50). A different rule applies to a corporation's own bonds, where the discount or premium is prorated over the life of the bonds as additional interest, or as a reduction of the interest charge. A profit or loss may arise upon retirement before maturity. To determine the value equivalent to "selling price," the premium or discount, remaining unamortized at the time of repurchase should be added to or subtracted from the par value. A corporation may thus have a taxable gain or a deductible loss from transactions in its own bonds in the same way as if the bonds were those of another corporation (Art. 545); an exception lies in the fact that the discount or premium on the bonds owned, obligations of another corporation, cannot be amortized.

No deductible loss arises in connection with the sale by a corporation of its own stock, commissions of a reasonable amount being regarded as a capital expenditure (T. B. R. 40), but interest received by a corporation from subscribers on their unpaid subscriptions was looked upon as being taxable income (L. O. 1035). Likewise, expenses of retiring stock are capital expenditures and cannot be claimed as a deduction (O. D. 852). A reduction in salaries due officers, when accepted by the officers, was held to be a capital transaction without taxable income arising to the corporation (O. D. 1034).

Discount and expenses incurred upon the sale of serial bonds should be prorated equitably as between the various series (O. D. 936); if bonds are retired before maturity at a discount and were originally sold for par, a taxable profit arises in the year of retirement (A. R. R. 545). Where discount had been charged off prior to the maturity of bonds a corporation was allowed to file amended returns (O. D. III).

IV

INSTALMENT SALES-CONTRACTS-LIQUIDATIONS INVOLUNTARY CONVERSIONS GIFTS

Profits from instalment sales taxable when realized. Two bases for reporting income from contracts. Profits of a retiring partner. Income of a liquidating corporation. Profits from appropriation by government and from casualty or theft. Property acquired by gift, devise, bequest, or inberitance. "Colorable" gifts.

RECOGNITION is made of the deferment of profit through sales of personal property and real estate on the instalment plan, where profits are taken up only as the cash is received. In T. B. R. 24, O. D. 623 and O. D. 793, a suggested plan of accounting for instalment sales is outlined which, in brief, embraces an "Unrealized Gross Profit" account (deferred credit) offsetting in part "Instalment Accounts Receivable." The former is reduced in proportion (and profit and loss credited) as actual cash is realized. In changing the records to the instalment method, no portion of sales the gross profits on which have already been included in full, should again be reported as taxable income. The 1918 law did not specifically permit accounting by the instalment sales method although the Department has permitted it since January 1, 1918; the 1921 act definitely allows it (Sec. 202 (f)).

An instalment sale is defined in Article 42 as a sale where the buyer usually pays less than 25% down, the remainder being spread over a period of weeks, months, or years, and where the seller retains either title, lien, or other interest in the property until payment is made in full. Although the first payment is more than 25%, the income may be reported on the instalment basis if the sale is really an instalment sale.

Upon default and repossession of the property, the latter must appear in the inventory of the vendor at the cost price thereof (less damages), and the instalments already received in cash, less the profit thereon already returned as income, must be shown as income in the year in which the repossession takes place (Art. 42-3).

The accounting for income derived from the sale of real estate does not differ, the 25% initial payment test being regarded as the dividing line. Instalments paid in are not to be treated as reductions of the original investment as is frequently the case in practice, but as a pro-rata realization of the selling price. Where a first payment of more than 25% is made the notes or other evidences of indebtedness received for the balance may have no readily realizable market value, in which case the rule of (e) (2) on page 46 will apply to the first and subsequent payments (Art. 4446). But this rule of Article 46 has apparently been regarded as optional by the Committee on Appeals and Review (A. R. R. 2698) and the Income Tax Unit (O. D. 842), possibly because of the wording of Article 1569. In other words, where property is sold the taxpayer has the choice of using the method of (e) (2), page 46, or the instalment sales method providing

(a) Cash of more than 25% is paid down, and the balance consists of

(b) Evidences of indebtedness having no fair or readily realizable market value.

Of course, the vendor may report the entire income in the year the sale occurs if he so elects, but his policy should be consistent.

Gross profits may be averaged over all instalment sales (O. D. 23) or may be more closely computed in accordance with the various classes of sales made (O. D. 25); if other data are not available average gross profits for the year may be taken (O. D. 1107).

While the first cash payment on an instalment sale is generally limited to 25%, a sale may, nevertheless, be an instalment sale where the personal credit of vendee made the discounting of the notes given by him prohibitive as to cost (O. D. 181, 715, 842 and A. R. R. 2698); however, low market value of evidences of indebtedness received does not in itself warrant regarding a sale as an instalment sale (I. T. 1191). Where cash of less than 20% was paid down and security other than the object of sale was offered as collateral to secure the remaining indebtedness, the sale was deemed to be a cash sale (O. D. 290 and 569). Sales of an automobile dealer who took used cars in exchange were not instalment sales (O. D. 782); likewise where less than 25% was paid down but more than 50% was paid before the end of two months, it was held that there had been a substantial initial payment and the sale was not on the instalment basis (O. D. 568 and 569). If an instalment account is continuous, payments will be regarded as applicable to the earliest purchases unless there is some means of identifying them with particular contracts (O. D. 815 and 1045). The benefit of instalment sales is not limited to dealers (S. 1353 and O. D. 482).

Expenses on instalment sales were held to be deductible only in the year incurred and could, therefore, not be prorated (0. D. 844); developmental expenditures yet to be made which are ordinarily included in the cost of lots may be estimated (O. D. 226) and later a redetermination of the profits made if necessary (O. D. 567).

A reversion to the accrual method necessitates the reporting of profits from the instalments of prior years (I. T. 1805).

CONTRACTS

Long-term contracts are like instalment sales in that cash receipts thereon may be spread over a period of several years. If the contract involves construction work there may be contingencies attaching to it, making an intermediate computation of profits impracticable. The Department has been liberal in prescribing rules for contractors to follow. The regulations outline two methods which are suggestive and not mandatory.

(a) Income may be reported on the basis of per

centage of completion. Copies of engineers' or architects' estimates should accompany the return and unused materials must be carried in the inventories. It is to be presumed that a reserve for contingencies may be deducted if it can be shown that past experience justifies its inclusion. A percentage may also be held out on the contractor as a guarantee of contract fulfilment; this amount is ordinarily received after the contract has been completed, and it would seem proper, therefore, to include it in income only in the year in which it is received.

(b) Income may be reported in the year the contract is completed.

Any other method which a contractor may desire to follow should, of course, meet the test of good accounting practice (Art. 36).

A change from the reporting of income on the completed contract basis could be made to the accrual basis without specific permission from the Commissioner, contracts already existing being continued on the old basis (O. D. 933). If a completed contract was not entirely paid for, the balance remaining as an account receivable must, nevertheless, be reported as income in the year of completion (O. D. 1147). Amounts received in cancellation of contracts are income in the year received (A. R. R. 485). A contract to sell real estate does not give rise to income until such time as the deed passes or until the burdens and benefits of ownership from a practical standpoint are transferred (O. 988 and O. D. 842); nor are mere purchase contracts to be accounted for until the goods are delivered to the carrier for shipment to the buyer, or, if the buyer is to call for the goods, until there is a specific identification of the goods manufactured or purchased and they are put into a deliverable state (O. D. 826).

PROFITS OF A RETIRING PARTNER

A partner on retiring from a partnership has taxable income or deductible loss if he receives cash or assets other