ings or improvements are completed their | debted to him gratuitously forgives the fair market value at the time of their completion. (b) The lessor may report as income at the time when such buildings or improvements are completed the farr market value of such buildings or improvements subject to the lease. (c) The lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the expiration of the lease and report as income for each year of the lease an aliquot part thereof. debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt. For exclusion from gross income of income attributable to discharge of indebtedness of a corporation in an unsound financial condition, see § 9.22 (b) (9)-11. [As amended by T.D. 4954, Nov. 16, 1939; 4 F.R. 4625] (b) Proceedings under Bankruptcy Act. Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act, as amended, of his indebtedness as the re by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, as amended, if immediately thereafter the taxpayer's liabilities exceed the value of his assets. Furthermore, income is not realized in any case by a taxpayer in the case of a cancellation or reduction of his indebtedness under Except in cases where the lessor has reported income upon basis (a), if the lease is terminated so that the lessor | sult of an adjudication in bankruptcy, or comes into possession or control of the property prior to the time originally fixed for the expiration of the lease, the lessor shall report income for the year in which the lease is so terminated to the extent that the value of such buildings or improvements when he becomes entitled to such possession exceeds the amount already reported as income on account of the erection of such buildings or improvements. No appreciation in value due to causes other than the termi nation of the lease shall be included. If the buildings or improvements are destroyed prior to the expiration of the lease, the lessor is entitled to deduct as a loss for the year when such destruction takes place the amount previously reported as income because of the erection of such buildings or improvements, less proper adjustment for depreciation in case option (a) was exercised, and less any salvage value subject to the lease to the extent that such loss is not compensated for by insurance or otherwise. (See sections 23 (e) and (f) and 113 (a) (14).) * † (1) a plan of corporate reorganization confirmed under either section 77B or Chapter X of the Bankruptcy Act, as amended; (2) a composition agreement confirmed under either section 12 or 74 of the Bankruptcy Act, as amended; (3) an "arrangement" or a "real property arrangement" confirmed under Chapter XI or XII, respectively, of the Bankruptcy Act, as amended; or (4) a "wage earner's plan" confirmed under Chapter XIII of the Bankruptcy Act, as amended. If, however, such plan of corporate reorganization or agreement of composi tion referred to in (1) to (4) above had § 9.22 (a)-14 Cancellation of indebt- for one of its principal purposes the edness. (a) In general. The cancella-avoidance of income tax, the cancellation of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in con tion or reduction of indebtedness, under such plan or agreement confirmed under section 12, 74, or 77B or under Chapter X, XI, XII, or XIII of the Bankruptcy Act, as amended, may result in the realization of income. sideration thereof cancels the debt, income in the amount of the debt is realized by the debtor as compensation for his services. A taxpayer realizes income For adjustment of basis of certain by the payment or purchase of his obli- property in the case of cancellation or gations at less than their face value. reduction of indebtedness required by (See $9.22 (a)-18.) In general, if a the Bankruptcy Act, as amended by the shareholder in a corporation which is in- | Act of June 22, 1938 (52 Stat. 840), see **For statutory and source citations, see note to § 9.1-1. Page 1629 enue Code. § 9.113 (b)-2.*† [As amended by TD. | ducting its business and obtains such 4954, Nov. 16, 1939; 4 F.R. 4625] needed money through voluntary pro NOTE: The second paragraph under para-rata payments by its shareholders, the graph (a) was added by T.D. 4954, Nov. 16, amounts so received being credited to 1939; 4 F.R. 4625, and is applicable only to its surplus account or to a special capitaxable years governed by the Internal Rev- tal account, such amounts will not be considered income, although there is no increase in the outstanding shares of stock of the corporation. The payments under such circumstances are in the nature of voluntary assessments upon, and represent an additional price paid for, the shares of stock held by the individual shareholders, and will be treated as an addition to and as a part of the operating capital of the company. (See §§ 9.22 (a)-14 and 9.24-2.) * † § 9.22 (a)-15 Creation of sinking fund by corporation. If a corporation, in order solely to secure the payment of its bonds or other indebtedness, places property in trust or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the corporation and shall be included as such in its gross income.*+ § 9.22 (a)-16 Acquisition or disposition by a corporation of its own capital stock. Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock. But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were deal § 9.22 (a)-18 Sale and purchase by corporation of its bonds. (1) (i) If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. (ii) If the corporation purchases any of such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price or face value is a deductible expense for the taxable year. (iii) If, however, the corporation purchases any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year. (2) (i) If, subsequent to February 28, 1913, bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or amortized over the life of the bonds. (ii) If the corporation purchases any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income consideration upon the sale of property (or over the face value plus any amount by it, or in satisfaction of indebtedness of premium not yet returned as income) to it, the gain or loss resulting is to be is a deductible expense for the taxable computed in the same manner as though year. (iii) If, however, the corporation the payment had been made in any less than the issuing price minus any purchases any of such bonds at a price other property. Any gain derived from such transactions is subject to tax, and income, the excess of the issuing price, amount of premium already returned as any loss sustained is allowable as a de-minus any amount of premium already duction where permitted by the provisions of the Act.