Decisions wll be entered under Rule 50.
1. Held, on the facts presented, that payments of salary and other benefits to or on behalf of petitioner's former medical secretary during an extended period of illness were for personal reasons and are not deductible as ordinary and necessary business expenses under sec. 162(a) of the Internal Revenue Code of 1954.
2. Held, further, that petitioners have not established that they are entitled to deductions, in excess of the amounts allowed by respondent, for the expenses of Christmas parties and fishing trips, automobile operating and depreciation expenses, expenses relating to the operation of a "tree farm," or for bad debt losses, and that petitioners are liable for the addition to tax imposed by sec. 6651(a), I.R.C. 1954, for the taxable year 1963.
*820 Respondent determined deficiencies in income tax of the petitioners and an addition to tax pursuant to section 6651(a) of the Internal Revenue Code of 1954 for failure to file a timely return, as follows:
| Addition | ||||
| Docket No. | Year | Deficiency | to tax, | |
| Sec. | ||||
| 6651(a) | ||||
| 4163-66 | Delores Bussabarger | 1964 | $ 2,864.48 | |
| 4164-66 | Robert A. and Delores Bussabarger | 1963 | 3,067.85 | $ 683.19 |
| 4165-66 | Robert A. Bussabarger | 1964 | 2,810.47 |
*77 A number of adjustments reflected in the notice of deficiency were agreed to or not contested by petitioners. The issues which remain for consideration are:
(1) Whether salary, FICA, and pension fund payments made by the petitioner Dr. Robert A. Bussabarger in 1963 and 1964 to his former medical secretary, Janice Edwards, are deductible as ordinary and necessary business expenses;
(2) Whether petitioners are entitled to deductions for the expense of Christmas parties hosted by Dr. Bussabarger in 1963 and 1964, in excess of the amounts allowed by respondent;
(3) Whether sums advanced to Janice Edwards and George Walters in years prior to those before the Court are properly deductible as either business or nonbusiness bad debts in 1963 or 1964;
(4) Whether petitioners are entitled to deduct as business expenses the cost of fishing trips taken by Dr. Bussabarger in 1963;
(5) Whether petitioners are entitled to deductions for automobile expenses and depreciation, in excess of the amounts allowed by respondent;
(6) Whether expenses incurred by Dr. Bussabarger in 1964 in connection with a "timber farm" owned by him are deductible as business expenses; and
(7) Whether petitioners are liable for *78 the addition to tax imposed by section 6651(a) of the Internal Revenue Code of 1954 for failure to file their return for 1963 timely.
FINDINGS OF FACT
The petitioners, Robert A. Bussabarger and Delores Bussabarger, are husband and wife. During the years involved and at the time the petitions herein were filed, they resided in Raymond Wash. They filed *821 a joint Federal income tax return for 1963 and separate returns for 1964 with the district director of internal revenue at Tacoma, Wash. The return for 1963 was filed September 24, 1964, more than 5 months after April 15, 1964, its due date. No extensions of time for filing were requested or obtained. Washington is a community property State and each of the petitioners reported one-half of the community income and expenses for 1964, all of which resulted from the activities of Robert A. Bussabarger (sometimes hereinafter referred to as petitioner).
Robert A. Bussabarger is a practicing physician and surgeon. He has been engaged in the general practice of medicine and surgery in Raymond, Wash., since October 1946. In general his practice was connected with a clinic operated at first in partnership with other physicians and later as *79 sole owner, with one associate physician. Approximately 12 to 18 persons were employed by petitioner in the clinic.
During the years involved and for a number of years prior thereto, petitioner and his associate treated an average of 1,000 patients per month in the clinic and in the hospital located in South Bend, Wash., approximately 3 miles from Raymond. Raymond has a population of approximately 3,700 and South Bend, the county seat of Pacific County, has a population of approximately 1,500. The principal industry of the area is logging and millwork. This is a somewhat isolated though scenic part of Washington and many tourists pass through Raymond on Highway No. 101 on their way to the ocean beaches. Aberdeen, which is some 25 miles away, has a population of 18,000 to 20,000.
