Stralla v. Commissioner

*802 The respondent has determined deficiencies in income tax against the petitioners, as follows:

*51 The issues presented relate to deductions for legal fees and expenses, payments made in compromise of litigation, and a bad debt loss, all pertaining to joint gambling ventures; to the distribution of income from the gambling ventures; and individual business expense deductions and individual long term capital losses.

FINDINGS OF FACT.

The petitioners are residents of California, and filed their respective individual income tax returns with the collector of internal revenue for the sixth district of California, with the exception of Louis Stralla, who filed his return with the collector for the first district of California.

During 1938 and 1939 Rex, Inc., a Nevada corporation, owned a gambling boat which was operated by Rex Operators, a partnership or joint venture, off the coast of Redondo and Santa Monica, California.

On March 14, 1939, there was filed with the collector of internal revenue at Los Angeles, California, a corporation income and excess profits tax return for Rex, Inc., for the taxable year 1938. The return was signed by petitioner A. C. Stralla, hereinafter referred to as Stralla, as president, and gave the address of 312 South Elm Drive, Beverly Hills, California. *52 The nature of its business was stated to be the owning of a gambling barge and equipment; that its only asset was a rebuilt gambling boat, known as S.S. Rex, acquired May 5, 1938, at a cost of $ 157,880; and that its only source of income was from rental of the Rex to Rex Operators, a joint venture, for $ 3,000 per month, and 5 per cent of their net income from operation of the fully equipped gambling boat. The return also stated that the books of *803 Rex, Inc., were in care of A. Stralla, at 312 South Elm Drive, Beverly Hills, California.

Also on March 14, 1939, there were filed in the same collection district two returns, on partnership Form 1065, for Rex Operators, giving its address as Redondo Beach, California. One return covered the period from May 5 to July 24, 1938, and the other from July 25 to December 31, 1938. Each return was signed by "A. C. Stralla, Agent Manager," and stated that the business of each venture was "operating gambling barge." Each return stated that it was a "joint venture," the first being organized May 5, 1938, and the second being organized July 25, 1938. The return of the first joint venture reported net income of $ 32,100.24 and*53 the other joint venture reported its net income as $ 14,554.17.

On March 6, 1940, a third joint venture, under the name of Rex Operators, filed a return, on partnership Form 1065, for the calendar year 1939, stating that the joint venture was organized January 1, 1939; that its business was "operating gambling barge," and that its address was "Rear 312 So. Elm Drive (Temporary office)." The return was signed by "A. Stralla, 'Gen. Manager,' 312 So. Elm Drive, B. H." It showed that a gross income of $ 1,164,346.97 was received from casino winnings, consisting of craps, "21," wheels, hazard; and also from concessions for bingo, poker, races, slot machines, lottery, commissary, and bar. It reported deductions aggregating $ 807,282.77, which included $ 60,499.27 for legal and professional services; $ 13,200 for State of California reparations; $ 7,500 for Railroad Commission; and an "uncollectible loan" of $ 15,500 of the Santa Monica Pier Co.; which resulted in a reported net profit from operations of $ 357,064.24, to which was added $ 27,148.80 due from Rex, Inc., and applied on the rent, giving a total reported net income of $ 384,213. The total reported distributive net income of*54 this joint venture, after a deduction for partners' salaries of $ 25,641, as reported, was $ 358,572.

The three joint ventures were brought about by changes of the parties in interest, and the various changes, both as to parties in interest and their percentages in the respective ventures, were shown in the above mentioned returns, as follows:

*804

*55 Petitioner Anthony Cornero Stralla was known as A. Stralla, A. C. Stralla, Tony Cornero, and "Tony," and in 1934 he signed his name to a sworn statement, made to a special agent of the revenue department, as Anthony M. Stralla. He also maintained a private telephone for a number of years at his home, 312 South Elm Drive, Beverly Hills, California, under the name of Michael Hill.

Stralla was not shown in any of the above-described returns as a party in interest in any of the joint ventures, entitled to receive a distributive share of their profits.

His 1938 individual income tax return was filed February 11, 1939. It showed his address as 312 South Elm Drive, Beverly Hills, California, and that his principal occupation or profession was "Gambling, Oil & Agent." He reported that he had received $ 8,130 from "Rex Operators, Bx. 231, Redondo, Calif.," and $ 1,100 from "Rex, Inc., 312 S. Elm Dr., Beverly Hills, Cal." He deducted $ 3,500 for "Expense drawing acct. expended for promotion of business of Rex Operators," and reported $ 5,750 as "Salaries and other compensation for personal services." He claimed a loss deduction of $ 4,715, computed as follows:

*56 Attached to his return were three "Information Returns" (Form 1099) which showed "salaries, wages, fees, commissions, bonuses" received by Stralla as follows: $ 1,100 from "Rex, Inc., 312 So. Elm Drive, Beverly Hills, Calif."; $ 2,900 from "Rex Operators, 312 South Elm Drive, Beverly Hills, Calif."; and $ 1,730 from "Rex Operators (Dissolved 24/7/38), Box 231, Redondo, Calif." In a schedule attached to his return appears the following statement:

*805 On or about July 24, 1938, I acting as agent for the following: James Lloyd, John Caporal [sic], Frank Housky, Marie Housky, Thos. Thebo, Delta M. Thebo and John T. Basom, did negotiate with Ben Krakour for the purchase of 30 shares of the Rex, Inc., for the sum of $ 47,000.00.

In turn these shares were distributed as follows: James Lloyd 6 3/4 shares, at a cost of $ 6731.25; John Corporal 1 share at a cost of $ 1700.00; Frank Housky 3 shares at a cost of $ 7500.00; Marie Housky 3 shares at a cost of $ 7500.00; Thos. Thebo 2 1/2 shares at a cost of $ 6250.00; Delta M. Thebo 2 1/2 shares at a cost of $ 6250.00 and John T. Basom 11 1/4 shares at a cost of $ 11068.75, making a total of $ 47000.00 paid to said Ben Krakour.

There *57 is no explanation why Lloyd's and Basom's average costs per share were less than $ 1,000. Corporal's cost of one share was $ 1,700, and the average cost per share of the others was $ 2,500.

