*2684 1. Where petitioner corporation paid over to its president large sums of money to use in the company's business, which sums were spent by him at his discretion, no record being kept by him of the amount, nature or purpose of any such expenditure and no accounting being made to the corporation, and the amounts claimed being rounded approximations or estimates, held, such proof is insufficient to establish error in disallowing such items as expense deductions.
2. Testimony, though uncontradicted, that all sums claimed were spent in the business of the company is not sufficient to establish the deductibility of expenditures as ordinary and necessary expenses.
*1282 In these proceedings which were consolidated for hearing and decision, the petitioner seeks a redetermination of deficiencies in income and profits taxes for the years 1918, 1919, 1920, 1921, 1923, and 1924, for which the Commissioner has made the following determinations:
| 1918 | $21,836.49 |
| 1919 | 27,876.30 |
| 1920 | 28,088.03 |
| 1921 | $5,338.41 |
| 1923 | 2,454.11 |
| 1924 | 1,193.03 |
*2685 The petitioner alleges error on the part of the Commissioner in refusing to allow as deductions from income various amounts designated "contract expenses," as follows:
| 1918 | $30,000 |
| 1919 | 57,370 |
| 1920 | 52,275 |
| 1921 | $26,074 |
| 1923 | 17,784 |
| 1924 | 22,900 |
Various other issues were raised in the petitions, but no testimony was presented and no arguments were made supporting them.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal offices at 81 Coffey Street, Brooklyn, N.Y. During the years involved it was engaged in installing asbestos insulation on boilers and steam pipes and insulation in cold storage plants on ships. Petitioner performed about 98 per cent of all the work of this nature that was done in the Port of New York. P. S. Thorsen, who owned from 82 per cent to 88 per cent of the capital stock, was president and manager of the petitioner.
The petitioner usually operated under subcontracts and practically all of its work was performed on rush orders. In order to collect quickly large numbers of laborers for this purpose it was necessary to pay labor agents certain bonuses and frequently to supply laborers with suitable*2686 clothing and tools when they were not properly equipped. If necessary, the men worked two shifts a day, making 14 days time a week. In order to keep the men together it was often necessary to take them in groups or squads to restaurants and furnish them meals. It was also found advantageous at times to pay ships' officers cash bonuses for the use of some of the ship's appliances and crew, and pay lump-sum amounts to the owners of barges for clearing away the refuse materials. Commissions were paid to various persons in securing contracts for work.
All of these expenditures, together with numerous other expenditures, were made in cash by Thorsen or some trusted employee, but *1283 no record of the expenditures was kept. In order to obtain money for these expenditures Thorsen would instruct the secretary to make out a check for whatever amount he desired which he would sign and subsequently cash. The secretary entered the amount of the check in the book under the heading of "contract expenses." The checks thus drawn by Thorsen during the year 1919 were as follows:
| Date | Amount |
| Jan. 28 | $2,500 |
| Feb. 4 | 2,500 |
| Feb. 13 | 3,500 |
| Mar. 20 | 5,000 |
| Apr. 4 | 2,500 |
| Apr. 16 | 5,000 |
| May 23 | 1,000 |
| June 12 | 1,000 |
| June 16 | 500 |
| July 22 | 1,000 |
| July 31 | 150 |
| Aug. 8 | $1,000 |
| Aug. 15 | 1,000 |
| Aug. 28 | 2,000 |
| Aug. 29 | 1,000 |
| Sept. 20 | 2,500 |
| Sept. 26 | 2,000 |
| Sept. 2 | 170 |
| Oct. 2 | 5,000 |
| Oct. 24 | 5,000 |
| Nov. 1 | 250 |
| Nov. 10 | 1,000 |
| Nov. 10 | $200 |
| Nov. 17 | 500 |
| Nov. 19 | 200 |
| Nov. 21 | 500 |
| Nov. 26 | 1,000 |
| Dec. 1 | 500 |
| Dec. 15 | 2,500 |
| Dec. 22 | 5,000 |
| Dec. 23 | 900 |
| Dec. 31 | 500 |
*2687 Withdrawals for the other years involved were similarly made, differing only in amounts. It was stipulated that the amounts claimed were paid by the company to Thorsen. Thorsen made expenditures of these withdrawals for the following purposes, among others:
