(3) The term "capital deductions" means such deductions as are allowed by section 214 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year;

(4) The term "ordinary deductions" means the deductions allowed by section 214 other than capital losses and capital deductions;

(5) The term "capital net gain" means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gain;

(6) The term "capital net loss" means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain;

(7) The term "ordinary net income" means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions; and

(8) The term "capital assets" means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:

A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 121⁄2 per cent of the capital net gain.

(c) In the case of any taxpayer (other than a corporation) who for any taxable year sustains a capital net loss, there shall be levied, collected, and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:

A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount minus 121⁄2 per cent of the capital net loss; but in no case shall the tax under this subdivision be less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of this section.

(d) The total tax determined under subdivision (b) or (c) shall be collected and paid in the same manner, at the same time, and subject to the same provisions of law, including penalties, as other taxes under this title.

(e) In the case of the members of a partnership, of an estate or trust, or of the beneficiary of an estate or trust, the proper part of each share of the net income which consists, respectively, of ordinary net income, capital net gain, or capital net loss, shall be determined under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary, and shall be separately shown in the return of the partnership or estate or trust, and shall be taxed to the member or beneficiary or to the estate or trust as provided in sections 218 and 219, but at the rates and in the manner provided in subdivision (b) or (c) of this section.

Regulations 65.

ART. 1651. Definition and illustration of capital net gain.— (a) Section 208, which applies to sales and exchanges of capital assets consummated after December 31, 1921, provides that any taxpayer other than a corporation may, if he so desires, state separately in his return his net gain on sales or exchanges of capital assets, and pay on such capital net gain (as defined and limited in the section) a flat tax of 122 per cent in lieu of the tax he would otherwise pay on such income under sections 210 and 211. The tax upon his net income from other sources, termed “ordinary net income" in this section, is to be computed at the rates and in the manner provided in sections 210 and 211. The total tax will be the sum of the tax upon the ordinary net income plus 1212 per cent of the capital net gain.

The term "capital assets" is defined to mean property held by the taxpayer for more than two years, whether or not connected with his trade or business, but not including stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. (See articles 1611-1618 with reference to inventories.) The specific property sold or exchanged must in general have been held for more than two years. However, if the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and the dividend shares are considered to be capital assets. Likewise, if property is exchanged for other property and no gain or loss is recognized under the provisions of section 203, and if the total period during which the original property and the property received in exchange have been held by the taxpayer is more than two

'years, the property received in exchange is considered to be capital assets.

"Capital gain" is taxable gain from the sale or exchange of capital assets. "Capital loss" is deductible loss resulting from the sale or exchange of capital assets. (See article 1591, for the basis for determining such gain or loss, and article 1561 as to adjustments for improvements and depreciation thereon.) "Capital deductions" are deductions properly allocable to or chargeable against capital assets sold during the taxable year, including items of expense connected with the sale or exchange of a capital asset, such as commissions paid brokers or agents. "Capital net gain" is the excess of the total amount of capital gain over the sum of (1) capital deductions and capital losses, and (2) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gain.

Residential property is included within the definition of capital assets; hence, a taxpayer (other than a corporation) selling such property at a profit may elect to be taxed under section 208. A loss from the sale of such property is not a "capital loss," however, unless the property was purchased or constructed by the taxpayer with a view to its subsequent sale for pecuniary profit. (See section 208 (a) (2) and article 141.)

Example.-A in 1924 sold (1) an office building for $1,000,000, which he had bought in 1915 for $500,000 and on which there was depreciation aggregating $100,000; and (2) stock in a mining company for $10,000 which he had purchased in 1919 for $20,000. Without regard to capital deductions (such as commissions paid on these sales) his capital gain would be $600,000, his capital loss $10,000, and his capital net gain $590,000. If his other net income (ordinary net income) in 1924 was $50,000, he may, instead of paying normal tax and surtax on his total net income of $640,000, segregate these capital transactions in his return and pay a tax on his capital net gain of $590,000 plus the normal tax and surtax upon his ordinary net income of $50,000. If, on the other hand, A sustained a net loss of $50,000 in his business, had a capital gain of $600,000, and a capital loss of $10,000, his capital net gain would be $540,000. In such a case, A may, instead of paying normal tax and surtax upon his total net income of $540,000, pay a tax of 121⁄2 per cent upon this amount.

