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what it is worth. The author feels very strongly that no transaction should be deemed to be closed unless there is an actual realization which can reasonably be looked upon as the equivalent of cash. On the other hand, it is only just to the government that when there is an exchange of one kind of property for an entirely different kind of property the recipient should not escape the tax merely because he refrains from converting what he receives into cash.

Basis when shares of same issue are bought and sold at different dates.-Securities owned by a dealer may be inventoried' and profits may be ascertained on the basis of the valuations thus determined. Other securities are to be valued in accordance with the following procedure:

REGULATION. 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 determined, the stock sold shall be charged against the earliest purchases 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 March 1, 1913, if purchased before that date, will be the profit to be accounted for as income. .... (Art. 39.)?

The theory of this regulation is wrong. When different purchases of the same issue of stock are made the actual result is an average cost. When a taxpayer buys 100 shares of a stock at 80 and later buys 100 shares at 60, he owns 200 shares at 70 and any subsequent accounting should be based on the average. There are difficulties in the application of the average rule when the certificates for the shares can be identified because there may be an actual intention on the part of the taxpayer to separate the transactions. Even here the right to select the certificates to be sold is used by some tax

"See page 305. Banks and financial institutions are required to account for profits on securities in the same fashion as individuals, except where the bank maintains a branch or department for dealing in securities.

[Former Procedure] A letter to the Corporation Trust Company, signed by Commissioner W. H. Osborn and dated February 26, 1916, prescribed that in case of stock purchased before March 1, 1913, “a proportionate part" of the profit "properly chargeable to the taxable period" should be returned,

payers to evade the intention of the law even though they follow the regulations. A taxpayer holding 100 shares of stock, which cost him 50 and which is freely selling at 100 desires to sell, but does not wish to pay the tax on the profit. He retains his original certificate and sells 100 shares "short." He claims that he has two continuing transactions and makes no return. In such cases the author has advised that the original stock should be returned as having been sold, as that is the way the transaction would be recorded in any accounts kept according to recognized accounting principles.

When sale is made on instalment plan can tax be deferred? -In many cases of sales of property the seller attempts to arrange that the proceeds of the sale shall be received in in

stalments over a period of years, thus deferring the imposition · of the tax. It is not feasible to discuss at length in this

book arrangements of this nature. If the purchaser is not in good financial standing or the seller retains title to his property or the cash payments are distributed over a long period of years, the transaction certainly cannot be considered to be closed. If the purchaser delivers his obligations to pay in such form as to render them the equivalent of cash, the transaction is a closed one and a tax will be imposed on the realized profit. If shares of stock are sold and delivery of part and payment therefor are postponed, the transaction should be deemed to be closed or not closed depending on the terms of the contract of sale.

Reorganizations, Mergers and Consolidations

The provision of the 1918 law set forth in section 202 (b) must be borne in mind constantly in discussing reorganizations, mergers and consolidations. This section holds, it will be recalled, that in general when property is exchanged for other property, the property received "shall be treated as the equivalent of cash to the amount of its fair market value,

See page 372.

if any," but that a transaction shall be considered a continuing one rather than a closed and completed one, first, "when in connection with the reorganization, merger or consolidation of a corporation a person* receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value," second, when there is no fair market value of the new securities, and, third, to a limited extent when the aggregate face value of the securities received is in excess of the face value of the securities exchanged.

The law thus places a premium upon those reorganizations, mergers and consolidations which otherwise might be held to be closed transactions, but in which payment is made for securities on a basis of the same or smaller par value. In such cases no return whatever is required even though there be an actual or market value of the new shares which is several times the par value.

When the aggregate par value of the securities received is in excess of the par value of the securities exchanged, the law apparently contemplates that to some extent the transaction may be a continuing one. It would seem that the taxable profit would in no event exceed the difference between the par value of the securities exchanged and the par value of the new securities, even though the difference in par value is less than the gain would be if calculated on the basis of the difference between the fair market value of the new securities and the cost or value March 1, 1913, of the old securities. In other words, if the par value of new securities is $100,000 greater than the par value of the old and the market value of the new is $200,000 greater than the cost, or March 1, 1913, value, of the old, the tax will be imposed only on the $100,000, because that is the lower of the two."

This, however, would afford little, if any, relief in the great majority of reorganizations because in very few instances is the market value of new securities equal to their par value.

““Person” is defined to include a corporation. 1918 law, section 1.
'Reg. 45, Art. 1569, page 380.

The principal objection to the section is that in very many cases so-called reorganizations are little more than the continuance of old businesses with the same ownership, which means that the holders of the new securities have no more, in fact, than they had before the exchange and there is actually no realization. When such exchanges are not finally closed transactions, usually it would be inequitable, even if there were a market value therefor, to impose the tax determined to any extent by the par value of the new securities.

In determining the amount of profit subject to tax upon the subsequent disposition of the securities received through a reorganization, the taxable income reported as the result of the above calculation must be taken into account.

In most reorganizations there is no fair market value for the new securities. There is usually a temporary, excited, manipulated market. An analysis of most reorganizations with the quotations for their securities at or about the time of their issue compared with subsequent prices would be evidence that fair market prices are difficult to determine. The courts are reluctant to impose a tax upon values established by widely fluctuating quotations. The new law cannot settle all or even most of such transactions. One transaction will be declared to be closed, and another transaction, similar, will be declared to be continuing. It will therefore be necessary to examine some of the rulings made under the old laws and regulations that present problems similar to those which will arise.

Disposition of surplus of dissolved corporation.—Practically all reorganizations and consolidations result in the dissolution of pre-existing corporations. Taxpayers who receive cash or securities arising from the dissolution of a corporation should inquire as to whether or not the old corporation had an undistributed surplus account on its books. If so, such surplus as and when distributed to stockholders in dividends (or the equivalent of dividends) was free from all tax as to the part accumulated prior to March 1, 1913, and free from the normal tax as to the part earned after March 1, 1913.

Dissolution of limited partnerships.—The procedure in the case of the dissolution of limited partnerships of the corporation type is the same as that for corporations. When there is a large surplus at the date of distribution it must be borne in mind that the normal income tax has been paid on all accumulations since March 1, 1913. If securities in a new corporation or limited partnership are received in exchange, the excess of the fair value of the new securities over the value of the old shares at March 1, 1913, or cost if acquired after that date, will be taxable as net income for the year when realized. If the new securities are delivered to the old partnership, instead of direct to the shareholders of the partnership, the old partnership will not be taxed unless the new securities exceed in par value the book value of the property disposed of, and not then if the fair value of the new securities does not exceed the book value of the assets transferred.

If the old partnership distributes the new securities to its shareholders they will have to account therefor the same as if they received them direct from the new corporation.

In any event the old partnership should distribute its surplus as a dividend up to the full amount shown on the books and thus afford its shareholders full opportunity to receive credit for the normal tax paid.

Dissolution of partnership.

REGULATION. 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 March 1, 1913, 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 February 28, 1913, on which the income tax has been paid. If, however, the partnership distributes its assets in kind and

'See Chapter XX as to dividends. 'See Chapter XXII.

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