therefore, it should be debited or charged with (a) the original cost; (b) the expenses incident to the purchase, such as cost of investigating the title, recording the deed, commissions to real estate agent, and any other expenses that clearly add to the cost of the purchase; (c) the cost of improvements that increase the value of the land, such as fencing, draining, leveling, filling in, building approaches, sidewalks, etc.

It is not always an easy matter to determine when expenditures are an actual improvement to the land. The auditor must examine carefully all charges to this account. Some think that interest may be charged to the account. For instance if money were borrowed at 6% to pay the expense of filling in, the interest will frequently be added to the cost of improvements. It is doubtful if it is good practice, in any event, to add interest to the cost of land, for to do so would mean that the Balance Sheet of the company who borrowed money to improve its real estate would show the land to be worth more than the land on the Balance Sheet of the company who paid cash for similar improvements.

Another matter that frequently requires consideration is the appreciation of land. If land is appraised at a higher value than cost price and its value has clearly increased, is it advisable to set up the supposed increase on the books? Sound accounting practice opposes such a procedure. To set up an appreciation in value would necessitate crediting an income account with the increased value. Such an increase would represent an unearned value and it is not likely that a company would care to pay income and excess profits taxes on such an extraneous profit. Furthermore, it would certainly be unwise to distribute such a profit.

When land is sold or otherwise disposed of, the account should be credited for the cost price of the land and not for the selling price. The profit or loss incident to the sale or disposition of land should be shown by a special nominal account. So far as is possible nominal and real accounts should be kept distinct. As many nominal accounts should be opened as are necessary to show the income and deductions from income, special profits and special losses.

The Theory of the Buildings Account. The object of this account is to show the cost of buildings on land owned by the business. The original cost is not often a matter of dispute. Buildings may be a part of real estate purchased, in which case a separate value should be placed on the land and buildings before they are recorded on the books. The total of this valuation should, of course, be the same as the purchase price of the real estate as a whole. Buildings may be erected under contract in which case the contract price should undoubtedly be set up as the cost. It would make no difference whether they were constructed under a straight contract or a "cost plus" contract. Buildings may be built by the firm itself. In this case the true cost should be set up on the books.

"If the construction is attended to by the concern itself, upon plans submitted by an architect, the cost of the building would include his fees, the expenses incurred in connection with permits, licenses, etc., the cost of insurance protection, the cost of all material used, the cost of labor expended on the foundations as well as on the structures, the cost of any outside labor which may have been required, the proportion of overhead expenses which apply to the construction, the interest on any moneys which have been borrowed for construction purposes and used therefore, up to the time when the new buildings were open for operation."

Some business men claim that they should be entitled to set up on the books the cost they would have had to pay an outsider to construct the buildings. Suppose a firm during an off-season decides to construct a building and by doing so saves a certain sum because it was able to construct the building cheaper than they could get an outsider to do the work. Would it not be correct to charge the building account with the sum it would have cost if the contract had been given to an outsider at an increased price? In this connection, note what Mr. Walton has to say:

"It is sometimes argued that the corporation would be entitled to charge its construction account with the same price that it would charge an outside customer. It is claimed that the use of its facilities in its own work would prevent its using them for outside work on which it would make a profit. It is more doubtful whether any concern would allow its own work to interfere with the taking of profitable outside contracts.

"No profit can be made except through a sale. In this case the reduced cost of the construction results in a saving and not in a profit, since there is no sale. In the end there will be no difference in the final effect on profits, whichever method is adopted. If the construc tion account is charged with the cost of the work plus the regular profit, the carrying of the building will be raised and the depreciation to be written off against the profits will be correspondingly increased. Therefore, if a profit is taken at first, it will be written off during the life of the plant, and will not be a permanent profit at all. On the other hand, if the work is charged out at cost, the annual depreciation will be less and the saving will be realized by the smaller yearly charge against profits for depreciation."

