Men cannot be made honest through legislation, but income tax legislation should contain ample penalties for false returns. Those who are honest can be depended upon to continue to be honest. The earlier income tax laws and regulations in almost entirely ignoring the accrual system of accounting and in forbidding conservative methods of valuing inventories actually reduced the revenue receipts of the government22 and at the same time attempted to impose upon taxpayers impossible methods of accounting and valuing. These regulations bore most heavily on honest and conservative business concerns and in no way worried the dishonest.

It is most gratifying to note the recognition now given to good accounting practice. It will not diminish the government's revenue and it will enable taxpayers readily to prepare returns from accounts which accurately reflect true net in

come.

The subject of inventories is fully discussed in Chapter XIII, "Income from Business." Also see Chapter XXIII.

"CONSTRUCTIVE" RECEIPT.-Even when the cash basis is used the regulations provide that income must be reported when it is made available irrespective of whether it is actually reduced to possession. If an item is a "constructive" receipt it is taxable.

The following regulations cover this matter fully.

REGULATIONS. 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, 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 transfer 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. Where a corporation contingently credits its employees with bonus stock, but the stock is not available to such

"See Income Tax Procedure, 1918, pages 32-37, for concrete example.

employees until the termination of five years of employment, the mere crediting on the books of the corporation does not constitute receipt. The distinction between receipt and accrual must be kept in mind. Income may accrue to the taxpayer and yet not be subject to his demand or capable of being drawn on or against by him. (Art. 53.)

Where interest coupons have matured, but have not been cashed, such interest payment, though not collected when due and payable, is nevertheless available to the taxpayer and should therefore be included in his gross income for the year during which the coupons matured. This is so if the coupons are exchanged for other property instead of eventually being cashed. Dividends on corporate stock are subject to tax when set apart for the stockholder, although not yet collected by him.23 . . . . The distributive share of the profits of a partner in a partnership or of a stockholder in a personal service corporation is regarded as received. . . . . Interest credited on savings bank deposits, even though the bank nominally have a rule, seldom or never enforced, that it may require so many 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 such accumulations 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 is income for the year of the maturity of the share. (Art. 54.)

BOOK ENTRIES.-It is desirable from many points of view that income tax returns agree with the books of the taxpayer, but the entries made on the books are not of fundamental importance when compared with the actual facts in a given situation.25 The facts, not the book entries, are the controlling factors.

Book entries, however, are required by the law if deductions are to be claimed for bad debts.26 In the cases of both individuals and corporations, debts to be deductible must be

"See Chapter XX.

"See Chapter XXII.

25See Reg. 45, Art. 23, and T. D. 2873.

Section 214 (a-7). But this may be modified by the power given to the Commissioner to accept accounts prepared upon a proper accounting basis. Regulations 45, however, do not permit the deduction of a bad debt until book entries are made writing it off.

"ascertained to be worthless and charged off."27

Moreover, under the Treasury regulations, additional book records are required.2

28

Rate of exchange on income accruing abroad.—

RULING. This office acknowledges receipt of your letter of January 4, 1916, wherein you cite the case of a resident American citizen who had accruing to him from time to time income from foreign investments which was not remitted to the United States but was placed to his credit in different foreign countries, and request to be advised whether in computing income tax liability it will be proper to use the rates of exchange prevailing at the time the amounts were credited abroad.

In reply you are advised that, in the case cited, it will be proper for the individual to return each item of income at the rate of exchange which prevailed on the date it was credited to his account. (Letter to Herbert M. Teets, New York, signed by Deputy Commissioner L. F. Speer, and dated January 11, 1916.)

This works to the disadvantage of taxpayers who closed their books at December 31, 1919, when nearly all foreign exchanges were much below par.

1918 law, Sections 214 (a-7), 234 (a-4).

[Former Procedure] Under the 1916 law, in addition to the restrictions stated above, corporations could secure deductions for losses in general including depreciation, only if they were "charged off." (See Reg. 33, Art. 182) [section 12 (a) Second]. The 1913 law contained no such restrictions.

For example, in the case of depletion, see Chapter XXXI.

INCOME FROM PERSONAL SERVICES

Following the plan of subdividing the items of income into convenient groups, adopting generally the order and classification used in the statute, this chapter is devoted to income from personal services. This term includes not only salaries and wages but also fees received from professions or vocations.

Distributions by personal service corporations are dealt with elsewhere,' because the earnings of personal service corporations as defined in the act are not necessarily of the nature of services as the word "services" is usually understood. Salaries, however, of officers or other employees of personal service corporations are dealt with here.

LAW. Section 213. . . . . (a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations,2 . . . .

Compensation of Certain Officers Exempt

Salaries of the President and United States judges now taxable. The omission in the 1918 law of the specific ex

'See Chapter XXII.

[Former Procedure] The language of the 1917 law is the same as the 1913 law except for an immaterial change in the first phrase of section 4. In 1917, those who received incomes in the form of salaries, compensation for services, including all professional fees, commissions, and income in general from an occupation, vocation, profession or from a business with no capital or only nominal capital were compelled to pay, in addition to their income tax, a tax of 8 per cent upon the income from such sources. In other words, if anyone received an earned income of any kind in excess of $6,000 which had not been subject to the excess profits tax, he was subject to this 8 per cent tax. No tax of this kind appears in the 1918 law.

emption formerly granted3 to the President and United States judges raises the interesting question as to whether or not the salaries of these officers (whose compensation is not supposed to be diminished during their terms of office') may be subjected to a federal income tax.

Salaries of newly appointed and of retired judges taxable. The exemption of the salaries of certain United States judges under the old laws did not apply to the salaries of those appointed subsequent to the passage of the law, nor to those of judges who had been retired (T. D. 2090, December 14, 1914).

Compensation of federal officers in general not exempt.Only those federal salaries which were specifically designated as not subject to the income tax were exempt under former laws. All other federal employees, except as noted below, were taxable under former laws and are taxable under the 1918 law."

Salaries of state officers and employees exempt.'-As a result of judicial interpretation of the scope of the federal taxing power, an implied limitation has been placed upon the power of Congress, prohibiting it from taxing the salaries of state officers. But there has been no interpretation of that

[Former Procedure] The 1917, 1916, and 1913 laws contained the following exemption:

LAW. "Section 4. The following income shall be exempt from the provisions of this title: . . . . the compensation of the present President of the United States during the term for which he has been elected, and the judges of the Supreme and inferior courts of the United States now in office, and the compensation of all officers and employees of a state, or any political subdivision thereof, except when such compensation is paid by the United States government."

'Attorney General Hoar, 13 Ops. Atty. Gen. 161 (1869). See also Pollock v. Farmers' Loan and Trust Co., 157 U. S. 429.

"The successive laws other than the 1918 law were passed October 3, 1913, September 8, 1916, and October 3, 1917.

"See Chapter XXXVIII.

[Former Procedure] The laws of 1913, 1916 and 1917 exempted such compensation. See further discussion of this subject, page 50. 'Collector v. Day, 11 Wall 113.