Rodgers Dairy Co. v. Commissioner , 14 T.C. 66 ( 1950 )

Rodgers Dairy Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. A. DeLucia, Petitioner, v. Commissioner of Internal Revenue, Respondent. Brass Rail Restaurant Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Rodgers Dairy Co. v. Commissioner

Docket Nos. 16152, 19906, 19907

United States Tax Court

14 T.C. 66; 1950 U.S. Tax Ct. LEXIS 291;

January 27, 1950, Promulgated

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Decisions will be entered under Rule 50.

1. Deductions -- Ordinary and Necessary Business Expenses -- Advertising Expenses. -- Where it is claimed by the Commissioner that the exhibiting of show animals by a corporation was a hobby of its controlling stockholder, rather than a means of advertising the corporate business, the test of deductibility of expenses incident thereto is whether the corporation honestly intended to acquire and continue to use the animals for advertising purposes, or whether that was merely a cloak for the alleged hobby, and the reasonableness of such expenditures in relation to the business is one indication of that intent.

2. Deductions -- Ordinary and Necessary Business Expenses -- Automobile Expenses. -- Where a corporation acquires and maintains an automobile for the use of its principal officer in his conduct of the business, the corporation is entitled to deduct all expenses incident to the operation and maintenance of the automobile and the depreciation thereon, even though the officer uses the automobile to a small extent for personal uses, and to that latter extent the equivalent of the expenses and depreciation is taxable to him as additional compensation representing the approximate value of his personal use of the vehicle.

3. Deductions -- Ordinary and Necessary Business Expenses -- Entertainment Expenses. -- Amounts expended for the entertainment of persons from whom the taxpayer procured business supplies are deductible as ordinary and necessary business expenses when shown to be for the promotion of the taxpayer's business.

Sidney B. Gambill, Esq., for the petitioners.

George C. Lea, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined deficiencies in income and excess profits taxes of Brass Rail Restaurant Co. (herein called Brass Rail) as follows:

		Excess profits
Year	Income tax	tax
1941	$ 748.83
1942	574.25	$ 2,602.01
1943	574.25	604.41
Total	1,897.33	3,206.42

The Commissioner determined deficiencies in income and excess profits taxes of Rodgers Dairy Co, (herein called Daury) as follows:

		Excess profits
Year	Income tax	tax
1942	$ 514.88
1943		$ 2,336.69
1944		5,415.06
1945		3,799.67
Total	514.88	11,551.42

The Commissioner determined a deficiency of $ 1,216.99 in income tax of E. A. DeLucia (herein called DeLucia) for the year 1941.

The issues for decision are as follows:

(1) Whether Brass Rail is entitled to deduct as ordinary and necessary business expenses under section 23 (a) for the taxable years 1942 and 1943 amounts expended by the company during those years for the maintenance, training, and transportation of show horses.

(2) Whether Brass Rail is entitled under section 23 (l) to deduct for each of the taxable years 1942 and 1943 amounts representing depreciation on show horses owned by the company.

(3) Whether Dairy is entitled to deduct as ordinary and necessary business expenses under section 23 (a) for the taxable years 1942, 1943, 1944, and 1945 amounts expended for the maintenance, training, and transportation of show horses.

(4) Whether Dairy is entitled to deduct under section 23 (l) for the taxable year 1945 an amount representing depreciation on show horses owned by the company; and for the taxable years 1942, 1943, 1944, and 1945 amounts representing depreciation on saddles, bridles, drapes, and a trunk used in connection with the training and showing of its horses.

(5) Whether Brass Rail is entitled to deduct as an ordinary and necessary business expense under section 23 (a) for each of the taxable years 1941, 1942, and 1943 amounts expended for the maintenance of two Russian wolf hounds.

(6) Whether Brass Rail is entitled to deduct as an ordinary and necessary business expense under section 23 (a) for each of the taxable years 1941, 1942, and 1943 amounts expended for the maintenance and operation of an automobile owned by the company.

(7) Whether Brass Rail is entitled to deduct under section 23 (l) for each of the taxable years 1941, 1942, and 1943 amounts representing depreciation on the automobile owned by that company.

(8) Whether DeLucia is entitled to deduct as an ordinary and necessary business expense under section 23 (a) for the taxable year 1941 an amount representing wages and taxes which he paid on account of a chauffeur employed by him.

(9) Whether Brass Rail is entitled to deduct as an ordinary and necessary business expense under section 23 (a) for each of the taxable years 1942 and 1943 amounts expended on liquor for the entertainment of the company's suppliers.

(10) Whether the Commissioner erred in including, as taxable income of DeLucia in 1941, 60 per cent of the amount expended in that year by Brass Rail for maintenance and operation of an automobile owned by the company, 60 per cent of the depreciation claimed on the automobile in that year, and an amount expended by the company in 1941 for the training and maintenance of two Russian wolf hounds.

