*185 Decisions will be entered under Rule 50.
Where a taxpayer who has available information as to material evidence in support of an allegedly allowable deduction refuses to name the recipients of the alleged payments of cash, and fails to connect such payments with any specific purpose, the respondent's action in disallowing such deduction will be affirmed for failure of proof of error.
*231 Respondent determined deficiencies in income tax and additions to tax under section 294(d)(1)(A) and section 294(d)(2) of the Internal Revenue Code of 1939 against petitioners for the calendar years 1951, 1952, and 1953, as follows:
| Addition to tax under secs. | |||||
| Docket No. | Petitioner | Year | Deficiency | ||
| 294(d)(1)(A) | 294(d)(2) | ||||
| 63192 | Stanley and Evelyn | ||||
| Rosenstein | 1951 | $ 3,608.42 | |||
| 1952 | 4,872.50 | ||||
| 1953 | 3,287.88 | ||||
| 63193 | Harry and Eve | ||||
| Rosenstein | 1951 | 8,798.16 | |||
| 1952 | 11,499.80 | ||||
| 1953 | 8,026.30 | ||||
| 63194 | Louis and Sylvia | ||||
| Rosenstein | 1951 | 3,540.72 | |||
| 1952 | 5,483.36 | ||||
| 1953 | 4,351.62 | ||||
| 63195 | Nancy Rosenstein | 1952 | 201.18 | $ 106.74 | $ 91.49 |
| 1953 | 580.22 | ||||
| 63196 | Jan Sara Rosenstein | 1952 | 97.61 | 40.96 | 35.10 |
| 1953 | 159.49 | ||||
| 63197 | Richard Simon | ||||
| Rosenstein | 1952 | 97.61 | 40.96 | 35.10 | |
| 1953 | 159.84 | ||||
| 63198 | June Rosenstein | 1952 | 200.56 | 106.45 | 91.25 |
| 1953 | 580.21 |
*186 Respondent concedes on brief that petitioners Nancy, Jan Sara, Richard Simon, and June Rosenstein are not liable for an addition to tax under section 294(d)(2) of the Internal Revenue Code of 1939 for the year 1952.
Petitioners concede on brief that the above-named petitioners are liable for an addition to tax under section 294(d)(1)(A) of the Internal Revenue Code of 1939, as determined for the year 1952.
Various other issues raised in the pleadings have been settled by agreement of the parties and are no longer in dispute. Such agreements and concessions will be given effect in the settlement under Rule 50.
There remain for our consideration the following questions: (1) Whether the amounts of $ 17,000, $ 27,500, and $ 20,000, allegedly disbursed by the partnership of S. Rosenstein & Sons to employees of customers and suppliers during the fiscal years ending June 30, 1951, June 30, 1952, and June 30, 1953, respectively, are deductible as ordinary and necessary business expenses; (2) whether the sum of $ 405, allegedly disbursed by S. Rosenstein & Sons for a gift of furniture during the fiscal year ending June 30, 1951, is deductible as an ordinary and necessary business expense; *187 (3) whether more than one-half of a $ 446.63 payment to Kraemer's Olympia Hotel in May 1951 is deductible as an ordinary and necessary business expense; and (4) whether respondent properly disallowed part of certain deductions claimed for liquor, football tickets, and other miscellaneous items.
*232 FINDINGS OF FACT.
Some of the facts are stipulated, the stipulation being incorporated herein by this reference.
All of the petitioners filed timely Federal income tax returns for the calendar years here in issue with the collector or director of internal revenue for the district of Indiana. Petitioners Harry, Stanley, and Louis Rosenstein each filed joint returns with their respective wives, Eve, Evelyn, and Sylvia Rosenstein, for the calendar years 1951, 1952, and 1953. The remaining petitioners filed individual returns for the calendar years 1952 and 1953.
