reasoning, the Board of Tax Appeals has permitted the deduction by the executor of the inheritance taxes of West Virginia and Connecticut (4 B. T. A. 127). Inheritance taxes on non-residents of Virginia, Kentucky, and Pennsylvania are estate deductions (G. C. M. 147).

ITEMS NOT DEDUCTIBLE AS TAXES

(a) Postage (deductible, however, if and as a business expense) (Art. 131).

(b) Federal income and excess profit taxes, including the 10% tax payable in 1917 on undistributed earnings, but excluding munitions taxes of 1916 and 1917 which were deductible. Federal income taxes including the 1909 excise tax were deductible prior to January, 1917 (O. D. 41, 240 and T. D. 2433).

(c) Improvement taxes. Taxes for local benefits are regarded as increasing the value of the property. To be deductible, real estate taxes must be for the general public welfare. Taxes covering repairs, or repairs and new construction, are deductible to the extent that they represent payments for repairs (Art. 133).

(d) Luxury taxes paid by the manufacturer on automobiles, furs, jewelry, works of art, and so forth, are deductible to the manufacturer but not to the purchaser. The right to deduct cannot be given by the manufacturer to the buyer (A. R. R. 3041; 3 B. T. A. 498; Art. 132).

(e) A gasoline tax is not deductible to the purchaser, when collected from distributors, unless a business expense (I. T. 1779, 2157; S. M. 3714).

In many states "stock" taxes are levied against individual stockholdings, payable, however, by the corporation. Such taxes, under the 1918 act, as described in O. D. 199 and O. 858, constituted an additional dividend to stockholders and

could be deducted by them as taxes paid. Since 1921 such taxes are deductible to the bank or other corporation paying the tax for the stockholder, and are not considered additional dividends to stockholders; nor can they be deducted by stockholders as taxes paid, as was the case under the 1918 act (Art. 135; 566). If the stockholder reimburses the bank, the deduction may be made by him but not by the bank. Again, the last three acts state that income taxes paid under tax-free covenant agreements are no longer additional income to the bondholder, although his tax payable may still be reduced by such amounts paid for him by debtor corporations (Art. 565).1

A franchise tax, imposed by the state of New York, is due November 1; an additional franchise tax due, not discovered until the following year, is deductible only in the prior year (A. R. R. 1153, overruling O. D. 371).

State income taxes are deductible in the Federal tax return for the same year (S. M. 4499A). Changes in the state tax computation require an amended Federal income tax return (O. D. 505), apparently only if the books are on an accrual basis (I. T. 1953, 1959, 1984); but the Wisconsin income tax, not determinable until the personal property tax was arrived at, could not be deducted before such determination was made (I. T. 1272, A. R. R. 3656). Recently (1925) the law was so changed that the income tax was no longer a credit against the property tax. In that year, the books being on an accrual basis, the income taxes for both 1924 and 1925 were deductible (I. T. 2281). Amounts withheld from salaries to pay income taxes, due in the following year, could be deducted in the year accrued (I. T. 1273). Federal income taxes were deductible expenses in 1916 and prior years and if the books were on an accrual basis could be deducted from 1916 income even though not entered on the books as a liability at the end of that year (A. R. R. 1082). Similarly, munitions taxes were deductions for the year in which accrued if the books were on the accrual basis (L. O. 1059; I. T. 2011; A. R. M. 26 and 29), and could legally be assessed against business already completed before the law became effective (A. R. R.2615). Income taxes paid to a contracting party in accordance with the terms of a "cost-plus" contract are deductible to the payer and taxable income to the payee (A. R. M. 16). Foreign taxes are deductible to 1 See page 275.

corporations on the accrual basis (A. R. R. 173). A mineral tax and income tax paid to the Province of British Columbia were deductions from gross income and not a credit against taxes otherwise payable, because the province was not regarded as foreign country (O. D. 1050). A foreign income tax levied against U. S.exempt income is neither a credit nor a deduction (I. T. 2294).

