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With reference to bonds, since they are regarded as debts of a corporation, they may be written off if it is ascertained, without reasonable doubt, that they are uncollectible. They are, therefore, treated somewhat different from stock and other securities since no losses can be claimed on the latter until they are actually disposed of. Discount on bonds incurred in their sale may be treated as a deduction and prorated over the life of the bonds. Discount on stock, however, is regarded as a capital loss and cannot be treated as a deduction.

Depreciation. A distinction must be made between depreciation and fluctuation. Depreciation is the decline in the value of property as a result of its use in the business. Fluctuation is a change in the market value of assets, either favorable or unfavorable, which is due to causes apart from the business. The former is an allowable deduction, while the latter is not. A distinction must also be made in connection with depreciation between repairs and renewals.

The cost of repairs may be treated as a deduction in addition to the allowance made for depreciation, but the same rule does not apply in the case of renewals. The regulations prescribe that they must be charged against the reserve for depreciation, therefore, cannot be treated as a deduction. In other words, a renewal is regarded as a capital expenditure. In arriving at the rate of depreciation, three things must be considered—the original cost, the estimated life and the residual value of the asset. Neither the Law nor the Regulations of the Treasury Department prescribe the rate of depreciation, which is permissible. Both say that a "reasonable" rate is allowable.

Collectors of internal revenue and inspectors of the department have, however, indicated their approval of certain rates. In certain cases known by the author, they have stated that two or three per cent. may be charged on wooden or frame buildings. They have also permitted a rate of ten per cent. on furniture and fixtures, and in some cases as high as twenty per cent. on certain kinds of machinery. However, they look with suspicion on high rates of depreciation and in the past the tendency has been to be overconservative rather than otherwise. Only assets employed by the corporation in its business are subject to depreciation. All assets so employed, both tangible and intangible, except good will and organization expenses, are regarded as subject to depreciation.

The amount of depreciation claimed must be entered upon the books of the corporation. It may be credited to the asset account to which it refers, or it may be credited to a reserve account. The latter is, of course, the approved accounting method and should be followed in recording the depreciation. In the 1918 Act, no mention was made of obsolescence, but the Treasury Department ruled that obsolescence could be considered in arriving at depreciation. In the 1921 and 1924 Acts, specific mention is made of obsolescence as an allowable deduction. Obsolescence should, therefore, be considered, in addition to wear and tear, in determining the amount of depreciation to be claimed. Obsolescence is not claimed as a separate deduction on the return but is included in depreciation. However, when obsolescence is included with depreciation, it is necessary to state separately, in a schedule attached to the return, the amount claimed and the basis upon which it is computed.

2.

Depletion. The Treasury Department has issued detailed rulings as to how the amount of depletion is to be calculated. The following important points may be mentioned:

1. If the property was acquired prior to March 1, 1913, the fair market value at that date is taken as the basis for calculating the depletion.

If acquired by purchase since the above date, the cost price is taken as the basis.

3. If "discovered" since the above date, the fair market value of the property at the date of discovery or within thirty days after "discovery", is the basis.

A distinction must be made between depreciation and depletion. Depreciation means the lowering of value due to wear and tear. Depletion is the decrease or lowering of the supply of the natural deposit. Generally speaking, the depletion may be calculated as follows:

Determine the original value as stated above.

Determine the total number of units and by division, the unit cost.

3. Multiply the number of units produced during the taxable period by the unit cost and treat this as the depletion charge.

The amount of depletion claimed must be entered upon the books the same as in the case of depreciation. As previously stated, detailed regulations in regard to the depletion of mines, etc., have been issued by the Treasury Department and can be obtained on request.

I.

2.

Items Not Deductible. In computing the net income of corporations, no deduction shall in any case be allowed for items specified in Section 215 of the Revenue Act. This was discussed in Unit Three under "deductions allowed individuals". Since there is no distinction between individuals and corporations in the application of this section of the Law, it needs no further discussion at this point.

