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The provision was so vigorously assailed that on June 1092 it was withdrawn, but there was substituted an equally objectionable provision.

REGULATION. .... in no case shall the preliminary estimate (for purposes of returns to be made in 1919) of the amount of such amortization exceed 25 per cent of the cost of the property. .... (T. D. 2859.)

No explanation was given as to the reasoning which produced 25 per cent of cost as the limit of loss which might be claimed.

The law calls for a reasonable deduction. If 25 per cent is reasonable no more can be claimed. If 35 per cent is reasonable, 35 per cent should be deducted. A multiplicity of regulations about the same section of the law merely confuses the taxpayer and throws upon him the burden of a correct interpretation of the law.

Period to which loss is apportioned.

REGULATION. For the purpose of making returns in 1919 the amount to be extinguished by amortization shall be spread in proportion to the net income (computed without benefit of the amortization allowance) between January 1, 1918, and the following dates : (a) if the claim is based on subdivision (1) of article 184, the date when the property was permanently discarded; (b) if the claim is based on subdivision (2) of article 184, the date upon which the property will be permanently discarded; and (c) if the claim is based upon subdivision (3) of article 184, April, 1919. All taxpayers claiming an allowance for amortization will be required to estimate the amount of their net income for the period between January 1, 1918, and the dates specified above, and also to estimate what part of such net income is properly allocable to the calendar year 1918 and what part thereof is properly allocable to the calendar year 1919. Such estimates shall be the basis for apportioning the amounts to be extinguished by amortization between the calendar years 1918 and 1919. Taxpayers reporting on the fiscal year basis (a) in all computations based upon 1918 rates shall use the amount of such allowance apportioned to the calendar year 1918; (b) in any computation based upon 1919 rates for a year beginning in 1918 and ending in 1919 shall use the amount of such allowance

12T. D. 2859, see page 761.

apportioned to the calendar year 1919; and (c) in any computation for a fiscal year beginning in 1919 shall use as many twelfths of the allowance apportioned to the calendar year 1919 as there are months of such fiscal year falling in the calendar year 1919. (Art. 185.)

It would of course defeat the purpose of the relief intended if a taxpayer were required to take the amortization deduction in a period when he had no net income. Such was not the intention of the law. It was assumed that war facilities produced an income while being used and that if their profitable use was diminished by the end of the war there should be an adjustment of the apparent profits equal to the loss sustained.

If a taxpayer required several months in 1919 to secure a market or use for war facilities and during those months the facilities were not producing a profit, the entire loss should be charged to 1918.

The method laid down in article 185 may work equitably in some cases. If the application of the method to a particular case does not yield to the taxpayer a reasonable deduction for amortization, some other method should be used.

No method of prorating on an April, 1919, reproduction basis, or on a 25 per cent maximum claim basis, will produce a reasonable deduction in all cases.

Taxpayers should prepare an estimate of the loss sustained and then apply the loss to the period affected. The accounts should be adjusted accordingly and if the result is not the same as would be produced by the conflicting methods in the regulations the taxpayer will have to look to the courts for a correct interpretation of the law.

The reference to “subdivision (3) of article 184, April, 1919," may or may not be construed to apply to article 184 as amended June 10, 1919.13 The latter was not in existence when article 185 was written. It should make no difference in determining a reasonable deduction.

18 See page 761.

Losses must be shown in taxpayer's books and statements.

REGULATION. Claims for amortization must be unmistakably differentiated in the return from all other claims for wear, tear, obsolescence and loss. No such claim will be allowed unless it is reflected in any accounts submitted by the taxpayer to stockholders and in any credit statements by the taxpayer to banks, and is given full effect on his financial books of account. If Government or other contracts taken by the taxpayer contained recognition of amortization as an element in the cost of production, copies of such contracts shall be filed with the taxpayer's return, together with a statement and description of any sums received on account of amortization and the basis upon which they were determined. In any case in which an allowance has been made for amortization of cost the taxpayer will not be allowed to restore to his invested capital for the purpose of the war profits and excess profits tax any portion of the amount covered by such allowance. (Art. 186.)

