*241 Decision will be entered under Rule 50.
1. As assistant manager of a branch office of a life insurance company, the petitioner received a salary, standard commissions on all policies sold by him personally, overwriting commissions on all policies sold by agents under his supervision, and renewal commissions. He received commissions in 1942 on several policies which he had written in 1941, amounting to less than 80 per cent of the total compensation received from the insurance company in 1942. Held that section 107, Internal Revenue Code, is not applicable to such commissions.
2. The amount of deductible expenses incurred by the petitioner in 1942 and 1943 determined on the evidence.
*477 The respondent has determined*242 a deficiency of $ 3,589.07 on the joint income and victory tax return filed by the petitioners for 1943. The year 1942 is also before us by reason of the Current Tax Payment Act of 1943. The questions here in controversy are whether section 107, Internal Revenue Code, is applicable to the commissions received by Harry Boverman on policies of insurance which he sold in 1941, and the deductibility of certain expenses claimed in the return.
FINDINGS OF FACT.
The petitioners are husband and wife, with residence in New York City. They filed a joint return for the calendar year 1943 with the collector of internal revenue for the fourteenth district of New York at Albany. The husband, Harry Boverman, hereinafter referred to as the petitioner, was employed as assistant manager of a branch agency of the Metropolitan Life Insurance Co., hereinafter referred to as Metropolitan, from early in 1935 until 1945. He entered into a written contract with Metropolitan for such employment on January 7, 1935. The contract, set out in material part below, 1 defined the petitioner's duties, fixed his compensation, and prescribed certain rules of conduct which he agreed to observe.
*243 The Manual of Instructions for Managers and Assistant Managers, referred to in the employment contract, contains detailed instructions for agents, as well as managers and assistant managers. It provides that the agent is to pay all expenses incurred by him in performance *478 of his agency agreement; that the assistant manager is to aid the manager in the supervision of the company's business in his district; and that management of the company's business includes "procurement of applications for new business on acceptable risks." It further provides that:
The offering of prizes or awards in any form whatever to policyholders for securing or influencing business is prohibited. Such offers are not only impolitic, but, in most States, they are unlawful.
Offers of prizes to Assistant Managers or Agents must not be made.
Under his employment contract the petitioner was paid a weekly salary, plus an "overriding commission" of 2 1/2 per cent on all new insurance written by the agency to which he was attached, and the standard agent's or "acquisition commissions" on all insurance written by him individually. He also received renewal commissions over a period of three years from the*244 date of the policy contract, amounting to 8 per cent on policies which he had written individually and 2 per cent on all other policies written by his agency. The renewal commissions on policies written by others were conditioned upon his remaining with the company and servicing the policies. For the years 1942 to 1945, inclusive, the petitioner received compensation from Metropolitan as follows:
| 1942 | 1943 | 1944 | 1945 | |
| Salary | $ 2,912.00 | $ 2,860.00 | $ 2,860.00 | $ 2,761.82 |
| Ordinary commissions | 13,086.43 | 6,410.26 | 6,020.88 | 8,381.26 |
| Accident and health commissions | 512.65 | 747.02 | 1,426.73 | 1,209.74 |
| Extra compensation | 547.26 | 1,162.59 | 1,631.12 | 1,263.76 |
| Total | 17,058.34 | 11,179.87 | 11,938.73 | 13,616.58 |
In the latter part of 1941 the petitioner wrote policies of insurance on the lives of three brothers, George L. Cohen, Wilfred P. Cohen, and Isidore M. Cohen, in the aggregate amount of $ 900,000. The policies were issued by Metropolitan in 1942, and in that year the petitioner received standard commissions thereon of $ 10,638.28. The Cohen brothers were business partners and the insurance was for business purposes. The petitioner had been in contact with*245 them for several years prior to 1941 and had spent considerable time and effort in convincing them of the advantages of this type of insurance. In the years 1943, 1944, and 1945 the petitioner received renewal commissions on the Cohen policies in the respective amounts of $ 1,868.96, $ 1,869.04, and $ 1,689.38.
