Brander v. Commissioner

1925 BTA LEXIS 1993 | B.T.A. | 1925

Lead Opinion

OPINION.

Steeniiagen

: When the taxpayer filed his original return he had had it prepared by a firm of certified public accountants upon whose advice he relied. He had no individual account books and it is said that the return was prepared from the data contained in the books of the corporation of which he was one of the two dominating stockholders. The return stated upon its face that it showed income accrued and not income received, and the amounts of income and deductions were shown to be as follows:

INCOME. .

Salaries and commissions as president and salesman

$115,166. 00 from Brander & Curry, Inc_

512. 50 Dividends received directly_

- $115, 678. 50

DEDUCTIONS.

2, 434. 89 Interest paid___

13, 327. 40 Depreciation on yacht used for business purposes, cost $66,637.00 at 20 per cent_

7,386. 00 Loss on stock market transactions___

2,000.00 Burglary: Jewelry stolen_

500. 00 Country club bond stolen_

- 25, 648. 29

90, 030. 21

After audit and investigation the Commissioner disallowed the depreciation on the yacht as a deduction. The taxpayer then, without securing any previous consent from the Commissioner, filed an amended return purporting to show income received instead of' income accrued, and he now insists that this is the proper method of determining his taxable income. Upon this method, he contends,, he is taxable not upon the amount of salary and commissions of $115,166 which had accrued to him as shown by the corporation’s books, but only upon the amount of $112,661.51, which he actually received during the taxable year. That he actually received only this amount is not disputed, but the Commissioner contends that the taxable income should be determined by the accrual method as originally adopted by the taxpayer; or, if the receipts method be used, the entire amount of $115,166 should nevertheless be included because the circumstances are such as to impute to the taxpayer the constructive receipt of the $2,904.49 entered upon the corporation’s books as a credit to him (and deducted by it on its return) but not actually paid.

There is no foundation in this record upon which it can be said that the method of accounting regularly employed in keeping the taxpayer’s books of account is the accrual method. He had no method of accounting, for he kept no books, and, except in an extraordinary case, which does not now come to mind, an accrual method without accounting records is an anomaly. Such a method is inherently an accounting system whereby one is enabled not merely to record receipts and payments after they 'take place but to keep track of his financial rights and obligations under a credit system. Even a simple practice of accruals would require systematic accounting and some sort of bookkeeping. Without records it may generally be concluded that the cash method is being used. But the Commissioner says that the taxpayer did have books, in effect, for his accounts were kept on the books of the corporation, and that from these his tax return was compiled. This is not to be assumed, and the proof is not convincing. It appears only that the single item of salary and commissions was taken from the corporation’s books. Whether all the remaining items of dividends, interest, depreciation, and losses also appear there is not established. We hold, therefore, that the receipts method may properly be used as the taxpayer claims.

The Commissioner then contends that the situation is such as to constitute a constructive receipt by the taxpayer, and cites article 53 of Regulations 45. This doctrine, as we have made clear in several appeals, is not to be applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his tona -fide selection of this method by “ construing ” that to be received of which in truth he has not had the use and enjoyment. Constructive receipt is an artificial concept which must be sparingly applied, lest it become a means for taxing something other than income and thus violating the Constitution itself. Doubtless, however, there are clear cases of constructive receipt, such, for example, as that of the bond owner who chooses not to cash his coupon but to permit it to remain uncut in the possession of another. He will not be heard to say that the amount of the coupon is not his income because he did not in fact receive it. The receipt is entirely within his own control and disposition. So, from the evidence, it seems to be in the present appeal. Brander and Curry were the sole owners ■of the business and all its assets. Brander, as president, could at any moment have elected to take the $2,904.49 as he did the $112,-661.51, and no one else could have prevented him. The corporation had sufficient assets to pay him and there was no one to dispute his right to it. He contends that, as a practical matter, the assets were pledged, and hence beyond his disposition. But the pledge itself was his voluntary act. During the year he permitted the corporation to change its investments, and he could just as freely have permitted it to pay its salary debt to him. It was not that the corporation would not pay, but rather that he would not receive. This election to give the corporation the temporary use of the amount is an exorcise by him of its'enjoyment, and this is one of the primary attributes of income. The Commissioner therefore correctly determined that the taxpayer’s income from salary and commission was $115,166.

The taxpayer purchased a yacht in the summer of 1919, for which he then paid $7,000. Before the yacht could be used it was necessary to have it overhauled and substantially repaired and reconditioned. This was not completed until 1920 and the cost was over $60,000. When this was paid does not appear in the record. Hence, in no event could there be an allowance for exhaustion of more than half a year upon the basis of $7,000, upon the evidence before us. But it is our opinion that no depreciation whatever may be recognized as a deduction.

A yacht is essentially a luxury. It is an instrument of pleasure and comfort which none but the wealthy can afford. It is not ordinarily regarded as a business facility. But it is argued that, however this may he ordinarily, this yacht was bought and used as a business facility; and this was its sole reason for existence. Curry, in testifying in his companion appeal [infra,, 237], said that the reason why these vessels were not purchased and owned by the corporation was that he and Brander wanted to continue as members of the New York Yacht Club and could do so only if they were yacht owners. Corporate yacht owners were not admitted to membership because yachting is not regarded as a commercial activity but as “ a gentlemen’s game.” Notwithstanding this, however, it is contended that in fact the yacht was property used in Brander’s trade or business of earning salary and commissions from the corporation. Brander had" tried for some time to build up his business through the subordinates of his customers and this was not sufficiently profitable. So he decided to “ work on the men higher up,” and this required activities of a social nature. He must live on their scale, offer them comforts and conveniences such as he thought they were accustomed to, and entertain them elaborately. So he joined clubs in the city and the country, bought automobiles, and finally a yacht. Sometimes he placed these entirely at the disposal of his business acquaintances and sometimes he went along. The purpose in this was to develop friendship in the hope of business profits. The story is familiar to all. In its essence it is the promotion of good will. It is the traditional drummer’s free cigar. Sometimes it takes the form of the local seller inviting the foreign buyer to his home for dinner or to his club for lunch or to his country club for golf. Sometimes it is subtle and sometimes obvious. Some there are who have no social interest except as it may be helpful to earnings. Thus the manufacturer makes friends with the wholesaler, the builder with the architect and the rubber merchant with the tire maker.

What we have said indicates the scope of the taxpayer’s argument. It becomes a question of degree and not one of defined principle. Merely because a social asset is also a business advantage, it is not to be said that its exhaustion is an item of business deduction. The yacht in the present appeal is a social instrument of this character and we hold that its exhaustion may not be deducted.

Smith dissenting.