ering the life of any officer or employee, or of 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.

"Group" insurance premiums are deductible. The law disallows deductions for premiums only when the taxpayer is a beneficiary. So-called "group" insurance premiums are deductible because the proceeds of the policies are paid to some one other than the taxpayer.

The law, however, ignores the practice of conservatively managed concerns in insuring against business risks which involve no element of profit or investment. Premiums paid for such insurance are actual business expenses. The law should discriminate between the cost of business life insurance and investment life insurance.

[Former Procedure-Continued]

tion, joint-stock company or association, or insurance company, shall not be deducted in computing the net income of such individual, corporation, joint-stock company or association, or insurance company, or in computing the profits of such partnership for the purposes of subdivision (e) of section eight (3).

The 1917 law made effective the procedure laid down in T. D. 2519. Although premiums on policies such as those described are not deductible annually, they may be cumulated and subtracted from the proceeds of such policies when and if proceeds are realized. This is made clear in the following quotation:

RULING. . . . . Amounts received by a corporation from policies paid on the lives of its officers or employees should be reported as income, after taking from the gross amount received on the policies the actual payments made by the corporation in the way of premiums, which premiums had not been charged against the earnings of previous years in determining the net income to be reported in preparing the corporation's returns of annual net income. The same ruling as set forth above will apply to partnerships and individuals. (Letter to the Mutual Life Insurance Co. of New York, signed by Deputy Commissioner L. F. Speer, and dated March 15, 1918.)

A possible explanation of the insertion of Section 32 in the law in 1917 is the desire to prevent evasion. It is conceivable that in a year of high tax rates a concern might reduce its taxes by insuring heavily various persons connected with the business. Evasion would be particularly easy if the various types of "investment" insurance were available.

Accident insurance premiums.-The 1918 law and the regulations hold that proceeds of accident insurance policies are not taxable income. Therefore premiums paid for accident insurance are not allowable deductions. The controlling reason for taking out accident insurance is to secure special income in case one's regular income is shut off. It would therefore seem logical to tax the income and allow credit for premiums paid and for any unusual expenses arising from the contingency giving rise to the payment of the insurance.

Property insurance premiums-when deductible.—

REGULATION. Premium paid for insurance on property used for business purposes is an allowable deduction. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and not deductible. (Reg. No. 33, 1918, ¶ 109.)

In conformity with this ruling, premiums on insurance covering a dwelling house occupied by the owner may not be deducted. On the other hand if the insurance covers a barn on a farm it is deductible.

Premium on fidelity bonds deductible.—

REGULATION. Where an employee is required to furnish bond and pay the premium on such bond as a necessary incident of his employment, the premium on the bond will constitute an allowable deduction in computing net income. (T. D. 2090.)

If the premium is paid by the employer the payment is likewise an allowable deduction as a business expense.

"Self-insurance" reserves.

REGULATION. Funds set aside by a corporation for insuring its own property are not a proper deduction, but if such funds are set aside, or a reserve therefor is set up, any loss actually sustained and charged to such funds or reserves may be deducted. (Reg. No. 33, 1918, ¶ 452.)

If the amounts set aside are simply equal to the premiums

'Section 213 (b-6).

2T. D. 2747, July 12, 1918.

'Income Tax Primer, 1918, question 67.

charged by an insurance company it is quite possible that the courts would decide that such reserves or provisions against losses would be allowable deductions as business expenses. Certainly sound accounting practice requires that such items should be charged to an expense account.

Procedure when premiums are paid in advance.

REGULATION. Premiums paid in advance, covering a period of several years, are to be taken as a deduction on the basis of one of two methods. When the books are kept on a cash basis, the entire amount is deductible in the year in which the premium is paid. When the books are kept on an accrual basis the premium is to be prorated over the period covered by the insurance. 1918, ¶ 110.)

Assessments for insuring bank deposits.

