*1531 1. Amounts properly deductible from gross income as ordinary and necessary business expense determined.
2. Determination by respondent of amounts of reasonable salary allowable as a deduction from gross income approved.
3. Respondent's disallowing deduction of amount representing bad debts approved, since taxpayer knew accounts to be worthless prior to taxable year and no evidence presented showing that accounts were actually charged off in taxable year.
*1168 This is a proceeding for the redetermination of asserted deficiencies in income taxes for the years 1923 to 1926, both inclusive, in the total amount of $5,049.09.
The following errors are assigned by petitioners:
1. Disallowance in the determination of taxable income for 1923 of a deduction in the amount of $900, alleged to represent expenses incurred in travel to and from the decedent's various places of business in connection with the conduct of his business.
2. Disallowance in the determination of taxable income for 1924 of a deduction in the amount of $400, alleged to represent*1532 an insurance premium paid.
3. Disallowance in the determination of taxable income for 1925 of the following deductions:
(a) $10,906.44 alleged to represent salaries paid,
(b) $2,514.14 alleged to represent bad debts,
(c) $1,292.90 alleged to represent expense incurred in travel to and from petitioner's various places of business in connection with the conduct of business,
(d) $2,427.52 alleged to represent items properly chargeable to rent,
(e) $400.00 alleged to represent insurance premium paid, and
(f) $132.35 alleged to represent advertising expense paid.
Although the petition alleges that the taxes in controversy are income taxes for the years 1923, 1924, 1925 and 1926, no error was assigned in the petition as to the year 1926. At the hearing, however, leave to amend the petition was granted. The amendment assigned no error on the part of the Commissioner, but alleged in substance that, if it be found that the amounts paid for the improvements in 1925 on the Market Street property should be written off pro rata over the term of the lease thereon, then the proportionate amount should be deducted from gross income in 1926.
FINDINGS OF FACT.
Andrew H. Dahl, *1533 the decedent, was a resident of Kenosha, Wis., until 1925, when he moved to La Crosse, Wis. He died January 24, 1928, and his estate is being probated in the county court in and for La Crosse County, Wis. Julia Dahl, Harry Dahl and Chester Dahl were appointed executors of the last will of Andrew H. Dahl and are still acting as such executors.
The decedent, during the years involved, was in the automobile business and maintained Ford agencies at Kenosha, Westby, Salem, Hillsboro, Viroqua, and Plymouth, all in the State of Wisconsin.
*1169 The decedent visited the various agencies throughout the year, usually traveling by automobile. He did not visit all the agencies on one trip, but grouped them and visited one group one month and the other the next. He visited all agencies at least six times a year and some of them oftener and as often as 20 times a year. He spent a day or so at each agency he visited. He entertained his employees and sometimes customers on these visits, and generally met with his salesmen and entertained them at dinner at a hotel for business purposes.
The decedent spent for business purposes $750 in 1923 and the same amount in 1925, in traveling*1534 to and from his various places of business and in the entertainment of employees and customers.
As required under the laws of the State of Wisconsin, the decedent carried employer's liability or workmen's compensation insurance, with the Employer's Mutual Liability Insurance Company. The insurance account in the books of account of the decedent shows the following debit and credit items relating to employer's insurance premiums, etc:
| 1923 | Item | Debit | Credit |
| 2/27 | Dividend - Employ Mutual | $56.34 | |
| 3/31 | Dividend - Employ Mutual | 6.36 | |
| 10/10 | Employers Mutual to 10/1/24 | $248.00 | |
| 11/5 | Excess Insurance - Pay roll - Employers Mutual | 200.03 | |
| 1924 | |||
| 9/10 | Dividend Employers Mutual | 84.00 | |
| 10/29 | Employers Mutual - Deposit Premium | 400.00 | |
| 10/30 | Rebate - Employers Mutual (1919, 1920 policy) | 11.80 | |
| 12/11 | Employers Mutual Liability Co | 314.51 | |
| 12/13 | Albert C. Mielenz (Employers Insurance) | 44.72 | |
| 12/16 | From Employees | 22.80 | |
| 1925 | |||
| 1/31 | From Employees | 21.60 | |
| 1/31 | Aetna Life Ins. Co. (Employees Insurance) | 44.72 | |
| 2/21 | From Employees | 21.60 | |
| 2/28 | From Employees | 1.20 | |
| 2/25 | Aetna Life Ins. Co. (Employees) | 44.72 | |
| 3/18 | Aetna Life Ins. Co. (Employees) | 44.72 | |
| 3/26 | From employees | 24.00 | |
| 4/23 | 10% Dividend Employers Mutual | 56.25 | |
| 4/24 | From Employees | 21.60 | |
| 4/10 | Aetna Life Ins. Co. (Employees) | 44.72 | |
| 5/11 | Aetna Life Ins. Co. (Employees) | 44.72 | |
| 5/23 | Insurance Employees | 20.40 | |
| 6/27 | Employees | 19.20 | |
| 6/ | Aetna Life Ins. Co. (Employees) | 28.70 | |
| 7/25 | Employees | 20.40 | |
| 7/2 | Aetna Life (Employees) | 39.04 | |
| 8/22 | Deducted - Employees | 15.60 | |
| 8/31 | Deducted - Employees | 1.20 | |
| 8/10 | Aetna Life Ins. Co. (Employees) | 40.46 | |
| 9/9 | Aetna Life Ins. Co. (Employees) | 40.46 | |
| 9/25 | Deducted - Employees | 15.60 | |
| 9/26 | Deducted - Employees | 1.20 | |
| 10/9 | Employers Mutual Ins. Co. (Deposit) | 400.00 | |
| 10/9 | Aetna Life Ins. Co | 34.62 | |
| 10/24 | Insurance - Deducted, Employees | 15.60 | |
| 11/9 | Aetna Life Ins. Co | 37.54 | |
| 11/21 | Insurance - Deducted, Employees | 14.40 | |
| 11/24 | Insurance - Deducted, Employees | 1.20 | |
| 11/25 | Insurance - Deducted, Employees | 1.20 | |
| 12/1 | Compensation - Employers Mutual | 243.33 | |
| 1/29 | Aetna Life (Albert Mielenz) Employees | 36.70 | |
| 12/31 | From Employees | 15.60 |
*1535 *1170 During the Christmas holidays in 1924 the decedent and his sons, Chester, Victor, A. J., and Harry Dahl, met at the home of the latter in LaCrosse, Wis. It was then agreed between the decedent and his sons, Victor and A. J. Dahl, in the presence of the other two sons, that Victor and A. J. Dahl should take full charge and operate completely the business of the decedent in Kenosha, each of the sons to receive a salary of $300 per month and one-third of the annual net profits of the business at Kenosha. The decedent remained in Kenosha, being more or less active in the business there, until April or May, 1925, when he left Kenosha and thereafter acted only in an advisory capacity. In 1926 the decedent sold the business to his sons, Victor and A. J. Dahl.
Victor Dahl commenced to work for the decedent in September, 1924, at the Kenosha agency. He was in charge of that agency until his brother, A. J. Dahl, commenced to work there, and after that he had his brother had joint control of the business. He had worked in the automobile business during summer vacations and Saturdays when he attended school and after 1920 devoted all of his time to the automobile business. *1536 Prior to the time he commenced to work for decedent he worked about 14 months for his brother Chester, who had a Chevrolet agency in Kansas City. He reported the total amount received during 1925, of $11,203.22, including his share of the profits, on his income-tax return for 1925 and paid taxes thereon.
A. J. Dahl is 32 years of age. He graduated from the University at Seattle, Wash., in 1920. Immediately after leaving the University he and his brother Victor, as partners, opened a Ford agency in Plymouth, Wis., and conducted the agency together until the fall of 1922. They each drew a salary each month and shared equally in the profits. He then went to Kansas City and worked for his brother Chester. His brother Chester, at the same time the decedent offered to employ him, made him an offer of employment whereby he was to receive a salary and 1 per cent of the gross sales of the business. It later developed that he would have received more money had he remained in Kansas City. He went to Kenosha in May, 1925, and received during that year salary for seven months at $300 a month and one-third of the annual net profits, in the amount of $7,603.22. He reported this amount*1537 as salary received in his 1925 income-tax return and paid taxes thereon. When he commenced to work in Kenosha, for the first four weeks he took care of delinquent accounts. Later he conducted sales meetings with his brother Victor. He and his brother Victor exercised joint supervision and control of the business.
The decedent deducted an amount of $2,514.14 from gross income of 1925, which amount included an item of $392.50, the total of 15 *1171 bad accounts, an item of $1,379.94, the total of 8 notes unpaid, and an item of $741.60, the account of M. Hall. All the accounts were old, some dating back to 1918. The financial condition of some of the debtors was and had been very poor for several years and of others, many years, prior to 1925. The decedent knew all the debtors and was well informed as to their financial responsibility and that the accounts were worthless prior to 1925.
In March, 1925, the decedent leased from H. E. Barden on a written lease for a term of two years a building on Market Street, Kenosha, to be used as a Lincoln car showroom. At that time Ford dealers were required to handle Lincoln cars and to have a separate place of business for the*1538 sale of Lincoln cars. This was an old building and had to be remodeled. During 1925 the decedent paid a total of $1,956.80 to one Sidney M. Jones for the remodeling of this property, $120.72 to the Grey Electric Company for wiring, and $100 for a used Lincoln car sign to one Seideman, a total of $2,177.52. These premises were vacated in the spring of 1925 at the expiration of the lease. No part of these improvements was removed upon vacation of the premises, pursuant to provision in the lease.
In August, 1925, the decedent leased from George H. Height for a term of five years a barn which was used for storage purposes. On August 31, 1925, the decedent paid $250 for moving into the barn, parts, used cars, implements, etc., to be stored therein.
In 1925 the decedent purchased equipment for a baseball team, consisting of uniforms, bats, balls and catcher's mit, mask and protector, for advertising purposes, at a cost of $132.35. The members of the team were mostly all employees of the decedent at Kenosha. The uniforms had the words "Dahl Ford" on them and the team was known and referred to as "Dahl Fords" in the newspapers and otherwise. Quite a bit of publicity was obtained*1539 on account of the team in 1925 and the team was continued thereafter. The shop foreman had charge of the equipment other than the uniforms and whenever he needed new equipment he was told to order it and decedent would pay for it. On an average the equipment lasted for a season. As a rule, if it lasted longer, whoever had any equipment kept it.
OPINION.
MCMAHON: On his income-tax return for 1923 decedent deducted $900, and on his income-tax return for 1925 he deducted $1,292.90, as a business expense for the respective years. No canceled checks, receipts or bookkeeping entries of any kind were presented in evidence. The testimony relating to these items is uncertain, indefinite and unsatisfactory. However, witnesses testified that the amounts *1172 in question were spent for entertainment for business purposes, and that decedent visited his places of business at least six times a year, each trip costing approximately $25 to $75.
Under the decision of , which requires the making of as close an approximation as can be where the evidence discloses an allowable deduction, although no records are kept and a*1540 mere estimate of the amount so expended is made, we hold that the respondent erred in disallowing such deductions in toto, and that an amount of $750 was properly allowable as a deduction from gross income in each of the years 1923 and 1925. . See also .
It is alleged in the petition that in the income-tax returns of both 1924 and 1925, the decedent deducted as a business expense an item of $400 alleged payment of compensation insurance premium and that the decedent received a dividend of $84 in 1924 and a dividend of $56.25 in 1925. A. J. Dahl, who testified that he was familiar with the books of account, stated that the debit item of $400 in each of the years 1924 and 1925 was a deposit paid to the insurance company to apply on the annual premium and that a rebate was paid by the insurance company at the end of the year upon ascertainment of the correct amount of premium due, and that no part of such premium was paid by or collected from the employees of the decedent. In 1924, as shown on the insurance account, a total of $714.51 was paid as premium on compensation insurance, and in 1925, *1541 a total of $643.33. In 1924 a dividend of $84 was received by the decedent and a rebate of $11.80, although this apparently was a rebate on 1919 and 1920 premiums. In 1925 a dividend of $56.25 was received.
