Smith v. Comm'r of Internal Revenue

• Decision Date: 11 February 1960
• Docket Number: Docket No. 64382.
• Citation: 33 T.C. 861
• Parties: AL J. SMITH AND KATHERINE F. SMITH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

33 T.C. 861

AL J. SMITH AND KATHERINE F. SMITH, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 64382.

Tax Court of the United States.

Filed February 11, 1960.

Thomas R. Ward, Esq., and Roland J. Mestayer, Jr., Esq., for the petitioners

Harold G. Clark, Esq., for the respondent.

In the State of Mississippi there are laws that make it a criminal offense to sell, keep in possession, give away, or transport intoxicating liquors in the State. There is another law that levies a tax on sales that are prohibited by law, and is customarily administered on sales of intoxicating liquors. Petitioner, a food broker, entertained persons with whom he was doing business or seeking their business by taking them to lunch or dinner and serving and giving them alcoholic beverages. He claimed deductions in the taxable year 1953 for the cost of intoxicating liquors purchased in Mississippi and served and given to business guests in Mississippi, and for the cost of meals he consumed on daily business trips but at the end of which he returned to his home. Held, (1) that the deduction for the cost of intoxicating liquors is not allowable as a business expense, as the allowance of such deduction would constitute a frustration and violation of the sharply defined policy of the State of Mississippi, and (2) that petitioner is not entitled to a deduction for the cost of the meals he consumed on business trips during the days at the end of which he returned to his home.

The respondent determined a deficiency in income tax against the petitioners for the taxable year 1953 in the amount of $461.86. The questions presented are (1) whether the amount expended by petitioner Al J. Smith for alcoholic beverages purchased in Mississippi and used by him in entertaining his customers in Mississippi is allowable as a deduction, it being Mississippi law that it is unlawful for any person to sell, possess, give away, or transport intoxicating liquors within the State, and (2) whether expenditures by him for certain of his meals purchased on business trips but from which he returned home at night, are deductible as business expense.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

Petitioners are husband and wife and reside in Meridian, Mississippi. For the taxable year 1953 they filed a joint income tax return on January 15, 1954, and an amended joint tax return on August 30, 1954, with the director of internal revenue for Mississippi.

Al J. Smith, hereafter referred to as petitioner, is a food broker, operating under the name of Smith Brokerage Company, with offices in Meridian. He represents food manufacturers, referred to as principals, and sells their products to wholesale dealers and specialty houses throughout a territory designated as east Mississippi and west Alabama. He is paid a commission on the products he sells.

In the conduct of his business petitioner deemed it necessary to entertain his principals or their representatives and particularly the buyers or customers who bought the products. The entertainment consisted of taking them to lunch or dinner and serving and giving them alcoholic liquors. It was his view that if he did not entertain the persons with whom he was doing business or seeking their business their accounts might go to rival competitors who might offer them such entertainment.

During 1953, petitioner expended $575.16 for meals on days when he was away from his home on business but at the end of each day he returned to his home. $503.30 was expended for 233 meals which included 105 meals consumed by petitioner and 128 by his business guests. The balance of $71,86 was expended for meals consumed by petitioner when he dined alone.

During the taxable year 1953, petitioner expended $633.75 on alcoholic liquors which he served and gave to his business guests. Based on records kept by petitioner, $330 was expended for alcoholic liquors outside Mississippi and served and given to his business guests outside of Mississippi. The balance of $303.75 was expended for alcoholic liquors in Mississippi and served and given to business guests in Mississippi.

It is, and during the taxable year was, unlawful in Mississippi for any person to sell, barter, give away, keep, or have in his possession any intoxicating liquors. Under another section of the Mississippi Code, a tax is imposed on the sale at wholesale or retail of ‘any tangible property, articles or commodities whatsoever, the sale or distribution or which is prohibited by law.’

On August 26, 1952, a special referendum election was held in Mississippi on the question of allowing counties upon petitioner of 20 per cent of the qualified electors to vote for or against legalizing the sale of intoxicating liquor of an alcoholic content of more than 4 per cent alcohol by weight. The measure was defeated by a vote of 140,681 to 80,822. Fourteen of 82 counties voted for adoption of the measure. Petitioner's home county of Lauderdale voted 3,201 for and 4,533 against it.

