not such in fact. There must be a complete alienation of all title and interest on the part of the donor. Physical possession or title deeds to the property transferred are indications of actual gift. Transfer of insurance policies is another. The absence of these and other evidences of ownership casts doubts upon the good faith of the transaction.

The resale of the property by the recipient and a subsequent "gift" of the proceeds to the donor is good evidence that no gift was made and the donor should be taxed upon the profit arising from the sale. Revocable "gifts" are not gifts at all within a proper interpretation of the revenue law.

In the next revision of the law it is probable that an attempt will be made to tax the appreciation which now appears to escape. In Notes on the Revenue Act of 1918, in Part I (page 13), the Secretary of the Treasury suggests (without recommendation) that "the gain or loss at that time [actual sale] should be measured as the difference between the price received and the cost to the original owner who acquired the property for value." The difficulty in requiring a donee to ascertain the cost or value of property at a remote period would probably make the proposed change ineffective.

Written up book values as of effective date of law never taxable.-Under both the 1909 and the 1913 laws, the courts have consistently held that, to be subject to the tax, increases in the value of property must have occurred during the period when the law was effective. The 1916, 1917 and 1918 laws, it will be recalled, specifically designate March 1, 1913, as the date from which appreciation shall be measured.

Supreme Court decisions regarding taxation of appreciation in property values.-We now have a satisfactory line of decisions of the Supreme Court bearing on the question of the taxation of increases in property values, and the fixing of March 1, 1913, as the date for the revaluation of all property, tangible and intangible, for income tax purposes.

Cases Under THE 1909 LAW.-The case of Doyle v. Mitchell Brothers Company,19 decided by the Supreme Court of the United States, May 20, 1918, turns upon the question of the taxability of the increased value of certain timber lands:

DECISION. Plaintiff acquired certain timber lands at its organization in 1903 and paid for them at a valuation approximately equivalent to $20 per acre. Owing to increases in the market price of stumpage the market value of the timber land, on December 31, 1908, had become approximately $40 per acre. The company made no entry upon its books representing this increase, but each year entered as a profit the difference between the original cost of the timber cut and the sums received for the manufactured product, less the cost of manufacture. After the passage of the excise tax act, and preparatory to making a return of income for the year 1909, the company revalued its timber stumpage as of December 31, 1908, at approximately $40 per acre. The good faith and accuracy of this valuation are not in question, but the figures representing it never were entered in the corporate books.

The Commissioner declined to recognize the deduction on the basis of the valuation of December 31, 1908. The court refused to sustain the Treasury, its position being shown by the following quotations from the decision:

DECISION. When the act took effect, plaintiff's timber lands, with whatever value they then possessed, were a part of its capital assets, and a subsequent change of form by conversion into money did not change the essence. Their increased value since purchase, as that value stood on December 31, 1908, was not in any proper sense the result of the operation and management of the business or property of the corporation while the act was in force. Nor is the result altered by the mere fact that the increment of value had not been entered upon plaintiff's books of account. Such books are no more than evidential, being neither indispensable nor conclusive. The decision must rest upon the actual facts, which in the present case are not in dispute.

Occasionally reference is made to appreciation arising from revaluations of corporate assets as of January 1, 1909. It should be noted that revaluations as of that date are of in

247 U. S. 179. See also U. S. v. Guggenheim Exploration Co., 238 Fed. 231; also Baldwin Locomotive Works v. McCoach (U. S. Circuit Court of Appeals for the Third Circuit), 221 Fed. 59.

terest only when there was a realization of such appreciation prior to February 28, 1913.20 The court also said:

Yet it is plain, we think, that by the true intent and meaning of the act the entire proceeds of a mere conversion of capital assets were not to be treated as income. Whatever difficulty there may be about a precise and scientific definition of "income," it imports, as used here, something entirely distinct from principal or capital, either as a subject of taxation or as a measure of the tax; conveying rather the idea of gain or increase arising from corporate activities. . . . .

Understanding the term in this natural and obvious sense, it cannot be said that a conversion of capital assets invariably produces income. If sold at less than cost, it produces, rather, loss or outgo. Nevertheless, in many if not in most cases there results a gain that properly may be accounted as a part of the "gross income" received "from all sources;" and by applying to this the authorized deductions we arrive at "net income." In order to determine whether there has been gain or loss, and the amount of the gain if any, we must withdraw from the gross proceeds an amount sufficient to restore the capital value that existed at the commencement of the period under consideration.

The same points are reiterated in Hays v. Gauley Mountain Coal Company, decided by the Supreme Court on the same day.

DECISION. The expression "income received during such year," employed in the act of 1909, looks to the time of realization rather than to the period of accrument, except as the taking effect of the act on a specified date (January 1, 1909) excludes income that accrued before that date. . . .

