Iff

1 INT RN L R NU
,c/5| ULL TIN
CUMUL TI ULL TIN 1954-1
anuary- une 1954
n ths ssue p g
ndng Lst h-v
Introducton 1
Ta Court of the Unted States, The 3-9
Part I. Current Rungs, Decsons, etc 11-293
Part II. Rungs and Decsons Under Pror Regua-
tons 295-299
Part III. coho Ta Rungs and Decsons 301-342
Part I . Legsaton and Treates 343-390
Part . dmnstratve and Msceaneous Matters. 391-402
Inde 403-417
UNIT D ST T S
GO RNM NT PRINTING O IC
W S INGTON : 1854
or sae by the Snperntendent of Documents, US Government Prntng Offce
Washngton 25, D. C. Prce 1.50 (P p.r)
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INDING LIST
Court Decsons:
1763
1764
1765
1766
1767
Revenue Rungs:
S4-1
64-2
54-3
54-4
54-5
54-6
54-7
54-
54-
54-10
54-11
54-12
54-13
54-14
54-15
54-16
54-17
54-18....
54-19
54-20
54-21
54-22
54-23.
54-34
54-25
54-26
54-27
54-29
54-29
54-30
54-31
54-32
54-33
54-34
54-35
54-36
54-37
54-38
54-41..
54-42..
54-43..
54-44..
54-45..
U-4f...
54-47..
54- ..
54-50..
54-51..
54-52..
54-53..
I1-51..
54-55..
54-56..
54-57..
54-58..
54-59..
54-60..
5M1..
_
296
277
326
116
217
n
n
67
78
:
206
334
171
20
24
I
n
n/
129
as
161
too
ts
179
gg
2oa
334
2M
236
258
L63
44
12:s
180
an
219
228
ag
178
198
199
24(1
242
267
222
22
64
119
ag
224
S
2 u
24
32
65
147
ISO
166
273
153
1,4
N
Pace
Revenue Rungs Contnued
54-63
64-64..
64-65..
54-66..
54-67..
54-68..
54-69..
54-70..
54-71..
54-72..
64-73 .
54-74..
54-75..
54-76..
54-77..
54-78..
54-79..
64-W)..
54-81..
54-82..
64-83..
54-84..
54-85..
64-86..
54-87..
84-88..
54-89..
54-90..
54-91..
54-92..
54-93..
54-94..
54-95..
54-06..
54-97..
54-98..
64-99..
64-100.
54-101.
54-102.
54-103.
54-104.
54-105..
54-106..
54-107.
54-10S..
54-109..
54-110.
54-111.
54-112..
54-113..
54-114..
64-115..
54-116..
54-117..
M-118..
64-119..
64-120..
54-121..
54-122..
64-123..
54-124..
54-125..
54-126..
54-127..
54-128..
64-129..
54-130..
s|
101
. S
149
151
OT
69
71
117
100
183
168
I .n
s
30 I
131
11
78
266
2-1
2-1
66
79
15 ,
177
1SI
1. I
2,7
307
280
53
.s
111
113
201
211
215
217
27.1
gag
391
12
28
Ik ,
.
62
28
76
17U
303
204
239
248
260
21,5
15:1
168
1
22.
127
183
241
2S9
225
271
271
383
304
329
332
134
3 s
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I
INDING LIST Contnued
ace
Page
Revenue Rungs Contnued
Revenue Rungs Contnued
64-131
341
87
64-210
20
64-132
64-211
23
60
88
24
54-213
28
205
262
64-214
20
30
280
54-216
31
96
64-217
32
106
116
267
394
12
15
38
39
51
54-218
33
54-219
6
54-220,.
6
64-221
54-222
1
64-221
17
64-224
21
21
64-22(1
22
M
54-227
20
159
332
138
54-228
26
12
54-230
11
149
64-231
a
s5
277
332
112
242
247
251
320
338
340
312
88
17
83
152
1S2
198
213
282
394
324
341
340
340
340
128
129
250
251
286
274
303
304
306
309
315
331
40
68
99
106
171
47
256
276
303
306
320
325
331
339
49
306
94
147
173
199
u
64-233
25
54-2 4
25
64-215
30
54-216
3
54-217..
31
64-238
8
54-219
23
64-240
25
64-241 _
s
64-242
14
64-243

64-214
10
64-245
2S
54-246
171
M-ff
54-247
25
64-248
321
64-249
Treasury Decsons:
51-250
34:
61156
13
6057
27
6058
171
64-177
6060
64-178 ..
6061
- 1
6002
64-180
0003
64-181 .
6004
51-182
6065
16
64-183 ..
6066
24
6067
64-185
6068
64-1 so
6069
6070
t-Mmeographs:
6071
221
39
64-191
64-6 (Rev. Rut. 54-104)
54-192
54-19 (Rev. Ru. 54-81)
64-20 (Rev. Ru. 54-86)
71
64-194
64-54 (Rev. Ru. 54-169)
64-195
64-55 (Rev. Ru. 64-148)...
64-196
54-73 (Rev. Ru. 64-164)

64-197
64-82 (Rev. Ru. 64-172)
3S
64-198
64-4)2 (Rev. Ru. 54-195)
41
64-199
64-78 (Rev. Ru. 64-209)
191
64-200
64-103 (Rev. Ru. 64-234)
251
64-21)1
ecutve Orders:
64-202
10518

81
64-203
10527
54-204
Pnbc Law:
324
343
54-200
Commttee Reports:
64-207
3s/
64-208
ouse Report No. 1307
351
64-209
8Cd
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71 592
30
INTRODUCTION
The Interna Revenue uetn s the authortatve nstrument of
the Commssoner of Interna Revenue for the announcement of off-
ca Interna Revenue rungs, and for the pubcaton of Treasury
Decsons, ecutve orders, egsaton, and court decsons pertanng
to Interna Revenue matters.
It s the pocy of the Servce to pubsh n the uetn a sub-
stantve and procedura rungs of mportance or genera nterest, the
pubcaton of whch s consdered necessary to promote a unform
appcaton of the aws admnstered by the Servce. It s aso the
pocy to pubsh a rungs whch revoke, modfy, amend, or affect
any pubshed rung. Rungs reatng soey to matters of nterna
management are not pubshed. The rungs are prepared n the
varous dvsons of the Natona Offce, ncudng the Offce of the
Chef Counse for the Interna Revenue Servce. pubshed
rungs have receved the consderaton and approva of the Chef
Counse.
Revenue Rungs reported n the uetn do not have the force and
effect of Treasury Department Reguatons (ncudng Treasury Dec-
sons), but are pubshed to provde precedents to be used n the ds-
poston of other cases, and may be cted and reed upon for ths
purpose. owever, snce each pubshed rung represents the con-
cuson of the Servce as to the appcaton of the aw to the entre
state of facta nvoved, Revenue offcers and others concerned are
cautoned aganst reachng the same concuson n other cases uness
the facts and crcumstances are substantay the same. In appyng
rungs pubshed n the buetn, personne of the Servce w, of
course, consder the effect of subsequent egsaton, reguatons, court
decsons, and rungs.
ach rung s desgnated as a Revenue Rung and shoud be
cted by reference to the uetn and page where reported. Thus,
Revenue Rung No. 54-80 shoud be cted as Rev. Ru. 54-80, C. .
1954-1, 11. Rungs are keyed to the appcabe sectons of the
Interna Revenue Code and reguatons.
Interna Revenue Cumuatve uetn 1954-1, contans a rungs,
decsons, and egsaton pertanng to Interna Revenue matters
pubshed n the weeky Interna Revenue uetns 1 to 26, ncu-
sve, for the perod anuary 1 to une 30, 1954. It aso contans a
cumuatve st of announcements reatng to decsons of The Ta
Court of the Unted States, pubshed n those uetns.
Ths Cumuatve uetn s prnted n fve parts, Part I, Current
Rungs, Decsons, etc. Part II, Rungs and Decsons Under Pror
Reguatons Part III, coho Ta Rungs and Decsons Part I ,
Legsaton and Treates and Part , dmnstratve and Msce-
aneous Matters.
()
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2
R I TIONS
The foowng abbrevatons n current use and formery used w
appear n matera pubshed n the uetn:
, , C, etc. The names of ndvduas.
. T. coho and tobacco ta rung.
. T. oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court Decson.
D. C. Treasury Department crcuar.
. O. ecutve Order.
. T. state and gft ta rung.
m. T. mpoyment ta rung.
. edera coho dmnstraton ct.
G. C. M. Chef Counse s memorandum (formery Genera Coun-
se s memorandum).
I. R. . Interna Revenue uetn.
IR-Mm. Pubshed IR-Mmeograph.
I. T. Income ta rung.
M, N, , Y, Z, etc. The names of corporatons, paces, or bus-
nesses accordng to conte t.
M. T. Msceaneous ta rung.
Mm. Pubshed Mmeograph.
P. L Pubc Law.
Rev. Ru. Revenue Rung.
S. T. Saes ta rung.
T. C The Ta Court of the Unted States.
T. D. Treasury Decson.
and y are used to represent certan numbers, and when used wth
the word doars represent sums of money.
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T T COURT O T UNIT D ST T S
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T T COURT O T UNIT D ST T S
PU LIS D IN T INT RN L R NU ULL TIN ROM
NU RY 1, 1954, TO UN 30, 1954, INCLUSI
It s the pocy of the Interna Revenue Servce to announce n the
Interna Revenue uetn at the earest practcabe date the deter-
mnaton of the Commssoner to acquesce or not to acquesce n a
decson of The Ta Court of the Unted States whch dsaows a de-
fcency n ta determned by the Commssoner to be due. Notce
that the Commssoner has acquesced or nonacquesced n a decson
of the Ta Court reates ony to the ssue or ssues decded adversey
to the Government. Decsons so acquesced n shoud be reed upon
by offcers and empoyees of the Interna Revenue Servce as prece-
dents n the dsposton of other cases. (No announcements are made
n the uetn wth respect to memorandum opnons of the Ta
Court.)
The Commssoner acquesces n the foowng decsons:
Ta payer
C rewng Corp. (formery ztec rewng Co.)..
tergood, C.eorge
ftergood, athryn
ustn Transt, Inc

mt, uus ., et a.. e ecutors of estate of arod

W.Ross - ---.
art, Stuart, et u .-
yth, Martha -
oardman, Caroyn Peck, estate of _.
oston and Mane Raroad ..
Docket No.
6701
11570
28960
28961
35411
36148
39955
40636
35478
5756
39129
34866
35412
Report
oume Page
20
21
21
20
18
21
21
20
16
515
80
849
1013
880
275
871
rennen, ames
rockman udng Corp., Ine
us easng Corporaton
20
21
20
1517
495
175
849
state ta decson.
t cquescence reates to the Issue whether pettoner sustaned osses In the year canw wth respect
number of peces of property.
(3)
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4
cqukscences Contnued
Ta payer
IL
Chenowth, II. C. ..
Congwood, et u .,
Commons et u ., ohn W
Crabtree, Geradne P
Crabtree, Water R
Crabtree, Co., Water R.
Crabtree et u ., Water I
Docket No.
I)
D sc et u ., nccnzo
D se, neenzo
Day, Chares
Dav, Sarafrancs
Darne, T. II.
Davock, arow N
Denton, ames M
Denton, ohn R
Dstrbutors nance Corp.5.
Dougas, D. W.
Dougas, Wam .
ast Coast qupment Co.
dwards, r., L. C
dwards Trust, nn
dwards Trust, Nancy
dwards, W.
merzan, Zabee
armers Creamery Co. of redercksburg, a.7.
enton, Lese
rst Natona Corporaton of Portand, The
ry, W. N
G
Gatto, nne, transferee
Gasgow, . wng
Graham, M. .
Guaranty Trust Co. of New York, ancary e ecutor
of estate of George McNaught Lockc 10
38349
32482
32483
38696
36285
36284
36287
36286
44474
44419
37118
37119
14315
36501
36852
36853
27309
187419
87420
30984
30885
25471
25472
30884
39109
20716
35203
108224
109642
758
37206
35921
38350
32102
Report
oume Pago
28
20
20
20
20
30
20
21
21
20
20
12
20
21
21
20
37
37
21
20
20
20
20
20
14
21
2
5
20
21
26
21
oard of Ta ppeas.
Nonacqueseenee pubshed In Cumuatve uetn I-2, p. 13, nsofar as ft reates to the ssue of
pettoners abty as transferees under sec. 322 of the Cv Code of Caforna, wthdrawn.
Nonacqueseenee pubshed n Cumuatve uetn 1952-2, p. 6, wthdrawn.
cquescence reates ony to whether 7,023 reported as dvdend ncome n pettoner s 1945 ta return
was reazed n 1945 or 1946.
6 Nonacqueseenee pubshed n the Cumuatve uetn 193S-2, p. 42, wthdrawn.
7 cquescence reates ony to the ssues whether e pendtures for restoraton of hudfnp shoud be cap-
tazed or deducted as ordnary e penses whether customer s payments for bottes represented deposU or
ta abe ncome and whether a vountary payment for voatou of O. P. . reguatons s deductbe.
Nonacqueseenee pubshed n Cumuatve uetn 1952-2, p. 4, wthdrawn.
state ta decson.
10 cquescence reates to resut ony n the Issues of whether the vaue of shares of stock of the ank of
Nova Scota owned by decedent at date of death s ncudbe n hs gross estate, and whether the vaue of
rtsh Treasury certfcates owned by decedcut at the tme, of death s ncudbe n bs gross estate.
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cquescenses Contnued
Ta payer
Docket No.
Report
oume Page

a, Caro R., et u
odges, gnes Wey, e ecutr
odges, W. L., estate of
odges, W. L. trustee
ooway, Inc., . M
udson, Shrey Duncan 1
ohnson, rances amer.
apan, acob M., et u
tte, Ots
raft oods Co. (formery raft Cheese Co. and
theretofore raft-Phen Cheese Corp.)
Undau, arry
Landau, erbert
Undau, ane, estate of
Undau, Ly
Uster, Caroyn aust, transferee
Uster, . C, transferee
Uster, dward Carro, transferee
Uster, Inc., . C.
Lesser, Cea, e ecutr of estate of Lous Rchards _.
Locke, George McNaught, estate of 15
M
MacMurray, red
MacMurray, rederck
MaeMurrav, rederck M.1 .
MacMurray, Lan, estate of.
Mayes, r., W.
Meon Natona ank Trust Co., et a., e ecutors
of estate of ohn C. Morrow
Moore, G. . .
Morrow, ohn C, estate of
291545
38336
38330
38337
26737
38350
33275
37495
37873
35442
4160
5574
42885
42887
42888
42886
97714
97716
97713
97442
34010
32102
40290
35201
40292
37394
35202
37395
40291
40292
36834
36554
38351
36554
.
26
t
26
21
20
21
21
21
21
21
21
21
21
43
43
43
43
2(1
21
21
21
21
21
21
19
26
19
445
301
301
301
40
926
371
134
79
513
414
414
414
414
159
159
159
159
904
64
1:,
1 ,
15
1 ,
286
1068
301
1068
oard of Ta ppeas.
Nonacquescence pubshed In Cumuatve uetn I-2, p. 13, Insofar as t reates to the Issue of
Pettoners abty as transferees under sec. 322 of the Cv Code of Caforna, wthdrawn.
cquescence as to resut ony.
u N onacquescence pubshed n Cumuatve uetn 1962-2, p. 5, wthdrawn.
|| state ta decson.
cquescence reates to resut ony n the ssues of whether the vaue of shares of stock of (he ank of
ffw Scota owned by decedent at date of death s Incudbe In hs gross estate, and whether the vaue of
rtsh Treasury certfcates owned by decedent at the tme of death s ncudbe In hs gross estate.
rederck M., rederck, and red MacMurray are the same pettoner.
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cquescences Contnued
Ta payer
Docket No.
Report
oume Page
N
Natona ank of Commerce n Memphs, e ecutor
under the ast w and testament of ohn . Snow-
den, II
New rtan Trust Co., e ecutor of estate of Caroyn
eck oardman
O
Occdenta Lfe Insurance Co., transferee of The rst
Natona Corporaton of Portand v
Pacfc Coast scut Co., et a.
Pacfc Ms
Provdence Trust Co. of Phadepha, ct a., e ecutors
of estate of rank W. Thachcr
R
. ft . urnture Co., The.
Rchards, aron, e ecutor of estate of I,ou chards2I.
Rchards, Lous, estate of
e-Way Products Inc.
oss, arod W., estate of
Roundup Coa Mnng Co., The
11316
35478
108307
10 11
71588
20888
17382
30251
34013
34010
34013
14314
30148
3G709
12
)
2
17
20
20
.)
20
12
I1
20
475
871
540
30
705
474
857
904
904
475
1013
388
et z.er, Los. 31172 21 398
Sdes, arry 31428 19 1114
Smth, Lan ond 42451 21 353
Snowden, II, ohn ., estate of 14310 12 475
Standard Coa, Inc., et a 28323 20 208
Stewart Tte Co 38050 20 630
Stewart Tte Guaranty Co 38028 20 630
Stone, II. C, estate of 38335 26 301
one, Mrs. . C, e ecutr 23 38335 26 301
Sutter, Rchard 37277 21 170
Suter, Rchard ., et u 37278 21 170
Swan, Samue G I 31163 20 1022
oard of Ta p r s.
state ta decson.
e Nonacquesccnec pubshed In Cumuatve uetn 10.R2-2, p. f, wthdrawn.
Nonacqucscencc pubshed u Cumuatve uetn IUI: _. p. 1, wdrawn.
r - |t -(ence pubswd n Cumuatve uetn 1 -1, p. 35, and Cumuatve uetn 1037-1,
p. 4a, wthdrawn.
Nonacqucscence pubshed n Cumuatve uetn 1952-1 p. 6, wthdrawn.
cquescence reates ony to wheter pettoner s entted to a deducton n 1 43 for catastrophe
Insurance.
- Nonacqucsopnoe pnbscd n Cumuatve uetn I . p. 13, nsofar as t reates to the ssue of
pettoners abty as transferees under sec. 322 of toe Cv Code of Caforna, wthdrawn.
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cquescences Contnued
Ta payer
T
Taey, Thomas
Taey, Thomas ., et u
Te te pron Co., Inc
Thaeher, rank , estate of
Transamerca Corporaton, transferee of The rst
Natona Corporaton of Portand
Trpe Deveopment Co
W
Western States Corporaton, transferee of The rst
Natona Corporaton of Portand a
Western Transmsson Corporaton 2
Woodv, Rhett ., ct u ..
Woody, Rhett W
Z
Zachry Reaty Co
Docket No.
33140
33141
34175
17382
108305
109045
2G00S
108306
109043
29490
36396
36397
35413
Report
oume Page
20
2(1
21
2(1
2
20
18
19
19
20
715
715
117
474
549
619
549
818
350
350
849
state ta decson.
u Nonacquescencc pubshed n Cumuatve uetn 1952-2. p. , wthdrawn.
onacquescence pubshed n Cumuatve uetn 1952-2, p. 8, wthdrawn.
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8
The Commssoner does NOT acquesce n the foowng decsons:
Ta payer
Docket N o.
Report
oume Page
dams, Mcdrum nderson Co., Inc.

camsey, Inez L
oston and Mane Raroad
Chareston Natona ank, The.
Cramer, mma
Cramer, verett L., Trust
Cramer, eanne L., Trust
Cramer, esse N
Cramer, Russe
Cramer, Russe ., r
Cramer, Staney S
Curran Reaty Co., Inc.s
armers Creamery Co. of redercksburg, a. .
o , Maurce
Godey, Ida S., estate of
Godey, Pau . and ohn W. Young, coe ecutors of
estate of Ida S. Godey
Goff, enretta
rschwad, Rebecca.
M
Marke, et u ., Thomas .
N
New McDermott, Inc., The .
O
Obear-Nester Gass Co
R
24599
35057
35057
34643
34G44
34645
99360
36271
19
23537
18
5756
16
33231
20
39447
20
39448
20
39449
20
39450
20
39451
20
39455
20
39454
20
22705
15
20716
14
39458
20
It
19
20
20
20
44
20
Rosen, Davd 34646 20
Roundup Coa Mnng Co., The s 36709 20
oard of Ta ppeas.
1 Nonacqueseence reates to Issue whether, under the retrement system of accountng, retrement osses
must be reduced by prc-1913 deprecaton and shoud ICC cost of reproducton new ess deprecaton be
reduced by the amount of engneerng costs ncuded theren.
s cquescence pubshed n Cumuatve uetn 1951-1, p. 2, nsofar as t reates to whether pettoner,
on accrua bass, may deduct from gross ncome n 1946 and 1947 amounts representng addtona Massachu-
setts e cse-ta abtes for those years when subsequent to cose of such years t was ndrecty dsputng
such abtes, wthdrawn.
Nonacqueseence reates ony to the ssue whether an e traordnary oss on bottes and crates not ade-
quatey offset by the usua deprecaton Is deductbe.
cquescence pubshed n Cumuatve uetn 1953-1, p. 5, wthdrawn.
1 Nonacqueseence reates to whether the e pendtures made by pettoner n 1944 for an ar shaft, fan, and
compressor arc aowabe as current busness e penses or capta e pendtures.
G
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Nonacquebcence Contnued
Ta payer
s
Sanson, ua L_..
Shvers, Myra
Skar, Margaret Rce
Spencer, Lotte
T
Tyree, oseph ., estate of..
Tyree, Whemna C, e ecutr of estate of oseph
Tyree

West ager musement Co., Inc
Docket No.
34647
39453
40559
39452
43589
43589
24598
Report
oume Page
20
20
21
20
20
20
21
561
679
349
679
675
675
486
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P RT I. CURR NT RULINGS, D CISIONS, TC.
INT RN L R NU COD
C PT R 1. INCOM T
SU C PT R .-G N R L PRO ISIONS
P RT I. R T S O T
S CTION 11. NORM L T ON INDI IDU LS
Reguatons 118, Secton 39.11-2: Ctzens
or resdents of the Unted States abe
to ta .
oregn students n the Unted States. (See Rev. Ru. 54-87, p. 155.)
S CTION 12. SURT ON INDI IDU LS
Reguatons 118, Secton 39.12-1: Surta
on ndvduas.
oregn students n the Unted States. (See Rev. Ru. 54 87, p. 155.)
P RT II. COMPUT TION O N T INCOM
S CTION 22(a). GROSS INCOM : G N R L
D INITION
Reguatons 118, Secton 39.22 (a) -1: What Rev. Ru. 54-80
ncuded n gross ncome.
The porton of a potca contrbuton receved by a potca
organzaton or a canddate for potca offce whch s dverted from
potca campagn purposes to the persona use of the canddate or
other ndvdua consttutes ta abe ncome to such canddate or
other ndvdua.
I. T. 3270. C. U. 1939 1 (Part 1), 108, modfed.
dvce s requested whether that part of the potca contrbutons
receved by apotca organzaton or an ndvdua seekng potca
()
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Regs. 118, 39.22(a)-. 12
offce whch s dverted to the persona use of the canddate or other
ndvdua consttutes ta abe ncome to such canddate or other
ndvdua.
Contrbutons to potca organzatons are customary made wth
(he ntent and understandng that they be used for the e penses of a
potca campagn or for some smar purpose. Such contrbutons
are not deductbe for edera ncome ta purposes by the donor. See
1. T. 327G, C. . 1939-1 (Part 1), 108.
Where a potca gft s receved by an ndvdua or a potca or-
ganzaton and t s hed or used for the purposes ntended, . e., for
present or future e penses of a potca campagn or for some smar
purpose, t s not ta abe ncome to the recpent. See I. T. 327G, supra.
owever, any amount dverted from the channe of campagn actv-
tes and used by a canddate or other ndvdua for persona use con-
sttutes ta abe ncome to such canddate or other ndvdua for the
year n whch the funds are so dverted. or e ampe, a canddate
seekng potca offce receves contrbutons totang 1,000 from n-
dvduas and organzatons for use n hs campagn for eecton to
such offce. Durng the campagn the canddate e pends 600 of the
contrbuted funds for campagn purposes. e uses the baance of the
campagn funds to reduce the mortgage on hs persona resdence. In
such a case the canddate w be requred to ncude n hs ta abe n-
come the 400 whch represents the porton of the fund whch he
dverted to hs persona use. Such amount w be ncndbe n ta -
abe ncome n the year n whch so dverted.
I. T. 3276, supra, s modfed to the e tent that t s nconsstent wth
the vews e pressed heren.
R GUL TIONS 118, S CTION 39.22 (a) -1: What Rev. Ru. 54-105
ncuded n gross ncome.
( so Secton 116, Secton 39.116-1.)
Gans reazed on the sae of tems of property, whch are the per-
sona property of the ta payer, such as persona automobes or
teevson sets, n a foregn country by a Unted States ctzen vng
abroad are not e empt from edera ncome ta under the provsons
of secton 116(a) of the Interna Revenue Code whch reates to the
e cuson of earned ncome from sources wthout the Unted States
n the case of ctzens who are resdng abroad. Such gans are n-
cudbe n gross ncome under the provsons of secton 22(a) of the
Code, and nasmuch as they resut from the sae of capta assets are
sub|ect to the mtatons provded n secton 117(b) of the Code.
or the purpose of determnng the gan, the cost and seng prce of
the property shoud be e pressed n mercan currency at the rate
of e change prevang as of the date of the purchase and the date of
the sae, respectvey. Cf, Rev. Ru. 291, C. . 1953-2,42,
R GUL TIONS 118, S CTION 39.22 (a)-: What Rev. Ru.
ncuded n gross ncome.
( so Secton 42, Secton 39.42-1.)
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13 Regs. 118, 39.22 (a)-.
Interest (ncrement n vaue) earned on a Seres Unted States
savngs bond regstered n the names of two natura ersous n the
aternatve as coowners but purchased entrey wth the funds of
one s a hs ncome, even though he gratutousy permts the other
to redeem the bond and retan the entre proceeds.
Where the purchase prce of such a savngs bond regstered n the
names of a husband and hs wfe n the aternatve as coowners
was contrbuted n part by each and the bond s ressued n the
names of the hubsand and ther daughter n the aternatve as co-
owners, any nterest that accrues (as earned) thereon thereafter
whe she remans such coowner s her ncome n proporton to the
wfe s contrbuton to the purchase prce. Such proporton of any
nterest that had accrued on the bond before ts ressue s ncome
of the wfe. Interest earned on the bond, whether t had accrued
before the ressue or accrues thereafter whe the husband contnues
to be the other coowner, s hs ncome n proporton to hs contr-
buton to the purchase prce.
dvce s requested regardng to whom nterest (ncrement n vaue)
earned on a Unted States savngs bond, Seres , regstered n the
names of two natura persons n the aternatve as coowners s n-
come, for edera ncome ta purposes, where the bond was purchased
entrey wth funds of one coowner but he gratutousy permts the
other coowner to redeem the bond and retan as hers the entre pro-
ceeds. dvce s aso requested regardng to whom nterest earned
on such a savngs bond s ncome where ts purchase prce was con-
trbuted n part by a husband and n part by hs wfe and t was
orgnay regstered n ther names n the aternatve as coowners
but, n order to effect a gft by the wfe of her coownershp theren
to ther daughter, s ressued so as to substtute her name as coowner
n pace of the wfe, wth the husband contnung as the other coowner.
The amounts and tme of ncreases n redempton vaues of such
savngs bonds generay are ndcated by tabes of redempton vaues
shown thereon. Wth respect to e tended Seres bonds ssued pror
to May 1, 1042, the perodca ncreases n ther redempton vaues
after ther orgna maturty are ndcated n a tabe n Department
Crcuar 885, C. . 1951-2, 32. Wth respect to e tended Seres
bonds ssued on or after May 1, 1942, the perodca ncreases n
ther redempton vaues after ther orgna maturty are ndcated
n tabes and C n Department Crcuar 653 (3d Rev.) tnted
pr 29, 1952, a copy of whch may be obtaned from any edera
Reserve ank, or the ureau of the Pubc Debt, Washngton 25, D. C.
Such ncrements n vaue do not accrue on the bonds rataby, but occur
(become earned) ony n specfc amounts at the end of the frst year
hed after ther ssue date (e cept where ssued on or after May 1,
1052, the frst ncrement occurs at the end of 6 months after ssue
date) and at the end of each foowng haf-year perod to orgna
or e tended maturty or earer redempton (e cept where ssued on
or after May 1, 1952, the fna ncrement perod before orgna
maturty s ony 2 months). or e ampe, n the case of a Seres
savngs bond purchased for 75 and bearng an ssue date of May
1, 1941, the frst, second, and thrd ncrements n vaue occurred
(became earned) on May 1,1942, November 1,1942, and May 1,1943,
n the amounts of 0.50, 0.50, and 0.50, respectvey and, n the case
of a Seres savngs bond of the same ssue prce but bearng an
ssue date of May 1, 1952, the frst, second, and thrd ncrements n
815309 54 2
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Regs. 118, 39.22(a)-.) 14
vaue occurred on November 1, 1052, May 1, 1953, and November 1
1953, n the amounts of 0.40, 0.80, and 1, respectvey.
s provded wth respect to such savngs bonds n secton 22(d)
of the Second Lberty ond ct (as amended by the Pubc Debt ct
of 1941, C. . 1941-1, 546), or the purposes of ta aton ncrement
n vaue represented by the dfference between the prce pad anc
the redempton vaue receved (whether at or before maturty) fo
savngs bonds sha be consdered as nterest.
In I. T. 3301, C. . 1939 2, 75, t was hed that, where such savng
bonds are regstered n the names of two natura persons n the ater-
natve as coowners, for e ampe, Mr. ohn ones or Mrs. Mary ones,
nterest (ncrement n vaue) earned thereon s ncome, for edera
ncome ta purposes, of the coowner whose funds were used to pur-
chase the bonds and that, f the purchase prce was furnshed r
part by each, the nterest s ncome of each n proporton to hs or he
respectve contrbuton to the purchase prce, provded, however, that
coowners who are husband and wfe domced n a State havng com-
munty property aws shoud ordnary ncude one-haf of the n-
terest as each spouse s ncome f the bonds are hed as communty
property.
It s hed that, where such a savngs bond regstered n the names o
two natura persons n the aternatve as coowners was purchased
entrey wth the funds of one of the coowners, a the nterest (n-
crement n vaue) earned thereon s hs ncome, even though he
gratutousy permts the other coowner to redeem the bond (whether
at or before ts maturty) and retan as hers the entre proceeds
Such hodng s consstent wth hodngs n O. D. 120. C. . No. 1, S
(1919) I. T. 3011, C. . -2, 132 (1930) I. T. 3097, C. . 1937-2.
219 everng v. Pau R. G. or.t, 311 U. S. 112, Ct. D. 1472, C.
1940-2, 206 and I. T. 3486, C. . 1941-2, 76, regardng to whom
assgned nterest ncome s ta abe for edera ncome ta purposes.
It s further hed that, where the purchase prce of such a savng
bond regstered n the names of a husband and hs wfe n the ater-
natve as coowners was contrbuted n part by each spouse and the
bond s ressued n the names of the husband and ther daughter n
the aternatve as coowners, the wfe s coownershp n the bond s
then transferred to the daughter. Therefore, whether such transfer
was for vauabe consderaton or as a gft, any nterest (ncrement
n vaue) that accrues (as earned) on the bond thereafter whe the
daughter remans such coowner s her ncome n proporton to the
wfe s contrbuton to the purchase prce, whereas such proporton
of any nterest that had accrued on the bond before ts ressue
ncome of the wfe. Snce the husband contnued as the orgna other
coowner, nterest earned on the bond, whether t had accrued before
the ressue or accrues thereafter whe he so contnues, s hs ncome n
proporton to hs contrbuton to the purchase prce.
Por rues reatve to when nterest (ncrement n vaue) on such
savngs bonds s returnabe, for edera ncome ta purposes, see
G. C. M. 15875, C. . I -2, 100 (1935) Mmeograph 6327, C. .
1948-2, 12 and D. C. 885, svpra (the atter reatng, nter aa, to
Seres bonds hed after ther orgna maturty). In regard to by
whom and when nterest on such savngs bonds hed n trust by a bank
s returnabe, see 1. T. 3575, C. . 194-2-2, 113.
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15 Regs. 118, 39.22 (a)-2.
muatons 118, Secton 39.22(a)-: What
ncuded n gross ncome.
mounts receved n settement of cams under the New ersey
Death by Wrongfu ct statute. (See Rev. Ru. 54-19, p. 179.)
Reguatons 118, Secton 39.22(a)-2: Compen Rev. Ru. 54-114
saton for persona servces.
( so Secton 22(b), Secton 39.22(b) (2)-2
Secton 113(a), Secton 39.113(a) (5)-
Reguatons 105, Secton 811(c), Secton 81.17.)
Treatment for edera Income ta purposes of retrement pay
and annuty benefts receved by retred members f tbe unformed
servces of tbe Unted States and ther benefcares under eectons
provded by the Unformed Servces Contngency Opton ct of
1 53. 67 Stat. 501, whereby a member may eect to receve retre-
ment y n a esser amount than that to whch he s entted
under the provsons of the Career Compensaton ct of 1949 and
other retrement aws n order to provde one or more annutes
payabe after hs death to hs wdow, chd or chdren.
dvce s requested wth respect to the ta status of the reduced
retred pay and the annutes n the hands of the recpents thereof
where a member of the unformed servces eects under the Unformed
Servces Contngency Opton ct of 1953, C7 Stat. 501, to receve
retred pay n a esser amount than that to whch he s entted under
the provsons of the Career Compensaton ct of 1919, G3 Stat. 802,
and other retrement aws n order to provde one or more annutes
payabe after hs death to hs survvng spou.se, chd or chdren.
The 1953 ct provdes a pan whereby an actve or retred member
of the unformed servces may eect to receve a reduced amount of
retred pay n order to provde one or more annutes payabe after
hs death to hs wdow, chd or chdren. Members of the unformed
servces are not compeed to provde annutes for ther dependents.
It s entrey vountary whether they partcpate n the pan. ow-
ever, they must eect to partcpate n the pan wthn a specfed
perod of tme or be barred from the annuty program. The act
further sets up provsons reatve to modfcaton or revocaton of
the eecton, and provdes for the operaton of the act n varous
eventuates.
The questons wth respect to whch advce s requested are set forth
beow.
( ) W a member s awarded statutory retred or retrement y or the
reduced retred pay consttute hs gross ncome for edera ncome t purposes
T. D. 5208, C. . 1943, 65, hods that the amounts deducted and wth-
hed pursuant to the Cv Servce Retrement ct of 1930, as amended,
from the basc saary pay or compensaton of those empoyees n the
cv servce of the T|nted States are payments made toward the
purchase of annutes under the act and are not aowabe deductons
for ncome ta purposes. In ke manner the amounts deducted from
the retred pay of members of the unformed servces to provde an-
nutes are not aowabe deductons for edera ncome ta purposes.
It s recognzed that n some cases the retred pay receved by a member
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Regs. 118, 39.22(a)-2. 16
w be entrey e empt from edera ncome ta and n some cases
t w be partay e empt. See Rev. Ru. 256, C. . 1953-2, 13.
Under the provsons of secton 22(b)(5) of the Interna Revenue
Code amounts receved n ta abe years begnnng after December 31,
1941, as a penson, annuty or smar aowance for persona n|ures
or sckness resutng from actve servces n the rmed orces of any
country are e empt from edera ncome ta .
( ) re the annutes Incudbe n the gross Income of the annutants as
provded for n secton 22(b) (2) of the Interna Revenue Code
Secton 22(b)(2)( ) of the Interna Revenue Code provdes that
amounts receved as an annuty under an annuty or endowment con-
tract sha be ncuded n gross ncome e cept that there sha be e -
cuded from gross ncome the e cess of the amount receved n the
ta abe year over an amount equa to 3 per centum of the aggregate
premums or consderaton pad for such annuty (whether or not pad
durng such year), unt the aggregate amount e cuded from gross
ncome n respect of such annuty equas the aggregate premums or
consderaton pad for such annuty.
(C) W the far market vaue of an annuty be ncudbe n the gross estate
of a deceased member of the unformed servces for edera estate ta purposes
Secton 811(c) (3) of the Code provdes, n part, that a transfer of an
nterest n property by the decedent after October 7,1949, s ncudbe
n the gross estate under secton 811(c) (1) (C) (whether decedent dd
or dd not retan any rght or nterest n the property transferred) f
possesson or en|oyment can through ownershp of such nterest be
obtaned ony by survvng the decedent. Therefore, the vaue of the
annuty payabe to the wdow or other survvors of the retred member
s ncudabe n hs gross estate for edera estate ta purposes under
secton 811 (c)(3).
(D) Is the cost of an annuty the aggregate of the amounts by whch the
decedent s retred pay was reduced or the far vaue of the annuty to the
annutant determned under secton 113(a) (5) of the Code, whch s reatve to
the ad|usted bass of property transmtted nt death
The amendments of secton 22(b)(2) and secton 113(a)(5) of the
Code by secton 303 of the Revenue ct of 1951 reate to |ont and
survvor annutes. The annuty nvoved n the nstant case s devod
of any |ont and survvorshp features. The wdow or chd or chdren
are the prmary and ony annutants. Therefore, the annuty nvoved
s not a survvorshp annuty and the substtuted cost bass provson
of secton 22(b)(2) and secton 113(a)(5) are not appcabe. The
annutant s bass, however, woud be determned under secton
113(a) (2) of the Code reatng to the bass of property acqured by
gft.
( ) W the annuty be sub|ect to the 5,000 e cuson from gross Income
provded for by secton 22(b) (1) ( ) of the Code
Secton 22(b) (1) ( ) of the Code, as amended by secton 302(a) of
the Revenue ct of 1951, provdes that there sha not be ncuded n
gross ncome and that there sha be e empt from ncome ta the
amounts receved under a contract of an empoyer provdng for pay-
ment of such amounts to the benefcares of an empoyee, pad by
reason of the death of the empoyee, whether n a snge sum or other-
wse. The aggregate of the amounts thus e cudabe by a of the
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17 egs. 118, 39.22(a)-3.
benefcares of the empoyee under a such contracts of any one em-
poyer may not e ceed 5,000. Secton 22(b)(1)( ) of the Code
contempates the case where money s pad by the empoyer n con-
sderaton of past servces. The annuty payments under the Un-
formed Servces Contngency Opton ct of 1953 to benefcares of
retred members are made n consderaton of annuty premums pad
by retred members, rather than n consderaton of past servces. The
Government n ths case acts ke the ssuer of an annuty pocy.
ccordngy, the annutes pad to benefcares under the Unformed
Servces Contngency Opton ct of 1953 are not entted to the e -
cuson provded n secton 22(b)(1)( ) of the Code.
( ) W tbe fact that the decedent s retred pay was e cuded from hs gross
Income, n whoe or n part, under secton 22(b) (5) of the Code, have any
effect on the ta abe status of tbe annuty pad to bs benefcares
Notwthstandng the fact that the deductons from the decedent s
retred pay, whch were used for the purpose of provdng annutes
for the wfe or other survvors, fowed from ether partay or fuy
ta -e empt ncome, the annuty payments to the survvors are sub|ect
to ta under the 3 percent rue of secton 22(b) (2) of the Code. The
survvor w, under the 3 percent rue be entted to recover as ta
e empt, the cost or other bass of the annuty contract, but any
ncome fowng from the annuty contract after the survvor has fuy
recovered the bass s sub|ect to ta .
(G) re the annutes sub|ect to wthhodng under secton 1022 of the Code
Wthhodng s not requred under secton 1622(a) of the code
on the annutes payabe to the wdow, chd or chdren. Secton
406.207(b) of Reguatons 120 provdes n part as foows:
In genera, pensons and retred pay are wages sub|ect to wthhodng. ow-
ever, no wthhodng s requred wtb respect to amounts pad to an empoyee
upon retrement whch are ta abe as annutes under the provsons of secton
22(b)(2).
(II) re the annutes sub|ect to wthhodng under secton 143(b) of the
Code where the annutant s a nonresdent aen
Secton 143(b) of the Code specfcay requres the wthhodng
of edera ncome ta at the source on amounts pad to nonresdent
aen ndvduas as annutes and the amount of the annuty ncud-
be n gross ncome s sub|ect to wthhodng ta at the rate of 30
percent uness ths rate s reduced by treaty provsons.
Reguatons 118, Secton 39.22(a)-2: Compen-
saton for persona servces.
Ta abty of penson benefts receved by unon members. (See
Rev. Ru. 54-190, p. 46.)
Reguatons 118, Secton 39.22(a)-3: Compen- Rev. Ru. 54-165
saton for persona servces.
Where the premums requred to purchase group term fe nsur-
ance for empoyees are pad out of contrbutons from both empoyer
and empoyees and the payments made by the empoyer provde
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Regs. 118, 39.22(a)-3. 18
ony cunent Insurance protecton, the amounts pad by the empoyer
are not ncudbe n the gross ncome of the benefted empoyees
notwthstandng the fact that the Insurance poces permt con-
verson, under certan crcumstances, nto permanent types of fe
nsurance.
dvce s requested whether empoyer contrbutons towards pre-
mums for the purchase of empoyees group term fe nsurance s
ncudbe n the gross ncome of the benefted empoyees where the
nsurance poces, under certan crcumstances, may be converted
by the ndvdua empoyees nto permanent types of fe nsurance.
In accordance wth the provsons of the group term fe nsurance
pocy n the nstant case the amount of nsurance on the fe of each
empoyee s determned by the empoyee s basc rate of pay. The
nsurance premums are pad for by contrbutons from both empoyer
and empoyee. The nsurance s group term fe nsurance, contan-
ng a permanent tota dsabty provson. n empoyee who term-
nates hs empoyment s entted to have ssued to nm, wthout ev-
dence of nsurabty, an ndvdua pocy of fe nsurance wthout
dsabty or other suppementa benefts, on whch he must pay the
premums. Such empoyee may date hs ndvdua pocy as of the
effectve date of hs nsurance under the group pocy, provded he
pays the dfferences between the amount of premums pad under the
group pocy and the premums that woud have been due under the
ndvdua pocy, wth nterest, or the cash vaue of the ndvdua
pocy, whchever s greater.
Secton 39.22(a)-3 of Reguatons 118, reatng to compensaton
pad other than n cash, provdes n part that premums pad by an
empoyer on poces of group fe nsurance coverng the ves of
hs empoyees, the benefcares of whch are desgnated by the em-
poyees, are not ncome to the empoyees.
The ta consequence of the purchase of groun fe nsurance are
set forth n Mm. 6477, C. . 1950-1,16. Under tne provsons of sec-
ton 29.22(a)-3 of Reguatons 111 (now secton 39.22(a)-3 of Regu-
atons 118) as nterpreted by Mm. 6477, supra, premums pad by
an empoyer on poces of group term nsurance coverng tne ves
of hs empoyees are not ncome to the benefted empoyees. Premums
pad by an empoyer for permanent forms of nsurance on the ves of
hs empoyees under group permanent fe nsurance poces consttute
ncome to the empoyees, e cept that under paragraph 5 of Mm. 6477,
supra, such premums do not consttute ncome f the empoyees rght
to permanent nsurance, or equvaent benefts, other than current
term nsurance, s forfetabe n case of subsequent separaton from
servce. The queston presented s whether the provsons of para-
graph 5 of Mm. 6477, supra, appy n the nstant case n vew of the
fact that the benefted empoyees have, under the terms of the pocy,
the rght on termnaton of empoyment to convert the poces nto
permanent types of fe nsurance.
The facts n the case presented ead to the concuson that the pre-
mums pad by the empoyer ony provde current nsurance protec-
ton and that the costs of any permanent or nonforfetabe features
of the pocy are borne by the empoyees.
It s hed that where the premums requred to purchase group
term fe nsurance for empoyees are pad out of contrbutons from
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19 Reg . 118, 39.22(a)-5.
both empoyer and empoyees and the payments made by the empoyer
provde ony current nsurance protecton, the amounts pad by the
empoyer are not ncudbe n the gross ncome of the benefted em-
poyees notwthstandng the fact that the nsurance poces permt
converson, under certan crcumstances, nto permanent types of fe
nsurance.
Reguatons 118, Secton 39.22(a)-5: Gross ev. u. 54-222
ncome from busness.
( soSecton 117(|), Secton S9.117(|)-1
and Secton 23 (1), Secton 39.23()-2.)
The pocy of the Inferna Revenue Servce recordng the edera
Income ta treatment of demonstrator automobes n the hands of
an antouote deaer, as set forth n I. T. 4002, C. U. 1051-2, 01, s not
affected by the uaucscence of the Servce n Latmcr-Looneu Cher-
rnct, nc. v. Commssoner, ID T. C. 120, acquescence C. . 1053-1, f.
That decson wth respect to the edera ncome ta treatment of
company cars n the hands of an automobe deaer s dstngushed
on the bass of the facts n that ease. The dstncton between
demonstrator ears and company ears n the hands of a deaer
Is determned on the bass of the facts In each partcuar ease.
dvce s requested whether the ncome ta treatment of profts on
the sae of demonstrator cars, as set forth n I. T. 4062, C. I . 1951-2,
61, s changed as a resut of the acquescence of the Interna Revenue
Servce n the court decson of Latmer-Looney Chevroet, Inc. v.
Commssoner, 1 ) T. C. 120, acquescence C. 13.1953-1, 5, prevous non-
acquescence, page 7, wthdrawn.
In I. T. 4002, C. . 1951-2, 01, t s hed that motor vehces ac-
qured by a deaer n the usua course of purchase for resae and tem-
porary used as demonstrators are presumaby hed for sae to
customers n the ordnary course of the deaer s busness. Conse-
quenty, no deprecaton s aowabe wth respect to such vehces,
they are not property used n the trade or busness, and gan on ther
sae may not be treated as capta gan under secton 117{|) of the
Interna evenue Code. It was stated that a deaer n motor vehces
s presumed to hod a such vehces owned by hm prmary for sae
to customers n the ordnary course of hs trade or busness but that
ths presumpton may be overcome where a deaer can estabsh that a
eertan vehce was acqured and used n the operaton of the busness.
The case of Latmer-Looney Chevroet, Inc., supra, deat wth the
ta treatment of profts on saes of certan vehces whch the pet-
toner contended were company cars used n ts busness. The
Commssoner argued that they were demonstrators. The court
found, as a fact, that the vehces were company cars hed prmary
for use n the pettoner s busness and hed, consequenty, that gan
from ther sae was sub|ect to the provsons of secton 117(|) of the
Code. contrary fndng of fact was made as to certan cars n the
case of W. R. Stephens Company v. Commssoner, Ta Court Memo-
randum Opnon ugust 8, 1951, affrmed 199 ed. (2d) 665, whch
Tvere found to be demonstrators hed prmary for sae to customers
n the ordnary course of busness.
There s no confct between the cases nsofar as the aw s con-
cerned. Tre decson by the court n each nstance was based entrey
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Regs. 118, 39.22(a)-21.) 20
on ts fndngs of fact. Whe the Revenue Servce does not neces-
sary concur n the fndngs of fact n the Latmer-Looney case, such
fndngs are not sub|ect to revew by appeate courts, therefore, no
appea was taken. The acquescence entered n the Latmer-Looney
decson s an acceptance of the determnaton n that case ony.
The decson n the Latmer-Looney case does not necesstate any
modfcaton of the rung n I. T. 4062, supra, and that rung con-
tnues to e press the poston of the Revenue Servce.
Whether a partcuar vehce s a demonstrator or a company
car s a queston of fact dependent upon the crcumstances. Some of
the factors to be consdered are: the method by whch t s fnanced, the
regstraton of the vehce, the manner n whch t s nsured, the
nature, duraton, and e tent of ts use by the deaer, and the requre-
ments of the manufacturer as to ts treatment. The mere occasona
use by a deaer of a demonstrator car w not make t a company
car. In order to quafy for treatment as property used n the trade
or busness, a vehce must have been acqured for that purpose and
devoted, bona fde, to use n the busness (other than for demonstraton
purposes) of the ta payer.
Where the facts n a partcuar case estabsh that a vehce quafes
as a company car, deprecaton s aowabe for the perod of tme
t s hed for such use. ny gan from the sae of such car so hed
and used for more than s months s sub|ect to the provsons of
secton 117(|) of the Code.
Reguatons 118, Secton 39.22(a)-21: Trust Rev. Ru. 54-9
ncome ta abe to the grantor as substanta
owner thereof.
( so Secton 23(a), Secton 39.23(a)-10
Secton 1000, Secton 80.2, Reguatons 108.)
The transfer of rea property to a trust for a 10-year perod for
the beneft of grantor s chdren wth bs wfe as one of two trustees,
wth the corpus to go to the grantor s wfe n the event of hs death
pror to the e praton of the 10-year perod, and wth a prvege of
easng back such property from the trustees consttutes a transfer
n form rather than substance. Renta payments made to the trust
by the grantor w not consttute deductbe busness e penses.
The grantor w reman the owner of the property durng the term
of the trust for purposes of edera Income and gft ta es and the
renta payments when made w consttute gfts.
dvce s requested as to the edera ncome and gft ta conse-
quences resutng from the transfer of property to a trust under cr-
cumstances herenafter descrbed.
The grantor owns and operates a restaurant on property whch he
proposes to transfer n trust for the beneft of hs chdren namng hs
wfe as one of two trustees to hod tte to the property. Trust ncome
may at the dscreton of the trustees be dstrbuted or accumuated.
t the e praton of 10 years the corpus of the trust w revert to the
grantor f he s vng and n the event of hs death the corpus w go
to the grantor s wfe. Upon termnaton of the trust any accumuated
ncome w be pad to the benefcares. Durng the term of the trust
the grantor by prearrangement has the prvege of rentng the
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21 Regs. 118, {39.22 (a)-21.
restaurant property consttutng the corpus of the trust from the
trustees at a renta to be determned by reputabe rea estate e perts.
The conveyance of property to the trust by the grantor n the nstant
case for the beneft of hs chdren wth a prvege of rentng back
such property, presents a form of reaocaton of ncome wthn a
famy group. ttempts at reaocaton of famy ncome have been
sought to be accompshed n the form of a trust, everng v. George
. Cfford, 309 U. S. 331, Ct. D. 1444, C. . 1940-1,105 famy part-
nershp, Commssoner v. rancs . Tower, 327 U. S. 280, Ct. D. 1670,
C. . 1946-1, 11 Commssoner v. Wam O. Cubertson, Sr. et u .,
337 U. S. 733, Ct. D. 1723, C. . 1949-2, 5 assgnment of ncome, e-
verng v. Pau R. G. orst, 311 U. S. 112, Ct. D. 1472, C. . 1940-2,
206 or royaty payments to members of a famy corporaton, Inge
Coa Corporaton v. Commssoner, 10 T. C. 1199, affrmed, 174 ed.
(2d) 569. The Supreme Court e amned the practca effects of the
transfer n each nstance to determne whether the transferor retaned
contro or en|oyment of the ncome or property transferred. The con-
trong consderaton n ntrafamy assgnments has been the ta
consequences fowng from the substance of a transacton rather than
from ts form. See Commssoner v. oseph Sunnen, 333 U. S. 591,
Ct, D. 1698, C. . 1948-1,7. conomc fact s emphaszed rather than
ega tte and techncates, e/gns v. ohn Thomas Smth, 308 U. S.
473, Ct. D. 1434, C. . 1940-1,127.
The promse to pay rent s anaogous to the promse to pay nter-
est. In . Cot ohnson v. Commssoner, 86 ed. (2d) 710, Ct. D.
1228, C. . 1937-1,187, where the ta payer gave hs wfe money whch
she paced n trust to be oaned back to hm, the Court stated that the
nterest pad by the husband to the wfe by way of a trust const-
tuted gfts and were not deductbe as a busness e pense. The hus-
band had not made a gft of the money paced n trust but merey had
made gratutous promses to pay nterest. Smar resuts were
reached n two recent dstrct court opnons n George L. Sa et u . v.
rancs R. Smth, D. C, . D., Pa., October 28, 1952, and n enry
rschenmann et u . v. arry C. Westover, D. C., S. D., Caf., une
30, 1952 (pendng appea).
In the Sa case the ta payer transferred certan sums of money to
three trusts set up for the beneft of hs chdren. Immedatey there-
after the money was oaned by the trusts to a partnershp controed
by the ta payer, and the trusts receved three bndng promssory
notes and an agreement to pay, n eu of nterest, a percentage of the
partnershp profts. In hs nstructons to the |ury, the Dstrct
Court |udge noted the factors of reaocaton of ncome n a famy
transacton, the ega and bndng effect of the notes, the gft of the
money on the condton that t be renvested n the partnershp, and
the fact that a ma|orty of the trustees were not famy members and
had a rght to e ercse ther ndependent |udgment and nvest the
money n any way they thought proper. The |ury returned a verdct
n favor of the coector who had dsaowed the so-caed nterest
deductons. In the rschenmann case the ta payer purchased
farmand for whch he had been payng a renta of about 4,500 for
a term of 5 years. The ta payer then made a gft of the and to
hs 12-year od daughter. The ta payer s brother, who was ap-
ponted guardan for the daughter, eased the and to the ta payer
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Regs. 118, { 39.22(a)-21.) 22
for a term of 5 years. Some 19,000 was pad as rent durng the
frst year of the ease. Whe the hgh rent fgured n the decson
of the court n denyng the deducton, t s aso noted that the court
found that the ta payer e ercsed the same possesson and contro
over the and after the gft and the settng up of the guardanshp as
he had pror thereto.
contrary resut was reached n . . Skemp v. Commssoner,
(1948) 108 ed. (2d) 598, reversng T. C. 415. and een C. rocn, et
a. v. Commssoner, (1950) 180 ed. (2d) 926, reversng 12 T. C.
1095. cert. den. 340 U. S. 814. owever, see . ed Whte v. frtz-
patrtck (1951) 193 ed. (2d) 398, cert. den. 343 U. S. 928, n whch
the Skemp and rown cases were dstngushed. It s beeved that
the Skemp and rown opnons n the Court of ppeas confct n
prncpe wth the easeback decsons n everng v. Lazarus and Co.
308 U. S. 252, Ct. D. 1430, C. . 1939-2, 208 (sae and easeback n
reaty a oan and securty for the oan) W. . rmston Co., Inc., et
a. v. Commssoner, (1951) 188 ed. (2d) 531 Stearns Magnetc
Manufacturng Co. v. Commsson, T. C. Memo. Op. Docket No.
23509, dated May 29, 1952 Inge Coa Corporaton, upra and 58fh
Street Paza Theater, Inc. v. Commssoner (1952) 195 ed. (2d) 724
(subease to wfe of prncpa stockhoder by famy corporaton).
In appyng the foregong prncpes to the nstant case t s evdent
that the transacton w be carred out under a prearranged pan.
The ndependence of the trustee n reaty dsappears under crcum-
stances where the transacton s prearranged. The grantor of the
proposed trust w merey transfer the property to the trust wth
contro reserved, thereby retanng the use and en|oyment of the
property. The busness of the grantor and the property n whch t
s conducted w reman undsturbed there has been no partng wth
a rea nterest n the property nvoved whch s requste to the pas-
sage of a gft. In substance the grantor remans the owner of the
property.
ccordngy, t s hed that the transfer of rea property to a trust
for a 10-year perod for the beneft of grantor s chdren wth hs wfe
as one of two trustees, wth the corpus to go to the grantor s wfe n
the event of hs death pror to the e praton of a 10-year perod,
and wth a prvege of easng back such property from the trustees
consttutes a transfer n form rather than substance. Renta pay-
ments made to the trust by the grantor w not consttute deductbe
busness e penses. The grantor w reman the owner of the prop-
erty durng the term of the trust for purposes of edera ncome
and gft ta es, and the renta payments when made w consttute
ffts.
Reguatons 118, Secton 39.22(a)-21: Trust ev. Ru. 54-41
ncome ta abe to the grantor as substanta
owner thereof.
The ncome of a trust created under an nstrument whch (1)
vests n the grantor-trustee the power to dstrbute from trust n-
come or corpus such amounts at such tme as he n hs soe dscre-
ton sha determne to be necessary for certan needs of the bene-
fcary and (2) provdes that upon death of the benecary the re-
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23 Regs. 118, 39.22 (a) -21.
mander sha be pad over to a desgnated educatona organzaton
consttutes ta abe ncome to the grantor under secton 22(a) of
the Interna Revenue Code.
dvce s requested whether the ncome of a trust created under
an nstrument the provsons of whch are set forth beow consttute
ta abe ncome to the grantor.
In the case presented, the ta payer created a trust namng hmsef
as trustee of certan persona property whch he then owned. The
trust nstrument provdes that the prncpa and ncome of the trust
sha be pad to the ta payers mother durng her fetme n such
amounts and at such tme as the trustee, n hs soe dscreton, sha
determne necessary for her care, comfort, support, mantenance,
beneft, and best nterests. The trust s to termnate upon the mother s
death and the baance of the prncpa and ncome remanng n the
hands of the trustee s to be pad over to a desgnated educatona
organzaton to be added to certan schoarshp funds. The grantor-
trustee has unmted power to nvest and renvest the prncpa and
ncome of the trust n such nvestments as he may choose n the e er-
cse of hs |udgment and dscreton. e has fu power and authorty
to change nvestments, and to se, grant, convey, pedge, or mortgage
any property, rea or persona, of whch the trust fund may at any
tme, n whoe or n pa, consst. The genera admnstratve powers
vested n the trustee are to be e ercsed prmary for the beneft of
the benefcary of the trust. urthermore, the trust nstrument does
sot vest n any person the power to borrow or to acqure the trust
corpus or ncome for ess than adequate consderaton.
Secton 39.22(a)-2I of Reguatons 118 provdes n pertnent part
that the ncome of a trust s ta abe to the grantor under secton 22(a)
of the Interna Revenue Code, athough not payabe to the grantor
hmsef and not to be apped n satsfacton of hs ega obgatons,
f he has retaned a contro of the trust so compete that he s st n
practca effect the owner of ts ncome. Such secton further pro-
vdes that a grantor has retaned contro so compete as to render the
ncome of a trust ta abe to hm, whatever the duraton of the trust,
f the benefca en|oyment of the corpus or the ncome therefrom s
sub|ect to a power ot dsposton, e ercsabe n any capacty (e cept
a power e ercsabe n one of certan ways set forth n the reguatons,
none of whch are present here), by the grantor or any person not
havng a substanta adverse nterest n the benefca en|oyment of
the corpus or ncome, whchever s sub|ect to the power, or both.
Under the trust nstrument, the grantor-trustee has the power to
dstrbute to hs mother durng her fetme from trust ncome or
corpus such amounts at such tme as he sha, n hs soe dscreton,
determne to be necessary for her care, comfort, support, mantenance,
beneft, and best nterests. y vrtue of such power, he aso deter-
mnes the amount of ncome and corpus pad over to the desgnated
educatona organzaton upon termnaton of the trust. ccordngy,
benefca en|oyment of the corpus and the ncome therefrom s sub|ect
to the power of dsposton by the grantor wthn the purvew of
secton 39.22(a)-21 of Reguatons 118.
In vew of the foregong, t s hed that the ncome of the trust s
ta abe to the grantor under secton 22(a) of the Interna Revenue
Code.
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Regs. 118, 39.22(a)-23. 24
Reguatons 118, Secton 39.22(a)-21: Trust Rev. Ru. 54-48
ncome ta abe to the grantor as substanta
owner thereof.
( so Reguatons 111, Secton 29.22(a)-21.)
In Commssoner v. Ruth S. Cark et a., 202 ed. (2d) 94, the
Court hed, on the facts presented, that the ncome of the trust there
nvoved was not ta abe to the grantor under the 10-year short-term
trust rue set forth n secton 29.22(a)-21 (c) of Reguatons 111 (now
sec. 39.22 (a)-21(c) of Reguatons 118) the facts beng that (1) the
trust was created pror to promugaton of that secton of the regua-
tons, (2) the trust was e tended pror to promugaton of such
reguatons so that ts tota term was 10 years, and (3) the benefcary
of the trust was a chartabe corporaton. The Interna Revenue
Servce w foow that decson n the dsposton of other cases ony
f the ssue and the facts n such cases are dentca to those n the Cark
case. Secton 29.22(a)-21 of Reguatons 111 was promugated De-
cember 29,1945. See T. D. 5488, C. . 1946-1,19.
Reguatons 118, Secton 39.22(a)-23: oca- Rev. Ru. 54-10
tons by cooperatve assocatons ta treat-
ment as to patrons.
ocatons of cooperatve assocatons and ta treatment as to
patrons of amounts dstrbuted n document form.
Secton 1. PuRros .
The purpose of ths Revenue Rung s to set forth the pocy of the
Servce and to furnsh nstructons to the dstrct drectors and other
empoyees concerned, wth respect to the ta treatment n the hands of
patrons, of amounts aocated n document form by cooperatve asso-
catons.
Sec. 2. Meanng of Terms.
or the purpose of ths Revenue Rung the terms cooperatve asso-
caton, patron, aocaton, and patronage dvdend have the
meanng ascrbed to them n secton 39 101(12)-2(b) of Reguatons
118. s so defned the term aocaton ncudes patronage dvdends
and other dstrbutons made by a cooperatve assocaton n any man-
ner whereby there s dscosed to the patron the doar amount appor-
toned on the books of the assocaton for the account of such patron.
The term patronage dvdend as defned does not ncude amounts
aocated on a patronage bass n document form whch are f ed wth-
out reference to earnngs of the assocaton. owever, the rues set
forth n secton 6 heren, as to the ta treatment of amounts aocated
n document form, appy not ony to patronage dvdends but to a
aocatons made by a cooperatve assocaton n document form.
Sec. 3. ackground.
.01 Treasury Decson 6014, approved May 29, 1953, C. . 1953-1,
110, added secton 29.22(a)-23 to Reguatons 111 (now 39.22(a)-23
of Reguatons 118), prescrbng rues for the ta treatment as to
patrons of aocatons by cooperatve assocatons. Secton 39.22(a)-
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25 Regs. 118, 39.22(a)-23.
23(b)(1) of Reguatons 118 sets forth the e tent of ta abty of
amounts aocated to a patron on a patronage bass by a cooperatve
assocaton wth respect to products marketed for such patron, or wth
respect to suppes, equpment, or servces the cost of whch s deduct-
be by the patron under secton 23 of the Code. These reguatons
provde n part to the effect that f the aocaton s n the form of
capta stock, revovng fund certfcates, certfcates of ndebtedness,
etters of advce, retan certfcates or smar documents, the amounts
aocated sha be ncuded n the computaton of the gross ncome of
the patron to the e tent of the face amount of such documents pro-
vded the aocaton s made n fufment and satsfacton of a vad
obgaton of such assocaton to the patron, whch obgaton was n
e stence pror to the recept by the cooperatve assocaton of the
amount aocated.
.02 These provsons as to the ta treatment of aocatons n the
hands of the patron where there s a contractua obgaton nvoved
do not represent a departure from rues prevousy n ef ect, but set
forth n reguaton form a pocy of the Servce whch has been ong
estabshed.
.03 The reguatons aso set forth rues for the treatment of an ao-
caton n document form where the aocaton was not made pursuant
to a vad obgaton of the assocaton to the patron. Normay n
such case amounts so aocated are ncuded n the gross ncome of the
patron to the e tent of cash or merchandse receved n redempton or
satsfacton of the document for the year n whch the cash or mer-
chandse s receved. n e cepton s where the document s a nego-
tabe nstrument, n whch case the amount to be ncuded n the gross
ncome of the patron n the year of recept s the far market vaue of
the document.
.04 The foregong descrbed treatment of aocatons to patrons s
consstent wth the theory under whch patronage dvdends are treated
by cooperatve assocatons. cooperatve assocaton may e cude
from ts gross ncome true patronage dvdends when made pursuant
to a pror agreement between the cooperatve organzaton and ts
patrons. The |ustfcaton for ths treatment rests upon the fact that
these patronage dvdends represent ether an addtona consdera-
ton due the patron for goods sod through the assocaton or a reduc-
ton n the purchase prce of suppes or equpment purchased by the
patron. The amounts whch may be e cuded as patronage dvdends
are not mted to the dstrbutons made n cash but ncude amounts
dstrbutabe but retaned by the cooperatve and dstrbuted n forms
other than cash. owever, where a cooperatve makes a dstrbuton
whch t s not obgated to make under a pree stng agreement, t s
not entted to e cude such dstrbuton from gross ncome even though
the dstrbuton s made on a patronage bass. Moreover, for ta abe
years begnnng after December 31,1951, n the case of e empt coopera-
tves and for a years n the case of cooperatves not e empt, any
recepts of a cooperatve assocaton whch t fas to aocate to ts
patrons must be ncuded n the ta abe ncome of the assocaton to the
same e tent as n the case of commerca corporatons generay. Ths
s true of any amounts set up n a reserve account as we as net mar-
gns remanng after provson for reserves. It s aso true of amounts
whch are consdered to be n parta payment of produce, hed back.
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Regs. 118, 39.22(a)-23.1 26
from patrons by a marketng cooperatve, even though the assocaton
consders such amounts as f ed wthout reference to earnngs.
.05 The theory under whch a cooperatve assocaton may make
an aocaton n document form s that the patron by e press contract
or by dong busness wth the cooperatve agrees to aow the assoca-
ton to retan funds to whch the patron s entted. ocatons other
than cash or merchandse usuay take the form of certfcates denotng
an nvestment n the capta of the assocaton or of certfcates of
ndebtedness by the cooperatve Where the document has been
ssued n accordance wth a pree stng agreement, the form of the
document s mmatera as to ts ta abty to the patron. It s con-
sdered that the patron has n effect receved n money the face amount
of the document and has ether renvested such amount n the capta
of the assocaton or aowed the assocaton the use of the money. In
ether event there s |ustfcaton for ncudng the face amount of
the document n the patron s gross ncome. Ths |ustfcaton e sts
by reason of the pree stng ega obgaton of the cooperatve to ds-
trbute a of ts net savngs to ts patrons each year and by the
agreement between the cooperatve and ts patrons, whch agreement
s ordnary set out n a marketng agreement or the assocaton s
charter, byaws, or both, whereby the patrons agree to accept other
than cash or merchandse for ther share of the net savngs.
.06 n mportant probem regardng the treatment of aocatons
n document form has arsen n those cases where an aocaton has
been made by a cooperatve assocaton but the patron has faed to
report the entre face amount of the document on hs return as ncome.
Of partcuar concern s the treatment of amounts receved n re-
dempton of documents ssued n pror years where the perod of
mtatons has e pred for the year of aocaton. The ssue n such
cases s the bass of the document to be used by the patron upon re-
dempton, sae, or other dsposton.
.07 There are precedents for hodng that when a ta payer has
faed to ncude n hs return property whch he receves and whch
represents ncome to hm he cannot n a subsequent reated trans-
acton shft hs poston so as to estabsh a bass for such property
n e cess of the amount carred nto ncome n the year of recept.
cose anaogy to the case of unreported noncash dstrbutons by a
cooperatve assocaton s found n decsons n whch a ta payer
receves shares of stock representng ncome n the year of recept.
n mportant case ustratng ths prncpe s Contnenta O Com-
pany v. ones, 177 ed. (2d) 508, certorar dened on the ssve of
duty of consstency 339 U. S. 931.
Sue. 4. Statement of Pocy.
In ne wth the decson n the Contnenta O Company case
and other supportng cases the Servce has adopted the foowng
pocy:
When a patron of a farmers marketng or purchasng cooperatve receves
capta stork, revovng fund certfcates, retan certfcates, certfcates of
ndebtedness, etters of ndvee, or smar documents representng an aocaton
to hm pursuant to a pree stng contractua obgaton, or n any ease n whch
the doar amount of such aocaton to hm s dscosed n any other manner,
and the patron reports the face amount of suc. aocaton, the bass upon
redempton, sae or other dsposton of the evdence of such aocaton s the
face amount. In any such case n whch the cash or merchandse receved by the
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27 Regs. 118, 39.22(a)-23.
patron s ess than the face amount, the patron may estabsh a oss under ap-
pcabe provsons of the Interna Revenue Code. On the other hnnd when a
patron receves smar evdence of an aocaton to hm and reports ess than
the face amount of the certfcate or other document, hs bass w be mted to
the amount reported n ncome n the year of recept thereof. Upon redempton,
sae or other dsposton of the evdence of the aocaton the e cess amount over
the amount reported w represent gross ncome to the patron n the year of
such redempton, sae or other dsposton.
Sec. 5. cepton to Genera Rue.
though the genera rue |ust stated w appy n the great
ma|orty of cases where the patron has faed to report the entre
face amount of an aocaton n document form, there are stuatons
n whch an e cepton shoud be made. These are cases n whch
the perod of mtatons for the year of aocaton has e pred and
before such e praton the Interna Revenue Servce was on notce
that the patron had ncuded n hs ncome an amount ess than the
face amount of hs certfcate or other evdence of aocaton. s an
e ampe ths notce mght consst of nformaton gven n the patron s
return from whch the Servce coud h .ve known that the patron
receved patronage dvdends n document form and faed to ncude
them n hs gross ncome. In any such e ceptona case the Servce
w not nsst that there be ncuded n ncome the amount by whch
the payment receved n the year of redempton e ceeds the amount
reported n the year of aocaton. owever, n ths type of case f
the amount receved upon redempton e ceeds the face amount of
the document, the e cess woud be ncuded n ncome.
Sec. 6. Codbse or cton.
.01 s a summary of the foregong the foowng rues shoud be
used n determnng the e tent to whch amounts aocated n docu-
ment form by a cooperatve assocaton shoud be ncuded n the
computaton of the patron s gross ncome.
1. Where an aocaton was made pursuant to a pree stng
agreement:
a. If the perod of mtatons has not e pred for the
patron s ta abe year n whch the aocaton was made, the
amount of the aocaton shoud be ncuded n the patron s
gross ncome to the e tent of the face amount of the
documents.
b. If the perod of mtatons has e pred for the patron s
ta abe year n whch the aocaton was made, the dffer-
ence, f any, between the amount reported n the year of
aocaton and the amount receved upon redempton, sae,
or other dsposton of the documents shoud be ncuded n
the patron s ncome for the ta abe year n whch the re-
dempton, sae, or other dsposton took pace.
2. Where an aocaton was made whch was not n pursuance
to a pree stng agreement and the document ssued was not a
negotabe nstrument the amount receved upon redempton,
sae, or other dsposton of the document shoud be ncuded n
gross ncome for the patron s ta abe year n whch receved.
3. Where an aocaton was made whch was not n pursuance
to a pree stng agreement and the document ssued was a nego-
tabe nstrument:
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Regs. 118, 39.22(b)(4)-. 28
a. If the perod of mtatons has not e pred for the
ta abe year of the patron n whch the aocaton was made,
the far market vaue of the nstrument shoud be ncuded
n the patron s gross ncome.
b. If the perod of mtatons has e pred the dfference be-
tween the amount reported n the year of aocaton and the
amount receved upon surrender, sae, or other dsposton of
the nstrument shoud be ncuded n the patron s gross
ncome.
.02 n e cepton to the rue stated n .b. above w be recognzed
n any case n whch the Interna Revenue Servce had knowedge,
pror to the e praton of the perod of mtatons, of the fact that the
patron has ncuded n hs ncome n the year of aocaton an amount
ess than the face amount of hs certfcate or other evdence of aoca-
ton. owever, n any such case the Interna Revenue Servce w be
charged ony wth knowedge of the facts refected n the ta payer s
return or dscovered upon an nvestgaton thereof.
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM
Reguatons 118, Secton 39.22(b) (2)-2: n-
nutes.
Ta status of annutes provded by an eecton by a member of the
unformed servces under the Unformed Servces Contngency Opton
ct of 1953. (See Rev. Ru. 54-144, p. 15.)
Reguatons 118, Secton 39.22(b) (3)-: Gfts Rev. Ru. 54-110
and bequests.
Putzer prze award for dstngushed edtora wrtng pub-
shed n a Unted States newspaper s an award made n recognton
of past achevement or present abtes. In these respects the Pu-
tzer awards for |ournasm are dstngushabe from the Rechhod
award made for musca compostons whch the Supreme Court of
the Unted States hed to be ta abe n the case of Robertson v. Unted
States, 343 U. S. 711, Ct. D. 1746, C. . 1952-2, 66. There s no ds-
charge of a contractua obgaton as n the payment of a prze to a
wnner n a contest there s no acceptance of a contract as between
sponsor and contestant| and there s no payment for servces ren-
dered. n award made n accordance wth the estabshed pan for the
award of Putzer przes consttutes a gft wthn the meanng of
secton 22(b) (3) of the Interna Revenue Code and s not requred to
be ncuded n gross ncome.
Reguatons 118, Secton 39.22(b) (4)-1: Inter- Rev. Ru. 54 106
est upon State obgatons.
onds duy ssued by or n behaf of a muncpaty for the purpose
of fnancng the acquston or constructon of muncpay owned
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29 Regs. 118, 39.22(b)(5)
ndustra pants for ease to prvate enterprses consttute obgatons
of a potca subdvson wthn the meanng of secton 22(b) (4) of
the Interna evenue Code. Interest pad on such bonds s e empt
from edera ncome ta under the provsons of secton 22(b) (4) of
the Code notwthstandng the purpose for whch they were ssued or
the fact that the promse to pay s mted to the revenue to be derved
from easng the property to be acqured or erected wth the proceeds
of the bonds. It s not necessary for purposes of secton 22(b) (4)
that the obgaton be a genera one, pedgng the genera credt of the
muncpaty or the use of ts ta ng power.
Reguatons 118, Secton 39.22(b) (5): Statu- Rev. Ru. 54-1
tory provsons e cusons from gross n-
come compensaton for n|ures or sckness.
sef-Insured pan estabshed by an empoyer In compance
wth the New York State Dsabty enefts Law provdng for
the payment of nonoccupatona dsabty benefts to empoyees,
under whch (1) the benefts pad are cosey correated to reguar
wages, (2) empoyees contrbute ony a part of the cost of the
benefts, and (3) there Is no separate entty Into whch the em-
poyer pays specfed sums n advance and from whch empoyees
receve benefts, s not n tsef a pan of nsurance wthn the
purvew of secton 22(b)(5) of the Interna Revenue Code.
dvce s requested whether nonoccupatona dsabty benefts
receved by empoyees under a sef-nsured pan, estabshed by an
empoyer n compance wth the New York State Dsabty enefts
Law under whch (1) the benefts pad are cosey correated to regu-
ar wages, (2) empoyees contrbute ony a part of the cost of the
benefts, and (3) there s no separate entty nto whch the empoyer
pays specfed sums n advance and from whch empoyees receve
benefts, are e cudabe from the gross ncome of the recpents as
aecdent or heath nsurance under secton 22(b) (5) of the Interna
Revenue Code.
In the case under consderaton reguar saared and houry em-
poyees who are necessary absent from work because of ness or
accdent, other than absences covered by workmen s compensaton
aws, receve cash benefts whch equa reguar wages or one-haf of
reguar wages for a stated ma mum perod. The empoyer deducts
from ts empoyees reguar payro the amounts authorzed under the
State aw as empoyee contrbutons. These amounts are credted on
the empoyer s books to the mpoyees Trust und for New York
State Dsabty Law, and ths account s charged wth the amounts
pad as dsabty benefts to empoyees. The cost of the benefts n
e cess of empoyee contrbutons s pad by the empoyer.
Secton 22(b) (5) of the Code provdes n part as foows:
(b) cusons rom Guoss Income. The foowng tems sha not be n-
cuded n gross Income and sha be e empt from ta aton under ths chapter
chapter 1 of the Code :
(5) Compensaton for n|ures or scknkss. cept n the case
of amounts attrbutabe to (and not n e cess of) deductons aowed
under secton 23( ) In any pror ta abe year, amounts receved,
315359 54 3
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Regs. 118, 39.22(b) (5). 30
through accdent or heath Insurance as compensaton fur
persona n|ures or sckness
n e amnaton of the facts n the nstant case does not revea the
e stence of nsurance wthn the meanng of secton 22(b)(5),
supra. See G. C. M. 23511, C. . 1943, 86. The fact that a pan
compes wth State aw does not by tsef make the pan one of n-
surance. See I. T. 4107, C. . 1952-2, 73. The contrbuton of ony a
part of the cost of the benefts by the empoyees does not n tsef con-
vert a pan nto nsurance. In Revenue Rung 208, C. . 1953-2,102,
the empoyee contrbutons covered the entre cost of the benefts
pad. urther, the benefts pad under the nstant pan are cosey
correated to the reguar wages of the covered empoyees and not to
the degree of dsabty. There s no arrangement apart from norma
payro procedure, such as a fund, trust, or assocaton, under whch
the empoyer, as we as the empoyees, contrbutes specfed sums n
advance and from whch dsabty benefts w at some future tme
be pad. though the books of the empoyer refect a credt to a
trust fund account, as a matter of fact, the empoyer has not estab-
shed an ndependent entty for the admnstraton of ths program.
There s nothng to dstngush the benefts receved under the n-
stant pan from the contnuaton of reguar compensaton n whoe or
n part durng a perod of dsabty. See Rev. Ru. 209, C. . 1953-2,
104. In vew of the foregong, t s hed that the pan of the nstant
empoyer s net a pan of nsurance wthn the purvew of secton
22(b) (5) of the Interna Revenue Code.
or the e tent to whch benefts receved under such pan are sub-
|ect to edera ncome ta and to wthhodng, see Rev. Ru. 54-2,
page 30, ths uetn.
Reguatons 118, Secton 39.22(b) (5): Statu- Rev. Ru. 54-2
tory provsons e cusons from gross n-
come compensaton for n|ures or sckness.
Nonoccupatona dsabty payments equa to a recpent em-
poyee s contrbutons to a sef-nsured pan are e cudabe from the
empoyee s gross ncome, but the e cess s ncudbe n hs gross
ncome and sub|ect to wthhodng of ncome ta at the source on
wages. The Interna Revenue Servce nvtes vews, comments, and
suggestons regardng method for determnng the e tent of the
recpent empoyees contrbutons to such pans whch are not
sub|ect to ta .
Revenue Rung 54-1, page 29 of ths uetn, hods the pan there
nvoved s not a pan of nsurance wthn the purvew of secton
22(b)(5) of the Interna Revenue Code. Therefore, payments re-
ceved thereunder are not to be e cuded from the gross ncome of the
recpent empoyee uness they represent a return of hs contrbutons
to the pan. The purpose of ths Revenue Rung s to prescrbe the
e tent to whch payments from such a pan (1) consttute gross n-
come to the empoyees and (2) are sub|ect to wthhodng of ncome
ta at the source on wages.
Wth respect to the ta abty of the benefts receved under such
a pan, t s hed that benefts equa to a of the recpent empoyee s
contrbutons to the pan are e cudabe from gross ncome a9 a
recovery of capta. To the e tent that any benefts receved e ceed
a of the empoyee recpent s contrbutons to the cost of the benefts,
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31 Regs. 118, 39.22 (b)(5).
they are ncudbe n the gross ncome of the recpent and are sub|ect
to wthhodng of ncome ta at the source on wages under secton
1G22 of the Code on and after anuary 1,1053, as prescrbed n I. T.
4107 or on and after such date an empoyer has been specfcay not-
fed by the Revenue Servce to begn wthhodng, or on and after
November 1, 1953 as prescrbed n Revenue Rung 209, C. . 1953-2,
104, whchever s appcabe. The empoyer sha wthhod as
foows:
1. If records of the contrbutons of ndvdua empoyees are mantaned by
an empoyer, he sha use the records to determne what part of each dsabty
payment Is a return of an empoyee s contrbutons and s not sub|ect to wth-
hodng under secton 1622 of the Code. The amount of a contrbutons, when-
ever made, by an empoyee to the dsabty pan of hs present empoyer sha
be recovered free from ta aton before there s any wthhodng on any ds-
abty payments.
2. In the event that records of Indvdua empoyee contrbutons are not man-
taned by an empoyer, the empoyer may consder the tota contrbutons of an
empoyee to be the product of the amount authorzed by the New York Sate
Dsabty enefts Law, . e., one-haf of 1 percent of wat es not to e ceed, how-
ever, 30 cents per week, 60 cents per 2-week perod, and 65 cents per semmonthy
payro perod, tmes the number of such payro perods durng whch the pan
has been n effect up to the date of dsabty.
The above concusons are not mted to pans covered by the New
York State Dsabty enefts Law but are appcabe as a matter of
prncpe to pans under the aws of other States havng comparabe
provsons.
Notce s hereby gven that the Interna Revenue Servce s gvng
further study to the method by whch the amount of the empoyee s
contrbuton may be determned for the purpose of e cudng such
amounts from wthhodng. The provsons of paragraph numbered
2 above represent a method whch the Revenue Servce w currenty
recognze but whch s not ntended as a substtute for the keepng of
accurate records by empoyers for the future. efore reachng any
concuson as to the requrements to be prescrbed, however, the
Revenue Servce w gve consderaton to any vews, comments, or
suggestons receved by t as to the method for determnng the
empoyee s contrbuton not sub|ect to ta . Such consderaton s e -
pected to ncude the e tent to whch prevousy computed tota con-
trbutons of an empoyee shoud be reduced by nonta abe dsabty
benefts pad to hm. so to be consdered s the e tent to whch em-
poyees contrbutons shoud be determned on the bass of the actua
weeky or other payments made by the empoyee or the perod of tme
he was actuay on the payro of the empoyer, rather than the ma -
mum amount authorzed durng the perod whch the pan was n
effect. vews, comments, or suggestons shoud be submtted be-
fore March 1, 1954, and addressed to the Commssoner of Interna
Revenue, Washngton 25, D. C. ( ttenton: T:R:I).
Pendng a further ssuance of a rung on ths matter, the provsons
of ths Revenue Rung sha be taken to refect the poston of the In-
terna Revenue Servce but begnnng anuary 1, 1954, the empoyer
sha keep records of dsabty benefts pad to ndvdua empoyees
and sha, for purposes of wthhodng, reduce the prevousy com-
puted tota contrbutons of an empoyee by the dsabty benefts pad
to hm on or after anuary 1, 1954, whch were not ta abe because
they consttuted a return of the empoyee s contrbutons.
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Regs. 118, 39.22(d)-. 32
S CTION 22(d). GROSS INCOM : IN NTORI S-
L CTI M T OD
Reguatons 118, Secton 39.22 (d)-: Last-n Rev. RuL 54 49
frst-out nventores.
specaty store, as defned In Rev. Ru. 23, C. . 1953-1, 34,
usng the cost Inventory method may empoy, under the eectve
nventory method prescrbed by secton 22(d) of the Interna Rev-
enue Code, cost prce nde es whch are derved from the depart-
ment store nventory (reta) prce nde es, pubshed by the ureau
of Labor Statstcs, by the use of approprate ratos based on cost
percentages for the respectve departments.
dvce s requested whether a specaty store that keeps ts nven-
tory records on the bass of cost, and desres to adopt the eectve n-
ventory method prescrbed by secton 22(d) of the Interna Revenue
Code, may empoy cost prce nde es derved from the department
store nventory (reta) prce nde es pubshed by the Unted States
ureau of Labor Statstcs, f t meets the requrements of Rev. Ru.
23, C. . 1953-1, 34, wth the e cepton of empoyng the reta n-
ventory method.
Rev. Ru. 23 suvra, hods that a reta estabshment known n the
trade as a specaty store may, wthout further proof, quafy as a
department store for use of the department store nventory prce
nde es pubshed by the ureau of Labor Statstcs, under the eec-
tve nventory method prescrbed by secton 22(d) of the Interna
Revenue Code, f t empoys the reta nventory method and carres
a varety and a reasonaby fu ne of merchandse coverng a reason-
abe fed of the groups ncuded n such nde es.
The group nde es pubshed by the ureau of Labor Statstcs
under the tte Department Store Inventory Prce Inde es measure
changes n the reta prces of the casses of goods descrbed there-
under. They do not purport to measure changes n whoesae or cost
prces to a reta department or specaty store. They are not d-
recty appcabe, therefore, for use by a specaty store usng the
cost nventory method for determnng the ad|ustment for prce
changes subsequent to the cose of the precedng ta abe year under
Treasury Decson 5605, C. . 1948-1, 16. owever, under certan
crcumstances approprate cost prce nde es for a specaty store
usng the cost nventory method may be derved from the ureau
of Labor Statstcs department store nventory (reta) prce nde es
by reference to the changes n the cost compements of the gross proft
margns of the ndvdua specaty store for approprate casses of
goods.
The dfference between the movements of whoesae (or cost) and
reta prces for any gven year must be refected n a cbange n the
markon percentage, snce cost and reta prces woud necessary
change by the same reatve amount f the markon were unform. The
change n the net markon percentage, or ts compement, the cost per-
centage, may therefore be used to derve a cost nde from a reta
prce nde for a gven department. The cost nde between two
dates s equa to the reta prce nde between these two dates mut-
ped by the fracton representng the rato between the cost percent-
ages at the frst and second dates, respectvey, as ustrated beow:
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33
Regs. 118, 39.22(d)- .
Department
Dee.31.190
Dec. 31. 195
Dec. 31, t52
1. Reta prce Inde (approprate group Inde )._
2. Net markon percentage (see Note )
3. Cost percentage (compement of ne 2)
4. Rato of cost percentages (current year over base year)
5. Cost prce Inde (ne 1 tmes ne 4)
100.0
40.2
50. S
66.8/59. 8
100.0
150.0
42.7
57.3
57. 3/59.8
143.7
100. 0
38.5
61.6
61.5/50.8
1 . 5
Notk . To be determned by the ta payer for each department on the bass of ts own average for the
ta abe year.
specaty store on the cost nventory method does not ordnary
compute the net markon percentages for ts respectve departments,
for ths s a too of the reta nventory method. It does, however,
compute ts gross proft percentages for ts respectve departments,
essentay the same quantty. The ony matera dfference between
the two s that the former s computed on the year s purchases, and
the atter on the year s saes, and ths dfference w average out over
a few years. It s, therefore, approprate to derve a cost nde by
reference to the rato between cost percentages derved by takng the
compements of the gross proft ratos for a department.
smpfed method of computng s avaabe, partcuary for use
when the base date for the reta prce nde s pror to the year of
adopton of the eectve nventory method by the ta payer. Ths
may be ustrated as foows:
Department
an. 1,1850 an. 1,1951
an. 1,1952
1. Reta prce nde ( an. 1,1941-100) ( . L. S. Oroup I)....
2. Oross proft percentage (see Note )
3. Cost percentaco (compement of ne 2). _. __
4. d|usted prce nde (ne 1 mutped by ne 3)
5. Cost prce Inde ( an. 1, WO-IOO) (ne 4 dvded by
112.4844 and mutped by 100). ._
101.3
41. 2
58. 8
112.4844
100.0
216.4
40.7
59. 3
128. 3252
114.1
211.7
41.5
68.6
123.S445
110.1
Note . To be determned by the ta payer for each department on the bass of ts own average for
the ta abe year.
The use of derved cost prce nde es, as descrbed above, by spe-
caty stores on the cost nventory method w be sub|ect to a the
condtons of Mmeograph 6244, C. . 1948-1, 21, and ev. Ru. 23,
C. . 1953-1, 34, e cept the condton that the ta payer empoy the
reta nventory method.
Reguatons 118, Seotov 39.22(d)-: Last-n
frst-out nventores.
Rev. Ru. 54-G3
Prce Inde es and data pubshed by the ureau of Labor Sta-
tstcs under date of December 9, 1953, for use by varety stores em-
poyng the reta and eectve nventory methods and the condtons
under whch the use of such nde es w be acceptabe n the ug
of edera ncome ta returns.
The purpose of ths Revenue Rung s to descrbe the set of speca
reta prce nde es whch have been prepared by the Unted States
ureau of Labor Statstcs (sometmes herenafter referred to as
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Regs. 118, 39.22(d)-. 34
LS) representng prce changes n the nventores carred by varety
stores, and the condtons under whch the use of these nde es w be
acceptabe n the fng of ncome ta returns of ta payers empoyng
the eectve nventory method of secton 22 (d) of the Interna Revenue
Code.
or the purpose of ths Revenue Rung the term varety stores,
foowng the practce of the Unted States ureau of the Census, s
defned as meanng reta estabshments prmary engaged n se-
ng a varety of merchandse n the ow and popuar prce ranges, such
as statonery, gft tems, women s accessores, toet artces, ght hard-
ware, toys, housewares, confectonery, etc. These stores frequenty
are known as 5 and 10 cent stores and 5 cents to a doar stores,
athough merchandse s usuay sod outsde these prce ranges.
Saes usuay are made on a cash-and-carry bass, wth the open se-
ng method of dspay and customer seecton of merchandse. (U. S.
Census of usness 1948, Trade Seres, arety Stores ureau of
the Census, uetn No. 3 3, p. 4.)
s descrbed n Mmeograph 0244, C. . 1948-1, 21, the Interna
Revenue Servce has accepted, for use by ndvdua department store
ta payers on a countrywde bass, the department store nventory
prce nde es, prepared and pubshed semannuay by the Unted
States ureau of Labor Statstcs for ths purpose, n connecton wth
the fng of ncome ta returns empoyng the eectve nventory
method.
rrangements have now been made by representatves of the mted
prce varety stores to have the ureau of Labor Statstcs prepare and
pubsh semannuay a smar set of nde numbers representng re-
ta prce changes of groups of departmenta nventores of varety
stores, e cusve of food, candy, and tobacco departments. Sub|ect
to proper appcaton under the eectve nventory method, as descrbed
beow, these LS varety store nventory prce nde es w be accepted
by the Interna Revenue Servce on a countrywde bass for use by n-
dvdua varety stores empo| ng the reta nventory method, as rep-
resentng prce changes for the respectve departments covered by
such group nde es.
The use of such nde es pubshed by the ureau of Labor Statstcs
s not mandatory nde es may be prepared by an ndvdua ta payer
based upon hs own data on prces and nventory quanttes, f ade-
quate, and f proof s submtted that sound statstca methods have
been empoyed that assure reabe nde es, not ony for the partcuar
year n queston, but for subsequent years. There may be no seectve
use of such nde es, however, combnng the use of certan of the LS
nde es wth respect to gven departments and the use of other n-
dvdua nde es wth respect to other departments, e cept n the case
of food, candy, and tobacco departments. Nether w aternate use
of LS nde es and ndvdua nde es n successve ta abe years be
permtted.
oth for purposes of the appcaton of the eectve nventory
method tsef, and for the use of the pubshed nde es, t s essenta
that ony reasonaby homogeneous or smar goods be ncuded n each
doar vaue poo or department. It s aso essenta to empoyment
of the pubshed T.S nde es that goods be ncuded n each depart-
ment or LI O poo that have been ncuded by the LS n the con-
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35 (Regs. 118, 39.22(d)-.
structon of the nde es. The cassfcatons shown n tabe II have
been proposed by representatves of the trade, to represent a reasonabe
mnmum standard departmentazaton of smar goods. If a ta -
payer has consstenty mantaned merchandsng records, for pur-
poses of the reta nventory method, of more detaed subdvsons
than the 27 departments sted, these shoud be retaned as the bass of
LI O poos. On the other hand, however, no broader LI O poos w
be accepted than the 27 ndvdua departments sted. ta payer
w not be permtted, for e ampe, to set up a LI O poo consstng
of departments 1 and 2 together, pece goods and domestcs. Mer-
chandse records w be requred whch w aow the dentfcaton of
nventory vaues, purchases, net markon, etc. for pece goods and
domestcs separatey. In appyng the LS nde es under the eectve
nventory method, a varety store ta payer w empoy each group
nde wth respect to each of the ndvdua departments named
thereunder.
s s the case wth other ta payers, a varety store must specfy (n
ts appcaton to use the eectve nventory method) whch goods sha
be ncuded under the method, and may omt the goods n certan de-
partments. If a ta payer wshes, however, to use the LS varety
store nventory prce nde es, ths eecton must be made wth respect
to a departments under a snge group nde . Snce each group nde
has been desgned to be representatve of the prce movements of a the
departments ncuded thereunder, a group nde w not be consdered
to be representatve of ony a porton of the departments to the e cu-
son of others. or e ampe, f a ta payer wshes to specfy pece
goods (department 1 n group I) as ncuded under the eectve method,
domestcs and aces and rbbons (departments 2 and 3 n group 1)
must aso be specfed f carred by the ta payer. t the same tme,
however, the fve departments under group nde II may be omtted
from such specfcaton.
Smary, a ta payer may specfy n connecton wth ts eecton to
ncude ony store stocks (countertop, undercounter, and stockroom
nventores) and e cude warehouse stocks. In order to nvoke the
provsons of secton 22(d) (6) of the Interna Revenue Code, how-
ever, reatng to the nvountary qudaton and repacement of nven-
tory, stocks of smar goods n a ocatons, ncudng warehouse
stocks, must be consdered together.
s provded n Treasury Decson 5605, C. . 1948-1, 16, snce the
eectve nventory method requres the use of cost, the reta seng
prces must be ad|usted, through the annua departmenta markon
percentages, for markdowns as we as markups. In other words, net
markons rather than gross markons must be empoyed n dervng
the cost of a departmenta nventory from ts reta vaue. The method
of appyng reta prce nde es to three hypothetca departments
under the reta nventory method and the eectve nventory method
s ustrated n e hbts through D of Mmeograph 6244, supra.
The LS varety store nventory prce nde es w represent prce
changes semannuay, as of une 15 and December 15. Such nde es
w be consdered as representatve of ether the begnnng or end of
such months. The nde es are e pected to be pubshed by the LS
about the frst of September and March. restart vo v, and w be
reproduced subsequenty n the Interna Revenue uetn. The
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egs. 118, 39.22(d)- .
36
nde es for une 1053 on a base of December 1952 as 100, are repro-
duced beow.
Tabe I. ureau of Labor Statstc/, varety store nventory prce nde es by
department groups
I December 1952 1001
Inde group
une 1953
Percent
from Dec 19
to une 1953
I. Dry Roods (depts. 1-3)
II. ppare (deps. 4-8)
III. ewery Wept. 9)
I . Toet Roods (dept. 10)
. ardware (depts. 11-13)
I. ouse decoratons and furnture (dept. 14)..
II. Chna, R assware, and pasteware (dept. 15)
III. Statonery (depts. 15-19)
I . Notons Mops. 20-23)...
. Toys (deps. 24-25)
I. Msceaneous (depts. 26-27)
Store tota
100.3
100.5
101.0
100.7
100.8
100.2
101.3
99.9
ML S
MLS
t I
0,5
1-0
0.7
0.S
0.2
1.
-I, 1
-
-
-. I
41
Note. Department numbers refer to departments as sted n tabe IL
T L II
arety store nde groups and departmenta cassfcaton
Inde group)
I. Dry goods
II. ppare
Departments and tubdepartmentt
1. Pece goods
. .Dress yardage
. Drapery and uphostery yardage
C. Sheetng, toweng, pastcs, ocoth
2. Domestcs
. Tabe nens
. Towes
C. ath accessores
D. eddng
. Coset accessores
. Curtans and drapes
O. Drapery hardware
. Cushon, paddngs, rugs, mats, etc.
3. Laces and rbbons
4. Men s and boys wear
. Outerwear
. Underwear
C. ccessores
5. Lades and grs wear
. Outerwear
. Underwear
C. ccessores
6. osery
. Men s and boys socks
. Lades and grs hose
C. Infants and chdren s ankets
7. Infants wear
. Outerwear
. Underwear
C. eddng, bath goods, bottes, rattes,
teethng rngs, etc.
8. Shoes, shoe repars and accessores
. Men s and boys shoes and sppers
. Lades and grs shoes and sppers
C. Infants footwear
D. Shoe repars
. Shoe brushes, poshes, bags, eto.
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37 Regs. 118, 39.22(d)-.
T L II Contnued
arety store nde groups and departmenta cassfcaton Contnued
-nda groupt Drpartmtn and ubdcpartmcntt
IIT. ewery 9. ewery
I . Toet goods 10. Toet goods
. ath goods
. Cosmetcs
C. Drugs (for medcaton)
D. Dpnta goods
. ar creams, otons, etc.
. ardware 11. uders hardware and eectrca suppes
. Carpentry suppes
. Pumbng suppes
C. Pant and pantng products
D. nves, nas, trowes, keys, thermom-
eters, etc.
Cookng suppes
. ubs and fuses
G. tures and accessores
. Lamps and shades
I. ashghts, fans, rons, cocks, etc.
12. termnators, santary, and househod hard-
ware
. Sprays and sprayers
. 1 raps and swatters
C. Posons, fakes, crystas, bas, etc.
D urnture and foor posh
. urnture and foor wa
. Meta poshes
G. rooms, brushes, mops, etc.
. Scourng pads, dsnfectants, ghter
fud and fnts, etc.
I. Woodenware (brushes, boards, pns,
etc.)
. Wndow awnngs, shades, ventators,
etc.
. Rubber mats, goves, bottes, treads,
etc.
13. Tnware
. umnumware
. nameware
C. Ironware
D. reware
Cutery
I. ouse decoratons 14. Mrrors, pctures, frames, and furnture
and furnture
II. Chna, gassware, 15. Chna, gassware, and pastcware
and pastcware . Chna and crockery
. Gassware
C. Pastcware
III. Statonery 16. Greetng cards
17. Decoratons, party favors, pcnc equpment,
and wrappng paper
. Decoratons
. Party favors and payng cards
C. Pcnc equpment
D. Wrappng paper
. Seasona paper goods
18. Offce and schoo suppes
. Paper goods
. Wooden goods
C. Meta goods
D. Msceaneous (erasers, gue, nks,
stamp pads, chak, etc.)
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Regs. 118, 39.22(d)- .
3S
T L II Contnued
arety store nde groups and departmenta cassfcaton Contnued
Inde groups
III. Statonery
I . Notons
Departments and tubdepartment
19. Readng matter and musc
. Readng matter (books, magaznes,
comcs)
. Musc (phonographs, records, etc.)
20. fods, purses and uggage
. ags and purses
. Waets and bfods
C. Luggage
21. Souvenrs and novetes
. Souvenrs
. Novetes (umbreas, ppes, ncense,
etc.)
C. rtfca fowers
22. Sewng goods
. rt needework
. Dressmakng suppes
C. Mendng suppes
23. ar goods and optca goods
. ar accessores (combs, curers,
brushes)
. Optca goods
24. Toys and sportng goods
. Dos
. Sportng goods
C. Meta toys
D. Pastc toys
. other toys
. Games
25. Seasona ornaments and decoratons other
than paper
26. Pets and pet suppes
27. ortcuture
Notk. There Is avaabe on request to the T . 8 ureau of Labor Statstcs (Washngton 25 D. C )
a tabuaton showng n deta the merchandse content of each of the departments and subdepartments
shown.
. Toys
I. Msceaneous
kot|atons 118, Secton 39.22(d)-: Last-n
frst-out nventores.
ev. u. 54-145
Prce Inde es for December 1953, pubshed by the ureau of
Labor Statstcs on March 15.1954, for use by varety stores empoy-
ug the reta Inventory and eectve nventory methods.
The foowng prce nde es for December 1953, pubshed by the
ureau of Labor Statstcs on March 15, 1954, for use by varety
stores empoyng the reta nventory and eectve nventory methods,
are accepted by the Interna evenue Servce pursuant to Treasury
Decson 5605, C. . 1948-1,16, and Mmeograph 6244, C. . 1948-1,
21, for approprate appcaton to nventores for ta abe years of
I months ended on November 30,1953, and December 31,1953. Con-
dtons under whch varety stores may empoy these nde es and
a st of departments ncuded n each nde group are set forth n
evenue ung 54-63, page 33, ths uetn.
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39
Regs. 118, 39.22(d)-.
Reguatons 118, Secton 39.22(d)-: Last-n
frst-out nventores.
Rev. Ru. 54-146
Prce nde es for anuary 1954, pubshed by the ureau of Labor
Statstcs on March 5, 11)54, for use by department stores empoyng
the reta nventory and eectve nventory methods.
The foowng prce nde es for anuary 1954 pubshed by the
ureau of Labor Statstcs on March 5, 1954, for use by department
stores empoyng the reta nventory and eectve nventory methods,
are accepted by the Interna Revenue Servce pursuant to Treasury
Decson 5605, C. . 1948-1, 16, and Mmeograph G244, C. . 1948-1,
21, for approprate appcaton to nventores for ta abe years of 12
months ended on December 31, 1953, and anuary 31, 1954.
The present nde es are for 20 revsed departmenta groupngs, n-
stead of for 10 groups as formery. owever, each of the 20 revsed
groups s ted to one of the former 10 groups to mantan contnuty
on the base perod of anuary 1941 as 00. No revsons were mado
n the nde es prevousy pubshed.
Inde numbers for the soft nes, hard nes, and store tota are con-
tnued n the present nde es. s n former nde es, the store tota
ncudes a departments n the store e cept for food, candy, quor,
tobacco, wapaper, and pant. Contract departments are aso e -
cuded as prevousy.
Tabe I shows the reatonshp of each of the 20 revsed groups to the
former 10 groups. Tabe II shows the defntons of the 20 revsed
groups n terms of the Controers Congress departments. Tabe III
shows the recent and current nde es for each such department.
ureau of Labor Statstcs, varety store nventor// prce nde es, by
department groups
December 19.12-1001
Inde group
arety store nventory
prce IndeUf
Dec. 1952
Dec. 19.13
Percent
change from
Dec. 19.12 to
Dec. 19.13
I. Dry Roods
II. ppare
III. ewery
I . Toet goods
. ardware -
I. ouse decoratons and furnture .
II. Chna, gassware, and pastcware
III. Statonery
I Notons
. Toys
I. Msceaneous
Store tota
100.0
100.0
100.0
100.0
100.0
100.0
on. n
1O0.0
100.0
100.0
100.0
100.4
II . .I
100. s
101.
101.2
99.2
100.0
99.8
69.6
103.6
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0.4
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0.8
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100. 0
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Regs. 118, 39.22(d)- .
40
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41
(Regs. 119, 39.22(d)- .
Tabe II. Revsed Groupng of Controers Congress Departments
aed Department Group Controer Consst Department
No.
Name
No.
Name
I. Pece goods
II. Domestcs and draperes
III. Women s and chdren s shoes
I . Men s and boys shoes
. Infants wear
I. Women s underwear
II. Women s and grs hosery
III. Women s and grs accessores
I . Women s outerwear and grs
wear
. Men s cothng
I. Men s furnshngs
II. oys cothng and furnshng
III. ewery
I . Notons
. Toet artces and drugs
I. urnture and beddng
II. oor coverngs
III. ousewares
11. Sks, vevets, and synthetcs
12. Wooen dress goods
13. Wash goods and nngs
14. Lnens
15. Domestcs Musns, sheetngs,
etc.
18. ankets, comfortabes, and
spreads
74. Draperes, curtans, and upho-
stery
47. Women s and chdren s shoes
67. Men s and boys shoes
43. Infants wear and nfants furn-
ture
36. Corsets and brasseres
38. nt underwear
39. Sk and musn underwear and
sps
42. Neggees and robes
37. Women s and chdren s hosery
31. Neckwear and scarfs
33. andkerchefs
35. Women s and chdren s goves
46. andbags and sma eather
goods
34. Mnery
51. Women s and msses coats
and suts
62. unor mss coats, suts, and
dresses
53. Women s and msses dresses
54. ouses, skrts, and sportswear
55. Grs wear
57. prons, houscdresscs, and un-
forms
59. urs
61. Men s cothng
62. Men s furnshngs
65. Men s hats
66C. oys cothng
66 . oys furnshngs
25S. Sverware and cocks
25C. Costume |ewery
25 . ne |ewery and watches
21. Laecs, trmmngs, and rbbons
23. Notons
26. Umbreas
27. rt needework
24. Toet artces and drug sundres
71M. Mattresses, sprngs, and studo
beds
71U. Uphostered furnture
710. Other furnture
72. Orenta rugs
73. Domestc foor coverng
76. Chna and gassware
78. ousewares
79. Gft shop
81 Pctures, frames, and mrrors
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Regs. 118, 39.22(d)- .
42
Tabe II. Revsed Groupng of Controers Congress Departments Contnued
Revsed Department Group Controers Congress Department
No.
Name
No.
Name
I . Ma|or appances
. Rados and T sets
I. No separate nde computed
75. Lamps
77. Ma|or appances
84. Rados, T , phonographs, and
records
28 Pooks and statonery
91. Toys and games
92S. Sportng goods
92C. Cameras and photographcequp-
ment
93 Luggage
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43
Regs. 118, 39.22(d)-.
III. Group nde es appcabe to each department as cassfed under
od and revsed groupng
eparment
Descrpton
dpTM Od proupa
an. 1941-100
Group
an. 1953
uy 1953
Indeps Revsed
croups
an. 1941-100
Group
an. I M
11 Sks, vevets, and synthetcs..
Wooen dress Roods
U , Wash eoods and nngs
14 Unens
15 Domestcs Musns, sheetngs, etc
1 ankefs, comfortabes, and spreads
Laces, trmmngs, and rbbons I
3 oUons I
TT To et artces I
D Drag sundres.. I
Sverware and cocks I
Costume tewery I
ne e-wery and watcbes I
3 Umbreas I
r: rt needework I
S ooks.- I
S Statonery I
31 Neckwear and scorb
33 andkerchefs .
M Mnery I
U Women s and chdren s goves ....
Corsets and brasseres I
STC Chdren s hosery I
I7W Women s hosery I
3 ntt ondorwear III
Sk and musn underwear and sps I
er cee and robes. III
43 Infant wear and Infante furnture III
S an b3gs_-
f Sma eather goods
47C Chdren s shoes U
CW Woman ssboes II
IC Women sand msses coats I
SIS Women sand msses suts.. I
DC unor mss coats and suts I
D unor mss dresses I
S Women s and msses dresses I
{4 ouses, skrts, and sportswear I
Grs wear I
n prons, housedresses, and unforms I
Men scothn g . IIIIII -..IIII.-III I.I
Men s furnshngs
tS Men s hats
C oy domng
oys furnshngs
g| Men s and boys shoes n
TIM Mstresses, sprngs, and studo beds I
TtU Uphostered furnture I
O Other furnture I
T Orenta raps -- II
T Domestc foor coverng II
74 Draperes, curtans, and uphostery I
75 Lamps III
TS Chna and gassware -
TT Ma|or appances - III
r- ousewares
M Pctures, frames, and mrrors II
M Rados, T , phonographs, and records III
SI Toys and games I
C cCnensand photographc equpment I
I
2112.8
2112.8
202.8
202.8
202.8
202.8
161.7
161.7
161.7
161.7
161.7
161.7
161.7
161.7
161.7
0
( )
108 9
168.9
179.2
168. 9
173.9
173.9
173.9
173.9
173.9
173.9
173.9
168.9
168.9
211.2
211.2
179.2
179.2
179.2
179.2
179.2
179. 2
179.2
179.2
179.2
200.9
200.9
a t. 9
200.9
200.9
211.2
201 . 1
206.1
206.1
193.7
193.7
202.8
158.4
193. 7
158.4
193. 7
1 3. 7
193.7
158.4
0)
w
an. 3
203 3
203.3
203.3
21 L . 3
203.3
163.8
163.8
1 1. 8
163.8
163. 8
163.8
163.8
1 3.8
163.8
170.6
170.6
179 2
170.6
172.7
172.7
172.7
172.7
172.7
172.7
172.7
170. 6
170. 6
212.1
212.1
179.2
179.2
179.2
179.2
179.2
179.2
179.2
179.2
179.2
201. 6
201.6
201.6
201.6
201.6
212.1
210. 4
210.4
210.4
195. 8
195. 8
2 3.3
157.8
195. 8
157.8
1SS. 8
19.1.8
1U5.8
I.-.7. 8

0)
I
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I
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III
III
III
I
I
I
I
III
III
I
1I1
I
II
II
I
I
I

III
UI
III
III
I
I
I
I
I
I
I
I
I

I
I
II
II
I
I
I
I
II
II
11
I3T
III
I
III
III
III

I
I
I
I
204.1
2114.1
204.1
7. 0
197.0
107 0
161.7
161.7
1R4.0
164.0
1M.3
164. 3
164. 3
161.7
161.7
0)
170.1
170.1
f. 1
170.1
172.5
173.7
173.7
172.5
172.5
172.5
170.2
170.1
170.1
213.3
213.3
ISO. 1
ISO. 1
ISO. 1
180.1
ISO. 1
1 1.1
IS). 1
ISO. 1
180.1
an. 4
201.3
an. 3
aa. |
aw. 2
213.1
211.4
211.4
211.4
192.9
192.9
197.0
154.3
197.7
154.3
197.7
197.7
197.7
157.0
0)
I
/ft eparate nd computed.
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Regs. 118, 39.23(a)-. 44
S CTION 22(n). GROSS INCOM : D INITION O
D UST D GROSS INCOM 1
Reguatons 118, Secton 39.22(n)-: d|usted
gross ncome.
Okahoma cgarette ta pad by consumer n connecton wth cga-
rettes used n trade or busness. (See Rev. Ru. 54-50, p. 55.)
Reguatons 118, Secton 39.22(n)-: Trade
and busness deductons.
ffect of net operatng oss deducton on ma mum aowance for
chartabe and other contrbutons. (See Rev. Ru. 54-56, p. 64.)
Rf.ouatons 118, Secton 39.22(n)-: d|usted
gross ncome.
Massachusetts cgarette ta es pad by consumer n connecton wth
cgaretter used n trade or busness. (See Rev. Ru. 54-132, p. 57.)
S CTION 23(a). D DUCTIONS ROM GUOSS
INCOM : P NS S
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 54-27
penses.
ckback payments made to uduce empoyees or agents to
promote purchases by ther empoyers or prncpas from the ta -
payers makng the payments, under certan condtons, are not
aowabe deductons for edera ncome ta purposes when made
by ta payers sub|ect to the edera Trade Commsson ct, as
amended, or the Packers and Stockyards ct, 11)21, as amended.
dvce s requested reatve to the deductbty under secton
23(a) (1) ( ) of the Inferna Revenue Code of kckback payments
made by a ta payer to empoyees and purchasng agents of hs cus-
tomers to nduce the empoyees and purchasng agents to promote
purchases by ther empoyers or prncpas from the ta payer makng
the payments.
Secton 23(a) (1) ( ) of the Interna Revenue Code provdes that
n computng net ncome there sha be aowed as deductons:
(a) penses.
(1) Trade or busness e penses.
( ) In genera. the ordnary and necessary e penses pad or
Incurred durng the ta abe year In carryng on any trade or
busness .
I I. T. 4096, C. . 1952-2, 91, t s hed that payments made by a
surgeon on a spt-fee bass to other physcans who refer patents to
hm are deductbe under secton 23(a)(1)( ) of the Code, supra,
provded they are norma, usua, and customary n the professon and
n the communty are approprate and hepfu n obtanng busness
and do not frustrate sharpy defned Natona or State poces ev-
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45 Regs. 118, 39.23(a)-.
denced by a governmenta deca aton proscrbng partcuar types
of conduct.
Under secton 5 of the edera Trade Commsson ct, as amended,
38 Stat. 717, whch provdes n part that unfar methods of compe-
ton n commerce and unfar or deceptve acts or practces n com-
merce are unawfu, the edera Trade Commsson s empowered and
drected to prevent persons, partnershps, or corporatons, e cept cer-
tan of those sub|ect to other reguatory acts, ncudng those sub|ect
to the Packers and Stockyards ct, 1921, from usng unfar methods
of competton n commerce and unfar or deceptve acts or practces
n commerce.
Sectons 202 and 312 of the Packers and Stockyards ct, 1921, as
amended, 42 Stat. 159, make t unawfu, among other thngs, for any
person sub|ect to the ct to engage n or use any unfar, un|usty
dscrmnatory, or deceptve practce or devce n commerce. Sectons
203 and 312 of the ct authorze the Secretary of grcuture, after
notce and hearng, to ssue orders requrng any such person to cease
and desst from engagng n or usng any such practce or devce.
The edera Trade Commsson has nformed the Interna Revenue
Servce that t s the poston of the Commsson that under certan
condtons the practce by seers sub|ect to the provsons of the ed-
era Trade Commsson ct, as amended, of payng money or makng
gfts to empoyees or agents of customers or prospectve customers,
or to empoyees or agents of compettors customers or prospectve
customers, s an unfar method of competton n voaton of secton
5 of the edera Trade Commsson ct, as amended. Tho condtons
are (1) that such payments or gfts be made to nduce the empoyees or
agents to promote purchases by ther empoyers or prncpas from
the seers makng the payments or gfts, or to nduce the empoyees
or agents to nfuence ther empoyers or prncpas to refran from
purchasng from compettors of the seers makng the payments or
gfts and (2) that the payments or gfts be made wthout the know-
edge or consent of the empoyers or prncpas of the empoyees or
agents.
The Department of grcuture has nformed the Interna Revenue
Servce that t s the poston of that Department that such practce
by persons who are sub|ect to the Packers and Stockyards ct, 1921, as
amended, s n voaton of the provsons of sectons 202 and 312 of
such ct f the payments (1) are not ordnary and customary n the
ndustry, (2) are made wthout the knowedge and consent of the
customer, or (3) are made to empoyees of ony certan of the seer s
customers.
In vew of the foregong t s hed that kckback payments made
by ta payers who are sub|ect to the edera Trade Commsson ct, as
amended, to empoyees or purchasng agents of ther customers or
prospectve customers are not deductbe, for edera ncome ta pur-
poses, uness the foowng condtons are met: The payments (1) must
be norma, usua, and customary n the ndustry and n the communty,
(2) must be approprate and hepfu n obtanng busness, and (3)
must be made wth the knowedge and consent of the customer or pros-
pectve customer. In the case of ta payers sub|ect to the Packers and
Stockyards ct, 1921, as amended, n addton to the condtons set
315350 54 4
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Regs. 118, 39.23(a)-. 46
forth above, such payments must be made wthout un|ust dscrmna-
ton between the ta payer s customers.
Reguatons 118, Secton 39.23(a)-: usness
e penses.
pense ncurred n connecton wth the sne of tme payment
nstament accounts recevabe. (See ev. Ru. 51 13, p. 119.)
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 54-190
e penses.
( so Secton 22(a), Secton 39.22(a)-2.)
Payments of unon assessments for the support of an od age
penson fund whch are requred to he made hy unon memhers n
order to reman n the unon and hod a unon |ob are ordnary
and necessary busness e penses of the unon members whch are
deductbe from ad|usted gross ncome under secton Z (a)()( )
of the Interna Revenue Code, f they eect to temze ther deductons
for edera ncome ta purposes.
Penson benefts pad to unon members from the od age penson
fund consttute ta abe ncome to the recpent under secton 22(a)
of the Code.
dvce s requested reatve to the edera ncome ta treatment
of (1) payments of unon assessments whch unon members are re-
qured to make for the support of an od age penson fund mantaned
by the unon and (2) penson benefts receved by unon members
from the penson fund.
The consttuton of the unon requres the payment of a per capta
assessment from every unon member for the support of an od age
penson fund. The assessments are based on a stated percentage of
the earnngs of members. Durng mted perods of sckness or ds-
abty however, members are e empt from the payment of the as-
sessments.
The consttuton provdes for the payment of stated weeky penson
benefts to any unon member who has reached the age of 60, has had
at east 25 years of contnuous membershp n the unon, and s unabe
to contnue hs empoyment or secure sustanng empoyment because
of age or dsabty. owever, other unon members may receve
the penson benefts f they have had a contnuous membershp n the
unon for 20 years, are totay ncapactated for work by reason of
an affcton, and have been dened admsson to a home for the aged
mantaned by the unon (on the bass that the home s not abe to
care for persons so affcted). though the consttuton permts
pensoned unon members to engage n ganfu empoyment whe
recevng beneft payments, the payments w cease durng stated
perods f ther earnngs from such empoyment reach a certan eve.
The admnstraton of the penson fund s the responsbty of an
e ecutve commttee. The commttee has the authorty to change the
benefts from the fund at w, and may revew the case of any pen-
soned member and dsbar hm from further partcpaton n the fund,
f n ts opnon the crcumstances warrant such acton.
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47 Regs. 118, 39.23 (a)-1.
The frst queston s whether the assessments pad by these unon
members may be deductbe by them as ordnary and necessary bus-
ness e penses under secton 23(a)(1)( ) of the Interna Revenue
Code. Ordnary dues and ntaton fees requred to be pad by n-
dvdua members to an organzed abor unon are deductbe busness
e penses for edera ncome ta purposes. See O. D. 450, C. . 2,
105 (1920) I. T. 3634, C. . 1944, 90 and I. T. 2888, C. . 1 -1,
54 (1935). member must pay hs assessments to reman n the
unon and keep a unon |ob, and t does not appear that the persona
vaue of each members nterest n the penson fund ordnary ap-
pro mates what he pays nto the fund so as to make hs assessment
payment a persona e pense or consderaton for an annuty. The
member actuay has no vested nterest n any rght to a penson,
even though the assessments are pad wth the e pectaton of par-
tcpaton n the fund.
ccordngy, t s hed that payments of unon assessments for the
support of the od age penson fund whch are requred to be made
by unon members under the above crcumstances are ordnary and
necessary busness e penses of the unon member whch are deductbe
from hs ad|usted gross ncome under secton 23(a)(1)( ) of the
Code f he eects to temze hs deductons for edera ncome ta
purposes.
The second queston s whether the pensons pad from the penson
fund are ta abe to the unon members. Snce t appears that the
pensons pad to members are drecty attrbutabe to ther empoy-
ment as members of the unon and to ther payment of unon assess-
ments n prevous years, the pensons cannot be sad to be pad wth-
out consderaton and are not gfts. ccordngy, t s hed that the
penson benefts pad to unon members from the od age penson fund
consttute ta abe ncome to the recpents under secton 22(a) of
the Code.
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 54-195
e penses.
Gudes to be used by nterna revenue offcers n determnng. In
accordance wth commony-recotmzed busness practces, tho aow-
abty and aso te amount of trave, entertanment and other
busness e penses.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to carfy Interna Revenue
Servce pocy so as to promote unformty n the appcaton of the
aw and reguatons to questons reatng to the substantaton and
aowance of deductons camed under secton 23(a) (1) of the Inter-
na Revenue Code.
Sec. 2. Persona and cttous pense Deductons.
It appears that some ta payers are erroneousy camng persona,
vng, or famy e penses as busness deductons. so, nstances
have been found n whch ta payers have camed fcttous deductons,
or have otherwse made e cessve cams wth wfu ntent to defraud.
Orgnay ssued as IU-Mmcograph No. 51 92, dated May 25, r 4.
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Regs. 118, 39.23(a)-. d
Snce the aw specfcay provdes that ony ordnary and necessary
trade or busness e penses propery may be camed as deductons
under secton 23(a)(1), t foows that each ta payer has the re-
sponsbty to cam as deductons ony those tems whch the aw
so descrbes. It foows aso that each representatve of the Com-
mssoner of Interna .Revenue has the responsbty to make certan
that no nondeductbe tems are aowed. Thus, each nterna revenue
agent s charged wth the duty of cosey scrutnzng camed deduc-
tons for busness e pense and deang appropratey wth nstances
where persona e penses are camed as busness deductons. In any
nstance n whch the e amnaton of an ncome ta return reveas
that fcttous deductons have been camed, the case w be deat
wth n accordance wth the approprate estabshed procedures.
Sec. 3. Ordnary and Necessary usness penses.
.01. In the verfcaton of deductons camed for e penses pad or
ncurred n connecton wth a ta payer s trade or busness, probems
constanty arse wth respect to the verfcaton of those deductons
whch are based upon a substanta number of sma tems of e -
pendture snce they often are not susceptbe of compete substan-
taton by documentary evdence. Typca of the deductons n whch
such questons arse are those for traveng and entertanment e pense.
.02 Ths Revenue Rung s not ntended to requre or permt that
the ta payer be reeved of the burden of proof n such matters nor
to sancton any faure to compy wth the record-keepng requre-
ments of the aw and reguatons. It deas prmary wth probems
of evdence and ts evauaton that are encountered n every day,
practca admnstraton of the ta aws. In connecton wth the con-
sderaton of deductons for tems such as traveng and entertan-
ment e pense, the e amnng offcer shoud e ercse carefu |udgment
whch w permt reasonabe determnatons under the aw and regu-
atons, provded he s satsfed that there s a proper bass for some
aowance. Ths w nvove consderaton of such matters as the
e tent to whch detaed verfcaton s requred, the papers or records
essenta to adequate substantaton, and the weght to be accorded
ora statements and e panatons. Such eements necessary w
vary accordng to the nature and reatve ta mportance of the tems
nvoved and the genera crcumstances surroundng the entre case.
.03 Cose appro matons of tems not fuy supported by docu-
mentary proof can very frequenty be reached by reconstructon
through resort to reabe secondary sources of nformaton and co-
atera evdence. or e ampe, n connecton wth a camed tem of
traveng e pense t mght be possbe for a ta payer to satsfy the
e amner that he was n a trave status a certan number of days out
of each month or year but mpossbe for hm to estabsh the detas
of a hs varous tems of trave e pense by documentary proof. In
such a case ra fares or pane fares can be ascertaned wth e actness
and automobe costs appro mated on the bass of meage covered.
reasonabe appro maton of meas and odgng mght be based
upon recepted hote bs or by appyng a day rate (determned
upon the bass of actua costs prevang n the partcuar communty
for comparabe accommodatons) to the provabe days of trave.
Items such as tps, ta fares, and the ke can be based upon a reason-
abe appro maton.
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49 Regs. 118, 39.23 (a)-.
.04 In connecton wth the determnaton of factua matters of ths
type, due consderaton shoud be gven to the reasonabeness of the
ta payers stated e pendtures for the camed purposes n reaton
to hs reported ncome, to the reabty and accuracy of hs records
n connecton wth other tems more ready endng themseves to
detaed record-keepng, and to the genera credbty of hs state-
ments n the ght of the entre record n the case. Dsaowng
amounts camed for such tems merey because there s avaabe
no documentary evdence whch w estabsh the precse amount
beyond any reasonabe doubt gnores commony-recognzed busness
practce as we as the fact that proof may be estabshed by credbe
ora testmony. On the other hand, t s not Servce pocy to aow
a percentage or other arbtrary-computed porton of deductons of
ths character merey for the purpose of settement.
Regct.attons 118, Secton 39.23(a)-1: usness Rev. u. 54-204
e penses.
Where a ta payer makes a payment to the Unted States In an
agreed settement of a cam hy the Offce of Prce dmnstraton
for aeged overcharges on saes of commodtes n voaton of regu-
atons ssued by that offce coverng prce cengs, under secton
205(e) of the mergency Trce Contro ct of 1 42, 56 Stat. 23, 34,
such payment s a deductbe busness e pense under secton
23(a)(1)( ) of the Interna evenue Code where the voaton s
nether wfu, ntentona, nor the resut of the faure to take
practca precautons.
I. T. 3(127, C. . 1943, 111 I. T. 3(130, C. . 1043, 113 I. T. 3799,
C. . 1946-1, 56 and I. T. 3800, C. . 1946-1, 82, modfed.
dvce s requested whether the payment by a ta payer to the
Unted States n an agreed settement of a cam by the Offce of Prce
dmnstraton for aeged voaton of secton 205(e) of the mer-
gency Prce Contro ct of 1942, 56 Stat. 23, 34 (herenafter referred
to as the ct), Offce of Prce dmnstraton reguatons, orders or
prce schedues, s deductbe as an ordnary and necessary busness
e pense under secton 23(a) (1) ( ) of the Interna Revenue Code.
I. T. 3C27, C. . 1943, 111, hods that n cases of actons by the Prce
dmnstrator, where the consumer s not entted to brng acton,
(1) amounts pad to the Unted States n satsfacton of |udgments
or settements of suts brought by the Prce dmnstator under sec-
ton 205(e) of the ct for voaton of a reguaton, order or prce
schedue are n the nature of penates for aw voaton, even though
the acton s a cv one, and are not deductbe: (2) amounts pad
to the Unted States where the Unted States s the consumer or user
pursuant to a |udgment under secton 205(e) of the ct, or amounts
pad n compromse of pendng or contempated tgaton n such
cases, are n effect punshment for n|ury to the genera pubc and are
not deductbe (3) amounts pad pursuant to |udgments n favor of
consumers or tenants (other than the Unted States) n consumer
actons under secton 205(e) of the ct, and amounts pad n compro-
mse of pendng or contempated tgaton of such cases, are consd-
ered remeda n nature and are deductbe as ordnary or necessary
e penses under secton 23(a) (1) ( ) of the Code and (4) vountary
payments made to the Unted States on account of prce ceng voa-
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Regs. 118, 39.23(a)-.) 50
tons durng the 6 months perod from anuary 30, 1942, on whch
date the ct was approved, to uy 3, 1942, on whch date secton
205(e) thereof became effectve, are deductbe under secton 23(a) (1)
( ) of the Code.
In I. T. 3030, C. . 1943,113, t s hed that payments to the Unted
States n cases where the consumers had a rght of acton aganst the
seer, were deductbe. fter the amendment of secton 205(e) of the
ct by secton 108(c) of the Stabzaton tenson ct of 1944, 58
Stat., 632, 640, n I T. 3799, C. . 1946-1, 56, was ssued n whch t
s hed that payments to the Unted States by vrtue of an acton by the
Prce dmnstrator, where the consumer has a rght of acton and
fas to brng an acton, whether or not the voatons were wfu or
the resut of faure to take practcabe precautons to prevent ther
occurrence, were not deductbe. See aso, I. T. 3800, C. . 194 1, 82.
Snce the adopton of the poston taken n the above-mentoned
rungs, the courts have hed that where the voaton s found to be
unntentona and not wfu, the payments made to the Unted States
are deductbe. See erry Rossman Corporaton v. Commssoner, 175
ed. (2d) 711 Natona rass Works, Inc. v. Commssoner, 182 ed.
(2d) 520 Commssoner v. Pacfc Mtts.W ed. (2d) 177 ershey
Creamery Co. v. Unted States, 101 ed. Supp. 877 en|amn Mar ant 2
et a. v. Yoke, 113 ed. Supp. 536 and armers Creamery Company
of redcncksburg, rgna, 14 T. C. 879.
In Commssoner v. S. . enngcr, 320 U. S. 467, Ct. D. 1596,
C. . 1944, 484, and Thomas . Ly et u . v. Commssoner, 343 U. S.
90, Ct. D. 1741, C. . 1952-1, 16, t was hed that the crteron for
deductbty of busness e penses, whch otherwse are ordnary and
necessary, s whether the aowance woud frustrate sharpy denned
Natona or State poces proscrbng partcuar types of conduct
evdenced by some Governmenta decaraton of them. though t
seems cear that the pocy of a crmna statute woud be frustrated by
the aowance of a deducton of a fne or penaty, t s necessary to ook
beyond the mere voaton of a cv statute and to ascertan whether
ts pocy s frustrated by aowance of the deducton. See ur-
roughs udng Matera Co. v. Commssoner, 47 ed. (2d) 178,
Ct. D. 297, C. . -, 397 (1931) Natona rass Works, Inc. v.
Commssoner, supra, and 1. T. 4042, C. . 1951-1,15.
The courts have hed unformy that the pocy of the ct was to
draw a sharp ne of dstncton between nnocent voators on the
one hand, and those who ether had voated the sad ct wfuy
or had faed to take practca precautons to compy therewth on
the other hand. The queston resoves tsef nto proof, wth the
burden restng on the camant. See Natona rass Works, Inc.,
supra, and enry Watterson ote Co. v. Commssoner, 194 ed.
(2d) 539. The fact that a settement wth the Offce of Prce dmn-
straton has been effected does not consttute an admnstratve deter-
mnaton of nnocent voaton. See George Schaefer and Sons, Inc.
v. Commssoner, 209 ed. (2d) 440.
Upon reconsderaton of ths queston, n the ght of the above-cted
courts decsons, t s hed that payments made to the Unted States
for voaton of the mergency Prce Contro ct of 1942, 56 Stat. 23,
34, Offce of Prce dmnstraton reguatons, orders, or prce sched-
ues, are deductbe as busness e penses, under secton 23(a) (1) ( )
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51 Regs. 118, 39.23 (a)-2.
of the Interna Revenue Code, f the ta payer proves that the voa-
ton was nether wfu, ntentona, nor the resut of the faure to
take practca precautons.
I. T. 3627, C. . 1943, 111 I. T. 3630, C. . 1943, 113 I. T. 3799,
C, . 1946-1, 56 and I. T. 3800, C. . 1946-1, 82, are hereby modfed
to the e tent nconsstent wth the vews e pressed heren.
Reguatons 118, Secton 39.23(a)-: usness Rev. Ru. 54-219
e penses.
The edera e cse ta on wagers under secton 3285(d) of the In-
terna Revenue Code and the speca ta under secton 3290 of the Code
pad by persons engaged n recevng wagers are deductbe, for ed-
era ncome ta purposes, as ordnary and necessary busness e penses
under secton 23(a) of the Interna Revenue Code, provded the ta -
payer s engaged n the busness of acceptng wagers or conductng wa-
gerng poos or otteres, or s engaged n recevng wagers for or on
behaf of any person abe for the ta under secton 3285(d) of the
Code.
Reguatons 118, Secton 39.23 (a) -2: Trave- Rev. Ru. 54-147
ng e penses.
Treatment of e penses ncurred by professona baseba payers,
Managers, coaches, and traners for trave, meas and odgng whe
away from home n connecton wth ther baseba dutes.
dvce s requested concernng the deductbty, for edera ncome
ta purposes, of e penses ncurred for trave, meas and odgng by
professona baseba payers, manngers, coaches, and traners, whe
away from ther permanent resdences n connecton wth the per-
formance of ther baseba dutes.
The baseba season, n the ma|or eagues, ordnary runs for fve
and one-haf months, durng whch perod 154 games are payed.
One-haf, or 77, of the games are payed at the cub town, and 11
games are payed n each of the seven other cub towns n the eague.
In addton, the ma|or eague cubs begn sprng tranng appro -
matey one and one-haf months pror to the season openng at oca-
tons dstant from the cub town. Thus, the personne of the ma|or
eagues are empoyed for appro matey 7 months n each year n base-
ba actvty. substanta percentage of such personne are aso
engaged, durng the ta abe year, n busness other than professona
baseba.
Secton 23(a) (1) ( ), of the Interna Revenue Code provdes that
n computng net ncome there sha be aowed as deductons:
(a) penses.
(1) TU D OR USIN SS P NS S.
( ) In Genera. the ordnary and necessary e penses pad or
Incurred durng the ta abe year n carryng on any trade or busness,
ncudng traveng e penses (ncudng the entre amount
e pended for meas and odgng) whe away from home n the pursut
of a trade or busness .
In Commssoner v. . N. owers, 32G U. S. 465, Ct. D. 1059, C. .
1946-1,57, the court sad that
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Regs 118, 39 23(a)-2. 52
Three condtons must be satsfed before a traveng e pense deducton may be
made under secton 2a(a) (1) ( ) :
(1) The e pense must he a reasonabe and necessary traveng e pense,
as that term s generay understood. Ths ncudes such tems as trans-
portaton fares and food and odgng e penses ncurred whe traveng.
(2) The e pense must be ncurred whe away from home.
(3) The e pense must be ncurred n pursut of busness. Ths means
that there must be a drect connecton between the e pendture and the
carryng on of the trade or busness of the ta payer or of hs empoyer.
Moreover, such an e pendture must be necessary or approprate to the
deveopment and pursut of the busness or trade.
It s the we estabshed poston of the Interna Revenue Servce
that the term home as used n secton 23(a)(1)( ) of the Code
means the ta payer s prncpa pace of busness, post of duty, or pace
of empoyment. In Mort L. er v. Commssoner, 5 13. T. . 1181,
the court sad that a ta payer may not keep hs pace of resdence at a
pont where he s not engaged n carryng on a trade or busness and
take a deducton from gross ncome for hs vng e penses whe awav
from home. Therefore, I. T. 3314, C. . 1039-2, 152, must be apped
n the case of ta payers whose ony busness or empoyment s tat as
professona baseba payers, managers, coaches, or traners. Such
ta payers are entted to deduct ther traveng e penses, ncudng
meas and odgng, when away from the cub town n pursut of
such busness or empoyment.
Where a ta payer s engaged n more than one trade or busness
and such busnesses requre a dvson of hs tme between two dstant
ctes, he may deduct hs traveng e penses ncurred n dschargng
hs dutes at that cty whch s removed from hs prncpa post of duty.
Water . rown v. Commssoner, 13 . T. . 832, acquescence, C .
III-1, 6 (1929) oseph W. Powe v. Commssoner, 34 . T. . 655
(appeaed on other ssues) oseph . Sherman, r. et u . v. Comms-
soner, 16 T. C. 332, acquescence, C. . 1951-2, 4. In other words,
where a ta payer has more than one pace of busness or empoyment
hs prncpa pace of busness or empoyment consttutes hs home
to serve as the pont of orgn for determnng hs deducton for
traveng e penses.
In those cases, therefore, where baseba payers, managers, coaches,
or traners aso engage n another trade or busness durng the ta abe
year a factua determnaton must be made as to the stus of the ta -
payer s prncpa busness post, . e., hs ta home. The more m-
portant factors to be consdered n makng a factua determnaton
regardng the ocaton of the ta payer s prncpa pace of busness
or ta home are the tota tme ordnary spent by the ta payer at
each of hs busness posts, the degree of busness actvty at each such
post, and whether the fnanca return n respect of each post s sg-
nfcant or nsgnfcant. No one factor s determnatve, athough the
pont ast mentoned shoud be gven great weght n cases where
a servces are performed as an empoyee or n those nstances where
a payer for nomna consderaton does some work for others pr-
mary for the purpose of mantanng sutabe physca condton.
or the purpose of determnng the stus of the ma|or post of a profes-
sona baseba payer, t s beeved proper, nsofar as the tme factor
s concerned, to consder ony the perod durng whch the payer s
at the busness headquarters of hs empoyer, . e., the cub town.
In the case of professona baseba personne who engage n a
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53 Regs. 118, 39.23(b)-.
trade or busness n addton to baseba durng the ta abe year, and
whose prncpa pace of busness s found under the above tests to be
ocated at a dstance from the headquarters of the baseba cub wth
whch they are affated durng the payng season, such ta payers
are entted to deduct the cost of meas and odgng whe at the
cub town. On the other hand, where the cub town s the ta -
payers prncpa pace of busness, such ta payers are entted to
deduct ther traveng e penses, ncudng meas and odgng, whe
traveng away from ther prncpa pace of busness, even though
ther permanent resdence s ocated at the mnor busness post. In
the atter case, ony that porton of such e penses at hs resdence whch
s drecty attrbutabe to the ta payer hmsef s a deductbe e pense
for edera ncome ta purposes.
Reguatons 118, Secton 39.23(a)-10: Rentas.
Renta payment by the grantor of a trust to the trustees not a
busness e pense. (See Rev. Ru. 54-9, p. 20.)
Rectatons 118, Secton 39.23 (a)-: penses
of farmers.
pendtures for mantenance and repar of earthen terraces to
prevent so eroson. (See Rev. Ru. 54-191, p. 68.)
S CTION 23(b). D DUCTIONS ROM GROSS
INCOM : INT R ST
Reguatons 118, Secton 39.23 (b) -1: Interest. Rev. Ru. 54-94
mounts camed as nterest n connecton wth certan so-caed
ta savngs pans tbe purpose of whch s to obtan an nterest deduc-
ton for federa ncome ta purposes are not deductbe under
secton 23(b) of the Interna Revenue Code.
The attenton of the Interna Revenue Servce has been caed to
severa stuatons where ta payers are attemptng to derve supposed
ta benefts n connecton wth transactons desgned to obtan nterest
deductons, for edera ncome ta purposes. 1 he queston s whether
the amounts desgnated as nterest are deductbe under secton
23(b) of the Interna Revenue Code. The foowng two e ampes
are ustratve:
ampe 1. M Insurance Company has sod to the ta payer an
annuty savngs bond (heren caed the bond ) under the foowng
condtons: Ta payer pays to M a snge cash premum of 100,000.
To fnance the premum, ta payer pays 100 to M n cash and bor-
rows 99,900 from M on a note that bears nterest at the rate of 5
percent the frst year and 3 percent thereafter. Ta payer s not per-
sonay abe on the note, M s soe recourse beng aganst the bond.
The bond has a maturty of 30 years. The cash vaue of the bond
s 100,000 at the tme the bond s ssued and the cash vaue ncreases
at the rate of 2y2 percent a year compounded annuay. t maturty
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Regs. 118, | 39.23fb)-. 54
ta payer w be entted to an annuty based on the net cash vaue
of the bond at that tme, . e., the e cess of the cash vaue over the
unpad baance on ta payer s note to M. Ta payer has the eecton
at maturty to receve n cash the net cash vaue of the bond, and f
ta payer des before maturty a benefcary named by hm s en-
tted to the then net cash vaue .
(In some cases of ths type t s provded that the ta payer may
surrender the bond at any tme after 1 year and receve the net cash
vaue thereof at such tme. In some cases t s provded that the
ta payer may at any tme borrow the net cash vaue on the bond
on a nonrecourse note wthout surrenderng the bond. In such cases
there may be no net cash vaue at maturty and f so no annuty
w be pad. In some cases t s provded that the ta payer may at
any tme suspend payment of nterest e cept to the e tent of one-
s teenth of 1 percent wthout surrenderng the bond, and the cash
vaue of the bond w cease to ncrease durng such suspenson.)
Ta payer cams that for edera ncome ta purposes he may de-
duct the nterest that he pays on the amount that he has bor-
rowed on the bond, but that he reazes capta gan f he ses the
bond. If ths s so, and f ta payer s surta rate s suffcenty hgh,
he w make a proft on the transacton notwthstandng that he
pays 3 percent nterest for a 2y2 percent nvestment.
ampe 2. In uy 1052 ta payer, an ndvdua who s not a
deaer n securtes, purported to purchase 5,000,000 Unted States
Treasury 1 percent notes due March 15, 1954, at 99. Ta payer
fnanced the purchase by makng a sma down payment and pur-
ported to borrow the baance from the N Company, a deaer n se-
curteS| on a 2 4 percent nonrecourse note maturng March 15, 1954,
depostng the Treasury notes as soe securty for the prncpa and
nterest on the note. N thereupon sod short the same amount of
Treasury notes of the same seres, and wth ta payer s consent N cov-
ered the short sae wth the deposted Treasury notes, thereby re-
cevng the funds whch t had oaned to the ta payer. Ta payer
may drect the sae of hs Treasury notes at any tme. It s contem-
pated that at or before maturty ta payer w drect the sae of hs
Treasury notes, and N w purchase 5,000,000 of such notes at the
then market prce to cover ts short sae.
(In some cases of ths type the ta payer pays part of the nter-
est on the note to N wth money borrowed from N on an addtona
nonrecourse note.)
Snce the ta payer w pay more nterest on the note to N than
the tota of the nterest and apprecaton that he w reaze on the
Treasury notes, ta payer w reaze no proft on the transacton apart
from the effect of the transacton on hs edera ncome ta . ow-
ever, ta payer, whose surta rate s suffcenty hgh, seeks to make a
proft by deductng the nterest that he pays from ordnary n-
come and reportng the gan on the sae of the Treasury notes as
capta gan.
It s the vew of the Interna Revenue Servce that amounts pad
by ta payer and desgnated as nterest n the above e ampes are not
nterest wthn the meanng of secton 23(b) of the Code, and are not
deductbe for edera ncome ta purpose Cf. 0 Coony Iarond
Co. v. Commssoner, 284 U. S. 552, Ct. D. 456, C. . I-1,274 (1932),
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55 Regs. 118, 39.23(c)-.
where the Supreme Court ndcated that nterest s the amount whch
one has contracted to pay for the use of borrowed money.
In the above e ampes the amounts pad by the ta payer are not
n substance payments for the use of borrowed money. s a matter
of substance the ta payer does not borrow any money, hence there s
no debt on whch he pays nterest. n nstrument that s caed
a note w not be treated as an ndebtedness where t does not n fact
represent an ndebtedness. See Tabot Ms v. Commssoner, 326 U. S.
521, Ct. D. 1GC0, C. . 1946-1,191 Matthessen, et a. v. Commssoner,
194 ed. (2d) 659. In e ampe 1, part of the nterest pad by the
ta payer w be returned to hm through the ncrease n the vaue of
the bond and the remander represents a payment to M for arrangng
the transacton so that ta payer may derve a supposed ta beneft.
If t s possbe to regard the transacton as an annuty transacton at
a, the nterest payments n reaty represent the premums pad
for the annuty. If the transacton s regarded as an endowment con-
tract, the nterest deducton s to be dsaowed under secton
24(a) (6) of the Code. In e ampe 2, ta payer n substance pays a
sum of money to the N Company for arrangng a transacton ackng
commerca substance so that ta payer may derve a supposed ta
beneft ta payer does not e pect to make a cash proft on the trans-
acton ndependent of edera ncome ta consequences, nor does ta -
paver rsk the monev that he borrows. Cf. Commssoner v. Trans-
fort Tradng Termna Corp., 176 ed. (2d) 570, 572, where the
Court of ppeas for the Second Crcut emphaszed that n con-
strung words of a ta statute whch descrbe commerca or ndustra
transactons we are to understand them to refer to transactons en-
tered upon for commerca or ndustra purposes and not to ncude
transactons entered upon for no other motve but to escape ta aton.
Reguatons 118, Secton 39.23(b)-: Interest.
pense ncurred n connecton wth sae of tme payment nsta-
ment accounts recevabe. (See Rev. Ru. 54-4. , p. 119.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY
Reguatons 118, Secton 39.23(c)-1 : Ta es. Rev. Ru. 54-50
( so Secton 22(n), Secton 39.22(n)-.)
The cgarette ta Imposed by tte 68, Okahoma Statutes 1931,
secton 586a, as amended, effectve une 10, . 3, s deductbe on
and after une 10, 1953, under secton 2:|(c)() of the Interna
Revenue Code by the vendee, user, consumer, or possessor of the
cgarettes who pays the ta to the retaer however, n the case
of an ndvdua who eects the optona standard deducton (see
sec. 23(aa) of the Code), no deducton Is aowabe uness the cga-
rette ta s attrbutabe to a trade or busness carred on by hm.
If the ta s attrbutabe to a trade or busness carred on by the
ndvdua, the amount of the ta s deductbe from gross ncome
In computng ad|usted gross ncome. See secton 22(n) (1) of the
Code,
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Regs 118, 39.23(c)-. 56
dvce s requested whether the ta on cgarettes mposed by the
State of Okahoma under the provsons of tte 08, Okahoma Stat-
utes 1951, secton 586a, as amended, effectve une 10,1953, s deduct-
be for edera ncome ta purposes by the consumer.
Secton 23(c)(1) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 39.23(c)- of Reguatons 118 provdes that n
genera ta es are deductbe ony by the person upon whom they are
mposed.
In I. T. 2919, C. . I -2, 86 (1935), t s hed that the Okahoma
cgarette (stamp) ta mposed by the aws of the State of Okahoma
s an aowabe deducton as a ta n the return of the frst seer wthn
the State of cgarettes to whch he has aff ed the stamps, or the con-
sumer of cgarettes to whch he has aff ed the stamps as requred
by the statutes.
The Revenue Servce has aso hed that the Okahoma cgarette
(stamp) ta s not a reta saes ta wthn the meanng of secton
23(c)(3) of the Code, and the amount of the ta s not deductbe
by the purchaser under that secton of the Code. Such poston has
been sustaned by the Unted States Court of ppeas, Tenth Crcut,
n Commssoner v. Ward Thompson ct u ., 193 ed (2d) 586, Ct,
D. 1744, C. . 1952-1, 26.
Secton 586a, chapter 16, tte 68, Okahoma Statutes 1951, as
amended by the act ( . . 912) effectve une 10, 1953, now reads, n
part as foows:
The ta hereby eved sha be n eu of a forms of ta on cgarettes, genera
or oca, and sha he pad ony once on any cgarettes sod, used, receved, pos-
sessed or consumed n ths State. Such ta sha be evdenced by stamps whch
sha be furnshed by and purchased from the Ta Commsson or by an mpres-
son of such ta by the use of a meterng devce when authorzed by the Ta
Commsson as provded n ths ct and sad stamps or mpresson sha be
securey aff ed to one end of each package n whch cgarettes are contaned
or from whch consumed.
The mpact of the ta eved by ths ct s hereby decared to be on the
vendee, user, consumer, or possessor of cgarettes n ths State and when sad
ta s pad by any other person such payment sha be consdered as an advance
payment nnd sha thereafter he added to the prce of the cgarettes and re-
covered from the utmate consumer or user. In makng a sae of cgarettes n
ths State a whoesaer or obber may separatey state and show upon the nvoce
coverng such sae the amount of ta on cgarettes sod. The ta sha be ev-
denced by approprate stamps attached to each package of cgarettes sod.
very retaer who makes saes of cgarettes wthn ths State to persons for
use or consumpton sha separatey show the amount of ta as evdenced by
approprate stamps to each package of cgarettes sod and the ta sha be co-
ected by the retaer from te user or consumer. The provsons of ths Secton
sha n no way affect the method of coecton of such ta on cgarettes as now
provded by e stng aw.
In vew of the above-quoted amendment and apparent ntent of the
Legsature of the State of Okahoma to mpose the cgarette ta upon
the vendee, user, consumer, or possessor of cgarettes n the State of
Okahoma, t s hed that the cgarette ta mposed by the State of
Okahoma under the provsons of chapter 16, tte 68, Okahoma
Statutes 1951, secton 586a, as amended, effectve une 10, 1953, s de-
ductbe on and after une 10, 1953, under secton 23(c)(1) of the
Code by the vendee, user, consumer, or possessor of the cgarettes who
pays the ta to the retaer however n the case of an ndvdua who
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57 Regs. 118, 39.23(c)-.
eects the optona standard deducton (see sec. 28(aa) of the Code),
no deducton s aowabe uness the cgarette ta s attrbutabe to a
trade or busness carred on by hm. If the ta s attrbutabe to a
trade or busness carred on by the ndvdua, the amount of the ta
s deductbe from gross ncome n computng ad|usted gross ncome.
See secton 22 (n) (1) of the Code.
On and after une 10, 1953, no deducton s aowabe to the frst
person who ses the cgarettes on account of the purchase of the cgar-
ette stamps from the State, and, accordngy, the porton of the prce
receved for the cgarettes whch represents the Okahoma cgarette
ta s not ncudbe n gross ncome.
Reguatons 118, Secton 39.23(c)-: Ta es. Rev. Ru. 54-132
( so Secton 22(n), Secton 39.22(n)-.)
The cgarette ta es mposed by chapter 640, Massachusetts Gen-
era Laws, as amended, are, on and after the effectve date of the
amendment by chapter 246, secton 13, cts of )53, deductbe under
secton 23(c)(1) of the Interna Revenue Code by the consumer,
e cept n the case of an ndvdua who eects the optona standard
deducton or the short-form 1040, no deducton Is aowabe uness
the cgarette ta s attrbutabe to a trade or busness carred on by
hm. If the ta s attrbutabe to a trade or busness carred on by
the Indvdua, the amount of the ta s deductbe from gross ncome
In computng ad|usted gross ncome. See secton 22(a)(1) of the
Code.
dvce s requested whether the ta es on cgarettes mposed by the
Commonweath of Massachusetts under the provsons of chapter 64C
of the Genera Laws, as amended on and after the effectve date of the
amendment by the cts of 1953, chapter 246, secton 13, approved pr
13, 1953, are deductbe for edera ncome ta purposes by the
consumer.
Secton 23(c)(1) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. Secton 39.23(c)-(a) of Reguatons 118 provdes that n
genera ta es are deductbe ony by the person upon whom they are
mposed.
I. T. 3G70, C. . 1944,114, hed that nasmuch as the Massachusetts
cgarette ta s mposed by the Commonweath of Massachusetts on
vendors other than retaers (sec. C, ch. 417, cts of 1941), such
ta s not deductbe for edera ncome ta purposes by the consumer.
Under chapter G4C of the Massachusetts Genera Laws pror to
ts amendment by secton 13, chapter 24C, cts of 1953, an e cse ta
on cgarettes sod s mposed by the Commonweath of Massachusetts
on vendors other than retaers. Cgarettes upon whch the e cse
ta has once been mposed and has not been refunded, f pad, are
not sub|ect to other ta upon a subsequent resae.
Secton 13, chapter 246, cts of 1953, whch amends chapter 64C
of the Massachusetts Genera Laws, reads as foows:
In addton to the e cse ta mposed by chapter s ty-four C of the Genera
Laws, and n addton to the addtono e cse ta mposed by secton nne
of chapter seven hundred and thrt|-one of the acts of nneteen hundred and
forty-ve, there Is hereby Imposed a further addtona e cse ta of one haf m
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Regs. 118, 39.23(e)-. 58
for each cgarette sod, used, receved as gft or gfts, or through e change or
barter n the commonweath durng the two-year perod begnnng September
frst, nneteen hundred and ffty-three, the same to be eved and coected as
provded n sad chapter s ty-four C, and the provsons of sad chapter sha
appy to sad further addtona e cse to the same e tent as to the norma
e cse eved thereunder. the provsons of sad chapter s ty-four C rea-
tve to the coecton, verfcaton and admnstraton of the ta thereunder
mposed sha, nsofar as pertnent, be appcabe to the ta Imposed by ths
act. cgarette ta es pad n pursuance of ths act and other statutes
of the genera or speca aws sha concusvey be presumed to be a drect
ta on the reta consumer, pre-coected for the purpose of convenence and
facty ony.
In vew of the above-quoted amendment and apparent ntent of the
Legsature of the Commonweath of Massachusetts to mpose the
cgarette ta upon the consumer, t s hed that the cgarette ta es
mposed by the Commonweath of Massachusetts under the provsons
of chapter 64C, Massachusetts Genera Laws, as amended, are deduct-
be on and after the effectve date of the amendment by chapter 246,
secton 13, cts of 1953, under secton 23(c) (1) of the Interna Reve-
nue Code by the consumer, e cept n the case of an ndvdua who
eects to use the optona standard deducton or the short-form 1040,
(frst sheet of orm 1040), no deducton s aowabe uness the cga-
rette ta s attrbutabe to a trade or busness carred on by hm. If
the ta s attrbutabe to a trade or busness carred on by the nd-
vdua, the amount of the ta s deductbe from gross ncome n
computng ad|usted gross ncome. See secton 22(n) (I) of the Code.
On and after the effectve date of the amendment by secton 13,
chapter 246, cts of 1953, no deducton for the cgarette ta es s
aowabe to the censees payng the ta es to the Commonweath of
Massachusetts. ccordngy, the porton of the prce pad by the
consumer to the censees for cgarettes whch represent the Massa-
chusetts cgarette ta es s not ncudbe n the gross ncome of such
censees.
S CTION 23(e). D DUCTIONS ROM ({ROSS INCOM :
LOSS S Y INDI IDU LS
Reguatons 118, Secton 39.23 (e)-: Losses Rev. u. 54-85
by ndvduas.
Losses sustaned to resdenta property as a resut of subso
shrnkage durng a perod of drought cons ute casuaty osses
wthn the meanng of secton 23(e)(3) of the Interna Revenue
Code.
dvce s requested whether osses sustaned to resdenta property
as a resut of subso shrnkage durng a perod of drought consttute
casuaty osses under secton 23(e) (3) of the Interna Revenue Code.
Secton 23 of the Interna Revenue Code provdes that n computng
net ncome there sha be aowed as deductons:
(e) Losses by Indvduas. In the case of an ndvdua, osses sustaned
durng the ta abe year and not compensated for by nsurance or other-
wse-

