Challenge Mfg. Co. v. Commissioner , 37 T.C. 650 ( 1962 )

Challenge Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. Ross Castendyck and Kathryn J. Castendyck, Petitioners, v. Commissioner of Internal Revenue, Respondent

Challenge Mfg. Co. v. Commissioner

Docket Nos. 83092, 83093

United States Tax Court

37 T.C. 650; 1962 U.S. Tax Ct. LEXIS 218;

January 10, 1962, Filed

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Decisions will be entered under Rule 50.

1. Expenses and depreciation on yacht and other boats owned by corporation, in exclusive possession of its sole stockholder, held not deductible by corporation in excess of amounts allowed by the Commissioner.

2. Certain travel and other expenses paid by corporation held personal and not deductible by corporation.

3. Expenditure for certain stereoviewers held capital outlay rather than business expense.

4. Amounts properly disallowed in 1 and 2 held equal to fair value of benefits received by sole stockholder and taxable to him as dividends.

George M. Bryant, Esq., and Houstin Shockey, Esq., for the petitioners.

David R. Brennan, Esq., for the respondent.

Raum, Judge.

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RAUM

Respondent determined the following deficiencies in income tax:

	Corporate	Individual
Year	petitioner	petitioners
1956	$ 17,044.34	$ 13,566.38
1957	12,662.38	8,772.72

The principal matters in controversy are (1) whether the Commissioner correctly disallowed one-half of the expenses paid by the corporate petitioner in connection with certain boats owned by it (but which were in the exclusive possession of one of the individual petitioners, its sole stockholder) as well as one-half the depreciation upon such boats; (2) whether he properly disallowed deductions to the corporate petitioner which he determined to represent travel and other personal expenses of the individual petitioners; and (3) whether amounts equal to the deductions disallowed in (1) and (2) may properly be included as dividends in the income of the individual petitioners.

FINDINGS OF FACT.

Some of the facts have been stipulated and, as stipulated, are incorporated herein by reference.

Petitioners J. Ross Castendyck and Kathryn J. Castendyck, husband and wife, reside at Newport Beach, California. They filed joint income tax returns for the years 1956 and 1957 on the cash basis with the district director of internal revenue at Los Angeles, California.

Petitioner Challenge Manufacturing Company is a California corporation, wholly owned by J. Ross Castendyck (sometimes hereinafter referred to as Castendyck), and is a successor to a sole proprietorship formerly operated by him. Its principal place of business is in Los Angeles County, California, some 25 miles from Newport Beach. It filed its corporation income tax returns for the taxable years, on an accrual basis, with the district director of internal revenue at Los Angeles, California. During 1956 and 1957 it engaged in the manufacture primarily of mobile concrete mixers, and to a considerably lesser extent of trench-digging machines and equipment used in the commercial laundry business.

Castendyck began manufacturing concrete mixers as a sole proprietor in the late 1940's, and it was that sole proprietorship (known as Challenge Manufacturing Co.) that was later transferred to the corporate petitioner in 1951, as hereinafter set forth.

Initially, Castendyck had no sales force for the mixers, the sales being effected through personal contact between him and customers. In 1949, he entered into an agreement with Cook Brothers Equipment Co. (hereinafter sometimes referred to as Cook) whereby Cook agreed to act as the sole nationwide distributor for his concrete mixers. A written agreement was executed on March 10, 1950, to carry out this arrangement, and it was thereafter amended on August 14, 1950, December 7, 1951, and December 21, 1951.

Castendyck organized the corporate petitioner on April 20, 1950, and transferred to it on January 1, 1951, the net assets of the sole proprietorship, exclusive of land and plant, in exchange for all of its capital stock at a net value of $ 50,183. The land and plant were then leased to the corporation under an oral agreement. He has continued to be the sole stockholder at all times material herein. He was its chief executive and devoted all of his working time to its business.

