113 (b) for determining the gain or loss from the sale or other disposition of property. (h) Loss on wash sales of stock or securities. For disallowance of loss deduction in the case of sales of stock or securities where within thirty days before or after the date of the sale the taxpayer has acquired substantially identical property, see section 118. (1) Net losses.-The special deduction for net losses of a prior year, to the extent provided in section 117. ART. 171. Losses.-Subject to the limitations on losses from sales or exchanges of stocks and bonds provided in section 23 (r) and article 272, losses sustained by individuals during the taxable year and not compensated for by insurance or otherwise are fully deductible, except by nonresident aliens (see section 213 and article 1051), if— (a) Incurred in a taxpayer's trade or business, or (b) Incurred in any transaction entered into for profit. Losses in respect of property not connected with a taxpayer's trade or business sustained by individuals during the taxable year, arising from fires, storms, shipwreck, or other casualty, or theft, and not compensated for by insurance or otherwise are also fully deductible, except by nonresident aliens (see section 213 and article 1051), and except that no such loss is deductible if at the time of the filing of the return of income such loss has been claimed as a deduction for estate tax purposes in the estate tax return. Subject to the limitations on losses from sales or exchanges of stocks and bonds provided in section 23 (r) and article 272, losses sustained by corporations during the taxable year and not compensated for by insurance or otherwise are also fully deductible. Losses must usually be evidenced by closed and completed transactions. The basis for determining the amount of the deduction for losses is the same as is provided in section 113 for determining the gain or loss from the sale or other disposition of property. (See articles 591–606.) Proper adjustment must be made in each case for any expenditure, receipt, loss, or other item properly chargeable to capital account, and for depreciation, obsolescence, amortization, or depletion. (See section 113 (b) and articles 605 and 606.) Moreover, the amount of the loss must be reduced by the amount of any insurance or other compensation received, and by the salvage value, if any, of the property. A loss occasioned by damage to an automobile maintained for pleasure, where such damage results from the faulty driving of the taxpayer or other person operating the automobile, but is not due to the willful act or willful negligence of the taxpayer, is a deductible loss in the computation of net income. Where damage to a taxpayer's automobile results from the faulty driving of the operator of an automobile with which the automobile of the taxpayer collides, the loss occasioned to the taxpayer by such damage is likewise deductible. No loss is realized by the transfer of property by gift or by death. But see section 44 (d) and article 355. A loss on the sale of residential property purchased or constructed by the taxpayer for use as his personal residence and so used by him up to the time of the sale is not deductible. Where, however, property so purchased or constructed is prior to its sale rented or otherwise appropriated to income-producing purposes and is used for such purposes up to the time of its sale, a loss from the sale of the property, computed as provided in section 111 and article 561, is an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was appropriated to income-producing purposes (with proper adjustment for depreciation) over the amount realized from the sale. However, in case the property was so appropriated prior to March 1, 1913, the loss is an allowable deduction in an amount not to exceed the excess of the value of the property at the time it was so appropriated or at March 1, 1913, whichever is greater (with proper adjustment for depreciation), over the amount. realized from the sale. Example: Residential property was purchased by a taxpayer in 1924 for use as his personal residence at a cost of $25,000, of which $15,000 was allocable to the building. The property was so used by the taxpayer until January 1, 1929. From that date to January 1, 1932, when the property was sold, it was rented by the taxpayer. The fair market value of the property at the time it was rented on January 1, 1929, was $22,000. The building had an estimated life of 20 years when the property was purchased by the taxpayer in 1924. The property was sold on January 1, 1932, for $16,000. The loss from the sale allowable as a deduction is $3,750, computed as follows: Cost of property in 1924_ $25,000 Less depreciation allowed (not less than amount allowable) in respect of the building (depreciation for 3 years at 5 per cent based on $15,000, cost of building) 2,250 Selling price of property 22, 750 16,000 Loss computed as provided in section 111 and article 561– 6, 750 Value of property at time it was rented on January 1, 1929_ 22, 000 2,250 19, 750 Selling price of property-. Portion of $6,750 loss which is deductible_ $16,000 8,750 Losses from the sale or other disposition of Treasury bills issued after June 17, 1930, are not deductible. See section 101 and articles 501-503 as to capital losses. See section 117 and articles 651-655 as to deduction for net losses of a prior year. See section 118 and article 661 as to disallowance of loss deduction in the case of sales of stock or securities where within a period beginning 30 days before the date of the sale and ending 80 days after such date the taxpayer has acquired substantially identical property. ART. 172. Voluntary removal of buildings.-Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income. When a taxpayer buys real estate upon which is located a building, which he proceeds to raze with a view to erecting thereon another building, it will be considered that the taxpayer has sustained no deductible loss by reason of the demolition of the old building, and no deductible expense on account of the cost of such removal, the value of the real estate, exclusive of old improvements, being presumably equal to the purchase price of the land and building plus the cost of removing the useless building. ART. 173. Loss of useful value. When, through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from use in such business, he may claim as a loss for the year in which he takes such action the difference between the basis (adjusted as provided in section 113 (b) and articles 605 and 606) and the salvage value of the property. This exception to the rule requiring a sale or other disposition of property in order to establish a loss requires proof of some unforeseen cause by reason of which the property has been prematurely discarded, as, for example, where an increase in the cost or change in the manufacture of any product makes it necessary to abandon such manufacture, to which special machinery is exclusively devoted, or where new legislation directly or indirectly makes the continued profitable use of the property impossible. This exception does not extend to a case where the useful life of property terminates solely as a result of those gradual processes for which depreciation allowances are authorized. It does not apply to inventories or to other than capital assets. The exception applies to buildings only when they are permanently abandoned or permanently devoted to a radically different use, and to machinery only when its use as such is permanently abandoned. Any loss to be deductible under this exception must be fully explained in the return of income. ART. 174. Shrinkage in value of stocks.-A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. The loss allowable in such cases is that actually suffered when the stock is disposed of. If stock of a corporation becomes worthless, its cost or other basis as determined and adjusted under section 113 is deductible by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing is made of its worthlessness. Where banks or other corporations which are subject to supervision by Federal authorities (or by State authorities maintaining substantially equivalent standards) in obedience to the specific orders or general policy of such supervisory officers charge off stock as worthless or write it down to a nominal value, such stock shall, in the absence of affirmative evidence clearly establishing the contrary, be presumed for income tax purposes to be worthless. For dealers in securities, see article 105. For limitations on deductions for losses from sales or exchanges of stocks and bonds generally, see article 272. ART. 175. Losses of farmers.-Losses incurred in the operation of farms as business enterprises are deductible from gross income. If farm products are held for favorable markets, no deduction on account of shrinkage in weight or physical value or by reason of deterioration in storage shall be allowed, except as such shrinkage may be reflected in an inventory if used to determine profits. The total loss by frost, storm, flood, or fire of a prospective crop is not a deductible loss in computing net income. A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm, except as such loss is reflected in an inventory if used. If live stock has been purchased (after February 28, 1913, for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such stock, less any depreciation allowable as a deduction in respect of such perished live stock, may be deducted as a loss if the loss is not compensated for by insurance or otherwise. The actual cost of other property (with proper adjustment for depreciation) which is destroyed by order of the authorities of a State or of the United States, may in like manner be claimed as a loss. If reimbursement is made by a State or the United States in whole or in part on account of stock killed or other property destroyed in respect of which a loss was claimed for a prior year, the amount received shall be reported as income for the year in which reimbursement is made. The cost of any feed, pasturage, or care which has been deducted as an expense of operation shall not be included as part of the cost of the stock for the purpose of ascertaining the amount of a deductible loss. If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. If an individual owns and operates a farm, in addition to being engaged in another trade, business, or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure. As to losses claimed as deductions for estate tax purposes, see article 171. See also articles 57, 131, and 210. ART. 176. Sale of capital stock and capital assets. A corporation sustains no deductible loss from the sale of its capital stock. (See article 66.) Any loss sustained by a corporation upon the sale of its capital assets, computed as provided in sections 111-113 and articles 561-606, subject to the limitations provided in section 23 (r) and article 272 as to losses from sales or exchanges of stocks and bonds and subject to the limitations provided in section 118 and article 661 as to the purchase and sale of stock or securities, is deductible. As to the sale and retirement by a corporation of its bonds, see article 68. [SEC. 23. DEDUCTIONS FROM GROSS INCOME.] [In computing net income there shall be allowed as deductions:] (j) Bad debts.-Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts); and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction. ART. 191. Bad debts.-Bad debts may be treated in either of two ways (1) By a deduction from income in respect of debts ascertained to be worthless in whole or in part, or (2) By a deduction from income of an addition to a reserve for bad debts. |