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TREASURY DEPARTMENT 
 UNFTED STATES INTERNAL REVENUE 
 
 V 
 
 INCOME TAX PRIMER 
 
 FOR 
 
 FARMERS 
 
 CREVISED) 
 
 PREPARED BY THE BUREAU OF INTERNAL REVEVIUE 
 FOR THE INFORMATION AND ASSISTANCE 
 OF TAXPAYERS _ .. . 
 
 FEBRUARY, 1920 
 
 ^ WASHINGTON 
 
 GOVERNMENT PRINTING OFFICE 
 
 -r 
 

^LBER! R. Ma\NN 
 
 1IBRAR> 
 
 AT 
 
 a3RNFLL UMVERSIT.Y 
 
 INCOME TAX PRIMER FOR FARMERS. 
 
 RETURNS. 
 
 1. Who is a farmer? 
 
 The term " farmer " as used in this primer embraces per- 
 sons operating stocli, dairy, poultry, fruit, or truck farms, 
 plantations, ranches, or any land used for fruit raising or 
 agricultural purposes. 
 
 2. I am a farmer. Am I required to make a personal income-tax 
 
 return for 1919? 
 
 Yes; if your total net income for the taxable year was 
 $1,000 or over, unless you were married and living with your 
 husband or wife on the last day of your taxable year, in 
 which case you should file a return in the event your total 
 net income equaled or exceeded $2,000. 
 
 3. To what personal exemptions am I entitled? 
 
 If on the last day of your taxable year you were a single 
 person you are entitled to an exemption of $1,000; if you 
 were married and living with your wife or husband, or were 
 the head of a family, you are entitled to an exemption of 
 $2,000. You are also entitled to a further exemption, whether 
 single or married or the head of a family, of $200 for each 
 person (other than husband or wife) dependent upon and 
 receiving his chief support from you, if such dependent per- 
 son is under 18 years of age, or, regardless of age, if incapable 
 of self-support because mentally or physically defective. 
 
 4. Wife dies July 1, 1919, leaving no children. Is the man entitled 
 
 to a $2,000 or $1,500 deduction as head of a family? 
 
 He is entitled to $1,000 personal exemption as a single man. 
 The joint personal exemption may not be claimed on account 
 of husband or wife Tpho dies during the taxable' year. The 
 status of the taxpayer on the last day of his taxable* year 
 determines his right to an additional exemption and to a credit 
 for dependents. If then he is the head of a family or is 
 married and living with his wife, the personal exemption of 
 $2,000 may be taken. If then he is the chief support of a 
 dependent who is under 18 years of age, or incapable of self- 
 support because mentally or physically defective, the credit 
 of $200 may be taken. Otherwise he is only entitled to a 
 personal exemption of $1,000. 
 6. The child dies July 1, 1919. Is the head of a family entitled to 
 a $200 or $100 deduction on that child ?i 
 
 The head of the family is entitled to no credit for this 
 child in his income-tax return. See answer to question No. 4. 
 
 3 
 
4 INCOME TAX PEIMBR FOR FARMERS. 
 
 6. On October 10, 1919, 1 married a widow with one dependent child 
 
 3 years old, both of whom I have supported since marriage. 
 To what exemption am I entitled? 
 
 To an exemption of $2,000 for yourself and wife and an 
 additional amount of $200 for the child. : 
 
 7. A widower having a child under 18 years of age pays board in a 
 
 private family for himself and child. Is he entitled to a 
 personal exemption of $2,200, as the head of a family with one 
 minor child ? If not, what exemption is he entitled to ? Ex- 
 plain what is the head of a family. 
 
 (a) A widower with^a child under 18 years of age, paying 
 board in a private family for himself and child, is entitled 
 to the exemption of $2,000 as the head of a family and also 
 to the additional exemption of $200 for such dependent child. 
 
 (5) A "head of a family" is a person who actually sup- 
 ports and maintains in one household one or more-individuals 
 who are closely connected with him by blood relationship, 
 relationship by marriage, or by adoption, and wliose right to 
 exercise family control and provide for these dependent in- 
 dividuals is based upon some moral or legal obligation. 
 
 8. A child under 18 years of age has an independent income; should 
 
 this child make-an individual report or must the income be 
 included in the parent's return ? 
 
 This case is governed by section 223 of the Revenue Act of 
 1918, and Article 403 of Regulations 45. The rule is that a 
 minor is required to render a return of income if he has a net_ 
 income of $1,000 or over for the taxable year. In case the 
 aggregate net income of the minor from any property he 
 possesses and from any funds held in trust for him by a 
 trustee or guardian and from any earnings fdr his own use 
 is at least $1,000, a return as in the case of any other individ- 
 ual must be made by him, or by his guardian, or some other 
 person charged with the care of this person or property 
 for him. An exception is made in case of a minor having an 
 income who is dependent upon his parent, and the parent 
 appropriates, or may appropriate his earnings. In such a 
 case earnings are income of the parent and not of. the minor. 
 It should be borne in mind, however, that in the absence of 
 proof to the contrary, a parent will be assumed not to have 
 emancipated his minor child and must include in his return 
 any earnings of the minor. 
 
 9. What is meant by the taxable year 1919 ? 
 
 The calendar year 1919 or any fiscal year ending during the 
 calendar year 1919. 
 
 10. What does the term fiscal year mean ? 
 
 An accounting period of 12 months ending on the last day 
 of any month otner than December. 
 
 11. Upon what period of time shall my 1919 income-tax return be 
 
 based ? 
 
 Upon the calendar year 1919, unless you have an established 
 accounting period which is a fiscal year as defined in the 
 answer to question 10. 
 
INCOME TAX PEIMEE FOR FABMBES. 9 
 
 12. My principal crop is tobacco. I keep books of account which 
 
 accurately show my true gains and profits, take annual in- 
 ventories, and close my books on March 31. My tax return 
 for 1918 covered the calendar year 1918. Upon what period 
 shall I make a return for 1919 ? 
 
 Since your annual accounting period is the fiscal year end- 
 ing March 31, you should rbake a return lowing your true 
 net income from April 1, 1918, to March 31, 1919. As this 
 return should have been filed not later than June 15, 1919, 
 you should attach an affidavit to it stating the reasons why 
 it was not filed on time. If you were keepmg your books on 
 this basis during 1917 and 1918 an amended return covering 
 the period April 1, 1917, to March 31, 1918, must also be filed, 
 accompanied with an affidavit. Your returns in future should 
 then be filed for your full fiscal year, and the one covering 
 period April 1, 1919, to March 31, 1920, must be filed not later 
 than June 15, 1920. Permission to change your accounting 
 period for income-tax purposes may be obtained through the 
 collector for your district, if such request is made not later 
 than 30 days prior to the date on which a return for your new 
 accounting period would be due and also 30 days prior to the 
 due date of your return on the present basis on which your 
 accounts are kept. 
 
 13. Can a return be made for a period of more than 12 months ? 
 
 No. 
 
 14. Where should my personal return for the year 1919 be filed? 
 
 "With the collector of internal revenue for -the district in 
 which you have your legal residence or principal place of 
 business. If your legal residence is located in one collection 
 district and your principal place of business in another, it is 
 optional with which collector your return shall be filed; but 
 for administrative reasons the Commissioner of Internal Rev- 
 enue desires that it be filed with the collector of the district 
 in which your legal residence is located. 
 
 15. When should my return for calendar year 1919 be filed with a 
 
 collector of internal revenue? 
 
 On any day after December 31, 1919, but not later than 
 March 15, 1920. 
 
 16. Will failure to file my return within the time prescribed by law 
 
 render me liable to any penalty ? 
 
 Yes. You would be liable to a penalty of 25 per cent of the 
 amount of the tax due from you, unless your failure to file the 
 return on time is satisfactorily shown to be due to a reason- 
 able cause. You would also be liable to an additional penalty 
 of not to exceed $1,000, unless you refused to make a return 
 when called upon to do so, in which case you would be liable 
 to a penalty of not to exceed $10,000, and imprisonment for 
 not more than one year, or both, together with the costs of 
 prosecution. 
 
 17. May an extension of time beyond March 15, 1920, be obtained 
 
 for the filing of my 1919 return ? 
 
 Yes. If, on account of illness or absence from home you 
 are unable to file your return within the time prescribed by 
 
8 ZHCOMH TAX PBIMER FOB FABMBSS. 
 
 law, you may obtain an extenfiiitHi' o>f 30 days ii st request 1^ere>- 
 for is made to the collector of yerar ddstrict witJiin the period 
 covered by the extension ai&ked for. Im tBtis reiefuest yon must 
 state the reason why the retioiini) can niOit ha, filed within the time 
 prescribed by law. 
 
 18. Would a personal return made by am ageitt far amdi in my behalf 
 
 be accepted? 
 
 If, by reason of illness, absence, or n<Hiiresideniee a tsbxpayer 
 is imable personally to make his retTam hes^ may appoint an 
 agent to act for him and the retmriat executed by the agent 
 will be accepted if he makes asffida^ thait he has sfifficient 
 ^knowledge to make a, complete and aiCEnrate return for his' 
 principal. Such agent assumes responsibadity for making the 
 return properly, and the p^talties provided for a delinquent, 
 erroneous^ felse, or :^randulent return are aipplicable to him. 
 
