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The lowering of the specific exemption to $1,000 and $2,000 has had the effect of bringing many thousands of farmers within the class of income tax payers. There are many difficulties involved in the assessment of tax upon the true net income of a farmer, the accounting difficulty being very serious. It is now generally recognized, however, that accurate accounting of the income and expenses incident to the business of farming is practicable and is very beneficial to the farmer. The attempt by the Commissioner of Internal Revenue to secure returns which reflect actual operating results should have unanimous support.

It has been charged in the past that lawmakers legislate in favor of the farmer whenever possible. It is questionable whether the farmer ever demanded special favors. It may rather be assumed that all he asked was a square deal, that is, the right to insist that no undue burden be placed upon him. It has not been shown that farmers as a class have knowingly evaded income tax requirements. Inability to understand the laws and difficulty in determining actual net income have probably deterred many from making returns. Under saner laws and intelligent administration it may be expected that many returns and substantial taxes will be received.

To the extent that a farmer is not required to return as income that part of his crops which is consumed as food by himself and his family he receives an allowance for living expenses. This is an allowance which is not permitted to any other class of taxpayers. As soon as possible the allowance should be withdrawn.

In Great Britain a method was devised under which a farmer's taxable income was assumed to have a definite relation to the rental value of the farm. Such a method would hardly meet with favor in the United States, but if a farmer is not willing to keep books and ascertain, even roughly, his net income some plan should be devised whereby to impose a reasonable tax in all cases in which a tax obviously is due.

Enormous prices for farm products and extensive purchases of automobiles and farm equipment of every sort indicate surplus funds among the farmers. It has been stated that farmers as a rule do not mortgage their farms to buy luxuries and that the expenditures mentioned must be out of the proceeds of taxable income rather than from borrowed money.

The introduction of the inventory system will do more than anything else to prove to the farmer that there may be an increase in net worth even though his bank balance has not increased.

Furthermore, it may be assumed that most sales of farm properties result in a taxable profit to the seller.

Gross income.

REGULATION. All gains, profits and income derived from the sale or exchange of farm products, whether produced on the farm or purchased and resold, shall be included in the return of income for the year in which the products were actually marketed and sold, unless an inventory is used.

SALE OF MACHINERY AND WORK ANIMALS.— In case of the sale of machinery, and of animals purchased as draft or work animals or solely for breeding purposes and not for resale, any excess over the cost thereof reduced by all sums theretofore deducted for depreciation shall be included as gross income in preparing the taxpayer's return.

EXCHANGE OF PRODUCE FOR MERCHANDISE. — Where farm produce is exchanged for merchandise, groceries or mill products, the market value of the article or product received in exchange is to be returned as income.

RENTS.Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or a money equivalent.

COMPUTING INCOME ON CROP BASIS. — If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such case the entire cost of producing the crop must be taken as a deduction in the year in which the gross income from the crop is realized.

LIVE STOCK PURCHASED FOR RESALE. — When live stock purchased is sold, its cost is to be deducted from the sales price in ascertaining the amount of gain or profit to be returned for tax purposes. If, however, an inventory is used, the cost price of the article sold must not be taken as an additional deduction in the return of income, as such cost price will be reflected in the inventory.

Definition of "farm.”As herein used the term "farm” embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit and truck farms, also plantations, ranches and all land used for farming operations. All individuals, partnerships or corporations that cultivate, operate or manage farms for gain or profit, either as owners or tenants, are designated farmers.

"Gentlemen” farmers.A person cultivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. ..... (Art. 38.)

.... If an individual owns and operates a farm, in addition to being engaged in another trade, business or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure..... (Art. 145.)

.... If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. .... (Art. 110.)

It may be inferred from the foregoing that if a person made a profit out of operating a farm he would be a farmer. The regulations are quite right in refusing to allow losses unless it can be shown that a farm is operated as if it were a transaction undertaken for profit.

If a taxpayer conducts the farm or estate chiefly for recreation or pleasure, and not as he would conduct a business for profit, the loss, if any, is apparent only. The deficit is a family, personal or living expense.

But if a taxpayer in good faith embarks in the farming business and loses money during one or more years the loss is an allowable deduction under the law, to the extent that losses are allowable in other businesses.

The newspapers have contained accounts of a suit against a collector of internal revenue recently brought by Stuyvesant Fish of New York to recover taxes collected on account of the disallowance of his claims for losses incurred in operating a farm. Mr. Fish is of the “gentleman” farmer type and the result of his action will serve as a precedent for others similarly situated.

Farmers' associations.

REGULATION. .... A farmers' association is not exempt from taxation where in accounting to farmers furnishing produce for the proceeds of sales it deducts more than the necessary selling expenses incurred. (b) Cooperative associations acting as purchasing agents are not expressly exempt from tax and must make returns of income, but rebates made to purchasers, whether or not members of the association, in proportion to their purchases may be excluded from gross income in computing the net income subject to tax. Any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax. (Art. 522.)

Expenses deductible.

REGULATIONS. A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business of farming.

TOOLS.The cost of ordinary tools, of short life or small cost, such as hand tools, including shovels, rakes, etc., may be included.

FEEDING AND RAISING LIVE STOCK.— The cost of feeding and raising live stock may be treated as an expense deduction, in so far as such cost represents actual outlay; but not including the value of farm produce grown upon the farm or the labor of the taxpayer. ..,.

FARM MACHINERY AND BUILDINGS.The cost of farm machinery and farm buildings represents a capital investment and is not an allowable deduction as an item of expense.

DEVELOPMENT EXPENSES.— Amounts expended in the development of farms, orchards and ranches prior to the time when the productive state is reached may be regarded as investments of capital.

Cost OF DRAFT OR WORK ANIMALS OR LIVE STOCK.The amount expended in purchasing draft or work animals or live stock either for resale or for breeding purposes is regarded as an investment of capital.

Cost OF AUTOMOBILE NOT DEDUCTIBLE.— The purchase price of an automobile, even when wholly used in carrying on farming operations, is not deductible, but it is regarded as an investment of capital.

UPKEEP OF AUTOMOBILE MAY BE DEDUCTIBLE.— The cost of gasoline, repairs and upkeep of an automobile if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned according to the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to business purposes is deductible as a necessary expense. .... (Art. 110.)


REGULATION. A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery and other physical property, including live stock purchased for draft, dairy or breeding purposes, but no claim for depreciation on live stock raised, or purchased for resale, will be allowed. Live stock purchased for draft, breeding or dairy purposes, or for any purpose other than resale, may be included in the inventory for each year at a figure which will reflect the reduction in value estimated to have occurred during the year through increase of age

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