the exemption, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of a State or Territory.

Mortgage indebtedness assumed by municipality.—

The purchase by a State of property subject to a mortgage executed to secure an issue of bonds does not render the bonds obligations of the State, and the interest upon them does not become exempt from taxation, whether or not the State assumes the payment of the bonds. (Art. 74.)

Interest on awards by state or municipality.-When a state or city takes property under the power of eminent domain, or when other awards of a state or city are paid with interest, the question arises as to whether or not interest on an award is equivalent to interest on an obligation and therefore is exempt from federal taxes.

The liability of a city to pay for property taken under the power of eminent domain is certainly an obligation. State constitutions provide that private property shall not be taken for public use except upon just compensation paid or secured. A city is allowed to give its own bond and under the obligation of this bond it is compelled to pay just compensation. Such just compensation is due as of the date of the taking, and when not paid immediately the citizen is placed in the same position by the payment of interest as such, or by the payment of an additional amount, which in some cases, is spoken of as "damages for detention" not exceeding legal interest, but it is in substance interest. It is, of course, important to the recipient that any part of the award which actually is tax-exempt interest should be properly designated.

Interest from Miscellaneous Sources

The law and the regulations do not enumerate all the sources from which taxable interest may be derived, but as with other items of income, the question of taxability depends on whether or not the amount received or accrued is in fact income.

Interest on bank deposits."

REGULATION... 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. .. (Art. 54.)

Income by banks from discount and interest on loans.

RULING. The Commissioner of Internal Revenue has authorized the publication of the following letter written in response to an inquiry from a national bank with reference to the method of reporting discount and interest on time loans for taxation purposes:

"Receipt is acknowledged of your letter of February 8, 1919, in which you state:

“On January 1, 1918, we changed our method of handling discount and interest on time loans. Up to this time all discount and interest charged on loans had been credited directly to discount and interest, but at this date, the actual amount of discount and interest, which had been so credited and was still unearned, was ascertained, credited to unearned account on our books, and thereafter, all discount and interest collected in advance was credited to this account, our discount earned receiving credit for each day's actual earnings.'

"You ask to be advised what course you should pursue in the preparation of your income and war excess profits tax returns for the year 1918. The method of treating discount and interest on time loans adopted by you on January 1, 1918, has been generally recognized as the correct method of computing such income, and the Comptroller of the Currency has suggested the adoption of this method by all national banks. The amount of income from discount and interest on time loans which you should report for the year 1918 is the amount of such income actually earned during that year, and as the amount of such income for the year 1917 and years prior thereto has been computed and reported upon a different method, amended returns should be filed showing the correct amount of such

'[Former Procedure]

REGULATION. "Interest on bank deposits or on certificates of deposit, whether paid or accrued and unpaid, must be included in the annual income return of the person entitled to receive such interest, whether on open account or on the certificate of deposit." (Reg. 33, 1914, Art. 67.)

This regulation ignored the "cash" basis, and required a return on the accrual basis. If the taxpayer did not receive notice of the interest until after his cash account for the year was closed, and if he were reporting upon a cash as distinguished from an accrual basis, he would, however, not have been required to include the interest until the following year.

income for each year back to 1909, inclusive, or to the date of the organization of your bank, if it was organized subsequent to 1909." (Letter to a National Bank, signed by Commissioner Daniel C. Roper, and dated February 11, 1919. Reprinted from The Federal Reserve Bulletin for March, 1919.) 10

Interest on Food Administration Grain Corporation

notes.

RULING. Interest on Food Administration Grain Corporation notes is not exempt from income and excess profits taxes. (Telegram to The Corporation Trust Company, signed by Commissioner Roper, April 13, 1919.)

Income from bonds paid at maturity or before. When bonds are purchased at a discount from their face value or when they are purchased at par and paid off at a premium, the excess received above cost or value March 1, 1913, (and interest periodically collected) is taxable income.