INCOME TAX QUESTIONS AND PROBLEMS

I. Does the amount of income of a corporation determine whether or not it shall file an Income Tax Return?

2. The Atlas Corporation leases a part of its property to R. V. Bettinger at an annual rental of $3,500.00. The rent received for this property is paid directly to the stockholders. Is the amount received as rent taxable income to the corporation?

3.

State whether or not it is necessary for a corporation to file a return under the following conditions:

(a) When a corporation is in existence only part of a year.
(b) When a corporation is not fully organized.
(c) When a corporation is fully organized but not doing

business,
(d) When a corporation has formerly done business but

has ceased to do so.

4. If a corporation changes its business year from a period of twelve months ending on August 31 to a period of twelve months ending on December 31, will it be necessary for it to file a return for a period of less than twelve months? If so, for what period of time would it be necessary to file a return in this case?

5. Name two conditions under which corporations may file consolidated returns and the requirements of evidence of affiliation.

6. In the preparation of consolidated returns under the Federal Income Tax Law, on what basis would you apportion the tax among the several corporations?

7. (a) Outline the steps a corporation must take in order to establish exemption from filing returns and paying income taxes.

(b) How may a corporation know that it is exempt from income taxation?

(8) Under what condition is it necessary for an organization to make a return of income after it has once established its right to exemption?

When and with whom does a corporation file its Income Tax Return?

(b) When and where should a foreign corporation that does not have any office or place of business in the United States file its Income Tax Return?

9. (a)

10. A New York corporation received during the year dividends amounting to $2,000.00 on stock of a Massachusetts corporation owned by it and $1,000.00 on stock of a British corporation owned by it.

Do these dividends constitute taxable income of the New York corporation under the Federal Income Tax Law?

II. Are contributions made by a corporation to religious, charitable, scientific or educational corporations deductible from gross income?

12. To what extent are salaries of officers and bonuses given to employees deductible in computing the net income of corporations under the Federal Income Tax Law?

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13. A corporation owns and operates a rolling mill. The following items appear among the disbursements for the current year: $1,000.00 to Red Cross for services of nurse and for medicines

at the mill's emergency hospital;
500.00 to the Community chest;
100.00 annual dues in National Mill Owners' Association;
500.00 to a local hospital for beds provided solely for the

use of the employees of the corporation;
250.00 to the Society for the Prevention of Cruelty to Children;
500.00 to attorney as retainer fee;
750.00 to firm of public accountants for services in connec-

tion with annual audit;
2,000.00 for delivery equipment;

125.00 for fire insurance premium;
1,200.00 for installation of new heating system in office building;
1,400.00 bonus paid to salesmen;
400.00 occupational tax paid to the city in which Company is

located;
800.00 paid to employee on claims resulting from loss of suit

for personal injuries. Specify which, if any, of these items the corporation may deduct from its gross income in determining its taxable income.

14. Designate which of the following named expenses are allowable deductions in computing the income tax of a domestic corporation:

(a) Donation to American Red Cross
(b) Donation to a local hospital.
(c) Donation to the County Fair Association.
(d) Donation to committee for paying expenses for political con-

vention to be held in home town.
(e) National Political Campaign Expenses.
(f) Local Political Campaign Expenses.
(g) Fine for violation of Child Labor Laws.

(h) Membership fee of Chamber of Commerce.
(i) Life insurance premiums on lives of officers, the corporation

the beneficiary.
(j) Life insurance premiums on lives of officers who are themselves

the beneficiaries. 15. The Ben Franklin Printing Company installed a printing press on January 1, 1920 at a cost of $7,000.00. The salvage value of the press was estimated at $1,000.00 and its life at fifteen years. A reserve for depreciation was set up on this basis and the depreciation claimed as a deduction in the Income Tax Return for each year. On December 31, 1924, it was found that the old press had become obsolete and it was decided to discard it and install a new press costing $12,000.00. What deduction should be claimed for the year 1924?

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