Lapas attēli
PDF
ePub

ANSWER:

No, for the Bureau has ruled that a transaction of this nature was not "entered into for profit."

REFERENCES:

Sec. 214 (a) (5) (Quoted under Problem 106)

In Bul. 1-19-59; O. D. 42, the Bureau ruled that: "The subletting of an apartment by a tenant on account of being required to make his residence in another city, is held not to be a 'transaction entered into for profit.' Therefore, any loss sustained through such transaction is not deductible from gross income."

PROBLEM 111

Illustrating Deductions Allowed-Losses Arising from
Storms, Etc.

FACTS:

Donald Parker owned a summer home (on which he carried no insurance) on the beach of Ocean Side. During February, 1921, one of the heavy winter storms swept away part of the foundations and made the collapse of the building certain if not removed and repaired. In order to repair the damage the house was moved back 50 feet from the shore.

The cost of repairing the damage was $150, and the cost of moving the house back 50 feet was $75. In June of the same year he decided to move it to a safer location to prevent possible further damage from future storms. The cost of the second removal was $125.

(1) QUESTION:

Is the cost of repairing the damage ($150) deductible?

ANSWER:

Yes.

(2) QUESTION:

Is the cost of the first removal ($75) deductible?

ANSWER:

Yes.

(3) QUESTION:

Is the cost of the second removal in June ($125) deductible?

ANSWER:

No.

REFERENCES:

Sec. 214 (a): "That in computing net income there shall be allowed as deductions: . . . "(6) Losses sustained during the taxable year of property not connected with the trade or business . . . if arising from storms . . . and if not compensated for by insurance or otherwise . . . 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." Bul. 43-20-1259, O. D. 698: "A taxpayer's personal residence located on a beach was damaged by a storm, which washed away part of the foundation and so undermined the building as to render its destruction certain if it was not immediately removed. In removing the building to a safer location it was further damaged.

"The damage caused by the direct action of the storm and by the removal to avoid further probable damage is held to have arisen from storm and deductible from gross income as a loss within the meaning of section 214 (a) (6) of the Revenue Act of 1918. If the building was moved to prevent further loss from the storm in question, the expense of moving it is also deductible as a loss; but if it was moved to prevent probable losses from future storms, the expense of moving it is regarded as a capital expenditure and should be added to the cost of the building in computing profit in the event of its sale, since the removal to a safer locality presumably increased its value."

CORPORATIONS:

Corporations are also permitted a deduction for losses arising from destruction of or damage to property similar to the case illustrated above.

REFERENCE:

Sec. 234 (a) (4) (Quoted under Problem 103)

PROBLEM 112

Illustrating Deductions Allowed Individuals-Losses in Case of Nonresident Alien-Loss by Fire

FACTS:

Jules Leblanc, a nonresident alien of the United States, owned

several houses in the United States from which he received rental. During 1921, one of these houses not covered by insurance, burned to the ground.

QUESTION:

Since Mr. Leblanc is a nonresident, would his agents in the United States be correct in deducting this loss from his other income from sources within the United States in preparing his return of income?

ANSWER:

Yes, as the property which was destroyed was located in the United States, and Mr. Leblanc was not compensated for the loss by insurance or otherwise.

REFERENCE:

Sec. 214 (a) (6) (Quoted under Problem 111)

PROBLEM 113

Illustrating Deductibility of Loss when Ascertained

FACTS:

For the calendar year 1921, the books of the Installment Furniture Company showed a net income of $25,000. The annual statements were duly prepared on this basis and presented to the board of directors at the annual meeting, and approved. These statements were also used in connection with the negotiation for certain loans. Subsequently to the closing of the books and the preparation of the statements mentioned above, the president of the corporation was led to believe that the accounts of the cashier were not all as they should be. He consequently instituted an investigation in 1922, and found that the cashier had systematically embezzled funds during the year 1921. The total amount taken by the cashier aggregated $40,000. The cashier, it was found, had dissipated every dollar of his ill-gotten gains and was financially irresponsible.

QUESTION:

For what year may the loss or embezzlement be taken as a deduction from gross income?

ANSWER:

The corporation, in the preparation of its return for the year 1921, should show the loss above mentioned as a deduction from gross income. However, if it desires to account for the loss for the year in which it was ascertained, that is, in 1922, the corporation should attach to its return a statement of the facts upon which it relies and the Commissioner, upon due consideration, may permit the loss to be accounted for during the year 1922. The allowance of a deduction for a loss in a year other than the one in which sustained is entirely within the discretion of the Commissioner and he will consider exercising this discretion only in exceptional cases.

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. .

T. D. 3261.-"The losses allowed as deductions under Sections 214 (a) (4), (5), and (6),1 and 234 (a) (4) 1 of the Revenue Act of 1921 shall be deducted as of the taxable year in which sustained. In exceptional circumstances, however, in order to avoid injustice to the taxpayer and to more clearly reflect his income the Commissioner may permit a loss to be accounted for as of a year other than the one in which sustained. For example, an embezzlement or a shipwreck may occur in 1921 but not become known until 1922 and in such a case income may be more clearly reflected by accounting for the loss as of 1922 rather than of 1921. If a taxpayer desires to account for a loss as of a period other than the one in which actually sustained, he shall attach to his return a statement setting forth his request for consideration of the case by the Commissioner, together with a complete statement of the facts upon which he relies. However, in his income tax return he shall deduct the loss only for the taxable year in which actually sustained. Upon the audit of the return the Commissioner will decide whether the case is within the exception provided by the statute; if not within the exception the loss will be allowed 1 See qualification under section 2 & 4 (a) (4) quoted above.

only as of the taxable year in which sustained. The allowance of a deduction for a loss in a year other than the one in which sustained is entirely within the discretion of the Commissioner and he will consider exercising this discretion only in exceptional cases.

FACTS:

PROBLEM 114

Illustrating Losses Due to Shrinkage in Inventory

[ocr errors]
[ocr errors]

The Oswego Paper Manufacturing Company filed its returns on the fiscal-year basis ended June 30. In computing its net income for the fiscal year ending June 30, 1921, it followed its customary practice of pricing its closing inventory on the basis of cost or market, whichever was lower. Due to a change in conditions which particularly affected its own business, the value of its inventory as reported at June 30, 1921, considerably declined. In view of the provision of the Revenue Act of 1921, under Paragraph 4, of Subdivision (a) of Section 234 which permits the deduction of

"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."

The corporation desires to file an amended return for the fiscal year ended June 30, 1921, and revise its inventory as of the closing date on the basis of the reduced values which prevailed subsequent thereto.

QUESTION:

Will such a revision in inventory be permitted by the Commissioner?

ANSWER:

No. The inventories having been originally computed on the basis of cost or market, whichever was lower, were computed in accordance with the regulations. The market referred to was the market prevailing at the inventory date. A subsequent de

« iepriekšējāTurpināt »