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The plaintiff in error seeks to recover the whole of these two assessments.

The same contention is made with respect to each of these payments as was made in No. 608, The Merchants' Loan & Trust Company, as Trustee V. Julius F. Smietanka, Collector of Internal Revenue, this day decided, viz., that the amounts realized from the sales of the stocks were in their inherent nature capital as distinguished from income, being an increment in value of the securities while owned and held as an investment and therefore not taxable under the revenue act of 1916 (39 Stat. 756) as amended in 1917 (40 Stat. 300) or under any constitutional law.

With respect to the first payment. It is plain that this assessment was on the profit accruing after March 1, 1913, the effective date of the act, realized to the owner by the sale after deducting his capital investment. The question involved is ruled by No. 608, supra, and the amount was properly taxed.

As to the second payment. The government confesses error in the judgment with respect to this assessment. The stock was sold in the year for which the tax was assessed for $22,253.75 less than its value when it was acquired, but for $120,710.75 more than its value on March 1, 1913, and the tax was assessed on the latter amount.

The act under which the assessment was made provides that the net income of a taxable person shall include gains, profits and income derived from

sales or dealings in property, whether real or personal

or gains or profits and income derived from any source whatever. (39 Stat. 757; 40 Stat. 300, 307.)

Section 2 (c) of this same act provides that "for the purpose of ascertaining the gain derived from a sale or other disposition of property, real, personal or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived."

And the definition of "income" approved by this court is: “A gain derived from capital, from labor, or from both combined, provided it be understood to include profits gained through sale or conversion of capital assets." Eisner v. Macomber, 252 U. S. 189, 207.

It is thus very plain that the statute imposes the income tax on the proceeds of the sale of personal property to the extent only that gains are derived therefrom by the vendor, and we therefore agree with the solicitor general that since no gain was realized on this investment by the plaintiff in error no tax should have been assessed against him.

Section 2 (c) is applicable only where a gain over the original capital investment has been realized after March 1, 1913, from a sale or other disposition of property.

It results that the judgment of the district court as to the first assessment, as we have described it, is affirmed, that as to the second assessment it is reversed, and the case is remanded to that court for further proceedings in conformity with this opinion. Reversed in part. Affirmed in part.

Mr. Justice Holmes and Mr. Justice BRANDEIS, because of prior decisions of the court, concur only in the judgment. SUPREME COURT OF THE UNITED STATES

No. 742.--OCTOBER TERM 1920. James J. Walsh, collector of internal revenue, In error to the district plaintiff in error,

court of the United

States for the district Frederick F. Brewster.

of Connecticut.

VS.

[March 28, 1921] Mr. Justice CLARKE delivered the opinion of the court. In this case the defendant in error sued the plaintiff in error, a collector of internal revenue, to recover income taxes for the year 1916, assessed

in 1918, and which were paid under protest to avoid penalties. The defendant answered, the case was tried upon an agreed statement of facts, and judgment was rendered in favor of the taxpayer, the defendant in error. The case is properly here by writ of error. Towne v. Eisner, 245 U. S. 418.

The defendant in error was not a trader or dealer in stocks or bonds, but occasionally purchased and sold one or the other for the purpose of changing his investments.

Three transactions are involved.

The first relates to bonds of the International Navigation Company, purchased in 1909, for $191,000 and sold in 1916 for the same amount. The market value of these bonds on March 1, 1913, was $151,845, and the tax in dispute was assessed on the difference between this amount and the amount for which they were sold in 1916, viz., $39,155.

The trial court held that this apparent gain was capital assets and not taxable income under the sixteenth amendment to the constitution of the United States, and rendered judgment in favor of the defendant in error for the amount of the tax which he had paid.

The ground upon which this part of the judgment was justified below is held to be erroneous in No. 608, Merchants' Loan & Trust Company, as Trustee v. Julius F. Smietanka, Collector of Internal Revenue, this day decided, but, since the owner of the stock did not realize any gain on his original investment by the sale in 1916, the judgment was right in this respect, and under authority of the opinion and judgment in No. 663, Goodrich v. Edwards, Collector, also rendered this day, this part of the judgment is affirmed.

The second transaction involved the purchase in 1902 and 1903 of bonds of the International Mercantile Marine Company for $231,300, which were sold in 1916 for $276,150. This purchase was made through an underwriting agreement such that the purchaser did not receive any interest upon the amount paid prior to the allotment to him of the bonds in 1906, and he claimed that interest upon the investment for the time which so elapsed should be added as a part of the cost to him of the bonds. But this claim was properly rejected by the trial court under authority of Hays v. Gauley Mountain Coal Company, 247 U. S. 189.

