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provement; that which is his personal concern or interest; employment, regular occupation, but it is not necessary that it should be his sole occupation or employment. (T. D. 1989, June 2, 1914.)

It is apparent that this definition is broad enough to include professions of all types, as well as various avocations and “side-lines.” Moreover, it is not necessary for a person to own a business in order to be in business or to have business expenses. Salaried officers and employees and persons receiving their remuneration on a commission basis often have business expenses which are necessary and are allowable as deductions. Recognition of this is found in the original edition of Regulations 45.8

REGULATION. .... Amounts paid from a salary received for all services rendered and expenses incurred are deductible as business expenses when the expenditures are occasioned by the services in respect of which the salary is paid. . . . . (Art. 292.)

In the April 17, 1919, edition of the regulations the statement was omitted. The omission, however, cannot operate to deprive anyone of a deduction for business expenses which the law permits.

Theory underlying the segregation of business expenses.In the opinion of the author the exact line between personal and business expenses can be determined with theoretical accuracy by ascertaining whether or not the various items would have been expended had the taxpayer's income been derived from some source, other than business, which required no outlay for business expenses. For example, if a salesman or other employee receives a salary of $3,000 per annum, the query should be propounded: “What would his personal, living or family expenses be if his income of $3,000 were derived from investments?” Theoretically he should be permitted to deduct any additional expenses incurred over and

"The excess profits tax law of October 3, 1917, specifically included professions within the definition of "trade" and "business." (See section 200.)

"The preliminary edition of these regulations was issued soon after the enactment of the law.

above those which he would pay if he were free to live wherever he chose and in any manner he chose within the limitations of his $3,000 investment income. If in order to earn his salary he must purchase books, attend lectures and incur similar expenses, they should be proper deductions. If he must belong to a luncheon club and entertain at his own expense prospective or actual customers, the dues and other charges of the club should be business expenses and allowable deductions. If, to be within reach of his place of business, he must live in a community where rents are high, this additional amount should be considered a business expense, as should also the cost of his commutation ticket on the railway.

There are, however, apparent difficulties in applying in practice the theoretical distinction worked out in the preceding paragraph. Moreover, the specific provision of the law forbidding the deduction of actual "personal, living or family expenses” complicates the situation, for, as a matter of fact, items which would ordinarily be classified as "family" and “personal” expenses (such, for example, as house rent) may be and often are at the same time true business expenses as ascertained by the test given above. The law forbids the deduction of the higher rent which A pays to be near his work and the regulations forbid the deduction of the commutation fare of B who prefers to spend time and railway fare rather than rent in order to secure accessibility to his business. Theoretically both deductions should be permitted. To work out a complete solution it is necessary both to change the law, so as to recognize certain "living” expenses as business expenses, and to liberalize the present regulations.10 .

'Income Tax Primer, 1918, question 65.

10The situation has been partly met in England by the establishment of allowances roughly equivalent to annual business expenses of this sort which are difficult to determine exactly, a practice permitted under the following section of the British act of 1913:

"Where the Treasury are satisfied with respect to any class of per

Importance of precise distinction.—The importance of distinguishing carefully between business and personal expenses and of securing a full deduction of the former is greatly emphasized by two elements in the situation. The first is that “unearned” income, which at present is taxed at the same rates as business income, often has no business expenses attached to it and consequently runs no danger of excessive taxation through failure to deduct such expenses. If business expenses are not completely deductible, business income will stand at a still greater disadvantage, as compared with funded income, than is intended when the rates on both earned and unearned incomes are the same. In the opinion of the author the failure to tax unearned income at a higher rate than earned income in itself constitutes a sufficiently great discrimination without adding to it in this manner. 11 The other element which emphasizes the desirability of carefully segregating business expenses is the fact that the average citizen of the United States is not given to a close analysis of his personal expenditures. He thus is apt to be taxed excessively, unless his attention is called to the importance of accurate accounts. Moreover, knowledge of one's personal expenditures undoubtedly leads to greater economy and increased savings. This, in turn, means larger amounts available for future income taxation, a fact which should not be overlooked

