Noland v. CIR

• Decision Date: 10 June 1959
• Docket Number: No. 7766.,7766.
• Citation: 269 F.2d 108
• Parties: Lloyd U. NOLAND, Jr., and Jane K. Noland, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fourth Circuit

269 F.2d 108 (1959)

Lloyd U. NOLAND, Jr., and Jane K. Noland, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 7766.

United States Court of Appeals Fourth Circuit.

Argued January 20, 1959.

Decided June 10, 1959.

George D. Gibson and H. Brice Graves, Richmond, Va. (T. Justin Moore, Jr., and Hunton, Williams, Gay, Moore & Powell, Richmond, Va., on brief), for petitioners.

Robert D. Hoffman, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A. F. Prescott, Attorneys, Department of Justice, Washington, D. C., on brief), for respondent.

Before SOBELOFF, Chief Judge, and SOPER and HAYNSWORTH, Circuit Judges.

HAYNSWORTH, Circuit Judge.

By their petition to review a decision of the Tax Court, Lloyd U. Noland, Jr. and his wife, who filed joint returns, seek to overturn the Commissioner's disallowance of miscellaneous deductions claimed as business expenses of the husband.

The taxpayer, Mr. Noland, is an executive of six corporations conducting substantial and profitable businesses. He is the president and a director of the Noland Company, Incorporated, which has its principal office in Newport News, Virginia, and which is engaged, in several states, in the wholesale distribution of plumbing, heating, industrial and electrical equipment and supplies, and of machine tools. He is chairman of the board of directors of Virginia Engineering Company, Inc., a director of Tidewater Construction Corporation, chairman of the board of directors of Richmond Hotels, Incorporated, president and a director of Biggs Antique Company, Incorporated, and president and a director of Antietam Hotel Corporation.¹

His adjusted gross income exceeded $299,000 in 1952 and $263,000 in 1953, the years with which we are concerned. His compensation by the Noland Company in 1952 was $42,230, of which $12,230 was his salary and $30,000 a bonus, and in 1953, $40,480, of which $25,480 was salary and $15,000 a bonus.

The expenses with which we are concerned may be classified as follows:

(1) The largest single item in each year was the cost of an elaborate party given at Christmas time for the personnel of the home office of the Noland Company. For years, the company, itself, had been giving a Christmas party in its offices, but the taxpayer felt they were of little worth. After he became president in 1951, he decided to enlarge the party by including the spouses of employees, to move the party to the Hotel Chamberlain and to add entertainment and dancing. He also decided to pay for the party, out of his own funds, because, he testified, he felt that would improve his personal relations with the personnel of the home office and relieve the company from pressure to give similar parties for the personnel of each of its many branch offices.

(2) In 1953, the Peninsula Industrial Committee, an affiliate of the Virginia Peninsula Chamber of Commerce, undertook to raise $125,000 for use in promoting the industrial development of the area. The taxpayer was a member of the board of the Committee, and served as chairman of the campaign. Obviously, the businesses of some of the companies for which the taxpayer worked were closely related to the purposes of the Committee, and they contributed to the campaign. In addition, the taxpayer made a personal contribution of $1500 to the campaign, which met with prompt success. Most of the contributions to the campaign were by corporations, but there were over 200 individual contributors.

(3) Dues to a number of clubs and associations, some of which, he testified, he used not at all, but had joined because some business associate or customer had requested him to do so, one of which he used for the entertainment of business associates and others of which he had joined because it gave him an opportunity to mingle socially with people he regarded as actual or potential customers, or in position to "influence" business.

(4) Subscriptions to periodicals of general interest, such as Time. The cost of subscriptions to matter more exclusively of business interest, as the Wall Street Journal, was allowed by the Commissioner. The taxpayer testified it was necessary that he be informed of general affairs in order to converse effectively with his associates and make speeches.

(5) Contributions to schools, a public library and other organizations which the Commissioner agreed would qualify as charitable contributions, but not as business expense.

(6) A general miscellany of expense items, principally relating to entertainment, much of it in taxpayer's home, and to gifts and remembrances. Many of these items are a prorated portion of the total cost, other portions of the total cost having been charged to one or more of the corporations as reimbursable expense. The unreimbursed portion of these items was subject to a further allocation between "unreimbursed business expense," for which deduction was claimed, and "personal expense" for which no deduction was claimed. The allocations were his own, and he made no attempt to obtain complete reimbursement for these items, for he felt the total cost was not properly chargeable to the corporations.

We start with the assumption that every person who works for compensation is engaged in the business of earning his pay, and that expense which is essential to the continuance of his employment is deductible under § 23(a)(1)(A) of the Internal Revenue Code of 1939 (26 U.S.C.A. § 23). See Hill v. Commissioner, 4 Cir., 181 F.2d 906; Schmidlapp v. Commissioner, 2 Cir., 96 F.2d 680, 118 A.L.R. 297. Salary has been treated as business income within the meaning of § 122 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 122. Batzell v. Commissioner, 4 Cir., 266 F.2d 371; Roberts v. Commissioner, 5 Cir., 258 F.2d 634; Pierce v. United States, 9 Cir., 254 F.2d 885; Overly v. Commissioner, 3 Cir., 243 F.2d 576; Folker v. Johnson, 2 Cir., 230 F.2d 906. The business of a corporation, however, is not that of its officers, employees or stockholders. Though the individual stockholder-executive, in his own mind, may identify his interest and business with those of the corporation, they legally are distinct, and, ordinarily, if he voluntarily pays or guarantees the corporation's obligations, his expense may not be deducted on his personal return. Deputy v. du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416; Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Interstate Transit Lines v. Commissioner, 319 U.S. 590, 63 S.Ct. 1279, 87 L.Ed. 1607; Burnet v. Clark, 287 U.S. 410, 53 S.Ct. 207, 77 L.Ed. 397. Nor may a corporation deduct as a business expense, payments which clearly further the businesses of its stockholders, but not its own. City Ice Delivery Co. v. United States, 4 Cir., 176 F.2d 347. The rule has particular applicability to closely held corporations where there may be temptation to transfer expense so that it may be deducted in the highest brackets. It is not suggested that the taxpayer here, when he personally assumed the cost of the annual Christmas party of the Noland Company, was prompted by any motive other than those he declared, but he was the dominant officer and stockholder, and the fact is that the deduction on his return, rather than upon the corporation's, would produce a net loss of revenue, a circumstance which naturally causes the Commissioner to look askance at the transaction.

The taxpayer, here, does not question the rule. Rather, he sought to prove in the Tax Court that the Noland Company required him to incur the expenses. His proof shows that the Noland Company, since its inception many years ago, has pursued a policy of paying liberal bonuses to those key employees whose efforts had been most productive. Under a continuing plan, twenty-five per cent of profit before taxes is set aside each year as a bonus fund. In the years in question and...