and water, and janitor and elevator service, if any.10 Where the landlord occupies a part of the building as his own dwelling he should not deduct such proportion of the expenses of operating the building as inure to his personal benefit, as that part constitutes personal or living expenses which are not deductible. Thus, if a landlord lives in one-half of the building, one-half of the expenses are not allowable deductions in his return.

Interest. A citizen or resident may with one exception deduct all interest paid or accrued within the taxable year on his indebtedness.11 This includes not only indebtedness incurred for business purposes, but indebtedness incurred for any purpose, such as for the purpose of buying dwelling houses or any articles or things of personal use. The one limitation on the amount of interest which may be deducted is with respect to interest paid or accrued on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917) the interest upon which is wholly exempt from taxation as income to the taxpayer.12

Taxes. Citizens or residents may deduct taxes paid or accrued within the taxable year imposed (a) by the authority of the United States except income, war profits and excess-profits taxes, (b) by the authority of any state or territory, or any county, school district, municipality or other taxing subdivision of any state or territory, or (e) by the authority of any possessions of the United States or any foreign country, except the amount of income, war-profits and excess-profits taxes allowed as a credit against the tax.18 Taxes assessed against local benefits of a kind tending to increase the value of the property 10 Letter from the Treasury Department dated February 26, 1915; I. T. S. 1918, ¶ 353.

11 Revenue Act of 1918, § 214 (a) 2.

12 Revenue Act of 1918, § 214 (a) 2; Reg. 45, Arts. 121 and 122. For a further discussion of this subject, see Chapter 28 on Deduction of Interest.

13 See Chapter 33 for statement of credit for taxes.

may not be deducted.14 Inheritance taxes are not taxes contemplated by this provision, and may not be deducted.15

Losses. The 1918 Law makes a radical departure in the provisions allowing deduction of losses in the case of individuals in that losses sustained during the taxable year by citizens or residents and not compensated for by insurance or otherwise are fully deductible if (a) incurred in the taxpayer's trade or business, or (b) incurred in any transaction entered into for profit, or (c) arising from fires, storms, shipwreck or other casualty or from theft. Other provisions of the 1918 Law provide that if a business has sustained a net loss in any year after October 31, 1918, and before January 1, 1920, such loss may be deducted from the net income of the preceding year and the tax readjusted accordingly. Another provision provides that if it is found during 1919 that the value of inventory has shrunk the loss consequent thereto may be deducted from the income of the taxable year 1918. Under the 1916 Law individuals were allowed to deduct in full all losses sustained in trade but only to a limited extent losses not sustained in trade. The various kinds of losses are discussed in the following paragraphs with reference to their deductibility under the present law and under preceding laws.

Losses Sustained in Trade. Under the present and preceding laws losses sustained during the taxable year and not compensated for by insurance or otherwise, may be deducted if incurred in trade or business.16 A loss incurred in trade or business must be an absolute loss not

14 Revenue Act of 1918, § 214 (a) 3; Reg. 45, Arts. 131-134. For a full discussion of this subject, especially changes made by the present law, see Chapter 29 on Deduction of Taxes.

15 Reg. 45, Art. 134. Letter from Treasury Department dated February 10, 1916; I. T. S. 1918, ¶486. For a discussion of the deductibility of inheritance taxes, see Chapter 29 on Deduction of Taxes.

16 Revenue Act of 1918, § 214 (a) 4; Reg. 45, Art. 141. For a full discussion of this subject see Chapter 30 on Deduction of Losses.

a speculative or fluctuating valuation of a continuing investment, and must be determined and ascertained to be an actual, a completed, a closed transaction.17

TRADE OR BUSINESS. Under the 1916 Law, the term "trade" and the term "business" were defined as synonymous terms and to be, "That which occupies and engages the time, attention and labor of anyone for the purpose of livelihood, profit, or improvement; that which is his personal concern or interest; employment, regular occupation, but it is not necessary that it should be his sole occupation or employment." The doing of a single act incidentally or of necessity not pertaining to the particular business of the person doing the same will not be considered engaging in or carrying on business.18 "In trade," as used in the 1916 Law, is held to mean the trade or trades in which the person making the return is engaged; that is, in which he has invested money, otherwise than for the purpose of being employed in isolated transactions, and to which he devotes at least a part of his time and attention. A person may be engaged in more than one trade and may deduct losses incurred in all of them under this provision of the law, provided that in each trade the above requirements are met. Losses on stocks, grain, cotton, etc., may also be deducted under this provision by a person engaged in the trade to which buying or selling thereof are incident as a part of the business, as by a member of a stock, grain or cotton exchange,19 but neither the investment of money in the stock of a company nor employment by the company in any official capacity makes the business of the company the trade of the investor or employee.20 The losses which

