(SL '%.^ N 5 ^^ HJ4655.N5T""""'"'"'""'"^ Comptroller's regulations relating to th 3 1924 014 049 229 NEW YORK STATE INCOME TAX BUREAU COMPTROLLER'S REGULATIONS RELATING TO THE INCOME TAX ISSUED PURSUANT TO CHAPTER 627 OF THE LAWS OF 1919 IMPOSING TAXES UPON AND WITH RESPECT TO PERSONAL INCOMES EUGENE M. TRAVIS State Comptroller Albany, N. Y. J. B. LYON COMPANY, PRINTERS ALBANY 1920 The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924014049229 CONTENTS Page FOREWORD vii Art. No. Title THE TAX 1 Scope of the law 1 2 Tax rate i • 3 Who are taxpayers 1 Net Income Defined 11 Meaning of net income 2 12 Computation of net income 2 13 Bases of computation 3 14 Methods of accounting , 4 INCOME TAX ON RESIDENTS GroMS Income Defined — Incluaiona 21 What included in gross income 6 22 Income from federal, state and municipal contracts 5 23 Compensation for personal services 5 24 Compensation of state officers 5 25 Compensation paid other than in cash 6 26 Compensation paid in notes 6 27 Payments received in warrants or securities 7 28 Gross income from business 7 29 Long term contracts 7 30 Gross income of farmers 8 31 Sale of stock and rights 9 32 Sale of patents and copyrights 10 33 Sale of good will ^,.. 10 34 Sale of personal property on instilment plan 10 35 Sale of real estate in lots 12 36 Sale of real estate involving deferred payments 12 37 Sale of real estate on instaUment plan 13 38 Deferred pajoneut sales of real estate not on installment plan 13 39 Isolated installment transactions 14 40 Annuities and insurance policies 14 41 Pension receipts 14 42 Rents and royalties 15 43 Forgiveness of indebtedness 15 44 When included in gross income 16 45 Income not reduced to possession 16 46 Examples of constructive receipt 17 [i] ii Contents Crof Income Defined — Inclutiona — Dividend t Art. No. Title P»ge 61 Dividends 18 62 Dividends paid in property 18 63 Stock dividends 18 64 Sale of stock received as a dividend 19 65 Distribution in liquidation 19 66 Distribution from depletion or depreciation reserve 19 Grota Income Defined — Excluatone 71 What excluded from gross income 21 72 Proceeds of insurance 21 73 Gifts and bequests 21 74 Interest exempt from tax 22 75 Dividends and interest from federal land bank and national farm loan associa- tion 22 76 Dividends from federal reserve banks 22 77 Income of foreign consulai officers 23 78 Compensation receivea from the United States 23 79 Income accruing prior to January 1, 1919 23 80 Subtraction for redemption of trading stamps 24 Crost Income Defined — Basil For Determining Cain or Lott 91 Basis for determining gain or loss from sale, gift or other disposition 26 92 Fair market value January 1, 1919 26 93 Sale of property acquired by gift or bequest 26 94 Exchange of property 27 95 Determination of gain or loss from exchange of property 27 96 Exchange for different kinds of property 28 97 Exchange of property and stock 28 98 Exchange of stock for other stock of no greater par value 28 99 Determination of gain or loss from subsequent sale 29 100 Exchange of stock for other stock of greater par value 30 101 Readjustment of partnership interests 30 Deductions Allowed — Basineaa Expenaea 111 Business expenses 31 112 Cost of materials 31 113 Repairs 32 114 Professional expenses 32 115 Compensation for personal services 32 116 Treatment of excessive compensation 33 117 Bonuses to employees 33 118 Traveling expenses 34 119 Pension payments 34 120 Rentals 35 121 Insurance premiums 35 122 Expenses of farmers 36 123 When charges deductible 37 124 Payments oy pubUc utiUties 38 125 Items not deductible 38 Contents iii Deductions Allowed — Interett Art. No. Title Page 136 Interest 39 137 Interest on capital 39 Deductions Allowed — Taxes 141 Taxes 40 142 Federal duties and excise taxes 40 143 Taxes for local benefits 40 144 Inheritance taxes 41 Deductions Allowed — Losses 151 Losses 42 152 Voluntary removal of buildings 42 153 Loss of useful value 43 154 Shrinkage in value of securities and stocks 44 155 Losses of farmers 44 Deductions Allowed — Bad Debts 161 Bad debts 46 162 Examples of bad debts 46 163 Worthless mortgage debt 47 164 Worthless securities 47 Deductions Allowed — Depreciation 171 Depreciation 48 172 Depreciable property 48 173 Depreciation of intangible property 49 174 Capital sum recoverable through depreciation allowance 49 175 Method of computing depreciation allowance 50 176 Modification of method of computing depreciation 50 177 Depreciation of patent or copyright 60 178 Depreciation of drawings and models 51 179 Charging off depreciation 51 180 Closing depreciation account 52 181 Depreciation in the case of farmers 52 Deductions Allowed — Depletion 190 Depletion of mines, oil and gas wells, natural deposits and timber 63 Deductions Allowed — Charitable Contributions 201 Charitable contributions 53 202 Definition of religious, charitable, scientific and educational corporations and associations 54 Personal Exemptions 205 Personal exemption of resident individual 65 206 Personal exemption of head of family 65 207 Personal exemption of married person 55 208 Exemption for dependents 66 209 Date determining exemption 66 210 Personal exemption of officer or employee of the United States 56 iv Contents inaentorie* Art. No. Title Page 216 Need of inventories 58 217 Valuation of inventories 58 218 Inventories at cost 58 219 Inventories at market 59 220 Inventories by dealers in securities 59 PartnerahipM 226 Partnerships 61 227 Limited partnerships 61 228 Association distinguished from partnership 61 229 Distributive shares of partners 61 230 Partnership returns 62 231 Contents of partnership return 62 232 Taxation of partners in partnership with fiscal year ending in 1919 63 233 Charitable contributions by partnerships 63 Eatates and Trusts 240 Fiduciary 64 241 Fiduciary distinguished from agent 64 242 Classification of income of estates and trusts 64 243 Resident and nonresident estates and trusts distinguished 65 244 Income of estates and trusts taxed to fiduciary 65 245 Income of estates and trusts taxed to beneficiaries 66 246 Fiduciary returns 67 247 Tax returns for beneficiaries 68 248 Return by guardian or committee 68 249 Returns where more than one trust 69 250 Return by receiver 69 251 Computation of income of estates and trusts 69 252 Losses and gains from the sales by fiduciaries of property included in the original trust or estate 70 253 Decedent's estate during administration 70 254 Deductions allowed estates and trusts 71 255 Liability for payment of the tax 71 Withholding at Source 261 Deducting and withholding tax at source 73 262 Deducting and withholding in 1919 73 263 Fixed or determinable annual or periodical income 73 264 Year, for purposes of deducting and withholding 74 265 Income not subject to deducting and withholding 75 266 Income of a c^onresident for services performed partly within and partly without the state 76 267 Form of residence certificate 77 268 Renewal of residence certificates 77 269 Deducting and withholding where residence is established 77 270 Return of tax withheld 77 Contents v Information at Source Art. No. Title Page 281 Who shall make returns of information 79 282 Return of information where no actual withholding 79 283 No return of information where there has been actual withholding 79 284 Return of information for payments in 1919 79 285 What is included in calculating $1,000 for the purpose of reportmg informa- tion 80 286 Returns of information as to payments for personal service 80 287 Return of information as to payments of interest on registered bonds 80 288 Return of information as to payment of dividends 81 289 Payments of which no return of information is required 81 290 Information as to actual owner 82 NONRESIDENT SECTION Tax on Nonresidents 401 Tax on nonresidents 83 Groaa income deRned 411 Gross income 83 412 Compensation for personal sei vices 83 413 Pensions received 84 414 Gross income from business 84 415 Definition of " business carried on " within the state 84 416 Sale of stocks, bonds and other securities 84 417 Sale of property other than securities 85 418 Rents and royalties 85 419 Interest and dividends 85 Deductions allowed 431 Allowable deductions 85 432 Business expenses 86 433 Taxes 86 434 Interest 86 435 Losses 86 Apportionment of income from sources xjoithin and without the State of New York 451 Earnings of salesmen 87 452 Salaries and wages of nonresident employees and officers 87 453 Wages of nonresident seamen 87 454 Income from vessels 88 455 Business carried on wholly within the State 88 456 Business carried on wholly without the State 89 457 Apportionment of business income from business carried on both within and without the State 89 470 Alternative basis of apportionment 90 Allowance of deductions and credit 481 Allowance of deductions to a nonresident -91 482 Allowance of credit for taxes 91 483 Conditions of allowance of credit 92 484 Redetermination of tax when credit proves incorrect . 92 vi Contents GENERAL PROVISIONS Residence Art. No. Title Page 601 Who is a resident 93 502 Who is a nonresident "3 503 Proof of residence 93 504 Loss of residence 94 Individual Returns 521 Resident individual returns 94 622 Form of return for residents 95 523 Nonresident individual returns 95 524 Return of income of minor 96 625 Return of corporate dividends 97 626 Accounting period 97 527 Fiscal year ending in 1919 97 528 Change in accounting period 98 529 Returns when accounting period changed 98 530 Verification of returns 99 631 Use of prescribed forms 99 Time and Place for Filing Return 541 Time for filing return 99 542 Time for fihng returns upon death or termination of trust 100 543 Extension of time by Comptroller 100 544 Place for filing returns 101 Payment of Taxet 651 Time for payment of tax 102 552 Receipts for tax payments 102 553 Interest on tax 102 654 Payment of tax by uncertified checks 102 655 Procedure with respect to dishonored checks 103 556 Penalties 103 Corrections of Returns 571 Comptroller's power of revision 104 572 Authority for abatement and refund of tax 104 573 Claim for abatement 104 574 Claim for refund 105 Returns f« be Public Records 681 Inspection of returns 106 682 Penalties for disclosure of returns 106 Appendix I Table showing where subjects covwed by Federal Regulations 45 are considered in these regulations 107 Appendix II The Tax Law 110 Index 133 FOREWORD By chapter 627 of the Laws of 1919, article 16 was added to the Tax Law. Its effect is to impose taxes upon and with respect to personal incomes. Upon the Comptroller is imposed the duty of administering the law and enforcing its provisions; That the purposes of the law may be accomplished, he is author- ized to make such rules and regulations as he may deem necessary to maie effective its provisions. The following rules and regula- tions are, therefore, prescribed by virtue of the power vested in the Comptroller and for the purpose intended. With respect to individuals, partnerships and estates and trusts, the provisions of the State Income Tax Law approximate very closely those of the Federal Revenue Act of 1918. Except for slight -wariations, it is evident the Legislature intended to parallel the Federal statute. Because of this fact and with the purpose of avoiding confusing the taxpayer, these rules and regulations closely follow those promulgated by the Federal Department of Internal Revenue. Notwithstanding the similarity .of the two statutes and between these regulations and Federal regulations 45, taxpayers and other interested persons should be guided by the contents of these rules and regulations on every doubtful ques- tion. It is unwise to assume, without verifying the fact, that on any particular point these regulations are identical with those of the Bureau of Internal Revenue. The table in the appendix hereof shows which articles of Federal regulations 45 are incorporated herein and the number of the article where the subject matter of each Federal regulation may be found. PEESoisrAL Income Tax versus Coepoeation Income Tax Article 16 of the Tax Law — the one with respect to which these rules and regulations are made — imposes a tax upon the incomes of natural persons (resident and nonresident) and estates and trusts (resident and nonresident). JSTo tax is imposed upon the incomes of corporations. The various classes of corporations are taxed under other laws. In effect, business corporations pay [vii] viii Foreword an income tax. It is known as a " franchise tax on business cor- porations " and is imposed by article 9-a of the Tax Law. The State Tax Commission is given authority to administer that law. It should be borne in mind that these regulations relate only to the law (article 16, Tax Law) imposing taxes upon and with respect to personal incomes, and, that they are not related to the law (article 9-a, Tax Law) which imposes a franchise tax on business corporations, sometimes known as the corporation income tax. The State Law versus the Fedeeal Statute Although other differences between the two statutes exist, atten- tion is called to the three more important ones. They are : (1) The State law does not tax the incomes of corpora- tions, while the Federal revenue act does. (2) The' State law does not classify nor permit the classification of personal service corporations as partner- ships; the Federal revenue act does admit