Sanford v. Comm'r of Internal Revenue, Docket No. 5578-66.

• Decision Date: 09 September 1968
• Docket Number: Docket No. 5578-66.
• Citation: 50 T.C. 823
• Parties: WILLIAM F. SANFORD, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 823

WILLIAM F. SANFORD, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5578-66.

Tax Court of the United States.

Filed September 9, 1968.

Gabriel T. Pap, for the petitioner.

John K. Antholis and Powell W. Holly, Jr., for the respondent.

T maintained a ‘diary’ in which he recorded alleged business entertainment expenditures for which he received no reimbursement from his employer. He did not either obtain or retain receipts or other corroborating documentary evidence with respect to such expenditures. Held: The Commissioner properly disallowed deduction for all such expenditures of $25 or more. Sec. 1.274-5(c) (2), Income Tax Regs., supporting such action, is valid.

The Commissioner determined a deficiency in petitioner's income tax for the year 1963 of $2,753.12. Petitioner disputes in this proceeding only the adjustment made by the Commissioner disallowing a deduction for certain entertainment expenses allegedly incurred by petitioner in 1963 and not reimbursed by his employer. Petitioner's nonreimbursed expenses were recorded in a desk calendar or ‘diary’ which purported to list certain information relating to such expenditure claimed, but he did not keep any supporting receipts or other documentary proof of the making of these expenditures. The Commissioner disallowed a deduction for petitioner's entertainment expenditures of $25 or more, but not those of less than $25. It is the correctness of this determination which constitutes the only issue in this case.

FINDINGS OF FACT

Some of the facts have been stipulated and, as stipulated, are incorporated herein by this reference along with accompanying exhibits.

William F. Sanford (hereinafter referred to as petitioner) filed his Federal income tax return for the calendar year 1963 with the district director of internal revenue, Manhattan District, New York, N.Y., using the cash method of accounting. This return was filed and the tax payable indicated thereon was computed on the basis that the petitioner qualified as an unmarried head of household. During the tax year and at the time the petition herein was filed petitioner resided in Chicago, Ill.

Petitioner was employed during 1963 by RKO General Broadcasting, Inc. (hereinafter referred to as RKO), as an outside salesman of television-advertising time on RKO's five television stations. Most of his sales were made through the presentation of recommendations to buy television-advertising time, and these ‘presentations' were often made at luncheons or dinners, either at restaurants or at his home. He was reimbursed by RKO for some of these expenditures, generally on the average of $50 to $60 per week, but it was understood that, for the most part, he would have to bear all entertainment expenses above this weekly amount. Petitioner worked primarily on a commission basis, and his rate of compensation took into account the fact that he occasionally incurred expenses in obtaining and keeping accounts for which he was not reimbursed.

On his Federal income tax return for the year 1963, petitioner listed ‘outside salesman expenses' totaling $13,950.35, less reimbursement from his employer, RKO, of $4,431.93, and deducted the difference of $9,518.42 as nonreimbursed employee business expenses. In his notice of deficiency, the Commissioner disallowed as a deduction $5,800.05 of the $9,518.42 claimed as business expenses, as well as $614.43 of petitioner's claimed deduction for medical expenses. In his petition to this Court, petitioner assigned as error only the disallowance of employee business expenses in the amount of $4,984.31.¹

Among the ‘outside salesman expenses' listed by petitioner was an item for ‘Entertainment, from my record’ in the amount of $8,853.35. Petitioner had been reimbursed by RKO for a portion of these expenses in the amount of $3,186.18, so that his claimed nonreimbursed entertainment expenses came to $5,667.17. The Commissioner disallowed a deduction for all alleged entertainment expenditures of $25 or more, a total of $4,984.31, which is the amount disputed by petitioner here. The remaining $682.86, representing the total of petitioner's alleged nonreimbursed entertainment expenditures of less than $25, was not disallowed by the Commissioner.

