or disability insurance payable under the War Risk Insurance Act of September 2, 1914, as amended, even though the benefit accrued before that date.19

Property Acquired by Gift. The value of property acquired by gift, bequest, devise or descent (but not the income from such property) is exempt.20 Such property need not be reported as income by the recipient.21 Money and real or personal property received as gifts, or received under a will or under statutes of descent and distribution, are exempt from tax, although the income therefrom derived from investment, sale or otherwise is not.22 An amount of principal paid under a marriage settlement is a gift. Christmas presents, gratuities, voluntary contributions and donations are considered as gifts and should not be reported as income by the recipient. An exception, however, is made in the case of clergymen.23 Donations made to employees and others, which do not have in them the element of compensation or are in excess of reasonable compensation for services, are considered gratuities.24 Where the salary of an employee is paid for a limited period after his death to a relative or dependent, in recognition of the services rendered by the employee, no services being rendered by the recipient, the payments are gifts and exempt from taxation.25 Of course, any amount paid by one person out of his income to another, as a gift, is not deductible from the gross income of the giver.

19 Reg. 45, Art. 72.

20 Revenue Act of 1918, §§ 213 (b) and 233.

21 Revenue Act of 1918, §§ 213 (b) 3,233 and 239. It was held under the 1913 Law that gifts to corporations were not exempt, but this ruling did not apply under the 1916 Law, since the provision of the 1913 Law exempting income of this character was contained in the subdivision applying particularly to individuals, while in the 1916 Law it was placed in a section having general reference to all taxpayers. Under the 1916 Law income of this character was exempt from the tax regardless of the status of the recipient. (Compare Revenue Act of 1916, § 4 with Act of October 3, 1913, ¶ B.) This is clearly the rule under the Revenue Act of 1918. (Revenue Act of 1918, §§ 213 and 233.)

22 Reg. 45, Art. 73.

23 See Chapter 15.

24 Reg. 45, Art. 107. For a discussion of so-called gifts which are in fact payment for services see Chapter 22.

25 T. D. 2090; Reg. 33, Art. 6.

Rights to Subscribe to Stock. Where a stockholder acquires the right to subscribe to new stock of the corporation and sells that right, the amount received is income.26 If he exercises the right, no income accrues until the stock subscribed for is sold.

Stock Received as Bonus. Where common stock is received as a bonus with the purchase of preferred stock or bonds, the total purchase price must be fairly apportioned between the stock and securities purchased for the purpose of determining the portion of the consideration attributable to each class of stock or securities and so representing its cost, but if that should be impracticable 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.27

Sale and Retirement of Corporate Bonds. If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss. If thereafter, the corporation purchases and retires 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. If bonds are issued at a premium, the net amount of such premium is gain or income which should be pro-rated or amortized over the life of the bonds. If the corporation purchases and retires any of such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income (or of the face value plus any amount of premium not yet returned

26 Letter from Treasury Department dated February 27, 1915; I. T. S. 1918, 420; Reg. 45, Art. 39. In Trefry v. Putnam, (Mass.) 116 N. E. 904, in which the Court held that gains derived from a sale of rights to subscribe for new shares of stock were taxable as income under the Massachusetts Income Tax Law, the Court said in part: "Such rights are themselves a species of intangible property. They come to the stockholder as a gratuity. They are a new thing of value which he did not possess before. The amount for which he sells them is a gain. They are not regarded ordinarily as a profit from the prosecution of the business, but are an inherent and constituent part of the shares. Their sale resulted from an exercise of judgment to that effect on the part of the stockholder. They are indistinguishable in principle from a sale of the stock itself, and gains derived from sales of such rights fall within the same class of income. The statute in this regard is not in conflict with the amendment."

27 Reg. 45, Art. 39.

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as income) over the purchase price is gain or income for the taxable year. If bonds are issued by a corporation at a discount and the corporation purchases and retires 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.28

Dividends on Life Insurance Policies. Dividends paid on life insurance policies that have not matured, whether or not such dividends are drawn in cash by the insured or applied to the reduction of the annual premium due, are not considered items of taxable income. Distributions on paid-up policies which are made. out of earnings of the insurance company subject to tax are in the nature of corporate dividends and are income of an individual only for the purpose of the surtax. The former represent merely a return of a part of the premium theretofore paid by the insured, while the latter represent a distribution of income earned by the insurance companies on the premiums paid by the insured.29

