prior to the incidence of the tax constitutes a closed transaction and such transaction cannot be re-opened for the purpose of reducing the taxable income of the corporation21 The court has held that if a loss sustained by a corporation selling its own bonds at a discount is an expense, it will not be paid until the maturity of the bonds and should, therefore, be pro-rated over the life of the bonds, and not deducted in full in the year in which the bonds were issued.22

Purchase of Bonds for Retirement. Where bonds have been issued at par, under the terms of an indenture requiring the corporation annually to purchase and retire a certain number of the bonds, and the corporation is required to purchase such bonds for retirement in the market, the difference between par value of the bonds and the amount paid for the bonds on retirement is deductible as a loss. If the bonds were issued at a premium, the loss to be claimed should be the difference between the price at which the bonds were issued and the price at which they were purchased for retirement, unless the amount of premium received on the original sale of the bonds was accounted for as income in the year in which the bonds were sold, in which case the difference between the par value and the purchase price may be deducted. In the event the bonds were issued at a discount, and the discount was charged against the earnings of the year in which issued, the difference between the par and the purchase price may be deducted as a loss; but if the discount on the bonds was pro-rated over the life of the bonds and the annual proportion charged against the yearly income, the

21 T. D. 2137.

22 Baldwin Locomotive Works v. McCoach, 221 Fed. 59.

amount to be charged off, as a loss, should be the difference between the price at which the bonds were issued and the purchase price minus an allowance for the sums that have been charged off annually on account of the pro-rated discount.23

Bonds Purchased Above Par. Where bonds have been purchased above par it seems, under the present law, that no deduction can ordinarily be made for the loss of the amount of the premium until the bonds are either sold in the market before maturity, or until the principal sum is received at the time of maturity. In either case the losses will be the difference between the amount paid and the amount received. Where, however, a taxpayer reports on a basis other than of actual receipts and disbursements it seems that this sum may properly be deducted in proportionate amounts each year as amortization.24

Loss by Destruction or Disappearance of Property. The law expressly provides, in the case of individuals, that the loss arising from fires, storms, shipwrecks, or other casualty, or theft, may be deducted in the year in which the loss is sustained. This kind of loss is allowed to corporations without specific mention, as with respect to corporations all losses are deductible. In the case of non-resident aliens the law permits the deduction of all such losses of property within the United States, and this

23 Letter from Treasury Department dated March 23, 1915; I. T. S. 1917, ¶ 1326.

24 Under the 1909 Law it was held that where bonds were purchased at a rate above par a proportionate amount of the premium might be deducted each year on account of amortization. T. D.

is apparently intended also in the case of foreign corporations, although the language of that provision seems to limit the losses to business or trade conducted by the foreign corporation within the United States.25 In all cases the law provides that the deduction may be made only when such losses are not compensated for by insurance or otherwise. The intent seems to be to permit a deduction of the losses to the extent that the taxpayer is not compensated by insurance or otherwise, and that if he is compensated for part of such loss he may deduct the part for which he is not so compensated. In claiming a loss due to the destruction of property the salvage value of the property must be considered as a partial compensation to be deducted from or not included in the amount claimed as deduction. Further, if depreciation has been claimed from time to time upon the property so destroyed, the aggregate amount of such depreciation allowance should be deducted from the cost of the property in ascertaining the amount of the loss. In this, as in all other cases, the measure of the loss is the difference between the cost of the property and the amount received as compensation. The value of the property at the time of the loss is not intended to be the measure of the loss, and it is not clear whether or not the value on March 1, 1913, may be taken instead of the cost, where the property was acquired prior to that date, as is expressly permitted by law in sales of property.2 26

LOSS OF LIVE STOCK. Where a farmer has purchased live stock which afterwards dies from disease or injury, or is killed by order of government authorities, and the

25 See Act of September 8, 1916; §§ 5 (a), 6 (a), 12 (a) and 12 (b).

26 See Chapter 20.

27

cost thereof has not been claimed as an item of expense,2 the actual purchase price of such stock, less any depreciation which may have previously been claimed, may be deducted as a loss. Any other property destroyed by order of government authorities may in a like manner be claimed as a loss; but if in any case reimbursement is made by the government in whole or in part on account of the stock killed or property destroyed, the amount so received must be reported as income for the year in which reimbursement is made,28 that is to say, only net loss is allowable as a deduction.

SHRINKAGE OR DETERIORATION IN STORAGE. Loss due to shrinkage or deterioration of produce in storage is not allowed as a deduction. Such shrinkage or deterioration is reflected in the selling price when the goods are sold and correspondingly reduces the net income at that time.29

WORTHLESS STOCK. A loss is none the less actual because an individual cannot divest himself of the possession of worthless stock by sale, but that condition alone does not give the loss in question such a character as appears to the Treasury Department to have been contemplated by the income tax law.30 However, if the stock has even the slightest value so that it may be sold for any amount it seems the loss may be deducted as it is then the result of a closed transaction. It seems, also, that the loss would be properly deductible if the corpora

27 A farmer may deduct as an item of expense the cost of live stock purchased for re-sale.

28 T. D. 2153. 29 T. D. 2153.

30 T. D. 2135.

tion has been dissolved, or if its charter has been forfeited since then there is a final ascertainment of the loss.

DISTRICT IRRIGATION BONDS. District irrigation bonds as a rule, if not always, are a lien upon the real estate affected by the irrigation project and until the corporation has taken such steps as are necessary to protect its rights and enforce the collection of the bonds it does not appear that the corporation would be warranted in writing out of its assets and deducting from income, as a loss, the face value or any other arbitrarily ascertained amount representing a loss or shrinkage in the value of such bonds.31

Worthless Debts. For the purpose of deduction as losses, debts are divided into two classes, (a) those which represent to the creditor a return of capital and (b) those which represent unpaid income. The former may be deducted regardless of when the debt became due and payable, but the latter, such as uncollected wages, salaries, rents, interest and items of similar taxable income, may not be deducted, if the debt became due on or after March 1, 1913, unless the amount thereof has been reported as income; but if the debt became due and payable prior to March 1, 1913, it may be deducted in any event.32 The losses which may be deducted are losses of capital; income on which the tax has been assessed assumes the status of capital, and income which became due and payable before the incidence of the tax is capital to the taxpayer although it may be received thereafter. The mere failure to receive income does not

31 T. D. 2152.

32 T. D. 2224.