of such a classification. (3) The State law groups taxpayers into two classes, (a) residents and (b) nonresidents; the Federal act classifies them as (a) citizens and resident aliens and (b) nonresident aliens. These three differences between the two statutes necessarily require regulations differing materially from those prescribed under the Federal statute. Aid Received In -the preparation of these regulations, the department received valuable advice and assistance from Moeris F. Feet, Esq., of the Guaranty Trust Company of New York, Mk. Wil- liam P. Powell, of The Corporation Trust Company of E"ew York, and Me. Herman M. Stein, of Messrs. Thompson & Black, public accountants. They devoted much time to reviewing and assisting in the preparation of these regulations and the tentative drafts of forms of return, and otherwise rendered service of great value to the State. Foreword IX The New York State Society of Certified Public Accountants very kindly co-operated in the work through a special tax com- mittee appointed for the purpose, of which Me. Heney B. Febnald was chairman, an.d Me. James F. Faeeell, secretary, and Messes. F. J. Clowes, J. S. M. Goodloe, Joseph J. Klein and EoBEET H. MoNTGOMEEY wore associate members. In addition, many valuable thoughts were contributed and much help derived from the suggestions of various members of the accounting and legal professions, from the bankers of the State and members of the Legislature. I desire, in this public way, to acknowledge the value to the ■Comptroller's Departmeoii; and to the State of New York, of the services, advice and assistance so freely and voluntarily placed at my disposal. Comptroller. THE TAX Article 1. Scope of the law — The statute imposes an income tax on individuals and on certain estates and trusts. {Tax Lww, section 351.) The tax is upon net income, as defined in the statute, after deducting from gross income, as defined in the statute, the allowable deductions. {Tax Laiv, sections 357, 358, 359, 360 and 361.) In certain cases exemptions are allowed against net income and in certain other cases credits against the amount of the tax. {Tax Law, sections 362 and 363.) Special provisions of the statute deal with the effect of the tax on non- resident individuals, partnerships, estates and trusts. {Tax Law, sections 351, 364 O'^d 365.) The tax is payable upon the basis of returns rendered by the taxpayers liable thereto, except that in some instances it is to be paid at the source of the income. {Tax Law, sections 366, 367, 368, 369, 370 and 371.) Art. 2. Tax rate — For the calendar year 1919, or for any fiscal year ending during the year 1919 and for each taxable year thereafter, an income tax is imposed at the rate of one per centum (1%) upon the first $10,000 of taxable income (net income after subtracting exemptions) ; two per centum (2%) upon the amount of taxable income in excess of $10,000 and not in excess of $50,000; three per centum (3%) upon the amount of taxable income in excess of $50,000. Art. 3. Who are taxpayers.^ — The word " taxpayer " includes (1) Every resident of the State of ISTew York, (2) Every estate and trust resident of the State of ISTew York, whose income is in whole or in part subject to the State income tax and (3) Individuals and estates and trusts, nonresident of the State of ISTew York, receiving taxable income from property owned or from business, trade, profession or occupation carried on or fol- lowed within the State of New York. [1] NET INCOME DEFINED Aet. 11. Meaning of net income — The tax imposed by the statute is upon income. In the computation of the tax various classes of income must be considered: (a J Income (in the broad sense), meaning all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits, including gains derived from the sale, exchange or other disposition of capital assets. It is not limited to cash alone, for the statute recognizes as income- determining factors other items, among which are inventories, accounts receivable, property exhaustion and accounts payable for expenses incurred. (Tax Law, sections 35S, 354-, 355 and 356.) (b) Gross income, meaning income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by the statute. {Tax Law, section 359.) (c) 'Net income, meaning gross income less statutory deductions. The statutory deductions are in general, though not exclusively, expenditures, other than capital expenditures, connected with the production of income. (Tax Law, sections 360 amd 361.) (d) Net income less exemptions. Though taxable net income is wholly a statutory conception, it follows, subject to certain modi- fications as to exemptions and as to some of the deductions and as to nonresidents, the lines of commercial usage. Subject to these modifications statutory "net income" is commercial "net income." This appears from the fact that ordinarily it is to be computed in accordance with the method of accounting regularly employed in keeping the books of the taxpayer. As tO' net income of nonresidents, see Tax Law, section 359. Aet. 12. Computation of net income — Net income must be computed with respect to a fixed period. Usually that period is twelve months and is known as the taxable year. Items of income and expenditure which as gross income and deductions are ele- ments in the computation of net income need not be in the form of cash. It is sufficient that such items, if otherwise properly included in the computation, can be valued in terms of money. The time as of which any item of gross income or any deduction [2] Net Income Defined 3 is to be accounted for must be determined in tbe ligbt of tbe fundamental rule that the computation shall be made in such a manner as clearly reflects the taxpayer's income. If the method of accounting regularly employed by him in keeping his books clearly reflects his income, it is to be followed with respect to the time as of which items of gross income and deductions are to be accounted for. If the taxpayer does not regularly employ a method of accounting which clearly reflects his income, the com- putation shall be made in such manner as in the opinion of the Comptroller clearly reflects it. Aet. 13. Bases of computation — ^ Approved standard methods of accounting will ordinarily be regarded as clearly reflecting income. A method of accounting will not, however, be regarded as clearly reflecting income unless all items of gross income and all deductions are treated with reasonable consistency. See section 350 of the Tax Law for definitions of "paid," "paid or acci-ued" and "paid or incurred." All items of gross income shall be included in the gross income for the taxable year in which they are received by the taxpayer, and deductions taken accordingly, unless in order clearly to reflect income such amounts are to be properly accounted for as of a different period. For instance, in any case in which it is necessary to use an inventory, no accounting in regard to purchases and sales will correctly reflect income except an accrual method. {Tax Law, section 359.) A taxpayer is deemed to have received items of gross income which have been credited to or set apart for him without restric- tion. {Article JfA.) On the other hand, appreciation in value of property is not even an accrual of income to a taxpayer prior to the realization of such appreciation through conversion or other disposition of the property. A taxpayer who changes the method ^ of accounting employed in keeping his books for the taxable year 1920 or thereafter, shall before computing his income upon such new basis for purposes of taxation secure the consent of the Comp- troller. Application for permission to change the basis of the return shall be made at least 30 days in advance of the date of filing return and shall be accompanied by a statement specifying the classes of items differently treated under the two systems and all amounts which woidd be duplicated or entirely omitted as a 4 Net Income Defined result of the proposed change. A taxpayer subject to Federal tax shall file with his application a copy of the consent of the Commissioner of Internal Eevenue, to change the basis of the return for Federal tax purposes. The requirement of notice to the Comptroller will be modified in such cases with respect to time, and where a change is authorized, it will be made efl^ective at the same date as that authorized by the Commissioner of Internal Eevenue. Aet. 14. Methods of accounting It is recognized that no uni- form method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. Among the essentials are the following: (1) In all cases in which the production, purchase or sale of merchandise of any kind is an income-producing factor, inven- tories of the merchandise on hand (including finished goods, work in process, raw materials and supplies) should be taken at the beginning and end of the year and used in computing the net income of the year; (2) Expenditures made during the year should be properly classified as between capital and income, that is to say, that expenditures for items of plant, equipment, etc., which have a useful life extending substantially beyond the year should be charged to a capital account and not to an expense account; (3) In any case in which the cost of capital assets is being recovered through deductions for wear and tear, depletion or obsolescence any expenditure (other than ordinary repairs) made to restore the property or prolong its useful life should be charged against the property account or the appropriate reserve and not against current expenses. A taxpayer must make his return on the basis on which his books are kept ; so that in making his State return, as in making his Federal return, he must use the basis on which his books are kept, if that basis reflects his true income. GROSS INCOME DEFINED: INCLUSIONS Art. 21. What included in gross income Gross income in- cludes in general compensation for personal and professional services, business income, profits from sales of and dealings in property, interest, rent, dividends, and gains, profits and in- come derived from any source whatever, unless exempt from tax by law. Profits derived from sales in foreign commerce are taxable. Income may be in the form of cash or of property. The amount of Federal or State income tax paid for or to a bondholder by an obligor pursuant to a tax-free covenant in its bonds is in the nature of additional interest paid the bondholder and must be included in his gross income. He is not, however, entitled to deduct such income tax paid on his behalf. As to the basis for determining gain or loss from sales and exchanges see Tax Law, sections 353, 354 and 355 and article 91. Aet. 22. Income from Federal, State and Municipal contracts Any profit received from the United States, a State or political subdivision thereof by an indejtendent contractor isi taxable income. Aet. 23. Compensation for personal services — Where no deter- mination of compensation is had until the completion of the serv- ices, the amount received is income for the taxable year of its determination. Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on in- surance premiums, tips, retired pay, pensions and retiring allow- ances paid by States and political subdivisions or private persons, are income to the recipients ; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other gifts and contributions received by a clergyman, evangelist or religious worker for services rendered. The salaries, wages and other compensation received from the United States by officials and employees are not subject to tax. See articles J^l and 210. {Tax Law, section 359.) Aet. 24. Compensation of State officers — Compensation paid its officers and employees by the State of ISTew York or any other state, or any political subdivision thereof, including fees re- [5] 6 Gross Income Defined: Inclusions ceived by notaries public commissioned by states and the commis- sions of receivers appointed by State courts, and including amounts paid to officers and employees while in the military or naval service, is taxable. Employees of universities receiving salaries paid in part or in whole from funds available under the Smith-Lever Act of May 8, 1914, who are officers or employees of a State, are required to return as taxable income the salaries so received. This is also true with re,3pect to the Act of August 30, 1890, relating to colleges for the benefit of agriculture and the mechanic arts, and to the Act of March 2, 1887, relating to agricultural experiment stations in such colleges. Art. 25. Compensation paid other than in cash — Where serv- ices are paid for with something other than money, the fair market value of the thing taken in payment at the time such payment is made 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 the fair value of the compensation received. Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. When living quarters such as camps are fur- nished to employees for the convenience of the employer, the rental value need not be added to the cash compensation of the employee, but where a person receives as compensation for serv- ices rendered a salary and in addition thereto living quarters, the value to such person of the quarters furnished constitutes income subject to tax. Premiums paid by an employer on life, accident or health policies in favor of his employees as addi- tional compensation of suc^h employees are income to the em- ployees. Contributions to retirement or pension funds accom- plished by deduction from the compensation otherwise payable to the employees are income to the employees. Aet. 26. Compensation paid in notes Promissory notes re- ceived in payment for services, and not merely as security for such payment, constitute income to the amount .of their fair market value. