Reclossss 3-29-29 M v D

1453. The above letter from the Department holds that he second of the two methods of calculating the income tax for a fiscal year ending in 1919 illustrated below should be used:

Net Income for fiscal year ending February 28, 1919.$100,000.00

1454. Statement by the Bureau of Internal Revenue relating to amortization -The statute allows, in the case of facilities or vessels acquired on or after April 6, 1917, for the production of articles (or the transportation of articles or men) contributing to the prosecution of the present war, a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer.

This allowance is not based upon the difference between the actual war cost of such facilities and what they would have cost at pre-war prices. Obviously the taxpayer is not entitled to recover or extinguish through amortization more than the difference between the war cost of such property and what he can sell the property for after the war, or if he continues to need and use it in his business, what it would have cost him after the war. As the rule is expressed in Article 183 of the Regulations: "The total amount to be extinguished by amortization, in general, is the excess of the unextinguished or unrecovered cost of the property over its maximum value (either for sale or for use as part of the plant or equipment of a going business) under stable post-war. conditions.”

The law and the regulations are scrupulously fair to the taxpayer in this connection. No narrow or rigid construction has been placed upon the limiting phrase "articles contributing to the prosecution of the present war." A period of three years has been provided for re-examination and review in order to ascertain from the actual trend of prices and business what real decline may have taken place in the use and value of plant and machinery purchased at war prices; and the actual declines will be recognized or allowed against the income subject to the war rates of taxation. Furthermore, the department has found it possible under the law to spread or apportion the deduction over the amortization period, not in accordance wit months or years, but in accordance with the profits of th

business. [See Article 185 of Regulations 45.] This means

at the taxpayer will not be required to charge off any amortization in a year in which there are no profits to absorb it. He takes heavy amortization when he has heavy profits. Claims based upon pre-war costs will be regarded as unreasonable and as evidencing an intent on the part of the taxpayer to secure larger deductions than are warranted by the statute or by a fair construction of what the equities and necessities of the present situation require.

1455. Return and payment of tax under the special taxes on occupations law. "Persons whose occupations are subject to an annual tax are advised by the Bureau of Internal Revenue to underscore on their calendars May 31, the last day for the return and payment of the tax.

"Failure to make return and pay the tax by that date renders the delinquent liable to a fine of $1,000 and an additional assessment of 25% of the amount due. The penalty for "wilfully refusing" to make return and pay the tax is a fine of not more than $10,000 or one year's imprisonment, or both. For making a false or fraudulent return, the penalty is a fine of not more than $10,000, or one year's imprisonment, or both, and an additional assessment of 50% of the amount due.

"The list includes brokers, $50. (If a broker is a member of a stock exchange, board of trade, or similar organization, the average value of a seat in which for the preceding year ended June 30 was $2,000, and not more than $5,000, there is an additional tax of $100, and if such value was more than $5,000, the tax is $150.) Pawnbrokers, $100; ship brokers, $50; custom house brokers, $50; proprietors of theatres, museums and concert halls, from $50 to $200, according to seating capacity of place of amusement (in towns and villages of 5,000 inhabitants or less, the tax is one-half of these amounts); proprietors of public exhibitions, exclusive of exhibitions held under the auspices of religious or charitable organizations, $15 in each State or Territory in which such exhibitions are held; proprietors of circuses, $100 in each State or Territory in which the circus is held; proprietors of bowling alleys, $10 for each alley or table; proprietors of shooting galleries, $20; proprietors of riding academies, $100; persons operating passenger automobiles for hire, $10 for each automobile having a seating capacity of more than two and not more than seven, and $20 for each automobile having a seating capacity of more than

seven.

"The law imposes also, in addition to all other taxes, a special tax of $1,000 on the carrying on of the liquor business by brewer, distiller, wholesale or retail dealer or on the manufacture of stills in any place in the United States in which carrying on such business is prohibited by local or municipal laws.'

"The occupational tax became effective January 1.

1456. "The Revenue Act of 1918 imposes also on pleasure boats, power boats and sailing boats of over five net tons an on motor boats with fixed engines not used exclusively for trade or commerce or national defense, a tax according to length and tonnage. This tax became effective April 26. Return and payment of the tax must be made on or before May 31." (Official announcement by the Bureau of Internal Revenue, dated May 22, 1919.)

1457. T. D. 2847. Page 423. Gifts, ordinary, not deductible. The following Treasury Decision does away with all doubt that has arisen as to whether contributions to the United War Work Fund and other similar organizations are deductible as necessary business expenses by a corporation:

Treasury Department

Office of Commissioner of Internal Revenue,

Washington, D. C.

To Collectors of Internal Revenue, Internal Revenue Agents, and Others Concerned:

The Revenue Act of 1918 contains two sections relating to deductions which may be made in ascertaining net income subject to tax. Section 214 relates to individuals and allows as deductions:

(1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,

etc.

(2) All interest paid or accrued within the taxable year on indebtedness, etc. (with certain exceptions).

(3) Taxes paid or accrued within the taxable year, etc. (with certain exceptions).

(4-10) Certain allowances for losses, bad debts, exhaustion, wear and tear of property of various sorts.

(11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, etc.

Section 234 relates to corporations, and allows as deductions:

(1) All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity.

(2) All interest paid or accrued within the taxable year on its indebtedness (with certain exceptions).

(3) Taxes paid or accrued within the taxable year, etc. (with certain exceptions).

(4 et seq.) Losses sustained of a certain character, bad debts, allowances for exhaustion, wear and tear, etc.

The question is presented whether corporations are entitled to deduct from their gross income for the purpose of the income tax, the amount of contributions to religious, charitable, scientific, or educational corporations or associations, this question arising most frequently with reference to contributions made to the Red Cross and other war activities.

It will be observed that there is no express deduction permitted corporations of such contributions, as in the case of individuals, and unless, therefore, they fall within the definition of some item of deduction allowed to corporations, they cannot be allowed. The only head within which it might be suggested that such contributions could be included is that of ordinary and necessary expenses paid or incurred in carrying on any trade or business, including reasonable salaries or other compensation, rentals, and payments for use of property, provided for in Paragraph 11. Practically these same deductions are permitted in Section 214 in the case of individuals, and had such words included the contributions or gifts mentioned in Paragraph 11 of Section 214, it would have been necessary to put in such paragraph, as they would have been covered by Paragraph 1 of such section.

The Attorney General, in an opinion dated May 19, 1919, states the view that ordinary and necessary expenses contemplated by Paragraph 1 of Sections 214 and 234 were not intended to include all necessary expenses because the two immediately succeeding paragraphs provide for deducting interest and taxes, both of which are necessary expenses; also the provision in regard to allowance for salaries, compensation, rentals, etc., indicates that all of the expenses, which are contemplated under the terms used in Paragraph 1 of these sections, are expenses incurred directly in the maintenance and operation of the business, and not all those which may be beneficial and even necessary in the broader sense.

In addition to the above considerations and to the fact that there is express provision for deducting contributions or gifts in the case of individuals, which is wanting in the section providing for deductions to be made by corporations, reference to the legislative history of the Revenue Act of 1918 (Congressional Record for September 17, 1918) shows that an amendment providing that corporations might make deductions of contributions or gifts, as in the case of individuals, came to a vote and was defeated, the principal reason assigned in the debate being that it would be dangerous to authorize directors