Petitioners Harry, Stanley, Louis, Nancy, Jan Sara, Richard Simon, and June Rosenstein (hereinafter referred to collectively as petitioners and individually by their first names) are all members of a partnership known as S. Rosenstein & Sons (hereinafter referred to as the partnership), having its principal place of business*188 at Mishawaka, Indiana. During the fiscal year ending June 30, 1951, and until January 2, 1952, the partnership was composed of Harry, Stanley, and Louis. On January 2, 1952, Nancy and June, children of Harry, and Jan Sara and Richard Simon, children of Stanley, became members of the partnership.
The partnership utilizes an accrual method of accounting and maintains its books and files its returns on the basis of a fiscal year ending June 30. It filed partnership returns for each of the fiscal years ending June 30, 1951, June 30, 1952, and June 30, 1953, with the collector or director of internal revenue for the district of Indiana.
On its returns for these 3 fiscal years the partnership claimed deductions for advertising and travel and entertainment expense, as follows:
| Fiscal year | Travel and | |
| ending June 30 | Advertising | entertainment |
| 1951 | $ 25,510.93 | $ 15,391.01 |
| 1952 | 34,410.83 | 17,288.49 |
| 1953 | 30,184.61 | 15,899.69 |
The deductions claimed for advertising included alleged payments to employees of customers and suppliers, gifts of furniture, liquor expense, ticket expense, and other miscellaneous items. Respondent disallowed deductions for advertising in the respective*189 amounts of $ 19,142.05, $ 29,186.83, and $ 22,525, and disallowed deductions for travel and entertainment in the respective amounts of $ 2,316.85, $ 1,444.25, and $ 1,650.60.
In September 1954 a fire destroyed part of the books and records of the partnership pertaining to the years here in issue.
The partnership is in the business of buying and selling industrial scrap and waste from various manufacturing facilities throughout the United States. It also markets new products which are developed by industrial plants. The business is highly competitive.
*233 Petitioners allege that in lieu of usual advertising of any kind, it has been the practice of the partnership to pay varying sums of cash during the Christmas season to employees of customers and suppliers in order to keep some tie with them. Petitioners claim this practice is a custom of the industry.
Beginning about November 15 each year petitioners cashed checks made payable to the First National Bank, of Mishawaka, Indiana. Petitioners claim the proceeds of these checks were divided into amounts varying from $ 25 to $ 300 and placed in Christmas envelopes, and that some of the envelopes were mailed, some were delivered*190 personally, and some were picked up by the recipients. With the exception of two named individuals, petitioners refused to disclose the names of the recipients of the alleged payments. The amounts given to these two named individuals are not indicated. Petitioners also failed to connect the alleged payments with any specific amount or with any specific business activity.
The records of petitioners show that the partnership cashed the following checks:
| Fiscal Year Ending June 30, 1951 | ||
| Check No. | Date | Amount |
| 23537 | Dec. 6, 1950 | $ 5,000 |
| 23560 | Dec. 11, 1950 | 6,000 |
| 23606 | Dec. 20, 1950 | 6,000 |
| Total | 17,000 | |
| Fiscal Year Ending June 30, 1952 | ||
| 25061 | Nov. 14, 1951 | $ 7,500 |
| 25095 | Nov. 20, 1951 | 4,000 |
| 25161 | Dec. 4, 1951 | 3,500 |
| 25169 | Dec. 6, 1951 | 3,500 |
| 25197 | Dec. 12, 1951 | 3,500 |
| 25207 | Dec. 14, 1951 | 4,000 |
| 25222 | Dec. 18, 1951 | 1,500 |
| Total | 27,500 | |
| Fiscal Year Ending June 30, 1953 | ||
| 26825 | Nov. 28, 1952 | $ 5,000 |
| 26862 | Dec. 5, 1952 | 5,000 |
| 26910 | Dec. 12, 1952 | 5,000 |
| 26946 | Dec. 19, 1952 | 5,000 |
| Total | 20,000 |
The evidence does not establish that the above amounts were deductible as ordinary and necessary business expenses.