(3) of property not connected wth the trade or busness, If the oss
arses from fres, storms, shpwreck, or other casuaty, or from
theft
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59 Regs. 118, 39.23(e)-.
Court decsons and rungs of the Interna Revenue Servce have
estabshed standards for the appcaton of secton 23(e) of the Code.
They have deveoped the concept that a casuaty as that term s
used n secton 23(e) of the Code must ncude an dentfabe event
f ng a pont at whch oss to the owner of the damaged property can
be measured, and must aso be une pected or unusua n the conte t
n whch t occurs. Rev. Ru. 79, C. . 1953-1, 41 arry ohnston
Grant v. Commssoner, 30 . T. . 1028. Ths concept of what s a
casuaty e cudes damage or oss resutng from progressve deterora-
ton through a steady operatng cause. See ugh M. Matheson
et a. v. Commssoner, 5-1 ed. (2d) 537, Ct. D. 510, C. . I-2, 392
(1932) Chares . ay v.- everng, 120 ed. (2d) 253 and Ray
burden v. Commssoner, 3 T. C. 1.
It s understood that n a consderabe group of cases there has
been a reatvey rapd and severe subso shrnkage resutng from
unusuay severe drought whch has weakened ether vertca or atera
support for budng foundatons. Such condtons are understood to
have produced e tensve crackng of was and other serous damage
to budngs n the area whch can be attrbuted nether to fauty
constructon nor to such gradua settement or subsdence as may nor-
may occur over a perod of years.
In vew of the above, t s hed that such osses sustaned wth re-
spect to resdenta budngs consttute casuaty osses wthn the
meanng of secton 23 (e) (3 | of the Code. The burden of provng that
any damage to property s of the character ndcated n the precedng
paragraph and the amount of the resutng oss rests on the ndvdua
ta payer.
The amount aowabe as a casuaty oss s the dfference between
the vaue of the property mmedatey precedng the casuaty and ts
vaue mmedatey after the casuaty, but not n e cess of an amount
equa to the ad|usted bass of the property, reduced by any nsurance
or compensaton receved. See I. T. 4032, C. . 1950-2,21. Improve-
ments to the property destroyed or damaged shoud be consdered as
an ntegra part of the entre property and no separate bass appor-
toned thereto n determnng the oss sustaned. See G. C. M. 21013,
C. . 1939-1 (Part 1), arry ohnston Grant v. Commssoner, supra.
Reguatons 118, Secton 39.23(e)-: Losses,
by ndvduas.
Redempton of corporate obgatons ssued wthout nterest coupons
or not n regstered form. (See Rev. Ru. 54-66, p. 128.)
Reguatons 118, Secton 39.23(e)-: Losses,
by ndvduas.
cess of saary contrbutons to partnershp from an eectve pub-
c offce over partnershp dstrbuton. (See Rev. Ru. 5-4-167, p. 152.)
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Regs. 118, 5 39-23(k)-5. 60
S CTION 23(f). D DUCTIONS ROM GROSS INCOM :
LOSS S Y CORPOR TIONS
Reguatons 118, Secton 39.23(f)-: Losses
by corporatons.
Losses arsng out of sae of tme payment nstament accounts
recevabe. (See Rev. Ru. 54-43, p. 119.)
Reguatons 118, Secton 39.23(f)-: Losses
by corporatons.
Redempton of corporate obgatons ssued wthout nterest coupons
or not n regstered form. (See Rev Ru. 54-66, p. 128.)
S CTION 23(k). D DUCTIONS ROM GROSS
INCOM : D D TS
Reguatons 118, Secton 39.23(k) -5: Reserve Rev. Ru. 54-133
for bad debts.
Mm. 6209, C. . 1947-2, 26, reatng to the reserve method of ac-
countng for bad debts n the case of banks, contempates that where
a bank has been n e stence for 20 years, ncudng the ta abe year,
t may compute ts movng average percentage of actua bad debt
osses to outstandng oans, upon whch ts reserve for bad debts s
based, on the bass of ts own ndependent data, ncudng any osses
t has sustaned on oans taken over when certan assets of another
bank (whch contnued n busness) were acqured and some of ts
abtes assumed.
The bad debt e perence factor whch covers the e perence of a
20-year perod, ncudng that of the current ta abe year, w, when
apped to oans outstandng at the cose of the year, provde for
antcpated osses as they occur on the oans acqured. Under the
provsons of Mm. 6209, t s not permssbe to use the e perence of
the bank from whch the oans were acqured for the purpose of com-
putng addtons to the reserve for bad debts.
Reguatons 118, Secton 39.23(k)-5: Reserve Rev. Ru. 54-148
for bad debts.
bank, In computng a reasonabe addton to ts reserve for
bad debts, may use an average e perence factor based on any
20 consecutve years of e perence after 1927, In eu of a movng
average e perence factor determned on a bass of 20 years ncudng
the ta abe year.
Com.-Mmeograph Co. No. 6209, C. . 1947-2, 26, suppemented.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to suppement Com.-Mmeo-
graph Co. No. 6209 dated December 8, 1947 (C. . 1947-2, 26),
Orgnay ssued as t Mmeograph No. 54-55, dated pr 8,1954.
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61 (Regs. 118, 39.23(k)-5.
whch authorzes, n the case of banks, a speca method for computng
a reasonabe addton to the reserve for bad debts under secton
23(k) (1) of the Interna Revenue Code and the reguatons promu-
gated thereunder.
Sec. 2. ackground.
The Servce has carefuy ree amned the provsons of Mmeograph
6209, supra, n the ght of e perence deveoped thereunder and, as
a resut of such ree amnaton, has approved an aternatve method
for the use of banks n computng the annua addton to the reserve
for bad debts and the ma mum amount permtted to be accumuated
n such reserve, as set forth n secton 4 hereunder.
Sec. 3. Defnton of Terms.
The term banks as used heren means banks or trust companes
ncorporated and dong busness under the aws of the Unted States
(ncudng aws reatng to the Dstrct of Coumba), of any State,
or of any Terrtory, a substanta part of the busness of whch con-
ssts of recevng deposts and makng oans and dscounts. Such
term as used n Mmeograph 6209 and heren does not ncude mutua
savngs banks not havng capta stock represented by shares, do-
mestc budng and oan assocatons, or cooperatve banks wthout
capta stock organzed and operated for mutua purposes and wthout
proft.
Sec. 4. ternatve Method.
.01 In eu of the movng average e perence factor provded n
paragraph 3 of Mmeograph 6209, whch s determned on a bass of
20 years ncudng the ta abe year, a bank may use an average e per-
ence factor based on any 20 consecutve years of ts own e perence
after the year 1927. Such average e perence factor, representng the
percentage of bad debt osses to oans for the perod seected, apped
to oans outstandng at the cose of the ta abe year, determnes the
ma mum permssbe addton to the reserve for the year.
.02 The amounts permtted to be added n each ta abe year to the
bad debt reserve under (.01) above may not e ceed an amount whch
w brng the accumuated tota n the bad debt reserve at the cose
of the ta abe year to a ceng equa to three tmes the average e per-
ence factor apped to outstandng oans: Provded,
1. That for the frst ta abe year begnnng after December 31,
1953, the amount of the addton theren to the reserve computed
under (.01) above may not e ceed one-thrd of the dfference
between the ceng so computed and the accumuated tota n the
reserve at the cose of the year before the addton and
2. That for the second ta abe year begnnng after December
31, 1953, the amount of the addton theren to the reserve com-
puted under (.01) above may not e ceed one-haf of the dfference
between the ceng so computed and the accumuated tota n the
reserve at the cose of the year before the addton.
.03 Consstent wth the provsons of Mmeograph 6209 whch per-
mt newy organzed banks and banks wthout suffcent years e per-
ence of ther own to set up a reserve commensurate wth the average
e perence of other smar banks wth respect to the same type of
315359 54 5
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Regs. 118, 39.23 (n)-. 62
oans, preferaby n the same ocaty, banks whch seect a 20-year
perod under (.01) above whch e tends back nto years for whch they
have no e perence of ther own w be permtted to f n such years
wth smar comparabe data.
.04 The provsons of paragraph 6 of Mmeograph 6209 reatng to
(he treatment of specfc bad debt osses and recoveres, and a other
rues utzed n t e appcat on of Mmeograph 6209 sha, to the e tent
not nconsstent, be appcabe to the aternatve method.
Sec. 5. ffect o Otku Documents.
Ths evenue Rung merey suppements Mmeograph 6209 by
provdng an addtona or aternatve method for computng the
annua addton to a reserve forbad debts and the ma mum amount
permtted to be accumuated n such reserve. anks whch are now
usng the movng average method provded n Mmeograph 6209 may
contnue to use that method f they so desre, and such method s st
avaabe to any other banks usng or changng to the reserve method
of accountng for bad debts.
Sec. 6. anks on Specfc Carce-off Method.
hcre a bank on the specfc charge-o method of accountng for
bad debts desres to ava tsef of the provsons of ths Revenue
Rung and change to the reserve method, appcaton to make such
change must be made n the manner prescrbed by secton 39.23(k)-,
Reguatons 118.
Sec. 7. ffectve Date.
The provsons of ths Revenue Rung are appcabe ony for ta -
abe years begnnng after December 31,1953.
pproved by M. . osom, ctng Secretay of the Treasury, pr
8, u : 4.
S CTION 23(1).-D DUCTIONS ROM GROSS INCOM :
D PR CI TION
Reouattons 118, Secton 39.23()-2: Deprec-
abe property.
Motor vehces used as demonstrators or company cars by dea-
ers. (See Rev. Ru. 54-222, p. 19.)
S CTION 23(m).-D DUCTIONS ROM GROSS
INCOM : D PL TION
Reguatons 118, Secton 39.23 (m)-1: Depeton Rev. Ru. 54-109
of mnes, o and gas wes, other natura deposts,
and tmber deprecaton of mprovements.
( so Secton 114. Secton 39.114-1.)
Determnaton of the processes propery ncuded n the term
ordnary treatment processes as set forth n secton 39.23 (m)-
1(f)(3) of Reguatons 118, and secton 114(b)(4)( ) of the
Interna evenue Code, wth respect to the manufacture of brck
and te from shae and brck and te cay.
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63 Regs. 118, 30.23(m)-.
dvce has been requested as to the processes n the manufacture
of brck and te and kndred products from shae and brck and te
cay that are ncuded under the term ordnary treatment processes
as used n secton 39.23(m)-(f) of Reguatons 118, and secton
114(b)(4)( ) of the Interna Revenue Code.
The varous treatment processes nvoved n the manufacture of
such products are as foows:
(1) The mnera s frst e tracted from the earth, usuay from
open pts.
(2) It s transported to the pant, generay by dumpcars or
trucks.
(3) The mnera s there dumped nto bns or sheds for storage
or drecty nto a crusher or granuator where the arge chunks are
reduced to sma workabe szes.
(4) In some cases, secondary grndng s requred.
(5) The mnera s then conveyed to a pugm where t s
m ed to the proper consstency usuay wth the addton of water
and/or other materas.
(6) The m ed product s then formed nto the shape desred,
usuay by an e truson or modng machne.
(7) These raw forms are then processed for the remova of
e cessve mosture and are then burned n kns.
(8) nay, the fnshed products are drawn from the kn
and oaded for shpment or storage.
ased on these facts, the frst four processes are ordnary treat-
ment processes wthn the meanng of secton 114(b) (4) ( ) of the
Code, and secton 39.23(m)-(f) of Reguatons 118. The m ng
of the mnera n the pugm wth water where ths s done to separate
out sand or other materas from the cay or shae s aso consdered
to be an ordnary treatment process other actons n the pugm,
as we as the succeedng processes sted above, are not consdered to
be ordnary treatment processes.
s to the computaton of the gross and net ncome from the property
for percentage depeton purposes after the costs of mnng and manu-
facturng have been segregated, see sectons 29.23(m)- (f) and (g)
of Reguatons 111, and sectons 39.23(m)- (e) and (g) of Regu-
atons 118.
Reguatons 118, Secton 39.23(m)-: Depeton Rev. Ru. 54 211
of mnes, o and gas wes, other natura de-
posts, and tmber deprecaton of mprove-
ments.
Sod and baed nursery stock are not assets of a character sub-
|ect to the aowance for depeton wthn the meanng of secton
23 (m) of the Interna Revenue Code.
dvce has been requested as to the deducton of depeton for
edera ncome ta purposes on ncome receved from the sae of sod
or baed nursery stock.
Sod conssts of the top stratum of so that s fed wth roots of
grass, herbs, etc. aed nursery stock conssts n part of a mass of
earth and roots that s moved wth a transpanted tree, shrub, or
herb.
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Itegs. 118, 39.23(o)-. 64
fter the remova of sod or baed nursery stock t s possbe to
restore the productvty of the and by the addton of other so,
and by varous ground condtonng procedures such as pantng, fer-
tzaton, sedmentaton, etc. The actvty of growng and seng
sod and baed nursery stock s essentay a farmng operaton. See
Reguatons 118, secton 39.60-1. or edera ncome ta purposes
a deducton s not permtted for the depeton of so ncdent to
farmng operatons but the farmer s permtted to deduct as a bus-
ness e pense the cost of mantanng the productvty of the and.
ccordngy, t s hed that no depeton s aowabe upon re-
mova and sae of sod or baed nursery stock from fee owned or renta
and. Cf. Reguatons 118, secton 39.23(1)-2. Revenue Rung 78,
C. . 1953-1,18, s not appcabe to ths stuaton.
Reguatons 118, Secton 39.23(m)-: Depeton
of mnes, o and gas wes, other natura deposts,
and tmber deprecaton of mprovements.
Reguatons 118 amended. (See T. D. 6059, p. SO.)
Reguatons 118, Secton 39.23(m)-G: Charges Rev. Ru. 54-42
to capta and to e pense n case of o and
gas wes.
( so Secton 183, Secton 39.183-1.)
The eecton to charge to e pense ntangbe drng and deveop-
ment costs ncurred n connecton wth the o operatons of a partner-
shp that fes ts return and computes ts ncome on orm 1065 s
e ercsabe by the partnershp. The partnershp eecton s con-
trong rrespectve of the eectons of the ndvdua partners as to
ther own operatons. See ente O Corporaton v. Commssoner,
20 T. C. 565 I. T. 3713, Cs . 1945,178,
S CTION 23(o). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS
Reguatons 118, Secton 39.23 (o) -1: Contr- Rev. Ru. 54-11
butons or gfts by ndvduas.
( so Secton 23(q), Secton 39.23(q)-.)
The Okahoma ducatona Teevson uthorty, created by an act
of the Okahoma Legsature, approved May 18, 1953, s an nstru-
mentaty of the State of Okahoma and contrbutons or gfts made
to the authorty, whch s to provde a statewde educatona teevson
system are deductbe by the donors n the manner and to the e tent
provded by secton 23 (o) and (q) of the Interna Revenue Code.
Reguatons 118, Secton 39.23 (o)-1 : Contr- Rev. Ru. 54-56
butons or gfts by ndvduas.
( so Secton 122, Secton 39.122-1 Secton
22(n), Secton 39.22(n)().)
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65 Regs 118, 39 23(o)-.
Under the provsons of secton 23 (o) of the Interna Revenue Code,
n computng the net ncome for a year to whch a net operatng oss
deducton s appcahe, the deducton for chartabe contrbutons
must be computed on the bass of the revsed ad|usted gross ncome
after aowance of the net operatng oss carryback. (See Rev. Rus.
287 and 280, C. 15. 1953-2, pp. 21 and 22, respectvey.)
Reguatons 118, Secton 39.23(o)-1 : Contr- Rev. Ru. 54-220
butons or gfts by ndvduas.
( so Secton 23(q), Secton 39.23(q)-, Reg-
uatons 118 Secton 812(d), Secton 81.44,
Reguatons 105 Secton 1004, Secton 8G.13,
Reguatons 108.)
The Pacfc War Memora Commsson s an agency of the Terr-
tory of awa. Contrbutons, gfts, egaces, bequests, devses,
or transfers thereto are deductbe for edera ncome ta and es-
tate and gft ta purposes n the manner and to the e tent provded
by the Interna Iteveuue Code.
dvce s requested whether the Pacfc War Memora Commsson
s an agency of the Terrtory of awa and whether contrbutons,
gfts, egaces, bequests, devses, or transfers thereto are deductbe
for edera ncome ta and estate and gft ta purposes.
The Pacfc War Memora Commsson was created by ct 288 of
the Legsature of the Terrtory of awa, approved May 17, 1949.
The Commsson s composed of seven persons apponted by the Gov-
ernor of awa n accordance wth the provsons of secton 80 of the
Organc ct, 31 Stat. 141. It s authorzed to create and mantan a
vng war memora commemoratng the sacrfces of the heroc dead
of Word War II and those who have recenty gven and n the future
may gve ther ves for ther country, and to accept for the accom-
pshment of ts ob|ectves, gfts and contrbutons from governmenta
agences and prvate persons. The Commsson s the soe offca
agency of the Terrtory of awa for the purpose of ct 288. It s
requred to submt to the Legsature of the Terrtory of awa at the
begnnng of each reguar sesson a fu report on ts actvtes together
wth such recommendatons as t may deem advsabe. moneys
e pended under the ct sha be pad by the Terrtora treasurer, upon
warrants ssued by the audtor, upon vouchers approved by the Char-
man of the Commsson. sum of money has been approprated out
of the genera revenues of the Terrtory for the purpose of defrayng
the e penses of the Commsson.
Secton 23 of the Interna Revenue Code provdes that n computng
net ncome there sha be aowed as deductons:
(o) C Rrr r. and Other Contrbutons. In the case of an ndvdua,
contrbutons or gfts payment of whch Is made wthn the ta abe year to or
for the use of:
(1) the Unted States, any State, Terrtory, of any potca subdvson
thereof or the Dstrct of Coumba, or any possesson of the Unted States,
for e cusvey pubc purposes
Secton 23(q) (1) of the Code provdes for the deducton of smar
contrbutons n the case of a corporaton.
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Regs. 118, 39.23(p)-.) 66
Secton 812 of the Code provdes that for the purpose of the estate
ta the vaue of the net estate sha be determned, n the case of a
ctzen or resdent of the Unted States by deductng from the vaue
of the gross estate
(d) Transfers for Pubc, Chartabe, and Regots ses. The amonnt
of a bequests, egaces, devses, or transfers, to or for the use of the
Unted States, any State, Terrtory, any potca subdvson thereof, or the
Dstrct of Coumba, for e cusvey pubc purposes, .
Smar provson for the estates of nonresdent aens s made by sec-
ton 861(a)(3) of the Code.
Secton 1004 of the Code provdes that n computng net gfts for
any caendar year there sha be aowed as deductons:
(a) Resdents. In the case of a ctzen or resdent
(2) Chartabe, etc., gfts. The amount of a gfts made durng such
year to or for the use of
( ) the Unted States, any State, Terrtory, or any potca sub-
dvson thereof, or the Dstrct of Coumba, for e cusvey pubc
pn-poses
Smar provson s made n the case of a nonresdent aen by sub-
dvson (b) (1) of secton 1004 of the Code.
It s hed that the Pacfc War Memora Commsson s an agency
of the Terrtory of awa. ccordngy, contrbutons thereto are
deductbe by the donors n computng ther ta abe net ncome for
edera ncome ta purposes n the manner and to the e tent provded
by secton 23 (o) and (q) of the Interna Revenue Code. equests,
egaces, devses, or transfers to or for the use of the Commsson are
deductbe n computng the vaue of the net estate of a decedent for
edera estate ta purposes n the manner and to the e tent provded
by sectons 812(d) and 861 (a) (3) of the Code. Gfts of property to
the Commsson are deductbe n computng net gfts for edera gft
ta purposes n the manner and to the e tent provded n sectons
1004(a) (2) ( ) and 1004(b) (1) of the Code.
Reguatons 118, Secton 39.23(o)-: Contr-
butons or gfts by ndvduas.
Contrbutons to separate funds of organzatons e empt under sec-
ton 101 of the Code. (See Rev. Ru. 54-243, p. 92.)
S CTION 23(p). D DUCTIONS ROM GROSS INCOM :
CONTRI UTIONS O N MPLOY R TO N M-
PLOY S TRUST OR NNUITY PL N ND COMP NS -
TION UND R D RR D-P YM NT PL N
Reguatons 1 8, Secton 39.23 (p)-: Contr-
butons of an empoyer to an empoyees
trust or annuty pan and compensaton under
a deferred-payment pan n genera.
Contrbutons by an empoyer n form of pensons pad to retred
empoyees. (See Rev. Ru. 54-152, p. 149.)
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67 Regs. 118, 39.23(bb)-.
S CTION 23(q). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS Y COR-
POR TIONS
Reguatons 118, Secton 39.23(q)-: Contr-
butons or gfts by corporatons.
Contrbutons to Okahoma ducatona Teevson uthorty.
(SeeRev.Ru. 54-11, p. 64.)
Reguatons 118, Secton 39.23 (q)-: Contr-
butons or gfts by corporatons.
Contrbutons made to the Pacfc War Memora Commsson an
agency of the Terrtory of awa. (See Rev. Ru. 54-220, p. 65.)
Reguatons 118, Secton 39.23(q)-: Contr-
butons or gfts by corporatons.
Contrbutons to separate funds of organzatons e empt under
secton 101 of the Code. (See Rev. Ru. 54-243, p. 92.)
S CTION 23 ( ). D DUCTIONS ROM GROSS INCOM :
M DIC L, D NT L, TC., P NS S
Reguatons 118, Secton 39.23( )-1 : Medca, Rev. Ru. 54-57
denta, etc., e penses.
( so Secton 24(a), Secton 39.24(a)-2.)
mounts e pended n the constructon of a swmmng poo or the
nstaaton of an eevator on property owned by a ta payer, even
though the poo or eevator was constructed or nstaed for reasons
of heath, pursuant to the recommendatons of a physcan, consttute
e pendtures for permanent mprovements or betterments whch n-
crease the vaue of the property, and may not be deducted as medca
e penses under secton 23( ) of the Interna Revenue Code. See
secton 24(a) (2) of the Code and ohn L. Seymovr v. Commssoner,
14T.C.1111.
S CTION 23(bb). D DUCTIONS ROM GROSS
INCOM : CIRCUL TION P NDITUR S
Reguatons 118, Secton 39.23(bb)-: Crcua- Rev. Ru. 54-3
ton e pendtures.
mounts pad by a newspaper pubsher to a chartabe orgpn-
zaton as a resut of an offer made n a teephone campagn for
addtona subscrbers that a porton of the prce of every subscrp-
ton receved durng the campagn woud be pad to such organza-
ton, pus the amount of the compensaton to the contractor n charge
of the soctaton, teephone costs, verfcatons, and other overhead
connected wth the campagn, consttute e pendtures to mantan
or Increase the crcuaton of the newspaper and are deductbe n
fu under secton 23(bb) of the Interna eveuue Code.
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Regs. 118, 39.24(a)-2. 68
dvce s requested reatve to the proper treatment for edera
ncome ta purposes of certan e pendtures ncurred by a newspaper
pubsher n a crcuaton campagn.
In order to meet competton from a rva newspaper n the same
cty the ta payer started a teephone campagn for addtona sub-
scrbers to ts day and Sunday newspaper, offerng as an nducement
to new subscrbers to make a payment of a porton of the subscrpton
prce to a chartabe organzaton. The ta payer entered nto an
agreement wth the chartabe organzaton under the terms of whch
t agreed that the organzaton woud receve a certan percentage of
the subscrpton prce pad n return for the prvege of statng that
fact n connecton wth the soctaton. soctng costs, such as
teephone charges, mang of acknowedgments, and the compensa-
ton of the contractor engaged to conduct the campagn, were to be
pad by the ta payer.
Secton 23(bb) of the Interna Revenue Code provdes that n
computng net ncome there sha be aowed as deductons:
(bb) Crcuaton pendtures. Notwthstandng Moton 24(a), a e pend-
tures (other than e pendtures for the purchase of and ov deprecabe property
or for the acqustons of crcuaton through the purchase of any part of the
busness of another pubsher of a newspaper, magazne, or other perodca) to
estabsh, mantan, or Increase the crcuaton of a newspaper, magazne, or
other perodca
It s hed that that porton of the prce of every subscrpton receved
by a newspaper pubsher durng a teephone campagn for addtona
subscrptons and pad to a chartabe organzaton as a resut of an
offer made durng the campagn, pus the amount of the compensaton
to the contractor n charge of soctaton, teephone costs, verfcatons,
and other overhead connected wth the campagn, consttute e pend-
tures to mantan or ncrease the crcuaton of the newspaper wthn
the meanng of secton 23(bb) of the Interna Revenue Code and are
deductbe n fu n computng net ncome for edera ncome ta
purposes.
S CTION 24(a). IT MS NOT D DUCTI L :
G N R L RUL
Reguatons 118, Secton 30.24(a)-2: Capta Rev. Ru. 54-191
e pendtures.
( so Secton 23(a), Secton 39.23(a)-.)
The costs of orgna constructon of earthen terraces to prevent
so eroson ordnary arc e pendtures for permanent mprovements
or betterments whch ncrease the vaue of the property on whch
they are constructed, and, as such, are nondeductbe capta e pend-
tures. pendtures for mantenance and repar of such terraces
are deductbe as ordnary and necessary busness e penses under
secton 23(a) (1) ( ) of the Interna Revenue Code.
dvce s requested reatve to the treatment, for edera ncome
ta purposes, of costs of orgna constructon and of mantenance and
repar of earthern farm terraces, n vew of the decson n . . Co-
ng wood et u,v. v. Commssoner, 20 T. C. No. 132, acquescence,
page 4, ths uetn. In that case the court found as a fact, based
o the evdence presented, that constructon of the terraces on the
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69 cks. 118, 5 39.25-2.
ta payer s farm ands dd not ncrease te vaue of the ands. It
concuded that the cost of ther constructon was a deduct be e pense.
The prncpe announced n the Congwood case w be foowed
by the Interna Revenue Servce n the dsposton of other cases ony
f the facts are found to be substantay smar to those n that case.
Generay, e pendtures by a ta payer for the constructon of
earthern terraces on and owned by hm are not deductbe e penses
wthn the meanng of secton 23(a) of the Interna Revenue Code,
but are capta e pendtures, the deducton of whch s prohbted by
secton 24(a) (2) of the Code. Ordnary, the constructon of earthen
terraces for the preventon of so eroson ncreases the vaue of the
property on whch they are constructed. In the absence of convncng
evdence to the contrary, t w be presumed, therefore, that terrace
constructon of ths type s an mprovement, the cost of whch s
propery chargeabe to capta account. owever, e penses for ther
mantenance and repar are deductbe as ordnary and necessary
e penses under secton 23(a) (1) ( ) of the Code.
Reguatons 118, Sucton 39.2-1 (a)-2: Capta
e pendtures.
mounts e pended n the constructon of a swmmng poo or the
nstaaton of an eevator on property owned by the ta payer to be
used n the care or treatment of a physca dsabty. (See Rev. Ru.
54-57, p. 67.)
S CTION 25.-CR DIT3 O INDI IDU L G INST
N T INCOM
Reguatons 118, Secton 39.25-2: Credts Rev. Ru. 54-70
of ndvduas for purpose of norma ta
and surta .
Under the adopton statutes of Maryand and rgna, a chd s
egay adopted for the purpose of the e empton for dependents
provded hy secton 2.1(b) of the Code when the nterocutory decree
of adopton Is entered. The adopton statutes of Mssour, however,
do not provde for an nterocutory decree and a chd Is not egay
adopted wthn the purvew of secton 25(b) of the Code unt the
decree of adopton s entered.
dvce s requested reatve to when, under the respectve aws of
Maryand, rgna, and Mssour, a chd s consdered to be egay
adopted for the purpose of the e empton for dependents provded by
secton 25(b) of the Interna Revenue Code.
Secton 25(b) (3) of the Code provdes that the term dependent
means any person wthn certan specfed reatonshps to the ta -
payer, ncudng a son or daughter of the ta payer, over haf of whose
support, for the caendar year n whch the ta abe year of the ta -
payer begns, was receved from the ta payer. Such secton further
provdes that a egay adopted chd of a person sha be consdered
a chd of such person by bood.
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Regs. 118, 39.25-2.) 70
It was stated n urnet v. enry arme, 287 U. S. 103, Ct. D. 611.
C. . I-2, 210 (1932), that the e erton of the penary power of
Congress under the Consttuton to ta ncome s not sub|ect to state
contro. The court went on to say, It s the w of Congress whch
contros, and the e presson of ts w n egsaton, n the absence
of anguage evdencng a dfferent purpose, s to be nterpreted so as
to gve a unform appcaton to a naton-wde scheme of ta aton.
State aw may contro ony when the operaton of the edera
ta ng act, by e press anguage or necessary mpcaton, makes ts
own operaton dependent upon state aw. Congress dd not defne
adopted n secton 25(b) (3) of the Code e cept to specfy that an
adopted chd sha be consdered a chd by bood. It can ony be
assumed that the quafcaton egay refers to the aws of the States.
The Court n the arme case, supra, recognzed that such an e pressed
or mped ntent cannot be superseded by an admnstratve pocy
whch s grounded ony upon unform appcaton of ta aw. See
Davcs Warehouse Company v. o oes, 321 II. S. 144, and state of
enry W. Putnam et a. v. Commssoner, 324 U. S. 31)3, Ct, D. 1638,
C. . 1045, 345.
The pertnent provsons of the Maryand State statutes are con-
taned n artce 16 of ack s nnotated Code of Maryand, 1951, sec-
ton 85 of whch provdes that an nterocutory decree sha be ssued
grantng pettoners temporary custody of the chd for a mted
perod of tme, not to e ceed 1 year the court retanng |ursdcton
of the case. Secton 86 provdes that the ega effect of an outstandng
nterocutory decree of adopton s to make the person adopted the
chd of the pettoner. Secton 87 merey provdes that the ega effect
of an nterocutory order sha be confrmed and contnued n the fna
decree.
Smary, secton 63-357 of the Code of rgna, 1950, provdes
that any chd adopted sha be, from and after the entry of the nter-
ocutory order, to a ntents and purposes, the chd of the person or
persons so adoptng hm.
Sectons 453.020 and 453.070 of the Mssour Revsed Statutes of
1949, n part, provdes for the proper fng of a petton for adopton,
wth the appontment by the court of a guardan ad tem and an
nvestgaton of sutabty. Secton 453.080 provdes that f the tra
perod of at east 9 months has been competed, a decree sha be entered
makng the chd, for a ega ntents and purposes, the chd of the
pettoner.
rom the foregong, t s apparent that under Maryand and rgna
statutes the effect of an outstandng nterocutory decree s a ega
adopton, snce the statutory tra perod mposes parenta obga-
tons upon the adoptng parents whch are greater than f they were
ony hodng the chd n temporary custody as a guardan. Durng
sucn perod, the obgatons and prveges are the same as f a fna
decree were entered. Under Mssour aw, however, there s no ega
adopton durng the tra perod. The adoptng parents do not
assume the fu rghts, prveges and obgatons whch are created
by the ssuance by a proper trbuna of an adopton decree. Indeed,
the 9-month rue emnates speedy adopton and a chd s not the
chd of adoptng parents, for a ega ntents and purposes, unt
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71 IRegs. 118, 39.27(g)-.
the 9 months tra perod has been competed and the adopton decree
entered.
ccordngy, t s hed that under the adopton statutes of Maryand
and rgna, a chd s egay adopted for the purpose of the
e empton for dependents provded by secton 25(b) of the Code when
the nterocutory decree of adopton s entered. It s further hed that
under the adopton statutes of Mssour, a chd s not egay
adopted, wthn the purvew of secton 25(b) of the Code, unt the
decree of adopton s entered, there beng no provson for an nter-
ocutory decree.
S CTION 26(b). CR DITS O CORPOR TIONS:
DI ID NDS R C I D
Reguatons 118, Secton 39.26(b)-: Credt
for dvdends receved.
Computaton of credt for the purpose of determnng the a-
ternatve ta . (See Rev. Ru. 54-28, p. 123.)

S CTION 26(h). CR DITS O CORPOR TIONS CR DIT
OR DI ID NDS P ID ON C RT IN PR RR D STOC
Reguatons 118, Secton 39.26(h)-: Credt
for dvdends pad on preferred stock of
pubc uttes.
Computaton of credt for the purpose of determnng the a-
ternatve ta . (See Rev. Ru. 54-28, p. 123.)
S CTION 26(). CR DITS O CORPOR TIONS: W ST RN
MISP R TR D CORPOR TIONS
Reguatons 118, Secton 39.26()-: Credt
of Western emsphere trade corporatons.
Computaton of credt for the purpose of determnng the aterna-
tve ta . (See Rev. Ru. 54-28, p. 123.)
S CTION 27(g).-CORPOR TION DI ID NDS P ID
CR DIT: DISTRI UTIONS IN LI UID TIONS
Reguatons 118, Secton 39.27 (g) -1: D n- Rev. Ru. 54-71
dends pad credt for dstrbutons n
qudaton.
corporaton, havng a pree stng defct, w be entted to a
dvdends pad credt under secton 27(g) of the Interna Revenue
Code, ony to the e tent that dstrbutons u compete or parta

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Regs. 118, 39.27(g)-I. 72
qudaton from current year s earnngs e ceed such pree stng
defct.
1. T. 3067, C. . 1937-1, 91, revoked.
urther consderaton has been gven to I. T. 3067, C. . 1937-1, 91,
whch nvoved the queston whether a corporaton upon ts quda-
ton n 1936 s entted to a dvdends pad credt under secton 27(f) of
the e venue ct of 1936 where ts operatng defct at the begnnng of
the year 1936 e ceeded ts earnngs and profts for that year to the
date of qudaton. Secton 27(f) of the 1936 act, whch aowed a
dvdends pad credt aganst the undstrbuted profts surta mposed
by secton 14 of the same act, provded as foows:
Dstrbutons n Lqudaton. In the case of amounts dstrbuted In quda-
ton te part of such dstrbuton whch s propery chargeabe to the earnngs or
profts accumuated after ebruary 2S. 1913, sha, for the purposes of computng
the dvdends pad credt under ths secton, be treated as a ta abe dvdend pad.
I. T. 3067, supra, hed that the corporaton was entted to a dvdends
pad credt under secton 27(f) of the 1936 act to the fu e tent of the
earnngs and profts for that year whch were dstrbuted, regardess
of the fact that the corporaton had an operatng defct at the begn-
nng of the ta abe year n e cess of the earnngs and profts for that
year.
smar probem arses under secton 27(g) of the Interna Revenue
Code, whch corresponds to secton 27(f) of the Revenue ct of 1936,
n connecton wth the surta mposed by secton 500 of the Code upon
undstrbuted subchapter net ncome computed under secton 504 of
the Code. Secton 2 (g) of the Interna Revenue Code provdes as
foows:
Dstrbutons n Lqudaton. In the case of amounts dstrbuted n quda-
ton the part of such dstrbuton whch s proery chargeabe to the earnngs or
profts accumuated after ebruary 28, 1913, sha, for the purposes of computng
the basc surta credt under ths secton, be treated as a ta abe dvdend pad.
The queston has been tgated wth respect to secton 27(f) of the
1936 act n ddressograph-Mutgraph Corporaton et ah, Ta Court
Memorandum Opnon, dated ebruary 5, 1945, and Sheabarger
Gran Products Company v. Commssoner, 146 ed. (2d) 177, affrm-
ng 2 T. C. 75, and opnons contrary to I. T. 3067, supra, were ren-
dered. See aso oey Securtes Corporaton v. Commssoner, 38
. T. . 1036, affrmed 106 ed. (2d) 731, Gaston Company, Inc., 39
. T. . 640, and rookyn Natona Corporaton v. Commssoner, 157
ed. (2d) 450, affrmng 5 T. C. 893.
In vew of the decsons n the Sheabarger and ddressograph
cases, supra, t s concuded that a corporaton, wth mpared capta,
shoud be aowed a dvdends pad credt wthn the meanng of secton
27(g) of the Interna Revenue Code ony to the e tent that dstrbu-
tons n compete or parta qudaton from current year s earnngs
e ceed the e stng defct. I. T. 3007, supra, s hereby revoked.
Pursuant to the authorty contaned n secton 3791(b) of the In-
terna Revenue Code, ths rung w be apped wthout retroactve
effect to dstrbutons n compete or parta qudaton made pror to
March 1, 1954, e cept that no credt or refund w be aowed wth
respect to any such dstrbuton.
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73 Regs. 118, 5 39.36-2.
P RT 111. CR DITS G INST T
S CTION 35. CR DIT OR T WIT LD ON W G S
Reguatons 118, Secton 39.35-2: Credt for Rev. Ru. 54-221
speca refunds of empoyee soca securty
( so Secton 1401(d) (3), Secton 408.802, Sec-
ton 1421, Secton 408.801, Reguatons 128.)
mpoyee ta wthhed wth respect to more than 3,600 of an
empoyee s wanes, under the provsons of the edera Insurance
Contrbutons ct, by reason of the empoyee havng receved wanes
from two or more empoyers durng caendar year, may be camed
as a credt aganst the empoyee s ncome ta abty n the same
manner as though It were deducted and wthhed as ncome ta at
the source.
mpoyee ta erroneousy wthhed wth respect to more than
3,600 of wages pad by a snge empoyer durng a caendar year,
however, may not be so credted, but shoud be ad|usted by the
empoyer wth the empoyee. If such an over-coecton cannot be
so ad|usted, a cam for credt or refund of the amount may be
fed wthn the perod of mtaton upon refunds and credts.
Mn. 5142, C. . 1940-2, 238, and Mn. 61 )8, C. . 1947-2, 145,
are nappcabe wth respect to wages pad after December 31,
1950.
dvce s requested whether an empoyee recevng wages n
e cess of 3,600 durng the caendar year by reason of hs havng
performed servces for two or more empoyers s entted to credt
aganst hs ncome ta abty the e cess over 54 ( 72 after 1953)
or empoyee ta mposed by the edera Insurance Contrbutons ct
and wthhed by hs empoyers wth respect to such wages, ncud-
ng an amount whch was erroneousy deducted by one of the empoyers
wth respect to remuneraton n e cess of 3,600.
If, durng any caendar year commencng after December 31, 1950,
an empoyee receves wages n e cess of 3,600 from two or more
empoyers, the empoyee s entted to a speca refund of the amount,
f any, by whch the empoyee ta mposed under the edera Insur-
ance Contrbutons ct wth respect to such wages and deducted there-
from e ceeds the empoyee ta wth respect to the frst 3,600 of such
wages.
n empoyee who s entted to a speca refund of empoyee ta
wth respect to wages receved durng a caendar year and who s aso
requred to fe an ncome ta return for such caendar year may obtan
the benefts of such refund ony by camng credt therefor n the same
manner as though t were an amount deducted and wthhed as ncome
ta at the source under secton 1622 of the Interna Revenue Code.
n empoyee who s entted to a speca refund and who s not re-
qured to fe an ncome ta return for the ta abe year nvoved may
obtan the refund by fng a cam estabshng hs rght thereto. The
cam shoud be fed on orm 843 wth the Dstrct Drector of Interna
Revenue for the dstrct n whch the empoyee resdes. The empoyee
sha submt wth the cam, as a part thereof, a statement settng forth
the reason why he s entted to cam the speca refund ncudng the
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Regs. 118, 39.35-2. 74
foowng nformaton, wth respect to each empoyer from whom he
receved wages durng the caendar year: (1) the name and address
of such empoyer, (2) the account number of the empoyee and the
empoyee s name as reported by the empoyer on hs returns, (3) the
amount of wages receved durng the caendar year to whch the cam
reates, (4) the amount of empoyee ta on such wages deducted by the
empoyer, and (5) the amount of such ta , f any, whch has been
refunded or otherwse returned to the empoyee. orm SS-9, Revsed,
may be used n suppyng ths nformaton.
The procedure set forth above s appcabe ony wth respect to an
empoyee who has receved wages from two or more empoyers and
ony wth respect to the ta deducted by each empoyer on the frst
3,000 of the empoyee s tota wages. Such procedure does not appy
to empoyee ta whch s erroneousy deducted from remuneraton
e ceedng 3,600 durng a caendar year receved by an empoyee for
empoyment performed for ony one empoyer.
If the empoyee ta s erroneousy wthhed wth respect to wages n
e cess of 3,000 pad by a snge empoyer, the empoyer shoud ad|ust
the overcoecton of empoyee ta wth the empoyee. (Sec. 1401(c)
of the ct.) If the overcoecton cannot be so ad|usted, a cam for
refund or credt may be fed n accordance wth the provsons of
secton 1421 of the ct reatng to erroneous or ega coectons of
ta . Pursuant to such secton the empoyee may authorze the em-
poyer to fe a cam and receve refund or credt of the overpayment
or the empoyee may fe such cam on hs own behaf. ach cam
for refund sha be made on orm 843 n accordance wth nstructons
reatng to such form and sha have attached as a part of the cam a
compete statement n support thereof. Credt may be camed by
the empoyer on hs return, orm 941, mpoyer s uartery edera
Ta Return, n accordance wth the nstructons thereon.
The evdence n support of an empoyer s cam sha ncude the
statement (1) that the empoyer has repad the ta to the empoyee
or has secured the wrtten consent of such empoyee to aowance of the
refund or credt, and (2) that the empoyer has obtaned from the
empoye a wrtten statement that the empoyee has not camed and
w not cam refund or credt of the amount of the overcoecton.
In every case, the empoyer sha mantan as part of hs records the
wrtten recept of the empoyee, showng the date and amount of the
repayment, or the wrtten consent of the empoyee, whchever s used
n support of the cam, and the wrtten statement of the empoyee
that he has not camed and w not cam refund or credt of the
amount of the overcoecton.
n empoyee s cam sha be supported by (1) a statement settng
forth whether the empoyee has camed credt aganst, or refund of
hs ncome ta by reason of a speca refund for the caendar year of
such overcoecton, and the amount, f any, so camed and (2) a state-
ment settng forth the e tent, f any, to whch the empoyer has re-
mbursed the empoyee n any manner for the overcoecton, the
amount, f any, of credt or refund of such overpayment camed by
the empoyer or authorzed by the empoyee to be camed by the em-
poyer, and such facts as w estabsh that the overpayment s not
ad|ustabe by and between the empoyer and empoyee. The em-
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75 IRegs. 118, 5 39.41-2.
poyee sha obtan the atter statement, f possbe, from the empoyer,
who shoud ncude n such statement the fact that t s made n support
of a cam to be fed by the empoyee for refund of empoyee ta pad
by such empoyer to the Dstrct Drector of Interna Revenue. If the
empoyer s statement s not submtted wth the cam, the empoyee
sha make the statement to the best of hs knowedge and beef, and
sha ncude theren an e panaton of hs nabty to obtan the
statement from the empoyer.
No refund or credt w be aowed after the e praton of the app-
cabe statutory perod of mtaton upon refunds and credt.
Mm. 5142, C. . 1940-2, 238, and Mm. 6198, C. . 1947-2,145, are
nappcabe wth respect to wages pad after December 31,1950.
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING
S CTION 41. G N R L RUL
Reguatons 118, Secton 39.41-2: ases of com- Rev. Ru. 54-4
putaton and changes n accountng methods.
modfcaton of a ta payer s accountng procedures whereby
pennes woud be emnated from certan nterna fnanca trans-
actons by ncreasng or decreasng the amount to the nearest doar
w be acceptabe for edera ncome ta purposes provded
such procedures, once adopted, are mantaned wth reasonabe
consstency.
dvce s requested whether a proposed modfcaton of a ta payer s
accountng procedures whereby pennes woud be emnated from
certan nterna transactons by ncreasng or decreasng the amount
to the nearest doar w be acceptabe for edera ncome ta
purposes.
Under the proposed pan pennes woud be emnated n the process-
ng of fgures reatng to certan nterna transactons such as accounts
payabe dstrbutons, saes dstrbutons, and payro dstrbutons.
aance sheet accounts, ncudng baances due to and from empoyees,
and otherS| woud be kept on an e act amount bass. owever, n the
nterna dstrbutons, pennes woud be emnated at the earest
stage of the accountng operatons. If an amount ends n 50 cents or
more, t woud be rounded upward to the ne t doar, and f ess than
50 cents, the pennes woud be dropped. The net varances resutng
from penny emnatons shoud be mnor snce the pennes added and
dropped woud tend to offset each other. Such varances w be
recorded as debts or credts n a penny emnaton account whch w
be mantaned for baancng purposes. t the end of the ta abe year,
ths account w represent addtona ncome or e pense dependng
upon ts baance.
In vew of the foregong, t s hed that the proposed modfcaton of
the ta payer s accountng procedures whereby pennes woud be em-
nated from certan nterna fnanca transactons s acceptabe for
edera ncome ta purposes provded that such procedures, once
adopted, are mantaned wth reasonabe consstency.
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Regs. 118, 39.44-1. 76
S CTION 42. P RIOD IN W IC IT MS O GROSS
INCOM INCLUD D
muatons 118, Secton 39.42-1: When ncuded
n gross ncome.
Increment n vaue of a Unted States savng bond, Seres , reg-
stered n the names of coowners, whch s ressued to substtute a new
coowner n pace of one of the orgna coowners. (See Rev. Ru.
54-143, p. 12.)
S CTION 44. INST LLM NT 15 S1S
Reguatons 118, Secton 39.44-1: Sae of Rev. Ru. 54-111
persona property on nstament pan.
reguar deaer n persona property may eect to report ncome
from nstament sues on the nstament bass and contnue to re-
port Income from saes on open account on the accrua bass. Such
a deaer s not requred to ncude amounts receved on account
of saes on open account n determnng ts net ncome from In-
stament saes, even though the saes on open account may have
been made pror to eecton by the ta payer to report Income from
nstament saes on the nstament bass.
dvce s requested whether a deaer n persona property who s
enterng nto a program of nstament seng n addton to seng
on open account may adopt the nstament bass of reportng ncome
as to ts nstament saes and contnue to report ts saes on open
account on the accrua bass. dvce s aso requested whether co-
ectons from saes on open account made n a pror ta abe year, the
proft on whch was reported on the accrua bass for such pror year,
w agan be sub|ect to ta aton n the current ta abe year, under
the provsons of secton 44(c) of the Interna Revenue Code and
secton 39.44-1 of Reguatons 118.
Secton 44 of the Code provdes n part as foows:
(a) Deaers n Persona Property. Under reguatons prescrbed by the
Commssoner wth the approva of the Secretary, a person who reguary ses
or otherwse dsposes of persona property on the nstament pan may return
as ncome therefrom n any ta abe year that proporton of the nstament
payments actuay receved n that year whch the gross proft reazed or to
be reazed when payment s competed, bears to the tota contract prce.

(c) Chance from ccrua to Instament ass. If a ta payer entted to
the benefts of subsecton (a) eects for any ta abe year to report hs net
ncome on the Instament bass, then n computng hs ncome for the year
of change or any subsequent year, amounts actuay receved dnrng any such
year on account of saes or other dspostons of property made n any pror
year sha not be e cuded.
Secton 39.44-1 (b) of Reguatons 118 provdes n part as foows:
a person who reguary ses or otherwse dsposes of persona property
on the nstament pan, whether or not tte remans n the vendor unt the
property s fuy pad for, may return as ncome therefrom n any ta abe year
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77 Regs. 118, 39.44-5.
that proporton of the nstament payments actuay receved n that year
whch the tota or gross proft (that s, saes ess cost of goods sod) reazed
or to be reazed when the property s pad for, bears to the tota contract prce.
Thus, the ncome of a deaer n persona property on the nstament pan
may be ascertaned by takng as ncome that proporton of the tota payments
receved n the ta abe year from nstament saes (such payments beng ao-
cated to the year aganst the saes of whch they appy) whch the tota or
gross proft reazed or to be reazed on the tota nstament saes made durng
each year bears to the tota contract prce of a such saes made durng that
respectve year. No payments receved n the ta abe year sha be e cuded n
computng the amount of ncome to be returned on the ground that they were
receved under a sae the tota proft from whch was returned as ncome durng
a ta abe year or years pror to the change by the ta payer to the nstament
bass of returnng ncome.
The Interna Revenue Code or the reguatons promugated there-
under do not prohbt a ta payer who otherwse meets the requre-
ments for reportng the proft on nstament saes on the nstament
bass from adoptng the nstament method of reportng such proft
and at the same tme contnung to report the proft from saes on
open account on the accrua bass.
The provsons of secton 44(c) of the Code, supra, and secton
39.44 1 of Reguatons 118, requrng a ta payer to ncude n the
computaton of ts net ncome from nstament saes for the year of
change from the accrua to the nstament bass or any subsequent
year amounts receved on account of saes made n a year pror to the
change, are appcabe ony n a stuaton where a ta payer makng
saes on the nstament pan eects to change ts method of reportng
nstament saes ncome from the accrua to the nstament bass.
urthermore, such provsons have reference ony to amounts receved
on account of nstament saes made n pror years, not to amounts
receved on account of saes on open account.
ccordngy, t s hed that a reguar deaer n persona property
may eect to report ncome from nstament saes on the nstament
bass and contnue to report ncome from saes on open account on the
accrua bass. It s further hed that such a deaer s not requred to
ncude n ncome amounts receved on account of saes on open ac-
count n determnng ts net ncome from nstament saes, even though
the saes on open account may have been made pror to eecton by
the ta payer to report ncome from nstament saes on the nsta-
ment bass.
deaer who desres to report the ncome from nstament saes
on the nstament bass must mantan books of account n such a
manner as to enabe an accurate computaton to be made of such
ncome on that bass n accordance wth the provsons of secton
39.44-1 of Reguatons 118.
Reguatons 118, Secton 39.44-5: Gan or oss
upon dsposton of nstament obgatons.
Reguatons 118 amended. (See T. D. 6059, p. 80.)
815359 54-
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Regs. 118, 5 39.53-2. 78
P RT . R TURNS ND P YM NT O T
S CTION 51. INDI IDU L R TURNS
Reguatons 118, Secton 39.51-1: Indvdua
returns.
ppcaton of the e cuson provded by secton 251 of the Interna
Revenue Code wth respect to communty ncome of spouses n com-
munty property aw States. (See Rev. Ru. 54-16, p. 157.)
S CTION 52. CORPOR TION R TURNS
Reguatons 118, Secton 39.52-1: Corporaton
returns.
Schedue PS ( orm 1120) prepared for use by ta payers n 1951
w be utzed n the preparaton of returns for caendar year 1953
and fsca years endng n 1954. (See Rev. Ru. 54-18, p. 165.)
S CTION 53.-TIM ND PL C OR ILING R TURNS
Reguatons 118, Secton 39.53-2: tenson Rev. Ru. 54-81
of tme for fng returns.
( so Secton 56, Secton 39.56-2 Secton 101,
Secton 39.101(12)-1.)
Tme e tended for fng e empt cooperatve assocaton ncome
ta return, orm 990-C (for farmers cooperatve marketng and
purchasng assocaton under secton 101(12) of the Interna Reve-
nue Code).
Secton 1. Purtose.
The purpose of ths Revenue Rung s to e tend the tme for rng
the empt Cooperatve ssocaton Income Ta Return, orm
990-C, and the tme for payment of the ncome ta due by a farmers
cooperatve marketng and purchasng assocaton.
Sec. 2. uthorty.
The e tenson of tme for fng orm 990-C and payng the ncome
ta due s granted pursuant to the authorty contaned n sectons
53(a) (2) and 5G(c) (1), respectvey, of the Interna Revenue Code.
Sec. 3. Scope.
Ths e tenson s granted to farmers cooperatve marketng and
purchasng assocatons e empt under secton 101(12) wth respect
to ta abe years begnnng n 1953.
Sec. 4. tended Date.
The tme for fng orm 990-C and the tme for payng the ncome
ta due by such an assocaton for a ta abe year begnnng n 1953 s
hereby e tended to and ncudng the 15th day of the 9th month
foowng the cose of such ta abe year.
Orgnay S U d os ( Mmeograph No. 54 19, dn d cbrunry 5, 1954.
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79 Regs. 118, 39.53-2.
Sec. 5. ccumuaton (f Interest.
Interest at the rate of 6 percent per annum w be assessed and co-
ected on the amount determned as the ta from the orgna due date
for payment of the ta , the 15th day of the 3d month foowng
the cose of the ta abe year, unt t s pad. owever, the payment
of the ta , or any nstament thereof, made n advance of the fng
of the return w stay the accumuaton of nterest on the amount of
such payment from the tme t s pad. ccordngy, any assocaton
desrng to mnmze the accumuaton of such nterest may make
such advance payments n fu or on the nstament bass as provded
n secton 5G of the Interna Revenue Code to the Dstrct Drector of
Interna evenue wth whom such return w be fed, ceary den-
tfyng such payments n order to ad the Dstrct Drector n the
proper appcaton of such payments and n computng nterest on
deferred payments.
Rec.u atons 118, Secton 39.53-2: tenson Rev. Ru. 54-86
of tme for fng returns.
tenson of tme for fng corporaton Income ta returns.
Rev. Ru. 22, C. . 1053-1, 84, superseded.
Secton 1. Purpose.
The foowng nstructons are ssued n order to smpfy the pro-
cedure n connecton wth appcatons for e tensons of tme for fng
ncome ta returns of corporatons by combnng n one form the ap-
pcaton for e tenson of tme and the statement n eu of a tentatve
return.
Sec. 2. Procedure To e o.owed.
.01 Dstrct Drectors of Interna Revenue are hereby authorzed to
grant e tensons of tme of 90 days for fng corporate ncome ta
returns pursuant to appcatons for such e tensons whch are made
by a person authorzed by the corporaton to do so, and who s ether
( ) an offcer of the corporaton, or (b) a person currenty enroed
to practce before the Treasury Department.
.02 ny such person may fe orm 7004 (Rev. eb. 1954), pp-
caton for tenson of Tme to e U. S. Corporaton Income Ta
eturn, and Statement n Leu of Tentatve Return, n pace of
a request for an e tenson and the tentatve return otherwse requred
to be fed by the ta payer corporaton on or before the statutory
fng date.
.03 The form must be prepared n dupcate. The orgna must
be fed wth the Dstrct Drector for the dstrct n whch the corpora-
ton s requred to fe ts ta return. It must be fed on or before the
oth day of the thrd month foowng the cose of the ta abe year
and must be accompaned by a remttance of an estmated amount
not ess than woud be requred as the frst nstament shoud the
ta payer eect to pay the ta n nstaments as provded by aw. s
evdence of the e tenson, the dupcate must be attached to the com-
peted return when t s fed.
Orgnay ssued as I -Mmeograh No. 4 20, dated ebruary 12, 1054.
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Regs. 118, 39.53-3.) 80
.04 Provded that the requrements of orm 7004 have been met,
the e tenson requested s to be consdered as havng been granted.
ny further e tenson, beyond that automatcay granted by fng
orm 7004, must be apped for n wrtng and specfcay granted.
.05 Dstrct D-rectors of Interna Revenue w be furnshed a
mted number of these forms whch w be avaabe n ther offces.
ny person requrng a substanta number of these forms shoud
suppy hs own. Reproductons shoud be smar n sze and coor,
and on paper substantay of the same weght and quaty as the
prescrbed orm 7004. Typewrtten reproductons are permssbe.
.( Whe the purpose of ths Revenue Rung s to ease the burden
of corporaton ta payers n connecton wth appcatons for e ten-
sons of tme for fng ther ncome ta returns, t s not ntended
that the change n procedure shoud affect the e stng pocy of Ds-
trct Drectors n consderng appcatons for e tensons of tme for
tng returns of ta payers other than corporatons.
Sec. 3. ffect- on Other Documents.
Ths Revenue Rung supersedes Rev. Ru. 22, C. . 1953-1, 84.
pror nstructons n confct wth the provsons of ths Revenue
Rung are hereby revoked.
Reguatons 118, Secton 39.53-3: tensons T. D. 6059
of tme n the case of foregn organzatons,
certan domestc corporatons, and ctzens
of Unted States resdng or traveng abroad.
( so Secton 23(n), Secton 39.23(m)- Sec-
ton 44, Secton 39.44-5 Secton 112(b),
Secton 39.112(b) (0)-3 Secton 112(f) Sec-
ton 39.112(f)- Secton 131(c), Secton
39.131 (c)-2 Secton 143, Secton 39.143-7.)
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 39.
INCOM T T L Y S GINNING T R D C M R 81. 1951
Reguatons 118 amended to Incorporate the changes made to
Reguatons 111 by Treasury Decson 6041, and for other purposes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Reguatons 118 (20 C R. pt. 39) are amended as foows:
Paragraph 1. Secton 39.23(m)-(e) (4) s amended by strkng the
frst sentence thereof.
Par. 2. Secton 39.53-3 s amended to read as foows:
Sec. 39.53-3. tensons of tme n the ease of foregn organzatons, certan
domestc corporatons, and ctzens of Unted States resdng or trarcng
abroad. n e tenson of tme for fng returns of ncome s hereby granted up
to and ncudng the ffteenth day of the s th month foowng the cose of the
ta abe year n the case of:
(a) oregn partnershps, regardess of whether they mantan an offce
or pace of busness wthn the Unted States
(b) oregn corporatons whch mantan an offce or pace of busness
wthn the Unted States
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81 Regs. 118, 39.53-3.
(c) Domestc corporatons whch transact ther busness and keep ther
records and books of account abroad
(d) Domestc corporatons whose prncpa ncome s from sources wthn
the possessons of the Unted States and
(e) mercan ctzens resdng or traveng abroad, ncudng persons n
mtary or nava servce on duty outsde the Unted States.
In a such cases a statement must be attached to the return showng that the
person for whom the return s made s a person descrbed n ths secton. Ta -
payers who take advantage of ths e tenson of tme w be charged wth nterest
at the rate of 6 percent per annum on the frst nstament of ta , f any, from
the orgna due date unt pad.
Par. 3. Secton 39.44-5 s amended by nsertng mmedatey after
the second sentence of paragraph (c) thereof the foowng new
sentence:
On and after September 1,1053, the functons of the Commssoner wth respect
to such bonds sha be performed by the dstrct drector of nterna revenue for
the nterna revenue dstrct n whch the ast return of the decedent s fed, and
any bond fed on or after such date sha be fed wth such dstrct drector.
Par. 4. Secton 39.112(b) (6)-3 s amended as foows:
( ) y strkng from the frst sentence of paragraph (a)(2)
thereof the words for transmtta to the Commssoner .
( ) y strkng the frst sentence of paragraph (a)(3) thereof
and nsertng n eu of such sentence the foowng:
or each of the ta abe years whch fas whoy or party wthn the perod
of qudaton, the recpent corporaton may be requred to fe a bond, the
amount of whch sha be f ed by the dstrct drector of nterna revenue.
(C) y nsertng at the end of paragraph (a) (3) thereof the fo-
owng sentence:
On and after September 1, 195.3, the functons of the Commssoner wth respect
to such bonds sha be performed by the dstrct drector of nterna revenue
for the nterna revenue dstrct n whch the return was fed, and any bond
fed on or after such date sha be fed wth such dstrct drector.
Par. 5. Secton 39.112(f)-(c) (3) s hereby amended by strkng
the part whch foows the frst sentence and nsertng n eu thereof
the foowng:
Such appcaton sha be made pror to the e praton of the one year after
the cose of the frst ta abe year n whch any part of the gan from the
converson s reazed, and sha contan a of the detas n connecton wth
the nvountary converson. Such appcaton, f made before Septemer 1, 1953,
sha be made to the Commssoner, or, f made on or after September 1, 1953,
sha be made to the dstrct drector of nterna revenue for the nterna revenue
dstrct n whch the return Is ted for the frst ta abe year n whch any of
the gan from the nvountary converson s reazed. No e tenson of tme sha
te granted pursuant to such appcaton uness the ta payer can show reason-
abe cause for not beng abe to repace the converted property wthn the re-
qured perod of tme.
Par. 6. Secton 39.131 (c)-2 s amended by nsertng after the ast
sentence thereof the foowng new sentence:
On and after September 1, 1953, the functons of the Commssoner wth respect
to such bonds sha be performed by the dstrct drector of Interna revenue,
and any bond fed on or after such date sha be fed wth the dstrct drector.
Par. 7. Secton 39.143-7 (b) s amended by strkng the ast sentence
thereof.
ecause ths Treasury Decson merey amends Reguatons 118 to
ncorporate theren the changes made to Reguatons 111 (26 C R, pt.
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Regs 118, 5 39.54-1. 82
2 ) by Treasury Decson 0041 (18 . R. 5515), approved September 9,
195.3, and (o correct certan cerca errors, t s found unnecessary to
ssue ths Treasury Decson wth notce and pubc procedure thereon
under secton 4(a) of the dmnstratve Procedure ct, approved
une 11, 1940, or sub|ect to the effectve date mtaton of secton 4(c)
of sad art.
(Tn s Treasury Decson s ssued under the authorty contaned
n sees. G2 and 3791 of the Interna Revenue Code (53 Stat. 32, 4G7
26 U. S. C. 02,3791).)
T. Co.eman ndrews,
Commssoner of Interna Revenue.
pproved anuary 8, 1954.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anunry 13, 19. 4, 8: 46 a. m.)
S CTION 54.-R CORDS ND SP CI L R TURNS
Rkguatons 118, Secton 39.54-1: Records and Rev. Ru. 54-64
ncome ta forms.
( so Secton 821, Reguatons 105, Secton
81.65 Secton 1000, Reguatons 108, Secton
80.23.)
Certan edera ta return forms and schedues may he repro-
duced unc used for fng purposes, n eu of the appcabe offca
forms, sub|ect, however, to prescrbed condtons and requrements.
ev. u. 5, C. . 1953-1, 87, superseded.
The purpose of ths Revenue Rung s to restate the pocy of the
Interna Revenue Servce reatng to acceptance of reproductons of
edera ta return forms and schedues, for fng purposes, n eu
of the offca forms and schedues prnted by the Government Prntng
Offce, and to supersede Rev. Ru. 5, C. . 1953-1, 87.
Sub|ect to the condtons and requrements herenafter descrbed,
the Servce w accept, for fng purposes, reproductons of any of the
foowng forms and schedues:
U. S. state Ta Return, orm 70(1.
T . S. Gft Ta Reurn, orm 709.
(ft Ta : Donee s or Trustee s Informaton Return of Gfts, orm 710.
Lfe Insurance Statement, orm 712.
Cam, orm 843.
U. 8. empt Cooperatve ssocaon Income Ta Return, orm 990-C.
U. S. Indvdua Income Ta Return, orm 1040.
II. S. Indvdua Income Ta Return, orm 1040 .
Proft (or Loss) from usness or Professon, Schedue C ( orm 1040).
Gans and Losses from Saes or changes of Property, Schedue D ( orm
1040).
U. S. Departng en Income Ta Return, orm 1040C.
Decaraton of stmated Ta , orm 1040- S.
Schedue of arm Income and penses, orm 1040 .
U. S. ducary Income Ta Return, orm 1041.
. S. Partnershp Return of Income, orm 1005.
Statement n Support of Credt Camed by Domestc Corporaton for
Ta es Pad or ccrued o a oregn Country or a Possesson of the Unted
States, orm 1118.
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83 Regs. 118, 39.54-1.
T . S. Corporaton Income Ta Return, orm 1120.
Schedue of Gans and Losses from Saes or changes of Property, Sched-
ue D ( orm 1120).
Computaton of U. S. Corporaton cess Profts Ta , Schedue
( orm 1120).
Return of Informaton and uthorzaton and Consent of Subsdary
Corporaton Incuded n a Unted States Consodated Income Ta Return,
orm 1122.
Statement for the Purpose of tendng Tme for Payment of Ta es Ry
Corporatons pectng Carry-Racks, orm 1138.
ppcaton for Tentatve Carry-Rack d|ustment, orm 1139.
In order to be acceptabe for fng purposes, reproductons of such
forms must meet the foowng condtons and requrements:
1. Reproductons must be facsmes of the compete offca form,
produced by photo-otfset, photoengravng, photocopyng, or other
smar reproducton process.
2. Reproductons must be on paper of substantay the same coor,
weght and te ture, and of quaty at east as good as that used n the
offca form.
3. The coor and quaty of the reproducton of the prnted matter
must be substantay the same as that of the offca form, and the
fed-n nformaton must be entrey egbe.
4. Reproductons must be of the same sze as that of the offca
form, both as to the overa dmensons of the paper and the mage
reproduced thereon.
5. Reproducton of page 3 of Schedue C ( orm 1040) must be on
propery preperforated paper of substantay the same weght, coor
and te ture as that used n the offca form.
The Interna Revenue Servce does not undertake to approve or
dsapprove the specfc equpment or process used n reproducng of-
fca forms, but requres ony that the reproduced forms satsfy the
stated condtons. It shoud be noted, however, that photostats do
not meet a of the above condtons.
Whe t s preferred that both sdes of the paper be used n makng
reproductons, resutng n the same page arrangement as that of
the offca form, the Servce w not ob|ect f ony one sde of the
paper s used, or f the reproducton has a dfferent fod than that
provded on the offca form.
Reproductons of forms may be made after nserton of the ta com-
putatons and other requred nformaton. owever, a sgnatures
on forms to be fed wth the Dstrct Drector of Interna Revenue
must be orgna sgnatures, aff ed subsequent to the reproducton
process.
The Interna Revenue Servce w, upon appcaton, furnsh back
and whte proofs to be used for ntermedate photographc steps n
reproducng forms requrng coored nk.
muatons 118, Secton 39.54-1: Records and Rev. Ru. 54-1C0
ncome ta returns.
__ In Rev. Ru. 54-G4, page 82, ths uetn, the reproducton of certan
edera ta forms was authorzed. ttenton s drected to the pro-
vsons of secton 8 of tte 17 and secton 58 of tte 44 of the Unted
States Code whch provde that Government pubcatons are not
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458.321.) 84
sub|ect to copyrght. ccordngy, no copyrght may be obtaned by
a prvate person for any edera ta form or any reproducton of such
form. Persons reproducng these forms commercay for sae to the
pubc shoud not ncude n advertsng matter, ssued to promote
such sae, anythng whch gves the mpresson that these forms have
been made the sub|ect of a copyrght.
S CTION 55. PU LICITY O R TURNS
ecutve Own 10527
INSP CTION OP INCOM . C SS PRO ITS, D CL R D I.t C SS PRO ITS,
C PIT L STOC , ST T , ND GI T T R TURNS Y. T S N T COM-
MITT ON N 1NO ND CURR NCY
y vrtue of the authorty vested n me by sectons 55(a), 508, 603,
729(a), and 1204 of the Interna Revenue Code (53 Stat. 21), 111, 171
54 Stat. 989, 1008 55 Stat. 722 2G U. S. C. 55(a), 508, COS, 729(a),
and 1204), t s hereby ordered that any ncome, e cess-profts, decared
vaue e cess-profts, capta stock, estate, or gft ta return for the
years 1942 to 1953, ncusve, sha, durng the ghty-thrd Congress,
be open to nspecton by the Senate ankng and Currency Commttee,
or any duy authorzed subcommttee thereof, for the purpose of ts
nvestgaton of oan pro|ects under secton 008 of Tte I of the Na-
tona ousng ct, as added by the ct of May 26,1942 (56 Stat. 303),
as amended, and the amounts of the mortgages, the cost of constructon,
and the cost of and of such pro|ects, n accordance and upon comp-
ance wth the rues and reguatons prescrbed by the Secretary of the
Treasury n Treasury Decson 6064, reatng to the nspecton of re-
turns by certan commttees of the Congress, approved by me ebru-
ary 11, 1954.
Ths ecutve order sha be effectve upon ts fng for pubca-
ton n the edera Regster.
Dwght D. senhower.
The Whte ouse,
pr 19, 1954.
( ed wth the Dvson of the edera Regster pr 20, 1954, 9:55 a. m.)
T. D. 6064
TITL 28 INT RN L U - NU . C PT R I, SU C PT R , P RT 458.
INSP CTION O R TURNS
Inspecton of certan returns by commttees of Congress other than
those enumerated n secton 55(d) of the Interna Revenue Code.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
2 o Offcers and mpoyees of the Interna Revenue Servce and Others
Comerncd:
Sec. 458.321. Inspecton of Returns bt Commttees of Conoress
Other than those numerated n Secton 55(d). (a) (1) Pur-
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85 458.321.
suant to the provsons of sectons 55(a), 508, 603, 729(a), and 1204 of
the Interna Revenue Code (53 Stat. 29, 111, 171 54 Stat. 989, 1008
55 Stat 722 26 U. S.C. 5(a), 508,603,729(a), and 1204), any ncome,
e cess-profts, decared vaue e cess-profts, captn stock, estate, or
gft ta return for any ta abe year sha be open to nspecton by any
commttee of the Congress, or any subcommttee of a commttee of the
Congress, specay authorzed to nspect such returns by an ecutve
order ssued under the aforementoned statutory provsons on or after
the date of the approva of ths Treasury Decson. Such nspecton
sha be sub|ect to the condtons and restrctons mposed by the -
ecutve order and the rues and reguatons herenafter prescrbed.
(2) The nspecton of any of the aforementoned returns may be
made by the commttee of the Congress, or the subcommttee of a
commttee of the Congress, authorzed as provded n subparagraph
(1) of ths paragraph, actng drecty as a commttee or as a sub-
commttee, or by or through such e amners or agents as such com-
mttee or subcommttee may desgnate or appont n ts wrtten
request herenafter mentoned. Upon wrtten request by the char-
man of such commttee or of such subcommttee to the Secretary
of the Treasury, gvng the names and addresses of the ta payers
whose returns t s necessary to nspect and the ta abe perods covered
by the returns, the Secretary of the Treasury or any offcer or empoyee
of the Treasury Department, wth the approva of the Secretary of
the Treasury, sha furnsh such commttee or subcommttee wth
any data reatng to or contaned n any such return or sha make
such return avaabe for nspecton by such commttee or subcom-
mttee or by such e amners or agents as such commttee or subcom-
mttee may desgnate or appont. Such data sha be furnshed,
or such return sha be made avaabe for nspecton, n an offce of
the Interna Revenue Servce. ny nformaton thus obtaned by
such commttee or subcommttee sha be hed confdenta: Provded,
however, That any porton thereof reevant or pertnent to the purpose
of the nvestgaton may be submtted by the nvestgatng commttee
to the approprate house of the Congress.
(3) Ths secton sha not be appcabe to any commttee author-
zed by secton 55(d) of the Interna Revenue Code to nspect returns.
(b) ecause ths Treasury Decson consttutes a genera state-
ment of pocy and estabshes a rue of Departmenta practce and
procedure, t s found that t s unnecessary to ssue ths Treasury
Decson wth notce and pubc procedure thereon under secton
4(a) of the dmnstratve Procedure ct, approved une 11, 194G,
or sub|ect to the effectve date mtaton of secton 4(c) of that act.
(c) Ths Treasury Decson sha be effectve upon ts fng for
pubcaton n the edera Regster.
M. . osom,
ctng Secretary of the Treasury.
pproved ebruary 11,1954.
Dwoht D. senhower,
2 he Whte ouse.
( ed wth the Dvson of the edera Regster ebruary 12,1004, 11: 13 a. m.)
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Regs. 118, 39.101-1.) 86
ecutve Om m 10518
INSP CTION O R TURNS Y T SP CI L COMMITT O T OUS O
R PR S NT TI S UT ORIZ D Y OUS R SOLUTION 217, IG TY-T I D
CONGR SS, TO IN STIG T T - MPT OUND TIONS
y vrtue of the authorty vested n me by secton 55(a) of the
Interna Revenue Code (53 Stat. 29 54 Stat. 1008 55 Stat. 722 26
U. S. C. 55(a)), any return on orm 990- made by an organzaton
e empt from ta under secton 101(6) of the Code (53 Stat. 33 64
Stat. 959 26 U. S. C. 101(6)), for the years 1950 to 1953, ncusve,
sha, up to and ncudng anuary 3, 1955, be open to nspecton by
the speca commttee of the ouse of Representatves authorzed
by ouse Resouton 217, ghty-thrd Congress, agreed to uy 27,
1953, to nvestgate ta -e empt foundatons, for the purpose of car-
ryng out the provsons of such Resouton, sub|ect to the condtons
stated n the Treasury Decson reatng to the nspecton of returns
by certan commttees of the Congress, approved by me ths date.
Ths ecutve order sha be effectve upon ts fng for pubca-
ton n the edera Regster.
DwG T D. S NIIOW rt.
The Whte ouse,
ebruary 11, 105k-
( ed wth the Dvson of the edera Regster ebruary 12,1054, 11: 13 a. m.)
S CTION 56. P YM NT O T
Reguatons 118, Secton 39.56-2: tenson
of tme for payment of the ta or part or
nstament thereof.
Tme e tended for fng e empt cooperatve assocaton ncome
ta return, orm 990-C. (See Rev. Ru. 54-81, p. 78.)
SU C PT R C SUPPL M NT L PRO ISIONS
SUPPL M NT . R T S O T
S CTION 101. MPTIONS ROM T
ON CORPOR TIONS
Reguatons 118, Secton 39.101-1: Proof of T. D. 6060
e empton annua returns.
TITL 26-INT N L R NU . C PT R I, SU C PT R . T RT R9.
INCOM T T L Y RS GINNING T R D C M R 31, 1951
Reguatons 118 amended regardng requrements for fng and
approvng appcatons for e empton from ncome ta annua
returns by farmers cooperatve marketng and purchasng
assocatons.
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7 Regs. 118, 39.101-1.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. 0.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to authorze certan changes n the processng of appca-
tons for e empton from ncome ta under secton 101 of the Interna
Revenue Code and to prescrbe rues respectng annua returns n the
case of farmers cooperatve marketng and purchasng assocatons
e empt under secton 101(12) of the Code, Reguatons 118 26 C R,
pt. 39 are hereby amended as foows:
Secton 39.101-1 s amended as foows:
( ) I3y strkng (4), e cept a bona fde credt unon, from the
thrd sentence of (a) thereof.
(13) y strkng under secton 101 (4), e cept bona fde credt
unons, orm 1027 from the fourth sentence of (a) thereof.
(C) y strkng , ncudng bona de credt unons, from the
ffth sentence of (a) thereof.
(D) y revsng (c) thereof to read as foows:
(c) Dutes of dstrct dm-tor wth respect to proof of e empton. The ds-
trct drector of nterna revenue sha take steps to nsure that the appcaton
and other p pers are compete and n order and shn take such other acton
as may be prescrbed eadng to a determnaton whether the organzaton s
e empt under secton 101.
( ) y nsertng mmedatey foowng the second sentence of (e)
thereof, whch sentence ends wth the words wth the requrements
of ths secton and of 39.153-1 , the foowng new sentence:
In the case of a farmers cooperatve marketng and purchasng assocaton
e empt under secton 101(12), such assocaton sha te annuay orm 990-C
n eu of orm 900.
( ) y strkng the words orms 990 and 990- from the thrd
sentence of (e) thereof, and nsertng n eu thereof orms 990,
990- , and 990-C .
(G) y strkng the words orm 990 or orm 990- from the
ast sentence of (e) thereof, and nsertng n eu thereof orm 990,
orm 990- , or orm 990-C .
( ) y nsertng mmedatey precedng the frst sentence of (f)
thereof the foowng new sentence:
The provsons of ths paragraph sha be Inappcabe n the case of a farmers
cooperatve marketng and purchasng assocaton e empt under secton 101(12).
(I) y addng mmedatey after the ast sentence of (g) thereof
the foowng new sentence:
owever, orm 990-C, appcabe under (e) above, to a farmers cooperatve
marketng and purchasng assocaton, sha be fed n accordance wth the
provsons of secton 53 and the reguatons prescrbed thereunder.
( ) y strkng the words orm 990 or orm 990- from ()
thereof, and nsertng n eu thereof orm 990, orm 990- , or
orm 990-C .
ecause ths Treasury Decson estabshes a rue of Department
practce and makes further amendments of a technca nature ony,
t s hereby found that t s unnecessary to ssue ths Treasury De-
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Regs. 118, 39.101-1.) SS
cson wth notce and pubc procedure thereon under secton 4(a)
of the dmnstratve Procedure ct, approved une 11, 1946, or
sub|ect to the effectve date mtaton of secton 4(c) of that act.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 62 and 3791 of the Interna Revenue Code (53 Stat. 32, 4C7
20 U. S. C. 62, 3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved anuary 12, 1954.
M. . of.som,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 15, 1 )54, 8:49 a. m.)
Reguatons 118, Secton 39.101-1: Proof of Rev. Ru. 54-134
e empton.
Rungs of the Interna Revenue Servce whch hod corporatons
e empt under secton 101 of the Interna Revenue Code are generay
effectve as of the date of ncorporaton, or the date when organzed
and operated for e empt purposes, provded the requrements of e -
empton have b en comped wth durng the entre perod. ow-
ever, when pror to ncorporaton an organzaton was formed and
operated n an e empt manner and ts ncorporaton merey had the
eect of changng the form of organzaton from that of an unn-
corporated organzaton to a corporaton, the rung woud ncude
the perod durng whch the organzaton operated n an unncorpo-
rated status. In such cases there s ncorporated n the rung a state-
ment wth respect to the perod covered.
Reguatons 118, Secton 39.101-1: Proof of Rev. Ru. 54 104
e empton annua returns.
stng procedures carfed and certan new procedures pre-
sfr d wth respect to certan organzatons camng e empton,
from edera ncome ta , under secton 101 of the Interna Revenue
Code.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to carfy certan procedures
and prescrbe new procedures for compance by organzatons cam-
ng e empton under secton 101 of the Interna Revenue Code.
Sec. 2. ng of ppcaton for empton.
.01. Genera requrements. ny organzaton camng e empton
under secton 101 of the Interna Revenue Code, uness aready n
recept of a determnaton etter or rung etter from the Interna
Revenue Servce estabshng e empton, s requred by Treasury
Department reguatons to fe an appcaton for e empton wth the
Dstrct Drector of Interna Revenue for ts dstrct. (Sec. 39.101-1
of Regs. 118, as amended by T. D. GOOD p. 86, ths uetn , approved
.- .a| Issued as t Mmco rapb No. 54 73, dated pr 28, 1054.
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89 Regs. 118, 39.101-1.
a 12, 1954.) If any such appcaton s fed wth the Natona
Offce or wth a fed offce other than as prescrbed by the reguatons,
t w, wthout any acton thereon, be forwarded mmedatey to the
approprate Dstrct Drector s offce.
.02 Organzatons wth ess than 12 months 1 operaton.
1. In vew of the statutory requrements for e empton and
the admnstratve responsbtes of the Servce n the fed of
e empt organzatons, a determnaton or rung on an appca-
ton for e empton w generay not be made wth respect to a
newy formed organzaton unt t has actuay operated for such
a perod and to such an e tent as to ceary demonstrate a bona
fde operaton for the purposes specfed n the e empton statute.
ceptons to ths genera rue are stated n secton 5.
2. cept as otherwse provded n secton 5, an appcaton
for e empton shoud not be fed by an organzaton unt t has
had at east 12 months of actve operaton (not mere e stence)
for the purposes for whch t was created, that s, actua operaton
for such a perod and to such an e tent as w ceary demonstrate
that n fact the organzaton s conducted for purposes wthn
the e empton provsons of the statute. ttenton s nvted
to the appcabe provsons of the reguatons and the nformaton
caed for on the appcaton forms to be fed by organzatons
camng e empton.
Sec. 3. Cassfcaton of ppcatons for empton.
ppcatons are cassfed n the foowng categores n the Dstrct
Drector s offce:
.01 Dstrct Drector s cases. Cases of a routne nature n whch
the appcaton of secton 101 of the Interna Revenue Code to the
facts shown on the e empton appcaton s cear under the reguatons
and rungs of the Natona Offce and whch do not present nvoved
or questonabe ssues w be cassfed as Dstrct Drector s cases.
or further detas, see sectons 4 and 5.
.02 Incompete appcaton cases. empton appcatons n the
case of newy formed organzatons as to whch determnatons or
rungs w not be made (as provded n secton 2.02 sub|ect to the
e ceptons under secton 5) and n other cases where the requred
nformaton s not gven on the e empton appcaton w be cassfed
as ncompete appcaton cases. In such cases the appcaton w
be returned to the organzaton wth an approprate etter of
e panaton.
.03 Natona Offce cases. Cases whch present nvoved or ques-
tonabe ssues and do not fa wthn the category of Dstrct Drec-
tor s cases or ncompete appcaton cases w bo cassfed as
Natona Offce cases. empton appcatons so cassfed w be
referred to the Natona Offce for rung, whch w be made to the
organzaton.
Sec. 4. cton on ppcatons fob empton.
.01 Dstrct Drectors are authorzed to ssue determnaton etters
n Dstrct Drector s cases as defned n secton 3, ncudng tenta-
tve determnatons of status n cases wthn the scope of secton 5.
Such etters w be ssued over the Dstrct Drector s sgnature, ether
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Regs. 118, 39.101-1. 90
concudng that the organzaton s e empt or that t s not e empt.
Such determnaton etters w represent the determnaton (or tenta-
tve determnaton as authorzed under secton 5) of the Dstrct D-
rector as to the status of an organzaton based on the appcaton to
the facts of the case of estabshed precedents and prncpes set forth
n the reguatons and rungs of the Natona Offce. The Natona
Offce w contnue to ssue rungs (or tentatve rungs) on e empt
organzatons n cases referred to the Natona Offce by Dstrct Drec-
tors as descrbed n secton 3.03 and secton 5.02.
.02 Types of organzatons whose e empton appcatons normay
present cear-cut stuatons on whch the Dstrct Drector s author-
zed to ssue determnaton etters ncude (but are not restrcted to)
the foowng:
101 (1). Labor unons (other than group).
101(4). Credt unons (State chartered).
101(6). Churches of we-known denomnatons. ( ppcatons
generay not requred.)
Communty chests, ncudng each partcpatng agency.
Loca organzatons of Savaton rmy and smar
organzatons.
4- cubs.
Pubc brares.
ducatona organzatons havng a student body, n-
structors, etc.
101(7). Chambers of commerce, boards of trade, rea-estate
boards, etc.
101(8). Loca veterans organzatons (other than group).
101(10). Mutua dtch or rrgaton companes.
Mutua teephone companes.
Sec. 5. ceptons to the Genera Rue Requrng ctve Opera-
ton for a Perod of Not Less Than 12 Months as a Condton
Precedent to the Issuance of a Determnaton or Rung.
.01 Tentatve determnaton etters w be ssued by Dstrct D-
rectors to newy formed organzatons wth ess than 12 months of
actve operaton n a case n whch an affrmatve showng s made (n
or n connecton wth the e empton appcaton) that the organza-
ton s of the communty or pubc type. Tentatve rungs w be
ssued by the Natona Offce upon the same standards n Natona
(Mfce cases. actors whch characterze a communty or pubc organ-
zaton ncude responsbe pubc representaton on ts board of drec-
tors or trustees, fnanca support provded by pubc contrbutons, or
requred reportng to a governmenta or pubc body assurng the or-
ganzaton s adherence to the purposes for whch t was formed, such
as perodca reportng to a State agency or potca subdvson.
ampes of organzatons of the communty or pubc type are set
forth beow:
1. Nonproft organzatons formed by we-known regous de-
nomnatons n furtherance of ther regous, chartabe, and
educatona purposes and actvtes
2. Chartabe organzatons such as hosptas, orphanages and
the ke, pubcy supported and managed, whch ceary serve a
present pubc need
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91 Regs. 118, 39.101-1.
3. eterans or chartabe organzatons havng for ther pur-
pose the promoton of the wefare of persons n the rmed orces
or who have been n the rmed orces, provded that such organ-
zatons estabsh that they ntend presenty to begn actve opera-
ton for the purposes specfed n secton 101(G) or secton
101(8)
4. ducatona organzatons such as schoos and coeges whch
normay have a reguar facuty, currcuum, and student body,
as descrbed n secton 54(f) (2) of the Code and
5. Other organzatons whch are ceary pubc n character
or whch represent a communty-wde pro|ect or undertakng.
.02 ny case n whch the facts n the e empton appcaton,
athough persuasve of the concuson that the organzaton s of the
communty or pubc type, present nvoved or questonabe ssues on
whch the Dstrct Drector s n doubt w be cassfed as a Natona
Offce case and processed as provded n secton 3. Where the facts
ceary estabsh that the organzaton s of the communty or pubc
type, the Dstrct Drector s authorzed to ssue a tentatve determ-
naton etter wth the requrement that the organzaton at the termna-
ton of ts frst fu year of operaton sha submt a new appcaton,
together wth compete supportng data as specfed n the appcaton
form or n the appcabe reguatons.
.03 The provsons of ths secton sha not be deemed to mt the
e stng authorty of the Dstrct Drector, n cases where the abty
of an organzaton for certan other edera ta es s dependent on a
determnaton under, or smar to that under, secton 101 (such as n
the case of certan e emptons under the admssons ta ), to make a
tentatve determnaton of the status of the organzaton for purposes
of such other ta es, pendng and sub|ect to a determnaton or rung
on the organzatons appcaton for e empton under secton 101.
owever, for ncome ta purposes, uness the e empton appcaton
fed under such crcumstances by an organzaton wth ess than 12
months of actve operaton makes an affrmatve showng that the
organzaton s of the communty or pubc type, t w be returned
as ncompete and a determnaton or rung as to the status of the
organzaton under secton 101 w not be made unt the organzaton
has had at east 12 months of actve operaton.
.04 Determnaton etters aowng e empton under secton 101(4)
of the Code w be ssued to State chartered credt unons at any tme
after ther formaton f they operate under unform byaws approved
by the State.
Sec. 6. Revew and Conferences.
.01 The Natona Offce sha conduct such revew of determnaton
etters ssued by Dstrct Drectors offces (ncudng tentatve deter-
mnaton etters) as s consdered necessary to assure conformty wth
the nterpretatons and poces of the Revenue Servce. It s the
genera pocy of the Interna Revenue Servce to mt the revocaton
of a rung wth respect to an organzaton prevousy hed to quafy
under secton 101 to a prospectve appcaton ony, f the organzaton
has acted n good fath n reance upon the rung ssued to t and a
retroactve revocaton of such rung woud be to ts detrment. ny
rung ssued as to the e empt status of an organzaton w not be
G
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Regs. 118, 39.101 (6)-. 92
consdered controng where there has been a msstatement or oms-
son of a matera fact or where the operatons of the organzaton are
conducted n a manner materay dfferent from that represented.
revocaton may be effected by a notce to the organzaton or by a
rung or other statement pubshed n the Interna Revenue uetn
appcabe to the type of organzaton nvoved. The same pocy w
be appcabe to determnaton etters ssued by Dstrct Drectors.
.02 Wth respect to any case comng under the provsons of ths
Revenue Rung whch s referred to the Natona Offce for ssuance
of a rung, or where the Natona Offce proposes to take a dfferent
vew as to the quafcaton of the organzaton for e empton under
secton 101 than that refected n a determnaton etter ssued by the
Dstrct Drector, conferences n the Natona Offce w be granted
n accordance wth the procedure for conferences on requests for ru-
ngs or technca advce. See Rev. Ru. 10, C. . 1953-1, 488, and
Mmeograph 0293, C. . 1948-2, 59.
Sec. 7. ffectve Date.
The provsons of ths Revenue Rung sha become effectve May
24, 1954.
Reguatons 118, Secton 39.101 (6) -1: Re- Rev. Ru. 54-243
gous, chartabe, scentfc, terary, and ed-
ucatona organzatons and communty
chests.
( so secton 23 (o), Secton 39.23(o)- Sec-
ton 23(q), Secton 39.23(q)-1.)
Organzatons whch are e empt under secton 101 of the Interna
Revenue Code, other than secton 101(6) of the Code, may estabsh
a separate fund e cusvey for regous, chartabe, scentfc, terary,
or educatona purposes, apart from ther other funds. If such sep-
arate fund s operated e cusvey for such purposes, separate books
and accounts are mantaned, and t otherwse meets the requrements
for e empton under secton 101(6) of the Code, contrbutons to the
fund are deductbe by donors n computng ther ta abe net ncome
n the manner and to the e tent provded n secton 23(o) or 23(q)
of the Code. fund of ths character shoud be organzed n such a
manner that ts assets cannot be used, upon dssouton or otherwse,
for the genera purposes of the organzaton creatng t but must be
used for purposes smar to those of the fund tsef. The status of
such a fund shoud be estabshed n the manner provded under sec-
ton 39.101-1 of Reguatons 118.
Reguatons 118, Secton 39.101 (6)-: Re-
gous, chartabe, scentfc, terary, and
educatona organzatons and communty
chests.
Income receved by a ta -e empt organzaton from research actv-
tes. (See Rev. Ru. 54-73, p. 1C0.)
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93 Regs. 118, 39.10(12)-.
Reguatons ft, Sf |ton 39.101(6)-1: Re-
gous, chartabe, scentfc, terary, and
educatona organzatons and communty
chests.
empton of a chartabe foundaton makng dstrbutons to other
ta -e empt organzatons. (See Rev. Ru. 51-137. p. 289.)
Reguatons 118, Secton 39.101 (12)-1: arm- Rev. Ru. 54-12
ers cooperatve marketng and purchasng
assocatons requrements for e empton un-
der secton 101(12) ( ).
Saes made by a farmers cooperatve assocaton, engaged In the
producton and dstrbuton of petroeum products, on the open
market of byproducts such us heavy fue os and dstates not
usabe by ts farmer patrons, and the vaue of petroeum products
e changed wth other refneres n order to utze Its output and
effect a sav.gs n transportaton costs sha, for the purpose of
determnng e empton under secton 101 (12) ( ) of the Interna
Revenue Code, be dsregarded In determnng whether the purchases
made for persons who are nether member nor producers e ceed
15 percent of the vaue of a purchases.
dvce s requested whether saes of heavy petroeum products
made on the open market by a farmers cooperatve assocaton and the
vaue of petroeum products e changed wth other refneres sha be
dsregarded n determnng whether the vaue of a purchases made
for persons who are nether members nor producers e ceeds the statu-
tory mtaton of 15 percent, as provded n secton 101(12) ( ) of
the Interna Revenue Code.
In the nstant case, a petroeum refnng company s a whoy owned
subsdary of an assocaton whch has been hed to be e empt from
edera ncome ta as a farmers cooperatve marketng and purchas-
ng assocaton under the provsons of secton 101(12) ( ) of the
Code. In earer years the cooperatve assocaton purchased petro-
eum products n the open market for ts member assocatons. In
order to assure a contnued suppy of such products the assocaton
acqured by purchase the refnng company here nvoved. Such com-
pany was reorganzed for the purpose of engagng n any actvty on
a cooperatve bass n connecton wth the acquston, deveopment,
producton, and dstrbuton of o, gas, petroeum, asphatum, and
other mneras and byproducts thereof. The prmary purpose of the
refnng company s the producton of petroeum fues requred by
farmers n the producton of agrcutura products. In the producton
of ght petroeum products used by farmers, certan byproducts such
as heavy fue os and dstates are produced whch ts farmer patrons
do not use. These products are dsposed ot to raroads, stee ms
or n whatever market s avaabe at the prevang market prce of
such products. urther, n order to utze ts output to the best ad-
vantage by effectng a savngs n transportaton costs, t s the prac-
tce of the refnery to make e changes of products wth other refneres
whch n turn dever a ke quantty of the same products to the ds-
trbutng agency of the assocaton from ther stocks ocated at ponts
convenent to ts farmer patrons.
3133C 0 54 T
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egs. 118, 39.107-1. 94
Secton 101(12) ( ) of the Interna Revenue Code provdes, n part,
for (he e empton from edera ncome ta of fanners, frutgrowers,
or ke assocatons organzed and operated on a cooperatve bass for
the purpose of purchasng suppes and equpment for the use of mem-
bers or other persons and turnng over such suppes and equpment
to them at cost, pus necessary e penses, provded they meet the other
requrements of that secton. Such assocatons may purchase suppes
and equpment for nonmembers provded that the vaue of suppes
and equpment purchased for nonmembers does not e ceed the vaue
of suppes and equpment purchased for members and provded fur-
ther that the vaue of suppes and equpment purchased for persons
who are nether members nor producers of agrcutura products does
not e ceed 15 percent of the vaue of a ts purchases.
It s hed that saes made by a farmers cooperatve assocaton,
engaged n the producton and dstrbuton of petroeum products,
on the open market of byproducts such as heavy fue os and dstates
not usabe by ts farmer patrons, and the vaue of the petroeum prod-
ucts e changed wth other refneres n order to utze ts output and
effect a savngs n transportaton costs sha, for the purpose of deter-
mnng e empton under secton 101(12) ( ) of the Interna Revenue
Code, De dsregarded n determnng whether the vaue of purchases
made for persons who are nether members nor producers e ceeds 15
percent of the vaue of a ts purchases.
Recusatons 118, Secton 39.101 (12) -1: arm-
ers cooperatve marketng and purchasng
assocatons requrements for e empton
under secton 101(12) ( ).
Tme e tended for fng e empt cooperatve assocaton ncome ta
return, orm 990-C. (See Rev. Ru. 54-81, p. 78.)
S CTION 107. COMP NS TION OR S R IC S R N-
D R D OR P RIOD O T IRTY-SI MONT S OR
MOR ND C P Y
Reguatons 118, Secton 39.107-1: Persona Rev. Ru. 54-206
servces.
nterna revenue code
or the purposes of secton 107(a) of the Interna Revenue Co e
a husband and wfe who resde n a noncommunty property State
may not spt ncome whch consttutes compensaton receved by
the husband for persona servces rendered by hm durng ta abe
years begnnng pror to anuary 1, 1048, the effectve date of
secton 12(d) of the Code.
dvce s requested reatve to the manner of determnng the
amount of edera ncome ta under secton 107(a) of the Interna
Revenue Code, attrbutabe to compensaton receved for persona
servces under the facts and crcumstances set forth beow.
In 1953, the ta payer-husband receved more than 80 percent of
hs tota compensaton for persona servces he rendered to one nd-
vdua durng the perod 1942 to 1947. e and hs wfe propose to
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95 Regs. 118, 39.107-1.
fe a snge return |onty for the ta abe year 1953. The ta payers
have at a tmes snce 1941 resded n a noncommunty property State,
and have fed ther returns on the caendar year bass.
The pertnent provsons of the Code are as foows:
Secton 12(d) provdes:
(d) Ta n Case op ont Return. In the case of n |ont return of husband
and wfe under secton 51(b), the combned norma ta and surta under
secton 11 and subsecton (b) of ths secton sha be twce the combned norma
ta and surta that woud be determned f the net ncome and the appcabe
credts aganst net ncome provded by secton 25 were reduced by one-haf.
Secton 51(b) (1) provdes:
(1 ) 16 ND ND WI .
(1) Ik genera. husband and wfe may make a snge return |onty.
Such a return may be made even though one of the spouses has nether
gross ncome nor deductons. If a |ont return s made the ta sha be
computed on the aggregate Income and the abty wth respect to the ta
sha be |ont and severa.
Secton 107(a) provdes:
(a) Persona Servces. If at east 80 per centum of the tota compensaton
for persona servces coverng a perod of thrty-s caendar months or more
s receved or accrued n one ta abe year by an ndvdua or a partner-
shp, the ta attrbutabe to any part thereof whch Is ncuded In the gross
Income of any ndvdua sha not be greater than the aggregate of the ta es
attrbutabe to such part had It been Incuded n the gross ncome of such nd-
vdua rataby over that part of the perod whch precedes the date of such
recept or accrua.
Secton 12(d) and secton 51(b)(1) were not appcabe for ca-
endar years pror to 1943.
The servces for whch the compensaton under consderaton was
receved were performed pror to the effectve date of the ncome-
spttng provsons of secton 12(d) of the Code, and the compensa-
ton was receved after the effectve date of that secton. Therefore,
the queston arses whether the provsons of secton 107(a) of the
Code sha be apped to such compensaton wthout regard to the
provsons of secton 12(d) of the Code or whether the compensaton
sha be spt equay between the husband and wfe before appyng
the provsons of secton 107(a) of the Code.
or the purposes of secton 107(a) of the Code, the soe fact that
the wfe performed no servces s not determnatve. It s mportant,
however, to determne who receved or accrued the compensaton, for
n computng the ta attrbutabe to ncome sub|ect to the provsons of
secton 107(a) t s necessary to determne the ta that woud have been
pad on such ncome had t actuay been ncuded n the recpent s
grofcs ncome rataby n the pror years. See dward C. Thayer et u .
v. Commssoner, 12 T. C. 795, acquescence, C. . 1950-1, 5 rthur
T. Schmdt v. Commssoner, 10 T. C. 740, acquescence, C. . 1949-1,
3 Wam . no v. Commssoner, 10 T. C. 550, acquescence, C. 1 .
1949-1, 3 and IR-Mm. 43, C. . 1952-2,112. ccordngy, f wthn
the meanng of secton 107(a) of the Code the compensaton was a
receved by the ta payer-husband the computaton under secton
107(a) must be made as though the husband aone receved the com-
pensaton n the pror years, and the ta payers may not spt such
compensaton n determnng the ta attrbutabe thereto uness they
coud have done so n the pror years had t actuay b en receved
then.
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Regs. 118, 39.107-3.1 96
wfe n a noncomnwnty property State does not receve or accrue
one-haf of the ncome of her husband. It does not foow from sec-
tons 12(d) and 51(b) of the Code that a husband and wfe each
receve or accrue one-haf ther combned ncome for edera ncome
ta purposes, but merey that f they are permtted to and do te a
|ont return ther ta sha be computed as f they each receved one-
haf of ther combned ncome. Thus, a husband and wfe n a non-
communty property State may not spt ther ncome f they te sep-
arate returns. Secton 51(b) of the Code tsef ndcates that a wfe
does not receve one-haf of her husband s ncome, for that secton
states that a |ont return may be fed even though a spouse has no
gross ncome and the ta sha be computed on the aggregate ncome.
ccordngy, t s hed that for the purposes of secton 107(a) of
the Code a husband and wfe who resde n a noncommunty property
State may not spt ncome whch consttutes compensaton receved
by the husband for persona servces rendered by hm durng a ta abe
year pror to the effectve date of secton 12(d) of the Code. The
ta attrbutabe to such ncome must be determned as though t were
ncuded n the recpent s gross ncome rataby durng the perod n
whch the servces were rendered.
In vew of the foregong, the Interna Revenue Servce s con-
straned not to foow the decson n Uo|ferbert v. R. . Lee Marsha
e m., 200 ed. (2d) 648.
The opnons e pressed heren n no way confct wth the decsons
n Maurce II. an ergh v. Commssoner, 18 T. C. 518, acquescence
n the decson on the ssue reated here, C. . 1953-1, G, or ederco
Sta forth v. Commssoner, 6 T. C. 140. The an ergh decson
hods that secton 107(a) ncome s ncuded n gross ncome for the
purpose of secton 275(c) of the Code n the year t s receved or ac-
crued, notwthstandng that the ta s computed as f t were receved
pro rata n the pror years. Ths decson foows from the fact that
secton 107(a) affects ony the computaton of the ta . The Sta-
forth decson hods that n computng the ta attrbutabe to pror
years, secton 107(a) ncome s not e empt merey because t woud
have been e empt f receved n the pror year. In other words, the
character of secton 107(a) ncome s determned n the year t s
receved or accrued, but n computng the ta attrbutabe to the pror
year the ta payer must foow the method of computaton of the pror
year.
Reguatons 118, Secton 30.107-3: ack pay Rev. Ru. 54-138
attrbutabe to pror ta abe years,
Thnt part of a ump sum payment receved durng 10.T3 by a mem-
ber of the eet Reserve attrbutabe to an ncrease n retred pay
computed under the provsons of Pubc Law 720, Seventy-nnth
Congress, 00 Stat. 00.-{, approved ugust 10, 1046, whch represents
payment for the perod begnnng wth the day foowng such mem-
ber s reease to nactve servce to ugust 10, 1046, does not const-
tute back pay wthn the meanng of secton 107(d) of the Interna
Revenue Code. The baance of the payment consttutes back pay,
and the edera ncome ta abty for the year n whch receved
may be computed n accordance wth the provsons of secton 107-
(d) (1) of the Code, provded such amount e ceeds 15 percent of the
gross ncome for that year.
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97 I .p s 118, 39.107-3.
dvce s requested whether a ump stun payment receved durng
1953 by a member of the eet eserve attrbutabe to ncreased retre-
ment pay computed under the provsons of Pubc Law 720, Seventy-
nnth Congress, GO Stat. 993, approved ugust 10, 1946, consttutes
back pay wthn the meanng of secton 107(d) of the Interna Rev-
enue Code.
Pubc Law 7 20, gupra, amended the Nava Reserve ct of 1938,
52 Stat. 1175, by provdng that an ensted man of the Reguar Navy
who transferred to the eet Reserve after competng more than t
years tota nava servce and thereafter performed actve duty whch,
when added to hs pror servce, equaed 20 or more years nava
servce was, upon hs subsequent reease from actve servce, entted
to have hs retaner or retred pay computed on the same bass as an
ensted man who orgnay transferred to the eet. Reserve after
competon of 20 or more years servce. Inasmuch as Pubc Law 720,
approved ugust 10,1940, contaned a retroactve feature, an ensted
man transferrng to the eet Reserve became entted to an ncrease
n hs retaner or retred pay computed from the day foowng hs
reease to nactve servce.
The manner n whch ths payment was to be computed was not
fnay determned unt 1953 when a settement agreement was reached
on the bass of the decson of the Unted States Court of Cams n
Chrstopher C. Sanders v. Unted States, 120 Ct. Cs. 501. ccord-
ngy, such ensted men dd not receve the ncrease to whch they
were entted under Pubc Law 720 unt 1953, at whch tme they
receved a ump sum representng an ad|ustment n the retred pay
datng from the day foowng ther reease to nactve servce.
Secton 107(d)(1) of the Code provdes, n part, as foows:
Is genera. If the nuount of the back pay receved or accrued by nn
ndvdua durng the ta abe year e ceeds 15 per centum of the gross ncome
of the nrtvdnt for such year, the part of the ta attrhutne to the
ncuson of such back pay n gross ncome for the ta abe year sha not be
greater than the aggregate of the ncreases n the ta es whch woud have
resuted from the ncuson of the respectve portons of such hack pay n
gross ncome for the ta abe years to whch such portons are respectvey
attrbutabe, .
Secton 107(d) (2) of the Code defnes back pay for the purpose
of the appcaton of secton 107(d) (1) of the Code as remuneraton,
ncudng wages, saares, retrement pay, and other smar compen-
saton whch s receved or accrued durng the ta abe year by an
empoyee for servces performed pror to the ta abe year for hs
empoyer and whch woud have been pad pror to the ta abe year
e cept for the nterventon of certan specfed events whch events
ncude () dspute as to the abty of the empoyer to pay such
remuneraton, whch s determned after the commencement of court
proceedngs .
Secton 39.107-3 of Reguatons 118 provdes n part that back pay
does not ncude addtona compensaton for past servces where
there was no pror agreement or ega obgaton to pay such add-
tona compensaton. In the nstant case there was no ega abty
to make ths payment unt the approva of Pubc Law 720, supra.
In vew of the foregong t s hed that that part of a ump sum
payment receved durng 1953 by a member of the eet Reserve at-
trbutabe to an ncrease n retred pay computed under the provsons
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Regs. 118, 39.111-1.1 98
of Pubc Law 720, supra, whch represents payment for the perod
begnnng wth the day foowng such members reease to nactve
servce to ugust 10, 1946, does not consttute back pay wthn the
meanng of secton 107(d) of the Interna Revenue Code. The ba-
ance of the payment consttutes back pay, and the edera ncome ta
abty for the year n whch receved may be computed n accordance
wth the provsons of secton 107(d) (1) of the Code, provded such
amount e ceeds 15 percent of the gross ncome for that year, whch
ncudes the entre amount of the ump sum payment receved.
SUPPL M NT . COMPUT TION O N T INCOM
S CTION 111. D T RMIN TION O MOUNT O , ND
R COGNITION O , G IN OR LOSS
Reguatons 118, Secton 39.111-1: Computaton Rev. Ru. 54-95
of gan or oss.
When a resdenta estate, whch hns hern acqured and hed by a
ta payer for a number of years as a snge unt, s sod n two parces
durng the ta abe year, (he sae of each parce s treated as a
separate transacton and the gan reazed or oss sustaned s com-
puted separatey on each sae. ny osses sustaned on the sae of a
persona resdence are not deductbe.
dvce s requested whether a resdenta estate sod n two parces
durng a ta abe year s treated as one transacton or two separate
transactons for edera ncome ta purposes.
In the nstant case, the ta payer purchased 245 acres of and n
1927 for appro matey 25a doars for the purpose of budng a home
thereon. Immedatey thereafter the ta payer caused to be but
thereon a arge manor house, together wth a managers resdence and
other e tensve mprovements at a tota cost of appro matey 425a
doars. The property at a tmes thereafter was hed by the ta payer
soey for persona resdenta purposes as a snge ntegrated unt,
and not for the purpose of nvestment, resae, or the producton of
ncome. In 1952 the ta payer attempted to se the property as a whoe
and snge unt, but was unsuccessfu. In the eary part of 1953, the
ta payer negotated a sae of appro matey 50 acres of the property
contanng the manor home and a the mprovements made on the
property for appro matey 175a: doars, and n the atter part of
the same ta abe year he sod the remanng acreage to a separate pur-
chaser for appro matey 380a doars.
ssessment of edera ncome ta es s made on the bass of an
annua accountng perod. urnett v. Canford dc rooks Co., 282 U. S.
359. Ct. D. 277, C. . -, 303 (1931) Unted States v. s R. Lews,
340 U. S. 590, Ct. D. 1738, C. . 1951-1, 21. owever, ths does not
permt separate saes and ega transfers of property to be treated as
cne transacton merey because such saes occur n the same ta abe
year. Under the facts n ths case to permt the ta payer to treat the
separate saes of hs resdenta estate as one ntegrated transacton
woud n effect, ater the rue set forth n secton 39.23(e)-(e) of
Reguatons 118, that osses on persona resdences are not deductbe.
urther, f these sats had been made wthn a 3-day perod whch
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99 112( )).
spanned 2 ta abe years dfferent ta resuts woud necessary be
reached under the rue of accountng by annua perods. There s no
ega or equtabe bass for treatng such saes as one ntegrated
transacton.
ccordngy, t s hed that when a resdenta estate, whch has been
acqured and hed by a ta payer for a number of years as a snge unt,
s sod n two parces durng the ta abe year, the sae of each parce
s treated as a separate transacton and the gan reazed or oss sus-
taned s computed separatey on each sae. ny osses sustaned on
the sae of a persona resdence are not deductbe.
S CTION 112(b). R COGNITION O G IN OR LOSS:
C NG S SOL LY IN IND
( so Secton 371, Secton 39.371-2, Regua- Rev. Ru. 51-192
tons 118.)
Under a proposed pan to Integrate and smpfy the ta payer s
hodng company system, pursuant to an order ssued by the Secur-
tes and change Commsson, a recaptazaton of a subsdary,
the e change of ts stock ncdenta thereto, and the dstrbuton of
the subsdary s sock to the stockhoders of the parent together wth
the dssouton of another subsdary and the transfer of Its assets
to the ta payer, w consttute nonta abe transactons under
sectons 112(b) (8) and 371 of the Code.
dvce s requested wth respect to the ta consequences for edera
ncome ta purposes of certan proposed transactons to be consum-
mated pursuant to a pan approved by the Securtes and change
Commsson.
Corporaton, a regstered hodng company under the Pubc
Utty odng Company ct of 1935, has outstandng ony one cass
of capta stock consstng of 1.000 shares par vaue 0 per share.
Corporaton owns 14 subsdares, 2 of whch are the Y Corporaton
and the Z Corporaton. Y Corporaton, a gas utty company, has
outstandng 400 shares of common stock, par vaue 10 per share, a
of whch are drecty owned by Corporaton, and has frst mortgage
bonds, a of whch are owned by the pubc. Z Corporaton s soe
busness s the operaton and mantenance of Y Corporaton s nter-
urban dstrbuton system. Its securtes consst of 10 shares of no
par vaue common stock, a drecty owned by Corporaton.
Pursuant to an order of the Securtes and change Commsson
that satsfes the condtons of secton 371(f) of the Code, t s pro-
posed that Y Corporaton w amend ts certfcate of ncorporaton
to ncrease ts authorzed common stock from 500 shares, par vaue 10
per share, to 1,100 shares of par vaue of 5 per share. Y Corporaton
w ssue 1,000 shares of such 5 par vaue common stock to Corpo-
raton n e change for 400 shares of 10 par vaue common stock now
hed by Corporaton and w ncrease ts capta account from
4,000 to 5,000 by transferrng thereto 1,000 from ts earned surpus
account. fter the recept by Corporaton of the new common
stock of Y Corporaton, Corporaton w transfer and dstrbute
such stock, on a share for share bass, to ts stockhoders va a transfer
agent. Z Corporaton w be dssoved and Corporaton w ac-
qure a of ts then remanng assets and w assume a of ts ab-
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S 112(b). 100
tes to credtors n an amount not e ceedng the vaue of the assets
acqured.
Secton 112(b)(8) of the Interna Revenue Code, n con|uncton
wth sectons 371, 372, and 373 (suppement R) of the Code, provdes
for nonrecognton of gan or oss and ad|ustment to bass n the case
of certan e changes and dstrbutons ordered by the Securtes and
change Commsson under the provsons of Secton 11(b) of the
Pubc Utty odng Company ct of 1935 (15 U. S. C. 79 (b)).
Secton 112 of the Interna Revenue Code reatng to the recognton
of gan or oss provdes n part as foows:
(b) changes Soey n nd.

(8) changes and dstrbutons n obedence to orders of securtes
and e change commsson. I the case of any e change or dstrbuton
descrbed n secton 371, no gan or oss sha be recognzed to the e tent
specfed n such secton wth respect to such e change or dstrbuton.
Secton 371 of the Interna Revenue Code reatng to the nonrecogn-
ton of gan or oss on e changes or dstrbutons n obedence to orders
of the Securtes and change Commsson provdes n part as
foows:
(a) changes of Stock ok Skc rteb Ony. No gan or oss sha be
recognzed to the transferor f stock or securtes n a corporaton whch s a
regstered hodng company or a ma|orty-owned subsdary company are trans-
ferc . to such cor oratou or to an assocate company thereof whch s a reg-
stered hodng company or a ma|orty-owned subsdary company soey n
e hange for stock or securtes and the e change s made by the trans-
feree corporaton n obedence to an order of the Securtes and change Com-
msson.
(c) Dstrbuton of Stock on Securtes Ony. If there s dstrbuted. In
obedence to an order of the Securtes and change Commsson, to a share-
hoder n a corporaton whch s a regstered hodng company or a ma|orty-
owned subsdary company, stock or securtes wthout the surrender by
sur h sharehoder of stock or securtes n such corporaton, no gan to the dstrb-
ut from the recept of the stock or securtes so dstrbuted sha be recognzed.
(d) Transfers Wthn System Groups. (1) No gan or oss sha be recog-
nzed to a corporaton whch s a member of a system group ( ) f such corpora-
ton transfers property to another corporaton whch s a meuer of the same
system group n e change for other property, md the e change by each corpora-
ton s mme n obedence to an order of the Securtes and change Comms-
son, .
Secton 39.371-2 of Reguatons 118 states, n part, that the genera
rue s that the entre amount of gan or oss from the sae or e change
of property s to be recognzed under secton 112(a) and that the
entre amount receved as a dvdend s to be ncuded n gross ncome
under the provsons of sectons 22(a) and 115 of the Code. One of
the e ceptons to the genera rue s provded n secton 112(b)(8)
wth respect to e changes, saes, and dstrbutons specfcay de-
scrbed n secton 371 of the Code. In the nstant case, snce the order
of the Securtes and change Commsson states that these trans-
actons are necessary or approprate to effectuate the provsons of
Secton 11(b) of the act and such order otherwse satsfes the con-
dtons of secton 371(f) of the Code, the transactons meet the re-
qurements of sectons 371, 372, and 373.
ccordngy, t s hed that no gan or oss w be recognzed to Y
Corporaton as a resut of ts ncreasng and changng ts outstandng
capta stock ncreasng ts capta account by a transfer out of ts
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101 (Regs. 118, 39.112(b)(2)-.
earned surpus account and asung new certfcates representng n-
creased shares to Corporaton or ts desgnees n e change for such
certfcates now hed hy Corporaton. No gan or oss w be recog-
nzed to Corporaton as a resut of the e change by t of od shares
for new shares of stock of Y Corporaton. No gan or oss w be
recognzed to Corporaton as a resut of the dstrbuton by t to ts
stockhoders of shares of stock of Y Corporaton, notwthstandng the
fact that the vaue of such stock w be substantay greater than the
bass of such stock n the hands of Corporaton. The transactons
w not dmnsh the accumuated earnngs and profts of Y Corpo-
raton avaabe for the dstrbuton of ta abe dvdends nor of
Corporaton as a resut of the dstrbuton. No gan or oss w be
recognzed to the stockhoders of Corporaton as a resut of the
recept by them of the stock of Y Corporaton transferred and ds-
trbuted to them by Corporaton or the transfer agent pursuant to
the pan. The cost or other bass of the stock of Corporaton n
the hands of the stockhoders, whether receved from Corporaton
or the transfer agent, must be apportoned between the stock of
Corporaton and the stock of Y Corporaton n proporton to the far
market vaue of each as of the effectve date of the dstrbuton by
Corporaton. The hodng perod of the stock of Y Corporaton
receved by a hoder of stock of Corporaton on the dstrbuton w
ncude the perod durng whch the stock of Corporaton was hed.
No gan or oss w be recognzed to Corporaton as a resut of com-
pete qudaton of Z Corporaton and the transfer of ts assets, sub-
|ect to ts abtes, to Corporaton. The bass of the assets of Z
Corporaton n the hands of Corporaton w be the same as the
bass of such assets n the hands of Z Corporaton mmedatey pror
to the qudaton.
Wthdrawa shares n a edera savngs and oan assocaton e -
changed for wthdrawa shares n a State budng and oan assoc-
aton, a party to a reorganzaton. (See Rev. Ru. 54-193, p. IOC.)
Reguatons 118, Secton 39.112(b) (2)-: Stock Rev. Ru. 54-C5
for stock of same corporaton.
( so Secton 112(g). Secton 3 ).112(g)-.)
Speca stock of one seres e changed for speca stock of another
seres ssued hy the same corporaton operatng as a reguated
Investment company, where each seres s whoy dependent for ts
earnngs and qudatng vaue upon entrey dfferent underyng
assets, gves rse to a ta abe gan or deductbe oss on the e change.
The fact that a pan of reorganzaton provdes that such converson
may be made wthn 90 days after the effectve date of a corporate
recaptazaton w not make the e change nonta abe under the
provsons of secton 112(b) (3) of the Interna Revenue Code.
dvce s requested reatve to the effect, for edera ncome ta
purposes, of an e change by a hoder of speca stock of one seres
n a reguated nvestment company for speca stock n another seres
ssued by the same company under crcumstances set fort beow.
The certfcate of ncorporaton of the SI Company, organzed and
regstered as a reguated nvestment company as defned n secton 301
of the Interna Revenue Code, authorzes the ssuance of shares
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Regs. 118, 39.112(b)(2)-. 102
of common stock and 1000a shares of speca stock, the atter to be
ssued n one or more seres pursuant to acton by the oard of Drec-
tors. The oard of Drectors subsequenty authorzed the ssuance of
the speca stock n severa seres. ach share of each cass of stock
has equa votng rghts wth a other shares of a other casses. ach
seres s named for the type of nvestments purchased wth the funds
obtaned from the sae of the speca stock of that seres. The under-
yng assets of each seres, representng the nvestment of the proceeds
from the sae of shares and the undstrbuted earnngs and profts
therefrom are segregated upon the books of account. The hoders of
shares of any desgnated seres have no nterest n the assets or ncome
of any other seres. ach seres s charged wth ts equtabe pro-
portons of the e penses and abtes of the corporaton. Shares of
any seres are redeemabe at ther current net asset vaue and are aso
convertbe nto shares of any other seres at ther reatve net asset
vaues.
Pursuant to a pan of reorganzaton the management of the M
Company proposes to emnate the varous seres of the od speca
stock by recassfyng the capta structure nto three genera manage-
ment seres. The shares of a prevousy e stng seres of speca
stock w be recassfed accordng to the type of nvestment repre-
sented thereby nto shares of one of the three new categores. The
converson prveges of the od seres w be emnated. owever,
the pan provdes that for a mted perod of 90 days after the effectve
date of the recaptazaton a hoder of shares of any of the three new
seres may convert them nto shares of ether of the other seres at net
asset vaue. Immedatey pror to the reorganzaton a accumuated
ncome and net reazed capta gan n each of the od seres w be
decared payabe to the stockhoders as ordnary ncome and as capta
gan dvdends.
The queston presented s whether (1) the recassfcaton of the
e stng casses of speca stock at the date of recaptazaton and (2)
the converson of the new stock nto shares of ether of the other seres
of new stock wthn 90 days after the effectve date of the recaptaza-
ton w consttute e changes of propertv wthn the meanng of
sectons 112 (a), (b)(2), and (b)(3) of the Code whch read as
foows:
S C. 112. R COGNITION O G IN OR LOSS.
(a) Genera R e. Upon the sae or e change of property the entre amount
of the gan or oss, determned under secton 111, sha be recognzed, e cept as
herenafter provded n ths secton.
(b) changes Soey n nd.

(2) Stock fob stock of same corporaton. No gan or oss sha be
recognzed f common stock n a corporaton s e changed soey for common
stock In the same corporaton, or f preferred stock n a corporaton s e -
changed soey for preferred stock n the same corporaton.
(3) Stock for stock on reorganzaton. No gan or oss sha be recog-
nzed f stock or securtes n a corporaton a party to a reorganzaton are,
n pursuance of the pan of reorganzaton, e changed soey for stock or
securtes n such corporaton or n another corporaton a party to the
reorganzaton.
On the bass of the foregong t s hed that the recassfcaton of the
e stng casses of speca stock pursuant to the pan descrbed w
consttute a reorganzaton wthn the meanng of secton 112(g) of
the Code. ccordngy, under the provsons of secton 112(b) (3) of
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103 Regs. 118, 39.112(b)(2)-.
the Code, no ta abe gan or deductbe oss w be recognzed to a
hoder of speca stock as the resut of the e change by hm, pursuant
to the pan, of such stock for the new recassfed stock, e cept that
gan w be recognzed n an amount not n e cess of cash receved n
eu of fractona shares.
Wth respect to the rghts granted under the pan of reorganzaton
to convert new stock nto ether of the other seres of new stock wthn
90 days after the effectve date of the recaptazaton t s hed that
such e changes w not quafy for ta -free treatment under secton
112(b) (3) of the Code. Secton 39.112(g)- of Reguatons 118 pro-
vdes n part that a pan of reorganzaton must contempate a trans-
acton specfcay descrbed as a reorganzaton n secton 112(g) to
cam nonrecognton under secton 112(b)(3). In the nstant case
the converson prvege granted to hoders of new stock to e change
such stock for other stock of a dfferent seres wthn a mted tme
after the effectve date of the pan does not appear to be an essenta
part of the pan of reorganzaton but rather an ndependent trans-
acton whereby the stockhoders are gven the eecton to e change
ther hodngs for others of ther choce. In ths connecton see Cr-
r Motors Co. v. Commssoner, 14 T. C. 2G3, affrmed 189 ed. (2)
704, certorar dened, 342 U. S. 88G, and mercan antam Car Co. v.
Commssoner, 11 T. C. 397, affrmed, 177 ed. (2d) 513, certorar
dened, 339 U. S. 920.
It s hed further that the e change of the new stock n the nstant
case for new stock of another seres does not meet the requrements of
secton 112(b) (2) of the Code. The rght of converson granted by
the pan of reorganzaton s not the rght to convert the stock hed,
share for share, for stock of another seres, but ony the rght to obtan
the number of shares of another seres equa n vaue to the market
vaue of the shares to be e changed. Moreover, the e cepton to
recognton of gan or oss provded by secton 112(b) (2) of the Code
s appcabe ony when common or preferred stock s e changed for
ke stock n the same corporaton.
The speca stock n the nstant case, both before and after the re-
captazaton s not common stock snce the hoders thereof do not
share rataby ether n the earnngs of the corporaton or n ts assets
on qudaton, t beng specfcay provded that the hoders of shares
of any desgnated seres have no nterest n the assets or ncome of any
other seres. urthermore, the certfcate of ncorporaton provdes
for the ssuance of common stock, whch stock has the norma charac-
terstcs of common stock and s entrey separate and dstnct from any
of the casses of speca stock theren consdered. Nether s the
speca stock a preferred stock snce the hoders thereof are not pre-
ferred as to dvdends out of the entre earnngs of the corporaton
and are restrcted to the earnngs of the segregated assets representng
hs partcuar cass of speca stock. Lkewse the hoder of speca
stock has no preference n the genera assets of the corporaton on
qudaton, e ceptng the rght to share rataby wth other members
of hs cass n the segregated assets representng that partcuar cass
of speca stock. Consequenty an e change of speca stock for speca
stock of a dfferent seres represents a ta abe e change of property,
the gan or oss from whch woud not be precuded from recognton
for edera ncome ta purposes by secton 112(b) (2) of the Interna
Revenue Code.
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Regs. 118, 39.112(f)-. 104
Reguatons 118, Secton 30.112(b) (5)-: Trans-
fer of property to corporaton controed by
transferor.
Transfer of property to a corporaton controed by transferor as
e frst step n the e ecuton of a transacton n whch the transferor
oses contro of such a corporaton. (See Rev. Ru. 54-96, p. 111.)
Reguatons 118. Secton 0.112(b) (6)-3: Lqu-
datons coverng more than one ta abe year.
Reguatons 118 amended. (See T. D. G050, p. 80.)
Reguatons 118, Secton 30.112(b) (7)-4: Treat- Rev. Ru. 54-244
net of gan.
The ta payer has obtaned the ma|orty of the capta stock of a
growers marketng cooperatve assocaton whch was ncorporated
n the State n whch t operates and whch has been hed to be e empt
for edera ncome ta purposes under the provsons of secton
101(12) of the Interna Revenue Code. The ta payer proposes to
qudate the corporaton. The books of the assocaton show no
earned surpus but there s capta stock outstandng whch was ssued
to growers pursuant to a revovng fund agreement. In accordance
wth such agreement the assocaton eac year retaned portons of
amounts due growers for crops and ssued stock therefor havng par
vaue equa to the retaned porton. The assocaton then used such
retentons n ts busness. Growers have reported the face amount of
the stock receved as part of ncome from crops each year. ed,
that the vaue of the above-descrbed stock does not represent earn-
ngs and profts of the assocaton wthn the meanng of secton
112(b)(7)( ) of the Code.
Reguatons 117, Secton 39.112(b) (11)-2: Lmta-
tons upon the appcaton of secton 112(b) (11).
No gan or oss w be recognzed to ether corporaton a party to a
reorganzaton or to ther sharehoders. (See Rev. Ru. 54-139,
p. 105.)
S CTION 112(f). R COGNITION O G IN OR LOSS:
IN OLUNT RY CON RSION
Reguatons 118, Secton 30.112(f)-: Invo-
untary converson where dsposton of the
converted property occurred after Decem-
ber 31,1050,
Reguatons 118 amended. (See T. D. 0058, p. 80.)
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105 Megs. 118, 39.112(g)- .
S CTION 112(g). R COGNITION O ( IN OR LOSS:
D INITION O R ORG NIZ TION
Reguatons 118, Secton 39.112(g)-1: Purpose Rev. Ru. 54-139
and scope of e cepton of reorganzaton e -
changes.
( so Secton 112(b), Secton 39.112(b) ()-2
Secton 113(a), Sectons 39.113(a) (7)-,
39.113(a) (23)- Secton 115(a), Secton
39.115(a)-3.)
51 Corporaton has outstandng 2,500 sharps of common stock,
n of whch s owned y one stockhoder. It s engaged n two
dverse feds of Manufacturng endeavor whch the corporaton
fees shoud be separated n order to nsuate each endeavor from
the abtes of the other. M Corporaton proposes to organze a
new corporaton and transfer to t a of the assets used n one ne
of endeavor, sub|ect to certan abtes, n e change for a of the
new corporaton s stock. Such stock w be dstrbuted to the soe
stockhoder of Corporaton, who has no present ntenton of qu-
datng ether corporaton or dsposng of ts stock. ed, such
transfer and e change w consttute a reorganzaton wthn the
meanng of secton 112(g)(1)(D) of the Interna Revenue Code.
dvce s requested wth respect to the ta consequences for edera
ncome ta purposes of a proposed spn-off reorganzaton heren-
after descrbed.
M Corporaton has outstandng 2,500 shares of common stock, a
of whch s owned by one stockhoder. It s engaged n two dverse
feds of endeavor, each of whch s operated as a branch of the cor-
poraton. One branch manufactures specay desgned eectronc
products for the Unted States Government the other branch manu-
factures and ses ar condtoners. The ar condtoner branch has
a separate saes force and separate producton workers. M Corpora-
ton fees that the two branches shoud be separated n order to nsuate
each from the abtes of the other. The eectroncs branch s voa-
te n nature and depends upon Government contracts, economc
condtons, and changes n word affars. The ar condtoner branch
s sub|ect to tgaton nvovng cams of patent nfrngement.
M Corporaton proposes to organze a new corporaton and transfer
to t the assets of one of the branches n e change for a the capta
stock (consstng soey of common stock) of the new corporaton.
Such stock w then be dstrbuted to the soe stockhoder of M Cor-
poraton wthout the surrender by hm of any of hs stock n the atter
corporaton. The soe stockhoder has np present ntenton of seng
or otherwse dsposng of any of the stock of ether corporaton or of
qudatng ether corporaton.
oth corporatons w contnue to operate as separate enttes, and
n genera they w have separate personne and factes. owever,
M Corporaton w contnue to manufacture a sma proporton of the
parts used by the new corporaton, and n the event of common use of
factes and empoyees the costs and saares w be aocated be-
tween the two corporatons on an equtabe bass. ny saes by M
Corporaton to the new corporaton w be effected at far market
prces.
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Regs. 118, 39.112(g)-. 106
Secton 112 of the Interna Revenue Code provdes n part as foows:
(g) Defnton of Reorganzaton. s used In ths secton
(1) Te term reorganzaton means (D) a transfer by a cor-
poraton of a or a part of Its assets to another corporaton If mmedatey
after the transfer the transferor or ts sharehoders or both are n contro
of te corporaton to whch the assets are transferred
Secton 39.112(g)- of Reguatons 118 provdes n part that the
purpose of te reorganzaton provsons of the Interna Revenue Code
s to e cept from the genera rue wth respect to the recognton of
gan or oss certan specfcay descrbed e changes ncdent to re-
ad|ustment of corporate structures as are requred by busness e gen-
ces and whch effect ony a read|ustment of contnung nterests n.
property under modfed corporate forms. Requste to a reorganza-
ton under the Code are a contnuty of the busness enterprse under
the modfed corporate form, and a contnuty of nterest theren on
the part of those persons who were the owners of the enterprse pror
to the reorganzaton.
It s hed that the transfer by M Corporaton of the assets of one of
ts branches, sub|ect to abtes pertanng to that branch, to the
new corporaton n e change soey for a of the stock of the atter
w consttute a reorganzaton under secton 112(g)(1)(D) of the
Interna Revenue Code. No gan or oss w be recognzed to ether
corporaton as a resut of the reorganzaton and no gan or oss w
be recognzed as a resut of the recept by the soe sharehoder of the
stock of the new corporaton. The bass of the assets acqured by the
new corporaton w be the same as the cost or other bass n the hands
of M Corporaton and the cast or other bass to the soe sharehoder
of the stock of M Corporaton w be aocated between the stock of
M Corporaton and the stock of the new corporaton acqured as a
resut of the transacton. proportonate part of the accumuated
earnngs and profts of M Corporaton w be aocabe to the new
corporaton. See Revenue Rung 270, C. . 1953-2, 35.
Reguatons 118, Secton 39.112(g)-: Purpose Rev. Ru. 54-193
and scope of e cepton of reorganzaton
e changes.
( so Secton 112(b) Secton 113(a), Secton
39.113(a) (6)- Secton 115(a), Secton
S9.115(a)-3.)
The M ssocaton, for bona fde busness reasons, proposes to
convert Itsef from a edera savngs and oan assocaton Into a
budng and oan assocaton under the aws of Caforna pursuant
to te provsons of the udng and Loan ssocaton ct, as
amended. Chapter 20 ), Statutes of Caforna, and secton 5() of
the ome Owners Loan ct of 1933, as amended, 48 Stat. 12S.
ed, the converson of M ssocaton Into a Sate assocaton w
consttute a nonta abe reorganzaton wthn the purvew of sec-
ton 112(g) (1) ( ) of the Interna Revenue Code.
dvce s requested wth respect to the ta consequences, for edera
ncome ta purposes, of a proposed reorganzaton herenafter
descrbed.
The M ssocaton, a edera savngs and oan assocaton, char-
tered pursuant to te ome Owners Loan ct of 1933, as amended,
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107 Regs. 118, 39.112fe)-.
4S Stat. 128, desres to convert tsef nto a budng and oan assoca-
ton under the aws of Caforna, pursuant to the provsons of secton
12.12 of the udng and Loan ssocaton ct, Chapter 269, Statutes
of Caforna, 1931, as added by Chapter 527, Statutes of Caforna,
1939, and secton 5() of the ome Owners Loan ct of 1933, supra,
as amended by Pubc Law 895, ghteth Congress, second sesson,
62 Stat. 1239. The members of the assocaton are those persons
havng money deposted (nvestor members) and persons who have
borrowed money from t (borrower members). The nterests of n-
vestor members are evdenced by nvestment share account certfcates
cr by savng share account books (whch w both be referred to
heren as share accounts).
y vote of appro matey 80 percent of a members of M ssoca-
ton entted to vote, a pan of converson nto a State assocaton has
been adopted and duy approved by the ome Loan ank oard, the
edera Savng and Loan Insurance Corporaton, and the budng
and oan commssoner of Caforna. Ths pan s, n substance, as
foows: The M ssocaton w ssue to ts members, n eu of ther
present share accounts, wthdrawabe shares provded for by secton
3.02 of the udng and Loan ssocaton ct, n the same wth-
drawa vaue as ther nterests n the edera assocaton, and a
borrower members of the edera assocaton w become borrower
members of the State assocaton. The amended charter w provde
for addtona capta secured by the sae, after the converson to a
State assocaton, of guarantee capta stock, as authorzed by secton
4.01 of the udng and Loan ssocaton ct. The wthdrawabe
shares after converson w contnue to have votng rghts, but the
owners of guarantee capta stock w have suffcent votng rght to
eect a ma|orty of the board of drectors.
The guaranteed capta stock w be of par vaue of 100 per share
and offered at 110 per share, sub|ect to the foowng preemptve
rghts of owners of share accounts:
(a) or a perod of 60 days after notce, each of the owners of
share accounts who were such owners of record on the day the
permt to convert s apped for sha be entted to subscrbe at
110 per share to any number of shares of the guarantee stock.
(b) Stock purchase warrants are to be ssued to share account
hoders for use n the event of an oversubscrpton for the guar-
antee capta stock, but not otherwse. ach share account hoder
w receve warrants for the purchase of guarantee stock of a par
vaue equa to 2 percent of the wthdrawa vaue of hs share
account wth fractona warrants ssued down to y100 of a share.
owever, on subscrpton, ony fu shares of guarantee capta
stock can be purchased. These warrants are assgnabe wthout
restrcton durng the 60-day perod open for preemptve sub-
scrpton by share account hoders. Thereafter, the warrants may
be sod ony to share account hoders who have subscrbed for the
guarantee stock. Subscrptons based upon warrants must be at
110 per share.
(c) Guaranteed shares not aocabe pursuant to warrants w
be aocated to subscrbng share account hoders n the ratos of
the vaues of ther share accounts to the share accounts of other
subscrbng share account hoders, ad|ustng for subscrpton war-
rants whch these subscrbng share account hoders have receved.
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Regs. 118, 39.112(g)-. 108
(d) If there s an under subscrpton to the guarantee stock
by the share account hoders at the end of the OU-dav perod a-
owed them for preemptve acton, then the unsubscrbed-for
stock may be sod as the drectors of the converted assocaton may
drect, but at 110 per share.
fter the sae of guarantee stock as been competed, there w be
ssued to each share account hoder a Certfcate of Contngent Interest
n Converson Surpus. These, certfcates w be ssued n the amounts
of each share account hoder s pro rata share n the accumuated sur-
pus of the assocaton at the date of converson to a State assocaton.
The certfcate hoders w have a rght to have ths surpus set apart
as a speca reserve, usabe by the assocaton but not dstrbutabe to
sharehoders unt after 15 years from the hte of the converson to
a State assocaton. If at any tme durng ths 15-year perod the
assocaton s qudated, or ts assets are sod n buk, then each cer-
tfcate hoder who s at such tme a hoder of wthdrawabe shares
n the assocaton sha be entted to receve, n addton to hs wth-
drawabe share n the funds of the assocaton, that part of the con-
verson surpus reserve represented by hs certfcate of contngent
nterest. These certfcates are not assgnabe separatey from the
wthdrawabe shares n connecton wth whch they are ssued.
Secton 5() of the ome Owners Loan ct, mpra, as amended,
provdes n part that a edera savngs and oan assocaton may con-
vert tsef nto a State-chartered nsttuton u n an equtabe bass,
sub|ect to approva by reguatons, or otherwse, by the ome Loan
ank oard and by the edera Savngs and Loan Insurance Corpora-
ton. Secton 12.12 of the udng and Loan ssocaton ct, supra,
as amended, provdes n part that any edera savngs and oan assoc-
aton may convert tsef nto a budng and oan assocaton under the
aws of Caforna upon a vote of 51 percent or more of the votes of
members of such edera savngs and oan assocaton cast at any
reguar or speca meetng caed to consder such acton.
Secton 12.12 of the udng and Loan ssocaton ct, supra, as
amended, further provdes that the converson to a State assocaton
becomes effectve upon the takng out of a charter under such act and
gvng the requste notces. Thereafter, the assocat on ceases to be a
edera savngs and oan assocaton and ownershp of a of ts
propertes vests by operaton of aw n the State assocaton wthout
any transfer of tte or other conveyance. It s e pressy decared n
such secton that the State budng and oan assocaton sha be merey
a contnuaton of the edera savngs and oan assocaton under a new
name and a new |ursdcton.
Secton 112(g) of the Interna Revenue Code provdes n part as
foows:
(g) Defnton of Reorganzaton. s used In s secton
(1) The term reorganzaton means ( ) a mere change n
Identty, form, or pace of organzaton, however effected.
In the nstant case the converson of the M ssocaton nto a State
assocaton meets the requstes of a nonta abe reorganzaton w thn
the meanng of secton 112(g) (1) ( ) of the Code, and w resut n
no gan or oss to ether assocaton. Cf. G. C. M. 24423, C. . 1945,
145. The assets w have the same bass n the hands of the State
assocaton as n the hands of the edera assocaton.
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109 (Regs. 118, 39.112(g)-2.
No gan or oss w be reazed by the nvestor members of the
edera assocaton upon the ssuance to them of the wthdrawabe
shares of the State assocaton, together wth the certfcates of con-
tngent nterest n the converson surpus of the assocaton. In cases
where subscrpton rghts are not e ercsed or sod, the bass of the
wthdrawabe shares n the State assocaton and the certfcates n
converson surpus w be the same as the cost or other of the share
accounts converted. In cases where subscrpton rghts or warrants
are e ercsed or sod, the cost or other bass of the share accounts
converted w be apportoned between (1) the wthdrawabe shares n
the State assocaton and the certfcates n converson surpus (they
beng not assgnabe separatey), and (2) the subscrpton rghts or
warrants whch are e ercsed or sod, n proporton to the respectve
vaues thereof at the tme the rghts or warrants are ssued. No gan
or oss w be reazed by the nvestor members of the edera assoca-
ton upon recept of the subscrpton rghts or warrants to purchase
guarantee capta stock of the State assocaton, at the tme the war-
rants become operatve, or at the tme the subscrpton rghts or
warrants are e ercsed. The bass of the guarantee stock purchased
by an nvestor w be measured by the subscrpton prce thereof pus
the bass of the share accounts of the edera assocaton whch s
apportonabe to the subscrpton rghts or warrants e ercsed. The
nvestor members of the edera assocaton who purchase subscrpton
rghts or warrants w reaze no gan or oss upon recept of such
rghts or warrants or upon the e ercse of such rghts or warrants.
The earnngs or profts of the edera assocaton at the converson date
w become earnngs or profts of the State assocaton avaabe for
dvdends.
Reguatons 118, Secton 39.112(g)-: Pur-
pose and scope of e cepton of reorganzaton
e changes.
change of speca stock n a reguated nvestment company for
speca stock n another seres ssued by the same company. (See Rev.
Ru. 54-65, p. 101.)
Smuatons 118, Secton 39.112 (g) -2: Defn- Rev. Ru. 54-13
ton of terms.
( soSecton 112(b) (3),Secton 39.112(b) (3)-
(5) Secton 113(a)(6), Secton 39.113(a)-
(6)-.)
ThR rearrangement of the capta structure of M Corporaton n
order to ncrease the common stock nterest of one of ts younger
e ecutves, n accordance wth a proposed pan of reorganzaton
under whch the corporaton w ssue new second preferred stock
In e change for common stock hed hy a certan group of present
sharehoders, w consttute a recaptazaton and, therefore, a
reorganzaton wthn the meanng of secton 112(g) (1) ( ) of the
Interna e venue Code.
dvce s requested reatve to the treatment for edera ncome ta
purposes of a proposed reorganzaton of the M Corporaton.
815359 64 8
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Regs. 118, 39.112(g)-2. O
The M Corporaton manufactures women s hghy styed shoes. The
capta stock of the M Corporaton conssts of 100 par vaue 4 percent
nonvotng cumuatve preferred stock, and 100 par vaue common
stock. owns appro matey 30 percent of each cass of stock.
owns appro matey 56 percent of each cass of stock and three mem-
bers of s famy who are not actve n the management of the cor-
poraton own an addtona 14 percent of the stock. 15 s G5 and
s 47 years od.
and have both been wth the company snce ts ncorporaton.
The operaton of the corporaton requres consderabe management
sk and abty, and the growth of the corporaton s due argey to
s efforts and abtes. s abtes and contnued nterest are con-
dered necessary to the future success of the company. s ds-
satsfed wth the fact that hs common stock equty n the corporaton
s ess than s notwthstandng that he makes at east as great a
contrbuton to the success of the company. In vew of the fact that
the company desres to retan s servces and the fact that the present
arrangement s not conducve to ma mum effort on s part or to hs
contnung wth the compan , t s proposed to ncrease s common
stock nterest n the corporaton to 40 percent at ths tme. (The
stockhoders have aso agreed that after s death s common stock
nterest w be ncreased to 50 percent through a rearrangement of
the capta stock at such tme.) In order to rearrange the capta
structure of the corporaton to effect an ncrease of s common stock
nterest to appro matey 40 percent at ths tme, the foowng
transacton s proposed:
(1) The corporaton w amend tts charter to authorze the ssue of a num-
ber of shares of a new 4 percent cumuatve second preferred stock havng a
ar vaue of 100. The preferred stock presenty authorzed w be desgnated
as frst preferred stock. The second preferred stock w be entted to cumua-
tve dvdends of 4 percent per annum and w be caabe at, and entted n
qudaton to, par vaue pus accrued dvdends. The second preferred stock
w be subordnate to the frst preferred stock but preferred over the common
stock as to dvdends and assets n qudaton.
(2) The corporaton w ssue the new second preferred stock to the other
four stockhoders (n proporton to the common stock hed by each) n e change
for a suffcent number of ther shares of common stock to effect an Increase In
s common stock nterest to 40 percent of the common stock outstandng after
the e change. The e change w be made on the bass of one share of second
preferred stock for an amount of common stock representng 100 of book vaue
on the date the pan s made effectve. No change w be made n the number of
shares of stock hed by .
(3) The corporaton w transfer from ts earned surpus account to ts capta
stock account an amount suffcent to refect the ncrease n the par vaue of
ts outstandng stock resutng from the e change.
Secton 112(g) (1) of the Interna Revenue Code provdes n part as
foows:
(g) Defnton of Rboboamzato . s used In ths secton
(1) The term reorganzaton means ( ) a recaptaza-
ton .
Secton 30.112(g)- of Reguatons 118 provdes n part that the
purpose of the reorganzaton provsons of the Interna Revenue
Code s to e cept from the genera rue certan specfcay descrbed
e changes ncdent to read|ustment of corporate structures whch
effect ony a read|ustment of contnung nterests n property under
modfed corporate forms. Requste to a reorganzaton under the
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I Regs. 118, 39.112(( )-2.
Code are a contnuty of the busness enterprse under the modfed
corporate form, and a contnuty of nterest theren on the part of
those persons who were the owners of the enterprse pror to the re-
organzaton.
It s hed that ssuance by the M Corporaton of the newy author-
zed second preferred stock n e change for part of ts common stock
w consttute a reorganzaton under secton 112(g)(1)( ) of the
Code. No gan or oss w be recognzed to the stockhoders as a
resut of the recept by them of the second preferred stock n e change
for a porton of ther common stock (sec. 112(b)(3) of the Code)
aso, no gan w be recognzed to . The bass to the recpents of
the new second preferred stock w be the same as the cost or other
bass of the common stock e changed therefor (sec. 113(a) (6) of the
Code). The reorganzaton w not dmnsh the accumuated earn-
gs and profts of the corporaton avaabe for dvdends wthn the
meanng of secton 115(a) of the Code.
Ths rung sha not be consdered as n any way affectng the pos-
sbe appcaton of secton 102 of the Code, urthermore, opnon s
reserved whether the proposed transacton w consttute a gft from
the other stockhoders to or from to the other stockhoders or the
payment of compensaton to any of the stockhoders of the Corpora-
ton n the event t s utmatey determned that on the date that the
e change s consummated there s a dsparty n vaue between the
stock surrendered and the stock receved n e change therefor. Opn-
on s aso reserved on the treatment for edera ncome ta purposes
of any sae or transfer (other than by bona fde hypothecaton) by a
sharehoder of a or any part of the new second preferred stock
ssued by the company, or of a redempton of such stock n the hands
of ether the orgna hoder or a purchaser or transferee thereof.
Reouatons 118, Secton 39.112(g)-2: Defn- Rev Ru. 54-96
ton of terms.
( so Secton 112(b), Secton 39.112(b) (5)-.)
seres of prearranged and Integrated steps by whch a corpo-
raton transfers part of ts assets to a new corporaton n e change
for a the stock of the new corporaton and then transfers such stock
to an nnreafed corporaton for 20 percent of the votng stock of
such corporaton s treated, for edera ncome ta purposes, as a
sge transacton, and docs not consttute a nonta abe reorganza-
ton as defned n secton 112(g)(1)(D) of the Interna Revenue
Code or a nonta abe transfer under secton 112(b) (5) of the Code.
dvce s requested whether the transacton descrbed beow const-
tutes ether a nonta abe reorganzaton under secton 112(g) (1) (D)
of the Interna Revenue Code or a ta -free e change under secton
112(b)(5).
Corporaton was engaged n two separate busnesses. In 1951
Corporaton organzed a new corporaton, the Y Corporaton, and
transferred to t a the assets pertanng to one of such busnesses
(sub|ect to appcabe abtes) n e change for a of the stock of
Y. thereupon, and as a part of a prearranged pan, transferred a
of the stock of Y to the Z Corporaton, an unreated corporaton that
has been engaged n busness for many years, n e change for whch Z
ssued to 20 percent of Z s votng stock.
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Regs. 118, 39.112(n)-. 112
Secton 112(g) (1) (D) of the Interna Revenue Code provdes that
the term reorganzaton ncudes a transfer by a corporaton of a
or a part of ts assets to another corporaton f mmedatey after the
transfer the transferor or ts sharehoders or both are n contro of the
corporaton to whch the assets are transferred. Secton 112(b)(5)
provdes n part that no gan or oss sha be recognzed f property s
transferred to a corporaton by one or more persons soey n e change
for stock or securtes n such corporaton, and mmedatey after the
e change such person or persons are n contro of the corporaton.
Secton 112(h) defnes the term contro to mean the ownershp of
stock possessng at east 80 per centum of the tota combned votng
power of a casses of stock entted to vote and at east 80 per centum
of the tota number of shares of a other casses of stock of the
corporaton.
The two steps of the transacton descrbed above were part of a pre-
arranged ntegrated pan, and may not be consdered ndependenty of
each other for edera ncome ta purposes. See everng v. ash-
ford, 302 U. S. 454, Ct. D. 1299, C. . 1938-1,286 Mnnesota Tea Co. v.
everng, 302 U. S. 609, Ct. I). 1305, C. . 1938-1,288 and assck v.
Commssoner, 85 . (2d) 8 ( nd Cr. 1936), cert. den. 299 U. S. 592.
Snce as a resut of the whoe transacton the Corporaton was not
n contro of the Y Corporaton after transferrng a part of ts assets to
that corporaton, the transacton dd not consttute a reorganzaton as
defned n secton 112(g) (1) (D), nor dd t consttute a ta -free trans-
fer under secton 112(b)(5). Smary, secton 112(g)(1)( ) s
not appcabe, for n net effect transferred part of ts assets to Z
n e change for a part of the Z stock, rather than a the stock of a pre-
vousy e stng corporaton. It s mmatera whether the transac-
ton s treated as consstng of two ta abe steps (a ta abe e change by
of part of ts assets for the stock of Y foowed by a ta abe e -
change by of Y stock for Z stock) or whether t s treated as a
snge ta abe transacton (n substance a ta abe transfer by of
part of ts assets to Z n e change for 20 percent of Z s stock, foowed
by a nonta abe transfer by Z of the newy acqured assets to Y n e -
change for Y s stock). In ether case the Corporaton has reazed
a gan or oss measured by the dfference between the far market
vaue of the Z stock receved by t and the bass n ts hands of the as-
sets transferred. The bass of the stock of Z n the hands of w
be equa to the far market vaue of sad stock at the tme t s receved.
The bass of the stock of Y n the hands of Z w be ts far market
aue at the tme t s receved by Z. The bass to Y Corporaton of
the assets receved by Y w be ther far market vaue at the tme
of recept.
S CTION 112(n). R COGNITION O G IN OR LOSS:
G IN ROM S L OR C NG O R SID NC
Reguatons 118, Secton 39.112(n)-: Gan Rev.Ru. 54-156
from sae or e change of resdence.
Where a ta payer ses the and on whch hs prncpa resdence s
ocated, and wthn the perod begnnng 1 year pror to the date of
the sae and endng 1 |ear after such date e purchases another ot
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113 Regs. 118, 39.113(a)(5)-.
and moves the od house to the new ot and uses t as hs prncpa
resdence, the provsons of secton 112(n) of the Interna Revenue
Code, reatng to the nonrecognton of gan from the sae or e change
by a ta payer of hs puncpa resdence, are appcabe to the sae of
the and. The gan reazed from such sae w be recognzed ony
to the e tent that the seng prce of the and e ceeds the cost of
purchasng the new ot, pus the cost of movng the house, the con-
structon of necessary foundaton supports, pumbng and eectrca
nstaatons, as we as the cost of other mprovements at the new
ocaton made wthn the perod begnnng 1 year pror to the date of
sae and endng 1 year after such date.
S CTION 113.- D UST D SIS OR D T RMINING
G IN OR LOSS
Reguatons 118, Secton 39.113(a)-2: Genera
rue.
ass of tme payment nstament accounts recevabe. (See Rev.
Ru. 54-43, p. 119.)
S CTION 113(a). D UST D SIS OR D T RMINING
G IN OR LOSS: SIS (UN D UST D) O PROP RTY
Reguatons 118, Secton 39.113(a) (5)-: ass Rev. Ru. 54-97
of property acqured by bequest, devse, or
nhertance.
or the purpose of determnng the bass under secton 113(a) (. )
of the Interna Revenue Code of property transmtted at death (for
determnng gan or oss on the sae thereof or the deducton for
deprecaton), the vaue of th 3 property as determned for the pur-
pose of the edera estate ta sha be deemed to be ts far market vaue
at the tme of acquston. cept where the ta payer s estopped by
hs prevous actons or statements, such vaue s not concusve but s
a presumptve vaue whch may be rebutted by cear and convncng
evdence. Of. Rev. Ru. 54-10, p. 24.
Reguatons 118, Secton 39.113(a) (5)-: ass
of property acqured by request, devse, or n-
hertance.
ass of an annuty provded by an eecton of a member of the
unformed servces under the Unformed Servces Contngency Op-
ton ct of 1953. (See Rev. Ru. 54-144, p. 15.)
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Regs. 118, 39.115(c)-. 114
Reguatons 118, Secton 39.113(a) (6)-: Prop-
erty acqured upon a ta -free e change.
Wthdrawabe shares of a State budng and oan assocaton re-
ceved n e change for wthdrawabe shares n a edera savngs and
oan assocaton pursuant to a ta -free reorganzaton of the assoca-
ton. (See Rev. Ru. 54-193, p. 106.)
Reguatons 118,Secton 39.113(a) (7)-: Prop-
erty acqured by corporaton n reorganzaton
after December 31, 1917.
ass of assets acqured by new corporaton n a reorganzaton
under secton 112(g)(1)(D) of the Interna Revenue Code. (See
Rev. Ru. 51-139, p. 105.)
S CTION 114. SIS OR D PR CI TION
ND D PL TION
Reguaton 118, Secton 39.114-1: ass for
aowance of deprecaton and depeton.
Meanng of the term ordnary treatment processes n the manu-
facture of brck from shae and brck and te cay. (See Rev. Ru.
54-109, p. G2.)
S CTION 1 .-DISTRI UTIONS Y CORPOR TIONS
Reguatons 118, Secton 39.115(c)-1 and Rev. Ru. 54-230
39.115(): Dstrbutons n qudatons.
Te redempton of capta stuck of a corporaton pursuant to an
agreement wth ts stockhoders whereby te proceeds of certan
nsurance poces purchased by the corporaton on the fe of ench
stockhoder w be used by the corporaton to redeem the capta
stock hed by the estate of the stockhoder, n case of death, w
consttute a parta qudaton wthn the meanng of secton 115
(c) and f) of the Interna Revenue Code. The amount receved
by the estate upon surrender of the capta stock w be treated as
n payment n e change for the stock ns provded by secton 115(c)
and gan or oss w be determned under secton 111, sub|ect to
the provsons of secton 117 of the Code. The e cess of the nsur-
ance proceeds receved by the corporaton over te aggregate sum
of the pre.uns pad w consttute earnngs and profts of the
corporaton avaabe for dstrbuton wthn the meanng of sec-
ton 11 ) (a) and (b) of the Code.
dvce s requested wth regard to the effect, for edera ncome ta
purposes, of a proposed redempton by a corporaton of that porton
of ts capta stock hed by the estate of a deceased stockhoder.
t the tme of death the decedent owned 4,420 shares of stock of
the corporaton. In addton to the stock now hed n the decedent s
esttte, each of the fve brothers of the decedent owns 4,420 shares of
stock of (he corpora ton, and the remanng 7,530 shares of the cor-
poraton ate owned by Corporaton. ach of the fve brothers owns
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115 Regs. 118, 39.115(c)-.
16 percent of the stock n Corporaton and the remanng 1C
percent s owned by the estate of the decedent.
The corporaton had entered nto an agreement wth ts stockhod-
ers for the acquston of that porton of ts capta stock hed by a
deceased stockhoder at tme of death. Pursuant to the agreement
each stockhoder agrees to se and the corporaton agrees to purchase
as much of ts capta stock beongng to a deceased stockhoder as the
proceeds of the nsurance poces purchased by the corporaton on
the fe of such stockhoder, together wth accrued dvdends and un-
earned premums, w purchase at the prce per share f ed by the
agreement.
The capta stock hed drecty and ndrecty by the estate of the
deceased stockhoder represents appro matey 15 percent of the tota
outstandng capta stock of the corporaton therefore, the redemp-
ton does not nvove a ma|orty stockhoder.
Secton 115 of the Interna Revenue Code provdes n part as
foows:
(a) Defnton of DmncNn. The term dvdend when used n ths
chapter means any dstrbuton made by a corporaton to ts shnre-
hoders, whether n money or n other property, (1) out of ts earnngs or profts
accumuated after ebruary 28, 1913, or (2) out of the earnngs or profts of the
ta abe year wthout regard to the amount of the earnngs and
profts at the tme the dstrbuton was made.
(b) Source of Dstrbutons. or the purposes of ths chapter every ds-
trbuton s made out of earnngs or profts to the e tent thereof, and from the
most recenty accumuated earnngs or profts.
(c) Dstrbutons n Lqudaton. mounts dstrbuted In par-
ta qudaton of a corporaton sha be treated as n part or fu payment u
e ebunge for the stock. The gan or oss to the dstrbutee resutng from such
e change sha be determned under secton 111, but sha be recognzed ony
to the e tent provded n secton 112. In the case of amounts dstrb-
uted n parta qudaton the part of such dstrbuton
whch s propery chargeabe to capta account sha not be consdered a
dstrbuton of earnngs or profts.

