As to insurance companies and foreign corporations, see sections 202, 204, 206, 207, and 231.*†

fessional services, business income, prof-| covenant, see section 143 (a) (3). As its from sales of and dealings in prop- to the determination of gain or loss from erty, interest, rent, dividends, and gains, the sale or other disposition of property, profits, and income derived from any see sections 111-113. source whatever, unless exempt from tax by law. (See sections 22 (b) and 116.) In general, income is the gain derived from capital, from labor, or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets. Profits of citizens, residents, or domestic corporations derived from sales in foreign commerce must be included in their gross income; but special provisions are made for nonresident aliens and foreign corporations by sections 211-238 and, in certain cases, by section 251, for citizens and domestic corporations deriving income from sources within possessions of the United States. Income may be in the form of cash or of property.

§ 9.22 (a)-2 Compensation for personal services. Commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, pay of persons in the military or naval forces of the United States, retired pay of Federal and other officers, and pensions or retiring allowances paid by private persons or by the United States are income to the recipients; as are also marriage fees, baptismal offerings, sums paid for saying masses for the dead, and other contributions received by a clergyman, evan

rendered. However, so-called pensions awarded by one to whom no services have been rendered are mere gifts or gratuities and are not taxable. The salaries of Federal officers and employees are subject to tax. As used in this section the term "Federal officers and employees" includes all judges of courts of the United States irrespective of when they took office. See § 9.116-2 as to compensation of State officers and employees. * † [As amended by T.D. 4903, June 13, 1939; 4 F.R. 2419]

If property is transferred by a corpo-gelist, or religious worker for services ration to a shareholder, or by an employer to an employee, for an amount substantially less than its fair market value, regardless of whether the transfer is in the guise of a sale or exchange, such shareholder or employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value to the extent that such difference is in the nature of (1) compensation for services rendered or to be rendered or (2) a distribution of earnings or profits taxable as a dividend, as the case may be. In computing the gain or loss from the subsequent sale of such property its basis shall be the amount paid for the property, increased by the amount of such difference included in gross income. This paragraph does not apply, however, to the issuance by a corporation to its shareholders of the right to subscribe to its stock, as to which see § 9.22 (a)-8.

NOTE: The next to the last sentence in this

section was added by T.D. 4903, June 13, 1939; 4 FR. 2419, and is applicable only to taxable years governed by the Internal Revenue Code.

§ 9.22 (a)-3 Compensation paid other than in cash. If services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. If the services were rendered at a stipulated price, in the absence of evidence to the contrary such price will be presumed to be the fair value of the compensation received. If a corporation transfers to its employees its own stock as compensation for services rendered by the employee, the amount of such compensation to be included in the gross income of the employee is the fair market value of the stock at the time of the transfer. If living quarters such as camps are furnished to employees for the convenience of the employer, the ratable value need not be added to the cash com

The fact that a dividend is declared shortly after the sale of corporate stock and the sale price is influenced by the expectation of the payment of a dividend, does not make such dividend when paid taxable to the vendor as a dividend. The amount advanced by the vendee to the vendor in contemplation of the next dividend payment is an investment of capital and may not be claimed as a deduction from gross income. As to the amount of income tax paid for a bondholder by the obligor pursuant to a so-called tax-free

pensation of the employees, but if a per- |cluded in gross income. If warrants are son receives as compensation for services issued by a city, town, or other political rendered a salary and in addition thereto subdivision of a State, and are accepted living quarters, the value to such person by the contractor in payment for public of the quarters furnished constitutes in- work done, the fair market value of such come subject to tax. The value of quar-warrants should be returned as income. ters furnished to the commissioned If for any reason the contractor upon officers, chief warrant officers, warrant officers, and enlisted personnel of the Army, Navy, Coast Guard, Coast and Geodetic Survey, and Public Health Service, or amounts received by them as commutation of quarters, are to be excluded from gross income. (See also section 22 (b) (6).) Premiums paid by an employer on policies of group life insurance covering the lives of his employees, the beneficiaries of which are designated by the employees, are not income to the employees. (See § 9.24-3.) *†

conversion of the warrants into cash does not receive and cannot recover the full value of the warrants so returned, he may deduct from gross income for the year in which the warrants are converted into cash any loss sustained, and if he realizes more than the value of the warrants so returned he should include the excess in his gross income for the year in which realized.*+

