terest paid or accrued within the taxable year on its indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title; . . ." INSURANCE COMPANIES (Other than life or mutual). REFERENCE: Sec. 247 (a): "That in computing the net income of an insurance company subject to the tax imposed by section 246 1 there shall be allowed as deductions: (2) All interest as provided in paragraph (2) of subdivision (a) of section 234; .. (See above.) PROBLEM 95 Illustrating Deductions Allowed-Interest Paid to Purchase and Carry Obligations of the United States Issued After September 24, 1917, Where the Interest FACTS: Therefrom is Wholly Exempt from Tax George Peterson, paying teller of the Mt. Vernon State Bank, purchased a $1,000 Fourth Liberty Loan Bond from his broker on Nov. 16, 1921, for $946.60, agreeing to pay for it as follows: At least $250 with his order, and the balance in monthly installments of not less than $100, with the privilege of paying off the unpaid balance at any time. His payments in 1921 were as follows: Nov. 16, 1921 Dec. 16, 1921 . $296.60 On Jan. 16, 1922, he paid off the balance due his brokers on the purchase $550. The interest charged by the broker for carrying this purchase was $9.25, which was paid Jan. 16, 1922. Mr. Peterson has no other Government securities. 1 Sec. 246 imposes a tax on all insurance companies other than life or mutual insurance companies. QUESTION: Is the interest of $9.25 deductible by Mr. Peterson and if so, in what year? ANSWER: No, for although the interest was paid to purchase obligations of the U. S. issued after Sept. 24, 1917, such obligations were not originally subscribed for by Mr. Peterson. REFERENCE: Sec. 214 (a) (2). (Quoted under Problem 94.) NOTE: The Revenue Act of 1918 permitted a deduction for interest paid or incurred to purchase or carry obligations of the United States issued after Sept. 24, 1917 (which included the second and subsequent issues of Liberty Bonds). However, the 1921 Act does not permit such a deduction except in the case of an original subscription to such issues. CORPORATIONS. The law with respect to the deductibility of interest is the same in the case of corporations as it is in the case of individuals. REFERENCE: Sec. 234 (a) (2). (Quoted under Problem 94.) PROBLEM 96 Illustrating Income to be Reported and Deductions from FACTS: Harry Powers has leased a residence in one of the suburbs of St. Louis to a tenant for a number of years at a fixed annual rental with the provision that all taxes and assessments are to be paid by the tenant in addition to this stated rental. During the year 1921 the street on which this residence was located was paved and curbed and an assessment was levied against the property to cover the proper share of the cost. In accordance with his agreement, the tenant paid the assessment. QUESTION: How should the assessment thus paid by the tenant be treated on the return of Mr. Powers for 1921? ANSWER: As the assessment is paid for the benefit of Mr. Powers it is regarded as income to him. However as the tax is assessed against property because of an improvement which tends to increase the value of such property, it is not an allowable deduction from gross income on the part of the landlord. (See Problem 97 as to treatment by tenant.) REFERENCES: Sec. 214 (a): "That in computing net income there shall be allowed as deductions: ... (3) Taxes paid or accrued within the taxable year except . . . (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed. . . ." Bul. 3-20-689; O. D., 373: "Assessments for local benefits paid by a tenant for his landlord according to agreement are held to be additional rent paid by the tenant, and therefore deductible from his gross income, provided the tenant uses the property for business purposes. The amount so received by the landlord is taxable income to him, but because of its nature is not an allowable deduction from his gross income." (C. B. 2, page 123). CORPORATIONS. This principle also applies in the case of corporations. See Sec. 234 (a) (3) (c) and Sec. 247 (a) (3). PROBLEM 97 Illustrating Deductions Allowed-Taxes as Part of Rental FACTS: Henry Katz leased a certain piece of property for ten years, in which he intended to open up a delicatessen store. His annual rental was to be $1,500, and in addition he was required to pay such taxes, assessments and water rent as might be levied on the property. QUESTION: As he did not have title to the property, are such taxes, etc., paid by Mr. Katz deductible from gross income? ANSWER: Yes. These payments are in the nature of additional rental required to be made for the continued use of such business property to which Mr. Katz has not taken, and is not taking, title. (See Problem 96 illustrating treatment by lessor of such payments by lessee.) REFERENCES: Sec. 214 (a) (1). (Quoted under Problem 82.) Art. 109, Regulations 62: "... Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant. Bul. 3-20-689; O. D., 373: (Quoted under Problem 96). CORPORATIONS. Corporations that are required by the terms of their lease to pay such taxes as are assessed against such leased property, are also permitted to deduct such taxes as additional rental. REFERENCE: Sec. 234 (a) (1). (Quoted under Problem 82.) PROBLEM 98 Illustrating Deductions Allowed Corporations-Taxes Paid on Shares of Stockholders Without Reimbursement FACTS: The Boonville City Bank was required to pay a stock tax for each of its stockholders, which tax was not reimbursed to the bank by the stockholders. QUESTION: Is this tax deductible by the bank on its return? ANSWER: REFERENCE: Sec. 234 (a): "That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: ... (3) . . . The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder or member of a corporation upon his interest as shareholder or member, which are paid by the corporation without reimbursement from the shareholder or member, but in such cases no deduction shall be allowed the shareholder or member for the amount of such taxes." NOTE: Where a corporation pays the tax as above for the benefit of its stockholders or members without reimbursement from them such tax is not deductible on the returns of such stockholders or members. REFERENCE: Sec. 214 (a): "That in computing net income there shall be allowed as deductions . . . (3) Taxes paid or accrued within the taxable year except . . . (d) Taxes imposed upon the taxpayer upon his interest as shareholder or member of a corporation, which are paid by the corporation without reimbursement from the taxpayer." PROBLEM 99 Illustrating Deductions Allowed Corporations-Taxes Paid Pursuant to Contract to Pay Normal Tax on its Bonds FACTS: The bonds of the Wakefield Foundry Company contain the provision that the obligor agrees to pay for its bondholders the Federal income tax to the extent of 2% on the interest paid annually on these bonds. |