sons in receipt of any salary, fees or emoluments payable out of the public revenue that such persons are obliged to lay out and expend money wholly, exclusively, and necessarily in the performance of the duties in respect of which such salary, fees, or emoluments are payable, the Treasury may fix such sum as in their opinion represents a fair equivalent of the average annual amount laid out and expended as aforesaid by persons of that class, and in assessing the income tax on the salary, fees, or emoluments of persons of that class, there shall be deducted from the amount thereof the sums so fixed by the Treasury; provided that if any person would, but for the provisions of this section, be entitled to deduct a larger amount than the sum so fixed, that sum may be deducted instead of the sum so fixed.” (3 and 4 Geo. V, Cap. 30, section 3.)

It may be that a fairly satisfactory solution of the problem in this country can be found by following the lines suggested in this law.

"See page 17.

by taxing authorities in framing regulations governing deductions for expenses.

Suggestion for segregating business expenses.—Where business expenses are intermingled with personal expenses, it is sometimes helpful to approach the problem in a negative fashion—that is, to ascertain first the amounts paid for personal, living and family expenses (items which are not deductible) and to assume tentatively that the remainder represents business expenses. With such an assumption in mind the examination of the charges composing this remainder often reveals deductible items not otherwise apparent.12

In the paragraphs which follow various items officially classified are cited as illustrative of allowable deductions. So long as good faith is observed in the inclusion of an expense item, it is not likely to arouse objection.

May personal expenses be deducted as casualties?-Section 215 provides that "no deduction shall in any case be allowed in respect of (a) personal, living or family expenses." But under deductions this statement appears :

Law. Section 214. (a) That in computing net income there shall be allowed as deductions: .....

(6) Losses sustained during the taxable year of property not connected with the trade or business (but in the case of a nonresident 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;

It has been stated by the collector of one of the largest New York districts that the allowable deduction for a casualty to property “not connected with the trade or business" would extend to net losses sustained to private automobiles. If so, the deduction would also extend to the breakage of

"The remainder, determined in the negative manner thus described, would, of course, not be an item acceptable to the tax authorities. The suggestion is made merely as a method of discovering deductible items which can be consolidated into a positive total of business expenses, suitable for use in the return.

statuary and ornaments in one's home, to eyeglasses and perhaps to children's toys.

The author is of the opinion that section 215 is controlling as to all items which the taxpayer ordinarily regards as "personal, living or family expenses," and therefore section 214 (a-6) includes only losses arising from such casualties as could not be regarded as personal, living or family expenses.

If a residence burns down, the loss not covered by insurance would be deductible. The test should be whether or not there has been a property loss, and no deduction should be permitted which cannot reasonably be so construed. In most cases taxpayers have three classes of expenditures: (1) expenses connected with business or trade; (2) expenses involved in investments and transactions entered into for profit; (3) personal, living or family expenses. Losses arising out of class (2) are made fully deductible under the 1918 law. This is a decided improvement in the law and should cover all reasonable deductions. The residences of taxpayers may be said to be in a class by themselves, but items which the taxpayer himself has always regarded as in class (3) should not be taken out of that class unless there is a sound economic reason for so doing—and the author does not consider that such a reason exists.

While it can hardly be said that the wording of the sections is ambiguous, yet the intention of the framers of the law is an important factor, and it may be assumed without investigation that there was no intention on their part of completely reversing all former procedure and permitting the deduction of such an item as a loss arising out of the puncture of an automobile tire.

Wages for personal service.-The law does not permit a deduction for wages paid to those in domestic service, nor to those, such as dressmakers and others, who produce articles consumed in the taxpayer's family, but wages paid to those who help to produce the income may be deducted. This rule is

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