As to those entertainment expenses for which he sought and obtained reimbursement from his employer— which are not involved herein— petitioner filed a detailed expense account with his employer every Tuesday in respect of the expenses incurred during the preceding calendar week. A number of those expenses were supported by receipts or other documentary evidence. Most of these expenses represented the cost of lunches, and most of them ranged from about $10 to $25 each. Petitioner also maintained a desk calendar or ‘diary,’ on which he recorded those entertainment expenses for which he did not seek reimbursement. Most of the items recorded on this calendar, or diary, represented the alleged cost of dinners, and most of these involved claimed expenditures in excess of $25. The entries on this calendar identified the names of the persons entertained, the amount allegedly spent, and by abbreviation or code, the restaurant, the advertising agency, and the alleged reason for the entertainment. However, in contrast to the expense accounts submitted to petitioner's employer, the particular client or account involved in the alleged business discussion was not identified, and in respect of none of the items recorded on the calendar did petitioner either obtain or retain any supporting receipt or other documentary evidence. No item for which petitioner sought reimbursement from his employer was recorded on the calendar.

Although the Commissioner did not disturb the deduction as to the items under $25 on the calendar, he disallowed the deduction in respect of all such items of $25 or more for want of proper substantiation, as required by section 274 of the 1954 Code and accompanying regulations. In this Court he makes the additional argument that the alleged expenses are in any event not deductible under section 162(a).

OPINION

RAUM, Judge:

Petitioner, an outside salesman of television-advertising time, claimed $8,853.35 entertainment expenses on Form 2106— ‘Statement of Employee Business Expenses,‘ which was made part of his 1963 income tax return (Form 1040). This sum, according to petitioner's testimony, represented the cost of luncheons and dinners during 1963 at which petitioner discussed business with ‘advertising agency people.’ He was either advanced or reimbursed for the cost of some of those meals by his employer, and the Commissioner does not challenge the propriety of such expenses here. The remaining expenditures, those for which petitioner neither sought nor received reimbursement, were claimed by petitioner as a deduction from his gross income in the aggregate amount of $5,667.17. The Commissioner disallowed $4,984.31 of this amount, which represents the total of petitioner's alleged nonreimbursed individual expenditures of $25 or more. The Commissioner takes the position that petitioner has not only failed to demonstrate that this disallowed portion in fact represented ordinary and necessary expenses incurred in carrying on his trade or business, but also that, even if a deduction would otherwise be available to petitioner under section 162, I.R.C. 1954, such deduction must be disallowed in view of petitioner's failure to comply with the substantiation requirements of section 274(d) and accompanying regulations. More specifically, the Commissioner contends that petitioner's failure to provide receipts or other acceptable documentary proof of his expenditures of $25 or more establishes that he did not have ‘adequate records' of those expenditures as required by section 274(d) and accompanying regulations, while petitioner claims that a ‘diary’ maintained by him in which the amounts of all his expenditures for entertainment were recorded, along with other information, was sufficient to meet the ‘adequate records' requirement, and that the regulations supporting the Commissioner's action are invalid. We hold that, while some of petitioner's claimed expenditures may have been ordinary and necessary in character, he has not complied with the substantiation requirements of section 274(d) and the regulations with respect to his expenditures for entertainment of $25 and over, that the regulations are valid, and that petitioner is not entitled to a deduction for entertainment expenses in excess of that allowed by the Commissioner.

The requirements imposed by section 274 were added to the Internal Revenue Code of 1954 by the Revenue Act of 1962, 76 Stat. 974. They are in addition to the requirements imposed by section 162, and petitioner still has the burden of proving initially that his expenditures were ordinary and necessary expenses, proximately related to his trade or business. H. Rept. No. 1447, 87th Cong., 2d Sess., p. 19 (1962); S. Rept. No. 1881, 87th Cong., 2d Sess., p. 27 (1962). Cf. Welch v. Helvering, 290 U.S. 111. We are by no means convinced that petitioner has carried this initial burden with respect to every expenditure disallowed by the Commissioner. To be sure, petitioner submitted in evidence a ‘diary,‘ consisting of pages from his desk calendar bound together, which purported to show the time, place, and amount of each of his nonreimbursed expenditures along with the persons entertained, the advertising agencies they represented, and the type of business discussed. But the large number of dinners claimed by petitioner as deductible expenses, approximately three per week, and the fact that the cost of petitioner's entertainment at luncheons was usually reimbursed by his employer, along with a relatively small number of dinners, suggests that at least some of his claimed nonreimbursed expenses may have been personal in nature. Certainly, the fact that petitioner may have entertained ...