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ascertained under stable postwar conditions, without reference

to such date.” is hereby amended to read as follows:

“(3) In the case of other property the basis for amortization calculation shall be the estimated value of the property to the taxpayer in terms of its actual use or employment in his going business, such value in no case to be less than the sale or salvage value of the property, provided, however, that 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. In the final determination the amount of the amortization allowance will be ascertained upon the basis of stable postwar conditions under regulations to be promulgated when these conditions become ap

parent.” (T. D. 2859, signed by Commissioner Daniel C. Roper, and dated June 10, 1919.)

If no further amendment of article 184 appears, taxpayers who are guided by its provisions may have to wait a long time before final determination of their claims is reached. “Stable postwar conditions” seem further away in December, 1919, than in June, 1919.

The author repeats that no taxpayer whose reasonable claim is known to be more than 25 per cent need fear that the 25 per cent maximum allowance will be sustained as a proper interpretation of the law.

The law imposes no limitation on the amount of amortization to be deducted in any one year, nor does it state that the entire amortization must be claimed as a deduction against one year's income. The intent of the law would seem to be to permit taxpayers who erected plants for war purposes to write off, as quickly as possible, the excess cost of such plants over normal or pre-war cost and to apply such write-off in reduction of income reported for taxation. Until such excess cost has been written off there is no income which should be taxed. Until the excess has been written off such taxpayers are not on an equal basis with other taxpayers who constructed their plants before the war and made no new capital expendi

tures to assist in the prosecution of the war. Furthermore the deduction for amortization is not actually being fully allowed if in part or in whole it is included in a tax return to an amount in excess of the net income determined prior to the application of the amortization deduction.

Assuming that the amortization allowance exceeds the net income of 1918, it would seem logical to apply the net income of each year from 1918 onward against the amortization allowance and to tax income only after the amortization has been fully applied against income.

CHAPTER XXXI

DEDUCTIONS FOR DEPLETION

The exhaustion of minerals, oils, timber, etc., by mining, flow and production of any kind must be reflected annually in the accounts of the owner in order accurately to determine the profits for the taxable year. It may be that the entire production yields a net revenue sufficient only to make proper provision for the return of the capital invested. In such case there should be nothing to pay under an income tax law. In the 1913 law there was an extraordinary provision which in some cases actually resulted in a tax being levied on a net loss. This inconsistency and injustice were corrected in the 1916 law and further improvements have been made in the 1918 law, so that now the accounts may be adjusted annually by adequate reserves and capital may be reimbursed before any taxable income need be returned.

Law. Section 214. (a-10) [Individuals]. Section 234 (0-9) [Corporations). That in computing net income there shall be allowed as deductions: .....

In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the d'scovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee; ....

Nothing more could be asked by any owner or lessee of natural deposits than "a reasonable allowance for depletion,” but the interests of lessor and lessee should be separated.

Theory of Depletion : As with depreciation, the theory which properly determines the distinction between capital and income in dealing with depletion of natural resources is that provision must be made for the return of the original capital or cost (or value March 1, 1913) before there can be any income. This involves a periodical charge, against the gross earnings realized from the product, of such amounts as will in the aggregate equal the original outlay by the time the property shall have been exhausted. Since obviously no engineer can determine within one ton or one barrel the total contents of a mine or well, a prudent owner will base his calculation upon a scale of exhaustion somewhat more rapid than is required by the maximum estimate of the total mineral content. As soon as the reserve for depletion equals the capital investment, no further charges can be made, no matter how much more product may be recovered. The excess is all income and must be so returned.

The language of the 1918 law is broad enough to permit the full deduction demanded by the theory of depletion.'

'[Former Procedure] Under the 1909 law no deduction could be made for depletion. The language of the statute that "all losses sustained within the year .... including a reasonable allowance for depreciation of property” (section 38, Second) has been interpreted by the Supreme Court of the United States as not permitting the deduction of allowances of this type (Von Baumbach, Collector, v. Sargent Land Co., 242 U. S. 503). The Bureau of Internal Revenue, acting upon this decision, has reassessed corporations which under this law claimed depletion allowance. For a full discussion and criticism of this decision see Income Tax Procedure, 1918, pages 405-408.

The 1913 law permitted “in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made" [section II G (b)]. The Supreme Court

General Procedure in Case of Depletion Basis of depletion allowance. In the case of properties acquired prior to March 1, 1913, the actual value on that date fixes the capital sum to be charged off thereafter. For instance, an individual may have purchased coal lands in 1908 at $400 per acre and thereafter may have charged off periodically against product such an allowance as would reasonably write off the cost before the tract was exhausted. If the value of the unmined coal appreciated, and it could be demonstrated that on March 1, 1913, the fair value was $800 per acre, subsequent to that date the charge for depletion should be doubled.

When such a condition exists, the proper procedure is to debit the property account and credit an account called "Surplus arising from reappraisement of property.” The property account, as so valued, will then be the basis of depletion charges. An adjustment should be made to have the account properly reflect the necessary charges to the beginning of the taxable year, and thereafter the annual charges should be accurately calculated. If such an account is created it will be

of the United States held that this 5 per cent limitation was constitutional even though it might be inadequate to provide fully for depletion and as a consequence might result in the tax being levied not only on the profit but also in part upon gross product or capital. (Stanton v. Baltic Mining Company, 240 U. S. 103.) For a full discussion of the procedure under this limitation of the 1913 law, see Income Tax Procedure, 1918, pages 402-406.

The 1916 law unchanged in 1917 [section 5, Eighth (a), individuals, and section 12 (a), Second, corporations] was as follows:

“(a) In the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof, which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowances authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. ...."

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