*† ing in the shares of another. So also if the corporation receives its own stock as returned as income (or of the face value plus any amount of premium not yet returned as income), over the purchase price is gain or income for the taxable § 9.22 (a)-17 Contributions to corporation by shareholders. If a corporation requires additional funds for con- year. (3) (i) If bonds are issued by a cor- | for the year in which the sale was made poration at a discount, the net amount the gain from such sale, computed as of such discount is deductible and should provided in sections 111-113. If the purbe prorated or amortized over the life chaser takes over all the assets and of the bonds. (ii) If the corporation pur- assumes the liabilities, the amount so chases any of such bonds at a price in assumed is part of the selling price.*† excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted (or over the face value minus any amount of discount not yet deducted) is a deductible expense for the taxable year. (iii) If, however, the corporation purchases any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price, plus any amount of discount already deducted (or of the face value minus any amount of discount not yet deducted), over the purchase price is gain or income for the taxable year. (4) (i) If bonds were issued by a corporation prior to March 1, 1913, at a premium, the net amount of such premium was gain or income for the year in which the bonds were issued and should not be prorated or amortized over the life of the bonds. (ii) If the corporation purchases any of such bonds at a price in excess of the face value of the bonds, the excess of the purchase price over the face value is a deductible expense for the taxable year. (iii) If, however, the corporation purchases any of such bonds at a price less than the face value the excess of the face value over the purchase price is gain or income for the taxable year. For exclusion from gross income of income attributable to discharge of indebtedness of a corporation in an unsound financial condition, see § 9.22 (b) (9)−1.*† [As amended by T.D, 4954, Nov. 16, 1939; 4 F.R. 4625] NOTE: The last paragraph of this section was added by T.D. 4954, Nov. 16, 1939; 4 FR. 4625, and is applicable only to taxable years governed by the Internal Revenue Code. § 9.22 (a)-19 Sale of capital assets by corporation. If property is acquired and later sold for an amount in excess of the cost or other basis, the gain on the sale is income. If, then, a corporation sells its capital assets in whole or in part, it shall include in its gross income § 9.22 (a)-20 Income to lessor corporation from leased property. If a corporation has leased its property in consideration that the lessee shall pay in lieu of other rental an amount equivalent to a certain rate of dividend on the lessor's capital stock or the interest on the lessor's outstanding indebtedness, together with taxes, insurance, or other fixed charges, such payments shall be considered rental payments and shall be returned by the lessor corporation as income, notwithstanding the fact that the dividends and interest are paid by the lessee directly to the shareholders and bondholders of the lessor. The fact that a corporation has conveyed or let its property and has parted with its management and control, or has ceased to engage in the business for which it was originally organized, will not relieve it from liability to the tax. While the payments made by the lessee directly to the bondholders or shareholders of the lessor are rentals as to both the lessee and lessor (rentals paid in one case and rentals received in the other), to the bondholders and the shareholders such amounts are interest and dividend payments received as from the lessor and as such shall be accounted for in their returns.*† § 9.22 (a)-21 Gross income of corporation in liquidation. When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in The corporate existence is dissolution. continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes. (See sections 274 and 298.) Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition. But see section 44 (d) and § 9.44-5. (See further § 9.52–2.) *† [SEC. 22. Gross income.] (b) Exclusions from gross income. The following items shall not be included in gross income and shall be exempt from taxation under this title: § 9.22 (b)-1 Exemptions; exclusions from gross income. Certain items of income specified in section 22 (b) are exempt from tax and may be excluded from gross income. These items, however, are exempt only to the extent and in the amount specified. No other items are exempt from gross income except (1) those items of income which are, under the Constitution, not taxable by the Federal Government; (2) those items of income which are exempt from tax on income under the provisions of any Act of Congress not inconsistent with or repealed by the Act; (3) the income exempted under the provisions of section 116. Since the tax is imposed on net income, the exemption referred to above is not to be confused with the deductions allowed by section 23 and other provisions of the Act to be made from gross income in computing net income. As to other items not to be included in gross income, see sections 112 and 119 and Supplements G, H, I, and J.*† [SEC. 22. Gross income.] [(b) Exclusions from gross income.-The following items shall not be included in gross income and shall be exempt from taxation under this title:] (1) Life insurance.-Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income); elected to exercise an option to receive the proceeds of the policy or any part thereof at a latter date or dates. If the policy provides no option for payment upon the death of the insured, or provides only for payments in installments, there is exempted only the amount which the insurance company would have paid immediately after the death of the insured had the policy not provided for payment at a later date or dates. Any increment thereto is taxable. In any mode of settlement the portion of each distribution which is to be so included in gross income shall be deter mined as follows: (a) Proceeds held by the insurer. If the proceeds are held by the insurer under an agreement (whether with the insured or with a beneficiary) to distribute either the increment to such proceeds currently, or the proceeds and increment in equal installments until both are exhausted, there shall be included in gross income, the increment so paid to the beneficiary, or so credited to the fund in each year by the insurer. (b) Proceeds payable in installments for a fixed number of years. If the proceeds are payable in installments for a fixed number of years, the amount that would have been payable by the insurance company immediately upon the death of the insured (if payment at a later date had not been provided for) is to be divided by the total number of installments payable over the fixed number of years for which payment is to be made, and the quotient represents the portion of each installment to be excluded from § 9.22 (b) (1)-1 Life insurance; gross income. The amount of each inamounts paid by reason of the death of stallment in excess of such excluded porthe insured. The proceeds of life in- tion is to be included in gross income. surance policies, paid by reason of the For example, if, at the insured's death, death of an insured to his estate or to $1,000 would have been payable in a any beneficiary (individual, partnership, single installment, but 10 equal annual or corporation, but not a transferee for payments are made in lieu thereof, the valuable consideration), directly or in portion of the installment received durtrust, are excluded from the gross in- ing any taxable year to be excluded from come of the beneficiary. While it is im- gross income is $100 ($1,000 divided by material whether the proceeds of a life 10). Any amount received as an installinsurance policy payable upon the deathment in excess of $100 is to be included in of the insured are paid to the beneficiary gross income. in a single sum or in installments, only the amount paid solely by reason of the death of the insured is exempted. The amount exempted is the amount payable had the insured or the beneficiary not (c) Proceeds payable in installments during the life of the beneficiary. If the proceeds are payable in installments during the life of the beneficiary the amount of each installment that is to be included in gross income will be deter-death of the insured and interest payments mined as in paragraph (b) of this section, except that the number of years to be used in the specified computation will be determined by the life expectancy of the beneficiary, as calculated by the table of mortality used by the particular insurance company in determining the amount of the annuity. on such amounts and other than amounts received as annuities) under a life insurance (d) Proceeds payable for a fixed number of years and for continued life. If the proceeds are payable in installments for a fixed number of years and for continued life, the amount of each installment that is to be included in gross income will be determined either as pro-respect of such annuity equals the aggregate vided in paragraph (b) of this section if the fixed number of years for which payment is to be made exceeds the life expectancy of the beneficiary, as calculated by the table of mortality used by the particular insurance company in determining the amount of the annuity; or, as provided in paragraph (c) of this section if such life expectancy exceeds the specified fixed period. premiums or consideration paid for such valuable consideration, by assignment or annuity. In the case of a transfer for a otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) or this paragraph: § 9.22 (b) (2)-1 Life insurance; endowment contracts; amounts paid other than by reason of the death of the insured. Amounts received under a life insurance or endowment policy (other than amounts paid by reason of the death of the insured, interest payments on such amounts, and amounts received as annuities) are not taxable until the aggregate of the amounts so received (when added to the amounts received before the taxable year under such policy) exceeds the aggregate premiums or consideration paid, whether or not paid during the taxable year.*† If a mode of settlement has been in effect prior to the first taxable year which begins after December 31, 1933 (or after December 31, 1935, in the case of a mode of settlement described in paragraph (d) of this section), the entire amount received and excluded from gross income in such prior years shall be deducted from the proceeds payable upon the death of the insured; the remainder shall be divided by the number of installments unpaid at the beginning of such taxable year (whether over the remaining portion of the fixed period or over the life § 9.22 (b) (2)-2 Annuities. Amounts expectancy as of that date, depending on received as an annuity under an annuity the mode of settlement adopted); and or endowment contract include amounts that quotient shall be the excludible por- received in periodical installments, tion of each installment. As soon as the whether annually, semi-annually, quaraggregate of the amounts received and terly, monthly, or otherwise, and whether excluded from gross income under the for a fixed period, such as a term of years, methods of computation provided for in or for an indefinite period, such as for this section equals the amount of the pro-life, or for life and a guaranteed fixed ceeds payable upon the death of the insured, the entire amount received thereafter in each taxable year must be included in gross income.*† period, and which installments are payable or may be payable over a period longer than one year. Such portion of each installment payment of an annuity shall be included in gross income as is not in excess of 3 percent of the aggregate premiums or consideration paid for such annuity, whether or not paid dur(2) Annuities, etc. Amounts ing the taxable year, divided by 12 and (other than amounts paid by reason of the multiplied by the number of months in [SEC. 22. Gross income.] [(b) Exclusions from gross income.-The following items shall not be included in gross income and shall be exempt from taxation under this title:] - received |