curred or continued to purchase or carry securities, such as municipal bonds, the interest upon which is exempt from tax, is not deductible. However, this exception does not apply to obligations of the United States issued after September 24, 1917, which include the liberty bonds of the second and subsequent issues, and interest on indebtedness incurred to purchase such obligations is deductible pursuant to the general rule. See articles 77-80. Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness. (Art. 121.) Interest on capital.-Interest calculated as being a charge against income on account of capital or surplus invested in the business, but which does not represent a payment on an interest-bearing obligation, is not an allowable deduction from gross income; that is to say, the interest which the money might earn if otherwise invested is not a deductible charge against income. (Art. 122.) Interest on indebtedness incurred for the payment of dividendpaying stock is deductible.-Interest upon a note the proceeds of which are used to purchase dividend-paying stock allowable as a deduction. (Letter of inquiry from Harris, Forbes & Company, New York, N. Y., and telegram of reply thereto signed by Commissioner Daniel C. Roper, and dated Nov. 19, 1917.) Deductions allowable: taxes. 3. Taxes other than income taxes paid or accrued within the taxable year imposed, first, by the authority of the United States, or of any of its possessions, or, second, by the authority of any state, or territory, or any county, school district, municipality, or other taxing subdivision of any state or territory, not including those assessed against local benefits of a kind tending to increase the value of the property assessed or, third, by the authority of any foreign government. (Source: Fed. Rev. Act 1918-§ 214, a-3.) Taxes.-Federal taxes (except income, war profits and excess profits taxes), State and local taxes (except taxes assessed against local benefits of a kind tending to increase the value of the property assessed), and taxes imposed by possessions of the United States or by foreign countries (except the amount of income, war profits and excess profits taxes allowed as a credit against the tax), are deductible from gross income. See section 222 of the statute and articles 381-384 as to tax credits. Postage is not a tax. Amounts paid to States under secured debts laws in order to render securities tax exempt are deductible. Automobile license fees are ordinarily taxes. (Art. 131.) Federal duties and excise taxes.-Import or tariff duties paid to the proper customs officers, and business, license, privilege, excise and stamp taxes paid to internal revenue collectors, are deductible as taxes imposed by the authority of the United States, provided they are not added to and made a part of the expenses of the business or the cost of articles of merchandise with respect to which they are paid, in which case they can not be separately deducted. (Art. 132.) * Taxes for local benefits.-So-called taxes, more properly assessments, paid for local benefits, such as street, sidewalk and other like improvements, imposed because of and measured by some benefit inuring directly to the property against which the assessment is levied, do not constitute an allowable deduction from gross income. A tax is considered assessed against local benefits when the property subject to the tax is limited to property benefited. Special assessments are not deductible, even though an incidental benefit may inure to the public welfare. The taxes deductible are those levied for the general public welfare by the proper taxing authorities at a like rate against all property in the territory over which such authorities have jurisdiction. When assessments are made for the purpose of maintenance or repair of local benefits, the taxpayer may deduct the assessments paid as an expense incurred in business, if the payment of such assessments is necessary to the conduct of his business. Where the assessments are made for the purpose of constructing local benefits, the payments by the taxpayer are in the nature of capital expenditures and are not deductible. Where assessments are made for the purpose of both construction and maintenance or repairs, the burden is on the taxpayer to show the allocation of the amounts assessed to the different purposes. If the allocation can not be made, none of the amounts so paid is deductible. (Art. 133.) Inheritance taxes.-State inheritance taxes paid by the executor or administrator of an estate of a deceased person, which are provided by law to be deducted from the respective legacies or distributive shares, are not allowable deductions in computing the net income of such estate subject to tax, even though the will contains a direction to pay inheritance taxes out of the residue. An inheritance tax is upon the transfer of the property and not upon the estate of the decedent or upon the executor or administrator, although the latter is required to pay it. In general, taxes paid or accrued within the year imposed by the authority of any State, or otherwise, are limited to those imposed upon the taxpayer and do not include taxes paid by him on behalf of another, even though he is required by law to make such payment. See articles 565 and 566. Since, moreover, the tax is imposed upon the transfer before the property reaches the legatee or distributee, and merely diminishes the capital share of the estate received by him, such tax is not imposed upon the legatee or distributee and is not an allowable deduction from his income. Similarly, federal estate taxes are not deductible. (Art. 134.) Taxable status of amount refunded by government in one year, representing tax paid for which credit has been taken as a deduction in a previous year.-Where a taxpayer receives a refund of taxes improperly assessed and collected (as, e. g., Federal excise taxes), he will not be required to include in his return for 1918 the amount received as refund of taxes erroneously paid in the preceding year. He should, however, file an amended return for 1917 and claim a deduction therein for the correct amount of taxes due for that year. The further amount of income tax due for 1917 as a result of the reduction in the item of taxes paid during the year and a letter of explanation should accompany the amended return when it is forwarded the Collector of Internal Revenue. (Letter to The Corporation Trust Company, signed by Commissioner Daniel C. Roper, and dated January 8, 1919.) Deductions allowable: losses in business or trade. 4. Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business. (Source: Fed. Rev. Act 1918-§ 214 a-4. See also § 353, supra, Ascertainment of Gain or Loss; and § 356, supra, Inventories.) Losses actually sustained during the year incurred in trade are limited by the language of the act itself. "In trade," is synonymous with business. "Business" has been defined as: "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 incidentally or of necessity not pertaining to the particular business of the person doing the same will not be considered engaging in or carrying on the business. (T. D. 1989, June 2, 1914.) The term "in trade," as used in the law and in Treasury Decision 2005, 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 engage in more than one trade and may deduct losses incurred in all of them, provided, that in each trade the above requirements are met. As to losses on stocks, grain, cotton, etc., if these are incurred by a person engaged in trade to which the buying or selling of stocks, etc., are incident as a part of the business, as by a member of a stock, grain, or cotton exchange, such losses may be deducted. A person can be engaged in more than one business, but it must be clearly shown in such cases that he is actually a dealer, or trader, or manufacturer, or whatever the occupation may be, and is actually engaged in one or more lines of recognized businesses before losses can be claimed with respect to either or more than one line of business, and his status as such dealer must be clearly established. 2090, Dec. 14, 1914.) (T. D. Neither the investment by an individual of money in the stock of a company nor the employment by the company of his services in any official capacity can serve to make the business in which the company was engaged a matter of his individual trade. (T. D. 2135, Jan. 23, 1915.) Shrinkage in book values.-* The loss considered here has in it no element of "depreciation" or "allowance for wear and tear," or "compensation from insurance or otherwise." It is to be such loss as is absolute and complete and which has been actually sustained. * * Depreciation as an allowable deduction in ascertaining annual net income for the income tax is separately provided for, and is not to be confused with loss. The depreciation provided to be taken as a deduction in a return of income is the value assigned to the deterioration of physical improvements or assets, such as are susceptible of having their value lessened through wear and tear, use or obsolescence. The depreciation referred to in the income tax law does not relate to evidence of a right or interest in property, and hence, any shrinkage in the value of bonds, stocks and like securities, due to fluctuations in their market value, is not deductible in a return of income as depreciation or loss. * Losses may be sustained by individuals or corporations on personal or real property. (T. D. 2005, July 8, 1914.) Book values which reflect a shrinkage in the value of assets are not a basis for determining taxable income. (T. D. 2090, Dec. 14, 1914.) Losses on judgment.—Any amount paid pursuant to judgment or otherwise on account of damages is deductible from gross income to the extent of, and when the amount is actually paid, less any amount of such damages as may have been compensated for by insurance. (Art. 158, Reg. 33, Rev., Jan. 2, 1918.) (2) A loss is none the less actual because an individual can not 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 department to have been contemplated by the income-tax law. 2135, Jan. 23, 1915.) Deductions allowable: losses, not in business or trade. (T. D. 5. 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; but in the case of a taxpayer other than a resident of the state, only as to such transactions within the state. (Source: Fed. Rev. Act 1918, § 214, a-5.) Loss-Definition.-The difference between "losses incurred in his business or trade" and losses "in transactions entered into for profit but not connected with his business or trade" is illustrated by the difference between the definitions of "avocation": That which takes one from his regular calling; a minor occupation; and "vocation": The occupation or pursuit to which one devotes his time or life, a calling. It is possible for a man to give sufficient time, attention, and capital to the pursuit of different lines of business to constitute more than one avenue of "business or trade or employment," his business or trade. Deductions allowable: losses from fire, etc. 6. Losses sustained during the taxable year of property not connected with the trade or business (but, in the case of a taxpayer other than a resident, only of property within the state) if arising from fires, storms, shipwrecks, or other casualty or from theft, and not compensated for by insurance or otherwise. (Source: Fed. Rev. Act 1918, § 214, a-6.) Losses.-Losses sustained during the taxable year and not compensated for by insurance or otherwise are fully deductible (except by non-resident aliens) if (a) incurred in the taxpayer's trade or business, or (b) incurred in any transaction entered into for profit, or (c) arising from fires, storms, shipwreck or other casualty, or from theft. They must usually be evidenced by closed and completed transactions. In the case of the sale of assets the loss will be the difference between the cost thereof, less depreciation sustained since acquisition, or the fair market value as of March 1, 1913, if acquired before that date, less depreciation since sustained, and the price at which they were disposed of. See section 202 of the statute and articles 39-46 and 1561. When the loss is claimed through the destruction of property by fire, flood or other casualty, the amount deductible will be the difference between the cost of the property or its fair market value as of March 1, 1913, and the salvage value thereof, after deducting from the cost or value as of March 1, 1913, the amount, if any, which has been or should have been set aside and deducted in the current year and previous years from gross income on account of depreciation and which has not been paid out in making good the depreciation sustained. But the loss should be reduced by the amount of any insurance or other compensation received. See articles 49 and 50. A loss in the sale of an individual's residence is not deductible. Losses in illegal transactions are not deductible. (Art. 141.) Voluntary removal of buildings.-Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income in a sum representing the difference between the cost of such property demolished or scrapped and the amount of a reasonable allowance for the depreciation which the property had undergone prior to its demolition |