The Supreme Court in Welch v. Helvering,290 U.S. 111">290 U.S. 111, 113 (1933), gave meaning to "ordinary and necessary expenses" as the terminology*189 was used in the predecessor provision to section 162(a). The Court indicated that "necessary" means "appropriate and helpful" in "the development of petitioner's business." In Deputy v. duPont,308 U.S. 488">308 U.S. 488, 495 (1940)the Supreme Court stated that--

Ordinary has the connotation of normal, usual, or customary. To be sure, an expense may be ordinary though it happen but once in the taxpayer's lifetime. * * * Yet the transaction which gives rise to it must be of common or frequent occurrence in the type of business involved.

Whether an expenditure is "ordinary and necessary" is a factual determination. Commissioner v. Heininger,320 U.S. 467">320 U.S. 467 (1943).

The first issue is whether petitioners are entitled in 1973 to an ordinary and necessary business expense deduction for payment of $36,312 to the Brazilian corporation, Netumar, for expenses associated with petitioners' maintaining a Brazil office and for use of an automobile in Brazil. Respondent does not dispute that petitioner paid $36,312 to Netumar in 1973. However, respondent argues that this*190 expenditure was not incurred in carrying on petitioner's existing trade or business. Rather, respondent asserts that the $36,312 constitutes a pre-operating or capital expenditure. On the other hand, petitioners contend that the Brazilian office expenditure was incurred in carrying on petitioner's existing practice of law in New York. Petitioner asserts that the Brazilian office was necessary to establish an appropriate appearance that would enable him to attract Brazilian shipping companies as new clients for his New York maritime law practice.

After review of the facts and circumstances of this case, we conclude that the use of the office and automobile by petitioner and his wife in 1973 was in part personal and in part in connection with obtaining a Brazilian fishing license. Therefore none of the $36,312 is properly deductible as an ordinary and necessary business expense.

Petitioner testified that in anticipation of expanding his law practice to include maritime cases which might flow from Brazilian shipping operations, he was introduced to and worked with a number of officials from various Brazilian shipping companies. However, the record does not indicate that any of*191 these meetings occurred at petitioner's Brazilian office. Nor does the record show that at the Brazilian office petitioner performed tasks that either were directed toward attracting Brazilian clients or succeeded in attracting that clientele.

It appears that the Brazilian office was used by petitioners primarily as a workplace to establish several new business ventures. The major venture was the formation of the Pilar-Ltda. fishing venture and the work toward obtaining a fishing license for Ltda. The record indicates that petitioner also did some work in development of a plan to "jumboize" Netumar's fishing fleet and in arranging for coal purchases for Frota Oceanica.

From the evidence we conclude that none of these ventures were connected with petitioner's law practice. Petitioner might have regarded the Pilar-Ltda. venture as a potential source of legal fees in future years. If he did, he certainly could not realistically expect any legal work from Pilar-Ltda. until the fishing operations had begun and perhaps become profitable. Anticipation of legal fees from a profitable investment*192 does not turn that investment into a business expense. The record indicates that petitioner expected Ltda. to be a profitable business and from these profits to obtain a return on his investment made in his wife's name. At the time of the trial of this case, Ltda still had the fishing license, and, so far as this record shows, petitioners had not abandoned the venture. In the future, the venture may become profitable. In any event, as of the year here in issue petitioners were still actively working to develop the venture.

Amounts paid to develop a new business are capital expenditures. Frank v. Commissioner, 20 T.C. 511">20 T.C. 511 (1953). There are cases dealing with the right of a taxpayer to deduct a loss from a loan to or investment in a business other than his primary occupation where the claim is made that the loan or investment was for the purpose of furthering his primary business. See Tulane Hardwood Lumber Co. v. Commissioner, 24 T.C. 1146">24 T.C. 1146 (1955); Snow v. Commissioner, 31 T.C. 585">31 T.C. 585 (1958); Electrical Fittings Corp. v. Commissioner, 33 T.C. 1026">33 T.C. 1026 (1960);*193 Pepper v. Commissioner,36 T.C. 886">36 T.C. 886 (1961). However, in all those cases the taxpayer had shown the worthlessness of the loan or investment. The question in those cases was whether the loss was an ordinary loss or a capital loss. Petitioners in the instant case have made no claim of a loss in 1973 from their investment in the venture in South America. Clearly, no portion of the office and other expenses in Brazil are deductible in 1973 as a loss from a transaction entered into to enhance petitioner's receipts from the practice of law. The venture was still viable in 1973.