When the corporate petitioner commenced business in 1951, Cook continued to act as the exclusive distributor for Challenge concrete mixers, and the corporate petitioner became privy to the distributorship agreement. Under the terms of the distributorship agreement Cook had the exclusive right to establish, appoint, and create other franchise dealers and subdistributors to handle the general sale and distribution of Challenge mixers upon such terms and conditions as it deemed to be to the best interest of Cook and the corporate petitioner. In California, Arizona, and Nevada, Cook sold Challenge mixers directly to customers, but sales in other areas were made through dealers. The agreement also gave it the exclusive right to handle all necessary advertising and sales promotion and take such other steps as it deemed necessary to expedite and handle the selling of Challenge mixers. Neither the corporate petitioner nor Castendyck could, under the agreement, sell or lease mixers directly to users since Cook was the exclusive distributor. Sales and leases to users were made only by Cook.

Cook became a corporation in the middle 1940's, and succeeded to a business previously conducted by a partnership. The partnership had been engaged since the late 1930's in the manufacture of dump trucks and other heavy-duty type trucks used in the construction business. Cook continued the same operation. When it became the distributor of Challenge mixers it had an organization with an established sales force throughout the United States. During 1956 and 1957, it was "one of the top three" distributors of mixers in the United States. The sales activity of Cook contributed greatly to the growth of the corporate petitioner prior to and during these years. Cook has never owned a yacht or other seagoing vessel.

During the years 1956 and 1957 the average profit of Cook on the sale of each concrete mixer purchased from the corporate petitioner was 21.5 percent. The average cost to Cook of each such mixer was $ 5,500. Its gross sales during those years were between $ 20 and $ 22 million, and about $ 7 to $ 8 million of that amount was attributable to products manufactured by the corporate petitioner. In each of those years, Cook expended approximately $ 200,000 in advertising and sales promotion; substantially more than seven-twentieths of this amount was expended to promote the sale of Challenge mixers.

During 1956 and 1957, other manufacturers produced concrete mixers, but the mixer manufactured by the corporate petitioner was superior to other mixers. It was simpler than anything on the market and had much lower operating and maintenance costs. It was also substantially lighter than other mixers, and thus permitted the user to carry a greater payload. It had a longer useful life than other mixers. These features of the mixer manufactured by corporate petitioner had not been matched by competitors during the years 1956 and 1957.

The sales of the corporate petitioner during the years 1956 and 1957 were as follows:

		Cook Bros.	American
Year	Total	Equip. Co.	Laundry
	$ 4,683,104.29	$ 4,187,865.85	$ 358,999.81
1956	100%	89.4%	7.7%
	$ 3,550,398.74	$ 2,939,448.69	$ 462,363.36
1957	100%	82.8%	13.0%

	Trench-digging	Trencher and
	machines to	drier parts;
Year	Oliver Corp.	parts sales to
	and miscellaneous	Bryan Corp.
	buyers
	$ 85,694.60	$ 50,544.03
1956	1.8%	1.1%
	$ 18,387.59	$ 130,199.10
1957	0.5%	3.7%

The sales of $ 4,187,865.85 to Cook in 1956 consisted exclusively of mixers and related service parts and repairs, and the sales of $ 2,939,448.69 to Cook in 1957 consisted of $ 139,619.14 in sales of trenchers and of $ 2,799,829.55 in sales of mixers and related service parts and repairs. The sales to American Laundry in 1956 consisted of driers and conveyor loaders, and in 1957 of tumblers and conveyor loaders.

No formal dividends were declared or paid by the corporate petitioner during the period 1950 through 1957. Sales of the sole proprietorship and the corporate petitioner progressed from $ 500,000 to $ 5 million between 1948 and 1956, and the corporate petitioner's earned surplus and undivided profits at the end of its taxable years ended December 31, 1955, 1956, and 1957, were $ 948,707.39, $ 1,235,724.54, and $ 1,373,706.94, respectively. Castendyck's compensation from the corporate petitioner was $ 82,299.74 and $ 44,113.57 for the years 1956 and 1957, consisting of a fixed salary of $ 30,000 plus bonus.

