Opinion
Docket No. 77126.
1960-11-16
DONALD G. GRAHAM AND JUANITA F. GRAHAM, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Bryant R. Dunn, Esq., and Ben J. Gantt, Jr., Esq., for the petitioners. Norman H. McNeil, Esq., for the respondent.
1. Held, petitioners incurred a deductible casualty loss in the amount of $13,125 occasioned by destruction of rare and unusually fine specimens of ornamental trees, plants, and shrubs on their residential property in an unseasonable freeze.
2. Petitioner husband was a partner in a law firm retained as local counsel by a major overseas airline. In 1955, petitioners took a 3-month trip to South America and on their return prepared a travel brochure and showed pictures of the trip to friends and acquaintances. The airline provided overseas transportation. Held, expenses of the trip are not deductible as ordinary and necessary business expenses. Bryant R. Dunn, Esq., and Ben J. Gantt, Jr., Esq., for the petitioners. Norman H. McNeil, Esq., for the respondent.
Respondent has determined a deficiency in petitioners' income tax for the year 1955 in the amount of $8,112.57. The adjustments giving rise to the deficiency are set forth in the statutory notice as follows:
(a) It is determined that the casualty loss deduction in the amount of $15,000.00 claimed by you on your 1955 return for damage to and destruction of trees and shrubbery on your residential property caused by freezing is excessive and did not in fact exceed $4,000.00, which amount has been allowed. Accordingly, your taxable income has been increased to reflect the unallowable amount of claimed casualty loss.
(b) The amount of $1,573.71 claimed in the itemized deductions of your 1955 return as nonreimbursed business expenses for a trip to South America is disallowed in full.
By amended return, claim for refund, and their petition, petitioners claim an increased casualty loss deduction in the amount of $17,500. On brief, respondent concedes petitioners are entitled to a casualty loss deduction in the amount of $9,500. Thus, the issues presented are:
1. Whether petitioners are entitled to a casualty loss deduction in excess of $9,500 by reason of damage to their residential property due to destruction by freeze of ornamental trees and shrubs.
2. Whether petitioners are entitled to deduct petitioner husband's cost of a trip to South America as nonreimbursed business expenses.
FINDINGS OF FACT.
Petitioners Donald G. Graham and Juanita F. Graham, husband and wife residing in Seattle, Washington, filed a Federal joint income tax return for the calendar year 1955 with the district director of internal revenue at Tacoma, Washington.
Petitioners' residence is located in Seattle's Broadmoor district, a tract which was subdivided in 1925 into 400 lots surrounding a golf course and now is regarded as a residential neighborhood of fine homes. Petitioners' land, consisting of 7 lots totaling 1 1/4 acres, was purchased over a period of years by petitioners for a total of $22,500, 3 lots in 1929, 3 lots prior to 1935, and 1 lot in 1946. Petitioners' residence, a 13-room house of French design, was built upon 3 lots in 1930 and 1931 at a cost of $40,000.
During the process of construction of petitioners' residence in 1930 and 1931, Donald employed a landscape architect to plan the first gardens, after which time his interest in gardening increased to the point where he began to visit nurseries and induced his acquisition of the additional lots to enlarge his garden.
The garden on petitioners' property evolved over a period of 25 years from a small collection of fairly choice plantings into a large collection, by number and maturity, of plants, shrubs, and trees as well as other landscaping elements, such as two artificial pools, walls, steps, dirt fill, rockeries, lawn area, and a greenhouse and garden house, all of which cost petitioners between $50,000 and $60,000.
Petitioners devoted many hours to gardening and also regularly employed a gardner for an annual wage to maintain the garden. Donald was one of the original founders and a past president of the University of Washington Arboretum, the first president of the Seattle Rhododendron Association, a judge of the Rhododendron Show of Seattle, author of magazine articles, and a member of the Royal Horticultural Society of England.
In the early 1930's, Donald found out that certain ornamental plants suited to Seattle's climate were not obtainable in this country due to the restrictions of the Plan Quarantine Act; however, upon a proper showing made, Donald obtained a private grower's import permit and began importing plant material from England and Japan for petitioners' garden.
By 1955, a majority of the plants in petitioners' garden had been purchased and some had been growing for 20 years or more. Petitioners never sold plants commercially but they did give them away. Otherwise, petitioners' garden changed from time to time due to petitioners' policy of getting rid of inartistic plant material, occasional remodeling of the garden by a landscape architect who reviewed the landscaping several times a year, and installation of new plants after consultation with the landscape architect.
