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A. F. REES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Rees v. Commissioner

Docket No. 41138.

United States Board of Tax Appeals

21 B.T.A. 698; 1930 BTA LEXIS 1810;

December 15, 1930, Promulgated

*1810 Under the Revenue Act of 1924, and regulations promulgated pursuant thereto, where it is shown that at least certain amounts were expended for traveling expenses, such minimum amounts may be allowed as deductions from gross income even though detailed records thereof were not kept.

Harry Sigmond, Esq., for the petitioner.

C. H. Curl, Esq., for the respondent.

SEAWELL

*698 This proceeding involves deficiencies in income tax as determined by the Commissioner as follows: 1924, $1,729.60; 1925, $1,160.81; and 1926, $2,310.80. In the petition, errors were assigned on account of depreciation for each of the years, but at the hearing it was stipulated that the correct amount of depreciation allowable is shown by increasing the amounts allowed by the Commissioner in his deficiency notice as follows: 1924, $558.43; 1925, $509.57; and 1926, $432.06. This leaves as the only issue in the case the deductibility of certain traveling expenses alleged to have been paid by the petitioner in carrying on his business.

FINDING OF FACT.

The petitioner is an individual residing in Hanover, Pa., where he is engaged in the hide and tallow business.

The*1811 petitioner is the sole owner of the aforementioned business which has been conducted by him since 1913, prior to which time he was employed in similar work with one of the large meat packers in Chicago. One part of the business consists of buying hides, curing them, and selling them on a brokerage basis. Some hides are handled on petitioner's own account. Another part of the business is rendering fats for the production of tallow. The materials (hides, carcasses, etc.) purchased are obtained from wholesale butchers, packing houses, and producers of lard and by-products. The finished products are sold to leather tanners, soap factories, and chemical and specialty concerns.

With the exception of a small amount of local business, which is less than 5 per cent of the total business done, the petitioner markes all of the purchases and sales, and has no traveling salesmen other than himself. The total purchases for the years in question were: 1924, $777,426.94; 1925, $970,851.23; and 1926, $1,013,501.33. The total sales for each of the same years were: 1924, $868,669.90; 1925, $1,068,296; and 1926, $1,170,524. In carrying on this work the petitioner was away from his place of*1812 business 76 to 80 per cent of his time during the years in question, covering various sections of *699 the country, which, in his business, may be divided as follows: New England territory, including Boston and Worcester, Mass., Providence, R. I. Nashau, N. H. Lewiston, Me., Winchester, Vt., and New Haven, and Bridgeport, Conn.; western territory, including Chicago, Ill., Muskegon, Mich., Fond du Lac, Wis., and Cleveland, Cincinnati and Columbus, Ohio; southern territory, including Louisville, Ky., New Orleans, La., Roanoke, Va., Washington, D.C., Baltimore, Md., Kingston, Tenn., and Morgantown, W. Va.; Canadian territory, including various towns in Ontario and New Brunswick; New York territory, including New York City and various towns over the State and in New Jersey; Pennsylvania territory, including Philadelphia, Pittsburgh, and various other towns over the State. The southern territory is visited about once every two months, where he spends ten days to two weeks; the western territory, about once a month, where he spends a week; and the Canadian territory about four times a year, where he spends ten days to two weeks. The New England, New York, and Pennsylvania territories*1813 are visited every week when he is not in other places. In addition he has a territory around Albuquerque, N. Mex., but he does not go there more than once each year.

The petitioner's business is highly competitive and it was necessary for him to keep in close contact with the trade. He stopped at the best hotels, where he entertained his customers within the limits customary in this line of business. The entertainment of his customers at the hotels was made necessary by the fact that he was covering a very large territory and he could often see them to advantage there rather than have to go to each individual customer. In addition to the entertainment of his customers at the hotels, he also expended certain other amounts in their behalf on theatre tickets, small gratuities such as cigars, candies, etc., and such amounts were from 5 to 10 per cent of the total amount claimed as a deduction for traveling expenses. All of the foregoing entertainment expenditures were for the purpose of stimulating and holding petitioner's trade or business and were usual in his line of business. The remainder of the deduction claimed was expended for railroad and Pullman fares, hotel bills, telephone*1814 and telegraph service, and stenographic work. The petitioner's method of financing himself on these trips was to draw out $200 from the business each week. Sometimes he would spend more, and sometimes less, than $200 per week, but all of the amount of $200 per week withdrawn was expended for the purposes heretofore indicated. That is, there was in no sense an accumulation from this fund which was used for other purposes, but whatever was left over at the end of one week was added to the $200 which was withdrawn at the beginning of the next week, and the total amount was thus available for traveling expenses. And over *700 each of the years before us there was likewise no accumulation from this fund, the total amount expended in each year being in excess of $10,400. The additional amount was made up from other funds of the petitioner for which no deduction is claimed. While the petitioner maintained a system of accounting records, no record was kept therein of the items for which the foregoing expenditures were made. The foregoing amount withdrawn from the business was in addition to some $10,000 to $13,000 which was withdrawn each year for personal and family expenses.

