WM. T. Stover Co. v. Comm'r of Internal Revenue

• Decision Date: 30 November 1956
• Docket Number: Docket No. 46766.
• Parties: WM. T. STOVER CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

27 T.C. 434

WM. T. STOVER CO., INC., PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 46766.

Tax Court of the United States.

Filed November 30, 1956.

E. Charles Eichenbaum, Esq., and W. S. Miller, Jr., Esq., for the petitioner.

C. H. Cobb, Esq., for the respondent.

1. Petitioner, whose business was that of selling surgical and hospital supplies and equipment, purchased a round-trip airplane ticket to England for a newspaperman who was to make a study of socialized medicine in England and upon his return to report to the Arkansas Medical Society on his findings and to write articles thereon for publication. The Society was, and always had been, opposed to the establishment of socialized medicine in this country, and its current interest was occasioned by agitation for the passage of legislation for the establishment of socialized medicine in some form. The newspaperman made the trip as planned and upon his return reported his conclusions to the Society and wrote articles thereon which were more unfavorable than favorable, the articles being submitted to the Society prior to their publication. In purchasing the ticket, petitioner knew the identity of the man making the trip and the purpose of his trip to England. Held, that the expenditure for the ticket was not an ordinary and necessary expense within the meaning of section 23(a)(1)(A) of the Internal Revenue Code of 1939. Textile Mills Securities Corporation v. Commissioner, 314 U.S. 326.

2. During the taxable years herein petitioner owned, maintained, and operated a pleasure boat on a lake near Hot Springs, Arkansas. The boat was used in part for entertainment in the promotion of petitioner's business and in part for the personal pleasures of its stockholders. On its returns, petitioner claimed deductions of the entire amounts expended by it in maintaining and operating the boat. Respondent disallowed half of the deductions so claimed. Held, that petitioner has failed to show that the respondent erred in his disallowance of one-half of the said deductions.

3. Petitioner, in the taxable years, made contributions to three hospitals, the deduction of which contributions was allowable to it under section 23(q)(2) of the 1939 Code. Held, that the respondent did not err in determining that the contributions to the three hospitals were not deductible as ordinary and necessary expenses under section 23(a)(1)(A) of the Code.

4. In 1950 petitioner employed Moody Moore, who at that time was employed full time by the State of Arkansas as Director of its Division of Hospitals. Petitioner employed Moore for the purpose of procuring his services and influence to the end that it would have an advantage over other concerns in the making of sales to hospitals, in respect of which Moore, as said director, had supervisory duties, powers, and functions. Such employment of Moore by petitioner and the services rendered by Moore to petitioner were antagonistic to and in conflict with Moore's duties and responsibilities as a public official. Held, that the compensation paid Moore, in the circumstances, was not an ordinary and necessary expense to petitioner within the meaning of section 23(a)(1)(A) of the 1939 Code.

The respondent determined deficiencies in income tax of $1,202.59 and $1,445.30 against the petitioner for the years 1949 and 1950.

The questions for decision are whether the respondent erred (1) in disallowing a deduction of $784.91 expended in 1949 for the purchase of a round-trip airplane ticket to England for a newspaperman who was to procure material and write articles on socialized medicine, under the sponsorship of the Arkansas Medical Society; (2) in disallowing as a deduction in both 1949 and 1950 one-half of the amounts expended in those years for the maintenance and operation of a pleasure boat; (3) in treating contributions made to hospitals in the taxable years as being subject, for deduction purposes, to the limitations of section 23(q) of the Internal Revenue Code of 1939, and not deductible under section 23(a)(1)(A); and (4) in disallowing for 1950 the deduction of $2,000 representing payments made to the Director of the Division of Hospitals of the State of Arkansas and claimed by petitioner as an ordinary and necessary expense.

FINDINGS OF FACT.

The petitioner is an Arkansas corporation, with its principal office in Little Rock. Its business is that of selling surgical and hospital supplies and equipment. It filed its income tax returns for the years herein with the collector of internal revenue for the district of Arkansas.