There were about eight agents regularly employed by the petitioner's office and under his supervision during 1942 and 1943. The petitioner kept in close touch with the agents and frequently accompanied them in their calls on insurance prospects. On those occasions the petitioner usually paid the streetcar, subway, or taxicab fares of agents and also paid for their lunches and sometimes dinners. Occasionally he and *479 the managers and other assistant managers at his office arranged lunches for the entire staff and divided the cost among themselves. The petitioner frequently gave prizes to the salesmen for the purpose of stimulating business.
On his own behalf, and in soliciting insurance for his individual account, the petitioner often entertained his prospective customers at lunch or dinner or night clubs and on occasions would take them and members of their families*246 to resorts for week ends. He also gave cases of whisky and other gifts to policyholders or prospects from time to time. He kept a diary in 1942 and 1943 in which he made entries purporting to show his daily expenditures in connection with his business. The diary contains numerous entries, in amounts of $ 1, $ 2, and $ 3 each, representing streetcar or taxicab fares and lunches, and other not so frequent entries of larger amounts, some over $ 100, representing prizes, dinners, liquor, and entertainment. There are also several entries showing amounts paid to other agents as their share of commissions on policies handled by the petitioner. Following are some of the items appearing in the account:
| Date | Item | Amount |
| 1-1-43 | Took out Mr. and Mrs. Kimball, Mr. and | |
| Mrs. Rattner, Mr. Cammer and friend, Milton Karl | ||
| and friend, Cocoanut Grove | $ 120.00 | |
| 8-7-43 | Week end Goldmans staff | 110.00 |
| 8-14-42 | Week end with Epstein Brothers, Shawanga | 45.00 |
| 7-17-43 | Mr. Sibell case liquor | 75.00 |
| 11-20-43 | Case of liquor Herman Miller | 100.00 |
| 12-25-42 | Liquor case G. L. Cohen $ 48, W. P. Cohen $ 48, | |
| J. M. Cohen $ 48, Miller $ 33 | 177.00 | |
| 3-14-43 | M. Bach accountant | 100.00 |
| 5-23-42 | Cohen Brothers and wives, Herman Miller | |
| and wife, Stork Club | 45.00 |
*247 The complete list of expenditures for the month of May 1943, which may be taken as typical of the entire account, is as follows:
| Date | Item | Amount |
| 5-1-43 | Fares $ 4.00, Mr. and Mrs. Saunders, | |
| dinner and show $ 20 | $ 24.00 | |
| 5-3-43 | Telephones $ 1 Fares $ 2 | 3.00 |
| 5-4-43 | Telephones $ 1 Fares $ 2 | 3.00 |
| 5-5-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-6-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-7-43 | Telephones $ 1.00 Fares $ 2.00 | |
| Staff dinner $ 40 | 43.00 | |
| 5-8-43 | Fares $ 3.00, Mr. and Mrs. R. Cohen, | |
| dinner and show $ 20 | 23.00 | |
| 5-10-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-11-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-12-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-13-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-14-43 | Telephones $ 1.00 Fares $ 2.00 | |
| Office prize $ 10 | 13.00 | |
| 5-15-43 | G. L. Cohen & wife, W. P. Cohen & wife, | |
| I. M. Cohen & wife, dinner and show | 90.00 | |
| 5-17-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-18-43 | Telephones $ 1 Fares $ 2 | 3.00 |
| 5-19-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-20-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-21-43 | Telephones $ 1.00 Fares $ 2.00 | |
| Office prize $ 10 | 13.00 | |
| 5-22-43 | Fares $ 4 Mr. and Mrs. Feinberg $ 20, | |
| dinner and show | 24.00 | |
| 5-24-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-25-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-26-43 | Telephones $ 1.00 Fares $ 2.00 | 3.00 |
| 5-27-43 | Telephones $ 1 Fares $ 2 | 3.00 |
| 5-28-43 | Telephones $ 1 Fares $ 2.00 | |
| Office prize $ 10 | 13.00 | |
| 5-29-43 | Fares $ 4.00, Mr. and Mrs. Ralph Cohen, | |
| dinner and show $ 20 | 24.00 | |
| 5-31-43 | Telephones $ 1 Fares $ 2 | 3.00 |
*248 *480 In his income tax return for 1942 the petitioner reported salary and other compensation for personal services of $ 7,238.34 and a net income of $ 2,282.50, after deducting expenses of $ 2,785 for "Entertainment, fares, telephone & other expenses incurred in connection with work, not reimbursed by employer," and $ 65.45 for dues in professional societies. He also claimed a deduction for medical expenses of $ 641.31.
