Haun v. Commissioner , 13 B.T.A. 297 ( 1928 )

BLAIR A. HAUN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Haun v. Commissioner

Docket No. 19660.

United States Board of Tax Appeals

13 B.T.A. 297; 1928 BTA LEXIS 3267;

September 10, 1928, Promulgated

---

1. Where petitioner's personal living expenses are included in deductions claimed for ordinary and necessary business expenses, the respondent's disallowance of the deductions is approved in the absence of evidence showing what portion of such amounts was business expenses.

2. The deficiency for the year 1922 is not invalidated by respondent's failure to comply with section 1005 of the Revenue Act of 1924.

W. Z. Proctor, Esq., for the petitioner.

Benton Baker, Esq., for the respondent.

---

LANSDON

The respondent has asserted deficiencies in income taxes for the calendar years 1922, 1923, and 1924, in the respective amounts of $373.66, $369.29, and $54.41. The petitioner alleges that there has been no legal determination of the deficiency asserted for the year 1922 in that no written notice was given of the reexamination upon which this deficiency was based, as provided for in section 1005 of the Revenue Act of 1924, and that the respondent erroneously determined net income for each of the years by deducting from gross sales only the expenditures shown by check stubs which do not take into account cash expenditures.

FINDINGS OF FACT.

Petitioner is an individual residing at Des Moines, Iowa, where during the taxable years he operated a suburban retail drug store.

The business income as reported by the petitioner for the years 1922, 1923, and 1924 has been increased by the respondent in the respective amounts of $6,170.07, $6,857.25, and $2,786.70. For the year 1922 petitioner kept no records of his business except gross sales, and net income as shown on his return was based on estimates. Business records for the years 1923 and 1924 consist of cash register readings, check stubs and a ledger maintained for part of the time only. Respondent has arrived at net income for the year 1922 by applying to gross sales the average percentage of net income to gross sales shown in his computation of net income for 1923 and 1924. The net income for 1923 and 1924 was recomputed by taking the cash register readings as gross sales and deducting therefrom expenses as shown on the check stubs. No deduction was allowed on account of cash expenditures.

In connection with his drug business petitioner conducted a luncheon service. Supplies were purchased for cash at a nearby grocery and the cooking was done in petitioner's living quarters above the store. This luncheon service was responsible for the a large part of gross income during the taxable years and supplies therefore constituted a large part of the cash expenditures. There were many small expenses which were paid in cash, such as papers, magazines, freight, laundry, returned bottles, and revenue stamps. For each cash expenditure a "paid out" slip was put in the cash drawer and at the end of the day the total of these slips was entered in the ledger and the slips destroyed. The average daily cash expenditure for 1923 and 1924 was $7.

The petitioner maintained his home above the drug store. All his personal living expenses were paid in cash from the business funds and were included in the daily "paid outs." These in turn were entered in the ledger as business expenses and go to make up the $7 daily average found above.

OPINION.

LANSDON: It is alleged by petitioner that in asserting the deficiency for the year 1922 respondent violated the provisions of section 1005 of the Revenue Act of 1924 by making a second examination of his books without having given written notice of his intention so to do.

Section 1005 of the Revenue Act of 1924, which is identical with section 1309 of the Revenue Act of 1921, provides:

No taxpayer shall be subjected to unnecessary examinations or investigations, and only one inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Commissioner, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.

We have held in , that the respondent's failure to comply with the above section by notifying the taxpayer in writing that an additional examination of books was necessary, may not be interposed as a defense invalidating the deficiency based largely upon information derived from other sources, where the examination was conducted without objection by the taxpayer, as the protection afforded by section 1005 was waived by the failure to object. There is no evidence in the instant case that petitioner objected to the reexamination of his books, and his failure so to do constitutes a waiver of the protection afforded by the statute.

The petitioner contends that in computing net income there should be allowed as a deduction all ordinary and necessary business expenses whether paid in cash or by check. He contends that respondent's method disallows the deduction of cash expenditures.

During the years herein involved petitioner's living expenses were paid in cash from business funds and were entered in the ledger kept for part of the period as "paid outs," which we have found to have averaged $7 daily. It has been repeatedly held that personal expenses may not be deducted in computing net income. ; .

In the absence of evidence to show what portion of the cash expenditures should be allocated to the business, the respondent's determination must be approved.

Decision will be entered for the respondent.