(b) The credit for taxes allowed by section 222 (see articles 381-387) is a credit against the total tax, however computed, but the credits allowed by section 216 are allowed "for the purpose of the normal tax only" and may not be taken against capital net gain although they may be deducted from “ordinary net income" in computing the amount of the tax. The credit allowed by section 209 in respect of earned income may be taken against the tax computed under the capital gain section.

Example. If B, a married person, had capital net gain of $60,000 and ordinary net income of $2,000, his $2,500 personal exemption would more than offset his ordinary net income, but he may not apply any part of it to reduce his capital net gain.

(c) A nonresident individual or a citizen entitled to the benefits of section 262 may elect to be taxed under section 208 with respect to sales or exchanges of property within the United States.

ART. 1652. Returns of capital net gain.-Segregation of capital transactions for the purposes of section 208(b) is required only where the taxpayer elects to be taxed under that subdivision. Where his total income tax for any taxable year does not exceed 122 per cent of his net income he will not elect to be so taxed for that year. See article 1651. When a taxpayer elects to be taxed under this section for any taxable year, he must attach to his return of income for such year an accurate statement under oath showing all items of capital gain, capital loss, and capital deductions in such manner as will clearly show the exact amount of his capital net gain for the taxable year. Each capital transaction must be separately shown and the capital items with respect thereto grouped together in order that the capital gain derived or the capital loss sustained from each capital transaction will readily appear. In the case of sales or exchanges of securities or any other property, the statement must show how long the property was held by the taxpayer immediately preceding the sale or exchange.

ART. 1653. Partnerships, estates, and trusts.- Members of a partnership may, with respect to any capital net gain, elect to be taxed as provided in section 208. Similarly, estates or trusts or the beneficiaries thereof may elect to be taxed as provided in section 208 with respect to any capital net gain. Where

the net income of a partnership, estate or trust consists in whole or in part of capital net gain, there shall be attached to the return (upon the request of any member or beneficiary, or without such request, at the election of the fiduciary of an estate) a statement showing (1) all items of capital gain, capital loss, and capital deductions, as provided in article 1652, and (2) the names of members or beneficiaries and the amounts of their respective shares in such capital net gain, or capital net loss.

ART. 1654. Capital net losses.- Subdivision (c) of section 208 provides for the determination of the tax in the case of any taxpayer (other than a corporation, but including the members of a partnership, an estate, or trust, or the beneficiaries thereof) who in any taxable year sustains a capital net loss. A "capital net loss" is the excess of the sum of the capital losses plus the capital deductions as defined in article 1651, over the total amount of capital gain, as therein defined. It is to be noted that, although the tax provided in subdivision (b) of section 208 in the case of a capital net gain is to be imposed at the election of the taxpayer, the limitation upon the deduction of a capital net loss provided in subdivision (c) will be applied irrespective of the taxpayer's election.

In the case of any taxpayer, other than a corporation, who sustains a capital net loss for any taxable year, a tax determined as follows will be levied, collected and paid in lieu of the normal tax and the surtax provided in sections 210 and 211; A partial tax will first be computed upon the basis of the ordinary net income, as defined in article 1651, at the rates and in the manner provided in sections 210 and 211, and the total tax will be this amount minus 1212 per cent of the capital net loss, but in no case shall the tax under this article be less than the taxes imposed by sections 210 and 211 computed without regard to the provisions of this article.

Revenue Act of 1924.

RECOGNITION OF GAIN OR LOSS FROM SALES AND EXCHANGES. (See Sec. 203, printed supra, p. 208.)

Regulations 65.

ART. 1571. Recognition of gain or loss.—In the case of a sale or exchange, the extent to which gain or loss, the amount of which is determined under section 202 of the statute, shall