 19. .May a husband and wife living together m^iike separate returns? 
 
 Yesi They should m eresry case make separate returns 
 where the wife has a separate income and the aggregate net 
 income of both husband and wife is $5,000 or over. Hus- 
 band and wife living together are entitled to a personal ex- 
 emption of not to exceed $2,000 against their aggregate net 
 income. If separate returns are made the personal exCToption 
 of $2,000 may be taken by either or divided between than. 
 
 20. Where can I get a blank form, upon which to make my return? 
 
 From the collector of internal revenue for your district. 
 The collector will endeavor to have such forms sent to you, 
 but failure to receive one will not exciase you from making a 
 return. If you do not receive one,- it is your duty t» request 
 the collector to furnish you with a blanik form* 
 
 EATE OF TAX. 
 
 21. What personal income taxes are imposed upon income received 
 
 during the calendar year 19^19 ? 
 
 The normal income tax on the incsome of every individual 
 citizen or resident of the United States is at the rate- of 4 per 
 cent upon the first $4,000 of the net income in excess of credits., 
 allowed (see question 111), and 8 per cent upon the excess over 
 that amount. A person receiving a net income, in excess of 
 $5,000 is liable to a surtax of 1 per cent upon income from 
 $5,000 to $6,000; 2 per cent upon income from $6,0X)0to $8,000; 
 3 per cent upon income from $8,000 to $10,000, etc. Assuming 
 that a man's net income for 1919 was $9,000 and that he was 
 entitled to $2,800 credits, his tax would be computed as fol- 
 lows : 
 
 - WOBMAL TAX. 
 
 Iiicome from $2,800 to $S,80O, at 4 per eent , $160 
 
 Income fromr$63QQ to $9,000, at 8 per cent 170 
 
 SURTAX. 
 
 rneorae from $5,000 to $6,000» at 1 per cent 10 
 
 Income from $6,000 to $8,000, at 2 per cent 40 
 
 Income fron» $8^660 ta $9'^e00-, at 3 per cent 30 
 
 Total tax 416 
 
IirCOMB TAX PRIMER FOR FARMERS. * 
 
 EXEMPT ITEMS. 
 
 22. What income of an individual is exempt from ihcome tax? 
 
 (a) The proceeds of life insurance policies paid upon the 
 death of the insured to individual Deneficiaries or to the 
 estate of the insured ; ^ 
 
 (b) The amount received by the insured- as a return of 
 premium or premiums paid by him under life insurance, en- 
 dowment, or annuity contracts, either during the term or at 
 the maturity of the term mentioned in the contract or upon 
 surrender of the contract ; 
 
 (e) The value of the property acquired by gift, bequest, 
 devise, or descent (but the income from such property shall 
 be included in gi-oss income) ; 
 
 {d) Interest upon (1) the obligations of a State, Territory, 
 or any political subdivision thereof, or the District of Colum- 
 bia ; or (2) securities issued . under the provisions of the 
 Federal farm'loan act of July 17, 1916; or (3) the obligations 
 of the United States or its possessions, except as follows: In 
 the case of obligations of the United States issued after Sep- 
 tember 1, 1917, the interest shall be exempt only if and to the 
 extent provided in the respective acts authorizing the issue 
 thereof as amended and supplemented, and shall be excluded 
 from gross income only if and to the extent it is wholly exempt 
 from taxation to the taxpayer; 
 
 (e) Amounts received, -through accident or health insur- 
 ance or under workmen's compensation acts, as compensation 
 for personal injuries or sickness, plus the amount of any 
 damages received, whether by suit or agreement on account of 
 such' injuries or sicloiess; 
 
 (/) So much of the amount received during the present 
 war by a person in the military or naval forces of the United 
 States as salary or compensation in any form from the United 
 States for active services in such forces, as does not exceed 
 $3,500. 
 
 23. Am I required to make any return of income wholly exempt 
 
 from income tax ? 
 
 The law requires that every person owning any of the obli- 
 gations, securities, or bonds enumerated in clauses (1), (2), 
 aiid (8) of paragraph (d) above shall submit a statement 
 showing the number arjd amount of such obligations, securi- 
 ties, and bonds owned by him and the income received there- 
 from. There is a place on the return form for showing such 
 information. 
 
 NET INCOME. 
 
 24. What is meant by the term " net income " ? 
 
 Net income means your total gross income, not including 
 income exempt from the tax by law, less the general deduc- 
 tions allowed by law. 
 
 25. What is the proper basis for computing net income of farmers? 
 
 Approved standard methods of accounting will ordinarily 
 be regarded as clearly reflecting income. The statute pro- 
 vides that the net income shall be computed in accordance 
 
S INCOME TAX PRIMER FOR FARMERS. 
 
 with the method of accounting regularly employed in keep- 
 ing the books of the taxpayer, but if the method employed 
 does not clearly reflect the income, the computation shall be 
 made upon such basis and in such manner as in the opinion 
 of the Commissioner does clearly reflect the income. 
 
 26. Is the inventory basis of figuring the income of farmers to be 
 
 used for the 1919 business ? ' The merchant, the blacksmith, 
 and the baker have always used this basis, and why can not the 
 farmer figure his business that way ? 
 
 While it is the desire of the department that inventories be 
 used by farmers as well as by others in computing net in- 
 come from a business involving purchase and sales, it is also 
 recognized that inventories can not be properly used except 
 in connection with a well-maintained set of books, and that 
 in most cases farmers who do not keep accurate books of 
 account will find it most satisfactory, both to themselves and 
 the Government, to report their income on the basis of cash 
 receipts and disbursements. 
 
 However, farmers who regularly keep books of account 
 upon an accrual basis, which clearly reflect their net income, 
 should make their returns upon the basis of such books of ac- 
 count. The rule with regard to inventories is that inventories 
 shall be taken, on the basis of " (a) cost, or (5) cost or 
 market, whichever is lower." (Regulation 45, art. 1582.) 
 It is recognized that insurmountable difficulties attend any 
 attempt by farmers to take iftventories at a cost basis. There- 
 fore, in such cases, inventories may be valued according to the 
 farm-price method, which is in wide use among farmers keep- 
 ing books of account upon an accrual basis. This method con- 
 templates valuation of inventories at market less cost of mar- 
 keting. 
 
 GROSS INCOME. 
 
 27. What is included in " gross income " ? - 
 
 Gross income includes gains, profits, and income derived 
 from every source whatever, unless wholly exempt from in- 
 come tax. 
 
 28. What items must I report in my return in figuring my income- 
 
 tax liability? 
 
 All gains or profits, and income derived from the sale or 
 exchange of property of any description, including farm prod- 
 ucts and live stock. The gain or profit derived from sale 
 of animals purchased and used solely for draft or work pur- 
 poses, or solely for breeding purposes, should be reported as 
 income. There must also be included in gross income amounts 
 received for board of persons, board and pasturage of animals, 
 labor of men and teams, and hire or use of machinery. 
 
 29. I raised a large crop of wheat in 1919, but did not sell it until 
 
 after the close of the year. Should I include the proceeds 
 from the sale of this wheat in my return for 1919? 
 
 No; unless you keep your books upon an accrual basis, in 
 which case the wheat would be reported in your closing in- 
 ventory for 1919. 
 
INGOME TAX PEIMER FOR FARMEKS. 9 
 
 30. I have always kept my accounts upon the basis of cash receipts 
 
 and disbursements. In 1919 I sold wheat which was raised 
 in 1916, 1917, and 1918. May I deduct the expense of raising 
 thiswheat in computing my profits, or must I include in gross 
 income the total amount received fo^ my wheat? 
 
 Where the cost of stock or farm products purchased in pre- 
 vious years for resale or the expense of raising stock or prod- 
 ucts on the farm has been claimed as a deduction or taken into 
 consideration in ascertaining the farmer's liability to income 
 tax for some year prior to 1919, the entire proceeds of the 
 sale are to be returned as income for the year in which the 
 sale was made, for the reason that the farmer having once 
 received the benefit of the deduction is not again entitled. to it. 
 If, however, such cost or expense has not been claimed as a 
 deduction or has not been taken into consideration in ascer- 
 taining the farmer's liability to income tax for a previous 
 year, by reason of the income of the farmer for the previous 
 year not being of sufficient amount to permit of the deduction 
 of such expense or of its being so taken into consideration, 
 the amount of such cost or expense may be deducted from the 
 selling price of the stock or farm products and the difference 
 only returned as gross income. 
 
 31. I rent a farm on shares. When is my share of the crops and 
 
 stock to be taken into consideration m making up my return ? 
 In the year in which they are sold or converted into cash 
 or the equivalent, unless your books are kept on an accrual 
 basis and inventories are taken. 
 
 32. How am I to determine the amount of gain or profit derived 
 
 from sale of property which is returnable for income-tax 
 purposes ? 
 
 If you acquired the property sold prior to March 1, 1913, 
 you should take its fair market price or value of that date, 
 add thereto all amounts subsequently expended in making im- 
 provements, deduct therefrom depreciation sustained between 
 March 1, 1913, and date of sale, and the difference between the 
 , result obtained and the selling price is the amount to be re- 
 ported under gross income. 
 
