amounts of taxes so paid by a corporation for its stockholders are not collected from the stockholders, the corporation charging the taxes as an item of expense. Such taxes, however, should be reported by the stockholders respectively as taxes paid by them, according to their proportionate interests in the corporation.17 The amount of the taxes so paid should also be treated as additional income from the net earnings of the corporation.18 Where shares of stock are sold after the tax has been assessed, but prior to the time it is paid 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.19

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

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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is set aside and carried to the credit of the state banking board or other duly authorized state officer, and may be withdrawn upon demand by such board or state officer to meet the demands of these officials in reimbursing depositors of insolvent banks, and, provided further, that no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,

17 T. D. 2135.

18 See Chapter 23.

19 Letter from Treasury Department dated February 25, 1916; I. T. S. 1917, ¶357. 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.

under the existing laws of the state, to the assets of the banking corporation. In 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.20 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.21 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.

20 T. D. 2152. 21 T. D. 2090.

CHAPTER 31

DEDUCTION OF LOSSES

The law provides in the case of individuals that "losses actually sustained during the year, incurred in business or trade, or arising from fires, storms, shipwreck or other casualty, and from theft, when such losses are not compensated for by insurance or otherwise, may be deducted, as also may debts due the taxpayer actually ascertained to be worthless and charged off within the year. In the case of the individual there is a limitation as to the amount of loss which may be deducted in transactions entered into for profit but not connected with his business or trade. This limitation and a discussion of losses incurred in trade is contained in the chapter on citizens and residents.1 The rules discussed in this chapter are those applicable to corporations and individuals generally. In the case of corporations all losses actually sustained and charged off within the year and not compensated by insurance or otherwise may be deducted.2

Measure of Loss. In the case of loss of property or assets the loss must be based upon the difference between the cost value 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

1 See Chapter 4.

2 Act of September 8, 1916, § 12 (a).

and deducted from gross income by way of depreciation.3 When property is sold, the loss is the difference between the selling price and cost where the selling price is less than the cost. 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 courf must, therefore, assume that the statute contemplated that the full amount of all losses sustained within the year would be allowed."5

Losses Must Be Actually Sustained During Year. The law provides 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." The Treasury Department holds that a loss to be deductible must be an absolute loss, actually sustained and ascertained during the tax year for which the deduction is sought to be made. It must be incurred in trade and be determined and ascertained upon an actual, a completed, a closed transaction. Losses sustained from the sale or dealings in personal or real property growing out of the owner

3 Reg. 33, Art. 124.

4 T. D. 2090.

5 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 if the gains and losses had been pro-rated as then required by the Treasury Department.

ship 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. 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."

Must Be Charged Off on the Books. In the case of corporations the loss may not be deducted unless it is actually sustained during the year and charged off on the books. This rule would seem to apply with equal force in the case of an individual who keeps books, but one who does not keep books is 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, for instance, 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 been definitely ascertained and the amount it represents has irredeemably disappeared from the assets of the taxpayer.9

Reserves for Losses. Reserves to take care of anticipated or probable losses are not a proper deduction.10

6 T. D. 2005.

7 T. D. 2005.

8 Reg. 33, Arts. 124 and 158.

9 Letter from Treasury Department dated August 14, 1914; I. T. S. 1917, ¶ 259.

10 Reg. 33, Art. 126.