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at December 31, 1920. What are the essential facts to be ascertained and reported with respect to contracts for purchase of materials that have a market value at the date of the balance-sheet (or at a date prior to date of certification) substantially less than cost? The most important data, in my opinion, are:

(1) Gross amount of commitments.
(2) Market value of materials at date of balance-sheet or at

a more recent date prior to certification.
(3) Net probable loss (difference between 1 and 2).
(4) Period during which corporation will be allowed to

liquidate the liabilities. (5) Provisions for financing the contingent liability by sales,

credits, loans or security issues. (6) Protection, if any, against loss through sale contracts.

There are two possible methods of representing a contingent liability on the balance-sheet : one, a reserve account, which would be created by a debit to surplus, and the other a footnote under the head of "contingent liabilities.” In my judgment, the form to be adopted is not vital, provided the essential facts are clearly set forth. Personally, I am inclined to prefer the use of the footnote, on the ground that there is uncertainty as to the occurrence of the liability and the amount of loss. A footnote relating to purchase commitments of the third class might be worded as follows:

“The company's contracts for purchase of materials
to be delivered during ... (period of time).... outstanding
at ..(date of balance-sheet)... aggregated $......
or $....

more than the market value of the
materials at ... (even date or more recent date)...

or
“On the basis of market values at .. (date of balance-
sheet or more recent date). the purchase contracts unfulfilled at
....... (date of balance-sheet)..... , aggregating $. .....
would show a contingent loss of approximately
$.....

It has been suggested that the total amount of commitments be disclosed for the reason that the significance to be attached to the amount of contingent loss depends considerably on the gross amount of commitments. Should the amount of commitments

be large, provision for financing would be an important consideration and the footnote should be amplified accordingly. In some trades vendors have agreed to accept notes with six to twelve months' maturities for the difference between cost and market value of the materials purchased.

How is the market value of commitments to be determined? In speaking before another assembly last week on the subject of purchasing, I was asked whether purchase commitments should be controlled by a budget. That question and the answer thereto imply that records are usually available in the purchasing department to show the amount of outstanding commitments in terms of dollars. A well organized corporation will be able to supply that information at short notice. It should be the duty of an auditor, in the initial stages of his examination to call for a schedule that shall set forth in reasonable detail the outstanding commitments and the market values of the various items as estimated by the purchasing agent. If the purchasing agent asserts that he is unable to supply the data, then the auditor is confronted with the same sort of difficulty as that which he encounters not infrequently in the verification of ledger accounts which are not supported by adequate details. He must form an opinion from such data as he can collect as to the likelihood of any contingent loss arising from commitments.

I am nearing the end of my time limit, and will conclude with a brief consideration of sale contracts as related to purchase contracts. I have in mind a fairly common practice in some businesses. A sales order may be taken for a quantity of goods at a definite price and purchase orders may be placed later for sufficient quantities of raw materials to cover the requirements of the sales order. We may assume that the sale price and the purchase prices are consistent in the sense that there is sufficient margin between them to allow the manufacturer a profit. If the purchase and sale contracts are both unfulfilled at the close of the fiscal year and there has been a sharp decline in commodity prices, it may be essential to mention both contracts in any reference to contingent liability. The contracts should not be assumed to be offsetting because the sales contract may not be enforceable. Under the conditions of the trade, it may not be possible for a seller to force his customer to take the goods, and we all know that there have been great numbers of cancellations in recent months. Again,

if the customer should become financially embarrassed and forced into receivership, the receiver would have the option of repudiating the contract, a right which he would certainly exercise if the stipulated price was unfavorable to the bankrupt concern. For these two reasons the protection in a sales contract may be more apparent than real.

When there is an inter-relation of purchase and sale contracts, I suggest that the footnote in explanation of the contingent liability should be worded substantially as follows:

"The company's contracts for purchase of materials
to be delivered during ....(period of time)... outstanding
at .. (date of balance-sheet).. aggregated $. ....
or $....

more than the market value of the
materials at .. (even date or more recent date)". , but $......
is covered by sale contracts, leaving $...
as the net amount of possible loss.”

