, 1922-07-20
KNOTTY POINTS
ARE CLEARED UP
Many Income Tax Inquiries Answer
ed in Bulletin lssukd by the
Revenue Department

The following statement, relative
to some points in the income tax
law which have been found by some
to be difficult to understand, il
made from the office Of Marshall 8.
Reynolds, collector Of internal rev.
enue for this district. for the pur-
pose OF clearing up any doubt as to
the proper method OF procedure
which may exist.
Numerous inquiries have been re-
ceived by the Bureau Of Internal
Revenue concerning Section 202 (c)
Cd OF the revenue act of 1921 which
provides that for the purpose 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 hold
property Of q 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 Sc
curities are exchanges resulting in
no gain or loss. Such interpreta-
lions of the law and regulations is
erroneous.
The bureau realizes that in many
cases 1t is difficult TO determine
whether the transaction Is true
exchange or really a sale aad rein
vestment OF the proceeds in other Sc
curities. To constitute an exchange
within the meaning OF Section 202
(c) % the transaction must be a
reciprocal transfer of property for
property Is distinguished from a
transfer OF property for a money
nNnciAoNaffNu To u,,oh nm a~oho 90
neither principal would pay q COM
mission to the other, although II a
broker in his capacity. as such. ne
gotiated the exchange for either prin-
cipal the fact that the broker was
paid a consideration for his services
would not Of itself take the trans
action out Of the classification as m
exchange.
If q person owning one hundred
shares Of stock in "A" corporation
should instruct q broker to exchange
them for shares of stock in "B" cor
poration, it 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" cor
one hundred shares of "A" corpora
tion stock and that the person own
ing the n 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. II,
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" corpora
ton, the transaction can not be
treated as an exchange but is a sale
OF "A" corporation stock and a pur-
chase OF "B" corporation stock. The
element Of exchange in this case is
lacking as there Is no reciprocal
transfer OF securities between prin-
cipals unless by mere coincidence.
When the broker in the transac-
ton, whatever his instructions may
be, sells the stock of "a" corpora
ton and then buys the stock in "B"
corporation, or buys the stock in
'B" corporation and then sells the
stock in "A" corporation. there Is
an interval of time. however short.
during which one Or both of the
customers would have title to no Sc
curities whatever. In a true ex-
change the passing of title to the
stock in the A corporation and &C.
QUESTION Of title to the stock in the
''B" corporation. and vice versa.
would be simultaneous as to both
parties to the exchange.
In all cases where there Is a
doubt as to whether the transaction
is a sale or exchange, all facts con-
nected with the transaction should
be submitted to the Bureau OF In
ternal Revenue for a ruling in he
ynoftor