of the house for his office, such portion of the rent as is property attributable to such office is deductible. The father is legally entitled to the services of his minor children, and allowances which he gives them, whether said to be in consideration of services or otherwise, are not allowable deductions. Alimony and an allowance paid under a separation agreement are not deductible from gross income. The cost of the equipment of an army officer to the extent only that it is specially required by his profession and does not merely take the place of articles required in civilian life is deductible. Accordingly, the cost of a sword is an allowable deduction, but the cost of a uniform is not.17 TRAVELING EXPENSE. Traveling expenses, as ordinarily understood, include railroad fares and meals and lodging. If the trip is undertaken for other than business purposes, such railroad fares are personal expenses and such meals and lodging are living expenses. If the trip is on business, the railroad fares become business instead of personal expenses, but the meals and lodging continue to be living expenses and are not deductible in computing net income. If, then, an individual whose business requires him to travel receives a salary as full compensation for his services, without reimbursement of traveling expenses, his expenses for railroad fares, but not for meals and lodging, are deductible from gross income. If such an individual receives a salary and is also repaid his actual traveling expenses, no part of such expenses is deductible from gross income and no part of such repayment is returnable as income. If such an individual receives a salary and also an allowance for meals and lodging, as, for example, a per diem allowance in lieu of subsistence, any excess of the cost of such meals and lodging over the allowance is not deductible, but any excess of the allowance over the actual expenses is taxable income. Congressmen and others who receive a mileage allowance for railroad fares should return as income any excess of such allowance over their actual expenses for such fares. A payment for the use of a sample room at the hotel for the display of goods is a business expense.18 17 Reg. 45, Art. 291. The same rule was followed under the Civil war income tax laws in regard to the services of minor children. (7 Int. Rev. Rec. 60.) 18 Reg. 45, Art. 292. See In re. Assessment of Taxes of T. A. Hayes, 16 Haw. 796; Galm v. U. S., 39 Ct. Cls. 55. IMPROVEMENTS AND BETTERMENTS. The Revenue Act of 1918 provides expressly in the case of individuals and corporations that no deduction shall be allowed in respect of any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property or estate.19 Amounts expended for additions and betterments add to the value of the property and are considered as a capital investment.20 If expenditures are made for permanent improvements and betterments they are treated as any other investment of capital; that is, if the asset in which the capital is invested is one on which depreciation may be claimed, the amount expended for the permanent addition or betterment is added to the cost of the property for the purpose of determining the annual depreciation allowance thereafter. The statute merely intends to prohibit the deduction of the entire amount in the year in which the expenditure is made. EXAMPLES OF CAPITAL EXPENDITURES. The following have been held 21 to be investments of capital and not deductible business expenses: (a) amounts expended for securing copyright and plates which remain in the possession of and the property of the person making the payments; (b) the cost of defending title or perfecting title to property; 22 (c) amounts expended for architect's services; 23 (d) commissions paid in purchasing and selling securities; 24 (e) amounts to be assessed and paid under an agreement between bondholders or stockholders of a corporation, to be used in a reorganization of the corporation; (f) an assessment paid by a stockholder of a national bank on account of his statutory liability; (g) expenditures of a railroad for sidings and spur tracks, 25 PUBLIC UTILITIES. In a decision under the 1909 Law it was held that the fact that, under the laws of California, a public utilities corporation is not the owner of the property, but merely 19 Revenue Act of 1918, §§ 215 (b) and 235. 20 Reg. 33, Art. 118. 21 Reg. 45, Art. 293; Reg. 33 Rev., Art. 8. 22 Such cost constitutes a part of the cost of the property. 23 Such amounts are a part of the cost of the building. 24 Such commissions are part of the cost or offset against the selling price of the securities. 