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, may properly treat as income as of the time of receipt Gross Income Defined: Inclusions V the fair discounted value of the note at such time. Thus, if it appears that such note is or could be discounted, the recipient may include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted. Aet. 27. Payments received in warrants or securities Where warrants are issued by, or in behalf of, a state, city, town, or other political subdivision of a state, and are accepted, in payment, the fair market value of such warrants at the time of receipt must be returned as income. When a contractor receives pay- ment in stock, bonds or other obligations of a corporation other than as stated above, such securities shall, for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of their fair market value. If upon conversion of the warrants or securities into cash or other property, the contractor receives an amount or value greater or less than the value so returned, the profit or loss so realized or sustained shall be reported in the return for the year in which such warrants or securities are converted. Art. 28. Gross Income from business — In the case of a manu- facturing, merchandising or mining business " gross income " means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions should not be made for depreciation, depletion, selling expenses or losses, or for items not ordinarily used in computing the cost of goods sold. Any allowance made to a taxpayer by a con- tracting department of the Government or by any other con- tractor for amortization or fall in the value of property, either as a part of the cost of production or as a part of the price of the product, shall be included in gross income, but unlike the Federal Income Tax Law, no deduction- for amortization is allowable under the state law. Aet. 29. Long term contracts. — Persons engaged in contract- ing operations, who have uncompleted contracts, in some cases 8 Gross Income Defined: Inclusions perhaps running for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work; that is, on jobs which have been finally completed any and all moneys received in payment will be returned as income for the year in which the work was completed. If the gross income is arrived at by this method, the deduction from gross income should be limited to the expen- ditures made on account of such completed contracts. In arriv- ing at the gross income by this method the receipts and expendi- tures relating to jobs commenced prior to 1919 must be included if completed in 1919 or subsequent years. Or the percentage of profit from the contract may be estimated on the basis of percentage of completion, in which case the income to be re- turned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated ex- penses necessary to the full performance of the contract are incurred during one year, one-half of the gross contract price should be returned as income for that year. Upon the com- pletion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer should file amended returns for such year or years. (Tax Law, sections 358 and SlJi- and article 67 J/..) Aet. 30. Gross income of farmers — ^AU gains, profits and in- come derived from the sale or exchange of farm products, whether produced on the farm or purchased and resold, shall be included in the return of income for the year in which the products were actually marketed and sold, unless an inventory is used. In the case of the sale of machinery, and of animals purchased as draft or work animals or solely for breeding purposes and not for resale, any excess over the cost thereof reduced by all sums theretofore deducted for depreciation shall be included as gross income in preparing the taxpayer's return. Where farm produce is exchanged for merchandise, groceries or mill products, the market value of the article or product received in exchange is to be returned as income. Eents received in crop shares shall be returned as of the year in which the crop shares are Gross Income Defined: Inclusions 9 reduced to money or a money equivalent. If a farmer is en- gaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such case the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized. When live stock purchased is sold, its cost is to be deducted from the sales price in ascertaining the amount of gain or profit to be returned for tax purposes. If, however, an inventory is used the cost price of the article sold must not be taken as an additional deduction in the return of income, as such cost price will be reflected in the inventory. As herein used the term "farm" embraces the farm in the ordinarily accepted sense and includes stock, dairy, poultry, fruit and truck farms, also plantations, ranches and all land used for farming operations. All taxpayers that cultivate, operate or manage farms for gain or profit, either as owners or tenants, are designated farmers. A person cultivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. (See ficriher, articles 122 and 181.) Aet. 31. Sale of stock and rights — When shares of stock in a corporation are sold from lots purchased at different times and at different prices and the identity of the lots can not be deter- mined, the stock sold shall be charged against the earliest pur- chase of such stock. The excess of the amount realized on the sale over the cost of the stock, or its fair market value as of January 1, 1919, if purchased before that date, will be the profit to be accounted for as income. In the case of stock re- ceived as a stock dividend, and in the case of stock in respect of which any such dividend was paid, the cost of each share of such stock shall be ascertained as specified in article 64. Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between the stock and securities purchased for the purpose of determining the portion of the consideration attributable to each class of stock or securities and so represent- ing its cost, but if that should be impracticable in any case, 10 Gross Income Defined: Inclusions no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost. {Article 96.) The en- tire amount realized from the sale of rights to subscribe for stock by a stockholder to whom such rights are issued, is income. Art. 32. Sale of patents and copyrights — A taxpayer disposing of patents or copyrights by sale should determine the profit or loss arising therefrom by computing the difference between the selling price and the value as of January 1, 1919, if ac* quired prior to that date, or between the selling price and the cost, if acquired subsequent to that date. The profit or loss thus determined should be increased or decreased, as the case may be, by the amounts deducted on account of depreciation of such patents or copyrights since December 31, 1918, or since the date of acquisition if acquired subsequent thereto. (^S^ee miicle 177.) Aet. 33. Sale of good will — Any profit or loss resulting from an investment in good will can be taken only when the business, or a part of it, to which the good will attaches is sold, in which case the profit or loss will be determined upon the basis of the cost of the assets, including good will, or their fair market value as of January 1, 1919, if acquired prior thereto. If nothing was paid for good will acquired on or after January 1, 1919, no deductible loss is possible, although, on the other hand, upon the sale of the business there may be a profit. It is immaterial that good will may never have been carried on the books as an asset, but the burden of proof is on the taxpayer to establish the cost or fair market value on January 1, 1919, of the good will sold. Aet. 34. Sale of personal property on installment plan Dealers in personal property ordinarily sell either for cash, or on the personal credit of the buyer, or on the installment plan. Occasionally a fourth type of sale is met with, in which the buyer makes an initial payment of such a substantial nature (for example, a payment of more than 25 per cent) that the sale, though involving deferred payments, is not one on the installment plan. In sales on personal credit, and in the Oross Income Defined: Inclusions 11 substantial payment type just mentioned, obligations of pur- cbasers are to be regarded as the equivalent of cash, but a dif- ferent rule applies to sales on the installment plan. Dealers in personal property who sell on the installment plan usually adopt one of four ways of protecting themselves in case of default: (a) through an agreement that title is to remain in the seller until the buyer has completely performed his part of the trafisaction ; (b) by a form of contract in which title is conveyed to the purchaser immediately, but subject to a lien for the unpaid portion of the purchase price; (c) by a present transfer of title to the purchaser, who at the same time exe- cutes a reconveyance in the form of a chattel mortgage to the seller ; or (d) by conveyance to a trustee pending performance of the contract and subject to its provisions. The general purpose and effect being the same in all of these plans, it is desirable that a uniformly applicable rule be established. The rule prescribed is that in the siale or contract for sale of personal property on the installment plan, whether or not title remains in the vendor until the property is fully paid for, the income to be returned by the vendor will be that proportion of each installment payment which the gross profit to be realized when the property is paid for bears to the gross contract price. Such income may be ascertained by taking that proportion of the total payments received in the taxable year from installment sales (always including payments received in the taxable year on account of sales effected in earlier years as well as those effected in the taxable year) which the gross profit to be realized on the total installment sales made during the taxable year bears to the gross contract price of all such sales made during the taxable year. Where a change is made to this method of computing net income the taxpayer's balance sheet should be adjusted conformably as of the date when the change is effected. If for any reason the vendee defaults in any of his installment payments and the vendor repossesses the property, the entire amount received on installment payments, less the profit already returned, will be income of the vendor for the year in which the property was repossessed, and the prop- erty repossessed must be included in the inventory at its original cost to himself, less proper allowance for damage and use, if any. 12 Gross Income Defined: Inclusions If the vendor chooses as a matter of consistent practice to treat the obligations of purchasers as the equivalent of cash, such a course is permissible. If sales during prior years contain a different percentage of profit than those of the taxable year, or if for any other reason corrections are required to produce a more accurate result, they can be made as of the end of the taxable year. Aet. 35. Sale of real estate in lots — Where a tract of land is purchased with a view to dividing it into lots or parcels of ground to be sold as such, the entire fair market value as of January 1, 1919, or the cost, if acquired subsequent to that date, shall be equitably apportioned to the several lots or parcels and made a matter of record in the books of the taxpayer, to the end that any gain derived from the sale of any such lots or parcels may be returned as income for the year in which the sale was made. This rule contemplates that there will be a measure of gain or loss in every lot or parcel sold, and not that the capital invested in the entire tract shall be extinguished before any taxable income shall be returned. The sale of each lot or parcel will be treated as a separate transaction and the gain or loss will be accounted for accordingly. Aet. 36. Sale of real estate involving deferred payments Deferred payment sales of real estate ordinarily fall into two classes when considered with respect to the terms of sale, as follows : (1) Installment transactions, in which the initial payment is relatively small (generally less than one-fourth of the purchase price) and the deferred payments usually numerous and of small amount. They include (a) sales where there is immediate trans- fer of title when a small initial payment is made, the seller being protected by a mortgage or other lien as to deferred payments, and (b) agreements of purchase and sale which contemplate that a conveyance is not to be made at the outset, but only after all or a substantial portion of the agreed installments have been paid. (2) Deferred payment sales not on the installment plan, in which there is a substantial initial payment (ordinarily not less Oross Income Defined-' Inclusions 13 than one-fourth of the purchase price), deferred payments being