SECTION 214(a)1, ARTICLE 109: Rentals. (See 7-21-1456; sec. 326, art. 831, and 8-21-1474; sec. 213 (a), art. 48.) Cost of improvements by lessee. SECTION 214(a)1, ARTICLE 111: When charges deductible. (Also Section 234, Article 564.) 4-21-1407 O. D. 778 A decree was made by a lower court in 1917 requiring a corporation to distribute dividends. The decision was affirmed in 1919 and a decree entered requiring payment of interest from the date of the decree in the lower court. The dividend, with interest, was paid in 1919 in accordance with the decree. Held, that the total amount paid should not be treated as a dividend, but only the amount originally decreed by the lower court. This decree established the relationship of debtor and creditor between the corporation and its shareholders, and the final decree not merely affirmed the relationship but awarded interest on the amount of the debt. The fact that the interest on the debt ran from the date of the decree in the lower court to the date of payment in 1919 does not require an application of the principle of accrual with reference to payment or receipt of interest, as it was not known that interest would be awarded or what the rate of interest would be until the appellate court entered its decree. Therefore, the interest on the amount of the dividends paid in 1919 in accordance with the decree of the supreme court, represented interest paid by the corporation, and is deductible from gross income for the year in which it was paid in accordance with section 234 (a) 2 of the Revenue Act of 1918. SECTION 214(a) 1, ARTICLE 111: When charges deductible. 6-21-1430 O. D. 794 Under the terms of a lease, a ground rental of 5 per cent of a certain sum of money is to be paid to the lessor each year during the life of the lease, and in addition there is to be paid annually a sum equal to 6 per cent of the cost to the lessor of the building on the land. It is also provided that during the first three years of the lease, the lessee may withhold certain portions of the stipulated rental, the amounts so withheld to be paid ratably in equal monthly installments in advance during the remaining eighteen years of the lease, it being understood that the amounts so withheld during the first, second, and third years, which are allowed to be withheld for the purpose of conserving the liquid assets of the lessee, shall become due and payable to the full extent that they have been withheld if the lease is terminated prior to the time specified. It is understood. that in the event of the cancellation of the contract or of any contingency arising which might affect the terms thereof, the amount withheld should be treated by all concerned as an actual liability of the lessee for the year from which it was withheld. The books of the lessee are kept upon the accrual basis and a funded reserve has been provided to meet the amount of the liability represented by the rents withheld. Held, that the amount of the rents withheld by the lessee during each of the first three years of the lease, although not paid in cash, constitutes an actual liability of the lessee for the year during which it was withheld and the amount so retained is an authorized deduction for such year. Under sections 212, 213, and 214 of the Revenue Act of 1918, the amount of rentals withheld by the lessee during the first three years of the lease may be accrued over the three years and the amount withheld during each year deducted from gross income for the year in which it was withheld. SECTION 214(a) 1, ARTICLE 111: When charges deductible. 10-21-1494 O. D. 836 An amount paid by a baseball club to another baseball club as the purchase price of a contract between such club and a player covering the services of the player for a period of more than one year is deductible from gross income during the life of the contract, a proportionate part of the price paid being deductible each year. SECTION 214(a)1, ARTICLE 111: When charges deductible. 16-21-1578 O. D. 879 Where a reserve, representing the estimated amount of claims which will be paid on account of loss and damage to freight and injuries to persons, is adjusted at the end of the year so that the balance approximates as nearly as possible the amount of the claims actually outstanding at the close of the year, such reserve is held to be one covering a contingent liability and hence is not deductible. Such amounts are deductible only for the year when the claims are put in judgment or paid. SECTION 214 (a) 1, ARTICLE 111: When charges deductible. 20-21-1638 O. D. 917 Under the patent laws of the United States the owner of a patent which has been infringed is entitled to recover an amount equal to the entire profits from the sales of the patented article and in addition an amount for any "damages" which he has sustained. The provision of article 111 of Regulations 45 relating to the deductibility of amounts paid pursuant to a judgment or otherwise on account of patent infringement is applicable to all amounts so paid, whether as damages" or as "profits" turned over to the patent owner. The principle underlying this provision is that losses such as those pursuant to a judgment rendered in patent infringement suits can not be properly set up as liabilities on the books of the taxpayer until such amounts become known liabilities, and in such cases the liability is not known until the judgment is rendered or the suit otherwise settled. SECTION 214(a)1, ARTICLE 111: When charges deductible. 