Mershon v. Commissioner

Carroll B. Mershon and Ruth Mershon, Petitioners, v. Commissioner of Internal Revenue, Respondent

Mershon v. Commissioner

Docket No. 26727 United States Tax Court 17 T.C. 861 ; 1951 U.S. Tax Ct. LEXIS 26 ; November 28, 1951 , Promulgated *26 Decision will be entered under Rule 50 .

Amounts stipulated to have been paid out by petitioner as traveling expenses held deductible under section 22 (n), Internal Revenue Code , without the necessity of determining petitioner's status as an employee.

Harry W. Miller, Esq ., for the petitioners.

Albert J. O'Connor, Esq ., for the respondent.

Opper , Judge .

OPPER *862 Petitioners attack respondent's determination of a deficiency of $ 144.40 in their 1947 income tax. The question is whether section 22 (n) of the Internal Revenue Code is applicable and the amount of deductions allowable. Some of the facts are stipulated.

FINDINGS OF FACT.

The stipulated facts are hereby found.

Petitioners are husband and wife with residence in Pittsburgh, Pennsylvania. They filed a joint income tax return for 1947 with the *27 collector for the twenty-third district of Pennsylvania.

About the first two weeks of 1947 petitioner Carroll B. Mershon, hereinafter referred to as petitioner, was employed by the Pennsylvania Industrial Engineers Division of Union Industries, Inc., from which source he reported wages of $ 756.49.

By contract dated January 30, 1947, denominated "EMPLOYMENT AGREEMENT BETWEEN OLSON ENGINEERING COMPANY AND CARROLL B. MERSHON," petitioner became associated with the latter company as a sales engineer for the purpose of selling furnace equipment. That instrument reads, in part, as follows:

Starting January 14, 1947, Carroll B. Mershon is employed by Olson Engineering Company and he will receive $ 500.00 per month as a drawing account payable in two (2) parts; namely, expenses and the remaining part of $ 500.00 after expenses have been deducted.

Commission of 20% on gross profit on all sales of equipment described in proposals assigned to him, payable upon completion of job. At the time inquiries are received, assignments will be made and approved. Credit will apply to all sales made by him up to the date of his leaving the company.

Pursuant to that agreement petitioner was given a drawing *28 account of $ 500 monthly. The monthly payment was designed to provide a regular income, "money advanced * * * on future earnings," for the purpose of giving stability to an irregular and uncertain business. It was expected of petitioner that he would earn future commissions at least equal to the monthly drawing account. Petitioner was provided desk space in a company office; telephone service was available but not customarily used, and a stenographer was at his disposal. He was free to work when and where he pleased; he made contact with his own prospects and took company assignments only if he elected to do so. He furnished his own transportation and paid expenses incurred in selling activity.

*863 These expenses were deducted from his drawing account and the company withheld income taxes and Federal Social Security taxes from the balance. No reimbursement was provided for expenses in excess of $ 500 a month.

Petitioner was not supervised in his selling activities, was not required to make work reports and had complete authority to close a sale of equipment. In negotiating the sale and installation of furnace equipment he prepared most of his contract cost estimates but *29 consulted with the president of the company about the final price and the design and construction of the type furnace most suitable for a particular plant.

In addition to his sales duties petitioner performed, at his election, service work for the company involving maintenance and service counseling in the field to purchasers of furnace equipment. This work was apart from his selling activities and he received compensation by the hour for services rendered in addition to traveling and living expenses. Occasionally he reported the work he had done to the company's chief engineer; on other occasions he would simply call in and report developments and time spent on the job for purposes of compensation.

Petitioner was free to engage in outside business activities in addition to those incident to his employment by Olson Engineering Company. During the taxable year petitioner helped install two or three small house furnaces for friends.

In their joint return for 1947 petitioners reported income from "wages, salaries, bonuses, commissions and other compensation" totaling $ 6,922.23. This figure was computed by deducting itemized expenditures of $ 976.77 from petitioner's total compensation *30 of $ 7,899 from the same sources. The resultant figure plus $ 43.50 in dividends was reported as adjusted gross income. In arriving at net taxable income there was deducted from adjusted gross income the $ 500 standard deduction provided by section 23 (aa) of the Internal Revenue Code .

