Net Income Deductions from Net Income 45. In computing the net income, no deductions in any case shall be allowed for: Personal, living or family expenses. Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. Any amount expended in restoring property or making good the exhaustion thereof for which an allowance has been made. Premiums paid on life insurance policy covering the life of any officer or employee, or of any persons financially interested in any trade or business carried on by the taxpayer when the latter is directly or indirectly a beneficiary. 46. But the following general deductions are authorized; they include more than was allowed under the previous laws: All necessary or ordinary expenses paid or incurred in carrying on a business or trade specifically including salaries for personal services actually rendered, also rentals or payments for continued use of the business premises or possession of property to which the taxpayer has not taken or is not taking title or in which he has no equity. All interest paid or accrued on indebtedness except that no deduction may be made for interest or indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is declared by law to be tax exempt. In the case of a nonresident alien individual it is the proportion of such interest which his gross income within the United States bears to his gross income from all sources. Taxes paid or accrued, such as are imposed by the authority of the United States, except income, war profits taxes; or taxes paid by a resident of the United States to one of its possessions except income, war profits or excess profits taxes (for which satisfactory evidence must be shown); assessments against local benefits of a kind tending to increase the value of the property are not allowable deductions. Section 222 also stipulates certain other miscellaneous and general deductions allowed on account of taxes paid. Losses sustained in the taxable year in trade or business and other losses not connected with the trade or business (in the case of a non-resident individual alien only property within the United States) arising from fire, storm or similar casualty, or from theft when losses are not compensated for by insurance or otherwise. Losses sustained in any transaction entered into for profit, though not connected with the trade or business (for a non-resident alien individual, only if transactions have been within the United States), not compensated for by insurance or otherwise. Debts ascertained to be worthless and charged off within the taxable year. A reasonable allowance for exhaustion, wear and tear of property used in trade or business and for obsolescence. In the case of buildings, machinery, equipment installed or acquired on or after April 6, 1917, and vessels constructed or acquired on or after that date for the transportation of men or articles contributing to the prosecution of the war there shall be allowed a reasonable deduction for amortization as to cost borne by the taxpayer, not including any other amount allowed by this law or by Act of Congress as a deduction. At any time within three years after the end of the war, there may be a redetermination, and at the request of the taxpayer, there shall be a redetermination of the tax due. In the case of mines, oil and gas wells, other natural deposits and timber, reasonable allowance for depletion and depreciation according to the "peculiar conditions in each case" based upon cost and cost of development not otherwise deducted. In the case of properties acquired prior to March 1, 1913, the fair market value on that date would govern; as to mines and wells discovered by the taxpayer after March 1, 1913 and not acquired as result of purchase of a proven tract where the fair market value is materially disproportionate to the cost, depletion allowance would be based on fair market value of property at date of discovery or within thirty days thereafter; all this to be governed by regulations of the Commissioner; in the case of leases, allowances are to be equitably proportioned between lessor and lessee. Contributions made to corporations organized and operated exclusively for religious, charitable, scientific or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual or to the "Vocational Rehabilitation Fund." This allowance, however, shall not be greater than fifteen per cent. of the taxpayer's net income as computed without the benefits of this deduction. The law stipulates that such gifts shall be allowed only if "verified" under regulations prescribed by the Commissioner. Non-resident aliens are allowed deductions for only such contributions as are made to domestic corporations or to the Fund. In the deductions above stated, excepting as may be noted, a non-resident alien individual shall be allowed these credits only if they are connected with income arising within the United States; the proper apportionment with respect to sources of income from within and without the United States shall be determined by the regulations of the Commissioner. 47. It is worth noting that in the 1918 Act, a decidedly broadened view is taken on the general subject of deductions. It is realized that bona fide losses, depreciation, etc., must necessarily be allowed before a taxpayer's real net income may be determined. When the maximum tax rate, normal and surtax, was seven per cent., as it was until 1916, it didn't matter so much if the "net income" was a fictitious rather than an accurate figure. But when the rate mounts to seventy-seven per cent., leaving but twenty-three per cent. to the taxpayer, it is perfectly clear that that tax must be levied on a real and not a fictitious net income. "Losses in Trade" 48. "Losses in trade" have been the subject of much controversy. The interpretation by the Treasury Department, under the 1913 Law, was that losses incurred in a business other than that of the taxpayer were not deductible in arriving at his net income even though the profits arising from similar business dealings were required to be included as taxable income. In 1916 and 1917, such losses were allowed, but only to the extent of the profits arising from like transactions. 49. The Revenue Act of 1918 does the obviously fair thing, it allows the deduction of the full amount of realized losses (sustained through transactions, entered into for profit, other than the taxpayer's regular business) entirely without consideration of the amount of profits, if any, derived from similar sources. "Net 50. Certain entirely new loss deductions and depreciation allowances are made in the new Statute. One Loss" of these is in respect to "net losses," sustained in the regular business of the taxpayer or from the bona fide sale of buildings, plant, equipment, etc., installed or acquired on or after April 6, 1917 and used for production contributing to the prosecution of the war. Such losses, if sustained during any "taxable year" beginning after : October 31, 1918, and ending prior to January 1, 1920, may be deducted in computing the net income for the preceding taxable year; and the taxes imposed for such preceding taxable year shall be redetermined accordingly. (As a practical matter, it would seem reasonable to expect the Treasury Department, in accordance with certain Claim in Abatement for Reduction of Inventory, etc., for 1918 For 1919 similar statutory provisions, to allow such deductions in computing income for the year 1918). Any amount found to be due upon such redetermining shall be credited or refunded in accordance with Section 252 of the statute. If the loss exceeds the net income of the year in question, the excess shall be allowed as a credit on the net income of the succeeding year. The benefit of this deduction may be had by not only individuals but by most other taxpayers. 51. Another new feature of the present Act is the general provision whereby actual depreciation in inventory and similar capital losses, occurring during either the calendar year 1918, or 1919, may be used as a deduction in computing net income for the year 1918. The taxpayer may file a claim in abatement for a substantial loss (whether or not actually realized by sale or other disposition), which is the result (1) of material reduction (not due to temporary fluctuation) in the value of the inventory for such taxable year, or (2) of the actual payment after the close of the taxable year of rebates "in pursuance of contracts entered into during such year upon sales made during such year." Payment of this tax is not required until the claim is decided, but the taxpayer must file a bond for double the amount covered by the claim. If any amount is found to be due after the claim is decided, the taxpayer is further chargeable with interest at the rate of one per cent. per month from the time the tax would have been due, had no such claim been filed. 52. If it is shown to the satisfaction of the Commissioner that the taxpayer has sustained a substantial loss of this character during the taxable year 1919, the amount |