Taxes paid by banks on depositors' funds were deductible by the banks if the depositors did not reimburse the bank (I. T. 346, 1388, 1407, see also I. T. 1208, 1276, 1322, 1481, A. R. R. 1098, S. R. 2959, 3410, and I. T. 2186, regarding non-deductibility under the 1918 act). Advances to stockholders covering the payment of such a tax were not an expense of the corporation and hence could not be deducted (I. T. 1407). But the fact that the profits of a shareholder were reduced by the payment on his behalf by the corporation of taxes imposed on his interest as a shareholder did not constitute a "reimbursement" of the corporation from the shareholder (I. T. 1255). The Connecticut capital stock tax, payable by all corporations, could not be deducted under the 1918 law (I. T. 1795), nor could the bank stock taxes of New Jersey (A. R. R. 2377), Minnesota (I. T. 1629), or Michigan (I. T. 1741).

Special assessment taxes can be deducted by a tenant if paid in part consideration for his rental and if the property is used for business purposes (O. D. 373). Prior to 1924, ordinary taxes on real estate could not be added to the cost of non-productive property (I. T. 1218). The 1924 and 1926 regulations specifically permit the addition of taxes and similar expenses to the cost of non-productive property, however (Art. 1561). Taxpayers should show the nature of assessments where it is possible to have improvement and ordinary taxes under the heading of special assessments (O. 928). Taxes levied under a law providing for the erection of dams and other flood safeguards, after the occurrence of floods, were taxes for local benefits (A. R. R. 3111).

A tax on the sale of property, added to the selling price, could be deducted only by the agent or distributer (I. T. 1195), unless the purchase was a business expense. Added to the price of real estate a tax assumed by a vendee becomes a part of the cost of the property; the vendor, however, may deduct the tax, at the same time treating it as an addition to the selling price of the property (S. M. 4122). The Cuba tax on sugar production was deductible from gross income (O. D. 372). An excise tax which had been added to the cost of goods could not later be treated (1918) as an expense (O. D. 197 and A. R. M. 121). A jewelry tax on an in

stalment was deductible in the year title passed, that is, when the last payment had been made (I. T. 2081).

Delinquent property taxes paid by a mortgagee before foreclosure were regarded as additional loans; paid after foreclosure and applicable to the period before, are capital expenditures (I. T. 1611). The cost of a tax certificate and taxes paid in connection therewith are capital expenditures (I. T. 1989).

XVI

BAD DEBTS AND LOSSES

Bad debts. Deduction of bad debts: the reserve and non-reserve methods. Losses from trade or business, from transactions entered into for profit, and from casualty or theft.

UNDER the 1918 act, a bad debt was any sum due which became uncollectible in the year in which claimed as a deduction. Bankruptcy need not have taken place but the creditor must have secured evidence that any legal action against his debtor would not have resulted in his (the creditor's) favor. If the sum due consisted of wages or other income unpaid, in order to constitute a deductible loss the amount must first have been included as income in the present or in some prior taxable year. If a debt was compromised, the portion uncollected was not deductible unless the creditor was able to show that suit against the debtor would have been useless. A "forgiven" debt, that is, a debt canceled without consideration, was not deductible.

Worthless bonds and notes have been and still are considered as bad debts from the point of view of the regulations and are subject to the same rules. When purchased or put on the books at a discount, not more than such discounted value may be deducted. If acquired prior to March 1, 1913, the deductible loss is the fair value at that date, in accordance with the rules already laid down. In the case of bonds or other debts secured by mortgage, no deductions could be made except in the year of foreclosure or in the year a refunding occurred. Bad debts collected constituted income of the year in which collected.

The last three revenue acts have permitted "in the discretion of the Commissioner, a reasonable addition to the reserve for bad debts" Sec. 214 (a) (5)). It has thus been