26-21-1705 A. R. R. 542 REVENUE ACT OF 1917. Recommended, in the appeal of the M Company, that the action of the Unit in rejecting claims for abatement and refund of taxes assessed and paid for the year 1919, such claims being based upon the ground that a loss through burglary was actually sustained and determined in 1919 instead of 1917, be sustained. The Committee has had under consideration the appeal of the M Company from the action of the Income Tax Unit in rejecting certain claims filed by that company for 1919. The facts briefly stated are to the effect that in 1917 the M Company suffered a loss through burglary in an amount approximating 9 dollars, and that of this amount approximately 5 dollars was made good by the several stockholders. (The taxpayer's brief speaks of this loss as having been incurred through an embezzlement, but certain court records in the files indicate that such loss was incurred through burglary.) In the preparation of the 1917 return for income and excess profits taxes the taxpayer called upon the collector of internal revenue for its district for advice in connection with the propriety of claiming the remaining 4 dollars as a loss, and was informed that in view of the fact that the company was insured against such loss, the loss was not determinable in 1917, and therefore could not be deducted in arriving at taxable net income. It appears that two companies which had issued policies of burglary insurance to the taxpayer disclaimed liability in connection with the burglary upon certain technical grounds and a showing that the loss was not incurred under such circumstances and conditions as resulted in a liability on the part of the insurer. It appears that suit was entered for recovery, and that in 1918 the lower court handed down a decision in which it was held that the insurance companies were not liable under the contracts of insurance which they had issued. The taxpayer in that year deducted a dollars of the 4x dollars loss, thereby showing no tax liability on its 1918 return. The record further shows that the case was appealed and that in 1919 the Superior Court affirmed the judgment of the lower court. After affirmation by the Superior Court the taxpayer prepared amended returns for 1919, in which the remaining 3x dollars was claimed as a deduction for loss; and also filed a claim for refund of the portion of 1919 taxes previously paid, and a claim for abatement of the remainder of tax assessed on the original return and then outstanding but not paid. The taxpayer argues the right to deduct the loss in 1919 upon the ground that such loss was not actually sustained or determined until such time as his claims against the insurance companies had been analyzed and adjudged. The Unit in reviewing such claims has held that the loss was deductible in the return for the year only in which such loss was actually sustained, or, in other words, at the time the burglary occurred, and upon such holding has rejected both the claim for abatement and the claim for refund. It is from such action upon the part of the Unit that the taxpayer appeals. The question then before the Committee for an opinion is when such loss as a matter of fact was actually sustained and in what year a deduction therefor may be properly claimed. Attention has been given to article 111 of Regulations 45, which provides in part that: A loss from theft or embezzlement occurring in one year and discovered in another is deductible only for the year of its occurrence. In the opinion of the Committee the ruling which is quoted states a principle in no uncertain terms, and that is to the effect that a loss sustained by theft or embezzlement is a loss deductible in the year in which sustained. The Committee finds itself unable to sustain the argument advanced by the taxpayer that where under a contract of insurance a taxpayer is insured against loss of this character, such loss is not actually determined or sustained until compensated by the insurance companies pursuant to such contract, or, as in the instant case, until the question of liability has been determined in litigation. Viewed in the light of subsequent events and taking into consideration the decree of the lower and superior courts, it is manifest that no liability on the part of the insurance companies existed at any time, which undoubtedly establishes as a fact that the loss was sustained at the time the theft was committed in 1917. The Committee has also given attention to the ruling stated in T. B. R. 55 (C. B. 1, p. 123), in which the Advisory Tax Board recommended that in cases in which a loss occurs in one taxable year the taxpayer