 If you purdiased the property on or after March 1, 1913, 
 - the difference between its cost plus all amounts subsequently 
 expended for permanent improvements less depreciation sus- 
 tained for years prior to 1919 and its selling price is to be 
 returned. 
 
 If the property came to you on or after March 1, 1913, as 
 an inheritance the difference between the appraisal value 
 placed upon it at the date of the death' of the testator plus 
 all amounts subsequently expended for permanent improve- 
 ments less depreciation as above indicated and its selling 
 price is to be returned. 
 38. How is the value as of March 1, 1913, of property sold in 1919 
 toibe determined? 
 
 -No method of determining this value can be stated whick 
 will adequately meet all circumstances. What that value was 
 is a question of fact to be established by any evidence which 
 will reasonably or adequately make it appear. 
 162176°— 20 2 
 
10 INCOME TAX PRIMER FOB FABMEBS. 
 
 34. Please advise what report should be made on. a farm sale made 
 
 by contract in 1919 on which $1,000 was paid and the balance 
 of purchase money to be paid March 1, 1920 ; after January 1, 
 1920, a mutual agreement was entered into whereby the con- 
 tract was canceled by the return of the $1,000 and a further 
 consideration of $1,000 paid by the seller for the cancellation 
 of the contract. Would this be considered a repurchase of the 
 farm, or would it be considered a loss of $1,000 paid for can- 
 cellatioa of the contract in the 1920 income? 
 
 {a) Assuming that the original paymSit of $1,000 was made 
 by the purchaser merely as a pl&dge for good faith in per- 
 formance of the contract, the transaction is considered incom- 
 plete and as not affecting income during 1919. ; 
 
 (b) The $1,000 which the seller paid in 1920 to be relieved 
 from the terms of the original contract is a capital investment 
 and should be treated as additional cost of the farm. 
 
 35. A man in 1919 entered into a contract for the sale of his farm, 
 
 the contract price heing $40,000. His profit was $10,000. He 
 received $800 down on contract, and was to receive $10,000 on 
 March 1, 1920, $10,000 on March 1, 1921, and $9,200 on March 
 1, 1922, the deferred payments being secured by a mortgage 
 on the land ; deed and possession were to be given on March 
 1, 1920, How should the profit be returned for income-tax 
 purposes ? 
 
 This transaction is a contract for sale in the future as dis- 
 tinguished from a present sale, as only a small cash payment 
 was made and the deed and possession were not to be delivered 
 until March 1, 1920. , The $800 is held to be a return of capital, 
 no part of which is taxable income for 1919. Inasnmch as the 
 sale will be consummated on March 1, 1920, the entire profit 
 from the transaction should be reported as income for the year 
 1920. Taxaible income will be received to the extent that the 
 contract price of $40,000, plus the amount of any depreciation 
 sustained on the buildings upon the land (exclusive of the tax- 
 payer's residence) , since March 1, 1913, exceeds the cost of the 
 farm (or its fair market value as of March 1, 1913, if it was 
 acquired prior to that date) , plus the cost of any permanent 
 improvements made by the seller since March 1, 1913, and not 
 claimed by him in any return of income. 
 
 36. An individual buys a section of Canada land under contract dur- 
 
 ing the prewar period. During 1919 he forfeited one-half 
 section to the Canadian Government suffering loss of all pay- 
 ments which had been made on the land upon returning the 
 land. After this the party sells out under contract, his right 
 to the other half section, receiving a cash payment on the land-. 
 Would the amount for which the half section of land sold 
 under contract be a profit ? 
 
 The individual who purchased a section of Canadian land 
 during the prewar period and during 1919 forfeited one-half 
 section to the Canadian Government, thereby suffering loss of 
 all payments which had been made on this half section may 
 deduct as a loss for the year in which the property was for- 
 feited, the cost or fair value as of March 1, 1913, if acquired 
 prior tihereto. Upon the sale by him of the other half section 
 
INCOME TAX PRIMER FOR FARMERS. 11 
 
 he should rej)ort as income the excess of the selling price over 
 the cost to him of such half section, or its fair market value 
 as of March 1, 1913, if acquired prior thereto. 
 
 37. A contract to sell a farm was made in 1919, payment of $1,000 
 
 down, balance to be paid in 1920, upon possession and deliv- 
 ery of deed. What part of cash payment goes in 1919 return ? 
 None. Profit on the sale should be returned as income for 
 1920. However, if the sale is not completed and the $1,000 
 is forfeited, the seller should return that as income. 
 
 38. In 1914, A bought 160 acres of land at $175 an acre. Recently B 
 
 bought 160 acres for $375 an acre with the idea of putting 
 the same on the market at once. There are no buildings on 
 either parcel of land. B finds upon investigation that if he 
 had A's 160 acres of land he could sell the same. Accord- 
 ingly he takes up the matter with A. It so happens that the 
 land owned by B is in a territory where A had formerly 
 lived and for that reason he accepts the proposition of B's 
 " trading even up." In the contract which is made by A and 
 B it is specified that they are trading the land on a basis of 
 $425 an acre, which is assumed to be its actual market value. 
 In the whole transaction A does not receive a cent in cash and 
 in fact will be at some expense because of having to move. 
 Should A have to pay an income tax on this transaction ? 
 
 Yes. The difference between the cost to A of the land origi- 
 nally held by him ($175 per acre) and the value of the land 
 received in exchange ($425 per acre) represents profit to A 
 and is subject to income tax. 
 
 The difference between the cost to B of the land originally 
 held by him ^$375 per acre) and the value of the land received 
 in exchange ($425 per acre) represents profit to B and is sub- 
 ject to income tax. 
 
 39. On August 1, 1919, A sells his farm to B on contract, complete 
 
 payment to be made, deed and possession to be delivered on 
 March 1, 1920. On December 1, 1919, A buys his own farm 
 back giving B a profit of $5,000 and destroys th^ original con- 
 tract. No deed is ever executed. Is A liable to an income tax 
 on the profit he had made in the original deal ? If not, then 
 is the $5,000 he paid to get the contract released loss than can 
 be deducted in computing his income for the year? 
 
 A made no profit on the original transaction. The contrajct 
 was clearly executory at that time, since its completion was 
 contingent upon the conveyance of title and deliverance of 
 property on March 1, 1920. The $5,000 payment by A, over 
 and above the consideration named in the first cpntract, was, in 
 . fact, an amount paid by A to be relieved from the terms of 
 the contract, and is additional cost of the property and should 
 be treated as a capital investment. 
 
 40. A sells his farm to B in August, 1919, for $10,000, receiving a 
 
 cash payment of $2,600, balance to be paid March 1, 1920, 
 when deed is to be delivered. Is any part of the tax on 
 profits in this deal to be included in A's return for 1919? Or 
 is it all to be included in his return for 1920 ? 
 
12 IWCOMB TAX PRIMEE FOB FARMERS. 
 
 The profit on the entire transaction should be reported by A.^ 
 as income for 1920. If the contract is canceled and the $2,500 
 is forfeited that amount is taxable income to A. 
 
 41. A and B are operating a farm in partnership and for that pur- 
 
 pose sell the personal property at public sale. A buys the most 
 of the property, in which he already owns a half interest. 
 Must an income tax be paid by the partnership on the total 
 amount of the sale in view of the fact that A already owned a 
 half interest in the property? 
 
 For the purpose of ascertaining the gain or loss from the 
 sale of property the partnership should report the difference 
 between the cost of the. property or its fair market value as 
 of March 1, 1913, if acquired prior thereto, and the sale price. , 
 The fact that one of the partners purchased the property from 
 the partnership would not affect the profit or loss to be re- 
 ported by the partnership on Form 1065. Under the Kevenue 
 Act of 1918 partnerships as such are not subject to income or 
 profits tax. 
 
 42. Two neighbors own farms and wish to exchange, without any 
 
 money consideration except the land traded, it simply being a 
 matter of location suiting each party better. Would this be 
 considered a sale by each party, subject to profits based on 
 1913 values? 
 
 Yes. Such transaction is considered a sale by each party 
 and the basis for computing the profit on each sale is the 
 cost of the farm, or the fair market value as of March 1, 
 1913, if acquired prior thereto. Proper adjustment should be 
 niade for any depreciation sustained on buildings which are 
 on the farms, and the cost of any improvements. , 
 
 43. A und B each owned an 80-acre farm. A wanted to buy a 67- , . 
 
 acre farm which was adjoining the 80 acres owned by B so 
 they traded one 80 for the other 80 and neither party re- 
 ceived any cash consideration, having made an even trade. 
 Should this trade be included in the returns of either A or 
 B, and if so, how should it be computed ? 
 
 In the exchange of properties having the same market 
 value, gain or loss is realized by each owner to the amount 
 of the difference between the fair market value at the time of 
 the exchange of the property received and the cost or fair 
 market value as of March 1, 1913, if acquired prior thereto, 
 of the property exchanged plus the cost of any pernianent 
 improvements and less any depreciation sustained. 
 