The books*191 and records of the partnership show expenditures for liquor of approximately $ 5,049.21 for the fiscal year ended June 30, 1951, and of approximately $ 3,851.53 for the fiscal year ended June 30, 1952. These expenditures were charged to the advertising account.
*234 The partnership had a custom of furnishing liquor to its suppliers, purchasers, and their servicemen throughout the entire year. Harry and Stanley used some of the liquor for entertaining at home.
Respondent disallowed deductions for liquor expense in the amount of $ 1,157.05 for the fiscal year ended June 30, 1951, and in the amount of $ 1,130.93 for the fiscal year ended June 30, 1952.
The books and records of the partnership show expenditures for Notre Dame football tickets in the amount of approximately $ 1,347.80 for the fiscal year ended June 30, 1951, and in the amount of approximately $ 1,847.20 for the fiscal year ended June 30, 1952. These expenditures were charged to the advertising account.
Each year the partnership distributes Notre Dame football tickets to people in the various neighboring plants with which it does business. Stanley sometimes attends the games if he has a business associate in town.
*192 Respondent disallowed deductions for football tickets in the amount of $ 50 for the fiscal year ended June 30, 1951, and in the amount of $ 155.90 for the fiscal year ended June 30, 1952.
On March 5, 1951, the partnership made a payment in the amount of $ 405 to the Ries Furniture Company. This expenditure was for furniture given as a Christmas gift to the named party with whom the partnership had been doing business for many years. The item is deductible.
On May 1, 1951, the partnership made a payment to Kraemer's Olympia Hotel in the amount of $ 446.63 for expenses incurred by Harry and his wife, Eve, while attending a meeting of dealers and people who handle the partnership line. The wives of some of the other participants were present. Respondent agrees that one-half of this expenditure (223.31) is deductible as an ordinary and necessary business expense. The deduction in the amount of $ 223.31 is allowed.
A payment of $ 79.95 made to the Ries Furniture Company in December 1951 for furniture sent to a customer, and a payment of $ 10 made to Rose Katz in January 1952 for a gift certificate are deductible as ordinary and necessary business expenses.
The evidence does not establish*193 that respondent erred in disallowing other miscellaneous charges to advertising expense for the fiscal year ended June 30, 1952.
The evidence does not establish that respondent erred in disallowing the amount of $ 2,525 claimed as other advertising expenses for the fiscal year ended June 30, 1953.
OPINION.
Petitioners are all members of the partnership of S. Rosenstein & Sons. The deficiencies here in issue arise as *235 a result of the disallowance of certain alleged advertising, travel, and entertainment expenses deducted on the partnership returns for the fiscal years ended June 30, 1951, through June 30, 1953. Some of the disputed items have been settled by agreement of the parties.
Advertising, travel, and entertainment expenses may be deducted from gross income only insofar as they are ordinary and necessary in carrying on a trade or business. 2 Whether or not a particular expenditure is a business expense turns on the facts of the case and the burden of proof is on the taxpayer to show that such expenditures were made and were primarily business rather than personal expenses. Henry Cartan, 30 T.C. 308">30 T.C. 308 (1958).
*194 Petitioners allege that it was the practice of the partnership during the Christmas season to give sums of cash varying in amount from $ 25 to $ 300 to the employees of certain customers and suppliers. During the fiscal years ended June 30, 1951, through June 30, 1953, petitioners allege that the sum of these payments amounted to $ 17,000, $ 27,500, and $ 20,000, respectively. These sums were charged to advertising. The Commissioner challenged the deductibility of such amounts and determined deficiencies accordingly.
As to the alleged payments of cash, petitioners, on whom rests the burden of proof of error, have failed to carry their burden in several basic respects.