1. Expenses in connection with labor consisting of the purchase of supplies, emergency meals, etc.
2. Expenses in connection with the assembling of labor, controversies with Unions, payments to various agents to gather together as many as four hundred laborers at a time for emergency work and other similar expenditures.
3. Traveling expenses.
4. Expenses in connection with annual Marine Exhibition, consisting of entertainment, traveling expenses for engineers and shipping men, quarters and overhead for same.
5. Expenses in connection with Maritime Association matters.
6. Expenses in connection with Naval Architects Association matters.
7. Special commissions for work on foreign ships paid in cash to foreign agents and officials and cash commissions paid for work brought to company by various parties not connected with the company in any manner.
8. Trucking, emergency and pick-up.
9. Miscellaneous*2688 entertainment.
The traveling expenses were incurred by Thorsen or one of his agents in trips to Boston, Philadelphia, Baltimore, and Washington on the business of the petitioner. Thorsen was on the train on an average of two nights a week during the period involved.
The gross income from the petitioner's business was as follows:
| 1918 | $824,605.86 |
| 1919 | 824,726.04 |
| 1920 | 602,036.38 |
| 1921 | $257,287.43 |
| 1923 | 268,522.09 |
| 1924 | 242,086.55 |
*1284 OPINION.
VAN FOSSAN: The only issue pressed at the hearing in these cases arises from the disallowance by respondent of certain large items of deductions styled by petitioner "contract expenses." The appellation is a misnomer and gives no indication of the true character of the expenditures, which were made under the following circumstances.
Petitioner was a one-man corporation, solely and completely dominated by P. S. Thorsen, its president and the owner of from 82 per cent to 88 per cent of its stock. During the taxable years involved the company enjoyed approximately 98 per cent of the ship-insulation business at the Port of New York. Much of this work was rush work in which it was necessary to assemble*2689 labor quickly and get expedited action at whatever cost. To accomplish these ends Thorsen, as president of petitioner, followed a practice of drawing large sums of money from the company treasury to spend as he saw fit in carrying out the company business. These sums were drawn by him without any explanation of purpose or relation to specific expenditures and varied in amount from approximately $18,000 in 1923 to $57,000 in 1919.
Thorsen spent these funds at his own discretion for payments to labor delegates, bonuses to truck drivers, commissions to ships' officers, traveling expenses, and other similar purposes, and made no record of such expenditures or accounting to the corporation therefor. The company's books show only the amounts of the several checks drawn to Thorsen's order and contain no record of the amount, nature, or purpose of final expenditures. Thorsen kept no books of any kind and made no record of what he spent or to whom it was paid. Asked to indicate how the money claimed to have been spent for labor was spent and the amount thereof in any year, Thorsen replied, "It can't be done." Similar replies greeted inquiries as to specific amounts spent for any other*2690 items. Thorsen frankly admits that he is utterly unable to specify the amount of any item for any year; that there are no records to which resort may be had and that his approximations as to the amounts spent in any year for any particular item might vary largely (as much as $2,000) if he were asked a second time.
The entire case is predicated on Thorsen's reiterated statement that all of the money advanced to him in the several years, admitted to amount to a sum in excess of $200,000, was spent "in the business of the company." As to what constituted the company's business, he testified, "When I am in New York I am on business all of the time. If I leave my house in the morning that is business from then until *1285 I get back, and I usually work about fourteen hours a day." He stated, further, that he has spent as much as $5,000 in a single day in the manner outlined, as to which "I make no accounting. When I need more money I go to the bookkeeper and say, 'Draw a check for so much and give it to me.' That is all there is to it." Asked how he segregated his daily personal expenses from the cash carried in his pocket which was available for use in the company's interests, *2691 he replied, "I never did." He did not carry "two separate pocketsful of money."