 44. A exchanges farms with B as follows : A gives farm as first pay- 
 
 ment of $40,000, same having been- acquired after March 1, 
 1913, for $20,000. Possession given on contract to, run for five 
 years at which time the balance due which is $60^000, is paid 
 and deed given. When and how should return be made? 
 
 A has made a profit of $20,000. 
 
 B is held to have received cash and property equal to the 
 value of $100,000 in exchange for his farm and he is required 
 to return as taxable profit for the year in which the exchange 
 was made the excess of the amount received for his farm, over 
 the fair market value of. the farm as of March 1, 1913, if 
 
INCOME TAX PRIMER FOR FARMERS. 13 
 
 acquired prior thereto, or its cost if acquired on or after that 
 date. Proper adjustment must be made for depreciation sus- 
 tained and also for the cost of any improvements. 
 
 45. A farmer sells his farm for $15,000, received $10,000 cash and a 
 
 city property which will not sell for more than $3,000, that 
 amount being the most offered for it. The fair market value of 
 the farm on March 1, 1913, was $16,000, and he acquired it 
 prior to^that date. How will he treat this transaction in his re- 
 port, as a sale for $13,000, or a sale for $15,000? • 
 
 This is in effect a modification of the original contract of 
 sale, by which seller agrees to accept a consideration of $13,000, 
 instead of the stipulated price of $15,000. The farmer there- 
 fore suffers a loss of $2,000. 
 
 46. In April, 1919, A agreed to sellB his farm for $10,000, payment 
 
 in full to be made in June, when B was to receive title atid 
 take possession. A died in May. Sale was completed by 
 executor. Should the profit or loss be reported in the return 
 for decedent or the return for the estate ? 
 
 The executor should account for the profit or loss in the 
 return for the estate covering the period from the date of 
 deathi to the close of the taxable year. 
 
 47. A sells a farm on contract in 1919 for $25,000, deed and posses- 
 
 sion to be given March 1, 1920; $2,000 is received by A during 
 1919 on this contract as first payment; is this $2,000 income 
 for 1919 or 1920? 
 
 The contract is executory during 1919, hence no part of the 
 $2,000 is taxable in A's hands for that year if it does not 
 exceed the cost or fair market value as of March 1, 1913, if 
 ■ acquired prior thereto. If the contract is canceled and the 
 $2,000 is forfeited, that amount is taxable income to the 
 seller. That portion of the $2,000 representing a profit on the 
 transaction should be reported (with the balance of the profit 
 realized) by A as taxable income for the year 1920. 
 
 48. Where two persons own property in undivided interests and 
 
 wish to divide said property by each taking his own share, 
 would this be considered a sale of property and subject to 
 income tax based on 1913 values? 
 
 No. _ , _ 
 
 49. An endowment insurance policy issued by a certain company 
 
 has noncash value until the end of the third year. If such a 
 policy were issued in the year 1911 (and therefore having 
 no value March 1, 1913), could the insured deduct the 
 premium paid in the years 1911 and 1912 from the amount 
 received from the policy when it matured as an endowment, 
 or must he deduct only the premiums paid since March, 
 1913? 
 
 The aggregate amount of the premiums paid during the 
 lifetime of the policy may be deducted from the amount re- 
 ceived from the proceeds ^vhen it matured, and the difference 
 between these two amounts represents income to be reported 
 for the year in which the proceeds of the policy are received. 
 
 50. A deeds his farm to his son B. The consideration in the deed 
 
 recites that B shall pay $5,000 to his brothers and sisters and 
 
14 INCOME TASt PBIMEE FOB PABMBBS. 
 
 $400 per year to the father during his liie. Shall this $400 , 
 be considered payment on the purcha.se price? 
 
 The gum of $5,000 paid to the brothers and sisters and the 
 $400 paid annually to the father in accordance "with the con- 
 sideration in the deed transferring the title to the farm from 
 the father to the son should be treated as payments on the 
 parchase price of the farm, no portibn of which is deductible 
 by the son. 
 61. An estate, after debts haA'e been paid, goes to the widow. Execu- 
 tor sells property, both real and personal, and after debts are 
 . paid widow has about $2,000 left, total proceeds from property 
 was $4,400. Does executor have to file income-tax report on 
 .said sale for estate, and does widow pay on her $2,000? 
 
 Where an executor sells the property of an estate for more 
 than its value at the death of the decedent, the excess is income 
 to the estate and, if with other income of the estate, the amount 
 equals or exceeds $1,000, a return should be filed and any tax 
 shown to be due thereby should be paid by the executor. The 
 estate is entitled to an exemption of $1,000. 
 
 The amount of money or the value of the property received 
 by an individual under a will or under the statutes of descent 
 and distribution is exempt from tax. Therefore, the amount 
 received by the widow from the estate of her husband is 
 exempt from tax. 
 
 52. A widow acting as administtatrix for the estate of her husband 
 
 was, during the period oi administration, forced by circum- 
 stances to sell at public auction aU stock and implements on the 
 farm. The stock had been raised by the deceased husband. 
 Everything on the place had been appraised by three disin- 
 terested appraisers, as required by the law governing the 
 settlement of estates. Would the widow be allowed to deduct 
 from the proceeds of the sale the amount at which the ap- 
 praisers had valued the stock ? Would she not be justified m 
 considering it as capital in place of income? 
 
 The profit or loss for purposes of income tax on the sale 
 of property of the estate sold by the administratrix will be 
 the difference between the selling price and the value of the 
 property as of the date of the husband's death, not the value 
 appraised for the purpose of the sale, unless the sale takes 
 place immediately following the death of the husband. The 
 appraised value lor the purpose of the Federal-estate tax or 
 the State-inheritance tax may be considered as the value of 
 the property at the date of the death of the husband, for .the 
 purpose of determining the profit realized from the sale. 
 
 53. Can a farmer deduct the cost of breeding stock from the proceeds 
 
 of his public sale if he has not taken his depreciation on said 
 breeding stock in previous years ? 
 
 A farmer is required to report as income the excess of the 
 selling price over the cost of Breeding stock, less depreciation 
 sustained thereon, irrespective of whether the depreciation 
 was actually claimed in previous returns. 
 64. A farmer was awarded $4,000 damages by the appraisers on ac- 
 count of the passage of a drainage ditch through his farm. 
 The amount being approximately $100 per acre for the land 
 
IITCOME TAX PEIMEB FOR FARMERS. 15 
 
 destroyed. The value of the land was at least $250 per acre. 
 Since the amount was awarded on the showmg that his farm 
 was depreciated in value to the amount of $4,000, should the 
 amount received be shown as income in the 1919 return; and 
 if "so, should credit in the amount be given elsewhere as a 
 " property value depreciation " ? May he deduct $6,000 as 
 damages, the same beiSig the difference between the fair 
 market value and the amount received ? 
 
 In this case the damage is not limited to the removal of the 
 dirt and the passage of the drainage ditch, but involves dam- 
 ages to the farm as a whole. The profit or loss from the trans- 
 action should be reported for the year during which the farm 
 is sold or otherwise dispose^ of. The basis for the profit or 
 loss is the cost of the farm if acquired subsequent to March 
 1, 1918, or the fair market value as of that date if acquired 
 prior to March 1, 1913, due allowance being given to per- 
 manent improvements and depreciation. 
 
 55. tWhat part of a public sale goes in subject to income tax? Must 
 
 machinery be valued at a depreciated figure in arriving at the 
 taxable income, though depreciation had never been taken? 
 
 In the case of property sold at a public sale, the profit to 
 be returned for income tax purposes is the amount by which 
 the selling price plus the amount of any depreciation sus- 
 tained on the property since March 1, 1913, exceeds the cost of 
 the property (or its fair market value as of Mar. 1, 1913, if 
 it was acquired prior to that date), plus the cost of any pei*- 
 manent improvements made by the seller since March 1, 1913, 
 and not claimed as a deduction by him in any return of income. 
 
 In computing the profit on depreciable property, the amount 
 of depreciation sustained since March 1, 1913, must be con- 
 sidered, whether or not such depreciation has been claimed as 
 deduction from gross income in former returns. 
 
 56. I sold some shares of bank stock in 1919 for $5,000. This 
 
 stock was purchased by me in 1914 for $3,000. I have paid 
 $400 interest in past years upon indebtedness incurred in the 
 purchase and carrying of the stock. How much of the $5,000 
 received by me must I include in gross income ? 
 
 The interest paid by you was a deductible expense from 
 gross income in income tax returns for the years in which paid 
 or accrued. You are therefore required to include in gross 
 income of 1919 the entire difference between the cost and 
 the sale price, or $2,000. 
 
 57. If a farmer exchanges produce for merchandise, groceries, etc., 
 
 is the value of such merchandise to be returned for tax pur- 
 poses ? ' -,..5, 
 
 Yes ; the price placed by the merchant upon the goods ex- 
 changed for farm produce is to be included as income in the 
 farmer's return. 
 
 58. During the year 1919 $60 was placed to my credit by banks in 
 
 which I had money deposited, which amount represented 
 interest upon my deposits. Does this interest, which was not 
 received by me in cash or withdrawn from the bank, constitute 
 a part of my gross income for 1919 ? 
 Yes. 
 
