REFERENCES: Sec. 214 (a): "That in computing net income there shall be allowed as deductions: . . . (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;" Art. 141, Reg. 62: "Losses sustained during the taxable year and not compensated for by insurance or otherwise are fully deductible . . . if (a) incurred in the taxpayer's trade or business . . . When loss is claimed through the destruction of property by . . . casualty, the amount deductible will be the difference between the cost of the property, less proper adjustment for depreciation, and the salvage value thereof. . . . Bul. 13-21-1531, O. D., 857: "A loss may be claimed by the owner of a business truck demolished in collision with a pleasure car proIvided that the truck was in use in connection with the business of the taxpayer at the time of the collision. No deduction may be claimed by the owner of the pleasure car wrecked in the collision." CORPORATIONS: Corporations are also permitted deductions for losses arising from destruction of or damage to property similiar to the case illustrated above. REFERENCE: Sec. 234 (a): "That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: .. (4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; unless, in order to clearly reflect the income, the loss should in the opinion of the Commissioner be accounted for as of a different period. . . In case of losses arising from destruction of or damage to property, where the property so destroyed or damaged was acquired before March 1, 1913, the deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913; .. FACTS: PROBLEM 104 Illustrating Deductions Allowed-Farm Losses Charles Du Bois, Vice-President of the American Manufacturing Company owns two farms, one in Florida and one in the northern part of New York State. Neither of these farms has as yet produced profits from its operation. The Florida farm was purchased three years ago and is operated on a commercial basis. As the land is cleared it is gradually planted in oranges, grapefruit and pecans. The New York farm consists of 400 acres of which 25 are cultivated to supply the superintendent and his assistants with vegetables and for grain to attract game birds for hunting, and the balance consists of woodland in which there are several small lakes and fishing streams. There is a log cabin on this farm, and Mr. Du Bois makes it his headquarters each year for his hunting and fishing trips in the woodland part of the farm. QUESTION: Since both farms show a loss, what is the proper treatment of the operating expenses of each for tax purposes? ANSWER: As it takes several years for the trees planted on the Florida farm to mature and bear commercially, it is natural that the operating expenses at first will exceed the income. However, as the farm is operated on a commercial basis the operating expenses are deductible, or they may, at the option of the taxpayer, be capitalized each year, until the farm has reached the productive state (see Art. 110, Reg. 62 below). As the New York farm, however, was operated more for recreation or pleasure than on recognized principles of commercial farming, the operating expenses of this farm should be treated as personal expenses and are not deductible. REFERENCES: Art. 38, Regulations 62: ". . . As herein used the term 'farm' embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms, also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as farmers. A person cultivating or operating a farm for recreation or pleasure, the result of which is a continual loss from year to year, is not regarded as a farmer. Art. 110, Regulations 62: "A farmer who operates a farm for profit is entitled to deduct from gross income as necessary expenses all amounts actually expended in the carrying on of the business for farming. . . . Amounts expended in the development of farms, orchards, and ranches prior to the time when the productive state is reached may be regarded as investments of capital. . . . If a farm is operated for recreation or pleasure and not on a commercial basis, and if the expenses incurred in connection with the farm are in excess of the receipts therefrom, the entire receipts from the sale of products may be ignored in rendering a return of income, and the expenses incurred, being regarded as personal expenses, will not constitute allowable deductions. Art. 145, Regulations 62: "Losses incurred in the operating of farms as business enterprises are deductible from gross income. If an individual owns and operates a farm, in addition to being engaged in another trade, business, or calling, and sustains a loss from such operation of the farm, then the amount of loss sustained may be deducted from gross income received from all sources, provided the farm is not operated for recreation or pleasure." PROBLEM 105 Illustrating Deductions Allowed-Losses Due to Sales of Securities after Passage of Revenue Act of 1921; Securities Immediately Repurchased FACTS: On Dec. 8, 1921, Max Emerson sold for $8,325, one hundred shares of U. S. Steel Common Stock which had cost him $13,662.50 in 1917, in order to write off a loss in this stock. He remembered that under the Revenue Act of 1918 he was permitted to deduct such a loss, and in giving the order to his broker to sell this stock, he also requested it immediately repurchased but from a party different from the one to whom the sale was made, to make the transaction one which the Bureau would consider a bona fide sale and in order that therefore a loss based thereon would be deductible from gross income. The repurchase was made with no intention of again immediately disposing of the stock. QUESTION: Does the Revenue Act of 1921 permit the deduction of a loss under these circumstances? ANSWER: No. Where stock or other securities are sold after the passage of the Revenue Act of 1921 (Nov. 23, 1921), and within thirty days from such sale the taxpayer acquires identical stock or securities, the loss incurred is not deductible, unless the stock or securities so acquired were received by bequest or inheritance. REFERENCE: Sec. 214 (a) (5): (Quoted under Problem 106.) CORPORATIONS: The above problem also illustrates the application of this principle as it affects corporations, as the same conditions apply in each case. REFERENCE: Sec. 234 (a) (4): (Quoted under Problem 106.) PROBLEM 106 Illustrating Deductions Allowed-Losses-Sale of Securities where Part Repurchased within 30 Days FACTS: On Nov. 30, 1921, J. M. Borden sold 1,000 shares of Complex Motor Co., common stock for $7.50 per share which he had purchased in 1914 for $25 per share. He had intended to wait 30 days before he repurchased the stock but a sudden rise in the market made him apprehensive, and on Dec. 15, 1921, he repurchased 500 shares at $11.50 per share which shares he still holds. QUESTION: Will this purchase, made within 30 days after the sale of the identical property, have any effect on the allowance of a loss based on the sale; and if so, to what extent ? ANSWER: Since one-half of the amount of the property sold was repurchased within 30 days, the deductible loss is only one-half of the actual loss sustained. The computation of the allowable loss in this case is as follows: Sec. 214 (a): "That in computing net income there shall be allowed as deductions: (5) 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; . . . No deduction shall be allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or disposition. If such acquisition is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed." CORPORATIONS. The above problem also illustrates the application of this principle as it affects corporations, as the same conditions apply in each case. REFERENCE: Sec. 234: "That in computing the net income of a corporation |