terns, or models result in the production of goods which prove to be salable for a certain length of time and then become obsolete and can not be sold, the amount expended for such designs, drawings, patterns, or models, less any amounts previously claimed as depreciation with respect to the same or as a return of capital, may when charged off, be included in, and deducted as a loss incident to running the business, provided full and complete information is reported in a manner satisfactory to the Commissioner.59

Losses Ascertained in 1919 Deductible from Net Income of 1918. The Revenue Act of 1918 contains a new provision regarding losses sustained after the close of the taxable year 1918. It is provided that a taxpayer may file, at the time of filing return for the taxable year 1918, a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year. In such case payment of the amount of the tax covered by the claim is not required until the claim is decided, but the taxpayer must accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due, with interest. If any part of such claim is disallowed, the remainder of the tax due must, on notice and demand by the collector, be paid by the taxpayer with interest at the rate of one per centum per month from the time the tax would have been due had no such claim been filed. If it is shown to be satisfaction of the Commissioner that such substantial loss has been sustained, then in computing the income tax the amount of such loss will be deducted from the net income. Where no such claim is

59 Reg. 33 Rev., Art. 177.

filed, but it is shown to the satisfaction of the Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described, the amount of such loss will be deducted from the net income for the taxable year 1918 and the income tax imposed for such year will be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination will be credited or refunded to the taxpayer.60 Such redetermination of value may be made (a) before the date of filing a return for that year, in which case the claim should be filed with the return, or (b) if no such claim is filed with the return, a claim may be filed subsequently thereto with the collector. Each claim should state the name and address of the taxpayer and should contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. Each claim should be supported by an affidavit, and after one claim has been allowed no further claim can be considered. To be allowed such inventory loss must be substantial in amount and represent either (a) a realization by sale of goods taken in the inventory or (b) a shrinkage in market price (and such shrinkage must show sound evidence of permanency) of goods taken in the inventory and unsold at the date of the claim. In determining whether a loss has been realized by the sale of goods taken in the inventory, all sales made subsequent to the date of the inventory will be deemed to have been made from the inventoried stock until such inventoried stock is exhausted. No claim will be allowed for any loss of anticipated profits. Claims may also be made for a deduction from income of the taxable year 1918 of the amounts of payments actually made after the close of such taxable year on account of rebates in pursuance of contracts entered into during such year upon sales made

60 Revenue Act of 1918, §§ 214 (a) 12 and 234 (a) 14.

during such year. In any case where payment of the tax has not been made prior to the filing of the claim no such payment shall be required upon the income covered by such claim until the claim is decided, but in such case the taxpayer shall accompany his claim with a bond in double the amount of the tax covered by the claim, with sureties satisfactory to the Commissioner, conditioned for the payment of any part of such tax found to be due. If any part of such claim is disallowed, then the remainder of the tax due shall bear interest at the rate of one per cent per month from the time the tax would have been due had no such claim been filed. The amount allowed by the Commissioner in respect of any such claim shall be deducted from the net income for the taxable year 1918, and the taxes shall be recomputed accordingly and the excess of tax due, if any, shall be credited or refunded to the taxpayer. In computing income for the taxable year 1919, the opening inventory must be properly adjusted by the taxpayer in respect of any claim allowed for the year 1918 under this provision. Goods taken in the inventory which have been so intermingled that they can not be identified with specific invoices will be deemed to be the goods most recently purchased.61

Net Losses. When used in this paragraph the term net loss" refers only to net losses resulting from either (1) the operation of any business regularly carried on by the taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities, constructed, installed or acquired by the taxpayer on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war; and when so resulting means the excess of the deductions allowed by law (excluding in the case of corporations amounts received as dividends from a corporation taxable upon its net income, and amounts received as dividends from a personal-service corporation out of earnings or profits upon which income.

61 Reg. 45, Art. 261.

tax has been imposed) over the sum of the gross income plus any interest received free from income or excess-profits taxes. If for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss will, under regulations prescribed by the Commissioner with the approval of the Secretary be deducted from the net income of the taxpayer for the preceding taxable year; and the income and excess-profits taxes for such preceding taxable year will be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination will be credited or refunded to the taxpayer. If such net loss is in excess of the net income for such preceding taxable year, the amount of such excess will under regulations prescribed by the Commissioner with the approval of the Secretary be allowed as a deduction in computing the net income for the succeeding taxable year. It is further provided that the benefit of the above provisions may be allowed to the members of a partnership and the beneficiaries of an estate or trust under regulations prescribed by the Commissioner with the approval of the Secretary,62

CLAIM FOR ALLOWANCE OF NET LOSS. A taxpayer having such a net loss may file a claim with the collector of the district in which the taxpayer's return for the preceding year was filed. Such claim should state the name and address of the taxpayer and should contain a concise statement of the amount of the loss sustained and the basis upon which it has been computed, together with all pertinent facts necessary to enable the Commissioner to determine the allowability of the claim. Each claim should be supported by an affidavit.63

62 Revenue Act of 1918, § 204. 63 Reg. 45, Art. 1602.

CHAPTER 31

DEDUCTION OF ALLOWANCE FOR DEPRECIATION, OBSOLESCENCE AND AMORTIZATION

In the case of individuals the Revenue Act of 1918 permits a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business of the individual, including a reasonable allowance for obsolescence. Property not used in his business is excluded. In the case of non-resident aliens, the deduction for depreciation or obsolescence is permitted if and to the extent that it is connected with income arising from a source within the United States; and the proper apportionment and allocation of the deduction with respect to sources of income within and without the United States is determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.2 In the case of corporations, the allowance is also for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence, limited in the case of a foreign corporation as above indicated in the case of non-resident aliens. The purpose of allowing a deduction each year for depreciation is to take care of the certain loss of property which takes place from year to year, due to wear and tear. The property must be used or employed in the trade or business of the taxpayer. No depreciation is allowed, for instance, on a dwelling house occupied by the owner