -110, C. . 195 -1,28, wth respect to a Putzer prze award
for dstngushed edtora wrtng.
ccordngy, t s hed that the foregong cash awards admnstered
by the mercan Chemca Socety are gfts, made n recognton of
past achevements or present abtes, and the amounts of such awards
are e cudabe from the gross ncome of the recpents under secton
22(b) (3) of the Internatona Revenue Code of 1939.
Reguatons 118, Secton 39.22(b) (3)-: Gfts Rev, Ru. 55-330
and bequests.
The cts approved December 17,1919, 1 Stat. 367, as amended, 10
U. S. C. 903, and une , 1920, 1 Stat. 812, at page 82 , as amended,
3 IT. S. C. 9 3, respectvey, provde, n genera, for gratutous pay-
ments to wdows, chdren, or other dependent reatves of offcers and
ensted members of the reguar rmy and reguar Navy (ncudng
the reguar Marne Corps) who de whe on actve duty. It s pro-
vded that such gratuty payments w be equa to 6 months pay
at the rate receved by such deceased members at the tme of ther
death. arous other cts have provded that the gratuty payments
sha aso be made to members of the r orce and, under certan
condtons, to members of the varous reserve components of the rmed
orces of the Unted States who de whe on actve duty. IIfd, the
amounts pad gratutousy to the benefcares of a deceased offcer or
ensted member of the rmed orces, under the condtons descrbed
heren, represent a gft by the Unted States and are, therefore, e -
cudabe from the gross ncome of such benefcares under the prov-
sons of secton 22(b) (3) of the Interna Revenue Code of 1939.
Reguatons 118, Secton 39.22(b) (3)-1: Gfts
and bequests.
mounts receved by a retred mnster or rabb. See Rev. Ru.
55- 22, page 1 .
Reguatons 118, Secton 39.22 (b) ( ) -1: Inter- Rev. Ru. 55-73
est upon State obgatons.
( so Secton 22(a) Reguatons 118, Secton
39.22 (a)- .)
Secondary or Cass Interest coupons whch are detached and
retaned by brokers of certan muncpa bonds are consdered to be
the brokers commsson and do not represent nterest as that
term s generay used. The far market vaue of such coupons s
ncudbe n gross ncome of the broker when receved. ny gan
reazed by the broker from the sae of the coupons pror to maturty
consttutes ordnary ncome. ny payments receved by the broker
from the muncpaty upon maturty of the coupons n e cess of
such far market vaue prevousy reported consttute ordnary
ncome.
dvce has been requested whether the proceeds, receved by brokers
of muncpa bonds, of a secondary or Cass nterest coupon, whch
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237
Regs. 118, 39.22(b)( )- .
s attached to certan muncpa bonds handed by such brokers, are
e cudabe from gross ncome under secton 22(b) ( ) of the Interna
Revenue Code of 1939.
Certan muncpa bonds are now ssued wth two seres of coupons
attached. Cass coupons are sod wth the bonds. Cass
coupons, havng an eary maturty date, are detached and retaned by
the brokers. The coupons may be sod at a dscount to banks,
ndvduas or other brokers.
s n the orthodo one-coupon seres bonds, brokers pace bds wth
the ssung authorty on the bass of tota nterest cost over the fe of
the ssue. One-coupon seres bonds are usuay sod at a premum
whch represents the brokers commsson. The two coupon seres
bonds are sod at par, but at a reduced nterest rate. The over-a
nterest cost to the muncpaty woud be the same for both types of
bonds. Smary, the net yed to the nvestor woud be the same.
ampe. or purposes of ustraton assume that a muncpaty
has for ssue one-coupon bonds of 1,000 par vaue bearng nterest at
2 percent maturng 10 years from the date of ssue.
The nterest rate on a comparabe two-coupon bond woud be 2.8
percent on the coupons and .2 percent on the coupons matur-
ng 1 year from date of ssue.
One Coupon
ond
Two Coupon
ond
Par vaue
1000.
20.
1000.
Premum representng brokers commsson
Investors cost
1020.
20.
1000.
rokers Commsson
Cash
20.
Interest cost to muncpaty for fe of bonds
coupons
300.
280.
20.
Tota nterest cost
300.
300.
Met yed to nvestor for fe of bonds
300.
20.
280.
Net yed
280.
280.
Secton 22(b)( ) of the Code provdes generay that nterest on
obgatons of a State, Terrtory, or any potca subdvson thereof,
orthe Dstrct of Coumba s e empt from ncome ta .
The usua mport of the term nterest s the amount whch one
has contracted to pay for the use of borrowed money. Od Coony
Raroad Co. v. Commssoner, 28 U. S. 552, Ct. D. 5G, C. . I-,
27 (1932).
stuaton smar to that under consderaton here s present n the
case of . Gates Loyd v. Commssoner, 15 ed. (2d) 6 2, certorar
dened, 329 U. S. 77. There, a syndcate woud purchase od out-
standng bonds, e change them for new refundng bonds wth
and coupons attached, detach the coupons, se the bonds
wth coupons attached to nvestors and se the coupons to
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Regs. 118, 39.22(b)( )-. 238
a bank at a dscount. In hodng the proceeds from the coupons
to be ta abe, the court sad n part:
nay, the Syndcate s money was Invested In the Cty bonds for but an In-
defnte, short perod of tme n an amost smutaneous operaton through
whch the Syndcate bought and hed the new refundng bonds, detached the
coupons and then sod both the bonds and coupons to dfferent purchasers.
Obvousy, the Syndcate coud not have, smutaneousy, a return of ts capta
nvestment and compensaton for the use of such money. Consequenty, we
cannot concude ogcay that the Syndcate receved the 6 7,630.38 as nterest
on the new Cty bonds.
Wth respect to the queston whether the payment to the ta payer
for servces rendered n ta -free bonds, nstead of cash money, ren-
dered the ncome thus receved, e empt from ta aton, the court, n
the case of oseph G. tner v. Lcderer, 63 ed. (2d) 877, sad n part:
f the ta was assessed, not upon the medum of payment, but upon
ncome from wages or saary, t foows as a matter of aw that the ta was
e a. The ncome of the appeant was ta abe and ths coud not be rendered
nonta abe by beng pad wth ta -free bonds.
Secton 39.22(a)- of Reguatons 118 provdes n part as foows:
Notes or other evdences of ndebtedness receved n payment for servces
consttute ncome to the amount of ther far market vaue.
Under the ong estabshed poston of the Interna Revenue Servce
notes and other evdences of ndebtedness receved n payment for
servces are ncudbe n gross ncome to the e tent of ther far market
(dscounted) vaue.
In vew of the above, t s hed that the far market vaue of the so-
caed coupons shoud be ncuded n the gross ncome of the
broker for the ta abe year n whch such coupons are receved. ny
gan reazed by the broker from the sae of the coupons pror to
maturty consttutes ordnary ncome and s ncudbe n gross n-
come when receved. ny payments receved by the broker from the
muncpaty upon maturty of the coupons n e cess of such far
market vaue prevousy reported consttute ordnary ncome.
Reguatons 118, Secton 39.22(b) ( )-: Inter- Rev. Ru. 55-75
est upon State obgatons.
The Macknac rdge uthorty, Lansng, Mchgan, was created
as a body corporate and an agency and nstrumentaty of the State of
Mchgan by ct No. 21 of the Pubc cts of 1950. y ct No. 21
of the Pubc cts of 1952, as amended by ct No. 1 1 of the Pubc
cts of 1953, the uthorty s authorzed and empowered to con-
struct and operate a brdge e tendng from the Upper Pennsua to the
Lower Pennsua of Mchgan, wth the necessary factes appurte-
nant thereto. The uthorty s empowered to ssue revenue bonds,
payabe soey from revenues derved from ownershp and operaton
of the brdge, and to f , revse, mpose and coect tos, fees, rents
and charges and to enter nto contracts for the use of the brdge
servces and factes so as to make such revenues generay suff-
cent at a tmes to pay a operatng, repar and mantenance e -
penses e cept to the e tent that such e penses may be n whoe or n
part cared for by the State ghway Department, to pay prncpa
and nterest on the bonds. ed, the Macknac rdge uthorty of,
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239 Regs. 118, 39.22(b) (15)-I.
Lansng, Mchgan, s a potca subdvson wthn the meanng of
secton 22(b)( ) of the Interna Revenue Code of 1939. ccordngy,
nterest on the bonds ssued by such uthorty s e empt from edera
ncome ta . See Commssoner v. state of e ander . Shamberg,
m ed. (2d) 998, Ct D. 16 8, C. . 19 5, 335, certorar dened, 323
U. S. 792 and Commssoner v. state of Carone Whte, 1 ed.
(2d) 1019, Ct. D. 16 7, C. . 19 5, 65, certorar dened, 323 U. S. 792.
Reguatons 118, Secton 39.22(b) ( )-: Inter- Rev. Ru. 55-76
est upon State obgatons.
The Mane Turnpke uthorty s a body corporate and potc cre-
ated by an act of the Legsature of the State of Mane, Chapter 69
of the Prvate and Speca Laws of 19 1. Pursuant to the above ct,
as subsequenty amended, the uthorty s authorzed and empowered
to construct, mantan and operate, n ntegra operatng unts, a turn-
pke, together wth a connectng tunnes, brdges, approaches, over-
passes and underpasses necessary to provde an a-weather hghway
between the southwestern and northeastern sectons of the State of
Mane, and to ssue turnpke revenue bonds, payabe soey from tos,
to pay the cost of such constructon. The uthorty s aso empowered
to acqure by purchase, or by condemnaton, n order to nsure m-
medate possesson, such ands, rghts, easements, franchses and other
property as t may deem necessary to the constructon of the turnpke.
ed, the Mane Turnpke uthorty s a potca subdvson wthn
the meanng of secton 22(b)( ) of the Interna Revenue Code of
1939. ccordngy, nterest on bonds ssued by such uthorty s
eempt from edera ncome ta . See Commssoner v. state of
e ander . Shamberg, 1 ed. (2d) 998, Ct. D. 16 8, C. . 19 5,
335, certorar dened, 323 U. S. 792 Commssoner v. state of Caro-
ne Whte, 1 ed. (2d) 1019, Ct. D. 16 7, C. . 19 5, 65, certorar
dened, 323 U. S. 792.
egcatons 118, Secton 39.22(b) ( )-1: Interest
upon State obgatons.
Ta abty of nterest on bonds or notes ssued by the Genesee a-
ey Regona Market uthorty set up by the Legsature of the State
of New York pursuant to Chapter 20, 1951 Laws of New York ef-
fectve March 31,1951. See Rev. Ru. 55-150, page 1 .
egcatons 118, Secton 39.22(b) (15)-1: Pay- Rev. Ru. 55- 7
ments to encourage e poraton, deveopment,
and mnng for defense purposes.
( so Secton 23(m), Secton 39.23(m)-.)
auage aowances granted by the tomc nergy Commsson
for the transportaton of uranum ore from the mne to the custom
m or purchase depot, to the e tent that costs thereof do not e -
ceed the aowance, are not consdered n arrvng at the repre-
sentatve market or fed prce of the ore for percentage depeton
purposes. owever, where the costs do e ceed the aowance, the
e cess must be used to reduce such representatve market or fed
prce.
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Regs. 118, 39.22(b)(15)-1. 2 0
Deveopment aowances, whch are not handed as oans or grants
speefk-ny made or arranged for before e poraton and deveop-
ment work s undertaken, are ta abe n the year of recept and,
snce they are bused on producton, are depetabe.
dvce has been requested (1) whether hauage aowances granted
by the tomc nergy Commsson for the transportaton of uranum
ore from the mne to the custom m or purchase depot shoud be
taken nto consderaton n arrvng at the representatve market or
fed prce for percentage depeton purposes, and (2) whether de-
veopment aowances, whch are not handed as oans or grants, but
are pad on a unt bass as ores are devered to purchase depots, con-
sttute an addton to gross ncome and are sub|ect to depeton.
The tomc nergy Commsson pays a f ed prce for a ore pro-
duced wthn a hundred mes of the purchase depot pus an addtona
hauage aowance to cover transportaton to the depot rather than
pay a f ed prce for ore at the purchase depot or custom m. The
Commsson s the ony purchaser of uranum ore and t sets a prce
for the ore wth a vew to treatng ake a producers wthn one
hundred mes of the purchase depot.
Where a hauage aowance s suffcent to cover transportaton costs
the depetabe gross ncome for uranum producers s the tomc
nergy Commsson s purchase prce pad for the ore wthout ad-
dton of the hauage aowance, and the net ncome for the percentage
depeton mtaton s that purchase prce, ess mne operatng costs.
If the hauage aowance e ceeds the hauage cost, the proft s or-
dnary ncome from an actvty other than mnng. Where, however,
the hauage costs e ceed the aowance, such e cess must be used to
reduce the depetabe gross ncome.
These resuts are ustrated beow, (1) where transportaton costs
e ceed aowances, and (2) where aowances e ceed costs:
() (2)
acs ncome ( RCprces, premum and bonuses). 50, 000 50, 000
Other ncome ( C hauage aowances) 10,000 10,000
Tota gross ncome... 00,000 60,000
Mne operatng costs. 20,000 20,000
ctua hauage costs 15, 000 8, 000
35, 000 28, 000
Net ncome before depcton 25,000 32,000
owabe depeton (see computaton). 6,750 7,500
Ta abe net ncome 18,250 2 ,500
Depeton computaton 11 (b) ( )
Saes ncome from mncra1.. 50,000 50,000
Income from hauage 10,000 10,000
Cost of hauage 15,000 8,000
cess of cost over ncome 5,000 0
Depetabe gross ncome 5,000 50,000
Operatng costs 20,000 20,000
Net ncome from property 25, 000 30, 000
60 of net ncome 12,500 15,000
15 of gross ncome (aowabe) 6,750 7,500
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2 1 22(b).
In vew of the above, t s hed that hauage aowances granted
by the tomc nergy Commsson for the transportaton of uranum
ore from the mne to the custom m or purchase depot, to the e tent
that costs thereof do not e ceed the aowance, are not to be taken nto
consderaton n arrvng at the representatve market or fed prce
of the ore for percentage depeton purposes. owever, where the
costs do e ceed the aowance, the e cess must be used to reduce such
representatve market or fed prce.
Wth respect to the ssue of deveopment aowances, secton
22(b) (15) of the Interna Revenue Code of 1939 provdes for the
e cuson from gross ncome of certan amounts receved for the en-
couragement of e poraton, deveopment, or mnng of crtca and
strategc mneras or metas.
Secton 39.22(b) (15)-1 of Reguatons 118 provdes n part that
secton 22(b) (15) of the Code s appcabe ony to amounts (1)
whch are pad to a ta payer () by the Unted States or by an agency
or nstrumentaty of the Unted States () as a grant, gft, bounty,
bonus, premum, ncentve, subsdy, oan, or advance () for the
encouragement of e poraton for, or deveopment or mnng of, a
crtca and strategc mnera or meta and (v) pursuant to or n
connecton wth an undertakng by the ta payer to e pore for, or
deveop or produce, such mnera or meta and to e pend or use any
amounts so receved for the purpose and n accordance wth the terms
and condtons upon whch such amounts are pad, whch undertakng
has been approved by the Unted States or by an agency or nstru-
mentaty of the Unted States. .
Deveopment aowances here consdered are consstenty made on
a unt bass as the ores are devered to the purchase depots. They
are not handed as oans or grants specfcay made or arranged for
before the e poraton and deveopment work s undertaken as pro-
vded for n secton 22(b) (15) of the Code. ccordngy, t s hed
that deveopment aowances, whch are not handed as oans or grants,
are ta abe n the year of recept and, snce they are based on pro-
ducton, are depetabe,
( so Secton 1621 Reguatons 120, Rev. Ru. 55-88
Secton 06.207.)
Treatment for edera Income ta purposes of retred pay re-
ceved by a member of the unformed servces of the Unted States
retred pror to October 1, 19 9 who eected under the provsons of
the Career Compensaton ct of 19 9, 63 Stat. 802, to receve retred
pay computed under the methods provded by such ct.
I. T. 017, C. . 1950-2, 12, ampfed.
urther questons have been presented wth respect to the treatment
for edera ncome ta purposes of retred pay receved by retred
members of the unformed servces under the provsons of the Ca-
reer Compensaton ct of 19 9, 63 Stat. 802. dvce has aso been re-
quested reatve to the wthhodng of ta under secton 1622 of the In-
terna Revenue Code of 1939 from such retrement payments.
Secton 22(b) of the Interna Revenue Code of 1939 reatng to e -
cusons from gross ncome provdes n part as foows:
(5) Compensaton for n|ures or sckness. amounts re-
ceved as a penson, annuty, or smar aowance for persona n|ures or
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5 22(b). 2 2
sckness resutng from actve servce n the rmed orces of any country

Secton 02 of the Career Compensaton ct of 19 9, supra, sets
forth the requrements to quafy for dsabty retrement pay. Un-
der ths secton t s necessary that the percentage of dsabty n ac-
cordance wth the eterans dmnstraton ratng schedue be 30 per-
cent or more to entte a member or members to dsabty retrement
pay uness he has at east 20 years of actve servce n whch case the
percentage of dsabty may be ess than 30 percent. Where the mem-
ber has competed ess than 8 years of actve servce he sha not be e-
gbe for any dsabty retrement pay regardess of percentage of
dsabty e cept when the dsabty resuts from an n|ury not the re-
sut of ntentona msconduct or wfu negect of such member
or was the pro mate resut of the performance of actve duty.
Secton 02(h) of the ct reads as foows:
That part of the dsabty retrement pay computed on the bass of years of
actve servce whch s n e cess of the dsabty retrement pay that a member
woud receve f such dsabty pay were computed on the bass of percentage of
dsabty sha not be deemed to be a penson, annuty, or smar aowance for
persona n|ures or sckness resutng from actve servce n the armed servce
n the armed forces of any country wthn the meanng of secton 22(b) (5) of
the Interna Revenue Code, as amended.
Secton 11 of the Career Compensaton ct, supra, provdes sub-
stantay that pursuant to such reguatons as the Presdent may pre-
scrbe certan members or former members of the unformed servces
retred pror to October 1, 19 9 for physca dsabty and who are
now recevng or are entted to receve retrement pay for physca
dsabty may eect, wthn the 5 year perod foowng October 1,
19 9,
( ) To quafy for dsabty retrement pay under the provsons of ths ct
and, dependent on hs quafcaton, sha be entted to receve ether the ds-
abty retrement pay or the dsabty severance pay prescrbed n ths tte

or
( ) To receve retred pay or retrement pay computed by one of the two
methods contaned n secton 511 of the ct:
member or former member of the unformed servces retred for
physca dsabty pror to October 1,19 9, who eects to have hs re-
tred pay or retrement pay computed by one of the two methods con-
taned n secton 511 of the ct may receve (a) the monthy retred
pay, retaner pay, or equvaent pay n the amount authorzed for such
members and former members by provsons of aw n effect on the day
mmedatey precedng the day of enactment of ths ct,
or (b) monthy retred pay, retrement pay, retaner pay, or equvaent
pay equa to 2y2 per centum of the monthy basc pay of the hghest
ederay recognzed rank, grade or ratng whether under a permanent
or temporary appontment, satsfactory hed, by such member or
former member as determned by the Secretary concerned and whch
such member, former member, or person woud be entted to receve
f servng on actve duty n such rank, grade, or ratng, mutped by
the number of years of actve servce credtabe to hm.
The questons presented are set forth beow: Reference to the
ct means the Career Compensaton ct of 19 9, supra,
1. W a member heretofore retred for physca dsabty who eects to have
hs retred pay computed n accordance wth one of the two methods set out n
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2 3 ( 22(b).
ecton 511 of the ct be abe for edera ncome ta es wth respect to any part
of such retred pay
ssume that a member who was prevousy retred for dsabty re-
sutng from actve servce eects to have hs retred pay computed n
accordance wth one of the two methods set out n secton 511 of the
ct:
(a) If he eects to have hs dsabty retred pay computed n the
amount authorzed therefor by provsons of aw whch were n effect
pror to October 12, 19 9, the pay s e empt under the provsons of
secton 22(b)(5) of the Code.
(b) If he eects to have hs dsabty retrement pay computed on
the bass of years of actve servce, t w, under the provsons of
secton 02(h) of the ct, be e empt under secton 22(b) (5) of the
Code to the e tent that t does not e ceed the dsabty retred pay
that he woud have receved f such pay were computed soey on the
bass of dsabty. The e empton granted by secton 22(b)(5) of
the Code does not appy to that part of the dsabty pay computed on
the bass of years of actve servce whch s n e cess of the pay that he
woud receve f t were computed soey on the bass of percentage of
dsabty.
2. W a ta abe porton of a ump sum receved under an eecton retroactve
to October 1, 19 9, be ta abe n (a) the year t s made, (b) the year when the
ump sum s receved, or (c) shoud t be aocated to the pror year or years
for whch pad
Secton 2 of the Code provdes n part that a tems of gross n-
come sha be reported for the ta abe year n whch receved by the
ta payer uness under the methods of accountng permtted by secton
1 of the Code any such amounts are to be propery accounted for as
of a dfferent perod. Inasmuch as a member or a former member
woud not have a ega rght to the addtona ncome pror to hs
eecton the ta abe porton of the ump sum payment shoud be n-
cuded n hs gross ncome for the year m whch t s receved f he s
on the cash bass and n the year of eecton f he s on the accrua bass.
3. W an eecton retroactve to October 1, 19 9 for the purpose of changng
compuaton of dsabty retrement pay or the retred or retaner pay, be aso
retroactve so as to change the ta abe status of such pay or e ampe:
who was retred pror to October 1, 19 9, for physca dsabty has been re-
cevng 550 a month nonta abe retred pay. On October 1, 1953 he eects to
quafy for dsabty retrement pay and on the bass of 30 years of actve duty s
entted to 716.06 a month (2 percent tmes 95 .75 basc pay under the ct
tmes 30) dsabty retrement pay. s percentage of dsabty at the tme of
hs retrement n accordance wth eterans dmnstraton ratng schedue s
determned as 30 percent. Under secton 02(b) of the ct 286. 3 of s ds-
abty retrement pay woud be e cuded from gross ncome ( 95 .75 tmes 30
percent) and 29. 3 a month woud be ncuded as part of hs gross ncome.
woud receve a ump sum payment n 1953 of 7,970.88 representng 8 tmes the
dfference between hs prevous pay of 550 and hs newy determned pay of
716.06 a month. owever, he has treated the 550 a month receved for the
-year perod as nonta abe ncome. If the ta abe status of s dsabty re-
trement pay s retroactvey changed, he woud have been entted durng the
-year perod to an aggregate e cuson of ony 13,7 9.6 whereas he actuay
e cuded an aggregate of 26, 00.00 from gross ncome durng the -year perod.
The amount of e empt retrement pay ( 550 per month) receved
by under pror aw for the perod pror to the date of the eecton,
October 1,1953, was propery treated as e empt from edera ncome
ta under secton 22(b) (5) of the Code and the e empton thereof
w not be dsturbed for the years or months pror to the eecton.
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22(b). 2
The amount of the new retrement pay ( 716.06 per month) receved
for perods subsequent to the date of the eecton s e empt to the
e tent that t does not e ceed the percentage of dsabty pay
( 286. 3 per month), and the baance ( 29.63 per month) s sub|ect
to ta n accordance wth the provsons of secton 02(h) of the ct
The e tent to whch the statutory ncrease n the retrement pay for
the perod pror to the date of the eecton, October 1,1953, s ta abe
depends on the e tent to whch the new pay based on years of servce
e ceeds (1) the percentage of dsabty pay or (2) the e empt pay
receved under pror aw, whchever s greater. The atter tem, snce
t s aready e empt under a pror aw, cannot be dsregarded n
makng the comparson for the purpose of secton 02(h) of the ct.
Thus, n the case of , snce the e empt pay under pror aw, 550,
e ceeds hs percentage of dsabty pay, 286. 3, the dfference of
106.06 per month ( 716.06, new pay, mnus 550, prevousy e empt
pay) for 8 months (the perod from October 1, 19 9, to October 1,
1953), or 7,970.88 ( 166.06 tmes 8), the entre amount of the ump
sum payment s ta abe n 1953 when receved. owever, had the
e empt percentage of dsabty pay e ceeded the e empt pay re-
ceved under a pror aw t s the proper amount to be compared wth
the new pay n determnng the mtaton appcabe under secton
02(h) of the ct to the retroactve pay receved for the perod pror
to the eecton as we as for the perods subsequent to the eecton.
. The ct of May 27, 19 , 58 Stat. 230, authorzes a member entted to re-
ceve retrement pay for mtary servce to wave as much of such retrement
as he may be entted to receve as a penson or compensaton under aws ad-
mnstered by the eterans dmnstraton. See I. T. 3739, C. . 19 5, 61. Sup-
pose n the case ustrated n queston 3 waved 90.00 of hs dsabty retre-
ment pay n order to receve a penson n ke amount from the eterans d-
mnstraton under the above-cted aw. s rate of dsabty at the tme of hs
retrement s determned at 30 percent. W he under secton 02(h) of the ct
be requred to report as hs gross ncome for edera ncome ta purposes 29.63
or ony 339.63 The 90 a month penson receved from the eterans dmns-
traton s, of course, nonta abe ncome.
e w be requred to report 29.63 and may e cude from gross
ncome the amount of 286. 3 as n the precedng case. There s no
statutory bass for assumng that the waver of 90 appes to the
ta abe tem of 29.63. further e empton from ncome ta must
be supported by an e press statutory provson,
5. Secton 02 of the ct provdes that under certan crcumstances members
of the armed servces sha be paced on the temporary dsabty retred st
for a perod of not onger than fve years. Under subsecton (d) thereof t
Is provded That dsabty retrement pay of any member whose name s
carred on the temporary dsabty retred st sha, for so ong as hs name
s carred on such st, be not ess than 50 per centum of the basc pay upon
whch the computaton s based. In a case where the rated dsabty s 30
percent, and the member had no more than 20 years of servce, s the dfference
between the 30 percent of basc pay and the 50 percent of basc pay ncuded
n gross Income wthn the meanng of secton 02(h) of the ct, or woud the
entre 50 percent receved be e cuded from gross ncome under secton 22(b)
(5) of the Code.
Secton 02(d) of the ct permts the member who s retred for
dsabty resutng from actve servce to eect to receve dsabty
retrement pay computed ether on the bass of years of servce or on
the bass of percentage of dsabty, provded that the resutng pay
sha be not ess than 50 per centum of the basc pay upon whch the
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2 5 ( 22(b).
computaton s based. Where the pay computed on the method
eected s ess than the mnmum 50 percent pay, the dfference repre-
sents pay of the same character as the pay to whch he s entted
under the method eected, . e., pay based on percentage of dsabty
or pay based on years of servce, as the case may be.
If the former, the entre 50 percent pay receved s e cuded from
gross ncome as e empt f the atter, t s, under the provsons of
secton 02(h) of the ct, e empt under secton 22(b) (5) of the Code
to the e tent that t does not e ceed the dsabty retred pay that he
woud have receved f such pay were computed soey on the bass of
dsabty. Sec. I. T. 017, C. . 1950-2,12. The e empton granted
bv secton 22(b) (5) of the Code does not appy to that part of the ds-
abty pay computed on the bass of years of actve servce whch s
n e cess of the pay that he woud receve f t were computed soey
on the bass of percentage of dsabty.
6. urther, contnung queston 5, If the member had 2 years of servce,
whch woud gve hm 60 percent of basc pay, s the dfference between the 60
percent and 50 percent mnmum the ta abe part under secton 02(b) of
the ct, or Is the entre dfference between the CO percent and the 30 percent,
whch s hs rated dsabty, ta abe
The entre dfference between the 60 percent pay and the 30 percent
pay, based on hs rated dsabty, s ta abe. See the ast sentence
m the answer to ueston 5.
7. W the wthhodng of ncome ta be based upon the tota amount of
dsabty retrement pay of the retred member or ony that part whch e -
ceeds an amount computed on the bass of the member s percentage of ds-
abty
Wthhodng w be requred ony on that part of the retrement
pay whch e ceeds an amount computed on the bass of the member s
percentage of dsabty. See secton 02(h) of the ct of 19 9,
supra, sectons 1621(a) and 1622(a) of the Code and Reguatons 120,
secton 06.207(a) (2).
8. ow shoud the wthhodng ta be computed on ump sum payments n
cases where a retroactve eecton s made
Wthhodng s requred n the year n whch the ump sum pay-
ments are made and ony on that part whch s hed to be ncudbe
n gross ncome. See secton 02(h) of the Career Compensaton ct
of 19 9, supra, and the answer to queston 2.
L T. 017, C. . 1950-2,12, ampfed.
Rev. Ru. 55-155
commssoned offcer of the rmed orces, retred for dsabty,
who receves retred pay based on hs ength of servce pursuant to
the provsons of the Career Compensaton ct of 19 9, 63 Stat. 802,
37 U. 8. C. 272, and aso receves compensaton on a day bass
for servces performed aw a cvan empoyee of the Unted States
Government, and who eects under the provsons of secton 212(a)
of the ct of une 30, 1932, 7 Stat. 382 at 06, 5 U. S. C. 59(a),
to refund hs retred pay and retan hs cvan pay shoud e cude
hs net retred pay n the same proporton that hs tota retred pny
s e cudabe under secton 22(b) (5) of the Interna Revenue Code
of 1939. owever, the ta abe porton of the recpent s tota
retred pay woud be sub|ect to wthhodng of ncome ta at source
under secton 1622 of the Code.
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122(b). 2 6
dvce has been requested regardng the method to be used n de-
termnng the amount of retred pay receved by a commssoned
offcer of the rmed orces whch s e cudabe under the provsons
of secton 22(b) (5) of the Interna Revenue Code of 1939, when he
eects under the provsons of secton 212(a) of the ct of une 30,
1932, 7 Stat. 382 at 06, 5 U. S. C. 59(a), to refund a porton of hs
retred pay n order to retan hs pay as a cvan empoyee of the
Unted Sates Government for certan days of the year.
Te ta payer, a commssoned offcer, was retred from the Unted
States rmy on une 30 of the ta abe year by reason of dsabty
resutng from actve servce and pursuant to the Career Compensa-
ton ct of 19 9, 63 Stat. 802, 37 U. S. C. 272, he eected to receve
retred pay computed on the bass of hs ength of servce. s
annua retred pay s 9,000. The porton of hs retred pay
attrbutabe to hs estabshed dsabty and whch s therefore e -
empt from ncome ta s 7,200 or 80 percent. The remander 1,800,
or 20 percent s ta abe. Durng the remander of the ta abe year,
after retrement, he was empoyed n a cvan capacty by the Unted
States Government and was compensated on a day bass ( 50 per
day). The foowng amounts were pad to the ta payer for the year
n queston:
Totas Ta abe
U. S. rmy (reguar pay for 6 months) 8, 000 8, 000
U. S. rmy (retred pay for 6 months) __ , 500 900
Cvan Pay (50 days) 2,500 2,500
Tota rates of 15,000 11, 00
Inasmuch as the compensaton from retred pay and other Gov-
ernment work amount to more than 3,000 a year, the ta payer made
occasona refunds durng the ta abe year to the Treasurer of the
Unted States, thus makng, for the days worked, an eecton, as per-
mtted by aw, to retan hs cvan pay. The tota retred pay re-
funded was 1,250 ( 25 per day for 50 days).
The authorty for the 3,000 mtaton mentoned above s con-
taned n secton 212(a) of the ct of une 30, 1932, supra, whch
provdes n part that after une 30,1932, no person hodng a cvan
offce or poston under the Unted States Government, or the muncpa
government of the Dstrct of Coumba, or under any corporaton,
the ma|orty of the stock of whch s owned by the Unted States,
sha be entted, durng the perod of such ncumbency, to retred
pay from the Unted States for or on account of servces as a comms-
soned offcer n any of the servces mentoned n tte 37 of the Unted
States Code (whch reates to the pay and aowances n the rmy,
Navy, Marne Corps, Coast Guard, Coast and Geodetc Survey, and
Pubc eath Servce), at a rate n e cess of an amount whch when
combned wth the annua rate of compensaton from such cvan
offce or poston, makes the tota rate rom both sources more than
3,000 and when the retred pay amounts to or e ceeds the rate of
3,000 per annum such person sha be entted to the pay of the
cvan offce or poston or the retred pay, whchever he may eect.
Under the facts n ths case, t s hed that a commssoned offcer
of the rmed orces, retred for dsabty, who receves retred pay
based on I113 ength of servce pursuant to the provsons of the Career
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2 7 Regs. 118, 39.22(d)-.
Compensaton ct of 19 9, supra, and aso receves compensaton on a
day bass for servces performed as a cvan empoyee of the Unted
States Government, and who eects under the provsons of secton
212(a) of the ct of une 30, 1932, supra, to refund hs retred pay
and retan hs cvan pay, shoud e cude hs net retred pay n the
same proporton that hs tota retred pay s e cudbe under secton
22(b) (5) of the Code. owever, the ta abe porton of the recpent s
tota retred pay woud be sub|ect to wthhodng of ncome ta at
source under secton 1622 of the Code.
Thus, n the nstant case, snce 80 percent of the retred pay for
the year s e empt from ncome ta because t s receved by reason
of physca dsabty then 80 percent of the net retred pay (. e., the
tota retred pay ess the amount refunded to the Treasurer) s aso
e empt from ncome ta . computaton ndcatng the e empt and
ta abe amounts of the retred pay s shown beow:
empt Ta abe
Tota retred pay....... , 500 3, 600 900
Less: Tota amount re-
funded 1,250 1,000 (80 ) 250 (20 )
Net amount of retred
pay 3, 250 2, 600 650
ence, 2,600 of the net retred pay of 3,250 s e empt from
edera ncome ta .
mounts receved because of persona n|ures. See Rev. Ru, 55-
331, page 271.
S CTION 22(c). GROSS INCOM : IN NTORI S
Reguatons 118, Secton 39.22(c)-2: auaton
of nventores.
Use of reta vaue of merchandse n vauaton of nventores. See
Rev. u. 55-285, page 69.
S CTION 22(d). GROSS INCOM
Reguatons 118, Secton 39.22(d)-: Last-n Rev. Ru. 55-220
frst-out nventores.
Revenue Rung 5 -C3, C. . 195 -1, 33, s modfed n vew of the
dscontnuance of the pubcaton of varety store nventory prce
nde es by the ureau of Labor Statstcs.
Revenue Rung 5 -63, C. . 195 -1,33, and Revenue Rung 5 -1 5,
C. . 195 -1, 38, set forth nventory prce nde es for une, 1953, and
December, 1953. respectvey, and data n connecton therewth, pub-
shed by the ureau of Labor Statstcs for use by varety stores
empoyng the reta and eectve nventory methods. It aso pre-
86 030 56 IT
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22(e). 2 8
scrbed the condtons under whch the use of such nde es woud be
acceptabe, under secton 22(d) of the Interna Revenue Code of 1939,
n the fng of edera ncome ta returns. Thereafter, ndustry
sponsors havng termnated arrangements for the preparaton by the
ureau of Labor Statstcs of the varety store nventory prce nde es,
pubcaton by that ureau of such nde es was dscontnued, as an-
nounced n I. R. . 195 -31,20.
The ffth paragraph of Revenue Rung 5 -63, supra, provdes as
foows:
Tbe use of such Inde es pubshed by the ureau of Labor Statstcs Is not
mandatory Inde es may be prepared by an ndvdua ta payer based upon hs
own data on prces and nventory quanttes, f adequate, and f proof s sub-
mtted that sound statstca methods have been empoyed that assure reabe
Inde es, not ony for the partcuar year n queston, but for subsequent years.
There may be no seectve use of such nde es, however, combnng the nse of
certan of the LS nde es wth respect to gven departments and the nse of
other ndvdua nde es wth respect to other departments, e cept n the case
cf food, candy, and tobacco departments. Nether w aternate use of LS
nde es and ndvdua nde es n successve ta abe years be permtted.
owever, pubcaton by the ureau of Labor Statstcs of varety
store nventory prce nde es havng been dscontnued, varety store
operators who had adopted such nde es n computng ther nvento-
res under the reta and eectve nventory methods, w be permtted
to use nde es prepared from ther own data on prces and quanttes,
consstent wth such ureau of Labor Statstcs nde es, n computng
nventores under those methods on subsequent dates for whch such
nde es have not been pubshed by the ureau of Labor Statstcs.
Revenue Rung 5 -63, supra, s modfed accordngy.
Reguatons 118, Secton 39.22(d)-7: Invoun-
tary qudaton and repacement.
d|ustment to be made n year of qudaton for nventory re-
paced. See Rev. Ru. 55-28, page 359.
S CTION 22(e). GROSS INCOM : DISTRI UTIONS
Y CORPOR TIONS
( so Sectons 22(a), 115(|) Reguatons 118, Ct D. 177
Sectons 39.22(a)-, 39.115(|)-.)
INCOM T S INT RN L R NU COD O 1030 D CISION O COURT
1. Income Ta Dstrbutons by Corporatons ffect on arn-
ngs or Profts of Dstrbutons n nd mount Ta abe
to Stockhoders arnngs and Profts To e Charged
Wth Cost of Property Dstrbuted n nd Wthout Re-
gard to Unreazed pprecaton n aue.
Where a parent corporaton dstrbuted stock of a subsdary-
corporaton to stockhoders of the parent as dvdends, and earnngs
and profts of the parent, computed wthout regard to any appreca-
ton n vaue of the subsdary s stock above ad|usted cost bass on
the parent s books, were suffcent to cover the ad|usted cost of the
stock dstrbuted but were not suffcent to cover ts far market vaue
at tme of dstrbuton, the dstrbuted stock was ta abe to the
parent s stockhoders as ordnary ncome to the fu e tent of ts
market vaue.
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2 9 22(e).
2. Decsons Reversed.
Decson of the Unted States Ta Court (T. C. M. pr. 3, 1053)
reversed.
Unted States Court op ppeas fob the Second Crcut
Commssoner of Interna Revenue, pettoner, v. anne rshon Trust, /
Chares rshon, Water rshon, and enry Segoert, trustees, respondent
Petton for revew by the Commssoner of Interna Revenue of a decson of the Ta
Court settng asde a rung of the Ta Court settng asde a rung of the Commssoner
determnng a defcency n respondent s ncome ta es for the year 1U 7. Reversed.
efore Cabk, ncks, and aran, Crcut udges
May IT, 195
OPINION
amas, Crcut udge: The queston rased by ths petton s the e tent to
whch the far market vaue of a corporate dstrbuton In knd s ta abe to
the sharehoder-dstrbutees as ordnary dvdend ncome where the earnngs
od profts of the dstrbutng corporaton are suffcent to cover the ad|usted
oust of the property dstrbuted but are nsuffcent to cover ts fu far market
taue at the tme of the dstrbuton.
In 19 7, Southern Natura Gas Company (herenafter caed Southern ) ds-
trbuted as dvdends to ts sharehoders (of whom Respondent was one)
,113,722.03 n cash and 1, 09,162 shares of common stock of Southern Pro-
ducton Company, Inc. (herenafter caed Southern Producton ), a whoy
owned subsdary of Southern. The Southern Producton stock had an ad|usted
cost vaue on Southern s books of 3,199,950. Its far market vaue at the
tme of dstrbuton was 8,983, 07.75. Southern had earnngs or profts before
these dstrbutons amountng to 5,07 ,586.32. The respondent ta payer s pro-
porton of these dstrbutons amounted to 12,680.62, of whch 2, 16.87 repre-
sented ts share of the cash dstrbuton and 10,263.75 Its share of the dstrbu-
ton payabe n Southern Producton stock, taken at market vaue.
In reportng these dstrbutons n ts federa ncome ta return for 19 7, the
tatayer proceeded on the premse that the market vaue of the Southern Pro-
ducton stock was ta abe to Southern s sharehoders as dvdend ncome ony
to the e tent of Southern s earnngs and profts, determned wthout regard to
y apprecaton In the vaue of Southern Producton stock above ts ad|usted
cost bass, on Southern s books. The Commssoner, however, rued that the
Southern Producton stock was ta abe to Southern s sharehoders as ordnary
ncome to the fuU e tent of ts far market vaue at the tme of recept, and
ocordngy determned that the ta payer had understated ts ncome for 19 7.
The Ta Court sustaned the ta payer s poston, hodng that the market vaue
of Southern Producton stock n e cess of Southern s earnngs and profts, as
computed on the bass of ts ad|usted cost on Southern s books, was appcabe
frst to reduce the bass of the sharehoders Southern stock and beyond that was
ta abe as a capta gan as provded n secton 115(d).
The controng sectons of the Interna Revenue Code are secton 22 (a) and
e),26U. S. C. secton 22, and secton 115 (a), (b), (d) and (|), 26 U. S. C.
secton 110. Ther reevant portons are prnted n the margn.1
Secton 22. Gnoss Income.
) Genera defnton. Gross Income ncudes gans, profts, and ncome derved
m dvdends, or gans or profts and Income derved from any source
bteTer.
(e) Dttrbuton by corporaton). Dstrbutons by corporatons sha be ta abe to
te sharehoders as provded In secton 115.
Scros 115. Dstrbutons by Conrot TONS
(a) Defnton of dvdend. The term dvdend when used In ths chapter
ffeans any dstrbuton made by a corporaton to ts sharehoders, whether In money or n
ter property, (1) out of ts earnngs or profts accumuated after ebruary 28,
1613
(b) Source of dstrbuton). or the purposes of ths chapter every dstrbuton
made oat of earnngs or profts to the e tent thereof
(d) Other dstrbuton) from capta. If any dstrbuton mnde by a corporaton to Its
fcarehou rs Is not out of Increase n vaue of property accrued before March 1, 1013, and
1 not a dvdend, then the amount of such dstrbuton sha be apped aganst and reduce
toe ad|onted bass of the stock provded n secton 113. and If In e cess of such bass, such
ecess sha be ta abe In the same manner as a gan from the sae or e change of
property ,
. ( ) Tauton of dvdend. If the whoe or any part of a dvdend s pad to a s| rf-
aer In any medum other than money the property receved other than money a
Waded In gross Income at Its far market vaue at the tme as of whch t becomes ncome
to tat bareboder.
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22(e).) 250
The ta payer s poston Is that the provsons of secton 115(a), defnng a
dvdend as any dstrbuton made by a corporaton out of ts earnngs or profts
accumuated after ebruary 28, 1913, aso measure the e tent to whch a ds-
trbuton In knd s sub|ect to dvdend ta aton n the hands of the sharehoders,
that s that the market vaue of the property dstrbuted s not ta abe as dv-
dend ncome beyond the e tent of the corporaton s earnngs or profts, any
e cess vaue beng sub|ect to a dfferent knd of ta treatment as hed by tbc
Ta Court.
More specfcay, the ta payer contend| that after emnatng from Southern s
earnngs or profts the cash dvdends of 52,113,722.03, whch are concededy
ta abe to Southern s sharehoders as ordnary ncome to ther fu e tent, the
vaue of the Southern Producton stock ( 8,983, 07.75) s ta abe as a dvdend
ony to the e tent of Southern s remanng earnngs and profts, vs.,
3,500,80 .29. The remanng vaue of the Southern Producton stock,
5, 22,5 3. 6, t Is contended, s sub|ect to the other ta treatment ndcated
above.
The Commssoner s poston s that a that Is e cuded from ndvdua In-
come ta aton under secton 115 are dstrbutons to sharehoders whch mpar
the capta of the dstrbutng corporaton. In essence hs argument s that
we shoud dstngush between the vaue of an asset n the hands of the corpora-
ton for the purpose of determnng surpus or capta mparment, and the vaue
of the asset for ta purposes when dstrbuted to the sharehoders. In the frst
aspect, so the Commssoner argues, the vaue of the asset s ts hstorca cost
to the corporaton, wthout regard to any subsequent apprecaton n vaue n
the second aspect, the worth of the asset s ts fu market vaue at the tme of
recept by the sharehoders and under the statute there Is no necessary money
correaton between these two sets of vaues. Therefore, It s contended, once
t s shown that a dstrbuton n knd has eft the corporate capta Intact, the
dstrbuton s out of the corporaton s earnngs or profts, and hence a dv-
dend under secton 115(a), whch under secton 115(|) becomes ta abe to the
Sharehoders to the fu e tent of ts market vaue at the tme of recept
More specfcay, the Commssoner contends that Southern s earned surpus
(5,67 ,580.32) beng greater than the tota vaue ( 5,313,672.03) of the dstrb-
uted cash and Southern Producton stock (at ts ad|usted cost to Southern),
the entre dstrbuton consttuted a dvdend, and as such the part represented
by Southern Producton stock, equay wth the cash part, was ta abe as ord-
nary Income to the fu e tent of ts far market vaue, vz., 8,983, 07.75.
We are thus caed upon to decde between these two opposng vews of the
ta ng pattern estabshed by secton 115. The decsons of the Ta Court have
fary consstenty supported the ta payer s poston. state of Oodey v.
Comm r, 19 T. C, No. 12 (1953), reatng to the dentca dstrbutons here n-
voved, and upon whch the decson beow was based Paune du Pont Dean v.
Comm r, 9 T. C. 256 (19 7) state of cheson, 3 T. C. M. 12 2 (19 ) and n
ts resut each Petroeum Corp. v. Comm r, 5 T. C. M. 638 (19 6).
The cases In the edera Courts, however, do not gve us any cear sgna. In
nze v. Comm r, 75 . 2d 989 (2nd Cr.), cert, dened 296 U. S. 579 (1935)
Ct. D. 1079, C. . -1, 217 (1936) , reed on by the Commssoner, It dd not
appear whether there was suffcent surpus to cover the fu market vaue of
the dstrbuton n knd. If there was, then that case dd not reach the ssue
before us. If there was not, we woud hestate to accept the aternatve bass
for decson, namey, that the dstrbuted property was acqured out of post-1913
earnngs or profts and retaned that character upon dstrbuton. See Pau.
Seected Studes n edera Ta aton, 2d Seres (1938), pp. 17 -176 Mooy, Some
Ta spects of Corporate Dstrbutons n nd, 6 Ta L. Rev. 57, 7 -76 (1950).
or the same reason we fnd Comm r v. Wakefed, 139 . 2d 2S0 (6th Cr. 19 3),
aso cted by the Commssoner, not persuasve. The concurrng opnon of
udge Whtacer n Gunness v. Unted States, 73 . Supp. 119 (Ct. Cams 19 7) s
an acceptance of the Commssoner s poston, but the decson of the ma|ort|
went upon other grounds, based on facts not nvoved here. In Comm r v. Tmken
state, 1 1 . 2d 625 (6th Cr. 19 ), cted by the ta payer, a dvdend n knc
was hed not ta abe as ncome to the stockhoder, but there the cost of the prop
erty dstrbuted was not covered by any earnngs or profts (whch had beer
e hausted by pror cash, dvdend dstrbutons), and n effect consttuted t
dstrbuton of capta.
We aso consder the egsatve hstory of secton 115, whch has been referred
to n the Respondent s bref, whoy uncear. nay, we fnd ta awyers, wh
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251 22(e).
haTe wrtten on the sub|ect, on both sdes of the queston. See Pau, Seected
Studes, etc., supra, 1G5-1S5, and aum, Dvdends n nd: Ther Ta spects,
63 arv. L. Rev. 593-609 (1950 .
We turn then to e amne the provsons of the Interna Revenue Code them-
seves. Secton 22(a) defnes gross ncome to Incude dvdends
or gans or profts and Income derved from any source whatever. No conten-
ton s made here that the Southern Producton stock consttuted ncome to
Southern s sharehoders otherwse than as a dvdend. Secton 22(e) provdes
that corporate dstrbutons are ta abe to the sharehoders as provded n
.secton 115. So far as here reevant, secton 115(n) defnes a dvdend as any
dstrbuton made by a corporaton to ts sharehoders, whether n money or n
ohr property, (1) out of ts earnngs or profts accumuated after ebruary
28,1913 .
Uoth partes here agree wth the premse of the Ta Court n the Oodcy case,
rtn Genera Uttes Operatng Co. . Uevcrng, 296 U. S. 200 (1935),
tCt. D, 1055, C. . -1, 211 (1930) , that under secton 115(a) unreazed appre-
caton n corporate assets may not be reckoned n earnngs or profts or, as
the Commssoner puts It, n computng earnngs or profts corporate assets
are to be taken at hstorca cost. Cf. R. D. Merr Co. v. Commssoner, T. C.
S3 (19 5), wheren the Ta Court hed thnt n determnng to what e tent a
dstrbuton made In the stock of another corporaton, whch had deprecated
n vaue beow ts cost to the dstrbutng corporaton, reduced earnngs and
profts avaabe for ater dstrbutons, the earnngs and profts of the dstrb-
utng corporaton shoud be charged wth the cost of the stock rather than merey
ts deprecated vaue. The capta Imparment statutes of some states permt
unreazed apprecaton to be cacuated In determnng corporate surpus ava-
abe for dvdends e. a., sec. 58, N. Y. Stock Corp. Law, Randa v. aey,
2 . T. 280 (19 2) . Other states, perhaps more n keepng wth sound account-
ng and busness practce, do not permt unreazed apprecaton to be counted
n computng corporate surpus, n determnng whch the corporate assets are to
be reckoned at ther hstorca cost. . g.. 111. Rev. Stats. 1951, C. 32, secton
(c) Penn. Stats., Tt. 15, sectons 2852-701 (), 702 (Purdon 1936). If the
matter be st open under the Genera Uttes case, supra, we agree wth the
Ta Court s concuson n ths respect, and thnk t s ths atter vew whch
Congress has adopted In secton 115(a).
To contnue wth secton 115, secton 115(b) entted Source of Dstrbutons
Rates that every dstrbuton Is made out of earnngs or profts to the e tent
thereof . Secton 115(d), entted Other Dstrbutons from Capta
provdes that f any dstrbuton s not a dvdend
t sha be apped to reduce the bass of the sharehoders stock n the dstrbut-
ng corporaton, and any e cess sha be ta abe as a capta gan. nd fnay
secton 115(.|) provdes: If the whoe or any part of a dvdend Is pad to a
sharehoder n any medum other than money the property receved other than
ney sha be ncuded n gross ncome at ts far market vaue at the tme as of
c t becomes ncome to the sharehoder.
s we see t, the rea nub of the dspute between the ta payer and the Com-
mssoner comes down to the queston or whether, as the ta payer contends,
secton 115(a) defnng dvdends as those corporate dstrbutons whch are
nade out of earnngs or profts, aso measures the amount of a dstrbuton In
knd whch s sub|ect to ordnary ncome ta aton as a dvdend under secton
113( ). The ta payer s poston s, n effect, that snce under secton 115(a)
reazed apprecaton n the vaue of the property to be dstrbuted s to be
deuded n measurng the corporaton s earnngs or profts for the purpose of
determnng the e tent to whch the dstrbuton Is a dvdend, kewse un-
reazed apprecaton shoud be e cuded n determnng how much of the
dstrbuton s sub|ect to ordnary ncome ta aton as a dvdend. The ta payer
acheves what t cams to be the proper resut by appyng the amount of the
wrnngs or profts of the corporaton aganst the apprecated vaue of the ds-
trbuted property, and treatng any e cess n such vaue as a capta dstrbuton
father than a dvdend.
We do not thnk that the ta payer s poston wthstands anayss. unda-
toentay, t nvoves measurng a dvdend dstrbuton for ta aton purposes
dfferenty from the way Congress has defned a dvdend. Thus, as we have
Itacs, wherever used In ths opnon, have been supped.
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22(e). 252
seen, In determnng whether the dstrbuton of an asset In knd Is a dvdend
under secton 115(a) the earnngs and profts of the corporaton are charged
wth the cost of the asset to be dstrbuted, wthout regard to any unreazed
apprecaton In Its vaue. Yet when t comes to determnng the nature of the
dstrbuton from the pont of vew of Its ta abty the ta payer woud have
us charge the same asset aganst the corporate earnngs or profts at ts appre-
cated vaue. ut surey the nature of a dstrbuton under secton 115 s not
so eusve. If a dstrbuton Is a dvdend when decared by the corporaton,
t s dffcut to see bow It can n part be somethng ese when receved by the
stockhoders. Stated otherwse, f corporate earnngs and profts are to be
charged wth the apprecated vaue of a dstrbuted asset, we thnk they shoud
aso be credted wth that vaue. ut f that were done here the probem -we
have woud dsappear. It s ony by measurng the e tent of the dvdend df-
ferenty n the hands of the sharehoders from the way In whch secton 115 (a)
requres t to be measured n the hands of the corporaton, that the ta payer
has a case.
No doubt Congress coud have enacted two such dfferent standards of
measurement, but we do not thnk that t has done so, and we are eft unper-
suaded by the ta payer s arguments to the contrary. We are referred to secton
115(b) whch provdes that every dstrbuton s made out of earnngs or
profts to the e tent thereof. ut we thnk that a that ths means s that
any corporate dstrbuton not made n the form of a dvdend decaraton s
nonetheess to be regarded as such to the e tent that t represents the earnngs
or profts of the corporaton.
The ta payer aso argued that secton 115(d) prescrbng capta gans
treatment for any dstrbuton whch s not out of ncrease n vaue of property
accrued before March 1,1913, and s not a dvdend embraces n that treatment
the unreazed apprecaton of a dstrbuton n knd whch e ceeds the earnngs
or profts of the corporaton before such dstrbuton. owever, we thnk that
secton 115(d), as ts capton Other Dstrbutons from Capta ndcates, s
rather desgned to sub|ect to capta gans ta aton those dstrbutons whch
have eft the capta of the corporaton mpared. nd concededy these ds-
trbutons dd not have that resut Indeed secton 115(d) seems to ns to
support the poston of the Commssoner rather than that of the ta payer.
The contenton of the ta payer encounters, we thnk, an Insuperabe ob-
stace In secton 115(|) whch requres a stockhoder to Incude n hs gross
ncome the whoe or any part of a dvdend pad n property at ts fu market
vaue at the tme as of whch It becomes Income to the sharehoder. No argu-
ment Is made that a dvdend n knd does not become ncome to the sharehoder
unt ts vaue s reazed by sae or other dsposton. Cf. Messer v. Comm r, 20
T. C, No. 31 (1953) ems akeres v. Comm r, 6 . T. . 308 (19 2).
that the ta payer argues s that ths secton was desgned to sette merey
the tme at whch a property dvdend s to be vaued for ncome ta Purposes.
We cannot accept so mted a constructon of secton 115(3). Rather, we thnk
that secton 115( ) removes whatever doubt there mght otherwse be that
dvdends In knd, as defned In secton 115(a), are ta abe as dvdends to the
fu e tent of ther market vaue at the tme of recept by the sharehoders.
nay, the ta payer, concedng that the accountng practces underyng the
Commssoner s poston may be mpeccabe, argues that there s frequenty a
dvergence between the ta aws and generay accepted busness concepts.
That may be true, but where, as here, the statutory pattern of ta aton and the
anguage used to accompsh t are both In accord wth sound accountng and
busness practces, such an argument furnshes no ground for readng the
statute otherwse than t Is wrtten. The ta payer s error, t seems to us, stems
from attemptng to te the factors appcabe to determnng the nature of the
dstrbuton to ts vauaton after ts nature has been determned. The appre-
cated vaue of the Southern Producton stock was not, nor was t requred
to be, a dstrbuton out of Southern s earnngs or profts t was smpy a
dstrbuton of that apprecaton whch was not a part of Southern s earnngs
or profts or of Its capta.
We hod that the Southern Producton stock was ta abe to the respondent at
ts fu market vaue at the tme of recept.
Reversed.
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253 22(e).
( so Secton 22(a), 115(|) Reguatons 118, Ct. D. 1775
Sectons 39.22(a)-1, 39.115(|)-.)
L COM T S INT RN L R NU COD O 1039 D CISION O COURT
L Income Ta Dstrbutons by Cobpobatons ffect on arn-
ngs or Profts of Dstrbutons n nd mount Ta abe
to Stockhodebs arnngs and Profts to be Chabged
wth Cost of Property Dstrbuted n nd Wthout Re-
gard to Unreazed pprecaton n aue.
Where a parent corporaton dstrbuted stock of a subsdary
corporaton to stockhoders of the parent as dvdends, and earnngs
and profts of the parent, computed wthout regard to any appreca-
ton n vaue of the subsdary s stock above ad|usted cost bass on
the parent s books, were suffcent to cover the ad|usted cost of the
stock dstrbuted but were not suffcent to cover ts far market vaue
at tme of dstrbuton, the dstrbuted stock was ta abe to the
parent s stockhoders as ordnary ncome to the fu e tent of ts
market vaue.
2. Decson Reversed.
Decson of the Unted States Ta Court (19 T. C. 1082) reversed.
Unted States Court of ppeas fob the Thrd Crcut
tate of Ida 8. odey, deceased Pau . Godcy and ohn W. Young, r., co-
tzecutors, respondents, v. Commssoner of Interna Revenue, pettoner
On petton for revew of the decson of the Ta Court of the Unted States
efore Mars, aodneb, and Staey, Crcut udges
May 28,195
OPINION
y Staet, Crcut udge. The Commssoner pettons for revew of a dec-
son of the Ta Court. 19 T. C. 1082 (1953). The facts were stpuated and
were found accordngy. We w attempt to state them generay so that ths
opnon does not become a weter of fgures.
Respondents decedent hed stock of the Southern Natura Gas Company. In
1W7 she and the other sharehoders of the gas company receved a dstrbuton
party n cash and party n property. The property conssted of shares of
stock of the Southern Producton Company, Inc., whch had been hed by the gas
company. The producton company stock had been acqured by the gns com-
pany at a cost of 3,199,950. t the tme of dstrbuton, ts far market vaue
was 8,983, 07.75. The tota cash dstrbuton by the gas company was 2,113,-
722.03, makng the tota of the cash and property receved by the sharehoders
11,097,129.78. t the tme of dstrbuton, the gas company had avaabe for
dvdends earnngs or profts totang 5,67 ,586.32. The footnote contans a
tabuar account of the arthmetc of what happened.1 The decedent treated
roughy haf of what she receved from the gas company as ordnary ncome for
theye::r 19 7. The Commssoner s defcency assessment hed her tota recepts
from the gas company to be ta abe as ordnary ncome. Raspondents were suc-
cessfu n the Ta Court, and the case comes here.
orgettng for the moment the cash dstrbuton, the case amounts to ths,
when reduced to ts essentas. corporaton made a dstrbuton n knd to ts
sharehoders of property whose far market vaue at the tme of dstrbuton
e ceeded ts cost to the corporaton and aso e ceeded the corporaton s earnngs
Tota earnngs and profts avaabe for 19 7 dv-
onrs 5, 67 , 586. 32
Dstrbuton charged out by Southern
Cash 1.50 per hare 2, 113, 722. 03
Property 6,375 per share C06t 3,109, 050. 00
Tota charged out by corporaton per books 5, 313, 672. 03
Dstrbutons receved by stockhoders
Cath 2, 118, 722. 03
Property, at far market vaue 8, 083, 07. 75
Tota receved by stockhoders 11, 007,129. 78
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22(e). 25
or profts avaabe for dvdends, when consdered apart from the property s
apprecaton In vaue. The earnngs or profts were, however, suffcent to cover
the cost to the corporaton of the property dstrbuted. In order to decde the
ta effect on the dstrbutees, therefore, we must determne whether a dstrbu-
ton n knd of apprecated property reduces the dstrbutng corporaton s earn-
ngs or profts by the far market vaue of the property, wthout addton of tbe
Increment In vaue, as the Ta Court hed, or whether t reduces earnngs or
profts ony by the cost of the property. The two methods produce substantay
dfferent resuts. If earnngs or profts, wthout addton of the ncrement
caused by the apprecaton In vaue, must be matched aganst the far market
vaue of the property, the dstrbuton w be a dvdend ony to the e tent of
earnngs or profts and the dstrbutees w be ta ed on that amount ony,
wth the e cess over earnngs or profts gong frst to reduce the bass of the
shares hed by the dstrbutees and any e cess over bass beng ta ed as a capta
gan under secton 115(d). Ths was the Ta Court s vew. On the other
hand, f earnngs or profts, agan wthout addton of the ncrement In vaue,
must be matched aganst the cost of the property, the entre dstrbuton w be
a dvdend and the dstrbutees w be ta ed upon the fu far market vaue
as ordnary ncome.
The probem acqures ts settng from the foowng provsons of the Interna
evenue Code. y secton 22(a) Gross ncome ncudes gans, profts, and
ncome derved from dvdends. ut secton 22(a) does not
defne a dvdend. or that purpose, ts subsecton (e) drects us to secton
115. Secton 115(a) defnes a dvdend as a corporate dstrbuton to ts share-
hoders out of ts earnngs or profts. Secton 115(b) provdes a
concusve statutory presumpton to the effect that every corporate dstrbuton
s out of earnngs or profts to the e tent thereof. nay, secton
115( ) vaues a property dvdend by provdng that the property receved
sha be ncuded n gross ncome at ts far market vaue.
The Ta Court sad that the geness of the probem was the Supreme Court s
decson n Genera Uttes Co. v. everng, 296 U. S. 200 (1935). There Gen-
era Uttes dstrbuted to ts sharehoders property that had apprecated n vaue
over Its cost to the corporaton. The Court hed that Genera Uttes derved no
ta abe gan from the dstrbuton. ecause of procedura ponts nvoved and the
sequence of the Commssoner s arguments before the oard of Ta ppeas, the
ourth Crcut, and the Supreme Court, the scope of the hodng of the Genera
Uttes case s uncertan. There s no doubt, however, that the case has receved
|udca and admnstratve acceptance as standng for the proposton that a cor-
poraton does not reaze ncome from the dstrbuton of property whch has ap-
precated n vaue over Its cost. We w so accept t for purposes of dscusson
here. Construng the Genera Uttes case as stated above, the Ta Court hed
(d) Other Dstrbutons rom Capta.
If any dstrbuton made by a corporaton to ts sharehoders s not out of ncrease In
vaue of property accrued before March 1, 1913, and Is not a dvdend, then the amount
of such dstrbuton sha be apped aganst and reduce the ad|usted bass of the stock
provded In secton 113, and It n e cess of such bass, such e cess sha be ta abe n the
ane manner as a gan from the sae or e change of property. 26 D. S. C b c
115(d) (1952).
20 d. sec. 22(a).
(e) DISTRI UTIONS Y CORPOR TIONS.
Dstrbutons by corporatons sha be ta abe to the sharehoders as provded n secton
115. 26 M. sec. 22(e). . un
SIC 115. DISTRI UTIONS T CORPOR TIONS (a) D INITION O DI ID ND.
The term dvdend when used n ths chapter means any dstrbuton made
by a corporaton to Its sharehoders, whether n money or n other property, (1) out or
Its earnnns or profts accumuated after ebruary 28, 1913, or (2) out of the earnngs or
profts of the ta abe year (computed as of the cose of the ta abe year wthout dmnuton
by reason of any dstrbutons mode durng the ta abe year), wthout regard to the amount
of the earnngs and profts at the tme the dstrbuton was made.
(b) Source of Dstrbutons.
or the purposes of ths chapter every dstrbuton a made out of earnngs or proft
to the e tent thereof, and from the most recenty accumuated earnngs or profts.
(|) auaton of Dvdend.
If the whoe or any part of a dvdend Is pad to a sharehoder n any medum other
than money the property receved other than money sha be Incuded n gross ncome at
ts far market vaue at the tme as of whch t becomes ncome to the sharehoder
26 d. sec. 115(a), (b), and ( ).
Pau, scertanment of arnngs or Profts for the Purpose of Determnng Ta -
abty of Corporate Dstrbutons. 51 arv. L,. Rev. 0, 55-57 (1937).
_ Commssoner of Interna Revenue v. Watefed, 139 . 2d 280 (C. . 6, 19 3) : Patt
Trust, CC T. C. M. 715 (10 5), pet. for revew dsm d. 16 . 2d 1016 (C. O
10 0) anan, 3 CC T. C. M. 670 (19 ) oshand, 2 CC T. C. M. 972 (19 3). See
aso aunotutou n 7 . L. R. 2d 750. 751 (19 9),
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255 22(e).
that the so-caed rue of that case shoud be apped n computng the amount
of a corporaton s earnngs or profts avaabe for dvdends even where no
queston of the effect on ts ta abe net ncome was nvoved.8 Therefore, the
spprecatoh n vaue of the property hed and dstrbuted by the gas company
here was not added to ts earnngs or profts. The resut was that the dstrbu-
ton of the cash and property was a dvdend and, thus, ta abe to the dstrbutees
as ordnary ncome ony to the e tent of the gas company s earnngs or profts.
The Commssoner s contenton was that earnngs covered the cost of the
property dstrbuted and, therefore, the dstrbuton was out of earnngs or
profts under 115(a) and was backed by earnngs or profts to the e tent
of cost under 115(b). The dstrbuton was, therefore, a dvdend. avng
been cassfed as a dvdend under 115 (a) and (b), 115(|) then cones nto opera-
ton and mposes a ta upon the dstrbutees to the e tent of the then far
market vaue of the property receved. Ths argument was re|ected by the Ta
Court because t was sad to destroy what was thought to e the proper correa-
ton between ta abty to the sharehoder-dstrbutees and the effect upon statu-
tory earnngs or profts of the corporaton and because t was thought that to
aow the Commssoner s argument to preva woud be to aow hm to do n-
drecty what the Court n Genera Uttes prevented hm from dong drecty,
. e., wrte up the earnngs or profts of the dstrbutng corporaton by the
amount of the unreazed apprecaton of the property dstrbuted. We concede,
of coarse, that the souton s not free from dffcuty, but we thnk the Com-
mssoner s theory has none of the effects attrbuted to t by the Ta Court and
s the better of the two rues.
There Is no statutory defnton of earnngs or profts. The attempt to
ascertan ts meanng s usuay made n a negatve way. That s, there s
genera agreement that earnngs or profts are not the same as ta abe net
Income. The Genera Uttes case has been accepted as another negatve
deneaton of earnngs or profts, n that t has been e tended, as the Ta Court
dd here, as supportng the proposton that earnngs or profts do not ncude
the apprecaton n vaue of the property dstrbuted. urthermore, Secton
115(1), whch came nto the Code n 19 0, seems to support the rue that un-
reazed gans shoud not ncrease earnngs or profts by provdng that a
reazed but nonrecognzed gan or oss sha not ncrease or decrease earnngs
or profts. That secton makes t cear that f a gan s not ony nonrecognzed
but aso not even reazed, a fortor, t shoud not be added to earnngs or profts.
Ct Commssoner of Interna Revenue v. Wheeer, 32 U. S. 5 2 (19 5), Ct. D.
1637, C. . 19 5, 3 9 . ut, f the apprecaton n vaue of the property s an
unreazed gan and, thus, may not be added to earnngs or profts, we thnk t
may not be subtracted ether. Pror to dstrbuton, the corporaton carres the
property on ts books at ts ad|usted eost bass, snce, as we have seen, the
apprecaton n vaue of the property n the absence of a cosed transacton, does
not become reazed ncome. Of course, t s qute true that the ncrement n
vaue s dstrbuted by the corporaton n the sense that t nheres n the prop-
wry and eaves the corporaton when the property does, but ts dstrbuton
does not decrease earnngs or profts because t never became part of earnngs
or profts. If the dstrbuton of apprecated property were a reazaton of n-
come by the corporaton to the e tent of the ncrement n vaue, smpe arth-
metc woud requre that the dstrbuton woud cause a smutaneous ncrease
and decrease n the earnngs or profts by the amount of the apprecaton. That
s, far market vaue coud be subtracted from earnngs and profts ony f far
market vaue (made up of cost, pus apprecaton) had theretofore been added
Natona Carbon Co., 2 T. C. 57 (10 3) state of Tmkcn, 7 . T. . 0 (1012),
fTd. 1 1 . 2d G25 (C. . 6, 10 ).
rommttoner of Interna Reentte v. Wheeer, 32 U. S. 5 2, .1 8 (10 5) Ct. I).
1 37, C. . 10 5, 3 0 , U. 8. Treat). Reft, f 29.115-3, arnngs or profts), 26 Code ed.
ess. I 20 115-3 (10 9). See aso brecht, Dvdends and arnngs or Profts, 7
Ta . L. er 157, 181-186 (1052) : udck, Dvdends and arnngs or Profts under
the Income Ta Law : Corporate Nonqudatng Dstrbuton, 89 D. of Pa. L. Rev. 805,
873-8 9 (10 1) : Pau. pra note 6. _
See La e Iron Works . Unted State/). 256 . 8. 377 (1021), Ct. D. 12, C. . , 373
(1921) Chapment . nderson, 11 . Supp. 913 (S. D. N. L. (1935).
U (I) ffect on earnngs and profts of gan or oss and of recept of ta -free dstr-
butons.

Gan or Ion ao reazed sha Increase or decrease the earnngs and profts to. but ot
tfyond the e tent to whch such a reazed gan or oss was recognzed n compntng ue
Income under the aw appcabe to the year n whch such sae or dsposton wa
ane. 26 U. S. C. cc. 115(1) (1952).
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5 22(e). 256
to earnngs and profts. The resut s that cost Is the ony rea varant and,
therefore, the ony rea reducton n earnngs or profts s to the e tent of
cost.
We thnk the correct approach to a case of a corporate dstrbuton of ap-
precated property s dctated by the Code. Secton 115 (a) and (b) defne a
dvdend. or purposes of characterzng a dstrbuton as a dvdend ve non,
. e., whether t s out of earnngs or profts, the soe reevant test s from the
standpont of the dstrbutng corporaton and from that standpont far market
vnue Is mmatera. The amount of a dstrbuton, once t s determned that
the dstrbuton s a dvdend, Is governed by 115(3) and s measured soey from
the standpont of the dstrbutees and wth reference to far market vaue, and
for that purpose the earnngs or profts of the corporaton are Immatera. Nor
do we thnk ths destroys any supposed correaton between ta abty to ds-
trbutees and effect on the corporaton s earnngs or profts. Indeed, there can
be no correaton. In terms of amounts of money, for ta purposes, as between
what the corporaton dstrbutes and what the sharehoders receve, becanse, by-
hypothess, the corporaton does not, but the dstrbutees do, reaze ncome to the
e tent of the apprecaton n vaue of the property dstrbuted. The ony cor-
reaton possbe Is that ta abty to the dstrbutees correspond wth the source
of the dstrbuted property In the earnngs and profts of the corporaton. The
Ta Court s Insstence that there must aways be an e act correaton between
the amount of doars by whch a dvdend n knd affects the earnngs or profts
of a corporaton and the amount of doars that are ta abe n the hands of the
stockhoder recevng the dvdend renders secton 115 (|) meanngess and makes
of 115(a) and (b) the sectons whch not ony determne the character and the
source of the dstrbuton but whch vaue the dstrbuton n the hands of the
stockhoder.
The foowng e ampe, suggested to us by the Commssoner, shows that the
resut of the Ta Court s decson competey dstorts the corporaton s earnngs
or profts and ts genera fnanca pcture. ssume that a corporaton has
5100,000 worth of capta and 12,000 of earnngs or profts. It owns property
whch cost 10,000 but has now apprecated to 15,000. The property s ds-
trbuted n knd to ts sharehoders. The Genera Uttes case Is sad to prevent
a reazaton of ncome to the corporaton of the 5,000 unearned ncrement and
aso to prevent ncreasng earnngs or profts by the 5,000 apprecaton. Now,
f the 15,000 far market vaue of the dstrbuted property, whch Incudes the
5,000 apprecaton, s charged aganst earnngs or profts, there resuts a 3,000
defct n that account or a reducton of capta by that amount. Reay, however,
the corporaton s nvestment n the property was a that It parted wth from a
ta standpont. s a matter of fact, after the dstrbuton, the corporaton s
capta s not ony whoy Intact but t has 2,000 of earnngs or profts remanng
and avaabe for future dvdends. If we return to the facts of our case, we
fnd that the Ta Court s souton causes equay unreastc resuts In the gas
company s earnngs or profts and fnanca pcture. fter the cash dstrbuton
the gns company had 3,500,80 .29 of earnngs or profts avaabe for dvdends.
To reduce that amount by the far market vaue of the dstrbuted property
( 8,083, 07.75), not ony consumes a of the earnngs or profts but resuts n
a defct n that account n the amount of 5, 22,5 3. 6 or a reducton of capta
n that amount, whch s a book stuaton atogether at odds wth the facts,
because n reaty capta not ony was st ntact but there were 360,01 .29 of
earnngs or profts eft. The Ta Court s decson not ony unduy mts the
amount whch s ta abe to the sharehoders as a dvdend by reason of the
nstant dstrbuton but removes 300,91 .29 of actua earnngs or profts from
future ta aton as a dvdend on any subsequent dstrbuton by the gas company.
We hod that upon a corporate dstrbuton of property that has apprecated
over cost but whose cost s e ceeded by earnngs or profts, consdered wthout
addton of the property s apprecaton n vaue, the proper reducton of earnngs
or profts s to the e tent of cost. Ta wse, ths means that n our case the entre
dstrbuton was a dvdend and the dstrbutees are ta abe upon the fu far
market vaue receved. We thnk ths does no voence ether to secton 115 (/)
of the Code or to the Genera Uttes case, but, on the contrary, s entrey
consstent wth both and wth what we thnk Is requred by 115 (a), (b), an
(|) In a case of ths knd.
f See nun, Dvdends n nd: Ther Ta spects, 63 arv. L. er. 503, 609 (1030).
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257 Regs. 118, 39.22(n)-.
It must be conceded that, whe we are not aone n our vew, amost a the
Ta Court cases have gone the other way. In It. D. Merr Co., T. C. 955,
959-903 (10 5), a case of a dstrbuton n knd of deprecated property, the
Ta Court hed that earnngs or profts shoud be reduced by cost rather than
the ower, far market vaue. See each Petroeum Corp., 5 CC T. C. M. 638
(19 6), setnbe, where far market vaue e ceeded cost In Reynods Sprng Co.
t. Commssoner of Interna Revenue, 1S1 . 2d 638 (C. . 6), cert, dened, 3 0
C. S. 821 (1950), another deprecated property dstrbuton, cost rather than
the ower, far market vaue was used to reduce equty nvested capta for
purposes of the e cess profts ta . Cf. Chares Lech Co. v. Unted States,
210 . 2d 901 (C. . 7, 195 ). The concurrence n Gunness v. Unted States,
73 . Supp. 119, 132-13 (Ct. CI. 19 7), cert, dened, 33 U. S. 819 (19 8), s n
agreement wth our theory and resut n treatng a dstrbuton of apprecated
propertv. The ma|orty dsposed of the case on the theory of Commssoner of
Interna Revenue v. Court odng Co., 32 U. S. 331 (19 5), Ct. D 1630, C. .
19 5. 58 , Commssoner of Interna Revenue v. Wakefed, 139 . 2d 280 (C. .
6,19 3), and nze v. Commssoner of Interna Revenue, 75 . 2d 989 (C. . 2),
cert, dened, 2I 5 T. S. 579 (1935, Ct. D. 1079, C. . -1, 217 (1936) , reach
onr resut upon dfferent prncpes.
No purpose woud be served by an e tended dscusson of the cases snce we
have set out above the two ma|or theores that have competed for acceptance
as the souton to our probem. Wth varatons of anguage, the decsons
espouse one or the other. The Ta Court s opnon n ths case presents one vew
as we as we thnk t can be presented. or the reasons stated we thnk the
other vew s the better one.
fter ths opnon was prepared but before t was fed, the Second Crcut
reached the same resut upon the same theory n a case nvovng the same cor-
porate dstrbuton as s nvoved here. Commssoner of Interna Revenue v.
anne rshon Trust, 213 . 2d. 523 (C. . 2, decded May 17, 195 ).
The |udgment of the Ta Court w be reversed and the cause remanded for
proceedngs n accordance wth ths opnon.
S CTION 22(k), GROSS INCOM : LIMONY,
TC., INCOM
Reguatons 118, Secton 39.22 (k)-: mony
and separate mantenance payments ncome
to former wfe.
Marta status where an ndvdua s separated from spouse under
an nterocutory decree of dvorce. See Rev. Ru. 55-178, page 322.
S CTION 22(n). GROSS INCOM : D INITION O
D UST D GROSS INCOM
Reguatons 118, Secton 39.22 (n)-1: d|usted Rev. Ru. 55-288
gross ncome.
n arrangement whereby an empoyee s pad a saary wth the
understandng that he w pay hs own e penses n the performance
of hs empoyment does not consttute a rembursement or other e -
pense aowance arrangement for the purposes of secton 22(n) (3) of
the Interna Revenue Code of 1939, n determnng ad|usted gross n-
come. The arrangement contempated by secton 22(n) (3) of the
1939 Code e sts ony where the rembursement or other e pense a-
owance s dentfed ether by makng a separate payment or by spe-
M Neary a of the eases are coected by Mooy, Some Ta spects ot Corporate Ds-
trbuton In nd, 6 Tn L. ev. 57 (1050).
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Regs. 118, 39.22(n)-. 258
cfcay ndcatng the separate amounts where both wages and the
e pense aowance are combned n a snge payment. In the absence
of such an arrangement, the amount of e penses (other than for trave,
meas and odgng whe away from home) pad or ncurred n connec-
ton wth hs empoyment may not be taken nto account n determn-
ng ad|usted gross ncome, but shoud be consdered n arrvng at net
ncome uness the ta payer cams the optona standard deducton.
Reguatons 118, Secton 39.22 (n)-: d|usted Rev. Ru. 55-315
gross ncome.
The ta mposed by the State of Coorado upon the porton of the
gross ncome of every person whch s derved from the producton
or e tracton of crude o, natura gas, or both crude o and natura
gas from petroeum deposts ocated wthn the State, Chapter 8 ,
Paragraph 6 (1), of the Coorado Statutes, nnotated, as amended
by the Laws of 1953, Sectons 1-3, 352-35 , s aowabe under sec-
ton 22(n) of the Interna Revenue Code of 1939 to the owner of an
operatng Interest In o and gas propertes as a deducton attrbu-
tabe to a trade or busness and to the owner of a royaty nterest,
such as a essor or subessor, as a deducton attrbutabe to property
hed for the producton of rents or royates.
dvce has been requested whether the ta mposed by the State of
Coorado upon the porton of the gross ncome of every person whch
s derved from the producton or e tracton of crude o, natura
gas, or both crude o and natura gas from petroeum deposts ocated
wthn the State s deductbe n computng ad|usted gross ncome
under secton 22 (n) of the Interna Revenue Code of 1939.
Chapter 8 , Paragraph 6(1), of the Coorado Statutes annotated,
as amended by the Laws of 1953, Sectons 1-3, 352-35 , provdes that
n addton to the ta mposed by subsectons (2), (3), ( ) and (5)
there sha be eved, coected and pad for each ta abe year endng
on and after December 31,1953, upon that porton of the gross ncome
of every person whch s derved from the producton or e tracton
of crude o, natura gas, or both crude o and natura gas from
petroeum deposts ocated wthn the State of Coorado a speca
ncome ta .
State and oca ad vaorem property ta es mposed upon ease-
hods, royates and other nterests n o and gas deposts ocated
wthn the State, e cept ad vaorem ta es mposed upon drng
roducton, storage and transportaton equpment and factes, may
e camed as a credt aganst ths speca ncome ta . The ta s
coected by wthhodng at the rate of 3 percent from payments made
by every producer or frst purchaser of o or gas. The ta wthhed
may be camed as a credt by the ta payer on hs edera ncome ta
return. Ths speca gross ncome ta descrbed above s not aowed
as a credt aganst the genera ncome ta of the State.
Secton 22 (n) of the Code provdes n part as foows:
(n) Defnton op d|usted Gross Income . s used n ths chapter the
term ad|usted gross Income means the gross ncome mnus
(1) Trade and busness deductons. The deductons aowed by secton
23 whch are attrbutabe to a trade or busness carred on by the ta payer.

( ) Deductons attrbutabe to rents and royates. The deductons
(other than those provded n paragraph (1), (5), or (C)) aowed by secton
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259 Regs. 118, 39.23(a)-.
23 whch are attrbutabe to property hed for the producton of rents or
royates
Secton 39.22(n)- of eguatons 118 provdes that ta es are de-
ductbe n arrvng at ad|usted gross ncome ony f they consttute
e pendtures drecty attrbutabe to the trade or busness or to prop-
erty from whch rents or royates are derved. Property ta es pad
or ncurred on rea property used n the trade or busness are de-
ductbe, but genera state ncome ta es are not deductbe n com-
putng ad|usted gross ncome, even though the ta payer s ncome
s derved from the conduct of a trade or busness or from property
hed for the producton of rents or royates. owever, the speca
Coorado ncome ta on gross ncome from o and gas producton
appes ony to ncome from the producton or e tracton of o or
pas from propertes n that State. Such ta s, therefore, drecty
attrbutabe to nterest n o and gas propertes and s desgned to
compement State and oca ad vaorem ta aton of such nterests.
To the e tent that such ad vaorem ta es are pad by the ta payer
they may be credted aganst hs abty for ths speca ncome ta .
The ta s not aowed as a credt aganst the genera ncome ta m-
posed by the State. There s such a pro mate connecton between
the ta and the property producng the ncome that the ta s, wthn
the meanng of the reguatons, drecty attrbutabe to the trade or
busness of the ta payer or to property from whch royates are de-
rved by the ta payer. See Robert . oshand, e ecutor under the
tr of Cornne S. oshand v. Commssoner, 19 T. C. 860, affrmed
per curam, 216 ed. (2d) 751, and I. T. 3829, C. . 19 6-2, 38.
ccordngy, the ta s aowabe to the owner of an operatng
nterest n o and gas propertes as a deducton attrbutabe to a trade
or busness under secton 22 (n) (1) of the 1939 Code and to the owner
of a royaty nterest, such as a essor or subessor, as a deducton
attrbutabe to property hed for the producton of rents or royates
under secton 22 (n) ( ) of the 1939 Code.
Reguatons 118, Secton 39.22 (n)-: d|usted
gross ncome.
Ta attrbutabe to a trade or busness deductbe n computng
ad|usted gross ncome. See ev. u. 55-289, page 278.
S CTION 23(a). D DUCTIONS OM G OSS
INCOM : P NS S
Reguatons 118, Secton 39.23(a)-: usness ev. u. 55-12
e penses.
penaty payment made by a ta payer to hs mortgagee to obtan
a reease from the mortgage on property used n hs trade or bus-
ness n order to secure a new oan from another source, consttutes a
busness e pense wthn the meanng of secton 23(a) (1) of the
Interna Revenue Code of 1939 and s deductbe by corporatons
as we as ndvduas. Under certan condtons the penaty pay-
ment woud consttute a deductbe nontrade or nonbusness e -
pense under secton 23(a) (2) of the Code, but t does not represent
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Regs. 118, 39.23(a)-. 260
a payment of Interest whch woud be deductbe under secton
23(b) of the Code.
Rev. Ru. 16S, C. . 1953-2,19, ampfed.
urther consderaton has been gven to Revenue Rung 168, C. .
1953-2,19, for the purpose of carfyngthe poston of the Interna
Revenue Servce wth respect thereto. That rung hods that a pen-
aty payment made by a ta payer to hs mortgagee to obtan a reease
from the mortgage on property used n hs trade or busness, n order
to secure a new oan from another source, s deductbe by the ta payer
n the year of payment or accrua, dependng upon hs method of
reportng ncome.
The Interna Revenue Servce has been asked to consder whether,
n addton to quafyng as a deducton under secton 23(a)(1) of
the Interna Revenue Code of 1939, the penaty payment quafes as
a deducton under secton 23(a) (2) of the Code and whether t may
consttute a payment of nterest whch s deductbe under secton
23(b) of the Code.
Revenue Rung 168, supra, reates specfcay to what was there
stated, namey, a mortgage on property used n a trade or busness
and a penaty payment made by the mortgagor to obtan a reease from
such mortgage n order to secure a new oan from another source. In
that rung t was hed that the penaty payment was deductbe under
secton 23(a) (1) of the Code regardess of whether the mortgagor
s a corporaton or an ndvdua. It s mmatera whether the penaty
payment referred to n the rung was made pursuant to a prepay-
ment provson n the orgna obgaton or mortgage, or was the re-
sut of negotatons between the mortgagor and mortgagee subsequent
to the oan agreement. In ether case, the amount of the penaty s
consdered pad by the borrower to reeve hmsef of the obgaton
under the mortgage agreement n order to obtan a new oan from an-
other source. Therefore, t s an e pense of canceng the od n-
debtedness. Cf. secton 39.22(a)-17 of Reguatons 118 and T. D.
603, C. . I -2, 58 (1935).
If the mortgage were on ncome producng property not used n
a trade or busness and f the condtons of secton 39.23(a)-15 of
Reguatons 118 were met, the penaty payment woud be an aowabe
deducton under secton 23(a) (2) of the Code n computng net n-
come.
If the mortgaged property were property hed for the producton
of rents or royates, the penaty payment shoud be taken nto consd-
eraton n arrvng at ad|usted gross ncome. See secton 22 (n) ( )
of the Code.
penaty payment made under the condtons set forth n Revenue
Rung 168, supra, does not meet the defnton of nterest under sec-
ton 23(b) of the Code. The Unted States Supreme Court has de-
fned nterest as the amount one has contracted to pay for the use of
borrowed money. See Pear . Deputy, et a. v. Perre S. DuPont,
308 U. S. 88, at 97, Ct. D. 1 35, C. . 19 0-1,118, ctng Od Coony
Raroad Company v. Commssoner, 28 U. S. 552, Ct. D. 56, C. .
I-1, 27 (1932). The penaty payment here nvoved s a payment
n addton to and dsassocated from the payment of nterest nas-
much as t s a payment made to obtan a reease from the obgaton
whch caed for the payment of nterest.
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261 Regs. 118, 39.23(a)- .
In order for a payment to be deductbe as nterest, t must be made
ot the use of borrowed money. payment made for the prvege
ot prepayng an ndebtedness s not one whch can be sad to be for
the use of the borrowed money t s n the nature of a penaty to gan
reease from a pre-e stng contractua abty to make payments n
the future. Such a payment cannot be cassfed as a payment of n-
terest wthn the meanng of secton 23(b) of the Code. Ths s true
whether the payment s made pursuant to a prepayment cause n the
orgna ndebtedness agreement or through a negotated reease. c-
cordngy, t s hed that the penaty payment under certan condtons
woud consttute a deductbe nontrade or nonbusness e pense under
secton 23(a) (2) of the Code, but t does not represent a payment of
nterest whch woud be deductbe under secton 23(b) of the Code.
Revenue Rung 168, supra, ampfed.
Regttatons 118, Secton 39.23(a)-: usness Rev. Ru. 55-109
e penses.
( so Secton 2 (a) Reguatons 118, Secton
39s2 (a)-.)
Members of reserve components of the rmed orces attendng
tranng drs under competent orders, wth or wthout compensa-
ton, are regarded as engaged n a trade or busness. Certan non-
rembursed transportaton e penses ncurred on trps (not e tend-
ng overnght) made by reservsts to attend such drs consttute
ordnary and necessary busness e penses under secton
23(a)(1)( ) of the Interna Revenue Code of 1939 and may be
deducted n computng net ncome, provded the optona standard
deducton s not eected. mounts e pended by a reservst for the
purchase and mantenance of unforms, whch he may wear ony
whe performng dutes as a reservst, are deductbe for edera
ncome ta purposes as ordnary and necessary busness e penses,
e cept to the e tent that nonta abe aowances are receved for
these costs.
dvce has been requested concernng the treatment, for edera
ncome ta purposes, of e penses ncurred by a member of a reserve
component of the rmed orces for transportaton n attendng au-
thorzed tranng drs and for the purchase and mantenance of
necessary unforms.
In the nstant case, the ta payer, a member of a reserve unt of the
rmed orces, s requred to attend authorzed tranng drs under
competent orders at a ocaton whch enabes hm to return to hs res-
dence each nght after partcpatng n such drs. The ta payer
receves basc pay for ony one-haf of the tota number of drs pre-
scrbed for the ta abe year, but does not receve any aowance or re-
mbursement for transportaton e penses ncurred n attendng such
drs. e s aso requred to purchase, mantan, and wear to such
drs the unforms desgnated by the partcuar branch of the rmed
orces to whch he beongs.
Secton 23(a) (1)( ) of the Interna Revenue Code of 1939 pro-
tdes n part that n computng net ncome there sha be aowed as
deductons the ordnary and necessary e penses pad or ncurred
durng the ta abe year n carryng on any trade or busness, ncud-
ng traveng e penses (ncudng the entre amount e -
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Regs. 118, 39.23(a)-.) 262
pendec for meas and odgng) whe away from home n the pursut
of a trade or busness .
Secton 8(d) of such Code provdes that the term trade or bus-
ness ncudes the performance of the functons of a pubc offce. The
Senate and Conference Commttee Reports on the Revenue of
193 , C. . 1939-1 (Part 2), 586 at 608, and 627 at 630, respectvey,
stated that secton 8(d) was decaratory of e stng aw. That pro-
vson has, therefore, been construed, not as automatcay convertng
nto a trade or busness the functons of every so-caed pubc offce
performed by a vounteer, but as recognzng that the functons of a
pubc offce whch are n the nature of a trade or busness shoud be
treated as such, even though the ncumbent thereof may serve wthout
compensaton, a factor whch s ordnary regarded as a prerequste
to the pursut of a trade or busness. Thus, fu-tme and many part-
tme mtary and cvan offcers and empoyees of the Government
are regarded as engaged n a trade or busness, even though they are
not compensated for ther servces. See D. C. ackng v. Comms-
soner, 9 . T. . 312, acquesence, C. . II-1,16 (1928) I. T. 2721,
C. . II-2, 38 (1933) G .C. M 23672, C. . 19 3, 66 and I. T. 012,
C. . 1950-1, 33. Compare I. T. 3752, C. . 19 5, 81. Snce t appears
that a member of a reserve unt of the rmed orces attendng pre-
scrbed drs performs servces whch are ordnary compensated and
has rghts, dutes, and obgatons whch are n the nature of a trade or
busness, t s hed that a reservst who attends drs under compe-
tent orders, wth or wthout compensaton, s engaged n a trade or
busness and may ncur ordnary and necessary e penses wthn the
scope of secton 23(a) (1) ( ) of the Code, even though he s not re-
mbursed therefor.
It s cear that a ta payer may deduct hs overnght traveng
e penses (ncudng the cost of meas and odgng) necessary n-
curred whe carryng on a trade or busness at a mnor or temporary
post of duty stuated at a dstance from the genera ocaton of hs
prncpa or reguar post of duty. Water . rown v. Commssoner,
13 . T. . 832, acquescence, C. . III-1, 6 (1929) oseph W.
Powe v. Commssoner, 3 . T. . 655, acquescence, C. . -2,
19 (1936) oseph TI. Sherman, r., et v . v. Commssoner, 16 T. C.
332, acquescence, C. . 1951-2, and arry . Schurer v. Comms-
soner, 3 T. C. 5 , acquescence, C. . 19 ,2 . That prncpe was e -
tended n Revenue Rung 190, C. . 1953-2,303, to permt ta payers to
deduct ther transportaton e penses (e cudng the cost of meas and
odgng) ncurred on day round trps to a mnor or temporary post
of duty stuated beyond the metropotan area whch consttutes ther
prncpa or reguar post of duty, even though such trps do not re-
qure them to be away overnght. ccordngy, t s hed that where
a member of a reserve unt of the rmed orces s requred to make
trps (not e tendng overnght) between the cty or genera area
whch consttutes hs prncpa or reguar post of duty and the ocaton
of drs conducted away from such area, he may deduct hs round-trp
transportaton e penses so ncurred as ordnary and necessary bus-
ness e penses under secton 23(a) (1) ( ) of the Code, provded free
transportaton between such ocatons s not furnshed by the rmed
orces. Ths concuson s appcabe regardess of whether the ta -
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263 Regs. 118, 39.23 (a)-.
payer attends such, drs n the evenng after hs reguar workng
hours or on an otherwse nonworkng day.
The rues stated n the precedng paragraph (aowng deductons
for overnght traveng e penses and day transportaton e penses
whe away from prncpa or reguar post of duty) are not appcabe
to the day commutng e penses of a ta payer who s empoyed on
dfferent days at dfferent ocatons wthn the same cty or genera
area, because such a ta payer s not away from hs prncpa or reguar
post of duty, snce that term s not mted to a partcuar offce or
budng, but ncudes the entre cty or genera ocaty n whch he s
customary empoyed. See Ward I. Thompson v. Commssoner,
15 T. C. 609 Raymond . ershner v. Commssoner, 1 T. C. 168
and Rev. Ru. 190, supra. Thus, t s hed that a reservst may not de-
duct any part of hs transportaton e penses ncurred n attendng
drs whch are conducted wthn the cty or genera ocaty whch
consttutes hs prncpa or reguar post of duty uness he s aso work-
n at some other- busness ocaton durng that same day.
Where an empoyee havng ony one empoyer s requred to work
part of the same day at each of two dfferent ocatons wthn the same
cty, t s cear that he must make a busness trp whch s drecty
attrbutabe to the actua performance of hs dutes, and that hs
necessary transportaton e penses n gong from hs frst to hs second
pace of empoyment woud generay be deductbe. If he has to
return to hs frst pace of empoyment durng that same day, hs
return trp woud aso be drecty connected wth the busness and hs
return transportaton e penses woud kewse be deductbe. ow-
ever, f at the end of hs workday he goes home drecty from hs
second pace of empoyment, hs trp woud ordnary be regarded
as commutng and hs transportaton e penses woud be nondeduct-
be, at east n those stuatons where hs transportaton e penses n
gong from that ocaton to hs home do not e ceed those from hs
headquarters offce to hs home.
Where an empoyee havng two separate empoyers s requred to
work on the same ofay at a dfferent ocaton wthn the same cty for
each of hs empoyers, t s recognzed that hs transportaton e penses
n gong from hs frst to hs second pace of empoyment are not
ncurred n dschargng the dutes of ether |ob or n carryng on the
busness of ether empoyer. Compare Commssoner v. . N. owers,
326 U. S. 65, Ct. D. 1659, C. . 19 6-1, 57. owever, snce both such
postons consttute part of the empoyee s trade or busness, oca
transportaton e penses n gettng from one pace of empoyment to
another consttute ordnary and necessary e penses ncurred n carry-
ng on hs combned trade or busness and n dschargng hs dutes
atooth ocatons durng that same day. Ths reasonng s n accord
wth the rown, Powe, and Sherman cases, supra, to the e tent they
aow ta payers who are carryng on two unreated occupatons at
wdey separated ocatons to deduct ther overnght traveng e -
penses ncurred n gettng from one busness ocaton to the other, and
wth I. T. 38 2, C. . 19 7-1, 11, to the e tent t hods that a State-
egsator who s aso engaged n some other trade or busness at a
dstance from the State capta may deduct hs transportaton e -
penses ncurred n makng day round trps between hs two paces
86 050 5 18
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118, 39.23(a)-. 26
of busness, provded such day round trps are necessary for the
purpose of dschargng hs dutes at both ocatons. owever, the
deducton of oca transportaton e penses, especay n a dua-
empoyer stuaton, woud usuay be mted to a one-way trp between
hs two oca paces of empoyment on the same day because the
empoyee ordnary woud not have to report back to hs frst pace
of empoyment on that day.
ccordngy, t s hed that when a reservst attends prescrbed drs
wthn the cty or genera ocaty whch consttutes hs prncpa or
reguar post of duty, and on that same day s workng at some other
busness ocaton theren, he may deduct hs one-way transportaton
e penses n gettng from one such busness ocaton to the other. Of
course, f the ta payer returns to hs resdence for dnner after hs
reguar workng hours and before attendng the dr, he can deduct
h s actua transportaton e penses ony to the e tent they do not e ceed
the transportaton e penses he woud have ncurred had he gone
drecty from one such busness ocaton to the other.
The transportaton e penses hed to be deductbe heren consttute
ordnary and necessary busness e penses, rather than traveng e -
penses whe away from home. Under the Interna Revenue Code of
1939, as amended, unrembursed transportaton e penses may be de-
ducted by an empoyee ony n computng net ncome and then ony
on condton that the ta payer temzes hs deductons nstead of eect-
ng the optona standard deducton.
Wth respect to the deductbty of the cost and mantenance of
reservsts unforms, such queston s governed by secton 39.2 (a)-
of Reguatons 118, whch provdes n pertnent part as foows:
Te cost of equpment of an rmy offcer to the e tent ony that It s
especay requred by hs professon and does not merey take the pace of
artces requred n cvan fe s deductbe. ccordngy, the cost of a sword
s nn aowabe deducton, but the cost of a unform s not.
The second sentence of the above-quoted reguaton s ntended to be
e panatory of the tests for deductbty prescrbed n the frst sentence
thereof, rather than to estabsh an nfe be rue that the cost of any
mtary unform s a nondeductbe persona e pense. In any case,
therefore, where a unform does not merey take the pace of artces
requred n cvan fe, deducton of amounts e pended n the pur-
chase and mantenance of such a unform woud not be precuded by
such reguaton. In the case of a reservst who s requred to wea
hs unform when on actve duty for tranng for temporary perods,
when attendng servce schoo courses, or when attendng tranng
assembes, and who s prohbted by mtary reguatons from wear-
ng hs unform e cept on such occasons, t s beeved the unform does
not merey take the pace of artces requred n cvan fe.
It s hed, therefore, that amounts e pended by reservsts for the
purchase and mantenance of unforms requred for such nfrequent
occasons as those set forth above, and aowed to be worn ony on suc.
occasons, are deductbe for edera ncome ta purposes as ordnar|
and necessary busness e penses, e cept to the e tent that nonta abe
aowances are receved for these costs. Such poston does not
represent any change n the vews of the Interna Revenue Servce wt
respect to the nondeductbty of the costs reated to unforms worn
wthout restrcton as to the occason for such wear by members of the
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265 Regs. 118, 5 39.23(a)-.
rmed orces on fu-tme actve duty. In such cases, the unform
s consdered to repace ordnary cvan cothng and does not meet
the test of the above-quoted provson of the reguatons.
-
RtcTn To- S 118, Secton 39.23 (a)-1: usness Rev. Ru. 55-189
e penses.
k sa Secton 116(g).)
Where a member of a shpowners protecton and Indemnty asso-
caton, whch assocaton s e empt from edera ncome ta to the
e tent provded n secton 116(g) of the Interna Revenue Code of
1939, pays Into the reserve fund of the assocaton an amount consd-
ered necessary to provde the necessary nsurance protecton eft
vod by the 100,000 deductbe provson, wth respect to each mem-
ber vesse, n standard hu and machnery marne nsurance poces
carred wth reguar marne nsurance carrers, such amount s de-
ductbe from the member s gross ncome as a busness e pense under
secton 23 (a) of the Interna evenue Code of 1939 to the e tent t s
ordnary and necessary.
dvce has been requested as to the deductbty of amounts pad
nto the reserve fund of a shpowners protecton and ndemnty asso-
caton by ts members, for the purpose of provdng the nsurance
protecton eft vod by the 100,000 deductbe provson n standard
hu and machnery marne nsurance poces carred wth reguar
marne nsurance carrers wth respect to each vesse. dvce has
aso been requested as to whether such assocaton, under the foowng
crcumstances, s e empt from edera ncome ta aton to the e tent
provded n secton 116(g) of the Interna Revenue Code of 1939.
The owners of severa vesses formed an assocaton for the purpose
of provdng the nsurance protecton eft vod by the 100,000 de-
ductbe provson wth respect to each vesse covered by standard hu
and machnery marne nsurance poces carred wth reguar marne
nsurance carrers. ach member pays annuay nto the reserve fund
of the assocaton 10a doars for each vesse owned by such member,
whch amount s consdered suffcent to provde the necessary nsur-
ance protecton.
mones comng nto the assocaton are used ony to cover operat-
ng e penses of the assocaton and osses sustaned by the vesses not
covered by the standard hu and machnery marne nsurance poces
carred wth respect to each vesse. No profts, gans or dvdends are
dstrbuted to the members of the assocaton. None of the funds are
to be drecty or ndrecty oaned, returned, dscounted, hypothecated,
pedged, gven, assgned, advanced, or nvested wth or to any mem-
bers of the assocaton. The assocaton s to contnue ndefntey
uness otherwse dssoved by a ma|orty vote of those owners entted
to vote. Upon dssouton, a funds beongng to the assocaton sha
be gven to chartabe organzatons. No members are to receve any
beneft, drect or ndrect, upon dssouton and dstrbuton of the
assets of the assocaton.
Secton 116(g) of the Code provdes for the e cuson from gross
ncome of The recepts of shpowner s protecton and ndemnty
assocatons not organzed for proft, and no part of the net earnngs
of whch nures to the beneft of any prvate sharehoder but such
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Regs. 118, 39.23(a)-. 2(36
corporaton sha be sub|ect as other persons to the ta upon ther net
ncome from nterest, dvdends, and rents.
ased upon the facts presented, t s hed that the mones receved
by the assocaton from ts members sha not be ncuded n ts gross
ncome under the authorty of secton 110(g) of the Code. owever,
the assocaton sha be sub|ect to ta upon ts net ncome from nter-
est, dvdends, and rents.
Wth respect to the amounts pad by the members nto the reserve
fund of the assocaton, such amounts are deductbe as a busness
e pense under secton 23(a) (1) of the Code to the e tent that they
are ordnary and necessary. Prma face, the amount deductbe w
be mted to that whch woud be payabe to an ndependent nsurance
company for a smar type of coverage. owever, n a partcuar
case a deducton of hgher amounts may be |ustfed on a showng by
the ta payer that they are necessary to the mantenance of a proper
reserve.
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 55-193
e penses.
( so Sectons 22(a), 22(b) Reguatons 118,
Sectons 39.22(a)-3, 39.22(b) (1)-1, 39.22(b)
(2)-5.)
Where an empoyer sponsors a nontrnsteed penson and nsurance
pan for the beneft of hs empoyees, funded by means of a contract
wth an nsurance company whch s the equvaent of a combnaton
group term fe nsurance and group annuty contract, the fe nsur-
ance premums pad by the empoyer under the contract are deduct-
be under secton 23(a)(1)( ) of the Interna Revenue Code of
1939 by the empoyer as ordnary and necessary busness e penses
n the year pad and, as prescrbed n the ast sentence of secton
39.22(a)-3 of Reguatons 118, are not ta abe to the empoyees.
Insurance benefts under the contract pad benefcares by reason
of the death of an empoyee pror to retrement are not ta abe to
the benefcary n accordance wth secton 22(b)(1)( ) of the
Code. enefts derved from the annuty porton of the contract
pad by reason of the death of an empoyee pror to retrement are
ta abe to the benefcary to the same e tent that they woud have
been ta abe to the empoyee had he ved and receved such bene-
fts, n accordance wth secton 39.22(b) (2)-5 of Reguatons 118,
e cept that amounts pad as a death beneft n e cess of that n
whch the empoyee had a nonforfetabe nterest at the tme of death
w be e cuded from gross ncome of the benefcary n an amount
not n e cess of 5,000 as provded under secton 22(b) (1) () of
the Code.
dvce has been requested whether (1) a busness deducton s
aowed for fe nsurance premums pad by an empoyer under a
nontrusteed combnaton group nsurance and group annuty con-
tract, (2) such premums are ta abe to the empoyee, (3) nsurance
benefts pad under the nsurance provsons of the group contract by
reason of the death of an empoyee pror to retrement are ta abe
to the benefcary, and ( ) death benefts under the retrement annuty
porton of the contract pad by reason of the death of an empoyee
pror to retrement are ta abe to the benefcary.
n empoyer estabshed a nontrusteed penson and nsurance pan
for the beneft of hs empoyees under whch annuty benefts are pro-
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267 egs. 118, 39.23(a)-.
vded retred empoyees and nsurance benefts are provded actve
empoyees. benefts are funded under a snge contract ssued by
a fe nsurance company. The empoyees do not contrbute to the
contract.
The retrement beneft features of the contract are smar to those
generay found n group annutes. In addton, as n some group
annuty contracts, a death beneft s pad from the accumuaton of
premums pad for the retrement annuty beneft, upon the death of
an empoyee pror to retrement, such death beneft beng equa to the
premums pad by the empoyer for the annuty beneft, but not e -
ceedng 56 tmes the monthy retrement annuty whch woud have
commenced at norma retrement age f the empoyee had not ded.
Ths porton of the pan has been hed to meet the requrements of
secton 165(a) (3), ( ), (5), and (6) of the Interna evenue Code
of 1939.
The nsurance porton of the contract provdes benefts payabe
upon death of an egbe empoyee pror to retrement whch consst
or (a) one year term group nsurance for empoyees not yet egbe
for retrement annuty coverage and, for empoyees covered by the
annuty porton of the contract: (b) a ump-sum nsurance beneft
whch, when added to the death beneft payabe under the annuty
porton of the contract, w be equa to 56 tmes the amount of the
monthy retrement beneft e pected at norma retrement age, and
(c) a monthy ncome death beneft of one-haf the monthy retre-
ment beneft e pected at norma retrement age, but not e ceedng
100 per month. The beneft provded n (c) s avaabe ony for
marred mae empoyees and runs from the date of death of such
empoyee to what woud have been hs norma retrement date had
he ved. The empoyee has the rght to desgnate the benefcary of
any death benefts.
Under the contract for those empoyees egbe for retrement
annuty coverage, separate eve annua premums are specfed for
each beneft, . e., the retrement annuty beneft and the nsurance
benefts ndcated n (b) and (c) above. In ths respect ths contract
dffers from the group permanent forms of nsurance and annuty
contracts where the specfed premum covers both annuty and n-
surance benefts. Moreover, the reserve mantaned by the nsurer
for the annuty porton of the contract s the fu actuara reserve
for such benefts, wthout ad|ustment on account of any defcency
n the reserve for the nsurance benefts outned n (b) and (c) above.
(In connecton wth the nsurance benefts n (b) and (c) above,
negatve reserves arse because a eve premum s charged for a
beneft whch decreases n such a way that the annua cost of nsurance
protecton decreases. The eve premums are nsuffcent to pay the
nsurance costs n earer years, whch resuts n a defcency whch s
not made up unt the end of the premum-payng perod.) or
state nsurance department vauaton purposes, a separate mnmum
reserve s mantaned for the nsurance benefts, part of such reserve
beng borrowed from the nsurer s genera surpus. It thus appears
t woud be possbe to ssue separate contracts for the nsurance and
annuty benefts wthout necessary requrng any change n the
premums charged, n the reserve mantaned, or n the benefts pro-
vded. In ths respect aso, the contract dffers from the group per-
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Regs. 118, 39.23(a)-. 268
manent forms n whch a snge combned reserve s mantaned for
the nsurance and annuty features wth respect to actve ves.
s noted above, after an empoyee becomes egbe for retrement
annuty coverage, eve annua premums are charged for the nsurance
benefts n (b) and (c) above. though n ths respect the nsurance
benefts are more ke group permanent nsurance than the typca
group (one-year term) nsurance, the use of the eve premum method
n connecton wth the decreasng amounts of nsurance produces nega-
tve reserves, so that there s no advance fundng for these nsurance
benefts. Therefore, the ony beneft whch can be derved from the
premums pad for these nsurance benefts conssts of current n-
surance protecton thus, t s ths feature that dstngushes typca
group term nsurance from group permanent nsurance n whch re-
serves are but up whch may be used for contnued nsurance protec-
ton or some other beneft. In the present contract, benefts payabe
upon termnaton of empoyment pror to death or retrement, or upon
termnaton of the pan, are derved soey from the reserve accumu-
ated under the retrement annuty porton of the contract, and no
porton of the reserve can be apped to contnued nsurance protecton.
Upon termnaton of empoyment pror to retrement, a partcpant
has the rght to convert hs term nsurance coverage to ndvdua per-
manent nsurance, wthout evdence of nsurabty, the premum for
ths permanent nsurance beng that appcabe to the cass of rsk to
whch the partcpant beongs and to the form and amount of the
pocy at hs then current age. owever, n accordance wth Revenue
Rung 5 -165, C. . 195 -1, 17, the mere fact that an nsurance con-
tract permts converson of term nsurance to permanent types of n-
surance for whch the empoyee pays the entre cost woud not make
the empoyer s premum payments for the term nsurance ncudbe
n the empoyee s gross ncome f, n the absence of such a provson
for converson, such premums woud not be so ncudbe.
On the bass of the foregong consderatons, t s hed that the con-
tract sha be consdered as the equvaent of a combnaton of group
term fe nsurance and group annuty contracts and not as a group
permanent form. ccordngy, the ta consequences set forth n
Mmeograph 6 77, C. . 1950-, 16, wth respect to group permanent
fe nsurance, are not here appcabe.
deducton from gross ncome s provded n secton 23(a) (1) ( )
of the Code for a the ordnary and necessary e penses pad or n-
curred durng the ta abe year n carryng on any trade or busness,
ncudng a reasonabe aowance for saares or other compensaton
for persona servces actuay rendered.
The ast sentence of secton 39.22(a)-3 of Reguatons 118 pre-
scrbes that premums pad by an empoyer on poces of group fe
nsurance coverng the ves of hs empoyees, the benefcares of
whch are desgnated by the empoyees, are not ncome to the
empoyees.
Secton 22(b) (1) ( ) of the Code provdes that there sha be e -
cuded from gross ncome and e empt from ncome ta , amounts
receved under a fe nsurance contract pad by reason of the death of
the nsured.
5,000 e cuson from gross ncome s provded n secton
22(b) (1) ( ) of the Code for amounts pad by or on behaf of an
empoyer by reason of the death of an empoyee. Paragraph (d) (1)
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269 IRegs. 118, 39.23(a)-.
of secton 39.22(b) ()-2 of eguatons 118 states n effect that such
e cuson s mted to amounts whch are specfcay desgnated as a
death payment wth respect to whch the deceased empoyee dd not
have a nonforfetabe rght whe vng. See aso Rev. Ru. 55-7 ,
pape 230, ths uetn.
Under paragraph (c), secton 39.22(b) (2)-5 of Reguatons 118, f
upon the death of a retred empoyee, the benefcary of such empoyee
s pad, n accordance wth the terms of the annuty contract reatng
to the deceased empoyee, an annuty or other death beneft, the
amounts receved sha be ncuded n the benefcary s ncome to the
e tent they woud have been ncuded n the ncome of the deceased
empoyee had he ved and receved such payment, e cept to the e tent
the e cuson provded by secton 22(b) (1) ( ) s appcabe. Smar
ta treatment woud appy to the death beneft under an annuty where
the empoyee des before retrement.
ccordngy, t s hed that where an empoyer estabshes a non-
trusteed penson and nsurance pan for the beneft of hs empoyees,
funded by means of a contract whch s the equvaent of a combnaton
group term fe nsurance and group annuty contract, the premums
Sad for the nsurance benefts under the contract by the empoyer are
eductbe by the empoyer under secton 23(a) (1) ( ) of the Code
as ordnary and necessary busness e penses n the year pad and, as
prescrbed n the ast sentence of secton 39.22(a)-3 of Reguatons 118,
are not ta abe to the empoyees. Insurance benefts under the con-
tract pad benefcares by reason of the death of an empoyee are not
ta abe to the benefcary n accordance wth secton 22(b) (1) ( ) of
the Code. enefts derved from the annuty porton of the contract
pad by reason of the death of an empoyee pror to retrement, are
ta abe to the benefcary n accordance wth secton 39.22(b) (2)-5
of Reguatons 118 to the same e tent they woud have been ta abe to
the empoyee had he ved and receved such benefts, e cept that any
porton of such amounts pad as a death beneft n e cess of that n
whch the empoyee had a nonforfetabe nterest at the tme of death
w be e cuded from gross ncome of the benefcary n an amount
not n e cess of 5,000 as provded under secton 22(b) (1) ( ) of the
Code.
muatons 118, Secton 39.23(a)-: usness Rev. Ru. 55-201
e penses.
mounts e pended by Natona Guard offcers to stmuate In-
terest In ther unt of the Guard, to mantan the strength of the
unt at a hgh eve, to bud up morae, etc., whch have not been
authorzed as a reguar e pense payabe by the Unted States rmy
but whch are pad out of the persona funds of the offcers are
hed not to be necessary to the ta payers busness as offcers of
the Natona Guard and as such are not deductbe as ordnary
and necessary busness e penses under secton 23(a)(1) of the
Interna Revenue Code of 1039 n computng the net ncome of such
offcers. Where these e pendtures are made n compance wth
approprate Unted States rmy reguatons respectng the makng
of contrbutons to company and other Guard unt funds, and where
such e penses are Incurred for e cusvey pubc purposes, deduc-
tons therefor are aowabe under secton 23(o) (1) of the Code.
dvce has been requested whether e penses ncurred by Natona
Guard offcers whch beneft the Unted States Natona Guard, but
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Regs. 118, 39.23(a)-. 270
whch are not authorzed by the Unted States rmy, are deductbe
n computng net ncome.
Some offcers of a Natona Guard unt have been makng vountary
e pendtures out of ther persona funds to beneft ther unt of the
Natona Guard of the Unted States. These e pendtures ncude
amounts spent for entertanment of prospectve new members, head-
quarters suppes, advertsng, budng sgns, equpment for the unt s
dayroom, etc., and are desgned to stmuate nterest n the Guard,
mantan the strength of the unt at a hgh eve, and bud up morae.
Secton 23(a)(1) of the Interna Revenue Code of 1939 provdes
that n computng net ncome there sha be aowed as deductons a
the ordnary and necessary e penses pad or ncurred durng the ta -
abe year n carryng on any trade or busness. owever, n the ab-
sence of any reguaton of the Natona Guard of the Unted States
or order from superor offcers, the e penses referred to above are hed
not to be necessary to the ta payers busness as offcers of the Natona
Guard of the Unted States.
ccordngy, such e penses ncurred by Natona Guard offcers
whch have not been authorzed as a reguar e pense payabe by the
Unted States rmy, but whch are pad out of the persona funds
of such offcers, are not deductbe as ordnary and necessary busness
e penses under secton 23(a)(1) of the Code n computng the net
ncome of such offcers. To the e tent e penses for the above-stated
purposes are ncurred n compance wth approprate Unted States
rmy reguatons respectng the makng of contrbutons to a com-
pany or other Guard unt fund and to the e tent t can be shown
that such e penses are ncurred for e cusvey pubc purposes, deduc-
tons therefor are aowabe n accordance wth secton 23 (o) (1)
of the Code. Compare W. W. ercaw v. Commssoner, 165 ed.
(2d) 521, the second ssue, nvovng the purchase of an eectrc cock
by an rmy offcer.
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 55-250
e penses.
Dues pad by members of the rmed orces of the Unted States
to an offcers or a noncommssoned offcers cub are not so drecty
connected wth the carryng on of ther trade or busness as to con-
sttute an ordnary and necessary busness e pense deductbe under
secton 23(a) (1) ( ) of the Interna Revenue Code of 1939.
dvce has been requested whether dues pad by an offcer of the
rmed orces of the Unted States to an offcers cub are deductbe
for edera ncome ta purposes as an ordnary and necessary busness
e pense.
In the nstant case, an offcer mantans a membershp n an offcers
open mess, a soca organzaton known as an offcers cub. though
membershp s on a vountary bass, t has come to be regarded as
customary among offcers.
Secton 23 of the Interna Revenue Code of 1939 provdes n part
as foows:
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271 Regs. 118, 39.23(a)-.
6 C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net Income there sha be aowed as deductons:
(a) penses.

( ) In Genera. the ordnary and necessary e penses pad or
ncurred durng the ta abe year n carryng on any trade or bus-
ness .
Secton 39.23 (a)-1 of Reguatons 118 provdes n part that busness
e penses deductbe from gross ncome ncude the ordnary and nec
essary e pendtures drecty connected wth or pertanng to the ta -
payers trade or busness. Secton 8(d) of the Code provdes that
the term trade or busness ncudes the performance of the functons
of a pubc offce. Mtary and cvan offcers and empoyees of the
Government have generay been regarded as engaged n a trade or
busness wthn the meanng of secton 23(a) (1) ( ) of the Code.
See I. T. 012, C. . 1950-1, 33.
Whether amounts pad for cub dues are deductbe as an ordnary
and necessary busness e pense must depend on a showng that such
e pense s drecty connected wth or pertanng to the carryng on
of the ta payer s trade or busness. I. T. 1936, C. . III-1. 122
(192 ), hods that the benefts arsng from membershp n a cub for
cavary offcers of the Natona Guard, whch empoyed stabe men to
care for the offcers mounts, dd not |ustfy the concuson that the
membershp dues pad to the cub represented an ordnary and nec-
essary busness e pense, and such dues were hed not deductbe. In
Chares . arrs et u . v. Commssoner, Ta Court Memorandum
Opnon, entered anuary 28,1953, t was hed that r orce ssoca-
ton dues pad by an r orce offcer were not deductbe as a busness
e pense.
In the case under consderaton, the purpose and use of membershp
n an offcers cub s not shown to be so connected wth the perform-
ance of duty as a member of the rmed orces as to |ustfy the con-
cuson that membershp dues pad to the cub represent an ordnary
and necessary busness e pense.
ccordngy, t s hed that dues pad by members of the rmed
orces to an offcers cub are not deductbe under secton 23(a) (1)-
( ) of the Code. smar concuson resuts wth respect to dues
pad by ensted personne of the rmed orces to a noncommssoned
offcers cub whch s consttuted and operated n the same manner as
n offcers cub.
ktatons 118, Secton 39.23(a)-1: usness Rev. u. 55-331
e penses.
( so Sectons 22(b), 23( ), 2 (a) Reguatons
118, Sectons 39.23 ( )-, 39.2 (a) -1.)
Premums pad by an ndvdua for hs persona dsabty nsur-
ance do not consttute busness e penses under secton 23(a) of the
Interna Revenue Code of 1939, but consttute persona e penses the
deducton of whch Is prohbted by secton 2 (a) (1) of the Code.
urther, such payments do not consttute medca e penses wthn
the meanng of secton 23( ) of the Code. owever, any amounts
receved by such ndvdua pursuant to the nsurance contract are
e cudabe from gross Income under secton 22(b) (5) of the Code
as amounts receved as compensaton for persona n|ures or
sckness.
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egs. 118, 39.23(a)-. 272
dvce has been requested whether premums pad by a ta payer
for hs persona dsabty nsurance, under the foowng crcum-
stances, are deductbe from hs gross ncome as a busness e pense
under the provsons of secton 23(a) of the Interna evenue Code
of 1939 or as a medca e pense under secton 23 ( ) of the Code.
The ta payer purchased dsabty nsurance whch woud, n part,
repace ncome ost by reason of the oss of, or oss of the use of, a
porton of the body vta to hs professon. The contract provdes
that, n consderaton of the premums pad, f at any tme durng
the perod of the nsurance the ta payer sha sustan fu oss or
parta oss of that part or parts of the body nsured, the underwrters
w pay the assured, hs e ecutors, or admnstrators, compensaton
n accordance wth the terms of the contract, but not e ceedng an
aggregate of a certan sum. The specfc queston presented s whether
the premums pad for such contract of nsurance are deductbe as a
busness e pense under secton 23(a) of the Code.
The appcabe sectons of the Code nvoved are as foows:
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net ncome there sha be aowed as deductons:
(a) penses.
(1) TR D O USIN SS P NS S.
( ) In Genera. the ordnary and necessary e penses pad or
ncurred durng the ta abe year n carryng on any trade or bus-
ness, .
( ) Medca, Denta, tc., penses. penses pad durng the ta abe year,
not compensated for by nsurance or otherwse, for medca care of the ta payer,
hs spouse, or a dependent .
Th term medca care , as used n ths subsecton, sha ncude amounts pad
for the dagnoss, cure, mtgaton, treatment, or preventon of dsease, or for the
purpose of affectng any structure or functon of the body (ncudng amounts
pad for accdent or heath nsurance)
S C. 2 . IT MS NOT D DUCTI L .
(a) Genera Rue. In computng net ncome no deducton sha n any case
be aowed n res cct of
(1) Persona, vng, or famy e penses, e cept e traordnary medca
e penses deductbe under secton 23( )
S C. 22. GROSS INCOM .
(b) cusons rom Gross Income. The foowng tems sha not be n-
cuded In gross ncome and sha be e empt from tn aton under ths chapter:

(5) Compensaton fob n|ures or sckness. cept n the case of
amounts attrbutabe to (and not an e cess of) deductons aowed under
secton 23( ) n any pror ta abe year, amounts receved, through accdent
or heath nsurance or under workmen s compensaton acts, as compensaton
for persona n|ures or sckness, pus the amount of any damages receved
whether by sut or agreement ou account of such In|ures or sck-
ness,
The statute ceary dstngushes between ordnary and necessary
e penses of a trade or busness and persona e penses, the former beng
deductbe and the atter nondeductbe. Secton 23(a)(1) of the
Code s not a ncusve, but the deducton of e penses under that
ecton s mted to those referred to theren.
Snce the benefts avaabe to the ta payer tnder the terms of the
nsurance contract ndemnfy hm aganst oss of, or oss of the use
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273 Regs. 118, 39.23(a)-.
of, a porton of the body, t s hed that the premums pad for such
coverage do not consttute a busness e pense wthn the meanng of
secton 23(a) of the Code, but consttute persona e penses the deduc-
ton of whch s prohbted by secton 2 (a) (1) of the Code. urther,
snce the benefts avaabe ndemnfy the ta payer aganst specfed
osses or body n|ures and do not, n any way, remburse hm for
any medca e penses, the premums pad for the coverage do not
consttute a proper deducton under secton 23 ( of the Code as an
e traordnary medca e pense. Compare Rev. Ru. 19, C. . 1953-
1, 59. owever, any amounts receved by the ta payer pursuant to
the nsurance contract are e cudabe from gross ncome under the
provsons of secton 22 (b) (5) of the Code.
Reguatons 118, Secton 39.23 (a)-1: usness
e penses.
Deductbty of trave e penses n connecton wth promotona ac-
tvtes of a ta e empt organzaton. See ev. u. 55- , page 291.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
penses of wfe who accompanes her husband on a busness trp
or to a busness conventon. See Rev. Ru. 55-57, page 315.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
Costs and e penses appcabe to property hed for sae n ordnary
course of busness contrbuted to an organzaton descrbed n secton
23(o) or secton 23 (q) of the Interna Revenue Code. See Rev. Ru.
55-138, page 223.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
pendtures of amounts coected from ot owners by a rea estate
deveopment company for fre and poce protecton and mantenance
of ts resdenta deveopment. See Rev. Ru. 55-15 , page 21G.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
Protectve artces of cothng worn by commerca fshermen. See
Rev. u. 55-235, page 27 .
Reguatons 118, Secton 39.23(a)-: us-
ness e penses.
Deductbty of nsurance pocy premums pad by a ta payer for
the purpose of rembursng hm for busness overhead e penses n-
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Regs. 118, 39.23(a)-2. 27
curred by hm durng proonged perods of nabty to work because
of n|ury or sckness. See Rev. Ru. 55-26 , page 11.
Reguatons 118, Secton 39.23 (a)-1: Trade or
busness e penses.
contrbuton by,a ta payer n busness for the purpose of brngng
a natona conventon to ocaty. See Rev. Ru. 55-265, page 22.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
penses ncurred by a teacher on sabbatca eave for study not
requred to mantan poston. See Rev. Ru. 55- 12, page 318.
Reguatons 118, Secton 39.23(a)-2: Trave- Rev. Ru. 55-235
ng e penses.
( so Secton 39.23(a)-.)
Crew members of a commerca fshng boat have ther prncpa or
reguar post of duty at the home port where they ordnary, or for an
ndefnte (as dstngushed from a temporary) perod, begn and end
ther fshng trps. Thus, they may deduct the reasonabe and neces-
sary e penses actuay ncurred by them for trave, meas, and odgng
when on a busness trp requrng ther absence from such home port
for a mnmum perod whch asts substantay onger than an ord-
nary day s work and durng whch ther dutes requre them to obtan
necessary seep whe away from such home port. See Rev. Ru. 5 -
97, C. . 195 -2, 75. pendtures ncurred by commerca fsher-
men for protectve cothng of a type not adaptabe to genera use, such
as o cothes, work goves, and rubber boots, may be deducted n com-
putng net ncome, provded the standard deducton s not camed.
See I. T. 3373, C. . 19 0-1, 28.
Reguatons 118, Secton 39.23(a)-2: Trave- Rev. Ru. 55-236
ng e penses.
The prncpes enuncated n Revenue Rung 5 - 97, C. . 195 -2,
75, and other rungs cted theren, concernng the deductbty and
substantaton of traveng and reated e penses ncurred by raroad
empoyees, are equay appcabe to ong ne truck drvers who ncur
e penses for meas and odgng whe away from ther home termna
n the pursut of ther trade or busness. Snce a ta payer s home
termna s not mted to a partcuar budng or property, but n-
cudes the entre cty or genera ocaty whch consttutes hs prncpa
or reguar post of duty, the cost of meas purchased wthn such gen-
era area at the begnnng or end of a ong ne truck drver s run
represents a nondeductbe vng e pense. See Revenue Rung
55-109, page 2C1 of ths uetn, and cases cted n the s th paragraph
thereof.
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275 Reg . 118, 39.23(a)-15.
Reguatons 118, Secton 39.23(a)-2: Trave-
ng e penses.
Trave e penses ncurred by a teacher on sabbatca eave for study
not requred to mantan poston. See Rev. u. 55- 12, page 318.
Reguatons 118, Secton 39.23(a)-9: Pensons
compensaton for n|ures.
Deductbty of payments by an empoyer to the wdow of a de-
ceased empoyee. See Rev. Ru. 55-212, page 299
Reguatons 118, Secton 39.23(a)-10: Rentas.
So-caed renta payments to bank whch purchased and hods ega
tte to automotve equpment whch t eases to ta payer. See Rev.
Ru. 55-25, page 283.
Reguatons 118, Secton 39.23(a)-15: Nontrade Rev. Ru. 55-23
or nonbusness e penses.
Where a subscrber to a sponsored nvestment pan pays a custody
fee, as dstngushed from a creaton fee to the sponsor and custodan
of the pan for servces rendered n makng nvestments and keepng
necessary records, the fee, pursuant to Revenue Rung 3, C. . 1953-1,
37, s deductbe annuay as a nonbusness e pense under secton
23(a) (2) of the Interna Revenue Code of 1939 and the subscrber-ta -
payer has no eecton to treat the fee as a capta e pendture.
Reguatons 118, Secton 39.23 (a)-15: Nontrade Rev. Ru. 55-190
or nonbusness e penses.
ttorney s fees and admnstraton e penses pad or ncurred by
the fducary of an estate n connecton wth the admnstraton of the
estate, ncudng e penses ncurred n the determnaton, coecton, or
refund of any ta , are not deductbe n the fducary s persona ncome
ta return. owever, e penses ncurred durng the admnstraton
of an estate whch are pad by the e ecutor or admnstrator n hs
capacty as the fducary of the decedent s estate are deductbe under
secton 23(a) (2) of the Interna Revenue Code of 1939, n the estate s
ncome ta return for the year n whch the payment was made,
provded such e penses are not camed as a deducton n computng
the net estate sub|ect to the estate ta . See sectons 39.23 (a)-15()
and 39.162-1 of Reguatons 118, and I. T. 018, C. . 1951-1, 39.
Reguatons 118, Secton 39.23 (a)-15: Nontrade Rev. Ru. 55-221
or nonbusness e pense.
Ltgaton e penses pad or ncurred n a sut to have a resduary
trust decared vod do not consttute e penses pro matey reated to
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Regs. 118, S 39.23(b)-. 276
the producton or coecton of ncome or to the management, conserva-
ton, or mantenance of property hed for the producton of ncome.
Such e penses are cassfed as e penses of defendng or perfectng
tte to property and are n the nature of capta e pendtures. c-
cordngy, they are not deductbe as nontrade or nonbusness e penses
under secton 23(a) (2) of the Interna Revenue Code of 1939 nsofar
as they are aocabe to recovery of property as dstngushed from
recovery of ncome.
S CTION 23(b). D DUCTIONS ROM GROSS INCOM :
INT R ST
Reguatons 118, Secton 39.23 (b) -1: Interest Rev. Ru. 55-389
Interest pad or accrued on debentures sod by a corporaton to In-
crease ts workng capta and to provde for refundng of Indebted-
ness, and pant e panson, consttutes an aowabe deducton wthn
the meanng of secton 23(b) of the Interna Revenue Code of 1939,
notwthstandng the temporary or short-term nvestment of a sub-
stanta porton of the proceeds from the debentures n ta -e empt
negotabe securtes.
dvce has been requested whether nterest pad or accrued on de-
bentures sod by a corporaton to ncrease ts workng capta and to
provde for refundng of ndebtedness, and pant e panson, consttutes
an aowabe deducton wthn the meanng of secton 23(b) of the
Interna Revenue Code of 1939 where a substanta porton of the
proceeds of the ndebtedness s temporary nvested n ta -e empt
securtes.
sharp growth n saes voume and rapdy ncreasng demands on
ta payer s manufacturng factes, as we as a matera ncrease n
ts workng capta requrements, necesstated an addtona fnancng
program. In ths connecton the ta payer ssued addtona capta
stock and snkng fund debentures. Through ths fnancng the ta -
payer proposed to provde addtona capta for addtona equp-
ment, factes and reated servces to manufacture ts products.. The
ta payer aso proposed to qudate some of ts debts. The baance of
the mones receved through ths fnancng program was to be used
for workng capta and other corporate purposes.
The sae of the addtona shares of stock and snkng fund de-
bentures was consummated n pr 195 , and a porton of the proceeds
was apped for purposes of qudatng the ta payer s debts, eavng
a net baance for the purpose of panned e panson and workng
capta.
The ta payer, beng aware of the tme requred to compete the
performance of constructon contracts and to obtan devery of ma-
chne toos, nvested a substanta porton of the proceeds from the
saes of debentures for a short but unspecfed perod of tme n ta -
e empt negotabe securtes.
Secton 23 of the 1939 Code provdes that n computng net ncome
there sha be aowed as deductons:
(b) Interest. Interest pad or accrued wthn the ta abe year on In-
debtedness, e cept on ndebtedness Incurred on contnued to purchase or carry
obgatons (other than obgatons of the Unted States ssued after September
2 ,1017, and orgnay subscrbed for by the ta payer) e nterest upon whch Is
whoy e empt from the ta es mposed by ths chapter.
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277 Regs. 118, 30.23(c)-.
The ndebtedness n queston has been ncurred for the purposes of
refnancng other ndebtedness, furnshng workng capta, and con-
tempated pant e panson, rather than to purchase or carry ta -
esempt securtes. ccordngy f the borrowed funds so nvested n
the ta -e empt securtes are e pended for pant e panson durng the
years 195 and 1955, t s hed that the nterest pad or accrued on the
debentures w consttute an aowabe deducton under secton 23(b)
of the Code, notwthstandng the temporary nvestment of such funds
n ta -e empt securtes. Compare S. . 5128, C. . I -2,156 (1925).
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY
Reguatons 118, Secton 39.23 (c)-1: Ta es. Rev. Ru. 55-65
The two percent addton mposed by secton 71.10(9) (c) of the
Wsconsn Statutes (1953) on corporatons, organzed n the State of
Wsconsn and censed to do busness theren, for faure to pay n-
come ta n fu on or before the 15th day of the thrd month foowng
the cose of the ncome year s a part of the ta and consequenty s
deductbe under secton 23(c) of the Interna Revenue Code of 1939.
The addtons mposed by secton 71.13(1) of the Wsconsn aw
to be added to the nta amount of ncome ta for denquency n
payment of the ta when due and under secton 71.11( 0) for faure
to fe an ncome ta return wthn the tme prescrbed by aw are
penates and therefore are not deductbe. See ossar Co., Inc. v.
Commssoner, 16 . T. . 952.
Reguatons 118, Secton 39.23 (c)-1 Ta es. Rev. Ru, 55-139
The ta Imposed by the State of Georga by secton 2 of the Georga
Retaers and Consumers Saes and Use Ta ct, Georga Laws 1951,
360, approved on ebruary 20, 1951, effectve pr 1, 1951, s a ta
mposed upon the purchaser or consumer and s deductbe under sec-
ton 23(c)(1) of the Interna Revenue Code of 1939 regardess of
whether or not t s mposed wth respect to property used n a trade or
busness.
L T. 058, C. . 1951-2,22, modfed.
urther consderaton has been gven I. T. 058 C. . 1951-2,
22, reatng to the ta mposed by the State of Georga under secton
2 of the Georga Retaers and Consumers Saes and Use Ta ct,
Georcpa Laws 1951, 360, approved on ebruary 20, 1951 effectve
pr 1,1951. In I. T. 058 t s hed that such ta s deductbe under
secton 23(c) (1) of the Interna Revenue Code of 1939 by persons
who engage n the busness of seng tangbe persona property at
reta n Georga and by persons e ercsng the respectve prveges
set forth n the ct. If such persons are ndvduas, the deducton
must be taken n computng ad|usted gross ncome. In the case
of such persons who are not ndvduas, the deducton s aowabe
f determnng net ncome. Where ta payers coect the ta from
vendees they must ncude the tota amounts so coected n ther gross
ncome for edera ncome ta purposes. It s further hed that
to the e tent that the ta s pad by the purchaser or consumer, other-
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Regs. 118, 39.23(c)-. 278
wse than n connecton wth hs trade or busness, t s deductbe
by the purchaser or consumer under secton 23(c)(3) of the Code,
e cept n the case of an ndvdua who eects to take the optona
standard deducton. In case the purchaser or consumer s an nd-
vdua and the ta s pad n connecton wth hs trade or busness,
the ta must be deducted n computng ad|usted gross ncome.
The ct, supra, provdes n part as foows:
S . 12. e t further enacted, by the authorty aforesad, that:
(a) The prvege ta heren eved, measured hy reta saes sha be
coected hy the deaer from the purchaser or consumer. Notwthstandng
any other provson, t s the purpose and utent of ths ct that the ta
mposes hereunder s. n fact, a evy on the purchaser or consumer of the
tangbe persona property or servces descrbed n ths ct, and the evy
on deaers ns specfed s merey as agent of the State for coecton of
snd ta . Therefore, notwthstandng any e emptons from ta es whch
any deaer may now or hereafter en|oy under the consttuton or aws of
ths or any other State, or of the I nted States, such deaer sha coect
the ta mposed hereunder from the purchaser or consumer and sha pay
the same over to the State Revenue Commssoner as heren provded.
Secton 23(c) (1) of the Code provdes that n computng net ncome
there sha be aowed as deductons ta es pad or accrued wthn the
ta abe yoar wth certan e ceptons not here matera. Secton
39.23(c)-(a) of Reguatons 118 provdes that n genera ta es are
deductbe ony by the person upon whom they are mposed. Under
secton 23(c) (3) of the Code, reta saes ta es are deductbe by the
consumer when the burden of the ta s borne by the consumer even
though the ta s not mposed upon the consumer but s mposed upon
the deaer, uness the property upon whch the ta s mposed s used
by the consumer n connecton wth hs trade or busness.
rom the phraseoogy of the ct, supra, notwthstandng any
other provsons , t appears that the egsatve ntent and
purpose was to mpose a ta on the purchaser or consumer of the
tangbe persona property or servces descrbed n ths ct, and that
the evy on deaers as specfed s merey as agent of the State for
coecton of the ta and to pay the same over to the State Revenue
Commssoner.
ccordngy, t s hed that the Georga saes and use ta s mposed
upon the purchaser or consumer and s pad by such ta payer as a
ta and s therefore deductbe under secton 23(c)(1) of the Code,
regardess of whether or not t s mposed wth respect to property
used n a trade or busness. Snce the deaers are agents of the State
for coecton purposes, amounts coected by them as ta and pad to
the State are not ncudbe n ther gross ncome for edera ncome
ta purposes. owever, amounts retaned by such agents as a fee
for coectng the ta arc ncudbe n gross ncome.
I. T. 058, C. . 1951-2, 22, s modfed to the e tent that t s
nconsstent wth the vews e pressed heren
Reguatons 118, Secton 39.23(c)-1: Ta es Rev. Ru. 55-289
( so Secton 22(n) Reguatons 118,
Secton 39.22(n)-.)
The ta mposed by the State of Msssspp, secton 1017 of the
Msssspp Code, as amended by ouse No. C78, pr 13, 195 ,
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279 Regs. 118, 39.23(e)-.
Cumuatve Suppement to Msssspp Code 19 2 nnotated, oume
T recomped, upon the sae, use, gft, possesson or consumpton of
cgarettes, cgars and smokng tobacco, the mpact or burden of whch
s decared to be upon the vendee, user, consumer or possessor of cga-
rettes wthn the State of Msssspp s deductbe under secton
25(c)(1) of the Interna evenue Code of 1939 by the consumer or
utmate user to the e tent that the amount of the ta s pad to the
vendor by the vendee. owever, n the case of an ndvdua who
eects to use the optona standard deducton, no deducton s aowabe
uness the ta s attrbutabe to a trade or busness carred on by hm.
If the ta s attrbutabe to a trade or busness carred on by the nd-
vdua the amount of the ta s deductbe from gross ncome n com-
putng ad|usted gross ncome wthn the meanng of secton 22(n) of
the Code, provded the trade or busness does not consst of the per-
formance of a servce as an empoyee. ffectve pr 13, 195 , no
deducton s aowabe to the whoesaer and no porton of the prce
pad by the consumer or utmate user for such products whch repre-
sents the ta es thereon s ncudbe n the gross ncome of the whoe-
saer.
Reguatons 118, Secton 39,23(c)-: Ta es.
onus requred by the State of Pennsyvana to be pad on capta
empoyed theren by organzatons not created under the aws of that
State, See ev. u. 55- 8, page 281.
Reguatons 118, Secton 39.23 (c)-: Ta es.
Deducbty of rea property ta es mposed by the State of Oho,
pursuant to secton 5719.01 of the Revsed Code of Oho, effectve
October 13,1953. See ev. u. 55-152, page 67.
Reguatons 118, Secton 39.23(c)-: Ta es.
Ta mposed by State of Lousana on cgarettes sod at whoesae
or reta. See ev. u. 55-326, page 2 .
Reguatons 118, Secton 39.23(c)-3: Ta es for
oca benefts.
Ta es assessed by Moffat Tunne Improvement Dstrct of Coorado.
See Rev. u. 55-28 , page 25.
S CTION 23(e). D DUCTIONS OM G OSS INCOM :
LOSS S Y INDI IDU LS
Reguatons 118, Secton 39.23 (e)-: Losses ev. u. 55-27
bv ndvduas.
( so Sectons 22(a), 23(f), eguatons 118,
Sectons 39.22(a)-, 39.23(f)-.)
or edera ncome ta purposes, no gan s reazed or oss sus-
taned upon the redempton, pror to maturty, of 21/2 percent Treasury
3C 050 56 10
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Regs. 118, 39.23(f)-. 280
onds, Investment Seres -1965. Interest on such bonds s ncudbe
n gross ncome when receved or accrued, dependng on the ta payer s
method of accountng, and such nterest accrues when t becomes pay-
abe and not unt then. The dfference between the amount receved
upon the redempton of such bonds pror to maturty and ther face
vaue consttutes a refund of a porton of the nterest prevousy re-
ceved and reported as gross ncome by the bondhoder, and therefore
t s deductbe by hm n the ta abe year of redempton as an ordnary
oss. Compare I. T. 350 , C. . 19 1-2,93.
Reguatons 118, Secton 39.23(e)-: Losses
by ndvduas.
d|ustments of e cessve accrua of nterest on future payment
funds hed by edera and banks. See Rev. Ru. 55-25 , page 326.
Reguatons 118, Secton 39.23(e)-2: ountary Rev. Ru. 55-110
remova of budngs.
( so Secton 23(f) Reguatons 118, Secton
39.23 (f)-.)
Where a ta payer purchases property, wth the ntenton of remov-
ng the od budngs thereon, and then ether erectng a new budng
thereon or usng the property wthout any addtona mprovements,
no deductbe oss or e pense s sustaned or ncurred upon the remova
of such od budngs. The remova costs consttute a part of the bass
of the and acqured. Secton 3 .23(e)-2 of Reguatons 118, and
O. D. 1031, C. . 5,1 1 (1921). urther, the bass of such property
must be reduced by the amounts of any payments receved from the
sae of the od budngs.
S CTION 23(f). D DUCTIONS ROM GROSS INCOM :
LOSS S Y CORPOR TIONS
Reguatons 118, Secton 39.23(f)-: Losses
by corporatons.
Loss upon vountary remova of budngs. See Rev. Ru. 55-110,
page 280.
Reguatons 118, Secton 39.23(f)-: Losses
by corporatons.
Interest refunded upon redempton, pror to maturty, of 2
percent Treasury onds, Investment Seres -1965. See Rev. Ru.
55-27 , page 279.
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281 Regs. 118, 39.23(g)- .
S CTION 23(g). D DUCTIONS ROM GROSS
INCOM : C PIT L LOSS S
Pecuatons 118, Secton 39.23 (g)- Capta Rev. Ru. 55-18
( so Secton 23 (c), Secton 39.23 (c)-.)
The bonus requred by the State of Pennsyvana to be pad, n
accordance wth the provsons of the Pennsyvana aw pror to ts
repea on uy 25, 1953, on capta empoyed or to be empoyed n
that State by an organzaton not created or chartered under the
aws of Pennsyvana and whch was captazed on the books of
the organzaton, does not consttute an aowabe deducton from
gross ncome for edera ncome ta purposes durng such tme as
the organzaton remans n e stence and the capta stock, or the
equvaent thereof, remans outstandng.
dvce has been requested whether the bonus requred by the State
of Pennsyvana to be pad on capta empoyed n that State by an
organzaton not created or chartered under the aws of Pennsyvana,
and whch was captazed on the books of the organzaton, becomes
deductbe for edera ncome ta purposes n 1953, the year n whch
the aw provdng for such payment was repeaed, or n some ater
year.
I. T. 3210, C. . 1938-2,1 1, hods that the bonus requred to be pad
to the State of Pennsyvana, as provded for by secton 1, ct of
May 8, 1901, as amended, and found n Tte 72, secton 1851 of Pur-
don s Pennsyvana Statutes, nnotated, on capta empoyed or to be
empoyed n that State by corporatons, mted partnershps, or |ont
stock assocatons, not created or chartered under the aws of the State
of Pennsyvana, was not a ta but a capta e pendture whch was not
deductbe for edera ncome ta purposes.
The ct of May 8, 1901, as amended, n respect of the bonus pay-
ment, was repeaed by Pubc Law 1 9 by the Pennsyvana Legsa-
ture on uy 25, 1953. See Purdon s Pennsyvana Statutes,
nnotated, Tte 72, Cumuatve nnua Pocket-Part, page 26. The
repeang provsons were not made retroactve, and, generay, became
effectve as of anuary 1,1953. Pubc Law 1 9 contans the provson
that every foregn corporaton, as that term s defned n the ct, n
respect of whch a certfcate has been ssued to do busness n the State
of Pennsyvana, at the effectve date, sha pay an e cse ta upon
the amount of any ncrease of capta actuay empoyed whoy wthn
that state and, as to such corporatons admtted to do busness n that
state after the effectve date, the ta s payabe upon the capta
actuay empoyed whoy wthn the state and upon any ncrease
thereof.
oregn corporatons as defned by Pubc Law No. 1 9, supra, n-
cudes mted partnershps or |ont stock assocatons chartered or
created by or under the aws of any other state or of the Unted States
or of any foregn country, whch has been ssued a certfcate of au-
thorty by the State of Pennsyvana to do busness wthn the State
and whch ether has ts prncpa or chef pace of busness ocated
wthn the State, or has any part of ts capta actuay empoyed
theren. It does not, however, ncude foregn nsurance companes
and foregn nonproft corporatons.
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Regs. 118, 39.23(k)-5. 282
Inasmuch as the ct of May 8, 1901, supra, under whch a bonus
payment was requred of an organzaton not created or chartered
under the aws of Pennsyvana, was not nvadated and the amount
of such payment s not refundabe, the cassfcaton thereof as a cap-
ta e pendture woud reman undsturbed.
ccordngy, t s hed that the bonus, whch was requred to be pad
to the State of Pennsyvana under ts aws on capta empoyed or
to be empoyed n that State by an organzaton not created, or char-
tered under the aws of Pennsyvana, whch payment propery was
captazed on the books of the organzaton, and the statute under
whch mposed not havng been nvadated, even though repeaed but
wthout retroactve effect, s not recognzabe as beng worthess or
deductbe, for edera ncome ta purposes, durng such tme as the
organzaton contnues n e stence and ts capta stock, or the equva-
ent thereof, remans outstandng.
Reguatons 118, Secton 39.23(g)-: Capta Rev. Ru. 55-66
1 OPS 055.
( so Secton 23(k), Secton 39.23(k)-.)
ocatons to patrons n document form ssued by a cooperatve
assocaton n accordance wth a pree stng agreement may take the
form of certfcates denotng an nvestment n the capta of the co-
operatve or of certfcates of ndebtedness of the cooperatve. In
such cases, t s consdered that the patron has n effect receved n
money the face amount of the document and has ether renvested
that amount n the capta of the assocaton or aowed the assocaton
the use thereof. See Rev. Ru. 5 -10, C. . 195 -1, 2 . The byaws
usuay dscose the nature of the reatonshp between the assocaton
and ts patrons, and hence, whether there has been an nvestment n
capta of or a oan to the assocaton. Ths reatonshp s refected n
the type of nstrument whch a patron receves. y showng whether
there has been an nvestment n capta or a oan, the nstrument w
ndcate whether a oss due to worthessness upon dssouton or n-
sovency, of the cooperatve whch ssued t, may be treated as a capta
oss or as a bad debt.
S CTION 23(k).-D DUCTIONS ROM GROSS
INCOM : D D TS
Reguatons 118, Secton 39.23 (k)-: ad debts.
Treatment of cooperatve assocaton aocatons n document form
upon dssouton or nsovency. See Rev. Ru. 55-66, above.
Reguatons 118, Secton 39.23(k)-5: Reserve Rev. Ru. 55-3
for bad debts.
In the case of a bank havng permsson to use and usng the reserve
method of accountng for bad debts for edera ncome ta purposes,
the aternatve method of computng addtons to the reserve, as
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283 Regs. 118, 39.23(1)-1.
provded n Revenue Rung 5 -1 8, C. . 195 -1, 60, may be adopted
at the opton of the bank for any ta abe year begnnng after De-
cember 31, 1953, wthout obtanng further permsson from the
Commssoner.
muatons 118, Secton 39.23(k)-5: Reserve Rev. Ru. 55-2
for bad debts.
Where a bank, usng ether the movng average percentage of actua
bad debt osses to oans n determnng addtons to ts reserve for
bad debts as provded n Mmeograph No. 6209, C. . 19 7-2, 26, or
the average e perence factor based on any 20 consecutve years of
bad debt e perence after 1927 as provded n Revenue Rung 5 -1 8,
C. . 195 r-, 60, has recovered durng any of the 20 years used n
computng ether e perence factor an amount of a oan charged off
as a bad debt pror to the representatve 20-year perod, the amount of
recovery shoud be taken nto account for the year of recovery n de-
termnng the bank s movng average percentage or ts average e -
perence factor.
Reguatons 118, Secton 39.23(k)-5: Reserve
for bad debts.
Incuson of certan preferred stock as part of tota depost or wth-
drawa accounts n the computaton of the addton to the reserve for
bad debts n the case of a budng and oan assocaton. See Rev. Ru.
55-391, page 306.
S CTION 23(1). D DUCTIONS ROM GROSS INCOM :
D PR CI TION
Reguatons 118, Secton 39.23(1)-1: Deprec- Rev. Ru 55-25
aton.
( so Secton 23(a), Secton 39.23(a)-10 Sec-
ton 2 (a), (Secton 39.2 (a) -2.)
The ta payer and a bank entered nto a Trust greement pro-
vdng that the atter as trustee woud purchase and ease to the
ta payer certan automotve equpment. owever, the trustee w
hod ony bare ega tte to the vehces and the ta payer w have
possesson as we as a the rghts and obgatons reatng thereto
durng ther usefu fe and aso any savage reazed upon ther fna
dsposton. The ta payer w make stpuated payments termed
rent to the trustee, whch w be equa to the costs ncurred by the
bank n acqurng the vehces as we as nterest and ncdenta e -
penses. The agreement further provdes that the ta payer may at any
tme acqure fu tte to the vehces by payng the baance of the costs
then remanng unpad. ed, that the ta payer s vrtua owner of
the vehces and s entted to deduct deprecaton thereon whch shoud
be spread over the usefu fe of the equpment rather than over the
stated ease perod. The payments termed rent n the agreement
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Regs. 118, 39.23(0-1. 28
consttute part payment for capta tems and shoud be captazed by
the ta payer nsofar as they represent capta payments.
Reguatons 118,Secton39.23(1)-1: Deprec- Rev. Ru. 55-89
aton.
The devsee of a essor who Is devsed an Interest In property
on whch a budng had been constructed by a essee wthout cost
to the essor, under a ease whch e tends beyond the usefu fe
of the budng, s not entted to a deprecaton aowance on the
budng.
dvce has been requested whether the devsee of a essor, who has
been devsed property, or an nterest n property, on whch a bud-
ng has been erected by the essee wthout cost to the essor under a
ong term ease whch e tends beyond the usefu fe of the budng,
s entted to a deprecaton aowance.
Secton 23 of the Interna Revenue Code of 1939 provdes for a
deducton from gross ncome for
(1) Deprecaton. reasonabe aowance for the e hauston, wear and
tear (Incudng a reasonabe aowance for obsoescence)
(1) of property used In the trade or busness, or
(2) of property hed for the producton of ncome.
In the case of a essor of property on whch a budng has been
erected by the essee wthout cost to such essor, under a ong term
ease whch e tends beyond the usefu fe of the budng, there s
no bass for the aowance of deprecaton to the essor snce the essor
has no nvestment or cost theren whch s sub|ect to e hauston.
Where the ta payer acqures such property by a devse, the bass of
the property so acqured, under secton 113(a) (5) of the Code, s the
far market vaue of the property at the tme of acquston.
In cases nvovng the sub|ect whch were decded by the Ta Court
ror to uy 13, 1951, t was stated that the ony reason the orgna
essor was not entted to deprecaton was that he had no bass (no
nvestment or cost) upon whch to compute deprecaton however, t
was hed that n the case of a devsee, a bass was acqured under
secton 113(a) (5) of the Code, whch bass the devsee was entted
to deprecate. See Mary Young Moore v. Commssoner, 15 T. C 906
. Chares Pearson, r. v. Commssoner, 13 T. C. 851, and Chares
ertram Currer v. Commssoner, 7 T. C. 980.
The court hed n the rst Natona ank of ansas Cty, Trustee
Wams W) v. Nee, 190 ed. (2d) 61, that the essor s testamen-
tary trustee was not entted, n the determnaton of ncome ta , to
aowance for deprecaton on ts aeged nterest n the budng
erected by the essee on eased premses, on the grounds that the trustee
had no nterest n the budng on the eased premses whch was de-
precabe under the statutory defnton that the budng was not
used n the trade or busness of the trustee, wthn the meanng of
secton 23(1) (1), nor was the budng hed for the producton of
ncome wthn the meanng of secton 23(1) (2) that the essor re-
served and receved, and her successors contnued to receve, rent
soey from the ground that the budng was desgned to produce
ncome, but not for the essor or her successors and snce the essee
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285 Regs. 118, 39.23(m)-.
pad for the budng and was entted to a credt aganst ncome for
ts deprecaton.
On appea, n Commssoner v. Mary Young Moore, 207 ed. (2d)
265, certorar dened 3 7 U. S. 9 2, the court reached the same con-
cuson as that reached n the rst Natona ank case. It stated
that t s not the physca property tsef, nor the tte thereto, whch
oone enttes the owner to cam deprecaton that the statutory a-
owance s avaabe to hm whose nterest n the wastng asset s
such that he woud suffer an economc oss resutng from the deter-
oraton and physca e hauston as t takes pace that the devsee
nherts ony an nterest n the and and a reversonary nterest n
the budng: and that ground rent, whch arses out of the devsee s
ownershp of and, w come n for a perod e tendng beyond the
fe of the budng, so that the devsee w not suffer an economc
oss as the budng wears out.
On uy 13, 195 , the court n bert L. Rowan v. Commssoner,
22 T. C. 865, reconsdered ts poston and stated that t w no onger
foow ts decsons n the Moore, Pearson, and Currer cases, but w
now foow the decsons n Commssoner v. /. Chares Pearson, r.,
M ed. (2d) 72, and Commssoner v. Mary Young Moore, 207 ed.
( 2d) 265.
ccordngy, t s hed that the devsee of a essor who s devsed
property, or an nterest n property, on whch a budng had been
constructed by the essee wthout cost to the essor, under a ease whch
e tends beyond the usefu fe of the budng, s not entted to a
deprecaton aowance on the budng.
S CTION 23 (m). D DUCTIONS ROM GROSS
INCOM : D PL TION
Reguatons 118, Secton 39.23(m)-: Depeton Rev. Ru. 55-13
of mnes, o and gas wes, other natura de-
posts, and tmber deprecaton of mprove-
ments.
In computng percentage depeton the gross seng prce, where
a prepayment dscount s nvoved, may be used ony n those cases
where the dscount s a cash dscount, not a trade dscount, and
represents a far nterest rate.
The Interna Revenue Servce has been requested to consder
whether the gross saes prce or the net saes prce shoud be used n
determnng gross ncome for percentage depeton purposes. The
queston nvoves the ssme type of stuaton as was presented n the
ase of Montrea Mnng Company v. Commssoner, 2 T. C. 088,
acquescence, C. . 19 , 20 (appeaed on other grounds to the Unted
States Court of ppeas for the S th Crcut).
In that case, the ta payer was engaged n mnng and seng ron
ore. ecause of the ta payer s ocaton, ts shpments to customers
were restrcted to the annua navgaton season of the Great Lakes,
whch e tends from pr through about November 15. The ta payer
contracted wth the customer to dever specfc tonnages of ore based
n the partcuar customer s needs for an entre year. Such contracts
usuay provded for payment n 12 equa nstaments. The customer,
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Regs. 118, S 39.23(m)-. 286
however, had the prvege of dscountng any or a nstaments at
a rate appro matng the prevang nterest rate upon bank oans.
Sub|ect to certan mtatons not here pertnent, the aowance for
depeton under secton 23 (m) of the Interna Revenue Code of 1939,
n the case of a ta payer n the mnng ndustry, s based on a certan
percentage of the gross ncome from the property durng the ta abe
year. In Montrea Mnng Co. v. Commssoner, supra, the court
rued, n effect, that for purposes there pertnent the term gross
ncome from the property was not synonymous wth the concept of
gross ncome as defned esewhere n the Code. In fact, the court
there stated that under the crcumstances presented the term means
the amount for whch the pettoner sod ts ore, an amount whch
t termed the seng amount.
fter revewng the partcuar crcumstances surroundng the
adopton by the ron ore mnng companes of the practce to e tend
cash dscounts to customers, the court n the above-mentoned case
dstngushed between cash and trade dscounts by statng, It s cear
that these dscounts are cash dscounts made to e pedte payments for
ore purchased by customers, not trade dscounts arsng out of market
condtons and resutng n a fat rate of prces rrespectve of the tme
of payment. Moreover, there can be no queston that they
appro mate a far nterest rate.
The court compared ths prncpe wth the practce of determnng
cost of nventores by a purchaser of merchandse, as provded by
rtce 22(c)-3 of Reguatons 9 (now sec. 39.22(c)-3 of Reguatons
118), wheren t s provded that cost means, n the case of merchandse
mrchased snce the begnnng of the ta abe year, the nvoce prce
ess trade or other dscounts, e cept strcty cash dscounts appro -
matng a far nterest rate, whch may be deducted or not at the opton
of the ta payer, provded a consstent course s foowed. The court
hed that under the authorty of these reguatons t woud appear
that pettoner s customers, assumng they used nventores at cost,
coud treat the dscounts n queston ether as ncome or a charge
aganst cost, provded a consstent course s foowed. On the bass
of the foregong the court reasoned that the pettoner, n keepng
wth ts ong and consstent accountng practce and that of the ndus-
try, s entted to treat such dscounts as busness e penses of the
nature of so-caed fnanca tems whch are propery deductbe as
ordnary and necessary e pense.
In vew of the above, t s the poston of the Interna Revenue
Servce that n computng gross ncome from the property for pur-
poses of secton 23(m) of the Interna Revenue Code, where a pre-
payment dscount s nvoved the gross seng prce may be used ony
n those cases where the dscount s a cash dscount, not a trade ds-
count, and represents a far nterest rate.
Reguatons 118, Secton 39.23(m)-: Depeton Rev. Ru. 55-35
of mnes, o and gas wes, other natura de-
posts, and tmber deprecaton of mprove-
ments.
The prncpes of G. C. M. 23C23, C. . 19 3, 313, reatng to the
treatment, for edera ncome ta purposes, of the assgnment of
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287 Regs. 118, 39.23(m)-.
producng operatng nterests n o and gas propertes for cash, wth
retenton of contngent producton payments, are aso to be apped
wth respect to the treatment of subeases of producng o and pas
propertes where cash s receved and the equpment Is assgned.
The e cess of the ad|usted bass of the equpment over the cash
receved s returnabe ony through depeton.
G. C. M. 23623, C. . 19 3, 313, modfed.
The Interna Revenue Servce has been asked whether, n vew of
the decson of the Supreme Court of the Unted States n W. G. Choate
r. Commssoner, 32 IT. S. 1, Ct. D. 1626, C. . 19 5,3 3, the prncpes
of G. C. M. 23G23, C. . 19 3, 313, are to be apped wth respect to
the treatment of subeases of producng o and gas propertes wth
retenton of an overrdng royaty nterest where the equpment s
assgned under the foowng crcumstances:
has a producng easehod wth an ad|usted easehod bass of
zero and an ad|usted equpment bass of 250a: doars. assgns a
easehod (or subeases) and assgns the equpment to for a cash
payment of 175a doars and retans an overrdng royaty of one-
eghth ( ). oowng the decson n the Choate case, the cash s
consdered as payment for the equpment to the e tent of ts deprec-
ated cost and the e cess of cash, f any. over the deprecated cost
represents a bonus or an advance royaty sub|ect to percentage depe-
ton n the hands of the subessor. Where the deprecabe cost of
equpment e ceeds cash, the e cess amount s consdered an addtona
cost of the royaty specfed n the ease. s cost of the royaty, such
e cess woud be returnabe through depeton.
Ths pocy s based on an e tenson of the prncpes stated n
0. C. M. 23623, supra, n whch t was hed that n transactons n-
vovng assgnments of producng o and gas eases for cash wth a
retenton of contngent o and gas payments no ess coud be aowed,
but the e cess of the ad|usted bass of equpment over cash receved
represented a part of the depetabe bass of the retaned economc n-
terest (the contngent o and gas payment). G. C. M. 23623 was
ssued pror to the decson n the Choate case, and e pressed the vew
that the theory of a sae of equpment woud not appy on those cases n
whch the assgnor or subessor retaned a royaty nterest throughout
the productve fe of the property as dstngushed from those cases
n whch the transacton effected a sae.
It s sometmes argued that deprecaton of the e cess of the ad|usted
equpment cost over the cash receved shoud be permtted over the
fe of the property nstead of transferrng such e cess to depetabe
cost. The faacy of permttng the return of the remanng bass n
any way other than through depeton may be ustrated by a stua-
ton where , n the foregong e ampe, transfers hs ease and equp-
ment wthout cash or other consderaton other than the retenton of
a one-fourth ( ) overrdng royaty. The stated argument woud
aow n such a case to contnue to deduct deprecaton (t mght be
caed amortzaton) despte the fact that he no onger owns the equp-
ment. urthermore, n such a case, snce the overrdng royaty has
been ncreased n amount due to the fact that the property was
equpped (the equpment havng been assgned), and depeton s
aowabe on such ncrease, t s apparent that the aowance of de-
precaton n addton to depeton resuts n doube deductons. Ths
s ess ready apparent, but nonetheess true, n the nstance of an
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Regs. 118, 39.23(m)-. 288
assgnment of the workng nterest wth a retenton of an economc
nterest (overrdng royaty nterest or contngent producton pay-
ment) nvovng the recept of cash n an amount ess than the ad|usted
bass of the equpment on the property. See evenue Rung 5 -5 8,
C. . 19f) -2, 91, nvovng the treatment of royaty payments made
for eased equpment.
ccordngy, the prncpes of G. C. M. 23623, supra, are aso to be
apped to cash payments made upon assgnments or eases (or upon
the subeasng) of producng o and gas propertes wth a retenton
of an overrdng royaty where equpment s assgned. The e cess of
the ad|usted bass of equpment over cash receved s returnabe to the
subessor ony as depeton.
G. C. M. 23623, C. 13. 19 3, 313, s modfed accordngy.
Reguatons 118, Secton 39.23(m)-: Depeton Rev. Ru. 55-251
of mnes, o and gas wes, other natura
deposts, and tmber.
ta payer who dredges sand and grave from the bed of a nav-
gnhe rver under a permt from the edera government whch
merey consttutes a waver by the Unted States of any ob|ecton
based on contro by the Unted States over navgaton, but whch
does not otherwse gve to the ta payer any ega rght nor economc
nterest n the depost, s not entted to percentage depeton uness
he has a depetabe economc nterest or ega rght to the depost
ndependent of such edera permt. Nether s depeton aowabe
on spo banks but up durng prevous dredgng operatons.
dvce has been requested whether a deducton for depeton on sand
and grave dredged for commerca sae from the bed of navgabe
rver s aowabe for edera ncome ta purposes under the foowng
crcumstances.
In the nstant case the ta payer dredges sand and grave from sev-
era rvers and ses t to varous ndustra concerns n the area. The
ta payer pays no royates for the sand and grave whch he removes
and ses. The operaton s carred on under a permt from the Unted
States rmy ngneers, but the ta payer has no e press permsson of
any knd from the State government to remove the sand and grave.
The permt from the rmy ngneers states that t s understood that
ths nstrument does not gve any property rghts ether n rea es-
tate or matera, or any e cusve prveges nor does t
obvate the necessty of obtanng State assent to the work authorzed.
It merey e presses the assent of the edera Government so far as
concerns the pubc rghts of navgaton. The permt s merey a
waver by the Unted States of any ob|ecton based on contro by the
Unted States over navgaton.
Secton 39.23(m)- of Reguatons 118 provdes n part that the
owner of an economc nterest n mnera deposts or standng tmber
s aowed annua depeton deductons and that an economc nterest
s possessed n every case n whch the ta payer has acqured, by n-
vestment, any nterest n mnera n pace or standng tmber and se-
cures, by any form of ega reatonshp, ncome derved from the
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289 Regs. 118, 39.23(m)-.
severance and sae of the mnera or tmber to whch he must ook
for a return of hs capta.
On the bass of the facts stated t does not appear that the ta payer
has any economc nterest n the sand and grave deposts. The per-
mt granted by the Unted States does not gve the ta payer any prop-
erty rghts n the depost, nor does t gve the ta payer a superor rght
n the deposts over anyone ese. Of course, the mere fact that the
ta payer does not have an e cusve ega rght n the deposts woud
not necessary deprve t of depeton f t dd have a nonrevocabe
ega rght to remove the deposts and such rght was a vauabe rght
based upon a ega consderaton. In e tendng percentage depeton
to sand and grave n the Revenue ct of 1951, t does not appear that
Congress ntended to ater the aw respectng the type of nterest that
s depetabe. See Senate Report No. 781 on the Revenue ct of 1951,
C.R. 1951-2, 58, at 8 .
ven f the ta payer owned the and underyng the sand and grave
deposts, t woud not necessary foow that the ta payer s entted
to depeton. Ths s based on the reasonng of the Supreme Court
of the Unted States mLynch v. worth-Stephens Co., 267 U. S. 36 ,
T. D. 3690, C. . I -1,162 (1925), and . G. Pamer v. ender, 287
U. S. 551, Ot. D. 6 1, C. . II-1, 235 (1933), that depeton s ava-
abe ony to one whose nterest s depeted by e tracton of the mnera.
In . Steve nderson et a. v. everng, 310 U. S. 0 , Ct. D. 1 56,
C. . 19 0-1, 108, the Court stated that the deducton for depeton s
ntended as compensaton for the capta assets consumed n the pro-
ducton of ncome through the severence of mneras. The court
added the grantng of an arbtrary deducton, n the nterests
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 pro-
ducton of gross ncome through severance. so see everng v.
ank-ne O Company, 303 U. S. 362, Ct. D. 1323, C. . 1938-1, 306.
ta payer s not entted to depeton f the vaue of hs nterest s
Dot dmnshed by e tracton of the mnera.
No nformaton s gven nor has there been any specfc consdera-
ton whether the sand and grave removed by the ta payer from the
rver bed s repenshed by the rver wthn a reatvey short perod
of tme. owever, f such s the case, the ta payer s nterest woud
not be e hausted by remova of the sand and grave, and for that add-
tona reason there woud of course be no rght to depeton.
In vew of the above t s hed that a ta payer who dredges sand
and grave from the bed of a navgabe rver under a permt from the
edera government whch merey consttutes a waver by the Unted
States of any ob|ecton based on contro by the Unted States over
navgaton, but whch does not otherwse gve to the ta payer any
ega rght nor economc nterest n the depost, s not entted to
Percentage depeton uness he has a depetabe economc nterest or
ega rght to the depost ndependent of such edera permt.
Nether s depeton aowabe on spo banks but up durng prevous
dredgng operatons. Compare Rev. Ru. , C. . 1953-1, 8.
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Regs. 118, 39.23(m)-. 290
Reguatons 118, Secton 39.23(m)-: Depe- Rev. Ru. 55-350
ton of mnes, o and gas wes, other natu-
ra deposts, and tmber deprecaton of
mprovements.
The ta payer mnes sat from underground deposts by hydrauc
methods. It s brought to the surface n the form of artfca brne
and used n that form as raw matera for the manufacture of chemca
products whch are the frst products marketed by the ta payer. or
eectroytc manufacturng purposes, sat produced n brne has the
same vaue as crude rock sat at the mouth of the mne. ed, n com-
putng gross ncome from the property, for percentage depeton
purposes, the market vaue of crude rock sat at the mouth of the mne
shoud be ascertaned ether from drect saes of such matera or by
workng back from saes of manufactured products. In order to arrve
at the market vaue of crude rock sat by workng back from saes of
manufactured products, t s necessary to reduce the saes prce by
costs, e penses, and profts whch are attrbutabe to any processes
subsequent to the competon of the mnng processes. No opnon s
e pressed wth respect to natura brne, ths rung beng mted to
natura sat deposts n sod form.
Reguatons 118, Secton 39.23(m)-: Depeton Rev. Ru. 55-390
of mnes, o and gas wes, other than natura
deposts, and tmber deprecaton of mprove-
ments.
Where the man ob|ectve of mnng grante or marbe s the produc-
ton of rough bocks, the mnng process ends when the rough bocks
of grante or marbe produced at the quarry are shpped or trans-
ferred for sawng, shapng, and poshng. owever, f the ta payer
ncdentay produces and ses crushed grante or marbe as a by-
product of mnng at the mne or quarry, amounts receved for such
producton may be ncuded n gross ncome sub|ect to percentage de-
peton. When, because of subsequent operatons, t s necessary to re-
sort to the proportonate profts method (secton 39.23(m)-(e) (3)
and secton 39.23(m)-(g) of Reguatons 118) to determne the gross
and net ncome from mnng, any ncome from such byproducts nc-
dent to operatons subsequent to mnng must be ncuded n determn-
ng the overa profts to be aocated to mnng and nonmnng
actvtes.
Reguatons 118, Secton 39.23(m)-: Depeton
of mnes, o and gas wes other natura de-
posts, and tmber deprecaton of mprove-
ments.
Depeton aowance wth respect to ncome receved from the sae
of oam. See Rev. Ru. 55-11, page 212.
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291 Regs. 118, 39.23(o)-.
Reguatons 118, Secton 39.23 (m)-: Depeton
of mnes, o and gas wes other natura de-
posts, and tmber deprecaton of mprove-
ments.
Treatment of haung and deveopment aowances granted by the
tomc nergy Commsson for percentage depeton purposes. See
Rev. Ru. 55- 7, page 239.
Reguatons 118, Secton 39.23(m).-: Depeton
of mnes, o and gas wes, other natura de-
posts, and tmber deprecaton of mprovements.
Processes whch are consdered mnng processes n the manufac-
ture of ghtweght aggregate from shae and sate. See Rev. Ru.
55-78, page 357.
Reguatons 118, Secton 39.23(m)-: Depeton
of mnes, o and gas wes, other natura depos-
ts, and tmber deprecaton of mprovement.
The decson n the case of Unted States v. Cherokee rck Te
Company, 218 ed. (2d) 2 , does not affect the poston of the Servce
wth respect to ordnary treatment processes n the case of brck and
te cav as set forth n Revenue Rung 5 -109, C. 13. 195 -1, 62. See
Rev. Ru. 55-2 , page 73.
Reguatons 118, Secton 39.23(m)-5: Compu-
taton of depeton based on percentage of
ncome n case of certan mnes or other
natura deposts.
Percentage depeton of cay used n con|uncton wth shae n the
manufacture of ght weght aggregate. See Rev. Ru. 55-180, page
S CTION 23(o). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
Reguatons 118, Secton 39.23(o)-1 : Contr- Rev. Ru. 55-
buttons or gfts by ndvduas.
( so Secton 23(a), Secton 39.23(a)-.
ta payer who gves hs servces gratutousy to an assocaton,
contrbutons to whch are deductbe under secton 23(o) of the
Interna Revenue Code of 1939, and who ncurs unrembursed
traveng e penses, ncndng the cost of meas and odgng, whe
away from home n connecton wth the affars of the assocaton
and at ts drecton, may deduct the amount of such unrembursed
e penses In computng hs net ncome sub|ect to the mtatons
provded by secton 23(o) of the Code.
dvce has been requested whether a deducton may be taken under
acton 23(a) (1) ( ) or secton 23(o) of the Interna Revenue Code
of 1939 by a ta payer servng an assocaton hed to be e empt for
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Regs. 118, 39.23(o)-. 292
edera ncome ta purposes for unrembursed trave e penses n
connecton wth the performance of hs offca dutes.
In the nstant case a ta payer who gves hs servces gratutousy
as an offcer of an assocaton, contrbutons to whch are deductbe
under the provsons of secton 23 (o) of the Code, ncurs unrembursed
traveng e penses, ncudng cost of meas and odgng, whe away
from home n connecton wth the affars of the assocaton and at
ts drecton.
Secton 23(a) (1) ( ) of the Code provdes n part that a deducton
s aowabe for traveng e penses (ncudng the entre amount
e pended for meas and odgng) whe away from home n the pur-
sut of a trade or busness . The traveng e penses ncurred
by the ta payer here under consderaton, n connecton wth hs actv-
tes on behaf of the assocaton, do not represent e penses ncurred n
carryng on a trade or busness and, therefore, are not deductbe
n computng hs net ncome under that secton of the Code.
Secton 23(o) of the Code provdes n part that n computng net
ncome there sha be aowed as deductons:
(o) Cn RT u- and Otheh Contbbutons. In the rase of an ndvdua con-
trbutons or gfts payment of whch s made wthn the ta abe year to or for
the use of:

(2) a corporaton, trust, or communty chest, fund, or foundaton created
or organzed n the Unted States or n any possesson thereof or-
ganzed and operated e cusvey for regous, chartabe, scentfc, terary,
or educatona purposes,
to an amount whch n a the above cases combned does not e ceed 20 per
centum of the ta payer s ad|usted gross ncome. .
ccordngy, t s hed that a ta payer who gves hs servces gra-
tutousy to an assocaton, contrbutons to whch are deductbe
under the provsons of secton 23(o) of the Code, and who ncurs
unrembursed traveng e penses, ncudng the cost of meas and
odgng, whe away from home n connecton wth the affars of the
assocaton and at ts drecton, may deduct the amount of such unre-
mbursed e penses n computng hs net ncome sub|ect to the mta-
ton provded by secton 23 (o) of the Code.
Reguatons 118, Secton 39.23(o)-: Contr- Rev. Ru. 55-156
butons or gfts by ndvduas.
( so Secton 23(q) Reguatons 118, Secton
ton 39.23(q)-.)
Contrbutons made to a reserve offcers assocaton are not de-
ductbe by the donors for edera ncome ta purposes under the
provsons of secton 23(o) and (u.) of the Interna eveuue Code
of 1939.
dvce has been requested whether contrbutons made to a reserve
offcers assocaton are deductbe by the donors for edera ncome
ta purposes under the provsons of secton 23 (o) of the Interna
Revenue Code of 1939.
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293 Regs. 118, | 39.23(o)-.
Secton 23 of the Code, reatng to deductons from gross ncome
provdes n part that n computng net ncome there sha be aowed
as deductons:
(o) Chartabe and Otheb Contrbutons. In the case of an Indvdua,
contrbutons or gfts payment of whch s made wthn the ta abe year to or
for the use of:

