The Washington herald., 1921-01-18
Income Tax
Facts You
Should Know
CHAPTER VII

Claims for deduction for losses
form an important item in income
tax returns and heretofore have
been the subject of numerous er-
rors. The mistakes are of COM
mission and omission. Claim is
made for a loss to which the tax
payer is not entitled. In other re-
turns no claim is made for a deduct
fble loss which. if included, would
mean a substantial reduction in tax.
Loss Deductions.
To be allowed, deductions for
losses must be confined to the fol-
lowing classes: Losses sustained in
trade or business; losses sustained
in transactions entered into for
profit though not connected with
a trade or business; losses sus-
tained of property not connected
with trade or business il arising
from fires, shipwreck. storms, or
other casualty, or from theft To
the extent any of the above losses
are compensated for by insurance
they are not deductible.
The loss must have been actually
Sustained during the year for which
IL is claimed in the taxpayers re-
turn. A taxpayer may feel certain
AAAaN AGaA estate O"ht -Dy MIN is
worth less than the purchase price.
a merchant may be convinced that
certain stock can not be sold un-
less marked below cost. In neither
event, however, is he entitled to a
claim for deduction until the loss
is made absolute by sale or other
disposition of the property.
Must Follow Statute.
Claims for losses must conform
closely to the wording of the stat
ute. A loss sustained in the sale
OF an automobile purchased for Per
sHnal u:e is not oeductible, because
it is not a transaction entered into
for prOoflI." Many claims are made
for losses sustained in the sale of
property used by the taxpayer as
a residence. Ordinarily, when a
man buys a home and moves into
II, he has no intention of selling.
He does not enter into a transac-
ton for profit" and such loss is
not deductible.
Owners OF stocks and bonds can
not deduct from gross income
amounts claimed as losses on ac-
count Of the shrinkage in value of
such securities through fluctuations
Of the market or otherwise. The
foregoing applies only to owners
and investors, and not to dealers
in securities. who by a special rule
are given the benefit of any shrink
age in the securities in which they
deal.
Losses in illegal transactions
poker playing, dice. horse racnig,
or other forms Of gambling-are
l-lrr1kfkT. al -
such transactions constitute taxable
income and must be included in the
return.
Worthless Debts.
While deductions for worthless
debts are provided for by revenue
act, many claims entered by tax
payers are not allowed because of
the nature of the obligation. Claims
for such deductions must have GER
tain qualities. The debt must have
been charged off within the year in
dence of the manner in which dis
covered: the return must show evil
dence OF hit emanner in which dis
coyery was made; statement should
be made that the debtor has been
discharged in bankruptcy or has
disappeared. leaving no trace, or
that the ordinary means of collec-
tion have been exhausted.
Unpaid loans made to needy rela-
lives or friends with little or no ex-
pectstion that they would be re-
turned are not deductible, but are
regarded as gifts. Where the cred
ltor continues to extend credit a
debt may not be claimed as worth
less. A debt may not be charged
pff or deducted in part, but must
be wholly worthless before any part
ssn be deducted, though it may be
clearly worth less than the face
amount. II a debt is forgiven, it
cannot be deducted, because it is
then regarded as a gift.
Not Proper Deduction.
AHdebt proved to be worthless is
aottslways a proper deduction For
example, unpaid amounts represent
Ing wages, salaries, rentals, or sim
mar items of taxable income are not
allowed as deductions unless, inclu-
sed as income in the creditors re-
turn for the year in which the de-
auction is soughMpr in a previous
year. The fact that expected income
vas not received does not reduce the
:axable income.
Payment Of an ordinary debt need
iot be included in the taxpayers re-
urn. since II is mere change in
'orm Of capital. Where, however, a
iebt charged off as worthless is in
later year recovered or partially
'ecovered the amount recovered is
aossble income TO the creditor for
beayesr in which received.
vents OF the evening with some
hing apDrDachfnr a f-,,.,,