Mill v. Commissioner

Horace Mill and Ruby A. Mill, Petitioners, v. Commissioner of Internal Revenue, Respondent Mill v. Commissioner Docket No. 5582 United States Tax Court 5 T.C. 691; 1945 U.S. Tax Ct. LEXIS 88; September 11, 1945, Promulgated *88 Decision will be entered under Rule 50. Petitioner's business was operating slot machines in club rooms of various lodges of the Loyal Order of Moose in the State of Ohio. Under agreement with the lodge officials the lodges received 75 percent of the "take" from the slot machines, the Ohio State Moose Association received 5 percent, and the petitioner received 20 percent. Held, that petitioner is not taxable on the income which belonged to and was received by the Ohio State Moose Association. Clarence K. Snyder, Esq., and Roger A. Zucker, Esq., for the petitioners. Lawrence R. Bloomenthal, Esq., for the respondent. Smith, Judge. SMITH *691 This proceeding involves a deficiency of $ 5,727.35 in petitioners' income tax for 1940. Petitioners allege that the respondent erred in including in their gross*89 income for 1940 $ 8,768.78 of income which they did not receive beneficially, and in disallowing the deduction of entertainment expenses of $ 1,409.10 and an attorney's fee of $ 100. FINDINGS OF FACT. Petitioners are husband and wife and are residents of Akron, Ohio. They filed a joint income tax return for 1940 with the collector of internal revenue for the eighteenth district of Ohio, at Akron. During 1940 and prior years Horace Mill, hereinafter referred to as petitioner (his wife, Ruby A. Mill, being a party to this proceeding only by reason of the fact that they filed a joint return for 1940), was engaged in the business of operating slot machines in the club rooms of various lodges of the Loyal Order of Moose and other fraternal groups in the State of Ohio, including the Elks, Eagles, and *692 Veterans of Foreign Wars. The controversy in this proceeding relates only to the operation of the slot machines installed in the lodge rooms of the Loyal Order of Moose. Petitioner had informal agreements with the officials of the individual lodges of the Loyal Order of Moose permitting him to install the slot machines in their club rooms on condition that the lodges should receive*90 a percentage of the "take" from the slot machines. Prior to 1935 the lodges received 80 percent of the take and petitioner 20 percent. At the National Convention of the Loyal Order of Moose held in Akron in July 1935, the officials of the national organization and those of most of the individual lodges agreed informally upon a plan to have a portion of the proceeds from the slot machines installed in the various lodge rooms paid over to the Ohio State Moose Association. The Ohio State Moose Association, hereinafter referred to as the state association, was created in 1929 for the purpose of promoting the Loyal Order of Moose in the State of Ohio. It maintained a group of paid employees who traveled about the state organizing new lodges and assisting those already organized in maintaining membership and uniform standards of operation. Prior to 1935 the state association was financed by quota assessments made against the individual lodges. In July of that year, pursuant to the plan agreed upon at the national convention, most of the individual lodges agreed to have 5 percent of their share of the slot machine proceeds go to the state association in lieu of their quota assessments, *91 and resolutions to that effect were adopted by their directors. Petitioner was informed of the arrangements and he agreed, as a matter of convenience, to transmit to the state association its share of the proceeds if the individual lodges would give him written authorization to do so. The Barberton, Ohio, lodge wrote to the petitioner on July 27, 1935, as follows: Starting August 1st 1935 you are hereby authorized to deduct 5% of our slot machine money (5 cent & 10 cent machines only) and send same to The Ohio State Moose Association c/o Lawrence Grove State Secretary in Cleveland to further the work of the Moose throughout the State. Similar letters were written to petitioner by the other lodges. All collections of money from the slot machines were made by petitioner or some of his employees. They would visit the club rooms of the lodges usually about once a week, and, with the assistance of some official of the lodge, would open the slot machines, count and wrap the money, and make out a collection slip which both would sign. The lodge officials would retain their 75 percent and petitioner would keep the balance. At the end of each month petitioner would remit to the state *92 association by check the 5 percent which it was *693 entitled to receive under the agreement. Accurate accounts of all of these transactions were kept by petitioner. The total amount remitted to the state association in 1940 was $ 8,768.78. Some of the lodges which first agreed