*1594 1. The amounts of deductions to which petitioners are entitled as ordinary and necessary business expenses determined.
2. Claimed deduction of loss on abandonment of inadequate electrical machinery disallowed in absence of proof that it was used in a business.
3. The provisions of section 1200 of the Revenue Act of 1924 do not authorize a 25 per cent reduction of the tax of an individual partner on his income for the year 1924, where such 1924 income is made up in part of a share of partnership income for a fiscal year beginning in 1923. Charles Colip,5 B.T.A. 123">5 B.T.A. 123, followed.
*798 These are proceedings duly consolidated for hearing for the redetermination of asserted deficiencies in income taxes as follows:
| Petitioner | Docket No. | Year | Deficiency |
| R. P. Shea | 37835 | 1923 | $7,993.50 |
| Do | 40034 | 1924 | 11,788.54 |
| Do | 40034 | 1925 | 8,831.15 |
| Joseph F. Logel | 37762 | 1923 | 12,910.00 |
| Do | 40071 | 1924 | 9,444.71 |
In Docket No. 37835 it is alleged that respondent*1595 erred in disallowing as a deduction in 1923 an amount of $18,069.50 deducted by petitioner as "entertainment and promotion expenses."
In Docket No. 40034 it is alleged that respondent erred in disallowing as a deduction in 1924 an amount of $15,000 representing "sales promotion expense."
Under Docket No. 40034 it is alleged that the respondent erred in disallowing as deductions in 1925:
(1) An amount of $31,500 representing "promotion and entertainment expenses"; and
(2) An amount of $4,950, representing loss sustained on account of abandoned inadequate electric equipment.
In Docket No. 37762 it is alleged that the respondent erred in disallowing as a deduction in 1923 an amount of $7,200.96, deducted by petitioner as "entertainment expenses."
*799 Under Docket No. 40071 it is alleged that the respondent erred in disallowing as deductions in 1924:
(1) An amount of $13,005.44 paid out by petitioner as entertainment expenses;
(2) An amount of $1,552.65 representing traveling expenses in connection with petitioner's business;
(3) An amount of $860 paid by petitioner as club dues and deducted as a business expense.
In each of Dockets Nos. 40071 and 40034 it*1596 is alleged that in computing tax liability for the year 1924 on the $27,352.09 of income found to be taxable at 1923 rates, the Commissioner determined a normal tax of $2,188.17 and a surtax of $13,676.05 without giving effect to the 25 per cent reduction provided by section 1201 of the Revenue Act of 1924, whereas the tax on that part of the income found to be taxable at the 1923 rates should be computed at the normal and surtax rates fixed under the Revenue Act of 1924.
FINDINGS OF FACT.
Each petitioner is an individual residing in Los Angeles, Calif.
During each of the years in question in this proceeding the petitioners were partners in the partnership of Shea and Logel and the partnership known as the Brentwood Country Club Estates. Each owned a 50 per cent interest in each partnership. The petitioner, Shea, is the father-in-law of the petitioner Logel. The partnership known as Brentwood Country Clug Estates owned, subdivided and sold a tract of land near the town of Brentwood, Calif.
The partnership of Shea and Logel acted as selling agents for Hancock Park, a real estate subdivision in Los Angeles, comprising about 2,058 acres which belonged to Allen Hancock. *1597 Shea and Logel received a commission of 7 per cent for sales of this property and a commission of 5 per cent for resales. During the time that the partnership was engaged in selling this property, the gross sales were in excess of $54,000,000. This was over the period from 1921 to 1926. The largest volume of sales occurred in 1923, 1924 and 1925.
It was agreed between the partners that selling expenses incurred by their salesmen were to be borne by the partnership, but that the expenses incurred by them (the partners) in effecting sales should be borne by each of them individually. They adopted this procedure because each had different ideas as to the methods of selling. None of the expenditures made by the petitioners and deducted in their individual income-tax returns were deducted as operating expenses by the partnerships.
