income means only the gross income from sources within the United States, determined under the provisions of section 217." See Problems 159 to 166, inclusive.

PROBLEM 82

Illustrating Deductions Allowed Individuals-Repairs to
Leased Property

FACTS:

Henry Fox, a wholesale furrier, leased a loft for a period of five years. The lease provided that the property was to be returned at the end of the lease in the same condition it was in at the date of the lease. In order to comply with this provision it was necessary to make certain repairs during the year. Mr. Fox makes his returns on the cash basis.

How should the expenditure for repairs be treated for tax purposes?

ANSWER:

It is an allowable deduction from gross income for the year in which paid.

REFERENCES:

Sec. 214: "(a) That in computing net income there shall be allowed as deductions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, (including . . rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity."

...

In. Bul. 35-21-1794; O. D. 1014, the Bureau ruled that where "by the terms of the lease the lessee is required to return the leased properties to the lessor at the end of the lease in the same condition they were in at the date of the lease, amounts expended to keep the properties in good condition and repair are deductible as business expenses in the returns of the lessee.. for the years in which such amounts are expended."

Art. 103, Regulations 62: "The cost of incidental repairs which neither materially add to the value of the property nor appreciably

prolong its life, but keep it in an ordinarily efficient operating condition, may be deducted as expense, provided the plant or property account is not increased by the amount of such expenditures.

Corporations: The principle illustrated above will also apply to corporations.

as

Sec. 234 (a): "That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed deductions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including . . . rentals or other payments required to be made as a condition to the continued use or possession of property to which the corporation has not taken or is not taking title, or in which it has no equity; . . ."

PROBLEM 83

Illustrating Deductions From Gross Income-Newspaper Advertising Expenses

FACTS:

Enoch Edwardes, who is engaged in the selling of men's furnishings, in 1921 expended $20,000 in advertising in local papers.

QUESTION:

How are these expenditures to be treated in Mr. Edwardes' income-tax return?

ANSWER:

Advertising expenses are to be treated as an expense for the year in which paid, or, if the taxpayer keeps his books on an accrual basis, in the year in which such expenses become a liability.

REFERENCE:

Bul. 38-21-1829, O. D., 1039:

"... It is held that the expenses of such advertising campaign are deductible as a business expense only in the return for the year in which such expenses were paid or in the year in which liability therefor accrued, if the books of the company are kept on an accrual basis."

NOTE:

The same rule would apply in case the taxpayer were a corporation instead of an individual.

PROBLEM 84

Illustrating Deductions from Gross Income-Advertising
Expense-Outfitting Baseball Team

FACTS:

Fred Yankey is a manufacturer of plumbing supplies whose product is trade-marked "YANKEE." In preparing his return for the calendar year 1921 he finds that certain amounts have been expended by him in outfitting an employee's baseball team, which travels to nearby communities playing other industrial teams of the same caliber, and using the name "YANKEE SUPPLIES." The result of this is that Mr. Yankey's business is given considerable publicity.

QUESTION:

For income-tax purposes, what is the proper treatment of the expenditures above mentioned?

ANSWER:

These expenditures, being in the nature of advertising, are deductible from gross income.

REFERENCE:

Bul. 37-21-1815; O.D., 1030:

"Inasmuch as it appears that the name of the taxpayer is given considerable publicity in the appearance of the taxpayer's baseball team in various parts of the district in which the taxpayer does business and by a report of the games in the newspapers of the vicinity, it is held that the expenses incurred relative to the outfitting and support of the ball team representing the taxpayer are similar to those expended in other methods of advertising and are deductible as business expenses in the income tax returns of the taxpayer. . . ."

NOTE:

The same ruling would apply in case the taxpayer were a corporation instead of an individual.

PROBLEM 85

Illustrating Deductions From Gross Income-Dues Paid to Trade Associations

FACTS:

Frank French, who is engaged in the manufacture and sale of chemical apparatus, in 1921 pays $200 membership dues to a chemical apparatus manufacturers' association organized to promote the business interests of its members.

QUESTION:

How is the above amount to be treated on Mr. French's income-tax return?

ANSWER:

The Bureau has held that dues paid to an association organized to promote the business interests of its members are deductible from gross income.

REFERENCE:

In Bul. 19-20-916, O. D. 496, the Bureau ruled in connection with dues paid to an association "organized for the purpose of promoting in all lawful ways the general business interests of exporters of forest products by the collection and dissemination to its members of information and statistics relating to such export business that membership dues paid by the members of this association represent a consideration for benefits flowing directly to them as an incident of their business and may, therefore, be deducted from gross income."

NOTE:

The same rule would apply in the case of a corporation taxpayer.

PROBLEM 86

Illustrating Deductions From Gross Income-Membership Dues in Chamber of Commerce

FACTS:

Rowland Royce, who is engaged in the automobile business,

expends $50 in 1921, for membership dues in the Chamber of Commerce in the city in which his business is located. The purpose of Mr. Royce's membership in this organization is to advance his business interests.

QUESTION:

May this item be taken as a deduction in Mr. Royce's incometax return?

ANSWER:

Yes, the dues would be considered a proper deduction from gross income.

REFERENCE:

Bul. 13-20-808; O. D., 421: "Membership fees or dues paid by individuals and corporations to a chamber of commerce or board of trade are deductible from gross income as a business expense provided the membership is employed as a means of advancing the business interests of the individual or corporation."

PROBLEM 87

Illustrating Deductions from Gross Income-Experimental Expenses

FACTS:

Charles Curtis, a taxpayer engaged in the manufacture of engineering supplies, in 1921 expends $40,000 in experimental work.

QUESTION:

How is this item to be treated on Mr. Curtis' tax return?

ANSWER:

The taxpayer has the option of either captalizing the expenditure, if its nature is such as to improve his facilities or product, or deducting it as a current expense. If capitalized it would be the subject of a depreciation allowance if Mr. Curtis' past experience was such as to enable him to estimate the probable period of usefulness.