( ) posts or organzatons of war veterans, or au ary unts or socetes
of any such posts or organzatons, f such posts, organzatons, unts, or
socetes are organzed n the Unted States or any of ts possessons, and
f no part of ther net earnngs nures to the beneft of any prvate share-
hoder or ndvdua
Secton 23(q) (3) of the Code, whch reates to the deductons of
contrbutons made by corporatons, contans wordng substantay
smar to that used n secton 23 (o) ( ) of the Code.
Secton 23(o) ( ) of the Code refers to war veterans organzatons
rather than to organzatons of veterans of the mtary servces gen-
eray and t s beeved that these provsons are not broad enough to
ncude reserve offcers organzatons. That these organzatons are
not organzatons of the same cass s recognzed n secton
1701(a) (1) ( ) of the Code, reatng to admssons ta es, whch spe-
cfcay mentons reserve offcers organzatons as we as organza-
tons of war veterans.
The membershp n the nstant assocaton s composed of persons
who hod a current commsson, or who formery hed a commsson,
n one of the mtary servces of the Unted States. The consttuton
cf the assocaton provdes that any person hodng a commsson n
any of the cvan components of the rmed orces of the Unted
States sha be egbe for actve membershp. There s no requre-
ment, however, that a member must be a war veteran, and the evdence
does not show that the membershp s made up entrey of war vet-
erans, or s essentay a war veterans organzaton.
It may be stated, however, that where an organzaton s essentay
a war veterans organzaton, the ncuson of a sma mnorty of
members who have served n an estabshed branch of the armed forces
but who have not served durng a perod of war w not precude cas-
sfcaton under the provsons of secton 23 (o) ( ) of the Code.
ccordngy, t s hed that contrbutons made to a reserve offcers
assocaton of the type here consdered are not deductbe by the donors
for edera ncome ta purposes under secton 23 (o) and (q) of the
Code,
rar ToTS 118, Secton 39.23(o)-: Contr- Rev. u. 55-157
butons or gfts by ndvduas.
( so Secton (d) Reguatons 118, Secton
39. -5.)
ta payer usng the nstament bass for the return of ncome
derved from a sae of rea property to an educatona organzaton,
contrbutons to whch are deductbe under secton 23(o) of the In-
terna Revenue Code of 1939, s sub|ect to edera ncome ta as
provded by secton (d) of the Interna Revenue Code of 1939 wth
respect to nstament notes due from such sae of rea property
when such notes are credted to the organzaton as gfts. owever,
the far market vaue of each note as of the date t Is credted as a
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Regs. 118, 39.23(o)-. 29
gft w consttute an aowabe deducton to the e tent provded
by secton 23(o) of the Code.
The ta payer n the nstant case sod a parce of rea estate to an
educatona organzaton, contrbutons to whch are deductbe under
secton 23(o) of the Interna Revenue Code of 1939. The terms of
settement provded for a cash payment amountng to ess than 30
percent of the purchase prce wth the baance of the purchase prce
represented by twenty equa annua nstament notes. The transac-
ton as a whoe dd not amount n substance to a gft of the dfference
between the vaue of the rea estate and the amount of the cash pay-
ment. The ta payer eected to report the ncome derved from the
sae on the nstament bass prescrbed n secton of the Code. d-
vce has been requested whether the ta payer w be sub|ect to ed-
era ncome ta as provded by secton (d) of the Code f he makes a
gft of each annua payment as t fas due and whether the credted
payment w represent a contrbuton deductbe to the e tent pro-
vded by secton 23(o) of the Code.
Under the provsons of secton (d) of the Code, f an nsta-
ment obgaton s satsfed at other than ts face vaue or dstrbuted,
transmtted, sod, or otherwse dsposed of, gan or oss sha resut
to the e tent of the dfference between the bass of the obgaton and,
n case of a dstrbuton, transmsson, or dsposton otherwse than
by sae or e change, the far market vaue of the obgaton at the
tme of such dstrbuton, transmsson, or dsposton. ny gan or
oss so resutng sha be consdered as resutng from the sae or
e change of the property n respect of whch the nstament obga-
ton was receved. The bass or the obgaton sha be the e cess of
the face vaue of the obgaton over an amount equa to the ncome
whch woud be returnabe were the obgaton satsfed n fu. See
secton 39. -5 of Reguatons 118.
Secton 23(o) of the Code provdes that n computng net ncome
an ndvdua ta payer may take a deducton for the contrbuton or
gft payment of whch s made wthn the ta abe year to or for the
use of certan organzatons to an amount whch does not e ceed 20
per centum of the ta payer s ad|usted gross ncome. If the contrbu-
ton or gft s other than money, the bass for cacuaton of the amount
thereof sha be the far market vaue of the property at the tme of
the contrbuton or gft. Secton 39.23(o)- of Reguatons 118.
On the bass of the foregong, t s hed that the ta payer s sub-
|ect to edera ncome ta as provded n secton (d) of the Code
wth respect to the notes whch are credted to the organzaton as
gfts. The far market vaue of each note as of the date credted
as a gft w consttute an aowabe deducton to the e tent pre-
scrbed n secton 23 (o) of the Code.
Reguatons 118, Secton 39.23 (o)-: Contr- Rev. Ru. 55-192
butons or gfts by ndvduas.
That porton of membershp dues earmarked for dstrbuton to
quafed chartes, and pad by ndvdua members to the treasurer
of a soca cub, actng aso as a duy consttuted coectng agent for
certau chartabe organzatons of the type set forth n secton 23(o)
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295 Regs. 118, 39.28(o)-.
of the Interna Revenue Code of 1939, Is deductbe as a contrbu-
ton by the donor members n computng ther ta abe net ncome n
the manner and to the e tent provded by secton 23(o) of the 1939
Code.
dvce has been requested whether amounts pad as membershp
dues to a soca cub and dstrbuted to quafed chartes under the
crcumstances set forth beow woud consttute aowabe deductons
to the members wthn the meanng of secton 23 (o) of the Interna
Revenue Code of 1939.
The rues of the nstant cub provde that each member sha pay
dues of 100a doars annuay. Of ths amount 30a| doars s n pay-
ment of two tckets to a dnner-dance and 70a: doars consttutes a
drect contrbuton by the member to organzatons, contrbutons to
whch are deductbe under the provsons of secton 23 (o) of the
Code. Checks n payment of dues are made payabe to the treasurer
of the cub, who has been authorzed both by the cub and the donee
organzaton to act as agent to receve members contrbutons for such
purposes.
Secton 23(o) of the Code provdes, n part, that n computng ta -
abe net ncome there sha be aowed as deductons n the case of an
ndvdua contrbutons or gfts payment of whch s made wthn
the ta abe year to or for the use of a corporaton, trust, or
communty chest, fund or foundaton organzed and operated
ecusvey for regous, chartabe, scentfc or educatona purposes
Secton 39.23 (o)- of Reguatons 118 provdes that a deducton s
aowabe under secton 23(o) of the Code ony wth respect to con-
trbutons or gfts whch are actuay pad durng the ta abe year,
regardess of when pedged and regardess of the method of account-
ng empoyed by the ta payer n keepng hs books or records.
Contrbutons made by members of the soca cub under the fore-
gong arrangement and pad over to organzatons whch are of the
type set out n secton 23(o) of the Code consttute aowabe deduc-
tons to the members n computng ther ta abe net ncome n the
manner and to the e tent provded by that secton. Contrbutons
receved by the treasurer who s aso actng as agent of such donee
organzatons, w be deductbe by the donors at the tme such con-
trbutons are pad to hm. owever, f the treasurer has not been
desgnated by the organzaton nvoved to act as ts agent, he s con-
sdered to be the agent of the contrbutor. ccordngy, n that case
such contrbutons are deductbe ony n the ta abe year n whch
they are actuay transferred to the donee organzaton.
kcatons 118, Secton 39.23 (o) -1: Contr- ev. u. 55-275
butons or gfts by ndvduas.
( so Sectons 811(c), 812(d) Reguatons
105, Sectons 81.17, 81. .)
Method of reportng, for ncome, gft, and estnte ta purposes,
contrbutons of money and property made to an ncome partcpa-
36 050 M 20
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Regs. 118, 39.23(o)-.) 296
ton fund of nn organzaton e empt from edera ncome ta under
secton 101(6) of the Interna Revenue Code of 1939, where pay-
ments from the net Income of the fund, f any, are to be made to
the contrbutors or to the contrbutors and ther desgnated
copartcpants durng ther ves.
n nqury has been receved reatve to the method to be foowed
n reportng for ncome, gft, and estate ta purposes a donaton of
money or property under the foowng crcumstances.
corporaton, contrbutons to whch have been determned to be de-
ductbe under secton 23(o) and secton 23(q) of the Interna Reve-
nue Code of 1939, ssued ncome partcpaton fund certfcates, n the
prncpa amount of 100a doars outstandng at any one tme, to
certan ndvduas desrous of contrbutng to the fund but who
wshed to reserve the rght to receve some ncome durng ther ves
or the ves of themseves and a desgnated copartcpant. Under the
pan, the donors contrbuted specfed doar amounts, or specfcay
vaued property, to ad n retrng a debt ncurred n the constructon
of a dormtory.
In return for such donaton, the donor was ssued a certfcate n
the form ndcated and he w, from tme to tme, receve payments
from the net ncome, f any, of the dormtory whch s pedged to
provde the payments to the contrbutors to the fund. Payments w
be mado to the hoders of the certfcates outstandng on each quartery
payment date up to the ma mum specfed annua percentages shown
upon the face of the certfcates. ach certfcate shows the ma mum
return possbe, determned by the age of the donor, or the younger
of the donor and hs copartcpant, at the tme the certfcate s ssued.
Snce the payments made to the donor are mted to a proportonate
share of the aggregate ncome and snce the pan n no way guarantees
future payments n any amount to the donors, the payments woud not
consttute annutes for purposes of secton 22(b) (2) of the Code or
for gft ta or estate ta purposes. The effect of the agreements
entered nto by and between the corporaton and the donor, whereby
he aone or wth another woud receve ncome payments, s to create
an rrevocabe trust.
Secton 23(o) of the Code provdes for the aowance of contrbu-
tons or gfts, payment of whch s made wthn the ta abe year to
or for the use of chartabe, educatona, and other desgnated, types
of nsttutons and organzatons.
The Interna Revenue Servce has hed that the phrase for the use
of s ntended to convev a meanng smar to that of n trust for ,
See Rev. Ru. 19 , C. . 1953-2, 128. In I. T. 1776, C. . II-2, 151
(1923), t was hed, under the Revenue ct of 1921, that where a donor
by wrtten nstrument gave a fe estate n bonds to an ndvdua and
the remander nterest to a church, the cash vaue of the gft to the
church was deductbe. In I. T. 3707, C. . 19 5,11 , t was hed that
where a ta payer creates an rrevocabe trust, reservng the ncome to
hmsef for fe wth remander over at hs death to a benefcary
whch meets the requrements of secton 23(o) (2) of the Code, the
present vaue of the remander nterest s deductbe by the ta payer
n hs ncome ta return for the ta abe year n whch the property s
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297 Regs. 118, 39.23(o)-.
transferred n trust, sub|ect to mtatons prescrbed n secton 23(o)
of the Code.
Therefore, t s hed that under the agreements n the nstant case,
whereby the donor aone or the donor wth another woud receve n-
come payments, a gft was made sub|ect to a fe estate or fe estates.
The amount to be aowed as a deducton n the year n whch spec-
fed doar amounts or specfcay-vaued property s transferred, s
the present vaue of the remander nterest. See I. T. 3707, swprat
The bass for cacuatng the amount of the gft of property, other
than money, w be the far market vaue of such property at the tme
of ts transfer under the agreement.
Wth respect to a gft made after December 31, 1951, the vaue of
the rght retaned by the donor s to be computed n accordance wth
Tabe I, secton 86.19(f) of Gft Ta Reguatons 108. The dffer-
ence between the vaue of the property transferred and the vaue of
the rght retaned by the donor s the vaue of the gft for gft ta
purposes. If a the payments are to cease at the death of the donor,
the entre vaue of the gft may be deducted on the gft ta return as a
chartabe gft. If, however, a survvorshp rght s nvoved, the
vaue of the gft postponed unt the death of the ast to de of two
persons w be furnshed by the Interna Revenue Servce, n connec-
ton wth any competed transacton, upon the recept of a request
dscosng the name, address, age, and date of brth of the donor, and
the name, address, age, and date of brth of the ndvdua donee.
Snce under the agreements the ncome s to be used n makng the
payments to the donor-benefcares and/or the copartcpants, the
ncome s ta abe to them.
Snce the transfer s one n whch the donor retaned for hs fe the
rght to the ncome from the property wthn the meanng of secton
811 (c) (1) ( ) of the Interna Revenue Code, t shoud be reported
n the estate ta return fed for hs estate and a deducton therefor
camed under secton 812(d) of the Code.
_ In the event the donaton to the fund s n the form of property hav-
ng a vaue n e cess of ts bass n the hands of the donor, the ap-
precaton n the vaue of such property w not consttute ta abe
ncome to the donor. s stated herenbefore, the bass of cacuatng
the amount of the gft of property, other than money, w be the far
market vaue of such property as at the tme of ts transfer to the cor-
poraton under the agreement.
muatons 118, Secton 39.23 (o)-: Contr- Rev. Ru. 55- 10
butons or gfts by ndvduas.
The satsfacton of a pedge to an organzaton descrbed n secton
23(o) of the Interna Revenue Code of 1939 by means of a donaton
or gft of property whch has ether apprecated or deprecated n
vaue does not gve rse to a ta abe gan or a deductbe oss. Such
contrbuton Is deductbe to the e tent of the far market vaue
thereof at the tme of the contrbuton or gft, to the e tent provded
by aw.
dvce has been requested whether the satsfacton of a pedge
made n terms of doars to an organzaton descrbed n secton 23 (o)
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Regs. 118, 39.23(o)-. 298
of the Interna Revenue Code of 1939, by the donaton or gft of
roperty whch has ether apprecated or deprecated n vaue w
e consdered a ta abe event gvng rse to a gan or oss for edera
ncome ta purposes.
Secton 23 (o) of the Code aows as a deducton n the case of an
ndvdua, sub|ect to prescrbed mtatons, contrbutons for gfts
payment of whch s made wthn the ta abe year to or for the use of
certan specfed organzatons.
Secton 39.23(o)- of Reguatons 118 provdes, n part, that a
deducton s aowabe under secton 23 (o) of the Code ony wth
respect to contrbutons or gfts whch are actuay pad durng the
ta abe year, regardess of when pedged and regardess of the method
of accountng empoyed by the ta payer n keepng hs books and
records. If the contrbuton or gft s n a medum other than money,
the bass for cacuatng the amount of the gft s the far market
vaue of the property at the tme of the contrbuton or gft.
It foows that for purposes of secton 23 (o) of the Code the event
whch gves rse to the deducton s the actua payment of money or
the transfer of property. It woud be nconsstent to treat such pay-
ment or transfer as a contrbuton or gft and at the same tme as
a satsfacton of a debt wth the ta consequences whch woud ord-
nary foow from the use of apprecated property or deprecated to
pay a debt.
In vew of the foregong t s hed that the satsfacton of a pedge
to an organzaton descrbed n secton 23(o) of the Interna Revenue
Code of 1939, by means of a donaton or gft of property whch has
ether apprecated or deprecated n vaue, does not gve rse to a
ta abe gan or a deductbe oss. Such contrbuton s deductbe to
the e tent of the far market vaue thereof at the tme of the contrbu-
ton or gft. Wth respect to the manner of handng contrbutons
of agrcutura or manufactured products or property hed for sae
n the ordnary course of busness see Revenue Rung 55-138, page 223
of ths uetn.
Reguatons 118, Secton 39.23(o)-1: Contr-
butons or gfts by ndvduas.
Contrbutons of property hed for sae n ordnary course of bus-
ness to an organzaton descrbed n secton 23 (o) of the Interna
Revenue Code. See Rev. Ru. 55-13S, page 223.
Reguatons 118, Secton 39.23(o)-: Contr-
butons or gfts by ndvduas.
Deductbty of unrembursed trave e penses n connecton wth
the performance of servces for an organzaton e empt under secton
101(8) of the Interna Revenue Code of 1939. See Rev. Ru. 55-151
page 28.
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299 Regs. 118, 39.23 (p)-.
S CTION 23(p). D DUCTIONS OM GROSS INCOM :
CONTRI UTIONS O N MPLOY R TO N M-
PLOY S TRUST OR NNUITY PL N ND COMP N-
S TION UND R D RR D-P YM NT PL N
muatons 118, Secton 39.23 (p)-: Contr- Rev. Ru. 55-212
butons of an empoyer to an empoyees trust
or annuty pan and compensaton under a
deferred payment pan n genera.
( so Secton 23(a Reguatons 118, Secton
39.23(a)-9.)
Regardess of whether an empoyer obgates hmsef to pay a
penson to the wdow of a deceased empoyee over a perod of years
or whether such payments are contngent upon some future hap-
penng, the empoyer may deduct n each ta abe year, under sec-
ton 23(p) of the Interna Revenue Code of 1939, ony those amounts
whch are actuay pad durng the year, sub|ect to the genera tests
of reasonabeness.
Revenue Rung 5 -625, C. . 195 -2, 85, s modfed to the e tent
nconsstent herewth.
The Interna Revenue Servce has reconsdered the poston e -
pressed n Revenue Rung 5 -625, C. . 195 -2, 85, reatng to the
tme when an empoyer may take a deducton for penson payments
made to the wdow of a deceased empoyee. Revenue Rung 5 -625,
tupra, states n part:
Where a corporaton on the accrua bass of accountng obges tsef to pay to
te wdow of a deceased empoyee, n perodc nstaments over a perod of years,
m addtona amount to cover compensaton for past servces rendered by such
empoyee, such amount Is generay deductbe under the provsons of secton
23(a) (1) ( ) of the Interna Revenue Code of 1939 as a busness e pense for the
|ear n whch such abty Is Incurred.
Whe ths s a correct statement of the genera prncpes under-
yng deductons by an accrua bass ta payer under secton 23(a) of
the Code, t does not propery take nto account the over-rdng pro-
vsons of secton 23 (p) of the Code, whch governs the deductbty
of contrbutons of an empoyer to or under a stock bonus, penson,
proft-sharng, or annuty pan and compensaton pad or accrued on
account of an empoyee under a pan or method of deferrng the re-
cept of such compensaton. Secton 23(p) (1) of the Code provdes
that f contrbutons are pad by an empoyer to or under a stock bonus,
penson, proft-sharng, or annuty pan, or f compensaton s pad or
accrued on account of any empoyee under a pan deferrng the recept
of such compensaton, such contrbutons sha not be deductbe under
secton 23(a), but f they satsfy the condtons of secton 23(a) they
be deductbe to the e tent provded n secton 23(p). In add-
ton to other mtatons, secton 23(p) requres that n order for a
contrbuton or compensaton to be deductbe thereunder, t must be
pad n the ta abe year, wth certan e ceptons not pertnent here.
Secton 23(p) of the Code, as we as Secton 39.23(p)-(c) of
Reguatons 118, provdes n part that Secton 23 (p) of the Code s
not confned to forma stock bonus, penson, proft-sharng, and annuty
pans, or deferred compensaton pans, but t ncudes any method
of contrbutons or compensaton navng the effect of a stock bonus,
Penson, proft-sharng, or annuty pan, or smar pan deferrng the
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Regs. 118, 39.23(p)-2. 300
recept of compensaton. Thus, where a corporaton pays pensons
to such of ts retred empoyees and n such amounts as may be deter-
mned from tme to tme by the board of drectors or responsbe off-
cers of the company, or where a corporaton s under an obgaton,
whether funded or unfunded, to pay a penson or other deferred com-
pensaton to an empoyee, there s a method havng the effect of a
pan deferrng the recept of compensaton for whch deductons are
governed by secton 23(p). If an empoyer on the accrua bass
defers payng any compensaton to an empoyee unt a ater year
or years under a method havng the effect of a stock bonus, penson,
proft-sharng, or annuty pan, or smar pan deferrng the recept
of compensaton, he sha not be aowed a deducton unt the year
n whch the compensaton s pad.
The above-stated provsons of the reguatons carry out the statu-
tory purpose of not aowng deductons for deferred compensaton
payments unt such compensaton s actuay pad. Whe the pro-
vsons of the reguatons referred to do not specfcay menton
wdows pensons, the same consderatons whch govern the deduct-
bty of pensons to retred empoyees woud aso appy n the case
of wdows pensons, snce the bass of the deducton for a wdow s
penson s that t represents addtona compensaton of the empoyee,
whch has been deferred.
ccordngy, t s the poston of the Interna Revenue Servce that,
regardess of whether an empoyer obgates hmsef to pay a penson
to the wdow of a deceased empoyee over a perod of years or whether
such payments are contngent upon some future happenng, the em-
poyer may deduct n each ta abe year under secton 23 (p) of the
Code ony those amounts whch are actuay pad durng the year,
sub|ect to the genera tests of reasonabeness. Revenue Rung 5
625, C. . 195 -2, 85, s modfed to the e tent t s nconsstent here-
wth.
Reguatons 118, Secton 39.23(p)-2: Informa- Rev. Ru. 55-20
ton to be furnshed by empoyer camng
deductons.
( so Part I, Secton 0 .)
ach empoyer camng deductons for contrbutons to an
empoyees trust or annuty pan, under secton 23(p) of the In-
terna Revenue Code of 1 39, on an ndustry-wde or area-wde
bass negotated by a abor unon for the beneft of empoyees who
are empoyed by one or more of the group of contrbutng empoyers,
where the contrbutons are based on such determnabe factors
as man-hours worked or unts produced, w not be requred to
furnsh a of the nformaton specfed n secton 30.23(p)-2 of
Reguatons 118 provded the pan trustees or an authorzed asso-
caton of the empoyers furnshes the requred data for the entre
group of partcpatng empoyers.
dvce has been requested concernng the nformaton necessary
to be fed by an ndvdua empoyer supportng deductons camed
under secton 23 (p) of the Interna Revenue Code of 1939 for con-
trbutons to an empoyee s trust or annuty pan on an ndustry-wde
or area-wde bass negotated by a abor unon, when the trustees
of the pan fe the compete data requred under secton 39.23 (p)-2
of Reguatons 118 for a contrbutng empoyers.
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301 Regs. 118, 39.23(p)-2.
mpoyers who cam deductons under secton 23(p) of the Code
re requred to fe the nformaton specfed n secton 39.23 (p)-2 of
Reguatons 118, to the e tent appcabe, by way of supportng the
deductons camed. Such nformaton must be fed n the offce of
the Dstrct Drector of Interna Revenue n whch the empoyer fes
hs ta returns. owever, secton 39.23(p)-2(e) of Reguatons 118
authorzes the Commssoner to requre any further nformaton con-
sdered necessary to determne aowabe deductons under secton
23(p) of the Code or quafcaton under secton 165(a) and to wave
the fng of such nformaton requred by secton 39.23(p)-2 of
Reguatons 118 whch he fnds unnecessary n a partcuar case. Pur-
suant to ths authorty, certan changes as noted beow, w be made
n the nformaton requred to be fed.
In the case of an empoyees trust or annuty pan estabshed on
an ndustry-wde or area-wde bass and negotated by a abor unon
for the beneft of empoyees who are empoyed by one or more of a
group of contrbutng empoyers, n whch the contrbutons of the
empoyers are based on such determnabe factors as man-hours worked
or unts produced, t w not be necessary for each ndvdua em-
poyer to furnsh a of the nformaton requred by secton 39.23(p)-2
of Reguatons 118 provded the pan trustees or an authorzed asso-
caton of the empoyers furnshes such data for the entre group of
partcpatng empoyers. In such cases, where t s desred to mt
the nformaton to be furnshed by the severa ndvdua empoyers,
the pan trustee or the assocaton of empoyers shoud furnsh once
each year the nformaton requred by secton 39.23(p)-2(a) of Regu-
atons 118, as foows:
(1) the nformaton sted under subparagraphs (1), (2), and
(7), e cept that when such nformaton has once been furnshed, t
need not be repeated uness a change n the facts makes a re-
submsson necessary n whch case, see subparagraph (b) of
secton 39.23(p)-2 of Reguatons 118
(2) the nformaton sted under subparagraphs ( ) () and (5)
on an over-a bass for the entre pan, uness each partcpatng
empoyer furnshes such nformaton wth respect to hs own
empoyees and
(3) the nformaton requred by subparagraphs (6) and (8).
If the nformaton specfed above s furnshed by the trustees or
the authorzed assocaton for the entre group of empoyers, each
ndvdua empoyer camng a deducton under secton 23(p) of the
Code may mt the nformaton he furnshes by attachng to hs
ncome ta return a statement showng:
(1) that the deducton camed s for contrbutons under
(name of pan) and that a favorabe rung wth respect thereto
was ssued on (date), contanng symbos ( ), and reference
shoud aso be made to ths Revenue Rung
(2) the nformaton requred by subparagraph (9) of secton
39.23(p)-2(a) of Reguatons 118
(3) that no other deductons are camed under secton 23(p)
of the Code, e cept that f other deductons are camed under
ths secton, fu nformaton as caed for under the above-cted
secton of Reguatons 118 s to be furnshed wth respect to such
other pans of deferred compensaton and
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Regs. 118, 39.23(p)-7. 302
( ) that the pan trustees, or assocaton of empoyers, have
undertaken to furnsh a other nformaton requred to be
furnshed under ths evenue Rung.
though ths Revenue Rung waves the requrement of fng
certan nformaton, t w not have the effect of precudng a Dstrct
Drector of Interna Revenue from requrng such addtona nfor-
maton as s consdered necessary to determne aowabe deductons
under secton 23(p) of the Code or quafcaton under secton 165 (a)
of the Code.
Ths Revenue Rung s ssued under the provsons of the Interna
Revenue Code of 193 ) however, t w aso be effectve under the
Interna Revenue Code of 195 to the e tent that t w not be n-
consstent wth the provsons of reguatons to be ssued under sec-
ton 0 of the 195 Code.
Reguatons 118, Secto 39.23(p)-7: Penson Rev. Ru. 55-1
and annuty pans mtatons under sec-
ton 23(p)()( )().
( so Secton 22(a), Secton 39.22(a)-.)
Refunds of contrbutons of empoyees, by the nsurer of an
empoyees annuty pan, do not consttute ta abe ncome to the
recpents. The aggregate amount pad by the empoyer to the
nsurer, as rembursement for such refunds, w be deductbe from
ta abe Income of the empoyer over a ten-year perod under secton
23(p) (1) ( ) () of the Interna Revenue Code of 1939 as a sup-
pementary cost of annuty credts.
dvce has been requested whether refunds of contrbutons of em-
poyees by the nsurer of an empoyees annuty pan consttute ta abe
ncome and whether an amount pad by the empoyer to the nsurer
as rembursement for such refunds woud be deductbe from ta abe
ncome of the empoyer.
n empoyer, who had estabshed an nsured annuty pan, under
whch both the empoyer and the empoyees made contrbutons to-
ward the fundng of the benefts to be provded, now proposes to
amend the pan to emnate the requrement for empoyee contrbu-
tons and to have the nsurer return a contrbutons prevousy made
by the empoyees to them and to remburse the nsurer for such
refunds.
It s hed that refunds made to empoyees under these crcumstances
woud consttute return of premums and therefore woud not be
ta abe ncome to the recpents.
It s further hed that the aggregate amount pad by the empoyer
to the nsurer, as rembursement for the refunds to empoyees, woud
be consdered as a suppementary cost of annuty credts and, as such,
woud be deductbe from ta abe ncome of the empoyer, under sec-
ton 23(p) (1) ( ) () of the Interna Revenue Code of 1939, over a
ten-year perod, sub|ect to appcabe mtatons of that secton and
to verfcaton upon e amnaton of ta returns nvoved.
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303 Regs. 118, 39.23(p)-7.
egt atons 118, Secton 39.23(p)-7: Penson Rev. Ru. 55- 11
and annuty pans mtatons under secton
23(p)()(a)(m).
In computng deductons for contrbutons to an empoyees pen-
son or annuty pan, as provded by secton 23(p) (1) ( ) ( ) of
the Interna Revenue Code of 1939, separate treatment sha be
accorded past servce costs whch are attrbutabe to substanta
amendments to the pan |ust as though such costs were provded
under dstnct suppementa pans. Interest on unfunded portons
thereof whch tend to ncrease such costs may not be ncuded n
the 10 percent base whe ncreases n cost due to unfavorabe e -
perence or underestmaton of the costs or to a change n the nsur-
ance company annuty rates shoud be ncuded n the 10 percent
base.
dvce has been requested as to the proper method of determnng
aowabe deductons under secton 23(p) (1) ( ) () of the Interna
Revenue Code of 1939 on account of an empoyer s contrbutons to
ts empoyees penson pan under a group annuty contract where the
cost of past servce credts has been ncreased by a substanta amend-
ment to the pan.
The empoyer estabshed an empoyees penson pan, as of anuary
1,19 1, wth a group annuty contract provdng past servce benefts
of 1 percent of average earnngs durng the 10 years precedng anu-
ary 1,19 1, for each year of credted servce pror to that date but not
ncudng servce pror to 1930. The snge premum cost to fund such
benefts as of December 1,19 1 was 2,000a doars. In 19 6, the cost
of past servce benefts was ncreased by ncreasng the rate of past
servce credts from 1 to 1 percent. ddtona amendments made
n 19 7 further ncreased the past servce costs as of that date by
e tendng the past servce credts to ncude servce pror to 1930,
and provdng certan suppementary annuty credts wth respect
to servce between 19 1 and 19 7. The snge premum cost as of
anuary 1, 1950, to fund the benefts as of that date was cacuated
actuaray at 5,000a) doars. The ta payer had contrbuted and de-
ducted 600a doars of the orgna past servce abty n 19 1, and
has snce deducted up to the ma mum mtatons n each succeedng
year. The queston presented s whether the nta cost of 2,000a
doars may be ncuded n the 10 percent base for purpose of comput-
ng mtatons on deductons for the year 1950 and subsequent years.
Secton 23(p) (1) ( ) () of the Interna Revenue Code provdes
a mtaton on deductons wth respect to past servce and
suppementary costs of:
an amount equa to the norma cost of the pan pus.
If past servce or other suppementary penson or annuty credts are provded
by the pan, an amount not n e cess of 10 per centum of the cost whch woud
be requred to competey fund or purchase such penson or annuty credts
as of the date when they are ncuded n the pan, e cept that n no
ease sha a deducton te aowed for any amount paa n after
tuch penson or annuty credts are competey funded or purchased. Itacs
apped.
It s the poston of the Interna Revenue Servce that where a
pan s amended to provde for a substanta ncrease n benefts so
that the amendment s smar to the estabshment of a dstnct sup-
pementa pan, deductons wth respect to the cost of the addtona
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Regs. 118, 39.23(q)-. 30
benefts may thereafter be aowed ony to the same e tent as deduc-
tons woud be aowed f the addtona benefts were provded under
a dstnct pan.
Snce the empoyer, n the nstant case, contrbuted and deducted
600.c doars of the orgna past servce abty n 19 1 and has
deducted the ma mum mtaton of 200a doars n each succeedng
year, t s apparent that the 10 1 snge premum cost of 2,000ar doars
(pus nterest on deayed nstaments thereof) was competey funded
and deducted by 19 9. ny remanng 10 percent base after that
tme shoud ncude ony costs of past servce and suppementary
credts provded by the amendments n 19 G and 19 7 as of the date
they were ncuded n the pan, and such costs shoud be ncuded
n the 10 percent base ony unt such tme as each s competey funded.
ccordngy, t s hed that the provsons of secton 23(p) (1) ( )
of the Code requres that separate treatment be accorded past servce
costs whch are attrbutabe to substanta amendments to an em-
poyees penson or annuty pan, |ust as though they were provded
under dstnct suppementa pans. Interest on unfunded portons
thereof whch tend to ncrease such costs may not be ncuded n
the 10 percent base whe, on the other hand, ncreases n cost due
to unfavorabe e perence or underestmaton of the costs or to a
change n the nsurance company annuty rates shoud be ncuded n
the 10 percent base.
Reguaton 118, Secton 39.23(p)-: Contr-
butons of an empoyer under a pan that
does not meet the requrements of secton
165(a) appcaton of secton 23 (p) (1) (D).
Deductbty of payments by an empoyer to an escrow fund whch
may be used to pay penson benefts. See ev. u. 55-310, page 5.
S CTION 23(q). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS Y COR-
POR TIONS
Reguatons 118, Secton 39.23(q)-: Contr-
butons or gfts by corporatons,
Contrbutons of property hed for sae n ordnary course of bus-
ness to an organzaton descrbed n secton 23 (q) of the Interna
Revenue Code. See Rev. Ru. 55-138, page 223.
Reguaton3 118, Secton 39.23 (q)-: Contr-
butons or gfts by corporatons.
Contrbutons to a reserve offcers assocaton. See Rev. Ru. 55-
150, page 292.
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305 (Regs. 118, 39.23(r)-.
S CTION 23(r). D DUCTIONS ROM GROSS INCOM :
DI ID NDS P ID Y N ING CORPOR TIONS
Reguatons 118, Secton 39.23 (r)-: Dv- Rev. Ru. 55-177
dends pad by mutua savngs banks, bud-
ng and oan assocatons, and cooperatve
banks.
or ta abe years begnnng after December 81, 1951, the entre
amount retaned by a domestc budng and oan assocaton as a
fne, penaty, forfeture or other fee, because of the wthdrawa of a
stockhoder from the assocaton pror to the maturty of hs shares,
Is Incudbe n the gross ncome of the assocaton for the year n
whch the rght to retan such amount s e ercsed, notwthstand-
ng the fact that a porton of the amount retaned s aocabe to
dvdends credted to the stockhoder s shares n certan pror years
durng whch the assocaton was not sub|ect to edera ncome ta a-
ton and no deducton was aowabe for dvdends credted to the
stockhoder s shares n such pror years.
dvce has been requested as to the treatment, for edera ncome
ta purposes, of amounts retaned by a domestc budng and oan
assocaton as a penaty because of the wthdrawa of a stockhoder
from the assocaton pror to the maturty of hs shares, where the
amounts retaned are rataby from dvdends credted to the ta -
payers shares n pror years and a porton of the amount so retaned
s aocabe to years durng whch the assocaton was not sub|ect to
edera ncome ta aton.
In the years 1950,1951 and 1952 the M budng and oan assocaton
credted to the shares of a stockhoder dvdends of 10a doars per
year, totang 30ar doars. In 1953 the stockhoder wthdrew from
the assocaton and receved 2 a doars n payment of the dvdends
credted for 1950, 1951 and 1952, the dfference of 6a doars beng
retaned by the assocaton as a penaty for wthdrawa of the stock-
hoder pror to the maturty of hs shares.
The specfc queston presented s whether the fu amount of the
G doars s ncudbe n the gross ncome of the budng and oan
assocaton for 1953, notwthstandng the fact that for the years 1950
and 1951 the assocaton was not sub|ect to edera ncome ta aton,
or whether ony 2 doars shoud be ncuded n the gross ncome
of the assocaton for 1953, snce that s the amount retaned aocabe
to dvdends credted to the stockhoder s shares n 1952 and for whch
the assocaton obtaned a ta beneft.
or ta abe years begnnng pror to anuary 1, 1952, domestc
budng and oan assocatons were not sub|ect to edera ncome
ta aton. owever, secton 313(h) of the Revenue ct of 1951
amended secton 10 (a) of the Interna Revenue Code of 1939, re-
atng to the defnton of a bank, to ncude wthn ts defnton do-
mestc budng and oan assocatons thus makng them sub|ect to
edera ncome ta wthn the mts prescrbed n secton 10 (b) of
the Code for ta abe years begnnng after December 31,1951. so,
secton 313(f) f ne Revenue ct of 1951, effectve for ta abe years
begnnng after December 31, 1951, amended secton 23(r) of the
C c to provde as foows:
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Regs. 118, 39.23(r)-. 306
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net Income there sha be aowed as deductons:

(r) Dvdends Pad by ankng Corporatons.
(1) In the case of mutua savngs banks, cooperatve banks, and domestc
budng and oan assocatons, amounts pad to, or credted to the accounts
of, depostors or hoders of accounts as dvdends on ther deposts or
wthdrawas accounts, f such amounts pad or credted are wthdrawabe
on demand sub|ect ony to customary notce of ntenton to wthdraw.
Secton 39.23 (r)-1(b) of Reguatons 118 provdes n the case of
a budng and oan assocaton whch operates n whoe or n part
as a sera assocaton whch ssues shares sub|ect to fnes, penates,
forfetures, or other wthdrawa fees, there s deductbe under secton
23(r) (1) of the Code the tota amount credted as dvdends upon
such shares. It s further provded that where the assocaton has
the rght to retan or recover a porton of the tota amount credted
as earnngs upon such shares as a fne, penaty or forfeture, or other
wthdrawa fee there s ncudbe n the gross ncome of the asso-
caton for the ta abe year n whch the rght s e ercsed amounts
retaned or recovered by the assocaton pursuant to the e ercse of
such rght.
ccordngy, t s hed that for ta abe years begnnng after De-
cember 31, 1951, the entre amount (n the nstant case 6a doars)
retaned by a domestc budng and oan assocaton as a fne, pen-
aty, forfeture or other wthdrawa fee, because of the wthdrawa
of a stockhoder from the assocaton pror to the maturty of hs
shares, s ncudbe n the gross ncome of the assocaton for the
year n whch the rght to retan such amount s e ercsed, notwth-
standng the fact that a porton of the amount retaned s aocabe
to the dvdends credted to the stockhoder s shares n certan pror
years durng whch the assocaton was not sub|ect to edera ncome
ta aton and that no deducton was aowabe for dvdends credted
to the stockhoder s shares n such pror years.
Reguatons 118, Secton 39.23 (r)-: Dvdends Rev. Ru 55-391
pad by mutua savngs banks, budng and
oan assocatons, and cooperatve banks.
( so Secton 23(k) Reguatons 118, Sec-
ton 39.23 (k)-5.)
Where t s shown that the actua reatonshp of the preferred
stockhoders of a budng and oan assocaton to the assocaton s
that of an ordnary depostor, the par vaue of preferred stock beng
wthdrawabe on demand sub|ect ony to the customary notce of n-
tenton to wthdraw, the assocaton s entted to a deducton, under
the provsons of secton 23(r) of the Interna Revenue Code of 1939,
for preferred stock dvdends ssued to and ta abe to the hoders of
the preferred stock. Such dvdends are deductbe by the assocaton
n the ta abe year n whch the redeemabe stock dvdend s ssued.
urthermore, the par vaue of the preferred stock outstandng on the
books of the assocaton at the end of the year consttutes a part o
the tota deposts or wthdrawabe accounts for the purpose of com-
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307 Rege. 118, 39.23( )-.
putng the addton to the reserve for bad debts under secton 23 (k) (1)
of the 1939 Code.
S CTION (23 ( ). D DUCTIONS OM GROSS INCOM :
M DIC L, D NT L, TC., P NS
Reguatons 118, Secton 39.23( )-1 : Medca, Rev. Ru. 55-261
denta, etc., e penses.
( soSecton2 (a) Reguatons 118, Secton
39.2 (a)-.)
( so Part I, Secton 213.)
Deductbty as medca e penses under secton 23 ( ) of the
Interna Revenue Code of 1939 of certan e pendtures made by
ta payers for transportaton, trave, speca educaton, medca n-
surance, heath nsttutes, ar condtonng devce, speca construc-
ton and equpment, speca cothng, food and beverages, and other
hygenc artces for purposes of heath.
Consderaton s gven heren to the deductbty under secton
23( ) of the Interna Revenue Code of 1939 of certan e pendtures
made by ta payers for purposes of heath, and on whch advce for
edera ncome ta purposes has been requested.
Secton 23 ( ) of the Code provdes n part as foows:
S C. 23. D DUCTIONS ROM GROSS INCOM .
In computng net ncome there sha be aowed as deductons:

( ) Medca, Denta, tc., penses. penses pad durng the ta abe year,
not compensated for by nsurance or otherwse, for medca care of the ta payer,
hs spouse, or a dependent specfed n secton 25 (b) (3)
The term medca care, as used In ths subsecton, sha Incude
amounts pad for the dagnoss, cure, mtgaton, treatment, or preventon of
dsease, or for the purpose of affectng any structure or functon of the body
(ncudng amounts pad for accdent or heath nsurance).
Secton 39.23 ( )- of Reguatons 118 provdes that aowabe de-
ductons under secton 23 ( ) w be confned strcty to e penses n-
curred prmary for the preventon or aevaton of a physca or
menta defect or ness. The ta payer sha furnsh the name and
address of each person to whom payment for medca e penses was
made and the amount and appro mate date of the actua payment
thereof. Cams for deductons must be substantated, when requested
by the Commssoner, by a statement from the ndvdua or entty
to whch payment for medca e penses was made, showng the nature
of the servce rendered, the amount pad therefor, and the date of the
actua payment thereof, and by such other nformaton as the Com-
mssoner may deem necessary.
In genera, any e pense pad prmary for the dagnoss, cure,
mtgaton, treatment, or preventon of dsease s aowabe as a medca
e pense deducton. Such e penses ncude payments for servces ren-
dered by physcans, surgeons dentsts, optometrsts, chropractors,
osteopaths, quafed psychatrsts and psychoogsts, and authorzed
Chrstan Scence practtoners. They aso ncude amounts pad for
hosptazaton nsurance, and for accdent or heath nsurance pre-
mums whch provde ndemnty for cost of medca care, but not for
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Regs. 118, 39.23( )-. 308
ndemnty soey for oss of earnngs. See I. T. 3598, C. . 19 3,157
Revenue Rung 1 3, C. . 1953-2, 129, and secton 39.23( )- of
Reguatons 118.
mounts pad prmary for the purpose of affectng some structure
or functon of the body are aowabe as a medca e pense deducton.
Such e penses ncude payments for obstetrca e penses, and -ray or
therapy treatments. penses pad prmary for the preventon or
aevaton of a physca or menta defect or ness ncude payments
for hospta e penses, nursng servce (ncudng nurses board where
pad by the ta payer), medca, aboratory, surgca, denta and other
dagnostc and heang servces. Smary, aowabe deductons aso
ncude the cost of eyegasses, hearng ads and component parts, a
seeng-eye dog and ts mantenance, artfca teeth and mbs.
mbuance hre essenta to the rendton of medca servces, and
trave e pense prmary for the preventon or aevaton of a physca
or menta defect or ness, when such trave s not, n any sense, for
vacaton purposes, consttute aowabe medca deductons. The de-
ductbty of trave e pense under the provsons of secton 23( ) of
the Code, however, must depend on the facts of each case and to the
e tent that such e pense can be substantated to the satsfacton of
the Commssoner.
Medca e pense, n order to be deductbe under secton 23 ( ) of the
Code, sub|ect to the mtatons provded n that secton, s therefore
any e pense pad and propery substantated as beng prmary for
any of the purposes enumerated n secton 23 ( ). penses of such
a nature that the persona or other benefts reazed are greater than
the medca benefts reazed w not generay quafy as aowabe
deductons.
The e pendtures n queston and the appcaton of secton 23 ( )
of the 1939 Code thereto are shown beow.
1. ote e penses ncurred where day vsts are requred to a
medca cnc. ed deductbe. Trave, meas and odgng ncurred
Srmary for and essenta to the rendton of medca servces are
eductbe under secton 23( ). See I. T. 3786, C. . 19 6-1, 75.
( owever, for years begnnng wth 195 see secton 213(e) of the
Interna Revenue Code of 195 and Commttee Reports denyng de-
ducton for food and odgng e cept where ncurred as part of a
hospta b.)
2. Cost of trp to orda soey for the beneft of a ta payer s post-
operatve throat and ung condton. In ths case, the ta payer under-
went an operaton for the remova of the aryn . Snce that operaton,
he breathes through an openng n hs throat. s efforts to breathe
durng the wnter at hs resdence n a northern cmate produce
spasms of coughng whch rupture bood vesses n hs ungs, causng
consderabe dstress to hm. e has found that he s entrey free of
ths condton when n orda durng the wnter months. It s hed
that, on the bass of the partcuar facts n ths case, the cost of a trp
to orda prmary for the aevaton of a physca defect, the cost
of such trp fuy substantated to the satsfacton of an e amnng
offcer of the Interna Revenue Servce, s deductbe under the pro-
vsons of secton 23 ( ) of the Code and of secton 39.23( )-1(d) (1)
of Reguatons 118. See I. T. 3786, supra, and Commssoner v. eever
L. Strngham, 183 ed. (2d) 579. (See note at end of tem 1. )
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309 Regs. 118, 39.23( )-.
3. Transportaton e pense of a physcay dsabed person to and
from hs pace of empoyment. In ths case, ta cab fares were pad
by a physcay handcapped vctm of poo n commutng to and from
Ls pace of empoyment. The e pense of such transportaton s a
persona e pense not deductbe for edera ncome ta purposes.
Compare ohn G. ruton v. Commssoner, 9 T. C. 882 sther .
Ranstead v. Commssoner, Ta Court Memorandum Opnon, entered
anuary 31,1951. #
. Cost of speca educaton or tranng of a deaf chd. Secton
39.23( )-(d) (1) of Reguatons 118 provdes, n part, that aow-
abe deductons under 23( ) w be confned strcty to e penses n-
curred prmary for the preventon or aevaton of a physca or
menta defect or ness. Under ths provson, t s hed that the
cost of speca nstructon or tranng, such as n speech and p
readng, desgned to aevate the oss of speech whch s attrbutabe
to deafness and to compensate n part for the oss of the sense of
hearng s deductbe as a medca e pense under secton 23( ) of
the Code. owever, the cost of ordnary nstructon whch a chd
woud requre n any event s not a medca e pense and s not de-
ductbe. See Commssoner v. Strngham.
5. Cost of reguar psychatrc therapy at a specay equpped treat-
ment schoo. Due to severe emotona dsturbances, a ta payer s
daughter s sent on the advce of a psychatrst to a treatment schoo
operatng 12 months n the year, at whch schoo she s under the care
of a practcng psychatrst and receves reguar psychatrc therapy.
Under such crcumstances the amount pad for psychatrc care whch
s for the prmary purpose of aevatng a menta ness s deductbe
as a medca e pense under secton 23 ( ) of the Code. s n stuaton
above, however, the cost of nstructon or tuton at such schoo
whch does not represent medca care s not deductbe.
6. Persona counseng program for remeda readng. Ta payer s
son s attendng a coege for a persona counseng program for
remeda readng. e s handed by a psychoogst and s recevng
ndvdua nstructon together wth psychotherapy. If the psycho-
therapy s ncdenta to genera supervsory counseng, the entre
e pense consttutes a persona e pense the deducton of whch s pro-
hbted by secton 2 (a)(1) of the Code. owever, f a cam for
deducton of the cost of the psychotherapy can be substantated, when
requested by the Commssoner, as havng been ncurred prmary
for the preventon or aevaton of a physca or menta defect or
ness, as requred n sectons 39.23 ( )-(d) (1) and 39.23 ( )-1(g)
of Reguatons 118, the cost thereof may be deducted as a medca e -
pense. See Rev. Ru. 1 3, C. . 1953-2, 129, and Rev. Ru. 5 - 57,
C. . 195 -2,100.
7. Snge annua premum pad on an nsurance pocy coverng
both accdenta n|ury and medca e pense resutng therefrom.
Ta payer pad premums on severa poces of the type whch provdes
for speca ndemntes n the case of varous enumerated n|ures (but
not for oss of earnngs) and, n addton to such ndemntes, for pay-
ment by the nsurance company of the e penses of treatment by a
physcan or surgeon, and hospta and nursng care requred by such
n|ures. The premum of each pocy s a snge specfed amount,
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egs. 118, 39.23( )-. 310
no aocaton of each premum beng shown wth respect to each type
of beneft avaabe under the contract.
Secton 23 ( ) of the Code provdes that n computng net ncome
there sha be aowed e penses, not compensated for by nsurance or
otherwse, for medca care of the ta payer, hs spouse, or hs depend-
ents, and that the term medca care, as used n that secton, sha n-
cude amounts pad for accdent or heath nsurance. In Robert O.
Domng, r. v. Commssoner, 9 T. C. 383, acquescence C. . 19 8 1,
1. t was hed that where the pettoner receved payments under ac-
cdenta nsurance contracts, desgnated n part as ndemnty for ds-
abty and n part as ndemnty for hosptazaton, etc., pettoner s
medca e pense was compensated for by nsurance wthn the mean-
ng of secton 23( ) of the Code ony to the e tent that he receved
nsurance payments specfcay desgnated as ndemnty payments
for hosptazaton, etc. oowng the reasonng of ths decson
Revenue Rung 19, C. . 1953-1, 59, hods that the amount of an-
nua premum pad for accdent and heath nsurance whch does not
provde rembursement to the nsured for medca e pense does not
consttute a proper deducton under secton 23( ) of the Interna
Revenue Code. ( mphass supped.) Ths anguage appearng
n Revenue Rung 19, supra, s not to be construed as meanng that
the tota premum pad for accdent nsurance whch does provde n
part for medca benefts s to be consdered deductbe entrey as a
medca e pense. Snce ony that porton of the pocy coverng
benefts whch remburse the nsured for medca e pense reduces
hs otherwse aowabe medca deductons under secton 23( ), ony
that part of the premum pad by the ta payer whch s attrbutabe
to the medca benefts of such pocy may be consdered a deductbe
medca e pense.
ccordngy, n the case of a snge, specfed premum pad annu-
ay or otherwse on a pocy whch provdes for both accdent ndemn-
tes and rembursement for medca e pense resutng from such acc-
dent, ony that porton of the premum attrbutabe to the medca
benefts of the pocy s deductbe as medca e pense under secton
23( ) of the Code.
8. Transportaton e pense to a doctor s offce. Secton 39.23 ( )
1(d) (1) of Reguatons 118 provdes that trave prmary for and
essenta to the rendton of medca servces s an aowabe medca
deducton. Transportaton e pense, as for e ampe ta cab fares,
pad for and propery substantated as beng prmary for the rend-
ton of medca servces consttutes an aowabe medca deducton.
9. ees pad to heath nsttutes. Ordnary, fees pad to a heath
nsttute where the ta payer takes e ercse, rubdowns, etc., are hed
to be a persona e pense, deducton for whch s prohbted by secton
2 (a) (1) of the Code. owever, fees pad to heath nsttutes may
be deductbe as medca e pense ony when such treatments by such
nsttutes are prescrbed by a physcan and are substantated by a
statement by the physcan that the treatments are necessary for the
aevaton of a physca or menta defect or ness of the ndvdua
recevng the treatments.
10. r condtonng devce. Inqures have been made as to the
deductbty of the cost of an ar condtonng devce whch has been.
nstaed n a room of the ta payer s resdence for the purpose of ef-
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311 Regs. 118, 39.23( )-.
fectng reef from an aergy or for reevng dffcuty n breathng
due to a heart condton. It s hed that the cost of an ar condton-
ng devce, pus the operatng e penses, ess any resae or savage vaue,
consttute an aowabe deducton as a medca e pense sub|ect to pre-
scrbed mtatons, provded that the need for t s substantated by
evdence submtted to show that the devce s used prmary for the
aevaton of a person s ness and provded further that the devce
does not become a permanent part of the dweng and may be removed
to other quarters.
11. O ygen equpment and o ygen for aevaton of ness.
mounts pad for o ygen equpment and o ygen used to aevate
dffcuty n breathng due to a heart condton may be deducted as a
medca e pense sub|ect to the mtatons prescrbed n secton 23( )
of the Code.
12. Constructon of speca room to accommodate an ron ung and
assocated equpment: operatng costs for ron ung change n home
heatng unt. In order to provde necessary care at home for a de-
pendent strcken wth poo, ta payer but a speca hospta room at
hs home to accommodate an ron ung, rockng bed, e tra chest resp-
rator and other equpment. Durng the dependent s confnement n
the hospta room added e penses were nvoved, such as power for
operaton of the ron ung, speca teephone setup, nursng servce, etc.
It was aso necessary to make a compete change of the home heatng
unt.
Wth respect to the cost of constructon of a speca room at a
dweng, even though prmary for medca purposes, and wth re-
spect to the cost of aterng a home heatng unt, such costs are hed to
consttute e pendtures for permanent mprovements or betterments
whch ncrease the vaue of the property, and do not quafy as med-
ca e penses under secton 23( ) of the Code. See ohn L. Seymour
v. Commssoner, 1 T. C. 1111 and Revenue Rung 5 -57, C. .
195 -1, 67.
The e penses of operatng an ron ung and of assocated equpment
necessary thereto, and the e pense of nursng care durng confnement
n the speca room are hed to be e penses ncurred prmary for the
aevaton of a physca ness, and may be deducted as a medca
e pense sub|ect to the mtatons prescrbed n secton 23( ) of the
Code.
13. Cost of a sma three-whee motor vehce commercay known
as an autoette used by a totay dsabed ta payer. The ta payer s
rated by the eterans dmnstraton as totay dsabed he can get
around for short dstances on crutches but s unabe to drve a car or
use pubc transportaton.
The cost of a sma three-whee vehce commercay known as an
autoette, acqured for transportaton purposes, rrespectve of the
ta payer s physca condton, does not represent an e pense ncurred
prmary for the aevaton of a physca defect or ness as provded
n secton 39.23 ( )- (d) (2) of Reguatons 118. Such an e pense s a
non-deductbe persona e pense under secton 2 (a) (1) of the Code.
Compare ohn C. ruton v. Commssoner, supra, and sther . Ran-
tteaav. Commssoner, supra.
38 050 58 21
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118, 30.23(c)- . 312
1 . Speca mattress and pywood boards for the reef of an arthrtc
condton. Ta payer s spouse has arthrts of the spne for whch
a speca mattress and a certan thckness of pywood boards has been
prescrbed. Under such crcumstances the e pense of a speca mattress
and pywood boards prescrbed for the reef of a physca dsease or
ness consttutes a medca deducton under secton 23 ( ) of the
Code.
15. Cost of speca food and beverages prescrbed for specfc a-
ments. dvce has been requested wth respect to the deductbty
as a medca e pense of (1) whskey prescrbed by a physcan for the
reef of angna pan resutng from a coronary artery dsease and (2)
cost of speca food prescrbed by a physcan for a ta payer who s
on an ucer det. Generay, the cost of speca food or beverages does
not quafy as a medca e pense wthn the meanng of secton 23( )
of the Code. owever, n speca cases, dependng upon the partcu-
ar facts presented, f the prescrbed food or beverage s taken soey
for the aevaton or treatment of an ness, s n no way a part of the
nutrtona needs of the patent, and a statement as to the partcuar
facts and to the food or beverage prescrbed s submtted by a phys-
can, the cost of such food or beverage may be deducted as a medca
e pense. Where the speca food or beverage s taken as a substtute
for food or beverage normay consumed by a person and satsfes hs
nutrtona requrements, the e pense ncurred s a persona e pence
wthn the meanng of secton 2 (a) (1) of the Code but where t s
prescrbed by a physcan for medcna purposes and s n addton to
the norma det of the patent, the cost may quafy as a medcna
e pense under secton 23( ).
16. Maternty cothng, antseptc daper servce, wgs, toothpaste.
mounts e pended for the preservaton of genera heath or for the
aevaton of physca or menta dscomfort whch s unreated to
some partcuar dsease or defect are not e penses for medca care
as defned n secton 23( ) of the Code. pendtures for maternty
cothng, antseptc daper servce, wgs, and toothpaste, are hed to be
persona e penses, the deducton of whch s prohbted by secton
2 (a)(1) of the Code. 0. G. Russe v. Commssoner, Ta Court
Memorandum Opnon, entered November 6,1953.
Reguatons 118, Secton 39.23( )-1: Medca,
denta, etc., e penses.
Premums pad for persona dsabty nsurance. See Rev. Ru.
55-331, page 271.
S CTION 23(z). D DUCTIONS ROM GROSS INCOM :
MOUNTS R PR S NTING T S ND INT R ST
P ID TO COOP R TI P RTM NT CORPOR TION
Reguatons 118, Secton 39.23(z)-1: mounts Rev. Ru. 55-31G
representng ta es and nterest pad to cooper-
atve apartment corporaton.
nonstock corporaton whch ses perpetua use and equty
contracts or propretary eases to ts members may consttute a
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313 Regs. 118, 39.23(0-1.
cooperatve apartment corporaton provded 80 percent of ts gross
Income s derved from tenant-stockhoders. Indvdua nomnees
of another corporaton who own perpetua use and equty contracts
or propretary eases for the use of such corporaton do not quafy
as tenant-stockhoders under secton 23(z)(2)( ) of the Interna
Revenue Code of 1939. Indvdua members who acqure perpetua
use and equty contracts, whether or not hed n the names of nom-
nees, quafy as tenant-stockhoders. Purchasers of perpetua use
and equty contracts or propretary eases who are tenant-stock-
hoders are entted to a deducton for ther proportonate share of
ta es and nterest pad or ncurred by the corporaton.
dvce has been requested whether a nonstock corporaton organ-
zed and operated n the manner descrbed beow w consttute a
cooperatve apartment corporaton wthn the meanng of secton 23 (z)
of the Interna Revenue Code of 1939. dvce has aso been requested
whether the purchasers of perpetua use and equty contracts or pro-
pretary eases n such corporaton are entted to a deducton for
ther proportonate share of the ta es and nterest pad or ncurred
by the corporaton.
corporaton (herenafter caed seer ) formed a new corpora-
ton (herenafter caed cooperatve ) as a nonstock corporaton to
be operated through a board of drectors eected by the members.
Seer owns an apartment house deveopment consstng of furnshed
and unfurnshed apartments, hote rooms, obbes, a dnng room,
garages, and stores. Cooperatve w be granted a ong-term ease
(possby 99 years wth renewa optons) ofthe ground and mproved
area on whch the budngs stand, together wth tte to mprove-
ments thereon. Seer w reserve from the ease and the deed to
mprovements, (1) furnture n the furnshed apartments and hote
rooms, (2) nonresdenta areas, and (3) personaty used n connec-
ton wth the operaton of non-resdenta factes.
The purchase prce for the ease w be pad n cash and deferred
purchase money notes secured by deeds of trust. The cash pad w
L e derved from sae by cooperatve of perpetua use and equty con-
tracts or propretary eases to members of the cooperatve. The con-
tracts or eases w be purchased by present tenants or others for a
prncpa sum. ny contracts or eases remanng unsod may be
purchased by ndvdua members of the cooperatve for resae.
The use contracts or eases w entte members to perpetua use
and en|oyment of a desgnated apartment. ny purchasers of use
contracts or eases, ncudng nomnees of seer, athough entted to
occupy apartments for dweng purposes, may ease apartments to
others for dweng purposes. The contracts or eases provde for
payment to cooperatve of mantenance charges, n whch w be n-
cuded operatng and mantenance e pense, rea estate ta es, nterest
and amortzaton under deeds of trust and ground ease renta.
Seer w aso have the rght to buy use contracts or eases, desg-
natng ndvdua nomnees as owners, and w have the rght to re-
qure sae of use contracts or eases to other ndvduas by cooperatve.
Seer w pay for a servces rendered by cooperatve, and prorated
amounts for ta es assessed aganst, and uttes used n, reserved parts
of the rea estate, the tota of whch w be substantay ess than 20
percent of the annua gross ncome to be reazed by cooperatve
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Regs. 118, 39.23(0-1.1 31
Secton 23 (z) of the Interna evenue Code of 1939 provdes as
foows:
(2) Defnton. or the purposes of ths subsecton
( ) Cooperatve apartment corporaton. The term cooperatve
apartment corporaton means a corporaton
() havng one and ony one cass of stock outstandng,
() a of the stockhoders of whch are entted, soey by reason
of ther ownershp of stock n the corporaton, to occupy for dwe-
ng purposes apartments n a budng owned or eased by such cor-
poraton, and who are not entted, ether condtonay or uncon-
dtonay, e cept upon a compete or parta qudaton of the
con oraton, to receve any dstrbuton not out of earnngs and
profts of the corporaton, and
() 80 per centum or more of the gross ncome of whch for
the ta abe year n whch the ta es and nterest descrbed n pa ra-
graph (1) are pad or ncurred s derved from tenant-stockhoders.
( ) Tenant-stockhoder. The term tenant-stockhoder means an
ndvdua who s a stockhoder n a cooperatve apartment corporaton,
and whose stock s fuy pad-up n an amount not ess than an amount
shown to the satsfacton of the Commssoner as bearng a reasonabe
reatonshp to the porton of the vaue of the corporaton s equty n
the budng and the and on whch t s stuated whch s attrbutabe
to the apartment whch such Indvdua s entted to occupy.
The case here under consderaton nvoves a nonstock corporaton.
Unke ordnary corporatons, a nonstock corporaton has no stock-
hoders but n pace thereof has members. In the absence of a con-
trary provson n the statute, charter, or by-aws, the rghts of mem-
bers of a nonstock corporaton have been hed to be the same as those
of a sharehoder n an ordnary corporaton. ard v. Tyer et a., 39
S. . (2d) 6 2 Leeds v. arrson, 72 (2d) 371. It has been hed
that the word stockhoder as used n a statute reatng to nsurance
companes meant, n the case of assessment companes, those who had
agreed to become members of the assocaton and pay assessments.
Sugg v. armers Mutua Insurance ssocaton et a., 63 S. W. 226.
In short, the terms stock and stockhoders are not necessary con-
fned to ther ordnary contempaton of a stock subscrpton t
whereby certan sums are agreed to be pad as contrbutons to a fund
ntended to suppy a capta stock for a company.
Secton 3797(a) (7) of the Code defnes the term stock to ncude
the share n an assocaton, |ont-stock company, or nsurance com-
pany, organzatons n whch the nterest of a member may not be rep-
resented by stock n a strct sense. Smary, the term share-
hoder s defned n secton 3797(a)(8) to ncude a member n an
assocaton, |ont-stock company, or nsurance company.
Cooperatve members n the nstant case possess the norma and
usua rghts of stockhoders, namey, a pro rata dstrbuton of assets
upon qudaton, partcpaton n management by reason of eectng
the board of drectors, and transferabty of ther nterest. ur-
thermore, a nonstock cooperatve apartment corporaton whch other-
wse quafes s n accord wth the purpose of secton 23(z) of the
1939 Code. The purpose of secton 23(z) s to pace the cooperatve
apartment owner n as favorabe a poston wth respect to nterest and
ta es pad as the owner of a dweng house. See Senate Report No.
1631 on the Revenue of 19 2, C. . 19 2-2, 50 , at pages 5 6 and
577. Perpetua use of and equty n an apartment or the propretary
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315 egs. 119, 39.2 (a)-.)
ease of an apartment, couped wth membershp n the corporaton,
s the equvaent for practca purposes of ownershp of an apartment.
In vew of the foregong, t s hed that provded the cooperatve
meets the 80 percent gross ncome requrement of secton 23 (z) (2)
of the Interna Revenue Code of 1939, t w consttute a cooperatve
apartment corporaton wthn the meanng of such secton. It s fur-
ther hed that (1) ndvduas who hod perpetua use and equty con-
tracts or propretary eases as nomnees for seer do not quafy as
tenant-stockhoders snce the benefca ownershp s n a corporaton,
whch cannot so quafy under secton 23 (z) and (2) ndvdua
members who acqure perpetua use and equty contracts or propr-
etary eases, whether or not hed n the names of nomnees, quafy
as tenant-stockhoders. ccordngy, the purchasers of perpetua use
and equty contracts or propretary eases who are tenant-stockhoders
n a cooperatve w be aowed the deductons provded for by secton
23(z)() of the 1939 Code.
S CTION 21(a). IT MS NOT D DUCTI L : G N R L
RUL
Reguatons 118, Secton 39.2 (a)-: Persona Rev. Ru. 55-57
and famy e penses.
( so Secton 23(a), Secton 39.23(a)-.)
mounts e pended by a ta payer for the purpose of barng hs
wfe accompany hm on a busness trp or to a busness conventon
represent nondeductbe persona e penses for edera ncome ta
purposes under the provsons of secton 2 (a) (1) of the Interna
Revenue Code of 1939, uness t can be shown that the presence of the
wfe on such a trp has a bona tde busness purpose.
dvce has been requested reatve to the deductbty of amounts
e pended by a ta payer for the trave e penses of hs wfe who ac-
companes hm on a busness trp or to a busness conventon.
Secton 2 (a) (1) of the Interna Revenue Code of 1939 provdes
that no deducton sha n any case be aowed n respect of persona,
vng, or famy e penses, e cept e traordnary medca e penses.
Secton 23(a) (1) ( ) of the Code provdes, n part, that n com-
putng net ncome there sha be aowed as deductons a ordnary
and necessary e penses pad or ncurred durng the ta abe year n
carryng on any trade or busness. Traveng e penses (ncudng
meas and odgng) whe away from home n the pursut of a trade or
busness are specfcay ncuded.
Secton 39.23(a)-2 of Reguatons 118 provdes as foows:
(a) Traveng e penses, as ordnary understood, ncude raroad fares and
meas and odgng. If the trp s undertaken for other than busness purposes,
the raroad fares are persona e penses and the meas and odgng are vng
e penses. If the trp s soey on busness, the reasonabe and necessary trave-
ng e penses, ncudng raroad fares, meas, and odgng, are busness e penses.
Such e penses must be drecty attrbutabe to the conduct of the bus-
ness to be deductbe.
Where a wfe accompanes her husband on a busness trp or to a
busness conventon the Code and Reguatons as cted above requre
a showng that her presence serves a oona fde busness purpose, .e.
s not merey for her peasure or vacaton, but s drecty attrbutabe
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Regs. 118, 39.2 (a)-. 316
to the husband s busness and necessary to the conduct thereof. Other-
wse, the porton of the e pense of the trp attrbutabe to the wfe s
trave consttutes a nondeductbe persona or vng e pense wthn
the provsons of secton 2 (a)(1) of the Code. The performance
by a wfe of some ncdenta servce for her husband, such as the occa-
sona typng of notes or smar servce whe accompanyng hm on
such trps, does not estabsh that her presence s necessary to the
conduct of hs busness.
The Ta Court of the Unted States (formery the oard of Ta
ppeas) has dened deductons for e penses of a wfe who accom-
paned her husband on busness trps n those cases where the wfe s
presence dd not serve a bona fde busness purpose. In the case of
the ppeas of George W. Megeath et a., 5 . T. . 127 , t was hed
that the porton of the traveng e penses ncurred by the ta payer
ncdent to the transportaton and mantenance of hs wfe who ac-
companed hm on a busness trp to urope was persona n nature
and not deductbe.
In the case of e S. Stocby v. Commssoner, Ta Court memo-
randum opnon entered une 30,1953, the court had many factors to
consder before arrvng at the decson that the e penses of the wfe
who accompaned the ta payer on severa busness trps durng the
years under consderaton were not deductbe. There the ta payer,
n hs unsuccessfu attempt to estabsh that hs wfe was the pro-
retor of the busness enterprse nvoved, ntroduced evdence that
s wfe sgned some busness checks, that her name appeared on
certan busness papers as propretor, that she dd spend some tme
at the pace of busness, that she dd assst n entertanng customers
and others mportant to the busness fe of the company, and that one
of the South mercan suppers of merchandse was arranged for
through one of her acquantances. The ta payer and hs wfe made
an e tensve tour of the Unted States n 19 3, a trp to orda n
19 , a trp to raz and Uruguay n eary 19 5 and a trp to Den-
mark n the atter part of 19 5. though the ta payer was con-
tnuay contactng actua or potenta customers and suppers on
these trps, he and hs wfe generay managed to ncude stops at
resort ctes or vsts wth reatves n ther tnerares. The court
found as a fact that the presence of the wfe on the trps was not
requred or necessary for the busness, and dened deducton of e -
penses therefor.
contrary decson, however, was reached n the case of ohn
Chares Thomas et a. v. Commssoner, oard of Ta ppeas memo-
randum decson entered March 1 , 1939, where t was hed that the
e penses pad for transportaton, board and odgng for the wfe
who accompaned her husband (the ta payer) on trps whch he made
n pursut of hs trade or busness, as a snger, were deductbe. In
that case the wfe, who was hersef traned as a snger, coached her
husband n preparaton for hs sngng roes, asssted n perfectng
hs pronuncaton of certan foregn anguages whch he had to sng,
n seectng approprate costumes, obtanng pubcty, pannng tn-
erares, seectng programs for hs concerts, and acted as hs secretary
and typst. On the bass of the nformaton avaabe, the oard
found as a fact that the wfe performed vauabe servces for her
husband n connecton wth hs busness whch requred her to be
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317 Regs. 118, 39.2 (a)-.
wth hm whe traveng awav from home and that the e penses n-
curred for her trave were ordnary and necessary busness e penses.
On the bass of the foregong dscusson and cases cted for ustra-
tve purposes, t s hed that amounts e pended by a ta payer for the
urpose of havng hs wfe accompany hm on a busness trp or to a
usness conventon represent nondeductbe persona e penses for
edera ncome ta purposes under the provsons of secton 2 (a) (1)
of the Code, uness t can be adequatey shown that the wfe s presence
on the trp has a bona fde busness purpose.
Reguatons 118, Secton 39.2 (a)-: Persona ev. u. 55-1 0
and famy e penses.
penses ncurred by an empoyee n movng hs famy and house-
hod goods from one ocaty to another where he had accepted a new
empoyment wth another empoyer represent nondeductbe e penses
under secton 2 (a) (1) of the Interna Revenue Code of 1939 prohb-
tng the deducton of persona, vng, or famy e penses. ow-
ances or rembursements for such e penses whch are receved from
the new empoyer under the foregong crcumstances must be ncuded
n gross ncome. See Revenue Rung 5 - 29, C. . 195 -2, 53, for
treatment of aowances or rembursements for movng e penses of an
empoyee who s transferred n the nterest of hs empoyer from one
offca staton to another for permanent duty.
Reguatons 118, Secton 39.2 (a)-: Persona Rev. Ru. 55-237
and famy e penses.
ta payer presenty engaged n nvestng n ndependenty pro-
duced pctures reeased n the Unted States proposes to make a trp
to urope to e pore the genera possbtes o makng more favorabe
nvestments n fms there. ed, e pendtures ncurred by the ta -
payer n makng a trp to urope for such purposes, wthout an e st-
ng rght or nterest resutng n the producton of ncome, do not
consttute deductbe e penses for edera ncome ta purposes.
Reguatons 118, Secton 39.2 (a)-: Persona Rev. Ru. 55-291
and famy e penses.
The ta payer s presdent of a corporaton engaged n the busness
of manufacturng machnery for use n the food and chemca proc-
essng ndustry. e was apponted as a ecturer on food technoogy
at coege at a saary of 1 per year. The purpose of acceptng such
an appontment was to estabsh hs reputaton as a ecturer and
wrter on food technoogy to a pont where nstead of vrtuay con-
trbutng hs servces he woud receve substanta persona ncome
therefrom. Wth the above n vew, the ta payer ncurred e penses
m the deveopment of outets for the matera used n hs ectures
through rado, teevson and magazne artces. In addton he ap-
peared on rado and conducted rado ntervews ncurrng certan
e penses n connecton therewth. ed, the e penses ncurred by the
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Regs. IIS, 39.2 (a)-.) 318
ta payer for the purpose of ncreasng hs prestge and estabshng
hs professona reputaton consttute persona e penses wthn the
meanng of secton 2 (a)(1) of the Interna Revenue Code of 1939
and, therefore, are not deductbe from gross ncome. Compare
Thomas . Wech v. everng, 290 U. S. I, Ct. D. 755, C. . II-2,
112 (1933), Manoe Cardozo v. Commssoner, 17 T. C. 3, and red-
erck . Purdy v. Commssoner, 12 T. C. 888.
Reguaton 118, Secton 39.2 (a)-1: Persona Rev. Ru. 55 12
and famy e penses.
( so Secton 23(a) Reguatons 118, Sectons
39.23 (a)-, 39.23 (a)-2.)
penses ncurred for trave and for study by a teacher on sab-
batca eave consttute persona e penses under secton 2 (a)
of the Interna Revenue Code of 1939, where such trave and study
are not requred to mantan the teachng poston. Persona e -
penses are not deductbe for edera ncome ta purposes.
dvce has been requested as to the deductbty for edera n-
come ta purposes of e penses ncurred by a teacher for trave and
study n urope whe on sabbatca eave granted by the schoo n
whch he teaches.
Ta payer s an nstructor n a secondary prvate schoo. The schoo
does not requre any of ts facuty to trave athough t encourages
nstructors to take eave for study and trave whch w resut
n mproved teachng. The schoo contnues to pay the nstructor s
saary durng the perod of eave but does not drect any of the
nstructor s pans nor does t requre any report concernng such
trave and study.
I. T. 0 , C. . 1951-1,16, hods that summer schoo e penses, n-
cudng tuton, room rent, and cost of trave, ncurred by a pubc
schoo teacher who was requred to attend summer schoo reguary
n order to mantan her poston were deductbe as ordnary and
necessary busness e penses under secton 23 (a) (1) ( ) of the Interna
Revenue Code of 1939. In I. T. 3380, C. . 19 0-1, 29, traveng
e penses ncurred by teachers on sabbatca eave from ther schoos
who receved compensaton whe so engaged, whch trave was re-
qured by the board of educaton, and who were requred to report
to the schoo reatve to ther trave, are smary deductbe.
Where, however, the e penses of trave and study were voun-
tary assumed by a teacher for the purpose of ncreasng hs prestge,
to mprove hs reputaton for schoarshp and earnng, and to better
ft hm for the dutes he was empoyed to perform, such e penses were
consdered to be persona e penses, deducton for whch s prohbted
by secton 2 (a) (1) of the Code. See Manoe Cardozo v. Comms-
soner, 17 T. C. 3, and I. T. 0 , supra.
ccordngy, t s hed that e penses ncurred for trave and for
study by a teacher whe on sabbatca eave, durng whch perod hs
saary from the schoo contnues to be pad to hmTnt the trave and
study are not requred by the schoo n order to mantan hs poston
are persona e penses under secton 2 (a) (1) of the Interna Revenue
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319 Regs. 118, 39.2 (a)-2.
) of 1939, whch are not deductbe for edera ncome ta pur-
Reguatons 118, Secton 39.2 (a)-: Persona
and famy e penses.
penses ncurred by members of reserve components of the rmed
orces for cost and mantenance of unforms, See Rev. Ru. 55-109,
page 261.
Reguatons 118, Secton 39.2 (a)-: Persona
and famy e penses.
Certan e pendtures made by ta payers for purposes of heath.
See Rev. Ru. 55-261, page 307.
Reguatons 118, Secton 39.2 (a)-: Persona
and famy e penses.
Premums pad for persona dsabty nsurance. See Rev. Ru.
55-331, page 271.
Reguatons 118, Secton 39.2 (a)-2: Capta Rev. Ru. 55-158
e pendtures.
mounts pad by a ta payer for the preparaton and fng of the
affdavt reatng to contnued use requred by secton 8 of the ct of
uy 5,19 6, 60 Stat. 27, 31,15 U. S. C. 1058, whch act provdes for
the regstraton and protecton of trade-marks, consttute capta
e pendtures made for the purpose of preventng canceaton of the
regstraton of a trade-mark. ccordngy, such e pendtures are
not deductbe for edera ncome ta purposes. See secton 39.2
(a)-2 of Reguatons 118.
Reguatons 118, Secton 39.2 (a)-2: Capta Rev. Ru. 55-252
e pendtures.
Generay, drect costs ncurred n connecton wth reforestaton
by pantng are capta e pendtures, recoverabe through depeton
as the tmber subsequenty becomes merchantabe and s cut or sod.
Compare Mm. 6030. C. . 19 6-2, 5 G. C. M. 65 , C. . III-2,
118 (1929). Such pantng costs ncude:
(a) preparaton of the ste, ncudng any grdng or brush
remova work to afford good growng condtons
(b) cost of seedngs and
(c) abor and too e pense, ncudng deprecaton of equp-
ment used n pantng such as trucks, tree panters, etc.
Indrect e pendtures, such as nterest pad on money borrowed to
satsfy a State aw requrng a depost to guarantee natura reforesta-
ton over a specfed perod of years n eu of pantng, or a servce
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Regs. 118, 39.2 (a)-6. 320
charge on a performance bond n eu of a cash depost, may be treated
as current deductons for the year n whch ncurred or captazed
cumuatvey n accordance wth a proper eecton by the ta payer
under the provsons of secton 39.2 (a)-6 of Reguatons 118.
Reguatons 118, Secton 39.2 (a)-2: Capta Rev. Ru. 55-253
e pendtures.
pendtures ncurred by a ta payer for constructon of a perma-
nent roadway n connecton wth the deveopment of a subdvson of
renta property owned by hm may not be deducted as an operatng
e pense but s to be consdered as an addton to capta nvestment
wthn the meanng of secton 2 (a) (2) of the Interna Revenue Code
of 1939.
Reguatons 118, Secton 39.2 (a)-2: Capta Rev. Ru. 55-290
e pendtures.
pendtures ncurred by a ta payer n the orgna constructon
of greens on a gof course consttute capta e pendtures to be added
to the orgna cost of the and and are not sub|ect to an aowance for
deprecaton. Subsequent operatng e penses for sod, seed, so and
other sundry mantenance consttute ordnary and necessary busness
e penses whch are deductbe from gross ncome for edera ncome
ta purposes.
Reguatons 118, Secton 39.2 (a)-2: Capta Rev. Ru. 55-332
e pendtures.
mounts pad to credtors of an nsovent corporaton by a new
corporaton, havng the same presdent as the former nsovent cor-
poraton, n order to obtan franchses to se the credtors products
consttute capta e pendtures whch are not deductbe as ordnary
and necessary busness e penses. See Thomas . Wech v. everna,
03 ed. (2d) 970, affrmed 290 U. S. I, Ct. D. 755, C. . II-2, 112
(1933). Such payments are consdered to be made to estabsh good
w.
Reguatons 118, Secton 39.2 (a)-2: Capta
e pendtures.
So-caed renta payments to bank whch purchased and hods ega
tte to automotve equpment whch t eases to ta payer. See Rev.
Ru. 55-25, page 2S3.
Reguatons 118, Secton 39.2 (a)-6: Ta es Rev. Ru. 55-118
and carryng charges chargeabe to capta
account and treated as capta tems.
Deay rentas pad or accrued In connecton wth non-producng
o and gas eases may, at the eecton of the ta payer, be captazed
as carryng charges on unmproved and unproductve rea property
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321 Regs. 118, 39.2 (a)-6.
under the provsons of secton 39.2 (a)-6 of Reguatons 118, wth-
out regard to the manner n whch that tem on the same ease was
handed for a pror year. Such tem may be captazed n respect
of one nonproducng o and gas ease, even though n the same ta -
abe year a ke treatment s not apped to other such eases owned.
dvce has been requested whether (1 deay rentas pad or ac-
crued n connecton wth non-producng o and gas eases may, at the
ta payer s eecton, be captazed as carryng charges on unmproved
and unproductve rea property under the provsons of secton
39.2 (a)-6 of Reguatons 118, (2) such eecton may be e ercsed wth
respect to a partcuar ease n a gven year f such eecton was not
e ercsed for the same ease n a pror year, and (3) such eecton must
appy to a nonproducng eases n a gven year.
In the nstant case, the ta payer (essee) owns nonproducng o
and gas eases on acreage n varous states and n Canada. Durng
pror years, the ta payer had deducted a deay rentas n determn-
ng ta abe ncome. egnnng wth the ta abe year 1953, ta payer
desres to captaze such deay rentas.
The provsons of paragraph (1) and sub-paragraph (1) () of sec-
ton 39.2 (a)-6(b) of Reguatons 118, n the nterpretaton of secton
2 (a) (7) of the Interna Revenue Code of 1939, state that carryng
charges on unmproved and unproductve rea property mav be cap-
tazed at the eecton of the ta payer, n the manner provded n sec-
ton 39.2 (a)-6(c) of the reguatons.
Payment of a deay renta wth respect to an undeveoped o and
gas ase e tends the perod n whch the essee may dr wes for
the producton of o and gas. In G. C. M. 11197, C. . II-1, 238
(1933), t was hed that deay rentas may be handed as carryng
charges on unproductve property. In I. T. 3693, C. . 19 , 272, t
was hed that a essee s nterest n an o and gas ease consttutes an
nterest n rea property, for edera ncome ta purposes. ccord-
ngy, undeveoped o and gas eases are deemed to be unmproved
and unproductve rea property wthn the meanng of secton
39.2 (a)-6(b) (1) () of Reguatons 118.
Secton 39.2 (a)-6(b)(2) of Reguatons 118 contans the prov-
sons that a ta payer may eect to captaze the carryng charges on
one pro|ect even though he does not eect to captaze carryng charges
on other pro|ects. n o and gas ease s a separate property and
thus s handed as a separate pro|ect. Compare G. C. M. 22106, C. .
19 1-1,2 5, and G. C. M. 2 09 , C. . 19 ,250.
In vew of the foregong, t s hed that deay rentas pad or accrued
n connecton wth nonproducng o and gas eases may, at the eecton
of the ta payer, be captazed as carryng charges on unmproved and
unproductve rea property wthn the purvew of secton 39.2 (a)-
6(b)(1) of Reguatons 118. Under the provsons of secton
39.2 (a)-6(b) (3) of the reguatons, an eecton may be e ercsed to
captaze deay rentas on a partcuar ease for a gven year wthout
regard to the manner n whch carryng charges were handed n pror
years wth respect to the same ease. n eecton may be made to
captaze deay rentas n a gven year wth respect to a partcuar
nonproducng o and gas ease even though such an eecton s not
e ercsed n that year wth respect to other such eases.
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Regs. 118, S 39.25-2. 322
S CTION 25.-CR DITS O INDI IDU LS
G INST N T INCOM
Reguatons 118, Secton 39.25-2: Credts of Rev. Ru. 55-178
ndvduas for purpose of norma ta and
surta .
( so Sectons 22(k), 51 Reguatons 118,
Sectons 39.22(k)-, 39.51-1.)
Consstent wth the nonacquescence, C. . 1953-2, 8, In the dec-
son n Marrner S. cces v. Commssoner, 19 T. 0. 10 9, affrmed,
208 ed. (2(3) 706, the Interna Revenue Servce w contnue to
adhere to the poston that an ndvdua egay separated from hs
spouse under an nterocutory decree of dvorce s egay separated
under a decree of dvorce or of separate mantenance wthn the
meanng of secton 25(b) (2) ( ) of the Interna Revenue Code of
1030 and thus s not to be consdered as marred. Such concusons
are equay appcabe to the nonacquescence, C. . 1953-2, 8, n
ce umphreys vans T. Commssoner, 19 T. C. 1102, affrmed,
211 ed. (2d) 378.
dvce has been requested whether the decson n Marrner S.
cces v. Commssoner, 19 T. C. 10 9, affrmed, 208 ed. (2d) 796,
w affect the poston of the Interna Revenue Servce that for the
purpose of secton 25(b)(2)( ) of the Interna Revenue Code of
1939 a ega separaton under an nterocutory decree of dvorce s a
ega separaton under that secton.
Secton 25(b) of the Interna Revenue Code of 1939 reates to the
e emptons aowabe on a edera ncome ta return, and paragraph
(2) ( ) thereof provdes: n ndvdua egay separated from hs
spouse under a decree of dvorce or of separate mantenance sha not
be consdered as marred. It foows that f a wfe s so separated
rom her husband, the husband cannot cam an e empton on hs
ncome ta return for her.
ouse of Representatves Report No. 127 , 80th Congress, C. .
19 8-1, 2 1, at 277, and Senate Report No. 1013, 80th Congress, C. .
19 8-1,285, at 32 , n consderng secton 25(b) (2) of the Code, state
n part:
The second rue s that an ndvdua egay separated (athough not abso-
utey dvorced) from hs spouse under a decree of dvorce or of separate
mantenance sha not be consdered as marred. Smar rues for the
determnaton of status are provded n secton 23(na) (0) of the Code (as
added by secton 302(c) of the b), reatng to the standard deducton, and
In secton 51(b) (5) of the Code (as added by secton 303 of the b) reatng
to |ont returns. unform constructon of a these provsons Is ntended.
The rue wth respect to the marta status of an ndvdua egay separated
from hs spouse under a decree of dvorce or of separate mantenance s
derved from a correspondng provson n secton 22(k) of the Code, reatng
to the ta treatment of amony and ke payments.
In the cces case, The Ta Court of the Unted States hed that
the ta payer and hs wfe who were egay separated under an nter-
ocutory decree of dvorce as of December 31,19 9, were for the pur-
pose of secton 51 of the Interna Revenue Code st husband and wfe
and thus entted to fe a |ont return for the year 19 9.
The Ta Court observed that an nterocutory decree of dvorce -was
not a decree of dvorce under State aw snce t dd not effect a fna
dvorce and was not a decree of separate mantenance as provded for
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323 Regs. 118, 39.25-2.
n the Utah statutes. owever, t s the poston of the Interna
Revenue Servce that the ntent of Congress, by the phrase decree of
dvorce or of separate mantenance, was to ncude any court decree
(other than a decree of absoute dvorce) whch egay separates the
partes and that oca aw s appcabe ony to dscover whether there
vsas such a decree and whether the decree had such effect upon the
marta obgatons of the partes as to amount to a ega separaton.
ccordngy, t s the poston of the Servce that the court n the
cces case was n error n hodng that the partes, athough egay
separated, were st entted to fe a |ont return under secton 51 of
the Code snce under State aw there was no decree of dvorce or of
separate mantenance. See aso I. T. 3761, C. . 19 5,76.
The fact that the Government dd not appy for certorar n the
cces case n no way represents an acceptance of the decson by the
Interna Revenue Servce. Consstent wth the nonacquescence n
the cces case, C. . 1953-2, 8, the Servce w contnue to hod that
an ndvdua egay separated from hs spouse under an nter-
ocutory decree of dvorce s egay separated under a decree of dvorce
or of separate mantenance wthn the meanng of secton 25(b) (2) ( )
of the Code and thus s not to be consdered as marred, and an e emp-
ton camed by the husband for hs wfe s not aowabe.
The foregong concusons are equay appcabe to the non-
acquescence, C. . 1953-2, 8, n ce umphreys vans v. Comms-
soner, 19 T. C. 1102, affrmed, 211 ed. (2d) 378, so that the poston
of the Servce contnues to be that an nterocutory decree of dvorce
may effect a ega separaton under a decree of dvorce or of separate
mantenance under secton 22 (k).
Reguatons 118, Secton 39.25-2: Credts of Rev. Ru. 55- 13
ndvduas for purpose of norma ta and surta .
The adoptng parents of a chd born n a foregn country must
ook to the parentage of the chd at the tme of ts brth n determn-
ng whether such chd s a ctzen for purposes of secton 25(b) (3)
of the Interna Revenue Code of 1939. chd born n a foregn
country to a nonresdent aen mother and a father who was a
member of the rmed orces of the Unted States who met the con-
dtons prescrbed by secton 301(a) (7) of the Immgraton and Na-
tonaty ct, was a ctzen of the Unted States at brth. There-
fore, a man and wfe, ctzens of the Unted States, who adopt such a
chd may cam the chd as a dependent If the other requrements
of secton 25(b) (3) of the Code are met.
dvce has been requested whether a chd, born n a foregn coun-
try, whose mother s a nonresdent aen and whose father s a member
of the rmed orces of the Unted States, who s adopted by another
member of the rmed orces and hs wfe, quafes as a dependent
of such adopted parents under the provsons of secton 25(b) (3) of
the Interna Revenue Code of 1939.
In the nstant case an offcer n the Unted States rmy and hs wfe,
ctzens of the Unted States, statoned n Germany, adopted the chd
of a German mother and a Unted States soder, aso a ctzen of the
Unted States. The chd was adopted n March of the ta abe year
and has been supported by the army offcer and hs wfe snce that tme.
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Regs. 118, 39.25-2. 32
Secton 25(b) of the 1939 Code provdes, n part, as foows:
(b) Credts fok oth Norma Ta and Surta .
(1) Credts. There sha be aowed for the purposes of both norma ta
and the surta , the foowng credts aganst net ncome:
(D) n e empton of 600 for each dependent whose gross ncome
for the caendar year n whch the ta abe year of the ta payer begns
s ess than 600, e cept that the e empton sha not be aowed n
respect of a dependent who has made a |ont return wth hs spouse
under secton 51 for the ta abe year begnnng n such caendar year.
(3) Defnton of dependent. s used In ths chapter chapter 1 of
the Code the term dependent means any of the foowng persons over
haf of whose support, for the caendar year n whch the ta abe year of
the ta payer begns, was receved from the ta payer:
( ) a son or daughter of the ta payer

or the purposes of determnne whether any of the foregons
reatonshps e st (1) a egay adopted chd of a person , sha
be consdered a chd of such person by bood. The term dependent does
not ncude any ndvdua who s a ctzen or sub|ect of a foregn country
uness such ndvdua s a resdent of the Unted States or of a country
contguous to the Unted States.
Lega adopton does not, of tsef, confer upon a chd the ctzen-
shp of the adoptng parents. owever, under the provsons of sec-
ton 301(a) (7) of the Immgraton and Natonaty ct, 66 Stat. 1G3,
8 U. S. C. 1 01 (formery secton 201 () of the Natonaty ct of
19 0, as added by ct of uy 31, 19 6, 60 Stat. 721, 8 U. S. C. 601),
a chd s a ctzen of the Unted States at brth f born outsde the
geographca mts of the Unted States and ts outyng possessons
of parents one of whom s an aen, and the other a ctzen of the
Unted States who, pror to the brth of such chd, was physcay
present n the Unted States or ts outyng possessons for a perod
or perods totang not ess than 10 |7ears, at east 5 of whch were
after attanng the age of 1 years: Provded, that any perods of
honorabe servce n the rmedf orces of the Unted States by such
ctzen parent may be ncuded n computng the physca presence
requrements of such paragraph.
Thus, n the nstant case, the chd acqured the status of a Unted
States ctzen by brth, not by adopton. See I. T. 38 8, C. . 19 7-1,
30.
ccordngy, t s hed that the adoptng parents of a chd born n
a foregn country must ook to the parentage of the chd at the tme
of ts brth n determnng whether such chd s a ctzen for purposes
of secton 25(b) (3) of the Code. chd born n a foregn country
to a nonresdent aen mother and a father who was a member of the
rmed orces of the Unted States who met the condtons prescrbed
by secton 301(a) (7) of the Immgraton and Natonaty ct, supra,
was a ctzen of the Unted States at brth. Therefore, a man and
wfe, ctzens of the Unted States, who adopt such a chd may cam
the chd as a dependent f the other requrements of secton 25(b) (3)
of the Code are met.
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325 Regs. 118, 39. 2-1,.
RmuuToN 118, Secton 39.25-2: Credts
of ndvduas for purpose of norma ta
w surta .
. spouse cannot quafy as a dependent and no deducton s aow-
abe or a spouse who has gross ncome n any amount. See Rev. Ru.
5-m,page 18.
P RT I . CCOUNTING ND M T ODS O CCOUNTING
S CTION 2. P RIOD IN W IC IT MS O GROSS
INCOM INCLUD D
Rectatons 118, Secton 39. 2-1: When n- Rev. Ru. 55-205
euded n gross ncome.
The poston of the Interna Revenue Servce regardng the tme
for reportng, for federa ncome ta purposes, compensaton resutng
from termnaton of Government contracts has not been changed by
vrtue of the decson n pe ectrca Manufacturng Company v.
Commssoner, 202 ed. (2d) 151, affrmng 16 T. C. 1171, nonac-
quescence C. . 1951-2, 5.
Such poston s generay stated n secton 39. 2-1 of Reguatons
IIS as foows:
cept as otherwse stated In ths paragraph, such Items as cams for com-
pensaton under canceed tovermnent contracts consttute ncome for the year
n whch tey are aowed or ther vaue Is otherwse defntey determned, f
the return s rendered on the accrua bass or for the year n whch receved,
f the return s rendered on the bass of cash recepts and dsbursements. In
the case of a termnaton of a war contract as defned by secton 3 of the Contract
Settement ct of 19 , 58 Stat. 6 9, 1 O. S. C. 103 (or the termnaton of any
other Government contract as to whch the rght to compensaton s defntey
f ed and the measure thereof s determnabe wth reasonabe accuracy), f the
return s rendered on a bass other than cash recepts and dsbursements, com-
pensaton for the termnaton sha, uness a dfferent method of reportng s
prescrbed or approved by the Commssoner, consttute ncome for the ta abe
year n whch fas the effectve date of the termnaton, e cept that If any
part of the compensaton s attrbutabe to cost, e penses, or osses ncurred
In a subsequent year such part of the compensaton sha be returned as ncome
for the subsequent year.
though genera nonacceptance by the Servce of the pe dec-
son s ndcated by the Commssoner s nonacquescence theren, t
w be noted that the decson dd not hod the counterpart of the
above-quoted reguatons n secton 29. 1-1 of Reguatons 111
(as amended by T. D. 5 05, C. . 19 ,15 ) to be nvad. The decson
dsagreed rather wth the Commssoner s determnaton n fndngs
of pertnent facts (n that partcuar case) and n the appcaton
thereto of such reguatons under Mmeograph 5897, C. . 19 5,131.
Reguatons 118, Secton 39. 2-1: When n-
cuded n gross ncome.
Interest on future payment funds hed by a edera and bank for
ts borrowers for future appcaton on ther ndebtedness to the bank.
See Rev. Ru. 55-25 , page 326.
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Reg . 118, 39. 2-2. 326
Reguatons 118, Secton 39. 2-1: When n-
cuded n gross ncome.
Interest accrued, before ressuance, on Seres , Unted States sav-
ngs bonds orgnay ssued to coowners but ater ressued to one of
coowners. See Rev. Ru. 55-278, page 71.
Reguatons 118, Secton 39. 2-2: Income not Rev. Ru. 55-25
reduced to possesson.
( so Secton 39. 2-1 Sectons 22(a), 23(e)
Reguatons 118, Sectons 39.22(a)-1,
39.23(e)-.)
Interest aowed on future payment funds hed by a edera and
bank for ts borrowers for future appcaton on tber ndebtedness
to the ank consttutes ncome for edera Income ta purposes to
te borrower on tbe cash recepts bass as of the date of the ds-
poston of the funds. Where the borrower s on the accrua bass,
tbe nterest s reportabe as ncome annuay as t s earned. If,
upon fna dsposton, nterest shoud be aowed at a dfferent rate
from that at whch t was accrued, the dfference n amount between
that fnay aowed and that formery accrued w consttute ether
ordnary ncome under secton 22(a) of the Interna Revenue Code
of 1939, or an ordnary oss under secton 23(e) of tbe Code, n the
year of fna dsposton of the funds.
dvce has been requested whether nterest aowed on future pay-
ment funds hed by a edera and bank for ts borrowers for future
appcaton on ther ndebtedness to the bank, shoud be reported for
federa ncome ta purposes as ncome of the borrowers annuay,
or ony when actuay apped on ther ndebtedness, or when some
other dsposton of the nterest s made.
In the nstant case the borrower has two oans from a edera and
bank, each bearng a dfferent nterest rate, and a second mortgage
and bank commssoner oan at a st hgher nterest rate. The and
bank commssoner oan s servced by the edera and bank but s
owned by the edera arm Mortgage Corporaton. The nterest
aowance on the future payment funds cannot be fnay determned
unt after the ndebtedness to whch such funds are apped and the
nterest rate on such ndebtedness are both known.
The edera arm Loan ct, 12 U. S. C. 781, authorzes a ed-
era and bank to accept condtona payments from borrowers
for subsequent credt upon ther ndebtedness to the bank, and
to aow nterest on such payments. Such secton enumerates the
powers, sub|ect to the mtatons and requrements of the statute,
of edera and banks generay. The eghteenth power pro-
vdes that a condtona payments accepted sha be sub|ect to such
terms and condtons, not nconsstent wth the provsons of the
statute and wth any rues or reguatons prescrbed for ts effcent
e ecuton by the arm Credt dmnstraton, as may be agreed upon
at the tme of ther acceptance. If a condtona payment s accepted
for subsequent credt upon a frst mortgage whch s at the tme or s
thereafter pedged as coatera securty for an ssue of farm-oan
bonds, a requrements, condtons, and mtatons set forth n sec-
tons 897-899 of Tte 12 sha appy to such payment the same as
though t were a present payment on the prncpa of the mortgage
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327 egs. 118, 39. 2-2.
pedged as coatera securty, and the edera and bank sha forth-
wth notfy the farm oan regstrar of ts recept of such payment
and account to hm therefor. very condtona payment accepted
by a edera and bank for subsequent credt upon ndebtedness of
a borrower sha be credted upon such ndebtedness as the borrower
may from tme to tme drect n accordance wth the terms and cond-
tons upon whch the payment has been accepted. t the opton of the
bank, the payment may n any event be credted upon such ndebted-
ness as ana when t matures f t s not otherwse pad by the borrower
at or before maturty. ny baance of condtona payments reman-
ng uncredted, when the ndebtedness on account of whch they have
been accepted has been pad n fu, sha be refunded to the borrower.
The terms upon whch a future payment fund s accepted are n-
cuded n reguatons ssued by the arm Credt dmnstraton.
These reguatons, whch have been made a part of Tte 6 of the
Code of edera Reguatons, Cumuatve rocket-Suppement for
the year 195 , provde n part as foows:
Secton 10.11(1 uture payment funds as authorzed ov 12 U. 8. 0. 78/,
ghteenth. uture payments funds sha be hed for subsequent credt
npon ndebtedness to tb| bank or the Corporaton edera arm Mortgage
Corporaton , e cept In cases of unusua crcumstances where the reease
of the fund Is ustfed. On future payment funds apped, Interest sha
be aowed to the date of appcaton at the effectve nterest rate(s) ap-
pcabe to the Indebtedness n connecton wth whch such funds are
apped. On future payment funds reeased under unusua crcumstances,
nterest sha be aowed to the date reeased at the effectve Interest rate(s)
appcabe to the ndebtedness n connecton wth whch such funds are
hed.
Secton 10.121 Unreated oans. In those cases n whch a borrower
has ndebtedness to the bank, the Corporaton edera orm Mortgage
Corporaton , or both whch s not secured by the same or common rea
property, determnaton shoud be made by the bank, on the bass of the
farts n each case, as to the Indebtedness or the ndebtednesses on whch the
future payment funds are to be accepted and hed for subsequent credt
When future payment funds are accepted n these cases, they sha be
sub|ect to a the provsons of the reguatons In ths part governng future
payment funds nsofar as practcabe.
Secton 10.122 Interest aowances: Interest sha be aowed future
payment funds n accordance wth the foowng terms and condtons:
(a) The rate(s) at whch nterest s aowed the borrower on future
payment funds apped sha be the rate(s) effectve on those nsta-
ment dates of the ndebtedness to whch the future payment funds are
apped and whch Instament dates occurred durng the perod such
future payment funds were hed. s used In ths part, effectve
Interest rate means the rate actuay charged the borrower on te
ndebtedness on whch future payment funds are apped.
(b) If It s decded n unusua crcumstances that the reease of
future payment funds hed n connecton wth a borrower s ndebted-
ness s |ustfed, nterest sha be aowed on such funds durng the
entre perod that the funds were hed. .
(c) Interest sha be aowed on future payment funds from the
date of acceptance of such funds to the date of ther dsposton and
such Interest sha be compounded as of the nstament dates of the
borrower s ndebtedness whch occurred durng the perod the future
payment funds were hed by the bank: Provded, That, at the opton
of the bank, nterest need not be aowed upon any amount whcb haa
not been hed for the credt of the borrower as unapped future pay-
ment funds for a perod up to 1 month: nd provded further. That In
any case where the aggregate nterest credt does not e ceed 25 cents,
no aowance need be made.
M 050 56 22
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Regs. 118, 39. 2-2.) 328
(d) Interest aowed on future payment funds sha be credted to
the borrower as of the dnte of dsposton of the funds.
Secton 39. 2-1 (a) of Reguatons 118 states that, e cept as other-
wse provded n Secton 2, a gans, profts, and ncome sha be
ncuded n gross ncome for the ta abe year n whch receved by
the ta payer uness they are ncuded as of a dfferent perod n
accordance wth the approved method of accountng foowed by hm.
Secton 39. 2-2 of Reguatons 118 provdes as foows:
Income not reduced to possesson. Income whch s credted to the ac-
count of or set apart for a ta payer and whch may be drawn upon by hm
at any tme s sub|ect to ta for the year durng whch so credted or set
apart, athough not then actuay reduced to possesson. To consttute
recept n such a case the ncome must be credted or set apart to the ta -
payer wthout any substanta mtaton or restrcton as to the tme or man-
ner of payment or condton upon whch payment s to be made, and must
be made avaabe to hm so that t may be drawn at any tme, and ts recept
brought wthn hs own contro and dsposton. book entry, f made,
shoud ndcate an absoute transfer from one account to another. If a
corporaton contngenty credts ts empoyees wth bonus stock, but the
stock s not avaabe to such empoyees unt some future date, the mere
credtng on the books of the corporaton does not consttute recept.
Snce the nterest aowance on future payment funds may be deter-
mned ony after the ndebtedness to whch the funds are apped, and
the nterest rate on such ndebtedness, are both known, such nterest s
not fnay determnabe and s not credted to the borrower unt the
date of the dsposton of the funds. Therefore, unt such dspos-
ton, snce there can be no credtng of any amount of nterest to the
ta payer pror to the dsposton of the funds, there can be no construc-
tve recept of ncome. ccordngy, n the case of borrowers keepng
ther books and fng ther returns on a cash recepts and dsburse-
ments bass, the nterest pad or aowed on future payment funds con-
sttutes ncome, for edera ncome ta purposes, as of the date of the
dsposton of the funds.
When future payment funds are accepted by the bank to be apped
aganst an ndebtedness when t becomes due, the bank s requred to
accrue upon ts books, on the due date of each nstament thereof, ts
abty for nterest on such funds at the rate actuay charged the
borrower on the unmatured porton of the ndebtedness n connecton
wth whch the future payment funds are hed. Therefore, a bor-
rower empoyng the accrua method of accountng shoud accrue
nterest on such funds at the same rate, notwthstandng the poss-
bty of an ad|ustment upon fna dsposton of the funds. See
Contnenta Te and Lumber Co. v. Unted States, 286 U. S. 290, Ct. D.
9 , C. . I-1,260 (1932). _
In vew of the foregong, t s hed that nterest aowed on future
payment funds hed by a edera and bank, for ts borrowers, for
future appcaton on ther ndebtedness to the bank consttutes n-
come, for edera ncome ta purposes, to the borrower on the cash
recepts and dsbursements bass, as of the date of the dsposton of
the funds. Where the borrower s on the accrua bass, the nterest
s reportabe as ncome annuay as t s earned. If, upon fna
dsposton, nterest shoud be aowed at a dfferent rate from that
at whch t was accrued, the dfference n amount between that fnay
aowed and that formery accrued w consttute ether ordnary n-
come under secton 22 (a) of the Interna Revenue Code, or an ordnary
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329 Regs. 118,39. 2-2.
Ices under secton 23(e) of the Code, n the year of fna dsposton of
the funds.
Reguatons 118, Secton 39. 2-2: Income not Rev. Ru. 55-317
reduced to possesson.
No ta abe ncome s reazed by an empoyee of a cty by reason of
transferrng to the cty s new retrement system hs accumuated
contrbutons n the cty s od retrement system (whch wns term-
nated n order that the empoyees coud quafy for benefts under
the Soca Securty ct, 9 Stat. 620, as amended, 2 U. S. C. 18)
and the nterest thereon. The aggregate of the empoyee s accumu-
ated contrbutons so transferred wthout regard to the nterest
credted thereon pus any contrbutons to the new retrement sys-
tem subsequent to such transfer w consttute the aggregate pre-
mums or consderaton pad for the annuty whch w be pad from
such system upon hs utmate retrement.
dvce has been requested reatve to the ta abty of nterest on
empoyees contrbutons transferred from the od retrement system of
a cty to ts newy created suppementa retrement system.
The facts surroundng the transfer are as foows:
Contrbutons were orgnay made by empoyees of the cty
and hed n trust under the cty s retrement system (od), es-
tabshed by an ordnance approved ugust 30, 19 . To permt
the empoyees to quafy under the Soca Securty ct, 9 Stat.
620, as amended, 2 U. S. C. 18, the above ordnance and sub-
sequent amendatory ordnances thereto were repeaed and the
system was termnated as of December 6, 1952. The ordnance
for the repea provded that the accumuated contrbutons of
the members be set asde n und. or transferred to und
for dsbursement on or before une 30, 1953. The empoyees
became covered under the Soca Securty ct, as amended, on
December 20,1952. ffectve December 22, 1952, the cty s sup-
pementa retrement system, adopted November 18, 1952, pro-
vded for retrement benefts suppementa to the benefts pro-
vded under the Soca Securty ct. unds and were
transferred to specfed accounts of the suppementa retrement
system. orms and were utzed by the empoyees to drect
the dsposton of ther accumuated contrbutons under the od
retrement system.
y e ecutng orm , an empoyee authorzes the transfer
and credt to hs account n the suppementa retrement system
hs accumuated contrbutons n the od retrement system n
an amount equa to the contrbutons that woud have been
based on the contrbuton rates provded n the suppementa
retrement system ess the sum necessary o back date soca
securty to anuary 1, 1951 or to the date of hs empoyment,
whchever perod s shorter, the remanng baance, f any, to be
refunded to hm. y sgnng orm , the empoyee becomes a
member of the suppementa retrement system and retans a
credts for pror servce wth the cty whch were aowabe under
the od retrement system.
y e ecutng orm , an empoyee authorzes the return to
hm of a hs accumuated contrbutons n the od retrement
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Regs. 118, 39. 3-2. 330
system after deductons for back datng soca securty contrbu-
tons to anuary 1,1951, or to the date of hs empoyment, whch-
ever perod s shortest. y sgnng orm the empoyee be-
comes a member of the suppementa retrement system as a new
member and forfets a credts for pror servce n the od retre-
ment system earned pror to December 22, 1952. Partcpatng
n the suppementa retrement system as a new member ana
forfetng a credts for pror servce specfcay mean that (a)
the empoyee cannot retre and receve an ordnary dsabty
retrement aowance unt after he has competed 5 years servce
as a member of the suppementa retrement system, (b) the
empoyee s empoyment wth the cty before December 22, 1952,
cannot be used to compute hs retrement aowance f he retres
at any tme after December 22, 1952, and (c) n the event of hs
death, hs benefcary w not be egbe for a death beneft from
the suppementa retrement system unt the empoyee has com-
peted 1 year of servce as a member of that system, and not unt
he has competed 5 years w the ma mum death beneft be
payabe.
Secton 39. 2-2 of Reguatons 118, promugated under secton 2
of the Interna Revenue Code of 1939, provdes n part that ncome
whch s credted to the account of or set apart for a ta payer and
whch may be drawn upon by hm at any tme s sub|ect to ta for the
year durng whch so credted or set apart athough not then actuay
reduced to possesson. To consttute recept n such a case, the ncome
must be credted or set apart to the ta payer wthout any substanta
mtaton or restrcton as to the tme or manner of payment or cond-
ton upon whch payment s to be made and must be made avaabe
to hm so that t may be drawn at any tme, and ts recept brought
wthn hs own contro and dsposton.
In vew of the provsons of the agreement evdenced by orm
and orm , t s hed that no ta abe ncome s reazed by an em-
poyee of the cty by reason of transferrng to the suppementa retre-
ment system hs accumuated contrbutons n the od retrement sys-
tem and the nterest thereon. The aggregate of the empoyee s ac-
cumuated contrbutons so transferred wthout regard to the nterest
credted thereon pus any contrbutons to the suppementa retrement
system subsequent to such transfer w consttute the aggregate
Premums or consderaton pad for the annuty whch w be pad
rom such system upon hs utmate retrement.
Where an empoyee receves a refund of hs contrbutons, together
wth nterest, the amount of the nterest s ncudbe n gross ncome
n the year of recept. O. D. 823, C. . , 77 (1921).
S CTION 3. P RIOD OR W IC D DUCTIONS
ND CR DITS T N
Reguatons 118, Secton 39. 3-2: When
charges deductbe.
ccrua of rea property ta es, mposed by secton 5719.01 of the
Revsed Code of Oho, effectve October 13, 1953. See Rev. RuL 55-
152, page 67.
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331 Regs. 118, 39. -5.
Reguatons 118, Secton 39. 3-2: When charges
are deductbe.
ccrua of vacaton pay by ta payers usng accrua method of ac-
countng. See Rev. u. 55- 26, page 68.
S CTION . INST LLM NT SIS
Reguatons 118, Secton 39. -1: Sae of
persona property on nstament pan.
Gan from sae of a rghts, tte, and nterest n a dstrbutorshp
agreement wth a foregn manufacturer. See Rev. Ru. 55-37 ,
page 370.
Reguatons 118, Secton 39. -5: Gan or oss Rev. Ru. 55-5
upon dsposton of nstament obgatons.
Rea property was sod to the Y Corporaton on the nstament
bass under a and contract wth the baance to be pad over a number
of years. The contract provded that upon payment of 50 percent of
the purchase prce and at the opton of Y Corporaton, a warranty
deed of the premses woud be devered to Y Corporaton n consdera-
ton of a promssory note secured by a rea estate mortgage, for the
baance of the purchase prce, wth nstament payments to be made
as set forth n the orgna contract of sae of sad premses. The Y
Corporaton has comped wth the terms of the orgna contract and
a mortgage contract has been substtuted for the and contract, con-
tanng the same terms and condtons for payment of the baance due
as set forth n the and contract. ed, the substtuton of the mort-
gage contract, n an amount equa to the unpad baance of the pur-
chase prce, payabe on the same terms and condtons of payment of
the baance under the and contract, resuts n a change n the type
of securty ony and does not consttute a satsfacton or dsposton of
an nstament obgaton gvng rse to gan or oss under secton
(d) of the Interna Revenue Code of 1939.
Reguatons 118, Secton 39. -5: Gan or Rev. Ru. 55-292
oss upon dsposton of nstament
obgatons.
Stock certfcates ssued by a budng and oan assocaton, In
parta payment for notes sod to such assocaton by a ta payer
reportng profts on the nstament bass, represent Income to the
ta payer n the year of the sae of the notes, even thongh pedged
to the assocaton as addtona coatera for the notes.
dvce has been requested whether stock certfcates ssued by a
budng and oan assocaton, n parta payment for notes sod, to
such assocaton by a ta payer reportng profts on the nstament
bass, represent ncome n the year n whch ssued, even though
pedged to the assocaton as addtona coatera for the notes, or
whether ncome s reazed at the tme the certfcates are reeased from
the coatera agreement.
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Regs. 118, 39. -5. 332
The ta payer s n the busness of constructng houses on ots whch
are owned by purchasers of the houses. These houses are sod on
credt and notes secured by mortgage are receved for the constructon
and erecton of the houses, payabe n monthy nstaments over a
perod of appro matey ten years. The proft wth respect to con-
structon of the houses s reported on the nstament bass.
In order to fnance constructon, the ta payer sod certan of the
notes shorty after recevng them to a budng and oan assocaton.
ecause of the amount of the oan n respect to the vaue of the houses
and ots, the assocaton was not wng to pay the fu purchase prce
of such notes n cash. It pad a certan amount n cash and the
baance n stock of the assocaton. Such stock was then pedged to
the assocaton as addtona coatera for the notes. Under the
terms of the coatera agreement, at such tme as the makers of the
notes have reduced ther ndebtedness to amounts on whch the asso-
caton woud be |ustfed n makng mortgage oans, the stock w
be reeased from the pedge and coatera agreement.
Secton 2 of the Interna Revenue Code of 1939 provdes n part as
foows:
(a) Geneba Rtte. The amount of a tems of gross ncome sha be ncuded
n the gross ncome for the ta abe year n whch receved by the ta payer, uness
under methods of accountng permtted under secton 1, any such amounts are
to be propery accounted for as of a dfferent perod.
Secton of the Code provdes n part as foows:
(d) Gan or Loss Upon Dsposton or Instament Obgatons. If an
nstament obgaton s satsfed at other than ts face vaue or dstrbuted,
transmtted, sod, or otherwse dsposed of, gan or oss sha resut to the e tent
of the dfference between the bass of the obgaton and (1) n the case of
satsfacton at other than a face vaue or a sae or e change the amount
reazed, or (2) n the case of a dstrbuton, transmsson, or dsposton other-
wse than by sae or e change the far market vaue of the obgaton at the
tme of such dstrbuton, transmsson, or dsposton.
In worth-Washbum Co. v. Ieverng, 67 ed. (2d) 69 , Ct. D.
808, C. . III-1, 208 (1935), the court hed that where a corporaton
sod ts assets n 1926, recevng ess than one-fourth of the tota
purchase prce n cash and the baance n notes, and n the foowng
year dscounted or sod the notes to a bank, beng contngenty abe
as ndorser, the transacton was cosed n 1927 and the proft refected
n the notes dscounted or sod consttuted ncome n that year, and
the corporaton was not entted to report the ncome n the subsequent
years n whch the notes were actuay pad to the bank.
In . . Gaagher Reaty Co. v. Commssoner, . T. . 219, the
ta payer, engaged n the busness of budng and seng resdenta
property, woud se houses for sma down payments and fnance the
baance by mortgages gven by the purchasers to budng and oan
assocatons. Such mortgages were for amounts n e cess of those for
whch the budng and oan assocatons made oans on smar prop-
erty and, to protect themseves, the assocatons wthhed such e cess
and requred the ta payer to e ecute bonds as securty therefor. The
assocatons retaned the e cess amount unt such tme as the purchas-
ers had pad a sum equa to that amount then the assocatons woud
pay over to the ta payer the amount retaned. It was the opnon of
the Unted States oard of Ta ppeas (now The Ta Court of the
Unted States) that the fact that a porton of the purchase prce for
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333 Regs. 118, 39. 6- 1(b) ( ).
(he property was assgned or eft n the hands of the budng assoca-
tons to nsure the mortgage payments by the purchasers, and that the
actua payments to the ta payer were deferred, dd not |ustfy the
ta payer, who was on the accrua bass of accountng, n e cudng
those amounts from ncome n the year of sae of the houses.
The coatera agreement, n the nstant case, specfcay provdes
that the ta payer s the ega and equtabe owner of certan savngs
shares of stock of the budng and oan assocaton. The agreement
further provdes that the pedge of such shares of stock as coatera
sha n no wse affect or mpar the ownershp of pedgor n the shares,
nor hs rghts, prveges or obgatons as a sharehoder n the assoca-
ton, e cept that the shares of stock sha be hed as coatera securty
for the payment of the note.
ccordngy, t s hed that the stock certfcates ssued by the bud-
ng and oan assocaton n parta payment for notes sod to such asso-
caton by a ta payer reportng profts on the nstament bass const-
tute ncome n the year of the sae of the notes, even though such
certfcates are pedged to the assocaton as addtona coatera for
the notes.
Reguatons 118, Secton 39. -5: Gan or oss
upon dsposton of nstament obgatons.
Canceaton of nstament obgatons of a chartabe organzaton.
See Rev. Ru. 55-157, page 293.
Reguatons 118, Secton 39. -5: Gan or oss
upon dsposton of nstament obgatons.
Gan or oss on nstament obgatons upon termnaton of a trust.
See Rev. Ru. 55-159, page 391.
S CTION 6. C NG O CCOUNTING P RIOD
Reguatons 118, Secton 39. 6 -1 (b) ( ) : p- Rev. Ru. 55-111
prova of change n accountng perod.
Where a ta payer desres to change hs accountng perod and un-
der the provsons of secton 39. 6-(b) (2) of Reguatons 118 s re-
qured to obtan pror approva of the Commssoner, the ta payer
must fe orm 1128, ppcaton for Change n ccountng Perod,
on or before the 15th day foowng the cose of the short ta abe year.
See secton 39. 6-1 (b) ( ) of Reguatons 118. orm 1128 requres
nformaton as to the annuazed net ncome for the short perod.
Where the net ncome for the short perod cannot be defntey de-
termned at the tme the orm 1128 s fed, a reasonabe estmate of
such net ncome w be acceptabe. The amount shown must be ceary
dentfed as the best estmate avaabe.
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Regs. 118, 39.53-2. 33
S CTION 7. R TURNS OR P RIOD O L SS T N
12 MONT S
Reguatons 118, Secton- 39. 7-2: Returns for
perod of ess than 12 months on account of
a change n accountng perod.
Change n parent corporaton s accountng perod to conform wth
that of ts subsdares. See Rev. Ru. 55-80, page 387.
P RT . R TURNS ND P YM NT O T
S CTION 51. INDI IDU L R TURNS
Reguatons 118, Secton 39.51-1: Indvdua
returns.
Marta status where an ndvdua s separated from spouse under
an nterocutory decree of dvorce. See Rev. Ru. 55-178, page 322.
Reguatons 118, Secton 39.51-2: orm of
return.
ecton to fe a |ont return where the ega status of one spouse
s that of a mssng person. See Rev. Ru. 55-387, page 131.
S CTION 53. TIM ND PL C OR ILING R TURNS
Reguatons 118, Secton 39.53-1: Tme for
fng returns.
tenson of tme for fng a short ta abe year return of a sub-
sdary corporaton. See Rev. Ru. 55-108, page 1 0.
Reguatons 118, Secton 39.53-2: tenson Rev. Ru. 55-86
of tme for fng returns.
n e tenson of tme unt ebruary 15, 1055, s granted to
farmers on the caendar year bass for fng ther 195 ncome ta
returns n eu of decaratons of estmated ncome ta and for
payng the ta due thereon.
The purpose of ths Revenue Rung s to grant an e tenson of
tme to farmers for fng ther 195 ndvdua ncome ta returns
n eu of decaratons of estmated ncome ta and for payng the
ta due thereon.
Under secton 60(a) of the Interna Revenue Code of 1939, an
ndvdua whose estmated gross ncome from farmng for the ta -
abe year s at east two-thrds of the tota estmated gross ncome
from a sources for the ta abe year s consdered a farmer.
1 Orgnay Issued as IRCrcuar No. 55-10, dated anuary 31, 1055.
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335 Regs. 118, 39.55-1.
Wth respect to farmers, the tme for fng a 195 caendar year
ndvdua ncome ta return and for payng n fu (wthout n-
terest) the amount computed on the return as payabe, n order that
the return sha be consdered a decaraton or an amended decaraton
of estmated ncome ta , s hereby e tended from anuary 31, 1955,
to ebruary 15, 1955.
S CTION 5 . R CORDS ND SP CI L R TURNS
Reguatons 118, Secton 39.5 -1: Records and
ncome ta forms.
Informaton returns n the case of edera credt unons. See Rev.
Ru. 55-133, page 138.
S CTION 55. PU LICITY O R TURNS
Reguatons 118, Secton 39.55-1: Inspecton Rev. Ru. 55-238
of returns.
edera nterna revenue aws nether requre a ta payer to aow
State or oca offcas to nspect hs copes of edera ta returns and
reated documents nor protect hm from such nspecton. Where cer-
tan State statutes requre the fng of copes of edera ta returns
n con|uncton wth the fng of oca returns, t s hed that such stat-
utes do not voate the provsons of secton 55 (f) of the Interna Reve-
nue Code of 1939. Secton 55 (b) (2) of such Code requres the Interna
Revenue Servce to permt any offca, body, or commsson, awfuy
charged wth the admnstraton of any State ta aw, to nspect any
or a ncome returns fed wth the Interna Revenue Servce, f the
nspecton s for the purpose of such admnstraton or for the purpose
of obtanng nformaton to be furnshed to oca ta ng authortes.
T. D. 6133
TITL 2 INT RN L R NU , 1939. C PT R I, SU C PT R , P RT 58.
INSP CTION O R TURNS
Inspecton of certan returns by commttees of Congress other
tban those enumerated n secton 55(d) of the Interna Revenue
Code of 1939.
Treasury Department,
Washngton 85, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Sec. 58.32 . Inspecton of Retur s bt Commttees of Congress
Other Than Those numerated n Secton 55 (d) of the Interna
Revenue Code of 1939. (a)(1) Pursuant to the provsons of sec-
tons 55(a), 508, 603,729(a), and 120 of the Interna Revenue Code
of 1939 (53 Stat. 29, 111, 171 5 Stat. 989, 1008 55 Stat. 722 26
U. S. C. 55(a), 508, 603, 729(a), and 120 ), any return wth respect
to ncome, e cess-profts, decared vaue e cess-profts, capta stock,
estate, or gft ta mposed by the Interna Revenue Code of 1939 sha
be open to nspecton by any commttee of the Congress, or any sub-
commttee of a commttee of the Congress, specay authorzed to
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Regs. 118, 39.55-1.1 336
nspect such returns by an ecutve order ssued under the afore-
mentoned statutory provsons on or after the date of the approva
of ths Treasury Decson. Such nspecton sha be sub|ect to the
condtons and restrctons mposed by the ecutve order and the
rues and reguatons herenafter prescrbed.
(2) Ony such of the aforementoned returns as are specfed n a
resouton adopted by the commttee n accordance wth the rues of
the approprate house of the Congress then appcabe to the reportng
of a measure or recommendaton from such commttee sha be open
to nspecton. Such resouton sha set forth 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 nspecton of returns author-
zed n ths secton may be made by the commttee of the Congress,
or the subcommttee of a commttee of the Congress, authorzed as
provded n subparagraph (1) of ths paragraph, actng drecty as a
commttee or as a subcommttee, or by or through such e amners or
agents as such commttee or subcommttee may desgnate or appont
n ts wrtten request herenafter mentoned. Upon wrtten request
by the charman of such commttee or of such subcommttee to the
Secretary of the Treasury, gvng the names and addresses of the ta -
payers whose returns t s desred to nspect and the ta abe perods
covered by the returns and statng that the resouton herenbefore
mentoned wth respect to the nspecton of such returns has been duy
adopted by such commttee or by the commttee under whch such
subcommttee functons, the Secretary or any offcer or empoyee of
the Department of the Treasury, wth the approva of the Secretary,
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 the e amners
or agents desgnated or apponted by such commttee or subcommttee.
Such data sha be furnshed, or such return sha be made avaabe
for nspecton, n an offce of the Interna Revenue Servce. ny n-
formaton thus obtaned by such commttee or subcommttee sha be
hed confdenta: Provded, however, That any porton thereof ree-
vant or pertnent to the purpose of the nvestgaton may be submtted
by the nvestgatng commttee to the approprate house of the
Congress.
(3) Ths secton sha not be appcabe to any commttee authorzed
by secton 55(d) of the Interna Revenue Code of 1939 to nspect
returns.
(b) ecause ths Treasury Decson consttutes a genera statement
of pocy and estabshes a rue of Departmenta practce and pro-
cedure, t s found that t s unnecessary to ssue ths Treasury Decson
wth notce and pubc procedure thereon under secton (a) of the
dmnstratve Procedure ct, approved une 11,19 5, or sub|ect to
the effectve date mtaton of secton (c) of that ct.
(c) Ths Treasury Decson sha be effectve upon ts fng for pub-
caton n the edera Regster.
G. M. umphrey,
Secretary of the Treasury.
pproved May 3,1955,
Dwoht D. senhower.
( ed wth the Dvson of the edera Regster May 3,1955 5: 02 p. m.)
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337 Regs. 118, 39.101(12)-1.
Inspecton of certan returns by the Senate Commttee on Govern-
ment Operatons. See ecutve Order 10606, page 1 3.
Inspecton of certan returns by the Commttee on Government
Operatons, ouse of Representatves. See . O. 10607, page 1 .
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
Reguatons 118, Secton 39.101(12)-1: armers Rev. Ru. 55-1 1
cooperatve marketng and purchasng assoca-
tons requrements for e empton under secton
101(12) ( ).
Where a farmers marketng and/or purchasng assocaton ssues
ether a certfcate of stock representng a patronage dvdend or a
check representng a dvdend payabe on ts stock, the mang of
ether of such nstruments to the patron woud consttute payment
for edera ncome ta purposes In the year of Issue, and such re-
funds w be aowed as deductons from gross ncome where, n the
ordnary handng of the ma, devery cannot be made and the as-
socaton hods the nstrument sub|ect to the cam of the rghtfu
owner.
The retenton by a farmers marketng and/or purchasng assoca-
ton of each patronage dvdend payabe n an amount ess than one
doar and smar retentons of the cents payabe n e cess of whoe
doar amounts do not consttute nequtabe treatment of a patrons
to an e tent whch woud eopardze the e empt status of such asso-
caton under secton 101(12) ( ) of the Interna Revenue Code of
1939.
dvce has been requested whether the mang by a farmers mar-
ketng and/or purchasng assocaton of a certfcate of stock repre-
sentng a patronage dvdend due, or a check representng a dvdend
due on the assocaton s stock, to the ast known address of a patron
consttutes payment for edera ncome ta purposes, aowabe as de-
ductons from gross ncome, where such nstruments are returned by
the Post Offce Department because of nondevery and hed by the
assocaton sub|ect to cam of the rghtfu owner aso, whether the
retenton by a farmers marketng and/or purchasng assocaton of
each patronage dvdend payabe n an amount ess than one doar
and smar retentons of the cents payabe n e cess of whoe doar
amounts consttute nequtabe treatment of a patrons to an e tent
whch woud |eopardze the e empt status of such assocaton under
secton 101(12) ( ) of the Interna Revenue Code of 1939,
farmers marketng and/or purchasng assocaton pays patron-
age dvdends n shares of ts capta stock. The certfcates are
maed to patrons at ther ast known addresses and a few of such
mangs are returned by posta authortes because of the nabty to
ocate the addressee patrons. The shares are hed by the assocatoa
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Regs. 118, 39.101 (8)-. 338
sub|ect to cam by the rghtfu owners unt such tme as the shares
are caed for redempton and payment. If the owner s not then
ocated, the shares are canceed and a credt s made to an approp-ate
ncome account, as e traneous ncome to the assocaton n the year
of canceaton. Smar treatment s gven to nondevered dvdend
checks.
Moreover, n the aocaton of patronage refunds a amounts of n-
dvdua aocatons n the amount of ess than one doar, and a cents
n e cess of even doars due patrons entted to more than one doar,
are set asde as a fund to defray the cost of mantanng patronage
records and the aocaton or dstrbuton of patronage dvdends.
The aggregate of amounts so retaned s sub|ect to edera ncome
ta es as net proceeds reazed whch reman undstrbuted.
It s hed that where ether a certfcate of stock representng a
patronage dvdend or a check representng a dvdend payabe on the
capta stock of a farmers marketng and/or purchasng assocaton s
propery prepared and paced n the ma at such tme that n the
ordnary handng of the mas t woud be receved by a patron wthn
the perod of tme prescrbed by secton 101(12) ( ) of the Code for
makng refunds, such acton woud consttute the payment of a patron-
age refund or a dvdend on capta stock, aowabe as a deducton
from gross ncome even though such stock certfcate or dvdend
check s ater returned and hed sub|ect to the cam of the patron be-
cause the patron cannot be found by the Post Offce Department. It s
further hed that the retenton by a farmers marketng and/or pur-
chasng assocaton of each patronage dvdend payabe n an amount
ess than one doar and smar retentons of the cents payabe n
e cess of whoe doar amounts do not consttute nequtabe treatment
of a patrons to an e tent whch woud |eopardze the e empt status
of such assocaton under secton 101(12) ( ) of the Interna Revenue
Code of 1939.
Reguatons 118, Secton 39.101(12)- : Patron- Rev. Ru. 55-26
age dvdends, rebates, or refunds treat-
ment as to cooperatve assocatons entted
to ta treatment under 101(12) ( ).
armers cooperatve marketng and purchasng assocatons, whose
byaws set forth a defnte pre-e stng obgaton of the assocaton
to make dstrbuton to patrons of a porton of the net profts as
Patronage dvdends, may have such dvdends e cuded from ncome
or edera ncome ta purposes regardess of whether the corporate
name contans the word cooperatve.
S CTION 101(8). MPTIONS ROM T ON
CORPOR TIONS: CI IC ORG NIZ TIONS
Reguatons 118, Secton 39.101 (8)-: Cvc
eagues and oca asocatons of empoyees.
Loca assocaton of empoyees operatng a bus servce for ts
members. See Rev. Ru. 55-311, page 72.
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339 Regg. 118, 39.112(a)-.
S CTION 109. W ST RN MISP R TR D
CORPOR TIONS
Reguatons 118, Secton 39.109-1: Western Rev. Ru. 55-372
emsphere trade corporatons.
Canadan or Me can corporaton s hed to be a domestc corpo-
raton for purposes of quafyng as a Western emsphere trade cor-
poraton under secton 109 of the Interna Revenue Code of 1939 f, as
provded n secton 1 1 (g) of the Interna Revenue Code of 1939, t s
organzed and mantaned soey for the purpose of compyng wth
the aws of ether country as to tte and operaton of property and f
t s so treated for purposes of secton 1 1 of the Code by a domestc
corporaton ownng or controng, drecty or ndrecty, 100 percent
of ts capta stock. See secton 39.1 1-1 (e) of Reguatons 118.
S CTION 112(a). R COGNITION O G IN OR LOSS:
G N R L RUL
Reguatons 118, Secton 39.112(a)-: Saes Rev. Ru. 55-77
or e changes.
Ta payer and 5 others, as tenants n common, owned undvded
nterests n rea property, ncudng a budng. The ta payer de-
sred to purchase the undvded nterest of one of the other tenants
n common, but no prce coud be agreed upon. In accordance wth
state aw, a partton acton was fed, thus forcng a sae of the prop-
erty. The ta payer, together wth of the other tenants n common,
purchased the property at the partton sae. The oca commssoner,
apponted by the court to make such partton n pursuance of hs
|udgment, dstrbuted the proceeds of the sae among a of the tenants
n common n accordance wth ther respectve undvded nterests
mmedatey pror to the partton sae. The commssoner conveyed
the entre tte to the property to the ta payer and the tenants n
common who |oned hm n submttng the |ont bd at the sae. ed,
under these crcumstances, the partton proceedngs consttuted a
nonta abe transacton for edera-ncome ta purposes. The ta -
payer nether reazed a ta abe gan nor sustaned a deductbe oss
on the sae of the undvded nterest n the property whch he owned
mmedatey pror to the partton proceedngs. The ta payer st
owns the nterest whch he owned pror to the sae| hence, he sod
nothng. The efect of the sae was to estabsh a prce at whch the
ta payer coud purchase the undvded nterest o one of the other
tenants n common. Compare Mary L. unncutt v. Commssoner,
10 . T. . 100 , acquescence, C. . II-2, 19 (1928).
Reguatons 118, Secton 39.112(a)-1: Saes Rev. Ru. 55-1 2
or e changes.
Z Corporaton owned certan ad|onng rea estate, evdenced by
separate conveyances, acqured at varous dates and from varous
sources. To accompsh consodaton of the property under a snge
deed, the property was transferred to a nomnee and retransferree to
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Regs. 118,5 39.112(b)(5)- . 3 0
the Z Corporaton, wthout consderaton. The nomnee was nether
an empoyee, offcer, drector nor stockhoder of the Z Corporaton.
ed, the transfer and retransfer of propertes under such condtons
does not gve rse to a ta abe gan or deductbe oss to ether party
and the bass of the consodated property remans unchanged.
Reguatons 118, Secton 39.112 (a)-1: Saes or Rev. Ru. 55-179
e changes.
Where State aw permts rea property to be sod at pubc aucton
n an acton brought by the hoders of fe or remander nterests,
wth the proceeds to be dvded and dstrbuted as the court may-
drect, and soey for the purpose of perfectng tte to the property,
a tract of and s put up for sae n such an acton brought by a the
current hoders of sucn nterests and repurchased by them at a
prce n whch they share n proporton to ther respectve nterests,
the transacton does not consttute a sae or e change for edera
ncome ta purposes to the e tent that the partes merey repurchase
ther own nterests and ther shares of the proceeds of sae are reds-
trbuted to them.
Reguatons 118, Secton 39.112 (a)-1: Saes or
e changes.
Treatment of a sae by the soe stockhoder of hs stock n one
corporaton to another corporaton aso whoy owned by hm. See
Rev. Ru. 55-15, page 361.
S CTION 112(b). R COGNITION O G IN OR LOSS:
C NG S SOL LY IN IND
Reguatons 118, Secton 39.112(b) (5)-1: Trans- Rev. Ru. 55-36
fer of property to corporaton controed by
transferor.
Where a sharehoder ownng of the cnpta stock of Corpora-
ton organzed a new corporaton and transferred hs shares n
e change for debenture bonds and stock of the new corporaton and
then donated hs stock to a ta -e empt corporaton whch subse-
quenty qudated the new corporaton, the consummated pan acks
substance and reaty and the transfer by the sharehoder of hs
stock to the new corporaton s not a transacton wthn the
purvew of secton 112(b) (5) of the Interna Revenue Code of 1039.
dvce has been requested wth respect to the treatment for edera
ncome ta purposes of a consummated transacton nvovng an
e empt corporaton, a new corporaton, and a certan sharehoder of an
od corporaton.
The Corporaton has outstandng 300 shares of capta stock. n
ndvdua stockhoder owned 50 shares of the corporaton, havng a
vaue n e cess of 3,000a doars and had a bass to hm for determnng
gan or oss of 1,000a doars.
The sharehoder proposed to make a substanta contrbuton to Y
Corporaton, an organzaton e empt for edera ncome ta aton.
To that effect, the foowng pan was e ecuted:
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3 1 Regs. 118, 39.112(b)(5)-.
(1) s an ndvdua, he organzed a new corporaton, Z, to whch
he transferred hs shares of stock of Corporaton n e change for
debenture bonds havng a face vaue n the amount of the vaue of
the stock of Corporaton transferred to the Z Corporaton, and
stock of Z Corporaton. The bonds woud mature n 12 years and
bear nterest at the rate of 1 percent per annum. The stock ssued
by Z Corporaton was wthout par vaue.
(2) The ndvdua donated hs stock n Z Corporaton to Y
Corporaton.
(3) The Z Corporaton, now a whoy-owned subsdary of the Y
Corporaton, qudated, and a of ts assets (stock of Corporaton)
were dstrbuted to Y Corporaton n e change for the stock of Z
Corporaton. Y Corporaton assumed the abty for the payment
of the bonds ssued by Z Corporaton.
( ) Corporaton was then qudated and the Y Corporaton
receved a pro rata share of the assets of n e change for the stock
of that corporaton.
(5) The sharehoder from tme to tme w donate to the Y
Corporaton such amounts of the bonds of the Z Corporaton as he
deems advsabe.
It s stated the foregong pan has been consummated n order that
such donatons w be made wthout ncome ta abty to the nd-
vdua and n such a manner as to enabe hm to spread the donaton
over a number of years.
Secton 112 of the Interna evenue Code of 1939 provdes, n part,
as foows:
(b) changes Soey n nd.
(5) Transfer to corporaton controed by transferor. No gan or oss
sha be recognzed If property Is transferred to a corporaton by one or
more persons soey n e change for stock or securtes n such corporaton,
and mmedatey after the e change such person or persons are n contro
of the corporaton

(h) Defnton of Contro. s used n ths secton the term contro means
the ownershp of stock possessng at east 80 per centum of the tota combned
votng power of a casses of stock entted to vote and at east 80 per centum
of the tota number of shares of a other casses of stock of the corporaton.
In the nstant case the transacton served no corporate busness
purpose for the transfer of the stock of Corporaton to the Z Cor-
poraton. See veyn . Gregory v. everng, 293 U. S. 65, Lt. D.
911, C. . I -1, 193 (1935). The Z Corporaton dd not engage
n the conduct of any trade or busness and dd not reman n e stence,
e cept for a bref tme as was necessary to mpement the donaton of
Corporaton s stock to the Y Corporaton. urthermore, the n-
dvdua sharehoder was not n contro of the Z Corporaton wthn
the meanng of secton 112(h). of such Code, snce hs ownershp of
the stock was ony transtory and the ob|ect of the pan was to pace
contro n the hands of the Y Corporaton.
ccordngy, t s hed that the consummated pan, nsofar as t
pertans to Z Corporaton, was ackng n substance and reaty, and
(hat the transfer by the ndvdua sharehoder of hs stock of the
Corporaton to the Z Corporaton was not a transfer to a corporaton
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Regs. I, 29,112(0-1. 3 2
controed by the transferors wthn the meanng of secton 112(b) (5)
of the Interna Revenue Code of 1939.
Shares of stock e changed n the same corporaton pursuant to a
organzaton. See Rev. Ru. 55-112, page 3 .
Treatment to sharehoders and the corporaton as a resut of a
reorganzaton. See Rev. Ru. 55-305, page 3 5.
S CTION 112(f). R COGNITION O G IN OR LOSS:
IN OLUNT RY CON RSIONS
Reguatons 111, Secton 29.112(f)-: Renvest- Rev. Ru. 55-170
ment of proceeds of nvountary converson.
ta payer who repaces requstoned property In antcpaton
of recevng an award by constructon of new factes fnanced out
of borrowed funds, and traces the condemnaton proceeds nto the
purchased property, can obtan the beneft3 of secton 112(f) of the
Interna Revenue Code of 1939.
I. T. 3827, C. . 19 G-2,57, modfed.
Reconsderaton has been gven to the ssue nvoved n I. T. 3827,
C. . 19 6-2, 57, n the ght of the decson n Leon Strauss et a. v.
Commssoner, 22 T. C. 1 0, acquescence, page 5, ths uetn.
I. T. 3827, supra, hods that a ta payer who repaces requstoned
property n antcpaton of recevng an award by constructon of new
factes fnanced out of hs own funds or borrowed funds cannot
obtan the benefts of secton 112(f) of the Interna Revenue Code of
1939.1 In reachng ths concuson t was determned that no dstnc-
ton shoud be made between ta payers usng borrowed funds and
ta payers usng ther own funds.
In the Strauss case, the ta payers, who were nformed by the State
of Caforna that ther property woud probaby be requred for hgh-
way purposes, found sutabe repacement property and, not havng
suffcent funds on hand to pay the fu purchase prce n cash as
requred by the seers, arranged for a oan from ther bank. They
agreed wth the bank that such oan was to be repad from the condem-
naton proceeds. None of the proceeds of the oan were at any tme
under the contro or n the possesson of the pettoners, as a tte com-
pany handed the purchase. The ta payers opened a speca account
for the e cusve purpose of havng a depostory for the payment
from the State, pad the oan, and reported ony the une pended ba-
ance of the proceeds from the sae as gan. Reyng on I. T. 3827,
supra, the Commssoner contended that the proceeds receved from
the State coud be traced ony to the borrowed funds and not drecty
nto the repacement property.
The rues appcabe where the dsposton of the converted property
occurred before anuary 1, 1951, are to be found n Reguatons 111,
sectons 29.112(f)- and 29.112(f)-2. Secton 29.112(f)- of such
1 Snce I. T. 3827 appes sec. 112(f) of the Code as It read pror to amendment by Pubc
Law 251, ntra, the concusons daed theren, as modfed by ths Revenue Rung,
effectve ony wth respect o a nMc venrs endng before nunry 1, 1 51.
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3 3 Regs. 118, 39.112(f)-.
reguatons provdes, n part, that t s not suffcent for the ta payer
to show that, subsequent to the recept of money from a condemnaton
award, he purchased other property smar or reated n use, but he
must trace the proceeds of the award nto the payments for the prop-
erty so purchased.
In Twnboro Corporaton v. Comm soner, 1 9 ed. (2d) 57 ,
certorar dened, 326 U. S. 75 , upon whch I. T. 3827, supra, n part,
s based, the court hed that where an owner of condemned property,
n antcpaton of the award, bought smar property wth hs own
funds and recouped hmsef out of the award when receved, he may
not en|oy the benefts provded by secton 112(f).
The court n the Strauss case hed secton 112(f) appcabe, thus
decdng that the award money whch was used as repayment for the
borrowed funds was money whch s forthwth n good fath under
reguatons prescrbed by the Commssoner wth the approva of the
Secretary e pended n the acquston of other property smar or
reated. The court consdered the argument that the award money
can be traced ony to the borrowed funds and not drecty nto the
repacement property and stated that n the Twnboro case the court
e pcty confned ts decson to the queston of antcpatory repace-
ment by a ta payer from hs own funds and subsequent recoupment
from the award proceeds.
The court stated that the egsatve hstory n connecton wth the
enactment of Pubc Law 251,82d Cong., 65 Stat. 733, C. . 1951-2,353,
to amend secton 112(f) of the Interna Revenue Code of 1939 (whch
emnated the tracng requrements for ta abe years begnnng
after 1950) reveas that Congress ntended to e tend the benefts of
secton 112(f) to nstances where a ta payer bought repacement
property out of hs own funds pror to recevng the award and ater
recouped hmsef and to cases where part of the award proceeds was
used to pay off ndebtedness on the converted property.
In the Strauss case the court ponted out that t was possbe to
trace wth accuracy the amount of the condemnaton proceeds drecty
nto the property purchased and coud see no |ustfcaton for m-
posng more e actng standards of tracng condemnaton proceedngs
where the purchase of repacement property has been made n antc-
paton of ther recept than where the purchase s made afterwards.
ccordngy, t s hed that a ta payer, who repaces requstoned
property n antcpaton of recevng an award by constructon of new
factes fnanced out of borrowed funds and traces the condemna-
ton proceeds nto the purchased property, can obtan the benefts of
secton 112(f) of the Code.
I. T. 3827, supra, s modfed to the e tent that t s nconsstent wth
the vews e pressed heren.
Reguatons 118, Secton 39.112(f )-: Invo- Rev. Ru. 55-351
untary converson where dsposton of the
converted property occurred after Decem-
ber 31,1950.
The purchase by a corporaton of an nterest n a partnershp
wthn the tme specfed n secton 112(f)(3)( ) of tne Interna
S6 030 56 23
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Regs. 118, 39.112(g)- . 3
Revenue Code of 1939, for purposes of repacng property nvoun-
tary converted, s not a purchase of other property smar or re-
ated n servce or use to the property converted, wthn the meanng
of secton 112(f) (3) ( ) of the 1939 Code, even though the partnershp
owns and operates property smar to the property converted.
S CTION 112(g). R COGNITION O G TN OR LOSS:
D INITION O R ORG NIZ TION
Reguatons 118, Secton 39.112(g)-: Purpose Rev. Ru. 55-112
and scope of e cepton of reorganzaton
e changes.
( so Sectons 112(b), 113(a), 115(a) Regua-
tons 118, Sectons 39.113(a)-C, 39.115(a)-3.)
S stockhoders ownng 5 percent of the common stock of a
corporaton (whch had ony common then outstandng) surrendered
n of ther common stock for newy ssued nonvotng preferred
stock of the same book vaue md same far market vaue. fter
the e change, none of the preferred stockhoders was nn offcer,
drector, or empoyee of the corporaton, and none of such stock-
hoders had any drect or ndrect economc nterest n the affars
of the corporaton e cept that evdenced hy hs preferred stock,
ed, the transacton s n nonta abe reorganzaton (recaptaza-
ton) wthn the terms of secton 112(g)(1)( ) of the Interna
Revenue Code of 103 .
dvce has been requested wth respect to the ta consequences, for
edera ncome ta purposes, of a change n the capta structure of
M Corporaton.
the stock of the .1/ Corporaton (whch had ony common stock
outstandng) was hed by 5 men nterested n ts management and
operaton and by the wves of these ndvduas. Three of these men,
due to -heath and other reasons, desred to cease a actvty n con-
necton wth the corporate busness, whe the other 2 desred to reman
actve n the busness. The 2 who wshed to reman actve wanted
compete contro of the corporaton and the others were wng to
et them have such contro.
ccordngy, a the nterested partes agreed that the stockhoders
who dd not wsh to reman actve woud e change ther common
stock for preferred stock. Therefore, the corporate charter was
amended to authorze the ssuance of nonvotng stock, preferred as to
dvdends and on qudaton, havng no pre-emptve rghts and
redeemabe at the opton of the corporaton. The 3 stockhoders who
desred to cease beng actve, and ther wves, surrendered a ther
common stock (totang 5 percent of a the stock) and receved n
e change preferred stock of equa far market vaue and of equa book
vaue (such book vaue beng determned by the corporaton s bass
for ts assets for ta purposes). The corporaton redeemed and
canceed a the common stock receved by t n the e change. fter
the transacton a the preferred stockhoders owned no common stock,
and were not offcers, drectors or empoyees of the corporaton. None
of the preferred stockhoders was reated by bood or marrage to
any common stockhoder, or to any offcer, drector or empoyee of
the corporaton, and no preferred stockhoder had any economc
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3 5 Regs. 118, 39.112(g)- .
nterest whatever n the affars of the corporaton e cept that
evdenced by hs preferred stock shares.
Secton 112(a) of the Interna Revenue Code of 1939 provdes,
effect, that upon the sae or e change of property, the entre amount
of the gan or oss resutng sha be recognzed, uness the resuts of
neh e changes are e pressy e empted by the provsons of secton
112(b) of such Code. mong the e changes, the resuts of whch are
e empted, s an e change n connecton wth a recaptazaton
(reorganzaton).
Secton 112(b) (3) provdes:
(b) changes Soey n nd.

(3) Stock for stock on reorganzaton. No gan or oss sha be rec-
ognzed f stock or securtes n a corporaton a party to a reorganzaton
are, n pursuance of the pan of reorganzaton, e changed soey for stocU
or securtes In such corporaton or In another corporaton a party to the
reorganzaton.
Secton 39.112(g)-1(b) of Reguatons 118 provdes that the pur-
pose of the reorganzaton provsons of the Interna Revenue Code
s to e cept from the genera rue certan specfcay descrbed e -
changes ncdent to such read|ustments of corporate structures, made
n one of the partcuar ways specfed n the Code, as are requred by
busness e gences, and whch effect ony a read|ustment of contnu-
ng nterests n property under modfed corporate forms. The same
subsecton aso provdes that a contnuty of the busness enterprse
under the modfed corporate form, and a contnuty of nterest
theren on the part of those persons who were the owners of the en-
terprse pror to the transacton, are requste to a reorganzaton
under the Code.
Secton 39.112(e) of Reguatons 118 provdes that a recaptaza-
ton and therefore a reorganzaton, takes pace f, for e ampe a
corporaton ssues preferred stock, prevousy authorzed but unssued,
for outstandng common stock.
ccordngy, the descrbed transacton s a recaptazaton as de-
fned by secton 112(g) (1) ( ) of the Interna Revenue Code of 1939
and under secton 112(b) (3) no gan or oss s recognzed to the stock-
hoders upon the e changes by them of ther common stock for new
preferred stock. The bass of the preferred stock receved by each
sharehoder s the same as the cost or other bass of the common stock
surrendered by hm. The e changes of common stock for preferred
stock have no effect upon the accumuated earnngs and profts of
U Corporaton avaabe for the dstrbuton of dvdends.
Regcato s 118, Secton 39.112 (g)-: Pur- Rev. Ru. 55-305
pose and scope of e cepton of reorganza-
ton e changes.
( so Sectons 112(b), 115(a) Reguatons
118, Secton 39.115(a)-3.)
M, an Oregon corporaton was engaged n warehouse operatons
servng farmers for proft. Due to competton of cooperatve asso-
catons the corporaton formed ts own cooperatve assocaton
under Oregon aws and effected a statutory merger by mergng M
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Regs. 118, 39.112(g)-1. 3 6
corporaton Into the cooperatve assocaton, the stock n the cor-
poraton beng e changed soey for stock In the cooperatve. 7 Id,
the transacton consttuted a nonta abe reorganzaton under
secton 112(g)(1)( ), secton 112(b)(3) and secton 112(b)( )
of the Interna Revenue Code of 1030.
dvce was requested wth respect to the ta consequences for
edera ncome ta purposes of a consummated reorganzaton here-
nafter descrbed.
M, an Oregon corporaton, was organzed for proft by farmers to
own and operate a warehouse for fanners. The capta stock conssted
of 20 shares of common stock, par vaue 100 per share. The vaue
of each share of such stock was 120, doars based upon a pro rata
share of the far vaue of the net assets. s many of the stockhoders
cf M corporaton were members of other cooperatve assocatons
and as most of the warehouse factes n the same area were operated
by cooperatve assocatons, t was desred to organze a new coop-
eratve assocaton wth a capta structure consstng of 30 shares
of common stock, par vaue 100 per share, and 250 shares of preferred
stock, par vaue 100 per share. oth ssues carred dvdend rates
of 5 percent, the dvdends on the preferred beng cumuatve and
any arrearages thereof beng payabe before any dvdends on the
common stock or patronage refunds are pad.
Pursuant to a merger agreement and pan of reorganzaton, a stat-
utory merger under the aws of the State of Oregon was effected by
mergng M corporaton nto a new cooperatve assocaton. Under
the pan, for each share of capta stock of /, the cooperatve ssued
tweve shares of ts capta stock as foows: ach stockhoder of the
corporaton who was a producer of agrcutura products upon sur-
render of stock of the corporaton receved for the frst 2 of each
such share one share of common stock of the cooperatve and one share
of preferred stock of the cooperatve for each addtona 2 share of
common stock of the corporaton. ach stockhoder of the corpora-
ton, who was not a producer of agrcutura products, receved for
each y12 share of common stock of the corporaton, one share of pre-
ferred stock of the cooperatve. ach stockhoder of the corporaton
who was a producer of agrcutura products became a member of the
cooperatve wth the rght to vote as such a member, upon surrender
of stock n the corporaton n e change for stock of the cooperatve.
Under the pan t was estmated that 80 percent of stockhoders of
the corporaton were engaged n farmng or were essors of farmng
property and 20 percent were nonproducers of farmng property.
Therefore, each of the corporaton s producer stockhoders receved
at east one share of common stock of the cooperatve as a resut of
the reorganzaton pan whch quafed them as members. The
amount of stock requred for membershp n the cooperatve was one
share of common stock. ach member had one vote. The hoders of
shares of the corporaton s stock who were nonproducers receved 8
shares of preferred stock of the cooperatve and the hoders of 10
shares of the corporaton s stock who were producers receved 17C
shares of preferred stock and 16 shares of common stock of the
cooperatve.
Secton 112 of the Interna evenue Code provdes n part as
foows:
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o 7 Regs. 118, 39.112(n)-.
(b) changes Soey n nd.

(3) Stock for stock on reorganzaton. No gan or oss sha be rec-
os|nzed If stock or securtes n a corporaton a party to a reorganzaton
are, n pursuance of the pan of reorganzaton, e changed soey for stock
or securtes n such corporaton or n another corporaton a party to the
reorganzaton.
( ) Same Gan op corporaton. No gan or oss sha be recognzed f
a corporaton a party to a reorganzaton e changes property, n pursuance
of the pan of reorganzaton, soey for stock or securtes n another
corporaton a party to the reorganzaton.

(g) Defnton of Reorganzaton. s used n ths secton
(1) The term reorganzaton means ( ) a statutory merger
.
Secton 39.112(g)-2 of Reguatons 118 states n part that the
words statutory merger refer to a merger effected n pursuance of
(he corporaton aws of the Unted States or a State or Terrtory or
the Dstrct of Coumba. Secton 39.112 (g) -1 provdes that n effect
there must be substanta busness reasons or e gences for the re-
organzaton there must be contnuty of the busness enterprse under
a modfed corporate form and there must be a contnuty of nterest
on the part of the persons who were the owners of the enterprse pror
to the reorganzaton. In the nstant case the condtons wth respect
to these sectons of the Code and the reguatons thereunder were fuy
comped wth.
ccordngy, t s hed that the transacton consttuted a statutory
merger and, therefore, a reorganzaton under secton 112(g) (1) ( )
of the Interna Revenue Code. No gan or oss was recognzed to M
corporaton, the cooperatve, or the stockhoders who e changed ther
S:tock. The undstrbuted earnngs and profts of M corporaton are
undmnshed by the transacton for the purpose of determnng the
amount of earnngs and profts of the cooperatve avaabe for dstr-
buton as dvdends.
S CTION 112(n). R COGNITION O G IN OR LOSS:
G IN ROM S L OR C NG O R SID NC
Reguatons 118, Secton 39.112(n)-: Gan Rev. Ru. 55-37
from sae or e change of resdenca.
Gan from the sae of a ta payer s resdence does not come wthn
the purvew of secton 112(n) of the Interna Revenue Code of 1039
where the proceeds of the sae are renvested n a home n whch
she has no ega nterest, but to whch her daughter, who contrbuted
part of the purchase money, hods tte. ny gan reazed from the
sae of the resdence w be recognzed and sub|ect to edera ncome
ta under the capta gan provsons of the Code.
dvce has been requested whether gan from the sae of a ta -
payer s od resdence comes wthn the purvew of secton 112(n) of
the Interna Revenue Code of 1939 where the new resdence n whch
she nvests the proceeds from the sae of her home s not purchased
n her name.
The ta payer sod her prncpa resdence whch she owned and
the proceeds were used to bud a new resdence on and beongng to
a coege whch empoys her daughter. The daughter supports the
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Regs. 118, 5 39.112(n)-. 3 8
ta payer and furnshed the addtona funds necessary over the
amount receved from the sae of the od resdence h order to bud
the new resdence. The ta payer may occupy the new resdence as
ong as she ves, but tte thereto s necessary hed by the daughter
as an empoyee of the coege, whch gave the daughter permsson
to erect the resdence on ts property. The resdence w utmatey
become the property of the coege.
Secton 112 of the Interna evenue Code of 1939 provdes n part
as foows:
(n) Gan rom Sae oh change of Resdence
(1) No.nrecognton of G . If property (herenafter n ths subsecton
caed od resence ) used by the ta payer as hs prncpa resdence s
sod hy hm and, wthn a perod begnnng one year pror to the date of
such sae and endng one year after such date, property (herenafter n ths
subsecton caed new resdence ) s purchased and used by the ta payer
as hs prncpa resdence, gau (f any) from such sae sha be recognzed
ony to the e tent that the ta payer s seng prce of the od resdence
e ceeds the ta payer s cost of purchasng the new resdence.
The purpose of secton 112(n) of the Code s to defer recognton
of a or a part of the gan reazed from the sae of the od res-
dence to a future ta abe event. Ths s accompshed under secton
112(h) by deductng from the bass of the new resdence the non-
recognzed gan reazed from the sae of the od resdence, and
usng ths ad|usted bass n computng the ta abe gan, f any, upon
the subsequent sae or e change of the new resdence.
The provsons of ths aw are appcabe to any ta payer seng a
prncpa resdence at a gan, and reef may be obtaned ony where
the requrements of ths secton are met. There are no provsons n
the aw whereby the ta payer may renvest the proceeds from the
sae of her home n the home of another ta payer wthout recognton
for edera ncome ta purposes of the gan reazed from such sae.
ccordngy, t s hed that gan from the sae of a ta payer s res-
dence does not come wthn the purvew of secton 112(n) of the
Interna Revenue Code where the proceeds of the sae are renvested
n a home n whch she has no ega nterest but to whch her daughter
hods tte. ny gan reazed from the sae of the resdence w be
recognzed and sub|ect to edera ncome ta under the capta gan
provsons of the Code.
Reguatons 118. Secton 39.112(n)-: Gan Rev.Ru. 55-00
from sae or e change of resdence.
Ony the porton of the cost of constructon wth respect to a
new resdence attrbutabe to a perod begnnng one year pror
to the date of sae of the od resdence and 18 months after such
date may be ncuded n the cost of the now resdence for the pur-
pose of determnng te nonrecognsscd gan under the provsons of
secton 112 (n) of the Interna evenue Code of 11)3 ).
dvce has been requested reatve to the nonrecognton of gan
from the sae of a resdence under the crcumstances descrbed beow.
The ta payer on uy 21, 1951 secured a budng permt to con-
struct a new home on a ot whch he had purchased as an nvestment
Constructon of the new resdence was commenced n September, 1951.
y uy 23,1952, the new house coud have been occuped, but t was
not entrey competed unt September 22, 1953, and the ta payer
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3 9 Regs. 118, 39.112(n)-.
moved nto t mmedatey thereafter. The home whch the ta payer
was occupyng as hs prncpa resdence was sod on September 22,
1953. _
Secton 112(n) (1) of the Code reatng to the nonrecognton of
gan from a sae or e change of a resdence, provdes n part that f
property (theren caed od resdence ) used by the ta payer as hs
prncpa resdence s sod by hm and, wthn a perod begnnng 1
year pror to the date of such sae and endng 1 year after such date,
property (theren caed new resdence ) s purchased and used by
the ta payer as hs prncpa resdence, gan, f any, from such sae
sha be recognzed ony to the e tent that the ta payer s seng prce
of the od resdence e ceeds the ta payer s cost of purchasng the new
resdence.
Secton 112(n) (2) (G) of the Code provdes n part that n the case
of a new resdence the constructon of whch was commenced by the
ta payer pror to the e praton of 1 year after the date of the sae of
the od resdence, the perod specfed n paragraph (1), whch n-
cudes a perod of 1 year pror to date of sae and endng 1 year after
such date, sha be consdered as ncudng a perod of 18 months be-
gnnng wth the date of the sae of the od resdence.
Secton 39.112(n)-(b) (5) of Reguatons 118 provdes n part:
The ta payer s cost of purchasng the new resdence Incudes ony so much
of such cost as s attrbutabe to constructon made wthn
te 30 month perod of tme
The 30-month perod of tme begns 1 year pror to the date of the
sae of the od resdence and ends 18 months after such date. or the
purposes of secton 112(n) of the Code, the date of the sae of the od
resdence s the governng date.
In the nstant case the constructon of the resdence was commenced
n September 1951 and competed to the e tent that the resdence coud
have been occuped by uy 23, 1952, but the new resdence was not
fnay competed unt September 22, 1953. In accordance wth the
above-stated reguatons, n order for a of the costs attrbutabe to
the constructon of the new resdence to come wthn the provson of
secton 112 (n) of the Code, t s necessary that the sae of the od res-
dence take pace wthn 1 year from the date of the begnnng of the
constructon of the new resdence and that such constructon be com-
peted wthn 18 months after the sae of the od resdence. Snce the
od resdence sod September 22, 1953, and constructon of the new
resdence was competed on the same date, ony so much of the cost
as s attrbutabe to the constructon of the new resdence durng the
perod begnnng September 22,1952, and endng September 22,1953,
may be consdered as the cost of purchasng the new resdence for the
purpose of secton 112 (n) of the Code. The costs whch were ncurred
pror to September 22, 1952, may not be taken nto account for ths
reason.
Regcatons 118, Secton 39.112 (n)-: Gan ev. Ru. 55-222
from sae or e change of resdence.
The sae of a famy resdence whch was rented for a perod of
three years durng a ta payer s assgnment n the rmed orces
does not come wthn the provsons of secton 112(n) (1) of the
Interna Revenue Code of 1039.
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Regs. 118, 39.113 (a)- . 350
dvce has been requested whether the sae of a famy resdence
whch was rented for a perod of 3 years durng a ta payer s asgn-
ment n the rmed orces comes wthn the provsons of secton
112(n) (1) of the Interna Revenue Code of 1939.
In the nstant case an offcer of the rmed orces of the Unted
States pror to hs retrement owned wth hs wfe a home and occu-
ped t as a prncpa resdence. ecause of a change n hs post of
duty, the ta payers were forced to gve up ther occupancy of the
resdence and rent t for a perod of 3 vears. The home was nherted
and was regarded as the famy resdence. Upon retrement of the
offcer, the rented resdence was sod and a new resdence was but n
another cty, upon and whch the ta payers owned. Such new res-
dence was then occuped as a prncpa resdence.
Secton 112(n)() of the Interna Revenue Code of 1939, reatng
to nonrecognton of gan from the sae or e change of a resdence,
provdes n part that f property (theren caed od resdence )
used by the ta payer as hs prncpa resdence s sod by hm and,
wthn a perod begnnng 1 year pror to the date of such sae and end-
ng 1 year after such date, property (theren caed new resdence )
s purchased and used by the ta payer as hs prncpa resdence, gan,
f any, from such sae sha be recognzed ony to the e tent that the
ta payer s seng prce of the od resdence e ceeds the ta payer s cost
of purchasng the new resdence.
Secton 39.112(n)-(b)() of Reguatons 118 provdes n part as
foows:
Whether or not property Is used by the ta payer as hs resdence, and whether
or not property s used by the ta payer as hs prncpa resdence (n the case
of a ta payer usng more than one property as a resdence), depends upon a
of the facts and crcumstances n each ndvdua case, ncudng the bona fdes
of te ta payer. The mere fact that property Is, or has been, rented s not
determnatve that such property s not used by the ta payer as hs prncpa
resdence. or e ampe, the ta payer purchases hs new resdence before he
ses hs od resdence, the fact that he temporary rents out the new resdence
durng the perod before he vacates the od resdence may not, n the ght of
a the facts and crcumstances n the case, prevent the new resdence from
beng consdered as property used by the ta payer as hs prncpa resdence.
In the nstant case, the ta payers were forced to gve up the occu-
pancy of ther resdence due to a change n the offcer s post of duty.
There was no ntent at the tme of ther eavng the home that a new
resdence woud be purchased as a repacement. The resdence was
not occuped by the ta payers for a perod of 3 years but was rented
and the facts and crcumstances n the case do not ndcate that rentng
of the resdence was a temporary arrangement entered nto durng
a perod made necessary by the purchase of a new resdence. ccord-
ngy, t s hed that the provsons of secton 112(n) of the Code
are not appcabe under the facts and crcumstances heren present.
S CTION 113(a). D.TUST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D) O PROP RTY
Reguatons 118, Secton 39.113(a)-: Scope Rev. Ru. 55-27
of bass for determnng gan or oss.
Pursuant to a reorganzaton under the supervson of the ank
Commssoner of the State In 1933 Y ank receved certfcates of
benefca nterest representng a certan amount of assets n the
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351 IRegs. 118, 39.113(a) (2)-.
ank. In a ta abe transacton n 1937 Y e changed the certfcates
for stock of , camng no deducton n ts edera corporate ncome
ta return for the oss nvoved n such transacton. ed, the bass
of the stock receved by s measured by the far market vaue
of such stock as of the effectve date of the e change.
dvce has been requested wth respect to the bass for edera n-
come ta purposes of certan shares of stock of ank acqured by
Y ank under the crcumstances set forth.
The ank was reorganzed under the supervson of the ank
Commssoner of a certan State pursuant to a pan of reorganzaton
durng the year 1933. In the transacton Y ank receved certf-
cates of benefca nterest ssued by a new ntermedary corporaton
organzed under the pan of reorganzaton. The certfcates repre-
sented 0 percent of the amount the Y Corporaton had on depost
n ank when t was cosed n 1933.
Pursuant to an agreement n 1937, the Y ank e changed the cer-
tfcates of benefca nterest for certan shares of stock of the
ank, the e change beng made on the bass of one share of stock
of ank for each 30a: doars represented by such certfcates. The
stock had a far market vaue of 10a doars per share when receved.
The queston presented s whether the Y Corporaton s permtted
to use as the cost bass of the stock of ank (30a doars per share),
rather than the far market vaue of the stock when t was receved
(10a doars per share), f Y Corporaton ses ts stock now or n any
future year, nasmuch as the Y ank suffered a substanta oss n
1337 as refected by ts corporate ncome ta return for that year
wthout takng nto consderaton the oss sustaned upon the e change.
In the nstant case, the Interna Revenue Servce hed that the de-
postors of the ank dd not sustan deductbe osses n 1933 under
the Revenue ct of 1932 upon recept of the certfcates of benefca
nterest ssued by the new corporaton pursuant to the pan of the
reorganzaton. It was hed further that the hoders of such certf-
cates reazed gan or oss upon the e change n 1937 under secton
112(a) of the Revenue ct of 1936 of ther certfcates for stock of
the ank, measured by the dfference between the cost bass of the
certfcates e changed (30a doars per share) and the far market
vaue of the stock of the ank receved (10a doars per share).
Inasmuch as t has been hed that the e change represented a cosed
transacton whch resuted n gan or oss to the certfcate hoders,
the bass of the stock receved n the e change s measured by ts
far market vaue (10ar doars per share) as of the effectve date of
the e change.
ccordngy, notwthstandng the fact that the Y Corporaton dd
not deduct the oss n the year of the e change because t woud re-
ceve no ta beneft, the varous Revenue cts, the Interna Revenue
Code of 1939, and the reguatons promugated thereunder, contan
no provsons permttng Y ank to use a cost bass of 30a doars
n te event of the sae of such stock.
Reguatons 118, Secton 39.113(a) (2)-: Property
transmtted by gft after December 31,1920.
ass of property acqured by gft and, n part, by e change for
annuty contract. See Rev. Ru. 55-119, page 352.
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Regs. 118, 39.113(b)()-. 352
Reguatons 118, Secton 39.113(a) (5)-: ass Rev. Ru. 55-293
of property acqured by bequest, devse, or
nhertance.
Where the fetme ncome benefcary of a testamentary trust e er-
cses durng hs fetme a genera power of appontment over the
corpus of the trust and apponts the property to hmsef, the bass of
the property for edera ncome ta purposes sha be the same n the
hands of the appontee as t was n the hands of the trustees, sub|ect
to ad|ustment as provded n secton 113(b) of the Interna Revenue
Code of 1939.
Reguatons 118, Secton 39.113(a) (5)-: ass
of property acqured by bequest, devse, or
nhertance.
ass of property dstrbuted n parta qudaton of trust prn-
cpa. See Rev. Ru. 55-117, page 233.
Reguatons 118, Secton 39.113(a) (f)-: Prop-
erty acqured upon a ta -free e change.
ass of shares of common stock for preferred stock n e change
pursuant to a ta -free reorganzaton. See Rev. Ru. 55-11-2, page 3 .
Reguatons 118, Secton 39.113(a) (13)-1: Prop-
erty contrbuted n knd by a partner to a
partnershp.
Gan or oss resutng from the merger of two common trust funds.
See Rev. Ru. 55-299, page 02.
S CTION 113(b). D UST D SIS OR D T RMINING
G IN OR LOSS: D UST D SIS
Reguatons 118, Secton 39.113(b) (1 )-: d- Rev. Ru. 55-119
|usted bass.
( so Sectons 113, 11 Reguatons 118, Sec-
tons 39.113(a) (2)-, 39.11 -1.)
ass for computng the deprecaton aowance and for deter-
mnng gan or oss upon the dsposton of property acqured n
e change for an annuty contract.
O. D. 9 5, C. . , (1921), and S. M. 31 1 , C. . I -2, 1S3
(1925), modted.
dvce has been requested reatve to the bass for (1) computng
deprecaton and (2) determnng gan or oss upon the subsequent
sae or e change of property receved by a ta payer n e change for
an agreement to make annuty payments to the annutant (transferor
of the property) for the remander of the annutant s fe.
In O. D. 9 5, C. . , (1921), the ta payer receved certan and
n e change for a cash payment and hs promse to support hs mother
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353 Regs. 118, 39.113(b) ()-
for the remander of her fe. O. D. 9 5, as modfed by I. T. 2689,
C. . II-1,160 (1933), pursuant to the recommendaton to that effect
n G. C. M. 11655, C. . II-1, 159 (1933), hods that the bass for
determnng gan or oss on the sae of such and s the sum of the cash
payment pus the dscounted vaue of the support to be furnshed.
In S. M. 31 1 , C. . I -2, 183 (1925), the ta payer purchased her
mother s fe nterest n property, gvng as the consderaton therefor
her agreement to contrbute to the support of her mother for the
remander of her mother s fe. S. M. 31 1 hods that the tota of
the payments made and to be made by the ta payer under the contract
w represent the cost of the property acqured.
Under the provsons of secton 23(e) of the Interna Revenue Code
of 1939, one of the requstes of a deductbe oss s that such oss
must actuay be sustaned durng the ta abe perod for whch the
deducton therefor s sought and evdenced by a cosed and competed
transacton. See secton 39.23 (e)- of Reguatons 118. trans-
acton n whch a ta payer who s not engaged n the busness of wrt-
ng annuty contracts receves property n e change for hs promse
to make annuty payments to the transferor s not a cosed and com-
peted transacton unt the death of the annutant. It s not unt
the death of the annutant that the f ed cost of the property so
acqured may be determned. The annutant havng ded and pay-
ments under the contract havng termnated, the cost of the property,
for edera ncome ta purposes, s the tota of the annuty payments
made. See Thomas . Mastn v. Commssoner, 28 ed. (2d) 7 8
Ctzens Natona ank of rksve, Mo. v. Commssoner, 122 ed.
(2d) 1011, certorar dened, 315 U. S. 822 and D. ruce orrester v.
Commssoner, T. C. 907. Of course, f the property acqured n
e change for an annuty contract s deprecabe property, or f the
property s sod pror to termnaton of the annuty payments, t s
necessary to determne a bass upon whch to compute a reasonabe
aowance for deprecaton and upon whch the gan or oss from the
sae or e change of the property may be determned.
In vew of the foregong and assumng an arm s-ength trans-
acton wth no ntent of a gft on the part of ether party, where a ta -
payer who s not engaged n the busness of wrtng annutes receves
property n e change for hs contract to make annuty payments, the
foowng edera ncome ta consequences w resut, sub|ect, how-
ever, to the provsons of secton 2 (b) of the Code of 1939, reatng
to the nondeductbty of certan osses from saes or e changes of
property:
1. The bass (unad|usted)1 of the property for the purpose of
computng the aowance for deprecaton pror to the death of
the annutant sha be the vaue of the prospectve payments
under the annuty contract (computed as o the date of the trans-
acton n accordance wth Tabe I, secton 86.19(f) of Regua-
tons 108 wth reference to the fe e pectancy of the annutant)
unt such tme as the annuty payments equa the vaue of the
annuty contract at the date of the transacton. ny annuty pay-
ments made n e cess of the vaue of the annuty contract at the
date of the transacton shoud be added to the bass of the property
When ns In ths rung, the torn) bn s (nnnd|usted) refers to the hnss pror to
te ad|ustment tor deprecaton, and does not contempate capta addtons or subtrac-
tons.
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Regs. 118, 39.113(b)()-. 35
for deprecaton purposes. owever, upon the death of the an-
nutant, the bass (unad|usted) for computng any subsequent a-
owance for deprecaton becomes the tota of the annuty
payments made under the contract. In the event deprecabe
and nondeprecabe property s receved, an aocaton, for the pur-
pose of computng the bass for the deprecabe porton of the
property, must be made on the bass of the rato of the respectve
ar market vaues of the deprecabe and nondeprecabe proper-
tes at the tme acqured.
2. Shoud dsposton of the property occur after the death of
the annutant, the bass (unad|usted) for determnng gan or oss
sha be the tota of the annuty payments made under the con-
tract. See D. ruce orrester v. Commssoner, supra.
3. Shoud dsposton of the property occur pror to the death
of the annutant, the bass (unad|usted) for determnng gan
sha be the tota of the annuty payments made under the con-
tract up to the date of dsposton pus the vaue of the prospec-
tve payments remanng to be pad at the date of such dsposton
(computed n accordance wth Tabe I, secton 86.19(f) of Regua-
tons 108 wth reference to the fe e pectancy of the annutant as
of the date of dsposton of the property). The bass (unad-
|usted) for determnng oss sha be the tota of the annuty
payments actuay made at the tme of dsposton. Compare sec-
ton 39.23(e)-, Reguatons 118 Thomas II. Mastn v. Comms-
soner, supra, and Ctzens Natona ank of rksve, Mo. v.
Commssoner, supra. Of course, a stuaton may arse where the
seng prce s ess than the ad|usted bass for gan and greater
than the ad|usted bass for oss. In such a case, nether gan nor
oss woud be recognzed at the tme of the sae.
Where dsposton of property acqured n e change for a promse
to make annuty payments has occurred pror to the death of the an-
nutant, the ta payer may reaze a gan or oss, for edera ncome
ta purposes, as a resut of events occurrng subsequent to such ds-
poston. Whether such events resut n a recognzed gan or a recog-
nzed oss s dependent upon the crcumstances n each ndvdua case.
If the tota of the annuty payments made under the contract (tota
of payments made before and after dsposton of the property) e -
ceeds the bass (unad|usted) of the property used n determnng the
gan or oss on the dsposton, such e cess s a oss n the year or vears
n whch pad. In the case of a recognzed oss, ths w ncude a
payments made after the date of dsposton of the property. Where
the seng prce s such that nether gan nor oss s recognzed upon
dsposton of the property, no oss s sustaned unt the tota of the
ayments made under the annuty contract (tota of payments made
efore and after dsposton of the property) when decreased by de-
precaton aowed or aowabe e ceeds the seng prce, at whch
tme such e cess s a oss n the year n whch pad.
On the other hand, n the case of a recognzed gan upon dsposton
of the property pror to the death of the annutant, f the tota of the
annuty payments utmatey made s ess than the bass (unad|usted)
for computng such gan, the e cess of such bass over the tota of the
annuty payments w consttute ncome n the year the annutant
des. In the case of a recognzed oss, there w be no gan as a resut
:
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355 Regs. 118, 39.113(b)()-.
of the annutant s death. In case nether gan nor oss was recognzed
n the dsposton of the property, f the tota annuty payments
matey made (decreased by deprecaton aowed or aowabe dur-
ng the perod the property was hed and ad|usted for capta add-
tons or subtractons) s ess than the seng prce, the e cess of the
seng prce consttutes ncome n the year the annutant des.
The nature of any gan or oss, whether capta or ordnary, whch
s recognzed as a resut of events occurrng subsequent to the sae of
the property nvoved w depend upon the purpose for whch the
property was hed. Compare . Donad rrowsmth et a., e ecutors
of the ast w and testament of rederck R. auer, deceased, and
Ruth R. auer et a. v. Commssoner, 3 U. S. 6, Ct. D. 1752, C. .
1952-2,136.
The prncpes outned above may be ustrated by the foowng
e ampes:
(a) ssume the far market vaue of the property receved s 95,000
(and 15,000 and budng 80,000) and the property s used n the
ta payer s trade or busness or for the producton of ncome. The
remanng fe of the budng s 50 years and the estmated savage
vaue of the budng at the end of that tme s 15,000. The annuty
contract provdes for annua payments of 10,000 to the annutant
(transferor) for the remander of hs fe. t the tme of transacton
the present vaue of the annuty contract s 9 ,785 (at age 69).
The annua deprecaton woud be computed for the perod up to the
date of the annutant s death as foows:
to 9 785- 15 00()
s 1 g 1,296.38
(b) If the annutant shoud de at the end of the eghth year, the
annua deprecaton for subsequent ta abe years woud be computed
s foows:
f 80,000 2- 15,000- 10,371.0
5s.):|,I ) anon o|
2 (remanng fe of budng)
(c) ssumng the property was sod at the end of the nnth year
and pror to the death of the annutant, the recognzed gan s com-
puted as foows:
Seng prce 150,000. 00
ass:
nnuty payments made (9 10,0O0) 90,000.00
Pus: aue of prospectve payments at date of
sae (age 78) 63,705.00
Unad|usted bass 153, 705. 00
Less: Deprecaton (9 1,296.38) 11,667. 2
d|usted bass 1 2, 037. 58
Recognzed gan 7,962. 2
Losses from annuty payment made after the property s dsposed of
woud be recognzed after the aggregate of the annuty payments
ght Rnnaty payments made.
1 Deprecaton for 8 years at 11,296.38.
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Regs. 118, 39.113(b) ()-. 356
e ceeds 153,705, . e., 6,295 of the 16th annua payment and a sub-
sequent payments are osses n the year n whch pad. owever, f
the 15th annua payment was the fna payment made, there woud
be a recognzed gan of 3,705 ( 153,705 mnus 150,000).
(d) ssumng a facts the same as n the precedng e ampe, e cept
that the seng prce s 75,000, the recognzed oss s computed as
foows:
Seng prce 75, 000. 00
Unad|usted bass ( ) annuty payments made) 90,000.00
Less: Deprecaton (9 1,21)0.38) 11,667. 2
d|usted bass 78, 332. 58
Recognzed oss 3, 332. 58
In ths nstance, each annuty payment made after the sae of the
property woud be recognzed as a oss n the year pad.
(e) If the seng prce were 105,000.00, no gan or oss woud
be recognzed at the tme the property s dsposed of, snce the seng
prce fas between the bass (ad|usted). 1 -2.037.58, for computng a
recognzed gan and the bass (ad|usted), 78,332.58, for computng
a recognzed oss. In ths stuaton, there woud be a recognzed oss
of 3,332.58 on the 12th annuty payment (seng prce, 105,000
(tota payments, 120,000-deprecaton, 11,667. 2). The fu
amount of each succeedng payment woud be a recognzed oss n the
year pad. If, however, the annutant ded after ony 11 payments
had been made, there woud be a recognzed gan n the year of the
annutant s death n the amount of 6,667. 2 (seng prce, 105,000
(tota payments, 110,000-deprecaton, 11,667. 2)).
If, n fact, an eement of gft s nvoved n connecton wth a trans-
acton where property s acqured n e change for an annuty contract,
such fact must be consdered by the recpent of the property n deter-
mnng hs bass for computng the deprecaton aowance and for
determnng gan or oss upon subsequent dsposton of such property.
Under secton 113(a) (2) of the Code the donee s bass for determnng
gan on the dsposton of property receved as a gft s the same as
t woud be n the hands of the donor, or the ast precedng owner by
whom t was not acqured by gft the donee s bass for determnng
oss s the same as the bass for determnng gan, or the far market
vaue of the property at the tme of the gft, whchever s ower. The
bass for deprecaton s the same as the bass for computng gan.
Secton 11 (a) of the Code. Tms, n determnng the bass for gan,
oss or deprecaton the donee s bass of the porton of the property
acqured by gft shoud be added to the bass computed under each
of the above-stated rues reatng to property receved n e change
for an annuty contract ony. In determnng the bass for gan, oss
or deprecaton whch s attrbutabe to the porton of the property
transferred as a gft, the donor s bass or the far market.vaue of the
tota property transferred, as the case may be, s reduced by the vaue
of the prospectve annuty payments to be made (computed as of
the date of the transacton n accordance wth Tabe I, secton 86.19 (f)
of Reguatons 108 wth reference to the fe e pectancy of the annu-
tant). Where necessary, an aocaton of the bass of the porton of
the property receved as a gft shoud be made between deprecabe
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357 Regs. 118, 39.11 -1.
and nondeprecabe property based on the rato of the tota far market
vaues of such deprecabe and nondeprecabe property.
See Revenue Rung 239, C. . 1953-2, 53, as to the ta abty of
annuty payments receved by an annutant who has transferred rea
property n e change for an annuty contract.
To the e tent they are nconsstent wth the foregong, S. M. 31 1 ,
C. .1 -2,183 (1925), s modfed, and O. D. 9 5, C. . , (1921),
as modfed by I. T. 2689, C. . II-1,160 (1933), s further modfed.
S CTION 11 . SIS OR D PR CI TION
ND D PL TION
Reguatons 118, Secton 39.11 -1: ass for Rev. Ru. 55-67
aowance of deprecaton and depeton.
Gypsum, n ts natura state, s a mnera whch may occur n rock-
ke masses but s very soft and rarey mned or used as stone for
ordnary commerca purposes. It s not to be cassfed as stone,
as that term s used n secton 11 (b) ( ) ( ) () of the Interna Rev-
enue Code of 1939 (as amended by secton 319 of the Revenue ct of
1951) and secton 39.23(m)-5(b) of Reguatons 118, uness t s used,
or sod for use, by the mne owner or operator as stone as defned
n such reguatons.
Reguatons 118, Secton 39.11 -1: ass for Rev. Ru. 55-78
aowance of deprecaton and depeton.
( so Secton 23 (m) Reguatons 118, Secton
39.23(m)-.)
Processes whch are ncuded n the term ordnary treatment
processes as set forth n secton 39.23(m)-:(f) of Reguatons 118,
and secton 11 (h)( )( ) of the Interna Revenue Code of 1939,
wth respect to the manufacture of ghtweght aggregate from
shae and sate.
dvce has been requested as to the processes n the manufacture
of ghtweght aggregate from shae and sate that are ncuded under
the term ordnary treatment processes as used n secton 39.23 (m)-
1(f) of Reguatons 118, and secton 11 (b)( )( ) of the Interna
Revenue Code of 1939.
The varous treatment processes nvoved n the manufacture of
such products are as foows:
(1) Remova of overburden
(2) astng wth dynamte
(3) Loadng on trucks
( ) Transportaton to prmary crusher
(5) Prmary crushng
(6) Remova from prmary crusher
(7) rng n a rotary kn
(8) Remova from kn and coong
(9) Crushng and screenng
(10) Loadng for shpment
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Regs. 118, 39.11 -1. 358
It s hed that the frst s processes are ordnary treatment proc-
esses wthn the meanng of secton 11 (b) ( ) ( ) of the Code and
secton 39.23(m)- (f) of Reguatons 118. The furnacng, or heatng
n the rotary kns, and a subsequent operatons, are hed to be
nonmnng processes.
s to the computaton of the gross and net ncome from the property
for percentage depeton purposes after the costs of mnng and manu-
facturng have been segregated, see sectons 39.2 (m)- (e) and (g)
of Reguatons 118.
Reguatons 118, Secton 39.11 -1: ass for Rev. Ru. 55-180
aowance of deprecaton and depeton.
( so Secton 23 (m) Reguatons 118, Secton
39.23(m)-5.) . .
Cay used n con|uncton wth shae n the manufacture of ght
weght aggregate does not quafy as brck and te cay as defned n
secton 39.23(m)-5(b) of Reguatons 118, and s not entted to per-
centage depeton uness of a type of cay specfcay dentfed n the
Code and reguatons as a cay for whch a 15 percent rate of per-
centage aowance s provded. See secton 11 (b)( )( ) of the
Interna Revenue Code of 1939 and secton 39.23(m)-5(b) of Regua-
tons 118.
Reguatons 118, Secton 39.11 -1: ass for
aowance of deprecaton and depeton.
ass for determnng depcton aowances wth respect to ncome
receved from the sae of oam. See Rev. Ru. 55-11, page 212.
Reguatons 118, Secton 39.11 -1: ass for
aowance of deprecaton and depeton.
Property acqured by a ta payer, not engaged n the busness of
wrtng annuty contracts, n e change for hs contract to make an-
nuty payments to the transferor. See Rev. Ru. 55-119, page 352.
Reguatons 118, Secton 39.11 -1: ass for
aowance of deprecaton and depeton.
The decson n the case of Unted States v. Cherokee rck Te
Company, 218 ed. (2d) 2 , does not affect the poston of the Servce
wth respect to ordnary treatment processes n the case of brck and
te cav as set forth n Revenue Rung 5 -109, C. . 195 -1, 62. See
Rev. Ru. 55-2 , page 73.
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359 Regs. 18, 39.115(a)-.
S CTION 115. DISTRI UTIONS Y CORPOR TIONS
egttatons 118, Secton 39.115 (a)-1: Dv- Rev. Ru. 55-28
dends. , . . ._
( so Secton 22 (d), Secton 39.22 (d) -7 Sec-
ton 718, Secton 35.718-2, Reguatons 112
Secton 36, Secton 0. 36-1 Secton 58,
Secton 0. 58- , Reguatons 130.)
In determnng the amount of earnngs and profts avaabe for
dvdends for a ta abe year n whch there was an Invountary
qudaton of nventory, repacement of whch was made n sub-
sequent years, the earnngs and profts for the year, of qudaton,
the year of repacement, and a ntervenng years must be ad|usted
to refect any ncrease or decrease n ncome attrbutabe to such
repacement. In the determnaton of equty nvested capta upon
whch the e cess profts credt s based, accumuated earnngs and
profts as at the begnnng of each year must be ad|usted for the
change n edera ncome and e cess profts ta abty for the
precedng ta abe year takng nto consderaton any ad|ustments
requred under secton 22(d) (6) of the Interna Revenue Code of
1939. The accumuated earnngs and profts n such cases, however,
sha be reduced by the amount of the Income and e cess profts
ta es determned wthout reducton for net operatng oss or unused
e cess profts credt carrybacks.
dvce has been requested concernng the method to be used n com-
putng the amount of earnngs and profts avaabe for dvdend ds-
trbuton where the nvountary qudaton and repacement prov-
sons of secton 22(d) (6) of the Interna Revenue Code of 1939 are
appcabe, and the effect to be gven any ncrease or decrease n the
edera ncome and e cess profts ta abty resutng from the
repacement of nventores nvountary qudated. dvce s aso
requested as to what effect a net operatng oss and/or an unused
e cess profts credt carryback w have upon the earnngs and profts
avaabe for dvdend dstrbuton for a pror ta abe year.
Wth regard to the repacement of an nventory nvountary qu-
dated secton 22(d) (6) of the 1939 Code provdes, n part, as foows:
S C. 22. GROSS INCOM .

(d) Last-n frst-out nventory method.
(6) Invountary qudaton and repacement op nventory.
( ) d|ustment of net ncome and resutng ta . Years begnnng pror
to anuary 1, 19 8. If, for any ta abe year begnnng after December 31,
19 0, and pror to anuary 1, 19 8, the cosng nventory of a ta payer
nventoryng goods under the method provded n ths subsecton refects a
decrease from the openng nventory of such goods for such year, and f
the ta payer eects to have the provsons of ths paragraph appy,
and f t s estabshed that such decrease s attrbutabe to the
nvountary qudaton of such nventory and f the cosng nven-
tory of a subsequent ta abe year, endng pror to anuary 1, 1963, refects
a repacement, n whoe or In part, of the goods so prevousy qudated,
the net ncome of the ta payer otherwse determned for the year of such
nvountary qudaton sha be ad|usted as foows:
() Increased by an amount equa to the e cess, If any, of the aggre-
gate cost of such goods refected n the openng nventory of the year
of nvountary qudaton over the aggregate repacement cost or
() Decreased by an amount equa to the e cess, f any, of the ag-
gregate repacement cost of such goods over the aggregate cost thereof
8 030# 56 2
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Regs. 118, 5 39.115(a)-. 360
refected n the openng nventory of the year of the Invountary
qudaton.
Ths secton of the Code and the reguatons promugated there-
under, affords ta payers usng the ast-n frst-out method of nven-
toryng goods an opportunty, by eecton, to use repacement cost
ratter than actua cost for goods qudated and, because of certan
reasons theren outned, not repaced at the cose of the ta abe year.
In commentng upon secton 119 of the Revenue ct of 19 2, whch
added secton 22(d) (6) of the Code, the Senate nance Commttee
stated, n report No. 1631, C. . 19 2-2, 50 , at 567, as foows:
It Is not ntended that any ad|ustment shoud be made wth respect to the
cosng nventory of the year of qudaton, or wth respect to the openng or
cosng nventores of ntervenng years, as an ncdent to the utmate repace-
ment. It s ntended, however, that the earnngs and profts account for the
year of qudaton and for a ntervenng years sha be ad|usted n a manner
consstent wth the ncrease or decrease of net ncome provded for wth respect
to the year of qudaton. ny determnaton of earnngs and profts avaabe
for dvdend dstrbuton, of the earnngs and profts factor n Invested capta,
and of a reated matters sha refect the proposed ad|ustments.
Therefore, where the repacement of an nventory nvountary
qudated s nvoved an ad|ustment of ncome sha be made n the
year of qudaton notwthstandng that such ad|ustment s not de-
termnabe unt the subsequent year n whch the repacement s made.
Secton 35.718-2 of Reguatons 112, appcabe to ta abe year be-
gnnng after December 31, 19 1 and pror to anuary 1, 19 6 and
secton 0. 58- of Reguatons 130, appcabe to ta abe years endng
after une 30, 1950 and begnnng pror to anuary 1,195 , provdes
n part that n the determnaton of equty nvested capta, upon
whch the e cess profts credt s based, accumuated earnngs and
profts at the begnnng of the ta abe year sha be decreased by the
amount of edera ncome and e cess profts ta abty for the
precedng ta abe year.
Wth regard to the net operatng oss and unused e cess profts
credt carrybacks, the Senate Report No. 1631, C. . 19 2-2, 50 , 597,
n commentng upon secton 155 of the Revenue ct of 19 2 whch
amended secton 122 of the Interna Revenue Code, states n part as
foows:
ta payer entted to a carry-back of a net operatng oss or unused
e cess profts credt (see secton 20 of the b) w not be abe to deter-
mne the deducton on account of such carry-back unt the cose of the future
ta abe year n whch he sustans the net operatng oss or has an unused
e cess profts credt. e must therefore fe hs return and pay hs ta
wthout regard to such deducton, and must fe a cam for refund at the
cose of the succeedng ta abe year when he s abe to determne the amount
of such carry-back. .
Therefore, where the carryback of a net operatng oss or an unused
e cess profts credt s nvoved the ad|ustments w not be deter-
mnabe unt the cose of the ta abe year n whch such ad|ustments
arose.
ccordngy, t s hed that n determnng the amount of earnngs
and profts avaabe for dvdend dstrbuton n a year n whch
there s an nvountary qudaton of nventory, repacement of whch
was made n a subsequent year, the earnngs and profts for the year
of qudaton, the year of repacement, and a ntervenng years must
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361 Regs. 118, 39.115(a)- .
be d|usted to refect any ncrease or decrease n ncome attrbutabe
to such repacement as requred by secton 22(d) (6) of the Code.
It s further hed that n computng nvested capta under secton
718, and e cess profts credt under secton 71 of the Code appcabe
to years begnnng after December 31, 19 1 and pror to anuary 1,
19 6, or nvested capta under secton 37, and e cess profts credt
under secton 36 of the Code appcabe to ta abe years endng after
une 30, 1950 and begnnng pror to anuary 1, 195 , accumuated
earnngs and profts must be decreased by the amount of accrued
edera ncome and e cess profts ta abty for the precedng ta -
abe year, computed on the bass of ncome as ad|usted under secton
22(d) (6) of the Code, and wthout beneft of any net operatng oss
or unused e cess profts credt carryback. The accumuated earnngs
and profts to be ncuded n nvested capta shoud not refect a net
operatng oss carryback, or the ad|ustments for ta es due to a net
operatng oss carryback or an unused e cess profts credt carryback,
pror to the begnnng of the frst ta abe year subsequent to the end
of the ta abe year n whch the net operatng oss was sustaned, or
the year n whch the unused e cess profts credt carryback was deter-
mned. It foows that ta ad|ustments for such carrybacks w not
be refected n the amount of earnngs and profts avaabe for dv-
dends n pror years.
S CTION 115(a). DISTRI UTIONS Y CORPOR TIONS:
D INITION O DI ID ND
Reocatons 118, Secton 39.115(a)-: Dv- Rev. Ru. 55-15
(ends.
( so Secton 112(a), Secton 39.112(a)-.)
Where a sae was made by a soe stockhoder of hs stock n one
corporaton to another corporaton whoy owned by hm n order
to emnate admnstratve e pen.se and to smpfy dua operaton,
there was no economc reaty to the transacton nsofar as any
renqushment of the nterest n the trst corporaton was concerned.
Payments receved from such sae represent a cash dstrbuton to
the ta payer ta abe as a dvdend under secton 115(a) of the
Interna Revenue Code of 11)39.
dvce has be n requested whether a sae by the soe stockhoder of
the stock of SI Corporaton to N Corporaton, aso whoy owned by
m, sha be treated as a bona fde sae reazng ong-term capta
gan or a dstrbuton ta abe as an ordnary dvdend.
SI Corporaton was engaged n the busness of ownng and rentng
termna budngs and transportaton equpment. N Corporaton
was a motor freght common carrer. Sost of the transportaton
termna budngs and a of the transportaton equpment owned by
SI Corporaton were rented to N Corporaton. oth corporatons
had substanta accumuated earnngs and profts as ndcated by ther
baance sheets. oth SI Corporaton and N Corporaton were whoy
owned by the same sharehoder. In order to set up the busness of
N Corporaton as an ntegrated operaton thus emnatng admn-
stratve e penses and smpfyng the dua operaton, the soe share-
hoder sod hs stock of SI Corporaton to N Corporaton. The far
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Regs. 118, 39.115(a)-3. 362
market vaue of the assets of M Corporaton was determned by an
ndependent apprasa. Upon consummaton of the pan, the nta
payment n the frst year dd not e ceed 30 percent of the approved
seng prce, and the remanng baance was to be pad n annua
nstaments.
Secton 115 of the Interna Revenue Code of 1939 reatng to dstr-
butons by corporatons provdes n part:
(a) Defnton of Dvdend. The term dvdend means any ds-
trbuton made by a corporaton to Its sharehoders, whether n money or n
other property, (1) out of ts earnngs or profts accumuated after ebruay 2S,
1913, or (2) out of the earnngs or profts of the ta abe year .
In the nstant case t s evdent that there s no economc reaty
to the sae nsofar as any renqushment of nterest by the soe share-
hoder n M Corporaton s concerned. The sharehoder receved a
cash dstrbuton from N Corporaton and, through the ownershp of
the stock of that corporaton, he st retans effectve contro of the
M Corporaton, the stock nterest whch the sharehoder was purport-
ng to se. though t s a we setted prncpe that the ta payer
has the ega rght to mnmze hs ta es by means whch the aw
permts, the true nature of the transacton s not to be dsgused by
the mere formasm empoyed. Ta abtes are measured by the
reatv of the transacton, not the mere form empoyed n brngng t
about See veyn . Gregory v. everng, 293 U. S. 65. Ct. D. 911,
C. . I -1, 193 (1935), and Commssoner v. Court odng Co.,
327 U. S. 331, Ct. D. 1636, C. . 19 5, 58.
ccordngy, t s hed that the sae by the soe sharehoder of hs
stock n M Corporaton to another corporaton whoy owned by hm
resuted n the dstrbuton of a ta abe dvdend wthn the purvew
of secton 115 (a) of the Interna Revenue Code.
Reguatons 118, Secton 39.115 (a)-: Dv-
dends.
ta abe dstrbuton made by a corporaton to ts sharehoders.
See Rev. Ru. 55-373, page 363.
Reguatons 118, Secton 39.115(a)-3: ffect
on earnngs or profts of certan ta -free
e changes and ta -free dstrbutons.
The earnngs and profts of a corporaton pursuant to a recaptaza-
ton. See Rev.Ru. 55-112, page 3 .
Reguatons 118, Secton 39.115(a)-3: ffect on
earnngs or profts of certan ta -free e -
changes and ta -free dstrbutons.
Treatment of undstrbuted earnngs and profts of corporatons
nvoved n a reorganzaton. Se Rev. Ru. 55-305, page 3 5.
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363 Regs. 118, 39.115(c)-.
S CTION 115(c). DISTRI UTIONS Y CORPOR TIONS:
DISTRI UTIONS IN LI UID TION
bgt|ato-ns 118, Secton 39.115(c)-1 : Dst - Rev. Ru. 55-373
tutons n qudaton.
( so Sectons 115(a), 115(g) Reguatons
118, Sectons 39.115 (a)-, 39.115(g)-.)
Where a contracton of ts corporate busness Is due to a can-
ceaton of ts franchse to dstrbute certan products, a dstrbu-
ton by a corporaton n compete canceaton and redempton of a
porton of ts capta stock, whch does not e ceed the net proceeds
derved by the corporaton from the buk saes of ts nventores, con-
sttutes a dstrbuton n parta qudaton wthn the meanng
of secton 115(c) and secton 115() of the Interna Revenue Code of
1930. To the e tent that the amount dstrbuted e ceeds the net
proceeds from the buk sae of nventores, such amount s ta abe as
a dvdend under to provsons of secton 115(a) and secton 115(g)
of the Code.
dvce has been requested wth respect to the ta consequences for
edera ncome ta purposes of a parta qudaton of a corporaton
under the foowng crcumstances.
corporaton was organzed as an appance dstrbutor, prnc-
pay under a franchse from a certan manufacturng corporaton.
The presdent of the dstrbutor corporaton and hs famy owned
GO percent and 0 percent, respectvey, of such corporaton s stock.
The presdent ded, and under the terms of hs w, hs wdow and
chdren are to receve, drecty or n trust, substantay a of hs
estate.
fter the death of the presdent the dstrbutor corporaton was
ferved notce by the manufacturng corporaton that under ts pocy
the franchse for dstrbutng ts products woud be canceed due to
such death. Ths franchse had been the reason for the organzaton
of the dstrbutor corporaton and the saes of the f ranchsed products
had consttuted appro matey 85 percent of ts busness. fter the
oss of ts key franchse the corporaton contnued to operate a ds-
trbutorshp for other products for a tra perod but ts busness was
unproftabe. ccordngy, t was determned that the corporaton
woud cease a of ts pror operatons and become a hodng corpora-
ton for ts rea estate. of ts nventory, other than rea estate, was
dsposed of n a seres of buk saes. The manufacturng corporaton
purchased a the nventores that were reated to ts ne of products
and the remander of the nventores were sod n buk to other pur-
chasers. s a resut of the foregong measures the corporaton was
n an e tremey qud poston.
fter the appance dstrbutorshp had been abandoned and the
corporaton became ony a hodng corporaton for rea estate, ts cap-
ta and surpus were far n e cess of the needs of the corporaton.
ccordngy, the stock hed by the estate of the ate presdent was
purchased by the corporaton at a prce determned from the net worth
of the corporaton. The tota redempton prce was n e cess of the
net proceeds derved by the corporaton from the buk saes of ts
nventores.
Secton 115 of the Interna Revenue Code of 1939 provdes n part:
(a) Defnton of Dvdend. The term dvdend when used n ths chap-
ter means any dstrbuton made by a corporaton to ts sharehoders,
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Regs. 118, | 39.115(g)-. 36
whether In money or In other property, (1) out of Its earnngs or profts accumu-
ated after ebruary 28, 1913, .