If a taxpayer keeps his accounts on an accrual basis it would be good accounting practice to enter annually as income a proportional part of the difference between cost and par, and return such accruals for income tax purposes. When the bonds are paid at maturity or called, the amount to be returned will be only the difference between cost, or value March 1, 1913, plus the amounts previously returned (except interest actually collected) and the amount received.

When the amount received is less than cost or value March 1, 1913, plus the amounts returned as income, the difference is an allowable deduction as a loss.11

Interest received by stock-brokers and others.-Interest charged by stock-brokers and others, who in the ordinary course of business make regular interest entries against customers' accounts, should be reported in income tax returns at

10[Former Procedure] Total amount earned and unearned or only amount earned was reported, depending on practice of bank in crediting such items to income. (Reg. 33, 1918, Art. 114.)

"See Chapter XXVII.

the gross amount so accrued or collected, and not at the net amount ascertained by deducting interest paid.12

Sinking fund increment.-Under the earlier laws the question arose as to whether or not interest on a corporation's own bonds held in its own sinking fund should be reported as income. Under the 1918 law it is immaterial how the interest is reported. The limitation on the interest deduction no

longer exists.13

"This point was decided in the case of Altheimer & Rawlings Investment Co. v. Allen, Collector (248 Fed. 688; 248 U. S. 578).

"A corporation which did a brokerage business and bought securities for its customers, who paid only a part of the purchase price, paying interest on balances, the corporation also paying for the securities purchased only part of the purchase price and owing balances on which it paid interest, including in return of gross income the difference between the interest received and the interest paid, made incorrect return. The interest received by plaintiff from its customers should be included in gross income."

The point at issue was the limitation on the allowable deduction for interest paid and only affects returns for periods prior to 1918. The 1918 law permits all interest paid to be deducted.

"[Former Procedure]

REGULATION. "If the trustees of a sinking fund established by a corporation have invested the amount of the sinking fund reserve or any portion of it in the bonds of the corporation and such corporation pays to the trustees the interest on these bonds, such corporation will be permitted to deduct such interest from its gross income, provided the amount of the interest thus paid, plus the interest on any other outstanding indebtedness which it may have, does not exceed the limit fixed by law. The interest paid to the trustees, together with all other earnings on investments made by the trustees of the sinking fund, must be included in the gross income of the corporation." (Reg. 33, 1918, Art. 189.)

If the interest was on a corporation's own bonds, there was no reason why it should ignore the fact that the paying of interest on one side and receiving it on the other (while a necessary formality under the deed of trust) does not affect the corporation's net financial standing. It is no richer and no poorer than before; therefore, the limitation as to the interest deduction mentioned in the foregoing decision was not sound. The limitation applied to outsiders-the public-because the law so provided, but it surely never was intended that interest paid to oneself might be taxable as income but not deductible as an expense. In spite of the regulation, in preparing returns such interest should have been entered net-that is, the entire amount paid to the public should have been stated, but not the amount paid to the corporation or to its own trustees.

Income from building and loan associations.

REGULATION. . . . . 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.)

The author does not agree with the second part of this ruling. All shares in building and loan associations have definitely fixed annual values.1 Shares issued prior to March 1, 1913, might have a fair market value considerably in excess of the paid-in instalments and under the law and regulations relative to profits on realizations the Treasury should have ruled that the taxable income is only that part of the profit which accrues subsequent to March 1, 1913.

It is quite possible that stockholders in building and loan associations may desire to set up on their books annually the interest or earnings allotted to their particular shares. In such cases the only income to report in the year of maturity would be the difference between the income already taxed and the final profit received.

Shares in many building and loan associations are not of the same nature as shares in corporations. No dividends are declared, but earnings are ascertained and are fully apportioned pro rata to the outstanding stock. So far as the books of the associations are concerned, an actual distribution is made and no surplus account is carried.

The accruing annual income from building and loan association shares and from life insurance policies is in the nature of interest earnings, as the funds are invested almost entirely in bonds and mortgages. They are formed on the mutual plan so that each stockholder or policyholder is in effect realizing annually his pro rata share of the entire net income.

"The redemption value is subject to certain restrictions or penalties when shareholders withdraw before the maturity of their shares.