THE LAW OF REAL ESTATE

Fenneberg in his treatise on "Simplified Law" defines real property or real estate as follows: "Real property or real estate represents a definite portion of land including everything growing above the ground as well as all things hidden beneath the surface. Ownership extends to the center of the earth and to the skies above. Since a landowner controls above and beneath his land he can forbid others from flying over it as well as tunneling under it; in the latter case the law governing mining claims is the single exception. Real estate is distinguished from personal property inasmuch as it includes all buildings and fixtures with utensils necessary thereto, such as fences, walls, minerals, furnaces and accessories, gas and water pipes, hat racks and book cases built in the walls or fastened to the floor, keys, blinds, screens, mantle pieces, gas fixtures, etc."

Ownership of Real Estate. Real estate may be owned outright or a person may possess the right to it during his own life or that of another.

An Estate in Fee Simple. An estate in fee simple constitutes an absolute ownership in real estate. This ownership is unconditional and is not hampered by restrictions. We may sell, lease or mortgage such real estate at any time.

An Estate for Life. An estate for life constitutes possession or the right to the use of real estate during one's life or the life of another. It may be limited to an individual to hold for the term of his own life or for that of any other person, or for more lives than one. One who has an estate for the life of another may transmit it to heirs or dispose of it by will until the event happens that terminates the life tenancy.

An Estate in Remainder, If an estate for life comes to an end, the final ownership of the real estate must either be given to another or revert to the original owner or his heirs. If the estate is given to another it is known as an estate in remainder.

An Estate in Reversion. When an estate for life ends. and it reverts to the original owner or his heirs, it is known as an estate in reversion.

Obligations of a Holder of an Estate for Life. The holder of an estate for life must make such repairs as are necessary to prevent the property from decaying or depreciating in value. He is not bound to make improvements or to replace buildings destroyed by acts beyond his control, such as fire, flood, cyclone

and other causes, legally known as "Acts of God." If improvements are made, they cannot be in part or whole charged to the reversioner. He need not pay the principal of any incumbrance, such as a mortgage, but he is compelled to pay the interest. He must do nothing to waste the estate, such as opening new mines or cutting all the timber. He may operate mines already open and he may cut a moderate amount of timber. If he should pay the principal of an incumbrance or an indebtedness, he becomes a creditor of the estate and the reversioner must in some manner equitably indemnify the life

owner.

Taxes on an Estate for Life. Life owners of real estate must pay the taxes, but in the case of assessments for permanent improvements, such as the building of streets, the laying of sewers and similar benefits in which the reversioner would be benefitted, the reversioner must, of course, pay his portion of such assessments.

INCOME TAX PROCEDURE

Taxes Constitute Deductions from Income. (Income Tax Law, Sec. 214.) "(a) That in computing net income there shall be allowed as deductions:

“(3) Taxes paid or accrued within the taxable year imposed (a) by the authority of the United States, except income, warprofits and excess-profits taxes; or (b) by the authority of any of its possessions, except the amount of income, war-profits and excess profits taxes allowed as a credit under section 222; or (c) by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed; or (d) in the case of a citizen or resident of the United States, by the authority of any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit under section 222; or (e) in the case of a nonresident alien individual, by the authority of any foreign country (except income, war-profits and excess-profits taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or business.

Assessments not Deductible. (Income Tax Primer, 1919.) "Taxes assessed against an individual on property owned by him to pay for the paving of a street contiguous to his property, the construction of a sewer, sidewalk, etc., or the

construction of ditches to drain property owned by him, can not be claimed as deductions. In short, taxes as are not general in nature and are levied on account of some work or privilege, the benefit of which accrues to a limited number of property owners, of which the taxpayer is one, are not allowable deductions."

Repairs on Real Estate Leased to a Tenant Constitute Business Expenses and are Deductible. (Income Tax Law. Sec. 214.) "(a) That in computing net income there shall be allowed as deductions:

"(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business including a reasonable allowance for salaries or other compensation for personal services actually rendered, and including rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity."

Repairs. (Art. 103. Reg. No. 45, 1918.) "The cost of incidental repairs which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures. Repairs in the nature of replacements, to the extent that they arrest deterioration and appreciably prolong the life of the property, should be charged against the depreciation reserve.

Repairs on Dwellings Owned and Occupied not Deductible. (Income Tax Law. Sec. 215.) "That in computing net income no deduction shall in any case be allowed in respect of

"(a) Personal, living, or family expenses;

"(b) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate;

"(c) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made."