Ulric v. Commissioner ( 1933 )

LENORE ULRIC, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Ulric v. Commissioner

Docket Nos. 48973, 53431.

United States Board of Tax Appeals

27 B.T.A. 666; 1933 BTA LEXIS 1345;

January 31, 1933, Promulgated

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Petitioner, a star in the theatrical profession, in order to make contacts, exchange ideas and viewpoints and to meet personally authors, critics, directors, newspaper writers and others, donated in 1927 and 1928 theatre tickets and dinners and entertainment to them, their friends, and others. Held, the expense so incurred is not deductible as ordinary any necessary expense of carrying on petitioner's business.

Meyer Kurz, Esq., for the petitioner.

R. W. Wilson, Esq., for the respondent.

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SEAWELL

Petitioner seeks redetermination of deficiencies in income tax for the year 1927 in the sum of $1,140.32, and for the year 1928 in the sum of $237.22. These deficiencies are the result of disallowance by the Commissioner of deductions of $7,075.75 for 1927 and $4,054.34 for 1928, claimed in said years by the petitioner, an actress, for expenses in entertaining newspaper critics, writers, theatrical producers, managers, vaudeville agents, authors and others connected with the theatrical and motion picture business, persons alleged to be in position to be helpful and useful to her in her professional work. Other issues, involving the addition of $229.86 to income on account of interest collected in 1927 by petitioner and omitted from the return, and the disallowance of $829.50 as a deduction ascertained to be a duplication, were conceded by the petitioner, leaving the single issue in reference to entertainment expense above stated.

FINDINGS OF FACT.

The petitioner, residing at 259 West 75th Street, New York City, is an actress and followed that calling during the entire years 1927 and 1928, the years involved in these appeals. During those years she played "Lulu Belle" and "Mima," which were produced by David Belasco, then and for some previous years her manager. For fifteen years petitioner has been an actress on the legitimate stage, sometimes also playing vaudeville. She was and still is a star in the profession. During the taxable years in question she received when playing in New York a straight salary from her manager, David Belasco, now deceased, and when on tour she received a minimum weekly salary and also a percentage of the box office receipts. During said years petitioner had a private financial secretary, who was in charge of hiring caterers and others for entertainment, making purchases and fixing prices, and writing checks and preserving the paid checks and receipts. No books of account were kept. During said years when on tour petitioner had a business manager, Tunis F. Dean, and an assistant business manager, Harry Shook.

In the prosecution of her work as an actress it was important for success that petitioner should know newspaper critics, writers, theatrical producers, managers, vaudeville agents, authors and other people connected with the theatrical and motion picture business, and to be favorably known by them. Theatrical stars generally do not have offices and this petitioner had none. To make the desirable contacts with the class of people mentioned a practical way is and was to entertain them socially by inviting them to dinners, luncheons and theatre parties, and this is usually done by all stars of the stage. Following such contacts authors have been known to write plays specially designed to suit the talents of the star visited. Such plays are known as "tailor made." Such contacts are generally designed to impress authors, theatrical producers, managers and agents with the advantages to be gained by business and professional associations with such actresses and sometimes lead to such associations and employment. Publicity and advertisement are important to all stars, and after contacting with newspaper critics and other writers in a social way there is greater prospect of voluntary publicity from them. There was no contract, tacit understanding or agreement, or any intimation or suggestion in any way or manner that any invited author, agent, newspaper critic, or other guest at such dinners, luncheons or theatre parties, during the taxable years in question, should furnish any publicity or in any other manner compensate the star for her hospitality or entertainment. The expense of entertaining critics, feature writers, columnists and press people generally, authors, agents, directors and other artists is usually incurred and paid by the starred and featured players in the theatrical business, and none of the expense of petitioner for such entertainments for the years 1927 and 1928 was reimbursed to her. During 1927 petitioner entertained at her home in honor of Max Reinhardt, a famous German producer, with more than a hundred guests present. For the occasion she purchased flowers, hired a caterer, extra serving help, an extra maid, musicians and decorators, and hired automobiles or taxicabs to bring the guests to her home and return them to their places of abode after the dinner. Exactly when the dinner was given, except that it was in 1927, was not stated in the evidence; the circumstances surrounding the entertainment and its specific purpose, other than to entertain and honor the distinguished German who was present, were not disclosed by any testimony and the cost attributable to it was not shown even approximately. There were present various people Mr. Reinhardt was delighted to know, and other people of the theatre. Incidentally it appeared in evidence that the petitioner personally, or through appointed agents, entertained also at Chicago, Cleveland and Detroit during the years involved in these appeals, but as to the specific dates, the attending circumstances and approximate individual cost of such entertainments there was no evidence. While on tour, petitioner's business manager was often delegated in her behalf to entertain various people. Like authority seems to have been also extended to the assistant manager. During 1927 petitioner refunded to the manager and assistant manager $440.39, in the aggregate, for advancements made by them for entertainment and theatre tickets during the year, and in 1928 she refunded to the assistant manager $964.45 advanced by him in like manner. These refunds constitute part of the deductions claimed by petitioner and are involved in these appeals. Whether petitioner knew previously of any purchase of such theatre tickets or of entertainments in her behalf given by her manager or assistant manager on tour, or was herself present at such entertainments, does not appear from the evidence.