It is a reasonable requirement that a taxpayer's books should reflect all transactions. When claim for amortization is made the loss should be charged against the period to which it belongs. If it should develop later that the actual loss is less than the book estimate an asset account and surplus will be increased as of the date of the estimate by the same amount. If additional taxes are shown to be due the increase in surplus resulting from the restoration of the asset will more than offset the debit to surplus for the additional tax.

Estimates to be adjusted within three years.

REGULATION. A redetermination of the deduction allowed on account of amortization may, or at the request of the taxpayer shall, be made by the Commissioner at any time within three years after the termination of the present war, and if as a result of an appraisal or from other evidence it is found that the deduction originally allowed was incorrect, the amount of tax due for each taxable year during the amortization period will be adjusted by additional assessment or by refund. (Art. 187.)

It should always be kept in mind that the original claim was based on an estimate, except in the case of sale or some other definite means of determination.

When it is found that the estimate was too large or too small the facts should be reported without delay and the taxes of the prior years should be redetermined.

The following ruling emphasizes the necessity for amended returns.

RULING. Reference is made to your letter of May 21, 1919, requesting information relative to the application of the provisions of section 214 (a), paragraph 9, of the Revenue Act of 1918, and articles 181 to 188 of Regulations 45, final edition, to the 1918 and 1919 returns of taxpayers. •

Your questions are answered in the order submitted as follows: (1) A claim for amortization applicable to the portion of the calendar year 1918 covered by the return of the taxpayer for the taxable year 1918 shall be included in such return, and if such amortization is not claimed therein it may not be taken in the return covering the taxable year 1919. The return for the taxable year 1919, shall provide only for the proper amortization applicable to such taxable year ascertained in accordance with the provisions contained in article 185 of Regulations 45. However, in cases where it will be impracticable to accurately determine the amortization during the calendar year 1919, any returns made during such period should include amortization allowances tentatively determined in accordance with articles 184 and 185 of Regulations 45.

(2) Returns made for the taxable year 1918, in cases where the taxpayers are entitled to amortization claims, should include such claims ascertained as provided in the preceding paragraph, and if subsequently the amortization as finally determined differs essentially from the amount claimed in the returns filed, then amended returns should be made. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated June 9, 1919.)

When an original estimate of loss proves to be excessive, because facilities believed to be of lessened value at the end of the taxable year 1919 have subsequently increased in value, amended returns should of course be made.

But if on subsequent sale facilities should be sold for more than book value, exclusive of amortization, the profit realized should be reported as of the period of sale and only the amount of amortization restored to the original period. This accords with the usual rule that appreciation in value should not be reported until realized.

REGULATION. To obtain the benefit of this provision of the statute the taxpayer must establish to the satisfaction of the Com

missioner that the entire deduction claimed and the proportion claimed for any particular year are reasonable. The taxpayer shall also submit a supplementary statement setting forth the following information: (a) a description of the property in reasonable detail ; (b) the date or dates on which the property was acquired, and from whom, or, if constructed, erected or installed by the taxpayer, the dates on which such construction, erection or installation was begun and completed; (c) evidence establishing the intention of the taxpayer on and after April 6, 1917, or on and after the date of acquisition or the date of beginning construction, erection or installation, to devote such property or vessels to the production of articles (or, in the case of vessels, the transportation of articles or men) contributing to the prosecution of the present war; (d) the cost of construction, erection, installation or acquisition; (e) the value of the property after termination of the amortization period; (f) a segregation of the property permanently discarded, or of the property which will be permanently discarded before the last instalment payment covered by the return; (g) all deductions from gross income otherwise taken or claimed with respect to such property; (h) the computation by which the total amount to be extinguished by amortization was determined; and (i) the computation by which the proportion of the amortization charge claimed as a deduction in the taxable year for which the return is being made was determined. (Art. 188.)

The details outlined above are only suggestive. Taxpayers in most cases will be able to meet all the requirements mentioned and in addition furnish other data to support their claims.

Limitation of Loss in 1919 Returns to 25 per cent

Not Legal

As stated on page 757, there is no more authority in the law for the limitation of the loss for amortization to 25 per cent than for the previous limitation to the basis of April, 1919, reproduction cost.

REGULATION. The paragraph numbered (3) in article 184 of the final edition of Regulations 45 which reads as follows:

"(3) In the case of other property the basis is the estimated reproduction cost as of April, 1919, of such property in its then condition. In the final determination such cost will be

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