2. In the case of the stock in respect of which any stock dividend was paid as described under 1, the cost of each share of old stock is similarly the quotient of the cost of the old stock divided by the number of old and new shares.

3. In the case of stock received as a dividend in 1916 or subsequent years out of surplus earnings or profits accrued since March 1, 1913, the cost of each share is the valuation at which it was returnable as income, as shown by the transfer of surplus to capital account on the books of the corporation, usually its par value.

4. In the case of the stock in respect of which any stock dividend was paid as described under 3, the cost of each share is its original cost, regardless of any stock dividend.84

Stock Dividends Resulting from Revaluation of Assets. If a corporation has earnings or surplus accumulated since February 28, 1913, any distribution will be deemed to be from such earnings until they have been distributed.85 If a corporation has no earnings or surplus accumulated after February 28, 1913, it may issue a stock dividend to distribute surplus created from the revaluation of capital assets or to represent value placed upon trademarks, good will, etc., and such dividends are not income to the shareholder. When stock received in payment of such a dividend, or stock in respect of which any such dividend was paid, is sold, the cost of each share of stock, whether old or new, for the purpose of ascertaining the gain or loss resulting from its sale, is the quotient of the cost of the old stock, if acquired on or after March 1, 1913, or its fair market price or value as of that date if acquired prior thereto, divided by the number of old and new shares added together. The profit so ascertained from the sale of such stock is income subject to both normal and surtax in the year in which the sale is made.86

84 T. D. 2734; Reg. 33 Rev., Art. 4, as amended by T. D. 2734. See also letter from Treasury Department dated October 30, 1916, I. T. S., 1918, ¶ 256. Letter from Treasury Department dated March 24, 1916 I. T. S., 1918, ¶ 257.

85 Letter from Treasury Department dated May 14, 1918; I. T. S. 1918, 3376.

86 T. D. 2734.

F. T.-26

CHAPTER 24

INCOME FROM ROYALTIES

Under the 1916 Law and prior laws the Treasury Department expressly required that royalties from mines, oil wells, patents, franchises, or other legalized privileges be separately reported by the individual, but not by corporations. No particular rules have been issued with respect to royalties and with respect to income from royalties, except to hold that royalties received by a corporation in accordance with a contract by which it has assigned the patent rights to manufacture machines, etc., are income and should he so accounted for,1 and that royalties paid to a proprietor by those who are allowed to develop or use property or operate under some right belonging to such proprietor are also to be accounted for as income.2 In the case of mines operated by a lessee on a royalty basis, the amount of royalty received by the lessor is income.3

Royalties from Mines. It has been contended that royalties received under mining leases and oil leases are in fact not income but payments of installments on the purchase price of the natural deposit. The nature of such leases has been the subject of some difference of opinion in the courts. It has been held that the leases are such in name only, and are in fact conveyances of the ore body in place as a part of the realty, and that the so-called royalties merely represent payments for so much land and are in

1 Reg. 33 Rev., Art. 113. January 24, 1916; I. T. S. 2 Reg. 33 Rev., Art. 4. 3 T. D. 2152.

Letter from Treasury Department dated 1918, ¶ 1262.

no just sense income, but mere conversions of the capital. On the other hand, it has been held that such leases do not constitute a sale of any part of the land and further, that ores or other materials derived from the usual operation of open mines or quarries, constitute the rents and profits of the land. The United States Supreme Court in a case arising under the 1909 Law reviewed the conflicting authorities, and held that under the language of that law royalties received under mining leases were income. In another case the lessee had the right or privilege of removing the ore so long as he saw fit to hold the same without exercising the privilege of cancellation, but nevertheless he was held to be in no legal sense a purchaser of ore in place. Such royalties are treated as income, against which the owner of the property may claim an allowance for depletion of the natural resource.

Royalties from Patents and Copyrights. Taxpayers receiving royalties from patents, copyrights, or other similar forms of property, may deduct from each payment a proportionate part of the cost thereof as representing at return of capital. This is more fully discussed in a subsequent chapter.6

Royalties Received by Non-Resident Aliens. Royalties paid to non-resident aliens under an agreement of purchase of certain patent rights, the payment being based upon the quantity of goods produced by the use of such patents, are held to be income accruing to non-resident aliens by reason of property owned or business carried on within the United States.7

4 Von Baumbach v. Sargent Land Co., 242 U. S. 503.

5 U. S. v. Biwabik Mining Co., 247 U. S. 116, reversing 242 Fed. 9. 6 Reg. 45, Arts. 45, 163; see chapter 31.

7 T. D. 2137.

CHAPTER 25

INCOME FROM MISCELLANEOUS SOURCES

After specifying a number of sources of income, the act provides that the net income of the taxpayer shall include gains or profits and income derived from any source whatever. In this chapter are set forth the rulings on income from sources not covered by the preceding chapters and on receipts which are not income.

Alimony. Alimony is not income, as it does not arise from any business transaction, and is not founded on any contract, but on the natural and legal duty of the husband to support the wife. It follows that the husband cannot deduct the amount he pays as alimony from his income for the purpose of the tax.

Accident, Health or Workmen's Compensation Insurance. Amounts received through accident or health insurance or under workmen's compensation acts as compensation for personal injuries or sickness are exempt from income tax and the amount of any damages received, whether by suit or agreement on account of such injuries or sickness is also exempt.3

1 Revenue Act of 1918, § 213 (a).

2 Gould v. Gould, 245 U. S. 151. This decision reversed the ruling of the Treasury Department on the point.

3 Revenue Act of 1918, § 213 (b) 6. Money paid to a person insured by an accident insurance policy on account of accident was first considered income (to the extent that the amount exceeded the aggregate premiums paid) but amounts received from a railroad company, by way of reimbursement for expenses incident to an accident were not income. But these rulings were revoked and it was held in pursuance of an opinion of the Attorney General based upon Doyle v. Mitchell Brothers, 247 U. S. 179, affirming

Assessments on Stock. Assessments paid by stockholders on stock are not income of the corporation, nor is a voluntary contribution on the part of the stockholders, to make good a deficit of the corporation. Such payments are simply an addition to the capital stock of the company.4

Cancelled Debts. Cancellations of debts do not ordinarily create income to the debtor.5 The rule might be otherwise, however, in case the cancellation was in consideration of services rendered, since the law provides that compensation for personal services, in whatever form paid, is income.

Allocation of Income from Judgments. Lands which are received as compensation for services in one year, the title to which is disputed and in a later year adjudged to be valid, constitute income to the grantee in the former year. On the other hand, a person may sue in one year on a pecuniary claim or for property, but money or property recovered on a judgment therefor rendered in a later year would be income in that year, assuming that it would have been income in the earlier year if then received. In general, a judgment for the plaintiff may produce income; a judgment for the defendant usually does not. However, money paid by a debtor to a receiver, pending determination as to which of two or more claimants other than the debtor is entitled to it, is to be treated as income of the successful claimant in the year when paid to the receiver. Bad debts or accounts charged off because of the fact that they were determined to be worthless and subsequently recovered, whether or not by suit, constitute income for the

235 Fed. 686, Lynch v. Turrish, 247 U. S. 221, and Southern Pac. Co. v. Lowe, 247 U. S. 330, that the proceeds of accident insurance policies received by an individual on account of injuries sustained by him through accident were not income under the 1916 Law as amended (T. D. 2747).

4 Letter from Treasury Department dated February 21, 1916; I. T. S. 1918, ¶ 1291.

5 U. S. v. Oregon-Washington etc. Co., 251 Fed. 211.