Castendyck enjoys boating, and derives pleasure working aboard a vessel. His interest in boating goes back many years, and he had owned boats for some years prior to 1950. In April 1950, he purchased Gallant Lady III, a 40-foot Cris-Craft cabin cruiser with two engines costing $ 18,850. He and his family were then living at Downey, California, about 11 miles southeast of Los Angeles, and he kept Gallant Lady III at the Villa Marina, Newport Beach, California. On April 21, 1950, 1 day after the incorporation of Challenge, he transferred Gallant Lady III to it. On April 6, 1951, it purchased the Gallant Baby, a 16-foot Cris-Craft for $ 1,650, and sold it in 1955. In March 1952, it sold Gallant Lady III and on March 21, 1952, bought Gallant Lady IV, a 49-foot Cris-Craft cabin cruiser with two engines, costing $ 37,455.72. In 1952 Castendyck and his family moved to Lido Isle, an island in the harbor at Newport Beach, connected with the mainland by bridge. Newport Beach is a boating center. Castendyck then purchased a waterfront lot at 618 Via Lido Nord on Lido Isle for $ 73,500, and built a house thereon as well as a dock in front of the property suitable for at least three boats. The dock and adjoining seawall cost about $ 12,000 and $ 7,750, respectively. The total cost of the entire property was approximately $ 250,000. He and his family moved into the new house in 1954. On July 7, 1954, the corporate petitioner purchased the Gallant Gal, a 25-foot Western-Fairlane 2-engine cabin cruiser, for $ 6,500. Later in 1954, the corporate petitioner sold Gallant Lady IV, and replaced it with Gallant Lady V, a 67-foot cabin cruiser which, with equipment, it had purchased for about $ 145,000. Gallant Lady V was built in Chicago, and was launched there on November 4, 1954, when it was christened by petitioner Kathryn J. Castendyck. It was a handsome and luxuriously outfitted vessel.

An article in the January 1955 edition of the magazine Sea and Pacific Motor Boat describes Gallant Lady V in detail and contains its plans as well as a number of pictures relating to the vessel. The article refers to the boat as having been built "for J. Ross Castendyck of Los Angeles."

On November 8, 1954, the Castendycks began a voyage on Gallant Lady V which took them down the Illinois Waterway and the Mississippi River to New Orleans and subsequently to Florida where they remained until January 14, 1955. They then proceeded to the Bahamas, Central America, the Panama Canal, and Acapulco. They remained in Acapulco from February 21, 1955, until April 1, 1955, when they left for the vessel's home port of Newport Beach, California.

On February 14, 1957, the corporate petitioner purchased a new Century boat #G20280 for $ 3,303.50. On February 28, 1957, it sold the Gallant Gal.

No attempt was ever made by Castendyck or the corporate petitioner to charter any of the vessels owned by the corporate petitioner. The only charter entered into was of Gallant Lady IV, to a prospective purchaser, for $ 12,000 and covered a period of 6 months. The boat was chartered only because Castendyck thought that the vessel would be purchased by the other party.

During 1956 and 1957, the vessels owned by corporate petitioner were moored at the dock in the front of Castendyck's home when not in use.

Based on information supplied by Castendyck, Lloyd's Registry of American Yachts for 1956 and 1957 named him as the owner of Gallant Lady V. During 1956 and 1957, Castendyck was a member of several yacht clubs. He had his own "burgee," a private yachtman's signal or pennant, which he flew from the mast of Gallant Lady V in 1956 and 1957, and which was registered in his name with Lloyd's Registry of American Yachts for 1956 and 1957. Castendyck has a master's license, and operated the boat himself; no professional master was employed. He had many friends in yachting circles whom he met through use of the boats purchased by the corporate petitioner.

Castendyck kept a log of the trips of Gallant Lady V, in which he recorded the places visited while the vessel was away from its home port, cruises made around Newport Harbor, guests who were on board while the vessel was in motion, persons who came on board at some of the places visited, fishing, swimming, drinking, and other social activities engaged in by the Castendycks, their children, and guests. Gallant Lady V was away from its dock on trips for approximately 93 days during the year 1956 and 48 days during the year 1957. During 1956, it was away on one voyage from January 14 to March 11, during which San Diego and a number of places along the Pacific Coast of Mexico as far south as Acapulco were visited. During that year it also made 10 trips to Cherry Cove, on Santa Catalina Island off the coast of southern California, 1 trip to San Diego, California, 1 trip to San Pedro, California, and 1 cruise in Newport Harbor. During 1957, Gallant Lady V made 14 trips to Cherry Cove, 2 trips to San Diego, and 4 cruises in Newport Harbor. During some of the days in 1956 and 1957 when Gallant Lady V was away from its home dock on trips there were guests on board that had some connection with the business of the corporate taxpayer; however, their presence on board did not necessarily have any proximate relationship to the business of the corporate taxpayer. On other days when Gallant Lady V was away from its home dock there were no guests who in any way had any connection with the business of the corporate taxpayer. Guests were not entertained on Gallant Lady V when it was docked in front of the Castendyck residence at Newport Beach.

