separate accounts, or timber owned on February 28, 1913, and the timber purchased since that date in several distinct transactions may be kept in several distinct accounts, or individual tree species or groups of tree species may be carried in distinct accounts, or special timber products may be carried in distinct accounts, or blocks may be divided into two or more accounts based on the character of the timber or its accessibility, or scattered tracts may be included in separate accounts. If such a division is made, a proper portion of the total value or cost, as the case may be, shall be allocated to each

account.

The timber accounts mentioned in the preceding paragraph shall not include any part of the value or cost, as the case may be, of the land. In a manner similar to that prescribed in the foregoing part of this section the land in a given "block" may be carried in a single land account or may be divided into two or more accounts on the basis of its character or accessibility. When such a division is made, a proper portion of the total value or cost, as the case may be, shall be allocated to each account.

The total value or total cost, as the case may be, of land and timber shall be equitably allocated to the timber and land accounts, respectively.

Each of the several land and timber accounts carried on the books of the taxpayer shall be definitely described as to their location on the ground either by maps or by legal descriptions.

For good and substantial reasons satisfactory to the Commissioner, or as required by the Commissioner, the timber or the land accounts may be readjusted by dividing individual accounts, by combining two or more accounts, or by dividing and recombining accounts.

3.23 (m)-28 Timber depletion and depreciation accounts on books. Every taxpayer claiming or expecting to claim a deduction for depletion or depreciation of timber property (including plants, improvements, and equipment used in connection therewith) shall keep accurate ledger accounts in which shall be recorded the cost or other basis provided by section 113 (a) of the Act, as the case may be, of the property, and the plants, improvements, and equipment, together with subsequent allowable capital additions to each account and all of the other adjustments provided by section 113 (b) of the Act and §§ 3.113 (a) (14)-1, 3.113 (b)−1, 3.113 (b)−2.

In such accounts there shall be set up separately the quantity of timber, the quantity of land, and the quantity of other resources, if any, and a proper part of the total cost or value shall be allocated to each. (See § 3.23 (m)-27.) These accounts shall be credited with the amount of the depreciation and depletion deductions computed in accordance with § 3.23 (m)-20 each year, or the amount of the depreciation and depletion shall be credited to depreciation and depletion reserve accounts, to the end that when the sum of the credits for depreciation and depletion equals the cost or other basis of the property, plus subsequent allowable capital additions, no further deduction for depreciation and depletion will be allowed.**

**For statutory and source citations, see note to §3.1-1.

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[SEC. 23. DEDUCTIONS FROM GROSS INCOME.]

[In computing net income there shall be allowed as deductions:] (o) Charitable and other contributions. In the case of an individual, contributions or gifts made within the taxable year to or for the use of:

(1) the United States, any State, Territory, or any political subdivision thereof, or the District of Columbia, for exclusively public purposes;

(2) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation;

(3) the special fund for vocational rehabilitation authorized by section 12 of the World War Veterans' Act, 1924;

(4) posts or organizations of war veterans, or auxiliary units or societies of any such posts or organizations, if such posts, organizations, units, or societies are organized in the United States or any of its possessions, and if no part of their net earnings inures to the benefit of any private shareholder or individual; or

(5) a fraternal society, order, or association, operating under the lodge system, but only if such contributions or gifts are to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals;

to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer's net income as computed without the benefit of this subsection. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. (For unlimited deduction if contributions and gifts exceed 90 per centum of the net income, see section 120.)

3.23 (0)-1 Contributions or gifts by individuals. In connection with claims for deductions under section 23 (o) of the Act, there shall be stated on returns of income the name and address of each organization to which a contribution or gift was made and the approximate date and the amount of the contribution or gift in each case. Claims for deductions under section 23 (o) of the Act must be substantiated, when required by the Commissioner, by a statement from the organization to which the contribution or gift was made showing the name and address of the contributor or donor, the amount of the contribution or gift and the date it was made, and by such other information as the Commissioner may deem necessary. If the contribution or gift is other than money, the basis for calculation of the amount thereof shall be the fair market value of the property at the time of the contribution or gift. No part of the contributions or gifts made by a partnership may be claimed as a deduction in the personal return of a partner. As to deduction of contributions or gifts by partnerships, see section 183 of the Act. In the case of a nonresident alien individual or a citizen of the United States entitled to the benefits of section 251 of the Act, see sections 213 (c) and 251 of the Act. This section does not apply to gifts by estates and trusts (see section 162 of the Act). For contributions or gifts by corporations see § 3.23 (q)-1.