Surrender Value of Insurance Policies. When an insured person discontinues insurance prior to the maturity of his policy, he is entitled to a certain surrender value which is paid to him by the insurance company. The amount so received represents the return to the insured of a part of the premiums he has paid in the past, and is therefore not income. If the amount should exceed the aggregate of premiums paid, the excess would be taxable income.30

Endowment Policies. Where an endowment policy is paid to the insured, it is exempt from tax to the extent that the payment represents a return without interest, to the insured of amounts. paid by him from time to time as premiums, but is taxable on the excess.31 Thus, if over a period of years the insured has paid $700 in premiums, and, at the expiration of the terms receives

28 Reg. 45, Art. 544. See p. 354.

29 Reg. 45, Art. 47; T. D. 2137.

30 Revenue Act of 1918, § 213 (b) 2; Reg. 45, Arts. 47 and 72; T. D. 2090; T. D. 2152; Letter from Treasury Department dated February 8, 1917, I. T. S. 1919, ¶ 949.

31 Revenue Act of 1918, § 213 (b) 2; Reg. 45, Arts. 47 and 72; T. D. 2090; T. D. 2152.

$1,000 from the insurance company, $300 of that sum is taxable income, but the $700, representing return of premiums, is not income.

Annuities. The Revenue Act of 1918 provides that the amount received by the insured as a return of premiums paid by him under life insurance, endowment or annuity contracts either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract is exempt from taxation.32 Under this provision of law the Treasury Department has ruled as follows: Annuities paid by religious, charitable and educational corporations under an annuity contract are subject to tax to the extent that the aggregate amount of the payments to the annuitant exceeds any amounts paid by him as consideration for the contract. An annuity charged upon devised land is income taxable to the annuitant, whether paid by the devisee out of the rents of the land or from other sources. The devisee is not required to return as taxable income the amount of rent paid to the annuitant, and he is not entitled to deduct from his taxable income any sums paid to the annuitant. Where an insured receives under life insurance, endowment or annuity contracts, sums in excess of the premiums paid therefor, such excess is income for the year of its receipt.33

Sharcs in Building and Loan Association. 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 accumulation does not become available to the shareholder until the maturity of a share, the amount of any share in excess

32 Revenue Act of 1918, § 213 (b) 2.

33 Reg. 45, Art. 47. Under the 1913 Law it was held that the amount by which the sum received exceeded the sum paid and coming into the hands of the person making the contract and payment was income. It was also first held that "when the settlement under such contract and payment is made in more than one payment each payment will be considered as being composed of interest and a proportionate part of the principal." and "where the entire annuity is composed of an interest return upon the principal sum paid therefor, the entire annuity is income." (T. D. 2090.) The matter quoted, however, was afterward stricken out of the ruling. (T. D. 2152.)

of the aggregate amount paid in by the shareholder is income for the year of the maturity of the share.34

Compensation by Insurance. Insurance money is clearly a substitute for the assets lost or destroyed. If the insurance money is in excess of the cost of the property it may be used to restore the property or be placed in a fund for that purpose for a reasonable time until restoration can be made, final accounting for tax on the excess over the amount actually and reasonably expended to replace or restore the property substantially in kind, being deferred until the restoration or replacement has taken place. If the taxpayer does not elect to restore the property the transaction will then be deemed to be completed. The rulings applicable in either alternative have been given in the earlier part of this chapter 35

Taxes on Profits from Sale of Property Paid by Vendee. In a case where the vendee of a business agrees that in addition to the purchase price he will pay the income and excess-profits taxes of the vendor arising from the sale of such business, it has been ruled that such taxes paid by the vendee constitute additional taxable income to the vendor.36

Tax Paid by Debtor on Account of Tax-Free Covenant Bond. Where a debtor corporation, in pursuance of a tax-free covenant clause in its bonds pays the 2% normal tax, the amount of the tax paid by the corporation is income to the bondholder. The obligor, in pursuance of a contract voluntarily entered into, guarantees to pay a direct liability of the taxpayer which consists in paying a certain amount of normal tax for him to the Government. The reduction of the payment of his tax liability under such a contract constitutes income to him by reducing his expenditures in that amount. The fact that the amount of the liability was paid direct to the Government instead of to the taxpayer, does not preclude such an amount from constituting income to the taxpayer.37

34 Reg. 45; Art. 54.

Letter from Treasury Department dated February 8, 1917; I. T. S. 1919, ¶ 949.

35 See p. 321.

36 Telegram from Treasury Department dated May 2, 1919; I. T. S. 1919, ¶ 3322.

37 Letter from Treasury Department dated September 13, 1919; I. T. S. 1919, ¶3567.