Stralla filed his individual income tax return for 1939 on February 9, 1940, in which he gave the same address as that shown in his 1938 return and his business as "Agent and Gambling." He reported under "Salaries or other compensation for personal services" received, $ 20,450 from Rex Operators and $ 6,666.66 from Rex, Inc., a total of $ 27,116.66. He deducted as expenses $ 4,000 for "wires, phones, auto travel and miscl.", and $ 250 as a total loss from Summerland oil lease, showing a reported net income of $ 22,866.66. Attached to his return was an "Information Return" (Form 1099), which showed that he received "Salaries, wages, fees, commissions, bonuses" in the amount of $ 18,750 from "Rex Operators, P. O. Box 231, Santa Monica, Calif." Neither his 1938 nor his 1939 return showed that he received a distributive share of Rex Operators' net income.

Petitioners Basom, Louis Stralla, and Madeline Stralla, in their individual income tax returns for 1939, reported income from Rex Operators as *58 follows: Basom, $ 85,387.04; Louis Stralla (community half), $ 7,171.44; and Madeline Stralla, $ 12,550.02. Petitioner Daisy J. Stralla, in her 1939 return, reported $ 17,928.60 on line 2, as "Dividends." She did not show the source of the "Dividends," and she claimed no loss of any kind in connection with the stock of Rex, Inc. She disclosed no interest in Rex Operators. Basom, in his return, reported a net short term capital gain as resulting from the transfer of 10 shares of stock of Rex, Inc., on January 1, 1939, and a greater short term loss on December 31, 1939, on 112 1/2 shares acquired January 1, 1939. He claimed a long term capital loss of $ 18,700 on account of 255 shares of stock of Rex, Inc., dissolved on December 31, 1939. Madeline Stralla also reported in her return a short term capital loss of $ 1,100, based upon 10 shares of stock of Rex, Inc., on December 31, 1939, and claimed a long term capital loss of $ 1,833.33, upon 25 shares of such stock on the same date. Louis Stralla and his wife lived at St. Helena, California. They filed separate community income tax returns. In his return he reported half of his salary received from Napa Winery Co. and $ 7,171.44*59 as half of the $ 14,342.88 received from *806 Rex Operators. He claimed a deduction of $ 1,629.16 for payment of "Federal Distilled Spirits Tax," and reported his net income for 1939 as $ 6,716.77, on which he paid income tax in the sum of $ 265.34.

The respondent determined that on dissolution of Rex, Inc., petitioner Basom owned 245 shares of stock, instead of 255, and that the cost basis of the said stock was $ 19,845, instead of $ 28,050, as claimed by Basom as the cost basis of the 255 shares. This reduction of basis resulted in a decrease in the long term capital loss allowed from $ 18,700, claimed by Basom on his return, to $ 13,230. The respondent made the determination by using, as Basom had done, $ 1,100 as the cost of each unit of 10 shares. He then determined that a capital distribution of $ 29,000 had been made, of which Basom's share was 24 1/2 per cent, or $ 7,105. The respondent also determined that Madeline Stralla's long term capital loss on 25 shares of Rex, Inc., was $ 1,833.33. He arrived at this amount by a computation similar to that used in his determination in Basom's case.

The respondent has determined that for 1938 Stralla had unreported income*60 of $ 10,531.26 from Rex Operators and has disallowed deductions of $ 3,500 claimed for expenses and $ 4,715 claimed as a loss from business. He has also disallowed the deduction of $ 4,000 expenses claimed by Stralla in 1939.

The parties have stipulated and agreed that the total amount of gross income of Rex Operators for 1939 was $ 1,164,346.97, as reported. The respondent has adjusted the reported distributive net income of $ 358,572 as follows:

The respondent has determined that Stralla and Basom are each taxable upon the 1939 distributive income of Rex Operators in the amount of $ 143,992.67, which is 32 1/4 per cent of the total adjusted net income of $ 446,488.91. It was shown and stipulated at the hearing that 32 1/4 per cent is the total of the reported percentages of Basom, Daisy J. Stralla, Louis Stralla, and 1 per cent of the reported interest of Madeline Stralla. *61 The respondent admits that there is some overlapping of such items of income as asserted against the various petitioners on account of some uncertainty in the evidence. The additional or adjusted distributive net income of Rex Operators has also *807 been asserted against Louis Stralla, Madeline Stralla, and Daisy J. Stralla. The following shows the total amount determined by the respondent against each of the three individuals last named:

Prior to the organization of Rex, Inc., and Rex Operators, Stralla had had business connections with petitioner Basom, and at other times with James Lloyd, one of the major parties in interest in Rex, Inc., and Rex Operators. Stralla and Lloyd had had interests in a gambling boat by the name of Tango, Stralla's interest being 15 per cent and Lloyd's 15 or 20 per cent. Stralla and Basom had been engaged at Culver City, California, in opening up and operating an illegal distillery. To the public, the plant was represented to be an oil storage or refining plant, *62 operating under the firm name of Warren Brothers Oil Co. In the front of the plant some oil operations were actually carried on, and it was necessary to increase the price of the oil from time to time to discourage buyers. About the same time or shortly afterwards, prohibition was repealed and a permit was sought and apparently obtained to construct and operate a legal distillery, known or sometimes referred to as Basom Distillery. The license was applied for by Basom, because Basom was the only one in the enterprise who had not been in difficulties with the Federal Government. Subsequently, through a transaction involving a sale or exchange of distillery stock, a cargo ship named Tooya was acquired.

Prior to acquiring the Rex and shortly after disposing of or losing their interest in the Tango, Lloyd and Stralla discussed the matter of operating a gambling ship off the coast of Santa Monica, California. Several such gambling barges had been operating a little over three miles off the coast of Santa Monica for a number of years. Stralla negotiated for the purchase of a boat known as the Star of Scotland. The bill of sale, which was dated May 2, 1938, shows the*63 purchaser as A. Stralla.