In determining his gross income from personal services the petitioner allocated a large portion of the $ 10,638.28 of commissions which he received in 1942 on the Cohen brothers policies to the prior years 1937 to 1941, inclusive, under section 107, Internal Revenue Code. The respondent restored these allocations to 1942 income, thereby increasing the net income for that year by the amount of $ 9,820. He also disallowed $ 2,687.01 of the business expenses claimed and $ 573.15 of the medical expenses.
For the year 1943 the petitioner reported gross income from Metropolitan of $ 11,179.87 and an income tax net income of $ 4,655, after the deduction of $ 4,277.32 of business expenses. He also claimed, among other items, $ 474.52 for medical expenses. The respondent*249 disallowed $ 3,869.69 of the business expenses, $ 42.45 of interest, and $ 252.15 of medical expenses.
The petitioner incurred deductible expenses in the pursuit of his insurance business of $ 1,000 in 1942 and $ 1,200 in 1943.
OPINION.
Our first question is whether in computing the petitioner's income tax liability for 1942 a portion of the commissions which he received in that year on the insurance policies on the lives of the Cohen brothers may be allocated to prior years, under section 107, Internal Revenue Code. Section 107 provides, in material part, as follows:
(a) Personal Services. -- If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.
The respondent*250 contends that section 107 is inapplicable, on the facts in this case. We agree with the respondent in this contention. The act specifies that for the income to be reallocable there must have been received in one taxable year at least 80 per cent of the taxpayer's total compensation for such personal services. The petitioner's total compensation in commissions from the Cohen policies alone, over the years 1942 to 1945, inclusive, was $ 16,065.66. Of that amount, $ 10,638.28 *481 was received in 1942 and the balance, consisting of renewal commissions, in 1943, 1944, and 1945. Thus, the amount received in 1942 was not 80 per cent of petitioner's total income from writing those policies. The petitioner argues that for the purpose of section 107 a distinction must be made between the "acquisition commissions," the assistant manager's "overriding commissions," and the "renewal commissions." In other words, he would treat the acquisition commissions only as compensation for the personal services of writing the policies and would separate that amount from all other income received from Metropolitan. That, we think, is contrary to the intendment of the statute. In several recent*251 cases this Court has denied taxpayers the right to split up in this manner their income from a single source, or employment contract. See Harry Civiletti, 3 T. C. 1274; affd., 152 Fed. (2d) 332; Paul H. Smart, 4 T. C. 846; affd., 152 Fed. (2d) 333; Julia C. Nast, 7 T. C. 432; and J. Mackay Spears, 7 T. C. 1271; affirmed per curiam, 164 Fed. (2d) 486. In the last cited case, where the facts were much like the instant case, it was held that the total compensation received by the taxpayer for engineering services performed by him in connection with a series of construction projects for a single employer under a single employment contract must be taken into account in determining whether the taxpayer was entitled to the benefit of section 107. Here, we think, the petitioner's entire earnings from his employment contract with the Metropolitan, including salary and commissions on all policies of insurance written by him, must be treated as compensation for personal services for the purpose*252 of section 107.
