Gilman v. Comm'r of Internal Revenue

• Decision Date: 01 August 1979
• Docket Number: Docket No. 7641-77.
• Citation: 72 T.C. 730
• Parties: WILLIAM S. GILMAN II and JEAN A. GILMAN, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

72 T.C. 730

WILLIAM S. GILMAN II and JEAN A. GILMAN, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 7641-77.

United States Tax Court

Filed August 1, 1979.

Held: 1. Under sec. 1.165-3(b)(1), Income Tax Regs., the demolition cost of a roof to a building used in petitioner's business so that a second floor could be added to that building is a deductible loss;

2. The cost of scrapping air conditioners belonging to petitioners' tenants and replacing them with air conditioners usable on second floor roof, necessitated by demolition of first floor roof, is part of the demolition cost of the roof;

3. Petitioners failed to substantiate claimed deductions for entertainment expenses under the requirements of sec. 274(a) and (d), I.R.C. 1954, but did substantiate a few items of other business expenses disallowed by respondent; and

4. Petitioners failed to tax under sec. 6653(a), I.R.C. 1954. John B. Bamberg, for the petitioners.

Roger D. Osburn, for the respondent.

SCOTT, Judge:

Respondent determined deficiencies in petitioners' Federal income tax for the taxable years 1973 and 1974 in the amounts of $7,008.26 and $4,314.75, respectively, and determined additions to tax for those years under section 6653(a), I.R.C. 1954,¹ of $350.41 and $215.74, respectively.

Some of the issues raised by the pleadings have been disposed of by agreement of the parties leaving for our decision:

(1) Whether petitioners are entitled to deduct for the year 1973 expenses for the demolition of air conditioning units owned and maintained by tenants in petitioners' office building and replacement thereof and the costs incurred in demolishing the roof of their office building, both of which costs were incurred in order to construct an additional story to the office building;

(2) Whether petitioners have substantiated in accordance with the requirements of section 274 all or any part of the deduction for entertainment expenses claimed on their returns; and

(3) Whether petitioners are liable for the additions to tax for negligence or intentional disregard of the rules and regulations.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Petitioners William S. Gilman II and Jean A. Gilman, who resided in Winter Park, Fla., at the time of the filing of their petition in this case, filed joint Federal income tax returns for the calendar years 1973 and 1974 with the Internal Revenue Service Center in Chamblee, Ga.

Mr. Gilman (hereinafter referred to as petitioner) in 1973 and 1974 was a practicing attorney in the Florida communities of Winter Park and Orlando. Petitioner in the years here in issue was also engaged in the real estate business. His real estate activities included the ownership of a shopping mall in Winter Park, Fla., and being an officer and director of Roberts & Gilman, ² a real estate sales company in Florida.

In 1964, petitioner acquired the Park Mall Building, a small, one-story office building with some retail shops. Pursuant to petitioner's standard procedures, the leases of the Park Mall tenants required them to provide and maintain their own heating and air conditioning systems. Traditionally, when a tenant would vacate the building, the new tenant would purchase the systems from the vacating tenant. Only once did a tenant remove the systems when he vacated the premises.

The areas which were cooled and heated by the units were relatively small, 400- 600-square-foot rooms. Window air conditioners could have been used, but they would have been unattractive. For this reason, small compressors and air handling units were placed in the ceiling of the building.

In 1973, petitioner decided to add a second level to the building. Construction of the addition was begun in February of 1973 and completed in September 1973. In order to move the existing air conditioners to the roof of the second floor, it would have been necessary to have large air ducts passing through the offices of the second floor. For this reason, petitioner decided to have the old air conditioning units removed and provide new ones at his expense to the tenants.³

Petitioner expended $7,094.14 to remove the old air conditioners which were scrapped and replace them with new ones. Petitioner spent $2,253.40 for the demolition of the first-level roof before addition of the second level. Demolition of the roof was necessary in order to pour the slab for the second floor.

Between the years 1971 and 1975, petitioner's responsibility in his law firm was to obtain business for the firm. Petitioner traveled in connection with his law practice and also in the operation of his real estate business.

Petitioner owned 50 percent of a corporation, W. S. G., Inc., which rented out a twin-engine Aero Commander airplane. Petitioner and his coowner in the corporation were given first call in renting the plane. In the years at issue, petitioner rented the airplane from his corporation for business-related travel on numerous occasions. On these trips, petitioner often took business associates.

