by the corporation on behalf of the stockholders, the one holding the stock on the date when a tax became due and payable is the one entitled to report the amount as a dividend and deduct the amount as a tax paid by him.24

Taxing Subdivisions of Territories. It was provided by the 1916 Law that "taxes paid within the year imposed by the authority of the United States (except income and excess-profits taxes) or of its Territories, or possessions, or any foreign country, or by the authority of any State, county, school district, or municipality, or other taxing subdivisions of any State, not including those assessed against local benefits" were deductible.25 No express provision was made for the deduction of taxes imposed by the authority of "any taxing subdivision" of any territory. The Revenue Act of 1918 now provides 26 for the deduction of taxes imposed by a taxing subdivision of any Territory.

Bank Guaranty Fund. Banking corporations which, pursuant to the laws of the state in which they are doing business, are required to set apart an amount, levied and assessed against them by the state authorities, as a "depositor's guaranty fund" may deduct the same from their gross income, provided the fund is set aside and carried to the credit of the state banking board or other duly authorized state officer, and may be withdrawn upon demand by such board or state officer to meet the demands of these officials in reimbursing depositors of insolvent banks, and, provided further, that no portion of the amount so set aside and credited is returnable, under the existing laws of the state, to the assets of the banking corporation. In

24 Letter from Treasury Department dated February 25, 1916; I. T. S. 1918, ¶490. An earlier ruling in a letter dated March 2, 1915, held that the stockholder owning the stock at the time the taxes were assessed was the one entitled to the deduction, but the later ruling referred to above seems to indicate the present attitude of the Treasury Department.

25 Revenue Act of 1916, §§ 5, 6, 12 (a) and 12 (b), as amended by Revenue Act of 1917.

26 Revenue Act of 1918, §§ 214 (a) 3, 234 (a) 3.

such cases the amount of the guaranty fund is no longer an asset of the bank, but is in the nature of a tax and as such is deductible.27 Strictly speaking, such assessments are more properly deductible as an expense of doing business or, perhaps, as a loss, since the fund is intended to meet the losses of the banking business as a whole.

Taxes Paid by a Tenant. Where a tenant pays the taxes on property leased by him, he may consider the amount so paid as an additional payment of rent and may deduct it as an expense of carrying on his business.28 To the landlord the amount is equivalent to an additional payment of rent and must be reported as such, but he may also deduct the amount, as, to him, it is a tax paid during the year by the tenant as his agent. The transaction is tantamount to a payment of the sum by the tenant to the landlord and a repayment by the landlord to the tenant, as his agent, for the purpose of satisfying the

tax.

27 T. D. 2152. 28 T. D. 2090.

CHAPTER 30

DEDUCTION OF LOSSES

The Revenue Act of 1918 provides in the case of individuals that in computing net income there may be allowed as deductions, if sustained during the taxable year and not compensated for by insurance or otherwise, (a) losses incurred in trade or business, (b) losses incurred in any transaction entered into for profit, though not connected with the trade or business, (c) losses of property not connected with the trade or business if arising from fires, storms, shipwreck, or other casualty or from theft. The extent to which losses may be deducted by non-resident aliens and foreign corporations and the subject of losses incurred in trade are more fully discussed in previous chapters.2 Individuals and corporations may also deduct debts ascertained to be worthless and charged off within the taxable year. The rules discussed in this chapter are those applicable to corporations and individuals generally. In the case of corporations all losses sustained during the taxable year and not compensated for by insurance or otherwise may be deducted. The 1918 Revenue Law contains

a new provision for the deduction of net losses in certain cases against the income of the preceding year,5 and also as to losses in inventory ascertained after the close of the taxable year.

1 Revenue Act of 1918, § 214 (a) 4, 5, 6.

2 See Chapters 4 on Citizens and Residents, 5 on Non-Resident Aliens and 14 on Foreign Corporations.

3 Revenue Act of 1918, §§ 214 (a) 7 and 234 (a) 5.

4 Revenue Act of 1918, § 234 (a) 4.

5 See p. 475.

6 See p. 473.

Measure of Loss. In the case of loss of property or assets the loss must be based upon the difference between the cost value or the value as of March 1, 1913, if acquired before that date, and the salvage value of the property or assets, including in the latter value such amount, if any, as has, in the current or previous years, been set aside and deducted from gross income by way of depreciation.7 When property is sold, the loss is the difference between the selling price and cost or value as of March 1, 1913, if acquired before that date, where the selling price is less than the cost. Losses resulting from the sale or other disposition of property are discussed in a later paragraph of this chapter. In a case arising under the 1909 Law, the court said: "There seems to be no limitation provided in the act as to the amount of deductions to be allowed for losses actually sustained from any source during the year, and whether due to conditions of business, the sale of property, or anything else, and the court must, therefore, assume that the statute contemplated that the full amount of all losses sustained within the year would be allowed."

Losses Must Be Sustained During Year. The 1916 Law provided in the case of individuals that the loss must be "actually sustained during the year" and in the case of corporations that the loss must be "actually sustained and charged off within the year." 10 The Revenue Act of 1918 omits the word "actually" in the case of individuals and the words "actually" and "and charged off" in the case of corporations. The Treasury Department holds that a

7 Reg. 33 Rev., Art. 147.

8 Reg. 33 Rev., Art. 147; T. D. 2090.

9 Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. 206. In this case the court required the corporation to report as income all of its profits and permitted it to deduct all of its losses on the sale of property during the year, regardless of the fact that some of the property was purchased prior to the incidence of the tax, it appearing that the result would be the same as if the gains and losses had been pro-rated as then required by the Treasury Depart

ment.

10 Revenue Act of 1916, § 12 (a).

loss to be deductible must be an absolute loss, actually sustained and ascertained during the taxable year for which the deduction is sought to be made. It must be determined and ascertained upon an actual, a completed, a closed transaction. Losses sustained from the sale or dealings in real or personal property growing out of the ownership or use of, or interest in, such property will not be deductible at all unless they are ascertained, determined and fixed as absolute in the above sense within the taxable year in which the deduction is sought to be made.11 The amount to be deducted as a loss should have in it no element of "depreciation" or "allowance for wear or tear" or "compensation from insurance or otherwise." The amount is to be an absolute and complete loss which has been actually sustained.12 Under the 1916 Law, in the case of corporations, the loss might not be deducted unless it was actually sustained during the year and charged off on the books. 13 This rule seemed to apply with equal force in the case of an individual who kept books, but one who did not keep books was not thereby deprived by the law of the right to claim a loss, except in the case of worthless debts.

FLUCTUATIONS IN BOOK VALUES. Fluctuations during the year in the value of capital assets, such as securities, even though evidenced by book entries, do not constitute losses actually sustained. A loss may not be deducted until as a result of a completed, a closed transaction, the loss has

11 T. D. 2005. See, however, the special rules at the end of this chapter.

12 T. D. 2005.

13 Under the 1916 Law it was held that a corporation was not entitled to a deduction for a loss unless charged off on the books of the corporation before such deduction was allowed. The statute was not to be construed as requiring that losses be charged off within the taxable year. It was sufficient that they were charged off before they were allowed as deductions. Consequently at the time of an examination of a corporation it was given an opportunity to reopen its books and charge off losses which it had actually sustained during the taxable year. (Letter from Treasury Department dated June 25, 1918; I. T. S. 1918, ¶ 3599.)