in carrying on farming operations, is not deductible and it is regarded as an investment of capital. The cost of gasoline, repairs, and upkeep of an automobile if used wholly in the business of farming is deductible as an expense; if used partly for business purposes and partly for the pleasure or convenience of the taxpayer or his family, such cost may be apportioned in accordance with the extent of the use for purposes of business and pleasure or convenience, and only the proportion of such cost justly attributable to use for business purposes alone is deductible as a necessary expense.22

INTEREST. The rules respecting the deduction of interest by farmers do not differ from the rules respecting the deduction of interest by other individuals and corporations subject to tax, and are discussed elsewhere in this book, 23

TAXES. In general, the rules respecting the deduction of taxes by farmers are the same as the rules respecting the deduction of taxes by other individuals or corporations subject to tax, and are discussed elsewhere in this book.24 Farmers who work out road or other taxes may

22 Reg. 45, Art. 110. Under Reg. 33 Rev., Art. 4 and T. D. 2153, dated February 12, 1915, the deduction of expenses in the return for the year in which they were made even though the crops and stock in connection with which they were incurred may not have been marketed during the year for which the return was rendered, was only permissible. Where under the former rulings a farmer has not deducted the cost of producing the farm products he may deduct the same from the selling price and report only the difference as income. T. D. 2665 now limits such deduction to the year in which the expenditures were made. It was formerly held that the cost of stock purchased for resale might, at the option of the farmer, be deducted as an expense, or taken into consideration upon the sale of such stock, but that money expended for stock for breeding purposes was, as now, to be regarded as capital invested and therefore not deductible, except as the stock depreciated in value. (See also Reg. 33 Rev., Arts. 4 and 123.)

23 See Chapter 28 on Deduction of Interest. 24 See Chapter 29 on Deduction of Taxes.

deduct the amount thereof, but if they do they must also include the same amount as income.

LOSSES. Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by reason of deterioration in storage shall be allowed. The total loss by frost, storm, flood or fire of a prospective crop, or of a crop which has not been sold, is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm. If live stock has been purchased for any purpose, and afterwards dies from disease, exposure or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such stock, less any depreciation which may have been previously claimed with respect to such perished live stock, less also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property, less depreciation already allowed, destroyed by order of the authorities of a State or of the United States may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States, in whole or in part, on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. In determining the cost of stock for the purpose of ascertaining the deductible loss there shall be taken into account only the purchase price, and not the cost of any feed, pasturage, or care which has been deducted as an expense of operation. If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business, or

calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure.25

DEPRECIATION. A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm machinery, and other physical property, including live stock purchased for draft, dairy, or breeding purposes, but no claim for depreciation on live stock raised or purchased for resale will be allowed. Live stock purchased for draft, breeding or dairy purposes, or for any purpose other than resale may be included in the inventory for each year at a figure which will reflect the reduction in value estimated to have occurred during the year through increase of age or other causes. Such a re duction in value should be based on the cost and estimated life of the live stock. If an inventory is not used, a reasonable allowance for depreciation may be claimed based upon the cost of draft and work animals and animals kept solely for breeding purposes and not for resale.26

DEPLETION. Farmers are permitted the same allowance for the exhaustion of natural deposits as other individuals and corporations. This subject is treated elsewhere in this book,27

Returns of Farmers. Farmers are required to make returns of annual income and annual or special returns with respect to withholding at the source, information at the source, and other matters in the same manner and according to the same rules as those prevailing in the case of all individuals and corporations. This subject is treated elsewhere in this book.28 In addition to the annual return of income, farmers are required to prepare and file

25 Reg. 45, Art. 145; Reg. 33 Rev., Arts. 4 and 123; T. D. 2665. 26 Reg. 45, Art. 172; Reg. 33 Rev., Arts. 4 and 123. See Chapter 31 on Depreciation.

27 See Chapter 32 on Depletion.

28 See Chapter 34 on Returns.

a "schedule of farm income and expenses" (Form 1040 F) copies of which may be obtained from the local collector.

Payment of Tax; Penalties. Farmers pay the tax in the same manner as other individuals and corporations.29 They are also subject to all the penalties which may be imposed upon other individuals and corporations.30

29 See Chapter 35 on Assessment and Payment of Tax. 30 See Chapter 36 on Penalties and Compromises.

CHAPTER 20

INCOME FROM SALES OR DEALINGS IN PROPERTY

The law expressly provides that gains, profits and income derived from sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property, shall be taxable. It has been argued that gains resulting from an increase in capital should not be taxed, in cases where an owner was not engaged in the business of dealing in such property, but the language of the statute is broad enough to indicate that Congress intended the tax to apply to all transactions whether or not the taxpayer is a dealer. A leading case 3 construing the income tax act of 1864 held that the gain to

1 Revenue Act of 1918, § 213 (a).

2 In Doyle v. Mitchell Brothers, 247 U. S. 179, decided under the 1909 Law, the Court said: "Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration in an act for taxing the doing of business in corporate form upon the basis of the income received from all sources. Although the plaintiff in this case was not a real estate trading corporation the court proceeded on the assumption that certain of the proceeds of a conversion of stumpage lands should be treated as income, the difficult question at issue being to differentiate between the capital and income of such proceeds. In Hays v. Gauley Mountain Coal Co., 247 U. S. 189, although the plaintiff was not engaged in the business of trading in stocks and did not have such business among its corporate powers, the court held that so much of the profits from a sale of certain stock as might be deemed to have accrued subsequent to December 31, 1908, must be treated as gross income. See also U. S. v. Cleveland &c. Ry. Co., 247 U. S. 195. These cases, however, construed the 1909 Law, which was not an income tax law, but a law imposing an excise tax. 3 Gray v. Darlington, 15 Wall. 63.