The expenses of acquisition, taxes, and maintenance of all of the vessels owned by the corporate petitioner were paid by it. The corporate petitioner had an account entitled "Gallant Lady V" at Richard's Lido Market, which sold food and liquor. Bills for purchases charged to this account were sent directly to the corporate petitioner, paid by it, and charged on its books to its sales promotion account. In most instances food consumed on trips of Gallant Lady V was prepared by the servants of the individual petitioners in their home before each trip. Any food or liquor not consumed on any trip was used by them in their home. The individual petitioners during 1956 and 1957 paid for some of the food and liquor consumed on trips of Gallant Lady V, and they also made some expenditures for utilities, for washing and cleaning the boat, and for laundry. They kept no record of these expenditures. In their returns for 1956 and 1957, they claimed the following deductions for business expenses not reimbursed by the corporation:

	1956	1957
Telephone	$ 330.59	$ 318.98
Promotion and entertainment	1,200.00	1,200.00
	1,530.59	1,518.98

Respondent did not disallow these claimed deductions.

The expenses paid by the corporate petitioner with respect to the Gallant Gal, Gallant Lady V, and Century boat during the years 1956 and 1957, and the depreciation deducted in those years by it with respect to these vessels, were as follows:

	1956	1957
Insurance	$ 2,286.25	$ 2,286.95
Property taxes	2,182.57	2,019.88
Operating and maintenance charges (food,
supplies, etc.)	10,405.22	6,832.71
Total	14,874.04	11,139.54
Depreciation	16,352.91	14,405.53
Total	31,226.95	25,545.07

The respondent disallowed one-half of the foregoing deductions claimed by the corporate petitioner on its 1956 and 1957 returns with respect to such vessels, namely $ 15,613.48 for 1956 and $ 12,772.54 for 1957, on the ground that the amounts thus disallowed were not ordinary and necessary business expenses of the corporate petitioner. Substantially more than 50 percent of the deductions taken by the corporate petitioner with respect to these boats related to the personal use and enjoyment of such boats by Castendyck and did not relate to the business of the corporate petitioner.

During 1956 and 1957 petitioner Kathryn J. Castendyck was vice president and a director of corporate petitioner. She was not on its payroll and did not receive a salary from it. In 1956, she accompanied her husband to Mexico on three trips and to New York on three trips. On one of their trips East they stayed in New York from April 25, 1956, through April 28, 1956, and from there went to Bermuda where they stayed from April 29, 1956, to May 4, 1956. From Bermuda, they proceeded to Boston, New York, Chicago, and then to Los Angeles. In 1957, she accompanied her husband to Mexico, Chicago, Las Vegas, Los Angeles, and New York. On trips to conventions she would go shopping with other women or give them advice in getting around the city.

In its returns for 1956 and 1957, the corporate petitioner deducted $ 2,918.82 and $ 1,224.19, respectively, as business expenses, representing the expenditures made by corporate petitioner to cover the travel expense of the individual petitioners on the above-mentioned trips taken in 1956 and 1957. $ 1,128.26 of the amount deducted in 1956 and $ 540.49 of the amount deducted in 1957 represented travel expense attributable to Kathryn Castendyck. Respondent disallowed the portion of the deductions taken which represented travel expense attributable to her.