secured by a mortgage or other lien. Such sales are distinguished from sales on the installment plan by the substantial character of the initial payment and also usiially by a relatively small number of deferred payments. In determining how these classes shall be treated in levying the income tax, the question in each case is whether the income to be reported for taxation shall be based only on amounts actually received in a taxable year, or on the entire consideration made up in part of agreements to pay in the future. Art. 37. Sale of real estate on installment plan In the two kinds of transactions included in class (1) in the foregoing article, installment obligations assumed" by the buyer are not ordinarily to be regarded as the equivalent of cash, and the vendor may report as his income from such transactions in any year that proportion of each payment actually received in that year which the gross profit to be realized when the property is paid for bears to the gross contract price. If the return is made on- this basis and the vendor repossesses the property after default by the buyer, retaining the previous payments, the entire amount of such payments, less the profit previously returned, will be income to the vendor and will be so returned for the year in which the property was repossessed, and the property repossessed must be included in the inventory at its original cost to himself (less any depreciation as defined in articles 171 and 172). If the tax- payer chooses as a matter of settled practice consistently followed to treat the obligations of the purchaser as equivalent to .cash and to report the profit derived from the entire consideration, cash and deferred payments, as income for the year when the sale is made, this is permissible. If so treated the rule prescribed in article 38 will apply. Aet. 38. Deferred payment sales of real estate not on installment plan — In class (2) in article 36 the obligations assumed by the buyer are much better secured because of the margin afforded by the substantial first payment, and experience shows that the greater number of such sales are eventually carried out accord- ing to their terms. These obligations for deferred payments are therefore to be regarded as equivalent to cash, and the profit 14 Gross Income Defined: Inclusions indicated by the entire consideration is taxable income for the year in which the initial payment was made and the obligations assumed. If the buyer defaults and the seller regains title to the land by agreement or process of law, retaining payments pre- viously irJade, he may deduct from his gi-oss income as a loss m the year of repossession any excess of the amount previously reported as income over the amount actually received, and must include such real estate in his inventory at its original cost to himself (less any depreciation as defined in articles 171 and 172). Art. 39. Isolated installment transactions — The provisions of articles 34 to 38, both inclusive, are applicable only to trans- actions by taxpayers who regularly deal in personal or real prop- erty upon the installment or deferred payment plan. Isolated transactions are not within the scope of these provisions. Art. 40. Annuities and insurance policies — Annuities paid under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds any amounts paid by him as consideration for the contract. An annuity charged upon devised land is income taxable to the an- nuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as taxable income the amount of rent paid to the annuitant, and he is not entitled to deduct front his taxable income any sums paid to the annuitant. Where an insured receives under life insur- ance* endowment or annuity contracts sums in excess of the premiums paid therefor, such excess is income for the year of its receipt. (Article 72.) Distributions on paid-up policies which are made out of earnings of the insurance company are in the nature of corporate dividends and as such are income of an individual subject to the tax. Aet. 41. Pension receipts — Pensions are classified as follows : (1) Periodical payments made to persons retired from service (a) after reaching a specified age, or (b) after a stated period of employment, or (c) on account of disability. (2) Compensation for personal injuries or sichness. Both classes of pensions may be paid out of funds to which the recipient has contributed, or out of funds to which the recipient has made no contribution. Gross Income Defined: Inclusions 15 First. — When received by a nonresident, a pension of any kind is not taxable income, as it is an annuity and, therefore, exempt from taxation against a nonresident under section 359, sub- division 3 of the Tax Law. Second. — When received by a resident, a pension is not taxable (a) when received from the United States Government, or (b) if received as compensation for personal injuries or sickness, or for accident or health insurance, or under workmen's compensation acts, or through war risk insurance, or under any law for the benefit or relief of injured or disabled members of the military or naval forces of the United States. Pensions "arising upon re- tirement for disability are not regarded as compensation for per- sonal injuries within the meaning of this paragraph. Pensions received from the ISTew York City Teachers' E'etirement Fund are exempt from taxation. {Neiv York City Charter^ section 1098-W.) Third. — All other pensions received by residents are taxable. Fourth. — If the recipient has contributed to the fund out of which the pension is* paid, the pension receipts are taxable only when, and to the extent that, they exceed the aggregate amount of all payments or contributions made by him to the fund. Aet. 42. Rents and royalties. — When improvements made by a lessee become part of the real estate, the value of such improve- ments upon the expiration of the existing term of the lease is income to the lessor. In gen&ral, sums paid by a tenant for the use of property, although to another than the landlord, are prop- erly to be regarded as rent and constitute income of the landlord. See further article 120. K'oyalties on patents and copyrights are income. Aet. 43. Forgiveness of indebtedness — The cancellation and forgiveness of indebtedness is dependent upon the circumstances for its effect. It may amount to a payment of income or to a gift or to a capital transaction. If, for example, an individual per- forms services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as com- pensation for his services and a corresponding amount is de- ductible by the creditor. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the 16 Gross Income Defined: Inclusions debtor and need not be included in the latter's gross income and may not be deducted by the creditor. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. Aet. 44. When included in gross income. — Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless they are in- cluded when they accrue to him in accordance with the approved method of accounting followed by him. (Articles 11-H.) Lands which are received as compensation for services in one year, the title to which is disputed and in a later year adjudged to be valid, constitute income to the grantee in the former year. On the other hand, a person may sue in one year on a pecuniary claim or for property, but money or property recovered on a judgment therefor rendered in a later year would be income in the year in which received assuming that it would have been income in the earlier year if then received. This is true of a recovery for patent infringement. Bad debts or accounts charged off because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the date when the amounts were charged off. (Articles 123 mid l&l.) Art. 45. Income not reduced to possession — Income which, is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart (unless previously accrued by the taxpayer and included in his return of income), although not then actually reduced to possession. To constitute receipt in such a case the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. A book entry, if made, should indicate an absolute trans- fer from one account to another. If the income is not credited, but is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. For example, where a corporation con- tingently credits its employees with bonus stock, but the stock is not available to such employees until the termination of five years of employment, the mere crediting on the books of the corporation Gross Income Defined: Inclusions IT does not constitute receipt. The distinction between receipt and accrual must be kept in mind. Income may accrue to the tax- payer and yet not be subject to his demand or capable of being dra^vn on or against by him. Art. 46. Examples of constructive receipt Where interest coupons have matured, but have not been cashed, such interest, though not collected when due and payable, is nevertheless avail- able to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured unless the debtor be in default. This is so although the coupons are exchanged for other property instead of eventually being cashed. Dividends on corporate stock are subject to tax in the year in which made payable, although not yet collected by the stockholder. (Tax Law, section 359 and articles IJi- and 61.) The distribu- tive share of the profits of a partner in a partnership is re- garded as received at the close of the partnership's fiscal year. {Tax Law, section 364, O'^d articles 229 and 230.) Interest credited on savings bank deposits, even though the bank nominally has a rule, seldom or never enforced, that it may require a stipu- lated number of days' notice in advance of cashing depositors' checks, is income to the depositor when credited. An amount credited to shareholders of a building and loan association, when such credit passes without restriction to the shareholder has a taxable status as income for the year of the credit. Where the amount of sucb accumulation does not become available to the shareholder until the maturity of a share, the amount of any share in excess of the aggregate amount paid in by the. shareholder (or value on January 1, 1919, plus subsequent payments) is income for the year of the maturity of the share. GROSS INCOME DEFINED: INCLUSIONS: DIVIDENDS Aet. 61. Dividends Dividends for the purpose of the statute comprise any distribution in the ordinary course of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of its earnings or profits. The mere declaration of a dividend is not a distribution. Dividends are income for ihe year in which payable, regardless of when the earnings or profits out of which they were paid were accumulated, except that dividends declared payable to stock- holders of record prior to January 1, 1919, are to be excluded from gross income even if received on or after January 1, 1919. (Article 79.) Although interest on United- States «bonds and certain other obligations is not taxable when received by a cor- poration, upon amalgamation with other funds of the cor- poration such income loses its identity and when distributed to stockholders in dividends is taxable to the same extent as other dividends. See further article 46. Aet. 62. Dividends paid in property — ^.Dividends paid in securities or other property (other than its own stock), in which the earnings of a corporation have been invested, are income to the recipients to the amount of the fair market value of such property when receivable by the stockholders. A dividend paid in stock of another corporation is not a stock dividend. Where a corporation declares a dividend in stock of another corporation, setting aside the stock to be so distributed and notifying the stockholders of its action, the income arising to the recipients of such stock is its fair market value at the time the dividend be- comes payable. Scrip dividends are subject to tax in the year in which the warrants are issuable to the stockholders. Aet. 63. Stock dividends — A dividend paid in stock of the corporation is income to the amount of the fair market value of the stock received as a dividend. But stock distributions made out of surplus when there are no earnings or profits are free from tax as dividends. (See article 66.) Stock dividends paid from earnings or profits received by a fiduciary and retained as an [18] Gross Income Defined: Dividends 19 accretion to the estate under the terms of the will or trust are income to the estate. Aet. 64. Sale of stock received as a dividend For the purpose of ascertaining the gain or loss derived from the sale of stock of a corporation received subsequent to December 31, 1918, as a dividend or from the sale of the stock in respect of vrhich such dividend "was paid, the cost of each share of new stock is the quotient of the sum of (a) the cost of the old stock or its value on January 1, 1919, if acquired prior thereto, plus (b) the valua- tion at which the new stock was returnable as income, divided by the number of old and new shai'es. Aet. 65. Distribution in liquidation — So-called liquidation or dissolution dividends by corporations during dissolution are not dividends within the meaning of the statute, and amounts so dis- tributed are to be regarded as payments for the stock of the dis- solved corporation. Any excess so received over the cost of his stock to the stockholder, or over its fair market value as of Janu- ary 1, 1919, if acquired prior thereto, is a taxable profit. A dis- tribution in liquidation of the assets and business of a corporation, which is a return to the stockholder of the value of his stock upon a surrender of his interest in the corporation, is distinguish- able from a dividend paid by a going corporation out of current earnings or accumulated surplus when declared by the directors in their discretion, which is in the nature of a recurrent return upon the stock. Art. 66. Distribution from depletion or depreciation reserve A reserve set up out of gross income by a corporation and main- tained for the purpose of making good any loss of capital assets on account of depletion or depreciation is not a part of its surplus out of which ordinary dividends may be paid. A distribution made from such a reserve will be considered a liquidating divi- dend and will constitute taxable income to a stockholder only to the extent that the amount so received is in excess of the cost or fair market value as of January 1, 1919, of his shares of stock. 