(b) Income taxes levied by states, and taxes levied by United States possessions and by foreign countries except income taxes of the last named, which are credits against the tax payable (Sec. 222; Art. 131).

(c) Import and export duties (Art. 132).

(d) Excise taxes (on so-called luxuries and semiluxuries, such as toilet articles) except those paid and deducted by the manufacturer (Art. 132).

(e) Taxes on transportation and other facilities (Art. 132).

(f) Stamp taxes (Art. 132).

(g) Taxes on admissions and dues (Art. 132). Certain other taxes are not deductible:

(a) Postage (deductible, however, if and as a business expense) (Art. 131).

(b) Federal income and excess profit taxes including the 10% tax payable in 1917 on undistributed earnings, but excluding munitions taxes of 1916 and 1917 which were deductible. Federal income taxes including the 1909 excise tax were deductible prior to January 1, 1917 (O. D. 41, 240 and T. D. 2433). Income taxes paid foreign governments are credits against the tax payable if similar privileges are extended citizens of this country.1

(c) Improvement taxes. Taxes for local benefits are regarded as increasing the value of the property. To be deductible, real estate taxes must be for the general public welfare. Taxes covering repairs, or repairs and new construction, are deductible to the extent that they represent payments for repairs (Art. 133).

(d) Luxury taxes paid by the manufacturer on auto1 See page 221.

mobiles, furs, jewelry, works of art, and so forth, are deductible to the manufacturer but not to the purchaser (Art. 132), and the right to deduct cannot be given by the manufacturer to the buyer (A. R. R. 3041).

(e) A gasoline tax is not deductible to the purchaser, when collected from distributers, unless a business expense (I. T. 1779).

The so-called "bank stock tax" is now deductible to the bank or other corporation paying the tax for the stockholder and no longer constitutes an additional dividend to the stockholder; nor can it be deducted by him as a tax paid as was the case under the 1918 act (Art. 135). If the stockholder reimburses the bank, the deduction may be made by him but not by the bank. The old rule under the 1918 act appears in O. D. 199 and O. 858. Further, the 1921 law states that income taxes paid under tax-free covenant agreements are no longer additional income to the bondholder, although his tax payable may still be reduced by such amounts paid for him by debtor corporations (Art. 565).

A franchise tax, imposed by the state of New York, is due November 1; an additional tax due, not discovered until the following year is deductible only in the prior year (A. R. R. 1153, overruling O. D. 371).

State income taxes are deductible in the Federal tax return

for the same year. Changes in the state tax computation require an amended Federal income tax return (O. D. 505); but the Wisconsin income tax, not determinable until the personal property tax was arrived at, could not be deducted before such determination was made (I. T. 1272, A. R. R. 3656). Amounts withheld from salaries to pay income taxes, due in the following year, could be deducted in the year accrued (I. T. 1273). Federal income taxes were deductible expenses in 1916 and prior years and if the books were on an accrual basis could be deducted from 1916 income even though not entered on the books as a liability at the end of that year (A. R. R. 1082). Similarly, munitions taxes were deductions for the year in which

accrued if the books were on the accrual basis (L. O. 1059 and A. R. M. 26 and 29), and could legally be assessed against business already completed before the law became effective (A. R. R. 2615). Income taxes paid to a contracting party in accordance with the terms of a "cost-plus" contract are deductible to the payer and taxable income to the payee (A. R. M. 16). Foreign taxes are deductible to corporations on the accrual basis (A. R. R. 173). A mineral tax and income tax paid to the Province of British Columbia were deductions from gross income and not a credit against taxes otherwise payable, because the province was not regarded as foreign country (O. D. 1050).

Taxes paid by banks on depositors' funds were deductible by the banks if the depositors did not reimburse the bank (I. T. 346, 1388, 1407, see also I. T. 1208, 1276, 1322, 1481, and A. R. R. 1098, regarding non-deductibility under the 1918 act). Advances to stockholders covering the payment of such a tax were not an expense of the corporation and hence could not be deducted (I. T. 1407). But the fact that the profits of a shareholder were reduced by the payment on his behalf by the corporation of taxes imposed on his interest as a shareholder did not constitute a "reimbursement" of the corporation from the shareholder (I. T. 1255). The Connecticut capital stock tax payable by all corporations, could not be deducted under the 1918 law (I. T. 1795), nor could the bank stock taxes of New Jersey (A. R. R. 2377), Minnesota (I. T. 1629), or Michigan (I. T. 1741).

Special assessment taxes can be deducted by a tenant if paid in part consideration for his rental and if the property is used for business purposes (O. D. 373). Ordinary taxes on real estate cannot be added to the property value (I. T. 1218). Taxpayers should show the nature of assessments where it is possible to have improvement and ordinary taxes under the heading of special assessments (O. 928). Taxes levied under a law providing for the erection of dams and other flood safeguards, after the occurrence of floods, were taxes for local benefits (A. R. R. 3111).

A tax on the sale of property, added to the selling price, could be deducted only by the agent or distributer (I. T. 1195), unless the purchase was a business expense. The Cuba tax on sugar production was deductible from gross income (O. D. 372). An excise tax which had been added to the cost of goods could not later be treated (1918) as an expense (O. D. 197 and A. R. M. 121).

Delinquent property taxes paid by a mortgagee before foreclosure were regarded as additional loans; paid after foreclosure and applicable to the period before, are capital expenditures (I. T. 1611).

Inheritance taxes, levied by states, are deductible by the beneficiary in the year paid or accrued in the case of most states with the exception of Pennsylvania, Rhode Island, Maryland, and Utah (Mim. 3036, I. T. 1612-3, 1643, 1721-2, 1732, 1773). The British legacy and succession duties are deductible to the beneficiary but the British estate duty is a tax upon the right of the testator to transmit (I. T. 1750).

XIV

BAD DEBTS AND LOSSES

Bad debts. Deduction of bad debts: the reserve and non-reserve methods. Losses from trade or business, from transactions entered into for profit, and from casualty or theft.

UNDER the 1918 act, a bad debt was any sum due which became uncollectible in the year in which claimed as a deduction. Bankruptcy need not have taken place but the creditor must have secured evidence that any legal action against his debtor would not have resulted in his (the creditor's) favor. If the sum due consisted of wages or other income unpaid, in order to constitute a deductible loss the amount must first have been included as income in the present or in some prior taxable year. If a debt was compromised, the portion uncollected was not deductible unless the creditor was able to show that suit against the debtor would have been useless. A "forgiven" debt, that is, a debt cancelled without consideration, was not deductible.

Worthless bonds and notes have been and still are considered as bad debts from the point of view of the regulations and are subject to the same rules. When purchased or put on the books at a discount, not more than such discounted value may be deducted. If acquired prior to March 1, 1913, the deductible loss is the fair value at that date, in accordance with the rules already laid down. In the case of bonds or other debts secured by mortgage, no deductions could be made except in the year of foreclosure or earlier. Bad debts collected constituted income of the year in which collected.

The 1921 law permitted "in the discretion of the Commissioner, a reasonable addition to the reserve for bad