16 INCOME TAX PRIMEB FOB FABMEBS. 
 
 69. I purchased a 6 per cent $100 coupon bornd at its face value, 
 plus $1.50; that is, three months' accrued interest. TTiree 
 months later I detached a coupon therefrom and collected $3 
 interest. Must the entire amount of interest received be re- 
 turned as income? 
 
 No. Report only so much interest as accrued after the 
 date of your purchase. It is the seller's duty to report the 
 balance. 
 
 60. Do the pensions and retired pay of exrofficers and men of the 
 
 United States military and naval forces constitute items of 
 taxable income? 
 Y^s. • 
 
 61. I own stock in a bank which, und^ a State law, is required to pay 
 
 the taxes assessed against such stock. How is this matter to 
 be handled for income-tax purposes ? 
 
 The proportionate part of the entire amount of taxes so paid 
 by the bank, which is properly chargeable against the number 
 of shares held by you, should b^ reported, for additional tax 
 purposes, in your personal return as a dividend, and then 
 claimed as a deduction under the heading of " Taxes." 
 
 62. Are amounts placed to the credit of a shareholder in a building 
 
 and loan association subject to income tax ? 
 Yes, if credited and made available to the shareholder. 
 
 63. Where service is rendered for a stipulated price, wage, or salary, 
 
 and paid with something other than money, shall consideration 
 be given the transaction for income-tax purposes ? 
 
 Where services are paid for with something other than 
 money, the fair market value of the thing taken in payment is 
 the amount to be included as income. If the services were 
 rendered at a stipulated price, in the absence of evidence to the 
 contrary, such price will be presumed to be th^ fair value of 
 the coippensation received. 
 
 64. I market my dairy products through a cooperative association 
 
 and during the year 1919 I received $300 in dividends from 
 the association. Am I required to include these dividends in 
 my gross income, and are they exempt from normal tax, the 
 same as dividends received upon my shares of bank stock? 
 
 All dividends from cooperative associations must be in- 
 cluded in gross income. They are not exempt frcHn normal 
 tax for the reason that the association itself is not taxed upon 
 its earnings. The dividends simply represent additional 
 amounts accruing to you upon sales through the association. 
 
 65. In rendering my 1915 return I claimed a deduction to cover a 
 
 debt I then believed to be absolutely worthless. In 1919, the 
 debtor has discharged part of his obligations. How ^ould I 
 treat this payment for income-tax purposes? 
 
 Consider it as an item of income and include this amount 
 under "Gross income " in your 1919 return. 
 
 66. I had cattle^ which I raised and which were worth $500, killed 
 
 t>y lightnmg. The cattle were insured and I received $500 in- 
 surance money. Must this be included in income? 
 
 Yes. For income-tax purposes the receipt is the equivalent 
 of a sale. It constitutes income to you. 
 
INCOME TAX PRIMER FOR FARMERS. 17 
 
 167. Are there any items of income, other than those above suggested, 
 "which should be included in gross income ? 
 
 Income from every source not wholly exempt from income 
 tax (see answer to question No. 22) must be included. These 
 include income from salaries and wages, rents, interest on 
 notes, mortgages, etc. ; also income from trustees and partner- 
 ships, royalties from mines, oil and gas wells, dividends on 
 stocks, etc. 
 
 DEDUCTIONS FROM GROSS INCOME. 
 
 68. What deductions are allowed from gross income in arriving at net 
 income ? 
 
 The Revenue Act of 1918 allows the following deductions 
 from gross income in ascertaining net income: 
 
 (1) All the ordinary and necessary expenses paid or in- 
 curred during the taxable year in carrying on any trade or 
 business. 
 
 (2) All interest paid or accrued within the taxable year on 
 indebtedness (except on indebtedness incurred or continued 
 to purchase or carry obligations or securities the interest upon 
 which is wholly exempt from taxation. 
 
 (3) Taxes paid or accrued within the taxable year except 
 Federal income, war-profits, and excess-profits taxes and 
 taxes assessed against local benefits of a kind tending to 
 increase the value of the property assessed. 
 
 (4) Losses sustained during the taxable year and not com- 
 pensated for by insurance or otherwise if incurred in trade 
 or business. 
 
 (5) Losses suctrincd during the taxable year and not com- 
 pensated for by insurance or otherwise, if incurred in any 
 transaction entered into for profit, though not connected with 
 the trade or business. 
 
 (6) Losses sustained during the taxable year on property 
 not connected with the trade or business if arising from fires, 
 storms, shipwrecks, or other casualty, or from theft, and if not 
 compensated for by insurance or otherwise. 
 
 (7) Debts ascertained to be worthless and charged off within 
 the taxable year. 
 
 (8) A reasonable allowance for the exhaustion, wear, and 
 tear of property used in the trade or business, including a 
 reasonable allowance- for obsolesence. 
 
 (9) In the case of mines, oil and gas wells, other natural 
 "deposits, and timber, a reasonable allowance for depletion 
 and for depreciation of improvements according to the pecu- 
 liar conditions in each case, based upon costs, including cost 
 of development hot otherwise deducted. 
 
 (10) Contribntionff or gifts made within the taxable year, 
 to corporations organized and operated exclusively for re- 
 ligious, charitable, scientific, or educational purposes, or for 
 the prevention of cruelty to children or animals, no part of 
 the net eami-igs of which inures to the benefit of any private 
 
18 INCOME TAX PKIMER TOE FAEMEBS. 
 
 stockholder or individual, or to the special fund for yocatioaal 
 rehabilitation, authorized by section 7 of the Vocational Re- 
 habilitation Act, to an amount not in excess of 15 per cent of 
 the taxpayer's net income as computed without the benefit of 
 this paragraph. 
 
 69. What items are not deductible from gross income? 
 
 Section 215 of the act provides : That in computing net in- 
 come no deduction shall in any case be allowed in respect of — ^ 
 
 (a) Personal, living, or family expense; 
 
 (b) Any amount paid out for new buildings or for perma- 
 nent improvements or betterments made to increase the value 
 of any property or estate ; 
 
 (c) Any amount expended in restoring property or in 
 making good the exhaustion thereof for which an allowance 
 is or has been made ; or ^. 
 
 (d) Premiums paid on any life insurance policy covering 
 the life of any officer or employee, or of any person financially 
 interested in any trade or business carried on by the taxpayer, 
 when the taxpayer is directly or indirectly a beneficiary un- 
 der such policy. 
 
 OKDINAET AND NECESSAET EXPENSES. 
 
 70. iWhat ordinary and necessary expenses are deductible ? 
 
 All amounts actually jpaid for labor in preparing land for 
 a crop, and the cultivation, harvesting, and marketing of the 
 crop ; the cost of the seed and fertilizer used ; the amounts 
 expended for labor used in caringi for live stock and the cost 
 of the feed purchased ; the amounts paid in making repairs to 
 farm buildings, but not the dwelling house ; repairs to fences, 
 farm machinery, etc. ; the cost of material and farm tbols 
 which are used up in the course of a year or so, such as pitch- 
 forks, spades, and similar tools, but not including farm im- 
 plements, machinery, wagons, and other vehicles which are 
 regarded as capital investments ; and the amount of rent paid 
 for a farm may also be claimed. If books are kept upon an 
 accrual basis, such expenses are deductible for the year or 
 years in which they accrued. 
 
 Amounts paid as the purchase price of an automobile, even * 
 though used wholly or partly in the business, are not deduc- 
 tible because such aniounts represent capital investments. A 
 reasonabla allowance for depreciation may be claimed, based 
 upon a portion of the cost in the ratio that the use of the 
 automobile for business purposes bears to its use for pleasure 
 or for personal and family convenience. 
 
 71. Are any payments for periiianent improvements to my farm 
 
 deductible ? 
 No ; they are not expenses ; they are investments of capital. 
 
 72. I purchased in 1918 a mowing machine and cultivator, at a cost 
 
 of $150, and small hand tools, at a cost of $50. Can these 
 amounts be deducted from gross income? 
 
 The cost of the hand tools may be deducted as an ordinary 
 expense. The purchase price or the cultivator and mowing 
 
INCOME TAX PBIMER FOB FARMEBS.- 19 
 
 machine constitutes investment. They have an estimated life 
 of more than one year, and payment for them should be con- 
 eidered capital expenditures. A reasonable amount for de- 
 preciation of the machines may be deducted from gross in- 
 come. 
 t3. Can payments of premiums on insurance policies for insurance 
 against fire, hail, tornado, or windstorm be deducted ? 
 
 The cost of insurance of crops and of all farm buildings ex- 
 cept the house in which the owner lives is deductible. 
 
 74. Can the cost of gasoline, repairs," and upkeep of an automobile 
 
 or other vehicle used partly for business purposes and partly 
 for pleasure be deducted ? 
 
 If the automobile is used one-half of the time or one-third 
 of the time for business purposes, the same fractional part 
 of the cost of repairs, etc., may be deducted as a necessary 
 expense. No deduction may be made if the automobile is 
 used solely for the pleasure or personal convenience of the 
 taxpayer or his family. 
 
 75. Are the items of expense incurred by me during the calendar 
 
 year in connection with a farm which I lease to another on a 
 cash or crop-share rental basis, such as repairs to fences, farm 
 buildings, etc., allowable as deductions? 
 
