Compensation received in the form of per diem allowances and mileage.-The 1918 regulations 47 specifically provided that congressmen, army officers and others who received stated allowances per mile or per diem to cover traveling or living expenses, and allowances for stationery, secretarial services, etc., should return as income any excess of such allowances over actual expenses. Article 102 of the present regulations provides, in effect, for the same procedure. In the case of liberal allowances such as congressmen receive, part of the allowance obviously is taxable and the regulation calls attention to this case specifically. In other cases, such as that of army officers, the allowance closely approximates the expenditure and it may not be worth while to attempt an exact accounting. There is, however, a definite obligation imposed upon the recipient to keep such a record as will indicate at the close of taxable periods whether or not return should be made. The record of deposits in one's cheque book usually is sufficient.

The Treasury has held that transportation charges paid by the government on account of the transportation of the families of army officers are in the nature of additional compensation.48

RULING. A person in the service of the American Red Cross receiving maintenance but no pay should return as income any excess of the amount received for maintenance over his actual living expenses. B. 1, page 66; O. D. 11.)

(C.

Compensation received in the form of deductions for pension funds, etc.-When deductions are made from the salaries or wages of employees (other than state or municipal employees) to cover compulsory or voluntary contributions to pension, sick or insurance funds, such payments or deductions should be added to the amounts received in reporting income which is subject to tax.

REGULATION. . . . pensions or retiring allowances paid by private are income to the recipients; (Art. 32.)

persons

However, a pension bond received by an employee is not income when received, because not readily realizable, but the annuities payable thereunder will be income in the year in which received.49 This ruling is based on the assumption that the employer has deducted the purchase price as an expense. If it is a gift the recipient is not subject to tax.

Tuition fees paid by employer.—

RULING. Employees of a corporation are required to go to schools not owned by it and maintain a certain average as a condition precedent to continued employment. The amount expended by the company for books, tuition, etc., in connection with the schooling should be included in the gross income of the employees. (C. B. I-1, page 72; I. T. 1304.)

The foregoing is not unreasonable. The amounts expended are properly classed by the employers as compensation paid to or for account of employees.

Unemployment benefits.

RULING. Amounts paid by an organized labor union as unemployed benefits to its unemployed members are required to be included in gross income of the recipients. (C. B. I-1, page 63; I. T. 1293.)

Where deductions are made from the pay of an employee for an unemployment fund, the employee will return as taxable income. any excess of benefits received from the fund over contributions made by him thereto.50

C. B. III-1, page 121; I. T. 1918.

The line between the profits resulting from business, dealt with in this chapter, and the profits resulting from appreciation of property, discussed in Chapter XXIV, must be somewhat arbitrarily drawn. Most business, of course, consists of dealing in property, while all dealings in property are usually thought of as "business" transactions.

An attempt is made to distinguish between income from the purchase and sale of merchandise, securities and other property by dealers, and income or profits realized by investors and others who are not dealers. General principles regarding the nature and taxation of appreciation of fixed assets and investment securities, real estate, etc., are discussed in Chapters XXIII to XXVI. Sales and exchanges of property (not forming part of a dealer's stock-in-trade) are also discussed therein. The discussion of inventories and installment sales falls within the scope of this chapter, but, owing to the special treatment which these subjects require, Chapters XXI and XXII, respectively, are devoted to their discussion.

LAW. Section 213. (a) The term "gross income" includes gains, profits, and income derived from . . . . trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from.... the transaction of any business carried on for gain or profit,

Gross income from business defined.

REGULATION. In the case of a manufacturing, 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.1 (Art. 35.)

Business need not be lawful.-The law of 1913 (section II B) provided that the tax was levied on the gains from "any lawful business carried on for gain or profit." In the law of 1916, the word "lawful" was omitted and it does not reappear in the 1918, 1921 or 1924 laws. This would seem to indicate a direct intention on the part of Congress to make "stealings" and "winnings" taxable as well as "earnings." Income from gambling and bootlegging would, of course, come under this head.

In this country there is not a large class of professional gamblers or others transacting an unlawful business, but such as can be reached should be taxed. Occasional betting, however, is frequent, millions of dollars being wagered on the results of political campaigns, athletic contests, etc. The winnings are subject to tax. What they win cannot be termed a gift or any other item specifically exempt from taxation, and "gains derived from any source whatever" are taxable. One should, therefore, include all receipts from bets in his income tax return. This in some cases would be a considerable item in the year of a presidential election. It would seem that net losses are deductible when the transactions were entered into for profit. It would not be wise to claim credit for a net loss arising from betting, but there is a clear obligation to return a net gain.

It is held that a bookmaker, in a state where the acceptance of

1

This statement of course does not modify those sections of the law and regulations which permit the use of recognized accounting practices. A taxpayer will not be required to change his method of accounting merely to ascertain items of "gross income."

bets is illegal, must return for taxation his earnings but may not deduct his losses.2

BRITISH PRACTICE.-In England it has been held that a professional bookmaker is liable to assessment under the income tax law. The court decided that:

DECISION. (Syl.) Persons receiving profits from betting systematically carried on by them throughout the year, are chargeable with income tax on such profits in respect of a "vocation.'

FRENCH PRACTICE.-In France, also, the government taxes income from gambling, according to a press dispatch. However, in France, gambling is not "illegal" when conducted under government license.

Those who patronize the lotteries on a large scale and whose quarterly winnings may amount to 1,000,000 francs have learned to their dismay that the new taxes strike a double blow at them.

First they must pay 20 per cent outright to the city of Paris as the tax on unforeseen revenues. Then when they have deposited the balance of their winnings in a bank it becomes a part of their general yearly revenue and is taxable another 15 per cent.*

SPECULATION IN "FUTURES," ETC.-The purchase and sale of "futures," which chiefly concern those who deal in cotton and other commodities on exchanges, are often called gambling and those who indulge in such transactions do not always consider that their gains are taxable income. It is immaterial whether the transactions are called business dealings, speculation, or gambling. If they result in net gain, the profit must be returned as taxable income.5

When does income arise?-The adoption of the accrual method. of accounting and the use of inventories do not by any means supply solutions for all the problems bound up in this question. Chapters XXIII to XXVI are devoted largely to the problem as to when the gains in the value of capital assets and other property are to be accounted for. The following rulings include a miscellaneous set of cases which illustrate the procedure recommended by the Treasury in determining when income may or may not arise.

3

Partridge v. Mallandaine, L. R. 18 Q. B. Div. 276 (1886).

New York Herald, November 21, 1920.

For discussion of deductibility of losses, see Chapter XXXVIII. For in

ventorying of "futures," see page 569.