paid or incurred during the taxable year in carrying on any trade or business including 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 for purposes of the business of property to which the tax-payer has not taken or is not taking title or in which he has no equity. Expenses of landlord in maintaining the property rented out by him may be deducted.

Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific or educational purposes or for prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any stockholder or individual, or to the special fund for vocational rehabilitation authorized by Section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per cent of the taxpayer's net income, as computed before deducting such gifts.

The following cannot be deducted: (a) Personal, living or family expenses. (b) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. (c) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made. (d) Premiums paid on any life insurance policy covering the life of any officer or employe or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer directly or indirectly is a beneficiary under such policy. (e) Gifts to dependent relatives.

2. Interest on Indebtedness-All interest paid or accrued within the taxable year on indebtedness except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917), the interest upon which is wholly exempt from taxation as income to the taxpayer, or in the case of a non-resident alien individual the proportion of such interest which the amount of his gross

income from sources within the United States bears to the amount of his gross income from all sources.

3. Taxes-Paid or accrued within the taxable year, imposed (a) by the authority of the United States except income, war-profits and excess-profits taxes, or (b) by the authority of any of its possessions except the amount of income, war-profits and excess-profits taxes allowed as a credit as indicated on page 11, or (c) by the authority of any State or Territory or any County, School district, Municipality or other taxing sub-division of any State or Territory not including those assessed against local benefits of a kind tending to increase the value of the property assessed, or (d) in the case of a citizen or resident of the United States by the authority of any foreign country except the amount of income, war-profits and excess-profits taxes allowed as a credit as indicated on page 11 or (e), in the case of a non-resident alien individual by the authority of any foreign country (except income, war-profits and excess-profits taxes and taxes assessed against local benefits of a kind tending to increase the value of the property assessed), upon property or business.

4. Losses, sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.

5. Losses, sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business, but in the case of a nonresident alien individual, only as to such transactions within the United States.

6. Losses, sustained during the taxable year of property not connected with the trade or business (but in the case of a non-resident alien individual only property within the United States) if arising from fires, storms, shipwreck or other casualty or from theft and if not compensated for by insurance or otherwise.

7. Debts, ascertained to be worthless, and charged off within the taxable year.

8. Depreciation-Reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

9. Depreciation-The Act contains special provisions permitting special deduction for buildings, machinery and other facilities acquired on or after April 6, 1917, and contributing to the prosecution of the war, and also in the case of mines, oil and gas wells, other natural deposits and timber.

10. Loss by falling prices, etc.-If it is shown to the satisfaction of the Commissioner of Internal Revenue that during the taxable year 1919 a taxpayer has sustained a substantial loss (whether or not actually realized by sale or other disposition) resulting from any material reduction (not due to temporary fluctuation) of the value of the inventory for the taxable year 1918, or from the actual payment after the close of the taxable year 1918 of rebates in pursuance of contracts entered into during the year 1918 upon sales made during the year 1918, then the amount of such loss shall be deducted from the net income for the taxable year 1918 and the tax for such year shall be redetermined accordingly. Any amount found to be due to the taxpayer upon the basis of such redetermination will be credited or refunded to the taxpayer.

11. Dividends received from taxable corporations. Also dividends from a personal service corporation out of earnings upon which the income tax has been imposed. These deductions apply to the normal tax only.

12. Interest on Government Bonds-Interest on obligations of the United States and bonds of the War Finance Corporation, which is taxable for the surtax as indicated on page 6 may be deducted for the normal tax.

13. Personal exemptions, see page 9. These exemptions are not allowed in figuring the surtax.

Q. I bought and sold stock in 1919 and on certain transactions made a profit of $5,000 and on others I sustained losses of $15,000. Can I deduct all of such losses?

A. Yes, you can deduct the entire amount of such losses notwithstanding they exceed your profits from similar transactions.

Q. When shares of stock of a corporation are sold from lots purchased at different times and at different prices, what lots shall the stock sold be charged against?

A. If the identity of the lots cannot be determined, the stock sold shall be charged against the earliest purchases of such stock.

Q. Are bonuses to employees allowable deductions from gross income?

A. Yes, when made in good faith and as additional compensation for services actually rendered by employees, provided such payments, when added to stipulated salaries, do not exceed a reasonable compensation for the services rendered.

Q. Must inventories be used in ascertaining net income? If so, upon what basis are they to be computed?

A. The statute provides that whenever in the opinion of A. the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Q. My profits for 1919 will be small due to losses sustained in selling goods at lower prices than they were valued in my inventory for 1918. I paid a high tax for 1918 on profits which were therefore largely paper profits. Can said losses be thrown back into 1918 by re-valuing my inventory for 1918 and the tax for said year redetermined?

A. Yes, provision is made in such a case for correcting your return for 1918 and having the tax for such year redetermined accordingly. (See paragraph 10 on the next preceding page.)

Q. I receive $500 a year interest on Tax-free Covenant Bonds of a corporation on which interest the corporation pays to the government 2% of the normal tax. Is this tax so paid by the corporation considered additional income to me?

A. Yes. It must be included in your income as additional interest. The amount of the tax so paid is also to be deducted from the total tax computed on your individual return.

Q. If my business sustained a net loss in 1919, may I have my 1918 return reopened and the 1918 income reduced by such net loss?

A. Yes, the statute provides that if for any taxable year beginning after October 31, 1918, and ending prior to January 1, 1920, it appears to the Commissioner that any taxpayer has sustained a net loss, the amount of such net loss shall be deducted from the net income of the taxpayer for the preceding taxable year and the taxes for such year redetermined accordingly. The difference in the tax shall be credited or refunded to the taxpayer.

Q. What is meant by a net loss referred to in the preceding question?

A. Net losses resulting from either (1) The operation of any business regularly carried on by any taxpayer, or (2) the bona fide sale by the taxpayer of plant, buildings, machinery, equipment or other facilities, constructed, installed or acquired by the taxpayer on or after April 6th, 1917, for the production of articles contributing to the prosecution of the present war and when so resulting, means the excess of the deductions allowed by law (excluding in the case of corporations amounts allowed as deductions under paragraph (6) of Sub-division (a) of Section 234) over the sum of the gross income, plus any interest received free from taxation, both under the income tax and the war-profits and excess-profits tax.

Q. Are the foregoing deductions allowed to the members of a partnership and the beneficiaries of an estate or trust?

A. Yes.