gross income of this latter corporation as taxes "paid by it," such taxes not being paid by this corporation, but being paid in its behalf by other corporations.30 30 T. D. 2927; U. S. v. Aetna Life Ins. Co., 260 Fed. 333. CHAPTER 25 DEDUCTION OF LOSSES The Revenue Act of 1918 provides in the case of individuals that in computing net income they may be allowed as deductions, if sustained during the taxable year and not compensated for by insurance or otherwise, (a) losses incurred in trade or business, (b) losses incurred in any transaction entered into for profit, though not connected with the trade or business, (c) losses of property not connected with the trade or business if arising from fires, storms, shipwreck, or other casualty or from theft. The extent to which losses may be deducted by non-resident aliens and foreign corporations is more fully discussed in previous chapters.2 Individuals and corporations may also deduct debts ascertained to be worthless and charged off within the taxable year. In the case of corporations all losses sustained during the taxable year and not compensated for by insurance or otherwise may be deducted. The rules discussed in this chapter are those applicable to corporations and individuals generally. The Revenue Act of 1918 contains a new provision for the deduction of net losses in certain cases from the income of the preceding year,5 and also a provision as to losses in inventory and from rebates ascertained after the close of the taxable year." Losses Sustained in Trade. Under the present and preceding laws losses sustained during the taxable year and not compensated for by insurance or otherwise, may be deducted if incurred in trade or business." A loss incurred in trade or business must be absolute and not a speculative or fluctuating valuation of a con 1 Revenue Act of 1918, § 214 (a), 4, 5, 6. Reg. 45, Art. 141. 2 See Chapters 4 and 10. 3 Revenue Act of 1918, §§ 214 (a) 7 and 234 (a) 5. 4 Revenue Act of 1918, § 234 (a) 4. 5 See p. 388. 6 See p. 389. 7 Revenue Act of 1918, § 214 (a) 4; Reg. 45, Art. 141. tinuing investment, and must be determined and ascertained to be an actual, a completed, a closed transaction.8 Losses Not Sustained in Trade. Under the present law citizens. and residents may deduct all losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business. It will be noted that in this provision the present law makes an important departure from the 1916 Law and permits the deduction of all losses incurred in transactions entered into for profit though not connected with a trade or business, notwithstanding that such losses may exceed the profits arising from the same class of transactions. A loss in the sale of an individual's residence is ruled not to be deductible. Losses in illegal transactions are not deductible.10 Trade or Business. Under the 1916 Law, the term "trade" and the term "business" were defined as synonymous terms and to be, "That which occupies and engages the time, attention and labor of any one for the purpose of livelihood, profit, or improvement; that which is his personal concern or interest; employment, regular occupation, but it is not necessary that it should be his sole occupation or employment." The doing of a single act incident 8 Reg. 45, Art. 141; T. D. 1989. Depreciation in the value of property is treated as a separate deduction and should not be confused with loss. 9 Revenue Act of 1918, § 214 (a) 5. Under the 1916 Law, a citizen was permitted to deduct the losses actually sustained in transactions entered into for profit but not connected with his business or trade only to an amount not exceeding the profits arising therefrom. A loss was required to be actually sustained during the year and the total amount deductible could not exceed the profits arising from the same class of transactions. (Revenue Act of 1916, § 5.) Thus, an individual making any investments in property from time to time or speculating was required to report all gains from such investments or speculations and might offset against the gains all losses sustained in similar transactions. He was required to report only the net gain from such transactions during the year, and if the net result for the year of a series of such transactions was a loss, he was not entitled to offset the loss against his income from trade or business. Prior to the 1916 Law 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. (T. D. 2135.) 