Janice Edwards was first employed by petitioner in 1948 to do clerical work and in 1950 or 1951 she was made business manager of the clinic. Her duties consisted of attending to the keeping of patients' charts and billing procedures -- sending out checks, bills, and notices regarding delinquent accounts. She was a "certified medical secretary" but was not a nurse.
Janice later contracted tuberculosis and *80 on January 18, 1960, was confined in the Firland Sanatorium in Seattle, Wash., where she remained until April 1961, and thereafter lived on property maintained by petitioner in Scio, Oreg., until her death in December 1964. For about 6 months in 1961 (whether in Raymond or while living in Scio is not clear, nor is the distance from Scio to Raymond shown) she did some typing work for the clinic on a part-time basis. She performed no services for petitioner in 1962, 1963, or 1964. Her job was filled by another employee after she left in 1960.
Prior to her illness, Janice was paid a salary of $ 420 or $ 450 per month. Petitioner continued paying her a salary from January 1960 until December 1964. For the first 5 months of 1961, she was paid $ 200 *822 a month and thereafter, until her death in December 1964, she was paid $ 400 a month. Petitioner also made payments on her behalf for social security and a pension fund. The salary and other payments made to or on behalf of Janice for 1963 and 1964 were as follows:
| 1963 | 1964 | |
| Salary | $ 4,800 | $ 4,450 |
| Social security | 174 | 174 |
| Pension fund | 480 | 445 |
| Total | 5,454 | 1*81 5,069 |
Petitioners deducted $ 5,454 on their joint return for 1963 and, on their separate returns for 1964, each deducted one-half of the total sum of $ 5,069, for salary and related expenses paid to or on behalf of Janice Edwards. Respondent disallowed the deductions claimed for salary and related expenses paid to or on behalf of Janice Edwards for both of said years.
Prior to 1962, petitioner had no specific plan for paid vacations or sick leave. On February 5, 1962, petitioner put into effect a plan providing for 1 to 3 weeks of paid vacation, depending upon the length of continuous employment, and for 10 days of nonaccruable paid sick leave each year during the first 5 years of employment. After 5 years of employment, paid sick leave could be extended "at the discretion of Dr. R. A. Bussabarger, employer."
In each of the years 1963 and 1964, petitioner hosted Christmas parties attended by approximately 150 persons of whom approximately one-third were employees of petitioner or of the hospital in which he practiced and two-thirds *82 were friends, neighbors, and patients of petitioner. The total costs attributable to these parties, amounting to $ 649.05 in 1963 and $ 918.65 in 1964, were deducted by petitioners on their income tax returns for those years. Respondent determined that one-third of the cost of each of the Christmas parties which was attributable to the entertainment of employees was properly deductible as business expense and disallowed the remaining two-thirds of such costs attributable to the entertainment of friends, neighbors, and patients.
In 1963, petitioner took a number of fishing trips costing a total of $ 148.45, which he deduced as "entertainment expenses" on the joint return filed by the petitioner for 1963. Of the 25 persons, other than petitioner, who went on such trips, 20 were patients and 5 were employees. Respondent disallowed the entire amount claimed for these trips.
*823 In 1964, each of the petitioners deducted one-half of $ 1,449.45, claimed by them as business bad debt deductions, attributable to the following loans or advances: Donald C. Cantrell, $ 400; Janice Edwards, $ 710.77; loans to employees, $ 338.68.
The $ 400 due from Cantrell represented the balance due on a personal *83 loan made by petitioner to Cantrell in 1959 in the amount of $ 1,000, on which $ 600 had been paid prior to 1964. Cantrell became insolvent in 1964. Respondent has allowed petitioners a short-term capital loss deduction on the loan to Cantrell.
The amount due from Janice Edwards resulted from salary advances made to her from 1958 through 1964, with partial payments deducted from her salary. At the time of her death in December 1964, the outstanding balance of such advances, none of which was evidenced by note, amounted to $ 710.77. No attempt had been made by petitioners to collect any of this amount in 1964, either by salary deductions or other means. Respondent disallowed the deductions claimed for such advances.
