Gizzi v. Commissioner

Joe F. and Ann Gizzi, Petitioners v. Commissioner of Internal Revenue, Respondent Gizzi v. Commissioner Docket No. 8854-72 United States Tax Court 65 T.C. 342; 1975 U.S. Tax Ct. LEXIS 40; November 4, 1975, Filed *40 Decision will be entered for the respondent. Petitioner deducted as business expenses his costs of certain entertainment, travel, business gifts, and club dues. He had maintained adequate records of these expenses, but his records were inadvertently thrown out. Held, the records were not lost due to a casualty beyond petitioner's control, and therefore he was not relieved of the substantiation requirements of sec. 274. Sec. 1.274-5(c)(5), Income Tax Regs.Held, further, even if the loss of the records had been due to a casualty beyond his control, petitioner did not reasonably reconstruct his claimed expenses, and is not entitled to the claimed deductions. Joe Gizzi, pro se. William W. Stuart, for the respondent. Hall, Judge. HALL *342 Respondent determined a $ 10,588.53 deficiency in petitioners' 1969 Federal income taxes. The issues in this case are whether petitioners are entitled to the claimed deductions for business gifts, club dues, and travel, entertainment, and advertising expenses. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Petitioners Joe F. and Ann Gizzi, husband and wife, filed a joint income tax return for 1969. Petitioners resided in River *343 Forest, Ill., at the time they filed their petition. Ann Gizzi is a party only by virtue of having filed a joint Federal income tax return with her husband. Joe F. Gizzi will be referred to herein as petitioner. Petitioner followed several lines of work in 1969. He served as a commission agent for Acme Fast Freight Co. (Acme), a company which specialized in transporting freight between the Chicago area and the west coast. Petitioner's duties for Acme involved soliciting additional clients, and he received as compensation a percentage of the fees he generated. Acme*42 did not reimburse petitioner for any expenses involved in soliciting customers. Petitioner also operated an air freight delivery business under the name of B & G Trucking Co. (B & G Trucking), during 1969. And, in October 1969, petitioner began operating a drive-in restaurant named Fiorie's Drive-In. To encourage business in both of his freight ventures, petitioner felt it necessary frequently to entertain current and potential customers. It was common in his branch of the freight industry to entertain clients and give them gifts. To improve relations with Acme customers, petitioner would host golf parties, which included dinner and drinks, at the Cog Hill Country Club. In 1969, he hosted at least three such events, inviting both current and potential clients. Petitioner frequently gave gifts, such as turkeys, hams, and clock radios, to both his Acme clients and his B & G clients. In 1969 petitioner also made five or six trips to California to entertain a Mr. Donald Soul, an employee of International Business Machines. Petitioner hoped that Mr. Soul would exert influence to direct freight business to him. Palm Springs was chosen as their meeting place because, according to*43 petitioner, the opportunities "to have a good time, so to speak" were more abundant in Palm Springs than in Los Angeles. Petitioner's custom was to pay for his business entertainment expenses, gifts, and travel expenses in cash. He recorded these expenses by writing on a voucher the date, place, purpose, and amount spent. In the case of business entertainment expenses, he also recorded the persons entertained. For gifts he included a description of the gift and the name of the recipient. To prepare his tax return, petitioner separated his accumulated vouchers into the categories designated by his tax preparer. Petitioner kept no separate diary of expenses. *344 Petitioner kept his accumulated vouchers in the storage area of his residence. Sometime after filing his 1969 return, petitioner began to experience marital problems and moved from his home. Subsequent to his moving and prior to respondent's audit, petitioner's records somehow disappeared from the storage area. Petitioner's son indicated that the records had been inadvertently thrown out. Petitioner in his 1969 income tax return claimed total business-related deductions for all three of his business ventures in*44 the amount of $ 49,086.16. His Acme-related expenses totaled $ 40,262; his B & G Trucking expenses totaled $ 7,427.78; and his restaurant expenses totaled $ 1,396.38. Respondent disallowed $ 38,293.10 of petitioner's claimed deductions, consisting of $ 34,825.72 of Acme-related deductions and $ 3,467.38 of B & G Trucking deductions. 