Wayburn v. Commissioner of Internal Revenue, Docket No. 74348.
| Decision Date | 26 June 1935 |
| Docket Number | Docket No. 74348. |
| Parties | NED WAYBURN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Colman Gray, Esq., for the petitioner.
Richard W. Wilson, Esq., for the respondent.
The respondent determined a deficiency in petitioner's income tax for 1930 in the amount of $2,526.94 and asserted a 50 percent fraud penalty in the amount of $1,263.47. In arriving at the deficiency the respondent made several additions to income, reduced a claimed deduction for taxes paid, and increased the deduction allowed for interest paid. Petitioner alleges error as to only two matters: (1) The addition to income of $22,080.91 described in the deficiency notice as unexplained bank deposits in the name of Mrs. Wayburn, and (2) the assertion of the fraud penalty.
The major addition to income is an amount of $22,080.91 which petitioner drew from the Ned Wayburn Studios of Dancing, a corporation, and which he did not return as income. Petitioner contends that this amount was not income to him, but was drawn for the purpose of entertaining people from whom the corporation drew its business and was expended for that purpose.
Petitioner is a theatrical producer and stage dancing instructor. He has been a theatrical producer for over thirty years. In 1920 he opened a dancing studio, which was incorporated in 1922 or 1923 under the name of Ned Wayburn Studio of Stage Dancing, hereinafter called the corporation. The capital stock of the corporation consisted of five shares, of which petitioner owned two, and his wife three, shares. Petitioner was president and managing director of the corporation.
The business of the corporation was obtained partly through advertising in magazines, newspapers, and theater programs, and partly through personal contacts of petitioner and his wife with various organizations and with many individuals, particularly well known people of the stage, screen, and radio. These personal contacts were made largely through entertainment provided by petitioner and his wife, consisting of theater parties, meals at public places, and social gatherings at their home in Long Island. Petitioner and his wife attended the opening performances of shows and clubs and various places of entertainment. For these openings petitioner purchased tickets for himself and his guests. He also staged many benefit affairs at his own expense. These expenditures were considered necessary to keep the corporation's name before the public.
Petitioner's home at Bayside, Long Island, is equipped with special entertainment facilities, including a recreation room capable of accommodating from eighty-five to a hundred people. This room contains a bar, card nooks, a table for roulette wheels, billiard table, and player piano. On the grounds of the home are a tennis court and equipment for various out-door games for children and adults. During 1930 petitioner and his wife had guests at their Long Island home almost daily; they had guests for breakfasts, luncheons, teas, dinners; they gave dinner parties for groups of twelve to fifteen guests; they staged entertainments for larger groups, numbering as many as eighty-five people; they had week-end guests. Some of their parties were catered affairs; for some they employed extra servants. They employed professional entertainers. Among the people entertained at petitioner's home were newspaper and theatrical men, and prominent people of the stage, screen, and radio. The children of some of petitioner's guests were pupils at his dancing studio. In addition to his Long Island home petitioner had a summer home in New Hampshire, with about seven acres of ground and fronting on a lake. He and his wife entertained extensively there.
The entertainments at petitioner's home were managed by his wife. To defray the entertainment expenses petitioner withdrew from the corporation weekly sums of around $400, with some variations, which he turned over to his wife. The sums so received by Mrs. Wayburn, aggregating $22,080.91 for the year 1930, were deposited in her bank accounts. Household expenses were paid from petitioner's salary which he received from the corporation. Neither petitioner nor his wife kept any books or records of personal expenditures or of entertainment expenses.
The amounts paid by the corporation to petitioner for entertainment were charged to salary accounts on the corporate books. The corporation claimed a deduction therefor, as salaries, in its 1930 return. The entry of these items under salaries rather than under the heading of entertainment expenses was for the purpose of avoiding explanations to creditors.
Both the petitioner and his wife appeared as witnesses and described at some length the various kinds of entertainment they provided both in and outside their home, testified as to the numbers of people entertained at different functions, the occupations or professions of some, and gave the names of some of the people entertained. They also testified as to the necessity of entertaining people who were able to and did bring pupils to the corporation. This latter evidence we do not regard as material except to show the purpose for which the $22,080.91 was received by the petitioner. We make no findings as to whether or not this sum was an ordinary and necessary expense of the corporation. There is, however, evidence that the sum of $22,080.91 was approximately 10 percent of the gross income of the New York studio of the corporation. We do find as a fact that this sum was furnished to petitioner by the corporation for the purpose of entertaining, and that petitioner entertained extensively for the purpose of benefiting the corporation. We are not convinced, however, that the whole sum was devoted to entertainment in behalf of the corporation. The evidence is that much of the entertaining was done at petitioner's home. No segregation was made between expenditures for maintaining the home for the use of petitioner and his family and those made for the purpose of entertaining for the benefit of the corporation. Doubtless, too, petitioner and his wife entertained personal guests as distinguished from those that they invited for the purpose of furthering the business of the corporation. It is apparent that in entertaining in the home there is inevitably an overlapping of the costs pertaining to the maintenance and operation of the home as such and those of providing entertainment. Perhaps in some cases a fair apportionment of costs might be made, but that was not attempted here. In fact, petitioner testified that he had no way of making any segregation of expenditures. Some of the entertainments in this case were catered affairs, and in some cases professional entertainers were brought in. In such cases the costs could no doubt have been determined by the petitioner. We have critically examined the testimony and it is our conclusion that a substantial sum was expended by petitioner and his wife out of the funds received from the corporation directly for entertainment in behalf of the corporate business. But we are unable to determine exactly the amount expended solely for that purpose. Petitioner relies on Blackmer v. Commissioner, 70 Fed. (2d) 255, in which the taxpayer was allowed a deduction for the entire amount claimed to have been expended as entertainment and publicity expenses. The facts of that case are somewhat different from those before us. In the Blackmer case it appears that the claimed business expenses did not include expenses of a personal character such as the entertainment of the taxpayer's family and close friends. Moreover, in that case, while the taxpayer did not keep an account book showing his expenditures, he had some records, "checks, statements of account, and vouchers." The court there pointed out that although such records were not introduced in evidence, "it does not appear that any question was raised as to his failure to produce them at the hearing." In the present case neither petitioner nor his wife, according to their testimony, kept any records. Petitioner did not know whether any canceled checks had been preserved. In view of the difference in the facts the Blackmer case is not authority for the finding in this case of a business expense of the entire sum claimed. This phase of the case seems to us to fall within the holding in Cohan v. Commissioner, 39...
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