To the extent that the expenses in Brazil were not for developing a new business, they appear to be primarily personal. Mrs. Heller's relatives and friends were in Brazil, and petitioners visited with them. Petitioners claimed that petitioner obtained the cases from the Public Administrator because of travels to and expenses incurred in Brazil. However, the record does not support this claim. In fact, one of the persons petitioners refer to as a possible source of work from Brazil was a defendant in the cases petitioner received from the Public Administrator.

On the basis of this record*194 we conclude that the major portion of the $36,312 is a nondeductible capital expenditure, and the balance, such as Mrs. Heller's use of the office and the automobile to the extent it was not in pursuit of the obtaining of the fishing license, has not been shown to be other than personal.

The second and third issues are whether the amounts claimed by petitioners to be deductible in 1973 as travel and entertainment expenses constitute ordinary and necessary business expenses under section 162, and, if so, whether these items have been substantiated as required by section 274. Petitioner testified that the $18,666 claimed deductions for travel expenses were for airplane fares and costs of hotels and meals incurred in his practice of law in New York. At one point he stated that a part of the claimed deductions for travel expenses might have been for payments that he made to longshoremen. However, the major portion of the testimony tends to relate this claimed expenditure to the deduction claimed for entertainment. Aside from showing that he and Mrs. Heller traveled to Brazil several times in 1973, petitioner did not show the places to which he traveled on business, the clients for*195 whom he traveled, the dates of the trips, the amounts expended at each location, or the purpose of each expenditure. Petitioner did testify that in 1973 he vacationed on St. Martin and in Florida.

Petitioners produced two checks, payable to Eastern Airlines in 1973, aggregating $4,605. Petitioner testified that he would charge all air tickets not paid in cash to his Eastern Airlines credit card and subsequently would pay the charges by check. Petitioner also testified that some of Mrs. Heller's trips to Brazil were charged on that credit card.

Pursuant to section 1.162-2(b) and (c), Income Tax Regs., travel expenses are deductible--

(b)(1) * * * only if the trip is related primarily to the taxpayer's trade or business. * * *

(2) Whether a trip is related primarily to the taxpayer's trade or business or is primarily personal in nature depends on the facts and circumstances in each case. * * *

(c) Where a taxpayer's wife accompanies him on a business trip, expenses attributable to her travel are not deductible unless it can be adequately shown that the wife's presence on the trip*196 has a bona fide business purpose. * * *

As we determined above, petitioner's primary efforts in Brazil were not in pursuit of his New York law practice. Instead, petitioners concentrated on establishing new business ventures and visiting with Mrs. Heller's family. Because the trips to Brazil were not related primarily to petitioner's existing trade or business, to the extent the claimed $18,666 travel expenses are related to trips to Brazil they are not deductible as ordinary and necessary business expenses. To the extent the travel expenses were for travel other than to Brazil, petitioners have failed completely to comply with the requirements of section 274 of substantiation of such expenses.

At trial petitioner testified that either all or a portion of the $6,049 claimed to be deductible as entertainment expenses consisted of cash paid to longshore gang bosses or for meals for witnesses. The purpose of the cash payments to longshore gang bosses was to persuade them to arrange for petitioner or Captain Ash during work hours to interview the longshoremen who might have witnessed occurrences which gave rise to some of petitioner's maritime cases or to show petitioner or Capitain*197 Ash the scene of an accident.