(c) Dstrbutons n Lqudaton. mounts dstrbuted n compete qu-
daton of a corporaton sha be treated as n fu payment n e change for the
stock, and amounts dstrbuted n parta qudaton of a corporaton sha be
treated as n part or fu payment n e change for the stock. The gan or oss to
the dstrbutee resutng from such e change sha be determned under secton
111,

(g) Redempton of Stock.
(1) In genera. If a corporaton cances or redeems ts stock
at such tme and n such manner as to make the dstrbuton and canceaton
or redempton n whoe or In part essentay equvaent to the dstrbuton
of a ta abe dvdend, the amount so dstrbuted n redempton or cancea-
ton of the stock, to the e tent that t represents a dstrbuton of earnngs
or profts accumuated after ebruary 28,1913, sha be treated as a ta abe
dvdend.
() Defnton of Parta Lqudaton. s used n ths secton the terra
amount dstrbuted In parta qudaton means a dstrbuton by a corpo-
raton n compete canceaton or redempton of a part of ts stock, .
It s hed that to the e tent the dstrbuton by the corporaton n
compete canceaton and redempton of a porton of ts capta stock
does not e ceed the net proceeds by the corporaton from the buk saes
of ts nventores, such dstrbuton consttutes a dstrbuton n parta
qudaton wthn the meanng of secton 115(c) and secton 115 () of
the Revenue Code of 1939, To the e tent that the amount dstrbuted
e ceeds the net proceeds, such e cess s ta abe as a dvdend under the
provsons of secton 115(a) and secton 115(g) of the 1939 Code and
secton 115(g)- of Reguatons 118. Snce the ndvduas who at the
tme of the redempton owned 0 percent of the stock of the corporaton
are aso the benefcares of the decedent s estate, ths case s not con-
troed by the sentence n secton 39.115(g)-(a) (2) of Reguatons
118 reatng to the redempton of a of a partcuar sharehoder s stock
so that he ceases to be nterested n the affars of the corporaton. See
Commssoner v. ohn T. Roberts, et a, 203 ed. (2d) 30 .
S CTION 115(g). DISTRI UTIONS Y CORPOR TIONS:
R D MPTION O STOC
Reguatons 118, Secton 39.115 (g)-: Dstr- Rev. Ru. 55-91
buton n redempton or canceaton of stock
ta abe as a dvdend.
( so Secton 117, Secton 39.17(b)-.)
Secton 115(g) (3) of the Interna Revenue Code of 1939, reatng to
the redempton of stock to pay death ta es, appes to amounts dstr-
buted n redempton of stock acqured n a nonta abe reorganzaton
under secton 112(g) (1) ( ) effectng a change ony n the name, state of
ncorporaton and the number of shares of the corporate entty where
the vaue of the stock of the former corporaton was ncuded n the
gross estate of the decedent.
ny gan or oss reazed by the estate upon the redempton of the
stock w be treated as a capta gan or oss under sectons 115(c) and
117 of the Interna Revenue Code of 1939.
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365 Reg . 118, 39.115(g)-.
dvce as been requested reatve to the edera ncome ta con-
sequences of a redempton by N Corporaton of a part of ts stock
owned by the estate of .
Incuded n the gross estate of were 120a shares of the stock of
theMCorporaton. The vaue of ths stock e ceeded 35 percent of the
take of the tota g-oss estate. The e ecutors of the estate sod 38a
shares of the stock to the M Corporaton n order to obtan funds for
the payment of estate and nhertance ta es. ater audt of the es-
tate ta return resuted n the determnaton of a defcency n estate
ta of 115a doars.
Pursuant to a pan of reorganzaton the M corporaton ncorpo-
rated the N Corporaton under the aws of another State. Under
the agreement between the two corporatons, a the assets and ab-
tes of the M Corporaton were transferred to the N Corporaton n
e change for a of the ssued and outstandng capta stock of N
Corporaton, whch conssted of 10,000a shares. fter the transfer,
the M Corporaton dstrbuted 5 shares of N Corporaton s stock n
e change for each of ts 210a outstandng shares.
s a resut of the reorganzaton, the estate of receved 10a
shares of stock of the Corporaton n e change for the remanng 83a
shares of stock of the M Corporaton that t owned.
The estate had no assets other than the stock of the Corporaton
from whch t coud reaze funds to pay the estate ta defcency and
nterest thereon. Pursuant to an agreement the N Corporaton re-
deemed a suffcent number of ts shares of stock hed by the estate of
for the estate to reaze cash equa to, but not n e cess of, the
aggregate amount of the estate and nhertance ta es mposed upon
the estate.
Secton 115(g) (1) of the Interna evcnue Code of 1939 provdes,
n genera, that f a corporaton cances or redeems ts stock at such
tme and n such manner as to make the dstrbuton and canceaton
or redempton n whoe or n part essentay equvaent to the ds-
trbuton of a ta abe dvdend, the amount so dstrbuted, to the
e tent that t represents a dstrbuton of earnngs or profts ac-
cumuated after ebruary 28, 1913, sha be treated as a ta abe dv-
dend.
Secton 115(g)(3) of the Code, wth reference to the redempton
of stock to pay death ta es, provdes that the genera rue n sub-
secton 115(g) sha not appy to such part of any amount so ds-
trbuted wth respect to stock the vaue of whch s ncuded n
determnng the vaue of the gross estate of a decedent, as s ds-
trbuted after such decedent s death and wthn the perod of mta-
tons for the assessment of estate ta or wthn 90 days after the
e praton of such perod, and as s not n e cess of the estate, n-
hertance, egacy, and successon ta es (ncudng any nterest co-
ected as part of such ta es) mposed because of such decedent s
death provded, that the vaue of the stock n such corporaton, for
estate ta purposes, comprses more than 35 per centum of the vaue
of fe gross estate of such decedent.
Te stock of the M Corporaton was the stock the vaue of whch
was ncuded n the gross estate of for estate ta purposes. ow-
ever, nasmuch as the stock of the N Corporaton was receved n a
nonta abe reorganzaton whch changed ony the name of the I
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Regs. 118, 39.116-1. . 366
Corporaton, the state of ncorporaton, and the number of shares of
the corporate entty , the stock of the N Corporaton s n substance
the same as the stock of the M Corporaton, the vaue of whch was
ncuded n the gross estate of the decedent.
ccordngy, t s hed that, under the provsons of secton
115(g) (3) of the Code, the redempton by the N Corporaton, wthn
the tme mt prescrbed, of shares of ts stock hed by the estate
of s not equvaent to the dstrbuton of a ta abe dvdend, snce
the vaue of the stock of the M Corporaton (now N Corporaton),
for estate ta purposes, comprsed more than 35 per centum of the
vaue of the gross estate of the decedent, and the amount of ths ds-
trbuton and prevous dstrbutons to the estate of dd not e ceed
the estate, nhertance, egacy, and successon ta es (ncudng nterest
coected as a part of such ta es) mposed upon the estate of .
113- gan or oss reazed by the estate upon the redempton of the
stock w be treated as a capta gan or oss under sectons 115(c)
and 117 of the Code.
Reguatons 118, Secton 39.115(g)-: Dstr-
buton n redempton or canceaton of
stock ta abe as a dvdend.
Whether a dstrbuton n connecton wth a canceaton or redemp-
ton of stock s essentay equvaent to a ta abe dvdend. See Rev.
Ru. 55-373, page 3C3.
S CTION 115(|). DISTRI UTIONS Y CORPOR TIONS:
LU TION O DI ID NDS
Reguatons 118, Secton 39.115(|)-: Dvdends
pad n property.
Corporate dstrbuton n knd where the earnngs and profts of the
corporaton are suffcent to cover the ad|usted cost of the property
dstrbuted but are nsuffcent to cover ts fu market vaue at the
tme of dstrbuton. See Ct. D. 177 , page 2 8 Ct. D. 1775, page 253.
S CTION 116. CLUSIONS ROM GROSS INCOM
Reguatons 118, Secton 30.116-1: arned Rev. Ru. 55-191
ncome from sources wthout the Unted
States.
Where a Unted States ctzen, a bona fde resdent of a foregn
country wthn the meanng of secton C(a) of the Interna Rev-
enue Code of 1039, as e penses, osses or deductons whch are
nether aocabe to hs ncome from sources wthn the Unted States
nor to hs ncome from sources wthout the Unted States, as for
e ampe, rea estate ta es on hs persona resdence abroad or med-
ca e penses, such amounts are deductbe wthout apportonment,
sub|ect to any appcabe provsons or mtatons provded n the
Code wth respect to such e penses, osses or deductons.
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367 (Regs. 118, f 39.116-1.
dvce has been requested reatve to the deductons propery ao-
cabe or chargeabe aganst amounts e cuded from gross ncome by
a Unted States ctzen under the provsons of secton 116(a) of the
Interna Revenue Code of 1939, under the foowng crcumstances.
The ta payer, a ctzen of the Unted States and a bona fde resdent
of a foregn country, wthn the meanng of secton 116(a) of the
Code, receved gross ncome amountng to 50a doars of whch 25a
doars was earned abroad and e cudabe from hs gross ncome under
the provsons of secton 116(a) of the Code. Deductons were camed
for rea estate ta es pad on hs persona resdence abroad as we as
persona and famy medca e penses. The specfc queston presented
s whether such e penses must be apportoned, as provded n secton
119 of the Code, as between amounts propery e cuded from and
amounts propery ncuded n gross ncome or whether such amounts
are deductbe wthout apportonment.
Secton 39.116-1 (a) (3 of Reguatons 118 provdes that there sha
not be aowed as a deducton from gross ncome any tems of e -
penses or osses or other deductons propery appcabe to or charge-
abe aganst the amounts e cuded from gross ncome under secton
116(a) of the Code. The apportonment and aocaton of such e -
penses, osses, or deductons as between ncome from sources wthn
and ncome from sources wthout the Unted States sha be deter-
mned n accordance wth the prncpes of secton 119 of the Code and
the reguatons thereunder.
Thus, any e penses, osses, or deductons drecty appcabe to
ncome e empt under secton 116(a) of the Code cannot be camed as
deductons from gross ncome. The apportonment and aocaton of
such e penses, osses, or deductons n accordance wth the prncpes
of secton 119 of the Code and the reguatons thereunder woud have
to be made ony n those cases where they cannot be dentfed as beng
attrbutabe e cusvey to ether ncudbe or e cudabe ncome but
are attrbutabe to both. See secton 11.02, Rev. Ru. 55-171, page 80,
ths buetn. or e ampe, where State ncome ta es are pad on
ncome part of whch ncome s, for edera ncome ta purposes, e -
cudabe from gross ncome under secton 116(a) of the Code, the
deducton for State ncome ta es under secton 23(c) of the Code
woud be apportoned between the ncudbe and e cudabe ncome n
accordance wth the prncpes of secton 119 of the Code and the
reguatons thereunder. See /. asetne Carstars, ecutor v.
Unted States, 75 ed. Supp. 683. owever, a saesman, a ctzen of
the Unted States, resdng and traveng abroad, who propery e -
cuded from gross ncome under secton 116(a) of the Code ncome
earned abroad, may not deduct n hs edera ncome ta return trav-
eng and other e penses ncurred by hm n earnng such e cuded
ncome. See secton 11.02, Rev. Ru. 55-171, supra.
In the nstant case the rea estate ta es pad on the ta payer s per-
sona resdence abroad as we as the medca e penses are attrbutabe
nether to reportabe ncome nor to ncome e cudabe under secton
116(a) of the Code. ccordngy, the rea estate ta es on hs per-
sona resdence abroad are deductbe from gross ncome, under secton
23(c) of the Code, wthout any apportonment and the medca
e penses may, sub|ect to the mtatons of secton 23( ) of the Code,
be deducted from the ta payer s gross ncome, aso wthout apporton-
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Regs. 118, 5 39.116-1. 368
ment thereof, provded, n each nstance, the ta payer does not cam
the optona standard deducton.
Reguatons 118, Secton 39.116-1: arned n- Rev. Ru. 55-29
come from sources wthout the Unted States.
Treatment of pensons (Incudng suppementa pensons) pad
retred Unted States ctzens by a domestc empoyer from current
operatng funds for servce rendered as a bona fde resdent of a
foregn country.
I. T. 3 72, C. . 19 1-1, 252, further modfed.
penson (ncudng one whch s ony suppementa) pad from
the current operatng funds of a domestc empoyer drect to a retred
Unted States ctzen on account of or wth respect to servces rendered
to the empoyer by the ctzen whe the atter was a bona fde res-
dent of a foregn country or countres wthn the meanng of secton
116(a)(1) of the Interna Revenue Code of 1939, as amended by
secton 321 of the Revenue ct of 1951, consttutes, n ts entrety,
earned ncome and ncome from sources outsde the Unted States
wthn the meanng of those terms as used n sectons 116(a) (3) and
119(c), respectvey, of the Code and s therefore whoy e cudabe
from the gross ncome of the pensoner under the provsons of secton
116(a)(1) of the Code.
owever, where a penson pad from the current operatng funds
of an empoyer s party wth respect to servces rendered by a Unted
States ctzen durng a perod when he was a bona fde resdent of a
foregn country or countres, wthn the meanng of secton 116(a) (1)
of the Code, and party wth respect to servces of the ctzen not
rendered durng such a perod (for e ampe, servces rendered n the
Unted States), the amount of such penson payment to be e cuded
from the ta abe ncome of the pensoner s that porton pad on
account of the servces of the ctzen rendered durng a perod qua-
fyng under secton 116(a) (1) of the Code.
If the amount of the penson s governed soey by the ength of
servce of the empoyee (for e ampe, 100 per year for each year of
servce, regardess of saary), or f the penson s of the f ed beneft
type (for e ampe, 30 percent of average compensaton over fna 5
years of empoyment), the e empt porton thereof w be that pro-
porton of each penson payment whch the number of months of
empoyment durng the perod quafyng under secton 116(a) of the
Code bears to the tota number of months n the ctzen s entre
perod of empoyment. The remander of the penson s ta abe n-
come to the retred empoyee. See I. T. 3 72, C. . 19 1-1, 252, as
modfed wth respect to other matters by IR-Mm. 71, C. . 1952-2,
170.
On the other hand, f the amount of the penson s determned n
whoe or n part by unts of compensaton actuay pad to the em-
poyee from year to year durng hs perod of tota empoyment, the
amount or porton of the penson e cudabe from the gross ncome
of the empoyee for edera ncome ta purposes w be governed,
to the e tent that the amount of the penson s so determned, by the
reaton of the tota compensaton actuay pad to the empoyee wth
respect to hs servces rendered abroad durng a perod quafyng
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369 Regs. 118, 39.116-1.
rader secton 116(a) of the Code, to the tota compensaton actuay
pad to the empoyee on account of hs entre perod of empoyment.
To the e tent that t s nconsstent wth the vews e pressed heren
reatve to pensons determned n whoe or n part by unts of com-
pensaton actuay pad to an empoyee from year to year durng hs
perod of tota empoyment, I. T. 3 72, supra, s further modfed.
The above prncpes appy whether or not the retred empoyee re-
sumes resdence n tho Unted States on, durng, or before retrement,
but do not appy to amounts pad pursuant to a pref unded stock bonus,
penson, annuty or proft-sharng pan. Wth respect to such pans,
see IR-Mhn. 71, C. . 1952-2,170.
Reguatons 118, Secton 39.116-1 arned
ncome from sources wthout the Unted
States.
The Ryukyu Isands, whch ncude Oknawa, arc a foregn country.
See Rev. Ru. 55-6, page 109.
Reguatons 118, Secton 39.110-1: earned
ncome from sources wthout the Unted
States.
Income ta gude for Unted States ctzens abroad. See Rev. Ru.
55-171, page 80.
Reguatons 118, Secton 39.116-1: arned
ncome from sources wthout the Unted
States.
ffect of communty property aws on ncome e cudabe from gross
ncome under the provsons of secton 116(a) of the Interna Revenue
Code of 1939. Se Rev. Ru. 55-2 6, page 92.
Reguatons 118, Secton 39.116-1: arned n-
come from sources wthout the Unted States.
Compensaton receved by a Unted States ctzen, from knder-
garten and nursery schoos operated on Unted States bases or nstaa-
tons ocated n foregn countres whch are operated on a permssve
bass rather than under offca nstructons or reguatons. See Rev.
Ru. 55-38 , page 9 .
S CTION 116(g). CLUSIO S ROM GROSS INCOM :
S IPOWN RS PROT CTION ND IND MNITY SSO-
CI TIONS
Determnaton of the status, for edera ncome ta purposes, of a
shpowners protecton and ndemnty assocaton. See Rev. Ru.
55-189, page 265.
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Regs. 118, 39.17(a)-. 370
S CTION 117(a). C PIT L G INS ND LOSS S:
D INITIONS
Reguatons 118, Secton 39.117(a)-: Mean- Rev. Ru. 55-79
ng of terms.
or edera ncome ta purposes, the sae of a gong busness
operated as a soe propretorshp does not consttute the sae of a
snge asset. Such a sae consttutes a sae of the ndvdua assets
comprsng the busness. or the purpose of determnng whether
the gan on the sae of a partcuar asset s to be ncuded n gross n-
come as an tem of ordnary ncome or whether t s to be treated as
gan from the sae of a capta asset, a of the ndvdua assets sod
must frst be cassfed as to (1) capta assets as defned n secton
117(a) of the Interna Revenue Code of 1939, (2) property used n
trade or busness as defned n secton 117(|) of the Code, and (3)
other property not comng wthn the provsons of secton 117(a) or
secton 117(|) of the Code as, for e ampe, stock n trade or nventory.
or ths purpose, records mantaned wth respect to the busness, as
we as ntangbe assets such as goodw, consttute capta assets.
See nsey ank Trust Co. v. Unted States, 15 ed. (2d) 968,
certorar dened, 329 U. S. 732. Ths s not ntended to ncude rec-
ords that are n fact nventory or stock n trade. The seng prce
must be aocated among a the assets sod accordng to the respectve
reatve vaues thereof, for e ampe, accordng to the rato of the
vaue of each ndvdua asset to the sum tota of the vaues of a the
assets sod. See C. D. ohnson Lumber Corp. v. Commssoner, 12
T. C. 3 8, acquescence, C. . 1950-2, 3. Separate computatons must
be made of the gan or oss wth respect to each asset sod, and the gan
or oss n each case must be treated n accordance wth the cassfcaton
of such asset, as descrbed above. See aron . Wams v. McGowan.
152 ed. (2d) 570 rnest . Watson v. Commssoner, 3 5 U. S. 5
Ct. D. 1760, C. . 1953-1,179.
Reguatons 118, Secton 39.117(a)-: Meanng Rev. Ru. 55-37
of terms.
( so Secton Reguatons 118, Secton 39. -1.)
The sae of a of a ta payer s rghts and Interest n a dstrbutor-
shp agreement wth a foregn manufacturer consttutes the sae of
a capta asset wthn the purvew of secton 117(a) of the Interna
Revenue Code of 1939 and the gan reazed s ta abe as a ong-term
capta gan. Such sae quafes as a casua sae of personaty on
the nstament bass wthn the purvew of secton (b) of the
1939 Code, where ess than 30 percent of the sae prce s receved In
the year of the sae.
dvce has been requested whether the sae of a of the ta payer s
rghts and nterest n a dstrbutorshp agreement wth a foregn manu-
facturer consttutes the sae of a capta asset and whether such a sae
quafes as a casua sae of personaty on the nstament bass under
the provsons of secton (b) of the Interna Revenue Code of 1930.
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371 Regs. 118, 39.117(a)-.
In the nstant case the ta payer, who s engaged n the busness of
actng as representatve of foregn manufacturers, was apponted soe
agent of a certan foregn company and ts subsdares wth respect
to the sae and dstrbuton of ther products whch were e ported to
the Unted States, ts terrtores and possessons. Under powers
prnted n the agency agreement, the ta payer apponted a domestc
company as hs dstrbutor for such products. The agreement s for a
term of 20 years uness termnated sooner under ts provsons.
The ta payer sod and assgned a of hs rghts, tte and nterest
n the orgna agreement to hs dstrbutor. ppro matey 10 per-
cent of the agreed purchase prce was pad upon e ecuton of the saes
agreements, and the baance thereof was pad n the foowng year.
Under the saes agreement, the ta payer warranted that the orgna
agency agreement was n fu force and effect that he was not n
defaut thereunder that he had the rght to assgn a hs rghts, tte
and nterest n and to such agreement and, that the e praton date
of hs rghts n and to the agreement remaned the same after the
assgnment.
The purchaser agreed to assume a the obgatons to be dscharged
under the orgna agreement. The sae covered ony the rghts of
the ta payer n the orgna agreement. It dd not ncude any phys-
ca assets of hs busness, nventory, f tures, or accounts recevabe.
The ta payer was to contnue hs actvtes n the handng of other
foregn products.
Secton 117(a) of the Interna Revenue Code of 1939 does not e -
cude from the term capta assets a contract of the type heren con-
cerned, whch s sod by a ta payer who s not, for edera ncome ta
purposes, a deaer n such contracts.
Secton (b) of the Interna Revenue Code of 1939 provdes n part
that n the case of casua saes of persona property f the seng prce
e ceeds 1,000, and the nta payments receved n cash or other prop-
erty, other than evdences of ndebtedness of the purchaser, durng the
ta abe perod of the sae do not e ceed 30 percent of the seng prce,
the gan reazed from such sae may be reported on the nstament
bass.
Secton 39. -1 of Reguatons 118 provdes n part that under the
nstament bass there s reportabe as ncome n any ta abe year ony
that proporton of the nstament payments actuay receved n that
year whch the gross proft reazed or to be reazed when payment s
competed bears to the tota contract prce.
In the nstant case, the seng prce s n e cess of 1,000, the nta
payment s ess than 30 percent of the seng prce, and the assets
nave been hed for a perod of more than 6 months.
In vew of the foregong, t s hed that (1) the sae of a of a ta -
payer s rghts and nterest n a dstrbutorshp agreement wth a for-
egn manufacturer consttutes the sae of a capta asset wthn the
purvew of secton 117(a) of the Interna Revenue Code of 1939 and
the gan reazed s ta abe as a ong-term capta gan, and (2) such
sae quafes as a casua sae of personaty on the nstament bass
wthn the purvew of secton (b) of the 1939 Code, where ess than
SO percent of the sae prce s receved n the year of the sae.
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Regs. 118, 39.117(h)-.) 372
Reguatons 118, Secton 39.117(b)-1: Deduc-
ton for ong-term capta gans.
Gan or oss reazed by an estate upon the redempton of stock of a
corporaton. See Rev. Ru. 55-91, page 36 .
S CTION 117(f). C PIT L G INS ND LOSS S:
R TIR M NT O ONDS, TC.
Redempton of Natona Savngs onds ssued by the Unted States
of Me co. See Rev. Ru. 55-135, page 213.
cess of the amount receved over the prce pad upon retrement
of bonds. See Rev. Ru. 55-136, page 213.
S CTION 117(h). C PIT L G INS ND LOSS S:
D T RMIN TION O P RIOD OR W IC LD
Reguatons 118, Secton 39.17(h)-: Deter- Rev. Ru. 55-68
mnaton of perod for whch capta assets
are hed.
partnershp s dssoved and ts busness s converted nto a soe
propretorshp where one of the partners purchases the partnershp
nterests of a of the other partners. See Nathan um et a. v. Com-
mssoner, 5 T. C. 702. Where a ta payer purchases the partnershp
nterests of a the other partners n a partnershp of whch he s
a member he becomes the owner of the assets, by purchase as respects
the fractona nterest attrbutabe to the purchased partnershp n-
terests, and, as respects the fracton attrbutabe to hs own partner-
shp nterest, by qudaton of hs partnershp nterest through an
n knd dstrbuton whch s an e change wthn the meanng of sec-
ton 117(h) (1) of the Interna Revenue Code of 1939. ccordngy,
snce n such case the bases of the dstrbuted assets attrbutabe
to hs partnershp nterest are determned wth reference to secton
113(a) (13) of the Code, the ta payer sha compute the hodng
perod for such property receved n qudaton whch s attrbutabe
to hs partnershp nterest, from the tme he acqured hs partnershp
nterest. Wth respect to the assets attrbutabe to partnershp n-
terests whch he acqured by purchase from the other partners, the
hodng perod of such assets begns from the date on whch such
partnershp nterests were purchased. George . Thorney et u . v.
Commssoner, 1 7 ed. (2d) 16, and dam esser r. v. Unted
States, 12 ed. (2d) 152.
Reguatons 118, Secton 39.17(h)-: Determ- Rev. Ru. 55-352
naton of perod for whch capta assets
are hed.
or the purposes of secton 117(h) of the Interna Revenue Code of
1939 reatng to the determnaton of the perod for whch property
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373 . Regs. 118, 39.1 I7(|)-I.
s hed, the hodng perod of tmber, acqured by a corporaton
(transferee) n a nonta abe e change under secton 112(b) (5) of the
Code and subsequenty cut by such corporaton under the eectve
treatment accorded the cuttng of tmber under secton 117(k)()
of the Code, ncudes the perod durng whch such tmber was hed
by the transferor. Compare G. C. M. 25301, C. . 19 7-2, 83.
Reguatons 118, Secton 39.117(h)-: Deter-
mnaton of perod for whch capta assets
are hed.
The hodng perod of securtes acqured by a partnershp for a
member thereof. See Rev. Ru. 55-39, page 03.
S CTION 117(). C PIT L G INS ND LOSS S: G INS
ND LOSS S ROM IN OLUNT RY CON RSIONS ND
ROM T S L OR C NG O C RT IN PROP-
RTY US D IN T TR D OR USIN SS
Reguatons 118, Secton 39.117 (|)-: Gans Rev. Ru. 55-295
and osses from nvountary conversons
and from the sae or e change of certan
property ustd n the trade or busness.
or edera ncome ta purposes, the rghts to water, under-
yng and owned by and used n the ta payer s trade or busness,
consttute an nterest n rea property. Where the underyng
water s used n ta payer s trade or busness and hed n e cess of
6 months t quates as property used n trade or busness wthn
the meanng of secton 117 (|) of the Interna Revenue Code of 1S39
and any gan or oss on the sae of such water rghts s sub|ect to
the treatment provded for n that secton.
dvce has been requested whether, for edera ncome ta pur-
poses, certan Water rghts underyng and owned by and used to-
gether wth the underyng water n the trade or busness of the ta -
payer consttute an nterest n rea property wthn the meanng of
acton 7(|) of the Interna Revenue Code of 1939 and are sub|ect to
t:e treatment provded for n that secton.
Ta payer owns n fee 500a acres of and hed for more than 6 months
whch s used n the farmng operatons of the ta payer. The ta -
payer sod 50a acres of perpetua water rghts underyng such prop-
erty by deed at a prce of 2a doars per acre. Immedatey, pror to
sae ta payer used water underyng such 50 acres for rrgaton pur-
poses n connecton wth hs farmng operatons. The deed provdes
that the ta payer n consderaton for a specfed sum does grant, se
and convey to the purchasers a of the water rghts n, to and under
the and as descrbed n sad deed together wth the rght of ngress
and egress for the purpose of e porng, prospectng, drng for, pro-
ducng and transportng water.
The grantee aso acqures the rght to construct, mantan and oper-
ate the necessary water wes, pumpng pant, water coectng and
fow ppe, both above and beow the surface, the necessary commun-
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Regs. 118, 39.120-1. m 37
caton and contro crcuts, together wth the necessary eectrc power
ne and other eectrc factes for furnshng power to the pumps and
an easement over sad and for the purpose of constructon, nstang,
operatng and mantanng the factes.
The grantor reserves the rght to use ony so much of the water n,
under and upon the premses as may be necessary to dr for and pro-
duce o, gas and other mneras, and further reserves the rght to use
such water for the purpose of norma farmng and ranchng oper-
atons and domestc use but not for rrgaton purposes.
Secton 7(|) of the Interna Revenue Code or 1939 provdes n
effect, that gans and osses from transactons covered by that secton
sha be treated as gans and osses from the sae or e change of capta
assets hed for more than 6 months f the aggregate of such gans e -
ceeds the aggregate of such osses. If the aggregate of the gans does
not e ceed the aggregate of such osses, such gans and osses sha not
be treated as gans and osses from the sae or e change of capta
assets.
The same prncpes can be apped n the nstant cases as were
apped n I. T. 3693, C. . 19 , 272, wheren t s hed that the
nterest of a essee n o and gas consttutes an nterest n rea prop-
erty for edera ncome ta purposes.
ccordngy, for edera ncome ta purposes, the water rghts
consttute an nterest n rea property. Where the underyng water
s used the ta payer s trade or busness and hed n e cess of 6
months t quafes as property used n trade or busness as defned n
secton 7(|) of the Interna Revenue Code of 1939, and any gan
or oss on the sae of such water rghts s sub|ect to the treatment pro-
vded for n that secton.
S CTION 119.-1NCOM ROM SOURC S WIT IN
UNIT D ST T S
Reguatons 118, Secton 39.119(a)- : Rentas
and royates.
Payments for the rght to use manufacturng know-how. See
Rev. Ru. 55-17, page 388.
S CTION 120.-UNLIM1T D D DUCTION OR C RI-
T L ND OT R CONTRI UTIONS
Reguatons 118, Secton 39.120-1: Unmted Rev. Ru. 55-255
deductons for chartabe and other con-
trbutons.
If an eecton s made on tbe fna edera Income ta return of
a partcuar year to have an overpayment of ncome ta for that
year credted aganst the estmated ta for the succeedng year, and
such overpayment Is actuay camed and aowed for the succeed-
ng year, the amount of such credt w consttute ncome ta pad
n the succeedng year wthn the meanng of secton 120 of the
Interna Revenue Code of 1039 to the e tent that the amount pad as
estmated ta durng such succeedng ta abe year does not e ceed
the ta abty for tnt year.
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375 Regs. 118, 30.120-1.
dvce has been requested whether a credt by reason of an eecton
made on a fna ncome ta return to have an overpayment credted
aganst estmated ta for the succeedng year w consttute ncome
ta pad n such succeedng year wthn the meanng of secton 120
of the Interna Revenue Code of 1939.
The ta payer made contrbutons and gfts as descrbed n secton
23(o) of the Code -whch, when added to the ncome ta pad by hm,
qua 90 percent of hs net ncome for each of the ast 9 years. Durng
the year 1953, he pad ncome ta n e cess of hs ta abty. e
eected on hs fna ncome ta return to have the overpayment credted
aganst hs estmated ta for the succeedng year (195 ). The amount
othe overpayment, whch was camed and aowed for the succeedng
year, does not e ceed hs succeedng year s ncome ta abty. If
the credt aganst hs estmated ta for the year 195 consttutes ncome
ta pad wthn the meanng of secton 120 of the Code, he may be n
a poston to quafy for the unmted deducton for chartabe con-
trbutons.
Under the crcumstances specfed n secton 120 of the Code, the
20 percent mtaton mposed by secton 23(o) of the Code on the
deducton for chartabe and other contrbutons s not appcabe.
Wthn the meanng of secton 120 of the Code, n the case of a ta abe
year begnnng after December 31, 19 2, there sha be ncuded n
addton to the ncome, war-profts, and e cess-profts ta es pad dur-
ng such ta abe year n respect of precedng ta abe years, the amount
of ncome ta pad durng such ta abe year n respect of such ta -
abe year. or e ampe, there sha be ncuded the amount pad as
estmated ta durng the ta abe year, to the e tent such amount
does not e ceed the ta for such ta abe year. See eguatons 118,
secton 39.120-1 (b)(2).
Secton 322(a) (3) of the Code provdes n part as foows:
The Commssoner Is authorzed to prescrbe, wth the approva of the Secre-
tary, reguatons provdng for the credtng aganst the estmated ta for any
ta abe year of the amount determned by the ta payer or the Commssoner to
be an overpayment of the ta for a precedng ta abe year.
The provsons of eguatons 118, secton 39.322-3(a) (3), nter-
pretng the above secton of the Code further add that f the ta payer
eects to have a or part of the overpayment shown by hs return
apped to hs estmated ta for hs succeedng ta abe year, no nterest
sha be aowed on such porton of the overpayment credted and such
amount sha be apped as a payment on account of the estmated
ta for such year or the nstaments thereof.
ccordngy, t s hed that f an eecton s made on the fna ed-
era ncome ta return of a partcuar year to have an overpayment of
ncome ta for that year credted aganst the estmated ta for the
succeedng year, and such overpayment s actuay camed and aowed
for the succeedng year, the amount of such credt w consttute n-
come ta pad n the succeedng year wthn the meanng of secton
120 of the Code to the e tent that the amount pad as estmated ta
durng such succeedng ta abe year does not e ceed the ta abty
for that year.
16 050 O 25
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Regs. I, 29.122- . 376
Reguatons 118, Secton 39.120-1: Unmted
deducton for chartabe and other contrbu-
tons.
Defnton of the provson ncome ta pad. See Rev. Ru. 55-
308, page 30.
S CTION 122. N T OP R TING LOSS D DUCTION
Reguaton 111, Secton 29.122-1: Computa- Ct. D. 1785
ton of net operatng oss carryovers and
net operatng oss carrybacks.
C SS PRO ITS T INT RN L R NU COD D CISION O
SL M COURT
1. Net Operatng Loss d|ustment fob cess Profts Ta es
Pad or ccrued.
n accrua bass ta payer cannot, n computng ts net operatng
oss for 10 0 to be carred back as a deducton aganst 1 ncome,
ncrease tnt o eratng oss by tbe amount of e cess profts ta es
pad n 10 0 but whch had accrued n 19 5. Secton 12 2(d) (6) of
the Interna Revenue Code of 1939 does not grant a ta payer an
opton to take deductons on a bass that s nconsstent wth the
method of accountng whch t empoys.
2. udgment Reversed.
udgment of the Unted States Court of Cams, 108 . Supp. 109,
110 . Supp. 000, reversed.
Supreme Court of the Unted States
The Unted States, pettoner, v. Oympc Rado and Teevson, Inc.
On wrt of certorar to the Unted States Court of Cams
May 23,1953
opnon
Mr. ustce Dougas devered the opnon of the Court.
Ths sut was brought n the Court of Cams for a ta refund. The ta payer,
a New York corporaton, kept ts books and accounts on the accrua bass and fed
ts federa ncome ta returns on the same bass, usng the caendar year. The
ta payer had a net operatng oss of 310,872.00 for 19 0. Ths oss was carred
back and set off aganst the ta payer s e cess profts net ncome for 19 and ts
e cess profts ta for 19 was ad|usted accordngy. That carryback was
authorzed by the Interna Revenue Code of 1939, secton 122 and t Is not n
controversy here.
The ta payer reported an e cess profts ta abty of 3 6,0 3.22 for 19 5.
In 19 0 the ta payer pad 263,272.80 n e cess profts ta es for 19 5. It con-
tends that that amount, pad n 19 0, shoud have been added to the net operat-
ng oss of 310,872.60 for that year and the sum of those fgures, nstead of
310,872.60, shoud have been carred back to 19 as a net operatng oss. If
that shoud have been done, the Unted States woud now owe the ta payer
the refund camed.
The Court of Cams, by a dvded vote, sustaned the ta payer s conten-
ton and hed that n computng ts net operatng oss for 19 6, the ta payer
was entted to ncude the amount of e cess profts ta pad n 19 6 on account
of ts 19 5 return. udgment was accordngy entered for the ta payer. 108 .
Supp. 109, 110 . Supp. 600. The case s here on a petton for a wrt of cer-
torar whch we granted (3 8 U. S. 808), because of a confct between the
decson beow and Lrwyt Corp. v. Commssoner, 215 . 2d 518, decded by the
Court of ppeas for the Second Crcut
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377 Regs. I, 29.122- .
Secton 23 (s) of the Interna Revenue Code provdes that n computng net
Income the net operatng oss deducton computed under secton 122 sha be
aowed as a deducton. Secton 122, as appcabe here, provdes a compcated
formua for carryng net operatng osses back for 2 precedng ta abe years
ad over nto the 2 succeedng ta abe years, thus takng for the mted purpose
of secton 122 a 5-year perod as the accountng unt. The part of secton 122
of whch the ta payer seeks to take advantage s (b) (1) reatng to the carry-
tack. y the e press terms of secton 122(b) (1) the carryback provsons
are sub|ect to the mtatons contaned n secton 122 (d)(6), whch provdes
n part, There sha be aowed as a deducton the amount of ta mposed by
Subchapter of Chapter 2 pad or accrued wthn the ta abe year.
Subchapter of Chapter 2 dentfes the ta whch may be used as a deducton
s the cess Profts Ta . ut f t Is to be used as a deducton, the ta must
ate been pad or accrued wthn the ta abe year.
The controversy here revoves around the meanng of pad or accrued. The
rears 19 and 19 5 were years of proft for the ta payer. The years 19 6 and
YU were years of oss. The ta payer kept ts books and fed ts returns on
the accrua bass of accountng. Its 19 5 e cess profts ta therefore accrued
n 19 5, though t was pad n 19 6. Yet the argument whch prevaed beow
s that the ta pad n 19 6 on account of the abty for 19 5 coud be used
under secton 122(d) (6) as a net operatng oss for 19 6. We take the other
Mew and concude that secton 122(d) (6) does not grant a ta payer an opton
to take deductons on a bass that s nconsstent wth the method of accountng
vheh t empoys.
Secton 1 states the genera rue that net ncome sha be computed n
accordance wth the method of accountng reguary empoyed n keepng the
books of the ta payer.
Secton 3 provdes that deductons and credts may be taken for the ta abe
year n whch pad or accrued or pad or ncurred, dependent upon the method
of accountng upon the bass of whch the net ncome s computed, uness n
order to ceary refect the ncome the deductons or credts shoud be taken
a. of a dfferent perod.
Secton 8 provdes, When used n ths chapter (c) The
terms Pad or ccrued sha be construed accordng to the method
of accountng upon the bass of whch the net ncome s computed under ths
Part. Ths provson of secton 8 woud tsef seem to be concusve of the ques-
ton snce secton 122 s n ths chapter to use the anguage of secton 8. nd
secton 8, together wth secton 1 and secton 3, seem to ndcate that the words
d or accrued have ony one meanng throughout the chapter, not the
changeabe meanng whch the ta payer seeks to gve them.
We dea here wth a deducton whch one obtans not as of rght, but as of
race. Deputy v. DuPont, 308 U. S. 88, 93 Ct. D. 1 35, C. . 19 0-1, 118 .
The ta payer has the burden to show that t s wthn the provson aowng
the deducton. ut the effort here made, f successfu, woud cause pad or
accrued, as used n secton 122(d) (6), to mean somethng dfferent than t does
n other sectons of the same chapter and that woud fy n the face of the
e press command of secton 8.
The Court of Cams recognzed the force of ths anayss, but concuded that
Congress coud not have meant what t sad because, f so, ths partcuar carry-
back provson woud have tte appcaton. rst, most corporatons are on
the accrua not the cash bass. Second, f an accrua ta payer s mted In ts
deductons to e cess profts ta es accrued wthn the ta abe year, the pro-
vson has tte vaue snce there s rarey a case when a ta payer woud be
abe for any e cess profts ta n a year n whch t had sustaned a net operat-
ng oss . 108 . Supp. 111. Ths ta payer argues the nequty of the
resuts whch woud foow from our constructon of the Code. ut as we have
sad before, genera equtabe consderatons do not contro the queston of
what deductons are permssbe. Deputy v. DuPont, supra, 93. It may be
that Congress granted ess than some thought or ess than was orgnay n-
Secton 122(b)(1) a entted Net operatng oss carryback and reads as foows:
If for any ta abe year begnnng after December 31, 19 1, the ta payer has a net
deratng oss, such net operatng oss sha be a net operatng oss carryback for each of
the 2 precedng ta abe years, e cept that the carryback In the case of the 1st precedng
abe year sha be the e cess, If any, of the amount of such net operatng oss over the
a t Income for the 2nd precedng ta abe year computed ( ) wth the e ceptons, addtons,
nd mtaton provded n subsecton (d) (1), (2). ( t. and (6). and ( ) by determnng
e net operatng oss deducton for such second precedng ta abe year wthout regard to
nch net operatng oss.
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Regs. I, 29.122- .) 378
tended. We can ony take the Code as we fnd It and gve It as great an Interna
symmetry and consstency as Its words permt We woud not be fathfu to the
statutory scheme, as reveaed by the words empoyed, If we gave pad or
accrued a dfferent meanng for the purposes of secton 122(d) (6) than t has
n the other parts of the same chapter.
Our constructon s n harmony wth the genera rue that a ta payer on an
accrua bass must take deductons n the year of accrua. See Securty s
Co. v. CommUsoncr, 321 U. 8. 281 Ct. D. 1603, C. . 19 , 526.
The fact that the constructon we fee compeed to make favors the ta payer
on the cash bass and dscrmnates aganst the ta payer on the accrua bass
may suggest that changes n the aw are desrabe. ut f they are to be made,
Congress must make them.
Reversed.
Mr. ustce aran took no part In the consderaton or decson of ths case.
Reguatons 111, Secton 29.122- : Compu- Ct D. 1786
taton of net operatng oss carryovers
and net operatng oss carrybacks.
C SS PRO ITS T INT RN L. R NU COD D CISION O
supreme court
1. Net O kratnq Loss d|ustment fob cess Profts Ta es
Pad or ccrued.
Under Sectons 122(a) and 122(d)(6) of the Interna Revenue
Code of 1939, n determnng the amount of the net operatng oss
for 19 6 to be carred back as a deducton aganst 19 ncome, a
ta payer on the accrua bass cannot ncrease that operatng oss
by the amount of e cess profts ta es whch were pad n 19 6 but
whch had accrued n 19 5. Unted States v. Oympc Rado and
Teevson, Inc. (Sup. Ct. Op. 5/23/55) foowed.
Under Sectons 122(b) (1) and 122(d) (0) of the Interna Revenue
Code of 1939, n determnng the amount of the net operatng oss
for 19 6 to be carred back as a deducton aganst 19 5 ncome, the
e cess profts ta to be offset aganst 19 net ncome s the amount
whch ta payer reported on ts return where such amount s arrved
at by proper appcaton of recognzed accountng prncpes on the
accrua bass, and not the amount utmatey found to be due.
2. Decson ffrmed n Part and Reversed n Part.
Decson of the Unted States Court of ppeas for the Second
Crcut, 215 . 2d 518, affrmed In part and reversed In part
Supreme Court of the Unted States
Lcuyt Corporaton (now known as Lewyt Manufacturng Corporaton),
pettoner, v. Commssoner of Interna Revenue
On wrt of certorar to the Unted States Court of ppeas for the Second Crcut
May 23,1955
opnon
Mr. ustce Dougas devered the opnon of the Court.
Ts case s a companon case to Unted States v. Oympc Rado Teevson,
Inc., |ust decded. The man pont n the 2 cases s the same whether a
ta payer on the accrua bass can, n computng ts net operatng oss for 1
year, deduct the amount of e cess profts ta es whch were pad n that year
but had accrued u an earer year.
The years 19 and 19 5 were years of proft for the ta payer. or the years
19 0 and 19 7, the ta payer ncurred net operatng osses whch were aowed
by the Commssoner as carryback deductons to the years 19 and 19 5. The
ta payer sought to augment Its net operatng oss for 19 6 by the amount of
e cess profts ta es whch t pad n 19 6 on account of Its 19 6 e cess profts
ta abty. The Commssoner dsaowed the deducton and the Ta Coort
sustaned the Commssoner. 18 T. C. 12 5. The Court of ppeas affrmed.
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379 Regs 111, 29.122- .
215 . 2d 518. The case Is here on a petton for certorar whch we granted
(3 8 U. S. 895) to resove the confct wth the Oympc Rado case. Our vews,
as e pressed n the atter case, concde wth those of the Court of ppeas.
ccordngy, we affrm that part of the |udgment.
Tbere s present n ths case a pont not nvoved n the Oympc Rado case.
The queston s whether the e cess profts ta that may be offset aganst 19
net ncome s the amount of e cess profts ta reported for the year n queston
or the amount utmatey found to be due. The ta payer cams It Is the former
the Commssoner, the atter.
The queston centers on secton 122(b)(1) and secton 122(d)(6). s we
have seen n the Oympc Rado case, secton 122(b)(1) drects that the net
operatng oss for a gven year be carred back to the two precedng ta abe
years. nd secton 122(d)(6) aows as a deducton the amount of ta
mposed oy Subchapter of Chapter 2 I. e., the e cess profts ta pad or
accrued wthn the ta abe year . (Itacs added.)
The ta payer s net ncome for 19 , as shown by ts return, was 827,852.99
and. as fnay determned, was 58 ,866.81. The e cess profts ta due accordng
to ts 19 return was 625,561.59. The Commssoner, after aowng as a
deducton a net operatng oss carryback of 16 ,326.38 arsng n 19 6, and
makng other ad|ustments, utmatey determned the ta payer s e cess profts
ta abty for 19 to be 280,5 0.33. The Commssoner computed the net
ncome for 19 at 30 ,326. 8, that s, 58 ,866.81 mnus 280,5 0.33. Snce
the net operatng oss of 16 ,326.38 was ess than 30 ,326. 8. there was no
oss to be carred back to 19 5, as secton 122(b) (1) provdes that the
carryback n the case of the frst precedng ta abe year sha be the e cess,
f any, of the amount of such net operatng oss over the net ncome for the
second precedng ta abe year .
The ta payer, however, contends that the e cess profts ta accrued n 19
s the ta shown on ts return for that year, vz., 625,561.59. If ths arger
amount s the correct fgure, then the deducton aowed aganst 19 ncome
w be so great as to eave a carryback whch can be deducted aganst 19 5
ncome.
The controversy turns on the meanng of the cause In secton 122(d)(6)
whch reads, the amount of ta mposed by Subchapter of Chapter 2
accrued wthn the ta abe year . The Commssoner contends that the
ta mposed s the ta utmatey determned to be due. The argument s
that the ta payer -havng once got back, through credt or refund, the dffer-
ence between the amount of the ta accrued In 19 and the amount fnay
determned to be due, no doube beneft shoud be nferred. The doube beneft,
t s argued, shoud certany be dened when the fgure upon whch t s based
has no economc reaty.
ut the rue that genera equtabe consderatons do not contro the measure
of deductons or ta benefts cuts both ways. It Is as appcabe to the Government
as to the ta payer. Congress may be strct or avsh n ts aowance of deduc-
tons or ta benefts. The formua t wrtes may be arbtrary and harsh n
ts appcatons. ut where the beneft camed by the ta payer s fary wthn
the statutory anguage and the constructon sought s n harmony wth the
statute as an organc whoe, the benefts w not be wthhed from the ta payer
though they represent an une pected wndfa. See uen v. Wsconsn, 2 0
U. S. 625, 630.
When Congress wrote the word Imposed nto secton 122(d)(6), t mght
have used t n one of two dfferent senses ether to dentfy the ta or to
defne the amount of the ta that s to be eved and coected. We thnk
that Congress used mposed n the former sense.
In the frst pace, the deducton aowed by secton 122(d) (6) s not the ta
Imposed by Subchapter of Chapter 2. It s the amount of ta mposed by
Subchapter of Chapter 2 accrued wthn the ta abe year. The
word mposed when used n con|uncton wth accrued makes toeraby cear
that mposed merey dentfes or descrbes the ta that accrued. That s
Secton 122(b)(1) provdes:
1/ for any ta abe year begnnng after December 31, 19 1, the ta payer has a net
t ratng Ion , such net operatng oss sha be a net operatng oss carryback for each of
te 2 precedng ta abe years, e cept that the carryback In the case of the 1st precedng
ta abe year sha be the e cess, If any, of the amount of such net operatng oss oyer the
et Income for the 2nd precedng ta abe year computed ( ) wth the e ceptons, addtons,
and mtatons provded n subsecton (d) (1), (2), ( ). and (6), and ( ) by determnng
the net operatng oss deducton for such 2nd precedng ta abe year wthout regard to suco
set operatng oss.
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Regs. I, 20.122- . 380
to say, the sentence as a whoe ndcates that Imposed s used merey by way
of reference. It seems cear that Congress had that understandng. The
Senate nance Commttee reported:
Secton 122 of the Code, reatng to computaton of the net operatng
oss deducton aowed by secton 23(s) of the Code, s amended so as to
aow the e cess profts ta pad or accrued wthn ta abe years (sub|ect
to certan rues) as a deducton In computng net operatng oss for, and
net operatng oss carryover and carryback from, such ta abe years.
S. Rep. No. 1031, 77th Cong., 2d Sess., p. 67. nd see . . Rep. No. 2333,
77th Cong., 2d Sess., p. 65.
That ndcates that the test of deductbty under secton 122(d)(6) Is
whether the ta accrued wthn the ta abe year.
Secondy, the genera secton deang wth deductons, secton 23, aows deduc-
tons for ta es pad or accrued durng the ta abe year, wth certan specfed
e ceptons. Secton 23(c). Some of the e cepted ta es are dentfed by we-
known names, e. g., federa ncome ta es, estate, nhertance, egacy, successon,
and gft ta es. See secton 23(c)(1)( ), (D). Other ta es e cepted are
dentfed by reference to the ta es Imposed by certan provsons of the
aw. Thus secton 23(c)(1)( ) e cepts war-profts and e cess profts ta es
mposed by Subchapter of Chapter 2. The appcabe Treasury
Reguaton Indcates that the word mposed Identfes the ta . It provdes
Sub|ect to the e cepton stated n ths secton ta es Imposed by
the Unted States are deductbe from gross ncome for the year
n whch pad or accrued. 26 C R secton 39.23(e)-.
Secton 23 s especay reevant here, snce the anguage of secton 122(d) (6)
was taken amost verbatm from secton 23. That secton as amended by tbe
Revenue ct of 19 1 had provded that. In computng net ncome, a deducton for
ta es pad or accrued wthn the ta abe year shoud be aowed.
s respects the e cess profts ta , secton 23(c) (2) provded:
or the purposes of ths subsecton, In the case of the e cess profts ta
mposed by Subchapter of Chapter 2
( ) The deducton sha be mted to the ta mposed for the ta abe
year . (Itacs added.)
It woud seem that ( ) woud have mted the secton 122(d) (6) ad|ustment
to the ta fnay pad. ut ( ) was omtted from secton 122(d)(6). The
word mposed as used In the quanttatve sense was dropped, whe the word
mposed as used to dentfy the ta was retaned.
nay, the ta that accrued wthn a gven year s not the ta fnay
determned to be due but the ta before utmate ad|ustments are made. That
s eementary n ta aw. See Securty our Ms Co. v. Commssoner, 321
U. S. 281, 28 Ct D. 1(103, C. . 19 , 526 . It woud seem therefore that tbe
concept accrued embodes the annua accountng prncpe. If, n case of
a ta payer on an accrua bass, events after the ta abe year are taken nto
account, the word accrued woud be effectvey read out of secton 122(d) (C)
or gven a vared meanng, contrary to our rung n the Oympc Rado case.
It s true that the computatons under secton 122 are desgned to spread
osses over a 5-year perod. ut we are concerned wth a technca concept
that s beng used ns the bass of the formua for that reaocaton. We fnd no
|ustfcaton for takng accrued as used n secton 122(d)(6) to mean one
thng n the settng of the Oympc Rado case and another n ths stuaton.
Our concuson s n accord wth a ne of reated decsons. The whoe ta
scheme has been posted on the bass that the duy to pay s wthout regard to
the deducton made avaabe by the carryback. See Mannng v. Seeey Tube
o Co., - 8 U. S. 561, 5(17 Ct. D. 1729, C. . 1050-1 113 . Ony recenty we
apped that prncpe to the e cess profts ta . In Unted States v. oppers Co.,
3 8 U. S. 25 Ct. 1). 1781, page 35, ths uetn , we hed that these ta es were
payabe n fu the year when they were due and that nterest was payabe on
the amounts so due, even though utmatey portons of the ta es were abated.
In short, the amount of ta accrued wthn the ta abe year under secton
122(d)(6) Is to be determned n accord wth the norma accountng concepts
reevant to the accrua bass. That amount s not. of course, to be ascertaned
soey by reference to the fgure set forth n the ta payer s return, for that
fgure may be erroneousy computed on the accrua bass. ut when an amount
s arrved at by proper appcaton of recognzed accountng prncpes on tbe
accrua bass, the tost of secton 122(d)(6) has been met. vents and trans-
actons of ater years, rreevant to a determnaton of ncome on the accrua
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381 Regs. 118, 39.125(a)- .
tads, do not warrant ateraton of the fgure computed under secton 122(d) (6)
to the year n queston.
ffrmed n part and reversed n part.
r. 3usUce aran took no part n the consderaton or decson of ths case.
S CTION 12 (b). MORTIZ TION D DUCTION: L C-
TION O MORTIZ TION
Reguatons 118, Secton 39.12 (b)-: Rev. Ru. 55-223
ecton of amortzaton.
Where an emergency facty, as defned In secton 12 (d) of the
Interna Revenue Code of 1939, conssts of two unts, the use of
one of the unts, before competon of constructon work common
to both unts, on an emergency bass for purposes other than those
for whch the facty was certfed does not operate to consttute the
unt n use a separate emergency facty.
dvce has been requested whether the use of one uncompeted
unt of a two-unt emergency facty, as defned n secton 12 (d)
(1) of the Interna Revenue Code of 1939, on an emergency bass
for purposes other than those for whch the facty was certfed
w operate to consttute the unt n use a separate emergency facty.
The facty covered by the certfcate of necessty conssts of a
power house budng, two generatng unts, boer pant equpment,
fue handng equpment, and other equpment essenta to the gen-
eraton of eectrc power by the two unts. substanta porton
of the constructon work s common to both generatng unts.
In December 1953, the frst generatng unt was paced n operaton
on an emergency bass, wthout a parts and contros thereof beng
competed, to furnsh emergency eectrc power to meet requrements
resutng from the nfu of mported workers engaged n construc-
ton of another pro|ect and to furnsh constructon power to the
pro|ect of whch ths unt was a part On anuary 1, 195 , there
was work uncompeted common to both unts. The entre facty
was competed n une 195 . The returns of the ta payer are fed
on a caendar year bass.
ased on the foregong facts, t s hed that the estabshment of
emergency power from one of the generatng unts before competon
for purposes other than those certfed, as stated heren, does not
operate to consttute that generatng unt a separate emergency fa-
cty competed pror to anuary 1, 195 , wthn the meanng of
secton 12 of the Code of 1939.
S CTION 125 (a). MORTIZ L OND PR MIUM:
G N R L RUL
bgt| tons 118, Secton 39.125(a)-: In Rev. Ru. 55-353
genera.
Where bonds of the type defned n secton 125(d) of the Interna
Revenue Code of 1939, the nterest from whch s whoy ta abe, were
sod by a ta payer at a proft and mmedatey thereafter the same
knd of bonds were purchased at a premum, the ta payer may eect,
wth respect to the bonds so purchased, to make an ad|ustment
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Regs. 118, 39.130-1.) 382
to the bases of the bonds for the amortzabe bond premum.
The amount of the amortzaton attrbutabe to the ta abe year
consttutes an aowabe deducton from gross ncome under secton
39.125 (a)-(b) (1) of Reguatons 118.
S CTION 127(a). W R LOSS S: C S S IN W IC
LOSS D M D SUST IN D, ND TIM D M D
SUST IN D
Reguatons 111, Secton 29.127(a)-3: Prop-
erty n enemy countres and enemy con-
troed areas.
War osses sustaned on property wthn or under the contro of a
country at war wth the Unted States. See Rev. Ru. 55-239, beow.
Reguatons 111, Secton 29.127(a)- : Invest- Rev. Ru. 55-230
ments referabe to destroyed or sezed prop-
erty.
( so Secton 29.127(a)-3.)
ustran I. . . 7 percent bonds and Dosave kten Raroad stock
hed by a ta payer on December 11, 19 1, are propertes whch are
consdered as havng been destroyed or sezed on that date (the date
war wth Germany was decared by the Unted States) wthn the
meanng of secton 127 of the Interna Revenue Code of 1939, reatng
to war osses, and the provsons of that secton are appcabe n
respect of such osses, notwthstandng the fact that the securtes were
hed on that date n a neutra country n the name of a nomnee of the
true owner.
S CTION 130. LIMIT TION ON D DUCTIONS LLOW-
L TO INDI IDU LS IN C RT IN C S S
Reguatons 118, Secton 39.130-1: Lmtaton Rev. Ru. 55 120
on deductons aowabe to ndvduas n
certan cases.
or the purposes of secton 130 of the Interna Revenue Code of
1939 reatng to the mtaton on deductons aowabe to ndvduas
n certan cases, uranum e poraton or mnng ventures are consd-
ered a separate trade or busness from that of o and gas ventures, f,
as a fact, t s shown that such ventures are separatey conducted and
are not cosey reated wth each other. Compare Rev. Ru 55 121,
beow.
Reguatons 118, Secton 39.130-1: Lmtaton Rev. Ru. 55 121
on deductons aowabe to ndvduas n
certan cases.
Where severa busness actvtes emanate from a Snge com-
modty, such as o and gas or a tract of and, t does not necessary
foow that such actvtes are one busness for the purposes of
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383 (Regs. 118, 39.130-1.
secton 130 of the Interna Revenue Code of 1939 reatng to the
mtaton on deductons aowabe to ndvduas n certan cases.
Where t s shown that such busness actvtes are separatey
conducted and are not cosey nterreated wth each other they
are consdered as separate busness actvtes for the purposes of
secton 130 of the Code.
dvce has been requested whether a ta payer s gross ncome from
the o and gas busness and hs ncome from drng o and gas wes
for others (contract drng), whether from hs ndvdua |ont
venture or partnershp operaton may, under the foowng crcum-
stances, be consdered as separate busnesses for the purposes of sec-
ton 130 of the Interna Revenue Code of 1939. dvce has been re-
quested whether busness actvtes emanatng from a snge parce of
and, such as the sae of standng tmber, grantng of eases for o and
gas mneras, operaton of producng o and gas wes and vestock
and farmng operatons may be consdered as separate busness actv-
tes for the purpose of secton 130 of the Code.
Ta payer, an o and gas producer, s a partner n a busness en-
gaged n contract drng for others. e s aso engaged, n hs own
ndvdua capacty, n seng o and gas. ach organzaton s op-
eratons s separatey conducted. bout 75 percent of the ta payer s
gross ncome s from the partnershp s contract drng operatons
for others, appro matey 2 percent of whch was done for the ta -
payer ndvduay, and the remander of hs gross ncome s prmary
from o and gas saes made on hs own account.
The provsons of secton 130 of the Code appy to a trade or bus-
ness carred on by an ndvdua. The actvty of deveopng o and
gas propertes and contract drng actvty are reated n the sense
that they dea wth the same commodtes o and gas. Standng
aone, ths fact does not make dssmar busness actvtes one bus-
ness for the purpose of secton 130 of the Code. Inherenty, the
actvty of contract drng s dfferent from the actvty of deveop-
ng o and gas propertes. The frst s a servce actvty n whch
the ncome from the busness usuay bears no reaton to the mn-
era producton from propertes dred. The second s a mnng ac-
tvty n whch the ncome s drecty proportona to mnera
producton.
The same woud be true wth respect to other busness actvtes
emanatng from a snge source. or e ampe, a ta payer owns a
parce of and and derves ncome therefrom under a contract for the
sae of standng tmber whereby the purchaser cuts and haus the tm-
ber. The ta payer aso derves ncome from grantng of eases to o
and gas mneras on such property as we as from producng o and
gas wes whch he operates on a porton of the property. In addton
he receves ncome from vestock and farmng operatons whch he
conducts on the property. ach of the operatons s separatey con-
ducted and s reated ony n the sense that a of them emanate from
the e potaton of a snge pece of property beongng to the ta payer.
owever, the actvtes of contract drng and of deveopng o
and gas propertes are not so unreated that they may never be carred
on so as to consttute one busness for the purpose of secton 130 of
the Code. Nor are the saes of standng tmber, grantng of eases to
o and gas mneras, operaton of producng o and gas wes, or ve-
stock and farmng operatons so unreated that two or more of such
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Regs. 118, 5 39.130 -2. 38
actvtes may never consttute one busness for the purpose of secton
130 of the Code. owever, whether such actvtes consttute one
or more than one busness depends upon whether they are n fact
operated prmary as a snge unt takng nto consderaton a pe-t-
nent factors. The same prncpes can be apped here as have been
apped n determnng whether osses n certan commodty trans-
actons were to be consdered osses ncurred n ta payer s reguar-
trade or busness or capta tems. See G. C. M. 17322, C. . -2,
151 (193G) enneth attee et a. v. Commssoner, 7 . T. .
117, acquescence, C. . 19 2-2, 2 Stewart Sk Corp. v. Comms-
soner, 9 T. C. 17 , acquescence, C. . 19 8-1,2.
In the nstant case, the partnershp actvtes of drng o and
gas wes for others have no practca reatonshp to the o and gas
producton of the ta payer ndvduay. The same s true wth re-
spect to the actvtes of seng standng tmber, grantng mnera
eases, operaton of producng o and gas wes, and vestock and
farmng a conducted on a snge parce of and by the same nd-
vdua, snce each actvty s separatey conducted and not so nter-
reated to any other actvty or actvtes so that t may be determned
that one or more of such actvtes consttute one busness.
ccordngy, where busness actvtes emanate from a snge com-
modty, such as o and gas or a tract of and, t does not necessary
foow that such actvtes are one busness for the purposes of secton
130 of the Interna Revenue Code reatng to the mtaton on de-
ductons aowabe to ndvduas n certan cases. Where t s shown
that such busness actvtes are separatey conducted and are not
cosey nterreated wth each.other, they are consdered as separate
busness actvtes for the purpose of secton 130 of the Code.
Reguatons 118, Secton 39.130-1: Lmta- Rev. Ru. 55 375
ton on deductons aowabe to ndvd-
uas n certan cases.
or the purpose of secton 130 of the Interna Revenue Code of 1939
reatng to the mtaton on deductons aowabe to ndvduas n cer-
tan cases, the short ta abe year requred to propery effect a change n
accountng perod consttutes a ta abe year. In determnng the
e cess of deductons over gross ncome from a busness under secton
130 of the Code, for the short ta abe year, the actua amount of such
e cess and not any annuazed amount sha be taken nto account n
determnng the mtaton of 50,000 descrbed n secton 130 (a) of the
Code.
S CTION 130 . MPLOY STOC OPTIONS
Reguatons 118, Secton 39.130 -2: Restrcted
stock opton.
Ownershp by empoyee of stock n corporaton grantng opton for
the purpose of appyng the ten percent ownershp rue. See Rev
Ru. 55-10 , page 6.
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385 Regs. 118, 39.131(a)- .
SUPPL M NT C CR DITS G INST T
S CTION 131(a). T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S: LLOW NC O
CR DIT
Reguatons 118, Secton 39.131(a)- : nay- Rev. Ru. 55- 1
ss of credt for ta es.
( so Secton 1 3 Reguatons 118, Secton
39.1 3-9.)
The Unted States foows the prncpe that trust ncome ds-
trbutabe to a nonresdent aen benefcary retans n hs hands
the same dentty as to source and character as the ncome possessed
n the hands of the fducary. Unted States ncome perodcay
pad to nonresdent aen fducares of a Canadan trust for ds-
trbuton to benefcares resdng n the Unted States, w be de-
ductbe by the trust and ta abe to the benefcares, and each bene-
fcary sha be entted to credt the ta wthhed whch s aocabe
to the ncome reportabe by hm, aganst the ncome ta computed
on hs return.
dvce has been requested whether Unted States ctzens or resdent
benefcares woud be entted to credt for ther pro rata share of
Unted States ncome ta , wthhed at the rate o 15 percent from
Unted States nterest and dvdend ncome, pad to the trustees of
a Canadan trust whether ncome so receved by the Unted States
resdent or ctzen benefcares of the Canadan trust, woud consttute
Canadan ncome for the purpose of computng the aowabe credt
for Canadan ta es and whether the benefcares who are ctzens of
the Unted States woud be entted to credt for the Canadan ncome
ta wthhed at the rate of 15 percent from the ncome dstrbuted to
them by the trustees.
The Canadan authortes hod that under ther aw such ncome
oses ts dentty as ncome from Unted States sources and requre
that ta be wthhed therefrom when dstrbuted by the trustees to
the benefcares n ths country whereas f the stuaton were re-
versed, the Unted States woud foow the prncpe that trust ncome
dstrbutabe to a nonresdent aen benefcary retans n hs hands
the same dentty as to source and character as the ncome possessed
n the hands of the fducary. See I. T. 3 95, C. . 19 1-2, 195.
Thus, a ctzen or resdent of Canada dervng dvdend or nterest
ncome from sources wthn Canada through a trust n the Unted
States woud not be sub|ected to Unted States ncome ta on such
ncome.
Under the provsons of secton 39.1 3-9 (b) of Reguatons 118,
ta wthhed at the source upon f ed or determnabe annua or perod-
ca ncome pad to nonresdent aen fducares s deemed to have been
pad by the persons utmatey abe for the ta upon such ncome.
ccordngy, t s hed that ncome from Unted States sources
whch s pad to the trustees of a Canadan trust, who n turn dstrbute
the ncome currenty to benefcares resdng n the Unted States,
does not ose ts character but w be deductbe by the trust and ta -
abe to the benefcares. ach benefcary s entted to credt the
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Regs. 118, 39.131 (a)-2. 386
porton of Unted States ta wthhed whch s aocabe to the ncome
reportabe by hm. Such ncome for the purpose of computng the
aowabe credt for Canadan ta es, consttutes ncome from Unted
States sources rather than Canadan sources. The actua amount of
ta pad to Canada by benefcares who are Unted States resdents
may be camed as a credt under secton 131(a) of the Interna Reve-
nue Code of 1939, sub|ect to the mtatons of Code secton 131(b).
If the entre ncome receved by a benefcary conssts of dvdends and
nterest from Unted States sources whch has passed through the
hands of a Canadan trustee, the benefcary w not be entted to
credt the Canadan ta on such ncome aganst hs Unted States ta ,
snce the numerator of the mtng fracton (whch conssts of ncome
from wthn Canada) woud be zero.
Reguatons 118, Secton 39.131 (a)-: na- Rev. Ru. 55-29G
yss of credt for ta es.
The Government of Sand raba by Roya Decree No. 17/2/28/
3321, dated November ,1950, mposed a genera ncome ta on ncomes
of ndvduas and corporatons and appes to a persons e cept those
specfcay e empted. y Roya Decree No. 17/2/28/763 , dated
December 27, 1950, the Government of Saud raba mposed an
addtona ta on every company regstered or requred to be regstered
n accordance wth the Decree for the Regstraton of Companes and
engaged n the producton of petroeum or other hydrocarbons n the
ngdom of Saud raba. ed, both the genera ncome ta and
the addtona ta mposed under the foregong Decrees come wthn
the Unted States concept of an ncome ta and are aowabe as a
credt aganst. Unted States ncome ta under the provsons of sec-
ton 131(a) of the Interna Revenue Code of 1939, sub|ect to the m-
tatons of secton 131(b) of the Code.
Reguatons 118, Secton 39.131 (a)-2: Countres Rev. Ru. 55-16
whch do or do not satsfy the smar credt
requrement.
The Unted ngdom satsfes the smar credt requrement of
secton 131(a) (3) of the Interna Revenue Code of 1939 wth respect
to ta es pad or accrued durng the ta abe year to the Unted ng-
dom. ccordngy, a rtsh natona resdng n the Unted States
s entted to a credt aganst hs Unted States ncome ta , sub|ect to
the mtatons provded n secton 131(b) of the Code, for ncome
ta es pad to the Unted ngdom provded he does not eect to use
the optona standard deducton n computng hs Unted States ta
abty.
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387 Regs. 118, 39.1 3-3.
S CTION 131(h). T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S: CR DIT OR
T S IN LI U O INCOM , TC., T S
Reguatons 118, Secton 39.131 (h)-: Meanng
of terms.
The Ryukyu Isands, whch ncude Oknawa, are a foregn country.
See Rev. Ru. 55-6, page 09.
SUPPL M NT D R TURNS ND P YM NT O T
S CTION 1 1. CONSOLID T D R TURNS
Reguatons 129, Secton 2 .1 : ccountng Rev. Ru. 55-80
perod of an affated group.
( so Secton 2 .32 Secton 7, Reguatons
118, Secton 39. 7-2.)
Where a parent corporaton has been granted permsson to change
ts accountng perod from a fsca to a caendar year bass to conform
wth that of ts subsdares, the requrements of secton 2 .1 (a) of
Reguatons 129 are consdered to have been met. consodated
return, ncudng the ncome of the common parent and of the sub-
sdares (computed as provded n secton 2 .32 of Reguatons 129),
s permtted to be fed for the short perod. ach subsdary s re-
qured to fe a separate return for the perod pror to the start of the
snort accountng perod of the parent corporaton. The consodated
net ncome s requred to be annuazed n accordance wth the prov-
sons of secton 7 (c) of the Interna Revenue Code of 1939.
S CTION 1 3. WIT OLDING O T T SOURC
Reguatons 118, Secton 39.1 3-1: Wthhodng
ta at source.
Reease of e cess ta wthhed, and e empton from, or reducton
n rate of, wthhodng of ta at source n the case of resdents of the
edera Repubc of Germany, as affected by the ncome ta conven-
ton between the Unted States and the edera Repubc of Germany.
See T.D. 6122, page 6 1.
Reguatons 118, Secton 39.1 3-2: ed or
determnabe annua or perodca ncome.
Payments for the rght to use manufacturng know-how. See
Rev. Ru. 55-17, page 388.
Reguatons 118, Secton 39.1 3-3: empton
from wthhodng.
Letters of notfcaton of e empton from wthhodng ta f y
nonresdent aens pursuant to a ta conventon. See Rev. Ru. 55-106,
page 102.
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Regs. 118 39.1 -. 388
Reguatons 118, Secton 39.1 3-9: Return of
ncome from whch ta was wthhed.
Income pad perodcay to a nonresdent aen fducary for ds-
trbuton to resdent benefcares. See Rev. Ru. 55- 1 , page 385.
S CTION 1 . P YM NT O CORPOR TION INCOM
T T SOURC
Pecuatons 118, Secton 39.1 -1: Wth- Rev. Ru. 55-17
hodng n the case of nonresdent for-
egn corporatons.
( so Secton 1 3, Secton 39.1 3-2 Sec-
ton 119, Secton 39.119(a)- .
That porton of payments made by a domestc corporaton to a
nonresdent foregn corporaton, pursuant to a contract whch pro-
vdes for the rght to use manufacturng know-how and persona
servces performed outsde the Unted States n connecton wth the
nstructon of ts empoyees wth respect to such know-how, whch
Is appcabe to the rght to use the know-how s n the nature of
royaty ncome and sub|ect to wthhodng of ta at source under
secton 1 of the Interna Revenue Code of 1939. The porton of
such payments appcabe to the persona servces s not ncome from
sources wthn the Unted States and not sub|ect to wthhodng of
ta at source.
dvce has been requested whether payments made by a domestc
corporaton to a nonresdent foregn corporaton, for the use of tech-
nca knowedge and methods and nstructon of ts empoyees n cer-
tan technques n connecton wth the p-oducton of certan chemcas,
consttutes ncome from sources wthn the Unted States sub|ect to
wthhodng of ta at source under secton 1 of the Interna Revenue
Code of 1839.
In the nstant case a nonresdent foregn corporaton, not engaged
n trade or busness wthn the Unted States, possessed certan tech-
nques and methods, commony referred to as know-how, for the
recovery and purfcaton of certan chemcas, whch a domestc cor-
poraton wshed to appy to commerca producton n the Unted
States. contract was entered nto whch censed the domestc cor-
poraton to use the technca know-how and processes of the foregn
corporaton for a specfed perod of tme. The foregn corporaton
woud aso provde nstructon n certan technques to the empoyees
of the domestc corporaton. The contract provded, among other
tngs, that the domestc corporaton woud pay a specfed amount
upon e ecuton of the contract and, after commencement of produc-
ton, quartery nstaments at a rate based on producton woud be
pad for the use of certan processes unt a specfed amount had been
reached. ddtona amounts woud be pad for servces of chemca
engneers and smar e perts n the country n whch the foregn
corporaton s ocated.
Secton 1 of the Code, reatng to payment of corporaton ncome
ta at the source, provdes n part as foows:
In the case of foregn corporatons sub|ect to ta aton under ths chapter
chapter 1 of the Code not engaged n trade or busness wthn the Unted States,
there sha be deducted and wthhed at the source n the same manner and
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389 Regs. 118 39.162-1.
upon the same tems of ncome as s provded n secton 1 3 a ta equa to 30 per
centum thereof.
Secton 39.1 3 2 of Reguatons 118 provdes that ony f ed or de-
termnabe annua or perodca ncome s sub|ect to wthhodng.
The Interna Revenue Code specfcay ncudes n such ncome, n-
terest, dvdends, rent, saares, wages, premums, annutes, compen-
satons, remuneratons, and emouments. ut other knds of ncome
are ncuded, as, for nstance, royates.
The essence of the contract s the makng avaabe to the domestc
corporaton the technca knowedge, methods, e perence, that s, the
know-how of the foregn corporaton. Whe manufacturng
know-how s of a nonpatentabe nature, t s somethng that ts
possessor can grant to another for a consderaton. The rght to use
such know-how s not materay dfferent from the rght to use
trade-marks, secret processes and formuae, and, f the rght thereto
s granted as part of a censng agreement, t becomes, n effect, an
ntegra part of the bunde of rghts acqured under such agreement.
The payments made under the contract are appcabe both to the
specfc rghts theren granted, that s, the rght to use the know-
how, and to servces performed abroad n nstructng and tranng
the empoyees or techncans of the domestc corporaton. Such pay-
ments shoud therefore be aocated between the cense to use the
know-how and the persona servces. Snce the persona servces
have ony nomna vaue apart from the cense to use such know-
how, a but a nomna sum shoud be aocated to the cense.
In vew of the above, t s hed that the porton of such payments
appcabe to the rghts granted under the contract s n the nature of
royaty ncome, that s, f ed or determnabe annua or perodca
ncome from sources wthn the Unted States and sub|ect to wth-
hodng of ta at source under secton 1 of the Code. The porton
of such payments appcabe to the servces performed abroad s not
ncome from sources wthn the Unted States and therefore not
sub|ect to wthhodng of ta at source.
Reguatons 118, Secton 39.1 -1: Wth-
hodng n the case of nonresdent for-
egn corporatons.
Reease of e cess ta wthhed, and e empton from, or reducton n
rate of, wthhodng of ta at source n the case of German companes,
as affected by the ncome ta conventon between the Unted States
and the edera Repubc of Germany. See T. D. 6122, page 6 1.
SUPPL M NT . ST T S ND TRUSTS
S CTION 162. N T INCOM
Reguatons 118, Secton 39.162-1: Income of Rev. Ru. 55-38
estates and trusts,
Where the fetme ncome benefcary of a testamentary trust from
tme to tme gves hs wrtten consent, pursuant to the terms of the w,
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Regs. 118, 39.162-1. 390
to pay a certan porton of the trust ncome to another ndvdua, the
amounts so pad w be ta abe as ncome to the benefcary nasmuch
as he, n pont of substance, has parted wth no substanta nterest n
property other than the specfed payments of ncome. See arrson
v. Sarah . Schaffner, 312 U. S. 579. Ct. D. 1503, C. . 19 1-1, 321.
owever, n the case of an rrevocabe assgnment, vad under oca
aw, of trust ncome for a perod of not ess than 10 years, such ncome
w be ta abe to the assgnee, provded the facts are not such as woud
sub|ect the fetme ncome benefcary (the assgnor) to the ta on the
ncome under the prncpes of secton 39.22(a)-21 of Reguatons 118,
secton 167 of the Interna Revenue Code of 1939, dward . Douqa
v. Wcuts, 296 U. S. 1, Ct. D. 10 1, C. . I -2, 250 (1936), or 1 T.
007, C. . 1950-1,11. In such a case the poston of the assgnor s
anaagous to that of the grantor of a trust. Under such crcumstances,
because of the perod and character of the assgnment, the fetme n-
come benefcary w be consdered to have made a dsposton of a
substanta nterest n the trust property. See dward T. ar v.
Commssoner, 300 U. S. 5, Ct. D. 1205, C. . 1937-1,175,
Reguaton s 118, Secton 39.162-1: Income of RevRu. 55-92
estates and trusts.
The terms of a w provde for a trust of the resdue of the estate,
the ncome to be pad to the testator s wfe and daughter durng ther
ves n the dscreton of the trustees. owever, the trustees have the
power at any tme to termnate the trust and pay over and dever the
whoe of the ncome from or corpus of the trust estate wthn 5 years to
certan desgnated chartabe organzatons n such proporton as the
trustees n ther uncontroed |udgment and dscreton may determne.
ed, that a donaton to charty out of the gross ncome of the trust
pror to a decson of the trustees to termnate the trust woud not be
pursuant to the terms of the w creatng the trust. ccordngy, the
trust estate woud not be entted to the chartabe deducton authorzed
by secton 162(a) of the Interna Revenue Code of 1939.
Reouatons 118, Secton 39.162-1: Income of Rev. Ru. 55-122
estates and trusts.
Where gfts of ncome to charty are not specfcay provded
for In a settement agreement resutng from the contest of a w,
any money receved by charty w not be aowabe as a chartabe
deducton under secton -(a) of the Interna Revenue Code of
1039.
dvce has been requested whether any amounts pad to certan
chartabe organzatons pursuant to a settement agreement resutng
from the contest of a w woud be aowabe as a chartabe deducton
authorzed by secton 162(a) of the Interna Revenue Code of 1939.
In the nstant case the decedent eft two ws. The frst w cre-
ated a trust of the resduary estate for the beneft of a son for fe wth
remander nterest of two-thrds to charty and one-thrd to grand-
chdren the second eft the buk of the estate to certan persons other
than the egatees named n the frst w. rom an order of the pro-
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391 ftegs. 118, 39.102-1.
bate court admttng the second w to probate, severa appeas were
fed by tbe chartes whch contested the atter w reyng on the st
w, and by the hers who contested both ws, camng the decedent
ded ntestate. efore |udgments were rendered n these suts, a set-
tement agreement was reached whereby the second w woud stand
admtted to probate and woud be admnstered as wrtten n a re-
spects, wth the e cepton of the resdue. Wth respect to the resdue,
the settement agreement provdes that a of the resdue of the de-
cedent s estate sha ncude the net ncome of the estate and sha be
dvded, pad over and dstrbuted by the e ecutor among the partes
to the agreement. Pursuant to the agreement certan chartabe or-
ganzatons receved substanta amounts n settement of ther cams.
The status of chartes contestng the probated w was that of
egatees under the pror w whch they proffered as the decedent s
ast w. Sueh status commanded the settement agreement and was
recognzed by t. See Rev. u. 1 5, C. . 1953-2,273. ccordngy,
t s concuded that the settement agreement takes the pace of the
w for the purpose of determnng the deducton aowabe under
secton 162(a) of the Interna Revenue Code of 1939.
owever, snce the settement agreement merey provdes that the
resdue of the estate sha ncude net ncome and does not specfcay
provde for gfts of ncome to charty, t s hed that the chartes are
pecunary egatees and any money receved by them woud not be
aowabe as a chartabe deducton under secton 162(a) of the 1939
Code because t was not receved n satsfacton of a cam for ncome.
Compare state of Raph R. uesman v. Commssoner, 198 ed. (2d)
133.
R Grn|mo s 118, Secton 39.162-1: Income Rev. Ru. 55-159
of estates and trusts.
( so Secton Reguatons 118, Secton
39. -5.)
ong-term capta gan was reazed on the sae of property form-
ng part of an nter vvos trust. The proceeds of the sae conssted
of cash and nstament obgatons. Ihe capta gan was reported
on the nstament bass on the fducary ncome ta return. t the
termnaton of the trust the corpus and unpad nstament obga-
tons were transferred to the benefcary of the trust. ed, the dstr-
buton of the nstament obgatons to the benefcary durng the ta -
abe year of the trust effected a dsposton of such obgatons and
resuted n acceeratng the capta gans ta thereon to the trust.
Secton (d) of the Interna Revenue Code of 1939. Capta gans
on unpad nstament obgatons dstrbuted to a benefcary at the
termnaton of a trust are deductbe by the trust and ta abe to the
benefcary n the ta abe year of dstrbuton at the capta gans rate.
See I. T. 2589, C. 13. -2, 156 (1931) G. C. M. 2 702, C. . 19 5,
2 1 Rev. Ru. 2 , C. . 1953-1, 263 and Carse v. Commssoner, 165
ed. (2d) 6 5. The gan s the dfference between the bass of the
obgaton and the far market vaue of the obgaton at the tme of
dstrbuton. The bass of the obgaton s the e cess of the face vaue
of the obgaton over an amount equa to the ncome whch woud be
S6 050 56 26
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Regs. 118, 5 39.165-1.) 392
returnabe were the obgaton satsfed n fu. See e ampe 2, secton
39. -5 of eguatons 118.
Reguatons 118, Secton 39.162-1: Income of
estates and trusts.
Payments made out of a fund whch has been set asde out of the
net ncome of an rrevocabe trust. See Rev. Ru. 55-286, page 75.
S CTION 165. MPLOY S TRUSTS
Reguatons 118, Secton 39.165-1: mpoyees Rev. Ru. 55-81
trusts.
penson pan of an empoyer w not fa to meet the requre-
ments of secton 165(a) of the Interna Revenue Code of 1939 merey
because t covers ony the empoyer s one empoyee.
dvce has been requested whether a penson pan of an empoyer
for the beneft of hs empoyees w meet the requrements of secton
165(a) of the Interna Revenue Code of 1939 f t covers ony the
empoyer s one empoyee.
n empoyer provdes a penson pan for the beneft of hs empoyees
at a tme when he has but one empoyee. The penson pan otherwse
meets a the requrements of secton 165(a) or the Code and the one
empoyee s covered by the pan. Provson for the coverage of add-
tona empoyees s made n the pan when, and f, they are ater
empoyed.
Secton 165(a) of the Code refers to a pan of an empoyer for the
e cusve beneft of hs empoyees. Other references n the Code and
Reguatons 118 pertanng thereto, concernng empoyees trusts,
are wth regard to empoyees. Ths s not consdered sgnfcant
To attrbute such sgnfcance to that secton of the Code, so as to
precude the estabshment by an empoyer of a pan for hs one
empoyee, woud be pacng a straned nterpretaton upon those parts
of secton 165(a) whch refer to empoyees.
It shoud be observed, however, that secton 39.165-1 (a) ( ) of
Reguatons 118 provdes n part that f a pan s so desgned as to
amount to a subterfuge for the dstrbuton of profts to sharehoders,
even f other empoyees who are not sharehoders are ncuded under
the pan, t w not quafy as a pan for the e cusve beneft of
empoyees. of the surroundng and attendant 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 n genera. The aw s concerned not so much wth the
form of any pan as t s wth ts effects n operaton. If, therefore, a
pan coverng ony one empoyee at a partcuar tme s not desgned,
or s not operated, as a means of sphonng profts to a sharehoder-
empoyee, or otherwse mtng partcpaton to an empoyee wthn
the enumeratons wth respect to whch dscrmnaton s prohbted,
t may satsfy the requrement that t be for the e cusve beneft of
empoyees n genera.
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303 Regs. 118, 39.165-2.
ccordngy, t s hed that where a penson pan meets a other
requrements of secton 165 (a) of the Code, the mere fact that t covers,
at a partcuar tme, ony the empoyer s one empoyee w not, for
that reason aone, cause te pan to fa of quafcaton under that
secton.
eg ato s 118, Secton 39.165-1: mpoyees
trusts n genera.
aratons n dstrbuton of benefts upon termnaton of penson
pan meetng the requrements of secton 165(a) of the Interna Reve-
nue Code of 1039. See Rev. Ru. 55-60, page 37.
egcato s 118, Secton 30.1C5-2: Impossb- Rev. Ru. 55-297
ty of dverson under the trust nstrument.
n empoyee s rghts tnder a penson or proft-sharng pan meet-
ng the requrements of secton 165(a) of the Interna Revenue Code
of 19. 59 are matters covered by the terms of the pan and/or trust
agreement and the provsons of oca aw. The enforcement of
such rghts s not a responsbty of, nor wthn the ursdcton of,
the Interna Revenue Servce. The ursdcton of the Interna
Revenue Servce wth respect to penson, etc., pans s mted to
determnatons whether the pans meet the appcabe requrements
of the Interna Revenue Code, whether amounts camed as deduc-
tons from gross ncome for contrbutons or payments to or under
such pans are aowabe, and as to the ta effect upon empoyees
of such contrbutons to, and the dstrbutons by or pursuant to,
such pans or trusts.
dvce has been requested concernng the empoyee s rghts under
a penson pan, meetng the requrements of secton 165(a) of the
Interna Revenue Code of 1939, and the assstance that may be made
avaabe from the Interna Revenue Servce n the enforcement of
such empoyee s rghts.
n empoyee partcpant n a penson pan, funded through a trust
wth a natona bank as trustee, separated from the servce of hs
empoyer and, under the provsons of the pan whereby every em-
poyee wth years of servce who termnates hs servces pror to
age 65 s entted to a prescrbed percentage of the empoyer s con-
trbutons on hs behaf, was vested wth a certan defnte nterest
n the trust fund. It s camed, however, that the empoyer, beng
unabe to contro the funds of the trust, demanded that the empoyee
fgn over to the empoyer the funds contrbuted by the empoyer
because of the empoyee s separaton from servce.
n empoyee s rghts under a penson, etc., pan are matters covered
by the terms of the pan and/or trust agreement and the provsons
of oca aw n regard thereto. The enforcement of such rghts s
nether a responsbty of, nor n any respect wthn the |ursdcton
of, the Interna Revenue Servce.
The |ursdcton of the Servce wth respect to penson, etc., pans
s mted to determnatons whether the pans meet the appcabe
requrements of the Code, whether amounts camed as deductons
from gross ncome for contrbutons or payments to or under such
pans are aowabe, and as to the ta effect upon empoyees of such
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Regs. 118, 39.165-6.) 39
contrbutons to, and the dstrbutons by or pursuant to, such pans
or trusts. In makng such determnatons, consderaton must be
gven to the actua operaton of the pan, and n a case such as ths
t woud of course be necessary to treat any assgnment by the em-
poyee to the empoyer of the empoyee s vested nterest n the trust
fund as a reverson to the empoyer whch s prohbted by secton
165(a)(2) of the Code.
muatons 118. Secton 39.165- : Dscrm-
naton as to contrbutons or benefts.
uafcaton of a penson or proft-sharng pan upon dscontnu-
ance of contrbutons. See Rev. Ru. 55-186, page 39.
Reguatons 118, Secton 39.165-6: Ta abty Rev. Ru. 55-298
of benefcary under a trust whch meets the
requrements of secton 165(a).
( so Secton 22(b) Reguatons 118, Secton
39.22(b) (2)-2.)
n empoyee-partcpant n a proft-sharng pan and trust, hed
to meet the requrements of secton 165(a) of the Interna Revenue
Code of 1939, w not be n recept of gross ncome when annuty con-
tracts (as dstngushed from contracts contanng an eement of fe
nsurance) are purchased n hs behaf regardess of whether the
empoyee has a vested nterest at the tme of purchase or the trustee
has but mted contro over the annutes. Such empoyee w be
n recept of ta abe ncome when the contracts are surrendered.
so, where, by reason of the termnaton of hs servce, a partc-
pant receves hs tota dstrbutons payabe, whch Incude hs
annuty contract, and surrenders hs contract for ts cash vaue dur-
ng hs ta abe year n whch the dstrbuton s receved, the ong
term capta gan treatment w be accorded such tota dstrbuton.
owever, ong term capta gan treatment may not be accorded
the proceeds of the contract where the termnatng empoyee defers
the surrender of the annuty contract unt a ta abe year subsequent
to the year of ts dstrbuton.
The above-stated prncpes are equay appcabe to the bene-
fcary of a deceased empoyee, where the dstrbuton has been made
by reason of termnaton of servces (. e. hs death whe n the
servce of hs empoyer).
dvce s requested (1) whether an empoyee s n recept of gross
ncome as a resut of the purchase for hm of an annuty contract (as
dstngushed from a contract contanng an eement of fe nsurance)
by the trustees under a proft-sharng pan whch meets the requre-
ments of secton 165(a) of the Interna Revenue Code of 1939, where
the empoyee s rghts under the contract are fuy vested at the tme
of the purchase (2) whether the ong term capta gan treatment
provded n secton 165(b) of the Code s accorded where the contract
s dstrbuted to the empoyee (or hs benefcary) by reason of the
termnaton of hs servces and, n a year subsequent to that n whch
such dstrbuton s made, the contract s surrendered for ts cash
vaue (3) whether such ong term capta gan treatment s ac-
corded f the contract s surrendered for ts cash vaue n the year n
whch dstrbuted to hm (or hs benefcary) and ( ) whether the
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395 Regs. 118, 39.165-0.
phrase wthn one ta abe year contaned n secton 165 (b) of the
Code mpes that the tota dstrbutons payabe from a trust e empt
under secton 165(a) of the Code must be made n the year n whch
the empoyee s servces are termnated n order to obtan the ong term
capta gan treatment.
The proft-sharng pan of the M company has been hed to meet the
requrements of secton 165(a) of the Code. Contrbutons to the
trust by the empoyer are aocated among the partcpants n accord-
ance wth a nondscrmnatory formua and are used to pay premums
under a group annuty contract of the money purchase type, whereby
pad-up deferred annutes are purchased for covered empoyees each
year the company makes a contrbuton to the trust. The rghts of
each of the partcpants to the benefts provded for hm under the
contract are fuy vested at the tme of purchase (premum payment),
e cept the rght to surrender for cash n the event of termnaton of
servces wthn 10 years pror to norma retrement date. If term-
naton of servce occurs more than 10 years pror to norma retrement
date, the pad-up deferred annutes provded for hs beneft w be
transferred to the partcpant, who may surrender them at any tme for
the cash surrender vaue thereof. The trustee has no power to cance
or surrender annutes once they are purchased, e cept he may sur-
render a partcpant s annutes for cash upon the partcpant s term-
naton of servce other than by retrement or death.
Secton 39.165-6(a) (2) of Reguatons 118 provdes that, f a trust
e empt under secton 165(a) of the Code purchases an annuty con-
tract for an empoyee and dstrbutes t to the empoyee n a year for
whch the trust s e empt, the contract contanng a cash surrender
vaue whch may be avaabe to the empoyee by surrenderng the
contract, such cash surrender vaue w not be consdered ncome to
the empoyee uness and unt the contract s surrendered.
Secton 165(b) of the Code provdes that f a trust e empt under
secton 165(a) of the Code pays to a dstrbutee wthn one ta abe
year of the dstrbutee the tota dstrbutons payabe wth respect to
the empoyee, on account of the empoyee s separaton from the serv-
ce, the amount of such dstrbuton, to the e tent t e ceeds the
amounts contrbuted by the empoyee, sha be consdered a gan from
the sae or e change of a capta asset hed for more than 6 months.
ccordngy, where a trust, e empt under the provsons of secton
165(a) of the Code, purchases an annuty contract (as dstngushed
from a contract contanng an eement of fe nsurance) for a par-
tcpatng empoyee, such empoyee s not n recept of gross ncome
by reason of such purchase, even though the empoyee has a vested
nterest n the contract at the tme of purchase or the trustee has a
mted contro over the contract. Nether s the empoyee (or hs
benefcary) n recept of gross ncome n the ta abe year n whch
such contract s dstrbuted to hm, by reason of such dstrbuton, but
s ta abe when the contract s surrendered.
Snce secton 165(b) of the Code provdes that the amounts ds-
trbuted or made avaabe to any dstrbutee of a trust e empt under
secton 165(a) of the Code sha be ta abe to hm n the year n whch
so dstrbuted or made avaabe, and snce the ong term capta
gan treatment s accorded ony where the tota dstrbutons pay-
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Regs. 118, 39.165-6. 396
abe are pad n one year by reason of tbe empoyee s separaton from
the servce, such ong term capta gan treatment s not appcabe
to a year subsequent to the year of dstrbuton of the contract.
urthermore, the proceeds of the annuty contract surrendered n a
year subsequent to ts dstrbuton by the trust are not pad on account
of the empoyee s separaton from the servce.
Where (1) the tota dstrbutons payabe, wth respect to an
empoyee partcpatng n a trust e empt under secton 165(a) of the
Code, are dstrbuted to a dstrbutee (empoyee or hs benefcary)
on account of the empoyee s separaton from the servce, (2) such
dstrbutons payabe are n the form of an annuty contract, and
(3) the dstrbutee surrenders the annuty contract for ts cash vaue
durng the ta abe year n whch the contract s dstrbuted to hm,
then the deferment of ta aton permtted by secton 39.165-6 (a) (2)
of Reguatons 118, s not appcabe, but the dstrbuton, represented
by the proceeds of the annuty contract, s treated as a ong term
capta gan, snce surrender of the contract durng the year of ts
recept from the trust has the same effect as a dstrbuton by the trust
n the form of cash.
Reguatons 118, Secton 39.165-6: Ta abty Rev. Ru. 55-35
of benefcary under a trust whch meets the
requrements of secton 165(a).
method of determnng net unreazed apprecaton, under sec-
ton 165(b) of the Interna Revenue Code of 1939, on stock of a
corporaton whch s dstrbuted under an empoyees savngs pan,
hed to meet the requrements of secton 165(a) of the Code, wheren
the amounts of ncrease or decrease n the vaue of a partcpant s
account at the tme of converson from one optona nvestment
method to another are ncuded n the tota amount credted to the
partcpant, s hed to correcty refect such net unreazed appre-
caton and the cost or other bass to the trust of the stock ds-
trbuted, wthn the meanng of subparagraph (c) of secton
39.165-6(b) (2) () of Reguatons 118.
dvce has been requested wth regard to the method of determnng
the net unreazed apprecaton wthn the meanng of that term
as used n secton 165(b) of the Interna Revenue Code of 1939, where
common stock of the empoyer corporaton s dstrbuted to a par-
tcpant under a proft-sharng pan desgnated as an empoyees
savngs pan sponsored by the empoyer.
Under the provsons of an empoyees savng pan, hed to meet
the requrements of secton 165(a) of the Code as a quafed proft-
sharng pan, each egbe empoyee s entted to aot not more than
5 percent of hs saary to be pad nto the trust. or each partcpant
the empoyer contrbutes an amount equa to 50 percent of the em-
poyee s aotment. Sub|ect to certan mtatons the sum of the
empoyee s aotment and the empoyer s contrbuton s nvested by
the trustee, n accordance wth the partcpant s drecton n one or
more of the foowng nvestment optons, provded that f more than
one opton sha be desgnated, the tota of a partcpant s aotments
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397 (Regs. 118, 39.165-6.
and empoyer contrbutons sha be aocated n mutpes of 10 percent
but not ess than 30 percent n any one opton:
Opton . n unsegregated fund nvested soey n common
stock of the empoyer hed n the name of the trustee.
Opton . n unsegregated fund nvested n a dversfed port-
foo of stocks and other securtes seected by and hed n the
name of the trustee.
Opton C. n unsegregated fund nvested n Unted States Gov-
ernment securtes seected by and hed n the name of the
trustee.
Opton D. Unted States Savngs onds, Seres , regstered
n the name of the partcpant and hed by the trustee.
partcpant may change hs nvestment drecton on any pan
annversary date or concurrenty wth a converson of nvestment.
partcpant has the rght once n each pan year to convert a or a
specfed part of the funds n hs account under any nvestment opton
or optons to an nvestment n one or more of the other nvestment
optons. In effectng a converson, the vaue of the converted part of a
partcpant s account s converted nto cash. Normay such con-
versons w be effected wthout sae of any securtes, but n an un-
usua stuaton sae of securtes mght be necessary. The amount of
cash s determned by mutpyng the number of unts credted to hs
account n the fund beng converted by the vaue of each unt on the
monthy vaue determnaton date foowng the date the trustee s
advsed . The number of unts of the fund nto whch the nvestment
s converted whch are acqured depends upon the vaue of such unts
on the vaue determnaton date.
The vaue determnaton date s the ast day of each caendar
month on whch busness s transacted on the New York Stock -
change. The tota vaue of a the stock n the fund on that date n-
cudng shares purchased wth dvdends, pus the amount of any
unnvested cash, s dvded by the tota number of unts theretofore
credted to a partcpants. ach partcpant s credted wth the
number of unts whch hs aotment and company contrbutons
durng that month w purchase on the bass of such unt vaue.
Secton 165(b) of the Code reates to the ta abty of the bene-
fcary n regard to amounts dstrbuted by a trust meetng the re-
qurements of secton 105(a) of the Code and provdes n part that
If the tota dstrbutons payabe wth respect to any empoyee are pad
to the dstrbutee wthn one ta abe year of the dstrbutee on account of the
empoyee s separaton from the servce, the amount of such dstrbuton to the
e tent e ceedng the amounts contrbuted by the empoyee, sha be consdered a
pan from the sae or e change of a capta asset hed for more than 6 months.
Where such tota dstrbutons ncude securtes of the empoyer corporaton,
there sha be e cuded from such e cess the net unreazed apprecaton at-
trbutabe to that part of the tota dstrbutons whch conssts of the securtes
of the empoyer corporaton so dstrbuted. The amount of such net unreazed
apprecaton and the resutng ad|ustment to bass of the securtes of the em-
poyer corporaton so dstrbuted sha be determned n accordance wth regua-
tons whch sha be prescrbed by the Secretary. In no event sha the
amount actuay dstrbuted or made avaabe to any dstrbutee ncude net
unreazed apprecaton n securtes of the empoyer corporaton attrbutabe to
the amount contrbuted by the empoyee. Such net unreazed apprecaton and
the resutng ad|ustments to bass of such securtes sha aso be determned n
accordance wth reguatons whch sha be prescrbed by the Secretary.
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Regs. 118, 39.165-6. 398
Under Reguatons 118, subsecton (b) (2) of secton 39.165-6 pro-
vdes that n determnng the net unreazed apprecaton n securtes
of the empoyer corporaton dstrbuted by the trust, reference w be
made to the cost or other bass to the trust of such securtes and to
the market vaue of such securtes at the tme of dstrbuton. In a
dstrbuton consstng n part of securtes whch have apprecated n
vaue and n part of securtes whch have deprecated n vaue, the
net unreazed apprecaton sha be the net ncrease n vaue of a
of the securtes ncuded n the dstrbuton. Two or more dstrbu-
tons made by a trust to a dstrbutee n a snge ta abe year of the
dstrbutee are treated as a snge dstrbuton.
Determnaton of the cost or other bass s made by whchever of the
foowng rues s appcabe:
(a) In the case of purchases earmarked for the account of a par-
tcuar empoyee so that the cost or other bass s refected n the
empoyee s account, such cost or other bass s used.
(b) Where the trust aocates among the accounts of partc-
patng empoyees, at the cose of each ta abe year or other spec-
fed perod, a securtes acqured by the trust durng the year
(e cusve of securtes unaocated under a pan provdng for
aocaton n whoe shares ony) the cost or other oass sha be
the average cost or other bass of a securtes of the same type
whch were purchased or otherwse acqured by the trust durng
such aocaton perod. or determnng the average cost n a
subsequent aocaton, the actua cost of securtes unaocated at
the cose of a pror aocaton perod sha be the average cost or
other bass of securtes of the same type aocated as of the cose
of such pror aocaton perod.
(c) In a case where nether (a) nor (b) s appcabe, f the
trust fund or a specfed porton thereof, s nvested e cusvey n
one partcuar type of securty of the empoyer corporaton, and
f durng the perod the dstrbutee partcpated n the pan none
of such securtes has been sod e cept for the purpose of payng
benefts under the trust or to enabe the trustee to obtan funds
wth whch to e ercse rghts whch have accrued to the trust, the
cost or other bass to the trust of a securtes dstrbuted to such
dstrbutee sha be the tota amount credted to the account of
such dstrbutee (or such porton thereof as was avaabe for
nvestment n such securtes) reduced by the amount avaabe
for nvestment but unnvested on the date of dstrbuton. If at
the tme of dstrbuton to a partcuar dstrbutee a porton of
the amount credted to hs account s forfeted, approprate ad-
|ustment sha be made wth respect thereto n determnng the
cost or other bass to the trust of the securtes dstrbuted.
(d) In a other cases, the average cost (or other bass) to the
trust s used.
Under the nstant pan, no stock s earmarked for the account of
a partcuar empoyee at the tme of purchase by, or contrbuton to,
the trust. The trust does not aocate the stock among the accounts
of partcpatng empoyees as of the cose of any ta abe year or any
other specfed perod of tme. No aocaton of stock s made e cept
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399
Regs. 118, 39.1G5-6.
n connecton wth, wthdrawas. Thus, nether subparagraph (a) nor
subparagraph (b) of secton 39.165-6(b) (2) () of Reguatons 118
(as outned n subparagraphs (a) and (b) of the ne t precedng para-
graph) are appcabe.
or purposes of determnng net unreazed apprecaton n secur-
tes of the empoyer corporaton whch are ncuded n a tota dstrbu-
ton under the pan, the credts to a partcpant s account sha ncude,
n addton to a aotments and contrbutons, the net amount of the
ncrease or decrease n the vaue of the converted part of the account
at the tme of the ast pror converson or reconverson of a part or
a of the account from one opton to another opton. On ths bass, the
amount of any such net ncrease woud be ncuded n the tota amount
credted to the account of the dstrbutee. Ths woud mean that
the amount of unreazed apprecaton woud be reduced by any n-
crease n the vaue of the account e stng at the tme of converson
wth an equvaent ncrease n the ta abe amount.
The method of determnng net unreazed apprecaton n securtes
of the empoyer corporaton whch are ncuded n a tota dstrbuton
under the pan, and the amount of such dstrbuton sub|ect to ta at
the tme the dstrbuton s made, s ustrated by the foowng e -
ampe :
n empoyee wth an annua saary of 3,600 aots 5 percent of hs
saary or 180 per year to the trust. The empoyer contrbutes an
addtona 50 percent of the empoyee s aotments or 90 per year.
The empoyee eects Opton (common stock of the empoyer) and
after 10 years of partcpaton e ercses the rght to convert to Opton
(dversfed stocks). fter further partcpaton for a perod of
3 years under Opton the empoyee e ercsed the rght to reconvert
to Opton . Upon competon of another 5 years of partcpaton
nnder Opton the empoyee retres and eects to receve the common
stock of the empoyer. The amounts credted to the account of the
empoyee at the tmes of converson, reconverson and retrement are
shown n the foowng tabuaton:
aue of empoyee s account
t tme of
converson
from Opton
to Opton
after 10 years
of partcpa-
ton
t tme of
reconverson
from Opton
to Opton
after 13 years
of partcpa-
ton
t tme of re-
trement after
18 years of par-
tcpaton
mpoyee s aotments
mpoyer s contrbutons
Tota -
auaton at aue Determnaton Date
Increase n vaue ..... ...
1,800
900
2, 3 0
1,170
2, 700
,050
3, 510
6,000
1, 350
2, 90
S3, 2 0
1, C20
, 860
11,250
6, 390
The tota vaue of the empoyee s account at the fna vaue deter-
mnaton date represents 150 shares of the empoyer s common stock
vaued at 75 per share. In the determnaton of the net unreazed
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Regs. 118, 39.165-6.1 00
apprecaton n securtes of the empoyer corporaton at the tme of
retrement the foowng tabuaton woud be made:
aue of empoyee s account at tme of dstrbuton 11,250
Less: aue of account at tme of reconverson to
Opton :
mpoyee s aotments 2,3 0
mpoyer s contrbutons 1,170
Increment reazed as a resut of such re-
converson 2, 90 6,000
Cost durng fna perod of partcpaton under
Opton :
mpoyees aotments 900
mpoyer s contrbutons 50 1,350 7,350
mount of net unreazed apprecaton 3,900
aue of empoyee s account at tme of dstrbuton 11, 250
Less: Net unreazed apprecaton 3,900
Tota empoyee s aotments 3, 2 0 7,1 0
mount of dstrbuton sub|ect to ta ,110
Thus, the average cost.or other bass of the stock, for purposes of
determnng gan or oss on any subsequent ta abe transacton theren,
woud be 9.00 per share, determned by dvdng the cost at the
tme of the dstrbuton ( 7,350) by the number (150) of shares
dstrbuted.
ccordngy, t s hed that n an empoyees savngs pan whch
meets the requrements of secton 165(a) of the Code, a method of
determnng net unreazed apprecaton on stock of the empoyer cor-
poraton whch s dstrbuted to partcpants under the pan, wheren
the amounts of ncrease or decrease n the vaue of a partcpant s ac-
count at the tme of converson from one optona nvestment method
to another are ncuded n the tota amount credted to the partcpant,
w correcty refect such net unreazed apprecaton and the cost
or other bass to the trust of the stock dstrbuted, wthn the meanng
of subparagraph (c) of secton 39.165-6(b) (2) () of Reguatons 118.
Reguatons 118, Secton 39.105-6: Ta abty
of benefcary under a trust whch meets the
requrements of secton 165(a).
Dstrbuton by an empoyees trust of funds receved as nterest on
ta -free securtes. See Rev. Ru. 55-61, page 0.
Reguatons 118, Secton 39.165-6: Ta a-
bty of benefcary under a trust whch
meets the requrements of Secton 165 (a).
Ta consequences where a partcpant n an empoyees proft-
sharng trust may eect, n the case of fnanca necessty, to wthdraw
hs vested nterest wth the consent of a commttee. See Rev. Ru.
55- 2 , page 2.
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01 Regs. 118, 39.165-1 (b).
S CTION 165(a). MPLOY S TRUSTS: MPTION
ROM T
Reguatons 118, Secton 39.165-1 (b) : m- Rev. Ru. 55-276
poyees trusts: ffated corporatons.
In the case of a penson pan mantaned onty by more than one
empoyer, whether or not they are affated corporatons, where em-
poyees covered by the pan may receve compensaton from more
than one of the partcpatng empoyers, the dscrmnaton pro-
hbted by secton 16. (a) of the Interna Revenue Code of 1039 and
the reguatons promugated thereunder w not resut merey be-
cause the annua compensaton used as a bass for determnng an
empoyee s egbty for benefts n a penson pan s defned as the
tota annua compensaton receved by the empoyee from a em-
poyers partcpatng n the pan. Such treatment s consstent wth
the prncpe set forth n PS No. 1 , dated ugust 2 , 19 , so ong
as there s a proper aocaton of the costs of the resutng benefts
among the partcpatng empoyers.
dvce has been requested -whether a penson pan mantaned
|onty by more than one empoyer (regardess of ther affated
status) w fa to quafy under secton 165(a) of the Interna Rev-
enue Code of 1939 f, n order to be egbe for benefts, the com-
pensaton of empoyees workng for more than one of the partcpatng
empoyers s consdered as the tota compensaton receved from a
such empoyers.
In an assumed case, the , Y, and Z corporatons are partcpants
n a |ont annuty contract. The contract provdes an ntegrated
3,600 e cess pan, . c, penson based on saary n e cess of 3,600 per
annum. mpoyees , / , and O are empoyed by a three corpora-
tons recevng an annua saary of 3,000 from corporaton, 2,000
from Y corporaton, and 1,000 from Z corporaton.
In ths case the queston arses as to whether empo|-ees , , and C
shoud be e cuded from the pan, snce they do not receve compensa-
ton n e cess of 3,600 from any one of the contractng corporatons,
whe a others empoyed at an annua saary of 6,000 by any one
of the partcpatng corporatons woud receve penson benefts based
on ther 2, 00 e cess saary.
The appcabe porton of secton 39.165-1 (b) of Reguatons 118,
pertanng to affated corporatons, states that a trust formng part
of a pan of affated corporatons for ther empoyees may be e -
empt f a the requrements are otherwse satsfed.
PS o. 1 ugust 2 ,19 provdes, n part:
n empoyees trust may be e empt from edera ncome ta under secton
105(a) of the Code even though severa corporatons make contrbutons thereto,
and whether or not such corporatons are members of an affated group as
defned n secton 1 1(d), provded a the requrements of secton 165(a) of
the Code, and the reguatons promugated thereunder, are otherwse satsfed
wth respect to each of the partcpatng corporatons and ts empoyees, the
provsons n regard to quafyng under secton 165(a) as aforesad, as we
s the deducton provsons of secton 23(p) of the Code, beng appcabe to
each empoyer separatey, regardess of the affated status of the partcpatng
group.
I the case of a penson pan mantaned |onty by more than one-
empoyer, whether or not they are affated corporatons, where em-
poyees covered by the pan may receve compensaton from more than
one of the partcpatng empoyers, t s hed that the dscrmnaton
prohbted by secton 165(a) of the Code and the reguatons promu-
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Regs. 118, 39.1G9-2. 02
gated thereunder w not resut merey because the annua compensa-
ton used as a bass for determnng an empoyee s egbty or bene-
fts n the pan s defned as the tota of annua compensaton receved
by that empoyee from a empoyers partcpatng n the pan. Thus
the above-descrbed pan need not be consdered dscrmnatory wthn
the meanng of secton 165(a) merey because for the purpose of de-
termnng egbty and benefts of empoyees , , and C each
empoyees annua compensaton s regarded as 6,000. so, t s hed
that such treatment s consstent wth the prncpe set forth n PS
No. 1 , so ong as there s a proper aocaton of the costs of the
resutng benefts among the partcpatng empoyers.
S CTION 169. COMMON TRUST UND
Reguatons 118, Secton 39.169-2: Income of Rev. Ru. 55-299
partcpants n common trust fund.
( so Secton 113(a) Reguatons 118, Secton
39.113(a) (13)-1.)
No gan or oss Is reazed by the partcpants n two common trust
funds or the funds themseves upon the merger of such funds, nor
w there be any change n the bases of the assets n the portfoos
of the common trust funds.
dvce has been requested whether the partcpants n two common
trust funds or the funds themseves reazed a gan or oss upon the
merger of the two funds and whether there s a change n the bases of
the assets n the portfoos of such funds as a resut of the merger.
bank operated two separate common trust funds. fter the
merger of the two funds the partcpants n each of the od funds
hed shares n the merged fund equa n vaue to the market vaue
as of the date of merger of ther shares n the orgna funds. There
was no dstrbuton of cash or securtes to any partcpant remanng
n the merged fund wth the e cepton of such sma cash ad|ustment
as was necessary to emnate fractona unts.
common trust fund s cassfed generay as a quafed form of
partnershp wthn the meanng of that term as defned by secton
3797(a) (2) of the Interna Revenue Code of 1939. That s, such a
fund s a partnershp, though the speca provsons of secton 169 of
the Code whch vary the partnershp provsons of the Code govern
as to ssues comprehended thereby. Snce common trust funds are
so treated for edera ncome ta purposes, secton 113(a) (13) of the
Interna Revenue Code s appcabe n determnng gan or oss. Ths
secton provdes:
If the property was acqured, after ebruary 28, 1913, by a partnershp
and the bass s not otherwse determned under any other paragraph of
ths subsecton, then the bass sha be the same as t woud be n the hands
of the transferor, ncreased n the amount of gan or decreased n the
amount of oss recognzed to the transferor upon such transfer under the
aw appcabe to the year n whch the transfer was made. If the property
was dstrbuted n knd by a partnershp to any partner, the bass of such
property n the hands of the partner sha be such part of the bass n hs
hands of hs partnershp nterest as s propery aocabe to such property.
Under the above secton, the merger s consdered as havng accom-
pshed a dssouton of the two funds wth each partcpant recevng
ts proportonate share of cash and undvded nterest n the e stng
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03 Regs. 118, 39.183-1.
funds as dstrbuton n knd, and the formaton of a new fund to whch
the partcpants n the od funds contrbute such dstrbutons n knd
(e cept for cash, receved to emnate fractona shares). or ths
purpose, the transfer by the trustees of the cash and assets of the two
funds to the new fund s regarded as effectng such dstrbutons of the
respectve funds foowed by contrbutons to the new fund. ccord-
ngy no gan or oss s reazed by the two funds or ther partcpants
and there s no change n bases of assets n the portfoos of the two
funds by reason of the dssouton of such funds.
SUPPL M NT . P RTN RS IPS
S CTION 183. COMPUT TION O P RTN RS IP
INCOM
eguatots 118, Secton 39.183-1: Computa- Rev, Ru. 55-39
ton of partnershp ncome.
( so Secton 117(h), Secton 39.117 (h)-,
The nvestment by a partnershp of a member s contrbuted capta
In securtes of hs own choce, and for hs own account, s n effect
a wthdrawa of such capta from the frm and an Investment by
hm n the securtes purchased, resutng n a reducton n the bass
of hs partnershp nterest. The bass of the securtes to the mem-
ber-ta payer s the cost to the partnershp, and the hodng perod
of snch securtes sha be computed from the date they were ac-
qured by the partnershp.
dvce has been requested reatve to the bass and hodng perod,
for edera ncome ta purposes, of securtes purchased by a partner-
shp for a member thereof under the foowng crcumstances.
In the nstant case, the ta payer s a genera partner of a frm,
whch conssts of both mted and genera partners. The mted
partners are entted to a f ed return on ther respectve capta con-
trbutons pus an addtona contngent return, dependent upon net
earnngs. cept as modfed by a speca provson affectng the ta -
payer n queston, the genera partners are entted to nterest at the
rate of s percent on ther respectve capta accounts and thereafter
the genera partners share a gans and osses n specfed but varyng
percentages. Some of the genera partners receve saares, and a of
them are permtted to make certan wthdrawas, ncudng wth-
drawas for the purpose of payng edera and State ncome ta es on
ther respectve shares of the frm s profts.
y a speca provson contaned n the partnershp agreement, as
amended, the ta payer may drect that the sum consttutng hs capta
account be nvested, n whoe or n part, n securtes of hs seecton,
the purchase prce beng charged to hs capta account, thereby re-
ducng to that e tent the amount upon whch the nterest aowabe
on hs capta account s computed. Ta payer s capta account w
be credted wth any dvdends, nterest or other dstrbutons re-
ceved by the frm as respects such securtes. The ncrease or decrease
n the vaue of such securtes w be for hs account. Such secur-
tes are to be sod at hs request and the proceeds credted to hs
capta account. The agreement provdes, aso, that the securtes so
purchased sha become and reman the property of the partnershp
and sha be deemed part of the capta contrbuted by the ta payer.
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Regs. 118, 39.187-1.1 0
The ta abe ncome accrung to the ta payer upon any such securtes,
or by reason of the sae thereof sha be deemed ta abe ncome from
the frm, or net capta gan from the frm for purposes of ascertanng
wthdrawas permtted hm for payment of edera and State ncome
ta es. Upon becomng entted to a dstrbuton of capta or to
wthdraw capta, upon termnaton of the partnershp or upon
retrement or otherwse, ta payer or hs estate s entted to receve
any securtes n hs capta account n knd.
The agreement further provdes that securtes purchased by the
partnershp for the ta payer s account sha become and reman the
property of the partnershp and sha be deemed part of the capta
contrbuted by the ta payer. Ths and other anguage used n the
agreement makes t pan that the securtes woud be treated as
partnershp property as respects the cams of credtors. Sub|ecton
of propertes, other than partnershp assets, to the cams of frm
credtors s so commony attaned by specfc agreement, by guaranty,
by pedge, or by representatons, that such sub|ecton, as evdencng
ntent to convert property nto partnershp property, may be re-
butted by provsons nconsstent wth such ntent. Where, as here,
the agreement provdes that certan property s acqured and hed
for the account of a partcuar partner, and a of the ncdents of
ownershp, ncudng the rght to be credted wth a ncome and
profts therefrom and a rghts of contro, are n hm, such property
cannot quafy as |onty owned property.
In vew of the foregong, t s hed that the securtes become the
property of the ta payer at the tme they are acqured for hm by the
partnershp. When the partnershp acqures the securtes for the
ta payer, t n effect dstrbutes cash to hm n the amount of the
cost of the securtes purchased. subsequent dstrbuton of the
securtes to hm s not a dstrbuton of partnershp property and
has no edera ncome ta consequences. ccordngy, for the pur-
poses of determnng bass and computng hodng perod, the ta -
payer acqures the securtes at the tme they are purchased for hs
account, and at a cost equa to the purchase prce.
Snce the partnershp agreement permts wthdrawa of contrbuted
capta wthout dmnuton of the ta payer s partcpaton rghts n
gans or osses, t s further hed that wthdrawas of contrbuted
capta under the agreement are not n payment for or qudaton of
part of hs nterest n the partnershp. ccordngy, an nvestment
of hs contrbuted capta n securtes of hs own choce, and for
hs own account, s n effect a wthdrawa of such capta from the
frm and an nvestment by hm n the securtes purchased, resutng
n a reducton n the bass of hs partnershp nterest
S CTION 187. P RTN RS IP R TURNS
Reguatons 118, Secton 39.187-1: Partner- Rev. Ru. 55-93
shp returns.
( so Sectons 1 26, 1G07 Reguatons 12S,
Secton 08.205 Reguatons 107, Secton
03.205.)
Interest n a partnershp acqured by the decedent s wdow and
subsequenty transferred to her sun, resutng n another change n
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05 ( egs. 118, 39.201-3.
membershp, does not, n tsef, termnate the partnershp for ed-
era ncome ta or empoyment ta purposes.
dvce has been requested as to whether the transfer of a deceased
partner s nterest n a partnershp by hs wdow termnates such part-
nershp, for edera ncome ta purposes under the provsons of the
Interna Revenue Code of 1939 and for purposes of the edera Insur-
ance Contrbutons ct (subchapter , chapter 9, Interna Revenue
Code of 1939) and the edera Unempoyment Ta ct (subchapter
C, chapter 9, Interna Revenue Code of 1939).
In the nstant case , the decedent, bequeathed to hs wdow hs
one-haf nterest n a partnershp whch he owned wth . The wdow,
for vauabe consderaton, transferred ths nterest to her son who
contnued n the partnershp wth , the remanng partner.
Revenue Rung 1 , C. . 1953-2, 212, and Revenue Rung 5 -31,
C. . 195 -1, 212, hod that a change n the membershp of a partner-
shp resutng from the death, wthdrawa, substtuton, or addton of
a partner or a shft of nterests among e stng partners does not, n
tsef, effect a termnaton of a partnershp for edera ncome ta
and empo3-ment ta purposes, respectvey, where the busness of the
partnershp or a substanta porton thereof s contnued. That prn-
cpe has been hed to be appcabe where the estate of the deceased
partner contnued the decedent s nterest n a partnershp whch con-
ssted of ony two partners. See Rev. Ru. 5 -55, C. . 195 -1, 153.
Revenue Rung 5 - 8 , C. . 195 -2, 2 2, provdes that ths prncpe
aso appes to mted partnershps.
Under the facts n the nstant case, t s evdent that the transfer
of the decedent s nterest n the partnershp by the wdow to her son
merey consttuted another substtuton n the partnershp n ac-
cordance wth Revenue Rung 1 , supra.
ccordngy, t s hed that nterest n a partnershp acqured by
the decedent s wdow and subsequenty transferred to her son resut-
ng n another change n membershp, does not, n tsef, termnate
the partnershp for edera ncome ta or empoyment ta purposes.
s n the cases of Revenue Rungs 1 and 5 -31, supra, the Inter-
na Revenue Servce w not requre ths Revenue Rung to be apped
wth respect to such a change n partnershp nterest whch occurred
pror to anuary 1,195 . See Rev. Ru. 5 -26, C. . 195 -1, 153.
SUPPL M NT G. INSUR NC COMP NI S
S CTION 201. LI INSUR NC COMP NI S
Reguatons 118, Secton 39.201-3: Lfe nsur- Rev. Ru. 55-256
ance companes defnton.
Y heath and accdent nsurance company ssued heath and acc-
dent poces provdng that such poces were renewabe at the e -
praton of each term, e cept that f the nsured had receved tota
benefts under such a pocy n an amount equa to tmes the aggre-
gate premums pad snce the date of ts ncepton and the nsured
was not dsabed at the e praton of the term, the company reserved
the opton not to renew the pocy. s requred by aw, reserves n
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Regs. 118, 39.207-1. 06
addton to unearned premums were mantaned by the company to
cover ts renewa obgaton. Such reserves were computed on an
actuara bass. ed, that such reserves may not be ncuded n the
fe nsurance reserves of the company under secton 201(c) (2) of
the Interna Revenue Code of 1939, snce the poces are not non-
canceabe heath and accdent nsurance contracts wthn the mean-
ng of that secton. See Reguatons 118, secton 39.201-3.
S CTION 20 . INSUR NC COMP NI S OT R T N
LI OR MUTU L
Reguatons 118, Secton 39.20 -3: Deductons. Rev. Ru. 55-300
( so Secton 207 Reguatons 118, Secton
39.207-3.)
Insurance companes sub|ect to the provsons of secton 20 or sec-
ton 207, e cept mutua fre nsurance companes descrbed n secton
20 (a)(1), are permtted deductons for dvdends and smar ds-
trbutons pad or decared to pocyhoders n ther capacty as such.
owever, dvdends to pocyhoders decared n an undetermned
amount at the cose of a ta abe year measured by the e cess of the
earnngs and profts of such year over an amount desgnated for sur-
pus ncrements do not consttute dvdends and smar dstrbutons
pad or decared to pocyhoders n that ta abe year wthn the
meanng of sectons 39.20 -3 or 39.207-3 of Reguatons 118. Under
those sectons, the deducton s mted to the payment of a defnte
amount or a reasonaby accurate estmate of the amount to be pad,
dependng on the accountng method used by the company. ccord-
ngy, dvdends decared n an undetermned amount are not deduct-
be n determnng such a company s ncome ta abty for the year
n whch the decaraton was made ether under secton 20 or secton
207.
S CTION 207. MUTU L INSUR NC COMP NI S OT R
T N LI OR M RIN
Reguatons 118, Secton 39.207-1: Ta on Rev. Ru. 55-2 0
mutua nsurance companes other than fe or
marne or fre nsurance companes sub|ect to
the ta mposed by secton 20 .
In the absence of democratc ownershp and contro by the pocy
members, an nsurance company may not quafy as a mutua n-
surance company ta abe under the provsons of secton 207 of the
Interna Revenue Code of 1939.
dvce has been requested whether certan mutua nsurance com-
panes are n fact mutua nsurance companes ta abe under the pro-
vsons of secton 207 of the Interna Revenue Code of 1939.
The companes n queston, and L, have heretofore fed edera
ncome ta returns as mutua fre and mutua abty companes,
respectvey. ach company has a pad-up guaranty capta repre-
sented by shares a of whch have votng rghts. There s no requre-
ment that sharehoders sha be pocyhoders, but there s a requred
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07 Regs. 118, 39.207-1.
equa representaton of the sharehoders of each company wth the
pocyhoders on the boards of drectors. The sharehoders have the
rght to one vote for each share owned. The sharehoders partcpate
m the earnngs of the companes through specfed percentage returns
on ther contrbutons to the guaranty capta. Upon dssouton the
sharehoders woud receve the par or face vaue as e pressed n the
certfcates and any accrued nterest due. ny baance or surpus
funds woud be the property of the pocyhoders whose poces were
n force at the tme of such qudaton. Nether company s e empt
from ta under the provsons of secton 101(11) of the Code.
mong the characterstcs of a mutua nsurance company s the
rght of a pocyhoders to be members to the e cuson of other
persons and to choose the management. Mutua re, Marne In-
and Insurance Co. v. Commssoner, 8 T. C. 1212, 1217, acquescence
C. . 19 7-2, 3. In the case of eystone utomobe Cub Casuaty
Company et at. v. Commssoner, 122 ed. (2d) 886, certorar dened,
315 U. S. 81 , the court recognzed that democratc ownershp and
contro s a fundamenta characterstc of mutua nsurance companes
and found that there was a substanta departure from the funda-
menta prncpe of contro where non-pocyhoders e ceedng 20 per-
cent of votng pocyhoders had the rght to vote.
rom a studv of the above-mentoned court decsons and G. C. M.
6782, C. . III-2, 209 (1929), and authortes referred to theren,
t s found that the e stence of pad-n guaranty capta represented
by shares under certan condtons prevents the cassfcaton of n-
surance companes as mutua nsurance companes nasmuch as t
deprves such companes of the requste democratc ownershp and
contro by pocyhoders. In genera, such condtons reate to the
foowng:
(1) The contro that the sharehoders as a group e ercse over
the operatons of the company.
(2) otng rghts of sharehoders.
(3) Representaton of sharehoders on the board of drectors.
( ) Rghts of sharehoders to partcpate n the earnngs of
the company to the e tent of recevng a return on ther capta
nvestment and n the dstrbuton of the company s assets n the
event of dssouton.
In the nstant case, the fact that the sharehoders, who are not
requred to be pocyhoders have votng rghts and representaton
on the boards of drectors equa to those of the po cy hoders and aso
receve a return on ther capta nvestment through partcpaton n
the earnngs, s suffcent evdence that there s ackng the funda-
menta characterstc of mutua or cooperatve organzatons demo-
cratc ownershp and contro emphaszed by the court n the eystone
case. The fact that the sharehoders do not share equay wth
pocyhoders n dstrbutons n qudaton does not effect such deter-
mnaton. The fact that the companes have prevousy fed edera
ncome ta returns as mutua nsurance companes does not precude
the Interna Revenue Servce, as the resut of a detaed e amnaton
of current ncome ta returns and study of the actua ownershp and
operaton thereof, from subsequenty hodng such companes are
not mutua nsurance companes.
M050 56 27
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Regs. 118, 231-3. 08
ccordngy, t s hed that n the absence of democratc ownershp
and contro by the pocy members an nsurance company may not
quafy as a mutua nsurance company ta abe under the provsons
of secton 207 of the Code. Thus, the nsurance companes n the n-
stant case woud be sub|ect to ta under the provsons of secton 20
of the Code, as nsurance companes other than fe or mutua com-
panes.
Reguatons 118, Secton 39.207-3: Dvdends
to pocyhoders.
Deductbty of an undetermned amount representng a dvdend
decaraton based on e cess of earnngs over surpus ncrement. See
Rev. u. 55-300, 06.
SUPPL M NT NONR SID NT LI N INDI IDU LS
S CTION 211. T O NONR SID NT LI N
INDI IDU LS
Reguatons 118, Secton 39.211-7: Ta aton
of nonresdent aen ndvduas.
Informaton requested by a Unted ngdom bank n regard to a
domestc corporaton whch wthhods ta on dvdends pad to
Unted ngdom stockhoders. See Rev. Ru. 55-9, page 075.
S CTION 212. GROSS INCOM
Reguatons 118, Secton 39.212-2: cuson
of earnngs of foregn shps or arcraft
from gross ncome.
quvaent e empton requrement wth respect to enezuea. See
Rev. Ru. 55- 07, page 77.
suppement foregn corporatons
S CTION 231. T ON OR IGN CORPOR TIONS
Reguatons 118, Secton 39.231-1: Ta aton
of foregn corporatons.
Canadan mutua nvestment company composed substantay of
stockhoders resdent n the Unted States. See Rev. Ru. 55 182
page 77.
Reguatons 118, Secton 231-3: cuson
of earnngs of foregn shps or arcraft
from gross ncome.
quvaent e empton requrement wth respect to enezuea. See
Rev. - 55- 07, page 77.
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09 Regs. 118, 39.251 (d)-.
SUPPL M NT . POSS SSIONS O T UNIT D ST T S
S CTIONS 251(d). INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S: D INITION
Reguatons 118, Secton 39.251 (d)-: Defn- Rev. Ru. 55-6
tons.
( so Secton 116, Secton 39.116-1 Secton
131, Secton 39.131 (h)-.)
The Ryukyu Isands, whch ncude the sand of Oknawa, do not
consttute a possesson of the Unted States wthn the meanng of
secton 251 of the Interna Revenue Code of 1939, but do consttute
a foregn country under sectons 116(a) and 131 of the Code. The
Ryukyu Isands are wthn the geographca area covered by the
terms of the Treaty of Peace wth apan and are not a part of the
Terrtory of the Pacfc Isands.
Revenue Rung 199, C. . 1953-2, 225, superseded.
queston has arsen as to the factua correctness of the hodng n
Revenue Rung 199, C. . 1953-2,225, that Oknawa and the Ryukyu
group to whch t beongs are a part of the former apanese mandated
sands now known as the Terrtory of the Pacfc Isands, whch are
admnstered by the Unted States under a trusteeshp agreement be-
tween the Unted States and the Securty Counc of the Unted
Natons. See I. T. 080, C. . 1952-1, 39.
Chapter II of the Treaty of Peace wth apan, U. S. C. C. . S.
o. 2, 1951, p. 2730, whch entered nto effect on pr 28, 1952
(Presdenta Procamaton 297 , 17 ed. Reg. 85, 3813 (1952)), s
entted Terrtory and provdes n part as foows: rtce 2(d).
apan renounces a rght, tte and cam n connecton wth the
League of Natons Mandate System, and accepts the acton of the
Unted Natons Securty Counc of pr 2, 19 7, e tendng the
trusteeshp system to the Pacfc Isands formery under mandate
to apan. rtce 3. apan w concur n any proposa of
the Unted States to the Unted Natons to pace under ts trustee-
shp system, wth the Unted States as the soe admnsterng au-
thorty, Nanse Shoto south of 29 north attude (ncudng the
Ryukyu Isands and the Dato Isands), Pendng the makng
of such a proposa and affrmatve acton thereon, the Unted States
w have the rght to e ercse a and any powers of admnstraton,
egsaton and |ursdcton over the terrtory and nhabtants of
these sands, ncudng ther terrtora waters. Thus, the ocaton
of the Ryukyu Isands s f ed as beng wthn the geographca
area to whch the terms of the Treaty of Peace appy and not a part
of the Terrtory of the Pacfc Isands.
The Interna Revenue Servce has been advsed that, n accordance
wth the terms of the Treaty of Peace wth apan, (1) the Ryukyu
Isands are at present beng admnstered by the Department of the
.rmy, (2) no proposa to pace these sands under a trusteeshp
as been made by the Unted States, and (3) t was ntended that
apan retan resdua soveregnty over these sands.
Whe the present powers of the Unted States over the Ryukyu
Isands are generay no ess e tensve than f the Unted States had
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Reg . 118, 39.273-1. 10
n fact acqured fu soveregnty over them, the fact remans that
the Unted States does not have absoute authorty over these sands.
See /State of the Netherands v. edera Reserve ank, 201 ed. (2d)
55, at 61.
ccordngy, t s hed that the Rvukyu Isands, whch ncude
the sand of Oknawa, do not consttute a possesson of the Unted
States wthn the meanng of secton 251 of the Interna Revenue
Code of 193 ), but do consttute a foregn country for the purposes
of sectons 116(a) and 131 of the Code.
Revenue Rung 190, supra, s hereby superseded.
S CTION 251 (|). INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S: MPLOY S O
UNIT D ST T S
Compensaton receved by a Unted States ctzen, from knder-
garten and nursery schoos operated on Unted States bases or nstaa-
tons ocated n possessons of the Unted States whch are operated
on a permssve bass rather than under offca nstructons or regu-
atons. See Rev. Ru. 55-381, page 9 .
S CTION 252. CITIZ NS O POSS SSIONS O
UNIT D ST T S
Reguatons 118, Secton 39.252-1: Status of
ctzens of Unted States possessons.
Saares or wages pad to ctzens of Guam. See Rev. Ru. 55-18 ,
page 500.
SUPPL M NT L. SS SSM NT ND COLL CTION O D ICI NCI S
S CTION 273. OP RDY SS SSM NTS
Reguatons 118, Secton 39.273-1: eopardy T. D. 6121
assessments.
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT SO.
INCOM T T L Y RS GINNING T R D C M R 31, 1951
Reguatons 118 amended to conform to Pubc Law 27 (83 1
Cong.), reatng to the abatement of |eopardy assessments.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On ugust 12,195 , a notce of proposed rue makng wth respect
to amendment of Reguatons 118 (26 C R, pt. 39) to conform to
Pubc Law 27 (83d Cong.) C. 13. 1953-2, 8 , approved ugust
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11 Regs. 118, 39.273-1.
1 ,1953, reatng to the abatement of |eopardy assessments, was pub-
shed n the edera egster (19 . R. 5088). Snce no comments
wth respect to the rues proposed have been receved, the amendments
to Reguatons 118 set forth beow are hereby adopted:
Paragraph 1. Secton 39.273 s amended by addng at the end
thereof the foowng:
(a) k batement f eopardy Does Not st. The Secretary may abate
the |eopardy assessment If he fnds that |eopardy does not e st. Such abate-
ment may not be made after a decson of The Ta Court of the Unted States
n respect of the defcency has been rendered, or, f no petton s fed wth
The Ta Court of the Unted States, after the e praton of the perod for fng
such petton. The perod of mtaton on the makng of assessments and the
begnnng of dstrant or a proceedng n court for coecton, n respect of any
defcency, sha be determned as f the |eopardy assessment so abated had not
been made, e cept that the runnng of such perod sha n any event be sus-
pended for the perod from the date of such |eopardy assessment unt the
e praton of the tenth day after the day on whch such |eopardy assessment
Is abated.
Sec. 273, as amended by Pub. Law 27 (83d Cong.). Such Pubc Law added
subsecton (a) k and made such subsecton appcabe to a |eopardy assess-
ments made, or n e stence, on the date of enactment of such ct ( ugust 1 ,
1053) and a |eopardy assessments made thereafter.
Par. 2. Secton 39.273-1 s amended by addng at the end thereof
the foowng:
(g)(1) The dstrct drector may abate a |eopardy assessment whch e sted
on ugust 1 ,1053, or whch s made on or after such date, f t s shown to hs
satsfacton that |eopardy does not e st. n abatement may not be made under
ths paragraph after a decson of the Ta Court n respect of the defcency has
been rendered or, f no petton s fed wth such Court, after the e praton of
the perod for fng such petton.
(2) The abatement of a |eopardy assessment, because |eopardy does not e st,
w have the effect of abatng any proceedngs to coect the ta so assessed.
The dstrct drector may then p oeeed to assess and coect a defcency n the
manner authorzed by aw as f the |eopardy assessment so abated had not
e sted. If a notce of defcency had been sent to the ta payer pror to the
abatement of the |eopardy assessment, whether such notce was sent before or
after the makng of the assessment, the abatement of such assessment w not
affect the vadty of the notce or of any proceedngs for redetermnaton based
thereon. The perod of mtaton on the makng of assessments and the begn-
nng of dstrant or a proceedng n court for coecton n respect of any de-
fcency sha be determned as f the |eopardy assessment so abated had not
been made, e cept that the runnng of such perod sha n any event be sus-
pended for the perod from the date of such |eopardy assessment unt the
e praton of the 10th day after the date on whch such |eopardy assessment
Is abated. The provsons of ths subparagraph may be ustrated by the fo-
owng e ampe.
ampe. On ebruary 15,105 , 28 days before the three-year statutory perod
of mtatons on assessments woud otherwse have e pred, a |eopardy assess-
ment was made n respect of a proposed defcency. On pr 2, 105 , before the
mang of the notce of defcency provded for by secton 273(b), ths assess-
ment was abated. y vrtue of ths subparagraph, the perod of mtatons for
the makng of an assessment dd not e pre pror to May 10, 105 , 1. e., the 38th
day after the date of the abatement. If the notce of defcency provded for
In secton 273(b) had been sent pror to the abatement, the runnng of the
statute of mtatons on assessments woud have been suspended pursuant to
the provsons of secton 277.
(3) Request for abatement of a |eopardy assessment, because |eopardy does
not e st, shoud be fed wth the dstrct drector and must state fuy the
reasons for the request and must be supported by such evdence as w enabe
the dstrct drector to determne that the coecton of the defcency s not n
|eopardy. See secton 273(c) and secton 30.273-1 (b) wth respect to the abate-
ment of eopardy assessments whch are e cessve n amount.
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Regs. 118, 39.275-2. 12
(Ths Treasury Decson s ssued under the authorty contaned
n sectons 62 and 3791 of the Interna Revenue Code of 1939 (53 Stat.
32, 6 26 U. S. C. 62, 3791).)
ustn . Wnke,
ctng Commssoner of Interna Revenue.
pproved anuary 27,1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 31, 1935, 8: 52 a. m.)
S CTION 275. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION
Reguatons 118, Secton 39.275-2: Perod of Rev. Ru. 55- 15
mtaton upon coecton of ta .
or the purpose of secton 275(e) of the Interna Revenue Code
of 1939 gross ncome of a member of a partnershp ncudes hs
proportonate share of the gross ncome of the partnershp. ny
partner s share of the gross ncome reported n the partnershp n-
formaton return s consdered as havng been returned by the ta -
payer, as such nformaton return s a return by or on behaf of each
partner.
dvce as been requested whether the Interna Revenue Servce
w foow I. T. 39S1, C. . 19 9-2, 78, and take the poston n the
appcaton of secton 275(c) of the Interna Revenue Code of 1939
that a partner s gross ncome ncudes hs proportonate share of part-
nershp gross ncome.
Secton 275(c) of the 1909 Code provdes as foows:
Omsson rom Gkoss Income. If the ta payer omts from gross ncome an
amount propery ncudbe theren whch s n e cess of 25 per centum of the
amount of gross ncome stated n the return, the ta may be assessed, or a pro-
ceedng n court for the coecton of such ta may be begun wthout assessment,
at any tme wthn 5 years after the return was ted.
I. T. 3981, supra, hods that a partner s gross ncome for the purpose
of secton 251 of the Code ncudes hs proportonate share of partner-
shp gross ncome rather than hs share of net ncome. In G. C. M.
20379, C. . 1950-1, 58, t s hed that, wth stated quafcatons, the
sae of a partnershp nterest shoud be treated as the sae of a capta
asset rather than a sae of the partner s undvded nterest n each and
every asset owned by the frm.
The courts have hed that a partner s not bound by the net ncome
shown n the partnershp return but may offset hs share of partner-
shp tems aganst correspondng ndvdua tems, and vce versa,
ndcatng that they recognze that the partners at a tmes own a share
nterest n the gross ncome of the partnershp. See m Mosbachcr
v. Unted States, 311 U. S. 619, and arry II. Neuberger v. Comms-
soner, 311 U. S. 83, Ct. D. 1 70, C. . 19 0-2, 228. The Neuberger
case, n effect, affrmed Zeda . ennngs et a. v. Commssoner, 110
ed. (2d) 9 5, certorar dened, 311U. S. 70 and ohn Crak v. Unted
States, 31 ed. Supp. 132. The ennngs case hed that a partner s
share of the frm gambng gans offset hs ndvdua gambng osses
under provsons aowng gambng osses ony as offsets to gambng
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13 Regs. 118, 39.29 -1.
gans. The Crak case hed that a nonresdent aen ndvdua who
was a member of partnershps operatng n the Unted States but
wth ncome from sources wthout the Unted States was not ta abe
upon hs share of such ncome from wthout the Unted States under
secton 213(c) of the Revenue ct of 1918, provdng that n the
case of nonresdent aen ndvduas gross ncome ncudes ony the
gross ncome from sources wthn the Unted States. It s we
recognzed that gross ncome, as earned, beongs to some ta abe
entty, and that a partnershp s not a ta abe entty. It ogcay
foows that the partners shoud be consdered as the owners of part-
nershp gross ncome.
In L. Genn Swtzer et a. v. Commssoner, 20 T. C. 759, the court
hed that, for the purposes of secton 275(c) of the Code, the gross
ncome of the partne-s ncuded ther dstrbutve share of the net
ncome of the partnershp. owever, upon the pettoner s appea to
the Unted States Court of ppeas for the Nnth Crcut, the Comms-
soner conceded the ssue and agreed that the partners gross ncome
shoud ncude ther proportonate share of the partnershp s gross
ncome. ccordngy, the case was remanded to The Ta Court of the
Unted States and on September 28, 195 , t vacated and set asde ts
decson wth respect to ths ssue. In accordance wth such concesson,
the poston taken n I. T. 3981, supra, and the nonacquescence, C. .
1951-1, , n the state of R. L. Langer et a. v. Commssoner, 16 T. C.
1, t s hed that for the purpose of secton 275 (c) of the Code gross
ncome of a member of a partnershp ncudes hs proportonate share
of the gross ncome of the partnershp. See arry Landau et a. v.
Commssoner, 21 T. C. 1 . ny partner s share of the gross ncome
reported n the partnershp nformaton return shoud be consdered
as havng been returned by the ta payer as such nformaton return
s a return by or on behaf of each partner.
SUPPL M NT M. INT R ST ND DDITIONS TO T T
S CTION 29 . DDITIONS TO T T IN
C S O NONP YM NT
Reguatons 118, Secton 39.29 -1: ddtons Rev.Ru. 55-29
to the ta .
ddtons to the ta Imposed under secton 29 (d) of the In-
terna Revenue Code of 1939 shoud not be dsturbed by the app-
caton of a reef provson such as a net operatng oss carryback.
dvce has been requested whether the addtons to the ta m-
posed under secton 29 (d) of the Interna Revenue Code of 1939 are
affected by the appcaton of a reef provson such as a net operatng
oss carryback.
In ohn . Mannng v. Seeey Tube and o Company, 338 U. S.
561, Ct. D. 1729, C. . 1950-1, 113, the court hed that whe a net
operatng oss carryback may serve to emnate a defcency for a pre-
vous year, the nterest whch had theretofore accrued on such de-
fcency was not emnated. In hodng that the Government was
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Regs. 118, 39.29 -1. 1
entted to nterest, the court concuded that there was a rea defcency
e stng pror to the occurrence of the carryback oss and the rght to
nterest s dependent upon the e stence of a defcency.
In G. C. M. 26 55, C. . 1950-1, 118, t s hed that nterest and
penates assessed and coected n connecton wth a edera ncome
ta abty shoud not be credted or refunded even though such ta
abty s reduced or emnated by net operatng oss carrybacks.
evenue ung 173, C. . 1953-2, 227, smary hods that an ad
vaorem penaty (neggence, denquency, or fraud) based upon the
amount of a defcency e stng pror to the appcaton of a reef
provson such as a net operatng oss carryback s to be mposed n
connecton wth a edera ncome ta abty, even though the ta
as reported n the orgna return s equa to or n e cess of the correct
ta as fnay determned after the appcaton of such provson.
These rungs foow the ratonae of the Seeey Tube and o Com-
pany case. s was ponted out n G. C. SI. 26 55, The statutory pat-
tern requrng prompt payment of ta es was the foundaton of the
opnon n the Seeey Tube and o Company case. The requrement
of prompt fng of returns s equay a statutory duty of a ta payer.
The carryback provsons of the Code do not modfy that duty.
The fng of a decaraton of estmated ta and the payment of n-
staments of estmated ta decared are kewse statutory dutes of a
ta payer. Secton 29 (d) of the Code mposes addtons to ta n
certan cases where the ta payer has faed to perform such dutes.
It s beeved the reasonng of the above-cted case and rungs s
equay appcabe to a case where addtons to ta have been mposed
by that secton. ccordngy, t s hed that the addtons to the ta
propery mposed under secton 29 (d) of the Code shoud not be
dsturbed by the appcaton of a reef provson such as a net op-
eratng oss carryback.
Reguatons 118, Secton 39.29 -1: ddtons ev. u. 55-22
to the ta .
The addtons to the ta provded by secton 29 (d) (1) ( ) or ( )
of the Interna Revenue Code of 1939 for faure to fe a decara-
ton or pay an nstament of estmated ta , and by secton
29 (d) (2) for substanta underestmaton of estmated ta are
both appcabe where there has been a faure to fe a decaraton
of estmated ta or faure to pay the ta and there has been a sub-
stanta underestmaton of estmated ta .
dvce has been requested whether the decson n the case of Unted
States v. Caude . Rdey, et a., 120 ed. Supp. 530, w be foowed
n determnng the addtons to the ta under secton 29 (d) of the
Interna evenue Code of 1939 n cases where no decaratons of est-
mated ta are fed.
Secton 29 (d) (1) ( ) of the Code provdes, n part, that
In the case of a faure to make or fe a decaraton of estmated ta wthn the
tme prescrbed there sha be added to the ta 5 per centum of each n-
stament due but unpad, and n addton, wth respect to each such nstament
due but unpad, 1 per centum of the unpad amount thereof for each month
durng whch such amounts reman unpad. In no event sha the aggregate
addton to the ta e ceed 10 per centum of the unpad porton of such
Instament.
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15 Regs. 118, 39.29 -1.
Secton 29 (d) (1) ( ) of the Code provdes, n part, that
In the case of the faure to pay an nstament of the estmated ta
wthn the tme prescrbed there sha be added to the ta 5 per centum
of the unpad amount of such nstament, and n addton 1 per
centum of such unpad amount for each month durng whch such amount
remans unpad. In no event sha the aggregate addton to the ta e -
ceed 10 per centum of the unpad porton of such nstament.
Secton 29 (d) (2) of the Code provdes, n part that
If SO per centum of the ta , n the case of ndvduas , e ceeds
the estmated ta , there sha be added to the ta an amount equa to
6 per centum of the amount by whch such ta e ceeds the est-
mated ta .
The ta payer n the Rdey case had not fed a decaraton of est-
mated ta and had not pad any nstament of estmated ta . mong
the penates or addtons to the ta asserted by the Commssoner were
(1) 10 percent of the ta for faure to fe a decaraton of estmated
ta as provded by secton 29 (d) (1) ( ) of the Code and (2) 6 per-
cent of the amount by whch the ta e ceeded the estmate (zero) for
substanta underestmate of estmated ta as provded by secton
29 (d) (2) of the Code. The court hed that the addton of 6 percent
for substanta underestmate shoud not be added, statng that the
greater addton to the ta mposed by secton 29 (d) (1) ( ) for fa-
ure to fe a decaraton prohbted the assessment of the esser add-
ton to the ta for underestmatng.
Secton 39.29 -1 (a) of Reguatons 118 states that secton 29 (d)
provdes for certan addtons to the ta n the case of
(1) aure to fe tmey a decaraton of estmated ta
(2) aure to pay wthn the tme prescrbed any nstament
of decared estmated ta and
(3) Substanta underestmate of the estmated ta .
It has been the poston of the Interna Revenue Servce that where
a decaraton of estmated ta was not fed wthn the tme prescrbed
and there s no showng of reasonabe cause, the addton to the ta
provded by secton 29 (d) (1) ( ) s appcabe. If n the same case
a substanta underestmate of ta aso occurs, the addton to the ta
provded by secton 29 (d) (2) s aso appcabe. Secton 39.29 -1
(b) (3) () (a) of Reguaton 118 states that n the event of a faure
to fe the requred decaraton the amount of the estmated ta for
the purposes of the addton to the ta mposed by secton 29 (d) (2)
s zero.
Ths provson of the reguatons has been uphed n severa cases.
or nstance, n G. . uer et v . v. Commssoner, 20 T. C. 308, at
page 316, the court states:
The faure of pettoners to fe decaratons of estmated ta wthn the tme
prescrbed for each of these years necessary resuted n a substanta under-
statement of estmated ta . We can not agree wth pettoners contenton
that because they fed no decaraton of estmated ta under secton 29 (d) (1),
they can not be her1, to have voated secton 29 (d) (2) for makng a substan-
ta underestmate of the estmated ta . The reguaton provdes that when a
decaraton of estmated ta Is not fed, the amount of the estmated ta , for the
Purpose of the provsons of secton 29 (d) (2) sha be zero, and that s the bass
used by respondent n computng the defcency under ths subsecton. The pet-
toners attack the reguaton as beng vod In that t dstorted the w of Con-
fess. The reguaton s couched n the same anguage used by Congress n
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Regs. 118, 5 39.362-2. 16
Conference Report . R. Report No. 510, 78th Cong. 1st Sess., C. . 19 3, 1351,
at page 1372 on egsaton coverng ths sub|ect and foows the procedure
theren prescrbed. It therefore appears that the reguaton actuay refects,
rather than dstorts, the w of Congress, and we uphod ts vadty.
or other cases supportng ths poston, see Domenc De ranco et u .
v. Commssoner, Ta Court Memorandum Opnon, entered Decem-
ber 19,1950 /. Ray Cook v. Commssoner, Ta Court Memorandum
Opnon, entered une 30,1952 and . D. Ledbcttcr v. Commssoner,
Ta Court Memorandum Opnon, entered March 31,1953.
ccordngy, n any case n whch there has been a faure to fe
a decaraton of estmated ta or to pay an nstament of estmated
ta decared and where there aso has been a substanta underestma-
ton of estmated ta , t s st the poston of the Interna Revenue
Servce that both the addton to the ta provded by secton
29 (d) (1) ( ) or ( ) of the Code for faure to fe a decaraton or
pay an nstament of estmated ta , and the addton to the ta pro-
vded by secton 29 (d)(2) for substanta underestmaton of est-
mated ta are appcabe.
SUPPL M NT R GUL T D IN STM NT COMP NI S
S CTION 362. T ON R GUL T D IN STM NT
COMP NI S
Reguatons 118, Secton 39.3C2-2: Method of Rev. Ru. 55- 16
ta aton of reguated nvestment companes.
or the purpose of the percentage requrement of secton 362(b)
of the Interna Revenue Code of 1939 reatng to the method of
ta aton of reguated nvestment companes, payments to share-
hoders upon ther redempton of ther shares n an open end regu-
ated nvestment company, representng ther proportonate part of
net ncome receved or recevabe up to the date of surrender of the
shares, sha be ncuded n determnng whether the company has
dstrbuted to ts sharehoders as ta abe dvdends at east 90 per-
cent of ts net ncome for the ta abe year.
dvce has been requested whether amounts pad to sharehoders of
a reguated nvestment company, representng ther proportonate
part of net ncome receved or recevabe up to the date of surrender
of ther shares for redempton, shoud be ncuded n determnng
whether the company has dstrbuted to ts sharehoders as ta abe
dvdends at east 90 percent of ts net ncome for the ta abe year for
the purpose of determnng whether the company may obtan the
benefts provded n secton 362(b) of the Interna Revenue Code of
1939.
The trust agreement, under whch the reguated nvestment com-
pany was created, provdes that reguar and e tra cash dvdends re-
ceved and earned nterest receved n respect of the trust property
become payabe to the sharehoders of record on partcuar dates.
The agreement aso provdes that the dstrbutons of profts reazed
on the sae of underyng assets may be dstrbuted from tme to tme.
Under the agreement, sharehoders may present ther shares at any
tme for qudaton and redempton. Upon the surrender to the
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17 Regs. 118, 39.362-2.
trustee of a certfcate for shares, the sharehoders are entted to re-
ceve n cash the vaue of ther shares as determned under the agree-
ment, such vaue representng ther proportonate share of a the
assets, ncudng ther share of dvdends and nterest receved or re-
cevabe, ess the deductons specfed theren, to the date of surrender.
The portons of the dstrbutons so made to surrenderng sharehoders,
representng ther proportonate part of the net ncome (consstng
of dvdends and earned nterest receved or recevabe), aocabe to
the surrendered shares to the date of surrender, are referred to as
equazaton payments.
reguated nvestment company as defned by secton 361(a) of
(he 1939 Code may be ta abe under Suppement of such Code. The
requrements n order for t to be so ta ed are (1) that t dstrbute
durng the ta abe year to ts sharehoders as ta abe dvdends, other
than capta gan dvdends, an amount not ess than 90 percent of ts
net ncome for the ta abe year computed wthout regard to net
ong-term and net short-term capta gans and (2) that t compy for
such year wth a rues and reguatons prescrbed by the Comms-
soner, wth the approva of the secretary, reatng to records requred
to be kept for the purpose of ascertanng the actua ownershp of ts
outstandng stock. See secton 362(a) of the Code and sectons
39.362-2 and 39.362-3 of Reguatons 118.
The sharehoders of open end nvestment companes (companes
whch may ssue new shares wth practcay no mtaton) are
entted at any tme, at ther opton, to surrender ther shares for re-
dempton. In the event such redemptons are e tensve n any ta -
abe year, the amount of the equazaton payments to sharehoders
may e ceed 10 percent of the net ncome for that year.
In Natona Securtes Seres Industra Stock Seres et a. v. Com-
mssoner, 13 T. C. 88 , acquescence, C. . 1950-1, , the court hed
that the accumuated net earnngs dstrbuted by the ta payers durng
the ta abe year on the redempton of shares were not preferenta
dvdends wthn the meanng of secton 27(h) of the 1939 Code and
that they were entted to ncude such sums as dvdends pad n
determnng ther basc surta credts under sectons 362(d) and
27(b)(1) of the Code.
though the factua stuaton n the nstant case s somewhat
dfferent from that e stng n the Natona Securtes Seres Indus-
tra Stock Seres case, the prncpes ad down n the atter case
are equay appcabe. ccordngy, t s hed that the amount of
equazaton payments to the redeemng sharehoders, representng
ther proportonate part of net ncome receved or recevabe up to
the date of surrender of ther shares, may be ncuded n deter-
mnng whether a reguated nvestment company has dstrbuted to ts
sharehoders as ta abe dvdends at east 90 percent of ts net ncome
for ts ta abe year (computed wthout regard to net ong-term and
net short-term capta gans), so as to compy wth the requrements
of secton 362 ( b ) of the 1939 Code.
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Regs. 118, I 39.372-5. 18
SUPPL M NT R. C NG S ND DISTRI UTIONS IN O DI NC TO ORD RS
O S CURITI S ND C NG COMMISSION
S CTION 372. SIS O D T RMINING G IN OR LOSS
Reguatons 118, Secton 39.372-5: ass of Rev. Ru. 55-355
stock or securtes acqured by sharehoder
upon ta -free dstrbuton under Secton
371(c).
ta payer, n one transacton, surrendered a of ts 6 and 7
preferred stock n a regstered pubc utty hodng company and
receved common stock of three pubc utty subsdary companes
under the nonta abe provsons of secton 371 of the Interna
Revenue Code of 103 ). Due to the manner of the e change, the ta -
payer s unabe to Identfy whcn of the stock receved was attrb-
utabe to each type of preferred stock e changed. ed, where
dentfcaton s ackng, the average rue s appcabe n deter-
mnng the bass of the common stock receved n the e change.
dvce has been requested as to the method of determnng the bass
of three pubc utty subsdary companes receved n e change for
preferred stock of the parent pubc utty hodng company.
The ta payer acqured varous bocks of 6 and 7 preferred stocks
of a regstered pubc utty hodng company at varous tmes and at
dfferent prces. Pursuant to a pan of qudaton of such company,
approved by an order of the Securtes and change Commsson, the
ta payer, n one transacton, surrendered a of ts 6 and 7 preferred
stock and receved n e change therefor common stocks of three pubc
utty subsdary companes of the qudated company, pus cash
dvdend ad|ustments. The gan to the ta payer on the e change
was not recognzed e cept to the e tent of cash receved n accordance
wth the provsons of secton 371(a) and 371(e) (1) of the Interna
Revenue Code of 1939.
the stock receved by the ta payer n the e change was receved
smutaneousy n one ot and was n the form of certfcates represent-
ng, n each nstance, 100 shares of stock, wth any odd number of
shares of any one of the companes beng ncuded n one certfcate.
There was no dentfcaton or desgnaton as to whch shares of the
common stocks of the three pubc utty companes were attrbutabe
to any specfc shares of the 6 or 7 preferred stock surrendered n
the e change.
The specfc queston presented s whether the ta payer may com-
ute an average bass for the common stock receved upon the
qudaton of the pubc utty company. It s fary we setted
that where dentfcaton s ackng, an average bass must be used
for stock of another corporaton receved n a nonta abe e change
pursuant to a reorganzaton under secton 112(g) (1) of the Code of
1939. See Lyde R. rrott v. Commssoner, Unted States oard of
Ta ppeas Memorandum Opnon, entered une 19, 19 2, affrmed,
136 ed. (2d) 9 and Chrstan W. on Gunten v. Commssoner, 28
. T. . 702, affrmed, 76 ed. (2) 670. In the nstant case, athough
the stock was not acqured n a nonta abe e change pursuant to a
reorganzaton under secton 112(g)(1) of the Code, the stock was
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19 Regs. 130, 0. 30-2.
acqured n a ta -free e change as a resut of a qudatng dstrbuton
under the provsons of secton 371 of the Code.
ccordngy, t s hed that the ta bass of the shares of common
stock receved n the e change shoud be determned by aggregatng
nto one fgure the respectve bases of the varous ots of the 6 and
7 preferred stock e changed and, after approprate ad|ustments,
under secton 372(a) of the Code, for cash receved and gan recog-
nzed, aocatng such fgure to the common stocks n proporton to
the tota far market vaue of the shares of each corporaton on the
effectve date of the e change. The amount thus aocated to the
common stock of each company w be dvded by the tota number
of shares of that company acqured n the e change so that the bass
of each share w be an average bass.
SU C PT R D. C SS PRO ITS T
P RT L R T ND COMPUT TION O T
S CTION 30. IMPOSITION O T
Reguatons 130, Secton 0. 30-2: Rate of Rev. Ru. 55-9
ta .
Where a corporaton, whch has undergone a de facto dssou-
ton n 1936, s reactvated as of anuary 1, 1950, as a resut of a
nonta abe transacton under secton 112(b)(5) of the Interna
Revenue Code of 1939, such corporaton s hed to have commenced
busness as of the date of reactvaton and s a new corporaton
wthn the meanng of secton 30(e) of the Code.
dvce has been requested whether the date of commencement of
busness or the date of recommencement of busness shoud be used n
determnng whether a corporaton s a new corporaton wthn the
meanng of secton 30(e) of the Interna Revenue Code of 1939.
The ta payer was organzed n 191 wth an authorzed capta
structure consstng of 25a: shares of preferred stock and 75a shares
of common stock. In 1936, ts net assets were transferred to a part-
nershp, the members of whch were stockhoders of the corporaton.
The stockhoders nterest n the partnershp was n the same propor-
ton as ther stock hodngs n the corporaton. though the entre
outstandng capta stock was canceed, the corporaton retaned ts
charter. rom 1936 to 1950 the corporaton had no ncome and ts
ony actvtes were the fng of annua statements and payment of
State franchse ta es.
s of anuary 1,1950, the corporaton was reactvated and the part-
nershp transferred ts net assets to the corporaton and dssoved.
The corporaton amended ts charter to authorze 10a: shares of com-
mon stock, whch together wth 600a doars of debentures were ssued
n e change for the partnershp s net assets.
Secton 30(e) of the Code provdes n effect that n the case of a
corporate ta payer whch commenced busness after uy 1, 19 5,
and whose ffth ta abe year ends after une 30, 1950, e cess profts
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Regs. 130, f 0. 30-2. 20
ta sha be eved at specfed rates dfferent from those mposed gen-
eray by secton 30(a) of the Code.
Secton 0. 30-2(e) (3) of Reguatons 130 provdes that the date
the corporaton commenced busness sha be determned for purposes
of secton 30(e) and of (e) of ths secton under the rues provded n
the reguatons promugated under secton 5, whch reates to the
computaton of average base perod net ncome n the case of new
corporatons.
Secton 0. 5-1 (a) (2) of Reguatons 130 provdes n part as
foows:
The words commenced busness do not have the same meanng as n e st-
ence. Ordnary, a corporaton commences busness when t starts the bus-
ness operatons for whch t was organzed a corporaton comes nto e stence
on the date of ts ncorporaton. Mere organzatona actvtes, such as ncor-
poraton or the ssuance of capta stock, are not aone suffcent to show com-
mencement of busness. If the actvtes of the corporaton have advanced to
the e tent necessary to estabsh the nature of ts busness operatons, t w
be deemed to have commenced busness. or e ampe, the acquston of operat-
ng assets whch are necessary to the type of busness contempated may con-
sttute the commencement of busness.
In I. T. 3S71, C. . 19 7-2, 62, t was hed that upon presentaton
of the facts to the coector, a corporaton whch has ceased busness
operatons, has retaned no assets, and has no ncome, may be reeved
from fng edera ncome ta returns even though the corporaton
has not been formay dssoved. Ths concuson was based on the
fact that there was no specfc provson n secton 29.52-1 of Regua-
tons 111 (now secton 39.52-1 of Reguatons 118) wth respect to
the necessty of fng a edera ncome ta return n the case of a
corporaton whch has ceased busness operatons but has not been
formay dssoved. It was aso observed that the above-mentoned
secton of the reguatons provded that a corporaton whch has re-
ceved a charter but has never perfected ts organzaton, whch has
transacted no busness and whch has had no ncome, may be reeved
of the necessty of makng a return as ong as t remans n an un-
organzed condton. The concuson reached n I. T. 3871, supra,
s further supported by reference to the decson n amn Chevroet
Co. v. Commssoner, 3 T. C. 107G, wheren t was hed that the Com-
mssoner acted propery n annuazng, pursuant to secton 711(a)
of the 1939 Code, the e cess profts ta return fed for the caendar
year 19 0 by a corporaton whch on une 30,19 0, dstrbuted a ts
assets, sub|ect to abtes, to ts stockhoders and dscontnued ts
busness, but dd not surrender ts charter. The court stated n effect
that even concedng that under State aw the corporaton had a ega
e stence for the entre caendar year t dd not foow that for pur-
poses of ncome and e cess profts ta dssouton may not occur pror
to the date the charter s canceed that there may be a de facto
dssouton even though there s not a de |ure one and that snce tho
corporaton had no capta, no ncome and no e pense and was a
mere empty she there coud be no doubt that there was a de facto
dssouton as of the date of the qudaton.
ccordngy, assumng the reactvaton of the corporaton as of
anuary 1,1950, resuted from a nonta abe transacton under secton
112(b)(5) of the 1939 Code, t s hed that a de facto dssouton
occurred n 193G that the ta payer termnated ts busness at that
tme and that the corporaton s deemed a new corporaton whch
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21 Regs. 130, 0. 31-1.
commenced busness as of the date of such reactvaton, wthn the
meanng of secton 30(e) of the Code.
Reguatons 130, Secton 0. 30-2: ate of ta .
ecton n the computaton of the e cess profts ta . See Rev. u,
55-376. beow.
S CTION 31. D INITION O D UST D C SS
P O ITS N T INCOM
Reguatons 130, Secton 0. 31-1: Defnton ev. u. 55-376
of ad|usted e cess profts net ncome.
( so Sectons 30, 33 eguatons 130,
Sectons 0. 30-2, 0. 33(a)-2.)
n ad|ustment sha be made for Interest on borrowed capta
under secton 33(a) (1) (N) or (O) of the Interna Revenue Code
of 1939 n those cases where (1) the tota of the e cess profts credt
(aowed under secton 3 ) and the unused e cess profts credt
ad|ustment (aowed under secton 32) s ess than 25,000 and
therefore, such sum s, pursuant to secton 31, ncreased to 25,000
and (2) where the ta payer s a new corporaton whose ta abty,
computed under the aternatve method set forth n secton 30(e)
(1), s ess than under the other computatons provded for n
secton 30.
dvce has been requested whether an ad|ustment shoud be made
for nterest on borrowed capta under secton 33(a) (1) (N) or (O)
of the Interna evenue Code of 1939 n those cases where (1) the
tota of the e cess profts credt (aowed under secton 3 ) and the
unused e cess profts credt ad|ustment (aowed under secton 32)
s ess than 25,000 and therefore, such sum s, pursuant to secton 31,
ncreased to 25,000 and (2) where the ta payer s a new corporaton
whose ta abty, computed under the aternatve method set forth
n secton 30(e) (1), s ess than under the other computatons pro-
vded for n secton 30.
Secton 30(a) mposes a ta upon the ad|usted e cess profts net
ncome of every corporaton. Ths ad|usted e cess profts net ncome
s defned by secton 31 as the e cess profts net ncome (as defned
n secton 33(a)) mnus the sum of the e cess profts credt (aowed
under secton 3 ) and the unused e cess profts credt ad|ustment
(aowed under secton 32) f the sum of the e cess profts credt
and the unused e cess profts credt ad|ustment shoud be ess than
25,000, secton 31 provdes that such sum s to be ncreased to 25,000.
Ths contempates an ncrease n the e cess profts credt and the un-
used e cess profts credt ad|ustment, and not a substtuton of a new
credt. Therefore, a corporaton w, n each nstance, have a credt
aowed under secton 3 . Secton 3 provdes for an e cess profts
credt based on ncome (secton 35) or a credt based on nvested
capta (secton 36).
s ndcated above, e cess profts net ncome s computed under
secton 33(a). That secton provdes that e cess profts net ncome
s norma ta net ncome pus or mnus certan ad|ustments set forth
theren. mong these ad|ustments, s an ad|ustment for nterest on
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Regs. 130, 0. 35-7. 22
borrowed capta the ad|ustment s made under secton 33(a)(1)
(N) f the e cess profts credt s based on nvested capta and under
secton 33(a) (1) (O) f the e cess profts credt s based on ncome.
Secton 30(a), n mposng a ta upon the ad|usted e cess profts
net ncome of a corporaton, provdes for certan aternatve computa-
tons. One of these, secton 30(a) (1) s a computaton based upon
ad|usted e cess profts net ncome the others, sectons 30(a) (2) ( ),
( ) and (C), and secton 150(a) (3), the atter of whch ncorporates
by reference any computaton under secton 30(e) wth respect to a
new corporaton usng a computaton based upon e cess profts net
ncome. The queston presented here s whether a corporaton whose
ad|usted e cess profts net ncome s beng sub|ected to ta , n makng
the aternatve computaton of ta under secton 30(a)(2) or (3),
upon ts e cess profts net ncome, or n computng ts ta under any
part of secton 30(a), after subtractng the mnmum of 25,000
aowed under secton 31, must utze the same e cess profts net
ncome that was used n computng the ad|usted e cess profts net
ncome under secton 31. It seems qute cear that t must. s stated
above, secton 30(a) mposes a ta upon ad|usted e cess profts net
ncome, whch must refect an e cess profts credt aowed under
secton 3 and hence an ad|ustment for nterest on borrowed capta.
It s then evdent, that those aternatve computatons thereunder
whch are based upon e cess profts net ncome are utzng the same
ncome sub|ect to ta under the genera rue enuncated theren but
wthout any reducton as provded for n secton 31.
ccordngy, t s hed that an ad|ustment sha be made for nterest
on borrowed capta under secton 33(a) (1) (N) or (O) of the Inter-
na Revenue Code of 1039 n those cases where (1) the tota of the
e cess profts credt (aowed under secton 3 ) and the unused
e cess profts credt ad|ustment (aowed under secton 32) s ess
than 25,000 and therefore, such sum s, pursuant to secton 31,
ncreased to 25,000 and (2) where the ta payer s a new corporaton
whose ta abty, computed under the aternatve method set forth
n secton 30(e)(1), s ess than under the other computatons pro-
vded for n secton 30.
S CTION 33. C SS PRO ITS N T INCOM
Reguatons 130, Secton 0. 33(a)-2: Computaton
of e cess profts net ncome for the ta abe year.
d|ustment for nterest on borrowed capta. See Rev. Ru. 55-376,
page 21.
S CTION 35(g). N T C PIT L DDITION OR R DUC-
TION C SS PRO ITS CR DIT S D ON INCOM
Reguatons 130, Secton 0. 35-7: Net cap- Rev. Ru. 55-392
ta addton or reducton.
In determnng a net capta addton tnder secton 35(g) of the
Interna Itevenue Code of 1939 for the purposes of the e cess profts
credt based on ncome, a dstrbuton by a corporaton of the stock
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23 Regs. 130, 0. 35-7.
of a whoy-owned subsdary as a dvdend, whch dstrbuton re-
duces the corporaton s nadmssbe assets and does not provde
funds used n ncreasng ts operatng assets, does not resut n a net
capta addton wthn the meanng of secton 35(g)(0) of the
Code.
dvce has been requested whether a corporaton s entted o a
net capta addton for the purposes of computng ts e cess profts
credt based on ncome where there has been a decrease n nadmssbe
assets n con|uncton wth an ncrease n operatng assets, the decrease
n nadmssbes resutng when stock n a whoy-owned subsdary
was dstrbuted by the corporaton to ts controng stockhoders as a
dvdend.
In the nstant case, the corporaton dstrbuted to ts two controng
corporatons as a dvdend a of ts stock n a whoy-owned sub-
sdary. The dstrbuton resuted n a net decrease n nadmssbe
assets of the dstrbutngcorporaton for the ta abe year n the
amount of 1.5-c doars. Durng the same ta abe year, there was a
net ncrease of .3 doars n the corporaton s operatng assets whch
came about by reasons other than the stock dstrbuton, snce no add-
tona funds were obtaned by the corporaton as a resut of the stock
dvdend.
Secton 35(g) (9) of the Interna Revenue Code of 1939 provdes
that the e cess of the decrease n nadmssbe assets for the ta abe
year over the net capta reducton for the ta abe year sha be con-
sdered the net capta addton (or sha be added to the net capta
addton otherwse determned), sub|ect to the e ceptons and mta-
tons provded n paragraph (10) of that secton. One of the mta-
tons n paragraph (10) s that such e cess of the decrease n nad-
mssbes sha not be greater than the e cess of the ncrease n
operatng assets for the ta abe year over the net capta addton
(determned wthout certan mtatons that are not pertnent here)
for that year.
The purpose of paragraph (9) of secton 35(g) of the Code s that
reductons n nadmssbe assets subsequent to the base perod are to
be aowed a credt as capta addtons provded that the addtona
capta s nvested n operatng assets. Senate Report No. 781, 82d
Cong., C. . 1951-2, 58 at 515. Operatng assets, as defned n para-
graph (10) of secton 35(g), supra, means property used n the
ta payer s trade or busness, stock n trade or other property of a
knd whch woud propery be ncudbe n the nventory of the ta -
payer, and property hed by the ta payer prmary for sae to cus-
tomers n the ordnary course of the ta payer s trade or busness. It
s apparent that the ntent of secton 35(g) (9) of the Code s that a
capta addton under that secton shoud resut where addtona
funds were obtaned from the dsposa of nadmssbe assets and such
funds are used to fnance e pandng manufacturng operatons,
factes, or nventores. Whe n some nstances an ncrease n
operatng assets coud come about by reasons other than by the sae
of nadmssbe assets, as, for e ampe, from ndebtedness ncurred
whch consttuted borrowed capta, a decrease n nadmssbe assets
for the purpose of secton 35(g)(9) woud not appear pertnent
where no addtona capta was made avaabe to the ta payer. In
the nstant case, no addtona funds were obtaned as a resut of the
050 56 28
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Regs. 130, 0. 56-1. 2
ta payer dstrbutng stock n a whoy-owned subsdary as a
dvdend.
ccordngy, t s hed that n determnng a net capta addton
under secton 35(g) of the Code for the purposes of the e cess profts
credt based on ncome, a dstrbuton by a corporaton of the stock of
a whoy-owned subsdary as a dvdend, whch dstrbuton reduces
the corporaton s nadmssbe assets and does not provde funds used
n ncreasng ts operatng assets, does not resut n a net capta
addton wthn the meanng of secton 35(g) (9) of the Code.
S CTION 36. C SS PRO ITS CR DIT S D ON
IN ST D C PIT L
Reguatons 130, Secton 0. 36-1: cess
profts credt based on nvested capta.
ccumuated earnngs and profts for nvested capta purposes
sha refect the ncrease or decrease n the edera ncome and e cess
profts ta abty of the precedng year attrbutabe to nventory
repacements, but not to refect any decrease because of net operatng
oss of unused e cess profts carrybacks. See Rev. Ru. 55-28, page 359.
S CTION 56. NORM LITI S IN INCOM IN
T L P RIOD
Reguatons 130, Secton 0. 56-1: bnor- Rev. Ru. 55-207
mates. v
( so Secton 721 Reguatons 112, Secton
35.721-1.
corporaton had, n pror years, pedged cotton produced by t
wth the Commodty Credt Corporaton as coatera for a oan.
It defauted upon ths oan, whereupon ts pedged cotton became,
under the terms of the oan agreement, part of a producer s poo
created and operated by the ender. The producer no onger had any-
rght of redempton wth respect to the cotton. It ater receved,
pursuant to the terms of the oan agreement, ts pro rata share of
the proceeds remanng after satsfacton of the oans chargeabe
aganst the pooed cotton and the e penses ncdent to conductng
the poo. ed, such amounts do not consttute abnorma ncome
wthn the meanng of secton 50(a) of the Interna Revenue Code
of 1939. ed further, even f such amounts coud be vewed as
abnorma ncome under secton 56(a) of the Code, such ncome
coud ony be attrbuted to the year n whch the ta payer s rght
to receve the ncome became f ed.
dvce has been requested whether, for the purposes of secton
56 of the Interna Revenue Code of 1939, the e cess of the proceeds
from the sae of pedged cotton over the amount of the producer s
oan from the Commodty Credt Corporaton consttutes abnorma
ncome attrbutabe to a year other than the year of accrua.
In 19 9, the ta payer, a corporaton keepng ts books on the
accrua method of accountng and reportng ts ncome on the bass
of a fsca year endng anuary 31st, obtaned a oan of 15a doars
from the Commodty Credt Corporaton, pedgng as coatera ts
19 8 cotton crop. In uy of 19 9 the ta payer defauted n payment
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25 Regs. 130, 0. 56-1.
of the oan and the cotton pedged as coatera for the oan was
paced n a poo by the Commodty Credt Corporaton. Durng ts
fsca year endng anuary 31,1951, the cotton was sod and the ta -
payer receved Z doars representng the proceeds of the sae, ess
payment of the oan and e penses. There s no showng that the sae
at a prce producng such proceeds was not the resut of mproved
busness condtons. The specfc queston presented s whether the
3| doars represents abnorma ncome attrbutabe to other years
wthn the purvew of secton 56 of the Code.
Secton 56(a) of the Code provdes n part:
(a) Defntons. or tbc purposes of ths secton
(1) bnorma ncome. The term abnorma ncome means ncome of
any cass descrbed n paragraph (2) ncudbe n the gross ncome of the
ta payer for any ta abe year under ths subchapter f t s abnorma for
the ta payer to derve ncome of such cass, or, f the ta payer normay
derves ncome of such cass but the amount of such ncome of such cass
ncudbe n the gross ncome of the ta abe year s n e cess of 115 per
centum of the average amount of the gross ncome of the same cass for the
four prevous ta abe years or, f the ta payer was not n e stence for
four prevous ta abe years, the ta abe years durng whch the ta payer
was n e stence.
Secton 56(a) (2) of the Code enumerates the separate casses of
ncome. In ths nstance the type of ncome under consderaton does
not appear to fa wthn the casses ( ) to (D) enumerated theren.
owever, t s provded that:
The cassfcaton of ncome of any cass not descrbed n subparagraphs
( ) to (D), ncusve, sha be sub|ect to reguatons prescrbed by the Secretary.
Secton 0. 56-2(b) of Reguatons 130 provdes n part:
Other ncome, not wthn a cass descrbed n subparagraphs ( )-(D) of
secton 56(a)(2), to whch secton 56 s appcabe may be grouped by the
ta payer, sub|ect to approva by the Commssoner on the e amnaton of the
ta payer s return, n such casses smar to those specfed n subparagraphs
( )-(D) of secton 56(a) (2) as are reasonabe n a busness of the type whch
the ta payer conducts, and as are approprate n the ght of the ta payer s bus-
ness e perence and accountng practce.
Secton 56(b) of the Code provdes n part:
(b) mount ttrbutabe to Other Tears. The amount of the net abnorma
ncome that s attrbutabe to any prevous or future ta abe year or years sha
be determned under reguatons prescrbed by the Secretary.
Secton 0. 56-3 of Reguatons 130 provdes n part:
mount ttrbutabe to Other Years. (a) The mere fact that an tem
ncudbe n gross ncome s of a cass abnorma ether n knd or n amount
does not resut n the e cuson of any part of such tem from e cess profts net
ncome. It s necessary that the tem be found attrbutabe under these regua-
tons n whoe or n part to other ta abe years. Ony that porton of the tem
whch s found to be attrbutabe to other years may be e cuded from the gross
ncome of the ta payer for the year for whch the e cess profts ta s beng
computed.
(b) Items of net abnorma ncome are to be attrbuted to other years n the
ght of the events n whch such tems had ther orgn, and ony n such amounts
as are reasonabe n the ght of such events. To the e tent that any Items of
not abnorma ncome n the ta abe year are the resut of such factors as hfru
prces, ow operatng costs, ncreased demand, or decreased competton, such
tems sha not be attrbuted to other ta abe years. Thus, no porton of an
tem s to be attrbuted to other years f such tem s of a cass of ncome whch
s n e cess of 115 percent of the average ncome of the same cass for the four
prevous ta abe years soey because of an mprovement n busness con-
dtons.
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Regs. 130, 0. 56-1 26
Thus, two condtons must be met before any ncome may be con-
sdered as abnorma wthn the meanng of secton 56 of the Code,
namey, (1) the ncome must be abnorma n knd or amount, and (2)
such abnorma ncome must be attrbutabe to other years.
The oan agreement wth the Commodty Credt Corporaton pro-
vdes, so far as s pertnent here, (1) that a hoders of the note sha
ook soey to the cotton for satsfacton of the oan, (2) that the
Commodty Credt Corporaton has the rght, f t so desres, to
purchase the pooed cotton, and (3) that the Commodty Credt Cor-
poraton s requred to remt the net proceeds, f any, to the producer.
rom the above t s apparent that the tte to the pooed cotton under
the crcumstances was n the producer and not the Commodty Credt
Corporaton. The proceeds from the sae beonged to the producer
and consttuted gross ncome. Ths gross ncome was the norma
ncome of the producer.
The above s n accord wth I. T. 01G, C. . 1950-2, 29, n whch
t s hed that advances receved by cotton producers under smar
oan agreements are oans and not proceeds from the sae of cotton,
even though the producer may not be caed upon to pay any defcency
whch may e st after the sae of the pedged cotton, provded the
producer reduces cotton acreage n accordance wth an agreement
wth the Secretary of grcuture and provded he has made no ms-
representaton n connecton wth the oan. dvances may be oans
even where there s absence of persona abty and the ender can
ook ony to the pedged securtes for repayment. so, f the pro-
ducer reazes an addtona amount upon qudaton of the poo, such
addtona amount w consttute ncome for the ta abe year n whch
hs rght to receve t becomes f ed, f he empoys the accrua method
of accountng.
In ths nstance the net proceeds of 3,r doars receved from the
sae of the producer s cotton, even f consdered to be abnorma ncome,
cannot be attrbuted to any year other than the fsca year endng
anuary 31,1951, as to do so woud be at varance wth the reguatons
and the estabshed accountng method of the ta payer. See Yuba
Gardens, Inc. v. Commssoner, 17 T. C. 33 .
ccordngy, t s hed that the 3 doars does not consttute ab-
norma ncome wthn the meanng of secton 56 of the Interna
Revenue Code of 1939 but consttutes norma ncome whch can ony
be attrbuted to the ta payer s ta abe year ended anuary 31, 1951.
Reguatons 130, Secton 0. 50-1: bnorma- ev. u. 55-377
tes n ncome n ta abe year.
or e cess profts ta purposes, the Increases n the redemp-
ton prces of nonnterest-bearng obgatons whch are reported as
ncome receved n any ta abe year by a corporaton on the cash
bass of accountng, pursuant to an eecton under secton 2(b) of
the Interna Revenue Code of 1939, consttute, to the e tent of the n-
come accrued up to the tme of the eecton, a separate cass of
abnorma ncome attrbutabe to the years In whch the ncreases
had ther orgn under secton 56 of the 1939 Code.
dvce has been requested whether certan ncreases n redempton
prces of nonnterest-bearng obgatons ssued at a dscount, under
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27 Regs. 130, 0. 56-1.
the crcumstances set forth beow, consttute abnorma ncome at-
trbutabe to other years wthn the meanng of secton 56 of the
Interna Revenue Code of 1939.
The corporaton keeps ts books and records and fes ts edera
ncome ta returns on the cash recepts and dsbursements bass.
Pursuant to an eecton under secton 2(b) of the 1939 Code, the
ncreases n the redempton prces of certan nonnterest-bearng
obgatons occurrng n the ta abe year 1950 and pror years were
treated as ncome receved n 1950. The amount reported n 1950
was 100a doars of whch 75a doars represented the accumuated
ncreases n vaue of such obgatons pror to 1950.
Secton 2 of the 1939 Code provdes n part:

(b) Non terest- earng Obgatons Issued at Dscount. If, In the case
of a ta payer ownng any nonnterest-bearng obgaton ssued at a dscount and
redeemabe for f ed amounts ncreasng at stated ntervas the ncrease
n the redempton prce of such obgaton occurrng n the ta abe year does not
(under the method of accountng used n computng hs net ncome) consttute
ncome to hm n such year, such ta payer may, at hs eecton made n hs return
for any ta abe year begnnng after December 31, 19 0, treat such ncrease as
ncome receved n such ta abe year. If any such eecton s made wth respect
to any such obgaton, t sha appy aso to a such obgatons owned by the
ta payer at the begnnng of the frst ta abe year to whch t appes and to a
such obgatons thereafter acqured by hm and sha be bndng for a subse-
quent ta abe years, uness upon appcaton by the ta payer the Commssoner
permts hm, sub|ect to such condtons as the Commssoner deems necessary,
to change to a dfferent method. In the case of any such obgatons owned
by the ta payer at the begnnng of the frst ta abe year to whch hs eecton
appes, the ncrease n the redempton prce of such obgatons occurrng
between the date of acquston and the frst day of such ta abe year
sha aso be treated as ncome receved n such ta abe year.
Secton 56 of the 1939 Code provdes n part:
(a) Defntons. or the purposes of ths secton
(1) bnorma ncome. The term abnorma ncome means ncome of
any cass descrbed n paragraph (2) ncudbe n the gross ncome of the
ta payer for any ta abe year under ths subchapter f t s abnorma for
the ta payer to derve ncome of such cass,
(2) Separate casses of ncome. ach of the foowng subparagraphs
sha be hed to descrbe a separate cass of ncome:

(D) Income ncudbe In gross ncome for the ta abe year rather
than for a dfferent ta abe year by reason of a change n the ta payer s
method of accountng.