() Defnton of Parta Lqudaton. s used n ths secton the terra
amounts dstrbuted n prta qudaton means a dstrbuton by a corpora-
ton n compete canceaton or redempton of a part of ts stock, or one of a
seres of dstrbutons n compete canceaton or redempton of a or a porton
of ts stock.
ccordngy, t s hed (1) that the proposed redempton of that
porton of the capta stock of the corporaton hed by the estate of
the deceased stockhoder, pursuant to the agreement whereby the
proceeds of certan nsurance poces on hs fe w be used by the
corporaton to redeem the capta stock hed by hs estate, n case of
death, w consttute a parta qudaton wthn the meanng of sec-
ton 115 (c) and () of the Interna Revenue Code (2) that the tota
amount receved by the estate upon surrender of the capta stock w
be treated, for edera ncome ta purposes, as n payment n e change
for the stock as provded n secton 115(c) and gan or oss w be de-
termned under secton 111 of the Code sub|ect to the provsons of
secton 117 of the Code and (3) that the e cess of the nsurance pro-
ceeds receved by the corporaton over the aggregate sum of the
premums pad w consttute earnngs and profts avaabe for ds-
trbuton wthn the meanng of secton 115 (a) and (b) of the Code.
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Regs. 118, 39.115(s)-. 116
S CTION 115(a). DISTRI UTIONS Y CORPOR TIONS:
D INITION O DI ID ND
Reguatons 118, Secton 39.115(a)-: Dv- Rev. Ru. 54-140
dends.
The dstrbuton by a natona bnnk of the stock of a whoy-
owned subsdary corporaton to a trust created for the purpose
of hodng the stock for the pro rata beneft of sharehoders of the
bank wth contro vested n the ma|orty of such sharehoders con-
sttutes a ta abe dvdend wthn the weanng of secton 115(a) of
the Interna Revenue Code to the e tent of earnngs and profts of
the bnnk avaabe for dvdends even though the dsposton of the
stock s ted to e stng stock ownershp n the bank.
dvce s requested as to the effect for edera ncome ta purposes
of a dstrbuton by a ta payer corporaton of the entre capta stock
of a whoy-owned subsdary to a trust for the beneft of the corpo-
raton s stockhoders under the crcumstances set forth beow.
The ta payer corporaton s a natona bank whch was organzed
under the natona bankng aws. It has for many years owned a
the stock of a subsdary corporaton whose assets consst prmary of
cash and rea estate and whose actvtes consst of deangs n varous
propertes and transactons whch are not permtted to the bank.
ecause of changes n the Natona ankng ct and the rungs
and requrements of the Comptroer of the Currency whereby na-
tona banks are restrcted n regard to the e tent and manner n whch
they may dea n nvestment securtes, and the acquston of stock n
other corporatons for ther own accounts, t became necessary for the
ta payer bank to emnate the stock of the subsdary from ts assets.
The bank accompshed ths by dstrbutng the stock to a trust whch
was organzed to hod the stock for the pro rata beneft of the stock-
hoders of the bank.
The trust agreement provdes that the trustees sha e ercse a
rghts and prveges of absoute owners of the stock ncudng, but
not mted to, the rght to vote the stock for any purpose whatsoever,
to receve a dvdends, to se or transfer the stock, provded that
any acton so taken sha be frst authorzed by benefcares ownng at
east a ma|orty of the benefca nterest n the assets of the trust.
No papers were dstrbuted to the stockhoders of the bank evdenc-
ng ther benefca nterest n the stock of the subsdary, therefore,
they receved nothng they can dspose of separatey from the bank
stock. Under the arrangement, the stock of the bank and the bene-
fca nterest n stock of the subsdary may not be transferred sepa-
ratey. If and when any shares of stock of the bank are transferred,
the pro rata nterest of the stockhoders of the bank n the stock of
the subsdary to the e tent of the shares so transferred w auto-
matcay be transferred aong wth the transfer of the bank s stock
wthout the e ecuton of any separate papers. No notaton appears
on the bank stock certfcates evdencng the benefca nterest n the
stock of the subsdary.
Inasmuch as the trust agreement provdes that no acton may be
taken by the trustees wthout the consent of a ma|orty of the hoders
of the benefca nterests, ownershp of the stock of the subsdary
was n effect transferred from the bank to the bank s stockhoders,
who thereby became free to contro such stock wthout fear of nter-
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117 Regs. 118, 39.116-1.
poston of the bank s credtors, depostors, and other thrd partes.
Secton 115(a) of the Interna Revenue Code provdes n part as
foows:
The term dvdend when vsed In ths chapter ret). 1 means any
dstrbuton made by a corporaton to ts sharehoders, whether n money or other
property, (1) out of ts earnngs or profts accumuated after ebruary 28, 1913,
or (2) out of the earnngs or profts of the ta abe year (computed as of the cose
of the ta abe year wthout dmnuton by reason of any dstrbutons made dur-
ng the ta abe year), wthout regard to the amount of earnngs and profts at
the tme the dstrbuton was made.
The bank n the nstant case dd not undergo a reorganzaton. It
aready owned the stock of the subsdary. y the transacton here
consdered ths stock was severed from the assets of the bank and the
benefca nterest thereof passed to the bank s sharehoders. The re-
sut of such transacton s not dfferent from what t woud be f the
stock of the subsdary had been dstrbuted drecty to the sharehod-
ers of the bank and tney n turn paced t n a trust for ther beneft.
The fact that the stock of the subsdary s ted up wth the bank stock
so that nothng may be receved by the sharehoders of the bank whch
can be dsposed of separatey from the bank stock does not serve to
render the transacton nonta abe.
In vew of the foregong, t s hed that the dstrbuton of the stock
of the subsdary to the trust for the beneft of the sharehoders of the
bank, measured by the far market vaue of the stock at the tme of the
dstrbuton, represents a ta abe dvdend to the sharehoders of the
bank wthn the meanng of secton 115(a) of the Interna Revenue
Code, mted, however, to the earnngs and profts of the bank ava-
abe for dvdends.
Reguatons 118, Secton 39.115(a)-3: ffect
on earnngs or profts of certan ta -free e -
changes and ta -free dstrbutons.
Proportonate part of the undstrbuted earnngs and profts of M
Corporaton w be aocabe to the new corporaton. (See Rev. Ru.
54-139, p. 105.)
Reguatons 118, Secton 39.115(a)-3: ffect
on earnngs or profts of certan ta -free
e changes and ta -free dstrbutons.
The earnngs and profts of the edera savngs and oan assocaton
converted nto a State budng and oan assocaton. (See Rev. Ru.
54-193, p. 106.)
S CTION 116.- CLUSIONS ROM GROSS INCOM
Reguatons 118, Secton 39.116-1: arned Rev. Ru. 54-72
ncome from sources wthout the Unted
States.
Where a ta payer meets the requrements of secton 110(a)(2)
of the Interna Revenue Code regardng presence n a foregn country
or countres durng at east 010 fu days durng any perod of 18
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Regs. 118, 80.116-1. 118
consecutve months, but receves compensaton attrbutabe to such
perod n a ta abe year endng subsequent to December 31, 1952,
no porton of whch fas wtbn the 18 month perod, no porton of
such compensaton receved n such ta abe year s e cudabe from
hs gross ncome.
dvce s requested as to the appcaton of secton 116(a) (2) of the
Interna Revenue Code (as amended by sec. 204 of the Technca
Changes ct of 1953, Pubc Law 287, 83d Coup., C . 1953-2, 485)
and Reguatons 118 as amended by Treasury Decson 6039, C. .
1953-2,162, wth respect to amounts receved after December 31,1952,
attrbutabe to earned ncome from sources outsde the Unted States
unfer the foowng crcumstances:
Ta payer worked abroad and met the requrements of secton
116(a)(2) of the Interna Revenue Code regardng presence n a
foregn country or countres durng at east 510 fu days durng a
perod of 18 consecutve months. e returned to the Unted States
at the end of 1952. In hs ta abe year 1953, no part of whch fe
wthn the 18 month perod, he receved compensaton attrbutabe
to such perod n the amount of 10,000.
Secton 39.116-(b) of Reguatons 118, as amended by T. 1). 6039,
supra, whch s appcabe to amounts consttutng earned ncome as
defned by secton 116(a)(3) of the Code, from sources outsde the
Unted States, provdes n part as foows:
(1) mounts consttutng earned ncome as defned n secton 110(a)(3)
sha e e cuded from gross ncome n the case of an ndvdua ctzen of the
Unted States who durng any perod of 18 consecutve months s present n a
foregn country or countres durng a tota of at east 510 fu days, f such
amounts are (I) from sources wthout the Unted States, () attrbutabe to
such perod, and () not pad by the Unted States or any agency or nstru-
mentaty thereof. If attrbutabe to a perod of 18 consecutve months In respect
of whch the ctzen quafes for the e empton from ta thus provded, the
amounts sha be e cuded from gross ncome rrespectve of when they are
receved.
(2) or ta abe years endng before anuary 1, 1953, there s no mtaton
upon the amount whch may he e cuded from gross ncome pursuant to sub-
paragraph (1). or ta abe years endng after December 31, 1952, but ony
wth respect to amounts receved after such date, the amount e cuded from
gross ncome under the provsons of secton fa)(2) sha not e ceed 20,000
f the 18 month perod ncudes the entre ta abe year. If the 18-month perod
does not ncude the entre ta abe year, the amount e cuded from gross ncome
under such secton for such ta abe year sha not e ceed an amount whch bears
the same rato to 2t),0( 0 as tht number of days In the part of the ta abe year
wthn the 18-month perod bears to the tota number of days n such year
Subparagraph (1) quoted above s sub|ect to the mtaton set forth
n subparagraph (2).
To ustrate the appcaton of ths pont to the facts n the nstant
case, subparagraph (1) of the reguatons quoted above, standng
aone, ndcates that the 10,000 woud be e cuded from gross ncome
snce t s earned ncome from sources outsde the Unted States and
s attrbutabe to a perod of 18 consecutve months durng whch the
ta payer was present n a foregn country for at east 510 fu days.
owever, snce no part of the ta abe year n whch the 10,000 was
receved fas wthn the 18-month quafyng perod, the appcaton
of the mtaton set forth n subparagraph (2) resuts n a fgure of
zero and no porton of the 10,000 receved n 1953, even though
attrbutabe to the quafyng perod, s e cudabe from gross ncome.
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119 Regs. 118, 39.117(a)-.
The formua for such computaton may be stated as foows, but
refers ony to ta abe years endng after December 31, 1952, and ony
wth respect to amounts receved after such date:
Number of days In that pnrt of
the ta abe year of recept fa-
ng wthn the 18-month perod #onn/v ... , . .,
, , -r , , / - -.-.- 20,0( ) Ma nun amount e cudabe.
Number of days n the ta abe
year of recept
ppcaton of the above formua to the facts n ths case s us-
trated as foows:
20,000 Zero Ma mum amount e cudabe.
In vew of the foregong, t s hed that where a ta payer meets
the requrements of secton 116(a) (2) of the Interna Revenue Code
regardng presence n a foregn country or countres durng at east
510 fu days durng any perod of 18 consecutve months, but receves
compensaton attrbutabe to such perod n a ta abe year endng
subsequent to December 31,1952, no porton of whch fas wthn the
18-month perod, no porton of such compensaton receved n such
ta abe year s e cudabe from hs gross ncome.
Reguatons 118, Secton 39.116-1: arned
ncome from sources wthout the Unted
States.
Gan on sae of persona property n a foregn country by a Unted
States ctzens vng abroad. (See Rev. Ru. 54-105, p. 12.)
S CTION 117(a). C PIT L G INS ND LOSS S:
D INITIONS
Reguatons 118, Secton 39.17(a)-: Meanng Rev. Ru. 54-43
of terms.
( so Secton 23(a), Secton 39.23(a)- Secton
23(b), Secton 39.23 (b)- Secton 23(f),
Secton 39.23(f)- Secton 113(a), Secton
39.113(a)-2.)
Transactons by a merchant under a certan commtment agree-
ment wth severa banks, whereby It ses to them at the end
of each monthy perod at a dscount ts Instament accounts
recevabe arsng out of current saes of merchandse, nstead of
hodng the accounts for coecton for tsef, consttute actua
saes thereof and not oans thereon. The accounts so sod were
property hed by the merchant prmary for sae to customers
n the ordnary course of ts trade or busness. ccordngy, osses
from the saes are deductbe by t n fu.
Where the merchant, under ts opton n the commtment agree-
ment, repurchases defauted accounts at ther unpad baances,
tbey agan become part of ts nstament accounts recevabe and
ts bass of each account s ts repurchase prce.
In computng addtons to the merchant s reserve for bad debts,
any nstament accounts recevabe whch have been, or forthwth
are to be, sod under the commtment agreement sha not be con-
sdered.
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Rega. 118, 39 117(a)-. 120
Commtment fees ncurred by te merehnnt under the com-
mtment agreement, beng current charges by the bunks for mak-
ng busness funds avaabe to t on a standby bass and not for
the use of funds, do not represent nterest ncurred but are de-
ductbe by t as ordnary and necessary busness e penses.
dvce s requested reatve to the edera ncome ta consequences
to a merchant of ts transactons, under a commtment agreement
wth severa banks, whereby t ses to them at the end of each
monthy perod at a dscount ts nstament accounts recevabe
arsng out of current saes of merchandse, nstead of hodng the
accounts for coecton for tsef.
In the nstant case, funds whch the merchant had obtaned from
bank and other oans were nsuffcent to fnance ts rapdy ncreasng
nstament saes, and provsons of ong-term oans outstandng pre-
vented further borrowng. Therefore, t negotated a commtment
agreement wth severa banks, tnder whch they agreed to pur-
chase, at the end of each monthy perod for 5 years, ts nstament
accounts recevabe offered for sae to them thereunder arsng out
of current saes of merchandse, provded and to the e tent ther
aggregate hodngs thereof w not e ceed certan amounts. The
accounts are payabe n monthy or other nstaments and mature
not more than 24 months from the date of devery of the merchandse,
tte to whch does not pass to the customers unt fu payment of
ther nstament obgatons.
The purchase prce to be pad by the banks for such accounts
sha be equa to the aggregate amount owng thereon by the mer-
chandse customers, ess dscount at a certan percent per annum.
The banks w pay 85 percent (referred to as the purchase per-
centage ) of such purchase prce to the merchant on each monthy
settement date and the baance of 15 percent (referred to as the
deferred payment ) thereof upon competon of payments owed by
the merchandse customers on the sod accounts. If the merchant
does not offer for sae to the banks such nstament accounts equa
to ther aforesad purchase commtments, t s requred to pay to
them quartery a commtment fee computed at a certan fractona
percent per annum on the average day unused amount. The mer-
chant may each month, on at east 30-days pror wrtten notce to the
banks, reduce ther purchase commtment.
s agent for the banks, though wthout any speca charge therefor,
the merchant w retan physca possesson of the nstament paper
sod by t to them, receve payments thereon from the merchandse
customers, and on each monthy settement date pay any net amount
due to the banks. such paper, and records pertanng thereto, w
be appropratey dentfed as property of the banks. In the event
of defauts by merchandse customers n ther accounts owned by
the banks, the merchant may, at ts opton , on each monthy sette-
ment date, repurchase such defauted paper at the amount owng
thereon by the merchandse customers, whereupon the banks w
reassgn t to the merchant wthout recourse. If the merchant
does not e ercse ts opton to repurchase such defauted paper, the
banks may forthwth cance the entre commtment agreement. The
merchant, however, s not obgated to repurchase such defauted
paper, nor does t have fu abty therefor as debtor, endorser, or
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121 Regs. 117, 39.117(a)-.
guarantor, but has abty, n effect as guarantor, ony to the e tent
of the deferred payment of 15 percent of the purchase prce of the
sod accounts whch the banks are not requred to pay unt compe-
ton of nstament payments owed thereon by the merchandse cus-
tomers. The merchant keeps ts books on the accrua method of ac-
countng, and has not eected to return ncome from ts nstament
payment merchandse saes on the nstament bass. Under ts method
of accountng, t ncudes n ts gross ncome, upon consummaton
of an nstament payment sae of merchandse, the amount of the
seng prce thereof, and any carryng charges, covered by the nsta-
ment obgaton receved. Deductons, from gross ncome, on account
of bad debts, are accompshed by the merchant through a reserve for
bad debts.
Upon the bass of the foregong, t s hed that the transactons by
the nstant merchant wth the banks under ther commtment agree-
ment, whereby t ses to them at the end of each monthy perod
at a dscount ts nstament accounts recevabe arsng out of cur-
rent saes of merchandse, nstead of hodng the accounts for coec-
ton for tsef, consttute actua saes thereof and not oans thereon
athough entered nto for fnancng purposes. Ths concuson s sup-
ported by numerous decsons nvovng transactons under smar
condtons and crcumstances. See Dea Nkko, ct a. v. Comms-
soner, Ta Court Memorandum Opnon entered September 11,1951
Thomas Gogqn cf ro. v. Commssoner. 45 . T. . 218: and decsons
theren cted, ncudng Lucus II, mer v. Commssoner, 05 ed.
(2d) 5(58, Ct. I). 759, C. . II-2, 172, and worth-Washburn Co.
v. evernn, 07 ed. (2d) 694, Ct. I). 808, C. 13. III-1, 208. Cf.
raser-Smth Co. v. Commssoner. 1-4 T. C. 892 and I. T. 4072, C. .
1952-1, 141. Such cases as rewster Shrt Corp. v. Co nmssonrr,
159 ed. (2d) 227. Ct. I). 1724. C. . 1949-2. 80: Centra Staton Sn-
nas, Inc. v. Commssoner, 10 T. C. 1015, affrmed, 174 ed. (2d) 479
and Southeastern nance Co. v. Commssoner, 4 T. C. 1009, affrmed,
153 ed. (2d) 205 are ceary dstngushabe, snce theren there was
postve unmted abty on the part of the transferors of the
accounts to repurchase or pay them n the event of defaut.
It s further hed that the accounts sod by the nstant merchant
to the banks, under ther commtment agreement whch t negotated
wth them for that purpose, were property hed hy t prmary for
sae to customers n the ordnary course of ts trade or busness. Sec-
ton 117(a) (1) ( ) of the Interna Revenue Code, n donng capta
assets, e cudes therefrom property hed by the ta payer prmary
for sae to customers n the ordnary course of hs trade or busness/1
It s recognzed that nstament accounts recevabe consttute prop-
erty. In Graham M evator Co. v. Thomas, 152 ed. (2d) 504,
the coector of nterna revenue was sustaned n takng the poston
that osses from the sae by the pettoner n 1942 of notes and accounts
recevabe, aong wth the busness of four branch estabshments, at
ess than ther face amounts, were not deductbe n fu as ordnary
busness osses under secton 2 (f) of the Interna Revenue Code but
consttuted osses from saes of capta assets, as defned n secton
117(a)(1) of the Code, deductons for whch were mted to the
amount of gans durng the ta abe year from saes, or e changes of
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Regs. 118, 39.117(a)-.) 122
capta assets. In the nstant case, however, the merchant sod forth-
wth, reguary, and n great numbers, ts nstament merchandse
saes accounts recevabe arsng from current merchandse saes to cer-
tan banks as ts customers therefore under a commtment agreement
obtaned from them for that purpose for a 5-year term. It s evdent,
therefor, that such accounts were hed by the merchant prmary for
sae to customers n the ordnary course of ts trade or busness wthn
the purvew of secton 117(a) (1) ( ), supra, rather than prmary as
nvestments for coecton for tsef as the notes and accounts re-
cevabe customary were hed by the pettoner n the Graham M f
evator Co. case, supra. On the other hand, the decson on Issue 2
n the anawha aey ank v. Commssoner, 4 T. C. 252, s we
n pont n the nstant case. The Commssoner was sustaned n
takng the poston, where a bank, foowng customary practce n
ts busness reguary carred on. subscrbed for aotments of Govern-
ment securtes wth the ntenton of dsposng of them even pror
to ther devery and not to hod them as nvestments, that such secur-
tes so dsposed of n 1940 and 1041 were not capta assets wthn
the purvew of secton 117 (a) (1) of the Interna evenue Code, and
the Court stated:
Wth respect to pettoner s transactons n dsposng of government securtes
aotted to t by the Unted States Treasury, we thnk the facts ceary demon-
strate that tese securtes were never hed by pettoner as nvestments, but were
acqured for sae n the reguar course of ts busness. It appears that these
transactons have ong been carred on by pettoner and that t has severa
nns as ts usua customers for such securtes. The pan to se was arranged
pror to the acquston of the securtes, whch were transferred on ssuance
drect to pettoner s customers. The sae beng concdent wth the acquston,
the bonds n queston were not an Investment In pettoner s bands. Itespond-
ent s sustaned n hs treatment of the gan on ther sae as ordnary ncome.
ccordngy, osses from the stes by the nstant merchant of current
nstament accounts recevabe to the banks tnder ther commtment
agreement, consstng of the amount whch the unpad baances of
the accounts sod e ceeded the purchase prce pad and payabe
therefor by the banks, are ordnary busness osses deductbe n fu
under secton 23(f) of the ( ode.
Where the nstant merchant, under ts opton n the commtment
agreement wth the banks, repurchases defauted accounts at ther
unpad baances, ts bass of each repurchased account s ts sad
repurchase prce. Snce such accounts, upon repurchase, agan became
part of the merchant s nstament accounts recevabe, they w be
treated thereupon, for edera ncome ta purposes, n the same
manner as smar accounts whch never were sod.
In the computaton of addtons to the merchant s reserve for bad
debts, any nstament accounts recevabe whch have been, or forth-
wth arc to be, sod by t to the banks under ther commtment agree-
ment sha not be consdered.
Commtment fees ncurred by the merchant under the commt-
ment agreement, beng current charges for makng busness funds
avaabe to t on a standby bass and not for the use of funds, do not
represent nterest ncurred but are deductbe to t as ordnary and
necessary busness e penses under secton 23(a) (1) ( ) of the Code.
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123 Regs 118, 39.117(c)-.
Reguatons 118, Secton 39.117 (a)-: Meanng
of terms.
Treatment by estate of amount receved from corporaton n re-
dempton of deceased sharehoder s capta stock. (See Rev. Ru.
51-239, p. 234.)
S CTTO 7(c).-C PIT L G INS ND LOSS S:
LT RN TI T S
Reguatons 118, Secton 39.117(c)-: - Rev. Ru. 54-28
ternatve ta n case net ong-term capta
gan e ceeds net short-term capta oss.
( so Secton 26(b), Secton 3).26(b)- Sec-
ton 20(h), Secton 39.2G(h)- Secton
26(), Secton 39.26()- Reguatons 111,
Secton 29.26-5 Secton 29.26-G, Secton
29.2G-7 Secton 29.117-3.)
or the purpose of computng the aternatve ta of corporatons,
under secton 117(c) of the Interna te enue Code, the credts
aowed corporatons under secton 2(1 (1 ), (h), and () of the Code
must be determned upon the ass of net ncome reduced ty the
e cess of the net ong-term capta gan over the net short-term
capta oss.
Secton 117(c)(1) of the Interna Revenue Code provdes that the
aternatve ta of corporatons sha be the sum of (1) a parta ta
computed upon the net ncome reduced by the amount of the e cess
of the ong-term capta gan over the net short-term capta oss, at
the rates and n the manner as f subsecton 117(c) of the Code had not
been enacted, pus (2) an amount equa to 25 per centum (2G per
centum for ta abe years begnnng after March 31, 1951, and before
pr 1, 1954) of the e cess of the net ong-term capta gan over
the net short-term capta oss.
The term net ncome s denned n secton 21 of the Code as the
gross ncome computed under secton 22 ess the deductons aowed
under secton 23. Thus, for the purpose of the aternatve ta , the
parta ta must be computed upon the net ncome reduced by the
amount of the e cess of the ong-term capta gan over the short-term
capta oss, wth the credts aowed under Code secton 26 (b), (h),
and () determned accordngy.
though Schedue D ( orm 1120), Schedue of Gans and Lasses
rom Saes or changes of Property, for the ta abe years 1950,
1951, and 1952 does not draw attenton to the fact that corporatons
computng the aternatve ta must determne the credts aowed
under secton 26 (b), (h), and () of the Code as set forth heren,
empoyees of the Interna Revenue Servce shoud redetermne such
credts consstent herewth, f upon e amnaton of a return t s
found that such credts have not been so determned by the ta payer.
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Regs. 118, 39.117(|)-. 124
S CTION 117(f). C PIT L ( INS ND LOSS S:
R TIR M NT O ONDS, TC.
Redempton of corporate obgatons ssued wthout nterest coupons
or not n regstered form. (See Rev. Ru. 54-6G, p. 128.)
S CTION 7(|). C PIT L G INS ND LOSS S: G INS
ND LOSS S ROM IN OLUNT RY CON RSIONS ND
ROM T S L OR C NG O C RT IN PROP-
RTY US D IN T TR D OR USIN SS
Reguatons 118, Secton 39.1 I7(|)-1: Gans Rev. Ru. 54-229
and osses from nvountary conversons
and from the sae or e change of certan
property used n the trade or busness.
( n from the sae of automobes hed for rent or ease by ta -
payers engaged n the busness of rentng and easng automobes
w not be dened treatment under secton 117(|) of the Interna
tevenue Code, for edera ncome ta purposes, where the attend-
ant crcumstances revea that such automobes are not aso property
hed by the ta payer prmary for sae to customers n the ordnary
course of hs trade or busness.
ev. u. 108, C. . I . 3 1, 1S5, modfed.
dvce s requested reatve to the appcaton of Rev. Ru. 108,
C. 15. 1953-1, 185, (o saes of automobes hed for rent or ease by
ta payers engaged n the busness of rentng and easng automobes,
where the attendant crcumstances revea that the automobes hed for
renta and ease purprses are not aso property hed by the ta payer
prmary for sae to customers n the ordnary course of hs trade
or busness.
Rev. Ru. 108, supra, hods that a ta payer who customary buys
automobes at whoesae prces, or at feet dscounts, and, after easng
them for a perod substantay ess than ther norma usefu fe, ses
them at whoesae or teta prces, may not treat the gan or oss from
such saes as gan or oss from the sae or e change of property used
n the trade or busness of the ta payer for the purposes of secton
7(|) of the Interna Revenue Code.
In genera, Rev. Ru. 108 s ntended to appy to cases where deaers
or other ta payers acqure automobes at whoesae or at feet prces
substantay ess than reta, rent them for a bref perod, and after
deductng deprecaton, se them at reta, thus reazng substanta
profts whch are reported as capta gans.
It s recognzed that there are many ta payers who are engaged,
bona f(h, n the busness of easng or rentng motor vehces to others,
and that these actvtes consttute ther busness. It s further rec-
ognzed that such ta payers must, as a sound busness practce, ds-
pose of vehces at a tme when t s no onger proftabe to contnue
usng them as renta property. Whether a partcuar ta payer s en-
gaged, bona fde, n the busness of easng or rentng automotve ve-
hces, or whether he s aso engaged n the busness of seng such
vehces, s a queston of fact whch must be determned wth regard
to a o the crcumstances surroundng hs operatons. It w not
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125 c-bs. 118, 39.122-1.
be presumed that a ta payer s n the busness of seng used vehces
soey because a ma|or porton of hs revenue for a gven year s derved
from such saes.
If a ta payer ses vehces at reta, or reazes a deaer s proft on
the sae, that proft w necessary be treated as ncome from the
sae of property hed prmary for sae n the ordnary course of
the ta payer s busness. On the other hand, hs vehces whch are
sod, through whoesae channes or by smar arrangements, whch
do not contempate a deaer s proft, w be treated as property used
n hs busness, and not as property hed prmary for sae to cus-
tomers. ny proft whch may resut from the sae of such vehces
by a partnershp, ndvdua, or corporaton controed by the seer
w be sub|ect to aocaton as provded n secton 45 of the Code.
Consequenty, Rev. Ru. 108, supra, w not be apped n respect
cf ta payers:
(1) who are prmary engaged n the busness of rentng or
easng motor vences to others, and
(2) who se ther used vehces at whoesae prces to deaers,
whoesaers, or |obbers, and
(3) who do not mantan factes for the reta sae of ve-
hces, such as showrooms, used car ots, or saes forces.
To the e tent that t s n confct wth the foregong, Rev. Ru.
108, C. . 1953-1,185, s modfed.
Reguatons 118, Secton 39. 117(|)-: Gans
and osses from nvountary conversons and
from the sae or e change of certan property
used n the trade or busness.
Motor vehces used as demonstrators or company cars by dea-
ers. (See Rev. Ru. 54-222, p. 19.)
S CTION 119(e). INCOM ROM SOURC S WIT IN
UNIT D ST T S: INCOM ROM SOURC S P RTLY
WIT IN ND P RTLY WIT OUT UNIT D ST T S
Reguatons 118, Secton 39.119(e)-2: Trans-
portaton servce.
Determnaton of Unted States and Canadan ncome of bus com-
panes operatng routes across the border. (See Rev. Ru. 54-5, p. 130.)
S CTION 122.-N T OP R TING LOSS D DUCTION
Reguatons 118, Secton 39.122-1: Net
operatng oss deducton.
ffect of net operatng oss deducton on ma mum aowance for
chartabe and other contrbutons. (See Rev. Ru. 54-50, p. G4.)
315309 54 9
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124 . 126
S CTION 124 . MORTIZ TION D DUCTION OR
GR IN STOR G CILITI S
Rev. Ru. 54-33
company proposes to construct a pubc gran warehouse ad-
|acent to a pubc gran warehouse aready owned by t and connect
the two warehouses by means of overhead and underground conveyors.
The recevng, eevatng, condtonng, and oadng out equpment n
the present warehouse w be used n connecton wth the new ware-
house. ed, f the constructon or erecton of the new warehouse s
competed on or before December 31, 1956, t w consttute a gran
storage facty wthn the meanng of secton 124 of the Interna
Revenue Code. The concuson woud be the same, n ths case, had
the e stng pubc gran warehouse been constructed as an emer-
gency facty under the provsons of secton 124 of the Code.
Rev. Ru. 54-44
gran warehouse or eevator that s censed under the Unted
States Warehouse ct s a pubc gran warehouse wthn the mean-
ng of secton 124U of the Interna evenue Code.
dvce s requested whether a gran warehouse or eevator that s
censed under the Unted States Warehouse ct consttutes a pubc
gran warehouse wthn the meanng of secton 124 of the Interna
Revenue Code.
In the nstant case, the ta payer s a processor of m ed feeds and
the operator of a gran warehouse that s censed under the Unted
States Warehouse ct, 39 Stat. 486, as amended. It uses ts present
storage capacty both for pubc storage and for storage of gran for
ts own account and, to the mts of ts capacty, accepts a gran
offered for storage. The ta payer pans to doube ts storage fac-
tes by constructng a gran eevator whch w be permanenty
equpped for recevng, eevatng, condtonng, and oadng out gran.
The new gran eevator w aso be censed under the Unted States
Warehouse ct. Snce ts e stng factes provde adequate stor-
age for ts own nventores, the ta payer w not operate the new
facty prncpay to store ts own gran however, some portons of
the facty may, from tme to tme, be used for the storage of ts own
gran.
Secton 124 of the Code provdes, n part, as foows:
(d) Defnton of Chan Storage acty. or the purposes of ths sec-
ton, tte terra gran storage facty means
(1) ny corn crb, gran bn, or gran eevator, or any smar structure
sutabe prmary for the storage of gran, whch crb, bn, eevator, or
structure s Intended by the ta payer at the tme of hs eecton to be used
for the storage of gran produced by hm (or, f the eecton s made by
a partnershp, produced by the members thereof) and
(2) ny pubc gran warehouse permanenty equpped for recevng,
eevatng, condtonng, and oadng out gran, .
It s hed that a gran eevator constructed after December 31,1952,
and on or before December 31, 1956, under the crcumstances nd-
cated above, consttutes a gran storage facty entted to the bene-
fts of secton 124 of the Interna Revenue Code.
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127 124 .
Rev. Ru. 54-58
gran eevator censed under the aws of the State of Washng-
ton or under the aws of any other State havng equvaent censng
provsons, and constructed and used for the storage of gran con-
sstent wth the terms of a ve year occupancy contract w th the
Commodty Credt Corporaton, s a puhc gran warehouse wthn
the meanng of secton 124 of the Interna Ievenue Code.
dvce s requested whether a gran eevator censed under the
aws of the State of Washngton and constructed and used accordng
to the terms of a 5-year occupancy contract wth the Commodty
Credt Corporaton s a pubc gran warehouse wthn the meanng
of secton 124 of the Interna Revenue Code.
In the nstant case the ta payer operates gran storage factes
n the State of Washngton that are censed under the provsons
of chapter 22.08 of the Revsed Code of Washngton. It uses those
factes both for pubc storage of gran and for storage of gran
for ts own account. s the resut of a 5-year occupancy contract
offered by the Commodty Credt Corporaton, the ta payer now
ans to construct addtona storage eevators. These w aso be
censed under chapter 22.08 of the Revsed Code of Washngton.
s permtted by the occupancy contract, the ta payer w use some
of the space n the addtona storage eevators for storage of gran
acqured for ts own use. owever, under the occupancy contract
the ta payer w agree that t sha at a tmes whe the provsons
of ths contract are operatve keep the facty permanenty equpped,
n good condton, and staffed and open for busness durng reguar
busness hours as a pubc, commerca, gran eevator for the recept,
storage, shpment, purchase, sae and handng of gran.
Under the occupancy contract, the Commodty Credt Corporaton
guarantees 75 percent occupancy of the addtona factes durng
the frst three contract years and 40 percent thereof for the two reman-
ng contract years. The guaranteed occupancy space woud be sub|ect
to the contro of that agency.
Secton 124 of the Interna Revenue Code reatng to the deducton
for amortzaton of gran storage factes provdes, n part, as
foows:
(d) Defnton of Oran Storage acty. or the purposes of ths secton,
the term gran storage facty means

(2) any pubc gran warehouse permanenty equpped for recevng, ee-
vatng, condtonng, and oadng out gran,
the constructon, reconstructon, or erecton of whch was competed after Decem-
ber 31, 1952, and on or before December 31, 1956.
Chapter 22.08 of the Revsed Code of Washngton provdes, n part,
as foows:
22.0S.010 Defnton, as used n ths chapter:
Gran warehouse ncudes any eevator, m, warehouse, pubc gran ware-
house, pubc warehouse, or other structure n whch gran or other commodtes
are receved from the pubc for storage, shpment or handng
Warehouseman means any person ownng, operatng, or controng a gran
warehouse .

22.0S. O Warehouseman s cense. very person operatng any gran or ter-
mna warehouse suo|ect to the provsons of th3 chapter sha, on or before
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Regs. 118. 39.130-1. 128
the frst day of uy of each year, procure from the drector a cense for each
warehouse so owned or operated for the ensung year before transactng busness
theren. .

22.08.270 Duty of warehouseman to serve.
very ran warehouseman sha receve for storage, handng, or shpment,
nsofar as the capacty of hs warehouse w permt, a commodtes ncuded
n the provsons of ths chapter, n sutabe condton for storape, tendered hm
n the usua course of busness, and sha ssue therefor a warehouse recept or
recepts .
It s hed that a gran eevator constructed after December 31,1952,
and on or before December 31, 1956, that s censed under the aws
of the State of Washngton or under the aws of any other State
havng equvaent censng provsons, and that s used for the storage
of gran consstent wth the terms of an occupancy contract wth
the Commodty Credt Corporaton, s a pubc gran warehouse wthn
the meanng of secton 12413 of the Interna Revenue Code.
S CTION 125. MORTIZ L OND P MIUM
Reguatons 118, Secton 39,125(a)-: In ev. u. 54 66
genera.
( so Secton 117(f), Secton 23(e), Sec-
ton 39.23(e)- Secton 23(f), Secton
39.23 (f)-.)
vdences of ndebtedness ssued by any corporaton (ncudng ke
obgatons ssued by a Government or potca subdvson thereof)
wthout nterest coupons or not n regstered form do not consttute
bonds wthn the meanng of that term as used n secton 125(d) of
the Interna Revenue Code. Therefore, premums pad upon the
acquston thereof are not amortzabe under the provsons of sec-
ton 125(b) of the Code. Nether are such evdences of ndebtedness
the type of obgatons comprehended by secton 117(f) of the Code.
Consequenty, any e cess of cost or other bass over the amount reazed
upon redempton of such obgatons s deductbe as an ordnary oss
under secton 23 (e) or secton 23 (f) of the Code.
S CTION 130. LIMIT TION ON D DUCTIONS LLOW-
L TO INDI IDU LS IN C RT IN C S S
Reguatons 118, Secton 39.130-1: Lmtaton Rev. Ru. 54-178
on deductons aowabe to ndvduas n cer-
tan cases.
In appyng secton 130 of the Interna Revenue Code, where the
facts estabsh that for ta purposes a husband and wfe are partners
n the same trade or busness or that each s partcpatng ndepend-
enty of the other n the same trade or busness wth hs or her own
money, the osses of the husband and wfe from that trade or busness
shoud be consdered separatey even though they fe |ont returns.
Under such crcumstances, where durng a ta abe year one spouse
sustans a oss of 10,000 and the other a oss of 15,000, the provsons
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129 Rors. 118 39.131 (b)-.
of secton 130 of the Code w not be appcabe snce nether of ther
ndvdua osses e ceeds 50,000.
Reguatons 118, Secton 39.130-1: Lmtaton Rev. Ru. 54-179
on deductons aowabe to ndvduas n cer-
tan cases.
Where a ta payer s engaged n a trade or busness n a communty
property State under crcumstances such that the ncome therefrom
s consdered to be communty ncome, for the purpose of appyng the
50,000 mtaton provded n secton 130 of the Interna Revenue
Code ta payer and hs spouse are treated as two ndvduas and one-
haf of the deductons attrbutabe to the trade or busness s consdered
to be aowabe to the ta payer and one-haf to the spouse. See
red MacMtrray, et a. v. Commssoner, 21T. C. 15, acquescence page
5, ths uetn.
SUPPL M NT C CR DITS G INST T
S CTION 131(a). T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S: LLOW NC O
CR DIT
Reguatons 118, Secton 39.131 (a)-1: na- Rev. Ru. 54-14
yss of credt for ta es.
The ta es mposed on corporatons by rtce 96, razan Law
No. 1474 of November 26, 1951, amendng the razan ncome ta
aw, fa wthn the Unted States concept of ncome ta es and are a-
owabe as a credt aganst Unted States ncome ta to the e tent pro-
vded by secton 131(a) of the Interna Revenue Code, sub|ect to the
mtatons contaned n secton 131(b) of the Code.
S CTION 131(b). T S O OR IGN COUNTRI S
ND POSS SSIONS O UNIT D ST T S: LIMIT
ON CR DIT
Reguatons 118, Secton 39.131 (b)-: Lm- Rev. Ru. 51-15
tatons on credt for foregn ta es.
The credt for ta es pad to a foregn country or a possesson of
the Unted States aowahe under secton 131(a) of the Interna
Rfvenue Code w be mted n appcaton ony as e pressy pro-
vded n secton 131(b) of the Code.
G. C. M. 26002, C. . 1919-2, 110, revoked G. C. M. 25723, C. .
194S-2, 131, renstated.
Reconsderaton has been gven to G. C. M. 26002, C. . 1949-2,110,
and G. C. M. 25723, C. . 1948-2, 131, n the ght of the Ta Court
Memorandum Opnon n the case of ames II. race v. Comms-
soner, entered ugust 27, 1952.
In G. C. M. 25t23, supra, t was hed that secton 131(a) of the
Revenue ct of 1934 (now sec. 131(a) of the Interna Revenue Code),
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Regs. 118, 39.131(c)-. 130
aowng credt for ta es pad to a foregn country or a possesson of
the Unted States, shoud be mted n appcaton ony as e pressy
provded n secton 131(b). Ths rung was modfed n G. C. M.
2( 062, supra, to mt the amount of ncome ta pad to a foregn coun-
try or possesson of the Unted States for whch credt coud be taken,
sub|ect to the mtatons of secton 131(b), to that porton of the n-
come ta pad to the foregn country or possesson of the Unted
States whch was attrbutabe to ncome ta ed both n the foregn
country or possesson of the Unted States and n the Unted States.
Secton 131(b) of the Interna Revenue Code provdes, n part, as
toows:
(1) The amount of the credt n respect of the ta pad or accrued to any
country sha not e ceed, In the case of a ta payer other than a corporaton,
the same proporton of the ta aganst whch such credt s taken, whch
the ta payer s net ncome from sources tcthn such country bears to hs
entre net ncome for the same ta abe year, Itacs supped
In the case of ames . race, supra, the ta payer was a ctzen of
the Unted States but a resdent of Canada. e had ncome from
Canadan sources, part of whch was e cuded from edera ncome
ta under secton 110(a) of the Code. The Commssoner dened the
ta payer credt under secton 131 of the Code for that porton of
Canadan ta es aocabe to e cuded earned ncome. The Ta Court
decded the case n favor of the ta payer reyng on the cases of /. .
De ter et u . v. Commssoner, 47 . T. . 285, acquescence C. .
1948-2,1, and everng v. dward . Ne, 139 ed. (2d) 8G5, whch
cases consttuted the bass for G. C. M. 25723, supra. In reachng ts
decson the Ta Court stated:
In the ten years whch have ntervened snce the decsons n the De ter and
Ne cases, supra , the Congress has had nnumerabe opportuntes to correct
any error of nterpretaton f one was made by the De ter and Ne cases. Need-
ess to say, no such acton has occurred.
We see no good purpose n questonng such ongstandng precedents as the
De ter and Ne cases. On ther authorty, pettoner s poston must be sustaned.
In vew of the foregong, t s hed that the credt for ta es pad to a
foregn country or a possesson of the Unted States aowabe under
secton 131(a) of the Interna Revenue Code w be mted n app-
caton ony as e pressy provded n secton 131(b) of the Code. c-
cordngy, G. C. M. 260G2, C. . 1949-2, 110 s hereby revoked and
G. C. M. 25723, C. . 1948-2,131, renstated.
S CTION 131(c). T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S: D USTM NTS ON
P YM NT O CCRU D T S
Reguatons 118, Secton 39.131 (c) -1: Rede- Rev. Ru. 54-5
termnaton of ta when credt proves n-
correct.
( so Secton 119(e), Secton 39.119(e)-2.)
Determnaton of Unted States and Canadan ncome of bus com-
panes operatng routes across the border.
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131 Rpga. 118, 39.131 (c)-.
1. Purpose. The purpose of ths Revenue Rung s to outne the
prncpes that have been agreed upon between the Interna Revenue
Servce and the Department of Natona Revenue of Canada for the
determnaton of the Canadan ncome of Unted States bus com-
panes operatng routes whch enter Canada, and Canadan bus
companes operatng routes whch enter the Unted States. Te use
by the respectve ta ng authortes of unform prncpes s necessary
to prevent doube ta aton of ncome n contraventon of rtce
I of the ta conventon wth Canada.
2. Interna Revenue Code provsons affected. The prncpes
heren promugated w be foowed by the Interna Revenue Servce:
(1) n the aowance of Canadan ta credts to domestc bus com-
panes under secton 131 of the Interna Revenue Code, ncudng any
redetermnaton of ta when the credt proves ncorrect, as provded
n secton 39.131(c)- of Reguatons 118 and correspondng prov-
sons of pror reguatons and (2) n the determnaton, under sec-
ton 119(e) of the Interna Revenue Code, of the ta abe ncome of
Canadan bus companes operatng n the Unted States, ncudng
determnatons under secton 39.119(e)-2(h) of Reguatons 118 and
correspondng provsons of pror reguatons.
3. Defntons. or the purpose of ths Revenue Rung, a bus
company s defned a9 a common carrer operatng ntercty hghway
passenger buses, aong wth the usua ncdenta baggage, e press,
ma, newspaper, and smar transportaton servces. n operatng
dvson s denned as the porton of the operatons of a bus com-
pany between certan termna ctes or over certan hghways, some-
tmes caed a route, for whch separate revenue and e pense
accounts are mantaned. In case a bus company does not mantan
such dvsona revenue and e pense accounts, the entre company s
consdered an operatng dvson for the purpose of ths Revenue
Rung.
4. Determnaton of Canadan ncome of a domestc hus company.
In the absence of compeng reasons to the contrary, the porton of the
net ncome of a domestc bus company operatng n Canada, attrbut-
abe to Canadan sources, w be determned by takng an aocabe
part of the net ncome of each dvson operatng across the border, n
accordance wth the foowng prncpes:
(a) The porton of the dvsona net ncome attrbutabe to Ca-
nadan sources s the rato of Canadan operatng revenues to tota
operatng revenues of such dvsons operatng across the border, de-
termned as foows:
(1) passenger revenues aocated on a passenger-me bass
and
(2) baggage, e press, newspaper, and msceaneous revenues
aocated on cther an actua or bus-me bass, as appears rea-
sonabe.
(b) The ta abe net ncome of each dvson enterng Canada sha
be determned as foows:
(1) Operatng revenues aocated to dvsons as foows:
m passenger revenues on a passenger-me bass and
() baggage, e press, newspaper, and msceaneous rev-
enues on ether an actua or bus-ne bass, as appears reason-
abe.
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egs. 118, 39.143-1. 132
(2) Operatng e penses, other deductons, nonoperatng n-
come and unaowabe deductons of the company to be:
() aocated to dvsons on a bus-me bass, n genera,
uness specfcay dentfed wth a partcuar dvson or
dvsons
() specfcay charged or credted to the approprate d-
vson or dvsons where thus dentfed or
() aocated on some other approprate bass where
ceary preferabe to ether of the above.
5. Determnaton of Unted States ncome of a Canadan bus com-
pany. The prncpes set forth above n paragraph 4 appy smary
to a Canadan bus company operatng n the Unted States, where an
eecton s made as provded n secton 39.119(e)-2(h) of eguatons
118, or correspondng provsons of pror reguatons.
Reguatons 118, Secton 39.131 (c) -2: Credt for
ta es accrued but not pad.
Reguatons 118 amended. (See T. D. 6059, p. 80.)
SUPPL M NT D. R TURNS ND P YM NT O T
S CTION 143. WIT OLDING O T T SOURC
Reguatons 118, Secton 39.143-1: Wthhodng T. D. 6056
t t source
( so Secton 144, Secton 39.144-1.)
TITL 28 INT RN L R NU C PT R I, SU C PT R , P RT 7.
T TION PU SU T TO TR TI S. SU P RT LGIUM, R GUL TIONS
P CTI NU RY 1, 1953
Reease of e cess ta wthhed, and e empton from, or reducton
In rate of, wthhodng under sectons 143 and 144 of the Interna
Revenue Code n the case of resdents of egum and of egan
corporatons, as affected by the ncome ta conventon between
the Unted States and egum procamed by the Presdent of the
Unted States on September 23,1053.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Tabe op Contents
Secton
7.1100. Introductory.
7.1101. Dvdends.
7.1102. Interest.
7.1103. Natura resource royates and rea property rentas.
7.1104. Patent and copyrght royates and fm rentas.
7.1105. Prvate pensons and annutes.
7.1100. Reease of e cess ta wthhed at source.
7.1107. ddressee not actua owner.
7.1108. Informaton to he furnshed n ordnary course.
7.110 ). enefcares of a domestc estate or trust.
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133 Itegs. 118, 8 39.143-1.
Secton 7.1100. Introductory. The ncome ta conventon be-
tween the Unted States and egum, sgned October 28, 1948, as
modfed and suppemented by the suppementary conventon between
such Governments, sgned September 9, 1952, and procamed by the
Presdent of the Unted States on September 23, 1953, herenafter
referred to as the conventon, provdes n parts as foows, effectve
wth respect to ncome derved n ta abe years begnnng on or after
anuary 1,1953:
rtce I
(1) The ta es whch are the sub|ect of the present conventon are:
(a) In the case of the Unted States: The edera ncome ta es.
(b) In the case of egum : The ncome ta es, the natona crss ta , and
the persona compementary ta , Incudng a addtons to these ta es.
(2) The present conventon sha appy aso to any other ta es of a sub-
stantay smar character Imposed by ether contractng State subsequenty
to the date of sgnature of the present conventon or by the government of any
terrtory to whch the present conventon s e tended under rtce II.
(3) In the event of apprecabe changes In the fsca aws of ether of the
contractng States the competent authortes of the contractng States w consut
together.
rtce II
(1) In the present conventon, uness the conte t otherwse requres:
(a) The term Unted States means the Unted States of merca,
and when used In a geographca sense means the States, the Terrtores
of aska and of awa, and the Dstrct of Coumba.
(b) The term egum when used In a geographca sense means the
ngdom of egum n urope.
(c) The term Unted States enterprse means an ndustra or commer-
ca enterprse or undertakng carred on In the Unted States by a ctzen
or resdent of the Unted States or by a corporaton or other urdca per-
son created or organzed n the Unted Staes or under the aws of the
Unted States or of any State or Terrtory of the Unted States.
(d) The term egan enterprse means an ndustra or commerca
enterprse or undertakng carred on n egum by a ctzen or resdent of
egum or by a corporaton or other urdca person created or organzed
n egum or under the aws of egum.
(e) The terms enterprse of one of the contractng States and enter-
prse of the other contractng State mean a Unted States enterprse or a
egan enterprse, as the conte t requres.
(f) The term permanent estabshment, when used wth respect to an
enterprse of one of the contractng States, means a branch, factory, mne,
o we, pantaton, workshop, warehouse, nstaaton, or other f ed pace
of busness, but does not ncude an agency uness the agent has, and habtu-
ay e ercses, a genera authorty to negotate and concude contracts on
behaf of such enterprse or has contro over a stock of merchandse from
whch he reguary ts orders on behaf of such enterprse. n enterprse
of one of the contractng States sha not be deemed to have a permanent
estabshment n the other contractng State merey because t carres on
busness deangs n such other contractng State through a bona fde
commsson agent or broker actng n the ordnary course of hs busness as
such. Wheu a corporaton of one contractng State has a subsdary cor-
poraton whch s a corporaton created or organzed n the other contract-
ng State or whch s engaged n trade or busness n such other contractng
State, such subsdary corporaton sha not, merey because of that fact,
be deemed to be a permanent estabshment of ts parent corporaton.
(g) The term ndustra and commerca profts sha not ncude the
foowng:
() Income from rea property
() Income from mortgages, from pubc funds, securtes (ncudng
mortgage bonds), oans, deposts, and current accounts
( ) Dvdends and other ncome from shares n a corporaton
(v) entas or royates arsng from easng persona property or
from any nterest n such property, ncudng rentas or royates for the
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Regs. 118, 39.143-1. 134
use of, or for the prvege of usng, patents, copyrghts, secret processes
and formuae, goodw, trade-marks, trade brands, franchses, and other
ke pro| erty
(v) Proft or oss from the sae or e change of capta assets
(v) Compensaton for abor or persona servces.
Sub|ect to the provsons of the present conventon, the ncome referred to n
subparagraphs () to (v) sha be ta ed separatey or together wth ndus-
tra and commerca profts n accordance wth the aws of the contractng
States.
(h) The term competent authorty or competent authortes means, n
the case of the Unted States, the Commssoner of Interna Revenue or hs
duy authorzed representatve: and n the case of egum, the Drecteur
Genera de dmnstraton des Contrbutons Dreetes or hs duy authorsed
representatve and, n the case of any terrtory to whch the present conven-
ton s e tended under rtce II, the competent authorty for the admns-
traton n such terrtory of the ta es to whch the present conventon
appes.
(2) In the appcaton of the provson of the present conventon by ether of
the contractng States, any term whch s not otherwse defned sha, uness the
conte t otherwse requres, have the meanng whch that term has under the aws
of such contractng State reatng to the ta es whch are the sub|ect of the
present conventon.
rtce I
Income of whatever m re derved from rea property sha be ta abe ony n
the contractng State n whch the rea property s stuated. Ths rtce does
not appy to ncome derved from mortgages or bonds secured by rea property.
rtce III
(1) The rate of Unted States ta on dvdends derved from sources wthn
the Unted States by a resdent or corporaton or other entty of egum not
havng a permanent estabshment wthn the Unted States sha not e ceed 15
percent.
(2) egum sha not Impose on dvdends derved from sources wthn e-
gum by a resdent or corporaton or other entty of the Unted States not havng
a permanent estabshment wthn egum any ta In the nature of a persona
compementary ta or surta thereon, or any ta smar to that wthhed at
the source on dvdends under Unted States aw n the case of nonresdent
aens and foregn corporatons.
rtce III
The rate of ta mposed by each of the contractng States upon Interest (on
bonds, notes, debentures, or on any other form of ndebtedness) derved from
sources wthn such State by a resdent or corporaton or other entty of the
other State not havng a permanent estabshment wthn the former State sha
not e ceed 15 percent.
rtce I
(1) Rentas or royates from rea property or In respect of the operaton of
mnes, quarres or other natura resources sha be ta abe ony n the contract-
ng State n whch such property, mnes, quarres, or other natura resources are
stuated. resdent of egum, or a corporaton or other urdca person
created or organzed n egum dervng such rentas or royates from sources
wthn the Unted States may eect for any ta abe year to be sub|ect to Unted
States ta as f such resdent, corporaton, or entty were engaged n trade or
busness wthn the Unted States through a permanent estabshment theren
n such ta abe year.
(2) Royates derved from wthn one of the contractng States by a resdent
or by a corporaton or other entty of the other contractng State as consderaton
for the rght to use copyrghts, patents, secret processes and formuae, trade-
marks, and other anaogous rghts sha be e empt from ta aton n the former
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135 egs. 118,139.143-1.
State, provded such resdent, corporaton, or other entty dues not have a per-
manent estabshment there. The terra royates as used n ths paragraph
sha be deemed to ncude rentas n respect of moton pcture fms.
rtce
(2) Prvate pensons and annutes derved from wthn one of the contractng
States and pad to ndvduas resdng In the other contractng Sate sha e
e empt from ta aton In the former Stte.
(3) The term pensons as used n ths rtce means perodc payments made
n consderaton for servces rendered or by way of compensaton for n|ures
receved.
(4) The term annutes as used n ths rtce means a stated sum payabe
perodcay at stated tmes, under an obgaton to make the payments n con-
sderaton of money pad.
rtce
(1) The competent authortes of the contractng States sha e change such
nformaton (beng nformaton avaabe under the respectve ta aton aws of
the contractng States) as Is necessary for carryng out the provsons of the
present conventon or for the preventon of fraud or the admnstraton of
statutory provsons and reguatons aganst ega avodance n reaton to the
ta es whch are the sub|ect of the present conventon.
(2) Doctments and Informaton contaned theren, transmtted under the pro-
vsons of the present conventon by one of the contractng States to the other
contractng State sha not be pubshed, reveaed, or dscosed to any person
e cept to the e tent permtted under the aws of the atter State wth respect
to smar documents or Informaton.
rtce II
ach of the contractng States sha coect ta es, whch are the sub|ect of ths
conventon, mposed by the other contractng State (as though such ta were a
ta mposed by the former State) as w ensure that the e empton, or reduced
rate of ta , as the case may be, granted under the present conventon by such
other State sha not be en|oyed by persons not entted to such benefts.
rtce III
(1) In no case sha the provsons of rtces , I, and II be con-
strued so as to mpose upon ether of the contractng States the obgaton
(a) to carry out admnstratve measures at varance wth the reguatons
and practce of ether contractng State, or
(b) to suppy nformaton or partcuars whch are not procurabe under
Its own egsaton or that of the State makng the appcaton.
(2) The State to whch appcaton s made for nformaton or assstance sha
compy as soon as possbe wth the request addressed to t. Nevertheess, such
State may refuse to compy wth the request for reasons of pubc pocy or f
compance woud nvove voaton of a busness, ndustra, or trade secret. In
such case It sha nform, as soon as possbe, the State makng the appcaton.

rtce
(1) The provsons of the present conventon sha not be construed to restrct
n any manner any e empton, deducton, credt, or other aowance accorded
by the aws of one of the contractng States n the determnaton of the ta
mposed by such State.
(2) Shoud any dffcuty or doubt arse as to the nterpretaton or appcaton
of the present conventon, the competent authortes of the contractng States
sha sette the queston by mutua agreement.
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Regs. 118, 39.143-1. 136
(3) Ctzens or corporatons or other |urdca persons of one of the contractng
States wthn the other contractng State sha not be sub|ected, as regards the
ta es referred to n the present conventon, to the payment of hgher ta es
than are mposed upon the ctzens or corporatons or other |urdca persons of
such other contractng State.
rtce I
The competent authortes of the two contractng States may (n the case of
the Unted States, wth the approva of the Secretary of the Treasury, and n
the case of egum, wth the approva of the Mnster of nance) prescrbe
reguatons necessary to carry out the provsons of the present conventon.
Wth respect to the provsons of the present conventon reatng to e change
of nformaton and mutua assstance n the coecton of ta es, such authortes
may, by common agreement, prescrbe rues concernng matters of procedure,
forms of appcaton and repes thereto, converson of currency, dsposton of
amounts coected, mnmum amount sub|ect to coecton, and reated matters.
rtce III
(1) The present conventon sha be ratfed and the nstruments of ratfca-
ton sha be e changed at russes as soon as possbe.
(2) The present conventon sha become effectve wth respect to ncome
derved n ta abe years begnnng on or after the 1st day of anuary of the
caendar year n whch the e change of the nstruments of ratfcaton takes
pace, e cept that f such e change takes pace after the 30th day of
September of such caendar year, rtces III and III and rtce I
(2) sha become effectve ony wth respect to payments made after the 31st
day of December of such caendar year. It sha contnue effectve for a
perod of 5 years begnnng wth the 1st day of anuary of the caendar year
n whch such e change takes pace and ndefntey after that perod, but may
be termnated by ether of the contractng States at the end of the 5-year
perod or at any tme thereafter, provded that at east 6-month pror notce
of termnaton has been gven, the termnaton to become effectve on the 1st
day of anuary foowng the e praton of the G month perod.
s used n ths Treasury Decson, any term defned n the conven-
ton sha have the meanng so assgned to t any term not so defned
sha, uness the conte t otherwse requres, have the meanng whch
such term has under the Interna Revenue Code.
Sec. 7.1101. Dvdends. (a) Genera. The rate of Unted States
ta mposed by the Interna Revenue Code upon dvdends derved
from sources wthn the Unted States n ta abe years begnnng
on or after anuary 1,1953, by a nonresdent aen (ncudng a non-
resdent aen ndvdua, fducary, and partnershp) who s a res-
dent of egum, or by a egum corporaton or other entty, sha
not e ceed 15 percent under the provsons of rtce III of the
conventon f such aen, corporaton, or other entty at no tme
durng the ta abe year n whch such dvdends are derved has a
permanent estabshment wthn the Unted States. s to what
constutes a permanent estabshment, see rtce II(1) (f) of the
conventon. Thus, f a nonresdent aen ndvdua who s a resdent
of egum performs persona servces wthn the Unted States dur-
ng the ta abe year, but has at no tme durng such year a permanent
estabshment wthn the Unted States, he s entted to the reduced
rate of ta wth respect to dvdends derved n that year from Unted
States sources, as provded n rtce III of the conventon, even
though under the provsons of secton 211 (b) of the Interna Rev-
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137 tegs.118, I3U.143-1.
enue Code he has engaged n trade or busness wthn te Unted
States durng such year by reason of hs havng performed persona
servces theren.
(6) ffect of address n egum on wthhodng n the, ease of
dvdend . or the purpose of wthhodng of Unted States ta
n the case of dvdends every nonresdent aen (ncudng a nonres-
dent aen ndvdua, fducary, and partnershp) whose address s
n egum sha be deemed by Unted States wthhodng agents to
be a nonresdent aen who s a resdent of egum not havng a
permanent estabshment wthn the Unted States and every foregn
corporaton whose address s n egum sha be deemed by such
wthhodng agents to be a egum corporaton not havng a per-
manent estabshment wthn the Unted States.
(c) Rate of wthhodng. Wthhodng at source n the case of
dvdends derved from sources wthn the Unted States and pad on
or after anuary 1, 1953, to nonresdent aens (ncudng a nonres-
dent aen ndvdua, fducary, and partnershp) and to foregn cor-
poratons, whose addresses are n egum, sha be at the rate of 15
percent n every case e cept that n whch, pror to the date of pay-
ment of such dvdends, the Commssoner of Interna Revenue has
notfed the wthhodng agent that the reduced rate of wthhodng
sha not appy.
The precedng provsons respectng the appcaton of the reduced
wthhodng rate n the case of dvdends pad to nonresdent aens
and foregn corporatons wth addresses n egum are based upon
the assumpton that the payee of the dvdend s the actua owner of
the capta stock from whch the dvdend s derved and consequenty
s the person abe to Unted States ta upon such dvdend. s to
acton by the recpent who s not the owner of the dvdend, see secton
7.1107.
The rate at whch Unted States ta has been wthhed from any
dvdend pad at any tme after the e praton of the 30th day after
the date on whch ths Treasury Decson s pubshed n the edera
Regster to any person whose address s n egum at the tme the
dvdend s pad sha be shown ether n wrtng or by approprate
stamp on the check, draft, or other evdence of payment, or on an
accompanyng statement.
Sec. 7.1102. Interest. (a) Genera. The rate of Unted States
ta mposed by the Interna Revenue Code upon nterest on bonds,
securtes, notes, debentures, or on any other form of ndebtedness,
ncudng nterest on obgatons of the Unted States, obgatons of
nstrumentates of the Unted States, and mortgages and bonds se-
cured by rea property, whch s derved from sources wthn the
Unted States n ta abe years begnnng on or after anuary 1,1953,
by a nonresdent aen (ncudng a nonresdent aen ndvdua,
fducary, and partnershp) who s a resdent of egum, or by a
egan corporaton or other entty, sha not e ceed 15 percent under
the provsons of rtce III of the conventon f such aen, cor-
poraton, or other entty at no tme durng the ta abe year n whch
such nterest s derved has a permanent estabshment n the Unted
States. s to what consttutes a permanent estabshment, see rtce
11(1) (f) of the conventon.
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Regs. 118. 39.143-1. 138
(5) ppcaton of reduced rate at source. To secure the reduced
rate of Unted States ta at source n the case of coupon bond nterest,
the nonresdent aen who s a resdent of egum, or the egan cor-
poraton or other entty, sha for each ssue of bonds fe orm 1001-
n dupcate when presentng the nterest coupons for payment. Ths
form sha be sgned by the owner of the nterest, trustee, or agent
and sha show the name and address of the obgor, the name and
address of the owner of the nterest, and the amount of the nterest.
It sha contan a statement that the owner (1) s a resdent of e-
gum, or s a egan corporaton or other entty, and (2) has no
permanent estabshment n the Unted States.
The reducton n the rate of Unted States ta contempated by
rtce 1II of the conventon, nsofar as t concerns coupon bond
nterest| s appcabe ony to the owner of the nterest. The person
presentng the coupon or on whose behaf t s presented sha, for the
purpose of the reducton n ta , be deemed to be the owner of the
nterest ony f he s, at the tme the coupon s presented for payment,
the owner of the bond from whch the coupon has been detached. If
the person presentng the coupon or on whose behaf t s presented
s not the owner of the bond, orm 1001, and not orm 1001- , sha
be e ecuted.
The orgna and dupcate of orm 1001- sha be forwarded by
the wthhodng agent to the Dstrct Drector of Interna Revenue,
udt Dvson, en Returns Secton, atmore 2, Maryand, wth
the quartery return on orm 1012. See secton 39.143-7 of ths
chapter Reguatons 118 , orm 1001- sha be sted on orm
1012.
or genera provsons pertanng to the use, wthout reference to
the provsons of the conventon, of ownershp certfcate, orm 1001,
by nonresdent aens and nonresdent foregn corporatons, see
secton 39.143-4 and secton 39.143-6 of ths chapter.
To secure the reduced rate of Unted States ta at source n the
case of nterest, other than coupon bond nterest, the nonresdent aen
who s a resdent of egum, or the egan corporaton or other
entty, sha fe orm 1001 - n dupcate wth the wthhodng
agent n the Unted States. Ths form sha be sgned by the owner
of the nterest, trustee, or agent and sha show the name and address
of the obgor and the name and address of the owner of the nterest.
It sha contan a statement that the owner (1) s a resdent of e-
gum, or s a egan corporaton or other entty, and (2) has no
permanent estabshment n the Unted States.
orm 1001 - sha be fed wth the wthhodng agent for each
successve 3-caendar-year perod durng whch such nterest s pad.
or ths purpose, the frst such perod sha commence wth the be-
gnnng of the caendar year n whch such ncome s frst pad on or
after anuary 1, 1953. ach such form fed wth any wthhodng
agent sha be fed not ater than 20 days precedng the date of the
frst payment wthn each successve perod, or, f that s not possbe
because of speca crcumstances, as soon as possbe after such frst
payment. Once such a form has been fed n respect of any 3-caendar-
year perod, no addtona orm 1001 - need be fed n respect
thereto uness the Commssoner of Interna Revenue notfes the wth-
hodng agent that another such form sha be fed by the ta payer.
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139 egs. 118, 39.143-1.
If, after fng such form, the ta payer ceases to be egbe for the
reduced rate of Unted States ta granted by rtce III of the
conventon n respect to such nterest, he sha prompty notfy the
wthhodng agent by etter n dupcate. When any change occurs
n the ownershp of the nterest as recorded on the books of the payer,
the reducton n rate of wthhodng of Unted States ta sha no
onger appy uness the new owner of record s entted to and does
propery fe a orm 1001 - wth the wthhodng agent.
The dupcate of each orm 1001 - (and etter) sha be m-
medatey forwarded by the wthhodng agent to the Dstrct Drector
of Interna Revenue, udt Dvson, en Returns Secton, at-
more 2, Maryand.
Sec. 7.1103. Natura Resource Royates and Rea Property
Rentas. The conventon dees not change the rate of Unted States
ta mposed pursuant to sectons 211 and 231 of the Interna Revenue
Code upon natura resource royates and rea property rentas. The
wthhodng of Unted States ta wth respect to such tems derved
from sources wthn the Unted States by nonresdent aens who are
resdents of egum, or by egan corporatons or other enttes, s
not changed by the conventon. See sectons 143(b) and 144 of the
Interna Revenue Code and rtces I and I (1) of the Conventon.
Sec. 7.1104. Patent and Copyrght Royates and m Rent-
as. (a) Genera. Royates derved from sources wthn the
Unted States n ta abe years begnnng on or after anuary 1, 1053,
by a nonresdent aen (ncudng a nonresdent aen ndvdua,
fducary, and partnershp) who s a resdent of egum, or by a
egan corporaton or other entty, as consderaton for the rght
to use copyrghts, patents, secret processes and formuae, trade-marks,
and other anaogous rghts are e empt from Unted States ta under
the provsons of rtce I (2) of the conventon f such aen, cor-
poraton, or other entty at no tme durng the ta abe year n whch
such royates are derved has a permanent estabshment wthn the
Unted States. Such royates are, therefore, not sub|ect to the wth-
hodng of Unted States ta at source. s to what consttutes a
permanent estabshment, see rtce 11(1) (f) of the conventon.
The term royates as used n ths secton sha be deemed to
ncude rentas n respect of moton pcture fms.
(6) ppcaton of e empton from wthhodng. To avod wth-
hodng of Unted States ta at source n the case of the royates to
whch paragraph (a) s appcabe, the nonresdent aen who s a
resdent of egum, or the egan corporaton or other entty, sha
fe orm 1001 - n dupcate wth the wthhodng agent n the
Unted States. The provsons of secton 7.1102(6) reatng to the
e ecuton, fng, and effectve perod of such form wth respect to
nterest are equay appcabe wth respect to the ncome fang
wthn the scope of ths secton.
The dupcate of each orm 1001 - (and etter) sha be m-
medatey forwarded by the wthhodng agent to the Dstrct Drector
of Interna Revenue, udt Dvson, en Returns Secton, at-
more 2, Maryand.
Sec. 7.1105. Prvate Pensons and nnutes. (a) Genera.
Prvate pensons and annutes, as defned n rtce (3) and (4)
of the conventon, derved from sources wthn the Unted States n
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Itegs. 118, 39.143-1. 140
ta abe years begnnng on or after anuary 1, 1953, and pad to a
nonresdent aen ndvdua who s a resdent of egum are e empt
from Unted States ta under the provsons of rtce (2) of the
conventon. Such tems of ncome are, therefore, not sub|ect to the
wthhodng of Unted States ta at source.
(6) ppcaton of e empton from wthhodng. To avod wth-
hodng of Unted States ta at source n the case of the tems of n-
come to whch paragraph (a) s appcabe, the nonresdent aen
ndvdua who s a resdent of egum sha notfy the wthhodng
agent by etter n dupcate that such ncome s e empt from Unted
States ta under the provsons of rtce of the conventon. The
etter of notfcaton sha be sgned by the owner of the ncome, sha
show the name and address of both the payer and the owner of the
ncome, and sha contan a statement that the owner, an ndvdua,
s nether a ctzen nor a resdent of the Unted States but s a resdent
of egum. If such etter s aso to be used as authorzaton for the
reease, pursuant to secton 7.110G, of e cess ta wthhed from such
tems of ncome, t sha aso contan a statement that the owner
was, at the tme when the ncome was derved from whch the e cess
ta was wthhed, nether a ctzen nor a resdent of the Unted
States but was a resdent of egum.
Ths etter sha consttute authorzaton for the payment of such
tems of ncome wthout wthhodng of Unted States ta at source
uness the Commssoner of Interna Revenue subsequenty notfes the
wthhodng agent that the ta sha be wthhed wth respect to pay-
ments of such tems of ncome made after recept of such notce. If,
after fng a etter of notfcaton, the owner of the ncome ceases to
be egbe for the e empton from Unted States ta granted by the
conventon n respect to such ncome, he sha prompty notfy the
wthhodng agent by etter n dupcate. When any change occurs
n the ownershp of such ncome as recorded on the books of the payer,
the e empton from wthhodng of Unted States ta sha no onger
appy uness the new owner of record s entted to and does propery
fe a etter of notfcaton wth the wthhodng agent.
ach etter of notfcaton, or the dupcate thereof, sha be m-
medatey forwarded by the wthhodng agent to the Dstrct Drec-
tor of Interna Revenue, udt Dvson, en Returns Secton, at-
more 2, Maryand.
(c) Deaton of pensons and annutes. Under rtce (3) of
the conventon, the term pensons, as used n rtce , means
perodc payments made n consderaton for servces rendered or by
way of compensaton for n|ures receved.
Under rtce (4) of the conventon, the term annutes, as
used n rtce , means a stated sum payabe perodcay at stated
tmes under an obgaton to make the payments n consderaton of
money pad.
Sec. 7.1106. Reease of cess Ta Wthhed at Source. In
order to gve the conventon effectve appcaton at the earest prac-
tcabe date, the e emptons from, and reductons n the rate of, wth-
hodng of Unted States ta at source granted by ths Treasury
Decson are hereby made effectve begnnng anuary 1, 1953, con-
tngent upon compance wth the appcabe provsons of secton
7.1101 through secton 7.1105.
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141 Regs. 118, 30.143-1.
In the case of dvdends derved from sources wthn the Unted
States and pad to a nonresdent aen (ncudng a nonresdent aen
ndvdua, fducary, and partnershp) or to a foregn corporaton,
whose address at the tme of payment was n egum, f Unted States
ta at the statutory rate (30 percent as of the date of approva of ths
Treasury Decson) has been wthhed from such dvdends on or
after anuary 1,1953, there sha be reeased by the wthhodng agent
and pad over to the person from whom t was wthhed an amount
whch s equa to the amount obtaned by subtractng 15 percent of
such dvdends from the ta so wthhed.
In the case of every ta payer whose address at the tme of payment
was n egum and who furnshes to the wthhodng agent orm
1001 - n accordance wth secton 7.1102(6) and secton 7.1104(6),
f Unted States ta at the statutory rate (30 percent as of the date of
approva of ths Treasury Decson) has been wthhed on or after
anuary 1, 1953, from the tems of ncome n respect of whch such
form s prescrbed n such sectons, there sha be reeased by the wth-
hodng agent and pad over to the person from whom t was wth-
hed
(1) n the case of nterest (other than coupon bond nterest),
an amount whch s equa to the amount obtaned by subtractng
15 percent of such nterest from the ta so wthhed from such
nterest and
(2) n the case of patent royates, copyrght royates, fm
rentas, and the ke, an amount equa to the ta so wthhed from
such tems.
In the case of every ta payer whose address at the tme of payment
was n egum and who furnshes to the wthhodng agent orm
1001- ceary marked SU STITUT and e ecuted n accordance
wth secton 7.1102(6), f Unted States ta at the statutory rate (28
percent or 30 percent, as the case may be, as of the date of approva
of ths Treasury Decson) has been wthhed from coupon bond nter-
est on or after anuary 1, 1953, there sha be reeased by the wth-
hodng agent and pad over to the person from whom t was wthhed
an amount whch s equa to the dfference between the amount of such
nterest mutped by the hgher of such statutory rates (30 percent
as of the date of approva of ths Treasury Decson) and 15 percent
of such nterest. One such substtute form sha be fed n dupcate
wth respect to each ssue of bonds and w serve wth respect to that
ssue to repace a orms 1001 prevousy fed by the ta payer n
the caendar year n whch the e cess ta was wthhed and wth
respect to whch such e cess s reeased.
The orgna and dupcate of such substtute orm 1001- sha be
forwarded by the wthhodng agent to the Dstrct Drector of Inter-
na Revenue, udt Dvson, en Returns Secton, atmore 2,
Maryand, wth the quartery return on orm 1012. See secton
39.143-7 of ths chapter. Such substtute orm 1001- sha be sted
on orm 1012.
In the case of every ta payer whose address at the tme of payment
was n egum and who furnshes to the wthhodng agent the etter
of notfcaton prescrbed n secton 7.1105(6) as authorzaton for
the reease of e cess ta wthhed, f Unted States ta at the statutory
315350 54 10
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Regs. 118, 39.143-1. 142
rate (30 percent as of the date of approva of ths Treasury Decson)
has been wthhed on or after anuary 1,1953, from prvate pensons
and annutes as defned n rtce , there sha be reeased by the
wthhodng agent and pad over to the person from whom t was wth-
hed an amount equa to the ta so wthhed from such tems.
The provsons of ths secton sha have no appcaton to e cess ta
wthhed at source whch has been pad by the wthhodng agent to
the dstrct drector of nterna revenue pursuant to secton 39.143-7
of ths chapter.
Sec. 7.1107. ddressee not ctua Owner. (a) Genera. If the
recpent n egum of any dvdend from sources wthn the Unted
States, wth respect to whch Unted States ta at the reduced rate of
15 percent has been wthhed at source pursuant to secton 7.1101(c),
s a nomnee or representatve through whom such dvdend fows to a
person other than one descrbed n secton 7.1101(a) as beng entted
to such reduced rate, such recpent n egum sha wthhod an
addtona amount of Unted States ta equvaent to the Unted
States ta whch woud have been wthhed f the conventon had not
been n effect (30 percent of such dvdend as of the date of approva
of ths Treasury Decson) mnus the 15 percent whch has been
wthhed at the source.
In any case n whch a fducary or partnershp wth an address
n egum receves, otherwse than as a nomnee or representatve,
a dvdend from sources wthn the Unted States wth respect to
whch Unted States ta at the reduced rate of 15 percent has been
wthhed at source pursuant to secton 7.1101(c), f a benefcary of
such fducary or a partner n such partnershp s not entted to the
reduced rate of Unted States ta granted by rtce III (1) of the
conventon, the fducary or partnershp sha wthhod an addtona
amount of Unted States ta wth respect to the porton of such
dvdend ncuded n such benefcary s share of the dstrbuted or ds-
trbutabe ncome, or n such partner s dstrbutve share of the n-
come, of such fducary or partnershp, as the case may be. The
amount of the addtona ta s to be cacuated n the same manner
as under the mmedatey precedng paragraph of ths secton.
If any amount of Unted States ta s reeased pursuant to secton
.1106 by the wthhodng agent n the Unted States wth respect to
a dvdend pad to such a person (nomnee, representatve, fducary,
or partnershp) wth an address n egum, the atter sha aso wth-
hod from such reeased amount any addtona amount of Unted
States ta , otherwse requred to be wthhed by the precedng pro-
vsons of ths secton n respect of such dvdend, n the same manner
as f at the tme of payment of such dvdend Unted States ta at
the rate of ony 15 percent had been wthhed at source therefrom.
(b) Returns ffed by egan wthhodng agents. The amounts
wthhed pursuant to paragraph (a) by any wthhodng agent n
egum sha bo deposted, wthout convertng such amounts nto
Unted States doars, wth the egum Drecteur Genera de 1 d-
mnstraton des Contrbutons Drectes on or before the 15th day
after the cose of the quarter of the caendar year n whch such wth-
hodng n egum occurs. The wthhodng agent makng such
depost sha render therewth such approprate egan form as may
be prescrbed by the Drecteur Genera de dmnstraton des Con-
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143 egs, us, 39.143-1.
trbutons Drectes. The amounts so deposted shoud be remtted
by the Drecteur Genera by draft n Unted States doars to the
Dstrct Drector of Interna Revenue, atmore 2, Maryand,
U. S. ., on or before the end of the caendar month n whch the
depost s made, and shoud be accompaned by such egan form
as may be requred to be rendered by the wthodng agent n e-
gum n connecton wth such depost.
Sec. 7.1108. Informaton to be urnshed n Ordnary Course.
(a) Genera. In compance wth the provsons of rtce of
the conventon the Commssoner of Interna Revenue w transmt
to the egan Drecteur Genera de dmnstraton des Contrbu-
tons Drectes, as soon as practcabe after the cose of the caendar
year 1953 and of each subsequent caendar year durng whch the
conventon s n effect, the foowng nformaton reatng to such
precedng caendar year:
(1) The dupcate copy of each avaabe orm 1042 Suppe-
ment fed pursuant to paragraph (b) of ths secton and
(2) The dupcate copy of each avaabe ownershp certfcate,
orm 1001- , fed pursuant to secton 7.1102(6), and substtute
orm 1001- , fed pursuant to secton 7.1106, n connecton wth
coupon bond nterest.
(b) In formaton return. To factate compance wth rtce
of the conventon, every Unted States wthhodng agent sha make
and fe n dupcate wth the dstrct drector of nterna revenue for
the dstrct n whch the wthhodng agent s ocated an nformaton
return on orm 1042 Suppement, wth respect to egan addressees,
whch sha be fed for the caendar year 1953 and subsequent caendar
years. Ths return sha be fed smutaneousy wth the orm 1042
requred by secton 39.143-7 of ths chapter.
There sha be reported on such orm 1042 Suppement a tems of
f ed or determnabe annua or perodca ncome derved from
sources wthn the Unted States and pa:d to nonresdent aens (n-
cudng nonresdent aen ndvduas, fducares, and partnershps)
and to nonresdent foregn corporatons, whose addresses at the tme
of payment were n egum, ncudng such tems of ncoma upon
whch, n accordance wth ths Treasury Decson, no wthhodng of
Unted States ta s requred e cept that any of such tems whch
consttute nterest n respect of whch orm 1001- or substtute
orm 1001- has been fed n dupcate wth the wthhodng agent
are not requred to be reported on such orm 1042 Suppement.
Sec. 7.1109. enefcares of a Domestc state or Trust.
nonresdent aen who s a resdent of egum and who s a bene-
fcary of a domestc estate or trust sha be entted to the e empton
from, or reducton n the rate of, Unted States ta granted by rtces
III, III , and I (2) of the conventon wth respect to dvdends,
nterest, and copyrght royates and the ke, to the e tent such tem
or tems are ncuded n hs share of the dstrbuted or dstrbutabe
ncome of such estate or trust, provded that he otherwse satsfes the
requrements of these respectve artces. In order to be entted n
such nstance to the e empton from, or reducton n the rate of, wth-
hodng of Unted States ta such benefcary must otherwse satsfy
such requrements and sha, where appcabe e ecute and submt to
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Regs. 118, 39.143-7. 144
the fducary of such estate or trust n the Unted States the orm
1001 - prescrbed n secton 7.1102(6) and secton 7.1104(5).
ecause t s necessary to brng nto effect at the earest practcabe
date the rdes of ths Treasury Decson respectng reease of e cess
ta wthed, and e empton from, or reducton n the rate of, wth-
hodng of ta , t s hereby found that t s mpractcabe to ssue
ths Treasury Decson wth notce and pubc procedure thereon under
secton 4(a) of the dmnstratve Procedure ct, approved uae 11,
194G, or sub|ect to the effectve date mtaton of secton 4(c) of that
act.
(Ths Treasury Decson s ssued under the authorty contaned n
sees. 62 and 3791 (53 Stat. 32, 467 26 U. S. C. 62,3791) of the Interna
Revenue Code and n rtce I of the conventon.)
O. Gordon Dek,
ctng Commssoner of nterna Revenue.
pproved December 4,1953.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster Deeemher 9, 19.r 3. 8: 50 h. m.)
Reguatons 118, Secton 39.143-2: ed or
determnabe annua or perodca ncome.
mony payments to an ndvdua, aen as to the Unted States,
resdng n Sweden. (See Rev. Rd. 54-53, p. 156.)
Reguatons 118, Secton 39.143-7: Return Rev. Ru. 54-242
and payment of ta wthhed.
Countres wth respect to whch Informaton returns on orm
1042 Suppement, reatng to f ed or determnabe annua or perod-
ca ncome derved from sources wthn the Unted States, must be
fed by wthhodng agents.
dvce s requested as to the countres wth respect to whch n-
formaton returns on orm 1042 Suppement are requred to be fed
by wthhodng agents pursuant to secton 7.1(a) of Treasury De-
cson 6055, C. . 1953-2, 77.
Secton 7.1(a) of Treasury Decson 6055, supra, provdes that for
the caendar year 1953 and subsequent caendar years, every Unted
States wthhodng agent sha make and fe an nformaton return
on orm 1042 Suppement, reatng to f ed or determnabe annua
or perodca ncome derved from sources wthn the Unted States
and pad to nonresdent aens whose addresses at the tme of pay-
ment are wthn a foregn country whch has entered nto an ncome
ta conventon wth the Unted States, f such conventon provdes
for the mutua e change of nformaton and f the Commssoner of
Interna Revenue determnes that such return s requred n the case
of such country. separate return s requred for each country wth
respect to whch such a determnaton s made.
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145 Regs. 118, 39.144-1.
Income ta conventons wth the foowng countres are now n
effect: ustraa, egum, Canada, Denmark, nand, rance,
Greece, Ireand, the Netherands, New Zeaand, Norway, Sweden,
Swtzerand, and the Unted ngdom. Informaton returns on orm
1042 Suppement are requred to be made and fed by wthhodng
agents wth respect to these countres for the caendar year 1954 and
subsequent years.
The fng of nformaton returns on orm 1042 Suppement w
be requred n the case of any country wth whch the Lnted States
n the future enters nto an ncome ta conventon provdng for the
mutua e change of nformaton. If the procamaton of the Pres-
dent of the Unted States, reatve to the ratfcaton of such a con-
venton, s ssued durng the frst 6 months of a caendar year, n-
formaton returns on I orm 1042 Suppement wth respect to that
country w be requred for the caendar year n whch the procama-
ton s ssued, and for each subsequent caendar year. owever, f
such procamaton s ssued durng the ast 6 months of a caendar
year, nformaton returns on orm 1042 Suppement wth respect to
that country w not be requred for the caendar year n whch the
procamaton s ssued, but w be requred for each subsequent ca-
endar year.
The above provsons do not appy to any caendar year n whch
amounts pad by wthhodng agents are not sub|ect to the provsons
of a conventon between the Unted States and a partcuar foregn
country. Thus, f the Presdent s procamaton reatve to a future
ncome ta conventon wth a foregn country s ssued durng the frst
6 months of 1955 and the conventon appes ony to amounts pad
on or after anuary 1, 1956, nformaton returns on orm 1042 Sup-
pement wth respect to that country are not requred for 1955, but are
requred for the caendar year 1956 and subsequent years. Smary,
f a conventon wth a foregn country s termnated, no returns on
orm 1042 Suppement are requred wth respect to that country for
any caendar year subsequent to the ast caendar year durng whch
the provsons of the conventon appy.
Reguatons 118, Secton 39.143-7: Return
and payment of ta wthhed.
Reguatons 118 amended. (See T. D. 6059, p. 80.)
S CTION 144. P YM NT O CORPOR TION INCOM
T T SOURC
Reguatons 118, Secton 39.144-1: Wthhodng
n the case of nonresdent foregn corporatons.
Reease of e cess ta wthhed, and e empton from, or reducton n
rate of, wthhodng n the case of egan corporatons, as affected
bv the ncome ta conventon between the Unted States and egum.
(See T. D. 6056, p. 132.)
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Regs. 118, 39.145-1. 146
S CTION 145. P N LTI S
Reguatons 118, Sucton 39.145-1: Penates. Ct. D. 1766
CRIMIN L LI ILITY INT RN L R NU COD D CISION O SUPR M
CO CRT
1. Contact Wth uror Presumpton of Pre|udce earng
Granted.
In a crmna case, nn.v prvate communcaton, contact, or tamper-
ns, drecty or ndrecty, wth a |uror durng a tra about the
matter pendng before te |ury s, for obvous reasons, deemed pre-
sumptvey pre|udca, If not made n pursuance of known rues of
the court and the nstructons and drectons of the court made
durng the tra, wth fu knowedge of the partes. The presump-
ton s not concusve, but the burden rests heavy upon the Govern-
ment to estabsh, after notce to and hearng of the defendant, that
such contact wth the |uror was harmess to the defendant.
2. udgment acated.
udgment of the Unted States Court of ppeas for the Nnth
Crcut (205 . (2d) 277 ( 52)) vacated and case remanded to
dstrct court for hearng to determne whether aeged |ury tamper-
ng was harmfu to defendant.
Supreme Court of the Unted States
mer . Remmer, pettoner, v. Unted Sates of merca
On wrt of certorar to the Unted States Court of ppeas for the Nnth Crcut
March 8,1901
Mr. ustce Mnton devered the opnon of the Court.
The pettoner was convcted by a |ury on severa counts chargng wfu
evason of the payment of edera ncome ta es. matter admtted by the
Government to have been handed by the tra court n a manner that may have
been pre|udca to the pettoner, and therefore confessed as error, s presented
at the threshod and must be dsposed of frst.
fter the |ury had returned ts verdct, the pettoner earned for the frst
tme that durng the tra a person unnamed had communcated wth a certan
|uror, who afterwards became the |ury foreman, and remarked to hm that
he coud proft by brngng n a verdct favorabe to the pettoner. The |uror
reported the ncdent to the |udge, who nformed the prosecutng attorneys and
advsed wth them. s a resut, the edera ureau of Investgaton was re-
quested to make an nvestgaton and report, whch was accordngy done. The
. . I. report was consdered by the |udge and prosecutors aone, and they
apparenty concuded that the statement to the |uror was made n |est, and
nothng further was done or sad about the maer. Nether the |udge nor the
prosecutors nformed the pettoner of the ncdent, and he and hs counse frst
earned of the matter by readng of t n the newspapers after the verdct.
The above-sated facts were aeged n a moton for a new tra, together wth
an aegaton that the pettoner was substantay pre|udced, thereby deprvng
hm of a far tra, and a request for a hearng to determne the crcumstances
surroundng the ncdent and ts effect on the |ury. supportng atdavt of the
pettoner s attorneys rected the aeged occurrences and stated that f they
hud known of the ncdent they woud have moved for a mstra and requested
that the |uror n queston be repaced by an aternate |uror. Two newspaper
artces reportng the ncdent were attached to the affdavt. The Government
dd not fe answerng affdavts. The dstrct court, wthout hodng the requested
hearng, dened the moton for a new tra. The court of appeas hed that the
Te moton for a new tra was aso prounde on tnnny other contenton , severa of
whch have aso ren presented to Is Court ecause of our dsposton of the case on
the ssue treated hcreu, we do nut pass upon these addtona questons.
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147 Regs. 118, 39.165-1.
dstrct court bad not abused ts dscreton, snce tbe pettoner had shown no
pre|udce to hm. 205 . 2d 277, 21 1. The case s here on wrt of certorar. 346
U. S. 884.
In a crmna case, any prvate communcaton, contact, or tamperng, drecty
or ndrecty, wth a |uror durng a tra about the matter pendng before the
|ury s, for obvous reasons, deemed presumptvey pre|udca, f not made n
pursuance of known rues of the court and the nstructons and drectons of the
court made durng the tra, wth fu knowedge of the partes. The presumpton
s not concusve, but the burden rests heavy u on the Government to estabsh,
after notce to and hearng of the defendant, that such contact wth the |uror
was harmess to the defendant. attmr v. Unted Sates, 140 U. S. 140, 14S-100
Whoton v. Unted States, 133 P. 2d 522, 527.
We do not know from ths record, nor does the pettoner know, what actuay
transpred, or whether the ncdents that may have occurred were harmfu or
harmess. The sendng of an . It. I. agent n the mdst of a tra to nvestgate
a uror as to hs conduct s bound to mpress the |uror and s very apt to do so
unduy. |uror must fee free to e ercse hs functons wthout the . . I.
or anyone ese ookng over hs shouder. The ntegrty of |ury proceedngs must
not be |eopardzed by unauthorzed Invasons. The tra court shoud not decde
and take fna acton e parte on nformaton such as was receved n ths case,
but shoud determne the crcumstances, the mpact thereof upon the |uror, and
whether or not t was pre|udca, In a hearng wth a nterested partes
permtted to partcpate.
We therefore vacate the |udgment of the court of appeas and remand the case
to the dstrct court wth drectons to hod a hearng to determne whether the
ncdent companed of was harmfu to the pettoner, and f after hearng t s
found to have been harmfu, to grant a new tra.
udgment vacated.
The Chef ustce took no part n the consderaton or decson of ths case.
SUPPL M NT . ST T S ND TRUSTS
S CTION 162. N T INCOM
eot|atons 118, Secton 39.162-1: Income of Rev. Ru. 54-207
estates and trusts.
capta oss carryover provded by secton 117(e) of the Interna
Revenue Code resutng from a capta oss ncurred by a decedent s
not deductbe by hs estate. capta oss sustaned by a decedent
durng hs fetme s deductbe ony n the return fed on hs behaf.
There can be no capta oss carryover from the decedent to hs estate
for the reason that the decedent and the estate are separate ta en-
ttes. See New Coona Ice Company v. IIeverng, 292 U. S. 435,
Ct. D. 841, C. . III-1, 191 state of R. R. Russe et a. v. Com-
mssoner, 34 T 715 I. T. 1562, C. . II-, 33 (1923).
S CTION 165 MPLOY S TRUSTS
Reguatons 118, Secton 39.165-1: mpoyees Rev. Ru. 54-51
trusts.
n nvestment by a proft-sharng trust In an ordnary fe n-
nsurance contract for each nsurabe partcpant under the trust,
w be consdered ncdenta and subordnate to the prmary pur-
pose of a quafed proft-sharng pan where (1) the aggregate
premums for fe nsurance n the case of each partcpant s ess
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Regs. 118, 39.165-1. 148
than one-baf of the aggregate of the contrbutons aocated to hm
at any partcuar tme an. (2) the pan sha requre the trustee
to convert the entre vaue of the fe Insurance contract at or be-
fore retrement to provde perodc ncome so that no porton of
such vaue may be used to contnue fe nsurance protecton beyond
retrement. Such an nvestment w not dsquafy the pan under
secton 165(a) of the Interna Revenue Code.
dvce s requested whether, on the bass of the foowng fact9,
an nvestment n ordnary fe nsurance by a proft-sharng trust for
each of ts nsurabe partcpants w dsquafy the proft-sharng
pan under secton 165(a) of the Interna Revenue Code.
The empoyer has estabshed a proft-sharng pan havng ac-
ceptabe contrbuton and aocaton formuae. Under the pan ess
than one-haf of each amount annuay aocated to each respectve
nsurabe partcpant s account s nvested n an ordnary fe n-
surance contract on hs fe. The nsurer has agreed wth the trustee
that, f so requested at a ater date, the contract w be converted to
an nsurance ncome contract whch w provde the empoyee wth
an annuty beneft for fe foowng hs retrement. The ordnary
fe nsurance contracts purchased under the pan are owned by the
trustee, but the partcpant has the rght to name a benefcary to re-
ceve the death proceeds of such contract upon hs death. Under
the pan the trustee s requred, 1 year pror to the partcpant s nor-
ma retrement date, to appy the funds credted to the partcpant
n the pooed nvestment account to convert the ordnary fe nsurance
contract on hs fe to an nsurance ncome contract n the ma mum
amount permtted under the agreement wth the nsurer. When an
empoyee has attaned norma retrement age, the trustee sha make
avaabe to the retrng empoyee the retrement ncome as provded
by the nsurance ncome contract then n force and, to the e tent that
any other funds reman n the trust, they sha be apped to purchase
a 9nge premum annuty contract, or the trustee may pay such funds
to hm n equa monthy nstaments over a f ed perod of tme.
Secton 39.1G5-(a) (2) of Reguatons 118 defnes the term proft-
sharng pan as foows:
proft-sharng pan s a pan estabshed and mantaned by an em-
poyer to provde for the partcpaton n hs profts, by hs empoyees or ther
benefcares, based on a defnte predetermned formua for determnng the
profts to be shared and a defnte predetermned formua for dstrbutng the
funds accumuated under the pan after a f ed number of years, the attan-
ment of a stated age, or upon the pror occurrence of some event such as ness,
dsabty, retrement, death or severance of empoyment. Itacs supped.
Secton 39.23(p)- of Reguatons 118, pertanng to the deducton
of contrbutons for ncdenta benefts, states that secton 23(p) s
appcabe to a contrbutons (ncudng contrbutons to provde
ncdenta benefts such as fe nsurance protecton) under a stock
bonus, penson, proft-sharng, or annuty pan.
or the purpose of ths rung, fe nsurance may be consdered
ncdenta where (1) the aggregate premums for fe nsurance n
the case of each partcpant s ess than one-haf of the aggregate of
the contrbutons aocated to hm at any partcuar tme and (2)
the pan sha requre the trustee to convert the entre vaue of the
fe nsurance contract at or before retrement to provde perodc
ncome so that no porton of such vaue may be used to contnue fe
nsurance protecton beyond retrement.
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149 Regs. 118, 39.165-1.
In vew of the foregong, t s hed that an nvestment by a proft-
sharng trust n ordnary fe nsurance contracts under the above-
stated condtons w not dsquafy a proft-sharng pan under sec-
ton 165(a) of the Interna Revenue Code.
Reguatons 118, Secton 39.1C5-1: mpoyees Rev. Ru. 54-67
trusts.
pan estabshed by an empoyer wbch provdes hs empoyees
ony such benefts as are afforded through the purchase of ordnary
fe nsurance contracts, whch contracts are converted to fe
annutes at the norma retrement date, does not consttute a
penson pan wthn the meanng of secton 165(a) of the Interna
Revenue Code.
dvce s requested whether a pan estabshed by an empoyer
whch provdes hs empoyees ony such benefts as are afforded
through the purchase of ordnary fe nsurance contracts, whch con-
tracts are converted to fe annutes at the norma retrement date,
consttutes a penson pan wthn the meanng of secton 165(a) o
the Interna Revenue Code.
Secton 165(a) of the Code provdes n part as foows:
(a) empton rom Ta . trust formng part of a stock bonus, penson,
or proft-sharng pan of an empoyer for the e cusve beneft of hs empoyees
or ther benefcares sha not be ta abe under ths suppement Suppement
, Subchapter C of Chapter 1 of the Code.
The prmary purpose of an ordnary fe nsurance contract s the
provdng of fe nsurance protecton, and the reserve accumuated
thereon s a resut of premum payments beng made on a eve bass.
Such a reserve w provde a reatvey sma retrement annuty n
comparson wth the annuty that a retrement ncome contract of the
same face amount w provde. Therefore, t may not be sad that a
pan provdng ony for the purchase of ordnary fe nsurance con-
tracts s prmary for the payment of defntey determnabe bene-
fts to empoyees over a perod of years after retrement. (See Regu-
atons 118, secton 39.165-1 (a) (2).)
ccordngy, t s hed that such a pan does not quafy as a pen-
son pan wthn the meanng of secton 165(a) of the Code. Such
a pan s to be dstngushed from a pan whch aso provdes nc-
denta fe nsurance protecton. (See Reguatons 118, secton
39.23(p)()(a).)
Rkot|t.attons 118, Secton 39.165-1: mpoyees Rev. Ru. 54-152
trusts.
( so Sectons 23(p), Secton 39.23(p)-.)
n empoyees penson trust under whch the empoyer does not
contrbute to the trust fund (the trust fund consstng ony of stated
contrbutons of empoyees and the ncome thereon), but does ob-
gate tsef to pay the fu amount of the stpuated retrement bene-
fts to each retred empoyee partcpant after the funds n the trust
to the empoyee s credt have ocen e hausted, w not fa to quafy
for e empton from edera ncome ta under secton 105 of the
Interna Revenue Code by reason of such mtatons upon con-
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Regs. 118, 39.105-6. 150
trbutons. Retrement benefts pad by the empoyer to retred
empoyees pursuant to ts obgaton under such a pan may be de-
ducted from gross ncome n accordance wth secton 23(p)()(D)
of the Code. See secton 39.23 (p) -11, Reguatons 118.
Reguatons 118, Secton 39.105-1: mpoyees Rev. Ru. 54-231
trusts.
Secton 39.1G5-1 of Reguatons 118 provdes that the term proft-
sharng pan, as used n secton 165(a) of the Interna Revenue Code,
s: a pan estabshed and mantaned by an empoyer to provde for
the partcpaton n hs profts, by hs empoyees or ther benefcares,
based on defnte predetermned formuas, for determnng the profts
to be shared and for dstrbutng the funds accumuated under the
pan after a f ed number of years, the attanment of a stated age,
or upon the pror occurrence of some event such as ness, dsabty,
retrement, death, or severance of empoyment. The term f ed num-
ber of years s consdered to mean at east 2 years. ccordngy, a
pan whch permts any empoyee to wthdraw any porton of hs
share of the empoyer s contrbuton 18 months after t has been made
and wthn a perod of ess than 2 years wthout regard to the attan-
ment of a stated age or the occurrence of some event such as ness, ds-
abty, retrement, death, or severance of empoyment s not a proft-
sharng pan wthn the purvew of secton 105(a) of the Code. Where
the perod of tme s more than 2 years the Servce w e amne a the
crcumstances of the pan to determne ts purpose and effect.
Reguatons 118, Secton 39.105-0: Ta abty Rev. Ru. 54-52
of benefcary under a trust whch meets the
requrements of secton 165(a).
unds used by the trustee of an empoyees trust quafed under
secton 105(a) of the Interna Revenue Code, to pay premums on
a group fe nsurance contract whch affords term nsurance pro-
tecton ony, are currenty Incudbe n gross ncome of the em-
poyee-partcpant of the trust under the provsons of secton
105(b) of the Code.
dvce s requested whether the ast sentence of secton 39.22(a)-3
of Reguatons 118, s appcabe to premums pad by a quafed em-
poyees trust under a group fe nsurance contract whch affords
term nsurance protecton ony.
The ast sentence of secton 39.22(a)-3, supra, states that Pre-
mums pad by an empoyer on poces of group fe nsurance cover-
ng the ves of hs empoyees, the benefcares of whch are desg-
nated by the empoyees, are not ncome to the empoyees. owever,
the appcaton of ths statement of the reguatons, as t appeared n
secton 29.22(a)-3 of the pror Reguatons 111, was quafed and
e paned by Mmeograph 6477, C. . 1950-1, 10. Paragraph 8 of
ths mmeograph, reatng to empoyees trusts, provdes n part that
So much of a premum so pad as s used for current fe nsurance
protecton for an empoyee and s pad from contrbutons of the em-
poyer or earnngs thereon consttutes ncome to the empoyee for the
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151 Regs. 118, 39.182-1.
year when pad . Ths statement s n conformty wth
the provsons of secton 39.165-6 of Reguatons 118, promugated
under secton 105(b) of the Interna Revenue Code, whch governs
the ta bty of benefcares wth respect to dstrbutons receved
from a quafed empoyees trust under secton 105(a) of the Code.
It w be noted that secton 39.22(a)-3, supra, reates to premums
pad by empoyers, whereas, secton 39.1C5 5, supra, governs the ta
consequences of nsurance protecton purchased by an empoyees trust
for ts partcpants.
unds contrbuted by an empoyer to an empoyees penson, proft-
sharng or stock bonus trust are deemed to be compensaton for servces
rendered as ndcated n secton 23(p) of the Interna Revenue Code.
mounts dstrbuted or made avaabe are ncudbe n the dstrb-
utees gross ncome for the year so dstrbuted or made avaabe to the
e tent and n the manner prescrbed under secton 165(b) of the Code.
Payments made by an empoyees trust as a premum for fe nsurance
protecton of a partcpant of the trust consttute a dstrbuton by the
trust. See Raymond . Moore et a. v. Commssoner, 45 . T. . 1073.
It s hed that funds used to provde term fe nsurance protecton
for the trust partcpants under a group fe nsurance contract are
currenty ncudbe n the gross ncome of the empoyee-partcpants
under the provsons of secton 105(b) of the Code.
SUPPL M NT P. P RTN RS IPS
S CTION 182. T O P RTN RS
Reguatons 118, Secton 39.182-1: Dstrbu- Rev. Ru. 54-68
tve shares of partners.
( so Secton 3797, Secton 39.3797-4.)
n arrangement wheren the members of the medca staff of a
hospta agree to poo certan fees consttutes a partnershp for
edera ta purposes, and each member Is ta abe upon hs dstrb-
utve share of the net earnngs thereof, whether or not dstrbuted.
dvce s requested regardng the edera ncome ta consequences
of an agreement entered nto by a member physcans of the medca
staff of a hospta to poo certan fees.
Under the terms of the agreement entered nto by a members of
the hospta staff, the fees receved by each ndvdua physcan on
account of servces rendered ward patents are turned over to a med-
ca servce fund. It appears that some ward patents are abe to pay
for ther medca care hut others are not. The purpose of the ar-
rangement s to make sure that each member of the staff receves an
equtabe share of the fees pad by ward patents. Dstrbutons are
made out of the fund to the member physcans n proporton to the
duraton of ther membershp on the staff durng the perod of ac-
cumuaton. y the end of each caendar year substantay a the
fees receved durng such year are dstrbuted, but certan sma
amounts are retaned as reserves for admnstraton e penses of the
fund.
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Rcga. 118, 39.183-1. 152
Secton 3797(a) (2) of the Interna Revenue Code states that The
term partnershp ncudes a syndcate, group, poo, |ont venture, or
other unncorporated organzaton, through or by means of whch
any busness, fnanca operaton, or venture s carred on, and whch
t not, wthn the meanng of ths tte, a trust or estate or a corpora-
ton. The term partner s defned as a member of such syndcate,
group, poo, |ont venture, or other unncorporated organzaton.
It s hed that the nstant arrangement consttutes a partnershp
wthn the meanng of secton 3707(a) (2) of the Interna Revenue
Code, and that the members of the hospta staff are the partners
thereof. The organzaton must fe a partnershp return, orm 1065,
for each ta abe year reportng theren, among other thngs, the tota
amount of fees receved for such ta abe year, the names of the nd-
vduas who woud be entted to share n ts net ncome f dstrbuted
and the amount of the dstrbutve share of each ndvdua. It s
further hed that each member must report as ta abe ncome hs ds-
trbutve share of the net ncome of the organzaton for the ta abe
year endng wth or wthn hs ta abe year, whether or not dstrb-
uted, even though t may refect certan amounts retaned by the or-
ganzaton as a reserve for e penses.
Reguatons 118, Secton 39.182-1: Dstrbu- ev. Ru. 54-167
tve shares of partners.
( so Secton 23(e), Secton 39.23(e)-.)
partnershp cannot e st for the purpose of servng as an eected
pubc offca, and the compensaton and any e pense aowance re-
ceved by a partner for hs servces n such an eectve offce do not
consttute partnershp ncome, even when pooed wth the earnngs
of a partnershp of whch he s a member as requred by the partner-
shp agreement. Such partner must ncude hs saary from the
eectve offce, wth the e cepton of any ta -e empt aowance, n the
gross ncome n hs ndvdua edera ncome ta return. To the
e tent that hs share of the pooed ncome, consstng of hs compen-
saton, aowances, and partnershp earnngs, e ceeds the amount pad
by hm to the poo, t w consttute hs dstrbutve share of the
partnershp ncome. In the event the amount pad by hm to the
poo s n e cess of hs share of the pooed ncome, such e cess s a
deductbe oss to hm under secton 23(e) of the Interna Revenue
Code, and s ta abe ncome to hs copartners. See I. T. 3824, 0. .
194G-2, 37.
S CTION 183.-COMPUT TION O P RTN RS IP
INCOM
Reguatons 118, Secton 39.183-1: Computa-
ton of partnershp ncome.
ecton to deduct ntangbe drng and deveopment costs as an
e pense. (See Rev. Ru. 54-42, p. G4.)
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153 Regs. 118, 5 39.187-1.
S CTION 187. P RTN RS IP R TURNS
Regtoatons 118, Secton 39.187-1: Partner- Rev. Ru. 54-26
shp returns.
( so Secton 113(a), Sectons 39.113(a) (5)-
and 39.113(a) (13)-1.)
ppcaton of Rev. Rn. 144, C. . 1953-2, 212, reatng to the
effect on a partnershp, for edera ncome ta purposes, of the
death, wthdrawa, substtuton, or addton of a partner.
Rev. Ru. 144, C. . 1953-2, 212, revoked O. D. 228, C. . 1, 190
(1919) and hods that a change n the membershp of a partnershp
resutng from the death, wthdrawa, substtuton, or audton of a
parner, or a shft of nterest among e stng partners does not, n tsef,
effect a termnaton of a partnershp for edera ncome ta purposes.
Rev. RuL 144 aso hods that a partnershp s bass n ts assets s ds-
tnct from the partners bases n ther partnershp nterest, and s not
affected by changes n such partnershp nterests. owever, the bases
of the nterests of the partners may be affected by any change n
membershp.
In vew of the fact that Revenue Rung 144 was not pubshed unt
ugust 3,1953. the Interna Revenue Servce, under the authorty of
secton 3791(b) of the Interna Revenue Code, w not requre the
provsons of that Revenue Rung to be apped wth respect to those
changes n partnershp nterests whch occurred pror to anuary 1,
1954.
Regu tons 118, Secton 39.187-1: Partner- Rev. Ru. 54-55
shp returns.
ffect of the death of a partner In the case of a partnershp con-
sstng of ony two partners.
dvce s requested whether Rev. Ru. 144, C. . 1953-2, 212, hod-
ng that a change n the membershp of a partnershp resutng from
the death, wthdrawa, substtuton, or addton of a partner or a shft
of nterests among e stng partners does not, n tsef, effect a termna-
ton of a partnershp for edera ncome ta purposes, appes to a
case where one of two partners des.
In some cases the survvng partner and the estate of the deceased
partner contnue the busness as a partnershp wthn the meanng of
secton 3797(a) (2) of the Interna Revenue Code. In ths stuaton
the rue of Rev. Ru. 144 s appcabe.
In other cases the partnershp busness s wound up over a perod of
tme and the deceased partner s estate contnues decedent s nterest
n the profts and osses of the busness durng the wndng-up perod.
In ths stuaton the partnershp contnues throughout such perod.
See I ener v. Pau Meon at a, 304 U. S. 271, Ct. D. 1345, C. . 1938-
1, 349.
In other cases the survvng partner, pursuant to an obgaton un-
dertaken n the partnershp agreement, purchases the decedent s nter-
est n the partnershp from the decedent s estate for an amount f ed or
determnabe as of the date of decedent s death. In ths stuaton the
partnershp termnates for edera ncome ta purposes on the date
of decedent s death.
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Regs. 118, 39.201-7.) 154
Snce ths Revenue Rung appes the prncpes stated n Rev. Ru.
144 to the acts heren, t w be gven nonretroactve appcaton to
the same e tent as Rev. Ru. 144, and accordngy, pursuant to the
puthorty contaned n secton 3791 (b) of the Code, the Interna Reve-
nue Servce w not requre ths Revenue Rung to be apped wth
respect to those changes n partnershp nterests whch occurred pror
to anuary 1,1954. See Rev. Ru. 54-26, page 153, ths uetn.
SUPPL M NT G. INSt NC COMP NI S
S CTION 201. LI INSUR NC COMP NI S
R GUL TIONS 118, S CTION 39.201-7: Net ncome Rev. Ru. 54-232
and deductons.
( so Secton 201, Secton 39.201-4.)
edera Income ta consequences of te e change y an nsurance
company of more than 50 percent of te capta stock acqured by t
n another nsurance company for a substanta porton of such com-
pany s assets and busness.
dvce s requested on the edera ncome ta consequences of the
e change by an nsurance company of more than 50 percent of the
capta stock acqured by t n another nsurance company for a sub-
stanta porton of such company s assets and busness.
The nsurance company (heren caed ) s and has for many
years been a fe nsurance company wthn the meanng of secton
201 of the Interna Revenue Code. It s engaged n the ndustra,
credt, and ordnary fe nsurance busness and the heath and accdent
nsurance busness. Te nsurance company (heren caed ) was
organzed for the purpose of engagng n the fe nsurance busness.
It s proposed that w acqure by purchase from certan of s
stockhoders more than 50 percent of the capta stock of (a of the
stock owned by such stockhoders). Pursuant to a rensurance agree-
ment between and , w surrender such stock to and w
convey to substantay a of ts assets e ceptng about 3,000,000
n cash, stocks, and securtes w transfer to and w rensure
most of s nsurance busness, e cept that w retan ts credt fe,
credt accdent, and credt accdent and heath nsurance busness, and
a porton of ts other fe nsurance busness consstng of pad-up
nsurance. Upon competon of these transactons, whch are sub|ect
to approva by the requste authortes, the capta stock of sur-
rendered by w be canceed.
Secton 201 (b) of the Interna Revenue Code provdes n part as
foows:
D INITION or LI INSUR NC COMP NY. When used n ths chapter, the
term fe nsurance company means an nsurance company whch s engaged
n the busness of ssung fe nsurance and annuty contracts (ether separatey
or combned wth heath and accdent nsurance), or noncanoeabe contracts
of heath and accdent nsurance, and the fe nsurance reserves (as denned n
subsecton (c) (2)) pus unearned premums and unpad osses ou noncanceabe
fe, heath, or accdent poces not ncuded n fe nsurance reserves, of whch
comprse more um 50 per centum of Us tota reserves. or the purpose of ths
subsecton, tota reserves means fe nsurance reserves, unearned premums and
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155 IRcys. 118, 39.211-2.
unpad osses not ncuded n fe nsurance reserves, and a other Insurance
reserves requred by aw.
Secton 201(c) of the Code, provdes, n part, that n the case of a
fe nsurance company, The term gross ncome means the gross
amount of ncome receved durng the ta abe year from nterest,
dvdends, and rents.
It s hed that f company quafes as a fe nsurance company
wthn the meanng of secton 201 of the Interna Revenue Code for
the ta abe year n whch the transactons are consummated, such
transactons w not resut n the recept of ta abe ncome by or
ts remanng stockhoders, e cept nsofar as rents or nterest have
been earned and not prevousy ncuded n ncome on the assets trans-
ferred. (Cf. Rev. Ru. 255, C. . 1053-2,10.) If company s a fe
nsurance company wthn the meanng of secton 201(b) of the Code
pror to the consummaton of the proposed transactons, and f after
the proposed transactons and unt the end of the ta abe year durng
whch the proposed transactons are consummated s an nsurance
company and ts fe nsurance reserves meet the 50-percent requre-
ment of secton 201 (b) of the Code, t w contnue to he a fe nsur-
ance company wthn the meanng of secton 201 (b) of the Code for
such ta abe year. In ths connecton t s hed that nsurance reserves
on pad-up fe nsurance poces, whch reserves are requred by aw
and are computed on the bass of recognzed mortaty tabes and
assumed rates of nterest, consttute fe nsurance reserves wthn
the meanng of sectons 201 (c) (2) and 201 (b).
SUPPL M NT . NONR SID NT LI N INDI IDU LS
S CTION 211.-T ON NONR SID NT LI N
INDI IDU LS
Reguatons 118, Secton 30.211-2: Defnton. Rev. Ru. 54-87
( so Secton 11, Secton 39.11-2 Secton 12,
Secton 39.12-1.)
foregn student studyng n the Unted Stntes for a degree
whch requres temporary resdence n the Unted States for a
mnmum of 2 years w be cassfed, for edera ncome ta
purposes, as a resdent aen.
dvce s requested reatve to the status for edera ncome ta
purposes of foregn students studyng n ths country.
In many nstances foregn students, both graduate and undergradu-
ate, combne a part-tme |ob wth ther study program. Some of
them brng ther fames wth them to the Unted States.
Secton 39.211-2 of Reguatons 118 provdes n part that an aen
actuay present n the Unted States who s not a mere transent or
so|ourner s a resdent of the Unted States for purposes of the ncome
ta . Whether he s a transent s determned by hs ntentons wth
regard to the ength and nature of hs stay. mere foatng nten-
ton, ndefnte as to tme, to return to another country s not suffcent
to consttute hm a transent. If he ves n the Unted States and has
no defnte ntenton as to hs stay, he s a resdent. One who comes
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Regs. 118, 39.231-. 156
to the Unted States for a defnte purpose whch n ts nature may be
prompty accompshed s a transent but f hs purpose s of such
a nature that an e tended stay may be necessary for ts accompsh-
ment, and to that end the aen makes hs home temporary n the
Unted States, he becomes a resdent, though t may be hs ntenton
at a tmes to return to hs domce abroad when the purpose for
whch he came has been consummated or abandoned.
ccordngy, t s hed that a foregn student studyng n the Unted
States for a degree whch requres temporary resdence n the Unted
States for a mnmum of 2 years w be cassfed, for edera ncome
ta purposes, as a resdent aen durng the perod of such resdence.
muatons 118, Secton 39.211-7: Ta aton Rev. Ru. 54-53
of nonresdent aen ndvduas.
( so Secton 143, Secton 39.143-2.)
n ndvdua who s not a Unted States ctzen and who resdes
n Sweden receves perodc amony payments from an ntervvos trust
estabshed n the Unted States by ner former husband for the pur-
pose of makng the payments. Such payments are ta abe by the
Swedsh authortes under the revenue aws of that country. Such
payments aso consttute f ed or determnabe annua or perodca
ncome sub|ect to the Unted States ncome ta . See Grard Trust
Corn change ank, as trustee of a trust under deed of bert R.
Gaatn Wesh dated March 19,1935 v. Commssoner, 194 ed. (2d)
708, certorar dened 344 U. S. 821. ed, perodc amony pay-
ments are not e empt from Unted States ncome ta under any of
the provsons of the ta conventon and protoco between the Unted
States and Sweden, procamed by the Presdent of the Unted States
December 12, 1939, effectve anuary 1, 1940. See T. D. 4975, C. .
1910-2, 43. ccordngy, the amony payments are sub|ect to Unted
States ncome ta and to the wthhodng of such ta at source at
the rate of 30 percent. See sectons 211(a) (1) ( ) and 143(b) of the
Interna Revenue Code. urther, rtce of the conventon,
provdes n part that where acton of the competent authortes of
the Unted Sttes and Sweden has resuted or may resut n doube
ta aton n respect of any ta es to whch the conventon reates, such
authortes may agree to an equtabe avodance of doube ta aton.
owever, such artce does not refer to a case where the reason for the
doube ta aton of ncome s due to the dfferences n the systems of
ta aton n the two countres.
SUPPL M NT 1. OR IGN CORPOR TIONS
S CTION 231.-T ON OR IGN CORPOR TIONS
Reguatons 118, Secton 39.231-1: Ta aton Rev. Ru. 54-119
of foregn corporatons.
Income of a Canadan corporaton derved from sources wthn the
Unted Staes and attrbutabe to the persona appearances n the
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157 Regs. 118, 39.251 (a)-.
Unted States of an entertaner does not consttute compensaton for
persona servces as contempated by secton 7.22(d) of the reguatons
prescrbed under the Unted States-Canadan ta conventon. See
T. D. 5206, C. . 1943, 526. Such ncome consttutes ndustra and
commerca profts whch are e empt from ta under rtce 1 of the
conventon, provded the corporaton has no permanent estabshment
n the Unted States.
SUPPL M NT . POSS SSIONS O T UNIT D ST T S
S CTION 251(a). INCOM ROM SOURC S WIT IN
POSS SSIONS O UNIT D ST T S: G N R L RUL
Regu atons 118, Secton 39.251 (a)-: Ct- Rev. Ru. 54-16
zens of the Unted States and domestc corpo-
ratons dervng ncome from sources wthn a
possesson of the Unted States.
( so Secton 51, Secton 39.51-1.)
Where the ncome receved by a husband durng a porton of a
ta abe year for servces rendered n a possesson of the Unted
States, s equay dvded wth hs wfe n accordance wth com-
munty property aws of the State n whch they are domced,
ether the husband or hs wfe, or both of them, may e cude such
ncome from gross ncome for edera ncome ta purposes pro-
vded they ndvduay meet the statutory percentage requrements
of secton 251 of the Interna Revenue Code.
I. T. 3005, C. . 1944,161, modfed.
Reconsderaton has been gven to the sue nvoved n 1. T. 3005,
C. . 1944,161, n the ght of the decsons n rancs C. Muen ct u .
v. Commssoner, 14 T. C. 1179 and by the Dstrct Court of the Unted
States n and for the Southern Dstrct of Caforna, Centra Dvson,
n the case of Mazebee G. Markham v. Unted States, une 23,1953.
In I. T. 3C65, supra, t was hed that where a husband rendered serv-
ce on Mdway Isand, a possesson of the Unted States, for neary 8
months durng 1941 and receved therefor compensaton whch const-
tuted communty ncome under the aws of the State of Caforna
where he and hs wfe were domced, that f the requrements of sec-
ton 251 of the Interna Revenue Code were met by the husband, the
wfe s share of the communty ncome was e cuded from gross ncome
for edera ncome ta purposes. Ths concuson was based on the
prncpe that f compensaton s receved by the husband domced n
a communty property State and s e empt from ta aton under the
Interna Revenue Code, such ncome s e cuded from gross ncome
pror to ts recept by the wfe, and that what she receves s e empt
ncome. In other words, the ncome beng e empt when earned by
the husband, t s aso e empt when receved by the wfe, regardess of
whether the husband and the wfe fe separate returns or a |ont return.
Snce the pubcaton of I. T. 3665, supra, the Ta Court has con-
sdered the case of rancs C. Muen et u . v. Commssoner, supra,
whch concerned a husband and wfe who were resdents of Te as,
a communty property State. Durng the ta abe vears 1945 to 1947,
ncusve, the husband was empoyed n Puerto Rco and the wfe
313359 54 11
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Regs. 118, 39.251 (a)-. 158
n Te as. The ta payers contended that the husband s ncome was
e empt from edera ncome ta under secton 251 of the Code. It was
hed that nasmuch as the ncome of the husband was composed of one-
baf of hs earnngs and one-haf of hs wfe s earnngs, ess than
bO percent of ther respectve ncome was derved from sources wthn
a possesson of the Unted States and that, therefore, nether the hus-
band nor the wfe quafed for e empton from ta under secton
251(a)(1) of the Code. The Ta Court durng the course of ts
opnon stated, n part, as foows:
The pettoners refer us to I. T. 3605, 1944 C. . 161, whch contans the
foowng anguage from . R. aufman, 9 . T. . 1180:
The earnngs of the husband from persona servces become mmedatey
a part of the communty. ny e empton from ta aton In reaton to those
earnngs mmedatey attaches to the tota amount, and whatever rght the
wfe may have to report one-haf thereof can not affect ts ta abe status
and convert nto ta abe ncome that whch was e empt when t came nto
the communty.
In that case, however, the earnngs of the husband, as an empoyee of a state,
were e empt from edera ncome ta under the evenne ct of 1921 and that
e empton apped regardess of the Inter ncuson of the earnngs n the com-
munty. There was no other test whch the earnngs had to meet n order to be
e empt. The earnngs of the husband n the present case were not e empt when
they came nto the communty, because, n order to be e empt, the requrements
of secton 251 have to be comped wth frst. There Is no choce as to when
secton 251 must appy, that s, hefore or after the amount earned by each spouse
s brought Into the communty. The rghts of each spouse n ncome beng
equvaent when t s earned, the queston of whether or not any part of that
ncome s e empt under secton 251 must foow after a hypothetca dstrbuton
o the ncome between the spouses, for t s not unt then that ther respectve
rghts n the earnngs of each are known. In ther appcaton to the earnngs
of the spouses, the prncpes of communty property aw do not awat the
determnaton of the source of those earnngs they appy at once.
In the Markham case, supra, the ta payer s husband was a member
of a partnershp whch n 1940 entered nto a |ont agreement wth
a thrd party for the purpose of carryng out certan constructon
contracts n the Panama Cana Zone, a possesson of the Unted States.
The |ont venture began operatons n the Cana Zone on or about
May 1,1940, and contnued to operate theren unt December 31,1941.
of the ncome of the ta payer and her husband derved from the
actve conduct of the partnershp busness n the Panama Cana Zone
was communty ncome under the aws of Caforna. though the
ta payer had ncome other than from the partnershp, her share of the
ncome from the |ont venture for the perods May 1,1940, to December
SI, 1941, amounted to at east 80 percent of her entre gross ncome for
such perod. The husband coud not satsfy the percentage requre-
ments of secton 251 of the Code wth respect to hs ncome. The
Government contended that nasmuch as the ta payer s husband had
earned the ncome and coud not quafy for the e cuson under secton
251 of the Code the ta payer coud not quafy even though she, n her
ndvdua capacty, met the requrements of secton 251, that s, at
east 80 percent of her ncome was derved from sources wthn a
possesson of the Unted States and at east 50 percent was derved
from the actve conduct of a trade or busness wthn a possesson of
the Unted States. owever, the court hed that the ta payer was
entted to the benefts of secton 251 of the Code even though her
husband coud not quafy for such benets.
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159 Rcgs. 118, 39.322-1.
The poston taken n I. T. 3G65, supra, was based n part on the
case of . . aufman v. Commssoner, 9 . T. . 1180, acquescences
C. . II-2, 21, whch hed that where the ncome of the husband s
e empt from ta aton because t was derved from servces performed
for a State government, such ncome retans ts e empt status n the
hands of the wfe, who under the communty property aws of that
State, s entted to one-haf of hs ncome.
Whe the resut reached n I. T. 3G65, supra, s correct, assumng
the wfe n that case had no ncome other than her communty share
of the compensaton earned and receved by her husband on Mdway
Isand, the aufman case s not appcabe to, or controng of, the
e cuson granted n secton 251, supra. The e cuson and e empton
n both stuatons s wth respect to a specfed cass of ncome. ow-
ever, secton 251 of the Code requres more than the determnaton of
a cass of ncome. It aso requres that the cass represent a specfc
porton of the ta payer s gross ncome. Under secton 116(a) of the
Code ncome earned by ether spouse whe a bona fde resdent of a
foregn country for an unnterrupted perod of an entre year or hs
or her presence n a foregn country for 17 months s e empt as to b|th
spouses rrespectve of how much or what knd of other ncome ether
or both may have. Under the stuaton n the aufman case, and the
aw as then e stng, f servces were performed for a State govern-
ment by ether spouse the ncome receved therefor was e empt as to
both spouses rrespectve of any other ncome they may have had.
owever, under secton 251 of the Code the mere fact that the ncome
s n a specfed cass, that s, the ncome was derved from the actve
conduct of a trade or busness wthn a possesson of the Unted States
or from sources wthn the possesson, does not quafy such ncome for
e cuson or e empton. In addton, n order for such ncome to be
e empt t must be determned n the case of each ndvdua ta payer
whether the percentage requrements of secton 251 supra, are met.
In vew of the foregong, t s hed that where the ncome receved by
a husband durng a porton of a ta abe year for servces rendered n a
possesson of the Unted States, s equay dvded wth hs wfe n ac-
cordance wth communty property aws of the State n whch they are
domced, ether the husband or hs wfe, or both of them may e cude
such ncome from gross ncome for edera ncome ta purposes pro-
vded they ndvdua meet the statutory percentage requrements
of secton 251 of the Inferna Revenue Code.
I. T. 3G65, supra s modfed to accord herewth.
SUPPL M NT O. O RP YMLImTS
S CTION 322. R UNDS ND CR DITS
eguatons 118, Secton 39.322-1: uthor- Rev. Ru. 54r-149
ty for abatement, credt, and refund of ta .
Payments of estmated ta for a partcuar ta abe year may not
be refunded pror to the cose of such ta abe year, even though an
amended decaraton fed by the ta payer after such payments were
made may show an estmated ta abty of zero. Such payments
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Regs. 118, 39.422-1. 160
may be refunded ony after the cose of the ta abe year for whch
they are made, when the actua amount of ta es due and the amount
of the overpayment may be correcty determned. See secton 322(e)
of the Interna Revenue Code.
Reguatons 118, Secton 39.322-3: Cams for Rev. Ru. 54-17
refunds by ta payers.
The ta payer, as the term s empoyed n secton 322 of the Interna
Revenue Code, means the one aganst whom the ta es were assessed.
Thus where a corporaton, snce qudated by merger wth a successor
corporaton, overpad ts edera ncome ta es, a cam for refund or
credt shoud be e ecuted by the successor corporaton n the name of,
and on behaf of, the corporaton whch pad such ta es, foowed by
the name of the successor corporaton. There must be fed wth each
cam proper evdence estabshng the qudaton and successon. If
the successon s a matter of pubc record, certfcates of the secretares
of state or other pubc offcas havng custody of these records must
be attached. If the successon s not a matter of pubc record (and
ony n such event) then a pertnent documents pertanng to such
successon, propery certfed by a notary pubc or other quafed of-
fcers of the corporaton, must be attached to the cam.
SUPPL M NT R. C NG S ND DISTRI UTIONS IN O DI NC TO ORD RS O
S CURITI S ND C NG COMMISSION
S CTION 371. NONR COGNITION O G IN OR LOSS
Reguatons 118, Secton 39.371-2: Purpose and
scope of e cepton.
Transactons made to ntegrate and smpfy a hodng company
system pursuant to an order of the Securtes and change Com-
msson. (See Rev. Ru. 54-192, p. 99.)
SUPPL M NT U. T TION O USIN SS INCOM O CLRT IN S CTION 101
ORG NIZ TIONS
S CTION 421. IMPOSITION O T
Reguatons 118, Secton 39.421-1: Imposton
of ta .
Income receved by a ta -e empt organzaton from research actv-
tes. (See Rev. Ru. 54-73, beow.)
S CTION 422.-UNR L T D USIN SS N T INCOM
Reguatons 118, Secton 39.422-1: Defnton Rev. Ru. 54-73
of unreated busness net ncome.
( so Secton 421, Secton 39.421-1 Secton
101 (G), Secton 39.101 (C) -1.)
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161 egs. 118, 39.422-1.
Income derved from research by a ta e empt coege, unver-
sty, or hospta, or by a ta -e empt organzaton operated pr-
mary for the purpose of carryng on fundamenta research, does
not consttute ncome from an unrented trade or busness. Income
derved by any organzaton to whch suppement U s appcabe
from research for the Unted States or any of ts agences or for a
State or potca subdvson thereof s not ncome from an unreated
trade or busness.
dvce s requested as to the ta abty of ncome derved by co-
eges, unverstes, hosptas and other nonproft organzatons from
research actvtes and of ncome derved from research for the Unted
States or any of ts agences or nstrumentates, or for a State or
potca subdvson thereof.
Secton 421 of the Interna Revenue Code provdes n part as
foows:
(a) In Genera. There sha be eved, coected, and pad for each ta abe
year begnnng after December 31, 11)50
(1) upon the suppement U net ncome of every organzaton
descrbed n subsecton (b)(1), a norma ta of
(b) ORG NIZ TIONS Stn| CT TO T .
(1) Organzatons ta abe as corporatons.
( ) Organzatons empt Under Secton 101(1), (C), (7) and
(14).
( ) 8tate Coeges and Unverstes. The ta es mposed by subsec-
ton (a) (1) sha appy In the case of any coege or unversty whch
s an agency or nstrumentaty of any government . Such
ta es sha aso appy In the case of any corporaton whoy owned by
one or more such coeges or unverstes.
(c) Defnton or Suppement U Net Income. The term suppement U
net Income of an organzaton means he amount by whch ts unreated bus-
ness net ncome (as denned n secton 422) e ceeds 1,000.
Secton 422 of the Code provdes n part as foows:
(a) Defnton. The term unreated busness net ncome means the gross
ncome derved by any organzaton from any unreated trade or bus-
ness sub|ect to the foowng e ceptons, addtons, and mtatons:
(7) There sha be e cuded a ncome derved from research for ( )
the Unted States, or any of ts agences or nstrumentates, or ( ) any
State or potca subdvson thereof and there sha be e cuded a
deductons drecty connected wth such ncome.
(8) ( ) In the case of a coege, unversty, or hospta, there sha be
e cuded a ncome derved from research performed for any person, and
a deductons drecty connected wth such ncome.
( ) In the case of an organzaton operated prmary for the purposes
of carryng on fundamenta research the resuts of whch are freey avaabe
to the genera pubc, there sha be e cuded a ncome derved from
research performed for any person, and a deductons drecty connected
wth such ncome.
Secton 39.422-1 (b)(0) of Reguatons 118 provdes that n com-
Sutng unreated busness net ncome there sha be e cuded ncome
erved from research for the Unted States or any of ts agences or
nstrumentates or a State or potca subdvson thereof, and a
deductons drecty connected wth such ncome a ncome derved
from research by a coege, unversty or hospta performed for any
person ard a deductons connected wth such ncome and a ncome
derved from research by an organzaton operated prmary for the
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Regs. 130, 40.433(a)-2. 162
purpose of carryng on fundamenta research (as dstngushed from
apped research) the resuts of whch are freey avaabe to the
genera pubc performed for any person and a deductons connected
wth such ncome. The term research does not ncude actvtes of
a type ordnary carred on as an ncdent to commerca or ndustra
operatons, for e ampe, the ordnary testng or nspecton of materas
or products or the desgnng or constructon of equpment and bud-
ngs. The term fundamenta research does not ncude research
carred on for the prmary purpose of commerca or ndustra
appcaton.
In the case of ta -e empt coeges, unverstes, and hosptas, as we
as ta -e empt organzatons operated prmary for the purpose of
carryng on fundamenta research (as dstngushed from apped re-
search) the resuts of whch are freey avaabe to the genera pubc,
ncome derved from any research, whether fundamenta or apped,
w not consttute ncome from an unreated trade or busness. ur-
thermore, n the case of any organzaton to whch the ta mposed by
secton 421 of the Code s appcabe, ncome derved from any re-
search for the Unted States or any State, terrtory, or potca sub-
dvson thereof s e cuded from unreated busness ncome and s not
sub|ect to suppement U ta . On the other hand, a ta -e empt organ-
zaton whch s not prmary engaged n fundamenta research and
whch s not a coege, unversty, or hospta w be sub|ect to ta on
ts suppement U net ncome (e cept from sources mentoned n the
precedng sentence) wth respect to any research f reguary carred
on and t not substantay reated to ts ta -e empt purposes.
ctvtes of a type ordnary carred on as an ncdent to com-
merca or ndustra operatons such as those mentoned n the e -
ampes gven n the reguatons referred to above do not consttute
research and are not e cuded by the foregong provsons n comput-
ng unreated busness net ncome of any organzaton sub|ect to the
suppement U ta whether or not the organzaton s of the cass
specfed n secton 422(a)(8) ( ) and ( ) above and whether or
not the ncome from such actvtes s derved from a source specfed
n secton 422(a) (7) above.
Whether the research or other actvtes not e cuded from unre-
ated trade or busness by the foregong specfc provsons consttute
a trade or busness unreated to the organzaton s ta -e empt purposes
s dependent on the facts of each case.
SU C PT R D.- C SS-PRO ITS T
P RT L R T ND COMPUT TION O T
S CTION 433. C SS-P O ITS N T INCOM
Reguatons 130, Secton 40.433 (a) -2: Compu- Rev. Ru. 54-74
taton of e cess-profts net ncome for the ta -
abe year.
Treatment for e cess-profts ta purposes of bad debt recoveres
by bunks on e reserve method of accountng for bad debts.
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163 Regs 130, 40.437-5.
dvce s requested wth respect to the proper treatment, for e -
cess-profts ta purposes, to be accorded recoveres of bad debts n the
case of banks usng the reserve method of accountng for bad debts.
Secton 433(a)(1)(G) of the Interna Revenue Code provdes for
the e cuson from e cess-profts net ncome of any ncome attrbutabe
to the recovery of a bad debt f the deducton for such debt was aow-
abe from gross ncome for any ta abe year for whch an e cess-
profts ta was not mposed (that s, a ta abe year begnnng before
anuary 1,1940, or a ta abe year begnnng after December 31, 1945,
and endng before uy 1,1950), or f such debt was propery charged
to a bad debt reserve durng any such ta abe year. Under secton
433(a) (1)(L) of the Code, banks whch have eected the reserve
method of accountng for bad debts for ncome ta purposes shoud
substtute for e cess-profts ta purposes a deducton for bad debts
whch actuay become worthess n the ta abe year.
Lne 19, page 1 of Schedue ( orm 1120), for the ta abe years
1952 and 1953 shoud refect the e cess, f any, of the actua bad debts
for the ta abe year over the tota recoveres of bad debts durng such
ta abe year. If such recoveres e ceed such actua bad debts, ne 19
shoud show such e cess as an addton, preferaby n red nk. Lne
1G of the returns shoud refect ony those recoveres whch shoud be
e cuded under secton 433(a) (1) (G) of the Code. Snce, for e cess-
profts ta purposes, banks are on the specfc chargeofT method for
treatng bad debts, no ad|ustment on ne 5 of Schedue P ( orm
1120) w be necessary where the ceng s reached and no addton
to the reserve s permssbe for ncome ta purposes under the pro-
vsons of Mmeograph 6209, C. . 1947-2,26.
S CTION 433(b). C SS-PRO ITS N T INCOM :
T L Y RS IN S P RIOD
Reguatons 130, Secton 40.433(b)-3: bnor-
ma deductons n base perod.
Meanng of the word deductons n the term abnorma deduc-
tons for e cess-profts ta purpose. (See Rev. Ru. 54-88, p. 177.)
S CTION 437. IN ST D C PIT L CR DIT
Reguatons 130, Secton 40.437-5: Defnton T. D. 6065
of equty capta.
( so Secton 458, Secton 40.458-4.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R , T UT 40.
C SS-PRO ITS T T L Y RS NDING I T R UN 30, 1950
Reguatons 130 amended to carfy treatment of ta payer s a-
bty for edera ncome and e cess-profts ta for the purpose of
determnng both equty capta under secton 437(c) and equty
Invested capta under secton 458(d) of the Interna Revenue Code.
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Regs. 130, 40.437-5. 164
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On December 13, 1952, notce of proposed ruemakng to amend
Reguatons 130 26 C R, pt. 40 wth respect to the accrua of ncome
and e cess-profts ta abty for the purpose of determnng equty
capta under secton 437(c) of the Interna Revenue Code and equty
nvested capta under secton 458(d) of the Interna Revenue Code
was pubshed n the edera Regster (17 . R. 11350). fter con-
sderaton of a reevant matter presented by nterested persons re-
gardng the rues proposed, the amendments to Reguatons 130 set
forth beow are hereby adopted.
Paragraph 1. Secton 40.437-5, as amended by Treasury Decson
5952 C. . 1952-2, 202 , approved December 2, 1952, s further
amended by redesgnatng (c) of such secton as (c) (1) , and by
addng at the end thereof the foowng:
(2) In computng abtes as of the begnnng of the ta abe year, a ta -
payer keepng ts books and makng ts Income ta returns on the accrua bass
sha, In accordance wth the prncpes appcabe n the determnaton of
earnngs and profts, treat as a abty the edera ncome and e cess-profts
ta es mposed for the precedng ta abe year. Ths rue s appcabe whether
or not such ta es were defnte and ascertanabe n amount at the cose of the
precedng year and whether or not such ta es were contested by the ta payer.
The provsons of the cess Profts Ta ct of 19 0 sha be taken nto account
for ths purpose n determnng the ncome and e cess-profts ta for ta abe
years endng after une 30, 1950. In genera, changes n the edera ncome and
e cess-profts ta aws appcabe to a ta abe year, enacted after the cose of
such year, w be taken nto account n determnng abtes f the ast date
prescrbed for fng the return for such year s subsequent to the date of
enactment of such changes.
Par. 2. Secton 40.458-4 s amended by strkng the fourth sentence
of (a) (1) and by nsertng n eu thereof the foowng:
In computng accumuated earnngs and profts as of the begnnng of the ta abe
year, a ta payer keepng ts books and makng ts ncome ta returns on the
accrua bass sha, n accordance wth the prncpes appcabe n the determna-
ton of earnngs and profts, subtract the edera ncome and e cess-profts ta es
mposed for the precedng ta abe year. Ths rue s appcabe whether or not
such ta es were defnte and ascertanabe n amount at the cose of the precedng
year and whether or not such ta es were contested by the ta payer. The prov-
sons of the cess Profts Ta ct of 1950 sha be taken nto account for ths
purpose n determnng the ncome and e cess-profts ta for ta abe years
edng after une SO, 1950. In genera, changes n the edera ncome and
e cess-profts ta aws appcabe to a ta abe year, enacted after the cose of
such year, w be taken nto account n determnng earnngs and profts f the
ast date prescrbed for fng the return for such year s subsequent to the date
of enactment of such changes.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. C.2 and 3791 of the Interna Revenue Code (53 Stat. 32, 467
26 U. S. C. 62, 3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 19,1954.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster March 24, 1954, 8:49 a. m.)
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165 ogs. 130, 40.452-4.
S CTION 449. P RSON L S R IC CORPOR TIONS
Reguatons 130, Secton 40.449-1: Ta aton Rev. Ru. 54-18
of persona servce corporatons.
( so Secton 52, Secton 39.52-1, Reguatons
118.)
Ta payers desrng to use Schedue PS ( orm 1120), Computaton
of Unted States Persona Servce Corporaton Income, n fng re-
turns for the caendar year 1953 or for a fsca year endng n 1954
shoud utze Schedue PS ( orm 1120) for 1951 and shoud make the
approprate changes n the dates prnted thereon.
S CTION 452. D USTM NT IN C S O POSITION
INCONSIST NT WIT PRIOR INCOM T LI ILITY
Reguatons 130, Secton 40.452-4: scertanment T. D. 6061
of amount of ad|ustment.
( so Secton 40.452-5.)
TITL 26 INT UN T. R NU -C PT R I. SU C PT R , P T 40.
C SS PRO ITS T T L Y RS NDING T R UN 30, 1950
Reguatons 130 amended to correct the e ampe n secton
40.452 4(f), reatng to ad|ustment n case of poston nconsstent
wth pror ncome ta abty.
Treasury Department,
Offc: of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna e venue Servce and Others
Concerned:
Reguatons 130 (26 C R, pt. 40) are hereby amended as foows:
Pakagrafh 1. Secton 40.452-4 (f), whch contans an e ampe -
ustratng the computaton of an ad|ustment n the case of a poston
nconsstent wth pror ncome ta abty, s amended as foows:
( ) y strkng out the computaton foowng the coon n the
thrd paragraph of the secton and nsertng n eu thereof the
foowng:
Ta prevousy determned for 10-18 28, ,r 00
Norma-ta net ncome ( 75,000) and surta net ncome ( 75,000) on
whch ta prevousy determned wns based 75,000
Pus: Ordnary oss prevousy aowed under secton 117(|) (e cess
of 25,000 oss on e change wth Y Corporaton over 10,000 gan on
sae of other deprecabe busness propery) 15, 000
Ordnary norma-ta net ncome 90, 000
Ordnary surta net ncome 00,000
Ta as recomputed (38 percent of 00,000 pus 25 percent of 10,000 g n
from sae of deprecabe busness property) 30, 700
Ta prevousy determned 28, 500
Increase n ta 8.200
Interest on ncrease In ta 1, 008
Tota ncrease for 1040 10,108
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Regs. 130, 40.461-2. 163
( ) y strkng out the computaton foowng the coon n the ast
paragraph of the secton and nsertng n eu thereof the foowng:
Increase for 1940 ( Corporaton) 10,168
Less: Decrease for 1946 (Y Corporaton) 5S9
Net Increase (amount of ad|ustment authorzed) 9, f 79
Par. 2. Secton 40.452-5 (b), reatng to the deductbty of the
porton of the ad|ustment under secton 452 whch represents nterest,
s amended by substtutng 1,854 for 942 and 1,968 for
1,056 .
ecause ths Treasury Decson merey corrects an erroneous com-
utaton n the reguatons, t s found to be unnecessary to ssue ths
reasury Decson wth notce and pubc procedure thereon under
secton 4(a) of the dmnstratve Procedure ct, approved une
11, 1946, or sub|ect to the effectve date mtaton of secton 4(c) of
that act.
(Ths Treasury Decson s ssued under the authorty contaned n
pecs. 62 and 3791 of the Interna Revenue Code (53 Stat. 32, 467 26
U.S.C.62,3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved anuary 19,1954.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster anuary 22, 1954, 8: 51 a. m.)
S CTION 458.- ISTORIC L IN ST D C PIT L
Reguatons 130, Secton 40.458-4: Determnaton
of equty nvested capta ccumuated earn-
ngs and profts.
Reguatons 130 amended. (See T. D. 6065, p. 163.)
P RT II. C SS-PRO ITS CR DIT S D ON INCOM IN CONN CTION WIT
C RT IN C NG S
S CTION 461. D INITIONS
Reguatons 130, Secton 40.461-2: cqurng Rev. Ru. 54-107
1 corporatons.
Where a corporaton has dsposed of a porton of ts assets, ds-
trbuted the proceeds to ts sharehoders, and e changed Its re-
manng assets for a of the Issued and outstandng capta stock
of a newy formed corporaton, the formaton of the new corpora-
ton w be deemed, for purposes of subchapter D of chapter 1 of
the Interna Revenue Code, a transacton wthn the meanng of
secton 461(a)(1)( ) of the Code and, therefore, the new or
acqurng corporaton s entted to compute ts e cess-profts
credt under part II of subchapter D of chapter 1 of the Code.
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167 Regs. 130, 40.461-2.
dvce s requested whether the formaton of a new corporaton,
and the transfer of certan assets under the foowng crcumstances,
w quafy as a part II transacton wthn the meanng of secton
461(a) (1) ( ) of the Interna Revenue Code, and whether the new
corporaton s entted to compute ts e cess-profts credt under part
II of subchapter D of chapter 1 of the Code.
The M Corporaton, herenafter referred to as the ta payer, was
ncorporated n 1922. Its authorzed capta stock conssts of 10,00 )
shares of preferred stock and 5,000 shares of common stock. Due to
certan crcumstances nvoved, ts stockhoders authorzed the board
of drectors to qudate and dssove the corporaton and to dstrbute
the proceeds n accordance wth the provsons of the stockhoders
qudaton agreement.
The ta payer s assets ncuded, among other thngs, the capta
stock of severa subsdary corporatons, a but one of whch were
qudated under the provsons of secton 112(b)(6) of the Code.
The capta stock of the remanng subsdary corporaton was sod.
Certan f ed assets were aso sod. The proceeds of these transactons
were dstrbuted to the stockhoders n accordance wth the prov-
sons of the qudaton agreement. The remanng assets of the ta -
payer conssted of a manufacturng pant whch t had been unabe
to dspose of, and certan other assets. In order to avod unnecessary
waste and to mantan the property n good condton for a potenta
purchaser, these assets, whch consttuted substantay ess than a
of the propertes of the ta payer, were transferred, sub|ect to certan
abtes, to a newy organzed corporaton n e change for a of ts
ssued and outstandng capta stock. The ta payer w retan the
stock unt a sae of t s effected, or unt the assets of the new corpora-
ton are sod and the corporaton s qudated. The proceeds w then
be dstrbuted to the ta payer s stockhoders pursuant to the quda-
ton agreement.
Secton 40.461-2 of Reguatons 130 states n part:
Skc. 40.461-2. cqurng Cobporatons. (a) The types of transactons
whereby a corporaton becomes an acqurng corporaton are specfed n secton
461(a). In addton to statutory mergers and consodatons and the acquston
of property n a compete qudaton n whch gan or oss s not recognzed
because of the provsons of secton 112(b)(6), ony the foowng types of
transactons are ncuded.

