Bennett's Travel Bureau, Inc. v. Comm'r of Internal Revenue

• Decision Date: 25 November 1957
• Docket Number: Docket No. 54126.
• Citation: 29 T.C. 350
• Parties: BENNETT'S TRAVEL BUREAU, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

29 T.C. 350

BENNETT'S TRAVEL BUREAU, INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 54126.

Tax Court of the United States.

Filed November 25, 1957.

George Clott, Esq., and Theodore Witkin, Esq., for the petitioner.

William F. Chapman, Esq., and William G. O'Neil, Esq., for the respondent.

1. Petitioner, an American travel bureau, was controlled by Bennett's Reisebureau A/S, Oslo, Norway, hereinafter called Bennett's Oslo. Petitioner's operations included arranging trips for tourists to European countries. Petitioner's patrons normally paid petitioner in advance and were issued certificates covering hotel and transportation accommodations which were honored by its business associates, including Bennett's Oslo, through which the arrangements were contracted. When the charges had been paid by Bennett's Oslo or other such associates, the amounts were billed by them to petitioner. Remittances by petitioner were customarily made in Norwegian kroner. During 1949, the official rate of exchange of Norwegian kroner was changed from 4.97 kroner to 7.15 kroner to the American dollar. In 1949, after the devaluation, petitioner bought kroner in the open market and discharged on existing indebtedness to Bennett's Oslo. Since the amount of American dollars necessary to acquire the kroner was less than the original debt computed in dollars, petitioner received the benefit of the difference in the amount of $25,077.61. Held, upon discharge of said indebtedness in kroner, petitioner realized ordinary income in the amount of $25,077.61.

2. At petitioner's request, Krogh, manager of Bennett's Oslo, customarily entertained patrons of petitioner at his home in Norway. Likewise, when special problems arose as to hotel accommodations, Krogh was requested to resolve the difficulties. On occasion, it was necessary for him to incur travel expense. The course of dealings between petitioner and Krogh established an implied agreement to reimburse him for his expenses of entertainment and travel, and to compensate him for services rendered on petitioner's behalf. At the end of each year, a lump sum was voted for such payment. Held, that the amounts accrued in 1949 for the foregoing purposes ($2,575.61 and $207.34) were deductible by petitioner as ordinary and necessary business expenses.

FISHER, Judge:

This proceeding involves a deficiency in income tax determined against petitioner in the amount of $13,516.47 for the taxable year ended December 31, 1949.

The issues presented for our consideration are (1) whether petitioner realized ordinary gain in the amount of $25,077.61 in 1949, upon the discharge of an indebtedness to Bennett's Oslo by the payment of the obligation in kroner after the devaluation of the krone; and (2) whether the amounts of $2,575.61 and $207.34 representing reimbursement of travel and entertainment expense and compensation to Krogh, manager of Bennett's Oslo, in relation to services rendered by Krogh in petitioner's interest, are properly deductible by petitioner as ordinary and necessary business expenses under section 23(a), I.R.C. 1939.

FINDINGS OF FACT.

Some of the facts are stipulated, and are included herein by this reference.

Bennett's Travel Bureau, Inc., hereinafter referred to as petitioner, is a Massachusetts corporation, with its principal office in New York, New York, engaged in the business of making travel arrangements for individuals desiring to travel in Europe. The petitioner filed its corporate tax return for its calendar year ended December 31, 1949, with the then collector of internal revenue for the third district of New York. It maintained its books and records and reported its income on an accrual method of accounting. During the period in question, as disclosed by petitioner's corporate income tax return for 1949, 50 per cent or more of its stock was owned by Bennett's Reisebureau A/S, Oslo, Norway, hereinafter called Bennett's Oslo.

Petitioner's business was to make transportation and hotel arrangements for clients or ‘patrons' desiring to travel in Europe, particularly in the Scandinavian countries. A client would request travel and hotel accommodations and petitioner billed the client on the estimated costs of the trip, plus a service charge of 20 to 25 per cent. The charge was customarily paid in advance by the client, although at times clients were permitted to make an initial payment on account and pay the balance periodically. Petitioner's cash account was debited and the ‘Patron's Account’ was credited. Petitioner issued certificates to its patrons covering hotel and transportation charges which were honored by designated business associates of petitioner including Bennett's Oslo, through which the accommodations had been contracted. Such associates, including Bennett's Oslo, then billed or transmitted ‘posting orders' to petitioner covering their expenditures in honoring such certificates. After translating these bills into American dollars at the prevailing rate of exchange, the patron's account would be debited for such expenditures and Bennett's Oslo (or such other company which contracted for and paid the charges) would be credited. Petitioner and Bennett's Oslo maintained a ‘running account’ reflecting the amounts payable to the latter during the year 1949. There is no evidence of any agreement, express or implied, that Bennett's Oslo was to be reimbursed in American dollar value as of any designated date.