(b) mount ttrbutabe to Other Years. The amount of the net abnorma
ncome that s attrbutabe to any prevous ta abe year or years sha
be determned under reguatons prescrbed by the Secretary.
It s abnorma for a ta payer to derve ncome of any cass ony f
the ta payer receved no gross ncome of that cass for the four
prevous ta abe years. Secton 0. 56-1 (a) of Reguatons 130. In
the nstant case the ta payer had no gross ncome comng wthn the
cass descrbed n secton 56 (a) (2) (D) supra, n the years precedng
1950.
Secton 0. 56-3 of Reguatons 130 provdes n part:
mount ttrbutabe to Other Years. (a) The mere fact that an tem In-
fndbe n gross ncome s of a cass abnorma ether n knd or amount does not
resut n the e cuson of any part of such tem from e cess profts net ncome.
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Regs. 130, 0. 58- . 28
It s necessary that the Item be found attrbutabe under these reguatons In
whoe or n part to other ta abe years. Ony that porton of the tem whch s
found to he attrbutabe to other years may be e cuded from the gross ncome
of the ta payer for the year for whch the e cess profts ta s beng computed,
(b) Items of net abnorma ncome are to be attrbuted to other years n the
ght of the events n whch such tems had ther orgn, and ony n such amounts
as are reasonabe n the ght of such events
In vew of the above, t s hed that the ncreases n redempton
prces of the nonnterest-bearng obgatons, purchased by the ta -
payer, accrued up to the tme of the eecton under secton 2(b) of
the Interna Revenue Code of 1939 consttute a separate cass of ab-
norma ncome wthn the meanng of secton 56(a)(2)(D) of the
Code and are attrbutabe to the ta abe years n whch they had ther
orgn. ccordngy, 75a doars of the tota ncreases s attrbutabe
to the years pror to 1950 and the baance to the ta abe year 1950.
Secton 0. 56-9 of Reguatons 130 provdes that the cass of n-
come may ncude such tems of ncome as are ncudbe n gross n-
come for the ta abe year by reason of a change from the nstament
method to the straght accrua method of accountng, a change n
nventory method, or a change from the reserve method to the specfc
charge-off method for the treatment of bad debts. Ths secton aso
provdes that the method of aocatng tems of net abnorma ncome
ncudbe n gross ncome for the ta abe year rather than for a df-
ferent year by reason of changes n accountng method, other than a
change from the nstament to the accrua method, s to be determned
n each partcuar case upon consderaton of a the facts n the case.
Secton 2(b) of the 1939 Code was enacted bv the Revenue ct of
19 1. . R. Report No. 10 0,77th Congress, C. .19 1-2, 13, at page
5, n dscussng the appcabty of such secton, stated n part:
Therefore, wth respect to such nonnterest-bearng Unted States de-
fense bonds, the effect of ths secton s to e tend, at the eecton of the ta payer,
the accrua method to a ta payer on the cash bass, but ony for the mted
purpose of reportng the ncrement n vaue of such bonds as t accrues.
Thus, t woud appear that t was the ntent of Congress that an eec-
ton under secton 2(b) of the 1939 Code be consdered a change n
the method of accountng for a mted purpose.
S CTION 58.- ISTORIC L IN ST D C PIT L
Reguatons 130, Secton 0. 58- : Determnaton Rev. Ru. 55-257
of equty nvested capta ccumuated earn-
ngs and profts.
or the purpose of computng equty nvested capta under the
provsons of secton 58(d) of the Interna Revenue Code of 1939
accumuated earnngs and profts may be determned by ncudng
theren, n the absence of a more accurate vaue, the cash surrender
vaue of nsurance poces carred by the ta payer, as benefcary,
on the ves of ts offcers.
dvce has been requested whether, for the purpose of computng
equty nvested capta, accumuated earnngs and profts shoud be
determned by ncudng theren the cash surrender vaue of nsur-
ance poces hed by a corporaton, as benefcary, on the ves of ts
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29 Regs. 130, 0. 58- .
offcers or by ncudng theren the tota premums pad by the cor-
poraton on such poces.
Under the provsons of secton 2 (a) ( ) of the Interna Revenue
Code of 1939 and the reguatons promugated thereunder, no porton
of premums pad on any fe nsurance pocy coverng the fe of
any offcer or empoyee, or of any person fnancay nterested n any
trade or busness carred on by the ta payer, may be deducted by the
ta payer n computng net ncome when the ta payer s drecty or
ndrecty a benefcary under such pocy. To the e tent that an
asset s created by the payment of such premums, the ta payer may
be consdered to have a bass n the asset equa to the cash surrender
vaue of the pocy. Ths queston was consdered n Century Wood
Preservng Company v. Commssoner, 69 ed. (2d) 967, wheren the
court sad:
The cost of an asset s the rea queston here. It s obvous that cost
s not the tota amount rad n as premums, snce contnung nsurance
protecton s part of the consderaton for the contract. The part of
the premums whch represents annua nsurance protecton has been
earned and used. The other part of the premum s an nvestment but
up as a reserve unt the pocy s matured or surrendered. If t s sur-
rendered, the hoder s entted to the cash surrender vaue from the
nsurer, or, roughy, the return of the equvaent of hs nvestment after
the cost of annua protecton s deducted from the premums.
The pettoner n ths case has made no effort to show the reserve
carred by the nsurer on these poces. ut cost s appro matey
refected by the cash surrender vaue of the poces .
The queston here presented was consdered by the courts and the
Interna Revenue Servce under the Word War I e cess profts ta
aw whch contaned provsons reatve to hstorca nvested capta
smar to those contaned n secton 58 of the Interna Revenue Code
of 1939. It was hed that amounts pad out of earnngs by a ta payer
as premums on nsurance poces carred by the ta payer on the ves
of ts offcers n e cess of that porton whch s appcabe to pure
term nsurance s the amount to be ncuded n nvested capta as
earned surpus. See . . Gaagher Reaty Co. v. Commssoner,
. T. . 219 Natona Straw Works v. Commssoner 7 ed. (2d)
M . R. R. 229, C. . 3, 35 (1920) O. D. 7 5, C. . 3, 355 (1920).
owever, n the case of Lucas v. ate aocay e ander et a .,
S79 U. S. 573, Ct. D. 76, C. . III-2 273 (1929), the Supreme Court
of the Unted States adopted the reserve vaue, . e. the reserve car-
red by the nsurer on the poces, n cacuatng the asset vaue of
an nsurance pocy. ut as a practca matter, n many cases the
cash surrender vaue cosey appro mates the vaue of the ta payer s
nvestment. In such nstances the sght dfference n amounts
nvoved may ba dsregarded n the nterest of admnstratve
convenence.
In vew of the above, t s hed that for the purpose of computng
equty nvested capta under secton 58(d) of the Interna Rev-
enue Code of 1939, accumuated earnngs and profts may be deter-
mned by ncudng theren, n the absence of a more accurate vaue,
the cash surrender vaue of nsurance poces carred by a ta payer,
as benefcary, on the ves of ts offcers.
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Regs. 118, 39. 81-1. 30
Reguatons 130, Secton 0. 58- : Determnaton
of equty nvested capta ccumuated earn-
ngs and profts.
ccumuated earnngs and profts to refect ncrease or decrease n
edera ncome and e cess profts ta abty of precedng ta abe
year attrbutabe to nventory repacement but not to refect decrease
because of net operatng oss or unused e cess profts credt carry-
backs. See Rev. Ru. 55-28, page 359.
SU C PT R . T ON S L - MPLOYM NT INCOM
S CTION 81. D INITIONS
Reguatons 118, Secton 39. 81-1: Net Rev. Ru. 55 30
earnngs from sef-empoyment.
Saary drawngs receved by a member of a partnershp as
compensaton for servces rendered to the partnershp are ncud-
be n computng net earnngs from sef-empoyment fcr purposes
of tbe Sef- mpoyment Contrbutons ct where, by agreement of
the partners, such payments are not chargeabe aganst the workng
member s capta account regardess of whether tbe partnershp
sustans an operatng oss, but are chargeabe aganst the capta
accounts of the remanng partners n tbe event of a partnershp
oss.
n nqury has been receved regardng the treatment for purposes
of the Sef- mpoyment Contrbutons ct (subchapter , chapter 1,
of the Interna Revenue Code of 1939) of payments made to the ony
workng member of a partnershp.
Pursuant to the partners agreement a the members, ncudng the
workng member, shared profts and osses equay the workng
member receved specfed weeky amounts termed saary drawngs
whether or not the partnershp operated at a proft and n the event
of a oss, such saary amounts were not charged aganst the workng
member s capta account but were deducted n equa portons from
the capta accounts of the other two partners.
The Sef- mpoyment Contrbutons ct mposes a ta upon sef-
empoyment ncome whch, as provded n secton 81(b), s based
upon net. earnngs from sef-empoyment. The quoted term s
defned n secton 81(a), as foows:
Net arnngs rom Sef- mp.oymf. t. The term net earnngs from sef-
empoyment means the gross ncome derved by an ndvdua from any trade
cr busness carred on by such ndvdua, ess tbe deductons aowed by Ibs
chapter whch are attrbutabe to such trade or busness, pus hs dstrbutve
share (whether or not dstrbuted) of the ordnary net ncome or oss, as com-
puted under secton 183, from any trade or busness carred on by a partnershp
of whch he s a member e cept . (Tbe e ceptons are not here
matera.)
It s cear that any porton of the partnershp s net operatng proft
or oss credted or charged, respectvey, to the workng members
capta account woud consttute hs dstrbutve share of
the ordnary net ncome or oss from any trade or busness
carred on by a partnershp wthn the scope of secton 81(a) and,
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31 Regs. 118, 39. 81-1.
hence, woud have to be taken nto account n computng hs net earn-
ngs from sef-empoyment.
Moreover, the -workngmember s so-caed saary drawngs woud
aso hare to be treated as net earnngs from sef-empoyment. s that
term s denned n secton 81 (a), t ncudes the gross ncome derved
bv an ndvdua from any trade or busness carred on by such nd-
vdua, ess the deductons attrbutabe to such trade or
busness. Wth certan e ceptons not matera here, secton 81(c)
provdes that the term trade or busness as t s used wth reference
to sef-empoyment ncome or net earnngs from sef-empoyment s
to have the same meanng as when used n secton 23 of the Code.
Inasmuch as partners are workng for themseves and cannot be
ther own empoyees, amounts receved by them as saares cannot
be treated as such for purposes of chapter 1 of the Code. ccord-
ngy, under the Code such amounts are not propery deductbe as
saary
receved by the workng member dd not e ceed the partnershp s n-
come, t s apparent that such payments woud consttute wthdrawas
of partnershp profts.
If, on the other hand, the amounts of the so-caed saary draw-
ngs shoud e ceed the partnershp s ncome they woud necessary
consttute wthdrawas of capta nsofar as the e cess s concerned.
Snce n that case the saary drawngs are to be charged to the cap-
ta accounts of the other two partners and not to the capta account of
the workng member, they woud be ta abe ncome to such workng
member and deductbe by the pa tners to whose capta accounts they
were charged. See, for e ampe, ugustne M. Loyd, 15 . T. . 82
acq., C. . III-1,27 (1929) G. C. M. 6582, C. . III-2, 200 (1929).
Inasmuch as these capta depetons are ordnary and necessary e -
penses ncurred n carryng on the busness of each of such partners
and, as such, deductbe by them n computng ther respectve net
ncomes, then the saary5 drawngs shoud be regarded as gross
ncome derved by an ndvdua from any trade or busness carred on
by such ndvdua wthn the scope of the defnton of net earnngs
from sef-empoyment quoted above.
There s further support for the concuson that these saary draw-
ngs shoud be treated as net earnngs from sef-empoyment as that
term s defned n secton 81(a). Whe these drawngs are not a
dstrbutve share of the partnershp s net ncome, they are amounts
receved n eu of such dstrbutve share under a guarantee contract
entered nto as an ncdent to the partnershp operaton.
Reguatons 118, Secton 39. 81-1: Net Rev. Ru. 55- 9
earnngs from sef-empoyment.
Income derved by an ndvdua from the sae of rea estate org-
nay purchased as nnmproved and and subsequenty dvded Into
ota and turned over to a rea estate frm to se consttutes ncome
from a trade or busness and shoud be ncuded n computng net
earnngs from sef-empoyment for purposes of the Sef- mpoyment
Contrbutons ct.
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Regs. 118, 39. 81-1. 32
The queston has been presented whether ncome receved by an
ndvdua from the sae, through a rea estate agency, of subdvded
and mproved rea estate orgnay purchased as unmproved and,
s sub|ect to the ta mposed under tne Sef- mpoyment Contrbu-
tons ct (subchapter , chapter 1, Interna Revenue Code of 1939.)
The ta payer n the nstant case purchased a arge tract of and
whch, at the tme of purchase, he had no ntenton of subdvdng.
few years ater, however, he subdvded the tract and spent consd-
erabe sums of monev to mprove the tract, nvovng cearng the and,
pavng streets, nstang street ghts, water mans, fre h3rdrants, etc.
e constructed and sod severa homes on the property but, n vew of
the e penses ncurred n connecton wth the subdvson of the tract,
these saes were at a oss to hm. ccordngy, he dscontnued the
budng pro|ect. Snce 1950, hs nterest n the rea estate pro|ect has
been confned to saes of the remanng ots n the tract. These saes
are conducted e cusvey by a rea estate frm and the ta payer devotes
none of hs tme to the actua seng of the ots, nether does he make
frequent vsts to the ocaton of the tract.
Secton 81 of the Sef- mpoyment Contrbutons ct provdes n
part as foows:
(a) Net arnngs rom Sef- mpoyment. The term net earnngs from
sef-empoyment means the gross ncome derved by an ndvdua from any
trade or busness carred on by such ndvdua, ess the deductons aowed by
ths chapter chapter 1 whch are attrbutabe to such trade or busness,

(c) Trade or usness. The term trade or busness, when used wth ref-
erence to sef-empoyment ncome or net earnngs from sef-empoyment, sha
have the same meanng as when used n secton 23 Interna Revenue Code of
1939 e cept that such term sha not ncude (the e ceptons are not
here matera).
Secton 39. 81-1 (b) (2), Reguatons 118, provdes, among other
thngs, that the trade or busness must be carred on by the ndvdua,
ether personay or through agents or empoyees.
Whether an ndvdua s engaged n a trade or busness s de-
pendent upon a the facts and crcumstances n the partcuar case.
s a genera rue, a person who s engaged n an occupaton or profes-
son for proft and who s not regarded as an empoyee for purposes
of the edera Insurance Contrbutons ct ta es s engaged n a
trade or busness.
In the nstant case, there are severa factors whch ead to the con-
cuson that the ta payer s engaged n the busness of seng property.
e personay subdvded the tract of and and spent consderabe sums
of money n dong so. ven though he dscontnued the part of hs
venture reated to the budng of homes, he never abandoned hs n-
tenton of seng the remanng ots. The fact that he chose to con-
duct those saes through a rea estate agency s not suffcent to e cude
hs ncome from those saes from the term net earnngs from sef-
empoyment.
ccordngy, t s hed that the ncome derved by the ndvdua
from the sae of rea estate orgnay purchased as unmproved and
and subsequenty dvded nto ots and turned over to a rea estate frm
to se consttutes ncome from a trade or busness and shoud be n-
cuded n computng net earnngs from sef-empoyment for purposes
of the Sef- mpoyment Contrbutons ct.
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33 Regs. 118, 39. 81-3.
Reguatons 118, Secton 39. 81-1: Net
earnngs from sef-empoyment.
Income earned by an ndvdua who mantans teephone nforma-
tona servce to varous automobe deaers for the purpose of enabng
ther saesmen to compete saes on specfc modes of cars. See ev.
Ru. 55-113, page 81.
Reguatons 118, Secton 39. 81-1: Net
earnngs from sef-empoyment.
Income receved by an ndependent contractor from sources wthout
the Unted States. See Rev. Ru. 55-172, page 98.
Reguatons 118, Secton 39. 81-1: Net
earnngs from sef-empoyment.
Royates and other ncome receved from wrtng books and gvng
pubc ectures as sdene actvtes of a fu tme unversty professor.
See Rev. Ru. 55-385, page 100.
Reguatons 118, Secton 39. 81-3: Trade or Rev. Ru. 55-258
busness.
n ndvdua who, n addton to part-tme empoyment, enters
varous and unreated prze contests n hs own behaf, and does not
advse or act for others n enterng such contests, s not engaged n
a trade or busness for purposes of the Sef- mpoyment Con-
trbutons ct. ccordngy, the vaue of the przes won by the
contestant athough sub|ect to norma ncome ta and surta s not
ncudbe n computng net earnngs from sef-empoyment.
queston has been rased whether the vaue of przes won by a
contestant n prze contests may be ncuded n computng net earnngs
from sef-empoyment for purposes of the Sef- mpoyment Con-
trbutons ct (subchapter , chapter 1, Interna Revenue Code of
1939).
In the nstant case, an ndvdua who s empoyed ony on a part-
tme bass due to a physca condton, devotes appro matey fve
hours day to enterng varous and unreated prze contests as a hobby.
s a resut the ndvdua has, on occasons, won severa przes both of
cash and merchandse. e does not advse or act for others n enter-
ng such contests but acts soey n hs own behaf.
Secton 81 of the ct provdes n part:
a) Net arnngs rom Sef- mpoyment. The term net earnngs from
-empoyment means the gross ncome derved by an ndvdua from any trade
or busness carred on by such ndvdua, ess the deductons aowed by ths
chapter chapter 1 whch are attrbutabe to such trade or busness,

(c) Trade or usness. The term trade or busness, when used wth refer-
ence to sef-empoyment ncome or net earnngs from sef-empoyment, sha have
he same meanng as when used n secton 23, .
In the nstant case, t s hed that the actvty engaged n by the
ndvdua wth respect to enterng varous and unreated prze con-
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Regs. 118, 39.502-1. 3
tests n hs own behaf as a hobby does not consttute a trade or bus-
ness, as contempated by secton 81 (c) of the ct. ccordngy, the
vaue of przes won by a contestant under the crcumstances descrbed
above, athough sub|ect to norma ncome ta and surta , s not ncud-
be n computng net earnngs from sef-empoyment.
Reguatons 118, Secton 39. 81-3: Trade or
busness.
Indvdua engaged n prvate tutorng. See Rev. Ru. 55-205,
page 85.
Reguatons 118, Secton 39. 81-3: Trade or
busness.
Income derved from the operaton of a watch repar department
wthn a |ewery store. See Rev. Ru. 55-2 8, page 117.
Reguatons 118, Secton 39. 81-3: Trade or
busness.
Se ton of a cemetery. See Rev. Ru. 55-328, page 98
C PT R 2. DDITION L INCOM T S
SU C PT R . P RSON L OLDING COMP NI S
S CTION 501. D INITION O P RSON L OLDING
COMP NY
Reguatons 118. Secton 39.501-1: Defnton Rev. Ru. 55- 17
of persona hodng company.
fnance company, operatng n a State whch does not have any
specfc statute reatng to or pertanng to fnance companes, may
nevertheess be e empt from persona hodng company surta es
under the provsons of secton 501(b)(8) of the Interna Revenue
Code of 1939 provded such company otherwse meets the provsons
of such secton.
S CTION 502. P RSON L OLDING COMP NY
INCOM
Reguatons 118, Secton 39.502-1: Mnera, Rev. Ru. 55-19
o, or gas royates.
In G. C. M. 22730, C. . 19 1-1, 21 , and G. C. M. 2 8 9, C. .
19 0-1, 60, t s estabshed that payments coected on n-o payment
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35 (Regs. 112, 35.722-5.
rghts, whch payment rghts are carved out of arger depetabe nter-
ests n o and gas n pace, do not ordnary quafy as royaty ncome.
In vew of the foregong, t s hed that, for the purpose of deter-
mnng persona hodng company ncome, o producton payments
coected on n-o payment rghts whch were not orgnay granted
or reserved n a easng transacton do not quafy as mnera, o, or
fras royates wthn the meanng of secton 502(h) of the Interna
Revenue Code of 1939.
SU C PT R . C SS PRO ITS T R P L D T R 19 5
P RT I
S CTION 718. UITY IN ST D C PIT L
Reguatons 112, Secton 35.718-2: Deter-
mnaton of day equty nvested cap-
ta ccumuated earnngs and profts.
ccumuated earnngs and profts sha refect the ncrease or de-
crease n the edera ncome and e cess profts ta abty of the pre-
cedng year attrbutabe to nventory repacements. See ev. Ru.
55-28, page 359.
S CTION 721. NORM LITI S IN INCOM IN
T L P RIOD
Reguatons 112, Secton 35.721-1: bnorma-
tes n ncome n ta abe year.
mount receved by ta payer n e cess of hs oan from the Com-
modtv Credt Corporaton after sae of hs nventory. See Rev. Ru.
55-207, page 2 .
S CTION 722. G N R L R LI CONSTRUCTI
R G S P RIOD N T INCOM
Reguatons 112, Secton 35.722-5: ppca- Ct. D. 1781
ton for reef under secton 722.
( so Secton 3771.)
C SS PRO ITS T INT RN L R NU COD D CISION O SUPR M
COURT.
1. INT R ST ON D ICI NCY INT R ST NOT T D W N PPLIC -
TION op Secton 722,1939 Code, bates Defcency.
batement of portons of defcences In e cess profts ta es by
reason of aowance of appcatons for reef under secton 722 of
the Interna Revenue Code of 1939 dd not reeve ta payers of
abty for Interest on such defcences from the orgna due dates
of the ta es abated. though the defcency for 19 0 determned
wthout reference to secton 722 had not been assessed, t was cor-
recty and adequatey assessed after t was partay abated.
2. udgment Reversed and udgment ffrmed.
udgment of Unted States Court of Cams (117 . Supp. 181)
reversed, and |udgment of Unted States Court of ppeas for the
fth Crcut (209 . 2d 692) afhned.
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Regs. 112, 35.722-5. 36
Supreme Court of The Unted States
29. The Unted States, pettoner, v. oppers Company, Inc., successor on
merger to koppers Unted Company and subsdares
On wrt of certorar to tUe Unted States Court of Cams
1. Premer O Refnng Company of Te as, pettoner, v. Unted States of
merca
On wrt of certorar to the Unted States Court of ppeas for the fth Crcut
anuary 31, 1955
OPINION
Mr. ustce uton devered the opnon of the Court.
The ssue n these cases s whether, for the years 19 0 through 19 5, abate-
ments of federa e cess profts ta es, through appcaton of I. R. C, secton
722, are retroactve. or the reasons hereafter stated, we hod that they are
not and that they reeve ta payers from the payment of nterest on defcences
n such ta es from the tme of the abatement, rather than from the orgna due
dates of the tn os abated.
In No. 29, Unted States v. oppers Co., the ta payer, respondent theren,
reported and pad e cess profts ta es of 6,512.76 for 19 0, and 1,781,288.1
for 19 1. In computng these tn es, t used e cess profts credts based upon
nvested capta. In 19 3 and 19 5. t apped under secton 722 for reef from
a or part of these ta es, camng that they were e cessve and dscrmna-
tory. In accordance wth the usua admnstratve practce, the Commssoner
determned the amount of the e cess profts ta es due wthout regard to the
appcaton for reef under secton 722. In dong so, he found t necessary
to proceed under I. R. C, secton 713, usng e cess profts credts based upon
the ta payer s ncome, rather than upon ts nvested capta. s a resut he
found that the above ta es, as returned and pad by the ta payer wthout ref-
erence to secton 722, had been understated and that the foowng defcences
e sted as of ther orgna due dates, March 15,19 1, and 19 2:
19 0 19 1
cess profts ta under 710(a) and 713.. 66, 921. 67 2, 208, 019. 09
Payments 6,512.76 1,781,288.1
Defcences 60, 08. 91 26, 730. 95
S C. 722. G N R L R LI CONSTRUCTI R G S P RIOD N T
INCOM .
(a) Genera Rcte. In any case n whch the ta payer estabshes that the tar com-
puted under ths subchapter as to e cess profts tn . sectons 710 et seq. (wthout the
beneft of ths secton) resuts n an e cessve and dscrmnatory ta and estabshes what
woud be a far and |ust amount representng norma earnngs to be used as a constructve
average base perod net ncome for the purposes of an e cess profts ta based upon a
comparson of norma earnngs and camncs durng an e cess profts tn perod, the ta
sha be determned by usng such constructve average base perod net ncome n eu of
the average base perod net ncome otherwse determned under ths subchapter.

(d) ppcaton ron Reef Under Ths Secton. The ta payer sha compute ts
a , fe ts return, and pay the ta shown on ts return under ths subchapter wthout the
appcaton of ths secton, e cept as provded n secton 710(a)(5). The benefts of ths
secton sha not be aowed uness the ta payer wthn the perod of tme prescrbed by
secton 322 and sub|ect to te mtatons as to amount of credt or refund prescrbed
In such secton makes appcaton therefor In accordance wth reguatons prescrbed by
the Commssoner wth the approva of the Secretary. If a constructve average base
perod net ncome has been determned under the provsons of ths secton for any ta abe
year, the Commssoner may, by reguatons approved by the Secretary, prescrbe the
e tent to whch the mtatons prescrbed by ths subsecton may be waved for the pur-
pose of determnng the ta under ths subchapter for a subsequent ta abe year. ( m-
phass supped.) 56 Stat. 91 -915, as amended, 57 Stat. C01-C02, 26 U. S. C. sec.
722(a)(d).
The above provsons of sec. 722(d) appy to ta abe years begnnng after December 31,
1939. 57 Stat. 602.
2 oppers Company, Inc., s. n fact, the successor to oppers Unted Company and Its
subsdares, whch fed consodated e cess profts ta returns for the years In queston.
or convenence, a of such corporatons are referred to as the ta payer.
Ths ta was computed and pad pursuant to the cess Profts Ta ct of 19-10. 5
Stat. 975. as amended. See I. . C, sec. 710 et seq. On November 8. 19 5, these prov-
sons became Inappcabe to any caendar year begnnng after 19 5. 59 Stat. 568.
Two methods of computaton of the e cess profts credt were authorzed: the nvested
capta method under I. R. C, sec. 71 . or the base perod Income method under I. . C,
sec. 713.
5 rty tmey consents, the Commssoner and fhc ta payer agreed that the amount of any
Income, e cess profts, or war profts ta due for 19 0 and 19 1 coud be assessed at any
tme on or before une 30, 1951.
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37 Regs. 112, 35.722-5.
The Commssoner computed Interest, at 6 percent on the above defcences,
amountng to 217,376.07 for 19 0, and 230,50 .86 for 19 1
fter e tended Investgatons and negotatons conducted under authorty
of secton 722, the Commssoner and the ta payer agreed upon a constructve
average base perod net Income whch f ed the e cess profts credts for the
years n queston and, as a resut, the reef avaabe under secton 722. fter
ths agreement was approved by the cess Profts Ta Counc of the ureau
of Interna Revenue, the Commssoner determned that the above-stated def-
cences, wth the beneft of secton 722, shoud be reduced to 260,55 .39 for
10 0. and to 95,7 0.33 for 19 1. The ta payer consented to the assessment
of these defcences, wth nterest as provded by aw. Whereupon, the Com-
mssoner sswd a forma determnaton of them and assessed them aganst
the ta payer. e aso assessed the above-stated nterest charges, based upon
the fu amount of the orgna defcences.
The ta payer pad the defcences and nterest so assessed but camed re-
funds of ,. . 8.71 for 19 0, and 178,78 . 8 for 19 1. Those sums represented
the nterest on the abatements n ts e cess profts ta es made under secton
722. When the Commssoner dsaowed the cams, the ta payer sued n
the Court of Cams to recover ther amounts. Wth one udge dssentng,
that court deducted a set-off and rendered |udgment n favor of the ta paver
for 270,216.3 . 126 Ct. CI. 8 7, 117 . Supp. 181. To resove the resutng
confct wth Unted States v. Premer O Co., 209 . 2d 692, we granted certorar,
3 7 U. S. 965.
In o. 1, Premer O Co. v. Unted States, the ta payer, pettoner theren,
pad the e cess profts ta es shown on ts orgna returns n the foowng
amounts: for 19 3, 56 ,107.70 (ad|usted to 560, 8 .8 ) for 19 , 353,292.15
(ad|usted to 313,639.13) and for 1915, 5,679.67. Thereafter, severa deduc-
tons whch the ta payer had made from ts ncome were dsaowed, resutng,
n 19 8, n the foowng defcences n ts payment of ts e cess profts and
ncome ta es as of ther orgna due dates:
Defcences wthout the appcaton of secton 722
Defcences n e cess profts ta , 19 3 19 19
under 710(a) and 713 78, 359. 80 55, 529. 92 190, 785. 32
Defcences n ncome ta 9. 060. 07 9. 178. 01 _(90. 00)
Tota defcences 87, 19.87 0 ,707.93 190,695.32
The Commssoner computed nterest, at 6 percent, on the above e cess profts
ta defcences as foows:
or 19 3 on 78,359.80, March 15,19 . to une 23, 19 8 20,08 . 79
or 10 on 55,529.92, March 15,19 5, to une 23,19 8 10,901.36
or 19 r on 190,785.32, March 15, 19 6, to une 19, 1918 - 25, 869.20
56, S55. 1
In the meantme, the ta payer had apped for reef under secton 722, seekng
acceptance of a constructve average base perod net ncome 1 of 357,000 for
each of the years at ssue. The cess Profts Ta Counc approved that
fer re as a credt In eu of 93,150.36 for each of the years 19 3 and 19 , and
tf 116, 37.95 for 19 5. Ths credt so far reduced the ta payer s ta abe e cess
profts as to abate ts e cess profts ta defcences for 19 3 and 19 entrey, and
that for 19 5 to 366.52. ccordngy, the Commssoner s assessment of the
remander of the ta payer s defcences n e cess profts ta es was for ony
3UC.52. owever, as n the oppers case, supra, he assessed aganst the ta -
payer the fu amount of the nterest charges based upon the orgna defcences.
The ta payer pad the defcency and nterest so assessed but camed refunds
totang 56,855. 1. That sura represented the nterest on the abatements n ts
e cess profts ta es made under secton 722. When the Commssoner dsaowed
The nterest on the 10 0 ta ran from March 15, 10 1, to anuary 2S, 10 0, whch was
tr -at as the date o ts payment that on the 10 1 ta run from March 15, 10 2. to
March 16 . 1051. whch was 30 days after the fnc of a waver consentng to the assessment
and coecton of the defcences nay determned. Sec I. It. C, see. 202(a), ufra, note 12.
batement of e cess profts ta defcences under secton 722. , ,.
W11 19 Wt
ResuOng credts) and defcency (96.U 7.98) (119,6 .57) 366.52
v rw urne that part of the ta payer s ncome that was sub|ect to e cess profts ta es. .SP Th
v n rnf toma cay eft more of the ta payer s ncome sub|ect to the norma ta and surta . 1 nose
Increases n the ta payer s ncome taes and ther consequences are not before us.
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Regs. 112, 35.722-5.) 38
those cams, the ta payer brought the nstant acton to recover ther amounts,
n the Unted States Dstrct Court for the Northern Dstrct of Te as, under
28 U. S. C. secton 13 6(a)(1). That ccurt rendered |udgment for the ta -
payer. 107 . Supp. 837. The Court of ppeas reversed. 209 . 2d 692. We
granted certorar to resove the confct wth Unted States v. oppert Co.,
tupra. 3 7 U.S. 987/
s the underyng ssue s the same n each case and for each year, we sha
dscuss t n reaton to the 19 0 ta es n the oppert case. There, the ta payer,
under the usua procedure, computed and pad the e cess profts ta of 6,512.76
shown on ts return for 19 0. In due course the Commssoner, wthout the
appcaton of secton 722, determned that the payment shoud have been
06,921.07, and, therefore, that a defcency of 00, 0S.91 was due the Unted
States, wth nterest from March 15, 19 1. I. It. C, sectons 53(a), 56(a). If
the ta payer had made no appcaton for reef under secton 722, there s
no doubt that such nterest woud have remaned due the Unted States unt
pad and that, when pad, t woud not have been refundabe. The same woud
have been true f the ta payer s appcaton for reef under secton 722 had
been fnay dened. The ta payer contends, however, that, because the Com-
mssoner has abated the ta payer s defcency from (50, 0S.91 to 260,55 .39
under secton 722, such reducton s necessary retroactve to March 15, 19 1,
and that the ta payer, accordngy, s entted to a refund of the nterest on
the sum abated. The Commssoner, on the other hand, contends that the
determnaton under secton 722 s not retroactve but s a current abatement
effectve when made.
Congress coud have prescrbed ether treatment but dd not e pressy specfy
ether. Our answer s determned from our consderaton of the statutory scheme
as a whoe, the reated provsons of the statute, the egsatve hstory of sec-
ton 722 and the admnstratve nterpretaton that has been gven the statute.
1. The Statutory Scheme as a Whoe.
The e cess profts ta was a devce ntated by Congress, ate n 19 0, In
great part for the quck coecton of arge sums needed by the Government n
a natona emergency. Congress sought to obtan those funds from abnormay
hgh corporate profts whe such profts were avaabe. To that end, t pre-
scrbed computatons of unusua profts and requred prompt payment of the
ta es on them.10
rom the begnnng the statute aso provded, n secton 722, a means of
subsequent ad|ustment of the ta n speca nstances where the norma com-
putaton of the ta was found to resut n nequty. The ad|ustment coud be
made ony after admnstratve acton and, pendng ts consderaton, t dd not
emnate the ta return or the ta payment otherwse requred. Unt 19 2, t
dd not permt even the postponement of the payment of any part of the standard
ta . Indeed, the fu payment of that ta soon was made an e press condton
of the appcaton for ad|ustment. I. 11. C, secton 722 (d). In 19 3, Congress
stated that f overpayments for ether of the ta abe years 19 0 or 19 1 were
found to he attrbutabe to secton 722, no nterest on such overpayments was
to be pad the ta payer. t east to that e tent, Congress e pressy recog-
nzed that the funds pad as e cess profts ta es, when due and wthout the
beneft of secton 722, were funds owed to and usabe by the Government.
The sgnfcance of ths statutory scheme further appears when t s apped
to the nstant case. If the nstant ta payer had pad ts requred ta n 19 1,
the Government woud have receved an addtona 60, ()S.91 at that tme. c-
cordngy, t woud have had the use of that mouey, wthout charge, durng the
cruca war years. Correspondngy, the ta payer woud have been wthout
that money durng the same perod. Instead, the ta payer, n fact, retaned
the funds for ts own use and now contends that t need not compensate the
Government for such use of a substanta part of t.
8 fp orgna |udgment for r)(,S53. 1 was modfed to .|2.2 )2. 0 to refect severa
ad|ustments, orurn the deducton of .72, representng nterest on the unnbated
defcency of 360.52 upon whch the ta payer conceded that nterest was chargeabe.
The grant was mted to the foowng queston stated n the petton :
Where a defcency n e cess profts ta . based on the ncome and credts as shown
In the ta payer s return, woud have e sted e cept for the subsequent appcaton of
Secton 722 of the Interna Revenue Code, s the ta payer abe for nterest on the amount
of such defcency (herenafter caed the potenta defcency ) whch woud have e sted
had It not been e tngushed hy the appcaton of Secton 722 3 7 U. S., at 988.
w I. R. C, fee. 713 on (e bass of Income, or I. R. C. sec. 71 on the bass of Invested
capta. I. R. C., ec. 721, authorzed standard aowances for specfed abnormates.
No return by the ta payer under I. C., sec. 722. was permssbe.
111. R. C, sec. 3771(g), nfra, note 15, dscussed at 12-13, ntra.
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39 Regs. 112, 35.722-5.
Whe In the Instant case the ta payer dd not underpay any amount actuay
gfuwn on ts return, as contempated by I. R. C, secton 29 (a), t understated
ts ta and thus -wthhed the amount n queston. The detrment to the Govern-
ment and beneft to the ta payer was the same the use of 60, 08.91 for 8
years. The above dstncton, emphaszed by the ta payer, may have heped
t n ntatng ts appcaton for reef under secton 722(d) because t coud
estabsh that, as east, t had pad the ta shown on ts return. The dstnc-
ton, however, suppes no ground for dfferent resuts once the defcences have
been determned. We fnd no mpcaton that a sef-servng error In the under-
statement of ts ta on ts ta return enttes the ta payer to a greater utmate
ta advantage than does a sef-servng error of the same sze n the under-
payment of the same ta . fortor we fnd nothng to |ustfy a greater ta
advantage to any ta payer that underpays ts correct ta , over one that pays
sncb ta n fu when due.
2. The Interest ebe n Controversy s ttbbutabe to I. R. C, Secton
292(a).
The nterest here n controversy was due under secton 292(a) from March 15,
19 1, unt pad. ccordngy, to obtan a refund of t, the ta payer must sustan
the proposton that the ta reef granted under secton 722 Is necessary retro-
actve, e tngushng the defcency as of the orgna due date of the ta and
thus emnatng the nterest charges for the correspondng perod. To that
end, the ta payer emphaszes the statement n secton 722(a) that, as a cond-
ton of securng the appcaton of secton 722, a ta payer must estabsh that
the usua procedure resuts n an e cessve and dscrmnatory ta and aso
must estabsh what woud be a far and |ust amount representng norma
earnngs to be used as a constructve average base perod net Income. Once the
ta payer has done that, the ta sha be determned by usng such constructve
average base perod net ncome n eu of the average base perod net ncome
otherwse determned under ths subchapter. Standng aone, ths drectve
anguage s eastc. It can be read consstenty ether wth the nterpretaton
that the new computaton repaces and abates the od one currenty, when the
new one s determned and assessed, or that t retroactvey repaces the od ta
from ts orgna due date. It eaves the ssue open for dsposton by the effect
of other causes reatng more specfcay to the ssue. or the reasons hereafter
stated, we read It as ookng forward, rather than backward.
3. I. R. C, Secton 710 (a)(5), Permts a Ta payer, Seekng Reef Under
Secton 722, to Defeb a Pabt of ts stng cess Profts Ta es Where
ts d|usted cess Profts Net Income ceeds 50 Percent of ts Nor-
ma Ta Net Income.
In 19 2, Congress added secton 710(a)(5), condtonay authorzng parta
deferment of the ta n cases where a ta payer camed benefts under secton
S C. 292. INT R ST ON D ICI NCI S.
) Genera Rde. Interest upon the amount determned as a defcency ahu be
seessed at the same tme an the defcency, sha be pad upon notce and demand from
tbe coector, and sha be coected as a part of the ta , at the rate of 6 per centum per
onom from the date prescrbed for the payment of the ta (or, If the ta Is pad In
nstaments, from the date prescrbed for the payment of the frst nstament) to the date
the defcency Is 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 Is assessed whchever s
tbe earer. 53 Stat. 88, as amended, 57 Stat. 602, 26 U. S. C. secton 292(a).
M Secton 722(d) ooks forward when It provdes that f a constructve base perod net
Income has been determned under sec. 722 for any ta abe year, the Commssoner may,
by reguatons approved by the Secretary, permt wavers of the secton s mtatons for
the purpose of determnng e cess profts ta es for a subsequent ta abe year. ven ts
effect Is not automatc, whereas t mght have been e pected to be so If the ad|ustment
were a retroactve correcton of the standard e cess profts credt.
S C. 710. IMPOSITION O T .
(a)

(5) Deferment of payment nr case of abnormaty: If the ad|usted e cess
profts net ncome (computed wthout reference to secton 722) for the ta abe year of
a ta payer whch cams on Its return, n accordance wth reguatons prescrbed by
tbe Commssoner wth the approva of the Secretary, the benefts of secton 722, s In
e cess ot 50 per centum of Its norma ta net Income for such year, computed wthout
the credt provded In ecton 26(e) (reatng to ad|usted e cess profts net Income),
the amount of ta payabe at the tme prescrbed for payment may be reduced by an
amount equa to 33 per centum of the amount of the reducton n the ta so camed.
or the purposes of secton 271, If the ta payabe s the ta so reduced, the ta so
reduced sha be consdered the amount shown on the return. 5 Stat. as
ootnote 1 contnued on the foowng page.
36 050 58 29
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Regs. 112, 35.722-5.) 0
722. The condton was that the ta payer s ad|usted e cess profts net Income
(computed wthout reference to secton 722) must e ceed 50 percent of the ta -
payer s norma ta net ncome for the year. ven then, deferment was mted
to 33 percent of the beneft camed under secton 722. If a ta payer, wthout
ths amendment, coud have successfuy deferred payment and avoded nterest
charges by foowng the course taken n the nstant cases, t coud, by under-
statement of Its ta , have deferred, wthout Incurrng Interest charges, the pay-
ment of a correspondng part of ts ta pendng reef. If so, there woud have
been tte need for secton 710(a) (5). The 19 2 amendment, by Its restrctons,
fary meant that, under a other crcumstances, the e stng ta es were to be
pad when due, or be sub|ected to nterest durng ther denquency under
secton 292(a).
. Tte Dena or Interest on Refunds s Prescrbed bt I. R. C, Secton
3771(g).
though secton 3771(g) was not enacted unt 19 3, t was then made ap-
pcabe to ta abe years before, as we as after, anuary 1, 19 2. It dened a
Interest on refunds attrbutabe to secton 722 where the refunds reated to the
ta abe years 19 0 or 19 1. It aso dened Interest on refunds reatng to ta -
abe years begnnng after anuary 1, 19 2, but mted such denas to the frst
year after the fng of an appcaton for reef under secton 722, or to perods
pror to September 16,19 5 (2 years after the effectve date of the amendment),
whchever was the ater.1
In cases where the Government has authorzed refunds of e cess profts ta es
overpad to It by reason of the abatement of ta es attrbutabe to secton 722,
secton 3771(g) e pressy precudes the payment of Interest by the Govern-
ment upon the amounts abated. Ths treats the Government as entted to
the use of the abated amounts between the tme of ther overpayment and
that of ther abatement. quty demands a comparabe resut n the case
of underpayments. Where unpad ta es are abated by reason of secton 722,
the ta payer then receves a reease from Its e stng obgaton to pay the
amount abated. owever, the Government havng been entted, up to that
tme, to coect and use the sum abated, the Government shoud receve nterest,
on the abated sum, for the perod durng whch the Government was entted
to have ts use. Ths Is the natura counterpart of the Government s freedom
from payng Interest on refunded overpayments.
5 The Legsatve story or Secton 722.
The e cess profts ta was ntated In 19 0. 5 Stat. 975 ct seq. It pro-
vded for prompt payment of arge ta es computed on Income refectng un-
usua profts, Computaton of the ta on the bass of the ta payers pror
ncome or nvested capta was prescrbed n sectons 713 and 71 . stand-
amended. 56 Stat. 917, but see aso, ater amendment Indcated by 20 U. S. C. secton
710(a)(6).
The Senate Commttee on nance Report aeconpM,yIng the Revenue ct of 19 2, 56
Sat. 798, stated:
though It Is beeved advsabe to requre a ta payer seekng reef under secton 722
to compute and pay Its ta wthout the beneft of such secton, there are some cases n
whch t woud be nequtabe to compe the ta payer to pay the entre amount of such
ta . Secton 710(a) Is therefore amended to provde as above quoted .
S. Rep. No. 1031, 77th Cong., 2d Sess. 205.
S C. 3771. INT R ST ON O RP YM NTS.
(g) Cams ased Upon Reef under Secton 722. If any part of an overpayment
for a ta abe year begnnng pror to anuary 1, 19 2, Is determned by the Comms-
soner to be attrbutabe to the fna determnaton of an appcaton for reef or beneft
under secton 722 for any ta abe year, no Interest sha be aowed or pad wth respect
to such part of the overpayment. If any part of an overpayment for a ta abe year
begnnng after December 31, 19 1. Is determned by the Commssoner to be attrbutabe
to the fna determnaton of an appcaton for reef or benet under secton 722 for any
ta abe yenr, no Interest sha be aowed or pad wth respect to such part of the over-
payment for any perod pror to one year after the fng of such appcaton, or September
16, 19 5, whchever Is the ater. 63 Stat. 05, as amended, 57 Stat. 602, 20 U. S. C.
ec. 8771(g).
MThe same ct added I. R. C, sec. 292(b), contanng comparabe provsons prohbtng
the assessment of Interest upon defcences attrbutabe to the fna determnaton of an
appcaton for reef under sec. 722. 63 Stat. 88. as amended. 57 Stat. 602, 26 U. S. C.
sec. 292(b). Ths apped, for e ampe, to defcences n the payment of ordnary
Income ta es resutng from an abatement under sec. 722 of e cess profts ta es. Such
an abatement automatcay woud eave a arger porton of a corporaton s ta abe Income
sub|ect to the norma Income ta and surta . Ths Increase, however, was not made
retroactve any more than the decrease In the e cess profts ta whch caused It was made
retroactve. Congress thus appropratey charged no Interest on the resutng defcent/
ust as t had aowed none on the reated overpayment.
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1 Regs. 112, 35.722-5.
rdzed treatment of abnormates was provded n secton 721. In addton,
secton 722 authorzed the Commssoner to make such ad|ustments as may
be necessary to ad|ust abnormates affectng ncome or capta. 5 Stat. 986.
The procedure under secton 722 was formazed by the cess Profts Ta
. mendments of 19 1, 55 Stat. 23-25, and put n ts fna form by the Revenue
ct of 19 2, 56 Stat. 91 -917, as amended, 57 Stat. 601-602. The technca and
dscretonary nature of the ad|ustment was emphaszed by the provson that
the determnaton of most computatons under secton 722 was revewabe ony
by a speca dvson of the Ta Court consttuted for the occason and by
no other court or agency. 55 Stat. 26, as amended, 56 Stat. 917, 59 Stat. 295,
673, 26 U. S. C. secton 732. ta payer never was permtted to fe a return
of ts own under secton 722. S. Rep. No. 75, 77th Cong., 1st Sess. 13 . R.
Rep. No. 1 6, 77th Cong., 1st Sess. 13.
The statute has been nterpreted as authorzng a procedure that s In the
nature of a cam for a refund preceded by ong nvestgatons of compcated
speca crcumstances, and foowed by e tended negotatons between the
Commssoner and ta payer to deveop a mutuay satsfactory constructve
average base perod net ncome. Ths nterpretaton eaves the usua pro-
cedure under secton 710 et seq. compete In tsef but sub|ect, upon appcaton,
to utmate ad|ustment n nstances accepted by the Commssoner under
secton 722. We fnd no statement of a purpose that secton 722 sha reeve
ta payers from penates or nterest charges due ether to ther defauts n
payng, or ther errors n computng, ther ta es. On the contrary, t has been
suggested that Congress consdered reef under secton 722 to be n the nature
of a favor and as not reevng the ta payer of Its duty to pay the orgna
ta when due.
The reguatons do not dea specfcay wth the Issue before us but, from
ther begnnng, n Treasury Reguatons 109, they have been consstent wth
the nterpretaton gven the ct by the Government. See secton 30.722-5, as
added by T. D. 526 , 19 3 Cum. u. 761, as amended, T. D. 5393, 19 Cum.
uL 15. In addton to the practce of the Commssoner n the Instant cases,
there s n the record of the Premer O Co. case an undsputed affdavt by a
Treasury Department revewer to the effect that the pocy foowed was the ad-
mnstratve pocy of the ureau:
It s the pocy of the ureau of Interna Revenue n those cases where
a or any part of a ta defcency has been e tngushed by appcaton of
the reef provsons of Secton 722 of the Interna Revenue Code not to
assess the e tngushed porton of such defcency. owever, nterest has
been computed and assessed on the e tngushed porton of the defcency
from the due date of the return to the thrteth day after the agreement,
orm 87 , s fed or date of assessment, whchever s the earer. ( mpha-
ss supped.)
Whe Mannng v. Seeey Tube d o Co., 338 U. S. 561 Ct. D. 1729, C. . 1950-1,
113 , reates to the carryback provsons of the Interna Revenue Code, t s
When Congress, n a ater ct, authorzed deferment of payments of comparabe ta es
andng determnatons of appcatons for reef, t dd so unequvocay. The reef pro-
vsons n the cess Profts Ta ct of 1950. 6 Stat. 1137, addng I. R. C, sees. 30- 72,
prescrbed formuas for determnng a substtute average base perod net ncome, sees.
2 6, and permtted the ta payer to ad|ust ts base perod net ncome at the tme the
return -was fed, sec. 7(e). See S. Rep. No. 2679, 81st Cong., 2d Sess. 17-21, dscussng
the genera reatonshp between these provsons and the e perence ganed under sec.
T22 now before us.
See eesatve hstory outned n mercan Coast Lne v. Commssoner, 159 . 2d
f 55 ICt. D. 1690, C. . 19 7-2, 129 and Pohatcong osery Ms v. Commssoner, 162
T. 2d 1 6 Ct. D. 1693, C. . 19 7-2, 122 .
there s no doubt a dfference between a ta , conceded to be due n the cor-
toraton s own return, and a ta assessed aganst t In nvtum. Ths argument mght
Iwrhapg be persuasve, f the dena of benetts under secton 722 were regarded as a con-
tttnent factor of the ta Itsef, as for e ampe are the condtons detaed In secton 721.
W do not ao regard secton 722: on the contrary It was a favor t presupposed that,
even after takng nto account the amcatory condtons of secton 721, the ta was due
m e grata the bow was softened t was a temperng of the wnd to the shorn
mb. Crcut udge Learned and, for the court, 159 . 2d, at 668. See aso. Idea
Packng Co. v. Commssoner, 9 T. C. 3 6, 3 9 Un-Term Stevedorng Co. v. Commssoner,
T. C. 817, 918.
a each Instance the secton 722 provded that a hypothetca base perod enrnncs
Wedt be taor made for the partcuar ta payer and that certan assumptons be made
a connecton wth the case. ach case was a probem In research, and the ega or ta
fwn t generay was Intertwned wth compcated accountng and economc probems.
most every factor whch had any Infuence on the partcuar busness was pertnent to the
fen T|rf f ho rme and e pense nvoved n reconstructng the average base perod earnngs
Wt were tremendous. S. ep. No. 2679, 81st Cong., 2d Sess. 17.
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Regs. 105, 81.10. 2
thoroughy consstent n prncpe wth the above dscusson. There the Court
uphed the coecton of nterest on a defcency whch ater was e tngushed
by carryng back a oss whch occurred n a subsequent year. It treated the
carryback as a current ad|ustment of the ta prevousy determned, character-
zng t as an abatement at 565. It recognzes I. R. C, secton 3771(e), as
a hep to the nterpretaton of the statute, much as we recognze I. R. C., sec-
ton 3771(g), as a hep here. See 507-5(18. The Court aso there announced
that In the absence of a cear egsatve e presson to the contrary, the ques-
ton of who propery shoud possess the rght of use of the money owed the
Government for the perod t s owed must be answered n favor of the Govern-
ment. d., at rm.
Whe the defcency for 19 0 n the amount of ( ,508.91 was propery de-
termned wthout reference to secton 722 and treated as a defcency for that
year by the Commssoner, t was not separatey assessed as much. Ths was
not necessary because, at the tme of ts determnaton and before ts assess-
ment, t was abated to 200,55 .39. The atter sum, wth nterest n the amount
of 217,370.07 computed on the whoe defcency of 00, 08.91, was correcty and
adequatey assessed and pad.
or the foregong reasons, we concude that the Government, In each case,
s entted to retan the nterest now n controversy. Therefore, n No. 29, the
|udgment of the Court of Cams Is reversed and, n No. 1, the |udgment of
the Court of ppeas s affrmed.
No. 29 Reversed.
No. 1 ffrmed.
Mr. ustce Reeu and Mr. ustce Doucas dssent.
C PT R 3. ST T T
SU C PT R . SIC ST T T
P RT II. ST T S O CITIZ NS O R SID NTS O T UNIT D ST T S
SU P RT I. COMPUT TION O T
S CTION 811. GROSS ST T
Reguatons 105, Secton 81.10: auaton Rev. Ru. 55-301
of property.
( so Secton 81.13.)
Unted States Savngs onds of Seres G and Seres w be re-
deemed at par (prncpa amount) before maturty after 6 months
from the ssue date upon the death of an owner or coowner, f a nat-
ura person, at the opton of the persons entted to the bonds. Where
such bonds are redeemed pror to maturty the nterest thereon ceases
at the end of the nterest perod ne t precedng the date of redemp-
ton. See sectons 315.23(c) and 315.21(d) of Treasury Department
Crcuar No. 530, Seventh Revson, dated May 21, 1952. ccord-
ngy, the par vaue (prncpa amount) of Unted States Savngs
onds of Seres G or owned by a decedent at the tme of hs death
consttutes the vaue at whch the bonds are ncudbe n hs gross
estate for edera estate ta purposes. Where the owner of such
See aso, Standard Roofng Matera Co. v. Unted State , 199 . 2d 607 Rodgers
T. Unted States, 123 Ct CI. 779, 108 . Supp. 727 Cumberand Portand Cement Co. r.
Unted States, 101 P. Supp. 577. nff d, 202 . 2d 152.
See Rodyers v. Unted States, supra Cumberand Portand Cement Co. T. Unted
States, supra.
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3 Regs. 105, 81.13.
bonds des between nterest payment dates no amount s ncudbe n
hs gross estate as accrued nterest from the ast nterest payment date
to me date of death.
Reguatons 105, Secton 81.10: auaton
of property.
auaton of |ewery, furs and reated artces of persona property
n edera gft ta returns. See ev. u. 55-71, page 110.
S CTION 811(a). GROSS ST T : D C D NT S
INT R ST
Reguatons 105, Secton 81.13: Property of Rev. Ru. 55-123
decedent at tme of death.
The rght of a decedent s estate to receve payment for ega
servces performed by the decedent on a contngent fee bass const-
tutes an Interest In property, the vaue of whch s ncudbe n hs
gross estate for edera estate ta purposes.
dvce has been requested whether the rght of the e ecutor of the
decedent s estate to receve payment for ega servces performed by
the decedent on a contngent fee bass consttutes an nterest n prop-
erty wthn the meanng of secton 811(a) of the Interna Revenue
Code of 1939.
The decedent, an attorney, was engaged n the handng of neg-
gence cases n the State of New York on a contngent fee bass. s the
resut of a dsposton of some of the cases n the cent s favor after
decedent s death, the e ecutor receved certan payments durng the
year foowng decedent s death. The e ecutor eected to have the
froperty of the estate vaued n accordance wth secton 811 (|) of the
nterna Revenue Code of 1939.
s a genera rue, the e ecutor or admnstrator of the estate of
a deceased attorney s entted to recover the reasonabe vaue of the
servces rendered by the deceased on a contngent fee bass upon the
subsequent termnaton of the tgaton n the cent s favor. The
genera rue s stated n secton 175, mercan ursprudence, o. 5,
as foows:
In the case of the dsabty or death of an attorney empoyed on a contngent
bass before fna ad|udcaton or settement has been obtaned, he or hs estate,
as the case may be, w be aowed to recover the reasonabe vaue of the servces
rendered by hm upon the subsequent successfu termnaton of the tgaton n
the cent s favor.
eadng case on the sub|ect s the New York case of Sargent v.
7. T. Centra . R. R. Co. et a., 209 N. Y. 360,103 N. . 16 . In
that case an attorney had entered nto a contngent fee contract wth
hs cent to prosecute the atter s cam for damages aganst a raroad
company. The attorney ded before the case was concuded and the
raroad company thereafter setted the case. The admnstrator of
te deceased attorney s estate brought sut aganst the raroad com-
pany to enforce the attorney s chargng en whch had attached to
the cent s cause of acton at the tme t was hed. In New York a
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Regs. 105, 81.13.
decedent attorney s estate not ony has the contngent rght of quantum
merut to rey on, but there s aso a en upon the cause of acton under
paragraph 75 of the udcary Law of the State of New York. In
hodng that the attorney s estate was entted to recover the reasonabe
vaue of the decedent s servces and that the raroad company was
abe therefor under the attorney s chargng en, the court sad:
If a awyer des, before he has prosecuted to udgment or settement, tgaton
whch e has undertaken to conduct for a certan compensaton, hs contract s
at an end, because both partes must be supposed to contempate the contnuance
of hs abty to perform as a condton of the contract, and the compen-
saton agreed upon cannot be recovered by hs representatve under the apree-
ment, because he dd not, and hs representatve cannot, carry out hs agreement.
The e tent of the recovery permtted hs representatve s the fu reasonabe
vaue of the servces rendered under the contract, not e ceedng, however, the
sum or the rate f ed by It.
See aso Inre Lake s state, 123 Y. S. 2d 307 (1953), whch n-
voved a smar stuaton where the court n reance upon the
Sargent case sad that under these crcumstances, the e tent
of the recovery permtted to hs representatve s the fu reasonabe
vaue of the servces rendered under the contract, not e ceedng, how-
ever, the sum or rate f ed by t. The case of In re Coeman, 87 ed.
(2d) 753, s consdered dstngushabe from the nstant case as t dd
not nvove recovery for ega servces on a quantum merut bass.
In the state of G. Percy McGue v. Commssoner, 1 . T. .
1199, the Unted States oard of Ta ppeas (now the Ta Court of
the Unted States) sad that the term property as used n the
estate ta statute embraces a choses n acton, ncudng cams for
compensaton for servces performed. Compare dward . Mc-
Cenncn v. Commssoner, 131 ed. (2d) 165, and ank of Caforna
v. Commssoner, 133 ed. (2d) 28.
In the nstant case, the decedent s rght to receve payment for
servces rendered n cases competed n hs fetme was f ed by con-
tract. fter the decedent s death, hs persona representatves had a
rght to recover on a quantum merut bass the reasonabe vaue of the
servces rendered by hm on a contngent fee bass n the cases n whch
settements or |udgments were obtaned after hs death. Ths rght
of the persona representatves s a chose n acton, a speces of per-
sona property.
determnaton of the far market vaue as of the date of decedent s
death, or other appcabe vauaton date, of the rght of the persona
representatves of a deceased attorney to recover for servces rendered
on a contngent fee bass n cases remanng unsetted as of such date
may present a dffcut probem, but t s possbe to fary apprase or
estmate the vaue of such rght. Compare everng v. bafe De-
post Trust Company of atmore, 316 U. S. 56, Ct/D. 1552, C. .
19 2-1, 2 6.
In the nstant case the e ecutor eected to have the property of
the estate vaued n accordance wth secton 811(|) of the Interna
Revenue Code of 1939 that s, one year after the date of death or
as of the date of sae, e change, or other dsposton n the nterm.
The amount reazed by the estate durng the year foowng the de-
cedent s death for hs servces consttutes a dsposton of the cam
for compensaton and the amount receved therefor represents the far
market vaue of the property as of the date of such dsposton. In
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5 egs. 105, 81.13.
ew of the foregong, t s hed that the far market vaue as of the
appcabe vauaton date of the rght of the e ecutor to receve com-
pensaton for ega servces performed by the decedent on a contngent
tee bass s ncudbe n hs gross estate as an nterest n property
wthn the purvew of secton 811(a) of the Interna Revenue Code
of 1939.
Snce the contrary poston e pressed by the Unted States oard
of Ta ppeas n the case of the state of oe Cra v. Commssoner,
. T. . Memorandum Opnon entered une 30, 19 2, s not con-
sdered to be a proper nterpretaton of the aw on ths ssue, the
Interna Revenue Servce w not foow that case n the dsposton
of other cases nvovng the same ssue.
Regt|atons 105, Secton 81.13: Property of Rev. Ru. 55- 18
decedent at tme of death.
The vaue of a rea estate owned by an Osage Indan at the date
of hs death s Incudbe n hs gross estate for edera estate ta
purposes e cept the vaue of a homestead aotment consstng of
ether agrcutura and grazng ands, not e ceedng a tota of 160
acres, or vage, town, or cty property not e ceedng n cost 5,000.
dvce has been requested whether for edera estate ta purposes
there s a mtaton on the homestead aotment of a deceased Osage
Indan not havng a certfcate of competency.
omestead aotments of Osage Indans are e empt from edera
ta aton under the foowng statutes:
ct of une 28,1906, 3 Stat. 539-5 1.
ach member of sad trbe sha be permtted to desgnate whch
of bs three seectons sha be a homestead, and hs certfcate of aotment and
deed sha desgnate the same as a homestead, and the same sha be naenabe
and non-ta abe unt otherwse provded by ct of Congress.
ct of March 2,1929, 5 Stat. 1 78-1 79.
omestead aotments of Osage Indans not havng a certfcate of
competency sha reman e empt from ta aton whe the tte remans n the
orgna aottee of one-haf or more of Osage Indan bood and n hs unaotted
hers or devsees of one-haf or more of Osage Indan bood unt anuary 1,1959
Provded, That the ta -e empt and of any such Indan aottee, her, or devsee
sha not at any tme e ceed one hundred and s ty acres.
ct of une 2 ,1938, 52 Stat. 103 -1036.
omestead aotments of Osage Indans not havng a certfcate of
competency sha reman e empt from ta aton whe the tte remans n the
orgna aottee of one-haf or more of Osage Indan bood and n hs unaotted
hers or devsees of one-haf or more of Osage Indan bood unt anuary 1,
198 : Provded, That the ta -e empt and of any such Indan aottee, her, or
dersee sha not at any tme e ceed one hundred and s ty acres.
The ct of une 20, 1936, 9 Stat. 15 2, whch apped to Indans
generay, ncudng Osage Indans, provded, n part, as foows:
Sec. 2. ands the tte to whch Is now hed by an Indan sub|ect to re-
strctons aganst aenaton or encumbrance e cept wth the consent or ap-
prova of the Secretary of the Interor, heretofore purchased out of trust or
restrcted funds of sad Indan, are hereby decared to be nstrumentates of
te edera Government and sha be nonta abe unt otherwse drected y
Congress.
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Regs. 105, 81.18. 6
Secton 2 of the ct of une 20, 1936, supra, was amended by the
ct of May 19,1937,50 Stat. 188, to read as foows:
homesteads, heretofore purchased out of the trust or restrcted fnnds of
ndvdua Indans, are hereby decared to be nstrumentates of the edera
Government and sha be nonta abe unt otherwse drected by Congress: Pro-
vded, That the tte to such homesteads sha be hed sub|ect to restrctons
aganst aenaton or encumbrance e cept wth the approva of the Secretary
of the Interor: nd provded further, That the Indan owner or owners sha
seect, wth the approva of the Secretary of the Interor, ether the agrcu-
tura and grazng ands, not e ceedng a tota of one hundred and s ty acres,
or the vage, town, or cty property, not e ceedng n cost 5,000, to be desg-
nated as a homestead. Itacs supped.
Under the foregong statutes reatng specfcay to the Osage In-
dans, t s cear that the homestead resutng from the desgnaton of
aotted ands s mted to 160 acres. The provsons and the egsa-
tve hstory of secton 2 of the ct of une 20,1936, as amended, nd-
cate no purpose to permt the desgnaton by any Indan of a second
homestead n ands purchased out of trust or restrcted funds whe
at the same tme the Indan purchaser retans a duy desgnated
homestead n aotted or prevousy purchased and. Where and pur-
chased out of trust or restrcted funds of ndvdua Indans s prop-
ery seected as a homestead, however, t may under that secton consst
ether of agrcutura and grazng and not e ceedng 160 acres, or
vage town, or cty property not e ceedng n cost 5,000.
In vew of the foregong, t s hed that the vaue of a rea estate
owned by an Osage Indan at the date of hs death s ncudbe n
hs gross estate for edera estate ta purposes e cept the vaue of a
homestead ether n aotted ands or n ands purchased out of trust
or restrcted funds, n accordance wth the mtatons stated n the
precedng paragraph. Compare ev. Ru. 5 -168, C. . 195 -1,182.
Reguatons 105, Secton 81.13: Property of
decedent at tme of death.
Lump sum payment to the wdow or wdower of the deceased or to
any person entted thereto under Tte II of the Soca Securty ct.
See Rev. Ru. 55-87, page 112.
S CTION 811(c). GROSS ST T : TR NS R IN CON-
T MPL TION O , OR T ING CT T, D T
Reguatons 105, Secton 81.17: Transfers n-
tended to take effect at or after the dece-
dent s death.
Reportng transfer to ncome partcpaton fund of chartabe
organzaton. See Rev. Ru. 55-275, page 295.
Reguatons 105, Secton 81.18: Transfers Rev. Ru. 55-302
wth possesson or en|oyment retaned
Where a decedent purchased a snge premum |ont fe and
survvorshp annuty contract from an nsurance company sub-
sequent to March 3, 1031, the vaue of the survvors annuty or, If
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7 Regs. 105, 8118.
the survvor annutant predeceased the decedent, the present worth
of refund payments due under the contract Is Incudbe n the
decedents gross estate under secton 811(c) of the Interna Revenue
Code of 1939.
dvce has been requested whether the vaue of a snge premum
|ont fe and survvorshp annuty contract purchased by a decedent
from an nsurance company subsequent to March 3,1931, s ncudbe
n hs gross estate n vew of the decson n state of Mary L. Pruyn v.
Commssoner, 18 ed. (2d) 971.
Where subsequent to March 3, 1931, a decedent has purchased an
annuty payabe to hmsef for fe and thereafter to a survvor
annutant for fe, the vaue of the survvor s annuty based on
repacement cost s ncudbe n the decedent s gross estate under
secton 811 (c) of the Interna Revenue Code of 1939. See Comms-
soner v. C. . Cse et a., 122 ed. (2d) 998, cert, dened 315 U. S.
821 Commssoner v. state of . M. Wder, 118 ed. (2d) 281, cert,
dened 31 U. S. 63 . owever, where the survvor annutant of
a |ont fe and survvorshp annuty pocy predeceases the decedent,
the present worth of the refund payments due under the contract s
ncudbe n the decedent s gross estate under secton 811(c) of the
Code.
smar annuty contract was consdered n state of Mary L.
Pruyn v. Commssoner, supra. In that case t was hed that the vaue
of the annuty contract was not ncudbe n the decedent s gross
estate. There, however, the annuty was purchased pror to March ,
1931, and, therefore, was nonta abe under the provsons of secton 7
of the Technca Changes ct of 19 9,63 Stat. 891,26 U. S. C. 811 (c),
C. . 19 9-2, 275, at 279. In ths connecton, see state of ohn M.
Goetchus v. Commssoner, 17 T. C. 95.
In vew of the foregong, t s hed that where the decedent pur-
chased a snge premum |ont fe and survvorshp annuty pocy
from an nsurance company subsequent to March 3, 1931, the vaue
of the survvor s annuty or, f the survvor annutant predeceased
the decedent, the present worth of refund payments due under the
contract s ncudbe n the decedent s gross estate under secton
811(c) of the Interna Revenue Code of 1939.
Reguatons 105, Secton 81.18: Transfers Rev. Ru. 55-378
wth possesson or en|oyment retaned.
Where the decedent transferred substantay a of hs property
nto a trust account for the beneft of hs chdren, reservng the rght
to wthdraw from the ncome or the prncpa, f necessary, a spec-
fed annuty or an amount equa to hs vng e penses, the transfer
was not a bona fde sae for an adequate and fu consderaton In
money or money s worth for the purposes of secton 811(c) (1) ( )
of the Interna Revenue Code of 1939, and the vaue of the property
transferred s ncudbe n hs gross estate for edera estate ta
purposes.
dvce has been requested whether the vaue of certan property
transferred by the decedent s ncudbe n hs gross estate for edera
estate ta purposes under the foowng crcumstances:
On pr 1, 1931, the decedent transferred substantay a of hs
property vaued at appro matey 100,000 nto a trust account for the
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Regs. 105, 81.20. 8
beneft of hs chdren, reservng the rght to wthdraw from the ncome
or the prncpa of the account 2,500 a year or a of hs vng e -
enses. rom the tme of the transfer to the date of decedent s death
s chdren pad a of hs vng e penses whch amounted to more
than the net ncome from the property.
Secton 811 of the Interna Revenue Code of 1939 provdes, n part,
as foows:
The vaue of the gross estate of the decedent sha be determned by Incudng
the vaue at the tme of hs death of a property, rea or persona, tangbe or
Intangbe, wherever stuated, e cept rea property stuated outsde of the
Unted States

(c) Transfers n Contempaton of, oh Takng ffect at. Death.
(1) Genera rue. To the e tent of any nterest theren of whch the
decedent has at any tme made a transfer (e cept n case of a bona fde sae
for an adequate and fu consderaton n money or money s worth), by trust
or otherwse

( ) under whch he has retaned for hs fe or for any perod not
ascertanabe wthout reference to hs deat or for any perod whch does
not n fact end before hs death () the possesson or en|oyment of, or the
rght to the ncome from, the property, or () the rght, ether aone or n
con|uncton wth any person, to desgnate the persons who sha possess
or en|oy the property or the ncome therefrom
The decedent dd not transfer the property to hs chdren abso-
utey n consderaton of ther agreement to pay hm 2,500 a year
or a of hs vng e penses but nstead he transferred the property
nto a trust account reservng the rght to receve 2,500 a year or a
of hs vng e penses out of the transferred property. ccordngy,
t s hed that the transfer was not a bona fde sae for an adequate and
fu consderaton n money or money s worth and s ncudbe n
decedent s gross estate under secton 811(c)(1)( ) of the Interna
Revenue Code of 1939 as a transfer under whch he retaned the pos-
sesson or en|o3-ment of, or the rght to the ncome from, the property.
S CTION 811(d). GROSS ST T : R OC L
TR NS RS
Reguatons 105. Secton 81.20: Transfers Rev. Ru. 55-393
wth power to change the en|oyment.
Where the terms of an nter vvos trust created by the decedent
were sub|ect to change or amendment by the trustee wth the consent
of the adut benefcary, or benefcares, then entted to receve the
trust ncome, and the decedent reserved the rght to remove the trustee
at any tme and appont another or successor trustee (ncudng hm-
sef), the en|oyment of the transferred property was sub|ect at date
of decedent s death to change through the e ercse of a power by hm
aone or n con|uncton wth others to ater, amend, revoke, or term-
nate wthn the meanng of secton 811(d) of the Interna Revenue
Code of 1939. ccordngy, the vaue of the property transferred to
the trust s ncudbe n hs gross estate. See state of Pau Lough-
rdge v. Commssoner, 183 ed. (2d) 291, certorar dened, 3 0 U. S.
830. owever, where the ony rght reserved to the decedent was
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9 Regs. 105, 81.37.
the rght to appont a new or successor trustee (hmsef) n the event
of the resgnaton or dsquafcaton of the orgna trustee, and such
contngency dd not occur durng decedent s fetme, the en|oyment
of the transferred property was not sub|ect at date of decedent s death
to change through the e ercse of a power by hm aone or n con-
|uncton wth others to ater, amend, revoke, or termnate. Under
such crcumstances, the vaue of the property transferred woud not
be ncudbe n hs gross estate. See state of 0. G. ennngs v.
Smth, 161 ed. (2d) 7 .
S CTION 811(|). G OSS ST T : OPTION L
LU TION
Reguatons 105, Secton 81.11: Optona Rev. Ru. 55-333
vauaton date.
Secton 811 (|) of the Interna evenue Code of 1939 does not
mt the appcaton thereof to the estates of decedents whch have
decreased n vaue durng the 1-year perod foowng the date of
death. Therefore, where an estate has ncreased n vaue durng
that perod of tme and the e ecutor has eected, on a return tmey
fed, to have the estate vaued n accordance wth the provsons of
secton 811 (|), a property ncuded n the gross estate whch has
not been dstrbuted, sod, e changed, or otherwse dsposed of wthn
1 year after the decedent s death sha be vaued as of the date 1 year
after the decedent s death. Property dstrbuted, sod, e changed,
or otherwse dsposed of wthn 1 year after the decedent s death
sha be vaued as of the date of such dstrbuton, sae, e change, or
other dsposton.
Reguatons 105, Secton 81.11: Optona ev. u. 55-379
vauaton date.
The ncrease n vaue of a pocy of nsurance, such as one owned
by a decedent who was not the nsured, whch ncrease s attrbutabe
to the payment of premums, or any nterest earned, durng the year
foowng date of death s deemed to be e cuded property wthn
the meanng of secton 81.11 of Reguatons 105 n determnng the
vaue of the pocy under the provsons of secton 811 (|) of the
Interna Revenue Code of 1939.
S CTION 812(b). N T ST T : P NS S, LOSS S,
IND T DN SS ND T S
eguatons 105, Secton 81.37: Ta es. Rev. Ru. 55-33
The decedent made gfts to thrd party donees durng the year n
whch he ded. The e ecutors of hs estate and hs survvng spouse,
who made no gfts durng the year, consented to treat the gfts as
havng been made one-haf by each spouse and fed edera gft ta
returns, each of whch dscosed a ta abty. The e ecutors of
the estate pad the entre gft ta abty. ed, the entre ta due
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Regs. 105, 81. . 50
wth respect to the gfts made by the decedent and pad by hs e ecu-
tors s deductbe under secton 812(b) of the Interna Revenue Code
of 1939 as a ta accrued pror to the decedents death, consttutng
an enforceabe obgaton of the decedent e stng at the tme of
death, notwthstandng the provsons of secton 1000(f) of the
1939 Codo to the effect that the abty for the ta of each spouse,
as thus computed, sha be |ont and severa.
S CTION 812(d). N T ST T : TR NS RS OR
PU LIC, C RIT L , ND R LIGIOUS US S
Reguatons 105, Secton 81. : Tranfers Ct. D. 1777
for pubc, chartabe, regous, etc., uses.
.( so Secton 81. 6.)
estate ta nterna revenue code decson of supreme court
1. Net state Transfers for Chartabe, etc. Uses Cond-
tona equests.
In determnng the net estate for edera estate ta purposes,
decedent s estate s not entted to a deducton under Secton 812(d)
of the Interna Revenue Code of 1939 on account of a chartabe
bequest that s to take effect ony f decedent s dvorced and chd-
ess 27-year-od daughter des wthout descendants survvng her
and her mother.
2. udgment reversed.
udgment of the Unted States Court of ppeas for the Second
Crcut (207 . 2d 600), affrmng n part decson of Ta Court of
Unted States (18 T. C. S36), reversed.
Supreme Court of the Unted States
Commssoner of Interna Revenue, pettoner, v. estate of Lous Sternbergcr,
the Chase Natona ank of the Cty of New York, e ecutor
On wrt of certorar to the Unted States Court of ppeas for the Second Crcut
anuary 10, 1933
OPINION
Mr. ustce urton devered the opnon of the Court
The ssue here s whether, n determnng a net estate for edera estate ta
purposes, a deducton may be made on account of a chartabe bequest that Is to
take effect ony f decedent s chdess 27-year-od daughter des wthout de-
scendants survvng her and her mother. or the reasons hereafter stated, we
hod that t may not.
Lous Sternberger ded testate une 25, 19 7. s edera estate ta return
dscoses a gross estate of 2, 06,5 1.71 and, for the addtona estate ta , a net
estate of . 2,06 ,3 6.55. It ncudes assets owned by hm at hs death and others
hed by the Chase Natona ank, respondent heren, under a revocabe trust
created by hm. s the revocabe trust makes provsons for charty that are,
for our purposes, dentca wth those n the w, ths opnon appes to both
dspostons.
The w paces the resduary estate In trust durng the ont ves of decedent s
wfe and daughter and for the fe of the survvor of them. Upon the death
of such survvor, the prncpa of the trust fund s payabe to the then vng
descendants of the daughter. owever, f there are no such descendants, one-
haf of the resdue goes to certan coatera reatves of decedent and the
other haf to certan chartabe corporatons. If none of the desgnated rea-
tves are vng, the entre resdue goes to the chartabe corporatons.1
c, ,TL -ecP.,rovsIon8 aPPcar morc fuy In state o ternocrger v. Commssoner, 18 T. C
oou, oo)- 3o,
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51 Regs. 105, 81. .
t decedent s death, hs wfe and daughter survved hm. s wfe was then
62 nd hs daughter 27. The atter marred n 19 2, was dvorced n 19 , had
ot remarred and had not had a chd.
In the estate ta return, decedent s e ecutor, respondent heren, deducted
179.15 .19 from the gross estate as the present vaue of the condtona bequest
to charty of one-haf of the resdue. Respondent camed no deducton for the
more remote chartabe bequest of the other haf of the resdue. The Comms-
soner of Interna Revenue dsaowed the deducton and determned a ta
defcency on that ground. The Ta Court reversed the Commssoner. 18 T. O.
836. The Court of ppeas for the Second Crcut affrmed the Ta Court, 207
. 2d 600, on the authorty of Meerhof v. ggns, 129 . 2d 1002. To resove
the resutng confct wth the Court of ppeas for the rst Crcut n Newton
Trust Co. v. Commssoner, 160 . 2d 175, we granted certorar, 3 7 U. S. 932.
The controng provsons of the Revenue Code are n substantay the same
terms as when they were frst enacted In 1919 and are as foows:
S C. 812. N T ST T .
or the purpose of the ta the vaue of the net estate sha be de-
termned by deductng from the vaue of the gross estate

(d) Transfers for Pubc, Chartabe, and Regous Uses. The
amount of a bequests, egaces, devses, or transfers to or for
the use of any corporaton organzed and operated e cusvey for re-
gous, chartabe, scentfc, terary, or educatona purposes .
I. R. C.
The Commssoner concedes that the corporatons named n the w quafy
as chartabe corporatons under the statute. There s no doubt, therefore, that
f the bequest to them had been mmedate and uncondtona, ts vaue woud
be deductbe. The queston before us s what, If any, chartabe deducton may
be made despte (1) the deferment of the effectve date of the chartabe bequest
unt the deaths of both decedent s wfe and daughter and (2) the condtonng
of the bequest upon a ack of decendants of decedent s daughter survvng at that
tme. We fnd the answer In the Treasury Reguatons, whch are of ong stand-
ng and strengthened by reenactments of I. R. C. secton 812(d), snce ther
promugaton.1
. Secton 81. of Treasury Reguatons 105 woud permt the deducton of the
present vaue of the bequest f t were an outrght bequest, merey deferred
unt the deaths of decedent s wfe and daughter.
In ther earest form, the predecessors of these reguatons, In 1919, recognzed,
In pan anguage, the proprety of the deducton of the present vaue of a deferred,
but assured, bequest to charty. Secton 81. (d) of Treasury Reguatons 105
does so wth nescapabe specfcty:
Sec. 81. . Transfers for Pubc, Chartabe, Regous, etc., Uses

(d) If a trust s created for both a chartabe and a prvate purpose, deducton
may be taken of the vaue of the benefca Interest n favor of the former ony
Orgnay sec. 03(a)(3) of the Revenue ct of 1918, 0 Stat. 1098. See aso, Grs-
wod. Cases and Materas on edera Ta aton (3d ed.), 679 et acq. 1 Pau. edera
state and Gft Ta aton, 638. et aeq.
Its atest reenactment Is In ee. 2055(a) of the Interna Revenue Code of 195 , 68
tat 390. The purpose of the deducton Is to encourage gfts to the named uses. d-
ward v. Socum, 26 U. S. 61, 63 Geo. Wash. L. Rev. 198, 201 28 a. L. Rev. 387-388.
Lke other ta deductons, however, It must rest on more than a doubt or ambguty.
8 e Unted States v. Stewart, 311 T . S. 60 71 Ct. D. I 86, C. . 19 0-2. 199 . and aso
Commuoncr v. acohton. 336 U. S. 28, 9 Ct. D. 1712, C. . 19 9-1, 0 .
Secton 08(a) of the Revenue ct of 19 2, 58 Stat. 9 9, added to I. R. C, sec. 812(d),
the totaed dscamer provson, whereby, under certan condtons, the renuncaton
of a prvate bequest whch effectuates a gft to charty earns a chartabe deducton from
the decedent s gross estate.
kt. 53. Pubc, chartabe, and smar bequests. It does not prevent
deducton that the property paced In trust s aso sub|ect to another trust for
prvate purpose. Thus, where money or property s paced In trust to pay the ncome
to an Indvdua durng fe, and then to pay or dever the same to a chartabe corpora-
ton, or appy the prncpa to a chartabe purpose, the chartabe bequest or devse forms
the bass for a deducton. The amount of the deducton, n such case, Is the va e. at
the date of the decedent s death, of the remander Interest n the money or property whch g
devsed or bequeathed to charty. or the manner of determnng the vaue of such reman-
der nterest, see rtce 20. 21 T. D. 783-78 . ,wt
rtce 20 prescrbed methods of determnng the present worth of a remander sub|ect to
t snge fe nterest.
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Regs. 105, 81. . 52
Insofar as such Interest Is presenty ascertanabe, and hence severabe from the
nterest n favor of the prvate use. Secton 81.10 ndcates the prncpes to be
apped n the computaton of the present worth of deferred uses, but such com-
putaton w not be made by the Commssoner on behaf of the e ecutor. Thus,
f money or property s paced n trust to pay the ncome to an ndvdua durng
hs fe, or for a term of years, and then to pay or dever the prncpa to the
chartabe corporaton, or to appy t to a chartabe purpose, the present vaue
of the remander s deductbe. To determne the present vaue of such re-
mander, use the approprate factor n coumn 3 of Tabe or of secton 81.10.
If the present worth of a remander bequeathed for a chartabe use s dependent
upon the termnaton of more than one fe, or n any other manner renderng
nappcabe Tabe or of secton 81.10, the cam for the deducton must be
supported by a fu statement, n dupcate, of the computaton of the present
worth made, n accordance wth the prncpe set forth n secton 81 0, by one
sked n actuara computatons. ( mphass supped.) 26 C R.
The very e pctness of the above provsons emphaszes ther restrcton to
the computaton of the present worth of assured bequests such as are the sub-
|ect of each of the ustratons and cross references n the secton. The statute
restrcts chartabe deductons to bequests to corporatons organzed and
operated e cusvey or chartabe purposes. ( mpha-
ss supped.) Lkewse, the above secton of the reguatons requres that the
deductbe vaue of the benefca nterest n favor of the desgnated chartabe
purpose be severabe from the nterest n favor of the prvate use. There s
no suggeston n the statute or n secton 81. of a deducton of funds other than
those ater to be used e cusvey for chartabe purposes.
. Secton 8 6 of Treasury Reguatons 105 permts no deducton for a con-
dtona bequest to charty uness the possbty that charty w not take
s so remote as to be neggbe.
ere, aso, the reguatons n ther earest form, In 1919, were unequvocay
restrctve. It was ony after court decsons had demonstrated the need for
dong so that the restrctons were restated so as e pressy to permt deduc-
tons of bequest assured n fact but condtona n form.
Secton 81. 6 now provdes e pressy that no deducton s aowabe for a
condtona bequest to charty uness the possbty that charty w not take
s so remote as to be neggbe. The whoe secton s sgnfcant:
Sec. 81 6. Condtona eqcests. (a) // as of the date of decedent s death
the transfer to charty s dependent upon the performance of some act or the
happenng of a precedent event n order that t mght become effectve, no de-
ducton s aowabe uness the possbty that charty w not take s so remote
as to be neggbe. If an estate or nterest has passed to or s vested n charty
at the tme of decedent s death and such rght or nterest woud be defeated
by the performance of some act or the happenng of some event whch appeared
to have been hghy Improbabe at the tme of decedent s death, the deducton
s aowabe.
(b) If the egatee, devsee, donee, or trustee Is empowered to dvert the
property or fund, n whoe or n part, to a use or purpose whch woud have
rendered t, to the e tent that t s sub|ect to such power, not deductbe had It
been drecty so bequeathed, devsed, or gven by the decedent, deducton w be
mted to that porton, f nny, of the property or fund whch Is e empt from an
e ercse of such power. ( mphass supped.) 20 C R.
Congressona Insstence upon the actua use of the funds e cusvey for chartabe
purposes appears n the foowng provsons descrbng the bequests that are deductbe :
The amount of a bequests to or for the use of any corporaton organsed
an operated e cusvey for regous, chartabe, scentfc, terary, or educatona pur-
poses vo part of the net earnngs of whch nures to the beneft 0/ any prvate
stockhoder or ndvdua or to a trustee or trustees, or a fraterna socety,
order, or assocaton operatng under the odge system, but onu f such contrbutons or
gfts are to be ned e cusvey for regous, chartabe, scentfc, terary, or
educntonn purposes . ( mphass supped.) I. R. C. sec. 812(d).
rt. 5t). Condtona bequests. Where the bequest, egacy, devse, or gft s dependent
upon the performance of some act. or the happenng of some event, n order to become
effectve t s necessary that the performance of the act or the occurrence of the event
shr have taken pace before the deducton can be aowed. Where, by the terms of the
bequest, devse or gft, t Is sub|ect to be defeated by a subsequent act or event, no deduc-
ton w he aowed. 21 T. U. 785.
1 Unted States v. Provdent Trunt Co.. 291 T. S. 272. See aso, oagand . avanagh,
80 I . Supp. 875 Snth unk d Trust Co. v. Unted States, 15 . Supp. 51.
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53 Regs. 105, 81. .
Sectons 81. and 81. 6 fuy mpement secton 812(d) of the code. In
ther eary forms they were obvousy mutuay e cusve and easy reconcabe.
The predecessor of secton 81. 8 confned chartabe deductons to outrght,
uncondtona bequests to charty. It e pressy e cuded deductons for char-
tabe bequests tbat were sub|ect to condtons, ether precedent or subsequent.
Whe t encouraged assured bequests to charty, t offered no deductons for
bequests that mght never reach charty. Subsequent amendments have carfed
sndnot changed that prncpe. Secton 81. 6(a) today yeds to no condton
uness the possbty that charty w not take s neggbe or hghy m-
probabe. Secton 81. 6(b) s equay strct. It reates to provsons whereby
funds may be dverted n whoe or n part to nonchartabe uses, and t mts
the ta deducton to that porton of each fund that cannot be so dverted.
Where the prncpa of a bequest to charty thus may be Invaded for prvate
purposes, t s ony the ascertanabe and assured baance of the bequest to
charty that Is recognzed for a ta deducton.
espondent concedes that the chance that charty w not take Is much more
than neggbe. Therefore, f secton 81. 6(a) appes to the nstant case, no
chartabe deducton s permssbe.
Respondent cams, however, that secton 81. covers ths case. In dong so,
It reads sectons 81. and 81. 6 together and, nstead of confnng them to ther
mutuay e cusve sub|ects, makes them overap. It appes secton 81. to
some deferred condtona bequests. It does so n any case where t can com-
pute, on approved actuara standards, the degree of possbty that charty w
receve the condtona bequest. Respondent then computes the present vaue
of a correspondng percentage of the entre deferred bequest. In short, re-
spondent cams an mmedate ta deducton equa to the present vaue of what-
ever fracton of the bequest corresponds, actuaray, to the chance that chanty
may beneft from t.
Ths Court consdered a somewhat comparabe proposa n 1928. In umes v.
Unted Statet, 276 U. S. 87, a ta payer sought a chartabe deducton based on a
bequest to charty that was condtona upon the death of decedent s 15-year-od
nece, wthout ssue, before reachng the age of 0. To sustan the proposa, the
ta payer sought to estabsh actuaray a measure of the chance that charty
woud receve the bequest and to fnd authorty n the Revenue Code for the
deducton of the present vaue of a correspondng percentage of the bequest.
Speakng through Mr. ustce randes, ths Court found the actuara computa-
ton nadequate. It, however, dd not drop the matter there. It made the
foowng statement:
One may guess, or gambe on, or even nsure aganst any future event. The
Soctor Genera tes us that Loyds of London w nsure aganst havng twns.
ut the fundamenta queston n the case at bar, s not whether ths contngent
nterest can be nsured aganst or ts vaue guessed at, but what constructon sha
be gven to a statute. Dd Congress n provdng for the determnaton of the
net estate ta abe, ntend that a deducton shoud be made for a contngency, the
actua vaue of whch cannot be determned from any known data Nether ta -
payer, nor revenue offcer even f equpped wth a the ad whch the actuara
art can suppy coud do more than guess at the vaue of ths contgeney. It
t cear that Congress dd not ntend that a deducton shoud be made for a
contngent gft of that character. ( mphass supped.) Id., at 9 .
Snce the above was wrtten, there have been advances n the actuara art.
Today, actuara estmates are empoyed more wdey than they were then.
The computatons now before us ustrate that advance. They do not, however,
essen the necessty for statutory authorzaton for such a ta deducton. The
scope of the authorty requred by respondent can best be apprecated f e amned
n the reveang ght of the specfc crcumstances of the present case.
The Ta Court and the Court of ppeas have approved respondent s actuara
computatons as fary refectng the present vaue of one-haf of a two-mon-
doar resdue, reduced n proporton to the chance that charty w receve t.
In makng ths estmate, respondent has computed the present vaue of the de-
ferred bequest on the bass of percent nterest compounded annuay and has
used the foowng actuara tabes:
L To determne the |ont fe e pectancy of decedent s wfe and daughter, the
Combned perence Mortaty Tabe prescrbed n secton 81.10 of the estate
ta reguatons.
2. To estmate the probabty of remarrage of the daughter, the mercan
Remarrage Tabe, pubshed by the Casuaty ctuara Socety.
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Regs. 105, 81. . 5
3. To estmate the chance of a frst chd beng born to decedent s daughter, a
specay devsed tabe whch has been found by the Ta Court to have been pre-
pared In accordance wth accepted actuara prncpes upon data derved from
statstcs pubshed by the ureau of the Census.
On the bass of these tabes, the Ta Court fnds that the present vaue of
the chartabe remander at the death of decedent s .1838 on the doar f com-
puted soey on the chances of hs daughter s remarrage .2 09 on the doar f
computed on the chance that of egtmate descendant of hs daughter w survve
her and .2 058 on the doar f computed on the chance that any egtmate or
egtmate descendant of hs daughter w survve her. It s ths ast estmate
that respondent seeks to appy here.
If respondent s successfu, t means the aowance of an mmedate and rrev-
ocabe deducton of over 17.1,000 from the gross estate of decedent, athough
respondent admts there Is a rea posshty that charty w receve nothng.
The bequest, n fact, offers to the daughter an nducement of about 2,000,000
to remarry and eave a descendant. To the e tent that ths nducement reduces
the actuaray computed average probabty that charty w receve ths be-
quest, t further demonstrates the napproprateness of authorzng chartabe
ta deductons based upon hghy condtona bequests to charty.
n even cearer ustraton of the effect of respondent s nterpretaton of the
code ready suggests tsef. If decedent had here condtoned hs bequest to
charty soey on the death of hs daughter before remarrage, the Remarrage
Tabe woud then f the present vaue of the chartabe remander at .183S on
the doar. The ta payer woud at once receve a substanta chartabe deduc-
ton on that bass. The daughter, however, woud have a 2,000,000 nducement
to remarry. If she dd so, her acton woud cance the possbty that charty
woud receve anythng from the bequest, but t woud not cance the ta deduc-
ton aready aowed to the estate. To whatever e tent any person can defeat
the fufment of any condton upon whch a beneft to charty depends, to
that e tent the actuara estmate that such beneft w reach charty s ess
dependabe. The aowance of such a ta reducton as s here sought woud
open a door to easy abuse. The resut mght we be not so much to encourage
gfts nurng to the beneft of charty as to encourage the wrtng of condtons
Info bequests whch woud assure chartabe ta deductons wthout assurng
benefts to charty.
We fnd no suggeston of authorty for such a deducton n secton 812(d).
That secton remans substantay the same as It was when Uumes v. Unted
States, supra, 276 U. S. S7, was decded. We aso fnd no authorzaton for
the deducton ether n secton 81. 6 or secton 81. of the reguatons, as thus
far dscussed. Ths reegates respondent to the foowng works now n secton
81. (d):
If the present worth of a remander bequeathed for a chartabe use s de-
pendent upon the termnaton of more than one fe, or n any other manner
renderng nappcabe Tabe or of secton 81.to, the cam for the deducton
must be supported by a fu statement, n dupcate, of the computaton of the
present worth made, n accordance wth the prncpe set forth n secton 81.10,
by one sked n actuara computatons. ( mphass supped.)
In vew of the statutory emphass upon outrght bequests and the ong-standng
e cuson of condtona bequests by secton 81. 0 of the reguatons (and ts
predecessors), we do not regard the above sentence as now Invadng the doman
of secton 81. 6 by e tendng the deducton to condtona bequests n a manner
Despte the concusons of the Ta Court and the Conrt of ppeas to the contrary, the
Government contends here that the proposed actuara vaue of the condtona remander
to charty does not upport the deducton. We do not reach that Issue, but the facts
matera to t are as foows: The Remarrage Tabe s based on a study of mercan
e perence conducted by a Commttee of the Casuaty ctuara Socety, 19 Proceedngs
of the Casuaty ctuara Socety (1933), 279-3 9. The tabe Is based soey upon the
remarrage e perence of wdows who, through the deaths of ther husbands, become bene-
fcares under workmen s compensaton aws In states where they ose compensaton benefts
upon remarrage. The reports reed upon cover e perence for pocy years 1921 to 1029.
Incusve. See d., at 286-288. See aso. Myers, urther Remarrage perence
86 Proceedngs of the Casuaty ctuara Socety (19 9), 72 et tea. The specay devsed
tabe as to the probabty of Issue s based upon statstcs, for whte women n 7 states
and the Dstrct of Coumba, Indcatng the degree of probabty that snch women, after
they are 27 years od, w marry and have frst-born chdren. See the foowng ureau
of the Census pubcatons for 19 0 ta Statstcs of the Unted States. Pt. II. 8 :
Natvty and Parentage of the Whte Popuaton Genera Characterstcs 110 Types of
ames 9. The nstant computaton assumes that such a chd w survve ts mother.
18 T. C. 836, 837-838.
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55 Regg. 105, 81. 6.
ready open to abuse. We regard the sentence as restrcted to computatons of
deferred, but assured, bequests. Secton 81.10(1) now deas at ength wth the
vauaton of remanders and reversonary Interests and gves many e ampes of
each computatons. very e ampe, however, s one of the vauaton of an
assured bequest. The addtona anguage n secton 81. (d), quoted above,
does not authorze the deducton, and secton 81. 6 prohbts t. Such specfc
and estabshed admnstratve nterpretaton of the statute s vad and shoud
not be overrued e cept for weghty reasons. Commssoner v. South Te as Co.,
333 U. S. 96, 501. Ct. D. 1697, C. . 19 8-1, 82.
Ths Court has not specfcay faced the Issue now before us snce umes v.
Unted States, supra, but we see no reason to retreat from the vews there stated.
Ths Court fnds no statutory authorty for the deducton from a gross estate of
any percentage of a condtona bequest to charty where there s no assurance
that charty w receve the bequest or some determnabe part of t Where
the amount of a bequest to charty has not been determnabe, the deducton
propery has been dened. ensee v. Unon Panters ank, 335 U. S. 595, 598-
600 Merchants ank v. Commssoner, 320 U. S. 256, 259-263 and see RoUnette
v. Ueverng, 318 U. S. 18 , 189. Where the amount has been determnabe, the
deducton has, wth equa proprety, been aowed where the desgnated charty
has been sure to beneft from t. Unted States v. Provdent Trust Co., 291 U. S.
272 Ithaca Trust Co. v. Unted States, 270 U. S. 151 Ct. D. 61, G. . II-1, 313
(1929) .
Some of the ower courts have squarey met the nstant probem and dened
the deducton. or e ampe, the deducton was dened n the rst Crcut where
the court found that t Is not certan that the charty w take 50 percent of
the corpus ony that t has a 50-50 chance of gettng a or nothng. e ton
Trust Co. v. Commssoner, 160 . 2d 175, 181. See aso, Graff v. Smth, 100 .
Supp. 2 oagand v. avanagh, 36 . Supp. 875 Wood v. Unted States, 20 .
Supp. 197. The admnstratve practce, as evdenced here by the acton of the
Commssoner, has been to deny the deducton. See further, Pau, edera state
and Gft Ta aton (19 6 Supp.), 26- 27.
The udgment of the Court of ppeas, accordngy, s reversed and the cause
remanded for acton n conformty wth ths opnon.
eversed.
Reguatons 105, Secton 81. : Transfers for
pubc, chartabe, regous, etc., uses.
Deducton for transfer to ncome partcpaton fund of chartabe
organzaton. See Rev. Ru. 55-275, page 295.
Reguatons 105, Secton 81. G: Condtona Rev. Ru. 55-335
bequests.
mounts dstrbuted by the e ecutor of an estate as chartabe
bequests, where the organzatons and the amount to be dstrbuted
to each are not f ed by the w, are not deductbe from the dece-
dent s gross estate under secton 812(b) of the Interna Revenue
Code of 1939 for edera estate ta purposes.
dvce has been requested reatve to the treatment for edera
estate ta purposes or amounts dstrbuted by the e ecuor of an
estate as chartabe bequests n carryng out the terms of a w.
In the nstant case the decedent eft a w bequeathng a of hs
rea and persona property to hs mother and brother. ach was
to have a one-haf share of the estate and n the event that ether
predeceased hm the survvor was to have the fu estate. The brother
was desgnated soe e ecutor under the w.
The w further contaned a provson that the mother and brother
make sutabe chartabe gfts out of hs estate the amount of the
88 050 56 30
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Regs. 105, 81. 7a. 56
gfts and the nsttutons to whch such gfts are made was eft soey
wthn ther |udgment.
In compance wth the wshes of the testator, the e ecutor
dstrbuted certan gfts to chartabe organzatons.
Secton 812 of the Interna evenue Code of 1939 provdes, n part,
as foows:
or the purpose of the ta the vaue of the net estate sha be determned,
In the case of a ctzen or resdent of the Unted States by deductng from the
vaue of the gross estate

(d) Tbansfebs fob Pubc, Chartabe and Regous Uses. The amount
of a bequests, egaces, devses, or transfers to or for the use of
the Unted States, any State, Terrtory, any potca subdvson thereof,
or the Dstrct of Coumba, for e cusvey pubc purposes, or to or for the
use of any corporaton organzed and operated e cusvey for regous,
chartabe, scentfc, terary, or educatona purposes, .
Snce the chartabe organzatons and the amount dstrbuted to
each were not f ed by the w, t s apparent that the amount whch
any charty mght receve was so uncertan that t coud not have been
stated n defnte terms of money. Under such crcumstances the
chartabe deducton s not aowabe. Dane W. Norrs et a. v.
Commssoner, 13 ed. (2d) 796, cert, dened 320 U. S. 756. Chares
. Derdge, r. st. of G. M. Ioehm) v. Unted States, 89 ed.
Supp. 8 5. Chares L. urdck et a. v. Commssoner, 117 ed. (2d)
972, cert, dened 31 U. S. 631.
In accordance wth the foregong, t s hed that amounts ds-
trbuted by the e ecutor of an estate as chartabe bequests, where
the organzatons and the amount to be gven to each are not f ed by
the w, are not deductbe from the decedent s gross estate under
secton 812(d) of the Interna evenue Code of 1939 for edera
estate ta purposes.
Reguatons 105, Secton 81. 6: Condtona
bequests.
Chartabe bequest to take effect upon death of decedent s wfe and
daughter wthout descendants. See Ct. D. 1777, page 50.
S CTION 812(e). N T ST T : U STS, TC., TO
SUR I ING SPOUS
Reguatons 105, Secton 81. 7a: Requests, etc., Rev. Ru. 55-277
to survvng spouse.
Where a pocy of nsurance contans a provson that the pro-
ceeds are to be retaned by the nsurance company and nterest
thereon pad monthy to the survvng spouse durng her fe wth
the rght n the wfe, e ercsabe by her aone and In a events, to
drect the nsurance company to pay the entre proceeds at her
death to her e ecutors, admnstrators or assgns, the survvng
spouse possesses a power of appontment wthn the meanng of
secton 812 (e) (1) (O) of the Interna Revenue Code of 1939. c-
cordngy, the proceeds of the pocy quafy for the marta deduc-
ton under secton 812(e) of the Code.
dvce has been requested concernng the estate ta marta deduc-
ton provsons of secton 812 (e) of the Interna Revenue Code of 1939
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57 Regs. 105, 81. 7a.
as apped to the proceeds of fe nsurance under the crcumstances
set forth beow.
In the nstant case a pocy of nsurance provdes that the proceeds
of the pocy were to be retaned by the nsurance company and n-
terest thereon pad monthy to the survvng spouse durng her fe.
The wfe was gven the rght, e ercsabe oy her aone and n a
events, to drect the nsurance company to pay the entre proceeds of
the pocy at her death to her e ecutors, admnstrators or assgns.
The specfc queston s whether the spouse possessed a power of ap-
pontment wthn the meanng of secton 812(e)(1)(G) of the In-
terna Revenue Code quafyng the proceeds of the pocy for the
marta deducton under secton 812 (e) of the Code.
Secton 812(e)(1)(G) of the Interna Revenue Code provdes as
foows:
(G) Lfe Insurance or nnuty Payments Wth Power of ppont-
ment n Survvng Spouse. In the case of an nterest n property passng
from the decedent consstng of proceeds under a fe nsurance, endow-
ment, or annuty contract, f under the terms of the contract such pro-
ceeds are payabe n nstaments or are hed by the nsurer sub|ect to
an agreement to pay nterest thereon (whether the proceeds, npon the
termnaton of any nterest payments, are payabe n a ump sum or n
annua or more frequent nstaments), and such nstament or nterest
payments are payabe annuay or at more frequent ntervas, com-
mencng not ater than thrteen months after the decedent s death, and
a amounts payabe durng the fe of the survvng spouse are payabe
ony to such spouse, and such spouse has the power to appont a amounts
payabe under such contract (e ercsabe n favor of such survvng
spouse, or of the e tate of such survvng spouse, or n favor of ether,
whether or not n each case the power s e ercsabe n favor of others),
wth no power n any other person to appont to any person other than
the survvng spouse any part of the amounts payabe under such
contract
() such proceeds sha, for the purposes of subparagraph ( ),
be consdered as passng to the survvng spouse, and
() no part of such proceeds sha, for the purposes of subpara-
graph ( ) (), be consdered as passng to any person other than
the survvng spouse.
Ths subparagraph sha be appcabe ony f, under the terms of the
contract, such power n the survvng spouse to appont, whether e er-
csabe by w or durng fe, s e ercsabe by such spouse aone and n
a events. Itacs supped.
The provsons contaned n the poc 7 to the effect that the survvng
spouse had the rght to drect payment of the proceeds to her e ecu-
tors, admnstrators or assgns s a power to appont to the estate of
Rch survvng spouse wthn the meanng of secton 812(e) (1) (G)
of the Code, supra. ccordngy, t s hed that snce the wfe s en-
tted to the ncome for fe and the rght, e ercsabe by her aone and
n a events to drect the nsurance company to pay the entre proceeds
of the pocy at her death to her e ecutors, admnstrators or assgns,
the nsurance quafes for the marta deducton under secton 812(e)
of the Code. Compare Rev. Ru. 5 -553, C. . 1951-2, 303.
The decson n Second Natona ank of Danve, Inos, Trustee
u/v/t W of een L. bd v. Daman, 209 ed. (2d) 321, whch
woud requre a concuson contrary to that reached heren, w not
be accepted by the Interna Revenue Servce as a precedent n the
dsposton of other cases nvovng smar fact stuatons.
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Regs. 105, 81. 7a. 58
Reguatons 105, Secton 81. 7a: equests, ev. Ru. 55-39
etc., to survvng spouse.
testamentary trust created by the decedent n favor of hs sur-
vvng spouse provdes that she s to receve the entre ncome from
the trust property, payabe n quartery nstaments, unt anuary
1, 1958, or unt her death, whchever s earer. If she s ave on
the stpuated date, the corpus s to be pad over to her n fee smpe
absoute. In the event of the spouse s death pror to the e praton
of the trust term, the corpus s to be pad over to the e ecutor of
her estate provded she sha so drect n her ast w n accordance
wth the genera and uncondtona power of appontment conferred
upon her by the decedent. Shoud she fa to e ercse the power, the
property s to be added to another trust created by the decedent n
favor of benefcares other than hs wfe. ed, the payment of the
corpus of the trust to the survvng spouse pror to her death s not
deemed to be a termnaton of the genera power of appontment wthn
the meanng of secton 81. 7a (c) of state Ta Reguatons 105 nor
does the namng of takers n defaut of the e ercse of her power of
appontment over the corpus of the trust fa to satsfy the condton,
contaned n such secton, that the survvng spouse must be abe to
appont to hersef or her estate. Snce no nterest n the trust property
s consdered as havng passed from the decedent to any person other
than hs survvng spouse, the trust n queston quafes for the marta
deducton under the provsons of secton 812(e) of the Interna
Revenue Code of 1939.
Reguatons 105, Secton 81. 7a: equests, Rev. Ru. 55-395
etc., to survvng spouse.
Decedent bequeathed the resdue of hs estate n trust and provded
that the trustee sha use the net ncome therefrom for the care, man-
tenance and support of hs wdow n such fashon and state as she
may desre, wth the power n the trustee, n the event such ncome
shoud be nsuffcent to meet her desres or demands, to se trust
assets from tme to tme and use the proceeds for the purposes afore-
sad. The trustee was drected to convert the remander of the trust
assets nto cash foowng the death of the wdow and to dstrbute
the proceeds of the sae and any accumuatons of the trust to certan
desgnated benefcares. ed, snce the terms of the trust dd not
confer upon decedent s survvng spouse the power, e ercsabe by her
aone and n a events, to appont the entre corpus or a specfc porton
thereof free of trust as requred by secton 812(e) (1) ( ) of the In-
terna Revenue Code of 1939, and as others were named to take so
much of the property as may reman upon her death, the nterest
passng to such spouse was a termnabe one wthn the meanng of
secton 812(e) (1) ( ) of the 1939 Code, no porton of the vaue of
whch quafes for the estate ta marta deducton.
Reguatons 105, Secton 81. 7a: equests, Rev. Ru. 55- 19
etc., to survvng spouse.
Property e empted from e ecuton under oca aws whch s set
off absoutey to a wdow from ber deceased husband s estate con-
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59 (Regs. 105, 5 81. 7a.
sttutes an nterest In property acqured by nhertance wthn the
meanng of secton 812(e) (3) of the Interna Revenue Code of 1939.
ccordngy, the vaue of such property quafes for the marta
deducton authorzed by secton 812(e) of the 1939 Code.
dvce has been requested whether property e empted from e ecu-
ton under oca aws whch s set off absoutey to the wdow from her
deceased husband s estate quafes for the marta deducton author-
zed by secton 812(e) of the Interna Revenue Code of 1939.
Secton 812(e) of the Interna Revenue Code of 1939 provdes, n
part, as foows:
(e) equests, etc., to Survvng Spouse.
(3) Defnton. or the purposes of ths subsecton, an nterest n
property sha be consdered as passng from the decedent to any person f
and ony f
( ) such nterest s bequeathed or devsed to such person by the
decedent or
( ) such nterest s nherted by such person from the decedent or
(C) such nterest s the dower or curtesy nterest (or statutory
nterest n eu thereof) of such person as survvng spouse of the
decedent .
The partcuar State statute nvoved n the nstant case provdes n
effect that when the deceased eaves a wdow, a persona property
whch n hs hands as head of a famy woud be e empt from e ecu-
ton, after beng nventored and apprased, sha be set apart to her
as her property, and be e empt n her hands as n the hands of the
decedent.
Whether e empt property set off to a wdow by oca statute const-
tutes an nterest n property passng from the decedent to hs survv-
ng spouse depends upon an nterpretaton of the word nherted.
In the case of Munro L. Lyeth v. oey, 305 U. S. 188, Ct. D. 1370,
C. . 1938 2,208, the queston nvoved was whether property receved
by an her under an agreement compromsng and settng hs contest
of the decedent s w s property acqured by nhertance wthn the
meanng of the Revenue ct of 1932. The Court sad:
the queston whether what the her has thus receved has been ac-
qured by nhertance wthn the meanng of the edera statute necessary
Is a edera queston. Congress estabshed ts own crtera and the
State aw may contro ony when the edera ta ng act by e press anguage or
necessary mpcaton makes ts operaton dependent upon state aw.
In re Mc ugh, 75 ed. Supp. 676, affrmed 168 ed. (2d) 350, the
queston nvoved was whether money receved by a bankrupt pursuant
to the edera mpoyees Labty ct for the death of hs son was
an nhertance wthn the terms of the Natona ankruptcy ct. The
court sad:
The term bequest and devse refer to the acquston of property by
w . Inhertance s a word of broader sgnfcance. ny means by
whch a reaton succeeds to the property of an ancestor may propery be termed
an nhertance. It ncudes a the methods by whch a chd or reaton takes
property from another at hs death, e cept by devse, and ncudes as we suc-
cesson as descent. Cf. 1 ouv. Law Det., Rawes Thrd Revson, page 1508.
Snce the e empt property nvoved n the nstant case actuay
passes to the survvng spouse by operaton of aw so as to gve her a
vested nterest theren, t s cear that such property comes wthn the
meanng of the term nhertance as defned n the case of In re Mc-
ugh, supra.
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Regs. 105, ( 81. 7 60
In vew of the foregong, t s hed that property e empted from
e ecuton under oca aws whch s set off absoutey to a wdow from
her deceased husband s estate consttutes an nterest n property ac-
qured by nhertance wthn the meanng of secton 812(e) (3) of the
Interna Revenue Code of 1939. ccordngy, the vaue of such
property quafes for the marta deducton authorzed by secton
812(e) of the 1939 Code.
Reguatons 105, Secton 81. 7d: Lmtaton Rev. Ru. 55-225
on amount of marta deducton.
Where the e ecutor of an estate eects to cam certan e penses
of admnstraton as deductons from the gross ncome of the estate
under secton 23(a) of the Interna Revenue Code of 1939 rather
than as deductons from the decedent s gross estate under secton
812(b) of the 1939 Code, the vaue of the decedent s ad|usted gross
estate, for the purposes of arrvng at the 50 percent mtaton
on the amount aowabe as a marta deducton, Is to be determned
by subtractng from the entre vaue of the gross estate the aggre-
gate amount of the deductons actuay camed and aowed under
secton 812(b) of the Code as dstngushed from those whch woud
merey be aowabe under ths secton.
dvce has been requested whether certan e penses of admns-
traton otherwse aowabe as deductons from the decedent s gross
estate under secton 812(b) of the Interna Revenue Code of 1939
w have the effect of ncreasng the ad|usted gross estate for the
purpose of determnng the 50 percent mtaton on the amount aow-
abe as a marta deducton shoud the decedent s e ecutor eect to
cam such e penses as deductons for edera ncome ta purposes
under secton 23(a) of the Code.
Secton 812(e) (1) ( ) of the Interna Revenue Code of 1939 pro-
vdes that the amount aowabe as a marta deducton sha not e -
ceed 50 per centum of the vaue of the ad|usted gross estate.
Under the genera rue provded by secton 812(e)(2)( ) of the
Code, the vaue of the decedent s ad|usted gross estate, for the pur-
pose of arrvng at the 50 percent mtaton on the amount aowabe
as a marta deducton, s to be determned by subtractng from the
entre vaue of the gross estate the aggregate amount of the deductons
aowed by secton 812(b) of the Code. Ths provson was desgned
to prevent a doube deducton wth respect to any tem, that s, a
deducton under both subsecton (b) and subsecton (e) of secton 812
of the Code. There s, however, no provson n ether the aw or the
reguatons statng that the aggregate amount of a deductons au-
thorzed by secton 812(b) of the Code, rrespectve of whether
camed or aowed for the purpose of the estate ta , must be sub-
tracted from the vaue of the decedent s gross estate for the purpose
of determnng the vaue of the ad|usted gross estate and the 50 per-
cent mtaton on the amount aowabe as a marta deducton.
The amount of the marta deducton aowabe n any case, how-
ever, cannot e ceed the net vaue to the survvng spouse of the prop-
erty nterests whch passed to her from the decedent, and whch quafy
for the deducton, or 50 percent of the vaue of the ad|usted gross es-
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G1 (Regs. 105, 81.9.
tate, whchever s the esser. mounts pad as attorney s fees and e -
ecutor s commssons, or as other e penses of admnstraton aowabe
as deductons under secton 812(b) of the Code, may n no event be
consdered as nterests n property whch passed from the decedent to
hs survvng spouse. Thus, whe an eecton on the part of the
decedent s e ecutor to take amounts pad as e penses of admnsterng
the estate as deductons from the gross ncome of the estate under
secton 23(a) of the Code, rather than as deductons from the gross
estate as authorzed by secton 812(b) of the Code, woud have the
effect of ncreasng the ad|usted gross estate for the purpose of arrv-
ng at the ma mum amount aowabe as a marta deducton, such
e penses are, nevertheess, to be taken nto account n determnng
the net vaue, for the purpose of the deducton, of the nterest n or
share of the estate whch passed from the decedent to hs survvng
spouse. In other words, where the vaue of the property nterests
whch passed to the survvng spouse, reduced by that porton of the
admnstraton e penses propery chargeabe thereto, and n respect
to whch no deducton s taken by the estate for the purpose of the
estate ta , s ess than 50 percent of the ad|usted gross estate com-
puted wthout regard to such e penses, the amount of the marta
deducton cannot e ceed the vaue of the property nterests whch
passed to such spouse, as thus reduced.
In vew of the foregong, t s hed that where the e ecutor of an
estate eects to cam certan e penses of admnstraton as deductons
from the gross ncome of the estate under secton 23(a) of the In-
terna Revenue Code of 1939 rather than as deductons from the
decedent s gross estate under secton 812(b) of the Code, the 50 per-
cent mtaton on the amount aowabe as a marta deducton s
determned by subtractng from the entre vaue of the gross estate
the aggregate amount of the deductons actuay camed and aowed
under secton 812 (b) of the Code.
S TIO 813(b). CR DITS G INST T : ST T ,
SUCC SSION, L G CY, ND IN RIT NC T S
Regcat-on s 105, Secton 81.9: Credt for Rev. Ru. 55-69
death ta es.
Where an aowance of credt for State nhertance ta es Is
made after a fna determnaton of the edera estate ta abty,
the refund attrbutabe to the aowance of such credt does not bear
Interest.
dvce has been requested whether a refund of edera estate ta due
under the facts herenafter set out bears nterest n vew of the fo-
owng provsons of secton 813(b) of the Interna Revenue Code
of 1939:
S C. S13. CR DITS G INST T .

(b) state, Successon, Legacy, and Inhertance Ta es. The ta Imposed
by secton 810 or 800 sha be credted wth the amount of any estate, nhertance,
egacy, or successon ta es, actuay pad to any State .

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Regs. 105, 81.9.) 62
Refund based on the credt may be made If cam therefor Is fed
wthn the perod above provded. ny such refund sha be made wthout
nterest
The facts of the present case are as foows:
The e ecutor of the estate fed a edera estate ta return showng
a gross ta abty of 65,700, credt for State nhertance ta of
3,920, and a net ta abty of 61,780 whch was assessed and pad.
Upon audt of the return, an addtona deducton of 10,000 was a-
owed for admnstraton e penses whch reduced the gross ta abty
to 62,700. s the evdence n support of the credt camed for State
nhertance ta es was not submtted, the audt resuted n a defcency
of 920. statutory notce was subsequenty ssued determnng a
defcency of 920. s a petton was not fed wth The Ta Court
of the Unted States, the defcency was duy assessed and pad. There-
after, the e ecutor fed a tmey cam for refund of 3,600 and sub-
mtted therewth evdence whch entted the estate to a credt of
3,600 for State nhertance ta es pad, resutng n an overpayment
of 3,600.
It s cear from the foregong that proof of the payment of the
State nhertance ta es, whch was a prerequste to the aowance
of the credt for such ta es, was not furnshed unt after the deter-
mnaton of the estate s edera estate ta abty. ccordngy, the
refund then found due was based on the aowance of the credt for
State nhertance ta es and the refund, under secton 813(b) of the
1939 Code does not bear nterest
The concuson so reached s supported by the decson of the Unted
States Court of ppeas for the Second Crcut n Guaranty Trust Co.
of New York (as e ecutor of the estate of Grayson M. P. Murphy) v.
Unted States, 192 ed. 2d 16 , n whch a refund of edera estate
ta es resutng from the aowance of a credt for New York estate
ta es, under crcumstances smar to the crcumstances of the present
case, was hed not to bear nterest. The court s decson s n part as
foows:
It was not unt the New York estate ta es were actuay pad that the
ta payer became entted to a credt, and hence to a refund. Unt then the
estate was the Government s debtor. If the e ecutor had never proved payment
of the New York ta es t woud never have been entted to any refund. There-
fore, we thnk t pan that the refund was based on a credt and so wthn
both the tera words and the pocy of secton 813(b), whch e pressy forbds
the payment of nterest on any such refund.
ccordngy, t s hed that where an aowance of credt for State
nhertance ta es s made after a fna determnaton of the edera
estate ta abty, the refund attrbutabe to the aowance of such
credt does not bear nterest.
Reguatons 105, Secton 81.9: Credt for Rev. Ru. 55-380
death ta es.
Where credt for state nhertance ta es s not camed on the
edera estate ta return any communcaton reatve to the aow-
ance or submsson of evdence n support of such credt receved
wthn four years after the fng of the estate ta return, f ceary
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63 (Regs. 105, 81.9.
Indcatng an ntent to cam the credt, may be consdered as a cam
for credt wthn the statutory perod provded by secton 813(b)
of the Interna Revenue Code of 1939. It s not necessary that the
evdence n support of the credt camed be fed wthn the statu-
tory perod the submsson of evdence showng that the nhert-
ance ta es were actuay pad wthn four years after the fng of
the return w satsfy the statutory requrement.
dvce has been requested whether an estate s entted to credt
for state nhertance ta es under the foowng crcumstances.
or reasons not matera heren the schedue of the edera estate
ta return for showng the computaton of ta was not fed n and
therefore no credt for state nhertance ta es was camed n the
return. Subsequent to the fng of the return the Interna Revenue
Servce was advsed that the documentary evdence n support of the
credt woud be fed as soon as the nhertance ta es were determned.
The Servce was ater requested to grant an e tenson of tme wthn
whch to fe the credt evdence. The correspondence was receved
wthn years after the fng of the return. The documentary ev-
dence n support of credt was submtted more than years after the
fng of the return but t showed that state nhertance ta es were pad
to the state pror to the e praton of the statutory perod.
Secton 813(b) of the Interna Revenue Code of 1939 provdes, n
part, as foows:
The ta mposed by secton 810 or 860 sha be credted wth the
amount of any estate, nhertance, egacy, or successon ta es actuay pad to
any State or terrtory or the Dstrct of Coumba, or any possesson of the
Unted States, n respect of any property ncuded n the gross estate (not n-
cudng any such ta es pad wth respect to the estate of a person other than
the decedent). The credt aowed by ths subsecton sha not e ceed 80 per
centum of the ta mposed by secton 810 or 860 and sha ncude
ony such ta es as were actuay pad and credt therefor camed wthn four
years after the fng of the return requred by secton 821 or 86 .
Itacs supped.
Generay, where an estate s sub|ect to the basc estate ta , credt for
nhertance ta es s camed on the return and such cam s consdered
as a cam for the credt wthn the meanng of secton 813(b), a-
though the nhertance ta es had not been determned or pad at the
tme the estate ta return was fed.
owever, where credt for state nhertance ta es s not camed
on the edera estate ta return, correspondence ndcatng an ntent
to cam credt receved wthn years after the fng of the return
may be consdered as a cam for credt wthn the statutory perod.
It s not necessary that the evdence n support of the credt camed
be fed wthn the statutory perod the submsson of evdence show-
ng that the nhertance ta es were actuay pad wthn years after
the fng of the return w satsfy the statutory requrement.
Under the crcumstances n ths case t s hed that the estate has
comped wth the statutory requrements. ccordngy, the estate
s entted to credt for state nhertance ta es. owever, any over-
payment of the ta whch may resut from aowance of the credt
taay not be refunded uness a cam for refund thereof on orm 8 3
was fed wthn the perod provded by secton 813(b) of the Interna
erenue Code of 1939.
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Regs. 105, 81.62. 6
S CTION 813(c). CR DITS G INST T : P ID TO
OR IGN COUNTRI S
Reguatons 105, Secton 81.9: Credt for Rev. Ru. 55-381
death ta es.
( so Secton 936(c) Reguatons 105, Sec-
ton 81.9.)
The credt provsons of the Unted States-Canadan Death Ta
Conventon, C. . 195 2, 633, pertan ony to the Domnon suc-
cesson dutes and are not appcabe to ta es mposed by anv of the
provnces of Canada. The Provnce of Ontaro, Canada, does not
meet the recproca credt requrement of the foregn death ta credt
provsons n sectons 813(c) and 936(c) of the Interna Revenue Code
of 1939, n the case of an estate of a deceased ctzen of Canada who at
the tme of death was domced n the Unted States, for the reason
that the Provnce of Ontaro does not aow credt aganst ts succes-
son duty for estate ta pad to the Unted States on property stuated
n the Unted States nor e empt such property from ts successon
dutes n the case of a deceased ctzen of the Unted States who at
tme of death was domced n Ontaro. ccordngy, the estate of
a deceased ctzen of Canada who at tme of death was domced n
the Unted States w not be entted to the credt provded by sectons
813(c) and 936(c) of the Code for any estate, nhertance, egacy, or
successon dutes pad to the Provnce of Ontaro.
SU P RT II. R TURNS ND P YM NT O T
S CTION 827(b). LI N OR T : LI ILITY O
TR NS R , TC.
Reguatons 105, Secton 81.62: Transfer Rev. Ru. 55-160
certfcates.
bank n possesson of property standng n the name of a nonresdent dece-
dent and hs wfe as |ont tenants, wth rght of survvorshp, s not reeved
from edera estate ta abty and the necessty of obtanng a transfer certf-
cate shoud an e ecutor or admnstrator be apponted, quafed, and actng
wthn the Unted States.
dvce has been requested whether a bank n possesson of property
standng n the name of a nonresdent decedent and hs wfe as |ont
tenants, wth rght of survvorshp, w be reeved from edera
estate ta abty and the necessty of obtanng a transfer certfcate
after the appontment of an e ecutor or admnstrator, quafed and
actng wthn the Unted States.
bank ocated n the Unted States has n ts possesson a bank
depost standng n the name of a nonresdent decedent and hs wfe
as |ont tenants, wth rght of survvorshp. The bank w not con-
sent to a wthdrawa of any part of the depost unt t has been pre-
sented wth a transfer certfcate or unt after an e ecutor or admn-
strator as been apponted and quafed n the Unted States. The
bank s concerned whether the appontment of an e ecutor or admn-
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65 Regs. 105, 81.50.
strator n ths country pror to the remova of any part of the fund
woud reeve t of abty for edera estate ta es.
Secton 81.62 of state Ta Reguatons 105 provdes n part that
certfcates permttng the transfer of property of nonresdent dece-
dents wthout abty w be ssued when the ta mposed upon the
estate, f any, has been fuy dscharged or provded for. It further
provdes that ths requrement sha not appy f there s an e ecutor
or admnstrator apponted, quafed, and actng wthn the Unted
States. Ths atter provson refers to property n the possesson or
contro of such e ecutor or admnstrator.
Property hed n |ont tenancy wth the rght of survvorshp does
not form a part of the probate assets of a decedent s estate. Tte to
such property passes drect to the survvng coowner by operaton of
aw. Snce the survvng coowner s regarded as the absoute owner,
t s cear that funds on depost wth a bank whch are hed n |ont
tenancy wth the rght of survvorshp woud not come nto the posses-
son or contro of an e ecutor or admnstrator. Under such crcum-
stances, a bank n possesson of property standng n the name of a
nonresdent decedent and hs wfe as |ont tenants, wth rght of sur-
vvorshp, can nsure avodance of edera estate ta abty ony by
demandng and recevng a transfer certfcate pror to the remova of
the funds by the survvng coowner.
P RT I. ST T S O NONR SID NTS NOT CITIZ NS O T UNIT D ST T S
S CTION 863. PROP RTY WIT OUT T UNIT D
ST T S
Reguatons 105, Secton 81.50: Stus of Rev. Ru. 55-1 3
property.
The decedent, a nonresdent aen not engaged n busness n the
Unted States at the tme of hs death, ded possessed of certan funds
whch he had paced n a safe-depost bo rented n hs name from a
bank ocated n the Unted States. ed, the words moneys depos-
ted as used n secton 803(b) of the Interna Revenue Code of 1939
appy to so-caed genera deposts wth a bank where the reatonshp
of debtor and credtor between the bank and the depostor e sts wth
respect to such deposts. Snce the funds n the safe-depost bo on
the date of decedent s death do not represent moneys deposted wth a
person carryng on the bankng busness wthn the meanng of secton
8G3(b) of the Code, they are ncudbe, for edera estate ta pur-
poses, n the decedent s gross estate stuated n the Unted States. See
G. CM, 22 19, C. . 1910-2, 288.
Reguatons 105, Secton 81.50: Stus of
property.
Stus of partcpatng unts of a common trust fund. See Rev. Ru.
55-163, page 67 .
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Regs. 105, 5 81.7 . 66
P RT I . SUPPL M NT L PRO ISIONS
SUPPL M NT . SS SSM NT ND COLL CTION O D ICI NCI S
S CTION 872. OP RDY SS SSM NTS
Reguatons 105, Secton 81.7 : ssessments. T. D. 6126
( so Secton 81.92 Sectons 1013, 101 Regu-
atons 108, Sectons 86. 3, 86. .)
TITL 28 INT RN L R NU . C PT R I. SU C PT R , P RT 81
ND P RT 86
Reguatons 105 and Reguatons 108 amended to conform to
Pubc Law 27 (83d Cong.), reatng to the abatement of |eopardy
assessments.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On October 7, 195 , a notce of proposed ruemakng wth respect
to amendment of Reguatons 105 (26 C R (1939), pt. 81) and Regu-
atons 108 (26 C R (1939), pt. 86) to conform to Pubc Law 27
(83d Cong.) C. . 1953-2, 8 , approved ugust 1 , 1953, reatng
to the abatement of |eopardy assessments, was pubshed n the ed-
era Regster (19 . R. 6 78). Snce no comments wth respect to
the rues proposed have been receved, the amendments to Reguatons
105 and Reguatons 108 set forth beow are hereby adopted:
Paragraph 1. There s nserted mmedatey after secton 872 and
before secton 87 of the Interna Revenue Code whch precede secton
81.7 of Reguatons 105 and precedng secton 86. 3 of Reguatons
108 the foowng:
PU LIC L W 27 (83d CONG.) PPRO D UGUST 1 , 1953
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That