(5) Under secton 461(a)(1)( ), the acquston of a part, as dstngushed
from a or substantay a, of the propertes of a corporaton . trans-
acton whch quafes ns a Part II transacton wthout regard to secton
461(a)(1)( ), s not a transacton descrbed In secton 461(a)(1)( ) for the
purpose of any speca rue under art II pertanng to transactons descrbed
n secton 461(a)(1)( ).
In vew of the foregong, t s hed that the transfer of the reman-
ng propertes of the ta payer to the new corporaton was part of a
snge transacton whch embraced the pror dstrbutons by the ta -
payer as we as the nstant acquston by the new corporaton. Snce,
when vewed n ths manner, ess than substantay a the propertes
of the ta payer were transferred to the newy formed corporaton n
e change for a of ts ssued and outstandng capta stock, t s fur-
ther hed that the creaton of the new corporaton and the transfer of
the remanng assets to t s, for purposes of subchapter D of chapter
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Regs. 130, 5 40.461-2. 168
I of the Interna Revenue Code, a transacton wthn the meanng of
secton 461(a)(1)( ) of the Code, and that the new or acqurng
corporaton s entted to compute ts e cess-profts credt under part
II of subchapter D of chapter 1 of the Code.
Reguatons 130, Secton 40.461-2: cqurng Rev. Ru. 54-120
corporatons.
( so Secton 474, Secton 40.474-1.)
Ta payer s not an acqurng corporaton wthn the meanng
of secton 461(a)(1)(D) of the Interna Revenue Code, snce t
dd not acqure substantay a the propertes of the soe propretor-
shp n e change for a of ts capta stock. It Is, however, a
purchasng corporaton wthn the purvew of secton 474(a) (1) ( )
of the Code, snce the propertes acqured consttuted substantay
a the propertes (other than cash) owned by the propretorshp.
dvce s requested whether, under the facts herenafter stated, the
ta payer s an acqurng corporaton wthn the meanng of secton
461(a) (1) (D) of the Interna Revenue Code, or a purchasng corpora-
ton wthn the purvew of secton 474(a) (1) ( ) of the Code.
The ta payer was organzed n 1949 for the purpose of carryng
on a suppy busness formery operated as a soe propretorshp under
the name of M Company. Durng the same year the merchandse
nventory, furnture and equpment, and goodw of the propretor-
shp, wth an aggregate baance sheet vaue of 13.43-, were transferred
to the ta payer n e change for a of ts capta stock, a nonta abe
e change under secton 112(b) (5) of the Interna Revenue Code. On
the same date, the rea estate of the propretorshp, wth an aggregate
baance sheet vaue of .5 , was transferred to the N Corporaton, an-
other corporaton formed smutaneousy wth the ta payer corpora-
ton. That part of such rea estate necessary for the ta payer s
operatons was eased from the N Corporaton. The remanng assets,
consstng of cash n the amount of :3.7.r, trade accounts recevabe n
the amount of 3.O , and other recevabes and sundry assets n the
amount of .3a , were retaned by the propretorshp whch aso re-
maned obgated for the abtes, wth an aggregate baance sheet
vaue of , none beng assumed by ether corporaton. No actve
busness was carred on by the propretorshp after the date of the
foregong transactons.
Under secton 461(a)(1)(D) of the Interna Revenue Code, an
acqurng corporaton s defned as a corporaton whch has acqured
substantay a the propertes of a partnershp n an e change to
whch secton 112(b) (5), or so much of secton 112 (c) or (e) as refers
to secton 112(b) (5), s appcabe. The word partnershp as used
n secton 461(a)(1)(D), svpra, s defned n secton 461(f) of the
Code to ncude a busness owned by a soe propretorshp. On the
bass of the facts submtted, t s hed that the propertes acqured by
the ta payer dd not consttute substantay a the propertes of the
propretorshp wthn the meanng of secton 461(a)(1)(D) of the
Code.
Secton 474 of the Code, entted cess Profts Credt ased on
Income Certan Ta abe cqustons, defnes a purchasng corpora-
ton, n subsecton (a) (1) ( ) thereof, as a corporaton whch, before
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169 Rogs. 118, | 39.481-1.
December 1,1950, acqured n a transacton other than a transacton
descrbed n secton 461(a), substantay a of the propertes (other
than cash) of another corporaton, of a partnershp, or of a busness
owned by a soe propretorshp. though the tte to secton 474
woud, f construed teray, mt that secton ony to certan ta abe
acqustons, t s the poston of the Interna Revenue Servce that a
corporaton whch acqures propertes from a soe propretorshp n a
nonta abe transacton, as n the nstant case, may quafy as a pur-
chasng corporaton under such secton, provded the transacton s
not one descrbed n secton 461(a) of the Code. Ths vew s recog-
nzed n sectons 40.474-5(a) (3) and 40.474-6(a) (3) of Reguatons
130, as added by T. D. 5998, C. . 1953-1,372.
ccordngy, t s hed that the ta payer s not an acqurng cor-
poraton wthn the meanng of secton 461(a) (1) (D) of the Interna
Revenue Code, snce t dd not acqure substantay a of the prop-
ertes of the soe propretorshp n e change for a of ts capta stock
It s further hed that the ta payer s a purchasng corporaton wthn
the purvew of secton 474(a) (1) ( ) of the Code, snce the propertes
acqured dd consttute substantay a the propertes (other than
cash) owned by the propretorshp. The quafcaton of the purchase
as one of substantay a the propertes under secton 474(a) (1) ( )
s attrbutabe to the e cuson of cash from consderaton pursuant
to the specfc anguage of that secton.
P RT I . C SS-PRO ITS CR DIT S D ON INCOM IN CONN CTION WIT
C RT IN T L C UISITIONS OCCURRING PRIOR TO D C M R 1, 1950
S CTION 474. C SS-PRO ITS CR DIT S D ON
INCOM C RT IN T L C UISITIONS
Reguatons 130, Secton 40.474-1: Purpose
and scope of part I .
cquston by a corporaton of substantay a the propertes
(other than cash) of a busness owned by a soe propretors )p. (Soe
Rev. Ru. 54-120, p. 168.)
SU C PT R . T ON S L - MPLOYM NT INCOM
S CTION 481. D INITIONS
Reguatons 118, Secton 39.481-1: Net Rev. Ru. 54-75
earnngs from sef-empoyment.
( so Secton 3797, Sectons 39.3797-1,
39.3797-4.)
The terra net earnngs from sef-empoyment as defned n sec-
ton 481(a) of the Interna Revenue Code may ncude the ncome
derved hy a wfe from a trade or busness carred on by a hus-
band and wfe partnershp, even though such a partnershp Is not
recognzed as vad under the aw of the State n whch organzed
and operated.
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Regs. 118, 39 481-1.) 170
dvce s requested whether the term net earnngs from sef-em-
poyment as defned n secton 481(a) of the Interna Revenue Code
may ncude partnershp ncome of wves who are members of a hus-
band and wfe partnershp where such a partnershp s not recognzed
as vad under the aw of the State n whch t operates, but s recog-
nzed for edera ncome ta purposes. In the nstant case the part-
nershps under consderaton operate n Lousana and Te as.
In Lousana and n Te as n some crcumstances husband and wfe
partnershps are not recognzed for many purposes. See for e -
ampe, arbanks, Morse rC Co. v. ordeon et a., 198 So. 391 Mon-
roe O rocert/ Co., Ltd. v. T. L. cfe M. Davs et a., 116 So. 646 13 Te .
Cv. Stat. rt, 4026 Dard et a. v. Smth, Chef ustce et a., 205
S. W. (2d) 366. The queston presented s whether State aw s con-
trong n determnng the e stence of a partnershp for sef-em-
poyment ta purposes.
Under secton 481(a) of the Interna Revenue Code the term net
earnngs from sef-empoyment ncudes an ndvdua s dstrbutve
share of the ordnary net ncome or oss as computed under secton
183, from any trade or busness carred on by a partnershp of whch
he s a mem)er, wth certan e ceptons not here matera. Thus, for
purposes of determnng net earnngs from sef-empoyment a part-
nershp s one whch s recognzed as such for ncome ta purposes.
See secton 39.481-1 of Reguatons 118.
Secton 3797(a)(2) of the Interna Revenue Code provdes a
defnton of the words partnershp and partner7 for purposes of
the Interna Revenue Code. Secton 39.3797-1 of R guatons 118
provdes that the term partnershp wthn the meanng of the Code
s not mted to the common aw meanng of partnershp, but s
broader n ts scope and ncudes groups not commony caed part-
nershps. It foows that the term partner s not restrcted to one
who has the capacty to become a member of a partnershp under o-
ca aw. The Code prescrbes ts own standards of cassfcaton of
busness organzatons and oca aw- s not controng.
Where a wfe who s a member of the same partnershp as her hus-
band s regarded as a partner wthn the meanng of the Code, her ds-
trbutve share of the ordnary net ncome from any trade
or busness carred on by the partnershp may consttute net earn-
ngs from sef-empoyment as defned n secton 481(a) of the Code
for purposes of the ta on sef-empoyment ncome even though such
partnershp s not recognzed for some purposes under the aw of the
State n whch t operates.
Reguatons 118, Secton 39.481-1: Net Rev. Ru. 54-112
earnngs from sef-empoyment.
mounts pad to a seamstress for servces performed for an
estbsbed customer centee consttute earnngs from sef-em-
poyment wthn the meanng of secton 4S(a) of the Interna
Revenue Code, where the servces are performed n the prvate
homes of the customers, the seamstress furnshes the equpment
requred to do the work, and she determnes the fee to be charged.
dvce s requested whether amounts pad to a seamstress for the
performance of servces n the prvate homes of her customer centee
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171 Regs. 118, 39.481-1.
consttute earnngs from sef-empoyment for purposes of the Sef-
mpoyment Contrbutons ct.
a the nstant case, the seamstress s engaged n makng dresses,
Lousecoats, chdren s cothes, spcovers, and draperes and n ater-
ng garments. She has been engaged n ths work for severa years
and has deveoped an estabshed customer centee who ca on her
for such servces. She works n the prvate homes of her customers,
furnshng her own equpment, such as scssors, needes, patterns, and
portabe sewng machne. Charges for the work performed are de-
termned by her accordng to the amount of tme requred for the
competon of the work nvoved. Whe most of her work comes
from her reguar customers, she occasonay accepts work from others.
er work s seasona.
Secton 481 of the Interna Revenue Code provdes n part as fo-
ows:
(a) N T RNINGS ROM S L - MPLOYM NT. The terra net earnngs from
f-empoyment means the gross Income derved by an ndvdua from any
trade or busness carred on y such ndvdua, ess the deductons aowed by
ths chapter Lchapter 1 whch are attrbutabe to such trade or busness

(c) TR D O USIN SS. The terra trade or busness , when used wth
reference to sef-empoyment ncome or net earnngs from sef-empoyment, sha
tare the same meanng as when used n secton 23, e cept that such term sha
not ncude

(2) The performance of servce by an ndvdua as an empoyee
Whe each case must be determned upon the bass of ts partcuar
farts, n the nstant case the seamstress s not performng servces
s an empoyee, but s engaged n carryng on a trade or busness. c-
cordngy, the amounts pad to her for the servces performed for
her customers consttute earnngs from sef-empoyment wthn the
meanng of secton 481 (a) of the Interna evenue Code.
GUL TIONS 118, S CTION 39.481-1: Net Rev. Ru. 54-194
earnngs from sef-empoyment.
The Income derved by an Indvdua from the sae of Chrstmas
trees whch are grown, wthout pantng or cutvatng the so,
on mountanous cut-over tmbernnd owned by hm consttutes earn-
ngs from sef-empoyment for edera sef-empoyment ta
purposes.
dvce s requested whether the ncome derved by an ndvdua
from the sae of Chrstmas trees grown on uncutvated tmberand
s sub|ect to the ta on sef-empoyment ncome.
n ndvdua who s reguary empoyed at a yeary saary as a
dtch rder on an rrgaton pro|ect owns severa parces of tmber-
and from whch he cuts trees to be sod as Chrstmas trees n caroad
ots drect to deaers. The and on whch the trees are grown s moun-
tanous and has prevousy been ogged off, the ogs havng been sod to
sawms. The stumps have not been removed to afford cutvaton
and the and cannot be powed or seeded even for grazng purposes.
The ndvdua purchased the and prmary for the purpose of se-
ng the trees and he has no ntenton of cutvatng the so for use
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Regs. 118, 39.481-1. 172
as a farm or for the rasng of vestock. The trees are not panted
and the so s not cutvated to promote ther growth. The ndvdua
prunes the trees and cuts down arger trees to afford more ght and
sunshne for the smaer ones. e devotes appro matey 160 hours
per year to prunng, cuttng, and seng the Chrstmas trees and
he does not engage any persons to assst hm.
Secton 481(a) of the Interna Revenue Code provdes n part:
(a) Net arnngs kom Sku- mp.oyment. The term net earnngs from
sef empoyment means the gross ncome derved hy an ndvdua from any
trade or busness carred on by such ndvdua, ess the deductons a-
owed e cept that n computng such gross ncome and deduc-
tons
(2) There sha be e cuded Income derved from any trade or bnsne-s
In whch, f the trade or busness were carred on e cusvey by empoyees,
the ma|or porton of the servces woud consttute agrcutura abor as
denned n secton 1420(h)
Secton 1426(h) of the Code defnes the term agrcutura abor
as ncudng a servces performed:
(1) On a farm, n the empoy of any person, n connecton wth cutvatns
the so, or n connecton wth rasng or harvestng any agrcutura or
hortcutura commodty,

s used n ths secton, the term farm ncudes stock, dary, poutry, frut.
fur-bearng anma, and truck farms, pantatons, ranches, nurseres, ranges
greenhouses or other smar structures used prmary for the rasng of agr-
cutura or hortcutura commodtes, and orchards.
It s hed that servces performed n the empoy of any person n
connecton wth the pantng, rasng, cutvatng, and harvestng of
Chrstmas trees consttute agrcutura abor as that term s defned
n secton 1426(h) of the Code, ony when such servces are performed
on a farm. Servces performed n connecton wth the cuttng and
transportng of trees from uncutvated and or forests do not const-
tute agrcutura abor wthn the meanng of such secton.
Snce the operatons of the ndvdua nvoved n the nstant case
were not conducted on a farm, the servces performed n connecton
wth such operatons are not to be treated as agrcutura abor as
defned n secton 1426(h) of the Code.
ccordngy, t s hed that the ncome derved by an ndvdua
from the sae of Chrstnas trees whch are grown wthout pantng or
cutvatng the so on mountanous cut-over tmberand owned, by
hm consttutes earnngs from sef-empoyment for edera sef-
empoyment ta purposes.
Reguatons 118, Secton 39.481-1: Net
earnngs from sef-empoyment.
Income derved by coowner and manager of a farm e cuded from
net earnngs from sef empoyment by reason of the provsons of
secton 4S(a) (2) of the Sef- mpoyment Contrbutons ct, (See
Rev. Ru. 54-170, p. 213.)
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173 Regs. 118, 39.481-3.
busness.
118, S CTION 39.481-3 : Trade or Rev. u. 54-208
Servces performed by an ndvdua as a norma e tenson of hts
professon of fnnera drector are consdered as ncdenta to tbe
practce of each professon and net earnngs therefrom w be
e empt fron tbe ta on sef-empoyment however, where a fnnera
drector engages n an enterprse whch s not ncdenta to the prac-
tce of bs professon of fnnera drector, such as the operaton of
an amLnance servce, a furnture store, or a forst shop, the net
earnags therefrom w not be e empt from the ta on sef-em-
poyment ncome.
dvce s requested as to the scope of the term funera drector as
ft s used n the Sef- mpoyment Contrbutons ct, secton 481 (c)
(5) of the Interna Revenue Code. or ta abe years begnnng after
December 31, 1950, secton 480 of the Code mposes a ta upon the
sef -empoyment ncome of every ndvdua. Sef -empoyment n-
come, n genera, conssts of the net earnngs derved by an ndvdua
(other than a nonresdent aen) from a trade or busness carred
on by hm as soe propretor or by a partnershp of whch he s a
member, sub|ect to certan e cusons, e ceptons, and mtatons.
or purposes of such ta , secton 481 (c) (5) of the Code e cudes
from the term trade or busness the performance of servces by an
ndvdua n the e ercse of hs professon as a funera drector.
owever, the performance of these servces by an ndvdua cannot
consttute the e ercse of such e cuded professon uness the ndvd-
ua meets the ega requrements, f any, for the practce thereof n the
pace where the servces are performed. urthermore, the statutory
desgnaton of the term funera drector s to be gven ts commony
accepted meanng. See Reguatons 118, secton 39.481-3 Rev. Ru.
276, C. . 1953-2, 88.
Generay ths term s understood to refer to one who s responsbe
for makng and carryng out a of the necessary arrangements for
funeras. In connecton wth the practce of hs professon, a funera
drector may perform servces not n themseves so e cuded such as
the reportng of deaths, the procurement of permts requred by aw,
the procurement of certfed copes of death certfcates, the remova
and transportaton of bodes for embamng processes, the embamng
of bodes, and the sae cf caskets, vauts, and shrouds. ut snce each
of these actvtes s a norma e tenson of the e ercse of the profes-
son of funera drector, and can reasonaby be embraced theren, a
of them w be regarded as an ncdence of the practce of such pro-
fesson and, hence, the net earnngs therefrom w be e empt from
the ta on sef-empoyment ncome.
On the other hand, f one who practces the professon of funera
drector aso engages n an enterprse whch s not ncdenta thereto,
SDc as tbe operaton of an ambuance servce, a furnture store, or a
Sorst shop, the net earnngs from each must be segregated and ony
( ose attrbutabe to such professon can be e empt from the ta on
sef-empoyment ncome. See Rev. Ru. 275, C. . 1953-2, 86.
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Rogs. 118, 39.481-3.) 174
R GUL TIONS 118, S CTION 39.481-3: Trade or Rev. Ru. 54-223
busness.
Remuneraton for servces performed by a member of a partner-
shp as an empoyee of another organsaton consttutes wages pad
to hm, no part of whch may be consdered as gross ncome derved
from a trade or busness carred on by the partnershp for purposes
of computng net earnngs from sef-empoyment, even though the
wages have been assgned to the partnershp n accordance wth a
partnershp agreement provdng for poong a of the ncome earned
by a of the partners.
dvce s requested reatve to the treatment for sef-empoyment
ta purposes of certan wages earned by an ndvdua and assgned to
a partnershp of whch he s a member.
In the nstant case, the ndvdua receves remuneraton for per-
sona servces performed by hm as drver of a schoo bus. e s
aso a member of a partnershp engaged n the gas, o and garage
busness. Snce the partners have agreed to poo a ncome earned
by them, he turns the amount receved for servces as a bus drver
over to the partnershp and t s ncuded n the gross ncome of the
partnershp n computng the amount of net ncome dstrbutabe to
the partners.
Secton 481 (a) of the Interna Revenue Code defnes the term net
earnngs from sef-empoyment as the gross ncome derved by an
ndvdua from any trade or busness carred on by such ndvdua,
ess the deductons aowed by ths chapter Ch. I whch are attrb-
utabe to such trade or busness, pus hs dstrbutve share (whether
or not dstrbuted) of the ordnary net ncome or oss, as computed
under secton 183, from any trade or busness carred on by a partner-
shp of whch he s a member
Secton 481 (b) of the Code provdes generay that the term sef-
empoyment ncome means the net earnngs from sef-empoyment
derved by an ndvdua but does not ncude
(1) That part of the net earnngs from sef-empoyment whch s In e cess
of: ( ) 3,000, mnus ( ) the amount of the wages pad to such ndvdua
durng the ta abe years
Secton 481 (c) of the Code provdes that the term trade or bus-
ness as used n secton 481 (a) of the Code sha not ncude the
performance of servce by an ndvdua as an empoyee.
Where a partner as an empoyee of another organzaton earns com-
pensaton consttutng wages for edera empoyment ta purposes,
those wages are sub|ect to such ta es rrespectve of whether they have
been assgned to hs partnershp. ccordngy, n ne wth the pur-
pose of secton 481 (b) of the Code, the empoyee-partner n the nstant
case shoud treat such wages as wages pad to hm n computng hs
sef-empoyment ncome n accordance wth secton 481 (b) (1) of the
Code. No part of such wages pad over to the other partners n
accordance wth the partnershp agreement may be consdered as
gross ncome derved from any trade or busness carred
on by such other partners, wthn the meanng of secton 481 (a) of the
Code, for purposes of computng ther net earnngs from sef-
empoyment.
The concusons stated heren are mted to the appcaton of the
sef-empoyment ta to assgnments of wages by an empoyee-partner
to hs partnershp.
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175 Regs. 118, 39.504-1.
C PT R 2. DDITION L INCOM T S
SU C PT R . P RSON L OLDING COMP NI S
S CTION 502. P RSON L OLDING COMP NY INCOM
Reguatons 118, Secton 3 .502-1: Persona Rev. Ru. 54-34
hodng company ncome.
The M Corporaton, a corporaton engaged n the busness of seng
fre nsurance, s the assgnee of certan nsurance agency agreements
to whch and hs son are partes. owns more than 25 percent n
vaue of the outstandng stock of M Corporaton. The nsurance
agency agreements were entered nto durng a perod n whch and
hs son were engaged n the busness of seng fre nsurance under a
partnershp agreement, and provde n part that or hs son are
named as agent for a fre nsurance company, wth fu power and
authorty to receve and accept proposas for nsurance coverng such
casses of rsks as the company may, from tme to tme, authorze to be
nsured to coect, receve, and recept for premums on nsurance
tendered by the agent to and accepted by the company . The
fre nsurance company has not renqushed ts rght to name the
ndvdua who may accept nsurance rsks on ts behaf under the
contract. ed, under the provsons of secton 502(e) of the Interna
Revenue Code, commssons receved by M Corporaton pursuant to
the contract consttute persona hodng company ncome. Cf. Genera
Management Corporaton v. Commssoner, 135 ed. (2d) 882, cert-
orar dened, 320 U. S. 757.
S CTION 504. UNDISTRI UT D SU C PT R
N T INCOM
Reguatons 118, Secton 39.504-1: Undstrb- T. D. 6058
uted subchapter net ncome.
( so Secton 29.504-1, Reguatons 111.)
TITL 26 INT RN L R NU C PT R I, SU C PT R , P RT 29 ND
P RT 39
Reguatons 111 and 118 amended to conform to secton 349 of
the Revenue ct of 1951, reatng to the e cuson of certan non-
dstrbutabe subchapter net ncome of persona hodng com-
panes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On September 5,1953, there was pubshed n the edera Regster
(18 . R. 5388) a notce of proposed ruemakng wth respect to
amendments to conform Reguatons 103 and 111 26 C R, pts. 19,
29 to secton 349 of the Revenue ct of 1951, approved OctoDer 20,
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Regs. 118, 39.504.-1.1 176
1951, reatng to the e cuson of certan nondstrbutabe ncome n
determnng the undstrbuted subchapter net ncome of persona
hodng companes. No comments regardng the rues proposed hav-
ng been receved durng the 30-day perod prescrbed n such notce,
the amendments to such reguatons and to Reguatons 118 26 C R,
pt. 39 set forth beow are hereby adopted:
R GUL TIONS 111 26 C R, TT. 291
Paragraph 1. There s nserted mmedatey precedng secton
29.504-1 foowng:
S C. 349. NONDISTRI UT L INCOM O P RSON L OLD-
ING COMP NI S R NU CT O 1051, PPRO D
OCTO U 20, 1951 .
ffectve for ta abe years begnnng after December 31, 1939, secton
504 s hereby amended by addng at the end thereof the foowng new
subsecton:
(e) The amount by whch the undstrbuted subchapter net n-
come determned wthout reference to ths subsecton e ceeds the
amount whch coud be dstrbuted on the ast day of the ta abe year
as a dvdend (1) wthout voatng any acton, reguaton, rue, order,
or procamaton taken, promugated, made, or ssued by, or pursuant
to the drecton of, the Presdent or any agency that he may desgnate,
under the Tradng Wth the nemy ct of October 16,1917, as amended,
or the rst War Powers ct of 1941, and (2) not sub|ect to a en In
favor of the Unted States.
Par. 2. Secton 29.504-1 s amended as foows:
( ) y deetng n the frst sentence thereof the word and whch
mmedatey precedes (D) .
( ) y strkng the perod at the end of the frst sentence and by
nsertng n eu thereof a comma and the foowng:
and ( ) the amount by whch the undstrbuted subchapter net ncome (deter-
mned wthout reference to ths provson) e ceeds the amount whch coud be
dstrbuted on the ast day of the ta abe year as a dvdend (1) wthout voat-
ng any acton, reguaton, rue, order, or procamaton taken, promugated,
made, or Issued by, or pursuant to the drecton of, the Presdent or any agency
that he may desgnate, under the Tradng Wth the nemy ct, 40 Stat. 411, as
amended (50 U. S. C. pp. 1 et seq.), or the rst War Powers ct, 1941, T 5 Stat.
838 (50 U. S. C. pp. 601 et seq.), and (2) not sub|ect to a en n favor of the
Unted States.
Par. 3. The amendments to Reguatons 111 (coverng ta abe years
begnnng after December 31,1941, and before anuary 1,1952) made
by paragraphs 1 and 2 of ths Treasury Decson are hereby made ap-
pcabe to ta abe years begnnng after December 31,1939, and before
anuary 1, 1942 (such years beng covered by Reguatons 103).
R GUL TIONS 118 28 C R, PT. 39
Par. 4. Secton 39.504-1 s amended as foows:
( ) y deetng n the frst sentence thereof the word and whch
mmedatey precedes (c) .
( ) y strkng the perod at the end of the frst sentence and by
nsertng n eu thereof a comma and the foowng:
and (d) the amount by whch the undstrbuted subchapter net ncome
(determned wthout reference to ths provson) e ceeds the amount whch
coud be dstrbuted on the ast day of the ta abe year as a dvdend (1)
wthout voatng any acton, reguaton, rue, order, or procamaton taken,
promugated, made, or ssued by, or pursuant to the drecton of, the Presdent
or any agency that he may desgnate, under the Tradng wth te nemy ct,
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177 Regs. 112, 35.71 (b)-2.
40 Stat. 411, as amended (50 U. S. C. pp. 1 et seq.), or the rst War Towers
ct, 1941, 50 Stat. S3S (50 U. S. C. pp. 001 et seq.), and (2) not sub|ect to a
en n favor of the Unted States.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 62 and 3791 of the Interna Revenue Code (53 Stat. 32, 407
2G U.S. C. 62,3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved December 4,1953.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera egster December 9, 1953, 8:50 a. m.)
SU C PT R . C SS-PRO ITS T
P RT I
S CTION 711(b). C SS-PRO ITS N T INCOM :
T L Y RS IN S P RIOD
Reguatons 112, Secton 35.7(b)-2: bnor- Rev. Ru. 54-88
ma deducton n base perod.
( so Secton 433(b), Secton 40.433(b)-3 Regu-
atons 130.)
or e cess-profts ta purposes, the word deductons In the term
abnorma deductons menus deductons aowabe by secton 23
of the Interna Revenue Code. Subtractons or osses reected n
net saes, cost of goods sod and gross Income, do not consttute de-
ducton wthn the meanng of sectons 711(b) (1) and 433(b) (9)
and (10) of the Interna Revenue Code.
The purpose of ths Revenue Rung s to state the poston of the
Interna Revenue Servce wth respect to the meanng of the term
deductons as used n secton 711(b) (1) and secton 433(b) (9) and
(10) of the Interna Revenue Code.
The term deductons means e penses or statutory deductons
aowabe by secton 23 of the Interna Revenue Code. It does not
mean subtractons whch are propery ncudbe n the computaton
of gross ncome.
Subtractons, whch are pro| ery ncudbe n computatons of gross
ncome regardess of the methods of accountng or computaton used
n the ta payer s books or returns, ncude nventory ad|ustments for
shortages ( remont Cake and Mea Company v. Commssoner, Ta
Court Memorandum Opnon dated November 20,1950), abandoned or
unsaabe merchandse (Mrs. C. . arnard v. Commssoner, 18
. T. . 1022), and prce fuctuatons and changes n methods of vau-
aton (Coorado Mng and evator Company v. Commssoner,
17 T. C. 1280 appeaed on another ssue).
No part of cost of goods sod as such may be treated other than
as a subtracton n computng gross ncome. owever, whether a
partcuar e pendture s propery ncudbe n cost of goods sod,
depends upon the nature of the e pendture. In a manufacturng
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Regs. 112, 35.71 (b)-2. 178
busness, cost of p|oods sod ncudes the cost of raw materas and
suppes enterng nto or consumed n the producton of the artces
sod, e pendtures for drect abor, and ndrect e penses ncdent
to and necessary for the producton of the artces. Cf. secton
89.22 (c)-3, Reguatons 118. owever, for the purposes of secton
711 (b) (1) and secton 433(b) (9) and (10) of the Code, t does not
ncude aowances for deprecaton, rentas, ta es, nsurance, other
recurrng charges, or osses ncurred or accrued wth respect to and,
budngs, machnery, and equpment or other factes used n pro-
ducton of artces rrespectve of whether these tems may be n-
cuded as part of cost of goods sod under an acceptabe accountng
practce.
Though e pendtures aowabe as deductons by secton 23 of the
Code have been camed and aowed as a part of cost of goods sod
pursuant to an acceptabe accountng practce, that fact does not
change the nature of the e pendtures or requre that they sha be
consdered as subtractons n computng gross ncome n appyng
secton 711(b)() and secton 433(b) (9) and (10) of the Code.
Thus, State rea estate, persona property, ncome, or franchse ta es,
edera and State soca securty or unempoyment compensaton ta es
are not subtractons n computng gross ncome, though they have
been cnmed and aowed as a part of the cost of goods sod (The
Montrea Mnng Company v. Commssoner, 2 T. C. 688). The fact
however that a ta payer has ncuded an tem n cost of goods sod,
though not decsve, s of evdentary vaue, as showng that the ta -
ayer consdered the tem to be norma rather than abnorma (Tovrea
and and Catte Company v. Commssoner, 10 T. C. 90).
In the case of artces of nventory whch are the sub|ect of one
or more osses wthn the meanng of the term deductons under sec-
ton 23(f for osses, as used n secton 711(b)()( ) and secton
433(b) (9) (C) of the Code, the cost of the artces sha be computed
pursuant to the provsons of ths Revenue Rung respectng the
computaton of cost of goods sod. If the adopted bass of vaung
nventores s cost or market, whchever s ower, the bass for
computng the casuaty oss sha not e ceed the ower vaue at the
tme of the casuaty. If for the ta abe years begnnng after Decem-
ber 31, 1940, and pror to anuary 1, 1948, the provsons of secton
22(d)(6)( ) of the Code are appcabe, the bass for computng
the casuaty oss sha be ad|usted to refect the ncrease or decrease
of net ncome, under causes () and () thereof| attrbutabe to the
casuaty oss. In vew of the provsons of secton 433(b) (10) (D)
of the Code, f the provsons of secton 22(d) (6) ( ) of tne Code are
appcabe, the bass for computng the casuaty oss for any ta abe
year endng after une 30, 1950, and pror to anuary 1, 1954, sha
aso be ad|usted to refect the attrbutabe ncrease or decrease of net
ncome under cause () thereof. owever, for the purposes of sec-
ton 711 (b) (1) ( ) and secton 433(b) (9) (C) of the Code, the oss
attrbutabe to the casuaty sha not ncude any part due to cr-
cumstances other than the casuaty, as, for e ampe, prce fuctuatons
occurrng pror to the casuaty.
pendtures aowabe as ordnary and necessary busness e -
penses, ncudng e pendtures occasoned by the casuaty, cannot be
treated as deductons under secton 23(f) for osses wthn the
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179 Regs. 105, 81.13.
meanng of secton 711(b) (1) ( ) and secton 433(b) (9) (C) of the
Code. There s no authorty to change an e pense under secton
23(a) (1) ( ) of the Code nto a oss under secton 23(f), n order to
consder and dsaow t under the provsons of secton 711(b) (1) ( )
or secton 433(b) (9) (C) of the Code {Consodated Motor Lnes, Inc.
. Commssoner, 6 T. C. 106G). Ths rue s appcabe regardess
of whether the e pendtures have been camed and aowed as deduc-
tons under secton 23(a) (1) ( ) of the Code or, pursuant to an ac-
ceptabe accountng practce, have been ncuded n cost of goods sod
and camed and aowed as subtractons n computng gross ncome
( eeder-Root, Inc. v. Commssoner, 11 T. C. G02).
C PT R 3. ST T T
SU C PT R .- SIC ST T T
P RT 1L ST T S O CITIZ NS O R SID NTS O T UNIT D ST T S
SU P RT I.-COMPUT TION O T
S CTION 811. GROSS ST T
Reguatons 105, Secton 81.3: Gross estate. Rev. Ru. 54-24G
The consent e ecuted by a husband, under the provsons of secton
1000(f) of the Interna Revenue Code, to treat a gft of property
owned by hs wfe to a thrd party donee as havng been made one-
haf by each, s not deemed to have created n the husband an nterest
n the property transferred whch, upon hs death, woud render any
part of such property ncudbe n hs gross estate for edera estate
ta purposes under the provsons of any of the subsectons of secton
811 of the Code.
S CTION 811(a). GROSS ST T : D C D NT S
INT R ST
Reguatons 105, Secton 81.13: Property of Rev. Ru. 54-19
decedent at tme of death.
( so Secton 22(a), Secton 39.22(a)-, Regu-
atons 118.)-
mounts recevabe In settement of cams under the New ersey
Death by Wrongfu ct statute, N. . S. . 2 : 31-1 31-f, are not
Incudbe n the decedent s gross estate for edera estate ta pur-
poses under secton 811(a) of the Interna Revenue Code nor ta abe
as ncome to the decedent s estate or to the dependents who w
receve the proceeds of the recovery.
dvce s requested whether the proceeds n settement of a cam
under the New ersey Death by Wrongfu ct statute are ncudbe
n the decedent s gross estate under secton 811(a) of the Interna
Revenue Code or consttute ta abe ncome of the estate or of the de-
pendents who w receve the proceeds of the recovery.
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Regs. 105, 81.13.1 180
The decedent met hs death as the resut of an arpane crash. The
e ecutr of the estate of the decedent commenced court acton aganst
the carrer under the New ersey Death hy Wrongfu ct statute,
N. . S. . 2 : 31-1 31-6. The carrer has offered to sette the
cams asserted by the pettoner.
The New ersey Death by Wrongfu ct statute provdes that an
acton w e, notwthstandng the death of the person n|ured, aganst,
the person who woud be abe for damages for the wrongfu act, neg-
gense or defaut had the deceased merey been n|ured. The acton
sha be brought by the e ecutor or admnstrator, w. w. a., or by an
admnstrator ad prosequendum, f there be nether of the atter ap-
ponted. owever, the acton sha be mantaned by ether of the
above partes not for hs beneft as such admnstrator ad prosequen-
dum, etc., but rather for persons who woud take the decedent s prop-
erty had he ded ntestate under the aws of New ersey. Specfcay,
chapter 31-4, Persons entted to amount recovered reads as foows:
The amount recovered n proceedngs under ths chapter sha be fcr the
e cusve beneft of the persons entted to take any ntestate persona pro erty
of the decedent, and n the proportons n whch they nre entted to take the
same. If any of the persons so entted were not dependent on the decedent at
hs death, the remander of the persons so entted sha take the same as
though they were the soe persons so entted. If n or none of the persons so
entted were then dependent on hm, they shn n take as aforesad.
Secton 811 (a) of the Interna Revenue Code provdes:
The vaue of the gross estate of the decedent sha be determned by ncudng
the vaue at the tme of hs death of n property, rea or persona, tangbe or
ntangbe, wherever stuated, e cept rea property stuated outsde of the
Unted States
(a) Decedent s Interest. To the e tent of the nterest theren of the
decedent at the tme of hs denth
The decsve queston n ths case s whether the decedent had an
nterest n the amount recoverabe under the New ersey Death by
Wrongfu ct statute or n the rght of acton at the tme of hs
death. The acton aganst the carrer was brought under the statute,
and the statute governs n determnng the dstrbuton of the pro-
ceeds of the recovery. The decedent n hs fetme never had an
nterest n the rght of acton or n the proceeds. e dd not create
the rght, t was created by statute and vested n the persons desgnated
n the statute. Inasmuch as the decedent had no rght of acton or
nterest n the proceeds at the tme of hs death, nothng passed
from the decedent to the benefcares. ccordngy, the amounts
recovered by the benefcares woud not be ncudbe n the decedent s
gross estate for edera estate ta purposes.
Secton 22(a) of the Interna Revenue Code provdes that a gans,
profts, and ncome derved from any source whatever are ncome sub-
|ect to ta aton. Proceeds of ths nature, that s, compensaton for
oss of fe, are not embraced n the genera concept of the term n-
come . See I. T. 2120, C. . II-2, 123.
In vew of the foregong, amounts recevabe n settement of cams
under the New ersey Death by Wrongfu ct statute, N. . S. .
2 :31-1 31-6, are not ncudbe n the decedent s gross estate for
edera estate ta purposes under secton 811(a) of the Interna
Revenue Code nor ta abe as ncome to the decedent s estate or to the
dependents who w receve the proceeds of the recovery.
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181 Regs. 105, 81.13.
Reguatons 105, Secton 81.13: Property of Rev. Ru. 54-89
decedent at tme of death.
Where a marred man domced n Te as purchases n hs own
name wth communty funds acqured In Te as rea property ocated
n New Me co and ansas and predeceases hs wfe, ony one-haf
of the vaue of such property s ncudbe In hs gross estate for
edera estate ta purposes. The respectve rghts of the husband
and wfe n such rea property are governed by the aw of the pace
where the property s stuated.
dvce s requested reatve to the e tent rea property acqured
n the manner set forth beow s to be ncuded n the decedent s gross
estate for edera estate ta purposes.
marred man, a resdent of Te as, a communty property State,
purchased wth the communty funds of hmsef and hs wfe rea
property stuated n New Me co and ansas. The husband took
tte to the purchased property n hs own name. e ded survved
by hs wfe.
The respectve rghts of the husband and wfe n rea property are
governed by the aw of the pace where such property s stuated
rather than by the aw of the domce of the partes.
The aw of descent and dstrbuton contaned n chapter 31 of the
New Me co Statutes, annotated, 1941, provdes that upon the death
of the husband one-haf of the communty estate goes to the wfe and
the other haf s sub|ect to the testamentary dsposton of the husband.
(Sec. 31-109.) ccordngy, t s hed that the vaue of ony one-haf
of the New Me co rea estate s ncudbe n the deceased husband s
gross estate.
The genera rue n a communty property State s that where a
husband, as manager and busness agent of the communty, purchases
rea property n a common aw State wth communty funds and takes
tte thereto n hs own name, he hods a one-haf nterest n the
property as trustee for hs wfe.
Secton 67-40(5 of Genera Statutes of ansas, nnotated, reads
as foows:
Conveyance to one person when consderaton pad by another. When a
conveyance for a vauabe consderaton s made to one person and the consdera-
ton therefor s paC by another, no use or trust sha resut n favor of the
atter but the tte sha vest In the former, sub|ect to the provsons of the
ne t two sectons.
Secton 67-407 provdes that every such conveyance sha be pre-
sumed frauduent as aganst the credtors of the person payng the
consderaton.
Secton 67-408 provdes as foows:
The provsons of the secton ne t before the ast sha not e tend to cases
where the aenee sha have taken any absoute conveyance In hs own name
wthout the consent of the person wth whose money the consderaton was pad
or where such aenee n voaton of some trust sha have purchased the and
wth moneys not hs own or where t sha be made to appear that by agree-
ment and wthout any frauduent ntent the party to whom the conveyance was
made, or n whom the tte sha vest, was to hod the and or some nterest
theren n trust for the party payng the purchase money or some part thereof.
In construng the provsons of sectons 67-406 and 408 of the
Genera Statutes of ansas, the Supreme Court of ansas has con-
sstenty hed that where the husband purchases and n ansas n
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Regs. 105, 81.13. 182
part or n whoe wth hs wfe s money, a trust s mpressed on the
and n favor of the wfe to the e tent the purchase prce was pad
wth her funds, uness the wfe ntended to make a gft to her husband.
See Commssoner v. Carre . Moter, 60 ed. (2d) 498. ccordngy,
t s hed that the vaue of ony one-haf of the ansas rea property
s ncudbe n the deceased husband s gross estate.
Reguatons 105, Secton 81.13: Property of Rev. Ru. 54-168
decedent at tme of death.
The vaue of the restrcted aotted ands of an Indan of the
uapaw Trhe s ncudbe n the deceased Indan s gross estate
for edera estate ta purposes under the provsons of secton
811 (a) of the Interna Revenue Code.
dvce s requested whether the vaue of a ICO acre homestead
owned by the decedent, a restrcted Indan of the uapaw Trbe, s
ncudbe n hs gross estate for edera estate ta purposes.
Under the prncpes ad down by the Supreme Court of the Unted
States n Okahoma Ta Commsson v. Unted States, 319 U. S. 598,
and n West v. Okahoma Ta Commsson. 334 U. S. 717, restrcted
aotted Indan ands are e empt from edera estate ta es f such
ands are e pressy e empted from ta aton n treates wth the specfc
trbes of Indans concerned or n edera statutes deang wth such
Indans, but e empton from such ta es s not to be mped or n-
ferred. Ths s cear from the foowng e tract from the decson of
the Court n Okahoma Ta Commsson v. Unted States, supra, n
whch the Court consdered the queston whether aotted ands and
other property of restrcted Indans of the ve Cvzed Trbes were
sub|ect to Okahoma estate ta aton:
Ths Court has repeatedy sad that ta e emptons are not granted by m-
pcaton. Unted States Trust Co. v. Ieverng, 307 U. S. 57, 00. It has apped
that rue to ta ng acts affectng Indans as to a others. s was sad of an
e cse ta on tobacco produced by the Cherokee Indans n 1870, If the e emp-
ton had been ntended, t woud doubtess have been e pressed. Cherokee
Tobacco, 11 Wa. 610, 020. In hodng the ncome ta appcabe to Indans.
the Court sad, The terms of the 1028 Revenue ct are very broad, and nothng
there Indcates that Indans are to be e cepted. If e empton e sts t
must derve pany from agreements wth the Creeks or some ct of Congress
deang wth ther affars . Superntendent v. Commssoner, supra, 420. If Con-
gress ntends to prevent the State of Okahoma from evyng a genera non-
dscrmnatory estate ta appyng ake to a ts ctzens, t shoud say.so n
pan words. Such a concuson cannot rest on dubous nferences. Non-
ta abty and restrcton upon aenaton are dstnct thngs , Superntendent
v. Commssoner, supra, 421, and when Congress wants to requre both non-
aenabty and uonta abty t can, as t has so often done, say so e pcty.
The concept that restrcted propertes of Indans were edera n-
strumentates and therefore consttutonay e empt from estate ta
consequences was e pressy renounced n Okahoma Ta Commsson
v. U. S. and West v. Okahoma Ta Commsson, supra.
n e amnaton of the treates between the Unted States and the
uapaw Trbe of Indans dscoses no provson under whch restrcted
aotted ands of such Indans are e empted from ta aton. urther-
more no provson has been found n any of the edera statutes dea-
ng wth the uapaw Indans whch can be hed to grant e empton
from edera ta aton to aotted ands of these Indans. The ct of
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183 IRcg . 105, 81.24.
pr 17, 1937, 50 Stat. 68, amendng the ct of March 3, 1921, 41
Stat. 1225, whch s referred to by the Unted States Court of Cams
n ts decson n Roberts v. Unted States, 96 ed. Supp. 775, author-
zed the State of Okahoma to ew a cross producton ta upon
mneras produced from restrcted aotted ands of the uapaw In-
dans, whch was to be n eu of a other State ta es of whatsoever
nature on sad restrcted ands or the ncome therefrom . owever,
ths act granted no e empton from edera ta aton.
In the ght of the poston taken by the Supreme Court of the Unted
States n the Okahoma Ta Commsson cases that e emptons from
estate ta aton of aotted ands of restrcted Indans may not be
mped or nferred, t s hed, n the absence of any statutory e emp-
ton from edera ta aton of restrcted aotted uapaw ands, that
the vaue of such ands s ncudbe n such Indans gross estate for
edera estate ta purposes. The poston so taken s n accord wth
the poston taken n Roberts v. Unted States, supra, whch hed that
the ct of pr 17,1937, supra, dd not e empt the estate of a deceased
restrcted Indan of the uapaw Trbe from edera estate ta es.
Reguatons 105, Secton 81.13: Property of
decedent at tme of death.
aue of stock orgnay acqured by decedent sub|ect to an opton
to purchase reserved by the ssung corporaton. (See Rev. Ru.
54-76, p. 194.)
S CTION 811(c). GROSS ST T : TR NS RS IN CON-
T MPL TION O , OR T ING CT T, D T
Reguatons 105, Secton 81.17: Transfers n-
tended to take effect at or after the decedent s
death.
aue of an annuty provded by an eecton of a member of the
unformed servces under the Unformed Servces Contngency Op-
ton ct of 1953. (See Rev. Ru. 54-155, p. 15.)
S CTION 811(f). GROSS ST T : POW RS O
PPOINTM NT
Reguatons 105, Secton 81.24: Property sub- Rev. Ru. 54-59
|ect to power of appontment by decedent.
Where the Incuson In the gross estate of a deceased donee of a
genera power of appontment of the property sub|ect to the power,
Is dependent upon an e ercse of the power by the donee, and the
donee partay e ercses the power by appropratng a part of the
property to her own use, the property unaffected by the e ercse s
not ncudbe n the donee s gross estate for edera estate ta
purposes under secton 811(f) (1) of the Interna Revenue Code.
dvce s requested whether the vaue of property over whch the
decedent ded possessed of a genera power of appontment under the
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Regs. 105, 81.24. 184
w of her deceased husband, s ncudbe n her gross estate for
edera estate ta purposes under the provsons of secton 811(f) of
the Interna Revenue Code where ncuson of such power s dependent
upon the e ercse thereof.
The decedent s husband ded n pr 1949. y hs w, whch was
e ecuted n 1939 and not repubshed by a codc e ecuted after
October 21,1942, he bequeathed and devsed the resdue of hs estate n
trust, to pay the ncome to hs wfe durng her fe and upon her death
to dstrbute the prncpa to named benefcares. The w authorzed
the trustee to pay over, transfer and dever any part or a of the
prncpa of the trust estate to the wfe at any tme or tmes she may
n her absoute and uncontroed dscreton request the same. Ths
dscretonary power conferred upon the wfe gave her a genera power
of appontment over the prncpa wthn the meanng of secton
811(f) of the Interna Revenue Code. The wfe e ercsed the power
durng her fe by wthdrawng to her own use a part of the prncpa
of the trust estate.
Secton 811 (f) (1) of the Code as amended bv the Powers of p-
pontment ct of 1951, Pubc Law 58, 82nd Congress, 65 Stat. 91,
C. 15. 1951-2, 343, provdes n part that the vaue of the gross estate
of a decedent sha be determned by ncudng the vaue at the tme
of hs death of:
(1) POP YTY WIT R SP CT TO W IC D C 1I NT RCIS S G N R L
POW R O PPOINTM NT C T D ON OR OR OCTO R 21, 1042. To the
e tent of any property wth respect to whch a genera power of appont-
ment created on or before October 21, 1942, s e ercsed by the decedent
(1) by w or (2) by a dsposton whch s of such nature that If t
were a transfer of property owned by the decedent, such property woud
be ncudbe n the decedent s gross estate under subsecton (c) or (d)
but the faure to e ercse such a power or the compete reease of such a
power sha not be deemed an e ercse thereof.
Secton 2(b) of the Powers of ppontment ct of 1951 provdes:
(b) Date of Creaton of Tower. or the purpose of ths secton a power
of appontment created by a w e ecuted on or before October 21, 1042, sha
be consdered a power created on or before such date f the person e ecutng
such w des before uy 1, 1040, wthout havng repubshed such w, by
codc or otherwse, after October 21,1012.
The w of the husband whch created the power of appontment
was e ecuted pror to October 21, 1042, and he ded before uy 1,
1949, wthout havng repubshed such w, by a codc or otherwse,
after October 21,1942. ccordngy the property sub|ect to the power
s not ncudbe n the nstant decedents gross estate (the donee of
the power) uness the decedent e ercsed the power by a dsposton
whch s of such nature that f t were a transfer of property owned
by the decedent, such property woud be ncudbe n her gross estate
under secton 811 (c) or (d) of the Interna Revenue Code.
Where the ncuson of property sub|ect to a power to appont s
dependent upon an e ercse of the power by the decedent, a parta
e ercse may, or may not, dependng upon the nature of the e ercse,
requre the ncuson of the entre property n the donee s estate.
Where the e ercse affects the entre property, for e ampe, the ap-
pontment of a fe estate n the whoe, the entre property s sub|ect
to the ta . owever, where the e ercse affects ony a part of the
property, the porton una feeted by the e ercse s not sub|ect to
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185 (Regs. 105, 81.24.
estate ta . Cf. state of Mabe Wooster v. Commssoner, 9 T. C. 742.
In the nstant case the decedent s e ercse of the power of appont-
ment by wthdrawng a part of the prncpa of the trust estate n
nowse affected her husband s testamentary dsposton of the reman-
ng prncpa. It s, accordngy, hed that, where the ncuson n
the gross estate of a deceased donee of a genera power of appont-
ment of the property sub|ect to the power s dependent upon an e er-
cse of the power by the donee, and the donee partay e ercses the
power by appropratng a part of the property to her own use, the
property unaffected by the e ercse s not ncudbe n the donee s
gross estate for edera estate ta purposes under secton 811(f) (1)
of the Interna Revenue Code.
Reguatons 105, Secton 81.24: Property sub- Rev. u. 54-153
|ect to power, of appontment by decedent.
Where a trustee, who s aso a benefcary of a trust, s prevented
by a State statute from partcpatng n a decson to dstrbute
corpus to hmsef, hs estate, hs credtors, or the credtors of hs
estate, no part of the trust pro erty s ncudbe n hs gross estate
under secton 811(f)(2) of the Interna Revenue Code by reason
of the fact that the trust nstrument provdes that the trustees may
dstrbute corpus to the benefcary.
dvce s requested whether the decedent as trustee and soe bene-
fcary of a trust possessed at her death a power of appontment wthn
the meanng of secton 811(f) (2) of the Interna evenue Code.
The decedent, domced n the State of New York, was a cotrustee
and fetme ncome benefcary of a trust created under the w of her
husband who ded n 1953. The w provded that shoud the bene-
fcary be n need of addtona funds for her mantenance, comfort,
or support, or for any other purpose or purposes whatsoever, the
trustees had the authorty to pay her such amounts of prncpa hed
n trust as n the e ercse of ther soe and absoute dscreton they
deem advsabe for such purposes.
Secton 141 of the New York Rea Property Law, whch appes
aso to personaty, provdes n part as foows:
power, vested n a person n hs capacty as trustee of an e press trust,
to dstrbute prncpa to hmsef cannot be e ercsed by hm f the power s
vested n two or more trustees, t may be e ecuted by the trustee or trustees
who are not so dsquafed f there s no trustee quafed to e ecute the power,
ts e ecuton devoves on the supreme court .
The New York courts have hed that a trustee who s aso a bene-
fcary of a trust s prevented by secton 141 of the New York Rea
Property Law from partcpatng n a decson to dstrbute corpus to
hmsef. In re: ender s W, 105 N. Y. S. (2d) 15 In re: tkns
state. 98 N. Y. S. (2d) 690. In the absence of an ndcaton that the
New York courts woud construe the statute otherwse, the Interna
Revenue Servce w accept the vew that such trustee s aso pre-
vented by the statute from e ercsng the power to dstrbute prncpa
to hs estate, hs credtors, or the credtors of hs estate.
It s hed that where a trustee, who s aso a benefcary of a trust,
s prevented by a State statute from partcpatng n a decson to
dstrbute corpus to hmsef, hs estate, hs credtors, or the credtors
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Regs. 105, 81.27. 186
of hs estate, no part of the trust property s ncudbe n hs gross
estate under secton 811 (f) (2) of the Interna Revenue Code by reason
of the fact that the trust nstrument provdes that the trustees may
dstrbute corpus to the benefcary.
S CTION 811(g). GROSS ST T : PROC DS O
LI INSUR NC
Reguatons 105, Secton 81.27: Insurance re- Rev. Ru. 51-20
cevabe by other benefcares.
Proceeds of nsurance poces on decedent s fe payabe to hs
former wfe under an agreement whch was by ts e press terms to
become effectve ony upon approva by the court n pendng dvorce
proceedngs, are not ncudbe n decedent s gross estate where the
agreement was ratfed and approved by the court and made a part
of the dvorce decree by reference.
dvce s requested whether the nterest of the decedent s former
wfe n te proceeds of nsurance poces on the decedent s fe s n-
cudbe n hs gross estate for edera estate ta purposes.
The decedent and hs wfe, resdents of abama, entered nto a
property settement agreement n contempaton of a dvorce. The
agreement provded that the decedent shoud pay hs wfe a certan sum
monthy for her mantenance and support unt her death or remar-
rage or the decedent s death, whchever event shoud rst occur. The
agreement further provded that the decedent shoud mantan and
keep n fu force and effect certan fe nsurance poces on hs fe
payabe to hs wfe n the form of an annuty. The agreement e -
ressy provded that t shoud not become effectve uness approved
y the court n the dvorce proceedngs and, f so approved, t shoud
be ncorporated n and made a part of the decree of dvorce. In the
decree of absoute dvorce, the agreement was ratfed and confrmed
and made a part of the decree by reference.
Secton 811(g)(2) of the Interna Revenue Code, reatng to the
ncudbty of the proceeds of fe nsurance n the nsured s gross
estate, provdes n part as foows:
(2) Recevabe by other benefcares. To the e tent of the amount
recevabe by a other benefcares as nsurance under poces upon the
fe of the decedent ( ) purchased wth premums, or other consderaton,
pad drecty or ndrecty by the decedent, n proporton that the amount
so pad by the decedent bears to the tota premums pad for the nsurance,
or ( ) wth respect to whch the decedent possessed at hs death any of the
ncdents of ownershp, e ercsabe ether aone or n con|uncton wth any
other person.
Secton 811(g)(3) of the Interna Revenue Code provdes as fo-
ows :
(3) Transfer not a gft. The amount recevabe under a pocy of n-
surance transferred, by assgnment or otherwse, by the decedent sha not
be ncudbe under paragraph (2) ( ) f the transfer dd not consttute a
gft, n whoe or n part, under Chapter 4, or, n case the transfer was made
at a tme when Chapter 4 was not n effect, woud not have consttuted a
gft, n whoe or n part, under such chapter had t been n effect at such
tme.
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187 Regs. 105, 81.10.
In Cornea arrs v. Commssoner, 340 U. S. 106, Ct. D. 1937, C. .
1950-2,77, t was hed that where a property settement agreement en-
tered nto n contempaton of dvorce was to become effectve ony upon
ts approva by the dvorce court and such agreement was ratfed and
approved by the court, the dvorced wfe acqured her property nterest
by the court decree and not by way of a transfer from her husband.
The agreement n ths case, as n the arrs case, su|rra, was not to
become bndng upon ether party uness approved by the court n the
decree of dvorce. In ths case, under abama aw, the wfe acqured
at the tme of the dvorce an absoute nterest n the annuty payments
f rovded n the nsurance poces and the court had under abama
aw authorty to decree such payments. ccordngy, to the e tent
recevabe by the decedent s .dvorced wfe, the nsurance proceeds are
not ncudbe n the decedent s gross estate under secton 811(g) (2)
( ) of the Interna Revenue Code (premum payment test) as she dd
not acqure her nterest n the proceeds by way of transfer whch woud
consttute a gft under chapter 4 of the Interna Revenue Code nor, to
the e tent recevabe by the dvorced wfe, are the proceeds ncudbe
under secton 811(g) (2) ( ) (ncdents of ownershp test) as the de-
cedent dd not possess any ncdents of ownershp n the poces at the
tme of hs death.
In vew of the foregong t s hed that proceeds of nsurance poces
on decedent s fe payabe to hs former wfe under an agreement
whch was by ts e press terms to become effectve ony upon approva
by the court n pendng dvorce proceedngs, are not ncudbe n de-
cedent s gross estate where the agreement was ratfed and approved
by the court and made a part of the dvorce decree by reference.
S CTION 811 (k). GROSS ST T : LU TION
O UNLIST D STOC ND S CURITI S
Reguatons 105, Secton 81.10: auaton Rev. Ru. 54-77
of property.
( so Secton 1005, Reguatons 108, Sec-
ton 86.19.)
auaton of stock of cosey hed corporatons n estate ta and
gft ta returns.
Secton 1. Purpose.
The purpose of ths revenue rung s to outne and revew n gen-
era the approach, methods and factors to be consdered n vaung
shares of the capta stock of cosey hed corporatons for estate ta
and gft ta purposes. The methods dscussed heren w appy ke-
wse to the vauaton of corporate stocks on whch market quotatons
are ether unavaabe or are of such scarcty that they do not refect
the far market vaue.
Sec. 2. ackground and Defntons.
.01 vauatons must be made n accordance wth the appcabe
provsons of the Interna Revenue Code and the edera estate ta
and gft ta reguatons. Sectons 811 and 1005 of the Code requre
that the property to be ncuded n the gross estate, or made the sub|ect
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Regs. 105, 81.10. 188
:
of gft, sha be ta ed on the bass of the vaue of the property at the
tme of the death of the decedent, the optona date f so eected, or
the date of gft.
.02 Secton 81.10 of state Ta Reguatons 105 and secton 86.19
of Gft Ta Reguatons 108 defne far market vaue, n effect, as the
nce at whch the property woud change hands between a wng
uyer and a wng seer when the former s not under any compu-
son to buy and the atter s not under any compuson to se. Court
decsons frequenty state n addton that the hypothetca bu|er and
seer are assumed to be abe, as we as wng, to trade and to be we
nformed about the property and concernng the market for such
property.
.03 Cosey hed corporatons are those corporatons the shares of
whch are owned by a reatvey mted number of stockhoders. Often
the entre stock ssue s hed by one famy. The resut of ths stu-
aton s that tte, f any, tradng n the shares takes pace. There
s, therefore, no estabshed market for the stock and such saes as
occur at rreguar ntervas sedom refect a of the eements of a
representatve transacton as defned by the term far market vaue.
Sec. 3. pproach to auaton.
.01 Determnaton of far market vaue, beng a queston of fact,
w depend upon the crcumstances n each case. No formua can be
devsed that w be generay appcabe to the muttude of dfferent
vauaton ssues arsng n estate and gft ta cases. Often an ap-
praser w fnd wde dfferences of opnon as to the far market
vaue of a partcuar stock. In resovng such dfferences he shoud
mantan a reasonabe atttude n recognton of the fact that vaua-
ton s not an e act scence. sound vauaton w be based upon
a the reevant facts, but the eements of common sense, nformed
|udgment and reasonabeness must enter nto the process of weghng
those facts and determnng ther aggregate sgnfcance.
.02 The far market vaue of a specfc property w vary as genera
economc condtons change from norma to boom or de-
presson that s, accordng to the degree of optmsm or pessmsm
wth whch the nvestng pubc regards the future at the requred
date of apprasa. Uncertanty as to the stabty or contnuty of
the future ncome from a property decreases ts vaue by ncreasng
the rsk of oss of earnngs and vaue n the future. The vaue of a
property wth very uncertan future prospects s hghy specuatve.
The appraser must e ercse hs |udgment as to the degree of rsk
attachng to a specfc property, but that |udgment must be reated
to a of the other factors affectng vaue.
Sec. 4. actors to Consder.
.01 It s advsabe to emphasze that n the vauaton of the stock
of cosey hed corporatons or the stock of corporatons where market
quotatons are ether ackng or too scarce to be recognzed, a ava-
abe fnanca data, as we as a reevant factors affectng the far
market vaue, shoud be consdered. The foowng factors, athough
not a-ncusve, are fundamenta and requre carefu anayss n each
case:
(a) The nature of the busness and the hstory of the enterprse,
ncudng the date of ncorporaton.
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189 Regs. 105. 81.10.
(b) The economc outook n genera and the condton and
outcome of the specfc ndustry n partcuar.
(c) The book vaue of the stock and the fnanca condton of
the busness.
(d) The earnng capacty of the company.
(e) The dvdend-payng capacty.
ff) Goodw.
(g) Saes of the stock and the sze of the bock of stock to
be vaued.
(h) The market prce of stocks of corporatons engaged n the
same or a smar ne of busness whch are sted on an e change.
.02 bref dscusson of each of the foregong factors foows:
fa) The hstory of a corporate enterprse w show ts past sta-
bty or nstabty, ts growth or ack of growth, the dversty or
ack of dversty of ts operatons, and other facts needed to form
an opnon of the degree of rsk nvoved n the busness. or re-
centy ncorporated companes the hstory of predecessor bus-
nesses shoud be consdered. The deta to be consdered shoud
ncrease wth approach to the requred date of apprasa, snce
recent events are of greatest hep n predctng the future but
a study of gross and net ncome, and of dvdends coverng a ong
pror perod, s hghy desrabe. The hstory to be studed
shoud ncude, but need not be mted to, the nature of the
busness, ts products or servces, ts operatng and nvestment
assets, capta structure, pant factes and management, a of
whch shoud be consdered as of the date of the apprasa, wth
due regard for recent sgnfcant changes. vents of the past
that are unkey to recur n the future shoud be dscounted,
snce vaue has a cose reaton to future e pectancy.
(b) sound apprasa of a cosey hed stock must consder cur-
rent and prospectve economc condtons as of the date of ap-
prasa, both n the natona economy and n the ndustry or
ndustres wth whch the corporaton s aed. It s mportant
to know that the company s more, or ess, successfu than ts
compettors n the same ndustry, or that t s mantanng a stabe
poston wth respect to compettors. qua or even greater
sgnfcance may attach to the abty of the ndustry wth whch
the company s aed to compete wth other ndustres. Prospec-
tve competton whch has not been a factor n pror years shoud
be gven carefu attenton. The pubc s apprasa of the future
prospects of compettve ndustres or of compettors wthn an
ndustry may be ndcated by prce trends n the markets for
commodtes and for securtes. The death of the manager of a
so-caed one-man busness may have a depressng effect upon
the vaue of the stock of such busness, partcuary f there s a
ack of traned personne capabe of succeedng to the management
of the enterprse. In vaung the stock of ths type of busness,
therefore, the effect of the oss of the manager on the future
e pectancy of the busness, and the absence of management-suc-
cesson potentates are pertnent factors to be taken nto
consderaton. On the other hand, there may be factors whch
offset, n whoe or n part, the oss of the manager s servces. or
315339 S 13
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Regs. 105, 81.10.) 190
nstance, the nature of the busness and of ts assets may be such
that they w not be mpared by the death of.the manager.
urthermore, the oss may be adequatey covered by fe nsurance,
or competent management mght be empoyed on the bass of the
consderaton pad for the former manager s servces. These, or
other offsettng factors, f found to e st, shoud be carefuy
weghed aganst the oss of the manager s servces n vaung the
stock of the enterprse.
(c) aance sheets shoud be obtaned, preferaby n the form of
comparatve annua statements for two or more years mmedatey
precedng the date of apprasa, together wth a baance sheet at
the end of the month precedng that date, f corporate accounng
w permt. ny baance sheet descrptons that are not sef-
e panatory, and baance sheet tems comprehendng dverse
assets or abtes, shoud be carfed n essenta deta by obtan-
ng suppementa schedues. These statements usuay w ds-
cose to the appraser, (1) qud poston (rato of current assets
to abtes) (2) amount of net f ed assets (3) workng
capta (4) ong-term ndebtedness (5) capta structure and
(6) net worth. Consderaton aso shoud be gven to any assets
not essenta to the operaton of the busness, such as nvestments
n securtes, rea estate, etc. In genera, such nonoperatng assets
w command a ower rate of return than do the operatng assets,
athough n e ceptona cases the reverse may be true. In com-
putng the book vaue per share of stock, assets of the nvest-
ment type shoud be revaued on the bass of ther market prce and
the book vaue ad|usted accordngy. Comparson of the com-
pany s baance sheets over severa years may revea, among other
facts, such deveopments as the acquston of addtona produc-
ton factes or subsdary companes, mprovement n fnanca
poston, and detas as to recaptazatons and other changes n
the capta structure of the corporaton. If the corporaton has
more than one cass of stock outstandng, the charter or certfcate
of ncorporaton shoud be e amned to ascertan the e pct
rghts and prveges of the varous stock ssues ncudng: (1)
votng power, (2) preference as to dvdends, and (3) preference
as to assets n the event of qudaton.
(d) Detaed proft-and-oss statements shoud be obtaned and
consdered for a representatve perod mmedatey pror to the
requred date of apprasa, preferaby fve or more years. Such
statements shoud snow (1) gross ncome by prncpa tems (2)
prncpa deductons from gross ncome ncudng ma|or tems of
operatng e pense, nterest and other e pense on each tem of
ong-term debt, deprecaton and depeton f such deductons are
made, offcers saares n tota f they appear to be reasonabe or
n deta f they seem to be e cessve, contrbutons (whether or
not deductbe for ta purposes) that the nature of ts busness
and ts communty poston requre the corporaton to make, and
ta es by prncpa tems, ncudng ncome and e cess-profts
ta es (3) net ncome avaabe for dvdends (4) rates and
amounts of dvdends pad on each cass of stock (5) reman-
ng amount carred to surpus and (6) ad|ustments to, and recon-
caton wth, surpus as stated on the baance sheet. Wth proft
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191 IRegs. 105, 81.10.
and oss statements of ths character avaabe, the appraser
shoud be abe to separate recurrent from nonrecurrent tems of
ncome and e pense, to dstngush between operatng ncome and
nvestment ncome, and to ascertan whether or not any ne of
busness n whch the company s engaged s operated consstenty
at a oss and mght be abandoned wth beneft to the company.
The percentage of earnngs retaned for busness e panson shoud
be noted when dvdend-payng capacty s consdered. Potenta
future ncome s a ma|or factor n many vauatons of cosey hed
stocks, and a nformaton concernng past ncome whch w be
hepfu n predctng the future shoud be secured. Pror earn-
ngs records usuay are the most reabe gude as to the future
e pectancy, but resort to arbtrary fve-or-ten-year averages wth-
out regard to current trends or future pospects w not produce a
reastc vauaton. If, for nstance, a record of progressvey
ncreasng or decreasng net ncome s found, then greater weght
may be accorded the most recent years profts n estmatng earn-
ng power. It w be hepfu, n |udgng rsk and the e tent to
whch a busness s a margna operator, to consder deductons
from ncome and net ncome n terms of percentage of saes.
Ma|or categores of cost and e pense to be so anayzed ncude the
consumpton of raw materas and suppes n the case of manu-
facturers, processors and fabrcators the cost of purchased
merchandse n the case of merchants utty servces nsurance
ta es depeton or deprecaton and nterest.
(e) Prmary consderaton shoud be gven to the dvdend-
payng capacty of the company rather than to dvdends actuay
pad n the past. Dvdend-payng capacty s a factor that must
be consdered n an apprasa, but dvdends actuay pad n the
past may not have any reaton to dvdend-payng capacty.
Specfcay, the dvdends pad by a cosey hed famy company
may be measured by the ncome needs of the stockhoders or by
ther desre to avod ta es on dvdend recepts, nstead of by
abty of the company to pay dvdends. Where an actua or
effectve controng nterest n a corporaton s to be vaued, the
dvdend factor s not a matera eement, snce the payment of
such dvdends s dscretonary wth the controng stockhoders.
The ndvdua or group n contro can substtute saares and
bonuses for dvdends, thus reducng net ncome and understatng
the dvdend-payng capacty of the company. It foows, there-
fore, that dvdends are ess reabe crtera of far market vaue
than other appcabe factors.
(f) In the fna anayss, goodw s based upon earnng ca-
pacty. The presence of goodw and ts vaue, therefore, rests
upon the e cess of net earnngs over and above a far return on the
net tangbe assets. Such e cess earnngs captazed at an ap-
proprate rate w furnsh one bass on whch to vaue the good-
w appcabe to the stock, but not necessary the controng
bass. Whe the eement of goodw may be based prmary on
earnngs, such factors as the prestge and renown of the busness,
the ownershp of a trade or brand name, and a record of success-
fu operaton over a proonged perod n a partcuar ocaty, aso
may furnsh support for the ncuson of ntangbe vaue.
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Regs. 105, 81.10.) 192
(g) Saes of stock of a cosey hed corporaton shoud be care-
fuy nvestgated to determne whether they represent transac-
tons at arm s ength. orced or dstress saes do not ordnary
refect far market vaue, nor do soated saes n sma amounts
necessary contro as the measure of vaue. Ths s especay
true n the vauaton of a controng nterest n a corporaton.
Snce, n the case of cosey hed stocks, no prevang market
prces are avaabe, there s no bass for makng an ad|ustment
for bockage. It foows, therefore, that such stocks shoud be
vaued upon a consderaton of a the evdence affectng the far
market vaue. The sze of the bock of stock tsef s a reevant
factor to be consdered. though t s true that a mnorty n-
terest n an unsted corporaton s stock s more dffcut to se
than a smar bock of sted stock, t s equay true that contro
of a corporaton, ether actua or effectve, representng as t does
an added eement of vaue, may |ustfy a hgher vaue for a specfc
bock of stock.
(h) The evenue ct of 1943 amended the Interna Revenue
Code by addng subsecton (k) of secton 811, whch states, n
effect, that n vaung unsted securtes the vaue of sted stocks
or securtes of corporatons engaged n the same or smar ne
of busness shoud be taken nto consderaton. In seectng cor-
poratons for comparatve purposes, care shoud be taken to use
ony truy comparabe companes. or ustraton, a corpora-
ton havng one or more ssues of preferred stock, bonds or deben-
tures n addton to ts common stock shoud not be consdered
comparabe to one havng ony common stock outstandng. In
ke manner, a company wth decnng busness and contractng
markets s not comparabe to one wth a record of current progress
and market e panson. The test shoud be for smarty not ony
of the type of busness but of the trend of earnngs, capta
structure, voume of saes, and sze n terms of tota assets, as we,
n order that the most vad comparson possbe w be obtaned.
Sec. 5. Weght to be ccorded arous actors.
The vauaton of cosey hed corporate stock entas the consdera-
ton of a reevant factors as stated n secton 4. Dependng upon the
crcumstances n each case, certan factors may carry more weght than
others because of the nature of the company s busness. To ustrate:
(a) arnngs may be the most mportant crteron of vaue n some
cases whereas asset vaue w receve prmary consderaton n others.
In genera the appraser w accord prmary consderaton to earnngs
when vaung stocks of companes whch se products or servces to
the pubc conversey, n the nvestment or hodng type of company,
the appraser may accord the greatest weght to the assets underyng
the securty to be vaued.
(b) The vaue of the stock of a persona or famy hodng company
s cosey reated to the vaue of the assets underyng the stock. or
companes of ths type the appraser shoud determne the far market
vaues of the assets of the company. Operatng e penses of the hod-
ng company and cost of qudatng t, f any, mert consderaton
when apprasng the reatve vaues of the stock and of the underyng
assets. The market vaues of the underyng assets gve due weght
to potenta earnngs and dvdends of the partcuar tems of property
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193 Regs. 105, 81.10.
underyng the stock, captazed at rates deemed proper by the nvest-
ng pubc at the date of apprasa. current apprasa by the
nvestng pubc shoud be superor to the retrospectve opnon
of an ndvdua. or these reasons ad|usted net worth shoud be
accorded greater weght n vaung the stock of a cosey hed famy or
persona hodng company than any of the other customary yardstcks
of apprasa, such as earnngs and dvdend payng capacty.
Sec. 6. Captazaton Rates.
In the appcaton of certan fundamenta vauaton factors, such
as earnngs and dvdends, t s necessary to captaze the average or
current resuts at some approprate rate. Determnaton of the proper
captazaton rate presents one of the most dffcut probems n vaua-
ton. That there s no ready or smpe souton w be made apparent
by a cursory check of the rates of return and dvdend yeds n terms
of the seng prces of corporate shares sted on the ma|or e changes
of the country. Wde varatons w be found even for companes n
the same ndustry. Moreover the rato w fuctuate from year to year
dependng upon economc condtons. Thus, no standard tabes of
captazaton rates appcabe to cosey hed corporatons can be
formuated. mong the more mportant factors to take nto con-
sderaton n decdng upon a captazaton rate n a partcuar case
are: (1) the nature of the busness (2) the rsk nvoved and (3) the
stabty or rreguarty of earnngs.
Sec. 7. verage of actors.
ecause vauatons cannot be made on the bass of a prescrbed
formua, there s no means whereby the varous appcabe factors n a
partcuar case can be assgned mathematca weghts n dervng the
far market vaue. or ths reason no usefu purpose s served by
takng an average of severa factors (for e ampe: book vaue, capta-
zed earnngs and captazed dvdends) and basng the vauaton on
the resut. Such a process e cudes actve consderaton of other pert-
nent factors, and the end resut s ncapabe of beng supported by a
reastc appcaton of the sgnfcant facts n the case e cept by mere
chance.
Sec. 8. Restrctve greements.
requenty, n the vauaton of cosey hed stock for estate and gft
ta purposes, t w be found that the stock s sub|ect to an agreement
restrctng ts sae or transfer. Where shares of stock were acqured
by a decedent sub|ect to an opton reserved by the ssung corporaton
to repurchase at a certan prce, the opton prce s usuay accepted
as the far market vaue for estate ta purposes. See Rev. Ru. 54-76
beow. owever, n such case the opton prce s not determnatve of
far market vaue for gft ta purposes. Where the opton, or buy and
se agreement, s the resut of vountary acton by the stockhoders
and s bndng durng the fe as we as at the death of the stock-
hoders, such agreement may or may not, dependng upon the crcum-
stances of each case, f the vaue for estate ta purposes. owever,
such agreement s a factor to be consdered, wth other reevant factors,
n determnng far market vaue. Where the stockhoder s free to
dspose of hs shares durng fe and the opton s to become effectve
ony upon hs death, the far market vaue s not mted to the opton
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Regs. 105, 81.44.) 194
prce. It s aways necessary to consder the reatonshp of the
partes, the reatve number of shares hed by the decedent, and other
matera facts, to determne whether the agreement represents a bona
de busness arrangement or s a devce to pass the decedent s shares
to the natura ob|ects of hs bounty for ess than an adequate and fu
consderaton n money or money s worth. In ths connecton see Rev.
u. 157, C. . 1953-2, 155 and Rev. Ru. 189, C. . 1953-2, 294.
R ODI- TIONS 105, S CTION 81.10(c): auatons Rev. Ru. 54-76
of property: Stocks and bonds.
( to Secton 811 (a), Secton 81.13.)
decedent bequeathed shares of stock of a corporaton, whch re-
served under ts artces of organzaton an opton to repurchase ts
stock at a specfc prce before any transfer coud be made to others.
The e ecutors fed a petton n the oca probate court askng whether
the restrcton on the transfer apped to a transfer by an e ecutor to
a specfc egatee. The supreme court of the State, n affrmng the
decson of the ower court, concuded that the restrctons were bnd-
ng on the decedent and the e ecutors not ony because they were n-
cuded n the artces of ncorporaton and were, therefore, n effect a
part of the charter of the corporaton, but aso by reason of the con-
tract made wth the corporaton when the decedent accepted the cer-
tfcates of stock contanng the prnted restrctons. ed athough
vad and enforceabe restrctons affectng the transfer of stock do
not necessary contro vaue for edera estate ta purposes (see Rev.
Ru. 157, C. . 1953-2,155), where a stockhoder acqures stock from
the corporaton sub|ect to an opton reserved to the corporaton n
the artces of organzaton to repurchase the stock at a specfc prce
before any sae or transfer, ncudng any transfer at the death of the
stockhoder, can be vady made to others, the opton prce, n the
absence of other matera crcumstances, w be accepted as the far
market vaue at the date of death, especay where the opton s e er-
csed by the corporaton. See state of bert L. Sat, et a. v. Com-
mssoner, 17 T. C. 92, acquescence, C. . 1952-1,4.
S CTION 812(d). N T ST T : TR NS RS OR PU LIC,
C RIT L , ND R LIGIOUS US S
R GUL TIONS 105, S CTION 81.44: Transfers for ev. Ru. 54-90
pubc, chartabe, regous, etc., uses.
decedent possessed at her death a power of appontment over
property whch was not ncudbe n her gross estate under secton
811(f) of the Interna Revenue Code as amended by the Powers of
ppontment ct of 1951 but whch was e pressy made avaabe
under her w for the payment of a egaces, as were her probate
assets. ed, for the purpose of computng the amount aowabe as
a chartabe deducton under secton 812 (d) of the Interna Revenue
Code, a bequests, chartabe and nonchartabe (e cept for bequests
of specfc assets) are consdered payabe pro rata out of the probate
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195 (Regs. 105, 5 81 47a.
assets and the apponted property. Therefore, ony the amount whch
s determned to he pad to chartes pro rata out of the probate assets
s deductbe under secton 812(d) of the Code.
Reguatons 105, Secton 81.44: Transfers for
pubc, chartabe, regous, etc., uses,
equests, egaces, devses, or transfers to the Pacfc War Memora
Commsson an agency of the Terrtory of awa. (See Rev. Ru.
54-220, p. 65.)
S CTION 812(e). N T ST T : U STS, TC.,
TO SUR I ING SPOUS
Reguatons 105, Secton 81.47a: equests, Rev. Ru. 54-20
etc., to survvng spouse.
The power gven by decedent to hs wdow to appont a porton
of the property passng from the decedent In trust for the beneft
of the wdow does not n Itsef create a separate trust In respect
of the porton of the trust corpus over whch the wdow has a
power of appontment so as to quafy the vaue of the entre
trust passng from the decedent, or any porton thereof, for the
marta deducton under secton 812(e)(1)( ) of the Interna
Revenue Code.
dvce s requested whether the power gven by decedent to hs
wdow to appont a porton of the property passng from the decedent
n trust for the beneft of the wdow n tsef creates a separate trust
n respect of that porton of the trust corpus over whch the wdow
has a power of appontment so as to quafy the vaue of the entre
trust passng from the decedent, or any porton thereof, for the
marta deducton under secton 812(e) (1) ( ) of the Interna Revenue
Code.
In the nstant case the decedent bequeathed the entre resdue of hs
estate to an nter vvos trust created by hm durng fe, the terms
of whch caed for the payment of the net ncome from the trust
estate to hs survvng spouse so ong as she shoud ve, wth the
power n the spouse, e ercsabe durng fe or by w, to appont n
her favor, n favor of her estate, or otherwse as she may pease, a
porton of the trust corpus equa n vaue to 50 percent of the vaue
of the decedent s ad|usted gross estate, reduced by the vaue of
property ncuded theren whch passed to the spouse other than under
the terms of the trust.
In the case of an nterest n property whch passes from a decedent
to a trust whch comes wthn the purvew of subparagraph ( ) of
secton 812(e) (1), the marta deducton s to be aowed ony f the
terms of the trust satsfy a the requrements of ths subparagraph.
One of such requrements s that under the terms of the trust the
survvng spouse must have the power, e ercsabe n favor of such
spouse, or n favor of hs or her estate, to appont the entre corpus
free of trust. That porton of secton 81.47a of Reguatons 105, whch
deas wth ths pont, provdes as foows:
If the survvng spouse s entted to ony a porton of the trust ncome, or has
power to appont ony a porton of the corpus, the trust fas to satsfy condtons
(1) and (3), respectvey.
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Regs. 105, 81.47(b). 196
Condton (3) s to the effect that the power e ercsabe n favor of the
spouse, or of her estate must e tend to the entre corpus of the trust
owever, t s further provded n the reguatons that ths condton
may be satsfed by one or more of severa separate trusts created by
the decedent that an undvded nterest n property may consttute
the corpus of a trust, and that the w or a snge trust nstrument may
create more than one trust.
Under the terms of the trust n the nstant case the decedent s wdow
s entted to the entre net ncome from the trust estate durng her fe-
tme. owever, there was no segregaton of the nterest n the resdue
of the decedent s estate whch passed n trust sub|ect to the power of
appontment n hs wdow such as woud consttute a separate trust
of an undvded nterest n the property so passng. trust nstru-
ment merey gvng the wdow the power to appont a porton of the
corpus of the trust estate transferred to the trust does not thereby create
a separate trust n respect of any porton of, or nterest n, the property
formng the entre trust corpus. The nterest n the trust property
whch passed to the wdow was n effect a fe estate n the entre
property, together wth a power of appontment over ony a porton of
the property, whch s ess than the vrtua ownershp contempated
by secton 812(e) (1) ( ) of the Code and secton 81.47a of Reguatons
105.
In vew of the foregong t s hed that the power gven by decedent
to hs wdow to appont a porton of the property passng from the
decedent n trust for the beneft of the wdow does not n tsef create a
separate trust n respect of the porton of the trust corpus over whch
the wdow has a power of appontment so as to quafy the vaue of the
entre trust passng from the decedent, or any porton thereof .for the
marta deducton under secton 812 (e) (1) ( ) of the Interna Revenue
Code.
Reguatons 105, Secton 81.47(b): Nonde- Rev. Ru. 54-121
ductbe nterests.
Where payment of Insurance proceeds s to be made to decedent s
survvng spouse ony f vng upon recept by nsurer of due proof
of nsured s death otherwse to named secondary or contngent bene-
fcares, the provsons of secton 812(e)(1)(D) of the Interna
Revenue Code are not appcabe and the marta deducton s ds-
aowed by reason of the termnabe nterest rue of secton 812(e)-
(1) ( ) of te Code.
dvce s requested concernng the estate ta marta deducton
provsons of secton 812(e) of the Interna Revenue Code as apped
to the proceeds of fe nsurance under the crcumstances set forth
beow.
In the nstant case a pocy of nsurance provdes n effect that the
nterests of the prmary benefcary (spouse of the nsured) n the
proceeds of fe nsurance w fa n case such benefcary s not v-
ng on the date the nsurance company receves due proof of the
death of the nsured. Secondary or contngent benefcares are named
to take the nsurance under such crcumstances. The specfc queston
s whether the provsons of secton 812(e) (1) (D) of the Code appy
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197 Regs 105, 5 81.47(b).
n such a case snce the condton wnch w cause a termnaton of
the nterest of the survvng spouse s one whch may occur ether
wthn or after the 6-month perod provded n ths secton.
Secton 812(e) (1) ( ) of the Code, reatng to fe estates or other
termnabe nterests, provdes that no marta deducton sha be a-
owed wth respect to property nterests whch pass from a decedent
to hs survvng spouse f (1) an nterest n the same property passed
at any tme for ess than an adequate and fu consderaton n money
or money s worth from the decedent to any person other than such
spouse, or the estate of such spouse, and (2) by reason thereof, such
person, or hs hers or assgns, may possess or en|oy any part of such
property after the termnaton or faure of the nterest theren whch
passed to the survvng spouse.
Secton 812(e) (1) (D) of the Interna Revenue Code provdes:
(D) Interest of Spouse Condtona on Survva for Lmted Terod.
or the purposes of subparagraph ( ) an nterest passng to the sur-
vvng spouse sha not be consdered as an Interest whch w termnate
or fa ukh the death of such spouse If
(I) such death w cause a termnaton or faure of such In-
terest ony f t occurs wthn a perod not e ceedng s months
after the decedent s death, or ony f t occurs as a resut of a
common dsaster resutng n the death of the decedent and the
survvng spouse, or ony f It occurs n the case of ether such
event and
() such termnaton or faure does not In fact occur.
Secton 81.47b(d) of Reguatons 105 provdes that where the con-
dton (uness t reates to the death of the spouse as a resut of a
common dsaster) s one whch may occur ether wthn the 6-month
perod or thereafter, the e cepton provded under secton 812(e)-
(1) (D) of the Code w not appy.
Under the terms of the nstant pocy, the payment of the nsurance
proceeds to the survvng spouse s condtoned upon her beng ave
upon recept by the nsurer of due proof of the nsured s death. Snce
submsson of due proof of the nsured s death may occur ether wthn
the 6-month perod foowng the decedent s death or thereafter, t
foows that a termnaton or faure of the survvng spouse s nterest
n the proceeds may aso occur by reason of her death ether wthn
such perod or thereafter. It s accordngy hed that the terms of
ths contract do not come wthn the provsons of secton 812(e)-
(1) (D) of the Interna Revenue Code and that the marta deducton
s therefore dsaowed by reason of the so-caed termnabe nterest
rue of secton 812(e)(1)( ) of the Code. Whether the nterest
passng to the survvng spouse s n the form of fe nsurance pro-
ceeds or otherwse, or, whether the spouse does n fact survve the con-
dton stated and take the property, s mmatera.
owever, see state of oy . ear, et a., v. aspcr, decded by
the Dstrct Court of the Unted States for the Dstrct of South
Dakota, Western Dvson, on uy 29,1053, whch nvoved a bequest
of the resdue of the decedent s estate to hs survvng spouse provded
she shoud be vng at the tme of dstrbuton of the estate. Ths
case was decded n favor of the ta payer but an appea from the de-
cson was fed by the Government wth the Unted States Court of
ppeas for the ghth Crcut on September 2,1953.
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Regs. 105, 81.65.) 198
S CTION 813(c). CR DITS G INST T : P ID TO
OR IGN COUNTRI S
Reguatokb 105, Secton 81.9: Credt for Rev. RuL 54-169
death ta es.
( so Secton 930(c), Secton 81.9, Regu-
atons 105.)
orm 70CC , Certfcaton of Payment of oregn Death Dtty, baa
been ssued for use In evdencng tbe payment of foregn death ta es
In a cases where credt therefor, whether pursuant to the Interna
Revenue Code or any death duty conventon, s camed aganst tbe
edera estate ta .
Mms. 5872, C. . 1045, 306 and 6117, C. . 1947-1, 150, modfed.
Secton 1. Puhfose.
Credts aganst the edera estate ta for estate, nhertance, egacy
or successon ta es actuay pad to a foregn country are, under
certan crcumstances, authorzed by the Interna Revenue Code and
the death duty conventons n effect between the Unted States and
severa foregn countres. The purpose of ths Revenue Rung s to
authorze the use of a snge form whch, when propery certfed by
the approprate foregn ta offca, may be accepted as evdence of
the payment of these ta es.
Sec. 2. orm 706C .
.01 orm 706C , Certfcaton of Payment of oregn Death Duty,
has been ssued for use n evdencng the payment of foregn death
ta es. It supersedes orm 706d, Certfcaton of Domnon Successon
Dutes, orm 706f, Certfcaton of Unted ngdom state Duty,
and orm 706, Certfcaton of rench Inhertance Ta . cept as
otherwse provded n subsecton .02 beow, orm 706C s to be used
to evdence payment of estate, nhertance, egacy, or successon ta es
to a foregn country n every case where credt therefor, whether pur-
suant to the Interna Revenue Code or any death duty conventon, s
camed aganst the edera estate ta .
.02 Unt the present suppes thereof are e hausted, orms 706d,
706f, and 700 may be used to evdence payment of the foregn death
ta es for wnch credts are authorzed by the conventons wth Canada,
the Unted ngdom, and rance. orm 706C w be avaabe n
a Dstrct Drectors offces.
Sec. 3. ffect on Other Documents.
Ths Revenue Rdng amends Mm. 5872, C. . 1945, 3t)6, and m.
6117, C. . 1947-1,150.
SU P RT n.-R TURNS ND P YM NT O T
S CTION 821. R TURNS
Reguatons 105, Secton 81.65: Preparaton Rev. u. 54-35
of return.
Secton 81.65 of state Ta Reguatons 105, reatng to the prepa-
raton of the edera estate ta return, orm 706, provdes that Dup-
Orgnay Issued as It-Mneograph No. 51-54, dated pr 5, 1954.
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199 {Regs. 105, f 81.65.
cate copes of the w, f the decedent ded testate, one of whch shoud
be certfed, must be submtted wth the return, together wth copes
of such other documents as are requred n orm 706 and n the app-
cabe secton of these reguatons. The term certfed copy refers
to a certfcaton made by a pubc offcer havng offca custody of
the orgna document. ccordngy, snce a w s a document n
the custody of the regster of ws, an offca servng n such capacty
or hs duy authorzed representatve s the person who mus certfy
one of the copes of the w submtted wth the edera estate ta
return.
Reguatons 105, Secton 81.C5: Preparaton Rev. Ru. 54-36
of return.
n attorney or agent who has prepared a edera estate ta return,
orm 706, and sgned the Decaraton of ttorney or gent Pre-
parng Return s not prevented from ater assstng the ta payer n
estabshng as a matter of fact a dfferent vaue for an tem of prop-
erty shown on the return, ether through a cam for refund or as an
offset aganst a defcency resutng from other ad|ustments proposed
by an nvestgatng offcer. The attorney or agent who sgned such
decaraton stated ony that ths return, ncudng the addtona
sheets nserted, f any, s a true, correct, and compete statement of
a the nformaton respectng the estate ta abty of ths estate
of whch I have any knowedge Itacs supped.
Reguatons 105, Secton 81.65: Preparaton Rev. Ru. 54-209
of returns.
The state Ta Return, orm 706 (Revsed December 1953),
refects ate statutory changes. Some of the sub|ect matter has
been rearranged n a more ogca sequence, the Instructons have
been ampfed, obsoete matera has om deeted, an., there has
been added a new Schedue S, Credt fur oregn Death Dutes,
whch must accompany each cam tor refund of ta based n whoe
or n part on the aowance of credt for foregn death tn es.
Mm. No. 5872, C. . 1045, 306, and Mm. No. 6117, C. . 1047-1,150,
superseded, Rev. Ru. 54-100, page 198, ths uetn, remans n fu
force and effect.
Secton 1. Ponros .
In the December 1953 revson of the estate ta return, orm 706,
severa changes were made. The purpose of ths Revenue Rung s
to e pan the more sgnfcant of those changes. In addton to the
changes noted n sectons 2 to 10, ncusve, of ths Revenue Rung,
mnor changes n the nstructons have been made, ether for the pur-
pose of carfyng statements whch have been msunderstood by ta -
payers or for the purpose of refectng changes n the aw.
Sec. 2. Rearrangement of Sub|ect Matter.
.01 Some rearrangement has been made n the sub|ect matter. or
the most part the rearrangement has been confned to the pacng on
Orgnay ssued as I -Mmeograph No. 54-78. dutrd pr 30. 1054.
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Regs. 105, 81.65. 200
the front and back of sheet I of severa tems whch formery were
scattered throughout the form. cept for the ntroducton o
Schedue S, and the nstructons therefor, a of the other tems and
schedues, begnnng wth Genera Instructons and endng wth
ddtona Instructons for states of Nonresdents not Ctzens
of the Unted States, appear n the same sequence as formery.
.02 or the convenence of the Dstrct Drectors offces, severa
tems reatng to the assessment of the ta have been paced on the
front of sheet I. They ncude the name of the decedent, the compu-
taton of the ta , and the space used for the recordng of assessments.
On the ower porton of sheet I, under the headng Determnaton by
Interna Revenue Servce, a bank space has been provded for the
recordng of data through the use cf assessment and overassessment
stamps. The Tabe for Computaton of state Ta now appears
on the back of sheet I.
S C. 3. SITUS RUL S PPLIC L IN T C S O NoNnrem NT LI NS.
s a consequence of statutory changes and the enterng nto effect
of many new death duty conventons wth foregn countres, the stus
rues found n the nstructons for severa of the schedues and n
ddtona Instructons for states of Nonresdents not Ctzens of
the Unted States have been revsed and enarged. Subsequent to the
tme the December 1953 revson of orm 706 was made, new death
duty conventons wth Greece and ustraa became effectve. The
stus rues under these two conventons are not set forth on the form.
The Greek conventon s effectve wth respect to the estates of de-
cedents dyng on or after December 30, 1953, and the conventon wth
ustraa s effectve wth respect tc the estates of decedents dyng on
or after anuary 7,1954.
S C. 4. SC DUL G.
The thrd and ffth questons on Schedue G have been reworded n
order that ther meanng may be cear and that the nformaton re-
qured by the reguatons w be furnshed. Instructons for the
schedue have been revsed to refect these changes and changes made
by the Technca Changes ct of 1953.
S C. 5. SC DUL .
The nstructons for Schedue have been competey revsed to
refect the changes made by the Powers of ppontment ct of 1951.
S C. 6. SC DUL L.
Schedue L has been revsed to emnate therefrom any reference to
the deducton whch at one tme was aowed for the support of de-
pendents. The nstructons for the schedue now carry a bref state-
ment to the effect that no deducton for the support of dependents s
aowed n the case of a decedent who ded after September 23,1950.
S C. 7. SC DUL O.
There has been emnated from Schedue O the ne formery used
for enterng the tota of the amounts aowed as deductons for the
support of dependents.
S C. 8. SC DUL R.
Schedue R has been revsed to provde for the computaton thereon
of the prorated specfc e empton provded for n severa death duty
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201 Regs. 105, 81.65.
conventons. It s desgned for use by the estate of every nonresdent
aen e cept one who at the tme of hs death was a resdent of rance
or a ctzen or resdent of Greece. n amendment of the reguatons
under the Canadan conventon reatve to the use of certan forms
w be ssued n the near future. fter that amendment s ssued,
suppementa orm 706b w no onger be used for computng the net
estates of nonresdent aens who were resdents of Canada. The
computaton of the net estate of a nonresdent aen who at the tme
of hs death was a resdent of rance or a ctzen or resdent of Greece
shoud be set forth on suppementa orm 7()6g (Schedue R(2)) and
not on Schedue R. In usng orm 70Gg n the case of a Greek estate,
care shoud be e ercsed (o foow the stus rues contaned n the
Greek conventon (and not those contaned n the rench conventon),
and no deducton shoud be taken for bequests to the survvng spouse
snce the Greek conventon provdes that no marta deducton s
aowabe.
Sec. 9. Schedue S.
Schedue S s a new schedue. It s to be used by the estates of
ctzens or resdents of the Unted States n computng the amounts
whch the Interna Revenue Code and the death duty conventons
wth foregn countres author/.e as credts aganst the edera estate
ta for estate, nhertance, egacy, or successon ta es pad to a
foregn country. Suppementa orm 706h formery used for com-
putng the amount of the credt authorzed by the rench conventon
w no onger be used for that purpose. mendments of the regua-
tons under the conventons wth Canada and the Unted ngdom
reatve to the use of certan forms w be ssued n the near future.
fter those amendments are ssued, suppementa orms 70Gc and
7()6e formery used for computng the amount of the credts authorzed
by the conventons wth Canada and the Unted ngdom w no
onger be used for those purposes. In every case where a cam for
refund of ta s fed and the cam s based n whoe or n part on the
aowance of credt for foregn death ta es, a computaton of the
credt on a copy of Schedue S must accompany the cam.
Sec. 10. Computaton of Ta .
The Computaton of Ta has been smpfed. ormery e ec-
utors were confronted wth the possbe necessty of makng entres
n the computaton at 11 paces. Most e ecutors w now fnd t
necessary to make entres at ony 4 paces. The nstructons for the
computaton have been rearranged to reduce consderaby the amount
of nstructon matera whch the e ecutor n the average case must
read.
Sec. 11. Dsposton or Cor S of Pkor Revsons of ohm 706.
In order to prevent the dstrbuton to ta payers of obsoete copes
of orm 706, effectve upon the recept n a Dstrct Drector s offce
of a suppy of the December 1953 revson of orm 706, the suppy
of pror revsons of that form hed for dstrbuton to the pubc sha
be dsposed of n the manner prescrbed for the dsposton of waste
paper.
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Regs. 105, { 81.78. 202
S C. 12. CT ON OT .R DOCUM NTS.
Mm. No. 6872, C. . 1945, 396, and Mm. No. 6117, C. . 1947-1,
150, as we as any other nstructons nconsstent wth ths Revenue
Rung, are hereby superseded. Rev. Ru. 54-169, page 198, ths
uetn, remans n fu force and effect
S C. 13. CTI D T .
Ths Revenue Rung s effectve pr 30,1954.
R GUL TIONS 105, S CTION 81.65: Preparaton
of return.
Reproducton, for fng purposes, of edera ta return forms and
schedues. (See Rev. Ru. 54-64, p. 82.)
S CTION 822. P YM NT O T
R GUL TIONS 105, S CTION 81.78: Payment wth Rev. Ru. 54-113
bonds or notes of the Unted States.
Rev. Ru. 156, C. . 1953-2, 253, sets forth the procedure for effect-
ng the appcaton of certan Treasury bonds n payment of edera
estate ta es.
The date whch the representatve of the estate desgnates on orm
PD1782, ppcaton of Redempton, as the date the Treasury bonds
are to be redeemed n payment of the ta shown to be due on the estate
ta return or n payment of an estate ta defcency, sha be consdered
the date of payment of the ta due (to the e tent of the proceeds of the
bonds so apped), provded the bonds are receved by the edera
Reserve bank, or by the Treasury Department n cases where bonds a| e
submtted drect on or before the date on whch the returned ta or
defcency ta s due. If the bonds are receved after the due date of
the returned ta or the date prescrbed for payment of a defcency ta ,
then the date the bonds are receved by the edera Reserve bank, or
by the Treasury Department where the bonds are submtted drect,
sha be consdered the date of payment.
edera Reserve banks have recenty been nstructed to ndcate on
the orms PD1782 the actua dates such bonds are receved by them.
ccordngy, where Treasury bonds are deposted wth a edera Re-
serve bank to be redeemed n payment of estate ta es, the actua date
of such depost w be refected on orm 15, Certfcate of Depost.
Where the bonds are deposted drecty wth the Treasury Department,
the actua date of such depost w be shown on the certfcate of
depost.
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203 Regs. 105, 81.50.
P RT III. ST T S O NONR SID NTS NOT CITIZ NS O T UNIT D ST T S
S CTION 861. N T ST T
Reguatons 105, Secton 81.13: Property of Rev. Ru. 54-21
decedent at tme of death.
( so Secton 862, Secton 81.50.)
onds of a domestc corporaton whch are among the assets n
the estate of a decedent who was a ctzen and resdent of Canada
w not be ncuded n the net estate for edera estate ta purposes
uness physcay stuated In the Unted States at the tme of hs
death.
dvce s requested whether bonds of a domestc corporaton, whch
are among the assets of the estate of a decedent who was a resdent and
ctzen of Canada, are ncudbe n the net estate for edera estate ta
purposes.
Secton 861(a) of the Interna Revenue Code and secton 81.13 of
Reguatons 105, promugated pursuant to secton 811(a) of the Code,
provde, n part, that n the case of a decedent who was a nonresdent
not a ctzen of the Unted States at the tme of death, ony the property
stuated n the Unted States s ncudbe n the net estate.
The queston s presented because of an apparent confct between the
provsons of the suppementa death duty conventon between the
Unted States and Canada and the provsons of state Ta Regua-
tons 105, reatng to the stus of property. Under secton 81.50 of the
reguatons, bonds n the estate of a nonresdent not a ctzen are deemed
not wthn the Unted States uness physcay stuated theren. See
erman . osten, e ecutor, for the estate of Lusa Terry Ponvert v.
Commssoner, 35 . T. . 568, affrmed per curam, 93 ed. (2d) 1002.
Under subparagraph (f) of rtce II of the conventon bonds of a
company are deemed to be stuated at the pace where the company s
ncorporated. owever, the provso at the end of rtce II prescrbes
that such rtce sha not be construed as ncreasng the abty of the
estate of any person under the estate ta aws of the Unted States.
y vrtue of the above-mentoned provso, the stus rues of rtce
II do not sub|ect any property to the estate ta that woud not other-
wse be so sub|ected. ccordngy, uness the bonds were physcay
stuated wthn the Unted States at the tme of the decedent s death,
they are not ncudbe n the net estate.
S CTION 862. PROP RTY WIT IN T UNIT D ST T S
Reguatons 105, Secton 81.50: Stus of prop-
erty.
onds of a domestc corporaton hed by a nonresdent not a ctzen
deemed property wthn the Unted States f physcay stuated
theren. (See Rev. Ru. 54-21, p. 203.)
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Reg . 105, 81.9. 204
S CTION 863. PROP RTY WIT OUT T UNIT D
ST T S
Reguatons 105, Secton 81.50: Stus of Rev. Ru. 54-114
property.
Moneys hed for a nonresdent aen decedent, who was not engaged
n busness n the Unted States at the tme of hs death, by an e press
company whose certfcate of ncorporaton authorzes t to do bankng
busness and whch does n fact do bankng busness, are not deemed
property wthn the Unted States for edera estate ta purposes
under the provsons of secton 803(b) of the Interna Revenue Code.
Moneys hed for such nonresdent aen decedent by an e press com-
pany not engaged n the bankng busness, as, for e ampe, amounts
represented by traveers checks of such e press company ssued to and
hed by such decedent at the tme of hs death, are not e cudabe from
the gross estate under secton 863(b) of the Code snce the reatonshp
of banker and depostor does not e st n such a case.
P RT I . SUPPL M NT L PRO ISIONS
SUPPL M NT . T NSION O P YM NT IN C S O UTUR INT R STS
S CTION 925.-P RIOD O T NSION
Reguatons 105, Secton 81.79(b): tenson
of tme for payment of ta attrbutabe to a
reversonary or remander nterest.
Credt for foregn death dutes and refund of ta attrbutabe to a
reversonary or remander nterest. (See Rev. Ru. 54-78, p. 390.)
SI C IT R .- DDITION L ST T T
S CTION 936(c). CR DITS G INST T : ST T , TC,
T S P ID TO OR IGN COUNTRI S
Reguatons 105, Secton 81.9: Credt for
death ta es.
orm 706C , Certfcaton of Payment of oregn Death Duty,
for use n evdencng the payment of foregn death ta es. (See Rev.
Ru. 54-169, p. 198.)
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205 Regs. 108, 86.3a.
C PT R 4. GI T T
S CTION 1000. IMPOSITION O T
Reguatons 108, Secton 86.2: Transfers
reached.
Renta payment by grantor to a trustee for property whch he con-
veyed to the trust (See Rev. Ru. 54-9, p. 20.)
Reguatons 108, Secton 86.3: Cessaton Rev. Ru. 54-135
of donor s domnon and contro.
( so Secton 1005, Secton 86.19.)
Where a do or endorses a certfcate of stock and devers t to
hs bank or broker wth drecton to have t transferred to a donee,
the gft s competed for gft ta purposes on the date the stock s
transferred to the donee on the books of the corporaton. ccord-
ngy, the vaue of such stock for gft ta purposes s the far market
vaue thereof as of such date, determned under the provsons of
secton 86.19(c) of Reguatons 108, rather than the far market vaue
thereof on the date on whch the donor requested hs bank or broker
to have the transfer made and endorsed the certfcate for that purpose.
Reguatons 108, Secton 86.3a: Gft of Rev. Ru. 54-6
husband or wfe to thrd party after
pr 2, 1948.
( so Secton 1006, Secton 86.20.)
husband and wfe are entted to the gft-spttng benefts tnder
the provsons of secton 1000(f) of the Interna Revenue Code
where one spouse fes a edera gft tn return for hmsef and,
n addton to sgnfyng hs own consent, e ecutes thereon as agent
for hs absent spouse a consent to treat the gft as havng been made
one-haf by each spouse, and fes a gft ta return for the absent
spouse as her agent, provded the return fed and the consent e e-
cuted by the one spouse as agent for the other are ratfed wthn a
reasonabe tme after the absent spouse s abe to do so.
dvce s requested whether a husband and wfe are entted to the
gft-spttng benefts under the provsons of secton 1000(f) of the
Interna Revenue Code n a stuaton where one spouse fes a edera
gft ta return for hmsef and as agent for hs absent spouse e ecutes
thereon a consent to treat the gft as havng been made one-haf
by each spouse, and n addton fes a gft ta return for the absent
spouse as her agent, and the return fed and the consent e ecuted
by the one spouse as agent for the other are ratfed wthn a reasonabe
tme after the absent spouse s abe to do so.
In the nstant case the wfe was the actua donor of the gft. In
the absence of her husband, who was on actve mtary duty outsde
815339 54 14
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Regs. 108, 5 86.3a. 206
the Unted States, she fed a tmey gft ta return for hersef and
e ecuted thereon, as agent for her husband, a consent to treat the
gft as havng been made one-haf by each spouse. t the same tme
a gft ta return was fed for the husband, as donor, and sgned
by the wfe as agent. The return and consent e ecuted by the wfe
as agent were ratfed by the husband subsequent to March 15 foow-
ng the cose of the year n whch the gft was made but wthn a
reasonabe tme after he was abe to do so.
Secton 1000(f) of the Interna Revenue Code, reatng to gfts by a
husband or wfe to a thrd party, provdes n pertnent part that a gft
made after the date of the enactment of the Revenue ct of 1948 by
one spouse to a person other than hs spouse sha, for the purpose of
the edera gft ta , be treated as havng been made one-haf by each
spouse. Ths provson of the gft ta aw s appcabe ony f both
partes consent (n accordance wth the reguatons) to treat a such
gfts made durng the year by ether whe marred to the other as
havng been made one-haf by each spouse. It s further provded
that such a consent may not be sgnfed after the 15th day of March
foowng the cose of the caendar year n whch the gfts were made,
uness before such 15th day no return has been fed for such year by
ether spouse. Secton 1006(b) of the Code provdes that edera
gft ta returns must be fed on or before March 15 foowng the
cose of the caendar year n whch the gfts were made.
Secton 86.3a of Reguatons 108, reatve to the sgnfyng of a
consent as requred by secton 1000(f) of the Code, makes no provson
for the e ecuton of a consent by an agent. owever, secton 86.20(a)
of the reguatons, promugated pursuant to secton 1006 of the Code,
reatve to the fng of gft ta returns, contempates e ecuton of a
return by an agent and provdes, so far as here matera:
The return sha not be made by an agent uness by reason of Iness, absence,
or nonresdenee, the person abe for the return Is unabe to make t wthn the
tme prescrbed. If by reason of ness, absence, or nonresdence, a return
s made by an agent, such return .must be ratfed by the donor or other person
abe for ts fng wthn a reasonabe tme after such person becomes abe to
do so otherwse the return fed by the agent w not be consdered the return
requred by the statute.
Secton 86.20(b) of the reguatons further provdes that the pro-
vsons of secton 86.20(a), supra, are appcabe wth respect to the
fng of edera gft ta returns n the case of a husband or wfe who
consent to the appcaton of secton 1000(f) of the Code.
It s accordngy hed that a husband and wfe are entted to gft-
spttng benefts under the provsons of secton 1000(f) of the Inter-
na Revenue Code n a stuaton where one spouse fes a edera gft
ta return for hmsef and, n addton to sgnfyng hs own consent,
e ecutes thereon as agent for hs absent spouse a consent to treat the
gft as havng been made one-haf by each spouse, and as such agent
aso fes a gft ta return for the absent spouse, provded the return
and consent e ecuted by the one spouse as agent for the other are
ratfed wthn a reasonabe tme after the absent spouse s abe to do
so.
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207 Regs. 108, 86.12.
Reguatons 108, Secton 86.3a: Gft of
husband or wfe to thrd party after
pr 2,1948.
ocaton of fetme specfc e empton n gfts of husband or wfe
to thrd party. (See Rev. Ru. 54-30, beow.)
S CTION 1003(b). N T GI rS: CLUSIONS
ROM GI TS
Rkguatons 108, Secton 86.10: Tota Rev. Ru. 54-91
amount of gfts.
Gfts were made n trust, the terms of whch provde that the trustee
n hs uncontroed dscreton s to use the net ncome and prncpa
for the support, educaton, or beneft of the donor s mnor chdren n
such amounts and at such tmes as sha be n accordance wth the
needs and best nterests of the benefcares as though he were hodng
the property as guardan of the benefcares. No person was ever
apponted as ega guardan. ed, snce there was no egay ap-
ponted guardan to demand mmedate dstrbuton, and the manner,
method, and tme n whch the trustee sha use the ncome and prn-
cpa of the trust for the support, educaton, or beneft of the bene-
fcares s dscretonary wth the trustee, the transfers n trust
consttuted gfts of future nterests n property aganst whch no
e cusons are aowabe under secton 1003 of the Interna Revenue
Code. See rthur C. Stfe v. Commssoner, 197 ed. (2d) 107.
Reguatons 108, Secton 86.10: Tota Rev. Ru. 54-92
amount of gfts.
Where a- gft s made n trust the terms of whch provde that the
trustee s to pay the ncome to a desgnated benefcary and that the
trustee may dstrbute such parts of the trust prncpa to the bene-
fcary as n hs uncontroed dscreton he may deem necessary and
roper, t s hed that the ncome whch w be dstrbuted to the
enefeary, whch s the benefcary s present nterest, s not sus-
ceptbe of determnaton and that under such crcumstances no e -
cuson s aowabe under secton 1003(b) (3) of the Interna Revenue
Code wth respect to the gft made of the rght to receve ncome from
the property transferred. See Syva 11. vans v. Commssoner,
198 ed. (2d) 435.
S CTION 1004. D DUCTIONS
Reguatons 108, Secton 86.12: Specfc Rev. Ru. 54-30
e empton.
( so Secton 1000, Secton 86.3a.)
No part of the fetme specfc e empton aowabe under the pro-
vsons of secton 1004(a)(1) of the Interna Revenue Code to one
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Regs. 108, 86.23. 208
spouse may be deducted from the vaue of a gft attrbutabe to the
other spouse. The gft-spttng provsons of secton 1000(f) of the
Code do not authorze the fng of a |ont gft ta return nor permt
the aocaton of any porton of the fetme specfc e empton of
ether spouse to the use of the other. or e ampe, f a husband has
no specfc e empton remanng avaabe, but hs wfe does, and the
husband makes a gft to whch hs wfe consents pursuant to secton
1000(f) of the Code, the specfc e empton remanng avaabe may
be camed ony on the return of the wfe wth respect to one-haf of
the gft. The husband may not cam a specfc e empton snce he
has none avaabe.
Reguatons 108, Secton 8G.13: Chartabe,
etc., gfts.
Gfts of property to the Pacfc War Memora Commsson an
agency of the Terrtory of awa. (See Rev. Ru. 54-220, p. 65.)
S CTION 1005.-GI TS M D IN PROP RTY
Reguatons 108, Secton 86.19: auaton of
property.
auaton of stock of cosey hed corporatons n edera gft ta
returns. (See Rev. Ru. 54-77, p. 187.)
Reguatons 108, Secton 86.19: auaton of
property.
aue of stock transferred from donor to donee. (See Rev. Ru.
51-135, p. 205.)
S CTION 1006.-R TURNS
Reguatons 108, Secton 86.20: Persons
requred to fe return.
Gft ta return fed by one spouse as agent for absent spouse. (See
Rev. Ru. 54-6, p. 205.)
Reguatons 108, Secton 86.23: orm of return.
Reproducton, for fng purposes, of edera ta return forms and
schedues. (See Rev. Ru. 54-61, p. 82.)
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209 Regs. 128, { 408.607.
C PT R 9. MPLOYM NT T S
SU C PT R . MPLOYM NT Y OT RS T N C RRI RS
P RT I. T ON MPLOY S
S CTION 1401(d)(3). D DUCTION O T ROM
W G S: SP CI L R UNDS
Reguatons 128, Secton 408.802: Speca
refunds of empoyee ta on wages over
3,600.
mpoyee ta wthhed wth respect to more than 3,600 of an em-
poyee s wages by reason of the empoyee havng receved wages from
two or more empoyers durng a caendar year. (See Rev. Ru.
54-221, p. 73.)
P UT III. G N R L PRO ISIONS
S CTION 1420. COLL CTION ND P YM NT O T S
Cost-of-vng aowances pad to cvan empoyees of the Unted
States Government statoned outsde of the Unted States. (See
Rev. Ru. 54-40, p. 222.)
Reguatons 128, Secton 408.C07: Payment Rev. Ru. 54-210
of ta .
mted partner who, upon dssouton of a mted partnershp
created under the Unform Lmted Partnershp ct of Caforna,
receved the return of property contrbuted to the capta of the
partnershp s abe for edera empoyment ta es Incurred by the
partnershp pror to ts dssouton.
dvce s requested whether, upon the dssouton of a mted part-
nershp organzed under the Unform Lmted Partnershp ct of the
State of Caforna, a mted partner, who performed no servces n
connecton wth the operaton of the busness and dd not partcpate
n ts management, s abe for edera empoyment ta es ncurred by
the partnershp pror to ts dssouton.
mted partnershp was formed under the Unform Lmted
Partnershp ct of the State of Caforna for the purpose of operatng
a restaurant and bar busness and a Certfcate and rtces of Lmted
Partnershp were duy e ecuted and recorded as requred by the State
aw. Two partners were desgnated as genera partners and one as a
mted partner. Smutaneousy, the three partners entered nto a
Condtona Sae greement whereby the genera partners agreed to
purchase the restaurant and bar owned by the mted partner. Under
the partnershp agreement, the mted partner transferred a quor
cense at an agreed vaue of a doars to the partnershp as hs contr-
buton and the genera partners transferred to the partnershp a
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Regs. 128, 408.607. 210
property, as we as the benefca nterest and rghts, acqured by them
under the Condtona Sae greement. It was agreed that a part-
ershp profts were to be pad to the genera partners and credted to
them. The mted partner was gven a specfc en on a the partner-
shp profts, merchandse, etc., as securty for the payments to be made
by the genera partners under the Sae greement. The genera
partners were responsbe for the conduct of the busness. The mted
partner performed no servces n connecton wth the operaton of the
busness and dd not partcpate n ts management. The agreement
provded for the dssouton of the partnershp upon payment of the
fu purchase prce of the busness or upon canceaton of the Cond-
tona Sae greement by reason of the buyers faure to perform the
terms and condtons of such agreement. If the partnershp was
dssoved because of the buyers defaut, the quor cense was to be
transferred to the mted partner. The partnershp was dssoved
due to the buyers defaut n payments, and the quor cense was
transferred to the mted partner. The genera partners fed the
requred empoyment ta returns but faed to pay the ta es due. The
queston has arsen whether the mted partner s abe for the ta es
ncurred by the partnershp pror to ts dssouton.
The appcabe portons of the foowng sectons of the Unform
Lmted Partnershp ct of Caforna as set forth n tte 2, chapter 2,
of the Caforna Corporatons Code nnotated, adopted uy 1,1947,
and n etfect durng the perod nvoved, provde:
Secton 15501. The mted partners as such sha not be bound
by obgatons of the partnershp.
Secton 15504. The contrbuton of a mted partner may be
cash or other property, but not servces.
Secton 15507. mted partner sha not become abe as a
genera partner uness, n addton to the e ercse of hs rghts and
powers as a mted partner, he takes part n the contro of the
busness.
Secton 15517. Labty of a mted partner to the partnershp.
When a contrbutor has rghtfuy receved the return n whoe or
n part of the capta of hs contrbuton, he s nevertheess abe
to the partnershp for any sum, not n e cess of such return wth
nterest, necessary to dscharge ts abtes to a credtors who
e tended credt or whose cams arose before such return.
In the nstant case, the Certfcate and rtces of Lmted Partner-
shp, e ecuted under the provsons of the Unform Lmted Partner-
shp ct of Caforna and recorded n accordance wth the State aw,
evdence the e stence of a bona fde partnershp composed of two
genera partners and one mted partner. or I edera empoyment
ta purposes, the members of a partnershp are both |onty and sever-
ay the empoyer of the ndvduas empoyed by the frm. See
S. S. T. 317, C. . 1938-2, 277. The fact that the mted partner dd
not partcpate n the management of the busness s not matera snce
that rght s vested n the genera partners.
The quor cense of the agreed vaue of doars, hed n the names
of the three partners, s regarded as a contrbuton by the mted
partner of other property wthn the contempaton of secton 15504
of the Unform Lmted Partnershp ct of Caforna.
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211 Regs. 128, 408.204.
Under secton 15517, supra, a contrbutor who has receved the return
n whoe or n part of hs contrbuton s abe to the partnershp for
any sum, not n e cess of such return wth nterest, necessary to ds-
charge ts abtes to a credtors who e tended credt or whose
cams arose before such return. It s accordngy concuded that snce
hs capta contrbuton was returned to hm, the mted partner s
abe to the e tent of hs returned contrbuton wth nterest for the
payment of the edera empoyment ta es ncurred by the partnershp
pror to ts dssouton.
S CTION 1421. O RP YM NTS ND UND RP YM NTS
Reguatons 182, Secton 408.801: Refund
or credt of overpayments whch are not
ad|ustabe.
mpoyee ta erroneousy wthhed wth respect to more than 3,600
of wages pad by a snge empoyer durng a caendar year. (See
Rev. RuL 54-221, p. 73.)
S CTION 1420. D INITIONS
Cost-of-vng aowances pad to cvan empoyees of the Unted
States Government statoned outsde of the Unted States. (See
Rev. RuL 54-40, p. 222.)
Reguatons 128, Secton 408.204: Who are Rev. Ru. 54-90
empoyees.
mancurst and a barbershop operator entered nto an agreement
whereby the mancurst commtted hersef to furnsh a mancurng
servce to the patrons of the barbershop durng the hours that the
shop Is open for busness however, It was stpuated that no such
seryce woud be furnshed on Wednesdays. The servce agreed
upon conssted of the avaabty of a sked and competent man-
curst, ether the party to the agreement or some other quafed,
person acceptabe to the barbershop operator. The mancurst s
free to refuse mancurng servce to any patron of the barbershop,
reguates her own workng hours, furnshes her own equpment,
toos, nstruments and suppes requred n the conduct of her bus-
ness, coects and retans the proceeds for hersef wthout usng the
operator s cash regster, and may termnate the arrangement when-
ever t s no onger satsfactory. ed, the mancurst s not nn em-
poyee of the operator of the barbershop for edera empoyment ta
purposes.
dvce s requested whether an ndvdua who, under an agree-
ment wth an operator of a barbershop, furnshes a mancurng serv-
ce to the patrons of the shop s an empoyee of the operator of the
shop for edera empoyment ta purposes.
In the nstant case, a mancurst and the operator of a barbershop
entered nto an agreement whereby she commtted hersef to furnsh
a mancurng servce to the patrons of the barbershop durng the
hours that the shop s open for busness however, t was stpuated
that no such servce woud be furnsed on Wednesdays. The serv-
ce agreed upon conssted of the avaabty of a sked and compe-
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Regs. 128, 408.205. 212
tent mancurst, ether the party to the agreement or some other qua-
fed person acceptabe to the barbershop operator. The mancurst s
free to refuse mancurng servce to any patron of the barbershop
f she so chooses. She reguates her own workng hours, furnshes her
own equpment, toos, nstruments, and suppes requred n the con-
duct of her busness, and coects and retans the proceeds from her
work wthout usng the operator s cash regster or otherwse furnsh-
ng the operator of the barbershop nformaton concernng her n-
come. She s not requred to and does not secure the operator s ap-
rova when she takes a vacaton however, n the nterest of good
usness reatonshp, she does, as a matter of practce, te hm when
she pans to be away for an e tended perod of tme. Whenever the
arrangement s no onger satsfactory, ether party may termnate t.
Secton 408.204(c) of Reguatons 128 provdes that generay the
ega reatonshp of empoyer and empoyee e sts when the person for
whom servces are performed has the rght to contro and drect the
ndvdua who performs the servces, not ony as to the resut to be
accompshed by the work but aso as to the detas and means by whch
that resut s accompshed. It s not necessary that the empoyer ac-
tuay drect or contro the manner n whch the servces are performed,
t s suffcent f he has the rght to do so. n ndvdua who s sub-
|ect to the contro or drecton of another merey as to the resut to be
accompshed by the work and not as to the means and method for ac-
compshng the resut, s an ndependent contractor. n ndvdua
performng servces as an ndependent contractor s not as to such
servces an empoyee under the usua common aw rues.
Whether a person s an ndependent contractor or an empoyee s
argey a queston of fact to be determned upon the partcuar facts
of each case. In the nstant case the mancurst obgated hersef to
furnsh a servce to the operator of the barbershop. She dd not agree
that she personay woud perforn the servces requred but retaned
the rght to empoy someone ese for ths purpose. The agreement
between them does not gve the operator the rght to drect the manner
n whch these servces are to be performed n fact, the ony rght
the operator has n the event of unsatsfactory servce s to brng about
the termnaton of the arrangement. That, n tsef, s not suffcent
to estabsh the reatonshp of empoyer and empoyee between hm
and the mancurst. ccordngy, t s hed that the mancurst n
the nstant case s not an empoyee of the operator of the barbershop
for edera empoyment ta purposes.
Reguatons 128, Secton 408.205: Who are Rev. Ru. 54-31
empoyers.
( so Secton 1G07, Secton 403.205, Regua-
tons 107.)
change n the membershp of a partnershp resutng from the
death, wthdrawa, substtuton, or addton of a partner, or a shft
of nterests among e stng partners does not, n tsef, effect a term-
naton of a partnershp for the purposes of the edera Insurance
Contrbutons ct and the edera Unempoyment Ta ct.
S. S. T. 199, C. . 1937-2, 405, and S. S. T. 354, C. . 1939-1 (Part
1), 294, modfed.
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213 Regs. 128, 5 408.208.
urther consderaton has been gven to the consequence of a change
n the membershp of a partnershp resutng from the death, wth-
drawa, substtuton, or addton of a partner, for the purposes of the
Indera Insurance Contrbutons ct and the edera Unempoyment
Ta ct.
S. S. T. 199, C. . 1937-2, 405, hed n part that a new empoyment
begns, for the purposes of Ttes III and I of the Soca Securty
ct where a partnershp busness s contnued after the death or retre-
ment of a partner. (Ttes III and I of the Soca Securty ct
have been ncorporated n ch. 9 of the Interna Revenue Code, and are
cted as the edera Insurance Contrbutons ct and the edera Un-
empoyment Ta ct.) S. S. T. 354, C. . 1939-1 (Part 1), 294 hed
dat S. S. T. 199 apped ony where the busness of the partnershp s
contnued, that servces performed n wndng up a partnershp
affars were not to be regarded as beng performed n a new empoy-
ment. Servces performed n carryng on the busness of a new part-
nershp, or n carryng on the busness on behaf of a remanng part-
ner, however, were to be regarded as servces performed n a new
empoyment.
In Rev. Ru. 144, C. . 1953-2, 212, t s stated that, as defned n
secton 3797(a) (2) of the Interna Revenue Code, the term partner-
shp for ta purposes s broader than the term under common aw,
the Unform Partnershp ct, or ndvdua State aws. ccordngy,
the edera ta consequences of transactons nvovng partnershps
and nterest n partnershps w be determned upon the bass of ther
substance and n accordance wth the edera ta aws wthout regard
to the technca refnements of State aws. Rev. Ru. 144 hed that a
change n the membershp of a partnershp resutng from the death,
wthdrawa, substtuton or addton of a partner, or a shft of n-
terests among e stng partners does not, n tsef, effect a termnaton
of a partnershp for edera ncome ta purposes.
In vew of the foregong, t s hed that a change n the membershp
of a partnershp resutng from t e death, wthdrawa, substtuton, or
addton of a partner, or a shft of nterests among e stng partners
does not, n tsef, effect a termnaton of a partnershp for the pur-
poses of the edera Insurance Contrbutons ct and the edera
Unempoyment Ta ct. Ordnary the partnershp w be treated
as contnung where the busness of the partnershp, or a substanta
porton thereof, s contnued.
S. S. T. 199 and S. S. T. 354, supra, are modfed to the e tent that
they are nconsstent wth the foregong.
Under the authorty contaned n secton 3791(b) of the Interna
Revenue Code, the Interna Revenue Servce w not requre the pro-
vsons of ths Revenue Rung to be apped wth respect to those
changes n partnershp nterests whch occurred pror to anuary 1,
1954.
egt|atons 128, Secton 408.208: grcu- Rev. Ru. 54-170
rura abor.
( so Secton 481, Secton 39.481-1, Regua-
tons 118.)
n ncome-producng farm descended to the hers of a decedent
as coowners, and one of the hers operated the farm for the ont
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Regs. 128, 408.208. 214
proft of a, recevng a stated sum e. c year and hs pro rata share
of the profts. Ths arrangement consttuted a partnershp wthn
the meanng of secton 3797(a)(2) of the Interna Revenue Code,
and none of the ncome derved by the operator from ths arrange-
ment consttuted wages for edera empoyment ta purposes or net
ernr.gs from sef-empoyment for sef-empoyment ta purposes.
dvce s requested regardng the nature for edera empoyment
and sef-empoyment ta purposes of ncome derved by an ndvdua
from the operaton of a farm under the crcumstances descrbed beow.
The farm n queston descended by w to an ndvdua and s
other hers as cotenants. y agreement among the cotenants such
ndvdua (hereafter caed the operator) operates the farm for the
|ont proft of a the cotenants and devotes hs fu tme and attenton
thereto. or hs servces n ths connecton the operator receves a
sated sum per year n addton to hs pro rata share of the profts
from the farmng operaton. t the end of each year he accounts to
each of the cotenants wth respect to ncome, e penses, and profts
for such year. The operaton of the farm conssts prncpay of the
cutvaton of the so, the rasng and harvestng of frut and fed
crops, the care and mantenance of a dary herd, and the care and
mantenance of farm budngs and equpment. the crops pro-
duced on the farm are sod. No mk produced by others s receved
or processed on the farm.
Under the facts of the nstant case the cotenants are partners wthn
the meanng of secton 3797(a)(2) of the Interna Revenue Code.
It foows that the amounts receved by the operator for hs work re-
atng to the operaton of the farm cannot be regarded as wages for
edera empoyment ta purposes. eng a partner, he s not an em-
poyee of the partnershp for edera empoyment ta purposes, bee
S. S. T. 23, C. . -2,405 (1936).
mounts receved by the operator do not consttute net earnngs
from sef-empoyment for sef-empoyment ta purposes. s de-
fned n secton 481 (a of the Code, the term net earnngs from sef-
empoyment means the gross ncome derved by an ndvdua from
any trade or busness carred on by such ndvdua, ess the deduc-
tons attrbutabe to such trade or busness pus hs dstrbutve
share (whether or not dstrbuted) of the ordnary net ncome or
oss, from any trade or busness carred on by a partnershp
of whch he s a member. ut that secton further provdes that n
computng such gross ncome and deductons and such dstrbutve
share of the partnershp s ordnary net ncome or oss there sha be
e cuded, among other thngs, ncome derved from any trade or
busness n whch, f the trade or busness were carred on e cusvey
by empoyees, the ma|or porton of the servces woud consttute agr-
cutura abor as defned n secton 1426(h).
It appears that the ma|or porton of the servces rendered n con-
necton wth the operaton of the nstant farm woud, f performed
e cusvey by empoyees, consttute agrcutura abor as defned
n secton 1426(h) of the Code. See Reguatons 128, secton 408.208.
ccordngy, the ncome derved by the operator from the operaton
of the farm does not consttute net earnngs from sef-empoyment
for purposes of the ta on sef-empoyment ncome.
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215 Regs. 128, 408.214
128, S CTION 408.214: States Rev. Ru. 54-224
ud ther potca subdvsons and n-
arumentates.
The N County grcutura tenson ssocaten of Pennsy-
vana, organzed pursuant to the 1 ennsyvana statutes for the
purpose of cooperatng wth the Unted States Department of gr-
cuture and the Pennsyvana State Coege n carryng out functons
requred by the Smth-Lever ct, provdng for cooperatve agrcu-
tura f- teuson work, fnanced by county funds, no membershp does
beng pad by anyone In the ssocaton, and e pressy decared by
statute to be a potca subdvson of the State, s a whoy owned
nstrumentaty wthn the meanng of secton 1426(b)(8) of the
edera Insurance Contrbutons ct, as amended.
dvce requested reatve to the status, for edera empoyment
purposes, of the N County grcutura tenson ssocaton of
ennsyvana.
The N County grcutura tenson ssocaton was organzed
nrsnant to the Pennsyvana statutes for the purpose of cooperatng
th the Unted States Department of grcuture and the Pennsy-
na State Coege n carryng out functons requred by the Smth-
ver ct, 38 Stat. 372, provdng for cooperatve e tenson work.
be Pennsyvana statutes authorze the county commssoners of
ch county to approprate funds for the operaton of the offce of
a agrcutura e tenson assocaton organzed wthn the county,
net funds are drect appropratons to the assocatons for oca e -
enses, such as, secretara hep, offce, offce suppes, transportaton
wthn the county, etc. The secretary of the assocaton s empoyed
y the e ecutve commtted of the assocaton and not by the county
whch the assocaton s organzed. The membershp of the sso-
caton s composed of persons vng n the county and nterested n
ncuture and home economcs work and no membershp dues are
ad by anyone n the ssocaton. The e ecutve commttee of the
ssocaton s eected by the members at ts annua meetng and the
commttee members serve wthout compensaton or e penses.
Secton 1426(b) of the edera Insurance Contrbutons ct, as
wnended, contans the foowng e cepton from the term empoy-
ment , as that term s defned n the ct:
(8) Servce performed n the empoy of a State, or any potca sub-
raMn thereof, or any nstrumentaty of any one or more of the foregong
Uch s whoy owned by one or more States or potca subdvsons
The determnaton of whether a county farm bureau s a State
nstrumentaty s based argey upon the structure of the organza-
ton.
In the nstant case, the N County grcutura tenson ssoca-
ton s an organzaton used by the State n carryng nto effect a part
of ts governmenta functons. ts funds are receved as appropr-
tons from the County oard of Commssoners and no membershp
s are pad by anyone n the ssocaton. The County oard of
(anmss oners suppes the offce, furnture, equpment and other e -
poses, and any such property woud revert to the County upon ds-
souton of the ssocaton. The ssocaton s not ncorporated and
been hed by the State counse to be a potca subdvson of the
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Regs. 128, 408.22C 216
State wthn the meanng of secton 2(c) of ct No. 491 of the Penn-
syvana statutes. ccordngy, t s concuded that the N County
grcutura tenson ssocaton s a whoy owned nstrumentaty
wthn the meanng of secton 1426(b) (8) of the edera Insurance
Contrbutons ct, as amended.
In m. T. 434, C. . 1942-2,216, t s hed that the M County arm
ureau whch was organzed n the State of Mssour and s operated
o cooperate wth the Coege of grcuture of the Unversty of
Mssour n carryng out the functons of the Smth-Lever ct, supra,
s not an nstrumentaty of the State. owever, the foowng facta
ready dstngush that rung from the present case. The M County
arm ureau s a corporate body engaged n cooperatve purchasng
for the proft of ts members. It aso s engaged n egsatve promo-
ton work when measures of nterest to the farmers are proposed and n
addton cooperates wth the Unversty of Mssour Coege of gr-
cuture and the Unted States Department of grcuture n brngng
the e tenson program n agrcuture and home economcs to the
farmers of the county. The sources of ncome are membershp fees
and an annua appropraton from the county court, the atter made
soev for the support of the e tenson program. It was concuded
that the structure of the M County arm ureau s nconsstent wth
ownershp by the State or county and that the mere cooperaton wth
the agrcutura e tenson work carred on by the Unversty of Ms-
sour Coege of grcuture does not transform t nto a State
nstrumentaty.
Reguatons 128, Sucton 408.226: Wages. Rev. Ru. 54 225
( so Secton 1621, Secton 406.207, Regu-
atons 120.)
Payments made by a producer of musca nges, spot announce-
ments, rado transcrptons, nnd fm sound tracks to a rado or tee-
vson artst, who s an empoyee of the producer wt respect to
servces performed n makng recordngs, for the reuse of such re-
cordngs consttute wages for purposes of the edera empoyment
ta es ncudng the wthhodng of ncome ta on wages.
dvce s requested whether payments made to a commerca re-
cordng artst for the reuse of recordngs and transcrptons made n
connecton wth rado and teevson broadcastng programs const-
tute wages for purposes of the edera empoyment ta es ncud-
ng the wthhodng or ncome ta on wages.
In the rado and teevson broadcastng ndustry, t s customary
for producers of recordngs of musca |nges, spot announcements,
rado transcrptons, and fm sound tracks to engage artsts to make
recordngs and transcrptons for specfc sponsors. On occasons they
may make recordngs to be sod through an advertsng agency to
ndvdua sponsors. The artst s pad a stated amount for each re-
cordng and transcrpton so made and an houry rate for the tme
spent n rehearsas n connecton therewth. In the performance of
such servces, the artst s an empoyee of the producer. In addton
to the payments receved for such engagements, the artst receves
addtona payments as the recordngs are subsequenty reused. Snce
the addtona amounts are pad wthout the performance of add-
tona servces by the artst, the queston arses whether such pay-
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217 Regs. 114, 5411.203.
ments consttute wages for purposes of the edera empoyment
ta es ncudng the wthhodng of ncome ta on wages.
The appcabe provsons of the Interna Revenue Code (sees.
1426(a), 1607(b), and 1621(a)) provde that the term wages
means a remuneraton for servces performed by an empoyee for hs
empoyer, ncudng the cash vaue of a remuneraton pad n any
medum other than cash, wth certan e ceptons and mtatons not
here pertnent. The reguatons promugated pursuant to the above-
mentoned sectons of the Code provde that remuneraton for em-
poyment, uness specfcay e cepted by the statute, consttutes wages
even though at the tme pad the reatonshp of empoyer and em-
poyee no onger e sts between the person n whose empoy the serv-
ces were performed and the ndvdua who performed them. (Sees.
408.226, 403.227, and 40C.207 of Reguatons 128, 107, and 120,
respectvey.)
The producer and the theatrca unon n whch the artst s a mem-
ber agree to accept and conform to a Code of ar Practce govern-
ng the mnmum terms and condtons estabshed by the unon for
rado recordng artsts. The Code of ar Practce provdes that the
artsts w be gven notce thereof and w contract sub|ect thereto.
The Code of ar Practce contempates a norma perod for the use
of recordngs and transcrptons for whch a stated fee s pad the
artsts as remuneraton. The Code of ar Practce aso contempates
that the recordngs and transcrptons may be reused subsequent to
the e praton of the norma perod, for whch use the artst s entted
to receve an addtona fee. It appears that the addtona fee re-
ceved by the artst for reuse of a recordng s pad pursuant to the
terms of the Code of ar Practce n connecton wth and as a resut
of the empoyment reatonshp whch e sted between the producer
and the artsts at the tme the recordngs or transcrptons were made.
ccordngy, t s hed that the addtona amounts pad to a rado
or teevson artst for the reuse of recordngs and transcrptons made
as a resut of servces performed by the artst consttute wages for
edera empoyment ta purposes and the wthhodng of ncome ta
on wages under secton 1622 of the Interna Revenue Code, regard-
ess of whether or not the artst s st n the empoy of the producer
at the tme the wages are pad.
SU C PT R .- MPLOYM NT Y C RRI RS
P RT I . G N R L PRO ISIONS
S CTION 1532. D INITIONS
Reguatons 114, Secton 411.203: Who are Ct. D. 1767
empoyees.
empoyment ta es nterna revenue code decson of court
1. mpoyment Ta es Labty fob Who be mpoyers
Who re mpoyees.
Where ndvduas, who render persona servce on property used
In the ta payer raroad s operatons, are hred, fred, supervsed,
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Regs. 114, 411.203.) 218
and compensated by an ndependent contractor who as contracted
to pe-form the work for the raroad, such ndvduas are not n
the servce of the raroad wthn the meanng of secton 1532(d)
of the Code, and, hence, are not empoyees of the ta payer for
purposes of the Raroad Retrement Ta ct.
2. UDOM NT I M D.
udgment of the Unted States Dstrct Court for the Dstrct of
Mnnesota (104 . Sopp. 745 (1052)) affrmed.
Unted States Court of ppeas for the ghth Crcut
mer . um, Coector of Interna Revenue, appeant, v. Chcago, St. Pau,
Mnneapos d Omaha Ra ray Company, appeee
. c from the Unted States Dstrct Court for the Dstrct of Mnnesota
efore Gardner, Chef udge, and Sanborn and ohnsen, Crcut udges
ugust 10, 1953
Sanhorn, Crcut udge: Ths acton was brought by the Chcago, St. Pau,
Mnneapos Omaha Raway Company (herenafter referred to as the Omaha)
aganst the Coector of Interna Revenue (whom we sha refer to as the Govern-
ment ) to recover edera empoyment ta es assessed and pad for the year 1947
under the Ratroad Retrement Ta ct, subchapter of chapter 9 of the Interna
Revenue Code, 2(1 U. S. C. . Int. Rev. Code, secton 1500 et seq.
The ta es assessed aganst the Omaha and pad by t were upon the earnngs
of persons who worked on the Omaha s pro erty but who were hred, drected,
supervsed, pad, and fred by the Shpey Company, a partnershp whch, under
a contract wth the Omaha, performed servces for t n connecton wth the
operaton of the raroad.
The Omaha asserted that t was not abe for the ta es n sut. Ths was
dened by the Government. The case was tred to the court, whch determned
that the Omaha was not abe under the Raroad Retrement Ta ct for ta es
wth respect to the earnngs of the empoyees of the Shpey Company. (104 .
Supp. 745.) rom the ensung |udgment, the Government has appeaed.
There s no dspute about the facts. or more thau forty-fve years the Omaha
hae contracted for servces such as the Shpey Company performed for t under
contract n 1947 and had contnuousy snce 1923 performed for t under contracts.
Generay stated, these servces bad to do wth the pacng of coa n bns or
chutes aong the raroad tracks for use n ocomotves, coang of ocomotves,
storng ce, cng refrgerator cars, servcng heaters n such enrs. ceanng freght
cars, transferrng shpments from bad order cars, and unoadng vestock for
feed, water and rest, and reoadng t. Smar contract servces rendered by the
Shpey Company were nvoved n the case of Reynods v. Chcago, St. Pau,
Mnneapos Omaha Ry. Co., 8 Cr., 1GS . 2d 943, whch case, together wth
Reynods v. Northern Pacfc Ry. Co., 8 Cr.. 168 . 2d 934, certorar dened 335
U. S. 828, and Reynods v. Great Northern Ry. Co., 8 Cr., 168 . 2d 944, was
decded by ths court n 1948.
In the Northern Pacfc, Great Northern and Omaha cases |ust referred to,
ths court rued that the raroads were not abe under the Carrers Ta ng ct
of 1937 for empoyment ta es for years pror to 1947 wth respect to empoyees
of ndependent contractors nformng servces comparabe to those performad
by the Shpey Company for the Omaha n the year 1947.
The contenton of the Government s that after anuary 1, 1947, the Raroad
Retrement Ta ct, whch amended the Carrers Ta ng ct of 1937, brought
wthn the coverage of the act the empoyees of the Shpey Company and of
other raroad contractors performng smar servces on raroad property, and
made the raroads abe for ta es upon the earnngs of such empoyees. The
amendment upon whch the Government rees s found n secton 1532(d) of
Pror to ts mendment on uy 31, 1940. co Stat 722, the act was known as the
Carrers Tu nc. ct of 1037, SO Stat. 4: . , 45 U S. C. ., sec. 2C1 et seq. tte 20 (Int
Rev. Code) U. S. C. 1940 d., sec 1500 et e .
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219 Regs. 114, 411.203.
tte 26 U. S. C. . Int. ev. Code. Tror to uy 31, 194C, that secton, whch
defned servce, read as foows (tte 20 U. S. C, 1040 d., secton 1532 (d)) :
n Indvdua s n the servce of an empoyer whether hs servce Is
rendered .vthn or wthout the Unted States f he Is sub|ect to the con-
tnung authorty of the empoyer to supervse and drect the manner of
rendton of hs servce, whch servce he renders for compensaton.
fter the amendment of uy 31,104(5, secton 1532(d) read:
n Indvdua s In the servce of an empoyer whether hs servce Is
rendered wthn or wthout the Unted States f (1) he Is sub|ect to the
contnung authorty of the empoyer to supervse and drect the manner
of rendton of hs servce, or he s renderng professona or technca
servces and s ntegrated nto the staff of the empoyer or he s renderng,
on the property used n the empoyer s operatons, other persona servces
the rendton of whch s ntegrated nto the empoyer s operatons, and ()
be renders such servce for compensaton .
It was the nserton of the anguage or he Is renderng, on the property used In
the empoyer s operatons, other persona servces the rendton of whch s
ntegrated nto the empoyer s operatons upon whch the Government bases ts
contenton that after anuary 1, 1947, the Omaha became abe for empoyment
ta es on empoyees of the Shpey Company performng raroad servces on the
Omaha s property.
Under the defnton of empoyer In secton 1532(a), tte 26 U. S. C. .
Int. Rev. Code, the Omaba Is unquestonaby an empoyer. n empoyee,
under secton 1532(b), means any ndvdua n the servce of one or more
empoyers for compensaton, and, under secton 1532(d), an ndvdua s pur-
portedy n the servce of an empoyer f he s renderng persona servces, on
the empoyer s property, the rendton of whch s Integrated Into the em-
poyer s operatons. Therefore, It s argued that any ndvdua who, on the
property of the Omaha, renders a persona servce n the furtherance of Its
operatons, such as cng refrgerator cars, coang ocomotves, or unoadng bad
order curs, s one of ts empoyees for the purposes of the ta ng act n sut,
regardess of who hred hm, who pays hm, or who supervses or drects the
manner n whch he performs hs servces. The Government asserts that a
of the empoyees of the Shpey Company dong raroad work for the Omaha
upon ts property are ceary covered by the act, and that the Omaha s abe
fo empoyment ta es wth respect to them.
.n the case of Reynods v. Northern Pacfc Ry. Co., supra, 168 . 2d 034,
939, 942-043, we referred to the uy 31, 1046, amendment to secton 1532(d) re-
spectng the defnton of servce as ndcatng that Congress bad not Intended
that the empoyees of ndependent contractors dong raroad work shoud be
covered by the Carrers Ta ng ct of 1037 for years pror to 1047. The amended
act had ony an ncdenta sgnfcance n the Northern Pacfc case and Its com-
panon cases. owever, upon the assumpton that the amendment of uy 31,
1046, meant a that ts anguage was susceptbe of meanng we e pressed the
vew that the coverage of the act had apparenty been e tended to ncude, after
anuary 1, 1047, the empoyees of Independent contractors performng raroad
servces on raroad property. What we sad was, of course, not ntended as a
rung upon the queston of the scope or effect of the amendment. Ths we
made cear In a subsequent per curam opnon. 168 . 2d 044. We had had no
occason to consder the egsatve hstory of the amendment.
It Is nterestng to note that the Court of Cams n the case of Pennsyvana
R. Co. v. Unted Mates (decded n 1047), 70 . Supp. 505, 604, n whch the
queston of the abty of the raoad for empoyment ta es under the Carrers
Ta ng ct of 1037 wth respect to empoyees of an Independent contractor was
nvoved, ntmated that no sgnfcant change In the ta ng act hod been made
by the amendment of uy 31, 1046, when consdered as a whoe and n the ght
of egsatve hstory.
The dstrct court In decdng the nstant case foowed the decson of the
Court of ppeas for the Tenth Crcut n Nchoas v. Denver t Ro Grande
Western R. Co., 105 . 2d 428, whch nvoved the same queston. The Tenth Cr-
cut hed that the empoyees of an ndependent contractor performng servces
for the Denver Ro Grande Western R. Co., on ts property, were not wthn
the coverage of the Raroad Retrement Ta ct. That court sad of the
amendment upon whch the Government reed n that case and rees n ths
case (pages 432-433 of 105 . 2d) :
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egs. 114, 411.203.1 220
When the new anguage contaned In the act Is read In the ght of ts
conte t, In the ght of other reated provsons of aw, and n the ght of
the entre egsatve hstory of the amendatory act, there Is no sustanabe
bass for the contenton that the added anguage was Intended or desgned
to brng wthn the scope of the act an ndependent contractor such as
Lamberg and hs empoyees. Whe the b as orgnay ntroduced was
Intended among other thngs to brng ndependent contractors of that knd
and ther empoyees wthn the purvew of the egsaton, and whatever the
purpose of Congress may have been n other respects, the egsatve hstory
ndcates ceary that the fna acton of Congress represented a deberate
ntent and purpose to eave such contractors and ther empoyees outsde the
scope of the act nsofar as empoyment ta es were concerned. nd that
utmate Congressona ntent and purpose beng cear, courts are not free
to construe the act otherwse.
The egsatve hstory of the act n sut s adequatey and accuratey stated
n udge ratton s opnon n the Denver d Ro Grande Western R. Co. case,
and need not be repeated. See pages 431-432 of 195 . 2d. It Is suffcent to
say that the proponents of the b ntroduced u Congress to amend the Carrers
Ta ng ct of 11)37 sought to enarge ts coverage and to make t appcabe to
ndependent contractors such as the Shpey Company and ther empoyees dong
raroad work, by e pandng the defnton of empoyer to e pressy cover
such contractors. No one readng the egsatve proceedngs resutng In the
re|ecton of that proposed change can have any doubt that Congress ntended to
deny the e tensons of coverage prowsed.
. The Government, however, contends that recourse may not be had to the
egsatve hstory of the amended act because the anguage of the amendment
reed upon s pan and unambguous. That contenton presents the doubtfu
queston n ths case. If the anguage of the amendment Is taken at ts fu
face vaue, t means what the Government says t means and what we thought
t meant when n 1948 we decded the Northern Pacfc and companon cases. It
s not our understandng that egsatve hstory may be resorted to for the
purpose of creatng an ambguty n the anguage of a statute whch otherwse
woud not be ambguous. Congress enacts aws not the egsatve proceedngs
underyng them. If one may not rey upon pan statutory anguage as e press-
ng the meanng of an act and must search egsatve hstory n order to deter-
mne whether or not Congress meant what t sad, then the hstory of egsaton
shoud, at east, be made as accessbe as the aw to whch t reates, so that one
may be advsed when and why a statute and ts hstory part company.
We know, from the proceedngs whch resuted n the passage of the Raroad
Retrement Ta ct, that, after the b for the act passed the ouse, the Senate
undertook to strke from the b a of the anguage whch t was thought woud
brng contractors such as the Shpey Company and ts empoyees wthn the
coverage of the act. Whether the Senate succeeded n ts attempt s, to say the
east, doubtfu.
The anguage of the amendment whch was not emnated from the b, and
upon whch the Government now rees, s, we thnk, no more ambguous than
was that of the statute consdered by ths court n the case of Warner v.
Dworsky, 194 . 2d 277, 279-280, or that nvoved n Mssour Pac. R. Co. 5Y
Secured S. .C. v. Thompson, 8 Cr., 194 . 2d 799, 803-804. One reasonaby may
beeve that Congress shoud be hed strcty accountabe for the anguage whch
t uses n a statute, and f any correctons are needed they shoud be made
by that body and not by the courts. See Crooks v. arreson, 282 U. S. 53, 60.
Ths court, however, has recognzed that n determnng the purpose and
coverage of o ta ng statute, egsatve hstory may not safey be gnored and
must be consdered, and that the anguage of such an act cannot aways be
accorded ts ordnary meanng. In everng v. Rebsamen Motors, Inc., 8 Cr.,
128 . 2d 584, 587, ths court, n referrng to a decson (reversed by the Supreme
Court) construng a ta ng act, sad:
We foowed the rue that the use by a egsatve body of words havng
defnte meanngs creates no ambguty and that such words are to be taken
and understood n ther pan, ordnary, and popuar sense. We have come
to reaze that that rue s not aways a safe gude to foow n construng
the anguage of a ta ng statute. Unted States v. rmature Rewndng Co.,
8 Cr., 124 . 2d 589, 591. It s our understandng, however, that the rue
s st to be apped uness t can ceary be seen that Congress used the
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221 Regs. 114, 411 03.
words In queston In a broader or dfferent sense than that whch woud
ordnary be attrbuted to them. See oey Securtes Corp. v. Comms-
soner, 8 Cr., 106 . 2d 731, 734, 735.
have aso recognzed the desrabty of unformty of decson among the
Ircts, partcuary wth respect to the coverage of ta ng statutes. Unted
taes v. rmature Rewndng Co., 8 Cr., 124 . 2d 589, 591, and cases cted,
febave wth some msgvngs concuded that In the Instant case resort propery
ar be hd to the egsatve hstory of the Raroad Retrement Ta ct for
ftermnng the purpose and scope of the anguage of the amendment here In
mtroversy.
It s safe to say that nether the proponents nor the opponents of the b
heh as amended became the Raroad Retrement Ta ct regarded the anend-
ent, upon whch the Government now rees, as havng any substanta bearng
the coverage of the act, nd that f there had been any ntmaton that the
mendment was ntended to have an effect such as s now camed for t, t woud
ve been strcken from the b.
The Charman of the Raroad Retrement oard, In e panng to the ouse
ommttee the proposed amendments, made the foowng statement about the
tanges n the secton wth whch we are concerned:
Carfcaton of defnton of mpoyee The severa acts proposed to
be amended by .R. 1302 defne an empoyee, n part, n terms of persons
In the servce of an empoyer. nd a person s n the servce of an em-
poyer f he s sub|ect to the contnung authorty of the empoyer to super-
vse and drect the manner of rendton of hs servce, whch servce he
renders for compensaton. The oard has found that professona and
technca persons, many of whom are commony regarded as empoyees,
typcay decde for themseves the manner n whch they w render servce
a raroad vce presdent, for e ampe, havng ursdcton over the ra-
road s medca department woud not thnk of teng a doctor how to
perform a surgca operaton. nd the doctor woud probaby resent drec-
ton n such a matter as unwarranted ay nterference wth hs professona
conduct. ut the doctor muy obvousy be an empoyee of the raroad
and the oard has so hed n many cases. ut there are cases n whch
such a hodng woud seem to be approprate, but In whch the facts cannot
be ft nto the statutory defnton and others In whch an approprate
rung becomes unduy dffcut. The provson of II. R. 13(52 that a person
renderng professona or technca servces s n the servce of an empoyer
f he s Integrated nto the staff of the empoyer w be benefca to the
admnstraton of the act.
The oard has hed, In numerous cases, that ndvduas renderng
servces under a contract wth a raroad are n fact empoyees of the
raroad by vrtue of a fndng that such ndvduas are sub|ect to the
contnung authorty of the raroad to supervse and drect the manner
of rendton of ther servce. s part of the carfcaton process set out n
. R. 1302, such contractors are made empoyers. Ths may be reasonabe
where a arge number of persons are workng for the contractor, but It
mght resut In the remova from coverage of some ndvdua contractors
who themseves perform a the servces under the contract. Ths resut,
as s desrabe, Is avoded n . R. 1302 by approprate modfcaton of the
subsecton deang wth n the servce of an empoyer.
pparenty the proponents of the amendment, In order to avod the
anomaous stuaton of makng an empoyer out of an ndvdua con-
tractor who had no empoyees and who hmsef dd n the work contracted
for, proposed to make hm an empoyee, nstead of an empoyer, under
the act. Therefore t appears that the amendment In sut was not ntended
to reate to Independent contractors such as the Shpey Company and ts
empoyees, but ony to a sef-empoyed ndvdua who was renderng servce
to a raroad under contract.
rung that the Raroad Retrement Ta ct requred the Omaha,
after anuary 1, 1947, to pay empoyment ta es wth respect to the earnngs
of the empoyees of the Shpey Company woud be contrary to the ceary
Indcated ntent of Congress not to e tend the coverage of the act to such
contractors and ther empoyees.
The |udgment appeaed from s affrmed.
815339 64 15
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Regs. 120, 406.207. 222
SU C PT R C T ON MPLOY RS O IG T OR MOR
S CTION 1607. D INITIONS
Reguatons 107, Secton 403.205: Who are
empoyers.
ffect of a change n the membershp of a partnershp where a sn
stanta porton of the busness s contnued. (See Rev. Ru. 54-
p. 212.)
SU C PT R D.-COLL CTION O INCOM T T SOURC
ON W G S
S CTION 1G21 D INITIONS
Reguatons 120, Secton 400.207: Wages. Rev. Ru. 54-
( so Secton 1420, Secton 406.226, Regua-
tons 128, Secton 1420.)
Cost-of-vng aowances, pad to certan cvan empoyees of the
Government of the Unted Sates statoned outsde the Unted
States, are not wages sub|ect to the wthhodng of ncome ta
at the source under secton 1022 of the Interna Revenue Code.
Whether such aowances are wages sub|ect to edern empoy-
ment ta es s to be determned, under secton 1420(e) of the Code,
by the head of the Government agency nvoved.
dvce s requested whether cost-of-vng aowances, pad to ce
tan cvan empoyees of the Government of the Unted Staff
statoned outsde of the contnenta Unted States, are sub|ect to t
edera Insurance Contrbutons ct ta es or to the wthhodng c
ncome ta under secton 1622 of the Interna Revenue Code.
Secton 204 of the Independent Offces ppropraton ct of 1041
approved pr 20, 1948, 62 Stat. 194, as e tended, provdes for t
payment, n accordance wth reguatons prescrbed by the Presden
of cost-of-vng aowances to cvan offcers and empoyees of t
Government of the Unted States statoned n foregn countres.
Secton 207 of the Independent Offces ppropraton ct, supra, a
amended by secton 104 of the Suppementa Independent Offt
ppropraton ct of 1949, approved une 30, 1948, 62 Stat. M
authorzes payment of smar aowances, n accordance wth reguf
tons prescrbed by the Presdent, to certan cvan empoyees of t
Government of the Unted States statoned n Terrtores and pos
sessons of the Unted States.
In vew of the purposes for whch the aforementoned cost-of- vm
aowances are provded the empoyees n queston, t s beeved tha
such payments do not consttute wages wthn the meanng of tn
edera Insurance Contrbutons ct or of secton 1621(a) of tv
Interna Revenue Code, reatng to the wthhodng of ncome ta a
the source.
ccordngy, t s hed that an amount, whch s specfcay dent
fed as a cost-of-vng aowance, pad to a cvan empoyee of tn
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223 Regs. 120, 40G 208.
Government of the Unted States statoned outsde the contnenta
Unted States or n aska, pursuant to sectons 204 or 207 of the
Independent Offces ppropraton ct of 1949, supra, as amended and
e tended, and n accordance wth appcabe reguatons thereunder
prescrbed by the Presdent, s not sub|ect to the wthhodng of n-
come ta under secton 1622 of the Interna Revenue Code. owever,
a payment whch s compensatory n nature, such as a post dfferen-
ta pad to an empoyee for servce at a post where condtons of
envronment have been deemed to warrant the payment of addtona
compensaton as a recrutment ncentve, s sub|ect to the wthhodng
of ncome ta under secton 1622 of the Code.
It s the opnon of the Interna Revenue Servce that the status of
the cost-of-vng aowance and of the post dfferenta for pur-
poses of the edera Insurance Contrbutons ct woud be the same
as for purposes of ncome ta wthhodng. owever, attenton s
drected to secton 1420(e) of the Interna Revenue Code, whch pro-
vdes n substance that n the case of ta es mposed by the edera
Insurance Contrbutons ct wth respect to servce performed n the
empoy of the Unted States or of a whoy owned nstrumentaty
thereof, the determnaton whether an ndvdua has performed serv-
ce whch consttutes empoyment, the determnaton of the amount
of remuneraton for such servce whch consttutes wages, and the
return and payment of the ta es mposed thereon, sha be made by
the head of the edera agency or nstrumentaty havng the contro
of such servce, or by such agents as such head may desgnate.
Reguatons 120, Secton 406.207: Wages.
Payments made by a producer to a rado or teevson artst for re-
use of recordngs. (See Rev. Ru. 54-225, p. 216.)
Reguatons 120, Secton 406.208: cusons Rev. Ru. 54-122
from wages.
penson pad to a retred empoyee whose remuneraton for
servces performed pror to hs retrement was specfcay e cuded
from the term wqcps under secton 1621(a) of the Interna Reve-
nue Code s not sub|ect to ncome ta wthhodng under secton
1622 of the Code.
dvce s requested whether a penson pad to a retred empoyee
s sub| ect to ncome ta wthhodng where the remuneraton pad
for the servces performed by hm pror to hs retrement was spe-
cfcay e cuded from the term wages under secton 1621(a) of
the Interna Revenue Code.
In the nstant case the penson s pad to an ndvdua who, pror
to hs retrement, was engaged n the performance of servces whch
consttute agrcutura abor wthn the meanng of secton
1621(a)(2) of the Code.
Secton 406.207(b) of Reguatons 120 provdes that n genera pen-
sons and retred pay are wages sub|ect to wthhodng. owever,
secton 1621 of the Code provdes, n part, that the term wages for
ncome ta wthhodng purposes means a remuneraton for servces
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Regs. 120, 406.605. 224
performed by an empoyee for hs empoyer wth certan e ceptons
among whch s remuneraton pad for agrcutura abor as defned
n secton 1426(h) of the Code.
Inasmuch as the penson pad to the retred empoyee s deferred
compensaton for past servces rendered, remuneraton for whch s
specfcay e cepted from the term wages under secton 1621(a) of
the Code, such penson s not sub|ect to ncome ta wthhodng under
secton 1622 of the Code.
S CTION 1623.-LI ILITY OR T
Reguatons 120, Secton 406.401: Labty
for ta .
Labty of a mted partner for edera ncome ta wthhed at
the source and due from a mted partnershp n whch he s a member.
(See Rev. Ru. 54-213, p. 285.)
SU C PT R . G N R L PRO ISIONS
S CTION 1631. ILUR O MPLOY R TO IL
R TURN
Reguatons 120, Secton 406.605: Pace and Rev. Ru. 54-45
tme for fng returns.
Procedure reatng to the asserton of penaty wth respect to
ncome ta wthhodng returns.
1. The purpose of ths Revenue Rung s to prescrbe the pocy of
the Interna Revenue Servce n assertng penaty n connecton wth
the return and payment of ncome wthhodng ta when the return
s fed on or before the 10th day of the second month foowng the
perod for whch t s made, accompaned by depostary recepts and
a check n fu payment of the ta due.
2. Secton 406.605 of Reguatons 120, whch specfes the due date
for the return and payment of ncome ta wthhed on wages, provdes
that f, and ony f, the return s accompaned by depostary recepts,
orm 450, showng tmey deposts, n fu payment of the ta es due
for the entre caendar quarter, the return may be fed on or before
the 10th day of the second month foowng the perod for whch t
s made. Otherwse the due date for fng the return s the ast day
of the month foowng the cose of the caendar quarter for whch
the return s made.
3. It has been brought to the attenton of the Servce that ast mn-
ute changes sometmes occason mnor ad|ustments n the ta due from
the tme the depost of the fu amount of the ta as determned s
made on or before the 30th day of the month foowng the end of a
caendar quarter and the tme the return may be tmey fed on or
before the 10th day of the second month foowng the perod for
whch t s made.
4. Therefore, f an empoyer, after the 30th day of the month fo-
owng the caendar quarter for whch hs return of ncome wthhod-
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225 Regs. 116, 405.501.
ng ta s made, ascertans a sght error n-hs computaton of the
amount of ta due and when fng hs return on or before the 10th
day of the second month foowng such quarter accompanes the
return and depostary recepts wth a check coverng the mnor ad|ust-
ment, no penaty for denquent fng w be asserted.
S CTION 1633. R C IPTS OR MPLOY S
Reguatons 11C, Secton 405.501: Recepts Rev. Ru. 54-32
for ta wthhed at source on wages.
orm W-2, Wthhodng Ta Statement for 1054 ues for the
manufacture of substtutes.
1. Reproductons of the offca orm W-2 may be made by em-
poyers and prnters who so desre. If any empoyer does not desre
to use reproductons of these forms, however, substtutes may be pr-
vatey prnted wth sght varatons of format, and used wthout
specfc approva of the Interna Revenue Servce f the foowng
condtons are met:
(a) rrangement of assemby: cept as provded n secton (e),
the parts n the assemby sha be arranged as foows: Copy , or
Dstrct Drector Copy , or mpoyee s Ta Return Copy C,
or mpoyee s Records Copy D, or mpoyer. references
to the varous parts sha be to Copy , Copy , Copy C, and
CopyD.
(b) Coor and quaty of nk and paper: rown nk on whte paper,
both of quaty as good as that used by the Government the paper to
be of substantay the same weght and te ture as that used n the
offca form, whch sprnted on substance 32 paper.
(c) Typography: Type to be not smaer than the correspondng
type on the offca form and, as neary as possbe, of the same font.
(d) ormat and data: The substtute forms to provde the same
spaces as the offca form for reportng wages pad and ta es wth-
hed. Payro deductons other than those requred to be reported
on the form may not be shown on Copes and . No devaton from
the nstructons on ether the front or back of Copes , , or C w be
permtted.
(e) ddtona copes: ddtona copes ma 7 be prepared for the
use of empoyers n connecton wth ta es or deductons other than
edera ncome ta and edera Insurance Contrbutons ct ta es.
Such addtona copes sha not be paced ahead of Copy C n the
assemby e cept that f a copy for a State or oca ta ng authorty s
prepared, t may be paced n the thrd poston n the assemby for
better egbty.
(/) Dmensons: The offca form s 8 nches wde by 3 nches
deep, e cusve of a Y, mcn snap stub on the eft sde of the form. The
substtute forms may vary n wdth from 7 nches to 8 nches, and n
depth from S/a nches to 3 nches. The snap feature s not requred
on substtutes.
(g) Carbonsed forms or uspot carbons 1: Not permssbe. Inter-
eaved carbon, f used, to be of good quaty to precude smudgng
and, preferaby, back.
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Regs. 120, 406 501.) 226
(h) The Government, Prntng Offce symbo: To be omtted.
() Speca dentfcaton: Copy 13 must show the fu-face dots, ar-
ranged vertcay on the upper rght sde.
2. The offca form s desgned for mang n a standard wndow
enveope. Ths feature w be found desrabe n most of the prvatey
prnted substtutes. In any rearrangement of the spaces for wage
nformaton, the bock headed Soca Securty Informaton must
be to the eft or above the bock headed Income Ta Informaton.
3. It s mportant that a space at east 14-nch deep be provded at
the top of the bocks contanng the notces to the empoyer and the
empoyee.
4. Copy D s ncuded n the offca assemby for the convenence
of the empoyer. though there s no requrement that prvatey
prnted substtute forms ncude Copy D, empoyers may fnd t desra-
be to make and retan such copy.
5. pprova of proposed substtute forms whch do not meet the
condtons stated above shoud be requested by etter, addressed to the
Commssoner of Interna Revenue, ttenton: O: C: C , Wash-
ngton 25, D. C, accompaned by a sampe or rough draft copy of the
proposed substtute.
Reguatons 120, Secton 406.501: Recepts Rev. Ru. 54-226
for ta wthhed at source on wages.
Use and reproducton by State and oca Governments of orm
W-2, Wthhodng Statements.
Crcuar 2299, C. . 1951-2, 194, and Revenue Run|. 54-32, page
225, ths uetn amended.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to prescrbe certan requre-
ments governng the prvate prntng of substtutes for orm W-2 for
1954 for the use of State and oca Governments, and the use of offca
orms W-2 for 1954.
Sec. 2. ackground,
If the offca orm W-2 for 1954, or a substtute therefor wThch
meets the requrements and specfcatons set forth n Revenue Rung
54-43, page 225, ths uetn, s used by an empoyer to show edera
ncome ta wthhodng nformaton n the case of an empoyee wth
wages and empoyee contrbutons under a State- edera agreement
pursuant to secton 218 of the Soca Securty ct, added by secton
106 of the Soca Securty ct mendments of 1950, no ob|ecton w
be nterposed by the Interna Revenue Servce to the empoyer enter-
ng the amounts of such wages and contrbutons n the spaces pro-
vded for edera Insurance Contrbutons ct wages and edera In-
surance Contrbutons ct empoyee ta . efore makng these entres,
however, the empoyer shoud determne whether or not such acton
w be satsfactory to the partcuar State nvoved. Ob|ecton
thereto may be rased n those States whch permt an empoyee to
deduct edera Insurance Contrbutons ct empoyee ta n comput-
ng hs State ncome ta , but whch do not permt a smar deducton
for Od ge and Survvors Insurance contrbutons made pursuant to
secton 218.
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227 Rega. 120, 400.501.
Sec. 3. Use of Substtute orms.
.01 mpoyers, wth empoyees covered for Od- ge and Surv-
vors Insurance purposes by agreement under secton 218, who desre
to report on orm W-2 not ony the requred edera ncome ta n-
formaton, but aso nformaton concernng empoyee contrbutons
wthhed and wages pad wthn the meanng of a State- edera agree-
ment under secton 218, may use substtutes for orm W-2 for 1954
wthout obtanng specfc approva of the Interna Revenue Servce
provded such substtutes meet the requrements stated n Revenue Ru-
ng 54-32, supra, and provded further that the foowng changes are
made:
(1) Substtute OLD G ND SUR I ORS INSUR-
NC UND R ST T - D R L GR M NTS for the
headng, SOCI L S CURITY IN ORM TION ( edera
Insurance Contrbutons ct) .
(2) Substtute Tota O. . S. I. Wages (before payro deduc-
tons) pad n 1054 and O. . S. I. empoyee contrbutons wth-
hed, f any for the captons, Tota . I. C. . Wages (before
payro deductons) pad n 1954 and . I. C. . empoyee ta
wthhed, f any .
(3) Change the frst sentence of the Notce to mpoyee, on
Copy , to read, (1) Soca Securty Wages If your wages were
sub|ect to O. . S. I. contrbutons, but are not shown, your
O. . S. I. wages are the same as wages shown under INCOM
T IN ORM TION , but not more than 3,600.
(4) Change the frst and second sentences of the Notce to
mpoyee, on Copy C, to read, If your wages were sub|ect to
O. . S. I. contrbutons, but are not shown, your O. . S. I.
wages are the same as wages shown under INCOM T IN-
ORM TION , but not more than 3,000. Your O. . S. I.
account s credted wth wages sub|ect to O. . S. I. contrbutons.
(5) The nstructons appearng on the back of Copy may be
omtted. If not omtted, the phrase Od- ge and Survvors
Insurance sha be substtuted for the edera Insurance Con-
trbutons ct O. . S. I. sha be substtuted for . I. C. .
and empoyee contrbuton sha be substtuted for empoyee
ta wherever they appear n the nstructons.
.02 In cases where State ard oca Government empoyees are not
covered under the soca securty program and the ta es under the
edera Insurance Contrbutons ct do not appy to ther wages,
the empoyer may use substtutes for orm W-2 for 1954 wthout
obtanng specfc approva of the Interna Revenue Servce, provded
such substtutes meet the requrements stated n Revenue Rung
54-32, supra, and provded further that the foowng changes are
made:
(1) The entre bock headed SOCI L S CURITY IN OR-
M TION ( edera Insurance Contrbutons ct) shoud be
deeted.
(2) The frst sentence of the Notce to mpoyee on Copy ,
and the frst two sentences of such notce on Copy C, shoud be
deeted.
(3) The nstructons appearng on the back of Copy may
be omtted. If not omtted, subparagraphs (b) and (c) of para-
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Regs. 46, 316.204a.) 228
graph 2 sha be deeted, and subparagraphs (d), (e), and (f)
sha be redesgnated as (b), (c), and (d).
Sec. 4. ffect on Other Documents.
Ths rung amends Crcuar 2299, C. . 1951-2, 194, and Revenue
Rung 54-32, page 225, ths uetn.
C PT R 9 . W R T ND W R T R T S
S CTION 1657. LOOR STOC S R UNDS ON L CTRIC
LIG T UL S
Reguatons 46, Secton 316.204a: Credts or refunds T. D. 6072
of ta on foor stocks of eectrc ght bubs, refrgera-
tors, and appances.
( so Secton 3416.)
TITL 26 INT RN L R NU . C PT R I. SU C PT R C, P RT 816.
CIS T S ON S L S Y T M NU CTUR R
Credts or refunds of ta on foor stocks of eectrc ght bubs
and tubes, refrgerators, quck-freeze unts, refrgeratng and freez-
ng apparatus, and eectrc, gas, and o appances.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 5, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to conform Reguatons 46,1940 dton (26 C R, pt. 316),
reatng to e cse ta es on saes by the manufacturer under subchapter
of chapter 29 of the Interna Revenue Code, to secton 1657 of the
Interna Revenue Code, as amended by secton 504(c) of the cse
Ta Reducton ct of 1954 (Pubc Law 324, 83d Cong., approved
March 31,1954), and to secton 3416 of the Interna Revenue Code, as
added by secton 305(b) of the cse Ta Reducton ct of 1954,
such reguatons are amended as foows:
Paragraph 1. There s nserted mmedatey foowng secton
316.204 the foowng:
S C. 504. T C NIC L M NDM NTS ( CIS T D DUCTION
CT O 1954, PPRO D M RC 31, 1054).