It is stipulated that the market value of these bonds on March 1, 1913, was $164,480, and the collector assessed the tax upon the difference between the selling price and this amount, but since the gain to the taxpayer was only the difference between his investment of $231,300 and the amount realized by the sale, $276,150, under authority of No. 663, Goodrich v. Edwards, Collector, this day decided, he was taxable only on $44,850.

The district court, however, held that any gain realized by the sale was a mere conversion of capital assets and was not income which could lawfully be taxed. In this respect the court fell into error. The tax was properly assessed, but only upon the difference between the purchase and selling price of the bonds as stated.

The third transaction related to stock in the Standard Oil Company of California, received through the same stock dividend involved in Eisner v. Macomber, 252 U. $. 189. The district court, upon authority of that case, properly held that the assessment made and collected upon this dividend should be refunded to the defendant in error.

It results that as to the profit realized upon the second transaction, as indicated in this opinion, the judgment of the District Court is reversed, but as to the other transactions it is affirmed for the reasons and upon the grounds herein stated. Judgment reversed in part, affirmed in part, and case remanded.

Mr. Justice Holmes and Mr. Justice BRANDEIS, because of prior decisions of the court, concur only in the judgment.

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TREASURY RULINGS

(T. D. 3153—April 9, 1921)

Income tax-Gross income-Invested capital.
Articles 549 and 870, regulations No. 45 (1920 edition), amended.

Articles 549 and 870, regulations No. 45 (1920 edition) are hereby amended to read as follows:

Art. 549. Exclusions from gross income.-A life insurance shall not include in gross income such portion of any actual premium received from any individual policyholder as is paid back, or credited to, or treated as an abatement of premium of such policyholder within the taxable year.

“Paid back” means paid in cash.

“Credited to” means applied by way of credit so as to reduce the premium received on the policy for the taxable year. It includes dividends applied (a) directly to the payment of the premium for the taxable year; (b) to purchase additional paid-up insurance or annuities; or (c) to shorten the endowment or premium paying period; or (d) left with the company to accumulate at interest. It does not include the amount of divisible surplus annually ascertained and apportioned to deferred dividend policies.

"Treated as an abatement of premium” means of the premium for the taxable year.

Where the dividend paid back or credited to a policyholder is in excess of the premium received from such policyholder within the taxable year there may be excluded from gross income only the amount of the premium received, and where no premium is received from the policyholder within the taxable year the company is not entitled to exclude from its premiums received from other policyholders any amount on account of such dividend payment.

ART. 870. Insurance companies. The reserve funds of life insurance companies, the net additions to which are deductible from gross income under the provisions of section 234 of the statute, can not be included in computing invested capital. The like reserve funds of insurance companies, other than life insurance companies, may be included in computing invested capital. See sections 325 and 326 (a) (3) and (b) and articles 569 and 814.

(T. D. 3154-April 11, 1921)

Action on claims for credit.

Regulations No. 45 (1920 ed.) amended. Article 1035 of regulations No. 45 (1920 edition) is hereby amended to read as follows:

Art. 1035. Action on claims for credit.-Upon receipt by the collector of a claim for credit on form 47 A, he will take no action thereon until the following requirements have been met:

(a) The collector must ascertain from the commissioner whether a claim for refund for the year or years upon which the claim for credit is based, and upon substantially the same ground, has been filed. If no such claim for refund has been filed, the collector may, on notice thereof from the commissioner, accept for filing the taxpayer's claim for credit.

(b) When it is known to the collector that a refund claim of the nature referred to above is on file with the commissioner, and has not been adjusted, he will not accept the taxpayer's claim for credit for the same year or years until the taxpayer has requested the commissioner to reject such claim and has been advised by the commissioner that such claim has been rejected. Claims for refund may not be converted into claims for credit, except in the manner above mentioned.

Upon acceptance for filing of a claim for credit on form 47 A, the collector shall certify thereon the required information concerning all outstanding assessments and payments covered thereby and shall note on

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his records that a claim for credit has been filed. He shall thereupon transmit the claim to the commissioner. Due notice will be given the collector and the taxpayer of the action taken on the claim. A schedule of credit claims on form 7220 A will be transmitted to the collector once a month and formal credit shall be taken by the collector at that time. If a claim is allowed against additional taxes due for other years, but such other taxes have not yet been assessed, only the amount of the excess of such taxes over the overpayment shall be assessed, or the excess of the overpayment over such taxes due shall be refunded as the case may be. The effective date of the filing of a claim for credit shall be the actual date of presentation to the collector. The filing of a claim for credit against the tax due under another return shall be subject to the same rules with respect to the addition of interest and penalties as if the taxpayer had filed a claim for abatement of the tax against which credit is desired. See articles 1003 and 1006.

Under no circumstances will a taxpayer be permitted to take credit for an alleged refund due for a prior year on any return filed for a subsequent year without filing a formal claim for credit on form 47 A, under the requirements as provided herein. An attempt to take a credit contrary to the instructions herein set forth shall not be held to be the filing of a claim under section 252 of the revenue act of 1918.

