Source: https://casetext.com/case/noland-v-cir
Timestamp: 2018-12-15 10:15:42
Document Index: 777061639

Matched Legal Cases: ['§ 23', '§ 23', '§ 122', '§ 122', '§ 24', '§ 24']

Noland v. C.I.R, 269 F.2d 108 | Casetext
Noland v. C.I.R
269 F.2d 108 (4th Cir. 1959)
United States Court of Appeals, Fourth CircuitJun 10, 1959
Noyce v. Commissioner of Internal Revenue
…However, the voluntary payment or guarantee of corporate obligations by corporate officers, employees, or…
Noyce v. Comm&apos;r of Internal Revenue
…It is well established that if an employee voluntarily pays his corporate employer&apos;s obligation, he cannot…
requiring "proof of some certainty and directness"
Summary of this case from Beckey v. Comm&apos;r
Summary of this case from Henao v. Comm&apos;r
George D. Gibson and H. Brice Graves, Richmond, Va. (T. Justin Moore, Jr., and Hunton, Williams, Gay, Moore Powell, Richmond, Va., on brief), for petitioners.
Robert D. Hoffman, Attorney, Department of Justice, Washington, D.C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and A.F. Prescott, Attorneys, Department of Justice, Washington, D.C., on brief), for respondent.
The taxpayer, Mr. Noland, is an executive of six corporations conducting substantial and profitable businesses. He is the president and a director of the Noland Company, Incorporated, which has its principal office in Newport News, Virginia, and which is engaged, in several states, in the wholesale distribution of plumbing, heating, industrial and electrical equipment and supplies, and of machine tools. He is chairman of the board of directors of Virginia Engineering Company, Inc., a director of Tidewater Construction Corporation, chairman of the board of directors of Richmond Hotels, Incorporated, president and a director of Biggs Antique Company, Incorporated, and president and a director of Antietam Hotel Corporation.
The Noland Company was founded by the taxpayer's father and was well-established when the taxpayer became employed by it. He and members of his immediate family are its controlling stockholders. So far as appears, though it is uncertain on this record, each of the other companies were established before his association with them, and he, or members of his family, are the owners of substantial proportions of the stock of each. At least, no contention is made here that the taxpayer is a promoter, a management consultant or a specialist in the revitalization of declining managerial organizations, or that he is engaged in any business other than that of earning his compensation from the enumerated corporations.
(3) Dues to a number of clubs and associations, some of which, he testified, he used not at all, but had joined because some business associate or customer had requested him to do so, one of which he used for the entertainment of business associates and others of which he had joined because it gave him an opportunity to mingle socially with people he regarded as actual or potential customers, or in position to "influence" business.
(6) A general miscellany of expense items, principally relating to entertainment, much of it in taxpayer's home, and to gifts and remembrances. Many of these items are a prorated portion of the total cost, other portions of the total cost having been charged to one or more of the corporations as reimbursable expense. The unreimbursed portion of these items was subject to a further allocation between "unreimbursed business expense," for which deduction was claimed, and "personal expense" for which no deduction was claimed. The allocations were his own, and he made no attempt to obtain complete reimbursement for these items, for he felt the total cost was not properly chargeable to the corporations.
We start with the assumption that every person who works for compensation is engaged in the business of earning his pay, and that expense which is essential to the continuance of his employment is deductible under § 23(a)(1)(A) of the Internal Revenue Code of 1939 ( 26 U.S.C.A. § 23). See Hill v. Commissioner, 4 Cir., 181 F.2d 906; Schmidlapp v. Commissioner, 2 Cir., 96 F.2d 680, 118 A.L.R. 297. Salary has been treated as business income within the meaning of § 122 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 122. Batzell v. Commissioner, 4 Cir., 266 F.2d 371; Roberts v. Commissioner, 5 Cir., 258 F.2d 634; Pierce v. United States, 9 Cir., 254 F.2d 885; Overly v. Commissioner, 3 Cir., 243 F.2d 576; Folker v. Johnson, 2 Cir., 230 F.2d 906. The business of a corporation, however, is not that of its officers, employees or stockholders. Though the individual stockholder-executive, in his own mind, may identify his interest and business with those of the corporation, they legally are distinct, and, ordinarily, if he voluntarily pays or guarantees the corporation's obligations, his expense may not be deducted on his personal return. Deputy v. du Pont, 308 U.S. 488, 60 S.Ct. 363, 84 L.Ed. 416; Welch v. Helvering, 290 U.S. 111, 54 S.Ct. 8, 78 L.Ed. 212; Interstate Transit Lines v. Commissioner, 319 U.S. 590, 63 S.Ct. 1279, 87 L.Ed. 1607; Burnet v. Clark, 287 U.S. 410, 53 S.Ct. 207, 77 L.Ed. 397. Nor may a corporation deduct as a business expense, payments which clearly further the businesses of its stockholders, but not its own. City Ice Delivery Co. v. United States, 4 Cir., 176 F.2d 347. The rule has particular applicability to closely held corporations where there may be temptation to transfer expense so that it may be deducted in the highest brackets. It is not suggested that the taxpayer here, when he personally assumed the cost of the annual Christmas party of the Noland Company, was prompted by any motive other than those he declared, but he was the dominant officer and stockholder, and the fact is that the deduction on his return, rather than upon the corporation's, would produce a net loss of revenue, a circumstance which naturally causes the Commissioner to look askance at the transaction.