Thorsen also supplied from his drawings large sums of money to his foreman and other trusted employees to use in the manner outlined as to himself, and he never demanded an accounting as to how this money was spent. The sum in the foreman's hands daily varied from one hundred to several hundred dollars. The testimony of the foreman as to specific expenditures is equally as vague as is Thorsen's.
On a record of which the quoted excerpts are typical and might be multiplied, if necessary, we are asked to find that the sums so expended, aggregating more than $200,000, were ordinary and necessary expenses of the corporation, including reasonable allowances for salaries and other compensation for personal services actually rendered.
The Lord Chancellor of England, in the old case of Wing v. Underwood, observed: "We may guess, imagine or fancy, but the law of England requires evidence." His animadversion is apt in the instant case. The record is replete with admissions of inability to indicate the amount of any specific expenditure. Though petitioner purports to approximate certain amounts, *2692 the approximations are shown to be so uncertain as to amount to nothing but an estimate or a guess. A recollection so deficient as to the expenditure of such large sums of money can scarcely be trusted to make reasonably accurate approximations. In fact, the only precise approximations submitted were a sort of "fair average during the several years" and made no pretense of precise application to any one year, or of being specific or aggregate sums spent for any one purpose.
Thus, in sum, we are asked to allow these large deductions as ordinary and necessary expenses solely on the statement that they were made in the company's business. It is so obvious as not to require demonstration or citation of instances that the test proposed is far too broad. Not every expenditure in "the business of the company" is an allowable deduction. Certain expenditures are expressly excluded by law. Others depend on the reasonableness of the amount expended. Many expenditures, proper in one situation, might be improper in the presence of other facts.
*1286 Nor is this a case where the returns were prepared from accurate information not now available in evidence. Here, the returns*2693 were based on equally vague data without supporting records as to the character and propriety of the ultimate expenditures. There is no controversy over the fact of payment to Thorsen. The payments to him are admitted, but this fact, supported only by his statement that the money was spent in furthering the company's interest, does not establish deductibility. Our concern is to ascertain how Thorsen, the president and representative of the company, spent the money. The cases cited by counsel for the petitioner are not controlling. Undoubtedly, where the issue is so framed that the undisputed testimony establishes the ultimate fact in question, decision should not be influenced by an unsupported or unverified doubt or suspicion. Such is not the case before us. No fraud is charged, the honesty of petitioner's testimony is unchallenged, and it might fairly be assumed that included in the expenditures made by Thorsen and his employees are many items properly deductible as expense if they were capable of ascertainment. Here the ultimate question to be established is the amount, propriety and allowability as tax deductions of specific expenditures. This requires proof, not merely*2694 of the fact that an expenditure has been made, but, when challenged, specifically its amount, purpose and character, and, in some instances, the reasonableness thereof. It might go further - where a blanket deduction is sought of a lump sum, admittedly subject to a wide inaccuracy, it may become necessary to negative the possibility that some part of the item has been spent for prohibited or unallowable purposes.
To place the stamp of approval on the practice proposed in this case would, if carried to its logical conclusion, permit corporations to dispense with much of their bookkeeping and would effectively require this Board to abdicate the function and duty imposed by law to determine the allowability of contested expense deductions. It would make the designated corporation officer the supreme arbiter.
We are reluctant to decide this case adversely to petitioner, entertaining as we do the feeling that hidden in the transactions may be many allowable items, but on the record before us, and it is as complete as it is possible to make it in the absence of book records and in dependence on hazy recollections, we have no alternative but to hold that petitioner has failed to prove*2695 that respondent erred.
Judgment will be entered for the respondent.