the result, it is alleged, that the M Company sustained a substantial loss in the value of the product that it had on hand at the close of the fiscal year ended December 31, 1918. The taxpayer contends that its claim for loss is supported by section 234 (a) 14 of the Revenue Act of 1918 and that articles 263 and 264 of Regulations 45 are contrary to paragraph 14 of subdivision (a) of section 234 of the Act. Paragraph 14 of subdivision (a) reads, in part, as follows: At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for such taxable year, or from the actual payment after the close of such taxable year of rebates in pursuance of contracts entered into during such year upon sales made during such year * ** *** If no such claim is filed, but it is shown to the satisfaction of the Commissioner that during the taxable year 1919 the taxpayer has sustained a substantial loss of the character above described, then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the taxes imposed by this title and by Title III for such year shall be redetermined accordingly ** * Article 263, Regulations 45, reads, in part, as follows: Inventory losses are allowable either (a) where goods included in an inventory at the end of the taxable year 1918 have been sold at a loss during the succeeding taxable year, or (b) where such goods remain unsold throughout the taxable year 1919 and at its close have a then market value (not resulting from a temporary fluctuation) materially below the value at which they were inventoried at the end of the taxable year 1918 Article 264 provides as follows: Where goods included in the inventory at the end of the taxable year 1918 have been sold during the succeeding taxable year, the loss which may be deducted from net income for the taxable year 1918 is the amount by which the value at which the goods sold were included in the inventory exceeds the actual selling price minus a reasonable allowance for selling expenses and for manufacturing expenses, if any, incurred in the taxable year 1919 and attributable to such goods. It is contended by the taxpayer specifically that subdivision (a) of article 263, as above quoted, is contrary to the law. The Committee has given very careful consideration to the contentions of the M Company, but it can not concur in its conclusions. The prices established by the Industrial Board of the Department of Commerce as of March 21, 1919, do not establish an inventory loss that may be claimed as of December 31, 1918, because in a taxable year there is a definite beginning and a definite ending, and inventories at these periods definitely measure the corporation's gross inAt no other time within the taxable year does an inventory determine gain or loss of the year. Article 263 (a) determines inventory loss by realization; article 263 (b) determines inventory loss by failure to realize during the taxable year on inventory on hand at the beginning of the taxable year. The fractional part of a year does not determine a gain or loss for the period of taxation. Temporary fluctuations in prices without realization do not signify loss and it has not been established that the prices fixed as of March 21, 1919, represented anything more than a temporary price within the taxable year. Paragraph 14, subdivision (a) of section 234 provides for a substantial loss of the value of the inventory sustained for such taxable year, but how can a loss be determined except by a closed transaction? The closed transaction may be the sale or the value of the goods at the end of the taxable period when profits for the period are determined. Otherwise, is it "a fact" that taxpayer has sustained a loss during the taxable year? It does not appear, therefore, that the Regulations are inconsistent with the provisions of the law. Since the case was argued before the Committee by representatives of the corporation further statements, supported by affidavit, have been submitted for consideration. In these statements the treasurer of the company asserts that the term "market price was used in the original claim for inventory loss instead of the term "asking price," because at or about December 31, 1918, and for the period between said date and March 21, 1919, there was in fact no real market for the product at the asking price," and it is now claimed that "the proper adjustment of the tax return would be to apply the asking prices fixed on or before March 21, 1919, to the asking prices on December 31, 1918, as representing fair bid prices as of December 31, 1918." It is admitted that the corporation and others similarly situated nominally continued to ask the high prices after December 31, 1918, but that purchases were not made at these prices because they were too high and the reduction in the asking prices on or before March 21, 1919, was in recognition of this. The taxpayer accordingly contends for "a fair substitution of the fair bid prices for the figures used in the inventory which were erroneously based on the asking prices" and supports its contention on that provision in article 1584 of Regulations 45 which reads as follows: It is recognized that in the latter part of 1918, by reason among other things of governmental control not having been relinquished, conditions were abnormal and in many commodities there was no such scale of trading as to establish a free market. This article further provides: In such a case when a market was established during the succeeding year, a claim may be