to share their proceeds with the state association later abandoned the plan and instructed petitioner to discontinue the remittances to the state association. On April 10, 1942, the Warren, Ohio, lodge wrote petitioner as follows: Our Lodge has made new arrangements with the Ohio State Moose Association in reference to the payment of funds to the Association. As of April 15, we will stop contributing to the Ohio State Moose Association 5% of the gross receipts of our machines, and, instead, will pay a quota assessment. You are therefore requested, on and after April 15, 1942, to stop taking from our share of the machines the 5% which you have heretofore deducted; and you will therefore turn over to the Lodge 80% of the income of these machines. It was customary for petitioner and his employees to buy drinks or cigars for the lodge officials, and other lodge members who happened to be present, whenever*93 the slot machine money was collected. Since the collections were not made at regular times it was often necessary to call the officials from their work or their homes to assist in the counting. The custom of "treating" was partly to compensate them for these inconveniences and partly to build up and retain the good will of the lodge officials. Such gratuities did not increase the amount of "play" on the slot machines or directly increase petitioner's income. During 1940 a total of $ 1,409.10 was expended in this manner by petitioner and his employees. In 1940 petitioner paid an attorney a fee of $ 100 for services in protesting a ruling of the Commissioner in respect of his income tax for 1938. In his return for 1940 petitioner claimed the deduction of both of the above amounts of $ 1,409.10 and $ 100 as ordinary and necessary business expenses. The respondent disallowed the deduction of both items. Petitioner reported a net income for 1940 of $ 54,666.62, over $ 50,000 of which was from his slot machine business. With the adjustments referred to above and others not here material the respondent has increased petitioner's net income to $ 65,394.14. The operation of slot machines*94 was unlawful in the State of Ohio in 1940. OPINION. Petitioner contends that the $ 8,768.78 representing the 5 percent of the slot machine income for 1940 which he paid over to the state association in that year was not his income, but was the income of the state association. *694 We think that the evidence supports petitioner's contention on this point. Petitioner could place his slot machines in the club rooms of the various lodges only with the consent of the lodge officials and on condition that the lodge should receive a large portion of the slot machine proceeds. In 1935 the lodges agreed that 5 percent of such proceeds should be paid to the state association and that their share should be reduced accordingly, to 75 percent instead of 80 percent. The state association agreed to accept that portion of the slot machine income in lieu of the quota assessment which they had been receiving from the lodges. The 5 percent which petitioner paid to the state association was no more his income than was the 75 percent which went to the local lodges. The respondent does not contend that that was income to the petitioner. The most practical view of the situation, perhaps, is that*95 petitioner and the individual lodges and the state association all participated in the slot machine business and divided the "take" among themselves. Regardless of the fact that the operation of slot machines was unlawful in the State of Ohio, we think that petitioner is taxable only upon the income which he received beneficially. The 5 percent which he remitted to the state association was never his income. We think that the respondent properly disallowed the deduction of both the $ 1,409.10 item claimed as entertainment expenses and the attorney's fee of $ 100. The evidence does not show that it was necessary for petitioner and his employees to buy drinks and cigars for the lodge officials or that it was of any substantial benefit to his business. Petitioner was not selling any commodity to the lodges and he admitted that these expenditures did not increase the "play" on the slot machines or his own income. There is no evidence that his slot machine business was in any way dependent upon the gratuities. We think that such expenditures were of a personal nature and not a business expense, as the respondent has determined. There is no evidence of record as to the nature of the*96 services for which the attorney fee was paid except that it was for protesting an income tax ruling by the Commissioner. In the absence of further evidence, we can not determine that the expenditure was paid "in carrying on any trade or business" or "for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income," within the meaning of section 23 (a) of the Internal Revenue Code. Decision will be entered under Rule 50.