pany, all interest actually paid by it within the year on deposits; (fourth) all sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof, or imposed by the government of any foreign country as a condition to carry on business therein; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, joint-stock companies or associations, or insurance companies, subject to the tax hereby imposed: Provided, That in the case of a corporation, joint-stock company or association, or insurance company, organized under the laws of a foreign country, such net income shall be ascertained by deducting from the gross amount of its income received within the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia, (first) all the ordinary and necessary expenses actually paid within the year out of earnings in the maintenance and operation of its business and property within the United States and its Territories, Alaska, and the District of Columbia, including all charges such as rentals or franchise payments required to be made as a condition to the continued use or possession of property; (second) all losses actually sustained within the year in business conducted by it within the United States or its Territories, Alaska, or the District of Columbia not compensated by insurance or otherwise, including a reasonable allowance for depreciation of property, if any, and in the case of insurance companies the sums other than dividends, paid within the year on policy and annuity contracts and the net addition, if any, required by law to be made within the year to reserve funds; (third) interest actually paid within the year on its bonded or other indebtedness to an amount of such bonded and other indebtedness, not exceeding the proportion of its paid-up capital stock outstanding at the close of the year which the gross amount of its income for the year from business transacted and capital invested within the United States and any of its Territories, Alaska, and the District of Columbia bears to the gross amount of its income derived from all sources within and without the United States; (fourth) the sums paid by it within the year for taxes imposed under the authority of the United States or of any State or Territory thereof; (fifth) all amounts received by it within the year as dividends upon stock of other corporations, joint stock companies or associations, and insurance companies, subject to the tax hereby imposed. In the case of assessment insurance companies the actual deposit of sums with State or Territorial officers, pursuant to law, as additions to guaranty or reserve funds shall be treated as being payments required by law to reserve funds. Deductions.

BUSINESS EXPENSES.

An ordinary expenditure by a mutual life insurance company for renewal of office furniture and equipment did not constitute assets, but was rather an expense of maintenance and operation, which it was entitled to deduct in determining the net income on which it was taxable under corporation tax act. (Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, 1912, and Conn. Mutual Life Ins. Co. v. Eaton, 218 Fed. 206, 1914.)

Where the State tax on capital stock of banks falls directly on the stockholders, these taxes can not be legally deducted from gross income in returns made by banks. The tax is not upon the banks, and in paying it they act as agents. (Eliot National Bank v. Gill, 210 Fed. 933, 1913, which was affirmed by C. C. A. in 218 Fed., 601, 1914, Eliot National Bank v. Gill. Same point similarly decided in National Bank of Commerce in St. Louis v. Allen, 211 Fed. 743, 1914,

which was affirmed in National Bank of Commerce in St. Louis v. Allen, 223 Fed. 472, 1915, and in Northern Trust Co. v. McCoach, 215 Fed. 991, 1914.)

Where a corporation sells its own bonds at a discount, if a loss sustained thereby is an expense it will not be paid until the maturity of the bonds, and should therefore be prorated over the life of the bonds and not deducted in full in the year in which the bonds were issued.

Government's theory that the discount should be apportioned over the lifetime of the bonds is sustained.

A book charge because of the sale of an issue of bonds at less than par or because of bad debts or for money paid out for charities is not a part of the "expenses actually paid within the year out of income" to be deducted from gross income. (Baldwin Locomotive Works v. McCoach, 215 Fed. 967, 1914. Affirmed in 221 Fed. 59, 1915, C. C. A.) and Chicago & Alton R. R. Co. v. U. S. (53 Ct. Cls. 41.)

Expenditures for additions and betterments to the property such as expenditures for sidings or spur tracks are not authorized deductions from gross income.

Payments for labor and materials which go into the actual operating of the road and the property are deductible as operating expenses. Maintenance means the upkeep or preserving of the condition of the property to be operated and does not mean additions to the equipment, additions to the property, or improvements of former condition of the road.