(b) Rate Deducton Date. Secton 1659 (reatng to defnton of
rate reducton date ) s hereby amended to read as foows:
S C. 1659. D INITION O R T R DUCTION D T .
or the purposes of ths chapter sees. 1650-1659, nch the term
rate reducton date means pr 1, 1954.
S C. 1657. LOOR STOC S R UNDS ON L CTRIC LIG T
I5UL S ( S M ND D Y S CTION 504(c), CIS T R -
DUCTION CT O 1954, PPRO D M RC 31, 1954).
(a) In Genera. Wth respect to any artce upon whch ta Is
mposed under secton 3406(a) (10), upon whch nterna revenue ta at
the rate prescrbed n secton 1650 has been pad, and whch, on the rate
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229 UeS8. 46, 310.201a.
reducton date Is bed by any person and Intended for sne, or for use
In the manufacture or producton of any artce ntended for sae, there
sha be credted or refunded to the manufacturer or producer of such
artce (wthout nterest), sub|ect to such reguatons as may be pre-
scrbed by the Commssoner wth the approva of the Secretary, an
amount equa to so much of the dfference between the ta so pad and
the ta that woud have been pad f the appcabe rate had been 10 per
centum, as has been pad by such manufacturer or producer to such er-
son as rembursement for the ta reducton on such artces, f cam for
such credt or refund s fed wth the Commssoner pror to ugust 1,
1904, based upon a request for rembursement submtted by such person
to the manufacturer or producer of such artce pror to uy 1, 1954.
(b) Lmtatons on gbty for Credt or Refund. No person
sha be entted to credt or refund under subsecton (a) uness he has
n hs possesson such evdence of the nventores wth respect to whch
he has made the rembursements descrbed n subsecton (a) as the
reguatons under subsecton (a) prescrbe.
(c) provsons of aw, ncudng penates, appcabe n respect
of the ta mposed under secton 3406(a) (10) sha, nsofar as app-
cabe and not nconsstent wth ths secton, be appcabe n respect of
the credts and refunds provded for n ths secton to the same e tent
as f such credts or refunds consttuted credts or refunds of such ta es.
S C. 305. R DUCTION O T ON R RIG R TORS ND UIC -
R Z UNITS ND ON L CTRIC, G S, ND OIL OUS -
OI PPLI NC S ( CIS T R DUCTION CT O 1034,
PPRO D M RC 31, 1054).

(b) oor Stocks Refund. Subchapter of chapter 29 (reatng to
manufacturers e cse ta es) s hereby amended by addng at the end
thereof a new secton as foows:
S C. 3416. LOOR STOC S R UND ON R RIG R TORS,
UIC - R Z UNITS, ND L CTRIC, G S, ND OIL
OUS OLD PPLI NC S.
(a) In Genera. Where before pr 1, 1954, any artce sub|ect
to the ta mposed by secton 3405(a), secton 3405(b), or secton
3408(a)(3) has been sod by the manufacturer, producer, or mporter,
and on such date s hed by a deaer and has not been used and s
ntended for sae, there sha be credted or refunded (wthout nterest)
to the manufacturer, producer, or Importer an amount equa to the dffer-
ence between the ta pad by such manufacturer, producer, or mporter,
on hs sae of the artce and the ta made appcabe to such artce
on and after pr 1, 1034, f such manufacturer, producer, or mporter
(1) has pad such amount ns rembursement to the deaer who
hed such artce on pr 1,1954 and
(2) fes cam for such credt or refund before ugust 1, 1954.
(b) Defnton of Deaer. s used n ths secton, the term
deaer ncudes a whoesaer, |obber, dstrbutor, or retaer. or the
purposes of ths secton, an artce sha be consdered as hed by a
deaer f tte thereto has passed to such deaer (whether or not devery
to hm has been made), and f for purposes of consumpton tte to such
artce or possesson thereof has not at any tme been transferred to
any person other than a deaer.
(c) Lmtaton on gbty. No person sha be entted to credt
or refund under ths secton uness e has n hs possesson such evdence
of the nventores wth respect to whch he has made the rembursements
descrbed n subsecton (a) as may be requred by reguatons pre-
scrbed under ths secton.
(d) Penates and dmnstratve Procedures. provsons of
aw, ncudng penates, appcabe n respect of the ta es mposed
under sectons 3405(a), 3405(b), and 3400(a) (3) sha, nsofar as app-
cabe and not nconsstent wth ths secton, be appcabe In respect of
the credts and refunds provded for n ths secton to the same e tent
as If such credts or refunds consttuted credts or refunds of such
ta es,
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Regs. 46, 316.204a.) 230
Sec. 316.204a. Credts oh Refunds or Ta on oor Stocks of ectrc Lght
ums, Refrgerators, and ppances. (a) In genera. Ths secton pre-
scrbes the reguatons appcabe wth respect to cams for refund or credt
of ta on foor stocks by
(1) manufacturers or producers of eectrc ght bubs or tubes (ta abe
under secton 3400(a) (10) of the Interna Revenue Code), provded fur
under secton 16T 7 of the Code, as amended by secton 504(c) of the cse
Ta Reducton ct of 1954, and
(2) manufacturers, producers, or mporters of refrgerators, quck-freez
unts, or refrgeratng and freezng apparatus (ta abe under secton 3405
(a) and (9) of the Code, or eectrc, gas, or o appances (ta abe ander
secton 3406(a)(3) of the Code), provded for under secton 3410 of the
Code, as added by secton 305(b) of the cse Ta Reducton ct of 1954.
(b) Defntons. s used herenafter n ths secton
(1) The term eectrc ght bub means any eectrc ght bub or tube
descrbed n and ta abe under secton 3400(a) (10) of the Code (ncudng
n each case parts or accessores of suc artce sod on or n connecton
therewth, or wth the sae thereof). (See secton 310.180 of the regua-
tons n ths part.)
(2) The term refrgerator means any househod type refrgerator,
househod type unt for the quck freezng or frozen storage of foods, or
combnaton of such househod type refrgerator and unt, descrbed n and
ta abe under secton 3405(a) of the Code, and any refrgerator com-
ponent descrbed n and ta abe under secton 3405(b) of the Code (Incud-
ng n each case parts or accessores therefor sod on or n connecton wth
the sae thereof). (See sectons 316.70(c) and 316.71(c) of the reguatons
n ths part.)
(3) The terra appance means any eectrc, gas, or o appa.ee de-
scrbed n and ta abe under secton 3406(a) (3) of the Code (ncudng n
each case parts or accessores of such artce sod on or n connecton there-
wth, or wth the sae thereof). (See secton 316.110(b) of the reguatons
n ths part.)
(4) The term foor stocks means
() n the case of refrgerators and appances, any such artce
whch on pr 1, 1054, s hed by a deaer and whch on such date has
not been used (that s, tte to such artce or possesson thereof has
not at any tme been transferred for purposes of consumpton to any
person other than a deaer) and s ntended for sae and
() n the case of eectrc ght bubs, any such artce whch on
pr 1, 1054, s hed by any person and ntended for sae, or for use n
the manufacture or producton of any artce ntended for sae.
(5) The term hoder or deaer means any whoesaer, obber, ds-
trbutor, or retaer hodng foor stocks ntended for sae, as we as any
person hodng foor stocks of eectrc ght bubs for use n the manufacture
of another artce Intended for sae.
(6) The terra od rate means the ta rate n effect pror to pr 1, 1954.
(7) The term new rate means the ta rate n effect on and after pr 1,
1954.
(c) Refund or credt. ny manufacturer or producer of eectrc ght bubs
and any manufacturer, producer, or mporter of refrgerators or appances
may cam a refund or credt n an amount e.ua to the dfference between the
ta pad by hm at the rate appcabe at the tme he sod such artces (n the
case of eectrc ght bubs 20 percent and n the ease of refrgerators and ap-
pances 10 percent) and the ta at the rate whch woud have been appcabe
had he sod such artces on or after pr 1, 1954 (n the case of eectrc ght
bubs 10 percent and n the case of refrgerators and appances 5 percent),
sub|ect to the terms and condtons set forth In ths secton. n mporter of
eectrc ght bubs s not egbe for a refund or credt under ths secton.
( ,) ass for refund or credt. The cam for refund or credt sha appy
ony wth respect to foor stocks hed on pr 1, 1954, by a hoder. ectrc
ght bubs, refrgerators, or appances n transt nt the frst moment of pr 1,
1954, sha be regarded as beng hed by the person to whom shpped e cept
where tte to such artces does not pass unt devered to the consgnee, n
whch case they sha be deemed to e hed by the shpper.
(e) Lmtaton on amount of refund or credt. The amount to be refunded
or credted under ths secton sha n no case e ceed the amount whch the
manufacturer, producer, or mporter has pad to the hoders as rembursement
for the ta reducton on the artces sod by hm to such hoders.
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231 egs. 46, 316.204a.
(f) Tme and pace for fng cam for refund or credt. (1) Refund. cam
for refund sha be fed on orm 813 before ugust 1, 1954, wth the Dstrct
Drector of Interna Revenue for the dstrct n whch s ocated the cunnnt s
prncpa pace of busness. The cam sha contan a statement that the
amount camed has not and w not be taken as a credt aganst ta . Snce
the offces of the Dstrct Drectors are cosed on Staturday, uy 31, 1954, a
cam for refund, to be consdered as tmey fed, must be receved In the offce
of the Dstrct Drector not ater than rday, uy 30, 1954.
(2) Credt. cam for credt aganst ta due sha be tnken on the appro-
prate ta return fed wth the dstrct drector of Interna revenue before
ugust 1, 1 )54. Snce the offces of the Dstrct Drectors are cosed on Saturday,
uy 31, 1954, a cam for credt, to be consdered as tmey fed, must be camed
on a return receved n the offce of the proper Dstrct Drector not bter than
rday, uy 30, 1954. credt aganst ta due may be taken on the ta return.
orm 720, fed on or before uy 30,1954, by the camant fur the quarter coverng
the months of pr, May, and une 1954. If a monthy return s fed, the
credt may be taken on the return for a month not ater than une 1954, f such
return s fed on or before uy 30, 1954. owever, rembursements actuay
made to hoders durng pr 1954 may be taken as a credt on the return coverng
anuary. ebruary, and March 1954, or on the return for the month of March
1954, f the return Is fed monthy, provded the credt Is tmey camed. The
return on whch the credt s taken must have attached a statement that a
refund cam has not and w not be fed coverng the amount taken as a credt.
ny amount camed under ths secton may be taken as a credt on the requred
ta return even though the amount of the credt s In e cess of the tota ta
abty shown on such return. In such case, the entre amount of the credt
not prevousy camed must be shown on the return, but the amount n e cess
of the tota ta abty shown on such return w be processed as If t were
a cam for refund fed on orm 843 (as provded n subparagraph (1) of ths
paragraph). or e ampe, f the ta return for the second quarter (coverng
the months of pr, May, and une, 1954, and fed on or before uy 30, 1954)
shows a tota ta abty of 40,000 and a camant has rembursed hoders
to the e tent of 100,000 durng that quarter, the camant may cam a credt
on that return n the fu amount of 100,000 but the amount n e cess of the
tota ta abty shown on such return ( 60,000) w be processed as If such
e cess had been camed as a refund on orm 843. camant who Is requre
to make monthy deposts wth a edera Reserve ank may reduce hs monthy
abty by the tota rembursements made by hm to hoders durng that month.
owever, t shoud be noted that the mere reducton of the monthy abty
n such case s not a fng of a cam for credt wthn the meanng of ths
secton. Where rembursements are made to hoders durng the month of uy
1954, the abty for such month shoud not be reduced by the tota of such
rembursements. The amount of such uy 1954 rembursements may be came
as a credt on the return coverng pr, May, and une 1954, or on the return
for the month of une 1954, f the return s fed monthy, or as a refund on
orm 843, f such return or cam s fed on or before uy 30,1954.
(g) Statement to be attached to cam for refund or credt. very person
fng a cam for refund on orm 843 or a cam for credt on orm 720 must
attach to such form a statement to the effect that (1) he has pad ta on the
artces covered by hs cam at the rate In effect at the tme such artces were
od by hm, (2) he has n hs possesson and avaabe for nspecton by nterna
revenue offcers at hs prncpa pace of busness the evdence wth respect to the
Inventores requred by paragraph (h) of ths secton, (3) he has actuay re-
mbursed a hoders of such nventores pror to the date of the fng of bs cam,
(4) the amount of hs cam does not e ceed the amount that he has pad to
the hoders as rembursement, and (5) n the case of cams coverng eectrc
ght bubs and tubes, he has made rembursement to hoders ony on the bass
of requests for such rembursement receved by hm pror to uy 1, 1954.
(h) vdence requred to support a cam for refund or credt. (1) In gen-
era. very person fng a cam for refund or credt under the provsons of
ths secton must support such cam by havng n hs possesson and avaabe
for nspecton by nterna revenue offcers at hs prncpa pace of busness for
at east a perod of 4 years from the date of fng of such cam evdence showng
the foowng:
() Inventores (a) ectrc ght bubs. The tota nventory of a
eectrc ght bubs, by types and szes, sod ta -pad and hed as foor stocks
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Regs. 46, 316.204a. 232
by the hoders thereof as of 12: 01 a. m. pr 1, 1954, and ntended for sae,
or for use n the manufacture ot another artce ntended for sae.
(6) Refrgerators and appances. The tota nventory of a refrgerators
and appances sod ta -pad and hed as foor stocks on 12:01 a. n. pr 1,
1054, and ntended for sae. The nventory sha show the mode number
of each artce and the quantty of each mode.
(c) Items ncudbe n nventores. There may be ncuded n s ch nven-
tores a refrgerators, appances, or tectrc ght bubs hed as foor stocks
on 12: 01 a. m. pr 1,1954, and ntended for sae, and n the case of eectrc
ght bubs aso those eectrc ght bubs ntended for use n the further
manufacture of another artce. The foowng are some tems whch sha
not be ncuded n such nventores:
(/) refrgerators, appances, or eectrc ght bubs purchased by
the hoder as a component part of, or on, or n connecton wth, another
artce
(2) refrgerators, appances, or eectrc ght bubs purchased ta -
free by the hoder
(3) refrgerators, appances, or eectrc ght bubs prevousy sod
by a hoder to a purchaser for use and thereafter repossessed and
(4) eectrc ght bub on whch ta was pad by an mporter on hs
saes thereof.
The effect of ths subdvson may be ustrated by the foowng e ampes:
ampe (7). hoder of refrgerators on pr 1, 1954, has mortgaged
a porton of hs stock as securty for a oan. Snce In ths nstance the
hoder retans possesson but may have transferred tte to the ender for a
purpose other than consumpton, the refrgerators may be ncuded n the
hoder s nventory.
ampe (2). hoder purchased a ghtng f ture n whch a fuorescent
tube was attached as a component part and aso purchased a tube and a
ghtng f ture as a unt but the tube and the f ture were not attached to
each other. In both nstances the tube s not to be ncuded n the nventory.
ampe (S). budng contractor on pr 1, 1954, has tte and
possesson of refrgerators and garbage dsposa unts whch he ntends
to nsta n apartments he s n the process of constructng or whch he may
construct n the future. These artces are not ncudbe n the nventory
snce the contractor s not hodng such artces for sae on pr 1, 1954.
ampe (4). traer manufacturer on pr 1, 1954, has tte to, and
possesson of, refrgerators whch he ntends to nsta n traers he s manu-
facturng or whch he ntends to manufacture. These refrgerators are not
ncudbe n the nventory snce the traer manufacturer s not hodng them
for sae on pr 1, 1954.
ampe (5). hoder has on hand on pr 1, 1954, severa refrgerat-
ng components purchased ta -pad whch he ntends to use n the manu-
facture of another artce. These components are not ncudbe n the
nventory snce they are not hed and ntended for sae as such.
() Other evdence requred. In addton to the evdence requred nnder
subdvson () of ths subparagraph, the evdence avaabe for nspecton
shoud aso shcv (a) the name and address of each hoder of such nven-
tores, (6) the quanttes of artces hed by each such hoder, (c) the tota
ta pad by the camant on such nventores, and (d) the tota ta
whch the camant woud have pad on such nventores had he computed
hs ta at the new rate. The tota ta pad on the nventory shoud refect
the actua ta pad on each artce ncuded n such nventory, determned
n accordance wth secton 316.8 and by makng ad|ustments for any retro-
actve prce changes granted to hoders pror to any rembursement made to
such hoders n accordance wth ths secton. Where It s mpractcabe to
ascertan the actua ta pad on each artce, the camant may determne the
tota ta pad on the bass of any other method acceptabe to the Internn
Revenue Servce, provded that the use of such method does not resut n an
amount n e cess of the aggregate ta actuay pad on the artces ncuded
n the nventory. requests for approva of a method of determnng the
tota ta pad sha be submtted to the offce of the Dstrct Drector of
Interna Revenue wth whom the camant w fe hs cam for refund or
credt n suffcent tme to permt such method to be approved or dsapproved
pror to the fng of the cam. The same bass for determnng the tota
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233 IRegs. 46, 316.204a.
ta pad shoud be used n determnng the ta whch woud have been pad
under the new rate. Where the tota ta pad s determned on a bass
other than the actua ta pad on each artce, the bass on wh. h ta s
computed on each artce must be determned n accordance wth the pro-
vsons of secton 316.8.
() Proof of rembursement to hoders (a) In genera. ach camant
must have n bs possesson satsfactory evdence showng that each hoder
of artces on whch a refund or credt s camed under ths secton has
wth respect to such artces hed by hm on pr 1, 11)54. been propery
rembursed and that such rembursement was actuay made pror to the
tme the cam for refund or credt Is fed. The rembursement may be
made drecty to the hoder by the manufacturer or by the manufacturer s
authorzed agent or representatve. Rembursement may aso be made
to the hoder s agent or representatve authorzed by hm to receve such
rembursement. Where n manufacturer through hs agent or representatve
remburses a hoder the evdence must show that the hoder actuay receved
such rembursement. Where a hoder authorzes the manufacturer to rem-
burse hm through the hoder s agent, evdence showng rembursement to
such agent by the manufacturer w be accepted as proof of actua rem-
bursement to the hoder. Rembursement sha be made, at the hoder s
opton. In cash, other merchandse, or by credt to the hoder s account. In
the case of credt the amount of the rembursement may not be n e cess of
the amount shown as the debt baance of the hoder s account payabe
at the tme the rembursement s made. or e ampe, f Company rem-
burses oder through Dstrbutor C In an amount of 50 on une 1,
1954, and oder owes Dstrbutor C 25 on that date, oder may be
credted In hs account payabe ony n the amount of 25, and the baance
of 25 must be pad to oder In cash or merchandse.
(6) Speca mtaton on rembursement to hoders of eectrc ght
bubs. manufacturer or producer camng refund or credt wth respect
to the ta on foor stocks of eectrc ght bubs must have satsfactory
evdence showng that each hoder of such bubs requested rembursement
pror to uy 1, 1054. equests for rembursements receved on or after
uy 1, 1954, w resut In the dsaowance of that porton of the cam
for refund or credt attrbutabe to such requests.
(1) Interest. No Interest sha be aowed wth respect to any amount of ta
refunded or credted under the provsons of ths secton.
( ) ffect on cams fed under secton 816.20. Cams for refund or credt
wth respect to returned saes, saes for e port, saes to States, etc., and saes
for e empt uses, authorzed under secton 3443(a) of the Interna evenue
Code and provded for under secton 316.204, fed wth respect to artces sod
by a camant pror to pr 1, 1954, sha be based on the rate of ta n effect
on and after pr 1, 1954 e cept where the camant submts proper evdence
showng that such artces were not covered by a cam for refund or credt of
ta on foor stocks provded for under ths secton, and n such case the cam
for refund or credt fed pursuant to the provsons of secton 310.204 sha e
based on the rate of ta n effect pror to pr 1, 1954.
Par. 2. Ths Treasury Decson sha be effectve on pr 1, 1954.
ecause ths Treasury Decson appes to eectrc ght bubs,
refrgerators, and appances hed on pr 1,1954, and prescrbes the
procedures respectng the rng of cams before ugust 1, 1954, for
refund or credt of ta on foor stocks of such artces, t s hereby
found that t s mpractcabe to ssue ths Treasury Decson wth
notce and pubc procedure thereon under secton 4(a) of the dmn-
stratve Procedure ct, approved une 11, 1946, or sub|ect to the
effectve date mtaton of secton 4(c) of sad act.
(Ths Treasury Decson s ssued pursuant to the authorty con-
taned n sees. 1C57 (59 Stat. 575 68 Stat. 42), 3416 (CS Stat. 40),
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It s. 43, 101.2. 234
3450 (53 Stat. 419), 3791 (53 Stat. 467) of the Interna Revenue
Code (26 U. S. C. 1657, 3416, 3450, and 3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved une 3, 1954.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster une 4,1954, 8: 53 a. m.)
Reguatons 40, Secton 310.204a: Credts or Rev. Ru. 54-239
refunds of ta on foor stocks of eectrc
ght bubs, refrgerators, and appances.
( so secton 3416.)
In appyng the foor stocks ta refund or credt provsons of the
cse Ta Reducton ct of 1954 (Pubc Law 324, 83d Cong., ap-
proved March 31, 1954), page 343. ths uetn, wth respect to foor
stocks of eectrc ght bubs and tubes, refrgerators, and appances
hed on pr 1, 1954, the 4-year statute of mtatons contaned n
secton 3313 of the Interna Revenue Code s not appcabe.
C PT R 10. DMISSIONS ND DU S
SU C PT R .- DMISSIONS
S CTION 1700. T
Reguatons 43, Secton 101.2: Meanng of Rev. Ru. 54-7
admssons.
Persons are admtted to certan areas of a dam wthout payment of
any charge. owever, persons who take a guded tour for whch a
fee s charged are admtted to areas of the dam and to a powerhouse
to whch persons who do not take the tour are not admtted. The
proceeds from the tour are used to compensate gudes and to mantan
tourst factes. ed, an amount pad for a guded tour whch
ncudes admsson to areas to whch persons who do not take the
tour are not admtted consttutes an amount pad for admsson and
s sub|ect to the ta mposed under secton 1700(a) of the Interna
Revenue Code. The ta appes even though the proceeds from the
tour are used to compensate gudes and to mantan tourst factes.
owever, an amount pad for a tour of areas to whch anyone may be
admtted free of charge s not consdered an amount pad for adms-
son and s not sub|ect to ta .
Reguatons 43, Secton 101.2: Meanng of Rev. Ru. 54-22
admsson.
Tn on admssons mposed by secton 1700(a) of the Interna
Revenue Code appes to an ancunt pad for an e change tcket
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235 Regs. 43, 101 2.
when sod for an amount equa to the mnmum admsson charge,
e cusve of ta , even though such tcket may be e changed for
hgher prced accommodatons for whch an addtona payment s
necessary. If an e change tcket s sod for a esser amount than
the mnmum admsson charge, e cusve of the ta , and admsson
cannot be ganed e cept by payment of an addtona charge, the
amount pa d for the e change tcket Is not sub|ect to ta unt or
uness such tcket s e changed for a tcket of admsson, at whch
tme the ta attaches to the tota amount pad for the e change
tcket and the addtona charge.
dvce s requested concernng the appcaton of ta on admssons
mposed by secton 1700(a) of the Interna Revenue Code to amounts
pad for e change tckets.
In the nstant case M Corporaton, whch produces and manages a
traveng show/ engages organzatons n communtes where perform-
ances are schedued to conduct advance saes of e change tckets. The
e change tckets are sod for 1 each of whch amount 50 cents s
retaned by the organzaton seng the tcket and the remanng 50
cents s turned over to the M Corporaton. The e change tckets are
redeemabe at the bo offce for genera admsson tckets for the show
or may be apped toward the purchase of reserve seats.
Secton 1700(a) of the Code mposes a ta on the amount pad for
admsson to any pace and appes to the amount whch must be pad
n order to gan admsson to a pace and not to the admsson tsef.
It s hed that where an e change tcket s sod for an amount equa
to the mnmum admsson charge, e cudng the ta , the amount pad
for such e change tcket consttutes a payment for admsson and the
ta attaches at the tme such payment s made, even though the tcket
may be e changed at the bo offce for hgher prced accommodatons
for whch an addtona payment s necessary. On the other hand, f
an e change tcket s sod for a esser amount than the mnmum ad-
msson charge, e cudng the ta , so that admsson cannot be ganed
e cept by payment of an addtona amount, the amount pad for the
e change tcket does not consttute an amount pad for admsson and
the ta does not appy thereto uness and unt such tcket, together w ,t h
the amount of the addtona charge, s presented at the bo offce, at
whch tme the ta attaches to the tota amount pad for the e change
tcket and the addtona charge.
ccordngy, snce the tckets sod by the organzatons engaged by
the M Corporaton may be e changed, for genera admsson tckets
to the show wthout payment of an addtona charge, the ta attaches
at the tme the payment of one doar s made to the organzatons by
the purchasers ot the e change tckets. In the event such tckets
are e changed for hgher prced accommodatons the ta attaches to
the addtona amount pad at. the tme of payment at the bo offce.
Where an e change tcket s sod under crcumstances that a ta
s due at the tme of sae, the ta shoud be coected by the organza-
ton and remtted to the corporaton who s actuay abe for the co-
ecton and return of the ta to the Government.
The e empton from the coecton of ta on admssons provded by
secton 1701 of the Code wth respect to certan casses of organza-
tons descrbed theren, does not appy where, as n ths case a the
proceeds do not nure e cusvey to the beneft of such organzatons.
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Regs. 43, 101.15. 236
R GUL TIONS 43, S CTION 101.14: Scope of ta . Rev. u. 54-211
The operaton of a teevson set n a restaurant, bar or smar
estabshment does not, n tsef resut n abty for the cabaret ta
mposed by secton 1700(e) of the Interna Revenue Code. ccord-
ngy, amounts pad for food, beverages, or merchandse n an estab-
shment whch does not otherwse quafy as a cabaret w not be
sub|ected to such ta by reason of the operaton of a teevson set
theren.
S CTION 1701. MPTIONS ROM T
R GUL TIONS 43, S CTION 101.15: emptons Rev. Ru. 54-23
from ta .
Where a rodeo s conducted by an educatona nsttuton whch
quafes for e empton from admssons ta , rders competng n the
rodeo for prze money under an arrangement wth the educatona
nsttuton whereby the prze money s derved from the entry fees pad
by the rders are professona performers wthn the meanng of sec-
ton 1701 (a) (2) (C) of the Interna Revenue Code, and the prze money
pad to the performers s compensaton wthn the meanng of that
secton. Snce the e empton from ta on admssons provded by sec-
ton 1701 of the Code does not appy to admssons where rodeo per-
formers partcpate for compensaton, the charge for admsson to the
rodeo, even though conducted by an e empt educatona nsttuton, s
sub|ect to the ta on admssons. or ths purpose, partcpatng for
compensaton means performng for payment whether such payment
s receved from the admsson proceeds or from some other source.
R GUL TIONS 43, S CTION 101.15: emptons Rev. Ru. 54-24
from ta .
The actvtes of a anguage group are consdered to be a part
of the servces offered by an educatona nsttuton whch quafes
for e empton from the ta on admssons under secton ITO(a) (1)-
( ) () of the Interna evenue Code. Proceeds from admssons
to an affar conducted by the educatona nsttuton whch nure
to the beneft of the anguage group nure n effect to the educatona
nsttuton and are not sub|ect to the ta on admssons mposed by
secton 1700 a) of the Code.
dvce s requested whether the e empton provded by secton
1(a (1) ( ) () of the Interna Revenue Code from the ta on
admssons appes to the proceeds from an affar conducted by an
educatona nsttuton whch nure to a anguage group.
In the nstant case, a anguage group mantans a house on the
campus of an educatona nsttuton whch quafes for e empton
under secton 1701 (a) (1) ( ) () of the Interna Revenue Code. The
house s open to the student body of the nsttuton. The anguage
group s a nonproft organzaton. Its purpose s to furnsh to the stu-
dent body an opportunty to acqure a practca knowedge of a foregn
anguage and to acquant the students wth the fe and customs of the
country n whch the anguage s spoken. Resdence or meas n the
house, n whch ony the foregn anguage s spoken, may repace
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237 Rcg . 43, 101 15.
credts n courses of conversaton and a part of the prescrbed tranng
necessary for a teacher s certfcate. Whe the anguage group s
not embraced strcty wthn the currcuum of the educatona nst-
tuton, t s mantaned by the department of foregn anguages of the
nsttuton and teachers are assgned and pad by the nsttuton to
ad n drectng conversaton n the house.
Secton 1701 of the Code provdes n part as foows:
No ta sha be eved In respect of
(a) Ckhtan Regous, ducatona, or Chartabe ntertanments, tc.
(1) In genera. nny admssons a the proceeds of whch
Inure
( ) e cusvey to the beneft of
() an educatona nsttuton whch s e empt under secton 101(G)
or whch s an educatona Insttuton of a government or potca
subdvson thereof, If such organzaton normay mantans a reguar
facuty and currcuum and normay has a reguary organzed body
of pups or students n attendance at the pace where Its educatona
actvtes are reguary carred on

If no part of the net earnngs thereof Inures to the beneft of any prvate
stockhoder or ndvdua
(2) None empt admssons. The e empton provded under paragraph
(1) sha not appy n the case of admssons to ( ) any athetc game
or e hbton uness the proceeds nure e cusvey to the beneft of an
eementary or secondary schoo or uness n the case of an athetc game
between two eementary or secondary schoos, the entre gross proceeds from
such game nure to the beneft of a hospta for crpped chdren, (IS)
wrestng matches or e hbtons, (C) carnvas, rodeos, or crcuses n whch
any professona performer or operator partcpates for compensaton, or (D)
any moton pcture e hbton.
The e empton from the ta on admssons provded by secton
1701(a) (1) ( ) () of the Code, reatng to educatona nsttutons,
e tends to any organzaton sponsored and admnstered by an educa-
tona nsttuton as part of ts educatona program, and n whch
membershp s open to any of the members thereof. ampes of such
organzatons are student governng bodes, athetc assocatons,
dramatc cubs, anguage cubs, scence cubs, and smar groups.
See secton 101.15, Reguatons 43, as amended by T. D. 6007, C. I.
1953-1, 412. Conversey, the e empton does not e tend to or appy
to fraterntes, sorortes, purey soca cubs, or other such
organzatons.
Snce the actvtes of the anguage group are a part of the servces
offered by the nsttuton, t s hed that the proceeds from an affar
conducted by the educatona nsttuton whch nure to the anguage
froup nure, n effect, to the educatona nsttuton, and are e empt
rom the ta on admssons mposed by secton 1700 of the Code,
e cept as otherwse provded by secton 1701(a) (2) of the Code.
Reguatons 43, Secton 101.15: emptons Rev. Ru. 54-46
from ta .
The e empton from ta on admssons provded by secton
1701(a) (1) of the Interna Revenue Code does not appy to charges
815359 4 10
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Regs. 43, 101.15. 238
for admsson to nffars, a the proceeds of whch nure to a
schoarshp fund controed and admnstered by a none empt
assocaton.
dvce s requested whether the e empton from ta on admssons
provded by secton 1701(a) (1) of the Interna Revenue Code s ap-
pcabe to charges for admsson to affars where the proceeds nure
to a schoarshp fund controed and admnstered by a none empt
assocaton.
In the nstant case, an assocaton presents pays, a the proceeds
of whch nure to a schoarshp fund. The fund s not a separate
entty but s controed and admnstered by the assocaton as one
of ts actvtes and s used to provde a schoarshp to an outstandng
student of a unversty whch quafes for e empton under secton
1701(a) (1) ( ) () of the Code. Nether the assocaton nor the fund
quafes for e empton from ncome ta under secton 101(6) of the
Code as an educatona or chartabe organzaton.
Secton 1701 of the Code provdes n part as foows:
S C. 1701. MPTIONS ROM T .
No ta sha he eved n respect of
(a) Certan Regous, ducatona, or Cn RT m. ntertanments, tc.
(1) In genera. any admssons a the proceeds of whch Inure
( ) e cusvey to the beneft of

() an educatona nsttuton whch Is e empt under secton
101(6) or whch s an educatona nsttuton of a government or
potca subdvson thereof, f such organzaton normay man-
tans a reguar facuty and currcuum and normay has a regu-
ary organzed body of pups or students In attendance at the pace
where ts educatona actvtes are reguary carred on
() a corporaton or any communty chest, fund, or foundaton
organzed and operated e cusvey for chartabe purposes, e empt
under secton 101(0), f such corporaton or organzaton s sup-
ported, n whoe or n part, by funds contrbuted by the Unted
States or any State or potca subdvson thereof, or s prmary
supported by contrbutons from the genera pubc
f no part of the net earnngs thereof nures to the beneft of any prvate
stockhoder or ndvdua
Where an educatona nsttuton whch quafes for e empton un-
der secton 1701(a) (1) ( ) () of the Code contros and admnsters
a schoarshp fund as part of ts nsttutona actvtes, the e emp-
ton provded by that secton appes to charges for admsson to
affars presented by anv organzaton a the proceeds of whch nure
to such fund. See Rev. Ru. 1G3, C. . 1953-2, 335. owever,
the e empton provded by that secton docs not appy to charges for
admsson to affars where the proceeds of whch nure to a schoar-
shp fund whch s controed and admnstered by a none empt
organzaton.
The e empton from ta on admssons provded by secton 1701(a)
(1) ( ) () of the Code, wth respect to organzatons operated e -
cusvey for chartabe purposes, appes to charges for admsson to
affars, the proceeds of whch nure to a schoarshp fund where the
fund s dentfabe as a separate entty organzed for chartabe pur-
poses, e empt under secton 101(0) of the Code, and s prmary
supported by contrbutons from the genera pubc.
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239 IRegs. 43, 101.15.
It s hed that snce, n the nstant ease, the schoarshp fund s
controed and admnstered by an assocaton whch does not quafy
as an educatona nsttuton under secton 1701(a) (1) ( ) () of the
Code, the e empton provded by that secton does not appy. It s
f urter hed that, snce the schoarshp fund controed and admn-
stered by the assocaton s not dentfabe as a separate entty meet-
ng the specfc requrements set forth n secton 1701(a) (1) ( ) ()
of the Code, the e empton provded by that secton wth respect to
chartabe organzatons does not appy. ccordngy, the charges
for admsson to pavs presented by the assocaton, the proceeds of
whch nure to ts schoarshp fund are sub|ect to the admssons ta
mposed by secton 1700 of the Code.
Reguatons 43, Secton 101.15: emptons Rev. Ru. 54-115
from ta .
deveopment fund was created and controed by an educatona
nsttuton, e empt under secton 1701 (a)()( )() of the Interna
Revenue Code, as the offca agency for soctng and recevng
funds for the purpose of ncreasng the factes of the nsttuton
for broader educatona opportuntes. Charges for admssons to
an affar conducted by an aumn assocaton the proceeds of whch
nure to the deveopment fund Inure, In effect, to the nsttuton and
are not sub|ect to the ta on admssons mposed by secton 1700(a)
of the Code.
dvce s requested whether the e empton provded by secton
1701 (a) (1) ( ) () of the Interna Revenue Code appes to charges
for admssons to affars conducted by an aumn assocaton, the pro-
ceeds of whch nure to a deveopment fund created by an e empt edu-
catona nsttuton for the purpose ndcated.
The deveopment fund s a nonproft organzaton created and con-
troed by the board of trustees of an e empt unversty as the offca
agency for soctng funds for the unversty. Its purpose s to assst
n deveopng and ncreasng the factes of the unversty for broader
educatona opportuntes and servces to ts students, aumn, and
ctzens of the State by encouragng gfts of money, property, works
of art, and the ke, and to receve, hod, and admnster such gfts.
Gfts may be socted ony for purposes prevousy approved by the
board of trustees of the unversty. The deveopment fund s e empt
from payment of ncome ta under secton 101(6) as an organzaton
operated e cusvey for educatona purposes.
Secton 1701 of the Code provdes n part as foows:
No ta sha be eved n respect of
(a) Certan Regous, ducatona, or Chartabe ntertanments, tc.
(1) In genera. any admssons a the proceeds of whch nure
( ) e cusvey to the beneft of

() an educatona Insttuton whch s e empt under secton
101(6) or whch s an educatona nsttuton of a government or
potca subdvson thereof, f such organzaton normay man-
tans a reguar facuty and currcuum and normay has a reguary
organzed body of pups or students n attendance at the pace where
Its educatona actvtes are reguary carred on
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Regs. 43, 101.28.1 240
If no par (f the net earnngs thereof nures to the beneft of any prvate
stockhoder or Indvdua

(2) None empt admssons. The e empton provded under paragraph
(1) sha not appy n the ease of admssons to ( ) any athetc game or
e hbton uness the proceeds nure e cusvey to the beneft of an eementnry
or secondary schoo or uness In the case of an athetc game between two
eementary or secondary schoos, the entre gross proceeds from such gnne
nure to the beneft of a hospta for crpped chdren, ( ) wrestng matches,
prze tghts, or bo ng, sparrng or other pugstc matches or e hbtons,
((. ) carnvas, rodeos, or crcuses n whch any professona performer or
operator partcpates for compensaton, or (D) any moton pcture e hbton.
It s hed that the charges for admsson to an affar conducted by an
aumn assocaton the proceeds of whch are pad nto the deveopment
fund estabshed under the above crcumstances nure, n effect, to the
educatona nsttuton and are e empt from the ta on admssons m-
posed by secton 1700(a) of the Code, e cept as otherwse provded by
secton 1701 (a) (2) of the Code.
SU C PT R . DU S
S CTION 1710. T
Reguatons 43, Secton 101.28: Intaton Rev. Ru. 54-37
fees.
ppcaton of the ta on ntaton fees mposed by secton
1710(a) (2) of the Interna Revenue Code to fees pad to a cub by
wthdrawng and Incomng members wth respect to the transfer
of stock.
dvce s requested regardng the appcaton of the ta on nta-
ton fees mposed by secton 1710(a) (2) of the Interna Revenue Code
to fees pad to a cub by wthdrawng and ncomng members wth
respect to the transfer of stock.
Under the Interna Revenue Code, the term ntaton fees n-
cudes any payment, contrbuton, or oan, requred as a condton
precedent to membershp, whether or not such payment, contrbuton,
or oan s evdenced by a certfcate of nterest or ndebtedness, or share
of stock, and rrespectve of the person or organzaton to whom pad,
contrbuted, or oaned.
Rev. Ru. 137, C. . 1953-2, 343, hods that a transfer fee re-
qured by a cub to be pad by a wthdrawng member wth respect to
hs sae of stock s not pad as a condton precedent to membershp
n the cub and the amount of such transfer fee s not sub|ect to ta
on ntaton fees mposed by secton 1710(a) (2) of the Code.
Secton 101.28 of Reguatons 43 provdes n part that n the case of
a transfer of stock from a retrng member, the cub shoud coect the
ta on the amount pad by the new member for the stock as we as ta
on any transfer fee requred from the new member. In such a case,
the transfer fee requred by the cub to be pad by the new member
as we as the amount pad by hm for the stock are pad as a cond-
ton precedent to membershp n the cub.
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. 241 (Regs. 71, 113.55.
The hodng n Rev. Ru. 137 appes ony n cases where a cub
requres the wthdrawng or retrng member to pay the transfer fee.
Where a cub requres tbe new member to pay the transfer fee, the
amount pad s sub|ect to ta on ntaton fees under secton 1710(a)
(2) of the Code.
SU C PT R C PRO ISIONS COMMON TO DMISSIONS ND DU S
S CTION 1715. P YM NT O T
Reguatons 43, Secton 101.37: Duty to
coect, return, and pay ta . Dues and
ntaton fees.
Reguatons 43 amended. (See T. D. 6057, p. 272.)
C PT R 11. DOCUM NTS, OT R INSTRUM NTS, ND
PL YING C RDS INCLUDING ST MP T S
SU C PT R .-R T ND P YM NT O T
S CTION 1801. CORPOR T S CURITI S
Reguatons 71, Secton 113.55: Issues sub- Rev. Ru. 54-60
|ect to ta .
change n the nterest rate of outstandng bonds, as effected
by a consodaton agreement, consttutes such a matera change
n the obgatons as to create a new ssue, sub|ect to orgna ssue
ta under sectons 1800 and 1801 of the Interna Revenue Code.
dvce s requested concernng the appcaton of the ta on ssue
of corporate securtes mposed by sectons 1800 and 1801 of the In-
terna Revenue Code where, under the provsons of a consodaton
agreement, the nterest rate of outstandng bonds s ncreased.
In the nstant case, M Corporaton and N ank e ecuted an agree-
ment pursuant to whch three mortgages and the bonds secured thereby
were consodated to consttute one outstandng mortgage and bond.
The agreement aso effected an ncrease n the nterest rate of the ob-
gaton from 3 percent to y2 percent.
Sectons 1800 and 1801 of the Code mpose a ta on a bonds ssued
by any corporaton. The rate of ta s 11 cents on each 100 or
fracton thereof of the face vaue of each bond.
It s hed that the change n the nterest rate of the outstandng
bonds, as effected by the consodaton agreement, consttutes such a
matera change n the obgatons as to create a new ssue sub|ect
to orgna ssue ta under sectons 1800 and 1801 of the Code. The
ta s due and payabe on the unpad baance of the bonds as conso-
dated and the necessary stamps shoud be aff ed to the consodaton
agreement and propery canceed.
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Rcrs. 88, 319 132. 242
Reguatons 71, Secton 113.56: Issues not ev. Ru. 54-212
sub|ect to ta .
n agreement whch merey reduces n amount the quarter-annua
nstaments due on a consodated bond, but whch does not affect the
prncpa amount of the obgaton, does not effect such a matera
change n the obgaton as to create a new ssue sub|ect to orgna
ssue ta under sectons 1800 and 1801 of the Interna Revenue Code.
Cf. ev. u. 54-60, page 241, ths uetn.
S CTION 1802. C PIT L STOC ( ND
SIMIL R INT R STS)
Reguatons 71, Secton 113.20: Scope of ta . Rev. Ru. 54-38
There s no provson n aw whereby the ssuance or transfer of
stock of a corporaton organzed for regous, chartabe, scentfc,
terary, or educatona purposes s by reason of such character e empt
from the stamp ta mposed by secton 1802 of the Interna Revenue
Code. ccordngy, the ssuance of stock by a corporaton organzed
for any such purposes or the subsequent transfer of the stock are not
e empt from the ta under that secton of the Code by reason of such
character.
SU C PT R C P N LTI S ND OR ITUR S
S CTION 1823. R UDS R L TING TO ST MPS
Reguatons 88, Secton 319.132: Reuse of Rev. Ru. 54-157
stamps prohbted.
rearms ct stamp Is consdered by the Interna Revenue
Servce to have been used after t has once been aff ed to an
nstrument, whether cr not such nstrument s proper or acceptabe.
Secton 2734 of the Interna Revenue Code provdes a ta on the
makng of frearms at the rate of 200 for each frearm e cept n the
case of certan weapons defned theren for whch the rate of ta s
1 for each such weapon. Secton 2720 of the Interna Revenue Code
provdes that each transfer of a frearm n the Unted States s
sub|ect to ta at the rate of 200 for each frearm e cept n the case of
certan weapons defned theren upon whch the transfer ta s at
the rate of 1 for each such weapon.
Secton 319.131 of Reguatons 88 provdes that 1 and 200 ad-
hesve stamps bearng the words rearms ct are used for the
payment of the ta on the makng of frearms by other than a quafed
manufacturer who has regstered and pad speca (occupatona)
ta , and the transfer tu . Secton 319.71 of Reguatons 88 provdes
that such adhesve stamps ssued by Dstrct Drectors of Interna
Revenue are canceed by wrtng or stampng thereon, n nk, the
ntas of the person canceng the stamp and the day, month, and
year, or by cuttng wth a machne or punch the ntas and date.
The stamps are aff ed to the orgna copes of the approprate orms
1 ( rearms) n the case of the ta on the makng o frearms, or
orms 4 ( rearms) n the case of the transfer of a frearm.
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243 Regs. 76, rt 3.
Secton 1823 of the Interna Revenue Code provdes, n part, that
whoever wfuy removes, or aters the canceaton or defacng marks
of, or otherwse prepares, any adhesve stamp wth ntent to use, or
causes the same to be used, after t has aready been used, sha, upon
convcton, ba punshed by a fne of not more than 1,000, or by m-
prsonment for not more than 5 years, or both, and any such reused,
canceed, or counterfet stamp and the veum, parchment, document,
paper, package, or artce upon whch t s paced or mpressed sha
be forfeted to the Unted States.
rearms ct stamp s consdered to have been used after t
has once been aff ed to an nstrument, whether or not such nstru-
ment s proper or acceptabe. The remova of any adhesve stamp
from a document to whch once aff ed wth ntent to reuse such stamp
s specfcay prohbted by aw.
cept where specfcay prohbted, mnor correctons may be
effected on a copes of an orgna form to whch a stamp has oeen
aff ed and such form w be accepted for fng. owever, f the
desred changes requre e tensve correcton, or are of a substantve
nature, a new form must be e ecuted. In such event a new rearms
ct stamp must be purchased and aff ed to the form pror to sub-
msson to the Commssoner of Interna Revenue.
Where a rearms ct stamp has been aff ed to a orm 1
( rearms) or orm 4 ( rearms) whch s mpropery e ecuted or
unacceptabe for any reason, the stamp shoud not be removed but
the form, wth the stamp aff ed thereto, shoud be submtted to the
approprate Dstrct Drector of Interna Revenue wth a cam for
redempton fed on orm 843.
C PT R 15. TO CCO, SNU , CIG RS, ND
CIG R TT S
SU C PT R D. IMPORT TION ND PORT TION
P RT II. PORT TION
S CTION 2135. MPTION ROM T
Reguatons 76, rtce 3: ond. T. D. 60C6
( so rtce 12.)
TITL 20 INT RN L R NU . C PT R I, SU C PT R C, P RT 141.
S IPM NT OR D LI RY O M NU CTUR D TO CCO, SNU , CIG RS,
CIG R TT S, ND CIG R TT P P RS ND TU S OR US S S STO S
WIT OUT P YM NT O T .
Tobacco sea stores bonds
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to estabsh ma mum pena sums for tobacco sea stores
bonds, requred of manufacturers of tobacco products and cgarette
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Rous 76, rt. 3. 244
papers and tubes, and propretors of tobacco sea stores warehouses,
Reguatons 76 26 C R, pt. 141 , but ony as prescrbed and made
appcabe to the Interna Revenue Code by Treasury Decson 4885
C. . 1939-1 (Part 1), 396 , approved ebruary 11,1939, are hereby
amended as foows:
P R GR P 1. Secton 1, act of ugust 4, 1886, set forth mmed-
atey precedng artce 3 (26 C R 141.3) s strcken out, and there s
nserted n eu thereof:
S C. 2135. INT RN L R NU COD , MPTION ROM T .
(a) S IPM NTS TO OR IGN COUNTRI S ND POSS SSIONS OP T
UNIT D ST T S.
(1) M NU CTUR RS. Manufactured tobacco, snuff, cgars or
cgarettes may be removed for e port to a foregn country or for
shpment to a possesson of the Unted States wthout payment of
ta under such rues and reguatons and the makng of such entres,
and the fng of such bonds and bs of adng as the Commssoner,
wth the approva of the Secretary, sha prescrbe.

(3) CIG R TT P P RS ND TU S. Under such rues and regu-
atons as the Commssoner wth the approva of the Secretary
may prescrbe, the ta es mposed by subsecton (d) of secton 2000
sha not appy n respect of cgarette papers or tubes sod for e port
or for shpment to a possesson of the Unted States and n due
course so e ported or shpped.
P R. 2. The second and thrd sentences of artce 3 (a) (26 C R
141.3 (a)), as amended by Treasury Decson 5205 (8 . R. 74) C. .
1943,1182 , are amended to read as foows:
separate bond must be fed for each such factory from whch wthdrawas
wthout payment of ta under ths part are to be made. The pena sum of the
bond must be suffcent to cover the estmated amount of ta whch may at any
tme consttute a charge aganst the bond: Provded, That the pena sum of the
bond furnshed under ths secton sha not e ceed 100,000 nor be ess than 500,
n the case of a bond coverng wthdrawas of cgars and cgarettes, and sha not
e ceed 25,000 nor be ess than 500, n the case of a bond coverng wthdrawas
of tobacco and snuff, or cgarette papers and tubes.
P R. 3. The ffth and s th sentences of artce 3(a) (26 C R
141.3(a)), as amended by Treasury Decson 5205 (8 . R. 74), are
strcken out and n eu thereof s added a new sentence readng as
foows:
When the mt of abty under a bond gven n ess than the ma mum pena
sum has been reached, no further shpments sha be made unt the abty has
been decreased, as provded n ths part, or au addtona or strengthenng bond,
wth the same surety as that o the orgna bond, or a new or supersedng bond,
s furnshed.
P R. 4. The frst sentence of artce 12 (26 C R 141.12) as amended
by Treasury Decson 5205 (8 . R. 74), s amended by strkng out the
words and n no case ess than 1,000 , and nsertng n eu thereof
tt: Provded, That the pena sum of any such bond sha not e ceed
200,000 nor be ess than 1,000 .
P R. 5. The fourth sentence of artce 12 (26 C R 141.12), as
amended by Treasury Decson 5205 (8 . R. 74), s amended to read
as foows:
When the mt of abty under a bond gven n ess than the ma mum pena
sum has been readed, no addtona shpments sha be receved nto the ware-
house unt an addtona or strengthenng bond, wth the same surety as that
011 the orgna bond, or a new or supersedng bond, s furnshed.
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245 Regs. 51, 320.40.
ecause the amendments made by ths Treasury Decson are of a
berazng character, t s found that t s unnecessary to ssue ths
Treasury Decson wth notce and pubc procedure thereon under
secton 4(a) of the dmnstratve Procedure ct, approved une 11,
194G, or sub|ect to the effectve date mtatons of secton 4(c) of sad
act,
Ths Treasury Decson sha be effectve on the date of ts pubca-
ton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned
n sec. 3791 of the Interna Revenue Code (53 Stat. 407 26 U. S. C.
3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 25,1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed n tbe edera Regster March 31,1054)
C PT R 19 R T IL RS CIS T S
S CTION 2400. T ON W LRY, TC.
Reguatons 51, Secton 320.34: Watches and Rev. Ru. 54-116
cocks
( so Secton 320.33.)
Stop watches and pedometers that are not equpped wth hands and
das or any other devce whch ndcates the tme of day are not con-
sdered watches wthn the meanng of secton 2400 of the Interna
Revenue Code and are not ta abe as such under that secton. ow-
ever, the ta mposed by secton 2400 of the Code on the sae of artces
made of, or ornamented, mounted or ftted wth, precous metas or
mtatons thereof appes to the sae of stop watches and pedometers,
otherwse not ta abe, where the cases for such artces are so made,
ornamented, mounted, or ftted.
S CTION 2401. T ON URS
Reguatons 51, Secton 320.40: Scope of ta . Rev. Ru. 54-100
rtces made of fur on the hde or pet whch can be worn
separatey or nterchangeaby wth coats, suts, or other garments
are artces of fur wthn the meanng of secton 2401 of the Interna
Revenue Code and sub|ect to ta when sod at reta.
reversbe coat made of fur on one sde and coth on tbe other
s an artce of whch fur s a component matera and s sub|ect to
ta f the vaue of the fur component s more than three tmes the
vaue of the ne t most vauabe component matera.
dvce s requested concernng the appcaton of the retaers
e cse ta mposed by secton 2401 of the Interna Revenue Code to a
fur artce sod n combnaton wth a coth coat or fur-trmmed coth
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Regs. 51, 5320.40. 246
coat when the fur artce s attached to the coat n such a manner
that t can be ready removed therefrom by the consumer and worn
separatey. dvce s aso requested as to the appcaton of the ta
to the sae of a reversbe coat made of fur on one sde and coth on
the other.
The ta mposed by secton 2401 of the Interna Revenue Code ap-
pes to the sae at reta of artces made of fur on the hde or pet,
and artces of whch such fur s the component matera of chef vaue,
but ony f such vaue s more than three tmes the vaue of the ne t
most vauabe component matera.
rtces made of fur on the hde or pet, such as coars, stoes, capes,
ascots, and scarves whch can be worn separatey or nterchangeamy
wth coats, suts, or other garments are artces of fur wthn the mean-
ng of secton 2401 of the Code and are sub|ect to the ta mposed
by that secton when sod at reta.
If any one of the above-descrbed artces of fur whch can be worn
separatey s attached to a coth coat or sut and these artces are
sod as an ensembe, there s a combnaton sae of a competey fnshed
fur artce and a coth coat or sut rather than a sae of a fur-trmmed
artce, and the ta s due on that porton of the reta saes prce of
the ensembe or unt whch s attrbutabe to the fur artce. Such
porton may be determned by appyng to the reta saes prce of the
ensembe or unt, the rato whch the separate reta saes prce of the
fur artce bears to the sum of the saes prces of both the fur artce
and the coth coat. If such artces are not sod separatey at reta
and do not have estabshed reta saes prces, the comparson may
be made on the bass of the costs of the artces.
Where an artce whch s not n tsef a compete fur artce and
whch cannot be worn separatey or nterchangeaby wth other gar-
ments s sewed by any means to a coth coat or sut, the sae of such
fur-trmmed coth coat or sut at reta s sub|ect to ta provded the
vaue of the fur component s more than three tmes the vaue of the
ne t most vauabe component matera.
Where an artce of fur whch can be worn separatey or nter-
changeaby wth other garments, as descrbed above, s sod n com-
bnaton wth a fur-trmmed coth coat or sut, for e ampe, a gar-
ment havng fur cuffs or fur borders, the entre ensembe s sub|ect
to ta , f the vaue of the fur trmmng (e cusve of the fur artce)
s more than three tmes the vaue of the ne t most vauabe compo-
nent. If, n such case, the fur-trmmed garment s nonta abe because
the vaue of the fur trmmng s not n e cess of three tmes the vaue
of the ne t most vauabe component, the ta w appy ony to the
porton of the sae prce of the entre ensembe whch s aocabe to the
fur artce ncuded n the combnaton.
The ta abty of the herenbefore-mentoned artces s not affected
by the coor of the matera used as nngs for the artces.
reversbe coat made of fur on one sde and coth on the other,
the coth matera beng of the knd normay used as the outsde ma-
tera of coth coats, as dstngushed from the knd of matera ord-
nary used n makng nngs for fur or coth coats s consdered to
be an artce of whch fur s a component matera regardess of
whether the fur component s permanenty attached to the coth coat
or s detachabe. The sae of such a garment s sub|ect to ta f the
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247 8 2707(a)-
vaue of the fur component s more than three tmes the vaue of the
coth she at the tme the components are assembed nto a fnshed
garment.
S CTION 2402. T ON TOIL T PR P R TIONS
Reguatons 51, Secton 320.50: Scope of ta . Rev. Ru. 54-101
rtces whch consttute toet preparatons wthn the meanng
of secton 2402 of the Interna Revenue Code are sub|ect to the ta m-
posed by that secton even though sod for use as theatrca makeup.
rtces ta abe as toet preparatons ncude face creams, toet
powders, pstcks, rouges, eyebrow and eyeash mascara, eye shadow
creams, and other preparatons whch are commony and commer-
cay known and sod n the trade for toet purposes. owever, such
tems as grease pants, cown whte, nose putty, back wa , backface
for mnstre maceup, and sprt gum are not consdered to be toet
preparatons wthn the meanng of secton 2402 of the Code and are
not sub|ect to the ta mposed by that secton.
C PT R 25. IR RMS
SU C PT R . PISTOLS ND R OL RS
S CTION 2707(a). P N LTI S
Rev. Ru. 54-158
The 100 percent penaty provded In sect on 2707 (a) of the Interna
Revenue Code shoud be assessed n a case where money wthhed
from empoyees as ta es, n eu of beng pad over to the Govern-
ment, was knowngy and ntentonay used to pay the operatng
e penses of a busness, or for other purposes.
dvce s requested whether the 100 percent penaty provded n
secton 2707(a) of the Interna Revenue Code shoud he assessed n
a case where money wthhed from empoyees as ta es, n eu of beng
pad over to the (|rovernment, was knowngy and ntentonay used
to pay the operatng e penses of a busness, or for other purposes.
Secton 2707 of the Code s appcabe to wthhodng of ncome
ta at the source, ta es under the edera Unempoyment Ta ct,
and ta es under the edera Insurance Contrbutons ct, and pro-
vdes n part as foows:
(a) ny person who wfuy fas to pay, coect, or truthfuy account for
and pay over the ta Imposed by secton 2707(a), or wfuy attempts n any
manner to evade or defeat any such ta or the payment thereof, sha, In addton
to other penates provded by aw, be abe to a penaty of the amount of the
ta evaded, or not pad, coected, or accounted for and pad over, to be assessed
and coected n the same manner as ta es are assessed and coected. .

(d) The term person as used In ths secton ncudes an offcer or empoyee
of a corporaton, or a member or empoyee of a partnershp, who as such offcer,
empoyee, or member s under a duty to perform the act n respect of whch the
voaton occurs.
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2707 (a). I 248
The queston as to what consttutes wfu, or wfuy as used
n secton 2707(a) of the Code was consdered n Matter of e D.
aynes (a bankrupt), 88 ed Supp. 379 Paddock et a. v. Semonet
et a., 218 S. W. (2d) 428 and ettems et a. v. Unted States, 97 ed.
Supp. 681. The bankrupt n the aynes case, supra, was one of the
organzers, aso a stockhoder, drector, presdent, and manager of a
corporaton whch was kept gong by vrtue of certan oans from
outsde sources, but at no tme dd t have suffcent funds to meet ts
current obgatons. The corporaton was nsovent and certan wth-
hodng ta es, ta es under the edera Insurance Contrbutons ct,
and ta es under the edera Unempoyment Ta ct were not pad.
The bankrupt, aso, was one of the offcers of the corporaton whose
duty t was to coect, where coecton was necessary, and pay the
ta es to the Unted States. Wth reference to the appcaton of sec-
ton 2700(a) of the Code to the facts n that case, the court sad:
We are we nwnre of the nnny meanngs that the courts have paced
on the word wfu . Spes v. Unted Sutes, 317 U. S. 492, 63 S. Ct. 304, 307,
87 L. d. 418 Ct. D. 1571, C. . 1943, 1038 . In ths case the court sad t s
a word of many meanngs, ts constructon often beng nfuenced by Its contents .
It s our |udgment that as the word s used n ths statute secton 2707(a) 1
t does not mean wcked desgn but rather that the person acts knowngy and
ntentonay. It woud seem therefore that f the offcer of the corporaton
had n hs hands or under bs contro the funds that bad been set apart for the
purpose of payng the ta and approprated such funds for some other purpose
that he acts wfuy .
The abty of an offcer of an nsovent corporaton for the cv
penaty provded n secton 2707(a) of the Code for faure to pay over
ta es wthhed from wages of empoyees of the corporaton was n-
voved n Paddock et a. v. Semonet et a,, supra. In that case the
court determned as a fact that Semonet was the dsbursng offcer
of the corporaton and that t was hs decson that the ta es woud
not be pad when due. The court found that Semonet n fang to
cause the corporaton to pay over the ta es had no frauduent motve
or ntent or purpose to defraud the Government of ts revenue, but
that he deberatey and ntentonay faed to cause payment of the
ta es when they were due. The court, ctng Murray R. Spes v.
Unted States, 317 U. S. 492, Ct. D. 1571, C. . 1943,1038, and Unted
States v. arry Murdoch, 290 U. S. 389, Ct. D. 771, C. . 1II-1,144
(1934), stated n part as foows:
Secton 2707(a) provdes that the penaty mposed theren sha be assessed
and coected n the same manner as ta es are assessed and coected 1. Thus
It s cear that the statute ntended a cv, not a crmna, sancton. The mpos-
ton of cv as we as crmna sanctons for the same act or omsson Is per-
mssbe and one sancton whch has ong been recognzed as cv, rather than
crmna, n spte of ts possbe severty, s the payment of f ed or varabe
sums of money. .
In Unted States v. Inos Centra Raroad Company, 303 U. S. 239, 58 S. Ct
533, 82 L. d. 773, sut was brought to recover a cv penaty for voaton of
a edera statute requrng the perodca unoadng of vestock n transt.
The Supreme Court there re|ected the argument that wfu Incuded an ev
motve or bad purpose and approved ts defnton as the atttude of a person
who, havng a free w or choce, ether Intentonay dsregards tbe statute
or s pany ndfferent to ts requrements. .

