viduals have been deductible if falling under the headings appearing on the preceding page. Examples are found in:

1. A sale of residential property purchased with a view to its subsequent sale for pecuniary profit (O. 780; 1 B. T. A. I101) even though temporarily lived in (A. R. R. 2849); but if bought for residential purposes and later rented, no loss upon the sale can be deducted (O. D. 1148). No distinction is to be drawn between property bought for resale and property bought for investment (O. D. 138). A loss from the forced sale to a state commission of a residence located in a flood district was not allowable as a loss from flood (A. R. R. 1819).

2. The removal of a house from a beach to prevent further damage, but not if removed to prevent probable future damage (O. D. 698). Damages by the sea to a house, not made good by repairs, were regarded as conjectural (I. T. 1567).

3. A sale of an investment received as a gift (T. B. R. 35). But where acquired before March 1, 1913, the claim must be supported by evidence of fair value at the date of gift as well as at March 1, 1913 (4 B. T. A. 756).

4. Marginal losses in 1917-if the taxpayer was able to prove his relations with a broker as a vocation (A. R. R. 404).

5. A judgment paid on account of misrepresentation in the sale of a farm (O. D. 978).

6. Sums belonging to a minor, misappropriated by a guardian (A. R. M. 144).

7. Payment made in compromise on account of neglect of duty as a director in a bank (O. D. 1091).

8. A shortage in the property account of National Guard officer; equipment replacements were personal expenses, however (I. T. 1182).

9. The forfeiture of an option (I. T. 1230).

10. The expenses of sending an agent to Europe to investigate the possibilities of establishing a certain business; the loss falls under (b) but not under (a) (I. T. 1505).

II. A ring, stolen, but not lost (O. D. 526). Burglary losses can be deducted only in the year of occurrence (A. R. R. 542).

12. Freezing and bursting of water pipes (O. D. 1076), or the explosion of a boiler (I. T. 2231).

13. A royalty interest purchased which proved worthless (O. D. 375). An oil lease may prove worthless where drilling has been abandoned (4 B. T. A. 370), although the Department's rule is that no loss arises until the lease expires or is canceled (S. M. 5700).

14. Extraordinary depreciation, equivalent to the reconstruction cost yet to be incurred, where a building had been damaged by an earthquake (A. R. R. 4725).

Personal expenditures which have been cited as non-deductible losses have been illustrated in:

1. Damages to an automobile owned and operated for pleasure purposes (O. D. 857; 4 B. T. A. 604)), although caused by the icy condition of a street (O. D. 629).

2. Amounts expended in defending damage suits covering personal injuries (O. D. 779, A. R. R. 444; 1 B. T. A. 214, 1239).

3. Losses on a lease (O. D. 42) or on the sale of a residence (A. R. R. 96) caused by the establishment of business connections in another city.

4. Stock surrender to wipe out an existing corporate deficit (O. D. 216).

5. Cases where a taxpayer was both seller and buyer (I. T. 1181).

6. Expenditures made in an attempt to apprehend a thief; the loss itself could be deducted, however (O. D. 571). 7. Damage of an individual's home by a bomb, unless a fire resulted (I. T. 2037).

8. Liquor stolen (1 B. T. A. 944).

9. Gambling losses are not deductible because not incurred in a transaction entered into for profit, an "incurred" expense being defined as an expense "forced upon one by operation of law." Winnings were taxable, to the extent they exceeded losses from the same source (1 B. T. A. 338). A bookmaker's income was similarly computed (1 B. T. A. 326). Expenses of a baseball pool (I. T. 2127) and losses from bets on horse races in New York (S. M. 2680A) were not deductible as losses.

A loss incurred through transactions entered into for profit but which were ultra vires 1 acts of a corporation could be de1 An ultra vires act of a corporation is one not authorized by its charter. An illegal act is one expressly forbidden by existing statutes.

ducted under the 1917 act. A distinction is drawn between ultra vires acts and illegal acts (L. O. 1092).

Recoverable insurance should be deducted from the loss and an amended return filed if the actual collections from the insurance companies differed from the estimated amounts (T. B. R. 55). The same rule holds for a recovery from embezzlement and from other losses (O. 845 and O. D. 165).

Cost of replacements in excess of insurance received is not a loss but a capital expenditure (O. D. 697). Depreciation and salvage must be considered in determining the extent of a loss (S. 1217). This last rule is presumably limited in application to property on which depreciation in the past has been an allowable deduction. The cost of removing buildings in the case of property purchased for another purpose is a capital charge and not a loss (O. D. 1031). No deductible loss occurred where it was necessary to demolish a part of a building for purposes of reconstruction (O. D. 773). The general application of the last rule is doubtful; rather the cost of demolition should be charged in part to the reserve for depreciation and part to expense, in the average case. Bills paid for a contractor who had absconded were not to be considered losses but capital charges (O. D. 925); this rule was changed by the Board of Tax Appeals, the payments being deductible losses (4 B. T. A. 133).

Stocks transferred at market value to a creditor to liquidate a debt give rise to a loss if the market value is less than cost (O. D. 555). This will still hold, presumably, unless the stocks were pledged originally to secure the debt (T. D. 3262). A repurchase of worthless securities by a dealer from a customer was held to be an acquisition of good-will (S. R. 2165); worthless securities purchased from a bank by a stockholder were an addition to his investment (S. M. 4510).

A loss must always be a definite one, separable from other costs. Thus, no loss can be assigned where the growth or productivity of trees merely is retarded (O. D. 374 and I. T. 1318), nor can a loss be sustained where a part of a purchased business was discontinued (A. R. R. 6062). No loss can arise where there is no "completed and closed" transaction (3 B. T. A. 535, 4 B. T. A. 893); land cannot be written off while title is retained (3 B. T. A. 535).

A breach of contract gives rise to a loss only when the debtor admits the liability to the creditor (1 B. T. A. 202; 3 B. T. A. 1339; 4 B. T. A. 50, 947).

No loss for 1921 can be put by the Commissioner into any previous year and no loss of any year prior to 1921 can be accounted for in any year except that of its occurrence (L. O. 1105).

XVII

NET LOSSES AND CONTRIBUTIONS

Net losses. Losses under 1918 act. Losses under 1921 act. Contributions in general. Donations to religious, charitable, and educational institutions. Gifts to cities. Contributions may be money or property. Proportionate shares. Valuation of contributions. Amounts paid into pension funds not deductible by corporations.

SECTION 204 of the Revenue Act of 1918 provided that a net operating loss sustained for a taxable year beginning after October 31, 1918, and ending before January 1, 1920, was deductible from the net income of 1918 and the tax for 1918 must, under such conditions, be recomputed, the taxpayer being entitled to a refund. If the loss for the period indicated exceeded the net income for 1918, the excess could be applied in reduction of the net income for 1920. Losses might not include those arising from the sale of capital assets except in the case of assets used in the production of a war facility.

Section 204 of the 1921 act and Section 206 of the 1924 and 1926 acts make a similar provision which is extended indefinitely into the future. That is, a loss for any one year may be deducted from the next succeeding year's income and if not thus absorbed the excess may be deducted from the second succeeding year's income. The net loss (computed in the same manner as net income and including losses from the sale or other disposition of capital assets used in production) must be decreased by (a) the excess of tax-free interest received over non-deductible interest paid, (b) the excess of the deductible losses not arising from trade or business over taxable net income from the same source (individuals only), (c) the excess of capital losses over capital gains (individuals only), (d) dividends excluded from income (corporations only), and (e) deple