RR 2-40

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SECTION 119. Personal, living, and family expenses. Personal, living, and family expenses are not
deductible. Insurance paid on a dwelling owned and occupied by a taxpayer is a personal expense and
not deductible. Premiums paid for life insurance by the insured are not deductible. In the case of a
professional man who rents a property for residential purposes, but incidentally receives his clients,
patients, or callers in connection with his professional work (his place of business being elsewhere), no
part of the rent is deductible as a business expense. If however, he uses part of the house for his office,
such portion of the rent as is properly attributable to such office is deductible. Where the father is
legally entitled to the services of his minor children, any allowances which he gives them, whether said
to be in consideration of services or otherwise, are not allowable deductions in his return of income.
Alimony, and an allowance paid under a separation agreement are not deductible from gross income.

SECTION 120.Capital expenditures. No deduction from gross income may be made for any
amounts paid out for new buildings or for permanent improvements or betterments made to increase
the value of the taxpayer's property, or for any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance for depreciation or depletion or other allowance is
or has been made. Amounts expended for securing a copyright and plates, which remain the property of
the person making the payments, are investments of capital. The cost of defending or perfecting title to
property constitutes a part of the cost of the property and is not a deductible expense. The amount
expended for architect's services is part of the cost of the building. Commissions paid in purchasing
securities are a part of the cost of such securities. Commissions paid in selling securities are an offset
against the selling price. Expenses of the administration of an estate, such as court costs, attorney's
fees, and executor's commissions, are chargeable against the "corpus" of the estate and are not
allowable deductions. Amounts to be assessed and paid under an agreement between bondholders or
shareholders of a corporation, to be used in a reorganization of the corporation, are investments of
capital and not deductible for any purpose in return of income.

In the case of a corporation, expenses for organization, such as incorporation fees, attorney's fees and
accountants' charges, are ordinarily capital expenditures; but where such expenditures are limited to
purely incidental expenses, a taxpayer may charge such items against income in the year in which they
are incurred. A holding company which guarantees dividends at a specified rate on the stock of a
subsidiary corporation for the purpose of securing new capital for the subsidiary and increasing the
value of its stockholdings in the subsidiary may not deduct amounts paid in carrying out this guaranty
in computing its net income, but such payments may be added to the cost of its stock in the subsidiary.

SECTION 121.Premiums on life insurance of employees. Any amounts paid for premiums on any
life insurance policy covering the life of an officer or employee or of any person financially interested
in the business of the taxpayer when the taxpayer is directly or indirectly a beneficiary under such
policy are not deductible.

SECTION 122.Losses from sales or exchanges of property. No deduction is allowed in respect of

losses from sales or exchanges of property, directly or indirectly
(a) Between members of a family. As used in Section 31, the family of an individual shall include only
his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal
descendants;

(b) Except in the case of distributions in liquidation, between an individual and a corporation more than
fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for
such individual;

(c) Except in the case of distributions in liquidation, between two corporations more than 50 per cent in
value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same
individual, if either one of such corporations with respect to the taxable year of the corporation
preceding the date of the sale or exchange was, under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;

(d) Between a grantor and a fiduciary of any trust;

(e) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor
with respect to each trust; or

(f) Between a fiduciary of a trust and a beneficiary of such trust.

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