should be deducted from time to time the amount of any definite loss or damage sustained by the property through casualty, as distinguished from the gradual exhaustion of its utility which is the basis of the depreciation allowance. In the case of the acquisition on or after March 1, 1913, of a combination of depreciable and nondepreciable property for a lump price, as, for example, buildings and land, the capital sum to be replaced is limited to an amount which bears the same proportion to the lump price as the value of the depreciable property at the time of acquisition bears to the value of entire property at that time. Where the lessee of real property erects buildings, or makes permanent improvements which become part of the realty and income or loss has been returned by the lessor as a result thereof, as provided in article 48, the capital sum to be replaced by depreciation allowances is held to be the same as though no such buildings had been erected or such improvements made. In the case of property which has been the subject of deductions for amortization under sections 214(a) (9) and 234(a) (8) of the Revenue Acts of 1918 and 1921, depreciation deductions will be allowed after the close of the amortization period upon the basis of the value of such property after the amortization allowance has been deducted. No depreciation deduction will be allowed in the case of property which has been amortized to its scrap value and is no longer in use. (See article 182 of Regulations 45 and 62.)

ART. 165. Method of computing depreciation allowance.— The capital sum to be replaced should be charged off over the useful life of the property, either in equal annual installments or in accordance with any other recognized trade practice, such as an apportionment of the capital sum over units of production. Whatever plan or method of apportionment is adopted must be reasonable and must have due regard to operating conditions during the taxable period. While the burden of proof must rest upon the taxpayer to sustain the deduction taken by him, such deductions must not be disallowed unless shown by clear and convincing evidence to be unreasonable. The reasonableness of any claim for depreciation shall be determined upon the conditions known to exist at the end of the period for which the return is made.

ART. 166. Obsolescence. With respect to physical property the whole or any portion of which is clearly shown by the taxpayer as being affected by economic conditions that will result in its being abandoned at a future date prior to the end of its normal useful life, so that depreciation deductions alone are insufficient to return the cost (or other basis) at the end of its economic term of usefulness, a reasonable deduction for obsolescence, in addition to depreciation, may be allowed in accordance with the facts obtaining with respect to each item of property concerning which a claim for obsolescence is made. No deduction for obsolescence will be permitted merely because, in the opinion of a taxpayer, the property may become obsolete at some later date. This allowance will be confined to such portion of the property on which obsolescence is definitely shown to be sustained and cannot be held applicable to an entire property unless all portions thereof are affected by the conditions to which obsolescence is found to be due.

ART. 167. Depreciation of patent or copyright.- In computing a depreciation allowance in the case of a patent or copyright, the capital sum to be replaced is the cost or other basis (not already deducted as current expense) of the patent or copyright. The allowance should be computed by an apportionment of the cost or other basis of the patent or copyright over the life of the patent or copyright since its grant, or since its acquisition by the taxpayer, or since March 1, 1913, as the case may be. If the patent or copyright was acquired from the Government, its cost consists of the various Government fees, cost of drawings, experimental models, attorney's fees, etc., actually paid. Depreciation of a patent can be taken on the basis of the fair market value as of March 1, 1913, only when affirmative and satisfactory evidence of such value is offered. Such evidence should whenever practicable be submitted with the return. If the patent becomes obsolete prior to its expiration such proportion of the amount on which its depreciation may be based as the number of years of its remaining life bears to the whole number of years intervening between the date when it was acquired and the date when it legally expires may be deducted, if permission so to do is specifically secured from the Commissioner. Owing to the

difficulty of allocating to a particular year the obsolescence of a patent, such permission will be granted only if affirmative and satisfactory evidence that the patent became obsolete in the year for which the return is made is submitted to the Commissioner. The fact that depreciation has not been taken in prior years does not entitle the taxpayer to deduct in any taxable year a greater amount for depreciation than would otherwise be allowable.

ART. 168. Depreciation of drawings and models.-A taxpayer who has incurred expenses in his business for designs, drawings, patterns, models, or work of an experimental nature calculated to result in improvement of his facilities or his product, may at his option deduct such expenses from gross income for the taxable year in which they are incurred or treat such articles as capital assets to the extent of the amount so expended. In the latter case, if the period of usefulness of any such asset may be estimated from experience with reasonable accuracy, it may be the subject of depreciation allowances. spread over such estimated period of usefulness. The facts must be fully shown in the return or prior thereto to the satisfaction of the Commissioner. Except for such depreciation. allowances no deduction shall be made by the taxpayer against any sum so set up as an asset except on the sale or other disposition of such assets at a loss or on proof of a total loss thereof.

