the property. In the case of mines and oil or gas wells the following shall not be considered as items properly chargeable to capital account: (1) Expenditures made in the taxable year 1932 or subsequent taxable years which are allowable under article 235 or article 236 as deductions in computing net income; (2) expenditures made in taxable years prior to 1932 which were allowed, or which may hereafter be allowed, as deductions in computing the net income of the taxpayer for such taxable years. In the case of unimproved and unproductive real property, carrying charges, such as taxes and interest, which have not been taken as deductions by the taxpayer in determining net income for the taxable year, or a prior taxable year, are properly chargeable to capital account. Example: A purchased property in 1927 for $10,000. He subsequently expended $6,000 for improvements. Disregarding, for the purpose of this example, the adjustments required for depreciation, the adjusted basis of the property is $16,000. If A sells the property in 1932 for $20,000, the amount of his gain will be $4,000. The cost or other basis must also be decreased by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion to the extent such deductions have in respect of any period since February 28, 1913, been allowed (but such decrease shall not be less than the amount of deductions allowable) under the Revenue Act of 1932 or prior income tax laws. The deductions by which the cost or other basis is to be decreased shall include deductions allowed under section 114 (b) (2), (3), and (4) for 1932 and subsequent taxable years, but the amount of the diminution in respect of depletion for taxable years prior to 1932 shall not exceed a depletion. deduction computed without reference to discovery value in the case of mines, or without reference to discovery value or a percentage of income in the case of oil and gas wells. Example: A purchased property in 1927 for $10,000. The depreciation allowed (not less than the amount allowable) with respect to the property for the period held amounted to $1,000. The adjusted basis of the property is $9,000. If A sells the property in 1932 for $8,000, the amount of his loss will be $1,000. The cost or other basis shall also be decreased by the exhaustion, wear and tear, obsolescence, amortization, and depletion sustained in respect of any period prior to March 1, 1913. (See article 606.) In the case of stock, the cost or other basis must be diminished by the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation, which was classified as a per sonal service corporation under the provisions of the Revenue Act of 1918 or 1921, out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921). Example: A purchased stock in 1923 for $5,000. He received in 1924 a distribution of $2,000 paid out of earnings and profits of the corporation accumulated prior to March 1, 1913. The adjusted basis. for determining the gain or loss from the sale or other disposition of the stock in 1932 is $5,000 less $2,000, or $3,000, and the amount of the gain or loss from the sale or other disposition of the stock is the difference between $3,000 and the amount realized from the sale or other disposition. Whenever it appears that the basis of property in the hands of the taxpayer is a substituted basis, as defined in this paragraph, the adjustments provided in this article shall be made after first making in respect of such substituted basis proper adjustments of a similar nature in respect of the period during which the property was held by the transferor, donor, or grantor, or during which the other property was held by the person for whom the basis is to be determined. A similar rule shall also be applied in the case of a series of substituted bases. The term "substituted basis" means a basis determined under any provision of section 113 (a) of the Act or under any corresponding provision of a prior income tax law, providing that the basis shall be determined (a) by reference to the basis in the hands of a transferor, donor, or grantor, or (b) by reference to other property held at any time by the person for whom the basis is to be determined. Example: A in 1926 purchased the X building and subsequently gave it to his son B. B exchanged the X building for the Y building in a tax-free exchange, and then gave the Y building to his wife C. C, in determining the gain or loss from the sale or other disposition of the Y building in 1932, is required to reduce the basis of the building by deductions for depreciation which were successively allowed (but not less than the amount allowable) to A and B upon the X building and to B upon the Y building, in addition to the deductions for depreciation allowed (but not less than the amount allowable) to herself during her ownership of the Y building. ART. 606. Property acquired before March 1, 1913.-In the case of property acquired before March 1, 1913, if the basis otherwise determined under section 113 (a), adjusted to March 1, 1913, in accordance with section 113 (b), is less than the fair market value of the property as of March 1, 1913, then the basis is such fair market value. Art. 606 § 113 Example (1): A in 1905 purchased property for $100,000. The depreciation sustained on the property prior to March 1, 1913, was $16,000, so that the cost adjusted for depreciation sustained prior to March 1, 1913, was $84,000. As of that date the fair market value of the property was $80,000. In 1932 A sold the property for $50,000. Depreciation on the property subsequent to February 28, 1913, allowed as deductions (not less than the amount allowable) was $38,000. A realized a gain of $4,000 from the sale of the property, computed as follows: Cost of property-. Less depreciation sustained prior to March 1, 1913. Cost, adjusted for depreciation sustained prior to March 1, 1913--- Less: Depreciation sustained prior to March 1, 1913__ Depreciation on the property subsequent to February 28, 1913, allowed as deductions (not less than the amount allowable) __ Basis as adjusted_ Selling price of property Gain ($50,000 minus $46,000) ‒‒‒‒‒‒ $100,000 16, 000 84,000 80,000 100, 000 $16,000 38,000 54, 000 46,000 50,000 4,000 Example (2): A in 1905 purchased property for $100,000. The depreciation sustained on the property prior to March 1, 1913, was $16,000, so that the cost adjusted for depreciation sustained prior to March 1, 1913, was $84,000. As of that date the fair market value of the property was $86,000. In 1932 A sold the property for $50,000. Depreciation on the property subsequent to February 28, 1913, allowed as deductions (not less than the amount allowable) was $38,000. A realized a gain of $2,000 from the sale of the property, computed as follows: Cost of property---- Less depreciation sustained prior to March 1, 1913_. Cost, adjusted for depreciation sustained prior to March 1, 1913_. Less depreciation on the property subsequent to February 28, 1913, Selling price of property Gain ($50,000 minus $48,000) ———. $100,000 16,000 84, 000 86,000 86, 000 38,000 48, 000 50,000 2,000 What the fair market value of property was on March 1, 1913, is a question of fact to be established by competent evidence. In determining the fair market value of stock in a corporation, due regard shall be given to the fair market value of the corporate assets on the basic date. In the case of property traded in on public exchanges, actual sales at or about the basic date afford evidence of value, but in each case the nature and extent of the sales and the circumstances under which they were made must be considered. Thus, prices received at forced sales or prices received for small lots of property may be no real indication of the value of the property. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. (a) Basis for depreciation.-The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property. (b) Basis for depletion. (1) GENERAL RULE.-The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except as provided in paragraphs (2), (3), and (4) of this subsection. (2) DISCOVERY VALUE IN CASE OF MINES.-In the case of mines (other than metal, coal or sulphur mines) discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. The depletion allowance based on discovery value provided in this paragraph shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit. (3) PERCENTAGE DEPLETION FOR OIL AND GAS WELLS.-In the case of oil and gas wells the allowance for depletion shall be 271⁄2 per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the (4) PERCENTAGE DEPLETION FOR COAL AND METAL MINES AND SULPHUR. The allowance for depletion shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance for the taxable year 1932 or 1933 be less than it would be if computed without reference to this paragraph. A taxpayer making return for the taxable year 1933 shall state in such return, as to each property (or, if he first makes return in respect of a property for any taxable year after the taxable year 1933, then in such first return), whether he elects to have the depletion allowance for such property for succeeding taxable years computed with or without reference to percentage depletion. The depletion allowance in respect of such property for all succeeding taxable years shall be computed according to the election thus made. If the taxpayer fails to make such statement in the return, the depletion allowance for such property for succeeding taxable years shall be computed without reference to percentage depletion. During the period for which property acquired after December 31, 1933, is held by the taxpayer (A) if the basis of the property in the hands of the taxpayer is, under section 113 (a), determined by reference to the basis in the hands of the transferor, donor, or grantor, then the depletion allowance in respect of the property shall be computed with or without reference to percentage depletion, according to the method of computation which would have been applicable if the transferor, donor, or grantor had continued to hold the property, or (B) if the basis of the property is, under section 113 (a), determined by reference to the basis of other property previously held by the taxpayer, then the depletion allowance in respect of the property shall be computed with or without reference to percentage depletion, according to the method of computation which would have been applicable in respect of the property previously held if the taxpayer had continued to hold such property. ART. 611. Basis for allowance of depreciation and depletion.-The basis upon which exhaustion, wear and tear, obsolescence, and depletion will be allowed in respect of any property is the same as is provided in section 113 (a), adjusted as provided in section 113 (b), for the purpose of determining the gain or loss from the sale or other disposition of such property, except as provided in article 223, |