losses can be deducted only in the year of occurrence (A. R. R. 542).

12. Freezing and bursting of water pipes (O. D. 1076). 13. A royalty interest purchased which proved worthless (O. D. 375).

Personal expenditures which have been cited as non-deductible losses have been illustrated in:

1. Damages to an automobile owned and operated for pleasure purposes (O. D. 857), although caused by the icy condition of a street (O. D. 629).

2. Amounts expended in defending damage suits covering personal injuries (O. D. 779, A. R. R. 444).

3. Losses on a lease (O. D. 42) or on the sale of a residence (A. R. R. 96) caused by the establishment of business connections in another city.

4. Stock surrender to wipe out an existing corporate deficit (O. D. 216).

5. Cases where a taxpayer was both seller and buyer (I. T. 1181).

6. Expenditures made in an attempt to apprehend a thief; the loss itself could be deducted, however (O. D. 571).

A loss incurred through transactions entered into for profit but which were ultra vires acts of a corporation could be deducted under the 1917 act. A distinction is drawn between ultra vires acts and illegal acts (L. O. 1092).

Recoverable insurance should be deducted from the loss and an amended return filed if the actual collections from the insurance companies differed from the estimated amounts (T. B. R. 55). The same rule holds for a recovery from embezzlement and from other losses (O. 845 and O. D. 165).

Cost of replacements in excess of insurance received is not a loss but a capital expenditure (O. D. 697). Depreciation and salvage must be considered in determining the extent of a loss (S. 1217). This last rule is presumably limited in application to property on which depreciation in the past has been an allowable deduction. The cost of removing buildings in the case of

1 An ultra vires act of a corporation is an act of the corporation not authorized by its charter. An illegal act is, of course, one expressly forbidden by existing statutes.

property purchased for another purpose is a capital charge and not a loss (O. D. 1031). No deductible loss occurred where it was necessary to demolish a part of a building for purposes of reconstruction (O. D. 773). The general application of the last rule is doubtful; rather the cost of demolition should be charged in part to the reserve for depreciation and part to expense, in the average case. Bills paid for a contractor who had absconded were not to be considered losses but capital charges (O. D. 925).

Stocks transferred at market value to a creditor to liquidate a debt gives rise to a loss if the market value is less than cost (O. D. 555). This will still hold, presumably, unless the stocks were pledged originally to secure the debt (T. D. 3262).

Loss on land improvements is not always deductible. Thus, no loss can be assigned where the growth or productivity of trees merely is retarded (O. D. 374 and I. T. 1318).

No loss for 1921 can be put by the Commissioner into any previous year and no loss of any year prior to 1921 can be accounted for in any year except that of its occurrence (L. O. 1105).

XV

NET LOSSES AND CONTRIBUTIONS

Net losses. Losses under 1918 act. Losses under 1921 act. Contributions in general. Donations to religious, charitable and educational institutions. Gifts to cities. Contributions may be money or property. Proportionate shares. Valuation of contributions. Amounts paid into pension funds not deductible by corporations.

SECTION 204 of the Revenue Act of 1918 provided that a net operating loss sustained for a taxable year beginning after October 31, 1918, and ending before January 1, 1920, was deductible from the net income of 1918 and the tax for 1918 must, under such conditions, be recomputed, the taxpayer being entitled to a refund. If the loss for the period indicated exceeded the net income for 1918, the excess could be applied in reduction of the net income for 1920. Losses might not include those arising from the sale of capital assets except in the case of assets used in the production of a war facility.

Section 204 of the 1921 act makes a similar provision which is extended indefinitely into the future. That is, a loss for any one year may be deducted from the next succeeding year's income and if not thus absorbed the excess may be deducted from the second succeeding year's income. The net loss (computed in the same manner as net income and including losses from the sale or other disposition of capital assets used in production) must be decreased by (a) the excess of tax-free interest received over non-deductible interest paid, (b) the excess of the deductible losses not arising from trade or business over taxable net income from the same source (individuals only), (c) dividends excluded from income (corporations only), and (d) depletion based on the excess of discovery value over cost (Art. 1601-5).