In the ght of the decsons of the Supreme Court of the Unted States, and
even though we agree that penaty statutes shoud generay be construed n
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249 { 2707(a).
favor of the ta payer, we have concuded that the dstrct court s fndng that
the respondent ntentonay and deberatey faed to pay the ta es when due
was suffcent to make hm abe for the cv penaty under secton 2707(a).
Respondent admttedy knew that the ta es were due. There was no conten-
ton that the statute was nappcabe to the ta payer Nor does the
proof show that the corporaton coud not have pad the ta es when they were
due. The proof merey shows that t was nconvenent for the corporaton to
pay the ta es at that tme, and that t was thought that the corporaton woud
have a better chance to operate proftaby f t postponed the payment of Its ta
obgaton and used the funds for ts own purposes nstead of payng them over
to the Government as the aw requres. The choce was knowng, deberate
and ntentona, and wth fu reazaton that the aw was beng voated. In
our opnon ths s the knd of case whch secton 2707(a) was ntended to
cover.
In the eems case, supra, whch nvoved a faure to compy wth
the wthhodng provsons of the ncome ta aws, the court found
that the ta payer had acted wthout reasonabe cause and stated n
part:
The government has taken the poston throughout, and st ad-
heres to the poston, that an ntentona and deberate non-compance, whch
concededy e sted here, was enough to brng the penaty statute nto pay. I
overrued ths contenton and st hod, that the word wfv n the
penaty statnte means wthout reasonabe cause, that s to say, caprcous
.
The dfference between the meanng of the word wfu as used
n a statute mposng cv penates (such as subsecton (a) of secton
2707 of the Code, supra) and as used n statutes mposng crmna
penates of fne or mprsonment, or both, (such as subsectons (b)
and (c) of secton 2707) can be seen from the decson of the Su-
preme Court of the Unted States n the case of Unted States v.
Murdock, supra. In that case the Supreme Court n consderng nter-
aa, secton 256 of the Revenue ct of 1926 and secton 148 of the
Revenue ct of 1928, requrng the makng of returns showng pay-
ments to others, and secton 1114(a) of the Revenue ct of 1926 (now
secton 2707(b) of the Interna Revenue Code), whch mposes crm-
na penates for wfu faure to make such returns, stated n part
as foows:
The word wfuy often denotes an net whch s ntentona, or knowng,
or vountary, as dstngushed from accdenta. ut when used n a crmna
statute It generay means an act done wth a bad purpose ( eton v. Unted
States, 86 U. S. 699 Potter v. Unted States, 155 U. S. 43S Spurr v. Unted States,
174 U. S. 728) : wthout |ustfabe e cuse ( eton v. Unted States, supra W-
ams v. Peope, 20 Coo. 272 Peope v. ewe, 138 Mch. 620 St. Lews, Iron
Mountan 6 S. R/. Co. v. atcsve W. Te. Co., 80 rk. 499 Cay v. State, 52
Te . Cr. R., 555) stubborny, obstnatey, perversey, (Waes v. Mner, 89 Ind.
118,127 Lynch v. Commonweath, 131 a. 762 Caus v. Cheago t. W. y. Co.,
136 Iowa 7 Stae v. arwe, 129 N. C. 550).
Ths court has hed that where drectons as to the method of conductng a
bnsness are emboded n a Revenue ct (o prevent oss of ta es, and the ct
decares a wfu faure to observe the drectons a pena offense, an ev motve
s a consttuent eement of the crme, eton v. Unted States, supra,
.
In vew of the foregong, t s hed that the 100 percent penaty
provded n secton 2707(a) of the Code shoud be assessed n a case
where money wthhed from empoyees as ta es, n eu of beng pad
over to the Government, was knowngy and ntentonay used to pay
the operatng e penses of a busness, or for other purposes.
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Regs. 88, 319.80. 250
SU C PT R . M C IN GUNS ND S ORT- RR LL D IR RMS
S CTION 2720. T
R GUL TIONS 88, S CTION 319.80: Scope of ta . Rev. Ru. 54-180
( so Secton 32(50 Secton 319.36.)
Partay deactvated submachne gung may be rented to varous
teevson networks wthout payment of the transfer ta of 200
coverng each such transfer provded the teevson networks and the
person from whom the machne guns are rented quafy as frearms
deaers and pay a speca occupatona ta of 200 per year.
dvce s requested as to the procedure to be foowed wth respect
to the renta of partay deactvated submachne guns by a frearms
company to varous teevson networks.
frearms deaer hodng a 1 edera frearms cense was re-
quested by varous teevson networks to suppy submachne guns to
ther studos. Snce the demand for the use of such weapons by the
teevson networks may be frequent, the deaer .desres to render ths
servce wthout the necessty of payng the 200 transfer ta on each
occason a weapon s rented. The submachne guns w be partay
deactvated n order that bank cartrdges may be used but the sub-
machne guns w not dscharge a pro|ecte.
Secton 2720 of the Interna Revenue Code provdes that there sha
be pad upon frearms transferred n the Unted States a ta at the rate
of 200 for each frearm e cept that on certan frearms, as descrbed
theren, the transfer ta sha be at the rate of 1. Secton 2721 (a)
of the Interna Revenue Code provdes certan e emptons from the
transfer ta , one of whch s the transfer of any frearm whch s un-
servceabe and whch s transferred as a curosty or ornament. In
order for a machne gun to be cassed as unservceabe t must be n-
capabe of dschargng a shot by means of an e posve and aso n-
capabe of beng repared and restored to a frng condton. The
submachne guns n queston coud be restored to a frng condton and,
therefore, coud not be e empt from the transfer ta .
Secton 3260(a) (2) of the Interna Revenue Code requres the pay-
ment of a speca occupatona ta of 200 per year by deaers n fre-
arms e cept that deaers who hande certan types of guns specfed
theren sha pay a ta of 1 per year.
Partay deactvated submachne guns may be rented to varous
teevson networks wthout payment of the transfer ta of 200
coverng each such transfer provded the teevson networks and the
person from whom the machne guns are rented quafy as frearms
deaers and pay the speca occupatona ta of 200 per year. efore
the frearms may be so transferred, the teevson networks and the
frearms company must each fe a return on orm ( rearms)
wth, and pay the ta to, the approprate Dstrct Drector of Interna
Revenue, n accordance wth secton 319.37 of Reguatons 88. orms
3 ( rearms) and orms 2 ( rearms) coverng the transfers may be
fed by the transferor and the transferee, respectvey, every 6 months,
as of uy 1 and anuary 1, n eu of such forms beng prepared to
cover each day s transactons.
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251 Regs. 88, 319.12.
S CTION 2733.-D INITIONS
Reguatons 88, Secton 319.12: rearm. Rev. Ru. 54-159
The ateraton of .38 and .45 caber revovers by removng the
rg from the barre of the guns and usng standard revover cart-
rdge casng, hand oaded wth shot, n eu of the customary end
pro|ectes, does not brng such weapons wthn the moanng of a
treunn us defned n secton 2733(a) of the Interna Revenue Code.
dvce s requested whether the ateraton of .38 and .45 caber
revovers to fre standard revover cartrdges hand oaded wth shot
woud cause them to be recassfed as frearms.
gunsmth proposes to ater .38 and .45 caber revovers to fre
shot cartrdges. The ateraton s accompshed by removng the
rfng from the barre of the gun, nstaaton of a restrctor rng or
choke, and usng standard revover cartrdge casngs, hand oaded
wth shot, nstead of the customary ead pro|ectes.
Secton 2733(a) of the Interna Revenue Code defnes a frearm as
a shotgun or rfe havng a barre of ess than 18 nches n ength,
or any other weapon, e cept a psto or revover, from whch a shot
s dscharged by an e posve f such weapon s capabe of beng
conceaed on the person, .
The ateraton of .38 and .45 caber revovers by the remova of
the rfng from the barre and the use of standard revover cartrdge
casngs, hand oaded wth shot, nstead of the customary ead pro|ec-
tes, does not remove such weapons from the cassfcaton as revovers.
They are not frearms wthn the meanng of secton 2733(a) of the
Interna Revenue Code.
Reguatons S8, Secton 319.12: rearm. Rev. Ru. 54-181
Cassfcaton of certan weapons for determnaton of whether
they are frearms wthn the meanng of that term as used n sec-
ton 2733 of the Interna evenue Code.
dvce s requested whether the weapons sted beow are frearms
under secton 2733 of the Interna Revenue Code.
Secton 2733(a) of the Code defnes a frearm as a shotgun or rfe
havng a barre of ess than eghteen nches n ength, or any other
weapon, e cept a psto or revover, from whch a shot s dscharged
by an e posve f such weapon s capabe of beng conceaed on tho
person, or a machne gun, and ncudes a muffer or sencer for any
frearm whether or not such frearm s ncuded wthn the foregong
defnton, but does not ncude any rfe whch s wthn the foregong
provsons soey by reason of the ength of ts barre f the caber
of such rfe s .22 or smaer and f ts barre s s teen nches or more
n ength.
The foowng weapons, capabe of beng conceaed on the person,
are frearms, beng cassfed as any other weapon :
U. S. Carbne, M-, .30 caber semautomatc, havng an
18-nch barre wth the stock sawed off eavng a psto grp of
4 nches n ength.
|ackknfe psto.
pam-squeeze revover.
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Regs. 88, 319.12.1 252
snge 18 -nch barre gun, chambered to fre 16 gauge shot-
gun shes, wth sawed-off stock, atered n such a manner as to
change the characterstcs of the orgna weapon so that t cannot
be cassfed ether as a shotgun or psto n the commony ac-
cepted defnton of those words.
dpper percusson gun, whch s made of bronze and whch
fres about a .32 caber pro|ecte by means of a percusson cap,
a
and s 13 nches overa n ength, wth a cup attached to one
end.
gun made by usng a 32-20 rfe barre mounted on the re-
cever or frame of a .410 gauge shotgun, wth a psto type grp
at an ange to the bore for hodng n one hand and desgned to
dscharge a shot by the acton of an e posve.
The foowng weapons are not frearms wthn the meanng of sec-
ton 2733 (a) of the Interna Revenue Code:
psto grn type German are gun wth two barres
nches n ength whch s not capabe of frng shotgun shes.
tweve gauge, 30 nch doube-barre shotgun, one barre of
whch has been sawed off to 14 ,4 nches. Snce the remanng
barre s 30 nches n ength, the weapon s not consdered as
capabe of beng conceaed on the person.
Secton 2733 (b) of the Interna Revenue Code defnes a machne gun
as any other weapon whch shoots, or s desgned to shoot, auto-
matcay or semautomatcay, more than one shot, wthout manua
reoadng, by a snge functon of the trgger.
n 8 mmeter caber German Lght Ma m ed Machne Gun
was atered by removng the orgna breech mechansm so that the
acton and barre assemby of a .22 caber short rm-fre autooadng
semautomatc rfe, ess wooden stock, forearm and sghts, coud be
craded on the nsde of the breech of the gun by use of brackets.
Such gun then was capabe of frng .22 caber rm-fre ammunton
and s operated by means of a 110 vot swtch-controed eectrc motor
wth a set of beveed gears to transmt moton of the motor to the
trgger mechansm of the rfe, so that when the trgger of the gun
s pued, moton of the eectrc motor s transmtted to the mechansm
of the rfe, thus frng the gun as ong as the trgger s hed back or
unt the 15-shot tubuar magazne s empted. Ths weapon s cass-
fed as a machne gun wthn the meanng of secton 2733(b) of
the Code.
R GUL TIONS 88, S CTION 319.12: rearm. Rev. Ru. 54-233
revover reftted wth a 10-nch barre s a frearn aa defned
n secton 2733(a) of the Interna Revenue Code.
dvce s requested whether the converson of a .455 caber revover
for the purpose of accommodatng shot cartrdges woud cause t to
be cassfed as a frearm.
gunsmth proposes to convert a .455 caber revover for the
purpose of accommodatng shot cartrdges. The converson of the
revover s accompshed by removng the reguar revover barre and
refttng a 10-nch barre to the frame of the revover.
It s hed that the refttng of revovers wth barres, other than
revover barres, consttutes a converson of such weapons and snce a
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253 Regs. 88, { 319.12.
10-nch barre s not desgned for use therewth but s an adopton of
a barre desgned for use wth other weapons such a converson woud
Sace the frearm wthn the cassfcaton of any other weapon as
efned n secton 2733(a) of the Interna Revenue Code.
S CTION 2733 (a) .-D INITIONS: IR RM
Reguatons 88, Secton 319.12: rearm. Rev. Ru. 51 245
( so edera rearms ct, Secton 1
Reguatons 131, Secton 315.2.)
Secton 1(3) of the edera rearms ct and secton 315.2 of
Reguatons 131 defne a frearm as any weapon, by whatever name
known, whch s desgned to e pe a pro|ecte or pro|ectes by acton
of an e posve and a frearm muffer or frearm sencer, or any part
or parts of such wea|wn.
teescopc sght or rfescope for a frearm s consdered n the
category of an accessory and not a part of a frearm wthn the above
defnton. Therefore, a person may mport and se teescopc sghts,
or rfescopes, for frearms wthout obtanng a cense to dea n fre-
arms under the edera rearms ct. There s no provson of aw
that mposes an e cse ta on the manufacturer, producer, or mporter
of such product.
Secton 2733(a) of the Interna Revenue Code defnes a frearm
as a shotgun or rfe havng a barre of ess than eghteen nches
n ength, or any other weapon, e cept a psto or revover, from
whch a shot s dscharged by an e posve f such weapon s capabe
of beng conceaed on the person, or a machne gun, and ncudes a
muffer or sencer for any frearm whether or not such frearm s
ncuded wthn the foregong defnton, but does not ncude any
rfe whch s wthn the foregong provsons soey by reason of
the ength of ts barre f the caber of such rfe s .22 or smaer and
f ts barre s s teen nches or more n ength.
The Corporaton manufactures a too powered by bank .22 and
.38 cartrdges whch s used for settng studs or drvng anchors nto
masonry or meta. The too s manufactured n two szes, one for ght
duty and one for heavy duty. It s hed that such too s not a frearm
wthn the defnton of the edera rearms ct or secton 2733(a)
of the Interna Revenue Code. ccordngy, a deaer s not requred
to obtan a cense to se such too nor s he abe for the speca ta
mposed by secton 32C0 of the Interna Revenue Code.
Reguatons 88, Secton 319.12: rearm. Rev. Ru. 54-247
( so edera rearms ct, Secton 1
Reguatons 131, Secton 315.2.)
devce for trappng anmas whch fres a speca pastc cartrdge
but s not capabe of frng pro|ectes s not a frearm wthn the
meanng of secton 2733(a) of the Interna Revenue Code or secton
1(3) of the edera rearms ct. Snce the pastc cartrdges are
not desgned to fre pro|ectes, they cannct be consdered ammunton
accordng to the commony accepted defnton of the term.
813359 54 IT
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Regs. 132, 325.22. 254
C PT R 27. OCCUP TION L T S
SU C PT R ,-SP CI L PRO ISIONS
P RT III. IR RMS
S CTION 3260. T
Reguatons 88, Secton 319.36: Rates of ta .
Ta abty ncurred through the renta of partay deactvated
submachne guns. (See Rev. Ru. 54-180, p. 250.)
C PT R 27 . W G RING T S
SU C f R .-T ON W G RS
S CTION 3285. T
Reguatons 132, Secton 325.22: cuded Rev. Ru. 54-240
wagers.
( so Secton 325.21.)
ranch boards tnd tp games come wthn the meanng of a
drawng as that term s used n secton 3285(b)(2) of the
Interna Revenue Code, and the operaton thereof by an organzaton
e empt from ncome ta under secton 101 of the Code Is kewse
e empt from wagerng ta es, provded no part of the net proceeds
derved from such operaton nures to the beneft of any prvate
sharehoder or ndvdua. owever, no e empton from wagerng
ta es Is provded by aw n connecton wth the operaton of
wagerng poos conducted for proft and a operators thereof,
ncudng organzatons e empt from ncome ta undeT secton 101
of the Code are abe for the wagerng ta es mposed by sectons
3285 and 321)0 of the Code.
dvce s requested concernng the appcaton of the wagerng
ta es mposed by sectons 3285 and 3290 of the Interna Revenue Code
to the operaton of punch boards, tp games, and wagerng poos by
an organzaton e empt from ncome ta under secton 101 of the Code.
Secton 3285 of the Code mposes on wagers an e cse ta equa to
10 percent of the amount thereof. Secton 3290 of the Code provdes
that an occupatona ta of 50 per year sha be pad by each person
abe for the e cse ta and by every person who s engaged n re-
cevng wagers for or on behaf of any person abe for the e cse ta ,
The term wager s denned n secton 3285(b) (1) of the Code as
ncudng ( ) any wager wth respect to a sports event or a contest
paced wth a person engaged n the busness of acceptng such wagers,
( ) any wager paced n a wagerng poo wth respect to a sports event
or a contest, f such poo s conducted for proft, and (C) any wager
paced n a ottery conducted for pro6t.
The term ottery as used n secton 3285(b) (1) of the Code n-
cudes the numbers game, pocy, and smar types of wagerng, but,
under the provsons of secton 3285(b) (2) of the Code, t does not
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255 I 3310.
ncude any drawng conducted by an organzaton e empt from n-
come ta under secton 101 of the Code f no part of the net proceeds
derved from such drawng nures to the beneft of any prvate share-
hoder or ndvdua. (See report of Senate Commttee on nance.
Senate eport No. 781, ghty-second Congress, rst sesson, C. .
1951-2, 458, at 541.) The term drawng refers to the physca
drawng of a tcket, or the equvaent thereof, such as the use of a
whee or a smar devce, whereby the wnner s concusvey deter-
mned by a number, etter, egend, or symbo, wthout reference to any
other event the happenng of whch s beyond the contro of the
operator. See M. T. 44, C. . 1952-2,251.
It s hed that punch boards and tp games come wthn the meanng
of a drawng, as that term s used n secton 3285(b) (2) of the Code,
and the operaton thereof by any organzaton e empt from ncome
ta under secton 101 of the Code s aso e empt from wagerng ta es,
provded no part of the net proceeds derved from such operaton
nures to the beneft of any prvate sharehoder or ndvdua.
Secton 325.21(c) of Reguatons 132, provdes that a wagerng poo
conducted for proft ncudes any scheme or method for the dstrbu-
ton of przes to one or more wnnng bettors based upon the outcome
of a sports event or a contest or a combnaton or seres of such events
or contests, provded such wagerng poo s managed and conducted
for the purpose of makng a proft.
No e empton from wagerng ta es s provded by aw n connecton
wth the operaton of wagerng poos conducted for proft. ccord-
ngy, a operators of such poos, ncudng organzatons whch are
e empt from ncome ta under secton 101 of the Code, are abe for
the 10-percent e cse ta and the occupatona ta of 50 per year
mposed by sectons 3285 and 3290 of the Code. Lkewse, each per-
son engaged n recevng wagers for or on behaf of the operator of
such a poo s aso abe for the occupatona ta .
C PT R 28. PRO ISIONS COMMON TO
MISC LL N OUS T S
SU C PT R . G N R L PRO ISIONS
RT II. SS SSM NT, COLL CTION. ND R UND
S CTION 3310.-R TURNS ND P YM NT O T
Rev. Ru. 54-234
orm 20, uartery edera cse Ta Return-Statement, w
contnue to be furnshed by ta payers whose records do not suppy
a porton of the nformaton caed for on the return.
Secton 4 of Rev. Ru 254, C. . 1053 2,451, superseded.
Secton 1. Purpose.
The purpose of ths Revenue Rung s to contnue the pocy stated
n Revenue Rung 254, C. . 1953-2, 451.
Orgnay ssued as I -Mmeograph No. 54-108, dated une 10,1054.
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Regs. 71, 113.150. 256
Sec. 2. ackground,-
Secton 3 of Revenue Rung 254, supra, provdes n part as foows:
.02 The Interna Revenue Servce w accept returns on orm 720 In whch
the ta payer competes the Informaton caed for n tems 1 through 5 and shows
the amount of ta n coumn c of the approprate schedue on the form. Ta -
payers shoud, however, compete such other portons of the form as may be
feasbe, and shoud be encouraged to suppy such addtona data as they can
based upon e stng records of purchases, saes, producton, and nventores.
.03 Ta payers who do not suppy the data caed for on orm 720 shoud
attach to the form as fed a bref statement e panng the fanre to
sup|rty the necessary data and descrbng the system empoyed by the ta payer
to assure the proper determnaton of e cse ta abty. Where the ta payer
s a member of an organzaton whch submts to the Interna Revenue Servce a
statement of the accountng procedures used by members, the ta payer
may attach a copy of such statement or refer to such statement, n eu of sub-
mttng a separate statement, If the ta payer s procedures are n accordance
wth that descrbed by the organzaton.
.04 The ta payer need furnsh the foregong statement ony once, uness a
further e panaton s requested or uness a change n bs record-keepng pro-
cedures affects hs abty to f n the return or determne the ta .
Sec. 3. Peuod to Whch Ths Pocy Is ppcabe.
The foregong pocy w be contnued unt further notce. No
change n the pocy s contempated for any quarter n 1954.
Sec. 4. ffect on Other Documents.
Ths evenue Rung supersedes secton 4 of Rev. Ru. 254, C. .
1953 -2, 451.
Sec. 5. Inqures.
Ta payers are nvted to consut wth Dstrct Drectors of Interna
Revenue about any probem reatng to the requrements for fng n
orm 720.
S CTION 3312. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION
Reguatons 71, Secton 113.150: Records and Rev. Ru. 54-196
returns.
Canceed documentary stamps may not be removed from the
Instruments to whch they are attached durng the 4-year perod
from the date the ta accrued and, as a matter of protecton to the
ta payer, shoud not be removed before the e praton of the 5-year
perod durng whch sut may be nsttuted to recover any ta es
aeged to be due.
dvce s requested whether documentary stamps may be removed
from nstruments for the purpose of sae or e change by or wth stamp
coectors.
Under secton 3312 of the Interna Revenue Code assessment of
documentary stamp ta es due may be made at any tme wthn 4 years
after the ta es accrued. fter 4 years, but not more than 5 years,
sut may be nsttuted wthout assessment to recover any ta es aeged
to be due but whch reman unpad.
Pursuant to the provsons of secton 113.150 of Reguatons 71, a
nstruments, memoranda, books, or documents to whch documentary
stamps have been aff ed and canceed sha be mantaned and pre-
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257 Regs. 8, 140.212.
served for at east 4 years from the tme of the reated transacton.
In vew of the foregong canceed documentary stamps may not bo
removed from the nstruments to whch they are attached durng the
4-year perod from the date the ta accrued and, as a matter of pro-
tecton to the ta payer, shoud not be removed before the e praton
of the 5-year perod durng whch sut may be nsttuted.
though the Interna Revenue Servce recognzes that there s
no prohbton n the aw or reguatons aganst the remova of such
stamps after the 4-year perod, attenton s drected to the penates
rovded under secton 1823 of the Interna Revenue Cede for the
rauduent use or reuse of such stamps.
P RT I . MISC LL N OUS PRO ISIONS
S CTION 8331. MPTION ROM T O DOM STIC
GOODS PURC S D OR T UNIT D ST T S
Reguatons 8, Secton 140.212: Ta -free Rev. Ru. 54-69
shpment of tobacco, snuff, cgars, cga-
rettes, and cgarette papers and tubes, for
use of the Unted States: Shpments
restrcted.
Cgarettes may not be wthdrawn free of ta for devery to
mtary and navn bases and estabshments n ths country for
dstrbuton to offcers and ensted personne at speca and ho-
day dnners or recreatona actvtes, where the funds used for the
purchase of the cgarettes are derved from donatons by offcers
and ensted personne to cub or camp funds and profts from post
or base e changes.
Permsson has been requested for the wthdrawa of nonta pad
cgarettes for devery to mtary and nava bases and estabshments
n the Unted States for dstrbuton to offcers and ensted personne
at speca and hoday dnners and at recreatona actvtes.
Whe such goods are ntended for gratutous dstrbuton, the
funds wth whch the cgarettes woud be purchased are derved from
donatons by offcers and ensted personne to cub or camp funds,
and profts from post or base e changes.
Secton 3331 or the Interna Revenue Code provdes as foows:
The prvege e stng by provson of aw on December 1, 1873 or thereafter
of purchasng suppes of goods mported from foregn countres for the use
of the Unted States, duty free, sha be e tended, under such reguatons as the
Secretary may prescrbe, to a artces of domestc producton whch are sub-
|ect to ta by the provsons of ths subtte.
Secton 140.212 of Reguatons 8, as added by Treasury Decson
6052, C. . 1953-2, 346, ssued under the authorty of secton 3331
of the Interna Revenue Code, provdes as foows:
Manufacturers of tobacco, snuff, cgnrs, cgarettes, and cgarette papers and
tubes, may shp such artces ta -free from ther factores, n accordance wth
ths subpart, to edera agences and nsttutons for gratutous dstrbuton.
Shpments of such artces for sae by edera agences or nsttutons are not
wthn the meanng of the aw authorzng the purchase of artces ta -free for
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Regs. 46, 316.50. 258
use of the Unted States. Insttutons owned or controed by the Governments
of the severa States, Terrtores, or the Dstrct of Coomba, are not entted
to receve such artces ta -free.
The purpose of the statute s to avod the procedures of requrn
the Government to pay nto the Treasury as ta es funds approprated
out of the Treasury for ts support.
Snce the cgarettes w be pad for from funds of the respectve
organzatons, and not from congressonay approprated funds, the
wthdrawa of cgarettes for devery to mtary and nava bases
and estabshments n ths country for dstrbuton to offcers and en-
sted personne at speca and hoday dnners and at recreatona ac-
tvtes woud not be wthdrawas for use of the Unted States
wthn the meanng of secton 3331 of the Interna Revenue Code.
Cgarettes may not be wthdrawn from factores ta -free for such
purposes.
C PT R 29. M NU CTUR RS CIS ND
IMPORT T S
SU C PT R .-M NU CTUR RS CIS T S
The Revenue Servce has concuded that the porton of Revenue
Rung 54-25, pubshed n Interna Revenue uetn 1954-2, 29,
under date of anuary 11, 1954, deang wth the computaton of ta
base s ambguous and sub|ect to varyng nterpretatons. ccord-
ngy, n the nterest of carty of understandng and appcaton, that
Revenue Rung s superseded to read as foows:
S CTION 3403. T ON UTOMO IL S, TC.
Reguatons 46, Secton 316.50: Scope of ta . Rev. Ru. 54-25
( so Secton 3441, Secton 316.15.)
Method of computng ta mposed by secton 3403 of the Code
wth respect to saes of automobes by an mporter who ses ony
a reta.
Rev. Ru. 54-25, I. R. . 1054-2, 20, superseded.
dvce s requested concernng the method of computng the ta
mposed by secton 3403 of the Interna Revenue Code wth respect
to saes of automobes by an mporter who ses ony at reta.
Under the authorty of secton 3441(b) (1) of the Code, the ta on
saes of automobes by an mporter who ses ony at reta s to be
computed on the prce for whch such artces are sod by manufac-
turers or producers n the ordnary course of trade as determned by
the Commssoner. Such determnaton has been made wth respect
to automobes and has been found to represent an amount equa to
75 percent of the estabshed reta st prce sub|ect to the ad|ust-
ments provded by secton 3441 (a) of the Code. Such ad|ustments are
to be made as foows: To 75 percent of the st prce shoud be ( )
added any separate charge made by the mporter for transportaton
or devery of the car to the purchaser and ( ) deducted the amounts
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259 Regs. 46, 316.50.
of (1) the transportaton or devery e pense actuay ncurred by
the mporter n effectng devery to the purchaser, and (2) any
e pense for nsurng the snpment to the purchaser (but not ncudng
nsurance on the shpment to the mporter). Ths computaton re-
fects the far market prce n the case where the amount of the ta
s to be passed on as a separate tem on the nvoce to the purchaser.
In such case the ta w be computed at the statutory rate of 10
percent of such far market prce. owever, where the amount of
the ta s not passed on as a separate tem but s ncuded n the nvoce
prce, the foregong computaton refects not ony the far market
prce but the ta thereon as we. In that case, and n compance
wth the rue set forth n secton 316.11 of Reguatons 4G, the ta may
be determned by takng one-eeventh (10/110) of such amount, so
as to emnate the ta from the ta base as requred by the aw.
In the event the ta base determned n the above-descrbed man-
ner resuts n a prce whch s ess than the mporter s cost of the auto-
mobes ncudng duty, nsurance, and other charges ncdent to pac-
ng the automobes n condton ready for devery to hs customers,
the ta sha be computed at 10 percent of such cost.
Reguatons 46, Secton 316.50: Scope of ta . Rev. Ru. 54-61
Saes by a manufacturer of new truck or truck traer bodes pro-
duced from new or savaged materas to repace bodes whch have
been wrecked are ta ube under secton 3403(a) of the Interna
Revenue Code.
dvce s requested concernng the appcaton of the ta under sec-
ton 3403(a) of the Interna Revenue Code to the sae by a manufac-
turer of new truck or truck traer bodes produced from new or
savaged materas furnshed by the manufacturer to repace bodes
whch have been wrecked.
Under secton 3403(a) of the Code, ta at the rate of 8 percent s
mposed on the sae by the manufacturer of automobe truck chasss,
automobe truck bodes, truck and bus traer and semtraer chasss,
and truck and bus traer and semtraer bodes.
It s hed that where a manufacturer furnshes ether new or savaged
materas and produces new truck or truck traer bodes to repace
bodes whch have been wrecked, the sae of the bodes by the manu-
facturer s sub|ect to ta under secton 3403(a) of the Code. owever,
under the provsons of secton 3443(a) of the Code, a credt may be
aowed to a manufacturer n the amount of e cse ta whch has been
pad on any new parts purchased and used by hm n the manufacture
of bodes wth respect to whch ta has been reported or pad. (See
secton 316.204, Reguatons 46.)
Saes by a manufacturer of truck or truck traer bodes to deaers
or others for resae are consdered saes at whoesae. Where the
manufacturer s vendee purchases such a body for use and not for re-
sae, the transacton s consdered a sae at reta.
The foowng sets forth the method of computng the ta wth
respect to saes by manufacturers of truck or truck traer bodes at
whoesae, whoesae and reta, and reta ony.
Wth respect to sae of bodes at whoesae, the ta mposed by sec-
ton 3403(a) of the Code shoud be based on the whoesae prce sub-
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Rcgg. 46, 5 316.50. 260
|ect to the foowng ad|ustments provded by secton 3441(a) of the
Code. To the whoesae prce there shoud be added any charge
for the transportaton or devery of the bodes and there shoud be
e cuded any e penses actuay ncurred by the manufacturer (1) n
effectng devery of the bodes to the purchasers, (2) for nstaaton
of the competed bodes on chasss, (3) for nsurng shpments to the
purchasers, and the amount of ta f not entered on the nvoce as a
separate charge.
Under the authorty of secton 3441(b) (1) of the Code, the ta on
reta saes of bodes by a manufacturer who aso ses such artces at
whoesae, s to be based upon hs hghest estabshed whoesae prce to
ndependent deaers, sub|ect to the same ad|ustments herenbefore
stated n connecton wth saes at whoesae.
The ta on saes of bodes by a manufacturer who ses ony at re-
ta s to be computed, under the authorty of secton 3441(b) (1) of
the Code, on the prce for whch such artces are sod by manufac-
turers or producers n the ordnary course of trade as determned by
the Commssoner. Such determnaton has been made wth respect
to truck or truck traer bodes and t has been found to represent 75
percent of the estabshed reta prce, sub|ect to ad|ustment wth re-
spect to the above-mentoned addtons and e cusons provded by
secton 3441(a) of the Code. Ths resuts n the ad|usted prce on
whch the ta s to ba based. If the ta s not ncuded n the reta
prce, t s to be computed at 8 percent of the ad|usted prce. Where
the ta s ncuded n the reta prce, t may be computed at two
twenty-sevenths (8/10.s) of the ad|usted prce n order to provde for
the e cuson of the ta from the prce on whch t s based. In any
case where the ta base determned n ths manner wth respect to
saes by a manufacturer who ses ony at reta resuts n a prce whch
s ess than the manufacturer s cost of the body when n condton ready
for devery to the purchaser, the ta shoud be computed at 8 percent
of such cost.
It s further hed that where a manufacturer merey repaces certan
parts of a used truck or truck traer body beongng to a customer,
such operaton s consdered to consttute a repar operaton and the
ta mposed under secton 3403(a) of the Code does not appy to
the amount charged for such repars. owever, the manufacturer s
abe for ta under secton 3403(c) of the Code wth respect to any
ta abe parts or accessores of hs manufacture or whch were pur-
chased by hm ta -free for further manufacture, whch are sod to
the customer n connecton wth the repar operaton.
Reguatons 46, Secton 316.50: Scope of ta . Rev. Ru. 54-117
ow-bed traer or semtraer whch s desgned and constructed
for transportng heavy equpment and whch by speca permsson
may operate on hghways s consdered to be an automobe truck
traer or semtraer wthn the meanng of secton 3403(a) of the
Interna Revenue Code. Saes of such traers by the manufacturer
are sub|ect to ta under that secton even though they may e ceed the
ma mum wdth and weght mtatons prescrbed by the aws of the
varous States.
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261 Regs. 46, 316.110.
S CTION 3406.- CIS T S IMPOS D Y
T R NU CT O 1941
Reguatons 46, Secton 31G.110: Scope of Rev. Ru. 54-228
ta .
ectrc ar heaters whch, because of ther desgn and construc-
ton and the purpose to be served, are usuay but In or permanenty
attached to a wa, f ture or smar constructon eement, do not
come wthn the cassfcaton of appances of the househod type
contempated by secton 3406(a)(3) of the Interna Revenue Code
and saes thereof by the manufacturer are not sub|ect to the ta
Imposed by that secton. On the other hand, portabe eectrc ar
heaters are consdered to be Incuded n the cassfcaton of app-
ances of the househod type and saes thereof by the manufacturer
are sub|ect to ta . S. T. 1)43, C. . 1952-2, 256, modfed.
dvce s requested concernng the appcaton of the ta on eectrc
appances mposed by secton 3406(a)(3) of the Interna Revenue
Code to eectrc ar heaters of the type desgned for permanent n-
staaton as dstngushed from those of the portabe type.
Secton 3406(a) (3) of the Code, effectve October 1,1941, mposed a
ta at the rate of 10 percent on the sae by the manufacturer, producer,
or mporter of eectrc ar heaters (not ncudng furnaces). y
vrtue of the amendment of that secton of the Code by secton 485 of
the Revenue ct of 1951, effectve November 1, 1951, the ta on such
heaters was mted n appcaton to those of the househod type.
Under the aw as amended by secton 305 of the cse Ta Reduc-
ton ct of 1954, effectve pr 1,1954, the rate of ta on househod
type eectrc ar heaters was reduced from 10 to 5 percent.
S. T. 945, C. . 1952-2, 256, hods that the ta mposed by secton
3406(a)(3) of the Code s appcabe to saes of eectrc ar heaters
whch are not n fact furnaces, even though they take the pace of
furnaces and are permanenty nstaed n the was, cengs, or foors
of budngs.
In addton to eectrc ar heaters, the statute mposes a ta on a wde
varety of eectrc, gas, and o appances of the househod type. In
ths range of ta abe appances the artces vary n sze from arge to
sma. Lkewse, a number of artces are portabe, whe others be-
cause of ther desgn and constructon and the purpose ntended to be
served are usuay but n or permanenty attached to a wa, f ture,
or smar constructon eement. In the admnstraton of secton
3406(a) (3) of the Code t s not possbe to ay down a genera rue or
yardstck such as sze, capacty, or portabty whch s susceptbe of
equa appcaton to each of the artces ta ed thereunder. In other
words the scope of ths secton of the aw s dependent upon the nature
of the partcuar artce nvoved, and consderatons wnch woud be
determnatve n the case of an eectrc ar heater woud not neces-
sary be approprate n the case of other artces named n the aw.
Wth respect to eectrc ar heaters, the dstncton between those
whch are portabe and those whch are but n or permanenty
nstaed s consdered to be a sgnfcant factor n determnng whether
they are appances of the househod type wthn the contempaton of
secton 3406(a) (3) of the Code. It s hed that eectrc ar heaters
whch, because of ther desgn and constructon and the purpose to be
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Regs. 46, 316.120. 262
served, are usuay but n or permanenty attached to a wa, f ture
or smar constructon eement, do not come wthn the cassfcaton of
appances of the househod type contempated by secton 3406(a) (3)
of the Code. ccordngy, saes of such heaters by the manufacturer
are not sub|ect to the ta mposed by that secton. On the other hand,
portabe eectrc ar heaters are consdered to be ncuded n the cass-
fcaton of appances of the househod type and saes thereof by a
manufacturer are sub|ect to ta .
S. T. 945, supra, s modfed to the e tent that t s nconsstent wth
the rung heren e pressed.
Reguatons 46, Secton 316.120: Scope of Rev. Ru. 54-136
ta .
Lenses (e cept st camera enses havng a foca ength of one
hundred and twenty mmeters or ess and moton pcture camera
enses havng a foca ength of thrty mmeters or ess), photo-
graphc apparatus and equpment, and any apparatus or equpment
desgned especay for use n the takng of photographs or moton
pctures or In deveopng, prntng, or enargng photographs or
moton pctures, are not ncuded n secton 3406(a) (4) of the Code,
as amended, and saes thereof by the manufacturer are not sub|ect
to ta . rtces whch pror to the amendment of that secton
were hed to be ta abe under these cassfcatons are not now
cassfabe as parts or accessores, and saes thereof are not sub|ect
to ta on or after November 1,1951, even though sod by the manu-
facturer on or n connecton wth a ta abe camera or ens.
dvce s requested whether photographc apparatus and equp-
ment and certan enses, ta abe under secton 3406(a) (4) of the
Interna Revenue Code pror to ts amendment by the Revenue ct
of 1951 are now ta abe under that secton, as amended, as parts or
accessores when sod by the manufacturer on or n connecton wth a
ta abe camera or ens.
Secton 3406(a)(4) of the Cod- , pror to the amendment thereof
by secton 486(a) of the Revenue ct of 1951, provded as foows:
S C. 3400. CIS T S IMPOS D Y T NU CT O 1941.
(a) Imposton. There sha be mposed on the foowng artces, sod by the
manufacturer, producer, or mporter, a ta equvaent to the rate, on the prce
for whch sod, set forth n the foowng paragraphs (ncudng n each case
parts or accessores of such artces sod on or n connecton therewth, or wth
the sae thereof) :
(4) Photographc apparatus. Comerp (e cept cameras weghng more
than four pounds e cusve of ens and accessores) and enses, photo-
graphc apparatus and equpment, and any apparatus or equpment desgned
especay for use n the takng of photographs or moton pctures or n
deveopng, prntng, or enargng photographs or moton pctures, 25 per
centum une posed photographc fms (ncudng moton pcture fms but
not ncudng -ray fm), photographc pates and senstzed paper, 15 per
centum.
Secton 316.120(a) of Reguatons 46, appcabe for the perod
October 1,1941, to October 31,1951, ncusve, defnes the term photo-
graphc apparatus and equpment as ncudng any artce used on
or n connecton wth a camera or ens n the takng of a st or
moton pcture. The foowng tems are sted as descrptve but
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263 Regs. 46, 316.120.
not a ncusve of such artces: range fnders, vew fnders, ens
e tenson tubes, fters, dffusers, trpods, focusng fnders, etc. That
secton defnes the phrase any apparatus or equpment desgned
especay for use n the takng of photographs or moton pctures or
n the deveopng, prntng, or enargng of photographs or moton
pcture fms as ncudng the foowng artces whch kewse are
stated to be descrptve and not a ncusve: e posure meters, en-
argers, enses and other attachments for enargers, tanks, or pans
desgned for deveopng fms, prntng frames, photofood amps and
refectors, fash bubs, etc.
Secton 3406(a)(4) of the Code, as amended by the Revenue ct
of 1951, effectve November 1,1951, provdes as foows:
S C. 3406. CIS T S IMPOS D Y T R NU CT O 1941.
(a) Imposton There sha be mposed on the foowng artces, sod by the
manufacturer, producer, or mporter, a ta equvaent to the rate, on the prce
for whch eod, set forth n the foowng paragraphs (ncudng n each case
parts or accessores of such artces sod on or n connecton therewth, or wth
the sae thereof) :
(4) photographc apparatus. Cameras and camera enses, and une -
posed photographc fm n ros (ncudng moton pcture Mm), 20 per
centum. The ta mposed under ths paragraph sha not appy to -ray
cameras, to cameras weghng more than four pounds e cusve of ens and
accessores, to st camera enses havng a foca ength of more than one
hundred and twenty mmeters, to moton pcture camera enses havng a
foca ength of more than thrty mmeters, to -ray fm, to unperforated
mcrofm, to fm more than one hundred and ffty feet n ength, or to fm
more than twenty-fve feet In ength and more than thrty mmeters n
wdth. ny person who acqures une posed photographc fm not sub|ect to
ta under ths paragraph and ses such une posed fm n form and dmen-
sons sub|ect to ta hereunder (or n connecton wth a sae cuts such fm
to form and dmensons sub|ect to ta hereunder) sha for the purposes of
ths subsecton be consdered the manufacturer of the fm so sod by hm.
Lenses (e cept st camera enses havng a foca ength of one hun-
dred and twenty mmeters or ess and moton pcture camera enses
havng a foca ength of thrty mmeters or ess), photographc
apparatus and equpment, and any apparatus or equpment desgned
especay for use n the takng of photographs or moton pctures or n
deveopng, prntng, or enargng photographs or moton pctures are
not ncuded n secton 3406(a) (4) of the Code, as amended, and saes
thereof by the manufacturer are not sub|ect to ta . rtces whch
pror to the amendment of that secton were hed to be ta abe under
these cassfcatons are not now cassfabe as parts or accessores and
saes thereof are not sub|ect to ta on or after November 1,1951, even
though sod by the manufacturer on or n connecton wth a ta abe
camera or ens.
The foowng are descrptve of artces ncuded n such cassfca-
tons and not sub|ect to ta , provded they are not ncorporated n a
ta abe camera or ta abe ens so as to become an ntegra part thereof:
Teephoto copyng, portrat and wde ange suppementary ens at-
tachments whch have an nfnte foca ength and cannot be used for
the takng of photographc pctures uness combned wth camera
enses range fnders ncudng those attachabe to cameras but operat-
ng ndependenty thereof but not ncudng those whch, athough
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Regs. 46, 316.204a. 264
detachabe from a camera, cannot operate ndependenty thereof vew
fnders focusng fnders ens e tenson tubes ghtng equpment
ncudng fashhoders, fash guns and hoders for food amps fters
n sp-on ces dffusers e posure meters cabe reeases sef-tmers
suppementary backs and trpods.
rtces that are ncorporated n a ta abe camera or a ta abe ens
so as to become an ntegra part thereof, and range fnders whch,
athough detachabe from a ta abe camera, cannot operate ndepend-
enty thereof, are sub|ect to ta as parts and accessores when sod by
manufacturers on or n connecton wth ta abe cameras or enses.
S CTION 3407. T ON IR RMS, S LLS, ND
C RTRIDG S
Reguatons 46 (1940), Secton 316.80: Scope Rev. RuL 54-98
of ta .
The ta Imposed by secton 3407 of the Interna Revenue Code
attaches to the sae of compete frearms, or frearms n a knockdown
condton but compete ss to a component parts. The ta does
not appy to the sae of parts or accessores for frearms when sod
separatey or when sod wth a compete frearm for use as spare
parts or accessores.
dvce s requested whether the ta on frearms mposed under
secton 3407 of the Interna Revenue Code s appcabe to saes by a
manufacturer of teescopc mounts, rubber reco pads, rfe sghts,
and repar parts for rfes and shotguns.
Secton 3407 of the Code mposes a ta of 11 percent on the sae by
the manufacturer, producer, or mporter of frearms, shes, and car-
trdges. The ta attaches ony to saes of compete frearms, or to
frearms whch, athough n a knockdown condton, are compete as
to a component parts. (Sec. 316.4 of Reguatons 46.) Parts or
accessores of frearms are not ta abe when sod separatey, or when
sod wth a compete frearm for use as spare parts or accessores.
ccordngy, teescopc mounts, rubber reco pads, rfe sghts, and
smar parts for rfes and shotguns are not ta abe when sod sep-
aratey, or when sod wth compete frearms for use as spare parts or
accessores. s to component parts of shes and cartrdges see
S.T.561,C. . I-2,483.
S CTION 3416. LOOR STOC S R UND ON R RIG-
R TORS, UIC - R Z UNITS, ND L CTRIC,
G S, ND OIL OUS OLD PPLI NC S
Reguatons 46, Secton 316.204a: Credts or
refunds of ta on foor stocks of eectrc ght
bubs, refrgerators, and appances.
ppcaton of statute of mtatons contaned n secton 3313 of the
Interna Revenue Code to cams for refund or credt of the manufac-
turers e cse ta es provded n the cse Ta Reducton ct of 1954,
wth respect to foor stocks of refrgerators and appances.
(See Rev. RuL 54-239, p. 234.)
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265 Regs. 42, 130.52.
SU C PT R C.-G N R L DMINISTR TI PRO ISIONS
S CTION 3441. S L TRIC
Reguatons 46, Secton 316.15: ar market
prce n case of reta saes, consgnments,
etc., generay.
Computaton of ta on reta saes of automobes by mporter.
(See Rev. Ru. 54-25, p. 258.)
S CTION 3443. CR DITS ND R UNDS
Reguatons 46, Secton 316.204: Credts and Rev. Ru. 54-118
refunds.
In the case of (1) an overpayment of manufacturers e cse ta
wth respect to certan saes (or uses) of a partcuar cass of artces,
and (2) the crcumstances under whch the overpayment arose are
such that the ta payer coud not obtan a refund thereof wthout frst
compyng wth the provsons of secton 3443(d) of the Interna
Revenue Code, the aowance of such overpayment as an offset aganst
the ta due on other saes of the same or of a dfferent cass of artces
woud consttute a credtng of the overpayment wthn the purvew
of secton 3443(d), whether the aowance s made as a credt on a
return or as an offset n computng the net amount of an addtona
ta abty. ccordngy, n such case the provsons of secton
3443(d) must frst be comped wth, before the ta payer s entted
to any ad|ustment of the overpayment. Under the provsons of that
secton, a credt for the overpayment s not aowabe uness the per-
son who pad the ta estabshes (1) that he has not ncuded the ta
n the prce of the artce wth respect to whch t was mposed, or
coected the amount of ta from the vendee, or (2) that he has repad
the amount of the ta to the utmate purchaser of the artce or has
secured the wrtten consent of such utmate purchaser to the aow-
ance of the credt. Secton 316.204 of Reguatons 46 defnes an ut-
mate purchaser as a person who purchases an artce for consump-
ton, or for use n the manufacture of other artces and not for resae
n the form n whch purchased.
C PT R 30. TR NSPORT TION ND
COMMUNIC TION
SU C PT R O TR NSPORT TION O P RSONS
S CTION 3469. T ON TR NSPORT TION
O P RSONS, TC.
Reguatons 42, Secton 130.52: Rate and Rev. Ru. 54-62
appcaton of ta .
The ta on the transportaton of persons Imposed by secton 3469
of the Interna Revenue Code s to be coected by a carrer at the
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Regs. 42, 130.52.) 266
prescrbed rate of 15 percent wth respect to each payment for trans-
portaton. In computng the amount of ta to be coected a frac-
tona part of a cent must be dsregarded uness t amounts to one-
bat cent or more, n whch case t must be Increased to one cent
The Interna Revenue Servce cannot authorze the coecton of ta
n an amount greater than that egay due.
dvce s requested whether a carrer n coectng the ta on the
transportaton of persons mposed by secton 3469 of the Interna Rev-
enue Code may coect an amount n e cess of 15 percent of ts estab-
shed passenger fare.
In the nstant case the carrer s estabshed passenger fare s 43
cents wth respect to whch a ta of 6.45 cents s appcabe computed
at the prescrbed rate of 15 percent The carrer n order to avod
the use of pennes desres to coect 7 cents as ta wth respect to
each fare or a tota of 50 cents.
Sectons 3469(a) and 1650 of the Interna Revenue Code mpose a
ta of 15 percent upon the amount pad for the transportaton of per-
sons by ra, motor vehce, water, or ar. Secton 3469(d) of the
Code provdes that the ta sha be pad by the person makng the
payment sub|ect to the ta .
Secton 3658 of the Code provdes that n the payment of any ta
not payabe by stamp a fractona part of a cent sha be dsregarded
uness t amounts to one-haf cent or more, n whch case t must be
ncreased to one cent.
It s hed that a carrer must coect the ta at the prescrbed rate of
15 percent of each payment made to t for the transportaton of per-
sons and that n computng the ta on each such payment a fractona
part of a cent must be dsregarded uness t amounts to one-haf cent or
more, n whch case t must be ncreased to one cent. ccordngy,
the ta requred to be coected on an estabshed passenger fare of 43
cents s 6 cents and the Interna Revenue Servce cannot authorze
the coecton of ta n an amount greater than that egay due.
R GUL TIONS 42, S CTION 130.52: Rate and Rev. Ru. 54-182
appcaton of ta .
Separate amounts pad, n connecton wth a one-way trp, for oca
transportaton n one cty and for transfer and through transporta-
ton to a neghborng cty, consttute amounts pad for contnuous
transportaton, and where the tota of the separate amounts pad for
such transportaton, ncudng the cost of the transfer, e ceeds 35
cents, such tota amount s sub|ect to the ta on transportaton of
persons Imposed by secton 3409 of the Interna Revenue Code.
dvce s requested whether the ta on transportaton of persons
mposed by secton 3469 of the Interna Revenue Code attaches to
charges for a one-way trp under the foowng crcumstances.
carrer operates buses on oca nes wthn cty M and on an
nterurban ne between a termna n cty M and a termna n
neghborng cty N. charge of 16 cents s made for any oca fare
on nes wthn cty M. fare of 35 cents s charged for transporta-
ton from any pont on the nterurban ne n cty M to cty N. .
passenger who uses a oca ne n cty M may, upon purchase of a
1-cent transfer, whch consttutes a recept for the payment of the
oca fare of 16 cents, and an addtona payment of 20 cents, or a
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267 Regs. 42, 130.54.
tota of 37 cents, obtan transportaton from any pont on a oca ne
n cty M to the estabshed termna or a dscharge pont on the n-
terurban ne n cty N.
Secton 3469(a) of the Code mposes upon the amounts pad for
the transportaton of persons by ra, motor vehce, water or ar,
wth certan e ceptons not here appcabe, a ta equvaent to 10
percent of the amount so pad. Under the provsons of secton
3469(b) of the Code the ta does not appy to amounts pad for trans-
portaton whch do not e ceed 35 cents.
In accordance wth the provsons of secton 130.52 of Reguatons
42, the ta on the transportaton of persons s to be measured by
the tota amount pad, whether pad at one tme or coected at
ntervas durng the course of a contnuous transportaton, as n the
case of a carrer operatng under the zone system.
It s hed that the separate amounts pad under the crcumstances
descrbed consttute payments for contnuous transportaton as con-
tempated by the reguatons. ccordngy, where the tota of the
separate amounts pad, ncudng the charge for the transfer, e ceeds
35 cents, such tota amount s sub|ect to the ta on transportaton of
persons.
Reguatons 42, Secton 130.54: Payments Rev. Ru. 54-39
not sub|ect to ta .
Secton 130.54(b) of Reguatons 42 sets forth the requrements for
estabshng the nonappcaton of the ta on transportaton of per-
sons mposed by secton 3469 of the Interna Revenue Code, to a pay-
ment made outsde the Unted States for transportaton between two
or more ponts wthn the Unted States, whch s part of transporta-
ton from or to a pont outsde the Unted States. The Interna
Revenue Servce has not approved the use of any form or e empton
certfcate to estabsh the nonta abe character of such a payment.
Reguatons 42, Secton 130.54: Payments Rev. Ru. 54-141
outsde the Unted States.
The ta on the transportaton of persons Imposed by secton 3469
(a) and (c) of the Interna Revenue Code appes to an amount pad
n Canada or Me co by a resdent of the Unted States who ntends
to trave between two ponts n the Unted States and who woud
normay make payment for such transportaton n the Unted States
but nstead goes to Canada or Me co to purchase hs transportaton
for the ostensbe purpose of havng an outsde eg as evdence of
a |ourney from or to a pont outsde the Unted States.
dvce s requested concernng the appcaton of the ta on the
transportaton of persons mposed by secton 3469 (a) and (c) of the
Interna Revenue Code n a stuaton where a resdent of the Unted
States ntends to trave between two ponts n the Unted States and
woud normay make payment for such transportaton n the Unted
States but nstead goes to Canada or Me co to purchase ths transpor-
taton and at the same tme to purchase a separate tcket for trans-
portaton between a pont n Canada or Me co and a pont n the
Unted States for the ostensbe purpose of havng such outsde eg
as evdence of a |ourney from or to a pont outsde the Unted States.
dvce s aso requested as to the ta consequences where such resdent
purchases a through tcket nstead of separate tckets.
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Regs. 42, 5 130.54. 268-
In accordance wth the provsons of secton 3469 (a) and (c) of the
Interna Revenue Code the ta s mposed upon amounts pad wthout
the Unted States on or after November 1,1950, for the transportaton
of persons on or after such date, by ra, motor vehce, water, or ar
whch begns and ends n the Unted States and for seatng or seepng
accommodatons furnshed n connecton therewth.
Secton 130.54(b) of Reguatons 42 provdes, n part, that the ta
does not appy to a payment made outsde the Unted States for trans-
portaton whch begns or ends outsde the Unted States. or pur-
poses of the precedng sentence, a payment made outsde the Unted
States for transportaton between two or more ponts wthn the
Unted States (such transportaton beng referred to n such secton
as the Unted States porton ), whch s part of transportaton from
or to a pont outsde the Unted States s a payment for transporta-
ton whch begns or ends outsde the Unted States, where t s def-
ntey estabshed at the tme of makng payment for the Unted
States porton that such porton s purchased for use n makng the
|ourney from or to a pont outsde the Unted States. The nonta a-
be character of the payment made outsde the Unted States for the
Unted States porton s to be estabshed under the rues set forth
n subparagraphs (2) through (5) of secton 130.54(b), supra. In
these rues the transportaton to or from a pont outsde the Unted
States s referred as connectng transportaton.
It s hed that a resdent of the Unted States purchasng transpor-
taton under the crcumstances descrbed n the frst paragraph has
not, wthn the purvew of secton 130.54 of Reguatons 42, purchased
transportaton whch consttutes connectng transportaton from
or to a pont outsde the Unted States regardess of whether the sep-
arate tcket or the porton of the through tcket whch represents the
outsde eg s used. ccordngy, the aeged connectng trans-
portaton between the pont n Canada or Me co and the pont n
the Unted States sha be dsregarded n determnng abty for the
ta , and the payment made n Canada or Me co for the transporta-
ton whch begns and ends n the Unted States s sub|ect to the ta
on the transportaton of persons.
The foowng e ampes w serve to ustrate the appcaton of
the foregong:
1. resdent of uffao ntends to trave by ra from uffao to
New Oreans. e goes to ort re, Ontaro, Canada, and purchases
hs tcket for the trp from uffao to New Oreans. e aso pur-
chases n ort re a bus tcket for transportaton from ort re
to uffao n order to have an outsde eg as evdence that hs |our-
ney began at a pont outsde the Unted States. e uses the bus
tcket for hs return to uffao. The transportaton by bus from
ort re to uffao does not consttute connectng transportaton.
Therefore, the amount pad n ort re for the ra transportaton
from uffao to New Oreans s a payment for transportaton whch
begns and ends n the Unted States and s sub|ect to the ta .
2. resdent of Detrot ntends to trave to Mam. e goes to
Wndsor, Ontaro, Canada, by prvate automobe and purchases hs
tcket for transportaton by ar from Detrot to Mam. s evdence
of an outsde eg he aso purchases n Wndsor a ra tcket for trans-
portaton for Wndsor to Detrot, but ths tcket s not used snce he
returns to Detrot by prvate automobe. The tcket for the ra
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269 Regs. 42, 130 58.
transportaton from Wndsor to Detrot does not consttute a tcket
for connectng transportaton. Therefore, the amount pad n
Wndsor for the ar transportaton from Detrot to Mam s a pay-
ment for transportaton whch begns and ends n the Unted States
and s sub|ect to the ta .
3. resdent of Detrot ntends to trave to Daas. or the pur-
pose of havng evdence of an outsde eg for hs trp he goes to
Wndsor, Ontaro, Canada, and purchases a through tcket for trans-
portaton from Wndsor to Daas. e actuay begns hs trp n
Wndsor. The transportaton between Wndsor and Detrot s not
connectng transportaton and n determnng abty for the ta
s dsregarded. Therefore, the ta appes to the payment made n
Wndsor for the transportaton from Detrot to Daas.
4. resdent of Los ngees who ntends to trave to New York
goes by prvate automobe to T|uana, Me co, and there purchases
a through tcket for transportaton from T|uana to New York. e
returns to Los ngees by prvate automobe and does not use the
porton of the through tcket coverng the transportaton from T-
|uana to Los ngees whch he had purchased as evdence of an out-
sde eg. The amount pad n T|uana for the porton of the through
tcket representng transportaton from Los ngees to New York s
a payment for transportaton whch begns and ends n the Unted
States, and s, therefore, sub|ect to the ta .
Under the authorty of secton 3791(b) of the Interna Revenue
Code, the concusons stated n ths Revenue Rung w be apped
wthout retroactve effect as to payments made pror to May 1, 1954,
for the type of transportaton heren dscussed, e cept that any ta
whch has been pad on such payments w not be refunded.
Reguatons 42. Secton 130.58: Motor vehces Rev. Ru. 54-47
wth seatng capacty of ess than ten.
Where mousnes are operated to and from an arport and sur-
roundng areas and passengers are pcked up or devered at any pace
or paces desgnated by them, as dstngushed from f ed pckup and
dscharge ponts estabshed by the mousne company, such vehces
are not consdered operated on an estabshed ne wthn the meanng
of secton 3469 of the Interna Revenue Code. If such vehces have
a seatng capacty of ess than 10 adut passengers, ncudng the
drver, the ta on the transportaton of persons s not appcabe to
amounts pad for such transportaton.
Reguatons 42, Secton 130.58: Motor vehces Rev. Ru. 54-108
wth seatng capacty of ess than ten.
Lmousne-automobes barng a seatng capacty of ess than ten
adut passengers, ncudng the drver, operated for the purpose of
conductng sghtseeng and peasure tours where the passengers
are pcked up or devered at any pace or paces desgnated by them,
and where the tours may be vared accordng to the wshes of the
passengers, are not consdered to be vehces operated on an estab-
shed ne wthn the meanng of secton 3469 of the Interna
Revenue Code.
816359 64 18
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Regs. 42, 130.58. 270
dvce s requested whether mousne-automobes operated for
the purpose of conductng sghtseeng and peasure tours, under the
foowng crcumstances, consttute vehces operated on an estabshed
ne wthn the meanng of secton 3469 of the Interna Revenue Code,
corporaton operates a feet of mousne-automobes for the
purpose of conductng sghtseeng and peasure tours. The mou-
snes accommodate seven passengers. The company mantans an
offce where teephone cas for servce are receved from customers,
brokers, and drver-ecturers. It does not, however, mantan an
estabshed pace or termna where servce begns or ends. Cas for
servce orgnate at tourst homes, courts, motes, hotes, nns, cabns,
and practcay any pace toursts stay. Lmousnes are kept over-
nght at the homes of the drver-ecturers and they are dspatched n
the mornng by phone order to the pont of orgn of the cas to pck
up the passengers. The tours are usuay for a party of two and
sedom e ceed four n number, and may be vared accordng to the
wshes of the passengers. Whe advertsed tours menton ponts of
nterest to be vsted, they are prmary suggestons and genera
outnes.
In a representatve month of operatons, over 60 percent of the
carrer s tours began at 40 suburban ponts, whe 38 percent of the
oca tours began at 25 dfferent ponts. Of the tota number of
passengers served, ess than 2 percent presented themseves for servce
at the company s offce. Whe the company operated ony eght m-
ousnes durng the month, t conducted 345 tours.
Secton 3469 (a) of the Code mposes upon the amount pad for the
transportaton of persons by ra, motor vehce, water, or ar a ta
equa to 15 percent of the amount so pad. The ta does not appy
to transportaton by motor vehces havng a seatng capacty of ess
than 10 adut passengers, ncudng the drver, uness such vehce s
operated on an estabshed ne.
Secton 130.58 of Reguatons 42 provdes that the term operated
on an estabshed ne means operated wth some degree of reguarty
between defnte ponts. It does not necessary mean that strct
reguarty of schedue s mantaned that the fu run s aways made
that a partcuar route s foowed or that ntermedate stops are
restrcted. The term mpes that the person renderng the servce
mantans and e ercses contro over the drecton, route, tme, number
of passengers carred, etc. It mpes aso that the prmary contract
between the operator and the person served s for the transportaton
of the person and not for the hre or use of the vehce.
Where mousnes are operated for the purpose of conductng sght-
seeng and peasure tours and passengers are pcked up or devered
at any pace or paces desgnated by them, as dstngushed from f ed
pckup and dscharge ponts estabshed by the mousne company,
and where the tours may be vared accordng to the wshes of the
passengers, such vehces are not consdered operated on an estabshed
ne wthn the meanng of secton 3469 of the Interna Revenue Code,
(See Rev. Ru. 54-47, p. 269, ths uetn.)
It s hed that snce, n the nstant case, the mousnes pck up or
dever passengers at any pace or paces desgnated by them, and the
tours are prmary arranged accordng to the passengers wshes, the
mousnes are not consdered to be operated on an estabshed ne
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271 Regs. 42, 130.60.
and the ta on the transportaton of persons s not appcabe to
amounts pad for such transportaton.
owever, f any partcuar mousne operaton has estabshed a
partcuar tour wth defnte ponts reguary vsted n a reguated
order whch w not be dsrupted accordng to the wshes of the pas-
sengers and over whch a defnte perodc servce s attempted to be
mantaned, athough strct reguarty s not essenta, t woud be
consdered a vehce operated on an estabshed ne wthn the mean-
ng of secton 3469 of the Code and the amounts pad for tours woud
be sub|ect to ta .
Reguatons 42, Secton 130.60: Commutaton Rev. Ru. 54-123
tckets.
The ta on the transportaton of persons Imposed by secton 3409
of the Interna Revenue Code does not appy to amounts pad by
commuters on a weeky bass for day transportaton servce be-
tween ther abodes and ther pace of empoyment, where the
commuters are not furnshed commutaton tckets but are gven
recepts as evdence of payment for the servce and are assgned
specfc seats on the vehce empoyed n the transportaton servce.
dvce s requested whether the ta on the transportaton of per-
sons mposed by secton 3469 of the Interna Revenue Code appes to
amounts pad by commuters for transportaton servce under the
foowng crcumstances.
n operator of buses furnshes transportaton e cusvey for the
accommodaton of persons who commute day to and from ther
paces of empoyment. Under the franchse ssued by the State, the
operator s not permtted to transport any passengers other than con-
tract commuters. The commuter makes payment for the transpor-
taton on a weeky bass and s entted to 10 one-way trps a week
n accordance wth a transportaton and rate contract. Tckets are
not ssued but each commuter s furnshed a recept as evdence of
payment and s assgned a specfc seat on a bus.
Secton 3469(a) of the Code mposes a ta upon amounts pad for
the transportaton of persons by ra, motor vehce, water, or ar.
mounts pad for certan trps are e empt from such ta under sec-
ton 3469(b) of the Code, whch provdes as foows:
(b) empton of Certan Trps. The ta mposed by subsecton (a) sha
not appy to amounts pad for commutaton tckets for one month or
ess .
In the nstant case, the transportaton servce s furnshed to com-
muters traveng day from ther abodes to ther pace of empoyment,
the servce s contracted for on a weeky bass, the servce s used wth
reguarty on each workng day of the week, the commuters are as-
sgned specfc seats on the vehces empoyed n the transportaton
servce, and the commuters are gven recepts whch dentfy them
as the ones entted to the servce. Thus, there are present n the case
substantay a the factors commony assocated wth a commutaton
servce for whch carrers normay ssue commutaton tckets for 1
month or ess wthn the contempaton of the e empton provded for
by the aw. The fact that the servce s rendered under such cond-
tons as not to warrant the ssuance of reguar commutaton tckets
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Regs. 42, 130.75. 272
s not consdered matera, partcuary snce the recept gven each
person payng for the servce serves n practca effect as a commuta-
ton tcket.
ased on the facts n the nstant case, t s hed that the payments
whch the commuters make to the bus operator are consdered pay-
ments for commutaton tckets wthn the meanng of secton 3409
of the Code and, therefore, are not sub|ect to the ta mposed there-
under.
SU C PT R D.- DMINISTR TI PRO ISIONS
S CTION 3470. P YM NT O T S
Reguatons 42, Secton 130.75: Refusa T. D. 6057
to pay ta es.
( so Secton 1715, Secton 101.37, Regua-
tons 43 Secton 3475, Secton 143.55,
Reguatons 113.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RTS 130,
101. ND 143
Reguatons 42 (1942 edton). Reguatons 43 (1941 edton),
and Reguatons 113 (1943 edton) amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
Reguatons 42 (1942 edton) 26 C R, pt. 130 , Reguatons 43
(1941 edton) 26 C R, pt. 101 , and Reguatons 113 (1943 edton)
26 C R, pt. 143 are amended as foows:
Paragraph 1. Secton 130.75 of Reguatons 42 s amended by
strkng out the second sentence thereof.
Par. 2. Secton 101.37 of Reguatons 43, as amended by Treasury
Decson 5349 C. . 1944, 639 , approved March 17, 1944, s further
amended by strkng out the ast sentence of the fourth undesgnated
paragraph.
Par. 3. Secton 143.55 of Reguatons 113 s amended by strkng
out the second sentence thereof.
ecause ths Treasury Decson merey removes from Reguatons
42, Reguatons 43, and Reguatons 113 an nstructon wth respect
to the submsson of nformaton by Dstrct Drectors of Interna
Revenue to thp, Commssoner, t s hereby found that t s unnecessary
to ssue ths Treasury Decson wth notce and pubc procedure
thereon under secton 4(a) of the dmnstratve Procedure ct,
approved une 11, 1946, or sub|ect to the effectve date mtaton of
secton 4(c) of sad act.
Ths Treasury Decson sha be effectve upon ts fng for pubca-
ton n the edera Regster.
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273 Regs. 113, 143.13.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 1855, 3472, and 3791 of the Interna Revenue Code (53 Stat.
206,423, and 467 26 U. S. C. 1855, 3472, and 3791).) ,
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved December 4,1953.
M. . osom,
ctng Secretary of the Treasury.
( ed wth the Dvson of the edera Regster December 8, 1953, 8: 50 a. m.)
SU C PT R -TR NSPORT TION O PROP RTY
S CTION 3475.-TR NSPORT TION O PROP RTY
Reguatons 113, Secton 143.1(f) : Meanng Rev. u. 54-102
of terms.
oundry facng even though consstng of puverzed coke s not
consdered coa wthn the meanng of secton 3475 of the Interna
Revenue Code. n amount pad for the transportaton of such mate-
ra s sub|ect to the ta on transportaton of property at the rate of
3 percent of the amount so pad.
Reguatons 113, Secton 143.13: ppcaton Rev. Ru. 54-54
of ta .
person -who hods hmsetf out to the pubc as one who for com-
pensaton ses, provdes, procures, furnshes, or arranges for the
transportaton of property s consdered to be a person engaged n
the busness of transportng property for hre wthn the meanng
of secton 3475 of the Interna Revenue Code.
dvce s requested concernng the appcaton of the ta on the
transportaton of property mposed by secton 3475 of the Interna
Revenue Code under the foowng crcumstances.
M Company receves nqures from shppers as to the cost and
avaabty of equpment to transport ther produce. It aso receves
nqures from hauers as to the avaabty of oads. Shppers con-
tract wth the company for the transportaton of ther produce and
the company then assgns the oads to hauers for devery at an agreed
prce. fter devery of the oads the hauers return sgned papers
to the company ndcatng acceptance of devery and are pad the
agreed prce. The company then bs the shppers for the contract
prce. The gross earnngs of M Company are represented by the df-
ference between the charges coected from the shppers and the
amounts pad to the hauers.
Under the provsons of secton 3475(a) of the Code the ta appes
to amounts pad to a person engaged n the busness of transportng
property for hre, ncudng amounts pad to a freght forwarder,
e press company, or smar person, but not ncudng amounts pad
by a freght forwarder, e press company, or smar person for trans-
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Regs. 113, 143.13. 274
portaton wth respect to whch a ta has prevousy been pad under
that secton.
The term person engaged n the busness of transportng property
for hre for the purpose of the ta mposed by secton 3475 (a) of the
Code, ncudes not ony a carrer who actuay transports the property
but aso a person who hods hmsef out to the pubc as one who for
compensaton ses, provdes, procures, furnshes, or arranges for ts
transportaton of property.
Under the crcumstances stated above t s hed that M Company s
engaged n the busness of transportng property for hre wthn the
meanng of secton 3475 (a) of the Code. ccordngy, the ta appes
to amounts pad to M Company by the shppers for the transportaton
of ther produce and such company shoud coect the ta and make
return thereof to the Government. owever, the ta does not appy
to amounts pad by M Company to hauers for transportaton wth
respect to whch the ta s payabe to such company.
R GUL TIONS 113, S CTION 143.13: ppcaton Rev. Ru. 54-124
of ta .
Charges made by a carrer to a shpper for shftng empty barges
before oadng and after unoadng n connecton wth transportaton
of property by the carrer represent e penses of the nature generay
ncurred by such carrers and ordnary refected n ther estabshed
tarffs. ed| where for any reason such e pense tems are not n-
cuded n a snge transportaton charge but are stated separatey,
the amounts so stated separatey must be ncuded n (or added to)
the transportaton charge for the purpose of the ta mposed by sec-
ton 3475 of the Interna Revenue Code.
R GUL TIONS 113, S CTION 143.13: ppcaton Rev. Ru. 54-183
of ta .
mounts pad by an agency or nstrumentaty of the Unted
States to carrers for haung pursuant to contracts on Standard
orm 32 (November 1949 edton) ncude both the transportaton
charges and any transportaton ta mposed by secton 3475 of the
Interna Revenue Code for whch the agency or nstrumentaty
may be abe.
dvce s requested whether the ta mposed by secton 3475 of the
Interna Revenue Code on the transportaton of property s n-
cuded h amounts pad by agences or nstrumentates of the Unted
States to carrers for haung performed pursuant to contracts on
Standard orm 32 (November 1949 edton) entered nto wth the
carrers.
Secton 3475 of the Code provdes that a ta sha be mposed upon
the amount pad wthn or wthout the Unted States for the transpor-
taton of property by ra, motor vehce, water, or ar from one pont
n the Unted States to another. The ta s payabe by the person
makng the ta abe transportaton payment and s coectbe by the
person recevng such payment.
Secton 307 of the Revenue ct of 1943, effectve une 1, 1944, ter-
mnated the genera e empton from ta on the transportaton of
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275 Regs. 113, 5 143.3a
property to or from the Government of the Unted States. See Mm.
6194, C. . 1947-2, 210. owever, pursuant to the provsons of. sec-
ton 307(c) of the Revenue ct of 1943, as amended, the Secretary
of the Treasury has contnued the e empton wth respect to the trans-
portaton of property to or from the Government of tne Unted States
on Unted States Government bs of adng. See authorzaton of
the Secretary of the Treasury, dated une 20,1947, C. . 1947-2, 211.
In M. T. 21, C. . 1944, 594, t s hed that the specfc e empton
from edera ta es provded by statutes creatng certan agences
or nstrumentates of the Unted States sted theren, was not ter-
mnated or otherwse affected by secton 307 of the Revenue ct of
1943. Wth respect to the ta on the transportaton of property such
specfc e empton s mted to transportaton charges pad drecty
by such agences or nstrumentates.
ccordngy, amounts pad to a carrer for the transportaton of
property to or from agences or nstrumentates of the Unted States
Government are sub|ect to ta uness (1) the shpments are made on
Unted States Government bs of adng, Standard orm 1103, or
(2) the transportaton charges are pad drecty to the carrer by one
of the Government agences sted n M. T. 21, supra.
Where an agency or nstrumentaty of the Unted States s not
e empt, as stated above, from ta on the transportaton of property,
the determnaton of whether the tota amount pad under a contract
between the agency and a carrer ncudes the amount of ta for whch
the agency s abe, depends upon the terms of the contract.
Paragraph 10(b) of Standard orm 32 provdes as foows:
eofba Ta es. cont as nmy be otherwse provded In ths contract,
the contract prce ncudes a appcabe edera ta es n eTect on the
contract date.
The rue appcabe n construng contract provsons wth respect
to edera transportaton ta es s that n the absence of terms n-
dcatng an e press agreement between the partes to the effect that the
amounts pad to the carrer ncude both the transportaton charges
and the transportaton ta , the ta w not be consdered as so ncuded.
In vew of the provsons of paragraph 10(b) of the contract to the
effect that the contract prce ncudes a appcabe edera ta es
t s hed that the amount pad to a carrer by an agency of the Unted
States under the provsons of such a contract ncudes both the trans-
portaton charges and any transportaton ta for whch the agency
may be abe.
Reguatons 113, Secto 143.30: Transpor- Rev. Ru. 54-8
taton of property beyond the boundares
of the Unted States.
The ta on the transportaton of pro| erty mposed by secton
3475 of the Interna Revenue Code does not appy to shpments of
automobe chasss n the course of e portaton to a foregn country
even though the chasss are further manufactured In the foregn
country and returned to the Unted States.
dvce s requested whether property shpped under the crcum-
stances heren descrbed consttutes property n the course of e porta-
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Pegs. 71, 113.82. 276
ton to a foregn destnaton and e empt from ta on the transportaton
of property mposed by secton 3475 of the Interna Revenue Code.
In the nstant case, shpments of automobe chasss are made by the
manufacturer from an nand pont n the Unted States to a port of
e portaton from whch port the chasss are shpped to a foregn
country where bodes are but thereon and the competed vehces
returned to the manufacturer n the Unted States.
Secton 143.30 of Reguatons 113 provdes that the ta mposed by
secton 3475 of the Code w not appy to an amount pad for trans-
portaton of property n the course of e portaton to a foregn
destnaton or shpment-to a possesson of the Unted States.
It s hed that shpments of automobe chasss under the crcum-
stances descrbed are consdered, for purposes of the ta mposed by
secton 3475 of the Code, to be n the course of e portaton to a foregn
country even though the chasss are further manufactured n the
foregn country and returned to the Unted States. ccordngy, the
ta on the transportaton of property mposed by secton 3475 or the
Code w not appy to amounts pad for the transportaton of the
chasss from the pont of shpment n the Unted States to the port
of e portaton, provded the person payng the transportaton charges
obtans proof of e portaton n accordance wth the provsons of
Reguatons 113.
R GUL TIONS 113, S CTION 143.55: Refusa
to pay ta es.
Reguatons 113 amended. (See T. D. 6057, p. 272.)
C PT R 31. DOCUM NTS ND OT R
INSTRUM NTS
S CTION 3482. CON Y NC S
R GUL TIONS 71, S CTION 113.82: Rate and com- Rev. Ru. 54-197
putaton of ta .
Where reaty s purchased sub|ect to an e stng mortgage, the
mortgage Is not removed by the sae of the reaty even though te
purchaser agrees wth the mortgagee to pay the mortgage at the
same tme that he takes tte to the reaty and the amount of such
mortgage may be e cuded from the sae prce of the reaty n com-
putng the ta on conveyances mposed by secton 3482 of the
Interna Revenue Code.
dvce s requested concernng the appcaton of the stamp ta
on conveyances mposed by secton 3482 of the Interna Revenue Code
n a transacton where, pursuant to a contract of sae, reaty s con-
veyed by deed to a purchaser, sub|ect to an e stng mortgage whch
the purchaser, by drect negotaton and agreement wth the mort-
gagee, pays off at the tme tte to the property s conveyed to the
purchaser.
Secton 3482 of the Code mposes a stamp ta on any deed, nstru-
ment, or wrtng whereby any ands, tenements, or other reaty sod
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277 3672.
sha be granted, assgned, transferred, or otherwse conveyed to,
or vested n, the purchaser or purchasers, when the consderaton or
vaue of the nterest or property conveyed, e cusve of the vaue of
any en or encumbrance remanng thereon at the tme of sae,
e ceeds 100. Where the net consderaton s n e cess of 100, the
rate of ta s 55 cents on each 500 or fractona part thereof.
It s hed that where reaty s purchased sub|ect to an e stng mort-
gage, the mortgage s not removed by the sae of the reaty even
though the purchaser agrees wth the mortgagee topay the mortgage
at the same tme that he takes tte to the reaty. The eecton by the
Purchaser to pay the mortgage was not a part of the contract of sae
ut was negotated ndependenty and coateray by the purchaser
wth the mortgagee. ccordngy, snce the mortgage was not re-
moved by the sae, the amount of such mortgage may be e cuded
from the sae prce of the reaty n computng the ta appcabe to
the conveyance of the reaty.
C PT R 36. COLL CTION
SU C PT R . LI N OR T S
S CTION 3670. PROP RTY SU CT TO LI N
Rev. Ru. 54-154
edera ta ens attach to property ony to the e tent of the den-
quent ta payer s nterest theren. Where a ta payer has ony an
opton to purchase rea property at the tme the edera ta en
arses, the en attaches to the opton and not to the rea estate. Where
hs rghts under the opton are termnabe, the Government s rghts,
by vrtue of ts en upon the ta payer s nterest, are kewse termn-
abe, beng no greater than those of the ta payer. ccordngy, when
the ta payer s rghts under an opton termnate after the edera ta
en has arsen, the rghts of the Unted States n the opton aso
termnate, snce there s no onger any property n the opton to whch
a en can attach.
S CTION 3672. LIDITY G INST MORTG G S,
PL DG S, PURC S RS, ND UDGM NT
CR DITORS
Ct. D. 1764
DMINISTR TI INT RN L R NU COD D CISION O SUPR M COURT
. Wthhodng and Soca Secuhty Ta es Lens Pbobty
edera and Muncpa Lens.
The frst In tme s the frst In rght rne appes n determnng
the reatve prorty of statutory edera and muncpa ens whch
attach to the same rea estate, where no queston of nsovency s
Invoved. The prorty of each en depends on the tme t attached
to the property and became cboate not on the fact that one en was
specfc and the other genera. The fact that under edera aw
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13672.1 278
the edera ens were subordnate to a recorded mortgage and that
under State aw the muncpa ens were entted to prorty over
the mo gage dd not gve the muncpa ens prorty over the
edera ens.
2. UDGM NT C T D.
udgment of the Supreme Court of rrors of the State of Con-
nectcut (94 . (2d) 10 (1952)) vacated and case remanded.
SUP U COU T O T UNIT D ST T S
The Unted tatet of merca, pettoner, v. Cty of New rtan, Connectcut,
et n.
On wrt of certorar to the Supreme Court of rrors of the State of Connectcut
ebruary 1,1954
OPINION
Mr. ustce MINTON devered the opnon of the Court
The queston presented by ths wrt Invoves the reatve prorty of statutory
edera and muncpa ens to the proceeds of a mortgage forecosure sae
of the property to whch the ens attached.
Two mortgages on the rea property of a corporaton ocated n the cty of
New rtan, Connectcut, were forecosed by |udgment sae n the Superor
Court of artford County, and a gross sum of 28,071.24 was reazed. ganst
ths fund, ere were cams of some 31,000, ncudng e penses of the sae,
the two mortgages, a udgment of record, and varous statutory ens asserted
by the cty and by the Unted States. The edera ens, securng unpad
wthhodng and unempoyment ta es and nsurance contrbutons totang
8,475.13, were created by secton 3(570 of the Interna evenue Code.1 They
arose at the tmes the assessment sts were receved n the offce of the Co-
ector of Interna Revenue for Connectcut on varous dates between pr 26,
1943, and September 21, 1950. The cty s ens, whch attached to the specfc
rea estate sod In the tota sum of 3,587.71, are for denquent rea estate ta es
and water rent. The rea estate ta es became due on varous dates n 1047
through 1951, the ens attachng In each case as of October 1 or other assess-
ment date of the pror year the water rent ens arose upon faure to pay4
and date from December 1,1947, to une 1,1951.
Connectcut statute provdes that rea estate ta ens sha take preced-
ence of a transfers and Incumbrances n any manner affectng the property
sub|ect to the en. nother State aw gves the water rent ens precedence
over a other ens or ncumbrances e cept ta es on the property sub|ect to
the ens. The funds avaabe for dstrbuton beng nsuffcent to pay a
camants n fu, the superor court drected that the e penses, the cty s ens,
the mortgages, the udgment en, and the Unted States ens be pad n that
order. The Unted States appeaed from the udgment nsofar as the statutory
ens of the cty were gven prorty over those of the Unted States. The Su-
preme Court of rrors of Connectcut affrmed, 139 Conn. 3G3, 94 . 2d 10, and
we granted certorar, 346 U. S. 809.
We are here deang wth severa statutory ens, some owned by the cty and
some by the edera Government, on rea estate. The Supreme Court of rrors
stated that the cty s ens were specfc and perfected. Such characterzaton
of a en by the State s not, of course, concusve aganst the edera Government.
Unted, States v. Securty Trust d Savngs ank, 340 U. S. 47, 49 Ct. D. 1736,
S C. 3670. PROP RTY SU CT TO LI N.
If any person abe to pay any ta negects or refuses to pay the same after demand,
the amount (Incudng any Interest, penaty, addtona amount, or addton to such
tar, together wth any costs that may accrue In addton thereto) sha be a en In favor
of the Unted States upon a property and rghts to property, whether rea or persona
beongng to such person. I. R. C., sec. 3070, 26 U. S. C. (1946 ed.) sec. 3670.
I. R. C., sec. 3671. 26 U. S. C. (1946 ed.) sec. 3671.
Conn. Gen. Stat., 1949. c. 88. sec. 1853.
Conn. Gen. Stat., 1040, c. 34, tec. 758.
Conn. Gen. Stat., 194D. c. 88. sec. 1853.
Conn. Gen. Stat., 1949, c. 34, sec. 758. s construed by the Supreme Court of rrors
of Connectcut In ths case, the term ta es In sec. 758 Incudes ony those ta es whch
may be assessed n favor of the State or some subdvson thereof and whch, under the
aw, are secured by specfc ens npou rea propert/. 139 Conn. 363, 867, 64 . 2d 10. 12.
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279 3672.
C. . 1950-2,151 Inos t. Campbe, 329 U. S. 362, 371. owever, we accept
the hodng as to the specfcty of the cty s ens snce they attached to specfc
peces of rea property for the ta es assessed and water rent due. The ens
may aso be perfected n the sense that there s nothng more to be done to have
a choate en when the dentty of the enor, the property sub|ect to the en, and
the amount of the en are estabshed. The edera ta ens are genera and,
n the sense above ndcated, perfected. ut the fact that one group of ens s
specfc and the other genera n and of tsef s of no sgnfcance n these cases
nvovng statutory ens on rea estate ony, tnted State v. Cty of Greenve,
118 . 2d 963, 964 Ct. D. 1524, C. . 1941-2, 173 . mortgage s a swcfc en,
yet a statutory en s as bndng as a mortgage, and has the same capacty
to bod the and so ong as the statute preserves t n force. Rankn v. Scott,
12 Wheat. 177,179.
Thus, the genera statutory ens of the Unted States are as bndng as the
specfc statutory ens of the cty. The cty gans no prorty by the fact that
ts ens are specfc whe the Unted States ens are genera. Obvousy, the
State cannot on behaf of the cty mpar the standng of the edera ens, wth-
out the consent of Congress, ehgan v. Unted States, 317 U. S. 338, 340
Ct. D. 1568, C. . 1943, 1130 Unted State v. Okahoma, 261 U. S. 253, 260
Unted States v. Snyder, 149 U. 8. 210, 214. On the other hand, the edera
statutes do not attempt to gve prorty n a cases to ens created under the
paramount authorty of the Unted States. The statute creatng the edera
ens here nvoved, 1. R. C, secton 3670, does not n terms confer prorty upon
them.
When the debtor s nsovent. Congress has e pressy gven prorty to the
payment of ndebtedness owng the Unted States, whether secured by ens or
otherwse, by secton 3466 of the Revsed Statutes, 31 U. S. C. (1946 ed.) secton
191. In that crcumstance, where a the property of the debtor Is nvoved,
Congress has protected the edera revenues by mposng an absoute prorty.7
Where the debtor s not nsovent. Congress has faed to e pressy provde for
edera prorty, wth certan e ceptons not reevant here,8 athough the Unted
States s free to pursue the whoe of the debtor s property wherever stuated.
The State, havng a en ony upon property wtbn ts boundares, may not reach
beyond the State ne to fasten t en upon other property. The record does
not estabsh that the ta payer n ths case was nsovent.
It does not foow, however, that the cty s ens must receve prorty as a
whoe. We beeve that prorty of these statutory ens s determned by another
prncpe of aw, namey, the frst n tme s the frst n rght. s stated by
Chef ustce Marsha n Rankn v. Scott, supra:
The prncpe s beeved to be unversa, that a pror en gves a pror
cam, whch s entted to pror satsfacton, out of the sub|ect t bnds, uness
the en be ntrnscay defectve, or be dspaced by some act of the party
hodng t, whch sha postpone hra n a Court of aw or equty to a subse-
quent camant. 12 Wheat., at 179.
Ths prncpe s wdey accepted and apped, n the absence of egsaton to
the contrary. 33 m. ur., Lens, secton 33 53 C. . S., Lens, secton 101). We
thnk that Congress had ths cardna rue n mnd when t enacted secton 3670,
a schedue of prorty not beng set forth theren. Thus, the prorty of each
statutory en contested here must depend on the tme t attached to the property
n queston and became choate.
The Unted States n camng prorty for a ts ens rees heavy on two
recent cases from ths court. Unted States v. Securty Trust Savngs unk,
tupra, and Unted States v. Gbert ssocates, 345 U. S. 361. We do not thnk
they are nconsstent wth our decson n ths case.
The Securty Trust case nvoved an nchoate attachment en that had not
rpened nto a |-dgment at the tme the edera ta ens attached. We noted
that n|umerous contngences mght arse that woud prevent the attachment
en from ever becomng perfected by a |udgment awarded and recorded.
M0 U. S., at 50. Thus, the attachment en was merey a s pendens notce
that a rght to perfect a en e sts. Ibd. Such nchoate ens may become
Certan as to amount, Identty of the enor, or the property sub|ect thereto on/
Unted States v. Gbert suneaten, 345 II. R. 3 1 fCt. D. 1757, C. t. 1953-1, 474
Unted Statet . Wadd, oand nn, . 123 U. S. 353 Ct. D. 1824, C. . 1945, 45 ) 1.
, . -/., 1. t. C, tec. 2800(e), 26 . S. C. (1846 ed.) nee. 2800(e) (dsted sprts
tu en).
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3C72.) 2S
at some tme subsequent to the date the edera ens attach and cannot then
be permtted to dspace such edera ens. Otherwse, a State coud affect
the standng of edera ens, contrary to the estabshed doctrne, smpy by
causng an nchoate en to attach at some arbtrary tme even before the amount
of the ta , assessment, etc., Is determned. ccordngy, we concuded In
Securty Trust that the ta ens of the Unted States are superor to the
nchoate attachment en . Id., at 51. In the nstant case, certan of
the cty s ta and water rent ens apparenty attached to the specfc property
and became choate pror to the attachment of the edera ta ens.
The State and the Unted States were both hoders of genera statutory ens
In the Gbert ssocates case. ut the queston we have here dd not arse
there because that was a case nvovng persona property and Insovency of the
ta payer. We sad n that case:
Where the en of the town and that of the edera Government are both
genera, and the ta payer s nsovent, secton 3466 Revsed Statutes ceary
awards prorty to the Unted States. 345 U S., at 366.
ere the contest s between two groups of statutory ens, one specfc and one
genera, attached to the same rea estate, wth no queston of Insovency n-
voved therefore, the frst n tme s the frst n rght.
The State fnds the rue of frst n tme, frst n rght not appcabe because
of secton 3672 of the Interna evenue Code,10 whch makes the en of the
Unted States nvad as to the pror recorded mortgages and the |udgment n
ths case. It ponts out that the mortgagee coud have pad the denquent rea
estate ta es and water rent, wth the amount so pad becomng part of the
mortgage debt covered by the mortgage en, and suggests that the edera
ta en woud therefore be nvad as to such amount by vrtue of secton 3672.
rom ths and a beef that Congress dd not Intend, by gvng mortgages and
|udgments prorty over edera ta ens, to supersede State aws makng certan
nterests superor to mortgages and |udgments, the Supreme Court of rrors
concuded that by enactng secton 3672 Congress e pressed the ntenton that
edera ens shoud be subordnated to such mortgages and |udgment ens as
are descrbed theren and, consequenty, subordnated to such other ncumbrances
as have prorty over those mortgages and |udgment ens.
We do not agree. The Unted States s not nterested n whether the State
receves ts ta es and water rents pror to mortgagees and udgment credtors.
That s a matter of State aw. ut as to any funds n e cess of the amount
necessary to pay the mortgage and |udgment credtors, Congress ntended to
assert the edera en. There Is nothng n the anguage of secton 3672 to show
that Congress ntended antecedent edera ta ens to rank behnd an| but the
specfc categores of Interests set out theren, and the egsatve hstory ends
support to ths mpresson.
Under the crcumstances, we vacate the |udgment of the Supreme Court of
rrors of Connectcut and remand the case to that court to have determned the
order of prorty of the varous ens asserted, n accordance wth ths opnon.
udgment vacated.
Rev. Ru. 54-93
Procedure wth respect to fng of notces of edera ta ens n
the State of New York.
Chapter 536 of the Laws of New York, 1944, an ct to amend the
en aw, n reaton to ens for ta es payabe to the Unted States
See Sarner, Correaton of Prorty and Len Rghts In the Coecton of edera
Ta es. 95 U. of Pa. L. Rev 73 , 755-761.
W S C. 3672. LIDITY G INST MORTG G S, PL DG S, PURC S RS.
ND UDGM NT CR DITORS.
(a) Invadty of Len Wthout Notce. Such en sha not be vad as aganst any
mortgagee, pedgee, purchaser, or udgment credtor unt notce thereof has been fed
by the coector . I. R. C, sec. 3672, as amended, 63 Stat 882, 26 C. S. C.
(1940 ed.) sec. 3672.
u Conn. Gen. Stat, 1949, c. 361. sec. 7102.
a We need not now pass upon the merts of ths suggeston snce the stuaton Is not
presented by the record n ths case.
139 Conn. 363, 373. 94 . 2d 10. 15.
See Unted States v. Gbert ssocates, 345 U. S. 301, 364 Unted States . Securty
Trust Savngs Sank, 340 U. S. 47, 01 (concurrng opnon).
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281 3C72.
of merca, whch authorzes the fng wth desgnated county or
other oca offcas n that State, of notces of edera ta ens aganst
rea or persona property (and of certfcates of reease or dscharge
of such ens), s accepted by the Interna Revenue Servce as egsa-
ton referred to n secton 3672 of the Interna Revenue Code, authorz-
ng the fng of notces of edera ta ens n desgnated county or
other oca offces.
The above provsons, as set out n artce 10- of book 32 of Mc-
nney s Consodated Laws of New York, nnotated, as amended,
are as foows:
Sectto 240. Notces or n.rNO Lens and C nnc T g o Reease or Dscharge.
1. Notces of ens upon rea property for ta es payabe to the Unted States
of merca and certfcates reeasng or dschargng such ens sha be fed n
the offce of the cerk of the county n whch rea property sub|ect to any such
en s stuated, e cept that If rea property sub|ect to any such en s stuated
n the county of ngs, the county of ueens, the county of New York or the
county of ron they sha be fed n the offce of the cty regster of the cty
of New York n such county. If such property be stuated n two or more coun-
tes, such notce or certfcate sha be fed n the offce of the cerk or the cty
regster, as the case may be, n each of such countes .
2. Notces of ens upon persona property for ta es payabe to the Unted
States of merca and certfcates reeasng or dschargng such en sha
be ted n the county wthn the cty of New York or n the town or cty where
the owner, f a resdent of the state, resdes at the tme the en arses, and
f not a resdent, n te county wthn the cty of New York or n the town or
ety where the property s at such tme. If there s more than one owner, such
notces or certfcates sha be ted n each county wthn the cty of New York
or town or cty wthn the state where each owner resdes at the tme the en
arses, and If any snch owner be a nonresdent of the state at suc tme, then
aso n the county wthn the cty of New York or In the town or cty n whch
the property s at such tme. In the cty of New York, such notces and cer-
tfcates sha be ted as foows: In the borough of rookyn, n the offce of the
cty regster n the county of ngs In the borough of ueens, n the offce of
the cty regster n ueens county n the borough of Rchmond, n the offce of
the cerk of the county of Rchmond: n the borough of Manhattan, n the offce
of the cty regster n the county of New York, and n the borough of the ron ,
n the offce of the cty regster n the county of ron . In every other town or
cty of the state, such notces and certfcates sha be fed n the offce of the
town or cty cerk, uness there s a county cerk s offce 1b such town or cty,
n whch case they sha be fed theren. If the property s n the cty of New
York at the tme the en arses, the notce or certfcate sha be fed n the
county wthn the cty of New York or n the town or cty where the owner, or
each of severa owners who are resdents of the state, resdes at the tme the en
arses, and aso In the county where the property Is stuated.
Sec. 241. es, Inde es, and ntres.
The offcer mantanng each offce specfed In secton two hundred forty
sha procure, at the e pense of the county, town or cty, a fe to he styed and
abeed federa ta en notces, and an Inde book or card Inde system to
be styed and abeed edera ta Iea nde . When a notce of any such
ta en s presented to hm for fng, he sha fe t n numerca order n the
fe, and sha enter It aphabetcay In the federa ta en nde . The entry
sha show the name and resdence of the ta payer named n the notce, the
coector s sera number of the notce, the date, hour and mnute of fng and
the amount of ta and penaty mposed.
Sec. 242. Reease and Dscharge of Lens.
When a certfcate of reease or dscharge of any such ta en, ssued by the
proper offcer, s presented for fng n the offce of the offcer where the notce
of en Is fed, such offcer sha permanenty attach the certfcate to the notce
of en and sha ent r the certfcate, wth the date In the federa ta en
nde or card nde system on the ne where tLe notce of en s entered. Snch
certfcate need not be acknowedged or proved e cept n accordance wth the
aws of the Unted States.
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5 3692. 282
Sec. 243. ees.
The fee to be pad a cerk or regster for fng and Inde ng each certfcate
of reease or dscharge of any such ta en Is ffty cents, e cept n the county
cerk s offces n the cty of New York, where the fee sha be as provded n
secton ffteen hundred Ufty-seven-a of the cv practce act.
Sec. 245. Purpose of rtce.
Ths artce s passed for the purpose of authorzng the fng of notce of
ens n accordance wth the provsons of the statutes of the Unted States
of merca appcabe thereto.
Whenever t becomes necessary to fe n the State of New York a
notce of edera ta en, or a certfcate of reease or dscharge of
such en, dstrct drectors of nterna revenue shoud fe the same n
the offce of the county or other oca offca desgnated n the above-
statute.
ev. Ru. 54-125
|udgment credtor wthn the contempaton of secton 3672 of
the Interna Revenue Code s a credtor who has obtaned not ony a
|udgment aganst hs debtor but aso (under appcabe State aw)
a en aganst the |udgment debtor s property pror to the fng of the
notce of the edera ta en. Mer v. ank of merca. N. T.
S. ., et a., 166 ed. (2d) 415. In the State of New York a |udgment
credtor acqures a en aganst funds of the |udgment debtor n the
hands of a thrd party upon servce of a subpoena and restranng
order n suppementary proceedngs under the New York Cv Prac-
tce ct. In re: rmont nttng Undergarment Co., nc., 182
ed. (2d) 740. (See ey. Ru. 225, C. . 1953-2, 467, as to when
a |udgment credtor acqures a en aganst the persona property of
t |udgment debtor n the State of New York.)
SU C PT R G DISTR INT
P RT I. DISTR INT O P RSON L PROP RTY
S CTION 3692. L Y
Rev. u. 54-171
Notces of evy to coect denquent edera ta es shoud not be
served upon a State empoyment commsson for the purpose of
reachng weeky benefts payabe to an unempoyed ta payer.
dvce s requested whether the edera Government, n the co-
ecton of edera ta es, w foow the provsons of a State statute
whch, among other thngs, e empts from evy, e ecuton, attach-
ment, or any other remedy whatsoever provded for the coecton of
debt, unempoyment benefts payabe to a ta payer by the State
empoyment commsson.
State e empton aws are nappcabe per se to debts, ncudng
ta es, due from a ctzen to the Unted States. Unted States v.
owe, 9 ed. 674. owever, they become appcabe when made so
by Congress tsef. nk v. CTNe, 106 U. S. 272, 276. The matter
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283 3092.
was summarzed n ank of the Unted States v. astead, 23 U. S.
51, 63, where the Supreme Court of the Unted States sad:
n offcer of the Unted States cannot, n the dscharge of hs duty, be gov-
erned and controed by State aws, any farther than such aws have been
adopted and sanctoned by the egsatve authorty of the Unted States.
Secton 1601 of the Interna Revenue Code, reatng to credts
aganst ta on empoyers of eght or more, provdes n part as foows:
(a) Contrbutons to State Unempoyment unds.
(1) The ta payer may. to the e tent provded n ths subsecton and sub-
secton (c), credt aganst the ta mposed by secton 1600 the amount of
contrbutons pad by hm nto an unempoyment fund mantaned durng
the ta abe year under the unempoyment compensaton aw of a State
whch s certfed for the ta abe year as provded n secton 1003.
(c) Lmt on Tota Credts. The tota credts aowed to a ta payer under
ths subchapter sha not e ceed 90 per centum of the ta aganst whch such
credts are aowabe.
Secton 1603of the Code provdes, n part, as foows:
(a) Requrements. The Soca Securty oard now the Secretary of Labor
sha approve any State aw submtted to t, wthn 30 days of such submsson,
whch t fnds provdes that

(4) TI money wthdrawn from the unempoyment fund of the State sha
be used soey In the payment of unempoyment compensaton, e cusve
of e penses of admnstraton, and for refunds of sums erroneousy pad
nto such fund and refunds pad n accordance wth the provsons of
secton 1006(b) .
The above-quoted provsons of the Interna Revenue Code ev-
dence a Congressona ntent that State unempoyment compensaton
aws sha be approved and certfed for purposes of securng the ta
credt under secton 1601 (a) of the Code ony f the requrements under
secton 1603(a) of the Code are met. Thus, t appears that Congress
has e pressy provded that State aws to be approved and certfed
must requre, among other thngs, that a money wthdrawn from
the unempoyment fund sha be used soey n payment of unempoy-
ment compensaton and certan refunds. ccordngy, for a State
unempoyment compensaton agency to use ths money to satsfy out-
standng edera ta abtes woud appear to contravene Con-
gressona ntent.
Under the provsons of secton 1603(c) of the Code, the State
aws are certfed each year, whch ndcates that the provsons
thereof and the way n whch they are admnstered are e amned
annuay by the Department of Labor for the purpose of determnng
whether the above-mentoned requrements are met. In the nstant
case the State aw has been approved and duy certfed. ( or cer-
tfcaton as to 1953, see 19 . R. 147, dated anuary 8,1954.)
In the ght of the foregong, t s cear that Congress ntended
the State empoyment commssons to use the money from the unem-
poyment funds soey for the payment of unempoyment compensa-
ton and certan refunds, and not for any other purpose. ccord-
ngy, notces of evy to coect denquent edera ta es shoud not
be served upon the State empoyment commsson for the purpose of
reachng weeky benefts payabe to an unempoyed ta payer.
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Regs. 118, 539.3797-4 284
C PT R 38. MISC LL N OUS PRO ISIONS
S CTION 3797. D INITIONS
R GUL TIONS 118, S CTION 39.3797-4: Partner- Rev. Ru. 54-84
shps.
In 1952 , a person wth capta, , a awyer, C, a ease supern-
tendent, and D, a drng superntendent, entered nto an agreement
to acqure, e pore, and deveop o and gas propertes. y the terms
of the agreement, , C, and D were authorzed to acqure o and gas
eases, to make contracts and commtments for the drng of wes
for o and gas, and otherwse to deveop the property they assumed
responsbty for the operaton and management of the propertes
acqured. agreed to furnsh a toos, to fnance the pro|ect, and
to bear any osses, but he reserved the rght to refuse at any tme to
contrbute further money. It was agreed that shoud frst be rem-
bursed out of the ncome from the property for a cost and e penses,
and that thereafter the profts shoud be dvded one-haf to and
one-s th each to , C, and D. , C, and D receved no compensaton
e cept ther share of the profts. The arrangement by ts terms dd
not provde the contnuty of fe and centrazaton of management
characterstc of a corporaton. Operatons were very successfu, and
subsequenty the partes sod certan of ther producng eases hed
for more than 6 months to an outsde purchaser. The eases had been
taken n s name and had not formay transfererd tte theren
to , C, and D pror to the sae, but the contract of sae rected that
, C, and D, as we as , were owners of nterests n the eases.
ed, the arrangement between , , C, and D consttute a |ont
venture or partnershp for edera ncome ta purposes , C, and D
were |ont venturers wth n the acquston, e poraton, and deve-
opment of o and gas propertes, rather than agents or empoyees
of n searchng for and easng such propertes. Of. W. L. Waa v.
Commssoner, 60 . (2d) 347, and W. . Mawey et a. v. Comms-
soner, 143 . (2d) 429. The eases hed for the group n s name
constuted partnershp assets, t beng mmatera for that purpose
that tte was hed n s name ony. To the e tent that such eases
consttute property used n the trade or busness wthn the mean-
ng of secton 117(|) of the Interna Revenue Code, gans or osses
resutng from the sae thereof are sub|ect to the provsons of that
secton.
R GUL TIONS 118, S CTION 39.3797-4: Partner-
shps.
Dstrbutve share of an organzaton s net ncome ta abe to
partner. (See Rev. Ru. 54-68, p. 151.)
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2S5 Refrs. 118. 39.3797-5.
Reguatons 118, Secton 39.3797-4: Partner-
shps.
Status for sef-empoyment ta purposes of the ncome derved by
a wfe from a busness carred on by a husband and wfe partnershp
n a State where such partnershps are not vad. (See Rev. Rut.
54-75, p. 169.)
Reguatons 118, Secton 39.3797-5: Lmted Rev. Ru. 54-213
partnershps.
( so Secton 1023, Secton 406.401, Regua-
tons 120.)
mted partner, under the aws of the State of Indana or of
any other State havng equvaent aws concernng mted partner-
shps, s not abe above and beyond bs capta contrbuton for the
obgatons of a mted partnershp (whch woud ncude edera
wthhodng ta es due from such a partnershp), provdng there are
no facts showng conduct on hs part n connecton wth the partner-
shp busness whch woud render hm abe ns a genera partner.
dvce s requested reatve to the abty of a mted partner n
a mted partnershp n the State of Indana for edera wthhodng
ta es due from the partnershp.
In the nstant case, the partnershp was composed of two persons,
a genera partner and a mted partner. ankruptcy proceedngs
whch were fed aganst the genera partner have been cosed. There
were no proceedngs aganst the mted partner or the partnershp
tsef nether were they partes to the proceedngs aganst the genera
partner. There reman unpad edera wthhodng ta es for the four
quarters of the year 1951. The partnershp was a bona fde mted
partnershp.
Secton 50-121 of chapter 1, tte 50, voume 10, part 1, of urns
Indana Statutes, nnotated (1951 Repacement), provdes that a
mted partnershp s a partnershp formed by two or more persons
havng as members one or more genera partners and one or more
mted partners. The mted partners as such sha not be bound
by the obgatons of the partnershp. Secton 50-127 thereof pro-
vdes that a mted partner sha not become abe as a genera partner
uness, n addton to the e ercse of hs rghts and powers as a mted
partner, he takes part n the contro of the busness. nd secton
50-136(1) (a) provdes that a mted partner sha not receve from
a genera partner or out of partnershp property any part of hs con-
trbuton unt a abtes of the partnershp, e cept abtes to
genera partners and to mted partners on account of ther contr-
butons, have been pad or there remans property of the partnershp
suffcent to pay them.
The above provsons show ceary that under Indana aw a mted
partner s not abe above and beyond hs contrbutons for the ob-
gatons of a mted partnershp (whch woud ncude edera wth-
hodng ta es due from such a partnershp) uness he takes part n
the contro of the busness. In the absence of a controng edera
statute, the aw of Indana reatve to the abty of a mted partner
315359 54 19
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3806. 286
for debts of the mted partnershp s consdered to be determnatve
of the abty of a mted partner for edera wthhodng ta es due
from a mted partnershp organzed and operated under the aw of
that State.
In vew of the foregong, t s hed that a mted partner, under
the aws of the State of Indana or of any other State havng equv-
aent aws concernng mted partnershps, s not abe above and
beyond hs capta contrbuton for edera wthhodng ta es due
from such a partnershp, provdng there are no facts showng conduct
on hs part n connecton wth the partnershp busness whch woud
render hm abe as a genera partner.
S CTION 3806. MITIG TION O CT O R N GOTI-
TION O W R CONTR CTS OR DIS LLOW NC O
R IM URS M NT
Rev. RuL 54-82
The provsons of secton 3806 of the Interna Revenue Code w
not appy to a subcontractor, who, at the drecton of the Government
agency that was the ssung ofce for the prme contract, makes a
refund to the prme contractor, uness such payment to the prme
contractor s made under crcumstances whch meet the condtons
of that secton requrng payment to the Unted States.
Where the provsons of secton 3806 of the Code are appcabe
to a prme or a subcontractor and the e cessve profts, appcabe to
the pror as we as the current year, are repad, such repayment of
e cessve profts to the Unted States Governmtnt sha be aocated
to the appcabe years n the absence of the appcaton of secton
3806(a) (4) of the Code. In the event that e cessve profts have
been repad wthout beneft of a ta credt, where such credt s
aowabe under secton 3800(b) of the Code, the credt sha be
treated as an overpayment of ta for the pror ta abe year. Such
overpayment s consdered made at the tme the payment, repayment
or offset was made, for the purpose of computng nterest under sec-
ton 3771 (b) of the Code.
dvce s requested as to the appcaton of Rev. Ru. 53, C. .
1953-1, 479, to prce redetermnaton cases under the foowng sets of
crcumstances:
( ) subcontractor to a prme Government contractor, had a sub-
contract prce redetermnaton made by the Government agency that
was the ssung offce for the prme contract, and, at ts drecton, made
a contract prce read|ustment refund to the prme contractor, re-
fund was made n 1951, the year n whch the appcabe subcontract
ncome was accrued. Under the same crcumstances a refund was
made n 1952, but such refund to the prme contractor covered sub-
contract ncome whch was accrued n 1951 and 1952.
( ) The prme contractor had a prce redetermnaton made n
1952 and made refund to the Government agency n 1952. Income
under the prme contract was accrued n 1951 and 1952. The prme
contractor treated such refund, n 1952, as a reducton of saes for
such year. No ta credts have been aowed under secton 3806 of the
Code snce the refunds pad were n the amount of the determnaton.
Wth respect to ( ), above, secton 3806(a)(1) states n part as
foows:
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2S7 5 3806.
In the case of a contract wth the Unted States or any agency thereof,
or any subcontract thereunder, whch s made by the ta payer, f a renego-
taton s made n respect of such contract or subcontract and an amount of
e cessve profts for a ta abe year s emnated, and the ta -
payer s requred to pay or repay to the Unted State or any agency thereof
. Itacs supped.
Snce secton 3806(a) deas ony wth payments or repayments re-
qured to be made to the Unted States or any agency thereof, payments
made drecty to a prme contractor by a subcontractor at the drecton
of the Government agency do not fa wthn the provsons of secton
3806 of the Code or Rev. u. 53, supra, uness the payment s made
to the prme contractor as an agent of the subcontractor to transmt
the payment to the Unted States and the payment s actuay trans-
mtted to the Unted States by the prme contractor, or uness the
payment s made under crcumstances whch make the prme con-
tractor a trustee of the payment for the beneft of the Unted States.
It s not suffcent, for the purpose of treatng such repayments under
secton 3806 of the Code, that the refund s made to the prme con-
tractor wth the understandng that such refund w be taken nto
consderaton when a prce redetermnaton or renegotaton s made
n the case of the prme contractor.
Wth respect to ( ), above, snce the repayment of e cessve profts
was made by the prme contractor to the Unted States Government,
the provsons of secton 3806 of the Code are appcabe to the prme
contractor. In the absence of the appcaton of secton 3806(a) (4)
of the Code to the case, the e cessve profts shoud be propery ao-
cated between 1951 and 1952 n order to compy wth the provsons of
secton 3806(a) (3) of the Code, whch reads:
(3) Deductons dsaowed. The amount of payment, repayment, or
offset descrbed n paragraph (1) or paragraph (2) sha not consttute a
deducton for the year n whch pad or ncurred.
If the e cessve profts have been repad wthout the beneft of a ta
credt, where such credt s aowabe under 3806(b), secton 3806(c)
of the Code provdes n part as foows:
(c) Credt n Leu of Oher Credt or Refund. If the amount aow-
abe as a credt under subsecton (b) e ceeds the amount aowed under such
subsecton, the e cess sha, for the purposes of the Interna revenue aws reatng
to credt or refund of ta , be treated as an overpayment for the pror ta abe
year tchch teas made at the tme payment, repayment, or offset teas made.
Itacs supped.
ccordngy, the provsons of secton 3806 of the Interna Revenue
Code w not appy to a subcontractor, who, at the drecton of the
Government agency that was the ssung offce for the prme contract,
makes a refund to the prme contractor, uness such payment s actuay
transmtted n fu to the Unted States by the prme contractor as
agent for the subcontractor, or uness the prme contractor becomes a
trustee of the payment for the beneft of the Unted States.
Where the provsons of secton 3806 of the Code are appcabe to
a prme or a subcontractor and the e cessve profts, appcabe to the
pror as we as the current year, are repad, such repayment of e -
cessve profts to the Unted States Government sha be aocated to
the appcabe years n the absence of the appcaton of secton
3806(a) (4) of the Code. In the event that e cessve profts have been
repad wthout beneft of a ta credt, where such credt s aowabe
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3806. 288
under secton 3806(b) of the Code, the credt sha be treated as an
overpayment of ta for the pror ta abe year. Such overpayment s
consdered as made at the tme the payment, repayment, or offset was
made, for the purpose of computng nterest under secton 3771(b) of
the Code.
Rev. u. 54-83
Secton 3806 of the Interna Revenue Code and Rev. Ru. 53, C. .
1953-1, 479, do not appy to upward ad|ustments of ncome under
prce redetermnaton causes emboded n Government contracts.
cessve profts on Government contracts, f made the sub|ect of
a credt memorandum or a defnte commtment to reduce the con-
tract prce, preferaby n wrtng, pror to the fng of the return,
may be emnated from ncome to be reported on the return. The
ad|ustment for the e cessve profts s, however, sub|ect to the
appcaton of the credt provded for by secton 3S06(b) of the Code
as to any further downward prce revson and to the restoraton
to ncome of the ta abe year n whch the amount of the commt-
ment or credt was e cuded, of any amount not ncuded n the
prce redetermnaton as fnay consummated.
dvce s requested as to (1) whether the provsons of secton 3806
of the Interna Revenue Code appy to upward ad|ustments of con-
tract prce under prce redetermnaton causes emboded n Govern-
ment contracts and (2) what s meant by the terms defntey
determnabe and repad as used n Rev. Ru. 53, C. . 1953-1, 479.
Secton 3806 of the Code s sent on the sub|ect of upward ad|ust-
ments, referrng to downward ad|ustment ony. Such upward ad|ust-
ments are therefore not sub|ect to the provsons of secton 3806 of
the Code. The treatment of retroactve upward ad|ustments s to be
determned under the reguar rues of accrua of ncome . The genera
rue s as stated n secton 39.41-1 of Reguatons 118 whch provdes:
The tme as of whch any tem of gross ncome or any deducton Is to be
accounted for must be determned n the ght of the fundamenta rue thnt
the computaton sha be mnde n such a manner as ceary refects the ta -
payer s ncome. If the method of accountng reguary empoyed by hm n
keepng hs books ceary refects hs ncome. It s to be foowed wth respect
to the tme as of whch tems of gross ncome and deductons are to be
accounted for.
s to what method may consttute a cear refecton of ncome,
secton 39.41-2 of Reguatons 118 provdes:
pproved standard methods of accountng w ordnary be regarded as
ceary refectng ncome. method of accountng w not, however, be regarded
as ceary refectng Income uness a tems of gross Income and a deductons
are treated wth reasonabe consstency.
Ordnary, to a ta payer on the accrua bass, such upward ad|ust-
ment of ncome s ncudbe n gross ncome for the ta abe year n
whch the contract s modfed to provde for ncreased prces. s to
downcard ad|ustments ony, secton 3806 of the Code requres that
such ad|ustments whch represent e cessve profts as defned n such
secton be reated back to the year or years n whch the orgna
contract prces were ncuded n gross ncome, uness permsson s
granted to adopt a dfferent methodof accountng under the provsons
of secton 3806(a) (4) of the Code.
The rues of accountng enforced upon a ta payer by any reguatory
body are not bndng on the Interna Revenue Servce, e cept as other-
wse specfcay provded for by statute, for the determnaton of ta
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289 Regs. 118, 39 3814-1.
abty under the Interna Revenue Code. See Od Coony Raroad
Company v. Commssoner, 284 U. S. 552, Ct. 1). 456, C. . I-1, 274
(1932).
Wth respect to (2) above, to the e tent appcabe to goods bed
durng the ta abe year for whch the ncome ta return has not yet
been fed, a credt memorandum ssued by the ta payer or a defnte
commtment to reduce the contract prce made to the contractng
offcer, preferaby n wrtng, pror to the fng of the return, may be
consdered as renderng the amount of such credt memorandum or
commtment defntey determnabe so that the amount thereof
whch woud otherwse be ncuded n ncome may be emnated
therefrom n fng the return. so, where e cessve profts have been
agreed upon wth a oca representatve of a contractng agency and
ony the fna approva thereof and repayment are necessary to gve
fu effect to the redetermnaton, the amount agreed upon, to the
e tent appcabe to goods bed durng the ta abe year, may be
emnated from ncome to be reported on the ncome ta return.
owever, where the ta payer e cudes the amount of such credt
memorandum or commtment, a statement to that effect, ncudng
the amount and the contract nvoved, shoud be made on the return.
When the prce redetermnaton s fnay consummated, f the amount
thereof e ceeds the amount of the credt memorandum or commt-
ment whch was e cuded from ncome n fng the return, the credt
provded for n secton 3806(b) s appcabe but sha be apped ony
to such e cess. If the amount of the prce redetermnaton as fnay
consummated s ess than the amount o. the credt memorandum or
commtment, the dfference sha be restored to ncome for the year
for whch the amount of the credt memorandum or commtment was
e cuded.
S CTION 3813. R UIR M NTS OR MPTION O
C RT IN ORG NIZ TIONS UND R S CTION 101(6)
ND OR D DUCTI ILITY O CONTRI UTIONS M D
TO SUC ORG NIZ TIONS
Reguatons 118, Secton 39.3813-3: Dsa-
owance of certan chartabe, etc., deductons.
empton of a chartabe foundaton makng dstrbutons to other
ta -e empt organzatons. (See Rev. Ru. 54-137, beow.)
S CTION 3814. D NI L O MPTION UND R S CTION
101(6) IN T C S O C RT IN ORG NIZ TIONS C-
CUMUL TING INCOM
Reguatons 118, Secton 39.3814-1: Dena Rev. Ru. 54-137
of e empton under secton 101(6) n the
case of certan organzatons accumuatng
ncome.
( so Secton 101(6), Secton 39.101 (6)-
Secton 3813, Secton 39.3813-3.)
chartabe foundaton whose prmary purposes and functons
consst of makng dstrbutons to ta -e empt hosptas and medca
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Regs 118, 39.3814-1. 290
research organzatons, but whch Is not operated prmary for the
purpose of actuay performng the actvtes generay carred on by
such organzatons, s not engaged n provdng medca or hospta
care wthn the meanng of secton 3S13(a) (5) of the Interna Rev-
enue Code and s, therefore, sub|ect to the provsons of secton 3814
of the Code reatng to accumuaton of ncome. The accumuaton
of ncome for a 3-year perod from bequests or gfts from the creator
who was the soe contrbutor to the organzaton s not consdered
unreasonabe n amount or duraton wthn the contempaton of
secton 3S14 of the Code, n the case of a chartabe foundaton whch
has for a perod of years dstrbuted substantay a contrbutons
receved and has accumuated no Income, provded that ony an
amount equa to the chartabe grants made from capta n pror
years, whch under the facts n ths case s not more than appro -
matey one year s ncome, s permanenty retaned as capta and the
baance of the accumuated ncome s dstrbuted n ts entrety at
the end of the specfc perod.
dvce s requested whether a chartabe foundaton whose prmary
purposes and functons consst of makng dstrbutons to ta -e empt
hosptas and medca rtsearch organzatons s engaged n provdng
medca or hospta care wthn the meanng of secton 3813(a) (5) of
the Interna Revenue Code so as to be e cepted from the provsons of
secton 3814 of the Code reatng to accumuaton of ncome and, f not
whether (1) current ncome or a porton thereof may be set asde unt
such tme as the amount of money e pended for chartabe purposes
out of contrbutons receved durng pror years has been recouped
and (2) whether current ncome over and above that referred to n
(1) may be accumuated for a perod not e ceedng 3 years for the
purpose of evovng standards and tests whch appcants for char-
tabe ads ought to meet and the reatve soca needs therefor, and
then dstrbuted.
The purposes of the chartabe foundaton heren nvoved are gen-
eray to take money or property by grant, devse, bequest, gft or
transfer to hod, se, ease or convey such property to nvest and
renvest the proceeds thereof to receve the ncome therefrom and
to appy such ncome and, n the dscreton of the drectors, the prn-
cpa, to regous7 chartabe, scentfc and terary purposes and to
corporatons and nsttutons whch quafy for e empton from ed-
era ncome ta under secton 101(6) of the Code. The foundaton s
ma|or actvtes n furtherance of such purposes have been to make
dstrbutons and grants to hosptas and aed nsttutons. ow-
ever, the foundaton does not actuay perform any actvtes generay
engaged n by hosptas or aed nsttutons.
rom ts ncepton unt 1951, the recepts of the foundaton con-
ssted soey of the contrbutons of one donor. Such recepts were
nether nvested nor accumuated but were dstrbuted as gfts or
grants to ta -e empt organzatons wth the resut that substantay
a of ts contrbutons for such years were dstrbuted. In 1951, the
foundaton was the benefcary under the w of the aforementoned
donor, as a resut of whch ncome for 1952 and subsequent years w
appro mate 2a to 2 doars a year. The foundaton now desres
to set asde out of current ncome a or a porton thereof unt such
tme as t has accumuated 3a doars, an amount equa to about 1
year s ncome. urthermore, snce the ncome has now become sze-
abe, the drectors of the foundaton fee that they need tme to deter-
mne proper standards by whch ts ncome s to be dstrbuted. To
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291 Regs. 118, 39.3814-1.
that end, they propose that ncome be further accumuated durng a
erod of not more than 3 years and that the amount so accumuated
dstrbuted for chartabe purposes at the end of the 3-year perod.
Secton 3814 of the Interna Revenue Code, whch reates to the
dena of e empton under secton 101(6) of the Code n the case of
certan organzatons accumuatng ncome, provdes n part that n
the case of any organzaton descrbed n secton 101(6) to whch
secton 3813 of the Code s appcabe, f the amounts accumuated
out of ncome durng the ta abe year or any pror ta abe year and
not actuay pad out by the end of the ta abe year:
(1) are unreasonabe In amount or duraton In order to carry out the
chartabe, educatona, or other purpose or functon consttutng the bass
for such organzaton s e empton under secton 101(C) : e empton
under 101(G) sha be dened for the ta abe year.
Secton 3813(a) of the Code sts certan casses of organzatons
descrbed n secton 101(6) whch are not sub|ect to the provsons of
sectons 3813 and 3814 of the Code, among whch are:
(5) an organzaton, the prncpa purposes or functons of whch are
the provdng of medca or hospta care or medca educaton or medca
research.
In vew of the foregong, t s hed that a chartabe foundaton
whose prmary purposes and functons consst of makng dstrbu-
tons to ta -e empt hosptas and medca research organzatons, but
whch as ts prmary actvty does not actuay perforn the actvtes
generay engaged n by such organzatons, s not engaged n pro-
vdng medca or hospta care wthn the meanng of secton
3813(a)(5) of the Interna Revenue Code and s, therefore, sub|ect
to the provsons of secton 3814 of the Code reatng to accumuaton
of ncome. owever, under the partcuar facts n ths case the ac-
cumuaton of ncome for a 3-year perod n the manner and to the
e tent stated s not consdered unreasonabe n amount or duraton
wthn the contempaton of secton 3814 of the Code, provded that
ony an amount equa to the chartabe grants made from capta n
pror years, whch under the facts n ths case s not more than ap-
pro matey 1 year s ncome, s permanenty retaned as capta and
the baance of the accumuaton s dstrbuted to e empt organzatons
n ts entrety at the end of the specfc perod.
Reguatons 118, Secton 39.3814-1: Dena Rev. Ru. 54-227
of e empton under secton 101(6) n the
case of certan organzatons accumuatng
ncome.
n organzaton e empt from edera ncome ta under secton
101(6) of the Interna Revenue Code has consstenty made annua
dstrbutons to chartabe and educatona organzatons n e cess
of ts annua ncome. The chef support of such organzaton conssts
of gfts from ts founder. The annua dstrbutons n e cess of
annua ncome have resuted n an nvason of ts contrbuted capta
In a substanta amount. ed, the accumuaton by the organza-
ton of ts capta gans Income and a certan mnor part of ts annua
dvdend and nterest ncome for a perod of ten years, or ess, de-
pendng upon the e tent of gans ncome, unt past nvasons of
ncome producng corpus have been restored, w not be consdered
unreasonabe n amount or duraton wthn the meanng of secton
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Regs. 118, 39.3814-1. 292
3814 of the Interna Revenue Code, provded the remanng Income
of the organzaton s dstrbuted to or earmarked for ta -e empt
purposes.
dvce s requested whether the accumuaton of ncome under the
crcumstances set forth beow, by an organzaton e empt from ed-
era ncome ta , w be consdered unreasonabe n amount or duraton
wthn the meanng of secton 3814 of the Interna Revenue Code.
The organzaton under consderaton s e empt from edera n-
come ta under the provsons of secton 101(6) cf the Code. The
chef support of the organzaton conssts of gfts from ts founder.
The pocy of the organzaton has been to make annua dstrbutons
to worthy chartabe and educatona organzatons wthout mtaton
as to the amount of ncome receved durng a partcuar year. In
past years the organzaton has dstrbuted ts entre annua ncome,
and n some years dstrbutons have been made n e cess of ncome
receved, resutng n an nvason of contrbuted capta n a sub-
stanta amount. The organzaton mantans no reserves for the
purpose of accumuatng ncome. Durng the years 1948 through 1953
t receved tota gross ncome of 900a doars of whch amount 500a
doars represents gans from the sae of capta assets, and durng
such years 1,400a doars was dstrbuted to ta -e empt organza-
tons.
In order to restore the ncome producng corpus whch had been so
substantay nvaded because of ts dstrbutons to chartabe and
educatona organzatons, the organzaton proposes to accumuate
each year (1) ts capta gans ncome and (2) a certan mnor part of
ts annua dvdend and nterest ncome, so as to accompsh such resto-
raton over a perod of ten years, or ess dependng upon the e tent of
capta gans ncome.
Secton 3814 of the Code provdes n part that n the case of any
organzaton descrbed n secton 101(6) of the Code to whch secton
3813 of the Code s appcabe (sec. 3813 s appcabe to ths organ-
zaton), f amounts accumuated out of ncome durng the ta abe
|ear or any pror ta abe year and not actuay pad out by the end
of the ta abe year are unreasonabe n amount or duraton n order to
carry out the chartabe, educatona, or other purposes or functon
consttutng the bass for such organzaton s e empton, such e emp-
ton sha be dened for the ta abe year. Secton 39.3814-1 of Regu-
atons 118 provdes n part that amounts accumuated out of ncome
become unreasonabe when more ncome s accumuated than s needed,
or when the duraton of the accumuaton s onger than s needed, n
order to carry out the purpose consttutng the bass for the organ-
zaton s e empton. Such secton further provdes that n deter-
mnng the reasonabeness of an accumuaton out of ncome there w
be dsregarded (1) gan reazed upon the sae or e change of donated
assets to the e tent such gan represents the e cess of the far market
vaue of such assets when acqured over ther substtuted bass n the
hands of the organzaton and (2) gans reazed upon the sae or
e change of assets hed for the producton of nvestment ncome (such
as dvdends, nterest, and rents) where the proceeds therefrom are
renvested wthn a reasonabe tme n property acqured and hed
n good fath for the producton of ncome.
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2U3 (Regs. 131, S 315.2.
Secton 39.3814-1 of Reguatons 118 specfcay provdes for the
dsregardng of the gans of a ta -e empt organzaton from the sae
or e change of certan of ts assets n determnng the reasonabeness
of an accumuaton out of ncome, provded the condtons set forth
theren are met. ccordngy, ths rung reates ony to the ncome
and gans of the organzaton whch are not to be dsregarded under
secton 39.3814-1 of Reguatons 118 n determnng the reasonabe-
ness of accumuatons out of ncome.
In vew of the crcumstances here present, t s hed that the accumu-
aton each year by the nstant organzaton of ts capta gans ncome
and a part of ts annua dvdend and nterest ncome for the perod of
ten years, or ess by vrtue of the accumuaton of capta gans n
amounts more substanta than contempated, unt past nvasons of
ts ncome producng corpus have been restored w not be consdered
an unreasonabe accumuaton of ncome wthn the meanng of secton
3814 of the Code, provded the annua ncome, ess the accumuatons
here nvoved, s dstrbuted to or earmarked for ts ta -e empt
purposes. or the purpose of determnng whether such annua
ncome s dstrbuted to or earmarked for ts ta -e empt purposes
there sha be ncuded n such ncome (1) gans from the sae or
e change of assets whch are acqured and hed for purposes other
than the producton of nvestment ncome, (2) gans from the sae or
e change of donated assets to the e tent such gans represent en-
hancement n the vaue of such assets whe n the hands of the or-
ganzaton, and (3) gans from the sae or e change of assets whch
are hed for the producton of nvestment ncome f the proceeds there-
from are not renvested wthn a reasonabe tme n property acqured
and hed for the producton of nvestment ncome.
Snce the tota amount of ncome accumuated durng the 10-year
perod s dependent upon contngent crcumstances, an e presson of
opnon s reserved as to whether further accumuaton w be per-
mtted at the end of the 10-year perod f the amount accumuated s
ess than s antcpated.
D R L IR RMS CT
S CTION 1
Reguatons 131, Secton 315.2: Defntons.
Cassfcaton of a teescopc sght or rfescope and of a too powered
by bank .22 and .38 cartrdges. (See Rev. Ru. 54-245, p. 253.)
S CTION 1(3)
Reguatons 131, Secton 315.2: Defntons.
devce for trappng anmas whch fres a speca pastc cartrdge
but s not capabe of frng pro|ectes cassfed. (See Rev. Ru.
54-247, p. 253.).
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P RT n. RULINGS ND D CISIONS UND R
PRIOR R GUL TIONS
INT RN L R NU COD
C PT R 1. INCOM T
SU C PT R . G N R L PRO ISIONS
P RT II. COMPUT TION O N T INCOM
S CTION 22(a). GROSS INCOM : G N R L
D INITION
Reguatons 111, Secton 29.22(a)-21: Trust
ncome ta abe to the grantor as substanta
owner thereof.
Income of a trust created pror to promugaton of secton 29.22(a)-
21 of Reguatons 111 and of whch a chartabe corporaton s bene-
fcary. (See Rev. Ru. 54-48, p. 24.)
S CTION 26. CR DITS O CORPOR TIONS
Reguatons 111, Secton 29.26-5: Credt for
dvdends pad on preferred stock of pubc
uttes.
Computaton of credt for the purpose of determnng the a-
ternatve ta . (See Rev. Ru. 54-28, p. 123.)
Reguatons 111, Secton 29.26-6: Credt for
dvdends receved.
Computaton of credt for the purpose of determnng the a-
ternatve ta . (See Rev. Ru. 54-28, p. 123.)
Reguatons 111, Secton 29.26-7: Credt of
Western emsphere trade corporatons.
Computaton of credt for the purpose of determnng the a-
ternatve ta . (See Rev. Ru. 54-28, p. 123.)
(295)
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Regs. I, 29.112(0-1.. 296
SU C PT R C SUPPL M NT L PRO ISIONS
SUPPL M NT . COMPUT TION O N T INCOM
S CTION 112(f). R COGNITION O G IN OR LOSS:
IN OLUNT RY CON RSION
Reguatons 111, Secton 29.112(f)-: Invo- Ct. D. 1763
untary converson where dsposton of the
converted property occurred pror to anu-
ary 1,1951.
INCOM T INT RN L R NU COD D CISION O COURT
1. Income Ta Recognton of Gan or Loss Invountary Con-
verson.
The statutory rght under secton 112(f) of the Interna Revenue
Code to postpone recognton of gan from an nvountary converson
of property s not ost by reason of ta payer s death but may be
e ercsed by hs persona representatve.
2. Decson Reversed.
Decson of the Unted States Ta Court, 17 T. C. 1017 (1951),
reversed.
Unted States Cockt of ppeas for the Thrd Crcut
state of Isaac Goodman, deceased an 8. Goodman, e ecutor, pettoner, v.
Commssoner of Interna Revenue, respondent
199 ed. (2d) 895
On petton to revew a decson of The Ta Court of te Unted States
efore Mars, Goodrch, and Staet, Crcut udges
November 2C, 1952
opnon
y Staet, Crcut udge. Pettoner, the e ecutor of the estate of the
deceased ta payer, seeks to take advantage of the provsons of secton 112(f)
of the Interna Revenue Code.1 That secton provdes, so far as s reevant
here, that no gan sha be recognzed f property, as a resut of an e ercse of
the power of condemnaton, s nvountary converted nto money whch s forth-
wth n good fath, under the Commssoner s reguaton, e pended n the acqus-
ton of smar property. The Commssoner s rung, sustaned by the Ta
Court,8 was that the renvestment requrements of the secton are satsfed ony
f carred out n the ta payer s fetme and that renvestment by the e ecutor
of the estate of a deceased ta payer, athough satsfyng a other requrements
of the secton, s not enough to enabe the estate to cam the statutory beneft.
1 See. 112(f) of the Interna Revenue Code Is as foows :
(f) Invountary Conversons. If property (ob a resut of ts destructon n whoe
or In part, theft or sezure, or an e ercse of the power of requston or condemnaton, or
the threat or mmnence thereof) s corapusory or Invountary converted Into property
smar or reated In servce or use to the property so converted, or nto money whch 1b
forthwth n pood fath, under reguatons prescrbed by the Commssoner wth the
approva of the Secretary, e pended n the acquston of other property smar or reated
n servce or use to the property so converted, or n the acquston of contro of a cor-
poraton ownng such other property, or In the estabshment of a repacement fund, no
gan sha be recognzed, but oss sha be recognzed. If any part of the money Is not so
e pended, the gan, f any, sha be recognzed to the e tent of the money whch a not
so e pended (regardess of whether such money a receved In one or more ta abe years
and regardess of whether or not the money whch s not so e pended consttutes gan).
26 U. S. C. sec. 112(f).
Ths secton was amended In 1051, but the amendments do not affect the ta probem
here. Pubc Law No. 251, 82d Cong., 1st ess., gee. 1 (Oct. 31,1851) C . 1951-2, 853 .
17 T. C (1052).
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297 egs. I, 29.112(0-1.
The stpuaton of facts was adopted by the Ta Court, and the foowng bref
statement s suffcent for an understandng of the probem presented.
Isaac Goodman, the decedent, owned an undvded one-haf nterest n a bud-
ng n Phadepha. The Commonweath of Pennsyvana condemned the greater
part of the budng, and he receved hs share of the condemnaton award on
October 18, 1944. e ded 2 days ater, ony a part of the award havng been
e pended n the acquston of property smar to that condemned. s e ecutor
contnued the acquston of such property and wthn 10 months had e hausted
the award. though a substanta gan was reazed from the award, n
makng decedent s-fna ncome ta return, the e ecutor dd not report that gan,
|ustfyng the omsson by reance on secton 112(f). The Commssoner s
determnaton of a defcency was uphed by the Ta Court, and ths petton for
revew foowed.
It s conceded that a but one of the statutory requrements have been
satsfed. Thus, the ony queston s the nove and very narrow one of whether
the statutory rght to postpone recognton of gan des wth the ta payer. We
hod that t does not.
Our readng of secton 112(f) convnces us that ts prmary concern s the
fact of renvestment n the prescrbed manner. There s not even a hnt as to
who must do the renvestng. The entre secton s stated n the passve voce,
thus ndcatng that Congress was ess concerned about the dentty of the actor,
so ong as he acted on behaf of the ta payer, than t was about whether he
acted n the statutory fashon. We are not persuaded, therefore, that a tera
nterpretaton of the secton supports the Commssoner s poston. In repy,
the Commssoner ponts to Treasury Reguaton 111, secton 29.112(f) (1) and
(2) as the bass for the contenton that renvestment must be made (urng the
ta payer s fetme. The argument s that the frequent repetton of the word
ta payer n the reguaton shows that the benefts of secton 112(f) are
avaabe ony f the requred acts are performed durng hs fetme. We cannot
accept such a narrow nterpretaton of the word ta payer. s a matter of
semantcs, t woud be dffcut to tak for very ong about payng ta es, and st
make sense, wthout here and there usng the word ta payer. ven the
Commssoner admts that the word s suffcenty broad to permt the ta -
payer s agent to perform the renvestment dutes. I ettoner further answers
The Ta Court concuded that the e pendtures were made forthwth and that the
property acqured was smar to that converted. That the forthwth requrement wns
satsfed s shown hy state of George erder. 30 . T. . . S4 (1 37), affrmed o nam.
erder v. everng, 106 . 2d 153 (C. . D. C), cert, dened 308 t:. S. (117 ( 3 ))
ugust uckhardt, 32 . T. . 1272 (1935) : Pau aberand, 25 . T. . 1370 (1 )32).
Pettoner s good fath and the smarty of the property acqured were not attacked.
Treasury Reguaton 111.
Sec. 29.112(f)-. Renvestment of Proceeds of Invountary Converson.
In order to ava hmsef of the benefts of secton 112(f) t Is not suffcent for the
ta payer to show that subsequent to the recept of money from a condemnaton award he
purchased other property smar or reated n use. The ta payer must trace the proceeds
of the award Into the payments for the property so purchased. It Is not necessary that
the proceeds be earmarked, but the ta pa er must be abe to prove that the same were
actuay renvested n such other property smar or reated n use to the property con-
verted. The benefts of secton 112(f) cannot be e tended to a ta payer who does not
purchase other property smar or reated n servce or use, notwthstandng the fact
that there was no other such property avaabe for purchase.

