FOREST TAXATION 153 



aggregate cost at time of sale. The compensation for such 

 investment is the anticipated dividends which will be paid to 

 the stockholders out of the profits when the lands are sold. The 

 addition of the earning power of the money invested to the orig- 

 inal cost of the lands would operate as a deduction of the divi- 

 dend from gross income. Dividends are not deductible, either 

 directly or indirectly. Interest purported to accrue on invest- 

 ments of this character, made by stockholders, cannot be added 

 to the initial cost of the assets for the purpose of fixing a cost 

 price as the basis for determining the profits accruing to the 

 corporation when such assets are sold." 



Since these regulations state previously that "the cost of 

 assets (land and timber) for the purpose of determining the 

 amount of income resulting from a sale is held to mean the pur- 

 chase price of the lands plus the taxes and other carrying charges 

 paid thereon prior to the sale," it is clearly the position of the 

 government that interest on such carrying charges will not be 

 permitted as a deduction from income. The national income tax 

 on timberlands would, therefore, be based upon the theory of 

 forest rent, ignoring interest, in spite of the fact that this income 

 is deferred until some future year as in case A, and not earned 

 annually as in case C. 



The tax would thus take the same per cent of income, whether 

 this income were received in six months or sixty years. For a 

 speculative business, where profits are not dependent on a definite 

 period of time, this method of taxing income may not act as a 

 deterrent. But with the production of forest crops, the announce- 

 ment in advance that "no deductions from the income tax will 

 be permitted for interest on future costs incurred in advance 

 of income," would have a direct influence on future profits and 

 act to prevent the undertaking. 



The controversy as to whether interest is a cost or an income 

 as affecting taxation either of income or capital values cannot 

 be settled, but may be dismissed, with this summary; past 

 interest accrued on the capital invested by the proprietor or 

 owner is not an actual cost, but merely a method of gauging 

 profits and will usually be neglected in taxation. But future 



