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repairs are only those repairs which will not if continued, as the component parts wear out and are restored, make permanent the property. 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.17

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

17 Letter from Treasury Department dated September 19, 1916; I. T. S. 1917, || 1363 and 1364.

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 and repair the ordinary equipment of office furniture and supplies.18

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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-todate 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

18 Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199.

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.” 19

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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 made annually of a proportionate amount, such item to be claimed as a payment made in lieu of rental.20

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. 21 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, it is held that 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 business or trade. The tenant may also deduct the cost of incidental repairs and maintenance to such buildings and improvements, 22 If the building is erected, or permanent improvements are made after the lease is partially expired, the cost thereof may be divided by the number of years the lease then has to run, and if the life of the lease is longer than the estimated life of the building or improvements, the cost may be divided by the number of years such building or improvements are expected to last, instead of the number of years constituting the life of the lease. 23

19 Connecticut Mutual Life Ins. Co. v. Eaton, 218 Fed. 206.

20 Letter from Treasury Department dated February 27, 1917; I. T. 8. 1917, 12068.

21 T. D. 2137.

Insurance Premiums. Where premiums are paid for insurance on property used for business purposes, or rented or leased to secure an income, the amount so paid constitutes an allowable deduction.24

LIFE INSURANCE PREMIUMS. 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 expenses.25

22 T. D. 2442, Reg. 33, Art. 115.

23 Letter from Treasury Department dated February 27, 1917; I. T. S. 1917, 1 2064.

24 T. D. 2090.

PREMIUM ON FIDELITY BOND. Where an employee is required to furnish a bond and pay the premium thereon, as a necessary incident to his employment, the amount so paid may be deducted by him as an expense. 26 If the employer pays the premium it may be included in his business expense.

RESERVES FOR INSURANCE. Funds set aside by a corporation for insuring its own property are not a proper deduction as a business expense, but any loss actually sustained may be deducted although actually paid out of a fund so set aside.27

Salaries. As a general rule, it may be stated that any salary paid in good faith under contract, express or implied, for services actually rendered is an allowable deduction as a business expense of the employer. Inordinate salaries paid by an individual employer to relatives or others would no doubt be disallowed on the ground that they were not paid in good faith, and

25 Act of September 8, 1916, $ 32, added by Act of October 3, 1917. Prior to the passage of this provision it was held by the Treasury Department that such premiums were deductible (T. D. 2090) but later this ruling was reversed and it was held thereafter that premiums were not deductible (T. D. 2519, dated August 30, 1917). It seems, from the language of this latter Treasury Decision, that it is not intended to have a retroactive effect for years prior to 1917.

26 T. D. 2090.
27 Reg. 33, Art. 122.

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