The corporate petitioner also took deductions as business expenses of $ 2,785.39 and $ 1,717.70, for 1956 and 1957, respectively, which were determined by respondent to represent personal expenses of the individual petitioners, and which were therefore disallowed. Of the amounts disallowed $ 433.14 in 1956 and $ 294.16 in 1957 were for gasoline purchased by the individual petitioners and their daughter, and the corporate petitioner has now conceded that they are not deductible by it. The remainder of the amounts disallowed involve the following: A May 31, 1956, charge to travel expense of $ 720 paid to Robert Abels for antique firearms, a gift to someone by Castendyck; a May 9, 1956, charge to travel expense of $ 400 paid to Charles E. Cook to reimburse him for cash advanced to Castendyck for expenses in Bermuda; a November 5, 1956, charge to sales promotion of $ 494 paid to Joseph G. Sawaya Co. for bronze statuettes, a wedding gift to Mr. and Mrs. Howard Cook from the Castendycks; an April 5, 1956, and December 18, 1956, charge to travel expense of $ 150 and $ 588.25, respectively, paid to Beverly Hills Travel Bureau for the portion of the airplane fare to Honolulu, Hawaii, for the Castendycks and their two daughters which was not charged to Castendyck's personal account by the corporate petitioner; an April 10, 1957, charge to travel expense of $ 350 paid to Castendyck for expenses on a trip to La Paz, Mexico; and a January 10, 1957, charge to travel expense and a January 10, 1957, charge to sales promotion of $ 608.03 and $ 465.51, respectively, paid to the Hotel Halekalani in Honolulu, Hawaii, for hotel room and expenses of the Castendycks and their two daughters in Honolulu from December 30, 1956, through January 4, 1957.

While in Hawaii in January 1957, Castendyck entertained two businessmen and their wives in Honolulu. These men were representatives of firms which had bought Challenge concrete mixers from Cook. The cost of this entertainment was $ 75 and was included in the amount of $ 465.51 claimed as a deduction by corporate petitioner in its 1957 return for the Castendycks' expenses in Honolulu.

On February 11, 1957, corporate petitioner expended $ 240.81 for some stereoviewers supplied to salesmen, and paid a 4 percent sales tax thereon of $ 9.63. These amounts were charged to advertising and taxes, and were claimed as business expense deductions in its return for 1957. Respondent determined that the amount expended for stereoviewers was a capital expenditure, and disallowed the deduction claimed for it.

The respondent determined that the individual petitioners received during the taxable year ending December 31, 1956, dividend income not reported in their return for that year in the amount of $ 19,527.13 consisting of disallowed corporate expense deduction -- for boat expenses, travel expenses, and expenses determined to be personal; and determined that the individual petitioners received dividend income from the corporate petitioner in the taxable year ending December 31, 1957, not reported in their return in the amount of $ 15,030.73 consisting of disallowed corporate expense deduction -- for boat expenses, travel expenses, and expenses determined to be personal.

OPINION.

1. The Commissioner disallowed deductions in the amounts of $ 15,613.48 and $ 12,772.54 for the years 1956 and 1957, respectively, for expenses and depreciation relating to the yacht Gallant Lady V and other boats owned by the corporate petitioner, Challenge Manufacturing Company. The amounts disallowed were one-half of the total amounts claimed in this connection by Challenge on its returns, and the theory of the Commissioner's determination was that to the extent of the amounts disallowed the vessels were not used in Challenge's business.

J. Ross Castendyck was the sole stockholder of Challenge, and the boats, although owned by Challenge, were kept at the private dock in front of Castendyck's $ 250,000 Lido Isle home, and were subject to his exclusive possession and control. There was no convincing evidence that the smaller boats were in any way used in the furtherance of Challenge's business. ^{Gallant Lady V.}

Gallant Lady V was a 67-foot cabin cruiser, handsome and luxuriously outfitted at a total original cost of about $ 145,000. It had been acquired by Challenge in 1954 and was the successor to Gallant Lady IV which Challenge had owned for some 2 years and which in turn was the successor to Gallant Lady III. Castendyck had owned Gallant Lady III as an individual and had transferred it to Challenge in 1950 1 day after incorporation, some 8 months prior to the transfer of his sole proprietorship to the corporation. His interest in boats went back many years prior to that time, and he had owned boats for a number of years before 1950. He obviously derived great satisfaction and pleasure from boats and various activities associated with them.

The spectacular prosperity of Challenge, based upon a superior product, presented Castendyck with the opportunity to indulge in his principal hobby. *659 been placed for a 92-foot cruiser to be custom built pursuant to Castendyck's specifications at a contract price of $ 363,500.)