Whether a husband and wife make a joint return or separate returns, the 15 percent limitation on the deduction for contributions or gifts is based on the separate net income (computed without regard to such contributions or gifts) of the spouse making the contributions or gifts. (See § 3.51-1.)

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A donation made by an individual to an organization other than one referred to in section 23 (o) of the Act which bears a direct relationship to his business and is made with a reasonable expectation of a financial return commensurate with the amount of the donation may constitute an allowable deduction as business expense.*

[SEC. 23. DEDUCTIONS FROM GROSS INCOME.]

[In computing net income there shall be allowed as deductions:]

(p) Pension trusts. An employer establishing or maintaining a pension trust to provide for the payment of reasonable pensions to his employees (if such trust is exempt from tax under section 165, relating to trusts created for the exclusive benefit of employees) shall be allowed as a deduction (in addition to the contributions to such trust during the taxable year to cover the pension liability accruing during the year, allowed as a deduction under subsection (a) of this section) a reasonable amount transferred or paid into such trust during the taxable year in excess of such contributions, but only if such amount (1) has not theretofore been allowable as a deduction, and (2) is apportioned in equal parts over a period of ten consecutive years beginning with the year in which the transfer or payment is made. Any deduction allowable under section 23 (q) of the Revenue Act of 1928 or the Revenue Act of 1932 or the Revenue Act of 1934 which under such section was apportioned to any taxable year beginning after December 31, 1935, shall be allowed as a deduction in the years to which so apportioned to the extent allowable under such section if it had remained in force with respect to such year.

3.23 (p)-1 Payments to employees' pension trusts. An employer claiming the benefit of the deduction allowable by section 23 (p) of the Act must show himself entitled to such deduction. In no case will any amount be allowed as a deduction for the taxable year under section 23 (p) of the Act and this section which was allowable as a deduction from gross income for any prior year. An employer who adopts or has adopted a reasonable pension plan, actuarially sound, and who establishes, or has established, and maintains a pension trust for the payment of reasonable pensions to his employees (if the trust is exempt from tax under section 165 of the Act, relating to trusts created for the exclusive benefit of employees) shall be allowed to deduct from gross income reasonable amounts paid to such trust, in accordance with the pension plan (including any reasonable amendment thereof), as follows:

(a) If the plan contemplates the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pension payments, then (1) amounts paid to the trust during the taxable year representing the pension liability applicable to such year, determined in accordance with the plan, shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the pension liability applicable to the years prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the 9 succeeding taxable years;

(b) If the plan does not contemplate the payment to the trust, in advance of the time when pensions are granted, of amounts to provide for future pension payments, then (1) amounts paid to the trust during the taxable year representing the present value of the expected future payments in respect of pensions granted to employees retired

*For statutory and source citations, see note to §3.1-1.

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[153]

during the taxable year shall be allowed as a deduction for such year as an ordinary and necessary business expense, and in addition (2) one-tenth of a reasonable amount transferred or paid to the trust during the taxable year to cover in whole or in part the present value of the expected future payments in respect of pensions granted to employees retired prior to the taxable year, or so transferred or paid to place the trust on a sound financial basis, shall be allowed as a deduction for the taxable year and for each of the 9 succeeding taxable years.

The right to a deduction under section 23 (p) of the Act will be recognized in cases where the pension trust may not be perpetual, provided the trust is of such a character as to evidence good faith on the part of the employer actually to pay the amounts placed in trust for employees' pension purposes. However, should any portion of the funds of a pension trust revert to the possession, ownership, or control of the employer by reason of the termination of the trust or otherwise, such amount (except to the extent that it represents a payment to the pension trust made by the employer in accordance with the pension plan and pursuant to (a) or (b) of this section, and not theretofore allowed as a deduction to the employer) shall be returned as income by the employer for the taxable year in which it so reverts, unless prior to the close of such year it shall again be placed in trust for the benefit of employees under provisions satisfactory to the Commissioner.