They refused to divulge, when requested by the Government on cross-examination at the trial of these cases, the identity of the recipients of the alleged payments. They do not plead lack of memory or loss of appropriate records. Apparently no record was ever made of the names of the individual recipients. Undoubtedly, had they so desired they could have furnished the names of many of the recipients, at least in sufficient numbers to permit a check or verification. This they refused to do. By their obstinacy they*195 have effectively tied the hands of the agents of the Government in the proper discharge of their duty of investigating and verifying the tax returns of the petitioners. They also have made it impossible for the Court to find either the fact of such payments or to find that the payments were bona fide ordinary and necessary business expenses.
*236 In effect, petitioners say to the Government, "We claim that we are entitled to deductions for advertising in the aggregate amount of $ 69,500, but we refuse to reveal the names of the recipients of the payments of such amounts and we will not co-operate with the Government nor the Court in verifying the fact and purpose of payment." It is an old maxim of the law that taxpayers, in dealing with the Government, must turn square corners. This, petitioners have failed to do. Respondent's determination of deficiencies is presumptively correct. He who challenges such a finding must carry the burden of proof of error. By their deliberate refusal to submit proper supporting information, petitioners have failed to discharge their duty.
Petitioners' testimony that the sums were paid, without giving any specific amounts or naming the *196 recipients or giving any information as to the services rendered by such recipients so as to enable the Government to investigate the items and verify by inquiry of the recipients their character and their allowability, adds nothing of any probative weight to the bare claims of the deductions made in the returns. When a deduction in a return is challenged by the Commissioner, and a deficiency determined, and petitioner carries the matter into this Court, he has the burden of satisfying the Court that the deductions claimed are properly allowable as ordinary and necessary business expenses. On the record before us, we are unable to hold that petitioners have successfully carried this burden.
These questions arose in an early decision of the Board of Tax Appeals in The National Concrete Co., 3 B.T.A. 777">3 B.T.A. 777 (1926). We there held that when the president of the taxpayer corporation refused to divulge, either to the Commissioner or at the trial, the names of certain influential people to whom the corporation made remuneration for assistance in securing public works contracts, the taxpayer had not furnished sufficient evidence of the alleged expenditures and*197 had failed in its burden of proof.
The National Concrete Co. case was followed by Evens & Howard Fire Brick Co., 8 B.T.A. 867">8 B.T.A. 867 (1927). There, the taxpayer, a manufacturer of fire brick and other clay products, turned over the proceeds of a $ 5,000 check to certain contractors to be used by the contractors in securing municipal contracts for which the taxpayer expected to furnish the materials. The taxpayer did not set forth the names or the addresses of the persons to whom the $ 5,000 was paid. Citing The National Concrete Co., supra, we held that we did not have sufficient evidence upon which to base a determination that the $ 5,000 was an ordinary expense, and sustained the Commissioner's determination that the expenditure was not deductible.
*237 The taxpayer in O'Laughlin v. Helvering, 81 F. 2d 269 (C.A.D.C., 1935), affirming 30 B.T.A. 1327">30 B.T.A. 1327, was the secretary of a company selling building and paving materials in the city of Chicago and other towns in Cook County, Illinois. The treasurer of the company was authorized to draw checks to the taxpayer, *198 who was to use the money to pay commissions on various sales made by individuals other than the company's regular salesmen. On his income tax returns for 1927 and 1928 the taxpayer included, as commissions received, $ 19,000 and $ 48,000, respectively. However, he claimed these same amounts as deductions for commissions paid out. The taxpayer testified that he did not retain any of the money for himself; that some of the money was spent for, or donated to, Christmas basket funds, labor unions, prize fights, football games, banquets and political organizations for campaign purposes; that he kept no record nor any list of any expenditure; that he did not know to whom he made any of the payments, or the amounts or dates thereof, but that it was all spent for the benefit of the company. We held that the evidence was not sufficient to overcome the Commissioner's determination.
The Court of Appeals for the District of Columbia affirmed, stating:
When a deduction is claimed, the government has an undoubted right to demand a full disclosure of the facts on which the claim is based, for otherwise it would be at the mercy of the unscrupulous taxpayer. Taxation is not only practical -- *199 it is vital. The obligation of good faith and fair dealing in carrying out its provisions is reciprocal and, as the government should never be overreaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of material facts.
The O'Laughlin case was cited in Greenfeld v. Commissioner, 165 F. 2d 318, affirming a Memorandum Opinion of the Tax Court. There, the taxpayer received the proceeds of certain stolen Government bonds. The Commissioner determined deficiencies in income tax and an addition to tax for fraud. The taxpayer testified that he was a racing broker and received commissions of 1 to 2 1/2 per cent from bookmakers for bets placed on horse races, and that one customer placed a number of bets through him, delivering various Government bonds to cover them. The taxpayer further testified that he did not recall the names of any of the seven or eight bookmakers with whom he had placed bets. The court, quoting lengthily from O'Laughlin, held that the taxpayer had not shown respondent's determination to have been in error. See also Birnbaum v. Commissioner, 117 F. 2d 395*200 (C.A. 7, 1941).
On the strength of the above authorities and on the facts in evidence in these cases, we hold that petitioners have failed to establish their right to the deductions of cash payments.
*238 This is not to say that a taxpayer must be able to account for every luncheon bought and every cocktail drunk in the course of business entertainment. But when an item is challenged it must be supported by adequate evidence. A taxpayer who has access to such evidence and refuses to produce it cannot complain if a decision goes against him.
The partnership had a custom also of furnishing liquor to its suppliers, purchasers, and their servicemen, and of distributing Notre Dame football tickets to people in various neighboring plants with which it did business. Some of the liquor was used by Harry and Stanley for entertaining at home. Stanley occasionally attended the football games if he had a business associate in town. Respondent disallowed only a small part of the amounts so claimed.
Petitioners have failed to show that respondent erred in disallowing a portion of the expenditures for liquor and football tickets. The evidence is so general in nature that it is impossible*201 to find any fact specifically related to the disputed items. The disallowance is therefore affirmed.
We are satisfied that the evidence is sufficiently specific as to the expenditure of $ 405 on March 5, 1951, for furniture given as a Christmas gift to a party with whom the partnership had been doing busines for many years, and we hold that this item is deductible.
On May 1, 1951, the partnership made a payment to Kraemer's Olympia Hotel in the amount of $ 446.63, representing expenses incurred by Harry and his wife, Eve, while attending a meeting of dealers and people who handle the partnership line, together with their wives. Respondent disallowed the entire amount. On brief, respondent conceded that the expenditure was deductible to the extent of $ 223.31. There is no evidence that Eve actively entertained, performed any secretarial services, or otherwise furthered the purposes of the partnership while at the meeting. The remaining portion of the expenditure is, therefore, not proven to be deductible.
A payment of $ 79.95 made to the Ries Furniture Company in December 1951 for furniture sent to a customer, and a payment of $ 10 made to Rose Katz in January 1952, representing*202 the cost of a gift certificate, are deductible as ordinary and necessary business expenses.
Petitioners failed to show the nature or explain the business purpose of other miscellaneous charges to advertising expense claimed as deductions on the partnership return for the fiscal year ending June 30, 1952, or of other charges to advertising expense in the amount of $ 2,525 claimed as deductions on the partnership return for the fiscal year ended June 30, 1953. These deductions are, therefore, disallowed.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners were consolidated herewith for trial: Harry and Eve Rosenstein, Docket No. 63193; Louis and Sylvia Rosenstein, Docket No. 63194; Nancy Rosenstein and June Rosenstein, each By Her Natural Guardian and Father, Harry Rosenstein, As Next of Friend, Docket Nos. 63195 and 63198, respectively; Jan Sara Rosenstein and Richard Simon Rosenstein, each By His (or Her) Natural Guardian and Father, Stanley Rosenstein, As Next of Friend, Docket Nos. 63196 and 63197, respectively.↩
2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. --
(1) Trade or business expenses. --
(A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. * * *↩