Buddy Schoellkopf Prods., Inc. v. Comm'r of Internal Revenue

• Decision Date: 31 December 1975
• Docket Number: Docket No. 8117-73.
• Citation: 65 T.C. 640
• Parties: BUDDY SCHOELLKOPF PRODUCTS, INC., PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

65 T.C. 640

BUDDY SCHOELLKOPF PRODUCTS, INC., PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 8117-73.

United States Tax Court

Filed December 31, 1975.

Petitioner is a Texas corporation engaged in the development, manufacture, and sale of various products for the outdoorsman. During the 1968 fiscal year, petitioner paid legal fees in connection with the acquisition of assets from Brunswick Corp. These assets included inventory, equipment, and trade names. Held, the portion of legal fees incurred by petitioner which is attributable to trade names must be capitalized. The remainder of these fees are currently deductible.

In order to finance the acquisition from Brunswick, petitioner secured a loan from Prudential. Petitioner had a loan with Prudential outstanding (first loan), and the new loan agreement provided that the first loan would be repaid from the proceeds of this new loan. Held, since the two loan transactions were sufficiently distinct to consider the cancellation of the first note a repayment, petitioner is entitled to deduct loan expenses incurred in connection with the first Prudential loan.

In 1964, petitioner purchased a used airplane. In depreciating the airplane, petitioner used the double declining balance method of depreciation. Both parties agree the rate used was improper. Respondent computed the depreciation for the years in issue using straight line depreciation, while petitioner seeks to use the 150-percent declining balance method. Held, petitioner is entitled to compute depreciation under the 150-percent declining balance method. Silver Queen Motel, 55 T.C. 1101 (1971), acq. 1972-2 C.B. 3, followed.

Two trusts, one with petitioner's president as trustee, and the other with petitioner's vice-president as trustee, leased land to a foundation for a 15-year term. The foundation in turn leased the land to petitioner for the same period. Although in form the lease contained a fixed term, in substance the lease term was of indefinite duration. Held, petitioner must amortize the cost of leasehold improvements over the estimated useful life of the improvements, rather than the shorter formal lease period.

Held, travel expenses claimed by petitioner are disallowed for lack of substantiation. Held: Dues paid to hunting and fishing club are not deductible as an ordinary and necessary business expense. Petitioner was unable to show the facility was used primarily for business purposes. Held, further, hunting expedition to Alaska by petitioner's president, the majority shareholder, and his son, is not deductible as an ordinary and necessary business expense since the trip was primarily personal; the incidental business benefit does not make the expenses for the trip deductible. William E. Collins, for the petitioner.

WILBUR, Judge:

Respondent has determined deficiencies in petitioner's Federal income taxes as follows:

+----------------------------------+
                ¦Year ended Nov. 30—  ¦Amount    ¦
                +-----------------------+----------¦
                ¦                       ¦          ¦
                +-----------------------+----------¦
                ¦1968                   ¦$22,171.51¦
                +-----------------------+----------¦
                ¦1969                   ¦16,435.76 ¦
                +----------------------------------+
                

The issues remaining for decision are:

(1) Whether petitioner was entitled to deduct travel expenses of $4,000 for the taxable year ending November 30, 1968.

(2) Whether legal fees incurred by petitioner in the acquisition of certain assets from Brunswick Corp. should be deducted in the year of acquisition or capitalized.

(3) Whether petitioner was entitled to deduct expenses incurred in obtaining a $900,000 loan which was later satisfied from the proceeds of a $1,700,000 loan made by the same lender or whether these expenses must be amortized over the original 15-year period of the first loan.

(4) Whether petitioner was entitled to compute depreciation on a used airplane under the 150-percent declining balance method for the years in issue.

(5) Whether petitioner was entitled to amortize certain leasehold improvements over the remaining life of the leases rather than on the basis of the estimated useful life of the improvements.

(6) Whether dues paid by petitioner to a hunting and fishing club were deductible as ordinary and necessary business expenses.

(7) Whether petitioner was entitled to deduct as an ordinary and necessary business expense the cost of an expedition to Alaska by petitioner's president (and majority shareholder) and his son.

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

Buddy Schoellkopf Products, Inc. (hereafter referred to as petitioner), is a corporation with its principal offices in Dallas, Tex. Petitioner maintains its books and records and files its income tax returns on the basis of a fiscal year ending November 30. The returns for the fiscal years ended November 30, 1968, and November 30, 1969, were filed with the Internal Revenue Service Center at Austin, Tex.