Respondent recomputed petitioners' income, allowed $ 892.17 of the itemized expenditures as a travel expense deduction in computing net income, and rejected the standard deduction of $ 500.

By amended petition petitioners plead increased itemized expenditures. They allege that respondent "erroneously disallowed as a deduction under Section 22 (n) of the Internal Revenue Code petitioners' deductions from adjusted gross income the cost of travelling, meals and miscellaneous expenses paid or incurred while away from home by Carroll B. Mershon * * *."

By affirmative plea in his answer the respondent alleged that by claiming the optional standard deduction in their return petitioners made an irrevocable election, that respondent erred in their favor in *864 allowing $ 892.17 in lieu of the standard deduction, and claimed an increased deficiency of $ 96.86 to cover the error. By reply petitioners *31 deny that their use of the standard deduction effected an irrevocable election and further state that the itemized deductions of $ 892.17 were intended in lieu of the $ 500 standard deduction if such itemized deductions are not allowable under section 22 (n) of the Internal Revenue Code .

At the hearing respondent abandoned the affirmative issue first raised in his answer.

In connection with the performance of service to the Olson Engineering Company petitioner expended the sum of $ 892.17 for traveling expenses, exclusive of meals.

OPINION.

Respondent having now withdrawn the contention he raised by his answer that an irrevocable election had been made by petitioner to avail himself only of the standard deduction, there is no longer any question of petitioner's right to deduct the actual expenses incurred by him. These have been stipulated to be not less than $ 892.17. The basic issue is whether that amount may be deducted in arriving at adjusted gross income under section 22 (n) , thereby granting this to petitioner in addition to the optional standard $ 500 deduction provided by section 23 (aa) . To a minor extent the correct amount of the deduction is also in issue.

We find it *32 unnecessary to determine whether petitioner was in fact an independent contractor or an employee. It is stipulated that the $ 892.17 was for traveling expenses exclusive of meals. Section 22 (n) (1) covers all expenses of an independent contractor who is not an employee. 1 *33 Irene L. Bell , 13 T. C. 344 . Section 22 (n) (2) covers the traveling expenses of an employee. 2 It hence seems beyond dispute that whether or not petitioner was an employee, he was unquestionably entitled to reduce his gross income by the amount of the stipulated traveling expenses, without interfering with the deductions otherwise permitted by section 23 . Kenneth Waters , 12 T. C. 414 .

The remaining problem involves a total of something less than $ 200 of claimed expenditures either disallowed originally by the deficiency notice or constituting an increased claim in the petition. As to none of these are we satisfied that petitioner has sustained his burden.

*865 The items consisting of $ 29.60 and $ 69.52 are claimed as increased expenses of travel. The stipulated travel expenses are not itemized and there is no testimony that the two figures mentioned are not included in the stipulated amount. These must accordingly be disallowed. There is no testimony as to an item of $ 10 claimed as "miscellaneous" expenditures. With regard to the claimed deduction for meals, $ 12.67 was asserted to be the amount expended by petitioner for his own meals. These are not allowable unless part of his *34 traveling expenses, and there is no proof that they were such. Finally, an item of $ 43.55, included in the claimed deduction for meals and stated to be for the entertainment of customers, was not otherwise identified. Petitioner testified on direct examination in answer to the question: "Did you engage in any outside business activities? A. I believe I did to a degree." There is no specific statement that the entertainment expenses were not incurred in these connections, and we lack sufficient information about them to be satisfied that they are deductible under any subsection of section 22 (n) .

We conclude that the stipulated item of traveling expense is deductible in arriving at petitioner's adjusted gross income, and that he is entitled, in addition, to the optional standard deduction under section 23 ; but that the additional amounts claimed must be disallowed.

Decision will be entered under Rule 50 .

Footnotes

1. SEC. 22 . * * *

(n) Definition of "Adjusted Gross Income." -- As used in this chapter the term, "adjusted gross income" means the gross income minus -- (1) Trade and business deductions. -- The deductions allowed by section 23 ↩ which are attributable to a trade or business carried on by the taxpayer, if such trade or business does not consist of the performance of services by the taxpayer as an employee;

2. (2) Expenses of travel and lodging in connection with employment. -- The deductions allowed by section 23 ↩ which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee;