property; if constructed on railroad property the cost is an expense in the year of construction (O. D. 1019; A. R. R. 1008).

(c) The rented part of a dwelling; depreciation on such part must be deducted from cost if the dwelling is sold (O. D. 1026).

(d) An interest in a patent, where an interest in a portion of the profits was retained in a sale (A. R. M. 35).

(e) An asset in the year acquired, depreciation being based on the length of time held (I. T. 1158).

(f) Plays; the basis for depreciation is their expected life; or lacking such estimate, the life of the copyright, if any; the remaining cost may be deducted in the year the play proves worthless (I. T. 1553).

(g) A new levee on business property, the cost of the old less depreciation being written off (I. T. 1653).

Depreciable property has not included:

(a) A building in the process of construction because its use has not yet commenced (O. D. 845).

(b) A building on leased property (O. D. 1014).

(c) Radium, because its use as a therapeutic agent is apparently unlimited (O. D. 837).

(d) Naval uniforms because they constitute ordinary wearing apparel (A. R. R. 594), and therefore a personal expense.

(e) Records of a title abstract company, because there is no point of time at which they become valueless (O. D. 1018); but if they are to be abandoned as worthless, depreciation and obsolescence may be claimed (I. T. 1775).

(f) The March 1, 1913, value of a leasehold, although its actual cost is subject to depreciation (T. D. 3414). A lease of oyster beds was held not to be a franchise because not associated with some public purpose (I. T. 1798).

(g) Formulas; but the cost thereof may be deducted in the year they are proved worthless (A. R. R. 39).

Obsolescence could not be charged off until it was certain that it would occur. Cost less depreciation, minus any salvage values, is the amount of depreciation and obsolescence that may be

spread over the period from the time it is certain the asset will become obsolete until the asset is discarded (O. D. 381). A business depression in any industry does not of itself give rise to obsolescence, but any sale of property at a loss due to economic conditions is deductible as a loss (O. D. 753). In the case of property such as buildings, obsolescence may be computed from the date the obsolescence is discovered and spread pro rata over the remaining years of life, providing such date of discovery is subsequent to January 1, 1918. If prior to that date it is to be presumed that obsolescence accruing during from 1913 to 1917, inclusive, cannot be deducted until the year in which the property is sold or abandoned (S. O. 114). No adjustment of invested capital need be made on account of obsolescence prior to 1918 (A. R. R. 963).

Intangible values acquired after 1913 are to be based on cost and not on the discounted value of their estimated future earnings (T. B. M. 39). The cost of a copyright could not include any amount representing the value of the author's own time and effort (O. D. 966). Where patent rights are renewed, the remaining cost as yet unamortized plus the cost of renewal is the amount to be spread over the period covered by the rights (A. R. R. 520). March 1, 1913, values of intangibles were not admitted in the case of a patent where the patent papers were not received until after that date (A. R. R. 1086), nor, where a value for good-will had been claimed by an individual making all sales himself, the reason in the latter case being that the good-will had no assignable value (A. R. R. 722). Where an individual, the principal stockholder of a corporation, acquired a contract in connection with a sale of property and reported the value of the contract as a part of the selling price, depreciation could be deducted by the corporation on such value even though the contract had not been assigned to the corporation (I. T. 1222). Where patterns, drawings, and flasks had been charged off before 1913 a retrospective appraisal in 1920 as at March 1, 1913, was permitted (A. R. R. 272). As indicated, good-will and other intangibles are subject to depreciation and obsolescence allowances, or perhaps obsolescence only in the case of goodwill. A deduction for obsolescence of good-will is allowable if it can be shown to the satisfaction of the Department that (1) the good-will will be of no value at the end of a reasonably definite period, and (2) the present business, as such, will be discontinued and the proprietors thereof cannot engage in any similar business thereafter (O. D. 472).

Liquor dealers who continued in business after prohibition laws became effective, could claim no loss for good-will, trade-marks, or other intangibles (O. D. 818). A loss on intangibles deducted in 1917 but which proved to be greater in 1918 upon actual sale, was an allowable deduction in 1917 (A. R. R. 93). Goodwill lost through prohibition legislation should be prorated between January 31, 1918, and January 16, 1920, unless business was discontinued before the latter date (T. B. R. 44; and A. R. R. 185). A brewery which engaged in the manufacture of cereal beverages after prohibition legislation became effective, abandoned the business in 1920. The obsolescence was deductible in 1920 and was not applicable to 1918 and 1919 (O. D. 1001). Vineyards were subject to obsolescence following the enactment of prohibition legislation. If continued for experimental purposes until new uses were found for the product, a tentative deduction of one-half the loss that would have resulted if total abandonment had taken place was allowed for the year in which the legislation was enacted. This would later be adjusted by deducting the additional loss that took place, if any. If the vineyard were junked and the land devoted to other uses the obsolescence deductible would be spread over the period from the enactment of the legislation to the date on which abandonment occurred (O. 862). Depreciation of property values ap pearing in a county assessment list, attributable to the loss of a liquor license in 1918, was not deductible because the transaction was not a closed one as long as the property was still being used as a soft drink parlor (A. R. R. 1329).

XII

AMORTIZATION AND DEPLETION

Amortization. Assets acquired or amounts expended before April 6, 1917, not subject to amortization. Depletion of mines, and oil and gas wells. Depletion of timber.

WHILE the possible deduction for amortization is of lesser interest in the preparation of returns for the year 1923 and returns of subsequent years, the problem, nevertheless, remains an important one for enterprises which contributed during the war period to the production of war facilities. Amortization, it will be remembered,1 has to do with extraordinary depreciation and obsolescence arising from purchases of or additions to capital assets during the war period (April 6, 1917-November 11, 1918). It was not necessary that the taxpayer be operating under a contract with the Government; the test was whether or not assets of a depreciable character had been constructed or purchased in connection with "the production of articles contributing to the prosecution of the war against the German Government" (Art. 183).

The amount recoverable through amortization allowances was the excess of the cost of the asset, less depreciation, if any, at January 1, 1918, and less any cash allowance for amortization under any contract (Art. 181), over its subsequent maximum value: that is, its sale price (or discarded value), or value to the going business, whichever was the higher, adjusted by depreciation accrued through use for other purposes (Art. 184). The value to the going business was defined as being no less than the scrap value and no higher than the estimated postwar cost of replacement less depreciation or depletion. Ratios of postwar costs to 1 See page 113.

pre-war costs to aid in determining the residual value have been published by the Commissioner (T. D. 3333). January 1, 1918, was the effective date of the 1918 act previous to which nothing but ordinary depreciation could be claimed as a deduction. In many instances enterprises operating under war contracts claimed "extraordinary" depreciation in their 1917 tax returns, but such depreciation was little else than amortization or obsolescence. A cash allowance for amortization, as a specific indemnity received under war contracts or as a deduction in 1918 and subsequent tax returns must be treated similarly to depreciation; i. e., subtracted from the asset or added to the reserve (Art. 181).

The dates between which amortization might be spread were January 1, 1918, (as described above) and the actual or probable date of its discard as a war facility. March 3, 1924, (three years after the resolution of Congress declaring the war at an end) which was the limitation date provided in the 1918 act, marks the limit after which deductions for amortization cannot be taken nor may valuations be made thereafter by the taxpayer or Commissioner for the purpose of redetermining the amortization allowance (Art. 187). The spread is made presumably according to good accounting principles, the regulations merely stating that if actually used as a war facility the method applied should take into account the total gross and net income for the periods in question, or the income actually derived from the asset; if the asset was not completed in time to be used as a war facility, the spread should have some relation to the expenditures on the asset amortization for which is claimed (Art. 185).

Depreciation on the reduced value (i. e., value reduced by amortization allowed under a contract and by amortization as above described) may be deducted after the amortization period unless the reduction has been to scrap value (Art. 182).

Deduction for amortization or any recomputation thereof