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. No deduction shall be allowed 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 30 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 other disposition, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of its business. 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. . . ." NOTE: The Revenue Act of 1921, was passed Nov. 23, 1921, at 3.55 P. M. PROBLEM 107 Illustrating Deductions Allowed Individuals-—Losses— FACTS: 15 Days after Sale On Nov. 29, 1921, in order to take a loss for tax purposes, Mathew Fox sold 100 shares of N. Y., N. H. & H. R. R. Co. common stock which had cost him $8,900 in 1915, for $1,350. It was his intention to repurchase the same number of shares of that stock after thirty days but on Dec. 14, 1921, he received 100 shares of N. Y. N. H. & H. R. R. Co. stock by bequest. QUESTION: Will the receipt of this stock by bequest within 30 days after the sale preclude Mr. Fox from claiming the loss of $7,550, on the sale! ANSWER: No. Where stock or securities are acquired by bequest or inheritance which are identical with property previously sold, it has no effect on such sale for tax purposes whether or not received within 30 days after such sale. REFERENCE: Sec. 214 (a) (5) (Quoted under Problem 106) PROBLEM 108 Illustrating Deductions Allowed -Losses-Shrinkage in Securities FACTS: Richard Ward, an officer of a manufacturing corporation, upon reviewing his income from securities just prior to the end of the year 1921, found that he had received no dividends or interest on the following: (1) 100 Shares Two Cities R. R. Co. Common Stock The Two Cities R. R. Company met with financial reverses in 1921, which resulted in the liquidation of the company. The bondholders received the entire proceeds of the sale of the company's assets in 1921, and there was nothing left to be distributed in liquidation to the stockholders. Due to the present low price of copper the K. B. Copper Mining Company temporarily discontinued operations during the year with the result that the stock was quoted on December 31, 1921, at 42. Mr. Ward had purchased this stock in 1915, at 27%. The North Star Lumber Company had large lumber concessions in Mexico under a grant providing that if the company did not operate for 5 continuous years the entire property then reverted to the Mexican Government. Due to the turbulent conditions in that country the company ceased operations in 1916, and has not deemed it wise to try to resume operations since that time. In 1921, therefore, the company being in default, the concession and all improvements thereon were confiscated, rendering the bonds absolutely worthless. QUESTION: Will the above conditions respecting the Two Cities R. R. Company and the K. B. Copper Mining Company stocks and the bonds of the North Star Lumber Company be reflected on Mr. Ward's return for 1921? ANSWER: (1) Since the stock of the Two Cities R. R. Company became worthless in 1921, the cost, or March 1, 1913, value if this stock was acquired prior to that date, may be taken as a loss on Mr. Ward's return for 1921. (2) Since this is a loss or shrinkage in the value of securities due to a fluctuation in the market, and would probably be recovered in the future as the market changed, no loss is deductible except on a sale or other disposition. (3) Worthless bonds are treated as bad debts, and the cost, or March 1, 1913, value if purchased prior thereto (depending on which of the provisions of Sec. 202 applies to the particular case under consideration), may be taken as a deduction from gross income as they become worthless (see Problem 119). In the case covered by this problem, therefore, Mr. Ward would be permitted a deduction from gross income for 1921, for the loss sustained on account of his North Star Lumber Company bonds, the extent of which would be determined under Sec. 202. REFERENCES: Art. 144, Regulations 62: "Shrinkage in value of stocks.-A person possessing stock of a corporation can not deduct from gross income any amount claimed as a loss merely on account of shrinkage in value of such stock through fluctuation of the market or otherwise. The loss allowable in such cases is that actually suffered when the stock is disposed of. See, however, article 154. However, if stock of a corporation becomes worthless, its cost or other basis determined under section 202 may be deducted by the owner in the taxable year in which the stock became worthless, provided a satisfactory showing of its worthlessness be made, as in the case of bad debts. Where banks or other corporations which are subject to supervision by Federal authorities (or by State authorities maintaining substantially equivalent standards) in obedience to the specific orders or general policy of such supervisory officers charge off stock as worthless or write it down to a nominal value, such stock shall, in the absence of affirmative evidence clearly establishing the contrary, be presumed for income tax purposes to be worthless. See article 151. . Art. 154, Regulations 62: "Where bonds purchased before March 1, 1913, depreciated in value between the date of purchase and that date, and were in a later year ascertained to be worthless and charged off, the owner is entitled to a deduction in that year equal to the value of the bonds on March 1, 1913. Bonds purchased since February 28, 1913, when ascertained to be worthless, may be treated as bad debts to the amount actually paid for them. Bonds of an insolvent corporation secured only by a mortgage from which on foreclosure nothing is realized for the bondholders are regarded as ascertained to be worthless not later than the year of the foreclosure sale, and no deduction for a bad debt is allowable in computing a bondholder's income for a subsequent year. To authorize a deduction for a bad debt on account of notes held prior to March 1, 1913, their value on that date must be established. "A taxpayer (other than a dealer in securities) possessing debts evidenced by bonds or other similar obligations can not deduct from gross income any amount merely on account of market fluctuation. Where a taxpayer ascertains, however, that due, for instance, to the financial condition of the debtor, or conditions other than market fluctuation, he will recover upon maturity none or only a part of the debt evidenced by the bonds or other similar obligations and is able to so demonstrate to the satisfaction of the Commissioner, he may deduct in computing net income the uncollectible part of the debt evidenced by the bonds or other similar obligations." CORPORATIONS: The principles illustrated in the above problem will also apply in the case of corporations. PROBLEM 109 Illustrating Deductions Allowed Individuals-Loss on Sale of Residential Property FACTS: Charles Martin has lived in the old family homestead for about ten years. In 1921 the neighborhood had run down and he decided to move to a better part of town. He therefore sold his home and the amount realized on the sale was less than the March 1, 1913, value of the house. QUESTION: Could the difference between the March 1, 1913, value and the selling price be deducted on his return for 1921? ANSWER: No, for the Bureau has held that the acquisition of residential property is not a "transaction entered into for profit" when the taxpayer resides therein, and hence a loss on the sale of such property used as a residence of the taxpayer is not deductible. REFERENCES: (Quoted under Problem 106.) Sec. 214 (a) (5): Art. 141, Reg. 62 (see Treasury Decision 3209): "... A loss on the sale of residential property is not deductible unless the property was purchased or constructed by the taxpayer with a view to its subsequent sale for pecuniary profit. . . ." PROBLEM 110 Illustrating Deductions Allowed Individuals-Losses-Apartment Sublet at Reduced Rental FACTS: Richard Brown had leased an apartment in 1920, for his personal use, for a period of five years at an annual rate of $1,800. In January, 1921, his business necessitated his removal to another city. In the meantime rents in that locality had dropped and in subletting the apartment he was unable to get a better price than $1,200. QUESTION: May the difference be taken as a loss on his return for the calendar year 1921? |