The garden achieved a certain notoriety in the Seattle area and has been the subject of directed tours by distinguished visitors and others interested in private gardens.
Prior to November 1955, petitioners' garden consisted of a large, quality collection of broad-leaf evergreen specimens, including mature, uncommon hybrids and magnolia trees, making up about 90 per cent of the garden. At least 300 varieties of rhododendrons, 150 varieties of camellias, 25 varieties of magnolias, 10 varieties of stewartia, among many other trees and shrubs, were growing in the garden. Petitioners' garden also contains trees and shrubs native to the Seattle area.
During 1955, spring plant growth in Seattle was delayed by record cold spells from March through June 8, 1955, after which time the area experienced a sudden increase in temperatures up to 100 degrees F. which wilted and burned tender foliage and sent certain plants into a state of temporary dormancy. The month of July 1955, was moist and cool, but August was the driest on record. September, October, and the early part of November 1955 were favorable months for growth and plants were stimulated. On November 11, 1955, a frigid air mass moved into Seattle. The maximum temperature on November 10, 1955 was 54 degrees F. and the temperature dropped to 15 degrees F. on November 11, later dropping to as low as 6 degrees F. above zero on November 15, 1955. The duration of the freeze was 6 to 8 days, with maximum temperatures below freezing for 6 of the 8 days.
Because of the climatic conditions which prevailed in the summer and fall, trees and shrubs were not prepared to cope with the sudden drop in temperature. The abrupt drop in temperature generally caused in the Seattle area the loss of a substantial number of broad-leaf evergreen plants, particularly rhododendrons and camellias, but some native plants also suffered from the freeze. Due to the freeze, 45 per cent to 50 per cent of the broad-leaf evergreens in petitioners' garden, which was composed of 90 per cent of such plant material, were destroyed.
Prior to the freeze petitioners' garden was particularly distinguished by the presence of unusually large specimens of certain rare trees which constituted accent points of the landscaping and in the shade of which many large plants and shrubs flourished. Many of the large trees and older plants and shrubs under them were killed by the freeze with the result that after the freeze and even after rearrangement and replacement of plants and trees, petitioners' garden tended toward uniformity of plant size and, although still containing many unusual plants, had lost much of its distinction.
The cost of purchasing and replacing plants, shrubs, and trees killed by the freeze to restore the garden to the condition it possessed prior to the freeze would have been at least $21,000. Adequate replacements for some of the destroyed trees and plants were and are unobtainable.
Petitioners have expended at least $10,000 in removing trees and plants killed by the freeze, moving existing plants, and purchasing and planting new trees and plants in an effort to restore the garden.
The trees, plants, and shrubs on petitioners' property prior to the freeze contributed to its value. The destruction of them by the freeze reduced the fair market value of the property by the amount of $13,125. Petitioners were not compensated in any amount by insurance or otherwise for their casualty loss.
Donald is senior member of a law firm, a partnership, with offices in Seattle. One of the firm's clients is Pan American World Airways (hereinafter referred to as Pan American) which pays the firm a monthly retainer of $416.67. Pan American pays the firm additional amounts for legal services rendered over and above routine services.
Donald took a leading part in handling the business of Pan American for the firm. He considered that Pan American expected the firm to do public relations and sales promotion work in addition to rendering legal services. Donald has encouraged air travel by way of Pan American among his friends and acquaintances and has solicited letters from influential local citizens on Pan American's behalf. On occasion arrangements to fly by way of Pan American were made for friends of Donald through the firm. When Donald has traveled by way of Pan American he has reported to the airline any deficiencies in service he noticed.
One of Donald's hobbies is fishing; he is considered by his friends and acquaintances as knowledgeable on the subject of good places for fishing. In 1955, Donald discussed with officials the possibility of increasing air traffic to South America, an area served by Pan American, by bringing tourist attractions of that continent to the attention of the public. Pan American agreed to furnish transportation to petitioners over its facilities. Petitioners' trip to South America covered a 3-month period in 9155, during which they visited Jamaica, Venezuela, Brazil, Uruguay, Argentina, Chile, Peru, and Panama City. Donald spent some time fishing in the lake region of Chile.
Upon their return to Seattle, petitioners prepared a brochure on their trip, setting forth their itinerary, and information on hotels, shops, and points of interest to tourists. They gave copies of the typed brochure to anyone who evidenced interest in the subject. From time to time they would entertain dinner guests with postprandial showings of pictures taken on their South American trip. Donald gave a talk before the Rhododendron Society in Seattle in which he described South American gardens.
