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Printing.–The depreciation of printing plants is about the same as that in the textile industry,50 with the exception of type, printers' tools, electrotypes, plates, etc., on which about 10 to 12 per cent should be applied annually.

Professions--Physician's claims for depreciation.-In New York a physician made the following claims for depreciation which were allowed : Residence, brick construction, on part occupied as offices

only ......... Automobile ..... Books ................ Instruments ................... Office furniture ... Country residence, wood construction, on part occupied as offices only..........................

......... 10



Reconstruction, rebuilding, restoration. When there is rebuilding, different elements may be present. If an owner restores an old business building, theoretically it should be charged to depreciation reserve. If no reserve exists, it may mean that no deduction for depreciation has been made in past years. If it is inadequate it means that the deduction has been insufficient. In such event, that part of the cost not covered by a reserve is an allowable deduction. This allowance, however, is strictly limited to what might be termed a repair or a renewal sufficient only to restore the building to the book cost. If more than this is done, there is an added asset and the excess represented by the improvement must be capitalized.

If a run-down property is purchased and a large amount is spent to bring it up to date, the cost will be a capital expenditure and cannot be deducted in the income tax return of the new owner. If the old owner had made the repairs and had not accumulated a reserve against which to charge them, he could have deducted the cost in his return. This is equitable, because the new owner is presumed to have insisted on a re

See page 735.

duction in the purchase price equal to the deterioration, and the old owner is supposed to have suffered a corresponding loss.

Shipping industry.

BRITISH PRACTICE.61 (a) The normal rates of allowance for de-. preciation are as follows: On steamers 4%

On the original cost price of the vessel plus On sailing vessels 3% s subsequent capital expenditure.

Exceptional cases are dealt with specially by the Commissioners concerned.

(b) Allowances are made year by year, until the total cost of the vessel, less the breaking up value (taken at the rate of 4 per cent in the case of steamers and 3 per cent in the case of sailing vessels), has been allowed.

(c) The net expenditure on the renewal of engines and boilers and the net cost of any structural improvements such as the lengthening or strengthening of a ship, is not allowed as a deduction for income tax purposes, but is added to the prime cost of the ship and depreciation allowed on the total amount.

(d) Where a vessel changes hands, allowances for wear and tear are granted to the new owner not exceeding the actual cost to him of the vessel (less breaking up value.)

The first reported case on the question of depreciation of ships is that of Burnley Steamship Company v. Aikin (10th July, 1894). The company were owners of the vessel "Burnley," which is a steel ship; they had been allowed a deduction for wear and tear of 5 per cent on the diminished value. They appealed to the Commissioners, claiming a deduction of 71/2 per cent, and asking that in deciding upon their claim the Commissioners should consider:

(1) That ships frequently become obsolete and of less earning power before they are physically worn out.

(2) That their market or sale value might, and frequently did, fall below their value as fixed by the depreciation rate allowed in making the assessment, or even that proposed by themselves (7772 per cent).

The Commissioners considered that the words of the act of 1878 did not cover either of these cases, and they disallowed the claim of the company, and on appeal to the Court of Session the decision of the Commissioners was confirmed.

A similar question arose in Leith, Hull and Hamburg Steam

“Murray and Carter, Income Tax Practice, page 252 et seq., pages 593, 594.

Packet Company v. Bain (Court of Session, Scotland, ist, 2nd and 16th June, 1897). The Commissioners had allowed depreciation at 51/2 per cent, being 5 per cent on cargo steamers and 6 per cent on passenger steamers (on diminished value), and the company appealed, claiming 772 per cent—viz., 7 and 8 per cent respectively. The court dismissed the appeal.

Questions to Commissioners on their basis of assessment:

(1) What period of years they assumed as the average duration of the profit-producing life of the ships, having regard to their annual depreciation in value solely by wear and tear;

(2) Whether an allowance of 51/2 per cent on the value of the steamer (year by year) would of itself be sufficient to produce a sum at the end of the steamer's average life equal to the steamet's cost; and

(3) Whether in fixing the sum allowed for depreciation they took into account the probable return obtainable by the due investment of the sum so allowed.