The State tax collector of Mississippi is charge with the duty of collecting the tax on all sales that are prohibited by law, but the tax has been customarily applied only to the sale of intoxicating liquors. In administering the act he has regularly assigned to duty in Louisiana two employees to copy the invoices issued to the wholesale dealers of Mississippi, which invoices show the quantities of alcoholic liquors sold to them. He also obtains from the Mississippi wholesalers invoices of liquors sold to the Mississippi retailers. Furthermore, he obtains from the records of the United States district director of internal revenue at Jackson, Mississippi, a copy of all permits issued to wholesale and retail liquor dealers by the district director.

During the fiscal year ending June 30, 1953, the United States district director of internal revenue at Jackson issued 1,523 special tax stamps to wholesale liquor dealers, retail liquor dealers, wholesale dealers in wines, wholesale dealers in wines and malt liquors, retail dealers in wines, and retail dealers in wines and malt liquors. For the fiscal year 1954, 1,473 special tax stamps covering the foregoing categories were issued with the exception that no stamps were issued to wholesale dealers in wines and malt liquors.

During the fiscal year ended June 30, 1953, 31 wholesale dealers made monthly payments of tax on sales of intoxicating liquors to the State collector in the aggregate amount of $942,901.45. During the 1954 fiscal year, 29 wholesale dealers made monthly payments of such tax to the collector in the total sum of $909,143.77.

The records of both the United States district director of internal revenue at Jackson and the State tax collector of Mississippi are open to the public as well as to public officials.

In addition to Louisiana, three other States, Arkansas, Tennessee, and Alabama, are situated on the borders of Mississippi and have legalized sales of intoxicating liquors. If any such liquors are transported from these States into and sold in Mississippi, the Mississippi State collector gets no records of such transactions and collects no taxes thereon.

Petitioner bought whisky in Mississippi when he wanted to and without much trouble. On the gulf coast of Mississippi, where Gulfport, Biloxi, and other resorts are located, alcoholic beverages are sold at bars and served at various eating places. The wholesale grocers of Mississippi usually hold their annual convention at one of the resorts in the gulf coast area and petitioner entertains some of his customers there. The packaged whisky petitioner purchased in Mississippi in 1953 always contained the Federal Liquor stamps.

Respondent disallowed petitioner's claimed deduction for the cost of whisky, in the amount of $633.75 as ‘Sales Promotion & Entertainment,‘ for the reason that ‘the purchase of or giving away of whisky violates sharply defined public policy inasmuch as section 2613 of the Mississippi Code prohibits the purchase, sale, importation and giving away of intoxicating liquors.’

Respondent disallowed the claimed deduction for the cost of meals while petitioner was not away from home overnight, for the stated reason that the expenses so incurred ‘represented nondeductible personal living expenses.’ Petitioner expended $276.50 as business expense for meals consumed by his business guests. He expended $226.80 on the meals he consumed when dining with his business guests.

Because respondent's disallowance of the deductions claimed increased the adjusted gross income of the petitioners to the extent that their claimed deduction for medical expense did not exceed 5 per cent of the adjusted gross income, respondent disallowed the medical deduction of $44.47 claimed.

OPINION.

TURNER, Judge:

The principle that an item of expense is not deductible if allowance thereof would contravene sharply defined State or Federal policy, has been well established. See Hoover Express Co. v. United States, 356 U.S. 38; Tank Truck Rentals v. Commissioner, 356 U.S. 30; Commissioner v. Sullivan, 356 U.S. 27; Lilly v. Commissioner, 343 U.S. 90; Commissioner v. Heininger, 320 U.S. 467; United States v. Winters, 261 F.2d 675, certiorari denied 359 U.S. 943; Wm. T. Stover Co., 27 T.C. 434; R. E. L. Finley, 27 T.C. 413, affd. 255 F.2d 128; Boyle, Flagg & Seaman, Inc., 25 T.C. 43; Anthony Cornero Stralla, 9 T.C. 801.

Section 2613 of the Mississippi Code Annotated (1942) makes it unlawful to keep, have in possession, sell, or give away intoxicating liquor.¹ Section 2642 of the Code makes it unlawful to transport into or within the State intoxicating liquors.²

Petitioner claimed as a deduction the cost of whisky in the amount of $633.75, as ‘Sales Promotion & Entertainment.’ Respondent has disallowed the entire amount on the ground that ‘the purchase of or giving away of whisky violates sharply defined policy inasmuch as section 2613 of the Mississippi...