 Yes ; deductible for the year in which paid if your books are 
 kept on a' cash, receipts and disbursements basis. If your 
 books are kept on an accrual basis these expenses are deductible 
 in the year in which they accrued. 
 
 76. A tenant, under the terms of a lease, is obliged to pay a cer- 
 
 tain cash rental and all taxes assessed against the property 
 and keep it insured. May he claim as a business expense the 
 aggregate amount of rental, taxes, and insurance premiums 
 paid? 
 
 Yes, if the property is used by the tenant for business or 
 trade purposes. 
 
 77. I own stock in a corporation which in 1919, assessed each of 
 
 its stockholders "$50 on'each share held. Can the amount paid 
 by me be claimed as a deduction ? 
 
 No. Assessments mg,de by a corporation on its capital stock 
 are regarded as further investments of capital and do not 
 constitute an allowable deduction in the return of the in- 
 dividual. 
 
 78. Can the value of a crop paid to the landlord by the tenant be 
 
 deducted as an expense by the tenant ? 
 
 ^o. It is not a part of the expenses paid by him. He 
 may deduct all amounts paid by him in raising the crop. 
 
 79. I emplo3^ a man to assist me in operating my farm and a woman 
 
 to assist about the house. Is the compensation paid to each 
 allowable as a deduction? 
 
 Unquestionably, as to the amount paid to the male em- 
 ployee, but a line must be drawn as to the amount paid to 
 the femal'e employee. If her time is employed entirely in 
 taking care of milk'and cream produced for sale, in the pro- 
 duction of butter, cheese, etc., the care of milk cans and 
 chums, or, if a separate table is maintained for laborers em- 
 
20 UrCXXME TAX PBIMER FOE TAEMEES. 
 
 ployed on the farm and her services are used entirely in the 
 preparation and serving of the meals furnished the laborers 
 and in caring for their rooms, the compensation paid her con- 
 stitutes an allovs^ahle deduction. If, however, she is employed 
 to assist in caring for the farmer's own household, no deduc- 
 tion can be claimed. 
 
 80. If I employ a minor son or daughter to assist me in my business 
 
 or trade and I pay a salary or wage for such assistance, may 
 I claim the amount as a deduction? 
 
 No. If, however, the son or daughter has attained his or 
 her majority or has been emancipated, the amount of compen- 
 sation paid for his or her services may be so claimed. (See 
 question No. 8.) " - 
 
 81. In purchasing fertilizers I gave notes in payment which I had 
 
 not paid at the close of the year. Should the cost of the fer- 
 tilizers be deducted in the year in which I gave the notes or in 
 the year in which I paid them ? 
 
 Payment by a note is the equivalent of a payment in cash. 
 Therefore, the cost of the fertilizers should be deducted from 
 income in the year in which the notes were given. 
 
 82. I pay dues to a county social club. Are these payments de- 
 
 ductible ? 
 
 No; such dues are a personal expense rather than a busi- 
 ness expense. 
 
 83. In certain States fruit growers, ranchers, and farmers are share- 
 
 holders in irrigation companies, which are mutual in char- 
 acter, and they are often assessed, in proportion to their hold- 
 ings of stock, for sufficient amounts to make repairs to the 
 irrigation system, cleaning out pipes, laterals, etc. Can such 
 assessments be claimed as deductions under the head of busi- 
 ness expenses? 
 
 Yes. Where the purpose of the assessment is merely to raise 
 funds to keep the irrigation system in usable condition and 
 not to make extensions or betterments, the amount assessed 
 against each shareholder may be so claimed. 
 
 84. I purchased a thrashing machine at an auction. Is the amount 
 
 I paid a legal deduction? 
 
 No ; it is an investment of capital. 
 
 85. (Jan the cost of digging irrigation ditches be deducted as an ex- 
 
 pense ? 
 
 No ; but the cost of repairing such ditches may be deducted. 
 
 86. I go to New York every year for the purpose of arranging for the 
 
 sale of my orange crop. May I deduct the expenses of my 
 trip? 
 
 The amount expended by you for railroad fare may be 
 claimed as a deduction, but the cost of meals and lodging rep- 
 resents a personal expense and is not deductible. 
 
 87. The average farm has at least a fair set of improvements. 
 
 Buildings require new roofs and other repairs. Pumps, wind- 
 mills, tanks, and troughs wear out. Fences must be repaired. 
 All these, and other expenses not thought of, make a big 
 item of exjiense on the farm. What is a fair vray to estimate 
 this depreciation when listing the income from fanning for 
 income tax ? 
 
INCOME TAX PRIMER FOR FARMERS. 21 
 
 Depreciation on farm buildings and equipment depends 
 upon the useful life of the property used m the business. 
 See answer to question number 105. It is to be understood, 
 however, that the cost of placing new roofs on buildings, and 
 the cost of pumps, windmills, tanks, etc., including the cost 
 of their installation, constitute capital expenditures and the 
 amount thereof may be made the subject of depreciation 
 charges the same as the cost of the original items. 
 
 Cost of repairs of articles that do not prolong the life more 
 than a period of one year may be deducted from gross income 
 as a business expense^ 
 
 Repairs in the nature of replacements, to the extent that 
 they arrest deterioration and appreciably prolong the life of 
 the property, should be charged against the depreciation re- 
 serve. 
 
 88. A man sold an option on several town lots. The lots were to be 
 
 paid for as sold by option holder. It later developed that 
 the option holder contemplated erecting undesirable build- 
 ing on the lots, and to prevent this from Jaeing done the 
 owner, returned the amount paid for the option and in ad- 
 dition paid $400 for its release. Is this $400 a deductible 
 item of expense or capital investment? 
 
 The $400 is a capital investment, and should be treated as 
 additional cost of the lots. 
 
 INTEREST. 
 
 89. Can all interest paid or accrued within taxable year on indebted- 
 
 ness be deducted ? 
 
 Yes; except on indebtedness incurred or continued to pur- 
 chase or carry securities (like municipal or county bonds), the 
 income from which is wholly exempt from tax. 
 
 TAXES. 
 
 f>0. Can all Federal and local taxes be deducted ? 
 
 Yes ; with the exception of United States income, excess and 
 war profits taxes, inheritance or legacy taxes, and assessments 
 against local ibenefits of a kind tending to increase the value 
 of the property assessed. 
 
 91. Am I not entitled to deduct the income-tax which I paid to the 
 
 collector for the taxable year 1918? 
 No. 
 
 92. A taxpayer's fiscal year ends January 31, 1920; is it proper to 
 
 charge against expense local taxes accrued for 1919, payable 
 in 1920, although taxes for 1918, payable in 1919, were charged 
 against the 1919 business? 
 
 The Revenue Act of 1918 provides that in^computing the net 
 income there shall be allowed as a deduction "taxes paid or 
 accrued within the taxable year imposed * * * by the 
 authority of any State or Territory or any county, school dis- 
 trict, municipality, or other taxing subdivision of any State 
 - 'Or Territory, not including those assessed against local bene- 
 
22 . INOOMB TAX PRIMER FOR rAKMERS. 
 
 fits of a kind tending to increase the vaJue of the properjtjr 
 assessed." Section 200, however, provides that the term 
 "Paid or accrued" is construed accordingto the method of 
 accounting upon the basis of which the net income is computed 
 under section 212, and article 23 thereunder, of Eegulations 
 45, which provides that the accounts of a taxpayer may be 
 kept on either a receipts or accrual basis and that deductions 
 shall be taken accordingly. 
 
 If, therefore, the books of a taxpayer are kept on the cash 
 receipts and disbursements basis, taxes accrued in 1919 but 
 iiot payable until 1920 can not be taken as a deduction until 
 actually paid in 1920. If, however, the books are kept on the 
 accrual basis the taxes may be taken as a deduction in 1919 " 
 when accrued, even though not payable until 1920. 
 
 LOSSES. 
 
 ( 
 
 93. My wheat crop was ruined by hail. I had no insurance. May 
 
 I deduct the value of the crop as a loss ? 
 
 No. The value of the crop has never entered into gross in- 
 come. The cost of raising the crop is deductible as a neces- 
 sary expense. 
 
 94. How am I to determine what amount of loss, resulting from a 
 
 sale of property, is allowable as a deduction ? 
 
 The same method of computation should be followed as is 
 outlined in the answer to the 32d question. If the result is a 
 loss instead of a gain, that loss may be claimed as a deduction. 
 
 95. Suppose I buy a farm, which is run down, with thfe inten- 
 
 tion of making it a profit-paying property — ^that is, I intend 
 to operate it for profit- and not for recreation or pleasure. 
 To do this I am obliged to «xpehd large amounts for labor in 
 plowing and cultivating the land, foT fertilizer, lime, etc., 
 and for several years the expenses will greatly exceed the 
 gross receipts. Can the excess of expenses over receipts for 
 each year be claimed as a loss ? 
 
 It is held that all such necdfesary expenses as contemplated 
 by the^income-tax law of cultivating, operating, or managing 
 a farm on a basis embodying the recognized principles of 
 commercial farming, for the purpose of gain or profit and not 
 for recreation or pleasure, may be claimed as deductions in 
 returns of income, even though these expenses exceed the in- 
 come from the farm and the result is a continued loss, pro- 
 vided the farm is continued to be operated on a strictly com- 
 mercial basis. 
 