1 OPINION Petitioner contends he is entitled to deduct the various entertainment expenses, costs of business gifts, air travel, *45 and club dues in issue because they are ordinary and necessary business expenses within the meaning of section 162, 2 and, further, that he has met the substantiation and other requirements of section 274. Respondent asserts that petitioner did not comply with section 274, and we agree. Therefore we do not reach any issue under section 162. Section 274(d) provides that entertainment expenses, gifts, club dues, and travel costs are not allowable as deductions "unless the taxpayer substantiates by adequate records or by sufficient *345 evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, * * * or use of the [club], or the date and description of the gift, (C) the business purpose of the gift or other item and, (D) the business relationship to the taxpayer of persons entertained, using the [club], or receiving the gift." *46 The Treasury regulations, in section 1.274-5(c)(2), provide that "adequate records" shall consist of a diary or account book or similar record in which the elements of the expenditures are recorded at or near the time of the expenditure. Petitioner maintained a voucher system adequately delineating the elements of the various entertainment, travel, and gift expenditures. 3 The vouchers, however, were inadvertently lost. The question therefore is whether, having originally maintained adequate records, he nevertheless fails to meet the substantiation requirements if he cannot produce them here. *47 Under section 1.274-5(c)(5), Income Tax Regs., if the taxpayer can establish that (1) he at one time possessed adequate records and (2) that his present lack of records is due to fire, flood, or other casualty beyond his control, then he is free of the normal substantiation requirements. The taxpayer in such a situation must instead reasonably reconstruct his expenditures. These regulations closely follow the congressional reports which accompanied the 1962 congressional revisions to section 274. H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 427; S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 741. The facts before us do not support the claim that the records were lost due to a casualty beyond petitioner's control. Marital difficulties and their consequences, no matter how seemingly independent of petitioner's will, do not sufficiently resemble floods or fire to be considered a casualty. See William C. Silver, Jr., 31 T.C.M. 402, 41 P-H Memo. T.C. par. 72-102 (1972), in which the Court held, by implication, that loss of records while *346 *48 moving from one residence to another was not a casualty beyond the taxpayer's control. Even if the Court were to view the loss of petitioner's records as a casualty, petitioner has failed to fulfill the additional requirement of reasonably reconstructing his records. See, e.g., Lewis M. Bryan, 43 P-H Memo. T.C. par. 74,266 (1974) (records lost while moving; no effort at reconstruction); Marie Seckel, 33 T.C.M. 734, 43 P-H Memo. T.C. par. 74,170 (1974) (records were burglarized; no effort at reconstruction); Marjorie E. Blackburn, 32 T.C.M. 1194, 42 P-H Memo. T.C. par. 73,254 (1973) (records lost in flood; no effort at reconstruction). For example, petitioner did not provide any information concerning the cost of the country club parties, their dates, or the identities of the persons entertained. Petitioner was equally indefinite as to both his business gifts and his California journeys. Petitioner also failed to submit any evidence regarding his Traffic Club dues and expenses. Petitioner's witness, Mr. Joseph F. Candela, sales manager at Acme, was present at*49 some of the Cog Hill Country Club functions, but gave no testimony regarding the dates or cost of each function. He indicated the identities of only 3 of the alleged 75 customers attending these parties. He also failed to document the dates, places, recipients, and costs of gifts. The witness provided no details about the dates, amounts, or places involved in petitioner's California travel. The witness did not even mention the Traffic Club deduction. Petitioner simply has not met the reconstruction requirement. Decision will be entered for the respondent. Footnotes 1. Respondent disallowed the following items: (a) Concerning petitioner's Acme-related work: Meals, lodging and other travel expenses $ 3,422.18 Air travel 2,936.40 Traffic Club dues, dinners, and meetings 3,600.42 Entertainment 14,305.55 Advertising and promotions-sales aids 9,874.17 Prizes and giveaways 687.00 34,825.72 (b) Concerning B & G Trucking: Advertising and promotion $ 3,467.38 The record contains almost no information concerning the advertising and promotion deduction claimed by petitioner for both of his freight ventures.↩ 2. All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue.↩ 3. The elements in the case of entertainment expenses are the amount, time, place, business purpose, and business relationship of the recipient. Sec. 1.274-5(b)(3), Income Tax Regs. For a gift, in addition to the five elements immediately above, the taxpayer must include a description of the gift. Sec. 1.274-5(b)(5), Income Tax Regs. Concerning travel expenditures, including lodging and meals incidental to such travel, the taxpayer must prove the four elements of amount, time, place, and business purpose. Sec. 1.274-5(b)(2), Income Tax Regs.↩