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and all pertinent facts relative thereto, including a schedule showing the computation of the net loss in accordance with section 206, and articles 1621 and 1626 of these regulations. If the evidence furnished satisfies the Commissioner that the taxpayer has sustained a net loss" the amount of such net loss may be allowed as a deduction in computing the net income of the taxpayer for the suc ceeding taxable year, and if such net loss is in excess of the net income for that year, the amount of the excess may be carried over and allowed as a deduction in computing the net income for the next succeeding taxable year (designated in section 206 as the "third year"). It should be noticed, however, that a "net loss. net loss" for a preceding year may not be considered in computing a "net loss" for a succeeding year. See section 206 (a).

ART. 1623. Net loss and capital net gain or capital net loss. If the taxpayer (other than a corporation) sustains in the second year a capital net loss, as defined in article 1654, the deduction of a net loss allowed by section 206(b) shall first be applied as a deduction in computing the ordinary net income for that year. If the ordinary net income is in excess of the net loss, the tax shall be computed as provided in article 1654. If the deduction is in excess of the ordinary net income (computed without such deduction) the amount of the excess of the net loss may be allowed as a deduction in computing net income for the third year. The capital net loss may not be carried over as a deduction into the third year.

If in the second year the taxpayer (other than a corporation) has a capital net gain, as defined in article 1651, the deduction of a net loss allowed by section 206(b) shall first be applied as a deduction in computing the ordinary net income for that year. If the ordinary net income is in excess of the net loss, the tax may be computed as provided in article 1651. If the deduction is in excess of the ordinary net income (computed without such deduction) the amount of the excess shall next be applied against the capital net gain for that year, and if in excess of the capital net gain, the amount of that excess shall be allowed as a deduction in computing net income for the third year.

If any portion of a net loss is allowed as a deduction in computing net income for the third year, under the provisions of either subdivision (b) or (c) of section 206, and the taxpayer (other than a corporation) has in the third year a capital net gain or a capital net loss, then the method of allowing the deduction in the third year is that provided in the two preceding paragraphs of this article.

ART. 1624. Net losses under preceding act.-If a taxpayer sustained a net loss for the taxable year 1922, in excess of his net income for the taxable year 1923 (the net loss and ordinary net income being computed under the Revenue Act of 1921) the amount of this excess

shall be allowed as a deduction in computing net income for the taxable year 1924 in accordance with the method provided in articles 1621 and 1623.

If a taxpayer sustained a net loss for the taxable year 1923, within the provisions of the Revenue Act of 1921, the amount of the net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under articles 1621 and 1623, allowed as a deduction for the two succeed-ing taxable years.

Where a taxpayer has a fiscal year beginning in 1923 and ending in 1924, his net loss for the period ending during 1924 shall be the sum of (1) the same proportion of a net loss for the entire period, determined under the Revenue Act of 1921, which the portion of the period falling within 1923 is of the entire period, and (2) the same proportion of a net loss for the entire period determined under this Act which the portion of the period falling within 1924 is of the entire period.

ART. 1625. Net losses of partnerships, estates and trusts, and insurance companies. The provisions of section 206 are applicable to the members of a partnership, to an estate or trust, and to insurance companies subject to the tax imposed by section 243 or 246.

ART. 1626. Illustration of computation of net loss.-The method of computation of net losses as outlined in articles 1621 and 1623 may be illustrated as follows:

A, an individual, conducting a trade or a business, finds the following facts relating to 1924:

(a) His deductions as computed under section 214 amount to $100,000.

(b) Included in the deductions is an item of $10,000 for loss by fire of property occupied by him as a residence and not used in connection with his trade or business.

(c) Other deductions otherwise allowed under section 214 on account of transactions entered into for profit outside of his trade or business amount to $3,000.

(d) His taxable gains from transactions entered into for profit and not connected with his trade or business are $5,000.

(e) Donations to the Red Cross amounting to $1,000 are included among the deductions.

(f) Depletion is claimed in the amount of $2,000, of which $500 is based upon the value of the mineral in the mine as of March 1, 1913, and $1,500 is attributable to increase in valuation on account of discovery subsequent to February 28, 1913.

(g) His entire gross income as computed under section 213 is $50,000.

(h) Interest received from municipal bonds exempted from taxation by section 213(b) (4) amounted to $10,000.

(i) Interest was paid upon money borrowed to carry municipal bonds in the amount of $8,000, which amount is not deductible under section 214(a) (2):

over taxable gains or profits not derived from such
trade or business-

8,000

Donations (e)-----·

1,000

Depletion on basis of value after discovery (f)-- $2,000
Less: Portion based on value as of Mar. 1, 1913__

500

Excess of deductions not sustained in trade or business

Portion of depletion representing discovery value in
excess of cost or value as of Mar. 1, 1913__.

