QUESTION: Is this tax deductible by the corporation on its return? ANSWER: REFERENCE: Sec. 234 (a) (3): “... In the case of obligors specified in subdivision (b) of section 221 no deduction for the payment of the tax imposed by this title, or any other tax paid pursuant to the contract or provision referred to in that subdivision, shall be allowed, nor shall such tax be included in the gross income of the obligee.” For quotation of section 221 (b) see Problem 176. PROBLEM 100 Illustrating Deductions Allowed Corporations-Taxes FACTS: The M. E. Baily Co., Inc., paid, among others, the following taxes during the year 1921: (a) Capital Stock tax (Federal 1920) (b) N. Y. State Franchise tax QUESTION: Are these taxes deductible on the company's return for the calendar year 1921? ANSWER: REFERENCES: 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) Taxes paid or accrued within the taxable year except (a) income, war-profits, and excess-profits taxes imposed by the authority of the United States, (b) so much of the income, warprofits and excess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit under section 238, and (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed. . . ." PROBLEM 101 Illustrating Deductions Allowed Individuals-Taxes FACTS: During the calendar year 1921, Frank Littlejohn, a real estate broker in the City of Buffalo, paid (or there was paid for him in the case of his stock in the First National Bank) the following taxes: (1) $ 342.68-City tax on his residence (2) 2,573.59-City tax on business property 153.54 Assessment for street paving in front of residence (3) (4) (5) (6) 468.73-N. Y. State Income tax (1920) 16.50-Water tax on residence occupied by him 255.52-Water tax on business property (7) 3,259.67-Federal Income tax (1920) (8) (9) (10) 43.36-N. Y. State tax on his stock in 1st National Bank 394.55 Federal luxury, club dues, etc., taxes The residence referred to above was occupied solely by Mr. Littlejohn and his family. The tax on bank stock was not repaid to the bank. QUESTION: What is the status of each of the above items for Federal income tax purposes? ANSWER: (1) Deductible; (2) Deductible; (3) Not deductible, being a tax against local benefits of a kind tending to increase the value of the property [Sec. 214 (a) (3) (c)]; (4) Not deductible, being considered a personal expense; (5) Deductible; (6) Deductible; (7) not deductible [Sec. 214 (a) (3) (a)]; (8) Not deductible [Sec. 214 (a) (3) (d)]; (9) Deductible; (10) Deductible. 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 (a) income, war-profits and excess-profits taxes, imposed by the authority of the United States, (b) so much of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States, as is allowed as a credit under section 222, (c) taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and (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." Bul. 45-20-1291; 0. D., 719: "The so-called water tax paid by property owners. . . is not an assessment levied against the property owner for the privilege of using the water, but is rather in the nature of a rental paid . . . for a certain commodity furnished . . . "Accordingly a lessor of residential property is entitled to deduct the water rent paid on such property, since in such case the rent is a business expense incident to the lease of the property. Where water rent is paid on residential property by the person occupying it as such, it becomes a personal expense and is not an allowable deduction." Art. 131, Regulations 62: "... Automobile license fees are ordinarily taxes." Bul. 20-20-936; O. D., 505: “. A taxpayer of the State of New York... may in rendering his Federal income tax return . . . deduct . . . the tax . . . imposed by the New York State personal income tax law, . . (passed May 14, 1919). Art. 133, Regulations 62: "So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk, and other like improvements imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. Bul. 22-19-535; 0. D., 287: "An individual may claim as a deduction the amount of war tax paid on facilities furnished by publie utilities, which includes tax on railroad and steamship fares, and the war tax paid on admissions and dues. The war excise taxes imposed by section 904 and paid by the purchaser are deductible. PROBLEM 102 Illustrating Deductions Allowed-Taxes-Treatment of that Portion of Foreign Income, War-Profits and Excess-Profits Taxes in Excess of the Credit FACTS: Allowed under Section 222 (a) (5) Hobart Collins, an American citizen, showed for the calendar year 1921 (his taxable year) gross income amounting to $54,926.47 and deductions (exclusive of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States) amounting to $26,839.50. Mr. Collins paid income taxes during 1921 to the Dominion of Canada amounting to $756.82. Of this amount, under the limitations of Section 222 (a) (5) of the Revenue Act of 1921, Mr. Collins is entitled to take as a credit against his income tax $398.47. QUESTION: What is Mr. Collins' taxable net income for 1921 ? 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 . . . (b) so much of the income, war-profits and excess-profits taxes, imposed by the authority of any foreign country or possession of the United States, as is allowed as a credit under section 222, . . .” NOTE: While this problem is illustrative of individuals, the same principle applies in the case of corporations. REFERENCES: ... 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) Taxes paid or accrued within the taxable year except. . . (b) so much of the income, war-profits and excess-profits taxes imposed by the authority of any foreign country or possession of the United States as is allowed as a credit under section 238. . . ." See Problems 180, 181, and 182 for quotation section 222. See Problems 183, 185 and 186 for quotation section 238. PROBLEM 103 Illustrating Deductions Allowed-LossesIncurred in FACTS: Fred Uhler, doing business as The Family Laundry Co., owns several delivery auto trucks, one of which, purchased in 1919, was wrecked in a collision during the taxable year 1921, while out delivering laundry. It was not covered by insurance, and the scrap value was found to be $25, the amount received therefor from a junk dealer. QUESTION: May the cost, less sustained depreciation and salvage value, be taken as a deduction on the return for the year in which the truck was wrecked? ANSWER: Yes, as it was a loss incurred in business which was not compensated for by insurance. |