Rex, Inc., was organized as a Nevada corporation about May 2, 1938, for the purpose of acquiring a gambling barge. The three incorporators named were M. F. Taylor, H. Cunningham, and M. A. Martin. They were also named as the three directors. On May 2, 1938, these directors held their first meeting. After electing a temporary president and a recording secretary, and adopting the bylaws for the organization, they elected M. F. Taylor president and H. Cunningham secretary. The first business transacted was the acceptance of the written offer of Stralla with respect to the sale and purchase of the Star of Scotland. The directors recessed for 15 minutes, during which period the assignment of the boat was received and the certificates *808 of all stock were transferred to Stralla, as trustee. On resumption of the meeting, and after the report of the above transaction was made, the officers resigned as such officers and Martin resigned as a director. Stralla was immediately named as a director to fill the vacancy, and the following officers were elected: Stralla, president; James Lloyd, vice president; and B. Krakour, secretary-treasurer. Thereupon, *64 Taylor and Cunningham resigned as directors and Lloyd and Krakour were named to fill those vacancies, both the resignations and the appointments to be effective at the close of the meeting. The authorized capital of Rex, Inc., was $ 100,000, divided into 1,000 shares with par value of $ 100 each. In the consideration for the transfer of the Star of Scotland, the corporation agreed to pay $ 13,000 to the former owners of the boat and $ 37,000 for repairs that were being made to the boat at that time under the supervision of Stralla. The bylaws of Rex, Inc., provided that meetings of the stockholders should be held at the offices of the company, at 312 South Elm Drive, Beverly Hills, California, or such other place as designated. Rex, Inc., continued to own the barge during 1938 and 1939. The Star of Scotland was originally a sailing vessel, and had no motive power. The vessel was taken to San Pedro soon after Stralla had acquired it, where it was reconditioned and converted into a house and deck, and the name Rex, given it by Stralla, was painted on it.

Stralla endorsed all the shares of stock in blank. Ten certificates of 10 shares each, numbered 1 to 10, had been issued*65 on May 2, 1938, in the name of Stralla, as trustee. They had been signed by H. Cunningham, secretary, and M. F. Taylor, president. Stralla distributed the certificates as the interests appeared, but the record does not reveal who the original parties in interest were or their respective interests, except that Lloyd, Krakour, and Stralla were interested in getting the gambling boat started and had become the directors and officers of the corporation. A unit of 10 shares was sold for $ 1,100, and in some instances a holder of such unit acquired a 1 per cent interest in Rex Operators. Krakour was known as representing "Eastern Interests," and he sold their interests in the corporation some time during 1938. On November 16, 1938, certificates Nos. 11 to 16, inclusive, for 50 shares each, and certificate No. 17 for 37 1/2 shares, a total of 337 1/2 shares, were transferred from Stralla, as trustee, to James Lloyd, as parts of certificates Nos. 1 to 4; certificates Nos. 18 to 24, inclusive, for 50 shares each, and certificate No. 25 for 17 1/2 shares, a total of 367 1/2 shares, were transferred by Stralla, as trustee, to John T. Basom, as parts of certificates Nos. 4 to 8; the remaining*66 shares of certificates Nos. 8, 9, and 10, consisting of 295 shares, were transferred by Stralla, as trustee, to the following individuals, in the respective amounts shown: *809

Kathrine Stralla is a sister of Stralla and the wife of Ernie Edwards. M. Stralla is the mother of Stralla.

On March 2, 1939, two certificates, Nos. 37 and 38, were issued to Frank Oreb, transferring to him 20 and 5 shares, respectively, of Delta Marie Thebo's 25 shares.

On December 19, 1939, 150 shares of stock were transferred to Milton Page, 105 by James Lloyd, 20 by Joe and Anne Ferris, 17 1/2 by Frank and Marie Housky, and 7 1/2 by Thos. J. Thebo, 5 of which he then transferred to Kathrine Stralla. At the same time, Basom transferred 5 of his shares to Ernie Edwards and 10 to M. Stralla.

The list of stockholders on November 16, 1938, and December 19, 1939, as shown by the transfers of stock, is as follows:

*67 The corporation was dissolved December 31, 1939.

The Rex was first anchored at a point a little more than three miles off the coast of Redondo, California, and later moved back to Santa Monica. During the operation of the Rex, Stralla performed many duties. He kept the ship seaworthy and looked after the protection of the passengers; he saw that the anchors were well placed, that there was sufficient life-saving apparatus, and that there was no overloading, as the capacity of the boat was 2,200 people at any one time. He had a room where he sometimes slept, and he was often on the boat 24 hours a day. He also saw that there were sufficient stores on board at all times.

Stralla sold the cargo boat Tooya, for which $ 42,750 was received and deposited by him on May 13, 1938, in a bank account at Santa Monica, California. Some of this money was used to pay some of the construction bills for the Rex and for the bank roll. Only Stralla and Basom could draw on the account. On May 18, 1938, Stralla *810 wrote a check on this account, signing Basom's name and his own, for $ 12,050, payable to cash, for Ben Krakour as a payment for his equity in the Rex. Some*68 new associates came in after Krakour and his associates transferred their interests in the Rex. On August 4, 1938, Stralla wrote another check, in his and Basom's name, payable to Krakour for $ 6,374 as payment in full for stock in the Rex.

A bank account was maintained by Rex Operators between May 9, 1938, and October 28, 1939. The signature card shows that any one of three could check upon this account, either A. Stralla, James Lloyd, or Ben Krakour. Stralla wrote some of the checks on this account in connection with the operation of the business.

Stralla secured and made arrangements for payment for various commercial insurance policies upon the hull of the Rex, "protection and indemnity" against robbery, for personal liability, insurance on the coin and currency, slot machines, and water taxis and on a "Lincoln Zephyr." This account was carried between May 5, 1938, and November 29, 1939, in the name of "A. Stralla, Agent for Rex, Inc.," with address as "End of Municipal Pier, Santa Monica, Calif.," and was later changed to "A. Stralla or Tony Cornero," and "A. Stralla," 312 South Elm Drive, Beverly Hills, California, the home address of Stralla. The account shows*69 that insurance was carried on a "home" or "dwelling" on November 16, 1938, and January 24, 1939. An entry on July 26, 1938, apparently for a policy against robbery, is reflected as a "Tr. from John T. Basom" and debited to this Stralla account. Stralla had done business with this insurance agency for many years. He informed the insurance agents that "they" had $ 150,000, or $ 160,000 to $ 200,000 in the vessel. There was $ 100,000 for protection and indemnity and $ 175,000 on the hull. All policies were discussed with Stralla. An insurance agent dealt almost entirely with Stralla in connection with the Rex. Stralla attended to insurance of the money, at first for $ 40,000 and then for $ 50,000. On May 10 and 11, 1938, the insurance agent wrote to Stralla at his home regarding various matters of insurance. Stralla and Rex, Inc., also were insured in connection with the water taxi service, as shown by a personal and confidential letter to Grange, the bookkeeper of Rex Operators, of April 26, 1939:

If you will refer to copy of the above policy, which is in folder for Haskell which we sent you, you will note an endorsement thereto attached including the names of "Rex, Inc. *70 and A. Stralla, Agent" under the policy. This endorsement is of course of the utmost importance, it is concealed dynamite. I shall not bore you with the trouble I went to to persuade the underwriters to grant the Endorsement Without an additional premium being made.

