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REGULATION. .... No such allowance may be made in respect of automobiles or other vehicles used chiefly for pleasure. .... (Art. 162.)

Books—business and professional.—The Treasury rules that the cost of professional books is not a business expense but is an investment of capital against which depreciation may be charged.31 Roughly speaking, books in a technical library depreciate at a rate rapid enough to justify charging off the total year's purchases in the case of libraries which are being kept up to date. This obviates the necessity of an annual revaluation of the entire library.

This plan has been approved by examiners who have satisfied themselves that the deduction for new books did not exceed reasonable depreciation on the entire library.

Buildings.—Obviously no general rate will apply to buildings, as methods of construction, materials used, purposes, etc., affect the wear and tear incident to use. In a case relating to depreciation of apartment houses, the government allowed 3 per cent (see below). Perhaps this was a fair rate under laws which excluded the factors of inadequacy, change in character of neighborhood and other items of obsolescence. Under the 1918 law obsolescence must be taken into consideration. Three per cent is the rate frequently used by manufacturers for slow-burning brick structures; and 2 per cent is the minimum rate for concrete, brick and steel fireproof structures. Perhaps 212 per cent is more nearly correct. Where walls are subjected to unusual strain or vibration, a rate of not less than 4 per cent should be used.

In a state where the subject has been carefully studied, a rate of 2 to 21/2 per cent for cement or brick buildings and 3 to 5 per cent for wooden buildings has been adopted.

The National Machine Tool Builders' Association uses

S'Income Tax Primer, 1918, question 59.

these rates: brick buildings, 3 per cent; frame buildings, 5 per cent.

The Primer states: "It has been estimated that the average usable lifetime of a frame building is 25 years, a brick building 35 years, a stone building or a steel and concrete building 50 to 100 years."'32

In the case of an apartment house the jury found that 3 per cent was a proper rate of depreciation.33 This was the rate allowed by the government, while the plaintiff claimed 5 per cent. The apartment house is situated at No. 320 West 84th Street, New York, a very desirable location. The jury was, of course, influenced by the charge of the court, which was in part as follows:

There is no question that the plaintiff was entitled to a deduction for wear and tear of this building, and the government allowed him, I believe, 3 per cent—he claims 5 per cent—and the question for you to determine is whether he is entitled to any greater allowance for depreciation over and above what the government allowed him, which is 3 per cent.

The burden would be upon him reasonably to satisfy you from the evidence that he was entitled to an allowance of an amount greater than 3 per cent in order to obtain that allowance because, as I say, he is the plaintiff asserting the claim. ....

The allowance is for wear and tear when it relates to a building .... that means the physical deterioration that a building suffers during the tax year; it does not include the depreciation in value due to a loss in rental value, because of modern buildings going up with better facilities than the old building had—that is not the idea.

The Treasury takes the following general position on the question of depreciation which applies particularly to the case of buildings:

REGULATION. .... No modification of the method should be made on account of changes in the market value of the property from time to time, such as, on the one hand, loss in rental value of buildings due to deterioration of the neighborhood, or, on the other, appreciation due to increased demand. The conditions affecting such market values should be taken into consideration only so far as they affect the estimate of the useful life of the property. (Art. 166.)

* Income Tax Primer, 1918, question 99. **Cohen v. John 2. Lowe, Jr., 234 Fed. 474 (1916.)

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The foregoing regulation refers exclusively to depreciation. When changed environment or other causes result in an ascertainable loss the claim for depreciation (which now includes ordinary obsolescence) should be correspondingly increased.

Cash registers.—The average life of a good cash register is from ten to twenty years, although some are in use to-day which were sold more than twenty years ago. The reduction in value during the early years is heavy, as with typewriters, and machines are frequently exchanged. This is due to inadequacy more than to depreciation. If an annual rate is to be constant over the expected effective life of the machines, it would be unwise to fix it at less than 15 per cent.

Chemical industry.-In the chemical industry buildings depreciate about 27/2 to 3 per cent. The machinery and equipment depreciation depends strictly upon the nature of the product manufactured, the average being about 15 per cent.

Containers.--In certain kinds of business, such as breweries, milk depots, spring-water distribution, bakeries, etc., considerable numbers of containers, such as casks, kegs, bottles, cases, cracker tins, etc., are owned, which are used principally for convenience of transportation and are supposed to be returned when empty. As to these, no specific rate of depreciation can be fixed. At balancing time an accurate inventory should be taken, if possible, but if not practicable, it will be necessary to make a calculation as to the number required for the normal operation of the business. An inspection of the reserve supply will serve as a check on the book valuation. In many cases concerns go on the assumption that all such containers are in possession of someone who will in due course return them, but experience proves that considerable numbers are lost, broken or stolen, and that to carry these as stock on hand is inaccurate.

Contracts.—The Treasury now recognizes the position the author has held for several years, viz., that any kind of property, tangible or intangible, may be amortized, depreciated or depleted either on the basis of market value at March 1, 1913, or upon cost since that time. The regulations are quite as liberal as could be desired.34

If an automobile dealer secures a valuable contract from a manufacturer, and turns it over to a corporation, the latter may claim as a deduction the cost of the contract spread over its life, but in this case as in all other similar cases the corporation cannot claim the deduction unless the payment for the contract was made in good faith and for proper consideration, and where there was any community of interest between the dealer and the company the former would be compelled to return as taxable income the purchase price of the contract received by him from the corporation.

Copyrights.-Copyrights may be charged off under the same procedure as patents, except that the term is 42 years or 50 years after author's death. As most copyrights diminish rapidly in value, depreciation should not be based on their life. Revaluation of each one is the only satisfactory solution. A list of copyrights owned should be compiled. Inquiry based on this list will develop evidence as to the actual worth of the asset.

Costumes--theatrical.

REGULATION. .... properties and costumes used exclusively in a business, such as a theatrical business, may be the subject of a depreciation allowance.35 (Art. 162.)

If adapted for "occasional” personal use, claim for depreciation is still allowable, but consideration must be given to the value of the personal use, depreciation in regard to which is not deductible.

"Reg. 45, Art. 163, see page 718.
SsSee page 547

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Electrical equipment manufacturers.-
Buildings:

Reinforced concrete ......
Brick and steel ..........
Mill type ............
Brick and joist ...........
Wood, sheet iron and stucco......
Inside piping and wiring.........
Heating and ventilating.............
Water, sewer, and drain pipes (outside of buildings)...
Piping and electric conductors (outside of buildings)..
Railway tracks and overhead equipment...
Machinery and tools-standard.....
Machinery and tools-special........
Electrical apparatus--standard.......
Electrical equipment-special....
Foundations for tools and apparatus
Ovens and furnaces......
Shafting, pulleys, and belting........
Rolling stock....................
Automobiles and other conveyances.
Special machinery and tools (additions).....
Patterns (additions ) ...
Miscellaneous shop fixtures and equipment.......
Office furniture and appliances...........
Power plant equipment. ............

These rates are based on gross book values at the end of the preceding year, except for patterns and tools, which are based on the previous year's additions.

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Electrotypes, woodcuts, etc.—The arguments urged as to patterns (see page 730) apply with equal force to electrotypes, woodcuts, etc. Conservative publishers charge almost the entire cost of plates as a direct cost of a first edition and are careful to revalue the balance of the account frequently. If a book or other publication is successful, the cost of plates, etc., can be readily absorbed in its cost, while if it is not successful, no new orders can be expected and it would be folly to carry the plates on the balance sheet at any valuation except as scrap metal. A number of bankruptcies have occurred in the publishing business through disregard of this principle.

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