The record is all too clear, except perhaps to the hopelessly naive, that Gallant Lady V was acquired primarily for the personal gratification of Castendyck, and that any so-called business use of the yacht was distinctly secondary. Indeed, we think that the Commissioner has been exceedingly generous in allowing deduction for one-half the depreciation and boat expenses paid by the corporation. Had he allowed a considerably smaller deduction, we would have approved his determination on this record.

There is, to be sure, evidence that on a number of trips of Gallant Lady V, Castendyck had among his guests persons who were officers of Cook, or were associated with companies that used or were potential users of Challenge's products, or who represented firms from which Challenge purchased supplies, or who were highly paid officers or employees of Challenge. A controversy has arisen between the parties as to which of these various persons may be regarded as having a "business" relationship with Challenge. However, we do not find it necessary to resolve any such conflict. The point is that even if there were guests aboard on every trip who could be labeled as having a "business" connection with Challenge -- an assumption contrary to fact, since there were some trips when there were no guests having any connection whatever with the corporation -- Challenge would still not be entitled to deduction of more than one-half the expenses and depreciation. For, as already noted, we are satisfied on this record that the yacht was acquired primarily for the personal gratification of Castendyck, and the mere fact that he may have coupled his personal enjoyment and use of that yacht with entertainment of so-called "business" contacts of Challenge does not detract from our conclusion that the "business" use was distinctly secondary.

Although we think that this issue must be decided against Challenge for the reason discussed above, Challenge's position is in fact considerably weaker for the following additional reasons:

(a) In the first place, there were some trips on which no "business" guests of any kind on any theory were aboard.

(b) In the second place, even when guests having some "business" connection with Challenge were aboard, it is far from clear to us that their presence on the yacht in any particular instance was proximately related to the business of Challenge so as to form the basis for deduction. It is entirely normal for friendships to develop with some of those that one meets in business transactions, and we cannot say on this record that a number of the so-called "business" guests were not also social friends of Castendyck and were not invited on the yacht because Castendyck found them companionable and congenial, wholly apart from business reasons. The mere fact that they may have been "business" contacts as well would not render deductible the cost of entertainment if it in fact was furnished primarily for social or personal reasons. The deduction is one that is peculiarly susceptible of abuse, and it has been decided that the one claiming it must show a proximate relationship between the entertainment and the business of the taxpayer. Ralph E. Larrabee, 33 T.C. 838">33 T.C. 838, 843; Eugene H. Walet, Jr., 31 T.C. 461">31 T.C. 461, 471, affirmed 272 F. 2d 694 (C.A. 5). The possible fact that some of the persons aboard may have been helpful to Challenge in some circumstances hardly establishes that they were invited solely for business reasons, or that their entertainment was in any significant way responsible for any benefits accruing to the corporation. We are far from convinced by the evidence that all of the alleged "business" visitors were entertained for business rather than social reasons.

(c) Thirdly, on some occasions the "business" guests included officers of Cook whose interest in selling Challenge mixers coincided with that of petitioner, whose presence could hardly be justified as "business entertainment," and who could have conducted business conferences more conveniently with Castendyck at his office 25 miles closer to Los Angeles rather than on a yacht. We have no credible evidence that any officer of Cook was entertained on Gallant Lady V for legitimate business reasons. Nor do we have any convincing evidence that any of the few highly paid officers or employees of Challenge itself who were guests on the yacht were entertained for other than social reasons. Indeed, the evidence shows that one of them was a neighbor of Castendyck and that they entertained one another in their homes, thus indicating a personal relationship between them apart from their business relationship.

(d) Finally, Gallant Lady V was moored most of the year in front of Castendyck's home, in his possession, available for his exclusive personal use -- an important factor (in addition to the actual trips made) in allocating expenses between personal and business use.

As we appraise the evidence, including the entire log, Gallant Lady V was used predominantly for the personal enjoyment of Castendyck, who from time to time included among his yachting companions so-called "business" contacts that he found agreeable. That this circumstance may perhaps justify some deduction surely does not mean that Challenge is entitled to deduct the entire expense of maintaining the vessel, or that the Commissioner has erred in allowing a deduction in the amount of one-half the expenses. *661 because he has allowed too much. We hold that Challenge has not shown that it is entitled to more favorable treatment on this issue than is reflected in the Commissioner's determination.

