Opinion
Docket No. 25496.
1951-09-20
THE KENTUCKY DISTRIBUTING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Leo Weinberger, Esq., Jerome Frank, Esq., and H. W. Vincent, Esq., for the petitioner. Hugh F. Culverhouse, Esq., for the respondent.
1. Respondent determined that during the fiscal year ended June 30, 1944, petitioner received additional unreported income from the sales of whiskey in excess of O.P.A. ceiling prices. Held: During the period involved petitioner did not charge nor receive payments in excess of O.P.A. ceiling prices, and respondent erred in his determination.
2. Deductible travel expenses incurred by petitioner during the fiscal year ended June 30, 1944, determined.
3. Respondent's determination of fair and reasonable salary for personal services rendered petitioner by its president during the fiscal year ended June 30, 1945, approved. Leo Weinberger, Esq., Jerome Frank, Esq., and H. W. Vincent, Esq., for the petitioner. Hugh F. Culverhouse, Esq., for the respondent.
The Commissioner made certain adjustments and determined deficiencies in income, declared value excess profits, and excess profits taxes for the following years in the following amounts:
+------------------------------------------------------+ ¦ ¦ ¦Declared ¦Excess ¦ +-----------------+----------+-------------+-----------¦ ¦Fiscal year ended¦Income tax¦value excess-¦profits tax¦ +-----------------+----------+-------------+-----------¦ ¦ ¦ ¦profits tax ¦ ¦ +-----------------+----------+-------------+-----------¦ ¦6-30-1943 ¦$742.42 ¦ ¦ ¦ +-----------------+----------+-------------+-----------¦ ¦6-30-1944 ¦2,470.66 ¦$22,318.25 ¦$126,055.94¦ +-----------------+----------+-------------+-----------¦ ¦6-30-1945 ¦1,383.30 ¦ ¦ ¦ +------------------------------------------------------+
The questions presented for our consideration and disposition are:
1. Did the respondent err in increasing petitioner's reported income for the taxable year ended June 30, 1944, by the amount of prices charged in excess of O.P.A. ceilings?
2. Did the respondent err in disallowing the travel expenses claimed by petitioner for the fiscal year ended June 30, 1944?
3. Did the respondent err in disallowing as excessive a portion of the salary paid to petitioner's president and controlling stockholder for the fiscal year ended June 30, 1945?
The petitioner has acquiesced in all other adjustments made by the Commissioner.
The issue concerning the deficiency for the fiscal year ended June 30, 1943, is not in dispute.
FINDINGS OF FACT.
Petitioner, The Kentucky Distributing Company, is a Kentucky corporation, having been incorporated in 1935. Its present mailing address is 602 Second National Bank Building, Cincinnati, Ohio. The various tax returns for the taxable years involved were filed with the collector of internal revenue for the first district of Kentucky.
During the years 1943, 1944, and part of 1945, petitioner engaged in the wholesale liquor business in Kentucky. David Fabe was its president, general manager, and sole stockholder. He directly supervised the sales, did all of the buying and negotiating with the distillers, and handled all transactions pertaining to banking. He did not directly supervise deliveries or the receipt and deposit of money. Petitioner's books were kept under Fabe's general supervision.
Petitioner had two salesmen during the fiscal year ended June 30, 1944. There had been others, but only these two remained after the fall of 1943. Shortly prior to this time, petitioner had removed all salesmen from the road. Whiskey was scarce, and petitioner could dispose of any it could purchase without the services of such salesmen. In the spring of 1943, petitioner was advised by the distillers that a certain amount of whiskey would be allocated to it, and would be shipped at irregular intervals whenever it was available.
When a shipment of whiskey was received, each customer was called and advised of the quantity to which he was entitled. The order and the invoice were then made up and turned over to the shipping clerk for delivery. Local deliveries were made in petitioner's own truck. Each such order was packed and the tickets affixed. The truck driver was then given the name and address of the consignee, and the amount to be collected. As required by Kentucky law, collection was made on delivery, and later turned in at petitioner's office.
The same general procedure was followed by the common carrier in connection with non-local orders except that the invoices were usually mailed, and the payments collected by the common carriers were mailed by it to petitioner. In either case, the amounts collected were those shown on the invoices which had been made up in compliance with current O.P.A. price ceilings.
On June 1, 1943, petitioner executed an application to the Department of Revenue of the Commonwealth of Kentucky for the renewal of its wholesale liquor license for the year commencing July 1, 1943. This application was refused and petitioner allowed 30 days in which to dispose of the merchandise on hand.