The amount attributed to employee loans consisted of a loan which petitioner made to George Walters in 1963 in the amount of $ 300, and $ 38.68 which petitioner had contributed to an "Employee Fund" in 1960. Petitioner no longer contends the $ 38.68 is properly deductible in 1964. Walters had been a part-time janitor at petitioner's clinic during part of 1962 and until September 1963. No note was given for the loan to Walters and no deductions for the loan were made *84 from his wages.
For the taxable year 1964, the petitioners (each claiming one-half) claimed deductions for automobile expenses in the amount of $ 1,879.47 and depreciation in the amount of $ 1,665.20, attributable to the business use of a Chrysler automobile by Dr. Bussabarger. No mileage records were maintained on the automobile which had been acquired in October 1963. The total mileage for 1964 was stipulated to have been approximately 23,000 miles. Respondent determined that 14,172 miles, or approximately 60 percent was for business useage and, accordingly, disallowed 40 percent of the claimed operating expenses and 40 percent of the claimed depreciation as attributable to personal use. He also determined that petitioners were not entitled to employ the double declining method of depreciation on the automobile. Respondent's determination resulted in the disallowance of $ 1,761.19 of the $ 3,544.67 claimed by petitioners for automobile expenses and depreciation.
For the taxable year 1964, petitioners (each claiming one-half) claimed deductions aggregating $ 2,605.64 for certain expenditures allegedly incurred by them in connection with the operation of a "tree *824 farm." Petitioner *85 acquired the farm, consisting of 80 acres, in 1961 or 1962 and immediately began planting trees on it each year. They were not intended for Christmas tree purposes. Petitioners' home is located on the farm, which is 2 miles from the clinic. The deductions claimed were for the following purposes and amounts:
| Labor involved in planting trees | $ 612.76 |
| Cost of trees | 200.80 |
| Graveling road | 518.23 |
| Ditching | 41.60 |
| Bulldozing fire trails | 881.00 |
| Power saw rental | 240.00 |
| Travel | 100.00 |
| Insect repellant | 11.25 |
| Total | 2,605.64 |
The parties have agreed $ 10 for travel and $ 11.25 for insect repellant are properly deductible and respondent has allowed such amounts for 1964. Respondent disallowed the deductions claimed for all the other items in the total amount of $ 2,494.39 on the ground that they were capital expenditures and therefore not deductible as ordinary business expenses. Of such expenditures $ 1,751.63 was paid in 1963 and $ 742.76 was paid in 1964. The parties agree that to the extent such expenditures may be allowable, deduction therefor shall be made in the year of actual payment.
OPINION
The principal issue presented is whether salary, FICA, and pension fund payments made by the petitioner, Dr. Robert A. *86 Bussabarger, in 1963 and 1964 to or on behalf of his former medical secretary, Janice Edwards, are deductible as ordinary and necessary business expenses.
Section 162(a) of the Internal Revenue Code of 19542 provides in pertinent part:
SEC. 162. TRADE OR BUSINESS EXPENSES.
(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including --
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
The question of what constitutes ordinary and necessary business expenses within the meaning of section 162(a) is one of fact to be determined from all of the facts and circumstances of the particular case. The burden of proof is upon the petitioner.
It has been stipulated that Janice actually performed no services for the petitioner from 1961 until her death in December 1964. There is *825 also no evidence or even suggestion that she was not adequately and fully compensated for the services rendered by her prior to April 1960 when she *87 was confined in the Firland Sanatorium or during the period she did part-time work in 1961. Accordingly, the amounts paid to her or on her behalf during the taxable years 1963 and 1964 did not constitute compensation for personal services actually rendered during the taxable years or for services previously performed. There is no contention that the amounts in question were paid pursuant to the "pension fund" (which petitioner described as a trust fund for the payment of retirement benefits and not for the payment of sickness benefits), or to the "vacation and sick leave" plan adopted by petitioner in 1962.
