traveling salesmen, as a part of the selling expense of their product, is a proper deduction. There must, however, be some showing that all of the allowance claimed as a deduction was actually expended for the purpose for which the allowance was made, namely, the selling of the product in question.15 Contributions for Campaign Expenses. Contributions for campaign expenses and sums of money expended for lobbying purposes, are held not to be ordinary and necessary expenses of corporations and are therefore not deductible.16 Customs Duties. Customs duties may be either deducted as taxes or may be included as a part of the cost price of the goods, if the taxpayer is engaged in the importation of goods and merchandise.17 Such duties of course should not be both included as cost of the goods and deducted as taxes. Discounts. Discounts, other than bank discounts on notes executed by a corporation, were required, under the 1909 Law, to be segregated from the interest item on the return and to be included under expenses. 18 Reserve for Redemption of Trading Stamps. Where a taxpayer, for the purpose of promoting his business, issues trading stamps or coupons redeemable in merchandise or cash, and sets up a reserve each year to cover all probable redemptions of coupons issued in that year, the reserve so set up may be deducted from gross income as a business expense, provided: (a) that the returns of the taxpayer are otherwise made on an accrual basis; (b) that any income tax and excess profits tax returns of the taxpayer which have been previously made covering the period since March 1, 1913, shall be amended, if necessary, so that deductions for any of such years are made on the 15 T. D. 2090. 16 T. D. 2137. 17 Letter from Treasury Department dated December 22, 1914; I. T S. 1918, ¶¶ 521 and 1454. 18 T. D. 1675. basis of reserves instead of upon actual redemptions as formerly required; and (c) that no larger amount shall be set up as a reserve for any taxable year than would be required for the redemption of such part of the entire issue of that year as it appears will eventually be presented for redemption. The reserve percentage will be determined by considering the experience of the taxpayer and of other users, taking into account any material differences between the taxpayer's situation and that of other users whose experience is relied on. Taxpayers who submit returns on this basis shall file therewith any amended returns called for by this ruling and shall also attach thereto a statement of the experience of the taxpayer and of any other user of coupons whose experience is relied on to determine the percentage of reserve, indicating the name of such other user, the denominations most largely issued, and the character of business involved in each instance. 19 Expenses of Maintenance. Maintenance 20 means the upkeep or preserving of the condition of the property to be operated and does not mean additions to the equipment, additions to the property or improvements of former condition of the property.21 Improvements. In the case of a railroad where old rails are replaced with new and heavier rails, wooden bridges and culverts with concrete and steel bridges and culverts, the rule is that the cost of renewals with like kind and quality is allowable, but excess cost is not allowable as a deduction.22 Repairs. Incidental repairs made to the business property of a taxpayer which neither add to the value of the property nor appreciably prolong its life, but keep it in an 19 Reg. 45, Art. 104; Reg. 33 Rev., Art. 141. 20 See Note 6. 21 Grand Rapids & Indiana Ry. Co. v. Doyle, 245 Fed. 792; T. D. 2210. 22 Grand Rapids & Indiana Ry. Co. v. Doyle, 245 Fed. 792; T. D. operating condition, are expense, provided the plant or property account is not increased by the amount of such expenditures.23 Expenditures for replacing worn out parts such as gears, bolts, nuts, valves, etc., so long as such replacements are not pursued to the extent of, and for the purpose of, finally restoring the machinery or equipment as a whole, constitute incidental repairs and are deductible as operating expenses. In addition, depreciation on the property so repaired may be claimed in order to replace the machinery, equipment or building when, as an entirety, it is worn out or is worthless for the purpose for which it is intended.24 Office Furniture and Equipment. An ordinary amount expended for renewal of office furniture and equipment, and charged to expense, was held not to be invested in assets, but to be a proper expense of maintenance of the business of an insurance company, which it was entitled to deduct in ascertaining its taxable net income under the 1909 Law. The company had expended in one year $1,213 for ordinary renewals of office furniture, in another year $1,379, and an additional sum of $1,808 for