*1815 OPINION.

SEAWELL: The Commissioner disallowed the entire amount of $10,400 ( $200 per week) claimed by the petitioner as a deduction from gross income in each of the years before us on the ground that it was in the nature of an estimate for which no detailed records were kept, though it is not understood that he contends that any of the purposes for which the petitioner testified he expended the amounts in question were not within the category of those items for which an expense deduction is ordinarily allowable. The statute provides (section 214(a)(1) of the Revenue Act of 1924) as follows:

In computing net income there shall be allowed as deductions:

(1) 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; * * *

What the Commissioner says in effect is that an allowance under the foregoing provision is limited by section 1002(a) of the Revenue Act of 1924, which*1816 provides that:

Every person liable to any tax imposed by this Act, or for the collection thereof, shall keep such records, render under oath such statements, make such returns, and comply with such rules and regulations, as the Commissioner, with the approval of the Secretary, may from time to time prescribe.

Pursuant to the above provision, article 1321 of Regulations 65 was promulgated, which reads in part as follows:

In assessing and collecting income taxes the Commissioner has the benefit of all existing internal revenue laws in so far as such laws are applicable. As an aid in assessing and collecting the tax the Commissioner may require any person liable to tax to keep specific records, render under oath such statements and returns, and comply with such rules and regulations as the Commissioner with the approval of the Secretary may prescribe. In accordance with this provision, every taxpayer carrying on the business of producing, manufacturing, purchasing, or selling any commodities or merchandise, except the business of growing and selling products of the soil, shall for the purpose of determining the amount of income under the Revenue Act of 1924 keep such permanent*1817 books of account or records, including inventories, as are necessary to establish the amount of gross income and deductions, credits, and other information required by an income tax return.

* * *

Further, *701 article 24 of Regulations 65 provides that:

It is recognized that no uniform method of accounting can be prescribed for all taxpayers, and the law contemplates that each taxpayer shall adopt such forms and systems of accounting as are in his judgment best suited to his purpose. Each taxpayer is required by law to make a return of his true income. He must, therefore, maintain such accounting records as will enable him to do so. * * *

But we do not understand the foregoing requirements to mean that the failure to record a given expense item is necessarily fatal to its allowance as a deduction any more than the failure to record an item of income would exempt it from taxation. Certainly, the Commissioner would not hesitate to tax an item of the latter class and we think it is likewise true that where it is conclusively shown that an expense has been incurred or paid, which would be deductible if properly recorded, the lack of recordation should not prevent its*1818 deductibility. Whether or not a given expenditure has been made and for what purpose are questions of fact, the burden of answering which rests upon the taxpayer, and such questions are more readily answered where proper records are kept. And we would not for a moment minimize the importance of the requirement in the statute and the regulations promulgated thereunder that records be kept; they are necessary for the orderly administration of the income-tax statutes. But we find nothing so mandatory in such statute and regulations that would preclude consideration being given to items which are not properly recorded in the records as kept.

The petitioner at bar did keep records, but failed to account properly therein for the traveling expenses here in question. He, however, testified in the most positive and unequivocal manner to the fact that he withdrew $200 each week during the year from his business for the purpose of meeting his traveling expenses and that he expended in excess of the amount so withdrawn during each year for purposes which, in our opinion, are well within the category of ordinary and necessary expenses as contemplated by the statute. This testimony was in*1819 no way impeached or discredited on cross-examination or otherwise, and therefore, in our opinion, must be taken as having established the fact that the expenditures were made and for the purposes as stated above. As the court said in :

* * * A jury, commission, or board may not arbitrarily ignore or discredit the testimony of unimpeached witnesses, so far as they testify to facts, and a wilful disregard of such testimony will be ground for a new trial; but the rule is different when witnesses testify merely as to their opinion. * * *

We are accordingly of the opinion that the deductions claimed of $10,400 for traveling expenses in each of the years here involved *702 should be allowed. ; ; and . All of the foregoing cases have been acquiesced in by the Commissioner, and present situations closely analogous to the one at bar. See also *1820 . While these cases all arose under either the Revenue Act of 1918 or 1921, whereas the present case arises under the Revenue Act of 1924, the controlling statutes in all instances are practically identical. The principal difference in these situations from the one at bar is the fact that under the 1924 Act the Commissioner has required that more detailed records be kept than he had theretofore prescribed. For reasons heretofore stated, we do not think this precludes the allowance of the deductions here claimed.

Reviewed by the Board.

Judgment will be entered under Rule 50.

LANSDON, SMITH, ARUNDELL, and MURDOCK concur in the result only.

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