Reasonable payments made by an employer during the taxable year directly to pensioners on account of pensions in respect of which no payment has been made to a pension trust shall be allowed as a deduction from gross income for such year as an ordinary and necessary business expense.

Devices of whatever nature for withdrawing profits or paying salaries to officers are not pension trusts within the meaning of the Act and this section.

A pension trust maintained by affiliated corporations for the exclusive benefit of their employees is within the scope of sections 23 (p) and 165 of the Act.

The application of section 23 (p) of the Act may be illustrated by the following examples:

Examples: (1) Accruals in advance of pensions granted. In 1936 the M Company adopted a reasonable pension plan and established a pension trust which was exempt from tax under section 165 of the Act. During the year and upon the basis of an actuarial computation the company paid $8,950,000 to the trust. At the time of the payment and in accordance with the pension plan of the company, the pension liability applicable to the years prior to 1936, in respect of employees then on the retired roll, for pensions to be paid in the future, was $2,000,000; the pension liability applicable to the years prior to 1936, in respect of employees on the active roll, for pensions to be paid in the future, was $6,500,000; the payment required to cover the pension liability applicable to the taxable year 1936 for pensions to be paid in the future, was $450,000. The amount paid to

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retired employees of the M Company by the pension trust as pensions during 1936 was $360,000.

The deduction for 1936 is computed as follows:

(i) Entire amount paid to pension trust representing the pension liability applicable to 1936 for pensions to be paid in the future-- $450,000

(ii) One-tenth of $8,500,000, amount transferred to pension trust to cover the pension liability applicable to the years prior to 1936, in respect of employees on either the retired roll or the active roll, for pensions to be paid in the future_---

Total deduction____

850,000

1,300,000

The amount of $360,000 paid to pensioners is not allowable as a deduction for income tax purposes since it was paid by the pension trust and not by the M Company.

(2) Accruals on basis of pensions granted. In 1936 the N Company adopted a reasonable pension plan and established a pension trust which was exempt from tax under section 165 of the Act. During the year and upon the basis of an actuarial computation the company paid $2,300,000 to the trust. At the time of the payment the present value of the expected future payments in respect of pensions granted to employees retired prior to 1936 was $2,000,000; the present value of the expected future payments in respect of pensions granted to employees retired during 1936 was $300,000. The amount paid to retired employees of the N Company by the pension trust as pensions during 1936 was $360,000.

The deduction for 1936 is computed as follows:

(1) Entire amount paid to the pension trust representing the present value of the expected future payments in respect of pensions granted to employees retired during 1936-..

(ii) One-tenth of $2,000,000, the amount transferred to the pension trust to cover the present value of the expected future payments in respect of pensions granted to employees retired prior to 1936.

Total deduction___

$300,000

200, 000

500, 000

The amount of $360,000 paid to pensioners is not allowable as a deduction for income tax purposes, since it was paid by the pension trust and not by the N Company.*t [As amended by T.D. 4792, Jan. 18, 1938, 3 F.R. 193]

3.23 (p)-2 Information to be furnished by employer claiming deductions. (a) If a deduction from gross income is claimed under section 23 (p) of the Act in an income return or in a claim for refund on account of payments to an employee's pension trust, the employer shall file with such return or claim for refund a statement describing the pension trust plan, including the basis and method of its operation, together with a copy of the trust indenture, with any amendments thereto, and other documents constituting a part of the plan. If all employees are not included as beneficiaries of the pension trust, a statement showing what classes of employees are excluded, and the general nature of their respective employment and duties, together with the reason why all employees are not covered by the pension trust plan, shall likewise be filed. If such statements have once been filed and if the return contains a statement when and where

*†For statutory and source citations, see note to §3.1-1.

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