law expressly prohibits deduction of the federal income tax. On the other hand, the bondholder should report as additional income the amount of tax so paid for him by the corporation. STATE INHERITANCE TAXES. State inheritance taxes paid by the executor or administrator of an estate of a deceased person, which are provided by law to be deducted from the respective legacies or distributive shares, are not allowable deductions in computing the net income of such estate subject to tax, even though the will contain a direction to pay inheritance taxes out of the residue. An inheritance tax is upon the transfer of the property and not upon the estate of the decedent or upon the executor or administrator, although the latter is required to pay it. In general, taxes paid or accrued within the year imposed by the authority of any State, or otherwise, are limited to those imposed upon the taxpayer and do not include taxes paid by him on behalf of another, even though he is required by law to make such payment. Since, moreover, state inheritance taxes are imposed upon the transfer before the property reaches the legatee or the distributee, and merely diminishes the capital share of the estate received by him, such tax is not imposed upon the legatee or distributee and is not an allowable deduction from his income.14 TAXES PAID BY CORPORATION FOR STOCKHOLDERS. Under the statutes of many of the states taxes are assessed against the stockholders of banks, the bank being required to pay the tax on behalf of its stockholders. In such cases it was held, under the 1909 Law, that the bank was not entitled to deduct the amount of taxes so paid as the tax was not a tax upon the bank or upon its property.15 This rule was continued under the 1913 Law and the 1916 Law, such taxes being held to be against the property of the private stockholders and not against either the cor 14 Reg. 45, Art. 134; letter from Treasury Department dated February 10, 1916; I. T. S. 1918, ¶¶ 486, 796 and 1669. 15 T. D. 1763. poration or its property.16 The requirements of a state law that a bank shall pay for the stockholder cannot be construed as authority under which the bank may deduct the tax.17 Where a statute requires the bank to pay the tax and gives it a lien upon the shares, the bank is not entitled to deduct the tax.18 Where the statute gives the bank the option either to pay the tax out of its general funds or to collect the same from its stockholders, that fact does not change the character of the tax as a tax against the property of the individual stockholders, and the bank cannot deduct.19 Even though the state statute makes no provision for recovery from the several shareholders of their proportional part of the amount so paid, the bank cannot deduct.20 The absence of an express provision in the statute does not show that there is no such right of recovery, or that the intention was for the tax to fall ultimately upon the bank and not upon the stockholders.21 As a general rule the amounts of taxes so paid by a corporation for its stockholders are not collected from the stockholders, the corporation charging the taxes as an item of expense. Such taxes, however, should be reported by the stockholders respectively as taxes paid by them, according to their proportionate interests in the corporation.22 The amount of the taxes so paid should also be treated as additional income from the net earnings of the corporation.23 Where shares of stock are sold after the tax has been assessed, but prior to the time it is paid 16 The Northern Trust Company v. McCoach, 215 Fed. 991; T. D. 2135. 17 T. D. 2161. 18 Eliot National Bank v. Gill, 210 Fed. 833, affirmed 218 Fed. 600; National Bank of Commerce v. Allen, 211 Fed. 743, affirmed 223 Fed. 472, petition to the United States Supreme Court for writ of certiorari denied October 25, 1915. 19 Northern Trust Company v. McCoach, 215 Fed. 991. 20 First Nat. Bank v. McNeel, 238 Fed. 559. 21 Home Savings Bank v. Des Moines, 205 U. S. 503. 22 T. D. 2135. 23 See Chapter 23. by the corporation on behalf of the stockholders, the one holding the stock on the date when a tax became due and payable is the one entitled to report the amount as a dividend and deduct the amount as a tax paid by him.24 Taxing Subdivisions of Territories. It was provided/ by the 1916 Law that "taxes paid within the year imposed by the authority of the United States (except income and excess-profits taxes) or of its Territories, or possessions, or any foreign country, or by the authority of any State, county, school district, or municipality, or other taxing subdivisions of any State, not including those assessed against local benefits" were deductible.25 No express provision was made for the deduction of taxes imposed by the authority of "any taxing subdivision" of any territory. The Revenue Act of 1918 now provides 26 for the deduction of taxes imposed by a taxing subdivision of any Territory. Bank Guaranty Fund. Banking corporations which, pursuant to the laws of the state in which they are doing business, are required to set apart an amount, levied and assessed against them by the state authorities, as a "depositor's guaranty fund" may deduct the same from their gross income, provided the fund is set aside and carried. to the credit of the state banking board or other duly authorized state officer, and may be withdrawn upon demand by such board or state officer to meet the demands of these officials in reimbursing depositors of insolvent banks, and, provided further, that no portion of the amount so set aside and credited is returnable, under the existing laws of the state, to the assets of the banking corporation. In 24 Letter from Treasury Department dated February 25, 1916; I. T. S. 1918, ¶ 490. An earlier ruling in a letter dated March 2, 1915, held that the stockholder owning the stock at the time the taxes were assessed was the one entitled to the deduction, but the later ruling referred to above seems to indicate the present attitude of the Treasury Department. 25 Revenue Act of 1916, §§ 5, 6, 12 (a) and 12 (b), as amended by Revenue Act of 1917. 26 Revenue Act of 1918, §§ 214 (a) 3, 234 (a) 3. such cases the amount of the guaranty fund is no longer an asset of the bank, but is in the nature of a tax and as such is deductible.27 Strictly speaking, such assessments are more properly deductible as an expense of doing business or, perhaps, as a loss, since the fund is intended to meet the losses of the banking business as a whole. Taxes Paid by a Tenant. Where a tenant pays the taxes on property leased by him, he may consider the amount so paid as an additional payment of rent and may deduct it as an expense of carrying on his business.28 To the landlord the amount is equivalent to an additional payment of rent and must be reported as such, but he may also deduct the amount, as, to him, it is a tax paid during the year by the tenant as his agent. The transaction is tantamount to a payment of the sum by the tenant to the landlord and a repayment by the landlord to the tenant, as his agent, for the purpose of satisfying the tax. 27 T. D. 2152. 28 T. D. 2090. CHAPTER 30 DEDUCTION OF LOSSES The Revenue Act of 1918 provides in the case of individuals that in computing net income there may be allowed as deductions, if sustained during the taxable year and not compensated for by insurance or otherwise, (a) losses incurred in trade or business, (b) losses incurred in any transaction entered into for profit, though not connected with the trade or business, (c) losses of property not connected with the trade or business if arising from fires, storms, shipwreck, or other casualty or from theft.1 The extent to which losses may be deducted by non-resident aliens and foreign corporations and the subject of losses incurred in trade are more fully discussed in previous chapters.2 Individuals and corporations may also deduct debts ascertained to be worthless and charged off within the taxable year. The rules discussed in this chapter are those applicable to corporations and individuals generally. In the case of corporations all losses sustained during the taxable year and not compensated for by insurance or otherwise may be deducted. The 1918 Revenue Law contains a new provision for the deduction of net losses in certain cases against the income of the preceding year, and also as to losses in inventory ascertained after the close of the taxable year.6 1 Revenue Act of 1918, § 214 (a) 4, 5, 6. 2 See Chapters 4 on Citizens and Residents, 5 on Non-Resident Aliens and 14 on Foreign Corporations. 3 Revenue Act of 1918, §§ 214 (a) 7 and 234 (a) 5. 4 Revenue Act of 1918, § 234 (a) 4. 5 See p. 475. 6 See p. 473. |