Silverman v. Comm'r of Internal Revenue

• Decision Date: 28 August 1957
• Docket Number: Docket No. 63265.
• Citation: 28 T.C. 1061
• Parties: ALEX AND DORIS SILVERMAN, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 1061

ALEX AND DORIS SILVERMAN, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 63265.

Tax Court of the United States.

Filed August 28, 1957.

John A. Ross, Esq., for the petitioners.

Claude R. Sanders, Esq., for the respondents.

TRAVEL EXPENSES OF WIFE PAID BY HUSBAND'S EMPLOYER— INCOME TO HUSBAND.— A corporation was paid the traveling expenses of the wife of its vice president who accompanied him on a business trip. The corporation claimed the cost of the wife's trip as a business expense deduction, but deduction was disallowed by the Commissioner. Petitioners allege that the corporation made a wedding gift to the vice president's wife of the cost of her trip. Held: (1) The corporation did not make a gift of the cost of the wife's trip. (2) Those costs were petitioners' personal expenses. (3) The husband realized income in the amount of the corporation's disbursement for his wife's trip.

The Commissioner determined a deficiency in income tax for the taxable year 1952 in the amount of $1,786.10. Petitioners do not contest a minor adjustment of the respondent. The only question to be decided is whether payment by a corporation of the expenses of a trip to Europe of the wife of Alex Silverman constitutes taxable income to him, as the Commissioner has determined, or a gift.

FINDINGS OF FACT.

Petitioners are residents of Kansas City, Missouri. They filed a joint return for 1952 with the district director of internal revenue for the sixth district of Missouri. Doris Silverman is before the Court because a joint return was filed. The question to be decided relates to Alex Silverman. He is referred to hereinafter as the petitioner, or as Alex.

Central Bag Co., Inc., a Missouri corporation having its principal place of business in Kansas City, Missouri, is engaged in the business of manufacturing cotton and burlap bags. Milton Silverman, Alex's brother, in 1952 was president and a director of Central Bag Co., hereinafter called the corporation. Milton's wife was a director. Milton, his wife, their children, and Alex owned all of the corporation's stock. Alex was a minority shareholder. In 1952, Alex was vice president, director, and sales manager of the corporation. Part of his duties consisted of purchasing materials needed in the business. Alex went to work for the corporation in 1939. Milton directed the business of the corporation.

The corporation regularly paid dividends for several years prior to 1952 as well as in 1952.

In the early part of 1952, Milton told Alex that it was necessary for Alex to go abroad for the corporation on a business trip to locate sources of supplies of burlap in Europe. Alex expected to be married to Doris at about the time of the proposed trip and he expressed some objections to taking the trip. Milton told Alex that if he would go abroad the corporation would make a gift to his wife of a trip to Europe. Alex did not make the suggestion of a gift to Doris a condition of his going abroad in 1952. Milton did not say that the corporation would make a gift to Alex.

Alex and Doris were married on April 25, 1952, and on the following day they departed for New York City. They sailed from there on May 2. They returned to Kansas City around June 12, 1952.

While he was abroad, Alex called on a number of manufacturers in various cities in France, Italy, and Switzerland with whom he discussed the corporation's business. Doris did not accompany Alex on his business calls; she spent her time sightseeing. Alex and Doris went to Paris, Geneva, Florence, Rome, and London. They spent 5 days at Antibes on the French Riviera during which time Alex did not attend to any business. Alex's trip was both a business trip for the corporation and his wedding trip.

As a result of Alex's trip, the corporation received samples of burlap and quotations of prices from European manufacturers, but it did not make any purchases.

Doris was not a stockholder or an employee of the corporation during 1952, and she did not render any services to the corporation.

The expenses of the trip (excluding miscellaneous purchases by Alex from his own funds) amounted to $6,408.02, which amount was paid by the corporation and was charged to travel expenses on its books for the fiscal year ended September 30, 1952, and was included in the deductions for business expenses in the corporation's income tax return.

There was no formal corporate authorization of any gifts from the corporation to either Alex or Doris, or of payment of the expenses of Doris's trip, and the corporation did not present anything to Doris, either a check, money, or any other evidence of a gift.

In 1952, Alex received a salary of $27,150, and dividends of $7,760 from the corporation.

The corporation, on September 30, 1952, had surplus in the amount of $1,575,037.

