Summary
explaining that taxpayers may deduct expenses while looking for another job during "reasonable period of transition" if those expenses are "proximately related to his business"
Summary of this case from Jacobs v. Comm'r of Internal RevenueOpinion
Docket No. 90341.
1963-04-3
HAROLD HAFT AND DORIS HAFT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Harold Haft, pro se. Joseph Wilkes, for the respondent.
Harold Haft, pro se. Joseph Wilkes, for the respondent.
For many years prior to 1958 petitioner had been engaged in selling costume jewelry to department stores and specialty shops in the southern part of the United States, primarily on a commission basis. His connection with his source of merchandise terminated in 1957; he thereafter actively sought some other connection in the same field. While thus seeking another connection, petitioner during 1958 continued to make various expenditures for gifts and entertainment of buyers for the establishments with which he had done business over the years. 1. Held, that such expenditures, made during a reasonable period of transition, qualify for deduction as ordinary and necessary business expenses to the extent that they were proximately related to petitioner's business. 2. Amount of expenses deductible in 1958 determined.
Respondent determined a deficiency in income tax in the amount of $1,963.78 for the year 1958.
The parties have stipulated that the issue submitted to this Court for decision is whether the expenditures totaling $11,670.61, made by petitioner Harold Haft during the year 1958, were ordinary and necessary expenses paid or incurred by him in carrying on any trade or business.
FINDINGS OF FACT
Some of the facts have been stipulated, and, as stipulated, are incorporated herein by reference.
Petitioners, husband and wife, are residents of New York City. They filed a joint income tax return for the year 1958 with the district director of internal revenue, Brooklyn, N.Y.
Prior to 1932, for approximately 17 years, Harold Haft (hereinafter referred to as petitioner) was continuously employed in the costume jewelry industry. During the period January 1, 1932, to December 31, 1956, he was employed as a salesman by Coro, Inc., a manufacturer of costume jewelry; his territory was the southern part of the United States. Prior to 1952, he was on a straight commission basis, earning as much as $60,000 gross commissions annually. From 1952 to December 31, 1956, he received a salary of $3,000 plus commissions. His selling expenses, which he paid, ranged from $15,000 to $25,000 a year. His customers were large department stores and specialty stores in the South. He was personally acquainted with the buyers representing such stores, and had nurtured their goodwill over a period of years. When he left Coro, Inc., on December 31, 1956, he owned 600 out of a total of 450,000 of its outstanding shares.
On January 1, 1957, petitioner, then approximately 58 years old, was employed by Kramer Jewelry Creations, Inc. (hereinafter referred to as Kramer), as salesman and sales manager at a salary of $30,000 per annum plus 2 1/2 percent of increased company sales. While employed by Kramer he continued to deal with many of the same customers that he had previously dealt with in behalf of Coro, Inc. As a result of a disagreement between petitioner and Kramer, he terminated his employment with it in September 1957. In settlement of petitioner's claims under his employment contact, Kramer agreed to pay him $15,000, of which $6,000 was paid in 1957 and $9,000 in 1958 ($1,500 per month, January through June 1958). He reported the $9,000 as income in his 1958 return. Other income received by him during that year consisted entirely of dividends, interest, and gains from stock transactions.
An announcement that petitioner had severed his connections with Kramer as of September 1, 1957, appeared in the Women's Wear Daily on September 6, 1957, and he received ‘many calls.’ One was from a friend who informed him that his partner was retiring and wanted to sell his one-half interest in a jewelry company in Miami, Fla., and suggested that petitioner purchase it. Petitioner and his wife went to Hollywood, Fla., and remained there from January 1 to March 29, 1958. While there he investigated the inventory and business of the Miami jewelry company and ‘a couple of other things' including a ‘possible real estate venture.’
During 1958 petitioner sought employment as a salesman by various concerns engaged in the sale of costume jewelry in the United States. His efforts did not meet with success because he found that some of these concerns did not want to displace salesmen who had been with them for many years, that others did not have major lines of costume jewelry which would permit him to make a profit after paying expenses, and that the sales of all of them were being adversely affected by the infiltration of foreign goods into the United States. In the latter part of 1958 he decided to establish a sales organization to represent foreign couturiers in this country. By the end of 1958, he had reached an agreement with six men representing different territories in this country to join such an organization. According to the plan he would cover the South and the other six men would handle sales in other parts of the country. Early in 1950, he spent several months in Europe conferring with European couturiers in an attempt to work out arrangements to represent them in the sale of their goods in this country. This project fell through in 1959. Other efforts subsequently made by petitioner to find employment as a jewelry salesman did not meet with success. In 1962 he formed a company under his name to engage in the manufacture and sale of costume jewelry. He anticipates dealing with the same customers that he had previously dealt with while in the employ of Coro, Inc., and Kramer.