Petitioner's principal contention is that the payments in question were made to Janice in the hope that this might insure her return to employment at the clinic upon the restoration of her health, and that such payments were therefore ordinary and necessary expenses related to the carrying on of his medical practice within the meaning of section 162(a).
Petitioner testified that Janice was a "certified medical secretary" (a term not otherwise defined herein) but was not a nurse. Her duties consisted of keeping patients' charts and attending to billing procedures -- sending out *88 checks, bills, and notices regarding delinquent accounts. He also stated that Janice was a very efficient employee and that "accredited medical secretaries" were difficult to obtain in the immediate community in which he practiced.
We do not question that Janice was an efficient employee and that her work had been beneficial to petitioner's practice in the past. We also do not doubt that experienced medical secretaries were difficult to obtain in the community. The fact remains, however, that another employee of the clinic took over Janice's duties after she left in 1960 and continued to perform such duties until after 1965, when she retired.
We are convinced, upon careful consideration of all the facts and circumstances presented herein, that the continued payment of the salary and other benefits in question was for personal reasons rather than for business purposes.
Janice had been in petitioner's employ since 1948. He admitted on the witness stand that he had a personal concern and feeling of responsibility for her and also admitted he told the revenue agent who investigated his returns that he had had a more intimate personal relationship with her during her employment. The fact *89 that he maintained her on a small farm which he owned in Oregon during the last 3 years of her life is also indicative of personal concern. Finally, petitioner's studious avoidance of questions concerning Janice's mental condition and the nature and duration of her illness would suggest *826 that petitioner did not expect her to be able to return to her work.
In support of his contention herein, petitioner has cited a number of authorities relating to various concepts to be considered in determining whether an expenditure is a business or nonbusiness expense. With one exception they dealt with factual patterns substantially different from that of the instant case and are of limited value herein.
Ware Knitters, Inc. v. United States, 168 F. Supp 208 (Ct. Cl. 1958), is the only case cited by petitioners which involved salary continuation payments made to an employee during a period of absence from his regular employment. In that case Robert L. Nields, a vice president and director of the plaintiff corporation, was absent from his regular employment from July 1942 to September 1945.
Robert first entered the civilian pilot training program in July 1942, and in August 1942 enlisted in the *90 Army Air Corps Enlisted Reserve but continued in the civilian pilot training program and, after completion of his course on September 29, 1942, was rated as an instructor. Thereafter he was engaged by a civilian school, which had a contract with the Army, in instructing Air Force cadets to fly. For this service he was paid a salary by the school ranging from $ 150 to $ 400 per month. He was discharged from the Army Air Corps Enlisted Reserve on April 3, 1944, and immediately severed his connection with the civilian pilot training program and accepted employment with the Sikorsky Division of United Aircraft Corp. as a production and test pilot of airplanes manufactured for use by the military, at a salary of something over $ 400 per month. He continued with this company until the cessation of hostilities in September 1945, and then returned to his regular employment with the plaintiff.
During his employment as an instructor and test pilot, Robert also performed a limited amount of supervisory service for the plaintiff which consisted of reviewing reports sent to him and conversations with employees concerning company business. He also attended directors meetings.
During each year *91 of his absence Robert received salary payments from the company in preferred stock and cash amounting to $ 7,705, $ 8,140, and $ 7,485 for the fiscal years ending in 1943, 1944, and 1945, respectively. Plaintiff was allowed to deduct the salary paid Robert while engaged in the civilian pilot training program but was denied deduction for the salary paid him while in the employ of Sikorsky.
The Court of Claims determined that the amounts paid him by the plaintiff during the period he was employed by Sikorsky were likewise deductible as ordinary and necessary expenses within the meaning of section 23(a)(1)(A) of the Internal Revenue Code of 1939, the predecessor of section 162(a), stating that such payments were made "to induce his return to his former employment and for *827 services to be rendered when he should return to work." The Court cited article 108 of Treasury Regulations 45 (1920 ed.)3 as well as a number of decisions (by other courts), each of which involved wage continuation payments made to an employee while in the military service. Neither Ware Knitters, Inc., supra, nor the cases cited therein involved wage continuation payments made to an employee during a long period of *92 illness such as we have in the present case. It is clearly distinguishable. Cf. Brandtjen & Kluge, Inc., 34 T.C. 416">34 T.C. 416, 440 (1960).
Snyder & Berman, Inc., 41 B.T.A. 1180">41 B.T.A. 1180, affd. 116 F. 2d 165 (C.A. 4, 1940), and Dreikhorn Bakery, Inc., a Memorandum Opinion of this Court dated May 12, 1948 (docket No. 14054), cited by respondent, are similar to the present case in that they involved salary continuation payments made to an employee of the taxpayer during an extended period of illness. In the Snyder & Berman case, payments made in 1936, 1937, and 1938 to the former assistant secretary-treasurer of the taxpayer, who had suffered a nervous breakdown in 1934 and was receiving mental treatment in a VA hospital, were held not to be deductible as *93 ordinary and necessary business expenses. In the Dreikhorn Bakery case, payments made in 1943 to a former employee who became ill in 1937 were held to be in the nature of personal expenses and not ordinary and necessary expenses of the taxpayer's business. See also Desmond's, Incorporated, 15 B.T.A. 738">15 B.T.A. 738 (1929), in which the salary paid to the former president of the taxpayer in 1919 and 1920 who became physically and mentally incapacitated in 1914, was held not an ordinary and necessary business expense.
In each of the above cases there was a blood relationship between the recipient and the officers or controlling stockholders of the taxpayer, an element which is not present in the instant case. We are nevertheless of the opinion that the payments involved herein were of a personal nature, motivated by the personal concern and feeling of responsibility which petitioner had for his former medical secretary, and are therefore not deductible as ordinary and necessary business expenses under the provisions of section 162(a). We so hold.
Issues 2 and 4Petitioner contends that the entire amount of the expenses attributable to the Christmas parties hosted by him in 1963 and 1964 are *828 deductible *94 as entertainment expenses directly related to and associated with the active conduct of his profession, under the provisions of section 274(a). 4*95 *96 It was stipulated that approximately 150 persons attended each of the parties of whom approximately one-third were employees of petitioner or of the hospital in which he practiced and that the other two-thirds were friends, neighbors, and patients of the petitioner. The costs, $ 649.05 in 1963 and $ 918.65 in 1964, were also stipulated. Respondent allowed the deduction of one-third of such costs which were attributable to the entertainment of employees and disallowed the deduction of the two-thirds attributable to the entertainment of friends, neighbors, and patients.
Other than the stipulated facts referred to above, petitioner has offered no evidence to show that the disallowed items were directly related to or associated with the active conduct of his trade or business. His uncorroborated, self-serving statement is not sufficient. As stated in H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 3 C.B. 425">1962-3 C.B. 425:
if *97 the group of persons entertained is large or the distractions substantial, the cost of the entertainment will not be deductible, in the absence of a clear showing of a direct relationship to the active conduct of the trade or business.
*829 And in S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 3 C.B. 734">1962-3 C.B. 734, it is stated:
It will not be sufficient that the entertainment expense is vaguely or remotely connected with a business motive; it must be demonstrated that the predominant purpose of the expense is to further the trade or business of the taxpayer. Where goodwill generated by the expense is vague or where the possibility of the expenditure resulting in the production of income is remote, no deduction will be permitted.
We hold that petitioners are not entitled to deductions for the Christmas party expenses in excess of the amount allowed by respondent. See Wm. Andress, Jr., 51 T.C. 863">51 T.C. 863 (1969); Vaughn V. Chapman, 48 T.C. 358">48 T.C. 358, 366 (1967); Reginald G. Hearn, 36 T.C. 672">36 T.C. 672, affd. 309 F. 2d 431 (C.A. 9, 1962), certiorari denied 373 U.S. 909">373 U.S. 909.
For similar reasons, we hold that petitioners are not entitled to deduct the cost of fishing trips taken by Dr. Bussabarger in 1963.
