Docket No. 64382.
Thomas R. Ward, Esq., and Roland J. Mestayer, Jr., Esq., for the petitioners Harold G. Clark, Esq., for the respondent.
Thomas R. Ward, Esq., and Roland J. Mestayer, Jr., Esq., for the petitioners Harold G. Clark, Esq., for the respondent.
In the State of Mississippi there are laws that make it a criminal offense to sell, keep in possession, give away, or transport intoxicating liquors in the State. There is another law that levies a tax on sales that are prohibited by law, and is customarily administered on sales of intoxicating liquors. Petitioner, a food broker, entertained persons with whom he was doing business or seeking their business by taking them to lunch or dinner and serving and giving them alcoholic beverages. He claimed deductions in the taxable year 1953 for the cost of intoxicating liquors purchased in Mississippi and served and given to business guests in Mississippi, and for the cost of meals he consumed on daily business trips but at the end of which he returned to his home. Held, (1) that the deduction for the cost of intoxicating liquors is not allowable as a business expense, as the allowance of such deduction would constitute a frustration and violation of the sharply defined policy of the State of Mississippi, and (2) that petitioner is not entitled to a deduction for the cost of the meals he consumed on business trips during the days at the end of which he returned to his home.
The respondent determined a deficiency in income tax against the petitioners for the taxable year 1953 in the amount of $461.86. The questions presented are (1) whether the amount expended by petitioner Al J. Smith for alcoholic beverages purchased in Mississippi and used by him in entertaining his customers in Mississippi is allowable as a deduction, it being Mississippi law that it is unlawful for any person to sell, possess, give away, or transport intoxicating liquors within the State, and (2) whether expenditures by him for certain of his meals purchased on business trips but from which he returned home at night, are deductible as business expense.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioners are husband and wife and reside in Meridian, Mississippi. For the taxable year 1953 they filed a joint income tax return on January 15, 1954, and an amended joint tax return on August 30, 1954, with the director of internal revenue for Mississippi.
Al J. Smith, hereafter referred to as petitioner, is a food broker, operating under the name of Smith Brokerage Company, with offices in Meridian. He represents food manufacturers, referred to as principals, and sells their products to wholesale dealers and specialty houses throughout a territory designated as east Mississippi and west Alabama. He is paid a commission on the products he sells.
In the conduct of his business petitioner deemed it necessary to entertain his principals or their representatives and particularly the buyers or customers who bought the products. The entertainment consisted of taking them to lunch or dinner and serving and giving them alcoholic liquors. It was his view that if he did not entertain the persons with whom he was doing business or seeking their business their accounts might go to rival competitors who might offer them such entertainment.
During 1953, petitioner expended $575.16 for meals on days when he was away from his home on business but at the end of each day he returned to his home. $503.30 was expended for 233 meals which included 105 meals consumed by petitioner and 128 by his business guests. The balance of $71,86 was expended for meals consumed by petitioner when he dined alone.
During the taxable year 1953, petitioner expended $633.75 on alcoholic liquors which he served and gave to his business guests. Based on records kept by petitioner, $330 was expended for alcoholic liquors outside Mississippi and served and given to his business guests outside of Mississippi. The balance of $303.75 was expended for alcoholic liquors in Mississippi and served and given to business guests in Mississippi.
It is, and during the taxable year was, unlawful in Mississippi for any person to sell, barter, give away, keep, or have in his possession any intoxicating liquors. Under another section of the Mississippi Code, a tax is imposed on the sale at wholesale or retail of ‘any tangible property, articles or commodities whatsoever, the sale or distribution or which is prohibited by law.’
On August 26, 1952, a special referendum election was held in Mississippi on the question of allowing counties upon petitioner of 20 per cent of the qualified electors to vote for or against legalizing the sale of intoxicating liquor of an alcoholic content of more than 4 per cent alcohol by weight. The measure was defeated by a vote of 140,681 to 80,822. Fourteen of 82 counties voted for adoption of the measure. Petitioner's home county of Lauderdale voted 3,201 for and 4,533 against it.
The State tax collector of Mississippi is charge with the duty of collecting the tax on all sales that are prohibited by law, but the tax has been customarily applied only to the sale of intoxicating liquors. In administering the act he has regularly assigned to duty in Louisiana two employees to copy the invoices issued to the wholesale dealers of Mississippi, which invoices show the quantities of alcoholic liquors sold to them. He also obtains from the Mississippi wholesalers invoices of liquors sold to the Mississippi retailers. Furthermore, he obtains from the records of the United States district director of internal revenue at Jackson, Mississippi, a copy of all permits issued to wholesale and retail liquor dealers by the district director.