 96. Can a deduction be permitted on account of the total destruction 
 
 of an orchard by frost, and what would be the proper method 
 of ascertaining the loss deductible ? 
 
 Yes. The amount to be claimed as a loss is the actual cost 
 of the trees destroyed plus. the amount of expenses incurred, 
 but not deducted for tax purposes, in caring for the orchard 
 up to the time it reached the productive stage, less any de- 
 preciation sustained. 
 
INCOME TAX PRIMER FOB FAKMERS, 23 
 
 •7. I own a tract of timber which was partially destroyed by fire 
 during 1919. Is this loss allowable as a deduction? 
 
 The actual amount of capital invested in standing timber, 
 jf acquired on or after March 1, 1913, and later destroyed by 
 , fire, may be claimed as a deduction if not compensated for by in- 
 surance or otherwise. If the timber was acquired prior to 
 March 1, 1913, its fair market price or value as of that date 
 may be claimed. To illustrate the method to be employed in 
 computing the amount of loss allowable as a deduction, the 
 following is submitted : A tract of land was acquired prior to 
 March 1, 1913, and the estimated amount of timber standing 
 on that tract on that date was 1,000,000 feet, board measure, 
 the fair market price. or value per 1,000 feet established by 
 the current prices prevailing in the locality of the tract in 
 question as of March 1, 1913, being $4. During the year 1919 
 400,000 feet of this timber was destroyed by fire. In this 
 case $1,600 is the amount which may be claimed as a deduction. 
 
 98. If cattle or other live stock are raised on a farm which I own 
 
 or operate, and are then lost through disease, may I claim 
 their value at the time of death as an allowable deduction ? 
 
 No. If, however, the stock which died were purchased for 
 any purpose and the cost has not been claimed in a previous 
 return as a deduction, that cost, less any insurance wluch may 
 be received, may be claimed as a deduction. In determining 
 the cost of stock for the purpose of ascertaining the deducti- 
 ble loss there shall be taken into account only the purchase 
 price, and not the cost of any feed, pasturage, or care which 
 has been deducted as an expense of operation. If gross 
 income is ascertained by inventories, no deduction can be 
 made for live stock or products lost during the year, whether 
 purchased for resale or^produced on the farm, as such losses 
 will be reflected in the inventory by reducing the amount of 
 live stock or products on hand at the close of the year. 
 
 99. I purchased $5,000 Liberty bonds in May, 1918, paying $5,000 
 
 for same. The market price of these bonds was only $4,800 
 on December 31, 1919. Am I entitled to deduct a loss of 
 $200 on th^ese securities? I am not a recognized dealer in 
 securities. 
 
 No. The securities have not been sold, and no loss has 
 been sustained. No loss can be deducted until securities are 
 disposed of and a loss actually is sustained. 
 
 DEBTS ASCERTAINED TO BE WORTHLESS. 
 
 MtO. What conditions are necessary in order that a worthless debt 
 may be claimed as a deduction ? 
 
 It must be (a) a bona fide debt, (5) definitely ascertained 
 to be worthless and uncollectible during the year for which 
 the deduction is claimed, and (c) if books are kept it must 
 be charged off within the year for which the deduction is 
 claimed and no longer considered an asset or carried as such 
 on the books. An account merely written down or a debt 
 recognized as worthless prior to the beginning of the taxable 
 year is not deductible. 
 
24 INOOME TAX PBIMER FOR FARMERS. 
 
 101. In 1919 a corporation or a firm to which I had loaned moneyi 
 
 became bankrupt. Can this debt be considered absolutely 
 worthless and claimed as a deduction for 1919 ? 
 
 Yes, if it is definitely known that nothing can be collected 
 from the debtor itself or any person connected with it. 
 
 102. Is it absolutely necessary that the debtor corporation or firm 
 
 mentioned in the above inquiry be declared a bankrupt and its 
 receiver discharged.before I can claim a deduction on account 
 of the debt in question ? 
 
 No. If the debtor corporation has no . assets whatsoever 
 available for application to the debt in question, and it is 
 definitely known that nothing whatsoever can be collected 
 from the debtor itself or any .person connected with it, a 
 creditor need not go to the expense of instituting bankruptcy 
 proceedings in order to establish his right to claim the worth- 
 less debt as a deduction. 
 
 103. "A" indorses a note for "B." The latter has since departed 
 
 for parts unknown and the note became due in 1919, and "A" 
 was required to make good his indorsement. Can he now 
 claim as a deduction the amount paid by him to the creditor? 
 Yes. If he has no knowledge of "JB's" present whereabouts 
 and has good reason to believe that he is possessed of no assets 
 and that it is his intention never to make payment of it, the 
 amount so paid by "A" may be considered a bad debt due him 
 from " B." 
 
 DEPRECIATION. 
 
 104. What is depreciation? 
 
 Depreciation is a lessening in value of farm buildings, ma- 
 chinery, etc., employed in the business arising from wear, tear, 
 o^ obsolescence. 
 
 105. At what rates may depreciation be claimed, and under what 
 
 conditions? 
 
 The annual allowance ' for depreciation should be based 
 upon the life of the property ; that is, the cost of the property 
 or the value of the same when acquired, if received by gift or 
 bequest, or its fair market price or value as of March 1, 1913, 
 if acquired prior thereto, should be ratably spread over its 
 life. For instance, the rate of depreciation to be deducted on 
 buildings used for business purposes the probable life of which 
 is 50 years would be 2 per cent. The probable life means of 
 course the number of years the property would be usable in 
 business if ordinary repairs are made from the date of acquisi- 
 tion or in case of property acquired prior to March 1, 1913, 
 the number of years the property would be usable from March 
 1, 1913. In the case of property acquired by gift or bequest, 
 ' the " cost " of such property for depreciation purposes is the 
 appraised value at the time the property was acquired. If 
 property in respect of which depreciation is claimed was 
 acquired prior to March 1, 1913, the fair market value as of that 
 date will b& assumed to be, in the absence of proof to the con- 
 trary, the cost of the property, less depreciation up to that 
 date. 
 
. INCOME TAX PRIMER FOR FARMERS. 25 
 
 In claiming depreciation the following fundamental prin- 
 ciples must be taken into considerations 
 
 (a) Only such depreciation as results from exhaustion, 
 ■wear, and tear of property, arising out of its use or employ- 
 ment in business or trade, can be claimed. Depreciation in 
 the value of a home or any article of property, such as auto- 
 mobiles, used for personal pleasure or convenience, can not be 
 claimed; the property must be used for the purpose of pro- 
 ducing income. 
 
 (&) Depreciation in the value of land, whether improved 
 or unimproved, due to ordinary erosion, exhaustion, or any 
 other cause, can not be claimed. 
 
 (c) Where, in the course of years, the owner of property 
 has claimed its full cost as depreciation in his income-tax re- 
 turns, no further claim will be allowed. 
 
 (d) The value to be cared for by depreciation is the actual 
 amount invested in the property and not the value which may 
 be arbitrarily or otherwise fixed. 
 
 106. What is the usual depreciation allowed on general feed mill 
 
 machinery, mill building, electric light plant, and frame build- 
 ing combined ? 
 
 As the rate at which depreciation may be claimed is de- 
 pendent to a greater or less extent upon local conditions, the 
 use to which the property is put and its probable life under- 
 normal business conditions, no rates applicable to all classes 
 of property have been established, and no specific rates can be 
 given at which depreciation may be claimed with respect to 
 any particular property. 
 
 107. What is the depreciation on gasoline engine? 
 
 The rate of depreciation which may be claimed on a gasoline 
 engine depends upon the useful life of the engine in the busi- 
 ness. See answer to question No. 105. 
 
 108. Am I entitled to deduct under the heading of " Depreciation " 
 
 shrinkage in the value of cattle, work horses, and mules pur- 
 cliased or raised on my farm ? 
 
 Depreciation may be claimed with respect to live stock pur- 
 chased for breeding or draft purposes on account of reduc- 
 tion in value due to increase of age or other causes. Such 
 animals should not, however, be included in your inventory 
 of live stock and farm products. 
 
 109. In 1Q14 I inherited a farm which I rent. May I olaim any 
 
 amount on account of wear and tear on the buildings which 
 are depreciating in value? 
 
 Ypu are entitled to claim a reasonable allowance for depre- 
 ciation, based on the fair value of the buildings at the time 
 acquired and then estimated life after such acquirement. 
 
 GIFTS. 
 
 110. How am I to determine to what extent contributions or gifts 
 
 made to corporations, organized and operated exclusively for 
 religious, charitable, scientific, or educational purposes, or for 
 prevention of cruelty to children or animals, or to the special 
 
26 INCOME TAX PKIMER FOR FAEMBES. 
 
 fund for vocational rehabilitation, may be claimed as a de- 
 duction ? 
 