§ 9.22 (a)-7 Gross income of farmers. A farmer reporting on the basis of receipts and disbursements (in which no inventory to determine profits is used) shall include in his gross income for the taxable year (1) the amount of cash or the value of merchandise or other prop

§ 9.22 (a)-4 Compensation paid in notes. Notes or other evidences of indebtedness received in payment for services constitute income to the amount of their fair market value. A taxpayer re-erty received during the taxable year ceiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt the fair discounted value of the note at such time. Thus, if it appears that such a note is or could be discounted on a 6 percent basis, the recipient shall include such note in his gross income to the amount of its face value less discount computed at the prevailing rate for such transactions. If the payments due on a note so accounted for are met as they become due, there should be included as income in respect of each such payment so much thereof as represents recovery for the discount originally deducted.*†

§ 9.22 (a)-5 Gross income from business. In the case of a manufacturing. merchandising, or mining business "gross income" means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. In determining the gross income subtractions

should not be made for depreciation, depletion, selling expenses, or losses, or for items not ordinarily used in computing

the cost of goods sold. But see § 9.23

from the sale of live stock and produce which were raised during the taxable year or prior years, (2) the profits from the sale of any live stock or other items which were purchased, and (3) gross income from all other sources. The profit from the sale of live stock or other items which were purchased after February 28, 1913, is to be ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that in the case of the sale of animals purchased as draft or work animals or solely for breeding or dairy purposes and not for resale, the profit shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation theretofore allowed (but not less than the amount allowable) in respect of such property as a deduction in computing net income.

In the case of a farmer reporting on the accrual basis (in which an inventory is used to determine profits), his gross profits are ascertained by adding to the

inventory value of live stock and products on hand at the end of the year the amount received from the sale of live stock and products, and miscellaneous receipts for hire of teams, machinery, § 9.22 (a)-6 State contracts. The and the like, during the year, and deprofit from a contract with a State or ducting from this sum the inventory political subdivision thereof must be in-value of live stock and products on hand

(m)-1 (g).

at the beginning of the year and the cost | for farming operations. All individuals, of live stock and products purchased partnerships, or corporations that cultiduring the year. In such cases all live vate, operate, or manage farms for gain stock raised or purchased for sale shall or profit, either as owners or tenants, are be included in the inventory at their designated as farmers. A person cultiproper valuation determined in accordance with the method authorized and vating or operating a farm for recreation adopted for the purpose. Also live stock tinual loss from year to year, is not reor pleasure, the result of which is a conacquired, for draft, breeding, or dairy garded as a farmer. purposes and not for sale, may be included in the inventory, instead of being treated as capital assets subject to depreciation, provided such practice is followed consistently by the taxpayer. In case of the sale of any live stock included in an inventory their cost must not be taken as an additional deduction in the return of income, as such deduction will be reflected in the inventory. (See § 9.22 (c)-6.)

Form 1040F should be filled in and attached to his income tax return by every farmer who either keeps no records or only records of cash receipts and disbursements; its use is optional with other farmers. (See further §§ 9.23 (a)-11, 9.23 (e)-5, and 9.23 (1)−10.) *†

§ 9.22 (a)-8 Sale of stock and rights. If shares of stock in a corporation are sold from lots purchased at different

identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. In the determination of the earliest purchases of stock the rules prescribed in paragraphs (1), (2), (3), and (4) of section 117 (h) (relating to the period for which property has been held) shall be applied. The excess of the amount realized on the sale over the cost or other basis of the stock will constitute gain. In the case of stock in respect of which was paid a stock dividend which did not constitute income under the Constitution, the basis for determining gain or loss from a sale of either the stock in respect of which the distribution was made or the stock dividend shall be ascertained in accordance with the principles set forth in § 9.113 (a) (12)-1. If common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price shall be fairly apportioned between such common stock and the securities purchased for the purpose of determining the portion of the cost attributable to each class of stock or secur