During the fiscal year ending June 30, 1953, the United States district director of internal revenue at Jackson issued 1,523 special tax stamps to wholesale liquor dealers, retail liquor dealers, wholesale dealers in wines, wholesale dealers in wines and malt liquors, retail dealers in wines, and retail dealers in wines and malt liquors. For the fiscal year 1954, 1,473 special tax stamps covering the foregoing categories were issued with the exception that no stamps were issued to wholesale dealers in wines and malt liquors.
During the fiscal year ended June 30, 1953, 31 wholesale dealers made monthly payments of tax on sales of intoxicating liquors to the State collector in the aggregate amount of $942,901.45. During the 1954 fiscal year, 29 wholesale dealers made monthly payments of such tax to the collector in the total sum of $909,143.77.
The records of both the United States district director of internal revenue at Jackson and the State tax collector of Mississippi are open to the public as well as to public officials.
In addition to Louisiana, three other States, Arkansas, Tennessee, and Alabama, are situated on the borders of Mississippi and have legalized sales of intoxicating liquors. If any such liquors are transported from these States into and sold in Mississippi, the Mississippi State collector gets no records of such transactions and collects no taxes thereon.
Petitioner bought whisky in Mississippi when he wanted to and without much trouble. On the gulf coast of Mississippi, where Gulfport, Biloxi, and other resorts are located, alcoholic beverages are sold at bars and served at various eating places. The wholesale grocers of Mississippi usually hold their annual convention at one of the resorts in the gulf coast area and petitioner entertains some of his customers there. The packaged whisky petitioner purchased in Mississippi in 1953 always contained the Federal Liquor stamps.
Respondent disallowed petitioner's claimed deduction for the cost of whisky, in the amount of $633.75 as ‘Sales Promotion & Entertainment,‘ for the reason that ‘the purchase of or giving away of whisky violates sharply defined public policy inasmuch as section 2613 of the Mississippi Code prohibits the purchase, sale, importation and giving away of intoxicating liquors.’
Respondent disallowed the claimed deduction for the cost of meals while petitioner was not away from home overnight, for the stated reason that the expenses so incurred ‘represented nondeductible personal living expenses.’ Petitioner expended $276.50 as business expense for meals consumed by his business guests. He expended $226.80 on the meals he consumed when dining with his business guests.
Because respondent's disallowance of the deductions claimed increased the adjusted gross income of the petitioners to the extent that their claimed deduction for medical expense did not exceed 5 per cent of the adjusted gross income, respondent disallowed the medical deduction of $44.47 claimed.
The principle that an item of expense is not deductible if allowance thereof would contravene sharply defined State or Federal policy, has been well established. See Hoover Express Co. v. United States, 356 U.S. 38; Tank Truck Rentals v. Commissioner, 356 U.S. 30; Commissioner v. Sullivan, 356 U.S. 27; Lilly v. Commissioner, 343 U.S. 90; Commissioner v. Heininger, 320 U.S. 467; United States v. Winters, 261 F.2d 675, certiorari denied 359 U.S. 943; Wm. T. Stover Co., 27 T.C. 434; R. E. L. Finley, 27 T.C. 413, affd. 255 F.2d 128; Boyle, Flagg & Seaman, Inc., 25 T.C. 43; Anthony Cornero Stralla, 9 T.C. 801.
Section 2613 of the Mississippi Code Annotated (1942) makes it unlawful to keep, have in possession, sell, or give away intoxicating liquor. Section 2642 of the Code makes it unlawful to transport into or within the State intoxicating liquors.
SEC. 2613. Unlawful to keep, have in possession, sell or give away intoxicating liquor.If any person shall sell or barter, or give away or keep or have in his possession, except as hereinafter authorized, any vinous, alcoholic, malt, intoxicating or spirituous liquor, or intoxicating bitters or drinks, which if drunk to excess will produce intoxication, such person, and all others who may have owned or had any interest at the time in the liquors, bitters or drinks sold or bartered, or kept or in possession contrary to law, shall on conviction, be punished as follows:(a) By a fine of not less than one hundred dollars, nor more than five hundred dollars, or by imprisonment in the county jail not less than one week nor more than three months, or both, for the first conviction under this section.(b) By a fine of not less than one hundred dollars and by imprisonment in the county jail not less than sixty days, nor more than six months, for the second conviction for violating this section.(c) By imprisonment in the state penitentiary not less than one year nor more than five years for conviction the third time under this section for the violation thereof after having been twice convicted of its violation.