Important: Mr. Grange, I am enclosing with this letter the Original of this endorsement and it should not be available to anyone anywhere, except to Mr. Stralla and yourself, at Mr. Stralla's home in his private file.

*811 The insurance agent wrote Stralla a personal letter on August 25, 1939, reading in part as follows:

I hope you appreciate, Tony, that I wouldn't do the following for anybody else.

I am enclosing our copy of the Hull Policy for the Rex (Firemen's Fund No. 788716). You can see from the way that the policy is written (I have outlined same in red) that the policy is of no value to anyone Without your signature. The policy doesn't read Rex Inc and/or A. Stralla, Agent. It reads Rex Inc and A. Stralla Agent so without the signature of A. Stralla, nothing can be done; the policy cannot be cancelled, no loss can be paid thereunder, etc. and as far as this office is concerned, we recognize*71 only your good self.

May I take this opportunity of informing you that if you should cash in on your interest in the Rex, this office would cancel our policy. You must appreciate that $ 175,000. is a lot of money for us to carry on a vessel which is not operating, and, if we did not have absolute confidence in "our man" we would cancel the policy the moment the Restraining Order was put in effect. Therefore, Tony, should you sell your interest in the Rex, we must ask that you advise us at once

While Stralla was regarded as the manager or head of the operations of Rex, Inc., and Rex Operators, Lloyd spent considerable time on the boat and, to some extent, participated in the operations. In 1939 they were desirous of having Fred S. Grange become the bookkeeper. Grange, after spending some days on the boat, agreed to take over the job only if he received a participation share. Stralla and Lloyd advised him that they would have to think it over, but subsequently told him that he would be given an interest of 4 per cent in Rex Operators. The books were thereafter kept by Grange until the close of the venture.

Both Stralla and Lloyd had accounts on the books of Rex Operators, described*72 as "Drawings and Salary." The first entry on Stralla's account was a charge of $ 50 on April 3, 1939. The first entry on Lloyd's account was a charge of $ 350 on April 6. The books also carried an account labeled "Partnership Capital." The first entry on this account was on March 23 and disclosed a credit of $ 60,000. There was no breakdown showing the source of this $ 60,000, which purported to be the bank roll for the gambling operations. By May 30 the entire $ 60,000 of the capital account had been withdrawn. The records do not show to whom the "Partnership Capital" was distributed.

The profits from the gambling operations were distributed from time to time. This was done by Lloyd and Stralla, one or both. It was not until on or about December 9, 1939, that any accounts purporting to show the participants in the operations or the recipients of the profits were entered on the books. The ship had been closed since August 1. After the closing of the gambling operations, revenue agents had visited the ship to check on the operations and the participants therein. At that time the books kept by Grange did not show *812 the participants or the parties to whom the profits*73 were distributed. Grange advised the revenue agent that any distribution of profits was handled through a special reserve account, under the control of Stralla, who made the distributions himself. The money was kept in a large iron safe on the boat and distributions were made in envelopes. The only entry showing a distribution found by the revenue agent in September of 1939 had to do with 1938. The entry reflected an October 1938 charge to Stralla's drawing account in the amount of $ 30,000. It also showed a reversal of the entry as of November 30, 1938, by means of a debit to "Partners Withdrawals." The accounts opened on the books on or about December 9, 1939, purported to show the distributions of profits from the 1939 operations and were in the amounts and percentages reported on the 1939 return of Rex Operators. By the end of October all of the profits had been distributed, except an amount regarded as sufficient to pay remaining charges. None of the accounts opened on or about December 9, 1939, reflected any contributions to "Partnership Capital" or "bank roll." At the end of the 1938 operations, and about October 28, 1938, when there was a sum of $ 30,000 available for*74 distribution, Lloyd prepared two sheets with respect thereto. On one of these he set forth certain percentages, his percentage being shown at 33 1/4 per cent and Basom's at 36 3/4 per cent. On the other sheet he listed opposite the names of the parties shown on the percentage sheet amounts totaling $ 30,000, the amounts shown opposite the various names representing that percentage of $ 30,000 shown for the various persons on the percentage sheet. The only differences were that on the percentage sheet husbands and wives were shown separately, whereas on the distribution sheet they were shown together by surname only, and Basom's name did not appear on the distribution sheet. In place of Basom and opposite an amount representing 36 3/4 per cent of the $ 30,000 appeared the name Tony.

On other sheets purporting to reflect operations from March 30 to April 10, 1939, and from March 30 to April 24, 1939, which sheets were used by Lloyd for some purpose, Stralla and Lloyd were listed as partners for the purpose of showing certain amounts designated as "Partners Salaries."

Petitioner Louis Stralla, during 1939, lived at St. Helena, California, about 500 miles from Santa Monica, and was*75 a younger brother of Stralla. He "knew very little" about Rex, Inc., or Rex Operators; he did not put any money into Rex Operators and did not work on the boat; was on the boat only two times; and was not primarily interested in the equipment of the boat or anything else, although he claimed he had a percentage in Rex Operators. He only knew "what Basom told him about percentages." When interviewed by revenue *813 agents at St. Helena in November 1939, he at first stated he did not know where he received shares of stock in Rex, Inc., but later stated it was a gift from Basom. One reason he offered the agents why Basom gave him the stock was because Basom liked the way he combed his black hair. He had known Basom for a long time. Louis told the agents he would have to call his "secretary" by long distance to ascertain the facts for them which he could not give. The call was to his brother, A. C. Stralla. He had worked with his brother Stralla in 1928, when they were engaged in the illegal liquor business. He did not own a bona fide interest in Rex Operators.

Petitioner Madeline Stralla, the mother of Stralla, was about 69 years of age at the time of the trial, and had *76 seldom been on the gambling boat. She furnished the money for a 2 1/2 per cent interest. The returns of Rex Operators reported an interest in the name of "M. Stralla." Respondent concedes that she owned an interest in the Rex and Rex Operators. She owned a 2 1/2 per cent interest in Rex Operators and 25 shares of stock of Rex, Inc.

