neither the investment of money in the stock of a company nor employment by the company in any official capacity makes the business of the company the trade of the investor or employee.13 The losses which seem to be limited by this provision of the law are those incurred in transactions involving sales or dealings in property. The law seems clearly to make a distinction between such losses and losses arising from fires, storms, shipwreck, or other casualty, and from theft.

Losses of Property from Fire, Storms, Etc. The law does not require that the property lost by fires, storms, shipwreck, or other casualty, or from theft, should be properly employed in the business or trade of the individual, but the Treasury Department seems to hold that even such losses must be sustained in trade.14 It seems to have been the intent of Congress, however, to permit the deduction of these losses by citizens or residents to the extent that the losses are not compensated for by insurance or otherwise.15

Losses Not Incurred in Trade. In transactions entered into for profit but not connected with his business or trade, a citizen or resident may deduct the losses

13 T. D. 2135. This extremely narrow construction of the language of the law has perhaps been the subject of more criticism than any other ruling of the Treasury Department. It operates to the detriment of every person who invests or speculates in property. Notwithstanding the criticism, however, Congress has not seen fit to remedy the injustice by permitting the deduction of all losses in transactions on which the gain, if any, is taxable.

14 T. D. 2005.

15 Act of September 8, 1916, § 5 (a). For a further discussion of the subject of losses see Chapter 31.

F. I. Tax.-3

actually sustained therein during the year to an amount not exceeding the profits arising therefrom. The loss must be actually sustained during the year and the total amount which may be deducted shall not exceed the profits arising from the same class of transactions.16 Under this heading an individual who makes investments in property from time to time, or who speculates, is required to report all of the gains from such investments or speculations and may offset against the gains all losses which he has sustained in similar transactions. He is thus required to report only the net gain from such transactions during the year. If, however, the net result for the year of a series of such transactions is a loss, he is not entitled to offset the loss against his income from buiness or trade.17

Worthless Debts. A citizen or resident may deduct all debts due to him actually ascertained to be worthless and charged off within the year. The law does not require such debts to have been incurred in the business or trade of the individual. It is sufficient if a debt was legally due and owing to the taxpayer, has actually

16 Act of September 8, 1916, § 5.

17 Prior to the passage of the Act of September 8, 1916, authorizing the deduction of losses not incurred in trade to the extent indicated above, it was held by the Treasury Department that an individual was required to report all income from transactions not incurred in trade but was not entitled to deduct any of the losses. Thus, if on a series of transactions during the year a gain of $5,000 was made, and $4,000 was lost, the sum of $5,000 was to be reported as income and no deduction could be made for the loss. T. D. 2135. Under the present law the taxpayer pays the tax only upon the net gain of $1,000. Logically, since the law taxes all gains from the sale of capital assets whether or not employed in business or trade, the law ought also to permit a deduction for all losses in the sale of similar assets.

been ascertained to be worthless and has been charged off within the year.18

Depreciation. An individual is allowed a reasonable deduction for exhaustion, wear and tear of property arising out of its use or employment in his business or trade. It is to be noted that this deduction applies expressly to property used in the individual's business or trade. No allowance for depreciation can be claimed upon other property, such as the individual's residence or his pleasure automobile. This limitation applies expressly to individuals. In other respects the provisions for allowing depreciation in the case of individuals. and corporations are the same, and are treated in a subsequent chapter on depreciation.19

Depletion of Natural Resources. Individuals are permitted the same allowance for the exhaustion of natural resources as is allowed to corporations in the case of oil wells, gas wells and mines. This subject is discussed in subsequent chapters.20

Improvements and Betterments. No deduction is allowed for amounts expended for new buildings, permanent improvements or betterments made to increase the value of any property or estate and no deduction is allowed for any amount expended for restoring property or making good the exhaustion thereof for which an allowance has been made. This limitation on the deductions allowed to individuals is the same as in the

18 See Chapter 31 for a further discussion on the deduction of worthless debts.

19 See Chapter 32 on Depreciation.

20 See Chapters 33 and 34.

case of corporations, and is a reasonable limitation. Amounts of capital invested in permanent improvements or betterments add to the value of the property. If such property is subject to wear and tear or depletion the additional amount so invested in the property may be taken into consideration in computing the allowance for depreciation or depletion. This subject is more fully discussed in a subsequent chapter.21

Contributions to Charities. A citizen or resident is allowed to deduct from his net income contributions or gifts actually made within the year to corporations or associations organized and operated exclusively for religious, charitable, scientific or educational purposes, or to societies for the prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private stockholder or individual. This deduction, however, is limited to an amount not in excess of 15% of the taxpayer's taxable net income including the amount of such contributions. The law further provides that such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Treasury Department. The deduction is not allowed to non-resident aliens or corporations.22

Credit of Dividends. For the purpose of computing the normal tax the individual may also deduct from his net income the amount received as dividends upon the stock or from the net earnings of any corporation taxable upon its net income under the law. The dividends intended to be included in this provision of the law are

21 See Chapter 27.

22 Act of Sept. 8, 1916, as amended, § 5.

apparently those of domestic corporations and also those of foreign corporations, if the foreign corporation is within this country and is taxable upon its net income. The amount of such dividends is deductible only for the purpose of assessing the normal tax, and not for the supertax.23

Personal Exemption. The personal exemption is allowed only to citizens and residents. A non-resident alien or a corporation has no right to claim this exemption. In the case of unmarried citizens or residents the amount of the exemption is $3,000 under the 1916 Law, and $1,000 under the 1917 Law. In the case of married persons living together, the exemption is $4,000, under the 1916 Law and $2,000 under the 1917 Law. In the case of the head of a family it is also $4,000 and $2,000 under the respective laws. If the person making the return is the head of a family there is an additional exemption of $200 for each child dependent upon such person, if under 18 years of age, or if incapable of self-support because mentally or physically defective. This deduction, of course, can be claimed only by one parent in a family. The same allowance for dependent children may be claimed under each law.24

GUARDIANS AND TRUSTEES. Guardians or trustees are allowed this personal exemption, as to income derived from the property of which such guardian or trustee has charge, in favor of each ward or cestui que trust, the amount of exemption depending, of course, on the single or married status of the ward or cestui que trust and the existence of dependent children. In no event,

23 Act of September 8, 1916, Sec. 5 (b).

24 Act of September 8, 1916, § 7, as amended. T. D. 2547.