Amortization

“ The amortization, both by the deduction of 1 per cent., and by the sums remaining available from the Moukabalah and the budget surpluses, is to be conducted by means of public purchases so long as it will be possible to effect these purchases below the price of 75.
In the event that during the period of the Moukabalah purchases cannot be made at a rate below 75, the amortization is to take place by drawings at the rate of 75. As soon as the increments of revenue shall produce a budget surplus of 150,000l. per annum, the amortization will take place at the rate of 80. ”

“ The distribution of bond discount over the interest payments made during the life of a bond issue is termed “amortization” of the discount. Scientifically, amortization is worked out on a compound interest basis, discussion and explanation of which are found on page 269, Volume II. Here, all we are concerned with is the principle involved and for the sake of simplicity the amortization is prorated evenly over the 40 interest periods, resulting in an additional interest charge of $250 each period. The record is therefore:
3. ”

“ The treatment of premiums paid on long-term investments and of discounts arising through the marketing of long-term obligations at a figure below par is reserved for consideration in the next chapter where their relation to the interest account and the problem of amortization will be considered. ”

“ By providing that amortization could be taken with reference to the 'amount payable on maturity or on earlier call date' (emphasis added) , Congress recognized that bonds are generally subject to redemption by the issuer prior to their maturity. In electing to allow amortization with reference to the period the bonds might actually be outstanding, Congress, through the words to which we have lent emphasis, provided that a bondholder could amortize bond premium with reference to any date named in the indenture at which the bond might be called. ”

“ No mistake is more frequent than the mistake made in underestimating the length of time needed to buy a farm and to pay for it under the amortization plan—that is to say, by yearly installments, which include, with interest, a portion of the capital. Ireland affords a good illustration. As one great Land Act has followed another, the length of time for the payment of the farm has been increased, until now the amortization period is about sixty-eight years. ”

“ The general practice of corporations in the past has been to ignore any reserve to cover depreciation and obsolescence. If, at the beginning of operations of any property, such a sum should be annually set aside out of earnings as should, when invested as a sinking fund, maintain the integrity of the investment, then this amortization fund at any period, plus the depreciated value of the physical property, should equal the amount of the total capital actually invested in the property. ”

“ The improvement can be so advanced with borrowed capital, and amortization over a period of 20 years will hold the annual revenue requirement, less interest, to the same amounts that would be required for a protracted improvement. ”

“ To remedy this inequity, the Treasury recommendd that amortization of premium be permitted in the case of taxable bonds, and that the basis for capital gain or loss for all bonds be adjusted by the amount of deduction allowable for taxables and disallowable for tax-exempts. ”

“ You are the equitable or beneficial owner of the property; and
(2) The basis claimed for the property should be recognized as bona fide for tax purposes; and
(3) The amount claimed represents a reasonable allowance for amortization expense.
Amortization of license granted by Welbehagen B.V............... $916,653 Amortization graduate list ..................................... 57,925 ________ Total disallowed $974,578 In the notice of deficiency the claimed depreciation for the fiscal year of est, a.e.c. ”

“ Although the record is not free from ambiguity, we take the Court of Appeals to have based its decision on the ground that the petitioner's amortization claims derived solely from net operating loss deductions carried forward from prior years, and that no additional amortization deductions for 1956 and 1957 were sought. Since we find that the petitioner adequately presented its amortization claims for 1956 and 1957, we vacate the judgment of the Court of Appeals and remand the case to that court for the consideration of those claims, without intimation of any kind as to their merit. ”

“ Should there be default in payments on the dates fixed of all or part of the half yearly interest or amortization payments, the Contractors shall have the right to exercise on behalf of the Bondholders all the rights of action which accrue to them from the special mortgage. ”

“ For the balance sheets of savings banks, insurance companies, and other investment concerns, scientific valuation of bonds with the attendant amortization up and down of discounts and premiums is not only theoretically correct but practical considerations, in a market such as prevails in a time of marked but temporary depression, demand that it, or some approximation to it, be used. ”

“ But observe, if the able person makes £100,000, and leaves that to his son, who, being but an ordinary gentleman, can get only from two and a half to four per cent on it, that revenue is pure interest on capital and in no sense whatever rent of ability. [16]
By "amortization" is meant the method of paying a debt by regular semi-annual or annual installments. To illustrate:
Suppose a farmer gives a mortgage on his farm of $1000, with interest at 5 per cent. In addition to the interest, he agrees to pay 2 per cent a year on the principal. ”

“ In making a computation of intangible values, it is certainly proper to consider the income account as averaged over a period of years, to avoid violent fluctuations of gross or net earnings, and a depreciation reserve should be determined for such years, as it cannot be claimed that, unless such an amortization fund is earned, in addition to other operating expenses and taxes, there is any non-physical value.
Professor Adams covered the depreciation in the Michigan work in the 4% annuity which was deducted before non-physical values were computed. ”

“ When in any crop the official average price reaches 2c or more per pound, 5 per cent. of the value of the sugar produced in that crop and pertaining to the mill, that is, excluding the sugar necessary to pay the price of the cane ground, shall be applied as a special amortization for the year in question, and 10 per cent. additional instead of the 5 per cent. when the price exceeds 2.50c, without such special amortizations, eliminating the obligation of the exactable amortizations that the debtor must pay. ”

