The Record-courier. [volume] (Gardnerville, Nev.) 1904-current, 1922-07-21
ACT
IS EXPLAINED

Numerous inquiries have been re-
ceived by the Bureau of Internal
Revenue concerning Section 202 (c)
u) of the revenue act OF 1921 which
provides that for the purposes of the
income tax no gain or loss shall be
recognized when property held for
investment, or for productive use In
trade or business mot including
stock-in-trade or other property held
primarily for sale) is exchanged for
property of like kind or use.
Many taxpayers and statesmen Of
securities are interpreting this to
mean that all sales of securities and
the Immediate purchase of like se-
curities are exchanges resulting In
no gain or loss. Such Interpretation
of the law and regulations is erro-
neous.
The Bureau realizes that in many
cases 1t is difficult to determine
whether the transaction is true
exchange or really a sale and rein
vestment of the proceeds in other
securities. To constitute an exchange
within the meaning of Section 202
(c) Q) the transaction must be a
reciprocal transfer of property for
property as distinguished from a
transfer of property for a money
consideration. In such an exchange
neither principal would pay a COM
mission to the other, although If a
broker in his capacity, as such, ne
gotiated the exchange for either prln-
cipal the fact that the broker was
paid a commission for his services
would not of itself take the trans
action out of the classification as
an exchange.
II a person owning one hundred
shares of stock in "A" corporation
should instruct a broker to exchange
them for shares of stock in "B" cor
poration, 1t would be essential in
order to bring the transaction within
the meaning of the exchange pro-
visions of the revenue act that the
person owning the shares of "B"
corporation stock should receive the
one hundred shares of "a" corpora
tion stock and that the person own
ing the one hundred shares Of "a
corporation stock should receive the
shares of "B" corporation stock. The
stock received in exchange should be
treated by each party as taking the
place Of the property exchanged. If
on the other hand, the instructions
to the broker are in effect to sell
one hundred shares of stock in "a
corporation and invest the proceeds
in shares of stock In "B" corporation
the transaction cannot be treated al
an exchange but is a sale of "A
corporation stock and a purchase ol
"B" corporation stock. The element
Of exchange in this case is lacking
as there is no reciprocal transfer Of
securities beteen principals unles.
by mere coincidence.
Where the broker in the trans
action, whatever his instructions ma,
be, sells the stock in "A" corpora
tion and then buys the stock IL
"B" corporation. or buys the stool
in "B" corporation and then SELL
the stock in "A" corporation, ther,
is an interval Of time, however short
during which one or both of tn,
customers would have title to n,
securities whatever. In a true ex
change the passing of title to tn
stock in the "A" corporation an,
acquisition of title to the stock Ii
the "B" corporation, and vice versa
would be simultaneous as to boil
parties to the exchange.
In all cases where there is a doub
as to whether the transaction Is
sale or exchange, all facts connecte,
with the transaction should be sub
mitted to the Bureau Of Interna
Revenue for ruling in the matter.
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