By letter dated July 20, 1943, the administrator of the Distilled Spirits Unit advised petitioner that its stock must be disposed of by midnight August 11, 1943, at which time petitioner must cease business. Disposal was to be under the supervision of the Distilled Spirits Administrator of Kentucky and a record of sales submitted to him each three days.
On August 11, 1443, the Distilled Spirits Administrator extended the time for disposing of the stock of merchandise until the closing of business August 20, 1943. Between July 1, 1943, and August 20, 1943, petitioner disposed of its entire stock of whiskey.
On August 19, 1943, the Kentucky Alcohol Beverage Control Board issued an order granting petitioner a special temporary wholesale liquor license until December 31, 1943.
When this temporary permit was granted, petitioner remained in business, continuing to receive whiskey and selling it to its customers. It followed the same business procedure, having the salesmen contact the customers from the office, writing out the orders, shipping the whiskey, making out the invoices and collecting on delivery. During this interval strenuous efforts were made to get the license renewed.
All of the whiskey was not disposed of by December 31, 1943, when the temporary license expired. Some of the stock had been deliberately held back so that shipment could be resumed should petitioner's permit be renewed. The holding back of whiskey in this manner continued until the latter part of January 1944. During the earlier part of that month petitioner still received its allocation of whiskey and made shipments to its customers as before.
On January 6, 1944, the Distilled Spirits Administrator notified the petitioner that, in accordance with the Kentucky law, it must, by January 31, 1944, liquidate all of its merchandise under the supervision of the administrator. The administrator thereupon made an inventory of the merchandise on hand.
During the month of January 1944, petitioner still felt that it would receive its license. Not until near the end of January was petitioner definitely advised that its permit would not be renewed and that it would have to dispose of its merchandise by January 31st, or such would be confiscated. Petitioner had about a day and one-half to dispose of approximately 2,000 cases.
During this period of time petitioner bottled certain barrel whiskey belonging to Mrs. David Fabe, the president's wife. Also, certain customers would purchase negotiable warehouse receipts for whiskey and have it bottled through petitioner. Each such transaction was approved by the State of Kentucky before the order was sent to the distillery for bottling. When each such order had been bottled it was shipped to petitioner's warehouse, billed and delivered by petitioner as explained above. Payment was required on delivery. The payment so collected was always the amount shown on the invoice.
Petitioner had disposed of all of its whiskey on or before January 31, 1944, and sold no whiskey after that date. All checks received after that date were for whiskey shipped on or before January 31, 1944.
The sum reported as gross sales on petitioner's income tax returns for the fiscal year ended June 30, 1944, corresponds to that reported in petitioner's general ledger for such period.
During the fiscal year ended June 30, 1944, petitioner's president, Fabe, traveled extensively relative to petitioner's business. Two such trips were made to the New York office of National Distillers, seeking to increase petitioner's allocation of merchandise and to purchase same. The cost of these trips, including entertainment, traveling expenses, and railroad fare, was estimated to be $250 each. The entertainment expenses served no particular business purpose. On neither trip did Fabe stay at a hotel.
One trip was made to the Jacksonville, Florida, office of National Distillers, which also pertained to the allocation of additional merchandise. The expense of this trip was also estimated to be $250. An additional trip was made to Jacksonville that ‘could have been done without‘ so far as the business was concerned.
Fabe further made approximately 15 trips to Ashland, Kentucky, 20 trips to Frankfort, Kentucky, and several trips to Lexington, Kentucky, in connection with petitioner's attempt to acquire a renewal of its permit.
The expenses incurred in connection with the above traveling were not supported by itemized records. In each instance, Fabe made the expenditures incident to the trip from his own funds. Upon his return from a particular trip, he would tell the bookkeeper the total amount of such expenditures. He was then reimbursed and the amount thereof entered on petitioner's books. The amount so paid out by petitioner during the fiscal year ended June 30, 1944, totaled $4,710.18.
Petitioner's ordinary and necessary business expense for traveling in the fiscal year ended June 30, 1944, totaled $2,500.
Petitioner paid Fabe a salary of $6,650 for the fiscal year ended June 30, 1945. Prior to this year, Fabe had been paid $18,000 per year. This amount had been determined by respondent to be excessive and, accordingly, reduced to $13,000 per year.
