during such year. In any case where payment of the tax has not been made prior to the filing of the claim no such payment shall be required upon the income covered by such claim until the claim is decided, but in such case the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due. If any part of such claim is disallowed, then the remainder of the tax due shall bear interest at the rate of one per cent per month from the time the tax would have been due had no such claim been filed. The amount allowed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918, and the taxes shall be recomputed accordingly and the excess of tax due, if any, shall be credited or refunded to the taxpayer. In computing income for the taxable year 1919, the opening inventory must be properly adjusted by the taxpayer in respect of any claim allowed for the year 1918 under this provision. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased.61

Net Losses. When used in this paragraph the term "net loss" refers only to net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities, constructed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts received as dividends from a corporation taxable upon its net income, and amounts received as dividends from a personal-service corporation out of earnings or profits upon which income 61 Reg. 45, Art. 261.

tax has been imposed) over the sum of the gross income plus any interest received free from income or excess-profits taxes. If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss will, under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the income and excess-profits taxes for such preceding taxable year will be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination will be credited or refunded to the taxpayer. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess will under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year. It is further provided that the benefit of the above provisions may be allowed to the members of a partnership and the beneficiaries of an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary.62

CLAIM FOR ALLOWANCE OF NET Loss. A taxpayer having such a net loss may file a claim with the collector of the district in which the taxpayer's return for the preceding year was filed. Such claim should state the name and address of the taxpayer and should contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. Each claim should be supported by an affidavit.63

62 Revenue Act of 1918, § 204. 63 Reg. 45, Art. 1602.

CHAPTER 31

DEDUCTION OF ALLOWANCE FOR DEPRECIATION, OBSOLESCENCE AND AMORTIZATION

In the case of individuals the Revenue Act of 1918 permits a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business of the individual, including a reasonable allowance for obsolescence.1 Property not used in his business is excluded. In the case of non-resident aliens, the deduction for depreciation or obsolescence is permitted if and to the extent that it is connected with income arising from a source within the United States; and the proper apportionment and allocation of the deduction with respect to sources of income within and without the United States is determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.2 In the case of corporations, the allowance is also for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence, limited in the case of a foreign corporation as above indicated in the case of non-resident aliens. The purpose of allowing a deduction each year for depreciation is to take care of the certain loss of property which takes place from year to year, due to wear and tear. The property must be used or employed in the trade or business of the taxpayer. No depreciation is allowed, for instance, on a dwelling house occupied by the owner

1 Revenue Act of 1918, § 214 (a) 8.

2 Revenue Act of 1918, § 214 (b).

3 Revenue Act of 1918, § 234

4 Revenue Act of 1918, § 234

(a) 7. (b).

as a private residence. The new provisions of the Revenue Act of 1918 for the deduction of a reasonable allowance for obsolescence and amortization are treated in this chapter in addition to the subject of depreciation of property used in the trade or business of a taxpayer.

Depreciation Under Preceding Income Tax Laws. The 1909 Law allowed the deduction of "all losses including a reasonable allowance for depreciation of property, if any." The 1913 Law allowed as a deduction in the case of individuals "a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business," and in the case of corporations "all losses including a reasonable allowance for depreciation by use, wear and tear of property, if any." The 1916 Law allowed to individuals a deduction of "a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade," and to corporations a deduction of "all losses including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade.'

Tangible Property Subject to Wear and Tear. Depreciation as an allowable deduction in ascertaining net income for the purpose of the income tax is not to be confused with the deduction for loss. The depreciation permitted to be taken as a deduction is the value assigned to the deterioration of physical improvements or assets such as are susceptible of having their value lessened through wear and tear. Assets of any character which are not affected by use, wear and tear (except patents, copyrights, etc.) are not subject to the depreciation authorized by the law."

LOSS IN RENTAL VALUE OF BUILDINGS. In the case of buildings the deduction on account of depreciation shall not include any allowance for an estimated loss due to 5 T. D. 2153.

6 Reg. 33 Rev., Art. 159; T. D. 2005.

7 Reg. 33 Rev., Art. 162; T. D. 2152; T. D. 2137.

lessening of rental value, nor shall the computation of the deduction be influenced by the changed environment after a period of years, nor by its lack of adaptability to the use originally intended nor to any other outside influence affecting its value but allowable depreciation shall be determined solely upon the estimated life of such buildings after making the due allowance for ordinary repairs, the cost of which may be deducted as expenses for maintenance and operation.8

REAL ESTATE. Real estate, as such, and as distinct from the improvements thereon, is not reduced in value by reason of wear and tear and an allowance for depreciation in the case of real-estate does not apply to the grounds, but is intended to measure the decline in the value of the improvements due to wear and tear of such improvements.9 In determining the cost of the real estate upon which depreciable property is located, it frequently occurs that no segregation is made of the cost of the buildings as separate and distinct from the cost of the ground upon which such buildings stand. In such cases where the actual cost of the buildings or improvements at the time they were taken over by the corporation can not be definitely determined, it will be sufficient for the purpose of determining the rate of depreciation to be used in computing the amount which will be deductible from gross income to estimate the actual value at the time acquired, of buildings or improvements if acquired after March 1, 1913, or the fair market price or value as of that date if the property was acquired prior to March 1, 1913.10

FARM BUILDINGS AND MACHINERY. Depreciation may be claimed on farm buildings and farm machinery (but not on the dwelling occupied by the owner) and also on other physical farm property subject to wear and tear.11

STOCK FOR BREEDING PURPOSES. A farmer may claim de

8 Cohen v. Lowe, 234 Fed. 474; Reg. 33 Rev., Art. 162.

9 Reg. 33 Rev. Art. 162; T. D. 2152; T. D. 2137.

10 Reg. 33 Rev., Art. 163; T. D. 2137, T. D. 2152.

11 T. D. 2153; T. D. 2665; Reg. 45, Art. 172.