R. 2318), and of securing a release of a claim on recently purchased land (A. R. R. 6972). Taxes, interest, and other "carrying" charges on unproductive property are a part of development expense and may, therefore, be capitalized at the option of the owner, provided they have not already been deducted as expenses (Art 1561; S. M. 5033). This rule is presumably effective from January 1, 1924, it having been held that the 1921 act does not permit its practice (Westerfield v. Rafferty, 4 Fed. (2nd) 590; T. D. 3667). The cost of advertising is not a carrying charge (I. T. 2284). Capital expenditures have included the cost of developing patents, which, in the opinion of the Board of Tax Appeals, must be capitalized (1 B. T. A. 967; 3 B. T. A. 30; 3 B. T. A. 822), surveying costs (S. M. 2423 and S. R. 17), costs of removing obstructions from a nearby highway (I. T. 2105), an unrecorded liability paid by a successor corporation (1 B. T. A. 799), development expense (including certain operating losses) arising through the growth of a branch of a business (4 B. T. A. 649), and excessive costs of construction (I. T. 2158; 1 B. T. A. 72). Over a period of five years a corporation each year was given credit, on the purchase price of a plant secured through a board of trade, for 5% of its annual pay-roll; such credit was held to be a capital expenditure (2 B. T. A. 1160). The reacquirement of property actually sold, at a figure substantially less than the original selling price, gives rise to no income; and the reacquired property must be valued at the reduced figure (I. T. 2178; 1 B. T. A. 706; 2 B. T. A. 357). A discount on the purchase of an investment is a reduction of cost (I. T. 2195). Expenditures on mines and wells are subject to more rigid rules than expenditures in connection with any other kind of property; thus, the option of handling the cost of productive and non-productive oil wells may differ, but the policy, once adopted, must be adhered to for all future tax purposes (I. T. 1698). In 3 B. T. A. 30 it was stated that expenditures "for the purpose of increasing the earning capacity" are capital expenditures. In the case of a mine, rails, pipe, pumps, and a hoist were found to have a useful life of but a few months, with a negligible residual value, and were permitted to be deducted as operating expenses, while the cost of empty-car-haul equipment was required to be capitalized because it did away with the services of several employees (1 B. T. A. 83). Generally, mine equipment lasting more than one year should be capitalized (S. M. 2319A; 3 B. T. A. 540); this rule supersedes the practice prior to 1926 whereby capital expenditures "necessary to maintain normal output" in mines and timber companies, could be charged to expense (Art. 224, 233, Regulations 65). CONSTRUCTIVE RECEIPT Income need not be actually received in order to be taxable. Bond coupons may be due October 15, but through negligence or other cause may not have been cashed until January of the following year. If the books are on a cash basis the unclipped coupon maturing October 15 would be income for the calendar year although not cashed during that year; if the books are on an accrual and calendar year basis the unclipped and matured coupon and the accrued interest between October 15 and December 31 would be included in the income calculation. There is thus a distinction between income accrued and income constructively received. If credited to the account of a taxpayer the income is not constructive unless at the same time it is unqualifiedly subject to withdrawal by him. "Subject to withdrawal" and "available" are the words frequently used by the Department in ruling that income has been constructively received. Distributive income of partnerships, personal service corporations (the latter after January 1, 1918, and before January 1, 1922), pools, joint ventures and estates and trusts, interest on savings accounts and other accumulating investments are examples of constructive receipt cited in the regulations (Art. 51-2). Income credited and made available and therefore taxable is illustrated by building and loan association profits credited to stockholders' accounts (O. D. 446) unless withdrawal is restricted as in the case of a cooperative bank where income on the withheld profits was taxable in the year the restriction was removed (O. D. 1081); profits, restricted or unrestricted, of a partnership (O. 912); insurance premiums paid on the lives of officers and employees where the officers or employees designate the beneficiary (O. D. 659); sales commissions earned (A. R. R. 366); income paid by a debtor of a taxpayer to a third person for the account of a taxpayer (O. 912, I. T. 1339, Mim. 3040, A. R. R. 2245, A. R. R. 2954 and I. T. 1846); dividends applied against the purchase price of stock held in escrow (i. e., constructive receipt to vendor who held title to stock) (I. T. 1958); accumulating and unpaid interest on a trust fund (O. D. 1047) and on an account with a broker (I. T. 1764), but not on retirement deductions from the salary of an employee until he leaves the service (I. T. 1738); profits of a close corporation credited without restriction to stockholders' personal accounts (A. R. R. 1004); a portion of the selling price of bonds held in escrow as a guaranty of interest to be paid on the bonds (I. T. 1788). Similarly, rentals paid by a lessee corporation direct to the stockholders of the lessor corporation constituted income to the lessor company (A. R. R. 589; American Telegraph and Cable Company v. U. S., 61 Ct. Cl.-; 2 B. T. A. 991; see also Art. 547), and income subject only to surtax when received by stockholders (I. T. 1896); in another instance, interest on corporate obligations, paid directly to stockholders, was looked upon as a liquidating dividend (I. T. 2016). Until an option to receive cash or stock from a partially liquidating corporation is exercised, no income need be reported (A. R. R. 375). The date a dividend is payable determines the period in which it is taxable (O. D. 97), even where dividend checks were not cashed until the death of an incompetent who could not sign them (I. T. 2072). Where a corporation loaned money without interest to stockholders whose stock was held as collateral, and no dividends were declared on such stock, dividends were nevertheless constructively received by the borrowing stockholders at each dividend declaration and interest was constructively received by the corporation in return, although no money passed (I. T. 1666). Payment by a corporation of the bills of a stockholder to whom it was indebted was regarded as the payment of interest to him; but constructive receipt for the balance of interest owing was held not to have occurred because the corporation had suffered large losses (A. R. R. 6239). |