The duration of patent rights in Great Britain was extended from 14 to 16 years in 1919 (see 9, and 9 and 10, Geo. V, c. 80, Chitty, Annual Statutes, 1919, p. 423). No corresponding change seems to have been made with respect to trade-marks. Important patent legislation is now pending in France which will radically change the existing law if passed.

The only actual change in duration of patents and trade-marks since 1909 in the countries named seems to have been in Great Britain, as indicated above.

Section 214 (a) 8, article 167: depreciation of patent or copyright. (Also section 326, article 843.)

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The committee has had under consideration the appeal of the M Company, from the action of the income-tax unit in disallowing for the taxable year 1917, an item of 50r dollars covering depreciation on certain patents.

In January, 1902, the M Company, then a newly organized corporation, acquired ownership of eight patents issuing therefor to A, the patentee, 900r dollars of stock of the corporation. This amount was subsequently increased 2x dollars by expenses of acquisition. The patents so acquired, except one, issued in 1900, had expired prior to January 1, 1917, but as of March 1, 1913, all but one were in effect. Fifteen new patents had, however, been added to the company's patents between date of incorporation and March 1, 1913. These additional patents were not capitalized. No depreciation was taken by the taxpayer on the patents which were capitalized, until the year 1917, when 1/17 of the book value was charged to expenses, notwithstanding the fact that all except one of them had expired prior to January 1, 1917.

The taxpayer relies upon articles 167 and 843 of regulations 45, and upon treasury decision 2929, amending article 163 of regulations 45, in support of his action.

It is assumed the actual value at date of acquisition of the patents by the issuance of stock has been determined by the income-tax unit, since this question is not at issue before the committee.

The case then comes clearly under the provisions of article 174, paragraph 552, and article 167, paragraph 494, regulations 33, revised, governing the collection of the income tax imposed by the revenue act of 1917.

Article 174, paragraph 552, provides:

An allowable deduction for any given year for return of capital invested in patents at the time of issue, will be an amount equal to 1/17 of the actual cost in cash or its equivalent of such patents.

This paragraph of article 174 was subsequently amended by advisory tax board recommendation 59, September 9, 1919, to provide as follows:

Depreciation of patents acquired prior to March 1, 1913, should be taken on the basis of their fair market value as of that date, if affirmative and satisfactory evidence of such value is offered.

Article 167, paragraph 494, provides:

Good will represents the value attached to a business over and above the value of the physical property, and is such an intangible asset that it is not subject to wear and tear and no claim for depreciation in connection therewith can be allowed. Any loss resulting from or on account of investment of good will can be determined only when the property or business to which the good will attaches is sold or disposed of, in which case the profit or loss will be determined upon the basis of the value of the assets, including good will, if acquired prior to March 1, 1913, or their cost if acquired subsequent to that date.

The basis for deduction authorized under the provisions of article 174 is the return of capital on an asset, the use of which in the trade or business

is definitely limited in duration. The taxpayer did not elect, during the life of the patents acquired in 1902, to provide for this return of capital. Had he made this provision his surplus for invested capital purposes under the revenue act would have been correspondingly reduced.

He, therefore, cannot now claim in a high taxable year, after the expiration of the life of the patents, an amount equivalent to 1/17 of the cost, thereby securing the benefit not only of a reduction in his taxable income for the year 1917, but the advantage of the investment, which in value is subject only to the definite limitations prescribed by the act and the regulations.

The committee therefore sustains the action of the income-tax unit in disallowing the item of 50r dollars claimed by the taxpayer in the taxable year 1917, as a deduction based on 1/17 of the cost of said patents.

Section 301, article 711: Imposition of tax. (Also section 214 (a) 4, 5, 6, article 141.)

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Held, that an individual who is engaged in more than one business, the income from which is taxable under different provisions of the law and regulations, may not deduct losses sustained in the one from gains or profits made in the conduct and operation of the other for the purpose of computing the excess profits tax for 1917.

The committee is in receipt of a memorandum from the income-tax unit in which the statement is made that the unit has consistently held that indivual taxpayers who suffered losses in 1917 from transactions which, had they resulted in a profit, would have been taxable under the provisions of section 201 of the revenue act of 1917, can not deduct such losses from income derived from a business in which there is no invested capital or not more than a nominal capital as provided in section 209 of the statute.

It is pointed out in the memorandum that cases arise in which losses are sustained in a business requiring the use of capital, and that such business may be closely related to the character of the business from which the individual taxpayer receives a salary or commissions which are taxable at the 8 per cent rate under the provisions of section 209. It is suggested that the ruling may be correct, but that it works a great hardship in many cases. Advice is requested as to whether the consistent action of the unit disallowing such losses for the purposes of the excess profits tax is correct.

It appears that A is a member of a partnership dealing on the Y exchange and that he receives for his services from such partnership a salary. In addition to the salary received for services rendered, it appears that A on his own account is engaged in the same general class of business as that of the partnership. A loss was sustained in such business and his representative strongly urges that since such loss was incurred in a business closely related to that in which the partnership was engaged he should be entitled to deduct such losses from the salary received, for the purpose of determining the income subject to tax at the 8 per cent rate under the provisions of section 209.

Section 200 of the revenue act of 1917 provides that when used in this title "the terms 'trade' and 'business' include professions and occupations." Article 8 of regulations 41 reads as follows:

In the case of an individual, the terms "trade," "business," and "trade or business" comprehend all his activities for gain, profit, or livelihood, entered into with sufficient frequency, or occupying such portion of his time or attention as to constitute a vocation, including occupations and professions. When such activities constitute a vocation they shall be construed to be a trade or business whether continuously carried on during the taxable year

or not, and all the income arising there from shall be included in his return for excess profits tax.