If there is an inventory of goods which also apply against the sale contracts, the footnote might be expressed in the following manner: "The unfulfilled purchase contracts aggregate $...

....at (date of balance-sheet), and after applying thereto the unfulfilled sale contracts in excess of the inventory at .... (date of balance-sheet)...., would show, on the basis of market values at (date of balance sheet or more recent date)........, a contingent loss of approximately $....

Amendments of New York Income-tax Law

BY MARK GRAVES

English history relates that the fiduciary of the court of chancery was the accountant. An examination of the returns on file in the New York state income-tax bureau will reveal that he continues to act as a trustee toward the state, because a goodly portion of the 800,000 returns filed in 1920 was prepared by the man skilled in accounts and to him should be accredited a share of the gratitude expressed by the bureau for the splendid response to the enactment of the statute.

With a few exceptions the original law remains unchanged. Therefore, a brief discussion will be given of the more important amendments in the order in which they appear in the several sections.

Subdivision 7 of section 385 presents a revision tending to clear up the technical interpretations of the word “resident." The change definitely declares that a resident for the purpose of determining liability to the tax imposed by the statute is “a person who shall at any time during the last six months of the calendar year" reside in the state of New York. This test of residence should be applied with reference to the income of any taxable year commencing with the year 1919.

Sections 351-a and 351-b provide for the re-imposition of the tax on non-residents. Following the decision of the United States supreme court, non-residents are allowed personal exemptions in the same amounts as residents.

Gross income as defined by section 359 now includes income to beneficiaries derived through estates or trusts whether as distributed or distributable shares. Care should be taken to include interest from investments upon which the investment tax (sec. 331—tax law) has been paid since May 14, 1919. In addition it must be remembered that pursuant to an opinion by the attorney-general, all income from investments upon which secured debt tax or mortgage tax was paid is subject to income tax. The investment-tax law was repealed by chapter 646 of the laws of 1920.

The amendment to section 360, sponsored by the income-tax

bureau, allowing the deduction of all interest paid or accrued during the taxable year on indebtedness, has met with general approval. Sub-divisions 5 and 6 state that the losses deductible by non-residents are limited to transactions in real property or tangible personal property having an actual situs within the state.

Broader scope is permitted in deductions for contributions. Under the present statute, a resident is entitled to deduct 15 per cent of his net income for contributions made to certain organizations regardless of their location or where organized. Nonresidents, however, are limited generally to contributions made to organizations existing by virtue of New York laws.

Statements to the effect that the personal exemptions have been changed are not true. The law coincides with the federal statute permitting (a) $1,000 to a single person, (b) $2,000 to a married person and to the head of a family and (d) $200 for dependents. But to maintain the tranquillity of the home, the exemption must be equally divided between a husband and a wife making returns.

The rule in relation to credit for taxes in case of taxpayers other than residents of the state has been amended virtually to exempt income to non-residents derived from sources in this state, providing this income is taxed by the state or country where they reside, if the laws of such state or country exempt income to residents of this state from sources in the other state or country. No credit will be allowed non-residents on any income exempt from taxation under the laws of the other state or country if the income is taxable under the laws of New York.

The duty of deducting and withholding is imposed on employers with reference to fixed or determinable annual or periodical compensation paid to non-resident employees. The amount of personal exemption allowed the employee is set-off against the net income and the tax is imposed on amounts over and above such exemption.

Certificates of residence (form 101) and certificates of nonresidence (form 102-revised) must be filed by the taxpayer with the withholding agent. A certificate showing the employee to be a resident of Massachusetts relieves the employer of the duty of deducting and withholding. In any case, if the employee left the service of the withholding agent prior to April 14, 1920, and was fully paid prior to that date, no obligation in respect to such pay

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