(b) Sectons 872 and 1013 (reatng to the abatement of |eopardy
assessments of estate and gft ta es, respectvey) are hereby amended
by addng at the end of each of such sectons the foowng new sub-
secton :
(|) batement f eopardy Does Not st. The Secretary may
abate the |eopardy assessment f he fnds that |eopardy does not e st.
Such abatement may not be made after a decson of The Ta Court
of the Unted States n respect of the defcency has been rendered or,
f no petton s fed wth The Ta Court of the Unted States, after
the e praton of the perod for fng such petton. The perod of
mtaton on the makng of assessments and the begnnng of dstrant
or a proceedng n court for coecton, n respect of any defcency,
sha be determned as f the |eopardy assessment so abated had not
been made, e cept that the runnng of such perod sha n any event
be suspended for the perod from the date of such |eopardy assessment
unt the e praton of the tenth day after the day on whch such
|eopardy assessment s abated.
(c) The amendments made by ths ct sha be appcabe to eopardy
assessments made or n e stence on the date of enactment of ths ct
or whch are thereafter made.
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67 Regs. 105, 81.7 .
Par. 2. Secton 81.7 of Reguatons 105, as amended by Treasury
Decson 603 C. . 1953-2, 278 , approved uy 29, 1953, s further
amended as foows:
( ) y changng the headng thereof to read as foows: ssess-
ments. (a) In genera
( ) y addng at the end of the frst paragraph of (a) the
foowng:
or abatement of |eopardy assessments where eopardy does not e st, see
paragraph (b).
(C) y addng at the end of such secton the foowng:
(b) batement of |eopardy assessments where |eopardy docs not e st.
(1) The Dstrct Drector may abate a |eopardy assessment whch e sted on
ugust 1 , 1953, or whch s made on or after such date, f t s shown to hs
satsfacton that |eopardy does not e st. n abatement may not be made
nnder ths paragraph after a decson of the Ta Court n respect of the def-
cency has been rendered, or, f no petton s fed wth such Court, after the
e praton of the perod for fng such petton.
(2) The abatement of a |eopardy assessment, because |eopardy does not e st,
w have the effect of abatng any proceedngs to coect the ta so assessed.
The Dstrct Drector may then proceed to assess and coect a defcency n the
manner authorzed by aw as f the |eopardy assessment so abated had not
e sted. If a notce of defcency had been sent to the ta payer pror to the
abatement of the |eopardy assessment, whether such notce was sent before
or after the makng of Ihe assessment, the abatement of such assessment w not
affect the vadty of the notce or of any proceedngs for redetermnaton based
thereon. The perod of mtaton on the makng of assessments and the begn-
nng of dstrant or a proceedng n court for coecton n respect of any def-
cency sha be determned as f the |eopardy assessment so abated had not been
made, e cept that the runnng of such perod sha n any event be suspended
for the perod from the date of such |eopardy assessment unt the e praton
of the 10th day after the date on whch such |eopardy assessment s abated.
The provsons of ths paragraph may be ustrated by the foowng e ampe.
ampe. On ebruary 15, 105 , 28 days before the 3-year statutory perod
of mtatons on assessments woud otherwse have e pred, a eopardy assess-
ment was made n respect of a proposed defcency. On pr 2, 105 , before
the mang of the notce of defcency provded for by secton 872(b), ths
assessment was abated. y vrtue of ths paragraph, the perod of mtatons
for the makng of an assessment dd not e pre pror to May 10,195 , . e., the 38th
day after the date of the abatement. If the notce of defcency provded for n
secton 872(b) had been sent pror to the abatement, the runnng of the statute
of mtatons on assessments woud have been suspended pursuant to the prov-
sons of secton 875.
(3) Request for abatement of a |eopardy assessment, because |eopardy does
not e st, shoud be fed wth the Dstrct Drector and must state fuy the
reasons for the request and must be supported by such evdence as w enabe
the Dstrct Drector to determne that the coecton of the defcency s not n
|eopardy. See secton 872(c) and the frst paragraph of secton 81.7 (a) wth
respect to the abatement of eopardy assessments whch are e cessve n amount.
Par. 3. Secton 81.92 of Reguatons 105 s amended by addng at
the end thereof the foowng:
See, however, secton 81.7 wth respect to requests for the abatement of |eopardy
assessments.
Par. . Secton 86. 3 of Reguatons 108, as amended by Treasury
Decson 5503 C. . 19 6-1,156 , approved March 20,19 6, s further
amended as foows:
( ) y changng the headng thereof to read as foows: eopardy
ssessments. (a) In genera.
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Regs. 105, 5 81.7 . 68
( ) y addng at the end of the second paragraph of (a) the
foowng:
or abatement of eopardy assessments where eopardy does not e st, see para-
graph (b).
(C) y addng at the end of such secton the foowng:
(b) batement of |eopardy assessments where |eopardy does not e st. (1)
The Dstrct Drector may abate a eopardy assessment whch e sted on ugust
1 , 1953, or whch s made on or after such date, f t s shown to hs satsfacton
that eopardy does not e st. n abatement may not be made under ths para-
graph after a decson of the Ta Court n respect of the defcency has been
rendered or, f no petton s fed wth such Court, after the e praton of the
perod for fng such petton.
(2) The abatement of a eopardy assessment, because eopardy does not e st,
w have the effect of abatng any proceedngs to coect the ta so assessed.
The Dstrct Drector may then proceed to assess and coect a defcency n the
manner authorzed by aw as f the eopardy assessment so abated had not
e sted. If a notce of defcency had been sent to the ta payer pror to the abate-
ment of the eopardy assessment, whether such notce was sent before or after
the makng of the assessment, the abatement of such assessment w not affect
the vadty of the notce or of any proceedngs for redetermnaton based thereon.
The perod of mtaton on the makng of assessments and the begnnng of
dstrant or a proceedng n court for coecton n respect of any defcency sha
be determned as If the eopardy assessment so abated had not been made, e cept
that the runnng of such perod sha n any event be suspended for the perod
from the date of such eopardy assessment unt the e praton of the tenth day
after the date on whch such eopardy assessment s abated. The provsons of
ths paragraph may be ustrated by the foowng e ampe.
ampe. On ebruary 15, 195 , 28 days before the 3-year statutory perod of
mtatons on assessments woud otherwse have e pred, a |eopardy assessment
was made n respect of a proposed defcency. On pr 2,195 , before the mang
of the notce of defcency provded for by secton 1013(b), ths assessment was
abated. y vrtue of ths paragraph, the perod of mtatons for the makng
of an assessment dd not e pre pror to May 10,195 ,1. e., the 38th day after the
date of the abatement. If the notce of defcency provded for n secton 1013(b)
had been sent pror to the abatement, the runnng of the statute of mtatons
on assessments woud have been suspended pursuant to the provsons of secton
1017.
(3) Request for abatement of a |eopardy assessment, because |eopardy does
not e st, shoud be fed wth the Dstrct Drector and must state fuy the
reasons for the request and must be supported by such evdence as w enabe
the Dstrct Drector to determne that the coecton of the defcency s not n
|eopardy. See secton 1013(c) and the second paragraph of secton 86. 3(a)
wth respect to the abatement of eopardy assessments whch are e cessve n
amount
Par. 5. Secton 86. of Reguatons 108 s amended by addng to
the end thereof the foowng:
See, however, secton 86. 3 wth respect to requests for the abatement of |eopardy
assessments.
(Ths Treasury Decson s ssued under the authorty contaned n
sees. 1029 and 3791 of the Interna Revenue Code of 1939 (53 Stat. 157,
67 26U.S.C. 1029, 3791).)
ustn . Wnke,
ctng Commssoner.
pproved March 1 ,1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 10, 1955, 8:50 a. m.)
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69 Regs. 105, 81.96.
Reguatons 105, Secton 81.92: Cam for
abatement-
Deegaton of authorty to Dstrct Drectors of Interna evenue
reatve to the abatement of |eopardy assessments of estate and gft
ta es. See T. D. 6126, page 66.
SUPPL M NT D. R UNDS
S CTION 910. P RIOD O LIMIT TION OR ILING
CL IMS
Reguatons 105, Secton 81.96: Cam for Rev. Ru. 55-226
refund.
( so Secton 3775.)
The Interna Revenue Servce Is wthout authorty to appy a
barred overpayment of edera estate ta aganst outstandng
assessments of ncome ta due by a decedent for years precedng
hs death.
dvce has been requested whether the representatves of an estate
are entted to recoup an overpayment of edera estate ta whch s
barred from refund aganst outstandng assessments of ncome ta
owed by the decedent for years pror to hs death.
cam for refund of edera estate ta based on the aowance
of addtona deductons from the decedent s gross estate for edera
and state ncome ta es owed by the decedent for years pror to hs
death was fed more than 3 years after the payment of the edera
estate ta . The representatves of the estate contend that under the
doctrne of recoupment whch was apped by the Supreme Court of
the Unted States n rnest M. u v. Unted States, 295 U. S. 2 7,
Ct. D. 969, C I -1, 310 (1935), the estate s entted to recoup
the barred overpayment of estate ta aganst an unpad ncome ta
assessment.
In the u case the barred over-assessment of estate ta and the
defcency n ncome ta arose out of decedent s share of the ncome of
a partnershp of whch he had been a member, earned by the partner-
shp after hs death. rst, the rght to receve the ncome was
ncuded n the decedent s gross estate for edera estate ta purposes
at a vaue equa to the amount of such ncome, and, second, the ncome
was ncuded as ta abe ncome of hs estate. The tem n controversy
was one and the same, partnershp ncome receved after death.
The decson of the Court n the u case, and ts decson n the
case of Robert G. Stone et a. v. Whte, 301 U. S. 532, Ct. D. 1232,
C. . 1937-1, 22 , whch aso deat wth the aowance of barred ta
cams by way of recoupment, were dscussed by the Supreme Court
of the Unted States n ts decson n Rothenses v. The ectro
Storage attery Company, 329 U. S. 296, Ct D. 1679, C. . 19 7-1,
109, n whch the Court further consdered the doctrne of recoupment
n edera ta cases and outned the scope of that doctrne n such
cases.
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Regs. 108, 5 86.3a. 70
In the ectrc Storage attery Company case the Court concuded
that n edera ta cases appcaton of the doctrne of recoupment
s mted to stuatons where a snge transacton or ta abe event
has been sub|ected to two ta es on nconsstent ega theores. In
such case the ta erroneousy pad may be recoupea aganst the ta
correcty due. The Court sad that n both cases ( u v. Unted
States and Stone v. Whte) a snge transacton consttuted the ta abe
event camed upon and the one consdered n recoupment that n
both, the snge transacton or ta abe event had been sub|ected to
two ta es on nconsstent ega theores and that what was mstakeny
pad was recouped aganst what was correcty due. The Court aso
observed that there s no statutory warrant for aowng barred refund
cams by way of recoupment or otherwse.
The present case s not one n whch a snge transacton or ta abe
event has been sub|ected to two ta es upon nconsstent ega theores.
The abty of the decedent for ncome ta es on ncome receved for
vears pror to hs death and the e cess estate ta pad by hs estate
by reason of hs faure to pay such ta es durng hs fetme, may not,
under the decsons of the Supreme Court of the Unted States, be
consdered as a snge transacton or ta abe event whch was sub-
|ected to two ta es upon nconsstent ega theores.
In vew of the foregong, t s hed that the Interna Revenue Servce
s wthout authorty to appy a barred overpayment of edera estate
ta aganst outstandng assessments of ncome ta due by a decedent
for years precedng hs death.
SU C PT R . DDITION L ST T T
S CTION 936(c). CR DITS G INST T : ST T ,
TC., T S P ID TO OR IGN COUNTRI S
Reguatons 105, Secton 81.9: Credt for
death ta es.
Credt for successon dutes pad to the Provnce of Ontaro. See
Rev. Ru. 55-381, 6 .
C PT R GI T T
S CTION 1000. IMPOSTION O T
Reguatons 108, Secton 86.2: Transfers
reached.
Gft of an annuty to a ta payer s spouse. See Rev. Ru. 55-388,
page 233.
Reguatons 108, Secton 86.3a: Gft of hus- Rev. Ru. 55-2 1
band or wfe to thrd party after pr 2,
19 8.
husband and wfe who entered nto a prenupta agreement under
whch each spouse waved a marta rghts n the property of the
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71 Regs. 108, 86 19.
other w not be dened the gft-spttng prvege provded by sec-
ton 1000(f) of the Interna evenue Code of 1939 f they have sgn-
fed ther consent to treat a gfts made by them to thrd party donees
as havng been made one-haf by each spouse and f they are otherwse
quafed to appy that prvege wth respect to the gfts n queston.
S CTION 1003(b). N T GI TS: CLUSIONS ROM
GI TS
Reguatons 108, Secton 86.10: Tota amount ev. Iu. 55-303
of gfts.
Where a gft s made n trust the terms of whch provde that the
trustee s to pay the ncome to three desgnated benefcares for ther
ves n such portons as he n hs soe dscreton sha determne, wth
remander over to others, t s hed that the vaue of the rght to the
ncome to be dstrbuted to a partcuar benefcary s not susceptbe
of determnaton. Under such crcumstances, no e cuson s aow-
abe under secton 1003(b) (3) of the Interna evenue Code of 1939
wth respect to the gfts made of the rght to receve ncome from the
property transferred. See everng v. Mary M. utchngs, 312 U. S.
393, Ct.D. 1 93, C. . 19 1-1, 38 Wech v. Pane et a., 130 ed. (2d)
990: Unted States v. rthur Peser, 312 U. S. 399, Ct. D. 1 95,
C. . 19 1-1, 1 and ondren et a. v. Commssoner, 32 U. S. 18,
Ct. D. 1627, C. . 19 5, 21.
Reguatons 108, Secton 86.10: Tota amount
of gfts.
Transfer or assgnment of a pocy of nsurance to a donee as
absoute owner. See Rev. u. 55- 08, page 113.
S CTION 1005. GI TS M D IN P OP TY
Reguatons 108, Secton 86.19: auaton of ev. u. 55-278
property.
( so Secton 2 eguatons 118, Secton
39. 2-1.)
Seres Unted States savngs bonds regstered In the names
of and In the aternatve as coowners, whch had purchased
In 19 8 entrey wth hs own funds, were ressued n 1953 n the
name of aone In order to effect a gft to hm of s coownershp
theren. ed, (1) the redempton vaue of the bonds at the tme re-
ssued s the proper vaue to be used by wth respect to such gft
for edera gft ta purposes and (2) the nterest (ncrement n
vaue) that had accrued (as earned) on the bonds before ther re-
ssue s a ncudbe n b gross ncome, for edera ncome ta
purposes, for hs ta abe year or perod wheren he made such gft,
e cept sucb nterest as he has propery returned as ncome pre-
vousy.
dvce has been requested reatve to the proper vaue to be used
by , for edera gft ta purposes, where Seres Unted States
36 050 58 31
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Regs. 108, 86.19. 72
savngs bonds regstered n the names of and hs son n the ater-
natve as coowners, whch had purchased n 19 8 entrey wth hs
own funds, were ressued n 1953 n the name of aone n order to
effect a gft to hm of :h coownershp theren. dvce has aso been
requested regardng to whom and when the nterest (ncrement n
vaue) that had accrued (as earned) on the bonds before ther ressue
s ta abe, for edera ncome ta purposes. and are domced
n a State whch does not have communty property aws.
Secton 1005 of the Interna Revenue Code of 1939 provdes that
If the gft s made n property, the vaue thereof at the date of the
gft sha be consdered the amount of the gft, and secton 86.17 of
Reguatons 108 provdes smary. Secton 86.19 of Reguatons 10S
provdes, n part, that The vaue at the date of the gft n the case
of bonds, wthn the meanng of the statute, s the far market
vaue per bond on such date. owever, snce Seres Unted
States savngs bonds are generay nonnegotabe and nontransferabe,
they are nonmarketabe and, accordngy, have no partcuar market
vaue. though ownershp theren s transferabe by death and by
ressue n certan cases (U. S. Savngs ond Reguatons, Department
Crcuar No. 530, 7th Rev., dated May 2 , 1952), ther ony defntey
ndcated or ascertanabe vaue s the amount at whch they are re-
deemabe by the Unted States Treasury. In Mm. 5109, C. . 19 0-2,
283, and Mm. 5202, C. . 19 1-2,2 1, t was hed, nter aa:
If ohn ones purchases wth hs separate funds savngs bonds and has
them regstered In hs name and that of another ndvdua n the aternatve
as coowners, for e ampe, ohn ones or Mrs. a S. ones, there s no gft
for edera gft ta purposes, uness and unt he durng hs fetme gratutousy
permts Mrs. a S. ones to redeem them and retan the proceeds as her sepa-
rate property, In whch event a gft of the then redempton vaue of the bonds
woud be made. Of course, such bonds f not prevousy redeemed woud on the
death of ohn ones be ncudbe n hs gross estate for estate ta purposes at
ther fu redempton vaue.
In other words, such a coownershp n Seres Unted States savngs
bonds as s here nvoved does not consttute a tenancy by the entrety
(see sectons 86.2(a) (6) and 86.19(h) of Reguatons 108), tenancy n
common, |ont tenancy (see secton 86.2(a)(5) of Reguatons 10S),
nor ownershp smar to a |ont bank account (see secton 86.2(a) ( )
of Reguatons 10S). acqured fu benefca ownershp of the
bonds at tme of purchase. Ths benefca ownershp woud not
be e tngushed durng s fetme unt (1) surrenders the bonds
to and gratutousy permts hm to cash them and retan the pro-
ceeds or (2) the bonds are ressued n s name aone. In the mean-
whe, for a practca purposes has ony the hope or e pectancy
that ether event ((1) or (2)) mght occurs Therefore, t s hed that
the proper vaue to be used by , for edera gft ta purposes, wth
respect to hs gft to of hs coownershp n such bonds whch he had
purchased entrey wth hs own funds s ther redempton vaue at the
tme they were ressued. The redempton vaues of such bonds durng
ther orgna terms generay are ndcated n tabes on the bonds.
The redempton vaues after the orgna maturtes of Seres bonds
ssued pror to May 1, 19 2, are ndcated n tabe n Department
Crcuar 653 (3rd Rev.) dated pr 29,1952, a copy of whch may be
obtaned from any edera Reserve ank, or the ureau of the Pubc
Debt, Washngton 25, D. C. The redempton vaues after the orgna
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73 Regs. 108, 86.19.
maturtes of Seres bonds ssued on or after May 1,19 2, are nd-
cated n tabes and C of that Crcuar.
In Revenue Rung 5 -1 3, C. . 195 -1,12, t was hed, nter aa,
that, where the purchase prce of such a savngs bond regstered n
the names of a husband and hs wfe n the aternatve as coowners
was contrbuted n part by each spouse and the bond s ressued n
the names of the husband and ther daughter n the aternatve as co-
owners, any nterest (ncrement n vaue) that had accrued (as earned)
on the bond before ts ressue s ncome, for edera ncome ta pur-
poses, of the wfe n proporton to her contrbuton to the purchase
prce. Consstenty, t s hed that the nterest (ncrement n vaue)
that had accrued (as earned) on the bonds n the nstant case before
ther ressue s a ncome of . s ndcated n secton 39. 2-6 of Reg-
uatons 118, and secton 29. 2-6 of Reguatons 111, such nterest (n-
crement n vaue) does not accrue rataby between the dates on whch
the redempton vaues ncrease, but, as outned n evenue Rung
5 -1 3, supra, the ncrements occur (become earned) ony n specfc
(f ed) amounts at the end of certan perods.
In Revenue Rung 5 -1 3, supra, however, no queston was pre-
sented or resoved regardng when the nterest (ncrement n vaue)
hed theren to be ncome of the wfe was returnabe by her, for ed-
era ncome ta purposes, f she had not aready returned t as ncome
on the accrua bass or pursuant to eecton under Code secton 2(b).
though references were made n that Revenue Rung to estabshed
genera rues reatve to when nterest (ncrement n vaue) on such
savngs bonds s returnabe under certan crcumstances ordnary n-
voved, none ncuded transfer of coownershp n such bonds by re-
ssue and reazaton of earned nterest (ncrement n vaue) thereon
by thus effectng a gft of t.- The references were made for genera
nformaton and because the rues apparenty were, or woud be, ap-
pcabe to the nterest ncome of the husband (who contnued as org-
na coowner), of the daughter (after she became coowner nstead of
the wfe), and of the wfe (to the e tent she may aready have prop-
ery returned t), and aso to nterest earned on a coowned bond hed n
the Revenue Rung to be a ncome of one coowner, where he had
purchased the bond entrey wth hs funds, even though he gratu-
tousy permts the other coowner to redeem t and retan the entre pro-
ceeds. It s hed that the nterest (ncrement n vaue) that had ac-
crued (as earned) on the bonds n the nstant case before ther ressue
s a ncudbe n . s gross ncome for hs ta abe year or perod
wheren he thus made a gft of t, e cept such nterest as he has prop-
ery returned as ncome prevousy. reazed the beneft of such n-
terest when he made the gft thereof, snce t was then aready earned
and he coud have reazed ts beneft n cash payment by obtanng
redempton of the bonds but chose nstead to reaze ts beneft n a
gft thereof to by causng the bonds to be ressued n the atter s
name aone. See I everng v. Pau R. G. orst, 311 U. S. 112, Ct. D.
1 72, C. . 19 0-2, 206, See, generay, I. T. 3357, C. . 19 0-1: 11
Internatona reghtng Corporaton, Inc. v. Commssoner, 135 ed|
(2d) 310, affrmng 5 . T. . 716 and Isdore rown, et u ., v. Com
mmoner, 22 T. C. 1 7, affrmed 220 ed. (2d) 12. Compare I. T.
tOU, C. . -2, 132 (1936) and I. T. 3097, C. . 1937-2, 219.
The above hodng s appcabe where the ressue occurs durng
toe e tended maturty perod of Seres bonds as we as where t oc-
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Regs. 128, 08.203. 7
curs durng ther orgna term. See Code secton 2(d), as added
by secton 2 of Pubc Law 12, 82d Cong., 66 Stat 26, 26 U S. C. 2,
C. . 1951-1,182.
Reguatons 108, Secton 86.19: auaton
of property.
auaton of |ewery, furs, and reated artces of persona property
n edera gft ta returns. See Rev. u. 55-71, page 110.
S CTION 1013. OP RDY SS SSM NTS
Reguatons 108, Secton 86. 3: eopardy
assessments.
Deegaton of authorty to Dstrct Drectors of Interna Revenue
reatve to the abatement of |eopardy assessments of estate and sft
ta es. See T.D. 6126, page 66.
S CTION 101 . CL IMS IN T M NT
Reguatons 108, Secton S6. : Cams n
abatement.
Deegaton of authorty to Dstrct Drectors of Interna Revenue
reatve to the abatement of |eopardy assessments of estate and gft
ta es. See T.D. 6126, page 66.
C PT R 9. MPLOYM NT T S
SU C PT R . MPLOYM NT Y OT RS T N C RRI RS
P RT 111. G N R L PRO ISIONS
S CTION 1 20(e). COLL CTION ND P YM NT O
T S: D R L S R IC
Reguatons 128, Secton 08.203: mpoyment
after December 31,1950.
Servces performed for whoy owned nstrumentaty of the Unted
States. See Rev. Ru. 55-96, page 88.
S CTION 1 26. D INITIONS
Reguatons 128, Secton 08.203: mpoyment
after December 31,1950.
Saares or wages pad to ctzens of Guam. See Rev. Ru 55-18 ,
page 500.
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75 Rega. 128, 08.20 .
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-18
empoyees.
n ndvdua entered nto a contract wth the owner of a mobe
dner to operate the dner for 50 percent of the net profts. Under
the terms of the contract, the operator seects the ste for operaton
of the dner determnes the hours t w be open to the pubc and
purchases a food, suppes and beverages to be sod as we as the
gasone and o necessary for movng the dner. ed, the operator
s not an empoyee of the owner of the mobe dner for edera
empoyment ta purposes.
n opnon has been requested whether an ndvdua who operates
a mobe dner for the owner thereof s an empoyee of the owner for
purposes of the edera Insurance Contrbutons ct (subchapter ,
chapter 9, Interna evenue Code of 1939).
The owner of a mobe dner entered nto a contract wth an nd-
vdua to operate the dner for ffty percent of the net profts. Under
the terms of the contract the owner agrees to equp the dner keep t
n proper operatng condton assume a e penses for such tems as
mechanca repar or repacement, tres, tubes, pantng, nsurance
and State cense keep compete records of a busness transacted
between the partes and make such records open to nspecton by the
operator. The operator agrees to purchase a food suppes and
beverages to be sod n the dner sustan the oss for a food spoage
pay for the gasone and o necessary for operaton of the dner take
the dner from the owner s pace of busness and, many for the
purpose of preventng vandasm, return t when he has termnated
operatons for the day. The operator s free to ocate the dner at
any ocaton whch he deems preferabe and he determnes the hours
he w keep t open to serve the pubc.
Secton 1 26(d) of the edera Insurance Contrbutons ct, as
amended, provdes that the term empoyee means any ndvdua
who, under the usua common aw rues appcabe n determnng
the empoyer-empoyee reatonshp, has the status of an empoyee.
Secton 08.20 (c) of Reguatons 128 reatng to the defnton of the
term empoyee, for edera empoyment ta purposes, provdes that
generay the reatonshp of empoyer and empoyee 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. If 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 contractor. n n-
dvdua performng servces as an ndependent contractor s not,
as to such servces, an empoyee under the usua common aw rues.
Whether an ndvdua s an ndependent contractor or an empoyee
s argey a queston of fact to be determned upon consderaton of
the partcuar facts n each case. In the nstant case the owner of
the dner s nterested ony n the resuts obtaned by the operator
and does not n any manner drect or contro hm as to the detas and
means by whch that resut s accompshed. The ffty percent net
profts retaned by the owner are consdered n the nature of a renta
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Regs. 128, 08.20 . 7G
fee for the use of the dner. ccordngy, t s hed that the operator
s not an empoyee of the owner of the dmer for edera empoyment
ta purposes.
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-31
empoyees.
Gudes to be used In determnng the status of traveng or cty
saesmen under secton 1 26(d) (3) (D) of the edera Insurance
Contrbutons ct.
1. Mmeograph 6583, C. . 1951-1, 97, n part, outnes the genera
appcaton of the provsons of the edera Insurance Contrbutons
ct (subchapter , chapter 9, of the Interna Revenue Code of 1939)
n the cases of traveng or cty saesmen.
2. Paragraph 6 of Mmeograph 6583 sets forth the condtons under
whch a traveng or cty saesman (other than an agent-drver or com-
msson drver) who s not an empoyee under the usua common-aw
rues, s consdered an empoyee under secton 1 26(d) (3) (D) of the
ct, wth respect to servces performed after 1950.
3. The purpose of ths Revenue Rung s to suppement paragraph
6 of the Mmeograph by provdng a defnton or genera nterpreta-
ton of certan terms appearng theren, and by gvng e ampes of
factua stuatons for purposes of secton 1 26(d) (3) (D) of the ct:
(a) u-tme bass. traveng or cty saesman whose entre
or prncpa busness actvty s the soctaton of orders pr-
mary for one prncpa from whoesaers, retaers, contractors,
or operators of hotes, restaurants, or other smar estabsh-
ments for merchandse for resae or suppes for use n ther bus-
ness operatons. Generay, a traveng or cty saesman w be
presumed to meet the prncpa busness actvty test n any ca-
ender quarter n whch he devotes 80 percent or more of hs work-
ng tme and attenton to the soctaton of orders for one prnc-
pa from whoesaers and/or the other customers specfed for
merchandse for resae or suppes of the requste character.
(b) Whoesaers. Those who buy merchandse or commodtes
n comparatvey arge quanttes and se such merchandse or
commodtes to |obbers, retaers, etc., as dstngushed from the
utmate consumers, n smaer quanttes for the purpose of re-
sae. Whoesaers do not process the merchandse n any way that
woud cause t to ose ts dentty. It s the character of ther
seng, not ther buyng, whch characterzes these as whoe-
saers.
(c) Retaers. Those who se merchandse or commodtes to
the utmate consumers, usuay n sma parces or quanttes.
or purposes of ths defnton, a merchant w not ose hs cass-
fcaton as a retaer merey because he may perform a servce
functon, or a processng or manufacturng operaton, wth respect
to the merchandse or commodty whch he ses. The dstngush-
ng feature of a retaer s the fact that he ses to the utmate
consumers.
(d) Contractors. Those who, for a f ed prce, undertake the
performance of work on an ndependent bass usuay on a arge
scae, whether for the pubc, a company, or an ndvdua, such
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77 Regs. 128, 08.20 .
as, constructon contractors and certan servce organzatons.
These ncude, among others, eectrca, pumbng, pantng, bud-
ng, hgh-way, wndow washng, wa ceanng and devery servce
contractors.
(e) Operators of hotes, restaurants or other smar estabsh-
ments. The phrase other smar estabshments refers soey
to estabshments smar to hotes and restaurants and usuay
s mted to estabshments whose prmary functon s the fur-
nshng of food and/or odgng.
(f) Merchandse for resae. Goods, wares, and commodtes,
whch ordnary are the ob|ects of trade and commerce, whether
at whoesae or reta, and whch are purchased for the purpose of
seng to others n substantay the same form as acqured. Ths
term ncudes tangbe materas whch do not ose ther dentty
between the tme of purchase and the tme of sae whe n the
hands of the vendor.
(g) Suppes for use n the customers busness operatons.
Means prncpay artces consumed n conductng or promotng
the customers busnesses. Generay the term suppes ncudes
a tangbe tems whch are not merchandse for resae or
capta tems. Servces, such as rado tme, advertsng space,
etc., are ntangbe tems and not wthn the defnton. ow-
ever, caendars, advertsng novetes, etc., used by the advertser
n hs busness consttute suppes.
. The foowng types of customers usuay are not ncuded n those
desgnated n secton 1 26(d)(3)(D) of the ct: manufacturers,
schoos, hosptas, churches, and nsttutons, muncpates and State
and edera governments. owever, an entty whch s not ncuded
n the type of customers specfcay desgnated may, through a unt
of ts organzaton, carry on a ceary dentfabe and separate busness
whch s n the ncuded category. or e ampe, where an entty, such
as a coege, unversty or other schoo, s engaged prncpay n
actvtes not n connecton wth reta dstrbuton of commodtes, but
through a unt of ts organzaton, such as a bookstore, carres on a
ceary dentfabe and separate busness, such separate unt, as such,
s a retaer wthn the meanng of secton 1 26(d) (3) (D).
5. The foowng e ampes n each of whch t has been estabshed
that the saesman s not an empoyee under the usua common aw
rues, ustrate the appcaton of the above terms n determnng
the status of traveng or cty saesmen under the statutory test pro-
vded n secton 1 26(d) (3) (D) of the ct. (In each such case the
saesman socts orders reguary and e cusvey for one prncpa,
transmts the orders to such prncpa, operates under an arrangement
whereby substantay a of the servces are performed by hm person-
ay, and has no substanta nvestment n factes (other than trans-
portaton factes) used n the performance of hs servces.)
ampe 1. The saesman performs saes servces for a company
engaged n pubshng cataogs and pans for home desgns. e
socts orders for the cataogs e cusvey from umber deaers. The
cataogs are purchased by the umber deaers ether for resae purposes
or for free dstrbuton to ther customers. The umber deaers are
whoesaers or retaers wthn the meanng of those terms as used
n secton 1 26(d) (3) (D) of the ct. The cataogs for resae const-
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Regs. 128, 08.20 . 78
tute merchandse for resae and those purchased for free dstrbu-
ton consttute suppes for use n the customers busness operatons.
The saesman meets the statutory test provded n such secton
1 26(d) (3) (D) and s an empoyee of the company for purposes of
the ta es mposed by the ct.
ampe 2. The empoyer s a whoesae dstrbutor of automotve
parts and a rubbersea compound to be nserted n automobe or truck
tre tubes. The saesman spends a of hs workng tme n soctng
orders for the dstrbutor s products from reta automobe deaers,
operators of gasone servce statons and repar shops, and automo-
be feet owners. Some of the deaers have shops at whch ony
ordnary repar work ncdent to the sae of automobes s performed.
The operators of the other repar shops are engaged prmary n
reparng automobes and tres and se no automotve parts other than
those nstaed by them and no rubbersea compound e cept that
nserted n ther customers tre tubes.
The automotve parts and rubbersea compound consttute mer-
chandse for resae or suppes for use n the customers busness
operatons wthn the meanng of secton 1 26(d)(3) (D) of the ct.
The operators of gasone servce statons and the reta automobe
deaers (ncudng deaers who n con|uncton wth ther saesrooms
operate repar shops at whch ony ordnary repar work ncdent to
the sae of automobes s performed) are retaers wthn the mean-
ng of such secton. The operator of an automotve repar shop or
garage who conducts a reta unt separate from hs reguar busness,
or separatey dentfed, kewse s wth respect to such unt a re-
taer. owever, generay the operator of a repar shop or garage
who has no such unt s not a retaer or other customer of the type
specfed n secton 1 26(d)(3)(D). The automobe or truck feet
owners who operate devery servce busnesses and contract wth mer-
chants to dever packages or the owners of trucks used n fufng
haung contracts are contractors wthn the meanng of secton
1 26(d) (3) (D). owever, the owner of a feet of ta cabs or mou-
snes used for transportng passengers or the owner of automobes
or trucks rented for drvng by the renters thereof s not deemed to be
a contractor.
Inasmuch as the saesman socts orders from some customers who
are not retaers, contractors or others of the types specfed n secton
1 26(d) (3) (U), t s cear that hs entre busness actvty s not
the soctaton of orders from the requste types of customers. Then
t s necessary to determne whether hs prncpa busness actvty
s the soctaton of orders for one prncpa from the requste types
of customers. The saesman estmates that he devotes 80 percent of
hs workng tme to soctng orders for the dstrbutor from the
requste types of customers n each caendar quarter and that these
actvtes are the prncpa source of hs ncome. It s concuded that
the saesman meets the statutory test provded n secton 1 26
(d) (3) (D), and s an empoyee of the dstrbutor for purposes of the
ta es mposed by the ct.
ampe 3. The saesman performs saes servces for a company
whch s engaged n the sae of new and used trucks and traers. e
socts orders e cusvey from truckng frms who purchase the
vehces for use n fufng haung contracts. though the truck-
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79 Regs. 128, 08.20 .
ng frms are contractors wthn the meanng of secton 1 26
(d) (3) (D) of the ct, the trucks and traers purchased by them
are capta nvestments of the customers and are not merchandse
or resae or suppes for use n the customers busness operatons.
ccordngy, the saesman does not meet a the requrements of the
statutory test contempated by secton 1 26(d) (3) (D), supra, and s
not an empoyee of the company for purposes of the ct.
ampe - The saesman socts orders on behaf of a company
whch s engaged n the manufacture of novety |e very. The orders
for such |ewery are socted from coege bookstores, |ewery stores,
newstands, drug stores, curo shops, automobe deaers, and mtary
suppy stores, ncudng rmy and r orce post e changes and
Navy shp servce stores. The products are purchased for resae by a
of the customers other than the automobe deaers. Those purchased
by the automobe deaers are for free dstrbuton to ther customers
for advertsng purposes. The coege bookstores, as separate unts
of the coege, are retaers wthn the meanng of secton 1 26
(d) (3) (D) of the ct. The mtary suppy stores, ncudng rmy
and r orce post e changes and savy shp servce stores, and the
operators of |ewery stores, newstands, drug stores, curo shops and
automobe deaers aso are retaers wthn the meanng of such
secton. The novety |ewery purchased for resae consttutes mer-
chandse for resae and that purchased for free dstrbuton con-
sttutes suppes for use n the customers busness operatons wthn
the meanng of secton 1 26(d) (3) (D). Snce the saesman s entre
busness actvty s the soctaton of orders for one prncpa for the
requste types of tems from customers specfed n secton
1 26(d) (3) (D) and he meets other condtons n such secton, he s
an empoyee for purposes of the ct.
ampe 6- The saesman performs saes servces for a company
whch s n the busness of seng and servcng sound and pro|ecton
equpment. e cas prncpay on schoos to nterest them n better
teachng methods by the use of audo-vsua equpment and to se
such equpment. e aso socts orders from churches. Snce he
socts orders prncpay or e cusvey from schoos and churches
whch, as such, are not the types of customers desgnated n secton
1 26(d) (3) (D) of the ct, he s not an empoyee of the company for
purposes of the ta es mposed by the ct.
ampe 6. The saesman performs saes servces for a frm whch
s engaged n seng advertsng on menus, foders, etc. e socts
orders for the advertsng from whoesaers, retaers, contractors, and
operators of restaurants, hotes, motes and smar estabshments.
The soctaton of orders for advertsng for ncuson on menus,
foders, etc., whch are not made avaabe to the advertser nvoved,
but are furnshed to other customers of the saesman or hs prncpa
for use or dstrbuton, does not consttute the soctaton of orders
of the type contempated by secton 1 26 (d) (3) (D) of the ct. ow-
ever, the soctaton of orders for advertsng on menus, foders, or
advertsng specates from whoesaers, retaers, contractors, or from
operators of hotes, motes, restaurants or other smar estabshments,
whch are used by such customers for use n ther busness operatons
(ncudng good w novetes dstrbuted by or on behaf of the ad-
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Regs. 128, 08.20 . 80
vertser) consttute the soctaton of orders for- suppes for use n
the customers busness operatons.
though a of the customers are of the types specfed n secton
1 20(d) (3) (D) of the ct, none of the orders are for merchandse
for resae by the customers from whom such orders are socted and
ony part of the orders are for suppes for use n the customers bus-
ness operatons. The saesman estmates that he devotes 60 percent
of hs tme durng each caendar quarter to soctng orders for the
frm from customers for advertsng for ncuson on menus, foders,
etc., whch are not made avaabe to the advertser nvoved and,
therefore, are not suppes for use n the customers busness opera-
tons. It s concuded that the saesman does not meet a the re-
qurements of the statutory test contempated by secton 1 26(d) (3)
(D), and s not an empoyee of the frm for purposes of the ta es
mposed by the ct.
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-95
empoyees.
Indvduas are seected by the M Communty Servce, Inc., to per-
form servces as homemakers n prvate homes. The Servce re-
qures the ndvduas to keep day records and retans the rght to
contro the ndvduas n the performance of ther servces. ed,
the Indvduas are empoyees of the Servce for edera empoy-
ment ta purposes.
The queston has been presented whether ndvduas who are se-
ected and paced n prvate homes by the M Communty Servce, Inc.,
a casework agency, for the purpose of performng servces as home-
makers are the empoyees of such Servce for purposes of the ed-
era Insurance Contrbutons ct (subchapter , chapter 9, Interna
Revenue Code of 11)39.)
It s the purpose of the homemaker servce to pace ndvduas,
carefuy chosen for ther homemakng sks and abty to get aong
wth peope, n a home where ther presence s needed to mantan the
home as a unt, and to keep t functonng durng the temporary n-
capacty or unavodabe absence of the mother. The servce s aso
avaabe to aduts overcome by short nesses, nfrmtes of od age,
or otherwse. The servce s furnshed free of charge when needed,
through the reef funds of varous chartabe agences. Some fam-
es, however, pay part or a of the cost of the servce f they are abe
to do so.
In the begnnng, the Servce paced an advertsement n the news-
paper for ndvduas who wshed to regster as homemakers. The
ndvduas nterested n the type of work nvoved now appy for reg-
straton. The ndvduas are requred to f out appcaton forms
and gve character and heath references. determnaton of
whether a prospectve homemaker has the necessary quafcatons for
an assgnment s based on such character and heath references and by
tra on the |ob. The Servce mantans a regster of homemakers and
requres them to keep a day record of hours worked, whch s then
used by the Servce n computng ther remuneraton. The Servce
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81 Regs. 128, 08.20 .
pays the ndvduas by check from ts own funds mmedatey upon
competon of each assgnment, wthout regard to whether t w be re-
mbursed by the famy for whom the servces were performed.
Secton 1 26 (d) (2) of the ct provdes, n part, that the term em-
poyee means any ndvdua who under the common aw rues app-
cabe n determnng the empoyer-empoyee reatonshp has the
status of an empoyee See secton 08.20 (c), eguatons 128, reat-
ng to common aw empoyees.
It s concuded that the M Communty Servce, Inc., retans the
rght to e ercse such drecton and contro over the homemakers n
the performance of ther servces as s necessary to consttute an em-
poyer-empoyee reatonshp. ccordngy, t s hed that ndvd-
uas seected and paced n prvate homes hy the M Communty Serv-
ce, Inc., to perform servces as homemakers are empoyees of that
Servce for edera empoyment ta purposes
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-113
empoyees
( so Secton 81 Reguatons 118, Sec-
ton 39. 81-1,)
n ndvdua and a group of automobe deaers entered nto
an agreement whereby the Indvdua mantans a centra teephone
servce n hs home and keeps a compete stng of the day car n-
ventory of each deaer for the purpose of enabng a saesman of
a partcpatng deaer to compete a sae of a specfc mode of car
not n the partcuar deaer s stock. The ndvdua Is nether su-
pervsed nor Issued Instructons concernng the manner of perform-
ng hs servces. e may deegate the work to a substtute of hs
own choosng wthout the consent of the deaers, and he receves a
reguar monthy fee for the servce pus teephone e penses. ed,
the ndvdua s not an empoyee of the automobe deaers for ed-
era empoyment ta purposes.
Inqury has been made whether an ndvdua, who furnshes cer-
tan teephone nformatona servce to varous automobe deaers n
the area, s the empoyee of such deaers for purposes of the edera
Insurance Contrbutons ct (subchapter , chapter 9, Interna Reve-
nue Code of 1939).
In the nstant case, an ndvdua and a group of automobe deaers
entered nto an ora agreement whereby the ndvdua agrees to man-
tan a centra teephone bureau n hs home for the deaers. y ca-
ng each of the deaers every day, he s abe to keep a compete stng
cf the day nventory of each, thus enabng a saesman of any deaer
to compete hs sae wth a customer for a partcuar mode or coor of
car not n the deaer s own stock, through purchase from another par-
tcpatng deaer. or these servces the ndvdua receves a regu-
ar monthy fee, pus teephone e penses. The deaers furnsh no
equpment or offce suppes, do not supervse or ssue nstructons n
the work, and do not requre that the servces be performed person-
ay. The ndvdua may reguate hs own hours, but of necessty
forks durng the norma workng hours of the frms. One of the
deaers acts as a coecton agent for the group, wthout fee, payng
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Regs. 128, 08.20 . 82
the ndvdua s monthy fee and teephone e penses, as we as co-
ectng the prorated share of e penses from each partcpatng deaer.
Secton 1 26(d) of the edera Insurance Contrbutons ct, as
amended, provdes among other thngs, that the term empoyee
means any ndvdua who, under the usua common aw rues appca-
be n determnng the empoyer-empoyee reatonshp, has the status
of an empoyee. See secton 08.20 (c), Reguatons 128, reatng
to common aw empoyees.
Whether an ndvdua s an ndependent contractor or an empoyee
s argey a queston of fact to be determned upon consderaton of
the partcuar facts n each case. In ths case t s shown that the au-
tomobe deaers do not e ercse or have the rght to e ercse contro
over the ndvdua n the performance of hs servces suffcent to
estabsh an empoyer-empoyee reatonshp under the usua common
aw rues. ccordngy, t s hed that the ndvdua n the nstant
case s not the empoyee of the automobe deaers for edera empoy-
ment ta purposes. owever, he s engaged n sef-empoyment wth
respect to ths actvty and the net earnngs he receves are sub|ect to
the provsons of the Sef- mpoyment Contrbutons ct (subchap-
ter , chapter 9, Interna Revenue Code of 1939).
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-12
empoyees.
reta furnture and eectrca appance company conducted an
e tensve advertsng campagn to promote the sae of ts mer-
chandse. It engaged a saesman on a commsson bass to ca on
prospects whose names t furnshed hm. It supped hm wth bus-
ness cards, order hooks, merchandse cataogues, and demonstrator
modes of some of Its appances. It provded hm a teephone serv-
ce at ts headquarters and otherwse made those headquarters
avaabe to hm n connecton wth hs saes actvtes. t tmes,
he wated on customers comng nto the company s store. ed, the
saesman s an empoyee of the company for edera empoyment
ta purposes.
n opnon has been requested reatve to the status, for edera
Insurance Contrbutons ct purposes (subchapter , chapter 9, In-
terna Revenue Code of 1939), of an ndvdua who performs saes
bervces for a reta furnture and eectrca appance company.
The company n the nstant case s engaged n the reta sae of
furnture and eectrca appances. It conducted an e tensve adver-
tsng campagn to promote the sae of ts merchandse and engaged
a saesman on a commsson bass to ca on prospectve customers
whose names t furnshed hm. It supped hm wth busness cards,
order books, merchandse cataogues, and demonstrator modes of
some of ts appances. It provded hm a teephone servce at ts
headquarters and otherwse made those headquarters avaabe to hm
n connecton wth hs seng actvtes. t tmes, he wated on cus-
tomers comng nto the company s store, though he was not re-
ured to observe reguar workng hours, he used the company s
actes as hs saes headquarters. e was requred to check wth
oca banks, etc., to obtan nformaton regardng the credt ratngs
of the customers to whom he sod the company s merchandse. t the
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83 Regs. 128, 08.20
end of each day, he reported the saes consummated durng the day.
ased upon these reports, the company pad hm hs commssons on
a weeky bass.
Secton 1 26(d) of the edera Insurance Contrbutons ct pro-
vdes that the term empoyee means any ndvdua who, under the
vsua common aw rues appcabe n determnng the empoyer-
empoyee reatonshp, has the status of an empoyee. The rues for
determnng empoyer-empoyee reatonshp under the usua common
aw rues are found n secton 08.20 (c), eguatons 128.
Whether a person s an ndependent contractor or an empoyee s
argey a queston of fact to be determned upon the partcuar facts
of each case. In the nstant case the nature of the servces performed
permt a greater freedom from empoyer contro than s usuay pres-
ent n the case of servces of a dfferent character. owever, the
company has authorty over the saesman n the performance of hs
servces as shown by the fact that he s furnshed wth the names of
prospects on whom he s e pected to ca, that he s furnshed wth
necessary factes, that he uses the company s offce as hs head-
quarters, and that he aso performs saes servces n the company s
store. ccordngy, t s hed that the company e ercses or has the
rght to e ercse such contro over the ndvdua n the performance
of hs servces as s necessary to estabsh the reatonshp of empoyer
and empoyee under the usua common aw rues for edera empoy-
ment ta purposes.
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-1
empoyees.
n ndvdua s empoyed by a deaer In used automobes to drve
automobes to an aucton company ocated n a cty dstant from
the deaer s pace of busness. The deaer nstructs the ndvdua
wth respect to the prce at whch the cars are to be sod at aucton,
requres the ndvdua to protect that prce, pays a e penses of
the trp, and remunerates the ndvdua on the bass of a stated
amount for each car sod. ed, the ndvdua s an empoyee
of the deaer for edera empoyment ta purposes.
n opnon has been requested whether an ndvdua empoyed by
a used car deaer to drve automobes to an aucton company ocated
n a cty dstant from the deaer s pace of busness and to protect
the prce at whch the car s to be sod s an empoyee of the deaer
for purposes of the edera Insurance Contrbutons ct (subchapter
, chapter 9, Interna Revenue Code of 1939).
In the nstant case, a deaer n used automobes empoyed an
ndvdua under the terms of an ora agreement to drve automobes
to an aucton company ocated n a cty dstant from the deaer s
pace of busness. The deaer paces a prce on the car to be sod at
aucton and requres the ndvdua to protect the prce. The
aucton company generay mas the check n payment for the car
drect to the deaer. The deaer pays a e penses ncurred by the
ndvdua n connecton wth the trp and remunerates hm on the
bass of a stated amount for each car sod. The ndvdua aso drves
automobes to the deaer s pace of busness from ocatons out of the
cty, for whch he receves a stated sum. servces are performed
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Regs. 128, 08.20 . S
n the name of the deaer. The ndvdua s servces may be term-
nated by the deaer for any or no reason. The ndvdua aso
performs smar servces for another used car deaer.
Secton 1 26(d) of the ct provdes, n part, that the term em-
poyee means any ndvdua who, under the usua common aw rues
appcabe n determnng the empoyer-empoyee reatonshp, has
the status of an empoyee. The gudes to be used n determnng the
empoyer-empoyee reatonshp under the usua common aw rues
are found n secton 08.20 (c) of Reguatons 128.
Whether a person s an ndependent, contractor or an empoyee s
argey a queston of fact to be determned upon the partcuar facts
of each case. In the nstant case the ndvdua performs persona
servces for the deaer and the deaer e ercses, or has the rght to
e ercse, such contro over the ndvdua n the performance of hs
servces as s necessary to estabsh an empoyer-empoyee reaton-
shp. The fact that the ndvdua performs servces for another
prncpa does not negatve the e stence of an empover-empovee
reatonshp. See S. S. T. 2 , C. . -2, 0G (1930). ccordngy,
t s hed that the ndvdua s an empoyee of the deaer for edera
empoyment ta purposes.
Reguatons 128, Sectton 08.20 : Who are Rev. Ru. . 55-195
empoyees.
Under hs ast w and testament a decedent bequeathed a of hs
property to hs three chdren as trustees. The estate conssts of cer-
tan busness property whch had been operated by the decedent as a
soe propretorshp. The w provdes that the trustees sha, n
ther dscreton, carry on the busnesses that the decedent was conduct-
ng at the tme of hs death, wth authorty to enpov a manager of
such busnesses and such other empoyees as they deem necessary.
The w aso provdes that n case a dfference of opnon shoud e st
among the trustees wth regard to any of the trust affars, the opnon
and determnaton of any two sha be controng. The trustees
eected to engage each of ther number to perforn servces n con-
necton wth the operaton of the busnesses of the trust whch are
outsde the scope of ther offca dutes as trustees.
rung pubshed as m. T. , C. . 19 3, 1070. hods that a soe
fducary shoud not be consdered an empoyee of the estate, ether
as to hs offca dutes or any servces performed outsde the scope
of hs offca dutes, snce the essentas of empoyment are ackng.
owever, such rung aso hods that where two or more fducares
engage one of ther number to perform servces for the estate whch
are specfcay recognzed as beng outsde the scope of the fducary s
offca dutes he may, as to such speca servces, be an empoyee pro-
vded the requste contro e sts.
ccordngy, nasmuch as each of the nstant trustees s sub|ect to
the supervson of hs cotrustees n the performance of hs speca
servces, t s hed that wth respect to such servces each trustee s an
empoyee of the trust for purposes of the edera Insurance. Contrbu-
tons ct (subchapter , chapter 9, Interna Revenue Code of 193 ).
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85 Regs. 128, 08.20 .
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-206
empoyees.
( so Secton 81 Reguatons 118, Secton
39. 81-3.)
n ndvdua, who Is engaged In the busness of prvate tutorng
and Is sef-empoyed wth respect to such actvty, s aso engaged
part-tme by the oard of ducaton to perform servces as a
substtute teacher n the pubc schoos. s a substtute teacher,
the ndvdua s requred to observe reguar schoo hours and s
sub|ect to the rues and reguatons prescrbed by the oard of
ducaton. ed, wth respect to her servces as a substtute
teacher, the ndvdua s an empoyee of the oard of ducaton
for edera empoyment ta purposes.
rung has been requested reatve to the status for purposes of the
edera Insurance Contrbutons ct (subchapter , chapter 9, In-
terna Revenue Code of 1939) and the Sef- mpoyment Contrbu-
tons ct (subchapter , chapter 1, Interna Revenue Code of 1939)
of an ndvdua who s engaged n the busness of prvate tutorng and
s empoyed part-tme by the oard of ducaton to perform
servces as a substtute teacher n the pubc schoos.
In the nstant case the ndvdua s engaged n prvate tutorng and
s sef-empoyed wth respect to such servces. She aso performs
servces as a substtute teacher n the pubc schoos. Whe perform-
ng servces as a substtute teacher, she s engaged n the reguar
actvtes of the schoo, s sub|ect to ts rues and reguatons, and s
requred to conform to reguar schoo hours. Such servces are per-
formed n the pubc schoo budngs.
Secton 1 26(d) of the edera Insurance Contrbutons ct pro-
vdes that the term empoyee means any ndvdua who, under the
usua common aw rues appcabe n determnng the empoyer-em-
poyee reatonshp, has the status of an empoyee. Secton 08.20 (c)
of Reguatons 128 reatng to the defnton of the term empoyee
for edera Insurance Contrbutons ct purposes, provdes that gen-
eray the reatonshp of empoyer and empoyee 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.
The ta under the Sef- mpoyment Contrbutons ct s mposed
upon sef-empoyment ncome whch n turn s based upon net
earnngs from sef-empoyment. It s necessary for an ndvdua
to carry on a trade or busness, ether as an ndvdua or as a
member of a partnershp, n order for hm to have net earnngs from
sef-empoyment. The performance of servces by an ndvdua as
an empoyee as defned n the edera Insurance Contrbutons ct,
wth an e cepton not here matera, does not consttute a trade or
busness.
In the nstant case, the ndvdua who hods hersef out to the pub-
c as a prvate tutor and s carryng on such busness for the purpose
of vehood or proft s sef-empoyed wth respect to such actvtes,
and the ncome derved therefrom shoud be consdered n determnng
net earnngs from sef-empoyment. owever, wth respect to the
ndvdua s servces as a substtute teacher n the pubc schoos she
s not engaged n an ndependent cang, but s sub|ect to drecton
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Regs. 128, 08.20 . 86
and contro by the oard of ducaton necessary to estabsh the
ega reatonshp of empoyer and empoyee for edera empoyment
ta purposes. See S. S. T. 3 1, C. . 1938-2, 297. Therefore, the
porton of the ndvdua s ncome attrbutabe to substtute teachng
an the pubc schoos does not consttute earnngs from sef-empoy-
ment for edera sef-empoyment ta purposes.
Reguatons 128, Secton 08.20 : Who are Rev. Ru. 55-279
empoyees
n ndvdua engaged as a teephone soctor of orders for a
company s products, cus persons and frms sted n the teephone
drectory. She uses a teephone, other offce factes, and suppes
furnshed by the company. The company gves her Instructons
regardng the genera conversaton and saes tak wth the pro-
spectve customers. She devotes severa hours day to the work,
performs the servces personay, and s remunerated on a comms-
son on saes bass. ed, she Is an empoyee of the company for
edera empoyment ta purposes.
nother teephone soctor engaged by the company socts
orders for ts products from her own home on part-tme bass.
She performs the servces at her convenence, wthout supervson,
pays a e penses ncurred n connecton wth her seng actvtes,
and s pad on a commsson on saes bass. ed, she s not an
empoyee of the company for edera empoyment ta purposes.
The Interna Revenue Servce has been requested to determne the
status, under the edera Insurance Contrbutons ct (subchapter ,
chapter 9, Interna Revenue Code of 1939) of ndvduas engaged to
perform servces as teephone soctors for a company n connecton
wth the sae of ts products under the two stuatons shown beow.
Case 1.
In the frst case, a person s engaged by the company to perform
servces as a teephone soctor n connecton wth obtanng orders
for ts products. er dutes are to teephone certan ndvduas and
nsttutons desgnated by the company and to enter the necessary
nformaton on an order bank when a sae s made. She s furnshed
a teephone, and other offce factes, and suppes by the company.
No perod of tranng was requred due to the type of servces per-
formed. owever, the company suggests the genera conversaton
and saes tak to be used wth the prospectve customers. The tee-
phone cas are made at tmes optona to the soctor, but she s
e pected to devote from to 8 hours of her tme each day to the
performance of these servces. She operates under the name of the
company. The company does not aow her a drawng account or
requre her to produce a mnmum voume of saes. er servces may
be termnated at any tme.
The rues for determnng whether, under the usua common aw
rues, an empoyer-empoyee reatonshp e sts are found n secton
08.20 (c) of Reguatons 128.
though detaed drecton and contro are not e ercsed by the
company over the performance of servces by the teephone soctor,
t s evdent that the company has the rght of drecton and contro
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87 Regs. 128, 08.20 .
and, n fact, e ercses a the contro whch s necessary and practcabe
for the accompshment of ts purposes. Ths concuson s based
upon a consderaton of the mpractcabty of detaed and contnu-
ous supervson due to the nature of the servces performed the fact
that the soctor s furnshed the names of prospectve customers to
be caed that she s furnshed, outsde her home, the factes and
suppes necessary for her work and, that she s requred to spend a
consderabe amount of tme each day on the company s premses.
ccordngy, t s hed that the reatonshp of empoyer and empoyee
for edera empoyment ta purposes e sts between the company and
ths teephone soctor.
Ca e 2.
The company aso engages another teephone soctor to ca house-
hoders for the purpose of obtanng orders for ts products. In order
to avod dupcaton of cas made by the other soctor ths soctor
f assgned certan pages of the teephone drectory from whch to
make her cas. She operates from her own home, performs the serv-
ces on a part-tme bass, wthout supervson, and pays a e penses
ncurred n connecton wth her seng actvtes. She does not sub-
mt reports, other than saes orders does not dever the products
sod or coect any payment therefor and s not requred to devote
any certan amount of tme to the work, perform any servces on the
company s premses, or produce a mnmum voume of saes. She
s pad a commsson on each sae made by her and s not aowed a
drawng account or any advance aganst antcpated earnngs.
ppyng the rues contaned n secton 08.20 (c), supra, t s hed
that the company does not e ercse or have the rght to e ercse the
contro necessary to estabsh the reatonshp of empoyer and
empoyee for edera empoyment ta purposes between tsef and
ths partcuar teephone soctor.
Reguatons 128, Secton 08.20 : Who are
empoyees.
n ndvdua performng servces for an organzaton as an organ-
zer of forum-type dnner cubs. See Rev. Ru. 55-233, page 11G.
Reguatons 128, Secton 08.20 : Who are
empoyees.
Indvdua conductng a watch repar department wthn a |ewery
store. See Rev. Ru. 55-2 8, page 117.
Reguatons 128, Secton 08.20 : Who are
empoyees.
Indvdua performng servces as se ton of a cemetery. See Rev.
u. 55-328, page 98.
3M050 SO 32
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Regs. 128, 08.213. 88
Reguatons 128, Secton 03.20 : Who are
empoyees.
Indvdua reparng automobe bodes and fenders on reguar
saary or percentage bass. See Rev. Ru. 55-370, page 122.
Reguatons 128, Secton 08.205: Who are
empoyers.
Change n membershp of partnershp where the busness thereof
was contnued. See Rev. Ru. 55-93, page 0 .
Reguatons 128, Secton 08.213: Unted States Rev. Ru. 55-96
and nstrumentates thereof.
( so Secton 1 20(e), Secton 08.203.)
Commssons and foundatons estabshed under the ubrght
ct, are whoy owned nstrumentates of the Unted States for
edera ta purposes. Servces performed n the empoy of such
commssons and foundatons come wthn the cassfcaton of
servces e cepted from empoyment under secton 1 26(b) (7) ( )
of the edera Insurance Contrbutons ct. owever wth re-
spect to such servces performed on and nfter anuary 1, 1931,
the determnaton as to whether an ndvdua s performng
servces whch consttute empoyment s to be made under sec-
ton 1 20(e) of the ct by the head of the Government agency
nvoved.
dvce has been requested whether servces performed by a teacher
n Thaand for an educatona foundaton estabshed and operatng
under the ubrght ct are e cepted from empoyment under the
edera Insurance Contrbutons ct (subchapter , chapter 9, In-
terna Revenue Code of 1939).
The ubrght ct, ct of ugust 1,19 6, 60 Stat. 75 , 50 IT. S. C.
16 1, authorzes the State Department to enter nto agreements wth
foregn governments to provde for an educatona e change pro-
gram. Ths statute contempates that ts provsons w be carred
out by the formaton of educatona foundatons operatng n the
foregn countres concerned. Such foundatons w receve foregn
currences, or credts therefor, hed or avaabe for e pendture by
the Unted States or any agency thereof, and not requred by aw
or agreement to be used for any other purpose, and w use such
funds for the purpose, among others, of fnancng studes, research,
nstructon, and other educatona actvtes of or for mercan ct-
zens n schoos and nsttutons of hgher earnng ocated n countres
other than the Unted States.
It s concuded that commssons and foundatons estabshed under
the ubrght ct are whoy owned nstrumentates of the Unted
States for edera ta purposes. Snce these commssons and foun-
datons are not corporatons t s the opnon of the Interna Revenue
Servce that servces performed n the empoy of such commssons
and foundatons come wthn the cassfcaton of servces e cepted
from empoyment by secton 1 26(b)(7)( ) of the edera In-
surance Contrbutons ct. owever, secton 1 20(e) of the ct
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89 Regs. 128, 08.215.
provdes, wth respect to servces performed on and after anuary
1,1951, n the empoy of the Unted States or a whoy owned nstru-
mentaty thereof, that (1) the determnaton as to whether an nd-
vdua has performed servces whch consttute empoyment as
defned n secton 1 26 of the ct, (2) the determnaton of the amount
of remuneraton for such servces whch consttutes wages as de-
fned n such secton, and (3) the return and payment of the ta es
mposed by the ct, sha be made by the head of the edera agency
or nstrumentaty havng contro of such servces or by such agents
as he may desgnate.
Reguatons 128, Secton 08.21 : States and
ther potca subdvsons and nstrumen-
tates.
Cvan empoyees of State Natona Guard. See Rev. Ru. 55-2 7,
page 117.
Reguatons 128, Secton 08.21 : States and
ther potca subdvsons and nstrumen-
tates.
Soca securty coverage for empoyees of a State nstrumentaty
e empt under secton 101 (6) of the Interna Revenue Code. See Rev.
Ru. 55-310, page 5.
Reguatons 128, Secton 08.215: Mnsters Rev. Ru. 55-2 2
of churches and members of regous orders.
Ordaned mnsters servng on the facutes of theoogca sem-
nares as teachers and admnstrators are performng servces n
the e ercse of ther mnstry and such servces are e cepted from
empoyment under secton 1 26(b) (9) ( ) of the edera Insurance
Contrbutons ct.
dvce has been requested whether servces performed by ordaned
mnsters as teachers and admnstrators on the facutes of theoogca
semnares are e cepted from empoyment under secton 1 20(b)
(9) ( ) of the edera Insurance Contrbutons ct (subchapter ,
chapter 9, Interna Revenue Code of 1039).
In the nstant case a theoogca semnary, whch s a nonproft,
chartabe, regous, and educatona nsttuton of earnng, e empt
from edera ncome ta under secton 101(6) of the Code, was
organzed for the purpose of tranng and educatng mnsters.
Ordaned mnsters are engaged by the semnary to serve on ts facuty
as teachers and admnstrators under ora agreements whch provde
ony that the mnster w receve such rghts, prveges, and benefts
as the semnary s poces provde for one hodng that specfc poston.
Secton 1 26(b) of the edera Insurance Contrbutons ct e -
cudes from the defnton of empoyment for the purposes of
that ct:
W)( ) Servce performed by a duy ordaned, commssoned, or censed
mnster of a church n the e ercse of hs mnstry or by a member of a regous
order n the e ercse of dutes requred by such order .
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Regs. 128, 08.215. 90
Reguatons 128, ssued pursuant to the ct, provdes n secton
08.215 that servces performed by a duy ordaned, commssoned,
or censed mnster of a church n the e ercse of hs mnstry, or by
a member of a regous order n the e ercse of dutes requred by
such order, are e cepted from empoyment. The dutes of mnsters
ncude the mnstraton of sacerdota functons and the conduct of
regous worshp, and the contro, conduct, and mantenance of re-
gous organzatons (ncudng the regous boards, socetes, and
other ntegra agences of such organzatons), under the authorty
of a regous body consttutng a church or church denomnaton.
Theoogca semnares are regous nsttutons of earnng, ther
purpose beng to tran and educate mnsters n the propagaton of
the regous prncpes and deas of varous church denomnatons.
It s concuded that ordaned mnsters servng on the facutes of
theoogca semnares as teachers and admnstrators are performng
servces n the e ercse of ther mnstry and that such servces are
e cepted from empoyment under secton 1 26(b)(9)( ) of the
ct. In the event that a theoogca semnary that s e empt from
edera ncome ta under secton 101(6) of the Code waves ts
e empton from the ta es mposed under the edera Insurance Con-
trbutons ct, the remuneraton pad to the mnsters servng on ts
facuty as teachers and admnstrators w nevertheess not consttute
wages for purposes of the ta es mposed under such ct. See T. D.
5823, C. . 1951-1, 89.
Reguatons 128, Secton 08.215: Mnsters Rev. Ru. 55-2 3
of churches and members of regous orders.
Servces performed by ordaned, commssoned, or censed mns-
ters, as heads of regous departments, or as teachers and admns-
trators, whose specfc dutes Invove no eccesastca functons, on
the facuty of a coege whch s not under the authorty of a regous
body consttutng a church or church denomnaton are not e -
cepted from empoyment under secton 1 26(b) (9) ( ) of the
edera Insurance Contrbutons ct.
Servces performed by an ordaned, commssoned, or censed
mnster as a Chapan and Professor of Regon at the coege are
e cepted from empoyment under such secton.
dvce has been requested whether servces performed by ordaned,
commssoned, or censed mnsters as heads of regous departments
or as teachers and admnstrators on the facuty of a coege are e -
cepted from empoyment under secton 1 26(b) (9) ( ) of the ed-
era Insurance Contrbutons ct (subchapter , chapter 9, Interna
Revenue Code of 1939). Smar advce has aso been requested rea-
tve to servces performed by an ordaned, commssoned, or censed
mnster as Chapan and Professor of Regon at the coege.
Secton 1 26(b) of the edera Insurance Contrbutons ct con-
tans the foowng e cepton from the term empoyment, for pur-
poses of the ta es mposed under the ct
(9) ( ) Servce performed by a duy ordaned, commssoned, or censed
mnster of a church n the e ercse of hs mnstry or by a member of a regous
order n the e ercse of dutes requred by such order
Revenue Rung 55-2 2, page 89, ths uetn, reates to servces
performed by ordaned mnsters as teachers and admnstrators on
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91 Regs. 128, 08.215.
facutes of theoogca semnares under ora agreements whch pro-
vde ony that they w receve such rghts, prveges, and benefts as
the semnary s poces provde for one hodng that specfc poston
and hods that such servces are e cepted from empoyment under
secton 1 26(b)(9)( ) of the ct. Ths resut s based upon the
concuson that theoogca semnares are regous- nsttutons of
earnng, dedcated to the tranng and educaton of mnsters n the
propagaton of regous prncpes and deas, and, hence, that the
servces performed by mnsters as teachers and admnstrators at such
femnares fa wthn the scope of secton 08.215 of Reguatons 128,
whch provdes:
Mnsters of churches and members of regous orders. Servces performed
by a duy ordaned, commssoned, or censed mnster of a church n the e er-
cse of hs mnstry, or by a member of a regous order n the e ercse of dutes
requred by such order, are e cepted from empoyment. The dutes of mnsters
ncude the mnstraton of sacerdota functons and the conduct of regous wor-
shp, and the contro, conduct, and mantenance of regous organzatons (n-
cudng the regous boards, socetes, and other ntegra agences of such organ-
zatons), under the authorty of a regous body consttutng a church or church
denomnaton.
The Interna Revenue Servce hods generay that servces per-
formed by ordaned mnsters as heads of regous departments and
as teachers and admnstrators on the facuty of a coege or unversty
whch, athough not bascay a regous nsttuton, s an ntegra
agency of a regous organzaton under the authorty of a regous
bodv consttutng a church or church denomnaton, are n the e ercse
of ther mnstry and are e cepted from empoyment under secton
1 26(b) (9) ( ) of the edera Insurance Contrbutons ct. ow-
ever, n the nstant case the Servce has accepted as facts the represen-
tatons whch support a concuson that athough the coege s an n-
sttuton of the M state conventon such conventon s not a regous
body consttutng a church denomnaton. Therefore, t s hed that
servces performed by ordaned mnsters as heads of regous depart-
ments as dstngushed from schoos of theoogy, and as teachers and
admnstrators on the facuty of the coege whose specfc dutes n-
vove no eccesastca functons, such as the conduct of regous wor-
shp, are not e cepted from empoyment under the provsons of
secton 1 26(b) (9) ( ) of the edera Insurance Contrbutons ct.
n ordaned mnster s engaged by the coege prmary as a
chapan and serves as Chapan and Professor of Regon wth a
specfcaton of dutes embracng the mnstraton of sacerdota func-
tons and the conduct of regous worshp. e s responsbe for
pannng the chape programs each Sunday and on one other day n
each week and s requred to preach at appro matey one-haf of the
Sunday servces. e s aso responsbe for the regous counse-
ng of students and for supervsng generay a regous actvtes
on the campus. e devotes appro matey one-haf of hs tme to
teachng, ncudng a course n regon.
Mmeograph 6633, C. . 1951-1,106 (whch prescrbes rues to de-
termne whether the servces of a duy ordaned mnster of a church
are performed n the e ercse of hs mnstry wthn the meanng
of secton 1 26(b)(9)( ) of the edera Insurance Contrbutons
ct), provdes, n subparagraph (a), paragraph 5, that servces n
the conduct of regous worshp or n the mnstraton of sacerdota
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Regs. 128, 08.226. 92
functons are n the e ercse of the mnstry whether or not they
are performed for a regous organzaton.
Snce the dutes mposed upon the nstant chapan, . e., the teachng
of regon and the performance of admttedy eccesastca servces
consdered n ther entrety are not susceptbe of segregaton nto two
separate and dstnct categores, secton 1 26(c) of the edera In-
surance Contrbutons ct, whch reates to ncuded and e cuded
servces s not appcabe. ccordngy, t s hed that servces per-
formed as Chapan and Professor of Regon , n the crcumstances
stated are performed n the e ercse of the mnstry wthn the con-
tempaton of Mmeograph 6633, supra, and are therefore e cepted
from empoyment under secton 1 26(b) (9) ( ) of the edera Insur-
ance Contrbutons ct.
Reguatons 128, Secton 08.226: Wages. ev. u. 55-196
( so Sectons 1607, 1621 Reguatons 107,
Secton 03.227 Reguatons 120, Secton
06.207.)
Where an agreement between a traveng saesman empoyed on
a straght commsson bass and hs empoyer provdes that some
part of the saesman s gross commssons be consdered (a) an a-
owance toward bona fde ordnary and necessary e penses to be
Incurred In the busness of the empoyer, or (b) a rembursement
for such e penses prevousy ncurred by the saesman n such
busness, the dfference between the gross commssons and the
aowance or rembursement for e penses consttutes the wages to
be reported for edera empoyment and wthhodng ta purposes,
provded proper dentfcaton s made at the tme of payment.
n nqury has been made regardng the proper method of deter-
mnng the amount of wages, for purposes of the edera Insurance
Contrbutons ct, the edera Unempoyment Ta ct, and Coec-
ton of Income Ta at Source on Wages (subchs. , C, and D, respec-
tvey, ch. 9, Interna Revenue Code of 1939) of a traveng saesman
empoyed on a straght commsson bass who pays, out of hs gross
commssons, the e penses ncurred by hm n connecton wth servces
performed for hs empoyer.
Sub|ect to certan e ceptons and mtatons not here matera, the
term wages s defned n sectons 1 26(a) and 1607(b) of the ed-
era Insurance Contrbutons ct and the edera Unempoyment Ta
ct, respectvey, to mean a remuneraton for empoyment, ncud-
ng the cash vaue of a remuneraton pad n any medum other than
cash .
Secton 08.226(a) of Reguatons 128, reatng to the defnton of
the term wages for purposes of the edera Insurance Contrbutons
ct, provdes, among other thngs, that amounts pad specfcay,
ether as advances or rembursements, for traveng or other bona fde
ordnary and necessary e penses ncurred or reasonaby e pected to
be ncurred n the busness of the empoyer are not wages. 1 raveng
and other rembursed e penses must be dentfed ether by makng a
separate payment or by specfcay ndcatng the separate amounts
where both wages and e pense aowances are combned n a snge
payment Secton 03.22 (a) of Reguatons 107, as amended, reat-
ng to the ta mposed under the edera Unempoyment Ta ct
contans ke provsons. See T. D. 5805, C. . 1950-2, 112. so,
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93 Regs. 128, 08.220.
the correspondng provsons of secton 1621(a) of the Code and
secton 06.207(c) of Reguatons 120, reatng to the coecton of
ncome ta at source on wages, are substantay the same as the above-
cted provsons pertanng to the edera Insurance Contrbutons
ct and the edera Unempoyment Ta ct.
ppyng the provsons of aw and reguatons cted above, t s
hed that the wages of a traveng saesman, who s pad on a straght
commsson bass, are the gross commssons pad to hm mnus any
amounts pad specfcay as advances or rembursements for traveng
and other bona fde ordnary and necessary e penses ncurred n the
busness of hs empoyer. Generay, where the empoyer s abty
to the traveng saesman s mted to the gross commssons earned,
no payment or porton thereof s consdered to be an advance or rem-
bursement for e penses. owever, f under the arrangements between
the traveng saesman and hs empoyer there e sts an e press or
mped agreement or understandng that some part of the traveng
saesman s gross commssons s to be consdered ether (a) an aow-
ance toward e penses to be ncurred n the busness of the empoyer,
or (b) a rembursement for e penses prevousy ncurred by the trave-
ng saesman n the busness of the empoyer, the dfference between
the gross commssons and the aowances or rembursements for e -
penses consttutes the wages to be reported as sub|ect to the edera
empoyment ta es and to ncome ta wthhodng under secton 1622
of the Code provded, of course, proper dentfcaton s made at the
tme of payment.
provson n an ora or wrtten contract of empoyment or n a
coatera agreement, to the effect that any payments made or ad-
vanced aganst earned commssons are frst to be apped to remburse
the traveng saesman for traveng or other bona fde ordnary and
necessary e penses, w satsfy the frst requrement of the regua-
tons. It s further necessary, however, that the porton thereof whch
represents rembursement for e penses be propery dentfed at the
tme of payment. Where both requrements are met, the porton whch
represents rembursement for e penses does not consttute wages and
shoud be deducted from the traveng saesman s gross commssons
n computng hs wages sub|ect to the ta es mposed by the edera
Insurance Contrbutons ct, the edera Unempoyment Ta ct,
and for purposes of the Coecton of Income Ta at Source on Wages.
The rung contaned heren s n accord wth Mmeograph 65 7,
C. . 1950-2,113.
Reguatons 128, Secton 08.226: Wages. Rev. Ru. 55-197
( so Sectons 1607, 1621 Reguatons 107,
Secton 03.227 Reguatons 120, Secton
06.207.)
Payments made by a company to Its empoyee under an account
separate and dstnct from bs earned commssons account, n
satsfacton of bs submtted by hm to the company for remburse-
ment of amounts actuay e pended by hm n conductng ts bus-
ness, do not consttute wages for edera empoyment ta
purposes.
n nqury has been receved as to the e tent of abty for
purposes of the edera Insurance Contrbutons ct, edera Unem-
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Regs. 128, 08.226. 9
poyment Ta ct, and Coecton of Income Ta at Source on Wages
(subchapters , C, and D, respectvey, chapter 9, Interna Revenue
Code of 1939) of a company wth respect to amounts pad to one of
ts empoyees as rembursements for e penses ncurred n conductng
company busness.
n ndvdua performed varous servces as an empoyee of a
company for more than 20 years durng whch he was pad frst on a
saary bass and ater on a saary and commsson bass. Ths ar-
rangement was changed by an agreement between the company and
the empoyee under whch hs saary was dscontnued and hs earn-
ngs were computed on a commsson bass. Under the agreement,
upon the submsson of e pense accounts by the empoyee, the company
rembursed hm for e penses actuay ncurred n ts busness up to a
certan ma mum each month. Separate and dstnct e pense accounts
were mantaned by the company and the amounts of rembursed e -
penses were deducted from the commssons earned by the empoyee.
The agreement provded that n the event the earned commssons
dd not equa the rembursed e penses, the dfference woud become
cue and payabe to the company. owever, at a ater date the com-
pany agreed that n ths partcuar case f the empoyee s commssons
were not suffcent to absorb the e penses, or f hs saes were ony
nomna, the e penses woud be wrtten off and no refund from the
empoyee woud be requred.
The facts n the nstant case are dstngushabe from those support-
ng the concuson reached n S. S. T. 6S, supra In the nstant case
the empoyment agreement dd not provde for advances aganst un-
earned commssons or otherwse and the company dd not make such
advances. Instead, the empoyment agreement provded that the
empoyee woud b the company for amounts, sub|ect to ma mum
mtatons, actuay e pended n ts behaf, that the company woud
remburse the empoyee ony to the e tent of hs bng, and that hs
earned commssons woud consttute a separate and dstnct account.
The empoyee was to receve commssons ony to the e tent that they
e ceed the amount of e penses whch he ncurred on behaf of the
company and submtted bs to t for rembursement. These prov-
sons were adhered to by the company and the empoyee.
ctuay, durng the ta abe year n queston the empoyee s com-
mssons totaed 12a: doars and the rembursed e penses totaed 27.
doars. The commssons dd not equa or e ceed the rembursed
e penses at any tme, and the tota amount receved from the company
durng the year was 27a doars. The servces of the empoyee for
the company were termnated durng the year n queston. The
company made no attempt to coect any porton of the dfference
between the commssons and the rembursed e penses.
The provsons of aw and reguatons reatng to the e cuson
from wages of traveng and other bona fde ordnary and necessary
e penses are found n Revenue Rung 55-196, page 92 of ths ue-
tn.
The attenton of the Interna Revenue Servce has been drected
to a rung pubshed as S. S. T. 68, C. . 1937-1, 355. In that rung
t s hed that advance payments made after December 31, 1936, to
tbouRb the concusons In ths Revenue Rung may be regarded aa reachng the
snme resut as the concusons of S. S. T. 316, C. . 1D38-2, 275 and 8. S. T. 379, C. .
1939-2. 2 I3, both of whch dstngushed S. S. T. 68, tupra, the fact that there were no
advances n the In tant case dstngushes t from both of these rungs.
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95 Regs. 11 , 11.303
saesmen of a company who have drawng accounts aganst unearned
saary, commssons, or other remuneraton for servces to be per-
formed n empoyment consttute wages at the tme of payment
for purposes of the ta es mposed under the Soca Securty ct.
Under the facts n that case, such advances are charged to ther draw-
ng accounts and any advances n e cess of the earned commssons
are carred as accounts due from the saesmen nvoved. In the event
a saesman s servces are termnated, the e cess s charged to proft
and oss.
ppyng the aw and reguatons cted and the prncpes set forth
n Revenue Rung 55-196, supra, t s hed that the payments repre-
sentng rembursements for e penses, made by the company upon the
bass of a separate and dstnct account and propery dentfed at the
tme of payment as beng rembursements for e penses, do not con-
sttute wages and are not sub|ect to the edera empoyment ta es
or to ncome ta wthhodng under secton 1G22 of the Code.
Reguatons 128, Secton 08.226: Wages.
Wages pad under the ar Labor Standards ct, See Rev. Ru.
55-203, page 11 .
Reguatons 128, Secton 08.220: Wages.
Cash vaue of awards earned by empoyee saesmen. See Rev. Ru.
55-232, page 115.
S CTION 1 30. OT R L WS PPLIC L
Reguatons 128, Secton 08.606: Pace and
tme for fng returns.
( so Secton 08.607.)
Date for fng return and makng depost of ta when due date
therefor fas on Saturday, Sunday, or ega hoday. See Rev. Ru.
55-83, page 523.
SU C PT R . MPLOYM NT Y C RRI RS
P RT I. T ON MPLOY RS
S CTION 1501. D DUCTION O T ROM
COMP NS TION
Reguatons 11 Secton 11.303: Coec- Rev. Ru. 55-202
ton of, and abty for, empoyees ta .
The abty of empoyers for the empoyee ta under the Ra-
road Retrement Ta ct, based on Increased ta abe compensaton
earned for the perod from uy 1, 195 , to ugust 30, 105 , ncu-
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Regs. 107, 03.205. 96
sve, Is mted to the e tent that the empoyer had under hs contro
at any tme subsequent to ugust 30, 195 , compensaton earned at
any tme by the empoyee.
dvce has been requested wth respect to the abty of the em-
poyer for the deducton of the empoyees share of the ta based |n
the ncrease n the amount of ta abe compensaton of those workers
who were empoyed subsequent to une 30, 195 , but who eft the
servce of the empoyer pror to ugust 31, 195 , the date on whch
the ct of ugust 31,195 , Pubc Law 7 6, 83d Cong., 68 Stat. 1038,
C. . 195 -2, 602, was approved. Pubc Law 7 6, whch amended
the Raroad Retrement Ta ct (subch. , ch. 9, Interna Revenue
( ode of 1939), ncreased the amount of compensaton per caendar
month whch s sub|ect to empoyer ta and empoyee ta . The
amendment appes to compensaton earned n uy 195 and subse-
quent months, regardess of when such compensaton s pad.
or each month pror to uy 195 , the ta es appy to the compen-
saton, not n e cess of 300, earned n any such month by an empoyee.
or uy 195 and each month thereafter, the ta es appy to com-
pensaton, not n e cess of 350, earned n any such month.
The ncrease n the ta es based on the ncrease n the amount of
ta abe compensaton mposed by Pubc Law 7 6 s retroactve to
uy 1, 195 . Secton 1501 of the Raroad Retrement Ta ct, as
amended by secton 202 of Pubc Law 7 6, requres the empoyer
to deduct the empoyee ta , based on the ncreased ta abe compensa-
ton, from compensaton as and when pad and makes the empoyer
abe for payment of the ta . It cannot have been ntended to mpose
a abty on an empoyer for the deducton or payment of the ta ,
based on the ncreased ta abe compensaton, wth respect to compen-
saton pad to hs empoyees pror to the approva of Pubc Law 7 6,
that s, durng the perod uy 1,195 , to ugust 30,195 , uness the
empoyer had n hs contro subsequent to ugust 30, 195 , amounts
of the empoyees compensaton from whch the ncreased deducton
coud be made.
ccordngy, t s hed that wth respect to the ncreased ta abe
compensaton earned by an empoyee for the perod from uy 1,
195 , to ugust 30, 195 , ncusve, the empoyer sha be abe for
the empoyee ta ony to the e tent that the empoyer had under hs
contro at any tme subsequent to ugust 30, 195 , amounts of com-
pensaton earned at any tme by the empoyee.
SU C PT R C T ON MPLOY RS O IG T OR MOR
S CTION 1607. D INITIONS
Reguatons 107, Secton 03.205: Who are Rev. Ru. 55-19
empoyers.
Crcumstances under whch a person may be regarded as an
empoyer wthn the meanng of secton 1607(a) of the edera
Unempoyment Ta ct, and accordngy abe for the ta mposed
under that ct
Inqures have been receved regardng the method to be used n
arrvng at a weeky count of empoyees for purposes of determnng
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97 Regs. 107, 03.205.
abty of an empoyer under secton 1607(a) of the edera Unem-
poyment Ta ct (subchapter C, chapter 9, Interna Revenue Code
of 1939) under certan condtons, partcuary where part-tme
empoyees are nvoved.
Secton 1607(a) of the ct provdes that 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 eght or more.
The foowng questons and answers ustrate the appcaton of
the foregong provsons of the ct.
ueston 1. re empoyees consdered to be n the empoy of an
empoyer durng the entre week where, because of the ong day
hours of empoyment, the empoyees are granted 1 or 2 days of absence
each week and substtutes repace the absent reguar empoyees
nswer. The reguar empoyees shoud be consdered to be n the
empoy of the empoyer durng the entre week. The bass of ths
concuson s that the empoyer-empoyee reatonshp whch e sts
between the partes does not termnate by reason of ther absence from
duty for 1 or 2 days durng the week. If the empoyer-empoyee
reatonshp e sts, t s mmatera that the empoyee perforns no
physca servce for the empoyer on certan days of the week.
S. S. T. 330, C. . 1938-2,331.
ueston 2(a). Is the number of postons n an enterprse a factor
to be consdered n determnng the number of workers wthn a week
or e ampe, suppose that an empoyer had reguary empoyed seven
ndvduas over a perod of weeks, then had to repace an empoyee
who resgned.
nswer. The number of postons n an empoyer s organzaton s
not a factor to be consdered n determnng the number of ndvduas
n hs empoy for purposes of the edera Unempoyment Ta ct.
ueston 2(b). ssumng that the empoyee had 3 weeks of accrued
vacaton tme, and the repacement empoyee began hs servces on the
mornng foowng the resgned empoyee s ast day of actua work,
woud both of those ndvduas be counted as beng n empoyment
durng the 3-week vacaton perod
nswer. n empoyee who resgns and has vacaton tme for whch
he receves hs reguar compensaton s consdered as beng n the
empoy of the empoyer durng the vacaton perod. The empoyee
who repaced hm s aso n empoyment and both empoyees shoud
be counted n determnng the empoyer s abty under the ct. s
prevousy ndcated, t s mmatera whether the empoyee actuay
performs physca servces for hs empoyer, provded an empoyment
reatonshp e sts between the partes.
ueston 2(c). If there were no vacaton perod nvoved, and the
former empoyee eft at the end of a workng day n the mdde of a
week, woud both workers be counted as beng n empoyment to
make a count of eght empoyees for the week, even though there were
never more than seven on any 1 day
nswer. Ths queston s answered n the negatve. Snce the em-
poyment reatonshp was termnated as of the end of the empoyee s
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egs. 107, 03.205. 98
ast workng day, there was no day n the caendar week on whch the
empoyer had more than seven ndvduas n hs empoy.
ueston 3(a). Is the method or frequency of payment consdered
to be a factor n determnng whether or not an empoyee s reguar
or permanent
nswer. The bass on whch compensaton s pad, n and of tsef,
s not a factor to be consdered n determnng whether a person had
the requste number of empoyees for the prescrbed perod to quafy
as an empoyer under the ct.
ueston 3(b). Woud a worker who s pad on a day bass aways
be construed to be n empoyment on ony a day-to-dav bass
nswer. The e stence of an empoyment reatonshp s the con-
trong factor. Whether or not an empoyment reatonshp, once
estabshed, contnues depends upon the ntenton of the partes wth
respect to ts contnuaton. or e ampe, f the agreement between
the partes contempates the performance of servces on 1 day each
week, the empoyment reaton contnues and the empoyee shoud be
counted n determnng abty under the ct even though he s pad
at the end of each day. On the other hand, where an empoyee works
1 day and the understandng between the partes s to the effect that
the empoyer w communcate wth the empoyee f and when hs
servces are needed and that empoyee w work f not otherwse
engaged, the empoyment reatonshp s termnated at the end of the
day he worked. In the atter nstance, the empoyee shoud be counted
n the empoy of ths empoyer ony on the days he actuay performs
servces for hm.
ueston . Woud a worker who s hred for a 5-day week and
pad every rday be construed to be n empoyment on Saturday
and Sunday even though the empoyer has no ega rght to requre
servces of the worker on those days
nswer. Ths wo-ker shoud be treated as beng n the empoy of
the empoyer on each of the 7 days of a week unt the empoyer-
empoyee reatonshp has been defntey termnated. If other em-
poyees are empoyed for the 6th and 7th days of the week, they
shoud be counted as addtona empoyees to those empoyed on a
5-day week bass.
ueston 5. In determnng whether an empoyee s reguar or
permanent, s any sgnfcance attached to the number of days per
week that he customary performs se vces or e ampe, woud a
man who has for rears worked ony 3 days n each week be construed
to be n empoyment on the remanng days of each week
nswer. It s not necessary to determne whether an empoyee s
reguar or permanent snce the term empoyer, as defned n
the ct, ncudes every person who empoys eght or more empoyees n
empoyment for the prescrbed perod. n empoyee who has worked
for an empoyer ony 3 days n each week for a number of years s
consdered to be n empoyment on the remanng days of each week.
ueston 6. Where an empoyer coud not get fu-tme empoyees
n hs area he had to permt housewves to work haf days 3 days per
week. ecause of ths stuaton, he pays part-tme saares to 12
peope each week, even though there are never more than 3 empoyees
n hs shop at any one tme, nor more than 6 on any one day. What
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99 Regs. 107, 03.228(a)(2).
number of empoyees shoud be recorded for each week n ths
stuaton
nswer. If the empoyees are engaged wth the understandng
that they w perform servces for the empoyer each week, the em-
poyer woud have 12 ndvduas n hs empoy on each day of the
week unt the empoyer-empoyee reatonshp s termnated.
Reguatons 107, Secton 03.205: Who are
empoyers.
Change n membershp of partnershp where the busness thereof
was contnued. See ev. Ru. 55-93, page 0 .
Reguatons 107, Secton 03.227: Wages.
Rembursement or advances for traveng and other e penses. See
Rev. Ru. 55-196, page 92.
Reguatons 107, Secton 03.227: Wages.
Rembursement for traveng and other e penses. See Rev. Ru.
55-197, page 93.
Reguatons 107, Secton 03.228(a) (2) : Wages Rev. Ru. 55-7
pad by predecessor attrbuted to successor.
partnershp composed of , , and C, an empoyer of eght or
more ndvduas, was n busness durng the frst 2 months of a caen-
dar year. C ded on the frst of March and D became a member of the
partnershp on the second of March. , , and D acqured a the
assets prevousy beongng to , , and C, and mmedatey after the
acquston empoyed a the ndvduas who were prevousy em-
poyed by , and C, and contnued the busness n ts entrety unt
the frst of uy. Snce the acquston was made under crcumstances
whch come wthn the ambt of Revenue Rung 5 -31, C. . 195 -1,
212,11, there was one empoyng entty durng the frst 6 months of the
caendar year whch quafed as an empoyer wthn the meanng
of secton 1607(a) of the edera Unempoyment Ta ct (subchap-
ter C, chapter 9, Interna Revenue Code of 1939). Corporaton N
succeeded Partnershp D on uy 1, acqurng a the assets of the
partnershp and empoyng a of ts empoyees for the baance of
the year. Secton 03.228(a)(2) of Reguatons 107, as amended,
provdes n part that wages pad by a predecessor sha not be con-
sdered as havng been pad by a successor uness both the predeces-
sor and the successor are empoyers as defned n secton 1607(a) of
the ct for the caendar year n whch the acquston occurs. Gen-
eray, an empoyer s one who has eght or more empoyees on at
east 1 day of each of 20 caendar weeks durng the caendar year.
See T. D. 5905, C. . 1952-1,173,185. ed, for purposes of the app-
caton of the 3,000 mtaton on wages provded by secton
1607(b) (1) of the ct, as amended, remuneraton pad by , , and C
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Regs. 120, 06.207.) 500
and , , and D may be consdered as havng been pad by Corpo-
raton N.
The empoyng entty, whch was orgnay composed of , and
C and ater of , and D s requred to fe one return, orm 9 0,
nnua edera Ta Return of mpoyers, reportng theren the re-
muneraton and ta abe wages pad Tby both groups durng the caen-
dar year. Corporaton N s an empoyer and shoud ncude n ne
2 of Schedue of ts return, orm 9 0, the remuneraton whch t
pad durng the caendar year to the former empoyees of , , C, and
D after appyng the 3,000 mtaton on wages provded by secton
1607(b)(1) of the edera Unempoyment Ta ct. or e ampe,
assume that there were 10 empoyees of , , C, and D, a of whom
were aso empoyed by Corporaton N as the successor empoyer. The
10 empoyees each receved remuneraton of 2,500 from , , C and D,
and 2,500 from Corporaton N, or a tota of 5,000 durng the year.
ssumng there were no other empoyees of Corporaton N durng the
year, the amount of 25,000 (10 2,500) woud be entered on ne 1,
Schedue , of the orm 9 0 fed by the corporaton. The number
10 woud be entered n the frst coumn on ne 2 and the amount of
20,000 ( 2,000 the amount n e cess of 3,000 pad to each of the 10
empoyees by the predecessor and successor empoyers) n the second
coumn thereon.
In Revenue Rung 5 -313, C. . 195 -2, 371, t s hed that the M
Corporaton may not take nto consderaton the remuneraton pad
by ts predecessor for purposes of the 3,000 mtaton on wages pro-
vded by secton 1607(b) (1) of the edera Unempoyment Ta ct.
In that case the predecessor was not an empoyer wthn the meanng
of secton 1007(a) of the ct. In the nstant case the predecessor s
consdered to be one entty whch quafes as an empoyer, as con-
tempated by Revenue Rung 5 -31, supra.
SU C PT R D.-COLL CTION O INCOM T T SOURC ON
W G S
S CTION 1621. D INITIONS
Reguatons 120, Secton 06.207: Wages. Rev. Ru. 55-18
( so Sectons 252, 1 26 Reguatons 118,
Secton 39.252-1 Reguatons 128, Sec-
ton 08.203.)
Wages pad to a ctzen of Guam, who s a ctzen of the Unted
States ony by vrtue of coectve naturazaton under the Organc
ct of Guam, by the Unted States or any agency thereof for
servces performed n Guam are not sub|ect to wthhodng of
Unted States ncome ta or the ta es mposed under the edera
Insurance Contrbutons ct.
n nqury has been receved whether wages pad by the Unted
States or an agency thereof to a ctzen of Guam, who s a ctzen of
the Unted States ony by vrtue of coectve naturazaton under
the Organc ct of Guam, nfra, for servces performed n Guam
are sub|ect to the Coecton of Income Ta at Source on Wages or
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501 Regs. 120, 06.207.
the ta es mposed under the edera Insurance Contrbutons ct
(subchapters D and , respectvey, chapter 9, Interna Revenue Code
of 1939).
Secton 31 of the Organc ct of Guam, 6 Stat. 38 , C. . 1950-2,
21 , whch was paced n operaton as of anuary 1,1951, by ecutve
Order 10211, C. . 1951-1,155, provdes as foows:
The ncome-ta aws n force In the Unted States of merca and those whch
may hereafter be enacted sha be hed to be kewse n force n Guam.
Secton 30 of the Organc ct of Guam provdes as foows:
customs dutes and edera ncome ta es derved from Guam, the pro-
ceeds of a ta es coected under the nterna-revenue aws of the Unted States
on artces produced n Guam and transported to the Unted States, ts Ter-
rtores, or possessons, or consumed n Guam, and the proceeds of any other
taes whch may be eved by the Congress on the nhabtants of Guam, and
a quarantne, passport, mmgraton, and naturazaton fees coected n Guam
sha be covered nto the treasury of Guam and hed n account for the govern-
ment of Guam, and sha be e pended for the beneft and government of Guam
n accordance wth the annua budgets.
In deveopng procedures for determnng economcay the amounts
to whch the Government of Guam s entted under the provson of
aw cted, wthout requrng ta payers to report separatey ther n-
comes derved from Guam and from other sources, t has been found
necessary to requre a departments and agences of the Unted States
Government havng empoyees statoned n Guam to report the Unted
States ncome ta wthhed from the saares and wages of such em-
poyees to the Unted States Commssoner of Interna Revenue.
mounts of ta so wthhed and reported are n due course credted
aganst the empoyees abty to the Government of Guam.
The Commssoner of Revenue for Guam w admnster secton 30,
supra, as t reates to the ncome ta abtes of ndvduas, other
than cvan and mtary personne of the Unted States Govern-
ment, who derve ther ncomes from Guam.
In Revenue Rung 56, C. . 1953-1, 303, t s hed that a ctzen of
Guam, who s a ctzen of the Unted States ony by vrtue of coec-
tve naturazaton under the Organc ct of Guam, s a ctzen of a
possesson of the Unted States for the purpose of secton 252 of the
Interna Revenue Code of 1939 and s sub|ect to edera ncome ta
ony upon ncome derved from sources wthn the Unted States.
Such ctzen s aso sub|ect to ncome ta mposed by the Government
of Guam by reason of the dua system of ta aton created by the
Organc ct of Guam. See I. T. 0 6, C. . 1951-1, 57.
Secton 251 of the Interna Revenue Code of 1939 reates to ncome
from sources wthn possessons of the Unted States. Subsecton (|)
of such secton, added by the Revenue ct of 1950, provdes as foows:
mpoyees of Usted States. or the purposes of ths secton, amounts
pad for servces performed by a ctzen of the Unted States as an empoyee of
tht Unted States or any agency thereof sha be deemed to be derved from
sources wthn the Unted States. Itacs supped.
Secton 252 of the Code provdes n part:
(a) ny ndvdua who s a ctzen of any possesson of the Unted States
(but not otherwse a ctzen of the Unted States) and who s not a resdent of
the Unted States, sha be sub|ect to ta aton under ths chapter ony as to
ncome derved from sources wthn the Unted States, and n such case the ta
ha be computed and pad In the same manner and sub|ect to the same cond-
tons as n the case of other persons who are ta abe ony as to ncome derved
from such sources.
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Regs. 120, 06.207.) 502
Under the provsons of secton 251 (|), supra, amounts pad for
servces performed n Guam by a ctzen of the Unted States, as an
empoyee of the Unted States or any agency thereof, are deemed to
be derved from sources wthn the Unted States and are sub|ect to
the wthhodng of Unted States ncome ta . The e cepton, from
the term wages, of remuneraton for servces performed by a ctzen
of the Unted States wthn a possesson of the Unted States under
the condtons provded by secton 1621(a) (8) ( ) of the Code s not
appcabe to remuneraton pad to empoyees of the Unted States or
an agency thereof. owever, ctzens of Guam, who are ctzens of
the Unted States ony by vrtue of coectve naturazaton under
the Organc ct of Guam, do not come wthn the purvew of secton
251 (|) of the Code, but are sub|ect to Unted States ncome ta under
secton 252 of the Code ony on ncome derved from sources wthn
the Unted States. Such persons are treated for the purpose of the
ta as f they were nonresdent aen ndvduas. Snce the term
Unted States does not ncude the Isand of Guam, saares or
wages pad to empoyees of the Unted States or any agency thereof
who are ctzens of Guam, not otherwse ctzens of the Unted States,
for servces performed n Guam (e cept n the remote crcumstances
that such an ndvdua s a bona fde resdent of the Unted States),
are not receved from sources wthn the Unted States and are not
sub|ect to the wthhodng of Unted States ncome ta . Such saares
or wages, however, are sub|ect to the wthhodng of ncome ta for
the Government of Guam by reason of secton 31 of the Organc ct
of Guam whch renders appcabe to Guam the ncome ta aws n
force n the Unted States.
nonresdent aen ndvdua or, as n ths nstance, a ctzen of
Guam, not otherwse a ctzen of the Unted States, who derves
no ncome from sources wthn the Unted States, has no ncome ta
abty to the Unted States and thus has a egay enforceabe cam
aganst the Unted States for refund of any ncome ta wthhed upon
hs ncome and erroneousy pad over to the Unted States, provded,
of course, the ta has not been ad|usted by the agency or credted
aganst the ctzen s abty to Guam.
The ta es mposed by the edera Insurance Contrbutons ct are
appcabe to a wages for empoyment, as those terms are defned
n the ct. Secton 1 26(b) of the ct ncudes n the defnton of
empoyment any servce, of whatever nature (wth certan e cep-
tons not here matera), performed after 1950 outsde the Unted
States by a ctzen of the Unted States as an empoyee for an mer-
can empoyer. Ctzens of Guam not otherwse ctzens of the Unted
States are not consdered to be ctzens of the Unted States for pur-
poses of secton 1 20(b), and the ta es mposed by such ct are not
appcabe to the remuneraton pad to them for servces performed
n Guam.
Reguatons 120, Secton 06.207: Wages.
Reguatons 120 amended to provde rues for wthhodng durng
195 and 1955 on payments whch are sub|ect to secton 105(d) of the
Interna Revenue Code of 195 reatng to wage contnuaton pans.
See T.D. 6128, page 123.
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503 Regs. 120, 06.501.
Reguatons 120, Secton 06.207: Wages.
mounts pad to member of the unformed servces under the
provsons of the Career Compensaton ct of 19 9, 63 Stat. 802.
See Rev. Ru. 55-88, page 2 1.
Reguatons 120, Secton 06.207: Wages.
Rembursement or advances for traveng and other e penses. See
Rev. Ru. 55-196, page 92.
Reguatons 120, Secton 06.207: Wages.
Rembursement for traveng and other e penses. See Rev. Ru.
55-197, page 93.
Reguatons 120, Secton 06.207: Wages.
Cash vaue of awards earned by empoyee saesmen. See Rev. Ru.
55-232, page 115.
S CTION 1622. INCOM T COLL CT D T SOURC
Reguatons 120, Secton 06.300: Statutory
provsons determnaton of ta .
Wages pad under the ar Labor Standards ct. See Rev. Ru.
55-203, page 11 .
S CTION 1627. OT R L WS PPLIC L
Reguatons 120, Secton 06.605: Pace and
tme for fng returns.
( so Secton 06.606.)
Date for fng return and makng depost of ta when due date
therefor fas on Saturday, Sunday, or ega hoday. See Rev. Ru.
55-83, page 523.
SU C PT R . G N R L PRO ISIONS
S CTION 1633. R C IPTS OR MPLOY S
Reguatons 120, Secton 06.501: Recepts for Rev. Ru. 55-1 5
empoyees
n empoyer who Is requred under the provsons of secton 1633
of the Interna Revenue Code of 1039 to furnsh a orm W-2. Wth-
hodng Ta Statement, to an empoyee sha, In addton to preparng
M050 66 33
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Regs. 120, 0G.501. 50
the statement, make a reasonabe effort to dever sueb statement to
the empoyee at the tme requred by secton 1633 of the Code or the
reguatons prescrbed thereunder. The mang of the statement to
an absent empoyee s ast known address w be consdered a suff-
cent compance wth the aw and reguatons.
n empoyer requred to furnsh a orm W-2, Wthhodng Ta
Statement, to an empoyee, who wfuy fas to furnsh such state-
ment at the tme prescrbed therefor by the aw and reguatons,
s sub|ect to the penaty provded by secton 163 of the Code.
dvce has been requested whether an empoyer who prepares a
orm W-2, Wthhodng Ta Statement, for an empoyee wthn
the tme requred by secton 1033 of the Interna Revenue Code of
1939 and hods the statement avaabe to an absent empoyee, wth-
out makng an effort to dever t to the empoyee, has fufed the
requrements of secton 1G33 of the Code.
Secton 1633 (a) of the Code provdes, n part, that:
very person requred to deduct and wthhod from an empoyee a ta under
secton 1 00 or 1C22, sha furnsh to each such empoyee n respect of
the remuneraton pad by such person to such empoyee durng the caendar year,
on or before anuary 31 of the succeedng year, or, f hs empoyment s term-
nated before the cose of such caendar year, on the day on whch the ast pay-
ment of remuneraton s made, a wrtten statement showng the foowng: (1)
the name of such person, (2) the name of the empoyee , (3) the tota
amount of wages as defned n secton 1621(a), ( ) the tota amount deducted
and wthhed as ta under secton 1622, (5) the tota amount of wages as defned
n secton 1 26(a), and (6) the tota amount deducted and wthhed as ta under
secton 1 00. Itacs supped.
Paragraph (c), secton 06.501, Reguatons 120, provdes, n gen-
era, that for good cause shown upon appcaton by the empoyer
the Dstrct Drector of Interna Revenue may grant an e tenson
of tme wthn whch to furnsh the orm W-2, Wthhodng Ta
Statement to empoyees. Upon termnaton of empoyment durng
a caendar year, an e tenson of tme, not e ceedng 30 davs, s
granted an empoyer to furnsh the statement. In the case of nter-
mttent or nterrupted empoyment where there s reasonabe e -
pectaton on the part of both empoyer and empoyee of further
empoyment, there s no requrement that a wrtten statement be
mmedatey furnshed the empoyee but when such e pectaton
ceases to e st, the statement must be furnshed wthn 30 days from
that tme.
Paragraph (d), secton 00.501, Reguatons 120, provdes, n part,
that the ta return copy and the empoyee s copy of each wthhodng
statement on orm W-2 for the caendar year, whch the empoyer
s requred to furnsh to the empoyee and whch after reasonabh
effort he s unabe to dever to the empoyee, sha be transmtted
to the Dstrct Drector wth the return on orm 9 1 fed by the em-
poyer for the frst caendar quarter of the ne t succeedng caendar
year or wth the empoyer s fna return f fed at an earer date.
Secton 103 of the Code provdes n part:
(b) any person requred under the provsons of secton 1633 to
furnsh a statement who wfuy furnshes a fase or frauduent statement,
or who wfuy fas to furnsh a statement n the manner, at the tme, an
showng the nformaton requred under secton 1633, or reguatons prescrbed
thereunder sha for each faure be sub|ect to a cv penaty of 50.
The questons whch have been presented and the answers
thereto are as foows:
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505 Regs. 120, 06.501.
ueston 1. n empoyee s absent from work on account of
a strke for severa weeks before the cose of the caendar year.
No agreement has been made as to the termnaton of the em-
poyee s servces and t s e pected that he w return to work
when the strke s setted. Is the empoyer requred to furnsh
the empoyee a orm W-2, Wthhodng Ta Statement, before
anuary 31, of the succeedng year
nswer: In the case of nterrupted empoyment by reason
of a strke or otherwse, where there s a reasonabe e pectaton
on the part of both the empoyer and the empoyee of further
empoyment n the caendar year, there s no requrement that
a wthhodng statement on orm W-2 be mmedatey furnshed
the empoyee. When such e pectaton ceases to e st, the state-
ment must be furnshed wthn 30 days from that tme. ow-
ever, f the ndvdua s servces have not been termnated before
the cose of the caendar year, the wthhodng statement on orm
W-2 must be furnshed to hm on or before anuary 31 of the
succeedng year, uness an e tenson of tme s granted by the
Dstrct Drector, regardess of whether he s present at or absent
from work.
ueston 2. n empoyee, whose servces have not been term-
nated, s absent from work for an e tended perod from the cose
of a caendar year to after anuary 31 of the succeedng year.
Does the empoyer satsfy the requrements of secton 1633 of the
Code by preparng a orm W-2, Wthhodng Ta Statement, on
or before anuary 31 of the year succeedng the year durng whch
remuneraton was pad for empoyment and hodng such state-
ment avaabe to te empoyee at the pace of empoyment
nswer: The empoyer, n addton to preparng the statement
on or before anuary 31 of the succeedng year, shoud make a rea-
sonabe effort to dever such statement to the empoyee on or be-
fore that date or wthn any e tenson of tme granted by the
Dstrct Drector. The mang of the orm W-2, Wthhodng
Ta Statement, to the empoyees ast known address w be con-
sdered a suffcent compance wth the aw and reguatons.
ueston 3. n empoyee wthout obtanng permsson from
hs empoyer s absent from work for severa weeks durng a caen-
dar vear. The empoyer does not e pect to renstate the empoyee
n the event he returns to work. Does the empoyer satsfv the
requrements of secton 1633 of the Code by preparng a orm
W-2, Wthhodng Ta Statement, and hodng the statement at
hs pace of busness unt t s caed for by the empoyee
nswer: The empoyer shoud ma the orm W-2 Wthhod-
ng Ta Statement, to the empoyee at the tme of mang hs fna
check for past servces rendered. If no remuneraton s due the
empoyee, the statement shoud be maed to the empoyee wthn
30 days from the date when the e pectaton of further empoyment
ceases to e st or wthn an e tenson of tme granted by the Ds-
trct Drector. The mere preparaton of the orm W-2 by the
empoyer and hodng t at hs pace of busness unt the empoyee
cas for t are not suffcent compance wth the aw and
reguatons.
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Regs. 3, 101.15. 506
n empoyer requred to furnsh a orm W-2, Wthhodng Ta
Statement, to an empoyee, who wfuy fas to furnsh such state-
ment to the empoyee at the tme prescrbed therefor by the aw and
reguatons, s sub|ect to the penaty provded by secton 163 of the
Code.
C PT R 10 DMISSIONS ND DU S
SU C PT R .- DMISSIONS
S CTION 1700. T
Reguatons 3, Secton 101.2: Meanng of Rev. Ru. 55-50
admsson.
company ses bookets contanng coupons whch are honored for
admssons to certan paces of entertanment. Such bookets aso
contan coupons whch may be e changed for the use of recreatona
factes, such as gof courses and bowng aeys. The monetary
vaue of the coupons contaned n a booket s greaty n e cess of the
nomna amount for whch the booket s sod. Such bookets are
pubshed by the company as a genera advertsng and promotona
servce for the persons partcpatng n the pan, and the company
retans the tota amount receved from ther sae as remuneraton for
ts advertsng and promotona servce. ed, snce the person grant-
ng the admsson does not receve any part of the amount pad for
the bookets contanng the coupons, no part of such amount represents
an amount pad for admsson wthn the meanng of secton 1700 of
the Interna Revenue Code of 1939, and, accordngy, s not sub|ect to
the ta mposed by that secton.
S CTION 1701. MPTIONS ROM T
Reguatons 3, Secton 101.15: emptons Rev. Ru. 55-70
from ta .
The determnaton of whether membershp fees pad to a charta-
be organzaton consttute contrbutons toward the support of the
organzaton wthn the mennng of secton 1701(a) (1) ( ) () of
the Interna Revenue Code of 1939 depends upon the character,
ob|ectves, and actvtes of the organzaton and the rghts and
prveges afforded the members. Goods donated to a chartabe
organzaton consttute contrbutons toward the support of the
organzaton wthn the meanng of secton 1701(a) (1) ( ) () of
the Code.
dvce has been requested whether membershp fees pad to a
chartabe organzaton, and goods donated to the organzaton, con-
sttute contrbutons toward the support of the organzaton wthn
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507 Regs. 3, 101.15.
the meanng of secton 1701(a) (1) ( ) () of the Interna Revenue
Code of 1939.
Secton 1701(a) (1) ( ) () of the Code provdes for e empton
from ta on admssons wth respect to any admssons a the pro-
ceeds of whch nure to a corporaton or any communty chest, fund,
or foundaton organzed and operated e cusvey for chartabe pur-
poses, e empt under secton 101(6) of the Code, f such corporaton
or organzaton s prmary supported by contrbutons from the
genera pubc.
The use of the term organzaton n the statute mpes a group
or body wth a more or ess defnte structure, operatng under some
form of rues and reguatons, and havng members, Membershp n
such an organzaton normay carres wth t certan rghts and prv-
eges, such as the rght to vote, hdd offce, etc. determnaton as
to now an amount may be characterzed when pad to an organzaton
for membershp theren, that s, whether as dues or as a contrbuton,
depends upon the facts nvoved. The basc factors to be consdered
are the character and ob|ectves of the organzaton, the actvtes
conducted by t, and the nature of the rghts and prveges conferred
on the members.
Where membershp n an organzaton of the type contempated by
secton 1701(a) (1) ( ) () of the Code s merey nomna and carres
no rghts or prveges, the fee pad for such membershp s hed to
be a contrbuton toward the support of the organzaton. Where
membershp n such an organzaton carres wth t some rghts and
prveges, a determnaton whether the fees pad by members are for
servces, prveges, or factes to be en|oyed by them, or whether such
fees are m reaty contrbutons, must be based, as ndcated above,
upon a consderaton of a the facts.
If the rghts and prveges of membershp are ncdenta to makng
the organzaton functon accordng to ts chartabe purposes, and
the beneft to be derved by a member s the persona satsfacton of
beng of servce to others and furtherng the chartabe cause n whch
the members share an nterest n common, then the membershp fee s
consdered a contrbuton toward the support of the organzaton.
s an ustraton of the foregong, a chdren s convaescent home
provdes free nursng care and rest-home factes for chdren re-
cuperatng from serous nesses. Membershps from the genera
pubc are socted and, based upon the amounts pad, are caed
contrbutng, assocate, donor, or patron membershps. members
have the rght to attend the annua meetng and vote for offcers of
the organzaton. The offcers seect a board of drectors n whose
hands are odged the actua contro and responsbty for runnng
the home. Members are requested, but are not requred, to put n a
number of hours of servce at the home servng as nurses ades, feedng
chdren, readng to them, etc. members are e pected to hep n
the fund-rasng actvtes of the organzaton and n securng mem-
bers. Twce a year the organzaton hods a soca functon to whch
the members and ther guests are nvted. These soca functons
have a threefod purpose frst, they serve as an e presson of grat-
tude to the members from the organzaton secondy, they serve to
attract new members and thrdy, they tend to wed the members n
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Regs. 3, 101.15. 508
a more tghty-knt group for better servce and heghtened morae.
or a perod of 1 month each year the organzaton conducts a rum-
mage sae of cothng, books, odds and ends, etc. The artces sod are
donated by members, frends, or others nterested n the chartabe
purposes and actvtes of the organzaton. The members run th
store durng the tme the sae s beng conducted, carng for the stock
and handng a transactons. the proceeds after e penses are
turned over to the organzaton.
In another stuaton an organzaton may have the same genera
purposes and actvtes as the one |ust descrbed, the ony dfference
beng that the rghts to vote and hod offce are restrcted to the donor
and patron members (those payng the hghest amounts of membershp
fees).
Upon consderaton of the facts as rected above, t s hed that the
amounts pad as membershp fees to ether of the foregong descrbed
organzatons consttute contrbutons to the support of the organza-
tons wthn the meanng of secton 1701(a) (1) ( ) () of the Code.
It s further hed that goods donated to the organzatons are contr-
butons toward ther support for purposes of that secton. The
amount of the contrbutons w be measured by the far market vaues
of the donated goods. In the case of the rummage sae, the seng
prce of an artce may, for such purpose, be accepted as representng
ts far market vaue.
On the other hand, membershp fees are consdered to be pad as
dues, rather than as membershp fees, where the organzaton s one
whch hods tsef out as furnshng certan factes and servces to ts
members for ther own beneft, and membershp n the organzaton s
acqured n order to secure the rght to en|oy the factes and servces
offered. In such event, the amount pad s hed not to be a contrbuton
for purposes of secton 1701(a) (1) ( ) () of the Code.
ccordngy, those membershp fees whch are consdered to be con-
trbutons, as we as the far market vaue of donated goods, may be
consdered as contrbutons n determnng whether a chartabe or-
ganzaton, whch otherwse quafes for e empton from the ta on
admssons, s prmary supported by contrbutons from the genera
pubc wthn the meanng of secton 1701 (a) (1) ( ) () of the Code.
Reguatons 3, Secton 101.15: emptons Rev. u. 55-161
from ta .
n entre opera, as we as aras from operas, when presented by a
cvc or communty membershp assocaton comes wthn the meanng
of the term concerts as used n secton 1701(c) of the Interna Reve-
nue Code of 1939. ccordngy, the e empton from ta on adms-
sons to concerts provded by that secton appes to amounts pad for
admsson to such presentatons, provded no part of the net earnngs
therefrom nures to the beneft of any member of the assocaton.
owever, the e empton provded by that secton does not e tend to
pays or shows presented by such an assocaton. See aso Rev. Ru.
2 5, C. 1 . 1953-2, 337.
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509 Regs. 3, 101.22.
SU C PT R . DU S
S CTION 1710. T
Reguatons 3, Secton 101.22: Meanng of ev. u. 55-318
dues or membershp fees.
Charges made by a soca, athetc, or sportng cub or organza-
ton to Its members for use of any soca, athetc, or sportng
prvege or facty for a perod of more than s days, come wthn
the meanng of the term dues as defned by secton 1712 of the
Interna Revenue Code of 1039, and such charges are sub|ect to the
ta on dues mposed by secton 1710(a) (1) of such Code.
dvce has been requested wth respect to the appcaton of the ta
on dues mposed by secton 1710 of the Interna Revenue Code of 1939
to charges made by a soca, athetc, or sportng cub or organzaton
to ts members for the use of any soca, athetc, or sportng prvege
or facty for a perod of more than 6 days.
In the nstant case a beach cub operated for soca purposes owns
a strp of ocean beach and provdes and mantans certan bathng
factes for the e cusve use of ts members and guests. mong the
factes provded are ockers and bathhouses whch a member may
rent on a seasona or on a day bass as an accommodaton for hs
guests. owever, the renta of such factes s optona. Members
may come to the cub n bathng suts and swm n the ocean or use
the swmmng poo wthout rentng ockers or bathhouses.
Secton 1710(a) (1) of the Code mposes a ta equvaent to 20 per-
cent of any amount pad as dues or membershp fees to any soca,
athetc, or sportng cub or organzaton, f the dues or fees of an
actve resdent annua member are n e cess of 10 per year. Secton
1712(a) defnes the term dues to ncude any charge for soca
prveges or factes, or for gof, tenns, poo, swmmng, or other
athetc or sportng prveges or factes for any perod of more than
6 days.
Revenue Rung 177, C. . 1953-2, 3 1, whch reates to the appca-
ton of the ta on dues to payments by members of a beach cub for
the use of cabns or cabanas, hods that snce members of the cub ob-
tan bathng and swmmng prveges ony by payment of charges
for cabns or cabanas, such payments consttute charges for bathng
and swmmng prveges wthn the meanng of secton 1712(a) of
the Code and are sub|ect to the ta on dues. That rung s predcated
upon facts n a partcuar case where members of the cub, n order to
obtan bathng and swmmng prveges, are requred to pay charges
for the use of cabns or cabanas for the summer season. owever,
the rung does not mt the appcaton of the ta on dues to pay-
ments for the use of such prveges or factes n stuatons where
members are requred to ava themseves of the prveges or factes
afforded. That a member may have the opton to decde whether he
w ava hmsef of any or a of the actvtes, factes or prveges
s not the controng factor wth respect to the appcaton of the ta .
The test s whether the charge confers the rght to partcpate n or
use the actvtes, factes, or prveges nvoved for a perod of more
than 6 days.
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Regs. 3, 101.29. 510
It s hed that any charge made by a soca, athetc, or sportng cub
or organzaton to any of ts members for the use of any soca, athetc,
or sportng prvege or facty, for a perod of more than s days,
rrespectve of whether the members have the opton to decde whether
they w ava themseves of such prvege or facty, comes wthn
the meanng of the term dues as defned by secton 1712(a) of the
Code. ccordngy, snce the charges for ockers and bathhouses are
charges for the use of athetc or sportng prveges or factes, such
charges are sub|ect to the ta on dues mposed by secton 1710(a) (1)
of the Code.
Inasmuch as those cubs, whose operatons come wthn the ambt
of Revenue Rung 177, supra, have reed upon t as a bass for not
sub|ectng the optona payments here nvoved to the ta mposed by
secton 1710(a) (1) of the 1939 Code, t s further hed that, under the
authorty of secton 3791(b) of the Interna Revenue Code of 1939
and secton 7805(b) of the Interna Revenue Code of 195 , the pos-
ton stated n ths Revenue Rung w not be apped retroactvey,
e cept that any ta whch has been pad w not be refunded.
Reguatons 3, Secton 101.22: Meanng of
dues or membershp fees.
Lfe membershps granted by a cub to wdows of members. See
Rev. Ru. 55-199, page 511.
Reguatons 3, Secton 101.29: Lfe mem- Rev. Ru. 55-193
bershp.
ppcaton of te ta on fe membershps mposed by secton
1710(a) (3) of the Interna evenue Code of 1039 to certan casses
of honorary membershps.
dvce has been requested concernng the abty of a cub for the
coecton of ta on fe membershps mposed by secton 1710(a) (3) of
the Interna Revenue Code of 1939 wth respect to certan casses of
honorary membershps.
In the nstant case a cub whch quafes as a soca, athetc, or
sportng cub wthn the meanng of secton 1710(a) of the Code has,
n addton to actve resdent annua membershps, the foowng
casses of non-dues-payng honorary membershps whch entte per-
sons granted such membershps the use of the factes of the cub:
(a) Potca and |udca membershps. Pubc offcers, such as |udges of
varous courts and oca, county and State offcas, are granted honorary mem-
bershps for a perod coverng ther tenure n pubc offce. Such an honorary
membershp automatcay termnates upon the e praton of the term of pubc
offce of each hoder.
(b) Mnstera membershps. arous oca mnsters are from tme to tme
granted honorary membershps, whch they retan as ong as they contnue n
ther mnstera postons n oca churches.
(c) Speca membershps. Outstandng athetc or pubc fgures are from
tme to tme granted honorary membershps. These membershps are for the
most part automatcay renewed annuay. The board of governors of the cub
seects those few whose membershps are to be termnated.
(d) onorary membershp after 0 years of cub membershp. Ths cass
Incudes a members who have been actve resdent annua members of the cub
for a perod of 0 years or more.
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511 Regs. 3, 101.29.
(e) onorary membershp granted the wdow of a member. Upon the death
of a member an honorary membershp s granted to hs wdow, whch enttes
her and her chdren to the factes of the cub for the duraton of her wdow-
hood.
honorary membershps descrbed above are granted by the cub
for perods of ndefnte duraton, wth the e cepton of those granted
to pubc offcers who are eected or apponted to offce for a specfc
perod of tme.
Secton 1710(a) (3) of the Code provdes n part that n the case of
fe membershps there sha be eved a ta equvaent to the ta upon
the amount pad by actve resdent annua members for dues or
membershp fees other than assessments. Secton 101.29 of Regua-
tons 3 provdes n part that f a person s a fe member, whether
he s a resdent or nonresdent, he must pay a ta equvaent to the ta
on dues or membershp fees pad by actve resdent annua members
of the cub.
In order to come wthn the meanng of fe membershp t s not
necessary that honorary membershps be termed such by the cub, nor
must there be a specfc provson that the membershps are to contnue
for fe. or the purpose of the ta an honorary member of a cub
who s entted to the use of the factes of the cub for a perod of
ndefnte duraton s consdered to be a fe member. The rght to
vote and hod offce s not a prerequste for ta abe fe membershp.
On the other hand, honorary membershps whch are granted for a
defnte perod of tme and are n fact termnated at the e praton of
that perod, and not renewed, are not consdered fe membershps and
are not sub|ect to ta provded no dues or membershp fees are pad.
The fact that the cub may retan the rght to termnate honorary
membershps at any tme woud not, of tsef, consttute them member-
shps for a defnte perod of tme.
ccordngy, t s hed that a honorary members of the cub are
fe members for purposes of the ta , wth the e cepton of those
pubc offcers who are eected for perods of defnte duraton, and
whose honorary membershp s automatcay termnated at the end of
ther tenure of pubc offce.
Ths rung s equay appcabe under the provsons of secton
2 1(a) (3) of the Interna evenue Code of 195 .
arer rungs of the Interna Revenue Servce reatng to wdow
and mnstera membershps have not been consstent wth the pos-
ton set forth heren therefore, under the authorty contaned n sec-
ton 7805 (b) of the 195 Code, ths Revenue Rung w not be apped
to such membershps pror to May 1, 1955, but w be effectve as of
that date.
Reguatons 3, Secton 101.29: Lfe mem- Rev. Ru. 55-199
bershp.
( so Secton 101.22.)
ass for computng the ta mposed by secton 1710(a) (3) of the
Interna Revenue Code of 1939 on fe membershps granted by a
cub to wdows of members when such membershps do not carry
wth them the fu cub prveges afforded mae members.
t dvce has been requested as to the bass for computng the ta on
fe membershps granted to wdows of members by a cub whch
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Regs. 71, 113.5 . 512
quafes as a soca, athetc, or sportng cub wthn the meanng of
secton 1710 of the Interna Revenue Code of 1939. Such fe mem-
bers are entted to the rghts of dues payng femae members who do
not en|oy the fu cub prveges afforded mae members. The dues
or membershp fees pad for femae membershp s ess than those pad
for mae membershp.
Secton 1710(a) (3) of the Code mposes on fe membershps a ta
equvaent to the ta upon the amount pad by actve resdent annua
members for dues and membershp fees other than assessments.
Secton 101.22 of Reguatons 3 defnes an actve resdent annua
member as one who s not a fe member but who en|oys fu cub
|rveges as dstngushed from the prveges en|oyed by a person
odng a nonresdent membershp, an assocate membershp or other
parta or restrcted membershp.
It s hed that snce the mae members of the cub are the ones who
en|oy the fu cub prveges such members are consdered the actve
resdent annua members of the cub wthn the meanng of the aw
and reguatons. ccordngy, the fe membershps granted by the
cub to wdows of members are ta abe to the e tent of the ta on the
dues or fees pad by the mae members of the cub even though such
fe membershps carry wth them ony the mted prveges granted
femae members of the cub.
C PT R 11. DOCUM NTS, OT R INSTRUM NTS, ND
PL YING C RDS INCLUDING ST MP T S
SU C PT R . R T ND P YM NT O T
S CTION 1801. CORPOR T S CURITI S
Reguatons 71, Secton 113.5 : Renewas. Rev. Ru. 55-97
corporaton e ecuted ts bond secured by a mortgage on rea
property, and subsequenty conveyed the mortgaged property to ts
straw man who on the same day entered nto an agreement wth the
mortgagee to e tend the maturty date of the bond. Immedatey
thereafter the straw man reconveyed the mortgaged property to the
corporate mortgagor. ed, the undertakng renewed s a corporate
obgaton sub|ect to the documentary stamp ta mposed by secton
1801 of the Interna Revenue Code of 1939, nasmuch as the corpora-
ton contnues to be requred to pay the debt as a condton to ts
contnued ownershp and use of the property, and f the debt s not
pad n accordance wth the terms of the nstrument, t must satsfy
the obgaton to the e tent of ts property securng the debt. The
genera charge on the corporaton s changed n substance by the straw
man renewa to a charge on specfc corporate property. owever,
the corporate character of the obgaton s not changed for the reason
that the corporaton must ether pay ts debt or surrender ts property
securng such payment. Ths fact renders the obgaton an under-
takng to pay out of a specfed fund or source and such undertakng
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513 Regs. 71, 113.33.
s suffcent to warrant mposton of the ta . ccordngy, the e -
tenson of the bond consttutes a renewa thereof wthn the meanng
of secton 1801 of the Code.
Reguatons 71, Secton 113.5 : enewas. ev. u. 55-185
corporate owner of rea estate e ecutes a mortgage bond and sub-
sequenty ses the mortgaged property to an ndvdua. The nd-
vdua owner ater enters nto an e tenson and modfcaton agree-
ment wth the mortgagee, wheren the owner agrees to pay the n-
debtedness and to compy wth the terms of the corporate bond and
mortgage. The form of agreement contans a cause whch provdes
that, n consderaton of the assumpton by the ndvdua of the pay-
ment of the corporate bond renewed, the mortgagee agrees that t
w not nsttute any acton, sut, cam or demand, n aw or n equty,
aganst the orgna corporate obgor, on account of the orgna corpo-
rate obgor s persona abty to repay the ndebtedness evdenced by
the bond. ed, such agreement does not of tsef unequvocay or un-
quafedy reease the corporaton from ts abty under the bond
so as to e enpt the renewa from the stamp ta as mposed by secton
1801 of the Interna Revenue Code of 1939. owever, f, under the
aw of any State n whch the form of e tenson agreement s used,
or pursuant to the decsons of the courts n such States, the cause
n queston effects a reease or dscharge of the corporate obgor
from a abty on the bond, the renewa woud not be sub|ect to
the stamp ta . See G. C. M. 22, 207, C. . 19 0-2, 325, wth respect
to conveyances n New York and New ersey between a corporaton
and ts nomnee, straw man, or other type of agent.
S CTION 1802. C PIT L STOC ( ND SIMIL R
INT R STS)
Reguatons 71, Secton 113.33: Saes and Rev. Ru. 55-259
transfers sub|ect to ta .
Transfers of the stock of a domestc corporaton are sub|ect to
the documentary stamp ta Imposed by secton 1802(b) of the In-
terna Revenue Code of 1939 when recorded on dupcate stock
records mantaned by the corporaton at Its head offce n ths
country, even though the transacton between transferor and trans-
feree s effected outsde the Unted States and s recorded n stock
transfer books mantaned outsde the Unted States.
dvce has been requested wth respect to the appcabtv of the
transfer ta mposed by secton 1802(b) of the Interna Revenue
Code of 1939 to transactons n stock of a domestc corporaton whch
take pace outsde the Unted States between nonresdents of the
Unted States, are recorded on transfer books mantaned outsde the
Unted States, and are subsequenty recorded on dupcate stock records
mantaned by the corporaton at ts head offce n ths country.
The stock n queston s sted on stock e changes n severa foregn
ctes, and ndependent stock transfer agents and regstrars are estab-
shed by the corporaton of those ctes. transfers made by such
agents are reported to the corporaton s head offce n ths country
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Regs. 71, 113.35. 51
whch keeps dupcate stock records and quartery compes a com-
pete stockhoders st.
Secton 1802(a of the Code mposes a ta upon each orgna ssue
of shares or certfcates of stock, or of profts, or of nterest n property
or accumuatons by any corporaton.
Secton 1802 (b) of the Code mposes a ta on a saes, or agreements
to se, or memoranda of saes or deveres of, or transfers of ega
tte to any of the shares or certfcates mentoned or descrbed n
secton 1802(a) of the Code.
Secton 113.33(k) of Reguatons 71 provdes that the transfer of
stock on the books of a domestc corporaton, regardess of where the
sae s made or the stock certfcate devered, s sub|ect to ta .
ccordngy, t s hed that transfers of the stock of a domestc
corporaton are sub|ect to the documentary stamp ta mposed by
secton 1802(b) of the Code when recorded on dupcate stock records
mantaned by the corporaton at ts head offce n ths country, even
though the transacton between transferor and transferee s effected
outsde the Unted States and s recorded n stock transfer books man-
taned outsde the Unted States.
Reguatons 71, Secton 113.35: Specfc e - Rev. Ru. 55-51
emptons provded n Secto 1802 (b).
transfer ta s not Incurred, e cept the ta on the sae, where
an odd-ot deaer actng as a prncpa transfers stock from hs name
to hmsef as custodan under a wrtten custodan agreement wth
the owner of the shares, provded the requste e empton certfcate
s furnshed.
dvce has been requested wth respect to the appcaton of the
documentary stamp ta mposed by secton 1802(b) of the Interna
Revenue Code of 1939 when stock s transferred from the name of an
odd-ot deaer, actng as prncpa, to hmsef as custodan under a
wrtten custodan agreement wth the owner of the stock.
In the nstant case, a monthy nvestment pan for buyng sted
stocks on a pay-as-you-go bass s operated by odd-ot frms n coopera-
ton wth representatve commsson brokerage frms of the New York
Stock change for the purpose of provdng sma nvestors a method
of buyng stock at mnmum cost n accordance wth ther current
avaabe funds. n nvestor or partcpant n the pan determnes
hs own program, wthn certan prescrbed mts, and ncurs ony
the customary commsson rates for a reguar servces afforded by the
an. The shares or fractona shares purchased for the nvestor
ecome hs e cusve property mmedatey and are at a tmes there-
after sub|ect to hs unquafed dsposton and contro. n ndvdua
desrng to acqure stocks pursuant to the method offered by the pan
e ecutes an nstrument known as a Purchase Order whch evdences
hs ntenton to nvest a stated amount monthy or quartery n a
named stock sted on the Stock change and sets forth the terms of
the agreement ncudng precse nstructons by the partcpant reat-
ng to pertnent matters affectng the operaton of the pan. The
nvestor s remttances are deposted n a specay authorzed bank ac-
count. The odd-ot deaer then ses to the change member, for the
account of the customer, such shares, or fractons thereof, of the
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515 Regs. 66, rt. 19.
desgnated stock as the remttance permts, after deductng reguar
commssons. The shares and fractons are credted to the account of
the customer and hed by the odd-ot deaer as custodan for the
nvestor. The remttances by the nvestor and the stock acqustons
for hs account contnue to be made and to accumuate n accordance
wth the terms of the Purchase Order, the stock beng devered pur-
suant to the nvestor s drectons.
Secton 1802(b) of the Code mposes a stamp ta on a saes or
transfers of ega tte to any shares or certfcates of stock, wth cer-
tan e ceptons, whch ncude the provson that the ta sha not be
mposed upon deveres or transfers of shares or certfcates from the
owner to a custodan f under a wrtten agreement between the partes
the shares or certfcates are to be hed or dsposed of by such custodan
for, and sub|ect at a tmes to the nstructons of, the owner or from
such custodan to such owner.
Secton 113.35(f) of eguatons 71 provdes that such an e emp-
ton sha not be granted n any case uness the devery or transfer
of stock to or by a custodan s accompaned by an e empton cer-
tfcate, as provded for n secton 113.35 () of those reguatons.
The sae of the stock by the odd-ot deaer to the nvestor through
the atter s member broker s ta abe under secton 1802(b) of the
Code. The shares thus purchased coud be devered to the customer
wthout ncurrng a transfer ta . Such shares coud then be trans-
ferred by the owner to hs custodan wthout ncurrng a transfer ta ,
provdng the requste e empton certfcate s aff ed. Snce the
drect or short-cut transfer of the shares from the odd-ot deaer n
hs capacty as seer to hmsef n hs capacty as custodan does not
nvove the short-cuttng of a ta abe transfer, no ta w be due on
such drect transfer f the necessary e empton certfcate s furnshed.
ccordngy, a transfer ta s not ncurred, e cept the ta on the
sae, where an odd-ot deaer actng as a prncpa transfers stock
from hs name to hmsef as custodan under a wrtten custodan agree-
ment wth the owner of the shares, provded the requste e empton
certfcate s furnshed
S CTION 1807. PL YING C DS
eguatons 66, rtce 19: Imported T. D. 6123
payng cards.
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 303. T
ON PL YING C RDS
Reguatons 66 amended to conform to secton 321 of the Tarff
ct of 1930, as amended by secton 13 of the Customs Smpfcaton
ct of 1953, reatng to admnstratve e emptons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. O.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Secton 321 of the Tarff ct of 1930, as amended by secton 13 of
the Customs Smpfcaton ct of 1953 (67 Stat. 515 19 U. S. C.
1321), authorzes the Secretary, under such reguatons as he sha
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Regs. 8, rt. 72. 516
prescrbe, to admt, free of customs duty and nterna revenue ta ,
certan mported artces not e ceedng 10 n vaue. The Customs
Reguatons (19 C R 8.3 and 9.6) prescrbe the crcumstances under
whch such artces may be mported free of customs duty and nterna
revenue ta . In order to conform Reguatons 66 (26 C R Pt. 305),
as made appcabe to the Interna Revenue Code of 1939 by Treasury
Decson 885 C. . 1939-1 (Part I), 396 , approved ebruary 11,
1939 (26 C R, Cum. Supp., note, p. 5876), to secton 321 of the Tarff
ct of 1930, as amended by secton 13 of the Customs Smpfcaton
ct of 1953, the frst sentence of artce 19 (a) of such reguatons,
as amended by Treasury Decson 5080 C. . 19 1-2, 312 , approved
October 3, 19 1 (26 C R 305.19(a)), s further amended to read as
foows:
cept as set forth In the Customs Reguatons (19 C R 8.3 and 9.6), reatng
to certan mportatons on and after September 7, 1953, of artces not e ceed-
ng 10 n vaue, payng cards mported from foregn countres on and after
October 1, 19 1, must be ta -pad at the rate of 13 cents per pack of not more
than 5 cards.
ecause ths Treasury Decson merey makes reference to the ap-
pcabe sectons of the Customs Reguatons whch permt the mpor-
taton of certan payng cards free of duty and nterna-revenue
ta , t s found that t s unnecessary to ssue ths Treasury Decson
wth notce and pubc procedure thereon under secton (a) of the
dmnstratve Procedure ct, approved une 11,19 6, or sub|ect to
the effectve date mtaton of sad secton (c) of sad ct,
(Ths Treasury Decson s ssued under the authorty contaned
n sec. 321 of the Tarff ct of 1930, as amended (67 Stat. 515 19
U. S. C. 1321), sectons 1836 and 3791 of the Interna Revenue Code
of 1939 (53 Stat. 20 , 67 26 U. S. C. 1836,3791).)
O. Gordon Df.k,
ctng Commssoner of Interna Revenue.
pproved ebruary 1,1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary , 1935, 8: 7 . M.)
C PT R 15. TO CCO, SNU , CIG RS, ND
CIG R TT S
SU C PT R . R T ND P YM NT O T
S CTION 2000(c). R T O T : CIG RS ND
CIG R TT S
Reguatons 8, rtce 72: Rates of ta on Rev. Ru. 55-20
cgars and cgarettes Date effectve
When ta accrues.
The prncpa market of a cgar s the ocaty In whch the buk of
such cgars are sod. If the cgars are sod sngy at reta n that
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517 Regs. 8, rt. 72.
ocaty for more than one prce, the ta to be pad sha be based
upon the reta prce at whch the ma|orty of the cgars are there
so sod. Where cgars are manufactured or mported to reta n
fu packages or bo es ony, or n ots of two or three cgars, for a
certan prce and the cgars are not sod n ther prncpa market
n any other manner so that there s no ordnary reta prce for a
snge cgar n such market, the prce of a snge cgar sha be the
prce of the package or ot dvded by the number of cgars theren.
dvce has been requested as to the proper bass for determnng the
ta rate on cgars weghng more than 3 pounds per thousand.
In the case here nvoved, a cgar manufacturer, producng ony one
type or grade of cgars, confned hs saes n the frst year of manufac-
ture prmary to saes of ndvdua cgars to frends and neghbors
at cents each. owever, saes by the manufacturer n subsequent
years were made n bo ots of 50 cgars at 50a cents per bo . The
cgars n the bo ots so purchased from the manufacturer were then
sod sngy to consumers at 2a and 3a cents per cgar.
Secton 2000(c) of the Interna Revenue Code of 1939 provdes that
n determnng the reta prce of cgars for ta purposes regard sha
be had to the ordnary reta prce of a snge cgar n ts prncpa
market. Ths method of determnng the proper ta rate s apped
n the case of cgars weghng more than 3 pounds per thousand.
The aw does not attempt to f the prce at whch the cgars sha
reta. It mposes a ta on such cgars sod or removed for consump-
ton or sae by the manufacturer or mporter thereof, based upon the
prce at whch the cgars are manufactured to reta, wth the term
reta nvovng the ordnary reta prce of a snge cgar n ts
prncpa market.
rtce 72 of Reguatons 8, 26 C. . R. Part 1 0, provdes that
where there s more than one prce for the same cgar n ts prncpa
market, the ta to be pad w be determned accordng to the prce
at whch the ma|orty are sod theren.
The prce at whch cgars are manufactured or mported to be sod
at reta s a queston of fact. The best evdence of that fact s the
prce at whch the cgars are actuay sod at reta n ther prncpa
market, that beng the one the manufacturer or mporter has chefy
n vew. The prncpa market of a cgar s regarded as the ocaty
where the buk of such cgars are sod. If the cgars are sod sngy
at reta n that ocaty for more than one prce, the ta to be pad
sha be based on the reta prce at whch the ma|orty of the cgars
are there so sod. Where cgars are manufactured or mported to
reta ony n fu packages or bo es, or n ots of two or three cgars
for a certan prce, and the cgars are never sod n ther prncpa
market n any other manner so that there s no estabshed reta
prce for a snge cgar n such market, the prce of a snge cgar s
the prce of the package or ot dvded by the number of cgars con-
taned theren.
In the nstant case, the rate of ta for the frst year n whch saes
were made shoud be determned upon the bass of the prce at whch
the manufacturer made snge saes of the cgars (a cents). The
bass for determnng the proper ta rate for subsequent years shoud
be the prce at whch the ma|orty of the cgars were sod sngy to
the consumers (ether 2a cents or 3a cents) and not the rate at whch
they were sod n bo ots by the manufacturer, dvded by 50.
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Regs. 51, 5 320.50. 518
C PT R 19. R T IL RS CIS T S
S CTION 2 00. T ON W LRY, TC.
Reguatons 51, Secton 320.30: Scope of ta . Rev. Ru. 55-125
n artce of |ewery whch s sod n an unassembed condton but
compete as to a component parts to an utmate consumer who
merey cements or otherwse assembes the parts nto an artce of
ewery s sub|ect to the ta mposed by secton 2 00 of the Interna
Revenue Code of 1939. The sae of unassembed |ewery artces to
a person for resae, as such, or for assembng nto competed artces
of |ewery for sae, s not a ta abe sae at reta. The person who
assembes such |ewery artces and ses the competed artces to the
utmate consumer s abe for the ta . Where |ewery artces are
sod for resae purposes, the character of the sae must be estabshed
n accordance wth the provsons of secton 320.23 of Reguatons 51,
reatng to the fng of a retaers e empton certfcate or equva-
ent proof to substantate the nonta abe sae for resae purposes.
S CTION 2 02. T ON TOIL T PR P R TIONS
Reguatons 51, Secton 320.50: Scope of Rev. Ru. 55-S
ta .
Saes of creams or otons whch are recommended soey for use
In softenng or ubrcatng the beard preparatory to shavng are not
sub|ect to rhe ta on toet artces mposed by secton 2 02 of the
Interna Revenue Code of 1030.
dvce has been requested concernng the appcaton of the ta on
toet preparatons mposed by secton 2 02 of the Interna Revenue
Code of 1939 to the sae of creams or otons ntended for use n soften-
ng or ubrcatng the beard preparatory to shavng ncudng prep-
aratons smary ntended for use before usng an eectrc razor.
Secton 2 02 of the Code mposes a ta on the sae of artces or
f reparatons ntended to be used for toet purpose. Secton 320.50 of
eguatons 51 ncudes as ta abe any artce advertsed or hed out
for toet purposes regardess of the name by whch t may be known
or dstngushed. fter shavng otons are ncuded among e ampes
of toet preparatons sub|ect to ta .
It s hed that creams or otons ntended for use n softenng or
ubrcatng the beard preparatory to shavng, ncudng preparatons
smary ntended for use before usng an eectrc razor, are not con-
sdered toet preparatons wthn the meanng of secton 2 02 of the
Code and saes thereof are not sub|ect to the ta . owever, f the
abes, eafets, or other advertsng reatng to such shavng prepara-
tons ncude any recommendatons for ther use as an after shavng
cream or oton, skn condtoner or for other toet purposes they are
consdered toet preparatons wthn the meanng of secton 2 02 of
the Code and saes thereof are sub|ect to the ta mposed by that
secton.
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519 Regs. 59, 323.1.
C PT R 27. OCCUP TION L T S
SU C PT R . SP CI L PRO ISIONS
P RT I . COIN-OP R T D MUS M NT ND G MING D IC S
S CTION 3267. T ON COIN-OP R T D MUS M NT
ND G MING D IC S
Reguatons 59, Secton 323.1: Meanng of Rev. Ru. 55-336
terms.
T here gum or candy vendng machnes are operated by the n-
serton of a 1-cent con and the ony artces occasonay dspensed
by the machnes aong wth the gum or candy are toy charms of
neggbe vaue, such machnes consttute bona fde vendng ma-
chnes whch are specfcay e cuded from the speca tu Imposed
by secton 3207 of the Interna Revenue Code of 1930.
dvce has been requested concernng the appcaton of the speca
ta on con-operated amusement and gamng devces, mposed by
secton 3267 of the Interna Revenue Code of 1939, to the mantenance
for use of the foowng descrbed devces.
The devces are con-operated machnes, each havng a gass bow
contanng bas of chewng gum or candy wth whch are m ed toy
charms of neggbe vaue. Upon the nserton of a 1-cent con a
machne dspenses a ba of gum, or candy, and occasonay toy
charms.
Under the provsons of secton 3267 of the Code, every person who
mantans for use or permts the use of, on any pace or premses
occuped by hm, a con-operated amusement or gamng devce s
abe for a speca ta of 10 a year wth respect to each amusement
devce and 250 a year wth respect to each gamng devce. That
secton defnes an amusement devce as any amusement or musc
machne operated by means of the nserton of a con, token, or smar
ob|ect. Gamng devces are defned as so caed sot machnes whch
operate by means of nserton of a con, token, or smar ob|ect and
whch, by appcaton of the eement of chance, may dever, or entte
the person payng or operatng the machne to receve cash, premums,
merchandse, or tokens. ona fde vendng machnes n whch are not
ncorporated gamng or amusement features are specfcay e cuded
from the ta .
Wth respect to vendng machnes whch have ncorporated gamng
features, secton 3267 of the Code provdes that such a machne oper-
ated by means of the nserton of a 1-cent con, whch, when t ds-
penses a prze, never dspenses a prze of a reta vaue of, or enttes
a person to receve a prze of a reta vaue of, more than 5 cents, and
f the ony prze dspensed s merchandse and not cash or tokens,
sha be cassfed as a con-operated amusement devce.
It s hed that where gum or candy vendng machnes are operated
by the nserton of a 1-cent con and the ony artces occasonay
dspensed by the machnes aong wth the gum or candy are toy charms
of neggbe vaue, such machnes consttute bona fde vendng ma-
chnes whch are specfcay e cuded from the speca ta mposed
by secton 3267 of the Code. Indvdua charms whch cost ess than
CI0.|0 DC 3
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Regs. 132, 325. 1. 520
1 cent to the person who mantans the machnes for use are regarded
to be of such nsgnfcant vaue that they do not come wthn the
category of przes wthn the scope of the aw.
C PT R 27 . W G RING T S
SU C PT R . T ON W G RS
S CTION 3285. T
Reguatons 132, Secton 325.21: Scope of ta . Rev. Ru. 55-82
( so Secton 3290 Reguatons 132, Secton
325. 1.)
In accordance wth the prncpes outned n Revenue Rung 5 -
05, C. . 195 -2, 01, the operaton of non-con-operated cay ma-
chnes and non-con-operated pnba machnes, where przes are
awarded to successfu payers, consttutes the operaton or a ottery
conducted for proft and s sub|ect to the wagerng ta es mposed by
sectons 32S5 and 3290 of the Interna Revenue Code of 1939. or
the purpose of ths rung the redeemng of free games won n con-
necton wth the operaton of such machnes s consdered to be the
awardng of przes.
SU C PT R .-OCCUP TION L T
S CTION 3290. T
Reguatons 132, Secton 325. 1: Person a- Ct. D. 1782
be for ta .
( so Secton 3291 Reguatons 132, Secton
325.50.)
OCCUP TION L T S INT RN L R NU COD D CISION O SUPR M
COURT
1. Wagerng Ta Consttutonaty.
The occupatona ta on the busness of acceptng wagers, m-
posed by secton 3290 of the Interna Revenue Code of 1939, s con-
sttutona n ts appcaton to the Dstrct of Coumba. The
statute nether voates the prvege aganst sef-ncrmnaton nor
contravenes the ban aganst unawfu search and sezure.
2. udgment ffrmed.
udgment of the Unted States Court of ppeas for the Dstrct
of Coumba, 21 . 2d S33, affrmed.
Supreme Court of the Unted States
rank Lecs, Pettoner v. Unted States of merca
On wrt of certorar to the Unted States Court of ppeas for the Dstrct of Coumba
Crcut
March 1 , 1955
OPINION
Mb. ustce Mnton devered the opnon of the Court,
n Informaton was fed n the Muncpa Court of the Dstrct of Coumba
chargng the pettoner wth voaton of 26 U. S. C. secton 3290 n that he
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521 Regs. 132, 325. 1.
engaged n the busness of acceptng wagers wthout payng the occupatona
ta mposed by that secton. The Muncpa Court sustaned a moton to dsmss
the nformaton. The Muncpa Court of ppeas for the Dstrct reversed, and
the Crcut Court of ppeas affrmed the Muncpa Court of ppeas. 21 . 2d
m. We granted certorar. 3 8 U. S. 810.
The questons presented n ths case are: Does the ct, as apped to the
pettoner n the Dstrct of Coumba, consttute a vad e ercse of the ta ng
power or s t a penaty under the guse of a ta 7 Secondy, does t voate the
fth mendment s prohbton as to compusory sef-ncrmnaton Thrdy,
does t contravene the ourth mendment s ban aganst unreasonabe search and
sezure The frst two questons were categorcay answered n the negatve,
and the vadty and consttutonaty of the ct uphed by us n Unted Sates v.
ahrger, 3 5 U. S. 22 Ct. D. 1755, C. . 1953-1, 56 the thrd queston s not
substantay dfferent from the second and s aso controed by ahrger. The
ony matera factua dfference between that case and the nstant case s that
n ahrger the voaton occurred n a Unted States dstrct of a State, namey,
Pennsyvana, whe n the nstant case the voaton s charged to have taken
pace n the Dstrct of Coumba.
The statute, 26 U. S. C. secton 3290, provdes:
speca ta of 50 per year sha be pad by each person who s abe
for ta under subchapter or who s engaged In recevng wagers for or on
behaf of any person so abe.
nother secton, 26 U. S. C. secton 3271, reads:
Payment of ta (a) Condton precedent to dong busness.
No person sha be engaged n or carry on any trade or busness mentoned
n ths chapter unt he has pad a speca ta therefor n the manner provded
n ths chapter.
Subchapter , referred to n secton 3290, provdes n secton 3285:
(a) Wagers.
There sha be mposed on wagers, as defned n subsecton (b), an e cse
ta equa to ten per centum of the amount thereof.
These provsons must be read together, and when we do, t seems cear that
payment of the speca 50 ta s to be made pror to engagng n the busness
of acceptng wagers.
We hed n ahrger that ths statute was a consttutona e ercse of the
ta ng power and was not a penaty under the guse of a ta . 3 5 U. S., at 2 -32.
It s argued that that case nvoved wagerng n a State, where such actvty s
not a voaton of federa aw, that the nstant case arses n the Dstrct of
Coumba, where wagerng s by federa aw a crme, D. C. Code (1951), secton
22-1501 et seq., and that ths statute as apped to pettoner n the Dstrct of
Coumba s a penaty n the guse of a ta . The short answer to ths argument
s that ths Court has ong hed that the edera Government may ta what t aso
forbds. Unted States v. Sta|off, 200 D. S. 77.
Secondy, t s contended by pettoner that the ct n queston s unconst-
tutona because compance compes sef-ncrmnaton n contraventon of the
fth mendment. The fth mendment provdes that one cannot be compeed,
n a crmna case, to be a wtness aganst hmsef. It s a shed that prevents
one from beng convcted out of hs own mouth by anythng short of vountary
tatements.
Pettoner mantans that the ta es mposed are retrospectve n appcaton.
It s argued that he must be abe for the ta under subchapter n the sense
that he must have aready wagered before he s requred to take out the occupa-
tona ta , and that to requre hm to do so compes admsson that he has
gambed. We do not so read the statute. The ct does not mean one must frst
have made a wager as defned n subchapter and therefore ncurred abty
to pay the ta eved theren before abty for the occupatona ta attaches.
The ct s whoy prospectve and by Its terms dd not become appcabe unt
November 1, 1951, more than 10 days after ts enactment on October 20, 1951.
See comper s note to 26 U. S. C. secton 3285. The statute smpy desgnates a
cass that s abe to pay the ten percent ta when a wager or wagers are made.
Payment of the 50 ta here under consderaton s a regstraton fee that must
be pad before engagng n the busness of wagerng.
We sad n ahrger, supra, at 32-33: Under the regstraton provsons of the
wagerng ta , appeee s not compeed to confess to acts aready commtted, he
s merey nformed by the statute that n order to engage n the busness of wa-
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egs. 71, 113.159. 522
gerng In the future he must fuf certan condtons. The condton here Im-
portant was that pettoner must frst pay the 50 ta , but that dd not gve hm
any cense to engage In an unawfu busness. Lcense Ta Cases, 5 Wa. 62,
71. It ony warned that If he proposed to carry on ths partcuar busness he
must pay the ta .
If pettoner desres to engage n an unawfu busness, he does so ony on hs
own voton. The fact that he may eect to pay the ta and make the prescrbed
dscosures requred by the ct Is a matter of hs choce. There s nothng com-
pusory about t, and, consequenty, there s nothng voatve of the fth
mendment. If e does not pay the occupatona ta , proceeds to accept wagers,
and s prosecuted therefor, as n ths case, he cannot be compeed to testfy and
may cam hs prvege. The ony compuson under the ct s that requrng the
decson whch woud-be gambers must make at the threshod. They may have to
gve up gambng, but there Is no consttutona rght to gambe. If they eect to
wager, though It be unawfu, they must pay the ta .
nd, fnay, the pettoner argues that to requre hm to pay the ta and e -
hbt the stamp n hs pace of busness, as requred by 26 U. S. C. secton 3293
of the ct, s to furnsh probabe cause for the ssuance of a search warrant. Ths
Is |ust another facet of the fth mendment argument, but the ready answer s
that the pettoner has no stamp. If he does not purchase a stamp even though
he wagers, whch s ths case, It s dffcut to see how such faure woud gve
probabe cause for the Issuance of a search warrant. s compant s that f
he had one he mght get n troube. Snce pettoner s wthout a stamp, he s not
n a poston to rase the queston as to what mght happen to hm f he had one.
The udgment s affrmed.
Reguatons 132, Secton 325. 1: Persons
abe for ta .
ppcaton of the occupatona wagerng ta to an operator of
certan non-con-operated machnes and to persons who receve wagers
for or on behaf of the operator of such machnes. See Rev. RuL
55-82, page 520.
S CTION 3291. R GISTR TION
Reguatons 132, Secton 325.50: Regstry,
return, and payment of ta .
Consttutonaty of the wagerng ta as apped to a pettoner n
the Dstrct of Coumba. See Ct. D. 1782, page 520.
C PT R 28. PRO ISIONS COMMON TO
MISC LL N OUS T S
SU C PT R . G N R L PRO ISIONS
P RT I. ST MPS, M R S, ND R NDS
S CTION 330 . R D MPTION O ST MPS
Reguatons 71, Secton 113.159: Cams for Rev. Ru. 55-396
redempton.
or the purpose of estabshng a cam for refund of the amount
pad for documentary stamps that have been purchased and erroue-
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523 T. D. 6025, 77.3.
ousy aff ed to a document, It Is necessary that such stamps be
submtted wth the cam or that they be endorsed by an nterna
revenue offcer who sha wrte on the face of the stamps cam for
refund fed. Where a document wth the stamps aff ed has been
ost and t s mpossbe to endorse them n the approved manner, a
refund of the amount pad for the stamps s not aowabe.
dvce has been requested whether a cam may be aowed for the
refund of the amount pad for documentary stamps whch had beeu
erroneousy attached to a deed that has been ost.
Secton 330 (a) of the Interna Revenue Code of 1939 authorzes
the Commssoner, sub|ect to reguatons prescrbed by the Secretary,
and upon recept of satsfactory proof of the facts, to make aow-
ances for or redeem stamps that may have been spoed, destroyed,
or rendered useess or unht for the purpose ntended, or for whch
the owner may have no use, or whch through mstake may have been
mpropery or unnecessary used, or where the rates or dutes repre-
sented thereby have been e cessve n amount, pad n error, or n
any manner wrongfuy coected.
becton 330 (b) of the Code prescrbes the method and condtons
of aowance and provdes, as an aternatve to gvng other stamps
n eu of the stamps redeemed, for the refundng of the amount or
vaue of the stamps.
Secton 113.159 of Reguatons 71 provdes that the stamps nvoved
n a cam sha be submtted therewth, or f t s mpractcabe to
remove the stamps from the nstruments to whch they are attached,
the nstruments shoud be presented to an nterna revenue offcer who
sha wrte on the face of the stamps the words cam for refund ed,
and attach to the cam a statement showng that such endorsement
has been made.
ccordngy, t s hed that n order to estabsh a cam for refund
of the amount pad for documentary stamps that have been purchased
and erroneousy aff ed to a document, t s necessary that such stamps
be submtted wth the cam or that they be endorsed by an nterna
revenue offcer who sha wrte on the face of the stamps cam for
refund fed. Where a document wth the stamps aff ed has been
ost and t s mpossbe to endorse them n the approved manner, a
refund of the amount pad for the stamps s not aowabe.
P RT II. SS SSM NT. COLL CTION, ND R UND
S CTION 3310. R TURN ND P YM NT O T
T. D. 6025, Secto 77.3: ng of e cse Rev. Ru. 55-83
tnv returns
( so Secton 77. Sectons 1 30, 1627
Reguatons 128, Sectons 08.606,
08.607 Reguatons 120, Sectons
06.605, 06.606.)
Where the due date for fng uartery edera cse Ta Re-
turn, orm 720, or mpoyers uartery edera Ta Return, orm
9 1, fas on a Saturday, Sunday, or ega hoday, the fng of the
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Regs. 6, 316. . 52
return w be consdered tmey f made on the ne t succeedng bus-
ness day.
Where the due date for makng a depost of e cse ta accompaned
by the Depostary Recept for edera cse Ta es, orm 537, or
of edera Insurance Contrbuton ct ta es and net ncome ta wth-
hed on wages accompaned by edera Depostary Recept, orm
50, for the frst two months of a caendar quarter fas on a Saturday,
Sunday or ega hoday, the makng of the depost w be consdered
tmey f made on the ne t succeedng busness day.
Where the due date for makng a depost for the ast month of the
caendar quarter fas on a Saturday, Sunday or ega hoday, the
makng of the depost w be consdered tmey f made on the nest
succeedng busness day. s to ths depost, however, the reguatons
provde aso that t must be made n ampe tme to enabe the de-
postary to return the vadated recept to the ta payer to be attached
to and fed wth the ta payer s return at the tme f ed for fng the
return.
S CTION 3313. P RIOD O LIMIT TION UPON
R UNDS ND CR DITS
owabty of credt camed for manufacturers e cse ta whch
e ceeds tota ta reported on return, wth the credt baance beng
taken on subsequent returns fed after e praton of the four-year
perod of mtaton. See Rev. Ru. 55-53, page 528.
C PT R 29. M NU CTUR RS CIS ND IMPORT
T S
SU C PT R .-M NU CTUR RS CIS T S
S CTION 3 03. T ON UTOMO IL S, TC.
Reguatons 6, Secton 316. : Who s a Rev. Ru. 55-93
manufacturer.
( so Secton 310.55 Secton 3 , Secton 316.7.)
In the recondtonng of a used generator, whch requres the
repacement of the armature wth one that has been rewound by the
person restorng the generator to usefu condton for sae, a manu-
facturng or rebudng operaton s performed on the armature
ony, and the ta s computed upon the estabshed seng prce of
the armature component.
Revenue Rung 5 -329, C. . 193 -2, 05, ampfed.
dvce has been requested concernng the method of determnng
the ta due when a rebut armature s used n recondtonng a
generator for sae (ncudng e change).
n automobe shop operates a generator e change servce.
generator accepted n an e change s dsassembed and ceaned, the
armature s rewound or repaced wth a prevousy rewound armature,
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525 Regs. 6, 316.55.
and the generator s then reassembed, repanted, and paced n stock
for subsequent e change. The e change prce of such a generator
s 10, -whe the estabshed e change prce of a rewound armature
s 1.50.
In the nstant case the rewndng of the armature consttutes a
rebudng operaton on a part whch s then used as a component
n the recondtonng of the generator. The ta shoud be based,
therefore, upon the estabshed seng prce of such a rebut arma-
ture, namey 1.50, e cudng the vaue of a ke part accepted h
e change.
Revenue Rung 5 -329, C. . 195 -2, 05, ampfed.
Reguatons 6, Secton 316.5 : Credt for Rev. Ru. 55-397
ta es on tres, nner tubes, automobe
rado or teevson recevng sets.
The credt aowabe under secton 3 03(e) of the Interna Revenue
Code of 1939 n respect of the ta -pad tres, tubes, automobe rado
or teevson recevng sets sod on or n connecton wth the sae of
chasss, bodes or vehces ta abe under secton 3 03(a) or (b) of the
Interna Revenue Code of 1939, s not granted to the person who
quafes as the manufacturer, producer, or mporter of the tres, tubes
or sets, nor s t a credt of the ta pad by such manufacturer, etc.,
wth respect to the sae or use of the tres, tubes, or sets. Instead, such
credt s granted to the person quafyng as the manufacturer, etc., of
the ta abe automotve chasss, body or vehce and s (n effect) an
ad|ustment n computng the ta to be pad wth respect to the sae
of the chasss, body or vehce. or these reasons, the restrctons
and condtons e pressed n secton 3 3(d) of such Code do not appy
to the credt authorzed by secton 3 03 (e).
Reguatons 6, Secton 316.55: Defnton Rev. Ru. 55-2G0
of parts or accessores.
Conventona (bet-drven) compressors and condensng unts whch
are prmary adapted for use n commerca refrgeraton, but whch
may be modfed for use n ta abe automotve vehces, are not
automobe parts or accessores wthn the meanng of secton 3 03(c)
of the Interna Revenue Code of 1939 and are therefore not sub|ect to
the ta mposed by that secton of the Code.
Reguatons 6, Secton 31G.55: Defnton Rev. Ru. 55-301
of parts or accessores.
gh pressure and ow pressure penc gauges used prncpay by
servce statons and garages n servcng customers tres arc artces
susceptbe of genera use and arc not consdered automobe parts or
accessores wthn the meanng of secton 3103(c) of the Interna Rev-
enue Code of 1939. ccordngy, saes of such artces arc not sub|ect
to the manufacturers e cse ta mposed by that secton.
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Regs. 6, 31C.C1. 526
Reguatons 6, Secton 316.55: Defnton of
parts or accessores.
Determnaton of the ta base where rewound armature s used n
the recondtonng of a used generator. See Rev. Ru. 55-98,
page 52 .
S CTION 3 0 . T ON R DIO R C I ING S TS, T L -
ISION R C I ING S TS, P ONOGR P S, P ONO-
GR P R CORDS, ND MUSIC L INSTRUM NTS
Reguatons 6, Secton 316.61: Rado, Rev. Ru. 55-320
teevson, phonograph components.
Premum submnature tubes, desgned for use n mtary equp-
ment, such as computers, guded msses, sono-buoys, radar bomb
sghts, fue contro for et engnes, etc., are hed not sutabe for
use on or n connecton wth, or as component parts of rado or tee-
vson recevng sets, phonographs, or combnatons of any of the
foregong, and are, therefore, not sub|ect to the ta mposed by sec-
ton 3 0 (b) of the Interna Revenue Code of 1939.
dvce has been requested whether certan premum submnature
tubes are sub|ect to the ta mposed by secton 3 0 (b) of the Interna
Revenue Code of 1939.
These tubes, whch are hghy engneered and e pensve, were de-
sgned for use n mtary equpment whch s sub|ect to consderabe
|ar or concusson, and n whch space s an mportant factor, such as
computers, guded msses, sono-buoys, radar bomb sghts, fue con-
tro for |et engnes, etc. They may be used n equpment whch trans-
mts and/or receves code, facsme, teetype, nstrument andng
sgnas or navgatona sgnas, and as an ncdent to the prmary
purpose ths equpment mght be used for voce recepton. These
tubes are equpped wth ead wres, nstead of the base whch s at-
tached to conventona recevng tubes, so that they may be sodered
nto the crcuts of mtary equpment. or such tubes to be usabe
n conventona crcuts n commerca rado or teevson recevng
sets, t woud be necessary to add, at substanta e pense, a base or
adapter to the tubes. Due to ther hgh prce, dctated by the re-
qurements of e tremey sma sze combned wth ong fe, rugged-
ness, and other features of desgn, they are not used n non-mtary
type rado or teevson recevng sets.
Secton 3 0 (b) of the Code mposes a ta on the sae by the manu-
facturer, producer, or mporter of tubes whch are sutabe for use
on or n connecton wth, or as component parts of, rado and teev-
son recevng sets, phonographs, or combnatons of any of the
foregong.
The ta abty of the tubes n the nstant case depends upon whether
they are sutabe for use n rado or teevson recevng sets.
Sutabe has been defned as fttng, convenent, approprate or
proper. The test of the sutabeness of an artce for a certan pur-
pose s not whether t s commony used therefor, but whether t
possesses actua, practca commerca ftness for that purpose. Whe
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527 Regs. 6, 316.61 .
t s recognzed that from a theoretca standpont these tubes coud
by adaptaton be used n rado or teevson recevng sets, t woud
seem from the facts presented that t woud be commercay mprac-
tca to do so.
ccordngy, t s hed that the premum submnature tubes de-
scrbed above are not sutabe for use on or n connecton wth, or
as component parts of, rado and teevson recevng sets, phono-
graphs, or combnatons of any of the foregong, and are, therefore,
not sub|ect to the ta mposed by secton 3 0 (b) of the Code.
Reguatons 6, Secton 316.61 : Specfc e - Rev. Ru. 55- 20
empton of certan communcaton recevers,
etc., and component parts.
( so Sectons 3 3, 3 Reguatons 6.
Sectons 316.20 , 316.7.)
Oscoscope anayzers desgned for detectng varatons of ar-
craft engne performance are consdered detecton recevers of the
commerca, mtary, or marne type for the purpose of reef from
ta on components named n secton 3 0 (b) of the Interna Revenue
Code of 1939 whch are contaned n such recevers sod to the Unted
States.
dvce has been requested whether arcraft engne anayzers con-
sttute communcaton, detecton, or navgaton recevers of the type
used n commerca, mtary, or marne nstaatons for purposes of
ta e empton, credt or refund wth respect to artces named n sec-
ton 3 0(d) of the Interna Revenue Code of 1939 whch are used n
such recevers manufactured for sae to the Unted States.
In the nstant case oscoscope type anayzers are connected to ar-
craft engnes n such a manner as to detect certan engne performance
characterstcs and reay eectrca mpuses to a recevng mechansm
whch converts these mpuses nto vsbe sgnas. These sgnas are
shown as eectronc wave patterns on the fuorescent screen of a pcture
tube. aratons of the eectronc wave patterns ndcate varatons
of, or rfrom, norma engne performance. These anayzers are pro-
duced n accordance wth mtary specfcatons for sae to the Unted
States Navy.
Sectons 3 0 (b), 3 3(a) (1) ( ) and 3 (b) of the Code provde
e empton, credt or refund of ta on artces of the type ta abe under
secton 3 0 (b) of the Code whch are used as matera n the manu-
facture or producton of, or as a component part of, communcaton,
detecton, or navgaton recevers of the type used n commerca,
mtary, or marne nstaatons f such recevers are to be sod to the
Unted States for ts e cusve use.
It s hed that oscoscope anayzers desgned for detectng vara-
tons of arcraft engne performance are consdered detecton recevers
of the commerca, mtary, or marne type for the purpose of reef
from ta on components named n secton 3 0 (b) of the Code whch
are contaned n such recevers sod to the Unted States.
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Regs. 6, 316.20 . 528
S CTION 3 06. CIS T S IMPOS D Y
T NU CT O 19 1
Reguatons 6, Secton 316,110: Scope of ev. Ru. 55-52
ta .
ectrc ncnerators, desgned for use n homes, whch, hy a burnng
procesS| dspose of paper, trash, rags and other combustbe househod
wastes ncudng garbage, are not consdered eectrc garbage dsposa
unts of the househod type wthn the meanng of secton 3 06(a) (3)
of the Interna Revenue Code of 1939 and are, therefore, not sub|ect
to the ta mposed by that secton.
Reguatons 6, Secton 316.110: Scope of ta . Rev. Ru. 55-1 6
n eectrc bet-drven fan whch s desgned for use as an e haust or
ntake ventatng fan to be operated as an ndependent unt and whch
has a bade dameter of ess than 0 nches, s consdered to be of the
househod type, uness t has other features of constructon by whch
t may be dentfed defntey as beng prmary adapted for commer-
ca or ndustra use. Therefore, such fans are sub|ect to the manu-
facturers e cse ta mposed by secton 3 06(a)(3) of the Interna
Revenue Code of 1939.
SU C PT R C G N R L DMINISTR TI PRO ISIONS
S CTION 3 3. CR DITS ND R UNDS
Reguatons 6, Secton 316.20 : Credts and Rev. Ru. 55-53
refunds.
( so Secton 3313.)
When receved by a dstrct drector of nterna revenue, a uartery
edera cse Ta Return, orm 720, showng a credt for manu-
facturers e cse ta prevousy pad, s recognzed as a cam for
the entre amount of the credt shown even though such amount may
e ceed the tota ta reported on the return. The credt baance may
be taken on returns for subsequent perods regardess of whether the
subsequent returns are fed before or after e praton of the -year
perod of mtaton on credts and refunds under secton 3313 of
the Interna Revenue Code of 1939. The condtons to be met are
(1) the return frst showng the credt baance must be fed wthn
the statutory perod for camng credt and (2) the fu amount of
the credt must be supported by the evdence otherwse requred by
reguatons reatng to credts and refunds whch ncudes compance
wth secton 3 3(a) (3) ( ) or 3 3(d) of the Code.
Reguatons 0, Secton 31G.20 : Credts and
refunds.
owabty of a credt or refund to a manufacturer n the amount
of any ta pad on components used by hm n the producton of
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529 Regs. 2, 130.37.
recevers sod to the Unted States for ts e cusve use. See Rev. Ru.
55- 20, page 527.
S CTION 3 . US Y M NU CTUR R, PRODUC R,
OR IMPORT R
Reguatons 6, Secton 316.7: Ta on use by
manufacturer, producer, or mporter.
The use of a rewound armature n the restoraton of a used genera-
tor consttutes the ta abe use of a manufactured artce. See Rev.
Ru. 55-98, page 52 .
Reguatons 6, Secton 316.7: Ta on use by
manufacturer, producer, or mporter.
Labty for ta on the use of an artce by a manufacturer, pro-
ducer, or mporter. See Rev. Ru. 55- 20, page 527.
C PT R 30. TR NSPORT TION ND
COMMUNIC TION
SU C PT R . T L GR P , T L P ON , R DIO, ND C L
CILITI S
S CTION 3 65. IMPOSITION ND R T O T
Reguatons 2, Secton 130.31: Scope of ta . Rev. Ru. 55-280
( so Secton 130.37.)
Informaton servces, such as stock and commodty quotatons, fur-
nshed to subscrbers where devery s effected by messenger or
teephone, even where such servces are furnshed by a teegraph
company do not consttute teegraph messages wthn the meanng of
secton 3 65(a)(1)( ) of the Interna Revenue Code of 1939 or a
eased wre servce wthn the meanng of secton 3 65(a)(2)( )
of the Code or a wre and equpment servce wthn the meanng of
secton 3 65(a)(2)( ) of the Code, and the amounts pad by the
subscrbers are not sub|ect to the ta es mposed by those sectons.
owever, where devery of the nformaton s effected by a te-ne
furnshed by the teegraph company the servce consttutes a wre and
equpment servce wthn the meanng of secton 3 65(a)(2)( )
of the Code, and the amount pad by the subscrbers s sub|ect to the
8 percent ta mposed by that secton.
Reguatons 2, Secton 130.37: Scope of ta .
ppcaton of the ta mposed by secton 3 65 of the Interna
evenue Code of 1939 wth respect to eased wre servce, and wre
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Regs. 2, 130.38. 530
and equpment servce where devery of nformaton s effected by
messenger or teephone. See Rev. Ru. 55-280, page 529.
Reguatons 2, Secton 130.38: Rate and Rev. Ru. 55-208
appcaton of ta .
n automatc transmtter whch reads a perforated tape contan-
ng converted confrmaton notces of stock market transactons and
transmts such Informaton, through a eased teetype crcut, to a
recevng-ony page teetypewrter whch prnts the nformaton on
sprocket-fed mutpe-copy form paper, provdes a communcaton
servce of the knd contempated by secton 3 65(a) (2) ( ) of the
Interna Revenue Code of 1939. The amounts pad for the ease of
the transmsson factes and for the ease of the crcut for such
transmsson are sub|ect to the ta mposed by that secton on
amounts pad for eased wre, teetypewrter, and takng crcut
speca servces.
dvce has been requested concernng the appcaton of the ta
mposed by secton 3 65(a) (2) ( ) of the Interna Revenue Code of
1939, on eased wre, teetypewrter and takng crcut speca servces
to amounts pad for the ease of crcuts and factes for the foowng
descrbed transmssons.
frm of brokers n securtes and commodtes wth branch and
fed offces throughout the Unted States eases severa types of wre
factes to meet ts varous needs. The eased factes ncude tee-
type crcuts connectng the branch and fed offces wth the man
offce, automatc tape transmtters ocated n the man offce, and
recevng-ony page teetypewrters ocated n the branch or fed offces.
Throughout the Imsness day orders for the purchase or sae of
securtes or commodtes are paced n the branch or fed offces.
ach order s e ecuted n the man offce and a message s sent to the
branch or fed offce where the order orgnated and that offce notfes
the customer of the competon of hs order. ach day after the cose
of the securty and commodty markets a punch card record s pre-
pared n the man offce for each transacton. These cards show the
dentfcaton of the branch offce, the date, account number, name
of securty, number of shares, whether purchase or sae, e change
symbo, prce per share, commsson, ta es, and doar e tent of the
transacton. The cards are segregated accordng to branch or fed
offce and the data shown on the cards for each partcuar offce are
converted nto a contnuous perforated teetypewrter tape. The per-
forated tape s then run through an automatc tape transmtter con-
nected by teetype crcut wth a recevng-ony page teetypewrter,
ocated n the branch or fed offce, whch prnts the confrmaton
notces on sprocket-fed mutpe-copy form paper.
Secton 3 65(a) (2) ( ) of the Code mposes a ta upon the amount
pad for eased wre, teetypewrter, or takng crcut speca servce,
e cept where such servce s used e cusvey n renderng wre
and equpment servce whch s ta abe at a ower rate under secton
3 65(a)(2)( ) of the Code.
Secton 130.38 of Reguatons 2 states that, n genera, eased wre,
teetypewrter, or takng crcut speca servce, ta abe under secton
3 65(a)(2)( ) of the Code, reates to prvate ne servce where
channes, equpment and other factes are furnshed to enabe users
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531 Regs. 2, 130.5 .
to communcate between specfed ocatons contnuousy or for spec-
fed perods. The communcatons may be teephonc, n Morse or
smar code, or may be reproduced at the termnatng end n the form
of a typewrtten page or tape, or pcture or facsme.
ccordngy, t must be concuded that the automatc tape trans-
mtter and recevng-ony page teetypewrter when connected by a
teetype crcut provde a communcaton servce of the knd contem-
pated by secton 3 05(a)(2)( ) of the Code. Therefore, amounts
pad for the ease of the transmsson factes and for the crcuts
for such transmsson are sub|ect to the ta mposed by that secton
on eased wre, teetypewrter, and takng crcut speca servces.
Reguatons 2, Secton 130. 2: Con-operated Rev. Ru. 55-99
teephones.
Under the provsons of secton 3 G5 (a) (3) of the Interna Revenue
Code of 1939 no ta s mposed wth respect to charges of 2 cents or
ess pad by the nserton of cons n con-operated teephones ava-
abe to the pubc, e cept that where such con-operated teephone serv-
ce s furnshed for a guaranteed amount the ta appes to the amount
pad under the guarantee pus any f ed monthy or perodc charge.
ted, that the ta appes to the fu amount of such guarantee
whether t s pad out of recepts from the con bo of the teephone
or from funds of the subscrber (guarantor). or e ampe, f a
subscrber guarantees a mnmum depost of 20 cents per day, and f
at the end of a 60-day perod t s determned that ony 9.75 has been
deposted n the con bo , the ta s based upon any perodc servce
charge pus the guaranteed amount of 12, even though ony 2.25 of
the guaranteed amount s pad from the subscrber s own funds.
SU C PT R C TR NSPORT TION O P RSONS
S CTION 3 69. T ON TR NSPORT TION O
P RSONS, TC.
Reguatons 2, Secton 130.53: Payments Rev. Ru. 55-8
for transportaton sub|ect to ta .
gr scout troop chartered a bus to transport ts members to a
camp and for sghtseeng n a cty en route to the camp. The amount
pad for the charter of the bus represented a per capta charge of more
than 35 cents for each person actuay transported. ed, an amount
pad by the gr scout troop for charterng the bus s sub|ect to the
ta on the transportaton of persons e empton s not granted |ust
because an organzaton s educatona, regous, etc.
Reguatons 2, Secton 130.5 : Payments not Rev. Ru. 55-209
sub|ect to ta .
The ta on the transportaton of persons Imposed by secton 3 09
of the Interna Revenue Code of 1939 does not appy to amounts
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Regs. 2, 130.5 . 532
pad by resdents of Canada to a trave agency In that country for
transportaton between ponts n the Unted States when such trans-
portaton Is a part of a package tour whch begns and ends n Can-
ada. Method of estabshng nonta abe character of such payments
s outned.
dvce has been requested whether the ta on the transportaton of
persons mposed by secton 3 69 of the Interna Revenue Code of 1939
appes to amounts pad outsde the Unted States under the foowng
crcumstances for transportaton between ponts wthn the Unted
States, and, f the ta does not appy, further advce has been re-
quested as to the evdence requred to estabsh the nonta abe char-
acter of such payments.
In the nstant case a Canadan trave agency ses to resdents of
Canada a package tour whch begns and ends n Canada and ncudes
transportaton between ponts n the Unted States. The trave agency
does not ssue a prepad order, e change order, or smar order for
the Unted States porton nf the tour, but transmts to the Unted
States carrer a bank draft for the purchase of a tcket for such
porton of the tour.
In accordance wth the provsons of secton 3 69 of the Code the
ta s mposed upon amounts pad wthout the Unted States on or
after November 1,1950, for the transportaton of persons on or after
such date, by ra, motor vehce, water, or ar whch begns and ends
n the Unted States.
Secton 130.5 (b) (1) of Reguatons 2 provdes, n part, that the
ta does not appy to a payment made outsde the Unted States for
transportaton whch begns or ends outsde the Unted States. or
purposes of the precedng sentence, a payment made outsde the
Unted States for transportaton between two or more ponts wthn
the Unted States (such transportaton beng referred to as the
Unted States porton ), whch s part of transportaton from or to
a pont outsde the Unted States, s a payment for transportaton
whch begns or ends outsde the Unted States, where t s defntey
estabshed at the tme of makng payment for the Unted States
forton that such porton s purchased for use n makng the |ourney
rom or to a pont outsde the Unted States. The Interna Revenue
Servce has not approved the use of any form or e empton certfcate
to estabsh the nonta abe character of such payment. owever,
secton 130.5 (b) (3) and ( ) of the Reguatons prescrbe specfc
provsons for the estabshment of the nonta abe character of a
payment made outsde the Unted States for the Unted States porton
n those cases where a prepad order, e change order, or smar order
for the Unted States porton s ssued outsde the Unted States and
the tcket s ssued wthn the Unted States pursuant to such order.
It s hed that snce the transportaton sod n Canada by the trave
agency s part of a package tour whch begns and ends outsde the
Unted States, the amount pad to the trave agency for the Unted
States porton of the tour s not sub|ect to ta . Snce n ths case no
prepad order e change order, or smar order s ssued, but nstead
a bank draft s transmtted to the Unted States carrer n payment
for the tcket whch s ssued wthn the Unted States, t s hed
further that to estabsh the nonta abe character of the payment
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533 Regs. 2, 130.58.
made to the Canadan trave agency for the Unted States porton
of the tour, t w be necessary for the trave agency to transmt to
the Unted States carrer wth the bank draft a statement (1) cer-
tfyng that the tcket s beng purchased by the agency for use by
the passenger n con|uncton wth connectng transportaton from a
pont outsde the Unted States and (2) showng (a) the orgn and
destnaton of the connectng transportaton, (b) the dentty of the
carrer furnshng the connectng transportaton, and (c) the sera
number of the tcket coverng such connectng transportaton. The
Unted States carrer shoud retan the statement n ts records as
evdence that the tcket ssued by t was purchased for use n con-
|uncton wth the connectng transportaton from a pont outsde the
Unted States. The Unted States carrer aso shoud nscrbe on
the tcket ssued by t the nformaton specfed n (a), (b), and (c)
above and, n addton, the name of the Canadan trave agency from
whch the payment for the tcket was receved.
Reguatons 2, Secton 130.5 : Payments not
sub|ect to ta .
ppcabty of the ta on the transportaton of persons to a pay-
ment made n Canada by a resdent of the Unted States for a trp
whch begns and ends outsde of the Unted States. See ev. u.
55- 09, page 126.
Reguatons 2, Secton 130.58: Motor veh- ev. u. 55-5
ces wth seatng capacty of ess than ten.
vehce propeed by a gasone motor and desgned to trave on
ce and snow surfaces by means of sks and endess chan-type tracks
s used for the transportaton of persons. The vehce s used prma-
ry to transport persons engaged n reparng power nes and to rescue
persons ost n the snow and t s not operated between defnte ponts
or wth any degree of reguarty. The seatng capacty of the vehce
s persons, ncudng the drver, but when addtona seatng space
s needed a traer wth a seatng capacty of 10 persons s attached
to the vehce. ed, the vehce consttutes a motor vehce wthn
the meanng of secton 3 69(a) of the Interna evenue Code of 1939.
owever, snce the vehce s not operated on an estabshed ne and
n vew of the specfc provson of the statute that the ta does not
appy to transportaton by motor vehces havng a seatng capacty
of ess than 10 adut passengers, ncudng the drver, when not oper-
ated on an estabshed ne, the ta does not appy to amounts pad for
transportaton n the vehce when operated wthout the traer. On
the other hand, amounts pad for transportaton n the vehce
when operated wth the traer attached are sub|ect to ta snce n
uch case the seatng capacty of the vehce s not ess than 10 adut
passengers, ncudng the drver. Ths s so on the assumpton that
the amounts so pad represent a per capta charge of more than thrty-
fve cents for each person actuay transported.
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Regs. 2, 130.6 . 53
Reguatons 2, Secton 130.59: Charges not Rev. Ru. 55-1 7
e ceedng 35 cents.
n amount pad to a truck owner for transportng agrcutura
workers from a concentraton pont to a farm and return s sub|ect
to the ta mposed by secton 3 69(a) of the Interna Revenue Code
of 1939 where payment for the round trp represents a per capta
charge of more than 35 cents for each worker transported. The per
capta charge s determned by dvdng the tota payment for a
round trp by the number of workers actuay transported.
dvce has been requested concernng whether the amount pad to
a truck owner for transportng agrcutura workers from a concentra-
ton pont to a farm and return s sub|ect to the ta on the transporta-
ton of persons mposed by secton 3 69 of the Interna Revenue Code
of 1939.
In the nstant case a truck owner s pad 20 for transportng agr-
cutura workers, rangng n number from 20 to 60, from a concentra-
ton pont to a farm and return.
Secton 3 69(a) of the Code mposes a ta upon amounts pad for
the transportaton of persons by ra, motor vehce, water, or ar, but
secton 3 69(b) provdes that the ta sha not appy to amounts pad
for transportaton whch do not e ceed 35 cents.
Secton 130.59 of Reguatons 2 provdes that an amount of more
than 35 cents pad for round trp transportaton s e empt from the
ta , f the reguar one-way snge fare of ke cass between the term-
na ponts of the round trp does not e ceed 35 cents. owever, that
secton aso provdes that an amount pad for the charter of a car,
tran, motor vehce, arcraft, or boat s e empt from the ta , f the
payment represents a per capta charge of 35 cents or ess for each
person actuay transported. It w be noted that the frst provson
appes ony to stuatons where there s an estabshed fare for one-
way transportaton between the termna ponts of a trp, as n the
case of reguar schedued trps, and woud not appy to charter trps
snce the charges for such trps are not based on an estabshed fare
for one-way transportaton. The separate provson concernng the
appcaton of the e empton n the case of charter trps furthermore
ma es no reference to a snge one-way trp, ndcatng that charter
trps are not paced n the same category as reguar schedued trps.
It s hed, therefore, that an amount pad to a truck owner for
transportng agrcutura workers from a concentraton pont to a
farm and return s sub|ect to the ta mposed by secton 3 69(a) of
the Code where payment for the round trp represents a per capta
charge of more than 35 cents for each worker transported. The per
capta charge s determned by dvdng the tota payment for a round
trp by the number of workers actuay transported.
Reguatons 2, Secton 130.6 : Transporta- Rev. Ru. 55-337
ton outsde the northern porton of the
Western emsphere.
Secton 3 69(a) of the Interna Revenue Code of 1939 provdes that
the ta on transportaton of persons sha not appy to the amount
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535 Regs. 113, 1 3.1.
pad for transportaton any part of whch s outsde the northern
porton of the Western emsphere, e cept wth respect to any part of
such transportaton whch s from any port or staton wthn the
Unted States, Canada, or Me co, to any other port or staton wthn
the Unted States, Canada, or Me co. steamshp company sod
tckets for a cruse that began and ended n New York but dd not
ncude a stop at any other port n the Unted States, Canada, or
Me co. The payments for the tckets were not sub|ect to the ta
on transportaton of persons for the reason that the cruse tnerary
ncuded a ca at the port of La Guara enezuea, a pont outsde
the northern porton of the Western emsphere, as defned n secton
3 69(a) of the Code. owever, due to engne troube whch de-
veoped durng the cruse the vesse was forced to omt the ca at the
South mercan port. ed, where tckets for a cruse are sod on
a ta -e empt bass by reason of the fact that the cruse tnerary n-
cudes a ca at a port outsde the northern porton of the Western
emsphere and an emergency arses durng the course of the cruse
whch makes t mpossbe for the vesse to make the schedued stop at
such port, the e empt status of the payments orgnay made for the
tckets s not nufed by the omsson of such stop, and the steamshp
company s not requred to coect the ta on the payments made by
the passengers for the cruse.
SU C PT R .-TR NSPORT TION O PROP RTY
S CTION 3 75. T NSPO T TION O PROP RTY
muatons 113, Secton 1 3.1: Meanng of Rev. Ru. 55-398
terms.
In response to an nqury from an assocaton of funera drectors
nd embamers, t s hed that a funera drector who, as a part of the
mortuary servces provded by hm, transports a corpse n hs own
hearse or ambuance from one cty to another, or who occasonay
performs such transportaton for another funera drector, s not con-
sdered to be a person engaged n the busness of transportng property
for hre wthn the meanng of secton 3 75 of the Interna Revenue
Code of 1939. ccordngy, amounts pad to a funera drector for
such transportaton are not sub|ect to ta .
Reguatons 113, Secton 1 3.1: Meanng of
terms.
ppcabty of the ta , mposed by secton 3 75 of the Interna
Revenue Code of 1939, to the devery by a truck owner of commod-
tes purchased by hm from a company where the persons to whom
devery s made have prevousy ordered such commodtes from
the company. See Rev. Ru. 55- 21, page 539.
86 050 56 35
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Regs. 113, 1 3.1. 53G
Reguatons 113, Secton 1 3.1: Meanng of Rev. Ru. 55-126
terms.
n amount pad to a househod goods carrer for packng and
unpackng cothng, whch Incudes the use of dspensabe ward-
robe cartons, s not sub|ect to ta , provded the packng and un-
packng servces are performed before and after the transportaton
movement and the charge therefor s bed separatey from the
charge for the transportaton movement.
dvce has been requested whether the ta on the transportaton of
property mposed by secton 3 75 of the Interna Revenue Code of
1939 s appcabe to amounts pad for certan servces performed n
connecton wth the transportaton of househod goods.
In the nstant case, a carrer, whch furnshes packng and unpack-
ng servces, uses amost e cusvey n packng artces of cothng
dspensabe wardrobe cartons that are made of cardboard. The
charge for these wardrobe cartons s set forth n the carrer s tarff
under the tem coverng the rates for packng and unpackng servces.
Ths tem provdes that the rates ncude (1) packng, unpackng and
the use of packng contaners and materas, or (2) packng and the
packng contaners and materas n the event that such packng con-
taners and materas are retaned by the shpper or consgnee. In
other words, the charge covers packng and unpackng servces, but f
the shpper or consgnee does not wsh to take advantage of the un-
packng servce, n eu thereof he may retan the packng materas,
ncudng the wardrobe carton.
Secton 3 75 of the Code mposes a ta upon the amount pad wthn
or wthout the Unted States, to a person engaged n the busness of
transportng property for hre, for the transportaton of property by
ra, motor vence, water or ar from one pont n the Unted States
to another, wth certan e ceptons not here appcabe.
Secton 1 3.1(d) of Reguatons 113 provdes that the term trans-
portaton means the movement of property by a person engaged n
the busness of transportng property for hre, ncudng nterstate,
ntrastate, and ntracty or other oca movements and that, n gen-
era, the term aso ncudes accessora servces furnshed n connec-
ton wth any such movement.
M. T. 15, C. . 19 3, 1158, hods that amounts pad for certan
servces, ncudng wardrobe servce, when furnshed n connecton
wth the transportaton of househod goods by the carrer whch per-
forms the transportaton movement, are sub|ect to the ta whether the
charge for such servces s ncuded n, or s bed separatey from,
the charge for the transportaton movement proper. Such a charge
for wardrobe servce s a charge for the use, durng the transportaton
movement, of a permanent type of wardrobe bo whch s retaned by
the carrer as a part of hs transportaton equpment. M. T. 15 aso
hods that amounts pad for packng and unpackng, or cratng and
uncratng, occurrng before and after a transportaton movement,
are not ta abe f the charges therefor are bed separatey.
It s hed that the charge made by the carrer n the nstant case
for (1) packng, unpackng, and the use of wardrobe cartons, or (2)
packng and the wardrobe cartons whch are retaned by the shpper
or consgnee, s a charge for packng and unpackng, and not a charge
for wardrobe servce, wthn the meanng of M. T. 15. ccordngy,
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537 Regs. 113, 1 3.13.
such charge s not sub|ect to ta , provded the packng and un-
packng servces are performed before and after the transportaton
movement, and provded the charge therefor s bed separatey from
the charge for the transportaton movement.
muatons 113, Secton 1 3.13: ppcaton Rev. Ru. 55-55
of ta .
The ta on the transportaton of property Imposed by secton
3 75 of the Interna Revenue Code of 1939 appes to amounts pad
to a port termna operator for the towng of ogs n a og reoad
operaton.
dvce has been requested whether the ta on the transportaton of
property mposed by secton 3 75 of the Interna Revenue Code of
1939 appes to amounts pad to a port termna operator for the tow-
ng of ogs from the paces of storage to the dock where they are
oaded onto ra cars.
In the nstant case M corporaton operates a port termna for n-
bound and outbound ocean cargo and ra shpments. One of ts
operatons s a og reoad whch nvoves the oadng of ogs from
rafts n the water to raroad og fats and gondoa cars for shpment
to umber yards and pup ms. The rafts of ogs are devered from
oggng companes by tugboats to the port and are moored at varous
te-up paces n the rver where they are stored unt the reoad can
pace them on the cars. When the ogs are brought from the storage
paces to the dock, M corporaton orders a tugboat to move the rafts
from the te-up paces to the reoad boom and pays the tugboat opera-
tor for the towng servces. The M corporaton bs the varous
oggng companes for the amount of the towage charges pus 20
percent of such charges.
Under the provsons of secton 3 75 of the Code the ta appes to
amounts pad to a person engaged n the busness of transportng
property for hre, ncudng amounts pad to a freght forwarder,
e press company, or smar person, but not ncudng amounts pad
by a freght forwarder, e press company, or smar person for trans-
portaton wth respect to whch a ta has prevousy been pad under
ths secton.
Secton 1 3.1(d) of Reguatons 113 provdes that the term trans-
portaton means the movement of property by a person engaged n
the busness of transportng property for hre, ncudng nterstate,
ntrastate, and ntracty or other oca movements, as we as towng,
ferryng, swtchng, etc. In genera, t ncudes accessora servces
furnshed n connecton wth a transportaton movement such as oad-
ng, unoadng, and smar servces.
The term person engaged n the busness of transportng property
for hre, for the purpose of the ta mposed by secton 3 75(a) of
the Code, ncudes not ony a carrer who actuay transports the prop-
erty but aso a person who hods hmsef out to the pubc as one who
for compensaton ses, provdes, procures, furnshes, or arranges for
the transportaton of property. See Rev. Ru. 5 -5 , C. . 195 -1,
. It s hed that to the e tent M corporaton furnshes the reoad serv-
ce whch ncudes towng of the ogs, M corporaton s a person en-
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egs. 113, 1 3.13. 538
gaged n the busness of transportng property for hre wthn the
meanng of secton 3 75(a) of the Code. ccordngy, the ta appes
to amounts pad to M corporaton by the oggng companes for the
towng of the ogs and for any accessora servces, such as oadng
and unoadng, furnshed n connecton therewth. owever, the ta
does not appy to the amounts pad by M corporaton to the tugboat
operators for towng wth respect to whch the ta s payabe to such
corporaton.
Reguatons 113, Secton 1 3.13: ppcaton Rev. Ru. 55-1 8
of ta .
ghway use ta es, such as ton-me, weght-dstance, a e-me and
fcmar ta es or tos, are mposed by severa states upon carrers by
motor vehce, and n some nstances an amount appro matng such
e pense tems ncurred by the carrer s bed to shppers separate
from the transportaton charge proper. ed, such amounts const-
tute a part of the tota transportaton charges sub|ect to the ta m-
posed by secton 3 75 of the Interna Revenue Code of 1939, even
though they may be bed separatey.
Reguatons 113, Secton 1 3.13: ppcaton Rev. Ru. 55-281
of ta .
Labty for payment of ta on the transportaton of property,
mposed by secton 3 75 of the Interna Revenue Code of 1939, fas
upon the person makng, or havng mmedate contro of makng,
any payment of ta abe transportaton charges to a person engaged
n the busness of transportng property for hre.
dvce has been requested concernng the person or persons abe
under the foowng crcumstances for the payment of ta on the
transportaton of property mposed by secton 3 75 of the Interna
Revenue Code of 1939.
In the nstant case a processng company entered nto a contract
wth growers of the commodty whch t processes concernng the
growng, harvestng, and devery of the commodty. Under the
contract a grower agrees to bear the cost of transportaton of the
commodty to the company s processng pant, the transportaton
charges to be pad drecty by the grower or charged aganst the
grower s account f pad by the company. Under the agreement the
company, n makng any transportaton arrangements or payments
for transportaton, acts soey as the agent of the grower. The hau-
ng of the commodty s performed by persons engaged n the busness
of transportng property for hre.
Secton 3 75(a) of the Code mposes a ta upon amounts pad for
the transportaton of property to a person engaged n the busness of
transportng property for hre. Secton 3 75 (c) of the Code provdes
that the ta sha be pad by the person makng the ta abe trans-
portaton payment and that each person recevng payment for ta -
abe transportaton sha coect the ta from the person makng such
payment.
Pursuant to the provsons of aw stated above and the reguatons
reatng thereto, abty for payment of the transportaton ta fas
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539 Regs. 3, 3.13.
upon the person makng, or havng mmedate contro of makng, any
payment of ta abe transportaton charges to a person engaged n the
busness of transportng property for hre. The ta s payabe at
the tme payment s made of the transportaton charges and a person
abe for payment of the ta by reason of makng a ta abe trans-
portaton payment may not, by separate agreement, avod hs respon-
sbty for makng payment of the ta concurrenty wth makng the
payment for transportaton servces. The determnaton of abty
for payment of transportaton ta s not dependent upon the terms
of a contract, such as the one n the nstant case, where the effect of
the terms thereof woud shft the responsbty for payment of the
transportaton ta , at the tme t s due, to a person other than the
person makng, or havng mmedate contro of makng, the ta abe
payment to the carrer.
ccordngy, t s hed that under the crcumstances descrbed the
processng company, when makng a payment to a carrer for haung
a commodty, ncurs abty for payment of the transportaton ta
concurrenty wth the payment of the ta abe transportaton charges.
Smary, a grower, when makng payment to a carrer for trans-
portaton, becomes abe for payment of the ta . ny probem of
rembursement between a grower and the company, when the com-
pany makes payment of the transportaton charges and the ta on
behaf of a grower, s a matter to be setted between the grower and
the company.
Reguatons 113, Secton 1 3.13: ppcaton ev. Ru. 55- 21
of ta .
( so Secton 1 3.1.)
ppcabty of the transportaton of property tar, mposed by
secton 3 75 of the Interna Revenue Code of 1939, to the devery
by a truck owner of commodtes purchased by hm from a company
where the persons to whom devery s made have prevousy ordered
ch commodtes from the company.
dvce has been requested whether certan amounts receved by a
truck owner for the back-hau of commodtes under the foowng
crcumstances are sub|ect to the ta on the transportaton of property
mposed by secton 3 75 of the Interna Revenue Code of 1939.
In the nstant case certan truck owners, such as farmers, gran and
feed deaers, and stock and produce deaers, hau ther products or
wares from ther homes or paces of busness to market n ther trucks.
In order to avod returnng wth empty trucks they enter nto ar-
rangements wth the saesmen of M company whose pant s ocated
near the truck owners market, for the devery of commodtes, orders
for whch have been obtaned by the saesmen from customers ocated
near the truck owners homes or paces of busness. Under the ar-
rangements the truck owners purchase the commodtes at M com-
pany s pant at the f. o. b. pant st prce, transport them to the cus-
tomers premses, and se them to the saesmen s customers at the de-
vered prce prevousy agreed upon between the saesmen and the
customers. Ths devered prce represents the f. o. b. pant st prce
of the commodty pus the amount for whch the saesman beeved
that he coud obtan transportaton of the order by one of these truck
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Regs. 113, 5 1 3.21. 5 0
owners. The truck owner assumes no sgnfcant rsk due to possbe
changes n the prce of the commodty purchased. urthermore, the
truck owner does not perform any servce from whch he coud gan
a proft e cept the servce of transportaton.
The ta mposed by secton 3 75 of the Code appes to amounts
pad for the transportaton of property to a person engaged n the
busness of transportng for hre. Secton 1 3.1 of Reguatons 113
states that such a person ncudes a common carrer, contract car-
rer, or other person transportng property for hre whoy or n
part by ra, motor vehce, water or ar. The ta s payabe by the
person makng the ta abe transportaton payment and s coectbe
by the person recevng such payment. In genera, where the de-
very actvtes of a whoesae or reta merchant are carred on wth
hs own trucks and are merey ncdenta to hs busness of seng
merchandse, the merchant s not regarded as a person engaged n the
busness of transportng property for hre even though a separate
charge for the devery s made to the customer. Mm. 5 7, C. .
19 2-2, 280. owever, where the truck owner does not have the
usua ndces of a merchant e cept the ownershp of the commodtes
carred, and where hs soe remuneraton s based on a charge for
transportaton, the truck owner s consdered to be engaged n the
busness of tranportng property for hre. Compare wth Rev. Ru.
5 - 63, C. . 195 -2, 2 .
It s hed that under the crcumstances descrbed the amount pad
to the truck owner by the customer of M company n e cess of the
purchase prce of the commodty pad by the truck owner consttutes
an amount pad by the customer for transportaton to a person en-
gaged n the busness of transportng property for hre wthn the
meanng of secton 3 75 of the Code and s sub|ect to the ta mposed
by that secton. The truck owner shoud coect the ta at the tme
the transportaton charges are pad to hm.
Reguatons 113, Secton 1 3.21: Post Offce Rev. Ru. 55-21
Department.
The ta on the transportaton of property mposed by secton
3 75 of the Interna Revenue Code of 1939 does not appy to amounts
pad to a carrer by the Tost Offce Department for the transporta-
ton of Unted States ma.
dvce has been requested by a motor carrer whether t must coect,
the ta on the transportaton of property mposed by secton 3 75 of
the Interna Revenue Code of 1939 wth respect to amounts pad to t
by the Post Offce Department for the transportaton of Unted States
ma.
Under the provsons of secton 3 75(a) of the Code, a ta s m-
posed upon the amount pad for the transportaton o property by
ra, motor vehce, water, or ar from one pont n the Unted States
to another. Such ta sha appy ony to amounts pad to a person
engaged n the busness of transportng property for hre, ncudng
amounts pad to a freght forwarder, e press company, or smar
person, but not ncudng amounts pad by a freght forwarder, e -
press company, or smar person for transportaton wth respect to
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5 1 Regs. 113, 1 3.2 .
whch a ta has prevousy been pad under that secton. Secton
3 75(b) of the Code provdes that the ta sha not appy to amounts
pad to the Post Offce Department for the transportaton of property.
mounts pad to the Post Offce Department for the transportaton
of ma are consdered to be amounts pad to a freght forwarder, e -
press company, or smar person, wthn the meanng of secton
3 75(a) of the Code, and f t were not for the specfc e empton
provded by secton 3 75(b) of the Code such amounts woud be sub-
|ect to the ta on the transportaton of property.
Snce payments to the Post Offce Department are e empt from
the ta , such payments are consdered the equvaent of payments
wth respect to whch a ta has prevousy been pad for the purpose
of determnng the abty of the Post Offce Department for ta on
ts payments to a motor carrer for transportng ma.
Therefore, when the Unted States Post Offce Department n ts
capacty as freght forwarder, e press company, or smar person,
coects from the sender or addressee the fu charges for the trans-
portaton of the ma, any amounts pad by the Post Offce Depart-
ment to other persons for transportaton servces rendered by them
n connecton wth the transportaton or devery of such ma are not
sub|ect to the ta on the transportaton of property mposed by secton
3 75 of the Code.
Reguatons 113, Secton 1 3.2 : States, Rev.Rn. 55-162
Terrtores, etc.
mounts pad for the transportaton of constructon materas
consgned to a State or potca subdvson of a State, ncudng an
agency or nstrumentaty thereof, n care of a contractor, for n-
corporaton nto a State pro|ect are e empt from ta on the trans-
portaton of property mposed by secton 3 75 of the Interna Reve-
nue Code of 1039, f such materas are so consgned pursuant to
nstructons ssued by the State or potca subdvson thereof au-
thorzng such procedure.
dvce has been requested whether the ta on the transportaton
of property mposed by secton 3 75 of the Interna Revenue Code of
1939 appes to amounts pad for the transportaton of constructon
materas consgned to a State ghway Commsson, a State Depart-
ment of Pubc Works, a State Pubc ousng uthorty, or any other
agency or nstrumentaty of a State, n care of a contractor, for
ncorporaton nto a State pro|ect.
Under the provsons of secton 3 75(b) of the Code, amounts pad
for the transportaton of property to or from the government of a
State, Terrtory of the Unted States, or potca subdvson thereof,
or the Dstrct of Coumba, are e empt from the ta .
Secton 1 3.2 of Reguatons 113 provdes that where the shp-
png papers show the consgnor or consgnee to be a State, Terrtory
or potca subdvson thereof, or the Dstrct of Coumba, or an
agency or nstrumentaty of any of the foregong, such papers may
be accepted by the carrer as proof of the e empt character of the
shpment. No certfcate of e empton s requred.
t s hed that the e empton provded by secton 3 75(b) of the
Code appes to amounts pad for the transportaton of constructon
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Regs. 113, 1 3.31. 5 2
materas to be ncorporated nto a State pro|ect, where such materas
are consgned to a State or potca subdvson of a State, ncudng
an agency or nstrumentaty thereof, n care of a contractor. In such
cases, the shppng papers must ceary show that the property s
consgned to the State or potca subdvson. owever, before a
contractor may take advantage of ths e empton and have construc-
ton materas consgned to a State or potca subdvson, n care of
hmsef, t w be necessary for the partcuar State or potca sub-
dvson to ssue approprate nstructons authorzng such procedure.
The e empton provded by secton 3 75(b) of the Code does not
appy wth respect to shpments of fue, ubrcants, spare parts and
tems of constructon equpment beongng to the contractor and whch
w not be ncorporated n the constructon pro|ect and whch w
not become the property of the State or potca subdvson thereof.
Reguatons 113, Secton 1 3.31: Contnuty Rev. Ru. 55-183
of movement.
If wheat, whch 5s purchased at nteror ponts for e portaton,
comes to rest at a seaport eevator and s processed for a busness
purpose, such processng consttutes a break n the contnuty of
the movement of the wheat. The movement of the wheat pror to
ths processng s domestc n character and sub|ect to the ta m-
posed by secton 3 75 of the Interna Revenue Code of 1939 on the
transportaton of property.
dvce has been requested whether the ta on the transportaton
of property, mposed by secton 3 75 of the Interna Revenue Code of
1939, appes to amounts pad for the transportaton of wheat from
nteror ponts n the Unted States to a gran company s eevator at
a port of e portaton, where, before beng e ported, the wheat comes
to rest and s processed n the foowng manner.
In the nstant case the contracts between the gran company and
ts foregn customers specfy the grade of wheat to be e ported. The
company purchases wheat from farmers, cooperatves, or country
deaers for devery to ts eevator. Ths wheat conssts of severa
casses and subcasses, each of whch s further broken down nto sev-
era grades based upon weght and other factors. In addton, t may
be of a speca grade, such as, smutty, tough, weevy, ergoty, treated,
or garcky. The seer s prce to the company s based upon the cur-
rent prce for the best grade of the specfc cass, but s sub|ect to
dscounts and charges accordng to varatons n grade. though
the speca grades may not be separatey marketabe, they are va-
uabe to the company for use n bendng wth hgher grades of wheat
for suppyng foregn demands.
s the wheat s receved at the eevator t s sorted nto bns accord-
ng to cass, subcass, and grade. y means of a graduated sot or
openng at the bottom of each bn and a system of convevor bets,
or other arrangements, the wheat n the varous bns can be drawn
out and bended. When an e port order s to be fed, predetermned
roportons of the wheat are drawn from the dfferent bns and
ended to produce a composte whch w conform to the partcuar
grade caed for n the contract. s a part of ths operaton, wheat
whch because of ts condton has been gven a speca grade and
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5 3 Regs. 113, f 1 3.31.
whch therefore mght not be merchantabe, or woud be sub|ected to
dscount, s appropratey treated by washng or ceanng so that t
can be bended wth hgher graded wheat. Through ths bendng
process t s possbe for the company to produce a composte whch
can be sod for a prce greater than that whch coud be obtaned f
the varous casses and grades were sod n separate ots.
Secton 3 75 of the Code mposes a ta upon the amount pad for
the transportaton of property by ra, motor vehce, water, or ar
from one pont n the Unted States to another. In accordance wth
Subpart of Reguatons 113 the ta does not appy to an amount
pad for the transportaton of property n the course of e portaton
to a foregn destnaton, or shpment to a possesson of the Unted
States. The test of the e port character of a shpment s the cont-
nuty of movement from the pont of orgn n the Unted States to ts
foregn destnaton. The mere fact that gran or other property
transported by one of the means enumerated n secton 3 75 of the
Code s fnay e ported does not necessary mean that t was contnu-
ousy n the course of e portaton after t was started on ts movement
from ts pace of orgn. Secton 1 3.31 of Reguatons 113 provdes
that n case a break occurs n the movement of property shpped for
e port, whch s not the faut of transportaton, and the property
comes to rest n transt pror to e portaton, that part of the amount
pad for the transportaton whch pertans to the movement from the
pont of orgn to the pont where the break occurs s ta abe.
ubreak may be sad to occur wherever the property s stopped for a
busness purpose, such as gradng, ceanng, m ng, sortng, or manu-
facture, and not merey n accommodaton to the means of transpor-
taton.
In the nstant case, the operatons conducted at the eevator, con-
sdered n ther entrety, cannot be regarded as a mere storage of
wheat wth ncdenta servces pendng the arrva of shppng accom-
modatons. Rather, the operatons are such that they consttute the
conduct of a domestc processng pant at whch varous casses and
grades of wheat are receved and sub|ected to bendng and other
forms of processng n the producton of the partcuar cass and
grade of wheat destned for e port. Under these crcumstances the
stoppage of the wheat n the gran company s eevator s not merey
n accommodaton to the means of transportaton but s essentay
for a busness purpose and therefore ths stoppage consttutes a
break n the contnuty of the movement from the nteror ponts
of orgn. ccordngy, a movements of the wheat pror to ths
stoppage are domestc n character and the amounts pad for such
transportaton are sub|ect to the ta on the transportaton of prop-:
erty mposed by secton 3 75 of the Code. See G. C. M. 22580, C. .
19 1-1, 59.
Reguatons 113, Secton 1 3.31: Contnuty Rev. Ru. 55-338
of movement.
Where cartons of goods shpped from an nand manufacturng
pant pursuant to an e port contract are stopped at a port to be over-
packed to meet e port packng specfcatons or whe a foregn cus-
tomer obtans the necessary e port cense or e changes foregn cur-
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3670. 5
rency for mercan doars to pay for the goods, the stoppage of the
goods s not for a busness purpose wthn the meanng of secton
1 3.31 of Reguatons 113 and does not consttute a break n the
contnuty of the e port movement of the goods. ccordngy, the
ta on the transportaton of property mposed by secton 3 75 of the
Interna Revenue Code of 1939 w not appy to the amount pad
for the transportaton of the goods from the nand manufacturng
pant to the port, provded the person payng the transportaton
charges estabshes e empton from payment of the ta n accord-
ance wth the appcabe provsons of Subpart of Reguatons 113.
Compare Rev. Ru. 55-183, page 5 2, ths buetn.
C PT R 3 . IN ORM TION ND R TURNS
SU C PT R . DISCO RY O T LI ILITY
S CTION 3603. NOTIC R UIRING R CORDS, ST T -
M NTS, ND SP CI L R TURNS
Reguatons 120, Secton 0G.607: Records.
Reguatons 120 amended to provde rues for wthhodng durng
195 and 1955 on payments sub|ect to secton 105(d) of the Interna
Revenue Code of 195 reatng to wage contnuaton pans. See T. D,
C128, page 123.
C PT R 36. COLL CTION
SU C PT R .-LI OR T S
S CTION 3670. PROP RTY SU CT TO LI N
Rev. Ru. 55-210
Where a ta payer has an unquafed f ed rght, under a trust or
a contract, or through a chose n acton, to receve perodc payments
or dstrbutons of property, a edera en for unpad ta attaches
to the ta payer s entre rght, and a notce of evy based on such en
s effectve to reach, n addton to payments or deductons then
due, any subsequent payments or dstrbutons that w become
due thereunder.
dvce has been requested whether a evy reaches ony such property
or money as may be due or owng the ta payer at the tme of the serv-
ce of a notce of evy for edera ta es.
Secton 3670 of the Interna Revenue Code of 1939 provdes:
If any person abe to pny 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.
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5 5 3672.
Secton 3692 of the Code provdes that f the person abe to pay
any ta negects or refuses to pay the same wthn ten days after notce
and demand the coector may evy:
upon a property and rghts to property, e cept such as are e empt by
the precedng secton, beongng to such person, or on whch the en provded n
secton 3670 e sts, for the payment of the sum due,
Secton 3710 (a) of the Code provdes:
ny person n possesson of property, or rghts to property, sub|ect to
dstrant, upon whch a evy has been made, sha, upon demand by the coector
or deputy coector makng such evy, surrender such property or rghts to such
coector or deputy, uness such property or rght s, at the tme of such demand,
sub|ect to an attachment or e ecuton under any |udca process.
The en arsng under secton 3670 appes to property owned by the
denquent at any tme durng the fe of the en. See Gass Cty
ank of eanette, Pa. v. Unted States, 326 U. S. 265, Ct. D. 1651, C. .
19 5,330.
It has been hed that a notce of evy does not attach to a ta payer s
rght to money that s contngent upon the performance of future
servces. See Unted States v. Long Isand Drug Company, et a.,
115 ed. (2d) 983. The court n that case sad that the ndebtedness
of a thrd party to a ta payer s sub|ect to evy, but not an ndebtedness
that s contngent upon the performance of future servces. Compare
Unted States v. Warren Raroad Co., et a., 127 ed. (2d) 13 ,137.
It has been hed that a notce of evy served upon a trustee of a spend-
thrft trust attaches to dstrbutons by the trustee to the benefcary
even though such dstrbutons are not due at the tme the evy s served.
Unted States v. Chares 0. Canfed, et a., 29 ed. Supp. 73 , appea
dsmssed sub. nom. Securty rst Natona ank of Los ngees v.
Unted States, 113 ed. (2d) 91. Compare In re Rosenberg s W,
199 N. . 206, Ct. D. 1069, C. . -1,258 (1936) M. Israe Schwarz,
et a. v. Unted States, 191 ed. (2d) 618.
Upon the bass of the above cted opnons t s the poston of the
Interna Revenue Servce that where a ta payer has an unquafed
f ed rght, under a trust or a contract, or through a chose n acton, to
receve perodc payments or dstrbutons of property, a edera en
for unpad ta attaches to the ta payer s entre rght, and a notce
of evy based on such en s effectve to reach, n addton to payments
or dstrbutons then due, any subsequent payments or dstrbutons
that w become due thereunder, at the tme such payments or dstrbu-
tons become due,
S CTION 3672. LIDITY G INST MORTG G S,
PL DG S, PURC S RS, ND UDGM NT CR DITORS
( so Part I, Secton 6323.) Ct. D. 1776
INCOM WIT OLDING ND SOCI L S CURITY T S INT RN L R NU
code op 1939 decson of court.
1. Income Wthhodng and Soca Securty Ta es Lens-
Prorty ankruptcy.
trustee In bankruptcy Is not a |udgment credtor wthn the
meanng of secton 3672(a) of the Interna evenue Code of 1939
and, therefore, the en for federa ta es s vad even though notce
thereof had not been fed pror to bankruptcy.
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S 3672. 5 6
2. Order Reversed.
Order of Referee In ankruptcy dated une 17,1953, reversed and
cause remanded for further proceedngs.
Unted States Dstrct Court for the Northern Dstrct of abama
Southern Dvson
In The Uatter of en Green, ankrupt
September 30,195
OPINION
TNN , Dstrct udge: ere for revew on hs certfcate s an order of honor-
abe Stephen . Coeman, Referee n ankruptcy, dated une 17,195 , pertanng
to the dstrbuton of funds of the bankrupt estate to appy on recorded ta ens
n favor of State Department of Industra Reatons of abama. Insstng that
the referee erred n avodng ts en for ta es, estabshed by 26 U. S. C. . 3670,
the Unted States stands squarey on the poston that a trustee n bankruptcy
s not a |udgment credtor wthn the meanng of 20 U. S. C. . 3672(a). Wth-
out attemptng ether to revew or to anayze the opnons of both tra and appe-
ate courts whch are n rreconcabe confct, ths court s of the opnon that
the Unted States s rght n ts contenton.
udca goss paced upon the words |udgment credtor as empoyed by
Congress n Secton 367., concusvey estabshes that such words were used
n the usua, conventona sense of a |udgment of a court of record. Unted
States vs. Gbert ssocates, 3 5 U. S. 361, at page 36 Ct. D. 1757, C. .
1953-1, 7 . See concurrng opnon of Mr. ustce ackson n Unted States
vs. Securty Trust and Savngs ank, 3 0 U. S. 7, at page 52 Ct. D. 1736, C. .
1950-2, 151 .
Concededy, nether of these cases was deang wth bankruptcy. If the trustee
n bankruptcy n the nstant proceedng (wheren there s no conventona
|udgment credtor to whose rghts the trustee woud succeed by operaton of
Secton 70(c) of the ct) s endowed wth the status of a |udgment credtor,
t must be because of the provsons of Secton 70(c) of the ankruptcy ct 11
U. S. C. . 110(c) , whch read as foows:
The trustee may have the beneft of a defenses avaabe to the bankrupt as
aganst thrd persons, ncudng statutes of mtaton, statutes of frauds, usury,
and other persona defenses and a waver of any such defense by the bankrupt
after bankruptcy sha not bnd the trustee. The trustee, as to a property,
whether or not comng nto possesson or contro of the court, upon whch a
credtor of the bankrupt coud have obtaned a en by ega or equtabe pro-
ceedngs at the date of bankruptcy, sha be deemed vested as of such date wth
a the rghts, remedes, and powers of a credtor then hodng a en thereon
by such proceedngs, whether or not such a credtor actuay e sts.
No one may doubt the authorty of Congress to consttute a trustee In bank-
ruptcy a |udgment credtor wth reference to federa-ta aws. Cear and ap-
proprate anguage to that end mght have been ncuded n Secton 70(c) of
the ct, but obvousy was not. Or, Congress mght have added trustees n
bankruptcy to the categores of persons descrbed n 26 U. S. C. . 3672(a). as
aganst whom the en created by 26 U. S. C. . 3070 s nvad unt notce thereof
has been fed by the coector as requred by aw, but t dd not. Nor dd t n-
cude the trustee n bankruptcy n the correspondng secton 6323 of the Interna
Revenue Code of 195 , 68 Sta. 779.
Nothng heren s ntended to say that a trustee In bankruptcy does not occupy
the fcttous poston of |udgment credtor n opposng the cams of condtona
vendors and other credtors hodng mpropery fed or unfed nstruments of
securty. The hodng here s crcumscrbed by the pont for revew and s
confned to the proposton that a bankruptcy trustee s not a |udgment credtor
wthn the purvew of 26 U. S. C. . 3672.
Socoogca and economc probems of tremendous scope mmedatey suggest
themseves If ths poston be sound. owever, they address themseves to Con-
gress, and to the egsatve process Is commtted the task of decdng whether
n many bankruptcy cases a of the assets of the estate are to be dstrbuted to
federa and state ta ng authortes to the e cuson of practcay a other
credtors, ncudng wage earners (where rea estate s Invoved).
n order w be entered remandng ths cause to the Referee n ankruptcy
for further proceedngs heren not nconsstent wth ths opnon.
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5 7 3672.
Ct. D. 1778
INCOM T S INT RN L R NU COD D CISION O SUPR M COURT
1. edera Ta Len Prorty Over ttachment Len ffect
of State Law.
en for edera ncome ta es fed after the ta payer s property
had been attached by a credtor but before the atter had recovered
|udgment aganst the ta payer was superor to the attachment en.
though under Oho aw an attachment en s desgnated an
e ecuton n advance the prorty of the en of the Unted States
for unpad ta es s a edera queston and the edera courts are not
bound by a State s characterzaton of ts ens.
2. udgment Reversed.
udgment of Unted States Court of ppeas for the S th Crcut
(209 . 2d 258), affrmng 109 . Supp. 9 3, reversed.
Supreme Court of the Unted States
Unted States of merca, pettoner, v. Mchae P. cr, Doar Savngs dc Trust
Company, the Doar Savngs Trust Company of Youngstown, Oho, guardan
of the estate of Mchae P. cr, and dward Oravtz, admnstrator of the
estate of ohn Oravec, a. k. a., Oravtz, deceased
On wrt of certorar to the Unted States Court of ppeas for the S th Crcut
anuary 10, 1955
opnon
Mr. ustce Mnton devered the opnon of the Court.
Ths case nvoves the reatve prorty between an attachment en and the
ens of the Unted States for unpad ta es. The dstrct court found the attach-
ment en pror to the ens of the Unted States, and the Court of ppeas
affrmed wthout opnon. We granted certorar, 3 7 U. S. 973.
On ugust 11, 19 8, the Unted States fed sut In the Dstrct Court for the
Northern Dstrct of Oho to coect unpad ncome ta es for the years 19 2-19 6
aganst one cr and hs wfe. cr was at the tme n the pententary for the
murder of one Oravec, whose persona representatve, Oravtz, had, on ugust 6,
19 7, n Mahonng County, Oho, fed an acton aganst cr for wrongfu death.
On the same date, certan cash and bonds of cr, whch were n hs safety depost
bo n the Doar Savngs and Trust Company, were attached by Oravtz. The
bo was not opened unt September 11,19 8, after the bank had been made guard-
an of cr. at whch tme an nventory was fed. The persona representatve,
Oravtz, and the bank, as guardan of cr, were made partes to the Government s
sut
On anuary 19, 19 9, the persona representatve of the murdered man recov-
ered udgment aganst cr n the sum of 18,500. In the meantme, on November
18,19 7, after the ssuance of the wrt of attachment, but more than a year before
the |udgment n the man acton for wrongfu death, the assessment sts for
unpad ncome ta es of cr and hs wfe for the years 19 2-19 6 were receved
n the offce of the Coector of Interna Revenue. On November 19,19 7, demand
for payment was maed to cr. On November 21, 19 7, a notce of the ta ens
was fed n the offce of the Recorder n Mahonng County, Oho, whch s the
resdence of the defendants and the ocaton of the crs property, and the pace
where the acton for wrongfu death was begun. Notce and evy of the ta ens
were served upon the Doar ank. It was stpuated that the ony queston
nvoved was the reatve prorty of the attachment en of the persona repre-
sentatve and the ta ens of the Unted States.
The ssue here s dentca wth that n Unted States v. Securty Trust Co.,
3 0 U. S. 7 Ct. D. 1736, C. . 1950-2, 151 , There the queston was stated as
foows:
The queston presented here Is whether a ta en of the Unted States Is
pror n rght to an attachment en where the edera ta en was recorded
subsequent to the date of the attachment en but pror to the date the attachng
credtor obtaned |udgment.
Our answer here s the same as n the Securty Trust Company case and for the
same reasons.
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3C72. 5 8
The reatve prorty of the en of the Unted States for unpad ta es s as we
sad n Unted States v. Wadd Co., 323 U. S. 353, 356, 357 Ct. D. 162 , C. .
19 5, 59 Inos v. Campbe, 329 D. S. 362, 371 Unted States v. Securty
Trust Co., 3 0 U. S. 7, 9, aways a edera queston to be determned fnay
by the edera Courts. The State s characterzaton of ts ens, whe good for
a State purposes, does not necessary bnd ths Court. Unted States v. Wad-
d Co., 323 U. S. 353, at 357 Unted States v. Gbert ssocates, 3 5 D. S. 301
Ct. D. 1757, C. . 1953-1, 7 . Therefore, the fact that the Oho courts had
desgnated an attachment en an e ecuton n advance, Rempe rf Son v. Ravens,
68 Oho St. 113, 67 N. . 282, and treated t as a perfected en at the tme of
attachment, does not bnd ths Court We must ook at the crcumstances as
we dd n the Wadd case, where the rgna court had hed a andord s en
was f ed, specfc, and not nchoate. Ths Court, after e amnng the facts,
found otherwse. In bert ssocates, the New ampshre court had hed that
the assessment of a ta was a |udgment and the Unted States en for ta es was
not vad aganst the ta assessment made by the town wthn the meanng of
secton 3672 of the Interna Revenue Code. We hed that athough New amp-
shre mght treat ts ta assessments as |udgments for State purposes, the as-
sessment of the ta was not a |udgment wthn the meanng of secton 3672. We
hod here that the attachment en n Oho s for edera ta purposes an nchoate
en because at the tme the attachment ssued the fact and the amount of the
en were contngent upon the outcome of the sut for damages.
In argument t was ponted out that the statute of Caforna nvoved n the
Securty Trust case was dfferent because Caforna courts had hed an at-
tachment en to be nchoate and a mere notce of a more perfect en to come,
whe Oho courts had hed t to be an e ecuton n advance and a en perfected
as of the tme of attachment. Ths dstncton s mmatera for purposes of
edera aw. Ths case s not to be dstngushed from Unted States v. Se-
curty Trust Co., 3 0 U. S. 7, and the |udgment s Reversed.
Ct. D. 1779
D R L T S INT RN L R NU COD D CISION OP SUPR M COURT
1. edera Ta Len Prorty Over Landord s Dstress for Rest
Under Laws of South Carona.
Where the andord on pr 7, 1952, fed request for dstress
warrant aganst ta payer for unpad rents and a recever was ap-
ponted on pr 8, 1952, the ta en fed by the Unted States on
pr 10, 1952, was superor to the andord s dstress en. The
andord s en was not a mortgage, pedge, or |udgment en and the
andord was not a purchaser. Moreover, the dstress en was not
perfected at the tme the Government s en was fed, snce under
South Carona aw ta payer had 5 days n whch to put up bond
and free the property from the en of dstress.
2. udgment Reversed.
udgment of the Supreme Court of the State of South Carona
(78 S. . 2d 277) reversed.
Supreme Court of te Unted States
Unted States of merca, pettoner, v. . P. Scov, et a.
On wrt of certorar to the Supreme Court of the State of South Carona
anuary 10,1955
Mr. ustce Mnton devered the opnon of the Court.
Ths case nvoves the reatve prorty of a andord s dstress for rent under
the aws of South Carona and a en for unpad ta es due the Unted States.
The andord, heren referred to as respondent, on pr 7,1952, fed n the Court
of Common Peas for Greenve County, South Carona, an affdavt settng forth
that the Roy ass Motor Company was ndebted to hm for rent and requestng a
Such en sha not be vad as acanst any mortgagee, pedgee, purchaser, or udgment
credtor unt notce thereof has been fed by the coector etc
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5 9 ( 3672.
dstress warrant whch ssued. The master s report shows ony that the andord
for past due rent proceeded on the 7th day of pr 1952, to dstress upon the
assets of sad corporaton for sad rent n arrears. The record does not dscose
what was actuay done n the dstress proceedngs. South Carona Code n-
notated, 1952, secton 1-151, provdes when the affdavt of a andord Is fed the
magstrate may ssue hs dstress warrant namng the amount due wth costs
and dever the warrant to an offcer for servce. The offcer sha forthwth de-
mand payment sec. 1-153 , and If not pad, he sha dstran suffcent property
on the rented premses to pay the amount, gvng a st -of property dstraned
together wth a copy of the dstress warrant to the tenant. The dstress must
be reasonabe as to amount of property dstraned on penaty of acton for dam-
ages sec. 1-158,159 . The tenant has 5 days n whch to put up bond and free
the property from the en of dstrant sec. 1-1G0 .
The ne t day, pr 8,1952, a recever was apponted for the corporate ta payer-
tenant as an nsovent. of the assets of the corporaton passed to the recever
who sod them and reazed therefrom the fund over whch ths contest s waged.
or nonpayment of ta es due, the Coector of Interna Revenue receved the
proper assessment sts n hs offce on March 19, 1951, May 2 , 1951, ugust 29,
1951, December 3, 1951, ebruary 23, 1952, and ebruary 28, 1952, and notce of
these ens thereafter was fed n the proper offce n Greenve County, South
Carona, on pr 10, 1952. Secton 3671 of the Interna Revenue Code provdes
that the en for such unpad ta es attaches when the assessment sts are receved
by the Coector. Therefore, ong before the andord obtaned a dstress warrant
te Government s ens for ta es had attached.
The Supreme Court of South Carona hed that snce the dstress warrant was
perfected before the recever was apponted the andord s dstress en was
superor to the Unted States prorty created by secton 3 66, Revsed Statutes,
31 U. S. C. secton 191. 22 S. C. 233, 78 S. . 2d 277. owever, we fnd t unnec-
essary to pass upon the effect of that secton. We hod that the Government
must preva because of Its ens under secton 3670, Interna Revenue Code.
The andord had a en other than a mortgage, pedge, or udgment en. s
to a other ens, such as the dstress en n the nstant case, secton 3672 of the
Interna Revenue Code affords no protecton. Unted States v. Securty Trust
Co., 3 0 U. S. 7, 51 (concurrng opnon) Ct. D. 1736, C. . 1950-2, 151 . Cf.
Unted States v. Gbert ssocates, Inc., 3 5 U. S. 361, 362-365 Ct. D. 1757, C. .
1953-1, 7 . Moreover, the dstress en was not perfected In the edera sense
at the tme the Government s ens were fed. Such perfecton Is, of course, a
matter of edera aw. Unted States v. Wadd Co., 323 U. S. 353 Ct. D. 162 ,
C. . 19 5, 59 Inos v. Campbe, 329 U. S. 362, 371. The 5-day perod spec-
fed by secton 1-160 of the South Carona Code had not eapsed. Durng ths
tme the tenant-ta payer coud have reacqured any nterest the andord may
have had n hs property by postng bond as provded by the Code. Therefore,
such a en was ony a caveat of a more perfect en to come, as we have so often
hed In other cases. Unted States v. Securty Trust Co., supra Unted States v.
Gbert ssocates, Inc., supra Unted States v. Wadd Co., supra, at 357-359
New York v. Macav, 288 U. S. 290.
It was decded n the tra court and argued here that the andord was a pur-
chaser wthn the meanng of secton 3672 of the Interna Revenue Code and,
therefore, that the Government en was nvad as to hm. purchaser wthn
the meanng of secton 3672 usuay means one who acqures tte for a vauabe
consderaton n the manner of vendor and vendee. Obvousy, the andord was
not a purchaser.
The udgment s Reversed.
Ct. D. 1780
D R L T S INT RN L R NU COD D CISION OP SUPR M COURT
1. edera Ta Len P ORTrr Oveb Garnshment Len Insur-
ance Pboceeds.
The en of a wrt of garnshment fed on behaf of a tgatng
credtor of ta payer for the purpose of attachng nsurance proceeds
agreed to be pad was not superor to a federa ta en fed subse-
quent to attachment but pror to entry of udgment n state court.
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I 3672.
550
Garnshee Insurance company s rght under Te as Raes of Cv
Procedure to reasonabe attorney s fees Incurred In connecton wth
sut s aso subordnate to ta en.
2. Cases oowed.
Unted States v. Mchae P. cr, et a. (U. S. Sup. Ct. decded
anuary 10,1955) and Unted State v. Securty Trust Co., 3 0 U. S.
7, foowed.
3. udgment Reversed.
udgment of Unted States Court of ppeas for the fth Crcut
(209 . 2d 68 ), affrmng decson of Dstrct Court (107 . Supp.
05), reversed.
Supreme Court of te Unted States
Unted States of merca, ntervenor, pettoner, v. the Lverpoo and London
and Oobe Insurance Company, Ltd., and Sunnyand Whoesae urnture
Company
On wrt of certorar to the Unted States Court of ppeas for tbe fth Crcut
anuary 10, 1955
OPINION
Mr. ustce Mnton devered the opnon of the Court.
Ths s a case nvovng prorty of edera ta ens and a en of garnshment.
On March 8, 1952, fre destroyed certan property of dams, engaged n a
furnture busness n Tempe, e County, Te as. Respondent nsurance com-
pany and another were nsurers. Tbe nsurance companes agreed on the amount
of tbe oss, and they were to share tbe payment equay. efore the nsurance
money was pad, a credtor of dams, the Sunnyand Whoesae urnture Com-
pany, on pr 8, 1952, sued dams on an open account. t the same tme a
wrt of garnshment was ssued and served upon the Lverpoo London Gobe
Insurance Company, attachng the nsurance funds due and owng dams. On
pr 21,1952, the assessment sts coverng the unpad edera ta es of dams
and hs wfe for 19 8 and 1950 were receved In the offce of the Coector of
Interna Revenue for Te as. On pr 26, 1952, notce of ta en was fed n
the offce of the county cerk of e County, Te as, In favor of the Unted States
for 10, 17.57, wth nterest Notce of the ta en wth warrants of dstrant
and notce of evy were served on the respondent nsurance company. On
une 20, 1952, |udgment was entered aganst dams n favor of Sunnyand for
2,516.70, wth nterest and costs. When the garnshee, the respondent nsur-
ance company, answered, t named the Unted States an addtona party defend-
ant and requested a determnaton of prortes of the garnshor and the Unted
States, and asked for reasonabe attorney s fees. The amendment was aowed,
and the Unted States was served wth process to appear n the state court. On
petton of the Unted States the nterpeader acton was removed to the North-
ern Dstrct of Te as, and the Unted States was dsmssed as a party defendant
and permtted to fe ts compant for forecosure of ts ta en. The respondent
Insurance company pad 7,500.39 nto tbe regstry of the court and asked for
an attorney s fee of 500. The dstrct court hed the en of the garnshor
superor to the ens of the Unted States for ta es and aowed the garnshee
500 for attorney s fees. The court of appeas affrmed, one udge dssentng.
The queston of prortes s Identca wth that of cr, No. 33, ths day
decded, and Unted States v. Securty Trust Co., 3 0 U. S. 7 Ct. D. 1736, C. .
1950-2, 151 . On the authorty of those cases we bod the ta ens of the Unted
States superor to the en of the garnshor.
s to the attorney s fee aowed the garnshee nsurance company, Rue 677,
ernon s Te as Rues of Cv Procedure, provdes:
Where the garnshee Is dscharged upon hs answer, the costs of the pro-
ceedng, ncudng a reasonabe compensaton to the garnshee, sha be ta ed
aganst tbe pantff where the answer of the garnshee has not been controverted
and the garnshee s hed thereon, such costs sha be ta ed aganst the defendant
and ncuded n the e ecuton provded for n ths secton where the answer
s contested, the costs sha abde the ssue of such contest.
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551 3710.
The dstrct conrt evdenty found there was no contest between the nsurance
company and the other partes, and that the nsurance company shoud be ds-
charged wth costs and aowance of a reasonabe attorneys fee of 500. It,
therefore, ordered the cerk to ssue a check to the nsurance company, payabe
out of the funds pad nto the court by t.
If the garnshment en s not pror to the Government ens, and we have
hed that t s not, certany fees aowed n that proceedng are not pror to the
Government ens, and the authorzaton of the payment of the attorney s fees
pror to the Government ens was error. The costs and fees shoud be ad|udged
aganst the defendant, as provded by Rue 677.
The |udgment s Reversed.
State of New ampshre desgnates offces n whch Dstrct D-
rectors of Interna Revenue may me ta ens and certfcates of reease
or dscharge. See Rev. Ru. 55-13 , page 196.
SU C PT R C DISTR INT
P RT III. G N R L PRO ISIONS
S CTION 3710. SURR ND R O PROP RTY SU CT
TO DISTR INT
( so Part I, Secton 6331 26 C R 301.6331-1.) Rev. Ru. 55-227
notce of evy may be served on an nstrumentaty of a State
to reach the accrued wages due an empoyee of that nstrumentaty
In order to obtan satsfacton of hs unpad edera ta es.
I. T. 2 05, C. . II-1, 72 (1928), modfed.
dvce has been requested whether State and oca governments and
ther agences and nstrumentates are sub|ect to evy and to the
provsons of secton 3710 of the Interna Revenue Code of 1939 for
amounts owed as accrued saares to ther empoyees who are denquent
n the payment of ther edera ta es and for amounts owed as
pensons to former empoyees wth denquent edera ta es.
The statutes governng the coecton of edera ta es are broad
and comprehensve. Secton 3670 of the Code provdes that, f any
person abe to pay any ta negects or refuses to pay the same after
demand, the amount ot the ta sha be a en upon a property and
rghts to property, whether rea or persona, beongng to such person.
Secton 3690 of the Code authorzes the Drector to coect ta es by
dstrant and sae of the goods, chattes, or effects, ncudng stocks,
securtes, bank accounts, and evdences of debt, of the person den-
quent. Secton 3691 sts the property e empt from sezure. Secton
3692 empowers the Drector 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 3670
e sts. Subsecton (a) of secton 3710 mposes upon any person n
possesson of property, or rghts to property, sub|ect to dstrant, a
duty to surrender such property to tne coector or hs deputy upon
proper evy and demand. Subsecton (b) of secton 3710 provdes
a penaty for voaton of the above requrement n a sum equa to the
(6 050
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3710. 552
vaue of the property or rghts not so surrendered, but not to e ceed
the amount of the ta es ncudng penates, nterest and costs from
date of evy. Subsecton (c) of secton 3710 provdes that the term
person as used n ths secton ncudes an offcer or empoyee of a
corporaton or a member or empoyee of a partnershp, who as such
offcer, empoyee, or member s under a duty to perform the act n
respect of whch the voaton occurs. Secton 3797(a) (1) provdes
that the term person when used n the Code sha be construed to
mean and ncude an ndvdua, a trust, estate, partnershp, company,
or corporaton.
It has been hed that a debt owed by a State to a ta payer s property
aganst whch a edera ta en may be forecosed. Unted States v.
Warren C. Graham et a., 96 ed. Supp. 318, affrmed State of Ca-
forna et a. v. Unted States, 195 ed. (2d) 530, certorar dened,
3 U. S. 831. The edera ta en s a contnung en appcabe
to after-acqured property. Gass Cty ank of eannette, Pa. v.
Unted States, 326 U. S. 265, Ct. D. 1651, C. . 19 5, 330.
I. T. 1557, C. . II-, 172 (1923), hods that the accrued saary of
an empoyee hed by an empoyer s an evdence of debt wthn the
purvew of the edera coecton statute (now secton 3690 of the
Interna Revenue Code of 1939) and may be eved upon the same as
any other smpe contract debt, such as a bank depost. ccrued
wages and other debts are sub|ect to evy and dstrant under secton
3690. See Unted States v. Long Isand Drug Co., 115 ed. (2d) 983
Margaret R. Cannon et a. v. Nchoas, 80 ed. (2d) 93 , Ct. D. 1113,
C. . -1, 313 (1935) Unted States . Ocean ccdent Guar-
antee Corp., 76 ed. Supp. 277 and Lucus ntrum v. Unted States
et a. U. S. D. C. for the Dstrct of Conn., decded December 1 ,1953.
I. T. 2 05, C. . II-1, 72 (1928), hods n part that I. T. 1557,
supra, refers to saares pad by prvate persons or corporatons and
that the anaogy (of accrued wages to bank deposts) shoud not be
e tended to ncude saares pad by a State or muncpaty operatng
pubc uttes and that accrued saares of offcers and empoyees of
State operated pubc uttes may not be eved upon for unpad ta es.
In vew of ater court decsons that rung has been regarded as
obsoete for some years, but heretofore t has not been e pressy
revoked.
Where saares or wages have accrued and funds approprated for
ther payment are n the hands or possesson of the approprate State
dsbursng offcas, the rght to such funds then beongs to the em-
poyees and they may sue for and recover them. Ths rght, beng
one to property, s e pressy made sub|ect to evy by the provsons
of secton 3692 of the Code, an overrdng edera aw. The fna
act of payment to the empoyee s purey admnstratve and mn-
stera, and therefore a evy by the Dstrct Drector of Interna
evenue under such crcumstances consttutes no nterference wth
soveregnty or wth the performance of any e ecutve governmenta
functon. Pendng payment, the State or ts nstrumentaty s
merey a custodan of the money due to the empoyee-ta payer. The
nterference contenton was rased n opposton to the ta aton of
State empoyees saares n everng v. Php L. Gerhardt et a., 30
U. S. 05, Ct. D. 13 3, C. . 1938-1, 2 6. In that case the Court hed
that the wages and saares of State empoyees are not e empt from
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553 3710.
edera ncome ta aton. If not e empt from beng ta ed, they are
not e empt from beng sub|ect to evy, for the esser act of coectng
an unpad ta out of the debt due the ta payer by dstrant or evy,
f necessary, s a reated power and kewse does not nterfere wth
soveregnty or the governmenta functon, but s a proper e ercse
of the enforcement provsons of the edera revenue aws mposng
the ta es. The consttutona power gven to the edera government
s to ay and coect ta es.
The queston whether secton 3710 of the Code s appcabe depends
upon whether a State or oca government, or ts agency or nstru-
mentaty, s a person n possesson of property or rghts to property
of the ta payer, wthn the meanng of that secton. Cosey reated
questons were consdered and decded n Unted States v. Warren O.
Graham et a., supra, where the State contended that t was not a
person wthn the meanng of secton 3678 (b) of the Code, and hence
coud not be made a party defendant to an acton to enforce the ed-
era ta en upon an ndebtedness of the State to the ta payer for
certan rentas, and that the ndebtedness was not property or a rght
to property of the denquent ta payer n the possesson of the State.
The Court, whose grounds and reasons were adopted n the opnon by
the Court of ppeas for the Nnth Crcut, n ts opnon stated n
part as foows:
Wth ths contenton I cannot agree. Nothng n the Interna Reve-
nue Code, ts egsatve hstory, or the pocy behnd the admnstraton of the
aw persuades me that Congress meant to e cude the state from those who coud
be made a party to ths proceedng. The Supreme Court has shown no partcuar
dsposton when consderng the meanng of the word person n Congressona
cts to e cude the states. State of Georga v. vans, 316 U. S. 159, 62 S. Ct.
872, 86 L. d. 13 6, construng a secton of the Sherman ct, 15 U. S. C. . para-
graph 1-7, 15 note. See aso State of Caforna v. . S. D. C, 6 . Supp. 7 ,
77- 78, three-|udge court construng the Merchant Marne ct, 6 U. S. C. .
paragraph 866 et seq. In State of Oho v. Ueverno, 292 IT. S. 360, 370, 5 S. Ct.
725, 78 L. d. 1307, the Supreme Court set forth numerous nstances n whch a
State has been hed to be a person wthn the meanng of some statute. Ut-
matey the queston s usuay wrapped up n the egsatve envronment of the
act There s nothng n the anguage of ths act to ndcate a narrow construc-
ton was to be paced upon the meanng of the word person .