The respondent in his brief calls attention to entries on the insurance account shown as credits from employees, and states that the record does not show what agreement the decedent had with employees relative to reimbursing him for this insurance. It was testified that no part of the compensation insurance premium was paid by employees, and it is to be noted that the insurance account discloses that the decedent paid amounts to the Aetna Life Insurance Company as premiums on "employees' insurance." In view of the positive and undisputed testimony and such account, in our opinion, these credits from employees were not credits against the debits representing compensation insurance premiums. The amount deducted for insurance on the 1925 income-tax return of the decedent, when compared with the account, discloses that he deducted the net premium paid on all insurance, thus allowing for such credits.
In his brief the respondent states that an entry on the insurance account*1542 in 1923 shows that the premium of $248 paid in that year covered a period ending October 1, 1924, and that on an accrual basis the decedent would be entitled to deduct only premiums paid *1173 for insurance applicable to the taxable year. No issue was raised as to this item in 1923. No evidence was presented to show on what basis the books of account of the decedent were kept. The deduction of "Notes Receivable and Accounts Receivable" as listed in the bad debt schedule attached to the taxpayer's 1925 income-tax return indicates an accrual basis of accounting. . The payment of premium in October each year and the entry in 1923 indicate that the premium covered a period from October 1 to the last day of September of the next year. The insurance premium, together with dividends and rebates, should therefore be adjusted accordingly and deduction of net amounts of premiums applicable to the taxable years respectively should therefore be allowed.
Section 214(a) of the Revenue Act of 1921 provides that in computing net income a reasonable allowance for salaries or other compensation for personal services actually rendered*1543 may be deducted. In 1924 the decedent employed his two sons to conduct the Kenosha agency, agreeing to pay $300 a month and one-third of the net profits to each. One son, Victor Dahl, received $3,600 as salary, and $7,603.22, being one-third of the net profits. The other son, A. J. Dahl, did not arrive in Kenosha until the later part of May and received $300 for seven months, or $2,100, and one-third of the net profits, or $7,603.22. Whether or not an actual contract existed and whether or not the contract of employment was legally enforceable against the decedent does not determine the reasonableness of the compensation. The testimony relative to the nature of services, the prior experience of the sons as executives, and the ability of the sons generally, was meager, indefinite and uncertain. No testimony was given to show an increase in business in 1925 due to the efforts and services of the sons.
In view of the testimony presented, the respondent's determination that $10,000 was a reasonable allowance for salary for the two sons in 1925 is approved.
Section 214(a) of the Revenue Act of 1921 provides that debts ascertained to be worthless and charged off within the taxable*1544 year may be deducted in computing net income. In disallowing for the year 1925 a deduction in the amount of $2,514.14, representing alleged bad debts charged off at the Westby Garage, in our opinion, the Commissioner was correct. Harry Dahl was positive in his statements that the accounts were no good, of long standing, that the decedent knew they were no good prior to 1925, and that they should have been charged off prior to 1925. Where all the facts and circumstances upon which the determination of worthlessness could be based had existed without change for years prior to the *1174 taxable year and were fully known to the taxpayer, taxpayer is not entitled to the deduction claimed in the taxable year. ; . No testimony was given and no bookkeeping entries were presented to show that the accounts were actually charged off within the taxable year.
The determination of the respondent in disallowing the deduction of this item is therefore approved.
As to the items paid for improvements on the Market Street property in the total amount of $2,177.52, the testimony and facts warrant*1545 us in holding that these items are capital expenditures, rather than current expense, and are depreciable over the life of the lease thereon.
As to the item of $250 paid in 1925 for moving into the building leased for five years and included in the amount of $2,427.52 alleged to represent items properly chargeable to rent, in our opinion it is a necessary business expense item and therefore is an allowable deduction.
There remains one more disputed item, the amount of $132.35 expended by the decedent in 1925 for equipment for a baseball team, known as the Dahl Fords, which provided a source of publicity for the Kenosha agency. Although part of the equipment was carried over from year to year, it appears that the amount carried over was negligible, the equipment in fact lasting only for a season. We are of the opinion that this item should be allowed as an ordinary and necessary business expense deduction in the year when expended.
Judgment will be entered under Rule 50.