It s Incumbent upon a ta payer forthwth to appy for and receve permsson to
estabsh a repacement fund n every case where t s not possbe to repace Immedatey.
If an e pendture In actua repacement woud be too ate, a request for the estabshment
of a repacement fund woud kewse be too ate.
Sec. 29.112(f)-2. Repacement unds. In any case where the ta payer eects to
repace or restore the converted property but It s not practcabe to do so mmedatey
(for e ampe, because of the ta payer s Inabty to obtan prortes, or because of other
wartme restrctons), he may obtan permsson to estabsh a repacement fund In hs
accounts n whch part or a of the compensaton so receved sha be hed, wthout deduc-
ton for the payment of any mortgage. In such a case the ta payer shoud make appca-
ton to the Commssoner on orm 1114 for permsson to estabsh such a repacement
fund, and In hs appcaton shoud recte a the facts reatng to the transacton and
decare that he w proceed as e pedtousy as possbe to repace or restore such property.
The ta payer w be requred to furnsh a bond wth such surety as the Commssoner may
requre n an amount not n e cess of doube (he estmated addtona Income ta es whch
woud be payabe If no repacement fund were estabshed. U. S. Treasury
Reguatons 111 (1943), 29 C. . R. sec. 20.112(f) (1) and (2) (Cum. Supp. 1949).
The stpuaton shows that the frst renvestment here was made by decede|t s attcr:1.
In fact on the day of death. Whe ths renvest cnf. - ro 0 ts anoun, does not
affect the ta probem here, tha Commssoner does not ob|ect to t because t was not
made by the decedent n person.
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Regs. I, 29.124-0. 298
ths argument of the Commssoner by showng the rather absurd resut of Its
tera appcaton. The reguatons set out the many proofs whch the ta payer
must estabsh to brng hmsef wthn secton 112(f). Suppose a ta payer
renvests ths proceeds of a condemnaton award n compance wth the secton,
and then he des before he, hmsef, can make the proofs. Surey, n that case,
hs estate woud not be dened reef. nother nstance may be cted to show
the error of the Commssoner s poston. Secton 112(1) aows nonrecognton of
the gan f the award Is put nto a repacement fund and ater nset n acqurng
property smar to that condemned. The reguatons requre that the ta payer
obtan the Commssoner s permsson to estabsh a repacement fund, and the
appcaton for permsson must contan a decaraton that the ta payer w
proceed as e pedtousy as possbe to repace the property condemned. Suppose
the requste permsson s obtaned, but, before the repacement fund can be
e pended, the ta payer des. We doubt that the Commssoner, faced wth those
facts, woud serousy stand on the contenton advanced here, that the e ecutor
coud not make the renvestment. We thnk that a far readng of secton 112 (f)
aows postponement of recognton of the gan even though the renvestment a
made by the e ecutor after the ta payer s death, assumng, of course, satsfacton
of a other requrements. avng so construed the secton, we woud be
forced to decare the reguatons nvad If they attempted to deny that rght.
We need not decde that queston, however, for we are of the opnon that the
reguatons may be construed as beng consstent wth secton 112(f). s we
have sad, the recurrng use of the word ta payer In the reguatons need
not be read as meanng the ta payer, durng hs fetme. constructon more
ogca and more consonant wth the purpose of the statute s that t means
the ta payer or one actng on hs behaf, before or after hs death.
In further support of hs vew, the Commssoner argues that at the ta payer s
death hs credtors, hers, and egatees acqured rghts n the fund used by pe-
ttoner n purchasng the property, thus showng that the rght to make ren-
vestment ends wth the ta payer s death. The cams of credtors mght be a
compete bar to renvestment when they so far consume the estate that there
s nothng eft to renvest. ut that s not ths case. In any event, there s
DO attempt here to cam the beneft of secton 112(f) for credtors, hers, or
egatees. The ta payer s estate Is the benefcary. Secton 142(a) (2) of the
Interna Revenue Code requres that the e ecutor fe a return for hs de-
cedent s fna ta abe perod. We see no reason why the e ecutor may not do
what the ta payer coud have done to perfect a rght whch came nto beng n
that fna ta abe perod.
We have gven carefu consderaton to the other ponts rased by the Com-
mssoner and fnd them to be wthout mert.
or the reasons stated, the |udgment of the Ta Court w be reversed.
S CTION 124. MORTIZ TION D DUCTION
R GUL TIONS 111, S CTION 29.124 0 : Defn- Rev. Ru. 54-214
The decson of the Court of Cams n Wckea Corporaton v. Unted
States, 108 ed. Snpp. 616, hodng that emergency facty amort-
zaton was aowabe under secton 124 of the Interna Revenue
Code wth respect to the entre cost of certan factes, notwthstand-
ng that the certfcate of necessty as ssued by the proper certfyng
authorty covered ony 35 percent of the cost of some of the factes
and none of the cost of others (as ad|usted bass of emergency
We cond agree wth the Commssoner s narrow vew of the meanng of ta payer
and st hod that sec. 112 (f) and the reguatons have been satsfed nere. We take
ta payer to menn the person sub|ect to the ta . See sees. 3707(a) (14) and 3801 (a) (2)
of the Interna Revenue Code. Certany, the decedent I no onger sub|ect to the ta . and,
thus, he Is not the ta payer. The ta w be pad. If due, out of the estate. Consequenty,
the stats Is the ta payer because It U sub|ect to the ta . nrthermore, the estate, actng
through the e ecutor, made the renvwtment. ence, the benefts of sec. 112(f) are
avaabe to the estate.
20 U. S. C. sec. 142.
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299 Regs. I, 29.124-0
factes wth respect to whch aowance of such amortzaton s
authorzed under Code secton 124), w not be foowed n other
cases. The Commssoner of Interna Revenue has no authorty to
revse, suppement, or enarge the scope of any such certfcate of
necessty. See Unted States Graphte Co. v. Sawyer, 176 ed. (2d)
868, affrmng per curam, 71 ed. Supp. 944, certorar dened, 339
U. S. 904, wheren the predecessor of Wckes Corporaton sought,
but was dened, an order to compe the Secretary of Commerce
(certfyng authorty) to ssue such a certfcate of necessty wth
respect to the entre cost of a of the same factes as were nvoved
n the Wckes Corporaton ta case, supra.
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P RT III. LCO OL T RULINGS
ND D CISIONS
INT RN L R NU COD
C PT R 26. LI UOR
S CTION 2800. LI UOR
Reguatons 11, Secton 189.270: Preservaton T. D. 6062
of marks and brands.
( so Secton 190.805, Reguatons 15.)
TITL 26 INT RN L R NU . Cn PT L SU C PT R C, P RTS 180
ND 1UO
mendment of requrements for marks on cases to permt
Identfcaton of botte abes and State stamps to be shown on
the Government sde of caws.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to permt botters of ta pad sprts and wnes to aff botte
abes, or other concse data, descrptve of the contents of the cases,
ncudng ndcatons of payment of State ta es, or symbos n eu
thereof, on the Government sde of cases, provded such addtona
nformaton does not confct wth, or detract from, the prescrbed
marks on cases, the foowng amendments to reguatons are hereby
adopted:
Paragraph 1. Reguatons 11 26 C R, pt. 189 s amended by
nsertng mmedatey foowng secton 189.270 the foowng new
secton:
Sec. 189.270a. ddtona Marks. The assstant regona commssoner may,
upon wrtten appcaton from the propretor, authorze the aff ng of botte
abes or other concse data, or symbos In en thereof, to the Government sde
of cases, to descrbe, for commerca dentfcaton purposes, the contents of
the cases and to show the payment of State ta es thereon: Provded, That such
addtona Informaton s set apart from and does not n any way detract from,
confct wth, or obscure, any of the markngs requred by ths part.
Par. 2. Reguatons 15 26 C R, pt. 190 s amended by substtutng
a coon for the perod at the end of secton 190.805 and addng the
foowng:
Provded, That the assstant regona commssoner may, upon wrtten appca-
ton from the propretor, authorze the aff ng of botte abes or other concse
815359 54 20 (301)
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Regs. 21, 191.139. 302
data, or symbos In eu thereof, to the Government sde of cases, to descrbe,
for commerca dentfcaton purposes, the contents of the cases and to show
the payment of State ta es thereon: Provded further. That such addtona
Informaton s set apart from and does not n any way detract from, confct
wth, or obscure, any of the markngs requred by ths part.
ecause the changes made are of a berazng character, t s found
that t s unnecessary to ssue ths Treasury Decson wth notce and
pubc procedure thereon under secton 4(a) of the dmnstratve
Procedure ct, approved une 11, 1916, or sub|ect to the effectve
date mtatons of secton 4(c) of sad act.
Ths Treasury Decson sha be effectve upon the date of pub-
caton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned
n sec. 161 of the Revsed Statutes and sec. 3176 of te Interna
Revenue Code (sec. 161 R. S. 5 U. S. C. 22 53 Stat. 375 26 U. S. C.
3176).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved ebruary 3,1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed In the edera Regster ebruary 6, 1954)
Reguatons 21, Secton 191.139: Record and T. D. 6063
report, orm 52 .
TITL 26 INT RN L R NU C PT R I, SU C PT R C, P RT 191.
IMPORT TION O DISTILL D SPIRITS, WIN S. ND RM NT D LI U0R3
Dsted sprts n customs bond for e port
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to e empt whoesae quor deaers who mport or pur-
chase dsted sprts n customs bond, for e portaton, or who acqure
dsted sprts n a foregn country for drect shpment to a foregn
customer, from the requrements of keepng orm 52 or Record 52,
Reguatons 21 26 C R, pt. 191 are hereby amended as foows:
Paragraph 1. Secton 191.139 s amended by addng a new sentence
at the end thereof to read as foows:
Whoesae quor deaers who Import or purchase In customs bond dsted sprts
for e portaton, or who acqure dsted sprts n a foregn country for drect
shpment to a foregn customer, are not requred to keep orm 52 or Record
52 and need not submt transcrpts or monthy summares thereof as to such
operatons.
ecause the amendment made by ths Treasury Decson s of a
berazng character, t s unnecessary to ssue ths Treasury Decson
wth notce and pubc procedure thereon under secton 4(a) of the
dmnstratve Procedure ct, approved une 11,-1946, or sub|ect to
the effectve date mtatons of secton 4(c) of sad act.
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303 IRegs. 7, 5 178.204.
Ths Treasury Decson sha be effectve on the date of ts pubca-
ton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 3176 and 3791 of the Interna Revenue Code (53 Stat. 375,
467 26 U. S. C. 3176,3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
D. . Strubnger,
ctng Commssoner of Customs.
pproved ebruary 3,1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed n the edera Regster ebruary 6, MM)
SU C PT R . DISTILL D SPIRITS
P RT I. PRO ISIONS R L TING TO T
S CTION 2801. R CTI I D SPIRITS
Reguatons 7, Secton 178.184: ormuae, Rev. Ru. 54-184
processes, and sampes.
( so Secton 178.211.)
The quantty and percentages of the varous vermouths used need
not be stated on formuae coverng vermouth to be made bv bendng
or m ng two or more vermouths, produced under approved formuae,
for the purpose of perfectng them accordng to commerca standards,
e cept n the case of formuae coverng the ntermngng of sghty
favored vermouth wth other vermouth. Snce a sampe of one bend
of such vermouths woud not be representatve of a bends authorzed
to be produced under the formua, the submsson of such a sampe
under secton 178.184(b) of Reguatons 7 woud serve no usefu pur-
pose and s not requred. ormuae for such vermouths must, of
course, be submtted for approva and shoud show the formua num-
ber, approva date, and the manufacturer s name for each vermouth to
be used. In the case of formuae coverng a vermouth produced by
ntermngng one or more sghty favored vermouths wth other
vermouths, the formua shoud show the quantty or percentage of each
vermouth used and a sampe of the product shoud be submtted.
Reguatons 7, Secton 178.204: Lmtatons. Rev. Ru. 54-198
Casen has been approved for use by wnemakers n the carfcaton
of standard grape wne, not to e ceed two pounds per one thousand
gaons of wne, provded t s used ony to an e tent or n a manner
whch w not change the basc composton of the wne or emnate
ts characterstc eements n accordance wth the provsons of sec-
ton 178.204 of Reguatons 7.
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Regs. 15, 190.499. 304
Sodum casenate has been approved for use by wnemakers n the
carfcaton of wnes provded t s used ony to an e tent or n a man-
ner whch w not change the basc composton of the wne or em-
nate ts characterstc eements n accordance wth secton 178.204 of
eguatons 7.
Rev. Ru. 25, C. . 1953-1, 431, s modfed to ncude the above.
n appcaton for the use of mac acd n the carfcaton of appe
wne has been dsapproved. Mac acd may be used ony for the pur-
pose of correctng natura defcences n the frut or berres or the
Iuce thereof, used to make wne, as provded n secton 178.138 of
teguatons 7.
Reguatons 7, Secton 178.211: ermouth or
other apertf wnes.
Submsson of sampes wth formuae coverng vermouth to be made
by bendng or m ng two or more vermouths produced under
approved formuae. (See Rev. Ru. 54-184, p. 303.)
Reguatons 15, Secton 190.361: Descrpton Rev. Ru. 54-235
of formua.
Water, as such, may not be used n the manufacture of a wne prod-
uct, rectfed wne, or wne cockta, n a rectfyng pant. owever,
ths w not precude the use of a smpe syrup or sugar souton of
not ess than 60 ang.
Reguatons 15, Secton 190.479: empton Rev. Ru. 54-185
from ta .
ends of two or more pure straght whskes, aged n wood for a
perod of not ess than 4 years, whch are e empt from the rectfcaton
ta of 30 cents per proof gaon by secton 2801 of the Interna Revenue
Code and secton 190.479 of Reguatons 15, may have added thereto
not more than 7 ounces of actvated carbon for each 400 gaons of
sprts for the purpose of carfcaton provded the character of the
whsky s not changed thereby. ormuas on orm 27- Suppe-
menta, ormua and Process for Rectfed Sprts, coverng such
bends of pure straght whskes to whch actvated carbon s to be
added shoud ncude a statement as to the amount to be used.
Reguatons 15, Secton 190.499: Com- Rev. Ru. 54-126
poundng wth sugar, carame, essence,
etc.
( so Secton 5(e), edera coho d-
mnstraton ct, Secton 21,
Reguatons No. 4.)
May Wne not e pressy defned by edera reguatons, s a
product made wth unfortfed whte grape wne as a base, favored
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305 Regs. 15, 190.124.
wth woodruff herbs, eaves, or essence, and havng an acohoc con-
tent not n e cess of 14 percent by voume. May Wne may be pro-
duced ony at a rectfyng pant, sub|ect to the 30 cent rectfcaton
ta prescrbed by secton 2800(a) (5) of the Interna Revenue Code,
pus ta on the ncreased gaonage as prescrbed by secton 190.501
of Reguatons 15. May Wne s not consdered an apertf wne
under secton 21, cass 7 of edera coho dmnstraton Regu-
atons No. 4. It shoud be desgnated and abeed as May Wne
and there shoud appear n drect con|uncton therewth the words
Lght Whte Wne- avored wth Woodruff erbs, Lght Whte
Wne avored wth Woodruff Leaves, or Lght Wte Wne-
avored wth Woodruff ssence, as the case may be.
P RT II. DISTILLING ND CTI TING
S CTION 2829.-INST LL TION O M T RS,
T N S, ND OT R PP R TUS
Reot|atons 11, Sf rnoN 189.60: ottng
tanks.
Use of Government ocks on stopcocks of gauge gasses on bottng
tanks. (See Rev. Ru. 54-215, beow.)
Reguatons 15, Secton 190.124: ottng Rev. Ru. 54-215
tanks.
( so Secton 189.60, Reguatons 11.)
Go/ernnent ocks now n use for securng the stopcocks on the
gauge gasses of bottng tanks Id rectfyng pants and ta pad
bottng houses may be removed.
dvce s requested whether t s necessary that Government ocks
be apped to the stopcocks on gauge gasses of bottng tanks.
Secton 190.124 of Reguatons 15 and secton 189.60 of Reguatons
11 contan the requrements reatve to bottng tanks and provde,
n part, that each bottng tank must be cosed and any necessary
openngs theren affordng access to the nteror or to the contents
must be cosed and secured wth a cover whch w be secured by a
Government ock or otherwse fastened and seaed.
It s hed that the sma stopcocks ordnary attached to gauge
gasses on bottng tanks n rectfyng pants and ta pad bottng
houses do not consttute openngs affordng access to the nteror or
to the contents of the tanks wthn the meanng and contempaton of
the reguatons. ccordngy, Government ocks now n use for se-
curng the stopcocks on the gauge gasses of bottng tanks n rectfy-
ng pants and ta pad bottng houses may be removed.
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Regs. 21, 191.139. 306
S CTION 2857. OO S O R CTI I RS ND W OL -
S L D L RS
R GUL TIONS 20, S CTION 194.216: ntry of Rev. Ru. 54-199
msceaneous tems.
composte case of quor, consstng of dfferent brands and knds
of quors whch are the product of one producer or varous producers,
may be made up on whoesae quor deaer premses. Secton 194.216
of Reguatons 20 provdes that where the sae of such quors to the
same person on the same day does not e ceed 10 gaons, the entry of
such tems n Record 52 Whoesae Lquor Deaer s Record and re-
port, orm 52 Whoesae Lquor Deaer s Monthy Report, sha
be stated as Msceaneous or Msc. and sha show the date, the
name and address of the person to whom sod, and the quantty.
Where the sae of such quors s n a quantty n e cess of 10 gaons,
the nformaton requred by the headngs of coumns 4 to 6 (name,
regstry or permt number, and State or country) of Record 52, Part
2, and transcrpt thereof on orm 52 sha be furnshed. rackets
may be paced around the names of the severa producers shown n
coumn 4 and around the appcabe sera numbers of the composte
cases shown n coumn 13 of such forms. The sera numbers of the
composte cases shoud be marked wth an astersk, or other mark,
dentfyng such cases.
whoesae quor deaer recevng cases made up on other whoe-
sae quor deaer premses w report such recepts n the norma
manner on Record 52, Part 1, and on the transcrpt thereof on orm
52 , Whoesae Lquor Deaer s Monthy Report, e cept that n
the coumn headed y Whom Dsted, Rectfed or otted the
name and permt number of the whoesae quor deaer from whom
the quors were receved shoud be shown.
R GUL TIONS 20, S CTION 194.217: Separate Rev. Ru. 54-205
record of name of dster, rectfer, or
botter.
Dsted sprts receved by a whoesae quor deaer from an m-
porter or another whoesae quor deaer may be reported n orm 52
Whoesae Lquor Deaer s Monthy Report wthout specfyng the
name of the dster, rectfer, or botter of the sprts n coumn 4
provded the propretor keeps at hs pace of busness a separate record
of such nformaton as requred by secton 194.217 of Reguatons 20
and the regstry or permt number of the dster, rectfer, botter,
or mporter, as the case may be, s entered n coumn 5, and the State
or country s entered n coumn 6.
R GUL TIONS 21, S CTION 191.139: Record and Rev. Ru. 54-186
report, orm 52 .
( so ct, Secton 4.)
n mporter who purchases dsted sprts abroad for shpment
to and resae n the Unted States, upon the order of a second Im-
porter to whom tte to the dsted sprts passes pror to entry of
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307 Regs. 21, { 191.139.
the sprts Into customs, s not requred to keep Record 2, Whoe-
sae Lquor Deaer s Record, coverng such sprts. The second
Importer who fes the entry for customs purposes must mantan
Record 52 In respect to recept of the mported sprts and ther
wthdrawa from customs custody, and must keep Record 52 n
respect to recept of the sprts at hs whoesae quor deaer
premses and ther dsposton therefrom.
n mporter s basc permt s hed to be actve f, wthn 2 years,
an entry of dsted sprts, wnes, etc., has been fed wth customs
offcas, athough wthn ths perod the mporter has nut paced a
drect order abroad nor purchased or possessed red strp stamps,
and woud therefore not be sub|ect to revocaton for reasons of n-
actvty as provded n secton 4(e)(2) of the edera coho d-
mnstraton ct.
dvce s requested as to the necessary records to be kept on Record
52, Whoesae Lquor Deaer s Record, where sprts are purchased
abroad by one mporter but entered nto customs custody n the name
of a second mporter. dvce s aso requested whether an mporter s
basc permt s consdered actve f, wthn 2 years, an entry of ds-
ted sprts, wnes, etc., has been fed wth customs offcas, athough
wthn ths perod the mporter has not paced a drect order abroad
nor purchased or possessed red strp stamps.
In the nstant case, a whoesae quor deaer n atmore, Mary-
and, who possesses an mporter s permt, paces an order wth a
ew York, r . Y., mporter for a certan brand of whsky, the New
York mporter beng the soe agent n the Unted States for the
product. The New York mporter forwards the order and the red
strp stamps, overprnted by hm, abroad. The cases of whsky are
consgned to the atmore mporter and, n addton to other nfor-
maton, they bear the number of hs mporter s basc permt. Tte to
the whsky passes to the atmore mporter pror to entry nto
customs custody. pertnent papers are forwarded by the New
York mporter to the atmore mporter. These papers are, n
turn, sent to a customhouse broker n atmore who, upon arrva
of the sprts, fes an mmedate consumpton entry n the name of
the atmore mporter. ond s gven and the ta and duty are
pad by the atmore mporter.
Secton 191.139 of Reguatons 21 provdes that every mporter
who mports and ses dsted sprts n buk sha keep a record of
a dsted sprts mported by hm on orm 52 , or he may keep
the record of buk sprts mported on orm 52 and the botted sprts
en Record 52. If botted sprts ony are mported, Record 52 sha
be used.
Snce the New York mporter does not fe entres wth customs
and does not have possesson of the sprts, ether physcay or con-
structvey, Record 52 need not be mantaned by hm n respect of
such sprts.
Record 52 must be mantaned by the atmore mporter n accord-
ance wth the provsons of secton 191.139 of Reguatons 21, show-
ng recept of the mported sprts and ther wthdrawa from customs
custody. Ths mporter must aso mantan Record 52 n respect
to recept of such sprts at hs whoesae quor deaer premses and the
dsposton of the sprts therefrom as requred by secton. 191.142
of Reguatons 21 and secton 194.210 of Reguatons 20.
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Regs. 10, 185.924. 308
The passage of the tte to the merchandse pror to arrva of the
poods n ths country under the stated crcumstances does not affect
the status of the New York mporter as an mporter and whoesae
quor deaer. though he does not actuay mport the dsted
sprts n the sense that he fes an entry for the warehousng of such
sprts or ther wthdrawa from customs custody, he does quafy as
an mporter through the hodng of an mporter s basc permt, by
whch he s permtted to purchase and shp red strp stamps abroad
n hs own name, and through the purchase of foregn sprts for shp-
ment to and resae n the Unted States.
The atmore mporter s requred under customs and nterna
revenue reguatons to quafy as an mporter snce he must fe the
entry for wthdrawa of the dsted sprts from customs custody.
Record 52 need not be mantaned by an mporter coverng dsted
sprts purchased n a foregn country by hm but tte to whch has
passed from hm to a second mporter pror to entry of such dsted
sprts nto customs custody. Record 52 n such case must be man-
taned by the mporter havng tte to the dsted sprts at the tme
they are entered nto customs custody.
Under the provsons of secton 4(e) of the edera coho d-
mnstraton ct, a basc permt sha, after due notce and oppor-
tunty for hearng, be revoked f t s found that the permttee has not
engaged n the operatons authorzed by the permt for a perod of
more than 2 years.
n mporter s basc permt s consdered actve f, wthn 2 years,
an entry of dsted sprts, wnes, etc., has been fed wth customs
offcas, athough wthn that perod the mporter has not paced a
drect order abroad nor purchased or possessed red strp stamps.
S CTION 2871. R GUL TION O TR IC IN CON-
T IN RS O DISTILL D SPIRITS
Reguatons 10, Secton 1S5.924: Lquor T. D. 6071
bottes.
( so Secton 185.925 Secton 2903, Sec-
tons 185.940, 185.961, 185.980.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 185.
W R OUSING O DISTILL D SPIRITS
mendment of requrements to permt bottng n bond of dsted
sprts n gaon and 1 gaon sze bottes.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order that dsted sprts may be botted n bond, ether for
domestc use or for e portaton,.n s gaon and 1 gaon sze bottes,
Reguatons 10 26 C R, pt. 185 are amended as foows:
Paragraph 1. Secton 185.924 s amended by nsertng mmedatey
after the coon n the second sentence the foowng 1 gaon,
gaon, .
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309 Regs. 10, 185.340.
Pab. 2. Secton 185.925 s amended by nsertng mmedatey after
the coon n the frst sentence the foowng: 1 gaon, y2 gaon, .
Par. 3. Secton 185.940 s amended by nsertng mmedatey after
the coon n the frst sentence the foowng: 4 bottes contanng 1
gaon each 6 bottes contanng y2 gaon each .
Par. 4. Secton 185.961 s amended by nsertng mmedatey after
the coon n the frst sentence the foowng 1 gaon, y2 gaon, .
Par. 5. Secton 185.980 s amended by nsertng mmedatey after
the coon n the frst sentence the foowng: 1 gaon, y2 gaon, .
ecause the changes made are of a berazng character, t s found
that t s unnecessary to ssue ths Treasury Decson wth notce and
pubc procedure thereon under secton 4(a of the dmnstratve
Procedure ct, approved une 11 1946, or sub|ect to the effectve date
mtatons of secton 4(c) of sad act.
Ths Treasury Decson sha be effectve upon the date of pubca-
ton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned n
sec. 3176 of the Interna Revenue Code (53 Stat. 375 26 U. S. C.
S176).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved May 11, 1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed In the edera Regster May 14, 1954)
Reguatons 13, Secton 175.55: Contaners for Rev. Ru. 54-236
dsted sprts.
( so secton 175.89.)
Wooden contaners of a capacty of one wne gaon or ess cannot
be approved for the packagng of domestc or mported dsted sprts
for sae at reta. Under the provsons of Reguatons 13, secton
175.55 to secton 175.59a, ncusve, and secton 175.89 to secton
175.94a, ncusve, contaners for packagng dsted sprts for sae
at reta are restrcted to gass, earthenware, or ke materas whch
are made of hard substances whch once formed or moded cannot
thereafter be atered or changed.
part h. nterna revenue bonded warehouses
S CTION 2872. ST LIS M NT ND CONTROL
Reguatons 10, Secton 185.340: ppcaton Rev. Ru. 54-187
of the surety for reease from bond.
Secton 185.340 of Reguatons 10 provdes n part that upon the
proper fng of an appcaton by the surety for reef from bond,
n the case of bond, orm 1571, Transportaton and Warehousng
ond, sad surety sha be reeved from abty for sprts trans-
ferred or consgned to the nterna revenue bonded warehouse whoy
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Regs. 4, 183.561.) 310
subsequent to the date named n the notce, but that f a supersedng
bond has not been fed by the prncpa pror to the date named n
the surety s notce, the surety sna contnue to reman abe under
the bond for a sprts on hand or n transt to the nterna revenue
bonded warehouse on sad date, unt such sprts have been awfuy
dsposed of or a new bond has been fed by the prncpa. owever,
under the crcumstances the warehouseman s barred from recevng
addtona sprts on the warehouse premses unt a supersedng bond
s fed.
The bottng of dsted sprts remanng n an nterna revenue
bonded warehouse or n transt thereto on the date gven n the app-
caton for reef from abty on a transportaton and warehousng
bond (and no supersedng bond s fed) woud not affect the bond
abty on such sprts and therefore may be permtted n accordance
wth the appcabe provsons of Reguatons 10.
S CTION 2878. DR WING, G UGING, ND M R TING
O DISTILL D SPIRITS
R GUL TIONS 4, S CTION 183.561: ppcaton, T. D. 6068
orm 236.
( so Sectons 183.564a, 183.572, 183.574, 183.-
577a, 183.580 Sectons 184.601, 184.604a,
184.612, 184.614, 184.67a, 184.620, Regua-
tons 5 Sectons 185.375, 185.692, 185.693,
185.706, 185.707, 185.708, 185.711, 185.712,
Reguatons 10.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RTS 183.
184, ND 185
mendment of requrements for the weghng of packages of ds-
ted sprts upon recept at Interna Revenue bonded warehouses.
TR SURY D P RTM NT,
O IC O COMMISSION R O INT RN L R NU ,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order to emnate the requrement that storekeeper-gangers
wegh packages of dsted sprts at the tme of ther recept after
transfer n bond from a dstery not on the same or contguous
premses or from another warehouse when such consgnor premses are
operated by the consgnee or an affate or subsdary thereof n the
mmedate vcnty, or when such packages of sprts are transferred
n conveyances seaed wth Government cap seas, the foowng
amendments to the reguatons are hereby adopted:
P R GR P 1. Wherever the term supervsor or dstrct super-
vsor appears n the sectons of the reguatons revsed by ths Treas-
ury Decson, such term s hereby amended to read ssstant Regona
Commssoner, coho and Tobacco Ta .
P R. 2. Reguatons 4 26 C R, pt. 183 are amended as foowt:
( ) Secton 183.561 s amended by:
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311 Regs. 4, 183 561.
(1) Strkng the words supervsory dstrct n the frst sentence
and nsertng n eu thereof the word regon .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of sprts n seaed con-
veyances wthout weghng the packages at tme of recept he shoud
ndcate on part 1 of orm 236 that the packages are to be trans-
ferred n scaed conveyances by enterng the phrase Government-
seaed conveyance.
) There s nserted mmedatey foowng secton 183.564 the
owng new secton:
Sec. 183.564a. Seaed Conveyances fob Packages. ach conveyance nset
to transport packages of dsted sprts n bond, whch s to be seaed n order
that the weghng of sprts upon recept at an nterna revenue bonded ware-
house w not be requred, must be constructed n such a manner that a open-
ngs may be cosed and secured by seas In order that access cannot be ganed
wthout showng evdence of tamperng. Cap seas to be furnshed by the Gov-
ernment w be used n seang the conveyance and such seas w be aff ed
as soon as the vehce s oaded. If the conveyance s not constructed In accord-
ance wth the provsons of ths secton, the storekeeper-gauger w notfy the
consgnor propretor that ts use as a seaed conveyance cannot be authorzed
and, If dsted sprts are conveyed theren, that weghng of the packages at
the consgnee premses w be requred. Under such crcumstances, cap seas
w not be apped to the conveyance. (53 Stat 375 26 U. S. C. 3176.)
(C) There s nserted after the frst sentence n secton 183.572 the
foowng new sentence: If the transfer s to be made by seaed con-
veyance, the storekeeper-gauger w note on orm 236 n the space
provded therefor the, sera numbers of the cap seas used.
(D) Secton 183.574 s amended by:
(1) Strkng the words supervsory dstrct n the frst sentence
and nsertng n eu thereof the word regon .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of sprts wthout wegh-
ng such packages at tme of recept he shoud ndcate on part 1 of
orm 236 that the packages are to be transferred n seaed conveyances
by enterng the phrase Government-seaed conveyance.
( ) There s nserted mmedatey foowng secton 183.577 the
foowng new secton:
S o. 183.577a. Seaed Conveyance fob Packages. If the packages of dsted
sprts are to be transported n a seaed conveyance, In order that the weghng
of the sprts upon recept at an nterna revenue bonded warehouse w not be
requred, such conveyance must be constructed and scaed as provded n secton
183.564a. (53 Stat. 375 28 U. S. C. 3176.)
( ) There s nserted mmedatey after the frst sentence n secton
183.580 the foowng new sentence: If the transfer s to be made by
seaed conveyance, the storekeeper-gauger w note on orm 236 n
the space provded therefor the sera numbers of the cap seas used.
Par. 3. Reguatons 5 26 C R, pt. 184 are amended as foows:
( ) Secton 184.601 s amended by:
(1) Strkng the words supervsory dstrct n the frst sentence
and nsertng n eu thereof the word regon .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of brandy n seaed con-
veyances wthout weghng the packages at tme of recept he shoud
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Regs. 4, 183 561. 312
ndcate on part 1 of orm 236 that the packages are to be transferred
n seaed conveyances by enterng the phrase Government-seaed
conveyance.
( ) There s nserted mmedatey foowng secton 184.604 the
foowng new secton:
Sec. 184.604a. Seaed Conveyances for Packages. ach conveyance used to
transport packages of brandy In bond, whch s to be seaed n order that the
weghng of the brandy upon recept at an nterna revenue bonded warehouse
w not be requred, must be constructed n such a manner that a openngs
may be cosed and secured by seas n order that access cannot be ganed wthout
showng evdence of tamperng. Cap seas to be furnshed by the Government
w be used In seang the conveyance and such seas w be aff ed as soon as
the vehce s oaded. If the conveyance s not constructed n accordance wth
the provsons of ths secton, the storekeeper-gauger w notfy the consgnor
propretor that ts use as a seaed conveyance cannot be authorzed and. If ds-
ted sprts are conveyed theren, that weghng of the packages at the consgnee
premses w be requred. Under such crcumstances, cap seas w not be
apped to the conveyance. (53 Stat. 375 20 U. S. C. 3170.)
(C) There s nserted after the frst sentence n secton 184.612 the
foowng new sentence: If the transfer s to be made by seaed con-
veyance, the storekeeper-gauger W note on orm 236 n the space
provded therefor the sera numbers of the cap seas used.
(D) Secton 184.614 s amended by:
(1) Strkng the words supervsory dstrct n the frst sentence
and nsertng n eu thereof the word regon .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of brandy wthout wegh-
ng such packages at tme of recept he shoud ndcate on part 1 of
orm 230 that the packages are to be transferred n seaed conveyances
by enterng the phrase Government-seaed conveyance.
( ) There s nserted mmedatey foowng secton 184.617 the
foowng new secton:
Sec. 184.617a. Seaed Conveyance foe Packages. If packages of brandy are
to be transported n a seaed conveyance, n order that the weghng of the brandy
upon recept at an nterna revenue bonded warehouse w not be requred, such
conveyance must be constructed and seaed as provded n secton 184.604a.
(53 Stat. 375 26 U. S. C. 3176.)
( ) There s nserted mmedatey after the frst sentence n secton
184.620 the foowng new sentence: If the transfer s to be made by
seaed conveyance, the storekeeper-gauger w note on orm 236 n
the space provded therefor the sera numbers of the cap seas used.
Par. 4. Reguatons 10 26 C R, pt. 185 are amended as foows:
( ) Secton 185.375 s amended by changng the perod at the end
of the frst sentence to a coon ana addng the foowng provso:
Provded, That the weghng of packages w not be requred (a)
where sprts are transferred n bond, from any dstery or nterna
revenue bonded warehouse, n convevances seaed wth Government
cap seas n accordance wth the provsons of secton 185.692 and the
conveyances are receved wth such seas ntact, or (b) where sprts
are receved from a dstery not on the same or contguous premses,
or from another warehouse, operated by the consgnee or an affate
or subsdary of the consgnee n the mmedate vcnty so the transfer
can be under observaton by Government offcers at a tmes where
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313 Rega. 4, 183.561.
packages are receved wthout weghng the storekeeper-ganger w
so ndcate n the approprate coumn on orm 1520 or 1619.
( ) Secton 185.692 and headnote are amended to read:
S C. 185.692. S L D CON Y NC S O P C G S. ach conveyance used to
transport packages of dsted sprts n bond, whch s to be seaed In order
that the weghng of sprts upon recept at an nterna revenue bonded ware-
house w not be requred, must be constructed n such a manner that a openngs
may be cosed and secured by seas n order that access cannot be ganed wthout
showng evdence of tamperng. Cap seas to be furnshed by the Government
w be used n seang the conveyance and such seas w be aff ed as soon as
the vehce s oaded. If the conveyance s not constructed n accordance wth
the provsons of ths secton, the storekeeper-gauger w notfy the consgnor
propretor that ts use as a seaed conveyance cannot be authorzed and, f
dsted sprts are conveyed theren, that weghng of the packages at the
consgnee premses w be requred. Under such crcumstances, cap seas w
cot be apped to the conveyance.
(C) Secton 185.693 s amended by:
(1) Strkng the words supervsory dstrct n the frst sentence
and nsertng n eu thereof the word regon .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of sprts n seaed
conveyances wthout weghng the packages at tme of recept he
shoud ndcate on part 1 of orm 236 that the packages are to be
transferred n seaed conveyances by enterng the phrase Govern-
ment-seaed conveyance.
(D) Secton 185.706 s amended by strkng the words tank car
n the frst sentence and nsertng n eu thereof conveyance seaed
wth Government cap seas .
( ) Secton 185.707 s amended by strkng the words tank car
n the two paces they appear n the thrd sentence and nsertng n
en thereof n the frst nstance conveyance seaed wth Government
cap seas, and n the second nstance conveyance .
( ) Secton 185.708 s amended by:
(1) Strkng the words supervsory dstrcts n the frst sentence
nd nsertng n eu thereof the word regons .
(2) Insertng after the second sentence the foowng new sentence:
If the appcant desres to receve packages of sprts wthout wegh-
ng such packages at tme of recept he shoud ndcate on part 1 of
form 236 that the packages are to be transferred n seaed conveyances
by enterng the phrase Government-seaed conveyance.
(G) Secton 185.711 s amended by strkng the words tank car n
the frst sentence and nsertng n eu thereof conveyance seaed wth
Government cap seas .
( ) Secton 185.712 s amended by:
(1) Strkng the words tank car n the two paces they appear
m the thrd sentence and nsertng n eu thereof n the frst nstance
conveyance seaed wth Government cap seas, and n the second
nstance conveyance .
(2) Strkng the word dstrct where t appears n the fourth
nd ffth sentences and nsertng n eu thereof the word regon .
ecause the changes made are of a berazng character, t s
found that t s unnecessary to ssue ths Treasury Decson wth
notce and pubc procedure thereon under secton 4(a) of the dmn-
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Regs. 10, 185.827. 314
stratve Procedure ct, approved une 11, 1946, or sub|ect to the
effectve date mtatons of secton 4(c) of sad act.
Ths Treasury Decson sha be effectve upon the date of pubca-
ton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned
n sec. 3176 of the Interna Revenue Code (53 Stat. 375 26 U. S. C.
3176).)
O. GORDON D L ,
ctng Commssoner of Interna Revenue.
pproved March 31,1954.
M. . OLSOM,
ctng Secretary of the Treasury.
(Pubshed In the edera egster pr 6,1054)
S CTION 2891. WIT DR W L O DISTILL D SPIRITS
TO M NU CTURING OND D W R OUS
R GUL TIONS 10, S CTION 185.827: ond. Rev. Ru. 54-237
banket bond may be fed on orm 1618, Transportaton
ond, coverng wthdrawas of dsted sprts from severa ware-
houses operated by the same propretor wthn an Interna revenue
regon. ach warehouse must be competey dentfed as to num-
ber, name, ocaton, street number, cty and State, n a rder at-
tached to the bond for that purpose.
dvce s requested whether a banket bond on orm 1618 may be
fed coverng transfers of dsted sprts from nterna revenue
bonded warehouses at. varous ocatons wthn an nterna revenue
regon to a Cass 6 Customs onded Manufacturng Warehouse, n
eu of fng a separate bond coverng transfers from each warehous.
Secton 185.827 of Reguatons 10 provdes n part that the manu-
facturer sha e ecute a bond to cover the transportaton of sprts
from the nterna revenue bonded warehouse from whch wthdrawn
to the customs manufacturng bonded warehouse. orm 1618 s used
n those cases where the manufacturer desres to furnsh bond under
whch sprts may be wthdrawn from tme to tme. Ths secton of
Reguatons 10 aso provdes that the bond sha be e ecuted n a pena
sum suffcent to cover the ta at the rate prescrbed by aw on the
ma mum quantty whch may be outstandng aganst the bond at
any one tme.
There s no provson of reguatons whch woud prohbt the e ecu-
ton of a bond coverng the wthdrawa of dsted sprts from more
than one warehouse operated by the same propretor for transfer to a
Cass 6 Customs onded Manufacturng Warehouse.
banket bond may be fed on orm 1618, Transportaton ond,
coverng wthdrawas of dsted sprts rom severa warehouses
operated by the same propretor wthn an nterna revenue regon.
ach warehouse must be competey dentfed as to number, name,
ocaton, street and number, cty and State, n a rder attached to the
bond for that purpose.
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315 Regs. 10, 185.97-.
P RT I . MISC LL N OUS PRO ISIONS R L TING TO DISTILL D SPIRITS
S CTION 2903. OTTLING O DISTILL D SPIRITS
IN OND
Reguatons 10, Secton 185.974: Propr- Rev. Ru. 54-188
etor s appcaton, orm 1515.
ppcaton on orr 1515, Dsted Sprts otted In ond,
for permsron to botte dsted sprts n bond may be submtted for
approva wth the data n part 5 omtted n cases where the ware-
houseman s not reasonaby certan as to the sze or szes of bottes
to be fed and the denomnatons of the domestc botted n bond
strp stamps to be requred. In such case, part 5 of the form w be
competed when the sprts have been dumped for bottng and pror
to the commencement of the bottng.
Permsson s requested by the propretor of an nterna revenue
bonded warehouse to make appcaton for domestc botted n bond
strp stamps n quanttes requred for each bottng dump mmed-
atey pror to the actua bottng of the sprts rather than estmatng
the number of stamps of a specfed sze or szes when fng appcaton
on orm 1515 for permsson to botte.
The requrements of secton 185.974 of Reguatons 10, f strcty
construed, resut n a hardshp n cases where t s found that the
predetermned denomnaton of stamps accordng to botte szes s
changed after the order for stamps s paced. Such hardshp coud be
avoded f the stamps were requested and obtaned pursuant to orm
1515 after the sprts have been dumped and pror to the actua bottng
of the sprts contaned n the bottng tanks.
ppcaton on orm 1515 must be fed for each ot of sprts to be
botted n bond and Reguatons 10 requres that such sprts be botted
e pedtousy. Therefore, t s not contempated by the reguatons
that the sprts w be hed n bottng tanks for any ength of tme
durng whch bottng orders woud ordnary be changed. owever,
t s possbe that a bottng order may be receved between the tme the
appcaton to botte s fed and the tme the sprts are n bottng
tanks ready to botte, whch w affect the botte szes to be used
and the strp stamps requred. ccordngy, part 5 of orm 1515,
showng the number and denomnaton of stamps requred, may be
e ecuted after the sprts have been dumped for bottng and pror
to the actua commencement of bottng operatons, at whch tme
the quanttes and denomnatons of stamps requred may be more
accuratey determned.
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Regs. 3, 182.692. 316
S CTION 2916. R MO L OR D N TUR TION OR
D STRUCTION O DISTILL T S CONT INING LD -
YD S OR US L OIL
Reguatons 3, Secton 182.692: Dst- T. D. 6067
ates from dsteres.
( so Sectons 182.700, 182.779 Secton
183.408, Reguatons 4 Secton 184.441,
Reguatons 5.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RTS 182,
183, ND 184
Losses of dstates
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On December 15, 1953, notce of proposed ruemakng, regardng
amendments to Reguatons 3 (26 C R, pt. 182), Reguatons 4 (26
C R, pt. 183), and Reguatons 5 (26 C R, pt 184), to conform the
reguatons to the provsons of secton 2901, Interna Revenue Code,
as amended by Pubc Law 448, ghty-frst Congress, by provdng
procedure for the remsson of ta on dstates ost whe n transt
n bond from regstered or frut dsteres to denaturng pants, or
whe on storage at denaturng pants pror to denaturaton, and to
provde that the propretor of the denaturng pant to whch ds-
tates are beng transferred sha be abe for the ta thereon from
the tme the dstates are removed from a dstery for transfer to
hs denaturng pant, was pubshed n the edera Regster (18 . R.
8206). No comments havng been receved durng the 30-day perod
prescrbed n such notce, the amendments to Reguatons 3, 4, and 5
set forth beow are bereby adopted:
Paragraph 1. Wherever the term dstrct supervsor appears n
the sectons of the reguatons revsed by ths Treasury Decson such
term s hereby amended to read ssstant Regona Commssoner,
coho and Tobacco Ta .
Par. 2. Reguatons 3 26 C R, pt. 182 are amended as foows:
( ) Secton 182.692 s amended as foows:
(1) y strkng from the frst sentence of paragraph (b) the
phrase to cover the recept, and nsertng n eu thereof the phrase
to assume abty for the payment of the ta on such dstates
from the tme they eave the regstered dstery or frut dstery
from whch they are removed, ncudng the transportaton, recept, .
(2) y strkng the ast sentence of paragraph (c), whch begns,
The abty of the dster .
(3) y addng a new paragraph to read as foows:
(e) ountary dentrueton. If the dstates, after remova from the regs-
tered dstery or frut dstery where produced, are found to be unft for
denaturaton, they may be destroyed at the denaturng pant upon fng notce
of ntent so to do and appcaton for supervson of destructon. The notce and
appcaton sha be fed, n trpcate, wth the storekeeper-gauger In charge,
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317 Regs. 3, 5 182 692.
and sha contan a descrpton of the dstates as shown on the orm 1520
receved from the dstery, and shn show the reasons for destructon. The
storekeeper-gauger w verfy the descrpton of the dstates, ncudng the
quantty reported, and w then supervse ther destructon. Upon destructon
of the dstates, the storekeeper-gauger w prepare a report on the back of the
notce and appcaton showng the method of destructon and certfyng to the
accuracy of the descrpton of the dstates contaned n the notce and app-
caton, and w forward the orgna thereof to the assstant regona comms-
soner, return one copy to the propretor, and retan the remanng copy for hs
fes. The propretor sha make proper entry on orm 146S- coverng the
destructon of the dstates.
( ) Paragraph (a) of secton 182.700 s revoked.
(C) There are nserted, mmedatey foowng secton 182.700, the
foowng new sectons:
Sec. S2.700a. Loss by Theft. The ta sha he coected on dstates stoen
whe n transt to a denaturng pant or whe stored theren pror to denature-
ton, uness the denaturer submts proof as to the cause of the oss and estab-
shes to the satsfacton of the assstant regona commssoner that t dd not
occur as the resut of connvance, couson, fraud, or neggence on the part of
the denaturer, dster, consgnor, consgnee, baee, or carrer, or the empoyees
of any of them. Cam for remsson of ta on dstates ost by theft sha be
fed as provded n sectons 182.700f-182.700h. The ta on dstates ost by
theft may be remtted or refunded ony to the e tent that the camant s not
ndemnfed or recompensed for such ta . (53 Stat. 340 as amended, 346, 358,
364, 375 26 U. S. C. 2001, 2016, 3105, 3124, 3176.)
Sec. S2.700b. Unauthorzed ountary Destructon. The ta sha be
coected on dstates vountary destroyed after remova from the regstered
dstery or frut dstery where produced, e cept as provded In secton
182.692(e). (53 Stat. 340 as amended, 340, 358, 304, 375 26 U. S. C. 2001, 2016,
3105,3124,3176.)
Sec. 182.700c. Losses cept by Teft. The ta on dstates ost other-
wse than by theft whe n transt to the denaturng pant or whe stored
theren pror to deuaturaton, may be remtted. In the case of any such oss,
the assstant regona commssoner may requre the denaturer to submt proof
as to the cause of such oss and, where deemed necessary, to fe a cam for
remsson of the ta as provded n sectons 182.700f-182.700h. (53 Stat. 340
as amended, 340, 358, 304, 375 20 U. S. C. 2901, 2916, 3105, 3124, 3170.)
Sec. S2.700d. Report of Losses. Losses of dstates n transt to a dena-
turng pant or whe stored theren pror to denaturaton must be reported to
the assstant regona commssoner by the denaturer mmedatey after the
osses are dscovered. Where osses of dstates n the denaturng pant occur
or are dscovered whe a Government offcer s on duty, the offcer w mme-
datey make a fu report of the oss to the assstant regona commssoner.
The reports shoud set out the nature, cause, nnd e tent of the oss n suffcent
deta to brng out a the known matera facts and crcumstances surroundng
the oss. The condton of each tank or other contaner from whch the oss
has been sustaned, and the quantty ost therefrom, shoud be reported. (53
Stat. 340 as amended, 346, 358, 304, 375 26 U. S. C. 2901, 2916, 3105, 3124, 3176.)
Sec. 182.700e. Investgaton by ssstant Regona Commssoner. The
assstant regona commssoner w consder the nature and e tent of any oss
reported by the denaturer or Government offcer and w mmedatey make such
Investgaton and requre such evdence to be submtted as he may deem neces-
sary. (53 Stat. 340 as amended, 346, 358, 304, 375 26 U. S. C. 2901, 2916, 3105,
3124,3176.)
Sec. 182.700f. ng of Cams. Cams for remsson of ta on dstates
ost on the premses of a denaturng pant or n transt thereto, when requred,
w be fed prompty wth the assstant regona commssoner of the regon
n whch the pant s ocated. Where a requred cam for remsson of ta
on such dstates Is not fed as provded n sectons 182.700a and 182.700c, the
assstant regona commssoner w requre mmedate payment of ta on the
quantty ost. (53 Stat. 340 as amended, 346,358,364, 375 26 U. S. C. 2901, 2916,
3105,3124,3176.)
3I3359 54 21
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Regs. 3, 182 692. 318
Sec. 182.700g. orm of Cams Cams for remsson of ta for osses oc-
currng on denaturng pant premses, or n transt thereto, sha be made on
etter sze paper (orgna ony) and sha set forth, under oath, the foowng
nformaton:
(a) The name of the denaturer and the regstry number and ocaton of
the denaturng pant
( ) The sera numbers of the tanks or other contaners from whch the
dstates were ost
(c) The uantty of dstates ost from each tank or other contaner,
and the tota quantty of dstates covered by the cam
(d) The tota amount of ta for whch the cam s fed
(e) The date of the oss or, f such date s not known, the date on whch
the oss was dscovered, and the cause and nature thereof, together wth a
the facts surroundng the oss
(/) The name of the carrer, f any
(g) If ost by theft, whether the oss occurred as a resut of connvance,
couson, fraud, or neggence on the part of the denaturer, dster, owner,
consgnor, consgnee, baee, or carrer, or the empoyees of any of them
(h) Whether the camant s ndemnfed or recompensed for the ta , and,
f so, the amount and nature of such ndemnty or recompense. The actua
vaue of the dstates, ess the ta , must be stated e pcty, and where re-
qured, certfed copes of a poces of nsurance or other documents of
ndemnty coverng the dstaes must be furnshed.
(53 Stat. 340 as amended, 340, 35S, 304, 373 20 U. S. C. 2001, 2910, 3103, 3124,
3170.)
Sec. 182.700h. Supportng Statements. Cams for remsson of ta on ds-
tates ost whe on the premses of a denaturng pant or n transt thereto,
must be supported by affdavts of persons havng persona knowedge of the
oss. (53 Stat. 340 as amended, 340, 35S, 304, 375 26 U. S. C. 2901, 2916, 3105,
3124.3170.)
Sec. S2.700. cton on Cam by ssstant Regona Commssoner. When
a cam for remsson of ta s receved by the assstant regona commssoner,
he w carefuy e amne the same to see that a the requred nformaton has
been furnshed, and w cause such nvestgaton to be made or requre such
addtona evdence to be submtted as he may deem necessary. Upon competon
of hs nvestgaton, f any, the assstant regona commssoner w aow
or dsaow the cam n accordance wth e stng aw and reguatons. (53 Stat.
340 as amended, 340, 338, 304, 375 26 U. S. C 2901, 2916, 3105, 3124, 3176.)
Sec. 182.700 . Records. Losses of dstates In transt to the denaturng
pant or whe stored theren sha be shown as a separate entry n the same
coumns n whch osses of acoho are shown on orm 1468- . (53 Stat. 346,
358, 364, 375 26 U. S. C 2916, 3105, 3124, 3170.)
(D) Secton 182.779 s amended to read as foows:
The ta on dstates ost whe n transt to a denaturng pant or whe stored
theren pror to denaturaton may be remtted n accordance wth the provsons
of sectons 182.700a-182.700.
Par. 3. Secton 183.408 of Reguatons 4 26 C R, pt. 183 s
amended by strkng therefrom the ast sentence, whch reads The
abty of the dster to ta on such dstates removed for denatura-
ton sha contnue unt they have been deposted n the denaturng
pant.
Par. 4. Secton 184.441 of Reguatons 5 26 C R, pt. 184 s
amended by strkng therefrom the ast sentence, whch reads The
abty of the dster to ta on such dstates removed for denatura-
ton sha contnue unt they have been deposted n the denaturng
pant.
Ths Treasury Decson w be effectve on the 31st day after pub-
caton n the edera Regster.
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319 Regs. 7, 178.319.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 3105, 3124, and 3176 of the Interna Revenue Code (53 Stat.
358,364, 375 26 U. S. C. 3105, 3124,3176).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 29, 1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed In the edera Regster pr 3, 1054)
SU C PT R . WIN S
S CTION 3030. T
Reguatons ,Secton 178.319: Remova free Rev. Ru. 54-216
of ta .
St wn may be removed from bonded wneres and bonded wne
storerooms free of ta for use n the manufacture of vnegar n accord-
ance wth the provsons of secton 178.319 to secton 178.328, ncusve,
of Reguatons 7. It s the responsbty of the propretor of the
vnegar pant to see that the amount of ta on the quantty of wne
shpped to hm and whch may be n transt to, or on hand at the
vnegar pant at any one tme does not e ceed the pena sum of the
bond. orm 1676, ond Coverng Remova to and Use of Wne at
negar Pant. The suffcency of the bond may be checked by the
ssstant Regona Commssoner, coho and Tobacco Ta , of the
regon n whch the vnegar pant s ocated from copes of orms
1415, ppcaton to Procure Wne Ta ree for Manufacture of
negar, and from the records mantaned by the propretor n ac-
cordance wth the provsons of secton 178.327 of Reguatons 7.
It s not mperatve that the entre quantty of wne covered by an
approved orm 1415 be shpped to the vnegar pant at one tme.
owever, n order to avod dffcuty n determnng the pena sum of
the bond to be fed by the propretor of the vnegar factory, the tota
quantty of wne whch may be shpped pursuant thereto shoud be
e hausted before a new orm 1415 s approved for the remova of the
same knd of wne from the same vendor. If there are outstandng
approved orms 1415 under whch removas have not been made, the
quantty of wne covered thereby must be taken nto consderaton
n determnng the pena sum of the bond, uness no shpments are to
be made thereunder and such orms 1415 are surrendered for
canceaton.
Grapes re|ected by frut packers because of sze and/or coor
may be used n the manufacture of wne and such wne, whether or
not fortfed and regardess of acohoc content, may be removed free
of ta for use n the manufacture of vnegar.
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Regs. 3, 182.874.1 320
St wne whch has acetfed nto vnegar and contans not ess
than 4 percent of acetc acd and not ess than 6 percent of acoho and
acds combned may be removed free of ta for use as vnegar, pur-
suant to approved appcaton orm 1415 under sectons 178.329 and
178.332 of Reguatons 7.
No restrctons have been mposed on vnegar pants wth respect
to the use of wne removed from a bonded wnery pursuant to secton
178.322 of Reguatons 7 other than to keep the prescrbed records
and premses avaabe for nspecton, as requred by sectons 178.327
and 178.328 of Reguatons 7.
SU C PT R C INDUSTRI L LCO OL
P RT II. INDUSTRI L LCO OL PL NTS
S CTION 3105. R GUL TIONS OR ST LIS ING,
ONDING, ND OP R TION O PL NTS ND
W R OUS S
Reguatons 3, Secton 182.323: Prohbted Rev. Ru 54-200
hours of operaton.
Tank cars of acoho for shpment n bond whch have been oaded,
seaed, ocked, and documented durng dayght hours, n accordance
wth the provsons of secton 182.323(a) of Reguatons 3, may be
transferred from the ndustra acoho pant premses durng the
hours between sunset and sunrse. Such tank cars shoud be moved as
e pedtousy as possbe.
Reguatons 3, Secton 182.874: orm 1482. Rev. Ru. 54-160
( so Secton 182.877.)
report fed on orm 1482, User s Report of Denatured coho,
showng the proper dsposton of a specay denatured acoho by
a specay denatured acoho user who ndcated hs desre to ds-
contnue use thereof, may be accepted as na, athough not so
marked. It w not be necessary that such permttee contnue to fe
orms 1482 each month showng No Transactons pendng fna
approva of the notce of dscontnuance. Such approva may not be
gven unt actua dsposton s made of a artces contanng spe-
cay denatured acoho. The bond of the manufacturer, f any,
shoud not be canceed unt a such artces have been propery ds-
posed of n accordance wth the appcabe provsons of Reguatons 3.
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321 Regs. 3, 1S2.837.
S CTION 3108. WIT DR W L O LCO OL T R
Reguatons 3, Secton 182.837: Manufacture T. D. 6070
of ethy acetate.
( so Secton 182.838 Secton 3109, Sectons
182.840,182.841.)
TITL 26 INT RN L R NU . C PT R 1, SU C PT R C, P RT 182.
INDUSTRI L LCO OL
Requrements for denaturng and packagng ethy acetate
amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
In order (1) to permt the use of undenatured ethy acetate n
processes where t s shown that t s necessary to use such matera
n ts pure state, (2) to permt the transfer of ethy acetate n tank
cars and tank trucks after the producer has dvested hmsef of owner-
shp, (3) to permt producers to transfer ethy acetate by ppene
to the premses of an affate or whoy owned subsdary entted to
receve ethy acetate, and (4) to permt whoesae deaers recevng
denatured ethy acetate n tank cars, tank trucks, and by ppene to
mckage denatured ethy acetate n contaners not e ceedng 55 ga-
ons n capacty, and, sub|ect to authorzaton of the ssstant Re-
gona Commssoner, to transfer denatured ethy acetate n tank
trucks from ther premses to the premses of others entted to receve
denatured ethy acetate, Reguatons 3, (2G C R pt. 182) are hereby
amended as foows:
Paragraph 1. Secton 182.837 s amended as foows:
( ) y strkng the word Manufacture n the headnote and n-
sertng n eu thereof the word Denaturaton .
(13) y strkng the perod at the end thereof and addng the fo-
owng: : Provded further, That upon a showng to the satsfacton
of the Commssoner that undenatured ethy acetate s necessary n
a manufacturng process other than for the producton of pharmaceu-
tca, scentfc, food, or toet preparatons or for the producton of
specay denatured acoho he may, as provded n secton 182.838,
authorze the use and shpment of such undenatured ethy acetate.
Undenatured ethy acetate procured by a user may not be resod wth-
out pror approva of the Commssoner.
Par. 2. Secton 182.838 s amended by strkng the entre secton
wth headnote and nsertng n eu thereof the foowng:
Sec. 1S2.83S. thy cetate Wthout Denatt|kants or Wth Optona De-
katubants. ny user desrng to procure undenatured ethy acetate for use n
a manufacturng process other than the producton of pharmaceutca, scentfc,
food, or toet preparatons or for the producton of specay denatured acoho,
as provded In secton 182.837, sha make appcaton to the Commssoner, stat-
ng fuy the purpose for whch the ethy acetate s to be used and why he cannot
use denatured ethy acetate. The appcaton sha contan a compete descrp-
ton of the process. ny user desrng to procure ethy acetate denatured wth
products or chemcas n eu of cao ethatate, denaturng grade wood acoho,
or methy sobuty ketone, sha make appcaton to the Commssoner, statng
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Regs. 3, 182.837. 322
fuy the purpose for whch the ethy acetate s to be used and why he cannot
use ethy acetate denatured wth authorzed denaturants. The appcaton sha
show the knd and quantty of products or chemcas that he desres to have
substtuted for the cao ethatate, denaturng grade wood acoho or methy
eobuty ketone, n order that t may be determned that such products or
chemcas possess satsfactory denaturng propertes. The appcaton sha
aso show the name of the producer of ethy acetate from whom the appcant
desres to procure the ethy acetate covered by the appcaton. If ethy acetate
s to be procured from a producer ocated n the same regon, the appcaton
sha be ed n quadrupcate, and f the ethy acetate s to be procured from
another regon, the appcaton sha be fed n quntupcate. If the Comms-
soner approves the appcaton, he w note hs approva on a copes thereof,
retan the orgna copy, return one copy to the appcant, forward one copy to
the producer, and one copy to the ssstant Regona Commssoner of the regon
n whch the appcant s ocated, and, where shpment s to be made from
another regon, one copy to the ssstant Regona Commssoner of such regon.
Par. 3. Secton 1S2.840 s amended by strkng the entre secton
and nsertng n eu thereof the foowng:
Denatured ethy acetate produced wth specay denatured acoho may be
sod by producers thereof to (a) other producers, (b) egtmate users for sovent
or other manufacturng purposes satsfactory to the Commssoner, not ncud-
ng manufacture, for sae, or preparatons whch do not contan suffcent quan-
ttes of other materas to defntey change the composton and character of
the ethy acetate, (c) reputabe whoesae deaers engaged n a bona fde pant
or chemca trade, for resae to egtmate users n the producer s orgna pack-
ages, n tank trucks or n packages not n e cess of 55 gaons fed from staton-
ary storage tanks on the premses of the whoesae deaer or from the pro-
ducer s orgna packages, and (d) reputabe reta deaers engaged n a bona
fde pant or chemca trade, for resae n accordance wth secton 182.843.
Secton 182.841 as ast amended by Treasury Decson 5767 s fur-
ther amended by strkng paragraph (b) thereof wth headnote and
nsertng n eu thereof the foowng:
(6) Transfers n tank cars, tank trucks, or // ppene. Upon wrtten author-
zaton of the ssstant Regona Commssoner, shpments of ethy acetate may
be made by producers n raroad tank cars, or n tank trucks operated by motor
carrers as defned n ths part, or n tank trucks operated or controed by
producers, ther bona fde agents or whoesae deaers, to themseves at other
ocatons, to ther bona fde agents and to whoesae deaers and producers,
ther bona fde agents and whoesae deaers may make shpment of ethy
acetate by such means to (1) other producers, (2) ther bona fde agents, (3)
whoesae deaers, and (4) to actua users for sovent or manufacturng pur-
poses and not for resae. Upon wrtten authorzaton of the ssstant Regona
Commssoner, producers may transfer denatured ethy acetate by ppene to
the premses of an affate or a whoy owned subsdary entted to receve
denatured ethy acetate. In the case of raroad tank car shpments the con-
sgnee must have raroad sdng factes to receve such tank car shpments.
In the case of tank car or tank truck shpments the consgnee must have suf-
fcent statonary storage tank factes to receve such tank car or tank truck
shpments. The ethy acetate must be run drecty from the tank car or tank
truck to the statonary storage tank and may not be drawn nto portabe, un-
marked contaners. In the case of transfers by ppene the ppene must be
connected wth statonary storage tanks on the premses of the consgnee.
ecause the amendments made by ths Treasury Decson are of a
berazng character, t s unnecessary to ssue ths Treasury De-
cson wth notce and pubc procedure thereon under secton 4(a) of
the dmnstratve Procedure ct, approved une 11, 1946, or sub-
|ect to the effectve date mtatons of secton 4(c) of sad act.
Ths Treasury Decson sha be effectve upon ts pubcaton n the
edera Regster.
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323 Regs. 3, 182.165.
(Ths Treasury Decson s ssued under the authorty contaned
n sees. 3105, 3124, and 3176 of the Interna Revenue Code (53 Stat.
385, 364, 375 26 U. S. C. 3105, 3124, 3176).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved pr 13, 1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed n the edera Regster pr 20, 1954)
Reguatons 3, Secton 182.165: ppcaton Rev. Ru. 54-217
for permt, orm 1447.
( so Sectons 182.168, 182.266.)
osptas, whch hod ta -free acoho permts and are operated
by muncpa subdvsons of States, controed by a bonrd of d-
rectors or trustees apponted by the governng body of the cty
or county nvoved, are not ordnary requred to notfy the s-
sstant Regona Commssoner, coho and Tobacco Ta , of
changes n the personne of the board of drectors or trustees.
dvce s requested whether muncpay-owned hosptas whch
are governed by a board of drectors or trustees and hod a ta -free
acoho user s permt need gve notfcaton n the event there s a
change n the personne of the board of drectors or trustees.
Usuay, the board of drectors or trustees s apponted by the gov-
ernng body of the cty or county nvoved, and certan members of
the board are e -offco members, such as the mayor of the cty, the
charman of the county commssoners, or smar offcers.
Secton 182.165(a) of Reguatons 3 provdes n part that appca-
tons for permts to use ta -free acoho by muncpa subdvsons of
a State or Terrtory sha be made to the ssstant Regona Comms-
soner, coho and Tobacco Ta , by the offcer duy authorzed to pro-
cure such acoho, and evdence of such authorty sha be submtted
wth the appcaton. Secton 182.168 of Reguatons 3 gves the Com-
mssoner or the ssstant Regona Commssoner, coho and To-
bacco Ta , the authorty to requre persons carryng on busness under
Reguatons 3 to furnsh such addtona nformaton as he may, at
any tme n hs dscreton, deem necessary wth respect to the quafy-
ng documents.
In the case of a corporaton, secton 182.266 of Reguatons 3 requres
that where there s a change n the offcers or drectors, the ssstant
Regona Commssoner, coho and Tobacco Ta , must be furnshed
e tracts of the mnutes of meetngs showng such changes. owever,
the Interna Revenue Servce hods that t s not necessary that the
ssstant Regona Commssoner, coho and Tobacco Ta , be not-
fed each tme there s a change n the board of drectors or trustees of
a hospta operated by a muncpa subdvson of a State where app-
caton for a permt to procure ta -free acoho has been propery fed
under secton 182.165(a) snce such nformaton may, n approprate
cases, be requred under secton 182.168.
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Regs. 3, 182.661. 324
Reguatons 3, Secton 182.168: Other qua-
fyng documents.
Change n board of drectors or trustees of a muncpay owned
hosptausng ta -free acoho. (See Rev. Ru. 51-217, p. 323.)
Reguatons 3, Secton 182.2C6: Changes n
offcers and drectors.
Change n board of drectors or trustees of a muncpay owned
hospta usng ta -free acoho. (See Rev. Ru. 54-217, p. 323.)
S CTION 3108(c). WIT DR W L O LCO OL T -
R : OR US IN R S RC , OSPIT LS, OR
C RIT L CLINICS
Reguatons 3, Secton 182.661: osptas, Rev. Ru. 54-173
santarums, or cncs.
Ta -free acoho may not be used by a rmncpay-owned hos-
pta In makng tests of any nature for another Insttuton or nd-
vdua uness such tests are made n pursuance of a recognzed
functon of the hospta. prvatey-owned hospta may not use ta -
free acoho wthdrawn under ts permt to make pathoogca
e amnatons or tests for other hosptas, for physcans, or for nd-
vduas who are not patents of the hospta. charge or fee may
be made or accepted by the hospta, whether muncpay or pr-
vatey owned, provded the payment s for e amnatons or tests
usng ta -free acoho whch the hospta s authorzed to make.
dvce s requested as to the uses, f any, whch may be made of
ta -free acoho wthdrawn by a muncpay-owned or a prvatey-
owned hospta other than for routne medcna, mechanca, and
scentfc purposes of the hospta tsef.
Secton 182.661 of Reguatons 3 provdes that ta -free acoho
wthdrawn by hosptas, santarums, or cncs operated for charty
and not for proft, may be used ony for medcna, mechanca, and
scentfc purposes and n the treatment of patents. The use of the
ta -free acoho and the resutant products sha be confned strcty
to the premses of the nsttuton wthdrawng the acoho, e cept
that where any such resutng product does not contan acoho and s
to be used n further research, t may be removed, wthout sae, for
that purpose ony. Such further research may be conducted at any
scentfc unversty or coege of earnng, aboratory engaged n scen-
tfc research, or hospta or cnc. ona fde medcnes compounded
wth ta -free acoho wthdrawn by cncs operated for charty and
not for proft may be used outsde of such cncs for treatment of
the patents thereof, but such medcnes may not be sod.
The foowng questons and answers ustrate the appcaton of
the foregong statement of reguatons.
ueston 1. May a muncpay-owned hospta conduct aboratory
tests of any nature n whch the use of ta -free acoho s nvoved for
another nsttuton, ether permttee, nonpermttee, or ndvdua
nswer. The use of ta -free acoho by a muncpay-owned hos-
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325 (Regs. 3, 182.841.
pta s authorzed for the use of such hospta for medcna, mechan-
ca, and scentfc purposes and for use n treatng ts patents. ow-
ever, the use of the ta -free acoho n makng tests of any nature for
another nsttuton or ndvdua s not authorzed under the pro-
vsons of Reguatons 3 uness such tests are made n pursuance of state
or county requrements and are n essence a recognzed functon of the
muncpay-owned nsttuton.
ueston 2. Do the same condtons appy to a prvatey-owned
hospta as appy to a muncpay-owned hospta
nswer. prvatey-owned hospta may not use ta -free acoho
wthdrawn under ts permt to make pathoogca e amnatons or
tests for other hosptas, for physcans, or for ndvduas who are not
patents of such hospta. Such aboratory work of a prvatey-
owned hospta s not consdered dstngushabe from that carred
on by any commerca aboratory.
ueston 3. May a charge be made or a fee accepted by the ta -
free permttee n whose aboratory the tests nvovng ta -free acoho
are made
nswer. charge or fee may be made or accepted by the permttee
hospta, whether muncpay or prvatey owned, provded the pay-
ment s for e amnatons or tests usng ta -free acoho whch the
hospta s authorzed to make.
ueston 4- Woud the fact that a patent s charged for the test
by the nsttuton, physcan, or other person submttng the specmen
to the ta -free permttee for anayss have any bearng on the egt-
macy of the permttee s use of the ta -free acoho
nswer. If a permttee s not authorzed to use ta -free acoho
n makng e amnatons for other nsttutons, for physcans, or
other persons submttng specmens to the permttee for anayss, the
queston of whether the patent s or s not charged by the submttng
nsttuton, physcan, or other person, woud have no bearng on the
egtmacy of the permttee s use of ta -free acoho.
S CTION 3109. S L O D N TUR D LCO OL
T R
Reguatons 3, Secton 182.840: To whom may
be sod.
Reguatons 3 amended. (See T. D. 6070, p. 321.)
S CTION 3114. LCO OL P RMITS
Reguatons 3, Secton 182.841: Saes to and Rev. Ru. 54-201
by deaers.
( so Secton 182.847.)
uk shpments of ethy acetate and propretary sovents may be
made by barge provded authorty s frst obtaned therefor and the
procedure prescrbed for tank car and tank truck shpments of such
materas as set forth n sectons 182.841(b) and 182.847(a) of Regu-
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3116.) 326
atons 3 s foowed. Sutabe dock and storage factes must be
made avaabe. The carrer operatng the barge n such cases shoud
be one engaged n the reguar transportaton of merchandse anc
quafed to make nterstate shpments, or the barge shoud be owned,
operated, or controed by the producer or hs bona fde agents. The
shpment, sae, and devery and/or repackagng of the propretary
sovents anc ethy acetate must otherwse conform wth the appcabe
provsons of Reguatons 3.
R GUL TIONS 3, S .CTION 182.847: Contaners.
uk shpments of propretary sovents by barge. (See Rev. Ru.
54-201, p. 325.
S CTION 3115. P N LTI S
Possesson of property ntended for use n unawfuy evadng
quor ta es. (See Ct. D. 1765, p. 326.)
S CTION 3116. OR ITUR S ND S IZUR S
( so Secton 3115.) Ct. D. 1765
CUIMIN L LI ILITY INT RN L R NU COD D CISION O
SUPR M COURT
1. S CTION 3116, INT RN L R NU COD , LSO D IN S CRIMIN L,
O NS .
The acts proscrbed n secton 3110, Interna Revenue Code, not
ony may resut In forfeture of the offendng property hut kewse
are made crmna and punshnbe under the genera penaty pro-
vsons of secton 3115, Interna Revenue Code.
SUPR M COURT O T UNIT D ST T S
The Unted States of merca, appeant, v. oyd Dton
On appea from the Unted States Dstrct Court for the Northern Dstrct of Georga
pr 5, 1954
OPINION
Mr. ustce CL R devered the opnon of the Court.
The soe queston here s whether sectons 3110 and 3115 of the Interna
Revenue Code make t a crmna offense to possess property Intended for nse
n producng nonta pad dsted sprts n voaton of the Code. ppeee
was ndcted under these sectons for wfuy and knowngy possessng SOO
pounds of sugar and parts of a st for the proscrbed purpose. On moton
the dstrct court, reyng on dctum n a court of appeas decson,1 dsmssed
the ndctment on the ground that secton 311(5 s preventatve and remeda
rather than crmna, and that t does not defne a crmna offense. The Gov-
1 ent v. Unted Statct, 157 . 2d 1 (If4f). See aso Unted Stan v. Wne, r S
. 2d 186 (1646). I those cases the Government hm Invoked ony the forfeture pro-
vsons of the secton as apped to such a cv proceedng, characterzaton of the secton
as preventve and remeda was obvousy accurate. The two reported cases whch pre-
Yousy have faced squarey the present ( eston have uphed the ndctments. Unttd
States . ar, 7 . Sup. 718 (1951) : aed States v. fan n. 91 . Supp. 249 (1050)
See aso (odctte v. Unted States, 190 . 2d 831 (1952), u whch the present Issue
apparenty was not rased.
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327 31186.
emnent ap eae drecty to ths court under te Crmna ppeas ct, 18
1. S. C. secton 3T31. 346 U. S. 930.
Secton 3116 ot the Interna Revenue Code Is captoned orfetures and
Sezures, and provdes n pertnent part: It sha be unawfu to have or
ssess any quor or property ntended for use n voatng the provsons of
tWspart, or te nterna revenue aws and no property rghts sha e st
n any such quor or property . Nothng In ths secton sha n any
Mnncr mt or afTect auy crmna or forfeture provson of the nterna
rtrenne aws, or of any other aw. The secton aso provdes for
sareU warrants and for procedure n sezure and forfeture. Secton 3115
ters the capton Penates and provdes that anyone voatng any of the
provsons of ths part for whch offense a speca penaty Is not prescrbed
ha be abe, for the frst offense, to a penaty of not e ceedng 1,000, or
mprsonment not e ceedng thrty days, or both . The two sectons
re ncuded wthn the same part of the Code.2
The appeant s poston s that secton 3115 makes voaton of any of the
provsons of ths part a crmna offense punshabe by fue and mprson-
ment secton 3116 contans a provson makng It unawfu to possess property
ntended for use n voatng the provsons of that part or the nterna revenue
aws hence the ndctment aegng a voaton of sectons 3116 and 3115 by
such possesson charges a crme. We agree and so hod. We thnk the pan
knguae of the two sectons read together can ead ony to the concuson that
the acts proscrbed n secton 3116 not ony may resut n forfeture but kewse
are made crmna and punshabe under the genera penaty provsons of
secton 3115.
The sectons here nvoved were borrowed, wth changes nsgnfcant for
present urposes, from the Natona Prohbton ct of 1919, 41 Stat. 305 et seq.
There the sectons appeared as sectons 25 (compare secton 3116) and 29
(compare secton 3115) of tte II, and presented a statutory pattern vrtuay
dentca to the present one. It s most persuasve that the courts conssenty
uphed crmna prosecutons brought under these sectons for the anaogous act
of possessng property desgned for the manufacture of quor Intended for use
n voaton of tte II of the Prohbton ct.
Part TI ( Industra coho Pants ) of Subchapter C ( Industra coho ) of
Ctapter 26 ( Lquor ). The fu te t of the two sectons s as foows :
S C. 3115. P N LTI S.
at IOL TIONS S TO OP R TION O PL NTS O UNL W UL WIT DR W L O T L
LCO OL,. Whoever operates an ndustra acoho pant or a denaturng pant wthout
compyng wth the provsons of ths part and awfu reguatons made thereunder, or
bo Ter wthdraws or attempts to wthdraw or secure ta free any acoho sub|ect to ta ,
or whoever otherwse voates any of the provsons of ths part or of reguatons awfuy
made thereunder sha be abe, for the frst offense, to a penaty of not e ceedng 1.000,
or nrrwnment not e ceedng thrty days, or both, and for a second or cognate offense
to a penaty of not ess than 100 nor more than 10,000. and to Imprsonment of not ess
than thrty days nor more than one year. It sha be awfu for the Commssoner In a
caseat of second or cognate offense to refuse to ssue for a perod of one year a permt for
the manufacture or use of acoho upon the premses of any person responsbe n any
:r for the voaton.
(b) IOL TIONS s G N R L. ny person voatng the provsons of ths part or of any
. untons ssued thereunder, for whch offense a speca penaty Is not prescrbed, sha
be abe to the penaty or penates prescrbed In subsecton (a). It sha be the duty
of the prosecutng offcer to ascertan, In the case of every voaton of ths part or the
resruaton made thereunder, for whch offense a speca penaty s not prescrbed, whether
th defendant has been prevousy convcted and to pead the pror convcton In the aff-
davt, nformaton, or ndctment.
(c) PR ors CON ICTION. If any act or offense s a voaton of ths part, and aso
of an| other aw In regard to the manufacture or ta aton of, or traffc In. Into catng
quor, a convcton for such act or offense under the one sha be a bar to prosecuton
therefor under the other.
S C. 3118. OR ITUR S ND S IZUR S.
It sha be unawfu to have or possess any quor or property Intended for use n
Toatn|- the provsons of ths part, or the Interna revenue aws, or reguatons prescrbed
under such part or aws, or whch has been so used, and no property rghts sha e st n
n| each quor or property. search warrant may ssue as provded n tte I of the
set of une 15. 1017, 40 Stat. 2 28, for the sezure of such quor or property. Nothng
n ths secton sha In any manner mt or affect any crmna or forfeture provson of the
Interna revenue aws, or of any other aw. The sezure and forfeture of any quor or
property under the provsons of ths part, and the dsposton of such quor or property
subsequent to sezure nnd forfeture, or the dsposton of the proceeds from the sae of
men quor or property, sha he n accordance wth e stng aws or those hereafter In
e stence reatng to sezures, forfetures, and dsposton of property or proceeds, for
Toaton of the Interna revenue aws.
1 . a Rfnndt v. Unted State , 280 . 1. (1 )22) : dnmnan v. Unted tates, 290 . 110
{192411 Stater T Unted State , 5 . 2d 312 (1925) I atrtu v. Unted States, 7 . 2d 804,
05 (1925). Compare Page v. Unted State, 278 . 41 (1U22).
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Regs. 18, 192.250. 328
Ths consstency of nterpretaton, foowed by Congress utzaton n th
Code of the same provsons, s aso hepfu n deang wth the mtaton
eet on 3115 whch makes the penates of that secton appcabe ouy wher
no speca penaty s provded for the offense. s a de novo proposton
mght be argued that n secton 3110 a speca penaty, forfeture, s provdet
ut ths argument wns avaabe wth equa force under the Prohbton t
and appears to have barred no prosecuton. Moreover, secton 3110 contan
a provson that Nothng n ths secton s a n any manner mt or affect an
crmna provson of the nterna revenue aws. Ths woud seem t
sette the pont.
Ceary Congress may mpose both a crmna and a cv sancton n respot
to the same art ths s nether unusua nor consttutonay ob|ectonabe. Se
1-Ie.verng v. Mtche, 303 U. S. 391, 3(19-400 (1 )3S) C. . 15)38-1, 317 . Lk
wse t s common n draftng egsaton to decare certan acts unawfu 1
one secton and set forth penates for ther commsson n another.
The ony suggeston on the face of the statute that secton 3116 was mean
to be remeda and nothng more comes from ts capton, orfetures an
Sezures, supped by the codfcrs n 1939. ut n enactng the Code Congrca
provded that The arrangement and cassfcaton of the severa provsons o
the Interna Revenue Tte have been made for the purpose of a more convenen
and ordery arrangement of the same, and, therefore, no nference, Impcato
or presumpton of egsatve constructon sha be drawn or made by reaso:
of the ocaton or groupng of any partcuar secton or provson or porto:
thereof, nor sha any outne, anayss, cross reference, or descrptve matte
reatng to the contents of sad Tt| be gven any ega effect. f 3 Stat. Is
To accompsh ts prmary purpose of brngng together a operatve revenu
aws and makng them more comprehensbe, the Code made bera use o
catchwords. Typcay, secton 3116 s ncuded n a subehapter entted In
dustra coho and n a part entted Industra coho Pants yet eve
under a most narrow nterpretaton of ts terms the secton s n no sense mte
to ndustra acoho.
So far as ght s to he had from egsatve hstory, It Is meager and ncon
eusve, n no way mtatng aganst the meanng we attrbute to the statute.
Reversed.
Concurrng opnon by Mr. ustce ack wth whom Mr. ustce Dougas, Mr
ustce ackson, and Mr. ustce Mnm concur.
SU C PT R D. RM NT D LI UORS
S CTION 3150. T
R GUL TIONS 18, S CTION 192.250: eer ta rate. Rev. Ru. 54-24
The e empton from edera and oca ta es granted to the n-
dvdua deegates to the Unted Natons does not entte them to
obtan fermented quors free of nterna revenue ta from a
brewery n the Unted States.
dvce s requested whether members of the deegaton of a fore r
country to the Unted Natons may, as members of a Dpomatc
mbassy, obtan fermented quors from a brewery n the Unted
States free of the nterna revenue ta .
Secton 315t)(a) of the Interna Revenue Code provdes n par
that there sha be eved and coected a ta (at the current rate)
on a fermented quor contanng one-haf of 1 percent or more o
acoho, brewed or manufactured and sod, or removed for consump-
. g., ar Labor Standards pt. 29 U. S. C. sees. 215. 216 Interna Revenue Cod
(nnrcntcs). L f I . S. C. fees 2.153, 2I 54. 2357.
. . ep. No. 6, 7Uth Cong., 1st sess. 3 S. ep. No. 20, 76th Cong., 1st sew. 8.
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329 egs. 18, 192.100.
ton or sae, wthn the Unted States. Secton 3150(b) of the Interna
Revenue Code provdes n part that the ta on such fermented mat
quor sha be pad by the owner, agent, or superntendent of the
brewery or premses n whch such fermented quors are made.
The nterna revenue ta on fermented mat quors must be pad by
the brewer before remova from the brewery premses for consumpton
or sae wthn the Unted States. The Interna Revenue Code does
not provde anv e cepton to ths requrement.
The e empton from edera and oca ta es granted to the ndvd-
ua deegates to the Unted Natons does not entte them to obtan
fermented quors free of nterna revenue ta from a brewery n the
Unted States.
S CTION 3155. R UIR M NTS ON R W RS
Reguatons 18, Secton 192.440: orm 103.
Reguatons 18 amended. (See T. D. G069, p. 330.)
S CTION 3155(f). R UIR M NTS ON R W RS:
R NDING N M O M NU CTUR R ND PL C O
M NU CTUR ON CONT IN RS
Reguatons 18, Secton 192.160: Markng Rev. Ru. 54-127
and brandng.
( so Sectons 192.255 and 192.259.)
Where the name of the brewer has been changed but no change of
ownershp s nvoved, the new name may be paced on the meta
kegs addtonay as successor by ndentaton such as sandbastng or
other approprate means. fter the new name becomes effectve the
brewer may be aowed reasonabe tme n whch to pace the new
name on the e stng cooperage but he shoud mmedatey pace a
stcker on the kegs bearng the markngs prescrbed by secton 192.255
of Reguatons 18 unt the kegs can be so branded, whch must be
done as e pedtousy as possbe.
Reguatons 18, Secton 192.400: Notce Rev. Ru. 54-103
to supervsor.
Under the provsons of secton 3155(f) of the Interna Revenue
Code and secton 192.400 to secton 192.403, ncusve, of Reguatons
18, a brewer may purchase from another brewer fermented mat
quor n vesses branded wth the name and ocaton of the purchas-
ng brewer, the ta pad stamps to be attached by the producng brewer
before remova however, there s no authorty n aw or reguatons
under whch brewers may smary purchase botted beer. Permsson
for such a transacton may not be granted. Purchased ta pad beer
ma not be receved on brewery bottng house premses for abeng.
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Regs. 18, 192.281. 330
S CTION 3157. OTTLING RM NT D LI UORS
Reguatons 18, Secton 192.281: Ta tabe T. D. 6069
computatons, cases n barre equvaents.
( so Secton 3155, Sectons 192.440,192.441.)
TITL 26 INT RN L R NU . C PT R I, SU C PT R C, P RT 192.
RM NT D M LT LI UORS
mendment of requrements for fng cases and preparng orms
103 and 139.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton 25, D. C.
To Offcers and mpoyees of the Interna Revenue Servce and Others
Concerned:
On December 10, 1953, notce of proposed ruemakng, regardng
amendments to Reguatons 18 26 C R, pt. 192 , to provde for a more
accurate determnaton of a brewer s ta abty by emnatng tbe
present provsons for packagng an ndscrmnate m ture of 7
and 8 ounce bottes or 11 and 12 ounce bottes of beer n one
case, and to requre that the day statement of fermented mat
quor botted be reported on orm 103 n eu of orm 139 was pub-
shed n the edera Regster (18 . R. 8119). No comments havng
been receved durng the 30-day perod prescrbed n such notce, tbe
amendments to Reguatons 18 set forth beow are hereby adopted:
Paragraph 1. Wherever the term supervsor or dstrct super-
vsor appears n the sectons of the reguatons revsed by ths Treas-
ury Decson, such term s hereby amended to read ssstant Regona
Commssoner, coho and Tobacco Ta .
Par. 2. Secton 192.281 s amended by changng the coon n the frst
sentence to a perod and strkng the provso whch begns Provded,
That due to condtons .
Par. 3. Secton 192.440 s amended as foows:
( ) y nsertng n the frst sentence, mmedatey after the words
removed from the brewery premses, the phrase the quantty of
fermented quor botted, .
( ) y strkng the ffth sentence, whch begns The aggregates
of quanttes botted .
Par. 4. Secton 192.441 s amended as foows:
( ) y strkng from the second sentence the words botted and
the aggregate quantty .
( ) y strkng from the ast sentence the words botted and en-
tres as to quanttes .
Ths Treasury Decson sha be effectve on the 1st day of the 1st
month whch begns not ess than 30 days foowng the date of pub-
caton n the edera Regster.
(Ths Treasury Decson s ssued under the authorty contaned n
sec. 161 of the Revsed Statutes and sees. 3176 and 3791 of the Inter-
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331 Regs. 3, 5 182.877.
na evenue Code (sec. 161 . S. 5 U. S. C. 22 53 Stat. 375, 4G7 26
U.S.C. 3176,3791).)
T. Coeman ndrews,
Commssoner of Interna Revenue.
pproved March 31,1954.
M. . osom,
ctng Secretary of the Treasury.
(Pubshed n the edera Regster pr 6, 1954)
S CTION 3158.- R W RY PR MIS S
Reguaton 18, Secton 192.31: Use of brewery Rev. Ru. 54-79
premses.
product prepared from mat, hops, and a gran product, whch s
not sub|ected to any fermentng process after brewng, may be pro-
duced on brewery premses as an unfermented mat beverage (cerea
beverage) n accordance wth the provsons of secton 3158 of the
Interna Revenue Code and secton 192.31 of Reguatons 18.
The requrements of Reguatons 18, contaned n secton 192.410 to
secton 192.422, ncusve, wth respect to the manufacture, bottng,
etc., of cerea beverages, must be foowed n the producton an
dstrbuton of the product.
SU C PT R .-MISC LL N OUS G N R L PRO ISIONS
S CTION 3171.-R CORDS, ST T M NTS, ND R TURNS
Reguatons 3, Secton 182.643: Preparaton Rev. Ru. 54-202
and dsposton.
Snce acoho produced from ethyene gas, or other petroeum de-
rvatve, may be deposted n an ndustra acoho bonded warehouse
and ater wthdrawn ta pad, or transferred n bond and ater wth-
drawn ta pad, the propretor of the ndustra acoho pant where
such acoho s produced shoud show coho Petroeum Derva-
tve on orm 1440, Report of coho Gauged. ccordngy,
where the orgn of acoho s requred to be shown on packages of ethy
acoho produced from ethyene gas or other petroeum dervatve,
such orgn shoud be shown as coho Petroeum Dervatve.
Reguatons 3, Secton 182.877: Procedure.
Dscontnuance of use of specay denatured acoho by a specay
denatured acoho user. (See Rev. Ru. 54-100, p. 320.)
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Regs. 28, 176 15. 332
S CTION 3176. RUL S ND R GUL TIONS
R GUL TIONS 7, S CTION 178.245: Genera. Rev. Ru. 54-128
Cases of ta pad wne botted on ta pad bottng house or rectfy-
ng pant premses, after recept of the wne by ppene from a
bonded wnery or bonded storeroom, as provded n secton 178.245
to secton 178.249, ncusve, of Reguatons 7, are not requred to
bear marks showng that the wne has been ta pad.
R GUL TIONS, S CTION 190.706: Rebott ng, Rev. Ru. 54-155
reabeng and restampng of botted sprts.
ottes of unsaabe mported dsted sprts may be dumped and
rebotted, under the supervson of a Government offcer. The re-
bottng, restampng, and reabeng operatons must be conducted n
accordance wth the appcabe provsons of Reguatons 15.
S CTION 3179. MPTION ND DR W C IN
C S O PORT TION
R GUL TIONS 28, S CTION 176.15: port storage Rev. Ru. 54-150
room.
port storage rooms may be estabshed at ports of e portaton for
the storage of deted sprts and wnes botted or packaged especay
for e port wth beneft of drawback ony n connecton wth ta pad
bottng houses, rectfyng pants and nterna revenue bonded ware-
houses, as authorzed by secton 176.16 of Reguatons 28. Such e -
port storage rooms for the storage of wne may be estabshed ony
n or contguous to bonded wneres and bonded storerooms as au-
thorzed by secton 176.15 of Reguatons 28. port storage rooms
may not be estabshed at the port of e portaton n or contguous to
whoesae quor deaer premses. The oottng-n-bond department
of an nterna revenue bonded warehouse may not be operated ater-
natey as a cass 6 customs bonded manufacturng warehouse for e -
port purposes. ppcatons for wthdrawa of e port sprts from
an e port storage room or from an nterna revenue bonded warehouse
may not be approved by a customs offcer n the name of the assstant
regona commssoner and such wthdrawas may not be made under
the supervson of a customs offcer. Such approva must be made by
the assstant regona commssoner as authorzed n secton 176.36 of
Reguatons 28.
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333 Ress. 23, { 181.30.
C PT R 27. OCCUP TION L T S
SU C PT R . SP CI L PRO ISIONS
P RT II. LI UOR
S CTION 3250.-T
Reot|atons 23, Secton 181.30: Repars or Rev. Ru. 54-218
ateratons.
dster woud not Incur abty to speca (occupatona and
commodty) ta es by renson of the repacement of a of tbe tnbes
of a condenser at one tme, wthout other modfcaton or change,
nor by reason of repacng the entre outer |acket of a condenser
wthout other modfcaton or change.
dvce s requested whether abty s ncurred by a dster to
speca (occupatona and commodty) ta es as a resut of the repace-
ment of a copper tubes n a condenser. dvce s aso requested
whether the repacement of the entre outer |acket of a condenser
woud sub|ect the dster to such ta es.
Secton 3250 (|) of the Interna Revenue Code provdes a speca oc-
cupatona ta of 55 upon manufacturers of sts and a commodty
ta of 22 (to be pad by the manufacturer) for each st or worm
manufactured. Secton 3254 (h) defnes a manufacturer of sts as
any person who msnufactures any st or worm to be used n
dstng.
Secton 181.30 of Reguatons 23 provdes that whenever a st,
worm, or condenser, to be used n dstng, s repared or atered by
the addton of new matera to such an e tent as vrtuay to resut
n the constructon of a new st, worm, or condenser, the person mak-
ng such repars or ateratons w be hed abe to the speca (com-
modty) ta for each st, worm, or condenser so requred or atered
nnd w ncur abty to the speca (occupatona) ta as a manu-
facturer of sts.
It s not consdered that the repar of a condenser by repacng a
of the tubes at one tme woud vrtuay resut n the constructon
of a new condenser. The she and ends were n e stence at
a tmes and woud have been referred to as a condenser. Sm-
arty, the repacement of the entre outer |acket of a condenser, wth-
out other modfcaton or change, woud not consttute the manufac-
ture of a new condenser.
ccordngy, t s hed that a dster woud not ncur abty to
speca (occupatona and commodty) ta es by reason of (1) the
repacement of a of the copper tubes n a condenser, wthout other
modfcaton or change or (2) by reason of the repacement of the en-
tre outer |acket of a condenser, wthout other modfcaton or change.
815350
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egs. 20, 194.29. 334
S CTION 3251. C SU L S L S
R GUL TIONS 20, S CTION 194.189: Saes by Rev. Ru. 54-189
e ecutor, admnstrator, or other fdu-
cary.
Under the provsons of secton 3251 (a) of the Interna Revenue
Code, and secton 194.189 of Reguatons 20, no speca ta w accrue
on a sae of dsted sprts, wnes, or mat quors made by a fre
nsurance company, or ts savagng agents, actng n a fducary
capacty, whch has taken over such products after ther damage by
fre, provded the products are sod n one parce ony or at pubc
aucton n parces of not ess than 20 wne gaons.
S CTION 3254. D INITIONS
R GUL TIONS 20, S CTION 194.29: Whoesae Rev. Ru. 54-129
deaers n quors persons abe.
( so Sectons 3, 6, edera coho dmns-
traton ct Secton 1, Reguatons
No. 1 Secton 3.20, Reguatons No. 3.)
reta quor deaer may purchase warehouse recepts for ds-
ted sprts and have the sprts transferred to an nterna rev-
enue bonded warehouse of hs choce for the purpose of bottng,
on hs order pursuant to a contract for payment of edera, State,
and oca ta es, pus storage and bottng charges, wthout In-
currng abty for speca ta as a whoesae quor deaer and
wthout obtanng a whoesaer s basc permt as ong as the ds-
ted sprts are botted for sae by the reta quor deaer.
The propretor of an nterna revenue bonded warehouse, hodog
a speca ta stamp as a whoesae quor deaer, Is not precuded
by secton 28(50 of the Interna Revenue Code, from recevng more
than 20 wne gaons of dsted sprts owned by a reta quor
deaer when such sprts are receved for the purpose of storage and
bottng on the order of the retaer and the ownershp of the
sprts remans wth, the reta quor deaer.
dvce s requested whether a reta quor deaer may, wthn the
ntent of the nterna revenue aws reatng to quors and of the
edera coho dmnstraton ct, purchase warehouse recepts
coverng dsted sprts, have such dsted sprts transferred to
an nterna revenue bonded warehouse for bottng and shpped to
hm, the retaer, through a whoesae quor deaer.
reta quor deaer purchased warehouse recepts for buk sprts
n e cess of 20 wne gaons from a quafed broker. e gave pos-
sesson of the warehouse recepts to the propretor of an nterna
revenue bonded warehouse who had the sprts transferred n bond
to hs warehouse. The propretor of the warehouse then ssued new
recepts to the reta quor deaer who nvoced them back to the
propretor of the nterna revenue bonded warehouse. Ths transac-
ton was not a sae but merey a bottng agreement. No payment of
money or transfer of other consderaton was made by the propretor
of the nterna revenue bonded warehouse for the warehouse recepts
and he contnued to treat the whsky as the property of the reta
quor deaer. The warehouse recepts were hed by the warehouse-
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335 Regg. 20, S 194.29.
man for bottng of the. whsky on the order of the reta quor deaer
under an agreement for payment of storage and bottng charges,
pus edera, State, and oca ta es. Upon competon of bottng,
the botted whsky was nvoced to the reta quor deaer through
a quafed whoesae quor deaer who was pad by the retaer for
ta es, storage and bottng charges, and the whoesae quor deaer s
charges.
In the nstant case, t was necessary that the botted whsky be con-
sgned to the retaer through a whoesaer to satsfy the requrements
of the aws of the State n whch the retaer s busness s carred on.
There are no edera requrements that a retaer receve botted
dsted sprts through a person hodng a whoesaer s basc permt.
Secton 6(a) of the edera coho dmnstraton ct, 49 Stat.
9S5, reads n part:
It sha be unawfu for any person to se or offer to se, contract
to se, or otherwse dspose of warehouse recepts for dsted sprts n buk
uness such warehouse recepts requre that the warehouseman sha package
such dsted sprts, before devery, n bottes abeed and marked n accord-
ance wth aw, or dever such dsted sprts n buk ony to persons to whom
It s awfu to se or otherwse dspose of dsted sprts n buk.
Such provsons and the provson of Reguatons No. 3 ssued there-
under reatng to buk saes and bottng of dsted sprts, do not
prohbt a reta quor deaer from purchasng warehouse recepts
for dsted sprts or from transferrng the warehouse recepts to a
permttee quafed to botte such sprts. The agreement between
the retaer and the botter regardng the transfer of the warehouse
recepts and the bottng of the whsky s a commerca transacton
for whch no specfc form s specfed or requred by edera aw
or reguatons, e cept that the whsky must be devered to a person
authorzed to receve whsky n buk.
Secton 3250(a) of the Interna Revenue Code provdes that whoe-
sae deaers n quors sha pay a speca (occupatona) ta at a
gven rate. Under secton 3254(b) of the Interna Revenue Code,
persons engaged n the busness of seng warehouse recepts must
pay the speca ta as a whoesae deaer n quors. owever, n
vew of the fact that nether tte to nor benefca ownershp of
the whsky passed from the reta quor deaer to the nterna rev-
enue bonded warehouse propretor n the course of the transacton,
the gvng possesson of the recepts s not a sae wthn the meanng
of the speca ta aws or under the provsons of Reguatons 20.
Secton 2800 of the Interna Revenue Code makes t unawfu for
any rectfer of dsted sprts, or whoesae or reta quor deaer,
to purchase or receve any dsted sprts n quanttes greater than
20 wne gaons from any person other than an authorzed rectfer
of dsted sprts, dster, or whoesae deaer.
ach company nvoved n the nstant transacton has pad the spe-
ca ta as a whoesae quor deaer e cept the retaer. ny pur-
chase by the botter of dsted sprts from the reta quor deaer
n uanttes greater than 20 wne gaons woud make the botter
abe for the penaty of 1,000 prescrbed by secton 2800 of the In-
terna Revenue Code. The warehouse recepts represent the whsky
and the transfer of the recepts represent constructve or symboc
devery of the whsky for the purpose of sae. Taney v. Penn. Nat
ank, 232 U. S. 174. owever, the transfer of the warehouse recepts,
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Regs. 10, 185.840. 336
wthout payment and on the bass of the agreement that the reta
quor deaer woud pay ta es and storage and bottng charges, woud
not consttute a purchase of the whsky wthn the meanng of sec-
ton 2860 of the Interna Revenue Code.
In the case of U. S. v. rdenburg, IT. S. Dstrct Court . D. a.
(1869), ed. Cas. No. 15168, the court hed that the word receve
as used n ths secton means receve for sae and that when a rectfer
or whoesae quor deaer receves, for storage ony and not for sae,
more than 20 wne gaons of sprts from a person other than one
authorzed to se such sprts, he does not ncur the penaty.
The reta quor deaer dd not ncur abty for the speca ta as
a whoesae quor deaer through purchase of the warehouse recepts
and dd not engage n transactons for whch a basc permt s re-
qured under the provsons of secton 3 of the edera coho d-
mnstraton ct.
The gvng possesson of warehouse recepts to the warehouseman
(botter) by the reta quor deaer under the agreement for payment
of ta es, and storage and bottng charges, dd not consttute recept
of the sprts from the reta quor deaer wthn the meanng of sec-
ton 2860 of the Interna Revenue Code.
C PT R 28 PRO ISIONS COMMON TO
MISC LL N OUS T S
SU C PT R .-G N R L PRO ISIONS
P RT I . MISC LL N OUS PRO ISIONS
S CTION 3331. MPTION ROM T O DOM STIC
GOODS PURC S D OR T UNIT D ST T S
Reguatons 10, Secton 185.840: Persons Rev. Ru. 54-249
entted to make wthdrawas.
Dsted sprts may be botted n bond for sae, free of ta , to
the rmed Servces Medca Procurement gency.
dvce s requested reatve to the sae of dsted sprts, free of
ta , to the rmed Servces Medca Procurement gency, and the
procedure to be foowed therefor.
Dsted sprts may be botted n bond for sae, free of ta , to the
rmed Servces Medca Procurement gency. Propretors of n-
terna revenue bonded warehouses may be authorzed to proceed wth
the bottng of such sprts upon recept of an order from the rmed
Servces Medca Procurement gency n advance of the fng of the
appcaton on orm 543, ppcaton for the Wthdrawa of Ds-
ted Sprts Other than coho, ree of Ta , Under the provsons
of Secton 3331. Interna Revenue Code, for Use of the Unted States,
n order that the sera numbers of the cases may be made avaabe
for ncuson n the requred bond. orm 544, and the appcaton,
orm 543. In such case, a copy of the order from the rmed Servces
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337 4 .
Medca Procurement gency must be e hbted to the storekeeper-
pauper and the sprts may not be shpped unt the necessary permt
on orm 1508, Permt for Wthdrawa of Dsted Sprts from
ond, ree of Ta , for Use of the Unted States, has been receved
by the warehouseman.
If the sprts are botted at 100 of proof, the warehouseman may
e ercse an opton regardng the use of green strp stamps on the
bottes, based on a preference e pressed n the contract by the rmed
Servces Medca Procurement gency. owever, n order that
green strp stamps may be used the sprts must bo egbe n a
respects for desgnaton as botted-n-bond sprts n accordance wth
the provsons of Reguatons 10. In the event green strp stamps
are to be used, the bottes w be abeed as botted-n-bond sprts
n accordance wth the appcabe provsons of Reguatons 10.
Where the contract cas for sprts of 100 of proof but specfes
that green strp stamps are not to be used, pan strps, bearng the
egend otted specay for the rmed Servces Medca Procure-
ment gency, may be substtuted therefor. If the sprts are egbe
for desgnaton as botted-n-bond oprts, the bottes w be abeed
as botted-n-bond sprts.
Where the contract cas for sprts of ess than 100 of proof pan
strps w be used n eu of green strp stamps and such sprts, as
we as sprts of 100 not egbe for desgnaton as botted-n-bond
sprts, w not bear botted-n-bond cauton notces or the desgna-
ton In ond. Government abes or strps of pan paper over
the necks of the bottes must bear the egend otted s||ecay for
the rmed Servces Medca Procurement gency.
The dsted sprts may not be stored esewhere than n the nterna
revenue bonded warehouse. The bottng of dsted sprts for the
rmed Servces Medca Procurement gency may be conducted smu-
taneousy wth the bottng n bond of sprts of 100 of proof n the
bottng-n-bond department of the nterna revenue bonded ware-
house provded the bottng nes are entrey separated from each
other and the botted sprts are stored separatey.
D R L LCO OL DMINISTR TION CT
S CTION 3. UNL W UL USIN SS S WIT OUT
P RMIT
Reguatons No. 1, Secton 1: When requred.
Purchase of warehouse recepts by a reta quor deaer. (See
Rev. Ru. 51-129, p. 334.)
S CTION 4. P RMITS
Dsted sprts purchased abroad by one mporter and entered nto
customs custody n the name of a second mporter. (See Rev. Ru.
54-186, p. 306.)
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Regs. 6, 6.20. 338
S CTION 5 (b). UN IR COMP TITION ND UNL W UL
PR CTIC S: TI D OUS
R GUL TIONS No. 6, S CTION 6.20: pp- Rev. Ru. 54-130
caton.
The coecton of dues by members of a whoesae quor deaers
assocaton from retaers on behaf of a reta quor deaers assoca-
ton, whether or not the whoesaers are compensated for such coec-
ton servce, fas wthn the ntent of secton 5(b) (3) of the edera
coho dmnstraton ct, and, f the dues coecton servce resuts
n the drect or ndrect nducement of the retaers to purchase from
such whoesaers to the e cuson n whoe or n part of goods sod or
offered for sae by other persons n nterstate commerce, voatons
of the act woud ensue.
R GUL TIONS No. 6, S CTION 6.20: pp- Rev. Ru. 54-151
caton.
The practce, on the part of a producer, mporter, or whoesaer of
mat beverages, of gvng or seng branded or pan gassware to
retaers of mat beverages for use on ther premses, woud fa wthn
the provsons of secton 5(b) (3) of the edera coho dmnstra-
ton ct, f the aw of the State n whch the retaer s ocated aso
prohbts ths practce. voaton of the act woud ensue f the
practce nduced retaers to purchase from the ndustry member
makng such gfts or saes to the e cuson n whoe or n part of
smar products sod or offered for sae by others n nterstate or
foregn commerce.
R GUL TIONS No. 6, S CTION 6.20: pp- Rev. Ru. 54-161
caton.
Prce reductons, rebates, refunds, and dscounts gven by a whoe-
sae quor deaer to a reta quor deaer pursuant to an agreement
made at the tme of the sae of the merchandse nvoved are con-
sdered a part of the saes transacton, consttutng reductons n prce
pursuant to the terms of the sae. Such transactons do not fa
wthn the purvew of secton 5(b) of the edera coho dmns-
traton ct, provded they do not nvove the mposton of any re-
qurement upon the retaer to take and dspose of a certan quota
of the whoesae deaer s products, or do not nvove any of the other
practces set forth n secton 5(a) to 5(d), ncusve, of the ct. Ths
vew woud hod rrespectve of whether the quantty dscount was
prorated and aowed on each devery, gven n a ump sum after the
entre quantty of merchandse purchased had been devered, or
based on doar voume or on the quantty of merchandse purchased.
Ordnary, free goods are nothng more than prce reductons
n the same status as dscounts and, smary, are not wthn
the purvew of secton 5(b) of the edera coho dmnstraton
ct. or e ampe, f a whoesae quor deaer agreed to gve a
reta quor deaer a free case for each 10 cases purchased, such
transacton s essentay a reducton n the usua prce. owever, f
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339 Regs. C, 6.23.
the amount of the product gven free wth the order s such that the
prcng aspect s merey a subterfuge, the transacton woud consttute
a gft wthn the meanng of ths secton of the edera coho
dmnstraton ct.
R GTTL TIONS No. 6, S CTION 6.23: Sgns. ev. u. 54-203
( so Secton 5(e) Reguatons No. 5,
Secton 70.)
The term Te as fth may be used to descrbe haf-gaon
bottes of dsted sprts provded the packages are ceary marked
to show the nctua contents.
The furnshng of thngs of vaue by a whoesaer to hs saesmen
does not come wthn the provsons of secton 5(b) (3) of the ed-
era coho dmnstraton ct and s therefore permssbe.
It s permssbe n the case of chan-store operatons to pace
dspays not e ceedng 10 n cost n any or a of the stores ncuded
n the chan. The 10 mtaton prescrbed by secton 6.23 of Regu-
atons No. 6 s appcabe to each reta estabshment.
dvce s requested whether the term Te as fth may be used
to descrbe haf-gaon bottes of dsted sprts. dvce s aso
requested whether a whoesae quor deaer may furnsh Te as hats
and shrts to hs saesmen for the purpose of advertsng a product
n connecton wth the use of the term Te as fth, and whether
Te as hats may be furnshed to retaers for dspay purposes.
Secton 5(e) of the edera coho dmnstraton ct, among
ether thngs, makes t unawfu for any person engaged n busness as
a manufacturer, botter, mporter, or whoesaer of acohoc beverages
to ntroduce nto nterstate commerce any dsted sprts, wne, or
mat beverages, uness such products are botted, packaged, and abeed
n conformty wth reguatons, n such manner as w prohbt de-
cepton of the consumer wth respect to the quantty of such product.
Snce the contaners must, under sectons 32 and 37 of Reguatons
No. 5 be ceary marked to show the actua contents, the use of the term
Te as fth to descrbe the haf-gaon bottes s not deceptve
thn the ntent of secton 5(e) of the edera coho dmnstra-
ton ct and s permssbe.
. Secton 5(b)(3) of the edera coho dmnstraton ct, sub-
wt to the |ursdctona mtatons n respect to mat beverages, pro-
hbts a manufacturer, mporter, or whoesaer of acohoc beverages
rom nducng a retaer to purchase hs products to the e cuson n
hoe or n part of smar products of other persons sod or offered
or sae n nterstate or foregn commerce under the condtons stated
heren by furnshng, gvng, rentng, endng, or seng to the re-
taer any equpment, f tures, sgns, suppes, money, servces, or other
thng of vaue, sub|ect to such e ceptons as may by reguatons be
prescrbed.
Ths subsecton of the edera coho dmnstraton ct s ap-
pcabe ony to the furnshng of equpment, f tures, sgns, etc., to
traers. Therefore, there woud be no ob|ecton to a whoesae
quor deaer furnshng hs saesmen wth Te as hats and shrts for
the purpose of advertsng a product dstrbuted by the whoesaer.
Secton 6.23 of Reguatons No. 6, ssued pursuant to the edera
coho dmnstraton ct, provdes that sgns, posters, pacards,
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I 5(h) . 340
etc., bearng advertsng matter and for use nsde a reta estabsh-
ment may be furnshed, gven, rented, oaned, or sod to the retaer
f they have no vaue to the retaer e cept as advertsements and f the
tota vaue of a such materas furnshed by any ndustry member and
n use at any one tme n any reta quor deaer s estabshment does
not e ceed 10.
There woud be no ob|ecton to the whoesaer settng up dspays
n reta stores by pacng merchandse of the retaer around one of
the Te as hats furnshed by the whoesaer provded the tota vaue
of a of the matera furnshed by the whoesaer (ncudng the cost
of settng up the dspay) w not e ceed 10. The 10 mtaton
referred to n the reguatons s appcabe to each reta estabshment
and not to each retaer. Therefore, t woud be permssbe n the
case of chan-store operatons to pace such a dspay n eacb of the
stores ncuded n the chan.
Rev. Ru. 54-1G2
The prohbtons of secton 5 (b) (6) of the edera coho d-
mnstraton ct aganst nducng purchases of acohoc beverages
by e tendng e cessve credt to a retaer are not voated so ong as
a current order from a retaer whose account s n arrears s accom-
paned wth a payment equa to or greater than the vaue of such
current order. Ths woud be true regardess of the manner n whch
the transacton s handed on the records of the supper.
Rev. Ru. 54-175
The practce of producers, mporters, or whoesaers of acohoc
beverages under the edera coho dmnstraton ct of furnsh-
ng merchandse or other thngs of vaue, such as barbecue sets, to
retaers of acohoc beverages, n con|uncton wth the sae of ds-
ted sprts, or wne, woud fa wthn the coverage of secton 5(b)
of the edera coho dmnstraton ct. oatons of the act
woud ensue f the furnshng of such merchandse nduced the re-
taers to purchase acohoc beverages from the ndustry member
furnshng the merchandse, to the e cuson n whoe or n part of
acohoc beverages sod or offered for sae by other persons n nter-
state or foregn commerce.
Rev. Ru. 54-176
ny contrbuton by a whoesae quor deaer to a cooperatve ad-
vertsement fas wthn the coverage of secton 5(b) of the edera
coho dmnstraton ct. Therefore, contrbutons by whoesae
quor deaers (even though n amounts of not e ceedng 10 doars
each) towards the cost of advertsng for the purpose of ceebratng
the renovaton and redecoraton of a reta quor deaer s cockta
ounge woud consttute voaton f nducement and e cuson
resut therefrom.
Rev. Ru. 54-177
voaton of secton 5(b) (3) of the edera coho dmnstra-
ton ct w ensue f retaers are nduced, wthn the |ursdctona
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341 Regs. 4, 21.
mtatons prescrbed theren, to purchase a brewer s product to the
e cuson n whoe or n part of smar products sod or offered for
sae by other persons n nterstate or foregn commerce as a resut of
the brewer guaranteeng a manufacturer of refrgeratng equpment
that he can se a specc number of mechanca beer coong cabnets
havng the trade name of the brewer permanenty embossed thereon,
and suesmen of the brewer nformng reta deaers that they can buy
at the whoesae prce. The brewer woud be furnshng or gvng
somethng of vaue wthn the meanng of secton 5(b)(3) of the
edera coho dmnstraton ct as the purchase of the beer
coong cabnet wth the embossed trade-mark woud resut n savngs
to the retaer whch he coud not otherwse get by purchasng cabnets
whch do not bear the permanenty embossed trade-mark.
In the case of mat beverages, secton 5(b) (3) of the edera co-
ho dmnstraton ct appes to transactons between a retaer n
a State and a brewer or whoesaer of mat beverages outsde such
State ony to the e tent that the aw of the State n whch the retaer
s ocated mposes smar requrements wth respect to transactons
between retaers and brewers or whoesaers n the State. Therefore,
ths rung woud not appy f the retaer were ocated n a State not
havng provsons smar to those contaned n the edera coho
dmnstraton ct.
S CTION 5(c).-UN IR COMP TITION ND UNL W UL
PR CTIC S: COMM RCI L RI RY
Reguatons No. 6, Secton 6.20: pp- Rev. Ru. 54-131
caton.
( so Secton 5(b).)
premum offer, whch states that s staness stee knves (wth a
3 vaue) w be furnshed for 1 and one neck band from a botte
of a partcuar brand of wne, or a smar offer, s not contrary to
any provsons of the edera coho dmnstraton ct, provded
retaers and empoyees of whoesaers and retaers are e cuded from
partcpaton theren.
S CTION 5(e). UN IR COMP TITION ND UNL W UL
PR CTIC S: L LING
Reguatons No. 4, Secton 21: The stand- Rev. Ru. 54-174
ards of dentty.
product whch s compounded from grape wne, wth herbs and
other natura aromatc favorng materas, and whch possesses the
taste, aroma, and characterstcs generay attrbuted to vermouth,
and has an acohoc content of ess than 15 percent by voume, woud
be appropratey desgnated as Grape Wne avored wth erbs
Customary Used n the avorng of ermouth.
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Regs. 3, 3.20. 342
Reguatons No. 4, Secton 21: The stand-
ards of dentty.
Producton and abeng of May Wne. (See Rev. Ru. 54-126,
p. 304.)
Reguatons No. 4, Secton 34: Cass and Rev. Ru. 54-238
type.
The term Dry may be propery apped ony to wnes ess sweet
than average wnes of the same cass and type, but n no event may
Dry be used on abes of wne havng a tota sods content of more
than 17 grams per hundred cubc centmeters. The words tra
Dry may be apped ony to wnes consderaby ess sweet than aver-
age wnes of the same cass and type.
Reguatons No. 4, Secton 39: Prohbted Rev. Ru. 54-250
practces.
ended wnes composed of two or more dstnct vntages may not
bear back abes showng the percentages and vntages of each of the
bend s components.
S CTION 5(f). UN IR COMP TITION ND UNL W UL
PR CTIC S: D RTISING
1 Reguatons No. 4, Secton 64: Prohbted Rev. Ru. 54-163
statements.
Secton 64(a)(8) of Reguatons No. 4 prohbts the use of
any statement, desgn, devce, or representaton whch reates to aco-
hoc content n the advertsng of wne.
It s hed that statements of acohoc content gven by ora presenta-
ton on rado and teevson or contaned n advertsng other than on
abe reproductons are n voaton of the reguatons. owever, no
ob|ecton s nterposed to the reproducton of an approved wne abe,
whch bears the statement of acohoc content, on any advertsng
meda, or to the dspayng on teevson of an actua wne botte
showng the approved abe bearng the statement of acohoc content
S CTION 6. UL S L S ND OTTLING
Reguatons No. 3, Secton 3.20: Dsted
sprts n buk.
Purchase of warehouse recepts by a reta quor deaer. (See
Rev. Ru. 54-129, p. 334.)
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P RT I . L GISL TION ND TR TI S
PU LIC L W 324, IG TY-T IRD CONGR SS
S COND S SSION
. R. 8224
n ct To reduce e cse ta es, and for other purposes
e t enacted by the Senate and ouse of Representatves of the
Unted States of merca n Congress assembed, That (a) Short
Tte. Ths ct may be cted as the cse Ta Reducton ct of
1954.
(b) ct mendatory of Interna Revenue Code. cept as
otherwse e pressy provded, wherever n ths ct an amendment or
repea s e pressed n terms of an amendment to or repea of a sec-
ton, subsecton, paragraph, or subparagraph, the reference sha be
consdered to be made to a provson of the Interna Revenue Code.
TITL I R T IL RS CIS T S
S C. 101. R T IL RS CIS T ON LUGG G , TC.
Secton 1651(a) (reatng to retaers e cse ta on uggage, etc.) s hereby
amended by strkng out 20 per centum and nsertng n eu thereof 10
per centum .
S C. 102. R T IL RS CIS T S ON W LRY, URS, ND TOIL T
PR P R TIONS.
or reducton n rate of retaers e cse ta es on |ewery, furs, and toet
preparatons, see secton 504(a).
S C. 103. CTI D T O TITL L
or effectve date of ths tte see secton 505(a).
TITL II T S ON DMISSIONS ND DU S
S C. 201. T ON DMISSIONS.
(a) Permanent Use or Lease of o es or Seats. Secton 1700(b) (1) (reat-
ng to ta on permanent use or ease of bo es or seats) s hereby amended by
strkng out 11 per centum and nsertng n eu thereof 10 per centum .
(b) Saes Ot|sde o Offce. Secton 1700(c) (1) (reatng to ta on saes
outsde bo offce) s hereby amended by strkng out 11 per centum and
nsertng n eu thereof 10 per centum .
(c) Cabarets, Roof Gardens, etc. The frst sentence of secton 1700(e) (1)
(reatng to ta on cabarets, roof gardens, etc.) s hereby amended to read as
foows: ta equvaent to 20 per centum of a amounts pad for admsson,
refreshment, servce, or merchandse, at any roof garden, cabaret, or other smar
pace furnshng a pnbc performance for proft, by or for any patron or guest
who s entted to be present durng any porton of such performance.
(d) Snge or Season Tckets and Subscrptons. or reducton n rate of
ta on admsson by snge or season tcket or subscrpton, see secton 504(a).
(e) Rate o ppy to Ma|or ractons. Secton 1700(a) (1) (reatng to
(343)
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344
rate of ta on snge or season tckets and subscrptons) s hereby amended by
strkng out fracton and nsertng n eu thereof ma|or fracton .
(f) empton of dmssons of fty Cents on Less. Secton 1700(a) (1)
(reatng to rate of snge or season tckets and subscrptons) s hereby amended
by strkng out the second sentence thereof and nsertng n eu thereof the
foowng: No ta sha be mposed under ths paragraph on the amount pad for
admsson
( ) f the amount pad for admsson s 50 cents or ess, or
( ) n the case of a season tcket or subscrpton, f the amount
whch woud be charged to the hoder or subscrber for a snge admsson
s 50 cents or ess.
(g) dmssons to Certan ack Tbacks.
(1) Secton 1700(a) (reatng to rate of ta on snge or season tckets and
subscrptons) s hereby amended by addng at the end thereof the foowng:
(3) Certan race backs. In eu of the ta mposed under paragraph
(1), a ta of 1 cent for each 5 cents or ma|or fracton thereof of the amount
pad for admsson to any pace (ncudng admsson by season tcket or
subscrpton) f the prncpa amusement or recreaton offered wth respect
to such admsson s horse or dog racng at a race track. The ta Imposed
under ths paragraph sha be pad by the person payng for such admsson.
(2) Secton 1700(b) (reatng to rate of ta on permanent use or ease of
bo es or seats) s hereby amended
( ) by strkng out paragraph (1) of subsecton (a) and nsertng
n eu thereof paragraph (1) or (3) of subsecton (a) and
( ) by nsertng after per centum the foowng: (20 per centum f
paragraph (3) of subsecton (a) Woud otherwse appy) .
(3) Secton 1700(c) (reatng to rate of ta on saes outsde bo offce) s
hereby amended
( ) by strkng out paragraph (1) of subsecton (a) and nsertng
n eu thereof paragraph (1) or (3) of subsecton (a) and
( ) by nsertng after per centum the foowng: (20 per centum
f paragraph (3) of subsecton (a) appes) .
(4) The ast sentence of secton 1700(e) (1) (reatng to ta on cabarets,
roof gardens, etc.) s hereby amended by strkng out subsecton (a) (1)
and nsertng n eu thereof paragraph (1) or (3) of subsecton (a) .
(h) Certan thetc Games for eneft of osptas for Crpped Ch-
dren. Secton 1701(a) (2) (reatng to none empt admssons) s hereby amend-
ed by strkng out between two eementary or secondary schoos and nsertng
n eu thereof the foowng: between teams composed of students from ee-
mentary or secondary schoos .
(1) empton of Schoo or Coege thetc vents. Secton 1701(a) (2)
(reatng to none empt admssons) Is hereby amended by addng at the end
thereof the foowng new sentence: Causes ( ) and ( ) sha not appy n
the case of any athetc event between educatona nsttutons hed durng the
reguar athetc season for such event, f the proceeds therefrom nure e cusvey
to the beneft of such nsttutons.
(|) storc Stes, Museums, and Panetahums. Secton 1701(e)(2) (re-
atng to e empton from admssons ta of hstorc stes) s hereby amended to
read as foows:
(2) storc stes, museums, and panetarums. ny admsson to an
hstorc ste, house, or shrne, to a museum of hstory, art, or scence, to a
panetarum, or to any e hbton n connecton wth any of the foregong,
operated
( ) by any State or potca subdvson thereof or by the Unted
States or any agency or nstrumentaty thereof f the proceeds there-
from nure e cusvey to the beneft of the State, potca subdvson,
Unted States, agency, or Instrumentaty, or
( ) by any socety or organzaton not organzed for proft f no
part of the net earnngs thereof nures to the beneft of any prvate
stockhoder or ndvdua.
or the purposes of subparagraph ( ), the term State ncudes aska,
awa, and the Dstrct of Coumba.
(k) Certan mateur Theater Performances. Secton 1701 (reatng to
e emptons from the admssons ta ) s hereby amended
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345
(1) by strkng out the perod at the end of subsecton (e) and nsertng
In eu thereof or and
(2) by addng at the end thereof a new subsecton as foows:
(f) Certan mateur Theater Performances. ny admsson to an ama-
teur performance presented and performed by a cvc or communty thenter group
or organzaton f no part of the net earnngs thereof nures to the beneft of
any prvate stockhoder or ndvdua.
S C. 202. T ON DU S.
(a) Dues or Membershp ees. Secton 1710(a) (1) (reatng to ta on dues
or membershp fees) s hereby amended by strkng out 11 per centum and
Insertng n eu thereof 20 per centum .
(b) Intaton ees. Secton 1710(a) (2) (reatng to ta on ntaton fees)
Is hereby amended by strkng out 11 per centum and nsertng n eu thereof
20 per centum .
S C. 203. CTI D T O TITL II.
The amendments made by secton 201 (other than subsecton (b) thereof)
sha appy ony wth respect to amounts pad for admssons on or after pr 1,
1904. In addton, such amendments sha appy
(1) n the case of any season tcket or subscrpton, ony f a the adms-
sons under such tcket or subscrpton can occur ony on or after pr 1,
1054 and
(2) n the case of the permanent use of a bo or seat or a ease for the
use of such bo or seat, ony f a the performances or e hbtons at whch
the bo or seat s used or reserved by or for the essee or hoder can occur
ony on or after pr 1, 1054.
The amendment made by subsecton (b) sha appy ony wth respect to amounts
pad on or after pr 1, 1054, for admssons on or after such date.
TITL III M NU CTUR RS CIS T S
S C. 301. CIS T S IMPOS D Y T R NU CT O 1941.
(a) Ta on Sportng Goons. Secton 3400(a) (1) (reatng to manufacturers
e cse ta on sportng goods) s hereby amended by strkng out 15 per centum,
e cept that on and afer pr 1, 1054, the rate sha be 10 per centum .
(b) Ta on Photographc pparatus. Secton 3400(a) (4) (reatng to man-
ufacturers e cse ta on photographc apparatus) s hereby amended by strkng
out 20 per centum and nsertng n eu thereof 10 per centum .
(c) Ta on ectrc L qht ubs and Tubes. Secton 3400(a) (10) (reatng
to manufacturers e cse ta on eectrc ght bubs and tubes) s hereby amended
to read as foows:
(10) ectrc ght bubs and tubes. ectrc ght bubs and tubes,
not ncudng artces ta abe under any other provson of ths subchapter,
10 er centum.
S C. 302. T ON M C NIC L P NCILS, OUNT IN ND LL-
POINT P NS, ND M C NIC L LIG T RS OR CIG R TI S,
CIG RS, ND PIP S.
Secton 3408(a) (reatng to ta on mechanca pencs, fountan and ba-
pont pens, and mechanca ghters for cgarettes, cgars, and ppes) s hereby
amended by strkng out 15 per centum and nsertng n eu thereof 10 per
centum .
S C. 303. T ON M TC S.
Secton 3400(a) (reatng to manufacturers e cse ta on matches) s hereby
amended by strkng out 2 cents per 1,000 matches and nsertng n eu
thereof the foowng: 2 cents per 1,000 matches but not more than 10 per
centum of the prce for whch so sod .
S C. 304. CUTTING OILS.
Secton 3413 (reatng to ta on ubrcatng os) s hereby amended
(a) by nsertng after 6 cents a gaon the foowng: (e cept that, n the
case of cuttng os, the ta sha not e ceed 10 per centum of the prce for whch
so sod) and
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(b) by addng at the end of such secton a new sentence as foows: or the
purposes of ths secton, the term cuttng os means os used prmary n
cuttng and machnng operatons (Incudng forgng, drawng, rong, shearng,
punchng, and stampng) on metas and known commercay as cuttng os.
S C 305. R DUCTION O T ON R RIG R TORS ND UIC -
R Z UNITS ND ON L CTRIC, G S, ND OIL OUS OLD
PPLI NC S.
(a) R DUCTION O T . Secton 3405 (reatng to manufacturers e cse ta
on refrgerators, quck-freeze unts, and sef-contaned ar-condtonng unts) Is
hereby amended by strkng out 10 per centum and Insertng In en thereof
the foowng: 5 per centum (10 per centum In the case of artces sub|ect to
ta under subsecton (c)) and secton 340G(a) (3) (reatng to manufacturers
e cse ta on eectrc, gas, and o appances) s hereby amended by strkng out
10 per centum and nsertng n eu thereof 5 per centum .
(b) LOOR STOC S R UND. Sbchapter of chapter 29 (reatng to manu-
facturers e cse ta es) s hereby amended by addng at the end thereof a new
secton as foows:
S C. 3416. LOOR STOC S R UND ON R RIG R TORS, UIC -
R Z UNITS, ND L CTRIC, G S, ND OIL OUS OLD
PPLI NC S.
(a) IN G N R L Where before pr 1, 1954, any artce sub|ect to the ta
mposed by secton 3405(a), secton 8406(b), or secton 3406(a)(3) has been
sod by the manufacturer, producer, or mporter, and on such date s hed by a
deaer and has not been used and s ntended for sae, there sha be credted or
refunded (wthout nterest) to the manufacturer, producer, or mporter an
amount equa to the dfference between the ta pad by such manufacturer, pro-
ducer, or mporter on hs sae of the artce and the ta made appcabe to such
artce on and after pr 1, 1954, f such manufacturer, producer, or mporter
(1) has pad such amount as rembursement to the deaer who hed such
artce on pr 1,1954 and
(2) fes cam for such credt or refund before ugust 1, 1954.
(b) D INITION O D I. . s used n ths secton, the term deaer ncudes
a whoesaer. obber, dstrbutor, or retaer. or the purposes of ths secton,
an artce sha be consdered as hed by a deaer f tte thereto has passed to
such deaer (whether or not devery to hm has been made), and If for purposes
of consumpton tte to such artce or possesson thereof has not at any tme
been transferred to any person other than a deaer.
(c) LIMIT TION ON LIGI ILITY. No person sha be entted to credt or
refund under ths secton uness he has n hs possesson such evdence of the
nventores wth respect to whch he has made the rembursements descrbed n
subsecton (a) as may be requred by reguatons prescrbed under ths secton.
(d) P N LTI S ND DMINISTR TI PROC DUR S. provsons of aw,
ncudng penates, appcabe n respect of the ta es mposed under sectons
3405(a), 3405(b), and 310G(a)(3) sha, nsofar as appcabe and not ncon-
sstent wth ths secton, be appcabe n respect of the credts and refunds
provded for n ths secton to the same e tent as f such credts or refunds con-
sttuted credts or refunds of such ta es.
S C. 306. CTI D T O TITL I.
or effectve date of ths tte, see secton 505(a).
TITL I T ON COMMUNIC TIONS
S C. 401. T ON T L GR P , T L P ON , R DIO, ND C L
CILITI S.
(a) T L P ON M SS G S, TC. Secton 3405(a) (1) ( ) (reatng to ta on
teephone messages, etc.) s hereby amended by strkng out 20 per centum
and nsertng In eu thereof 10 per centum .
(b) T L GR P , C RL , ND R DIO DISP TC S. Secton 3405(a) (1) ( ) re-
atng to ta on teegraph, cabe, and rado dspatches or messages) s hereby
amended by strkng out 15 per cent of the amount so pad, e cept that n te
case of each nternatona teegraph, cabe, or rado dspatch or message the rate
sha be 10 per centum and nsertng In eu thereof the foowng: 10 per
centum of the amount so pad .
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(c) Leased Wre Sfrvce. Secton 3405(a) (2) ( ) (reatng to ta on tensed
wre servce, etc.) Is hereby amended by strkng out 15 per centum and n-
sertng In eu thereof 10 per centum .
(d) Wre and qupment Servce. Secton 3405(a) (2) ( ) (reatng to ta
en wre and equpment servce) Is hereby amended to read as foows:
( ) ta equvaent to 8 per centum of the amount pad for any
wre and equpment servce (ncudng stock quotaton and nformaton
servces, burgar aarm or fre aarm servce, and a other smar serv-
ces, but not ncudng servce descrbed n subparagraph ( )).
(e) Loca Teephone Servce. or educton n rate of ta on oca tee-
phone servce, see secton 504(a).
S C 402. CTI D T O TITL I .
(a) In Genera. Sub|ect to the provsons of subsecton (b), the amend-
ments made by secton 401 sha appy wth respect to amounts pad on or after
pr 1,11)54, for servces rendered on or after such date.
(b) mounts Pad Pursuant to s Rendered. The amendments made
by secton 401 sha not appy wth respect to amounts pad pursuant to bs
rendered before pr 1, (. 4. In the case of amounts pad pursuant to bs
rendered on or after such date for servces for whch no prevous b was ren-
dered, such amendments sha appy e cept wth respect to such servces as were
rendered more than 2 months before such date. In the case of servces rendered
more than 2 months before such date the provsons of sectons 1050 and 3465
of te Interna Revenue Code In effect at the tme such servces were rendered
sha appy to the amounts pad for such servces.
(c) Technca mendment. Secton 1058 s hereby repeaed.
TITL MISC LL N OUS T S
S C. 501. T ON S D POSIT O S.
Secton 1850(a) (reatng to ta on the use of safe depost bo es) s hereby
amended by strkng out 20 per centum and nsertng n eu thereof 10 per
centum .
S C. 502. T ON PISTOLS ND R OL RS.
Secton 2700(a) (reatng to ta on pstos and revovers) s hereby amended
by strkng out 11 per centum and nsertng n eu thereof 10 per centum .
S C 503. T ON TR NSPORT TION O P RSONS, TC.
or reducton In rate of ta es on the transportaton of persons and on seats,
berths, etc., see secton 504(a).
S C. 504. T C NIC L M NDM NTS.
(a) Termnaton of Ta Rates Under Secton 1650. Secton 1050 (reatng
to war ta rates of certan msceaneous ta es) Is hereby amended by nsertng
after begnnng wth the effectve date of tte 111 of the Revenue ct of 1043
the foowng: and endng March 31, 1054, .
(b) Rate Reducton Date. Secton 1650 (reatng to defnton of rate re-
ducton date ) s hereby amended to read as foows:
S C. 1659. D INITION O Tt T R DUCTION D T .
or the purpose of ths chapter the term rate reducton date means pr
1,1054.
(c) oor Stocks Refunds on ectrc Lght ubs. Secton 1057(a) (re-
atng to foor stocks refunds on eectrc ght bubs) s hereby amended (1) by
strkng out the ta that woud have been pad If secton 1650 had not been
appcabe and nsertng n eu thereof the foowng: the ta that woud have
been pad f the appcabe rate bad been 10 per centum and (2) by strkng
out pror to the e praton of three months after the rate reducton date and
nsertng In eu thereof the foowng: pror to ugust 1, 1054, based upon a
request for rembursement submtted by such person to the manufacturer or
producer of such artce pror to uy 1,1054 .
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(d) owng eys and Mard and Poo Tabes. The frst sentence of
secton 3268(a) (reatng to ta on bowng aeys, and bard and poo tabes)
s hereby amended to read as foows: very person who operates a bowng
aey, bnrd room, or poo room sha pay a speca ta of 20 per year for
each bowng aey, bard tabe, or poo tabe.
S C. 505. CTI D T S.
(a) The amendments made by tte I, tte III, and secton 502, and the
amendment made by secton 504(a) nsofar as t affects the rates of the retaers
e c.se ta es mposed by sectons 2400, 2401, and 2402 of the Interna Revenue
Code and the rate of the manufacturers e cse ta mposed by secton
3406(a) (10) of such Code, sha appy ony wth respect to artces sod on or
after pr 1, 1954. or the purposes of the precedng sentence, an artce sha
not be consdered sod before pr 1,1954, uness possesson or rght to possesson
passes to the purchaser before such date. In the case of
(1) a ease,
(2) a contract for the sae of an artce wheren t s provded that the
prce sha be pad by nstaments and tte to the artce sod does not pass
unt a future date notwthstandng parta payment by nstaments,
(3) a condtona sae, or
(4) a chatte mortgage arrangement wheren t s provded that the
saes prce sha be pad n nstaments,
entered nto before pr 1, 1954, payments made on or after pr 1, 1954, sha,
for purposes of ths subsecton, be consdered as payments made wth respect
to artces sod on or after pr 1,1954.
(b) The amendment made by secton 501 sha appy ony wth respect to
amounts pad on or after pr 1, 1954.
(c) The amendment made by secton 504(a) sha appy
(1) nsofar as t affects the rate of the ta Imposed by secton 1700(a) (1)
of the Interna Revenue Code, wth respect to amounts pad for admssons
on or after pr 1,1954, but, n the case of any season tcket or subscrpton,
ony f a the admssons under such tcket or subscrpton can occur ony
on or after pr 1, 1954
(2) nsofar as t affects the rates of the ta es mposed by subsectons (b),
(c), and (e) of secton 1700 of the Interna Revenue Code, as though the
rates sted under the headng Od Rate n the tabe n secton t SO of
such Code were the rates estabshed by the amendments made by tte II
of ths ct
(3) nsofar as t affects the rates of the ta es mposed by subsectons
(a)(1)( ), (a)(2)( ), and (a)(2)( ) of secton 3465 of the Interna
Revenue Code, as though the rates sted under the headng Od Rate In
the tabe n secton 1050 of such Code were the rates estabshed by the
amendments made by secton 401 of ths ct
(4) nsofar as t affects the rate of the ta mposed by secton 3456(a) (3)
of the Interna Revenue Code, as though such amendment were an amend-
ment made by secton 401 of ths ct and
(5) Insofar as t affects the rates of the ta es mposed by secton 3469 of
the Interna Revenue Code, wth respect to amounts pad for or n connecton
wth transportaton whch begns on or after pr 1, 1954.
S C. 506. SP CI L CR DIT OR R UND O TR NSPORT TION ND
DMISSIONS T S.
Notwthstandng any other provson of aw, n any case n whch ta has
been coected pror to pr 1, 1954, at the rate n effect (wthout regard to
the amendments made by ths ct) pror to pr 1, 1934, for or n connecton
wth the transportaton of persons whch begns on or after pr 1, 1954, or
for admssons (referred to n secton 201, other than subsectons (b), (c),
and (g) thereof, of ths ct) on or after pr 1, 1954, the person who coected
the ta sha pay the same over to the Unted States but credt of refund (wth-
out nterest) of the ta coected n e cess of that appcabe (by reason of the
amendments made by ths ct) on or after pr 1, 1954, sha be aowed to the
person who coected the ta as f such credt or refund were a credt or refund
under the appcabe provson of the Interna Revenue Code, but ony to the
e tent that, pror to the tme such transportaton has begun or pror to the
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event to whch the rght to admsson reates, he has repad the amount of such
e cess to the person from whom he coected the ta , or has obtaned the consent
of such person to the aowance of the credt or refund. or the purpose of
ths ct, transportaton sha not be consdered to have begun on or after pr 1,
1954, f any part of the transportaton pad for (or for whch payment has
been obgated) commenced before pr 1,1954.
S C. 507. SP CI L U LS.
(a) empton bom Manufacturers cse Ta .
(1) mendment of secton 3412(c). Secton 3412(c)(2) (reatng to
manufacturers e cse ta on gasone) Is hereby amended to read as foows:
(2) the term gasone means a products commony or commercay
known or sod as gasone (Incudng casnghead and natura gasone).
(2) Credts and refunds. cept In the case of any qud wth respect
to whch ta was pad under secton 3412 as n effect pror to the effectve
date of ths secton, cause () of secton 3443(a) (3) ( ) s hereby repeaed,
and causes (v), (v), (v), and (v) of secton 3443(a)(3)( ) are re-
desgnated causes (), (v), (v), and (v), respectvey.
(b) Imposton of Retaers cse Ta . Secton 2450 of the Interna
Revenue Code s hereby amended to read as foows:
S C. 2450. T .
(a) Dese ue. There s hereby Imposed a ta of 2 cents a gaon upon
any qud (other than any product ta abe under secton 3412)
(1) sod by any person to an owner, essee, or other operator of a dese-
powered hghway vehce, for use as a fue In such vehce or
(2) used by any person as a fue n a dese-powered hghway vehce
uness there was a ta abe sae of such qud under paragraph (1).
(b) Speca Motor ues. There s hereby mposed a tu of 2 cents a gaon
upon benzo, benzene, naphtha, queed petroeum gas, or any other qud
(other than kerosene, gas o, or fue o, or any product ta abe under secton
3412 or subsecton (a) of ths secton)
(1) sod by any person to an owner, essee, or other operator of a motor
vehce, motorboat, or arpane for use as a fue for the propuson of such
motor vehce, motorboat, or arpane or
(2) used by any person as a fue for the propuson of a motor vehce,
motorboat, or arpane uness there was a ta abe sae of such qud under
paragraph (1).
(e) Rate Reducton. On and after pr 1, 1955, the ta es mposed by ths
secton sha be /4 cents a gaon n eu of 2 cents a gaon.
,(c) Technca mendments.
(1) Credts and refunds. Secton 2452(a) (reatng to credts and re-
funds) s hereby amended to read as foows :
(a) Nonta abe Use or Sae by endee. credt aganst ta under ths
chapter, or a refund, may be aowed or made to a person n the amount of ta
pad by hm under ths chapter wth respect to hs sae of any qud to a vendee
for use as fue n a dese-powered hghway vehce, or wth respect to hs sae
of benzo, benzene, naphtha, quefed petroeum gas, or any other qud to a
vendee for use as fue for the propuson of a motor vehce, motorboat, or ar-
pane, f such person estabshes, n accordance wth reguatons prescrbed
by the Secretary, that
(1) ether
( ) the vendee used such qud otherwse than as fue In such a
vehce, motorboat, or arpane or resod such qud or
( ) such qud was used or was resod for use for any of the
purposes, but sub|ect to the condtons, provded n secton 3451 and
(2) such person has repad or agreed to repay the amount of such ta
to such vendee, or has obtaned the consent of the vendee to the aowance
of the credt or refund.
No Interest sha be aowed wth respect to any amount of ta credted or
refunded under the provsons of ths subsecton.
(2) Ta -frfe saes. Secton 2453 (reatng to ta -free saes) s hereby
amended by strkng out as fue In a dese-powered hghway vehce and
nsertng In eu thereof covered by ths chapter.
S15358 -64 23
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(3) Cehtan vesses. Chapter 20 (reatng to speca fues) Is hereby
amended by addng at the end thereof the foowng new secton:
S C. 2456. MPTION O SP CI L MOTOR U LS US D OR C R.
T IN SS LS.
The e empton from ta under chapter 29 provded n secton 3451 sha aso
appy to the tn mposed under secton 2450(b).
(4) Cerca mendment. The headng of chapter 20 s hereby amended to
read as foows:
C PT R 20. SP CI L U LS
(d) ffectve Date. The amendments made by ths secton sha take effect
on the frst day of the frst month whch begns more than ten days after the date
of the enactment of ths ct. owever, the ta mposed under secton 2450(b)
sha not appy to any qud whch has been sod by a producer or mporter
pror to the effectve date of ths secton and whch s ta abe under secton 341:2
(reatng to gasone ta ) as n effect pror to the effectve date of ths secton.
TITL I ON -Y R T NSION OP C RT IN CIS T R T S
S C. 691. ON -Y R T NSION O C RT IN CIS T R T S.
(a) tenson op Rates. The foowng provsons are hereby amended by
strkng out pr 1, 1954 each pace It appears and nsertng n eu thereof
pr 1,1955 :
(1) The second sentence of secton 2800(a)(1) (reatng to dsted
sprts generay).
(2) The ast sentence of secton 2800(a)(3) (reatng to mported per-
fumes contanng dsted sprts).
(3) Secton 3030(a)(1) ( ) (reatng to ta on st wnes).
(4) Secton 3030(a) (2) (reatng to ta on sparkng wnes, queurs, and
cordas).
(5) The second sentence of secton 3150(a) (reatng to ta on fermented
mat quors).
(6) The second sentence of secton 3412(a) (reatng to ta on gasone).
(7) Secton 2000(c) (2) (reatng to ta on cgarettes).
(8) Secton 3403 (reatng to ta on automobes, etc.).
(b) Technca mendments.
(1) Secton 1056 (reatng to foor stocks refunds on dsted sprts,
wnes and cordas, and fermented mat quors) s hereby amended by
strkng out pr 1, 1954 each pace t appears and nsertng In eu
thereof pr 1,1955 , and by strkng out May 1,1954 and Insertng n eu
thereof May 1, 1955 .
(2) Secton 3412(g) (reatng to foor stocks refunds on gasone) s
hereby amended by strkng out pr 1, 1954 each pace t appears and
Insertng n eu thereof pr 1, 1955 , and by strkng out uy 1, 1954
and nsertng n eu thereof uy 1,1955 .
(3) Secton 2000(g) (reatng to foor stocks refunds on cgarettes) s
hereby amended by strkng out pr 1, 1954 each pace It appears and
nsertng n eu thereof pr 1, 1955 , and by strkng out uy 1, 1954
and Insertng n eu thereof uy 1,1955 .
(4) Secton 3250(1) (5) (reatng to drawback n the case of dsted
sprts used n the manufacture of certan nonbeverage products) s hereby
amended by strkng out March 31, 1954 and nsertng n eu thereof
March 31, 1955 .
(5) Secton 497 of the Revenue ct of 1951 (reatng to refunds on artces
from foregn trade zones) s hereby amended by strkng out pr 1, 1954
each pace t appears and nsertng n eu thereof pr 1, 1955 .
(c) oor Stocks Refunds on utomobes, tc. Secton 3403 (reatng
to ta on automobes, etc.) Is hereby amended by addng at the end thereof
the foowng new subsecton:
(f) oor Stocks Refunds.
(1) Where before pr 1, 1955, any artce sub|ect to the ta Imposed
by subsecton (a) or (b) has been sod by the manufacturer, producer, or
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351
Importer, and s on such date hed by a deaer and has not been used and
Is ntended for sae, there sha be credted or refunded (wthout nterest)
to the manufacturer, producer, or mporter an amount equa to the dfference
between the ta pad by such manufacturer, producer, or mporter on hs
sae of the artce and the amount of ta made appcabe to such artce
on and after pr 1, 1955.
(2) s used n ths subsecton, the term deaer ncudes a whoesaer,
obber, dstrbutor, or retaer. or the purposes of ths subsecton, an
artce sha be consdered as hed by a deaer f tte thereto has passed
to such deaer (whether or not devery to hm has been made), and f for
purposes of consumpton tte to such artce or possesson thereof has not
at any tme been transferred to any person other than a dener.
(3) Under reguatons prescrbed by the Secretary, the refund provded
by ths subsecton may be made to the deaer nstead of the manufacturer,
producer, or mporter, f the manufacturer, producer, or mporter waves
any cam for the amount so to be refunded.
(4) When the credt or refund provded for n ths subsecton has been
aowed to the manufacturer, producer, or mporter, he sha remt to the
deaer to whom was sod the artce n respect of whch the credt or re-
fund was aowed so much of that amount of the ta correspondng to
the credt or refund as was ncuded In or added to the prce pad or
agreed to be pad by the deaer.
(5) No person sha be entted to credt or refund under ths subsecton
uness ( ) he has n hs possesson such evdence of the nventores wth
respect to whch the credt or refund s camed as may be requred by
reguatons prescrbed under ths subsecton, and ( ) cam for such credt
or refund s fed wth the Secretary before uy 1, 1955.
(6) provsons of aw, ncudng penates, appcabe In respect of
the ta Imposed under subsectons (a) and (b) sha, Insofar as appcabe
and not nconsstent wth ths subsecton, be appcabe n respect of the
credts and refunds provded for n ths subsecton.
pproved Murg|u 31,1954.
COMMITT PORTS
CIS T R DUCTION CT O 1954
ouse of Representatve Report No. 1307, ghty-thrd Congress, Second Sesson
March 4, 1954
Mr. Reed of New York, from the Commttee on Ways and Means, submtted
the foowng report to accompany . R. 8224 :
The Commttee on Ways and Means, to whom was referred the b ( . R.
8224) to reduce e cse ta es, and for other purposes, havng consdered the
same, report favoraby thereon wthout amendment and recommend that the
b do pass.
G N R L ST T M NT
Those e cse ta rates whch are now above 10 percent are reduced to 10
percent under ths b. The commttee beeves that ths reducton w stmu-
ate busness and empoyment, not ony n those ndustres drecty affected by
these ta es, but aso n other ndustres, snce consumers w pay ess for many
of these ta ed tems and have more money avaabe for other purchases. Some
of these ta es enter drecty nto busness costs and a reducton of such costs
s desrabe. urthermore, ths change provdes a more equtabe ta system
by eveng down those rates whch are now e cessvey hgh and thus removes
dscrmnaton.
The foowng tabe sts the ta es whch are reduced under ths b, showng
the rates under present aw, and the estmated reductons In e cse ta
coectons:
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352
Retaers e cses:
urs
ewery
Luggage
Toet preparatons.
Tota.
Manufacturers e cses:
Sportng goods
Mechanca pens, pencs, ghters..
ectrc ght bubs and tubes
Pstos and revovers..
rearms, shes, and cartrdges
Cameras, enses, and fm
Tota.
Msceaneous e cses:
Teephone, teegraph, rado, cabe-
Loca teephone
Transportaton of persons
Leases of safe depost bo es
dmssons:
Genera
Cabarets
Cub dues ntaton fees
Tota
Grand tota
Rates under
present aw
Percent
I If
If
2(1
11
11
2 1
( )
Rates under
ths b
Percent
Reducton n
e ese-ta
coectons
(fu year
effect
M. d.
sn
4

3
(
20
Ntg: I
1
r
za
125
. .
5
t:
1-
Under present aw ths rate Is schedued for reducton to 10 percent on pr. 1,1954.
Teephone or rado teephone messages, to charges over 24 cents, 25 percent domestc teegraph, cabe,
and rado dspatches, 15 percent: Internatona teepraph, cobe and rado ovpatches, 10 percent eased
wro servce, teetypewrter, or takng crcut speca servce, 25 percent.
1 Under present aw a penaty ta of 50 percent Is Imposed on saes by propretors In e cess of the estab-
shed ta ths rate s not reduced.
The b aso provdes that those e cse ta es whch, under present aw, woud
be reduced on pr 1, 1954, w reman at present eves e cept n the case of
the ta on sportng goods. In hs budget message, the Presdent stated that
because of the present need for revenue he recommended contnuaton of the
e cses schedued to be reduced pr 1, and ths b carres out that recommenda-
ton. The ta on sportng goods Is the ony ad vaorem ta above 15 percent n
ths group benre t was ncuded n the group reduced to 10 percent. It s
contempated that the commttee w revew e cse ta rates ne t year.
The ta es whch are contnued at present rates are sted beow and the est-
mates of ncreased ta coectons due to contnuaton are shown:
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353
cse ta rates ncreased by the Revenue ct of 1951 contnued under the b
Increafted
coectons
due to con-
tnuaton
(fu year
effect)
Unt of ta
Present rate
contnued
under b
Rate pror
to Revenue
ct o 1951
Lquor ta es:
Mon
150
Dsted sprts
Per proof gaon.
10.50
W -
Wne:
t
s
87
St wne:
Contanng ess than 14 percent a-
coho.
Contanng 14 to 21 percent acoho.
Per wne gaon..
15 cents...
do
60 cents...
2
do
2.25
acoho.
Sparkng vnes, queurs, cordas, etc.:
do
10.50
9
8
Lqueurs, cordas, etc., and art-
fcay carbonated wnes.
Por Y pnt.
15 cents...
10 cents...
Manufacturers e cses:
Par 1,000
4
3.50
101
Per gaon
2 cents
1M cents..
7 percent-.
225
Manufacturers
10 percent...
276
sae prce. do
8 percent
5 percent.-
75
do
...do
60
5
Msceaneous e cses: Dese fue used for hgh-
way vehces.
2 cents
()
Tota
1,077
No e cse ta pror to Revenue ct of 1951.
CTI D T
or the reta and manufacturers ta es and safe-depost bo es the new ta
rates are to appy to transactons on or after pr 1, 1954. owever, n the
case of (1) eases, (2) nstament saes, (3) condtona saes, or (4) chatte
mortgage Instament arrangements, entered Into before pr 1, 1954, payments
made after pr 1,1954, are to be sub|ect to the new rates.
or admssons, the new ta rates appy to amounts pad on or after pr 1,
1954, for admssons on or after that date. or the carbaret ta , the new rates
appy wth respect to perods after 10 a. m. on pr 1. or dues, the new ta
rates appy to amounts pad on or after pr 1 as dues or membershp fees for
perods begnnng on or after pr 1 or as ntaton fees.
The new communcatons ta rates w appy wth respect to amounts pad
pursuant to bs rendered on and after pr 1, 1954, for servces rendered on
and after such date, and for any servces rendered In ebruary and March for
whch no prevo-s b was rendered.
The new rate of ta on transportaton of persons appes wth respect to
amounts pad on and after pr 1,1954, for or n connecton wth transportaton
whch begns on or after such date.
C NG S IN ISTING L W
In compance wth cause 3 of rue III of the Rues of the ouse of Repre-
sentatves, changes n e stng aw made by the b, as Introduced, are shown
as foows (e stng aw proposed to be omtted I encosed n back brackets,
new matter s prnted n tacs, e stng aw n whch no change s proposed s
shown n roman):
INT RN L R NU COD
C PT R 9 -W R T S ND W R T R T S
S C. 1650. W R T R T S O C RT IN MISC LL N OUS T S.
In eu of the rates of ta specfed n such of the sectons of ths tte as are
set forth In the foowng tabe, the rates appcabe wth respect to the perod
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354
begnnng wth the effectve date of tte III of the Revenue ct of 1943 and
endng March 31, 1954, sha be the rates set forth under the headng, War Ta
ate :
Secton
Descrpton of ta
Od rate
War ta rate
1700(a)
1700 fh)
1700(c)
1700(c)
1710(a)(1)
1710 a 2)
2400 (e cept as respects
watches seng at re
ta Tor not more than
65 am aarm cocks
seng at reta for not
more than 5).
2401
3402
3268
MOf.fo IO)
340.1(a)(1)( )
34 5(n)(2)( )
8466(a)(2)( )
34fS(a)(3)
3409(a)
3400(c)
dmssons.
Permanent use or ease of
bo es or Mats.
Paes of tckets outsde bo
offce.
Cabarets, roof ardens, etc
Dues or membershp fees
Intaton fees
ewery
urs
Toet preparatons
ard and poo tabes and
bowng aeys.
ectrc pht bubs and tubes..
Teephone, one dstance
Leased wres, etc
W n and equpment servce..
-/oen teephone servce,.
Transportaton of persons
Seats, berths, etc
I cent for each 10 cents
or fracton thereof.
II per centum
11 per centum ..
5 per centum
11 per centum
11 per centum
10 per centum
10 per centum
10 per centum
10 per year per tabe
10 per year per
aey.
5 per centum ,
20 per centum
15 per centum
5 per centum
10 per centum
n per centum
10 per centum
1 cent for each 5 cents
or ma|or
thereof.
20 per centum.
10 per centum.
20 per centum.
20 per centum.
20 per centum.
20 per centum.
20 per centum.
20 per centum.
20 per year per tabe:
20 per year per
aey.
20 per centum.
36 per centum.
25 per centum.
8 per centum.
15 per centum.
15 per centum.
15 per centum.
S C. 1651. R T IL RS CIS T ON LUGG G , TC.
(a) Ta . There s hereby mposed upon the foowng artces (ncudng In
each case fttngs or accessores therefor sod on or n connecton wth the sae
thereof) sod at reta a ta equvaent to 20 10 per centum of the prce for
whch so sod:
(1) Trunks, vases, traveng bags, sutcases, satches, overnght bags,
hat bo es for use by traves, beach bags, bathng sut bags, bref cases made
of eather or mtaton eather, and saesmen s sampe and dspay cases.
(2) Purses, handbags, pocketbooks, waets, bfods, and card, pass, and
key cases.
(3) Toet cases and other cases, bags, and kts (wthout regard to sze,
shape, constructon, or matera from whch made) for use n carryng toet
artces or artces of wearng appare.

S C. 1657. LOOR STOC S R UNDS ON L CTRIC LIG T UL S.
(a) In Genera. Wth respect to any artce upon whch ta s mposed under
secton . {406 (a) (10), upon whc nterna revenue ta at the rate prescrbed n
secton 1650 has been pad, and whch, on the rate reducton date s hed by any
person and ntended for sae, or for use n the manufacture or producton of any
artce ntended for sae, there sha bo credted or refunded to the manufacturer
or producer of such artce (wthout nterest), sub|ect to such reguatons as may
be prescrbed by the Commssoner wth the approva of the Secretary, an amount
equa to so much of the dfference between the ta so pad and the ta that woud
have been pad f secton 1050 had not been appcabe the appcabe rate had
heen 10 per centum, as has been pad by such manufacturer or producer to such
person as rembursement for the ta reducton on such artces, f cam for such
credt or refund s fed wth the Commssoner pror to the e praton of three
months after the rate reducton date.
S C 1658. T L GR P , T L P ON , R DIO, ND C L CILITI S.
Notwthstandng secton 1G50, the rates theren prescrbed wth respect to the
ta es Imposed by secton 3405 (a) (1), (2), and (3) sha contnue to appy wth
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355
respect to amounts pad pursuant to bs rendered pror to the rate reducton
date and, n the case of amounts pad pursuant to bs rendered on or after the
rate reducton date for servces for whch no prevous b was rendered, the
decreased rates sha appy e cept wth respect to such servces as were rendered
more than two months before such date and, n the case of servces rendered more
than two months before such date, the provsons of sectons 1650 and 3405 n
effect at the tme such servces were rendered sha be appcabe to the amounts
pad for such servces.
S C. 1659. D INITION O R T R DUCTION D T .
or the purposes of ths chapter the term rate reducton date means such
date as the Congress sha by aw prescrbe pr 1,195k.
C PT R 10 DMISSIONS ND DU S
Subchapter dmssons
S C. 1700. T .
There sha be eved, assessed, coected, and pad

(b) Permanent Use ob Lease of o es or Seats.
(1) Rate. In the case of persons havng the permanent use of bo es or
seats n an opera house or any pace of amusement or a ease for the use of
such bo or seat n such opera house or pace of amusement (n eu of the ta
mposed under paragraph (1) of subsecton (a)), a ta equvaent to 11 10
per centum of the amount for whch a smar bo or seat s sod for each per-
formance or e hbton at whch the bo or seat s used or reserved by or for
the essee or hoder.
Note. The rate of ta presenty n effect on permanent use or ease of bo es
or seats s the temporary war rate of 20 per centum as provded n secton 1650
of the Interna Revenue Code, whch under the b e pres March 31, 1954.

(c) Saes Outsde o Offce.
(1) Rate. Upon tckets or cards of admsson to theaters, operas, and
other paces of amusement, sod at news stands, hotes, and paces other than
the tcket offces of such theaters, operas, or other paces of amusement, at a
prce n e cess of the sum of the estabshed prce therefor at such tcket
offces pus the amount of any ta mposed under paragraph (1) of subsecton
(a), a ta equvaent to 11 10 per centum of the amount of such e cess.
Note. The rate of ta presenty n effect on saes outsde bo offces s the
temporary war rate of 20 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31,1954.

(e) Ta on Cabarets, Roof Gardens, tc.
(1) Rate. ta equvaent to 5 10 per centum of a amounts pad for
admsson, refreshment, servce, or merchandse, at any roof garden, cabaret,
or other smar pace furnshng a pubc performance for proft, by or for
any patron or guest who s entted to be present durng any porton of such
performance.
Note. The rate of ta presenty n effect on cabarets, roof gardens, etc., s
the temporary war rate of 20 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31,1954.

Subchapter Dues
S C. 1710. T .
(a) Rate. There sha be eved, assessed, coected, and pad
(1) Dues ob membershp fees. ta equvaent to 11 10 per centum
of any amount pad as dues or membershp fees to any soca, athetc, or
sportng cub or organzaton, f the dues or fees of an actve resdent annua
member are n e cess of 10 per year.
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Note. The rate of ta presenty n effect on dues or membershp fees s the
temporary war rate of 20 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31, 1954.
(2) Intaton fees. ta equvaent to 113 10 per centum of any
amount pad as ntaton fees to such a cub or organzaton, f such fees
amount to more than 10, or f the dues or membershp fees, not Incudng
Intaton fees, of an actve resdent annua member are n e cess of 10
per year.
Note. The rate of ta presenty n effect on ntaton fees s the temporary
war rate of 20 per centum as provded n secton 1650 of the Interna Revenue
Code, whch under the b e pres March 31,1954.
C PT R 12 S D rOSIT O S
S C. 1850. T .
(a) ate. There sha be mposed a ta equvaent to 203 10 per centum of
the amount coected for the use of any safe depost bo .

C PT R 15 TO CCO, SNU , CIG RS, ND CIG R TT S
Subchapter Rate and Payment of Ta
S C. 2000. R T O T .
(c) Cgars and Cgarettes. Upon cgars and cgarettes manufactured n or
mported nto the Unted States, whch are sod by the manufacturer or mporter,
or removed for consumpton or sae, there sha be eved, coected, and pad the
foowng ta es:

(2) Cgarettes. On cgarettes made of tobacco, or any substtute there-
for, and weghng not more than three pounds per thousand, 4 per thousand
unt pr 1,1954, and 3.50 per thousand on and after pr 1, 19543
Weghng more than three pounds per thousand, 8.40 per thousand
e cept that f more than 6 nches In ength they sha be ta abe at the rate
provded n the precedng paragraph, countng each 2 nches (or fracton
thereof) of the ength of each as one cgarette.
The ta mposed by ths subsecton sha be n addton to any mport
dutes mposed upon mported cgars and cgarettes.

(g) oor Stocks Refunds on Cgarettes.
(1) In genera. Wth respect to cgarettes, weghng not more than
three pounds per thousand, upon whch the ta mposed by subsecton (c)
(2), or upon whch foor stocks ta mposed by subsecton (f), has been pad,
and whch, on pr 1, 1954, are hed by any person and Intended for sae,
or are n transt from foregn countres or nsuar possessons of the Unted
States to any person n the Unted States for sae, there sha be credted or
refunded to such person (wthout Interest), sub|ect to such reguatons as
may be prescrbed by the Secretary, an amount equa to the dfference
between the ta pad on such cgarettes and the ta made appcabe to such
artces on pr 1, 1954, f cam for such credt or refund s fed w-n the
Secretary pror to uy 1,1954.
(2) Lmtatons on egbty for credt or refund. No person sha
be entted to credt or refund under paragraph (1) uness ( ) such person,
for such perod or perods both before and after pr 1, 1954 (but not
e tendng beyond one year thereafter), as the Secretary sha by reguatons
prescrbe, makes and keeps, and fes wth the Secretary such records of nven-
tores, saes, and purchases as may be prescrbed In such reguatons and ( )
such person estabshes to the satsfacton of the Secretary, wth respect to
the cgarettes for whch credt or refund s camed by hm under ths secton,
that on and after pr 1, 1954, and unt the e praton of three months
thereafter, the prce at whch cgarettes of such cass were sod (unt a
number equa at east to the number on hand on pr 1, 1954, were sod)
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refected, n such manner as the Secretary may by reguatons prescrbe, the
amount of the ta reducton.
(3) Penaty and admnstratve procedures. provsons of aw,
ncudng penates, appcabe n respect of nterna revenue ta es on cga-
rettes sha, nsofar as appcabe and not nconsstent wth ths subsecton,
be appcabe n res ect of the credts and refunds provded for n ths subsec-
ton to the same e tent as f such credts or refunds consttuted credts or
refunds of such ta es.
C PT R 20 DI S L U L
S C. 2450. T ON DI S L U L.
There s hereby mposed a ta of 2 cents a gaon upon any qud (other than
any product ta abe under secton 3412)
(1) sod by any person to an owner, essee, or other operator of a deset-
powered hghway vehce, for use as a fue n such vehce, or
(2) used by any person as a fue n a dese-powered hghway vehce
uness there was a ta abe sae of such qud under cause (1).
On and after pr 1,1954, the ta mposed by ths secton sha be 1 cents a
gaon n eu of 2 cents a gaon.
C PT R 25 IR RMS
Subchapter Pstos and Revovers
S C. 2700. T .
(a) Rate. There sha be eved, assessed, coected, and pad upon pstos
and revovers sod or eased by the manufacturer, producer, or mporter, a ta
equvaent to 11 10 per centum of the prce for whch so sod or eased.
C PT R 26 LI UOR
Subchapter Dsted Sprts
P RT I PRO ISIONS R L TING TO T
S C. 2800. T .
(a) Rate.
(1) Dsted sprts generay. There sha be eved and coected on
a dsted sprts n bond or produced n or mported nto the Unted States
an nterna revenue ta at the rate of 10.50 on each proof gaon or wne
gaon when beow proof and a proportonate ta at a ke rate on a frac-
tona parts of such proof or wne gaon, to be pad by the dster or mporter
when wthdrawn from bond. On and after pr 1, 1954, the rate of ta
mposed by ths paragraph sha be 9 n eu of 10.50.
(3) Imported perfumes contanng dsted sprts. There sha be
eved and coected upon a perfumes mported nto the Unted States con-
tanng dsted sprts, a ta of 10.50 per wne gaon, and a proportonate
ta at a ke rate on a fractona parts of such wne gaon. Such ta sha
be coected by the coector of customs and deposted as nterna revenue
coectons, under such rues and reguatons as the Commssoner, wth the
approva of the Secretary, may prescrbe. On and after pr 1, 1954, the
rate of ta mposed by ths paragraph sha be 9 In eu of 10.50.

Subchapter Wnes
S C. 3030. T .
(a) Rate.
(1) St wnes.
( ) Imposton. Upon a st wnes, ncudng vermouth, and a
artfca or Imtaton wnes or compounds sod as st wne, produced In
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358
or mported Into the Unted States on or after the effectve date of sec-
ton 452 (a) of the Revenue ct of 1951, or whch on UCU date were
on any wnery premses or other bonded premses or n transt thereto
or at any customhouse, there sha be eved, coected, and pad ta es
at rates as foows, when sod, or removed for consumpton or sae:
On wnes contanng not more than 14 per centum of absoute acoho,
17 cents per wne-gaon, the per centum of acoho under ths secton to
be reckoned by voume and not by weght , e cept that on and after
pr 1, 1954, the rate sha be 15 cents per wne-gaon
On wnes contanng more than 14 per centum and not e ceedng 21
per centum of absoute acoho, 67 cents per wne-gaon , e cept that
on and after pr 1, 1954, the rate sha be 60 cents per wne-gaon
On wnes contanng more thnn 21 per centum and not e ceedng 24
per centum of absoute acoho, 2.25 per wne-gaon , e cept that on
and after pr 1, 1954, the rate sha be 2 per wne-gaon
such wnes contanng more than 24 per centum of absoute acoho
by voume sha be cassed as dsted sprts and sha pay ta accord-
ngy.
ny such wnes may, under such reguatons as the Commssoner
may prescrbe, wth the approva of the Secretary, be sod or removed
ta -free for the manufacture of vnegar, or for the producton of deaco-
hozed wnes contanng ess than one-haf of 1 per centum of acoho
by voume.
The ta es mposed by ths subparagraph ( ) of ths paragraph sha
not appy to deacohozed wnes contanng ess than one-haf of 1 per
centum of acoho by voume nor, sub|ect to reguatons prescrbed by
the Commssoner, wth the approva of the Secretary, to wnes produced
for the famy use of the duy regstered producer thereof and not sod
or otherwse removed from the pace of manufacture and not e ceedng
n any case two hundred gaons per year.

(2) SP R LING WIN S, LI U URS, ND CORDI LS. Upon the foowng
artces whch are produced n or Imported nto the Unted States, on or
after the effectve date-of secton 452 (a) of the Revenue ct of 1951, or
whch on such date are on any wnery premses or other bonded premses or
n transt thereto or at any customhouse, there sha be eved, coected, and
pad, n eu of the nterna-revenue ta es mposed thereon by aw pror to
such date, ta es at rates as foows, when god, or removed for consumpton
or sae:
On each botte or other contaner of champagne or sparkng wne, 17 cents
on each one-haf pnt or fracton thereof , e cept that on and after pr 1,
1954, the rate sha be 15 cents on each one-haf pnt or fracton thereof
On each botte or other contaner of artfcay carbonated wne, 12 cents
on each one-haf pnt or fracton thereof L e cept that on and after pr 1,
1954, the rate sha be 10 cents on each one-haf pnt or fracton thereof
On each botte or other contaner of queurs, cordas, or smar com-
pounds, by whatever name sod or offered for sae, contanng sweet wne,
ctrus-frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune
wne, pum wne, pear wne, pawpaw wnes, papaya wnes, pneappe wnes,
cantaoup wnes, or appe wne, fortfed, respectvey, wth grape brandy,
ctrus-frut brandy, peach brnnrty, cherry brandy, berry brandy, aprcot
brandy, prune brandy, pum brandy, pear brandy, pawpaw brandy, papaya
brandy, pneappe brandy, cantaoup brandy, or appe brandy, 12 cents on
each one-haf pnt or fracton thereof , e cept that on and after pr 1.
1954, the rate sha be 10 cents on each one-haf pnt or fracton thereof
ny of the forogong artces contanng more than 24 per centum of
absoute acoho by voume (e cept vermouth, queurs, cordas, and smar
compounds made n rectfyng pants and contanng ta -pad sweet wne,
ctrus-frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune
wne, pum wne, pear wne, pawpaw wnes, papaya wnes, pneappe wnes,
cantaoup wnes, cr appe wne, fortfed, respectvey wth grape brandy,
ctrus-frut brandy, peach brandy, cherry brandy, berry brandy, aprcot
brandy, prune brandy, pum brandy, pear brandy, pawpaw brandy, papaya
brandy, pneappe brandy, cantaoup brandy, or appe brandy) sha be
cassed as dsted sprts and sha be ta ed accordngy.
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The Commssoner, under reguatons prescrbed by hm, wth the approva
of the Secretary, Is authorzed to remt, refund, and pay back the amount
of a ta es on such queurs, cordas, and smar compounds pad by or
assessed aganst rectfers at the dsted sprts rate pror to une 20, 1936.
SU C PT D RM NT D L T O S
S C. 3150. T .
(a) R T . There sha be eved and coected on a beer, ager beer, ae,
forter, and other smar fermented quor, contanng one-haf of 1 per centum,
or more, of acoho, brewed or manufactured and sod, or removed for consump-
ton or sae, wthn the Unted States, or mported Into the Unted States, by
whatever name such quors may be caed, a ta of 9 for every barre contanng
cot more than thrty-one gaons, and at a ke rate for any other quantty or for
the fractona parts of a barre authorzed and defned by aw. On and after
pr 1,1954, the ta mposed by the precedng sentence sha be at the rate of
8 n eu of 9. In estmatng and computng such ta , the fractona parts of
a barre sha be haves, thrds, quarters, s ths, and eghths and any fractona
part of a barre, contanng ess than one-eghth, sha be accounted one-eghth
more than one-eghth, and not more than one-s th, sha be accounted one-s th
more than one-s th, and not more than one-fourth, sha be accounted one-
fonrth more than one-fourth, and not more than one-thrd, sha be accounted
one-thrd more than one-thrd, and not more than one-haf, sha be accounted
cue-haf more tban one-haf, and not more than one barre, sha be accounted
one barre and more than one barre, and not more than s ty-three gaons,
sha be accounted two barres, or a hogshead.
The provsons of ths secton requrng the accountng of hogsheads, barres,
and fractona parts of barres at the ne t hgher quantty sha not appy where
the contents of such hogsheads, barres, or fractona parts of barres are wthn
the mts of toerance estabshed by the Commssoner by reguatons whch he
a hereby authorzed to prescrbe wth the approva of the Secretary and no
assessment sha be made and no ta sha be coected for any e cess n any case
where the contents of the hogsheads, barres, or fractona parts of barres here-
tofore or ereafter used are wthn the mts of the toerance so prescrbed.
C PT R 27 OCCUP TION L T S
SU C PT SP CI L PRO ISIONS

ST OWLING LL YS, ND ILL RD ND POOL T L S
S C. 3268. T ON OWLING LL YS, ND ILLI RD ND POOL
T L S.
(a) R T . very person who operates a bowng aey, bard room, or poo
room sha pay a speca ta of 10 20 per year for each bowng aey, bard
tabe, or poo tabe. very budng or pace where bows are thrown or where
gunes of bards or poo are payed, e cept In prvate homes, shn be regarded
u a bowng aey, bard room, or poo room, respectvey. No ta sha be
mposed under ts secton wth respect to a bard tabe or poo tabe n a hos-
pta f no charge Is made for the use of such tabe. The ta Imposed under ths
secton sha not appy for any perod begnnng after une 30, 1952, wth respect
to any bowng aey, bard tabe, or poo tabe mantaned e cusvey for the
nse of members of the rmed orces on any property owned, reserved, or used
by, or otherwse acqured for the use of, the Unted States If no charge Is made
for ther use.
. The rate of ta presenty n effect on bowng aeys and bard and
Poo tabes s the temporary war rate of 20 as provded n secton 1650 of the
menta Revenue Code, whch under the b e pres March 31, 1954.
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C PT R 29 M NU CTUR RS CIS ND IMPORT T S
SU C PT M MU CTU S1 CIS T S
S C. 3403. T ON UTOMO IL S, TC.
There sha be mposed upon the foowng artces sod by the manufacturer,
producer, or mporter, a ta equvaent to the foowng percentages of the prce
for whch so sod:
(a) utomobe truck chasss, automobe truck bodes, automobe bus chasss,
automobe bus bodes, truck and bus traer and semtraer chasss, truck and
bus traer and semtraer bodes, tractors of the knd chefy used for hghway
transportaton n combnaton wth a traer or semtraer (ncudng In each of
the above cases parts or accessores therefor sod on or n connecton therewth
or wth the sae thereof), 8 per centum , e cept that on and after pr 1,1954,
the rate sha be 5 percentum . sae of an automobe truck, bus, truck or
bus traer or semtraer sha, for the purposes of ths subsecton, be consdered
to be a sae of the chasss and of the body.
(b) OT R C SSIS ND ODI S, TC. Other automobe chasss and bodes,
chasss and bodes for traers and semtraers (other than house traers) sut-
abe for use In connecton wth passenger automobes, and motorcyces (Incud-
ng n each case parts or accessores therefor sod on or n connecton therewth
or wth the sae thereof), e cept tractors, 10 per centu| , e cept that on and
after pr 1, 1954, the rate sha be 7 per centum . sae of an automobe,,
traer, or semtraer sha, for the purposes of ths subsecton, be consdered to
be a sae of the chasss and of the body.
(c) Parts or accessores (other than tres and nner tubes and other than rado
and teevson recevng sets) for any of the artces enumerated n subsecton (a)
or (b), 8 per centum , e cept that on and after pr 1, 1054, the rate sha be 5
per centum . or the purposes of ths subsecton and subsectons (a) and (b),
spark pugs, storage batteres, eaf sprngs, cos, tmers, and tre chans, wch
are sutabe for use on or n connecton wth, or as component parts of, any of
the artces enumerated n subsecton (a) or (b), sha be consdered parts or
accessores r such artces, whether or not prmary adapted for such use.
Ths subsecton sha not appy to chasss or bodes for automobe trucks or
other automobes. Under reguatons prescrbed by the Commssoner, wth the
approva of the Secretary, the ta under ths subsecton sha not appy n the
case of saes of parts or accessores by the manufacturer, producer, or mporter
to a manufacturer or producer of any of the artces enumerated n subsecton
(a) or (b). If any such parts or accessores are resod by such vendee otherwse
than on or n connecton wth, or wth the sae of, an artce enumerated n
subsecton (a) or (b) and manufactured or produced by such vendee, then for
the purposes of ths secton the vendee sha be consdered the manufacturer or
producer of the parts or accessores so resod. In determnng the sae prce
of a rebut automobe part or accessory there sha be e cuded from the
prce, n accordance wth reguatons prescrbed by the ecretary, the vaue of
a ke part or accessory accepted n e change.

S C. 3406. CIS T S IMPOS D Y T R NU CT O 1941.
(a) IMPOSITION. There sha be mposed on the foowng artces, sod by the
manufacturer, reducer, or mporter, a ta equvaent to the rate, on the prce for
whch sod, set forth n the foowng paragraphs (ncudng n each case parts or
accessores of such artces sod on or In connecton therewth, or wth the sae
thereof) :
(1) SPO TIN GOODS. admnton nets badmnton rackets (measurng 22
Inches over a or more In ength) badmnton racket frames (measurng 22
nches over a or more n ength) badmnton racket strngs badmnton
shuttecocks badmnton standards bard and poo tabes (measurng 43
nches over a or more n ength) bard and poo bas and cues tor such
tabes bowng bas and pns cay pgeons and traps for throwng cay
pgeons crcket bas crcket bats croquet bas and maets cartng
stones deck tenns rngs, nets, and posts gof bags (measurng 26 nches or
more n ength) gof bas gof cubs (measurng 30 Inches or more n
ength) acrosse bas acrosse stcks poo bas poo maets sks sk
poes snow shoes snow toboggans and seds (measurng more than 60
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nches over a In ength) squash bas squash rackets (measurng 22 Inches
over a or more In ength) squash racket frames (measurng 22 nches
over a or more n ength) squash racket strng tabe tenns tabes, bas,
nets, and paddes tenns bas tenns nets tenns rackets (measurng 22
nches over a or more n ength) tenns racket frames (measurng 22 nches
over a or more n ength) tenns racket strng 15 per centum, e cept that
on and after pr 1, 1954, the rate sha be 10 per centum fshng rods,
crees, rees, and artfca ures, bats, and fes 10 per centum.
(4) Photographc apparatus. Cameras and camera enses, and une -
posed photographc fm n ros (Incudng moton pcture fm), 20 10 per
centum. The ta mposed under ths paragraph sha not appy to -ray
cameras, to cameras weghng more than four pounds e cusve of ens and
accessores, to st camera enses havng a foca ength of more than one
hundred and twenty mmeters, to moton pcture camera enses havng a
foca ength of more than thrty mmeters, to -ray fm, to unperforated
mcrofm, to fm more than one hundred and ffty feet n ength, or to fm
more than twenty-fve feet n ength and more than thrty mmeters In
wdth. ny person who acqures une posed photographc fm not sub|ect
to ta under ths oarrgraph and ses such une posed fm In form and dmen-
sons sub|ect to ta hereunder (or n connecton wth a sae cuts such fm
to form and dmensons sub|ect to ta hereunder) sha for the purposes of
ths subsecton be consdered the manufacturer of the fm so sod by hm.
(10) ectrc ght bubs and tubes. ectrc ght bubs and tubes,
not ncudng artces ta abe under any other provson of ths subchapter,
5 10 per centum.
Note. The rate of ta presenty n effect on eectrc ght bubs and tubes s
the temporary war rate of 20 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31,1954,
S C. 3407. T ON IR RMS, S LLS, ND C RTRIDG S.
There sha be Imposed upon frearms, shes, and cartrdges, sod by the man-
ufacturer, producer, or mporter, a ta equvaent to 11 10 per centum of the
prce for whch so sod. The ta mposed by ths secton sha not appy (1) to
artces sod for the use of any State, Terrtory of the Unted States, or potca
subdvson thereof, or the Dstrct of Coumba, or (2) to pstos and revovers.
The ta es mposed by ths secton sha not appy to any frearm on whch the
ta provded by secton 2720 has been pad.
The provsons of secton 3452 (reatng to e praton of ta es) sha not appy
to the ta mposed by ths secton.
S C. 3408. T ON M C NIC L P NCILS, OUNT IN ND LLPOINT
P NS. ND M C NIC L LIG T RS OR CIG R TT S, CIG RS,
ND PIP S.
(a) Imposton of Ta . There sha be mposed on the foowng artces,
sod by the manufacturer, producer, or mporter, a ta equa to 15 10 per
centum of the prce for whch so sod : Mechanca pencs, fountan pens, and ba-
pont pens mechanca ghters for cgarettes, cgars, and ppes.

S C. 3412. T ON G SOLIN .
(a) There sha be mposed on gasone sod by the producer or Importer
thereof, or by any producer of gasone, a ta of 2 cents a gaon, e cept that
under reguatons prescrbed by the Commssoner wth the approva of the Secre-
tary the ta sha not appy n the case of saes to a producer of gasone. On
and after pr 1,1954, the ta Imposed by ths secton sha be a cents a gaon
h eu of 2 cents a gaon.
(b) If a producer or mporter uses (otherwse than n the producton of
gasone) gasone sod to hm free of ta , or produced or Imported by hm, such
use sha for the purposes of ths chapter be consdered a sae. ny person to
whom gasone s sod ta -free under ths secton sha be consdered the producer
of such gasone.
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(c) s used n ths secton
(1) the term producer ncudes a refner, compounder, or bender, and
a deaer seng gasone e cusvey to producers of gasone, as we as a
producer.
(2) the term gasone means ( ) a products commony or commercay
known or sod as gasone (ncudng casnghead and natura gasone), ben-
zo, benzene, or naphtha, regardess of ther cassfcatons or uses and ( )
any other qud of r knd prepared, advertsed, offered for sae or sod for use
as, or used as. a fue for the propuson of motor vehces, motorboats, or
arpanes e cept that t does not Incude any of the foregong (other than
products commony or commercay known or sod as gasone) sod for
use otherwse than as a fue for the propuson of motor vehces, motorboats,
or arpanes, and otherwse than n the manufacture or producton of such,
fue, and does not ncude kerosene, gas o, or fue oL
(d) very person sub|ect to ta under ths secton or secton 3413 sha, before
Incurrng any abty for ta under such sectons regster wth the coector for
the dstrct n whch s ocated hs prncpa pace of busness (or, f he has no
prncpa pace of busness n the Unted States, wth the coector at atmore,
Maryand) and sha Rve a bond, to be approved by such coector, condtoned
that he sa not engage n any attempt, by hmsef or by couson wth others,
to defraud the Unted States of any ta under such sectons that he sha render
trny and competey a returns, statements, and nventores requred by aw or
reguatons n pursuance thereof and sha pay a ta es due under such sectons
and that he sha compy wth a requrements of aw and reguatons n pur-
suance thereof wth respect to ta under such sectons. Such bond sha be n
such sum as the coector may requre n accordance wth reguatons prescrbed
by the Commssoner wth the approva of the Secretary, but not ess than 2,OOO.
The coector may from tme to tme requre new or addtona bond n accord-
ance wth ths subsecton. very person who fas to regster or gve bond as
requred by ths subsecton, or who n connecton wth any purchase of gasone
or ubrcatng o fasey represents hmsef to be regstered and bonded as pro-
vded by ths subsecton, or who wfuy makes any fase statement n an app-
caton for regstraton under ths subsecton, sha upon convcton thereof be
fned not more than 5,000 or mprsoned not more than fve years, or both,
together wth, the costs of prosecuton. If the Commssoner fnds that any
manufacturer or producer has at any tme evaded any edera ta on gasone or
ubrcatng o, he may revoke the regstraton of such manufacturer or producer,
and no sae to, or for resae to, such manufacturer or producer thereafter sha
be ta -free under secton 3413, ths secton, or secton 3442, but such manufac-
turer or producer sha not be reeved of the requrement of gvng bond under
ths subsecton.
(e) Under reguatons prescrbed by the Commssoner wth the approva of
the Secretary, records requred to be kept wth respect to ta es under secton 3413,
or ths secton, and returns, reports, and statements wth respect to such ta es
fed wth the Commssoner or a coector, sha be open to nspecton by such.
offcers of any State or Terrtory or potca subdvson thereof or the Dstrct
of Coumba as sha be charged wth the enforcement or coecton of any ta on
gasone or ubrcatng os. The Commssoner and each coector sha furnsh
to any of such offcers, upon wrtten request, certfed copes of any such state-
ments, reports, or returns fed n hs offce upon the payment of a fee of 1 tor
each one hundred words or fracton thereof n the copy or copes requested.
(f) 1951 LOOR STOC S T . On gasone sub|ect to ta under ths secton
whch, on the effectve date of secton 489 (a) of the Revenue ct of 1951, s hed
and Intended for sae, there sha be eved, assessed, coected, and pad a foor
stocks ta at the rate of cent per gaon. The ta sha not appy to gasone
In reta stocks hed at the pace where ntended to be sod at reta, nor to gasone
hed for sae by a producer or Importer of gasone. The provsons of secton 3443
sha be appcabe to the foor stocks ta mposed by ths subsecton so as to
entte, sub|ect to a the provsons of such secton, (1) any manufacturer or pro-
ducer to a refund or credt of such ta under subsecton (a) (1) of such secton,
and (2) any person payng such foor stocks ta to a refund or credt thereof
where gasone s by such person or any other person used or resod for any of
the purposes specfed n snbparagraphs ( ) (), (), and () of subsecton
(a) (3) of such secton.
C(g) LOOR STOC S R UNDS ON G SOLIN .
(1) IN G N R L. Wth respect to any gasone ta abe under ths secton.,
upon whch ta (ncudng foor stocks ta ) at the appcabe rate has been.
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363
pad, and whch, on pr 1,1954, Is hed and ntended for sae by any person,
there sha be credted or refunded (wthout nterest) to the producer or
mporter who pad the ta , sub|ect to such reguatons as may be prescrbed
by te Secretary, an amount equa to so much of the dfference between the
ta so pad and the amount of ta made appcabe to such gasone on and
after pr 1, 1954, as has been pad by such producer or mporter to such
person as rembursement for the ta reducton on such gasone, f cam for
such credt or refund s fed wth the Secretary pror to uy 1, 1954. No
credt or refund sha be aowabe under ths subsecton wth respect to
gasone n reta stocks hed at the pace where ntended to be sod at
reta, nor wth respect to gasone hed for sae by a producer or mporter
of gasone.
(2) LIMIT TION ON LIGI ILITY O CR DIT O R UND. No producer or
mporter sha be entted to a credt or refund under paragraph (1) uness
he has n hs possesson satsfactory evdence of the nventores wth respect
to whch he has made the rembursements descrbed In such paragraph, and
estabshes to the satsfacton of the Secretary wth respect to the quantty
of gasone as to whch credt or refund s camed under such paragraph, that
on or after pr 1, 1954, such quantty of gasone was sod to the utmate
consumer at a prce whch refected the amount of the ta reducton.
(3) P LTT ND DMINISTR TI PROC DUR S. provsons of aw,
ncudng penates, appcabe n respect of the ta mposed under ths
secton sha, nsofar as appcabe and not nconsstent wth ths subsecton,
be appcabe n respect of the credts and refunds provded for n ths sub-
secton to the same e tent as f such credts or refunds consttuted credts
or refunds of such ta es.
C PT R 30 TR NSPORT TION ND COMMUNIC TION

SC C PT T L GR P , T L P ON , R DIO, ND C L CILITI S
S C 3465. IMPOSITION ND R T O T .
(a) There sha be Imposed:
(1) T L P ON ND T L GR P , TC.
( ) On the amount pad wthn the Unted States for each teephone
or rado teephone message or conversaton for whch the to charge Is
more than 24 cents, a ta equa to 20 10 per centum of the amount so
pad. If a b s rendered the ta payer for the servces descrbed n ths
subparagraph, the amount upon whch the ta sha be based sha be
the sum of a such charges ncuded n the b, and the ta sha not be
based upon the charge for each tem, separatey, ncuded n the b.
t Note. The rate of ta presenty n effect on ong dstance teephone messages
s the temporary war rate of 25 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31,1954.
( ) On the amount pad wthn the Unted States for each teegraph,
cabe, or rado dspatch or message a ta equa to 15 per centum of the
amount so pad, e cept that In the case of each nternatona teegraph,
cabe, or rado dspatch or message the rate sha be 10 per centum 10
per centum of the amount so pad. If a b s rendered the ta payer for
the servces descrbed n ths subparagraph, the amount upon whch the
ta at each of the rates n ths subparagraph sha be based sha be the
sum of a such charges at that rate ncuded n the b, and the ta
sha not be based upon the charge for each tem, separatey, ncuded
In the b.
If the ta under subparagraph ( ) or ( ) s pad by nsertng cons n con-
operated teephones, the ta sha be computed to the nearest mutpe of 5
cents, e cept that where the ta s mdway between mutpes of 5 cents, the
ne t hgher mutpe sha appy. Ony one payment of a ta Imposed by
subparagraph ( ) or ( ) sha be requred notwthstandng the nes or
statons of one or more persons are used In the transmsson of such dspatch,
message, or conversaton.
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(2) L S D WIR S, TC.
( ) ta equvaent to 15 10 per centum of the amount pad for
eased wre, teetypewrter, or takng crcut speca servce, but not
Incudng an amount pad for eased wre, teetypewrter, or takng cr-
cut speca servce used e cusvey n renderng a servce ta abe under
subparagraph ( ).
Note. The rate of ta presenty n effect on eased wres, etc., s the temporary
war rate of 25 per centum as provded n secton 1650 of the Interna Revenue
Code, whch under the b e pres March 31,1954.
( ) ta equvaent to 5 8 per centum of the amount pad for
any wre and equpment servce (Incudng stock quotaton and nforma-
ton servces, burgar aarm or fre aarm servce, and a other smar
servces, but not ncudng servce descrbed n subparagraph ( )).
The ta sha appy under ths paragraph whether or not the wres or servces
are wthn a oca e change area.
Note. The rate of ta presenty n effect on wre and equpment servce s the
temporary war rate of 8 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31,1954.
MINORITY I WS
We supported the e cse ta reductons n ths b. We ob|ect, however, to the
hasty acton of the commttee and the nadequate consderaton gven to the
sub|ect of e cse ta es.
Invoved In the b s a tota of 1.989 bon n e cse ta revenue, made up
by reductons n e cse ta es of 912 mon and ncreases of 1.077 bon. The
ne t effect Is an ncrease1 of 165 mon n e cse ta es.
The b was not avaabe to the members of the commttee unt we met to
consder t n e ecutve sesson, and deberatons on t were competed n 1 day.
In a our e perence n handng ta egsaton, there has never been such hasty
consderaton of egsaton nvovng so much revenue.
We deny the cam that the b reduces a number of e cse ta rates on a
seectve bass. The ony seecton nvoved n ths b s more or ess a ne-of-
sght proposton where an ad vaorem rate that stands up above 10 percent s
eveed to 10 percent Such a seecton competey gnores any e cse ta whch
Is beow 10 percent, or whch s eved on a doar-and-cents bass per unt ta ed.
We do not mean that reef s not needed n the areas covered In the b, but
we do beeve that consderaton shoud be gven to other areas of e cse ta es and
the voumnous testmony whch the commttee receved ast summer reatng to
admnstratve probems In the e cse ta fed.
ranky, we were not prepared ourseves on such short notce to make we-
consdered recommendatons for other ad|ustments n the fed of e cse ta es.
We dd fa back on the ad|ustments whch were recommended n the revenue
b of 1950 as t passed the ouse, whch provded for e cse ta reductons of
1 bon. It w be recaed that these reductons were deeted n the Senate, due
to the advent of the orean confct and the necessty of ncreasng rather than
decreasng revenues. The recommendatons In the revenue b of 1950 were
made by the commttee after ong hearngs and consderaton, and there were
|ustfabe reasons for makng them. Most of the reductons contaned n the
current b were aso contaned n that b.
mong the addtona ad|ustments whch we attempted to make n the current
b and whch were defeated by the ma|orty were the foowng, many of whch
were aso Incuded n the revenue b of 1950: to repea the ta on handbags,
bfods, key cases, etc. watches seng for ess than G5, and cocks and aarm
cocks seng for ess than 5 househod water heaters mechanca pens and
pencs admssons admssons where the admsson prce s 50 cents or under
admssons to movng pcture theaters where the admsson prce s 50 cents or
under admssons to amusement parks and rdes where the admsson prce does
not e ceed 15 cents househod Ironers and drers communcatons eased wre
servce furnshed to shut-n students oca teephone cas coege and schoo
athetc games and bowng aeys, bard and poo tabes operated wthout
charge by nonproft organzatons or governmenta agences. We aso proposed
to cut the ta on transportaton of property In haf.
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365
These may not be the ony, or necessary the most deservng, cases for ad|ust-
ments or for reductons at ths tme, but due to the fact that the b was
consdered on such short notce we were not as fuy prepared to make ad|ust-
ments as we woud ke to bare been.
nother unusua feature of ths b whch seems to us to be dffcut to defend
on ts face s the fact that the net effect of the b amounts to an Increase n
e cse ta es of 165 mon. It s pousy camed n the tte of the b that
t reduces e cse ta es. We dspute ths. more approprate tte woud be
b to ncrease e cse ta es.
We are aso dsturbed by the fact that the ma|orty are not |ust contnung the
ncreases n e cse ta es that were provded n the Revenue ct of 1951 to
fnance defense preparatons for the orean confct for a temporary perod
they are makng them permanent. Ths contrasts to ther proposa to contnue
present corporate ta es at ther present eve for ony 1 year. Ths ncrease n
e cse ta es amounts to over 1 bon. Our ony purpose n ncreasng these
e cse ta rates n the Revenue ct of 1951 was to fnance these defense prepara-
tons, and we Inserted a termnaton date so that the ta es woud e pre auto-
matcay.
We attempted n the current b to permt the reductons to take pace on
pr 1 as schedued, because these e cse ta rates are even hgher than they
were durng Word War II, and, snce they are seectve, t seems to us that these
partcuar ndustres shoud not be snged out from a others to bear such a
heavy oad. ang In ths, we attempted to assure these ndustres that these
hgh rates woud be contnued ony for 1 year. The ma|orty defeated us n
both of these attempts, and the effect of ther acton, as we stated, s to make
these ncreases permanent.
The ma|orty was determned to present ths b to the ouse as t was ntro-
duced, and a our efforts at makng t more equtabe were precuded from
success even before they were made
The mn|orty aso gnored the Treasury Department, whch fet that the ony
ad|ustments n e cse ta es whch shoud be made at ths tme are n dstressed
ndustres, whch they name as beng the fur Industry and the move ndustry.
The usua procedure of the commttee n consutng the Treasury Department on
egsaton whch t s consderng was not foowed In ths case.
We woud ke to pont out that ths Is the thrd nstance n whch the ma|orty
party has Increased ta es, despte ther cams durng the ast presdenta
campagn that they were not ony gong to reduce ta es but aso baance the
budget We do not mean that we beeve that the fsca condton of the Treasury
may not requre the revenue nvoved n these ncreases, but we are concerned
about the mseadng promses whch the ma|orty party made. It w be recaed
that the e cess profts ta was contnued from une 30, 1953, to December 31,
1953. The commttee has aready voted to contnue the corporate ta at 52
percent for another year, and n ths b the e cse ta rate ncreases made n the
Revenue ct of 1951 are beng made permanent. These Increases n ta es am
the estmated defct of amost 3 bon In the current year s budget s a case,
n our opnon, of actons agan speakng ouder than words.
ebe Cooper.
ohn D. Dnoe,
Wbur D. Ms.
Nobe . Gregobt.
. Sdney Camp.
me . oband.
erman P. berhabteb.
Cec R. no.
Thomas . O ren.
ae oggs.
315359 54 24
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366
CIS T R DUCTION CT O 1954
Senate Report No. 1085, ghty-thrd Congress, Second Sesson. Caendar No. 1086
March 19 (egsatve day, March 1), 1954
Mr. Mkn, from the Commttee on nance, submtted the foowng report
to accompany R. 8224 :
The Commttee on nance, to whom was referred the b ( . R. 8224) to re-
duce e cse ta es, and for other purposes, havng consdered the same, report
favoraby thereon, wth amendments, and recommend that the b do pass.
I. G N R L ST T M NT
The b as passed by the ouse provdes that a ad vaorem e cse ta es
(1. e., ta e pressed as a percent of the prce at whch artces or servces are
sod) whch are now above 10 percent are to be reduced to 10 percent. The ouse
b aso e tended for 1 more year the rates schedued for reducton on pr 1,
1954, by present aw (e cept the ta on sportng goods).
The report of the ouse commttee wth respect to the rate reductons sug-
gests that these reductons w stmuate busness and empoyment, not ony n
those ndustres drecty affected by these ta es, but aso n other ndustres, snce
consumers w pay ess for many of these ta ed tems and have more money
avaabe for other purchases. It was aso suggested that some of these ta es
enter drecty nto busness costs and that a reducton n such costs s desrabe.
urthermore, It s suggested that these changes provde a more equtabe ta
system by eveng down those rates whch are now e cessvey hgh and thus
dscrmnatory.
In genera your commttee agrees wth the reasons presented In the ouse
report for makng e cse reductons at ths tme. owever, t does not beeve
that a certan few of the present ta rates above 10 percent consttute a hard-
shp ether to the person suppyng the artce or servce or to the person purchas-
ng t. It s beeved that ths Is true wth respect to the ta on admssons to
racetracks for horse and dog racng the ta on cub dues and ntaton fees
and the ta on safe depost bo es. s a resut your commttee contnues the
20-percent ta rates In these cases.
Your commttee aso beeves that the admssons ta consttutes a speca
hardshp n certan cases. It s beeved that ths Is true In the case of sma
theaters and others where the charge Is 60 cents or ess In the case of coege
athetc events (not ncudng postseason games such as bow games) In the
case of museums of hstory, art, or scence operated by a governmenta unt or
nonproft organzaton and n the case of athetc events between students of
severa eementary or secondary schoos where the proceeds nure to the beneft
of a hospta for crpped chdren. s a resut your commttee e empts adms-
sons charged In such cases from the 10-percent admssons ta .
Tour commttee s attenton has aso been caed to certan manufacturers
e cse ta es not eved on the bass of prce where the ta Is equa to more than
10 percent of the manufacturer s prce. The ta on ordnary matches whch s
2 cents per 1,000 usuay represents somethng ke 17 percent of the reta prce
for matches and cuttng o whch Is sub|ected to the 6 cents per gaon ta on
ubrcatng o s substantay above 10 percent of the manufacturer s prce.
Tour commttee In these cases provded that n no event s the ta to e ceed 10
percent of the manufacturer s prce. Ths w gve these e cses equa treat-
ment wth those eved on an ad vaorem bass whch were reduced to 10 percent
by the ouse bL
Your commttee has added another amendment to the b whch doea not
affect the payment of ta es n any way but does have the effect of emnatng
the unnecessary coecton and subsequent refund of the 2 cents per gaon ta
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267
on gasone substtutes. In the case of benzo, benzene, naphtha, or other quds
(not ncudng gasone), present aw requres that ths ta be pad by the pro-
ducer and then f ths qud s used, or sod for use, n farm tractors or oth-r
than for use n motor vehces, motorboats, or arpanes, a refund or credt of
the ta s provded. Ths unnecessary ta coectng and refundng s avoded
under the amended b by coectng the ta at the reta eve n the case of
these fues where they are used for a motor vehce, motorboat or arpane and
by coectng no ta at a where they are used for other purposes.
Severa technca amendments have aso been made by your commttee. Most
of these dea wth the transton to the new reduced rates. In the case of the
reta and manufacturers e cses, an amendment has been adopted to provde
that an artce s not to be consdered as sod pror to pr 1, 1954, uness
possesson, or rght to possesson, of the artce has passed before such date.
Ths makes the reduced rates appcabe In the case of ay-aways where pos-
sesson passes after pr 1, 1954.
or both the admssons ta and the transportaton-of-persons ta an amend-
ment was adopted provdng that where tckets were purchased pror to pr 1,
1954, for admssons or transportaton on or after that date, the purchasers of
the tckets are to be egbe for refunds (to be obtaned through the ssuer of
the tcket) equa to the ta reducton provded n the b.
The foor stock refund provson for eectrc ght bubs was modfed by your
commttee to provde that the manufacturer s to have 4 rather than 3 months
after the reducton date n whch to fe hs cam for refund or credt. owever,
those to whom the manufacturer sod the bubs must st submt ther requests
for refunds to the manufacturer wthn 3 months of ths date.
technca change was aso made n the manner n whch the admssons
ta s to be apped. Your commttee s b provdes that ths ta s to be 1
cent for each 10 cents or ma|or fracton thereof. Ths s the rue under
e stng aw. The ouse b provded that the ta was to be 1 cent for each
10 cents or fracton thereof. Ths was the rue n effect pror to the enactment
of the Revenue ct of 1943.
Tour commttee made no change In the ouse provson e tendng unt pr 1,
1955, the rate reductons (other than the reducton n the ta on sportng goods)
schedued under present aw to take effect pr 1, 1954. Nor dd t make any
changes n the foor-stock refunds provded for automobes and trucks, gaso-
ne, cgarettes, and acohoc beverages. Many requests were receved to pro-
vde e praton or reducton dates for e cses not so provded for by the ouse
b. Tour commttee dd not beeve t was desrabe to do so because of the
adverse effect such dates are key to have on saes and because of the tme m-
tatons at present f ths b s to take effect as of pr 1,1954.
start has been made n ths b toward reducng e cse ta es by brngng
down to 10 percent oppressve and dscrmnatory rates above the 10-percent
eve. Tour commttee woud have ked to have made reductons n e cse
ta rates whch were at or beow the 10-percent eve. Ths was not possbe
because of the present state of the budget. s soon as the budget w permt,
t s the ntenton of the commttee to make a comprehensve revson of the
entre e cse ta system.. Many of the e cse ta es now n effect were mposed
darng Word War II or at the outbreak of the orean war and need to be
competey overhaued or emnated. mong the ta es whch are partcuary
troubesome and whch w receve attenton as soon as the state of the budget
w permt are those reatng to home appances and the ta on transportaton
of property.
II. Rate Changes and emptons
The foowng tabe sts the ta es whch are reduced under ths b, showng
the rates under present aw, and the estmated reductons n e cse ta
coectons.
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Tame 1. cse rate reductons effectve pr. 1, 19,r , . . 822. as passed by
the ouse, and as reported by Senate Commttee on nance
ouse b
nance Commttee b
Rates under
present aw
Reducton
n e cse
ta co-
ectons
Reducton
In e cse
ta co-
ectons
Rates
Rates
(fu-year
effect)
(fu-year
effect)
Retaers e cses:
Mons of
doars
20
100
40
65
hfarts of
doars
urs
20 percent...
10 percent...
10 percent...
20
ewery
do
do
do
100
Luggage
do.
do
do
w
Manufacturers e cses:
do
do
do
55
3
do
3
4
do
Mechanca pencs and pens,
do
do
do
4
and ghters.
ectrc eht bubs and tubes...
Pstos and revovers
20 percent...
11 percent.
do
20
do
20
do
neg.
do
neg.
do
1
do
1
do
15
do
15
2 cents per
thousand.
Not to e -
ceed 10
percent.
4
6 cents per
do
Cuttng o
gaon. do
do
Not to e -
ceed 10
percent.
1
Msceaneous e cses:
Long dstance teephone, tee-
graph, etc
( )
10 percent...
235
10 percent...
235
125
15 percent do
do
125
85
do
Transportaton of persons
do
do
95
dmssons:
....do
0
do
do
152
10 percent If
prce e -
ceeds 60
cents.
217
do
do
23
19
10 percent...
23
Tota
do
do
912
958
Under present aw ths rate s schedued for reducton to 10 percent on pr. 1,1954.
1 Teephone or rado-teephone messages, to charges over 24 cents, 25 percent domestc teegraph, cabe,
and rado dspatches, 15 percent Internatona teegraph, cabe and rado dspatches, 10 percent eased wre
servce, teetypewrter, or takng crcut speca servce, 25 percent.
Under present aw a penaty ta of 50 percent Is mposed on saes by propretors In e cess of the estab-
shed ta ths rate Is not reduced.
The rate on a admssons to horse and dog races remans at 20 percent wth no 60-cent e empton. d-
mssons to coege athetcs (e cudng postseason games) and to museums are e empt from ta .
No change from ouse b.
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369
T L 2. cse ta rates e tended to pr. 1, 1955
Increased
coectons
due to con-
tnuaton
(fu-year
efect)
Unt of ta
Present rate
contnued
tnder b
Rate after
pr. 1, 1955
Lquor tares:
Dsted sprts
MUm
150
Per proof gaon _.
10.80 .
9
Per barre.
9
8
87
nc:
t wne:
Contanng ess than 14 percent
acoho.
Contanng to 21 percent a-
Per wne gaon...
....do
17 cents
15 cents
coho.
Contanng 21 to 24 percent a
cono.
67 cents
do
....do
2.25
10.50
C.
cent acoho.
Sparkng wnes, queurs, cordas,
etc.:
Champagne or sparkng wne..
Lqueurs, cordas, etc., and
trtfcav carbonated wnes.
Tobacco taes: Cgarettes
Manufacturers e cses:
Gasone -
It
g
Per M pnt do
17 cents
12 cents
15 cents
10 cents
Per 1,000
Per gaon . ..
4
3.50
181
22S
sae, prce.
.. do ...
2 cents ..
276
Trucks, buses, truck traers
8 percent
5 percent .
75
fo
do
do
60
Per gaon
1 cents
{
hghway vehces.
Tota..
1,077
III. OT TR CTO t t ND OT G SOLIN SU STITUT S
Under e stng aw, gasone s defned for purposes of the manufacturers
e cse ta to mean: ( ) prodncts commony or commercay known or sod
s gasone (ncudng casngbead and natura gasone) and ( ) benzo, benzene,
or naphtha, and any other qud of a knd prepared, advertsed, offered for
sae or sod for use as, or used as, a fue for the propuson of motor vehces,
mo tor boats, or arpanes. The second group of products are referred to In the
reguatons (reguatons 44 reatng to the ta es on gasone, ubrcatng o, and
matches), as cass products, and t s these cass products wth whch your
commttee s amendment b s concerned.
Cass products are sub|ect to ta ony f offered for sae, sod as, or used as
fue for the propuson of motor vehces, motorboats, or arpanes. n mpor-
tant proporton of these products s not used for such purposes, however, but
for such e empt uses as sovents and tractor fue. The manufacturer may se
these products free of ta f he obtans a certfcate pror to or at the tme of
tae from the purchaser who certfes that he s gong to use them for a non-
ta abe purpose. owever, manufacturers generay have to se the products
on a ta -pad bass because the purchasers usuay are dstrbutors or deaers
who buy the products for resae and not for use. In ths stuaton, a cass
product may be sod free of ta by the deaer to the utmate consumer f the
atter certfes that he s gong to use t for a nonta abe purpose. The e emp-
ton certfcate sgned by the consumer must then be sent by the deaer to the
manufacturer so that the atter may take a credt or obtan a refund for the ta
orgnay pad. The manufacturer can then ad|ust the deaer s account. Snce
there are a consderabe number of consumers who buy cass products for
nonta abe purposes, ths procedure s cumbersome and costy.
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370
Tour commttee s amendment rectfes ths probem by changng the method of
ta aton of cass motor fues. It emnates the ta on those products at the
manufacturers eve and mposes t at the reta deaers eve. It aso provdes
that f the ta s not coected at the tme of reta sae, and the consumer made
a ta abe use of the product, abty for ta then s to be ncurred by the con-
sumer. Ths s the system whch now Is used for the. ta on dese fue.
Lqud fues, whch have been sub|ect to ta when used for the propuson of
a motor vehce, motorboat, or arpane under e stng aw because they are
wthn the dstaton range of cass products (as provded n sec. 314.30 of
reguatons 44), reman sub|ect to ta under your commttee s b. Lqud fues
whch presenty are nonta abe as beng wthn the dstaton range of kerosene,
gas o, or fue o contnue ther nonta abe status under the b. The ta es
on dese fue and products commony or commercay known or sod as gasone
w contnue to be ta ed as under e stng aw.
I . CTI D T
or the reta and manufacturers ta es the new ta rates are to appy to saes
on or after pr 1,1954. rtces are not to be consdered as sod pror to pr
1, 1954. uness possesson, or rght to possesson, of the artce passes before that
date. owever, n the case of (1) eases, (2) Instament saes, (3) condtona
saes, or (4) chatte mortgage Instament arrangements, entered Into before
pr 1, 1954, payments made after pr 1, 1954, are to be sub|ect to the new
rates.
or admssons the new ta rates appy to amounts pad for admssons on or
after pr 1,1954. mounts coected before that date for admsson on or after
that date, to the e tent of the rate reducton, are to be aowed as a credt or refund
to the person who coected the ta f pror to the tme of the admsson he has
repad ths amount to the person who bought the tcket or the cabaret ta , the
new rates appy wth respect to perods after 10 a. m. on pr 1,1954.
The new communcatons ta rates w appy wth respect to amounts pad
pursuant to bs rendered on and after pr 1, 1954, for servces rendered on
and after such date, and for any servces rendered n ebruary and March for
whch no prevous- b was rendered.
The new rate of ta on transportaton of persons appes wth respect to
amounts pad on and after pr 1, 1954, for or n connecton wth transportaton
whch begns on or after such date. refund or credt provson smar to that
descrbed above n the case of the admssons ta s appcabe wth respect to
transportaton tckets purchased before pr 1, 1954, for use on or after that
date. owever, n ths case the b aso provdes that transportaton s not to be
consdered as havng begun on or after pr 1, 1954, f any part of the trans-
portaton pad for (or for whch payment has become obgated for) commenced
before pr 1, 1954.
C NG S IN ISTING L W
In compance wth subsecton 4 of rue I of the Standng Rues of the
Senate, changes n e stng aw made by the b are shown as foows (e stng
aw proposed to be omtted s ncosed n back brackets new matter s prnted
n tacs e stng aw n whch no change s proposed s shown n roman):
INT RN L R NU COD
C PT R 9 W R T S ND W R T R T S
S C. 1650. W R T R T S O C RT IN MISC LL N OUS T S.
In eu of the rates of ta specfed In such of the sectons of ths tte as are
set forth n the foowng tabe, the rates appcabe wth respect to the perod
begnnng wth the effectve date of tte III of the Revenue ct of 1943 and
endng March SI, 1954, sha be the rates set forth under the headng War Ta
Rate :
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cattom
Descrpton of ta
Od rate
War ta rate
1700(a)
1700(b)
1700(c)-
1700(e)
1710(a)(1)
1710(a)(2)
2400 (e cept as respects
watches seng at re-
ta for not more than
65 and aarm cocks
seng at reta for not
more than 5).
2401
2402
3268
3406(a)(10)
3465(a)(1)( )
3465(a)(2)( )
3465(a)(2)( )
3465(a)(3)
3469(a)
3460(c)
dmssons.
Permanent use or ease of
bo es or seats.
Saes of tckets outsde bo
offce.
Cabarets, roof gardens, etc
Dues or membershp fees
Intaton fees
ewery
urs
Toet preparatons.
ard and poo tabes and
bowfrw aeys.
ectrc ght bubs and tubes.
Teephone, ong dstance
Leased wres, etc
Wre and equpment servce..
Loca teephone servce
Transportaton of persons
Seats, berths, etc
I cent for each 10 cents
or fracton thereof.
II per centum
11 per centum
per centum
11 per centum
11 per centum ..
10 per centum
10 per centum
10 per centum
10 per year per tabe
10 per year per aey.
5 per centum
20 per centum
15 per centum
5 per centum ,
10 per centum
10 per centum
10 per centum
1 cent for each 5 cents
or ma|or fracton
thereof.
2C per centum.
20 per centum,
20 per centum.
SO per centum.
20 per centum,
20 per centum.
20 per centum.
20 per centum.
20 per year per tabe
20 per year per aey.
20 per centum.
25 per centum.
25 per centum.
8 per centum.
II per centum.
15 per centum.
15 per centum.
S C. 1651. R T IL RS CIS T ON LUGG G , TC.
(a) Ta . There Is hereby Imposed upon the foowng artces (ncudng In
each case fttngs or accessores therefor sod on or In connecton wth the sae
thereof) sod at reta a ta equvaent to 20 10 per centum of the prce for
whch so sod:
(1) Trunks, vases, tra eng hags, sutcases, satches, overnght bags, hat
bo es for use by traveers, beach bags, bathng sut bags, bref cases made of
eather or mtaton eather, and saesmen s sampe and dspay cases.
(2) Purses, handbags, pocketbooks, waets, bfods, and card, pass, and
key cases.
(3) Toet cases and other cases, bags, and kts (wthout regard to sze,
shape, constructon, or matera from whch made) for use In carryng toet
artces or artces of wearng appae.
S C. 1656. LOOR STOC S R UNDS ON DISTILL D SPIRITS, WIN S
ND CORDI LS, ND RM NT D M LT LI UORS.
(a) In Genera. Wth respect to any artce upon whch ta Is mposed under
secton 2800(a), 3030(a), or 3150(a), upon whch nterna revenue ta (Incudng
foor stocks ta ) at the appcabe rate prescrbed by such secton has been pad,
and whch, on pr 1, 1954 1955, s hed by any person and ntended for sae
or for use n the manufacture or producton of any artce ntended for sae, there
sha be credted or refunded to such person (wthout nterest), sub|ect to such
reguatons as may be prescrbed by the Secretary, an amount equa to the
dfference between the ta so pad and the rate made appcabe to such artces
on and after pr 1, 1954 1955, by such secton, If cam for such credt or
refund s fed wth the Secretary pror to May 1, 1954 1955.
(b) Lmtatons on gbty for Credt or Refund. No person sha be
entted to credt or refund under subsecton (a) uness (1) such person, for such
perod or perods both before and after pr 1, 1954 195.5 (but not e tendng
beyond one year thereafter), as the Commssoner wth the approva of the
Secretary sha by reguatons prescrbe, makes and keeps, and fes wth the
Commssoner, such records of nventores, saes, and purchases as may be pre-
scrbed n such reguatons and (2) such person estabshes to the satsfacton
of the Commssoner, wh respect to each knd of artce for whch refund Is
camed by hm under ths secton, that on and after pr 1, 1954 1955 and
unt the e praton of three months thereafter, the prce at whch artces of
such knd were sod (unt a number equa at east to the number on hand on
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372
pr 1, 1954 1955 were sod) refected, n such manner as the Commssoner
may by reguatons prescrbe wth the approva of the Secretary, the amount of
the ta reducton.
(c) provsons of aw, ncudng penates, appcabe n respect of nterna
revenue ta es on dsted sprts, wnes, queurs and cordas, mported perfumes
contanng dsted sprts, and fermented mat quors sha, nsofar as appcabe
and not nconsstent wth ths secton, be appcabe n respect of the credts and
refunds provded for n ths secton to the same e tent as If such credts or
refunds consttuted credts or refunds of such ta es.
S C. 1657. LOOR STOC S R UNDS ON L CTRIC LIG T UL S.
(a) IN G N R L. Wth respect to any artce upon whch ta Is mposed under
secton 3406(a) (10), upon whch nterna revenue ta at the rate prescrbed n
secton 1650 has been pad, and whch, on the rate reducton date s hed by any
person and ntended for sae, or for use n the manufacture or producton of any
artce ntended for sae, there sha be credted or refunded to the manufacturer
or producer of such artce (wthout nterest), sub|ect to such reguatons as may
be prescrbed by the Commssoner wth the approva of the Secretary, an amount
equa to so much of the dfference between the ta so pad and the ta that woud
have been pad f secton 1630 bad not been appcabe the appcabe rate had
been 10 per centum, as has been pad by such manufacturer or producer to such
person as rembursement for the ta reducton on such artces, If cam for such
credt or refund s fed wth the Commssoner pror to the e praton of three
months after the rate reducton date pror to ugust 1, 1954, based upon a re-
guest for rembursement submtted by such person to the manufacturer or pro-
ducer of such artce pror to uy 1,1954.
S C. 1658. T L GR P , T L P ON , R DIO, ND C L CIL-
ITI S.
Notwthstandng secton 1650, the rates theren prescrbed wth respect to the
ta es mposed by secton 3465(a) (1), (2), and (3) sha contnue to appy wth
respect to amounts pad pursuant to bs rendered pror to the rate reducton
date and, n the case of amounts pad pursuant to bs rendered on or after the
rate reducton date for servces for whch no prevous b was rendered, the
decreased rates sha appy e cept wth respect to such servces as were rendered
more than two months before such date and, n the case of servces rendered
more than two months before such date, the provsons of secton 1650 and 3465 n
effect at the tme such servces were rendered sha be appcabe to the amounts
pad for such servces.
S C. 1659. D INITION O R T R DUCTION D T .
or the purposes of ths chapter the term rate reducton date means such
date as the Congress sha by aw prescrbe pr 1, 1954.
C PT R 10 DMISSIONS ND DU S
SU C PT DMISSIONS
S C. 1700. T .
There sha be eved, assessed, coected, and pad
(a) SINGL O S SON TIC T Su C rproN
(1) R T . ta of 1 cent for each 10 cents or ma|or fracton thereof of
the amount pad for admsson to any pace, Incudng admsson by season
tcket or subscrpton. No ta sha be mposed on the amount pad for
admsson of a chd under 12 years of age f the amount pad s ess than 10
cents. No ta sha be mposed under ths paragraph on the amount pad
for admsson
( ) f the amount pad for admsson s 60 cents or egs, or
( ) n the case of a season tcket or subscrpton, f the amount whch
woud be charged to the hoder or subscrber for a snge admsson s CO
cents or ess.
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Note. The rate of ta presenty n effect for admsson, ncudng admsson
by season tcket or subscrpton, s the temporary war rate of 1 cent for each
5 cents or ma|or fracton thereof as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31,1954.
(2) y whom pad. The ta Imposed under paragraph (1) sha be pad
by the person payng for such admsson.
(3) Certan race tracks In eu of the ta mposed under paragraph
(/), a taw of 1 cent for each 5 cents or ma|or fracton thereof of the amount
pad for admsson to any pace (ncudng admsson by season tcket or
subscrpton) f the prncpa amusement or recreaton offered wth respect
to such admsson s horse or dog racng at a race track. The ta mposed
under ths paragraph sha be pad by the person payng for such admsson.
(b) Permanent Use or Lease of o es ob Seats.
(1) Rate. In the case of persons havng the permanent use of bo es or
seats In an opera house or any pace of amusement or a ease for the use of
such bo or seat In such opera house or pace of amusement (In eu of the
ta mposed under paragraph (1) or (3) of subsecton (a)), a ta equvaent
to 11 10 per centum (20 per centum f paragraph (3) of subsecton (a)
woud otherwse appy) of the amount for whch a smar bo or seat s sod
for each performance or e hbton at whch the bo or seat s used or re-
served by or for the essee or hoder.
Note. The rate of ta presenty n effect on permanent use or ease of bo es
or seats s the temporary war rate of 20 per centum as provded n secton 1650
of the Interna Revenue Code, whch under the b e pres March 31, 1954.

