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lescence cannot be reduced to enough of a certainty to make a periodical allowance for it, there is a strong reason for omitting it as an element of prime cost. If it can be estimated closely enough to set aside a definite amount, the author thinks it should be called depreciation rather than obsolescence. If a close estimate cannot be made the allowance should go in the accounts as an extraordinary expense, rather than as an ordinary operating expense.

Extraordinary obsolescence. The foregoing relates to socalled "ordinary obsolescence." The regulation as to extraordinary obsolescence is as follows:

REGULATION. When through some change in business conditions the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in the business, he may claim as a loss for the year in which he takes such action the difference between the cost or the fair market value as of March 1, 1913, of any asset so discarded (less any depreciation allowances) and its salvage value remaining.

PROOF REQUIRED.This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property must be prematurely discarded, as, for example, where machinery or other property must be replaced by a new invention, or where an increase in the cost of or other change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible.

WHEN NOT APPLICABLE.— This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets.

WHEN APPLICABLE TO BUILDINGS AND MACHINERY.The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned.

MUST BE CHARGED OFF.— Any loss to be deductible under this exception must be charged off on the books and fully explained in returns of income. .... (Art. 143.)

EXTRAORDINARY OBSOLESCENCE DUE TO PROHIBITION.As stated in the foregoing regulation (article 143), an exception to the rule "requiring a sale or other disposition of property in order to establish a loss” is made "where new legislation directly or indirectly makes the continued profitable use of the property impossible.”

A concrete illustration of loss occasioned by new legislation is that caused by state and national prohibition. When the slavery question was a live issue there were many who thought that slave owners, who had vested property interests in slaves, should not be deprived of their property without compensation. Likewise there are many who think that those who have acquired property rights in the liquor business should not be subjected to loss without compensation.

As with the slavery question, public sentiment is opposed to governmental compensation for losses sustained by the liquor interests, but when property losses due to prohibition are established those sustaining the losses are entitled to deductions therefor in their income and excess profits tax returns.

Allowable losses include goodwill and other intangibles but the deduction is limited to fair market value March 1, 1913, or actual cost since that time.

RULING. Receipt is acknowledged of your letter of March 12, 1919, in which you request a ruling to the effect that distillers and dealers in liquors may for the year 1918 take a reasonable amount for obsolescence of goodwill, trade-marks, and trade-brands, the value of which has been impaired or destroyed by prohibition legislation. In reply you are advised that a reasonable allowance for obsolescence of such assets may be taken by distillers and dealers in liquors against earnings between November 21, 1918, the date upon which the Agricultural Appropriation Act, providing for war time prohibition, was enacted, and July 1, 1919, the date upon which the war time prohibition is to become effective.

"For modification of period during which obsolescence can be charged, see page 747.

TAXPAYER MAY NOT CONTINUE IN SIMILAR BUSINESS.— To sustain a claim for a deduction for obsolescence in respect of goodwill, trade-marks, or trade-brands, the taxpayer must show that the value of the property in question has been destroyed or will be destroyed not later than June 30, 1919, and that the taxpayer is not continuing in any similar trade or business.

ASSIGNABLE, ASSETS ONLY MAY BE ALLOWED FOR. — An allowance will be made only in respect of such assets as are assignable as distinguished from those attaching to the individuals owning or conducting the business or to the premises at which it is being or has been conducted.

ASSETS MUST NOT BE VALUABLE IN CONTINUING BUSINESS.No allowance for obsolescence will be made in any case where, in connection with the operation of his previous business, the taxpayer has developed a goodwill, trade-mark, or trade-brand that will be valuable in continuing a lawful business after June 30, 1919.

BASIS OF LOSS MUST BE COST OR VALUE MARCH I, 1913.— The values will be based on those as at March 1, 1913, if the goodwill, trade-marks, or trade-brands were acquired or established prior to that date, or at the actual cost thereof, if acquired subsequent to February 28, 1913.

Information helpful in establishing the values would be of the following general character:

WHEN LOSS IS CLAIMED ON ACCOUNT OF PROPERTY ACQUIRED PRIOR TO MARCH 1, 1913.—

A. Where the goodwill, trade-marks, or trade-brands were acquired prior to March 1, 1913:

1. The nature of business (whether distillers, wholesalers, or retailers, or a combination thereof).

2. Date of foundation of business and whether organized as an individual, partnership, or corporation. Also date and particulars of each change in the ownership or form of organization of the business, such as the admission or retirement of a partner or partners; the incorporation of a company and of each reorganization thereof.

