Chapter VII. Deductions Based Upon Destruction of Property (Pars. 501-506) The law provides that the taxpayer may deduct from gross income all losses occasioned by fire, flood, etc., when not compensated by insurance or otherwise. For example, if D's property is destroyed by fire and he carries no insurance, he can deduct as a loss the total cost provided the property was acquired during the year when destruction occurred. If the property was acquired during a prior taxable year, the full deduction would be ascertained by deducting from the cost, (unless acquired prior to March 1st, 1913), the depreciation charged off during the prior and the present taxable years, plus the cost of improvements and betterments, capitalized and not treated as an expense. If the property had been acquired prior to March 1st, 1913, the starting point in the calculation would be the market value as of March 1st, 1913. Where fire or other loss occurs and insurance is carried, the total amount deductible by the taxpayer is the difference between the loss as ascertained in accordance with the suggestions contained in the preceding paragraph and the amount of recovery from the insurance company. Where the amount recovered from the insurance company is in excess of the book value of the property destroyed (because the market or replacement value of the destroyed property insured is greater than the cost), the excess of recovery over such book cost constitutes gross income to the taxpayer. There is this proviso, however, that the amount recovered by the taxpayer may, under regulations of the Department, be employed for the purpose of replacing the destroyed property, in which event no gross income may result, although the book value of the property may be increased. The depreciation thereafter must be based upon the book cost and not upon the increased cost. A somewhat anomalous situation arises where the taxpayer's residence, owned and exclusively occupied by him, is destroyed. Ordinarily, losses not incurred in trade or in transactions entered into for profit, do not constitute allowable deduction. An exception occurs in the case of non-business property such as residences of taxpayers destroyed. The amount of loss deductible is exactly the same as in the case of business property destroyed, the treatment of which was discussed in the preceding paragraphs. It may be appropriate to discuss under this heading a situation which arises where an old building is removed prior to the erection of a new one. The average business man would regard the cost of removing the old building as an unrequited expense, but the Department has held that the cost of such removal cannot be taken as a deduction from income but must be capitalized by adding same to the cost of a new building. The cost of erecting the new building plus the cost of removing the old shall be made the basis of depreciation. Many who are affected by this ruling cannot see the equitableness of it and it is quite likely that the court may some day be asked to pass upon the issue. The regulations create a conflict and apparently endeavor to distinguish between the removal of a building promptly after purchase and such removal at later dates. Chapter VIII. Deductions Based Upon Miscellaneous Expenses and Cost. In this chapter there is a brief discussion of only a few of the many items which might properly be included under this caption. Those excluded are in the main of the kind which are common to all business and not peculiar to the real estate industry. (A) Taxes and Assessments The law provides that all general taxes paid by the taxpayer except Federal income and profits taxes, shall constitute allowable deductions. There is just one other exception. Taxes paid for so-called local benefits of a kind tending to increase the value of the property are not allowed as deductions. It does not appear necessary to tell members of the Board what is meant by such assessments. (B) Bad Debts (Pars. 509-512) The peculiar situation which has arisen out of the recent rent legislation has been discussed elsewhere. Ordinarily, taxpayers who report on accrual basis may deduct uncollectible rents, but those who report on a cash basis may not do so on the theory that no income has been reported except as received. The subject of "Bad Debts" also arises in connection with the foreclosure of mortgages and the failure on the part of the mortgagor to meet interest payments. With respect to uncollectible interest, the same rule applies as to uncollectible rent. Taxpayers who report on accrual basis may deduct uncollectible interest; others may not. As to deduction under the heading of "Bad Debts" of sums uncollectible under bonds and mortgages, the Department has held that it is insufficient to procure a judgment evidencing the insufficiency of the collateral, namely the mortgage, but that it is encumbent upon the taxpayer to proceed against the bond. Naturally, the regulations cannot imply that legal proceedings are necessary in every case. The Department, however, must be satisfied that the obligation on the bond is worthless. Such evidence is similar to that necessary in order to establish losses on loans, accounts receivable, etc. As to compromise of indebtedness arising out of bond and mortgage transactions, little can be added to the ruling of the Department except that the facts in each specific case must be separately treated because ordinarily, losses resulting from compromise are not deductible. Members of the Board cannot be too strongly cautioned against entering into ill-advised compromises. In spite of the fact that a market value is definitely created the Department in unrecorded. rulings has indicated that no loss is established in the case where the mortgagee buys in at sale the collateral. This, on the doubtful theory that the loss will only be established at the time of the sale of the collateral by the purchasing mortgagee. The cost of repairs constitute an allowable deduction. Where so-called repairs increase the value of the property, that portion of the expenditure which more than replaces old property, is not an allowable deduction but must be capitalized. Field agents have often objected to repairs where depreciation has also been taken by the taxpayers. The regulations distinctly provide that both incidental repairs and a fair depreciation may be treated as allowable deductions by the taxpayer, any rulings of revenue agents to the contrary notwithstanding. It is generally known that contributions made to recognized charitable and educational associations and other like organizations are deductible up to fifteen per cent. of the taxpayer's net income. Unfortunately, when contributions are made by a corporation, deductions are not permitted, except in one case which need not be discussed in this connection. In a closed corporation, the usual type in real estate ownership, the stockholders individually rather than the corporation as an entity should make whatever contributions appeal to the organization. Contributions made by a partnership are not deductible as such, but the individual members of the partnership may consider the contribution as made by them individually in the same proportion as they share in profits and losses. (E) Salaries The allowance of salaries is no longer of moment, except in the case of corporations. Were it not for the variation between corporate and individual income tax rates the amounts of salaries to corporate officers would be immaterial. It is evident that because of the fact that real estate is conducted through so-called closed corporations, the matter of salaries to active officers has received scant, if any, attention. The amount of salaries paid are in no way standardized and it might well be to the benefit of the industry if the Real Estate Board conducted an anonymous inves |