2. We consider next the deductibility by the corporate petitioner of $ 1,128.26 in 1956 and $ 540.49 in 1957 which it paid for the travel expense attributable to Kathryn Castendyck when she accompanied her husband on trips to Mexico, Bermuda, New York, Boston, Chicago, and Las Vegas. It is the contention of petitioners that her activities on these trips contributed to the promotion of the business of corporate petitioner. There was testimony that when she went to conventions with her husband she helped some of the women in attendance with their shopping, or in general was helpful to them. However, the evidence does not satisfactorily disclose which if any of the foregoing trips (or what portions thereof) involved conventions. Moreover, it does not convince us that her presence on any of these trips, whether or not they involved conventions, had a bonafide business purpose, or that any of her alleged "business" activities were not merely colorable to camouflage what for her were predominantly pleasure trips. The respondent's disallowance of deductions claimed for the travel expenses attributable to her is approved. Cf. Alex Silverman, 28 T.C. 1061">28 T.C. 1061, affirmed 253 F. 2d 849 (C.A. 8).

3. The respondent disallowed deductions for certain expenditures made by the corporate petitioner totaling $ 2,785.39 for 1956 and $ 1,717.70 for 1957 on the ground that they represented personal expenses of the individual petitioners. We have set forth in our findings the various items included in these totals. The corporate petitioner has conceded that two components, one amounting to $ 433.14 in 1956 and one amounting to $ 294.16 in 1957, are not deductible by it. Petitioners have failed to offer any evidence to prove that the remaining items, with one exception, constituted deductible business expenses of the corporate petitioner and the respondent's disallowance of deductions for those items is therefore approved.

The exception on which some evidence was submitted related to a trip to Hawaii made by Castendyck, his wife, and two daughters in the latter part of December 1956. They stayed in Honolulu from December 30, 1956, through January 4, 1957. A portion of the total airplane fare, and of the hotel bill and expenses in Honolulu, was treated by the corporate petitioner as being a personal expense of Castendyck, and the balance, representing $ 738.25 expended for airplane fare in 1956 and $ 1,073.54 expended for "hotel room and expenses at Honolulu" in 1957, was deducted by it as a business expense. The amounts deducted were disallowed by the respondent. While in Hawaii in January 1957 Castendyck and his wife entertained two businessmen and their wives in Honolulu. These men were representatives of concerns which had bought concrete mixers from Cook. The evidence does not disclose that the trip was made for the purpose of entertaining these businessmen or convince us that such entertainment was not merely incidental to what was primarily a family pleasure trip during a holiday period. Neither does it disclose the cost of entertaining them. Following the suggestion in Cohan v. Commissioner, 39 F. 2d 540, 544 (C.A. 2), we have found that the cost of such entertainment was $ 75, and hold, without strong conviction, that the corporate petitioner is entitled to deduct $ 75 of the $ 1,073.54 claimed for 1957. The corporate petitioner has not proved that anything in excess of this amount was deductible. The respondent's determination in relation to these items, subject to the foregoing qualification, is approved.

4. An expenditure of $ 240.81 was made by corporate petitioner in 1957 for stereoviewers supplied to salesmen, and was deducted in its 1957 return as a business expense. Respondent disallowed the claimed deduction on the ground that the purchase of stereoviewers was a capital expenditure. It would seem that in view of the probable borderline character of this item and its comparatively small amount it would have been wiser audit practice to have accepted the taxpayer's treatment, particularly, since in the long run, the revenues would not be adversely affected. Nevertheless, the matter has been placed in issue, and we are called upon to decide it. However, there is no evidence in the record from which we can determine the useful life of these stereoviewers, and, since the burden of proof is upon the taxpayer, we must decide this issue against it for failure of proof.