 You should first ascertain what your net income would 
 be were you not entitled to a deduction on account of such 
 contriubtions or gifts, and then if the aggregate of such 
 contributions or gifts made during the year to such corpora- 
 tions does not exceed 15 per cent of your taxable net income 
 so computed their aggregate amoimt may be entered in the 
 space provided therefor under " General deductions " on a 
 personal return form. If such aggregate amount exceeds 15 
 per cent of your taxable net income so computed, the excess 
 can not be claimed. 
 
 For example: Your total net income without deduction for 
 contributions amounts to $20,000. During the year you have 
 contributed to the National Ked Cross $1,000; to the Young 
 Men's Christian Association $1,000: toward the construction 
 of a new church $1,000; and to the associated charities of 
 your home city $500; a total of $3,500. Fifteen per cent of 
 your total net income amounts to $3,000 ; therefore this latter 
 amount may be claimed as a deduction and the balance of 
 your contributions and gifts may not be claimed. 
 
 In claiming a deduction on account of such contributions 
 or gifts there should be shown on the return of income (a) 
 the name and address of each organization to which a contri- 
 bution or gift. was made and \b) the date and amount of each 
 such contribution or gift. 
 
 CREDITS. 
 
 111. I understand that a part of the net income is not liable to the 
 
 normal tax. To what credits am I entitled in arriving at the 
 net income liable to the normal tax? 
 
 (a) The amounts received as dividends from a corporation 
 which is taxable by the United States upon any portion of its 
 net income. 
 
 (h) The amount received as interest upon obligations of the 
 United States which is included in gross income. 
 
 (c) The personal exemptions referred to in answers to ques- 
 tion No. 3. (For the purpose of imposing the surtax the 
 ■ taxpayer's net income is entitled to none of these credits.) 
 
 RETUENS OF INFORMATION. 
 
 112. Are returns of information required of farmers? 
 
 Section 256 of the Eevenue Act of 1918 provides in part that 
 > all individuals, corporations, and partnerships, in whatever 
 
 capacity acting, including lessees or mortgagors of real or per- 
 sonal property, fiduciaries, and employers, making payment to 
 another individual or partnership of interest, rents, salaries, 
 wages, .. premiums, annuities, compensations, remunerations, 
 emoluments, or other fixed or determinable gains, profits 
 * * * of $1,000 or more in any taxable year * * * 
 shall render a true and accurate return to the commissioner, 
 
INCOME TAX PRIMER FOR FARMERS. 27 
 
 under such regulations and in such form and manner and to 
 such extent as ma^^ be prescribed by him with the approval of 
 the Secretary, setting forth the amount of such gains, profits, 
 and income, and the name and address of the recipients of such 
 payment. 
 
 113. Upon what forms shall I make returns of information and with 
 
 whom shall I file such returns ? 
 
 Eeturns of information should be filed on Form 1099 (re- 
 vised) and should be filed with the Commissioner of Internal 
 ^ Revenue on or before March 1 of each year, accompanied by a 
 
 letter of transmittal, under oath, on. Form 1096 (revised). 
 
 114. I pay an annual rent exceeding $1,000 to an agent who refuses 
 
 to disclose the name of the landlord. Should I make a return 
 of information? 
 No. The return in that case should be made by the agent. 
 
 115. Where a person receives a cash compensation for services ren- 
 
 dered, and in addition thereto commissions, living expenses, or 
 other allowances, is the aggregate amount of cash^ plus the 
 value to such person of the allowances, to be returned ? 
 
 Yes. A return is required in each case where the cash com- 
 pensation, plus the value of the allowances, equals or exceeds 
 $1,000 for the taxable year. 
 
 PAYMENT, ABATEMENT, AND EEETJND OF TAX ASSESSED. 
 
 116. To whom is an assessment of income tax to be paid ? - 
 
 To the collector of internal revenue with whom your return 
 was filed. 
 
 117. When does payment of income tax assessed against an individual 
 
 on a calendar year return become due and payable ? 
 
 The first installment shall be paid at the time fixed by law 
 for filing the return, and the second installment shall be paid 
 on the 15th day of the third month, the third installment on 
 the 15th day of the sixth month, and the fourth installment 
 on the- 15th day of the ninth month, after the time fixed by 
 law for filing the return. 
 
 The total tax may be paid at the time of filing the return, 
 or if not so paid, one installment may be paid and the balance 
 may be paid in installments, or in full, on or prior to any sub- 
 sequent installment date referred to above. Failure to pay 
 any installment on the date fixed by law makes the taxpayer 
 liable for the payment of the balance of tax due upon notice 
 and demand by the collector. 
 
 118. May the income tax due from a taxpayer be paid in a single 
 
 payment instead of in installments? 
 
 Yes. Section 260 of the act provides that the tax may, at 
 the option of the taxpayer, be paid in a single payment, in 
 which case the total amount is to be paid on or before the time 
 fixed by law for filing the return; or, where an extension of 
 time for filing the return has been granted, on or before the 
 expiration, of ihe period of such extension. 
 
 119. What recourse has a taxpayer when he feels that he has been 
 
 assessed an income tax in excess of his true tax liability ? 
 
28 INCOME TAX PKIMEB TOR FARMERS. 
 
 He may pay the tax under protest and file claim for refund, 
 or he may exercise his right to file with the collector of in- 
 ternal revenue for his- district a claim for abatement, executed 
 on Form 47, copies of which may be obtained from the col- 
 lector. The filing of a bona fide claim prior to the due date 
 of the tax acts as a stay to the collection of the 5 per cent 
 penalty for delinc[uency in payment, provided in case of re- 
 jection of the claim, the tax due is paid within 10 days from 
 the date of notice of such rejection. However, in case of re- 
 jection interest at the rate of one-half of 1 per cent per month 
 will run from the date the amount was due until paid. 
 
 It should be understood, however, that the filing of a claim 
 for abatement of tax alleged to have been erroneously assessed 
 does not operate as a suspension of the collection of the tax. 
 If the collector feels that the suspension of collection will 
 jeopardize the interests of the Government, "4ie may collect 
 the tax and leave the taxpayer to his remedy of filing a claim 
 for refund. 
 
 120. In 1919 I paid $50 income tax in excess of my true tax liability 
 
 for the year 1918. Can this excess payment be applied in 
 payment of a later assessment of tax ? 
 
 Yes; the excess payment is to be credited against any in- 
 come,, war-profits, or excess-profits taxes, ^ or installment 
 thereof, due from the taxpayer at the time of the discovery 
 of the overpayment for the prior year, and any balance, of 
 such excess is to be refunded to the taxpayer. It will be 
 necessary, however, to file a claim for such credit with your 
 collector on form 47-A. 
 
 121. Will any information contained in my .personal return be dis- 
 
 closed to another? 
 
 No. The law specifically provides that any information 
 relative to an individual's income and deductions obtained 
 from his personal return or otherwise, in connection with the 
 income tax, shall be inviolably confidential, and it is unlaw- 
 ful for any employee of the United States to divulge or make 
 known such information in any manner whatsoever to any 
 person except the proper officers and employees of the Treas- 
 ury Department, or to the proper officers of a court for use 
 in a trial of any case to which both the United States and 
 the person rendering the return are parties; and any offense 
 against this provision of law will be held to be a misdemeanor 
 and be punishable by a fine not exceeding $1,000, or imprison- 
 ment not exceeding one year, or both, at the discretion of the 
 court, and dismissal from the service of the Government. 
 
 122. If my attorney requests a copy of my return or any informa- 
 
 tion relative thereto, will his request be granted? 
 
 No ; unless the return was rendered by him for and in your 
 behalf, or he submits an authorization, personally signed by 
 you, permitting the copy or information to be given to him. 
 
INDEX. 
 
 A. 
 
 Question. 
 
 Accounting, inventory basis 26 
 
 receipts and disbursements 20 
 
 system required 25 
 
 Accounting period, change of 12 
 
 Agent, returns filed by 18, 122 
 
 Allowances 115 
 
 Assessments, income tax 116-120 
 
 capital stock ' 61, 77 
 
 Irrigation company , 83 
 
 Automobile, repairs upon , 70, 74 
 
 B. 
 
 Blank forms, where obtainable 20 
 
 Building and loan associations, dividends on stock 62 
 
 C. 
 
 Change from calendar year to fiscal year basis 12 
 
 Claims for excess taxes paid 119 
 
 Computation of income 25 
 
 Contributions to charitable organizations 68 (10) 
 
 Cooperative associations 64 
 
 Credits, allowable 111 
 
 for excess payment of tax 120 
 
 Crop rentals, Income from [ 31 
 
 LOt deductible expense of tenant J 78 
 
 D. 
 
 Debts, bad or worthless charged off 65,68 (7), 100-103 
 
 collection of bad, charged off : 65, 
 
 payment by surety 103 
 
 Deductions, from gross income 68 
 
 gifts to charitable organizations 68 (10), 110 
 
 items not deductible 69 
 
 ordinary and necessary expenses 68 (1), 70-88 
 
 taxes paid by tenant 76 
 
 worthless debts 65,68 (7), 100-103 
 
 Depletion, allowance for ,68 (9) 
 
 Depreciation, allowance for 55,68 (8, 9), 105-109 
 
 defined 104 
 
 live stock 53,108 
 
 Dividends, exempt from normal tax 111 
 
 from cooperative associations , 64 
 
 Dues, social club 82 
 
 29