Issue 3This issue *98 involves deductions claimed by petitioners as business bad debts for advances made to Janice from 1958 to 1964, the outstanding balance of which at the time of her death was $ 710.77, and a loan which petitioner made to George Walters, a former part-time janitor, in 1963 in the amount of $ 300. Neither amount was represented by a note. Petitioners offered no evidence that said advances or loans constituted business rather than nonbusiness bad debts, or that they became worthless in 1964. Moreover, petitioners have not discussed this issue in their briefs and are deemed to have abandoned it. Respondent's determination of this issue is sustained.
Issue 5Petitioners claimed deductions for automobile expenses and depreciation for 1964 in the total amounts of $ 1,879.47 and $ 1,665.20, respectively. No mileage or expense records on the automobile were kept by petitioners. It was stipulated the total mileage for 1964 was approximately 23,000 miles. Respondent determined that 14,172 miles or approximately 60 percent was for business usage and, accordingly disallowed 40 percent of the claimed operating expenses and of the claimed depreciation as attributable to personal use. Petitioners *99 have failed to establish that they are entitled to deductions in excess of the amount allowed by respondent.
Issue 6Petitioners claimed deductions as ordinary expenses for the year 1964 for certain expenditures alleged to have been incurred in connection with the operation of a "tree farm," consisting mainly of *830 planting trees, graveling roads, ditching and bulldozing fire trails. Respondent disallowed all but $ 21.25 of the total amount claimed on the ground that they were capital expenditures and not ordinary business expenses. Petitioners have not discussed this issue and, accordingly, are deemed to have abandoned it. See also Income Tax Regs., secs. 1.611-3(a) and 1.175-3; United States v. Regan, 410 F. 2d 744 (C.A. 9, 1969), certiorari applied for June 30, 1969.
Issue 7Petitioners filed their joint Federal income tax return for 1963 on September 24, 1964, more than 5 months after its due date. No extensions of time for filing were requested or obtained and petitioners offered no evidence that the delay in filing was due to reasonable cause. Respondent correctly determined that petitioners are liable for the addition to tax imposed by section 6651(a). See Income Tax Regs., sec. 301.6651-1(a)(3).
Decisions *100 wll be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Robert A. and Delores Bussabarger, docket No. 4164-66; and Robert A. Bussabarger, docket No. 4165-66.↩
1. Par. 6 of the stipulation states the total sum deducted for 1964 was $ 5,056.31. The figures shown above are as set forth in the notice of deficiency. The discrepancy is not explained. The parties have used the total figures shown above in their briefs.
2. Unless otherwise indicated, all Code references herein are to the Internal Revenue Code of 1954.↩
3. Art. 108, Regs. 45 (1920 ed.), promulgated under the Revenue Act of 1918, contained the following provision:
Salaries paid by employers during the continuance of the war to employees who are absent in the military or naval service or are serving the Government in other ways at a nominal compensation, but who intend to return at the conclusion of the war, are allowable deductions.
See also I.T. 3417, 2 C.B. 64">1940-2 C.B. 64, and I.T. 3602, 1 C.B. 64">1943-1 C.B. 64↩.
4. SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.
(a) Entertainment, Amusement, or Recreation. --
(1) In General. -- No deduction otherwise allowable under this chapter shall be allowed for any item --
(A) Activity. -- With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such item was associated with, the active conduct of the taxpayer's trade or business, or
(B) Facility. -- With respect to a facility used in connection with an activity referred to in subparagraph (A), unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer's trade or business and that the item was directly related to the active conduct of such trade or business,
and such deduction shall in no event exceed the portion of such item directly related to, or, in the case of an item described in subparagraph (A) directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), the portion of such item associated with, the active conduct of the taxpayer's trade or business.
* * * *
(d) Substantiation Required. -- No deduction shall be allowed --
(1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home),
(2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity, or
(3) for any expense for gifts,↩
unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility, or receiving the gift. The Secretary or his delegate may by regulations provide that some or all of the requirements of the preceding sentence shall not apply in the case of an expense which does not exceed an amount prescribed pursuant to such regulations.