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with it. A loss, to be deductible, must be one that has already been paid off or charged off the books, and not merely an estimated or speculative loss. Treasury Regulations, Articles 124, 126, 127, 128, 138. Insurance Companies, 143 and T. R. 147a. See T. D. 2135, page 5. Losses from sale of real estate (150) are not deductible. (T. D. 1989.)

125. Debts Proven Worthless. The fifth deduction is "debts due to the taxpayer actually ascertained to be worthless and charged off within the year.” Treasury Department ruling 2224 construes this provision to include unpaid and uncollectible wages, salaries, rents, etc., provided that such were listed as income for the year in which they became due and were afterwards ascertained to be uncollectible. The same regulation says that all debts that became due and payable prior to March 1, 1913, and not ascertained to be worthless prior to that date, are allowable as deduction for the year in which they are actually ascertained to be worthless and are charged off the books. Treasury Regulation 125 construes the words “ascertained to be worthless” to mean “after legal proceedings to collect same have proved fruitless, or it clearly appears that the debtor is insolvent.” If the debts are subse quently collected after being charged off, they must be listed as income for the year in which they are collected. Briefly, when one listing his income tax lists a certain debt as deductible, he must show his reason for charging it off his books, and if the Collector has any doubt about it, he has power to call for fuller details. This deduction does not apply to corporations, but only to individuals. For Corporation exemptions see St. G(b) and T. R. 113. Accrued income, 146. Professional fees, [47.

(26. Depreciation. Sixth among the allowable deductions is "a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 per centum of the gross value at the mine of the output for the year for which the computation is made.” (T. R. 6, 142, 145, and T. D. 2137, page 7.) No deduction is allowable for repairing or restoring such wear and tear, for which an allowance has elsewhere been made, and none for new buildings and permanent improvements made to increase the value of the property. “Depreciation” as herein allowed is entirely distinct from "losses” as discussed in paragraph 24. The "losses” must be absolute and complete, while the "wear and tear” or “depreciation" constituting the sixth allowable de duction is merely a reduction in the value and not a loss of it. This depreciation is defined by Treasury Regulation 2005 as "the deterioration of physical improvements or assets, such as are susceptible of having their value lessened through wear and tear, use or obsolescence.” Shrinkage in the market value of stocks, bonds and like securities is not allowable as a deduction under either provision. This pro vision of the statute is clearly defined in Articles 129 and 130 of the Treasury Regulations herein, and the summary of which is that depreciation must be such as is not covered by the expenses of operating, must be due to the wear and tear of ordinary use, and must be so averaged up from year to year that all the allowances together would constitute the value of the life of the property. For “Depreciation” on Patents see 156. Farms, (151. See T. D. 2005, 2131, and 2137, page 5. Depreciation for Fiduciaries, T. D. 2267.

127. Exemptions from Net Income. This paragraph discusses the part of the net income that is not taxable (T. R. 3). The preceding six paragraphs defined the six parts of gross income which are not included in net income. Preceding them, in paragraph 19, are listed four items that are part of gross income, but not taxable and not required to be listed. All the paragraphs from 18 to 26 inclusive constitute the legal definition of net income, and this paragraph added to it defines what is taxable net income. The first exemption is that part of the net income which is represented by the dividends on stocks in corporations and other associations on which the corporation itself paid the normal tax. (St. B. and 149.) The second is that part of the net income on which the tax was withheld and paid at the source, as explained in paragraph 32. The third is the exemption of $3,000 for an individual who is not married, or $4,000 if married. (St. C., 1158.) This latter obviously does not apply to corporations, which are required to pay the normal tax of 1 per centum, and that only on all their net income. If both husband and wife have separate incomes, the return for both of them shall be made, but only one exemption of $4,000 shall be allowed. (152.)

