A similar decision was handed down in Georgia Railway & Power Co. et al. v. Railroad Commission of Georgia et al. Deductions of federal and state taxes in computing employees' bonus.-The author's comments on this subject will be found on pages 519-521 hereof. * 262 U. S. 625, 67 L. Ed. 1144, 43 Sup. Ct. 680. Preceding chapters discuss the deductions for expenses, interest and taxes. The concept of capital gains and losses, incorporated into the income tax laws in 1921, is treated in Chapter XXVI. It remains to discuss the deductions embraced within the comprehensive term "losses." It is desirable to subdivide this subject and to devote separate chapters to the special items, namely, so-called "net losses," which may be offset against income in subsequent years, losses due to bad debts, depreciation, obsolescence, depletion and gifts. Consequently the subject matter of this chapter is a residuum consisting of the losses due to general and miscellaneous causes, such as See Chapters XXXIX to XLIV fluctuation in market values, disasters and accidents of various kinds, dishonesty, faulty judgment, etc. Until the 1918 act became effective, individuals were subject to a very definite restriction in that losses incurred by them in transactions entered into for profit outside their regular trade or business were deductible only to a limited extent. Neither the 1921 nor the 1924 laws materially changed the 1918 law except in respect of "wash sales." The Treasury at one time restricted the word "profits" to mean only those gains derived from the sale or other disposition of the investment itself. The Solicitor broadened this definition in a ruling, of which the following is the conclusion: RULING. It is therefore held that all returns-e.g., dividends, rents, interest, surplus from sales, etc.-actually realized within the taxable year from subordinate endeavors entered into for profit are "profits" within the meaning of the fifth deduction, sec. 5 (a), Revenue Act of 1916; and that losses actually sustained within the same taxable year by reason of similar transactions, closed and completed, may be offset to the extent of such realized profits. (C. B. 4, page 163; L. O. 1061.) 3 The 1918 law included certain "relief" provisions designed to prevent hardship during the period following the war from possible violent changes in inventory values. The administration of this section by the Treasury restricted the relief to far less than Congress intended when it enacted the 1918 law. The 1921 and 1924 laws contain no provision similar to the inventory loss provision contained in sections 214 (a-12) and 234 (a-14) of the 1918 law, but do contain "net loss" provisions similar in principle to section 204 in the 1918 law, which permit the application of the loss of one year against the net income of a later year. In their application, however, the "net loss" provisions in the later laws differ materially from the corresponding section of the 1918 law. They are discussed in Chapter XXXIX. 4 Losses Which Are Deductible In a broad sense there are no limitations, under the 1924 law, upon the right of individuals and corporations to deduct all losses [Former Procedure] Under 1917 and former laws, see Income Tax Procedure, 1924 and earlier editions. rations. 4 Section 214 (a-12) for individuals, and section 234 (a-14) for corpo- sustained during the taxable year, whether or not incurred in business or trade. There are certain requirements, such as those regarding transactions entered into for profit, "wash sales," etc., but in general all losses may be deducted. The restrictions are fully discussed in the following pages. Individuals. LAW. Section 214. (a) That in computing net income there shall be allowed as deductions: (5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; but in the case of a nonresident alien individual only if the profit, if such transaction had resulted in a profit, would be taxable under this title. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property then only a proportionate part of the loss shall be disallowed; (6) Losses sustained during the taxable year of property not connected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. The basis for determining the amount of the deduction under this paragraph, or paragraph (4) or (5), shall be the same as is provided in section 204 for determining the gain or loss from the sale or other disposition of property; Corporations. LAW. Section 234. (a) (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise. No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of its business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed. The basis for determining the amount of the deduction for losses sustained shall be the same as is provided in section 204 for determining the gain or loss from the sale or other disposition of property. Losses, to be allowed as deductions, must meet the provisions of the law that they have been actually "sustained"-a reasonable requirement. Most concerns charge off or provide reserves for losses as and when losses occur and the items to be deducted can be taken directly from the books. In the case of individuals who keep no books, more difficulty is experienced. In discussing the phrase "losses sustained" the regulations state that this condition "must usually be evidenced by closed and completed transactions." 5 This, however, does not preclude the use of inventories for the purpose of ascertaining gains or losses. The privilege of using inventories, long permitted to business men generally in the case of merchandise, was not extended to dealers in securities until 1918 when it was given this broader application by an opinion of the Attorney General (31 Op. A. G. 301; T. D. 2744) who advised that the Supreme Court in a case (Doyle v. Mitchell Brothers Company, 247 U. S. 179, 62 L. Ed. 1054, 38 Sup. Ct. 467) under the 1909 law sanctioned the practice. For a full discussion of inventories the reader is referred to Chapter XXI. If an individual is engaged in business on his own account or as a partner, and the year's operations result in a net loss, the amount of such loss is an allowable deduction from income from other sources in a tax return. The Treasury has ruled that a partnership which holds all the stock of a corporation and provides funds to liquidate losses incurred by that corporation, may not deduct such payments as losses of the partnership. An individual who turned his business over to a corporation received in exchange capital stock of the corporation. He guaranteed the accounts receivable and it subsequently developed that they were in part uncollectible. Compelled to reimburse the corporation, he deducted the payment as a loss in the year reimbursement was made. Art. 141. The placing of property in escrow, pending payment therefor, does not constitute a closed transaction and the loss thereon is not deductible unless and until the property is delivered or made available to the purchaser. (C. B. II-1, page 91; I. T. 1594.) C. B. 4, page 155; O. D. 795: see also C. B. II-1, page 93; A. R. R. |