There was also testimony that the Noland Company restricted the use of expense accounts. Salesmen and executives were reimbursed for their "normal" expenses, including the cost of entertainment of customers having current business relations with the company, but were not reimbursed for expenses incurred in the "extra curricular" promotion of new business or the entertainment of fellow employees.
It is doubtful that this showing differentiates this company from hosts of others which employ liberal bonus and incentive plans and which impose reasonable limitations upon the use of expense accounts. A director testified that the two policies had led him to feel encouraged to spend his money as well as his time in extra hours in an effort to develop new business, and, doubtless the bonus plan did encourage additional effort. The testimony would support a finding that there was relation between increases in business and the amount of the bonus of the employees who produced it, but no suggestion that the amount of money an employee spent in promotional activity had any direct effect upon his bonus or was even known to the directors who allocated the bonus fund.
As proof of an affirmative requirement that the taxpayer make the expenditures in question, we agree with the Tax Court that it was "vague" and "unsatisfactory." A different inference seems more likely. While an employee, generally, was not reimbursed for his cost in entertaining his fellow employees, the company had paid the cost of the Christmas party for years. There is no suggestion that it would not have done so in 1952 and 1953, if the taxpayer had not elected to stand the cost himself. There was no direct testimony relating the supposed policy to the taxpayer's contribution to the Peninsula Industrial Committee, to which the company also contributed, and the taxpayer's entertainment expense was allocated in part to the company. Perhaps the Commissioner or the Tax Court might have found that the taxpayer's allocation of his entertainment expense was a result of the supposed policy and in accordance with it, but the taxpayer's only testimony was that he attempted an "equitable" allocation of those expenses.
Certainly the proof was not so certain or definite as to compel a finding that these expenditures were required by the company or the conclusion that they were deductible business expenses of the taxpayer.
See Hill v. Commissioner, 4 Cir., 181 F.2d 906; Schmidlapp v. Commissioner, 2 Cir., 96 F.2d 680, 118 A.L.R. 297.
"* * * Reputation and learning are akin to capital assets, like the good will of an old partnership. Cf. Colony Coal Coke Corp. v. Commissioner of Internal Revenue, 4 Cir., 52 F.2d 923. For many, they are the only tools with which to hew a pathway to success. The money spent in acquiring them is well and wisely spent. It is not an ordinary expense of the operation of a business."
They are comparable to expenses to qualify oneself for advancement or to obtain new office. McDonald v. Commissioner, 323 U.S. 57, 65 S.Ct. 96, 89 L.Ed. 68; Mays v. Bowers, 4 Cir., 201 F.2d 401. It is greatly to be doubted that expenses, which are clearly personal in nature, could be converted into business expenses of the individual by a formalistic requirement of his employer that they be incurred. Personal, living and family expenses are nondeductible by the express provision of § 24(a)(1), 26 U.S.C.A. § 24(a)(1). No magic form of words occurs to us by which an employer can convert them into something else, and relieve his employees of a portion of the tax burden uniformly borne by all other individuals.
The Tax Court found, and the evidence shows, that the taxpayer is a man of generosity and public spirit. His testimony also shows, not unnaturally, that he identifies himself and his business with the several corporations and their businesses, and all of these are further identified with the interest and growth of the community. Such identification frequently lends a business significance to personal hospitality and generosity without making either wholly factitious, but the business significance, upon this showing, is immediately that of the corporations, only derivatively that of the executive-stockholder. See Greenspon v. Commissioner, 8 Cir., 229 F.2d 947.
See Schmidlapp v. Commissioner, supra.