New-York tribune., 1910-02-27
FEDERAL TAX LAW
EFFECT ON REALTY.
Mortgage Interest Nay Be De.
duced from Gross Income.

The Allied Real Estate Interests has re-
ceiyed a copy OF Attorney General Wicker
sham's ruling regarding the operation Oh
the federal corporation tax upon real es-
tate corporations 1t Is to the effect that
where realty corporations have taken title
to real property subject to mortgage, but
have not assumed the indebtedness secured
thereby, 1t may deduct from It's gross re-
ce,pts the entire interest on such Indebted
ness.
The ruling is as follows:
"Tbe so-caIIed corporation tax law (act
Of August s. 1909, Section 3S) imposes spe-
ciaI excise tax upon the corporations, joint
stock companies and associations and IN
surance companies therein described. TO be
measured by i per cent upon the net IN
come. which net income. by the second
paragraph. 10 to be ascertained by deduct
inx from the gross amount of such income
received within the year from all sources
certain specified items. among which only
the two following are necessary to be con-
sidered az bearing on the present inquiry,
viz:
''First-Ail the ordinary and necessary
expenses actually paid within the year out
of the income In the maintenance and oper-
alton Of It's business and properties, includ-
Ing all charges, such as rentals or fran
chtse payments. required to be made as
condition to the continued use or possession
OF property.
"Third-Interest actually paid within tho
year on its bonded or other Indebtedness to
an amount Of such bonded and otner IN
debtedness not exceeding the paid-up capi-
tai stock Of such corporation, joint STOCK
company or association, or insurance COM
c<o at close of the wear.
and in the case Of bank. banking asso-
citation or trust company, all interest act
ually paid by it within the year on de-
posits."
It Is manifest that with respect to inter-
est on Its" bonded or other Indebtedness
the right Of deduction and the limitation OF
that right must be found in the third para
graph above quoted. and that, however
burdensome such limitation may appear to
be to the particular companies anecteo
thereby, it is nevertheless very clearly ex-
pressed by the act of Congress. 1t surely
cannot be assumed that Congress, having
specifically set limitation to the amount
of interest upon the Indebtedness of a cor
puration which may be deductible from It's
gross income In reaching the measure OF
the tax under this law, left the way open
in the first clause to eliminate the Im1ta-
ton imposed Dy lnc SO tllol IL III ahS
of the cases suggested by the Allied Real
Estate Interests the Indebtedness secured
by mortgage upon the properties acquired
by the respective corporations shall have
been assumed by them and has thereby be-
come their Indebtedness, interest on such
Indebtedness can be deducted only to an
amount not exceeding the interest on the
paid-up capital stock OF the respective cor
porations. On the other hand. cases arc
suggested in the communication submitted
where q realty corporation takes title to
real property subject to mortgage, but
does not assume the Indebtedness secured
thereby Under such circumstances, as is
stated In the brief. ''such mortgage is in no
sense its Indebtedness; the thing itself.
l. e.. the real property, and not the cor
poration, is liable for the mortgage and in
terest thereon; but in order that the cor
poration may maintain keep possession
of or not be ousted therefrom, the interest
must be paid
This would not be payment by the cor
poration owning the property subject to
such lien or its own indebtedness. because
the Indebtedness is not its bonded or
other Indebtedness, but an Indebtedness Gre
ated by a third party and charged as a