In September 1949, the English pound sterling was devalued. At the same time, the official rate of exchange of Norwegian kroner was changed from 4.97 kroner to the American dollar to 7.15 kroner to the American dollar.

The indebtedness to Bennett's Oslo incurred in the early part of 1949, translated into American dollar value, exceeded the amount of dollars expended later that year, after the devaluation of the krone, to pay the indebtedness in kroner, by $25,077.61.

In December 1949, the amount of said difference or surplus was debited to an account in petitioner's general ledger entitled ‘Bennett's-Oslo’ in the amount of $25,077.61. Petitioner's general journal reflects this debit, together with balancing credit entries as follows: ‘Oslo Spec.-11,269’ and ‘Currency Fluct. a/c-13,808.61.’ The credit entries were posted to two new accounts set up on petitioner's general ledger as of December 31, 1949. One such account, account No. 4, was entitled ‘Oslo Special Account,‘ with a credit payable to Bennett's Oslo, in the amount of $11,269, and a further credit in 1950 in the sum of $26.10. Said account was closed out between February and December 1950 by the purchase for Bennett's Oslo, of an adding machine, a bookkeeping machine, a Cadillac car, a bonus to Ivar G. Krogh, a cash remittance, a transfer of funds ‘To Oslo Regular, a/c,‘ and other miscellaneous items.

The other new account was entitled ‘Currency Fluctuation Account,‘ with a credit in the amount of $13,808.61. Said account is still open on the books of petitioner. Petitioner considered that this item was part of its capital, and that it was at liberty to use that amount for whatever purpose it wished.

On page 4, item 13, under the designation ‘Liabilities' (surplus reserves) in its corporation income tax return for the calendar year 1949, petitioner reported ‘For exchange fluctuation’ the amount of $13,808.61.

The circumstances giving rise to the credits to the Oslo Special and Currency Fluctuation accounts were as follows: After the devaluation of the krone, it was apparent that the result would be a benefit of $25,077.61. Petitioner stated on brief that it was a wholly owned subsidiary of Bennett's Oslo. Bennett's Oslo decided that the money would be kept in this country. Bennett's Oslo also decided that the benefit was to be shared by both petitioner and itself, and that the benefit allocated to itself would be the credit subsequently credited to ‘Oslo Special’ account, while the benefit to petitioner would be the amount subsequently credited to ‘Currency Fluctuation’ account which they regarded as an addition to petitioner's capital. The administrators of Bennett's Oslo were also in part prompted by the belief that if the benefit were so treated, no part of it would be subject to tax either under the Norwegian corporation law or the United States income tax laws. The decision as to the application of the $25,077.61 was entirely that of Bennett's Oslo, which was in a position to dictate such disposition because of its admitted control over petitioner. There is no evidence of any preexisting agreement, express or implied, between Bennett's Oslo and petitioner, controlling the disposition or allocation as between the two companies of gains and benefits (or losses) accruing to either as a result of currency fluctuation or devaluation.

During the year 1949, there was no written agreement entered into between petitioner and Bennett's Oslo relative to the management of petitioner's affairs or the disposition of accounts payable to Bennett's Oslo.

During the year in question, Ivar Krogh was manager of Bennett's Oslo. There was no contract of employment between petitioner and Krogh. As an added attraction to the tours arranged by petitioner, it was petitioner's practice to have Krogh open his private home to entire groups of its American patrons for a cocktail party so that they could be entertained and observe the mode of living in a Norwegian household. Also, on various occasions, when petitioner was unable to secure hotel accommodations for one of its groups on tour it would request Krogh, who is well known in Scandinavia, to travel outside of his country in order to obtain such accommodations.

Petitioner did not receive any written itemization of the expenses incurred by Krogh in performing said functions. During the year, however, when Aagaard (petitioner's vice president and manager) visited Norway, Krogh would inform him orally as to the estimated amounts...