'No distribution, however, will be deemed to have been made from such a reserve except to the extent that the amount paid exceeds the surplus and undivided profits of the corporation. In general, any distribution made by a corporation other than out 20 Gross Income Defined: Dividends of earnings or profits is to be regarded as a return to the stock- holder of part of the capital represented by his shares of stock, and upon a subsequent sale of such stock his profit will be the excess of the selling price over the cost of the stock or its fair market value as of January 1, 1919, after applying on such cost or value the amoimt of any such capital distribution. GROSS INCOME DEFINED: EXCLUSIONS Aet. 71. What excluded from gross income Gross income excludes the items specifically exempted by section 359 of the Tax Law. 'Such tax-free income should not be included in the return of income and need not be mentioned in the return, except where information regarding it is specifically called for. The exclusion of such income should not be confused with the reduc- tion of income by the application of allowable deductions or exemptions. {T'cujc Law, sections 360 and 362 cmd article 11.) Aet. 72. Proceeds of insurance (a) Upon the death of an insured the proceeds of his life insurance policies, whether paid to his estate or to individual beneficiaries, directly or in trust, are excluded from the gross income of the beneficiary. (Tax Law J section 359.) (b) During his life only so much of the amount received by an insured under life, endowment or annuity contracts as represents a return, without interest, of the value thereof on January 1, 1919, plus the premiums paid by him thereafter, is excluded from his gross income. (Article ^0.) (c) The amounts received by an insured or his estate or other beneficiaries through accident or health insurance or under work- men's compensation acts as compensation for personal injuries or sickness are excluded from the gross income of the insured, his estate and other beneficiaries. Any damage recovered by suit or agreement on account of such injuries or sickness are similarly excluded from the gross income of the individual injured or sick, or of his estate or other beneficiaries entitled to receive such damages. A-mounts received from any allotments, family allowances, compensation, or death or disability insurance payable under the War Eisk Insurance Act of September 2, 1917, as amended, are excluded from gross income. Art. 73. Gifts and bequests — Money and real or personal property received as gifts, or received under a will or under statutes of descent and distribution, are exempt from tax, although the income therefrom derived from investment, sale or otherwise is not. (Tax Law, section 359, and articles 23, J^S and 93.) An amount of principal paid under a marriage settle- [21] 22 Gross Income Defined: Exclusions ment is a gift. ISTeither alimony nor an allowance based on a separation agreement is included in gross income, nor are th.^ allowable deductions. {Article 125.) Aet. 74. Interest exempt from tax — Among income exempt from ta:x is interest upon tbe obligations of the United States or its possessions; or securities issued under the provisions of the Federal Farm Loan Act of July 17, 1916; or bonds issued by the war finance corporation ; or the obligations of the State of ~Eew York or of any municipal corporation or political subdivision thereof; or investments upon which the tax provided for in section 331 of the Tax Law has been paid between June 1, 1917, and llJay 14, 1919, during the period of years for which such tax shall ha.ve been paid. {T\ax Law, section 359.) How- ever, the income from securities (1) upon which the investment tax was paid after May 14, 1919, or (2) upon which the secured debt tax or the mortgage tax was paid, is not exempt. The term " political subdivision " denotes any division of the State made by the proper authorities thereof acting within their constitutional powers for the purpose of carrying out a portion of those functions of the State which by long usage and the inherent necessities of government have always been regarded as public. Political sub- divisions of the State, within the meaning of the exemption, include special assessment districts so created, such as road, water, sewer, gas, light, drainage, school and similar districts and divi- sions. The purchase by the State or any political subdivision thereof of property subject to a mortgage does not render the debt an obligation of the' State, or of such political subdivision, and the interest upon it does not become exempt from taxation, whether or not the purchaser assumes the payment of the debt. Aet. 75. Dividends and interest from Federal land bank and national farm loan association — The income derived from divi- dends on stock of Federal land banks and national farm loan associations and from interest on farm loan bonds is excluded from gross income. {Tax Law, section 359.) Aet. 76. Dividends from federal reserve banks The dividends received on the stock of federal reserve banks are excluded from gross income. Dividends paid by member banks, however are treated like dividends of ordinary corporations. Oross Income Defined: Exclusions 23 Aet. 77. Income of foreign consular officers The income of foreign ambassadors and ministers from investments in bonds and stocks and from interest on bank balances, and the fees of foreign consuls-general, consuls, vice-consuls-general, vice-consuls, deputy consuls-general, deputy consuls and consular agents, vs^ho are not citizens of the United States, are excluded from gross income, but income of such foreign officials from any business carried on by them in the State of New York would be taxable. The com- pensation of citizens of the United States who are officers or employees of a foreign government is, however, not exempt from tax. Aet. 78. Compensation received from the United States Salaries, wages and other compensation received from the United States by officials or employees thereof, whether in a civilian capacity or in the military or naval service, including the fees and commissions of receivers and referees appointed by Federal courts, are exempt from taxation and should be excluded from gross income. The salaries, wages and other compensation of per- sons engaged in the operation of railroads, telegraphs, telephones and cables during the period of federal control and operation are regarded as paid by the United States, and likewise exempt from taxation. The amount received must, however, be reported on the return of income, and must be subtracted from the personal exemption. (Article 210, and Tax Laiv, section 359, subdivision 1-f, and 362, subdivision 3.) Aet. 79. Income accruing prior to January 1, 1919 Property held by the taxpayer on January 1, ]9'19, is capital. Included in this capital are all claims, whether evidenced by writing or not, and all interest which had accrued thereon before that date. Interest accruing on or after that date is taxable income. Where an interest-bearing claim con'tr acted prior to January 1, 1919, is paid in whole or in part after that date, any gain derived from the conversion of the claim into money is taxable. The amount of such gain is the excess of the proceeds of the claim (both principal and interest), exclusive of any interest accrued since Decem'ber 31, 1918 (but such interest must be returned as in- come), over the fair market value of the claim as of January 1, 1919 (both principal and interest then accrued). In the case 24 Gross Income Defined: Exclusions of an insurance policy its surrender value as of January 1, 1919, may be used as a basis for the purpose of ascertaining the gain derived from the sale or other disposition of such policy. Where services were rendered prior to January 1, 1919, but paid for thereafter, the amount received for such services ordinarily should not be included in gross income. If, however, the value of such a claim on January 1, 1919, was less than the amount received subsequent to that date, the difference should be included in gross income. A claim for the purjiose of this article means a right existing unconditionally on January 1, 1919, and then assignable, whether presently payable or not. Interest does not, of course, include dividends on corporate stock. {Tcbx Law, section 350, cmd article 61.) Dividends declared payable to stockholders of record prior to January 1, 1919, are to be excluded from gross income even if received on or after January 1, 1919. Aet. 80. Subtraction for redemption of trading atamps — Where a taxpayer for the purpose of promoting his business, issues with sales trading stamps or premium coupons redeemable in merchan- dise or cash, he should in computing the income from such sales subtract only the amount received or receivable which will be required for the redemption of such part of the total issue of trading stamps or premium coupons issued during the taxable year as will eventually be presented for redemption. This amount will be determined in the light of the experience of the taxpayer in his particular business and of other users engaged in similar businesses. The taxpayer shall file for each of the five preceding years, excluding the taxable year, or such number of these years as stamps or coupons have been issued by him, a state- ment showing (a) the total issue of stamps during each year, (b) the total stamps redeemed in each year, and (c) the per- centage for each year of the stamps redeemed to the stamps issued in such year. A similar statement shall also be presented show- ing the experience of other users of stamps or coupons whose experience is relied upon by the taxpayer to determine the amount to be subtracted from the proceeds of sales. The Comptroller will examine the basis used in each return, and in any case in which the amount subtracted in respect of such stamps or coupons is Gross Income Defined: Exclusions 25 found to be excessive an amended return or amended returns will be required. In the case of an individual furnishing a co-operative or other trading stamp system for others, he shall compute his income in accordance with the same principles and submit similar state- ments with his return. GROSS INCOME DEFINED: BASIS FOR DETER- MINING GAIN OR LOSS Aet. 91. Basis for determining gain or loss from sale, gift or other* dispositijon. — For the purpose of ascertaining the gain or loss from the sale, gift, exchange, or other disposition of property the basis is (a) its fair market price or value as of January 1, 1919, if acquired prior thereto, or (b) if acquired on or after that date, its cost or its approved inventory value. In both cases proper adjustment must be made for any depreciation or deple- tion sustained. Gifts, whether charitable contributions or other- wise, constitute a disposition of property which may result in a profit or loss to be measured by the difference between the cost (or the value on January 1, 1919, if acquired prior thereto) and the value at the date of the gift. Aet. 92. Fair market value January 1, 1919 What the fair market price or value of property was on January 1, 1919, is a question of fact to be established! by any evidence which will reasonably and adequately make it appear. In the case of securities dealt in on a recognized exchange, the fair market value on January 1, 1919, will ordinarily be deter- mined by the average of the bid and asked prices after closing on December 31, 1918. In all other cases other evidence of value is necessary and bona fide sales nearest January 1, 1919, of secur- ities publicly or privately dealt in, or appraisals for inheritance or similar purposes, will be considered. Aet, 93. Sale of property acquired by gift or bequest In the case of property acquired by gift, bequest, devise or descent the basis for computing gain or loss on a sale is the fair market price or value of the property at the date of acquisition or as of Janu- ary 1, 1919, if acquired prior thereto. For the purpose of deter- mining the profit or loss from the sale of property acquired by bequest, devise, or descent since December 31, 1918, its value as appraised for the purpose of the ISTew York transfer tax, or in the case of estates not subject to that tax its value as appraised in a State court for the purpose of State inheritance tax should be deemed to be its fair market value when acquired. If there [26] Basis For Determining Ocrni or Loss 27 has been no judicial determination of the fair market value as of the date of acquisition, such value is a matter of fact to be proved by the taxpayer. {Tax Law, section 353.) Aet. 94. Exchange of property — Gain or loss arising from the acquisition and subsequent disposition of property is realized when as the result of a transaction between the owner and another person the property is converted into cash or . into property (a) that is essentially different from the property disposed of and (b) that has a market value. In other words, both (a) a change in substance and not merely in form, and (b) a change into the equivalent of cash, are required to complete or close a transaction from which income may be realized. By way of illustration, if a man owning ten shares of listed stock exchanges his stock certificate for a voting trust certificate, no income is realized, because the conversion is merely in form; or if he ex- changes his stock for stock in a small, closely held corporation, no income is realized if the new stock has no market value, although the conversion is more than formal ; but if he exchanges his stock for a liberty bond, income may be realized, because the conversion is into independent property having a market value. The property received in exchange may be real estate, personal property, or a chose in action. The exchange of a so-called con- vertible bond for stock pursuant to such a privilege granted in the bond will produce income if the stock received in exchange has a fair market value in excess of the cost or fair market value as of January 1, 1919, of the bond. {T^ax Law, section 35 J/..) Aet. 95. Determination of gain or loss from exchange of prop- erty. — (a) The amount of income derived in the case of an ex- change of property, as of stock for a bond, is the excess of the fair market value at the time of exchange of the bond received in exchange over the original cost of the stock exchanged for it, or over the fair market price or value of such stock as of Janu- ary 1, 1919, if acquired before that date. The amount of income derived from a subsequent sale of the bond for cash is the excess of the amount so received over the fair market value of such bond when acquired' in exchange for the stock, (b) On the other hand, if the property received in exchange is substantially the same property or has no market value, then no gain or loss is 28 Basis For Determinmg Gwvn or Loss realised, but the new property is to be regarded as substituted for the old and upon a sale of the new property the amount of income derived is the excess of the amount so received over the cost or fair market value as of January 1, 1919, of the old. (Tax Law, section 355.) Art. 96. Exchange for different kinds of property. — (a) If property is exchanged for two different kinds of property, such as bonds and stock, the bonds having a market value and the stock none, the value of the bonds is to be compared with the cost or fair market value as of January 1, 1919, of the original property, as the case may be. If the market value of the bonds is less than such cost or value, the difference represents the cost of the stock. If the market value of the bonds is greater than such cost or value, the difference is taxable income at the time of the exchange and whenever sold the entire proceeds of the stock will be taxable, (b) If property is exchanged for two different kinds of property, such as bonds and stock, neither having a market value, the cost or fair market value as of January 1, 1919, of the original prop- erty should be apportioned, if possible, between the bonds and stock for the purpose of determining gain or loss on subsequent sales. If no fair apportionment is practicable, no profit on any subsequent sale of any part of the bonds or stock is realized until out of the proceeds of sale there shall have been recovered the entire cost or fair market value as of January 1, 1919, of the original property. Aet. 97. Exchange of property and stock — Where property is transferred to a corporation in exchange for its stock, the exchange constitutes a closed transaction and the former owner of the property realizes a gain or loss if the fair market value of the stock is greater or less than the cost or the fair market value as of January 1, 1919 (if acquired prior thereto), of the property given in exchange. For the rule applicable where a corporation, in connection with a reorganization, merger or consolidation, exchanges property for stock, see article 98. Aet. 98. Exchange of stock for other stock of no greater par value — In general, where two (or more) corporations unite their properties by either (a) the dissolution of corporation B Basis For Determvnvng Oain or Loss 29 and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A or (e) the consolidation of the corparations, no taxable income is received from the transaction by A or B' or the stock- holders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c) and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securi- ties surrendered. The term " reorganization," as used in section 354 of the statute, includes cases of corporate readjustment where stockholders exchange their stock for the stock of a holding cor- poration, provided the holding corporation and the original cor- poration, in v^hich it holds stock, are closely related and afhliated. So-called " no-par-value stock " issued under a statute or statutes which require the corporation to fix in a certificate or on its books of account or otherwise an amount of capital or an amount of stock issued which may not be impaired by the distribution of dividends, will for the purpose of this section be deemed to have a par value representing an aliquot part of such amount, proper account being taken of any preferred stock issued with a prefc erence as to principal. In the case (if any) in which no such amount of capital or issued stock is so required, " no-par-value stock " received in exchange will he regarded for purposes of this section as having in fact no par or face value, and consequently as having "no greater aggregate par or face value" than the stock or securities exchanged therefor. Aet. 99. Determination of gain or loss from subsequent sale The new stock and securities received as described in the pre- ceding article take the place of the old stock and securities. For the purpose, therefore, of ascertaining the gain derived or loss sustained from the subsequent sale of any stock or securities so received, the original cost to the taxpayer or the fair market value as of January 1, 1919, of the stock or securities in respect of which the new stock and securities were issued, less any untaxed distribution made to the taxpayer by A out of the former capital or surplus of B, or hy the consolidated corporation out of the 30 Basis For Determining QaAn or Loss former capital or surplus of A or B, is the basis for determining the amount of such gain or loss. Aet. 100. Exchange of stock for other stock of greater par value. — If in the case of any reorganization, merger or consolidation the aggregate par or face value of the new stock or securities received is in excess of the aggregate par or face value of the stock and securities exchanged, income will be realized from the transaction by the recipients of the new stock or securities to an amount limited by (a) the excess of the par or face value of the new stock or securities over the par or face value of the old and (b) the excess of the fair market value of the new stock or securities over the cost or fair market value as of January 1, 1919, of the old. In other words, the taxable profit will be (a) or (b) whichever is less. Upon a subsequent sale of the new stock or securities their cost to the taxpayer will be the cost or fair market value as of January 1, 1919, of the old stock and securities, plus the profit taxed on the exchange. Aet. 101. Readjustment of partnership interests When a partner retires from a partnership, or it is dissolved, he realizes a gain or loss measured by the difference between the price received for his interest and the cost to him or (if acquired prior thereto) the fair market value as of January 1, 1919, of his interest in the partnership, including in such cost or value the amount of his share in any undistributed partnership net income earned since December 31, 1918, on which the income tax has been paid. If, however, the partnership distributes its assets in kind and not in cash, the partner realizes no gain or loss until he disposes of the property received on distribution. Whenever a new partner is received into a partnership, or any existing part- nership is reorganized, the facts as to such change or reorganiza- tion should be fully set forth in the next retam of income, in order that the Comptroller may determine whether any gain or loss has been realized by any partner. But see also article 94. DEDUCTIONS ALLOWED: BUSINESS EXPENSES Aet. lll.j Business expenses — Business expenses (wbpther subtracted from total receipts in computing gross income or deducted from gross income in computing net income) include all items entering into what is ordinarily known as the cost of goods sold, together with selling and management expenses, except such classes of items as are treated in articles 136-190 under " Deductions Allowed." Among the items to be treated as business expenses are material, labor, supplies and repairs in the case of a manufacturer, while a merdhant would include his purchases of goods bought for resale. In either case the amount to be taken as a deduction in any year should be determined by taking into consideration the inventory at the beginning and end of the year. Other items that may be included as business expenses are reasonable compensation for the services of officers and employees, advertising and other selling expenses. A taxpayer is entitled to deduct all the ordinary and necessary expenses paid in carrying on his business from his gross income from whatever source. Expenses in earning income which is not taxable do not constitute allowable deductions in computing net income from other sources which are taxable under the law. In the case of a nonresident taxpayer the ordinary and necessary expenses which may be deducted are those paid in connection with income arising, from sources within the state only. {Tax Law, section 360, and articles Jf32 and 481.) Aet. 112. Cost of materials — Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only to the amount that they are actually consumed and used in operation during the year for which the return is made, provided that the cost of such material and sup- plies has not been taken into account in determining the net income for any previous year. If a taxpayer carries materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the taxpayer to include in his expenses and deduct from gross income the total cost of [31] 32 Deductions Allowed: Business Expenses such supplies and materials as were purchased during the year for which the return is made, provided the net income is clearly reflected by this method. Aet. 113. Repairs — The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expendi- tures. 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 reserve. Aet. 114. Professional expenses — A professional man may claim as deductions the cost of supplies used by him in the prac- tice of his profession^ expenses paid in the operation and repair of an automobile used in making professional calls, dues to pro- fessional societies and subscriptions to professional journals," the rent paid for office rooms, the expense of the fuel, light, water, telephone, etc., used in such offices, and the hire of office assist- ants. Amounts expended for books, furniture and professional instruments and equipment of a permanent character are not allowable deductions, but a proper allowance for the deprecia- tion of such capital assets may be deducted. (Tax Law, section 861, and article 125.) Aet. 115. Compensation for personal services ^Among the ordi- nary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. This test and its practical application may be further stated and illustrated as follows : (1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. An ostensible salary may be in part payment for property. For example, an owner may sell a business to another, the seller agree- ing to continue in the service of the purchaser. In such a case it may be found that the salary of the seller is not merely for Deductions Allowed: Business Expenses 33 services, but in part constitutes payment for the transfer of the business. (2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enter- prise, it does not follow that pajanents on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. G-enerally speaking, if contingent compensation is paid pursuant to a free bargain between the enterprise and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordi- narily be paid. (3) In any event the allowance for compensation paid, to be deductible, may not exceed what is reasonable in all the circum- stances. It is in general just to assume that reasonable and true compensation is only such amount as would ordinarily be paid for like services by like enterprises in like circumstances. The circumstances to be taken into consideration are those existing at the date when the contract for services was made, not those existing at the date when the contract is questioned. (Article 23.) The father is legally* entitled to the services of his unemanci- pated minor children and allowances which he gives them, whether such be in consideration of services or otherwise, are not allowable deductions in his return of income. Aet. 116. Treatment of excessive compensation In the case of excessive payments by partnerships, the amounts disallowed should ordinarily be treated as shares of the profits of a partner- ship, except that a payment for property by an individual or a partnership should be treated by the individual or partnership as a capital expenditure and by the recipient as part of the purchase price. Aet. 117. Bonuses to employees — Gifts or bonuses to em- ployees will constitute allowable deductions from gross income when such payments are made in good faith and as additional compensation for services actually rendered by the employees, 34 Deductions Allowed: Business Expenses provided such payments, wlien added to the stipulated salaries, do not exceed a reasonable compensation for the services ren- dered. Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are considered gratuities and are not deductible from gi-oss income. Aet. 118. Traveling expenses — Traveling expenses, as ordi- narily understood, include railroad fares and meals and lodging. If the trip is undertaken ifor other than business purposes, such railroad fares are personal expenses and such meals and lodging are living expenses. If the trip is on business, the traveling expenses including railroad fares, meals and lodging become business instead of personal expenses. (a) If, then, an individual whose business requires him to travel receives a salary as full compensation for his services, without reimburse- ment of traveling expenses, his traveling expenses are deduct- ible from gross income. (b) If such individual receives a salary and is also repaid his actual traveling expenses, no part of such expenses is deductible from gross income and no part of such repayment is returnable as income, (c) If such an individual receives a salary and also an allowance for meals and lodging, as, for example, a per diem allowance in lieu of subsistence, any excess of the cost of such meals and lodging over the allowance is not deductible, but any excess of the allowance over the actual expenses is taxable income. Any person who receives a mileage allowance for railroad fares should return as income any excess of such allowance over his actual expenses for such fares. A payment for the use of a sample room at a hotel for the display of goods is a business expense. Aet. 119. Pension pajrments — Amounts paid for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump sum amounts paid as compensation for injuries, are proper deduc- tions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or other- wise. No deduction shall be made for contributions to a pension fund held by the taxpayer, the amount deductible in such case being the amount actually paid to the employee. When the amount of the salary of an officer or employee is paid for a Deductions Allowed: Business Expenses 35 limited period after his death to his widow or heirs in recog- nition of the services rendered by the individual, such payments may be deducted. Salaries paid by employers during the con- tinuance of the war to employees who are absent in the military or naval service or are serving the Government in other ways at a nominal compensation, but who intend to return at the con- clusion of the war, are allowable deductions. {See article ^1.) Akt. 120. Rentals — Rent for the use of business property is a deductible expense. In the case of a professional man who rents a property for residential purposes but incidentally re- ceives there clients, patients or callers in connection with his professional work (his place of business being elsewhere) no part of the rent is deductible as a business expense. If, how- ever, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where a leasehold is acquired for a specified sum, the pur- chaser may take as a deduction in his retarn an aliquot part of such sum each year, based on the number of years the lease has to run. Taxes paid by a tenant to or for a landlord for busi- ness property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord, the amount of the tax being deductible by the latter. The cost of erecting buildings or permanent improvements on ground leased by a taxpayer is additional rental and is, therefore, a proper deduction from gross income, provided; such buildings and im- provements under the terms of the lease revert to the ovsmer of the ground at the expiration of the lease. In such a case, the cost will be prorated according to the number of years con- stituting the term of the lease. The lessee will not be permitted to deduct from gross income any depreciation with respect to such buildings, but the cost of incidental repairs necessary to keep them in an efficient condition for the purposes of their use may be deducted. If, however, the life of the improvement is less than the life of the lease, depreciation may be taken by the lessee instead of treating the cost as rent. (Article ^2.) Aet. 121. Insurance premiums — Premiums for insurance against fire, storm, theft, accident or other similar losses in the case of a business, including employer's liability and work- 36 Deductions Allowed: Business Expenses men's compensation insurance, are deductible business expenses. Insurance paid on a dwelling owned and occupied by the tax- payer, is a personal expense, and not deductible. Premiums paid for life insurance by the insured are not deductible. Where the taxpayer pays premiums on an insurance policy on the life of an employee or individual financially interested in the taxpayer's business, for the purpose of protecting him- self from loss in the event of the death of any such person, such premiums are not deductible from his gross income. But if the taxpayer is in no sense a beneficiary under such a policy, except as he may derive advantage from the increased efficiency of the employee, and pays the premiums purely as reasonable additional compensation of such employee, they are allowable deductions. (Articles 115 and 117.) Aet. 122. Expenses of fanners A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in carrying on the business of farming. The cost of ordinary tools, of short life or small cost, such as hand tools, including shovels, rakes, etc. may be included. The cost of feeding and raising live stock may be treated as an expense deduction, in- so far as such cost represents actual outlay, but not including the value of farm produce grown upon the farm or the labor of the taxpayer. Where a farmer is engaged in producing crops which take more than a year from the time of planting to the process of gather- ing and disposal, expenses deducted may be determined upon the crop basis, and such deductions must be taken in the year in which the gross income from the crop has been realized. If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. The cost of farm machinery and farm buildings represents a capital investment and is not an allowable deduction as an item of expense. Amounts expended in the development of farms, orchards and ranches prior to the time when the productive Deductions Allowed: Business Expenses 37 state is reached may be regarded as investments of capital. The amount expended in purchasing draft or work animals or live stock either for resale or for breeding purposes is regarded as an investment of capital. The purchase price of an automobile even when wholly used in carrying on farming operations, is not deductible, but is regarded as an investment of capital. The cost of gasoline, repairs and upkeep of an automobile if used wholly in the business of farming is deductible as an ex- pense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for pur- poses of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. (Article 30.) Aet. 123. When charges deductible — Each year's return, so far as practicable, both as to gross income and deductions there- from, should be complete in itself, and taxpayers are expected to make every reasonable effort to ascertain the facts necessary to make a correct return. {Articles 11-14 and 71.) The ex- penses, liabilities or deficit of one year can not be used to reduce the income of a subsequent year. A person making returns on an accrual basis has the right to deduct all author- ized allowances, whether paid in cash or set up as a liability, and it follows that if he does not within any year pay or accrue certain of his expenses, interest, taxes or other charges, and makes no deduction therefor, he can not deduct from the income of the next or any subsequent year any amounts then paid in liquidation of the previous year's liabilities. A loss from theft or embezzlement occurring in one year and discovered in another is deductible only for the year of its occurrence. Any amount paid pursuant to a judgment or otherwise on account of damages for personal injuries, patent infringement or otherwise, is deductible from gross income when the claim is put in judg- ment or paid, less any amount of such damages as may have been compensated for by insurance or otherwise. If subsequent to its occurrence, however, a taxpayer first ascertains the amount of a loss sustained during a prior taxable year which has not been deducted from the gross income, he may render an amended 38 DeducUo-ns Allowed: Business Expenses return for such preceding taxable year, and may file a claim for refund of the excess tax paid by reason of the failure to deduct such loss in the original return. (Tw; Law, section 37 Jt amd article 57 4.) Art. 124. Payments by public utilities. — In the case of a pub- lic utility acquired, constmcted, operated or maintained by a taxpayer under contract with any State, Territory or political subdivision thereof, or with the District of Columbia, containing an agreement that a portion of the net earnings of such public utility shall be paid to the State, Territory or political subdi- vision thereof, or the District of Columbia, the amount so paid may be deducted by the taxpayer as a necessary expense m transacting business. {T [References in italics are to sections of the law ; otlier references are to articles of the regulations.] Index 157 Partnerships — continued not subject to tax 236 readjustment of interest of 101 returns § 368, 226, 230, 231, 544 fiscal year ending in 1919 232 of members of 229 place for filing 544. Patent depreciation, deduction. 173 177 infringement, recovery for, wlien included in gross income 44 royalties as taxable income 42 sale of, determination of gain or loss 32 Pattei-ns, depreciatiort, deduction 178 Payment as to which no return of information is required 289 of taxes § 379^ 551-556 at source 270 by public utilities, deduction 124 dishonored checks, procedure 555 penalties § ,J79, 556 receipts 552 time § 377, 551 uncertified checlvs 554 Payments interest on coupon bonds, information at source 289 received in warrants or securities 2,7 registered bonds, information at source 287 requiring information, returns 285 Penalties § 379, 553, 556 disclosure of returns § SSlf, 682; Pension fund, contributions to, taxable income 25 Pensions deductions 119 nonresident, taxability 41,413 taxability of 23, 41 Per diem allowance in lieu of subsistence, excess as taxable income. ... 118 Period, accounting, see accounting period covered by returns 526, 529 of administration, of estate or trust, defined 253 Periodical income, defined 263 Personal effects, depreciation 172 exemptions § 362, 205-210 date determining 209 head of family 206 individual 205 married person 207 officer or employee of the United States 210 single person 205 [References in italics are to sections of the law; other- references are to articles of the regulations.] ]^58 Index Personal — continued injviries ^23 deductibility of damages • • • • • insurance or damages received, taxability § 359 (^-e). property exemption from personal property tax. extent of § ^^^ service ^ sales on installment plan compensation, see compensation place of payment, withholding at source Place for filing returns ^ ' ^^''T'" ... 122,155 f armsi operated for ' vehicles, depreciation Policies, proceeds of, taxability ^ ^^^ C^""-'' ^J^ Possession, income reduted to ■ ■ ' • ' • Power of revision by Comptroller 8 -^ '^' Premium coupons, basis of deductions for redemption of 80 Premiiuns, insurance 121 paid by employer, deduction taxable income to employee simis in excess of, taxable income § 359 fS-S;, 40 Prescribed forms, use of Preserving returns § ^^^ (^>' ^^^ Procedure v^ith respect to dishonored checks 555 Proceeds of insurance, tasiability Professional fees, return of, information at source, not required 289 men, expenses deductible ^^5 fees of, withholding at source 263 Profit and loss sale of property, nonresident 417 securities, nonresident 41^ Profits deferred payment sales of real estate 38 farmers °^ foreign oommerce 21 installment plan, sales of real estate 35-39 long term contracts 29 sales of copyrights 32 estates and trusts 252 good will 33 patents 32 property 91 stock and rights 31 Promissory notes, compensation paid in, 'as taxable income 29 Proof of residence 503 Propaganda associations, contributions to, not deductible 202 [References In Italics are to eections of the law ; other references are to articles of the regulations.] Index 159 Property acquired prior to January 1, 1919 distributed as dividends 62 exchanged determination of gain or loss from 94-96 for stock (j^ sale or disposal of s 353 91 Public park gift of real estate to city for, not allowable deduction 201 utilities, payments by, deductions 124 Purchase money mortgage, bad debt 163 Railroad employees, taxability of compensation during period of federal control i^g Ranches, deductions of amounts expended in development 122 Kate used in deducting and withholding 261 Pates of tax | $51^ 2 Readjustment of partnership interests 101 Peal estate installment transactions 37 sales involving deferred payments 36, 38 by heirs, taxability of proceeds 244 ■sold in lots 35 Peasonable cause, delay in filing returns § STl, 543 Receipt basis of computation of net income 13 Receipts for tax payments 552 Receivers commissions, taxability, federal courts 78 fiduciary 240 returns of 250 •state courts 24 Records accounting, necessity of maintaining 14 depreciable property 179 Recovery for infringement of patent 44 of judgment, when included in gross income 44 of taxes by action § S81 Redemption of trading stamps 80 Redetermination of tax when credit proves incorrect 484 Referee, fees of, federal court, taxability 78 Refunds authority therefor § STJf, 572 3laim therefor 123, 574 nonresident 523 penalties 574 taxes 574 Regulations, power of comptroller to make § S83 Religious corporations defined 202 worlcers, gifts and contributions to, taxable income 23 [References in italics are to eectiona of the law ; other references are to articles of tlie regulations.] 160 Index Removal of buildings, deduction of loss ^^'^ Renewal of residence certificate ^^° Rent crop shares, taxable income 30 deductions 120 gross income § S59 (1), 42 farmers 30 landlord", where paid by tenant 42, 120 nonresident 418 information at source § S66 (Z), 289 professional men, deduction 114 unpaid, as bad debts 162 Hents and royalties 42 nonresidents 418 Repairs deduction of cost Ill, 113 tenants 120 Replacements, addition of cost, in determining capital sum to be replaced by depreciation allowance 113, 174 Residence certificate of § 366 (1), 267 defined 603 depreciation of 172 given up 504 loss of 504 New York State, acquired after deducting and withholding, effect of 269 sale of, deduction of loss in 151 Resident alien exemption of 207 not head of family ; 206 beneficiary, taxability of 245 defined ^350 (1), 601 estate and trust, defined 243 pension receipts of, taxability 41 return of 521-522 trust, defined 243 who is I 350 (7), 501 Retired pay of employees, taxability 23, 41 Returns accounting period changed § 370, 52&-529 corporate dividends 525 corrected, when payable 55I disclosure of, penalties therefor 581-582 extension of time for filing 543 failure to file, penalties § 375 555 false or fraudulent, penalties § $76 556 fiduciaries 24R fiscal year ending in 1919 g27 [References in Italics are to sectlona of the law; other references are to nrtir.io= of the regulations.] amtieH Index 161 Returns — continued for decedent 542 forms of 531 fiduciary 246 have effect of regulations 531 nonresident 52,3 partnersliip 230 resident 522 guardian or committee 248 husband and wife 521 income of minor 524 information at source, see information at sov/rce inspection of § 38^, 581 married persons 521 minors 624 necessity 521 nonresident 523 obtaining forma § STl, 531 parents 524 partners 229 partnership § 368, 226, 230, 231 period covered 526, 529 place of filing 644 prescribed forms of, must be used 531 preservation of § SS^ (1), 581 receivers 250 resident individuals 521 secrecy § S81t, 582 tax withheld, see icithholding at source 270 termination of estate or trust 542 time of filing 541 use of prescribed forma 531 verification of § 367, 530 voluntarily made after due date § 376 (2), 556 where more than one trust 249 Review of determination of comptroller, by certiorari § 375 Revision of returns by comptroller § 37^, 571 Revocable trust, income of 251 Royalties 42 nonresident 418 Sailor's pensions 41 Salaries and wages of nonresident employees and ofi5cers apportionment of 452 as deductions 115'-117 paid during war, deduction 119 paid to widow, of employee, deduction 119 unpaid, as bad debts Ii62 [References in Italics are to sections of the law; other references are to articles of the regulations.] 1G2 Index Sales basis for determining gain or loss § S53, 91-101 bonds and other securities, nonresident 416 copyrights 32 farm products 30 fiduciaries 252 good will 33 installment plan personal property 34, 39 real estate 35-39 nonresidents 417 patents and copyrights 32 property acquired by gift or inheritance 93 real estate involving deferred payments 36-38 lots 35 residence, loss by deduction 151 stocks and rights 31 nonresident 416 received as dividend 64 Salesmen deduction of, traveling expenses 118 nonresident, withholding at source from § S66 (2), 266 Salvage value, in computing depreciation 180 Sample room, traveling men 118 Savings bank deposits, constructive receipt of interest 46 Scientific corporations, defined 202 Scope of the law 1 Scrapping machinery, deduction of loss 152 Scrip, dividends paid in 62 Secrecy of returns § S8i, 581-582 Secret formulae or processes, depreciation deduction 173 Secured debt tax, paid, income taxable 74 Securities dealers in, definition 220 dividends paid in g2 inventory of dealers 220 loss from shrinkage I54 payment in 27 value on January 1, 1919, how determined 92 worthless Ig4 Selling expense, deduction w\ Separate returns by married persons g2i Separation agreement, payments under, as income and deduction 73 125 Shareholders building and loan association, constructive receipt of distributive shares ^g forgiveness of indebtedness 40 of [Referencps in italics arc to sections of the law; other references are to articlpa the regulations.] aiticies Index 163 Shares, partners „ 229 Shipwreck, losses from, deduction % S60 (6), 161 Shrinkage crops, deduction 155 ■securities and stocks 154 Sickness compensation paid during 41 insurance and damages received, taxability § 359 (2-e), 72 pensions, on account of ^359 (2-eJ, 41 Sidewalk assessments, deduction of § 360 (3), 143 Smith-Lever Act, taxability of salaries, paid under 24 Soldiers' pensions, taxability § 359 (2-6), 41 Special assessments, deductions § 360 (3), 143 State Comptroller, see comptroller State contracts, income from, taxable income 22 inheritance taxes, deduction 144 interest upon obligations of, taxability § 359 (2-d), 74 officers of, compensation, taxability 24 taxes, deductions § 360 (3), 141 Statutory allowance paid to widow from estate or trust 244 Stock amount received from sale of rights to subscribe for, taxability. . 31 assessments on 125 bonus, constructive receipt by employee 45 compensation paid employee in, as taxable income 26 dividends, gross income § 359 (1), 31, 46, 63, 64 exchanged for other property 97 exchanged for stock 98, 100 subsequent sale of, determination of gain or loss 99 exemption from personal property tax, extent of § 352 profits from sale of 31 shrinkage in value of 164 worthless, deduction 154, 164 Storm insurance against, deduction 121 losses by, deduction § 360 (6), 151 Street assessment, not deductible § 360 (3), 143 Subcontractors, information at source as to payments to employees. . . . 286 Subscription for stock, amount received from sale of right to, as taxable income 31 Subtraction for redemption of trading stamps 80 Sunday, due date for filing return 641 Supplies deduction of cost of HI professional man 114 Surrender value of insurance policy 79 Tariff duties, deductions % 360 (3), 142 [Keferences in italics are to sections of the law ; other referencps are to articles of the regulations.] 164 Index Taxable year computation of net income 12 defined 526 gross income ^ Taxes abatement of ; 572-573 automobile license fee, deductions 141 customs duties, deductions § S60 (3), 142 deductions for '. § S60 (3), -141-144 nonresidents 433 estates and trusts 255 deductions 144 excise, deductions % 360 (3), 142 Federal, deductions ^360 (3), 141, 142 import duties, deductions § 360 (3), 142 inheritance, deductions 144 interest on 553 liability of, estates and trusts 255 license, deductions 142 local benefits, deductions § 360 (3), 141, 143 nonresidents 401 paid by tenant 120 partners in partnership with fiscal year ending in 1919 232 penalty for nonpayment 553', 556 rates of 2 receipts for 552 refunds 572 repairs, assessments, deductions § 360 (5), 143, 574 sidewalk assessments § 360 (3), 143 special assessments, deductions § 360 (3), 143 stamp, deductions 142 street assessments, deductions § 360 (3), 143 tariff duties, deductions § 360 (3), 142 time payable § 377, 551 trusts 255 withholding at source § S66 (1), 261 return of 270 Tax-free covenant clause in bonds, tax as gross income 21 Tax-free income 7X Taxpayers definition % $50 (2), 3 returns by fiduciaries § 36g^ 246 for beneficiaries 247 estates and trusts 246 Telegraph employees, taxability of compensation during period of Federal control yg Telephone employees, taxability of compensation during period of Federal control yg [References in italics are to sections of the law ; other references are to articlpn of the regulations.] Index 165 Tenant paying taxes 120 Tentative returns may be required as condition of extension of time. . 543 Termination of estate or trust, return to be filed on 542 Theatrical costumes, depreciation, deductions 172 Theft insurance premimns against loss by 121 losses by, deductions § 360 (6), 151 Timber, depletion § 3S0 (9), 190 Time as of which item of gross income or deduction is to be accounted for § 359 (1), 12,44, 46 for filing returns 541 extension of 543 on death or termination of trust 542 payment* of tax § 377, 551 Tips, ta3;ability 23 Title, deduction of cost of defending or perfecting 125 Tools, ordinary, farmers' 122 Trade brands depreciation, deductions 173 losses deductions § 360 (k), 151 . nonresidents 435 marks, depreciation, deductions 173 name, depreciation, deductions 173 Trading stamps, subtraction for redemption 80 Transfer tax deductions 144 Transients, definition 502 Traveling expenses, deduction 118 Treatment of excessive compensation II16 Trusts, see estates and trusts Uncertified cheeks, payment of tax 554 Uncompleted contracts, ascertainment of gross income 29 Understatement of income in return , 571 United States employees and officers, taxability of salaries § S59 (2-f), 78 exemption- of employees § 362 (3), 210 interest on obligations of, taxability § 359 (2-d), 74 officer and employee of, personal exemption § 362 (3), 210 pensions from, taxability 41 taxes, deductions § 360 (3), 141 Universities, employees of, taxability of salaries paid from Smith- Lever Act 24 Unpaid rents as bad debts 162 salaries, as bad debts 162 wages, as bad debts 162 Useful value, loss of 153 Use of prescribed forms § 37-?, 531 [References in italics are to sections of the law ; otber references are to articles of the regulations.] 166 Index Valuation change in metkods of • "'■' inventories • « 317 Value ■ascertainment - 93 fair market "2 product received in exchange for farm produce, return, aa income. . 30 real estate, sold in lots 35 Verification of returns § SSI, 530 Vocational rehabilitation fund, deduction of contribution to 201 Voluntary absence of wife or husband 207 removal of buildings, deduction of loss 152 returns after due date 5'56 Wages deduction of payments Ill nonresident seamen 453 paid to widow or employee, deduction 119 unpaid, as bad« debts 162 '■^ar chest gifts deductions , 201 finance bonds, taxability 74 risk insurance, taxability of allotments and allowances 41,72 Warrant for collection of taxes, has effect of judgment S ^^^ Warrants, payments in 27 Wear and tear of property, deductions 171 \\Tien charge is deductible 123 Who is a resident 501 Withholding at the source § 566 (1), 261-270 agent, defined % S50 (10), 281 annual or periodical income 263 fixed or determinable income 263 income not subject to 265 in 1919 262 no return of information respecting payments on which there has been withholding 2S3 payments on which required 263 other than cash 263 period of time covered 264 refund of excessive amount withheld 523' residence certificate 267 renewal of 268 return of tax withheld 270 services performed partly within and partly without, appor- tionment of 266 [Eeferenees in italics are to sections of the law ; other references are to articles of the regulations.] Index 167 Withholding at the source — continued when required ,. 263 not required 265 where residence is established 2169 withholding agent, defined 281 year for purpose of 264 Workmen's compensation, taxability oi amount received.. § 359 (2-d), 41 Worthless mortgage debt bad d«bts 16S securities, deduction of losses 154, 164 Year, for purpose of deducting and withholding. . . ' 264