26 T.C. 666 (1956), 56115, Moorman v. C. I. R.
| Citation | 26 T.C. 666 |
| Opinion Judge | ATKINS, Judge: |
| Party Name | L. L. MOORMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. L. L. MOORMAN AND ESTATE OF LILLIAN W. MOORMAN, DECEASED L. L. MOORMAN, EXECUTOR, PETITIONERS, |
| Attorney | Richard E. Thigpen, Esq., and Fred D. Hamrick, Jr., Esq., for the petitioners. W. Preston White, Jr., Esq., for the respondent. |
| Case Date | June 25, 1956 |
| Court | U.S. Tax Court |
Page 666
Page 667
1. GROSS INCOME- COMMISSIONS.- Gross income includes entire amounts received by the petitioner as commissions on sales of securities, rather than only the difference between such amounts and the amounts of the expense accounts submitted by the petitioner to his employer.
2. DEDUCTIONS- ADJUSTED GROSS INCOME.- Expenses of travel, meals, and lodging while away from home, held deductible in determining adjusted gross income under section 22(n)(2) of the Internal Revenue Code of 1939. The amounts of such deductible expenses found. Other expenses held not deductible under section 22(n)(3) in computing adjusted gross income, since a so-called reimbursement arrangement between the petitioner and his employer was not such within the meaning of section 22(n)(3).
3. DEDUCTIONS- NET INCOME.- Such other expenses, held deductible in computing net income in lieu of standard deduction. The amounts of such deductible expenses found.
The respondent determined deficiencies in income tax and 5 per cent additions thereto for the years and in the amounts as follows:
Additions
5 per cent
Year Deficiency (Sec. 293 (a))
1949 $577.81 $28.89
1950 1,307.26 65.36
1951 1,498.58 74.93
The principal controversy between the parties is whether the respondent erred in treating as gross income the full amounts received as commissions on sales of securities in the petitioner's territory. The petitioner treated in his returns, as gross income, the difference between his commissions and the amounts that he reported to his employer as expenses. Other issues concern the deductions allowable in computing adjusted gross income and net income, the allowance of the standard deduction, and the imposition of the addition for negligence. FINDINGS OF FACT. L. L. Moorman, herein called the petitioner, is a resident of North Carolina. [1] His home in the taxable years was at Rutherfordton. income tax return for the year 1949 and the joint returns of himself and his wife, Lillian W. Moorman, for the years 1950 and 1951 were filed with the collector of internal revenue for the district of North Carolina. The returns were made on the cash receipts and disbursements method of accounting. Since 1918 the petitioner has been engaged in some phase of the investment business. In the taxable year, and in 1948, he was employed by the National Securities & Research Corporation, herein sometimes called the corporation or the employer. The corporation is an underwriter and manager of several mutual investment funds. Through dealers in a number of cities it sells participations in the several funds. The petitioner's designation was that of resident vice president of the corporation. He had the supervision of sales and distribution of the mutual investment funds in what was known as the Southern Territory which consisted of the States of Florida, Georgia, South Carolina, North Carolina, Tennessee, Texas, Louisiana, Oklahoma, Kentucky, Mississippi, and Alabama. His duties, generally, consisted of traveling through his territory, interesting dealers in securities in the offerings of the corporation, and getting the dealers to sell the investment funds to the public. Under the terms of the petitioner's Page 668 employment, no longer than 3 months was to elapse between visits to any producing dealer or important territory. The terms of the petitioner's employment were contained in a letter addressed to him dated August 1, 1947, and modifications thereof in a letter dated January 19, 1948, on both of which the petitioner noted his acceptance. The material parts of the letter of August 1, 1947 are as follows: The following terms and conditions will constitute a working agreement under which you are to represent us in the ‘ Southern Territory.’ * * * 1) It is understood that you are to devote your entire time to the wholesaling of various security offerings underwritten or sponsored by our Company. * * * 3)(a) As compensation for your efforts, you are to be paid on all sales of National Securities Series and First Mutual Trust Fund in your territory each month a commission of 40% of the first $5,000.00 of ‘ gross sales load’ received by the Company on such sales, and 30% of all subsequent ‘ gross sales load’ to the Company on such sales during the month. ‘ Gross sales load’ represents amounts retained by the Company after payment out of total load of dealer commissions at rates now in effect or hereafter allowed by the Company under its standard Selling Group Agreement and after any extra commissions, concessions, or distributions made to dealers to dealer salesmen in the form of contest prizes or incentive arrangements that may be determined and put into effect by the Company. 