As we construe the latter act, it measured the tax by the income received within the year for which the assessment was levied, whether it accrued within that year or in some preceding year while the act was in effect; but it excluded all income that accrued prior to January 1, 1909, although afterwards received while the act was in effect.21

CASE UNDER 1913 LAW.-The principle enunciated in the cases arising under the 1909 law was extended to the 1913

20See page 341.

"Again in the case of U. S. v. C. C. C. & St. L. Railway Co. (247 U. S. 195, decided May 20, 1918) the Supreme Court declared: "We concur in the view that the defendant was not taxable except with respect to so much of the profit upon the stock as accrued after December 31, 1908."

law in the case of Lynch v. Turrish,22 decided by the Supreme Court of the United States, June 3, 1918. In this case the plaintiff received in cash double the par value of stock held by him in a lumber company, the distribution being made upon the surrender of the stock, after which the company went out of business. The sum thus distributed represented an "increase due to the gradual rise in the market value of the lands" owned by the company before March 1, 1913. The following are the most pertinent paragraphs of the decision:

DECISION. And in determining the application of the statute to Turrish we must keep in mind that on the admitted facts the distribution received by him from the Payette Company manifestly was a single and final dividend in liquidation of the entire assets and business of the company, a return to him of the value of his stock upon the surrender of his entire interest in the company, and at a price that represented its intrinsic value at and before March 1, 1913, when the act took effect.

The District Court and the Circuit Court of Appeals decided that the amount so distributed to Turrish was not income within the meaning of the statute, basing the decision on two propositions as expressed in the opinion of the Circuit Court of Appeals, by Sanborn, Circuit Judge,—(a) The amount was the realization of an investment made some years before, representing its gradual increase during those years, and which reached its height before the effective date of the law, that is, before March 1, 1913, and the mere change of form of the property "as from real to personal property, or from stock to cash," was not income to its holders because the value of the property was the same after as before the change; (b) The timber lands were the property, capital and capital assets, of their legal and equitable owner, and the enhancement of their value during a series of years "prior to the effective date of the income tax law, although divided or distributed by dividend or otherwise subsequent to that date, does not become income, gains, or profits taxable under such an act."

If increase in value of the lands was income, it had its particular time and such time must have been within the time of the law to be subject to the law, that is, it must have been after March 1, 1913. But, according to the fact admitted, there was no increase after that date and therefore no increase subject to the law. There was continuity of value, not gain or increase. In the first proposition of the Court of Appeals we, therefore, concur.2

2247 U. S. 221. "236 Fed. 653.

23

After considering the contentions of the government in the case of Gray v. Darlington, the court indicated its concurrence with the second proposition of the Circuit Court of Appeals as well.24

The decisions of the Supreme Court during 1918 are of the greatest importance. It is apparent that many assessments and collections of taxes commencing in 1910 were made which the Supreme Court will not sustain. Taxpayers who had gains or profits or doubtful items of income during the years 1909 to 1917 may have been improperly assessed thereon. The Treasury will, of course, be required to comply with the decisions of the Supreme Court and refund all taxes collected under erroneous constructions of the law.

"In a series of recent decisions the Supreme Court has interpreted the law as it affects the taxability of dividends received when such dividends represent in part surplus accumulated or assets increased in value before March 1, 1913. This matter is fully discussed in Chapter XX, "Income from Dividends." It should be pointed out here, however, that the court has established a distinction depending upon the nature of the transaction. Dividends from such funds were declared not taxable in the Turrish case, discussed above, where there was a single final dividend; in the case of Southern Pacific Co. v. Lowe (247 U. S. 330, June 3, 1918). where the dividend was a mere paper transaction the holding company itself doing the business of the subsidiary and having possession of the property; and in the case of the Gulf Oil Corporation v. Lewellyn (248 U. S. 71, December 9, 1918) where the holding company owned all the shares in the subsidiary except the directors' qualifying shares. In the case of Lynch v. Hornby (247 U. S. 339, June 3, 1918) a sharp distinction is drawn between the type of dividend discussed in the foregoing decisions and the case of the "ordinary stockholder receiving dividends declared in the ordinary course of business." The court declared that "under the 1913 act dividends declared and paid in the ordinary course by a corporation to its stockholders, after March 1, 1913, whether from current earnings or from a surplus accumulated prior to that date, were taxable as income to the stockholder." The case of Peabody v. Eisner (247 U. S. 347, June 3, 1918), (also brought under the 1913 law) was declared to be controlled by Lynch v. Hornby.

It can hardly be said, therefore, that the Supreme Court has decided that all values existing at March 1, 1913, are capital, but the 1916, 1917 and 1918 revenue laws are quite definite on the point that dividends declared out of surplus accrued prior to March 1, 1913, are not taxable, so that the case of Lynch v. Hornby has no bearing on dividends received after January 1, 1916.