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FEDERAL INCOME TAX STATUTE 1 (QUESTIONS SUGGESTED BY REPORTERS, May 19 & 20, 1950)

handle is hein.ali/aliftp0393 and id is 1 raw text is: QUESTIONS SUGGESTED BY REPORTERS FOR INCOME TAX STATUTE DISCUSSION ON FRIDAY AND SATURDAY, MAY 19 AND 20, 1950 The following topics, in the form of questions, may assist in focusing the discussion concerning Tentative Drafts Nos. 2 and 3 on the more important issues presented by these drafts. I. DEDUCTIONS 1. Expenses a. Ordinary and Necessary Requirement. Issue: Should the requirement that business expenses be or- dinary and necessary, in order to be deductible from gross in- come, be eliminated? Note: Present law requires, generally speaking, that only those business expenses which are ordinary and necessary may be deductible. Hence genuine expenses as distinguished from gifts, distributions of profits, or capital expenditures may be dis- allowed as deductions if found for some reason not to satisfy such qualification. The draft removes this limitation nd permits all business expenses to be deductible despite any extraordinary character. For example, under the draft salaries paid in the tax- payer's business would be deductible even if abnormally high, provided no element of gift or profit distribution to shareholders is involved. See Tentative Draft No. 2, sections X150 (a) (1), page 22, and X151 (a) (1), page 25; and comments B-2 (a), pages 149 and 156, b. Nonpersonal Expenses of Individuals. Issue: Should individuals be permitted to deduct from gross income all their expenses incurred or losses sustained which are not personal, family, or living expenses or losses? Note: Under present law an individual's expenses, to be deductible, must affirmatively qualify as being in trade or business or in the production of income. At the same time personal, fam- ily, or living expenses are specifically disallowed as deductions. There is, therefore, a possible gap between the area of specific allowance and disallowance. The draft fills this hiatus by remov- ing the affirmative qualifications and thereby extending the area of permissible deductibility up to the boundaries of the area of disallowance. Under the draft, for example, expenses incurred by a nonprofessional trustee in the settlement of a suit for wrong- ful administration of a trust would be deductible. As under

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