Daisy J. Stralla was formerly married to Stralla, but prior to the tax periods herein involved they were divorced. She had remarried and, though she signed her income tax return as Daisy J. Stralla, her name was Daisy Jean Carbajol. She received no stock in Rex, Inc. Stralla had promised her $ 20,000 after their divorce, and she received $ 15,000 when she signed some paper which she believed was a final settlement of what he had promised to give her. Stralla had her appointed as secretary of Rex, Inc. The reason advanced for giving her a percentage was that Stralla did not want his position as manager jeopardized and "so that we could have a strong ally all through the operation." She did not have a bona fide interest in Rex Operators.

The deductions in 1938 for legal and professional services, aggregating $ 2,950, relate to services rendered*77 by Joseph Fainer in that year. He represented about 20 employees of Rex Operators in a justice of the peace court of Redondo Township. These defendants had been arrested on the Rex, on charges of violating a California statute prohibiting various forms of gambling, which were dismissed on the ground that the State of California was without jurisdiction. Fainer also represented Stralla in the Superior Court of Los Angeles County. Stralla was indicted with others for violating the bookmaking statute, section 337 (a) of the California Penal Code. In the trial of Stralla the question of jurisdiction was presented and the jury could not reach a verdict. After the case against Stralla was reset for November 14, 1938, and before that date, Fainer and the prosecuting attorney made an agreement whereby it was arranged that the case against Stralla would be dismissed, but that the same *814 testimony adduced during the Stralla trial would be the evidence in the trial of Howard Adams upon his plea of not guilty and would constitute the evidence of record in appealing his case for the purpose of having the question of jurisdiction determined.

In 1939 other attorneys were employed*78 by Stralla in connection with the Adams case, and in other legal actions. The deductions for legal and professional services in 1939, in the aggregate amount of $ 51,716.91, relate chiefly to legal proceedings.

An appeal in the jurisdictional test case, under the title of People v. Stralla, et al., was taken to the District Court of Appeal for the Second District of California, which held that the State of California was without jurisdiction, in a two-to-one decision, on March 20, 1939, 88 Pac. (2d) 736. On April 18, 1939, the Supreme Court of California granted an appeal from that decision, and on November 20, 1939, rendered its opinion, modified December 19, 1939, 96 Pac. (2d) 941, in which it held:

The waters, known as Santa Monica Bay, which lie in an indentation of the coast of California between points about 25 nautical miles apart, the line of the coast forming a curve inward to a distance of about 10 miles from a line drawn between the headlands, constituted a "bay" included within the territorial boundaries of the state of California by the Constitution, and jurisdiction of the State over the waters of the bay*79 could be exercised for all purposes, including the prosecution of defendant who operated a gambling ship anchored in the waters of the bay.

In connection with these appeals, a total of $ 15,197.37 was paid to the following attorneys:

The amount paid Ben Blue was for services and expenses in preparing and filing a brief amicus curiae.

Geisler had been previously employed by Stralla to represent him in the case of People v. Stralla, W. J. Stanley et al., in which the defendants were charged with having conspired to violate section 357 (a) (2) of the California Penal Code, which prohibits the registering of bets. The case was tried in the Municipal Court of Los Angeles County, and on August 28, 1939, the judge dismissed the charges against Stralla on the grounds that no substantial proof of conspiracy had been made and that the State of California had no jurisdiction over offenses that had been committed on the Rex, which was located 3.6 miles from the Santa Monica shore. The judge, in his opinion, found that Stralla "is one of the proprietors*80 and managers" of the Rex. Stralla paid Geisler $ 2,500 for his services in this case and later retained *815 him to assist in the test case, which at that time had been appealed to the Supreme Court.

Suit had been instituted against Stralla et al., in which an injunction was requested to restrain the defendants as "owners and operators" of the Rex, and on August 1, 1939, a temporary restraining order was issued, which was made permanent on November 29, 1939. The operations on the Rex were never resumed after August 1, 1939. Louis P. Pink was paid $ 2,500 and Tom Cluff, of Cluff and Bullard, was paid $ 1,500, for their services in representing Stralla in the injunction suit. Cluff was paid $ 25 for a telephone consultation.

Stralla and others filed a writ of prohibition suit, which he took to the District Court of Appeals, in which the question of jurisdiction was raised, and for his services in connection with this case, A. Verge was paid $ 1,500. He was also paid $ 100 for representing Stralla and others in the police court.

A "Complaint for Penalties" was instituted against Rex Operators, a copartnership, Stralla, Lloyd, Basom, Madeline Stralla, et al., for*81 operating "water taxis" in violation of section 50 (d) of the California Public Utilities Act, which required the operators of such vessels to obtain a license for their operation. The total amount of penalties asked for was $ 496,000. Louis P. Pink was paid $ 3,500 for services rendered in connection with this litigation.

In addition to the fees paid to Pink for services in the cases specified above, he was also paid $ 250 per month for the last six months of 1939. During the same period he received a total of $ 708.96 as expenses.

After the decision of the California Supreme Court had been rendered, Stralla and his attorneys held a conference with the attorney general or his assistants at San Francisco, which resulted in a settlement of all pending litigation by the compromise payment of $ 20,700, of which $ 13,200 was paid into the attorney general's investigative fund and $ 7,500 to the Railroad Commission. Neither Basom nor Lloyd attended these conferences. On December 4, 1939, the attorney general addressed a letter to Stralla, in which it was stated that the letter was written at Stralla's request to make clear the reason why the payment of $ 13,200, which Stralla was *82 required to make as a condition of settlement for the litigation growing out of the operations of the Rex, was required to be made in the form of a donation for expenses of the attorney general; also that one of the conditions of settlement of the numerous lawsuits was that the State of California should be reimbursed for expenses in connection with the investigation and prosecution of the litigation, such donation to be made as authorized by section 453 (a) of the Political Code. The judgment taken in the penalties suit was for $ 7,500. The payments were made in cashier checks by Stralla.

*816 Stralla employed John J. O'Connor, an attorney, of New York, to look after legislation that might be introduced in Congress and which might affect the operation of the Rex. While the test case was being prosecuted and it was uncertain as to the State of California having jurisdiction over the gambling boats, Congressmen were attempting to get the Federal Government to take jurisdiction. O'Connor set up an office in Washington and examined several bills that were introduced in Congress, to see what effect, if passed, they would have on Rex Operators. In a memorandum that he *83 submitted with respect to one bill, in which he criticized the provisions of the bill, he concluded his statement with: "All the Shipping interests and the State Department should be notified of any hearings, all of whom protested that the language was much too broad." For his services O'Connor was paid $ 11,002.75.