filed for any loss sustained in accordance with the provisions of section 214 (a) 12 or section 234 (a) 14 of the statute. See articles 261-268. It would appear from the above quotation from article 1584, on which the taxpayer relies, and on that provision of the article which immediately follows the quotation that in so far as the market was established during the succeeding year the claim must be made under section 214 (a) 12 of the statute and article 263 of Regulations 45, pertaining thereto. Article 1582 provides that: * Inventories must be valued at (a) cost or (b) cost or market, as defined in article 1584 as amended, whichever is lower * *. Whichever basis is adopted must be applied consistently to the entire inventory. A taxpayer may, regardless of his past practice, adopt the basis of "cost or market whichever is lower," for his 1920 inventory, provided a disclosure of the fact and that it represents a change is made in the return. Article 1584 provides that: Under ordinary circumstances "market" means the current bid price prevailing at the date of the inventory for the particular merchandise in the volume in which ordinarily purchased by the taxpayer Where no ** * * open-market quotations are available the taxpayer must use such evidence of a fair market price at the date or dates nearest the inventory as may be available, such as specific transactions in reasonable volume entered into in good faith, or compensation paid for cancellation of contracts for purchase commitments. Where, owing to abnormal conditions, the taxpayer has regularly sold such merchandise at prices lower than the current bid price as above defined, the inventory may be valued at such prices, and the correctness of such prices will be determined by reference to the actual sales of the taxpayer for a reasonable period before and after the date of the inventory. These revised Regulations give effect to current bid price and to sales, under abnormal conditions, at prices lower than current bid price in determining market value, and the closing paragraph of the article (above quoted) recognizes the abnormality in the latter part of the year 1918. While article 263 provides for the manner of determining 1918 inventory losses when the market was established during the succeeding year, it would appear that the revised Regulations (article 1584) in defining market open up another condition by which inventory loss may be determined at the close of the taxable year 1918. Emphasis is placed on the wording of the law (paragraph 14 of subdivision (a)), which reads: At the time of filing return for the taxable year 1918 a taxpayer may file a claim in abatement based on the fact that he has sustained a substantial loss resulting from any material reduction of the value of the inventory for such taxable year. * * * * If, then, there was, as a matter of fact, as of December 31, 1918, a material reduction in the value of the inventory of the M Company, determined by the use of fair bid prices or selling prices of the M Company under abnormal conditions instead of by use of asking prices, the reduction would appear to be a deductible loss to be claimed as of that year. It is not considered this loss can be determined by prices fixed as of March 21, 1919, or any other date subsequent to the close of the taxable year 1918. It must be determined as of the date of the inventory, the period at which the taxable income of the company is determined. If the loss can not be satisfactorily determined as of the close of the taxable year, the conditions under article 263 should govern. Article 1584 provides that: * The inventory may be valued at such prices, and the correctness of such prices will be determined by reference to the actual sales of the taxpayer for a reasonable period before and after the date of the inventory. The Committee recommends that the Income Tax Unit promptly develop the necessary facts and, if the facts justify disposition of the claim of the M Company in accordance with the above opinion, that it be governed accordingly. SECTION 215.-ITEMS NOT DEDUCTIBLE. SECTION 215, ARTICLE 291: Personal and family expenses. 9-21-1481 O. D. 828 Article 291 of Regulations 45 provides that premiums paid for life insurance by the insured are not deductible in computing net income subject to tax. The Revenue Act of 1918 makes no provisions for the deduction of premiums paid on insurance issued under the War Risk Insurance Act to persons who were in the active military or naval service. Therefore, the premiums paid on insurance, taken out under the War Risk Insurance Act, whether or not subsequently converted, are not deductible in computing net income subject to tax. SECTION 215, ARTICLE 291: Personal and family expenses. 17-21-1595 O. D. 892 The expenses incurred by school-teachers in attending summer school are in the nature of personal expenses incurred in advancing their education and are not deductible in computing net income. SECTION 215, ARTICLE 291: Personal and family expenses. 25-21-1692 O. D. 951 Expenses incurred by a railroad conductor in the purchase of uniforms which his employer requires him to wear during business hours are held to be personal and are not allowable deductions in computing net income. SECTION 215, ARTICLE 291: Personal and family expenses. (Also Section 214 (a) 1, Article 101.) 