ordinary renewals of attendants' uniforms, door mats, window shades, awning, small hardware, oils and other articles of like character and also the sum of $2,244 for ordinary renewals of office equipment, consisting of lamps, alterations of fixtures, shades, meters, fans, plugs, wirings, etc., and these expenditures were no greater than the average of similar expenditures for other years and did not exceed 5% of the cost of all the plaintiff's existing furniture and equipment similar to the articles detailed, and none of the items was considered in the corporation's books or statement as assets because of their rapid depreciation. It was held that the articles mentioned were of a perishable and transient nature, and properly charged to expense of maintenance, since they apparently did no more than maintain in proper condition 23 Reg. 33, Art. 131; Reg. 45, Art. 103. 24 Reg. 45, Art. 103; letter from Treasury Department dated September 19, 1916, and repair the ordinary equipment of office furniture and supplies.25 Expenditures for Alterations. In the case of a company which expended approximately $5,000 for alterations in its home office, apparently solely with a view of facilitating the carrying on of its business, it was held under the 1909 Law that such amount was properly deducted as an expense. The Court said in part: "It should be remembered, also, that in these days of up-to-date business method requirements it often becomes necessary for business concerns to change the lay-out and appointments of the places wherein they carry on business, with a view to economy in space, a saving of unnecessary labor, and the bettering of working conditions of employees, to the end that a net saving of running expenses will result. In view of the consistent expansion of the plaintiff's business, which the evidence shows, it would seem that the amount expended for the changes made in the office ought not, under the circumstances, to be considered unreasonable or unusual, and that, therefore, the amount claimed might well have been allowed as an item of deduction. It seems to the court that business concerns, in matters of this kind, should be allowed a reasonable discretion, and the law so enforced as to help rather than to hinder them in making reasonable progress in the development of their business, for it must appear to anyone giving the matter a moment's consideration that the more successful a business the larger the results, even from the standpoint of taxes accruing to the government." 26 Payment in Lieu of Rental. Where a leasehold is purchased and paid for in one sum at the beginning of the lease the amount so paid may be divided by the number of years constituting the life of the lease and a deduction 25 Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, affirmed 201 Fed. 918. 36 Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. 206. F. T.-28 made annually of a proportionate amount, such item to be claimed as a payment made in lieu of rental.27 Rent for Residential Property. In the case of a pro fessional man who rents property for residential purposes but receives there clients, patients, or callers in connection with his professional work (his place of business being elsewhere) no part of the rent is deductible as business expense. 28 Repairs and Improvements Made by a Tenant. Where a lease requires the tenant to make all necessary repairs or improvements, which repairs or improvements revert to the landlord at the expiration of the lease, the tenant may charge the cost of all such repairs and improvements to the expense of doing business. If the improvements are somewhat permanent in character, the expense should not be all deducted in one year, but should be pro-rated over the number of years constituting the term of the lease, and the amount deductible from gross income of each year would be the aliquot part of such cost.29 Taxes or other expenses paid by the tenant for the landlord should be deducted by the tenant as expense. Cost of Buildings Erected by Tenant Under Terms of Lease. Where, under the terms of a rental or lease contract, a tenant agrees to erect a building, or to expend during the rental period a certain fixed sum in making improvements upon the freehold, the building or permanent improvements become a part of the realty, unless otherwise agreed upon between the contracting parties. As the use of the building or permanent improvement by the tenant, during the term of the lease, is a part of the consideration of the contract, the cost of such buildings or improvements may be pro-rated by the tenant over the leased term and be deducted, at an annual rate, as a part of the necessary expenses actually paid in carrying on any busi 27 Letter from Treasury Department dated February 27, 1917; I. T. S. 1918, ¶ 1506. 28 Reg. 33 Rev., Art. 8, 29 T. D. 2137. |