The contenton that there s no property aganst whch the pantff s ta ens
may be forecosed s wthout support. Congress ntended to sub|ect n of a
ta payer s property, e cept that specfcay e empt to the payment of ta es.
Property s a word of very broad meanng and when used wthout quafca-
ton may reasonaby be construed to ncude obgatons, rghts and other ntang-
bes, as we as physca thngs. Property wthn the ta aws shoud not be
Rven a narrow or technca meanng. Ctzens State ank, arstow, Te as v.
Mda, 10 Cr. 11 ed. (2d) 380, 382. Communcatons between state offcas
actng n ther offca capacty revea that they consdered that the state owed
the ta payer a specfc sum of money. The uncontroverted evdence shows that
the state entered nto an agreement wth the ta payer as a resut of whch the
state became ndebted to the ta payer. The debt of the state to the ta payer
comes wthn the purvew of the ta en. Sec. 3670, 3G78, Tte 26 U. S. C. .
In State of Oho v. everng, ct a., supra, cted n the quotaton,
the Court found no mert n the contenton that the State was not
embraced wthn the meanng of the word person as used n a ed-
era statute whch eved a ta upon every person who ses or offers
for sae foregn or domestc dsted sprts, and whch defned per-
son to mean and ncude a partnershp, assocaton, company, or
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(37 0. 55
corporaton, as we as a natura person. See aso Unted States v.
Cty of New York, 82 ed. (2) 2 2, 2 5.
ccordngy, t s hed that State and oca governments and ther
agences and nstrumentates are sub|ect to evy and to the provsons
of secton 3710 of the Code for amounts owed as accrued saares to
ther empoyees who are denquent n the payment of ther edera
ta es and for amounts owed as pensons to former empoyees wth
denquent edera ta es.
To the e tent that I. T. 2 05, supra, hods that accrued saares of
offcers and empoyees of State or muncpay operated pubc ut-
tes may not be eved upon for unpad ta es, t s revoked.
Ths rung, whch s based on appcaton of the provsons of the
Interna Revenue Code of 1939, has equa appcaton under the pro-
vsons of the Interna Revenue Code of 195 . See sectons 6321, 6331,
6332, and 633 of the Interna Revenue Code of 195 . See aso regua-
tons promugated under secton 6331 at secton 301.6331-1( ) ()
whch provde: ccrued saares, wages, or other compensaton of any
offcer, empoyee, or eected or apponted offca of a State or Terr-
tory, or of any agency, nstrumentaty, or potca subdvson thereof
are aso sub|ect to evy to enforce coecton of any edera ta . T. D.
6119, page 1 5, ths uetn.
SU C PT R . SUITS Y UNIT D ST T S
S CTION 37 0. UT ORIZ TION TO COMM NC SUIT
Ct, D. 1773
INCOM T INT RN L R NU COD D CISION O SUPR M COURT
1. Income Ta vason Indctment adty of Indctment
Secured by Dstrct ttorney Wthout Sancton by ttor-
ney Genera s Offce ecutve Order 6166 Power of
Grand ury.
aure of the ttorney Genera to drect that a sut for recovery
of Income ta es or pennty be commenced does not bar prosecuton
for fng fase and frauduent ncome ta returns. Secton 5 of
ecutve Order 6166, transferrng to the Department of ustce re-
sponsbty for prosecutng federa offenses, and a ustce Depart-
ment Crcuar, drectng how ths responsbty shoud be e ercsed,
do not bar a Dstrct ttorney, on hs own ntatve, from presentng
a ta evason case to the grand |ury, nor do they curta power of
grand |ury to consder and nvestgate aeged crmes wthn Its
|ursdcton.
2. Crmna Proceedngs 26 U. S. C, Secton 37 0.
Secton 37 0, Interna Revenue Code of 1939 appes ony to cv
suts and not to crmna proceedngs.
3. Wthdrawa of Pea of Noo Contendere fter Sentence.
Pettoner may not, after sentence, wthdraw a pea of noo con-
tendere to correct manfest In|ustce on the ground that the court
msed pettoner and government counse made promses of enency
or probaton, where the evdence, wthout a doubt, refutes pet-
toner s cam and where no e cepton was taken to any statement
pror to sentence.
. udgment ffrmed.
udgment of the Unted States Court of ppeas for the Tenth
Crcut (212 . 2d 125) affrmed.
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555 37 0.
Supreme Court of the Unted States
Odom arre Suvan, pettoner, v. Unted States of merca
On wrt of certorar to th Unted States Court of ppeas tor the Tenth Crcut
December 6,195
OPINION
Mr. ustce Mnton devered the opnon of the Court.
Upon peas of nofo contendere the pettoner was found guty of voatng the
ncome ta aws by makng and fng fase and frauduent returns. The Dstrct
Court sentenced hm to three years mprsonment and fned hm 13,000. The
Court of ppeas affrmed, 212 . 2d 125, and we granted certorar, 3 7 U. S. 1010.
On ebruary 28, 1952, a duy consttuted grand ury for the Dstrct of ansas
Indcted the pettoner on four counts for fase and frauduent statements n hs
ndvdua ta returns and on two counts n another Indctment for fase and
frauduent returns of the Centra Theatre Co., a corporaton of whch he was
presdent To these ndctments the pettoner entered peas of not guty. e
ater wthdrew these peas, and to two counts of the ndctment on hs ndvdua
returns and to one count on the corporaton returns, he entered peas of noo
contendere. The other counts were dsmssed.
efore the peas of noo contendere were entered, pettoner had fed motons
to dsmss the ndctments because the evdence upon whch they were based was
presented to the grand |ury by the Dstrct ttorney wthout drecton to do so
by the ttorney Genera s offce. These motons were overrued after argument
and tme for brefng. Ths presents the frst queston, namey, were the ndct-
ments fauty because, wthout sancton by the ttorney Genera s offce, the Ds-
trct ttorney offered evdence to the grand |ury upon whch the ndctments
were returned It s frst contended by pettoner that pursuant to 26 U. S. C.
secton 37 0,1 the ndctments coud not be returned wthout authorzaton by
that offce. We agree wth the Court of ppeas that ths secton appes ony td
cv suts and not to crmna proceedngs. In the absence of words n ther
conte t requrng a dfferent concuson, the phrase suts for recovery ord-
nary means cv suts and not crmna prosecutons. epncr v. Unted States,
213 U. S. 103, 105-109 Stockwc v. Unted States, 13 Wa. 531, 5 2-5 3. One
recovers n a cv acton but prosecutes and punshes n a crmna proceedng.
The further contenton s made that secton 5 of ecutve Order No. 6166,
and Crcuar Letter No. 2 31 of the Department of ustce requred approva
from the ttorney Genera s offce before any evdence coud be presented to the
grand |ury and that such drecton was not gven. It s admtted that no author-
zaton was receved from the ttorney Genera s offce to present the evdence
to the grand |ury n the nstant case nor does the record revea ceary that an
emergency e sted. pparenty none was reported to the Department of ustce
as requred by Crcuar Letter No. 2 31.
Pror to ecutve Order No. 6166, prosecutons for the voaton of Interna
revenue aws were often referred drecty to Unted States Dstrct ttorneys
for presentaton to grand |ures. The purpose of secton 5 of ecutve Order
No. 6166, among other thngs, was to transfer responsbty for the prosecuton
of crmna proceedngs and suts by or aganst the Unted States n cv matters
to the Department of ustce.
5 No mt for the recovery of ta es, or of any fne, penaty, or forfeture, sha bo com-
menced uness the Commssoner authorzes or sanctons the proceedngs and the ttorney
Genera drects that the sut be commenced.
The functons of prosecutng n the courts of the Unted States cams and demands
by, and offenses aganst, the Government of the Unted States and of defendng cams
nd demands aganst the Government, and of supervsng the work of Unted States
ttorneys, marshas, and cerks In connecton therewth, now e ercsed by any agency or
offcer, are transferred to the Department of ustce.
s to any case referred to the Department of ustce for prosecuton or defense In the
worts, the functon of decson whether and In what manner to prosecute, or to defend,
or to compromse, or to appea, or to abandon prosecuton or defense, now e ercsed by
mt aeency or offcer, Is transferred to the Department of ustce.
for the e ercse of such of hs functons as are not transferred to the Department
f ustce by the foregong two paragraphs, the Soctor of the Treasury Is transferred
from the Department of ustce to the Treasury Department.
Nothng In ths secton sha be construed to affect the functon of any 6 .,
offcer wth respect to cases at any stage pror to reference to the Department of |ustce
for prosecuton or defense. Promugated une 10, 1933, 8 U. S. C. sees. 12 -132. .
In accordance therewth, a Unted States ttorneys are drected to present fT1 ,Pe
to a grand ury concernng voatons of revenue aws of the Unted States ony .
authorzed to do o bv ths offce, uness an emergency cas for mmedate acton, n v.m -a
(vest a fu report shoud prompty be submtted. ugust 10, 1933.
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37 0. 556
It was not the purpose of the ecutve Order to drect how the responsbty
shoud be e ercsed but to f t n the Department of ustce. ow that respons-
bty was to be dscharged was a matter for the Department To make the sys-
tem unform, Crcuar Letter No. 2 31 was sent to a Dstrct ttorneys. It was
never promugated as a reguaton of the Department and pubshed n the
edera Regster. It was smpy a housekeepng provson of the Department
and was not Intended to curta or mt the we-recognzed power of the grand
|ury to consder and Investgate any aeged crme wthn ts ursdcton. See
Unted States v. Thompson, 251 U. S. 07, 13- 15 ar v. Unted States, 250
U. S. 273, 2S2 ae v. enkc, 201 U. S. 3, 01-66 rsbe v. Unted States, 157
U. S. 100-163.
Therefore, t Is not contended that, asde from the ecutve Order and the
departmenta etter, a grand |ury mny not consder evdence of crme known to
the grand |urors or reveaed by ther nvestgaton. It Is ony urged that the
ecutve Order and the departmenta etter mted the acton of the grand
ury In respect to cases concernng voatons of nterna revenue aws. We hod
the Order and the etter had no such restrctve effect, and the grand ury In
ths case was free to consder the evdence put before It by Government counse
wthout authorzaton from the ttorney Genera s offce In Washngton. The
evdence was presented by the Dstrct ttorney who was a representatve of the
Department of ustce, notwthstandng that he faed to compy wth the de-
partmenta drectve. or ths he s answerabe to the Department, but hs
acton before the grand ury was not sub|ect to attack by one Indcted by the
grand |ury on such evdence. The motons to dsmss were propery overrued.
Three days after |udgment had been pronounced fndng the pettoner guty
under hs peas of too contendere and sentences passed, the pettoner fed a
moton askng for eave to wthdraw hs peas. Later he fed an amended mo-
ton to wthdraw the peas and a petton for probaton. In hs moton to wth-
draw the peas he gave the foowng reasons, (1) because of manfest n|ustce,
(2) because he had entered hs peas under the mstaken beef, Induced by the
acts and statements of Government counse, that he woud be paced on proba-
ton, and (3) because of msconduct of the Dstrct ttorney. The Dstrct
Court, after hearng argument, dened the moton and the petton for probaton
and fed ts fndngs of fact, athough there apparenty was no request for them.
Under Rue 32(d) a defendant may, after sentence, wthdraw a pea of noo
contendere to correct manfest n|ustce. It Is ths provson that pettoner rees
upon. e cams he was somehow msed by Government counse to beeve that
If he entered the peas of noo contendere he woud receve probaton. y the
court s fndngs, whch, n ght of the evdence, rase not a doubt, It Is setted
that the court In no way msed the pettoner and that Government counse made
no promses of enency or probaton.
Pettoner argues that the Unted States ttorney msed hm because hs
statement to the court durng the hearng for probaton was stronger than pet-
toner and hs counse e pected. No e cepton was taken to anythng the Ds-
trct attorney sad, nor was any compant made about such statement unt
after sentence was pronounced. We have read ths statement and the affdavts
of both counse. The statement was factua, dspassonate and far. The pet-
toner has faed to show any manfest In|ustce as requred by Rue 32(d).
Durng a of the proceedngs from arragnment to dena of petton for proba-
ton, pettoner was represented by abe and e perenced counse. In our opnon
they were not and coud not have been msed by the acton and statements of
Government counse. The |udgment Is
ffrmed.
See Rue 23(c). ed. Rues Crm. Proe.
Whdraca of Pea of Gut)/. moton to wthdraw a pea of guty or of noo
contendere may be made ony before sentence s Imposed or mposton of sentence Is
suspended but to correct manfest In|ustce the court after sentence may set asde the
|udgment of convcton and permt the defendant to wthdraw hs pea. ue 32(d),
ed. Rues Crm. Proc.
t the une 23 hearng, the court specfcay nqured of defendant s counse as to
whether any remark or statement made by the court to defendant s counse had nfuenced
them n advsng the defendant to enter the peas above mentoned. The court waa
assured by defendant s counse and now fnds that no statement of the court made to
defendant s counse or In the presence of defendant Infuenced the defendant s entrance
of hs peas of noo contendere.
The court further fnds that no promse of probaton or enence was made, ether to
the defendant personay or to hs counse by the Unted States ttorney or hs assstant
who handed the prosecuton for the Government. ndngs 9 and 10, R. 91-92.
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557 3771.
C PT R 37. T M NTS, CR DITS, ND R UNDS
S CTION 3770. UT ORITY TO M T M NTS,
CR DITS, ND R UNDS
Rev. Ru. 55-32
To the e tent provded by secton 3770(a) of the Interna Revenue
Code of 1939, a cam for refund of edera ta es pad erroneousy by
a trustee n bankruptcy n voaton of the genera prorty provsons
of secton 6 - (2) of the ankruptcy ct, 30 Stat. 5 , as amended,
w be consdered and processed wthout requrng further acton by
the trustee and/or bankruptcy court.
S CTION 3771. INT R ST ON O RP YM NTS
Rev. Ru. 55-339
Ta pad on orm 10 0-C, U. S. Departng en Income Ta Re-
turn, s an advance payment of ta . Interest due on an overpay-
ment of such ta as determned by a subsequenty fed fna return
for the year, w run from the due date of the fna return and not
from the actua date of payment of the ta .
n ndvdua ncome ta return was fed by an aen ta payer
when he departed from the Unted States. The return was prepared
on orm 10 0-C, Unted States Departng en Income Ta Re-
turn, and the ta was pad. Subsequenty, a fna return for the ta -
abe year was fed and t was found that an overpayment of ta had
been made at the tme of fng orm 10 0-C. Cam for refund was
fed aegng nterest was due on the overpayment from the date of
payment of the ta .
dvce has been requested whether the payment of ta made at
the tme of the fng of a Unted States Departng en Income Ta
Return on orm 10 0-C, w cause nterest on an overpayment of
the ta to run from the date of such payment or whether t w com-
mence to run on the due date of the fna return for that year.
Secton 3771 (b) of the Interna Revenue Code of 1939 provdes for
the aowance of nterest at the rate of 6 percent per annum on any
overpayment n respect of any nterna revenue ta commencng
from the date of the overpayment. Secton 322(b)( ) provdes
that advance payments of ta sha be deemed to have been made not
earer than the ast day prescrbed by aw for fng the return or
payng the ta determned wthout regard to any e tenson of tme.
Under secton 1 6 of the Interna Revenue Code of 1939, and the
reguatons promugated n connecton therewth, an aen ntendng
to depart from the Unted States s requred to obtan a Certfcate of
Compance and, uness he s not n defaut n makng returns or pay-
ng hs ta or has otherwse made satsfactory arrangements to secure
such payment, to e ecute and fe a return on orm 10 0-C for the
current ta abe perod. owever, the ta payabe at that tme, on
the bass of the return so fed, s ony n an appro mate amount, de-
termned as neary as may be, up to and ncudng the date of hs n-
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Regs. 118, 39.3801 (a) ()- .) 558
tended departure. Reguatons 118, secton 39.1 6-1 (b). The de-
partng aen s st requred to fe a return for the fu ta abe year.
G. C. M. 17195, C. . -2,107, at 110 (1936) Ludwg Lttauerd: Co.
v. Commssoner, 37 .T. . 8 0.
It s hed that the ta pad on orm 10 0-C, Unted States De-
partng en Income Ta Return, s an advance payment of ta .
Interest due on an overpayment of such ta as determned by a sub-
sequenty fed fna return for the year, w run from the due date
of the fna return and not from the date of actua payment of the
ta .
owabty of nterest on refunds of manufacturers e cse ta es
erroneousy or mstakeny pad by reta deaers. See Rev. Ru. 55-
272, page 199.
S CTION 3771(g). INT R ST ON O RP YM NTS:
CL IMS S D UPON R LI UND R S CTION 722
Interest on defcences n abated ta es through appcaton of sec-
ton 722 of the Interna Revenue Code of 1939 s not abatabe. See Ct.
D. 1781, page 35.
S CTION 3775. CR DITS T R P RIODS O
LIMIT TION
Credt or recoupment of barred overpayment of edera estate ta
aganst defcences n ncome ta . See Rev. Ru. 55-226, page 69.
C PT R 38. MISC LL N OUS PRO ISIONS
S CTION 3801. MITIG TION O CT O LIMIT TION
ND OT R PRO ISIONS IN INCOM T C S S
Reguatons 118, Secton 39.3801 (a) ()- : Rev. Ru. 55-3 0
na dsposton of cam for refund as
a determnaton.
Secton 3801(a) (1) (C) () of the Interna Revenue Code of 1939
provdes n effect that a dsaowed cam for refund (other than one
dsaowed by reason of offsettng tems) s not fnay dsposed of
unt the e praton of the 2-year statutory perod aowed by secton
3772 of the Code for nsttutng sut on the cam (uness sut s nst-
tuted pror to the e praton of such perod). ta payer may not
wave hs rght to nsttute sut, wth respect to a dsaowed cam, n
order to e pedte the treatment of the acton taken on the cam as a
determnaton under secton 3801 of the Code. owever, the necessty
of watng for the e praton of the 2-year perod of mtaton pro-
vded n secton 3772 of the Code may be avoded n such cases as are
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559 380 .
descrbed n the reguatons by the use of a cosng agreement to effect
a determnaton. See secton 39.3801(a) ()- (c), (d) and (e) of
Reguatons 118.
S CTION 380 . TIM OR P R ORMING C RT IN CTS
POSTPON D Y R SON O W R
Rev. Ru. 55-127
The perod of tme requred to be dsregarded under secton 380 (f)
of the Interna Revenue Code of 1939 wth respect to ndvduas
servng n or n support of the rmed orces of the Unted States
n the orean combat zone, as defned n ecutve Order 10195,
C. . 1951-1, 6, s appcabe n the case of a |ont return of an nd-
vdua and hs wfe, but s not appcabe to a separate return of the
wfe shoud she eect to fe on that bass. The fng of a separate
return by the wfe for the ta abe year does not precude the fng
of a |ont return subsequenty by the husband and wfe for such ta -
abe year wthn the tme prescrbed by aw for the fng of a return
by the husband. See secton 72.301, T. D. 5279, C. . 19 3, 952.
Thus, even though the wfe fes a short orm 10 0, Indvdua Income
Ta Return, or a 10 0 , mpoyee s Optona U. S. Income Ta Re-
turn, an eecton to fe a |ont return or a separate ong orm 10 0 may
be made on or before the postponed due date for the fng of a return
by the husband. |ont return fed by the wfe, under a proper power
of attorney s a bndng eecton but f no authorzaton has been con-
ferred upon the wfe such eecton s not bndng upon the husband.
When fng ndvdua ncome ta returns under secton 380 (f) of
the Code, a statement, ndcatng the dates on whch combat servce,
or hosptazaton as the resut of combat servce, commenced and
termnated, shoud be attached to each return.
Rev. Ru. 55-382
The decson n eorge W. Carnrck v. Commssoner, 9 T. C. 756,
acquescence, C. . 19 8-1, 1, hodng that a defcency notce had
been tmey maed under crcumstances stated theren, s not con-
sdered by the Interna Revenue Servce to be n confct wth ts
poston wth respect to the perod of tme to be dsregarded under
secton 380 of the Interna Revenue Code of 1939 for the purpose of
determnng the due date for fng returns of ncome.
dvce has been requested reatve to the method of computng the
perod of tme to be dsregarded by members of the rmed orces
of the Unted States under secton 380 of the Interna Revenue Code
of 1939 wth partcuar reference (1) to the perod of tme to be ds-
regarded n determnng the perod of mtaton on assessment and
coecton, and (2) to the perod of tme to be dsregarded for the
purpose of determnng the due date for fng returns of ncome.
Secton 380 provdes that n the case of certan ndvduas outsde
of the mercas after December 6,19 1, the perod of tme begnnng
and endng as of the dates theren mentoned sha be dsregarded
n determnng, under the nterna revenue aws, n respect of any ta
abty of such ndvduas, whether the varous acts enumerated n
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5 380 .) 560
that secton were performed wthn the tme prescrbed by aw.
mong the acts so enumerated are those whch are requred to be
performed wthn a perod of mtaton reckoned from the happenng
of an event and others whch are requred to be performed on or
before certan f ed dates.
In George W. Carnrck v. Commssoner, 9 T. C. 756, acquescence,
C. . 19 8-1, 1, the Ta Court of the Unted States consdered the
tmeness, under secton 380 (a) of the Code, of a notce of defcency
n 19 1 ta es maed n ugust 19 5 to a ta payer whose 19 1 return
was fed on March 16,19 2, and who, from ebruary 19 to ebruary
19 5, as a member of the rmed orces of the Unted States, was
contnuousy outsde the mercas and n the uropean theatre of
operatons. In hodng that the defcency notce had been tmey
maed to the ta payer, the court stated n part as foows:
Snce the pettoner s return was fed on March 16, 19 2. the statute
of mtatons woud ordnary hnve e pred on March 10, 19 5. owever, by
reason of secton 380 (a) of the Code, the statute was toed when pettoner
embarked for the Unted ngdom n ebruary 19 , after the statute had run
for ess than two years. Under the provsons of that secton, the perod of
tme durng whch pettoner was contnuousy outsde the mercas, and the
ne t 90 days thereafter, are to be dsregarded n determnng whether the re-
spondent sent the notce of defcency wthn the prescrbed tme. Pettoner
returned to ths country n ebruary 19 5. Thereafter, the statute of mta-
tons st had more than a year to run. Notce of defcency was sent n ugust
19 5, and so there can be no queston but that ts mang was tmey.
The poston taken by the Ta Court that, n cases where perods
of tme are to be dsregarded under subsecton (a) of secton 380
of the Code, n determnng the tme wthn whch a notce of def-
cency may be ssued, there shoud be taken nto account the perod
of tme otherwse remanng as of the date of the ta payer s departure
from the contnenta Unted States, for the ssuance of the notce of
defcency, s n harmony wth the e ampe gven n secton 72.203(c)
of Treasury Decson 5279, C. . 19 3,952, at page 968. That e ampe
hods that where, n the case of a member of the mtary forces, a
perod of tme s to be dsregarded under secton 380 n determnng
whether a petton was tmey fed wth the Ta Court, there shoud
be taken nto account the perod otherwse remanng for the fng
of such petton (under sec. 272 of the Code) as of the date of the
ta payer s departure from the contnenta Unted States:
ampe. On pr 1, 19 3, the Commssoner duy maed to , a member
of the mtary forces of the Unted States, a notce of defcency n respect of
s ncome ta for the ta abe year begnnng on anuary 1, 19 1. Under the
provsons of secton 272, has 90 days after the notce s maed wthn whch to
fe a petton wth The Ta Court of the Unted States for a redetermnaton of
the defcency. eaves the contnenta Unted States on May 1,19 3, and serves
on actve duty outsde the contnenta Unted States unt he returns thereto on
pr 30, 19 . does not agan serve outsde the contnenta Unted States
unt after October 1 , 19 . Under the provsons of ths secton the ast day
on whc may tmey fe a petton wth The Ta Court of the Unted States
for a redetermnaton of the defcency s October 1 , 19 . Ths date s deter-
mned as foows: the day on whch the notce of defcency was maed, that s
pr 1, 19 3, s e cuded and the day of s departure from the contnenta
Unted States, that s, May 1, 19 3, s ncuded n determnng that porton of
the 90-day perod whch had e pred on s departure from the contnenta Unted
States, whch s 30 days the perod of tme whch s dsregarded commences at
the frst moment of May 2, 19 3, the day foowng s departure from the con-
tnenta Unted States, and termnates at the ast moment of ugust 15,19 , te
15th day of the fourth month foowng the month n whch ceases to serve out-
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561 Regs. 131, 315.2.
ade the contnenta Unted States and the 60th day thereafter (the 90 days for
fng a petton wth The Ta Court ess 30 days thereof whch had e pred on
s departure from the contnenta Unted States) s October 1 , 19 .
smar poston was taken n the e ampe gven n secton 72.503
(a) of Treasury Decson 5279, C. . 19 3, 952, at page 971, regard-
ng the tme to be dsregarded n the fng of a petton wth the Ta
Court, under secton 380 , by , a cvan, to whom the Commssoner
had maed a notce of defcency n respect of hs 19 1 ncome ta es
on ebruary 1, 19 3, and who had eft the mercas for ngand on
March 1,19 3, and had returned to the mercas on March 31,19 .
In the same e ampe t was hed that f (the cvan) makes hs
edera ncome ta return for 19 2 on a caendar year bass, the due
date for fng hs ncome ta return for such ta abe year , under sec-
ton 380 , s une 29,19 (the nneteth day after s return to the
mercas . It w be observed that there was not added to the tme
to be dsregarded the perod between March 1, 19 3, when eft
the mercas, and March 15, 19 3, the date on whch he woud have
been requred to fe hs return for 19 2 under secton 53(a) of the Code.
The same rue woud appy n determnng the due date for fng
an ncome ta return by a member of the mtary forces, under smar
crcumstances.
The decson n the Carnrck case reatng to the perod of tme to
be dsregarded under secton 380 of the Code, n determnng whether
a notce of defcency was tmey maed to a member of the mtary
forces of the Unted States, s not consdered by the Interna evenue
Servce to be n confct wth ts poston reatng to the due date of a
edera ncome ta return where, by reason of the ta payer s absence
from the mercas, a perod of tme s to be dsregarded under secton
380 n determnng wnether a return was tmey fed.
S CTION 3806. MITIG TION O CT O R N GO-
TI TION O W R CONTR CTS OR DIS LLOW NC
O R IM URS M NT
ffect of nson ct on contracts and subcontracts sub|ect to or
e empted from renegotaton under the Renegotaton ct of 1951, as
amended and e tended. See Rev. Ru. 55-173, page 10 .
D R L IR RMS CT
S CTION 1
eocato s 131, Secton 315.2: Defntons. Rev. Ru. 55-358
Secton 1(3) of the edera rearms ct, 15 U. S. C. 901(3),
demes a frearm as any weapon, by whatever name known, whch s
desgned to e pe a pro|ecte or pro|ectes by the acton of an e -
posve and a frearm muffer or frearm sencer, or any part or parts
of such weapon. ed, a psto or revover grp, whether of standard
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Regs. 131, g 315.27. 562
or custom desgn, s a component part of a frearm, as dstngushed
from accessores or attachments thereto, and therefore s a frearm
wthn the purvew of secton 1 (3) of the ct. Whe a deaer, defned
n secton 1(5) of the ct, 15 U. S. C. 901(5), may manufacture
speca stocks, etc., a cense as a manufacturer s requred to aw-
fuy engage n the manufacture or mportaton of psto or revover
grps n quantty ots for purposes of sae or dstrbuton.
Reguatons 131, Secton 315. 0: Genera. Rev. Ru. 55-3 2
( so Part I, Secton 181.)
deaer who engages In the busness of assembng frearms from
component parts n quantty ots for purposes of sae or dstrbuton
n nterstate or foregn commerce must procure a cense as a manu-
facturer of frearms, pursuant to the provsons of the edera re-
arms ct. Labty to the manufacturer s e cse ta mposed under
secton 1S1 of the Interna Revenue Code of )5 woud be ncurred
on the subsequent sae of the frearms so produced.
dvce has been requested whether t s necessary to obtan a manu-
facturer s cense n order to assembe rfes.
Secton 1 of the edera rearms ct, 52 Stat. 1250,15 U. S. C. 901,
provdes n part that the term manufacturer ncudes a person
engaged n the busness of manufacturng frearms, etc., for purposes
of sae or dstrbuton. It aso provdes that a deaer may repar
or ft speca barres, stocks, trgger mechansms or breech mechansms
to frearms.
The atter provson permts a censed deaer to engage n such
actvty on an ndvdua tem bass but, n effect, precudes a deaer
from engagng n the busness of assembng frearms from component
parts n quantty ots for purposes of sae or dstrbuton n nterstate
or foregn commerce. ccordngy, n order to assembe frearms for
such purposes, a cense as a manufacturer of frearms must frst be
procured n accordance wth the edera rearms ct. so, ab-
ty for the manufacturer s e cse ta , mposed under secton 181 of
the Interna Revenue Code of 195 , s ncurred on the subsequent sae
of the frearms so produced from the component parts.
S CTION 1(3)
Reguatons 131, Secton 315.27: rearm. Rev. Ru. 55-173
( so Sectons 315.71, 315.72.)
barre acton comprsed of the barre wth front and rear
sghts front and rear stock bands recever wth compete bot,
trgger acton, magazne, etc., assembed, s a frearm as defned
by the edera rearms ct.
dvce has been requested whether barre actons as descrbed
heren are frearms as defned by the edera rearms ct or whether
they are consdered parts wth no records requred to be kept nor e cse
ta es pad.
Secton 1(3) of the edera rearms ct, 15 U. S. C. 901(3), de-
fnes a frearm as any weapon, by whatever name known, whch s
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563 Regs. 131, 315.72.
desgned to e pe a pro|ecte or pro|ectes by the acton of an e po-
sve and a frearm muffer or frearm sencer, or any part or parts of
such weapon. Sectons 315.71 and 315.72 of Reguatons 131 requre
manufacturers and deaers to mantan compete and adequate records
of a frearms manufactured or sod, ncudng frearms n an un-
assembed condton, but not ncudng parts of frearms.
It s hed that a barre acton comprsed of the barre wth front
and rear sghts front and rear stock bands recever wth compete
bot, trgger acton, magazne, etc., s a weapon, compete e cept for
the stock, whch s capabe of e peng a pro|ecte or pro|ectes by
the acton of an e posve. ccordngy, component parts when con-
sdered as an assembed or unassembed unt, consttute frearms wth-
n the purvew of secton 1(3) of the edera rearms ct as ds-
tngushed from parts of frearms as contempated by sectons 315.71
and 315.72 of eguatons 131. owever, the provsons of secton
181 of the Interna Revenue Code of 195 , are not appcabe to the
sae thereof.
S CTION 3
Reguatons 131, Secton 315. 0: Genera.
Referra of orders for frearms to manufacturers by censed deaers.
See Rev. Ru. 55-33, page 128.
Reguatons 131, Secton 315.71: Manufacturers
records.
Cassfcaton of barre actons under the edera rearms ct.
See Rev. Ru. 55-175, page 562.
Reguatons 131, Secton 315.72: Deaers
records.
Cassfcaton of barre actons under the edera rearms ct.
See Rev. Ru. 55-175, page 562.
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P RT I
LCO OL T RULINGS ND D CISIONS
SU P RT . RULINGS ND D CISIONS UND R T
INT RN L R NU COD O 195
Rungs and decsons pubshed n Part III, Subpart , of the
Interna Revenue uetn are based on the appcaton of provsons
of the Interna Revenue Code of 195 and, uness otherwse noted
theren, are pubshed wthout consderaton as to any appcaton
of the provsons of the Interna Revenue Code of 1939, the edera
coho dmnstraton ct, or reated pubc aws.
SU TITL . LCO OL, TO CCO ND C RT IN
OT R CIS T S
C PT R 51. DISTILL D SPIRITS, WIN S, ND R
SU C PT R . G LLON G ND OCCUP TION L T S
RT I. G LLON G T S: SU P RT . DISTILL D SPIRITS
S CTION 5008. STRIP ST MPS OR DISTILL D
SPIRITS
Rev. Ru. 55-100
Interna revenue dsted sprts botte strp stamps (red, green and
bue) w, on and after anuary 1, 1955, be furnshed to quafed
Sersons wthout cost. Under the provsons of secton 5008 of the
nterna Revenue Code of 195 , the charge of one cent each (one-fourth
cent n the case of the denomnaton of ess than one-haf pnt) for
strp stamps, whch was mposed under the Interna Revenue Code of
1939, s emnated.
On and after anuary 1, 1955, strp stamps w be ssued wthout
charge on the bass of orders, propery approved, on orm 03, Order
for otte Stamps otted-n- ond Strps, and orm 28, Order
for otte Stamps Other than ottng-n- ond Strps. The
money vaue strp stamps heretofore provded w be devauated and
w contnue to be ssued after anuary 1, 1955, but wthout charge.
It s contempated that n the future the pref symbo ndcatng the
nterna revenue coecton dstrct w be omtted from the symbos
appearng on the strp stamps, but each stamp, e cept the strp stamps
of ess thau one-hat pnt denomnaton, w bear a sera number.
(565)
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5 50 1. 566
The ssuance of strp stamps wthout charge w make t unneces-
sary for owners of such stamps to present unusabe stamps to Dstrct
Drectors for e change. Such stamps w be turned over to the store-
keeper-gauger for destructon.
Cams for redempton of strp stamps purchased on or before De-
cember 31,195 , w be fed wth the approprate ssstant Regona
Commssoner, coho and Tobacco Ta , Dy the owners thereof. Such
cams shoud be accompaned by the stamps, uness the stamps were
ressued pursuant to a verfed nventory, and an nventory of the
stamps. Inventores of stamps hed by domestc botters w be ver-
fed by storekeeper-gaugers at the premses and the stamps ressued
to the botters for use on and after anuary 1,1955. Stamps hed n
ths country by mporters w be surrendered to the approprate s-
sstant Regona Commssoner, coho and Tobacco Ta , for ver-
fcaton of nventory and, where desred, for ressuance. Stamps hed
abroad by mporters or ther agents or foregn suppers may be sur-
rendered for verfcaton of nventores and ressuance, to such n-
terna revenue or customs offcers on duty abroad, as may be desg-
nated to perform ths task by the Commssoner of Interna Revenue
and the Commssoner of Customs. Cams of the type heren referred
to w be processed n the reguar manner for payment. ttenton s
nvted to the reguatons whch provde that the redempton of ths
knd of stamp may be made ony n quanttes of the money vaue of
5 or more and where cam s fed wthn 2 years from the date of
ssue of the stamps.
S CTION 5009. ST MPS OR DISTILL D SPIRITS
WIT DR WN OR PORT TION
Procedure for handng stamps to be aff ed to packages and casks
of dsted sprts and acoho ntended for e port, under the Interna
Revenue Code of 1951. See Rev. Ru. 55-102, page 569.
SU P RT C-WLN S
S CTION 50 1. IMPOSITION ND R T O T
( so Secton 5051.) Rev. Ru. 55-101
Under the provsons of the Interna Revenue Code of 195 , and
the reguatons promugated pursuant thereto, the method of payment
of nterna revenue e cse ta es on beer and wne mposed by sectons
5051 and 50 1 of the Code of 195 w be by ta returns nstead of by
stamps. See 26, the eer Reguatons, C R Part 2 5, and the Wne
Reguatons, 26 C R Part 2 0, effectve anuary 1, 1955. Under
such reguatons, the sae of beer and wne stamps was dscontnued as
of the cose of busness on December 31,195 .
orm 203 , eer Ta Return, provdes spaces for showng the
name and address of the brewery and for the date and sgnature of
the person e ecutng the return, as we as the capacty n whch
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567 50 1.
he sgns. There are fve nes at the top of the form for enterng
the amounts of the tota ta es due from Schedue , pus ad|ustments,
gross ta , mnus ad|ustments, and ta to be pad wth the return.
Schedue provdes for showng the tota barres of keg beer and
botted beer, as we as the amount of ta , whch s the same amount
to be entered on ne 1 at the top of the form. Schedues and C
w be used for refectng nformaton on ad|ustments whch w
ncrease or decrease the amount of ta due the Government. t the
top of the return form, space has been provded for showng the
Sera No. of the return whch, for each ta payer, w begn wth
fc on anuary 1 of each caendar year.
orm 2050, Wne Ta Return, provdes space at the top for
showng the name of the ta payer, the operatng bonded name of the
wnery or wne cear and the number and address thereof. Immed-
atey beow, fve spaces are provded for showng the tota ta from
Schedue , ad|ustments from Schedue , tota, ess credt ad|ust-
ments from Schedue C, and the amount of ta to be pad wth the
return. Spaces are then ndcated for the sgnature of the ndvdua
sgnng the return, the capacty n whch he sgns, and the date.
Schedue provdes for nformaton showng the computaton of
the ta , and Schedues and C provde spaces for ndcatng the pus
and mnus ad|ustments. There s aso provded at the top of the
form a space for showng the sera number of the return. Such sera
number w begn wth 1 for each ta payer on the frst day of each
caendar year.
orm 2052, Prepayment of Wne Ta has been adopted as the
form for use of wneres and wne cears n connecton wth the pre-
payment of the wne ta . Such form s sef-e panatory and w be
seray numbered n the same manner as orm 2050.
The beer ta return, orm 203 , w be prepared n quadrupcate
and w be submtted, wth the accompanyng remttance, to the Ds-
trct Drector of Interna Revenue not ater than the cose of the
busness day ne t succeedng that on whch the ta abty s ncurred,
e cept that orm 203 need not be prepared nor the remttance of the
ta made unt the tota gross ta (for one or more days) reaches 100.
owever, regardess of the amount of gross ta , orm 203 , wth re-
mttance, w be prepared and fed coverng the ast day or days of
the ne t precedng month, even though the amount of ta due s ess
than 100. The tme for fng the wne ta return, orm 2050, s
the same, e cept that the ta due w be aowed to accumuate unt
the tota for successve days s 10 nstead of 100.
The orgna and one copy of orm 203 or orm 2050, wth remt-
tance n fu for the net amount of ta , w be maed or devered
to the Dstrct Drector of Interna Revenue. One copy of the return
w be retaned by the ta payer, and the remanng copy, n the case
of brewers, w be transmtted to the ssstant Regona Comms-
soner, coho and Tobacco Ta , wth orm 103, rewer s Monthy
Report of Operatons, not ater than the 10th day of the succeedng
month. The ta may be pad by cash, or by check or money order made
payabe to the Dstrct Drector of Interna Revenue. The Wne
Reguatons provde that where the propretor of a bonded wnery or
a bonded wne cear desres to remove wne sub|ect to ta n an amount
n e cess of hs ta deferra bond coverage, orm 2052 w be used
88 050
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5057. 5G3
and fed n dupcate wth the Dstrct Drector of Interna Revenue,
accompaned by an approprate remttance.
eer and wne stamps whch were not used and whch were n the
hands of brewers and propretors of wne cears and wneres at the
cose of busness on December 31,195 , may be submtted for redemp-
ton on orm 8 3 to the ssstant Regona Commssoner, coho
and Tobacco Ta . (See the Msceaneous Reguatons Reatng to
Lquor, 26 C R Part 170.)
Copes of the severa forms whch are dscussed n ths Revenue
ng are avaabe from the offces of the ssstant Regona Com-
mssoner, coho and Tobacco Ta .
SU P RT D.- R
S CTION 5051. IMPOSITION ND R T O T
Procedure for handng beer ta returns under the Interna Revenue
Code of 195 , and the dsposton of unused beer stamps. See Rev.
Ru. 55-101, page 500.
S CTION 5053. MPTIONS
20 C R 2 5.291: Recprocatng foregn coun-
tres.
Costa Rca added to st of recprocatng foregn countres. See
Rev. Ru. 55-362, page 577.
S CTION 5057. R UND ND CR DIT O T , OR
R LI ROM LI ILITY
26 C R 2 5.253: eer ost or destroyed by Rev. Ru. 55-3 3
fre, casuaty, or act of God.
Secton 5057(b) of the Interna Revenue Code of 195 and secton
2 5.253 of the eer Reguatons permt the refund of ta or aowance
of credt for the ta pad on beer ost as a resut of breakage before
the transfer of tte thereto to any other person. Sectons 2 5.25 and
2 5.255 of the reguatons estabsh the procedure for the fng of
cams for refund or credt, respectvey, and requre that cams under
secton 5057 of the Code must be fed wthn 6 months from the date
of the oss. ed, due to the frequency of osses of beer as a resut of
breakage, brewers shoud fe cams on a monthy bass for refund of
ta or for aowance of credt for the ta pad on beer so ost before
tte to the beer has been transferred to another person. The day
summary record of the remova of botted beer, requred by secton
2 5.351 of the eer Reguatons, must be kept by the brewer showng
the quanttes of beer Tost by breakage after remova but whe st
owned by the brewer.
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569 5173.
SU P RT . G N R L PRO ISIONS
S CTION 5061. M T OD O COLL CTING T
( so Secton 5009.) ev. Ru. 55-102
Secton 5061 of the Interna Revenue Code of 195 provdes that the
ta es on dsted sprts and on other products sha be pad by return,
wth the provso that the ta es sha contnue to be pad by stamp unt
the Secretary or hs deegate sha, by reguatons, provde for the pay-
ment of the ta es by return. The reguatons provde for e tendng
the use of the e stng dsted sprts e cse ta stamps to cover
packages of dsted sprts, and aso provde that storekeeper-gaugers
w ssue whoesae quor deaer s stamps n approprate nstances,
thereby emnatng the further use of the dsted sprts coupon
stamps for ta payng dsted sprts.
Under the reguatons ssued pursuant to secton 5009 of the Interna
Revenue Code of 195 , the fve and ten cent stamps aff ed to packages
and casks of dsted sprts ntended for e port w be furnshed t y
Dstrct Drectors of Interna Revenue wthout charge, upon recept
of orm 206, Dsted Sprts for portaton, ree of Ta ,
propery e ecuted and accompaned by orm 1520, Report of Sprts
Gauged, or orm 1 56, coho for port, propery e ecuted and
accompaned by orm 1 0, Report of coho Gauged. The stamps
now beng used w contnue to be ssued unt such tme as new stamps
may be provded.
S CTION 5062. R UND ND DR W C IN C S
O PORT TION
Reguatons 28, Secton 176.11a: Recprocatng
foregn countres.
Costa Rca added to st of recprocatng foregn countres. See
Rev. Ru. 55-362, page 577.
SU C PT R . DISTILL RI S
P RT I. ST LIS M NT
S CTION 5173. DISTILL RY I TUR S ND
UIPM NT
26 C R 235.129: ottng tanks. Rev. Ru. 55-56
Secton 235.129 of the Rectfcaton of Sprts and Wnes Regua-
tons provdes n part that outet ppe connectons on bottng tank3
must be equpped wth check vaves. Ths requrement appes to
ppenes attached to bottng tanks nstaed at rectfyng pants pror
to e stng reguatons as we as those nstaed subsequent thereto.
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1519 . 570
P RT II. OP R TION
S CTION 5193. DR WING, G UGING, ND M R ING O
DISTILL D SPIRITS
26 C R 225. 15: To change knd of cooperage. Rev. Ru. 53- 0
Neutra gran sprts of 190 degrees of proof may be receved at
an nterna revenue bonded warehouse, reduced n proof to 111 de-
grees of proof In buk gaugng tanks n the regauge room of the
warehouse, and drawn off nto reused wooden barres for the purpose
of Improvng the quaty of the sprts.
dvce has been requested whether t s permssbe to receve
neutra gran sprts at an nterna revenue bonded warehouse at 190
degrees of proof, dump such sprts nto buk gaugng tanks n the
regauge room n order to reduce the proof thereof to 111 degrees and
draw the sprts off nto reused wooden barres, and, f so, what sera
numbers shoud be paced on the packages.
Secton 225. 15 to secton 225. 17, reguatons reatng to the ware-
housng of dsted sprts, make provson for the transfer of
sprts from one knd of cooperage to another and estabsh the
procedure to be foowed reatve thereto. Secton 225. 08 pro-
vdes n part that sprts n warehouse storage tanks whch were
produced at 190 degrees or more of proof may be reduced n such
storage tanks to not ess than 111 degrees of proof pror to beng
drawn nto packages. Secton 225. 11 of the reguatons provdes
that a packages fed from warehouse storage or gaugng tanks sha
be seray numbered, separatey from packages fed at the dstery,
begnnng wth number 1, preceded by the etter T, as T-, T-2, etc.
Whe the reguatons do not specfcay provde for the proposed
procedure, t s hed that the use of buk gaugng tanks for such
transfer, dumpng, reducng n proof and fng of packages wth
dsted sprts, n accordance wth the appcabe provsons of Regu-
atons 10, as ndcated above, consttutes substanta compance there-
wth and may be permtted, upon proper request, by the ssstant
Regona Commssoner, coho ana Tobacco Ta . Such operatons
may be performed ony at such tmes as there are no regauge actv-
tes beng conducted and when the servces of a storekeeper-gauger
are avaabe for necessary supervson. The packages n whch the
sprts are paced after reducton n proof shoud be seray numbered
n accordance wth Secton 225. 11.
S CTION 519 . TR NS R O SPIRITS T R GIST R D
DISTILL RI S
26 C R 225.12 : Ppenes. Rev. Ru. 55-359
so 26 C R 225.581 236.383.)
Dsted sprts may be ta pad In two or more buk gaugng
tanks of an Interna revenue bonded warehouse for transfer by ppe-
ne to a rectfyng pant for perfectng bends at such pant.
dvce has been requested whether dsted sprts may be ta pad
n e cess of the amount requred for a bend, a parta transfer by
ppene made to the rectfyng pant processng tank, and the rem-
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571 519 .
nants remanng n the gaugng tanks subsequenty transferred to a
separate processng tank.
Secton 225.581 of the Reguatons reatng to the Warehousng of
Dsted Sprts provdes n part that when sprts have been gauged
or regauged for ta payment they must be prompty ta pad and
removed from the warehouse. Secton 225.12 , reatve to ppene
transfers, requres that the ppenes must be so arranged as to permt
compete dranage or emptyng after each transfer of sprts.
Secton 235.383 of the Reguatons reatng to the Rectfcaton of
Sprts and Wnes, coverng the recept of sprts at a rectfyng pant
by ppene, by reference to secton 235.382, requres the rectfer to
gve notce on orm 122, Rectfer s Notce of Dumpng and Rectfca-
ton, to the nterna revenue offcer assgned to the rectfyng pant
mmedatey upon the transfer of sprts nto processng tanks.
In order to utze the ma mum gaugng tank factes n the
nstant case, the propretor desres to ta pay n e cess of the amount
of sprts needed for each batch of sprts to be bended at the rect-
fyng pant. The e act amount of each type of sprts requred n a
bend woud be transferred from the warehouse gaugng tank to a
processng tank at the rectfyng pant. The gaonage remanng n
the gaugng tank woud be retaned temporary. fter the requred
amount of each type of sprts had been transferred, the ppene
woud be ceared by ar. Subsequenty, the remnants remanng n
each tank woud be pumped to another processng tank and the ppe-
ne agan ceared by ar. Ths procedure woud be contnued unt
desred batches of bended sprts had been competed n the
rectfyng pant and a remnants had been transferred to the process-
ng tank contanng remnants ony.
It s hed that dsted sprts may be ta pad n two or more buk
gaugng tanks of an nterna revenue bonded warehouse n e cess of
the actua needs for perfectng bends at a rectfyng pant and the
remnants of such sprts eft n the warehouse tanks temporary after
the nta quanttes needed have been wthdrawn. owever, the
wthdrawa of the tota quantty of sprts from each tank must be
competed e pedtousy and wthn a 2 -hour perod n substanta
compance wth secton 225.12 and secton 225.581. so, orms 122
must be prepared after the recept of the ast depost and the ast
remnant n the respectve processng tanks for each batch competed
n the rectfyng pant, n substanta compance wth secton 235.383.
26 C R 225.581: Immedate remova upon ta -
payment.
Ta payment of dsted sprts n two or more buk gaugng tanks
of an nterna revenue bonded warehouse n e cess of the actua needs
for perfectng bends at a rectfyng pant. See Rev. Ru. 55-359,
page 570.
26 C R 235.383: Recept by ppene.
Ta payment of dsted sprts n two or more buk gaugng tanks
f an nterna revenue bonded warehouse n e cess of the actua needs
for perfectng bends at a rectfyng pant. See Rev. Ru. 55-359,
page 570.
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5212.1 572
P RT III. G N R L PRO ISIONS R L TING TO DISTILL RI S ND
DISTILL D SPIRITS
S CTION 5212. PR NTION ND D T CTION O
R UD
26 C R 182.526: Wthdrawa for ta free use Rev. Ru. 55-321
or for e port.
( so 5555 182.6 3.)
Secton 182.526 of the Industra coho Reguatons requres n
part that when acoho s wthdrawn free of ta from an ndustra
acoho pant or a bonded warehouse for scentfc purposes, use of
hosptas, etc., there sha be stenced on the Government head of
each package or sde of each case the purpose of wthdrawa, such as
ospta Use, Scentfc Purposes, etc. ed, n cases where the
wthdrawa permt, orm 1 50, coho for Use by States, Muncpa-
tes, osptas, Coeges, Scentfc Insttutons, tc., does not show
the specfc purpose for whch ta free acoho s wthdrawn, t w be
suffcent to show on the package and on orm 1 0, Report of co-
ho Gauged, the purpose of wthdrawa as Scentfc, or an appro-
prate abbrevaton thereof.
26 C R 225.6 0: Refng, gaugng, and mark- Rev. Ru. 55-399
ng packages of ta pad sprts wthdrawn
from a gaugng tank.
( so edera coho dmnstraton ct,
Secton 5(e) Reguatons No. 5, Sec-
ton 21.)
Procedure wth respect to the markng and brandng of whoesae
quor deaer packages contanng straght whsky ta pad at the end
of 8 years and consodated n the orgna packages whch are then
coated wth paraffn, and the subsequent abeng of such sprts
when botted.
dvce has been requested whether homogeneous straght whsky,
whch s ta pad at 8 years of age and consodated n the orgna
contaners as whoesae quor deaer packages, may st be desgnated
accordng to the orgna cass and type f the whoesae quor deaer
packages are coated on the outsde wth paraffn. If so, further advce
has been requested concernng the markngs and brands to be paced
en the whoesae quor deaer packages.
Secton 21, Cass 2 (b), (c), and (d) of Reguatons No. 5 provdes
that whsky botted on or after uy 1,1938, and aged n charred new
oak cooperage for not ess than 2 caendar months may be desgnated
straght whsky f a dstate from fermented mash of gran ds-
ted at not more than 1G0 degrees of proof and wthdrawn from the
cstern room of the dstery at not more than 110 degrees and not
ess than 80 degrees proof, whether or not such proof s further re-
duced pror to bottng to not ess than 80 degrees proof and further
as straght rye whsky or straght bourbon whsky f dsted
from a fermented mash of gran of whch not ess than 51 percent
s rye gran or corn gran, respectvey, and aged n charred new oak
cooperage. The reguatons defne age n the case of mercan type
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573 5217.
whsky, other than the varous types of corn whsky, as that perod
durng whch, after dstaton and before bottng, dsted sprts
have been kept n charred new oak contaners. Secton 39(a) (2) of
the reguatons requres that the age of any of the types of straght
whsky be stated substantay as foows: Ths whsky s years
and/or months) od.
Whsky produced and aged n accordance wth the standards re-
ferred to and whch s buk gauged soey for ta payment and return
(consodated) to the orgna packages for bottng at a ater date,
woud be consdered as havng remaned n the orgna oak contaners
from the date of depost n the warehouse. Therefore, the cassfca-
ton of the sprts and the prvege of camng age thereon woud re-
man unchanged. owever, the provson n the reguatons for
camng age contempates the storage of the sprts n standard oak
contaners under norma condtons. Therefore, and n accordance
wth the requred age statement n the case of straght whsky, age
may be camed ony for the tme the whsky n queston was stored
n the warehouse n standard oak contaners under norma condtons.
Snce no age may be camed on whsky for the perod of ts storage n
cooperage coated wth paraffn, the ma mum age to be shown on the
abes when the whsky s botted may not be n e cess of 8 years.
The whoesae quor deaer packages shoud be marked as ndcated
n the appcabe sectons of the eguatons reatng to the Warehous-
ng of Dsted Sprts, partcuary sectons 225.6 0 and 225.6 1.
If the orgna barres to be used for repackagng the ta pad whsky
are coated wth paraffn, such treatment woud make the barres com-
parabe to paraffn ned barres from the standpont of camng age
and the knd of cooperage shoud be marked on the barres as P R.
If the orgna barres to be used for repackagng the ta pad whsky
marked C are not so treated, the knd of cooperage to be shown on
the barre may be desgnated as C n accordance wth the ntent
of secton 225.6 0 of the reguatons.
S CTION 5217. MPTIONS R L TING TO N TION L
M RG NCY TR NS RS
26 C R 220.55 : odka. Rev. Ru. 55-11
( so Treasury Decson 586 , Secton 171.195.)
Sprts, ncudng acoho, transferred to a regstered dstery
pursuant to Treasury Decson 586 , C. . 1951-2, 2 8, may not be
redsted or otherwse used In the producton of vodka at a regs-
tered dstery.
dvce has been requested whether acoho transferred from an
ndustra acoho pant or an ndustra acoho bonded warehouse to
an nterna revenue bonded warehouse and redesgnated as neutra
sprts, pursuant to the provsons of Treasury Decson 586 , C. .
1951-2, 2 8, may be transferred to a regstered dstery for the
manufacture of vodka.
or the purpose of assurng avaabty of adequate suppes of
acoho at 160 of proof or more for Government use n case of a
natona emergency, secton 3183 of the Interna Revenue Code of
1839 and Treasury Decson 586 , ssued pursuant thereto, authorze,
among other thngs, the transfer of acoho from an ndustra acoho
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S 52 1. 57
pant or an ndustra acoho bonded warehouse to a dstery or
nterna revenue bonded warehouse for redstaton or storage or
any other purpose deemed necessary for the natona defense, wth the
prvege of wthdrawa therefrom, f of a proof of 160 or more, for
any ta free purpose authorzed by sectons 3100 to 3126, ncusve, of
the Interna Revenue Code of 1939 (sectons 5301 through 5320 of
the Interna Revenue Code of 195 ) or for any purpose authorzed
for ke sprts produced at a dstery. These provsons were n-
corporated n secton 5217 of the Interna Revenue Code of 195 .
Secton 220.55 of the Dsted Sprts Reguatons (formery sec-
ton 183.533 of Reguatons ) provdes n part that neutra sprts
whch are reduced to not more than 110 of proof and after such re-
ducton n proof are so treated by one of the methods set forth n the
reguatons so as to be wthout dstnctve character, aroma, or taste
sha be branded odka. Ths provson s based on secton 21 (a) of
of the edera coho dmnstraton Reguatons No. 5, reatng to
the abeng and advertsng of dsted sprts, whch prescrbes a
standard of dentty for odka n ke anguage. Thus, athough
odka may be produced at a regstered dstery, the reguatons
above cted requre wthdrawa at not more than 110 of proof and so
confct wth the requrement that acoho f transferred to a regstered
dstery or an nterna revenue bonded warehouse and removed for
beverage purposes be wthdrawn at a proof of 160 or more.
Therefore, there s no authorty for transferrng acoho from an
ndustra acoho pant or ndustra acoho bonded warehouse to an
nterna revenue bonded warehouse for ater transfer to a regstered
dstery for redstaton and utmate remova from bond as
odka even though the acoho s redesgnated as neutra sprts
n the nterna revenue bonded warehouse under secton 171.233 of
Treasury Decson 586 .
owever, acoho or neutra sprts transferred to nterna revenue
bonded warehouses from ndustra acoho pants and ndustra a-
coho bonded warehouses pursuant to Treasury Decson 586 may be
wthdrawn, f 160 of proof or more, ta pad and then transferred
to a rectfyng pant for the producton of odka. See Rev. Ru.
5 -336, C. . 195 -2,557.
Treasurt Decson 586 , Secton 171.195: u-
thorzed removas.
Producton of vodka from sprts transferred pursuant to Treasury
Decson 586 , C. . 1951-2,2 8. See Rev. Ru. 55-11 , page 36.
SU C PT R C INT RN L R NU OND D W R OUS S
P RT II. OP R TIONS
S CTION 52 1. SUP R ISION O OP R TIONS
26 C R 225.352: eys to propretor s ocks. Rev. Ru. 55-360
The propretor of an nterna revenue bonded warehouse may aff
hs ocks to any doors between nteror parts of a warehouse budng
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575 52 1.
or to any of the outsde doors of an ndvdua budng, provded that
as many keys to each of the propretor s ocks are furnshed to the
ssstant Regona Commssoner, coho and Tobacco Ta , as may
be requred. Where the outsde doors of a budng are to be secured
wth propretor s ocks, such ocks shoud be aff ed n such a manner
that the Government ock can be ndependenty aff ed and removed.
26 C 225.355: Warehouse to be kept ocked. ev. Ru. 55-115
Secton 225.355 of the Warehousng Dsted Sprts reguatons,
whch reates to the ockng of nterna revenue bonded warehouses,
provdes n part that where the dsted sprts or other property s n
mmnent danger of oss by fre, food, or other casuaty or where the
safety of the propretor or hs empoyees s endangered, and t s m-
practcabe to frst obtan authorzaton from the storekeeper-gauger n
charge or the ssstant Regona Commssoner, coho and Tobacco
Ta , cty or State fre or poce offcas or the propretor of the ware-
house may remove seas or ocks for the purpose of preventng oss of
property or of avodng danger to the safety of personne.
In order to advse the pant propretor and pubc or prvate fre or
poce organzatons reatve to the breakng of such ocks, the fo-
owng statement may be paced on or near warehouse doors n the form
of sgns or warnngs:
IN T NT O S RIOUS M RG NCY
I NTR NC IS N C SS RY TO PR NT OR COM T IR ,
LOOD, OR OT R DIS ST R, T LOC S ON T IS W R -
OUS M Y RO N Y M M RS O PU LIC OR PRI T
IR OR POLIC ORG NIZ TIONS, OR T PROPRI TOR.
W N SUC NTR NC Y ORC IS M D , T PROPRI TOR
MUST NOTI Y T STOR P R-G UG R WIT OUT D L Y,
ND M INT IN STRICT GU RD UNTIL IS RRI L.
26 C R 225.357: dmttance of propretor. Rev. Ru. 55-361
( so 26 C R 225.359.)
though the gaugng of sprts at an nterna revenue bonded
warehouse Is prohbted under ordnary crcumstances e cept for of-
fca purposes, the provsons of secton 225.357 of the Reguatons
reatng to the Warehousng of Dsted Sprts for access to the
sprts for other egtmate purposes Is nterpreted as permttng
the takng of gross and net weghts and proofs of sprts n specfc
nstances, such as oss or quaty studes, etc., wth the approva of
the ssstant Regona Commssoner, coho and Tobacco Ta ,
where the data obtaned woud be of nterest to the Government as
we as to the propretor.
dvce has been requested regardng the regauge of e permenta
packages of dsted sprts at the end of the e perments conducted
n an nterna revenue bonded warehouse for the purpose of deter-
mnng the rate of oss sustaned durng storage.
The commerca gaugng of sprts remanng n storage s prohb-
ted by secton 225.359 of the Reguatons reatng to the Warehousng
of Dsted Sprts, whch provdes, Sprts sha not be gauged e -
cept as requred for offca purposes. Secton 225.357 of the regua-
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32 7.) 576
tons makes provson for the propretor of an nterna revenue bonded
warehouse to have admttance, n the presence of a storekeeper-gauger,
to the warehouse and the sprts theren for the purpose of reparng
cooperage, takng necessary measures to prevent waste of the sprts
by eakage or for other egtmate purposes.
The gaugng of sprts n the manner prescrbed n the reguatons,
n specfc nstances such as oss or quaty studes, etc., wth the ap-
prova of the ssstant Regona Commssoner, coho and To-
bacco Ta , where the data obtaned woud be of nterest to the Govern-
ment as we as to the propretor, comes wthn the scope of other
egtmate purposes and therefore s not n voaton of secton 225.359
of the reguatons. Ths work shoud be done at a tme or tmes when
a storekeeper-gauger s avaabe for the requred supervson.
26 C R 225.359: Commerca gaugng.
Gaugng of sprts n specfc nstances, such as oss or quaty
studes wth the approva of the ssstant Regona Commssoner,
coho and Tobacco Ta . See Rev. Ru. 55-361, page 575.
S CTION 52 7. WIT DR W L O SPIRITS OR
PORT TION
26 C R 182.591: port bonds. Rev. Ru. 55-116
n e porter may e ecute one bond, orm 1 95, Contnung -
port ond ( coho Wthdrawn Ta - ree for portaton) cover-
ng e portatons from more than one ndustra acoho bonded
warehouse operated n the same nterna revenue regon.
dvce has been requested whether one contnung e port bond on
orm 1 95 may be e ecuted coverng e portatons from more than one
ndustra acoho bonded warehouse n eu of a separate e port bond
for each such ndustra acoho bonded warehouse.
Secton 182.59 of the Industra coho Reguatons provdes n
part that a contnung bond, orm 1 95, may be fed by the e porter
to cover e portatons of acoho from an ndustra acoho bonded
warehouse from tme to tme and that the pena sum of the bond
sha be suffcent to cover the ta at the dsted sprts rate on the
ma mum quantty of acoho that may reman unaccounted for at
any one tme but not n e cess of 200,000 or ess than 1,000.
There s no provson n the reguatons whch woud prohbt the
fng of one bond by an e porter to cover wthdrawas for e porta-
ton of acoho from more than one ndustra acoho bonded ware-
house. ccordngy, one bond, orm 1 95-, may be e ecuted by an
e porter coverng e portatons from more than one ndustra acoho
bonded warehouse operated n the same nterna revenue regon. The
pena sum of the bond must cover the ta on the ma mum quantty of
acoho that may reman unaccounted for at any one tme so that the
tota ta on such quantty of acoho does not e ceed the ma mum
amount stated n the bond. so, consent of surety must be fed
specfyng any addtona warehouses from whch wthdrawas w
be made.
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577 | 5281.
S CTION 52 8. WIT DR W L O SPIRITS WIT OUT
P YM NT O T
26 C R 182.630b: Recprocatng foregn coun- Rev. Ru. 55-3621
tres.
( so 5362, 5053, 5062 26 C R 225.861,2 0.691,
2 5.291 Reguatons 28, Secton 176.11a.)
coho, dsted sprts, wne and fermented mat quor may be
wthdrawn free of ta or wth beneft of drawback for use as suppes
on arcraft regstered n Costa Rca and actuay engaged n foregn
trade or trade between the Unted States and ts possessons, where
trade by foregn arcraft s permtted. ccordngy, Revenue Rung
5 -576, C. . 195 -1, 32, s hereby modfed to ncude Costa Rca.
s so modfed, the Revenue Rung reads as foows:
Under the provsons of secton 309 of the Tarff ct of 1930, as amended
( 6 Stat 690, as amended 19 U. S. C. 1309) and appcabe reguatons of the
Interna Revenue Servce, acoho, dsted sprts, fermented mat quor and
wne may be wthdrawn free of ta or wth beneft of drawback for use as
suppes on arcraft regstered n the foowng foregn countres and actuay
engaged n foregn trade or trade between the Unted States and ts possessons,
where trade by foregn arcraft s permtted:
ustraa
Denmark
Norway
ahama Isands
cuador
Peru
egum
rance
Sweden
ermuda
Israe
Swtzerand
raz
Itay
Unted ngdom
Canada
apan
Costa ca
The Netherands
26 C R 225.861: Recprocatng foregn coun-
tres.
Costa Rca added to st of recprocatng foregn countres. See
Rev. Ru. 55-362, above.
SU C PT R D. R CTI YING PL NTS
P RT II. OP R TION
S CTION 5281. R GUL TION O USIN SS O
R CTI I R
26 C R 235.3 5: orm 27- Suppementa. Rev. Ru. 55-176
( so Part III-C, Secton 5 (e) Regu-
atons No. 5, Secton 22.)
sma percentage of recovered sprts (not neutra) may be used,
wthn the 2y2 percent mtaton permtted for harmess coorng,
favorng, and bendng materas prescrbed n secton 22 of Regua-
tons No. 5, n a bend of straght whsky and neutra sprts. The
basc bend must consst of the prescrbed percentages of straght
whsky and neutra sprts wthn the mtatons of the approved
formua, orm 27- Suppementa, ormua and Process for Rect-
fed Products, coverng such bend. owever, neutra sprts as such
urther modfed by Rerenue Rung 55-7 1, I. R. . 1955-51, to Incude the edera
Repubc of Germany.
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5301.) 678
may not be used as a part of the 2 2 percent permtted for coorng,
favorng and bendng materas. See Rev. u. 6 -350, C. .
195 -2, 58. Neutra sprts whch have been reduced n proof to
ess than 190 and stored n reused cooperage, as for e ampe, for a
perod of from 2 to years are st cassed as neutra sprts wthn
the ntent of Revenue Rung 5 -350, supra, and, accordngy, may
not be used as a part of the 2 /2 percent permtted for coorng, favor-
ng, and bendng materas.
SU C PT R .-INDUSTRI L LCO OL PL NTS, OND D W R -
OUS S, D N TURING PL NTS, ND D N TUR TION
RT I. INDUSTRI L LCO OL PL NTS. OND D W R OUS S. ND
D N TURING PL NTS
S CTION 5301. ST LIS M NT O INDUSTRI L
LCO OL PL NTS
26 C R 182.7: Industra coho Pants : T. D. 6117
Restrct ons
( so Sectons 5302, 5303 26 C R 182.51 ,
182.715.)
TITL 26 INT RN L R NU C PT R I. SU C PT R , P RT US.
INDUSTRI L LCO OL
Msceaneous amendments
Treasury Department,
Offce of the Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On November 17,195 , a notce of proposed ruemakng wth respect
to part 182 of tte 26 (1939) of the Code of edera Reguatons was
pubshed n the edera Regster 19 . R. 7 08). The purposes
of the amendments were stated as (a) to mpement the provsons
of the Interna Revenue Code of 195 (1) by permttng the conduct of
other busnesses on the ndustra acoho pfant premses, (2) by de-
etng the restrcton that ndustra acoho pants may not be ocated
wthn 600 feet of a vnegar pant usng the vaporzng process, (3) by
deetng the restrcton that ether may not be produced on ndustra
acoho pant premses, ( ) by deetng the requrement that sgns
at ndustra acoho pants, bonded warehouses, and denaturng pants
be panted n o coors or gded, (5) by deetng the requrement for
a speca appcaton to bud a fence around an ndustra acoho
pant, bonded warehouse, or denaturng pant, (6) by requrng the
regstry of ony those sts set up for dstaton, redstaton, or
recovery of acoho or rum, (7) by changng the retenton perod for
whoesae quor deaer records from to 2 years, (8) by deetng the
requrement that e port stamps be pad for, and (9) by permttng
the recovery of denatured rum, and (b) to mpement admnstratve
decsons reatve to ndvdua suretes, the approva of orms 161
and 1696 by the storekeeper-gauger, the methods of ta payment of
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579 5301.
acoho, tank truck shpments, the transfer of nstructons to empoyees
from reguatons to nterna management documents, the use of orm
92, the date of submsson of reports by permttees, the emnaton of
orm 129, and the remova of reguatory provsons reatve to ethy
acetate. No data, vews, or arguments pertanng thereto havng been
receved wthn the perod of 15 days from the date of pubcaton
of sad notce accordngy, part 182 of tte 26 of the Code of edera
Reguatons s amended as foows:
Paragraph 1. Wherever the term supervsor or dstrct super-
vsor appears n the sectons of the reguatons revsed by ths Treas-
ury decson, such term s hereby amended to read assstant regona
commssoner .
Par. 2. Subsecton 182.6(n) and 182.36,182.37,182.138,182.189,
182.190, 182.191, 182.192, 182.193, 182.19 , 182.195, 182.196, 182.283,
182. 08 , 182.56 ,182.572,182.573,182.57 ,182.57 q, 182.57 r, 182.57 t,
182.837, 182.838, 182.839, 182.8 0, 182.8 1, 182.8 2, 182.8 3, 182.8 ,
182.929, and 182.930 are revoked.
Par. 3. Secton 182.1 s redesgnated as secton 182.3 and new sec-
tons 182.1 and 182.2 to read as foows are nserted:
Sec. 182.1. Producton and Dsposton or Industra coho. These
reguatons, Reguatons 3 and append , Industra coho (26 C R pt. 182),
contan the precedura and substantve requrements reatve to the producton,
dsposton, and use of ndustra acoho, ncudng denatured acoho. The
reguatons cover the estabshment and operaton of ndustra acoho pants,
bonded warehouses, and denaturng pants, the ta payment, transfer, e por-
taton, and denaturaton of acoho, formuas for denaturaton, the use of acoho
free of ta , the sae and use of denatured acoho, the transportaton of ta -free
and specay denatured acoho, the packagng, abeng, and sae of artces
contanng denatured acoho, and the brngng nto ths country of acoho and
artces contanng acoho from abroad. These reguatons aso cover the ssu-
ance of permts coverng the producton of acoho and denatured acoho, the
sae of specay denatured acoho, and the wthdrawa, transportaton, and
use of specay denatured and ta -free acoho.
Sec. 182.2. orms Prescrbed. The Drector, coho and Tobacco Ta Dv-
son, Is authorzed to prescrbe a forms requred by ths part, ncudng bonds,
appcatons, reports, returns, and records. Informaton caed for sha be
furnshed n accordance wth the nstructons on the forms or Issued In respect
thereto.
Par. . Secton 182.6, as amended by Treasury Decson 5801 C. .
1950-2,15 , approved ugust 11,1950, s further amended by addng
to the end thereof the foowng two new paragraphs:
(a-10) ssstant regona commssoner sha mean the assstant regona
commssoner. coho and Tobacco Ta , who Is responsbe to, and functons
under the drecton and supervson of, the regona commssoner of nterna
revenue.
(a-) Drector, coho and Tobacco Ta Dvson sha mean the Drector,
coho and Tobacco Ta Dvson, Interna Revenue Servce, Treasury Depart-
ment, Washngton, D. C.
Par. 5. Secton 182.7 s amended to read as foows:
Sec. 182.7. Industra coho Pants Restrctons. Industra acoho
pants may not be ocated In any dweng house, or In any shed, yard, or ncosure
connected wth any dweng house, or on board of any vesse or boat, or on any
premses where beer, wnes, vnegar, sovents, or propretary antfreezes or
artces manufactured wth denatured acoho are manufactured or produced,
or where sugars or srups are refned, or where quors of any descrpton are
retaed, or where any other busness s carred on : Provded, That ndustra
acoho pant premses may be used for the conduct of other busnesses by the
propretor of the ndustra acoho pant not nvovng the producton of aco-
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5 5301.) 580
hoc beverages but whch (1) utze materas, equpment, or proccesses smar
to or nterchangeabe wth those used for the producton of acoho, (2) nvove
the use of byproducts or wastage from the producton of acoho, or (3) utze
portons of premses or equpment not requred n the producton of acoho for
entrey dssmar busnesses such as genera storage or mechanca repar
work: nd provded further. That the Drector, coho and Tobacco Ta Dv-
son, sha fnd, upon appcaton made to hm n each case, that such use w
not |eopardze the revenue and w not unduy ncrease admnstratve super-
vson.
Par. 6. Secton 182.35 s amended by deetng from the secton the
foowng: , panted n o coors or gded, .
Par. 7. Secton 182. 7 s amended by deetng from the frst sentence
of the secton the foowng: panted n o coors or gded, .
Par. 8. Secton 182. 8 s amended to read as foows:
Sec. 182. 8. ences ok. Wats and Gates. The provsons of secton 18258
reatng to fences or was (and gates theren) around the premses of an ndus-
tra acoho pant ore hereby e tended to and made appcabe to bonded ware-
houses.
Par. 9. Secton 182.55 s amended by deetng from the frst sentence
of the secton the foowng: , panted n o coors or gded, .
Par. 10. Secton 182.56 s amended to read as foows:
Sec. 182.56. ences ob Was and Gates. The provsons of secton 182.38
reatng to fences or was and gates around the premses of an ndustra acoho
pant are hereby e tended to and made appcabe to denaturng pants.
Par. 11. Secton 182.13 s amended to read as foows:
Sec 1S2.13 . Regstry or Sts. very person havng n hs possesson or
custody, or under hs contro, any st or dstng apparatus set up for dsta-
ton, redstaton, or recovery of acoho or run must regster such st or
dstng apparatus on orm 26, n trpcate, wth the assstant regona com-
mssoner of the regon n whch such equpment s ocated as soon as t s set up.
orm 26 must be verfed by a wrtten decaraton that such regstraton s made
under the penates of per|ury. The assstant regona commssoner w, on
approvng the regstraton of a st on orm 26, retan one copy, forward one
copy to the Drector, coho and Tobacco Ta Dvson, and return the reman-
ng copy to the pant propretor. The propretor w retan hs copy at hs pant
premses avaabe for Inspecton by nterna revenue offcers.
Par. 12. Secton 182.185 s amended to read as foows:
Sec. 182.185. Surety ob Securty. The bonds requred by ths part sha be
gven wth corporate surety or coatera securty.
Par. 13. Secton 182.186, as amended bv Treasury Decson 607
C. . 195 -2, 81 , approved une 28, 195 , s further amended to
read as foows:
Sec. 182.186. Corporate Surety. Surety bonds may be gven ony wth surety
companes hodng certfcates of authorty from the Secretary of the Treasury
as acceptabe suretes on edera bonds, sub|ect to the mtatons prescrbed
by the Secretary n Treasury Department orm 356 Revsed, and sub|ect to
such amendments as may be Issued from tme to tme.
Par. 1 . Secton 182.197 s amended by deetng the foowng from
the snge sentence of the secton: , whether ndvdua or corporate, .
Par. 15. Secton 182.199, as amended by Treasury Decson 5801,
s further amended by deetng the fourth and ffth sentences of the
secton and nsertng n eu thereof the foowng sentence: The
consent may be e ecuted for the surety company by an agent or at-
torney n fact duy authorzed so to do by power of attorney fed by
the surety wth the approprate assstant regona commssoner, or
the consent may be e ecuted by the home offce offcas of such surety.
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581 5301.
Par. 16. Secton 182.20 s amended as foows:
( ) y deetng the words these reguatons n the frst sentence
of the secton and substtutng n eu thereof the words ths part .
( ) y deetng the word Commssoner n the second and ffth
sentence of the secton and substtutng n eu thereof the foowng:
Drector, coho and Tobacco Ta Dvson .
(C) y deetng the thrd sentence of the secton and substtutng
n eu thereof the foowng sentence: new bond sha be requred
mmedatey n case of the nsovency of a corporate surety.
Par. 17. Secton 182.260(e) s amended to read as foows:
(e) Regstry of sts. Regster the sts set up for the dstaton, reds-
taton, or recovery of acoho or rum, If any, on orm 26, In trpcate, In
accordance wth secton 182.13 .
Par. 18. Secton 182.261(a) (3) s amended to read as foows:
(3) Regstry of sts. Regster the sts set up for the dstaton, reds-
taton, or recovery of acoho or rum, If any, on orm 26, In trpcate, In ac-
cordance wth secton 182.13 .
Par. 19. Secton 182.262(b) (3), as amended by Treasury Decson
6115 C. . 195 -2, 511 , approved December 8, 195 , s further
amended to read as foows:
(3) Regstry of sts. If the busness Is to be permanenty dscontnued, fe
orm 26, n trpcate, n accordance wth secton 182. 32 for those sts set up
for the dstaton, redstaton, or recovery of acoho or rum.
Par. 20. Secton 182.279a, as added by Treasury Decson 60 8,
C. . 1953-2, 356 , approved November 5, 1953, s further amended
by deetng the frst sentence of the ntroductory paragraph and sub-
sttutng n eu thereof the foowng sentence: n ndustra aco-
ho pant may be operated aternatey for the producton of acoho
under ths part, the producton of dsted sprts under part 183 of
ths tte, or the producton of brandy under part 18 of ths tte:
Provded, That such operaton as an ndustra acoho pant, regs-
tered dstery, or frut dstery s for a perod of 2 hours, or mu-
tpes thereof, concurrent wth the caendar day, or days, as the case
may be.
Par. 21. Secton 182.279c(a), as added by Treasury Decson 60 8,
s further amended as foows:
( ) y deetng the frst sentence of the secton and nsertng n
eu thereof the foowng sentence: e orm 1696 wth the store-
keeper-gauger n charge gvng notce of ntenton to suspend
operatons.
( ) y deetng the words ssstant egona Commssoner n
the fourth sentence of the secton and substtutng n eu thereof the
foowng words: storekeeper-gauger n charge .
Par. 22. Secton 182.279d(a), as added by Treasury Decson 60 8,
s further amended by deetng the frst sentence of the secton and
substtutng n eu thereof the foowng sentence: e orm 1696
wth the storekeeper-gauger n charge for authorty to resume
operatons.
, Par. 23. Secton 182.279e, as added by Treasury Decson 60 8,
s further amended by strkng from the secton the words ssstant
Regona Commssoner and substtutng n eu thereof the words
storekeeper-gauger n charge .
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15301. 582
Par. 2 . Secton 182. 08, as amended by Treasury Decson 5788,
C. . 1950-1, 151 , approved May 19, 1950, s further amended to
read as foows:
Sbc. 182. 081. Gaugng of Packages. Whenever the propretor desres to
wthdraw acoho n packages on payment of ta , he sha correcty wegh and
proof the acoho and determne the e act contents of each package In proof
gaons. e sha prepare orm 1 0, n quadrupcate, gvng the detas of
the gauge.
Pah. 25. Secton 182. 08k, as added by Treasury Decson 5788, s
further amended to read as foows:
Sec. 182. 08k. Ta patment and Remova or coho. The ta on acoho
to be removed n packages w be pad by the propretor by use of dsted
sprts e cse ta stamps prescrbed by secton 182.57 b, procured n accord-
ance wth sectons 182.57 h-182.57 |, and used n accordance wth the appcabe
provsons of secton 182.568a. whoesae quor deaer s stamp for attach-
ment to the package w be procured by the propretor In accordance wth sec-
tons 182.57 o and 182.57 p. fter recept of the whoesae quor deaer s
stamp the propretor w stamp and mark the packages as provded In sectons
182.525, 182.527, and 182.528 after whch he w mmedatey remove the acoho
from the premses or to hs ta pad storeroom, f one has been provded. When
the acoho has been removed the storekeeper-gauger w retan 1 copy of orm
1 0, forward 1 copy to the assstant regona commssoner, and return 2 copes
to the propretor who w retan 1 copy n accordance wth secton 182. 55b, and,
If he so desres, furnsh the remanng copy to the vendee.
Par. 26. y amendng the undesgnated centerhead mmedatey
precedng secton 182. 32 to read as foows: Regstry of Sts .
Par. 27. Secton 182. 32, as amended by Treasury Decson 5711,
s further amended to read as foows:
Sec. 182. 32. Regstet on orm 26. very st set up for the dstaton, re-
dstaton, or recovery of acoho or rum must be regstered on orm 26, n
trpcate, n accordance wth secton 182.13 . The temporary suspenson of a
pant does not necesstate reregstraton of the sts. The operaton of a pant
by aternatng propretors, where no permanent change n ownershp occurs, does
not requre regstraton of the sts by the propretors. When there s a
change n ocaton or use or a bona fde change n ownershp of a st, the
st must be regstered to refect the change.
Par. 28. Secton 182. 1, as amended by Treasury Decson 5773
C. . 1950-1,199 , approved ebruary 13, 1950, s further amended
to read as foows:
Sec. 182. 1. Transfer greement, orm 161 . Where the outgong propretor
and hs successor so arrange for the transfer of dstng materas the out-
gong propretor w fe wth the storekeeper-gauger n charge copes of orm
161 duy e ecuted by hmsef and the successor. The storekeeper-gauger w,
upon approva, furnsh 1 copy to the transferor, 1 copy to the transferee, and
2 copes to the assstant regona commssoner, 1 for the fe of the transferor
and 1 for the fe of the transferee.
Par. 29. Secton 182.51 , as amended by Treasury Decson 607 ,
approved une 28,195 , s further amended as foows:
( ) y deetng the s teenth sentence.
( ) y deetng the word oad n the seventeenth sentence and
substtutng n eu thereof the word compartment .
Par. 30. Secton 182.525 s amended to read as foows:
Sec. 182.525. Stamp Numbers. When acoho s wthdrawn ta pad, or ta -
free for e port, transfer to a customs manufacturng bonded warehouse, or
for use on vesses and arcraft, the sera number of the whoesae quor deaer s
or e port stamp and the date of wthdrawa sha be marked on the package or
case mmedatey beow such stamp.
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583 5301.
Pah. 31. Secton 182.527 s amended as foows:
( ) Paragraph (a), as amended by Treasury Decson 5711, s
further amended by deetng from the paragraph the word Ta pad
and substtutng n eu thereof the foowng: Whoesae quor
deaer s .
( ) Paragraph (b), as amended by Treasury Decson 607 , s
further amended to read as foows:
(b) Canceaton. Whoesae quor deaer s and e port stamps, after beng
aff ed, w be mmedatey canceed by the propretor by stencng or stampng
thereon at east fve fne parae waved nes, ong enough to e tend beyond the
top and bottom of the stamp. Such stenc or stamp sha be provded by the
propretor.
Par. 32. Secton 182.528, as amended by Treasury Decson 5711,
s further amended as foows:
( ) gure 1 s amended by addng a decma and the number 1
after the number 95 to cause the proof gaons to appear as 95.1.
( ) gure 2 s amended by deetng the word ta pad above the
word stamp n the outne representng the stamp and before the
word stamp mmedatey beow the outne representng the stamp
and substtutng n eu thereof W. L. D. and by addng a decma
and the number 1 after the number 95 to cause the proof gaons
to appear as 95.1.
(C) gure 3 s amended by addng a decma and the number 1
after the number 95 to cause the proof gaons to appear as 95.1.
(D) gure s amended by addng a decma and the number 1
after the number 95 to cause the proof gaons to appear as 95.1.
( ) gure 5 s amended by deetng the word ta pad above the
word stamp n the outne representng the stamp and before the
word stamp mmedatey beow the outne representng the stamp
and substtutng n eu thereof W. L. D. and by deetng the number
2 and substtutng n eu thereof the number 6 .
( ) gure 6 s amended by deetng the word ta pad above the
word stamp n the outne representng the stamp and before the
word stamp mmedatey beow the outne representng the stamp
and substtutng n eu thereof T . L. D. .
(G) gure 7 s amended by deetng the word ta pad above the
word stamp n the outne representng the stamp and before the
word stamp mmedatey beow the outne representng the stamp
and substtutng n eu thereof T . L. D. and by addng a decma
and the number 1 after the number 95 to cause the proof gaons
to appear as 95.1.
Par. 33. Secton 182.563 s amended as foows:
( ) y amendng the second sentence to read as foows: e sha
prepare orm 1 0, n quadrupcate, gvng the detas of the gauge.
( ) y deetng the fourth sentence.
Par. 3 . Secton 182.565, as amended by Treasury Decson 5801,
s further amended to read as foows:
Sec. 1S2.565. Ta patme t and Remova of coho. The ta on acoho to
be removed n packages and cases w be pad by the propretor by use of dsted
sprts e cse ta stamps prescrbed by secton 182.57 b, procured n accordance
wth sectons 182.57 h-S2.57 |, and used n accordance wth the appcabe prov-
sons of secton 182.568a. whoesae quor deaer s stamp for attachment to
the package or case w he procured by the propretor n accordance wth sec-
tons 182.57 o and 182.57 p. fter recept of the whoesae quor deaer s
86 050 56 88
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15301. 58
stamp, the propretor w stamp and mark the packages or cases as provded
In sectons 182.525, 182.527, and 182.528 after whch he w mmedatey remove
the acoho from the premses or to hs ta pad storeroom, f one has been pro-
vded. When the acoho has been removed the storekeeper-gauger w retan
1 copy of orm 1 0, forward 1 copy to the assstant regona commssoner,
and return 2 copes to the propretor, who w retan 1 copy as a permanent
record as provded n secton 182.6 3(h) and, f he so desres, furnsh the reman-
ng copy to the vendee.
Par. 35. Secton 182.566, as amended by Treasury Decson 5801,
s further amended to read as foows:
Sec. 182.566. Gaugng or coho. Whenever the propretor desres to wth-
draw acoho for ta payment and remova n tank cars or tank trucks, the acoho
w be run nto a weghng tank, where t w be gauged and then run nto
such conveyances. The propretor sha prepare orm 1 0, n quadrupcate for
ntraregon shpments and n quntupcate for nterregon shpments, gvng the
detas of the gauge. In case the acoho s to be taspad by use of a certfcate of
ta payment, the propretor sha submt a copes to the storekeeper-gauger for
e amnaton. If the forms are n proper order, the storekeeper-gauger w re-
tan one copy and return the other copes to the propretor. In case the acoho
s to be ta pad by use of dsted sprts e cse ta stamps, the propretor sha
proceed n accordance wth secton 182.568a.
Par. 36. Secton 182.568a, as amended by Treasury Decson 5919
C. . 1952-2, 306 , approved uy 16, 1952, s further amended to
read as foows:
Sec 182.568a. Use or Dsted Sprts cse Ta Stamps. Where acoho
s to be ta pad by use of dsted sprts e cse ta stamps, the propretor w
cance the necessary number of stamps n the e act amount of the ta due by
perforaton as prescrbed heren, or by egby wrtng or stampng on each
stamp wth ndebe (Inda) nk, hs name, the regstry number of the ware-
house, and the date of orm 1 0 for e ampe, ohn Doe Industres, Incorpo-
rated, Industra coho onded Warehouse No. 63, New ersey, orm 1 0
une 1, 195 . Pror to use n ta payment, the propretor, f he so desres, may
partay precance the stamps to the e tent of showng hs name and regstry
number ony. The date of orm 1 0 must not be entered on the stamp n ad-
vance of actua use n ta payment. The assstant regona commssoner may.
n hs dscreton, approve a sutabe abbrevaton of the requred nformaton
for canceaton, Incudng the ntas for the name of the propretor, f ade-
quate for dentfcaton for e ampe, . D. Ind. Inc. I W03-N -1 O-6-
1-5 . The propretor s canceaton must be made on the ower porton of
the stamp beow the fgures and words ndcatng the denomnaton of the stamp.
If the propretor s canceaton s made by perforaton, each etter and fgure
of the canceaton must be not ess than one-fourth of an nch n heght and
of proportonate wdth and sutaby spaced for egbty and dstnctness, and
must be ceary and sharpy outned ether (a) by perforaton through the
substance of the stamp, and not merey puncturng t, each perforaton to be not
ess than one thrty-second of an nch n wdth or dameter or (b) by perfora-
tons n the form of ncsons through the stamp of at east one thrty-second
of an nch n wdth, cuttng out the form of the etters and fgures from the
substance of the stamp, whch etters and fgures must re of the sze, spacng,
and dstnctness as above specfed. The propretor w then attach the can-
ceed dsted sprts e cse ta stamps to one copy of orm 1 0 and submt
a copes of that form to the storekeeper-gauger. The storekeeper-gauger, f the
forms are In order and the canceed stamps are n the proper amount of the
ta shown due on the orm 1 0, w then further cance and deface the stamps
by cuttng a hoe one-haf Inch square In the upper rght hand corner, and whoy
wthn the border, of each stamp and w e ecute a certfcate on a copes of
orm 1 0 (usng the certfcate of the Dstrct Drector, propery modfed)
certfyng to the recept and further canceaton of strmps n the amount of
ta due. The canceed dsted sprts e cse ta stamps w be securey
attached to a copy of orm 1 0 by means of a stape, eyeet, or smar devce.
Such copy of orm 1 0 w be attached to the board on the weghng tank and
reman thereon unt the acoho covered by such stamps has been removed.
whoesae quor deaer s stamp for attachment to the contaner w be procured
by the propretor n accordance wth sectons 182.57 0 and 182.57 p.
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585 5301.
Pah. 37. Secton 182.571, as amended by Treasury Decson 6090
C. . 195 -2, 92 , approved ugust 13, 195 , s further amended
by addng at the end thereof the foowng two new sentences: Where
acoho s ta pad by use of dsted sprts e cse ta stamps and a
whoesae quor deaer s stamp s ssued, the storekeeper-gauger w
retan a copy of orm 1 0. In the case of tank truck or tank car
shpments ta pad by the use of dsted sprts e cse ta stamps and
shpped to a vendee n another regon, a copy of orm 1 0 sha be
forwarded to the assstant regona commssoner of the regon n
whch the vendee s ocated.
Par. 38. y amendng the undesgnated centerhead mmedatey
precedng 182.57 b. to read as foows: Dsted Sprts cse
Ta Stamps for Removas n Packages, Tank Cars, or Tank Trucks
and by Ppenes.
Par. 39. Secton 182.57 h, as amended by Treasury Decson 5919,
s further amended as foows:
( ) y nsertng between the frst and second sentence of the sec-
ton the foowng new sentence: The ta on acoho removed n pack-
ages must be pad by such stamps.
( ) y deetng the word coector n the second sentence and
substtutng n eu thereof the words Dstrct Drector .
(C) y deetng the word coectors n the fourth sentence and
substtutng n eu thereof the words Dstrct Drector .
Par. 0. Secton 182.57 1, as amended by Treasury Decson 5919,
s further amended to read as foows:
Sec. 182.57 1. Redempton of Dsted Sprts cse Ta Stamps. The as-
sstant regona commssoner may redeem dsted sprts e cse ta stamps
that have been spoed, destroyed, or rendered useess or unft for the purpose
ntended, or for whch the owner may have no use, or whch through mstake
may have been Impropery or unnecessary used.
Par. 1. Secton 182.57 m, as amended by Treasury Decson 6075
C. . 195 -2, 7 , approved une 28, 195 , s further amended as
foows:
( ) y amendng the headnote to read as foows: Cam to s-
sstant Regona Commssoner .
( ) y deetng the frst sentence and substtutng n eu thereof
the foowng sentence: Propretors desrng to have dsted sprts
e cse ta stamps redeemed under the provsons of secton 182.57 1
must make cam on orm 8 3 to the assstant regona commssoner
wthn 3 years after the purchase of such stamps.
Par. 2. y amendng the undesgnated centerhead mmedatey
precedng secton 182.57 o to read as foows: Whoesae Lquor
Deaer s Stamps for Packages, Tank Cars, and Tank Trucks .
Par. 3. Secton 182.57 o, as amended by Treasury Decson 5919, s
further amended to read as foows:
Sec. 182.5750. ppcaton for Stamps. Where acoho, ta pad by use of
dsted sprts e cse ta stamps, s to be removed n packages, tank cars, or
tank trucks, the propretor w make a request for whoesae quor deaer s
(tamps on orm 1 0 at the tme he submts the forms and dsted sprts e cse
ta stamps n accordance wth secton S2.568a.
Par. . Secton 182.57 p, as amended by Treasury Decson 5919,
s further amended to read as foows:
Sec 182.57 p. Issuance of Whoesae Lquor Deaer s Stamps. On recept
ot 1 orms 1 0 bearng appcaton for whoesae quor deaer s stamps, the
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5301. 5S6
storekeeper-gauger w Issue the stamps and enter the sera number of each
stamp and a notaton that the stamps were ssued on a copes of orm 1 0.
The copy of orm 1 0 retaned by the storekeeper-gauger In the case ot ta -
payment where a whoesae quor deaer s stamp Is ssued sha be paced n
a permanent fe as authorty for ssuance of the stamp. When ssung the stamps,
the storekeeper-gauger w enter on each stamp a the nformaton caed for
and aff hs sgnature to the stamp n the space provded therefor. The store-
keeper-gauger may enter hs sgnature by means of facsme stamp, provded
care s taken to use ony such nk as w nether fade nor bur. Where an
apprecabe number of whoesae quor deaer s stamps w be used, the pro-
pretor must provde the storekeeper-gauger n charge wth sutabe rubber
stamps for the nserton of nformaton common to a whoesae quor deaer s
stamps to be used by hm.
Par. 5. Secton 182.590 s amended to read as foows:
Sec. 182.590. port Stamps Requred. very package of acoho ntended
for e portaton must have an e port stamp aff ed thereto at the tme of ts
remova from the bonded warehouse. Such stamps sha be obtaned by the
propretor of the warehouse from the Dstrct Drector of the nterna revenue
dstrct n whch the warehouse s ocated.
Par. 6, Secton 182.591 s amended to read as foows:
Sec. 1S2.591. orms to be Sent to the Dstrct Drector. The propretor of
the warehouse w forward a copes of orm 1 56, wth orm 1 0 attached,
to the Dstrct Drector for the necessary number of e port stamps.
Par. 7. Secton 182.592 s amended to read as foows:
Sec 182.592. cton by Dstrct Drector. The Dstrct Drector w (a)
ssue the necessary number of e port stamps, (b) enter the knd and sera
numbers of the stamps on a copes of orm 1 0, and (c) retan 1 copy of
each form (1 56 and 1 0) and return 3 copes, wth the e port stamps, to the
propretor of the warehouse.
Par. 8. Secton 182.6 8, paragraph (b) of whch was amended by
Treasury Decson 571 C. . 19 9-2,177 , approved ugust 2, 19 9,
and paragraph (c) of whch was amended by Treasury Decson 531
C. . 19 , 686 , approved anuary 5, 19 , s further amended as
foows:
( ) y deetng the word four mmedatey precedng the word
years n the thrd sentence of paragraph (b) and substtutng n eu
thereof the word two .
( ) y deetng the word Investgator from the cause the tran-
scrpts sha be so fed wth the Investgator n Charge n the frst
sentence of paragraph (c) and substtutng n eu thereof the word
supervsor .
(C) y deetng the word four mmedatey precedng the word
years n the seventh sentence of paragraph (c) and substtutng n
eu thereof the word two .
(D) y deetng n the seventh sentence of the secton the words
the Commssoner or .
Par. 9. Secton 182.669, as amended by Treasury Decson 5788, s
further amended as foows:
( ) y deetng the foowng from the frst sentence of the sec-
ton : Report of Ta - ree coho , .
( ) y deetng the word Government n the ffth sentence of
the secton and substtutng n eu thereof the words nterna
revenue .
Par. 50. Secton 182.715 s amended by deetng the words orms
129 and from the frst sentence of the secton and substtutng n
eu the word orm .
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587 5301.
Pah. 51. Secton 182.731, as amended by Treasury Decson 5568
C. . 19 7-2, 227 , approved uy 3, 19 7, s further amended as
foows:
( ) y deetng the s th sentence.
( ) y deetng the word oad n the seventh sentence and sub-
sttutng n eu thereof the word compartment .
Par. 52. y amendng the undesgnated centerhead mmedatey
precedng secton 182.780 to read as foows: Regstryof Sts .
Par. 53. Secton 182.780, as amended by Treasury Decson 5711, s
further amended to read as foows:
Sec. 182.780. Regstry on orm 26. very denaturer havng n bs possesson
or custody, or under bs contro, sts set up for tbe redstaton or recovery of
acoho or rum, must regster such sts wth tbe assstant regona commssoner
of tbe regon n whch the equpment s ocated on orm 2G, as provded by
secton 182.13 .
Par. 5 . Secton 182.781, as amended by Treasury Decson 6090, s
further amended by deetng the form number 129 from the ffth
sentence of the secton.
Par. 55. Secton 182.787, the ntroductory paragraph of whch, as
amended by Treasury Decson 6032 C. . 1953-2, 362 , approved
uy 23,1953, s further amended as foows:
( ) y amendng the headnote to read as foows: orms 1 68- ,
,0,D| ,and ,
( ) y deetng the number 129 and the word and foowng
the word orms n the frst sentence of the secton.
(C) y amendng paragraph (a), prevousy unamended, to read
as foows:
(a) Denaturants. The quanttes of denaturants used In each denaturzaton
w be entered on orm 1 68- , accordng to formua. t the cose of the
month, the quanttes of denaturants receved and used or removed durng the
month w be summarzed and entered on orm 1 68-C denaturants receved
beng summarzed and entered accordng to knd, and denaturants used beng
summarzed from orm 1 68- and entered accordng to both knd and formua.
(D) y deetng n the frst sentence of paragraph (e), as amended
by Treasury Decson 6090, the form number 129 and the word
and foowng the word orms .
( ) y deetng n the frst sentence of paragraph (f), as amended
by Treasury Decson 55 C. . 19 6-2, 202 , approved September
10, 19 6, the form number 129 and the word and foowng the
word orms .
( ) y deetng n the frst sentence of paragraph (f), the word
Government and substtutng n eu thereof the words nterna
revenue .
Par. 66. y deetng the undesgnated centerhead mmedatey
precedng secton 182.837.
Par. 57. Secton 182.87 , as amended by Treasury Decson 6032,
s further amended as foows:
( ) y deetng the words the reguatons n between the word
by and the word ths n the second sentence of the secton.
( ) y deetng the ffth sentence of the secton.
Par. 58. y amendng the undesgnated centerhead mmedatey
precedng secton 182.878 to read as foows: Sae, Use, and Recovery
of Denatured Rum .
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| 5301. 588
Pah. 59. Secton 182.879, as amended by Treasury Decson 5801, s
further amended to read as foows:
Seo. 182.879. Deaers n and Usebs of Denatured Rum. The provsons of
ths part reatng to specay denatured acoho w appy, Insofar as appcabe,
to the procurement and sae by bonded deaers, and the procurement, use, and
recovery by manufacturers, of denatured rum, e cept that deaers sha make
deveres n accordance wth part 216 of ths tte.
Pah. 60. Secton 182.880 s amended to read as foows:
Sec. 182.880. orms, Records, and Reports. The same forms, records, and
reports as are prescrbed n tbs part concernng the procurement and sae by
bonded deners, and the procurement, use, and recovery by manufacturers of
specay denatured acoho, sha appy to and be used, nsofar as appcabe,
after makng proper modfcaton, n each nstance n connecton wth the pro-
curement and sae by bonded deaers, and the procurement, use, and recovery by
manufacturers, of denatured rum: Provded, That bonds on orm 653- or
582- w be used n eu of bonds on orms 1 75 or 1 80, n connecton wth
appcaton for permt as a bonded deaer In denatured rum, or wth appcaton
by a manufacturer to use and recover denatured rum. The pena sums of bonds
on orms 653- and 582- w be computed as provded n ths part wth respect
to bonds, orms 1 75 and 1 80. Where a user desres to recover denatured rum
and the terms of hs bond do not cover such operaton, consent of surety must
be fed on orm 1533 e tendng the terms of hs bond, orm 582- .
Par. 61. Secton 182.881 s amended as foows:
( ) y enterng at the head of the st of form numbers and
descrptons the foowng: 26 Regstry of sts .
( ) y deetng the foowng three tems from the st of form
numbers and descrptons: 597 Notce of shpment of specay de-
natured rum (n eu of orm 1 73), 1 30 Order to show cause why
permt shoud not be revoked, copy of compant attached, and 1 30-
Order to show cause why permt shoud not be revoked .
Par. 62. Secton 182.882 s amended to read as foows:
Sec. 182.8S2. Sae, Use, or Recovery of oth Specay Denatured coho
and Denatured Rum. Where t s desred to procure and se, use, or recover
both specay denatured acoho and denatured rum, separate appcatons for
permts and separate bonds sha be fed and separate permts procured for the
specay denatured acoho and for the denatured rum. Separate records sha
be kept and separate reports nnde for the specay denatured acoho and for
the denatured rum so receved and sod, used, or recovered.
ecause these amendments are needfu for the enforcement of the
appcabe provsons of the Interna Revenue Code effectve anuary
1, 1955, t s hereby found that t s contrary to the pubc nterest to
ssue ths Treasury Decson sub|ect to the effectve date mtaton
of secton (c) of the dmnstratve Procedure ct, approved une
11,19 6.
Ths Treasury Decson sha be effectve on anuary 1,1955.
(Ths Treasury Decson s ssued under the authorty contaned n
sec. 7805 of the Interna Revenue Code of 195 (68 Stat. 917 26
U.S.C.7805).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved December 28,195 .
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 30, 195 , S: 5 a. m.)
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589 5303.
S CTION 5302. ST LIS M NT O INDUSTRI L
LCO OL OND D W R OUS
26 C R 182.51 : Tank trucks.
26 C R Part 182 amended. See T. D. 6117, page 578.
S CTION 5303. ST LIS M NT O INDUSTRI L
LCO OL D N TURING PL NTS
26 C R 182.707: Denaturants not requred to Rev. Ru. 55-128
be tested.
The Natona ormuary (N. .) and Unted States Pharma-
copoea (U. S. P.) substances, ncudng sods, quds, essenta os
and aromatc materas Chemcay Pure (C. P.) or Commercay
Pure materas and mtaton essenta os and aromatc sub-
stances, denaturng grade, approved by the Natona Offce from tme
to tme for use n eu of the natura os, are denaturants whch
may be used at a denaturng pant wthout prevous testng and
approva by a duy authorzed chemst, as provded n secton
182.707 of the Industra coho Reguatons.
dvce has been requested as to the types of denaturants whch may
be used at a denaturng pant wthout prevous testng and approva
by a duy authorzed chemst.
Secton 182.707 of the Industra coho Reguatons provdes that
where a chemcay or commercay pure sat or sod or a U. S. P.
orN. . essenta o, or an essenta o approved by the Commssoner,
s used as a denaturng matera, the same need not be submtted for
testng e cept when the Commssoner sha so drect, provded the
matera s devered to the storekeeper-gauger n the orgna seaed
package of a reputabe manufacturer of chemcas, bearng a abe de-
scrptve of ts contents paced thereon by the manufacturer.
The N. . and U. S. P. substances ncude sods, quds, essenta
os, and aromatc materas.
Chemcay Pure (C. P.) or Commercay Pure materas ncude
denaturants whose descrptons n the specay denatured acoho
formuas are gven, as foows:
1. ormadehyde souton contanng 37 percent formadehyde
(N. . or methano-free).
2. Soap, dred and granuated or powdered.
3. 100 percent acetadehyde (C. P. or Commercay Pure).
. ard soap, good toet grade.
5. Metry voet (Commercay Pure).
6. O of Ctronea (natura o), O of Mustard, oate
(natura or synthetc).
7. Whte or orange sheac, arsenc and rosn-free (a commer-
ca grade).
8. Safro (pure aromatc).
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5303.
590
Imtaton essenta os and aromatc substances, denaturng grade,
whch have been approved by the Natona Offce for use n eu of
the natura os, are as foows:
Manufacturer Method of dentfcaton Labe requrements
P. R. Dreyer, Inc.,
New York, N. Y.
Genera Drug Com-
Sanv, New York,
f. Y.
P. R. Dreyer, Inc.,
New York, N. Y.
P. R. Dreyer, Inc.,
New York, N. Y.
P. R. Dreyer, Inc.,
New York, N. Y.
Poak s ruta Works.
Inc., Long Isand
Cty, N. Y.
Dodge and Ocott Co.,
New York, N. Y.
orasynth Laborato-
res, New York, N. Y.
P. R. Dreyer, Inc.,
New York N. Y.
rtzsche rothers,
Inc., New York,
N. Y.
Dodge and Ocott Co.,
New York, N. Y.
Magnus, Mabee and
Reynard, Inc., New
York, N. Y.
Magnus, Mabee and
Reynard, Inc., New
York, N. Y.
orasvnth Laborato-
res, New York, N.Y.
Norda ssenta O
and Chemca Co.,
New York, N. Y.
O of ergamot
Imtaton O of erg-
amot, D. G., Dreyer.
Synthetc O of erg-
amot, No. 3 6 3 0,
Modfed, D. G.,
Genera Drug.
Imtaton O of erga-
amot, No. 10, D. G.
Dreyer.
Imtaton O of erga-
amot, No. 15, D. G.
Dreyer.
Imtaton O of erga-
mot, No. 20, D. G.,
Dreyer.
Imtaton O of erga-
mot, D. G., Poak s.
Synthetc O erga-
mot. No. 185, D. G.,
D. O.
O ergamot Syntheto
No. 90, D. G., ora-
synth.
O of Cassa
Imtaton O of Cassa,
D. G., Dreyer.
Imtat on O of Cassa,
D. G., rtzsche.
Synthetc O of Cassa,
No. 173, D. G., D.
O.
Cnnamc dehvde N.
., D. G., MM R.
Imtaton Cassa O,
D. G., MM R.
O Cassa Imtaton,
No. 175, D.G., ora-
synth.
Imtaton O of Cassa,
D. G., Norda.
sters as Lnay cetate 36-
38 and
ssenta Os, Isoates and
romatcs 62-6 .
Lnav sters 36 mnmum,
and ssenta Os, romatcs
and Isoates 6 m a -
mum.
sters as Lnay cetate
36 mnmum, and ssen-
ta Os, romatcs, and
Isoates 6 ma mum.
sters as Lnay cetate
36 mnmum, and
ssenta Os, romatcs, and
Isoates 6 ma mum.
sters as Lnay cetate
36 mnmum, and
ssenta Os, romatcs, and
Isoates 6 ma mum.
sters as Lnay cetate
36 mnmum, and
ssenta O, Isoates, and
romatcs 6 ma mum.
sters as Lnay cetate
36 mnmum, and
ssenta O, Isoates, and
romatcs 6 ma mum.
sters as Lnay cetate
36 Mnmum, and
ssenta O, Isoates and
romatcs -6 ma mum.
Cnnamc dehyde 80
mnmum, and
ssenta Os, romatcs, and
Isoates 20 ma mum.
Cnnamc dehyde 80
mnmum, and
ssenta Os, romatcs, and
Isoates 20 ma mum.
Cnnamc dehyde 80
mnmum, and
ssenta O, Isoates and
romatcs 20 ma mum.
Cnnamc dehyde 80
mnmum.
Cnnamc dehyde 80
mnmum.
Cnnamc dehyde 80
mnmum, and
ssenta Os, Isoates and
Other romatcs 20
ma mum.
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591
5303.
Manufacturer
Method 0/Identfcaton
Labe Ttqurtment
On, of Cassa Contnued
. C. Ryand, Inc.,
New York, N. Y.
Ungerer and Company,
fe., New York, N. Y.
Dodge and Ocott Co.,
New York, N. Y.
Schmme Co., Inc.,
New York, N. Y.
Ungerer and Company,
Inc., New York, N. Y.
The Gvaudan Corpo-
raton, Deewanna,
N. .
eton Chemca Com-
pany, Inc., rookyn,
Imtaton O of Cassa,
D. G., Ryand.
Imtaton O of Cassa,
D. G., Ungerer.
O Cnnamon (Cassa)
Terpeneess, D. G.,
D. 0.
O Imtaton Cassa
S- 8 5, D. G.,
Schmme.
Imtaton O of Cassa,
D. G., Ungerer.
Imtaton O of Cassa,
D. G., Gvaudan.
Imtaton O of Cassa,
No. 2 2, D. G., e-
ton.
O op Coves
Dodge and Ocott Co., O Cove Terpeneess,
New York, N. Y. D. G., D. O.
Cnnamc dehyde 93 .
Cnnamc dehyde 96
mnmum.
Cnnamc dehyde 80
mnmum.
Cnnamc dehyde 95
mnmum.
Cnnamc dehyde 80
mnmum.
Refned Coa Tab Concentrate
Wrght, Layman
Umnev, Ltd., South-
wark, S. ., London,
ngand.
Gvaudan-Deawanna,
Deawanna, N. .
P. R. Dreyer, Inc.,
New York, N. Y.
Lauter s, New
York, N. Y.
Genera Drug Co., New
York, N. Y.
Tombare Products,
Corp., New York,
N. Y.
Lauter s, New
York, N. Y.
P. R. Dreyer. Inc.,
New York, N. Y.
Refned Coa Tar Con-
centrate, D. G.,
Wrght, Layman
Umney, Ltd., 66
Park Street, South-
ward S. . 1.
ISOT TMOL
Isothymo, D. G., G-
vaudan-Deawanna.
O op Lavender
Imtaton O Lavender
owers, D. G.,
Dreyer.
O of Lavender, Svn-
thetc No. 32- , D.
G., Lauter s.
Synthetc O of Lav-
ender No. 3938,
Modfed, D. G.,
Gen. Drug.
O of Lavender, rt-
fca No. 2 1, D.
G., Tombare.
O Lavender Synthetc
No. 323 , D. G.,
Lauter s.
Imtaton O of Laven-
der No. 10, D. G.,
Dreyer.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
32.3 mnmum, and
ssenta Os, Isoates, and
romatcs 67.7 ma -
mum.
Lnay sters 30 mn-
mum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
Lnay sters 30 mn-
mum, and
ssenta O, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
G
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2

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I 5303.
592
Manufacturer
Method of dentfcaton
Labe requrement
P. R. Dreyer, Inc.,
New York, N. Y.
P. R. Dreyer, Inc.,
New York, N. Y.
Gvaudan-Deawanna,
N. Y.
rtzsche ros., New
York, N. Y.
Ungerer Company,
New York, N. Y.
Ungerer Company,
New York, N. Y.
Poak s ruta Works.
Inc., Long Isand
Cty, N. Y.
rtzsche ros., ew
York, N. Y.
Magnus, Mabee and
Reynard, Inc., New
York, N. Y.
Dodge and Ocott Co.,
New York, N. Y.
orasynth Labora-
tores, New York,
N. Y.
orasynth Labora-
tores, New York,
N. Y.
Naugatuck romatcs
(Dvson of U. S.
Rubber Co.), New
York, N. Y.
eton Chemca Com-
pany, Inc., rook-
yn, k. Y.
Norda ssenta O and
Chemca Company,
Inc., New York,
N. Y.
S. . Penck and Com-
pany, New York,
On. of Lavekder Contnued
Imtaton O of Laven-
der No. 15, D. G.,
Dreyer.
Imtaton O of Laven-
der No. 20, D. G.,
Dreyer.
O of Lavender, Syn-
thetc No. 2706, D.
G., Gvaudan-Dea-
wanna.
O of Lavender, Imta-
ton No. 1 22 , D.
G., rtzsche.
Imtaton O of Laven-
der, D. G., Ungerer.
Imtaton O of Laven-
der No. 122, D. G.,
Ungerer.
Imtaton O of Laven-
der, D. G., Poak s.
O of Lavender, Syn-
thetc No. 1 539,
D. G., rtzsche.
Imtaton Lavender O
No. 30, D. G
MM R.
Synthetc O Lavender
No. 186, D. G.,
D. O.
O Lavender Syntheto
No. 50, D. G., ora-
synth.
O Lavender Synthetc
No. 1 550, D. G.,
orasynth.
rtfca O of Laven-
der No. C-, D. G.,
Naugatuck.
O of Lavender, Imta-
ton T. G. S., D. G.,
eton.
O Lavender Imta-
ton, D. G., not
U. S. P., Norda.
Imtaton O of Laven-
der, D. G., Penck.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
32 mnmum, and
ssenta Os, romatcs, and
Isoates 68 ma mum.
sters as Lnay cetate
32 mnmum, and
ssenta Os, romatcs, and
Isoates 68 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma trum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
57 mnmum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
G
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-
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2

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593
5303.
Manufacturer
Method of dentfcaton
Labe requrement
Orbs Products Corpo-
raton, New York,
N. Y.
eton Chemca Com-
pany, Inc.. rook-
yn, N.Y.
Naugatuck romatcs
(Dvson of U. S.
Rubber Co.), New
York, N. Y.
The Gvaudan Corpo-
raton, Deawanna,
N. .
Poak s ruta Works,
Mddetown, N. Y.,
Poak s ruta Works,
Mddetown, N. Y.
erona Chemca Com-
pany, Newark, N. .
The Gvaudan Corpo-
raton, Deawanna,
N. .
The Gvaudan Corpo-
raton, Deawanna,
N. .
The Gvaudan Corpo-
raton, Deawanna,
N. .
orasynth Laborato-
res/New York, N.Y.
Dodge Ocott, Inc.,
New York, N. Y.
res rothers, New
York, N. Y.
Gvaudan - Deawanna,
N. Y.
. Maschmc|er, r.,
Inc., New York, N.
Y.
Mann ne Chemcas,
Inc., New Y ork, N.
Y.
Roure-DuPont, Inc.,
New York, N. Y.
O of Lavender Contnued
Imtaton O of Laven-
der C, D. G., Orbs.
Imtaton O of Laven-
der, D. . No. 9 7,
D. G., eton.
O of Lavender, rt-
fca, CSC No. 8 8,
D. G., Naugatuck.
Synthetc Lavender
Perfume O,
GD-D-67611, D. G.,
G vaudan-Dea-
wanna
O Lavender Techn-
ca, Synthetc, D. G.,
Poak s.
O Lavender Sovo,
Synthetc, D. G.,
Poak s.
O of Lavender, Tech-
nca, D. G., erona.
O Lavender Imtaton
D N, D. G., GD.
O of Lavender Imta-
ton No. 195, D. G.,
Gvaudan.
O of Lavender Imta-
ton No. 151, D. G.,
Gvaudan.
Intaton Lavender O
No. 97 2 D. G.,
orasynth.
O of Lavender Imta-
ton No. 1955, D. G.,
D. O.
Mentho
Synthetc Mentho
(homo meta men-
tho), D. G., res
ros.
Racemc Mentho, D.
G., Gvaudan-Dea-
wanna.
Racemo Mentho, D.
G., Maschme|er.
Menthoone, D. G.,
Mann.
O op Nebo
O, Nero Synthetc
R-D, D. G.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters Cacuated as Lnay
cetate 53 mnmum.
sters Cacuated as Lnay
cetate 53 mnmum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta O, Isoates, and
romatcs 70 ma mum.
sters Cacuated as Lnay
cetate 50 mnmum.
sters Cacuated as Lnay
cetate 69 mnmum.
sters Cacuated as Lnay
cetate 30 mnmum and
ssenta Os, romatcs, and
Isoates 70 ma mum.
sters as Lnay cetate
30 mnmum, and
ssenta Os, romatcs and,
Isoates 70 ma mum.
sters as Lnay cetate
38.50 mnmum.
G
e
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2
0
1
3
-
0
1
-
2
2

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3
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1

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( 5331.
59
Manufacturer
Method of dentfcaton
Lae requrement
ercuea Powder Co.,
Wmngton, De.
Magnus, Mabee Rey-
nard, Inc., New York,
N. Y.
Magnus, Mabee Rey-
nard, Inc., New York,
N. Y.
P. R. Drever, Incor-
porated, New York,
N. Y.
P. R. Dreyer, Incor-
porated, New York,
Schmme Co., Inc.,
New York, N. Y.
O, of Pnb
O of Pne, Yarmor
No. 302, ercues.
O of Dwarf Pne
Needes, Synthetc,
D. G., MM R.
Imtaton Dwarf Pne
Neede O, D. G.,
MM R.
O of Pnus Syvestrs,
D. G., Dreyer.
O of r Needes Sbe-
ran, D. G., Dreyer.
O Imtaton r ssenta Os 65 , and ro-
Needes Sberan S- matcs 35 .
8 6, D. G., Schm-
me.
ppcants for the use of specay denatured acoho desrng to
use any of the aternate denaturants sted above must fe proper
appcaton on orm 1 9- , ormua and Preparaton Made wth
Specay Denatured coho. The aternate denaturant desred
shoud be propery dentfed at ne of the form by use of the de-
scrpton thereof shown n coumn two, Method of Identfcaton, of
the above st. The denaturants shoud be furnshed to the store-
keeper-gauger at the denaturng pant n orgna packages propery
abeed to dentfy the company manufacturng the denaturant and
to show the specfcatons for such denaturant, f any, as ndcated n
coumn three, Labe Requrements, of the st.
denaturtnts for whch detaed tests and specfcatons are gven
n the ppend to the Industra coho Reguatons must be ap-
proved by an authorzed chemst before use. Substances such as
stronger mmona Water, U. S. P., and other denaturants that are
U. S. P. or N. ., C. P. or Commercay Pure, do not need the Com-
mssoner s permsson for use provded such substances as receved
conform to secton 182.707 of the Industra coho Reguatons.
owever, the storekeeper-gauger at the denaturng pant has the re-
sponsbty for the acceptance or re|ecton of any denaturng matera
and may, at hs dscreton, request the testng of substances of whch
he s uncertan.
26 C R 182.715: urnshng approved denatur-
ants.
26 C R Part 182 amended. See T. D. 6117, page 578.
P RT IL D N TU TION
S CTION 5331. WIT DR W L ROM OND R O
T
26 C R 182.8 7: Contaners. Rev. Ru. 55-181
Secton 182.8 7(c) of the Industra coho Reguatons provdes
that bona fde agents of producers of propretary sovents and acquer
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595 5361.
thnners may receve such products n raroad tank cars or n tank
trucks and may transfer such products to packages for sae to others,
such packages f more than 5 gaons capacty to be furnshed by the
producer. The provson requrng the manufacturer to furnsh the
drums for packagng propretary sovents and acquer thnners by hs
agent s for the purpose of nsurng adequate dentfcaton of such
manufacturer, and s not construed as prohbtng the purchase, wth
the consent of the producer, of such packages by the agent. ccord-
ngy, t s hed that bona fde agents of producers may purchase con-
taners of more than 5 gaons capacty, wth the consent of the
producer, for the packagng of propretary sovents and acquer thn-
ners, provded the symbo and sera number of the producer s em-
bossed thereon.
26 C R Secton 182.8G6: Storage, use, and Rev. Ru. 55-129
records.
specay denatured acoho permttee usng specay denatured
acoho and sopropy acoho on the same premses, but who uses
the specay denatured acoho ony for aboratory purposes, s not
requred to mantan the records prescrbed n secton 182.866 of
the Industra coho Reguatons.
dvce has been requested whether a permttee who uses both
specay denatured acoho and sopropy acoho on the same prem-
ses s requred to mantan the records of such use f the specay
denatured acoho s used on such premses ony for aboratory testng.
Secton 182.866 of the Industra coho Reguatons provdes n
part that f a manufacturer hodng a permt to use specay de-
natured acoho aso uses sopropy acoho on the same premses, he
must keep a manufacturng record at such premses, avaabe for n-
specton by nterna revenue offcers, showng the nformaton spec-
fed n that secton.
In the nstant case, specay denatured acoho s used e cusvey n
aboratory anayss and not for manufacturng purposes. ccord-
ngy, t s hed that the prescrbed records need not be mantaned by a
specay denatured acoho permttee who aso uses sopropy acoho
at the same premses f the specay denatured acoho s used e -
cusvey for aboratory testng and not for manufacturng purposes.
SU C PT R . OND D ND T P ID WIN PR MIS S
P RT II OP R TIONS
S CTION 5361. OND D WIN C LL R OP R TIONS
26 C R 2 0.132: Commerca frut products Rev. Ru. 55-363
and by-products.
( so 26 C R 2 0.890.)
Secton 2 0.132 of the Wne Reguatons provdes that the propretor
of a bonded wne cear may, under the provsons of sectons 2 0.890 to
2 0.892, ncusve, prepare for market and store commerca frut
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5362.
596
products and by-products not ta abe as wne. Secton 2 0.890 mts
such actvtes to those n whch frut or frut |uce s the prncpa
matera used n producton. Therefore, favorng syrup for soft
drnks, n whch frut or frut |uce s not the prncpa matera, may
not be prepared, stored, etc., on bonded wne cear premses. ow-
ever, the Interna Revenue Servce w not ob|ect to a wnemaker cur-
tang hs bonded wnery or bonded wne cear premses (for e ampe,
durng the off-season) n order that the bottng room may be used
temporary for the preparaton and bottng of such products.
26 C R 2 0. 81: Casses of wne other Rev. Ru. 5-322
than standard wne.
Secton 2 0. 81 of the Wne Reguatons ncudes among the casses
of wne whch are not standard wne, but whch may be produced or
stored on bonded wne cear premses, standard type bendng sherry,
or smar wne products not for beverage use, produced as provded
n secton 2 0. 85. ed, a sated wne whch contans not n e cess
of 21 percent acoho by voume and not ess than 1.5 grams of sat
per 100 cubc centmeters s a wne product, not for beverage use, un-
der secton 2 0. 85. Such a product may be produced, stored and
handed on standard wne premses under authorty of secton 2 0. 81
upon approva of formua on orm 698-Suppementa, ormuas and
Process for Wne.
26 C R 2 0.890. ppcaton.
avorng syrup for soft drnks n whch frut or frut |uce s not
the prncpa matera may not be prepared, stored, etc., on bonded
wne cear premses. See Rev. Ru. 55-363, page 595.
S CTION 5362. R MO LS O WIN ROM OND D
PR MIS S
26 C R 2 0.691: Recprocatng foregn coun-
tres.
Costa Rca added to st of recprocatng foregn countres. See
Rev. Ru. 55-362, page 577.
26 C R 2 0.7 1: ppcaton. Rev. Ru. 55-213
( so 5372 26 C R 2 0.7 6 edera coho
dmnstraton ct, Secton 5(e)
Reguatons No. , Secton 30.)
Sampes of wne may not be removed by the propretor of a bonded
wne cear ta -free for dstrbuton by hs saesmen to prospec-
tve purchasers. Such sampes must be ta pad and must be abeed
n accordance wth the requrements of secton 30 of Reguatons
No. .
dvce has been requested whether sampes of wne may be removed
ta -free by the propretor of a bonded wne cear for saesmen to pass
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597 5381.
out to prospectve purchasers. In the event such sampes must be
ta pad, advce was aso requested regardng the abeng thereof.
Secton 5362 of the Interna Revenue Code of 195 provdes n part
that wne may be removed from bonded wne cear premses, wthout
abty for ta beng ncurred by reason of such remova, for use by
or for the account of the propretor or hs agents for anayss or test-
ng, organoeptcay or otherwse. Secton 2 0.7 1 of the Wne Regu-
atons authorzes a propretor to remove sampes of wne for anayss
or testng by a aboratory.
Secton 5372 of the Code authorzes the utzaton of wne n any
onded wne cear for testng, tastng, or sampng, free of ta . Pur-
suant to ths authorzaton, secton 2 0.7 6 of the Wne Reguatons
provdes for the testng, tastng, or sampng of ta -free wne by pro-
spectve purchasers ony on the bonded wne cear premses.
There s no provson n the aw or reguatons for the remova of
ta -free wne sampes for saesmen to pass out to prospectve pur-
chasers. ccordngy, wne removed for that purpose must be ta -
pad and must be abeed n accordance wth the requrements of
secton 30 of Reguatons No. .
S CTION 5368. G UGING, M R ING, ND ST MPING
26 C R 2 0.579: Labeng botted wne. Rev. Ru. 55-3
Secton 2 0.579 of the Wne Reguatons provdes n part that when
wne s botted by the producer or propretor of a bonded wne cear
under an authorzed trade name, such trade name may be stated on
the abe as the name of the propretor. Secton 2 0.192 permts the
use of two or more authorzed trade names smutaneousy or ater-
natey for bottng or packagng of wne. propretor bottng wne
of hs own producton, under an authorzed trade name, may use on
the abe the phrase Produced and botted by where the use of such
phrase s consstent wth provsons of Reguatons No. ssued pur-
suant to the edera coho dmnstraton ct.
S CTION 5372. S MPLING
26 C R 2 0.7 6: or tastng and testng.
Sampes of wne for dstrbuton by saesmen of a bonded wne
cear propretor to prospectve purchasers. See Rev. Ru. 55-213,
page 596.
P RT I. C LL R TR TM NT ND CL SSI IC TION O WIN
S CTION 5381. N TUR L WIN
26 C R 2 0. 89: Spoed wne. Rev. Ru. 55-21
( so edera coho dmnstraton ct, Sec-
ton 5(e) Reguatons No. , Secton 21.)
wne made wthn the mtatons for natura wne, whch has
become substandard by reason of the deveopment of e cessve
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5382.1 598
Toate acdty, may be bended on bonded wne cear premses wth
another natura wne made from the same knd of frut for the
purpose of correctng the substandard condton. The resutng
bend may be marketed as a standard wne f the voate acdty a
wthn the mtatons prescrbed by secton 21 of Reguatons No. .
so, wne whch has become substandard by reason of the de-
veopment of e cess voate acdty may be removed to a vnegar
pant covered by bond. orm 1676, ond Coverng Remova to and
Use of Wne at negar Pant
dvce has been requested whether wne whch has become sub-
standard by reason of e cess voate acdty may (1) be bended wth
other wne to produce a wne conformng to the specfcatons for
standard wne, and (2) may be transferred to a vnegar pant covered
by bond, orm 1676, ond Coverng Remova to and Use of Wne
at negar pant.
Secton 5381 of the Interna Revenue Code of 195 provdes, n part,
that wne whch has become substandard by reason of ts condton
sha, uness the condton s corrected, be transferred to premses n
whch wnes other than natura wne may be stored or used.
Secton 5362 of the Code provdes, n part, that wne may be re-
moved free of ta from bonded wne cears for use n the producton
of vnegar. Sectons 2 0.650 to 2 0.658, ncusve, of the Wne Regu-
atons estabsh the requrements reatve to such removas. No
standard s prescrbed n the aw or reguatons for wne removed
for the manufacture of vnegar.
Wne whch has become substandard by reason of the deveopment
of e cessve voate acdty may be bended on bonded wne cear
premses wth another natura wne made from the same knd of frut
for the purpose of correctng the substandard condton, and the re-
sutng bend may be marketed as a standard wne f the voate
acdty s wthn the mtatons prescrbed by secton 21 of Reguatons
No. .
Wne whch has become substandard by reason of the deveopment
of e cess voate acdty may be removed to a vnegar pant covered
by bond, orm 1676.
S CTION 5382. C LL R TR TM NT O N TUR L
WIN
26 C R 2 0.530: Notce. Rev. Ru. 55- 1
product known as ferrn has been approved for use by wne-
makers to remove ron from wne snce ts use s recognzed as a cear
treatment consstent wth good commerca practce as provded n
secton 2 0.530 of the wne reguatons.
Revenue Rung 25, C. . 1953-1, 31, s modfed to ncude the
above.
Prescrbed methods and procedures for testng for resdues when
wne s treated wth femn or smar approved products may be
obtaned from the offces of the ssstant Regona Commssoner,
coho and Tobacco Ta ,
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599 5 11.
S CTION 5382(b). C LL R TR TM NT O N TUR L
WIN : SP CI IC LLY UT ORIZ D TR TM NTS
36 C R 2 0.353: Concentrated frut |uce. Rev. Ru. 55- 00
rut |uce concentrate reduced wth water to a degree not ess
than the densty of the |uce from whch t was made, and concen-
trate made from |uce of an orgna densty of more than 22 degrees
r and reduced to not ess than 22 degrees r , are deemed to be
|uce for purposes of standard wne producton. Concentrated
|uce may be used n con|uncton wth unconcentrated |uce derved
from the same knd of frut for deveopment of acoho n wne.
S CTION 5383(a). M LIOR TION ND SW T NING
LIMIT TIONS OR N TUR L GR P WIN S: SW T-
NING O GR P WIN S
26 C R 2 0.368: Sweetenng n permanent Rev. Ru. 55-215
storage.
Secton 5383(a) of the Interna Revenue Code of 195 provdes
that any natura grape wne produced thereunder may, t not n
reserve nventory, be sweetened after fermentaton and before ta -
payment wth pure dry sugar f the sugar sods content of the fn-
shed wne does not e ceed 10 percent of the weght of the wne and
the acohoc content of the fnshed wne after sweetenng s ess than
1 percent by voume. ed, wne produced n conformty wth the
provsons of secton 2 0.365 of the Wne Reguatons may be sweet-
ened by a wnemaker who s not the producer of the wne, pursuant to
secton 2 0.368 of such reguatons. The fnshed wne must be wthn
the mtatons specfed as to sugar sods content and acohoc
content.
SU C PT R G. R W RI S
P RT II. OP R TIONS
S CTION 5 11. US O R W RY
26 C R 2 5.10: rewery. Rev. Ru. 55-36
eer may be receved wthout payment of ta by a brewer from
another brewery beongng to hm. Secton 2 5.21 of the eer Regu-
atons requres that botted beer so transferred must be receved n
the brewery bottng house. Secton 2 5.10 of the reguatons defnes
a brewery bottng house as that porton of the brewery set apart by
the brewer and so descrbed on orm 27-C, Notce by rewer, where
beer s to be botted. ed, a room whch does not have the usua
bottng equpment and n whch no beer s to be botted s not con-
sdered as a bottng house wthn the meanng and ntent of the eer
Reguatons and may not be approved as such for use n recevng
botted beer from another brewery beongng to the same brewer.
86 050 56 39
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5511. 600
26 C R 2 5.30: Restrctons. Rev. Ru. 55-365
The brewery offce on bonded premses may not be used for admn-
stratve actvtes n connecton wth the purchase and sae of beer
produced and botted by another brewer.
dvce has been requested whether the brewery offce on bonded
premses may be used for admnstratve actvtes n connecton wth
the purchase and sae of beer produced and botted by another brewer.
The beer nvoved s produced and botted by another brewer, and
therefore the queston does not reate to the resae of beer purchased n
accordance wth sectons 2 5.300 to 2 5.303, ncusve, of the eer
Reguatons. Under such condtons, and by reason of the sae of
such purchased botted beer, the brewer woud be engagng n busness
as a whoesae deaer n beer n addton to hs actvtes as a brewer.
Secton 2 5.30 of the reguatons precudes the estabshment or
operaton of a brewery n any budng or on any premses where any
quor or beverages are kept, sod or deat n ether at whoesae or
reta. Therefore, the brewery offce on the bonded premses may
not be used for admnstratve actvtes n connecton wth the pur-
chase and sae of beer produced and botted by another brewer n the
brewer s capacty as a whoesae deaer n beer.
26 C R 2 5.31: Use of brewery. Rev. Ru. 55-21G
part of the rackng room on the brewery premses, whch s
under refrgeraton, may be parttoned off from the baance of the
rackng room by erectng a substanta wre partton between the
two parts. Ths porton of the rackng room under refrgeraton may
then be consdered as, and made a part of, the bottng house premses
and may be used for the storage of unta pad botted beer. It shoud
be so descrbed n a suppementa notce fed on orm 27-C, Notce
by rewer, as requred by secton 2 5.70 of the eer Reguatons.
The door from the room to be used for the storage of nonta pad
botted beer shoud ead drecty onto the oadng deck.
SU C PT R .-MISC LL N OUS PL NTS ND W R OUS S
P RT 11. OL TIL RUIT- L OR CONC NTR T PL NTS
S CTION 5511. ST LIS M NT ND OP R TION
26 C R 198.29: Use of premses. T. D. 6129
TITL 26 INT RN L R NU (1930). C PT R 1. SU C PT R C. P RT
108. PRODUCTION Of OL TIL RUIT- L OR CONC NTR T S
Use of premses
Treasury Department,
Offce of Cosussoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to reeve restrctons on use of voate frut-favor con-
centrate pant premses, Reguatons 30 26 C R 198 (1939) , as made
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601 5 555 .
appcabe to the Interna Revenue Code of 195 by Treasury Decson
6091 C. . 195 -2, 7 , dated ugust 16, 195 and secton 7807 of
the Code, are amended as foows:
Secton 198.29 s amended to read as foows:
Sec. 198.29. Use of Premses. The premses of a concentrate pant sha be
used e cusvey for the manufacture of concentrates by any process whch In-
cndes evaporaton from the mash or uce of any frut. Such premses may be
used by the propretor, n addton to such manufacture of concentrates, for the
producton of a marketabe artce from the fashed |uce or mash or for the
producton of a food product made from frut of the same knd used n the
manufacture of voate frut-favor concentrates: Provded, That the assstant
regona commssoner fnds that such other busness w not |eopardze the reve-
nue, nor unduy ncrease admnstratve supervson. propretor desrng to
use the premses for such other busness must fe appcaton In trpcate wth
the assstant regona commssoner settng forth fuy the detas of the desred
actvty. Such other busness may not be commenced unt approva has been
obtaned from the assstant regona commssoner. (68 Stat. 627, 677 26
C.S.C. 5171, 5511)
ecause ths Treasury Decson merey reeves restrctons on the
use of voate frut-favor concentrate pant premses, t s found
that t s unnecessary to ssue ths Treasury Decson wth the pubc
ruemakng and effectve date requrements of secton (a) and (c)
of the dmnstratve Procedure ct (60 Stat. 238 5 U. S. C. 1003),
Ths Treasury Decson sha be effectve upon fng for pubcaton
n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned n
68 Stat. 917 26 U. S. C. 7805).
O. Gordon Dek,
ctng Commssoner of Interna Revenue.
pproved March 28,1955.
. Chapman Rose,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 28, 1955, :03 p. m.)
SU C PT R I.-MISC LL N OUS G N R L PRO ISIONS
S CTION 555 . PILOT PL NT OP R TIONS
26 C R 170. 0: uthorty to wave reguatory T. D. 6116
provsons.
TITL 26 INT RN L R NU , 195 . C PT R I, SU C PT R , P RT
170. MISC LL N OUS R GUL TIONS R L TING TO LI UOR
uthorty for pot and e permenta operatons
Treasury Department,
Offce of the Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Secton 555 of the Interna Revenue Code of 195 (Pubc Law
591,83d Cong., 2d sess.), provdes as foows:
Sre. 565 . Pot Pant Operatons. or the purpose of factatng the deveop-
ment and testng of mproved methods of governmenta supervson (necessary
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5555. 602
for the protecton of the revenue) over dsteres, Intcrnn revenue bonded
warehouse, rectfyng pants, ndustra acoho pants, ndustra acoho bonded
warehouses, ndustra acoho denaturng pants, or smar premses estabshed
under ths chapter or of chapter 26 of the Interna Revenue Code of 1930, the
Secretary or hs deegate s authorzed to wave any reguatory provsons of
ths chapter for temporary pot or e permenta operatons. Nothng n ths
secton sha be construed as authorty to wave the fng of any bond or the
payment of any ta provded for n ths chapter. The authorty under ths
secton sha termnate on December 31,1953.
Pursuant to the above provson of aw, there s added mmedatey
foowng subpart of part 170 of tte 26 of the Code of edera
Reguatons the foowng new subpart:
Subpart C Pot akd permenta Operatons
Secton 170. 0. uthorty to Wave Reguatory Provsons. cept as pro-
vded n secton 170. 1, the Drector, coho and Tobacco Ta Dvson, s
authorzed to wave, for such tme as may be necessary, reguatory provsons
of chapter 51 of the Interna Revenue Code of 195 and reguatons ssued there-
under, for the purpose of factatng the deveopment, testng, and mprovement
of methods of governmenta supervson (necessary for the protecton of the
revenue) over premses estabshed and quafed under such provsons of aw
and reguatons. or ths purpose, the Drector may, wth the approva of the
propretor thereof, desgnate any such premses for such operatons. The pro-
vsons of aw and reguatons waved and the perod of tme durng whch such
waver sha contnue sha be stated n wrtng by the Drector.
Sec. 170. 1. Lmtatons on Waver or Reguatory Provsons. The pro-
vsons of secton 170. 0 sha not be construed as authorty to wave the fng
of any bond or the payment of any ta provded for n chapter 51 of the Inter-
na Revenue Code of 195 . The Drector, coho and Tobacco Ta Dvson,
sha wave reguatory provsons of aw ony when such acton s necessary to
enabe hm to deveop, test, and mprove methods of governmenta supervson
necessary for protecton of the revenue. The authorty contaned n secton
170. 0 sha termnate on December 31, 1955.
Ths Treasury Decson sha be effectve upon pubcaton n the
edera Regster.
ecause ths Treasury Decson s necessary to gve mmedate effect
to secton 555 of the Interna Revenue Code of 195 to factate the
deveopment, testng, and mprovement of methods of governmenta
supervson necessary for the protecton of the revenue, t s found
that compance wth the pubc ruemakng and effectve date requre-
ments of secton (a) and (c) of the dmnstratve Procedure ct
(60 Stat. 238 5 U. S. C. 1003), s mpractcabe and contrary to th3
pubc nterest.
(Ths Treasury Decson s ssued under the authorty contaned n
68 Stat. 917 26 U. S. C. 7805).
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved: December 23, 195 .
M. . osom,
ctng Secretary of the Treasury.
(Pubshed n the edera Regster December 29, 195 )
S CTION 5555.-R CORDS, ST T M NTS, ND R TURNS
26 C R 182.6 3: Preparaton and dsposton.
or the method of showng the purpose for whch ta free acoho
s wthdrawn, n cases where the wthdrawa permt, orm 1 50, does
not show the specfc purpose, see Rev. Ru. 55-321, page 572. .
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603 5556.
26 C R 2 0.901: orm 2050.
Method of ad|ustng errors nvovng underpayment or overpay-
ment of ta on wne. See Rev. Ru. 55-323, beow.
26 C R 2 5.3 2 : eer ta return, orm 203 . Rev. Ru. 55-323
( so 26 C R 2 0.901.)
Where errors are found n a brewer s records, nvovng the over-
payment and underpayment of ta on beer, whch do not affect the
quanttes of beer removed sub|ect to ta as reported on orm 103,
rewer s Monthy Report of Operatons, and orm 2051, Record of
rewery Operatons, the ad|ustng fgures need be entered ony on
orm 203 , eer Ta Return, n the spaces provded therefor. Where
the quanttes of beer reported on orms 103 and 2051 are affected by
the ad|ustments reported on orm 203 , the ad|ustng fgures shoud
be shown by speca entres n the current reports, orms 103 and 2051,
foowed by a memorandum notaton e panng the errors.
rrors nvovng underpayment or overpayment of ta on wne
may be smary ad|usted wthout requrng amended orm 702,
Monthy Report of Wne Cear Operatons, by showng ad|ustments
n the spaces provded therefor on orm 2050, Wne Ta Return, n
nstances where the quanttes of wne reported on orm 702 are not
affected by such ad|ustments. Where the quanttes of wne reported
on orm 702 are affected by the ad|ustments, the ad|ustng fgures
shoud be shown by the propretor of the wnery or bonded wne cear
by speca entres n the report on orm 702 fed for the current month,
foowed by an e panatory notaton n regard to the errors.
S CTION 5556. R GUL TIONS
26 C R 182. 39: Competon of operaton re- Rev. Ru. 55-130
qured.
( so 182. 0 26 C R 220.706 and 220.709.)
Where a pant, operated aternatey as a regstered dstery and
an ndustra acoho pant, uses ony one type of mash and the
sprts or acoho produced s dentca e cept for desgnaton, the
sts may be consdered suffcenty boed out when the sprts drop
n proof to a pont beow that requred for the type of sprts beng
produced.
dvce has been requested whether t s necessary to competey
bo out sprts remanng n the sts at the tme operatons of a
pant as a dstery are dscontnued and pror to ts operaton as
an ndustra acoho pant, or vce versa.
The Industra coho Reguatons, Part 182, and the Reguatons
reatng to the Producton of Dsted Sprts, Part 220, permt the
aternate operaton of a pant as an ndustra acoho pant and a
dstery pursuant to the requrements specfed theren. Sectons
182. 39 and 182. 0 and sectons 220.706 and 220.709 of such regua-
tons provde for dsposton of the acoho and sprts produced (fn-
shed and unfnshed) e ceptng the resdues of such acoho and
sprts remanng n sts whch t s not practcabe to competey
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5556.1 G0
bo out, and the materas remanng on hand whch may be trans-
ferred to the successor.
The provsons of the reguatons were ntended to permt the ds-
ter to effect a practca method of concudng dstaton for an
aternate operaton of the pant wthout the necessty of termnatng
operatons. Consequenty, the beer beng conveyed to the beer sts
shoud be cut preferaby when the beer wes are empty and dstaton
shoud proceed unt the quantty of beer entered nto the sts has
been practcay e hausted.
When the same type of mash s beng used n the producton of the
same type of sprts by the same manner of operatons and the acoho
and sprts produced are dentca e cept for desgnaton, the sts
may be consdered suffcenty boed out to compy wth the provsons
of the reguatons when the sprts drop n proof to a pont beow that
requred for the type of sprts beng produced.
26 C R 182. 0: Transfer of materas, etc.
eer remanng n the beer sts at the tme a pant s aternated
from a dstery to an acoho pant or from an acoho pant to a ds-
tery. See Rev. Ru. 55-130, page 603.
26 C R 220.706: Competon of operaton re-
qured.
eer remanng n the beer sts at the tme a pant s aternated
from a dstery to an acoho pant or from an acoho pant to a ds-
tery. See Rev. Ru. 55-130, page 603.
26 C R 220.709: Transfer of materas, etc.
eer remanng n the beer sts at the tme a pant s aternated
from a dstery to an acoho pant or from an acoho pant to a ds-
tery. See Rev. Ru. 55-130, page 603.
26 C R 225.969: Use of fter ads. Rev. Ru. 55-217
( so 26 C R 235.700 26 C R 230.193.)
The provsons of Revenue Rungs 5 -185, C. . 195 -1, 30 , and
5 -352, C. . 195 -2, 75, permttng the use of actvated carbon at
the rate of 7 ounces to 00 gaons of sprts as a fterng medum
n the carfcaton of whsky to be botted wthout rectfcaton and
to be botted n bond, respectvey, provded the orgna character
or composton of the dsted sprts s not changed thereby, are
hereby modfed to ncude a casses and types of dsted sprts
botted n bond or botted wthout rectfcaton.
26 C R 230.193: Use of fter ads.
Use of actvated carbon as a fterng medum n the carfcaton
of a casses and types of sprts botted n bond and botted wthout
rectfcaton. See Rev. Ru. 55-217, page 60 .
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605 56 8.
Use of actvated carbon as a fterng medum n the carfcaton of
a casses and types of sprts botted n bond and botted wthout
rectfcaton. See Rev. Ru. 55-217, page 60 .
SU C PT R . P N LTI S, S IZUR S, ND OR ITUR S
R L TING TO LI UORS
P RT I. P N LTY. S IZUR , ND OR ITUR PRO ISIONS PPLIC L TO
DISTILLING, R CTI YING, ND DISTILL D ND R CTI I D PRODUCTS
S CTION 56 8. P N LTY ND OR ITUR OR
R UDUL NT CL IMS OR PORT DR W C OR
UNL W UL R L NDING
( so Part III- , 2885 (d).) Rev. Ru. 55-32
Domestc dsted sprts may be wthdrawn from customs cus-
tody, free of duty, by foregn persons havng dpomatc or consuar
status, or by mtary personne of foregn countres wthn the pro-
vsons of 19 U. S. C. 196a, provded there has been a vad wth-
drawa for e portaton foowed by a competed and bona fde
e portaton n respect of a partcuar ot of sprts and such sprts
are remported under the Tarff ct of 1930, as amended, 19 U. S. C,
and paced n a Cass 2 customs warehouse.
dvce has been requested whether domestc dsted sprts wth-
drawn for e portaton free of ta or wth beneft of drawback may be
remported and wthdrawn from customs custody wthout payment of
duty (equa to the nterna revenue ta ) for the purpose of suppyng
dpomats of foregn countres, or foregn mtary mssons n the
Unted States under secton 196a of Tte 19 of the Unted States Code.
Secton 56 8(b) of the Interna Revenue Code of 195 reads as
foows:
very person who ntentonay reands wthn the |ursdcton of the Unted
States any dsted sprts whch have been shpped for e portaton under the
provsons of ths chapter, or who receves such reanded dsted sprts, and
every person who ads or abets n such reandng or recevng of such sprts,
sha be fned not e ceedng 5,000 and mprsoned not more than 3 years and
a dsted sprts so reanded, together wth the vesse from whch the same was
reanded, wthn the |ursdcton of the Unted States, and a vesses, vehces,
or arcraft used n reandng and removng such dsted sprts, sha be for-
feted to the Unted States.
The term wthdrawa for e portaton n secton 56 8(b) of the
Code s nterpreted to mean a wthdrawa wth the ntenton that such
sprts be severed from the mass of goods n ths country and entered
nto and fow n commerce n the foregn country. Smary, e -
portaton s not compete unt the act of mportaton s effected n
the foregn country. Intentonay reands s construed as meanng
the brngng back to ths country of goods that ether have not been
e ported or were not wthdrawn for vad e portaton. Therefore, t
woud appear that a vad wthdrawa for e portaton whch s fo-
owed by a competed e portaton woud not be sub|ect to the prohb-
ton aganst reandng contaned n the above secton of the Code, and
woud entte the sprts, when remported, to the advantages of the
provsons of secton 1201 of Tte 19 of the U. S. Code.
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7805. 606
Snce the vadty of the wthdrawa for e portaton depends upon
the ntenton of the e porter, no hard and fast rue may be ad down
as to what does or does not estabsh such ntent. ach remportaton
of dsted sprts prevousy e ported must rest upon ts own facts.
If t can be shown that the so-caed e portaton was merey to
evade, defeat, or deay the payment of ta by gvng the product a
temporary stus n a foregn country, then, upon reandng, the goods
and persons concerned woud be sub|ect to abty under secton
56 8(b) of the Interna Revenue Code of 195 (secton 2885(d)(2)
of the Interna Revenue Code of 1939). Compare ager v. dd, 78
ed. 3 1.
Where there has been a vad wthdrawa for e portaton foowed
by a competed e portaton as to a certan ot of sprts and such
sprts are remported under the Tarff ct of 1930 and paced n a
Cass 2 customs warehouse, they may be wthdrawn free of duty by
foregn persons en|oyng dpomatc or consuar status, or by .mtary
personne of foregn countres wthn the provsons of secton 19Ca
of Tte 19 of the U. S. Code n the same manner that such persons can
secure sprts of foregn orgn from such warehouses free of duty.
C PT R 80. G N R L RUL S
SU C PT R . PPLIC TION O INT RN L R NU L WS
S CTION 7805. RUL S ND R GUL TIONS
26 C R 220.379: Tests of beer and stage. Rev. Ru. 55-218
The provsons of secton 220.379 of the Dsted Sprts Regua-
tons, whch requre the dster to test sampes of beer mmedatey
pror to dstaton, are ntended to requre such tests on the bass
of ndvdua f ermenters. The provsons n the nstructons on orm
1598, Propretor s Report of Operatons at Regstered Dstery,
reatve to the sampng of beer from fermenters at regstered ds-
teres w be changed to conform to the above requrement when
the form s ne t revsed. Whe the testng of composte sampes
of beer s not permtted, the acohoc content of stage or spent beer
may be determned from a composte sampe.
26 C R 230.115: uafcaton. Rev. Ru. 55-3 5
Secton 230.115 to secton 230.118, ncusve, of the Reguatons
reatng to ottng of Ta pad Sprts, contan the requrements
and procedure for operatons of a ta pad bottng house under ater-
natng propretorshps. The reguatons do not requre that ater-
nate propretors operate on the bass of 2 -hour perods. ed, where
each aternate propretor has bascay quafed for the operaton of
the ta pad bottng house, the aternate operatons may be effected at
any desgnated tme durng reguar busness hours pursuant to the
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607 7805.
fng and approva of orm 1696, Notce of ternate Operatons, n
the manner provded n the sectons referred to. The pant operaton
s of course sub|ect to the restrctons provded by sectons 230.155 and
230.156 of the reguatons.
26 C R 235.129: ottng tanks Rev. Ru. 55-3 6
( so 26 C R 235.901.)
The outet ppe nes of bottng tanks at rectfyng pant premses
are not requred to be equpped wth check vaves where such bot-
tng tanks are to be used e cusvey for the bottng of unrectfed
products.
Revenue Rung 55-56, page 569, ths uetn, modfed.
dvce has been requested whether the requrement of secton
235.129 of the Reguatons reatng to the Rectfcaton of Sprts and
Wnes, that check vaves be nstaed n the outet ppe nes of
bottng tanks appes n the case of bottng tanks used e cusvey
for the bottng of unrectfed products.
Secton 235.685 of the reguatons provdes that propretors of
rectfyng pants desrng to Dotte ta pad dsted sprts or wnes
wthout rectfcaton w gve notce on orm 230, Descrpton and
Gauge of Sprts or Wnes for ottng Wthout Rectfcaton. Sec-
ton 235.901 thereof requres Government ocks upon the manheads,
nets, and outets of bottng tanks e cept where the bottng s
pursuant to orm 230.
In vew of the provson of secton 235.901 of the reguatons, t
s hed that the requrement of secton 235.129 for the nstaaton
of check vaves n the outet ppenes of bottng tanks does not appy
to bottng tanks used e cusvey for the bottng of sprts pursuant
to orm 230. ccordngy, the Interna Revenue Servce w not
requre the nstaaton of check vaves n the outet ppenes of bottng
tanks whch are used ony for the bottng of unrectfed products
pursuant to orm 230. owever, f such bottng tanks are to be
used at anv tme for the bottng of rectfed products pursuant to
orm 237, Report of Rectfed Sprts and Wnes, check vaves must
frst be nstaed n the outet ppenes.
Revenue Rung 55-56, page 569, ths uetn, s accordngy mod-
fed to emnate the requrement for check vaves on outet ppenes
n the case of bottng tanks used e cusvey for the bottng of
unrectfed products pursuant to orm 230.
26 C R 235.901: Where ocks are requred.
or requrements wth respect to nstaaton of check vaves on
the outet ppenes of bottng tanks at rectfyng pants, see Rev.
u. 55-3 6, page 607.
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2885. 608
SU P RT . RULINGS ND D CISIONS UND R T
INT RN L R NU COD O 1939
Rungs and decsons pubshed n Part III, subpart , of the
Interna Revenue uetn are based on the appcaton of provsons
of the Interna Revenue Code of 1939 and, uness otherwse noted
theren, are pubshed wthout consderaton as to any appcaton of
the provsons of the Interna Revenue Code of 195
C PT R 26. LI UOR
SU C PT R . DISTILL D SPIRITS
P RT III. INT RN L R NU OND D W R OUS S
S CTION 2885. PORT TION O SPIRITS WIT DR WN
RO I W R OUS S
Wthdrawa of domestc dsted sprts from customs custody, free
of duty, by foregn persons havng dpomatc or consuar status, or
by mtary personne of foregn countres. See Rev. Ru. 55-32 ,
page COS.
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609 5(b).
SU P RT C RULINGS ND D CISIONS UND R T
D R L LCO OL DMINISTR TION CT OR R -
L T D L WS
ngs and decsons pubshed n Part III, Subpart C, of the
Interna Revenue uetn are based on the appcaton of provsons
of the edera coho dmnstraton ct and, uness otherwse
noted theren, are pubshed wthout consderaton as to any appca-
ton of the provsons of the Interna Revenue Code of 195 or the
Interna Revenue Code of 1939.
D R L LCO OL DMINISTR TION CT
S CTION . P RMITS
Reguaton No. 1, Secton 1. 2: Change Rev. Ru. 55-1C
n ownershp, management, or contro of
busness.
Secton 1. 2 of Reguatons No. 1 provdes that n the event of any
change n the ownershp, management, or contro of any busness
operated pursuant to a basc permt (f tne permttee s a corporaton,
f any change occurs n the offcers, drectors, or persons ownng or
controng more than 10 percent of the votng stock of sad cor-
poraton) the permttee sha mmedatey notfy the appcabe s-
sstant Regona Commssoner of such change, gvng the names and
addresses of a new persons partcpatng n the ownershp, manage-
ment, or contro of such busness, or n the case of a corporaton, the
names and addresses of such new offcers, drectors, or persons ownng
or controng more than 10 percent of the votng stock. Ths requre-
ment for mmedate notfcaton of changes s nterpreted n the
ght of other nterna revenue reguatons whch requre that such
notfcaton must be made wthn 10 days. See, for e ampe, 26 C R
220.260 of the Reguatons Reatng to the Producton of Dsted
Sprts. ccordngy, t s hed that notfcaton of such changes
wthn 10 days by hoders of basc permts under the edera coho
dmnstraton ct w satsfy the requrements of secton 1. 2 of
Reguatons No. 1.
S CTION 5(b). UN IR COMP TITION ND UNL W UL
PR CTIC S: TI D OUS
Reguatons No. 6, Secton 6.23: Insde Rev. Ru. 55- 03
sgns: Wne and mat beverages.
( so Secton 6.23a.)
In determnng whether or not advertsng sgns, posters, dspays,
etc ntended for use consecutvey n more than one reta estabsh-
ment fa wthn the e ceptons specfed n secton 6.23 and secton
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5 5(b). 610
6.23a of Reguatons No. 6, the tota vaue may not be prorated pro-
portonatey to the amount of tme the artces reman on the premses
of a partcuar retaer.
Reguatons No. 6, Secton 6.23a: Insde
sgns: Dsted sprts.
Meanng of the term tota vaue as used n sectons 6.23 and
6.23a of Reguatons No. f ee Rev. Ru. 55- 03, 600.
Reguatons No. 6, Secton 6.28: Retaer Rev. Ru. 55- 2
advertsng specates.
Secton 6.28 of Reguatons No. 6 provdes that retaer adverts-
ng specates, such as trays, coasters, beer mats, menu cards, mea
checks, etc., whch bear advertsng matter and whch are prmary
vauabe to the retaer as pont-of-sae advertsng meda, may be
furnshed, gven, or sod to a retaer f the aggregate cost to any
ndustry member of such retaer advertsng specates furnshed,
gven, or sod n connecton wth any one reta estabshment n
any one caendar year does not e ceed 10. ed: Such retaer ad-
vertsng specates furnshed by ndustry members to retaers whch
bear advertsng matter of the ndustry member furnshng them may
aso bear the name or name and address of the retaer to whom
furnshed.
Rev. Ru. 55-166
n nsurance pocy purportedy protectng a retaer from the
theft of bottes from a counter dspay s gven to a retaer by a pro-
ducer or whoesaer of dsted sprts or wne. ed, the gvng of
such nsurance pocy consttutes the furnshng of a thng of vaue
wthn the meanng of secton 5(b)(3) of the edera coho d-
mnstraton ct. ccordngy, f retaers, ether drecty, or n-
drecty through whoesae channes, are nduced to purchase dsted
sprts or wne to the parta or compete e cuson of dsted sprts
or wne sod or offered for sae by other persons n nterstate or
foregn commerce, by the furnshng of these nsurance poces, vo-
atons of the ct woud ensue. owever, n vew of the apparenty
neggbe cost of the poces, t s doubtfu that the furnshng of
the poces to retaers woud resut n the nducement and
e cuson proscrbed by secton 5(b) (3) of the ct.
Rev. Ru. 55-167
The furnshng of a pourng rack wth bottes of dsted sprts
or wne by producers or whoesaers of dsted sprts to retaers
woud come wthn the coverage of secton 5(b) (3) of the edera
coho dmnstraton ct. It woud not fa wthn any of the
e ceptons to the statute set forth n Reguatons No. 6, reatng to
nducements furnshed to retaers. ccordngy, f retaers, ether
drecty, or ndrecty through whoesae channes, are nduced to
purchase dsted sprts or wne to the parta or compete e cuson
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611 5(b).
of dsted sprts or wne sod or offered for sae by other persons n
nterstate or foregn commerce, as a resut of furnshng these pourng
racks, voatons of the act woud ensue. owever, the cost of the
racks woud be a factor n determnng as to whether the furnshng
thereof to retaers woud resut n the proscrbed nducement and
e cuson , . e., f the cost s nomna, t s questonabe whether
nducement and e cuson woud resut.
Rev. Ru. 55-168
n organzaton has among ts members reta quor deaers as
we as varous other oca busness estabshments. It s a non-proft
corporaton organzed for the purpose of nducng conventon groups
to hod ther conventons n the cty n whch the organzaton s
ocated. ed, dues payments made by whoesaers of dsted sprts,
wne, and mat beverages to such organzaton woud come wthn
the coverage of secton 5 (b) (3) of the edera coho dmnstraton
ct. oatons thereof woud resut f such payments nduced the
varous hote and restaurant members (acohoc beverage retaers)
to purchase acohoc beverages from such partcpatng whoesaers
to the parta or compete e cuson of acohoc beverages sod or
offered for sae by non-partcpatng whoesaers. If, however, mem-
bershp n the organzaton s on a competey vountary bass wth
dues set at specfed rates as, for e ampe, 100 per year for sma
whoesae quor deaers, 500 per year for medum-szed whoesae
quor deaer , and 1,000 per year for arge whoesae quor deaers,
rather than on a sdng scae based on the voume of busness en|oyed
by each whoesaer, and there s no dscrmnaton by the retaers
who are members of the organzaton aganst non-member whoesaers,
payments of dues by partcpatng whoesaers woud be unkey to
resut n any voaton of secton 5(b) (3) of the ct.
ev. u. 55 01
The purchase of tckets to a retaer s open house, annversary
party, remodeng party, or smar event sponsored by the retaer,
woud resut n a voaton of secton 5(b) (3) of the edera coho
dmnstraton ct f the purchase of such tckets by producers,
mporters, or whoesaers from retaers resuts n the proscrbed
nducement and e cuson.
dvce has been requested whether the purchase by a whoesaer
of acohoc beverages of tckets to a retaer s open house, annversary
party, remodeng party, or smar event, woud fa wthn the cov-
erage of secton 5(b) (3) of the edera coho dmnstraton ct.
Secton 5(b) (3) of the edera coho dmnstraton ct, among
other thngs, makes t unawfu for any person engaged n busness
as a producer, mporter, or whoesaer of acohoc beverages, drecty
or ndrecty or through an affate, to nduce a retaer to purchase
acohoc beverages from such person to the e cuson or parta
e cuson of acohoc beverages sod or offered for sae by other
persons n nterstate commerce, under the condtons set forth theren
and, n the case of mat beverages, wthn the |ursdcton mtatons
mposed by the penutmate paragraph of secton 5, by gvng money
or other thngs of vaue to such retaers.
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5(e). 612
The purchase of tckets to a retaer s open house, annversary party,
remodeng party, or other smar event sponsored by the retaer,
woud fa wthn the cover of secton 5(b) (3). ccordngy, f the
purchase of such tckets by producers, mporters, or whoesaers from
retaers resuts n the proscrbed nducement or e cuson, voatons
of the ct woud ensue.
S CTION 5(e). UN IR COMP TITION ND UNL W UL
P CTIC S: L LING
Reguatons No. 3, Secton 21: The standards
of dentty.
endng of natura wne whch has become substandard by reason
of the deveopment of e cessve voate acdty wth another natura
wne made from the same knd of frut. See Rev. Ru. 55-21 ,
page 597.
Reguatons No. , Secton 30: Genera.
Sampes of wne for dstrbuton by saesmen of a bonded wne
cear propretor to prospectve purchasers. See Rev. Ru. 55-213,
page 506.
Reguatons No. , Secton 50: Certf- Rev. Ru. 55-169
cate of abe approva.
( so Reguatons No. 5, Secton 50
Reguatons No. 7, Secton 1.)
otters and Importers of dsted sprts, wnes, and mat bever-
ages may use sets of abes dfferng from sets of abes covered by
certfcates of approva ony n that there bus been added an add-
tona shouder, strp, or other a) e bearng the name, or name and
address, of the whoesaer or retaer, preceded by such phrases as
botted for, seected for, made for, or mported for.
Revenue Rung 5 -302, 2, C. . 100 -2, 08o, superseded.
dvce has been requested whether a wne mporter may pace on
bottes of mported wne, abes dentfyng whoesae and/or reta
dstrbutors, even though such abes are not covered by the mporter s
Certfcate of Labe pprova, orm 16 9.
The nstructons on orm 16 7, ppcaton for Certfcate of
Labe pprova Under the edera coho dmnstraton ct,
presenty requre that the compete set of abes to be used on any
ndvdua contaner must be submtted wth ths form. orm 16 9,
Certfcate of Labe pprova Under the edera coho dmns-
traton ct (whch s ssued pursuant to orm 16 7), to whch are
aff ed abes dentca wth those on orm 16 7, authorzes ony the
use of such abes and others dfferng from them n certan specfed
respects, such as a change n the proportonate sze of the abes or
the statement of dfferent net contents.
In order to avod the constant resubmsson of abes to cover sets
of abes dfferng from prevousy approved abes ony n that they
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613 5(e).
contan an addtona strp, shouder, or other abe merey dentfyng
a whoesaer or retaer for whom the product was botted or mported,
botters and mporters of dsted sprts, wnes, and mat beverages
may use sets of abes dfferng from sets of abes covered by certf-
cates of approva n that there has been added an addtona shouder,
strp, or other abe bearng ony the name, or name and address, of
the whoesaer or retaer, preceded by such phrases as botted for,
seected for, made for, or mported for, and contanng no refer-
ences whatever to the characterstcs of the product.
orms 16 7 and 16 9 w be appropratey revsed when they are
reprnted.
Revenue Rung 5 -392, C. . 195 -2, 585, superseded.
Reguatons No. 5, Secton 21: The stand-
ards of dentty.
Requrements wth respect to age to be camed on straght whsky
whch s ta pad at 8 years of age and consodated n the orgna
contaners as whoesae quor deaer packages. See Rev. Ru. 55-399,
page 572.
Reguatons No. 5, Secton 22: teraton Rev. Ru. 55-165
of cass and type: armess coorng, favor-
ng, and bendng materas.
The presence n a whsky produced n a gven foregn country of
not more than 2 percent of harmess coorng, favorng, or bend-
ng materas, ncudng whskes of other orgn, s not requred to
be dscosed upon the abe.
dvce has been requested whether the presence of bourbon, rye, or
mat whsky used as a or a porton of the permssbe 2y2 percent
harmess coorng, favorng, and bendng matera, and of an orgn
other than that of the whsky n whch t s used, woud have to be
dscosed on the abe of such rectfed product.
Secton 22 of Reguatons No. 5 permts the use n whskes, other
than mercan type straght whskes, of harmess coorng, favor-
ng or bendng materas such as straght mat or straght
rye mat whskes, whch are customary empoyed theren
n accordance wth estabshed trade usage, f such coorng, favorng,
or bendng materas do not tota more than 2y2 percent by voume
of the fnshed product.
The Interna Revenue Servce does not consder that the orgn of
ths mted amount of such favorng materas, ncudng whskes
permtted to be used n ths connecton, affects the rght of the fnshed
product to cam ts proper State or country of orgn. or e ampe,
a bend of straght entucky whskes mght contan the permssbe
amount of straght mat or straght rye mat whskes, or smar
whskes sutabe for use n ths connecton, of other than entucky
orgn, wthout affectng the rght of the fnshed product to be desg-
nated as a entucky bend.
Smary, any whsky produced n any gven foregn country mght
contan 2 percent of harmess coorng, favorng, or bendng ma-
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5(e). 61
teras, ncudng whskes of other orgn, wthout any confct occur-
rng wth the provsons of secton 22 of Reguatons No. 5. The
presence of such whskes used wthn the 2 percent mtaton woud
not be requred to be dscosed upon the abe. owever, whe t
woud not be necessary under the statute and reguatons, there s no
ob|ecton to the addton of the foowng statement to a standard cer-
tfcate of orgn propery ssued by a duy authorzed offca of a
foregn country:
The tota coorng, favorng or Wendng materas used In ths product do
not e ceed 2 /| percent by voume of the fnshed product.
Reguatons No. 5, Secton 22: teraton
of cass and type harmess coorng, favorng,
and bendng materas.
Use of recovered sprts (not neutra) and neutra sprts stored
n reused cooperage as coorng, favorng, or bendng matera h
bends of whsky. See Rev. Ru. 55-176, page 577.
Reguatons No. 5, Secton 50: Certf-
cates of abe approva.
Use of abes by botters and mporters dentfyng whoesae or
reta dstrbutors, not covered by certfcates of abe approva. See
Rev. Ru. 55-1G9, page 612.
Reguatons o. 7, Secton 27: Net Rev. Ru. 55-131
contents.
The new odd sze contaners for mat beverages must bear very
arge and conspcuous statements of net contents on ther abes, n
the manner heren prescrbed. cans and abes for the new sma
szes shoud be presented to the Drector, coho and Tobacco Ta
Dvson, for approva.
When Reguatons No. 7, Reatng to Labeng and dvertsng of
Mat everages, were adopted n 1936, no provsons were made for
standards of f, as was tho case ntay wth the dsted sprts
abeng reguatons and ater wth the wne abeng reguatons so
far as domestc wnes are concerned. The omsson of such standards
from the mat beverage abeng requrements apparenty resuted
from the fact that contaners for these products seemed we stand-
ardzed and, wth the e cepton of specates and neggbe quant-
tes of beer and ae packaged n so-caed spts, were predomnanty
mted to the tweve-ounce, quart and two-quart contaners, wth the
eeven-ounce contaner beng used n mted areas of the West. Ths
stuaton has contnued reatvey unchanged unt qute recenty.
Late n 195 , however, certan new contaners, dfferng n net con-
tents from the tradtona cans and bottes, began to appear upon the
market. One of these was the four-ffths quart and others were the
ten and eeven-ounce cans. It has been rumored that st other szes
may make ther appearance before ong.
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615 5(0.
The coho and Tobacco Ta Dvson s consderng the advsa-
bty of hodng a hearng ookng toward the adopton of standards
of f for mat beverages, the determnaton as to whch w be de-
pendentn part, on the resuts of a consumer survey now beng under-
taken. Pendng a decson n ths matter and effectve mmedatey,
the new odd sze contaners are requred to bear very arge and con-
spcuous statements of net contents on ther abes n order to mnmze
any consumer decepton whch may resut from the consumer s rea-
tve ack of famarty wth these szes and ther confuson n hs mnd
wth smar and arger contaners to whch he s accustomed. The
mere bowng of the net contents statement n the base of a gass botte
does not consttute suffcent conspcuousness n the case of these new
szes. Such statement shoud appear n arge type upon a neck or
other front abe. In the case of cans, the statement shoud appear
wth strkng conspcuousness n a horzonta rather than a vertca
poston.
cans and abes for the new sma szes shoud be presented to
the Drector, coho and Tobacco Ta Dvson, for approva, re-
gardess of the nstructons on the abe appcaton form, orm 16 7,
ppcaton for Certfcate of Labe pprova Under the edera
coho dmnstraton ct, and w henceforth be |udged by these
standards. Labes and cans aready n use shoud be appropratey
revsed wth a possbe promptness.
Inqures n regard to ths Revenue Rung shoud refer to the num-
ber thereof and the symbos O: T: .
Reguatons No. 7, Secton 1: Certf-
cates of abe approva.
Use of abes by botters and mporters dentfyng whoesae or
reta dstrbutors, not covered by certfcates of abe approva. See
Rev. Ru. 55-169, page 612.
Rev. Ru. 55- 02
There s no provson n the edera coho dmnstraton ct
or n chapter 51 of the Interna Revenue Code of 195 whch woud
prohbt the sae by reta quor deaers to consumer purchasers of
packets of comc whsky abes.
S CTION 5(f). UN IR COMP TITION ND UNL W UL
PR CTIC S: D RTISING
Reguatons No. 7, Secton 5 : Prohbted Rev. Ru. 55- 0
statements.
References to the caore content of mat beverages In the adver-
tsng thereof and to more specfc mpcatons, however made,
that mat beverages are nonfattenng or vrtuay so, are key to
msead the consumer and may not be permtted.
The Interna Revenue Servce has been requested to determne
whether references n mat beverage advertsng to caore content and
8M000 56 10
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5(f). 616
representatons mpyng that the mat beverage s nonfattenng are
key to be mseadng to the pubc.
Secton 5(f) of the edera coho dmnstraton ct and secton
5 of Reguatons No. 7, reatve to mat beverage advertsng, pro-
hbt the use n any advertsement whch s n nterstate commerce or
whch s cacuated to nduce saes n nterstate commerce of any
statement that s fase or mseadng n any partcuar or that s
dsparagng of a compettor s products, f the aw of the State nto
whch the mat beverages are to be shpped mposes smar requre-
ments.
or some tme, varous members of the brewng ndustry have em-
poyed advertsng themes whch ether drecty or ndrecty have
tended to convey the mpresson that ther products are nonfattenng
or reatvey ess fattenng than other compettve beverage tems or
than food tems used n the norma det. One eary approach nvoved
the use of cams of freedom from starch or reatve freedom from
sugar, on the part of the advertsed mat beverage product.
In the sprng of 1953, members of the ndustry were advsed that
such sugar and starch cams were mseadng and contrary to the
reguatons snce a beers are free of starch and none contans more
than a neggbe quantty of sugar, so sma as not to account for any
apprecabe porton of the product s caorc content. Ths vew was
aso stated, wth respect to starch n beer, n Revenue Rung 5 -513,
C. . 195 -2,593. In the sprng of 195 , the ndustry was advsed that
caore references, to avod mseadng the pubc, shoud be quafed
by accurate statements as to actua caorc content. The ndustry was
further advsed that caorc comparsons between the advertsed beer
and food or beverage tems commony consumed by the pubc were
not consdered ob|ectonabe on the bass of the facts then avaabe.
s tme passed, however, and as addtona brewng companes
adopted the ow caore theme, t became ncreasngy evdent that ow
caore cams, even when quafed by statements of the actua caorc
content, mght be mseadng n certan respects. Numerous ndustry
members, as we as certan State contro offcas, urged the ree am-
naton o ths queston.
Durng the cosng weeks of the year 195 , the coho and Tobacco
Ta Dvson began a consumer survey n order to determne whether
mseadng mpcatons were nvoved n the use of such a theme.
Ths survey supports the poston that treatments cacuated to mpy
nonfattenng or ess fattenng propertes on the part of beer are
mseadng and therefore contrary to the reguatons. Substanta
percentages of the peope ntervewed n the survey receved the m-
presson that the advertsed product was ether entrey nonfattenng
or at east neggbe n caore content that t was ess fattenng
than other compettve beers that the consumer coud ose weght by
drnkng t that the product was appro matey equa n food vaue
to the food tem wth whch ts caore content was compared or that
the advertsed product coud be substtuted for these food tems wth
the same nutrtona resuts.
Members of the brewng ndustry have been advsed to desst from
the use of any further references to the caore content of ther prod-
ucts and to more specfc mpcatons, however made, that ther prod-
ucts are nonfattenng or vrtuay so. Inasmuch as the Interna
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617 5(f).
Revenue Servce dd not prevousy ob|ect to caore treatments, pend-
ng the deveopment of specfc evdence on ths pont, a reasonabe
tme s beng aowed for the preparaton of substtute advertsng
copy. Snce t s now evdent, however, that such advertsng s key
to resut n consumer decepton, the transton to unob|ectonabe
advertsng shoud be effected as e pedtousy as possbe.
ev. u. 55- 3
Secton 5(f) of the edera coho dmnstraton ct provdes
n part that t s unawfu for a dster or rectfer among others to
pubsh or dssemnate n any newspaper, perodca or other pubca-
ton or any other prnted or graphc matter, any advertsement of
dsted sprts, f such advertsement s n nterstate commerce or s
cacuated to nduce saes n such commerce or s dssemnated by
ma uness t conforms wth reguatons desgned, among other thngs,
to prevent consumer decepton and prohbt dsparagng or fase or
mseadng statements. ed, saes pamphets reatng to dsted
sprts or wnes whch are not dstrbuted to or shown to consumers
or eft wth retaers but are to be e hbted to prospectve whoe-
saer or retaer purchasers by a permttee s saesman consttute ad-
vertsng wthn the meanng of secton 5(f) of the ct.
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P RT I
L GISL TION ND TR TI S
SU P RT . L GISL TION
PU LIC L W 1, IG TY- OURT CONGR SS
C PT R 1, IRST S SSION
. R. 2369
n ct To amend secton 7237 of the Interna Revenue Co.de of 195 .
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That the frst sen-
tence of subsecton (a) of secton 7237 of the Interna Revenue Code
of 195 s hereby amended by strkng out subpart C of part I, and
nsertng n eu thereof Part I . Subsecton (b) of such secton
s hereby amended by strkng out subpart C of .
pproved anuary 20, 1955.
PU LIC L W 18, IG TY- OURT CONGR SS
C PT R 18, IRST S SSION
R. 259
n ct To provde a one-year e tenson of the e stng corporate
norma-ta rate and of certan e cse-ta rates.
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That ths ct may
be cted as the Ta Rate tenson ct of 1955.
S C 2. ON -Y R T NSION O CORPOR T NORM L T -R T
Secton 11(b) (reatng to corporate norma ta ), secton 821(a)(1)( )
(reatng to mutua nsurance companes other than nternsurers), and secton
821(b) (1) (reatng to nternsurers) of the Interna Revenue Code of 195 are
hereby amended as foows:
(1) y strkng out pr 1, 1955 each pace t appears and nsertng
n eu thereof pr 1,1956
(2) y strkng out pr 1, 1955 each pace t appears and nsertng
n eu thereof pr 1,1956
(3) y strkng out March 31, 1955 each pace It appears and nsertng
n eu thereof March 31,1956
( ) y strkng out March 31,1955 each pace t appears and nsertng
n eu thereof March 31,1956 .
S C. 3. ON -Y R T NSION O C RT IN CIS T R T S.
(a) tenson of Rates. The foowng provsons of the Interna Revenue
Code of 195 are hereby amended by strkng out pr 1, 1955 each pace It
appears and Insertng In eu thereof pr 1,1956
(1) secton 0 1(c) (reatng to speca fues)
(2) secton 061 (reatng to motor vehces)
(619)
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620
(3) secton 081 (reatng to gasone)
( ) secton 5001 (a) (1) (reatng to dsted sprts)
(5) secton 5001(a)(3) (reatng to mported perfumes contanng
dsted sprts)
(6) secton 5022 (reatng to cordas and queurs contanng wne)
(7) secton 50 1(b) (reatng to wnes)
(8) secton 5051(a) (reatng to beer) and
(9) secton 5701 (c) (1) (reatng to cgarettes).
(b) Technca mendments. The foowng provsons of the Interna ev-
enue Code of 195 are hereby amended as foows:
(1) Secton 50C3 (reatng to foor stocks refunds on d ed sprts,
wnes, cordas, and beer) s amended by strkng out pr 1, 1955 each
pace t appears and nsertng n eu thereof pr 1,1956 , and by strkng
out May 1, 1955 and nsertng n eu thereof May 1, 1956, .
(2) Secton 513 (a)(3) (reatng to drawback n the case of dsted
sprts) s amended by strkng out March 31, 1955 and nsertng n eu
thereof March 31,1956 .
(3) Subsectons (a) and (b) of secton 5707 (reatng to foor stocks
refunds on cgarettes) are amended by strkng out pr 1, 1955 each
pace t appears and nsertng n eu thereof pr 1, 1956 , and by strkng
out uy 1, 1955 and Insertng n eu thereof uy 1, 1956 .
( ) Subsectons (a) and (b) of secton 6 12 (reatng to foor stocks
refunds on motor vehces and gasone) are amended by strkng out pr 1,
1955 each pace t appears and nsertng n eu thereof pr 1, 1956 , and
bv strkng out uy 1, 1955 each pace t appears and Insertng n eu
thereof uy 1,1956 .
Secton 97 of the Revenue ct of 1951 (reatng to refunds on artces from
foregn trade zones), as amended by the cse Ta Reducton ct of 195 , s
hereby amended by nsertng after Interna Revenue Code each pace t
appears of 1939 (or secton 5701(c), 5001(a), 5022, 50 1(b), or 5051(a) of
the Interna Revenue Code of 195 ) , and by strkng out pr 1, 1955 each
pace It appears and nsertng n eu thereof pr 1,1956 .
pproved March 30,1955.
PU LIC L W 76 , IG TY-T IRD CONGR SS
C PT R 1209, S COND S SSION
. R. 6287
n ct To e tend and amend the Renegotaton ct of 1951
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That subsecton (a)
of secton 102 of the Renegotaton ct of 1951 s hereby amended by
strkng out December 31, 1953 and nsertng n eu thereof De-
cember 31,195 .
Sec. 2. (a) Secton 105(f) (1) of such ct s amended by strkng
out 250,000 wherever t appears theren and nsertng n eu thereof
the foowng: 250,000, n the case of a fsca year endng before
une 30, 1953, or 500,000, n the case of a fsca year endng on or
after une 30,1953 .
(b) Secton 105(f)(3) of such ct s amended by nsertng, n
the second sentence thereof, after the 250,000 amount the foowng:
, the 500,000 amount, .
Sec. 3. (a) Paragraph (6) of secton 106(a) of such ct s hereby
amended by nsertng mmedatey aowng the second perod theren,
the foowng: In desgnatng those casses and types of contracts
whch sha be e empt and n e emptng any ndvdua contract under
ths paragraph, the oard sha consder as not havng a drect or
1 or e cerpts from the Renegotaton ct of 1061, see C. . 1061-1,180.
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621
mmedate connecton wth natona defense any contract for the fur-
nshng of materas or servces to be used by the Unted States, a De-
partment or agency thereof, n the manufacture and sae of synthetc
rubbers to a prvate person or to prvate persons whch are to be used
for nondefense purposes. If the use by such prvate person or per-
sons sha be party for defense and party for nondefense purposes,
the oard sha consder as not havng a drect or mmedate connec-
ton wth natona defense that porton of the contract whch s de-
termned not to have been used for natona defense purposes. The
method used n makng such determnaton sha be sub|ect to approva
by the oard.
(b) The amendment made by subsecton (a) sha be effectve as
f t were a part of such Renegotaton ct of 1951 on the date of ts
enactment.
Sec. . (a) Paragraph (1) of secton 106(c) of such ct s hereby
amended by strkng cut from subcontracts and nsertng n eu
thereof from contracts or subcontracts.
(b) Paragraph (1) of secton 106(c) of such ct s further
amended by nsertng ( ) after the word e cept and by addng
before the perod at the end of such paragraph the foowng: and
( ) to recepts and accruas from contracts for new durabe pro-
ductve equpment n cases n whch the oard fnds that the new
durabe productve equpment covered by such contracts cannot be
adapted, converted, or retooed for commerca use .
(c) Paragraph (2) of such secton 106(c) s hereby amended to
read as foows:
(2) Defnton. or the purpose of ths subsecton, the term durabe
productve equpment means machnery, toos, or other equpment whch
does not become a part of an end product, or of an artce ncorporated
theren, and whch has an average usefu fe of more than fve years.
(d) The amendments made by subsectons (a), (b), and (c) sha
appy ony wth respect to fsca years (as defned n secton 103 (h)
cf the Renegotaton ct of 1951) endng on or after une 30,1953.
Sec. 5. (a) Secton 106(a) of such ct s hereby amended
(1) by strkng out, n paragraph (7), by reason of ths sub-
secton. and nsertng n eu thereof by reason of any paragraph,
other than paragraph (8), of ths subsecton or and
(2) by addng at the end of such secton the foowng:
(8) any contract or subcontract for the makng or furnshng of a stand-
ard commerca artce, uness the oard makes a specfc fndng that com-
pettve condtons affectng the sae of such artce are such as wU not
reasonaby prevent e cessve profts. Ths paragraph sha appy to any
such contract or subcontract ony f (1) the contractor or subcontractor
fes, at such tme and n such form and deta as the oard sha by regua-
tons prescrbe, such nformaton and data as may be requred by the oard
under ts reguatons for the purpose of enabng t to reach a decson wth
respect to the makng of a specfc fndng under ths paragraph, and (2)
wthn a perod of s months after the date of fng of such nformaton and
data, the oard fas to make a specfc fndng that compettve condtons
affectng the sae of such artce are such as w not reasonaby prevent
e cessve profts, or (3) wthn such s -month perod, the oard makes a
specfc fndng that compettve condtons affectng the sae of such artce
are such as w reasonaby prevent e cessve profts. ny contractor or
subcontractor may wave the e empton provded n ths paragraph wth
respect to recepts or accruas n any fsca year by ncudng a statement to
such effect In the fnanca statement fed by such contractor or subcon-
tractor for such fsca year pursuant to secton 105(e) (1). ny specfc
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622
fndng of the oard under ths paragraph sha not be revewed or rede-
termned by any court or agency other than by the Ta Court of the Unted
States n a proceedng for a redetermnaton of the amount of e cessve
profts determned by an order of the oard. or the purpose of ths
paragraph
( ) the term artce ncudes any matera, part, component, a -
seroby, machnery, equpment, or other persona property
( ) the term standard commerca artce means an artce
(1) whch, n the norma course of busness, s customary
manufactured for stock, and s customary mantaned n stock
by the manufacturer or an .- deaer, dstrbutor, or other commerca
agency for the marketng of such artce or
(2) whch s manufactured and sod by more than two persons
for genera cvan ndustra or commerca use, or whch s
dentca n every matera respect wth an artce so manufactured
and sod:
(C) the term dentca n every matera respect means of the
same knd, manufactured of the same or substtute materas, and hav-
ng the same ndustra or commerca use or uses, wthout necessary
beng of dentca specfcatons and
(D) the term persons does not Incude any person under contro
of, or controng, or under common contro wth any other pers
consdered for the purposes of subparagraph ( ) (2) of ths paragraph.
(b) The amendments made by subsecton (a) sha appy to con-
tracts wth the Departments and subcontracts ony to the e tent of the
amounts receved or accrued bv a contractor or subcontractor after
December 31, 1953.
Skc. 6. (a) Secton 106(a)( ) of such ct s hereby amended bv
strkng out or at the end thereof and nsertng the foowng:
and to such furnshng or sae n any case n whch the oard fnds
that the reguatory aspects of rates for such furnshng or sae, or
the type and nature of the contract for such furnshng or sae, are
such as to ndcate, n the opnon of the oard, that e cessve profts
are mprobabe or .
(b) The amendment made by subsecton (a) sha appy ony wth
respect to fsca years (as defned n secton 103(h) of the Renegota-
ton ct of 1951) endng on or after December 31,1953.
Sec. 7. (a) Secton 105 (d) of such ct s hereby amended by strk-
ng out the perod at the end of the ast sentence thereof and nsertng
the foowng: , and sha aso have the power to set asde and
decare nu and vod any such agreement f, upon a request made to
the oard wthn three years from the date of such agreement, the
oard fnds as a fact that the aggregate of the amounts receved or
accrued by the other party to such agreement durng the fsca year
covered by such agreement was not more than the mnmum amount
sub|ect to renegotaton specfed n secton 105(f) for such fsca
year.
(b) The amendment made by subsecton (a) sha be effectve as
f t were a part of the Renegotaton ct of 1951 on the date of ts
enactment.
Sec. 8. Secton 201 (h) of such ct s hereby amended by strkng
out two years and nsertng n eu thereof four years , and bv
addng at the end thereof the foowng new sentence: If any such
case has been dsmssed by any court for faure to substtute for
the War Contracts Prce d|ustment oard pror to the effectve date
of ths sentence, such case s hereby revved and renstated n such
court as f t had not been dsmssed.
pproved September 1, 195 .
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623
SU P RT . T CON NTIONS
T. D.6120
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 7.
T TION PURSU NT TO TR TI S
Treasury Decson 6055 amended to provde that orm 10 2 Sup-
pement be fed wth the Dstrct Drector of Interna Revenue,
atmore 2, Maryand.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Paragraph 1. In order to provde for the fng of orm 10 2 Sup-
pement (reatng to ncome pad to persons whose addresses are n any
foregn country wth whch the Unted States has a ta treaty) wth
the Dstrct Drector of Interna Revenue, atmore 2, Maryand, the
frst undesgnated subparagraph of secton 7.1(a) of Treasury De-
cson 6055 (26 C R 7.1(a) (1)) C. . 1953-2,77 s amended to read
as foows:
very Unted States wthhodng agent sha make and fe an nformaton
return on orm 10 2 Suppement wth respect to each foregn country whch
has, or w have, entered nto an ncome ta conventon wth the Unted States,
f such conventon provdes for the mutua e change of nformaton and f the
Commssoner of Interna Revenue determnes that such return s requred n
the case of such country. or the caendar year 1053, ths return sha be fed
wth the Dstrct Drector of Interna Revenue for the dstrct In whch the
wthhodng agent s ocated. or the caendar year 195 and subsequent ca-
endar years, orm 10 2 Suppement sha be fed wth the Dstrct Drector of
Interna Revenue, atmore 2, Maryand.
Par. 2. The amendment provded by paragraph 1 sha appy not-
wthstandng any reguaton to the contrary whch has been approved
pror to the date on whch ths Treasury Decson s pubshed n the
edera Regster.
ecause ths Treasury Decson merey amends Treasury Decson
6055 to change the desgnaton of the offca wth whom certan docu-
ments sha be fed, t s hereby found unnecessary to ssue ths Treas-
ury Decson wth notce and pubc procedure thereon under secton
(a) of the dmnstratve Procedure ct, approved une 11, 19 6,
or sub|ect to the effectve date mtaton of secton (c) of that ct.
(Ths Treasury Decson s ssued under the authorty contaned
n secton 7805 (68 Stat. 917 26 U. S. C. 7805) of the Interna Rev-
enue Code of 195 , and n the provsons reatng to e change of n-
formaton whch are found n the respectve ncome ta conventons
between the Unted States and the foregn countres here concerned.)
ustn . Wnke,
ctng Commssoner of Interna Revenue.
pproved anuary 11,1955.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed In the edera Regster anuary 15, 1955)
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62
UNIT D ST T S-C N D INCOM T
CON NTION
The conventon between the Unted States and Canada for the avod-
ance of doube ta aton and the preventon of fsca evason wth re-
spect to ncome ta es (C. . 19 3, 526), whch was sgned at Washng-
ton on March ,19 2, was modfed and suppemented on une 12,1950.
The suppementary conventon was ratfed by Canada on ugust 1,
1950 was approved for ratfcaton by the Unted States Senate on
September 17, 1951, and was ratfed by the Presdent on November
16, 1951. The ratfcatons were e changed at Washngton on No-
vember 21, 1951. The suppementary conventon was procamed by
the Presdent on November 29, 1951, and s effectve wth respect to
ta abe years begnnng on or after the frst day of anuary of the
caendar year n whch occurs the e change of the nstruments of
ratfcaton.1
The conventon, as so modfed and suppemented, reads as foows:
rtce I
n enterprse of one of the contractng States s not sub|ect to ta aton by the
otber contractng State n respect of ts ndustra and commerca profts e cept
n respect of such profts aocabe n accordance wth the artces of ths conven-
ton to ts permanent estabshment n the atter State.
No account sha be taken n determnng the ta n one of the contractng
States, of the mere purchase of merchandse effected theren by an enterprse of
the other State.
rtce II
or the purposes of ths conventon, the term Industra and commerca prof-
Its sha not ncude ncome n the form of rentas and royates, nterest, dv-
dends, management charges, or gans derved from the sae or e change of capta
assets.
Sub|ect to the provsons of ths conventon such Items of ncome sha be ta ed
separatey or together wth ndustra and commerca profts n accordance wth
the aws of the contractng States.
rtce III
1. If an enterprse of one of the contractng Sttes has a permanent estab-
shment n the other State, there sha be attrbuted to such permanent estabsh-
ment the net ndustra and commerca proft whch t mght be e pected to
derve f t were an ndependent enterprse engaged n the same or smar actv-
tes under the same or smar condtons. Such a net proft w, n prncpe, be
determned on the bass of the separate accounts pertanng to such estabshment.
In the determnaton of the net ndustra and commerca profts of the perma-
nent estabshment there sha be aowed as deductons a e penses, wherever
ncurred, reasonaby aocabe to the permanent estabshment, ncudng e ecu-
tve and genera admnstratve e penses so aocabe.
2. The competent authorty of the ta ng State may, when necessary, n e ecu-
ton of paragraph 1 of ths rtce, rectfy the accounts produced, notaby to
correct errors and omssons or to reestabsh the prces or remuneratons entere
n the books at the vaue whch woud preva between ndependent persons
deang at arm s ength.
3. If (a) an estabshment does not produce an accountng showng Its own
operatons, or (6) the accountng produced does not correspond to the norma
usages of the trade n the country where the estabshment s stuated, or (c)
3 Two separate versons of par. 1 of rtce are effectve on two dfferent dates.
The suppementary conventon sgned une 12, 1U50, added the ast sentence to par. 1
of rtce III.
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625
the rectfcatons provded for n paragraph 2 of ths rtce can not be effected
the competent authorty of the ta ng State may determne the net ndustra
am commerca proft by appyng such methods or formuae to the operatons
of the estabshment as may be far and reasonabe.
. To factate the determnaton of ndustra and commerca profts aoca-
be to the permanent estabshment, the competent authortes of the contractng
States may consut together wth a vew to the adopton of unform rues of
aocaton of sucb profts.
rtce I
1. (a) When a Unted States enterprse, by reason of ts partcpaton n the
management or capta of a Canadan enterprse, makes or mposes on the
atter, n ther commerca or fnanca reatons, condtons dfferent from those
whch woud be made wth an ndependent enterprse, any profts whch shoud
normay have appeared n the baance sheet of the Canadan enterprse but
whch have been, n ths manner, dverted to the Unted States enterprse, may
be ncorporated n the ta abe profts of the Canadan enterprse, sub|ect to
appcabe measures of appea.
(b) In order to effect the ncuson of such profts n the ta abe profts of
the Canadan enterprse, the competent authorty of Canada may, when neces-
sary, rectfy the accounts of the Canadan enterprse, notaby to correct errors
and omssons or to reestabsh the prces or remuneraton entered n the books
at the vaues whch woud preva between ndependent persons deang at arm s
ength. To factate such rectfcaton the competent authortes of the con-
tractng States may consut together wth a vew to such determnaton of profts
of the Canadan enterprse as may appear far and reasonabe.
2. The same prncpe appes, mutats mutands, n the event that profts are
drerted from a Unted States enterprse to a Canadan enterprse.
rtce
Income whch an enterprse of one of the contractng States derves from the
operaton of shps or arcraft regstered n that State sha be e empt from
ta aton n the other contractng State.
The present conventon w not be deemed to affect the e change of notes
between the Unted States of merca and Canada, dated ugust 2 and September
17,1028, provdng for reef from doube ncome ta aton on shppng profts.
rtce I
1. (a) Remuneraton, wages or saary (other than pensons) pad to an
ndvdna by the Unted States of merca, or by any agency, nstrumentaty
or potca subdvson thereof, n respect of servces rendered n the dscharge
of governmenta functons, sha be e empt from Canadan ta f the ndvdua
s ether a ctzen of the Unted States of merca, or s not ordnary resdent
n Canada or Is ordnary resdent n Canada soey for the purpose of renderng
those servces.
(b) Remuneraton, wages, or saary (other than pensons) pad to an n-
dvdna, other than a ctzen of the Unted States of merca, by Canada, or
by any agency, nstrumentaty or potca subdvson thereof, n respect of
servces rendered n the dscharge of governmenta functons, sha be e empt
from Unted States ta .
2. The provsons of paragraph 1 of ths rtce sha not appy to payments
n respect of servces rendered n connecton wth any trade or busness carred
on for purposes of proft by ether of the contractng States or by any agency,
nstrumentaty or potca subdvson thereof.
3. (a) The Unted States of merca agrees to e empt from ts ncome ta
ncome derved from sources outsde the Unted States of merca by a member
of the Canadan forces or by a ctzen of Canada servng or empoyed by the
Government of Canada at defense estabshments n the Unted States of mer-
ca, or by the wfe or mnor chdren of such member or ctzen.
(b) The same prncpe sha appy, mutats mutands, to ncome derved from
sources outsde Canada by a member of the Unted States forces or by a ctzen
of the Unted States of merca servng or empoyed by the Government of the
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026
Unted States of merca at defense estabshments In Canada or by the wfe
or mnor chdren of such member or ctzen.
btce I
Pensons (ncudng Government pensons) and fe annutes derved from
wthn one of the contractng States by a resdent of the other contractng State
sha be e empt from ta aton n the former State.
btce II
1. resdent of Canada sha be e empt from . ted States ta upon com-
pensaton for persona (ncudng professona) servces performed durng the
ta abe year wthn the Unted States of merca f he s present theren for a
perod or perods not e ceedng a tota of 1S3 days durng the ta abe year and
ether of the foowng condtons s met
(a) hs compensaton s receved for such persona servces performed
as an offcer or empoyee of a resdent, or corporaton or other entty of
Canada, or
(b) hs compensaton receved for such persona servces does not e ceed
5,000.
a
3. The provsons of paragraphs 1 and 2 of ths rtce sha appy, mutats
mutands, to a resdent of the Unted States of merca wth respect to compensa-
ton for such persona servces performed n Canada.
rtce ..
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.
btce III
professor or teacher who s a resdent of one of the contractng States and
who temporary vsts the other contractng State for the purpose of teachng,
for a perod not e ceedng two years, at a unversty, coege, schoo or other
educatona nsttuton n such other State, sha be e empted by such other State
from ta on h, - remuneraton for such teachng for such perod.
o Paragraph 2 deeted by Protoco.
Pror to amendment by the suppementary conventon sgned une 12, 1950, rtce I
read as foows :
rtce I. Wages, saares and smar compensaton pad by the Government, or any
agency or Instrumentaty thereof, of one of the contractng States or by the potca
subdvsons or terrtores or possessons thereof to ctzens of such State resdng In the
other State sha be e empt from ta aton In the atter State.
Pensons and fe annutes derved from wthn one of the contractne States and pad
to Indvduas resdng n the other contractng State sha be e empt from ta aton n the
former State.
rtce I was added by suppementary conventon sgned une 12, 1950.
Pror to amendment by the suppementary conventon sgned une 12, 11 50. rtce II
read as foows:
btce II. 1. resdent of Canada sha be e empt from Unted States ncome ta
upon compensaton for abor or persona servces performed wthn the Unted States of
merca If he conforms to ether of the foowng condtons :
(0) e Is temporary present wthn the Unted States of merca for a perod or
perods not e ceedng a tota of 183 days durng the ta abe year and such compensaton
( ) s receved for abor or persona servces performed as an empoyee of. or under con-
tract wth, a resdent or corporaton or other entty of Canada and ( ) does not e ceed
5,000 In the aggregate durng such tn abe year or (6) he Is temporary present In the
Unted States of merca for a perod or perods not e ceedng a tota of 90 days durnc
the ta abe year and the compensaton receved for such servces does not e ceed f 1,500
In the aggregate durng such ta abe year.
2. The provsons of paragraph 1(a) of ths artce sha have no appcaton to the
professona earnngs of such Indvduas as actors, artsts, muscans and professona
athetes.
3. The provsons of paracrnphs 1 and 2 of ths artce sha appy, mutats mutands, to
a resdent of the Unted States of merca dervng compensaton for persona servces
performed wthn Canada.
rtce III was added by suppementary conventon sgned une 12, 1950.
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627
rtce I
Students or busness apprentces from one of the contractng States resdng
n the other contractng State for purposes of study or for acqurng busness
e perence sha not be ta abe by the atter State n respect of remttances
receved by them from wthn the former State for the purposes of ther man-
tenance or studes.
rtce
Income derved from sources wthn one of the contractng States by a re-
gous, scentfc, terary, educatona, or chartabe organzaton of the other
contractng Stae sha be e empt from ta aton n the State from whch the
ncome s derved f, wthn the meanng of the aws of both contractng States,
such organzaton woud have been e empt from ncome ta .
rtce I
1. The rate of ncome ta mposed by one of the contractng States, n respect
of ncome derved from sources theren, upon ndvduas resdng n, or corpo-
ratons organzed under the aws of, the other contractng State, and not havng a
permanent estabshment n the former State, sha not e ceed 15 percent for
each ta abe year.
2. Notwthstandng the provsons of paragraph 1 of ths artce, ncome ta
In e cess of 5 percent sha not be mposed by one of the contractng States In
respect of dvdends pad by a subsdary corporaton organzed under the aws
of such State, or of a potca subdvson thereof, to a parent corporaton
organzed under the aws of the other contractng State, or of a potca sub-
dvson thereof: Provded, however, That ths paragraph sha not appy f
the competent authorty n the former State s satsfed that the corporate
reatonshp between the two corporatons has been arranged or s mantaned
prmary wth the ntenton of takng advantage of ths paragraph.
3. Notwthstandng the provsons of rtce II of ths conventon, para-
graph 1 or paragraph 2, or both, of ths rtce, may be termnated wthout
notce on or after the termnaton of the 3-year perod begnnng wth the
effectve date of ths conventon by ether of the contractng States mposng a
rate of ncome ta n e cess of the rate of 15 percent prescrbed n paragraph 1
or n e cess of the rate of 5 percent prescrbed n paragraph 2.
. The provsons of ths rtce sha not be construed so as to contravene
the ta conventon between the Unted States of merca and Canada, effectve
anuary 1, 1930, to pr 29, 19 1.
rtce II
1. Dvdends and nterest pad by a corporaton organzed under the aws of
Canada to a recpent, other than a ctzen or resdent of the Unted States of
merca or a corporaton organzed under the aws of the Unted States of
merca, sha be e empt from a ncome ta es mposed by the Unted States
of merca.
2. Dvdends and nterest pad by a corporaton organzed under the aws of
the Unted States of merca whose busness s not managed and controed n
Canada to a recpent, other than a resdent of Canada or a corporaton whose
busness s managed and controed n Canada, sha be e empt from a ta es
mposed by Canada.
rtce III
1 Corporatons organzed under the aws of Canada, more than 50 percent of
the outstandng votng stock of whch s owned, drecty or ndrecty, throughout
Pror to amendment by the suppementary conventon sgned une 12, 1950, par. 1 of
rtce I read as foows:
ncn I. 1. The rate of Income ta Imposed by one of the contractng States, In
r ct of Income derved from sources theren, upon ndvduas resdng In, or corporatons
organzed under the aws of, the other contractng State, and not engaged In trade or
bntctss In the former State and havng no offce or pace of busness theren, sha not
t-eed 15 percent for each ta abe year.
Pror to amendment by the suppementary conventon sgned une 12, 1050, rtce II
read as foows:
men IL Dvdends and Interest pad on or after the effectve date of ths con-
venton by a corporaton organsed under the aws of Canada to Indvdua resdents or
Canada, other than ctwns of the Unted States of merca, or to corporatons organsert
onder the aws of Canada sha be e empt from a ncome ta es mposed by the unted
States of merca.
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628
the ast haf of the ta abe year by ndvdua resdents of Canada, other than
ctzens of the Unted States of merca, sha be e empt from any ta es
mposed by the Unted States of merca wth respect to accumuated or un-
dstrbuted earnngs, profts, ncome, or surpus of such corporatons.
2. Corporatons organzed under the aws of the Unted States of merca,
more than 50 percent of the outstandng votng stocks of whch s owned, drecty
or Indrecty, throughout the ast haf of the ta abe year by ndvdua resdents
of the Unted States of merca sha be e empt from any ta es mposed by
Canada n the nature of undstrbuted profts ta on undstrbuted profts of
the corporaton wth respect to accumuated or undstrbuted earnngs, profts,
ncome, or surpus of such corporatons.
btce III
1. resdent or corporaton organzed under the aws of Canada dervng
from sources wthn the Unted States of merca rentas from rea property
may eect for any ta abe year to be sub|ect to the ta mposed by the Unted
States of merca on a net bass as f such resdent or corporaton were engaged
In trade or busness wthn the Unted States of merca through a permanent
estabshment theren durng such ta abe year.
2. Rentas from rea property derved from sources wthn Canada by an
ndvdua or corporaton resdent n the Unted States of merca sha receve
ta treatment by Canada not ess favorabe than that accorded under secton
99, the Income Ta ct, as n effect on the date on whch ths rtce goes nto
effect.
btce III
Drectors fees pad by a corporaton to an ndvdua resdng n one of the
contractng States for servces at Drectors meetngs hed In that State sha
be e empt from ta by the other State.
rtce III C
Royates for the rght to use copyrghts or In respect of the rght to produce or
reproduce any terary, dramatc, musca, or artstc work (but not ncusve
of rents or royates n respect of moton pcture fms) derved from sources
wthn one of the contractng States by a resdent or corporaton or other entty
of the other contractng State not engaged n trade or busness n the former
State through a permanent estabshment sha be e empt from ta mposed by
such former State.
rtce I
1. (a) The Unted States ncome ta abty for any ta abe year begnnng
pror to anuary 1, 1936, of any ndvdua resdent of Canada, other than a
ctzen of the Unted States of merca, or of any corporaton organzed under
the aws of Canada, remanng unpad as of the date of sgnature of ths con-
venton may be ad|usted on a bass satsfactory to the Commssoner: Provded,
That the amount to be pad n settement of such abty sha not e ceed the
amount of the abty whch woud have been determned f
( ) the Revenue ct of 1936 as modfed by the ta conventon between
the Unted States of merca and Canada, effectve anuary 1, 1936, to
pr 29,19 1 (e cept n the case of a corporaton organzed under the aws
of Canada more than 50 percent of the outstandng votng stock of whch was
owned drecty or ndrecty throughout the ast haf of tte ta abe year
by ctzens or resdents of the Unted States of merca), and
Pror to amendment by the suppementary conventon sgned une 12, 1950, rtce III
read as foows:
btc III. Corporatons organzed under the aws of Canada, more than 50 per-
cent of the outstandng votng stock of whch Is owned drecty throughout the ast haf
of the ta abe year by ndvdua resdents of Canada, other than ctzens of the Unted
States of merca, sha be e empt from any ta es mposed by the Unted States of merca
wth respect to accumuated or undstrbuted earnngs, profts. Income or surpus of such
corporatons. Wth respect to corporatons organzed under the aws of Canada not
e empt from snch ta es under the provsons of ths artce the competent authortes of
the two contractng States w consut together.
rtce III was added by suppementary conventon sgned nne 12, 1050.
11 rce III was added by suppementary conventon sgned une 12, 1050.
rtce III C was added by suppementary conventon sgned une 12, 1050.
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629
( ) rtces II and III of ths conventon bad been n effect for such
year.
II the ta payer was not, wthn the meanng of Revenue ct of 1936, engaged
n trade or busness wthn the Unted States of merca and had no offce or
pace of busness theren durng the ta abe year, the amount of nterest and
penates sha not e ceed 50 percent of the amount of the ta wth respect to
whch such Interest and penates have been computed.
(b) The Unted States ncome ta abty remanng unpad as of the date
of sgnature of ths conventon for any ta abe year begnnng after December
31,1935, and pror to anuary 1, 19 1, n the case of any ndvdua resdent of
Canada, other than a ctzen of the Unted States of merca, or n the case of
any corporaton organzed under the aws of Canada sha be determned as f
the provsons of rtces II and III of ths conventon had been n effect
for such year.
2. The provsons of paragraph 1 of ths artce sha not appy
(a) Uness the ta payer fes wth the Commssoner wthn 2 years from
the date of sgnature of ths conventon a request that such ta abty
be so ad|usted together wth such nformaton as the Commssoner may
requre
(b) In any case n whch the Commssoner s satsfed that any defcency
n ta s due to fraud wth ntent to evade the ta .
rtce
1. s far as may be In accordance wth the provsons of The Income Ta
ct, Canada agrees to aow as a deducton from the Domnon ncome and
cess profts ta es on any ncome whch was derved from sources wthn the
Unted States of merca and was there ta ed, the approprate amount of such
ta es pad to the Unted States of merca.
2. s far as may be n accordance wth the provsons of the Unted States
Interna Revenue Code, the Unted States of merca agrees to aow as a de-
ducton from the ncome and e cess profts ta es mposed by the Unted States
of merca the approprate amount of such ta es pad to Canada.
rtce I
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 In 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 resdent or, If the
ta payer s a corporaton or other entty, wth the State n whch t was created
or organzed. If the cam shoud be deemed worthy of consderaton, the com-
petent anthorty of such State may consut wth the competent authorty of the
other State to determne whether the doube ta aton n queston may be avoded
n accordance wth the terms of ths conventon.
rtce II
Notwthstandng any other provson of ths conventon, the Unted States of
merca In determnng the ncome and e cess profts ta es, Incudng a sur-
ta es, of ts ctzens or resdents or corporatons, may ncude n the bass npon
whch such ta es are mposed a tems of ncome (other than ncome wthn the
scope of par. 1(b) of rtce I) ta abe under the revenue aws of the Unted
States of merca as though ths conventon had not come nto effect.
Ths wordng of par. 1 of rtce Is effectve annary 1, 10 9, as amended by the
unpementary conventon sgned une 12,1050.
ffectve pror to anuary 1, 10 0, the wordng of ths paragraph read ns foows:
btce . In accordance wth the provsons of sec. 8 of the Income War Ta ct
as In effect on the day of the entry Into force of ths conventon, Canada agrees to aow as
a deducton from the Domnon ncome and e cess profts ta es on any ncome whch whs
drrred from sources wthn the Unted States of merca and was there ta ed, the appro-
prate amount of such ta es pad to the Unted States of merca.
Pror to amendment by the suppementary conventon sgned une 12, 10S0, paragraph
I of rtce read as foows:
rtck . In accordance wth the provsons of secton 131 of the Unted btatcs
Interna Revenue Code as In effect on the dny of the entry nto force of ths conventon,
the ITnted States of merca agrees to aow as a deducton from the ncome and e cess
Profts ta es mposed by the Unted States of merca the approprate amount of such ta es
Pad to Canada.
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630
rtce III
The competent authortes of the two contractng States may prescrbe regu-
atons to carry Into effect the present conventon wthn the respectve States and
rues wth respect to the e change of nformaton.
The competent authortes of the two contractng States may communcate
wth each other drecty for the purpose of gvng effect to the provsons of the
present conventon.
rtce III
To avod wthhodng of both Unted States ta and Canadan ta wth re-
spect to compensaton for persona servces performed by a resdent of one of
the contractng States whe temporary present In the other State
(a) The Commssoner may, wth the approva of the Secretary of the
Treasury, by reguatons specfy the crcumstances under whch such com-
pensaton of a resdent of the Unted States of merca temporary per-
formng persona servces n Canada may be e empted from deducton and
wthhodng of Unted States ta , and
(b) The approprate Canadan authorty may by reguatons specfy the
crcumstances under whch such compensaton of a resdent of Canada tem-
porary performng persona servces n the Unted States may be e empted
from deducton and wthhodng of Canadan ta .
rtce I
Wth a vew to the preventon of fsca evason, each of the contractng States
undertakes to furnsh to the other contractng State, as provded n the suc-
ceedng artces of ths conventon, the nformaton whch ts competent author-
tes have at ther dsposa or are n a poston to obtan under ts revenue aws
n so far as such nformaton may be of use to the authortes of the other con-
tractng State n the assessment of the ta es to whch ths conventon reates.
The nformaton to be furnshed under the frst paragraph of ths artce,
whether n the ordnary course or on request, may be e changed drecty be-
tween the competent authortes of the two contractng States.
rtce
1. The competent authortes of the Unted States of merca sha forward
to the competent authortes of Canada as soon as practcabe after the cose
of each caendar year the foowng nformaton reatng to such caendar year:
The names and addresses of a persons whose addresses are wthn Canada
and who derve from sources wthn the Unted States of merca dvdends, Inter-
est, rents, royates, saares, wastes, pensons, annutes, or other f ed or deter-
mnabe annua or perodca profts and ncome, showng the amount of such
profts and ncome In the case of each addressee.
2. The competent authortes of Canada sha forward to the competent
authortes of the Unted States of merca as soon as practcabe after the cose
of each caendar year the foowng nformaton reatng to such caendar year:
(a) The names and addresses of a persons whose addresses are wthn
the Unted States of merca and who derve from sources wthn Canada,
dvdends, nterest, rents, royates, saares, wages, pensons, or other f ed
or determnabe annua or perodca profts and ncome, showng the amount
of such profts and ncome n the case of each addressee.
(b) The names and addresses of a persons whose addresses are outsde
of Canada and who derve through a nomnee, or agent, or custodan n
Canada ncome from sources wthn the Unted States of merca, and who
are not entted to the reduced rate of 15 percent wth respect to such ncome
provded n rtce I of ths conventon, showng the amount of such ncome
n the case of each addressee.
(c) The names and addresses, where avaabe, of persons whose addresses
are outsde of Canada and who derve dvdends durng the caendar year
from corporatons organzed under the aws of Canada, more than 50 per-
cent of the gross ncome of whch s derved from sources wthn the Unted
States of merca, showng the amount of such dvdends n each case.
M rtce III was added by suppementary conventon sgned une 12, 1950.
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631
(d) The names and addresses of a persons whose addresses are wthn
the Unted States of merca and who benefcay or of record own stocks or
bonds, debentures or other securtes, or evdences of funded ndebtedness,
of any company ta ed n Canada as a non-resdent-owned nvestment corpora-
ton. The term Non-resdent-owned nvestment corporaton sha have
the same meanng as when used n the Income War Ta ct of Canada.
rtce I
1. If the Mnster n the determnaton of the Income ta abty of any
person under any of the revenue aws of Canada deems It necessary to secure
the cooperaton of the Commssoner, the Commssoner may, upon request, fur-
nsh the Mnster such nformaton bearng upon the matter as the Commssoner
s entted to obtan under the revenue aws of the Unted States of merca.
2. If the Commssoner n the determnaton of the ncome ta abty of any
person under any of the revenue aws of the Unted States of merca deems
t necessary to secure the cooperaton of the Mnster, the Mnster may, upon
request, furnsh the Commssoner such nformaton bearng upon the matter
as the Mnster s entted to obtan under the revenue aws of Canada.
rtce II
Ths conventon and the accompanyng protoco whch sha be consdered to be
an ntegra part of the conventon sha be ratfed and the nstruments of rat-
fcaton sha be e changed at Washngton as soon as possbe.
Ths conventon and protoco sha become effectve on the 1st day of anuary,
1M1. They sha contnue effectve for a perod of 3 years from that date
and ndefntey after that perod, but may be termnated by ether of the con-
tractng States at the end of the 3-year perod or at any tme thereafter provded
that, e cept as otherwse specfed In the case of rtce I, 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 6-month perod.
PROTOCOL
1. The ta es referred to n ths conventon are:
(a) for the Unted States of merca:
the edera ncome ta es, ncudng surta es, and e cess-profts ta es.
(b) for Canada:
the Domnon Income ta es, ncudng surta es, and e cess-profts
ta es.
2. In the event of apprecabe changes In the fsca aws of ether of the con-
tractng States, the Government of the two contractng States w consut
together.
3. s used n ths conventon:
(a) the terms person, ndvdua and corporaton sha have the
same meanngs, respectvey, as they have under the revenue aws of the
ta ng State or the State furnshng the nformaton, as the case may be
(b) the term enterprse Incudes every form of undertakng, whether
carred 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 Canadan enterprse
(d) the term Unted States enterprse means an enterprse carred on n
the Unted States of merca by an ndvdua resdent In the Unted States
of merca, or by a corporaton, partnershp or other entty created or
organzed n or under the aws of the Unted States of merca, or of any
of the States or Terrtores of the Unted States of merca
(e) the term Canadan enterprse s defned n the same manner mutats
mutands as the term Unted States enterprse
(f) the term permanent estabshment ncudes branches, mnes and o
wes, farms, tmberands, pantatons, factores, workshops, warehouses.
86 050 08 - 1
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632
offces, agences and other f ed paces of busness of an enterprse, but does
not Incude a subsdary corporaton. The use of substanta equpment
or machnery wthn one of the contractng States at any tme n any ta -
abe year by an enterprse of the other contractng State sha consttute
a permanent estabshment of such enterprse In the former State for such
ta abe year.
When an enterprse of one of the contractng States carres on busness n
the other contractng State through an empoyee or agent estabshed there,
who has genera authorty to contract for hs empoyer or prncpa or has
a stock of merchandse from whch he reguary fs orders whch he re-
ceves, such enterprse sha be deemed to have a permanent estabshment
n the atter State.
The fact that an enterprse of one of the contractng States has busness
deangs In the other contractng State through a commsson ageut, broker
or other ndependent agent or mantans theren an offce used soey for
the purchase of merchandse sha not be hed to mean that such enterprse
has a permanent estabshment In the atter State.
. The term Mnster, as used n ths conventon, means the Mnster of
Natona Revenue of Canada or hs duy authorzed representatve. The term
Commssoner, as used In ths conventon, means the Commssoner of Interna
Revenue of the Unted States of merca, or hs duy authorzed representatve.
The term com)etent authorty, as used n ths conventon, means the Com-
mssoner and the Mnster and ther duy authorzed representatves.
5. The term Unted States of merca, when used n n geographca sense,
Incudes ony the States, the Terrtores of aska and awa, and the Dstrct
of Coumba. The term Canada when used In a geographca sense means the
Provnces, the Terrtores and Sabe Isand.
C. The term subsdary corporaton as used n rtce I of ths Conventon
means a corporaton 95 percent of whose shares (other than drectors quafyng
shares) havng fu votng rghts are benefcay owned by another corporaton,
provded that (e cept n the case of corporaton the chef busness of whch s
the makng of oans) ordnary not more than one-quarter of the gross ncome
of such subsdary corporaton s derved from nterest and dvdends other
than nterest and dvdends receved from ts subsdary corporatons.1
7. (a) The term rentas and royates referred to n rtce II of ths con-
venton sha ncude rentas or royates arsng from easng rea or mmovabe
or persona or movabe property or from any nterest n such property, ncudng
rentas or royates for the use of, or for the prvege of usng, patents, copy-
rghts, secret processes and formuae, good w, trade marks, trade brands, fran-
chses and other ke property
(b) the term nterest, as used In ths conventon, sha ncude ncome ars-
ng from nterest-bearng securtes, pubc obgatons, mortgages, hypothecs,
corporate bonds, oans, deposts, and current accounts
(c) The term dvdends, as used n ths conventon, sha ncude a ds-
trbutons of the earnngs or profts of corporatons.
8. The terra pensons referred to n rtce I of ths conventon means
perodc payments made n consderaton for servces rendered or by way of
compensaton for n|ures receved.
9. The term fe annutes referred to n rtce I of ths conventon
means a stated sum payabe perodcay at stated tmes, durng fe, or durng
a specfed number of years, under an obgaton to make the payments n con-
sderaton of a gross sum or sums pad by the recpent or under a contrbutory
retrement pan.1
The ast sentence of the frst paragraph 3(f) was added by suppementary conventon
sgned une 12. 1050.
17 Pror to amendment by tbe suppementary conventon sgned une 12, 1050, par. 6 rea
as foows :
0. The term subsdary corporaton referred to In rtce I of ths conventon
moans a corporaton a of whose shares (ess drectors quafyng shares) havng fa
votng rghts are benefcay owned by another corporaton, provded that ordnary not
more thnn one-quarter of the gross Income of such subsdary corporaton Is derved from
Interest and dvdends other than Interest and dvdends receved from Its subsdary
corporatons.
The suppementary conventon sgned une 12, 1050, adds to I In par. 8 of the
prntoro.
The suppementary conventon sgned une 12, 1050, adds to I In par. 9
of the protoco.
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633
10. The term permanent estabshment as used n rtce I of ths conventon,
sha not be deemed to ncude an offce used soey for the purchase of mer-
chandse
11. The provsons of the present conventon sha not be construed to restrct
In 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 m-
posed by such State.
12. The ctzens of one of the contractng States resdng wthn the other
contractng State sha not be sub|ected to the payment of more burdensome
ta es than the ctzens of such other State.
D ne n dupcate, at Washngton, ths th day of March, 19 2 (Orgna
Conventon).
Done In dupcate, at Ottawa, ths 12th day of une, 1950 (Suppementary
Conventon).
or the Government of the Unted States of merca:
Sumner Wees (Orgna Conventon)
uan . arrngton (Suppementary Conventon)
or the Government of Canada:
I 30 TON McCarthy (Orgna Conventon)
D. C. bbott (Suppementary Conventon)
UNIT D ST T S-C N D INCOM T CON NTION
T. D. 60 7, Secton 7. 9: Natura resources, Rev. u. 55-200
royates, rea property rentas, saares.
wages, emouments, etc.
( so Part I, Secton 1 1.)
The earnngs from wthn the Unted States of a trust created or
organzed n Canada as a part of a stock bonus, penson, or proft-
sharng pan of a Unted States subsdary of a Canadan corpora-
ton for the empoyees (ncudng those renderng servces ony n
the Unted States) of such subsdary are sub|ect to ta n the
Unted States, and to the wthhodng of ta at source thereon as
requred by sectons 871 and 1 1 of the Interna Revenue Code of
195 , sub|ect to the ncome ta conventon between the Unted States
and Canada, notwthstandng that such earnngs are receved on
behaf of, and dsbursed to, the benefcares of the trust by a Unted
States bank actng as agent for the Canadan trustee. See ncome
ta conventon as modfed and suppemented T. D. 60 7, C. .
1953-2, 59.
The queston has been rased as to whether earnngs from sources
wthn the Unted States of a Canadan trust formng part of a Unted
States empoyer s penson pan for ts Unted States empoyees are
sub|ect to the wthhodngof ncome ta at source, as requred by sec-
ton 1 1 of the Interna Revenue Code of 195 , where such earnngs
are receved on behaf of the trust, hed on ts behaf, and utmatey
dsbursed to ts benefcares n the Unted States by a Unted States
bank actng as agent for the Canadan trustee.
The M company, a Unted States empoyer and subsdary of a
Canadan parent corporaton, adopted on behaf of ts empoyees the
penson pan and trust prevousy estabshed n Canada by ts Ca-
nadan parent corporaton. contrbutons to the trust by the
Unted States subsdary on behaf of ts empoyees are made n Unted
Pror to amendment by the suppementary conventon sgned une 12, 1050, par. 10
read as foows:
10. The terms engaged In trade or busness and offce or pace of busness as nsed
h rtce I of ths conventon sha not be deemed to Incude an offce used soey for the
purchase of merchandse.
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63
States doars to a Unted States bank actng as agent for the Canadan
trustee. Such Unted States bank, at a tmes actng as agent of ts
prncpa (the Canadan trustee), hods and nvests such contrbu-
tons n the Unted States, receves the earnngs on such nvestments,
and utmatey dstrbutes the contrbutons of the Unted States
empoyer, and earnngs thereon, to ts Unted States empoyees or
ther desgnated benefcares. The Unted States bank does not
consttute a permanent estabshment n the Unted States of the
Canadan trustee.
Secton 01(a) of the Interna Revenue Code of 195 provdes, as a
requrement for the quafcaton of a penson trust for e empton
from ta n the Unted States under secton 501(a) of the Code, that
such trust sha be created or organzed n the Unted States.
Secton 1 1 of the Code provdes, n genera, that a persons havng
the contro of ncome of any nonresdent aen ndvdua, to the e tent
that such ncome consttutes gross ncome from sources wthn the
Unted States, sha deduct and wthhod from such ncome a ta
equa to 30 percent thereof. rtce I of the ncome ta conventon
between the Unted States and Canada, C. . 19 0, 526, as ast modfed
and suppemented, page 627, ths uetn provdes, n part, that the
rate of ncome ta mposed by one of the contractng States, n respect
of ncome derved from sources theren, upon ndvduas resdng n, or
corporatons organzed under the aw of, the other contractng State,
and not havng a permanent estabshment n the former State, sha
sha not e ceed 15 percent for each ta abe year. See T. D. 60 7,
C. . 1953-2, 59.
On the bass of the facts heren set forth, snce a trust created n
Canada as a part of an empoyer s penson pan for empoyees w
not quafy for e empton from ta n the Unted States, t s hed that
the ncome of such a trust from sources wthn the Unted States s
sub|ect to wthhodng of ncome ta at source n the Unted States,
as requred by secton 1 1 of the 195 Code, at the rate of 15 percent
thereof as provded by the ncome ta conventon between the Unted
States and Canada, notwthstandng such ncome s derved ony from
the nvestment n the Unted States of funds contrbuted to the trust
on behaf of the Unted States empoyees by a Unted States empoyer
and s receved, hed, and utmatey dstrbuted to Unted States bene-
fcares of the trust by a Unted States bank actng as resdent agent
of the nonresdent trust.
UNIT D ST T S C N D INCOM T CON NTION
T. D. 60 7, Secton 7. 5: Introductory. Rev. Ru. 55-2S2
( so Part, Secton 8S2.)
Corporaton organzed under the aws of Canada as an nvest-
ment company wth an agent n the Unted States who as a dscre-
tonary power of attorney to purchase and se securtes n the
Unted States, w be treated as a resdent foregn corporaton
under secton 882 of the Interna Revenue Code of 195 and no
reducton of the ta rate under the Income ta conventon between
the Unted States and Canada, page 62 , ths uetn, s permssbe.
dvce has been requested whether a Canadan corporaton
organzed as an nvestment company, whch has an agent n the Unted
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C35
States wth a dscretonary power of attorney to purchase and se
Unted States securtes and to keep records of the Canadan corpora-
ton n ths country, s a resdent foregn corporaton sub|ect to the
provsons of secton 882 of the Interna Revenue Code of 195 , and,
f so, whether t s entted to be ta ed at the reduced rate provded
for n the ncome ta conventon between the Unted States and
Canada, page 62 , ths uetn.
Secton 882 of the Code provdes n part that a foregn corporaton
engaged n trade or busness n the Unted States sha be ta abe as
provded n secton 11 of the Code on ncome from sources wthn the
Unted States, that foregn corporatons sha not be aowed credts
aganst ta for the ta es of foregn countres and Unted States
possessons aowed by secton 901, and that f any foregn corporaton
has no offce or pace of busness n the Unted States, the return re-
qured by secton 6012 of the Code sha be made by ts agent.
The ncome ta conventon between the Unted States and Canada,
mpra, provdes that the rate of ta on ncome derved from sources
wthn the Unted States sha not e ceed 15 percent f the corporaton
has no permanent estabshment n the Unted States. The protoco
whch accompanes the conventon states that the term permanent
estabshment ncudes an agency and that f busness s carred on
n the Unted States through an empoyee or agent estabshed there
who has genera authorty to contract for the corporaton, such enter-
prse sha be deemed to have a permanent estabshment n the Unted
states.
ccordngy, t s hed that a Canadan corporaton whch has an
agent n the Unted States wth a dscretonary power of attorney to
purchase and se Unted States securtes, w be treated as a resdent
foregn corporaton sub|ect to the provsons of secton 882 of the 195
Code and that no reducton of the ta rate under the ncome ta con-
venton s permssbe. See G. C. M. 21219, C. . 1939-1, Part 1, 201.
UNIT D ST T S- D R L R PU LIC O G RM NY
INCOM T CON NTION
conventon between the Unted States and the edera Repubc of
Germany for the avodance of doube ta aton wth respect to ncome
ta es was sgned at Washngton on uy 22, 195 . The conventon
was approved for ratfcaton by the Unted States Senate on ugust
20, 195 , and was ratfed by the Presdent on September 22, 195 .
The conventon was ratfed by Germany on December 19,195 . The
ratfcatons were e changed at onn on December 20, 195 , and the
resdent procamed the conventon on December 2 , 195 . It s
effectve for the ta abe years begnnng on and after anuary 1,195 .
The conventon reads as foows:
btce I
(1) The ta es referred to n ths conventon are:
(a) In the case of the Unted States of merca: The edera ncome
ta es, ncudng surta es and e cess-profts ta es
(b) In the case of the edera Repubc: The Income ta , the corporaton
ta and the ern emergency contrbuton (Notopfer).
(2) The present conventon sha aso appy to any other ncome or profts
w of a substantay smar character whch may be mposed by one of the,
contractng States after the date of sgnature of the present conventon.
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636
rtce II
(1) s used n ths conventon:
(a) The term Unted States means the Unted States of merca, and
when used n a geographca sense means the States, the Terrtores of
aska and awa, and the Dstrct of Coumha
(b) The term edera Repubc means the edera Repubc of Ger-
many and when used In a geographca sense means the terrtory over whch
the asc Law for the edera Repubc of Germany s n effect
(c) The term permanent estabshment means a branch, offce, factory,
workshop, warehouse, mne, stone quarry or other pace of e potaton of
the ground or-so, permanent dspay and saes offce, or a constructon or
assemby pro|ect or the ke the duraton of whch e ceeds or w key
e ceed tweve months, or other f ed pace of busness but does not ncude
the casua and temporary use of mere storage factes, nor does t Incude
an agent or empoyee uness the agent or empoyee has fu power for the
negotaton and concudng of contracts on behaf of the enterprse and aso
habtuay e ercses ths power, or has a stock of merchandse from whch he
reguary fs orders on behaf of the enterprse. n enterprse of one of
the contractng States sha not be deemed to have a permanent estabsh-
ment n the other State merey because t carres on busness deangs n
such other State through a commsson agent, broker, custodan or other n-
dependent agent, actng n the ordnary course of hs busness as such. The
fact that au enterprse of one of the contractng States mantans n the
other State a f ed pace of busness e cusvey for the purchase of goods
and merchandse sha not of tsef consttute such f ed pace of busness a
permanent estabshment of the enterprse. The fact that a corporaton of
one contractng State has a subsdary corporaton whch s a corporaton
of the other State or whch s engaged n trade or busness n the other
State sha not of tsef consttute that subsdary corporaton a permanent
estabshment of ts parent corporaton. The mantenance wthn the terr-
tory of one of the contractng States by an enterprse of the other contractng
State of a warehouse for convenence of devery and not for purposes of
dspay sha not of tsef consttute a permanent estabshment wthn that
terrtory
(d) The term enterprse of one of the contractng States means, as the
case may be, Unted States enterprse or German enterprse
(e) The term Unted States enterprse means an ndustra or com-
merca enterprse or undertakng carred on n the Unted States by a
resdent (ncudng an ndvdua n hs ndvdua capacty or as a member
of a partnershp) or a fducary of the Unted States or by a Unted States
corporaton or other entty the term Unted States corporaton or other
entty means a corporaton or other entty created or organzed under the
aw of the Unted States or of any State or Terrtory of the Unted States
(f) The term German enterprse means an Industra or commerca
enterprse or undertakng carred on n the edera Repubc by a natura
person (ncudng an ndvdua n hs ndvdua capacty or as a member
of a partnershp) resdent n the edera Repubc or by a German company
the term German company means |urdca persons together wth enttes
treated as |urdca persons for ta purposes under the aws of the edera
Repubc and
(g) The term competent authortes means, n the case of the Unted
States, the Commssoner of Interna Revenue as authorzed by the Secretary
of the Treasury and n the case of the edera Repubc, the edera
Mnstry of nance.
(2) In the appcaton of the provsons of ths conventon by one of the con-
tractng States any term not otherwse defned sha, uness the conte t otherwse
requres, have the meanng whch the term has under ts own appcabe aw .
or the purposes of ths conventon resdence n the edera Repubc sha
ncude the customary pace of abode theren.
rtce III
(1) Industra or commerca profts of an enterprse of one of the contractng
States sha not be sub|ect to ta by the other State uness the enterprse s
engaged n trade or busness n such other State through a permanent estabsh-
ment stuated theren. If t s so engaged, such other State may mpose Its ta
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637
upon the entre ncome of such enterprse from sources wthn such State and
w mt ts ta aton of the enterprse to ncome from such sources.
(2) No account sha be taken n determnng the ta n one of the contractng
States of the mere purchase of merchandse theren by an enterprse of the
other State.
(3) Where an enterprse of one of the contractng States s engaged n trade
or busness n the terrtory of the other contractng State through a permanent
estabshment stuated theren, there sha be attrbuted to such permanent
estabshment the ndustra or commerca profts whch t mght be e pected
to derve f t were an ndependent enterprse engaged n the same or smar
actvtes under the same or smar condtons and deang at arm s ength wth
the enterprse of whch t s a permanent estabshment.
( ) In the determnaton of the Industra or commerca profts of the per-
manent estabshment there sha be aowed as deductons a e penses whch
are reasonaby aocabe to the permanent estabshment, ncudng e ecutve
and genera admnstratve e penses so aocabe.
(5) The competent authortes of the two contractng States may ay down
rues by agreement for the apportonment of ndustra or commerca profts.
rtce I
Where an enterprse of one of the contractng States, by reason of ts par-
tcpaton n the management or the fnanca structure of an enterprse of the
other contractng State, agrees to, or mposes on the atter enterprse, commerca
or fnanca condtons dfferng from those whch woud be made wth an
ndependent enterprse, any profts whch woud normay have accrued to one
of the enterprses, but by reason of those condtons have not so accrued, may
be ncuded n the profts of that enterprse and ta ed accordngy.
rtce
Profts derved by an enterprse of one of the contractng States from the
operaton of shps or arcraft, sha be e empt from ta by the other State.
rtce I
(1) The rate of ta mposed by the Unted States sha not e ceed 15 percent
n the case of dvdends from sources wthn the Unted States derved by a
German company not havng a permanent estabshment n the Unted States
and ownng at east 10 percent of the votng stock of the corporaton payng such
dvdend.
(2) The rate of ta mposed by the edera Repubc sha not e ceed 15 per-
cent n the case of dvdends from sources wthn the edera epubc derved
by a Unted States corporaton not havng a permanent estabshment n the
edera Repubc and ownng at east 10 percent of the votng stock of the Ger-
man company payng such dvdend.
(3) If, subsequent to the date of sgnature of ths Conventon, the percentage
of stock ownershp provded In secton 131(f) (1) of the Interna Revenue Code
Is reduced, the percentage of stock ownershp provded n paragraphs (1) and
(2) of ths rtce sha kewse be deemed to be smutaneousy reduced.
rtce II
Interest on bonds, notes, debentures, securtes or on any other form of n-
debtedness (e cusve of nterest on debts secured by mortgages on farms, tm-
berands or rea property used whoy or party for housng purposes) derved,
bona fde as nterest,
( ) by a natura person resdent n the edera Repubc, or by a German
company, not havng a permanent estabshment n the Unted States, sha
be e empt from ta by the Unted States or
( ) by a resdent, or corporaton or other entty of the Unted States,
not havng a permanent estabshment n the edera Repubc, sha be
e empt from ta by the edera Repubc.
rtce III
Royates and other amounts derved as bona fde consderaton for the rght
to use copyrghts, artstc and scentfc works, patents, desgns, pans, secret
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638
processes and formune, trade-marks and other ke property and rghts (n-
cudng rentas and ke payments n respect to moton pcture fms or for the
use of ndustra, commerca or scentfc equpment), derved
( ) by a natura person resdent In the edera Repubc, or by a German
company, not havng a permanent estabshment In the Unted States, sha
be e empt from ta by the Unted States or
( ) by a resdent, or corporaton or other entty of the Unted State ,
not havng a permanent estabshment n the edera Repubc, sha be
e empt from ta by the edera Repubc.
rtce I
(1) Income from rea property stuated n one of the contractng States (n-
cudng gans derved from the sae or e change of such property and nterest
on debts secured by mortgages on farms, tmberands, or rea property used
whoy or party for housng purposes) and royates n respect of the opera-
ton of mnes, stone quarres or other natura resources derved by a resdent
or corporaton or other entty or company of the other contractng State, sha
be ta abe ony by the former State.
(2) (n) natura person resdent In the edera Repubc or a German com-
pany dervng from sources wthn the Unted States any tem of ncome comng
wthn the scope of paragraph (1) of ths rtce, may, for any ta abe year,
eect to be sub|ect to ta by the Unted States on a net ncome bass as f such
resdent or company were engaged n trade or busness wthn the Unted States
through a permanent estabshment theren.
(b) resdent or corporaton or other entty of the Unted States dervng
from sources n the edera Repubc any tem of ncome comng wthn the scope
of paragraph (1) of ths rtce, may, for any ta abe year, eect to be sub|ect
to ta by the edera Repubc on a net ncome bass as f such resdent or
corporaton or other entty were encaged n trade or busness wthn the edera
Repubc through a permanent estabshment theren.
rtce
(1) n ndvdua resdent of the edera Repubc sha be e empt from
Unted States ta upon compensaton for abor or persona servces performed
n the Unted States (ncudng the practce of the bera professons and rend-
ton of servces as drector) f he s temporary present n the Unted States for
a perod or perods not e ceedng a tota of 183 days durng the ta abe year and
ether of the foowng condtons s met:
(a) hs compensaton s receved for such abor or persona servces per-
formed as an empoyee of, or under contract wth, a natura person res-
dent n the edera Repubc, or a German company and such compensa-
ton s borne by such resdent or company, or
(b) hs compensaton receved for such abor or persona servces does not
e ceed 3,000.
(2) The provsons of paragraph (1) of ths rtce sha appy mutatt
mutands, to an ndvdua resdent of the Unted States wth respect to com-
pensaton for such abor or persona servces performed In the edera Repubc.
rtce I
(1) (a) Wages, saares and smar compensaton and pensons pad by the
Unted States or by ts states, terrtores or potca subdvsons, to an n-
dvdua (other than a German ctzen) sha be e empt from ta by the edera
Repubc.
(b) Wages, saares and smar compensaton and pensons pad by the ed-
era Repubc, Laender or muncpates, or by a pubc penson fund, to an n-
dvdua (other than a ctzen of the Unted States and otheT than an ndvdua
who has been admtted to the Unted States for permanent resdence theren)
sha be e empt from ta by the Unted States.
(c) or the purposes of ths paragraph the term pensons sha be deemed
to ncude annutes pad to a retred cvan government empoyee.
(2) Prvate pensons and prvate fe annutes whch are from sources wthn
one of the contractng States and are pad to ndvduas resdng n the other
contractng State sha be e empt from ta aton by the former State.
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639
(3) The term pensons , as used n ths rtce, means perodc payments
made n consderaton for servces rendered or by way of compensaton for
n|ures receved.
( ) The term fe annutes , as used n ths rtce, means a stated sum
payabe perodcay at stated tmes durng fe, or durng a specfed number
of years, under an obgaton to make the payments In return for adequate and
fu consderaton n money or money s worth.
rtce II
professor or teacher, a resdent of one of the contractng States, who
temporary vsts the other contractng State for the purpose of teachng for a
perod not e ceedng 2 years at a unversty, coege, schoo or other educatona
nsttuton n the other contractng State, sha be e empted by the other con-
tractng State from ta on hs remuneraton for such teachng durng that
perod.
btc e III
(1) resdent of one of the contractng States who s temporary present n
the other contractng State soey as a student at a unversty, coege, schoo or
other educatona nsttuton n the other contractng State, sha be e empt
from ta by the atter State wth respect to remttances from abroad for study
and mantenance.
(2) n apprentce (Incusve of oontaere and Praktkanten n the edera
Repubc), a resdent of one of the contractng States, who s temporary pres-
ent n the other contractng State e cusvey for the purposes of acqurng bus-
ness or technca e perence sha be e empt from ta by the atter State n re-
spect of remttances from abroad for study and mantenance.
(3) resdent of one of the contractng States who s a recpent of a grant,
aowance or award from a nonproft regous, chartabe, scentfc, terary or
educatona organzaton, sha be e empt from ta by the other State on such
payments from such organzaton (other than compensaton for persona serv-
ces).
( ) resdent of one of the contractng States who s an empoyee of an
enterprse of such State or an organzaton descrbed n paragraph (3) of ths
rtce, and who s temporary present n the other contractng State for a perod
not e ceedng one year soey to acqure technca, professona or busness e pe-
rence from any person other than such enterprse or organzaton, sha be e -
empt from ta by such other State on compensaton from abroad pad by such
enterprse or organzaton f hs annua compensaton for servces wherever per-
formed does not e ceed 10,000.
rtce I
(1) Dvdends and nterest pad by a German company (other than a Unted
States corporaton) sha be e empt from Unted States ta where the recpent
Is a nonresdent aen or a foregn corporaton.
(2) Dvdends and nterest pad by a Unted States corporaton sha be e -
empt from ta by the edera Repubc where the recpent s not a resdent or
company of the edera Repubc.
btc e
(1) It s agreed that doube ta aton sha be avoded n the foowng manner:
(a) The Unted States, In determnng ts ta es specfed In rtce I of ths
conventon In the case of ts ctzens, resdents or corporatons, may, regard-
ess of any other provson of ths conventon, ncude In the bass upon
whch such ta es are mposed a tems of Income ta abe under the revenue
aws of the Unted States as f ths conventon had not come nto effect. The
Unted States sha, however, sub|ect to the provsons of secton 131, In-
terna Revenue Code, as n effect on the date of the entry nto force of ths
conventon, deduct from ts ta es the amount of edera Repubc ta es spec-
fed n rtce I of ths conventon. It Is agreed that by vrtue of the pro-
vsons of subparagraph (b) of ths paragraph the edera Repubc sats-
fes the smar credt requrement set forth n secton 131(a) (3), Interna
Revenue Code.
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(b) The edera Repubc, n determnng Its ta es specfed In rtce I
of ths conventon In the case of resdents of the edera Repubc or Ger-
man companes, sha e cude from the bass upon whch Its ta es are
mposed such tems of Income as are deat wth In ths conventon, derved
from the Unted States and not e empt from Unted States ta but n
the case of a ctzen of the Unted States resdent n the edera Repubc
there sha be e cuded from the ta base a tems of ncome derved from
the Unted States provded that the tems are ta ed by the Unted States.
The edera Repubc, however, reserves the rght to take nto account n
the determnaton of the rate of ts ta es the ncome e cuded as provded
n ths subparagraph.
(2) The provsons of ths rtce sha not dsturb the e emptons from ta
of the Unted States or of the edera Repubc granted by rtce I (1) of
the present conventon.
rtce I
(1) The competent authortes of the contractng States sha e change such
Informaton (beng nformaton avaabe under the respectve ta aton aws
of the contractng States) as Is necessary for carryng out the provsons of
the present conventon or for the preventon of fraud or the ke n reaton
to the ta es whch are the sub|ect of the present conventon. ny nformaton
so e changed sha be treated as secret and sha not be dscosed to any persons
other than those concerned wth the assessment and coecton of the ta es
whch are the sub|ect of the present conventon. No nformaton sha be e -
changed whch woud dscose any trade, busness, ndustra or professona
secret or any trade process.
(2) ach of the contractng States may coect such ta es Imposed by the
other contractng State as though such ta es were the ta es of the former
State as w ensure that any e empton or reduced rate of ta granted under
the present conventon by such other State sha not be en|oyed by persons not
entted to such benefts.
(3) In no case sha the provsons of ths rtce be construed so as to
mpose upon ether of the contractng States the obgaton to carry out admns-
tratve measures at varance wth the reguatons and practce of ether con-
tractng State or whch woud be contrary to ts soveregnty, securty or pubc
pocy or to suppy partcuars whch are not procurabe under Its own egsa-
ton or that of the State makng appcaton.
rtce II
(1) Where a ta payer shows proof that the acton of the ta authortes of
the contractng States has resuted or w resut n doube ta aton contrary
to the provsons of the present conventon, he sha be entted to present hs
case to the State of whch he s a ctzen or a resdent, or, f the ta payer s a
company or a corporaton of one of the contractng States, to that State. Shoud
the ta payer s cam be deemed worthy of consderaton, the competent au-
thorty of the State to whch the cam s made sha endeavor to come to an
agreement wth the competent authorty of the other State wth a vew to
avodance of doube ta aton.
(2) or the settement of dffcutes or doubts n the nterpretaton or app-
caton of the present conventon or n respect of ts reaton to conventons of the
contractng States wth thrd States the competent authortes of the contract-
ng States sha reach a mutua agreement as qucky as possbe.
rtce III
(1) The provsons of ths conventon sha not be construed to deny or affect
In any manner the rght of dpomatc and consuar offcers to other or addtona
e emptons now en|oyed or whch may hereafter be granted to such offcers.
(2) The provsons of the present conventon sha not be construed to restrct
In any manner any e empton, deducton, credt or other aowance now or here-
after accorded by the aws of one of the contractng States n the determnaton
of the ta mposed by such State, or by any other agreement between the con-
tractng States.
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6 1
(3) The ctzens of one of the contractng States sha not, whe resdent In
the other contractng State, be sub|ect theren to other or more burdensome ta es
than are the ctzens of such other contractng State resdng n ts terrtory.
The term ctzens as used n ths rtce ncudes a |urdca persons, partner-
shps and assocatons created or organzed under the aws n force n the re-
spectve contractng States. In ths rtce the word ta es means ta es of
every knd or descrpton, whether edera, State, Laender or muncpa.
rtce I
(1) The competent authortes of the two contractng States may prescrbe
reguatons necessary to carry nto effect the present Conventon wthn the
respectve States.
(2) The competent authortes of the two contractng States may commun-
cate wth each other drecty for the purpose of gvng effect to the provsons of
ths conventon.
rtce
(1) The present conventon sha aso appy from the date specfed n para-
graph (1) of rtce I to Land ern whch for the purposes of ths conven-
ton comprses those areas over whch the ern Senate e ercses |ursdcton.
(2) It s a condton to the appcaton of ths conventon to ern n accord-
ance wth the precedng paragraph that the Government of the edera epubc
sha prevousy have furnshed to the Government of the Unted States of mer-
ca a notfcaton that a ega procedures n ern necessary for the appcaton
of ths conventon theren have been comped wth.
(3) fter appcaton of ths conventon to Land ern n accordance wth
paragraphs (1) and (2) of ths rtce, references n ths conventon to the ed-
era Repubc sha aso be consdered references to Land ern.
rtce I
(1) The present conventon sha be ratfed and the Instruments of ratfca-
ton sha be e changed at onn as soon as possbe. It sha have effect for the
ta abe years begnnng on or after the frst day of anuary of the year n whch
such e change takes pace.
(2) The present conventon sha contnue effectve for a perod of 5 years
begnnng wth the caender year n whch the e change of the nstruments of
ratfcaton takes pace and ndefntey after that perod, but may be termnated
by ether of the contractng States at the end of the 5-year perod or at any tme
thereafter, provded that at east 6 months pror notce of termnaton has been
gven and, n such event, the present conventon sha cease to be effectve for
the ta abe years begnnng on or after the frst day of anuary ne t foowng the
e praton of the 6-month perod.
Do e at Washngton, n dupcate, n the ngsh and German anguages, each
te t havng equa authentcty, ths twenty-second day of uy, 195 .
or the Unted States of merca:
ohn osteb T)ues sea
or the edera Repubc of Germany:
brecht v. esse sea
UNIT D ST T S- D R L R PU LIC O G RM NY
INCOM T CON NTION
( so Part I, Sectons 1 1, 1 2.) T. D. 6122
( so Part II, Sectons 1 3, 1
Reguatons 118, Sectons 39.1 3-1,
39.1 r-.)
TITL 28 INT RN L R NU C PT R I, SU C PT R O. P RT 503.
INCOM T WIT OLDING D R L R PU LIC O G RM NY
Reease of e cess ta wthhed, and e empton from, or reducton
In rate of, wthhodng of ta at source n the case of resdents
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of the edera Repubc of Germany and of German companes, as
affected by the Income ta conventon between the Unted States
and the edera Repubc of Germany procamed by the Presdent
of the Unted States on December 2 , 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Tabe of Contests
Secton
503.1 Introductory.
503.2 Dvdends.
503.3 Interest.
503. Patent and copyrght royates and fm rentas.
503.5 Prvate pensons and prvate fe annutes.
503.6 Reease of e cess ta wthhed at source.
003.7 Informaton to be furnshed n ordnary course.
503.8 enefcares of a domestc estate or trust.
503.9 Land ern.
Secton 503.1 Introductory. (a) The ncome ta conventon
between the Unted States and the edera Repubc of Germany,
sgned on uy 22,195 , and procamed by the Presdent of the Unted
States on December 2 , 195 , herenafter referred to as the conven-
ton, provdes n part as foows, effectve for ta abe years begnnng
on or after anuary 1, 195 :
rtce I
(1) The ta es referred to n ths Conventon are:
(a) In the case of the Unted States of merca: The edera ncome
ta es, ncudng surta es and e cess profts ta es
(b) In the case of the edera Repubc: The ncome ta , the corpora-
ton ta and the ern emergency contrbuton (Notopfer).
(2) The present Conventon sha aso appy to any other Income or profts
ta of a substantay smar character whch may be Imposed by one of the
contractng States after the date of sgnature of the present Conventon.
rtce II
(1) s used n ths Conventon:
(a) The term Unted States means the Unted States of merca, and
when used n a geographca sense means the States, the Terrtores of
aska and awa, and the Dstrct of Coumba
(b) The term edera Repubc means the edera Repubc of Ger-
many and when used n a geographca sense means the terrtory over whch
the asc Law for the edera Repubc of Germany Is n effect
(c) The term permanent estabshment means a branch, offce, factory,
workshop, warehouse, mne, stone quarry or other pace of e potaton of
the ground or so, permanent dspay and saes offce, or a constructon or
assemby pro|ect or the ke the duraton of whch e ceeds or w key
e ceed tweve months, or other f ed pace of busness but does not ncude
the casua and temporary use of mere storage factes, nor does t ncude
an agent or empoyee uness the agent or empoyee has fu power for the
negotaton and concudng of contracts on behaf of the enterprse and aso
habtuay e ercses ths power, or has a stock of merchandse from whch
he reguary fs orders on behaf of the enterprse. n enterprse of one
of the contractng States sha not be deemed to have a permanent estabsh-
ment In the other State merey because t carres on busness deangs n
such other State through a commsson agent, broker, custodan or other
ndependent agent, actng n the ordnary course of bs busness as such.
The fact that an enterprse of one of the contractng States mantans n
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6 3
the other State a f ed pace of busness e cusvey for the purchase of goods
and merchandse sha not of tsef consttute such f ed pace of busness
a permanent estabshment of the enterprse. The fact that a corporaton
of one contractng State has a subsdary corporaton whch s a corpora-
ton of the other State or whch s engaged n trade or busness n the
other State sha not of tsef consttute that subsdary corporaton a per-
manent estabshment of ts parent corporaton. The mantenance wthn
the terrtory of one of the contractng States by an enterprse of the other
contractng State of a warehouse for convenence of devery and not for
purposes of dspay sha not of tsef consttute a permanent estabshment
wthn that terrtory
(d) The term enterprse of one of the contractng States means, as the
case may be, Unted States enterprse or German enterprse
(e) The term Unted States enterprse means an ndustra or com-
merca enterprse or undertakng carred on n the Unted States by a
resdent (ncudng an ndvdua n hs ndvdua capacty or as a member
of a partnershp) or a fducary of the Unted States or by a Unted States
corporaton or other entty the term Unted States corporaton or other
entty means a corporaton or other entty created or organzed under the
aw of the Unted States or of any State or Terrtory of the Unted States
(f) The term German enterprse means an ndustra or commerca
enterprse or undertakng carred on n the edera Repubc by a natura
person (ncudng an ndvdua n hs ndvdua capacty or as a member
of a partnershp) resdent n the edera Repubc or by a German company
the term German company means |urdca persons together wth enttes
treated as |urdca persons for ta purposes under the aws of the edera
Repubc and
(g) The term competent authortes means, n the case of the Unted
States, the Commssoner of Interna Revenue as authorzed by the Secre-
tary of the Treasury and n the case of the edera Repubc, the edera
Mnstry of nance.
(2) In the appcaton of the provsons of ths Conventon by one of the
contractng States any term not otherwse defned sha, uness the conte t
otherwse requres, have the meanng whch the term has under ts own app-
cabe aws. or the purposes of ths Conventon resdence n the edera
Repubc sha Incude the customary pace of abode theren.
btce I
(1) The rate of ta mposed by the Unted States sha not e ceed 15 percent
In the case of dvdends from sources wthn the Unted States derved by a
German company not havng a permanent estabshment n the Unted States
and ownng at east 10 percent of the votng stock of the corporaton payng
such dvdend.

