Henry v. Comm'r of Internal Revenue

• Decision Date: 25 August 1961
• Docket Number: Docket No. 71796.
• Citation: 36 T.C. 879
• Parties: ROBERT LEE HENRY AND BETTY JANE HENRY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

36 T.C. 879

ROBERT LEE HENRY AND BETTY JANE HENRY, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 71796.

Tax Court of the United States.

Filed August 25, 1961.

Robert Lee Henry, Esq., pro se.

Norman L. Rapkin, Esq., for the respondent.

Petitioner, a tax payer and accountant, purchased a yacht on which he flew a red, white, and blue pennant with the numerals ‘1040’ on it, purportedly to provoke inquiries and thus promote petitioner's business by giving him contracts with people in yachting circles who might become clients in the future. Held, the cost of insurance and maintenance of the yacht, and depreciation thereon, are not deductible as ordinary and necessary expenses paid or incurred in carrying on petitioner's trade or business for the year 1954.

DRENNEN, Judge:

In this proceeding respondent determined a deficiency in income tax due from petitioners for the taxable year 1954 in the amount of $4,375.88.

The only issue for decision is whether petitioners are entitled to business deductions for the taxable year 1954, representing the expenses of maintenance and depreciation of a yacht during that year.

FINDINGS OF FACT.

Petitioners were husband and wife, residing in New York, New York, during the year 1954. They filed a joint Federal income tax return for the taxable year 1954 with the district director of internal revenue, Upper Manhattan District of New York.

Robert Lee Henry, hereafter referred to as petitioner, is and was in 1954 a certified public accountant, licensed in the State of New York, and a member of the New York Bar. He is now a member of the Florida Bar. He belongs to the American Institute of Certified Public Accountants, the Bar Association of Nassau County, New York, and the Bar Association of Broward County, Florida. He is admitted to practice before this Court as well as before the United States District Court for the Southern District of New York, the Eastern District of New York, and the Southern District of Florida. He has held a United States Treasury card for over 30 years. He has never been involved in any professional disciplinary action.

As a CPA and lawyer, petitioner developed into a tax specialist, but his law practice is not devoted solely to that specialty. He has recently undertaken admiralty and probate work, and before that he developed a real estate practice.

In 1954, petitioner was employed by Powers Chemco, Inc., in Glen Cove, New York, at an annual salary of $10,400. In addition, he was a partner in a law partnership with offices in New York City, and a partner in a public accounting firm in Wilmington, Delaware.

Petitioner learned to ride horses at an early age. In 1938, when he could afford to, he bought a hunter and commenced going into competition. He did fairly well in competition and developed a clientele among others interested in riding. When petitioner returned from service in the Navy in 1945, he found that the Army had discontinued its horse show team and he organized the United States horse show civilian team.

Petitioner's activities with horses brought him into the horse-racing field and his professional clientele now includes persons and corporations he has come in contact with in that field.

In 1953, petitioner had to give up active participation in riding. He bought a 26-foot boat, the Bar Bill 1st, in June 1953; or $6,600. On June 25, 1954, he bought Bar Bill 2nd, a 40-foot Wheeler. The cost of Bar Bill 2nd, including the trade-in allowance which he received for Bar Bill 1st, was $18,500. He traded in Bar Bill 2nd in June 1955 for a 46.6-foot shrimp boat called North Star.

When petitioner bought Bar Bill 1st, he hoped that he would be able to make contacts among yacht owners and that his professional clientele would consequently increase. Petitioner did not use the boat to entertain or transport existing or prospective clients or business contacts, nor to transport himself on business.

As a conversation piece, petitioner conceived of and adopted a house flag colored red, white, and blue and bearing the numerals ‘1040.’ The flag provoked inquiries, and petitioner was a CPA and a lawyer practicing as a tax specialist and that the numerals ‘1040’ represented the form number of a Federal individual income tax return. Further opportunities to discuss business arose from these replies. Often these discussions concerned taxes.

In the years 1957 through 1960, petitioner had clients whom he had met as a result of his interest in boats.

In 1960, petitioner also had clients whom he had met as the result of his former activities with horses.

