certificates of deposit. An analysis of the items shown under loss on sale of capital assets and miscellaneous investments, shows the following:

Loss on sale of engine purchased in 1917, which
was part of the equipment used in the busi-
ness of the company

Loss on sale of stock of the U. S. Steel Cor-
poration purchased in 1916, out of surplus
funds

$14,000

Total loss...

26,000

$40,000

Profit on sale of stock of the Allied Chemical
Company purchased in 1915, out of surplus
funds

10,000

Net loss on these three transactions ...... $30,000

The property on account of which the depletion of $4,000 is shown above was acquired April 17, 1915, and was not at the time of acquisition a proven tract or lease. However as the result of discoveries made by the Mohegan Oil Co. in 1917, the value of such property within thirty days after discovery was such that on the basis of such discovery value the depletion for 1921 would have been $92,000.

PROBLEM:

Compute the "net loss" of this company for 1921, as "net loss" is defined under section 204 (a).

SOLUTION:

It is to be observed that in the computation of "net loss" which follows, the amount of depletion included among the deductible items is only the depletion based upon cost in accordance with the limitations prescribed by paragraph (9) of section 234. The rule, as interpreted by the author (see Problem 132) is that the depletion based upon discovery value may not exceed the

depletion based upon cost (or March 1, 1913, value) unless the depletion based upon cost (or March 1, 1913, value) is less than the net income from the property subject to depletion (computed without the benefit of a depletion deduction), in which case the depletion based upon discovery value may not exceed such net income.

26,000

Loss on sale of engine

....

......

Loss on sale of U. S. Steel Co. stock ... Dividends received from domestic corporations not entitled to benefits of section 262 ...

2,000 $177,000

$52,000

(Sec. 204-a-2) Tax-free interest

received ..... $ 1,500

2,000

500

(Sec. 204-a-4) Dividends

2,000

(Sec. 204-a-5) Depletion based on dis

covery value ....

0

83,000

"Net loss"

$94,000

REFERENCE:

Sec. 204 (a): "That as used in this section the term 'net loss' means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery and other capital assets, used in the conduct of such trade or business); and when so resulting means the excess of the deductions allowed by section 214 or 234, as the case may be, over the sum of the following: (1) the gross income of the taxpayer for the taxable year, (2) the amount by which the interest received free from taxation under this title exceeds so much of the interest paid or accrued within the taxable year on indebtedness as is not permitted to be deducted by paragraph (2) of subdivision (a) of section 214 or by paragraph (2) of subdivision (a) of section 234, (3) the amount by which the deductible losses not sustained in such trade or business exceed the taxable gains or profits not derived from such trade or business, (4) amounts received as dividends and allowed as a deduction under paragraph (6) of subdivision (a) of section 234, and (5) so much of the depletion deduction allowed with respect to any mine oil or gas well as is based upon discovery value in lieu of cost."

PROBLEM 37

Illustrating Deductibility by a Corporation of Net Loss
of One Year from Taxable Income of a Later Year

FACTS:

The Musical Advertiser, Inc., for the calendar year 1921, has a "net loss," as defined in section 204 (a), of $100,000, Its income-tax return is filed on the calendar-year basis.

QUESTION:

In what year is the 1921 net loss deductible from taxable income?

ANSWER:

In 1922, to the extent that the 1921 net loss is not in excess of the 1922 net income. Any excess over 1922 net income would be deductible in 1923, to the extent of the 1923 net income.

REFERENCE:

Sec. 204 (b): "If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary."

PROBLEM 38

Illustrating Computation of Net Loss of One Year Deductible from Taxable Income of a Later Year in the Case of a Partnership

FACTS:

John and Lill, a domestic partnership, in 1921 suffers a net loss, as defined in section 204 (a), of $2,400. The partnership is composed of Mr. John, who receives one-third of the partnership profits, and Mr. Lill, who receives the other two-thirds. Neither of the partners has income from any source other than from the partnership business. The net income of the business in 1922, was $25,000. Both partnership and partners file returns on the calendar-year basis.

QUESTION:

How is the net loss to be treated?

ANSWER:

In the Revenue Act of 1921 the provision extending the application of the net-loss section to partnerships is the same as that in the Revenue Act of 1918. Consequently, in view of the

procedure under the Revenue Act of 1918, it is reasonable to believe that the 1921 net loss is deductible in the 1922 personal returns of the partners, in the proportion in which they share profits, namely:.

Mr. John (3)

Mr. Lill (%)

REFERENCES:

$800

1,600

Sec. 204 (c): "The benefit of this section shall be allowed to the members of a partnership... under regulations prescribed by the Commissioner with the approval of the Secretary." Sec. 204 deals with "net losses."

PROBLEM 39

Illustrating Computation of Net Loss of One Year De-
ductible From Taxable Income of a Later Year in the

FACTS:

Case of an Estate

For the calendar year 1921, the estate of Mark Mortem, deceased, suffered a net loss, as defined in section 204 (a), of $50,000. The net income in 1922 was $40,000 and in 1923, $100,000. The beneficiaries had no income other than that received from the estate.

QUESTION:

What would be the effect of the net loss?

ANSWER:

$40,000, of the net loss of $50,000, exhausts entirely the net income of the estate for 1922, so that the beneficiaries of the estate have no taxable net income for 1922. The balance of the net loss, or $10,000, reduces the net income of the estate for 1923, to $90,000, upon which basis the beneficiaries of the estate are subject to tax.

REFERENCE:

Sec. 204 (c): "The benefit of this section shall be allowed to