Pacific Bone, Coal & Fertilizer Co. v. Commissioner

*77 In this proceeding the petitioner seeks a redetermination of income and profits taxes for the calendar years 1920 and 1921, as to which, the respondent has determined deficiencies in the amount of $1,731.94 and $2,315.52, respectively. Of the total deficiency asserted the aggregate sum of $2,868.57 is in controversy. The deficiencies in controversy arise from the respondent's action in disallowing as a deduction from income the amount of $4,915.32 charged to traveling expense in 1920 and the amount of $5,329.50 charged to traveling expense in 1921.

FINDINGS OF FACT.

The petitioner is a California corporation organized in 1883. Its business is the manufacturing and distributing of fertilizing materials and its principal office is located at San Francisco. Its principal active officers during the years 1920 and 1921 were Solomon Peiser, president and general manager, and Milton*4192 Haas, vice president and secretary. Solomon Peiser had been connected with petitioner corporation since 1890 and during the years under question devoted about one-half of his time to his duties of buying and selling and to the general supervision of the corporation's business. The other half of his time was devoted to the affairs of the Texas Cemical Co., a corporation located in Houston, Tex., engaged in a kindred line of of his time was devoted to the affairs of the Texas Chemical Co., a

Milton Haas had been connected with petitioner corporation since 1911 and during the years under question devoted most of his time to the buying and selling, managing the sales force, and in the absence of Solomon Peiser, president and manager, acting in his stead. Haas also owned stock in the Texas Chemical Co. and was its secretary and active in its affairs.

Of petitioner corporation's stock Peiser owned 39 1/2 per cent, Haas owned 22 1/2 per cent, and, with the exception of some 20 shares held by outsiders, the balance was owned by two other directors. Peiser and Haas, in 1920, togethere received as salary and bonus $24,000 and in 1921 they together received as salary $12,000. Petitioner's*4193 gross sales in 1920 amounted to about $1,500,000 and in 1921 to about $823,000.

*78 During the years 1920 and 1921 and for many years prior thereto it was customary, when funds were needed by either Peiser or Haas for traveling or other expenses, to draw such funds from petitioner's cashier, at the same time instructing the cashier to charge such withdrawals to the respective travel or personal accounts, as the case might be. Haas, who was unmarried until some time in 1921, lived at the Palace Hotel in San Francisco during a portion of the years 1920 and 1921. He traveled considerably those years and during the periods of his absence from the city on these trips out of town his room at the hotel was not maintained. During the years 1920 and 1921 petitioner paid certain bills on account of expenditures incurred by Haas at the Palace Hotel. These expenditures were for living expenses of Haas and for the entertaining of various buyers of petitioner. Funds were also advanced these years to Haas and charged on petitioner's books to traveling expenses, but such funds were used by Haas for entertaining purposes.

In its returns for 1920 and 1921 petitioner claimed as deductions*4194 from its income for those years on account of business expenses certain lump-sum amounts captioned as "traveling expenses." They are as follows:

The respondent in auditing petitioner's returns disallowed $4,915.32 of the total amount claimed as traveling expenses in 1920 and $5,329.50 of the total amount claimed as traveling expenses in 1921,

OPINION.

VAN FOSSAN: The only issue raised herein is whether or not the petitioner in computing its net income for the years 1920 and 1921 is entitled to deduct in those years the respective amounts of $4,915.32 and $5,329.50 covering certain so-called living, traveling, and entertainment expenses incurred by its secretary.

The evidence in the case is unsatisfactory and conflicting. At no place in the record has petitioner segregated the items of expense so as to show what portion of the amounts disallowed represented either official travel and entertainment, or personal living expenses of petitioner's secretary. The testimony does indicate, however, that a considerable portion of the amounts in controversy represented personal living expenses*4195 of the secretary at the Palace Hotel in San Francisco, Calif.

Personal living or family expenses are not allowable deductions from income under the Revenue Acts of 1918 and 1921 (sections 235 and 215(a) of both Acts). On the other hand, such expenses as *79 traveling and entertaining, in order to be allowable as deductions under section 234(a)(1) of the Revenue Acts of 1918 and 1921, must be proved with reasonable definiteness.

The burden of showing the incorrectness of the respondent's determination is upon the petitioner. This the petitioner has wholly failed to do.

Judgment will be entered for the respondent.