128. Bonds. Government bonds are not taxable under the Income law. The Sixteenth Amendment permits the tax to be levied on income "from whatever source derived," but notwithstanding this, the Pollock case ((10) and many others have plainly held that one taxing power cannot tax another taxing power, and the present statute accordingly exempts the income from all Government bonds. (St. B.) The bonds exempt are those of the United States or any of its possessions, a State, city, town, or any other political subdivision of a State. (T. R. 5.) The provision does not include any kind of private obligation or bond, but only those under the legislative authority of a State or of the United States. Any bonds or obligations of any taxation district duly authorized by a State are included. By Treasury Department ruling 1946 it is held that the provision specifically includes the bonds of special assessment districts under the constitutional authority of a State, such as districts for improvements of streets or highways, sewerage, gas, light, reclamation, drainage, irrigation for public use, levee and school purposes. As to withholding the tax on bonds at the source, see paragraph 32. Bonds, other than Government bonds, with a clause guaranteeing the owner against any tax, shall not be free from the income tax. (Section G(b) of the Statute, and T. D. 1942, and T. D. 2090.) A corporation or other taxpayer is allowed deduction for depreciation in value of bonds purchased above par which decrease as the time of maturity approaches, the deduction to be proportionate with the number of years of the life of such bonds, and the decrease in value to be entered on the books of account. (T. R. 135.)

129. Gifts and Bequests. Property acquired by gift or bequest, like the income from bonds and life insurance, are in reality a part of the gross income, but are not to be considered as such for purposes of taxation. (St. B.) Any property, real or personal, acquired by gift, bequest, devise or descent, in any year, is not to be included as part of the income for that year, but the income from it during the year and after being acquired is to be included. (T. R. 4.) Treasury Regulations 120 and 121 concern donations made to others and not received by the taxpayer. Such gifts or donations which are paid as pensions to retired employees or on account of injuries received by employees, or for charitable or educational purposes directly in connection with the business, are allowable as deductions under the head of "expenses.” (See paragraph 21 above.) Gifts or gratuities to employees not as a regular system in the business are not deductible for "expenses" or otherwise. (T. R. 120.)

130. Life Insurance. Income from life insurance shall not be included in the taxable income, with only one exception. (St. B.) This exception is an interest payment to a beneficiary or an excess repayment to the insured. (T. R. 56 and T. D. 2090.) Premiums paid on life insurance do not constitute an allowable deuction as necessary expense, but are a part of personal expenses. ([21.) When a partnership or corporation pays premiums on life insurance of individual members for the benefit of the business, the amount so paid is deductible as "expenses,” but when such policies mature or otherwise become payable by the Insurance Company, the amount so received must be included as income. (T. D. 2090, pages 11 and 23, and T. D. 2152.) The amount received from a life insurance policy on the death of the insured is not to be included as income by the beneficiary, and the amount received by the insured himself at the maturity of an endowment or cash-surrender policy is not to be counted as income, but the amount by which life insurance exceeds the premiums paid, when returned to the insured himself, is to be counted as income. (T. D. 2090, under head of Annuity.) An insurance agent must return as income his commissions on insurance premiums. (T. D. 2011.) Insurance companies. (943.) See T. D. 2137, page 2. 131. Salaries.

Salaries. All salaries except those specifically exempted are taxable as income and are to be included in the return of the income, and salaries, as here used, applies to wages and other compensation for personal services. (St. B.) The tax is paid by the employer unless the amount is so uncertain that he cannot determine it, this being what is known as "withholding at the source” as discussed in paragraph 32. The amount of mileage or "subsistence,” as also board” or other compensation, is to be counted as part of the salary, but as to mileage and "subsistence," only to the extent of the excess over the actual expense. This tax applies to all officers and employees of the United States whose income exceeds $3,000, and in such cases the amount of the tax is withheld by the paymaster and paid by him. (T. D. 2079.) (The President, during the present term of his office, and all United States judges, during present terms of office, are exempt from this tax. 919.) Salaries paid by a State or any political subdivision thereof, as a city, county, or town, are exempt from taxation, and this includes salaries of public school teachers unless their salaries are paid by the United States. (T. R. 5e.) No salary is taxable under any circumstances unless it, together with other income, exceeds the exemptions and deductions allowed by law as shown in preceding paragraphs. Compensation for personal services is to be returned as income, including produce, rent, board, or in "whatever form paid.” For Professional fees see 147. For Salaries plus commissions see T. D. 2090, “Compensation.”

132. Withholding at Source. This provision in subsection D of the Statute has been most misunderstood and most criticised of all the requirements. It has been said that this requirement in the English law made it a success, presiimably that because of it individuals could not escape the tax; but in America it has caused complaint, and suggestions for

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