In light of the nature of the practice of maritime law, we do not doubt that petitioner made some cash payments to the longshore gang bosses for the purposes he stated and that he advanced cash to Captain Ash to use for this purpose. Respondent contends that the amounts paid by petitioner to longshore gang bosses and for meals for witnesses were gifts or entertainment and that section 274(d) requires that expenditures for gifts and entertainment be substantiated by adequate records or sufficient corroborating evidence. To meet the adequate records requirement of section 274(d), the regulations must be followed. Sanford v. Commissioner, 50 T.C. 823">50 T.C. 823 (1968), affd. per curiam 412 F.2d 201">412 F.2d 201 (2d Cir. 1969). Section 1.274-5(b)(3), Income Tax Regs., requires that the substantiation include adequate records or other sufficient evidence indicating the amount, time, place, business relationship, and business purpose of the claimed expenses.The record contains no such detailed information with respect to any portion*198 of the $6,049. Section 274(d) prohibits allowing a gift or entertainment expense deduction based on estimated expenditures. H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 3 C.B. 405">1962-3 C.B. 405, 427; S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 707">1962-3 C.B. 707, 741; Sanford v.Commissioner, supra.In our view any amount spent by petitioner for meals for witnesses, if not charged to clients, would come within the substantiation requirement of section 274(d). However, amounts of cash given by petitioner to Captain Ash to facilitate his investigation of an accident to the extent not charged to clients would not constitute gifts covered by section 274(d). Also, a payment by petitioner to longshore gang bosses for assisting petitioner in investigating the scene of an accident or in arranging for petitioner to interview several longshoremen at one time would not constitute a gift within the meaning of section 274(d). These payments are more in the nature of payments for assistance in investigating a case. Petitioner was able to save his own time by paying for this assistance.

On the basis of this record it is difficult to estimate*199 the portion of the $6,049 which was spent for assistance in investigating cases and the part spent for meals for witnesses. Petitioner's estimate of $200 a week for paying for assistance in investigating cases for the weeks he was in New York is obviously higher than the total $6,049 deduction claimed. Using our best judgment, we conclude that petitioner spent $5,000 in 1973 for assistance in investigating cases. Cohan v.Commissioner, 39 F.2d 540 (2d Cir. 1930), affg. 11 B.T.A. 743">11 B.T.A. 743 (1928). We therefore hold that $5,000 of the claimed $6,049 for "entertainment" expense is properly deductible, and the balance is not deductible because of petitioner's failure to meet the requirements of section 274(d).

The third issue is whether petitioners are entitled to deduct any portion of a claimed $3,540 automobile expense. Section 162 permits a deduction for expenses incurred in the operation of an automobile used in the furtherance of a taxpayer's trade or business. Where a taxpayer fails to maintain detailed records of the transportation costs associated*200 with his business, approximations based upon collateral evidence and secondary sources may be used to determine the appropriate deduction. Section 1.162-17(d), Income Tax Regs.; Cohan v. Commissioner, supra.

Petitioner testified that in 1973 he traveled several times weekly from New York to such New Jersey ports as Hoboken, Leonardo, Elizabeth, and Newark to interview longshoremen in connection with his investigations of pending maritime cases. Petitioner estimated that he drove approximately 60 miles round trip from his New York office to Elizabeth and Newark, New Jersey, approximately three to five times weekly. Petitioner testified that occasionally he drove to Leonardo, New Jersey, which he considered to be a trip of approximately 40 to 50 miles from his New York office. Petitioner estimated that these business travels resulted in approximately 200 to 300 miles of driving in his automobile weekly.

While petitioner did not provide a diary or detailed record of his drives from New York to the various port cities, we rely upon the Cohan rule and estimate that in 1973 petitioner drove approximately 200 miles during a normal*201 week of investigation. Since petitioner was in Brazil and Florida a total of approximately 8 to 9 weeks in 1973 and was engaged in trials in New York for another 8 to 12 weeks, we conclude that petitioner traveled approximately 6,500 miles in 1973 in the ordinary course of his business as a maritime lawyer. Therefore, petitioner is entitled to a deduction for the cost of operating his automobile in carrying on his law practice as based upon the standard mileage rate in effect in the tax year in issue. See Rev. Proc. 70-25, 2 C.B. 506">1970-2 C.B. 506.