25-21-1693 O. D. 952 A taxpayer engaged in the retail drug business was indicted and tried for an alleged illegal sale of narcotics in connection with his business and was sentenced to pay a fine and to imprisonment. The case has been appealed and is still pending. Held, that the attorney's fees paid are a personal expense and not an allowable deduction in computing net income under the Revenue Act of 1918. SECTION 215, ARTICLE 292: Traveling expenses. This mimeograph revokes and supersedes Mim. 2675. 2-21-1389 Mim. 2688 Attention is invited to the provisions of Treasury Decision 3101 (C. B. 3, p. 191), approved December 16, 1920, which amends 292 of Regulations 45. Heretofore the regulations contemplated that if an individual undertook a trip on business, only his railroad fares and other incidental expenses attributed to the business and not expenses for meals and lodging were deductible for income tax purposes, on the theory that expenses for meals and lodging were living expenses within the purview of section 215 of the Revenue Act of 1918. Treasury Decision 3101 contemplates a broader view of the situation. It recognizes as an underlying principle that a certain amount. expended while on such a trip may be attributed solely to the business, and that such amount is deductible as a business expense, but does not disregard the fact that wherever a person may be, at home or abroad, he necessarily must have personal and living expenses which in any event are not deductible. In examples (a), (b), and (c) of the Treasury decision this principle is kept in mind and each class referred to is put on the same 61360°-21-14 basis as to personal living and business expenses. As section 216 of the Act has made provision for credits against net income to married and unmarried persons and the heads of families by permitting credits of $1,000 in the case of unmarried persons, $2,000 in the case of married persons and heads of families, and an additional credit of $200 for each person dependent upon and receiving his chief support if such person is under eighteen years of age or is incapable of self-support because mentally or physically defective, the fact that expenses may continue at home must be disregarded entirely, provision having been made for them in this section. Expenses at home become material only in arriving at the ordinary and necessary expenses required by the individual taxpayer for meals and lodging when at home, for this is the basis used in determining what expenses for meals and lodging may be attributed to the business. But no special consideration is given to the individual who because of his marital status or personal inclination continues to have expenses at home during his absence therefrom. Such expenses are for his personal convenience or those of his family and will not be grounds for any additional deduction. EXAMPLE A. John Adams receives a salary at the rate of $15,000 a year from Smith & Jones. He is away from home three months during the year. All expenses (including board and lodging) incurred are to be paid by Mr. Adams without reimbursement. The taxpayer is one of a family of five. It cost him to maintain his household $400 a month. This amount includes rent, $200; grocery bills, light, etc., $125; and servant hire, $75. His pro rata share of the expenses is one-fifth or $80 a month. His board and lodging while away from home is $10 a day or $300 a month. It, therefore, cost him $220 in excess of his average expense at home, which amount is attributed to the business. The entire $15,000 should be reported as income and the excess expenses of $220 a month for three months, namely, $660, is an allowable deduction in computing net income. EXAMPLE B. Now, if John Adams should receive an allowance for actual expenses when away from home, his living expenses continue none the less. Not all of the expenses paid for meals and lodging are attributable to the business. The same division, of the expense must be made, as in example A, by first ascertaining what it costs the taxpayer for meals and lodging when at home. This amount, while paid by the employer, retains its character as a living expense, and as it does not come out of the pocket of Mr. Adams, but is actually paid to him, it is additional income to him and taxable as such. All in excess of that amount is of course attributed to the business, but as it is not included in gross income no part of such excess is deductible. The excess, if included in gross income, would be immediately deducted, and as one amount would offset the other, neither is considered in the tax return. The matter should be worked out in this way. In A we found the pro rata share of Mr. Adams's expenses for meals and lodging while at home to be $80 a month. His expenses for these items while away from home on business are $300 a month. Expenses attributed to the business, therefore, are but $220 a month. As he receives $300 a month to cover business expenses of $220 a month, the difference, or $80 a month ($240 for three months), is additional compensation to be included, with his salary of $15,000 a year, in gross income. The same result would be obtained if Mr. Adams returned his salary, $15,000, plus expense money, $900, total. $15,900, in gross income, and deducted an amount equal to the difference between the expense money, $900 and $240 (the amount required for ordinary expenses for meals and lodging while at home), or $660. EXAMPLE C. Robert Green receives a salary of $12,000 as traveling salesman for Brown & Company. In addition thereto he receives a per diem allowance of $8 a |