(c) Saes Outsde o Offce.
(1) Rate. Upon tckets or cards of admsson to theaters, operas, and
other paces of amusement, sod at news stands, hotes, and paces other than
the tcket offces of such theaters, operas, or other paces of amusement, at a
prce n e cess of the sum of the estabshed prce therefor at such tcket
offces pus the amount of any ta mposed under paragraph (1) or (3) of sub-
secton (a), a ta equvaent to 11 10 per centum (20 per centum f para-
graph (3) of subsecton (a) woud otherwse appy) of the amount of such
e cess.
Note. The rate of ta presenty n effect on saes outsde bo offce s the
temporary war rate of 20 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31,1954.

(e) Ta on Cabarets, Roof Gardens, tc.
(1) Rate. ta equvaent to 5 10 per centum of a amounts pad for
admsson, refreshment, servce, or merchandse, at any roof garden, cabaret,
or other smar pace furnshng a pubc performance for proft, by or for
any patron or guest who s entted to be present durng any porton of such
performance. So ta sha be appcabe under ths paragraph on
account of an amount pad for an admsson wth respect to whch ta s
mposed under subsecton (a) (3).
Note. The rate of ta presenty n effect on cabarets, roof gardens, etc., s
the temporary war rate of 20 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31, 1954.
S C 1701. MPTIONS ROM T .
No ta sha be eved under ths subchapter n respect of
(a) Certan Regous, ducatona, or Caktau.e ntertanments,
tc.
(1) In genera. cept as provded In paragraph (2), any admssons a
the proceeds of whch nure
( ) e cusvey to the beneft of
(1) a church or a conventon or assocaton of churches
() an educatona Insttuton whch s e empt under secton
101(6) or whch s an educatona Insttuton of a government or
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potca subdvson thereof, f such organzaton normay mantans
a reguar facuty and currcuum and normay has a reguary organ-
zed body f pups or students In attendance at the pace where ts
educatona actvtes are reguary carred on
(111) a corporaton or any communty chest, fund, or foundaton
organzed and operated e cusvey for chartabe purposes, e empt
under secton 101(6), If such corporaton or organzaton Is sup-
ported, n whoe or n part, by funds contrbuted by the Unted
States or any State or potca subdvson thereof, or s prmary
supporte 1 b- contrbutons from the genera pubc
(v) a socety or organzaton conducted for the soe purpose of
mantanng symphony orchestras or operas and recevng substanta
support from vountary contrbutons
(v) an organzaton (organzed pror to October 1, 1951) whch
Is e empt under secton 101(6) and whch s operated for the pur-
pose of conductng an annua chautauqua program of educatona,
cutura, and regous actvtes at a permanent ocaton
f no part of the net earnngs thereof uurea to the beueft of any prvate
stockhoder or ndvdua
( ) e cusvey to the beneft of Natona Guard organzatons, Re-
serve offcers assocatons or organzatons, posts or organzatons of war
veterans, or au ary unts or socetes of any such posts or organzatons,
f such posts, organzatons, nnts, or socetes are organzed In the
Unted States or any of Its possessons, and If no part of ther net earn-
ngs Inures to the beneft of any prvate stockhoder or ndvdua or
(C) e cusvey to the beneft of a poce or fre department of any
cty, town, vage, or any muncpaty or e cusvey to a retrement,
penson, or dsabty fund for the soe beneft of members of such a
poce or fre department or to a fund for the hers of such members.
(2) NON MPT DMISSIONS. The e empton provded under paragraph
11 I sha not appy n the case of admssons to ( ) any athetc game or
e hbton uness the proceeds nure e cusvey to the beneft of an eementary
or secondary schoo or uness n the case of an athetc game between two
eementary or secondary schoos between teams composed of students from
eementary or secondary schoos, the entre gross proceeds from such game
nure to the beneft of a hospta for crpped chdren, ( ) wrestng matches,
prze fghts, or bo ng, sparrng, or other pugstc matches or e hbtons,
(C) carnvas, rodeos, or crcuses In whch any professona performer or
operator partcpates for compensaton, or (D) any moton pcture e hbton.
Causes ( .) and ( ) sha not appy n the case of any athetc event between
educatona nsttutons hed durng the reguar athetc season for such
event, f the proceeds therefrom nure e cusvey to the beneft of such
nsttutons.

(e) (1) OM ND G RD N Touns. ny admsson to a home or garden whch
Is temporary opened to the genera pubc as part of a program conducted by
a socety or organzaton to permt the nspecton of hstorca homes and
gardens f no part of the net earnngs thereof nures to the beneft of any prvate
stockhoder or Indvdua.
(2) ISTORIC SIT S. ny admssons to hstorc stes, houses, and shrnes,
and museums conducted In connecton therewth, mantaned and operated by
a socety or organzaton devoted to the preservaton anrt mantenance of such
hstorc stes, houses, shrnes, and museums f no part of the net earnngs thereof
nures to the beneft of any prvate stockhoder or ndvdua.
(2) ISTORIC SIT S, MUS UMS. ND PL N T IUMS. ny admsson to e
hstorc ste, house, or shrne, to a museum of hstory, art, or scence, to a pane-
tarum, or to any e hbton n connecton wth any of the foregong, operated
( ) by any State or potca subdvson thereof or by the Unted Statet or
any agency or nstrumentaty thereof f the proceeds therefrom nure e cu-
svey to the beneft of the State, potca subdvson, Unted States, agency,
or nstrumentaty, or
( ) by any socety or organsaton not organzed for proft f no part of
the net earnngs thereof nures to the beneft of any prvate stockhoder or
ndvdua.
or the purposes of subparagraph ( ), the term State ncudes aska, awa,
and the Dstrct of Coumba.
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Subchapter Dues
S C. 1710. T .
(a) Rate. There sha be eved, assessed, coected, and pad
(1) Dues or membershp tees. ta equvaent to 11 10 per centum
of any amount pad as dues or membershp fees to any soca, athetc, or
sportng cub or organzaton, f the dues or fees of an actve resdent annua
member are n e cess of 10 per year.
Note. The rate of ta presenty n effect on dues or membershp fees s the
temporary war rate of 20 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31, 1954.
(2) Intaton fees. ta equvaent to 11 20 per centum of any
amount pad as ntaton fees to such a cub or organzaton, f such fees
amount to more than 10, or f the dues or membershp fees, not ncudng
ntaton fees, of an actve resdent annua member are n e cess of 10
per year.
Note. The rate of ta presenty n effect on ntaton fees s the temporary
war rate of 20 per centum as provded n secton 1650 of the Interna Revenue
Code, whch under the b e pres March 31,1954.

C PT R 15 TO CCO, SNU , CIG RS, ND CIG R TT S
Subchapter Rate and Payment or Ta
S C. 2000. R T O T .
(c) Cgars and Cgarettes. Upon cgars and cgarettes manufactured n or
Imported nto the Unted States, whch are sod by the manufacturer or mporter,
or removed for consumpton or sae, there sha be eved, coected, and pad the
foowng ta es:

(2) Cgarettes. On cgarettes made of tobacco, or any substtute there-
for, and weghng not more than three pounds per thousand, 4 per thousand
unt pr 1, 1054 1055, and 3.50 per thousand on and after pr 1,
D954 1955
Weghng more than three pounds per thousand, 8.40 per thousand
e cept that f more than 6 nches n ength they sha be ta abe at the rate
provded n the precedng paragraph, countng each 2 nches (or fracton
thereof) of the ength of each as one cgarette.
The ta mposed by ths subsecton sha be In addton to any mport
dutes mposed upon mported cgars and cgarettes.

(g) oor Stocks Refunds on Cgarettes.
(1) In genera. Wth respect to cgarettes, weghng not more than
three pounds per thousand, upon whch the ta mposed by subsecton (c)
(2), or upon whch foor stocks ta mposed by subsecton (f), has been pad,
and whch, on pr 1, 1054 19 5, are hed by any person and ntended for
sae, or are n transt from foregn countres or nsuar possessons of the
Unted States to any person n the Unted States for sae, there sha be
credted or refunded to such person (wthout nterest), sub|ect to such regu-
atons as may be prescrbed by the Secretary, an amount equa to the df-
ference between the ta pad on such cgarettes and the ta made appcabe
to such artces on pr 1, 1054 Uoo, f cam for such credt or refund s
fed wth the Secretary pror to uy 1, 954 1955.
(2) Lmtatons on egbty fob credt, or refund. No person
sha be entted to credt or refund under paragraph (1) uness ( ) such
person, for such perod or perods both before and after pr 1, 1054 1955
(but not e tendng beyond one year thereafter), as the Secretnry sha by
reguatons prescrbe, makes and keeps, and fes wth the Secretary such
records of nventores, saes, and purchases as may be prescrbed n such
reguatons and ( ) such person estabshes to the satsfacton of the Sec-
retary, wth respect to the cgarettes for whch credt or refund s camed by
hm under ths secton, that on and after pr 1, 1954 1955, and unt the
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37G
e praton of three months thereafter, the prce at whch cgarettes of such
cass were sod (unt a number equa at east to the number on hand on pr
1, 1954 1955, were sod) refected, n such manner as the Secretary may by
reguatons prescrbe, the amount of the ta reducton.
(3) Tenatt and admnstratve procedures. provsons of aw,
ncudng penates, appcabe n respect of nterna revenue ta es on cga-
rettes sha, nsofar as appcabe and not nconsstent wth ths subsecton,
be appcabe n respect of the credts and refunds provded for n ths subsec-
ton to the same e tent as f such credts or refunds consttuted credts or
refunds of such ta es.
C PT R 20 DI S L U L SP CI L U LS
S C. 2450. T ON DI S L U L.
There s hereby mposed a ta of 2 cents a gaon upon any qud (other than
any product ta abe under secton 3412)
(1) sod by any person to an owner, essee, or other operator of a dese-
powered hghway vehce, for use as a fue n such vehce, or
(2) used by any person as a fue n a dese-powered hghway vehce
uness there was a ta abe sae of such qud under cause (1).
On and after pr 1,1954, the ta Imposed by ths secton sha be 1 cents a
gaon n eu of 2 cents a gaon.
(o) Dese ur. There s hereby mposed a ta of 2 cents a gaon upon any
qud (other than any product ta abe under secton 3412)
(1) sod by any person to an owner, essee, or other operator of a dese-
powered hghway vehce, for use as a fue n such vehce or
(2) used by any person as a fue n a dese-powered hghway vehce uness
there was a ta abe sae of such qud under paragraph (1).
(6) Speca Motor ue. There s hereby mposed a ta of 2 cents a gaon
upon benzo, benzene, naphtha, quefed petroeum gas, or any other qud {other
than kerosene, gas o, or fue o, or any product ta abe under secton t or
subsecton (a) of ths secton)
(/) sod by any person to an owner, essee, or other operator of a motor
vehce, motorboat, or arpane for use as a fue for the propuson of such
motor vehce, motorboat, or arpane or
(2) used by any person as a fue for the propuson of a motor vehce,
motorboat, or arpane uness there was a ta abe sae of such qud under
paragraph (1).
(c) Rate Reducton. On and after pr 1, 1955, the ta es mposed by ths
secton sha be y2 cents a gaon n eu of 2 cents a gaon.
S C. 2452. CR DITS ND R UNDS.
(a) Non-Ta abe Use or Sae by endee. credt aganst ta under ths
chapter, or a refund, may be aowed or made to a person In the amount of ta
pad by hm under ts chapter wth respect to hs sae of any qud to a vendee
for use as fue n a dese-powered hghway vehce, If such person estabshes, In
accordance wth reguatons prescrbed by the Secretary, that
(1) the vendee used such qud otherwse than as fue n such a vehce
or resod such qud, and
(2) such person has repad or agreed to repay the amount of such ta to
such vendee, or has obtaned the consent of the vendee to the aowance of
the credt or refund.
No nterest sha be aowed wth respect to any amount of ta credted or re-
funded under the provsons of ths subsecton.
(a) NONT L Use OR Sae Y endee. credt aganst ta under ths
chapter, or a refund, may be aowed or made to a person n the amount of ta
pad by hm under ths chapter wth respect to hs sae of any qud to a vendee
for use as fue n a dese-powered hghway vehce, or wth respect to hs sae of
benzo, benzene, naphtha, quefed petroeum gas, or any other qud to a vendee
for use as fue for the propuson of a motor vehce, motorboat, or arpane, f
such person estabshes, n accordance wth reguatons prescrbed by the Secre-
tary, t
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377
(1) ether
( ) the vendee used, such qud otherwse than as fue n such a
vehce, motorboat, or arpane or resod such qud or
( ) such qud teas used or teas resod for use for any of the purposes,
hut sub|ect to the condtons, provded n secton 3451 and
(2) such person has repad or agreed to repay the amount of such ta to
such vendee, or has obtaned the consent of the vendee to the aowance of the
credt or refund.
No nterest sha be aowed wth respect to any amount of ta credted or re-
funded under the provsons of ths subsecton.
S C. 2453. T - R S L S.
Under reguatons prescrbed by the Secretary, no ta under ths chapter sha
be mposed wth respect to I he sae of any qud for the e cusve use of any
State, Terrtory of the Unted States, or any potca subdvson of the foregong,
or the Dstrct of Coumba, or wth respect to the use by any of the foregong
of any qud as fue n a dese-powered hghway vehce. cohered by ths
chapter.

S C. MS6. MPTION O SP CI L MOTOR U LS US D OR C R-
T IN SS LS.
The e empton from ta under chapter S9 provded n secton 3451 sha aso
appy to the ta mposed under secton 2450(b).
C PT R 25 IR RMS
Subchapter Pstos and Revovers
S C. 2700. T .
(a) Rate. There sha be eved, assessed, coected, and pad upon pstos
and revovers sod or eased by the manufacturer, producer, or Importer, a ta
equvaent to 10 per centum of the prce for whch so sod or eased.
C PT R 20 LI UOR
Subchapter Dsted Sprts
P RT I PRO ISIONS R L TING TO T
S C. 2800. T .
(a) Rate.
(1) Dsted sprts generay. There sha be eved and coected on
a dsted sprts n bond or produced n or mported nto the Unted States
an nterna revenue ta at the rate of 10.50 on each proof gaon or wne
gaon when beow proof and a proportonate ta at a ke rate on a frac-
tona parts of such proof or wne gaon, to be pad by the dster or m-
porter when wthdrawn from bond. On and after pr 1, 1954 1955, the
rate of ta mposed by ths paragraph sha be 9 In eu of 10.50.

(3) Imported perfumes contanng dsted sprts. There sha be
eved and coected upon a perfumes mported nto the Unted States con-
tanng dsted sprts, a ta of 10.50 per wne gaon, and a proportonate
ta at a ke rate on a fractona parts of such wne gaon. Such ta sha
be coected by the coector of customs and deposted as nterna revenue
coectons, under such rues and reguatons as the Commssoner, wth the
approva of the Secretary, may prescrbe. On and after pr 1, 1954 1955,
the rate of ta mposed by ths paragraph sha be 9 n eu of 10.50.
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378
SU C PT WN S
S C. 3030. T .
(a) R T .
(1) STILL WIN S.
( ) Imposton. Upon a st wnes, ncudng vermouth, and a
artfca or mtaton wnes or compounds sod as st wne, produced n
or mported nto the Unted States on or after the effectve date of sec-
ton 452(a) of the Revenue ct of 1951, or whch on such date were
on any wnery premses or other bonded premses or n transt thereto
or at any customhouse, there sha be eved, coected, and pad ta es
at rates as foows, when sod, or removed for consumpton or sae:
On wnes contanng not more than 14 per centum of absoute acoho,
14 cents per wne-gaon, the per centum of acoho under ths secton to
be reckoned by voume and not by weght, e cept that on and after
pr 1, 1054 1955, the rate sha be 15 cents per wne-gaon
On wnes contanng more than 14 per centum and not e ceedng
21 per centum of absoute acoho, 67 cents per wne-gaon, e cept that
on and after pr 1, 1954 1955, the rate sha be 60 cents per wne-
gaon
On wnes contanng more than 21 per centum and not e ceedng 24
per centum of absoute acoho, 2.25 per wne-gaon, e cept that on
and after pr 1, 1954 1955, the rate sha be 2 per wne-gaon
such wnes contanng more than 24 per centum of absoute acoho
by voume sha be cassed as dsted sprts and sha pay ta accord-
ngy.
ny such wnes may, under such reguatons as the Commssoner
may prescrbe, wth the approva of the Secretary, be sod or removed
ta -free for the manufacture of vnegar, or for the producton of deaeo-
hozed wnes contanng ess than one-haf of 1 per centum of acoho
by voume.
The ta es mposed by ths subparagraph ( ) of ths paragraph sha
not appy to deacohozed wnes contanng ess than one-haf of 1 per
centum of acoho by voume nor, sub|ect to reguatons prescrbed by
the Commssoner, wth the approva of the Secretary, to wnes produced
for the famy use of the duy regstered producer thereof and not sod
or otherwse removed from the pace of manufacture and not e ceedng
n any case two hundred gaons per year.

(2) SP R LING WIN S, LI U URS, ND CORDI LS. Upon the foowng
artces whch are produced In or mported nto the Unted States, on or
after the effectve date of secton 452(a) of the Revenue ct of 1951, or
whch on such date are on any wnery premses or other bonded premses or
n transt thereto or at any customhouse, there sha be eved, coected, and
pad, n eu of the nterna-revenue ta es mposed thereon by aw pror to
such date, ta es at rates as foows, when sod, or removed for consumpton
or sae:
On each botte or other contaner of champagne or sparkng wne, 17 cents
on each one-haf pnt or fracton thereof, e cept that on and after pr 1,
1954 1955, the rate sha be 15 cents on each one-haf pnt or fracton
thereof
On each botte or other contaner of artfcay carbonated wne, 12 cents
on each one-haf pnt or fracton thereof, e cept that on and after pr 1,
1954 955, the rate sha be 10 cents on each one-haf pnt or fracton
thereof
On each botte or other contaner of queurs, cordas, or smar com-
pounds, by whatever name sod or offered for sae, contanng sweet wne,
ctrus-frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune
wne, pum wne, pear wne, pawpaw wnes, papaya wnes, pneappe wnes,
cantaoup wnes, or appe wne, fortfed, respectvey, wth grape brandy,
ctrus-frut brandy, peach brandy, cherry brandy, berry brandy, aprcot
brandy, prune brandy, pum brandy, pear brandy, pawpaw brandy, papaya
brandy, pneappe brandy, cantaoup brandy, or appe brandy, 12 cents on
each one-haf pnt or fracton thereof, e cept that on and after pr 1, 1954
1955, the rate sha be 10 cents on each one-haf pnt or fracton thereof
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379
ny of the foregong artces contanng more than 24 per centum of
absoute acoho by voume (e cept vermouth, queurs, cordas, and smar
compounds made In rectfyng pants and contanng ta -pad sweet wne,
ctrus-frut wne, peach wne, cherry wne, berry wne, aprcot wne, prune
wne, pum wne, pear wne, pawpaw wnes, papaya wnes, pneappe wnes,
cantaoup wnes, or appe wne, fortfed, respectvey wth grape brandy,
ctrus-frut brandy, peach brandy, cherry brandy, berry brandy, aprcot
brandy, prune brandy, pum brandy, pear brandy, pawpaw brandy, papaya
brandy, pneappe brandy, cantaoup brandy, or appe brandy) sha be
cassed as dsted sprts and sha be ta ed accordngy.
The Commssoner, under reguatons prescrbed by hm, wth the approva
of the Secretary, s authorzed to remt, refund, and pay back the amount
of a ta es on such queurs, cordas, and smar compounds pad by or
assessed aganst rectfers at the dsted sprts rate pror to une 26,1036.
SU C PT R D RM NT D LI UORS
S C. 3150. T .
(a) R T . There sha be eved and coected on a beer, ager beer, ae,
porter, and other smar fermented quor, contanng one-haf of 1 per centum,
or more, of acoho, brewed or manufactured and sod, or removed for consump-
ton or sae, wthn the Unted States, or mported nto the Unted States, by
whatever name such quors may be caed, a ta of 9 for every barre contanng
not more than thrty-one gaons, and at a ke rate for any other quantty or for
the fractona parts of a barre authorzed and defned by aw. On and after
pr 1, 1954 1955, the ta mposed by the precedng sentence sha be at the
rate of 8 n eu of 9. In estmatng and computng such ta , the fractona
parts of a barre sha be haves, thrds, quarters, s ths, and eghths and auy
fractona part of a barre, contanng ess than one-eghth, sha be accounted
one-eghth more than one-eghth, and not more than one-s th, sha be accounted
one-s th more than one-s th, and not more than one-fourth, sha be accounted
one-fourth more than one-fourth, and not more than one-thrd, sha be accounted
one-thrd more than one-thrd, and not more than one-haf, sha be accounted
one-haf more than one-haf, and not more than one barre, sha be accounted
one barre and more than one barre, and not more than s ty-three gaons,
sha be accounted two barres, or a hogshead.
The provsons of ths secton requrng the accountng of hogsheads, barres,
and fractona parts of barres at the ne t hgher quantty sha not appy where
the contents of such hogsheads, barres, or fractona parts of barres are wthn
the mts of toerance estabshed by the Commssoner by reguatons whch he
hereby authorzed to prescrbe wth the approva of the Secretary and no
assessment sha be made and no ta sha he coected for any e cess n any case
where the contents of the hogsheads, barres, or fractona parts of barres here-
tofore or hereafter used are wthn the mts of the toerance so prescrbed.

C PT R 27 OCCUP TION L T S
SU C PT SP CI L PRO ISIONS
P RT II LI UO
S C. S250. T .

(1) M NU CTUR RS O P ODTTC S O D SIGN T D NON R G PRODUCTS.

(5) DR W C . In the case of dsted sprts ta -pad and used as
provded n ths subsecton, a drawback sha be aowed
( ) at the rate ot 8 on each proof gaon upon whch ta s pad at a
rate of 9 per proof gaon pror to the effectve date of secton 462 of
the Revenue ct ot 1951,
( ) at the rate of 9.50 on each proof gaon upon whch ta s pad at
a rate of 10.50 per proof gaon on and after the effectve date of secton
462 of the Revenue ct of 1 O, and
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380
( ( ) at the nte of 8 on each proof gaon upon whch ta s pad at
a rate of 9 per proof gaon after March 31, 1934 1955.
Such drawback sha be due and payabe quartery upon fng of a proper
cam wth the Secretary. No cam under ths subsecton sha be aowed
uness fed wth the Secretary wthn the three months ne t succeedng the
quarter for whch the drawback s camed.

P RI OWLING LL YS, ND ILLI RD ND POOL T L S
S C. 3268. T ON OWLING LL YS, ND ILLI RD ND POOL
T L S.
(a) IIate. very person who operates a bowng aey, bard room, or poo
room sha pay a speca ta of 10 20 per year for each bowng aey, bard
tabe, or poo tabe. very budng or pace where bows are thrown or where
games of bards or poo are payed, e cept n prvate homes, sha be regarded
as a bowng aey, bard room, or poo room, respectvey. No ta sha be
mposed under ths secton wth respect to a bard tabe or poo tabe n a hos-
pta f no charge Is made for the use of such tabe. The ta mposed under ths
secton sha not appy for any perod begnnng after une 30,-1952, wth respect
to any bowng aey, bard tabe, or poo tabe mantaned e cusvey for the
use of members of the rmed orces on any property owned, reserved, or used by,
or otherwse acqured for the use of, the Unted States f no charge s made for
ther use.
Note. The rate of ta presenty fn effect on bowng aeys and bard and
poo tabes s the temporary war rate of 20 as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31, 1954.
.
C PT R 29 M NU CTUR RS CIS ND IMPORT T S
Subchapter Manufacturers cse Ta es
S C. 3403. T ON UTOMO IL S, TC.
There sha be mposed upon the foowng artces sod by the manufacturer,
producer, or mporter, a ta equvaent to the foowng percentages of the prce
for whch so sod:
(a) utomobe truck chasss, automobe truck bodes, automobe bus chasss,
automobe bus bodes, truck and bus traer and semtraer chasss, truck and
bus traer and semtraer bodes, tractors of the knd chefy used for hghway
transportaton n combnaton wth a traer or semtraer (ncudng n each of
the above cases parts or accessores therefor sod on or n connecton therewth
or wth the sae thereof), 8 per centum, e cept that on and after pr 1, 1954
1955, the rate sha be 5 per centum. sae of an automobe truck, bus, truck
or bus traer or semtraer sha, for the purposes of ths subsecton, be consd-
ered to be a sae of the chasss and of the body.
(b) Other Chasss and odes, tc. Other automobe chasss and bodes,
chasss and bodes for traers and semtraers (other than house traers) sut-
abe for use n connecton wth passenger automobes, and motorcyces (ncudng
n each case parts or accessores therefor sod on or n connecton therewth or
wth the sae thereof), e cept tractors, 10 per centum, e cept that on and after
pr 1, 1954 1955, the rate sha be 7 per centum. sae of an automobe,
traer, or semtraer sha, for the purposes of ths subsecton, be consdered to
be a sae of the chasss and of the body.
(c) Parts or accessores (other than tres and nner tubes and other than rado
and teevson recevng sets) for any of the nrtces enumerated n subsecton (a)
or (b), 8 per centum, e cept that on and after pr 1, 1954 1955, the rate
sha be 5 per centum. or the purposes of ths subsecton and subsectons
(a) and (b), spark pugs, storage batteres, eaf sprngs, cos, tmers, and tre
chans, whch are sutabe for use on or n connecton wth, or as component
parts of, any of the artces enumerated n subsecton (a) or (b), sha be con-
sdered pans or accessores for such artces, whether or not prmary adapted
for such use. Ths subsecton sha not appy to chasss or bodes for automobe
trucks or other automobes. Under reguatons prescrbed by the Comms-
soner, wth the approva of the Secretary, the ta under ths subsecton sha not
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381
appy n the case of saes of parts or accessores by the manufacturer, producer,
or Importer to a manufacturer or producer of any of the artces enumerated n
subsecton (a) or (b). If any such parts or accessores are resod by such vendee
otherwse than on or n connecton wth, or wth the sae of, an artce enumer-
ated n subsecton (a) or (b) and manufactured or produced by such vendee,
then for the purposes of ths secton the vendee sha be consdered the manufac-
turer or producer of the parts or accessores so resod. In determnng the sae
prce of a rebut automobe part or accessory there sha be e cuded from the
prce, n accordance wth reguatons prescrbed by the Secretary, the vaue of a
ke part or accessory accepted In e change.
.
(/) oor Stocks Refunds.
(1) Where before pr 1, 1955, any artce sub|ect to the ta mposed by
subsecton (a) or (b) has been sod by the manufacturer, producer, or m-
porter, and s on such date hed by a deaer and has not been used and s n-
tended for sae, there sha be credted or refunded (wthout nterest) to the
manufacturer, producer, or mporter an amount equa to the dfference be-
tween the ta pad by such manufacturer, producer, or mporter on hs sae
of the artce and the amount of ta made appcabe to such artce on and
after pr 1,1955.
(2) s used n ths subsecton, the term deaer ncudes a whoesaer,
|obber, dstrbutor, or retaer. or the purposes of ths subsecton, an ar-
tce sha be consdered as hed by a deaer f tte thereto has passed to
such deaer (whether or not devery to hm has been made), and f for
purposes of consumpton tte to such artce or possesson thereof has not
at any tme been transferred to any person other than a deaer.
(S) Under reguatons prescrbed by the Secretary, the refund provded by
ths subsecton may be made to the deaer nstead of the manufacturer, pro-
ducer, or mporter, f the manufacturer, producer, or mporter waves any
cam for the amount so to be refunded.
(4) When the credt or refund provded for n ths subsecton has been
aowed to the manufacturer, producer, or mporter, he sha remt to the
deaer to whom was sod the artce n respect of chch the credt or refund
was aowed so much of that amount of the ta correspondng to the credt
or refund as was ncuded n or added to the prce pad or agreed to be pad
by the deaer.
(5) o person sha be entted to credt or refund under ths subsecton
uness ( ) he has n hs possesson such evdence of the nventores wth
respect to whch the credt or refund s camed as may be requred by regu-
atons prescrbed under ths subsecton, and (II) cam for such credt or
refund s fed wth the Secretary before uy 1,1955.
(6) provsons of ac, ncudng penates, appcabe n respect of the
ta mposed under subsectons (a) and (b) sha, nsofar as appcabe and
not nconsstent wth ths subsecton, be appcabe n respect of the credts
and refunds provded for n ths subsecton.
S C. 3406. CIS T S IMPOS D Y T R NU CT O 1941.
(a) Imposton. There sha be mposed on the foowng artces, sod by the
manufacturer, producer, or mporter, a ta equvaent to the rate, on the prce for
whch sod, set forth n the foowng paragraphs (ncudng n each case parts or
accessores of such artces sod on or n connecton therewth, or wth the sae
thereof) :
(1) Spoutng goods. admnton nets badmnton rackets (measurng 22
nches over a or more n ength) badmnton racket frames (measurng 22
nches over a or more n ength) badmnton racket strng badmnton
shuttecocks badmnton standards bard and poo tabes (measurng 45
Inches over a or more n ength) : bard and poo bas and cues for such
tabes bowng bas and pns cay pgeons and traps for throwng cay
pgeons crcket bas crcket bats croquet bas and maets curng stones
deck tenns rngs, nets, and posts gof bags (measurng 2(5 nches or more n
ength) gof has gof cubs (measurng 30 nches or more n ength)
acrosse bas acrosse stcks poo bas poo maets: sks sk poes snow
shoes snow toboggans and seds (measurng more than (O nches over a n
815359 84 25
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382
ength) squash bas squash rackets (measurng 22 nches over a or more
n ength) squash racket frames (measurng 22 nches over a or more In
ength) squash racket strng tabe tenns tabes, bas, nets, and paddes
tenns bas tenns nets tenns rackets (measurng 22 nches over a or
more n ength) tenns racket frames (measurng 22 nches over a or more
n ength) tenns racket strng 15 per centum, e cept that on and after
pr 1,11)54, the rate sha be 10 per centum fshng rods, crees, rees, and
artfca ures, bats, and fes 10 per centum.
.
(4) Photographc apparatus. Cameras and cnmera enses, and une -
posed photographc fm n ros (ncudng moton pcture fm), 20 10 per
centum. The ta mposed under ths paragraph sha not appy to -ray
cameras, to cameras weghng more than four pounds e cusve of ens and
accessores, to st camera enses havng a foca ength of more than one
bunded and twenty mmeters, to moton pcture cameras enses havng a
foca ength of more than thrty mmeters, to -ray fm, to unperforated
mcrofm, to fm more than one hundred and ffty feet n ength, or to fm
more than twenty-fve feet n ength and more than thrty mmeters n
wdth. ny person who acqures une posed photographc fm not sub|ect
to tn under ths paragraph and ses such une posed fm n form and dmen-
sons sub|ect to ta hereunder (or n connecton wth a sae cuts such fm
to form and dmensons sub|ect to tn hereunder) sha for the purposes of
ths subsecton be consdered the manufacturer of the fm so sod by hm.

(10) ectrc ght bubs and tubes. ectrc ght bubs and tubes,
not ncudng artces ta abe under any other provson of ths subchapter,
5 10 per centum.
Note. The rate of ta presenty n effect on eectrc ght bubs and tubes s
the temporary war rate of 20 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31, 1954.
S C. 3407. T ON IR RMS, S LLS, ND C RTRIDG S.
There sha be mposed upon frearms, shes, and cartrdges, sod by the man-
ufacturer, producer, or mporter, a ta equvaent to 11 10 per centum of the
prce for whch so sod. The ta mposed by ths secton sha not appy (1) to
artces sod for the use of any State, Terrtory of the Unted States, or potca
subdvson thereof, or the Dstrct of Coumba, or (2) to pstos and revovers.
The ta es mposed by ths secton sha not appy to any frearm on whch the
ta provded by secton 2720 has been pad.
The provsons of secton 3452 (reatng to e praton of ta es) sha not appy
to the ta mposed by ths secton.
S C. 3408. T ON M C NIC L P NCILS, OUNT IN ND LL-
POINT P NS, ND M C NIC L LIG T RS OR CIG R TT S,
CIG RS, ND PIP S.
(a) Imposton of Ta . There sha be Imposed on the foowng artces,
sod by the manufacturer, producer, or mporter, a ta equa to 15 10 per
centum of the prce for whch so sod : Mechanca pencs, fountan pens, and ba-
pont pens mechanca ghters for cgarettes, cgars, and ppes.

S C. 3409. T ON M TC S.
(a) Manufacturers Ta . There sha be Imposed upon matches sod by
the manufacturer, producer, or mporter, a ta of 2 cents per 1,000 matches
but not more than 10 per centum of the prce for whch so sod, e cept that n the
case of fancy wooden matches and wooden matches havng a staned, dyed, or
coored stck or stem, packed n bo es or n buk, the ta sha be 5 cents per
1,000 matches.
S C. 3412. T ON G SOLIN .
(a) There sha be mposed on gasone sod by the producer or mporter thereof,
or by any producer of gasone, a ta of 2 cents a gaon, e cept that under regua-
tons prescrbed by the Commssoner, wth the approva of the Secretary, the ta
sha not appy n the case of saes to a producer of gasone. On and after pr
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1, 10 3 1S55, the ta mposed by ths secton sha be 1 cents a gaon n
eu of 2 cents a gaon.
(b) If a producer or mporter uses (otherwse than n the producton of gaso-
ne) gasone sod to hn free of ta , or produced or mported by hm, such use
sha for the purposes of ths chapter be consdered a sae. ny person to whom
gasone s sod ta -free under ths secton sha be consdered the producer of
such gasone.
(c) s used n thU secton
(1) the term producer ncudes a refner, compounder, or bender, and
a deaer seng gasone e cusvey to producers of gasone, as we as a
producer.
(2) the term gasone means ( ) a products commony or commercay
known or sod as gasone (ncudng casnghead and natura gasone) , ben-
zo, benzene, or naptha, regardess of ther cassfcatons or uses and ( )
any other qud of a knd prepared, advertsed, offered for sae or sod for
use as, or used as, a fue for the propuson of motor vehces, motorboats, or
arpanes e cept that t does not ncude any of the foregong (other than
products commony or commercay known or sod as gasone) sod for use
otherwse than as a fue for the propuson of motor vehces, motorboats,
or arpanes, and otherwse than n the manufacture or producton of such
fue, and does not ncude kerosene, gas o, or fue o .
(d) very person sub|ect to ta under ths secton or secton 3413 sha, before
ncurrng any abty for ta under such sectons regster wth the coector for
the dstrct n whch Is ocated hs prncpa pace of busness (or, f he has no
prncpa pace of busness n the Unted States, wth the coector at atmore,
Maryand) and sha gve a bond, to be approved by such coector, condtoned
that he sha not engage n any attempt, by hmsef or by couson wth others,
to defraud the Unted States of any ta under such sectons that he sha render
truy and competey a returns, statements, and nventores requred by aw or
reguatons n pursuance thereof and sha pay a ta es due under such sectons
and that he sha compy wth a requrements of aw and reguatons n pur-
suance thereof wth respect to ta under such sectons. Such bond sha be n
such fum as the coector may requre n accordance wth reguatons prescrbed
by the Commssoner, wth the approva of the Secretary, but not ess than 2,000.
The coector may from tme to tme requre new or addtona bond n accord-
ance wth ths subsecton. very person who fas to regster or gve bond as
requred by ths subsecton, or who n connecton wth any purchase of gasone
or ubrcatng o fasey represents hmsef to be regstered and bonded as pro-
vded by ths subsecton, or who wfuy makes any fase statement n an app-
caton for regstraton under ths subsecton, sha upon convcton thereof be
fned not more than 5,000 or mprsoned not more than fve years, or both,
together wth the costs of prosecuton. If the Commssoner fnds that any
manufacturer or producer has at any tme evaded any edera ta on gasone or
ubrcatng o, he may revoke the regstraton of such manufacturer or producer,
and no sae to, or for resae to, such manufacturer or producer thereafter sha
be ta -free under secton 3413, ths secton, or secton 3442, but such manufac-
turer or producer sha not be reeved of the requrement of gvng bond under
ths subsecton.
(e) Under reguatons prescrbed by the Commssoner wth the approva of
the Secretary, records requred to be kept wth respect to ta es under secton 3413,
or ths secton, and returns, reports, and statements wth respect to such ta es
fed wth the Commss mer or a coector, sha be open to nspecton by such
offcers of any State or Terrtory or potca subdvson thereof or the Dstrct
of Coumba as sha be charged wth the enforcement or coecton of any ta on
gasone or ubrcatng os. The Commssoner and each coector sha furnsh
to any of such offcers, upon wrtten request, certfed copes of any such state-
ments, reports, or returns fed n hs offce upon the payment of a fee of 1 for
each one hundred words or fracton thereof n the copy or copes requested.
(f) 1051 oor Stocks Ta . On gasone sub|ect to ta under ths secton
whch, on the effectve date of secton 48 ) (a) of the Revenue ct of 1951, s hed
and ntended for sae, there sha be eved, assessed, coected, and pad a foor
stocks ta at the rate of / cent per gaon. The ta sha not appy to gasone
n reta stocks hed at tt pace where ntended to be sod at reta, nor to gasone
hed for sae by a producer or mporter of gasone. The provsons of secton 3443
sha be appcabe to the foor stocks ta mposed by ths subsecton so as to
entte, sub|ect to a tae provsons of such secton, (1) any manufacturer or pro-
ducer to a refund or credt of such ta under snbsecton (a) (1) of such secton.
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and (2) any peraoa payng such foor stocks ta to a refund or credt thereof
where gasone Is by such person or any other person used or resod for any of
the purposes specfed In subparagraphs ( ) (1), (11), and (111) of subsecton
(a) (3) of such secton,
(g) LOOR STOC S R UNDS ON G SOLIN .
(1) IN G N R L. Wth respect to any gasone ta abe under tbs secton,
upon whch ta (ncudng foor stocks ta ) at the appcabe rate has been
pad, and whch, on pr 1, 1954 7955, s hed and Intended for sae by any
person, there sha be credted or refunded (wthout nterest) to the producer
or mporter who pad the ta , sub|ect to such reguatons as may be prescrbed
by the Secretary, an amount equa to so much of the dfference between the
ta so pad and the amount of ta made appcabe to such gasone on and
after pr 1. 1054 1955, as has been pad by such producer or Importer to
such person as rembursement for the ta reducton on such gasone, f cam
for such credt or refund s fed wth the Secretary pror to uy 1, 1954
1955. No credt or refund sha be aowabe under ths subsecton wth re-
spect to gasone In reta stocks hed at the pace where ntended to be sod at
reta, nor wth respect to gasone hed for sae by a producer or mporter of
gasone.
(2) LIMIT TION ON LIGI ILITY O CR DIT OR R T ND. No producer or
Importer sha be entted to a credt or refund under paragraph (1) uness he
has n hs possesson satsfactory evdence of the Inventores wth respect to
whch he has made the rembursements descrbed In such paragraph, and
estabshes to the satsfacton of the Secretary wth respect to the quantty
of gasone as to whch credt or refund s camed under such paragraph, that
on or after pr 1, 1954 7955, such quantty of gasone was sod to the
utmate consumer at a prce whch refected the amonnt of the ta redacton.
(3) P LTT ND DMINISTR TI P OC DU S. provsons of aw,
ncudng penates, appcabe n respect of the ta mposed under ths secton
sha, Insofar as appcabe and not nconsstent wth ths subsecton, be ap-
pcabe In respect of the credts and refunds provded for n ths subsecton to
the same e tent as f such credts or refunds consttuted credts or refunds
of such ta es.
S C. 3413. T ON LU RIC TING OILS.
There sha be mposed upon ubrcatng os sod In the Unted States by
the manufacturer or producer a ta at the rate of 6 cents a gaon (e cept that, n
the case of cuttng os, the ta sha not e ceed 10 per centum of the prce /or
whch to sod), to be pad by the manufacturer or producer. very person abe
for ta under ths secton sha regster and fe bond as provded n secton
3412 (d). Under reguatons prescrbed by the Commssoner wth the approva
of the Secretary, no ta sha be Imposed under ths secton upon ubrcatng os
god to a manufacturer or producer of ubrcatng os for resae by hm, but for
the purposes of ths chapter such vendee sha be consdered the manufacturer or
producer of such ubrcatng os. or the purposes of ths secton, the term
cuttng os means os nsed prmary n cuttng and machnng operatons on
metas and known commercay as cuttng os.

SU C PT C G N R L DMINISTR TI PRO ISIONS
S C. 3443. CR DITS ND R UNDS.
(a) credt aganst ta under ths chapter, or a refund, may be aowed or
made

(3) to a manufacturer, producer, or mporter, n the amount of ta pad
by hm under ths chapter wth respect to the sae of any artce to any
vendee, f the manufacturer, producer, or mporter has n hs possesson such
evdence as the reguatons may prescrbe that
( ) such artce was, by any person
(1) resod for the e cusve use of any State, Terrtory of the
Unted States, or any potca subdvson of the foregong, or the
Dstrct of Coumba, or, n te case of musca nstruments embraced
n secton 3404(d), resod for the use of any regous or nonproft
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educatona nsttuton for e cusvey regous or educatona pur-
poses
(11) used or resod for use for any of the purposes, but sub|ect
to the condtons, provded n secton 3451
( I) n the cage of products embraced n paragraph (2) of
secton 3412(c) used or resod for use otherwse than as fue for
the propuson of motor vehces, motor boats, or arpanes, and
otherwse than n the producton of such fue: Provded, however,
That no credt or refund sha be aowed or made under ths para-
graph n the case of saes or uses of products commony or com-
mercay known or sod as gasone, ncudng casngbead and
natura gasone
t(v) ( ) n the case of ubrcatng os, used or resod for
nonubrcatng purposes.
(v) (v) n the case of une posed moton pcture fms, used or
resod for use n the makng of news ree moton pcture fms
C(v) ( ) n the case of artces ta abe under secton 3403(c)
(other than spark pugs, storage batteres, eaf sprngs, cos, tmers,
and tre chans), used or resod for use as repar or repacement
parts or accessores for farm equpment (other than equpment
ta abe under subsecton (a) or (b) of secton 3403)
(v) ( ) In the case of a communcaton, detecton, or navga-
ton recever of the type used n commerca, mtary, or marne
Instaatons, resod to the Unted States for ts e cusve use.

C PT R 30 TR NSPORT TION ND COMMUNIC TION

SU C PT T L GR P , T L P ON , R DIO, ND C L CILITI S
S C. 8465. IMPOSITION ND R T O T .
(a) There sha be mposed:
(1) T L P ON ND T I O P , TC.
( ) On the amount pad wthn the Unted States for each teephone
or rado teephone message or conversaton for whch the to charge s
more than 24 cents, a ta equa to 203 10 per centum of the amount so
pad. If a b s rendered the ta payer for the servces descrbed n ths
subparagraph, the amount upon whch the ta sha be based sha be
the sum of a such charges ncuded n the b, and the ta sha not be
based upon the charge for each tem, separatey, ncuded n the b.
Note. The rate of ta presenty n effect on ong dstance teephone messages
s the temporary war rate of 25 per centum as provded n secton 1650 of the
Interna Revenue Code, whch under the b e pres March 31, 1954.
( ) On the amount pad wthn the T nted States for each teegraph,
cabe, or rado dspatch or message a ta equa to 15 per centum of the
amount so pad, e cept that n the case of each nternatona teegraph,
cabe, or rado dspatch or message the rate sha be 10 per centum 10
per centum of the amount so pad. If a b s rendered the ta payer for
the servces descrbed n ths subpa-at raph, the amount upon whch the
ta at each of the rates n ths subparagraph sha be based sha be the
sum of a such charges at that rate ncuded n the h, and the ta
sha not be based upon the charge for each tem, separatey, Incuded
n the b.
If the ta under subparagraph ( ) or ( ) s pad by nsertng cons n con-
operated teephones, the ta sha be computed to the nearest mutpe of 5
cents, e cept that where the ta s mdway between mutpes of 5 cents, the
ne t hgher mutpe sha appy. Ony one payment of a ta mposed by
snbparagraph ( ) or ( ) sha be requred notwthstandng the nes or sta-
tons of one or more persons are used n the transmsson of such dspatch,
mess-age, or conversaton.
(2) L S D WI S, TC.
( ) ta equvaent to 15 10 per centum of the amount pad for
eased wre, teetypewrter, or takng crcut speca servce, but not
ncudng an amount pad for eased wre, teetypewrter, or takng cr-
cut speca servce used e cusvey In renderng a servce ta abe under
subparagraph ( ).
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386
Note. The rate of ta presenty n effect on eased wres, etc., s the temporary
war rate of 25 per centum as provded n secton 1650 of the Interna Revenue
Code, whch under the b e pres March 31,1954.
( ) ta equvaent to 5 8 per centum of the amount pad for
any wre and equpment servce (Incudng stock quotaton and Informa-
ton servces, burgar aarm or fre aarm servce, and a other smar
servces, but not ncudng servce descrbed n subparagraph ( )).
The ta sha appy under ths paragraph whether or not the wres or servces
are wthn a oca e change area.
Note. The rate of ta presenty n effect on wre and equpment servce s the
temporary war rate of 8 per centum as provded n secton 1650 of the Interna
Revenue Code, whch under the b e pres March 31, 1954.
CIS T R DUCTION CT O 1954
ouse of Representatve eport No. 1446, ghty-thrd Congress, Second Sesson
March 29, 1954
Mr. eed of New York, from the commttee of conference, submtted the
foowng conference report to accompany . R. 8224 :
The commttee of conference on the dsagreeng votes of the two ouses on
the amendments of the Senate to the b ( . R. 8224) to reduce e cse ta es,
and for other purposes, havng met, after fu and free conference, have agreed
to recommend and do recommend to ther respectve ouses as foows:
That the Senate recede from ts amendments numbered 1, 2, 4, 21, 22, 23, 24,
20, 27, 28, 29, 32, 33, 34, 37, 38, and 39.
That the ouse recede from ts dsagreement to the amendments of the Senate
numbered 3, 5, 8, 9, 10, 12, 13, 15, 16, 17, 20, 25, 30, 31, 35, 30, 40, 41, 42, 43, 46,
47,48, 49, 50, 51, 52, 53, and 54 and agree to the same.
mendment numbered 6:
That the ouse recede from Its dsagreement to the amendment of the Senate
numbered 6, and agree to the same wth an amendment as foows:
In eu of the matter proposed to be nserted by the Senate amendment Insert
the foowng:
(/) MPTION O DMssONSO TYC NTSORL SS Secton 1700 (a)
(1) (reatng to rate of ta on snge or season tckets and subscrptons) t
hereby amended by strkng out e second sentence thereof and nsertng n eu
thereof the foowng: o ta sha be mposed under ths paragraph on the
amount pad for admsson
( ) f the amount pad for admsson s 50 cents or ess, or
(It) n the case of a season tcket or subscrpton, f the amount whch
woud be charged to the hoder or subscrber for a snge admsson f 50
cents or ess.
nd the Senate agree to the same
mendment numbered 7:
That the ouse recede from ts dsagreement to the amendment of the Senate
numbered 7, and agree to the same wth an amendment as foows:
On page 3, of the Senate engrossed amendments, strke out nes 10 through.
22, ncusve, and nsert:
subsecton (a) appes) .
(4) The ust sentence of secton ITOO(e) (1) (reatng to ta on cabarets,
roof gardens, etc.) s hereby amended by strkng out subsecton (a) (1)
and nsertng n eu thereof paragraph (1) or (3) of subsecton (a) .
nd the Senate agree to the same.
mendment numbered 11:
That the ouse recede from Its dsagreement to the amendment of the Senate
numbered 11. and agrco to the same wth amendments as foows:
On ase 5, ne 10, of the Senate engrossed amendments, strke out Cvc
and nsert Certan mntevr
O pge C, of the Senate engrossed amendments, strke out nes 1 through
5, ncusve, and nsert:
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387
(f) Certan matk Theater Performances. ny admsson to on
amateur performance presented and performed by a cvc or communty theater
group or organzaton f no part of the net earnngs thereof nures to the bene-
ft of any prvate stockhoder or ndvdua.
nd the Senate agree to the same.
mendment numbered 14:
That the ouse recede from Its dsagreement to the amendment of the Senate
numbered 14, and agree to the same wth an amendment as foows:
In eu of the matter proposed to be nserted by the Senate amendment nsert
the foowng:
The amendments made by secton SOI (other than subsecton (b) thereof)
sha appy ony wth respect to amounts pad for admssons on or after pr
1, 1954. In addton, such amendments sha appy
(1) n the case of any season tcket or subscrpton, ony f a the adms-
sons under euch tcket or subscrpton can occur ony on or after pr 1,
1954 and
(2) n the case of the permanent use of a bo or scat or a ease for the
use of such bo or seat, ony f a the performances or e hbtons at whch
the bo or seat s used or reserved by or for the essee or hoder can occur
ony on or after pr 1, 1954.
The amendment made by subsecton (6) sha appy ony wth respect to amounts
pad on or after pr 1,1954, for admssons on or after such date.
nd the Senate agree to the same.
mendment numbered 18:
That the ouse recade from ts dsagreement to the amendment of the Senate
numbered IS, and agree to the same wth an amendment as foows:
On page 7, ne 21, of the Senate engrossed amendments, after machnng
operatons , nsert (ncudng forgng, drawng, rong, shearng, punchng, and
stampng) and the Senate agree to the same.
mendment numbered 19:
That the ouse recede from ts dsagreement to the amendment of the Senate
numbered 19, and agree to the same wth amendments as foows:
egnnng on page 8, ne 25, of the Senate engrossed amendments, strke out
s hed on such date and nsert on such date s hed
On page 9, ne 4, of the Senate engrossed amendments, strke out one-haf
and nsert the dffecnce between
On page 9, ne 5, of the Senate engrossed amendments, strke out artce,
and nsert artce and the ta made appcabe to such artce on and after pr
, 1954,
On page 10, ne 6, of the Senate engrossed amendments, after secton , nsert
to the same e tent as f such credts or refunds consttuted credts or refunds
of such ta es
nd the Senate agree to the same.
mendment numbered 44:
That the ouse recede from ts dsagreement to the amendment of the Senate
numbered 44, and agree to the same wth an amendment as foows:
In eu of the matter proposed to be nserted by the Senate amendment nsert
the foowng:
S C. 50e. SP CI L CR DIT OR R UND O TR NSPORT TION ND
DMISSION T S.
Notwthstandng any other provson of aw, n any case n whch ta has been
coected pror to pr 1,1954, at the rate n effect (wthout regard to the amend-
ments made by ths ct) pror to pr 1, 1954, for or n connecton wth the
transportaton of persons whch begns on or after pr 1,19r 4, or for admssons
(referred to n secton SOI, other than subsectons (b), (c), and (g) thereof,
of ths ct) on or after pr 1, 1954, the person who coected the ta sha pay
the same over to the Unted States but credt or refund (wthout nterest) of
the tu coected n e cess of that appcabe (by reason of the amendments
made by ths ct) on or after pr 1, 1954, sha be aowed to the person who
coected the ta as f such credt or refund were a credt or refund under the
appcabe provson of the Interna Revenue Code, but ony to the e tent that,
pror to the tme such transportaton has begun or pror to the event to whch
the rght to admsson reates, he has repad the amount of such e cess to the
person from whom he coected the ta , or has obtaned the consent of such
person to the aowance of the credt or refund. or the purpose of ths ct,
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388
transportaton sha not be consdered to have begun on or after pr 1, 1954,
f any part of the transportaton pad for (or for whch payment has been
obgated) commenced before pr 1, 1954.
nd the Senate agree to the same.
mendment numbered 45:
. That the ouse recede from Its dsagreement to the amendment of the Senate
numbered 45, and agree to the same wth an amendment as foows:
On page 13, ne 10, of the Senate engrossed amendments, strke out 506 and
nsert 507 and the Senate agree to the same.
D NI L . P,
T OM S . N IWS,
RIC D M. SIMPSON,
COOP ,
W. D. MILLS,
Managers on the Part of the ouse.
. D. M11.1,1 k --.
IIUO tTTL ,
DW D M TIN,
D C. O NSON,
Managers on the Part of the Senate.
ST T M NTS O T M N G RS ON T T RT O T OUS
The managers on the part of the ouse at the conference on the dsagreeng
votes of the two ouses on the amendments of the Senate to the b ( . R. 8224)
to reduce e cse ta es, and for other purposes, submt the foowng statement
n e panaton of the effect of the acton agreed upon by the conferees and
recommended n the accompanyng conference report:
mendments Nos. 1 and 2: These are cerca amendments. The Senate
recedes.
mendment No. 3: Under e stng aw the admssons ta n the case of
roof gardens, cabarets, and smar paces s 20 percent. The b as passed the
ouse woud have reduced the rate of ta to 10 percent. The Senate amendment
contnues the 20 percent rate. The ouse recedes.
mendment No. 4: Ths a cerca amendment. The Senate recedes.
mendment No. 5: Ths amendment provdes that the ta on admssons
sha be 1 percent for each 10 cents or ma|or fracton thereof. Under the ouse
b the ta woud be 1 cent for each 10 cents or fracton thereof. The ouse
recedes.
mendment No. 6: Ths amendment (for whch there s no correspondng
provson n the ouse b) provdes that the ta on admssons under secton
1700 (a) (1) of the Interna Revenue Code w not appy n the case of any
admsson of 60 cents or ess. The ouse recedes wth an amendment under
whch such ta w not appy In the case of any admsson of 50 cents or ess.
mendment No. 7: Ths amendment (for whch the re s no correspondng
provson n the ouse b) retans the e stng rate of 1 cent for each 5 cents
or ma|or fracton thereof n the case of admssons, f the prncpa amusement
or recreaton offered wth respect thereto s horse or dog racng at a race track.
Ths amendment aso contans technca provsons wth respect to the ta on
permanent use or ease of bo seats, saes outsde the bo offce, and cabarets,
whch are necessary because of the hgher rate of ta on admssons to such
racng events. The ouse recedes wth a technca amendment.
mendment No. 8: Under ths amendment (for whch there Is no correspond-
ng provson n the ouse b) admssons to an athetc game between teams
composed of students from eementary or secondary schoos woud be e empt
from ta , f the entre gross proceeds from such game nure to the beneft of a
hospta for crpped chdren. Under e stng aw the game must be between
two eementary or secondary schoos. The ouse recedes.
mendment No. 9: Under ths amendment (for whch there s nr correspond-
ng provson n the ouse b) admssons to athetc games and e hbtons
and to wrestng and bo ng matches between educatona nsttutons w be
e empt f he durng the reguar athetc season for such event and f the
proceeds therefrom nure e cusvey to the beneft of such nsttutons. The
ouse recedes.
mendment No. 10: Under e stng aw admssons to hstorc stes, houses,
_nnd shrues, and museums conducted n connecton therewth, mantaned and
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389
operated by certan socetes and organzatons are e empt from ta . Under
the Senate amendment (for whch there s no correspondng provson n the
ouse b) the e stng e empton Is contnued. Iu addton, ths amendment
e empts from ta admssons to certan museums of hstory, art, and scence
and to panetarums operated by States or ther potca subdvsons, by the
Unted States, or by nonproft socetes and organzatons. The amendment aso
e tends the e stng e empton for hstorc stes, houses, and shrnes to those
operated by States or ther potca subdvsons or by the Unted States. The
ouse recedes.
mendment No. 11: UndPr ths amendment (for whch there s no corre-
spondng provson In the ouse b) there s e empted from ta admssons to
performances presented by a cvc theater or communty theater group or organ-
zaton, f no part of the net earnngs thereof nures to the beneft of any prvate
stockhoder or ndvdua. The ouse recedes wth amendments makng t cear
tbat the e empton s to appy ony n the case of amateur performances whch
are presented and performed by a cvc or communty theater group or
organzaton.
mendments Nos. 12 and 13: The ouse b reduced the ta on dues and
membershps, and the ta on ntaton fees, from the e stng rate of 20 percent
to 10 percent. The Senate amendments contnue the 20 percent rate for both
ta es. The ouse recedes.
mendment No. 14: Ths Is a technca amendment reatng to the effectve
date for the changes n the ta es on admssons and dues. The ouse recedes
wth technca and conformng changes.
mendment No. 15: The ouse b reduced the ta on frearms, shes, and
cartrdges from 11 percent to 10 percent. Under the Senate amendment the
e stng 11 percent rate s retaned. The ouse recedes.
mendment No. 16: Ths s a cerca amendment. The ouse recedes.
mendment No. 17: Under ths amendment (for whch there s no corre-
spondng provson In the ouse b) t s provded that the e stng rate of ta
of 2 cents per 1.000 matches sha not e ceed 10 percent of the prce for whch
the matches are sod by the producer, manufacturer, or mporter. The ouse
recedes.
mendment No. 18: Under ths amendment (for whch there Is no corre-
spondng provson In the ouse h) t s provded that the e stng rate of ta
on ubrcatng os of 0 cents a gaon sha not, In the case of os used prmary
In cuttng and machnng operatons on metas and known commercay as put-
tng os, e ceed 10 percent of the prce for whch such cuttng os are sod by
the manufacturer or producer. The ouse recedes wth an amendment makng
It cear that the term cuttng and machnng operatons , as used n the Senate
amendment, ncudes forgng, drawng, rong, shearng, punchng, and stampng.
mendment No. 19: Under ths amendment (for whch there s no corre-
spondng provson n the ouse h) the manufacturers e cse ta es on re-
frgerators, quck-freeze unts, and eectrc, gas, and o appances are reduced
from 10 percent to 5 percent. The Senate amendment aso Incudes a provson
for foor stocks refunds on such artces. The ouse recedes wth technca
amendments to the foor stocks refund provsons.
mendment No. 20: Ths s a cerca amendment. The ouse recedes.
mendment No. 21: Tns Is a cerca amendment. The Senate recedes.
mendment No. 22: Ths s a cerca amendment. The Senate recedes.
mendment No. 23: The ouse b reduced from 20 to 10 ercent the ta on
the use of safe depost bo es. Under the Senate amendment, the e stng 20
percent rate s retaned. The Senate recedes.
mendment No. 24: Ths s a cerca amendment. The Senate recedes.
mendment No. 25: Ths s a technca amendment to correct an error In the
ouse b. The ouse recedes.
mendment No. 26: Ths s a cerca amendment. The Senate recedes.
mendment No. 27: Ths s a cerca amendment. The Senate recedes.
mendment No. 28: Ths s a cerca amendment. The Senate recedes.
mendment No. 29: Ths s n technca amendment reatng to the effectve
date for the termnaton of the war ta rate nsofar as t reates to roof gardens,
cabarets, and smar paces. The Senate recedes.
mendments Nos. 30 and 31: These amendments provde that, In the case of
foor stocks refunds on eectrc ght bubs and tubes, cam for credt or refund
must be fed before ugust 1. 1954, and based on a request for rembursement by
the person hodng the ght bubs or tubes whch s submtted to the manufacturer
or producer before uy 1,1954. The ouse recedes.
315359 54 26
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390
mendment No. 32: Ths s a cerca amendment. The Senate recedes.
mendment No. 33: Ths Is a cerca amendment. The Senate recedes.
mendment No. 34: Ths s a cerca amendment. The Senate recedes.
mendment No. 35: Ths s a technca amendment reatng to the effectve
date of certan provsons of the b. The amendment provdes that In deter-
mnng whether such provsons appy, an artce sha not be consdered sod
before pr 1, 1954, uness possesson or rght to possesson passes to the
purchaser before such date. The ouse recedes.
mendment No. 36: Ths Is n technca amendment made necessary by amend-
ment No. 35. The ouse recedes.
mendment No. 37: Ths was a technca amendment made necessary by
amendment No. 23. The Senate recedes.
mendments Nos. 38 and 39: These were cerca amendments. The Senate
recedes.
mendments Nos. 40, 41, 42, and 43: These amendments make technca and
cerca changes made necessary by other amendments. The ouse recedes.
mendment No. 44: Ths amendment adds to the b a new secton reatng to
the credtng or refundng of overpayments of ta on admssons and on trans-
portaton where an e cessve amount of ta s coected before pr 1, 1954, for
transportaton of persons begnnng on or after pr 1, 1954, or for admssons
on or after such date. The ouse recedes wth technca and conformng
changes.
mendment No. 45: Under e stng aw, the ta on benzo, benzene, naphtha,
and certan other quds s pad by the producer, and then f the qud c sod
for use or used In farm tractors or other than n motor vehces, motorboats, or
arpanes, a refund or credt Is aowabe. Under the Senate amendment, the ta
w be coected at the reta eve f the fues are sod for use or used In motor
vehces, motorboats, or arpanes, and no ta w be coected f they are sod or
used for other purposes. Under the Senate amendment the rates of ta are the
same as under the b as t passed the ouse. The ouse recedes wth a cerca
amendment whch changes the secton number.
mendment No. 46: Ths amendment strkes out matter whch becomes
surpusnp:e by reason of amendment No. 45. The ouse recedes.
mendments Nos. 47, 48, 49, 50, 51, 52, 53, and 54: These are cerca amend-
ments made necessary by amendments Nos. 45 and 46. The ouse recedes.
Dane . Reed,
Thomas . enkns,
Rchard M. Smpson,
ere Coopeb,
W. D. Ms,
Managers on the Part of the ouse.
UNIT D ST T S-UNIT D INGDOM D T T
CON NTION
T. D. 5565, Secton 82.108: Cam for credt Rev. Ru. 54-78
or refund and nterest on refund.
( so Secton 925, Interna Revenue Code,
Secton 81.79(b), Reguatons 105.)
The provsons of rtce I (1) of the death duty conventon be-
tween the Unted States and the Unted ngdom, C. . 1947-1, 125,
nsofar as t concerns the mtaton perod for camng credt aganst
or refund of edera estate ta or rtsh estate duty n case of defer-
ment of ta attrbutabe to a reversonary nterest, appy ony where
the estate eects such deferment under such terms and condtons as
are prescrbed by the statutes of the contractng party nvoved. (In
the Unted States, sees. 925 and 926 of the Interna Revenue Code.
In the Unted ngdom, sec. 7(6) of the nance ct of 1894.)
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P RT . DMINISTR TI ND MISC LL N OUS
M TT RS
Rev. Ru. 54-104
Interm aowances n respect of net renegotaton rebates
1. In the case of a renegotaton made pror to a recomputaton of
an amortzaton deducton pursuant to secton 124(d) of the Interna
Revenue Code n connecton wth the determnaton of ta es mposed
by chapters 1, 2 , 2 , 2D and 2 of the Code for the fsca year to
whch the e cess profts determned by the renegotaton are at-
trbutabe, the Renegotaton ct (S th Suppementa Natona De-
fense ppropraton ct, 1942, as amended) provdes that there sha
be repad by the Unted States (wthout nterest) to a contractor or
subcontractor after such recomputaton, the amount of a
net renegotaton rebate , as defned by the act. Under e stng
procedures (Mm. 6023, C. . 1946-2, 187 and Mm. 6023, Supp. 1,
C. . 1951-1, 155) the edera ta beneft from the renegotaton
whch s a necessary factor n determnng the amount of the net
renegotaton rebate to be repad, s computed on the bass of the ta -
payer s ta abe ncome as ad|usted and s furnshed the Renegota-
ton Rebate ranch, Genera Servces dmnstraton, by the Interna
Revenue Servce, ony after there has been a determnaton of the
ta abty for the renegotated year. In cases nvovng non-agreed
or tgated ssues, cams for reef under secton 722 of the Code, and
other features whch precude an eary determnaton of the ta ab-
ty, ths has resuted n substanta deays n competng acton on con-
tractors appcatons for net renegotaton rebate payments under
the act.
2. The purpose of ths Revenue Rung s to provde a procedure
for the determnaton of a tentatve edera ta beneft n order
that the Renegotaton ebate ranch may approve nterm payments
of net renegotaton rebates n those cases where there has been a
determnaton of the gross renegotaton rebate by the Renegota-
ton Rebate ranch but where the edera ta beneft cannot be com-
puted under e stng procedures because there has been no fna de-
termnaton of the ta abty for the renegotated year.
3. Contractors or subcontractors desrng to ava themseves of
these nterm payment provsons may do so by fng wth the Gen-
era Servces dmnstraton, Renegotaton Rebate ranch, an p-
pcaton for Interm Payment of Net Renegotaton Rebate n the
form of hbt , page 21. The appcaton shoud be submtted
n trpcate and, as ndcated theren, shoud ncude a computaton
of the edera ta beneft whch the contractor or subcontractor de-
termnes, from ts own knowedge, to be appcabe to the gross
renegotaton rebate determned by the Renegotaton Rebate ranch.
Orgnay Issued as IR-Mmeograph No. 54-6, dated anuary 12, 1934.
(391)
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3( 2
4. Upon approva of the contractor s appcaton by the Renegota-
ton Rebate ranch two copes w be transmtted to the Natona
Offce, Interna Revenue Servce ( ttenton: 0:C: CR) wth a
request for a statement of the tentatve edera ta beneft appcabe
to the gross renegotaton rebate.
5. In order to adequatey protect the nterests of the Government
and to assure that the nterm payment w not e ceed the net
renegotaton rebate whch woud be due on the bass of a fna deter-
mnaton of ta abty, the edera ta beneft computed by corpora-
ton contractors, as shown n ther appcatons, w be compared
wth the edera ta beneft whch woud resut f, n the case of the
partcuar appcant, the ma mum ta rates for the year nvoved
were appcabe. Snce ths w not be feasbe n the cases of ap-
eants other than corporatons, and n vew of the very mted num-
er of such appcants, appcatons n other than corporaton cases
w be referred to the approprate Dstrct Drector s offce for con-
sderaton and determnaton of a tentatve edera ta beneft on the
bass of the facts e stng n the partcuar case, usng as a gude the
genera rue that each determnaton shoud be made upon the bass
whch w afford the contractor (ta payer) the argest possbe n-
term payment whe at the same tme safeguardng the Government s
nterests. The same procedure w be foowed n certan corpora-
ton cases as descrbed n paragraph 9 beow. If the facts n the case
are such that a tentatve beneft may not be determned wth suffcent
defnteness to accompsh the purposes of ths Revenue Rung and
at the same tme assure protecton of the Government s nterest, the
Renegotaton Rebate ranch w be advsed that no tentatve ed-
era ta beneft can be determned.
6. or the above purposes the gross renegotaton rebate as shown
n any corporaton appcaton approved and forwarded by the Rene-
gotaton Robate ranch, w be mutped by the approprate per-
centage (ma mum effectve rate) from the foowng tabe accordng
to the partcuar ta abe year or years nvoved:
ppcabe
percent
Ta|aNt year (rate)
Caendar years 1942 and 1943, or
fsca years ended n 1943 90
sca years:
egnnng ndnn
eb. 1, 1943 an. 31, 1944 90. 424660
Mar. 1, 1943 eb. 29, 1944 90. 819670
pr. 1, 1943 Mar. 31, 1944 91. 243170
Mav 1, 1943 pr. 30, 1944 91. 653005
une 1, 1943 Mav 31, 1944 92. 076505
uy 1, 1943 une 30, 1944 92. 486340
u . 1, 1943 uv 31, 1944 92. 909835
Sept. 1, 1943 ug. 31, 1944 93. 333335
Oct. 1, 1943 Sept. 30, 1944 9 743170
Nov. 1, 1943 Oct. 31, 1944 94. 166665
Dec. 1, 1943 Nov. 30, 1944 94. 576505
Caendar years 1944 and 1945, or
fsca years ended n 1945 85. 5
7. If the edera ta beneft as shown by the corporaton n ts ap-
pcaton equas or e ceeds the amount determned by the method
descrbed n the precedng paragraph, the amount shown n such app-
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393
caton w be furnshed the Renegotaton Rebate ranch by the In-
terna Revenue Servce as the tentatve edera ta beneft.
8. If the edera ta beneft as shown n the corporaton s app-
caton s ess than the amount determned by the method descrbed
n paragraph 6, but s at east 95 percent of such amount, then the
amount determned by the method descrbed n paragraph 6 w be
furnshed as the tentatve edera ta beneft.
9. If the ta beneft shown n the appcaton s ess than 95 percent
of the amount determned by the method descrbed n paragraph 6,
a copy of the appcaton w be forwarded to the offce of the Dstrct
Drector havng audt |ursdcton of the case for verfcaton of the
amount of the edera ta benefts shown n the appcaton on the
bass of the facts e stng n the partcuar case or, where necessary
to protect the Government s nterest, a recomputaton of a dfferent
amount as a tentatve edera ta beneft.
10. stng procedures for the determnaton of edera ta bene-
fts n renegotaton rebate cases, by fed offces of the Interna Reve-
nue Servce, and for the furnshng of statements of such benefts to
the Renegotaton Rebate ranch, Genera Servces dmnstraton,
contnue n effect and are not changed by ths Revenue Rung, rre-
spectve of whether or not any appcaton for an nterm payment s
made under ts provsons. owever, the statement of federa ta
beneft computed after there has been a determnaton of the ta
abty for the renegotated year under the provsons of Mmeo-
graph 6023 (formery forwarded wth the fe upon submsson of the
case for post-revew acton n Washngton) w, n a cases not pres-
enty requrng routng to the Natona Offce for revew acton, be
routed to the Natona Offce, ttenton: O: C: CR.
I IT
Genera Servces dmnstraton
Renegotaton Rebate ranch
18th and Streets, N. W.
Washngton 25, D. C.
On or about , 19 , the undersgned fed a cam for a net
renegotaton rebate In accordance wth subsecton (a) (4) (D) of the Renegota-
ton ct, and the reguatons promugated thereunder. Snce no determnaton
has been made of the amount of the net renegotaton rebate propery payabe
on such cam, appcaton Is hereby made for an Interm payment on account
of such rebate, and In support thereof the foowng facts are submtted:
(a) Name and address of camant:
(6) sca year to whch cam reates:
( nded)
(c) Orgna renegotaton settement: Pursuant to agreement No. (or order) dated
(d) mount of gross renegotaton rebate:
(e) edera ta beneft ( ttach schedues
showng computaton)
(/) Net renegotaton rebate ((d) mnus (e))
(Name of camant)
y
(Sgnature and tte of authorzed offca)
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394
C RTI IC TION
I hereby certfy that the facts set forth heren and In the appended schedues
and statements are true and correct to the best of my knowedge, nformaton
and beef.
(Tte of offcer authorzed to e ecute cam)
(Date)
appcatons and supportng documents must be fed In trpcate.
n appcaton fed by a corporaton must be e ecuted by an authorzed offcer of
corporaton. or procedure for fng and e ecuton of appcatons by partnershps see
par. R 383.3(3) (c). Certfcaton must be sgned by same offcer or person e ecutng
appcaton, f corporaton or propretorshp, If partnershp, by one genera partner bavns
know dre of farts.
Tte 18, U. S. C, see. 10(11, makes It a crmna offense to make a wfuy fase
statement or representaton to any department or agency of the Unted States as to am
matter wthn Its ursdcton.
Rev. u. 54-142
substtute power of attorney e ecuted In accordance wth the
terms of the orgna power does not destroy the rghts of the orgna
attorney or agent to represent the prncpa In matters before the
Treasury Department uness such Intent Is Indcated n the orgna
power of attorney.
dvce s requested whether the e ecuton of a substtute power of
attorney destroys the rghts gven an attorney or agent under the
orgna power of attorney.
genera power of attorney e ecuted by the prncpa gave hs
attorney or agent the rght to represent hm n a matters before the
Treasury Department wth fu powers of substtuton and revoca-
ton. There was no ndcaton n the power as to the ntent of the
prncpa to mt the rght of hs agent when the power of substtu-
ton was e ercsed.
If the attorney or agent desgnated n a power of attorney wth
power of substtuton become negbe to practce before the Treas-
ury Department such negbty operates to defeat the rghts of the
attorney or agent under the substtute power of attorney. See secton
10.9 of D. C. 230 (Rev.) C. . 1952-2,275, at 289.
rom the foregong, t s apparent that n the absence of any ev-
dence of the ntent of the prncpa that hs attorney or agent has de-
stroyed hs own rghts, the orgna attorney .or agent woud not be
dsassocated from a case by vrtue of the e ecuton of a substtute
power of attorney.
ccordngy, t s hed that a substtute power of attorney e ecuted
n accordance wth the terms of the orgna power does not destroy
the rghts of the orgna attorney or agent to represent the prncpa
n matters before the Treasury Department uness such ntent s
ndcated n the orgna power of attorney. owever, where a sub-
sttuton s made the nstrument of substtuton shoud ndcate the
person who w actuay be representng the prncpa at that tme
and to whom correspondence shoud be addressed.
ev. Ru. 54-172
Outne of the authorty and genera procedures of the Natona
Offce of the Interna Revenue Servce and of the offces of the Dstrct
Orgnay Issued as IR-Mmeograph No. 64-82, dated May 10, 1984.
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Drectors wth respect to ssung rungs and determnaton etters to
ta payers and enterng nto cosng agreements on specfc ssues.
Rev. Ru. 10, C. . 1953-1, 488, superseded Rev. Ru. 32, C. .
1953-1, 265, and Mm. 6293, C. . 1948-2, 59, modfed.
Secton 1. Pubpose.
The purpose of ths Revenue Rung s to descrbe the authorty and
genera procedures of the varous offces of the Interna Revenue Serv-
ce n ssung rungs and determnaton etters to ta payers and n
enterng nto cosng agreements on specfc ssues as to the nterpre-
taton or appcaton of the ncome ta , profts ta , estate ta , gft ta ,
empoyment ta , and e cse ta aws (other than acoho, tobacco, and
certan frearms ta es). Ths Revenue Rung s ntended to nform
ta payers and ther representatves of the approprate offces of the
Interna Revenue Servce to whch they may drect requests for
rungs, determnaton etters, or cosng agreements n order to pro-
mote the effcent handng of ther nqures by the Interna Revenue
Servce.
Sec. 2. Genera Pocy and Defntons.
.01 It s the pocy of the Interna Revenue Servce to answer n-
qures of ndvduas and organzatons, whenever approprate n the
nterest of sound ta admnstraton, as to ther status for ta purposes
and as to the ta effects of ther acts or transactons, pror to ther
fng of returns or reports as requred by the revenue aws. One of
the functons of the Natona Offce of the Interna Revenue Servce s
the ssuance of rungs on such matters. Dstrct Drectors of Interna
Revenue appy the statute, reguatons and rungs of the Natona
Offce n the determnaton of ta abty and the coecton of ta es,
and are authorzed, as provded n ths Revenue Rung, to ssue deter-
mnaton etters wthn the scope of ther functons n answer to ta -
payers nqures or requests.
.02 The term rung s used to descrbe a wrtten statement
ssued by the Natona Offce of the Interna Revenue Servce whch
s an e presson of the offca nterpretaton or pocy of the offce of
the Commssoner of Interna Revenue. Rungs are ssued by the
Commssoner, or under hs authorty, and are ntended to serve the
purpose of estabshng prncpes and poces of the Servce n the
nterpretaton and appcaton of substantve ta aw. Rungs are
ssued ony by the Natona Offce of the Interna Revenue Servce.
The ssstant Commssoner (Technca), actng under a deegaton of
authorty from the Commssoner, s n genera responsbe for the
ssuance of rungs. Ths authorty s, sub|ect to approprate super-
vson, redeegated to the Ta Rungs Dvson and ts ranches.
.03 The term determnaton etter s used to descrbe a wrtten
statement ssued by a Dstrct Drector of Interna Revenue n re-
sponse to an nqury by an ndvdua or an organzaton, and soey
by way of appcaton to the facts nvoved n a partcuar nqury
or request of the prncpes and poces prevousy estabshed by the
Natona Offce. Determnaton etters are ssued ony where a deter-
mnaton can be made on the bass of ceary estabshed rues as set
forth n the statute, Treasury Decsons or Reguatons, or rungs,
opnons or court decsons pubshed n the Interna Revenue u-
etn. Where such a determnaton cannot be made (such as where
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the queston presented nvoves a nove ssue) or the matter s e -
cuded from the |ursdcton of a Dstrct Drector of Interna Revenue
by the provsons of ths Revenue Rung, a determnaton etter w
not be ssued by the Dstrct Drector.
.04 The term cosng agreement s used to descrbe an agreement
between the Commssoner of Interna Revenue and a ta payer wth
respect to a specfc ssue or ssues pursuant to secton 3760 of the
Interna Revenue Code. Such cosng agreements are based on ru-
ngs whch have been sgned by the Commssoner and n whch the
Commssoner ndcates that he w enter nto a cosng agreement
upon the bass of the hodng of the rung etter.
S C. 3. RULINGS ISSU D Y T N TION L O IC IN W S INGTON,
D.C.
.01 In ncome, profts, estate, and gft ta matters the Natona
Offce w e ercse |ursdcton wth respect to prospectve trans-
actons and wth respect to competed transactons affectng returns
to be fed, e cept that t w not ordnary ssue rungs to ta payers
or ther representatves n connecton wth returns to be fed f the
dentca ssue s aso nvoved n a return or returns of the ta payer
aready fed for a ta abe perod or perods wth respect to whch the
statutory perod of mtaton on assessment or refund of ta has not
e pred. s to nqures nvovng the quafcaton of a pan under
secton 165(a) of the Interna Revenue Code, and the e empt status
of an organzaton under secton 101 of the Interna Revenue Code,
see sectons 4.04 and 4.05 of ths Revenue Rung.
.02 In empoyment and e cse ta matters the Natona Offce w
e ercse |ursdcton over requests for rungs receved n the .Natona
Offce whether such request s receved drect from the ta payer or
whether t s receved through the offce of a Dstrct Drector of In-
terna Revenue, e cept that the Natona Offce w not ordnary
ssue a rung to a ta payer or hs representatve f t knows or has
reason to beeve that the ssue s before the Dstrct Drector n an
actve e amnaton or audt of the abty of the ta payer. Lke-
wse, the Natona Offce w not ordnary take |ursdcton of an
ssue wth respect to future acton f t knows or has reason to beeve
that the dentca ssue s before the Dstrct Drector n an actve
e amnaton or audt of the abty of the ta payer for a pror perod.
S C. 4. D T RMIN TION L TT RS ISSU D Y DISTRICT DIR CTORS O
INT RN L R NU .
.01 In ncome, profts, estate, and gft ta matters Dstrct Drectors
of Interna Revenue are authorzed to ssue determnaton etters n
response to ta payers requests submtted to ther offces nvovng
competed transactons ony, whch affect returns requred to be fed
n ther dstrcts, but ony f the queston presented s covered spe-
cfcay by statute, Treasury Decson or Reguatons, or specfcay
by a rung, opnon, or court decson pubshed n the Interna Reve-
nue uetn. Determnaton etters w not usuay be ssued wth
respect to a queston whch nvoves an ncome, profts, estate, or gft
ta return or returns to be fed by the ta payer f the dentca
queston s nvoved n a return or returns aready fed by the ta -
payer. Dstrct Drectors of Interna Revenue may not ssue deter-
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397
mnaton etters as to the ncome, profts, estate, or gft ta consequence
of prospectve or proposed transactons, e cept as provded n para-
graph .04 of ths secton.
.02 In empoyment and e cse ta matters Dstrct Drectors of
Interna Revenue are authorzed to ssue determnaton etters n
response to requests from ta payers who have fed or who are requred
to fe returns n the dstrct over whch they have |ursdcton, but
ony f the queston presented s covered specfcay by statute, Treas-
ury Decson or Reguatons, or specfcay by a rung, opnon, or
court decson pubshed n the Interna Revenue uetn. ecause
of the mpact of these ta es upon the busness operatons of the ta -
payer ana because of the pecuar probems of admnstraton both
to the Servce and to the ta payer, Dstrct Drectors of Interna
Revenue sha take approprate acton n regard to such requests
receved whether the request s n regard to competed or prospectve
transactons or a return prevousy fed or to be fed.
.03 Notwthstandng the provsons of paragraphs .01 and .02 of
ths secton, a Dstrct Drector of Interna Revenue may not ssue
a determnaton etter n response to an nqury, athough presentng
a queston covered specfcay by statute, reguatons, or a rung, etc.,
pubshed n the Interna Revenue uetn, where (1) t appears that
a smar nqury from the ta payer has been drected to the Natona
Offce, (2) the determnaton etter s requested by an ndustry, trade
assocaton, or smar group, or (3) the request nvoves an ndustry-
wde probem. Under no crcumstance w a Dstrct Drector of
Interna Revenue ssue a determnaton etter uness t s ceary nd-
cated that the nqury s wth regard to a ta payer or ta payers
n the dstrct under the supervson of the Dstrct Drector who
receves the request. Notwthstandng the provsons of paragraph
.02 of ths secton, the Dstrct Drector of Interna Revenue may not
ssue a determnaton etter on an empoyment ta queston when the
specfc queston nvoved has been or s beng consdered by the
Natona Offce or the Soca Securty dmnstraton. Nor may the
Dstrct Drector of Interna Revenue ssue a determnaton etter
on an e cse ta queston f the request s for a determnaton of far
market prce under sectons 3441(b) and 3444 of the Interna Reve-
nue Code or for a determnaton of far charges under secton 34G0
of the Interna Revenue Code.
.04 The authorty and procedure provded n Revenue Rung 32,
C. . 1953-1, 265, wth respect to the dsposton by Dstrct Drectors
of requests coverng the quafcaton of pans under secton 165(a)
of the Interna Revenue Code s contnued, but for ths purpose the
etters ssued by Dstrct Drectors n response to such requests sha
be consdered and desgnated as determnaton etters.
.05 Dstrct Drectors of Interna Revenue have authorty to ssue
determnaton etters as to the quafcaton of certan organzatons
for e empton from edera ncome ta under secton 101 of the
Interna Revenue Code n accordance wth nstructons ssued n ths
connecton. See Rev. Ru. 54-164, p. 88, ths uetn.
.06 request receved by a Dstrct Drector of Interna Revenue
wth respect to a queston nvoved n an ncome, profts, estate, or
gft ta return or returns aready fed w, n genera, be consdered
n connecton wth the e amnaton of the return or returns. ow-
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398
ever, f response to such nqury s made pror to an e amnaton or
audt, t w not be consdered a determnaton etter but w be
consdered a tentatve fndng n any subsequent e amnaton or audt
of the return.
S C. 5. DISCR TION RY UT ORITY To ISSU RULINGS ND D T RMI-
N TION L TT RS.
.01 cept as provded n paragraph .02 of ths secton, the Interna
Revenue Servce has dscretonary authorty to ssue determnaton
etters or rungs (or to approve cosng agreements pursuant to
secton 3760 of the Interna Revenue Code). That dscreton w be
e ercsed n the ght of a reevant crcumstances, ncudng the
busness or other reasons motvatng the transacton, and wth a vew
to ssung determnaton etters or rungs (or approvng cosng
agreements) ony to the e tent consstent wth a wse admnstraton
of the revenue system.
.02 Rungs w be made n the Natona Offce on prospectve
transactons where the aw or reguatons provde for a determnaton
of the effect of a proposed transacton for ta purposes, as n the case
of a transfer comng under the provsons of secton 1250 and secton
1251 of the Interna Revenue Code, or an e change comng under
the provsons of secton 112() of the Code.
S C. 6. U STIONS ON W IC No RULING OR D T RMIN TION L TT R
WILL ISSU D.
In addton to the other stuatons descrbed heren, rungs or deter-
mnaton etters ordnary w not be ssued n connecton wth
ncome, profts, estate, and gft ta matters where the determnaton
requested s prmary one or fact, e. g., (1) market vaue of property,
(2) whether compensaton s reasonabe n amount, (3) whether a
transfer s one n contempaton of death, (4) whether retenton of
earnngs and profts by a corporaton s for the purpose of avodng
surta on ts sharehoders, or (5) whether a transfer or acquston
s wthn secton 15 (c) or secton 129 of the Interna Revenue Code.
S C. 7. INSTRUCTIONS TO T P Y RS.
.01 Requests for determnaton etters and rungs shoud be sub-
mtted n dupcate f more than one ssue s presented n the request
or f a cosng agreement s aso requested wth respect to the ssue
presented. Requests reatng to prospectve transactons shoud not
contan aternatve pans. ach request for a determnaton etter or a
rung on ether a prospectve transacton or a competed transacton
must ncude the foowng:
(a) compete statement of the facts regardng the trans-
acton, ncudng the names and addresses of a the nterested
partes, together wth a copy of each contract or other document
necessary to present such facts. (Inasmuch as e hbts and docu-
ments w be retaned n the Servce fes, orgna documents
shoud not be furnshed.) If the sub|ect matter s a corporate
reorganzaton, dstrbuton, or smar or reated transacton,
there shoud aso be submtted the corporate baance sheet nearest
the date of the transacton (the most recent baance sheet f the
transacton s prospectve).
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(b) fu and precse statement of the busness reasons, f any,
for the transacton.
(c) If the ta payer s contendng for a partcuar determna-
ton, an e panaton of the ground for such contenton, together
wth a memorandum of reevant authortes.
.02 If the request s wth respect to the quafcaton of a pan under
secton 165 of the Code, see Rev. u. 32, supra. If the request s wth
respect to the quafcaton of an organzaton for e empton from
edera ncome ta under secton 101 of the Code, see Rev. Ru. 54-104,
5, supra.
.0.3 request by or on behaf of a ta payer must be sgned by the
ta pa| er or hs duy authorzed representatve. If the matter s beng
handed by a representatve of the ta payer, the conference and prac-
tce requrements regardng the furnshng of power of attorney, ev-
dence of enroment to practce, etc., must be met. Requests wth re-
spect to matters on whch a rung s desred from the Natona Offce
shoud be addressed to the Commssoner of Interna Revenue, Wash-
ngton 25, D. C. Requests wth respect to matters on whch a deter-
mnaton etter from a Dstrct Drector of Interna Revenue s desred
shoud be addressed to the offce of the Dstrct Drector wth whch the
ta return of the ta payer has been fed or s requred to be fed. In
ths connecton see aso Rev. Ru. 32, and Rev. Ru. 54-164, supra.
.04 ta payer or hs representatve who desres an ora dscusson
of the ssue or ssues nvoved shoud ndcate such desre n wrtng
when fng the request or shorty thereafter n order that the confer-
ence may be arranged at that stage of the consderaton when t w
be most hepfu. Snce a conference s usuay more hepfu durng
earer stages of the consderaton, the ta payer or hs representatve
shoud not request that the conference be deferred unt Interna
Revenue Servce acton (whether or not n accord wth the ta payer s
contenton) s mmnent. More than one conference shoud not be
sought uness the ta payer has mportant new matters to present, or
uness the probems nvoved requre consderaton of the case by df-
ferent dvsons or offces of the Interna Revenue Servce. If the
Servce fnds that addtona conferences are necessary the ta payer or
bs representatve w be so advsed.
.05 It s the practce of the Servce to process requests for rungs
or determnaton etters n reguar order and as e pedtousy as
possbe. Compance wth a request for consderaton of a partcuar
matter ahead of ts reguar order tends to deay the dsposton of
other matters. owever, requests for processng ahead of the reguar
order, made n wrtng and showng cear need for such treatment,
w be gven consderaton as the partcuar crcumstances warrant.
.06 Where a ta payer receves a determnaton etter or a rung
pror to the fng of hs return he shoud attach to hs return the deter-
mnaton etter or rung (or a copy thereof) wth respect to any
transacton whch has been consummated and whch s reevant to
the return beng fed.
Sec. 8. Reference of Matters to the Natona Offce.
.01 Requests for determnaton etters receved from ta payers by
Dstrct Drectors of Interna Revenue and whch, n accordance wth
the provsons of ths Revenue Rung, are not to be acted upon by the
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Dstrct Drector sha be forwarded to the Natona Offce for repy,
and the ta payer advsed accordngy. ny queston as to the au-
thorty of the Dstrct Drector to act on a specfc matter shoud be
resoved n favor of referrng the matter to the Natona Offce.
.02 Dstrct Drectors of Interna Revenue are authorzed to refer
to the Natona Offce any request for a determnaton etter whch,
n ther |udgment, warrants the attenton of the Natona Offce. Lke-
wse, Dstrct Drectors are authorzed, n the audt or e amnaton
of a return or returns, to request technca advce from the Natona
Offce, by addressng such requests to the ssstant Commssoner
(Operatons), who w refer the matter to the ssstant Comms-
soner (Technca). technca advce memorandum w be ssued
to the Dstrct Drector of Interna Revenue by the ssstant Com-
mssoner (Technca) or hs deegate. The practce provded for
under Com.-Mmeograph 6293, C. . 1948-2, 59, for hearngs n the
Natona Offce where the Dstrct Drector refers an ssue to the
Natona Offce for technca advce w contnue, wth the approprate
substtuton of the ttes of offces and offcers as provded by orders
ssued to mpement Reorganzaton Pan No. 1 of 1952.
S C. 9. R R NC O M TT RS TO DISTRICT DIR CTORS.
Requests for rungs receved from ta payers by the Natona Of-
fce whch, n accordance wth the foregong provsons, are not to be
acted upon by the Natona Offce sha be forwarded for approprate
acton to the Dstrct Offce n whch the return has been or w be
fed. The ta payer sha be advsed of the acton taken.
S C. 10. WIT DR W L O R U STS.
The ta payer s request for a rung or a determnaton etter may
be wthdrawn at any tme pror to the sgnng of the etter of repy.
The wthdrawa of the request w not prevent the Natona Offce
from furnshng ts vews to the Dstrct Drector n whose offce the
return has been or w be fed. Nether sha such wthdrawa prevent
a Dstrct Drector of Interna Revenue from consderng the nfor-
maton submtted n a subsequent audt or e amnaton of the ta -
payer s return. ven though a request s wthdrawn a corre-
spondence and e hbts sha be retaned n the fes of the Interna
Revenue Servce and may not be returned to the ta payer.
S C. 11. OR L D IC TO T P Y RS.
It s the pocy of the Servce not to ssue rungs or determnaton
etters upon ora request. or reasons of sound admnstraton, ora
opnons or advce gven to ta payers by empoyees or offcers of the
Interna Revenue Servce are consdered as ads to ta payers ony.
S C. 12. CT O RULINGS.
.01 Generay no statement by any offca of the Interna Revenue
Servce, other than a cosng agreement under secton 3760 of the
Interna Revenue Code, s fna and concusve upon the Interna
Revenue Servce. owever, see paragraphs .05, .06, and .07 of ths
secton.
.02 s part of the determnaton of a ta payer s abty, t s the
responsbty of the Dstrct Drector to ascertan whether any rung
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401
prevousy ssued to the ta payer has been propery apped. Thus,
t shoud be determned whether the representatons upon whch the
rung was based refected an accurate statement of the matera facts
and whether the transacton actuay was carred out substantay as
proposed.
.03 If, n the course of the determnaton of the ta abty, t s
the vew of the Dstrct Drector that a rung prevousy ssued to
the ta payer shoud be modfed or revoked, the fndngs and recom-
mendatons of the Dstrct Drector shoud be forwarded to the Na-
tona Offce for consderaton of the matter pror to further acton.
Such reference to the Natona Offce w be consdered a request for
technca advce and the procedures appcabe to such requests w
be foowed. Otherwse, the rung s to be apped by the Dstrct
Drector n hs determnaton of the ta payers abty.
.04 pproprate coordnaton wth the Natona Offce sha be
undertaken n the event that any other fed offca havng |ursdc-
ton of a return or other matter proposes to reach a concuson contrary
to a rung prevousy ssued to the ta payer.
.05 rung found to be n error or no onger n accord wth the
poston of the Interna Revenue Servce may be modfed or revoked.
Modfcaton or revocaton may be effected by a notce to the ta payer
to whom the rung orgnay was ssued, or by a rung or other
statement pubshed n the Interna Revenue uetn. owever, t s
the genera pocy of the Interna Revenue Servce to mt the revoca-
ton or modfcaton of a rung ssued to or wth respect to a partcuar
ta payer to a prospectve appcaton ony, (a) f there has been no
msstatement or omsson of matera facts, (b) the facts subsequenty
deveoped are not materay dfferent from the facts on whch the
rung was based, (c) there has been no change n the appcabe aw,
and (d) such ta payer acted n good fath n reance upon such ru-
ng and a retroactve revocaton woud be to hs detrment.
.06 Wth respect to rungs pubshed n the Interna Revenue
uetn, t s the genera pocy of the Servce that ta payers may
rey upon such rungs n determnng the rue appcabe to ther
own transactons and need not request a specfc rung appyng the
prncpes of the pubshed rung to the facts of the ta payer s
partcuar case where otherwse appcabe. See, however, .08 of ths
secton. In the event of revocaton or modfcaton of a rung pub-
shed n the Interna Revenue uetn, t s the genera practce of
the Servce to make such revocaton or modfcaton prospectve ony.
.07 Under the provsons of secton 1108(b) of (he Revenue ct
of 1926 (whch s regarded as st n effect even though not ncor-
porated n the Interna Revenue Code), a rung hodng that the
sae or ease of a partcuar artce s sub|ect to the manufacturers
e cse or the retaers e cse ta must be mted n ts retroactve
appcaton n any case, where (1) such rung reverses a pror rung
hodng the partcuar artce to be nonta abe, and (2) the ta payer
n reance upon such rung parted wth possesson or ownershp of
such artce wthout passng the ta on to hs customer.
.08 Snce each rung represents the concuson of the Servce as to
the appcaton of the aw to the entre state of facts nvoved, revenue
offcas and others concerned are cautoned aganst reachng the same
concuson n other cases uness the facts and crcumstances are sub-
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402
stantay the same. urthermore, Servce personne and others con-
cerned shoud, n ths connecton, consder the effect of subsequent
egsaton, reguatons, court decsons, and rungs.
S C. 13. CT O D T RMIN TION L TT RS.
determnaton etter ssued by a Dstrct Drector, n accordance
wth ths Revenue Rung, sha be gven the same effect upon e amn-
aton of the return of the ta payer to whom the determnaton etter
was ssued as s descrbed n secton 12, n the case of a rung ssued
to a ta payer, e cept that reference to the Natona Offce s not neces-
sary where upon the e amnaton of the return t s the opnon of the
Dstrct Drector that a concuson contrary to that e pressed n the
determnaton etter s ndcated. Dstrct Drector s not author-
zed to mt the revocaton of a determnaton etter to a prospecve
appcaton ony, but may refer the matter to the Natona Offce for
e ercse by the Commssoner, or hs deegate, of the authorty so to
mt the revocaton.
S C. 14. CT ON OT R DOCUM NTS.
.01 Rev. Ru. 10, C. . 1953-1, 488, s superseded by ths Revenue
Rung.
.02 Rev. Ru. 32, C. . 1953-1,265, s amended as provded n secton
4.04 of ths Revenue Rung.
.03 Mn. 6293. C. . 1948-2, 59, s amended as provded n secton
8.02 of ths Revenue Rung.
Sec. 15. CTI D T .
The effectve date of ths Revenue Rung s May 24, 1954.
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IND

Pan
ccountng methods, amounts rounded to nearest doar . 75
dmnstraton and procedure:
Coecton, dstrant, evy for denquent edera ta es, State empoy-
ment commssons 282
unctons reatng to bonds deegated to Dstrct Drectors, Regua-
tons 118 amended 80
Power of attorney, substtuton, rghts gven orgna attorney or
agent - 394
Prorty of |udgment en over ens subsequenty fed 282
Rungs, determnaton etters, and cosng agreements, procedures of
Natona Offce and Dstrct Offces.. 394
coho ta :
coho:
thy, produced from ethyene gas, other petroeum dervatve,
markng cases 331
Ta -free, for use by muncpay-owned or prvatey-owned hos-
ptas 324
onds:
Canceaton, approva of notce of dscontnuance of use of
specay denatured acoho 320
Pena sum, vnegar pant propretor, parta shpments, st wne. 319
Transportaton and warehousng bond, for sprts 309
Transportaton ond, wthdrawa of dsted sprts from ware-
houses 314
ottes:
M ed szes, packagng, Reguatons 18 amended 330
One-haf gaon and 1 gaon szes, Reguatons 10 amended 308
reweres:
Change n name, markng, rebrandng, cooperage 329
Sae of fermented quors, ta -free, to ndvdua deegates to
Unted Natons.. 328
rewery premses, producton of unfermented mat beverage 331
Contaners:
rewery meta cooperage, marked, rebranded, name change 329
thy acetate and proprety sovents, buk shpments by barge.. 325
Wooden, reta sae of dsted sprts 309
Dsted sprts:
Imported, rebottng 332
In bond, part 5, orm 1515, competed after dumpng, pror to
bottng. 315
Labes and State ta stamps aff ed to cases, Reguatons 11 and
15 amended. 301
Te as fth, haf-gaon bottes, markng packages 339
Transportaton and warehousng bond 309
Transportaton bond, wthdrawa from severa warehouses oper-
ated by same owner 314
qupment and suppes, condenser, repacement of tubes or outer
|acket 333
portaton, dsted sprts and wnes, storage room 332
ermented mat quor:
eer:
Labeng, purchased ta pad 329
Ta -free, sae to ndvdua deegates to Unted Natons 328
Packagng, Reguatons 18 amended 330
(403)
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coho ta Contnued
rearms:
Cassfcaton . 251
Devce for trappng anmas whch fres a pastc cartrdge 253
rearms, shes, etc.. reuse of stamps . 242
Partay deactvated submachne guns rented to teevson net-
works 250
Ram.sot powder drven fastenng toos, deaer s cense to se 253
Revover reftted wth 10-nch barre to accommodate shot
cartrdges 252
Revovers atered to fre shot cartrdges . 251
orms, 52 , nformaton to be shown 306
orms 1482, User s Report of Denatured coho, fna 320
Government offcers, wthdrawa of e port sprts, storage room or
bonded warehouse __ 332
Government use, dsted sprts, rmed Servces Medca Procure-
ment gency 336
Importaton, sprts purchased by one mporter consgned to another. 306
Industra acoho, ethy acetate, Reguatons 3 amended 321
Industra acoho pants, transfer of tank cars of acoho, n bond,
between sunset and sunrse 320
Labeng:
eer, purchased ta pad 329
Product from grape wne smar to vermouth 341
Wne, tota sods content, more than 17 grams per 100 cubc
centmeters 342
Labes, ndcatng percentages, vntages of components of bended
wnes 342
Marks and brands:
rewery meta cooperage, name change 329
Commerca, State ta stamps aff ed to cases, Reguatons 11
and 15 amended 301
Materas, casen, sodum casenate, wne carfers 303
Permts:
Determnaton of actve status of 306
Ta -free acoho, muncpay-owned hospta 323
Records:
orm 52 or Record 52. Reguatons 21 amended 302
orm 1440, notaton, coho Petroeum Dervatve 331
Separate, name of dster, rectfer, or botter 306
Whoesae quor deaers . 306
Composte cases of quor entres........ 306
Rectfyng pants:
Producton and abeng of May Wne 304
Use of water, syrup, sugar soutons n wne manufacture 304
Reports:
orm 103, day statement of fermented mat quor botted,
Reguatons 18 amended _ 330
orm 1482, User s Report of Denatured coho, fna 320
Whoesae quor deaer, composte cases of quor entres . 306
Reta quor deaer:
arbecue sets, etc., furnshed by whoesaers 340
eer coong cabnets offered at whoesae prce by brewer, un-
awfu nducement 340
Cooperatve advertsng, contrbutons receved from whoesae
quor deaers, voaton 340
Denquent, further credt e tenson _ 340
Gfts of gassware from ndustry members, unawfu nducement.. 338
Purchase of warehouse recepts 334
uantty dscounts granted by whoesaers 338
Stamps, strp, domestc, competng part 5, orm 1515, mmedatey
pror to bottng dsted sprts 315
Tanks, bottng, Government ocks on stopcocks of gauge gasses . 305
Ta es:
Labty for, osses of dstates, Reguatons 3, 4, 5, amended 316
Labty for, sae of damaged products by fre nsurance company. 334
negar pants, pena sum of bond, st wne, parta shpments 319
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coho ta Contnued
oatons: P e
arbecue sets, etc., furnshed retaers by whoesaers 340
eer coong cabnets offered at whoesae prce by brewer, un-
awfu nducement 340
Inducement, e cuson, contrbutons by whoesae quor deaers
to cooperatve advertsng of reta quor deaers 340
Labeng, product from grape wne smar to vermouth 341
Possesson of property ntended for use n evadng quor ta es. 326
uantty dscounts, subterfuge saes transactons 338
Unfar competton, gfts of gassware to retaers 338
Unawfu nducements 338
Whoesae quor deaer durnshng Te as hats to saesmen and
chan-store reta estabshments 339
Warehouses, nterna revenue bonded:
Dsted sprts, weghng of packages on recept, Reguatons
4,5, 10 amended . 310
Transportaton and warehousng bond 309
Wthdrawas, Transportaton ond 314
Wrhskes, bends of two or more, aged n wood, actvated carbon added
thereto _ 304
Whoesae quor deaers:
port storage rooms 332
uantty dscounts, prce reductons, granted reta quor
deaers 338
Record 52 coverng mported dsted sprts 306
Wne:
dvertsng, acohoc content 342
ppcaton of terms Dry , tra Dry ... 342
end of two or more dstnct vntages, abeng 342
Carfcaton, use of casen, sodum casenate 303
Labes and State ta stamps aff ed to cases, Reguatons 11 and
15 amended 301
Manufacture of wne products, rectfed wne, wne cockta,
soutons used n rectfyng pant 304
Premums offered 341
Product from grape wne smar to vermouth 341
Sampes requred to be submtted wth formuae, bendng of
vermouths 303
St, acetc, acohoc content, vnegar manufacture 319
Ta pad markng not requred 332
ens (nonresdent), perodc amony payments to, sub|ect to Unted
States ncome and wthhodng ta 156
ens (resdent), foregn students n the Unted States 155
mony, pad, perodcay to nonresdent aen 156
mendments:
Reguatons 3:
Sectons 182.692, 182.700, 182.779 316
Sectons 182.837, 182.838, 182.840, 182.841 321
Reguatons 4:
Secton 183.408. 316
Sectons 183.561, 183.564a, 183.572, 183.574, 183.577a, 183.580.. 310
Reguatons 5:
Secton 184.441 316
Sectons 184.601, 184.604a, 184.612, 184.614, 184.617a, 184.620.. 310
Reguatons 10:
Sectons 185.375, 185.692, 185.693, 185.706, 185.707, 185.708,
185.711, 185.712... 310
Sectons 185.924, 185.925, 185.940, 185.961, 185.980 308
Reguatons 11:
Secton 189.270(a) (added) 301
Reguatons 15:
Secton 190.805 301
Reguatons 18:
Sectons 192.281, 192.440, 192.441 330
Reguatons 21:
Secton 191.139 302
815359 54 2T
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mendments Contnued
Reguatons 42:
Secton 130.75 272
Reguatons 43:
Secton 101.37 272
Reguatons 76:
rtces 3, 12 _ 243
Reguatons 111:
Secton 29.504-1 175
Reguatons 113:
Secton 143.55 _ 272
Reguatons 118:
Sectons 39.23(m)-, 39.44-5, 39.53-3, 39.112(b)(6)-3, 39.112(f)-
1, 39.131(c)-2, 39.143-7 80
Secton 39.101-1 _ _ 86
Secton 39.504-1 175
Reguatons 130:
Sectons 40.437-5, 40.458-4 163
Sectons 40.452-4, 40.452-5 _ 165
mortzaton:
mergency factes, certfcate of necessty, change n 298
Gran storage, eevator 126
Gran storage facty:
Constructon of new warehouse ad|acent to e stng warehouse.. 126
Lcensed gran eevator under occupancy contract wth Commod-
ty Credt Corporaton 127
nnutes, ta abty, dependents of members of the unformed servces... 15
rmed orces:
Retrement pay, ad|ustment, pursuant to Pubc Law 720 96
Retrement pay reduced to provde annutes for dependents 15
ttorneys and agents, orgna, rghts under orgna and substtute powers
of attorney 394
utomobes:
Gan from sae of demonstrators and company cars 19
Renta cars, capta gans treatment 124
wards, przes, etc., Putzer 28

ack pav, pursuant to Pubc Law 720, ump sum to eet Reservst 96
ad debts:
ddtons to reserve:
perence factor 60
Instament accounts recevabe 119
Reserve method of accountng for 60
anks:
perence factor, computng addtons to bad debts reserve 60
Reserve method of accountng for bad debts 60
Stock of subsdary dstrbuted to sharehoders 116
ass:
Property transmtted at death 113
Reorganzaton, converson of edera savngs and oan assocaton
nto State budng and oan assocaton 106
Repurchased denquent nstament accounts 119
Stock, reorganzaton, separate ncorporaton of branches 105
onds:
Interest, muncpa bonds 2S
Intersst, Unted States savngs, ressued substtutng new name n
pace of one orgna coowner 12
usness e penses, deductbe, kckback payments 44
C
Campagn e penses, funds dverted to persona use 11
Capta assets, partnershp nterest, effect of change n membershp 153
Capta e pendtures:
Constructon of earthen terraces to prevent so eroson 68
Swmmng poo or eevator nstaed for heath reasons . 67
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407
Capta gans and osses: uw
ternatve ta , computaton, credts aowed corporatons . 123
Carryovers, capta oss ncurred by decedent 147
Corporatons, osses, redempton of corporate obgatons 128
states and trusts, amounts receved n redempton of capta stock
hed by estate of deceased stockhoder 114
Indvduas, osses, redempton of corporate obgatons 128
Property 117(|) treatment:
utomobes purchased for renta 124
Company cars n hands of deaer dstngushed from demon-
strators 19
O and gas propertes, sae of producng eases by partners 284
Capta stock, redempton of, by use of proceeds from fe nsurance
pocy on deceased sharehoder 114
Carryback and carryovers, ndvduas, net ncome reduced, chartabe
contrbutons aowabe 64
Casuaty (osses). (See Losses: Casuaty or theft.)
Chartabe contrbutons. (See Contrbutons (deductbty).)
Ctzens of Unted States (nonresdent):
arnngs for servces performed abroad 117
Sae of persona property . 12
Cams for refund or abatement:
Overpayment of ta refunded at cose of ta abe year 159
Ta erroneousy coected from subsdary corporaton pror to
qudaton 160
Cosng agreements, procedures of Natona Offce and Dstrct Offces . 394
Commssons receved by corporaton pursuant to contract wth agent . 175
Commttee reports:
Conference Report No. 1446 386
ouse of Representatves Report No. 1307 . 351
Senate Report No. 1085 366
Communty property and ncome, sources wthn possessons of Unted
States 157
Compensaton (receved):
Property other than cash, empoyer contrbutons to group fe
nsurance 17
Saares, fees, etc., pubc offca, contrbuton to partnershp ncome
poo 152
Servces, 36 months or more:
eet Reservst, retrement pay ad|ustment 96
Persona, rendered by husband pror to anuary 1, 1948 94
Sckness or n|ures:
Labor unon od age penson benefts 46
Sef-nsured pan (New York), e cess over contrbutons 29
Contracts:
etween agents and corporaton, commssons derved from 175
Renegotaton, ad|ustment of ncome and e cess-profts ta es, app-
caton of Rev. Ru. 54-53 n certan cases 286-288
Contrbutons (deductbty):
Corporatons:
Chartabe fund mantaned by e empt organzaton 92
Contrbutons to The Okahoma ducatona Teevson
uthorty 64
Newspaper pubsher, crcuaton e pendtures . 67
Indvduas:
Chartabe fund mantaned by e empt organzaton 92
Contrbutons to The Okahoma ducatona Teevson
uthorty - 64
Contrbutons to the Pacfc War Memora Commsson . 65
Net operatng oss carryback, reducton n net ncome 64
Cooperatves:
tenson of tme for fng returns, orm 990-C - 78
armers marketng and purchasng assocaton, purchases for per-
sons who are nether members nor producers 93
armers , procedure for fng returns, Reguatons 118 amended 86
Patronage dvdends, document form, ta treatment 24
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408
Corporatons: aga
Genera:
Chartabe foundaton sub|ect to secton 3814 of the Code,
accumuaton of ncome 289
empt status, effectve date of S3
New second preferred stock e changed for common stock n
reorganzaton pan, recognzed gan 109
Lqudaton:
Cam for refund of ta erroneousy coected 160
Parta, effected through redempton of capta stock hed by
estate of deceased sharehoder 114
Sae of corporate assets, cam for ta erroneousy coected pror to._ 160
Court decsons:
Chcago, St. Pau, Mnneapos, Omaha Raway Co. em v 217
Cty of New rtan et a. Unted States v 277
D on, oyd Unted States v. ... 326
Goodman, state of Isaac, et a., v. Commssoner 296
Remmer, mer ., Unted States v 146
Credts aganst net ncome, net ong-term capta gan or oss, computaton,
aternatve ta 123
Credts (dependents). (.See emptons.)
Crmna prosecutons, convcton, wfu evason, |udgment vacated 146
D
Damages, receved under New ersey Death by Wrongfu ct statute.. 179
Decedents, estate of, damages recevabe under New ersey Death by
Wrongfu ct statute 179
Deductons:
usness e penses:
mortzaton, gran storage factes 127
ppcaton of 50,000 mtaton n communty property States. 129
Crcuaton e pendtures 67
Commtment fee, osses, arsng from sae of nstament accounts
recevabe 119
Compusory assessments for abor unon od age penson fund 46
Constructon of earthen terraces to prevent so eroson 6S
cse and speca ta es pad by person acceptng wagers 51
Intangbe drng and deveopment costs ncurred by partner-
shp 64
ckback payments 44
Prce contro voatons on commodty saes, amounts pad n
settement 49
Renta payments by grantor to trustee 20
Substantaton and aowance 47
Trave, meas, odgng, professona baseba personne 51
Contrbutons. (See Contrbutons (deductbty).)
Medca e penses, cost of swmmng poo or eevator 67
Ta es:
State of Massachusetts on cgarettes 57
State of Okahoma on cgarettes 35
Dependents (credt). (See emptons.)
Depeton:
Percentage, processes used n the manufacture of brck from shae
and brck and te cay f
Remova of sod and baed nursery stock 63
Deprecaton:
utomobes, demonstrators and company cars 19
ass of property transmtted at death 113
Dsabty benefts, New York, amounts e ceedng contrbutons 29
Dstrant, en attaches ony to e tent of ta payer s rghts n property 277
Dstrbutons (corporatons):
Converson of edera savngs and oan assocaton nto State bud-
ng and oan assocaton 106
Lqudaton, pree stng defct 71
Redeem capta stock hed by estate of deceased sharehoder 114
Reorganzaton, separate ncorporaton of branches 105
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409
Dvdends:
Pad credt:
owed corporatons, aternatve ta computaton 123
Pree stng defct 71
Patronage, document form, ta treatment n hands of patrons 24
Receved credt, aowed corporatons, aternatve ta computaton.. 123
Stock dvdends, stock of subsdary dstrbuted by bank to ts share-
hoders... _ 116

arned ncome (sources wthout Unted States), nonresdent ctzens 117

ectons (manner and effect):
y partnershp to charge to e pense ntangbe drng and deveop-
ment costs 64
Deaer reportng sae on persona property on nstament bass 76
mpoyees trusts. (See Trusts: mpoyees .)
mpoyment ta es:
grcutura abor:
arm operated by partnershp 213
Prunng, cuttng, and seng Chrstmas trees 171
mpoyer, partnershps, change n membershp 212
mpoyer-empoyee reatonshp:
Mancurst 211
Partner operatng farm for partnershp 213
Government empoyees, cvan, outsde contnenta Unted States,
cost-of-vng aowances, post dfferenta payments 222
Raroad retrement empoyees, contract servces 217
Refunds or credt, speca, cam for e cessve ta wthhed 73
State nstrumentates, county farm bureau, Pennsyvana 215
Ta , abty for, mted partner 209
Unempoyment funds, evy for denquent edera ta es 282
Wages:
Cost-of-vng aowances, post dfferenta payments, cvan
empoyees, outsde contnenta Unted States 222
Payments for reuse of recordngs 216
state ta :
onds, Unted States, redempton, date of ta payment 202
Chartabe gfts and bequests:
Chartabe deducton, proraton of 194
Pacfc War Memora Commsson, an agency of the Terrtory of
awa 65
Cams for refund attrbutabe to reversonary or remander nterest. 390
Communty property, ncuson n gross estate 181
Credts aganst ta , foregn ta credt, orm 706C , evdence of
payment 198
Damages for wrongfu death, receved under New ersey Death by
Wrongfu ct statute 179
Domce, aw of, communty nterest 181
Indans, uapaw Trbe, aotted ands 182
Insurance, fe:
Death benefts, pad survvng spouse vng when proof of dece-
dent s death s submtted 196
Recevabe by benefcary other than estate, ncuson n gross
estate.. 186
Marta deducton:
Power of appontment, over ony porton of property receved by
wdow 195
Termnabe nterest, survvng spouse, nsurance pocy proceeds. 196
Powers of appontment:
ercse of:
Parta 183
Proraton of chartabe deducton 194
Genera power:
Receved by wdow to appont ony a porton of property
receved 195
Trustee-benefcary prevented by State aw from dstrbutng
trust corpus to hmsef 185
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410
state ta Contnued P n
Iea property, ncuson n gross estate, New Me co, ansas 1S1
Returns:
Certfcaton of copy of w 198
orm 706 (revsed December 1953) 199
Preparaton of orm 706 by attorney or agent on behaf of ta -
payer 199
Stus of property:
onds of a domestc corporaton, decedent a ctzen and resdent
of Canada . 203
Law of, governs communty nterest 181
Moneys hed for nonresdent aen by an e press company 204
Transfer, contempaton of death, e ercse of gft-spttng prvege,
gross estate of consentng spouse 179
Treates, ta :
Decedent a ctzen and resdent of Canada, bonds of a domestc
corporaton ncuded n assets . 203
emptng restrcted aotted and of Indans, uapaw Trbe 182
auaton:
Shares of stock of cosey hed corporaton 1S7
Stock, death of stockhoder, opton to repurchase reserved by
ssung corporaton . 194
states and trusts. (See Trusts: states and trusts.)
cess-profts ta :
d|usted e cess-profts net ncome 17
ttrbutabe to bad debt recoveres, fng orm 1120 162
cess-profts credts:
ased on ncome, acqurng corporaton 166
storca nvested capta, equty nvested capta, Reguatons
130 amended 163
Invested capta, equty capta defned, Reguatons 130 amended. 163
Industry base perod rates of return, purchasng corporaton, propr-
etorshp propertes acqured 16S
Ta , rate and computaton, Reguatons 130 amended to correct e -
ampe n secton 40.452-4(0 163
Ta -free e changes, propertes of soe propretorshp acqured by
corporaton 168
changes of property:
Capta stock at par vaue for crop ncome ._ 104
Capta stock, for certan assets of nsurance company 154
Sae of and and remova of prncpa resdence to new ot 112
Securtes, parent regstered hodng company and subsdares 99
Stock for stock of same corporaton 101
cse ta es:
dmssons ta :
ffars conducted by aumn assocaton, proceeds nurng to
unversty fund 239
ffars conducted by none empt assocaton, proceeds nurng
to schoarshp fund.. 237
ssessments by Dstrct Drectors, Reguatons 43 amended 272
change tckets 234
Guded tour 234
Pocy for furnshng nformaton on orm 720, quartery return,
contnued 255
Proceeds nurng to anguage group conducted by educatona
organzaton 236
Rodeo conducted by e empt educatona nsttuton, performers
partcpatng for compensaton 236
Cabaret ta :
Operaton of teevson set as ony form of entertanment 230
Communcatons ta :
ssessments by Dstrct Drectors, Reguatons 42 amended 272
Dues, ntaton fees, etc:
ssessments by Dstrct Drectors, Reguatons 43 amended 272
Stock transfer, fees pad by wthdrawng or ncomng cub mem-
bers. 240
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411
cse ta es Contnued Page
Manufacturers ta :
utomobes, etc.:
Computaton of ta on reta saes by mporter, Revenue
Rung 54-25 superseded . 258
Low-bed traers or semtraers . 260
Repacement bodes for trucks or truck traers 259
ectrc ar heaters, permanenty nstaed or portabe types 261
ectrc ght bubs, etc.:
oor stocks refunds, Reguatons 46 amended 228
oor stocks refunds, statute of mtatons 234
rearms, shes, etc.:
Parts and accessores for frearms 264
Teescopc sghts, rfescopes mported, deaer s cense to
se 253
Genera, credts and refunds, ta pad on nonta abe saes 265
Lenses, photographc equpment 262
Refrgerators, etc.:
oor stocks refunds, Reguatons 46 amended 228
oor stocks refunds, statute of mtatons . 234
Stamp ta es:
onds, etc., agreement reducng amount of quarter-annua
nstaments 242
Reducton of certan e cse ta rates and 1-year e tenson of certan
other e cse ta es (Pubc Law 324) 343
Retaers ta :
ur artces, fur-trmmed coats, reversbe fur coats 245
ewery, stop watches and pedometers 245
Toet preparatons used as theatrca makeup 247
Safe depost bo es, assessments by Dstrct Drectors, Reguatons
42 amended _ . 272
Stamp ta es:
onds, etc., new ssue, nterest rate change, consodaton agree-
ment 241
onds, etc., remova of documentary stamps 256
Conveyances, remova of documentary stamps 256
Sae of reaty sub|ect to an e stng mortgage 276
Stock, etc., transfer of stock by e empt organzaton 242
Transportaton ta :
Persons:
Charges n e cess of 35 cents . 266
Commutaton tckets 271
orm or e empton certfcate for estabshng nonta abe
character of payments 267
ractona part of cent dsregarded n computng the amount
of ta to be coected by carrer 265
Lmousnes operated to and from arport and surroundng
areas and havng a seatng capacty of ess than 10 pas-
sengers 269
Purchase of tcket n Canada or Me co 267
Sghtseeng tours, mousnes not operated on estabshed
ne 269
Property:
ssessments by Dstrct Drectors, Reguatons 113 amended 272
utomobe chasss, shpments from wthn Unted States
to port of e portaton. 275
Charges pad by edera agences and nstrumentates 274
oundry facng, consstng of puverzed coke 273
Produce assgned to hauers for devery 273
Shftng empty barges 274
Wagerng ta es, organzatons, ta e empt, operatng punchboards,
tp games, wagerng poos 254
empt corporatons and assocatons:
ccumuaton of ncome, amount or duraton 291
ppcaton for e empton, procedure 88
Chartabe foundaton sub|ect to secton 3814 of the Code, accumua-
ton of ncome... . 289
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412
empt corporatons and assocatons Contnued
ffectve date of e empton 88
armers cooperatves, purchases for persons who are nether members
nor producers 93
Growers marketng cooperatve, capta stock ssued for member s
crop ncome 104
Operatng punchboards, tp games, wagerng poos, abty for wager-
ng e cse ta es 254
Procedure for fng returns, Reguatons 118 amended 86
Separate chartabe fund 92
Unreated busness net ncome, research actvtes 160
empt ncome:
ward receved for dstngushed edtora wrtng, Putzer prze- 28
undamenta research, e empt organzatons 160
Nonresdent Canadan corporaton, ncome derved from entertaner s
persona appearances n the Unted States 156
emptons:
Dependents, when are chdren egay adopted, Maryand, rgna,
and Mssour statutes _ 69
Nonresdent aens, perodc amony payments to 156
tenson of tme:
armers cooperatves 78
ng of corporaton ncome ta returns 79

armers and farmng, capta e pendtures, constructon of earthen ter-

races to prevent so eroson 68
oregn corporatons, Canadan, nonresdent, ncome from an entertaner s
persona appearances n the Unted States 156
oregn ta credt:
razan ta on corporatons 129
us companes, routes between Unted States and Canada 130
Ta es pad on ncome e empt from Unted States ta 129
orms:
edera ta , copyrghted 83
W-2, use and reproducton by State and oca governments 226
W-2. Wthhodng Ta Statement for 1954, reproducton.... 225
Gan or oss:
ass:
Property transmtted at death 113
Sae of persona property, nonresdent ctzens of Unted States.. 12
Recognton:
Capta stock e changed for crop ncome 104
Converson of edera savngs and oan assocaton nto State
budng and oan assocaton 106
Dstrbutons, e changes, transfers of stock, regstered hodng
company and subsdares 99
change of new second preferred stock for common stock on
reorganzaton . 109
Postponement of 296
Reorganzaton:
ntre pan a snge transacton 111
Separate ncorporaton of branches 105
Sae of and and remova of prncpa resdence to new ot 112
Sae of resdenta property n two parces . 98
Stock for stock of same corporaton 101
Gft ta :
Domnon and contro, transfer of stock 205
Donee, persona abty of, ncome from trust . 207
cusons:
uture nterest, trust for care of donor s mnor chdren 207
Present nterest, not aowabe, ncome not determnabe 207
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413
Gft ta Contnued Pw
Gft-spttng:
ocaton of specfc e empton to other spouse . ... 207
Return fed and consent e ecuted by one spouse as agent for
absent spouse 205
Gfts of property to the Pacfc War Memora Commsson, an agency
of the Terrtory of awa . 65
Specfc e empton, not aocabe to use of other spouse 207
Transfers, easeback of property, renta payments by grantor to
trustee.. 20
Trusts:
uture nterests, for care of donor s mnor chdren.. 207
Income not determnabe 207
auaton:
Genera, stock transferred . 205
Shares of stock of cosey hed corporat on 187
Gross ncome:
cusons, damages under the New ersey Death by Wrongfu
ct statute receved by decedent s estate or by dependents 179
Incusons:
enefts under sef-nsured pan (New York), e cess over con-
trbutons _ 29
Dverted porton of potca contrbutons 11
Income from e change of assets between nsurance companes.. 154
Income from sources wthout Unted States, nonresdent
ctzens 117
Lfe nsurance premums pad by empoyees trust 150

usband and wfe, separate nterests n same trade or busness, mta-

ton on osses 128
I
Income:
rom sources wthn possessons of Unted States, communty ncome
of spouses 157
rom sources wthout Unted States:
us companes, routes enterng Canada 130
Sae of persona property 12
Indvduas osses. (See Losses: Indvduas.)
Informaton at source, orm 1042 Suppement, e change of nformaton
under ncome ta conventons 144
Instament saes, ncome reported on nstament bass by deaer n per-
sona property... . 76
Insurance:
Commssons receved by corporaton engaged n fre nsurance bus-
ness pursuant to contract wth agent 175
Premums:
mpoyer contrbutons to, group fe nsurance 17
Pad by empoyees trust for partcpants 150
Proceeds, used to redeem capta stock hed by estate of deceased
stockhoder 114
Insurance companes:
Lfe, e changes of capta stock for certan busness assets 154
Interest:
Pad on notes whch do not n fact represent an ndebtedness 53
Receved:
Muncpa bonds 28
Unted States savngs bond, redeemed by one coowner 12
Inventores (LI O):
Department stores, anuary 1954 LS prce nde es 39
ectve method, prce nde es for une 1953, for use by varety
stores 153
Specaty stores 32
arety stores, December 1953 LS prce nde es 08
Invountary converson of property, postponement of recognzed gan 296
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414

udgments, vacated, convcton for wfu evason of ta es . 146

L
Leases, producng o and gas, sae by partners 284
Legsaton:
ghty-thrd Congress:
Pubc Law 324 343
Lens for ta es:
edera, fng, reeasng, dschargng n New York State 280
New York, |udgment credtor, prorty 282
Opton rghts 277
Prorty, edera or muncpa 277
Lqudaton (see aso Corporatons: Lqudaton):
Dvdends pad credt, pree stng defct . 71
Growers marketng cooperatve assocaton, treatment of outstand-
ng capta stock s vaue 104
Loans, bank, acqured wth certan assets from another bank 60
Losses:
Casuaty or theft, drought damages to resdenta property 58
Indvduas:
Drought damages to resdenta property 58
cess of pubc offca s contrbuton over share of partnershp
ncome poo 152
Lmtat n on:
ocaton between ta payer and spouse n communty property
States 129
usband and wfe havng separate nterests n same trade or
busness 128
Msceaneous, ordnary osses, redempton of corporate obgatons 128
M
Mtgaton of effect or mtaton, renegotaton of war contracts, appca-
ton of Rev. Ru. 54-53 n certan eases 286-288
N
Net ncome:
Computaton, carryover, capta oss ncurred by decedent 147
Persona hodng companes, undstrbuted subchapter ncome 175
Unted States and Canadan, bus companes 130
.Unreated busness ncome, research actvtes 160
Net operatng oss, reducton n net ncome, chartabe contrbutons aow-
abe to ndvduas . 64
O
Obgatons of, States and subdvsons, muncpa bonds, mted abty.. 28
O and gas propertes:
ecton by partnershp to charge to e pense ntangbe drng and
deveopment costs 64
Tte vested n one partner, sae of producng eases 284
Overpayments, refunded ony after cose of ta abe year 159
p
Partnershps:
Capta gans and osses, sae of producng eases, o and gas prop-
ertes, secton 117(|) treatment 284
Death of partner, effect on partnershp nterests and requrements for
fng returns 153
Dstrbutons:
Medca servce fund 151
Share of pooed ncome, ta abe or deductbe as a oss 152
Lmted, abty of mted partner 285
Returns:
Change n membershp durng year 153
Medca servce fund _ 151
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415
Payment of ta , farmers cooperatves ... . 78
Penates, asserted n connecton wth return and payment of ncome wth-
hodng ta 224
Pensons, od age, abor unon empoyment, compusory unon assessments
n pror years .. _..... 46
Persona hodng companes:
Commssons receved pursuant to contract wth agent . 175
Undstrbuted subchapter net ncome 175
Persona servce corporatons, nformaton returns, utzaton of Schedue
PS ( orm 1120) 1951 165
Pubc Law:
ghty-thrd Congress:
No. 324 reducng certan e cse ta rates and e tendng for 1 year
certan other e cse ta es . 343
Pubcty of returns and nformaton:
Commttees of Congress 69
Senate ankng Commttee _ 84

Rea estate:
New York State, fng, reeasng, dschargng, edera ta ens . 280
Sae of and and remova of prncpa resdence to new ot 112
Sae of resdenta estate n two parces 98
Redempton of stocks and bonds, Unted States savngs, redeemed by one
coowner 12
Refunds. (See Cams for refund or abatement.)
Reguatons (see aso mendments: Reguatons):
Wthhodng, Unted States- egum ncome ta conventon 132
Renegotatons. (See War contracts.)
Rent pad, easeback of property by grantor of trust 20
Reorganzatons:
Converson of edera savngs and oan assocaton nto State budng
and oan assocaton 106
change of new seoond preferred stock for common stock, recogn-
ton of gan 109
New stock e changed for new stock of another seres 101
Recognton of gan or oss, entre pan a snge transacton 111
Separate ncorporaton of branches 105
Resdence. (See Rea estate.)
Resdent aens. (See ens (resdent).)
Returns:
Corporatons:
empt, procedure for fng returns,Reguatons 118 amended.. 86
tenson of tme for fng 79
oregn, e tenson of tme for fng returns, Reguatons 118
amended 80
Indvduas, resdng or traveng abroad, e tenson of tme for fng re-
turns, Reguatons 118 amended 80
Informaton:
orm 1042 Suppement, e change of nformaton under ncome
ta conventons 144
Utzaton of Schedue PS ( orm 1120) 1951 1 165
Inspecton:
Commttees of Congress . 84
Senate ankng Commttee . 84
Reproducton of 82
Tme for fng:
armers cooperatves 78
Income wthhodng ta 224
Rungs. (See dmnstraton and procedure.)
S
Saes or e changes, sae of and and remova of prncpa resdence to new
ot.. 112
Securtes transactons, stock recaptazaton, e changes, dstrbutons,
approved by Securtes and change Commsson 99
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416
Sef-empoyment ta : Ptf
grcutura abor:
Partner operatng farm for partnershp 213
Prunng and cuttng Chrstmas trees on nonfarm and . 171
Communty property, wfe s dstrbutve share of ncome from hus-
band and wfe partnershp 109
unera servces, carfcaton of term funera drector 173
Incuded and e cuded earnngs, prunng and cuttng Chrstmas trees
on nonfarm and 171
Partners and partnershps, wages for empoyment assgned to partner-
shps. . 174
Professons, e cuded from trade or busness, funera drector 173
Trade or busness:
Performance of servces as funera drector does not consttute a. 173
Seamstress, servces performed n homes of estabshed customer
centee 170
Stock dvdends. (See Dvdends (stock).)
Suppement U ncome, research actvtes, e empt organzatons 160
T
Ta Court of the Unted States, The:
Decsons of, st of acquescences and nonacquescences... 3-7
Ta es:
Deducton:
State of Massachusetts on cgarettes 57
State of Okahoma on cgarettes 55
oregn countres. (See oregn ta credt.)
Tobacco ta :
onds, sea stores, ma mum pena sums, Reguatons 76 amended... 243
Sea stores, ma mum pena sums for bonds. Reguatons 76 amended. . 243
Unted States use of artces, gratutous dstrbuton at mtary
estabshments 257
Traveng e penses, professona baseba personne, away from cub
town or ta home 51
Treates:
Canada, nonresdent corporaton dervng ncome from an enter-
taner s persona appearances n the Unted States 156
Unted States- egum ncome ta conventon, wthhodng regua-
tons 132
Trusts:
mpoyees :
Lfe nsurance premums pad for partcpants 150
Penson:
Ordnary fe nsurance ony benefts 149
Pad by empoyer after empoyee contrbutons are e -
hausted 149
Proft-sharng pan:
Incdenta fe nsurance 147
Wthdrawas 150
states and trusts:
Leaseback of property by grantor 20
Net ncome computaton, capta oss carryover 147
Income for beneft of grantor:
Cark decson to be foowed n other cases ony f ssue and
facts are dentca 24
Soe dscreton over dstrbutons to benefcary 22
War contracts: W
Renegotaton:
d|ustment of ncome and e cess-profts ta es, appcaton of
Rev. Ru. 53 n certan cases 286-288
Rebates, nterm aowances 391
Western emsphere Corporatons, aowabe credts, computaton, aterna-
tve ta 123
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417
Wthhodng:
mpoyees, cvan government, outsde contnenta Unted States,
cost-of-vng aowances, post dfferenta payments 222
Income ta at source:
Cost of-vng aowances, e cuded 222
Reguatons under Unted States- egum ncome ta conventon. 132
Labty for ta , mted partner 285
Nonresdent aens:
orm 1042 Suppement, e change of nformaton under ncome
ta conventons 144
Perodc amony payments to 156
Penates and nterest, money wthhed from empoyees as ta es
wfuy used to pay busness e penses 247
Recepts:
orm W-2:
Reproducton 225
Use and reproducton, State and oca governments 226
Wages:
Payments for reuse of recordngs 216
Pensons, based on e cepted agrcutura abor 223
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