“ The term 'general call price' is used to designate the price at which the issuer may freely and unconditionally redeem all or any portion of the outstanding bonds from its general funds. The lower, 'special call price,' is the amount the issuer would pay if the bonds were redeemed with cash from certain specially designated funds. [3]
In computing net income, the 1939 Code permits a taxpayer to deduct, through amortization, the premium he has paid in purchasing corporate bonds. ”

“ The deficiency notice with respect to the depreciation schedule for the fiscal year of est, a.e.c. ended June 30, 1981, which is the year involved in docket No. 3014-85, shows adjustments disallowing a claimed interest deduction, disallowing amortization of $974,578, and determining other income by disallowing a claimed Hopi partnership loss of $773,762, and "wardrobe" of $3,111. ”

“ At least where the taxpayer's books are kept upon the accrual basis, its final disbursement may be anticipated by amortization and the amortized amount deducted annually from his gross income.
2. Our decision in Old Colony Railroad Co. v. Commissioner, supra, does not require a different conclusion because the commissions in the present case were allowed before 1913. It was recognized in that case that premiums on a bond issue received after the Sixteenth Amendment might be prorated over the period of the life of the bonds and taxed annually as income during this period. ”

“ Mortgage Financing.—One of the most desirable types of financing is through a financially sound building and loan association whereby the interest and the amortization of the mortgage are taken care of through monthly payments. Such building and loan mortgages are available in most localities throughout the country. A series of monthly payments can be made which will take care of the interest payments and the mortgage itself so that within a period of from ten to twelve years, in most cases, the mortgage is amortized and the owner has the advantages of a home that is free of encumbrance. ”

“ I should in the meantime advance money for the plots, and the business should gradually redeem them with its surplus. That is quite as practical as dividing the surplus among the workmen, and we thereby create values for the enterprise. Talking of surplus—you’ve worked well, Pelle! I made an estimate of it last night and found it’s already about ten thousand (£555) this year. But to return to what we were talking about—mortgage loans are generally able to cover the building expenses, and with amortization the whole thing is unencumbered after some years have passed. ”

“ When it is found, and after making allowance for probable salvage value at the time of retirement, it is a mere matter of mathematics to compute under the straight-line method the rate of annual accrual.
This rate when applied to the cost of the depreciable property fixes two things: (1) The amount of the depreciation accrual to deduct from gross, before determining net, income. For this purpose a high rate works in favor of the taxpayer for any given year. (2) It also determines the amount by which the cost base must be reduced for application of depreciation rates the following year. ”

“ For example, when the cost of placing the asset in efficient condition for operation is less than, say, $100, it is charged as repair cost and therefore does not increase the book value of the asset. If the cost exceeds $100, an analysis is made to determine what portion of it, if any, increases the value of the asset. The amount of the betterment is of course a charge to the asset account, while the rest of it is a charge to some expense account. ”

“ And it is very clear, from a reading of § 38, that the phrase 'entire net income,' as used in its first paragraph, has no other meaning than that which is particularly set forth in the second paragraph, which declares, in terms, how 'such net income shall be ascertained.' It may well be that mortgage interest may, under special circumstances, be treated as among the 'ordinary and necessary expenses,' or as included among the charges 'required to be made as a condition to the continued use or possession of property.' See 28 Ops. ”

“ The determination of the value of the elements of cost, the [Pg 98] proper differentiation between capital and revenue charges, and finally the calculation of the amount of depreciation necessary to the valuation of fixed assets—all are estimates. It is true, they are estimates based on experience, but, from their nature and the influence of local conditions in a given case, no universally applicable law of experience can be formulated. It is safe to say that two men would seldom, if ever, arrive at the same estimate of the values of given assets. ”

“ And the same must be said of the value at which they have reckoned the short annuity of a half per cent. for ten years annexed to the new 4 per cents. In forming the scheme for the last loan this annuity was, I have said, estimated at 81⁄10 years purchase, agreeably to its real value, supposing the payments yearly, the first payment to be made at the distance of a year, and money improved at 4 per cent. compound interest. But it has in general been sold at about 71⁄2 years purchase; which is less than its value, supposing money improved at 51⁄2 per cent. compound interest. ”

“ And the promise to pay interest or rent, or the expectancy of dividends upon stock, the amount of such payments, the past and prospective regularity of the payments, and other elements bearing upon the expectation of the receipt of income affect the value of any income producing property. But these elements are not separately valued in appraising the worth of the asset at any given time. It is the uniform practice to value the asset as an entirety, taking into consideration all the elements that go to give it value in the market. ”

“ In case of default and consequent foreclosure of the mortgage, extra payment is made to the trustee covering all services incident to the foreclosure.
For the disbursement of sinking funds, interest, or coupons, the temporary use of the money may be considered adequate compensation, if the amount involved is large. A commission on the sum distributed or a fixed amount is charged when acting as fiscal agent, apart from duties in other capacities. For acting as registrar or as transfer agent it is usual to make a fixed charge per annum, based on the amount of labor involved. ”

“ Interest on borrowed money should not be included. The charges to operating expense on account of repairs should be adequate, and care must be taken to see that charges to the repair accounts do not show a sudden falling off toward the close of the period under review. The reserve for depreciation should be credited with the proper amounts. Sales, effected for a subsequent period, are not to be considered in the accounts of the current period as this would tend to inflate the profits. Shipments made to branch offices or on consignment account should not be regarded as sales. ”