(3) If, subsequent to the date of sgnature of ths Conventon, the percentage
of stock ownershp provded n secton 131 (f) (1) of the Interna Revenue Code
of 1939 s reduced, the percentage of stock ownershp provded n paragraphs
1 and of ths rtce sha kewse be deemed to be smutaneousy re-
duced.
rtce II
Interest on bonds, notes, debentures, securtes or on any other form of ndebted-
ness (e cusve of nterest on debts secured by mortgages on farms, tmberands
or rea property used whoy or party for housng purposes) derved, bona fde
as nterest,
( ) by a natura person resdent n the edera Repubc, or by a German
company, not havng a permanent estabshment n the Unted States, sha
be e empt from ta by the Unted States or
btce III
Royates and other amounts derved as bona fde consderaton for the rght
to use copyrghts, artstc and scentfc works, patents, desgns, pans, secret
processes and formuae, trade-marks and other ke property and rghts (n-
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6
eudng: rentas and ke payments n respect to moton pcture fms or for the
use of ndustra, commerca or scentfc equpment), derved
( ) by a natura person resdent n the edera Repubc, or by a German
company, not havng a permanent estabshment n the Unted States, sha
be e empt from ta by the Unted States or
btce I
(1) Income from rea property stuated n one of the contractng States (n-
cudng gans derved from the sae or e change of such property and nterest
on debts secured by mortgages on farms, tmnerands, or rea property used
whoy or party for housng purposes) and royates n respect of the operaton
of mnes, stone quarres or other natura resources derved by a resdent or
corporaton or other entty or company of the other contractng State, sha be
ta abe ony by the former State.
(2) (a) natura person resdent n the edera Repubc or a German com-
pany dervng from sources wthn the Unted States any tem of ncome comng
wthn the scope of paragraph (1) of ths rtce, may, for any ta abe year,
eect to be sub|ect to ta by the Unted States on a net ncome bass as f such
resdent or company were engaged n trade or busness wthn the Unted States
through a permanent estabshment theren.
rtce I
()(a) Wages, saares and smar compensaton and pensons pad by the
Unted States or by ts states, terrtores or potca subdvsons, to an nd-
vdua (other than a German ctzen) sha be e empt from ta by the edera
Repubc.
(b) Wages, saares and smar compensaton and pensons pad by the
edera Repubc, Laender or muncpates, or by a pubc penson fund, to an
ndvdua (other than a ctzen of the Unted States and other than an nd-
vdua who has been admtted to the Unted States for permanent resdence
theren) sha be e empt from ta by the Unted States.
(c) or the purposes of ths paragraph the term pensons sha be deemed
to ncude annutes pad to a retred cvan government empoyee.
(2) Prvate pensons and prvate fe annutes whch are from sources wthn
one of the contractng States and are pad to ndvduas resdng n the other
contractng State sha be e empt from ta aton by the former State.
(3) The term pensons , as used n ths rtce, means perodc payments
made n consderaton for servces rendered or by way of compensaton for
In|ures receved.
( ) The term fe annutes , as used In ths rtce, means a stated sum
payabe perodcay at stated tmes durng fe, or durng a specfed number of
years, under an obgaton to make the payments n return for adequate and
fu consderaton n money or money s worth.
btce I
(1) Dvdends and nterest pad by a German company (other than a Unted
States corporaton) sha be e empt from Unted States ta where the recpent
Is a nonresdent aen or a foregn corporaton.
rtce I
(1) The competent authortes of the contractng States sha e change such
Informaton (beng nformaton avaabe under the respectve ta aton aws of
the contractng States) as s necessary for carryng out the provsons of the
present Conventon or for the preventon of fraud or the ke n reaton to the
ta es whch are the sub|ect of the present Conventon. ny nformaton eo e -
changed sha be treated as secret and sha not be dscosed to any persons
other than those concerned wth the assessment and coecton of the ta es
w:hch are the sub|ect of the present Conventon. No nformaton sha be
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6 5
e changed whch -woud dscose any trade, busness, ndustra or professona
secret or any trade process.
(2) ach of the contractng States may coect such ta es Imposed by the
other contractng State as though such ta es were the ta es of the former
State as w ensure that any e empton or reduced rate of ta granted under
the present Conventon by such other State sha not be en|oyed by persons not
entted to such benefts.
(3) In no case sha the provsons of ths rtce be construed so as to
mpose upon ether of the contractng States the obgaton to carry out admn-
stratve measures at varance wth the reguatons and practce of ether con-
tractng State or whch woud be contrary to ts soveregnty, securty or pubc
pocy or to suppy partcuars whch are not procurabe under ts own egsaton
or that of the State makng appcaton.
rtce II

(2) or the settement of dffcutes or doubts n the nterpretaton or app-
caton of the present Conventon or n respect of ts reaton to Conventons of
the contractng States wth thrd States the competent authortes of the con-
traetne States sha reach a mutua agreement as qucky as possbe.
rtce III
(1) 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
ddtona e emptons now en|oyed or whch may hereafter be granted to such
offcers.
(2) The provsons of the present Conventon sha not be construed to
restrct n any manner any e empton, deducton, credt or other aowance now
or hereafter accorded, by the aws of one of the contractng States n the
determnaton of the ta mposed by such State, or by any other agreement
between the contractng States.
rtce I
(1) The competent authortes of the two contractng States may prescrbe
reguatons necessary to carry nto effect the present Conventon wthn the
respectve States.
(2) The competent authortes of the two contractng States may communcate
wth each other drecty for the purpose of gvng effect to the provsons of
ths Conventon.
rtce
(1) The present Conventon sha aso appy from the date specfed n para-
graph (1) of rtce I to Land ern whch for the purposes of ths Con-
tenton comprses those areas over whch the ern Senate e ercses |ursdcton.
(2) It s a condton to the appcaton of ths Conventon to ern n
accordance wth the precedng paragraph that the Government of the edera
Repubc sha prevousy have furnshed to the Government of the Unted States
of merca a notfcaton that a ega procedures n ern necessary for the
appcaton of ths Conventon theren have been comped wth.
(3) fter appcaton of ths Conventon to Land ern n accordance wth
paragraphs (1) and (2) of ths rtce, references n ths Conventon to the
edera Repubc sha aso be consdered references to Land ern.
rtce I
(1) The present Conventon sha be ratfed and the nstruments of ratfcaton
sha be e changed at onn as soon as possbe. It sha have effect for the
ta abe years begnnng on or after the frst day of anuary of the year n whch
uch e change takes pace.
(2) The present Conventon sha contnue effectve for a perod of fve years
begnnng wth the caendar year n whch the e change of the nstruments of
ratfcaton takes pace and ndefntey after that perod, but may be termnated
by ether of the contractng States at the end of the fve-year perod or at any
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tme thereafter, provded that at east s months pror notce of termnaton
has been gven and, n such event, the present Conventon sha cease to be effec-
tve for the ta abe years begnnng on or after the frst day of anuary ne t
foowng the e praton of the s -month perod.

(b) s used n ths Treasury Decson, any term defned n the
conventon sha have the meanng so assgned to t any term not so
defned sha, uness the conte t otherwse requres, have the meanng
whch such term has under the Interna Revenue Laws.
Sec. 503.2 Dvdends (a) Genera. (1) Dvdends pad by a
German company (other than a Unted States corporaton) and re-
ceved n ta abe years begnnng on or after anuary 1, 195 , by a
nonresdent aen or a foregn corporaton are e empt from Unted
States ta under the provsons of rtce I of the conventon.
Such dvdends are, therefore, not sub|ect to the wthhodng of
Unted States ta at source.
(2) The rate of Unted States ta mposed by the Interna Revenue
Code upon dvdends (other than dvdends fang wthn the scope
of subparagraph (1)) derved from sources wthn the Unted States
n ta abe years begnnng on or after anuary 1, 195 , by a German
company (other than a Unted States corporaton) sha not e ceed
15 percent under the provsons of rtce I of the conventon f ()
such company at no tme durng the ta abe year n whch such dv-
dends are derved has a permanent estabshment n the Unted States
and () such company owns, at the tme the dvdends are pad, 10
percent or more of the votng stock of the payng corporaton.
(b) ppcaton of reduced rate of wthhodng. (1) To secure
wthhodng of Unted States ta at the rate of 15 percent at source
n the case of dvdends to whch paragraph (a) (2) s appcabe, the
German company sha notfy the wthhodng agent by etter n
dupcate that such ncome s sub|ect to the reduced rate of Unted
States ta under the provsons of rtce I of the conventon.
The etter of notfcaton sha be sgned by an offcer of the company
and sha show the name and address of the corporaton payng the
dvdend, the name and address of the German company recevng the
dvdend, and the offca tte of the offcer sgnng the etter. It
sha contan a statement () that the owner of the dvdend s a Ger-
man company (other than a Unted States corporaton), () that the
owner at no tme durng the current ta abe year had a permanent
estabshment n the Unted States, and () that the German com-
pany owns 10 percent or more of the votng stock of the corporaton
payng such dvdend.
(2) Ths etter of notfcaton, whch sha consttute authorzaton
for appcaton of the reduced rate of wthhodng of Unted States
ta at source, sha be fed wth the wthhodng agent for each suc-
cessve 3-caendar-year perod durng whch such ncome s pad. or
ths purpose, the frst such perod sha commence wth the begnnng
of the caendar year n whch such ncome s frst pad on or after
anuary 1, 195 . ach such etter fed wth any wthhodng agent
sha be fed not ater than 20 days precedng the date of the frst
payment wthn each successve perod, or, f that s not possbe be-
cause of speca crcumstances, as soon as possbe after such frst
payment.
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(3) If such etter s aso to be used as authorzaton for the reease,
pursuant to secton 503.6 (a)(3), of e cess ta wthhed from dv-
dends, t sha aso contan a statement () that, at the tme when the
dvdends were derved from whch the e cess ta was wthhed, the
owner was a German company (other than a Unted States corpora-
ton), () that the owner at no tme durng the ta abe year n whch
such dvdends were derved had a permanent estabshment n the
Unted States, and (h) that the Germany company owned, at the tme
when such dvdends were pad, 10 percent or moe of the votng stock
of the corporaton payng such dvdends.
( ) Once a etter has been fed n respect of any 3-caendar-ycar
perod, no addtona etter need be fed n respect thereto uness the
Commssoner of Interna Revenue notfes the wthhodng agent
that an addtona etter sha be fed by the ta payer. If, after
fng a etter of notfcaton, the ta payer ceases to be egbe for
the reducton n rate of Unted States ta granted by the conventon
n respect to such dvdends, such ta payer sha prompty notfy
the wthhodng agent by etter n dupcate. When any change occurs
n the ownershp of the stock as recorded on the books of the paver,
the reducton n the rate of wthhodng of Unted States ta sha
no onger appy uness the new owner of record s entted to and
does propery fe a etter of notfcaton wth the wthhodng agent.
(5) ach etter of notfcaton, or the dupcate thereof, sha be
mmedatey forwarded by the wthhodng agent to the Dstrct
Drector of Interna Revenue, udt Dvson, en Returns Secton,
atmore 2, Maryand.
(c) Dvdends pad to German company where degree of stock
ownershp uncertan. (1) In any case n whch a German company
(other than a Unted States corporaton) antcpates the recept of
dvdends descrbed n paragraph (a) (2) and the reatonshp e st-
ng between the German company and the payng corporaton s
such as to render uncertan whether, by reason of the requrement as
to stock ownershp, the reducton n rate of Unted States ta granted
by artce I of the conventon w appy to such dvdends, the
German company sha not undertake to fe the etter of notfcaton
prescrbed by paragraph (b) (1) uness t has, pror to such fng,
apped for and receved from the Commssoner of Interna Revenue,
Washngton 25, D. C, a determnaton that such German company
owns 10 percent or more of the votng stock of the payng corporaton.
The appcaton to the Commssoner sha contan a fu statement
of a the facts pertnent to a determnaton of the queston.
(2) s soon as practcabe after the appcaton has been fed,
the Commssoner of .Interna Revenue w determne whether the
German company owns suffcent votng stock of the payng corpora-
ton to permt t to cam the beneft of artce I of the conventon
n the case of such dvdends and sha notfy the German company
of hs determnaton. The German company sha forthwth fe wth
the payng corporaton a copy of the Commssoner s etter of notfca-
ton.
(3) If the Commssoner s determnaton s that the German com-
pany does own 10 percent or more of the votng stock of the payng
corporaton, the German company may thereafter, f otherwse qua-
30 000 M 2
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fed, secure the reduced rate of wthhodng at the source wth re-
spect to subsequent payments of such dvdends, by fng the etter
of notfcaton n accordance wth paragraph (b).
( ) determnaton by the Commssoner that the German com-
pany does own suffcent votng stock of the payng corporaton to
permt t to cam the beneft of artce I of the conventon w
appy unt such tme as the stock ownershp of the payng corpora-
ton has changed to the e tent that, because of such change, dvdends
to be receved from the payng corporaton by the German company
no onger quafy for the reduced rate of Unted States ta under
artce I of the conventon. If such change n stock ownershp
occurs, the German company sha prompty notfy both the Com-
mssoner of Interna Revenue and the payng corporaton of the
then e stng facts wth respect to such stock ownershp.
(5) In any case n whch a German company (other than a Unted
States corporaton) has receved on or after anuary 1. 195 , dv-
dends descrbed n paragraph (a) (2) and the reatonshp e stng
between the German company and the payng corporaton was, at the
tme the dvdends were pad, such as to render uncertan whether,
by reason of the requrement contaned n artce I of the con-
venton as to stock ownershp, such dvdends quafed for the reduced
rate of Unted States ta , the German company sha appy to the
Commssoner of Interna Revenue for a smar determnaton as
to the degree of stock ownershp at the tme the dvdends were pad.
If the Commssoner s determnaton s that at such tme the degree
of stock ownershp was such as to permt the appcaton of the
reduced rate of Unted States ta granted by artce I of the con-
venton, hs etter of notfcaton may, sub|ect to the provsons of
secton 503.6(b), authorze the reease of e cess ta wthhed wth
respect to such dvdends.
Sec. 503.3 Interest (a) Genera. (1) Interest pad by a Ger-
man company (other than a Unted States corporaton) and receved
n ta abe years begnnng on or after anuary 1, 195 , by a nonres-
dent aen or a foregn corporaton s e empt from Unted States ta
under the provsons of artce I of the conventon. Such nterest
s, therefore, not sub|ect to the wthhodng of Unted States ta at
source.
(2) Interest (other than nterest fang wthn the scope of sub-
paragraph (1)) on bonds, debentures, securtes, or on any other form
of ndebtedness, ncudng nterest on obgatons of the Unted States
and of nstrumentates of the Unted States, whch s derved, bona
fde as nterest,n ta abe years begnnng on or after anuary 1,195 .
by a natura person (other than a ctzen or resdent of the Unted
States) resdent n the edera Repubc of Germany, or by a Ger-
man company (other than a Unted States corporaton), s e empt
from Unted States ta under the provsons of artce II of the
conventon f such person or company at no tme durng the ta abe
year n whch such nterest s derved has a permanent estabshment
n the Unted States. Such nterest s, therefore, not sub|ect to the
wthhodng of Unted States ta at source.
(3) The provsons of subparagraph (2) sha have no appcaton
to nterest on debts secured by mortgages on farms, tmberands, or
rea property used whoy or party for housng purposes.
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(b) ppcaton of e empton from wthhodng. (1) To avod
wthhodng of Unted States ta at source n the case of coupon bond
nterest to whch paragraph (a) (2) s appcabe, the resdent of the
edera Repubc of Germany or the German company sha, for each
ssue of bonds, fe orm 1001-G R n dupcate when presentng the
nterest coupons for payment. Ths form sha be sgned by the owner
of the nterest, trustee, or agent and sha show the name and address
of the obgor, the name and address of the owner of the nterest, and
the amount of the nterest. It sha contan a statement () that the
owner s nether a ctzen nor a resdent of the Unted States but s a
resdent df the edera Repubc of Germany, or, n the case of a com-
pany, the owner s a German company (other than a Unted States
corporaton), and () that the owner has no permanent estabshment
n the Unted States.
(2) The e empton from Unted States ta contempated by artce
II of the conventon, nsofar as t concerns coupon bond nterest,
s appcabe ony to the owner of the nterest. The person presentng
the coupon or on whose behaf t s presented sha, for the purpose of
the e empton from ta , be deemed to be the owner of the nterest ony
f he s, at the tme the coupon s presented for payment, the owner
of the bond from whch the coupon has been detached. If the person
presentng the coupon or on whose behaf t s presented s not the
owner of the bond, orm 1001, and not orm 1001-G R, sha be
e ecuted.
(3) The orgna and dupcate of orm 1001-G R sha be for-
warded by the wthhodng agent to the Dstrct Drector of Interna
Revenue. udt Dvson, en Returns Secton, atmore 2, Mary-
and, wth the quartery return on orm 1012. orm 1001-G R need
not be sted on orm 1012.
( ) To avod wthhodng of Unted States ta at source n the
case of nterest, other than coupon bond nterest, to whch paragraph
(a) (2) s appcabe, the resdent of the edera Repubc of Germany
or the German company sha notfy the wthhodng agent by etter
n dupcate that such ncome s e empt from Unted States ta under
the provsons of artce II of the conventon. The etter of notf-
caton sha be sgned by the owner of the nterest, trustee, or agent
and sha show the name and address of the obgor and the name and
address of the owner of the nterest. It sha contan a statement ()
that the owner s nether a ctzen nor a resdent of the Unted States
but s a resdent of the edera Repubc of Germany, or, n the case
of a company, the owner s a German company (other than a Unted
States corporaton), and () that the owner has at no tme durng
the current ta abe year had a permanent estabshment n the Unted
States.
(5) Ths etter of notfcaton, whch sha consttute authorzaton
for the payment of such nterest wthout wthodng of Unted States
ta at source, sha be fed wth the wthhodng agent for each suc-
cessve 3-caendar-year perod durng whch such ncome s pad.
or ths purpose, the frst such perod sha commence wth the begn-
nng of the caendar year n whch such ncome s frst pad on or after
anuary 1, 195 . ach such etter fed wth any wthhodng agent
sha be fed not ater than 20 days precedng the date of the frst
payment wthn each successve perod, or, f that s not possbe be-
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cause of speca crcumstances, as soon as possbe after such frst
payment.
(6) If such etter s aso to be used as authorzaton for the reease,
pursuant to secton 503.6(a) (3), of e cess ta wthhed from nterest,
other than coupon bond nterest, t sha aso contan a statement ()
that, at the tme when the nterest was derved from whch the e cess
ta was wthhed, the owner was nether a ctzen nor a resdent of
the Unted States but was a resdent of the edera Repubc of
Germany, or, n the case of a company, the owner was a German com-
pany (other than a Unted States corporaton), and () that the
owner at no tme durng the ta abe year n whch such nterest was
derved had a permanent estabshment n the Unted States.
(7) Once a etter has been fed n respect of any 3-caendar-year
perod, no addtona etter need be fed n respect thereto uness the
Commssoner of Interna Revenue notfes the wthhodng agent that
an addtona etter sha be fed by the ta payer. If, after fng a
etter of notfcaton, the ta payer ceases to be egbe for the e emp-
ton from Unted States ta granted by the conventon n respect to
such nterest, such ta payer sha prompty notfy the wthhodng
agent by etter n dupcate. When any change occurs n the ownershp
of the nterest as recorded on the books of the payer, the e empton
from wthhodng of Unted States ta sha no onger appy uness
the new owner of record s entted to and does propery fe a etter
of notfcaton wth the wthhodng agent.
(8) ach etter of notfcaton, or the dupcate thereof, sha be
mmedatey forwarded by the wthhodng agent to the Dstrct
Drector of Interna Revenue, udt Dvson, en Returns Secton,
atmore 2, Maryand.
Sec. 503. Patent and Copyrght Royates and m Rent-
as (a) Genera. (1) Royates and other amounts derved n ta -
abe years begnnng on or after anuary 1,195 , by a natura person
(other than a ctzen or resdent of the Unted States) resdent n the
edera Repubc of Germany, or by a German company (other than
a Unted States corporaton), as bona fde consderaton for the rght
to use copyrghts, artstc and scentfc works, patents, desgns, pans,
secret processes and formuae, trade-marks, and other ke property
and rghts, are e empt from Unted States ta under the provsons
of artce III of the conventon f such person or company at no
tme durng the ta abe year n whch such ncome s derved has a
permanent estabshment n the Unted States. Such tems of ncome,
are, therefore, not sub|ect to the wthhodng of Unted States ta at
source.
(2) The provsons of ths secton sha appy to rentas and ke
payments n respect to moton pcture fms or for the use of ndustra,
commerca, or scentfc equpment.
(b) ppcaton of e empton from wthhodng. (1) To avod
wthhodng of Unted States ta at source n the case of the ncome
to whch ths secton s appcabe, the resdent of the edera Repubc
of Germany or the German company sha notfy the wthhodng
agent by etter n dupcate that such ncome s e empt from Unted
States ta under the provsons of artce III of the conventon. The
provsons of secton 503.3(b) reatng to the e ecuton, fng, and
effectve perod of the etter of notfcaton prescrbed theren wth
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651
respect to nterest, ncudng ts use for the reease of e cess ta wth-
hed, are equay appcabe wth respect to the ncome fang wthn
the scope of ths secton.
(2) ach etter of notfcaton, or the dupcate thereof, sha be
mmedatey forwarded by the wthhodng agent to the Dstrct D-
rector of Interna Revenue, udt Dvson, en eturns Secton,
atmore 2, Maryand.
Sec. 503.5 Prvate Pensons and Prvate Lfe nnutes (a)
Genera. Prvate pensons and prvate fe annutes, as denned n
artce I (3) and ( ) of the conventon, whch are receved from
sources wthn the Unted States n ta abe years begnnng on or
after anuary 1, 195 , by a nonresdent aen ndvdua who s a
resdent of the edera Repubc of Germany are e empt from Unted
States ta under the provsons of artce I (2) of the conventon.
Such tems of ncome are, therefore, not sub|ect to the wthhodng
of Unted States ta at source.
(b) ppcaton of e empton from wthhodng. (1) To avod
wthhodng of Unted States ta at source n the case of the tems
of ncome to whch paragraph (a) s appcabe, the nonresdent aen
ndvdua who s a resdent of the edera Repubc of Germany
sha notfy the wthhodng agent by etter n dupcate that such
ncome s e empt from Unted States ta under the provsons of
artce I of the conventon. The etter of notfcaton sha be sgned
by the owner of the ncome, sha show the name and address of both
the payer and the owner of the ncome, and sha contan a statement
that the owner, an ndvdua, s nether a ctzen nor a resdent of
the Unted States but s a resdent of the edera Repubc of Germany.
(2) If such etter s aso to be used as authorzaton for the reease,
pursuant to secton 503.6(a)(3), of e cess ta wthhed from such
tems of ncome, t sha aso contan a statement that the owner was,
at the tme when the ncome was receved from whch the e cess ta
was wthhed, nether a ctzen nor a resdent of the Unted States
but was a resdent of the edera Repubc of Germany.
(3) Ths etter sha consttute authorzaton for the payment of
such tems of ncome wthout wthhodng of Unted States ta at
source uness the Commssoner of Interna Revenue subsequenty
notfes the wthhodng agent that the ta sha be wthhed wth
respect to payments of such tems of ncome made after recept of
such notce. If, after fng a etter of notfcaton, the owner of the
ncome ceases to be egbe for the e empton from Unted States
ta granted by the conventon n respect to such ncome, he sha
prompty notfy the wthhodng agent by etter n dupcate. When
any change occurs n the ownershp of such ncome as recorded on the
books of the payer, the e empton from wthhodng of Unted States
ta sha no onger appy uness the new owner of record s entted
to and does propery fe a etter of notfcaton wth the wthhodng
agent
( ) ach etter of notfcaton, or the dupcate thereof, sha be m-
medatey forwarded by the wthhodng agent to the Dstrct Drec-
tor of Interna Revenue, udt Dvson, en Return Secton,
atmore 2, Maryand.
Sec. 503.6 Reease op cess Ta Wthhed at Source. (a)
Genera. .(1) In order to gve the conventon effectve appcaton at
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652
the earest practcabe date, the e emptons from, and reducton n
the rate of, wthhodng of Unted States ta at source granted by
ths Treasury Decson are hereby made effectve begnnng anuary
1, 195 , contngent upon compance wth the appcabe provsons
of sectons 503.2 through 503.5.
(2) In the case of dvdends and nterest pad by a German com-
pany (other than a Unted States corporaton) to a nonresdent aen
or to a foregn corporaton, f Unted States ta at the statutory rate
has been wthhed on or after anuary 1, 195 , there sha be reeased
by the wthhodng agent and pad over to the person from whom t
was wthhed, an amount equa to the ta so wthhed from such tems.
(3) In the case of every ta payer whose address at the tme of pay-
ment was n the edera Repubc of Germany and who furnshes to
the wthhodng agent the etter of notfcaton prescrbed n sectons
503.2(b), 503.3(b), 503. (b), and 503.5(b) as authorzaton for the re-
ease of e cess ta wthhed, f Unted States ta at the statutory rate
has been wthhed on or after anuary 1, 195 , from the tems of n-
come n respect of whch such etter s prescrbed n such sectons,
there sha be reeased (e cept as provded n paragraph (b)) by the
wthhodng agent and pad over to the person from whom t was
wthhed
() In the case of dvdends, the dfference between the ta so
wthhed and the ta requred to be wthhed pursuant to secton
503.2(b) and
() In the case of nterest (other than coupon bond nterest),
copyrght royates and other tems to whch secton 503. s ap-
pcabe, and prvate pensons and prvate fe annutes as de-
fned n artce I of the conventon, an amount equa to the ta
so wthhed from such tems.
( ) In the case of every ta payer whose address at the tme of pay-
ment was n the edera Repubc of Germany and who furnshes to
the wthhodng agent orm 1001-G R ceary marked Substtute
and e ecuted n accordance wth secton 503.3(b), f Unted States ta
at the statutory rate has been wthhed from coupon bond nterest on
or after anuary 1, 195 , there sha be reeased by the wthhodng
agent and pad over to the person from whom t was wthhed an
amount equa to the ta so wthhed from such nterest. One such
substtute form sha be fed n dupcate wth respect to each ssue of
bonds and w serve wth respect to that ssue to repace a orms 1001
prevousy fed by the ta payer n the caendar year n whch the e -
cess ta was wthhed and wth respect to whch such e cess s reeased.
(5) The orgna and dupcate of substtute orm 1001-G R sha
be forwarded by the wthhodng agent to the Dstrct Drector of
Interna Revenue, udt Dvson, en Returns Secton, atmore
2, Maryand, wth the quartery return on orm 1012. Substtute
orm 1001-G R need not be sted on orm 1012.
(b) Interest pad where degree of stock ownershp s determned.
If Unted States ta at the statutory rate has been wthhed on or after
anuary 1,195 , from dvdends descrbed n secton 503.2(a) (2) and
pad to a German company (other than a Unted States corporaton),
and f the reatonshp e stng between the German company and the
payng corporaton was, at the tme the dvdends were pad, such as
to render uncertan whether, by reason of the requrement contaned n
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653
artce I of the conventon as to stock ownershp, such dvdends
quafed for the reduced rate of Unted States ta , the wthhodng
agent sha reease and pay over to the German company the dfference
between the ta so wthhed and the ta requred to be wthhed pur-
suant to secton 503.2(b), ony f the German company (1) furnshes
to the wthhodng agent a copy of the Commssoner s authorzaton of
reease prescrbed n secton 503.2(c) (5) and (2) fes the etter of
notfcaton prescrbed n secton 503.2(b) (1).
Sec. 503.7 Informaton to be urnshed n Ordnary Course
(a) Genera. In compance wth the provsons of artce I of
the conventon the Commssoner of Interna Revenue w transmt to
tbe edera Mnstry of nance, as soon as practcabe after the cose
of the caendar year 1955 and of each subsequent caendar year durng
whch the conventon s n effect, the foowng nformaton reatng to
such precedng caendar year:
(1) The dupcate copy of each avaabe orm 10 2 Suppe-
ment fed pursuant to paragraph (b) and
(2) The dupcate copy of each avaabe ownershp certfcate,
orm 1001-G R, fed pursuant to secton 503.3 (b) and subst-
tute orm 1001-G R, fed pursuant to secton 503.6 (a), n
connecton wth coupon bond nterest.
(b) Informaton return. (1) To factate compance wth artce
I of the conventon, every Unted States wthhodng agent sha
make and fe n dupcate wth the Dstrct Drector of Interna
Revenue, atmore 2, Maryand, an nformaton return on orm
10 2 Suppement, wth respect to persons havng addresses n the
edera Repubc of Germany, whch sha be fed for the caendar
year 1955 and subsequent caendar years. Ths return sha be fed
smutaneousy wth orm 10 2.
(2) There sha be reported on such orm 10 2 Suppement a
tems of f ed or determnabe annua or perodca ncome (and
amounts descrbed n secton 02 (a) (2), secton 631 (b) and (c), and
secton 1235 of the Interna Revenue Code of 195 , whch are con-
sdered to be gans from the sae or e change of capta assets) derved
from sources wthn the Unted States and pad to nonresdent aens
and to nonresdent foregn corporatons, whose addresses at the tme
of payment were n the edera Repubc of Germany, ncudng such
tems of ncome upon whch, n accordance wth ths Treasury de-
cson, no wthhodng of Unted States ta s requred e cept that
any of such tems whch consttute nterest n respect of whch orm
1001-G R or substtute orm 1001-G R has been fed n dupcate
wth the wthhodng agent are not requred to be reported on such
orm 10 2 Suppement.
Sec. 503.8 enefcares of a Domestc state or Trust.
nonresdent aen who s a resdent of the edera Repubc of Ger-
many and who s a benefcary of a domestc estate or trust sha be en-
tted to the e empton from Unted States ta granted by artces II,
III and I of the conventon wth respect to dvdends, nterest,
and copyrght royates and the ke, to the e tent such tem or tems
ae ncuded n that porton of the ncome of such estate or trust
whch s (or woud, but for such e empton, be) ncudbe n the gross
ncome of the benefcary, provded that he otherwse satsfes the
requrements of these respectve artces. In order to be entted
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65
n such nstance to the e empton from wthhodng of Unted States
ta such benefcary must otherwse satsfy such requrements and
sha, where appcabe, e ecute and submt to the fducary of such
estate or trust n the Unted States the approprate etter of notfca-
ton prescrbed n sectons 503.3(b) and 503. (b).
Sec. 503.9 Land ern. The conventon sha aso appy to Land
ern effectve for ta abe years begnnng on or after anuary 1,
195 , but ony f the notfcaton has been furnshed to the Unted
States Government n accordance wth artce (2) of the con-
venton. fter appcaton of the conventon to Land ern n
accordance wth artce , references n the conventon and n ths
Treasury Decson to the edera Repubc of Germany sha aso be
consdered references to Land ern.
ecause t s necessary to brng nto effect at the earest prac-
tcabe date the rues of ths Treasury Decson respectng reease of
e cess ta wthhed, and e empton from, or reducton n the rate of,
wthhodng of ta , t s hereby found that t s mpractcabe to ssue
ths Treasury Decson wth notce and pubc procedure thereon under
secton (a) of the dmnstratve Procedure ct, approved une 11,
19 6, or sub|ect to the effectve date mtaton of secton (c) of that
ct.
(Ths Treasury Decson s ssued under the authorty contaned n
secton 7805 of the Interna Revenue Code of 195 (68 Stat 917
26 U. S. C. 7805) and n rtce I of the conventon.)
O. Gordon Dek,
ctng Commssoner of Interna Revenue.
pproved anuary 28, 1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 28, 1955, 2:55 p. m.)
UNIT D ST T S- P N ST T , IN RIT NC ND
GI T T CON NTION
conventon between the Unted States and apan for the avod-
ance of doube ta aton and the preventon of fsca evason wth
respect to ta es on estates, nhertances and gfts was sgned at Wash-
ngton, D. C, on pr 16, 195 . The conventon was approved for
ratfcaton by the Unted States Senate on ebruary 25, 1955, and
was ratfed by the Presdent on March 7, 1955. The conventon was
duy ratfed by apan. The nstruments of ratfcaton were e -
changed at Tokyo on pr 1,1955, and the Presdent procamed the
conventon on pr 8, 1955. It s effectve wth respect to estates or
nhertances n the case of persons who de on or after pr 1, 1955,
and to gfts made on or after that date. The conventon reads as
foows:
rtce I
(1) The ta es referred to In the present conventon are:
(a) In the case of the Unted States of merca: The edera estate and
gft ta es.
(b) In the case of apan: The nhertance ta (Incudng the gft ta ).
(2) The present conventon sha aso appy to any other ta on estates, n-
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655
hertances or gfts whch has a character substantay smar to those referred
to n paragraph (1) of ths rtce and whch may be mposed by ether con-
tractng State after the date of sgnature of the present conventon.
btce II
(1) s used n the present conventon:
(a) The term Unted States means the Unted States of merca, and
when used n a geographca sense means the States, the Terrtores of
aska and awa, and the Dstrct of Coumba.
(b) The term apan , when used n a geographca sense, means a the
terrtory n whch the aws reatng to the ta referred to n paragraph
(1) (b) of rtce I are enforced.
(c) The term ta means those ta es referred to n paragraph (1) (a)
or (b) of rtce I, as the conte t requres.
(d) The term competent authortes means, n the case of the Unted
States, the Commssoner of Interna Revenue as authorzed by the Secretary
of the Treasury and, n the case of apan, the Mnster of nance or hs
authorzed representatve.
(2) In the appcaton of the provsons of the present conventon by ether
contractng State any term not otherwse defned sha, uness the conte t other-
wse requres, have the meanng whch such term has under the aws of such
State reatng to the ta .
(3) or the purposes of the present conventon, each contractng State may
determne n accordance wth ts aws whether a decedent at the tme of hs
death or a benefcary of a decedent s estate at the tme of such decedent s death,
or a donor at the tme of the gft or a benefcary of a gft at the tme of the gft,
was domced theren or a natona thereof.
rtce III
(1) If a decedent at the tme of hs death or a donor at the tme of the gft
was a natona of or domced n the Unted States, or f a benefcary of a
decedent s estate at the tme of such decedent s death or a benefcary of a gft
at the tme of the gft was domced n apan, the stus at the tme of the trans-
fer of any of the foowng property or property rghts sha, for the purpose of
the mposton of the ta and for the purpose of the credt authorzed by rtce
, be determned e cusvey In accordance wth the foowng rues:
(a) Immovabe property or rghts theren (not ncudng any property
for whch specfc provson s otherwse made n ths rtce) sha be
deemed to be stuated at the pace where the and nvoved s ocated.
(b) Tangbe movabe property (Incudng currency and any other form
of money recognzed as ega tender n the pace of ssue and e ceptng such
property for whch specfc provson s otherwse made n ths rtce) sha
be deemed to be stuated at the pace where such property s physcay o-
cated, or, f n transtu, at the pace of destnaton.
(c) Debts (ncudng bonds, promssory notes, bs of e change, bank
deposts and nsurance, e cept bonds or other negotabe Instruments n
bearer form and such debts for whch specfc provson s otherwse made
n ths rtce) sha be deemed to be stuated at the pace where the debtor
resdes.
(d) Shares or stock n a corporaton sha be deemed to be stuated at the
pace under the aws of whch such corporaton was created or organzed.
(e) Shps and arcraft sha be deemed to be stuated at the pace where
they are regstered.
(f) Goodw as a trade, busness or professona asset sha be deemed
to be stuated at the pace where the trade, busness or professon to whch
t pertans s carred on.
(g) Patents, trade-marks, utty modes and desgns sha be deemed to
be stuated at the pace where they are regstered (or used n case they are
not regstered).
(h) Copyrghts, franchses, rghts to artstc and scentfc works and
rghts or censes to use any copyrghted matera, artstc and scentfc
works, patents, trade-marks, utty modes or desgns sha be deemed to be
stuated at the pace where they are e ercsabe.
(1) Mnng or quarryng rghts or mnng eases sha be deemed to be
stuated at the pace of such mnng or quarryng.
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(|) shng rghts sha be deemed to be stuated n the country In whose
government s |ursdcton such rghts are e ercsabe.
(k) ny property for whch provson s not herenbefore made sha be
deemed to be stuated n accordance wth the aws of the contractng State
mposng the ta soey by reason of the stus of property wthn such State.
but f nether of the contractng States mposes the ta soey by reason of
the stus of property theren, then any such property sha be deemed to be
stuated n accordance wth the aws of each contractng State.
(2) The appcaton of the provsons of paragraph (1) of ths rtce sha
be mted to the partcuar property, and any porton thereof, whch wthout
such provsons woud be sub|ected to the ta es of both contractng States or
woud be so sub|ected e cept for a specfc e empton.
rtce I
Where one of the contractng States mposes the ta soey by reason of the
stus of property wthn such State, n the case of a decedent who at the tme
of hs death, or of a donor who at the tme of the gft, was a natona of or
domced n the Unted States, or In the case of a benefcary of a decedent s
estate who at the tme of such decadent s death, or a benefcary of a gft who
at the tme of the gft, was domced n apan, the contractng State s| mposng
the ta :
(a) sha aow a specfc e empton whch woud be appcabe under Its
aws f the decedent, donor, or benefcary, as the case may be, had been a
natona of or domced n such State, n an amount not ess than tbe
proporton thereof whch ( ) the vaue of the property, stuated accordng
to rtce III n such State an sub|ected to the ta es of both contractng
States or whch woud be so sub|ected e cept for a specfc e empton, bears
to ( ) the vaue of the tota property whch woud be sub|ected to the ta
of such State f such decedent, donor, or benefcary had been a natona of or
domced n such State and
(b) :)ha (e cept for the purpose of subparagraph (a) of ths paragraph
and for the purpose of any other proportona aowance otherwse provded)
take no account of property stuated accordng to rtce III outsde sneb
State n determnng the amount of the ta .
rtce
(1) Where ether contractng State mposes the ta by reason of the natonaty
thereof or the domce theren of a decedent or a donor or a benefcary of a
decedent s estate or of a gft, such State sha aow aganst ts ta (computed
wthout appcaton of ths rtce) a credt for the ta mposed by the other
contractng State wth respect to property stuated at the tme of the transfer n
such other State and ncuded for the ta es of both States (but the amount of
the credt sha not e ceed that porton of the ta mposed by the credtng State
whch s attrbutabe to such property). The provsons of ths paragraph sha
not appy wth respect to any property referred to n paragraph (2) of ths
rtce.
(2) Where each contractng State mposes the ta by reasons of the natonaty
thereof or the domce theren of a decedent or a donor or a benefcary, wth
respect to any property stuated at the tme of the transfer outsde both con-
tractng States (or deemed by each contractng State to be stuated n Its terr-
tory, or deemed by one contractng State to he stuated |n ether contractnc
State and deemed by the other contractng State to be stuated outsde both
contractng States or deemed by each contractng State to be stuated n the
other contractng State), each contractng State sha aow aganst ts ta
(computed wthout appcaton of ths rtce) a credt for a part of the ta
mposed by the other contractng State attrbutabe to such property. The tota
of the credts authorzed by ths paragraph sha be equa to the amount of
the ta mposed wth respect to such property by the contractng State mpos-
ng the smaer amount of the ta wth respect to such property, and sha be
dvded between both contractng States n proporton to the amount of the ta
mposed by each contractng State wth respect to such property.
(3) The credt authorzed by ths rtce, If appcabe, sha be In eu of any
credt for the same ta authorzed by the aws of the credtng State, the credt
appcabe for the partcuar ta beng ether credt authorzed by ths rtce
or credt authorzed by such aws, whchever s the greater. or the purposes of
ths rtce, the amount of the ta of each contractng State attrbutabe to
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657
any desgnated property sha be ascertaned after takng nto account any ap-
pcabe dmnuton or credt aganst ts ta wth respect to sucb property (other
than any credt tnder paragraph (1) or (2) of ths rtce), provded, however,
n case another credt for the ta of any other foregn State s aowabe wth
respect to the same property pursuant to any other conventon between the credt-
ng State under the present conventon and such other foregn State, or pursuant
to the aws of the credtng State, the tota of such credts sha not e ceed the
amount of ta of the credtng State attrbutabe to such property computed be-
fore aowance of such credts.
( ) Credt aganst the ta of one of the contractng States for the ta of the
other contractng State sha be aowed under ths rtce ony where both
such ta es have been smutaneousy mposed at the tme of a decedent s death
or at the tme of a gft.
(5) No credt resutng from the appcaton of ths rtce sha be aowed
after more than fve years from the due date of the ta aganst whch credt
woud otherwse be aowed, uness cam therefor was fed wthn such fve-
year perod. ny refund resutng from the appcaton of ths rtce sha
be made wthout payment of nterest on the amount so refunded, uness other-
wse specfcay authorzed by the credtng State.
(6) Credt aganst the ta of one of the contractng States sha not be fnay
aowed for the ta of the other contractng State unt the atter ta (reduced
by credt authorzed under ths rtce, f any) has been pad.
rtce I
(1) The competent authortes of both contractng States sha e change such
nformaton avaabe under the respectve ta aws of both contractng States
as s necessary for carryng out the provsons of the present conventon or for
the preventon of fraud or for the admnstraton of statutory provsons aganst
ta avodance n reaton to the ta . ny nformaton so e changed sha be
treated as secret and sha not be dscosed to any person other than those,
ncudng a court, concerned wth the assessment and coecton of the ta or the
determnaton of appeas n reaton thereto. No nformaton sha be e changed
whch woud dscose any trade, busness, ndustra or professona secret or any
trade process.
(2) ach of the contractng States may coect the ta Imposed by the other
contractng State (as though such ta were the ta of the former State) as w
ensure that the credt or any other beneft granted under the present conventon
by such other State sha not be en|oyed by persons not entted to such benefts.
rtce II
Where a representatve of the estate of a decedent or a benefcary of such
estate or a donor or a benefcary of a gft shows proof that the acton of the ta
authortes of ether contractng State has resuted, or w resut, n doube
ta aton contrary to the provsons of the present conventon, such representatve,
donor or benefcary sha be entted to present the facts to the competent
authortes of the contractng State of whch the decedent was a natona at the
tme of hs death or of whch the donor or benefcary s a natona, or f the
decedent was not a natona of ether of the contractng States at the tme o
hs death or f the donor or the benefcary s not a natona of ether of the
contractng States, to the competent authortes of the contractng State n
whch the decedent was domced or resdent at the tme of hs death or n whch
the donor or benefcary s domced or resdent. Shoud the cam be deemed
worthy of consderaton, the competent authortes of such State to whch the
facts are so presented sha undertake to come to an agreement wth the com-
petent authortes of the other contractng State wth a vew to equtabe
avodance of the doube ta aton n queston.
rtce III
(1) The provsons of the present conventon sha not be construed to deny
or affect n any manner the rght of dpomatc and consuar offcers to other or
addtona e emptons now en|oyed or whch may hereafter be granted to such
offcers.
(2) The provsons of the present conventon sha not be construed so as to
Increase the ta mposed by ether contractng State.
(3) 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
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658
the contractng States and any other State, the competent authortes of the
contractng States may sette the queston by mutua agreement t beng under-
stood, however, that ths provson sha not be construed to precude the cor
tractng States from settng by negotaton any dspute arsng under the present
conventon.
( ) The competent authortes of both contractng States may prescrbe regu-
atons necessary to Interpret and carry out the provsons of the present con-
venton and may communcate wth each other drecty for the purpose of gvug
effect to the provsons of the present conventon.
rtce I
(1) The present conventon sha be ratfed and the nstruments of ratfcaton
sha be e changed at Tokyo as soon as possbe.
(2) The present conventon sha enter nto force on the date of e change of
nstruments of ratfcaton and sha be appcabe to estates or nhertances n
the case of persons who de on or after the date of such e change and to gfts
made on or after that date.
(3) ther of the contractng States may termnate the present conventon
at any tme after a perod of fve years sha have e pred from the date on whch
the conventon enters nto force, by gvng to the other contractng State notce
of termnaton, provded that such notce s gven on or before the 30th day of
une and, n such event, the present conventon sha cease to be effectve for
the ta abe years begnnng on or after the frst day of anuary of the caendar
year ne t foowng that n whch such notce Is gven.
In wtness whereof, the undersgned Penpotentares have sgned the present
conventon.
Done at Washngton, In dupcate. In the ngsh and apanese anguages, each
te t havng equa authentcty, ths s teenth day of pr, 105 .
or the Unted States of merca :
Water eue Smth
or apan:
S. Iuuch
UNIT D ST T S- P N INCOM T CON NTION
conventon between the Unted States and apan for the avod-
ance of doube ta aton and the preventon of fsca evason wth re-
spect to ta es on ncome was sgned at Washngton, D. C, on pr 16,
195 . The conventon was approved for ratfcaton by the Unted
States Senate on ebruary 25,1955, and was ratfed by the Presdent
on March 7,1955. The conventon was duy ratfed by apan. The
nstruments of ratfcaton were e changed at Tokyo on pr 1,1955,
and the Presdent procamed the conventon on pr 8, 1955. It s
effectve for the ta abe years begnnng on and after anuary 1,1955.
The conventon reads as foows:
rtce I
(1) The ta es referred to n the present conventon are:
(a) In the case of the Unted States of merca: The edera ncome
ta es, ncudng surta es.
(b) In the case of apan: The ncome ta and the corporaton ta .
(2) The present conventon sha aso appy to any other ta on Income or
profts whch has a character substantay smar to those referred to In para-
graph (1) of ths rtce and whch may be mposed by ether contractng State
after the date of sgnature of the present conventon.
rtce II
(1) s used n the present conventon:
(a) The term Unted States means the Unted States of merca, and
when used n a geographca sense means the States, the Terrtores of aska
and awa, and the Dstrct of Coumba.
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(b) The term apan , when used In a geographca sense, means a the
terrtory In whch the aws reatng to the ta es referred to n paragraph
(1) (b) of rtce I are enforced.
(c) The term permanent estabshment means an offce, factory, work-
shop, branch, warehouse or other f ed pace of busness, but does not ncude
the casua and temporary use of merey storage factes. It aso ncudes
an agency f the agent has and habtuay e ercses a genera authorty to
negotate and concude contracts on behaf of an enterprse or has a stock of
merchandse from whch he reguary fs orders on ts behaf. n enter-
prse of one of the contractng States sha not be deemed to have a perma-
nent estabshment In the other contractng State merey because t carred
on busness deangs n such other State through a bona fde commsson
agent, broker, custodan or other ndependent agent actng n the ordnary
course of hs busness as such. The fact that an enterprse of one of the
contractng States mantans n the other contractng State a f ed pace of
busness e cusvey for the purchase for such enterprse of goods or mer-
chandse sha not of tsef consttute such f ed pace of busness a perma-
nent estabshment of such enterprse. The fact that a corporaton of one
of the contractng States has a subsdary corporaton whch s a corpora-
ton of the other contractng State or whch Is engaged n trade or busness n
the other contractng State sha not of tsef consttute that subsdary cor-
poraton a permanent estabshment of ts parent corporaton.
(d) The term enterprse of one of the contractng States means, as the
case may be, Unted States enterprse or apanese enterprse.
(e) The term Unted States enterprse means an Industra or com-
merca enterprse or undertakng carred on In the Unted States by a res-
dent (ncudng an ndvdua, a fducary and partnershp) of the Unted
States or by a Unted States corporaton or other entty and the term
Unted States corporaton or other entty means a corporaton or other
entty created or organzed under the aw of the Unted States or of any
State or Terrtory of the Unted States.
(f) The term apanese enterprse means an Industra or commerca
enterprse or undertakng carred on In apan by an Indvdua resdent n
apan or by a apanese corporaton or other entty and the term apanese
corporaton or other entty means a corporaton or other assocaton hav-
ng |urdca personaty, or a partnershp or other assocaton wthout
|urdca personaty, created or organzed under the aws of apan.
(g) The term ta means those ta es referred to n paragraph (1) a)
or (b) of rtce I, as the conte t requres.
(h) The term competent authortes means, In the case of the Unted
States, the Commssoner of Interna Revenue as authorzed by the Secre-
tary of the Treasury and, n the case of apan, the Mnster of nance or
hs authorzed representatve.
(1) The term ndustra or commerca profts Incudes manufacturng,
mercante, agrcutura, fshng, mnng, fnanca and nsurance profts, but
does not Incude Income n the form of dvdends, Interests, rents or roya-
tes, or remuneraton for persona servces.
(2) In the appcaton of the provsons of the present conventon by ethpr
contractng State any term not otherwse defned sha, uness the conte t other-
vse requres, have the meanng whch such term has under the aws of such
State reatng to the ta .
rtce III
(1) n enterprse of one of the contractng States sha not be sub|ect to
the ta of the other contractng State n respect of Its Industra or commerca
profts uness It has a permanent estabshment stuated In such other State. If
t has such .permanent estabshment such other State may mpose ts ta upon
the entre ncome of such enterprse from sources wthn such other State.
(2) In determnng the ta of one of the contractng States no account sha
be taken of the mere purchase of merchandse theren by an enterprse of the
other contractng State.
(3) Where an enterprse of one of the contractng States hao a permanent
estabshment stuated n the other contractng State, there sha be attrbuted
to such permanent estabshment the Industra or commerca profts whch t
mght be e pected to derve If It were an Independent enterprse engaged In
the same or smar actvtes under the same or smar condtons and deang on
an Independent bass wth the enterprse of whch It Is a permanent estab-
shment.
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660
( ) In determnng the ndustra or commerca profts of a permanent estab-
shment there sha be aowed as deductons a e penses wherever ncurred,
reasonaby aocabe to such permanent estabshment, ncudng e ecutve and
genera admnstratve e penses so aocabe.
(5) The competent authortes of both contractng States may, consstent
wth other provsons of the present conventon, arrange detas for the appor-
tonment of ndustra or commerca profts.
rtce I
Where an enterprse of one of the contractng States, by reason of ts partc-
paton n the management or the fnanca structure of an enterprse of the other
contractng State, makes wth or mposes on the atter enterprse, n ther com-
merca or fnanca reatons, condtons dfferent from those whch woud, be
made wth an ndependent enterprse, any profts whch woud normay have
been aocabe to one of the enterprses, but by reason of such condtons bave
not been so aocated, may be ncuded n the profts of such enterprse and ta ed
accordngy.
rtce
(1) Notwthstandng the provsons of rtce III and rtce I of the pres-
ent conventon, ncome whch an enterprse of one of the contractng States
derves from the operaton of shps or arcraft regstered
(a) n such State, or
(b) n a thrd country whch e empts ( ) such enterprse and ( ) an
enterprse of the other contractng State, from ts ta on earnngs de-
rved from the operaton of shps or arcraft, as the case may be, regstered
n the respectve States
sha be e empt from the ta of such other contractng State.
(2) The present conventon sha not be construed to affect the arrangement
between the Government of the Unted States and the Government of apan
provdng for reef from doube ta aton on shppng profts effected by the
e change of notes at Washngton dated March 31, 1920 and une 8, 1926.
rtce I
The rate of ta mposed by one of the contractng States on nterest on bonds,
securtes, notes, debentures or any other form of Indebtedness (ncudng mort-
gages or bonds secured by rea property) receved from sources wthn such
State by a resdent or corporaton or other entty of the other contractng State
not havng a permanent estabshment n the former State sha not e ceed
15 percent.
btce II
The rate of ta mposed by one of the contractng States on royates and
other amounts receved as consderaton for the rght to use copyrghts, artstc
and scentfc works, patents, desgns, secret processes and formuae, trade-marks
and other ke property (ncudng n such royates and other amounts, rentas
and ke payments In respect of moton-pcture fms or for the use of Industra,
commerca, or scentfc equpment) from sources wthn such State by a
resdent or corporaton or other entty of the other contractng State not havng
a permanent estabshment n the former State sha not e ceed 15 percent.
rtce III
resdent or corporaton or other entty of one of the contractng States
dervng
(a) Income from rea property (ncudng gans derved from the sae
or e change of such property, but not Incudng Interest from mortgages or
bonds secured by rea property), or
(b) royates In respect of the operaton of mnes, quarres or other natu-
ra resources
stuated wthn the other contractng State may eect, for any ta abe year, to be
sub|ect to the ta of such other State on a net bass as If such resdent or corpora-
ton or other entty had a permanent estabshment n such other State durng
such ta abe year.
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rtce I
d Indvdua resdent of one of the contractug States sha be e empt from
the ta of the other contractng State upon compensaton for abor or persona
servces (ncudng the practce of bera professons) performed n such other
State n any ta abe year f such resdent s temporary present n such other
State:
(a) for a perod or perods not e ceedng a tota of 180 days durng such
ta abe year and hs compensaton s receved for such abor or persona
servces performed as an offcer or empoyee of a resdent or corporaton or
other entty of the former State, or
(b) for a perod or perods not e ceedng a tota of 90 days durng such
ta abe year and hs compensaton receved for such abor or persona serv-
ces does not e ceed 3,000 Unted States doars, or the equvaent sum n
yen as computed at the offca basc rate of e change n effect at the tme
such compensaton s pad.
rtce
(1) (a) Saares, wages and smar compensaton pad by the Unted States
to an ndvdua who s a ctzen of the Unted States (other than an ndvdua
who has been admtted to apan for permanent resdence theren) sha be
e empt from ta by apan.
(b) Saares, wages and smar compensaton pad by apan to an ndvdua
who s a natona of apan (other than an ndvdua who has been admtted
to the Unted States for permanent resdence theren) sha be e empt from ta
by the Unted States.
(2) The provsons of ths artce sha not appy to saares, wages or smar
compensaton pad n respect of servces rendered n connecton wth any trade
or busness ca rred on by ether of the contractng States for purposes of proft.
rtce I
resdent of one of the contractng States, who, In accordance wth agreements
between the Governments of the contractng States or between educatona estab-
shments n the contractng States for the e change of professors and teachers,
or at the nvtaton of the Government of the other contractng State or of an
educatona estabshment n such other State, temporary vsts such other
State for the purpose of teachng for a perod not e ceedng two years at a
nnversty, coege, schoo or other educatona nsttuton n such other State,
sha be e empt from the ta of such other State on hs remuneraton for such
teachng for such perod.
rtce II
(1) resdent of one of the contractng States who Is temporary present
In the other contractng State soey as a student at a recognzed unversty,
coege or schoo n such other State, sha be e empt from the ta of such
other State wth respect to remttances from abroad (ncudng payments, f
any, by hs empoyer abroad).
(2) resdent of one of the contractng States who s a recpent of a grant,
aowance or award from a regous, chartabe, scentfc, terary or educatona
organzaton of such State and who Is temporary present n the other contract-
ng State, sha be e empt from the ta of such other State on such grant, aow-
ance or award remtted from abroad (other than compensaton for persona
servces).
(3) resdent of one of the contractng States who s an empoyee of, or
tnder contract wth, an enterprse of such State or an organzaton referred
to n paragraph (2) of ths rtce, and who s temporary present n the
other contractng State for a perod not e ceedng one year soey to acqure
technca, professona or busness e perence from a person other than such
enterprse or organzaton, sha be e empt from the ta of such other State on
compensaton from abroad pad by such enterprse or organazton for hs serv-
ces rendered durng such perod, If the amount of compensaton pad by sur-h
enterprse or organzaton for hs servces durng such perod, when computed
on the anua bass, does not e ceed 6,000 Unted States doars, or the equvaent
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662
urn In yen as computed at the offca basc rate of e change n effect at the
tme such compensaton Is pad.
rtce III
or the purpose of the present conventon:
(a) Dvdends pad by a corporaton of one of the contractng States sha
be treated as ncome from sources wthn such State.
(b) Interest pad by one of the contractng States ncudng oca Govern-
ment thereof or by an enterprse of one of the contractng States not havng a
permanent estabshment n the other contractng State sha be treated as ncome
from sources wthn the former State.
(c) Gans, profts and ncome derved from the purchase and sae of persona
property sha be treated as derved from the country n whch such property s
sod.
(d) Gans, profts and ncome derved from the sae by a ta payer n one of the
contractng States of goods manufactured n the other contractng State n whoe
or n part by such ta payer sha be treated as derved n part from the country
In whch manufactured and n part from the country n whch sod, and to the
e tent such gans, profts and ncome are not aocabe under other provsons of
the present conventon they sha be aocated between both contractng States n
accordance wth such ta payer s reatve saes and property n the respectve
countres.
(e) Income from rea property (ncudng gans derved from the sae or e -
change of such property, but not ncudng nterest from mortgages or bonds
secured by rea property) and royates n respect of the operaton of mnes,
quarres, or other natura resources sha be treated as ncome derved from the
country n whch such rea property, mnes, quarres or other natura resources
are stuated.
(f) Compensaton for abor or persona servces (ncudng the practce of
bera professons) sha be treated as ncome from sources wthn the country
where are rendered the servces for whch such compensaton s pad.
(g) Royates for usng, or for the rght to use, n one of the contractng States,
patents, copyrghts, desgns, trademarks and ke property sha be treated as n-
come from sources wthn such State.
rtce I
It s agreed that doube ta aton sha be avoded n the foowng manner:
(a) The Unted States, n determnng the ta of ts ctzens, resdents or cor-
poratons or other enttes may, regardess of any other provson of the present
conventon, ncude In the bass upon whch such ta s mposed a tems of
ncome ta abe under the revenue aws of the Unted States as f the present con-
venton had not come nto effect. The Unted States sha, however, sub|ect to
the provsons of secton 131 of the Interna Revenue Code as n effect on the frst
day of anuary 195 , deduct from ts ta the amount of the ta of apan. In
determnng the credt under the sad secton 131 of the Interna Revenue Code,
any nterest receved from an enterprse of the Unted States wth a permanent
estabshment n apan sha be treated as ncome from sources wthn apan to
the e tent so treated under the aws of apan, f the debt wth respect to whch
such nterest Is pad s made n connecton wth the busness of such permanent
estabshment of such enterprse.
(b) apan, n determnng the ta of ts resdents or corporatons or other
enttes may, regardess of any other provson of the present conventon, ncude
n the bass upon whch such ta s mposed a tems of ncome ta abe under
the ta aws of apan as f the present conventon had not come Into effect
apan sha, however, deduct from ts ta so cacuated the amount of the ta
of the Unted States upon ncome from sources wthn the Unted States and
Incuded for the ta es of both contractng States, but n an amount not e ceedng
that proporton of the ta of apan whch such ncome bears to the entre Income
sub|ect to the ta of apan.
(c) In determnng the ta es of the contractng States of a recpent, who s a
ctzen, resdent or corporaton or other entty of the Unted States, of a dvdend
from a apanese corporaton, n so far as the ta of apan mposed on ncome
or profts of a corporaton out of whch a dvdend s pad s deemed under the
ta aws of apan to have been mposed on a recpent of such dvdend:
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663
() The Unted States sha deem that such recpent has pad wth respec
to such dvdend the ta of apan n an amount equa to 25 percent of the
amount of such dvdend, and deduct, under the provsons of paragraph (a)
of ths rtce, from ts ta the amount of the ta of apan so deemed to
hare been pad provded the recpent ncudes n gross ncome the amount
of ta thus deemed to have been pad, and
() apan sha mpose wth respect to such dvdend receved by such
recpent (e cept as such recpent s a resdent of or has a permanent
estabshment n apan) no ta other than the ta mposed on ncome or
profts of the corporaton out of whch such dvdend s pad.
rtce
(1) Organzatons organzed under the aws of apan and operated e cusvey
for regous, chartabe, scentfc, terary or educatona purposes sha, to the
e tent and sub|ect to condtons provded n the Unted States Interna Revenue
Code, be e empt from the ta of the Unted States.
(2) Organzatons organzed under the aws of the Unted States and operated
e cusvey for regous, chartabe, scentfc, terary or educatona purposes
sha, to the e tent and sub|ect to condtons provded n the ta aws of apan,
be e empt from the ta of apan.
rtce I
(1) There sha be aowed, for the purposes of the ta of the Unted States, n
the case of a resdent of apan who s a nonresdent of the Unted States (other
than an offcer or empoyee of the Government of apan), n addton to the
e empton provded n secton 21 of the Unted States Interna Revenue Cude
as n effect on the frst day of anuary 195 , a credt aganst net ncome, sub|ect
to the condtons prescrbed n secton 25 of the Interna Revenue Code as n
effect on the sad date, for the spouse of the ta payer and for each chd of the
ta payer who are present n the Unted States and resdng wth hm n the
Unted States at any tme durng the ta abe year, but such addtona credt
sha not e ceed that proporton thereof whch the ta payer s gross ncome from
sources wthn the Unted States for the ta payer s ta abe year bears to hs
entre ncome from a sources for the fsca or caendar year n whch ends such
ta abe year.
(2) or the purposes of the ta of apan, there sha be aowed n the case
f a ctzen of the Unted States who s a resdent of apan the same e emptons
for a dependent or dependents as those granted to a natona of apan who s a
resdent of apan.
rtce II
(1) The competent authortes of both contractng States sha e change such
nformaton avaabe under the respectve ta aws of both contractng States
as s necessary for carryng out the provsons of the present conventon or for
the preventon of fraud or for the admnstraton of statutory provsons aganst
ta avodance n reaton to the ta . ny nformaton so e changed sha be
treated as secret and sha not be dscosed to any person other than those, n-
cudng a court, concerned wth the assessment and coecton of the tn or the
determnaton of appeas n reaton thereto. No nformaton sha be e changed
whch woud dscose any trade, busness, ndustra or professona secret or any
trade process.
(2) ach of the contractng States may coect the ta mposed by the other
contractng State (as though such ta were the ta of the former State) as
w ensure that the e emptons, reduced rates of ta or any other beneft granted
under the present conventon by such other State sha not be en|oyed by persons
not entted to such benefts.
rtce III
Where a ta payer shows proof that the acton of the ta authortes of ether
contractng State has resuted, or w resut, n doube ta aton contrary to the
provsons of the present conventon, he sha be entted to present the facts
to the competent authortes of the contractng State of whch he s a natona
or a resdent, or, f the ta payer s a corporaton or other entty, to those of the
SM030
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66
contractng State under the aws of whch t s created or organzed. Shoud
the ta payer s cam be deemed worthy of consderaton, the competent author-
tes of such State to whch the facts are so presented sha undertake to come
to an agreement wth the competent authortes of the other contractng State
wth a vew to equtabe avodance of the doube ta aton n queston.
rtce I
(1) The provsons of the present conventon sha not be construed to deny
or affect n any manner the rght of dpomatc and consuar offcers to other or
addtona e emptons now en|oyed or whch may hereafter be granted to such
offcers.
(2) The provsons of the present conventon sha not be construed to restrct
In any manner any e empton, deducton, credt or other aowance now or
hereafter accorded by the aws of one of the contractng States n determnng
the ta of such State.
(3) Shoud any dffcuty or doubt arse as to the nterpretaton or appcaton
of the present conventon, or ts reatonshp to conventons between one of the
contractng States and any other State, the competent authortes of the con-
tractng States may sette the queston by mutua agreement t beng understood,
however, that ths provson sha not be construed to precude the contractng
States from settng by negotaton any dspute arsng under the present
conventon.
( ) The competent authortes of both contractng States may prescrbe regu-
atons necessary to nterpret and carry out the provsons of the present conven-
ton and may communcate wth each other drecty for the purpose of gvn
effect to the provsons of the present conventon.
rtce
(1) The present conventon sha be ratfed and the nstruments of ratfcaton
sha be e changed at Tokyo as soon as possbe.
(2) The present conventon sha enter nto force on the date of e change of
nstruments of ratfcaton and sha be appcabe to ncome or profts derved
durng the ta abe years begnnng on or after the frst day of anuary of the
caendar year n whch such e change takes pace.
(3) ther of the contractng States may termnate the present conventon
at any tme after a perod of fve years sha have e pred from the date on whch
the present conventon enters Into force, by gvng to the other contractng State
notce of termnaton, provded that such notce s gven on or before the 30th
day of une and, n such event, the present conventon sha cease to be effectve
for the ta abe years begnnng on or after the frst day of anuary of the caendar
year ne t foowng that n whch such notce s gven.
In wtness whereof, the undersgned Penpotentares have sgned the present
conventon.
Done at Washngton, n dupcate, n the ngsh and apanese anguages, each
te t havng equa authentcty, ths s teenth day of pr, 195 .
or the Unted States of merca:
Water ede Smth
or apan:
S. Iguch
Memorandum
It s understood that n the appcaton of rtce I and rtces I and II
of the conventon between apan and the Unted States of merca for the
vodance of Doube Ta aton and the Preventon of sca vason wth res ect
to Ta es on Income
(1) the provsons of rtce I sha not be construed to deny ttf
e emptons from the apanese ta or the Unted States ta , as the case na|
be, granted by rtce (1), rtce I and rtce II
( ) nether of the contractng States sha be precuded from ta ng Ut
own natonas or ctzens wth respect to ncome comng wthn rtce I
or rtce II.
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UNIT D ST T S- P N INCOM T CON NTION
( so Part I, Sectons 1 1,1 2.) T. D. 6130
TITL 26 INT RN L R NU . C PT R I, SU C PT R , P RT 606.
P N
Reease of e cess ta wthhed, and e empton from, or reducton
In rate of, wthhodng of ta at source n the case of resdents of
apan and of apanese corporatons or other enttes, as affected
by the ncome ta conventon between the Unted States and apan
sgned on pr 16,195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Tate or Contents
Secton
506.1 Introductory.
506.2 Dvdends.
5065 Interest.
506. Patent and copyrght royates and fm rentas.
506.3 Reease of e cess ta wthhed at source.
506.6 Informaton to be furnshed n ordnary course.
506.7 enefcares of a domestc estate or trust
506.8 Sources of ncome.
506.9 ffectve date.
Secton 506.1 Introductory. (a) Pertnent provsons. The n-
come ta conventon between the Unted States and apan whch was
sgned on pr 16, 195 , herenafter referred to as the conventon,
provdes n part as foows, effectve wth respect to ncome or profts
derved durng ta abe years begnnng on or after anuary 1,1955.
rtce I
(1) The ta es referred to n the present conventon are:
(a) In the case of the Unted States of merca: The edera ncome
ta es, ncudng surta es.
(b) In the case of apan: The ncome ta and the corporaton ta .
(2) The present conventon sha aso appy to any other ta on ncome or
profts whch has a character substantay smar to those referred to n para-
graph (1) of ths rtce and whch may be mposed by ether contractng State
after the date of sgnature of the present conventon.
rtce II
(1) s used n the present conventon:
(a) The term Unted States means the Unted States of merca, and
when used n a geographca sense means the States, the Terrtores of
aska and awa, and the Dstrct of Coumba.
(b) The term apan, when used n a geographca sense, means a
the terrtory In whch the aws reatng to the ta es referred to n paragraph
(1) (b) of rtce I are enforced.
(c) The term permanent estabshment means an offce, factory, work-
shop, branch, warehouse or other f ed pace of busness, but does not n-
cude the casua and temporary use of merey storage factes. It aso
ncudes an agency f the agent has and habtuay e ercses a genera au-
thorty to negotate and concude contracts on behaf of an enterprse or
has a stock of merchandse from whch he reguary fs orders on ts behaf.
n enterprse of one of the contractng States sha not be deemed to have
a permanent estabshment n the other contractng State merey because
t carred on busness deangs In such other State through a bona fde com-
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666
msson ngent, broker, custodan or otber ndependent agent actng n the
ordnary course of hs busness as such. The fact that an enterprse of
one of the contractng States mantans n the otber contractng State a
f ed pace of busness e cusvey for the purchase for such enterprse of
goods or merchandse sha not of Itsef consttute such f ed pace of bus-
ness a permanent estabshment of such enterprse. The fact that a corpo-
raton of one of the contractng States has a subsdary corporaton whch
s a corporaton of the other contractng State or whch Is engaged n trade
or busness n the other contractng State sha not of tsef consttute
that subsdary corporaton a permanent estabshment of ts parent cor-
porton.
(d) The term enterprse of one of the contractng States means, as the
case may be. Unted States enterprse or apanese enterprse.
(e) The term Unted States enterprse means an ndustra or commer-
ca enterprse or undertakng carred on n the Unted States by a resdent
(ncudng an ndvdua, a fducary and partnershp) of the Unted States
or by a Unted States corporaton or other entty and the term Unted
States corporaton or other entty means a corporaton or other entty
created or organzed under the aw of the Unted States or of any State or
Terrtory of the Unted States.
(f) The term apanese enterprse means an Industra or commerca
enterprse or undertakng carred on n apan by an ndvdua resdent n
apan or by a apanese corporaton or other entty and the term apanese
corporaton or other entty means a corporaton or other assocaton havng
urdca personaty, or a partnershp or other assocaton wthout urdca
personaty, created or organzed under the aws of apan.
(g) The term ta means those ta es referred to In paragraph (1)
(a) or (b) of rtce I, as the conte t requres.
(h) The term competent authortes means, In the case of the Unted
States, the Commssoner of Interna Revenue as authorzed by the Secretary
of the Treasury and, n the case of apan, the Mnster of nance or hs
authorzed representatve.
() The term ndustra or commerca profts Incudes manufacturng,
mercante, agrcutura, fshng, mnng, fnanca and nsurance profts,
but does not Incude ncome n the form of dvdends. Interest, rents or
royates, or remuneraton for persona servces.
(2) In the appcaton of the provsons of the present Conventon by
ether contractng State any term not otherwse defned sha, uness the
contest otherwse requres, have the meanng whch such term has under
the aws of such State reatng to the ta .

rtce I
The rate of ta Imposed by one of the contractng States on nterest on
bonds, securtes, notes, debentures or any other form of ndebtedness (n-
cudng mortgages or bonds secured by rea property) receved from sources
wthn such State by a resdent or corporaton or other entty of the other
contractng State not havng a permanent estabshment In the former State
sha not e ceed 15 percent.
rtce II
The rate of ta mposed by one of the contractng States on royates and
other amounts receved as consderaton for the rght to use copyrghts,
artstc and scentfc works, patents, desgns, secret processes and formuae,
trade-marks and other ke property (ncudng n such royates and other
amounts, rentas and ke payments n respect of moton-pcture fms or
for the use of ndustra, commerca, or scentfc equpment) from sources
wthn such State by a resdent or corporaton or other entty of the other
contractng State not havng a permanent estabshment n the former State
sha not e ceed 15 percent.
rtce III
resdent or corporaton or other entty of one of the contractng States
dervng
(a) ncome from rea property (ncudng gans derved from the sae or
e change of such property, but not ncudng Interest from mortgages or
bonds secured by rea property), or
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667
(b) royates In respect of the operaton of mnes, quarres or other
natura resources stuated wthn the other contractng State may eect,
for any ta abe year, to be sub|ect to the ta of such other State on a net
bass as f such resdent or corporaton or other entty had a permanent
estabshment n such other State durng such ta abe year.

rtce III
or the purpose of the present conventon:
(a) Dvdends pad by a corporaton of one of the contractng States sha
be treated as ncome from sources wthn such State.
(b) Interest pad by one of the contractng States ncudng oca Gov-
ernment thereof or by an enterprse of one of the contractng States not
havng a permanent estabshment n the other contractng State sha be
treated as Income from sources wthn the former State.

(e) Income from rea property (ncudng gans derved from the sae
or e change of such property, but not ncudng nterest from mortgages or
bonds secured by rea property) and royates n respect of the operaton
of mnes, quarres, or other natura resources sha be treated as ncome
derved from the country n whch such rea property, mnes, quarres or
other natura resources are stuated.

(g) Royates for usng, or for the rght to use, n one of the contractng
States, patents, copyrghts, desgns, trade-marks and ke property sha be
treated as ncome from sources wthn such State.

rtce
(1) Organzatons organzed under the aws of apan and operated e cusvey
for regous, chartabe, scentfc, terary or educatona purposes sha, to the
e tent and sub|ect to condtons provded n the Unted States Interna Reve-
nue Code, be e empt from the ta of the Unted States.

rtce II
(1) The competent authortes of both contractng States sha e change such
Informaton avaabe under the respectve ta aws of both contractng States
as s necessary for carryng out the provsons of the present conventon or for
the preventon of fraud or for the admnstraton of statutory provsons aganst
ta avodance n reaton to the ta . ny nformaton so e changed sha be
treated as secret and sha not be dscosed to any person other than those, n-
cudng a court, concerned wth the assessment and coecton of the ta or the
determnaton of appeas n reaton thereto. No nformaton sha be e changed
whch woud dscose any trade, busness, ndustra or professona secret or any
trade process.

rtce I
(1) The provsons of the present conventon sha not be construed to deny
or affect n any manner the rght of dpomatc and consuar offcers to other
or addtona e emptons now en|oyed or whch may hereafter be granted to
such offcers.
(2) The provsons of the present conventon sha not be construed to restrct
In any manner any e empton, deducton, credt or other aowance now or here-
after accorded by the aws of one of the contractng States n determnng the
ta of such State.
(3) Shoud any dffcuty or doubt arse as to the Interpretaton or appcaton
of the present conventon, or ts reatonshp to conventons between one of the
contractng States and any other State, the competent authortes of the con-
tractng States may sette the queson by mutua agreement t beng under-
stood, however, that ths provson sha not be construed to precude the contract-
ng States from settng by negotaton any dspute arsng under the present
conventon.
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668
( ) The competent authortes of both contractng States may prescrbe reg-
uatons necessary to nterpret and carry out the proTsons of the present conven-
ton and may communcate wth each other drecty for the purpose of gvng
effect to the provsons of the present conventon.
rtce
(1) The present conventon sha be ratfed and the nstruments of ratfcaton
sha be e changed at Tokyo as soon as possbe.
(2) The present conventon sha enter nto force on the date of e change
of Instruments of ratfcaton and sha be appcabe to ncome or profts derved
durng the ta abe years begnnng on or after the frst day of anuary of the ca-
endar year n whch such e change takes pace.
(3) ther of the contractng States may termnate the present conventon at
any tme after a perod of 5 years sha have e pred from the date on whch the
present conventon enters nto force, by gvng to the other contractng State
notce of termnaton, provded that such notce s gven on or before the 30th
day of une and, In such event, the present conventon sha cease to be effectve
for the ta abe years begnnng on or after the frst day of anuary of the caen-
dar year ne t foowng that n whch such notce s gven.

(b) Meanng of terms. s used n ths Treasury Decson, any
term defned n the conventon sha have the meanng so assgned to
t any term not so defned sha, uness the conte t otherwse requres,
have the meanng whch such term has under the nterna revenue
aws.
Sec. 506.2. Dvdends. Dvdends pad by a apanese corporaton
sha, n accordance wth rtce III (a) of the conventon, be treated
as ncome from sources wthn apan. Dvdends pad bv such a cor-
poraton, and derved n ta abe vears begnnng on or ater anuary
1,1955, by a nonresdent aen ndvdua or a foregn corporaton are,
therefore, e empt from Unted States ta and are not sub|ect to the
wthhodng of Unted States ta at source, snce the gross ncome of
such persons ncudes ony the gross ncome from sources wthn the
Unted States.
Sec. 506.3. Interest. (a) empt from ta . Interest pad by a
apanese enterprse not havng a permanent estabshment n the
Unted States at any tme durng ts ta abe year sha, n accordance
wth rtce III(b) of the conventon, be treated as ncome from
sources wthn apan. Interest pad by such an enterprse, and de-
rved n ta abe years begnnng on or after anuary 1, 1955, by a
nonresdent aen ndvdua or a foregn corporaton s, therefore,
e empt from Unted States ta and s not sub|ect to the wthhodng
of Unted States ta at source, snce the gross ncome of such persons
ncudes ony the gross ncome from sources wthn the Unted States.
(b) Reduced rate. The rate of Unted States ta mposed upon
nterest (other than nterest fang wthn the scope of paragraph
(a) of ths secton) on bonds, securtes, notes, debentures, or on any
other form of ndebtedness, ncudng nterest on obgatons of the
Unted States, obgatons of nstrumentates of the Unted States,
and mortgages and Donds secured by rea property, whch s receved
from sources wthn the Unted States n ta abe years begnnng on
or after anuary 1, 1955, by a nonresdent aen ndvdua who s a
resdent of apan, or by a apanese corporaton or other enttv, sha
not e ceed 15 percent under the provsons of rtce I of the con-
venton f such aen, corporaton, or other entty at no tme durng the
ta abe year n whch such nterest s receved has a permanent estab-
shment n the Unted States.
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669
(c) Trade or busness. If, n the case of nterest descrbed n para-
graph (b) of ths secton, a nonresdent aen ndvdua who s a res-
dent of apan performs persona servces wthn the Unted States
durng the ta abe year, but has at no tme durng such year a per-
manent estabshment n the Unted States, he s entted to the reduced
rate of ta wth respect to nterest receved n that year from Unted
States sources, as provded n rtce I of the conventon, even
though under the provsons of secton 871 (c) of the Interna evenue
Code of 195 he has engaged n trade or busness wthn the Unted
States durng such year by reason of hs havng performed persona
servces theren.
(d) Reducton n rate of wthhodng at source. (1) Couponbond
nterest. () orm to use. To secure wthhodng of Unted States
ta at the rate of 15 percent at source n the case of coupon bond n-
terest to whch paragraph (b) of ths secton appes, the nonresdent
aen ndvdua who s a resdent of apan, or the apanese corpora-
ton or other entty, sha, for each ssue of bonds, fe orm 1001-
n dupcate when presentng the nterest coupons for payment. Ths
form sha be sgned by the owner of the nterest, trustee, or agent and
sha show the name and address of the obgor, the name and address
of the owner of the nterest, a descrpton of the obgatons, the
amount of nterest and ts due date, and the date upon whch the
nterest coupons were presented for payment. It sha contan a
statement that the owner ( ) s a resdent of apan, or s a apanese
corporaton or other entty, and ( ) has no permanent estabshment
u the Unted States.
() Reducton appcabe ony to owner. The reducton n the rate
of Unted States ta contempated by rtce I of the conventon,
nsofar as t concerns coupon bond nterest, s appcabe ony by the
owner of the nterest. The person presentng the coupon, or on whose
behaf t s presented, sha, for the purpose of the reducton n ta ,
be deemed to be the owner of the nterest ony f he s, at the tme the
coupon s presented for payment, the owner of the bond from whch
the coupon has been detached. If the person presentng the coupon,
or on whose behaf t s presented, s not the owner of the bond, orm
1001, and not orm 1001- , sha be e ecuted.
() Dsposton of form. The orgna and dupcate of orm
1001- sha be forwarded by the wthhodng agent to the Dstrct
Drector of Interna evenue, udt Dvson, en Returns Secton,
atmore 2, Maryand, wth the quartery return on orm 1012.
orm 1001- sha be sted on orm 1012.
(2) Interest not payabe by coupons () orm to use. To secure
wthhodng of Unted States ta at the rate of 15 percent at source n
the case of nterest (other than coupon bond nterest) to whch para-
graph (b) of ths secton appes, the nonresdent aen ndvdua who
s a resdent of apan, or the apanese corporaton or other entty,
sha fe orm 1001 - n dupcate wth the wthhodng agent n the
Unted States. Ths form sha be sgned by the owner of the nterest,
trustee, or agent and sha show the name and address of the obgor
and the name and address of the owner of the nterest. It sha con-
tan a statement that the owner ( ) s a resdent of apan, or s a
apanese corporaton or other entty, and ( ) has no permanent
estabshment n the Unted States.
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() Manner of fng. orm 1001 - sha be fed wth the wth-
hodng agent for each successve 3-caendar-year perod durng whch
such nterest s pad. or ths purpose, the frst such perod sha
commence wth the begnnng of the caendar year n whch such n-
come s frst pad on or after anuary 1, 1955. ach such form
fed wth any wthhodng agent sha be fed not ater than 20
days precedng the date of the frst payment wthn such successve
perod, or, f that s not possbe because of speca crcumstances, as
soon as possbe after such frst payment. Once such a form has been
fed n respect of any 3-caendar-year perod, no addtona orm
1001 - need be fed n respect thereto uness the Commssoner of
Interna Revenue notfes the wthhodng agent that another such
form sha be fed by the ta payer. If, after fng such form, the
ta payer ceases to be egbe for the reduced rate of Unted States ta
granted by rtce I of the conventon n respect to such nterest, he
sha prompty notfy the wthhodng agent by etter n dupcate.
When any change occurs n the ownershp of the nterest as recorded
on the books of the payer, the reducton n rate of wthhodng of
Unted States ta sha no onger appy uness the new owner of record
s entted to and does propery fe a orm 1001 - wth the wth-
hodng agent.
() Dsposton of form. The dupcate of each orm 1001 -
(and etter) sha be mmedatey forwarded by the wthhodng agent
to the Dstrct Drector of Interna Revenue, udt Dvson, en
Returns Secton, atmore 2, Maryand.
Sec. 506. . Patent and Copyrght Royates and m Rentas.
(a) Reduced rate. Under rtce II of the conventon, the rate
of Unted States ta mposed upon royates and other amounts re-
ceved from sources wthn the Unted States n ta abe years begn-
nng on or after anuary 1, 1955, by a nonresdent aen ndvdua
who s a resdent of apan, or by a apanese corporaton or other
entty, as consderaton, for the rght to use copyrghts, artstc and
scentfc works, patents, desgns, secret processes and formuae, trade-
marks, and other ke property, sha not e ceed 15 percent f such
aen, corporaton, or other entty at no tme durng the ta abe year
n whch such tems are receved has a permanent estabshment n
the Unted States.
(b) m rentas. The provsons of ths secton sha appy to
rentas and ke payments n respect of moton pcture fms or for
the use of ndustra, commerca, or scentfc equpment.
(c) Reducton n rate of wthhodng at source. (1) orm to use.
To secure wthhodng of Unted States ta at the rate of 15 percent at
source n the case of the tems of ncome to whch ths secton appes,
the nonresdent aen ndvdua who s a resdent of apan, or the
apanese corporaton or other entty sha fe orm 1001 - n
dupcate wth the wthhodng agent n the Unted States.
(2) Manner of fng. The provsons of secton 506.3(d) (2) reat-
ng to the e ecuton, fng, effectve perod, and dsposa of orm
1001 - are equay appcabe wth respect to the ncome fang
wthn the scope of ths secton.
Sec. 506.5. Reease or cess Ta Wthhed at Sot|bce. (a)
mounts to be reeased. (1) Interest and royates. In the case
of every ta payer whose address at the tme of payment was n
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671
apan and who furnshes to the wthhodng agent orm 1001 - n
accordance wth sectons 506.3(d) (2) and 506. (c), f Unted States
ta at the statutory rate has been wthhed on or after anuary 1,
1955, from the nterest, and royates and other ke amounts, n respect
of whch such form s prescrbed, the wthhodng agent sha reease
and pay over to the person from whom the ta was wthhed an
amount whch s equa to the dfference between the ta so wthhed
and the ta requred to be wthhed pursuant to such sectons.
(2) Coupon bond nterest. () Substtute form. In the case of
every ta payer whose address at the tme of payment was n apan
and who furnshes to the wthhodng agent orm 1001- ceary
marked Substtute and e ecuted n acordance wth secton 506.3
(d)(1), f Unted States ta at the statutory rate has been wthhed
from coupon bond nterest on or after anuary 1,1955, the wthhod-
ng agent sha reease and pay over to the person from whom the ta
was wthhed an amount whch s equa to the dfference between the
ta so wthhed and the ta requred to be wthhed pursuant to such
secton. One such substtute form sha be fed n dupcate wth
respect to each ssue of bonds and w serve wth respect to that ssue
to repace a orms 1001 prevousy fed by the ta payer n the ca-
endar year n whch the e cess ta was wthhed and wth respect to
whch such e cess s reeased.
() Dsposton of form. The orgna and dupcate of substtute
orm 1001- sha be forwarded by the wthhodng agent to the
Dstrct Drector of Interna Revenue, udt Dvson, en Returns
Secton, atmore 2, Maryand, wth the quartery return on orm
1012. Substtute orm 1001- sha be sted on orm 1012.
(3) Dvdends derved from apanese corporaton. If Unted
States ta at the statutory rate has been wthhed on or after anuary
1, 1955, from dvdends pad to a nonresdent aen ndvdua or a
foregn corporaton by a apanese corporaton, the wthhodng agent
sha reease and pay over to the person from whom the ta was
wthhed an amount whch s equa to the ta so wthhed.
( ) Interest pad by apanese enterprse. If Unted States ta at
the statutory rate has been wthhed on or after anuary 1, 1955,
from nterest pad to a nonresdent aen ndvdua or a foregn
corporaton by a apanese enterprse not havng a permanent estab-
shment n the Unted States at any tme durng ts ta abe year,
the wthhodng agent sha reease and pay over to the person from
whom the ta was wthhed an amount whch s equa to the ta so
wthhed.
(b)- mounts not to be reeased. The provsons of ths secton
sha have no appcaton to e cess ta wthhed at source whch has
been pad by the wthhodng agent to the Dstrct Drector of
Interna Revenue.
Sec. 506.6. Informaton To e urnshed n Ordnary Course.
(a) Documents to apan. In compance wth the provsons of
rtce II of the conventon the Commssoner of Interna Revenue
w transmt to the Mnster of nance of apan, as soon as prac-
tcabe after the cose of the caendar year 1955 and of each subsequent
caendar year durng whch the conventon s n effect, the foowng
nformaton reatng to such precedng caendar year:
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672
(1) The dupcate copy of each avaabe orm 10 2 Suppement
fed pursuant to paragraph (b) of ths secton and
(2) The dupcate copy of each avaabe ownershp certfcate,
orm 1001- , fed pursuant to secton 506.3(d)(1), and substtute
orm 1001- , fed pursuant to secton 506.5(a)(2), n connecton
wth coupon bond nterest.
(b) Informaton return by wthhodng agent. (1) orm to use.
To factate compance wth rtce II of the conventon, every
Unted States wthhodng agent sha make and fe n dupcate
wth the Dstrct Drector of Interna Revenue, atmore 2, Mary-
and, an nformaton return on orm 10 2 Suppement, wth respect
to persons havng addresses n apan, whch sha be fed for the
caendar year 1955 and subsequent caendar years. Ths return sha
be fed smutaneousy wth orm 10 2.
(2) Informaton to be gven. There sha be reported on such orm
10 2 Suppement a tems of f ed or determnabe annua or perod-
ca ncome (and amounts descrbed n secton 02(a) (2), secton 631
(b) and (c), and secton 1235 of the Interna Revenue Code of 195 ,
whch are consdered to be gans from the sae or e change of capta
assets) derved from sources wthn the Unted States and pad to
nonresdent aens (ncudng nonresdent aen ndvduas, fducares,
and partnershps) and to nonresdent foregn corporatons, whose ad-
dresses at the tme of payment were n apan, ncudng such tems
of ncome upon whch, n accordance wth ths Treasury Decson, no
wthhodng of Unted States ta s requred e cept that any of such
tems whch consttute nterest n respect of whch orm 1001- or
substtute orm 1001- has been fed n dupcate wth the wthhod-
ng agent s not requred to be reported on such orm 10 2
Suppement.
Sec. 506.7. enefcares of a Domestc state or Trust. If he
otherwse satsfes the requrements of the respectve artces con-
cerned, a nonresdent aen ndvdua who s a resdent of apan and
who s a benefcary of a domestc estate or trust sha be entted to
the e empton from, or reducton n rate of, Unted States ta granted
by rtces I, II, and III of the conventon wth respect to dv-
dends, nterest, and patent royates and other ke amounts, to the
e tent such tem or tems are ncuded n that porton of the ncome of
such estate or trust whch, wthout regard to the conventon, woud be
ncudbe n hs gross ncome. In order to be entted n such nstance
to the e empton from, or reducton n rate of, wthhodng of Unted
States ta such benefcary must otherwse satsfy such requrements
and sha, where appcabe, e ecute and submt to the fducary of
such estate or trust n the Unted States the orm 1001 - prescrbed
n secton 500.3(d) (2) and secton 506. (c).
Sec. 506.8. Sources of Income. or determnng the sources of
ncome for purposes of ths Treasury Decson, see sectons 861 to
80 , ncusve, of the Interna Revenue Code of 195 and rtce III
of the conventon.
Sec. 506.9. ffectve Date (a) Genera. In order to gve the
conventon effectve appcaton at the earest practcabe date, the
e emptons from, and reductons n the rate of, wthhodng of Unted
States ta at source granted by ths Treasury Decson are hereby made
effectve begnnng anuary 1,1955, contngent upon compance wth
the appcabe provsons hereof.
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673
(b) sca years. Snce the conventon s effectve wth respect to
ncome or profts derved durng ta abe years begnnng on or after
anuary 1,1955, the fact that the e empton from, or reducton n the
rate of, wthhodng of Unted States ta at source granted by ths
Treasury Decson s made effectve begnnng anuary 1, 1955, n
respect of the tem of ncome concerned s not a determnaton n
tsef that such tem of ncome s entted to the beneft of the e emp-
ton from, or reduced rate of, Unted States ta granted by the
conventon.
ecause t s necessary to brng nto effect at the earest practcabe
date the rues of ths Treasury Decson respectng reease of e cess
ta wthhed, and e empton from, or reducton n the rate of, wth-
hodng of ta , t s hereby found that t s mpractcabe to ssue ths
Treasury Decson wth notce and pubc procedure thereon under
secton (a) of the dmnstratve Procedure ct, approved une 11,
19 6, or sub|ect to the effectve data mtaton o secton (c) of
that ct.
(Ths Treasury Decson s ssued under the authorty contaned n
sec. 7805 of the Interna Revenue Code of 195 (68 Stat. 917 26
U. S. C. 7805) and n rtce I of the ncome ta conventon be-
tween the Unted States and apan whch was sgned on pr 16,
195 .)
O. Gordon Dek,
ctng Commssoner of Interna Revenue.
pproved pr 22,1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster pr 26, 1955, 8: 51 a. m.)
UNIT D ST T S-R PU LIC O IR L ND
INCOM T CON NTION
T. D. 5897, Secton 7.1002: Interest. Rev. Ru. 55-356.
Interest on Unted States Savngs onds Seres hed as survvng
coowner by a ctzen and resdent of Ireand not engaged n busness
n the Unted States and sub|ect to Irsh ta on such nterest s
e empt from edera ncome ta under rtce II() of the
ncome ta conventon between the Unted States and the Repubc
of Ireand.
dvce has been requested whether accrued nterest receved upon
redempton of Unted States Savngs onds Seres whch were
purchased wth funds of a ctzen of the Unted States s sub|ect to
edera ncome ta n a case where the bonds are regstered n the
name of such ctzen and a ctzen and resdent of the Repubc of
Ireand as coowners and the Unted States ctzen des pror to the
redempton of the bonds.
Secton 691 of the Interna Revenue Code of 195 provdes that
a tems of gross ncome n respect of a decedent whch are not prop-
ery ncudbe n respect of the ta abe perod n whch fas the
date of hs death or a pror perod sha be ncuded n gross ncome,
for the ta abe year when receved, by the one acqurng the rght
to receve such ncome.
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67
owever, rtce II (1) of the ncome ta conventon between
the Unted States and the Repubc of Ireand, T. D. 5897, C. .
1952-1, 89, provdes n part as foows:
Interest (on bonds, securtes, notes, debentures, or any other form of n-
debtedness) derved from sources wthn the Unted States by a resdent of
Ireand who s sub|ect to Irsh ta on such nterest and not engaged n trade
or busness n the Unted States, sha be e empt from Unted States ta .
In vew of the foregong, t s hed that when Unted States Savngs
onds Seres are presented for redempton by a resdent and ct-
zen of Ireand who s not engaged n trade or busness n the Unted
States and who s sub|ect to Irsh ta , the accrued nterest thereon w
not be sub|ect to Unted States ta .
To obvate wthhodng at the source n the case of such nterest
the wthhodng agent shoud be notfed by etter n dupcate sgned
by the owner of the bonds statng that such ncome s e empt from
Unted States ta under the provsons of rtce II (1) of the
conventon. The etter shoud aso contan a statement that the Unted
States Government s obgator, that the owner s resdent n Ireand,
not a ctzen of the Unted States, has no permanent estabshment
n the Unted States, and s sub|ect to Irsh ta on such nterest. See
secton 7.1002(b) of the wthhodng reguatons pertanng to the
ta conventon between the Unted States and the Repubc of Ire-
and, T. D. 5897, supra. Such a etter sha consttute authorzaton
for the payment of such nterest wthout deducton of the ta at
source.
UNIT D ST T S-UNIT D INGDOM D T T
CON NTION
T. D. 55C5, Secton 82.10 : Stus of property. Rev. Ru. 55-163
( so Part II, Secton 863 Reguatons 105,
Secton 81.50.)
Where trust funds hed by a New York trust company under a re-
vocabe deed of trust e ecuted by a resdent and natona of Great
rtan are nvested by the trustee n partcpatng unts of a common
trust fund, the stus of the partcpatng unts s n the Unted States for
edera estate ta purposes.
dvce has been requested whether the partcpatng unts of a
common trust fund purchased wth funds hed by a New York trust
company under a revocabe deed of trust e ecuted by a resdent and
natona of Great rtan have a stus n the Unted States for ed-
era estate ta purposes.
The decedent, a resdent and natona of Great rtan e ecuted
a revocabe deed of trust namng a trust company n New York as
trustee. The funds of ths trust were nvested by the trustee n par-
tcpatng unts of a common trust fund estabshed and operated
under the provsons of secton 100-c of the New York ankng Law.
The ob|ect of a common trust fund s not to hod and conserve par-
tcuar property, wth ncdenta powers, as n the tradtona type
of trust. Ths type of trust s a ega busness entty desgned to pro-
vde a medum for the sharng of profts, capta gans, osses and
e penses by consttuent trusts n proporton to ther contrbuton.
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675
Whe each partcpatng trust shares rataby n the common trust
fund, the e cusve management and contro s vested n the trust
company as trustee and nether a fducary nor any benefcary of a
partcpatng trust sha have or be deemed to have any ownershp n
any partcuar asset or nvestment hed n the common trust fund.
The trust company s requred to keep the assets of the common trust
fund separate from ts own, and n ts fducary capacty may not
dea wth tsef or any affate. Muane v. Centra anover ank
Trust Co., et a., 339 U. S. 306.
The stus of an equtabe nterest n a conventona prvate trust s
determned by reference to the underyng assets. Commssoner v.
Davd arcay Nevus, 76 ed. (2d) 109, Ct. D. 10 9, C. . I -2,
350 (1935). In the nstant case the partcpatng unts consttute the
underyng assets of the trust estabshed by the decedent. Such unts
are aso evdence of the rghts of the trust aganst the trustee of the
common trust fund.
Inasmuch as the reatonshp of debtor and credtor between the
settor and the admnstrator of the common trust fund does not e st,
the partcpatng unts do not consttute a debt wthn the meanng
of rtce 11(2) (c) of the Unted States-Unted ngdom Death
Ta Conventon, C. . 19 7-1,125. In vew of the rghts to share n
the profts, osses, capta gans, and e penses, these unts are n the
nature of propretary nterests. Snce the stus rues of the conven-
ton do not cover ths type of property, the stus s determned under
the aws of the Unted States, the country of nondomce. See rtce
111(2) of the conventon.
In vew of the foregong, t s hed that where trust funds hed by
a New York trust company under a revocabe deed of trust e ecuted
by a resdent and natona of Great rtan are nvested by the trus-
tee n partcpatng unts of a common trust fund, the stus of the
partcpatng unts s n the Unted States for edera estate ta
purposes.
UNIT D ST T S-UNIT D INGDOM INCOM T
CON NTION
T. D. 5569, Secton 7.530: Recproca Rev. Ru. 55-9
admnstratve assstance.
( so Part I, Secton 871 Part II, Secton
211, Reguatons 118, Secton 39.211-7).
The Interna Revenue Servce w rase no ob|ecton to a domes-
tc corporaton s furnshng data appearng on ts Corporaton
Income Ta Return, orm 1120, for the use of a Unted ngdom
bank In behaf of the Unted ngdom stockhoders of the corpora-
ton n order to factate the recognton of the credt aowed under
the Unted ngdom s ta aws for Unted States ta wthhed or
pad by the domestc corporaton.
dvce has been requested whether a domestc corporaton, whch
has been wthhodng a ta of 15 percent on dvdends pad to Unted
ngdom stockhoders of such domestc corporaton, may upon
request by a Unted ngdom bank, provde a statement of data
appearng on the Corporaton Income Ta Return, orm 1120, for
use by such bank n order to factate the recognton of the credt
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676
aowed under the Unted ngdom s ta aws for Unted States ta
wthhed or pad by the domestc corporaton.
Pursuant to rtce I of the ncome ta conventon between the
Unted States and the Unted ngdom of Great rtan and
Northern Ireand, T. D. 5569, C. . 19 7-2, 100, a domestc corpora-
ton has been wthhodng a ta of 15 percent of the amount of
dvdends pad to Unted ngdom stockhoders of the corporaton.
rtce III of such conventon provdes, n part, as foows:
(2) Sub|ect to such provsons (whch sha not affect the genera
prncpe hereof) as may be enacted In the Unted ngdom, Unted
States ta payabe n respect of ncome from sources wthn the
Unted States sha be aowed as a credt aganst any Unted ng-
dom ta payabe n respect of that ncome. Where such ncome s
an ordnary dvdend pad by a Unted States corporaton, such
credt sha take nto account (n addton to any Unted States
ncome ta deducted from or Imposed on such dvdend) the Unted
States ncome ta mposed on such corporaton n respect of ts
profts, and where t s a dvdend pad on partcpatng preference
shares and representng both a dvdend at the f ed rate to whch
the shares are entted and an addtona partcpaton n profts,
such ta on profts sha kewse be taken nto account In so far
as the dvdend e ceeds such f ed rate.
Thus, n contrast to the Unted States system of ta aton, the
rtsh ta aw vews the ta pad by the domestc corporaton as,
n effect, a ta pad proportonatey by the Unted ngdom stock-
hoders thereof and a credt s aowed by the Unted ngdom not
ony for the Unted States ta of 15 percent wthhed from the
dvdends at the source but aso for a porton of the ta pad by such
domestc corporaton.
In accordance wth rtce of the conventon the contractng
partes adopt the prncpe of e change of such nformaton as s
necessary to the admnstraton of the provsons of the conventon
but not ncudng nformaton whch woud dscose any trade secret
or trade process. The practce has e sted snce the effectve date of
the conventon whereby Unted ngdom Inand Revenue authortes
have been furnshed data by the Interna Revenue Servce taken
from orms 1120 of varous named domestc corporatons.
ccordngy, the Interna Revenue Servce w rase no ob|ecton
to a domestc corporaton s furnshng data appearng on ts Corpo-
raton Income Ta Return, orm 1120, for the use of a Unted
ngdom bank n behaf of the Unted ngdom stockhoders of the
corporaton n order to factate the recognton of the credt aowed
under the Unted ngdom s ta aws for Unted States ta wthhed
or pad by the domestc corporaton.
UNIT D ST T S-UNIT D INGDOM O GR T RIT IN
ND NORT RN IR L ND T CON NTION
T. D. 5569, Secton 7.526: stng profes- Rev. Ru. 55-211
sors or teachers.
( so Part II, Secton 22(a) Reguatons
118, Secton 39.22 (a)-2.)
Where the prmary purpose of a professor or teacher from the
Unted ngdom of Great rtan and Northern Ireand n vstng
the Unted States on an e change vstor vsa s to teach, ecture or
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677
Instruct at a unversty for a perod of not more than 2 years from
the date of arrva, hs entre remuneraton s e empt from edera
ncome ta by reason of the provsons of rtce III of the
ncome ta conventon between the Unted States and the Unted
ngdom of Great rtan and Northern Ireand. See Treasury
Decson 5569, C. . 19 7-2, 100.
dvse has been requested whether certan grants and feowshps
receved by natonas of the Unted ngdom of Great rtan and
Northern Ireand n ths country as feows on e change vstor vsas
are e empt from edera ncome ta by reason of rtce III of
the ncome ta conventon between the Unted States and the Unted
ngdom of Great rtan and Northern Ireand.
number of such natonas of foregn countres are at unverstes
n ths country on e change vstor vsas as feows apponted by the
approprate government agency n charge of admnstraton of the
ubnght program. These ndvduas a hod facuty appontments
n the varous unverstes but there are consderabe dfferences n
ther dutes.
rtce III of the Income Ta Conventon between the Unted
States and the Unted ngdom of Great rtan and Northern Ire-
and, Treasury Decson 5569, C. . 19 7-2,100, provdes:
professor or teacher from the terrtory of one of the contractng partes who
vsts the terrtory of the other contractng party for the purpose of teachng, for
a perod not e ceedng 2 years, at a unversty, coege, schoo, or other edu-
catona nsttuton n the terrtory of such other contractng party sha be
e empted by such other contractng party from ta on hs remuneraton for
such teachng for such perod.
If the prmary purpose of a professor or teacher from the Unted
ngdom s vstng the Unted States s to teach, ecture or nstruct
at a Unversty for a perod of not more than 2 years from the date
of arrva and a substanta porton of hs tme s devoted to such
dutes hs entre remuneraton woud be regarded as arsng from
teachng and woud be e empt from edera ncome ta under rtce
III of the ncome ta conventon even though a porton of hs
tme s devoted to research or other functons. Where, however,
the prmary purpose of hs presence n the Unted States s the pursut
of research and ke dutes and any teachng s ncdenta to such
research t cannot be consdered that he s present n the Unted
States for the purpose of teachng wthn the meanng of the e emp-
ton provded n rtce III.
In appyng the above prncpes to the facts of a partcuar case,
t s recognzed that the norma dutes of a teacher embrace not ony
forma cassroom work nvovng reguary schedued ectures, dem-
onstratons or other student-partcpaton actvtes but aso the ess
forma methods of mpartng deas n semnars or other nforma
groups and n efforts undertaken |onty n a aboratory. or e am-
pe, t s often one of the dutes of a teacher n scentfc feds to
supervse the research pro|ects of graduate students. ctvtes n
whch a teacher engages for the purpose of conferrng on students the
beneft of hs knowedge and methods as dstngushed from the pur-
sut of hs own pro|ects woud be consdered a part of hs teachng.
ccordngy, t s hed that f the prmary purpose of a professor
or teacher from the Unted ngdom n vstng the Unted States
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678
on an e change vstor vsa s to teach, ecture or nstruct at a unver-
sty for a perod of not more than 2 years from the date of arrva,
hs entre remuneraton s e empt from edera ncome ta by reason
of the provsons of rtce III of the ncome ta conventon be-
tween the Unted States and the Unted ngdom of Great rtan
and Northern Ireand.
LIST O T CON NTIONS TO W IC T UNIT D
ST T S IS P RTY S O PRIL 11,1955
Conventons reatng to ta es on ncome whch are n effect:
Country
Offca te t
symbo
Sgned
Ratfcatons
e changed
ffectve date
Ctaton
Sweden
Canada
Suppementa
rance
Second Conventon
Suppementa
Unted ngdom
Denmark
Netherands
New Zeaand
Norway
Ireand
Swtzerand-..
South frca
Protoco
nand
egum
Suppementa
Greece
Protoco.
ustraa
Germany
apan
TS 858
TS 9 3
TI S 23 7
TS
TS
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
TI S
885
S
I .IM
15 1 ,
IS I
I M
2.OT
2: .r 7
23S
U0
2510
2510
25
2 33
2 U
2902
2002
2S80
Mar.
Mar.
uno
pr.
uy
() I.
pr.
May
pr.
Mar.
une
Sept.
May
Dec
uy
Mar.
Oct.
Sept.
eb.
pr.
May
uy
pr.
23, 19M
.19 2
12,1950
27. 1832
25,1939
18,19 6
16.19 5
6,19 8
29,19 8
16.19 8
13.19 9
13.19 9
2 ,1951
13.19 6
1 .1950
3,1952
28,19 8
9, 1952
20, 1P50
20.1953
1 ,1853
22, 195
16,195
Nor.
une
Nov.
pr.
Dec.
Oct.
uy
Dec.
Doc.
Dec.
Nov.
Dec.
Sept.
uy-
uy
Doc.
Sept.
Sept.
Dec.
1 .
Dee.
Dec.
pr.
1 . 1939
15,19 2
21,1951
9.1935
30,19
17, 19 9
25,19 6
1, 19 8
1.19 8
18.1951
11,1951
20, 1951
27,1951
15.1952
15.1952
18, 1952
9,1953
9,1953
30, 1953
30,1953
1 .1953
20, 195
1,1955
an. 1,19 0
an. 1,19 1
an. 1,1951
(termnated)
an. 1,19 5
an.
an.
an.
an.
.Ta.
an.
an.
an.
uy
uy
an.
an.
an.
an.
Ian.
an.
an.
an.
1.1950
1,19 5
1,19 8
1,19 7
1,1951
1.1951
1,1951
1.1951
1.19 6
and
1,19 8
1.1952
1,1953
1,1953
1,1953
1,1953
1,1953
1,195
1,1955
C. . 19 0-2, 3
C . 19 3, 526
P. 62 , ths u.
O. . 19 6-1,13
C. . 19 7-2,100
C. . 1950-1,76
C . 1950-1,92
C. . 195 -2,651
C. . 195 -2, 655
C. . 195 -2,626
C. . 195 -2,626
P. 658, ths uD.
Treaty Seres.
Treates and Other Internatona greement Seres.
Conventons reatng to ta es on ncome whch are sgned but not n
effect:
Country Sgned
Unted ngdom Suppementa May 2. , 105
Itay Mar. 30, 1955
esdes the above conventons whch are n effect or have been sgned,
forma negotatons eadng to the draftng of conventons, the te ts
of whch have not yet been setted, have been hed wth ustra, Coom-
ba, Cuba, onduras, Israe, Lu emburg and Uruguay, and e pora-
tory dscussons have taken pace wth representatves of rgentna,
raz, Me co, Paraguay, the Phppnes and enezuea. Proposas
have bet ) made for e tenson of the conventon wth the Netherands
to the Netherands ntes and for e tenson of the conventon wth
the Unted ngdom to den, arbados, rtsh onduras, Cyprus,
Domnca, akand Isands, Gamba, God Coast, Grenada, amaca,
Leeward Isands, Maurtus, Ngera, St. Luca, St. ncent, Sey-
chees, Serra Leone, and Trndad and Tobago.
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679
Conventons reatng to ta es on estates and nhertances whch are
n effect:
Country
Offca te t
symbo
Sgned
Ratfcatons
e changed
ffectve
date
Optona
date
Ctaton
Canada
Suppementa .
Unted ngdom
rance
Protoco..
Norway
Ireand
South frca
Protoco
Swtzerand
nand
Greece
Protoco
ustraa
apan
TS S |
TI 8 23 8
TI S 15 7
TI S 1082
TI S 1982
TI S 2358
TI S 2355
TI S 2509
TI S 2509
TI S 2533
TI S 2595
TI S 2901
TI S 2901
TI S 2880
TI S
une 8, 19
une 12,1950
pr. 16,19 5
eb. 6,19 5
Not. 21,1951
uy 25,19 6
une 1 ,19 1
Nov. 21,1951
uy 25,19 6
Oct.
May
une
Sept.
pr.
uy
uy
Mar.
eb.
uy
May
pr.
IS, 19 15
17,19 8
13.19 9
13.19 9
10, 19 7
1 .1950
9.1951
3.1952
20,1950
18,1953
1 ,1953
16,195
Oct.
Oct.
Dec.
Dec.
uy
uy
Sept.
Dec.
Dec.
Dec.
an.
pr.
17, 19 9
17,19 9
11.1951
20, 1951
15.1952
15,1952
17,1952
18.1952
30.1953
30.1053
7,195
1,1955
Oct.
Oc-t.
Dec.
Dec.
uy
uy
Sept.
Dec.
Dec.
Dec
an.
pr.
17,10 9
17,19 9
11,1951
20.1951
15.1952
15,1952
17,1952
18.1952
30.1953
30,1953
7,195
1,1955
an. 1,19 5
an. 1,1951
uy 1,19
uy 1,19
C. . 19 5,
381
C. . 195 -
2,633
C. . 19 7-
1,125
P. 65 , ths
u.
Conventons reatng to ta es on estates and nhertances whch are
sgned but not n effect:
Country
Sgned
egum May 27.195
Itay Mar. 30,1955
esdes the above conventons whch are n effect, or have been
sgned, forma negotatons eadng to the draftng of conventons, the
te ts of whch st awat settement, have been hed wth ustra,
Coomba, Germany, Lu emburg, Me co, the Phppnes, Sweden
(suppementa conventon) and Uruguay, and e poratory dscussons
have taken pace wth representatves of rgentna, raz, Cuba,
onduras, Inda, Israe, Netherands, New Zeaand and enezuea.
Conventons reatng to ta es on gfts whch are n effect:
Offca e . Ratfcatons
Country tymba Sgned e changed ffectve date
ustraa TI S 2879 May 1 ,1953 Dec. 1 ,1953 Dec. 1 ,1953
The conventon wth apan reatng to ta es on estates and nher-
tances aso reates to gft ta es.
36 050
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680
SU P RT C COMMITT R PORTS
R NU CT O 1955
ouse of Representatves Report No. 69, ghty-fourth Congress, rst Sesson
ebruary 22, 1055
Mr. Cooper, from the Commttee on Ways and Means, submtted the foowng
report to accompany . R. 259 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
259) to provde a 1-year e tenson of the e stng corporate norma-ta rate
and of certan e stng e cse-ta rates, and to provde a 20 credt aganst
the Indvdua Income ta for each persona e empton, havng consdered the
same, report favoraby thereon wthout amendment and recommend that the
b do pass.1
I. Genera Statement
The prncpa features of . R. 239 are as foows:
(1) The b woud provde an addtona 1-year e tenson, from pr 1,
1955, to pr 1, 1956, of the e stng 52-percent corporate ta rate by contnung
the present norma ta rate of 30 percent.
(2) The b woud e tend for one addtona yenr, from pr 1, 1955, to
pr 1, 1956, e stng e cse ta rates on certan acohoc beverages, motor
vehces, gasone, speca fues, and cgarettes.
(3) The b woud provde a 20 ta credt effectve anuary 1, 1956, wth
respect to each persona e empton camed by a ta payer.
It s e pected that the e tensons of the corporate ncome-ta rate and the
e cse-ta rates, whch were requested by the Presdent and whch otherwse
woud be reduced as of ths pr, w Increase revenues n fsca year 1955
by about 191 mon and n fsca year 1956 by about 1,96 mon. The 20
ta credt woud be effectve for the caendar year 1956, the year wth respect
to whch the Presdent ndcated he hoped to make a recommendaton for a
ta reducton. In the fsca year 1956 the reducton w decrease ndvdua
ta abty by 815 mon. The combned effect of the rate e tensons and
the ndvdua ncome-ta reducton means a net ncrease n revenues n the
fsca year 1950 of 1,1 9 mon.
The ndvdua ncome-ta reducton granted In ths b Is desgned prmary
to ad ow-ncome ta payers and to bnance the stmuants provded for nvest-
ment ast year wth ncreased stmuants to consumer purchasng power ne t
year. It w stmuate the demand for consumer products whch n turn w
ncrease the market for producers goods.
II. Revenue ffects
The revenue effects of your commttee s b for the fsca years 1955 and 1956
and aso on a fu year s bass are shown n tabe 1. Tota recepts n the
Presdent s budget are estmated at 59 bon n the fsca year 1955 and 60
bon for the fsca year 1956. Those estmates antcpate revenue of appro -
matey 200 mon n fsca year 1955 and appro matey 2 bon n fsca
year 1956 to be derved from the e tenson of the present corporate and e cse
ta rates as recommended by the Presdent. Wthout these recommended
e tensons, recepts nnder the Presdent s budget woud amount to 58.8 bon
n the fsca year 1955 and 57.7 bon In the fsca year 1950. Your commttee s
b w ncrease revenue over that provded under e stng aw n the fsca
year 1955 by 191 mon and n the fsca year 1956 by 1,1 9 mon.
Ony the e tenson of the e cse ta es s e pected to have any effect on budget
recepts n the fsca year 1955. Under e stng aw the e cse-ta reductons
woud be effectve for pr, May, and une n the fsca year 1955 and the coec-
tons for the fsca year 1955 woud refect most of the reductons for these
months. The reducton n corporate ta es under e stng aw woud not be
refected In recepts n fsca year 1955 because of the ag n corporate ta
Thn net was approved by the Presdent on Mnreh 30, 1955, and Is known as Pubc
Law 18, 8 th Cong., 1st Sess., page 019 of ths uetn.
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681
coectons. Most of the revenue effect from e tendng the present corporate
ncome-ta rate for 1 year beyond pr 1, 1055, woud be refected n coectons
for the fsca year 1956, but some effect w carry over nto the fsca year 1957.
The ndvdua ncome ta reducton resutng from the ta credt of 20 per
e empton woud be effectve n the ast 6 months of the fsca year 1956 (. e.,
the perod from anuary 1 to une 30, 1956). It s estmated that ndvdua
ncome ta es coected through wthhodng or under the decaraton system
w be reduced by 815 mon for the fsca year 1956 as a resut of ths
provson. The 20 per e empton ta credt w be fuy effectve n the fsca
year 1957.
Tabe 1. ffect of . ft. 259 on recepts
(In mons of doars
In the fsca
year
On a fu
bass
1955
1956
.0
-815
-2,093
0
1,075
tenson of certan e cse ta es. ...
191
889
1,080
Tota
191
1,1 9
737
Nora. oor stock rotunds amountng to about 200 mon n 1955 and 195C w be postponed for 1 year
as a resut of e tendng the above-mentoned e cse ta rates.
Source: Prepared by the staff of the ont Commttee on Interna Revenue Ta aton.
III. Ta Cbedt for Indvduas
Secton of your commttee s b aows to a ta payer a 20 ta credt for
each e empton camed by hm wth respect to bmsef and any dependents he
may have. owever, In no case s ths ta reducton to e ceed the ta abty
as otherwse determned. In the case of a marred ta payer wth 2 chdren,
ths secton provdes a ta reducton of 80 e cept where hs ta abty s ess
than that amount, n whch case bs abty woud be competey emnated.
ta payer who quafes for an e tra e empton because he s 65 years of age
or over or bnd w receve an e tra 20 credt wth respect to each such
e empton.
The ta reducton s provded n the form of a credt aganst the ta abty
as otherwse computed. To smpfy the ta computaton for those wth n-
comes beow 5,000 who use the optona ta tabe, ths reducton s refected
n the ta abty as shown n ths tabe.
The 20 ta credt s to be avaabe wth respect to years begnnng after
December 31, 1955. Thus ta payers on a caendar-year bass w receve the re-
ducton provded by ths b for the entre caendar year 1956. or ta payers
on a fsca-year bass ths reducton s avaabe ony wth respect to years
begnnng n 1956.
number of technca amendments were requred by the addton of the 20
credt. These ncude provson for the aowance of ths credt n the case of
estates (but not trusts), the rasng by 100 of the requrement for rng decara-
tons of estmated ta for those wth more than 100 of ncome not sub|ect to
wthhodng, and provson for the proratng of ths credt n the case of short
ta abe years. The 20 credt aso s refected n the revsed wthhodng ta
tabes. Ths w mean that the reducton n ta es dne to the credt w provde
an ncrease n take-home pay effectve anuary 1, 1956.
Tabe 2 shows by seected ad|usted gross-ncome casses the number of ta -
payers under present aw and under the b. It aso shows by these casses
the number of ndvduas reeved of ta under the b and the amount of the
ta reducton and ts percentage dstrbuton. Tabe 3 shows the ta burdens
for a snge person, a marred coupe wth no dependents, and a marred coupe
wth two dependents under present aw and under the b. Ths ndcates the
amount of ta under present aw and the b for seected Income eves, and
the ta reducton for each eve n terms of both doar amounts and percentages.
Tabe shows the effectve rates of ta under present aw and under the b
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682
for seected ncome eves for a snge person wth no dependents, a marred
coupe wth no dependents, and a marred coupe wth two dependents.
Your commttee beeves that ta reef for ndvdua ncome ta payers gen-
eray, and partcuary ow-ncome ta payers, s needed to support an e pandng
economy. The 20 ta credt s equtabe n that t benefts a ta payers and
s dstrbuted to every ta payer eveny on a doar bass wth respect to each
persona e empton. Ths ta reef w be of partcuar beneft to those fames
havng an ad|usted gross ncome of under 5,000, as ndcated n tabe 2.
In order to have e pandng producton we must have ncreasng consumpton.
The ta payers n the ncome cass of 5,000 and under, and ths group ncudes
the vast ma|orty of our ta payers, are the ones who of necessty must spend
most of ther ncome. Ta savngs In ths area mmedatey enters the Naton s
spendng stream. Ths n turn ncreases the demand for consumer goods whch
resuts n greater producton. Ths type of ta reef w have a sustanng and
dynamc effect on our economy.
Your commttee s partcuary concerned that our gross natona product
decned n 195 to 357 bon from ts 1953 eve of 365 bon. Ths decne
ceary ponts out the faure of our economy to refect the growth that shoud
resut from our ncreases n popuaton, abor force, and productvty.
Moreover, unempoyment was 5 percent of the cvan abor force n 195
as contrasted to ony 2.5 percent n 1953. Ths occurred at the same tme the
average workweek In manufacturng decreased from 0.5 to 39.7 hours. The
admnstraton has made optmstc forecasts for the genera eve of busness
condtons In 1955. owever, t appears doubtfu that n 1955 we w reach
the fu empoyment eve of 1953 and mantan t thereafter. ta reducton,
effectve as of the frst of ne t year, however, shoud ead to hgher consumer
e pendtures n 1956 and thereafter.
y grantng ta reef to the great buk of our hard-pressed ta payers who
are n the ow-Income area, the 20 credt w tend to restore baance to our
ta structure. The baance was dstorted ast year wth the enactment of the
Interna Revenue Code of 195 , whch prmary gave reef to busnesses and
ta payers n the hgher ncome eves.
The present admnstraton sponsored ths ta reef ast year on the grounds
that t was necessary to encourage nvestment. Statstcs Indcate that these
ta ncentves for nvestment have not succeeded n hatng the decne n nvest-
ment n pant and equpment. Such nvestment has contnued to decne snce
md-1953. Your commttee beeves that ta concessons to nvestment ncome
w not promote capta goods e panson uness such concessons are couped
wth ta reef desgned to boster demand for consumer goods. The 20 ta
credt w be effectve n accompshng an e panded consumer demand.
The 20 ta credt w make a reaty out of the hope e pressed by the Pres-
dent n hs recent budget message, wheren he stated:
I hope that ta reductons w be so |ustfed ne t year. If so, I sha rec-
ommend a reducton n ta es to spread the reef fary among a ta payers
n a way whch w be the most effectve to reeve Indvdua ta burdens
and to ncrease Incentve for effort and nvestment.
Not ony does the 20 ta credt make a reaty out of ths hope, t aso
spreads the reef fary among a ta payers n a way whch w be the most
effectve to reeve Indvdua ta burdens and to ncrease ncentve for effort
an nvestment.
The 20 ta credt w nsure that those ta payers referred to by the Presdent
w be gven the reef whch he hopes to gve them. t the same tme ths reef
w e pand prvate spendng and tend to offset the contractve effect of our
economy of reductons In Government e pendtures.
The Presdent s statement seems aso to recognze the fact that n order to
reestabsh a baanced ta system, reef must be provded generay for a
ndvdua ta payers. The reef provded ast year, as the estmates have
ndcated and as many ta payers have by now dscovered, gave seectve reef
to hgh-bracket ta payers and sma ta payers benefted ony n e ceptona
cases. Low-Income fames who comprse the vast ma|orty of our mercan
ta payers receved ony a token porton of that ta reef.
The proposed ta credt w tend to more equay dstrbute the ta burden
among the varous Income casses.
The ta reef provded ast year for corporatons had a very substanta effect
on ther profts after ta es. Recent statstcs ndcate that even wth decn-
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683
fng saes corporate profts have- generay ncreased. Ths has meant, tn turn,
arger payments of dvdends to sharehoders who were aso granted ta reef
ast year on such ncome.
fforts ast year to provde more equtabe ta reef amost succeeded n the
ouse. It w aso be recaed that practcay every Member of the other body
on 1 of 3 separate motons voted for a 20 ta credt of one knd or another.
Your commttee beeves that these actons by the Congress ndcated that both
ouses recognzed even ast year that genera ta reef was desrabe.
It s estmated that the defct for fsca year 1956 w be 2. bon. The
20 ta credt, snce t does rot become effectve tnt anuary 1, 1956, woud
add appro matey 815 mon to ths estmated defct, makng the tota 3.2
bon, assumng that there are no reductons n e pendtures as presenty
estmated. Ths tota defct for 1956 woud be 1.3 bon ess than the .5
bon defct for fsca year 1955, whch resuted n part from the ta reductons
provded ast year.
Your commttee made the 20 ta credt effectve anuary 1, 1956, because the
Presdent s budget ndcates that the cash budget w show a substanta sur-
pus n the ast haf of the fsca year 1950, when ths reef woud frst become
effectve.
On tho bass of the foregong dscusson, your commttee beeves that the 20
ta credt, whch provdes reef fary for a ta payers, s fuy warranted.
Shoud there be a deteroracon n word condtons and t becomes necessary to
substantay ncrease our mtary e pendtures, the Congress, as t has done
n the past under such crcumstances, woud have to revew our entre ta
structure to determne where addtona revenues coud be equtaby obtaned.
Tabe 2. stmated dstrbuton of the number of ta payers and tota ta reduc-
ton by ncome casses resutng from a 20 ta credt for each e empton
Number of ta payer n thousands
doar amounts n mons)
Number of ta -
payers
Number of
ta payers
reeved from
a ta a-
bty under
b
Ta reducton
d|usted gross ncome casses
Present
aw

mount
Percent-
age of
tho tota
reducton
gong
to each
ncome
cass
1,575
7,109
12,613
16. 113
13, 76
1,010
6,267
10,563
13.955
13,103
56
26
1 9
311
8
0
1.2
7. 13
,oro- 2 m .
S 2
2,050
1 .86
21. 2
1,159
| O-tt OOO . - -
372
21.01
9,885
,898
,987
1,37
65.65
S5 ooo-tn ono .- -
16,9 7
16,9 7
56
3,606
3,606
125
6.95
616
616
22
1.06
173
173
6
.29


1
.07
6
5
PI
.01
on.non-s.nnn.mn
1
1

TO
m
TO
TO
Tota over .1,000 -
21,39
21,39
719
3 .23
Tota
71,279
66,292
,987
2,093
100.00
Less than 500,000.
Less than 0.005 percent.
Less than 500 ta payers.
None gures may not add to totas due to roundng.
Source: Prepared by the staff of the ont Commttee on Interna Revenue Ta aton.
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68
Tabe 3. Comparson of the ndvdua ncome ta burdens under present aw
and under a ta credt of 20 for each e empton
Income after persona deductons but before
the deductons for persona e emptons
mount of ta
Present aw
nm
Ta reducton under b
80
60
280
260
88
68
71IS
688
9
92
1,780
1,760
2, 36
2. 16
. 8
, 28
0,9 2
6,922
9.796
9.776
20, 3S8
26,368
00.7W
66,778
2 7,27
2 7,25
20, 27
29,25
86 , 78
869, 58
0
0
100.0
fO
120
0
25.0
31 f
320
0
11.1
500
620
0
7.1
760
720
0
5.1
1, 16
1,376
0
1
1,888
1,8 8
0
11
3,200
3,220
0
11
.872
,832
0
.8
6,72
6,68
0
.6
19.592
19,552
0
.2
52.776
52,736
0
.1
222,572
222,532
0
(0
03,5 8
03,508
0
( )
858,5 8
858,508
0
0)
80
120
0
320
2 0
620
0
1,152
1,072
1,592
1,512
2,900
2,820
, 6
,38
f,258
6,188
18. S
18,80
51,912
61,832
221,50
221, 2
02, 56
02,376
857, 56
857,376
mount
Percent
SINGL P RSON. NO D P ND NTS
700
1,000
2,000
3,000
,000
5,000
8,000
10,000...
15,000...
20,000...
25,000...
50,000...
100,000..
300.000..
500,000_.
1,000,000
0)
8
m )
25 0
7.1
1
IS
I
1.1
.
.
.3
.1
.1
M RRI D COUPL , NO D P ND NTS
1, 00
2,000
3.000
.000
5,000
8.000
10.000...
15,000...
20,000...
25,000...
50,000...
100.000..
300,000..
500,000..
1,000,000
M RRI D COUPL , 2 D P ND NTS
2,800
3,000
,000
5,000
8,000
10,000
15,000
20.000
25.000...
50,000...
100,01 1..
300,000..
500,000..
1,000,000
so
80
80
80
so
so
80
so
St)
80
SO
SO
SO
80
Less than 0.05 percent.
Takes Into account the ma mum effectve rate mtaton of 87 percent of ta abe ncome.
Source: Prepared by the staff of the ont Commttee on Interna Revenue Ta aton.
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2
0
1
3
-
0
1
-
2
2

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3
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2

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685
Tabe . Comparson of the ndvdua ncome ta effectve rates under present
ate and under the commttee b to aow a ta credt of tZO to the ta payer
for each of hs e emptons
Income after persona deductons
but before the deductons or
persona, e emptons
Pres-
ent
aw

Income after persona deductons
but before the deductons for
persona e emptons
Pres-
ent
UW

Percent
Percent
2.9
8.0
6.0
1 .0
13.0
16.3
15.6
17.7
17.2
18.9
18.5
22.3
22.0
2 .
2 .2
Percent
29.7
3 .7
39.2
62.8
66.8
82.
85.9
86.9
2.9
8.0
6.0
12.0
10.7
1 .0
13.0
15.2
1 .
17.7
17.2
18.9
18.5
21.7
21.5
M RRI D COUPL ,
TWO D P ND NTS
2300
2.9
20,000.
22.3
25.1
37.8
51.9
73.8
80.5
85.7
21.9
.0
8.0
10.
1 .
16.9
19.3
1.3
6.0
8.8
13.
15.1
18.8
25.000..
2 .8
60,000..
37.6
100,0110
51. S
300,000
73.8
500,000
80.5
1,000,000
85.7
SINGL P RSON, NO D P ND NTS
ron...
1,000..
2,000
3,000..
,000..
IMOO..
16.000..
t.000
15,000....
20,000....
25,000....
50,000....
100,000..
300,000..
500,000..
1,000,000
Percent
29.5
a.n
39. 1
62. 7
68. s
82.
85.9
8 9
M RRI D COUPL NO D P ND NTS
1, 00
2.000
3,000
.000
5,000
8,000
10 00.--..
OUU
20,000....
25,000....
50,000...
100,000..
300,000..
500,000..
1,000,000
2 .
20.
39. 2
. . . s
7 .2
M. 7
85.9
2 .2
26. 7
39. 1
52. 7
7 . 2
M. 7
80.9
1 Takes Into account the ma mum effectve rate mtaton o: 87 percent of ta abe Income.
Source: Prepared by the staff of the ont Commttee on Interna Revenue Ta aton.
I . tenson of the Corporate Income and Certan cse Ta Rates
Tour commtte s b aso e tends for 1 year the present 52 percent corporate
ncome ta rate (composed of a 30-percent rate on the frst 25,000 of earnngs
and 52 percent on earnngs above that amount) otherwse due to revert to 7
percent as of pr 1,1955. Your commttee s b aso e tends the present e cse
ta rates due to be automatcay reduced as of pr 1, 1955. These ncude the
e cse ta es on dsted sprts, beer, wne, cgarettes, gasone, automobes,
motorcyces, trucks, buses, truck traers, automobe parts and accessores, and
dese and speca motor fue. These e cses are descrbed more fuy In tabe 5
whch shows the unt of ta , the rates before and after pr 1, 1956, under ths
b and the revenue effects of these e tensons for the fsca years 1955 and 1950
and aso on a fu-year bass.
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1
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2

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6
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686
Tabe 5. cse ta ratet e tended unt pr. 1,1956,1 under the commttee UU
Unt of a
Rate e -
tended for
perod from
pr. 1,1955,
to Mar. 31,
I960
Rate to be-
come effec-
tve pr. 1,
1956
ffect on revent
u
year of
opera-
ton
sca
1965
sca
1956
M-
on
38
21
M-
on
TI-
Lquor ta es:
: mt
(127
Dst ed sprt
Per proof gaon.
tee
eer ..
8
M
S
Wne:
St wne:
Contanng ess tban
Per wne gaon.
15 cents.....
(2
1 percent a coho.
Contanng 1 to 21
do
percent acoho.
Contanng 21 to 2
do
I2.L5
percent acobo .
do
10. 0
S9
than 2 percent
acoho.
Sparkng wnes, -
queurs, cordas, etc.:
3
7
139

Champagne or
sparkng wne.
do
13. 0
13
Lqueurs, cordas,
etc.
do
1 92
1.60
rtfcay carbon-
ated wnes.
do
S2. 0
2
Manufacturer s e cses:
Per 1,000
.
13.50
6
185
Per gaon
1 cents
31
37
ts
:
Passenger cars and motor-
cyces.
Trucks, buses, truck tra-crs.
uto parts and accessores..
Retaers e cses: Dese and
speca motor fue.
Manufacturers
sae prce.
10 percent...
7 percent
263
3M
- . . . . o . . . . . . . . . .
8 percent
5 percent
53
60

do
do
7
1
9
6
cents
191 1 SS9 1 L .W
These rates were ncreased by the Revenue ct of 1951 and the ncreases were schedu ed to era.nate on
pr. 1, 193 . The c.se Ta Reducton ct o. 19C e tended these ra:c ncreases to pr. 1,1 55.
Source: Prepared by the staff of the ont Commttee on Interna Rev-nue Ta aton.
In addton to e tendng the rates specfed above, your commttee s b aso
postpones for 1 more year the foor stock refunds or credts presenty effectve
wth respect to stocks of varous ta pad products on hand on pr 1, 195. .
These foor stock refunds are avaabe n the case of dsted sprts, wnes, and
beer, cgarettes, gasone, and automobes, motorcyces, trucks, buses, truck tra-
ers, and automobe parts and accessores.
The rate e tenson provded by the b In the case of the corporate ncome
ta s that of the 30-percent norma ta , due to be reduced to 23-percent The
e tenson In ths case makes the 30-percent rate appcabe to ta abe years be-
gnnng and endng before pr 1, 1936, and a 25-percent rate appcabe wth
respect to ta abe years begnnng and endng thereafter. proraton formua,
aready n the Interna Revenue Code, provdes for corporatons whose ta abe
years overap ths date.
Your commttee s b provdes for the e tenson of the corporate ncome-ta
and the e cse-ta rates for another year as requested by the Presdent. Some
2.8 bon of revenue s nvoved on a fu year s bass.
. Detaed panaton of the
The frst secton provdes that the b, when enacted nto aw, may be cted as
the evenue ct of 1935.
Secton 2: Ths secton provdes for a 1-year e tenson of the corporate norma-
ta rate at the 30-percent eve.
Secton 11(b) of the Interna Revenue Code of 195 mposes on corporatons
n genera a norma ta equa to 30 percent of the ta abe Income n the case of
a ta abe year begnnng before pr 1, 1955, and a norma ta equa to 25 per-
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687
cent of the ta abe Income n the case of a ta abe year begnnng after March
31,1955. Under the b, the reducton from 30 percent to 25 percent woud occur
on pr 1,1956, rather than on pr 1,1055.
Secton 11(c) of the 105 Code mposes on corporatons In genera a surta
equa to 22 percent of the amount by whch the ta abe ncome e ceeds 25,000.
No change n the surta rate s provded for n the 195 Code or n the b.
Thus, the effect of the b s to e tend for 1 year the perod durng whch the
combned norma ta and surta on ta abe ncome n e cess of 25,000 w be 52
percent, and to provde that at the e praton of such 1-year perod the com-
bned ta es on such ta abe ncome w be reduced from 52 percent to 7 percent.
Secton 2 of the b aso amends subsectons (a) (1) ( ) and (b) (1) of secton
821 of the 195 Code, whch contan the ta -mposng provsons for certan
mutua nsurance companes (ncudng such companes whch are nternsurers
or recproca underwrters). The effect of the b Is to provde that the reduc-
ton from 30 percent to 25 percent n the rate of the norma ta on the ta abe
ncome of such companes woud occur on pr 1, 1956, rather than on pr 1,
1955.
The contnuaton of the e stng norma ta rate on corporatons for 1 year
automatcay affects computatons under certan other provsons of the 195
Code. or e ampe, secton 511(a) (1) of such Code mposes, on the unreated
busness ta abe ncome of certan chartabe and other organzatons, a norma
ta and surta computed as provded n secton 11. Thus, athough the b
contans no specfc amendment to secton 511(a)(1), the reducton n the ta
mposed by that secton woud take effect on pr 1,1956, rather than on pr
, 1955.
Other e ampes of computatons whch woud be affected by the e tenson of
the 30-percent corporate norma ta rate for 1 year are those under the foowng
sectons of the 105 Code secton 2 (reatng to the deducton for dvdends
receved by corporatons on certan preferred stock of pubc uttes), secton
2 7 (reatng to the deducton for dvdends pad on certan preferred stock of
pubc uttes), secton 522(a) (rentng to ta on certan farmers coopera-
tves), secton 852(b)(1) (reatng to ta on reguated nvestment companes),
secton 922 (reatng to speca deducton In the case of a Western emsphere
trade corporaton), and secton 1361(h)(1) (reatng to ta on unncorporated
busness enterprses eectng to be ta ed as corporatons).
Secton 3: Subsecton (a) of ths secton woud contnue wthout change,
unt pr 1,1956, certan e stng e cse ta rates.
or a tabe showng the types of artces concerned, the unts of ta , the
e stng e cse ta rates, and the rates whch, under the b, woud take effect
on pr 1,1956, see tabe 5 on page 9 of ths report.
The frst sentence of subsecton (b) of ths secton makes the technca
amendments to the 195 Code whch are necessary to refect the 1-year e ten-
son of e stng e cse ta rates made by subsecton (a) of ths secton. The
second sentence of subsecton (b) makes smar conformng amendments to
secton 97 of the evenue ct of 1951 (reatng to refunds on artces from
foregn trade zones).
Secton : Ths secton woud amend the 195 Code by Insertng a new sec-
ton 38, under whch an ndvdua ta payer woud be aowed a credt aganst
ncome ta of 20, mutped by the number of e emptons (ncudng the
addtona e emptons for age and bndness and for dependents) aowed as a
deducton under secton 151 of the 195 Code. The credt woud appy ony In
the case of ta abe years begnnng after December 31, 1955. (There woud
be no parta credt for ta abe years begnnng In 1955 and endng In 1956.)
n estate woud be aowed a credt aganst ncome ta of 20 a trust woud
not be entted to any such credt.
The amount of the credt aowed to the ta payer may not e ceed the amount
of the ta Imposed by chapter 1 of the 195 Code, reduced by certan credts
aganst ta aready aowed by part I of subchapter of chapter 1. These
credts whch must be taken nto account n computng the mtaton on the
new credt are: the credt wth respect to ta es of foregn countres and posses-
sons of the Unted States, the credt for dvdends from certan domestc cor-
poratons receved by ndvduas, the credt for partay ta -e empt Interest
receved by Indvduas, and the credt for retrement ncome.
Secton 6: Ths secton contans the technca amendments necessary to
conform the provsons of the 195 Code to the new secton 38 whch woud
be nserted by secton of the b.
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688
Subsecton (a) of ths secton contans nne numbered paragraphs. Para-
graph (1) woud amend secton 1(d) of the 195 Code to ncude In the cross
references for such secton 1 (whch reates to the rates of ncome ta for nd-
vduas) a reference to the new secton 38.
Paragraph (2) woud amend secton 3 of the 195 Code (reatng to the
optona ta tabe f the ad|usted gross ncome s ess than 5,000) so as to nsert
a new ta tabe. Ths new tabe ncorporates n ts provsons the 20 credt
aganst ncome ta . Thus, f the ta payer s entted to one e empton, the
ta mposed under the new tabe s 20 ess than the ta under the e stng
tabe f he Is entted to three e emptons, the reducton s 60.
Paragraph (3) woud amend secton 21(d) of the 195 Code (reatng to
effect of changes n rates durng a ta abe year.) Ths amendment s necessary
to make t cear that the change In the optona ta tabe (whch change s,
n effect, a change n rates) w appy ony to ta abe years begnnng after
December 31, 1955, and that secton 21 w not cause any reducton n the
optona ta for any ta abe year begnnng before anuary 1, 1956. Snce ths
amendment to subsecton (d) of secton 21 of the 195 Code appes ony to
ta abe years begnnng before anuary 1, 1956, and endng after December
31,. 1955, the e stng provsons of secton 21(d) w contnue to appy to
ta abe years begnnng before anuary 1, 195 , and endng after December 31,
1953.
Paragraph ( ) woud amend the tabe of sectons for part P7 of subchapter
of chapter 1 of the 195 Code to refect the Inserton of the new secton 38, and
the renumberng of the e stng secton 38 as secton 39.
Paragraph (5) woud amend secton 36 of the 195 Code to provde that an
ndvdua eectng to pay the optona ta under secton 3 w not receve the
new credt provded by secton 38. Ths amendment s necessary because the
credt has been fuy refected n the new optona-ta tabe.
Paragraph (6) woud amend secton 151 of the 195 Code (reatng to aow-
ance of deductons for persona e emptons) to add a new subsecton (f). The
new subsecton (f) contans a cross reference to the 20 credt per e empton
provded by the new secton 38.
Paragraph (7) woud amend secton 3(c) of the 195 Code (reatng to re-
turns for ess than 12 months by reason of a change n the annua accountng
perod). Under ths amendment, a reducton n the new credt woud be made
on the same bass as s provded by e stng secton 3(c) for reducng the
amount aowed for each persona e empton.
Paragraph (8) woud amend subsecton (a) of secton 6 2 of the 195 Code
to add a new paragraph ( ). The new paragraph ( ) provdes n effect that an
estate (whch, under secton 6 2(b) of the 195 Code, s entted to one 600
e empton n eu of the persona e emptons aowed by secton 151) woud be
aowed one 20 credt under secton 38(a). The amount of ths credt woud,
of course, be sub|ect to the mtatons set forth In the new secton 38(b).
Paragraph (9) woud amend secton 6015(a) (2) ( ) of the 195 Code (reatng
to the decaraton of estmated ncome ta by Indvduas). Under the e stng
terms of ths provson, an ndvdua s requred to fe a decaraton of estmated
ta If hs gross ncome for the ta abe year can reasonaby be e pected to ncude
more than 100 from sources other than wages and can reasonaby be e pected
to e ceed the sum of ( ) the amount obtaned by mutpyng 600 by the number
of e emptons to whch he s entted under secton 151, pus ( ) 00. The b
woud change the 600 fgure referred to In cause ( ) of the precedng sentence
to 700, n order to ad|ust ths fng requrement to the new 20 credt.
Subsecton (b) of secton 5 contans two numbered paragraphs whch woud
amend the e stng wthhodng tabes to refect the new 20 credt. Paragraph
(1) woud amend the tabe contaned In secton 3 02(b)(1) (reatng to the
percentage method of wthhodng Income ta at source). Paragraph (2) woud
amend the tabes contaned n secton 3 02(c) (1) (reatng to the wage bracket
method of wthhodng ncome ta at source).
Subsecton (c) of secton 5 contans the effectve dates for the amendments
made by subsectons (a) and (b) of that secton. The technca amendments
made by subsecton (a) woud appy ony to ta abe years begnnng after Decem-
ber 31,1955 e cept that the amendment made to secton 21(d) of the 195 Code
by paragraph (3) of subsecton (a) woud appy ony to ta abe years begnnng
before anuary 1, 1956, and endng after December 31, 1955. The amendments
to the wthhodng tabes made by. subsecton (b) of ths secton woud appy
ony wth respect to wages pad after December 31,1955.
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689
I. Changes n stng Law
T T T NSION CT O 1955
Senate Report No. 36, ghty -fourth Congress, rst Sesson, Caendar No. 39
March 1,1955
Mr. yrd, from the Commttee on nance, submtted the foowng report
to accompany . R. 250 :
The Commttee on nance, to whom was referred the b ( . R. 250) to
provde a 1-year e tenson of the e stng corporate norma-ta rate and of
certan e stng e cse-ta rates, and to provde a 20 credt aganst the ndvd-
ua ncome ta for each persona e empton, havng consdered the same, report
favoraby thereon wth amendments and recommend that the b as amended
do pass.
The amendments are as foows:
1. In the frst secton, amend the short tte of the b to be the Ta Rate
tenson ct of 1955.
2. Strke out sectons and 5 of the b (reatng to aowance of 20 credt
for each persona e empton).
3. mend the tte of the b so as to read:
n ct to provde a 1-year e tenson of the e stng corporate norma-ta
rate and of certan e stng e cse-ta rates.
I. Genera Statement
. R. 259, as amended by your commttee, ke the ouse b, provdes for
a 1-year e tenson of the present corporate ncome ta rate and the e stng
rates of certan e cses. The rates of these ta es otherwse are schedued for
redacton on pr 1, 1955. owever, your commttee s b emnates the
sectons of the ouse b provdng an ndvdua Income ta reducton for
1956.
The present 52 percent corporate Income ta rate, wthout the 1-year e ten-
son provded In the b, woud revert to 7 percent as of the 1st of ths pr.
The e cse ta rates whch wthout ths b aso woud be decreased ths pr
are those on acohoc beverages, cgarettes, gasone, automobes, trucks, auto
parts, and dese and speca motor fue.
The Indvdua ncome ta reducton whch woud be provded by the ouse,
but not by your commttee s, b Is a 20 ta credt for each e empton. Ths
woud be effectve begnnng n the caendar year 1956.
Your commttee agrees wth the e tensons of the present corporate and e cse
ta rates because the edera budget s unbaanced for 1955 and 1956 and be-
cause t shows no e pendture reducton n 1956 to offset further ta reducton.
Moreover, your commttee does not beeve that an ndvdua ncome ta reduc-
ton for 1956 s |ustfed ths far n advance. The commttee s not, however,
cosng the door to the future consderaton of an ndvdua ta reducton for
1956 f the fnanca condtons of the Treasury mprove to a suffcent e tent to
make the reducton of ndvdua ta es possbe wthout addng to the debt.
II. Revenue and udget ffects
The revenue effects of your commttee s b and the ouse b for the fsca
years 1955 and 1956, and aso on a fu year s bass, are shown n tabe 1. Ony
the e tenson of the e cse ta es under ether b s e pected to have any effect
on budget recepts n the fsca year 1955. Under e stng aw the e cse ta
reductons woud be effectve for pr, May, and une n the fsca year 1955
and the coectons for the fsca year 1955 woud refect most of the reductons
for these months. Under both bs ths decrease n revenue s avoded. The
reducton n corporate ta es under e stng aw woud not be refected n re-
cepts n fsca year 1955 because of the ag In corporate ta coectons. Most
of the revenue effect from e tendng the present corporate ncome ta rate for 1
year beyond pr 1,1955, w be refected n coectons for the fsca year 1956,
but some effect w carry over Into the fsca year 1957. The ndvdua ncome
Not reproduced.
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690
ta reducton provded by the ouse b, but not your commttee s b, woud
be effectve In the ast 6 months of the fsca year 1956 (1. e., the perod from
auuary 1 to une 30, 1956). It s estmated that Indvdua Income ta es co-
ected through wthhodng or under the decaraton system woud be reduced
by 815 mon for the fsca year 1956 as a resut of ths ouse provson. The
20 per e empton ta credt woud be fuy effectve under the ouse b
n the fsca year 1957.
Tabe 1. Comparson of effect of ouse and nance Commttee bs on recepts
In mons o doars
ISM
In the fsca year
1956
oth
bs
Commttee
b
ouse
b
Commttee
b
ouse
Indvdua Income ta 2C credt ( ouse
b
tenson of 5 percentage ponts of corpo-
0
0
- 815
0
- 2,093
0
1,075
1,075
1,760
1,080
.7S0
191
889
889
1.080
Tota
191
1,96
1,1 9
2.880
737
Source: Sta of the ont Commttee on Interna Revenue Ta aton.
Tabe 2 shows the effect of your commttee s b on the budget for the fsca
years 1955 and 1950. s ths tabe ndcates, e pendtures n the Presdent s
budget are estmated at 63.5 bon and 62. bon, respectvey, for the
fsca years 1955 and 1956. Recepts n the budget as provded for by e stng
aw are estmated at 5S.8 bon and 57.7 bon for these 2 years. Ths
Indcates n both years an e cess of e pendtures over these recepts of .7
bon. The e tenson of the e cse rates as provded In your commttee s
b decreases ths defct to .5 bon In the fsca year 1955. In 1956 the
combned effect of the e cse and corporate ncome ta e tensons reduce the
defct to 2.5 bon. The ouse ncome ta cut woud ncrease ths defct
agan to 3.3 bon.
Tabe 2. ffect of the nance Commttee b on the 1955 and 1956 budgets
In bons of doars
Tsca
year
1955
1956
03.5
62.
58.8
57.7
- .7
ffect of e tendng corporate and e cse ta rates as n commttee b:
.2
0
1 S.O
.2
- .5
-15
The budget estmate of the effect on revenue In the fsca year 1956 of e tendng the corporate and e cse
ta rates s 100 mon above the |ont commttee staff estmate. Usng the budget fgures woud d e :se
the defcts shown by 1U0 mon.
1 These foor-stock refunds, wthout the e tensons, m.ght affect the 1955 nstead o the S6 bud|et.
They, however, are shown as reported In the Presdent s budget.
Source: Staff of the ont Commttee on Interna Revenue Ta aton.
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691
III. Reasons tob mnaton op 20 Indvdua Income Ta Credt
The ouse b woud have aowed a ta payer a 20 ta reducton for each
e empton camed by hm wth respect to hmsef and any dependents he mght
have. ta payer who was 6a or over or bnd woud have receved an e tra
20 wth respect to each such e empton. The ta reducton was to take the
form of a credt aganst the ta abty as otherwse computed but was not to
e ceed ths ta abty. The reducton provded by the ouse b woud have
been effectve for the caendar year 1956 and subsequent years.
Your commttee s b deetes the provsons reatng to ths ta reducton.
Ths reducton s omtted wthout ntendng to mpy, however, that subsequent
events may not |ustfy an ndvdua ncome ta reducton for 1036.
The ta reducton provded by the ouse b woud frst become effectve
some 10 months from now and t s estmated that t woud decrease revenues
n the year endng une 30, 1956, by S15 mon. The fu mpact of the re-
ducton, however, woud not be fet unt the fsca year 1957. In that year
t s estmated that revenues woud be decreased by 2.1 bon. Your commttee
s unabe to te ths far n advance whether the economy n 1956 and 1957 w
need such a reducton. Moreover, your commttee beeves that t woud be most
dffcut to remove such a reducton, once granted, even though subsequent
budgetary and economc condtons shoud show that such a reducton was
unwarranted.
The Presdent s budget presented ths ast anuary forecast a defct of .5
bon for the fsca year 1955 and 2. bon for the fsca year 1956. These
budget fgures aready take nto account the revenue to be ganed from the e -
tenson of the e stng corporate and e cse ta rates. No forecast s as yet
avaabe for 1957 when the ouse reducton woud have ts prncpa mpact.
The 1955 budget s not reduced under ether the ouse or your commttee s
b. The ouse b ncreases the 1956 defct by 815 mon, or to appro -
matey 3.3 bon. St more mportant, the ouse measure woud make a
baanced budget n 1957 much more dffcut to accompsh, because t woud
decrease revenues n that year by 2.1 bon.
It s contended by some that despte the budgetary stuaton, economc con-
dtons demand a ta reducton for ndvduas. Ths has been |ustfed on the
grounds that the gross natona product for the caendar year 195 fe about
8 bon behnd the eve of 1953. Ths decne In economc actvty ast year,
however, woud not appear to requre a ta reducton ne t year. On the con-
trary, most economc ndcators have shown an mprovement n the atter part
of 195 whch s contnued n the eary data avaabe for 1955.
Thus, the gross natona product ncreased n the ast quarter of 195 , as aso
dd the nde of ndustra producton whch (on a premnary bass) showed
further mprovement n anuary of 1955. The factory workweek was engthened
n the atter part of 195 and decned ess than s usua n anuary of 1955.
Unempoyment aso fe n the atter part of 195 . Ths same pattern of m-
provement s repeated In varous other economc Indcators. Certany the
recent Improvement suggests that there s no need to rush n now to make an
ndvdua ta reducton whch w not be effectve unt 10 months from now.
I . tenson of the Corporate Income and Certan cse Ta ates
Tour commttee s b, ke the ouse b, e tends for 1 year the present 52
percent corporate ncome ta rate that otherwse s due to revert to 7 percent
as of pr 1, 1955. The 5 percentage pont reducton woud occur In the 30
percent norma ta to whch a corporate ta abe ncome s sub|ect. The 22
percent surta , whch appes ony to ncome above 25,000, remans unchanged.
Your commttee s b, aso ke the ouse b, e tends for 1 year the present
e cse ta rates due to be automatcay reduced as of pr 1, 1955. These In-
cude the e cse ta es on dsted sprts, beer, wne, cgarettes, gasone, auto-
mobes, trucks, automobe parts and accessores, and dese and speca motor
fue. These e cses are descrbed more fuy n tabe 3 whch shows the unt
of ta , the rates before and after pr 1, 1956, under ths b and the revenue
effects of these e tensons for the fsca years 1055 and 1956 and aso on a fu-
year s bass.
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692
Tabe 3. cse ta rates e tended unt pr. 1, 1956 under both the ouse
commttee bs
Unt of ta
Rate e -
tended for
perod from
pr. 1,19S5,
to Mar. 31,
1956
Rate to be-
come effec-
tve pr. 1,
1956)
ffect on revenue
o
year of
opera-
ton
sca
1955
sca
1956
M-
ons
38
21
/8
M-
on
1127
Lquor ta es:
ont
89
6
Dsted sprts
Per proof gaon.
Per barre
10.50
9
Wne:
9
8
85
St. wne:
Contanng ess than
Per wne gaon..
17 cents
15 cents
1 percent acoho.
Contanng 1 to 21
do
percent acoho.
Contanng 21 to 2
do
2.25
2.
percent acoho.
do
10.50
9
than 2 percent
acoho.
Sparkng wnes, quors,
cordas, etc.:
3
10
Champagne or
sparkng wne.
do
3. 0
3
Lquers, cordas,
etc.
do
1.92
1.60
rtfcay carbon-
ated wnes.
do
2. 0
2
Manufacturer s e cses:
Per 1,000

3.50
6
13
IS
Per gaon
2cents
cents
31
37
219
25(1
Passenger cars and motor-
Manufacturers
sae prce.
10 percent...
7 percent
263
an
8 percent
5 percent
7
7
1
53
60
uto parts and accessores
Retaers e cses: Dese and
speca motor fue
do
do
do
9
6
56
1)1 cents
191
889
1.0S0
1 These rates were ncreased by the Revenue ct of 1951 and the ncreases were schedued to termnate on,
pr. 1, 195 . The cse Ta Reducton ct of 195 e tended these rate ncreases to pr. 1,1955.
Source: Prepared by the staff of the ont Commttee on Interna Revenue Ta aton.
In addton to e tendng the rates specfed above, your commttee s b, and
the ouse b, postpone for 1 more year the foor stock refunds or credts pres-
enty effectve wth respect to stocks of varous ta pad products on hand on
pr 1, 1955. These foor stock refunds are avaabe n the case of dsted
sprts, wnes, and beer, cgarettes, gasone, and automobes, trucks, and auto-
mobe parts and acessores.
The rate e tenson provded by the b n the case of the corporate ncome ta
makes the 52 percent rate appcabe to ta abe years begnnng and endng
before pr 1, 1956, and a 7-percent rate appcabe wth respect to ta abe
years begnnng and endng thereafter. proraton formua, aready n the
Interna Revenue Code, provdes for corporatons whose ta abe years overap
ths date.
Tour commttee has provded for the e tenson of the corporate Income ta
and the e cse ta rates for another year prmary because the present budget
stuaton does not |ustfy such reductons at the present tme. Some 2.8 bon
of revenue s nvoved on a fu year s bass. In ths connecton, the Presdent
In hs recent budget message stated:
ecause we must keep our e stng revenues Intact, I have aready recom-
mended to the Congress n my state of the Unon message that e stng rates
on both e cses and corporate ncomes be e tended for 1 year ny other
course of acton woud resut n ether (1) nadequate e pendtures for
natona securty, or (2) nfatonary borrowng.
Tour commttee s n accord wth the Presdent n beevng that the budget does
not permt these reductons to take pace n 1955.
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693
. Changes n stng Law

T T T NSION CT O 1955
oose of Representatves Report No. 303, ghty-fourth Congress, rst Sesson
March 28,1955
Mr. Cooper, from the commttee of conference, submtted the foowng con-
ference report to accompany . R. 259 :
The commttee of conference on the dsagreeng votes of the two ouses on the
amendments of the Senate to the b ( . R. 259) to provde a 1-year e tenson
of the e stng corporate norma-ta rate and of certan e stng e cse-ta rates,
and to provde a 20 credt aganst the ndvdua Income ta for each persona
e empton, havng met, after fu and free conference, have agreed to recommend
and do recommend to ther respectve ouses as foows:
That the ouse recede from ts dsagreement to the amendments of the Senate
numbered 1 and 2 and agree to the same.
That the ouse recede from ts dsagreement to the amendment of the Senate
to the tte of the b and agree to the same.
ebe Cooper,
W. D. Ms,
Dane Reed,
Thomas . enkns,
Managers on the Part of the ouse.
abby . ybd,
Water . Geoege,
by . . .
RO RT S. ,
. D. MLLI IN,
dward Martn,
Managers on the Part of the Senate.
ST T M NT O T M N G RS ON T P RT O T OUS
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two ouses on the amendments of the Senate to the b ( . R.
259) to provde a 1-year e tenson of the e stng corporate norma-ta rate
and of certan e stng e cse-ta rates, and to provde a 20 credt aganst
the ndvdua Income ta for each persona e empton, submt the foowng
statement n e panaton of the effect of the acton agreed upon by the con-
ferees and recommended n the accompanyng conference report:
mendment No. 1: The frst secton of the ouse b authorzed the b to
be cted as the Revenue ct of 1955. The Senate amendment authorzed the
b to be cted as the Ta Rate tenson ct of 1955 . The ouse recedes.
mendment No.: Sectons and 5 of the ouse b provded for a credt
aganst the ndvdua ncome ta n an amount equa to 20 mutped by the
number of e emptons aowed as deductons n computng ta abe ncome.
The credt t.pped to ta abe years begnnng after December 31, 1955. The
Senate amendment struck out sectons and 5 of the ouse b. The ouse
recedes.
mendment to the tte: The Senate amendment to the tte of the b con-
formed the tte to the amendments made by the Senate to the te t of the b.
The ouse recedes.
ere Cooper,
W. D. Ms,
Dane . Reed,
Tomab . enkns,
Managers on the Part of the ouse.
Not reproduced.
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P RT
DMINISTR TI ND MISC LL N OUS
M TT RS
CUTI ORD R 10583
mendment of ecutve Order No. 10289,1 reatng to the
performance of certan functons affectng the Department of the
Treasury.
v vrtue of the authorty vested n me by secton 301 of tte 3 of
the Unted States Code, and as Presdent of the Unted States, t s
ordered that ecutve Order No. 10289 of September 17, 1951 (16
. R. 9 99), entted Provdng for the Performance of Certan unc-
tons of the Presdent by the Secretary of the Treasury be, and t s
hereby, amended as foows:
1. Paragraph 1 s amended by addng at the end thereof the foow-
ng subparagraph ():
() The authorty whch s now vested n the Presdent by secton 256 (b) of
the Interna Revenue Code (26 U. S. C. 256 (b)), and whch on and after anuary
1.1055, w be vested n the Presdent by secton 735(b) of the Interna Ievenue
Code of 105 , to ssue, n accordance wth the provsons of the sad secton
:TG (b) or 735(b), as the case may be, orders provdng for the regstraton and
the mposton of a speca ta upon a persons n the Cana Zone who produce,
mport, compound, dea n, dspense, se, dstrbute, or gve away narcotc drugs.