Where old rails are replaced with new and heavier rails, wooden bridges and culverts with concrete and steel bridges and culverts, the rule is that the cost of renewals with like kind and quality is allowable, but excess cost is not allowable as a deduction. (Grand Rarids & Indiana Ry. Co. v. Doyle, 245 Fed. 789, 1915.)

Profits of corporation distributed to stockholders nominally as salaries not deductible from gross income as they do not differ from dividends on stock. (Jacobs & Davies (nc.) v. Collector. Decision of lower court affirmed in 228 Fed. 505, 1915.)

A corporate shipowner is entitled to deduct necessary repairs; that item not being included in "depreciation," which means the lessening in value due to obsolescence, etc. (San Francisco & P. S. S. Co. v. Scott, 253 Fed. 854, 1918.)

DEPRECIATION.

Insurance companies owning securities taken at market value may not, under this act, deduct from gross income as depreciation the not decrease in market value of such securities, as depreciation is limited to the loss in actual use value due to wear and tear reflected in a fall in money value. (Opinion of Judge Hand, U. S. D. C.

So. Dist. of N. Y. 1919, in the case of N. Y. Life Ins. Co. v. Anderson.) This case, as reported in 257 Fed. 576, was further heard upon a question of accounting only, and is now on appeal on the point of depreciation allowances.

DEPLETION AND DEPRECIATION-MINING COMPANIES.

A corporation mining ores from its own premises is not entitled to deduct from the proceeds of the ores mined, by way of depreciation under the corporation tax law of 1909, the difference between the gross proceeds of the sales of ores during the year and the moneys expended in extracting, mining, and marketing the ores. (Stratton's Independence (Ltd.) v. Howbert, 231 U. S. 399, 1913.)

In determining the net income of a corporation for a given year on which it is subject to excise tax under act August 5, 1909, the corporation is entitled to a "reasonable allowance" for depreciation of its property and under such a provision a mining corporation engaged in extracting ore from its mines is entitled to an allowance for depreciation equal to the value in place of the ore extracted and disposed of during the year. (United States v. Nipissing Mines Co., 202 Fed. 803. Affirmed in 206 Fed. 431, 1913.)

The property of a coal mining corporation was depreciated for each ton of coal mined to the amount of 15 cents per ton. Held, That the corporation could not be taxed on the theory that the full value of the coal mined represented the income, but was entitled to deduct therefrom such amounts as represented depreciation in the mining property. (Forty Fort Coal Co. v. Kirkendall, 233 Fed. 704, 1915.) District court, M. D. Penn.

Proceeds of a sale of ore in a mine considered income and exhaustion or depletion of capital can not be deducted therefrom as depreciation. (Von Baumbach v. Sargent Land Co. 242 U. S. 503, reversing decision of the U. S. Dist. Ct. in 207 Fed. 423, and C. C. A. 219 Fed., 31.)

Depletion of ore bodies. For the purpose of determining its net income for the basis of taxation under the act, a mining corporation is not entitled to deduct from its gross income any amount whatsoever on account of depletion or exhaustion of ore bodies caused by its operations for the year for which the tax is assessed. (Goldfield Cons. Mines Co. v. Scott, 247 U. S. 126.)

Deduction of cost value of ore in ground.-In the ascertainment of its net income under the act, a mining corporation is not entitled to a deduction against gross proceeds from the mining and treatment of ores to the extent of the cost value of the ore in the ground before it was mined, ascertained in compliance with T. D. 1675, 1918. (Id.) The lessee of mining property may not deduct the proportional value of the ore in place on January 1, 1909, with respect to each

ton of ore mined, as so much depletion of capital assets, but may deduct a proportionate part of the royalty paid in advance. (U. S. v. Biwabik Mining Co., 247 U. S. 116, 1918, Supreme Court affirming the decision of the district court and reversing that of the C. C. A. 242 Fed. 9, 1917.)

DEPLETION AND DEPRECIATION-LUMBER COMPANIES.

In distinguishing preexisting capital from income subject to the act, it is a mere question of method whether a deduction be made from gross receipts in ascertaining gross income, or from gross income, by way of depreciation, in ascertaining net income.