Petitioner also maintained a 55-foot yacht on which he entertained for business and social purposes. In connection with the use of his yacht, petitioner incurred bills in 1973 at the Ocean Reef Club, Walker's Cay Club, Sombrero Club, and Cannonport Club. In 1974, petitioner incurred bills at the Sombrero Club and Cannonport Club.

Petitioner also purchased liquor for use on his airplane and his yacht at Deluxe liquors in both 1973 and 1974.

In both 1973 and 1974, petitioner was a dues paying member of the Orlando Country Club and the Orlando University Club. Petitioner and his wife both used the facilities of the Orlando Country Club during the years 1973 and 1974.

During the years 1973 and 1974, petitioner paid by checks (1) a total of $479.95 and $582.67, respectively, to the University Club; (2) a total of $1,010.11 and $997.30, respectively, to the Orlando Country Club; (3) a total of $774 and $1,325, respectively, to Deluxe Liquors; (4) a total of $925 and $1,500.75, respectively, to American Express Co. for charges made on his American Express card; (5) a total of $484 and $1,350, respectively, to BankAmericard for charges made to his BankAmericard account; (6) a total of $181 and $1,688, respectively, to the Cannonport Club; and (7) a total of $842 and $110, respectively, to the Sombrero Key Club. In 1973, petitioner paid by checks a total of $1,234 and $1,173.98 to the Ocean Reef Club and Walker's Cay Club, respectively. Also, petitioner in 1974 paid a total of $699 by three checks to a pilot of the plane owned by the corporation in which he owned a 50-percent interest. In 1974, petitioner paid $21 by check to National Car Rental. Petitioner gave a check for $150 in 1974 to John Ivey, who was the foreman of the construction company that had done the work for the addition of the second floor to petitioner's Park Mall Building. Petitioner made this gift because of the good work the foreman had done. Petitioner paid $10 by check in 1974 to the Winter Park Chamber of Commerce. He paid $70 by check in 1973 to the Olympic dinner but did not attend. He paid $110 by check in 1974 to Brandel Stevens for rental of an airplane and $303 to Hook Travel. Petitioner in 1974 paid $10.40 by check to Lucy Little for flowers for a deceased client and wrote a $400 check for cash with the notation: “Dallas Trip.” With the checks for payment of his American Express and BankAmericard bills petitioner had some receipts showing the establishments at which the items were purchased but these receipts contained no additional information. Among the American Express receipts is a payment made on November 6, 1973, to the St. Regis Sheraton Hotel in New York City of $39.24 and a payment made on November 6, 1973, to the Laurent Restaurant in New York City of $127.27. In August 1973, petitioner paid $95.28 to the Key Biscayne Yacht Club for dockage fees and food. Petitioner has some of the statements from the University Club and Orlando Country Club which he paid by check, but these statements show only the nature of the charge such as “restaurant” and “bar” and no other information.

Petitioner did not keep a contemporaneous diary, account book, or the like for his 1973 and 1974 travel or entertainment expenses. Petitioner had his returns for both 1973 and 1974 prepared by certified public accountants. He turned his records over to the accountants for use in preparation of his returns. Before signing the return for each of the years 1973 and 1974, petitioner read it over.

At the time of the trial, petitioner did not have all the records he had furnished his accountants. He did not know where the balance of his records were or exactly how they might have been lost. Petitioner moved from one office to another after 1974. Also, his records were extensively examined by the Federal Bureau of Investigation (FBI) in connection with an investigation unrelated to him.

Petitioner, on his 1973 Federal income tax return, claimed a business expense deduction of $6,834 as “unreimbursed entertainment,” and on his 1974 return, under this same designation, claimed a business expense deduction of $8,376.

Respondent, in his notice of deficiency, disallowed all of petitioner's entertainment expenses with the following explanation:

The deductions of $11,671.00 and $15,981.00 claimed for employee business expenses in 1973 and 1974, respectively, are not allowable in full, because it has not been established that any amount in excess of $5,523.00 and $7,953.00, respectively, for the years 1973 and 1974 represents an ordinary and necessary business expense or was substantiated by adequate records or by sufficient evidence corroborating your own statements as to (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility, or the date and description of the gift, (C) the business purpose of the...