This brings us to the question of expense deductions. For both 1942 and 1943 the petitioner claimed large deductions for sundry expenses, such as carfare, lunches, telephone calls, gifts to insurance prospects, and prizes to the agents under his supervision. The respondent has disallowed all but a small portion of the amounts claimed in each of the years 1942 and 1943.
In our findings of fact we have set out in considerable detail the character of the expenditures and the manner in which the petitioner kept his record of them. Some of the items claimed appear to be more in the nature of personal expenditures than ordinary and necessary business expenses. Substantial amounts for liquor and other gifts to insurance prospects and prizes to agents are listed in petitioner's expense account, although petitioner's employment contract with Metropolitan expressly forbade such gifts and prizes. Those expenditures may have aided the petitioner in writing insurance or increased the amount of his "overriding commissions," as the petitioner contends, but, since they were forbidden by his employment contract, we can not say that they were ordinary and necessary expenses incident*253 to the performance of that contract.
*482 Also, the evidence gives rise to serious uncertainties as to the accuracy of petitioner's so-called expense account. The petitioner testified about keeping this account as follows:
Q. What was the nature of this record?
A. I would mark down on my card the expenses that I had for the day, and then I would enter it in my book.
Q. We will come to the book in a moment. How long on the average would you accumulate these daily slips before entering them somewhere else?
A. Sometimes a week, sometimes two weeks, sometimes three weeks.
The items appearing in the account as cost of taxicab fares, lunches, and telephone calls are all in round figures of dollar units. On being asked to explain this the petitioner testified:A. Well, I usually knew how much money I started out with in the morning, and when I came home at night I always looked to see how much I had, and then tried to break up the difference.
Q. And in doing that did you take into account any personal expenditures that you might have had?
A. Yes.
Q. Did you include any of those in Petitioner's Exhibit No. 12?
A. No.
Q. Is it a fact that with respect to the carfares, cabs*254 and phone calls, you used the nearest approximate round amount?
A. That's right.
Obviously, petitioner kept no actual or accurate account of his business expenses, but compiled a so-called expense account based on mere conjecture or speculation.
Notwithstanding the nondeductible character of some of the items claimed, however, and the uncertainty of the proof as to some of the others, we are convinced from the evidence, as a whole, that the petitioner did incur expenses of a deductible character in excess of what the respondent has allowed, and we must therefore make such allowance as the evidence justifies. Cohan v. Commissioner, 39 Fed. (2d) 540. Accordingly, we have found, as set out above, that the petitioner incurred deductible expenses of $ 1,000 in 1942 and $ 1,200 in 1943.
The parties are in agreement as to the amount of the expenditures claimed for medical expenses, so that there remains only the matter of applying the statutory percentage allowable therefor. Proper adjustment for that item will be made under Rule 50 computation.
Decision will be entered under Rule 50.
Footnotes
1. In consideration of my appointment as an Assistant Manager of the Metropolitan Life Insurance Company (hereinafter called the Company), I hereby agree:
1st. To nominate to the Company for appointment suitable Agents for the Company's business, to instruct them in the details of the work, and to perform any and all other duties in the way of inspecting, canvassing, collecting or otherwise as directed by the Company or the Manager of my District, and to use my utmost endeavors to promote the success of the Company's business.
2d. To pay all the usual and necessary expenses of every kind incident to my position, including carfares excepting those, if any, agreed to in writing by the Company * * *
3d. To engage in no other business or employment whatsoever during the term of my service in this capacity, nor to act directly or indirectly for any other company, society or association.
4th. To obey all the rules of the Company contained in the Manual and Instruction Book, as the same now are and may hereafter be, and all other rules of the Company, however they may be published or communicated * * *
* * * *
6th. I agree to accept as compensation for my services,
(a) A weekly salary in accordance with the Company's schedule of salaries payable to Assistant Managers.
(b) Commissions in accordance with the Company's scale of commissions in force from time to time.
(c) Such other compensation as the Company may grant from time to time.↩