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(T. D. 3155—April 11, 1921)

Income tax-Nonresident aliens. Articles 312, 313, 314 and 315, regulations No. 45, amended. Articles 312, 313, 314 and 315 of regulations No. 45 are hereby amended, to conform with an opinion of the attorney general of March 1, 1921, to read as follows:

ART. 312. Who is a nonresident alien individual?-A "nonresident alien individual” means an individual (a) whose residence is not within the United States and (b) who is not a citizen of the United States. An alien actually present in the United States who is not a mere transient or sojourner is a resident of the United States for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to his stay and the length and nature of his stay. A mere floating intention, indefinite as to time, to return to another country is not sufficient to constitute him a transient. If he lives in the United States and has no definite intention as to his stay, he is a resident. One who comes to the United States for a definite purpose which in its nature may be promptly accomplished is a transient; but if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the United States, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned.

Art. 313. Proof of residence of alien.—The following rules of evidence shall govern in determining whether or not an alien within the United States has acquired residence therein within the meaning of the revenue act. An alien, by reason of his alienage, is presumed to be a nonresident alien. Such presumption may be overthrown (1) in the case of an alien who presents himself for determination of tax liability prior to departure for his native country, by (a) proof that the alien, at least six months prior to the date he so presents himself, has filed a declaration of his intention to become a citizen of the United States under the naturalization laws, (b) proof that the alien, at least six months prior to the date he so presents himself, has filed form 1078 (revised) or its equivalent, or (c) proof of acts and statements of the alien showing a definite intention to acquire residence in the United States or showing that his stay in the United States had been of such an extended nature as to constitute him a

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resident; (2) in all other cases by (a) proof that the alien has filed a declaration of his intention to become a citizen of the United States under the naturalization laws, (b) proof that the alien has filed form 1078 (revised) or its equivalent, or (c) proof of acts and statements of an alien showing a definite intention to acquire residence in the United States or showing that his stay in the United States has been of such an extended nature as to constitute him a resident. In any case in which an alien seeks to overcome the presumption of nonresidence under (1) (c) or (2) (c) above, if the officer who examines the alien is in doubt as to the facts, such officer may, to assist him in determining the facts, require an affidavit or affidavits setting forth the facts relied upon, executed by some creditable person or persons, other than the alien and members of his family, who have known the alien at least six months prior to the date of execution of the affidavit or affidavits.

Art. 314. Loss of residence by alien.-An alien who has acquired residence in the United States retains his status as a resident until he abandons the same and actually departs from the United States. An intention to change his residence does not change his status as a resident alien to that of a nonresident alien. Thus an alien who has acquired a residence in the United States is taxable as a resident for the remainder of his stay in the United States. The status of an alien on the last day of his taxable year or period determines his liability to tax for such year or period as a resident or nonresident. See articles 305 and 306.

Art. 315. Duty of employer to determine status of alien employee. If wages are paid to aliens without withholding the tax, except as permitted in article 316, the employer should be prepared to prove the status of the alien as provided in the foregoing articles. An employer may rely upon the evidence of residence afforded by the fact that an alien has filed form 1078 (revised) or an equivalent certificate of the alien establishing, residence. An employer who seeks to account for failure to withhold in the past, if he had not at the time secured form 1078 (revised) or its equivalent, is permitted to prove the former status of the alien by any material evidence.

(T. D. 3156—April 11, 1921)

Capital-stock tax.
Amendment of T. D. 2800 of March 12, 1919, concerning liability to capital-

stock tax of railroad corporations whose properties were held and oper-
ated by the federal government under the army appropriation act
approved August 29, 1916.
T. D. 2800 is hereby amended to read as follows:

Under section 107 of the act of September 8, 1916, every domestic corporation was required to pay annually a special excise tax with respect to the carrying on or doing business equivalent to 50 cents for each $1,000 of the fair value of its capital stock. The act approved February 24, 1919, increased the tax to $1 for each $1,000 of the fair average value of the capital stock and reduced the exemption from $99,000 to $5,000. Questions have been raised as to the liability to the capital-stock tax of corporations owning railroads controlled and operated by the federal government.

Liability to capital-stock tax is made to depend upon whether a corporation is "carrying on or doing business" within the meaning of the taxing act. A corporation which has been organized or chartered to operate a railroad property but which has ceased to operate it by reason of the fact that the property is being operated by the federal government is not liable to capital-stock tax unless it is carrying on or doing business in connection with other property than its railroad property. The renting of property which was acquired by the corporation as an incident to its railroad business but which was not needed by the federal government is not such carrying on or doing of business as would involve the corporation in liability to capital-stock tax.

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