Bell v. Comm'r of Internal Revenue
| Decision Date | 20 September 1949 |
| Docket Number | Docket No. 17093. |
| Citation | 13 T.C. 344 |
| Parties | IRENE L. BELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Under the facts, various deductions taken by petitioner from gross income in computing her business loss for 1945 approved.
2. Petitioner filed her return under section 400, I.R.C. She used an automobile in soliciting insurance business in her home city and its suburbs and in driving from her home to the market in the operation of her cafeteria. Held, the expense of the automobile operation is a deductible item in computing petitioner's adjusted gross income under the provisions of section 22 (n) (1), I.R.C. Malcolm A. Brenner, Jr., Esq., for the petitioner.
N. A. Townsend, Esq., for the respondent.
The Commissioner determined a deficiency in petitioner's income tax for the year 1945 in the amount of $130. This deficiency resulted from the disallowance by the Commissioner of a business loss of $352.72 and of a deduction of $270 for ‘Auto maintenance and supplies.‘ The correctness of these two disallowances is the question involved in this case.
Petitioner during the taxable year was a resident of Atlanta, Georgia, and she filed her income tax return with the collector of internal revenue for the district of Georgia.
From January 1 to September 1, 1945, petitioner sold burial insurance policies issued by the Family Fund Burial Insurance Co. of Atlanta and collected premiums from the customers. She devoted all of her working hours for six days a week to this work and was paid a commission on her sales and collections. For the period January 1 to September 1, 1945, she received commissions in the amount of $1,187.67, which were reported in her income tax return for the year 1945.
She was unrestricted as to her territory, paid all of her own expenses, and was not under the direction or control of the insurance company as to hours of work, methods of transportation, or working operations. She called at the insurance office only for the purpose of reporting her sales and collections and getting her commissions. She used her automobile constantly in her selling and collection work, as this method greatly increased her efficiency. She maintained no record of her automobile expense, but its use was confined to her business operations. Her computation of automobile expense was based upon an estimate of 5,400 miles traveled during the year in the operation of her insurance business and later in the operation of her cafeteria. She estimated that her automobile used in city traffic cost her 5 cents a mile.
Petitioner filed her return and computed her income tax under the provisions of section 400 of the Internal Revenue Code and deducted $270 from the income which she received as commissions in computing her adjusted gross income. This deduction was labeled ‘Auto maintenance and supplies.‘
On November 15, 1945, petitioner purchased a cafeteria, with its furniture and equipment and a stock of supplies, from one B, C. Fox for a consideration of $1,700 cash, promissory notes to Fox of $1,742.95, and the assumption of an indebtedness of $4,940.61. She operated this cafeteria through December 31, 1945. She employed an auditor to keep her accounts, which were kept on the cash receipts basis. She kept a file of her invoices and a daily record of her business transactions, which she delivered to her auditor once a week, to be entered on the cash journal and general ledger. These original documents were in the possession of the auditor in the fall of 1946, when he died. When petitioner was informed that her income tax return was being questions, she endeavored to get the documents delivered by her to the bookkeeper from his widow, but discovered that they were either lost or destroyed.
The cash journal contained the following entries reflecting the opening of the business:
+-----------------------------------------+
¦ ¦Debit ¦Credit ¦
+---------------------+---------+---------¦
¦B. C. Fox—cash ¦ ¦$1,700.00¦
+---------------------+---------+---------¦
¦Notes—Fox ¦ ¦1,742.95 ¦
+---------------------+---------+---------¦
¦Loftus & Clein ¦ ¦4,940.61 ¦
+---------------------+---------+---------¦
¦Furniture & Equipment¦$7,887.56¦ ¦
+---------------------+---------+---------¦
¦Inventory ¦400.00 ¦ ¦
+---------------------+---------+---------¦
¦Insurance ¦96.00 ¦ ¦
+---------------------+---------+---------¦
¦ ¦$8,383.56¦$8,383.56¦
+-----------------------------------------+
Petitioner in her income tax return for 1945 reported a loss for the six weeks operation in 1945 of $352.72. This loss was based upon the following profit and loss statement prepared from the books of account of the Bell Cafeteria for the period November 15 to December 31, 1945:
+---------------------------------------------+
¦INCOME: ¦ ¦ ¦
+-------------------------+---------+---------¦
¦Sales ¦ ¦$3,828.36¦
+-------------------------+---------+---------¦
¦Cost of goods sold ¦ ¦ ¦
+-------------------------+---------+---------¦
¦Food ¦$2,132.82¦ ¦
+-------------------------+---------+---------¦
¦Labor ¦1,291.85 ¦3,424.67 ¦
+-------------------------+---------+---------¦
¦Gross profit on sales ¦ ¦403.69 ¦
+-------------------------+---------+---------¦
¦EXPENSES: ¦ ¦ ¦
+-------------------------+---------+---------¦
¦Depreciation ¦$98.59 ¦ ¦
+-------------------------+---------+---------¦
¦Electricity—Gas—Water ¦20.09 ¦ ¦
+-------------------------+---------+---------¦
¦Insurance ¦96.00 ¦ ¦
+-------------------------+---------+---------¦
¦Interest ¦1.00 ¦ ¦
+-------------------------+---------+---------¦
¦Linen—laundry ¦79.17 ¦ ¦
+-------------------------+---------+---------¦
¦Office supplies ¦11.20 ¦ ¦
+-------------------------+---------+---------¦
¦Repairs ¦59.35 ¦ ¦
+-------------------------+---------+---------¦
¦Rent ¦300.00 ¦ ¦
+-------------------------+---------+---------¦
¦Store and kitchen expense¦76.01 ¦ ¦
+-------------------------+---------+---------¦
¦Taxes and licenses ¦15.00 ¦ ¦
+-------------------------+---------+---------¦
¦Total expenses ¦_ ¦$756.41 ¦
+-------------------------+---------+---------¦
¦Deficit for the period ¦ ¦352.72 ¦
+---------------------------------------------+
The depreciation item was computed at the rate of 10 per cent per year for 1 1/2 months. The insurance policy expired August 7, 1946.
Petitioner's balance sheet as of December 31, 1945, was as follows:
During 1945 it was difficult, if not impossible, because of war conditions to get delivery of meat and other supplies for the restaurant without using petitioner's own automobile.
In the notice of deficiency the respondent disallowed both the operating loss of $352.72 and the $270 deduction for ‘auto maintenance and supplies‘ which the petitioner claimed on her 1945 income tax return.
Respondent contends first that the petitioner has failed to establish her business loss for 1945 because she has produced no original documents showing receipts and disbursements by which the business loss may be established and also because she had failed to furnish an inventory of her restaurant supplies at the beginning and the end of the taxable year.
Petitioner herein was unable to produce at the trial the papers showing the separate items of receipts and disbursements which made up her six weeks operation of the cafeteria. She was also unable to introduce the statement of the individual items which made up her inventory. However, from the testimony, her auditor was a man of considerable experience, and the cash journal, together with the ledger sheets which he kept from the original evidence of the business transactions, were in evidence. From the initial entries in the cash journal pertaining to inventories of furniture and equipment and merchandise on hand, it...
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