5. The Commissioner also determined that the individual petitioners should have reported as dividends in their own income tax returns the following amounts which were disallowed as deductions claimed by the corporate petitioner:

	1956	1957
Boat expenses (including depreciation)	$ 15,613.48	$ 12,772.54
Travel expense	1,128.26	540.49
Personal expenses	2,785.39	1,717.70
	19,527.13	15,030.73

We have dealt with the disallowance of these deductions to the corporation in 1, 2, and 3, supra, and hold that to the extent that such disallowance has been approved above the amounts are properly includible in the individual petitioners' gross income as dividends. Expenditures made by a corporation for the personal benefit of its stockholders or the making available of corporate-owned facilities to stockholders for their personal benefit may constitute taxable income in amounts equal to the fair value of the benefits involved. Cf. American Properties, Inc., 28 T.C. 1100">28 T.C. 1100, 1114-1115, affirmed 262 F. 2d 150 (C.A. 9) (amounts expended by corporation for racing boats for benefit of stockholder); Charles A. Frueauff, 30 B.T.A. 449">30 B.T.A. 449 (rent-free use of corporation's apartment); Reynard Corporation, 30 B.T.A. 451">30 B.T.A. 451 (rent-free use of corporation's house); Percy M. Chandler, 41 B.T.A. 165">41 B.T.A. 165, affirmed 119 F. 2d 623 (C.A. 3) (rent-free use of corporation's apartment and lodge); Paulina duPont Dean, 9 T.C. 256">9 T.C. 256 (rent-free use of corporation's house); Dean v. Commissioner, 187 F. 2d 1019 (C.A. 3), affirming a Memorandum Opinion of this Court (rent-free use of corporation's house); Rodgers Dairy Co., 14 T.C. 66">14 T.C. 66 (personal use of corporation's automobile); Louis Greenspon, 23 T.C. 138">23 T.C. 138, affirmed on this point but reversed on other grounds 229 F. 2d 947 (C.A. 8) (farm expenses paid by corporation); Alex Silverman, 28 T.C. 1061">28 T.C. 1061, affirmed 253 F. 2d 849 (C.A. 8) (wife's travel expenses paid by corporation); Chester Distributing Co. v. Commissioner, 184 F. 2d 514 (C.A. 3), affirming per curiam a Memorandum Opinion of this Court (personal entertainment expenses paid by corporation).

In our opinion there is no convincing evidence before us establishing that the benefits conferred upon Castendyck had a fair value less than the amounts (including depreciation) properly disallowed to the corporation. Nor are we persuaded by the alternative contention that even if any such benefits, or any portion thereof, are taxable to the individual petitioners they should be regarded as additional compensation rather than dividends, with the consequence that the amounts thus chargeable to the individuals would be deductible by the corporation. We think that this point has no merit. No such benefits were ever intended as compensation; they simply represented a device for making available to the corporation's sole stockholder a portion of its steadily increasing accumulated earnings and profits.

Decisions will be entered under Rule 50.

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Footnotes

• 1. There was, to be sure, a vague suggestion that one of the smaller boats was associated in some undisclosed manner with work in which Challenge was allegedly engaged in developing a marine engine. However, this evidence was so weak and unsatisfactory that we cannot conclude that this boat was in any way used for Challenge's benefit.↩

• 2. We do not take seriously Castendyck's attempt to reject the use of the word "hobby" as applied to his interest in boats. We think the word is aptly descriptive here.↩

• 3. Petitioners argue that in determining the total amount spent, account should be taken of the unreimbursed amounts spent by the individual petitioners. We think there is no merit to this contention on this record. The amount of the individual petitioners' expenditures in connection with the boats was not shown. The factual basis for this point is vague and unsatisfactory. Also, we note that the individual petitioners took $ 1,200 a year as deductions on their returns for promotion and entertainment which the Commissioner has allowed, that the Commissioner has allowed Challenge deductions for one-half of its expenses and depreciation relating to the smaller boats (which were not allowable at all on this record), and, in view of our conclusion that all the boats were maintained primarily for Castendyck's personal use and enjoyment, we cannot say, on the evidence before us, that the amounts of deduction actually allowed by the Commissioner inadequately reflect the amounts properly allocable to the alleged "business" use. No error has been shown in the Commissioner's determination in this respect.

  Moreover, in attempting to estimate the total expenses allocable to the boats, counsel argue, referring to the Castendycks' $ 250,000 Lido Isle home, that: "It is a fair approximation that at least $ 200,000 was tied up in the beach property for the benefit of the corporation and that a minimum of $ 10,000.00 annual interest was forfeited by the Castendycks. This was in effect an expenditure by them for the benefit of the corporation." The suggestion that the Castendycks paid about four-fifths of the purchase price of their apparently luxurious home for the benefit of the corporation rather than for themselves puts too great a strain on our credulity.↩