Dwgt D. senhower.
The Whte ouse
December 18, 1951 .
( ed wth the Dvson of the edera Regster December 20, 105 , 10:15 a. m.)
s amended by ecutve Order 10583, supra, ecutve Order
10289, nsofar as t reates to nterna revenue affars, reads as foows:
Provdng for the performance of certan functons of the Pres-
dent by the Secretary of the Treasury.
P.y vrtue of the authorty vested n mc by secton 1 of the act of ugust 8,
1950, 0 Stat. 19 (Pubc L.aw 073, 81st Congress), and as Presdent of the
Unted States, t s ordered as foows:
1. The Secretary of the Treasury s hereby desgnated and empowered to per-
form the foowng-descrbed functons of the Presdent wthout the approva,
ratfcaton, or other acton of the Presdent:

(h) The authorty vested n the Presdent by secton 3050 of the Interna
Revenue Code (26 U. S. C. 3050) to estabsh convenent coecton dstrcts (for
tbe purpose of assessng, evyng, and coectng the ta es provded by the nterna
revenue aws), and from tme to tme to ater such dstrcts.
() The authorty whch s now vested n the Presdent by secton 256 (b) of
the Interna Revenue Code (20 U. S. C. 256 (b)), and whch on and after
anuary 1,1055, w be vested n the Presdent by secton 735(b) of the Interna
10 . R. 0100 3 C R, 1901 Supp., p. 69.
(695)
30 050 56 5
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696
Revenue Code of 19.r , to Issue, In accordance wth the provsons of the sad
secton 250 (b) or 7. 5r (b), as the case may be, orders provdng for the regstra-
ton and the mposton of a speca ta upon a persons n the Cana Zone who
produce, mport, compound, dea n, dspense, se, dstrbute, or gve away
narcotc drugs.
2. The Secretary of the Treasury Is hereby desgnated and empowered to per-
form wthout the approva, ratfcaton, or other acton of the Presdent the
foowng functons whch have heretofore, under the respectve provsons of
aw cted, requred the approva of the Presdent n connecton wth ther per-
formance by the Secretary of the Treasury:

(c) The authorty vested In the Secretary of the Treasury by secton 1805 of
the Interna Revenue Code (20 U. S. C. 1805) to Issue rues and reguatons (wth
respect to sver buon) necessary or proper to carry out the purposes of the
sad secton.

. s used n ths order, the term functons embraces dutes, powers, respon-
sbtes, authorty, or dscreton, and the term perform may be construed to
mean e ercse.
5. actons heretofore taken by the Presdent In respect of the matters
affected by ths order and n force at the tme of the Issnnnee of ths order, n-
cudng reguatons prescrbed by the Presdent n respect of such matters, sha,
e cept as they may be nconsstent wth the provsons of ths order, reman n
effect unt amended, modfed, or revoked pursuant to the authorty conferred
by ths order.
CUTI ORD R 10586
Desgnatng Certan Offcers to ct as Secretary of the Treasury
y vrtue of the authorty vested n me by secton 179 of the Re-
vsed Statutes (5U.S.C.6), and secton 301 of tte 3 of the Unted
States Code, t s ordered as foows:
In case of the death, resgnaton, absence, or sckness of the Secre-
tary of the Treasury and the Under Secretary of the Treasury, the
foowng-desgnated offcers of the Treasury Department sha, n the
order of successon ndcated, act as Secretary of the Treasury unt a
successor s apponted or unt the absence or sckness of the ncumbent
sha cease:
1. Under Secretary for Monetary ffars.
2. ssstant Secretares, n the order f ed from tme to tme by the
Secretary of the Treasury.
3. Genera Counse.
ecutve Order No. 871 of March 18,19 1, entted Desgnatng
Certan Offcers To ct as Secretary of the Treasury n Case of b-
sence or Sckness of the Secretary , s hereby revoked.
Dwght D. senhower.
The Whte ouse,
anuary 13,1055.
( ed wth the Dvson of the edera Regster anuary 13, 1955, 3: 52 p. m.)
CUTI ORD R 10602
Desgnatng the Secretary of the Interor as the Representatve of
the Presdent to approve the obgaton and e pendture of certan
moneys by the Government of the rgn Isands.
y vrtue of the authorty vested n me by secton 7652(b) (3) of
the Interna Revenue Code of 195 (Pubc Law 591, 83rd Cong., 68
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697
Stat. 907), I hereby desgnate the Secretary of the Interor as the
representatve of the Presdent to approve the obgaton and e pend-
ture by the government of the rgn Isands of the moneys referred
to n the sad secton 7652 (b) (3).
Dwght D. senhower.
The Whte ouse,
March 23, 1955.
( ed wth the Dvson of the edera Regster March 2 , 1955, 10: 22 a. m.)
PROCL M TION 3082
Determnng , -Dpheny-6-Dmethyamno-3- e anone to be
an Opate.
y the Pbesdent of the Unted States of merca
Procamaton
W R S secton 731(g) of the Interna Revenue Code of 195
provdes n part as foows:
Opate. The word opate , as used n ths part sha mean any drug (as
defned n the edera ood, Drug, and Cosmetc ct 52 Stat. 10 1, secton
201(g) 21 U. S. C. 321) found by the Secretary or hs deegate, after due notce
and opportunty for pubc hearng, to have an addcton-formng or addcton-
sustanng abty smar to morphne or cocane, and procamed by the
Presdent to have been so found by the Secretary or hs deegate.
ND W R S, the Secretary of the Treasury, after due notce
and opportunty for pubc hearng, has found that the foowng
named drug has an addcton-formng or addcton-sustanng a-
bty smar to morphne, and that n the pubc nterest ths fndng
shoud be effectve mmedatey:
, -dpheny-6-dmethyamno-3-he anone.
NOW, T R OR , I, DWIG T D. IS N OW R, Pres-
dent of the Unted States of merca, do hereby procam that the
Secretary of the Treasury has found that the aforementoned drug
has an addcton-formng or addcton-sustanng abty smar to
morphne and that n the pubc nterest ths fndng shoud be effec-
tve mmedatey.
IN WITN SS W R O , I have hereunto set my hand and
caused the sea of the Unted States of merca to be aff ed.
DON at the Cty of Washngton ths 23d day of ebruary n
the year of our Lord nneteen hundred and ffty-fve, and of the
Independence of the Unted States of merca the one hundred and
seventy-nnth.
(sea) Dwght D. senhower
y the Presdent:
erbert oover, r.,
ctng Secretary of State.
( . R. Doc. 55-18 0 ed wth the Dvson of the edera Regster
eb. 28, 1055 3:03 p. m.)
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698
T. D. 6118
TITL 26 INT RN L R NU
Temporary rues reatng to the Income ta and admnstratve
matters under the Interna Revenue Code of 195 .
Treasuby Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On ugust 27,195 , notce of proposed rue makng wth respect to
temporary rues reatng to ncome ta and admnstratve matters
under Interna Revenue Code of 195 were pubshed n the edera
Regster (19 . R. 5 90). fter consderaton of a such reevant
matter as was presented by nterested persons, the proposed rues
have been modfed as set forth beow and are hereby adopted:
Tabe of Contents
Paragrap
1 nnutes certan proceeds of endowment and fe nsurance contracts
actuara tabes.
2 Income from dscharge of ndebtedness speca rue of e cuson tme
and manner of fng consent to ad|ustment of bass.
3 greements as to usefu fe and rate of deprecaton.
Chartabe, etc., contrbutons and gfts mtatons for ndvduas spe-
ca rue.
5 Research and e permenta e pendtures.
6 So and water conservaton e pendtures treated as e penses not charge-
abe to capta account.
7 Organzatona e pendtures tme and manner of makng eecton.
8 Prepad ncome.
9 ccrua of rea property ta es.
10 Reserves for estmated e penses.
11 Undstrbuted persona hodng company ncome.
12 Deducton for defcency dvdends.
13 Undstrbuted foregn persona hodng company ncome ta es eecton.
1 Defnton of property speca rue as to operatng mnera nterests
eecton to aggregate under secton 61 (b).
15 Defnton of property speca rue as to nonoperatng mnera Interests
permsson to aggregate separate nterests under secton 61 (c).
16 Speca rues appcabe to dstrbutons by trusts n frst 65 days of
ta abe year.
17 oregn ta credt aowed to sharehoders of a reguated nvestment
company manner of makng eecton and notfyng sharehoders.
18 d|usted bass ncome from dscharge of ndebtedness.
19 Defntons agreements treated as determnatons.
20 Notce of quafcaton as e ecutor or recever.
21 utomatc e tensou of tme for fng corporaton ncome ta returns.
The foowng rues, prescrbed under the Interna Revenue Code
of 195 (Pubc Law 591, 83d Cong., approved ug. 16, 195 ), reate
to certan eectons or other actons by ta payers under provsons of
such Code whch do not correspond to provsons of the Interna Rev-
enue Code of 1989 (as to cases nvovng correspondng provsons,
see sec. 7807 of the Interna Revenue Code of 195 and T. D. C091,
approved ug. 16,195 ).
The rues set forth heren are desgned to nform ta payers as to
how, when, and where to perform certan acts requred or permtted
under the Interna Revenue Code of 195 . More comprehensve rues
wth respect to the sub|ects nvoved w be ncorporated n subse-
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699
quent reguatons under the Code. The ncuson n ths Treasury
Decson of rues reatng to certan acts s ntended to assst ta pay-
ers n the performance of such acts. Rues wth respect to other acts
requred or permtted by other provsons of the 195 Code w be
covered n subsequent reguatons.
Paragraph 1. nnutes Certan Proceeds of ndowment and Lfe In-
stance Contracts ctuara Tabes. (a) ppcaton of paragraph. The
computatons and rues set forth In ths paragraph are to be used to determne
the e tent to whch amounts receved n nstaments (to whch secton 72 ap-
pes) under annuty, fe Insurance, or endowment contracts are e cudabe from
the gross ncome of the recpent, e cept for those cases where the speca rues
of secton 72(d), (e), (g), (h), (|), or (k) appy.
(b) Genera rue. (1) cuson rato. In order to determne the amount to
e cude from gross ncome an e cuson roo Is to be found for the partcuar
contract. Ths e cuson rato s apped to the tota recepts under the contract
for the ta abe year of the recpent. The dfference between the tota recepts
and the resut of the computaton s to be ncuded n the gross Income of the
recpent. The e cuson rato s determned by dvdng the Investment n the
contract nt the annuty startng date by the e pected return under the contract.
Such nvestment n the contract sha consst of the aggregate of premums and
other consderaton pad ess the aggregate of any amount or amounts receved
before the annuty startng dnte to the e tent that such amounts were e cudabe
from the gross ncome of the recpent. Thus, assumng that the nvestment In
the contract s 12, 0 and the e pected return s 16,000, the e cuson rato Is
12,G50/ 1C,000, or 70.1 percent (79.00 rounded to the nearest tenth). If the
monthy payment s 100, the amount to be e cuded from gross Income In con-
necton wth each monthy payment s 79.10 (79.1 percent of 100). Thus, f
12 such monthy payments are receved, the tota amount to be e cuded for
the ta abe year Is 0 9.20 (12 79.10) and 250.80 s the amount to be Incuded
n the gross ncome of the annutant.
(2) nnuty startng date. The annuty startng date (e cept In the case
of an annuty descrbed In subparagraph (d) (2)) s the frst day of the frst
perod for whch an amount s receved as an annuty under the contract, e cept
that f such date was before anuary 1, 195 , then the annuty startng date Is
anuary 1, 195 . In the case of an annuty descrbed n subparagraph (d) (2),
the annuty startng date s anuary 1, 105 , or the frst day of the frst perod
for whch an amount s receved as an annuty under the contract by the survv-
ng annutant, whchever s ater. The frst day of the frst perod for whch an
amount s receved as an annuty sha be whchever s the Inter of the foowng:
(I) The date upon whch the obgatons of the contract become f ed, or
() The frst day of the perod (year, haf-year, quarter, or month de-
pendng on whether payments are to be made annuay, semannuay, quar-
tery, or monthy) whch ends on the date of the frst annuty payment.
(3) pected return for one annutant. In the case of an annuty, endow-
ment, or fe nsurance contract under whch one annutant s to receve a monthy
ncome for fe, the e pected return s determned by mutpyng the annua pay-
ment by the mutpe shown n Tabe I of subparagraph (f) under the age and
se of the annutant as of the annuty startng date. Thus, where a mae has
purchased a snge-premum-mmedate annuty of 100 per month for hs fe
and at the tme of purchase (n ths case the annuty startng date) the annu-
tant s age at hs nearest brthday s 00, the e pected return s computed as
foows:
Monthy payment of 100 12 months equas annua payment of 1, 200
Mutpe shown n Tabe I, mae, age CO 1 .
pected return ( 1,200 1 . ) 17,280
( ) d|ustment of mutpe for eary or other than monthy payments. If
payments are to be made quartery, semannuay, or annuay, or f the nterva
between the annuty startng date and the date of the frst payment s ess than
the nterva between future payments, an ad|ustment of the appcabe mutpe
shown In Tabe I may be requred, but no such ad|ustment s requred f the
payments are to be made more frequenty than monthy. The amount of the
ad|ustment, If any, s to be found n accordance wth the foowng tabe:
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700
If the number of
wboe months
from the annuty
startng date to
the frst payment
date ts
L ss
than
1
1
3
s

5
s
7
8 9
10
11 12
nd payments un-
der the contract
arc to be made:
0.5
.3
.2
.1
0.5
.2
1
0
0.
.1
0
0.3
0
0.2
0
0.1
-.1
0
-.2
0
-0.1
-as
-0.3
-0.
-0.5
Semannuay..
uartery
-.1
Monthy
Thus, at age CO, mae, the mutpe found n Tabe I, ad|usted for quartery pay-
ments the frst of whch s to be made 1 fu month after the annuty startng
date, s 1 .5 (1 . .1) for semannua payments the frst of whch s 6 fu
months from he annuty startng date, the ad|usted mutpe s 1 .2 (1 . .2)
for annua payments the frst of whch s 1 fu month from the annuty startng
date, the ad|usted mutpe Is 1 .9 (1 . .5). If the annutant n the e ampe
shown n subparagraph (b) (3) were to receve an annua payment of 1,200 12
fu months after hs annuty startng date, the amount of the e pected return
woud be 10,080 ( 1,200 1 . .5 13.9 ).
(5) pected return under unform payment |ont and survvor annuty. In
the case of a |ont and survvorshp contract nvovng two annutants whch
provdes the frst annutant wth a monthy ncome for fe and, after the death
of the frst annutant, provdes an dentca monthy ncome for fe to a second
annutant, the e pected return sha be determned by mutpyng the amount of
the annua payment by the mutpe shown n Tabe II under the ages and se es
of the annutants as of the annuty startng date. or e ampe, a husband
purchased a |ont and survvorshp annuty contract provdng for payments of
100 per month for fe and, after hs death, for the same amount to hs wfe
for the remander of her fe. t the annuty startng date hs age at hs near-
est brthday s 70 and that of hs wfe s 07. The e pected return s computed
as foows:
Tweve monthy payments of 100 1,200
Mutpe shown n Tabe II (mae, age 70 femae, age 07) 19. 7
pected return ( 1,200 19.7) 23,0 0
n ad|ustment of the appcabe mutpe shown In Tabe II s requred where
payments under a |ont and survvorshp contrnct are made quartery, seman-
nuay, or annuay, or where the Interva between the annuty startng date and
the date of the frst payment s ess than the nterva between future payments.
Ths ad|ustment sha be made n the same manner as descrbed n subparagraph
(b)( ).
(0) pected return under varabe payment ont and survvor annutes.
() In the case of a contract whch provdes that a specfed annutant s to re-
ceve a certan payment as an annuty for fe and after hs death a reduced an-
nuty Is to be pad to a specfed survvor (but not f the second annutant
predeceases the frst), the e pected return sha be computed n the foowng
manner. The mutpe appcabe to the frst annutant s to be found n Tabe I
as though the contract were for a snge fe annuty. The porton of the e -
pected return wth respect to the frst annutant s then computed by appyng the
mutpe so found n Tabe I to the tota payments receved annuay. See the
e ampe n subparagraph (b) (3).
Tabe II s then used to ocate the mutpe under both of the annutants ages
as of ther nearest brthdays on the annuty startng date. The mutpe so de-
termned for both annutants s reduced by the amount of the snge fe mutpe
determned for the frst annutant. The dfference Is then mutped by the
amount of the tota payment to be receved annuay by the second annutant
dd ths resut to the porton of the e pected return wth respect to the frst an-
nutant to obtan the e pected return under the contract These prncpes may
be ustrated by the foowng e ampe:
ampe. husband purchased a |ont and survvorshp annuty contract
provdng for payments of 100 per month ( 1,200 per year) for fe and, after
hs death, payments to hs wfe of 50 per month ( 600 per year) for fe. t
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701
the annuty startng date, hs nearest brthday s 70 nnd thnt of hs wfe 67. The
e pected return under the contract s computed as foows:
Mutpe from Tabe II (mae, age 70 femae, age 67) 19. 7
Mutpe from Tabe I (mae, age 70) 12.1
Dfference (mutpe appcabe to second annutant) 7.6
Porton of e pected return (second annutant), 7.6 600 , r 60
Porton of e pected return (frst annutant), 12.1 1,200 1 ,520
pected return under the contract 19,080
The tota e pected return (n ths e ampe, 19,080) s to be used n computng
the amount to be e cuded from gross ncome. Thus, f the nvestment n the
contract n ths e ampe s 1 ,310, the e cuson rato s 1 ,310/ 19,080, or 75
percent. The amount e cudabe from each monthy payment made to the husband
s 75 percent of 100, or 75, and 25 of each payment receved n hs ta nbe year
by the annutant w be ncuded n hs gross ncome. fter the husband s
death, the amount to be e cuded by the survvng wfe woud be 75 percent of
each monthy payment of 50, or 37.50, and 12.50 of each payment receved
n her ta abe year woud be ncudbe n her gross ncome. n ad|ustment of
the appcabe mutpes shown n Tabes I and II s requred where payments
under a |ont and survvorshp contract are made quartery, semannuay, or
annuay, or where the nterva between the annuty startng date and the date
of the frst payment s ess than the nterva between future payments. Ths
ad|ustment sha be made n the same manner as descrbed n subparagraph
(b) ( ).
() In the case of a contract whch provdes that a certan amount s to be
pad as an annuty to a specfed annutant for the |ont ves of such annutant
and another person, or s to be pad |onty to both durng ther |ont ves, and
a smaer amount s to be pad as an annuty to the survvor regardess of whch
of the annutants s the frst to de, the e pected return sha be computed n
the foowng manner. Tabe II s used to ocate the mutpe under both the
annutants ages as of ther nearest brthdays on the annuty startng date. The
mutpe so determned s reduced by the mutpe under both the annutants ages
fonnd n Tabe II . The dfference s then mutped by the amount of the
reduced payment to be receved annuay by the survvor annutant. dd ths
resut to the porton of the e pected return obtaned by mutpyng the mutpe
found n Tabe II by the tota payment to be receved annuay whe both
annutants are ave. These prncpes may be Iustrated by the foowng
e ampe:
ampe. husband purchased a ont nnd survvorshp annuty contract pro-
vdng for payments of 100 per month ( 1,200 per year) for as ong as both
he and hs wfe ve, and, after the death of the frst to de, payments to the
survvor of 00 a month ( 000 per year) for fe. t the annuty startng date,
hs nearest brthday s 70 and that of hs wfe 07. The e pected return under
the contract s computed as foows:
Mutpe from Tabe II (mae, age 70 femae, nge 07) 19.7
Mutpe from Tabe II (mae, age 70 femae, age 67) 9.3
Dfference 10.
Porton of e pected return (reduced payment), 10. 000 1_ 6,2 0
Porton of e pected return (fu payment), 9.3 1,200 11,100
pected return under the contract 17, 00
The tota e pected return (n ths e ampe, 17, 00) s to be used n computng
the amount to be e cuded from gross ncome. Thus, f the nvestment n the
contract In ths e ampe s 13,250, the e cuson rato s 13,250/ 17, 00, or
0.1 percent. The amount e cudabe from each monthy payment made whe
both are ave s 76.1 percent of 100, or 76.10, and 23.90 of each payment re-
ceved n the ta abe year w be ncuded n gross Income. fter the death of
the frst to de, the amount to be e cuded by the survvor woud be 70.1 percent
of each monthy payment of 50, or 38.05, and 11.95 of each payment receved
n hs or her ta abe year (as the case may be) woud be ncudbe n hs or
her gross ncome. n ad|ustment of the appcabe mutpes shown n Tabes II
and II s requred where payments under a |ont and survvorshp contract
ere made quartery, semannuay, or annuay, or where the nterva between
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702
the annuty startng date and the date of the frst payment Is ess than the
nterva between future payments. Ths ad|ustment sha be made n the same
manner as descrbed n subparagraph (b) ( ).
(7) pected return for term certan. In the case of an annuty whch s
to be pad for a term certan such as a f ed number of months or years, wthout
regard to fe e pectancy, the e pected return s determned by mutpyng the
f ed number of years or months, as the case may be, by the amount of the pay-
neut provded In the contract for each such perod.
(c) cuson tchere there a refund feature. If (/) the e pected return
under a contract depends to some e tent on fe e pectancy, (2) the annuty
contract provdes for payments to a benefcary or the estate of an annutant,
and (3) such payments are n the nature of a refund of the consderaton pad,
the nvestment n the contract s to be determned n the foowng manner:
(1) Determne the number of years necessary for the guaranteed amount
to be fuy pad by dvdng the ma mum amount guaranteed as of the
annuty startng date by the amount to be receved annuay under the con-
tract The number of years shoud be stated n terms of the nearest whoe
year consderng for ths purpose a fracton of one-haf or more as the ne t
greater number of whoe years.
() Consut Tnbe III for the approprate percentage under the whoe
number of years found n () and the age of the annutant at the annuty
startng date.
() Usng the percentage found n (), fnd the percentage of whchever
of the foowng s the smaer: (a) the nvestment n the contract as of
the annuty startng date or (6) the tota amount guaranteed as of such date.
(v) Subtract the amount found n () to the nearest doar from the
nvestment n the contract as of the annuty startng date.
The resut s the nvestment In the contract ad|usted for the vaue of the refund
feature and s to be used n determnng the e cuson rato. No ad|ustment
smnr to that requred by subparagraph (b) ( ) s requred to the percentage
found n Tube III. These prncpes may be ustrated by the foowng
e ampe:
ampe. husband, age 65, purchased for 21,053, an Immedate Instament
refund annuty payabe 100 per month for fe. The contract provded that
n the event the husband dd not ve ong enough to recover the fu purchase
prce, payments were to be made to hs wfe unt the tota payments under the
contract equaed the purchase prce. The Investment n the contract ad|usted
for the purpose of determnng the e cuson rato s computed n the foowng
manner:
Cost of the annuty contract (nvestment n the contract, unad|usted).. 21,053
mount to be receved annuay 1,200
Number of years for whch payment s guaranteed ( 21,053
dvded by 1,200) 17.5
Rounded to nearest whoe number of years 18
Percentage ocated n Tabe III for age 05 (age of the annutant
as of the annuty startng date) and 18 (the number of whoe
years) 30
I/ess vaue of refund feature to the nearest doar (30 of
21,053) 6,316
Investment n the contract ad|usted for the vaue of the re-
fund feature 1 ,737
In the case of contracts, under whch the nvestment n the contract s ess than
the guaranteed amount, ony the porton of the guaranteed amount whch does
not e ceed the nvestment n the contract consttutes a refund of the premums
or other consderaton pad.
(d) Speca rues reatng to nvestment n the contract. (1) mpoyer con-
trbutons. The term aggregate of premums and other consderaton pad, for
the purposes of ths paragraph, sha ncude not ony amounts contrbuted by the
empoyee, but aso amounts contrbuted by the empoyer to the e tent that ()
such amounts were ncudbe n the gross ncome of the empoyee at the tme
contrbuted or () such amounts woud not have been Incudbe In the gross
Income of the empoyee had they bee pad drecty to the empoyee at the tme
contrbuted by the empoyer.
In addton to the foregong, any amount found e cudabe under paragraphs
(1) nnd (2) (D) of secton 101(b), under paragraph (1) of secton 22(b) of the
Interna Revenue Code of 1939, or under reguatons wth respect to ether of
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these, sha aso be treated as consderaton pad by the empoyee. Contrbutons
of empoyers e cudabe from empoyees gross ncome at the tme contrbuted
whch, had they been pad drecty to the empoyees, woud have been ncudbe
n ther gross ncome are not to be ncuded n the aggregate of premums and
other consderaton pad n determnng nvestment n the contract. Thus, f
an empoyer made contrbutons, under a quafed pan, toward the purchase
of a contract provdng an annuty for an empoyee or hs benefcary, and f
such contrbuton woud have been ta abe ncome to the empoyee at the tme
had t been pad drecty to hm ns compensaton nstead, the aggregate of pre-
mums and other consderaton pad woud not ncude such contrbutons.
(2) Certan survvor annutants. In the case of a |ont and survvor annuty
contract n respect of whch the frst annutant ded n 1951, 1952, or 1953, secton
72(1) requres that the aggregate of premums or other consderaton pad
wth respect to the survvng annutant sha be the bass of the contract as deter-
mned under secton 113(a) (5) of the Interna Revenue Code of 1939. ( or rues
governng ths determnaton, see Regs. 118, 39.113(a) (5)-.) In determnng
such survvng annutant s nvestment n the contract, such aggregate sha be
reduced ony by amounts receved under the contract by the survvng annutant
aone and so receved before the annuty startng date to the e tent such an
amount was e cudabe from hs gross ncome at the tme of recept. or defn-
ton of annuty startng date for such cases, see subparagraph (b) (2) of ths
paragraph.
(e) Speca cases. If the terms of the contract are such that Tabes I, II,
II , and III cannot be correcty apped, assstance shoud be requested from
the offce of the Dstrct Drector of Interna Revenue wth whom the ncome
ta return s to be fed. In such cases the computaton sha be made on the
bass of tabes whch w be consstent wth Tabes I, II, II , and III.
(f) Tabes. The tabes to be used n connecton wth ths paragraph are
as foows:
Tabe I. Ordnary fe annutes one fe e pected return mutpes
ges
Mutpes
ges
Mutpes
ge|
Mutpes
Mae
emae
Mae
emao
Mae
emae
f.
11
65.0
1
6
33.0
76
81
9.1
7
12
G . 1
2
7
32.1
77
82
8.7
s
13
63.2
3
8
31.2
78
83
8.3

1
62.3

9
30.
79
8
7.8
10
IS
61.
5
50
29.6
80
86
7.5
11
16
60.
6
51
28.7
81
86
7.1
11
17
59.5
7
62
27.9
82
87
6.7
1.3
18
58.6
8
63
27.1
83
88
6.3
1
19
57.7
9
6
26.3
8
89
6.0
13
20
56.7
50
65
25.5
86
90
6.7
It
21
55.8
51
56
2 .7
86
91
5
IT
22
5 .9
62
67
2 .0
87
92
6.1
s
23
53.9
63
68
23.2
88
93
.8
19
2
53.0
5
58
22.
89
9
.5
a
25
52.1
55
60
21.7
90
95
.2
a
26
27
51.1
50.2
56
67
61
62
21.0
20.3
91
02
93
9
06
97
98
99
100
.0
3.7
3.5
3.3
3.1
22
23
28
9.3
58
63
19.6
2
29
30
8.3
7.
59
60
6
18.9
18.2
95
25
65
26
31
6.5
61
66
17.5
9f
97
101
102
2,9
27
32
5.6
62
67
16.9
98
103
2.7
2.6
2.3
2.1
28
33
.6
63
68
16.2
99
10
29
3
3.7
6
69
16.0
100
105
30
35
2.8
66
70
15.0
31
38
1.9
66
71
1 .
101
106
1.9
32
37
1.0
67
72
13.8
102
107
1.7
33
38
0.0
68
73
13.2
103
108
1.5
3
39
39.1
69
7
1Z6
10
109
1.3
35
0
38.2
70
75
12,1
105
110
1.2
106
111
L0
36
1
37.3
71
76
11.6
107
112
.8
37
2
36.6
72
77
11.0
108
113
.7
38
3
35.6
73
78
10.5
109
11
.0
39

3 .7
7
79
10.1
110
115
.3
0
5
33.8
75
80
9.6
111
116
0
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Tabe II. Ordnary |ont fe and ast survvor annutes two ves e pected
return mutpes
ges
Mae
36
N
37
2
38
3
38
0
6
1
2
8

6
6
61
17
Mae
emae
0
1

6
7
18
9
80

35
3t
87
0
1
2
3

5
6.2
5.7
5.2
5.3
.8
.3
.
.0
3.5
2.9
2.
1.9
1.
3.6
3.1
2.6
2.0
1.5
1.0
3.3
2.7
2.1
3.0
2.3
L8
2.6
1 3
1.7
1.1
2.0
1.
0.7
1. S
1.1
.8
.3
3.9
3.
2.9
2.
2.0
3.8
3.3
..
0.8
0.
38
1.6
1.0
0.5
1.2
0.6
0.1
0.5
39.9
39.3
a
39.S
a 2
39.5
38.9
39.2
39.7
38.6
6
7
8
9
0.5
0.0
39.6
39.1
39.1
39.2
38.7
38.2
37.7
38.8
38.2
37.7
37.2
36.8
3S.
38.0
37.8
37.3
36.8
36.3
37.5
38.6
8.9
86.
60
35-
51
35.9
35.
ges
52
35.U
Mae
8
53
9
6
60
55
61
66
62
57
53
M
65
60
66
61
57
62
18
63
60
Mae
emae
58
69
6
t
36
36
0
1
2
3

5
1.6
1.3
1.0
0.8
0.1
39.
38.7
38.0
37.
0.6
39.9
3 . 2
38.5
37.8
37.1
0.
39.7
39.0
38.3
37.0
36.9
0.3
39. 5
38.8
38.1
37.3
36.6
tt
39.3
38.6
37.9
37.1
36.
0.0
39.2
38.
37.7
36.9
36.2
39.8
39.0
38.3
37.5
36.8
36.0
39.7
38.9
38.1
37.3
36.6
35.9
39.6
38.8
38.0
37.2
36.
36.7
3a:
37
38
3D
0
0. 8
0.2
39. 6
38.9
38.3
0.6
39.9
39.2
38.6
38.0
0.3
39.6
39.0
38. 3
37.7
38.6
37.9
37.1
36.3
35.5
1
2
3

6
7
8
9
50
37.7
37. 1
3115
36. 0
35.5
37.3
37.0
36.
35.8
35.3
3 .7
36.7
36.1
35. 5
3 .9
3 .
36.5
35.8
35.2
31. 0
3 .0
36.2
36.0
35.3
3 .7
3 .0
33.
36.7
35.1
3 .
33.8
33.1
35.5
3 .8
3 .2
33.5
32.9
35.3
3 .6
33.9
33.3
32.6
35.1
3 .
33.7
33.0
32.
35.0
3 .2
3 .S
3 .1
33.3
32.6
3L9
36.8
36.2
35.6
35.1
35.6
3 .9
3 .3
33.7
sae
5
32.8
32.2
6
7
8
9
51
52
53
5
55
35.0
3 .5
31.0
3 .6
3 .1
33.0
33. 1
3 .2
33.8
33.3
32. 8
32. 3
33.5
32.9
32.
31.9
31.
33.1
32.6
32. 0
31.5
31.0
32.8
32.2
31.7
31.2
30.6
32.5
81.9
32.2
31.6
31.1
32.0
31.
30.8
80.2
29.6
81.7
31.1
30.5
29.9
29.3
31.5
30.9
30.2
29.6
29.0
31.3
33.7
33.2
32.7
32.3
sae
31.
30.8
30.3
30.5
29.9
30.0
29.
50
31.8
28.8
66
57
58
60
60
31.
30.9
30.5
30.5
30. 1
29.6
30.1
29.8
29.3
28.8
28.3
27.9
20.
28.9
28.
27.9
27.5
29.1
28.6
28.1
27.6
27.1
28.8
28.2
27.7
27.2
26.7
28.5
27.9
27.
26.9
26.
28.2
29.7
29.2
28.8
77 5
27.1
26.5
26.0
61
62
63
6
27.1
26.7
26.2
26.3
25.8
26.
25.9
25.
25.0
2 .6
25.5
25.1
2 .6
2 .2
65
23.S
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Tabe II. Ordnary |ont fe and ast survvor annutes two ves e pected
return mutpes Contnued
ges
Mae
61
66
62
63
68
6
65
70
66
71
67
72
68
73
69
7
70
75
71
72
73
Mae
emae
67
69
76
77
rs
33
0
39.
39.3
39.2
39.1
39.0
38.9
38.9
38.8
38.8
38.7
38.7
38.6
38.6
33
1
38.6
38.
as. 3
38.2
38.2
38.1
38.0
38.0
37.9
37.9
37.8
37.8
37.7
37
3
37.7
37.6
37.5
37.
37.3
37.3
37.2
37.1
37.1
37.0
36.9
36.9
36.9
38
3
38.9
36.8
36.7
36.6
36.5
36.
36.
36.3
36.2
36.2
36.1
30.0
36.0
39

36.3
36.0
35.9
35.8
35.7
35.6
35.5
35.5
35.
35.3
35.3
5. 2
a5. 2
m
5
36.
35.3
35.1
35.0
3 .9
3 .8
3 .7
3 .6
3 .6
3 .5
3 .
3 .
3 .3
1
8
3 .6
3 .5
31. I
3 .2
3 .1
3 .0
33.9
33.8
33.8
3a7
316
a. 5
33.5
a
7
33.8
33. 7
33.6
33.5
33. 1
33.2
33.1
33. (I
aao
32.9
32.8
32 7
32.7
a
8
33.2
33.0
32.9
327
326
326
32
323
322
321
32 0
31.9
31.9
M

32.5
32.3
32.1
32 0
31. S
31.7
31.6
31.6
31.
31.3
31.2
31.1
31.1
3
SO
31.8
31. 0
31.-1
31.3
31.1
31.0
30.8
307
306
30.5
30.
30.
30.3
8
51
31.1
30.9
30.7
30.5
30.
30.2
30.1
30.0
29.9
29.8
29.7
29.6
29.5
7
53
30.
30.2
30.0
29.8
29.7
29.5
29.
29.3
29.1
29.0
28.9
28.8
28.7
8
63
29.8
29.5
29.3
29.2
29.0
28.8
217
28.5
28.
28.3
28.2
28.1
28.0
0
6
29.1
28.9
28.7
28.5
28.3
28.1
28.0
27.8
27.7
27.6
27.5
27.
27.3
30
55
38.5
28.3
38.1
27.8
27.6
27.5
27.3
27.1
27.0
26.9
26.7
26.6
20.5
a
M
37.9
27.7
27.
27.2
27.0
26.8
26.6
26.5
28.3
26.2
26.0
25.9
25.8
S3
67
27.3
27.1
26.8
26.6
26.
2(1.2
26.0
25.8
26.7
25.5
25.
25.2
25.1
S3
68
26.8
26.5
28.2
211.1)
25.8
25.6
25.
25.2
25.0
2 .8
2 .7
2 .6
2 .
1
68
36.2
25.9
25.7
25.
25.2
25.0
2 .7
2 .6
2 .
2 .2
2 .0
23.9
23.8

60
26.7
25.
25.1
2 .9
2 .6
2 .
2 .1
23.
23. S
23.(1
21
23.3
2a
M
61
35.2
2 .9
2 .6
2 .3
2 .1
23.8
23.6
23.
23.2
23.0
228
226
22.5
57
83
2 .7
2 .
2 .1
23.8
23.5
23 3
23.0
228
22.6
22
22.2
220
21.9
S3
63
2 .3
23.9
23.6
23.3
23.0
22.7
225
222
220
21.8
21.6
21.
21.3
59
6
23.8
2a 5
23.1
22.8
225
22.2
21.9
21.7
21.5
21.2
21.0
20.9
20.7
to
65
23.
23.0
22 7
22.3
220
21.7
21.
21.2
209
20.7
20.5
20.3
20.1
a
66
23.0
22.6
22.2
21.9
21.6
21.3
21.0
20.7
20.
20.2
20.0
19.8
19.6
81
67
......
22.2
21.8
21.6
21.1
20.3
20.5
20.2
19.9
19.7
19.5
19.2
19.0
a
68
21.
21.1
20.7
20.7
20.3
20
20.0
20.1
19.6
19.8
19.3
19.5
19.0
19.2
19.0
18.5
18.7
18.2
18.5
18.0
0
68
18.7
63
70
19.8
18.6
19.2
s. 9
18. 0
18.3
18. 0
17.8
17.3
17.6
17.1
W
71
18.2
18.8
18.5
18.2
17.9
17.6
(7
73
18 6
a
17.8
17.5
17.2
16.8
10.7
89
73
7
17.8
17.
17.1
17.1
16.7
16.8
16.
16.5
16.1
16.2
m
15.8
n
75
16.
16.1
15.8
15.5
71
76
77
16.7
15.
15 1
15.1
1 .8
1 .
73
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700
Tabe II. Ordnary |ont fe and ast survvor annutes ttco ves e pected
return mutves Contnued
ges
Mae
7
75
76
77
82
78
83
79
8
80
85
81
86
83
87
88
8
88
S
Mae
omae
79
80
81
as

35
0
38.(
38.5
38.5
38.1
38.
38.
38.
38.
38.
38.
38.3
38.3
3.,
1
37.7
37.6
37.6
37.6
37.6
37.6
37.5
37.5
37.5
37.6
37.5
37.
D7
2
36.8
36.8
36.7
36.7
30.7
36.7
36.6
38.6
36.6
36.6
36.6
36.5

3
36. U
35.9
35.9
35.9
35.8
36.8
35.8
35.8
35.7
35.7
36.7
35.7
38

35. 1
35.1
35.0
35.0
35.0
3 .9
3 .9
3 .9
3 .9
3 .8
3 . S
S
0
5
3 .3
3 .2
3 .2
3 .1
3 . 1
3 .1
3 .1
3 .0
3 .0
3 .0
3 .0
3 .0
1
0
33.
33.
33.3
33.3
33.3
33.2
33.2
33.2
33.2
33.1
38.1
311
2
7
32.6
32.6
32.5
32 5
32
32.
32.
32 3
323
323
33.3
32.1
3
8
31.8
31.8
31.7
31.7
31.6
31.6
31.5
31.5
31.6
31.6
31.
31.

0
31.0
30.9
30.9
30.8
30.8
30.8
30.7
30.7
30.7
30.6
30.6
sat
5
50
30.2
30. 1
30.
30.0
30.0
29.9
29.9
29.9
29.8
29.8
28.8
29.
6
51
2 .
29.
29.3
28.2
29.2
29.2
29.1
29.1
29.0
29.0
28.0
28.5
7
52
28.7
28.6
28.5
28.5
28.
28.
28.3
28.3
28.2
28.2
28.2
28.1
8
53
27.8
27.8
27.8
27.7
27.6
27.6
27.5
27.5
27.5
27.
27.
27.
9
5
27.2
27.1
27.0
26.9
26.9
26.8
26.8
26.7
26.7
26.6
26.6

60
55
26.
26.3
26.3
26.2
26.1
26.1
28.0
26.0
25.9
25.9
25.8
2 .S
51
56
25.7
25.6
25.5
25.5
25.
25.3
35.3
25.2
26.2
26.1
25.1
210
52
67
25.0
2 .9
2 .8
2 .7
2 .7
2 .6
2 .5
2 .5
2 .
2 .
2 .3
2 .3
53
58
2 .3
2 .2
2 . 1
2 .0
23.9
23.9
23.8
23.7
217
23.6
28.6
23.
5
69
23.6
23.5
23.
23.3
23.2
23.2
23.1
23.0
23.0
229
229
T-
55
60
23.0
22.9
22.8
22.7
22.6
22.5
22.
223
223
222
222
:
56
61
22.3
22.2
22.1
22.0
21.9
21.8
21.7
21.6
21.6
21.8
21.5
n
57
62
21.7
21.f
21.5
21.3
21.2
21.1
21.1
21.0
20.9
20.8
20.8
20.7
58
63
21.1
21.0
20.8
20.7
20.6
20.5
20.
20.3
20.2
20.2
20.1
.o
59
6
20.5
20.
20.2
20.1
20.0
19.9
19.8
19.7
19.6
19.5
19.
19.
60
65
19.9
19.8
19.6
19.5
19.
19.3
19.1
19.0
19.0
18.9
18 8
117
61
06
19.
19.2
19.1
18.9
18.8
18.7
1.1.5
18.
18.3
IS. 3
18.2
111
62
67
18.8
18.7
18.5
18.3
18.2
18. 1
18.0
17.8
17.7
17.7
17.6
17.
3
68
18.3

18.0
17.8
17.6
17.6
17.
17.3
17.2
17.1
17.0
I
6
f.9
17.8
17.0
17.
17.3
17.1
17.0
. 8
16.7
16.6
16.5
16.
Mv
66
70
17.3
17.1
16.9
16.7
16.6
1C
16.3
16.2
16.0
15.9
16.8
15.8
66
71
10.9
I . 6
16.
16.3
16.1
15.9
15.8
15.6
16.5
15.
16.3
112
67
72
f.
16.2
16.0
15.8
15. 6
15.
16. 3
15. 1
15.0
1 .9
1 .8
1 .7
68
73
10.0
15.7
15. 5
15.3
15.1
15.0
1 .8
1 .6
1 .6
1 .
1 .3
1 .2
69
7
15.6
15.3
15.1
1 .9
1 .7
1 .5
1 .3
1 .2
1 .0
13.9
13.8
117
70
75
15.2
1 .0
1 .7
1 .5
1 .3
1 .1
. . |
13.7
13 .6
13.
13.3
113
71
76
1 .8
1 .5
1 .3
1 .1
13.8
13.6
13.5
13.3
13.1
13.0
128
117
72
77
1 .5
1 .2
13.9
13.7
13.6
13.2
13.0
12.9
12.7
125
12
12.3
73
78
1 . 1
13.8
13.6
13.3
13.1
12.9
12.7
125
12 3
121
120
11.1
7
79
13.8
13.5
13.2
13.0
12.7
12 5
12.3
12 1
11.9
11.7
11.6
U.
75
80
13.2
12.9
12.6
12.
12.2
11.9
11.7
11.6
11.
11.2
at
T.
81
82
12.6
2.3
12.1
12.1
11.8
11.8
11.5
11.6
11.3
11.
11.1
11.2
10.8
11.0
10.7
10.8
10.7
77
10.5
10.3
78
83
11.6
11.2
11.0
10.7
10.5
10.3
10.1
ao
79
8
11.0
10.7
10.
10.5
10.2
10.2
10.0
10.0
8.7
9.8
9.5

80
85
9.3
81
86
87
9.9
9.7
9.
9.5
8.2
9.3
9.0
8.1
82
88
83
88
89
90
9.0
87
8
8
S5
8..
86
8.1
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707
Tabe II . nnutes for |ont fe ony ttco ves ewpectcd return mutpes
pa
Mae
36
36
1
37
2
38
3
39

0
1
2
7
3

9
5
6
51
7
Mae
emae
0
5
6
8
50
62

36
37
0
1
3
3

6
30.3
29.9
29.5
29.
29.0
28.6
29.0
28.6
28.2
28.5
28.2
27.8
27.
27.0
28.0
27.5
27.2
26.9
20.5
262
25.8
27.0
26.7
26.
20. 1
25.8
25.
26.8
26.2
25.9
25.6
25.3
25.0
26.0
25.7
25. 5
25.2
2 .8
2 .5
25.5
25.2
25.0
2 .7
2 .
2 .1
2 .9
2 .7
2 .
2 .2
23.9
23.0
2 .
27.7
27.3
27.0
26.6
26.2
2 .2
38
39
27.8
23.7
0
23. 1
1
6
7
8
0
60
25.
25.0
2 .6
2 .6
2 .2
23.9
2 .2
23.8
23.5
23.1
23.8
23.
23. 1
22.7
22.
23.3
23.0
22.7
22.3
22.0
22.9
2
3

5
21.6
6
51
21.6
21.2
7
52
1
ges
Maa
8
53
9
6
60
61
56
62
53
68
5
59
55
60
56
61
57
62
58
63
59
6
60
Mae
emae
66
67
66
IS
0
1
2
3

5
23.8
23.6
23.
23.2
22.9
22.7
23.3
23.1
22.7
22.5
22.3
22.1
21.9
21.7
22.1
22.0
21.8
21.6
21.
21.2
21.6
21.
21.2
21.1
20.9
20.7
21.0
20.
19.8
19.7
19.6
19.
19.3
19.1
19.3
19.1
19.0
18.9
18.7
18.6
18 7
18.1
18.0
17.9
17.8
17.7
17.5
17.5
17.
17.3
17.2
17.1
17.0
17.0
16.9
16.8
16.7
16.6
16.5
36
37
38
22.0
22.6
22.
22.2
20.8
20.7
20.5
20.3
20.1
20.3
20.1
20.0
19.8
19.6
18.6
18.
18.3
18.2
18.0
39
0
1
6
7
8
9
50
22.
22.1
21.8
21.5
21.2
21.9
21.6
21.
21.1
20.8
21.
20.9
20.7
20.5
20.2
19.9
20.
20.2
20.0
19.8
ID. 6
19.9
19.7
19.5
19.3
19.1
19.
19.2
19.0
18.8
18.6
18.9
18.7
18.6
18.
18.1
18.
17.9
17.
17.2
17.1
16. 9
16.7
16.9
16.7
16. 6
16. -1
10.3
16.3
16.2
16.1
2
3

21.2
20.9
20.6
20.
18.2
18.1
17.9
17.7
17.7
17.6
17.
17.2
15. .)
15.8
6
7
8
0
SO
SI
62
63
6
20.9
20.5
20.2
20.6
20.1
10.8
19.5
20.1
19.8
19.
19.1
18.8
19.7
10.
19.1
1 8
18.
19.2
19.0
18.7
18.
18.1
18.8
18.5
18.3
18.0
17.7
18.
17.9
17.7
17.5
17.2
16.9
17.5
17.3
17.0
16.8
16.6
17.0
16. 6
16.
16.2
16.1)
15.8
16.1
15.9
15.7
15.5
15.3
15.0
15. 5
15.3
15.1
1 .9
55
18.1
17.9
17.6
17.3
16.8
16. 6
16.
16.2
SI
SI
67
68
69
60
18.1
17.8
17.
17.
17.0
16. 8
16.
16. 1
16.7
16.
16.1
15.8
16.3
16.0
15.8
1.1.5
15.2
15.9
15.5
15.3
15.1
1 .8
1 .5
IS. 1
1 .9
1 .7
1 .
1 .2
1 .7
52
17.1
16.8
15.7
IS.
15.1
1 .9
53
1 .3
5
55
15.5

61
1 .9
1 .6
1 .3
1 .3
1 .0
13.9
13.7
13.
13.1
67
62
63
6
05
58
CO
12.8
60
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708
Tabe II . nnutes for |ont fe ony two ve e pected return
mutpes Contnued
ges
Mae
61
66
62
63
68
6
69
66
66
7
72
68
73
69
70
71
72
77
n
Mae
emae
67
70
71
7
75
76
7
38
0
16.
15.8
15.3
1 .7
1 .2
13.7
13.1
116
12.1
11.6
11.1
10.7
10.2
3
1
16.3
15.8
15.2
1 .7
1 .1
13.6
13.1
12.6
12.1
11.6
11.1
10.6
10.3
37
2
I . 2
15.7
15.1
1 .6
1 .1
13.6
13.0
12.5
12.0
11.5
III
o. e
10.1
38
3
16. 1
15.8
15.1
1 .5
1 .0
13.5
13.0
12.5
12.0
11.5
11.0
10.6
10.1
39

16.0
15.5
15.0
1 .5
13.9
13.
12.9
12.
11.9
11.5
11.0
10.5
10.1
to
5
15.9
16.
1 .9
1 .
13.9
13.
12.9
12.
11.9
11.
11.0
10.5
10.0
1
6
15.8
16.3
1 .8
1 .3
13.8
13.3
12 8
12.3
11.8
11.
10.9
10.5
10.0
2
7
15.7
15.2
1 .7
1 .2
13.7
13.2
12.7
12.3
11.8
11.3
10.
a
ao
3
8
15.6
15.1
1 .0
1 .1
13.6
13.1
12.7
12.2
11.7
11.3
10 8
10.
9.9

9
15.5
15.0
1 .5
1 .0
13.5
13.1
12.6
12.1
11.7
11.2
10.8
10.3
9.9
5
60
16.3
118
1 .
13.0
13.
13.0
12.5
12.0
11.6
11.1
10 7
10.3
9.8
8
51
15.2
1 .7
1 .2
13.8
13.3
12.9
12.
12.0
11.5
11.1
10.6
10.2
9.8
7
52
15.0
1 .6
1 .1
13.7
13.2
12.8
12.3
11.9
11.
11.0
10.6
10.1
9.7
8
63
1 .9
1 .
1 .0
13.5
13.1
12.6
12.2
11.8
11.3
10.9
10.5
10.1
9.7
9
M
1 .7
1 .3
13.8
13.
13.0
12.5
12.1
11.7
11.3
10.8
10.
10.0
9.6
80
55
1 .5
111
13.7
13.3
12.8
12.
12.0
11.6
11.2
10 7
10 3
9.9
S.5
51
56
1 .3
13.9
13.6
13.1
12.7
12.3
11.9
11.8
11.1
10.7
10 3
9.9
9.5
52
57
1 .1
13.7
13.3
12.9
12.5
12.1
11.7
11.3
10.9
10.6
10.2
9.8
9.
S3
68
13.9
13.6
13.2
12.8
12.
12.0
11.6
11.2
10.8
10.5
10.1
9.7
9.3
8
59
13.7
13.
13.0
12.6
12.2
11.9
11.5
11.1
10.7
10.3
10.0
9.6
9.2
88
60
13.5
13.2
12.8
12.
12.1
11.7
11.3
11.0
10.6
10 2
9.9
9.5
9.1
88
61
13.3
12.9
12.6
12.2
11.9
11.8
11.2
10.8
10.5
10.1
9.8
9.
9.0
57
62
13.0
12 7
12.
12.0
11.7
11.
11.0
10.7
10.3
10.0
9.6
9.3
8.9
58
63
12.8
12.5
12.2
11.8
11.5
11.2
10.9
10.5
as
9.8
9.6
9.2
8.8
59
6
12.6
12 3
11.9
11.6
11.3
11.0
10.7
10.
10.11
9.7
9.
9.1
8.7
60
65
12.3
12.0
11.7
11.
1L1
10 8
10.5
10.2
9.9
9.6
9.3
8.9
8.6
61
66
12.0
11.8
11.6
11.2
10.9
10.6
10.3
10.0
9.7
9.
9.1
8.8
8.5
62
67
11.5
11.2
11.0
10.7
10.
10.1
9.8
9.6
9.3
9.0
8.7
8
63
68
11.0
10.7
10.5
10.2
9.9
9. 7
9.
S.
8.9
8.8
8.8
8.7
8.6
8.5
8.
8.2
8.2
8.1
8.0
6
69
10.5
10.2
10.0
9.7
9.5
9 2
68
70
10 0
9.8
9.5
9.3
8.0
66
71
9.5
9.3
9.1
8.8
8.6
8.6
8.
8. 2
8.3
8.1
8.0
7.8
8.1
7.9
7.8
67
72
9.1
8.9
7.7
5
68
73
8.6
8.
7.7
7.6
69
7
8.2
8.0
7.3
70
75
7 8
7.6
7.
7.2
71
76
77
78
7.
7.2
7.0
7 0
72
6.
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709
Tabe II . nnutes for |ont fe ony tro veg-
mutpes Contnued
-e pected return
ges
Mae
7
78
76
81
77
82
78
79
8
80
85
81
86
82
87
83
88
8
89
85
90
86
Mae
emae
79
80
83
91

0
9.7
9.3
8.9
as
a
7.7
7.3
ao
6.6
6.2
5.9
ae
as
M
1
9.7
9.3
a9
8. 1
ao
7.7
7.3
6.9
6.6
2
5.9
ae
5.3
7
3
9.7
9.3
as
a
8.0
7.8
7.3
6.9
6.5
6.2
5.9
5.6
6.3
38
3
9.7
9.2
8.8
8. 1
ao
7.6
7.2
6.9
as
a2
5.9
ae
6.3
39

9.6
9.2
as
8.
8.0
7.6
7.2
ac
6.5
2
a9
ae
5,
m
6
9.6
9.2
8.8
8.
ao
7.6
7.2
a9
as
a2
ao
ae
5.2
a
8
9.6
9.2
a7
as
7.9
7.6
7.2
as
as
6.1
5.8
as
as
2
7
9.5
9.1
a7
8.3
7.9
7.5
7.2
6.8
6.5
0.2
as
5.5
5.2
3
8
9.5
9.1
8.7
8.
7.9
7.5
7.2
6.8
as
a
as
6.5
5.2

9
9.5
9.0
8.6
8.
7.9
7.5
7.1
6.8
6.
a
as
as
6.2
6
SO
9.
9.0
8.6
a2
7.8
7.S
7.1
as
a
a
5.8
as
5.2
6
51
9.
9.0
8.0
8.2
7.8
7.
7.1
a7
a
a
6.8
6.5
a2
7
62
9.3
8.9
as
a
7.8
7.
7.1
6.7
a
a
6.8
5.6
5.2
8
63
9.3
8.9
as
a
7.7
7.
7.0
a7
a
6.0
a7
a
6.1
9
6
9.2
8.8
a
a
7.7
7.3
7.0
a7
as
ao
a7
a
a
50
65
9.1
8.8
8.
ao
7.7
7.3
7.0
ae
6.3
ao
a7
5. 1
a
SI
60
9.1
a7
8.3
ao
7.6
7.3
a9
ae
6.3
ao
5.7
5.
a
(2
67
9.0
8.6
a3
7.9
7.6
7.2
6.9
a6
6.2
S.9
6.6
5.
a
S3
68
8.9
8.6
a2
7.9
7.6
7.2
a9
as
6.1
6.9
6.6
a3
a
M
60
s.a
as
8.2
7.8
7.5
7.1
6.8
6.5
6.2
5.9
ae
a3
5.0
s
60
8.8
8.
a
7.7
7.
7.1
as
a
a
as
5.6
5.3
ao
M
61
8.7
S. t
ao
7.7
7.3
7.0
a7
a
a
as
a6
5.3
ao
57
62
8.6
8.3
7.9
7.6
7.3
7.0
a7
.
a
5.8
as
S. 2
5.0
m
63
8.6
S.2
7.9
7.5
7.2
.
6.6
6.3
8.0
5.7
6.5
6.2
.9

6
8.
a
7.8
7.5
7.1
6.8
6.5
a3
6.0
a7
a
6.2
.9
60
65
8.3
ao
7.7
7.
7.1
8
as
.2
a9
ae
6.
a
.9
61
66
8.2
7.9
7.6
7.3
7.0
a7
t:
a
ao
ae
5.3
5.1
.8
83
67
a
7.8
7.5
7.2
ao
ae
6.
a
5.8
5.5
6.3
ao
.8
63
68
8.0
7.7
7.
7.1
1 .. 8
6.6
a3
ao
a7
5.5
a2
5.0
.7
6
69
7.8
7.6
7.3
7.0
a7
6.5
(.. 2
a9
6.7
5.
a2
.9
.7
66
70
7.7
7.
7.2
ao
ae
.. 1
a
ao
ae
5.
a
.9
.7
66
71
7.6
7.3
7.1
6.8
6
as
ao
as
as
a3
a
.8
.6
67
72
7.
7.2
as
a7
t..
a2
ao
1.7
as
6.2
6.0
.8
.6
68
73
7.3
7.0
0.8
ae
3
a
ao
ae
a
5.2
.9
.7
.5
69
7
7.1
6.9
6.7
I ..
6.2
ao
as
5.5
a3
a
.9
.7
.5
70
75
7.0
as
as
t..:s
a
.-.9
a7
t.
a2
ao
.8
.6
1.1
71
76
6.8
6.6
6.
a2
ao
8
ae
as
6.1
.9
.7
.5
.3
72
77
6.6
6.
a3
a
5.9
a7
as
3
6.0
.9
.7
.5
.3
73
78
6.6
6.3
a
6.9
6.7
5.5
5.3
a
6.0
.8
.6
.
.2
7
79
6.3
6.1-
ao
5.8
6.6
5.
6.2
5.0
.9
.7
.5
.3
1.1
75
80
6.0
as
6
as
3
a
.9
.8
.6
1.1
.2
1.1
76
81
ae
as
5.3
5.2
5.0
.8
.7
.6
.3
.1
.0
77
82
as
6.2
5.0
.9
.7
.S
.
.2
.1
3.9
78
83
8
5.0
.9
.7
.7
.6
.6
.5
.
.3
.2
.1
.0
.0
3.9
3. 8
79
.3
3 7
SO
85
.5
. u
.2
.1
3.9
3.8
3.6
3.6
81
86
.2
.1
3.9
3.8
3.7
83
87
.0
3.8
3.7
3.6
3.6
83
88
89
SO
3.7
3.0
3.5
3.
3.3
3.
8
3.5
3.3

as
86
91
3.1
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711
of refund feature
Duraton of Ruaranteed amount Contnued
Years
18
IS
20
21
22
23
2
26
26
27
28
29
30
31
32
33
3
86
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
1
1
2
2
2
2
2
2
2
2
2
2
2
2
1
1
2
2
2
2
2
2
2
2
2
2
2
3
1
1
2
2
2
2
2
2
2
2
2
2
2
8
1
1
2
2
2
2
2
2
2
2
2
2
3
3
1
2
2
2
2
2
2
2
2
2
2
3
3
3
1
2
2
2
2
2
2
2
2
2
2
3
3
3
1
2
2
2
2
2
2
2
2
2
3
3
3
8
2
2
2
2
2
2
2
2
2
2
3
3
3
8
2
2
2
2
2
2
2
2
2
3
3
3
3
3
2
2
3
2
2
2
2
2
3
3
3
3
3
3
2
2
2
2
2
2
2
2
3
8
3
3
3
3

2
2
2
2
2
2
2
2
3
3
3
3
3

2
2
2
2
2
2
2
2
3
3
3
3
3

2
2
2
2
2
2
2
3
3
8
3
3

2
3
2
2
2
2
2
3
3
3
3
3

S
2
2
2
2
2
2
2
3
3
3
3
8

5
s
2
2
2
2
2
2
3
8
3
3
3

5
5
6
2
2
2
2
2
2
3
3
3
3
3

6
5
6
S
2
2
2
2
2
8
3
8
8
3

6
5
5
5
6
2
2
2
2
8
3
8
8
3

6
5
6
6
6
6
2
1
3
3
3
3
3
3

6
5
S
6
6
6
7
2
2
3
3
3
3
3

6
5
6
6
6
6
7
7
2
3
3
3
3
3

5
5
5
6
6
6
7
7
8
2
3
3
3
3

5
S
6
6
6
6
7
7
8
8
3
3
3
3

S
S
5
6
6
6
7
7
8
8
9
1
3
3

5
5
5
6
6
6
7
7
8
8
9
9
2
3

6
6
5
6
6
7
7
7
8
8
9
10
10
1

S
6
S
6
6
7
7
7
8
8
9
10
10
11

6
6
6
6
6
7
7
8
8
8
0
10
10
11
12

S
6
6
6
6
7
7
8
8
9
9
10
10
11
12
12

6
S
6
6
6
7
7
8
8
9
9
10
10
11
12
13
13

6
6
6
8
7
7
8
8
9
8
10
11
11
12
13
13
1
6
3
e
6
7
7
8
8
9
9
10
11
11
12
13
13
1
15
(
6
s
1
7
8
8
9
9
10
11
11
12
13
1
1
15
16
6

7
7
8
8
8
9
10
11
11
12
13
1
IS
16
16
17
t
7
7
8
8
g
9
10
11
11
12
13
1
15
If.
16
17
18

7
S
8
8
9
10
11
12
12
13
1
IS
16
17
18
18
19
7
8
8
8
8
10
11
12
12
13
1
IS
16
17
18
19
20
21
7
8
S
8
10
11
12
12
13
1
IS
16
17
18
19
20
21
22
8
8
s
10
11
12
12
13
1
IS
16
17
18
19
20
21
22
23
a
9
10
11
12
12
13
1
15
16
17
18
19
20
21
22
2
25
a
10
11
12
12
13
1
15
16
17
18
19
20
21
23
2
25
20
10
11
12
12
13
1
15
16
17
18
19
20
22
23
2-1
25
26
28
n
11
13
13
1
IS
18
17
18
19
21
22
23
2
25
27
28
29
t
13
13
1
IS
16
17
18
20
21
22
23
2
26
27
28
29
31
12
13
1
IS
16
17
18
20
21
22
23
25
26
27
28
30
31
32
18
1
IS
16
17
18
20
21
22
23
25
26
27
29
30
31
33
3
1
13
16
17
19
20
21
22
2
26
26
28
29
30
32
33
3
36
It
18
17
18
20
21
22
2
25
26
28
29
31
32
33
35
36
38
18
17
18
20
21
22
2
25
26
28
28
31
32
3
36
30
38
39
17
18
20
21
22
2
25
27
28
29
31
32
3
35
37
38
0
1
18
30
21
22
2
25
27
28
30
31
33
3
36
37
39
0
1
3
18
21
22
2
25
27
28
30
31
33
3
36
37
39
0
2
3
5
21
22
2
2S
27
28
30
31
33
35
36
38
39
1
2

5
7
a
3
36
27
28
30
32
33
35
36
38
0
1
3

6
7
8
23
25
27
28
30
32
33
35
37
38
0
1
3

0
7
9
50
29
27
28
30
32
33
35
37
38
0
2
3
6
0
8
9
51
62
26
28
30
32
33
35
37
38
0
2

6
7
8
60
51
62
6
28
30
32
33
35
37
39
1
2

6
7
9
SO
52
53
5
55
80
32
33
36
37
39
1
2

6
7
9
50
62
63
55
66
57
30 050 56
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712
Tabe III. Percent vaue
ges
Duraton of guaranteed amount
Years
Moe
emae
1
2
3

6
6
7
8
9
10
11
12
11
1
15
16
17
Per-
Per-
Per-
Per
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
M
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent cent
71
1
3

6
8
9
11
13
1
16
18
20
22
2
26
28

67
72
2
3
5
6
8
10
12
1
15
17
19
21
23
25
27
29
31
08
73
2
3
5
7
9
11
13
1
16
18
21
23
25
27
29
31
33
09
7
2

6
7
9
11
13
16
18
20
22
2
26
28
30
33
35
70
75
2

0
8
10
12
1
17
19
21
23
26
28
30
32
3
37
71
76
2

11
13
15
18
20
22
25
27
29
32
3
36
39
72
77
2
6
7
9
12
1
16
19
21
2
26
29
31
3
36
38
1
73
78
2
5
7
10
12
15
18
20
23
25
28
30
33
35
38
0
3
7
79
3
5
8
11
13
16
19
22
2
27
30
32
35
37
0
2
5
78
80
3
6
8
11
1
17
20
23
26
29
31
3
37
39
2

7
78
SI
3

9
12
It
18
21
2
27
30
33
36
39
1

6
9
77
82
3
7
10
13
16
20
23
26
29
32
35
38
1
3
6
8
51
7
83

7
11
1
17
21
2
28
31
3
37
0
3
5
8
50
53
79
8

8
11
15
19
22
26
29
33
36
39
2
5
8
50
53
55
80
85

8
12
IS
20
2
27
81
3
38
1

7
50
52
55
57
81
80

0
13
17
21
25
29
33
36
0
3
6
9
52
5
57
59
S2
87
6
9
1
18
23
27
31
35
38
2
5
8
51
5
56
59
61
s:
88
5
10
15
19
2
28
33
37
0

7
60
63
56
58
61
63
M
80
6
11
16
21
26
30
3
38
2
6
9
62
55
58
60
63
65
85
SO
6
11
17
22
27
32
36
1

8
51
55
57
60
62
65
67
Pah. 2. Income rom Dscharge of Indebtedness Speca Rue of cuson
Tme and Manner of ng Consent to d|ustment of ass. Secton 108(a)
provdes thnt the ta payer may e cude ncome resutng from the dscharge of
ndebtedness for whch the ta payer s abe, or sub|ect to whch the ta payer
hods property, f the ndebtedness was ncurred or assumed by a corporaton, or
by an ndvdua n connecton wth the acquston of property used n hs trade
or busness. owever, to e cude such ncome, the ta payer must consent to the
reguatons then n effect under secton 1017. Unt reguatons are ssued under
secton 108, such consent, n the case of ether a corporaton or an ndvdua,
sha be fed n accordance wth 39.22(b) (9)- and 39.22(b) (9)-2 of Regua-
tons 118 (20 C. . R., pt. 39).
Par. 3. greements as to Usefu Lfe and Rate of Deprecaton. Secton
107(d) provdes that a ta payer and the Secretary or hs deegate may, n ac-
cordance wth reguatons prescrbed by the Secretary or hs deegate, enter nto
a bndng wrtten agreement deang specfcay wth the usefu fe and rate of
deprecaton of any deprecabe property. No such agreement w be entered
nto unt after the promugaton of the reguatons under secton 107(d).
Par. . Chartabe, etc, Contrbutons and Gfts Lmtatons for Indvd-
uas Speca Rue. The purpose of ths paragraph s to prescrbe the method
of appcaton of the benefts and mtatons provded by secton 170 (b) (1) wth
respect to the speca rue appcabe to chartabe contrbutons descrbed n
subparagraph ( ) of that secton. n ndvdua may cam a deducton for
chartabe contrbutons made durng the ta abe year to or for the use of
those recpents descrbed n secton 170(c) to the e tent that such contrbutons
do not e ceed 20 percent of the ta payer s ad|usted gross ncome. owever,
n any case where the tota contrbutons e ceed the 20-percent mtaton, the
speca rue n secton 170(b)(1)( ) shoud be frst apped. The tota con-
trbutons made drecty to but not merey for the use of any church, schoo,
or hospta, as defned n causes (1), (), and () of that secton, shoud be
camed as a contrbuton deducton to the e tent that such contrbutons do not
e ceed 10 percent of the ta payer s ad|usted gross ncome. ny e cess shoud
be added to the other contrbutons to form a bass for the contrbutons sub|ect
to the 20-percent mtaton. d|usted gross ncome need not be reduced by any
net operatng oss carryback for purposes of appyng ether the 10-percent or
the 20-percent mtaton. The term hospta referred to n cause () means
an organzaton, the prncpa functons of whch are provdng medca or
hospta care. Such term does not ncude medca educaton or medca research
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713
of refund feature Contnued
Duraton of guaranteed amount Contnued
Years
18
19
20
21
23
23
2
25
26
27
28
29
30
31
32
33
3
86
Pa-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
Per-
ce
cent
cent
cent
cent
cent
cent
cent
cent
cent
cent
rent
cent
cent
cent
cent
cent
SI
33
35
37
39
1
3

6
8
0
51
62
5
55
56
58
59
33
35
37
39
1
3
5
6
8
50
51
53
5
56
67
58
59
61
35
37
30
1
3
5
7
8
50
62
S3
65
66
67
59
60
61
62
37
39
1
3
6
7
8
51
62
63
66
56
58
59
60
62
63
6
39
1
3
5
7
.
50
62
5
55
67
58
60
61
62
63
6
65
a
3
6
7
9
61
52
6
5f
57
59
60
61
63
6
65
66
67
a
5
7
0
61
63
5
56
58
60
60
62
63
6
65
6(1
67
68
a
7
9
61
53
55
5f
58
m
61
62
6
65
66
67
68
69
70
7
9
61
63
65
67
58
60
61
63
6
65
66
67
68
69
70
71
9
61
63
66
57
8
CO
62
63
6
66
67
68
69
70
71
72
72
51
58
66
67
69
60
62
63
65
6
67
68
69
70
71
72
73
S3
55
57

66
67
9
61
63
69
61
63
6
61
62
6
66
62
6
66
67
6
65
67
68
70
66
68
70
71
68
69
71
72
69
70
72
73
70
71
73
7
71
72
7
76
72
73
73
7
7
67
69
61
65
67
69
75
a
63
65
66
68
70
66
66
68
69
71
73
69
71
72
7
70
72
73
75
76
72
73
7
76
73
7
76
77
7
75
76
75
63
65
67
66
68
70
71
68
70
71
73
75
76
68
7
75
77
organzatons referred to n secton 503(b)(5). The appcaton of ths para-
graph may be ustrated by the foowng e ampes:
ampe (1). , an ndvdua, reports hs ncome on the caendar year bass
and for the year 195 has an ad|usted gross ncome of 10,000. Durng 195
he made contrbutons to the foowng chartabe organzatons:
1. Organzatons descrbed n sec. 170(b)(1)( ) 2, 00
2. Other chartabe organzatons 700
3. Tota contrbutons pad 3,100
Deduct-
be
contr-
butotu
. Contrbutons to organzatons descrbed n sec. 170(b) (1) ( ) 2, 00
5. Speca mtaton under secton 170(b) (1) ( ) : 10 percent of
ad|usted gross ncome 1,000
8. Deductbe amount: ne or ne 5, whchever s the esser 1,000
7. cess of ne over ne 5 1, 00
8. dd: contrbutons to other chartabe organzatons 700
9. Contrbutons sub|ect to the mtaton under sec. 170(b)
(1) ( ) 2,100
10. Lmtaton under sec. 170(b) (1) ( ) : 20 percent of the ad-
|usted gross ncome 2,000
U. Deductbe amount: ne 9 or ne 10, whchever s the esser. 2,000
12. Contrbutons not deductbe 100
13. Tota deducton for contrbutons 3,000
ampe (2). , an ndvdua, reports hs ncome on the caendar-year bass
and for the year 195 has an ad|usted gross ncome of 10,000. Durng 195 he
made contrbutons to the foowng chartabe organzatons:
1. Organzatons descrbed n sec. 170(b) (1) ( ) 700
2. Other chartabe organzatons 2, 00
3. Tota contrbutons pad - 3,100
. Contrbutons to organzatons descrbed n sec. 170(b) (1) ( ) 700
C. Lmtaton descrbed n sec. 170(b) (1) ( ) : 10 percent of the
ad|usted gross ncome 1,000
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71
Deduct-
be
contr-
buton
6. Deductbe amount: ne or ne 5, whchever s the esser 700
7. cess of ne over ne 5 0
8. dd: contrbutons to other chartabe organzatons 2, 00
0. Contrbutons sub|ect to the mtaton under sec. 170(b)
(1) ( ) 2, 00
10. Lmtaton under sec. 170(b) (1) ( ) : 20 percent of the ad-
|usted gross ncome 2,000
11. Deductbe amount: ne 9 or ne 10, whchever s the esser- 2,000
12. Contrbutons not deductbe 00
13. Tota deducton for contrbutons 2,700
Par. 5. Research and permenta pendtures. (a) ecton to treat
such e pendtures as e penses not chargeabe to capta account. (1) Manner
of makng eecton not requrng consent. Secton 17 (a) (2) ( ) authorzes an
eecton to treat research or e permenta e pendtures as e penses whch are
not chargeabe to capta account. n eecton not requrng consent may e
made for the frst ta abe year sub|ect to the Interna Itevenue Code of 195 for
whch such e pendtures are pad or ncurred. The eecton sha be appcabe
to a such e pendtures and sha be made by a statement attached to the return
for the frst ta abe year to whch the eecton s appcabe. Such statement
sha ndcate that the ta payer has eected under the provsons of secton
17 (a) (2) ( ) to treat a research and e permenta e pendtures as deductbe
e penses not chargeabe to capta account.
(2) ppcaton to change method. n eecton once made under subparagraph
(a) (1) sha be bndng for the ta abe year for whch the eecton s made am
for a subsequent ta abe years, uness consent to make a change s obtaned
from the Dstrct Drector of Interna Revenue for the dstrct n whch the
return s fed. ppcatons for consent to make a change w not be accepted
before the promugaton of reguatons under secton 17 .
(3) Consent to mae eecton at any tme Secton 17 (a)(2)( ) provdes
that a ta payer may, wth the consent of the Secretary or hs deegate, eect at
any tme to treat research or e permenta e pendtures as e penses whch are
not chargeabe to capta account. No appcaton for consent under that secton
w be accepted before the date of promugaton of the reguatons under secton
17 . Such reguatons, however, w provde a reasonabe perod of tme wthn
whch ta payers w be permtted to appy for such consents n the case of ta -
abe years sub|ect to the Interna Revenue Code of 195 whch end after the
enactment of such Code and before the promugaton of reguatons under secton
17 .
(b) mortzaton of such e pendtures. (1) Manner of makng eecton not
requrng consent. Secton 17 (b) (1) provdes that a ta payer may treat certan
research or e permenta e pendtures as deferred e penses to be deducted
rataby over such perod of not ess than 00 months as may be seected by the
ta payer begnnng wth the month n whch the ta payer frst reazes benefts
from such e pendtures. The eecton may be made for any ta abe year begn-
nng after December 31, 1953. provded t s made not ater than the tme pre-
scrbed for fng the return for such ta abe year (ncudng e tensons thereof).
Such eecton sha be made by a statement attached to the ta payer s return
for the frst ta abe year to whch the eecton s appcabe. Such statement
sha set forth the amounts of each type of such e pendtures and the ength of
the perod over whch such e pendtures are to be rataby deducted.
(2) ppcaton to change method. n eecton once made under subparagraph
(b) (1) sha be bndng for the ta abe year for whch the eecton s made and
for a subsequent ta abe years, uness consent to make a change s obtaned
from the Dstrct Drector of Interna Revenue for the dstrct n whch the
return s fed. ppcatons for consent to make a change w not be accepted
before the promugaton of reguatons under secton 17 .
Par. 6. So and Water Conservaton pendtures Treated as penses
Not Chargeabe to Capta ccount. (a) Manner of makng eecton not
requrng consent. Secton 175(d)(1) authorzes an eecton to treat so and
water conservaton e pendtures as e penses whch are not chargeabe to capta
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715
account. n eecton not requrng consent may be made for the frst ta abe year
sub|ect to the Interna Revenue Code of 195 for whch such e pendtures are
pad or ncurred. The eecton sha be appcabe to a such e pendtures and
sha be made by a statement attached to the return for the frst ta abe year to
whch the eecton s appcabe. Such statement sha specfy the amount of
each type of such e pendtures and sha descrbe them n deta.
(b) ppcaton to change method. n eecton once made under subpara-
graph (a) sha be bndng for the ta abe year for whch the eecton s made
and for a subsequent ta abe years, uness consent to make a change s obtaned
from the Dstrct Drector of Interna Revenue for the dstrct n whch the re-
turn s fed. ppcatons for consent to make a change w not be accepted
before the promugaton of reguatons under secton 175.
(c) Consent to make eecton at any tme. Secton 175(d) (2) provdes that a
ta payer may, wth the consent of the Secretary or hs deegate, eect at any
tme to treat so and water conservaton e pendtures as e penses whch are
not chargeabe to capta account. No appcaton for consent under that secton
w be accepted before the date of promugaton of the reguatons under secton
175. Such reguatons, however, w provde a reasonabe perod of tme wthn
whch ta payers w be permtted to appy for such consents n the case of ta -
abe years sub|ect to the Interna Revenue Code of 195 whch end after the
enactment of such Code and before the promugaton of reguatons under sec-
ton 175.
Pab. 7. Organzatona pendtures Tme and Manner of Marno ec-
ton. The eecton provded by secton 2 8(a) wth respect to organzatona
e pendtures sha be made n a statement attached to the corporaton s ncome
ta return for a ta abe year begnnng after December 31, 1953. The return
and statement must be fed not ater than the date prescrbed by aw for fng
the return (ncudng any e tensons of tme) for the ta abe year for whch the
eecton s made. The statement sha descrbe the e pendtures and set forth
the amount thereof and the number of months (not ess than 00), begnnng wth
the month n whch the ta payer began busness, over whch such e pendtures
are to be deducted rataby. The perod so eected sha be adhered to n comput-
ng the ta payer s ta abe Income for the ta abe year for whch the eecton s
made and a subsequent ta abe years.
Par. 8. Prepad Income. (a) Manner of makng eecton not requrng con-
tent. Secton 52 permts ta payers to eect to take prepad ncome nto account
as f receved over certan specfed perods. The eecton to report prepad n-
come as ta abe ncome under the provsons of secton 52(a), 52(b) (1), and
52(d) (3) ( ) may be made, wthout consent, for the frst ta abe year sub|ect
to the Interna Revenue Code of 195 n whch such prepad ncome n the par-
tcuar trade or busness s receved. Such eecton sha be appcabe to a
prepad ncome of the partcuar trade or busness receved n the ta abe year
for whch the eecton s made and n a subsequent ta abe years (e cept as pro-
vded n secton 6(e) am secton 52(d)(2). The eecton sha be made by
a statement attached to the ta payer s return for the frst ta abe year to whch
the eecton s appcabe. Ths statement sha show:
(1) the method of accountng used by the ta payer In the partcuar
trade or busness
(2) the nature of the prepad ncome, for e ampe, rent from rea estate
or rents and royates
(3) the perod over whch each cass of abty descrbed n secton
52(e) (2) e tends
( ) the ta abe years and the amounts of prepad ncome to be ncuded
n pross ncome for each year and
(5) the method of aocaton.
If any part of the prepad ncome s connected wth a abty of ndefnte dura-
ton, that fact sha be noted under (3) and the prepad ncome sha be appor-
toned as between tems wth respect to whch the perod of abty s defnte
and as to whch the perod of abty s ndefnte.
(b) Consent to change method of apportonng ncome consent to make eec-
ton at any tme. n appcaton for consent under secton 52 (a) (1) or (a) (2),
52(b)(2), and 52(d)(3)( ), w not be be accepted before the date of the
promugaton of the reguatons under secton 52. Such reguatons, however,
w provde a reasonabe perod of tme wthn whch ta payers w be per-
mtted to appy for such consents n the case of ta abe years sub|ect to the
Interna Revenue Code of 195 whch end after the enactment of such Code and
before the promugaton of reguatons under secton 52.
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Par. 9. ccrua of Rea Property Ta es. (a) In genera. Secton 61 (e)
permts ta payers who compute ta abe ncome under an accrua method of
accountng to accrue rea property ta es rataby over the perod of tme to whch
such ta es reate. If the accrua of rea property ta es s proper n connecton
wth one of the methods of accountng descrbed n secton 6(c) (3) and ( ),
any ta payer usng such a method of accountng may eect to accrue such ta es
rataby n the manner descrbed above. See, however, secton 16 (d) reatng
to ap rtonnent of ta es on rea property between seer and purchaser.
(b) Manner of makng eecton not requrng consent. Secton 61(c) (3) ( )
provdes that the method of treatng ta es provded In secton 61(c) may be
adopted wthout consent for the frst ta abe year sub|ect to the Interna Revenue
Code of 195 n whch the ta payer ncurs rea property ta es. Such eecton
must be made not ater than the tme prescrbed by aw for fng the return for
such year (ncudng e tensons thereof). The eecton sha be made by a state-
ment attached to the ta payer s return for the frst ta abe year to whch the
eecton s appcabe. The statement sha show: (1) The method of accountng
used by the ta payer and (2) the perod of tme to whch the ta es are reated.
(c) Consent to make eecton at any tme n appcaton for consent under
secton 61(c)(3)( ) w not be accepted before the date of promugaton of
reguatons under secton 61. Such reguatons, however, w provde a reason-
abe perod of tme wthn whch ta payers w be permtted to appy for such
consents n the case of ta abe years sub|ect to the Interna Revenue Code of
195 whch end after the enactment of such Code and before the promugaton
of reguatons under secton 61.
Par. 10. Reserves fob stmated penses. (a) Manner of makng eecton
not requrng consent. Secton 62 permts ta payers n computng ta abe
ncome to eect to deduct a reasonabe addton to reserves for estmated e -
penses. n eecton under the provsons of secton 62(c)(3)( ) may be
made wthout consent for the frst ta abe year sub|ect to the Interna Revenue
Code of 11)5 for whch there are estmated e penses attrbutabe to the partcuar
trade or busness. Such eecton sha be appcabe to a estmated e penses
attrbutabe to the partcuar trade or busness for the ta abe year for whch
the eecton s made and for a subsequent ta abe years (e cept as provded
n sec. 6(e)). The eecton sha be made by a statement attached to the
ta payer s return for the frst ta abe year to whch the eecton s appcabe.
Ths statement sha show :
(1) the method of accountng used by the ta payer n the partcuar trade
or busness
(2) the nature of the estmated e penses, for e ampe, warrantes on
appances , or guarantes on servce contracts
(3) f reated to a contract the perod over whch the abty on each
cass of such contracts e tends and
( ) a schedue showng In deta how the amount of the estmated
e penses was computed.
(b) Consent to make eecton at any tme. n appcaton for consent under
secton 02(c) (3) (I) w not be accepted before the date of the promugaton
of reguatons under secton 02. Such reguatons, however, w provde a
reasonabe perod of tme wthn whch ta payers w be permtted to appy for
such consents n the case of ta abe years sub|ect to the Interna Revenue Code
of 195 whch end after the enactment of such Code and before the promugaton
of reguatons under secton 02.
Par. 11. Undstrbuted Persona odng Company Income. (a) Ta es
eecton. The eecton provded by secton 5 5(b)(1), reatng to the method
of deductng certan ta es n computng the undstrbuted persona hodng
company ncome, sha be made by deductng the ta es accrued durng the ta -
abe year, n the return for any ta abe year endng after une 30, 195 . The
eecton sha appy to the ta abe year for whch made and a subsequent ta -
abe years and sha be rrevocabe.
(b) mount of en n favor of the Unted States sharehoders eecton.
The eecton by sharehoders of persona hodng companes, provded by secton
5 5(b) (9), wth respect to dvdends attrbutabe to the satsfacton or reease
of a en n favor of the Unted States, sha be made by fng a statement as a
part of the ta payer s return for the ta abe year (whch year s sub|ect to the
Interna Revenue Code of 195 ) n whch the dvdends nre requred to be
reported as ncome. The statement sha show the computaton of the ncrease
n the sharehoder s ncome ta for each pror ta abe year whch woud have
resuted f the porton of the dvdend attrbutabe to the satsfacton or reease
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717
of the en whch Is aocabe to such pror ta abe year had been receved n
such pror ta abe year.
Par. 12. Deducton for Defcency Dvdends. (a) Determnaton agree-
ment other than cosng agreements. The agreement provded by secton
5 7(c)(3) (reatng to determnaton by agreement other than a cosng agree-
ment under secton 7121) sha be e ecuted n dupcate, and sha set forth
the amount of the persona hodng company ta abty for the ta abe year.
It sha be sgned by, or on behaf of, the ta payer and by the Dstrct Drector
and sha have the same effect as a determnaton under any other provson of
secton 5 7(c). The date of the determnaton under such agreement sha be
the date on whch t s sgned by the Dstrct Drector.
(b) Cam requred tme for fng cam. Unt reguatons are ssued under
secton 5 7, the rues set forth n Reguatons 118 wth respect to fng of a
cam for defcency dvdend credt (see Regs. 118, 39.506-5) sha appy n
fng a cam for a defcency dvdend deducton wth the foowng e ceptons:
(1) The tme for fng a cam for a defcency dvdend deducton sha be
120 days after the date of the determnaton provded by secton 5 7(c) and
(2) determnaton under secton 5 7(c) sha ncude a determnaton by
agreement sgned by the ta payer and the Dstrct Drector as provded by
secton 5 7(c) (3) and the rues under subparagraph (a).
Par. 13. Undstrbuted oregn Persona odng Company Income Ta es
ecton. The eecton provded by secton 556(b) (1), reatng to the method
of deductng certan ta es n computng undstrbuted foregn persona hodng
company ncome, sha be made by deductng the ta es accrued durng the ta abe
year, n the return for such ta abe year. The eecton may be made n any
ta abe year endng after the date of the enactment of the Interna Revenue
Code of 195 , sha appy to the ta abe year for whch made and a subsequent
ta abe years, and sha be rrevocabe.
Par. 1 . Defnton of Property Speca Rue as to Operatng Mnera
Interests ecton to ggregate Under Secton 61 (b). Secton 61 (b)
authorzes a ta payer who owns two or more separate operatng mnera nter-
ests whch consttute part or a of an operatng unt to eect, n accordance
wth reguatons, to aggregate, and to treat as one property, any two or more
of such nterests, and to treat as a separate property each such nterest whch
he does not eect to ncude wthn the aggregaton. The eecton must be made
wth respect to each separate operatng mnera nterest not ater than the tme
prescrbed for fng the return (ncudng e tensons thereof) for whchever of
the foowng ta abe years s the ater: The frst ta abe year begnnng after
December 31, 1953, or the frst ta abe year n whch any e pendture for
e poraton, deveopment, or operaton In respect of the Interest Is made by the
ta payer after the acquston of such nterest. Such eecton sha be made
n a statement attached to the ta payer s return for the frst ta abe year pre-
scrbed for makng such eecton. Such statement sha ncude Informaton to
show that the nterests aggregated are part or a of one operatng unt. The
ta payer shoud aso attach to the return a property map, and such e pana-
tory data as may be necessary, to dentfy the operatng unt, the propertes n
the unt whch are beng aggregated, and the propertes whch w be treated
separatey. Such eecton, when made, shn be effectve for a purposes of
subtte of the Interna Revenue Code of 195 , and sha be bndng for a
subsequent years uness consent to make a change s obtaned. ppcatons for
consent to make a change w not be accepted before the promugaton of
reguatons under secton 61 .
Par. 15. Defnton of Property Speca Rue as to Nonoperatnq Mnera
Interests Permsson to ooregate Separate Interests Under Secton 61
(c). Secton 61 (c) provdes that the Secretary or hs deegate may, on showng
of undue hardshp, permt the ta payer to treat (for a purposes of subtte )
certan separate nonoperatng mnera nterests as one property. Permsson
w not be granted under secton 61 (c) to aggregate such separate nonoperatng
mnera nterests pror to the promugaton of reguatons under that secton.
owever, If the ta payer has reguary aggregated such separate nonoperatng
mnera nterests n pror ta abe years the frst return sub|ect to the provsons
of the Interna Revenue Code of 195 may be fed on such bass sub|ect to the
approva of the Dstrct Drector of Interna Revenue, provded that permsson
to contnue such treatment s requested as a part of such return and the return
s tmey fed. In other cases the fng of a return for any ta nbe year sub|ect
to the Interna Revenue Code of 195 pror to the Issuance of reguatons under
secton 61 (c) sha not precude the ta payer from requestng permsson to
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adopt an aggregaton n an amended return n accordance wth such reguatons.
Par. 16. Speca Rues ppcabe to Dstrbutons by Trusts n rst 65
Days of Ta abe Year. Secton 663(b) permts fducares of certan trusts to
eect to treat as pad or credted by the trusts on the ast day of the precedng
ta abe year amounts whch are propery pad or credted wthn the frst 63 days
of the ta abe year. The eecton sha be made n a statement attached to the
return for the frst ta abe year sub|ect to the Interna Revenue Code of 195 .
The eecton must be made not ater than the tme prescrbed by aw for fng
the return for such year (ncudng e tensons thereof). Once made, the eecton
s rrevocabe wth respect to the ta abe year to whch the eecton s appcabe
and a subsequent ta abe years. Snce the eecton affects not ony the amount
aowabe as an addtona deducton to the trust under secton 661, but aso the
amount treated as ta abe to the recpent benefcary under secton 662, the
fducary sha notfy such benefcary of the eecton.
Par. 17. oregn Ta Credt owed to Sharehoders op a Reguated Invest-
ment Company Manner of Makng ecton and Notfyng Sharehoders.
reguated nvestment company sha make the eecton under secton 853 by
attachng a statement to ts return for the ta abe year settng forth suffcent
facts to estabsh that t meets the requrements of secton 853 and ndcatng
(1) the tota amount of ncome, war-profts, or e cess profts ta es pad
to foregn countres or possessons of the Unted States
(2) the date and form of notce to ts sharehoders and
(3) the proportonate share of such ta es pad durng the ta abe year
aocabe to each share of each cass of stock of the reguated nvestment
company.
The eecton s appcabe ony wth respect to ta abe years sub|ect to the
Interna Revenue Code of 195 and sha be made wth respect to a such ta es
and must be made not ater than the tme prescrbed for fng the return
(ncudng e tensons thereof).
Par. 18. d|usted ass Income rom Dscharge of Indebtedness. Secton
1017 provdes that, where ncome from dscharge of Indebtedness s e cuded
under secton 108(a), the whoe or a part of the amount so e cuded sha be
apped n reducton of the bass of the property hed by the ta payer durng the
ta abe year of such dscharge. Unt reguatons are ssued under secton 1017,
the amount of the ad|ustment and the method for aocatng t to partcuar
propertv. n the case of ether a corporaton or an ndvdua, sha be determned
n accordance wth sectons 39.113(b) (3)- and 39.113(b) (3)-2 of Reguatons
118 (26 C. . R.,pt.39).
Par. 19. Defntons greements Treated as Determnatons. Secton 1313
(a) ( ) provdes that an agreement entered nto by the Secretary or hs deegate
nnc. the ta payer (n addton to a cosng agreement under sec. 7121) sha be
treated as n determnaton for the purpose of the ad|ustment authorzed by
secton 1311. No such agreement w be entered nto unt after the promuga-
ton of reguatons under secton 1313(a) ( ).
Par. 20. Notce of uafcaton as ecutor or Recever. Unt reguatons
are ssued under secton 6036, the notce of quafcaton as e ecutor, recever,
etc., requred by such secton sha be requred at the tme and ony to the e tent
provded n e stng reguatons under the Interna Revenue Code of 1939 whch
are contnued n effect under the Interna Revenue Code of 105 . See, for e am-
pe, sectons 81.57 through 81.60 of Reguatons 105 (26 C. . R. 81.57 through
81.60), reatng to notce of quafcaton by e ecutors.
Par. 21. utomatc tenson of Tme for ng Corporaton Income Ta
Returns. The automatc e tenson of 3 months for fng corporaton ncome
ta returns, provded for n secton 6081(b), w be granted upon the fng of
orm 700 n accordance wth the rues prescrbed n IR-Mmeograph No. 5 -20,
dated ebruary 12, 195 .
Par. 22. Rues ppcabe to Deegaton of uthorty. In any case n whch
a functon s vested by the Interna Revenue Code of 195 n the Secretary or
hs deegate, and Treasury reguatons or Treasury decsons (ncudng ths
Treasury decson) provde that such functon may be performed by a Dstrct
Drector of Interna Revenue, a Regona Commssoner of Interna Revenue,
an ssstant Commssoner of Interna Revenue, or by a desgnated offcer or
empoyee n the offce of a Dstrct Drector, Regona Commssoner, or ssstant
Commssoner
(a) Such provson In the reguatons or a Treasury Decson sha consttute
a deegaton by the Secretary to the Commssoner of the authorty to perform
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roch functon and a redeegaton thereof by the Commssoner to the desgnated
offcer or empoyee, and
(b) n offcer or empoyee authorzed by reguatons or a Treasury Decson
to perform a functon sha have authorty to redeegate the performance of such
functon to any offcer or empoyee performng servces under bs supervson
and contro, uness such power to so redeegate s prohbted or restrcted by
proper order or drectve, and
(c) The Commssoner may aso redeegate authorty to perform such func-
ton to other offcers or empoyees of the Interna Revenue Servce and, to the
e tent he deems proper, may authorze further redeegaton of such authorty,
and
(d) The Commssoner may prescrbe such mtatons as he deems proper on
the e tent to whch any offcer or empoyee of the Interna Revenue Servce sha
perform any such functon, but, n the case of an offcer or empoyee desgnated
n reguatons or a Treasury Decson as authorzed to perform such functon,
such mtatons sha not render nvad any performance by such offcer or
empoyee of the functon whch, e cept for such mtatons, such offcer or em-
poyee s authorzed to perform by such reguatons or Treasury Decson n effect
at the tme the functon s performed.
(Ths Treasury Decson s ssued under the authorty contaned
n secton 7805 of the Interna Revenue Code of 195 (68 Stat. 917:
26U.S.C. 7805).)
ustn . Wnke,
ctng Commssoner of Interna Revenue.
pproved December 30,195 .
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 30, 105 ,12: 0 p. m.)
T. D.612
TITL 28 INT RN L R NU
Temporary rues reatng to unncorporated busness enterprses
eectng to be ta ed as domestc corporatons under secton 1361 of
the Interna Revenue Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. 0.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to prescrbe temporary rues wth respect to unncor-
porated busness enterprses eectng to be ta ed as domestc corpora-
tons, Treasury Decson 6118 I. R. . 1955-3,90 , approved December
30,195 , s hereby amended by addng at the end thereof the foowng
paragraph:
Par. 23. Unncorporated usness nterprses ectng to be
Ta ed as Domestc Corporatons (a) In genera. Secton 1361
permts certan unncorporated busness enterprses to eect to be ta ed
as domestc corporatons. If the quafcatons stated n secton
1361(b) are met, and f a proper eecton s fed n accordance wth
the provsons of ths paragraph, then an unncorporated busness
enterprse wth respect to whch such an eecton s fed sha be treated
for ncome ta purposes as a domestc corporaton under the provsons
of secton 1361. The eecton may be made ony wth respect to ta abe
years of the partnershp, or the propretor, begnnng after December
31,1953, and endng after ugust 16,195 .
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(b) Manner of makng eecton. (1) The eecton sha be made
by fng a statement that the partners or the propretor, as the case
may be, eects under secton 1361 (a) to have the enterprse treated as
a corporaton, and by fng the return or amended return requred
by subparagraph (3) wthn the tme prescrbed by that subparagraph.
The eecton s vod uness perfected by the fng of such return or
amended return.
(2) The statement sha be fed durng the frst 60 days after the
cose of the frst ta abe year of the partnershp or propretor to whch
the eecton s appcabe. The statement sha gve suffcent nforma-
ton to estabsh that the enterprse meets the quafcatons set forth
n secton 1361(b). It sha aso contan an agreement to notfy the
dstrct drector wth whom the statement s fed f the nterest of the
eectng propretor or partners n the capta and profts of the enter-
prse becomes 80 percent or ess, or f the enterprse becomes a corpora-
ton. The statement sha be sgned by the propretor or a of the
partners ownng an nterest n the enterprse at any tme durng the
perod begnnng wth the frst day of the frst ta abe year to whch
the eecton appes and endng on the day the eecton s fed. or
e ampe, a partner or propretor havng an nterest at any tme durng
the frst ta abe year wth respect to whch the eecton appes s
requred to sgn the statement even though he hods no nterest at the
end of such year or at the tme of the eecton. partner or propretor
who acqures hs nterest after the end of the frst ta abe year to whch
the eecton appes but pror to the date of the eecton s aso requred
to consent to the eecton by sgnng the statement even though he
hods no nterest at any tme durng the frst year to whch the eecton
s appcabe.
(3) If a statement of eecton s tmey fed, the eecton must be
perfected by fng for such enterprse an ncome ta return on orm
1120 contanng a statement that such return has been prepared n
compance wth the reguatons under secton 1361. If the ast day
prescrbed for fng the return for such enterprse (ncudng any
e tenson of tme for such fng) fas before the ast day of the thrd
month foowng the month n whch the reguatons under secton
1361 are pubshed n the edera Regster, the eecton sha be
perfected by fng an amended return contanng a smar statement,
rather than a return, on or before the ast day of such thrd month.
( ) The requred statement and the ncome ta return (and any
amended return) sha be fed wth the dstrct drector of nterna
revenue wth whom the enterprse woud be requred to fe ts return
f t were a domestc corporaton. See secton 6091(b) (2).
(5) n eecton made n compance wth ths paragraph sha be
rrevocabe as provded n secton 1361(e) and sha appy to the
ta abe year for whch made and to a subsequent ta abe years.
(c) dmnstratve provsons. (1) The ncome ta return of the
enterprse (and any amended return) sha be fed on orm 1120 Cor-
oraton Income Ta Return and sha be sgned by the propretor or
y any of the partners of the enterprse. Such return sha be ceary
desgnated as a return of a secton 1361 enterprse. There sha be at-
tached to the return a schedue of the persona hodng company n-
come of the enterprse and the e penses attrbutabe to such ncome,
(See secton 1361 ().) In the case of a partnershp, the schedue sha
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721
dscose the amount and nature of each partner s dstrbutve share of
the persona hodng company ncome and the e penses attrbutabe
thereto.
(2) The tme for fng orm 1120 by an unncorporated busness
enterprse sub|ect to the eecton under secton 1361 s e tended 6
months or unt September 15, 1955, whchever s earer, provded a
tentatve return s fed on or before the due date prescrbed by sec-
ton 6072(b) of the 195 Code, and provded such enterprse pays,
on or before the date prescrbed for payment of the ta , the amount
propery estmated as ts ta or the frst nstament thereof requred
under secton 6152. Ths e tenson sha not appy to the ndvdua
returns of the propretor or partners of the enterprse. If, any such
partner or propretor shoud desre an e tenson of tme for fng hs
ndvdua ncome ta return, he shoud request permsson therefor
from the dstrct drector. In such a case the ta payer shoud gve
fu nformaton as to the reasons for requestng such an e tenson.
(3) ach ndvdua propretor or partner of the enterprse sha
fe an amended ndvdua ncome ta return, or a statement that no
such return s necessary, on or before the ast day of the thrd month
foowng the month n whch the reguatons under secton 1361 are
pubshed. The amended return or statement sha be fed wth the
dstrct drector for the dstrct n whch the orgna return was fed.
ecause the eecton provded n secton 1361 must be e ercsed
wthn 60 days after the cose of the ta abe year of the enterprse, t
s found mpractcabe to ssue ths Treasury Decson wth notce and
pubc procedure thereon under secton (a) of the dmnstratve
Procedure ct, approved une 11, 19 6, or sub|ect to the effectve
date mtaton of secton (c) of that ct.
(Ths Treasury Decson s ssued under the authorty contaned n
sectons 1361, 6081, and 7805 of the Interna Revenue Code of 195
(68 Stat. 350, 751, 917 26 U. S. C. 1361, 6081, 7805).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved ebruary 2 ,1955.
. Chapman ose,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster ebruary 2 , 1955,12: 36 p. m.)
T. D.6131
TITL 26. INT RN L R NU
Temporary rues reatng to the dates for makng deposts and pay-
ments and for fng e cse ta returns by certan persons requred
to coect and pay over certan e cse ta es mposed by the Interna
Revenue Code of 195 .
Treasury Department,
Offce of Commssoner of Interna Revenue.
W ashng ton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to prescrbe temporary rues reatng to the dates for
makng deposts and payments of certan e cse ta es and for the
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722
fng of returns of such ta es under the Interna Revenue Code of
15)5 , Treasury Decson 6118, page 698, ths uetn, approved Decem-
ber 30, 11)5 , as amended by Treasury Decson 612 , page 719, ths
uetn, approved ebruary 2 , 1955, s further amended by addng
at the end thereof the foowng paragraph:
Par. 2 . Dates fob Depostng, Payng, and mng Returns of Certan -
cse Ta es. (a) The rues set forth n ths paragraph prescrbe the dates on
whch persons descrbed n (b) hereof are requred to fe returns on orm 720
reportng the e cse ta es Imposed under secton 251 (communcatons), 261
(transportaton of persons), or 271 (transportaton of property), of the Interna
Revenue Code of 195 and the dates on whch such persons are requred to depost
and pay over such ta es to the Unted States. other requrements reatng to
the tng of returns and the depostng and payment of such ta es set forth n the
appcabe reguatons and Treasury Decson 0025 C. . 1953-2, 00 , approved
uy 3, 1053, as made appcabe to the Interna Revenue Code of 195 by Treasurv
Decson 0091 O. . 195 -2, 7 , sgned ugust 10, 195 , reman n fu force
and effect.
(b) In the case of any person who obtaned a permanent e tenson of tme
(whch e tenson was n effect on December 31, 195 ) for fng any return and
makng any depost or payment of the ta es mposed under secton 3 05, 3 69,
or 3 75 of the Interna Revenue Code of 1939, each quartery return ( orm 720)
of the e cse ta es mposed under secton 251, 201, or 271 of the Interna
Revenue Code of 195 sha be fed, and each depost and payment of such
e cse ta es sha be made, on or before the ast day whch woud have been f ed
under such permanent e tenson of tme for fng the return and for makng
the depost and payment of the e cse ta es Imposed under the correspondng
secton of the Interna Revenue Code of 1939, as the case may be, f the Interna
Revenue Code of 1939 had not been repeaed.
ecause the rues prescrbed heren are of a berazng character,
t s hereby found that t s unnecessary to ssue ths Treasury Decson
wth notce and pubc procedure thereon under secton (a) of the
dmnstratve Procedure ct, approved une 11, 19 6, or sub|ect to
the effectve date mtatons of secton (c) of sad ct.
(Ths Treasury Decson s ssued under the authorty contaned n
sees. 6071, 6302, and 7805 of the Interna Revenue Code of 195 (68
Stat. 7 9,775,917 26 U. S. C. 6071,6302,7805).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved pr 29, 1955.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster May , 1955, 8: 9 a. m.)
ursdcton and procedure reatng to offers n compromse of
narcotcs, smokng opum, and marhuana. See Rev. Ru. 55-153,
page 199.
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IND
Page
DMINISTR TI :
batements, |eopardy assessment 66
ccountng perods, nterm rues for change 7
ssessment, coecton, refund, abatement, 195 reguatons 1 5
ssessments, |eopardy, abatement 66
Cams for abatement, |eopardy assessment 66
Cams for refund or abatement, waver of rght to nsttute sut 5oS
Cams for refund:
Documentary stamps aff ed to ost documents 522
Inhertance ta credt, correspondence wthn statutory perod ns
cam 62
Pad erroneousy by trustee n bankruptcy 557
Recoupment, appcaton of barred estate ta over-assessment
aganst ncome ta 69
Coecton of ta :
Government depostares, deposts ess than coectons 196
Levy on accrued wages due State empoyees 551
Levy on |ont checkng accounts 197
Penates, faure to depost ta es 196
Court decsons:
cr, et a., Mchae P. Unted States v 5 7
Lverpoo London Gobe Insurance Co., Ltd., and Sunnyand
Whoesae urnture Co. Unted States v 5 9
Sov, et a., R. P. Unted States v 5 S
Deferment for fng returns, husband and/or wfe servng n orea... 559
Deegaton of authorty:
Desgnaton of offcers to act as the Secretary 696
Offers n compromse, narcotcs 199
Performance of certan functons of the Presdent by the Secretary
of the Treasury 695
Secretary of Interor as representatve of Presdent n rgn
Isands to perform certan dutes 696
Dstrant, evy on accrued wages due State empoyees 551
ectons:
Deprecaton, aowed pror to 1952 95
Unncorporated busness enterprses ta ed as domestc corpora-
tons 719
nforcement, empoyee s rghts under penson pan 393
tenson of tme, e cse ta es, speca due dates for certan returns,. 721
udgments, wthdrawa of pea of noo contendere after |udgment
pronounced and sentence passed 55
Lens:
state ta , bank hodng funds of nonresdent deceased coowner.. 0
ng, n New ampshre 190
Lens for ta es:
uture payments due under f ed rght to receve property 5
Levy on |ont checkng accounts 197
Prorty:
ttachment en, Oho 5 7
Garnsheeng nsurance proceeds, attorney s fees, Te as 5 9
Landord s dstress for rent, South Carona 5 8
Trustee n bankruptcy 5 5
Lmtaton perod:
Refunds or abatement, waver of rght to nsttute sut 558
Penates:
stmated ta , faure to fe decaraton, substanta under-
estmate 1
aure to depost ta es 196
Government depostares, deposts ess than coectons 196
Wthhodng recepts, hed avaabe to empoyees not suffcent.. 603
(723)
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72
DMINISTR TI Contnued
Returns:
cse ta es, speca due dates for certan returns . 721
tenson of tme:
Consodated . 1 1
mpoyees trust 139
Nonta abe fducary 1 1
edera credt unon, nformaton 138
usband and wfe, ega guardan of mssng spouse for sef and
spouse 131
Informaton supportng deductons, contrbutons to empoyees
trust 300
Inspecton:
ouse of Representatves, Commttee on Government
Operatons 1 , 1 2, 335
Senate Commttee on Government operatons 1 3, 1 2, 335
Prepared for ta payer, verfcaton 139
Suts, refunds, waver of rght to nsttute 558
Temporary rues under 195 Code . 698
LCO OL T :
dvertsng:
Matera, tota vaue, defned 609
Prohbtve, mat beverages as nonfattenng 615
Retaer advertsng specates furnshed by ndustry 610
Saes pamphets dspayed to prospectve whoesaers or retaer
purchasers 617
coho:
Deveopment n wne, use of concentrated frut |uce 599
port stamps 569
Isopropy, used on specay denatured acoho permttee s prem-
ses, records 595
Ta -free:
rcraft suppes, Costa Rca 577
Wthdrawa, method of showng purpose 572
Transfers under T. D. 586 , use at dstery for vodka 573
eer:
otted, purchase, sae at another brewer s offce . 600
ottng house defned 599
reakage osses, brewer s monthy cams 568
Nonfattenng, prohbtve advertsng 615
Odd sze contaners, abeng 61
Ta -free arcraft suppes, Costa Rca 577
Unta pad botted, storage . 600
endng:
Substandard wne wth natura wne 597
Whskey of foregn producton, contanng other whskes as
bendng, coorng or favorng matera 613
onded wne cears:
coho deveopment, use of concentrated frut |uce 599
Producton of favorng syrup for soft drnks 595
Propretor bottng under trade name, own producton, abes 597
Wneres:
Reports, ta overpayment, underpayment, errors 603
Standard wne premses, producton, storage, handng
sated wne 596
Use of ferrn to remove ron from wne 598
onds, e port, wthdrawas from more than one ndustra acoho
bonded warehouse . 576
otters:
ternate operaton of ta pad bottng house 606
Dsted sprts, wnes, mat beverages abes, certfcates of
approva . 612
reweres:
ottng house for recept of beer . 599
rewers monthy cams for breakage osses 568
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725
LCO OL T Contnued Page
reweres Contnued
Offce use, purchase, sae, botted beer produced by another
brewer 600
Reports, ta overpayment, underpayment, errors 603
Storage of unta pad botted beer 600
Cams:
Redempton:
Dsted sprts strp stamps 565
Unused beer, wne stamps 5G6
Refund, or credt, beer ost by breakage 508
Contaners:
ottes:
eer receved from another brewery 599
ght ycar-od straght whsky, abeng 572
New odd sze, mat beverages, abeng 61
Contaners:
Packages:
Consodated, ta pad, eght-year straght whsky, markng,
brandng 572
Purchase by agents of producers, for propretary sovents,
acquer thnners 59
Reused wooden, for neutra gran sprts reduced n proof-. 570
Ta -free acoho, marked scentfc 572
Corporatons, changes n offcers, etc., notce 609
Customs:
Custody, remported domestc dsted sprts wthdrawn free of
duty 605
Deaers and users, specay denatured acoho permttee, sopropy
acoho used on premses, records 595
Denaturants, aternate, approved by Natona Offce 589
Denaturng pants:
Industra acoho:
ternate and synthetc denaturants 589
stabshment and operaton procedure 578
Dsted sprts:
dvertsed n saes pamphets dspayed to prospects 617
otted n bond or wthout rectfcaton, addton of actvated
carbon 60
Commerca gauge by propretor, nterna revenue bonded
warehouse 575
Coupon stamps emnated, e cse stamps, e tended use 569
Dsteres, nterna revenue bonded warehouses, rectfyng
pants, etc 601
Domestc, remported, wthdrawn from customs custody, free of
duty 605
Neutra gran, dumped, reduced n proof, packaged n reused
.wooden cooperage 570
Recovered sprts, for coorng, favorng, of bended whsky 577
Ta -free arcraft suppes, Costa Rca 577
Ta pad eght-year straght whsky, markng, brandng, abeng.. 572
Ta payment n e cess of requrements for bendng 568
Transfers under T. D. 586 , use for vodka 573
Dsteres:
Regstered:
ternate operatons, bong out sts 603
Testng sampes of beer and stage 606
Transfers of sprts under T. D. 586 , use n producton of
vodka... 573
qupment and suppes:
reweres, partton of rackng room 600
Check vaves, bottng tanks, unrectfed products 607
Check vaves n outet ppe connectons on bottng tanks 569
Contaners, for propretary sovents, acquer thnners 59
Pourng racks furnshed retaers by whoesaers 610
Propretor s ocks, doors of nterna revenue bonded warehouse 57
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726
LCO OL T Contnued P e
qupment and suppes Contnued
Seas, ocks, emergency remova from nterna revenue bonded
warehouse doors 575
ermented mat quors. (See eer.)
ormuae:
Sated wne, producton, storage, handng on standard wne
premses 596
Sugar sods, and acohoc content, fnshed grape wne 599
Gauge, commerca, dsted sprts, nterna revenue bonded ware-
house 575
Importers:
Dsted sprts, wnes, mat beverages abes, certfcates of
approva 612
Purchasng tckets to retaers sponsored events 611
Inducements:
dvertsng matera, vaue defned 609
Insurance furnshed by whoesaers 610
Industra acoho pants:
ternate operatons, bong out sts 603
onded warehouses, denaturng pants 601
stabshment and operaton procedure 578
Labes:
end of substandard and natura wnes 597
otted eght-year straght whsky 572
Dsted sprts, wnes, mat beverages, certfcates of approva.. 612
ew odd sze contaners, mat beverages 61
Whsky:
Comc, retaer, sae to trade 615
oregn producton contanng other whskes as bendng,
coorng or favorng matera 613
Wne produced, botted under trade name by propretor 597
Wne removed from bonded wne cears as sampes 596
Losses, breakage, brewer s monthy cams 56
Marks and brands:
coho wthdrawn ta free, purpose 572
Consodated packages, ta pad eght-year straght whsky 572
Materas:
ctvated carbon added to dsted sprts, botted n bond or
wthout rectfcaton 60
fcrrn to remove ron from wne 598
Coorng, favorng or bendng, use of recovered and neutra
sprts 577
avorng syrup for soft drnks produced at bonded wne cears. . 595
Remanng n sts at tme of aternate operatons 603
Testng .sampes of beer and stage n fermenters 606
Whskes used to favor, coor, and bend, abeng 613
Partnershps, changes n tme of notfcaton 609
Permts, basc, permttees, notce of busness changes 609
Propretary sovents, acquer thnners, contaners, purchase by
agents of producers 59
Records, sopropy acoho used on specay denatured acoho per-
mttee s premses 595
Rectfyng pants:
ottng tanks, outet ppe connectons 569
Check vaves, bottng tanks, uurectfed products 607
Reguatons:
20 C R:
170, Pot pant operatons 601
182, Industra acoho _ 578
198.29, Use of voate frut-favor concentrate pant premses. 600
Reports, brewers, wnemakers, errors 603
Reta quor deaers:
Counter dspays protected by nsurance furnshed by whoe-
saers 610
Interor advertsng matera, tota vaue, defned 609
Members wth retaers n nonproft organzaton 611
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727
LCO OL T Contnued fa
Reta quor deaers Contnued
Members wth whoesaers n nonproft organzaton 611
Pourng racks furnshed by whoesaers 610
Sae, to trade, comc whsky abes 615
Sponsorng events, tckets purchased by whoesaers, mporters,
producers 611
Sampes:
eer and stage, testng 606
Wne, dstrbuton by saesmen 596
Stamps:
Dsted sprts, e cse, e tended use 569
port, ssuance for packages, casks of dsted sprts and
acoho 569
ermented mat quors, dsposton, redempton of unused stamps. 566
Strp, ssuance devauaton, redempton 565
Wne, dsposton, redempton of unused stamps 566
Sts, bong out, aternate operatons 603
Tanks:
ottng, check vaves n outet ppe connectons 569
ottng unrectfed products, check vaves 607
uk gaugng, dsted sprts ta pad n e cess of requrements
for bendng 570
Ta pad bottng houses, operaton by aternate propretors 606
negar pants, transfer of substandard wne from standard wne
premses 597
oatons:
Insurance furnshed by whoesaers 610
Retaer, sae of comc whsky abes, to trade 615
Tcket purchase, by whoesaers, mporters, producers, to retaer
sponsored events 611
Whoesaers furnshng pourng racks to retaers 610
Whoesaer-retaer membershp n nonproft organzaton 611
oate frut-favor concentrates, pant premses used to manufacture
other products . 600
Warehouses:
Industra acoho bonded:
stabshment and operaton procedure 57S
Wthdrawas from more than one, e port bond 576
Interna revenue bonded:
Commerca gauge, propretor 575
mergency remova of seas, ocks from doors 575
Propretor s ocks aff ed to doors 57
Whoesae quor deaers:
urnshng pourng racks to retaers 010
Purchasng tckets to retaer sponsored events 611
Wne:
dvertsed n saes pamphets, dspayed to prospects 617
coho deveopment, use of concentrated frut |uce 51(9
Natura, remova of ron wth ferrn 59S
Natura grape, sweetened by wncmaker other than producer 599
Produced, botted under trade name by propretor 597
Sated, producton, storage, handng on standard premses 596
Sampes for dstrbuton by saesmen 596
Substandard bended wth natura wne 577
Ta -free arcraft suppes, Costa Rca 362
Wneres. (See onded wne cears.)
MPLOYM NT T S:
eneft provsons, waver of e empton, whoy-owned State nstru-
mentaty 119
Domestc servce, addtona at empoyer s pace of busness - 120
mpoyer:
ght or more empoyees . 96
mpoyment servce, casework agency, homemakers 80
86 050 50- 7
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72S
MPLOYM NT T S Contnued
mpoyer Contnued
Partnershps, death of partner, nterest transferred by wdow to
so - 0
Wages pad by predecessor, 3,000 mtaton 99
mpoyer-empoyee reatonshp:
uto reparman, percentage bass 22
Drvers, used cars to aucton S3
ducares, servces outsde offca dutes 8
omemakers, furnshed by casework agency s(
Management servces, mobe dner operated on commsson 75
Promoters, organzng forum-type dnner cubs 110
Saesmen, eectrca appances 3
Se ton mantanng cemetery under wrtten contract OS
Teacher n pubc schoos, aso prvate tutor S0
Teephone servce, keepng car nventory for deaers S1
Teephone soctors, company products SC
Traveng saesmen, status after 1950 76
Watch reparman, percentage of recepts for space n store 117
Government empoyees servng abroad, ubrght ct SS
Incude-e cuded servce, domestc n non-farm home, addtona at
empoyer s pace of busness 120
Instrumentates:
State:
Mtary nsttute, rgna 119
Natona Guard unts, cvan empoyees 117
Mnsters facuty members and chapans:
Coeges 00
Theoogca semnares S9
Raroad retrement ta :
Compensaton, 350 mtaton, retroactve appcaton 95
mpoyee ta , deducton, retroactve effectve date of 350
mtaton 95
Returns:
Due date Saturday, Sunday, or ega hoday 523
ousehod empoyees, addtona servces at empoyer s pace
of busness 120
udgment coverng unpad mnmum or overtme wages 11
Ta :
Deducton, payment to Government, suts under ar Labor
Standards ct 11
Payments, quartery returns, due date Saturday, Sunday, or
ega hoday 523
Wages:
wards earned by saesmen pad to wves 115
Pad by predecessor empoyer, 3,000 mtaton 99
Pad by Unted States to ctzens of Guam, servces n Guam 500
Traveng e penses, rembursement arrangements 92-3
When to be reported, |udgment coverng unpad mnmum or
overtme wages 11
Wavers, State nstrumentaty 119
ST T T :
dmnstraton e penses:
ttorney s fees, etc., eecton to deduct from gross ncome of
estate.. 60
Sectons 81.71, 81.92, abatement, |eopardy assessments 66
ssessments, |eopardy, abatement 66
ank deposts:
Nonresdent aen, safe-depost bo n Unted States bank 65
Nonresdent deceased coowner, ta abty of bank avoded ony
bv transfer certfcate 6
onds, Unted States, vaue Seres U and savngs 2
Chartabe gfts and bequests:
Contngent bequests, possbty that charty w receve too
remote, dependent on ack of descendants - 50
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729
ST T T Contnued Pa e
Chartabe gfts and bequests Contnued
Deductons:
equests dstrbuted by e ecutor, rembursed by estate--.. oo
Transfer to ncome partcpaton fund of e empt organza-
ton 295
Cams aganst estate:
Debts of decedent, payment by e ecutors of ta on gfts, spt
wth survvng spouse for gft ta 9
Cams for refund:
owance of credt for State nhertance ta es, nterest. .. 61
Inhertance ta credt, correspondence wthn statutory perod
as cam 62
Contngent nterests, ega fees, nterest n property... 3
Court decson:
Sternberger state, Lous Commssoner v 50
Credts aganst ta :
oregn ta credt, Provnce of Ontaro, recproca requrement
of death ta credt 6
Inhertance ta credt:
Correspondence wthn statutory perod as cam 62
Interest on refund 61
Interest on overpayments, credt for State nhertance ta es 61
Indans, Osage, vaue of rea property owned at death . 5
Insurance, fe:
Transferred or assgned, vaue, survvor s annuty, or present
worth, refund payments 6
Len for ta , bank hodng funds of nonresdent deceased coowner 6
Marta deducton:
d|usted gross estate, eecton to deduct admnstraton e -
penses from gross ncome of estate 60
equests, etc., to survvng spouse, e empt property set off by
oca statute 58
Power of appontment:
Insurance pocy proceeds 56
Namng of takers n defaut 58
Termnabe nterest, no power to appont e ercsabe by spouse
aone..- 58
Nonresdents not ctzens:
unds n safe depost bo n Unted States bank 65
Trust fund of rtsh natona 67
Rea property, owned by Osage Indan at death 5
Stus of property:
New York trust company, funds for rtsh natonas 67
Safe-depost bo n Unted States bank, funds of non resdent
aen decedent 65
Ta conventons, Unted States- apan, estate, nhertance and gft
ta es 65
Transfers:
Income, possesson or en|oyment retaned, specfc annuty or
vng e penses 7
Power to ater, amend, revoke or termnate, contngent power of
decedent 8
Retrement and death benefts, ump-sum payment under Soca
Securty ct 112
Treates:
Unted States- apan, estate, nhertance and gft ta es 65
Unted States-Unted ngdom, stus rues . 67
auaton:
Contngent fees for ega servces 3
cse ta on |ewery, furs, etc 110
Optona method:
Increase n vaue of nsurance pocy 9
Property ncreased or decreased n vaue 9
Rea property owned by Osage Indan at death 5
Seres G and Unted States savngs bonds 2
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730
C SS PRO ITS T : Pace
bnorma ta year:
Income from sae by Commodty Credt Corporaton of pedged
crop 2
Increases n redempton prces of nonutcrest-bearng obgatons. 2t|
d|usted e cess-profts net ncome:
batements of ta es by reef provsons, abty for nterest 3r
Interest on borrowed capta ... . 2
Court decson:
oppers Company, Inr., successor on merger to oppers Unted
Company and Subsdares Unted States v. Premer O
Refnng Company of Te as v. Unted Staes 35
cess profts credts:
ased on ncome, stock dvdend, net capta addton or reduc-
ton 22
Invested capta, equty, nsurance carred by corporaton on
ves of offcers 2S
Reef for new corporatons:
Corporaton reactvated after a de facto dssouton 10
Interest on borrowed capta 21
CIS T S:
dmssons ta :
dvertsng bookets contanng coupons 500
Contrbutons to chartabe organzaton, membershp fees or
goods donated 506
Opera, cvc or communty assocaton 50S
mendments:
Reguatons 5, narcotcs, ora prescrptons 3
Reguatons CO, ta -free mportaton of payng cards 515
T. D. 0118, speca due dates for certan returns 721
Cams:
Refund:
Documentary stamps aff ed to ost documents 522
Interest on manufacturers e cse ta es erroneousy pad by
reta deaers 199
Con-operated devces, ba gum or candy vendng machnes, toy
charms as przes 519
Commttee reports:
Ta Rate tenson ct of 1055:
ouse of Representatves Report o. G9 97
Senate Report No. 36 357
Conference Report No. 305 11U
Communcatons ta :
utomatc transmtter readng perforated tape through a teetype
crcut . 530
Con-operated teephone servce 531
Speca due dates for certan returns 721
Stock quotatons devered by messenger or teephone 529
Subscrbers, te-ne 529
Court decson:
Lews, rank, v. Unted States 520
Dues, ntaton fees, etc.:
Charges for prveges or factes . 509
onorary membershps 510
Lfetme membershps to wdows of members 511
Genera, certan ta rates e tended 619
Import ta es, oeomargarne, use of documentary stamps as evdence
of payment 127
Legsaton:
ghty-fourth Congress:
Pubc Law 1, voatons reatng to narcotc drugs 61-
Pubc Law 18, Ta Rate tenson ct of 1055 619
Manufacturers ta :
ppances:
haust or ntake ventatng fan 52S
ousehod type, eectrc ncnerators 52s
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731
CIS T S Contnued Page
Manufacturers ta Contnued
utomobes, etc.
Parts or accessores, bet-drven compressors and condensng
unts 525
Penc ar pressure gauges 525
Person quafyng for credt aowance under secton 3 03(e)
of the 1939 Code 525
Rebut armature used n recondtonng a used generator 52
Genera:
Credt shown on return, cam 528
Oscoscope type anayzers desgned for detectng varatons
of arcraft engne performance 527
Rado and T recevers, premum submnature tubes desgned
for use n mtary equpment 526
Narcotcs:
ng ora prescrptons 201
, -Dpheny-6-Dmethyamno-3- e anone 697
Penaty voatons 619
Reguatons. See mendments.)
Reguatory ta es:
Cotton futures, use of documentary stamps as evdence of pay-
ment 127
Whte phosphorus matches, use of documentary stamps as ev-
dence of payment 127
Retaers ta :
ewery, unassembed artce, compete as to parts 518
Toet preparatons, beard softeners 518
Returns:
ng, payment of ta , due date Saturday, Sunday, or ega
hoday -_- 523
Speca due dates for certan returns 721
Stamp ta es:
onds, etc.:
Corporate obgatons, renewa by purchaser of mortgaged
property 513
tenson by a straw man . 512
Payng cards, ta -free mportaton 515
Stocks, etc.:
Rates and computaton, saes and transfers, Reguatons 71
appcabe under 195 Code 126
Transfer by odd-ot deaer as prncpa to hmsef as custodan
for purchaser 51
Transfers effected outsde Unted States, dupcate records
n Unted States..... . 513
Transportaton ta :
Persons:
us chartered by gr scout troops 531
mergency precudes stop outsde northern porton of
Western emsphere 53
Motor vehce on sks and endess track 533
Speca due dates for certan returns 721
Trp by Unted States resdent, wthn Canada 126
Truck on charter bass, per capta charge 53
Unted States porton of package tours begnnng and end-
ng n Canada... 531
Property:
ack-hau transportaton by truck owners 539
Cothng, packng and unpackng charges, dspensabe
carton 536
Constructon matera for a State nstrumentaty 5 1
unera drector transportng corpse n own hearse or
ambuance 535
Movement of goods for e port stopped at port of embar-
katon 5 3
Person abe for payment of the ta 538
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732
CIS T S Contnued P
Transportaton ta Contnued
Property Contnued
Speca due dates for certan returns 721
State hghway use ta es mposed on carrer and bed to
shpper 53S
Towng by port termna operator 537
Unted States ma by motor carrer 5 0
Wheat shpped from nteror ponts to gran eevator at port
of e portaton 5 2
Wagerng ta es:
Lotteres, non-con-operated machnes, free game ,r)20
Occupatona, Dstrct of Coumba 520
IR RMS:
Cassfcaton:
arre acton, component parts 562
Psto, revover grps 501
20-gauge gun, two barres pontng n opposte drectons 129
arous gadget guns 129
Deaer:
Lcensed, referrng orders to bona fde manufacturers 128
Records, sae of barre actons 5C2
Lcense, manufacturer s, assembng of frearms, component parts 562
Manufacturer:
rearms assembed from component parts . 562
Lcense, deaer manufacturng, mportng psto, revover grps 561
Records, sae of barre actons 502
Manufacturers e cse ta , sae, frearms, assembed by deaer . 562
Speca ta , occupatona referra of orders to manufacturers by
censed deaer _ 12S
GI T T :
mendments:
Reguatons:
Sectons 86. 3, 86. , abatement, |eopardy assessments 66
ssessment of ta :
Defcency, |eopardy, abatement 66
Chartabe gfts, transfer to ncome partcpaton fund of e empt
organzaton 295
cusons:
uture nterest, gft vauaton ndetermnabe 1
Insurance:
ssgnment of, fe pocy gven donee 113
Present nterest, fe nsurance pocy 113
Spt gfts, to thrd party, marta rghts n property waved by each
spouse 70
Trusts, ncome dstrbuton, soe dscreton of trustee 71
auaton:
P cse ta on |ewery, furs, etc 110
Genera, Seres savngs bonds . 71
INCOM T :
batement. (See Cams for refund or abatement.)
ccountng methods, prepad ncome and estmated e penses, 195
Reguatons 50
ccountng perod:
Change:
stmated short perod net ncome 333
Short ta abe year, mtaton on deductons 38
Interm rues for changes 7
Parent changed to conform wth subsdares 38
d|usted gross ncome:
Coorado ta on ncome from o and gas property nterests,
deducton 25S
mpoyee s saary and e penses combned 257
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733
INCOM T Contnued P f
dvance payments, departng aens, date nterest on overpayment
begns ... 57
ens (nonresdent):
Dscosure by domestc corporaton of ncome ta return data 675
enezuea, ta mposed on transportaton companes 77
Wthhodng reguatons under Unted States- apan conventon.. 665
ens (resdent), ncome from vestock rased and sod outsde the
Unted States _ 212
mendments:
Reguatons 118:
Secton 39.273-1, eopardy assessments, abatement 10
Reguatons 120:
26 C U, 06.207, 06.607, wthhodng of ncome ta , pay-
ments durng 195 and 1955 under wage contnuaton
pans 123
mortzaton, eecton, ta abe and partay ta abe bonds 381
mortzaton (emergency factes), competed unt of two-way
facty, not a separate facty . 381
nnutes:
Ta abty:
mounts pad deceased empoyees benefcary under a group
contract 230
Death beneft payment receved by benefcary under
snge premum deferred annuty contract 219
Payment to chartabe organzaton by husband for annuty. 233
Proceeds, annuty contract, surrendered n trust dstrbuton. 39
Transfer of penson funds from one quafed trust to another. 0
rmed orces:
Pay:
Combat, orea 17
Deceased member, gratuty to benefcary 236
rst 60 days accrued eave at tme of dscharge 218
Prsoner of war rembursement for oss of persona rghts.. 213
Perod of tme dsregarded:
ng returns of husband and/or wfe servng n orea 550
Lmtaton on assessment and coecton, due date for rng
returns 559
Retrement pay:
Dsabty:
Members of unformed servces under Career
Compensaton ct of 19 9 2 1
Porton refunded due to mtaton on cvan pay,
amount e cuded ._ 2 5
Unforms, traveng e penses, reservsts 261
ssessment of ta :
eopardy abatement 10
Ta Reguatons (195 ) promugated 1 5
ssgnment (ncome), unpad accounts recevabe assgned to rrevo-
cabe trust 211
wards, przes, etc.:
mercan Chemca Socety 235
Cadet or mdshpman apponted to servce acs /c-nv 21
ack pay, retroactve ncrease n ar ma pay, propose. downward
ad|ustment.. OS
ad debts:
anks usng reserve method 2S2
Patronage aocatons, document form 2 2
anks:
ternatve method of computng addtons to reserves 2S2
perence factor, recovery of oan charged otr as bad debt 283
ass:
Common stock of subsdary for preferred stock of parent n
ta -free e change under orders S C 18
Merger of common trust funds 02
Propertes consodated under one deed 339
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73
INCOM T Contnued act
ass Contnued
roperty:
mounts receved from sae of od budngs, vountary
remova from and purchased 280
In hands of testamentary benefcary 352
Stock, earnngs and profts, nonstatutory merger 35
Stock:
Common for preferred n corporate qudaton 3
Merger, subsdares of foregn corporaton 3
Trust prncpa, parta dstrbuton n knd 233
enefcares:
ass of property wthdrawn from trust and apponted to sef 352
Death payments under pan, empoyee dyng whe empoyed 231
Deceased empoyee, payments on behaf of empoyer by nsurance
company 230
Deceased member of rmed orces, gratuty pad by Unted
States 236
Trust, termnaton, gans on unpad nstament obgatons 391
Unted States ctzen, Unted States ncome dstrbuted by
Canadan trust 385
enefts under pans:
ccdent and heath, sckness durng pregnancy 16
nnuty, nsurance, to benefcary of empoyee deceased pror
to retrement 266
onds:
Interest:
ccrued on Seres , pror to ressuance 71
ntcpated for perod hed between maturty and redemp-
ton dates 2(
Genesee aey Regona Market uthorty 1
Issued at dscount 213
Natona Savngs onds of Me co 213
Potca subdvson:
Mane Turnpke uthorty 230
Mchgan Macknac rdge uthorty 238
Secondary coupons on muncpa bonds retaned by broker.. 236
Treasury bonds redeemed at oss before maturty 279
Unted States savngs, ctzen and resdent of Ireand survv-
ng co-owner 673
Premums, amortzabc, eecton on ta abe or partay ta abe
bonds 381
udng and oan assocatons:
Penates retaned upon wthdrawa of shares 305
Preferred stock dvdends, addton to bad debts reserve 306
usness e penses:
Captazed:
onus on capta of foregn corporaton mposed by Penn-
syvana 281
Deay rentas, nonproducng o and gas eases 320
Indrect e pendtures n connecton wth reforestaton 310
mpoyees, rembursement for movng e penses 317
Capta assets:
Defnton:
Cassfcaton of assets of soe propretorshp 370
Rghts n dstrbutorshp agreement 370
odng perod, securtes purchased b3 partnershp for member.. 03
Capta e pendtures:
onus on capta of foregn corporaton mposed by Pennsyvana. _ 281
Cost of affdavt, contnued use of trademark 319
Deepenng e stng we, constructng new we, resut of drought.. 25
Deay rentas, nonproducng o and gas eases 320
Drect costs n connecton wth reforestaton 319
Greens on gof course 320
Insovent corporaton s debts to trade credtors pad by new
corporaton 320
Ltgaton to vod a resdua trust . 275
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735
INCOM T Contnued Page
Capta e pendtures Contnned
Permanent roadway n connecton wth deveopment of renta
property 320
Renta payments on auto equpment 283
Capta gans and osses:
states and trusts:
Instament obgatons, dstrbuton at termnaton of
trust 391
Redempton of stock acqured n reorganzaton, payment
of ta es 36
Indvduas:
ssets of soe propretorshp aocaton of seng prce 370
onds ssued at dscount 213
mpoyee-partcpant eectng to wthdraw a or part of
funds standng to hs credt n an empoyees proft-
sharng trust 1 3
Patronage aocatons, document form 282
Redempton of Natona Savngs onds of Me co 213
Sae of rghts n dstrbutorshp agreement . 370
Lvestock. (See Lvestock saes.)
Property 117(|) treatment, sae of underyng water rghts 373
Tmber and coa, perod tmber hed by transferor, treatment by
transferee --- 372
Casuaty osses. (See Losses: Casuaty or theft.)
Capta stock:
ass, bank stock after reorganzaton 350
Transferred to corporaton controed by transferor 3 0
Carrybacks and carryovers, net operatng oss deducton n year of
accrua 376,378
Chartabe contrbutons. (See Contrbutons (deductbty).)
Ctzens of Unted States:
oregn born chd of nonresdent aen mother and Unted States
ctzen soder, adopted by Unted States ctzens 323
Pensons for servces performed abroad . 368
Ctzens of Unted States (nonresdent):
Ta es on persona resdences abroad, medca e penses 366
Teachers n nursery schoos on Unted States bases abroad 9
Treatment of ncome earned abroad 80
Cams for refund or abatement:
Income Ta Reguatons (195 ) promugated 1 5
Ta es pad erroneousy by trustee n bankruptcy 557
Waver of rght to nsttute sut 558
Coecton of ta , Ta Reguatons (195 ) promugated 1 5
Commssons:
rokers, secondary nterest coupons on bonds 236
Insurance saesman, dscount on own pocy 221
Commttee reports:
Ta Rate tenson ct of 1955:
ouse of Representatves Report No. 69 97
Senate Report No. 36 - 357
Conference Report No. 305 110
Communty property and ncome, wfe s share of husband s ncome
from wthout Unted States 92
Compensaton receved:
Convenence of empoyer, new empoyment, movng e penses 317
Property other than cash:
wards earned by saesmen, pad to wves 115
Dscount aowed saesman on own pocy --- 221
Saares, fees, etc., pad by more than one empoyer affectng
empoyee s penson pan egbty 01
Sckness or n|ures:
bsence n 1953 quafyng for 195 e cuson -- 17
mpoyee absent because of quarantne or ness of famy
member - 17
Iness durng pregnancy 16
86 050 56 8
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736
INCOM T Contnued ag
Compensaton receved Contnued
Sckness or n|ures Contnued
Member of rmed orces, convaescent dong ght work for
hospta f
Unted States cv servants . 15
Consodated returns. See Returns: Consodated.)
Contracts:
Government:
Renegotaton sub|ect to nson ct 10
Termnaton 32o
Group annuty, payments to deceased empoyee s benefcares on
behaf of empoyer 230
Contrbutons (deductbty):
Corporatons:
ar market vaue of donated nventory property 223
Payment to e empt organzatons earmarked for chartabe
organzatons.. 20
Penson payments to wdow of deceased empoyee 29 )
Reserve occrs assocaton 202
Indvduas:
Chartabe organzaton, property n satsfacton of pedge.. 207
Contrbutons to a rehabtaton center 28
penses of Natona Guard offcer 26 )
ar market vaue of donated nventory property 223
Instament notes credted ns gfts to maker 293
Payments to e empt organzatons earmarked for chartabe
organzatons __ 20
Retrement system, transferred wth nterest to new system.. 329
Soca cub, membershp dues earmarked for chartes 29
Speca deducton 26
ctvtes for e empt organzatons 201
Dutes for e empt organzaton. 28
aue of remander nterest, ncome partcpaton fund of
e empt organzaton 295
Lmtaton:
mpoyees trusts, treatment past servce costs 303
Museum e empt as educatona organzaton 28
Speca deducton 20
Trusts:
Chartabe donaton before termnaton 390
Chartabe gfts per settement agreement 390
Contrbutons by empoyer to temporary depostory, em-
poyees benefts 5
mpoyees , nformaton supportng deductons 300
Unmted:
Chartabe, meanng of ncome ta es pad 30
ffect overpayment credted aganst estmated ta for suc-
ceedng year 37
Cooperatves:
Dstrbuton, patronage dvdends, retenton of ess than whoe
doar amounts 337
Patronage dvdends, cooperatve not n name 338
Tenant-stockhoder, deducton of nterest and ta es 312
Corporatons:
Genera:
Income from transacton through nomna agencv of an
offcer . 217
Loss upon vountary remova of od budngs 280
Stock opton, empoyee, combned votng power rue 6
Lqudaton, nonstatutory merger 35
Court decsons:
Genera mercan Investors Company, Inc. v. Commssoner 210
Genshaw Gass Company and Wam Godman Theatres, Inc.
Commssoncr v 207
Godky state, Ida S. Commssoner v 253
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737
INCOM T Contnued Pag
Court decsons Contnued
Green, Matter of en 5 5
rshon Trust, anne Commssoner v 2 8
Lewyt Corporaton (now known as Lewy Manufacturng Corpora-
ton) v. Commssoner 378
Oympc Rado and Teevson, Inc. Unted States v 376
Suvan, Odom arre v. Unted States 55
Credts aganst ta , Ta Reguatons (195 ) promugated 1 5
Credts (dependents). (See emptons.)
Crmna prosecutons, vadty of ndctment secured wthout sanc-
ton of ttorney Genera 55
Damages, fraud and anttrust voaton 207
Decedents, ump sum payment due Government empoyee 75
Decaratons. (See stmated ta .)
Deductons:
usness e penses:
Contrbuton to commttee to brng conventon to ocaty.. 22
Conventon, busness trp, wfe accompanes husband 315
mpoyer s premums pad on nsurance coverng group
nsurance and annutes 266
ntertanment, quor purchased or used n Okahoma 22
Insurance premums pad on pocy coverng overhead e -
penses durng absence due to sckness or n|ury 11
Lmtaton, deductons for ndvduas, separate actvtes n
snge commodty 382
Mantenance, gof course greens 320
Payment for reease of mortgage 259
Payments nto reserve for vesse damage not covered by
nsurance 265
Premum on nsurance pocy coverng porton of body
vta to professon 271
Rea estate deveopment company, mantenance fund
dsbursements 216
Suppementary contrbutons by empoyer to remburse
nsurer for refunds of empoyees contrbutons to an-
nuty pan 302
Transportaton e penses attendng drs, Reserve Compo-
nents of rmed orces 261
Trave and study, teacher on sabbatca eave 318
Contrbutons. (See Contrbutons (deductbty).)
mpoyees:
Cothng to protect commerca fshermen 27
Trave and reated e penses, ong ne truck drvers 27
Trave, meas, odgng, by commerca fshermen 27
nes and penates, wthdrawa of shares, budng and oan
assocaton 305
Medca e penses:
Certan unusua e pendtures made for purposes of heath... 307
Not attrbutabe to ncudbe or e cudabe ncome, Unted
States ctzen, nonresdent 366
Premum on nsurance pocy coverng porton of body vta
to professon 271
Nonbusness e penses:
ttorney s fees, etc., pad by fducary 275
Custody fee pad to sponsored nvestment pan 275
Dues, members of rmed orces cubs 270
mpoyees saary and e penses combned 257
Incurred by Natona Guard offcer 269
Ltgaton to vod resdua trust 275
Payment for reease of mortgage 259
Trave, trp to e pore nvestment possbtes 317
Persona e penses, (oee Persona e penses.)
Ta es:
Coorado, ncome from o and gas property nterests 258
Georga saes and use, purchaser or consumer 277
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738
INCOM T Contnued P e
Deductons Contnued
Ta es Contnued
eved by Moffat Tunne Improvement Dstrct 25
Lousana on cgarettes 2
Lousana saes, used n purchasers trade or busness 23
Msssspp on cgarettes, cgars, smokng tobacco 278
Nebraska on cgarettes 23
Oho rea property 07
Persona resdence abroad, Unted States ctzen nonresdent- 366
Wsconsn, addtons to ta 277
Tenant-stockhoder n cooperatve apartment 312
When to be taken:
cess profts ta pad durng year but accrued n pror year. 376, 37S
Oho rea property ta es 67
Potenta refund, ad|ustment of retroactve ncrease n ar-
ma pay OS
Reserves for estmated e penses, 195 Reguatons 50
acaton pay, tme of accrua OS
Defcences:
bated by reef provsons, abty for nterest 35
mnated by reef provsons 13
Dependents (credt). (See emptons.)
Depeton:
Cay n con|uncton wth shae dentfed 35S
Crushed rock produced and sod at quarry, smar products re-
sutng from subsequent operatons, percentage 290
Gypsum defned 357
auage aowances by tomc nergy Commsson 239
ydraucay mned sat, percentage 290
Loam, bass for depeton 212
O and gas propertes, treatment of subeases 2S6
Processes used n the manufacture of brck and te, percentage.. 73
Sae of ron ore, prepayment dscount 2S5
Sand and grave dredged from bed of navgabe rver under ed-
era permt, percentage 288
Treatment processes n manufacturng shae and sate 357
Deprecaton:
ass of property acqured n e change for annuty contract 352
udng constructed by essee on essor s property, devsee of
essor 28
ectons, 195 reguatons, aowed pror to 1952 95
Leased automotve equpment 283
Dstrbutons:
Dvdends, nvountary qudaton of nventory 359
Dstrbutons (corporatons):
mpoyee-partcpant eectng to wthdraw a or part of funds
standng to hs credt n an empoyees proft-sharng trust 1- 3
Porton of stock redeemed due to contracton of busness, parta
q udat on 363
Redempton of stock owned by estate, acqured n reorganzaton. 36
Reorganzaton, undstrbuted earnngs and profts 3 5
Stock dvdends, amount ta abe to sharehoder-dstrbutees 2 8
Stock of a controed corporaton 31
Stock sod by owner to another corporaton owned by hm 361
Transfer of penson funds from one quafed trust to another 0
Dvdends:
Dstrbuton:
Check returned, hed for patron 337
quazaton payments by open end nvestment company.. 16
Stock sod by owner to another corporaton owned by hm.. 361
Lqudaton, parta, 6tock redeemed for prce n e cess of n-
ventores sod . . 303
Pad credt:
udng and oan assocaton, penates for wthdrawa of
shares - 305
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739
INCOM T Contnued P ee
Dvdends Contnued
Pad credt Contnued
Decared n an undetermned amount by nsurance com-
pany 06
Patronage:
Document form 2S2
Stock certfcate returned, hed for patron 337
Word cooperatve not n name of assocaton 338
Stock dvdends:
udng and oan assocatons, preferred stockhoder-
depostor 306
Dstrbuton n knd, amount ta abe to sharehoder-
dstrbutees 2 8
Stock of controed corporaton dstrbuted to stockhoders.. 31
arned ncome (sources wthout Unted States):
Nonresdent ctzens 80
Pensons pad retred Unted States ctzens 368
Teachers n nursery schoos on Unted States bases abroad 9
Wfe s share of husband s ncome ._ 92
ectons (manner and effect):
Deprecaton aowed before 1952, 195 reguatons 95
Overpayment credted aganst estmated ta , unmted deduc-
ton for chartabe contrbutons 37
Temporary rues under 195 Code 698
Unncorporated busness enterprses ta ed as domestc corpora-
tons, temporary rues under 195 Code 719
mpoyees trusts. (.See Trusts: mpoyees .)
states and trusts. (See Trusts: states and trusts.)
stmated ta :
Carfcaton of fng nstructons 132
aure to fe decaraton, substanta underestmate, penates.. 1
changes of property, transfer of stock to corporaton controed by
transferor . 3 0
empt corporatons and assocatons:
grcutura, guardng purty of the breed of Wesh pones 71
Chartabe, wdows and chdren of pocemen or fremen ked n
ne of duty 73
mpoyees operatng bus for own convenence 72
mpoyees trusts, returns, e tenson of tme 139
edera credt unons, nformaton returns 138
oundaton promotng books of an ncorporator 72
Payments earmarked for use n dstrbutng terature to char-
tabe organzatons 29
State nstrumentaty 119
Transfer of stock of new corporaton 3 0
empt ncome:
ward for scentfc achevement, mercan Chemca Socety 235
Payments made durng 195 and 1955 under wage contnuaton
pans 123
Sources wthout the Unted States, Ityukyu Isands 09
emptons:
Dependents:
Cadet or mdshpman apponted to servce academy 21
Mutpe support agreement 19
oregn born chd of nonresdent aen mother and Unted
States ctzen soder 323
Spouse, separated under nterocutory decree of dvorce 322
ead of househod, mantans prncpa abode of granddaughter. 205
Spou6e, status as dependent 18
tenson of tme:
Consodated returns 1 1
ng of returns:
Dssoved subsdary 1 0
mpoyees trusts 139
armers 33
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7 0
INCOM T Contnued r n
armers and farmng:
Lvestock hed for breedng, gan or oss on sae of anmas born
and rased on farm 226
Lvestock producers, assocaton guardng purty of the breed
of Wesh pones 71
ducares:
ng orm 10 1 at death of fe tenant, dstrbuton of trust
assets 130
Lega guardan of mssng spouse, fng returns 113
oregn corporatons:
gent n Unted States to buy and se Unted States securtes-. C3
ass, property acqured by merger, subsdares of foregn cor-
poraton 3
Canadan, mutua nvestment company composed argey of
stockhoders n Unted States 77
enezuea, ta mposed on transportaton companes 77
oregn ta credt:
Dscosure by domestc corporaton to foregn bank 075
Dstrbuton receved by domestc corporaton from foregn
subsdary 80
Inda, smar requrement 79
Saud- raban addtona ta on companes producng petroeum. 386
Status of Ryukyu Isands 09
Unted ngdom, smar requrement 386
Unted States ncome dstrbuted by Canadan trust to bene-
fcares n Unted States 3S.
enezuea, ta mposed on transportaton companes 77
Gan or oss:
ass:
d|usted, property acqured n e change for annuty con-
tract... 352
ank stock after reorganzaton 350
Common stock of subsdary for preferred stock of parent
n ta -free e change under orders of S C 18
Merger of common trust funds 02
Propertes consodated under one deed 339
Property n hands of testamentary benefcary 352
Stock, parta dstrbuton of trust prncpa 233
Genera, assgment of subeases n o and gas propertes 2S6
Recognton:
pprecated or deprecated property, donated n satsfacton
of pedge made n terms of doars 297
Condemned property repaced wth borrowed funds 3 2
change of property between domestc subsdares of foregn
corporaton 3
change of property n nonstatutory merger 35
change of stock 3 0
Partton proceedngs, tenants n common 339
Perod for determnng constructon cost of new resdence .. 3 8
Proceeds from sde of resdence nvested n new resdence.. 3 7
Purchase of partnershp nterest by corporaton for repace-
ment purposes 3 3
Rea property, sod and repurchased by owners n ther same
respectve nterests 3 0
Renegotaton ct of 1951 amended 620
Reorganzaton, common gven for preferred stock _ 3
Sae by owner of underyng water rghts 373
Sae of famy resdence rented whe owner was n rmed
orces 3 9
Sae of stock by owner to another corporaton owned by hm.. 361
Stock of controed corporaton dstrbuted 31
Substtuton of mortgage for baance due on nstament of
and contract . 331
Warehouse corporaton merged nto new cooperatve 3 5
Gfts, retred mnsters and rabbs, unsocted payments granted
by former congregaton 1
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7 1
INCOM T Contnued Pa
Gross ncome:
cusons:
Compensaton for perod of sckness or n|ures convaescent
member of rmed orces dong ght work for hospta 16
Death payment, empoyees trust 228
Death payment under pan, empoyee dyng whe empoyed. 231
Deceased member of rmed orces, gratutous payment to
benefcary 236
Dvdends dstrbuted to patrons of cooperatve 338
usband s ncome from sources wthout Unted States,
domce n communty property state 92
Income from sources wthout the Unted States, Unted
States ctzen 80
Premums, edera empoyees group fe nsurance pocy.. 13
Premums pad on endowment contract whch ncudes other
benefts 232
Refunds by nsurer of empoyees contrbutons to an annuty
pan 302
Remuneraton of vstng teachers, Great rtan and
Northern Ireand 676
Reserve for nsurance protecton, Shpowners Protectve
and Indemnty ssocaton 265
Transfer of penson funds from one quafed trust to another. 0
Trust prncpa apprecated n vaue, parta dstrbuton 233
Wages for perod of sckness or n|ures, Unted States cvan
empoyee 15
Wages or payments under pan, ness n 1953 contnung
nto 195 17
Incusons:
nnuty payments or gfts to benefcares of trust 75
Compensaton for frst 60 days accrued eave, members of
rmed orces upon dscharge 21S
Death beneft payment receved by benefcary under a
snge premum deferred annuty contract 219
Deveopment aowances, tomc nergy Commsson 239
Income from transacton by corporaton through nomna
agency of an offcer 217
Lump sum due deceased Government empoyee pad to
benefcares or estate 75
Mantenance charges pad to deveopment company by ot
owners 210.
Partner s proportonate share of partnershp gross ncome.. 12
Premums pad for other benefts n endowment contract.. 232
Prepad ncome, 195 Reguatons 50
Proceeds from nsurance pocy coverng rembursement for
overhead e penses ncurred durng absence due to sckness
or n|ury 11
Proceeds from sae of oam 212
Revenues of utty n e cess of approved rates 215
Wages durng absence because of quarantne or ness of
famy member 17
When ncuded:
Corporate dstrbuton n knd, amount ta abe to share-
hoder-dstrbutees as dvdends 2 8
Dsabty retrement pay, members of unformed servces . 2 1
Interest aowed on future payment funds hed by a edera
Land ank 320
Interest, contrbutons to od retrement system transferred
to new system 329
Interest receved on redempton of bonds 213
Redempton of Natona Savngs onds of Me co 213
Stock certfcates receved and pedged as addtona coat-
era for notes 331
Termnaton of Government contract 325
Unpad accounts recevabe assgned to rrevocabe trust . 211
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7 2
INCOM T Contnued P t
ead of househod, mantans prncpa abode of granddaughter . 205
odng perod:
Partners purchase of nterests of a other partners 372
Tmber hed by transferor, treatment by transferee 372
Income:
rom sources wthn Unted States possessons, wages pad by
Unted States to ctzens of Guam, servces n Guam 500
rom sources wthout the Unted States:
Status of Ryukyu Isands 09
Teachers n nursery schoos on Unted States bases abroad.. 91
Instament saes:
Rghts n dstrbutorshp agreement, casua sae of personaty 370
Stock certfcates receved and pedges as addtona coatera for
notes, ncome 331
Substtuton of mortgage for baance due on nstament and
contract . 331
Insurance:
Premums:
ndowment contracts, ncudng other benefts 232
Government porton, edera empoyees group fe nsurance
pocy 13
Pocy coverng porton of body vta to professon 271
Insurance:
Proceeds:
Death beneft payment receved by benefcary under a
snge premum deferred annuty contract 219
Death benefts, purchased by Unted Natons . 227
Pocy coverng porton of body vta to professon 271
Insurance companes:
Lfe, heath and accdent pocy wth opton not to renew, fe
nsurance reserves 05
Mutua, other than fe:
Characterstcs, absence of democratc ownershp and contro. 06
Dvdends decared n undetermned amount 06
Rensurance recoveres 76
Other than fe or mutua, dvdends decared n undetermned
amount . 06
Interest:
empt:
onds:
Mane Turnpke uthorty 239
Mchgan Macknac rdge uthorty 239
Potca subdvson, New York 1
Interest:
On ta :
Defcency abated by reef provsons 35
Resut of amendments to 195 Code, date from whch
computed 19S
Overpayments of ta , advance payment by departng aen, date
nterest begns 557
Pad:
Debentures sod, temporary nvestment of funds borrowed.. 276
Payment for reease of mortgage 259
Tenant-stockhoder n cooperatve apartment 312
Interest:
Receved:
onds, dscount at whch ssued 213
cessve accrua, future payment funds hed by a edera
Land ank 326
Unted States savngs bond, ctzen and resdent of Ireand
survvng co-owner 673
Inventores:
d|ustment, property donated to e empt organzatons . 223
Lvestock born and rased on farm, hed for breedng purposes 226
Reta vaue, merchandse at begnnng and end of year . 69
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7 3
INCOM T Contnued p e
Inventores (LI O):
Department stores, anuary 1955 LS prce nde es . 69
Invountary qudaton, repacement n subsequent years. 359
arety stores, use of aternatve set of nde es . 2 7
Invountary conversons:
Condemned property, repaced wth borrowed funds 3 2
:m

P
Partnershp nterest purchased by corporaton for repacement
purposes, treatment . 3 3
Legsaton:
ghty-thrd Congress:
Pubc Law 76 , e tendng and amendng the Renegotaton
ct of 1951 620
ghty-fourth Congress:
Pubc Law 18, Ta Rate tenson ct of 1955 619
Lcenses, e cusve, patent royates 97
Lmtaton perod:
ssessment of ta , coecton of ta , tme dsregarded, nd-
vduas outsde the mercas 559
Coecton of ta , partner s share of partnershp gross ncome,
nformaton return 12
Refunds and abatement, waver of rght to nsttute sut 558
Lqudatons, parta, porton of stock redeemed due to contracton
of busness 363
Lvestock saes, computaton of gan or oss, anmas born and rased
on farm 226
Loans, charged off as bad debt, recovered, e perence factor 283
Losses:
Casuaty or theft:
Dryng up of we durng drought 25
Moth damage to fur coat 25
Losses:
Indvduas:
Deductbty, antcpated nterest on bonds between ma-
turty, redempton dates 26
Lmtaton on deductons, accountng perod, short ta abe
year 38
Redempton Treasury onds before maturty, refund of
nterest . 279
ountary remova of od budngs 280
Lmtaton on:
Separate busness actvtes from snge commodty 382
Uranum e poraton or mnng ventures 382
Msceaneous, computaton of abnorma nsurance osses 76
Medca e penses. (.See Deductons.)
Mtary personne. (See rmed orces.)
Mnes:
Deveopment aowances, when ta abe 239
Sae of ron ore, prepayment dscount 285
Sat, hydrauc methods, percentage depcton 290
Uranum e poraton or mnng ventures, osses, mtaton on
deductons 382
Net ncome:
Incuson n estate resdue, settement agreement 390
Trusts, transfer of ncome by fetme ncome benefcary to
another - 389
Net operatng oss:
Carrybacks and carryovers, nvountary qudaton of nventory.. 359
Deducton n year of accrua 376, 378
O and gas propertes, assgnment of subeases 286
Optons, empoyee stock, combned votng power rue - 6
Partnershps:
ass of property, securtes purchased by partnershp for member. 03
Capta gans and osses, partner s purchase of nterests of a
other partners 372
If |
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7
INCOM T Contnued hn
Partnershps Contnued
Death of partner, nterest transferred by wdow to son 0
Returns, mtaton perod for coecton, each partner s share
returned 12
Patents, speca cense agreements, royates 2 1
Penates:
stmated ta , faure to fe decaraton, substanta under-
estmate 1
aure to make decaraton and pay estmated ta 13
Payment for reease of mortgage 25
Pensons:
Retred mnsters and rabbs, unsocted payments, granted
by former congregaton 1
Wdow of deceased empoyee 2
Penson trusts. (See Trusts: mpoyees .)
Perod of tme dsregarded:
ssessment, coecton of ta , ndvduas outsde the mercas 559
usband and/or wfe servng wth armed forces n orea . 559
Persona e penses:
ttorney s fees, etc., pad by fducary 275
Conventon, busness trp, wfe accompanes husband 315
Lecturer, estabshng professona reputaton 317
I mg ne truck drvers, meas n genera area of home termna.. 271
Rembursement for movng e penses 317
Trave and study, teacher on sabbatca eave SIS
Trave, trp to e pore nvestment possbtes 317
Unforms of Reservsts, rmed orces 201
Persona hodng companes:
nance company, e empton from surta n absence of pertnent
State aw 3
Royates, n-o payment rghts 3
Rea estate:
Cost of new resdence, constructon perod 2 S
Sae of famy resdence rented whe owner was n rmed
orces 2 9
Sae of resdence, proceeds nvested n new resdence 3 7
Sod and repurchased bv owners n ther same respectve nterests,
to perfect tte I 3 0
Recoveres, nvestment company, nsder profts 210
Redempton of stocks and bonds:
Owned by estate and acqured n reorganzaton 30
Porton of stock redeemed for prce n e cess of nventores sod 303
Treasury bonds redeemed before maturty, refund of nterest 279
Treatment of dscount at whch bond was purchased . 213
Refunds. (See Cams for refund or abatement.)
Reguated nvestment companes:
quazaton payments by open end nvestment company,
percentage requrement 303
Recovery of nsder profts 210
Reguatons:
20 C R:
1. 52-1 through 1. 52-8, 1. 62-1 through 1. 02-7 Treat-
ment of prepad ncome, reserves for estmated e penses.. 50
1.1020, ectons, deprecaton 95
1.1 91-1 through 1.1 9 -2, Ta on transfers to avod
ncome ta 106
801.6201, ssessment uthorty: 301.6301, Coecton
authorty 301.6 02, uthorty to make credts or refunds
301.0 0 , batements 1 5
Wthhodng, ncome ta conventons, fng orm 10 2 Suppe-
ment, T. D. 0055 amended 623
Wthhodng, I nted States- apan Income Ta Conventon 005
Renegotaton. (See War contracts.)
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7 5
INCOM T Contnued Page
Reorganzatons:
Merger subsdares of foregn corporaton 3
Recaptazaton common stock e changed for preferred 3
Recognton of gan or oss, nonstatutory merger 35
Warehouse corporaton merged nto new cooperatve . 3 5
Resdence. (See Rea estate.)
Resdent aens. (See ens (resdent).)
Retrement ncome, mnsters and rabbs, unsocted payments granted
by former congregaton 1
Returns:
Consodated:
ccountng perod changed to conform wth subsdares 387
tenson of tme for fng 1 1

ducary:
orm 1011, fed at death of fe tenant, dstrbuton of trust
assets 130
Lega guardan of mssng person 131
ractona part of year, dssoved subsdary 1 0
usband and wfe:
Interocutory decree of dvorce 322
Lega guardan of mssng spouse for sef and spouse 131
Spouse camed as dependent 18
Indvduas, e tenson of tme for farmers 33
Informaton:
edera credt unon 138
orm 10 2 Suppement, to be fed n atmore, T. D. 6055
amended.. 623
Inspecton, ta payer s copy by State offcas 335
Sgnature, statement of verfcaton 139
Tme for fng, perod dsregarded, ndvduas outsde the
mercas 559
Royates:
ssgned subeases n o and gas propertes 286
cusve cense agreements 97
In-o payment rghts, persona hodng company ncome 3
Saes or e changes:
ocaton of seng prce among a assets 370
Cost of new resdence , constructon perod 3 8
Partton proceedngs, tenants n common 339
Patents, e cusve rghts 97
Property acqured n e change for annuty contract 352
Rea property, sod and repurchased by owners n ther same
respectve nterests to perfect tte 3 0
Securtes transactons:
Insder profts, recovery by nvestment company 210
Investment by partnershp of member s contrbuted capta 03
Servcemen. (See rmed orces.)
Suts, refunds, waver of rght to nsttute 558
Surta es, e empton:
Corporaton merged wth parent corporaton durng ta abe
year 206
Ta conventons:
Canadan nvestment corporaton havng agent n Unted States
to buv and se Unted States securtes 63
Unted States-Canada 62
Unted States- edera Repubc of Germany 635
Unted States- apan, ncome ta 65
Unted States-Unted ngdom of Great rtan and Northern
Ireand, vstng teachers 676
Wthhodng of ta on earnngs n Unted States of Canadan
trust --.- 633
Wthhodng reguatons under Unted States- edera Repubc
of Germany conventon 6 1

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7 6
INCOM T Contnued r e
Ta es:
Deducton:
Coorado, ncome from o and gas property nterests 258
cess profts ta es pad durng year but accrued n pror
year 376,378
Georga saes and use, purchaser or consumer 277
Leved by Moffat Tunne Improvement Dstrct 25
Lousana on cgarettes 2
Lousana saes, used n purchasers trade or busness 23
Msssspp on cgarettes, cgars, smokng tobacco 278
Nebraska on cgarettes 23
Oho rea property 67
Tenant-stockhoder n cooperatve apartment 312
Wsconsn, addtons to ta 277
oregn countres. (See oregn ta credt.)
Rates of certan e stng corporate norma ta e tended 619
Transfers to avod ncome ta , stock or securtes to foregn enter-
prses, 195 reguatons 106
ctvtes for ta e empts 291
Commerca fshermen, away from home port 27
Dutes for e empt organzaton 28
Long ne truck drvers 27
Teacher on sabbatca eave 3IS
Treates:
Canadan nvestment corporaton havng agent n Unted States
to buy and se Unted States securtes 63
Unted States-Canada, ncome ta 62
Unted States-Ireand, nterest on Unted States savngs bonds.. 673
Unted States- apan, ncome ta 65
Unted States-Unted ngdom, dscosure of ta data by do-
mestc corporaton 675
Wthhodng reguatons under Unted States- apan conventon. 665
Trusts:
mpoyees :
nnuty contract, surrendered n dstrbuton 39
Compensaton pad by more than one empoyer affectng
egbty 01
Contrbutons:
mpoyer to temporary depostory 5
Informaton supportng deductons 300
Treatment past servce costs 303
Death payment, e cudabe 228
tenson of tme for fng returns 139
Net unreazed apprecaton on dstrbuted stock 396
Partcpant eectng to wthdraw a or part of funds standng
to hs credt 1- 3
Penson or proft-sharng pan, ta abty of nterest receved
by trust . 0
Penson pan:
nforcement of empoyee s rghts 393
Ony one empoyee 392
Proft-sharng, dscontnuance of contrbutons by empoyer. 39
Suppementary contrbutons by empoyer to remburse n-
surer for refunds of empoyees contrbutons to annuty
pan . 302
Termnaton, varance n dstrbutve shares, effect on qua-
fcaton 37
Transfer of penson funds from one quafed trust to another. 0
Unted States subsdary of Canadan corporaton, wth-
hodng of ta on earnngs of Canadan trust 633
states and trusts:
Chartabe donaton, deductbty of before termnaton . 390
Income transferred by fetme ncome benefcary to another. 389
Payments from speca fund for annutes or gfts 75
Settement agreement, chartabe gfts, deductbty . 390
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7 7
INCOM T Contnued Pace
Trusts Contnued
states and trusts Contnued
Status durng dstrbuton of assets 130
Termnaton, gans on unpad nstament obgatons 391
Income for beneft of grantor, fe e pectancy of grantor ess
than 10 or 15 years 226
Msceaneous, rrevocabe, unpad accounts recevabe assgned
to 211
acaton pay, accrua and deducton 68
War contracts, renegotaton, Renegotaton ct of 11)51, sub|ect to
nson ct 10
War osses, ustran bonds and German raroad stock, nomnee n
neutra country on date war decared 382
Western emsphere corporatons:
Countres sted 9
Whoy-owned Canadan or Me can subsdary 339
Wthhodng:
mpoyer, |udgment under ar Labor Standards ct, unpad
back wages 11
emptons, fng of etters of notfcaton by nonresdent aens
wth wthhodng agent 102
oregn corporaton, payments for use of technca know-how .. 388
Income ta at source:
wards earned by saesmen, pad to wves 115
Dsabty retrement pay, members of unformed servces
under Career Compensaton ct of 19 9 2 1
arnngs n Unted States of Canadan trust for Unted
States empoyees 633
Payments to foregn corporaton 388
Reguatons under Unted States- edera Repubc of
Germany conventon 6 1
Reguatons under Unted States- apan conventon 665
Unted States ncome dstrbuted by Canadan trust to bene-
fcares n Unted States 385
Nonresdent aens:
Dscosure of domestc corporaton to foregn bank 675
ng of etters of notfcaton of e empton wth agent 102
Informaton on orm 10 2 Suppement, to be fed n at-
more, T. D. 6055 amended 623
Payment, due date Saturday, Sunday, or ega hoduy 523
Recepts, hed avaabe to empoyee not suffcent 503
Records, payment durng 195 and 1955 under wage contnuaton
pans 123
Wages:
Pad by Unted States to ctzens of Guam, servces n Guam, 500
Payments durng 195 and 1955 under wage contnuaton
pans 123
Traveng e penses, rembursement arrangement for com-
msson saesmen 92-3
S L - MPLOYM NT T :
arnngs:
Saes through rea estate frm, ots remanng n mproved sub-
dvson 31
Se ton mantanng cemetery under wrtten contract 98
Incuded and e cuded earnngs, prvate tutor aso teacher n pubc
schoos S5
Partners and partnershps, workng partner s saary 30
Trade or busness:
Consutant, scentfc, Unted States ctzen n foregn country-.. 98
Contest entrant, vaue of przes won 33
Prvate tutor aso substtute teacher n pubc schoos 85
Saes through rea estate frm, ots remanng n mproved su -
d vson 31

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7 8
S L - MPLOYM NT T Contnued par
Trade or busness Contnued
Se ton mantanng cemetery under wrtten contract . 9S
Teephone bureau, mantanng car nventory for deaers S1
Watch reparman, percentage of recepts for space n store 117
Wrtng and ecturng actvtes of fu-tme professor 100
T CON NTIONS:
Conventons n effect, or n the negotaton stage, between the Unted
States and varous foregn governments C78
TO CCO T :
Rates, cgars, reta prce determned 516
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