CHAPTER 27 DEDUCTIONS-IN GENERAL [Page 299.] Accruals. Corporations keeping books of account on an accrual basis may deduct from gross income accrued interest for the year when shown as a charge against accrued income upon the books of account. (T. D. 2625.) [Page 302.] Voluntary Destruction of Property. Loss due to the voluntary removal or demolition of old buildings, the scrapping of old machinery, equipment, etc., incident to renewals and replacements will be deductible from gross income, in an amount representing the difference between the cost of such property demolished or scrapped and an amount measuring a reasonable allowance for the depreciation which the property had undergone prior to its demolition or scrapping; that is to say, the deductible loss is only so much of the original cost, less salvage, as would have remained unextinguished had a reasonable allowance been charged off for depreciation during each year prior to its destruction. When a corporation buys real estate, upon which is located a building or buildings, which it proceeds to raze, with a view to erecting thereon another building or buildings, it will be held that the corporation has sustained no deductible loss by reason of the demolition of the old building or buildings. In such case it will be considered that the value of the real estate, exclusive of old improvements, is equal to the pur chase price of the land and buildings. (Reg. 33 Rev., Arts. 155 and 156.) [Page 303.] Investment of Capital. Investments of capital are not deductible. The following have been held to be investments of capital and not expenses: (a) Amounts expended for securing copyright and plates which remain in possession of and as property of the person making the payments, are investments of capital and can not be allowed as deductions in returns of income. (b) Cost of defending title or perfecting title to property, constitutes a part of the cost of the property and is not a business expense. (c) The amount expended for architect's services is part of the cost of the building and not a deductible business expense. (d) Commissions paid in purchasing and selling securities are a part of the cost or selling price of the securities and not otherwise deductible. They do not constitute expense deductions in a return of income. (Reg. 33 Rev., Art. 8.) [Page 306.] CHAPTER 28 DEDUCTION OF BUSINESS EXPENSES Sums Expended for Materials Used and on Hand. If a corporation carries materials or supplies on hand for which no record of consumption is kept or of which physical inventories at the beginning and end of the year are not taken, it will be permissible for the corporation to include in its expenses and deduct from gross income the total cost of such supplies and ma terials as were purchased during the year for which the return is made. (Reg. 33 Rev., Art. 130.) [Page 306.] Commissions. Commissions paid in purchasing and selling securities are a part of the cost or selling price of the securities and not otherwise deductible. They do not constitute expense deductions in a return of income. (Reg. 33 Rev., Art. 8.) [Page 307.] Redemption of Trading Stamps. Corporations, mercantile or otherwise, which issue trading stamps, coupons, etc, for the purpose of increasing their business, which stamps or coupons are redeemable in merchandise, may allowably deduct from gross income as a business expense the amount which such corporations actually expend for such stamps or coupons, and also the actual cost to the corporations of the merchandise given in redeeming the same. This rule contemplates that a reserve set up as a liability equal to the redemption value of the stamps or coupons issued is not, as such, an allowable deduction, the deduction being limited to the cost of the stamps or coupons and the merchandise with which they are redeemed. (Reg. 33 Rev., Art. 141.) [Page 311.] Rent for Residential Property. In the case of a professional man who rents a property for residential purposes but receives there clients, patients, or callers in connection with his professional work (the place of business being elsewhere) no part of the rent is deductible as business expense. (Reg. 33 Rev., Art. 8.) F. I. Tax Supp.—4 [Page 312.] Life Insurance Premiums. The provision of Section 32 of the Act of September 8, 1916, that premiums paid on life insurance policies covering the lives of officers, employees, or those financially interested in any trade or business conducted by an individual, partnership, or corporation, may not be deducted as a part of the annual expense, applies to all forms of life insurance, the premiums upon which the individual, partnership or corporation may pay who ever may be the beneficiaries. (Reg. 33 Rev., Art. 236.) [Page 315.] Allowances to Minor Children. The father is legally entitled to the service of his minor children. As a rule, allowances which he gives them, whether said to be in consideration of service or otherwise, are not allowable deductions, in his return of income nor are they income to the children. (Reg. 33 Rev., Art. 8.) [Page 315.] Bonus and Profit Sharing Payments. The earlier rulings on this subject have been modified by a recent decision which holds that special payments, sometimes denominated gifts or bonuses, made by corporations, partnerships, or individuals to officers or employees, will constitute allowable deduction from gross income in ascertaining net income for the purpose of the income tax, when such payments are made in good faith and as additional compensation for the services actually rendered by the officers or employees. If such payments, when added to the stipulated salaries do not exceed a reasonable compensation for the services rendered, they will be regarded as a part of the wage or hire of the officer or employee, and therefore an ordi nary and necessary expense of operation and maintenance, and as such will be deductible from gross income. Special payments made to officers or employees, although in the form of additional salaries or compensation, will be regarded as a special distribution of profits or compensation for the capital invested, and not as payment for services rendered, if the amount of such payments is based upon or bears a close relationship to the stock holdings of such officers or employees, or to the capital invested by them in the business. Payment under such latter conditions being in the nature of dividends or distribution of profits will not be deductible from gross income. Salaries of officers or employees, who are stockholders or have an interest in the business, will be subject to careful analysis, and if they are found to be rather in proportion to the stock holdings or interest of such officers and employees than to the real value of the services rendered and to be in excess of the salaries paid to officers or employees in similar positions in other concerns doing business of a like nature and of approximately equal volume and earnings, the amount paid in excess of reasonable compensation for the services will not be deductible from gross income, but will be treated as a distribution of profits. (T. D. 2616; Reg. 33 Rev., Art. 8.) In one case it was held that a distribution by a corporation of 10% of its net earnings to employees in addition to their regular salaries or wages was a proper deduction from gross income if the distribution was made for services actually rendered and was not such a distribution of profits as would be covered by the terms "gratuity" or "free bonus" (Letter from Treasury Department dated November 12, 1917; I. T. |