Advertising for any of these purposes, over the corporation's name, was deductible (Art. 562). A bank was not allowed to deduct from gross income a donation made through a Chamber of Commerce for the purpose of inducing a railroad company to extend its tracks into the town where the bank was located (I. T. 1169; 1975). A corporation was a member of chambers of commerce and commercial clubs in various cities but was not allowed to deduct contributions, in addition to regular fees, for the purpose of local benefits and activities (I. T. 1153). Although a Y. M. C. A. was located on the property of the donor and was used exclusively for the benefit of its employees, the corporation could not deduct contributions for its support (O. D. 986); this decision is of doubtful application at present. A donation to a Baptist church in a mill village owned by the corporation was a proper deduction (1 B. T. A. 6). Without benefits flowing to a corporation, donations to a hospital were not ordinary expenses (I. T. 1980). Tickets for entertainments, commonly sold in the community to business enterprises, are an expense to a business enterprise making the purchase, necessary to maintain good-will (4 B. T. A. 837); this decision is in conflict with I. T. 2135.

XVIII

INSURANCE-TRAVELING AND OTHER EXPENSES

Insurance premiums as a business expense. Traveling expenses. Compensation to employees. Rentals. Professional expenses. Miscellaneous business expenses.

INSURANCE premiums paid by a taxpayer who is the beneficiary or whose estate is the beneficiary under the policy are not deductible, the rule being applicable alike to individuals and corporations (Sec. 215(a) (4); Art. 291, 581); the law looks upon such payments as a form of investment. But if a corporation which pays the premium is not the beneficiary the premium will be regarded as additional compensation to the employee and therefore deductible to the corporation as a business expense (Art. 293). This is presumed to include premiums paid on group insurance policies, even though such premiums do not constitute taxable income to employees benefiting thereby (Art. 33).

Premiums on insurance securing a loan, paid by an individual, and later by a partnership or corporation, have been held to be deductible as business expenses (O. D. 38, 396, 711, 843, 1011). This, however, has been changed in part, the rule now being that no premiums paid on policies on the lives of officers or employees which constitute the security for loans are deductible, because the person or corporation paying the premium is a beneficiary even though he is not equitably entitled to claim from the proceeds any more than the amount of the loan (Sol. Op. 136). It has also been held that no deduction can be claimed by an officer of a corporation if he pays a premium on insurance covering his life where the corporation is the beneficiary (I. T. 1214). But the corporation can deduct premiums on policies securing loans where the debtor insured is not an officer or employee or one financially interested in the corporation (I. T. 1511). Where a debtor was financially unable to meet premiums on policies securing a loan, payment of the premiums by the creditor were additional advances to the debtor (A. R. R. 7895).

Premiums paid on insurance policies payable to the estate of the creator but assigned to a charitable organization as security for a loan were not deductible (I. T. 1453).

A taxpayer who was required to take out insurance in favor of partners was allowed to deduct the premiums as a business expense provided none of the proceeds would be used to satisfy any obligation of the taxpayer (I. T. 1340).

Premiums on indemnity bonds taken out by government employees were deductible (O. D. 878).

TRAVELING EXPENSES

Traveling expenses incurred by an individual under the 1918 act were on the border line between personal and business expenses. When a trip was undertaken for other than business purposes, the expenses (except transportation tax) were not deductible. But the individual could deduct his traveling expenses for business purposes, including meals and lodging, unless reimbursed therefor, to the extent that they were in excess of his expenses while living at home. There were three possible cases:

(a) When the individual paid his own expenses, was not reimbursed therefor and his salary did not cover such expenses, the latter, including meals and lodging over and above the additional expenses of his household if he were living at home, constituted proper business expenses.

(b) If the individual was reimbursed for his actual traveling expenses, including meals and lodging, taxable income resulted from such reimbursement equal to his expenses if he were living at home.

(c) An allowance for expenses was taxable to the extent that it exceeded the actual expense (including only the extra cost of meals and lodging) to which it referred, and a deficiency of the allowance in covering the excess cost of meals and lodging was deductible. Thus mileage allowances to Army officers and United

States employees were taxable to the extent they were in excess of actual traveling expenses (Art. 292 of Regulations 45 and T. D. 3146).

By specific provision in the 1921, 1924, and 1926 acts, business traveling expenses are deductible in total. An individual claiming a deduction for traveling expenses is required to include in his return a statement indicating his business, number of days away from home, total expenses for meals and lodging during that time, and total of other traveling expenses (Sec. 214(a) (1); Art. 102).

T. D. 3146 (see above) was made applicable to the Revenue Acts of 1916, 1917, and 1918 (O. D. 1015). A commercial traveler should have included all of the expenses of maintaining his household, including rent, as information accompanying his return. If he owned his own home he was not required to include a fair rental value. Should he fail to furnish this information he would not be entitled to the deduction (O. D. 924; A. R. R. 572). Traveling expenses which could not be substantiated absolutely were not allowed. Entertainment expenses, supported by a memorandum book or by canceled checks, have been allowed as deductions (3 B. T. A. 835, 840); but such expenditures must be clearly differentiated from personal expenses (3 B. T. A. 664). A percentage basis was not permissible (A. R. R. 719). Amounts spent by a secretary of a member of Congress in making trips to his home, if not purely personal, were held to be deductible (O. D. 865), but his expenses while in Washington were not (I. T. 1264). A member of Congress was not allowed to deduct expenses of making trips of a personal nature to and from Washington, nor expenses of his family, nor campaign expenses (O. D. 864). The expense of maintaining an automobile used to travel around state was a deductible expense to a taxpayer who worked on commission basis (A. R. R. 1021), as was the expense of operating an automobile used chiefly in business (A. R. R. 551). Amounts expended by Department field auditors should be deducted and the allowance included in gross income (I. T. 1380). Transportation charges paid by the Government on account of the transportation of the families of Army officers and officers of the State Department were in the nature of additional compensation and as such included in gross income; the actual expenses were deductible (O. D. 1135; I. T. 1518). A teacher could not deduct fare expended to and from another school during

the summer session (I. T. 1238). Expenses of a commuter for fare and meals were considered personal expenses and not deductible (I. T. 1184).

Living expenses of a single taxpayer who had no home and who was employed continuously on the road could not be deducted (O. D. 905). An unmarried traveling man could deduct his expenses while away if he maintained a home or other living quarters at all times and could substantiate the fact (I. T. 1490). Amounts spent by a naval officer while on duty afloat were deductible provided he maintained a home or quarters on shore (I. T. 1497).

COMPENSATION TO EMPLOYEES

Much of the information relative to compensation for services as income applies to the same item as a deduction.1 In general, taxable income to an employee is an allowable deduction to the employer, while a gift to the individual is a non-allowable deduction to the individual or corporation employer. The 1926 law in this respect is the same as the previous act in describing the amount that may be deducted under this head: "a reasonable allowance for salaries or other compensation for personal services actually rendered" (Sec. 214(a) (1)).

The Department recognizes the difficulty of distinguishing between salaries, dividends, and gifts when compensation is paid by a corporation. No definite rules are laid down with respect to what constitutes excessive compensation in any enterprise. Bonuses, even profit-sharing bonuses, are allowable deductions if the total compensation to any one individual is not unreasonable. Pensions paid by a corporation direct or through a fund controlled by the corporation are not allowable deductions until actual distribution to the employee is made (Art. 106-109). The Department has paraphrased its concept of "reasonable compensation" in the following words: "Such amount as would ordinarily be paid for like services by like enterprises in like circumstances" (Art. 106(3)).

1 See pages 143 ff.