Under the 1918 act, where a taxpayer suffered a net operating loss through floods in 1919, he was permitted to file a claim for refund and apply the net loss against 1918 income (O. D. 367). If a corporation had a net income from Government contracts and a loss from other operations it was permitted to deduct the loss from the income on Government contracts (A. R. M. 5; O. D. 532). A corporation's loss for 1919 could not be deducted from the income of a predecessor sole proprietorship for 1918 (A. R. R. 1597). That part of the net loss resulting from the sale of capital assets by a corporation in 1919 could not be deducted from net income for the year 1918 unless such loss resulted from the sale of assets used in connection with the furnishing of war facilities as described in Section 204(a) (2) (I. T. 1401, overruling I. T. 1179, and A. R. M. 185). A member of a partnership could not amend his return for 1918 for the partnership loss during 1919 unless he sustained a net loss with respect to his entire net income derived from all sources (O. D. 430). Section 204 did not exclude farmers (O. D. 558) or foreign corporations (O. D. 611). A net operating loss for the year 1919 could not be deducted from the income of a fractional preceding year but could be applied against the full taxable year next preceding such fractional year or against the following full taxable year should the net losses be not fully absorbed (I. T. 1465, modifying I. T. 1423). If the taxable year did not fall entirely between October 31, 1918, and January 1, 1920, no net loss was deductible under Section 204 (O. D. 511). The 1921 law, however, allows corporations with fiscal years to prorate a loss for the year ending in 1921 (Sec. 204(d)). A net loss sustained for a fractional year falling between October 31, 1918, and January 1, 1920, was not deductible (O. D. 445) nor could the loss reported on a return covering the six months ending June 30, 1919, be combined with the prorated income for the remaining six months of the year in order to be deductible (A. R. R. 1128). Under the 1918 act a net operating loss, to be deductible from the net income of another year, must be for a full calendar or fiscal year (A. R. R. 743). A net loss for the calendar year 1919 was deductible from a full fiscal year ending November 30, 1918, a portion being thus deducted from 1917 income; and where the fiscal year basis was returned to in 1920 the net loss, if unabsorbed, could be deducted from the income of the full fiscal year ending in 1921 (I. T. 1704). If there was no taxable income for 1918, the net loss for the year falling entirely between October 31, 1918, and January 1, 1920, could be applied against the income of 1920 (O. D. 431) and

the tax payable was computed only on the adjusted income for 1920 (O. D. 928), but the net loss section of the 1918 act did not extend to any years other than 1918, 1919, and 1920 (O. D. 860).

Under the 1921 act, a consolidated return which claimed a loss for 1921 because of a subsidiary now inactive was allowed to use that loss against the consolidated income for 1922 (I. T. 1386). A corporation changed from a fiscal year ending October 31, 1921, to a calendar year; the net operating loss for the fiscal year could not be deducted from the income for the two months' period ending December 31, but could be deducted from the net income of the years 1922 and 1923 (I. T. 1211). A loss for 1921 or any portion thereof cannot be deducted after 1923 (I. T. 1718). A husband in previous years filed a return on the calendar year basis and his wife on a fiscal year basis; they were not allowed to file a joint return on a fiscal year basis and deduct the net loss to the husband or any portion of it (I. T. 1514). Losses may include losses from stock if the taxpayer makes a business of speculation (I. T. 1818), and a loss from a factory fire (I. T. 1808). Stockholders of a personal service corporation could deduct in their 1922 and 1923 returns their portion of the net loss of the corporation for 1921 (I. T. 1665). Net losses of a previous year may appear as an ordinary deduction on the income tax return (e. g., on Line 23(a), Form 1120) (Mim. 3059).

CONTRIBUTIONS

Deductible contributions from 1918 to 1920, inclusive, were limited to those given by individuals to religious, charitable, scientific, and educational corporations exempt from tax as described in Section 231(6) of the Revenue Act of 1918 and to the special fund for vocational rehabilitation under an act of Congress dated July 27, 1918. The total deduction with respect to contributions could not exceed 15% of the individual's net income before deducting any contributions. Gifts other than money were at first valued for deduction purposes at cost (or March 1, 1913, value), less accrued depreciation which had or should have been deducted from gross income, but this rule in Regulations 45 has since been changed to fair value at time of gift (T.