On the South American trip petitioners incurred expenses for lodgings, meals, and domestic transportation, and miscellaneous items for which they were not reimbursed by Pan American in the amount of $3,147.43, one-half of which ($1,573.71) they claimed as an itemized deduction on their 1955 return as nonreimbursed business expenses of Donald. Petitioners were reimbursed by Pan American for their expenses of air travel over its facilities. Petitioners reported business income of $55,783.19 on their 1955 return.
The expenses of the trip in the amount of $1,573.71, or any portion thereof, claimed as a deduction by petitioners were not ordinary and necessary business expenses of Donald.
OPINION.
BLACK, Judge:
Although respondent allowed petitioners a casualty loss of $4,000 due to the destruction in their garden, his expert witnesses testified that the fair market value of petitioners' property decreased $9,500 as a result of the freeze, and on brief respondent now concedes this sum is an allowable deduction under section 165(a), (b), and (c)(3), I.R.C. 1954.
SEC. 165. LOSSES.(a) GENERAL RULE.— There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.(b) AMOUNT OF DEDUCTION.— For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property.(c) LIMITATION ON LOSSES OF INDIVIDUALS.— In the case of an individual, the deduction under subsection (a) shall be limited to—(3) losses of property not connected with a trade or business, if such losses arise from * * * casualty * * *
The parties do not disagree as to the applicable principle of law by which the amount of the loss is to be determined. That rule was stated in Buttram v. Jones, 87 F.Supp. 322, 324, thus:
The deductible loss is the difference between the value of the estate immediately preceding the casualty and the value after the casualty but not in excess of an amount equal to the adjusted basis of the estate, and in determining such loss the trees and shrubbery should be treated as an integral part of the estate and no separate basis apportioned thereto. (Footnotes omitted.)
The question of the extent of the decrease in the value of the property is one of fact. John S. Hall et al., Executors, 16 B.T.A. 71. After a careful review of the testimony of expert witnesses introduced by the parties, evidence of the cost of repairing and replacing the damaged portions of petitioners' garden, and all other relevant factors presented in the record, we are satisfied that the fair market value of petitioners' property decreased by the amount of $13,125 as a result for the damage wreaked by the freeze, and have so found. Therefore, that amount of casualty loss should be allowed petitioners under Rule 50 instead of the $4,000 which the Commissioner allowed in his deficiency notice.
The second issue presented is whether petitioners may deduct one-half of the nonreimbursed expenses of their trip to South America as ordinary and necessary business expenses of Donald.
While travel expenses incurred by a partner in connection with partnership business are not normally deductible by the partner on his individual return, where partners agree that such expenses are to be borne by each partner, the expenses are deductible by the partner incurring them. Hiram C. Wilson, 17 B.T.A. 976; Frederick S. Klein, 25 T.C. 1045. If the travel expenses here in issue constitute ordinary and necessary business expenses, we have no doubt that petitioners may deduct them.
Expenses are ordinary if incurred in pursuing a course of conduct which constitutes a normal and natural response under the specific circumstances in which a taxpayer finds himself. Welch v. Helvering, 290 U.S. 111; Hill v. Commissioner, 181 F.2d 906.
Donald's situation with regard to expenses claimed as deductible was that he was senior partner of a law firm retained as local counsel by an airline client for an amount totaling approximately $5,000 per year. The client paid the law firm additional unspecified sums for legal services rendered beyond the routine. Donald, as the partner who took a leading part in handling the client's affairs, felt the client expected the firm to render promotional and public relations advisory services in addition to legal services. For the years in which the expenses, deduction of which is here sought, were incurred, Donald reported distributable income from the partnership in the amount of $55,783.19, or in excess of $4,600 per month for a full year. While the client provided Donald with air transportation outside this country, Donald expended $1,573.71 for his costs on the trip. He was accompanied on the trip by his wife, no part of whose expenses is claimed as deductible. Donald spent 3 months on the South American trip and away from his partnership office. Except for the overseas transportation provided by the client, neither the firm nor Donald was reimbursed for Donald's expenses or paid for his time or efforts. Under the facts in the instant case, we are not convinced that Donald's 3-month trip to South America can be classed as a business trip on behalf of Pan American. He claims a deduction of the entire amount of $1,573.71 (one-half of the expenditures incurred and paid on the trip by himself and wife). It seems manifest to us that this cannot be allowed as a deduction under the applicable law and regulations. We hold, therefore, that Donald's expenses of the South American trip are not deductible as nonreimbursed business expenses.
Decision will be entered under Rule 50.