Nelson v. Comm'r of Internal Revenue, Docket No. 6768.

• Decision Date: 18 April 1946
• Docket Number: Docket No. 6768.
• Citation: 6 T.C. 764
• Parties: ALBERT NELSON, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

6 T.C. 764

ALBERT NELSON, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

Docket No. 6768.

Tax Court of the United States.

Promulgated April 18, 1946.

1. In September 1934 petitioner started a wholesale linen business with approximately $2,500, about $1,000 of which was contributed by his wife. She worked constantly with him in such business until the early part of 1938. From June 1936 thourgh 1941 petitioner also operated a hotel on leased property, with occasional assistance from his wife. Funds from all business activities of petitioner were deposited in a bank account over which he alone had control. The property in which the hotel business was operated was purchased on land contract in the latter part of 1939. The initial and subsequent payments through 1941 on such property were made from petitioner's bank account. Held, the entire income derived from the hotel business for 1941 was not the income of the wife growing out of the ownership of property by reason of title thereto being in her name, but was income derived from petitioner's business and growing out of the use of property and, as such, was taxable to him under section 22(a), Internal Revenue Code.

2. Sales may not be reduced in 1941 because of some discrepancy in the accounts where it has not been shown that such discrepancy was due to an error, either in commission or omission, occurring in 1941.

3. The amount of automobile and entertainment expenditures allowable as ordinary and necessary business expenses determined. Raymond A. Fox, Esq., and Harvey H. Berger, C.P.A., for the petitioner.

Clarence E. Price, Esq., and Walter W. Kerr, Esq., for the respondent.

The Commissioner determined a deficiency of $3,060.30 in income tax for the year 1941. The petitioner assails as erroneous the action of the Commissioner including in his taxable income (1) the net income of $9,403.91 derived from the operation of a hotel, alleged by petitioner to be taxable to his wife, (2) the amount of $160.31 representing an increase in the reported net income derived from petitioner's linen business, and (3) the disallowance of claimed entertainment and automobile expenses in the amount of $1,070.

FINDINGS OF FACT.

The petitioner is a resident of Detroit, Michigan. He was married on November 19, 1933. His wife, Goldye Jean Nelson, for about two and one-half years prior to her marriage was employed as a dental hygienist.

About September 1934 petitioner entered into a wholesale linen business under the name of ‘A. Nelson Company,‘ to which petitioner contributed about $1,500 and his wife about $1,000. The moneys contributed t to the business by the wife consisted of savings out of her salary as dental hygienist and about $400 received upon a matured insurance policy. Petitioner and his wife had an understanding that if she would do the inside work for ‘some time‘ so that petitioner was free to go out and solicit business her share would be the same as that of petitioner.

Until the birth of a daughter sometime in the early part of 1938, petitioner's wife assisted petitioner in the linen business. She spent almost every work day and several evenings each week at the place of business taking care of the inside work while petitioner went out soliciting business. After the birth of the daughter she worked only occasionally. In addition to working in the business, she also kept house. A second child was born in 1942.

In June 1936 petitioner commenced the operation of the Aberdeen Hotel, which was held under lease until about October 30, 1939. On that date a land contract was executed by the receiver for the First National Bank of Detroit and Phil Taubman (father of petitioner's wife), under the terms of which the receiver agreed to sell and convey to Taubman land in the city of Detroit (on which the Aberdeen Hotel was located) described as: ‘Lot nine (9) Block 47, of Cass Farm, according to the plat recorded in 1836 in Liber 12 of Plats on Page 324 in the City Records; otherwise known as 830-8 Abbott Street, Detroit,‘ in consideration of the payment of $41,000, of which $8,200 was payable upon the execution of the contract and the balance of $32,800, together with interest at 6 percent, in monthly payments of $328 each, to be applied first on interest and the balance on principle. The petitioner received a commission of $1,730 from the receiver for the sale of the property. Under date of November 10, 1939, the land contract was assigned by Phil Taubman to Etitioner's wife. Monthly payments were made thereafter, the last one on December 3, 1942, at which time there was a balance due on the contract of $26,159.52, with interest from November 30, 1942. Under date of December 31, 1942, the property as above described, together with all and singular the hereditaments and appurtenances thereunto belonging or in anywise appertaining, was conveyed by quitclaim deed to petitioner's wife. The balance due on the land contract was paid in part by moneys obtained from the National Bank of Detroit upon a note for $20,000, signed by petitioner and his wife, payment of which was secured by a mortgage on the property. The license for the operation of the hotel was at all times, including the year 1941, issued in the name of petitioner. Prior to the birth of her first child in the early part of September 1938, petitioner's wife devoted a portion of her time to the hotel business, but after the birth of such child she went to the hotel only occasionally.