The petitioner testified that in 1927 she spent $7,075.74 in entertaining authors, managers, critics, press people, agents and other actors and actresses and others connected either with the press or the theatre business, and in substantiation and corroboration she introduced in evidence paid and canceled checks drawn by her, or on her behalf, during the year 1927, payable to various payees or to cash. These checks bore no evidence of the purpose of their issuance, but the petitioner's secretary identified them and classified in the aggregate, the specific purposes for which they were issued as follows: For musicians, $80; auto hire, $99.95; caterers, $1,847.55; extra maid, $21; flowers, $214; "entertainment," $309.74; not remembered, $308; and theatre tickets, $4.082.74, a total of $6,962.98. We find the sum of $6,654.98 ($6,962.98 less $308) to be the amount expended in 1927 by the petitioner for theatre tickets and entertainment claimed by her to be deductible as ordinary and necessary business expense for said year. The petitioner testified that in 1928 she spent $4,054.34 in entertaining the same classes of people as in 1927, and in substantiation and corroboration she introduced paid and canceled checks drawn in 1928 and in like manner as those in the previous year and payable in similar manner as the 1927 checks, and her secretary identified them and classified, in the aggregate, the specific purposes for which they were issued as follows: For musicians, $26.50; auto hire, $17; caterers, $1,006.62; flowers, $316.50; "entertainment," $520.30; not remembered, $396.25; and theatre tickets, $1,329.65, a total of $2,283.67. We find the sum of $1,887.42 ($2,283.67 less $396.25) to be the amount expended in 1928 by the petitioner for theatre tickets and entertainment claimed by her to be deductible as ordinary and necessary business expense for said year. These aggregate sums include the refunds to petitioner's manager and assistant manager while on tour in said years.

Petitioner's income tax returns (Form 1040) for 1927 and 1928 showed gross income for the respective years of $69,533.17 and $42,922.89. Deductions claimed (other than those here involved) in the respective years included the following amounts acquiesced in and allowed by the Commissioner: Professional advertisement paid for by taxpayer in 1927, $675; in 1928, $450; tips to stage hands, theatre attendants and others in connection with the business of taxpayer, 1927, $480; 1928, $230; traveling expenses on the road while acting in plays, consisting of hotel, meals, tips and for taxpayer's maid and secretary, 1927, $9,645; 1928, $4,960; photographs for professional or display purposes, including fan photographs and postage, 1927, $3,125; 1928, $1,252.40.

OPINION.

SEAWELL: Entertainment to be a business expense and allowable as a deduction from gross income should have some definite, reasonable purpose connected with the business in hand and tending to its aid (), and be of a nature reasonably calculated to accomplish the end sought. Entertainment expense of this kind has been allowed as such deduction, ; ; ; . Where the expense is not incurred in the exercise of prudent business judgment and the business benefits are not direct and reasonably to be expected, such deductions are held not allowable. , and . If no definite line of demarcation exists, then it would seem "the rule of reason" should apply. (.)

When giving her testimony on the hearing in this proceeding petitioner was asked by her counsel what business benefit she sought to derive from these expenses for entertainment, and replied: "It was my idea to establish a contact, to have people with me, because our profession makes it necessary for us to know people personally and to know their emotional reactions and their angles on our business, our profession which is built of emotions, and in order to have them understand from our angle, our idea of a play. * * * if you are selecting a cast, it is necessary to find out their viewpoint, their reaction, their angle on a certain character, * * * whether it is an author, a newspaper man, a man who writes special stories, special features to be given to the public, it is practically the same thing. It is necessary to establish a contact in order to understand the right interpretation of a play or the role or various roles in the play."

When she was asked the "specific value" from a business point of view of maintaining contacts with prominent and successful authors, her reply was: "Well, in order to give them ideas, * * * if the author finds the general idea interesting, he writes a character or a play for this particular star. * * * A successful play may come of it, and a successful play may not come of it. It is an experiment, you see." Similarly, as to "critics," unless they have the "viewpoint" of the actress they may give to the public their own unaided impressions; as to "feature writers," they should know the kind of "sports" the actress likes and her "hobbies" so that this information may be conveyed to the public in their writings, if any; as to "directors," "it is the same idea as it would be with an author"; and as to a manager, he "is also another angle." There was no testimony to fit the entertainment, expense for which is here under investigation, to the general purposes of entertainments mentioned in the petitioner's evidence. Nowhere in the evidence were we shown that during the years 1927 or 1928 petitioner made contact by means of entertainment with an author to give him her ideas or to discuss details of a play to be written for her by him; or that she was engaged in selecting a cast for any play, making necessary contact with other actors or actresses. The general purposes of the entertainment provided by her during the taxable years appear not only remote in their relation to her business, but of a character not reasonably to be expected to benefit the business. There was no more than a bare possibility of business benefit as disclosed by the evidence.