Petitioner testified that he spent approximately $1 on tolls on the days he drove to New Jersey ports. We conclude from our determination of the weeks during which petitioner made trips to New Jersey that, in addition to the deduction for use of his personal automobile, petitioner is entitled to deduct $100 for payment of tolls on business trips in 1973.

The fourth issue is whether any part of petitioners' underpayment of income taxes was due to negligence or intentional disregard of the rules and regulations within the meaning of section 6653(a). *202 Section 6653(a) provides:

(a) Negligence or Intentional Disregard of Rules and Regulations With Respect to Income or Gift Taxes.--If any part of any underpayment underpayment (as defined in subsection (c)(1)) of any tax imposed by subtitle A or by chapter 12 of subtitle B (relating to income taxes and gift taxes) is due to negligence or intentional disregard of rules and regulations (but without intent to defraud), there shall be added to the tax an amount equal to 5 percent of the underpayment.

Respondent takes the position that the deficiency in income tax paid for 1973 was in part attributable to a failure on the part of petitioners to maintain adequate books and records. Respondent states that "It is a well established principle that where the understatement of the tax due is a result of lax bookkeeping methods, the negligence penalty may properly be asserted."

The 5 percent addition to tax may be imposed if a taxpayer has failed to maintain accurate or adequate records or ledgers from which the proper income and deductions are determinable. Zivnuska v. Commissioner, 33 T.C. 226">33 T.C. 226, 240 (1959).*203 Respondent's determination in the notice of deficiency that a portion of an underpayment of tax is due to negligence or intentional disregard of rules and regulations raises the presumption of correctness and imposes upon the taxpayer the burden of proving that the imposition of an addition to tax under section 6653(a) is erroneous. Courtney v.Commissioner, 28 T.C. 658">28 T.C. 658, 669 (1957).

At trial petitioner admitted that he is not a capable bookkeeper and hired secretaries with bookkeeping skills to maintain accurate and proper records. A taxpayer, however, cannot avoid the duty of filing accurate tax returns by foisting that responsibility onto an agent. Bailey v. Commissioner, 21 T.C. 678">21 T.C. 678, 687 (1954). This record totally fails to show what underlying records of travel or entertainment expenses petitioner supplied to his bookkeeper. A taxpayer who makes no effort to prevent errors in bookkeeping is negligent within the meaning of section 6653(a). Leroy Jewelry Company v.Commissioner, 36 T.C. 443">36 T.C. 443, 445-446 (1961). At trial petitioner*204 admitted that he was unaware of the treatment certain disbursements received for bookkeeping purposes since he relied upon his secretaries-bookkeepers to properly maintain his records. Petitioner gave the impression that he did not supervise his secretaries in their bookkeeping tasks.

In response to respondent's assertion that petitioners failed to maintain adequate records, petitioners take the position that the materials needed to substantiate their claimed deductions were stolen from their attorney's automobile in August 1977. We note that petitioner's records were apparently lost by theft after receipt of respondent's statutory notice of deficiency and that petitioners made no attempt to reconstruct the lost records.

As a result of petitioners' failure to duplicate their lost records and petitioner's delegation of the recordkeeping task to his secretaries-bookkeepers, we conclude that petitioners were negligent within the meaning of section 6653(a).