In 1949, William T. Stover, petitioner's president and general manager, was approached by two past presidents of the Arkansas Medical Society, with a request that petitioner purchase a round-trip airplane ticket to England for an experienced newspaperman who had been employed or commissioned by the Society to make a study of socialized medicine in England and upon his return to report to the Society on his findings and to write articles thereon for publication.

The interest of the Society in the matter was occasioned by agitation for the passage of legislation to establish some form of socialized medicine in this country. The Society has always opposed such legislation.

Some members of the Society, the number or percentage thereof not being disclosed, were or had been customers of petitioners, and most, if not all, of them were in position to promote goodwill, if not business directly, for petitioner.

Petitioner purchased the ticket as requested at a cost to it of $784.91, and the newspaperman made the trip as planned. Upon his return, he reported his conclusions to the Society and wrote articles thereon, which articles ‘were more unfavorable then favorable’ toward socialized medicine. Prior to their publication, the articles were submitted to the Society.

In purchasing the ticket, the petitioner knew the identity of the newspaperman and the purpose of his trip to England.

In its income tax return for 1949, petitioner claimed a deduction of the amount expended for the above ticket as an ordinary and necessary expense in the conduct of its business. It was disallowed by the respondent in his determination herein.

During the taxable years petitioner owned and maintained a 27-foot cabin cruiser on Lake Hamilton, near the city of Hot Springs, Arkansas. The boat was used at times in each of the said years for the purpose of entertaining doctors and their wives, representatives of hospitals and of supply houses with which petitioner did business, and petitioner's employees. It was also used by Stover in entertaining personal friends, and by the two sons of another stockholder.¹ The other stockholder maintained a summer home on the lake. Except for payments for gasoline when Stover was using the boat personally, petitioner paid all costs of maintenance and operations. As shown by a ledger sheet in petitioner's books of account, the major costs, by far, for the maintenance and operation of the boat were for repairs and boathouse rent and charges by Lake Hamilton Marine Service, presumably the operator of the boathouse. Beyond the fact that the payments to the Lake Hamilton Marine Service for some of the off-season months were $15 in amount, the rate of boathouse rent per month, there is no breakdown of the payments to the Lake Hamilton Marine Service. Repairs constituted a very substantial portion of the amounts expended on the boat in 1949.

In its income tax returns for both 1949 and 1950, petitioner deducted in full the amounts paid by it for the maintenance and operation of the boat. Respondent in his determination disallowed an amount indicated as one-half of such costs for each year.²

In 1949, petitioner made a contribution of $750 to the building fund of the Warner-Brown Hospital of El Dorado, Arkansas, and in 1950, petitioner also made a contribution to the building fund of St. Edward's Hospital of Fort Smith, Arkansas, and a contribution of $600 to the building fund of St. Vincent's Infirmary in Little Rock.

Each of the hospitals named had been substantial customers of petitioner prior to its making of the contributions, and they continued to be so thereafter.

Each of the above hospitals was of such character that contributions made to them by a corporation would have been deductible by the corporation under section 23(q) of the Internal Revenue Code of 1939.

In its income tax returns for 1949 and 1950, petitioner deducted the above contributions to the three hospitals as ordinary and necessary expenses in the conduct of its business. The respondent in his determination disallowed the expenses so claimed.

In its returns for the years herein and exclusive of the above contributions to the three hospitals, petitioner, pursuant to section 23(q), deducted contributions in an amount equal to 5 per cent of its net income computed without the benefit of the section 23(q) deductions. The respondent in his determination allowed the section 23(q) deductions as claimed.

By a statute enacted in 1947 by the Arkansas Legislature, a Division of Hospitals, which was to function as a part of or under the State Board of Health, was created. It was to ‘be administered by a full time salaries Director under the supervision and direction of the State Health Officer.’³ Among the functions of the Division of Hospitals, according to the statute, were the surveying of the need for construction of hospitals, and on the basis thereof, the developing of a program for the construction of public or other nonprofit hospitals; the making of applications for Federal funds under Public Law No. 725 of the Seventy-ninth Congress, approved August 13, 1946, entitled the ‘Hospital Survey and Construction Act’; to assist in carrying out the hospital construction program; the preparation and submission to the Surgeon General of the United States of a State plan for the construction of hospitals in the State of Arkansas;...