3. In respect to the trade-marks or trade-brands for which a deduction is claimed:

(a) The date established and by whom.
(b) The date of acquisition by the present owners.
(c) The price paid therefor and whether paid in cash or

stock; if the latter, state the basis of the valuation on which the purchase price was determined.

(d) For each year from 1900 or the date of the establishment of the trade-mark or trade-brand, if subsequent to that year to 1919 inclusive:

(1) Annual sales (quantity and amount).

(II) The gross profit on sales (i.e., the difference between the selling price and the cost price of the merchandise sold).

(III) The total expenses and losses of the business which, when deducted from the gross profit on sales, will produce

(IV) The net income.

Where the records permit, the sales and gross profit on. sales should be submitted for each class of merchandise sold and, if possible, for each trade-mark or trade-brand in respect of which a deduction is claimed.

(V) The amount of capital invested in the business (i.e., capital or capital stock and paid in or earned surplus and undivided profits) as at the beginning of each year.

(VI) The amount included in the invested capital at the beginning of the period in respect of goodwill, trade-marks, or trade-brands and the date and amount of each subsequent addition to the goodwill, trade-marks, or trade-brands.

(e) Full details of each offer to purchase any of the trademarks or trade-brands, setting forth in particular the date of each offer, by whom and on whose behalf made; the amount of each offer, and whether payable in cash or stock; and the date or dates on which the purchase price was proposed to be paid, and the amounts to be paid on each such date.

4. Where a deduction is claimed in respect of goodwill, as distinct from trade-marks or trade-brands, the following information should be submitted:

(a) The date of acquisition, and from whom acquired.

(b) The amount paid therefor and whether paid in cash or in stock. If the latter, state the basis of the valuation on which the purchase price was arrived at.

(c) For each year from 1900 or the date of acquisition, if subsequent to that year, to 1919, inclusive.

(I) The annual sales of the business (quantity and amount) classified, if possible, as to the various kinds of merchandise sold.

(II) Gross profit on each class of merchandise sold, or if the records do not disclose the information, the gross profit of the business as a whole.

(III) Total yearly expenses and losses of the business which, when deducted from the gross profit on sales, will produce

(IV) The net income from the business.

(V) The amount of capital invested in the business (i.e., capital or capital stock and paid in or earned surplus and undivided profits), as at the beginning of each year.

(VI) The amount included in invested capital at the beginning of the period in respect of goodwill and the date and amount of each subsequent addition to goodwill, trade-marks, or trade-brands.

(d) Full details of each offer to purchase the goodwill, setting forth in particular the date of each offer; by whom and in whose behalf made; the amount of each offer and whether payable

in cash or in stock, and the date or dates on which the purchase · price was proposed to be paid, and if on more than one date, the amount payable on each such date.

WHERE LOSS IS CLAIMED ON ACCOUNT OF PROPERTY ACQUIRED AFTER MARCH 1, 1913. —

B. Where goodwill, trade-marks, or trade-brands were acquired subsequent to February 28, 1913:

1. Dates of acquisition of goodwill or of each trade-mark or trade-brand.

2. From whom acquired.

3. Purchase price of goodwill or of each trade-mark or tradebrand.

4. Whether purchased for cash or stock; if the latter, state the basis of the valuation on which the purchase price was arrived at.

Similar information to that suggested in A-3d and 3e, and in A-4 should also be furnished for each of the five years prior to the date of acquisition, and for each year thereafter up to and including the year 1919.

HISTORY OF PROHIBITION LEGISLATION MUST BE SUBMITTED. —

C. In the case of goodwill, trade-marks, and trade-brands acquired prior to March 1, 1913, a statement should be submitted showing the development of prohibition and local option laws within the territory of the taxpayer during the five years preceding March 1, 1913. Such statement should show each prohibition or local option law enacted by any state or other governmental unit within the business territory of the taxpayer, and should also state the unsuccessful efforts at such legislation during such period. (Letter to Mr. Levi Cooke, Washington, D. C., signed by Commissioner Daniel C. Roper, and dated June 21, 1919.)

RULING. This Department has considered the request contained in your letter of June 23 last for a modification of the ruling relative to obsolescence of goodwill, trade-marks and trade-brands of

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