Petitioner engages in the development, manufacture, and sale of various products for the outdoorsman, including gun cases, hunting clothes, sleeping bags, and flotation equipment. Factories for the manufacture of these items are maintained by petitioner in Mineola, Tex., and Dallas, Tex.

During the taxable years ended November 30, 1968, and November 30, 1969, Hugo N. Schoellkopf, Jr. (Buddy), was president of petitioner and the owner of 67 1/2 percent of the outstanding capital stock of petitioner; Delbert Chandler was a vice president of petitioner and the owner of 22 1/2 percent of the capital stock of petitioner, and Hugo W. Schoellkopf III (Hugo) was an employee but not an officer of petitioner.

Issue 1. Travel Expenses

FINDINGS OF FACT

During the period December 11, 1967, through June 17, 1968, petitioner paid Buddy the sum of $4,000 which was charged on the records of petitioner as travel expenses. Buddy testified that these expenditures were properly incurred but petitioner has no records to substantiate the expenditure of these funds. No amount has been allowed by respondent as travel expenses for Buddy during this period. However, during the period February 27, 1967, through August 14, 1967, the amount of $3,050 was paid to Buddy for travel expenses and this amount was allowed by respondent. Similarly, the sum of $8,000 paid to Buddy was claimed by petitioner and allowed by respondent for the period of October 17, 1968, through August 17, 1969.

OPINION

The first issue is whether the Commissioner erred in disallowing $4,000 of travel expenses claimed by petitioner. In order to successfully deduct its travel expenses under Code section 162,¹ petitioner must substantiate these expenditures pursuant to the rules set forth in section 274(d). Section 274(d) provides that no deduction shall be taken for travel, entertainment, or gift expenses unless by either ‘adequate records' or ‘sufficient evidence corroborating his own statement’ the taxpayer substantiates the essential elements relating to the nature and business character of the expenditure.² Among the specific showings required by the statute are the amount of the expense, the time and place of the travel, and the business purpose of the expenditure.

The substantiation requirements are clarified and explained in detail by the regulations.³ The Treasury regulations under section 274 state that to meet the ‘adequate records' requirements the taxpayer must maintain ‘an account book, diary, statement of expense or similar record * * * and documentary evidence * * * which, in combination, are sufficient to establish each element of an expenditure’ specified in the statute and regulations.⁴

Petitioner concedes that the adequate records requirement is not met here. Petitioner argues, however, that it has met the alternative standard of substantiation; viz., sufficient evidence corroborating petitioner's own statement. In addition to the testimony of petitioner's president, Hugo N. Schoellkopf, Jr., petitioner cites similar travel expenses which were substantiated and allowed by the respondent for periods both before and after the time frame in question. Unfortunately for petitioner, the existence of these allowed expenditures, without more, is not enough to satisfy the other ‘sufficient evidence’ requirement. In discussing other ‘sufficient evidence’ the regulations provide that if the taxpayer is unable to meet the ‘adequate records' requirement, then he must establish each element⁵ of the expenditure:

(i) By his own statement, whether written or oral, containing specific information in detail as to such element; and

(ii) By other corroborative evidence sufficient to establish such element. ⁶

The regulations go on to state that the taxpayer lacking adequate records must corroborate his own testimony with respect to the amount, time, and place of an expenditure by direct evidence obtained from one other than the taxpayer. The business purpose of an expenditure may be established by circumstantial evidence.

The regulations thus envision specific evidence about the activities that gave rise to an expense.⁷ The record here is devoid of such specifics. In fact, no evidence of any particular individual travel expense appears in the record.

Not only did petitioner's corroborating evidence fail to shed any light on specific expenses incurred within the contested period, even the testimony of Buddy was only of a general nature. Under these circumstances, we must disallow any deductions for travel expenses for the period December 11, 1967, through June 17, 1968.

The existence of allowable travel expenses for the periods prior to and subsequent to the period under examination here, may admittedly suggest that some legitimate travel expenses were incurred during this period. Nevertheless, we must disallow petitioner's claimed travel expenses in full. Section 274 was specifically designed to overturn, in this area, the rule in Cohan V. Commissioner, 39 F.2d 540 (2d Cir. ...