Losses from similar transactions carried forward from the taxable year 1932__. Total losses___ $50,000 225, 000 Gains from sales of stocks and bonds which were not capital assets___ 100,000 Excess of total losses over gains---- 125, 000 The amount allowable as a deduction for the taxable year 1933 for the losses from the sale of stocks and bonds is limited to $100,000. The excess of the losses over the gains ($125,000) is not deductible. Since the amount of such excess ($125,000), less the losses carried forward from the taxable year 1932 ($50,000), or $75,000, does not exceed A's net income for the taxable year 1933 ($100,000), the entire $75,000 may be carried forward and applied against the gains from similar transactions for the taxable year 1934. Example (3): For the taxable year 1934 the net income of A (who was not a person described in section 23 (r) (3)) from salaries, dividends, and rents was $150,000. He had losses and gains from sales of stocks and bonds as follows: Losses from sales of stocks and bonds which were not capital assets (computed without regard to any losses sustained during the preceding taxable year)-- $35, 000 Losses from similar transactions carried forward from the taxable year 1933_. 75, 000 Total losses_ 110,000 Gains from sales of stocks and bonds which were not capital assets. 100, 000 Excess of total losses over gains-- 10,000 The amount allowable as a deduction for the taxable year 1934 for the losses from the sale of stocks and bonds is limited to $100,000. The excess of the losses over the gains ($10,000) is not deductible. After subtracting from such excess ($10,000) the amount of the losses brought forward from the preceding year ($75,000), there is no remainder to be carried forward and applied against the gains from similar transactions for the taxable year 1935. Example (4): For the taxable year 1933 the operating net income of the M Corporation (which was not a person described in section. 23 (r) (3)) was $200,000. The corporation had losses and gains from sales of stocks and bonds as follows: Losses from sales of stocks and bonds which were capital assets____ $100, 000 Losses from sales of stocks and bonds which were not capital assets (computed without regard to any losses sustained during the preceding taxable year)_. 25, 000 Losses from similar transactions carried forward from the taxable year 1932. Total losses from sales of stocks and bonds which were not Gains from sales of stocks and bonds which were not capital assets__ $25,000 50,000 75, 000 The entire amount of the losses from the sales of stocks and bonds which were capital assets ($100,000) is deductible. The entire amount of the losses from the sale of stocks and bonds which were not capital assets ($50,000) is also deductible since such amount does not exceed the gain from such transactions ($75,000). There is no excess of such losses to be carried forward and applied against similar transactions for the taxable year 1934. For the purposes of Title I of the Act, gains or losses (a) from short sales of stocks and bonds, or (b) attributable to privileges or options to buy or sell such stocks and bonds, or (c) from sales or exchanges of such privileges or options, are to be considered as gains or losses from sales or exchanges of stocks and bonds which are not capital assets. As used in this article the term "stocks and bonds" means (1) shares of stock in any corporation, or (2) rights to subscribe for or to receive such shares, or (3) bonds, debentures, notes, or certificates or other evidences of indebtedness, issued by any corporation (other than a government or political subdivision thereof), with interest coupons or in registered form, or (4) certificates of profit, or of interest in property or accumulations, in any investment trust or similar organization holding or dealing in any of the instruments mentioned or described in section 23 (t), regardless of whether or not such investment trust or similar organization constitutes a corporation within the meaning of the Act. See further section 101 and articles 501-503 as to capital net gains and capital net losses. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) General rule.-In computing net income no deduction shall in any case be allowed in respect of (1) Personal, living, or family expenses; (2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate; (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy. (b) Holders of life or terminable interest.-Amounts paid under the laws of any State, Territory, District of Columbia, possession of the United States, or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act (except the deductions provided for in subsections (k) and (1) of section 23) for the purpose of computing the net income of an estate or trust but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled. (c) Tax withheld on tax-free covenant bonds. For tax withheld on tax-free covenant bonds, see section 143 (a) (3). ART. 281. Personal and family expenses.-Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a professional man who rents a property for residential purposes, but incidentally receives clients, patients, or callers there in connection with his professional work (his place of business being elsewhere), no part of the rent is deductible as a business expense. If, however, he uses part of the house for his office, such portion of the rent as is properly attributable to such office is deductible. Where the father is legally entitled to the services of his minor children, any allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions in his return of income. Alimony and an allowance paid under a separation agreement are not deductible from gross income. (See article 83.) The cost of equipment of an Army officer to the extent only that it is especially required by his profession and does not merely take the place of articles required in civilian life is deductible. Accordingly, the cost of a sword is an allowable deduction, but the cost of a uniform is not. ART. 282. Capital expenditures.