A total of $ 10,667.43 was paid to G. K. Brobeck, Paul Sepulveda, and John Burke for "Public Relations." No specific duties that they performed or were to perform are shown. Brobeck received two cash payments of $ 3,000 and $ 2,000, respectively. Sepulveda received $ 3,867.43 in cash, except two checks amounting to $ 150, and Burke received $ 1,800 in cash.

All payments were made either by Stralla or at his direction.

The Santa Monica Pier Co. bad debt of $ 15,500 claimed as a deduction was written off on the books of Rex Operators, based upon a letter from the company, dated December 7, 1939, advising Grange that it was impossible to make payment "at this time" and that they would have to turn the property back to the bank "or attempt to interest new capital." The charge-off was based solely on the letter of December 7, 1939.

The Santa Monica Pier Co. debt is not shown*84 to have become worthless in 1939.

Petitioner A. C. Stralla was the owner of all interests in Rex Operators shown on Rex Operators books and returns for Louis Stralla, Daisy Stralla and Madeline Stralla, except 2 1/2 per cent shown as belonging to Madeline Stralla.

OPINION.

For purposes of discussion and disposition the issues may be divided into three groups: (1) The ownership of the income from the gambling ventures; (2) the deductions claimed on the partnership return of Rex Operators; and (3) certain deductions claimed on the individual returns.

The interests in the income from Rex Operators attributed to Stralla and Basom are the same interests, namely, 32 1/4 per cent of the total distributable income of Rex Operators. That attributed to Louis Stralla, Madeline Stralla, and Daisy Stralla are lesser parts of this *817 same 32 1/4 per cent. At the trial and on brief, the respondent's primary claim was that the entire 32 1/4 per cent of the profits of Rex Operators was the income of A. C. Stralla and not that of Basom, Louis Stralla, Madeline Stralla, and Daisy Stralla. In the alternative, he takes the position that all of such income not determined to be that of A. C. Stralla*85 was the income of Basom. It is the claim of the petitioners that A. C. or Tony Stralla owned no participating interest in the profits of Rex Operators and that the 32 1/4 per cent interests here in question belonged to the individuals, as shown on the partnership return of Rex Operators.

The petitioners rely chiefly on the testimony of Lloyd, Stralla, and Grange and on certain book accounts of Rex Operators. Neither Basom, Madeline Stralla, nor Daisy Stralla testified, although Basom was present in the courtroom during most, if not all, of the trial. It was the testimony of Lloyd, Tony Stralla, and Grange that the participating interests in Rex Operators were as shown by the partnership return and that they were not in any way related or comparable to the percentages of stock ownership in Rex, Inc., the corporation which owned the ship. Grange was not an employee of Rex Operators from the beginning of operation, but at first was helping out. After spending approximately two weeks on the Rex, he agreed to accept employment if he was given an interest in the operations. He was told he could have an interest of 4 per cent, and thereafter he was an employee of Rex Operators *86 on that basis. As to the ownership of the participating interests, it is apparent that he had no direct knowledge. He did not make the distributions, and it is apparent that any detailed information claimed by him was acquired after operations had ceased and most of the money had been distributed. When the revenue agent was on the ship, in September of 1939, Grange knew practically nothing about the participating interests in Rex Operators and such information as he did have resembled to no substantial extent the data later recorded by him on the individual accounts at or about December 9, 1939.

Both A. C. Stralla and Lloyd were old hands in the conduct of illegal enterprises. Stralla, in 1929, had entered a plea of guilty, was fined $ 4,500 and sentenced to two years in the Federal penitentiary for violation of the Tariff Act of 1922, conspiracy to violate section 593 of the act and conspiracy to violate the Prohibition Act of October 28, 1918. Lloyd entered a plea of guilty to violation of the National Prohibition Act and, on January 15, 1929, was sentenced to serve a term of one year's imprisonment, which sentence was suspended, subject to certain conditions. Stralla, with*87 Basom, had at an earlier date been engaged in opening up and operating an illegal distillery in Culver City, California, the distillery being designed to give the impression that it was an oil refinery. The demeanor of Lloyd *818 and Stralla on the witness stand, the responses, particularly those of Stralla, to questions, and the impressions gained from their testimony render such testimony of little value, except such as may be in the nature of admissions against interests or may be subject to some check or verification from other evidence of record.

The sequence of events leading up to the organization of Rex, Inc., and Rex Operators, and throughout the gambling operations, leads us to the conclusion that Basom and Tony Stralla had been for some time, and were, operating more or less on a joint basis. They had been engaged in the construction of an illegal distillery at Culver City. After repeal, using Basom as the front, since he had had no trouble with Federal authorities, they acquired a permit to build and operate a distillery. Through some transaction involving distillery stock, they had acquired the cargo ship, Tooya. The Tooya had been sold in the spring*88 of 1938 and the proceeds, amounting to $ 42,750, were deposited in a bank account on which Basom and Stralla could draw. The withdrawals, so far as shown, were by Stralla, and the most substantial sums were used as payments to Ben Krakour, who was the original secretary of Rex, Inc., and was shown as representing certain "Eastern" participants in both Rex, Inc., and Rex Operators. Krakour and his eastern associates were bought out of the ventures some time in 1938. From the record, it would appear that the effective date was July 24, 1938, when the interests of Rex Operators were changed and the second joint venture began. It was at or about this time that Basom purported to make various generous gifts of participating interests to Tony Stralla's brother Louis, his mother Madeline, and his former wife Daisy, none of whom are shown to have made any contributions whatever to the partnership capital or the gambling bank roll, other than the 2 1/2 per cent interest originally acquired and owned by Madeline Stralla. Louis, on the witness stand, admitted that he at no time during either 1938 or 1939 contributed anything. So far as the record discloses, Tony Stralla ran the "show," *89 except for such minor participation in management as Lloyd may have given. In light of all the circumstances, we do not consider it particularly significant that in so far as the records are concerned Tony Stralla was not shown as having any participating interest in Rex Operators. That the use of Basom as a front was not new, was indicated by the method of applying for the license for the construction of the distillery at or about the time of repeal of prohibition. Stralla also indicated to a revenue agent that, in view of an old case against him, the Government wanted to attach anything he owned and it did him no good, therefore, to own anything.