The respondent allowed the corporation a business expense deduction in the amount of $3,204.01, one-half of the cost of the trip, for Alex's expenses while traveling in pursuit of the corporation's business. He determined that petitioners realized income in the amount of $3,204.01 from the corporation's payment of Doris's traveling expenses.

The corporation did not make a gift of the cost of the trip abroad of Doris in 1952.

The stipulated facts are found as stipulated.

OPINION.

HARRON, Judge:

The question to be decided is whether Alex Silverman realized additional income in the taxable year in the amount of $3,204.01 which was disbursed by his employer, a corporation, for his wife's traveling and subsistence expenses when she accompanied him on a trip he was directed to take in pursuit of his employer's business. Alex is a stockholder of the corporation, and an officer and director.

Respondent contends, first, that the amount in dispute constituted additional compensation of Alex for which he rendered services; or, in the alternative, that it constituted a constructive dividend to Alex as a payment by the corporation to him or in his behalf, either directly for his benefit or for the benefit of a member of his immediate family. Respondent makes an alternative argument that the payment was reimbursement for travel expenses which Alex was required to include in his gross income, for which deduction is not allowable to him because his wife's traveling and subsistence expenses were not incurred in pursuit of a trade or business.

Petitioners contend that the payment was a wedding gift of the corporation to Doris and is, therefore, to be excluded from gross income under the provisions of section 22(b) (3), 1939 Code.

Consideration is given first to principles which apply to the traveling and subsistence expenses of an employee's wife who goes with him on a trip which he takes in pursuit of his employer's business, and to the status for taxation of expenditures made by an employer for the benefit or personal use of an employee or a member of his family.

It is well established that amounts expended by a taxpayer for the purpose of having his wife accompany him on a business trip where the wife's presence did not serve a bona fide business purpose represent nondeductible personal expenses under the provisions of section 24(a) (1), 1939 Code. Leland D. Webb, 1 B.T.A. 759; George W. Megeath, et al., 5 B.T.A. 1274, 1287; Walter Schmidt, 11 B.T.A. 1199; Regs. 118, sec. 39.24(a)-1, and sec 39.23(a)-2; Rev. Rul. 55-57, 1955-1 C. B. 315. If such personal expenses as the wife's traveling expenses are paid by the employer directly or under reimbursement, they are not deductible by the husband-employee as business expenses or traveling expenses while away from home in the pursuit of business, notwithstanding such payment by the employer. Baxter D. McClain, 2 B.T.A. 726.

It is also well settled that where funds of a corporation are disbursed for the personal use or economic benefit of a stockholder or his immediate family, there being no intention of repayment, the amount so disbursed are either the equivalent of corporate distributions or additional compensation for services (depending upon the facts and circumstances), especially in the case of dealings between closely held corporations and their stockholders. Casper Ranger Construction Co., 1 B.T.A. 942; L. J. Christopher, 13 B.T.A. 729, affd. 55 F.2d 527; C. W. Murchison, 32 B.T.A. 32; Ned Wayburn, 32 B.T.A. 813, 816; Charles A. Rogers, 38 B.T.A. 16, 22, affd. 111 F.2d 987; Jesse S. Rinehart, 18 T.C. 672; Louis Greenspon, 23 T.C. 138, 151 reversed on other grounds 229 F.2d 947; Oreste Casale, 26 T.C. 1020, 1024; Commissioner v. Bonwit, 87 F.2d 764, certiorari denied Bonwit v. Helvering, 302 U.S. 694; Paramount-Richards Theatres, Inc. v. Commissioner, 153 F.2d 602; Lash v. United States, 221 F.2d 237, certiorari denied 350 U.S. 826.

In the instant case, it is admitted that Doris's presence during the business trip of Alex had no business purpose and that the trip involved the wedding trip of Alex and Doris. There is testimony of Milton, the president and majority stockholder of the corporation, that Alex expressed objections to taking the trip abroad and that Milton offered the arrangement of having Doris accompany Alex at no expenses to him as an inducement to Alex to agree to go. Alex was an employee of the corporation. Under all of the circumstances there is a strong presumption that the payment of Doris's traveling and subsistence expenses represented a bonus or additional compensation to Alex for his services to the corporation in going on a business trip at the particular time. Under the authorities above cited it would be held that the payment by the corporation, being for the personal use and economic benefit of Alex and a member of his immediate family, and constituted income to Alex, unless petitioners have succeeded in their burden of proving that the corporation made a gift, as they contend.

Whether a payment is a gift depends, first, on the intention of the alleged donor. Schumacher v. United States, 55...