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or other causes. Such a reduction in value should be based on the cost and estimated life of the live stock. If an inventory is not used, a reasonable allowance for depreciation may be claimed based upon the cost of draft and work animals and animals kept solely for breeding purposes and not for resale. .... (Art. 171.)

LOSSES.

REGULATION. Losses incurred in the operation of farms as business enterprises are deductible from gross income.

DETERIORATION OR LOSS BY CASUALTY NOT DEDUCTIBLE.— If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by reason of deterioration in storage shall be allowed. The total loss by frost, storm, flood or fire of a prospective crop, or of a crop which has not been sold, is not a deductible loss in computing net income.

LOSS FROM DEATH OF STOCK RAISED ON FARM--NOT DEDUCTIBLE. — A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm.

LOSS FROM DEATH OF STOCK PURCHASED IS DEDUCTIBLE.— If live stock has been purchased for any purpose, and afterwards dies from disease, exposure or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such stock, less any depreciation which may have been previously claimed with respect to such perished live stock, and less also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property, less depreciation already allowed, destroyed by order of the authorities of a State or of the United States may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. In determining the cost of stock for the purpose of ascertaining the deductible loss there shall be taken into account only the purchase price, and not the cost of any feed, pasturage or care which has been deducted as an expense of operation.

INVENTORY METHOD WHEN USED WILL REFLECT LOSS.If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. .... (Art. 145.)

It should be noted that farmers are entitled to the benefit of section 204 and if a net loss is sustained in any taxable year, beginning after October 31, 1918, and ending prior to January 1, 1920, such net loss may be deducted in the preceding year or in the succeeding taxable year. Farmers, of course, if their fiscal year ended at any date between January and October, would not be entitled to the benefit of section 204. Presumably most farmers make up their accounts on the basis of the calendar year, so that there will be no discrimination against them, as is the case with many corporations.

Farmers who keep books.—The regulations provide that farmers who keep books according to an approved system may prepare their returns therefrom.

Operating a farm is conducting a business for profit. Accurate results cannot be ascertained unless inventories are taken Otherwise a farmer who is breeding stock and accumulating a large herd might show no income (or a loss) for several years and then, if he were to dispose of all his stock in one year, he would have to pay an excessive tax, although the profit would be properly distributable over several prior years.

The accurate and fair method would be to inventory his stock annually and pay the tax on the profit as it accrues annually and as shown by his books.

PART V

MISCELLANEOUS TAXES

FEDERAL CAPITAL STOCK (EXCISE) TAX

As a means of raising additional revenue, Congress in 1916 imposed an excise tax, commencing January 1, 1917, on corporations for the privilege of doing business. In view of the income and excess profits taxes imposed upon corporations this tax should have been discontinued, but instead of taking such action Congress merely increased the rate and reduced the exemption. The provisions of the 1918 law were made retroactive to July 1, 1918.

The rate now in force for domestic corporations is $12 for each full $1,000 of the average fair value of the capital stock for the year preceding the taxable year in excess of the exemption of $5,000. The rate is comparatively low and the exemption such that the total tax is not excessive.

In his report for 1919 the Commissioner states: “The early regulations touching valuations have been radically elaborated and modified until under present approved methods it has become necessary to individualize each case, considering all elements and factors which throw light on values and harmonizing them so far as possible in the ultimate values found.”

This is an admission that the earlier regulations were wrong. The early administration of the law did not reflect credit on the Treasury. Originally an attempt was made to divide corporations into a few classes and value the capital stock of all companies in each on practically the same basis.

Theoretically, the tax is on the privilege of doing business in a corporate capacity, but it is difficult to assess a tax on the

'Title IV of the revenue act of September 8, 1916, Public No. 271, 64th Congress.

The former rate was 50 cents for each $1,000 and the exemption was $99,000.

*Foreign corporations, however, are not permitted any deduction.

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