Flanagan v. Commissioner ( 1942 )

RAYMOND F. FLANAGAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Flanagan v. Commissioner

Docket No. 107373.

United States Board of Tax Appeals

47 B.T.A. 782; 1942 BTA LEXIS 647;

September 25, 1942, Promulgated

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">*647 Expenditures by a taxpayer for the entertainment of public officials of town and county governments with which he has or seeks contracts, held, not deductible, being contrary to public interest.

Lawrence J. Schork, Esq., for the petitioner.

Harold D. Thomas, Esq., for the respondent.

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STERNHAGEN

">*782 The Commissioner determined deficiencies in petitioner's income tax of $673.58 for 1937 and $718.84 for 1938. Petitioner assails the disallowance of deductions claimed as business expenses.

FINDINGS OF FACT.

Petitioner, a resident of Kenmore, New York, filed income tax returns for 1937 and 1938 with the collector for the twenty-eighth district of New York.

He has been employed for twenty-eight years by the Buffalo Slag Co. as a salesman of slag and various other products. He works on a straight commission basis, receiving no salary or allowance for expenses incurred in the procurement of sales.

In 1937 and 1938 approximately 75 percent of petitioner's sales were to counties and other political subdivisions of western New York. The remainder was made to private contractors. It is the general practice of the counties to take closed">*648 bids once a year and award contracts for materials to the lowest bidder. The towns do not take bids. It has long been the custom of petitioner and salesmen of other material companies to entertain county and town officials. Petitioner does not entertain public officials to influence them but because he can not defy this long established practice. He believes that his business would suffer if he did not carry on such entertainment. Sometimes petitioner entertains jointly with salesmen by ">*783 noncompeting companies, but never with those of competing companies. One purpose of the entertainment is to secure information as to road building programs, but the same information is available through channels open to the public. Petitioner spent $4,059.24 in 1937 and $3,259.42 in 1938 for such entertainment, which, for the most part, consisted of parties in hotels and night clubs. He spent $1,055.08 and $1,272.87 for the entertainment of private contractors.

The Commissioner allowed the deduction of expenses incurred in the entertainment of private contractors, but disallowed the deductions where public officials were concerned.

OPINION.

STERNHAGEN: The petitioner testified">*649 that, in entertaining the public officials of the several counties and towns with which he had long been doing business, he had no purpose to influence them in their consideration of his offers or contracts, but that this sort of entertainment had been carried on many years by him and his competitors and if he should discontinue it he "would be crucified" - "looked upon as a nonentity." He therefore regards the cost of the entertainment as an "ordinary and necessary expense of carrying on his business." Even though this might be literally true, the question is whether the statutory language is to be applied literally or is to be interpreted to exclude such expenses from its meaning.

Such entertainment of public officials who necessarily have a direct or indirect relation to the contracts which petitioner seeks is, speaking generally, commonly regarded as contrary to the public interest. It is as much against public policy as expenditures to influence legislation; and such expenditures have been consistently denied deductibility, irrespective of the absence in the concrete case of a venal motive. ">*650 . If the expenditures were expressly prohibited by state law, they would be denied recognition as ordinary and necessary expenses for the purpose of tax deduction, . We hold that the deduction is also withheld by the statute from expenditures by one who is selling materials under contract with towns and counties for entertaining public officials, even though it does not appear that the expenditures are repugnant to express provisions of law.

The disallowance of the amounts of $4,059.24 and $3,259.42 spent in entertaining public officials is sustained.

Decision will be entered under Rule 50.