4)(a) You agree to limit your expenses of operation to the minimum necessary for the proper conduct of your business. The Company will reimburse you for all of your expenses which we approve, including compensation of any people employed by you, traveling expenses, telegraph and telephone expenses (except as noted below), and entertainment expenses, but we will deduct the same from the commissions payable to you under this contract. The cost of all wires between dealers and our New York office necessary to the placing of orders, confirmation of sales and requests for quotations are to be paid by the Company without deduction from the commission. The Company also agrees to pay, without deduction from commissions, expenses in connection with the registration of our issues in your territory. the registration of our issues in your territory. (b) The Company agrees to meet one-half of the cost of the price card list and any advertising deemed necessary by you and approved by us. The ‘ cost of the price card list’ is limited to the purchase cost of the cards and stamps and any mailing depots arranged for in any part of your territory. The cost of preparing any cards in the Home Office will be borne by the Company. (c) A record of your monthly expenses is to be in our office no later than the fourth business day of the following month. Such expenses should be broken down roughly under the items of transportation, meals, etc., hotels, and sales promotion. If this record is received by us and the expenses approved before the settlement of your commission account for the previous month, we will exempt the total amount of your expenses from your monthly earnings in calculating your withholding tax on earnings. If we do not get this record from you, it will be necessary for us to take out the withholding tax on your entire gross earnings. (d) Settlement of your commission account will be made each month within five (5) business days after the close of the previous month and the check for your earnings less deductions will be mailed to you. An advance of $500.00 Page 669 against this monthly settlement will be mailed to you on the 15th of each month. If your gross commissions during the month are not sufficient to cover this advance and other deductions, the deficiency will become a charge against any future net earnings. The material parts of the letter of modification dated January 19, 1948, are:
1. Section 4(d) is amended to provide for an advance of $500 against commissions earned by you to be made on the first and fifteenth of each month effective February 1st. It is understood that between now and February 1st you may request an advance of $250 to be charged against the February 1st advance and in the event of such request, the amount to be advanced on February 1st will be reduced to $250. Commissions earned under your contract will be credited against the aforementioned advances and if your gross commissions during the month are not sufficient to cover your advances and other deductions, the deficiency will become a charge against any future net earnings. 2. It is understood that should your commissions earned in any calendar month exceed the amount of advances and deductions provided for under your agreement, there will be paid to you and charged to your account, 25% of said excess and the remaining 75% of said excess will be credited to your account against advances made.
It is further understood that if your commission earnings credited under your agreement exceed charges made for advances and deductions on a cumulative basis, the excess will then be applied 50% to be paid to you and 50% to be retained by the company as credit in your account until such amount equals $2,000, the intent being that there will always be a $2,000 credit to your account to take care of periods during which your earnings will not equal the deductions and advances made to you. The modifications also listed 6 areas in the petitioner's territory that he was to visit at least 3 times a year. In accordance with his employment contract, the petitioner traveled over the territory assigned to him, sometimes by airplane, but mostly by automobile. Covering the territory was an almost continuous operation, but he spent some time at his home in Rutherfordton. He does not know how much time he spent at home or away from home in the taxable years. He kept daily records of his expenses and the mileage of his automobile used on business trips, from which he compiled a monthly summary that he sent to his employer's New York office. He used the figure of 10 cents per mile as representing the cost of operating his automobile on his business trips. The petitioner's wife accompanied him...
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