Although petitioner did not have any costume jewelry to sell to his former customers during 1958, he felt that this was only a temporary condition and that he should keep in touch with them. When he was employed by Coro, Inc., and Kramer, he entertained buyers and merchandise managers of the stores when they came to New York, and made Christmas and other gifts to them, and he continued this practice during the year 1958. The entertainment consisted of taking them to dinner, to the theater, to night clubs, and to a country club of which he was a member. The gifts consisted of liquor and other items, and in 1958 he paid for some Christmas gifts made in 1957. During 1958 he corresponded with the persons he had dealt with at the stores, and also communicated with them by phone and by telegram.
During 1958 petitioner resided in New York in a five-room apartment which he rented. He set aside one of the rooms for his use as an office. In that room he had a desk, files, a separate telephone, stationery, etc.
In his income tax return for the year 1958, petitioner claimed the following deductions for business, traveling, and entertainment expenses:
+--------------------------------------------------------------------+ ¦Expenses paid out for possible purchase of business interest; ¦ +--------------------------------------------------------------------¦ ¦real estate venture interest; or sales representation in ¦ ¦ +----------------------------------------------------------+---------¦ ¦Florida; January 1-March 29, 1958: ¦ ¦ +----------------------------------------------------------+---------¦ ¦Hotels, airplane fares, auto expenses ¦$5,473.16 ¦ ¦ +----------------------------------------------------------+---------¦ ¦For business purposes—50 percent ¦$2,736.58¦ +----------------------------------------------------------+---------¦ ¦Entertainment of buyers—New York promotions—meals, ¦ ¦ +----------------------------------------------------------+---------¦ ¦theaters, night clubs, etc ¦1,075.99 ¦ +----------------------------------------------------------+---------¦ ¦Gifts to buyers ¦684.70 ¦ +----------------------------------------------------------+---------¦ ¦Liquor gifts ¦774.25 ¦ +----------------------------------------------------------+---------¦ ¦Country club membership for entertaining buyers¦$3,960.50 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Less 25 percent for personal use ¦990.13 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦ ¦ ¦ ¦2,970.37 ¦ +----------------------------------------------------------+---------¦ ¦Telephone and telegrams—$144.86—1/3 for business use ¦48.29 ¦ +----------------------------------------------------------+---------¦ ¦Rent of apartment—$3,981.36—1/3 for business use ¦1,327.12 ¦ +----------------------------------------------------------+---------¦ ¦Postage, stationery, luggage, etc ¦52.39 ¦ +----------------------------------------------------------+---------¦ ¦Organization dues—Traveling Mens Association ¦25.00 ¦ +----------------------------------------------------------+---------¦ ¦Floater, liability, and traveling insurance ¦164.40 ¦ +----------------------------------------------------------+---------¦ ¦Automobile expenses: ¦ ¦ ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Gasoline ¦$434.53 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Oil, greasing, and maintenance ¦48.00 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Auto repairs ¦128.04 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦AAA—$20; gifts to garagemen, etc. $25 ¦45.00 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Auto insurance ¦220.83 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Depreciation on 1958 Cadillac—Cost ¦6,200.00 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Allowance on trade— ¦ ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦1954 Oldsmobile adjusted cost ¦$4,341.05 ¦ ¦ ¦ +------------------------------------+----------+----------+---------¦ ¦Depreciation taken ¦3,617.54 ¦ ¦ ¦ +------------------------------------+----------+----------+---------¦ ¦Net cost ¦723.51 ¦ ¦ ¦ +------------------------------------+----------+----------+---------¦ ¦Trade—in allowance ¦1,600.00 ¦ ¦ ¦ +------------------------------------+----------+----------+---------¦ ¦Balance over cost ¦876.49 ¦ ¦ ¦ +------------------------------------+----------+----------+---------¦ ¦Cadillac adjusted cost ¦5,323.51 ¦ ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Depreciation 25 percent ¦1,330.88 ¦ ¦ +-----------------------------------------------+----------+---------¦ ¦Total auto expenses ¦2,717.28 ¦ ¦ +----------------------------------------------------------+---------¦ ¦For business use—2/3 ¦1,811.52 ¦ +----------------------------------------------------------+---------¦ ¦Total business, traveling, and entertaining expenses ¦11,670.61¦ +--------------------------------------------------------------------+
The amounts listed in this schedule as having been paid were in fact expended by petitioner during the year 1958, and of the total of such amounts $5,200 represents ordinary and necessary business expenses, deductible by petitioner in 1958.