The final issue for decision is whether petitioners are liable for an addition to tax under section 6651(a) for failure to timely file their 1973 income tax return. *205 Section 6651(a)(1) provides that failure to timely file a Federal income tax return results in the application of an addition to the tax of the dilatory taxpayer of 5 percent per month up to a maximum of 25 percent unless the taxpayer proves the failure is "due to reasonable cause and not due to willful neglect." ^{*206 Petitioners take the position that their failure to timely file their tax return was due to reasonable cause rather than willful neglect. The question of whether petitioners' failure resulted from "reasonable cause" is a question of fact, and the burden of proof is upon petitioners. Shomaker v. Commissioner, 38 T.C. 192">38 T.C. 192, 202 (1962); Latham Park Manor, Inc. v. Commissioner, 69 T.C. 199">69 T.C. 199, 219 (1977), affd. in an unpublished opinion, 618 F.2d 100">618 F.2d 100 (4th Cir. 1980).}

In a letter dated April 15, 1974, petitioner requested a 90-day extension for filing petitioners' calendar year 1973 income tax return. In the letter petitioner stated that the request was based upon his absence from the country for most of 1973 and that this absence prohibited his supplying the necessary information for the preparation of his tax return to his accountant. On May 6, 1974, the Internal Revenue Service granted a 60-day extension. The Internal Revenue Service received petitioner's 1973 income tax return on July 15, 1974.

Petitioners argue that if their request for a 90-day extension had been granted, their 1973 tax return would have been filed timely. On*207 brief, petitioners remark that "Unbeknownst to Mr. Heller, however, his timely request for a ninety (90) day extension had been altered by the Internal Revenue Service to a sixty (60) day request." The record is clear that even though petitioner requested a 90-day extension, respondent granted a 60-day extension to petitioners for filing their tax return. The obligation falls on petitioners to determine the correct due date of their return. The duty of timely filing a tax return is the personal duty of a taxpayer, and the taxpayer cannot excuse himself from the proper performance of that duty by claiming to be unaware of the correct due date. Groves v. Commissioner, 38 B.T.A. 727">38 B.T.A. 727, 738 (1938); Sabatini v. Commissioner, 98 F.2d 753">98 F.2d 753 (2d Cir. 1938), affg. 32 B.T.A. 705">32 B.T.A. 705 (1935). Petitioners' failure to timely file their 1973 income tax return did not result from reasonable cause and we therefore sustain respondent's determination of an addition to tax under section 6651(a).

Decision will be entered under Rule 155.

Footnotes

1. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954 as amended and in effect in the year in issue.↩

2. The bill submitted by Netumar to petitioner is as follows:

↩

OFFICE RENTAL	US$ 9,600.00
TELEPHONE	US$ 1,210.00
TELEX	US$ 6,028.00
TRANSPORTATION, AUTOMOBILE
AND CHAUFFEUR	US$ 5,773.00
INTERPRETER	US$ 2,511.00
OFFICIAL TRANSLATIONS, PHOTOSTATS
SECRETARY, OFFICE BOY, CLEANING,
MISCELLANEOUS	$10US,054.00
UTILITIES, ELECTRICITY	US$ 1,136.00
TOTAL	$36,312.00

3. Sec. 6651(a)(1) provides:
(a) Addition to the Tax.--In case of failure--
(1) to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), subchapter A of chapter 51 (relating to distilled spirits, wines, and beer), or of subchapter A of chapter 52 (relating to tobacco, cigars, cigarettes, and cigarette papers and tubes), or of subchapter A of chapter 53 (relating to machine guns and certain other firearms), on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate;↩

Document Info

Docket Number： Docket No. 6545-77.

Citation Numbers： 40 T.C.M. 1338, 1980 Tax Ct. Memo LEXIS 174, 1980 T.C. Memo. 417

Filed Date： 9/22/1980

Precedential Status： Non-Precedential

Modified Date： 11/21/2020

Authorities (6)

Cohan v. Commissioner of Internal Revenue , 39 F.2d 540 ( 1930 )

William F. Sanford v. Commissioner of Internal Revenue , 412 F.2d 201 ( 1969 )

Deputy, Administratrix v. Du Pont , 60 S. Ct. 363 ( 1940 )

Sabatini v. Commissioner of Internal Revenue , 98 F.2d 753 ( 1938 )

Welch v. Helvering , 54 S. Ct. 8 ( 1933 )

Commissioner v. Heininger , 64 S. Ct. 249 ( 1943 )

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