should compute his loss by deducting from the total loss the estimated amount of the recoverable insurance, and that the loss so determined should be deducted from the taxpayer's income of the year in which the loss was sustained; further, that if subsequent events demonstrate that this estimate was substantially inaccurate, an amended return should be filed correcting the amounts. In discussing the question being considered at the time T. B. R. 55 was written, the Advisory Tax Board said that under all of the provisions of the law providing for loss deductions the emphasis is placed, so far as the time of the deduction is concerned, upon the word sustained, and that the Department has consistently held that a loss is properly deductible only in the year in which it occurs. The Advisory Tax Board pointed out also that the same principle had been applied in cases of damage arising from storms, even though it was not possible to determine accurately the amount of the loss until a subsequent fiscal period. In view of the foregoing, the Committee is of the opinion that in the instant case the amount of determined loss is deductible in the taxpayer's return for the year 1917 only, and that the matter of litigation upon insurance policies and the resulting decrees handed down by the courts have no effect whatever upon the time when the loss was actually sustained. It is the opinion of the Committee further that the result of such litigation is merely a measure or a guide to be used in the determination of the amount and extent of loss actually sustained in 1917. Therefore, it is recommended in the appeal of the M Company that the action of the Unit in rejecting claims for abatement and refund of taxes assessed and paid for the year 1919, such claims being based upon the ground that a loss through burglary was actually sustained and determined in 1919 instead of 1917, be sustained. SECTION 214 (a) 3.-DEDUCTIONS ALLOWED: SECTION 214(a) 3, ARTICLE 131: Taxes MUNITION MANUFACTURER'S TAX, TITLE III, SECTION 302 (c) DEDUCTION OF TAXES AND INTEREST. 4-21-1408 L. O. 1057 (d), ACT OF 1. Only taxes and interest actually paid within the taxable year may be deducted from gross income in munition manufacturer's tax returns for the years 1916 and 1917. 2. Income taxes paid for 1915 in 1916 may not be deducted from gross income. 3. Only that interest is deductible which was actually paid within the taxable year on debts or loans which filled both of two requirements: (1) That they were contracted to meet the needs of the munition business and (2) that the proceeds thereof were actually used to meet such needs. Interest paid within the taxable year on that part of the principal used in the munition business in 1915, if any, from which the profit is not returned for the purpose of the munitions tax is not deductible. A memorandum of October 4th raises several questions relating to the proper construction of Section 302, paragraphs (c) and (d) of the Revenue Act of 1916. The specific questions asked are: (1) What taxes may be deducted in the 1916 and 1917 munition tax returns? (2) May 1915 income taxes paid in 1916 be deducted in the munition tax return for 1916? (3) What proportion of interest paid can be deducted in the munition tax returns? Section 302 of the Revenue Act of 1916 provides: That in computing net profits under the provisions of this title for the purpose of the tax there shall be allowed as deductions from the gross amount received or accrued for the taxable year from the sale or disposition of such articles manufactured within the United States the following items: (c) Interest paid within the taxable year on debts or loans contracted to meet the needs of the business and the proceeds of which have been actually used to meet such needs; (d) Taxes of all kinds paid during the taxable year with respect to the business or property relating to the manufacture: The first taxable year was the twelve months' period ending December 31, 1916 (sec. 300 of the Act), the tax ceased to be effective on December 31, 1917 (sec. 214, Revenue Act of 1917). (1) Article 18 of Regulations 39 relating to the excise tax on munition manufacturers provides: The taxes deductible under this title are those taxes of all kinds which were actually paid during the year in which the gross income was received or accrued, and which were imposed with respect to the business or property relating to or used in the manufacture of articles, the profit from which is returned for the purpose of the tax imposed by this title. If the taxes paid by a manufacturer of munitions or parts thereof are not segregated from those paid with respect to other business or property, they will be apportioned in accordance with the rule hereinbefore set out for apportioning running expenses, and the amount deductible from the gross income received or accrued from the manufacture and sale of munitions or parts will be the amount thus apportioned and made applicable as a proper charge against the income from the manufacture of munitions or parts thereof. 61360°-21-10 |