*800 The petitioner, Shea, sold in 1923 the following described property:
| Description of property | ||||
| Name of purchaser | Lot No. | Tract No. | Full purchase price | Amount claimed by petitioner as deduction for down payment |
| R. V. Adams | 179 | 5666 | $2,500 | $833.00 |
| J. McComas | 354-355 | 5462 | 5,000 | 1,250.00 |
| A. L. Shea | 351-352 | 5462 | 5,000 | 1,250.00 |
| Blanche Friend | 15 | 5666 | 3,500 | 875,00 |
| George Hargis | 40 | 5666 | 3,500 | 1,166.50 |
| R. V. Adams | 13 | 6466 | 6,500 | 1,560.00 |
| F. Brice | 15 | 6466 | 6,500 | 1,560.00 |
| E. Williamson | 184 | 5462 | 1,900 | 475.00 |
| W. Gethin | 111 | 5462 | 2,000 | 500.00 |
| C. Oleson | 110 | 5462 | 2,000 | 500.00 |
| G. Krier | 20 | 5462 | 3,500 | 1,000.00 |
| L. Clark | 91 | 5666 | 2,000 | 500.00 |
| M. Foster | 6 | 7705 | 6,600 | 1,320.00 |
| F. Brice | 15 | 7705 | 6,600 | 1,320.00 |
| A. L. Shea | 21 | 7705 | 6,600 | 1,320.00 |
| 7 | 7705 | 6,600 | 1,320.00 | |
| J. McComas | 8 | 7705 | 6,600 | 1,320.00 |
*1598 Of the above listed lots, the last four were a part of the Hancock Park subdivision. The remainder belonged to the Brentwood Country Club Estates. The full selling price of the property in the Brentwood Country Club Estates was reported in the income tax return of the partnership. Of the persons listed above as purchasers, A. L. Shea was the sister of the petitioner Shea, George Hargis was a son-in-law of petitioner Shea, R. V. Adams was a brother-in-law of petitioner Shea, F. Brice was a distant relative of petitioner Shea, and M. Foster was a distant female relative of petitioner Shea. J. McComas at that time was not related to the petitioner, but later became his wife.
Petitioner Shea, in order to obtain the services of the parties listed above in selling other lots, contracted with them to make the down payment on each of the lots above enumerated, and in the year 1923 he made the down payments on the last four lots listed above, by check.
A bank was acting as trustee in the sale of these properties. In the case of the Brentwood Country Club Estates lots petitioner Shea informed the bank as each lot was sold by him that he was assuming to pay the initial payment, and*1599 each contract of sale was credited with the amount of the down payment. The amount was charged to Shea in each case. Shea and Logel, as partners, were purchasing this property on the deferred-payment plan.
In the case of the Hancock Park lots, Shea paid the amount of the down payment to the bank by check rather than have the amount charged to him. Shea accomplished some sales of lots *801 through the above named persons. A number of the Brentwood Country Club Estates lots (exact number not shown), were at sometime (not disclosed by the record) reconveyed to the petitioner, Shea. Whenever a lot was reconveyed to Shea he gave the person reconveying the lot a check for the amount of the credit which had previously been given as a down payment on the purchase price.
In 1924 and 1925 Shea spent amounts for entertainment and sales promotion in order to further his business, but did not keep any detailed records of amounts expended by him for this purpose. The respondent disallowed deductions for the years 1924 and 1925 of $15,000 and $31,500, respectively, claimed by petitioner Shea as "sales promotion and entertainment expenses." In 1924 Shea spent $15,000 and in 1925*1600 he spent $31,500 for sales promotion and entertainment for the purpose of furthering his business.
Shea acquired a ranch consisting of 1,490 acres of land situated in the Antelope Valley, California. He purchased two machines for the purpose of furnishing light to this property, but it developed that they were inadequate for that purpose. He therefore discontinued the use of such machines and still owns them. He has offered them for sale for $500, but has been unable to sell them. The ranch was originally purchased for Shea's pleasure. It is not a stock ranch although Shea sometimes rented it out to stock men. Shea, himself, has gone into the stock business on a small scale. He has sold stock, but has not made any money in that business. On his return for the year 1925 petitioner Shea claimed as a loss on account of the abandonment of this inadequate electrical equipment an amount of $4,950. The respondent disallowed this claimed deduction.