Noting as we do that, as between Tony Stralla and Basom, Stralla is the one who dominates, and looking at various of the facts and circumstances disclosed of record, it might even be reasonable to conclude *819 that the Government is correct in its primary contention and that the entire participating interest in Rex Operators of 32 1/4 per cent, here involved, actually belonged to Tony Stralla and that none of it belonged to Basom. We are of the opinion, however, and have concluded from various other facts and circumstances, that*90 Basom and Tony Stralla continued in this venture, as they had in previous ventures, to own and operate their interests under some joint arrangement and that each was an owner, to some extent, in the 32 1/4 per cent interest in Rex Operators, here involved. Basom has reported on his returns the percentages attributed to him on the partnership returns of Rex Operators. By his silence in these proceedings, he admits that much, but through counsel denies any greater amount. The remaining portion of the 32 1/4 per cent interest was carried in the names of members of Tony Stralla's family and that of a former wife, to whom, in connection with their divorce, he had agreed to pay over some twenty thousand dollars. No convincing reason has been advanced as to why Basom would give to any of these individuals any participating interest in Rex Operators which actually belonged to him. The same is not true of Tony Stralla, and the entire facts and circumstances of record which are in any way convincing refute any thought that Louis Stralla, Daisy Stralla, and Madeline Stralla were the real owners of such interest. We have accordingly concluded and hold that the percentage interests appearing*91 on the books and returns of Rex Operators as belonging to Louis Stralla, Daisy Stralla, and Madeline Stralla, except 2 1/2 per cent of Madeline Stralla's interest, belonged to A. C. Stralla.

The next group of issues covers deductions claimed on the partnership returns of Rex Operators which were disallowed by the respondent in his determination. These deductions may be placed in three further classifications: (1) Legal fees and expenses aggregating $ 51,716.97, which amount includes payments described as being made for "public relations"; (2) payments made to the State of California in settlement of penalties claimed in a suit instituted by the California Railroad Commission relating to the operation of the water taxis; and (3) a claim of a bad debt of $ 15,500 owing to Rex Operators by the Santa Monica Pier Co.

The legal fees and expenses and the penalties and payments made to the State of California were all in some way connected with the defense or satisfaction of suits or claims bottomed on the unlawful operation of the gambling ship Rex. At no time did the petitioners make any claim that the gambling operations were within the law if the gambling operations aboard the ship*92 were within the jurisdiction of the State of California. There is no contention that the activities were not contrary to the California law if conducted within the boundaries of that state.

*820 The petitioners contend that the expenditures were ordinary and necessary expenses in the conduct and operation of the business of Rex Operators and that it matters not for the purpose of deduction in determining net income that the business carried on was unlawful. They rely on Commissioner v. Heininger, 320 U.S. 467. The respondent contends that the Heininger case is not contolling in that the business of Heininger was not unlawful in and of itself, but that only certain practices in carrying it on were banned by law.

We think that the position of the respondent is sound. The Supreme Court in the Heininger case did specifically note that Heininger was conducting a lawful business, but that certain practices in its conduct were illegal. It is true that Justice Black pointed out in the opinion of the Court that section 23 (a) contains no express reference to the lawful or unlawful character of the business expenses which are declared to be*93 deductible and, further, that the respondent had admitted in his brief that it was not the purpose of the revenue act to penalize illegal business by taxing gross income instead of net income. Also in the opinion it was stated: "It has never been thought, however, that the mere fact that an expenditure bears a remote relation to an illegal act makes it nondeductible." The petitioners insist that the statement exactly fits the situation here. They fail to note, however, the preceding statement of the Court to the effect that "The Bureau of Internal Revenue, the Board of Tax Appeals, and the federal courts have from time to time, however, narrowed the generally accepted meaning of the language used in Section 23 (a) in order that tax deduction consequences might not frustrate sharply defined national or state policies proscribing particular types of conduct. A review of the situations which have been held to belong in this category would serve no useful purpose for each case should depend upon its peculiar circumstances. A few examples will suffice to illustrate the principle involved. Where a taxpayer has violated a federal or a state statute and incurred a fine or penalty he *94 has not been permitted a tax deduction for its payment. Similarly, one who has incurred expenses for certain types of lobbying and political pressure activities with a view to influencing federal legislation has been denied a deduction. And a taxpayer who has made payments to an influential party precinct captain in order to obtain a state printing contract has not been allowed to deduct their amount from gross income." The Court, by footnote, cited with apparent approval decided cases in the categories stated, and at no place did the Court indicate or hold that the decisions were unsound or in conflict in any way with the principles declared in the Heininger case. Among the cases so cited were Great Northern Railway Co. v. Commissioner, 40 Fed. (2d) 372; Bonnie Bros., Inc., 15 B. T. A. 1231; Burroughs Building Material Co. v. Commissioner, *821 47 Fed. (2d) 178; Estate of John W. Thompson, 21 B. T. A. 568; Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326; and Rugel v. Commissioner, 127 Fed. (2d) 393.*95 Unlike the Heininger case, the business here carried on, being within the jurisdiction of the State of California as determined by the California courts, was illegal. There was nothing lawful about it. The laws of California prohibit such operations and provide punishment for the operators. The legal proceedings in connection with which the expenditures were made were in no sense proceedings to enforce regulatory provisions of law governing a lawful business. The allowance of the deductions here claimed would be in our opinion "to frustrate sharply defined * * * policies" of the State of California "proscribing" gambling operations. The expenditures here in issue were not made in the actual production of the income; deduction of expenses of that character has been allowed. The expenditures here were made to perpetuate or to assure the continuance of an illegal business, and their deduction, in our opinion, would be contrary to public policy and not within the meaning, purpose, and intent of the statute. The deductibility of payments made with a view to influencing Federal legislation has been passed on specifically by the Supreme Court itself, in Textile Mills Securities Corporation v. Commissioner, supra,*96 wherein the disallowance of such a deduction was approved. The payments to John J. O'Connor fall under the ban there prescribed. Certain amounts are claimed as deductions under the heading "public relations." So-called public relations expenditures in connection with the conduct of an illegal business would most likely also fall within the ban of Textile Mills Securities Corporation v. Commissioner, supra.In the instant case, however, the proof does not show the nature of the duties which were supposed to be performed, or were performed. The deduction claimed accordingly falls for lack of proof.