During the year under review, Fabe's duties included disposing of petitioner's lease which had 2 years to run and thereby acquiring petitioner's release from liability thereunder, taking care of correspondence, answering inquiries of revenue agents and, with few exceptions, being present in the office each day.
Respondent determined that the amount so paid Fabe for performing the foregoing duties was unreasonable and disallowed $5,450 thereof.
OPINION.
VAN FOSSAN, Judge:
This case presents three purely factual questions. The first and major one concerns the fiscal year ended June 30, 1944, and involves the question of whether petitioner derived additional unreported income from the alleged sale of whiskey at prices in excess of O.P.A. ceilings.
The regular wholesale liquor license held by petitioner expired on June 30, 1943. Its renewal was refused by the Commonwealth of Kentucky. Thereafter, several temporary permits were issued petitioner to allow for a liquidation of its stock. Throughout the period commencing July 1, 1943, and ending January 31, 1944, petitioner's business was continued under such temporary permits, and strenuous efforts were made to acquire the reissuance of its license. All efforts failed, and petitioner's operations ceased on January 31, 1944.
Respondent determined that during the year involved, petitioner realized additional unreported income from its sales of whiskey in excess of O.P.A. ceiling prices, and that this excess is includible in petitioner's taxable income under the provisions of section 22(a) of the Internal Revenue Code.
SEC. 22. GROSS INCOME.(a) GENERAL DEFINITION.— ‘Gross income‘ includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *
Petitioner has introduced evidence consisting of the testimony of several witnesses. This evidence was to the effect that no overceiling prices were charged during the period under review and that no such payments were received by any employee of petitioner.
In support of his determination, respondent had introduced the testimony of five witnesses. While there was some evidence adduced which lent a measure of support to the government charges, it was exceedingly vague. In some instances, it was not definitely fixed as to time. Several witnesses testified that they made a cash payment they understood to be in excess of the ceiling price appearing on the invoice, but they were unable to state that they ever knew the ceiling price, to identify the person to whom such payment was made, or to remember the amount so paid. Only on one occasion was that person definitely identified, and he categorically denied receiving anything above the invoice price. Moreover, this particular witness was unable to give more than a hazy, uncertain approximation of the alleged excess payment.
When taken as a whole, the most that can be said for respondent's evidence is that it evokes suspicion. In reaching a conclusion, we are limited to the record made. We may not go outside thereof and indulge in speculation.
After giving due consideration to all the evidence adduced by both parties, we feel that petitioner has met its burden of proof and should prevail on this issue.
The second issue raises the question of whether respondent correctly disallowed the travel expenses claimed as a deduction by petitioner for the fiscal year ended June 30, 1944.
The pertinent portion of the Internal Revenue Code is section 23(a)(1)(A).
And that section allows a deduction for travel expenses incurred during the taxable year ‘ * * * in the pursuit of a trade or business; * * * . ‘ Any portion of such expenses that may be categorized as personal are not so deductible. Section 24(a)(1), Internal Revenue Code.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) EXPENSES.—(1) TRADE OR BUSINESS EXPENSES.— (A) In General.— All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
SEC. 24. ITEMS NOT DEDUCTIBLE.(a) GENERAL RULE.— In computing net income no deduction shall in any case be allowed in respect of—(1) PERSONAL, LIVING, * * * EXPENSES, * * * .
After considering the trips made and the expenses incurred by Fabe, in the light of the circumstances known then to exist, we are convinced that some part, but not all, of such travel expenses was prompted by strictly business considerations and should be allowed as a deductible expense.
Consequently, we have applied the rule of Cohan v. Commissioner, 39 F.2d 540, and have come to the conclusion that $2,500 fairly represents the amount of such expenses as is properly deductible.
There remains the question of whether respondent erred in disallowing, as excessive, part of the amount paid Fabe by petitioner for personal services rendered it during the fiscal year ended June 30, 1945. The applicable statute is section 23(a)(1)(A), supra.
Petitioner contends that the presumption of correctness attached to respondent's determination was overcome and disappeared when it introduced evidence on the question under consideration through the testimony of Fabe, that respondent has offered no evidence nor discredited such testimony, that it has, therefore, established a prima facie case, and that a decision must be reached on the testimony as it appears. We do not agree.
Here, we have little evidence as to the services actually rendered and the value to be placed thereon other than Fabe's self-serving, sketchy, and uncorroborated testimony. It did not establish petitioner's contention as to amount or value or his services. We have no alternative to sustaining respondent's determination as to this issue.
Decision will be entered under Rule 50.