-Amounts paid for increasing the capital value or for making good the depreciation (for which a deduction has been made) of property are not deductible from gross income. (See section 23 (k) and article 201.) Amounts expended for securing a copyright and plates, which remain the property of the person making the payments, are investments of capital. The cost of defending or perfecting title to property constitutes a part of the cost of the property and is not a deductible expense. The amount expended for architects' services is part of the cost of the building. Commissions paid in purchasing securities are a part of the cost price of such securities. Commissions paid in selling securities, when such commissions are not an ordinary and necessary busi ness expense, are an offset against the selling price. Expenses of the administration of an estate, such as court costs, attorneys' fees, and executors' commissions, are chargeable against the corpus of the estate and are not allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or shareholders of a corporation, to be used in a reorganization of the corporation, are investments of capital and not deductible for any purpose in returns of income. (See article 67.) An assessment paid by a shareholder of a national bank on account of his statutory liability is ordinarily not deductible but, subject to the provisions of the Act, may in certain cases represent a loss. Expenses of the organization of a corporation, such as incorporation fees, attorneys' and accountants' charges, are capital expenditures and not deductible from gross income. A holding company which guarantees dividends at a specified rate on the stock of a subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the value of its stock holdings in the subsidiary may not deduct amounts paid in carrying out this guaranty in computing its net income, but such payments may be added to the cost of its stock in the subsidiary. ART. 283. Premiums on business insurance.-Premiums paid by a taxpayer on an insurance policy on the life of an officer, employee, or other individual financially interested in the taxpayer's business, for the purpose of protecting the taxpayer from loss in the event of the death of the officer or employee insured are not deductible from the taxpayer's gross income. If, however, the taxpayer is not a beneficiary under such a policy, the premiums so paid will not be disallowed as deductions merely because the taxpayer may derive a benefit from the increased efficiency of the officer or employee insured. (See articles 53 and 126-129.) In either case the proceeds of such policies paid by reason of the death of the insured may be excluded from gross income whether the beneficiary is an individual or a corporation, provided the beneficiary is not a transferee of the policy for a valuable consideration. (See section 22 (b) (1) and (2) and article 82.) ART. 284. Life or terminable interests.-Amounts paid to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be subject to any deduction for shrinkage (whether called depreciation or any other name) in the value of such interest due to the lapse of time. In other words, the holder of such an interest so acquired may not set up the value of the expected future payments as corpus or principal and claim deductions for shrinkage or exhaustion thereof due to the passage of time. No deduction shall be allowed in the case of a life or terminable interest acquired by gift, bequest, or inheritance, where the estate or trust is entitled to a deduction under the Act but there is no reduction of the income of the life or terminable interest. For example, an estate or a trust in a certain State sells securities at a loss; if, under the laws of that State, the beneficiary suffers no actual loss, then even though the estate or trust is permitted to deduct such loss in making its return, the beneficiary whose income has not been diminished thereby is not entitled to a deduction on account of such loss, but must include in his return the full amount distributed or distributable. (See section 162 and article 862.) However, in the case of property held by one person for life with remainder to another person and in the case of property held in trust, see section 23 (k) and article 201 as to depreciation and section 23 (1) and article 221 as to depletion. SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME. There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income: (a) Dividends.-The amount received as dividends (1) from a domestic corporation which is subject to taxation under this title, or (2) from a foreign corporation when it is shown to the satisfaction of the Commissioner that more than 50 per centum of the gross Income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determined under the provisions of section 119. The credit allowed by this subsection shall not be allowed in respect of dividends received from a corporation organized under the China Trade Act, 1922, or from a corporation which under section 251 is taxable only on its gross income from sources within the United States by reason of its receiving a large percentage of its gross income from sources within a possession of the United States. (b) Interest on United States obligations.-The amount received as Interest upon obligations of the United States which is included in gross income under section 22. (c) Personal exemption. In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them. (d) Credit for dependents.-$400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age |