17 T. D. 1989. Depreciation in the value of property is treated as a separate deduction and should not be confused with loss. 18 T. D. 1989.

19 T. D. 2090.

20 T. D. 2135. The definition of "trade or business' discussed in the text above has now lost considerable importance in view of the provision (Revenue Act of 1918, § 214 (a) 5) that losses incurred in any transaction entered into for profit may be deducted even

were limited by this provision of the 1916 law were those incurred in transactions involving sales or dealings in property. The law seemed clearly to make a distinction. between such losses and losses arising from fires, storms, shipwreck, or other casualty, and from theft.

Net Losses of Any Business. If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, a citizen or resident has sustained a net loss as defined in the next paragraph, the same is allowed as a deduction in computing his net income for the preceding taxable year, and the income and the war profits and excess-profits taxes imposed by the Revenue Act of 1918 for such preceding taxable year may be redetermined accordingly. Any amount found to be due upon the basis of such redetermination to a citizen and resident is credited or refunded to him, and if such net loss for the preceding taxable year is in excess of his net income for the same year, the amount of such excess may be allowed as a deduction in computing his net income for the succeeding taxable year. Such net loss must be proved by evidence satisfactory to the Commissioner and the deduction thereof is subject to regulations to be prescribed by him with the approval of the Secretary.21 This subject is more fully discussed in another chapter 22

though such losses exceed the profits arising from the same class of transactions. Under the 1916 Law, it will be noted, the Treasury Department adopted an extremely narrow construction of the words "business or trade," a construction which has been the subject of considerable criticism and which operated to the detriment of every person investing or speculating in property. Congress has now seen fit to remedy the injustice involved in this narrow construction by permitting the deduction of all losses in transactions entered into for profit even though they may exceed the profits arising from the same transactions (Revenue Act of 1918, § 214 (a) 5). Consequently the definitions of "trade or business" discussed in the text above are no longer so important except in cases arising under the 1916 and 1913 Laws.

21 Revenue Act of 1918, § 204 (b); Reg. 45, Arts. 1601-1603. 22 See Chapter 30 on Deduction of Losses.

DEFINITION OF NET LOSS. The term "net loss" as used in the foregoing paragraph refers to net losses resulting from (1) the operation of any business regularly carried on by the citizen or resident, or (2) the bona fide sale by him of a plant, buildings, machinery, equipment or other facilities constructed, installed or acquired by him on or after April 6, 1917, for the production of articles contributing to the prosecution of the war with Germany; and when so resulting from either of the above sources, the term "net loss" means the excess of the deductions allowed to the citizen or resident over the sum of his gross income and any interest received free from income and war excess-profits taxation.23

Losses Not Sustained in Trade. Under the present law citizens and residents may deduct all 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.24 Under the 1916 Law, a citizen was permitted to deduct the losses actually sustained in transactions entered into for profit but not connected with his business or trade only to an amount not exceeding the profits arising therefrom. A loss was required to be actually sustained during the year and the total amount deductible could not exceed the profits arising from the same class of transactions.25 Thus, an individual making any investments in property from time to time or speculating was required to report all gains from such investments or speculations and might offset against the gains all losses sustained in similar transactions. He was required to report only the net gain from such transactions during the year, and if the net result for the year of a series of such transactions was a loss, he was not entitled to offset the loss against his income from trade or business.26 It

23 Revenue Act of 1918, § 204 (a); Reg. 45, Art. 1601.

24 Revenue Act of 1918, § 214 (a) 5.

25 Revenue Act of 1916, § 5.

26 Prior to the 1916 Law it was held by the Treasury Department that an individual was required to report all income from transac