Lapas attēli
PDF
ePub
[merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small]
[blocks in formation]

Under the Treasury rulings so-called "ordinary obsolescence," viz., that obsolescence which is accruing but which cannot be definitely ascertained, is to be included in the annual depreciation allowances rather than in a specific reserve for obsolescence.

The allowance for "accruing" obsolescence as distinguished from that which has "accrued" 1 is stated in the following regulation.

REGULATION. With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made. No deduction for obsolescence will be permitted merely because, in the opinion of a taxpayer, the prop1 For "accrued" obsolescence or "loss of useful value," see Art. 143, page

1031.

erty may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and can not be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due. (Art. 166.)

In practice, it has rarely been possible to convince revenue agents that the depreciation rate should have added to it a percentage for "accruing obsolescence." Often the manufacturer himself has had a somewhat hazy idea as to how accruing obsolescence could be estimated, and has not had collected the facts to show that such obsolescence is something which he is entitled to deduct. Federal income tax laws prior to 1918 contained no reference to obsolescence and amortization.

The World War brought about such a tremendous increase in plant facilities at inflated costs that Congress saw fit to provide in the 1918 and 1921 laws a means of offsetting the inflation against the abnormal profits resulting from war business. The means comprised an "allowance for amortization," which is discussed later in this chapter. All laws after 1917 have provided for a reasonable allowance for obsolescence [section 234 (A-7)].

REGULATION. A reasonable allowance for the exhaustion, wear and tear, and obsolescence of property used in the trade or business may be deducted from gross income. For convenience such an allowance will usually be referred to as depreciation, excluding from the term any idea of a mere reduction in market value not resulting from exhaustion, wear and tear, or obsolescence. . . . . (Art. 161.)

The foregoing regulation accords with proper accounting methods. Depreciation allowances set up by conservative concerns were always supposed to be sufficient to include adequate provision for ordinary obsolescence. It follows that in fact deductions were made for obsolescence. The law definitely sanctions the deductions which taxpayers have been making and the Treasury has been allowing.

RULING. . . . . Obsolescence, of which the case here presented is typical, is not like depreciation, a matter of decrease in earning power or in absolute efficiency, but only in relative efficiency. It has its origin in the fact that although the original efficiency be maintained, yet, owing to improvements in the art or changed economic conditions, a device or factor in production will eventually have to be discarded. The loss is a future loss, but for equitable reasons the statute permits it to be spread over the period for which it can be foreseen, and allows the portion assignable to the period subsequent to December 31, 1917, to be deducted pro rata over such period.

In the instant case the vessels of the 5,000-ton class will today net cents freight per mile, as when they were first constructed. Their

intrinsic value is unimpaired, but, because the newer and larger type will earn from six to eight times as much, it is evident that, when the number of larger vessels becomes sufficient to handle the carrying trade of the Great Lakes, the smaller vessels will become economically impossible of operation and will necessarily be discarded or junked. . . . . (C. B. I-1, 161; A. R. R. 963.)

The contention of the Income Tax Unit that surplus accruing in years prior to 1918 should be reduced by accruing obsolescence in those years, was overruled by the Committee on Appeals and Review. (C. B. I-1, 161; A. R. R. 963.) Obsolescence as described above has been discussed in the preceding chapter. Obsolescence which may be said to be "realized" is considered in the following pages.

Obsolescence

LAW. Section 214. (a) In computing net income there shall be allowed as deductions:

(8) A reasonable allowance for . . . . obsolescence. In the case of improved real estate held by one person for life with remainder to another person, the deduction provided for in this paragraph shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary;

The last sentence of section 214 (a-8) appears for the first time in the 1926 law and provides for the apportionment of the allowance for obsolescence 3 between life-tenant and remainderman. The explanatory regulation (Art. 161) is dealt with in the preceding chapter.

[ocr errors]

In the Jackson Co. State Bank's Appeal (2 B. T. A. 1100) the taxpayer demolished an old building and made a claim for obsolescence. The Board upheld the Commissioner in denying the claim and said:

DECISION. In the opinion of the Board the situation presented by the taxpayer is not one which would entitle it to an obsolescence deduction. Obsolescence is a process more or less gradual of becoming obsolete and a deduction is spread over the years from the time that process begins until the property becomes obsolete. There is no evidence in this appeal of any such fact. The destruction or removal of parts of a building during the taxable year is not the subject of an obsolescence deduction.

2 This section deals with individuals. Section 234 (a-7) applies the same language, with the omission of the last sentence, to corporations.

[Former Procedure] See Income Tax Procedure, 1926, page 1481.

The author does not agree with the foregoing definition of obsolence. If it were "more or less gradual" it would partake more of the nature of depreciation. In ordinary language it imports something sudden or unexpected rather than gradual and expected. It may be that the taxpayer should have claimed that he incurred a loss, but it is just as probable that the old building became obsolete before its life was exhausted, that the event had not been foreseen and the taxpayer innocently (and perhaps correctly) thought that section 214 (a-8) was written for his benefit.

Duplicate deductions must be avoided. No well-regulated concern would charge off the same item of plant or equipment more than once, but on this point the law contains a special warning. Care must be taken that any allowances for depreciation or obsolescence claimed and allowed in returns for years prior to the taxable year be not claimed again. [Law, section 215 (a-3).] This, however, does not apply to amounts claimed in previous years but not allowed.

Present Accounting Practice as to Obsolescence *

The author believes the position assumed by the Treasury in regard to obsolescence prior to the enactment of the 1918 law was essentially sound. He is not prepared to support the contention of certain accountants that extraordinary obsolescence, like depreciation, is an item of prime cost.

To the extent that an allowance for ordinary obsolescence has been merged with depreciation it is entirely proper to charge the combined allowance to operating expenses. The attempt to anticipate extraordinary obsolescence should be from accumulated profits and not from current income.

Uncertainty of obsolescence.-Ordinary depreciation is certain and can not be avoided any more than death or taxes. It accrues from day to day. In many cases, one can see it. Obsolescence when applied to the future (there is no difference of opinion as to the treatment of known obsolescence) is a matter which is more difficult of estimate than depreciation. No one knows when it will come. In some cases, where expected, it has not materialized. In many

'See Auditing, Theory and Practice, Vol. I (3rd edition), by R. H. Montgomery, page 329.

« iepriekšējāTurpināt »