FINDINGS OF FACT.

Petitioners Brass Rail Restaurant Co. and Rodgers Dairy Co. are corporations organized and existing under the laws of the Commonwealth of Pennsylvania. They filed their tax returns for the taxable years with the collector of internal revenue for the twenty-third district of Pennsylvania.

Petitioner E. A. DeLucia is an individual who during the period here in question resided in Pittsburgh, Pennsylvania, and filed his tax returns with the collector of internal revenue for the twenty-third district of Pennsylvania.

Each of the corporate petitioners conducted a restaurant business, serving food and beverages at prices ranging from 5 cents to a maximum amount less than $ 1. Brass Rail operated a chain of ten restaurants, all in Pittsburgh, except one located at Dormont, a suburb of Pittsburgh. Dairy operated twelve restaurants, all in Pittsburgh except two, one in Wilkinsburg and the other in Mt.Lebanon, also suburbs of Pittsburgh. All of the Brass Rail restaurants sold liquors, wines, and beer, but the Dairy restaurants did not.

DeLucia was president and J. A. Dolmovich was secretary-treasurer and manager of both corporate petitioners during the taxable years.

The board of directors of Brass Rail consisted of DeLucia, Dolmovich, and Anna Rodgers, who is the wife of DeLucia's nephew. The board of directors of Dairy consisted of DeLucia, his wife, Jean Wanda DeLucia, and Dolmovich.

The stock of Brass Rail during the years 1941 to 1943, inclusive, and of Dairy during the taxable years was owned as follows:

	Shares owned
Owner
	Brass Rail	Dairy
E. A. DeLucia	426	61,100
Jean Wanda DeLucia	50	500
J. A. Dolmovich	20	800
Bernice Lois Dolmovich	1
Mathilda Dolmovich		60
Andrew Pepper	2
Anna A. Rodgers	1	10
Brass Rail		35,955
Scattered holdings -- 150 or less per holder		1,575
Total	500	100,000

The general offices and warehouses of Brass Rail and Dairy are located on Neville Street in Pittsburgh. A lot about 200 feet deep and fronting on Neville Street adjoins the building which was purchased in 1941. The petitioners planted grass and shrubbery and installed walkways, a simulated well, lantern posts, and a picket fence on the lot. A large neon sign on the front of the building identifies it as the property of Brass Rail. The building is located so that it can be seen by a good many people passing by.

Brass Rail purchased two Russian wolf hounds in 1941. A kennel for the dogs was built at the rear of the lot. The dogs were allowed to run in the lot during the daytime and could be seen from the street. The wolf hounds were exhibited at three dog shows in Pittsburgh, all within nine days in the year 1942. They were listed in each dog show catalogue as belonging to Brass Rail. DeLucia lived at the King Edward Apartments, two blocks from the Brass Rail offices, but never took the dogs home with him. The dogs were never off the lot except for the three dog shows and one occasion in 1943 when they escaped.

Brass Rail expended the following amounts for food and kennel fees and expenses in connection with the keeping and showing of the two dogs, including $ 100 paid in 1943 on account of damages inflicted by the dogs:

	1941	1942	1943
Board	$ 104	$ 33.75	$ 33.75
Kennel fees and expenses			24.40
Damages			100.00
Total	104	33.75	158.15

Brass Rail claimed deductions in those amounts as ordinary and necessary business expenses for advertising. The Commissioner disallowed the deductions and included the $ 104 claimed as a deduction in 1941 in DeLucia's taxable income for that year. The amounts expended were ordinary and necessary expenses of the business.

Brass Rail and Dairy advertised prior to 1941 through three Pittsburgh newspapers, and by giving away $ 20 in gold daily to customers holding lucky tickets which were given with food purchases.

Brass Rail's prior advertising expenditures ranged from a high of $ 8,165.01 in 1932 to a low of $ 275.31 in 1939. Its sales for the taxable years averaged about $ 740,000 and its net income about $ 39,000.

Dairy's prior advertising expense ranged from a high of $ 2,009.24 in 1939 to a low of $ 469.28 in 1937. Its sales for the taxable years averaged about $ 618,000 and its net income about $ 35,000.

The board of directors of Dairy passed a resolution on December 1, 1941, which was in part as follows:

Mr. DeLucia spoke on increasing the volume of business because the Corporation has not made enough profit for the amount of the investment. He suggested trying advertising to the extent of $ 5000 per year. And, he also said, that Show Horses would be a big ad for the Corporation. So he presented the buying of two Show Horses for advertising purposes from Green's Farms, Clarence, New York, for the sum of $ 2350.