In arriving at the tax liability of each of the petitioners for the year 1924 the respondent allocated $27,352.09 of the $82,056.27 found to be the share of each partner in the income of the partnership of Brentwood Country Club Estates*1601 for the fiscal year ended August 31, 1924, as income taxable at the 1923 rates, and then computed a normal tax on the amount of $2,188.17 by applying the 8 per cent rate to the income allocated to 1923 and computed a surtax on said allocated income by applying the 1923 surtax rates.
Shea made his income-tax return upon the cash receipts and disbursements basis.
Logel, in his returns for the years 1923 and 1924, claimed deductions in the amounts of $7,200.96 and $13,005.44, respectively, as entertainment and promotion expenses. Logel's household expenses, were as follows:
| 1919 | $2,491.87 |
| 1920 | 5,332.23 |
| 1921 | 4,744.17 |
| 1922 | 11,434.32 |
| 1923 | $23,966.97 |
| 1924 | 29,745.08 |
| 1925 | 28,253.79 |
*802 Logel kept no detailed records of amounts paid out by him for entertainment expense incident to his business operations, nor of other sales expenses. No amounts expended by Logel for sales promotion expenses were credited on the books of the partnerships to Logel's account and deducted as partnership operating expenses.
In his return for 1924 Logel deducted an amount of $1,552.65 as traveling expenses, which was disallowed as a deduction by respondent. This represented*1602 the traveling expenses on a trip taken in that year by Logel to Florida to learn the prices of land there, in order to fix the price of the land he and Shea were selling in California. The "boom" was then in progress in Florida.
In his return for the year 1924 Logel claimed as a deduction an amount of $860 as club dues, which claimed deduction was disallowed by the respondent.
The income-tax returns of the partnership of Shea and Logel were rendered upon a calendar-year basis.
OPINION.
MCMAHON: Petitioner Shea contends that he paid $18,069.50, or gave credit in that amount, to purchasers of lots in order to induce them to assist him in selling other lots. This amount, it is alleged, represents the down payment on the lots which we have listed in our findings of fact, and petitioner Shea contends that it is deductible in 1923. The evidence upon this assignment of error is vague and confusing. From it we can not find that he actually paid out in 1923 more than $5,280 as down payments. That amount was paid out by Shea in 1923 as down payments on four Hancock Park lots, which petitioner sold as agent for Allen Hancock, and there is nothing in the evidence to indicate that*1603 there was any agreement that the amount of the down payment should be returned to him. On the other hand, in cases where Brentwood Country Club Estates lots were reconveyed to Shea, he gave the persons reconveying the lots his check in the amount of the credit which had previously been given as down payments on the purchase price of the lots. By agreement between Shea and Logel each was to bear individually the amount of expense which he individually incurred. Any deduction allowable is therefore limited to the amount of $5,280, since we must assume that petitioner Shea operated upon a cash receipts and disbursements basis. In view of the fact that this expenditure was made to induce others to direct business to petitioner Shea, we consider it an ordinary and necessary business expense and therefore deductible in 1923.
Shea also alleges that the respondent erred in disallowing as deductions from gross income for 1924 and 1925 amounts of $15,000 *803 and $31,500, respectively, claimed by him in his return as "sales promotion and entertainment expense." He kept no records of amounts expended for this purpose, but testified that at the time he rendered his returns he had*1604 the facts before him showing that those were the proper amounts. He further testified that he spent all of the amounts which he claimed in his returns. In this situation, where petitioner Shea did not keep records, but testified that he knew that the amounts claimed were spent for the purpose of furthering his business, we are of the opinion that such amounts constitute allowable deductions from his gross income of the respective years. We believe that such a conclusion is required by the decision in . See also, .
Shea alleges that the respondent erred in computing his tax liability for the year 1925 in disallowing a claimed deduction of $4,950 for inadequate electrical equipment abandoned in that year. From the evidence it seems clear to us that the ranch upon which the electrical equipment was installed was devoted primarily to Shea's pleasure purposes rather than to business purposes. While there is evidence to show that at some time Shea engaged in the stock business to a limited extent, we are not informed as to whether this occurred in the years in question. We therefore*1605 hold that the respondent did not err in disallowing the claimed deduction.