In , relied on by petitioner, the main controversy was as to traveling expenses and there were only two small items of "entertainment" involved. One was when Cohan, a theatrical producer, supplied coffee and sandwiches to a cast rehearsing his play in Chicago. The cast so supplied were evidently in his employ. The other was when he entertained four or five critics and some city hall employees when promoting his play. In remanding the cause to the Board, the Circuit Court of Appeals made this entry: "The cause is remanded to make some allowance for the expenses of travel and the like; otherwise it is affirmed." In the instant case the petitioner's traveling expenses have been allowed and are not here involved; and also her expenses at hotels and for meals and tips for herself, her maid and her secretary have been allowed by the Commissioner as claimed by her.

Unfortunately, in this proceeding we were provided with no evidence as to the attendant circumstances of these entertainments, showing the amount or necessity of expense incurred. The nearest approach to such evidence was with reference to the entertainment in honor of the famous German producer, Max Reinhardt, in New York in 1927. This was an elaborate affair, with hired caterers, musicians, and decorators, and with cut flowers and automobiles for the use of more than a hundred guests. The cost is not mentioned or segregated from other similar expense claimed for the year. If the Board, in the performance of its duties, is required judicially to determine that claimed deductions do or do not fall within the scope of the statute, it must first know the facts in each particular instance and as to each item of the expense, in order to ascertain that it is or is not an ordinary and a necessary expense and such as has been incurred in carrying on the taxpayer's business. . An expense out of all proportion to the business and larger than any possible direct benefit to be derived therefrom could hardly be adjudged an ordinary and necessary business expense in accordance with the provisions of the statute. To permit the petitioner or her witnesses to decide that the expenses are ordinary and necessary and incurred in carrying on her business is for the Board to abdicate its duty.

The same observations apply in this case with reference to theatre tickets. Not only the expense for that purpose, amounting to $1,956.86 in the month of February, 1927, alone, should be explained in detail, but every item, however small. Generalities do not supply the rigid individualistic requirements of the law. Donations of one's stock in trade are not an ordinary method of increasing business; certainly the delegation of authority to others to make such donations would appear far removed from prevailing business practice; and if the donations of theatre tickets are claimed to be in the theatrical world an ordinary and necessary expense of business, it should be shown not in a general way, but in each instance in which the claim is made.

When the custom arose of entertaining other theatrical people by stars of the stage with complimentary tickets and dinners is not shown in the evidence. Legend tells us that Shakespeare died on his fifty-second birthday (April 23, 1616), and that his death was hastened, if not caused, by partaking of hospitality supplied by himself in entertaining his friends, Ben Jonson and another poet. The potency of donated favors, especially of food, in securing adherents is recognized. Francis Marion held together his dispirited troops by adding to their love of home and country some ash-baked sweet potatoes. Cannibals have been turned from a hostile to a friendly attitude by a cup of salt. Arabs, it is said, will not attack those with whom they have broken bread. Men, women and children have always been willing to follow a leader who can provide food in a desert place, if for no other reason than because of the loaves and fishes.

Friends are of great assistance to petitioner; but so they are to all others in whatever business they may be engaged. But they can not be purchased in a business way, even indirectly. Every expense from which some incidental business advantage may flow is not a business expense under the statute; and every business expense is not necessarily an "ordinary" expense, and even when it is such it may not be "necessary." There may be court suggestion that the word "and" which connects the words "ordinary" and "necessary" in the statute here involved (section 214(a) of the Revenue Act of 1926) should be given the meaning of "or," but we prefer to leave the statute as enacted by Congress. Even though the word "ordinary" might be considered as synonymous with "customary" (with which we do not agree), and even though it be admitted that it is customary for some stars to entertain as petitioner claims to have done, such entertainment has not been shown in this proceeding to have been reasonable in amount or extent, or necessary in fact to any extent. David Belasco, petitioner's manager, and one most eminent in the theatrical profession, according to the evidence of the petitioner herself, never entertained; and other actors and actresses, including stars, follow Mr. Belasco in this practice without, it appears, diminution of income or prestige.

Considering that there have been allowed as deductions to petitioner all her advertising expenses and all her other expenses connected directly and reasonably with the prosecution of her business as an actress, as hereinbefore and in our findings of fact pointed out, we must hold that the respondent was not in error in his determination of the deficiencies herein.

Judgment will be entered for the respondent.