(Reg. No. 33,

REGULATION. Banking corporations which, pursuant to the laws of the states in which they are doing business, are required to set apart, keep, and maintain in their banks the amount levied and assessed against them by the state authorities as a “depositors' guaranty fund," may deduct from their gross income in their returns of annual net income the amount so set apart each year to this fund, provided that such fund, when set aside and carried to the credit of the state banking board or other duly authorized state officer, ceases to be an asset of the bank, but may be withdrawn in whole or in part, upon demand by such board or state officer to meet the needs of these officers, as required by state laws, in reimbursing depositors in insolvent banks, and provided further that no portion of the amount thus set aside and credited is returnable, under the existing laws of the state, to the assets of the banking corporation.

If, however, such amount is simply set up on the books of the bank as a reserve to meet a contingent liability, and remains an asset of the bank, it will not be deductible except as it is actually paid out as required by law and upon demand of the proper state officers. (Reg. No. 33, 1918, ¶¶ 455-457.)1

Rentals

'No difficulty arises concerning ordinary rentals paid in cash in business operations. Sometimes, however, the rental charge is increased by expenditures not included in the cash.

'T. D. 2152.

payments to the landlord. These, of course, are deductible under the head of rentals.

Certain interest payments are held to be the equivalent of rentals and are deductible as such. (See page 458.)

Taxes paid by a tenant.—

REGULATION. Taxes paid by a tenant to or for a landlord for business property are additional rent and constitute a deductible item to the tenant and taxable income to the landlord. The amount of the tax will be deductible by the landlord. (Reg. No. 33, 1918, ¶ 115.)

A statement in the Primer emphasizes the fact that in this case the property must not be used by the tenant as a home.1

Permanent improvements on leased ground.

REGULATION. The cost of erecting permanent buildings, or of making permanent improvements on ground leased by a company, is held to be an additional rental and is therefore a proper deduction from gross income, provided such buildings and improvements, under the terms of the lease, revert to the owner of the ground at the expiration of the lease. In such case, however, the cost will be prorated according to the number of years constituting the term of the lease and the annual deduction will be an aliquot part of such cost. (Reg. No. 33, 1918, 445-)

Cost of lease may be apportioned over term as rent.

REGULATION. Where a leasehold is sold for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum, each year, based on the number of years the lease has to run. (Reg. No. 33, 1918, ¶ 113.)

Premium paid for lease.-Where a premium is paid to secure a lease, the amount represents an additional expense of doing business, the effect being payment of a higher rent. Sometimes the landlord will buy an unexpired lease and rent direct to the new tenant at the increased rate. Where the premium paid is small, it would be proper to charge it all off at once as an expense. If the amount is large and the lease has a long time to run, the proper method of handling it is to 'Income Tax Primer, 1918, question 69.

set up the amount paid as a deferred asset, charging off each year the proportion of the premium which has expired. As it represents increased rent, the rent paid and the proportion of the premium should be carried into the expense account as one item.

A corporation issued $100,000 of its capital stock to pay for a leasehold having 31 years to run. The question arose as to how it should be treated in the accounts. If the value placed upon the leasehold was not excessive, the transaction was the same as if the corporation had sold its stock for cash. and had then purchased the lease for cash. In that event it would have been proper to charge off each year as an expense one thirty-first of the amount paid.

Depreciation and repairs on buildings on leased lands.—

REGULATION. The cost of the buildings being a rental charge and deductible on the prorated basis, the lessee corporation will not be permitted to deduct from gross income any depreciation with respect to such buildings, but the cost of incidental repairs necessary to keep them in an efficient condition for the purposes of their use, may be deducted as an expense of operation and maintenance.1

If, however, the life of the improvement is less than the life of the lease, the depreciation may be taken by the lessee, based upon the cost and life of the improvement. (Reg. No. 33, 1918, ¶¶ 446-447.)

Rentals paid by professional men and others.-Under the title "Business expenses of the professional man" (page 406) will be found a full discussion of this topic.

Business Expenses Distinguished from Capital Outlay

Organization and similar expenses.-The Treasury rulings forbid the deduction of attorneys' fees, accountants' fees, fees paid to state authorities and other expenditures usually grouped under the term "organization expenses." On this point the rulings are in direct conflict with good accounting

'T. D. 2137.