In the following cases the gain or income is not subject to excess profits tax, and the capital from which such gain or income is derived shall not be included in "invested capital": (a) Gains or profits from transactions entered into for profit, but which are isolated, incidental, or so infrequent as not to constitute an occupation, and (b) the income from property arising merely from its ownership, including interest, rent, and similar income from investments except in those cases in which the management of such investments really constitutes a trade or business.

Article 14 of regulations 41, as amended by treasury decision 3017, reads in part as follows:

A. Trades or businesses having no invested capital or not more than a nominal capital, including, in the case of individuals, occupations in which they receive salaries, wages, fees, or other compensations; and

B. Trades or businesses having more than a nominal capital.

In the case of a corporation or partnership, all the trades and businesses in which it is engaged shall be treated as a single trade or business (as provided in section 201), and all its income from whatever source derived shall be deemed to be received from such trade or business, and if in such trade or business, considered as a unit, such corporation or partnership employs more than a nominal capital (whether invested, borrowed, or of any other character), it will not be entitled to be assessed under the provisions of section 209.

Inasmuch as all the trades or businesses in which a corporation or partnership is engaged are treated as one, a corporation or a partnership shall be allowed either the deduction provided for in section 203 or the deduction provided for in section 209 (depending on the character of its trade or business), but not both.

In the case of an individual each trade or business in which he is engaged, the net income from which is subject to the excess-profits tax, shall be classified as provided in this article. Each trade or business in class A shall be taxed as provided in article 15, and each trade or business in class B shall be taxed as provided in article 16. If an individual is engaged in two or more trades or businesses, in one of which he employs more than a nominal capital (whether invested, borrowed, or of any other character), he will be assessed under the provisions of section 209 only as to those trades or businesses in which he employs no invested capital or not more than a nominal capital; and as to all others, he will be assessed under section 201.

If an individual has more than one business with invested capital, they will all be regarded as one, and (under the provisions of section 203) only one deduction will be allowed; if he has more than one business with not more than a nominal capital, they will be regarded as one, and (under the provisions of section 209) only one deduction will be allowed. If he has both kinds of businesses, he will be regarded as having two businesses, and there will be two deductions, but not more than two. (See articles 35 and 36, regulations 41.)

Article 35 of regulations 41 deals with the determination of net income of individuals where there is no invested capital or not more than a nominal capital, and provides as follows:

The net income which is derived from a trade or business having no invested capital or not more than a nominal capital, including salaries, wages, fees, or other compensations (constituting net income of class A as defined in article 14) shall be determined for the taxable year by adding the total net income from all such sources (or in the case of a nonresident alien in

dividual the total net income from all such sources within the United States) as reported for income tax purposes for the same year.

The inquiry here presented for consideration is whether an individual taxpayer engaged in two businesses: (1) Requiring invested capital and (2) requiring no invested capital or not more than a nominal capital, may deduct losses sustained in either from profits derived from the other. It has been consistently held that an individual may be engaged in more than one business, and even though such businesses may be closely related the losses in one may not be deducted from the profits of the other unless both businesses are taxable under the same provisions of the law.

In the instant case submitted with request for advice, it appears that A was engaged in two businesses during 1917; that these businesses may have been closely related and that from one he received a salary and from the other, in which he was trading on his own account with capital, he sustained a considerable loss. If he had shown a profit from both businesses there can be no question but that the income-tax unit would not have permitted the consolidation of such profits for the purpose of computing the tax, for the reason that the income derived from one business was clearly taxable under the provisions of section 209, and had there been income from the other business it would have clearly been taxable under the provisions of section 201. This being true, there is no sound argument why the losses sustained in business by A trading on his own account with capital may be deducted from the salary received for services rendered to a partnership of which he was a member.

In a prior committee recommendation it was held that a member of a banking firm was subject to excess-profits taxes on certain commissions received in 1917 from the sale of certain coal properties which were owned by a corporation of which the member of the firm owned a considerable part of the capital stock. It was there held that the commissions grew out of a transaction which was made possible through his banking connections and through his ownership of stock in the coal company. Had the amount received been profits on the sale of something which the individual member of the banking firm owned, such profits would not have been subject to the excess-profits tax under the provisions of section 209 but would have been subject to such tax under the provisions of section 201, provided the member of the banking firm devoted sufficient time and attention to the deal to constitute a trade or business.

Under the foregoing quoted provisions of the regulations the committee finds that A is engaged in two businesses: (1) As a member of a partnership from which he received a salary and (2) trading on the Y exchange on his own account with capital out of which the losses in question arose. If under the law and regulations the income from both businesses could not be combined for the purpose of computing excess-profits tax, it is thought that since there was a loss in one of the businesses in which the taxpayer was engaged, such loss may not properly be deducted from income clearly taxable under the provisions of a separate and distinct section of the statute.

Students' Department

EDITED BY H. A. FINNEY

The examination questions of the American Institute of Accountants are now used by thirty-two state C. P. A. boards as well as by the institute. Readers of THE JOURNAL OF ACCOUNTANCY who were candidates in the November examinations conducted by these boards or by the institute are. therefore, already familiar with the problems. These solutions, it should be understood, merely represent the opinion of the editor of this department and are not official solutions by the institute.

EXAMINATION IN ACCOUNTING THEORY AND PRACTICE PART I

November 16, 1920, 1 P. M. to 6 P. M.

Answer questions 1 and 2 and any three other questions.