The Waterbury Democrat. [volume] (Waterbury, Conn.) 1917-1946, 1944-02-26
YOUR FEDERAL
INCOME TAX
TRADES AND EXCHANGES
part n


Among the forms of transactions
to which consideration must be given
in preparing Federal income tax
return are trades and exchanges of
property. When a person receives
goods for services, as in the case
Of q workman taking groceries for
wages, or a lawyer receiving Secur-
tiles for professional services, q Ques-
ton Of income tax liability arises. It
also arises when farmer trades
farm produce for services or goods,
such as groceries or farm equipment,
or when cattle or farms or other
property Is traded. It arises fire.
4uently In security transactions par
ticularly in reorganizations, where
one form Of security is exchanged
for another form of security Of the
same or different corporation. All
such transactions may give rise to
taxable gain.
In the case where a taxpayer ex-
changes his services for goods or
property-for instance, carpenter
who puts up shelves for q grocer
and is paid in groceries-the fair
market value of the goods or prop
erty received is considered as ordi-
nary income and should be reported
in item (Wages, salaries, etc) of
either short Form 1040A or long
Form 1040.
Taxpayers who have income from
any other kind of trade or exchange
must use long Form l040. If farm
produce is exchanged for merchan-
disc, groceries, or the like, the
market value of the articles received
in exchange is to be included in
gross income. In this instance, if a
farmer traded cabbages for SO
worth of harness. he should in
clude the $40 in his farm income,
and the cost of raising the cabbages
will be included in the farm ex-
penSes used in determining net in
come from the farm business. Where
property is exchanged for property
of another kind, or for services,
the transaction may give rise to
capital gain or loss (if the property
exchanged Is a capital asset, re-
portable in Schedule B, item 6(a) Of
the return Form 1040; and where
the property exchanged Is not a cap
ital asset the transaction may give
rise to ordinary gain or loss report
able in Schedule B and item 6(b)
Of the return Form 1910. In such
cases, the measure Of gain or loss
Is the difference between the basis
Of the property exchanged and the
fair market value Of the property
received in exchange.
Where, however, property is ex-
changed for property Of a like kind,
the transaction, within certain def
mite limitations. is considered as CIV
ing rse neither to gain nor to loss,
and accordingly Is nontaxable.
The general provision regarding
nontaxable exchanges is that the
property exchanged must have been
held for productive use In a trade or
business or for investment. and ex-
changed solely for property of a
like kind to be held either for pro-
ductive use in trade or business or
for investment. The simplest ex-
ample Of such an exchange would
be q trade Of work horses.
It sometimes happens that o tax
payer has an involuntary gain, as
when property Is sold under con-
domination. or Is destroyed or stolen.
with the receipt Of insurance. II
the proceeds Of involuntary CONVEX
sion are forthwith in good faith
invested in property which is similar
or related In service or use to the
property converted" no gain shall
be recognized. If. however, any part
Of the money received is not so
reinvested, the gain in excess Of the
amount not reinvested would be
taxable. The taxpayer must be able
to prove that the money received
was the money actually reinvested
In such other property. Moreover,
certain restrictions are imposed on
the kind Of property in which re-
investment may be made. For in-
stance, an investment in improved
real estate Of the proceeds from
forced sale Of unimproved real estate,
would not be considered as an in-
vestment in property similar or re-
lated in service or tlse," and any
gain would be taxable.