PROBLEM 126 Illustrating Case in Which Amortization Deduction is Allowable FACTS: The Minnesota Wisconsin Milling Company, in order to meet a very greatly increased demand for its product as the result of the late war, expended $400,000 in the construction of plant and equipment. These expenditures were made subsequent to April 6, 1917, and prior to the signing of the Armistice on November 11, 1918. The company had no contracts directly with the Government. However, its product was considered an absolute necessity and it was given the usual priority accorded to necessities during the war. The company is about to file its 1921 return and finds that it has never made claim for the amortization of any part of its war construction. As the result of a survey made during January, 1922, it finds that it has facilities for manufacture far in excess of its requirements at that time, and it estimates that such facilities will be greatly in excess of the requirements of the company for at least several years to come. QUESTION: Is the company entitled to a claim for amortization, and, if so, what steps should it take in connection with such claim? ANSWER: As the plant and equipment above referred to constructed after April 6, 1917, was constructed for the production of articles contributing to the prosecution of the war against the German Government, the corporation is entitled to a reasonable deduction for the amortization of such property. As the company has made no prior claim for amortization it should make claim at the time of filing its 1921 income tax return. This claim should be supported by full details in accordance with the requirements of the Bureau of Internal Revenue. Upon an investigation of the company's claim by the Bureau's engineers the Treasury Department will determine the amount of amortization, if any, to be allowed as well as the period over which the amortization allowance is to be spread. REFERENCES: Sec. 234 (a) (8): "In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German Government, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of such war, there shall be allowed, for any taxable year ending before March 3, 1924, (if claim therefor was made at the time of filing return for the taxable year, 1918, 1919, 1920, or 1921) a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous Acts of Congress as a deduction in computing net income." Cf. Bul. 16-19-464; O. D. 259: "Machinery, equipment, or other facilities erected or acquired on or after April 6, 1917, for the production or manufacture of sugar is considered as contributing to the prosecution of the war, and the cost may be amortized in accordance with the provisions of section 234 (a) 8 of the Revenue Act of 1918." NOTE: The allowance for amortization in the case of individuals is governed by the same rules and regulations as in the case of corporations. See section 214 (a) (9), which reads exactly the same as section 234 (a) (8), quoted above. PROBLEM 127 Illustrating Redetermination in Case Amortization Claim Has Been Allowed FACTS: The Bridgeport Machine Tool Company in filing its return for the year 1918, claimed amortization in the amount of $150,000, on account of war facilities. Engineers of the Amortization Section of the Bureau of Internal Revenue in the winter of 1919, made a field examination of the company's equipment on account of which the amortization above mentioned was claimed. The engineers then found that the war facilities were being used by the company in connection with its ordinary business and that from all appearances these facilities were used to full capacity. Accordingly the Bureau disallowed the claim of the company for amortization of its war facilities and allowed as a deduction only an amount which provided for depreciation. During the year 1922 the Chairman of the Board of Directors of the company directed the Chief Engineer of the company to prepare a report of the extent to which the company's plants were idle. Such report showed that fully one-half of the plant capacity of the company was not in use. QUESTION: Is the corporation entitled to reopen its return for the year 1918, which had been fully audited by the Bureau and to restate its claim for amortization in the light of conditions which had developed subsequent to the examination of the company's return by the Bureau? ANSWER: The company may at any time before March 3, 1924, request the Commissioner to re-examine its returns and upon such request the Commissioner is required to so re-examine the return. If the Commissioner finds as a result of an appraisal or from other evidence that the disallowance of the amortization originally made as a result of the Bureau's audit is incorrect, the tax for 1918 is required to be redetermined. REFERENCE: Sec. 234 (a): "That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: . . . (8) . . . At any time before March 3, 1924, the Commissioner may, and at the request of the taxpayer shall, re-examine the return, and if he then finds as a result of an appraisal or from other evidence that the deduction originally allowed was incorrect, the income, war-profits, and excess-profits taxes for the year or years affected shall be redetermined and the amount of tax due upon such redetermination, if any, shall be paid upon notice and demand by the collector, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer in accordance with the provisions of section 252." NOTE: The same provision is made under section 214 (a) (9) applying to individuals. PROBLEM 128 Illustrating Case in Which Amortization is not Allowed even Though Property was Acquired Subsequent to April 6, 1917, and for Purposes Contributing to the Prosecution of the War against the German Government FACTS: The Boonville Railroad Company in 1917, and subsequent to April 6, of that year, laid a line from Boonville to Munitionstown. At Munitionstown there was located a large plant which was turning out munitions for the United States Government and which was operated by the Munitions Company. The sole purpose of the line laid by the railroad company was to furnish transportation to the employees of the Munitions Company to and from their homes in Boonville. The company expended $40,000 on this line, which several months after the signing of the Armistice, became practically worthless. No claim has heretofore been made by the company for amortization. QUESTION: Is the railroad company entitled to an amortization allowance for the property above mentioned? ANSWER: In a similar case the Bureau has ruled that as the railroad line was not constructed for the purpose of manufacture or production of articles contributing to the prosecution of the war against the German Government, but was constructed for the purpose of furnishing transportation, the taxpayer was not entitled to a deduction for amortization. The reference in the statute to the transportation of articles or men contributing to the prosecution of such war applies only in the case of vessels constructed or acquired after April 6, 1917. Accordingly, under the present rulings in the Bureau no deduction will be allowed the Boonville Railroad Company on account of amortization. REFERENCE: Bul. 45-21-1909; L. O. 1074: "A claim for amortization on additional facilities which were acquired and built by a railroad subsequent to April 6, 1917, to meet the additional demands upon such road arising out of the prosecution of the war is not within the statute and must be denied. . . . It is held that where railroads constructed additional track, lines, sidings, stations, roundhouses and repair shops and purchased additional locomotives and cars in order to meet the demands on such roads, occasioned by the war, no allowance may be made for amortization as those facilities do not fall within the classes enumerated in section 234 (a) 8 of the Revenue Act of 1918. . . ." NOTE: The author is inclined to the opinion that the Bureau's construction of the law with respect to a case of the kind above referred to, is ultra-technical. The author feels that there is sufficient room and ground for an interpretation of the amortization provision permitting taxpayers in cases such as given above, to be allowed amortization deductions. PROBLEM 129 Illustrating Basis of Depletion Allowance for Lessor and Lessee-Bonus or Advanced Royalty FACTS: Allen Bush purchased ore properties for $60,000, June 6, 1914, when they had an estimated ore content of 50,000 tons. On December 1, 1916, he leased the properties (for the life of the |