In addition to the linen and hotel business, the petitioner during 1941 had three houses constructed. The money for that purpose was taken from the A. Nelson Co. bank account. The total amounts received and paid out during 1941 as shown in the ‘Buildings‘ column in the receipts and disbursements records were $19,007.60 and $21,603.25, respectively.

From the very outset in 1934 petitioner had charge and control of the moneys derived from his business activities. All moneys received from the linen business and the operation of the Aberdeen Hotel were deposited in an account with the National Bank of Detroit in the name of A. Nelson Co. Petitioner alone had authority to sign checks for the withdrawal of funds therefrom. During all the time from 1934 to 1941, inclusive, no moneys derived from the linen business or the operation of the hotel were paid to petitioner's wife as compensation for her services or as a distribution of profits. During the earlier years whenever she needed money for household expenses petitioner gave it to her; later she was given a regular allowance for household expenses. The down payment of $8,200 on the Aberdeen Hotel property was made by check on the account of A. Nelson Co. The monthly payments of $328 on the land contract were also paid with checks on the account of A. Nelson Co. Petitioner's wife had no bank account until November 1942, when she opened a bank account in the Manufacturers National Bank.

For the year 1941 a record of linens sold was kept on columnar looseleaf sheets on which in separate columns the place of delivery, date, name of customer, invoice number, sale price, amount of sales tax, amount of invoice, amount of charge sale, and amount of cash sale, respectively, were entered. These columns were totaled monthly. The monthly totals of sales, sales tax, invoices prices, charge sales, and cash sales were entered on a separate sheet and totaled for the year. A record of receipts was kept on similar sheets, on which in separate columns were entered the amounts of bank deposits, discount allowed, date, names of purchasers, amounts received on individual cash and charge sales, and amount received on miscellaneous sales. These sheets also had a column captioned ‘Aberdeen Hotel‘ in which total receipts of the hotel for the day were entered. In August a column was added captioned ‘Buildings.‘ The monthly total of each column was entered on a separate sheet and totaled to show yearly totals of entries under bank deposits, discount sales, miscellaneous sales, Aberdeen Hotel, and buildings. On similar sheets a record of disbursements was kept. In the first four columns were entered the date, name of payee, check number, and amount of check, respectively. The remaining columns were captioned: ‘Mdse.,‘ ‘Rent,‘ ‘General Expenses,‘ ‘Light,‘ ‘Heat & Telephone,‘ ‘Freight & Cartage,‘ ‘Commissions Salaries,‘ ‘Personal,‘ ‘Sales Tax,‘ ‘Social Security,‘ ‘Aberdeen Hotel,‘ ‘Loans,‘ ‘Interest,‘ and ‘Taxes.‘ In the month of April three columns were added covering certain designated lots, which columns were in the following month consolidated into one column captioned ‘Buildings.‘ At the end of 1941 the total monthly disbursements entered in the ‘Aberdeen Hotel‘ column were allocated on a separate yellow sheet to various items, such as principal, interest, payroll, coal, gas and light, water, telephone, laundry, linens and furnishings, office supplies, maintenance and repairs, general, insurance, taxes and painting and decorating. The amounts entered in the principal and interest columns represented the monthly payments of $328 on the land contract covering the Aberdeen Hotel property. Checks issued for personal expenses and withdrawals were entered in the personal column. The record of disbursements shows no check issued to petitioner's wife as salary, distribution of profits, or otherwise. Under date of November 8, 1941, a check of A. Nelson Co. payable to cash in the amount of $5,000 on the National Bank of Detroit was issued and entered in the personal column. The check bears the endorsement of petitioner and his wife.

The above records were kept by a bookkeeper employed and paid by petitioner.

According to an audit report as of June 30, 1939, the net worth of A. Nelson, Co. was $18,622.17 as of that date.

The petitioner, upon the advice of a certified public accountant, filed a separate return for 1941. Petitioner's wife, upon the advice of the same accountant, filed for the...