The principle upon which the removal of minerals by mining companies has been held not to produce a depreciation within the meaning of the act is inapplicable to the case of a company engaged in the business of manufacturing and selling lumber from timber supplied by its own timber lands, and which sells the lands incidentally after the timber is removed. (Doyle v. Mitchell Bros. Co., 235 Fed. 686, affirmed by 247 U. S. 179, 1918.)

INTEREST.

An investment and mortgage loan company not allowed, as a deduction, the amount paid as interest to purchasers of certain evidence of indebtedness called "debenture bonds" and the amount paid to purchasers of mortgage notes and bonds secured by mortgages on real estate sold and assigned by plaintiff to investors with its guarantee, these mortgages being called "guaranteed real estate securities." (Middlesex Banking Co. v. Eaton, 221 Fed. 86; C. C. A. affirming judgment in 233 Fed. 87.)

Interest on bonded or other indebtedness paid within the year is to be deducted from gross income, according to the second clause of sec. 38; but only the interest paid upon such indebtedness to an amount not exceeding the corporation's paid up capital stock. The question was decided by the Supreme Court, decision of Anderson v. Forty-Two Broadway (239 U. S. 69) and followed in Boston Terminal Co. v. Gill (246 Fed. 664, 1917), C. C. A., affirming decision of the district court. (T. D. 2428.)

Where a corporation carries a current indebtedness exceeding the amount of its paid up capital stock, the interest deductions allowed in determining the net income subject to the corporation tax is limited to so much of the indebtedness as does not exceed the capital.

Congress has power to adopt a basis of distinction between corporations carrying indebtedness that exceeds the amount of the capital and those that do not, and the provision in the corporation tax act limiting the amount of interest deductions to so much of

the indebtedness as does not exceed the capital stock is not an arbitrary classification. (Anderson v. Forty-Two Broadway Co. 239 U. S. 69, 1915.) (Reversing 209 Fed. 991 and 213 Fed. 777.)

Interest on unassumed mortgages may be deducted under the provisions of the act. (Annual Report of the Commissioner of Int. Rev. 1915, p. 34. American Real Estate Co. v. Marshall.)

The * * * company was organized under a special statute closely defining its organization and powers for the purpose of building and maintaining a union station. As in effect required by the act, its capital stock of $500,000 was subscribed for by the five railroad companies named therein, in equal shares. Such companies were also required to use the station, and to pay therefor, in proportion to the use made of the same, such amounts as should be necessary to pay the expenses of the corporate administration and of maintaining the station, the interest on the company's bonds, which amounted to $14,500,000 and dividends on its stock not exceeding 4 per cent. Such companies were also required in case of foreclosure to pay any deficiency of the bonded debt in the same proportions. The company received a substantial income aside from the payments from the railroad companies from facilities furnished to the traveling public and from leases and concessions. It had never paid any dividends on its stock. It was required to pay a state franchise tax on its capital stock, but the station property was assessed to the railroad companies. Held, that the company was a corporation "organized for profit" and "engaged in business," within the meaning of section 38, act of August 5, 1909, and subject to the special excise tax thereby imposed; that its gross income under the act included all sums received from the railroad companies, and that it was entitled to a deduction therefrom on account of interest paid, under clause 2, to the extent only of the interest on so much of its debt as equalled its capital stock of $500,000. (Boston Terminal Co. v. Gill, 246 Fed. 664, 1917.)

A corporation which did a brokerage business and bought securities for its customers, who paid only a part of the purchase price, paying interest on balances, the corporation also paying for the securities purchased, only part of the purchase price and owing balances on which it paid which it paid interest, including in its return of gross income the difference between the interest received and the interest paid, made an incorrect return under the act of August 5, 1909. Interest received by plaintiff from customers should be included in gross income. Interest may be deducted only to an amount not exceeding the paid up capital stock outstanding at the close of the year. (Altheimer & Rawlings Investment Co. v. Allen, collector, 248 Fed., 688.) (Petition for Writ of Certiorari in U. S. Supreme Court dismissed Nov. 11, 1918, 248 U. S. 578.)