10 Reg. 45, Art. 141. The validity of the rule as to loss on the sale of a residence may be questioned unless it is conceded that a gain on such sale is not taxable. ally or of necessity not pertaining to the particular business of the person doing the same will not be considered engaging in or carrying on business.11 "In trade," as used in the 1916 Law, is held to mean the trade or trades in which the person making the return is engaged; that is, in which he has invested money, otherwise than for the purpose of being employed in isolated transactions, and to which he devotes at least a part of his time and attention. A person may be engaged in more than one trade and may deduct losses incurred in all of them under this provision of the law, provided that in each trade the above requirements are met. Losses on stocks, grain, cotton, etc., may also be deducted under this provision by a person engaged in the trade to which buying or selling thereof are incident as a part of the business, as by a member of a stock, grain or cotton exchange, 12 but 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 were limited by this provision of the 1916 law were those incurred in transactions involving sales or dealings in property. The law seemed clearly to make a distinction between such 11 T. D. 1989. 12 T. D. 2090. 13 T. D. 2135. The definition of "trade or business' discussed in the text above has now lost considerable importance in view of the provision (Revenue Act of 1918, § 214 (a) 5) that losses incurred in any transaction entered into for profit may be deducted even though such losses exceed the profits arising from the same class of transactions. Under the 1916 Law, it will be noted, the Treasury Department adopted an extremely narrow construction of the words "business or trade," a construction which has been the subject of considerable criticism and which operated to the detriment of every person investing or speculating in property. Congress has now seen fit to remedy the injustice involved in this narrow construction by permitting the deduction of all losses in transactions entered into for profit even though they may exceed the profits arising from the same transactions (Revenue Act of 1918, § 214 (a) 5). Consequently the definitions of "trade or business" discussed in the text above are no longer so important except in cases arising under the 1916 and 1913 Laws. In Bryce v. Keith, 257 Fed. 133, arising under the 1913 Law, the Court has adopted a broader construction of the term "trade" than the Treasury Department. In this case it was held that loss of the value of corporate stock, acquired by numerous transfers of property to the corporation and payment of corporate debts, transactions carried on for a considerable period, complicated in character and involving large sums of money so that they must have required much time and attention, was a loss incurred in trade. losses and losses arising from fires, storms, shipwreck, or other casualty, and from theft. Losses Must Be Sustained During Year. The 1916 Law provided in the case of individuals that the loss must be "actually sustained during the year" and in the case of corporations that the loss must be "actually sustained and charged off within the year. "14 The Revenue Act of 1918 omits the word "actually" in the case of individuals and the words "actually" and “and charged off" in the case of corporations. The Treasury Department holds that a loss to be deductible must be an absolute loss, actually sustained and ascertained during the taxable year for which the deduction is sought to be made. It must be determined. and ascertained upon an actual, a completed, a closed transaction. Losses sustained from the sale or dealing in real or personal property growing out of the ownership or use of, or interest in, such property will not be deductible at all unless they are ascertained, determined and fixed as absolute in the above sense within the taxable year in which the deduction is sought to be made.15 The amount to be deducted as a loss should have in it no element of "depreciation" or "allowance for wear or tear" or "compensation from insurance or otherwise." The amount is to be an absolute and complete loss which has been actually sustained.16 Losses of Capital. What the law contemplates as a deduction is the loss of capital,17 either by the sale of property or by the 14 Revenue Act of 1916, § 12(a). 15 Reg. 45, Art. 141; T. D. 2005. See, however, the special rules at the end of this chapter. 16 T. D. 2005. Under the 1916 Law, in the case of corporations, the loss might not be deducted unless it was actually sustained during the year and charged off on the books. It was held that a corporation was not entitled to a deduction for a loss unless charged off on the books of the corporation before such deduction was allowed. The statute was not to be construed as requiring that losses be charged off within the taxable year. It was sufficient that they were charged off before they were allowed as deductions. Consequently at the time of an examination of a corporation it was given an opportunity to reopen its books and charge off losses which it had actually sustained during the taxable year. (Letter from Treasury Department dated June 25, 1918; I. T. S. 1918, ¶3599.) This rule seemed to apply with equal force in the case of an individual who kept books, but one who did not keep books was not thereby deprived by the law of the right to claim a loss, except in the case of worthless debts. 17 It is interesting to note that under the Civil War Income Tax Laws, losses |