partment has always held, in the case of corporations, that it was immaterial whether deductions, except for taxes and losses, were evidenced by actual disbursements in cash, or evidenced in such other ways as to be properly acknowledged by the corporate officers and so entered on the books of the corporation as to constitute a liability against the assets. Except as the same may be modified by the provisions of the act, limiting certain deductions and authorizing others, the net income as returned by a corporation for the purpose of the tax should be the same as that shown by the books or the annual balance sheet. No special system of bookkeeping has been required, nor any specific method prescribed in rulings or regulations by which the net income should be determined. As to taxes, the Department held in the past that the tax - must be actually paid, and not merely entered as a charge, in order to be deducted, and in the case of losses the loss must be actually sustained and not merely charged off. As to taxes, the rule seems to be changed in the case of corporations electing to report according to their books, as indicated in the following paragraph.

ACCRUALS. Corporations which accrue on their books, monthly or at other stated periods, amounts sufficient to meet fixed annual or other charges, may deduct from their gross income the amount so accrued, provided such accruals approximate as nearly as possible reason why an individual should not be permitted to avail himself of the same privilege of reporting on a basis other than that of actual receipts and disbursements, since the law extends the privilege to both in identical language.

3 Reg. 33, Art. 158.

4 T. D. 2161.

the actual liabilities for which the accruals are made, and provided that in cases wherein deductions are made on the accrual basis, income from fixed and determinable sources accruing to the corporation is returned, for the purpose of the tax, on the same basis.5

RESERVES TO MEET LIABILITIES. Where pursuant to the consistent practice of accounting of a corporation, or pursuant to the requirements of the Interstate Commerce Commission or of any federal, state or municipal supervising authority, corporations set up and maintain reserves to meet liabilities, the amount of which, and the date of payment or maturity of which is not definitely determined or determinable at the time the liability is incurred, the amount credited to such reserves may be deducted, provided the amounts deductible on account of the reserves approximate as nearly as can be determined the actual amounts which experience has demonstrated will be necessary to discharge the liabilities incurred during the year, for the payment of which additions to the reserves are made. If it is found that the amount credited to any such reserve is in excess of the reasonable or probable needs for which the reserve was created, the excess will be disallowed as a deduction and restored to income for the purpose of the tax. In no event will sinking funds or other reserves set up to meet additions, betterments or other capital obligations be allowed as deductions. Reserves to meet losses contingent upon shrinkage in values, losses from bad debts, losses from capital investments, etc., are not allowed as deductions, since such losses are only deductible when definitely determined

5 T. D. 2433.

as a result of a closed or completed transaction and actually charged off."

Additions and Betterments. The law provides expressly in the case of individuals and corporations that no deduction shall be allowed for any amount paid out for new buildings, permanent improvements, or betterments made to increase the value of any property or estate, and no deduction shall be made for any amounts of expense in restoring property or making good the exhaustion thereof for which an allowance is or has been made. Amounts expended for additions and betterments are considered as a capital investment. Thus, expenditures of a railroad for sidings or spur tracks are additions and betterments and therefore not deductible. If expenditures are made for permanent improvements and betterments they are treated as any other investment of capital, that is, if the asset in which the capital is invested is one on which depreciation may be claimed, the amount expended for the permanent addition or betterment is added to the cost of the property for the purpose of determining the annual depreciation allowance thereafter. The statute merely intends to prohibit the deduction of the entire amount in the year in which the expenditure is made.

PUBLIC UTILITIES. In a decision under the 1909 Law it was held that the fact that, under the laws of California, a public utilities corporation is not the owner

6 T. D. 2433.

7 Act of September 8, 1916, §§ 5, 6 and 12.

8 Reg. 33, Art. 118.

9 Grand Rapids and Indiana Railway Company v. Doyle, T. D.

of the property, but merely intrusted with the use thereof, did not entitle it to more favorable treatment than other corporations. Money received from the consumers to pay for service connections to be laid in public streets was held to be income on which the corporation was liable to pay a tax, notwithstanding that all or nearly all of the sums so received may have been expended in betterments and extension of its system. Moneys expended for service connections and pipe extensions are invested in permanent improvements, and do not come within any of the permitted classes of deductions mentioned in the statute.10 They are not in the nature of improvements made merely to facilitate the transaction of a growing business, the expenses of which have been held deductible.11

Expense of Restoring Property. Expense of restoring property or making good the exhaustion thereof is not an allowable deduction where a depreciation allowance is or has been made for the purpose, that is, where an annual allowance has been claimed for depreciation of property subject to wear and tear, the expense of restoring such property may not again be deducted, but must be taken out of the sum so set aside for depreciation.

Voluntary Destruction of Property. Losses due to voluntary removal of buildings, etc., incident to improvements, are not allowed as a deduction. It is presumed

10 Union Hollywood Water Co. v. Carter, 238 Fed. 329. It would seem, however, that it is unjust in a case like this to tax the company on its receipts where the money is for improvements and betterments to property which it does not own.

11 See Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, referred to in Chapter 28.

that depreciation up to the time of the removal has been covered by previous depreciation charges and the residuary value of the building removed is considered a part of the cost of the new building, that is, as a capital investment to be added to other items of cost on the aggregate of which depreciation of the new building may be based.12

Special Assessments for Local Benefits. The law expressly provides that assessments against local benefits shall not be deducted as taxes, although frequently referred to as taxes and imposed by local governments. Such assessments as, for instance, for paving, curbing, installing sewage and water systems, etc., are held to be expenditures which add to the value of the property and should be capitalized, that is, added to the cost of the property for the purpose of determining the loss or gain in a subsequent sale of such property.13

12 Reg. 33, Art. 127.

13 Letter from Treasury Department dated December 22, 1914; I. T. S. 1917, ¶ 1342. See Chapter 20.