Shea further contends that the respondent erred in computing his income-tax liability for the year 1924 in that he failed to give him the benefit of the 25 per cent reduction, provided in section 1200(a) of the Revenue Act of 1924, on that part of the deficiency attributable to his distributive share of income from the Brentwood Country Club Estates taxable at 1923 rates.
Section 1200(a) of the Revenue Act of 1924 provides as follows:
Any taxpayer making return, for the calendar year 1923, of the taxes imposed by Parts I and II of Title II of the Revenue Act of 1921 shall be entitled to an allowance by credit or refund of 25 per centum of the amount shown as the tax upon his return.
This identical question was presented in , and we there held contrary to the contention of the petitioner. To the same effect is , affirmed in . In affirming the Board's decision the Circuit Court expressly disagreed with the case of *1606 , which holds to the contrary. In conformity with our prior decisions, we hold that respondent did not err in refusing to allow the 25 per cent credit. We also hold that the respondent did not err in refusing to allow the petitioner, Logel, a credit of 25 per cent as alleged by petitioner Logel in Docket No. 40071.
*804 The petitioner, Logel, contends that the respondent erred in disallowing amounts of $7,200.96 and $13,055.44 claimed by him in his returns for the years 1923 and 1924, respectively, as "entertainment and promotion expenses." Logel testified that he entertained prospective purchasers of lots in his own home for the purpose of promoting his sales. He kept no detailed records of expenses incurred in this connection, but asks us to find that those amounts were spent for that purpose, because so-called "household expenses" increased from $11,434.32 in the year 1922 to $23,966.97, $29,745.08 and $28,253.79, in the years 1923, 1924 and 1925, respectively. Logel testified that the so-called "household expenses" for 1923 and 1924 included amounts spent in entertaining prospective customers for business purposes, *1607 but admitted that there is no way to segregate such expenditures from his personal expenses. There is no testimony that Logel knew at the time of the hearing or at the time the return was filed that the amounts claimed as deductions were correct. This situation is somewhat analogous to that presented in , in which we stated:
* * * The petitioner himself kept no record of his disbursements and was entirely unable to recall the facts relating to any of them or to testify how any item had been spent. He testified generally as to his belief that the amount claimed was "practically all" used to pay traveling expenses, but this leaves an intimation that some of it may have been otherwise spent.
In this condition of the evidence we find no warrant for a finding of fact that any part of the amounts so withdrawn in 1923 constituted ordinary and necessary expenses of carrying on petitioner's business. The Board is in no position from this record to make such an estimate as is suggested in *1608 , even if it were to assume from the evidence that some such amounts were paid and that no part thereof had been allowed as a deduction by the respondent.
* * *
Following our holding in that proceeding, we hold that petitioner Logel in the instant proceeding is not entitled to the claimed deduction in question.
The evidence discloses that Logel, in 1924, spent an amount of $1,552.65 for traveling expenses on a trip to Florida for the purpose of assisting himself and Shea in the pricing of the lots which they were attempting to sell in California. From the evidence we are of the opinion that this expenditure was made on behalf of the two partnerships rather than on behalf of Logel individually. It is therefore our opinion that one-half of that amount is deductible by each partnership. The partnership of Logel and Shea made its return upon a calendar-year basis and, since Shea and Logel each owned a 50 per cent interest in that partnership, the distributive share of each in the income of that partnership for the calendar year 1924 should be reduced by one-fourth of the amount of $1,552.65. *805 However, since*1609 the partnership known as the Brentwood Country Club Estates operated upon the basis of a fiscal year ending August 31, and since we are not informed as to when, during the year 1924, the expenditure was made, we are unable to determine that the one-half of such expenditure attributable to that partnership is deductible by it in the fiscal year ended August 31, 1924. There is, therefore no basis in the record for holding that the share of each in the income of that partnership which was distributable in 1924 should be reduced by any portion of the amount of $1,552.65.
There is no evidence whatsoever in the record as to the allegation of error concerning an amount of $860 paid by Logel as club dues and deducted by him as a business expense. Logel makes no mention of it in his brief and has apparently abandoned the issue. The respondent's determination in this regard will therefore not be disturbed.
Judgment will be entered under Rule 50.