The minutes of the Brass Rail board of directors' meeting of June 2, 1942, show that DeLucia suggested an increase in advertising expenditures in order to preserve the company's established good will. He suggested spending $ 5,000 per year and recommended the use of show horses for that purpose. He moved that one horse be bought "for advertising purposes" for the sum of $ 1,000, and his motion was adopted. The board of directors of Brass Rail on July 15, 1942, authorized the buying of two additional show horses "for advertising purposes." This resolution also was introduced by DeLucia.

The horses mentioned above, and one or more additional horses, were acquired by Brass Rail and Dairy. Horses of the corporate petitioners were exhibited under the names of their owners in 24 shows, at least 20 of which, and perhaps all of which, took place within the years 1942 through 1945. About 11 of the shows were either in Pittsburgh or within a radius of 30 miles of Pittsburgh. The others were at places remote from Pittsburgh, 8 of them outside of the State of Pennsylvania.

Brass Rail and Dairy use a blue and white color scheme on their store fronts and trucks. Those same colors were used when the horses were shown. The blankets were blue and white, as were the drapes hung on the stables and the equipment trunks. The companies' initials were painted on the equipment trunks. Signs were displayed in front of the stables at each show disclosing that Brass Rail and Dairy were the owners of the horses. Catalogues, in which the companies were listed as the owners of the horses, were distributed at each show.

The horses won many prizes at the shows in which they were exhibited. A display of some fifty to seventy-five ribbons was exhibited on the walls of the corporate offices. One large cup was displayed for a week in each of the Brass Rail restaurants at a time not disclosed by the record.

The corporate petitioners advertised their show horses in several of the programs as being "of North Hills Stables." DeLucia personally owned North Hills Stables. He was listed as a box holder in the program of one show.

DeLucia never rode a horse in any show. He did not personally train the horses. That was done by hired trainers. He never rode the horses except when no trainer was available, and then only to exercise them in the immediate vicinity of their barns. Sometimes he personally cleaned their stalls. He later, at a time not disclosed in record, purchased his own stables and the horses were boarded there at the same rate as other stables had theretofore been charging the corporate petitioners.

Some of the horses were sold at substantial profits. Stud fees were collected and credited to advertising.

The cost of the first two horses purchased by Dairy in 1941 was charged to advertising and claimed as a deduction in that year, the deduction being allowed by the Commissioner. Two additional horses were purchased by Dairy in June, 1945, and three others by Brass Rail in June and July of 1942. The horses were four to six years of age when acquired and were assigned a useful life of eight years by their owners for depreciation purposes. The claims of the corporate petitioners for depreciation deductions on the horses purchased after 1941 were disallowed by the respondent. They were allowable deductions.

The amounts expended by Brass Rail and Dairy for care and maintenance of the horses, transporting them to the various horse shows, entry fees and other miscellaneous expenses, were as follows:

Year	Brass Rail	Dairy
1942	$ 600.00	$ 1,991.93
1943	1,354.00	2,463.45
1944		2,588.76
1945		2,595.95

The corporate petitioners claimed deductions in those amounts in those years as ordinary and necessary business expenses for purposes of advertising. The deductions were disallowed by the respondent. They were ordinary and necessary expenses of the businesses.

Dairy purchased some bridles, saddles, drapes, and a trunk during 1942, 1943, and 1944 for use in the training and showing of its horses. These items were assigned a useful life of five years and Dairy claimed depreciation deductions thereon. The deductions were disallowed by the respondent. The deductions were allowable.

An automobile was purchased and maintained by Brass Rail for the use of DeLucia. It was used 90 per cent for business purposes and 10 per cent for nonbusiness purposes of DeLucia during 1941, and the nonbusiness use during 1942 and 1943 was negligible.

Brass Rail claimed deductions for the years 1941, 1942, and 1943 in the respective amounts of $ 934.22, $ 459.97, and $ 234.37 representing expenditures for the operation and maintenance of the automobile. The respondent disallowed 60 per cent of those deductions, and included the 60 per cent disallowed in 1941 in DeLucia's taxable income for that year. The entire expenditures were ordinary and necessary expenses of the business.

Brass Rail claimed deductions for the years 1941, 1942, and 1943 in the respective amounts of $ 741.77, $ 753.19, and $ 753.19, representing depreciation on the automobile. The respondent disallowed 60 per cent of those deductions and included the 60 per cent disallowed in 1941 in DeLucia's taxable income for that year. The entire amounts claimed were allowable deductions.

Brass Rail employed a driver for the automobile prior to 1938. The driver was on duty from 8 a. m. to 6 p. m. daily. The "forty hour law" came into effect in 1938, limiting the number of hours an employee could work if employed by a concern employing more than eight persons. The board of directors of Brass Rail then requested DeLucia to pay the driver's salary himself, which he did thereafter. Brass Rail did not reimburse him for such expenditures.

