S. 1917, Paragraph 2481.) A profit sharing or bonus payment, however, is not in any event allowed as a deduction if the amount is left on deposit with the company to secure the company against such losses as may be charged to the employees. (Letter from Treasury Department dated November 30, 1917.) [Page 317.] Pensions. No deduction shall be made for contributions to a pension fund the resources of which are held by the corporation, the amount deductible in such case being the amount actually paid to the employee. (Reg. 33 Rev., Art. 136.) [Page 318.] Farmers. Amounts expended in the development of orchards and ranches prior to the time when the productive stage is reached are considered as investments of capital and are not deductible as expense. (Reg. 33 Rev., Art. 4.) CHAPTER 29 DEDUCTION OF INTEREST [Page 323.] Accrued Interest. Corporations keeping books of account on an accrual basis may deduct accrued interest for the year whether paid or not when shown as a charge against accrued income upon the books of account. (T. D. 2625.) CHAPTER 31 DEDUCTION OF LOSSES [Page 337.] Issue of Bonds Below Par. Where a railroad company sold bonds and equipment notes at a discount in 1906 and the books show that the loss was entirely charged off under the profit and loss account for 1906, and the company in making returns of excise tax for the years 1911 and 1912 failed to deduct the proportionate amount of discount sustained, it has no right to claim refund of such amount. (Chicago and Alton Railroad Company v. U. S. Court of Claims, decided December 3, 1917; D. T. 2631.) If the bonds were sold subsequent to January 1, 1909, at a discount, and the amount of the discount was then charged off on the books, either against earnings or surplus, but not deducted in the corporation's return of net income, such discount as was not then deducted in its entirety, may be spread over the life of the bond, and an aliquot part of the discount may be deducted from the gross income of each year until the bonds mature or are redeemed. In cases wherein a corporation sells its bonds at a discount plus a commission for selling the amount of such discount and commission, together with other expenses incidental to issuing the bonds, constitutes a loss, the aggregate amount of which loss will, for the purpose of an income tax return, be prorated over the life of the bonds sold, and the amount thus apportioned to each year will be deductible from the gross income of each such year until the bonds shall have been redeemed. If a corporation having sold its bonds at a discount, the discount having been deducted from gross income later repurchases or redeems the bonds at a price less than par, the difference between the price at which they are redeemed and their par value will be returned as income. (Reg. 33 Rev., Art. 150.) [Page 339.] Loss by Destruction or Disappearance of Property. When the loss is claimed through the destruction of property by fire, flood, or other casualty the amount deductible will be the difference between the value as of March 1, 1913, or the cost of the property and the salvage value thereof, including in the latter value the amount, if any, that has been or should have been set aside and deducted in the current or previous years from gross income on account of depreciation and which has not been paid out in making good the depreciation sustained. (Reg. 33 Rev., Art. 147.) [Page 343.] When Debts May be Considered Worthless. Where an indebtedness is claimed and contested and a settlement is had by way of compromise whereby an amount, less than the debt claimed, is accepted in full payment and satisfaction of the debt, the difference between the amount paid and that claimed is not allowable as a deduction for bad debts. Where the settlement in compromise consists of a promise to pay an amount less than the debt claimed, the amount promised to be paid forms the basis of a new transaction, and upon failure to make good this promise the question will arise as to the deductibility of the new amount only. Where all of the surrounding and attendant circumstances indicate that a debt is worthless and uncollectible and that legal action to enforce payment would in all probability not result in the satisfaction of execution on a judgment, a showing of these facts will be sufficient showing of the worthlessness of the debt for purposes of deduction. Where, under foreclosure, a mortgagee buys in the mortgaged property and credits the indebtedness with the purchase price the difference between purchase price and the indebtedness will not be allowable as a deduction for bad debt-the property which was security for the debt being in possession and ownership of the mortgagee is, for the purposes of income tax, held to be sufficient to justify a disallowance of a claim for bad debt. Only where purchaser for less than debt is another than mortgagee may the difference between debt and net from sale credited be deducted as bad debt. (Reg. 33 Rev., Art. 8.) It is not essential that the bad debt or account shall be proved worthless by legal proceedings before the deduction may be allowed but the corporation must not only be satisfied that the debt or account is worthless, but must be able to satisfy the Commissioner or Collector of Internal Revenue that the accounts charged off were definitely determined at the time to be worthless and that they had not been recognized as worthless or without value prior to the beginning of the year for which the return is made. (Reg. 33 Rev., Art. 151.) [Page 344.] Loss Due to Adverse Judgment. Amounts paid pursuant to judgment or otherwise on account of damages are deductible from gross income in the year and to the extent such amounts are actually paid, less any amount of such damages as may have been compensated for by insurance. (Reg. 33 Rev., Art. 158.) If on suit for damages the amount recovered is less than the damage sustained or less than an amount necessary to make good the damage the difference between the actual amount of damage sustained and the amount recovered will be deductible as a loss. (Reg. 33 Rev., Art. 94.) [Page 345.] Cost of Drawings, Models and Patterns. Expenditures made for designs, drawings, patterns or models representing work of an experimental nature should be treated as a capital disbursement and not as an expenditure if the designs, drawings, patterns or models prove to be satisfactory and result in the production of salable goods. If, however, they prove to be unsatisfactory and have no asset value, the expenditure may be charged off as a loss incident to running the business and as such deducted from gross income, provided that the taxpayer is taking credit for such expenditures in the income tax return makes a full and complete explanation with respect to the same and to the satisfaction of the Commissioner of Internal Revenue. (Reg. 33 Rev., Arts. 175 and 176.) If designs, drawings, patterns, or models result in the production of goods which prove to be salable for a certain length of time and then become obsolete and can not be sold, the amount expended for such designs, drawings, patterns, or models, less any amounts previously claimed as depreciation with respect to the same or as a return of capital, may when charged off, be included in, and deducted as a loss incident to running the business, provided full and complete information is reported in a manner satisfactory to the Commissioner of Internal Revenue. (Reg. 33 Rev., Art. 177.) Obsolescence Deductible, Cost Less Depreciation and Salvage. Amounts representing losses on account of obsolescence of physical property may be included |