OPINION
RAUM, Judge:
The Commissioner's disallowance of deductions for expenses aggregating $11,670.61 in 1958 raises two principal issues: Whether petitioner was engaged in business in 1958, and, if so, whether the challenged expenditures were proximately related thereto. The fact that the expenditures were made is not in dispute.
1. Petitioner has spent virtually his entire adult life in the costume jewelry business, and during the period 1932-56 he served as a salesman for Coro, Inc. He worked primarily on a commission basis, earning as much as $60,000 a year, and paying his own expenses. His territory was the southern part of the United States. His principal customers were the large department stores and specialty shops. He dealt with the buyers for those establishments, and had fostered their goodwill over the years through entertainment and gifts. Upon termination of his connection with Coro, Inc., he continued his personal contact with the southern territory and dealt with many of the same customers in behalf of Kramer Jewelry Creations, Inc. However, his connection with Kramer was short-lived. He and Kramer came to a parting of the ways in the fall of 1957. Petitioner nevertheless still regarded himself as being in the costume jewelry business and actively sought other connections. Meanwhile, he continued to maintain his contacts with his customers, through correspondence, telephone, etc., and continued to entertain the buyers and other representatives of the stores with which he had dealt. The maintenance of their goodwill was a matter of the highest importance to him.
Plainly, petitioner did not cease to be in the costume jewelry business in 1957 and 1958 merely because he temporarily had no merchandise to sell. It was a period of transition in which he was actively seeking another connection that would enable him to continue to serve the same customers with whom he had previously dealt. We think that the respondent's position that petitioner was not carrying on a trade or business in these circumstances gives an unduly narrow interpretation to the statute. His failure to make sales in 1958 by reason of his temporary lack of access to a source of costume jewelry to sell is not controlling. Cf. Walter G. Morley, 8 T.C. 904, 915-916. This case is to be sharply distinguished from Henry G. Owen, 23 T.C. 377, where a Government employee living in Washington, D.C., from 1944 to 1954 made expenditures in 1947 to maintain a law office in North Dakota in anticipation of resuming his law practice at some indefinite future time after completing his Government service. The present case more closely resembled that of a worker who is temporarily unemployed and who continues to pay his union dues while looking for another job. In such situations the taxpayer should be allowed to deduct those expenses properly referable to his trade or business which, we hold, did not cease to exist during a reasonable period of transition. And in the context of the present case, where petitioner was actively seeking a suitable connection commensurate with his status in the costume jewelry field, we think that the period of transition was a reasonable one. We turn therefore to the question whether the expenditures in controversy were proximately related to petitioner's business.
2. The mere fact that petitioner made the expenditures in question does not, of course, entitle him to deduction therefor. He must show that they were proximately related to his business. We are reasonably satisfied that the items described as ‘Entertainment of buyers,’ ‘Gifts to buyers,‘ and ‘Liquor gifts' were in fact related to promoting the goodwill of buyers for the establishments with which petitioner had been doing business over the years, and are deductible. On the other hand, expenses allocable to petitioner in the amount of $2,736.58 in respect of a 3-month sojourn in a resort setting in Florida at the height of the winter season stand on a different footing. We are far from satisfied that this item is other than personal, and, to the extent that any portion of it may be referable to investigating the purchase of an interest in some business or in some real estate venture such amount would not in any event be deductible. Hyman Myers, 38 T.C. 658, 666; John F. Koons, 35 T.C. 1092, 1101; Eugene H. Walet, Jr., 31 T.C. 461, 471, affirmed per curiam 272 F.2d 694 (C.A. 5); Morton Frank, 20 T.C. 511, 513.
Some of the remaining smaller items, such as telephone, postage, stationery, and organization dues, appear to be deductible. On the other hand, the record fails to contain convincing evidence supporting the large proportion of country club and automobile expenses which petitioner has allocated to business. So too, the allocation of one-third the rent of a five-room apartment is excessive. The case calls for the application of the familiar Cohan rule (39 F.2d 540, 544), and, using our best judgment, we have found that out of a total of $11,670.61 expenses in question, $5,200 represents ordinary and necessary business expenses, deductible by petitioner in 1958.
Decision will be entered under Rule 50.