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pressed in terms of English currency) were deducted, and the balance of the net profits on hand were converted at the prevailing rate of exchange at the end of the year. The converted balance plus the remittances converted at actual rates gave the taxable income expressed in American money for the year (O. D. 550 and 618). A corporation bought sterling exchange, remitting it to a London representative to use in purchasing raw materials. The Department ruled that the corporation had sustained no deductible loss at the close of its taxable year on the unexpended credit abroad on account of a lower exchange rate (O. D. 940), because a loss on foreign exchange is not deductible until realized (O. D. 764). The cost of goods purchased abroad priced in terms of foreign currency was the cost of the remittances covering the payment (O. D. 498). A domestic corporation bought substantially all of its raw material from its French stockholders. In making credit or debit entries the amounts were entered in francs and then in dollars converted at the current rate on the day of the transaction. The company in reporting income had converted the entire amount of francs due French interests into dollars at the prevailing rate at the end of the year whereas the proper method was held to be that income should be reported on the basis of dollars converted on the date of the transaction. If the amount due the French stockholders at the end of any year showed a debit balance due to exchange rates, that amount should have been applied against the portion of the debt which was longest outstanding and the difference in the exchange rates was taxable income or deductible loss (O. D. 590). Taxpayers trading or manufacturing in foreign countries have been allowed to convert their current assets, less current liabilities payable in foreign currency, at the current rate of exchange at the end of the year, or at any rate less favorable where the circumstances would seem to warrant (A. R. R. 15 and O. D. 489). A taxpayer, owning foreign securities received credit abroad expressed in foreign money for the interest as it accrued. The taxable income on the transaction was the amount expressed in terms of dollars converted on the date the credit was given at the then current rate of exchange. If a draft was mailed for the interest, the taxable income was determined by the rate of exchange on the date the draft was received. Where the purchase and sale of foreign securities resulted in a gain as computed in terms of the currency of that foreign country but in a loss when computed in terms of United States money, the result in terms of United States currency was the deductible loss (O. D. 809). A dealer in foreign exchange who was regularly engaged in the purchase and resale of foreign money to customers, may inventory

his unconverted exchange at cost or market whichever is lower. This rule does not apply, however, to an individual purchasing foreign money for investment or speculative purposes; a loss or profit therefrom can be reported only when his purchase is disposed of (O. D. 834). In general, income should be expressed in United States money at the exchange rate at the date of receipt (O. D. 419, 559). Commissions paid in a foreign country to Americans should be reported by both the corporation and the individual at the rate existing on the date paid or credited to the account, regardless of the number of commissions paid (O. D. 1066).

The following references contain approved quotations of values of foreign money with respect to the dollar at the close of various periods: O. D.'s 551, 772, 803, 876, 898, 913, 996, 1027, 1036, 1052, 1053, 1065 and 1137; I. T.'s 1202, 1315, 1324, 1325, 1482, 1483, 1495, 1544 and 1809.

IX

COMPENSATION FOR SERVICES-CANCELLATION OF INDEBTEDNESS

Compensation for services. When compensation is included as taxable income. Receipts representing additional compensation. Distinction between compensation for services and other forms of receipt. Military exemptions. Non-taxable compensation. Forgiveness of indebtedness. Accounts payable as taxable income.

SALARIES, wages, pensions from prior employers, commissions, tips, fees, and rewards are examples of sums that have been included in compensation for personal services. Amounts must be included in returns in the year in which they are made available to the taxpayer, or, if the books are kept on a cash basis, in the year in which received. When the compensation cannot be definitely determined for any one year or if its payment is dependent on some contingency, the amount need not be returned until the year of its determination. Where living quarters are furnished in addition to a cash compensation, a fair rental for such accommodations must be included in the return unless these accommodations are regarded as furnished "for the convenience of the employer." Premiums paid on insurance policies in favor of an employee or persons he may designate are taxable income to the employee as additional compensation unless they represent payments on group life insurance with beneficiaries designated by employees; in the latter case the premiums are not taxable to the employee. Compensation other than cash is taxable at its fair market value at the time of receipt; notes may be taken at their discounted value, providing the discount is included as income when the notes are paid (Art. 32-4). Traveling allowances over and above actual traveling expenses are taxable

as additional compensation (Art. 101(a)). Amounts received as compensation may, however, actually be dividends (Art. 105) or gifts (Art. 107). In the 1921 law all compensation received from the United States as a war pension and amounts received by veterans under the War Risk Insurance or Vocational Rehabilitation Acts are exempted from tax (Sec. 213(b) (9)). It had been previously held that such amounts except from War Risk Insurance were taxable (Sol. Op. 97).

