Alter v. Commissioner

Robert H. Alter and Lucile Alter, Petitioners v. Commissioner of Internal Revenue, Respondent Alter v. Commissioner Docket No. 5722-66 United States Tax Court 50 T.C. 833; 1968 U.S. Tax Ct. LEXIS 74; September 9, 1968, Filed *74 Decision will be entered for the respondent. T maintained a "diary" in which he recorded alleged business-entertainment expenditures for which he received no reimbursement from his employer. He did not either obtain or retain receipts or other corroborating documentary evidence with respect to such expenditures. Held: The Commissioner properly disallowed deduction for all such expenditures of $ 25 or more. Sec. 1.274-5(c)(2), Income Tax Regs., supporting such action, is valid. William F. Sanford, 50 T.C. 823, followed. Gabriel T. Pap, for the petitioners. Robert M.*75 Pearl, for the respondent. Raum, Judge. RAUM *834 The Commissioner determined a deficiency in petitioners' income tax for the year 1964 of $ 287.86. At issue is whether a portion of a claimed deduction for entertainment expenses, in the amount of $ 618.30, was properly disallowed by the Commissioner for lack of substantiation. FINDINGS OF FACT Robert H. Alter and Lucile Alter are husband and wife. Their legal residence on the date of the filing of the petition herein was in Hastings-on-Hudson, New York, and they filed a joint Federal income tax return for the calendar year 1964 with the district director of internal revenue, Manhattan District, New York. Lucile Alter is a party to these proceedings solely by virtue of having filed a joint return with Robert H. Alter, and references hereinafter to "petitioner" will refer only to the latter. Throughout 1964, petitioner was employed as "vice-president in charge of sales" of the Radio Advertising Bureau, Inc., a trade association for the radio industry located in New York City whose function is to promote the use of radio as an advertising medium. Petitioner was paid on a straight salary basis, and received total wages *76 in 1964 in the amount of $ 28,355.79. Since Radio Advertising Bureau, Inc., was a trade association, "not a stock company," petitioner had no stock or other proprietary interest therein. Petitioner functioned as an "outside salesman," soliciting sales of radio time by making presentations to advertisers and advertising agencies. In this capacity, he was required to and did in fact make numerous business trips to various points in the United States, and when he was not traveling would also make sales calls in New York City. Petitioner's employer paid or reimbursed him, within certain guidelines, for expenditures incurred on business trips, such as transportation, meals, and lodging; it would also pay for entertainment expenditures whenever petitioner was specifically directed to incur them. However, there were many occasions in which petitioner felt it necessary to entertain either to further the sales objectives of the company or for his own personal advancement which were not covered by his employer's policy on entertainment expenses. As to these expenditures, mostly for dinners at various hotels and restaurants, and mainly in New York City, petitioner neither sought nor received*77 reimbursement. On his Federal income tax return for the year 1964, petitioner reported total "outside salesmen's expenses" of $ 7,187.13, less reimbursement from his employer of $ 3,330, and deducted the difference *835 of $ 3,857.13 as nonreimbursed employee business expenses. In his notice of deficiency, the Commissioner disallowed as a deduction $ 907.50 of the $ 3,857.13 so claimed, and adjusted downward petitioner's deduction for medical expenses in the amount of $ 36.30, with the following explanation: Business Expenses have been partially disallowed for lack of proper (sic) such as receipts etc. under provisions of Internal Revenue Code Section 274. Entertainment $ 618.30 Travel (taxis) 289.20 $ 907.50 Medical adjustment on adjusted gross income 36.30 943.80 Petitioner disputes here only the disallowance of entertainment expenses in the amount of $ 618.30, which approximates the total of petitioner's entertainment expenditures of $ 25 or more. Petitioner's expenditures for entertainment of less than $ 25 were not disallowed by the Commissioner. Petitioner kept a small pocket diary entitled "Business Entertaining Expenses At-A-Glance," in which*78 he had made 37 entries for 1964. The type of "entertainment," whether lunch, dinner, cocktails, or some other form of entertainment, was not set forth, but the entries did record the date, the alleged reason for the occasion, those present, the place of entertainment, and the total amount allegedly spent on each occasion. Petitioner either did not obtain or did not retain any receipts or other documentary evidence supporting the diary entries. Of the 37 entries, 17 involved alleged expenditures of $ 25 or more, and the Commissioner's disallowance was based on these items. OPINION This case raises the issue of the proper method to be used in substantiating deductions for entertainment expenditures under section 274(d), I.R.C. 1954. 1 That subsection precludes a taxpayer *836 from deducting any entertainment or similar expense unless he has substantiated such item, in all the various particulars there set forth, by "adequate records" or by "sufficient evidence corroborating his own statement." Regulations have been promulgated to define these terms, and, as far as is relevant to the disposition of this case, provide that in addition to maintaining a written record of his expenditures, *79 the taxpayer must retain documentary proof of every expenditure of $ 25 or more containing sufficient evidence to establish the amount, date, place, and the essential character of the expenditure. Sec. 1.274-5(c)(2)(i) and (iii), Income Tax Regs. If this "adequate record" is lacking, only "direct evidence, such as a statement in writing or the oral testimony of persons entertained" will ordinarily suffice to substantiate the expenditure in these respects. Sec. 1.274-5(c)(3), Income Tax Regs. In William F. Sanford, 50 T.C. 823, decided this day, we held that these provisions in the regulations represent a valid exercise of the Commissioner's authority to interpret the requirements of section 274(d). Petitioner's failure to produce either supporting documentary proof or direct evidence of the amount, date, and place of his expenditures of $ 25 and over clearly violates these regulations and thus the Commissioner's determination that such expenses were not properly substantiated must be sustained. *80 Although the Commissioner's notice of deficiency states that petitioner's entertainment expenses were partially disallowed "for lack of proper [substantiation] such as receipts etc. under provisions of Internal Revenue Code Section 274," the Commissioner correctly points out on brief that section 274 is a disallowance provision, and operates only to disallow expenses which have initially been demonstrated to be allowable under some other section of the Code. See H. Rept. No 1447, 87th Cong., 2d Sess., p. 19 (1962); S. Rept. No. 1881, 87th Cong., 2d Sess., p. 27 (1962). The Commissioner now takes the further position that in the circumstances of this case petitioner failed to meet even his initial burden of proving that the disallowed entertainment expenses were ordinary and necessary expenses of his trade or business, under section 162, I.R.C. 1954. In view of our conclusion in respect of section 274 and the accompanying regulations, it is unnecessary to reach this point. Decision will be entered for the respondent. Footnotes 1. SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES. (d) Substantiation Required. -- No deduction shall be allowed -- * * * * (2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, * * * * * * * unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility, or the date and description of the gift, (C) the business purpose of the expense or other item and, (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift. The Secretary or his delegate may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations.↩