Reply of the Commissioners:
(1) That they had assumed 22 years as the average;

(2) That 512 per cent on the diminished value will itself amount, in 22 years, to £71 35. rod. per cent; and if the money so allowed were used in trade to produce 5 per cent, the amount would be increased to £138 2s. 8d., also, if invested in Consols, say' at 212 per cent, it would amount to £98 11s. 2d. That this left out of view the breaking-up value of the ship; and

(3) That in fixing the deduction they had taken into account that the sum annually allowed might be so invested as to produce a return of 3 per cent per annum.

The statute, Lord Trayner said, did not limit the deduction to such a sum as if invested at 3 per cent would indemnify the person; it entitled him to the full amount of the depreciation, without condition as to how he disposed of it. The Commissioners were, therefore, wrong in taking the interest into account.

At the meeting of the Peninsula and Oriental Steamship Company in December, 1896, Sir Thomas Sutherland, speaking on the question of wear and tear, stated that between 1870 and 1894—a period of 25 years—the company had sold for £516,601 steamers of which the original cost was £4,436,362, and, further, that during the time in which these steamers had been in the company's service the amount of depreciation written off at 5 per cent on the original cost, added to the amount realized by the sales, aggregated only £4,267,621, as compared with the original cost as above,

The usual allowance for refrigerators or refrigerating machinery is understood to be 6/2 per cent on the prime cost; for oil tank steamers 5 per cent on prime cost.

Soap industry.—Depreciation in this industry is about the same as in chemical factories. 52

Textile industry.-In the textile industry the depreciation on buildings is somewhat heavy owing to the vibration of the machines. The rate assigned to the machinery is often made high because of the likelihood of obsolescence and the introduction of new appliances. The average depreciation provides for about 3 per cent on the building and 6 per cent on the machinery.

There is a wide variance in practice as to the depreciation of textile machinery. In some districts where machines, perhaps fifty years old, are giving good service today, the disposition is toward low rates. In this industry the continual renewal of many different parts of a loom serves to reduce the depreciation rate. Experience proves, however, that some of these old machines are "pets” and more modern machines which have been worn out and replaced several times in the same period are forgotten. A writer in the Textile World Record suggested 334 per cent as a rate for cotton and woolen machinery, including spinning and weaving machinery. A prominent Boston firm of textile mill engineers uses these rates : Woolen and worsted machinery....

.....2-272% Cotton machinery...

....... 3 Dyeing and similar machinery subjected to acid fumes, etc...

... 5

Timber industry.53—Specific provision is made in the regulations regarding depreciation on property used in a timber project when the probable life of the asset exceeds that of the

"See page 714.

"For regulations relating to depletion of timberlands, see Chapter XXXI.

project itself. The same rules as apply in the case of mining, oil and gas projects apply here, viz., that the life of the project shall be considered a limiting factor, due allowance being made for salvage value. (See page 726.)

Tools, jigs, dies, etc.—As a rule the practice of depreciating small tools by means of a percentage cannot be followed satisfactorily. So many such tools are used up, lost or stolen, that an inventory should be made periodically and all the tools on hand should be revalued. If this plan is followed for several years and a trustworthy rate of depreciation is secured, it may be feasible to omit the revaluation for a year or two, applying the rate previously ascertained. The tax commissioner of one of the states has adopted rates varying from 25 to 50 per cent or, as an alternative, the entire cost of replacements.

In many manufacturing concerns the item of tools, jigs, dies, etc., not standard equipment, is a large one and the tendency is to overvalue it. Heavy depreciation should be applied, because most of such equipment is made or adapted for special uses, and the inevitable changes in types and styles of production require corresponding changes in the tools. As stated heretofore under "Patterns, drawings, models, designs, etc.” page 730), the book value should be written down very rapidly. The minimum rate should not be less than 20 per cent.

Edward N. Hurley, former chairman of the Federal Trade Commission, urges that special tools be charged off practically at once, and states that the neglect to depreciate this account rapidly enough has been responsible for many failures.

Typewriters.-In the average office, and where properly cared for, the life of a good typewriter is from three to five years. In some offices the machines are turned in and new ones purchased every two to three years. Such typewriters are repaired and resold and are used several years more by those who buy them second-hand. Repairs are not profitable

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