DeLucia expended the following amounts in 1941 in connection with the employment of a chauffeur:

Salary	$ 1,360.46
Federal old age benefits	13.61
State unemployment compensation fund	36.72
Compensation insurance	15.00
Total	1,425.79

He claimed a deduction for the total amount as an ordinary and necessary business expense. The deduction was disallowed by the respondent. Ninety per cent of the expenditures were ordinary and necessary expenses of his business.

Brass Rail expended $ 424.50 in 1942 and 108 in 1943 on liquor which was used for entertaining men from whom the companies purchased supplies. The liquor was kept in the company office at all times. The company claimed deductions for those amounts as miscellaneous business expenses. The deductions were disallowed by the respondent. The expenditures were ordinary and necessary expenses of the business.

OPINION.

Brass Rail and Dairy purchased some show horses and also some show dogs. They contend that they obtained those animals for advertising purposes. The Commissioner has disallowed all deductions claimed in connection with the ownership and use of the animals, and his principal contention seems to be that they were obtained, not for advertising the two chains of restaurants, but for the personal pleasure of DeLucia. Apparently, the petitioners' claim that the dogs and horses were acquired and used for advertising purposes overtaxes the Commissioner's credulity, and that is understandable in view of the fact, inter alia, that most of the shows in which the horses were exhibited were in places remote from Pittsburgh rather than before local audiences who might possibly be attracted to the chain of restaurants by the exhibition of the horses. There is no question of amounts and the totals are not large in relation to the business sales and income.

Decision of all of the issues having to do with the ownership and use of these animals depends upon whether Brass Rail and Dairy honestly intended to acquire and use the animals for advertising purposes and continued to use them for that purpose, or whether "advertising" was merely a thin cloak for the pursuit of a hobby by DeLucia. Cf. Aptos Land & Water Co., 46 B. T. A. 1232. The reasonableness or unreasonableness of the expenditures in relation to the business is one test of that intent. The Commissioner must depend largely, if not entirely, upon circumstantial evidence to support his contention, because there is no direct showing that DeLucia had as a hobby the ownership and exhibiting of dogs and horses. There is direct evidence, on the other hand, that the horses were acquired for advertising purposes and also that they were used for that purpose. The evidence, as a whole, leaves considerable doubt, but it preponderates slightly in the petitioner's favor, and findings have been made that the claimed deductions are allowable. This disposes of the issues listed above as 1, 2, 3, 4, 5, and the last part of 10.

Another question has to do with the maintenance and operation of an automobile owned by Brass Rail and with the salary of a chauffeur who operated the automobile. The Commissioner, in determining the deficiencies, took the position that 40 per cent of the use of the automobile was for business purposes and 60 per cent was personal use by DeLucia. He allowed Brass Rail to deduct 40 per cent of the expenses and 40 per cent of the depreciation on the automobile, and for the year 1941 he added the remaining 60 per cent of each item to the income of DeLucia. He attempts to justify adding the amounts to the income of DeLucia upon the theory that they represent additional compensation. They would, as additional compensation to DeLucia, nevertheless, be deductible by Brass Rail. The evidence is clear that Brass Rail owned and operated the automobile solely for the benefit of DeLucia in his conduct of the business of the company. The entire amounts expended by Brass Rail are deductible. While DeLucia did not use the automobile exclusively for business purposes, nevertheless, the nonbusiness uses during the taxable years 1942 and 1943 were so small that they may be disregarded for present purposes. Cf. R. Golden Donaldson, 18 B. T. A. 230. DeLucia made some personal use of the automobile and he has failed to show that such use during 1941 was inconsequential. An allocation between business and nonbusiness use is necessary, Cohan v. Commissioner, 39 Fed. (2d) 540, and although the evidence does not show how much of one use there was and how much of the other, a finding has been made that 10 per cent was nonbusiness use. It follows that DeLucia should deduct only 90 per cent of his expenditures in connection with the chauffeur, and that the equivalent of 10 per cent of the cost of operating the automobile and 10 per cent of the depreciation for 1941 was properly included in his income as additional compensation from Brass Rail, being the approximate value of his personal use of the car.

The remaining issue is whether Brass Rail is entitled to deduct as ordinary and necessary business expense the amounts expended on liquor for the entertainment of persons who supplied the company with goods. The amount is not large in relation to the purchases of the company, and the evidence, such as it is, preponderates in favor of the petitioner, with the result that it is entitled to the deduction claimed. Cf. I. Goldman, 12 B. T. A. 874; F. L. Bateman, 34 B. T. A. 351.

Decisions will be entered under Rule 50.