25 Grand Rapids & Indiana Ry. Co. v. Doyle, 245 Fed. 792; T. D. 2210. intrusted with the use thereof, did not entitle it to more favorable treatment than other corporations. Money received from the consumers to pay for service connections to be laid in public streets was held to be income on which the corporation was liable to pay a tax, notwithstanding that all or nearly all of the sums. so received may have been expended in betterments and extension of its system. Moneys expended for service connections and pipe extensions are invested in permanent improvements, and do not come within any of the permitted classes of deductions mentioned in the statute.26 They are not in the nature of improvements made merely to facilitate the transaction of a growing business, the expenses of which have been held deductible. 27 EXPENSE OF RESTORING PROPERTY. The Revenue Act of 1918 provides expressly in the case of individuals and corporations that no deduction shall be allowed in respect of any amount expended in restoring property or in making good the exhaustion thereof on which an allowance is or has been made.28 This is also a reasonable limitation since if such property is subject to wear or tear and depletion, the additional amount so invested in the property may be taken into consideration in computing the allowance for depreciation and depletion. INSURANCE ON EMPLOYEES. No deduction is permitted for any amount paid in premiums on any life insurance policy covering the life of any employee or any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.29 But if the taxpayer is in no sense a beneficiary under such a policy, except as he may derive advantage from the increased efficiency of the employee, and pays the premiums purely as reasonable additional compensation of such employee, they are allowable deductions. The question whether the proceeds of such policies paid upon the death of the insured may be excluded from gross income or must be included therein depends upon whether the beneficiary is an individual or a corporation.30 26 Union Hollywood Water Co. v. Carter, 238 Fed. 329. 27 See Mutual Benefit Life Ins. Co. v. Herold, 198 Fed. 199, affirmed 201 Fed. 918. 28 Revenue Act of 1918, §§ 215 (c), 235. 29 Revenue Act of 1918, §§ 215 (d), 235. See p. 324. 30 Reg. 45, Art. 294. F. T.-22 Special Assessments Against Local Benefits. Although assessments against local benefits are frequently referred to as taxes, and are imposed by local governments, they are not deductible as taxes, if "of a kind tending to increase the value of the property assessed." 31 The quoted words were added by the Revenue Act of 1918. Under the 1916 Law, which did not contain this provi sion, such assessments as, for instance, for paving, curbing, installing sewerage and water systems, etc., were held to be expenditures which add to the value of the property and should be capitalized, that is, added to the cost of the property for the purpose of determining the loss or gain in a subsequent sale of such property.32 31 Revenue Act of 1918, §§ 214 (a) 3, 234 (a) 3. 32 Letter from Treasury Department dated December 22, 1914; I. T. S. 1919, ¶ 1883. CHAPTER 22 DEDUCTION OF BUSINESS EXPENSES The Revenue Act of 1918 permits to corporations the deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade. or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered, and 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.1 The law permits to individuals the same deduction, except that the property with respect to which rentals, or other payments required to be made, may be deducted, must be used "for purposes of the trade or business" carried on by the individual. The deduction of business expenses is allowed in the case of non-resident aliens and non-resident foreign corporations if and to the extent that they are connected with income arising from a source within the United States; and the proper apportionment and allocation of their deduction with respect to sources of income within and without the United States must be determined under the rules and regulations prescribed by the Commissioner with the approval of the Secretary. The special provisions applicable to non-resident 1 Revenue Act of 1918, § 234 (a). 2 Revenue Act of 1918, § 214 (a) 1. 3 Revenue Act of 1918, §§ 214 (b) and 234 (b). The 1916 Law permitted to individuals the deduction of the "necessary expenses actually paid in carrying on any business or trade," (Revenue Act of 1916, § 5 (a)), and in the case of corporations all the ordinary and necessary expenses paid within the year in the maintenance and operation of the business and properties of the corporation, 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." The Revenue Act of 1918 further qualifies the expenses deductible as stated in the text above by stipulating that they all be "ordinary" as well as "'necessary," allows their deduction if "incurred" as well as "paid" omitting the word "actually" in connection with the word "paid." (Revenue Act of |