In every case of the sale of machinery, | dates or at different prices and the farm equipment, or other capital assets purchased after February 28, 1913 (which are not to be included in an inventory if one is used to determine profits), any excess over the cost thereof less the amount of depreciation theretofore allowed (but not less than the amount allowable) in respect of such property as a deduction in computing net income, shall be included as gross income. If farm produce is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Rents received in crop shares shall be returned as of the year in which the crop shares are reduced to money or the equivalent of money. Proceeds of insurance, such as hail and fire insurance on growing crops, should be included in gross income to the amount received in cash or its equivalent for the crop injured or destroyed. 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, with the consent of the Commissioner (see § 9.41-2), be com-ities, but if that should be impracticable puted upon the crop basis; but in any such cases the entire cost of producing the crop must be taken as a deduction for the year in which the gross income from the crop is realized.

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

in any case, no profit on any subsequent sale of any part of the stock or securities will be realized until out of the proceeds of sales shall have been recovered the total cost.

Although the issuance by a corporation to its shareholders of rights to subscribe to its stock may not under section 115 (f) give rise to taxable income, gain may be derived or loss sustained by the share

holder from the sale of such rights. In the case of stock in respect of which were issued stock subscription rights which did not constitute income under the Constitution, and in the case of such rights, the following rules are to be applied:

(1) If the shareholder does not exercise, but sells, his rights to subscribe, the cost or other basis of the stock in respect of which the rights are issued shall be apportioned between the rights and the stock in proportion to the respective values thereof at the time the rights are issued, and the basis for determining gain or loss from the sale of a right on one hand or a share of stock on the other will be the quotient of the cost or other basis assigned to the rights or the stock, divided, as the case may be, by the number of rights issued or by the number of shares held.

$2,000 (proceeds of sale of rights) less $1,524.39 (cost of old stock apportioned to rights)=$475.61, profit.

For the purpose of determining the gain or loss from the subsequent sale of the stock in respect of which the rights were issued, the adjusted cost of each share is $121.95—that is, $60,975.61÷500.

(2) If the shareholder exercises his rights to subscribe, the basis for determining gain or loss from a subsequent sale of a share of the stock in respect of which the rights were issued shall be determined as in paragraph (1). The basis for determining gain or loss from a subsequent sale of a share of the stock obtained through exercising the rights shall be determined by dividing the part of the cost or other basis of the old shares assigned to the rights, plus the subscription price of the new shares, by

Example. A taxpayer in 1933 pur- the number of new shares obtained.

chased 500 shares of common stock at $125 a share, and in 1938, by reason of the ownership of such stock, received 500 rights entitling him to subscribe to 100 additional shares of such stock at $100 a share. Upon the issuance of the rights each of the shares of stock in respect of which the rights were issued had a fair market value of $120, and the rights had a fair market value of $3 each. Instead of subscribing to the additional shares, he sold the rights at $4 each. The profit is computed as follows:

500 (shares) ×$125 =$62,500, cost of old stock (stock in respect of which the rights were issued)

500 (shares) ×$120 =$60,000, market value of old stock

Example. A taxpayer in 1935 purchased 500 shares of common stock at $125 a share, and in 1938, by reason of the ownership of such stock, received 500 rights entitling him to subscribe to 100 additional shares of such stock at $100 a share. Upon the issuance of the rights each of the shares of stock in respect of which the rights were issued had a fair market value of $120, and the rights had a fair market value of $3 each. The taxpayer exercised his rights to subscribe to the additional shares and later sold one of such shares for $140. The profit is computed as follows:

$1,524.39 (cost of old stock apportioned to rights pursuant to the computation in the example under paragraph (1)) +$10,000 (subscription price of additional shares)=$11,524.39, basis for determining gain or loss from sale of additional shares.

$11,524.39÷100-$115.24, basis for determining gain or loss from sale of each share of additional stock.

$140 (proceeds of sale of share of additional stock) less $115.24 $24.76, profit.

The basis for determining the gain or loss from subsequent sale of the stock in respect of which the rights were issued is $60,975.61-500, or $121.95 a share.

If the stock in respect of which the rights are issued was purchased at dif