ART. 169. Charging off depreciation.-A depreciation allowance, in order to constitute an allowable deduction from gross income, must be charged off. The particular manner in which it shall be charged off is not material, except that the amount measuring a reasonable allowance for depreciation must be either deducted directly from the book value of the assets or preferably credited to a depreciation reserve account, which must be reflected in the annual balance sheet. The allowances should be computed and charged off with express reference to specific items, units, or groups of property, each item or unit being considered separately or specifically included in a group with others to which the same factors apply. The taxpayer should keep such records as to each item or unit of depreciable property as will permit the ready verification of the factors used in computing the allowance for each year for each item, unit, or group.

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ART. 170. Closing depreciation account.-If the use of any property in the business is permanently discontinued, although no sale or other disposition of the property has taken place, a determination of any gain or loss may be made; but any deduction in respect of any loss thereon must be disclosed in the taxpayer's return for the year in which the determination is made and a full statement of the facts and the basis upon which the computation is calculated must be attached to the return. Upon a sale or other disposition of the property, the consideration received shall be compared with the amount of the estimated salvage value used in computing the gain or loss as above provided, and the amount of the difference shall be treated as a gain or loss, as the case may be, of the year in which the sale or other disposition was made. (See articles 141-145.)

ART. 171. Depreciation in the case of farmers.-A reasonable allowance for depreciation may be claimed on farm buildings (other than a dwelling occupied by the owner), farm

Reg 6 machinery, and other physical property. A reasonable allow

ance for depreciation may also be claimed on live stock acquired for work, breeding, or dairy purposes, unless they are included in an inventory used to determine profits in accordance with article 38. Such depreciation should be based on the cost and the estimated life of the live stock. If such live stock be included in an inventory no depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the inventory. (See also articles 38, 111, and 145.)

NASHVILLE, ETC. RY. CO. v. UNITED STATES (Circuit Court of Appeals of the United States, 1920. 269 Fed. 351, 2 Am. Fed. Tax R. 1299.)

KNAPPEN, Circuit Judge. This case is before this court a second time. In substance it is this: In June, 1916, the United States, under the direction of its Commissioner of Internal Revenue, brought suit to recover from defendant an excise tax of 1 per cent claimed to be due from it for each of the years 1909 and 1910, under section 38 of the Revenue Act of August 5, 1909 (36 Stat. 11, 112, .c. 6), which makes every corporation to which it applies "subject to pay annually"

a special excise tax of 1 per cent on its net income, to be determined by deducting from gross income, among other things, operating expenses, losses sustained, "including a reasonable allowance for depreciation of property," interest on indebtedness, and taxes. The declaration alleged the filing by defendant with the Commissioner of Internal Revenue, on February 25, 1910, and February 21, 1911, respectively, of returns of its net income for the respective years 1909 and 1910; that both returns were incorrect as to the amount of defendant's income-that for 1909, in that it included, as an item of deduction from gross income, an alleged charge of $26,000 to expenses, which was not a necessary expense actually paid out of income in the maintenance and operation of its business and properties; those for both years, in that they included charges to depreciation of roadway, amounting to $249,024.54 for the year 1909 and $239,229.70 for the year 1910, which were not charged against the capital valuation of the roadway on its books, and were not reasonable allowances for depreciation of roadway within the meaning of the act; that the three items named were disallowed by the Commissioner of Internal Revenue and held by him to be incorrectly charged, and that they were in fact not correct and proper deductions from gross income, and that the total amounts so deducted, which should have been included as net income in said returns, were for the year 1909 $275,024.54, and for 1910 $239,229.70; that the defendant was thus indebted to the United States and subject to pay an income tax of 1 per cent upon the amounts stated; that it had failed and refused to make payment; and that the alleged taxes were thus due from defendant and payable by it to the United States.

The railway company demurred to the declaration upon grounds, so far as now important: (a) That the government could not recover an excise tax in advance of an assessment by the Commissioner of Internal Revenue; and (b) that the railway company, having made its returns and paid the assessments made by the Commissioner, could be made subject to no further obligation unless the Commissioner should discover some item to be false within three years from March 1st of the year succeeding the calendar year for which the return is made. The trial court sustained the demurrer. This court reversed that action, and remanded the case for further pro