In August 1954, Bar Bill 2nd was damaged by a hurricane. Petitioner's insurance covered the repairs and the cost of these repairs is not part of the deductions claimed herein by petitioner. Bar Bill 2nd was used very little by petitioner from June 1954, when he bought it, until it was damaged by the hurricane. In about September 1954, petitioner's doctor advised him to stop work, rest, and relax, and to take the usual precautions that accompany heart trouble from which petitioner had been suffering in 1954. By this time, Bar Bill 2nd was repaired and petitioner had a friend run his boat from New York to Florida. Petitioner and his son were aboard. The trip took 14 days, and petitioner and his son spent the winter of 1954 in Florida. In addition, when petitioner himself used Bar Bill 2nd in 1954, his family was sometimes aboard.

For the taxable year 1954, petitioner claimed on his income tax return the following expenses of operating Bar Bill 2nd as ordinary and necessary expenses of petitioner's trade or business:

+-----------------------+
                ¦Depreciation ¦$8,250.00¦
                +-------------+---------¦
                ¦Maintenance  ¦3,528.22 ¦
                +-------------+---------¦
                ¦Insurance    ¦651.08   ¦
                +-------------+---------¦
                ¦Total        ¦13,429.30¦
                +-----------------------+
                

The foregoing expenses represent petitioner's computation of 100 percent of the expenses incurred in maintaining Bar Bill 2nd in 1954; he made no allocation of such expenses for personal use of the boat.

Petitioner has not shown that the expenses of maintaining Bar Bill 2nd in 1954, or any portion of such expenses, represented ordinary and necessary expenses of petitioner's trade or business. He has not shown that the acquisition and use of the boat was not primarily for personal purposes, or that the expenses of maintaining the boat in 1954, or any portion of such expenses, were proximately related to petitioner's trade or business.

No part of petitioner's expenses in maintaining a boat in 1954 is deductible as business expenses by petitioners for the taxable year 1954.

OPINION.

Petitioner is a certified public accountant and a lawyer. He is a specialist in the field of Federal taxation although his legal practice is not confined to that field. On his return for 1954, he claimed, as expenses of his business, deductions amounting to $13,429.30, representing depreciation ,costs of maintenance, and insurance expense of a boat, Bar Bill 2nd. The total amount of these deductions has been disallowed by respondent, who contends that none of the expenses of maintaining the boat are ordinary and necessary to petitioner's trade or business and that, in any event, petitioner has not substantiated all of the expenses which he claims are deductible, although respondent agrees that certain expenditures were, in fact, made.

Petitioner maintains that his expenses incurred in connection with his boat were ordinary and necessary to his business in 1954. Although petitioner adduced evidence of these expenses at the hearing, he moved preliminary that the Court rule that no issue of substantiation of expenses was involved in the case, since neither the explanatory paragraph of the statutory notice of deficiency nor respondent's answer made reference to substantiation of the deduction, which, argued petitioner, were disallowed solely on the grounds that they were not ordinary and necessary to petitioner's business. The motion was taken under advisement and the parties discuss the point on brief. In view of our holding that whatever expenses petitioner incurred in connection with Bar Bill 2nd in 1954 are not allowable business deductions, it is unnecessary to pass on petitioner's motion.

Petitioner bought his first boat, Bar Bill 1st, in June 1953 for $6,600. It was a 26-footer. He traded this boat for the boat in controversy in June 1954. Including the trade-in allowance, petitioner paid a total of $18,500 for Bar Bill 2nd. In June 1955, he traded Bar Bill 2nd for a 46.6-foot shrimp boat, North Star. He does not contend that Bar Bill 2nd was used for transportation in his business or that he needed it in order to entertain clients or prospective clients. He contends that he bought and operated the boat strictly as a promotional scheme; he says that, restricted by professional ethics as certified public accounts and lawyers are, he had to publicize his ‘calling in a dignified and discreet manner’; and that operation of Bar Bill 2nd in 1954 ‘presented such a method of permissive advertising.’ He has summarized his position succinctly:

I contend that I operated the boat in question as a promotion on the hope that rich clients might result— much the same as if I had purchased a full page advertisement in a class magazine announcing that I was for hire.

In support of this position, petitioner realized that he had come to appreciate the monetary value of sporting contacts before he went into yachting. He learned a to ride a horse as a boy and, according to his testimony, he learned very well. In about 1938, he bought a hunter and engaged in competition, in which he did ‘fairly well.’ He fared better in his professional practice; soon he developed a clientele among the ‘horse people’ most of whom ‘were rich— very rich’ and had tax problems. The horse activity led to ‘the racing field’ and petitioner came to represent three important racing stables. However, in 1953...