1,500

Total exclusion from deductions___

10, 500

Total expenses directly attributable to the conduct of the
trade or business_.

89, 500

If A has an ordinary net income in 1925 of $25,000, and sustains a capital net loss of $10,000, he will pay no tax for 1925, since he had a net loss in 1924 of $37,500, and will carry over $12,500 as deduction for computing net income in 1926. If A in 1926 has ordinary net income of $10,000 and a capital net gain of $50,000, he may, at his option, pay a tax of 12 per cent upon $47,500, under the provisions of article 1651.

FISCAL YEARS

SEC. 207. (a) If the taxpayer makes return for a period beginning in one calendar year (hereinafter in this subdivision called "first calendar year") and ending in the following calendar year (hereinafter in this subdivision called "second calendar year") and the law applicable to the second calendar year is different from the law applicable to the first calendar year, then his tax

under this title for the period ending during the second calendar year shall be the sum of: (1) the same proportion of a tax for the entire periòd, determined under the law applicable to the first calendar year and at the rates for such year, which the portion of such period falling within the first calendar year is of the entire period; and (2) the same proportion of a tax for the entire period, determined under the law applicable to the second calendar year and at the rates for such year, which the portion of such period falling within the second calendar year is of the entire period.

(b) If a fiscal year of a partnership begins in one calendar year and ends in another calendar year, and the law applicable to the second calendar year is different from the law applicable to the first calendar year, then (1) the rates for the calendar year during which such fiscal year begins shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year, and (2) the rates for the calendar year during which such fiscal year ends shall apply to an amount of each partner's share of such partnership net income (determined under the law applicable to such calendar year) equal to the proportion which the part of such fiscal year falling within such calendar year bears to the full fiscal year. In such cases the part of such income subject to the rates in effect for the most recent calendar year shall be added to the other income of the taxpayer subject to such rates and the resulting amount shall be placed in the lower brackets of the rate schedule applicable to such year, and the part of such income subject to the rates in effect for the next preceding calendar year shall be placed in the next higher brackets of the rate schedule applicable to such year.

(c) Any amount paid before or after the enactment of this Act on account of the tax imposed for a fiscal year beginning in 1923 and ending in 1924 by Title II of the Revenue Act of 1921 shall be credited toward the payment of the tax imposed for such fiscal year by this Act, and if the amount so paid exceeds the amount of such tax imposed by this Act, the excess shall be credited or refunded in accordance with the provisions of section 281.

ART. 1631. Fiscal years ending in 1924.-The tax for a period beginning in 1923 and ending in 1924 is the sum of the following:

(a) The tax attributable to the calendar year 1923, found by computing the tax upon the income of the taxpayer for the fiscal year under the provisions of the Revenue Act of 1921, and by taking the proportion of such tax which the portion of the period falling within the calendar year 1923 is of the entire period;

(b) The tax attributable to the calendar year 1924, found by computing the tax upon the income of the taxpayer for the fiscal year under the provisions of the Revenue Act of 1924, and by taking the proportion of such tax which the portion of the period falling within the calendar year 1924 is of the entire period.

CAPITAL GAINS AND LOSSES

SEC. 208. (a) For the purposes of this title

(1) The term " capital gain means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;

(2) The term "capital loss" means deductible loss resulting from the sale or exchange of capital assets;

(3) The term "capital deductions " means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable. year;

(4) The term "ordinary deductions" means the deductions allowed by section 214 other than capital losses and capital deductions;

(5) The term "capital net gain" means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gain;

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(6) The term 'capital net loss" means the excess of the sum of the capital. losses plus the capital deductions over the total amount of capital gain;

(7) The term "ordinary net income" means the net income, computed in aecordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions; and

(8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:

A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12 per centum of the capital net gain..

(c) In the case of any taxpayer (other than a corporation) who for any taxable year sustains a capital net loss, there shall be levied, collected, and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:

A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount minus 12 per centum of the capital net loss; but in no case shall the tax under this subdivision be less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of this section.

(d) The total tax determined under subdivision (b) or (c) shall be collected and paid in the same manner, at the same time, and subject to the same provisions of law, including penalties, as other taxes under this title.

(e) In the case of the members of a partnership, of an estate or trust, or of the beneficiary of an estate or trust, the proper part of each share of the net income which consists, respectively, of ordinary net income, capital net gain, or capital net loss, shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary, and shall be separately shown in the return of the partnership or estate or trust, and shall be taxed to the member or beneficiary or to the estate or trust as provided in sections 218 and 219, but at the rates and in the manner provided in subdivision (b) or (c) of this section.

ART. 1651. Definition and illustration of capital net gain. (a) Section 208, which applies to sales and exchanges of capital assets consummated after December 31, 1921, provides that any taxpayer other