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however, of taxing the income or profit from the sale in the year in which it is actually received.

Royalties from Patents. An allowance for return of capital, in the case of one receiving royalties from patents, is permitted on the following basis. The deduction for exhaustion of capital assets represented by the patents should be each year one-seventeenth of the actual cost of such patents. Where the patent has been secured from the Government, by the taxpayer claiming the deduction, its cost would represent the various government fees, cost of drawings, experimental models, attorneys' fees, and other expenses. Where the patent has been purchased for a cash consideration, the purchase price represents the cost. Where a corporation has purchased a patent and made payment therefor in its own stock or other securities, the actual cash value of such stock or other securities at the time of purchase will represent the cost.15 Where depreciation at this rate has been claimed for one or more years and the value of the patent disappears, through obsolescence or any other cause, in a subsequent year, the unreturned cash investment remaining in the patent may be claimed as a total loss and be deducted from the income of that year.16 Where a patent is purchased after it is partially expired the cost of the patent may be divided by the number of years of life of the patent remaining at the date of purchase. Thus, for instance, if a patent has ten years to run at the time of purchase, one-tenth of the cost may be deducted each year.17

16 Reg. 33, Art. 137. 16 Reg. 33. Art. 138.

17 Letter from Treasury Department dated September 24, 1915; I. T. 8. 1917, 11414.

Royalties from Copyrights. Allowance for return of capital invested in copyrights may be taken by the owner of the copyright in the same manner as stated above in the case of patents, taking the life of the copyright as the divisor, the cost as the dividend, and the result as the amount of the annual allowance.

Royalties from Lease of Natural Deposits. In the case of mines, oil wells, and gas wells, the law provides expressly for methods of determining the annual allowance for depletion. See the Chapters on Depletion.18

18 See Chapters 33 and 34.

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In determining the net taxable income of an individual or a corporation certain deductions are specified in the law. While the deductions allowed both corporations and individuals are based upon the same principles they vary in some particulars, due to differences in the status of the two classes of taxpayers. Thus, the corporation may deduct the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties, while an individual may only deduct the necessary expenses actually paid in carrying on any business or trade, not including personal living or family expenses. On the other hand, an individual may deduct all interest paid within the year (subject to one exception applicable to both individuals and corporations) while a corporation is limited to a deduction of interest paid on indebtedness not exceeding one half of its total indebtedness plus the amount of its capital stock outstanding. Again, all losses sustained by a corporation during the year may be deducted but in the case of individuals, losses incurred in transactions entered into for profit not connected with the taxpayer's business or trade may be deducted only to an amount not exceeding the profits arising from such transactions. In the case of corporations and individuals the allowance for depreciation is limited to property used in the business or trade of the taxpayer, but in the case of corporations the amount must be actually charged off.” Taxes paid during the year may be deducted to the same extent by both individuals and corporations. In the case of non-resident aliens and foreign corporations the deductions are intended to be limited to such expenses, losses, etc., as are incurred in the creation of the income which is taxed by this Government. The special provisions applicable to individuals, corporations, non-resident aliens and foreign corporations are set forth in the chapters dealing respectively with those subjects. The general provisions applicable to all taxpayers are discussed in this and the following chapters.

Only the Deductions Specified in the Statute Are Allowed. It must be borne in mind that although the tax is imposed on the net income of a taxpayer, yet the net income so taxed is that which is specifically defined in the statute, and not that which may be generally termed net income in accounting practice or recognized as such by custom. There may be, for instance, many deductions dictated by prudence and good business management which are not recognized or countenanced by the law. Only those deductions which are expressly specified in the statute may be taken for income tax purposes.

Deductions Must Be Actual. The deductions specified in the statute can be deducted by the taxpayer only in case they represent actual payments or actual liabilities. It is not permissible, for instance, for a taxpayer owning the property used and occupied for his or its own business purposes to include as a deduction the rental value of the property so owned. Neither is it permissible to deduct an amount representing the interest which might be earned on the capital employed in the business, if such capital were invested or employed otherwise, or so placed as to earn a given rate of interest. Primarily the deductions claimed in any year must be those represented by actual cash disbursements on the part of the taxpayer unless the taxpayer has chosen to report on some other basis than that of actual receipts and disbursements.

Reporting Deductions According to Book Entries. Where an individual or a corporation, keeping accounts upon any basis other than that of cash receipts and disbursements, has elected to report his or its net income according to such basis, and is permitted by the Treasury Department to do so, both the income and the authorized deductions must be computed and accounted for on the same basis, and the same practice must be consistently followed year after year. When deduction is made of the amounts accrued or reserved, a further deduction cannot be made when the actual liability or obligation is paid. In so far as the accrual or reserve is sufficient to meet the liability it must be charged against the fund created to meet it. If it is found upon investigation that returns made upon the basis of accruals and reserves do not reflect the true net income, the taxpayer will not thereafter be permitted to make returns upon any basis other than that of actual receipts and disbursements. The Treasury De

1 T. D. 2137.

2 T. D. 2433. Although this Treasury Decision refers expressly to corporations, and not to individuals, and no similar rules have been prescribed with respect to the latter, there seems to be no

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