Academic journal article Accounting Historians Journal

The AIA's Special Bulletin Series and Its Early Guidance on Tax Issues Related to Depreciation, 1920-1929

Academic journal article Accounting Historians Journal

The AIA's Special Bulletin Series and Its Early Guidance on Tax Issues Related to Depreciation, 1920-1929

Article excerpt

ABSTRACT: When the final state ratified the 16th Amendment to the U.S. Constitution in 1913, levying taxes directly on individual incomes became a reality and opened up expanded taxation on businesses. For example, the supporting legislation allowed for the deduction of wear and tear on equipment as a business expense based on the service lives. Unfortunately for the tax preparer, there was no clear meaning of wear and tear and the interpretation of the of service lives in the legislation. With little or no guidance to CPA tax preparers and their clients, it was inevitable that Bureau of Internal Revenue examiners would question returns with such deductions. To help its members to understand better, the new law and the ever-increasing complexity of accounting issues related to it, the American Institute of Accountants began to publish the Special Bulletin Series in January 1920. Many of the answers present in the Bulletins between 1920 and 1929 solved accounting and tax problems in ways still used nearly a century later.


Following the ratification of the 16th amendment, Congress passed the Revenue Act of 1913 providing for the taxation of individual income earned from a wide variety of sources. (1) In addition, the Act noted that the income for tax purposes was "subject only to such exemptions and deductions as are hereinafter allowed." Similar to the 1909 Tariff Act that taxed corporate income, the Revenue Act of 1913 allowed a deduction for an, "[a]mount representing a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment in the business," for the determination of taxable income. Although common in the 21st century, the basic concept of depreciation was new to most accountants of that day.

As America's fledgling accounting profession began completing tax returns for clients, many questions arose as to the law's application, especially in the areas of asset lives, valuation, and allowable deductions. Accountants looked to their primary professional organization, the American Institute of Accountants (AIA), (2) for guidance. In 1920, the Institute's library began to publish a series of Special Bulletins to answer questions about the new tax law, depreciation, and other accounting issues of the day.

This paper will discuss issues related to the application of depreciation after the ratification of the 16th amendment and the guidance provided by the Bulletins that helped the accounting profession to interpret the increasingly complex tax policy. (3) In addition to the application of the law in the early 1920s, the paper will use modern tax law to compare practices from the 1920s and help identify the origin of current practice. The paper will concentrate on three issues related to the application of depreciation. First, there were questions related to the appropriate amount or rate of depreciation allowed for various types or classifications of types of assets and their service lives. The second area related to the recognition of asset obsolescence versus asset depreciation. Finally, AIA members asked how to handle allowed and allowable depreciation as it dealt with Bureau of Internal Revenue rulings and audits.


Although there are many economic articles in the genre, (4) since the early 1970s there has been a dearth of research published on the history of income tax in the United States and its relationship to financial accounting. Within this limited literature review, there appears to be two streams of research. The first stream of research concentrates more on tax law and its nature. Foran and Gray [1988], discussed the development of unitary tax laws just prior to the 16th Amendment where a state enacted laws to tax businesses that did not reside within the state, but owned property or did business within the state's jurisdiction. In 1989, Roberts and Samson dealt with the history, and nature, of progressive taxation in the United States. …

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