In addition to the fees specifically paid for services rendered in connection with the suits and proceedings discussed above, Louis Pink was paid $ 250 per month for the last six months of 1939. In his testimony, Pink referred to the $ 250 payment as a retainer, under which he was to take care of claims for personal injuries, assault and battery, and the like. He did not, however, with any more definiteness describe any matters actually handled by him thereunder, and there is no showing that his services played any part in the production of income. *97 That the monthly "retainer" for five of the six months did not relate to any income-producing operations then carried on is also indicated by the fact that five of the six months for which the "retainer" was paid were after gambling operations had been closed, and activity was centered primarily on such steps as would defeat the State of California in its efforts to bar operation of the Rex. In addition *822 to the so-called retainer, there was some claim that a fee was paid to Pink in connection with a suit by the County of Los Angeles against Rex Operators and various individuals for personal property taxes, which suit was still pending at the end of 1939. Pink did not remember whether he had received any fee in connection with that suit. Furthermore, it appears from the answer filed by Pink in the proceeding that defense of the proceeding may have been a part of the general effort to establish lack of jurisdiction of the State of California over the Rex, in order that the gambling operations might be resumed. We have already determined that fees paid for such purpose are not deductible. Pink was also shown to have received $ 450 which, according to the check issued*98 therefor, was for attorney's fees in "LaVelle and Harris cases." There is no showing or explanation of the identity of either LaVelle or Harris, and Pink in his testimony denied that the amount represented attorney's fees, stating that he used the money to settle some matters connected with the individuals named, but did not remember just what they were. With respect to the $ 708.96 paid to Pink as expenses, the evidence discloses, in so far as the purposes of the expenditures are shown, that the expenses had been incurred by Pink in connection with the jurisdictional suit, the injunction proceeding, and the penalty proceeding by the State of California. On such showing, we are unable to say that any of the amounts so paid to Pink constituted allowable deductions.

Respondent's disallowance of the deductions claimed for legal fees and expenses, penalties, and public relations services is accordingly sustained.

The respondent is also sustained in his disallowance of the deduction as a bad debt of the amount of $ 15,500 owing by the Santa Monica Pier Co. to Rex Operators. The petitioners' claim falls for failure of proof. The petitioners contend that when their business was closed*99 it necessarily ended the business of the Santa Monica Pier Co. The only proof is a letter written by the president of the company in the taxable year. In that letter it was indicated that there might still be opportunity to pay a part of the indebtedness at a later date, but no investigation was made as to the condition of the finances of the company, its assets, or its ability to obtain new capital. We do not know when, if at any time, the debt became worthless.

The deductions claimed by the individual petitioners which have been disallowed by the respondent are items listed as business expenses by Stralla in 1938 and 1939, in the amounts of $ 3,500 and $ 4,000, gambling losses by Stralla in 1938 of $ 4,715, a long term capital loss by Basom in 1939 of $ 18,700 and a long term capital loss by Madeline Stralla in 1939 of $ 1,833.33.

With respect to the business expenses claimed by Stralla, there is some contention on his part that the money expended was never his, but *823 that of Rex Operators, which he held and disbursed in connection with the gambling venture and that such items were accordingly erroneously included in his gross income. The proof offered is not sufficiently*100 definite to substantiate this claim. Neither is the proof sufficient to establish a proper basis for allowing their deduction in computing his net income. A considerable sheaf of bills and other papers were placed in evidence. With respect to numerous items reflected by such papers, there is not even any basis for arguing that any proof of record establishes a connection with the business of Rex Operators, or any other business, which may have been carried on by Stralla himself. So far as the record discloses, except for the personal statements of Stralla himself, they may have been personal expenditures. In such state of the record, the "business expense" deductions claimed by Stralla are denied.

The item of $ 4,715 was claimed by Stralla in his 1938 return as a gambling loss. The record is no more informative than was Stralla's return, and, for lack of convincing and substantiating proof of facts which would supply basis for allowance of the deduction, his claim with respect thereto is denied.

Basom has claimed a long term capital loss for 1939 of $ 18,700, reported as being the deductible long term capital loss on 255 shares of stock of Rex, Inc. He claimed a cost basis *101 of $ 28,050 for the 255 shares. The respondent in his determination found that the cost basis, when properly adjusted for 245 shares, was $ 19,845, and allowed a long term capital loss of $ 13,230. Both Basom and the respondent started their computations with a cost of $ 1,100 for each unit of 10 shares. The respondent determined, however, that $ 29,000 had been returned to the stockholders by way of capital distribution, and reduced Basom's cost for 245 shares by 24 1/2 per cent of $ 29,000. It is Basom's contention that such an adjustment is erroneous in that the $ 29,000 was distributed to the holders of participating interests in Rex Operators and that there was no connection or relationship between the interests in Rex Operators and the stockholdings in Rex, Inc. He developed on cross-examination of one of respondent's witnesses, a revenue agent, that the books and accounts of Rex Operators indicated a difference between the stockholders of Rex, Inc., and holders of participating interests in Rex Operators.

We have previously noted the manner in which the individual accounts purporting to show the participating interests in Rex Operators appeared on the books. We have also*102 noted the fact that in the beginning the theory was that the holder of each unit of stock should be a participator to the extent of 1 per cent in the gambling operations. That the percentages did, certainly during 1938, follow the ownership of the stock in Rex, Inc., to some extent, is indicated by the listing of percentages and distributions made by Lloyd during the first joint *824 venture. Thereafter there were some changes in the participating interests in Rex Operators. These changes, however, followed upon the heels of the purchase of the stock of the Krakour or "Eastern Interests" in Rex, Inc. We are unable to say on the record, as the petitioners desire us to do, that there was no connection between the holdings in Rex, Inc., and Rex Operators and that there was no return of capital to the stockholders in Rex, Inc. There is a further discrepancy in Basom's case with respect to his stock in Rex, Inc. The proof shows that on December 19, 1939, he was the record holder of 352 1/2 shares. He reported a short term capital loss on 112 1/2 of these shares. If the stock records are correct and he properly reported his loss on the 112 1/2 shares, he had left only 240 shares*103 instead of the 255 shares claimed by him and the 245 shares allowed to him by respondent in his determination of the deficiency. Such being the state of the record, we are unable to say that Basom is entitled to a greater long term capital loss deduction than was allowed by the respondent.

The same method of computation was applied in determining petitioner Madeline Stralla's long term capital loss on her 25 shares of stock. Her claim of error in the respondent's determination also falls for lack of proof.

Decision will be entered under Rule 50.