Excessive salaries paid by a corporation to the extent not allowed as a deduction are to be regarded as dividends and subject only to surtax when bearing a close relationship to stockholdings. They may represent payments for property, in which case the recipient must treat the amount received as part of the purchase price (Art. 106).

Compensation from a state or political subdivision thereof is exempt (Art. 88); this rule is not contained in the 1918 and the 1921 acts, but resulted from a ruling of the Attorney General (T. D. 2843). Under the 1918 act, there was a $3,500 exemption (above personal credits) to those in the army or navy service.

Salaries of Federal judges were held to be exempt by Evans v. Gore (253 U. S. 245), providing the income tax law was not in existence at the time of their appointment. The reason for this rule lies in the third article of the Federal Constitution: "the judges, both of the Supreme and inferior courts . . . . shall . . . . receive for their services a compensation which shall not be diminished during their continuance in office." A similar limitation applies to the salary of the President (Art. II).

When compensation is included as taxable income-Bonuses awarded in 1919 for services rendered in 1916 constituted income to the recipient for 1919 (O. D. 497). Bonuses of 1916 received by check dated January 2, 1917, were taxable income of 1917 (A. R. R. 182). A railway employee was discharged and later reinstated with salary for the intervening two years; the amount was taxable in the year in which received (O. D. 512). Addi

tional salaries paid at the end of a term of years upon the condition that officers make the business pay, were taxable to the officers and a deductible expense to the corporation in the year payment was made (A. R. R. 232). A lump sum awarded to a receiver without being previously fixed was income for the year received, even though allocated by the court to certain years of service (T. D. 3159 and 2960; see also T. B. R. 12) and even if offset by overdrafts made in anticipation of the award of additional salary (T. D. 3161). A, keeping his books on a cash basis, received in 1919 for services beginning in 1909 compensation which was actually determined in 1919 when the business was liquidated. It was held to be taxable for 1919 to the extent it exceeded the March 1, 1913, value of the claim (O. D. 717, superseding O. D. 460). A fee allowed in 1919 to an attorney for an estate, by court order, for services from 1908 to 1919 was taxable in full in 1919 because there was no determinable claim as of March 1, 1913 (O. D. 1116). An award is taxable income when received (O. D. 602). Where a Federal officer's salary was held up for a number of years awaiting outcome of a contested election, the amount was held to be taxable income in the year received (O. D. 432). Commissions paid into court and held pending a decision as to ownership, were not required to be returned as income until settlement (O. D. 980). Commissions were taxable income when credited to the account of and placed under the control of the taxpayer (A. R. R. 366). Commissions paid in advance were taxable in the year advanced. Any portion paid back was deductible in the year returned (O. D. 19). Where an individual was employed as an agent for a firm and under his contract was to receive as compensation 50% of the profits of the agency which might be appropriated by him monthly as earned, the amount actually appropriated constituted income to the agent for the year in which appropriated because the balance was the property of the principal as long as it remained undrawn (S. 1312).

Receipts representing additional compensation. Where a clergyman was given free use of a parsonage, a fair rental value was required under the 1918 act to be reported as additional income (O. D. 862), but if he received only enough to live on and turned the remainder back to the order he was not required to make a return (O. D. 1197). From January 1, 1921, no income on account of quarters furnished need be reported (Sec. 213(b) (11)), a cash allowance to cover the cost of a parsonage, less expenses attributable to the portion thereof devoted to professional uses, is taxable income (I. T. 1694). The term minister

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