*3440 1. Traveling and entertainment expenses incurred by members of a partnership and their employees in carrying on its business are deductible in computing the partnership's taxable income when such expenses are shown to have been ordinary and necessary business expenses.
2. The evidence does not establish that the Commissioner erred in including in I. Goldman's income for 1920 and 1921 certain deposits made in his savings bank account.
*874 These proceedings, consolidated for hearing and decision, are brought to redetermine the income tax and surtax of the petitioners, I. Goldman and his son, Harold Goldman, for the years 1920 and 1921. In Docket No. 11173 the respondent has determined deficiencies *875 in the amounts of $2,630.79 and $1,556.89, respectively, and in Docket No. 11907 in the amounts of $957.21 and $413.68, respectively, for the years 1920 and 1921.
The petitioners allege that the respondent erred in disallowing as deductions from the income of the partnership hereinafter mentioned, under*3441 the provisions of section 214(a)(1) of the Revenue Acts of 1918 and 1921, the amounts of $2,241 and $3,543.25 for the years 1920 and 1921, respectively, as general expenses necessary in the local entertainment of customers and visiting manufacturers and the amounts of $2,695.99 and $3,682.96 for the years 1920 and 1921, respectively, as traveling and other expenses incurred on business trips to New York City, and that consequently the distributive shares of the partners should be diminished correspondingly.
The petitioner I. Goldman also alleges that the respondent erred in adding to the petitioner's income for the years 1920 and 1921 the sums of $7,804.20 and $6,838.97, respectively, representing deposits in his saving account and containing no element of gain or loss reflected in income.
FINDINGS OF FACT.
I. Goldman, the petitioner in Docket No. 11173, had been engaged in the wholesale women's ready-to-wear business for 40 years. For some time previous to the year 1920 he had been conducting the business at 788 Market Street, San Francisco, Calif., under the firm name of Goldman's Cloak & Suit Co., he and his son Harold Goldman, the petitioner in Docket No. 11907, being*3442 equal partners therein. I. Goldman had managed the business, bought all merchandise and dictated the policy of the store, to whose interests he devoted his entire time. The partnership carried a stock of merchandise valued at approximately $100,000 and did an annual business of about $500,000. R. Fineman was floor manager of the store and H. Goldman was actively engaged in the business. Mrs. Frances Hart (formerly Miss Fields) was bookkeeper and office manager from 1917 to 1923, inclusive.
It was the custom of the petitioner, I. Goldman, to receive from the partnership advances to cover his contemplated traveling and entertainment expenses or to be reimbursed for such expenditures previously made by him. At times he permitted substantial amounts to accummulate before securing a check from the firm in payment thereof. Mrs. Hart issued checks payable to "Cash" and charged "General expense" on the books. Likewise, smaller sums were supplied to Fineman and Harold Goldman to provide entertainment for the firm's business customers and guests. I Goldman usually signed the checks but in his absence H. Goldman, or rarely, Mrs. *876 Hart, signed them. The entries relating*3443 to such transactions were made on the books of the partnership at or about the time each advance or reimbursement check was issued. No itemized expense accounts were submitted to the partnership by I. Goldman, H. Goldman, or R. Fineman, but all such expenditures were wholly for the benefit of the partnership business. Expenditures of this nature aggregated $2,241 in 1920 and $3,543.25 in 1921, respectively.
The above described method of making payment of business expenses of this character had been the custom of the partnership and petitioner I. Goldman for many years prior to 1920. The chief results of these expenditures were that they enabled the firm to obtain new customers and increased business, to keep in touch with changes in styles, colors and materials and to secure preferential offierings from the manufacturers.
Two small items, $192.40 for cigars and $80.25 for glace fruit, represented purchases made for the purpose of "treating" customers and inducing better and more prompt service from the manufacturers.
The petitioner I. Goldman annually made a minimum of four trips, sometimes six or more, to New York City to purchase goods for the firm. The respondent has*3444 allowed for each year traveling expenses, arbitrarily calculated, covering trips from San Francisco to New York City, at the rate of $879.26 per trip. I. Goldman always spent more for the firm's benefit than he was repaid by the firm. During 1920 and 1921 he made additional trips from New York City to Stamford, Conn., and Philadelphia, Pa., to purchase and secure delivery of merchandise. During 1920 a monthly allocation of $200 was made to cover traveling expenses and in 1921, upon an auditor's advice, it was increased to $600 per month. For this purpose the firm advanced to and reimbursed I. Goldman in the sums of $2,695.99 and $3,682.96 during the years 1920 and 1921, respectively.
The expenditures made by I. Goldman consisted chiefly of entertainment and dinners to employees of the Majestic Cloak Co., a large manufacturer of cloaks and suits, and were made to insure expedition in the shipment of orders, care and discretion in the selection of colors and materials and, in general, special consideration and service, greatly to the benefit of the firm. I. Goldman was a small stockholder of the Majestic Cloak Co.
The deposits made in the savings bank account of I. Goldman*3445 during 1920 and 1921 consisted of sums received by him from salary, the sale of bonds, rents, transfer of money from the partnership to his personal account and from money due him from various other sources.
OPINION.
VAN FOSSAN: The first issue raised is whether or not the firm of Goldman's Cloak & Suit Co., in which the petitioners had equal interests, *877 was entitled to deduct in 1920 and 1921 the sums of $4,936.99 and $7,226.21, respectively, representing general expenses and traveling expenses incurred during those years by the petitioners and by R. Fineman, the floor manager of said firm.
We are concerned not so much with the particular method of bookkeeping used by the partnership and the petitioners in charging and crediting their various accounts, as with the use to which such expenditures were actually devoted. It appears beyond question that the sums claimed as entertainment and traveling expenses were utilized for those purposes, and as such were ordinary and necessary expenses incurred during the taxable years of 1920 and 1921 in carrying on the trade or business of the partnership. The evidence shows that more than the amounts charged were actually*3446 spent by petitioner I Goldman for the benefit of the business and that the amounts so expended by H. Goldman and R. Fineman were duly authorized. Consequently, the fact that the partners and the floor manager were not required to, and did not, keep an accurate itemized statement of these expense accounts is not material. ; .
Therefore, we hold that the sums of $4,936.99 and $7,226.21 should be deducted from the partnership's gross income for the years 1920 and 1921, respectively, under the provisions of section 214(a)(1) of the Revenue Acts of 1918 and 1921.
Among the savings bank deposits made for the credit of I. Goldman appear items which obviously may contain a certain amount of gain and profit, such as rents, sales of bonds, etc. The petitioner has failed to segregate such items and to show that his income tax has been paid on such gains and profits. In the absence of evidence to the contrary, we must approve the action of the Commissioner in adding the sums of $7,804.20 and $6,838.97 to the income of petitioner I Goldman for the years 1920 and 1921, respectively.
Judgment will*3447 be entered under Rule 50.