SEC. 2642. Unlawful to transport into this state— or within the state.It shall be unlawful for any transportation company, or any agent, employee, or officer of such company, or any other person, or corporation to transport into or deliver in this state in any manner or by any means any spirituous, vinous, malt, or other intoxicating liquors or drinks intended for private use, or for any such person, company, or corporation to transport any spirituous, malt, vinous, or intoxicating liquors or drinks from one place within this state to another place within the state, or from one point within this state to any point without the state, except in cases where this chapter authorizes the transportation.
Petitioner claimed as a deduction the cost of whisky in the amount of $633.75, as ‘Sales Promotion & Entertainment.’ Respondent has disallowed the entire amount on the ground that ‘the purchase of or giving away of whisky violates sharply defined policy inasmuch as section 2613 of the Mississippi Code prohibits the purchase, sale, importation and giving away of intoxicating liquors.’ He does not now contend that the purchase of alcoholic liquor is a violation of the law, but does content that ‘(t)he cost of alcoholic beverages by petitioner in the State of Mississippi and given to his customers in that State is not deductible because the sale, possession and giving away of alcoholic beverages are forbidden in Mississippi by statute and, therefore, the allowance of such a deduction would frustrate the sharply defined public policy of that State as expressed in its statutes and through the votes of its citizens.’
The record shows that $330 of the claimed deduction of $633.75 was expended by petitioner on whisky outside Mississippi and given to his customers or business guests outside Mississippi, and respondent is not now contending that petitioner is not entitled to a deduction of that amount.
Mississippi's statewide prohibition laws were first enacted by the State legislature in 1908. Acts 1908, Chs. 113, 114, 115; Hughes v. State, 52 So. 631 (Miss.). As late as 1952, in a special referendum election, the majority of the voters approved the continuance of statewide prohibition by voting against a proposal to permit local option elections in the individual counties. Thus, the people of Mississippi, through their representatives in the legislature and by their vote in 1952, have established and ratified a sharply defined policy against the traffic in alcoholic liquors.
This Court, in R. E. L. Finley, supra, denied a deduction for the cost of liquor for business promotion and entertainment, on the ground that the expenditure in question was made in violation of Oklahoma prohibition laws, at which time Oklahoma had statewide prohibition laws. Later the United States Court of Appeals for the Tenth Circuit disallowed a deduction claimed by a lawyer-taxpayer of Tulsa, Oklahoma, for the cost of whisky purchased and used in his home for the entertainment of clients and prospective clients of his law firm, on the ground that the taxpayer deliberately and knowingly patronized an illegal business, and by such patronage there was a severe and immediate frustration of State policy. United States v. Winters, supra.
Petitioner contends that Mississippi's prohibition laws do not establish such a policy for Mississippi, since, by another State law, a tax is levied on sales that are prohibited by law, that in administering the law, the tax is applied only on the sales of intoxicating liquors, that the manner in which the tax is collected by the State officials is an encouragement to liquor dealers and is an inducement to the prosecuting officials to be lax in the prosecution of the violations of the prohibition laws.
Miss. Code Ann. (1942), Tit. 40, Chapter 3— Sales, Division 1—General Sales Tax:SEC. 10108-01. Tax on sales prohibited by law.— 1. Upon every person engaging or continuing within this state in the business of selling or distributing, at wholesale or retail, any tangible property, articles or commodities whatsoever, the sale or distribution of which is prohibited by law, there is levied and imposed a tax equal to ten per cent of the gross proceeds of the selling price thereof, which shall be collected in the manner herein provided.2. The administration of this act shall be vested in and exercised by the state tax collector, and the enforcement thereof in any of the courts of the state shall be under his jurisdication. The state tax collector may require the assistance of and act through the attorney general, prosecuting attorney of any county, or any district attorney and may, where in his opinion the circumstances justify it, employ special counsel to aid in the enforcement of this act. The state tax collector may also employ such deputies as may in his opinion be necessary to aid in the administration of this act and the state tax collector and all such special counsel and deputies shall be compensated in the manner hereinafter provided. Each deputy appointed by the state tax collector under the provisions of this act shall execute a bond in the sum of five thousand dollars ($5,000.00) conditioned according to law for the faithful discharge of his duties.3. The tax imposed under the provisions of this act shall be due and payable on or before the 15th day of the month next succeeding the month in which it accrued. The state tax collector shall collect the tax on or before the 15th day of each month by causing the person liable therefor to pay all taxes due hereunder for the preceding month. To facilitate the administration of this act the state tax collector is hereby authorized to prescribe the method and procedure governing the collection of the tax and anyone failing to comply with the method and procedure so prescribed or who shall fail to pay the tax as and when due, shall be liable for a penalty in the sum of double the amount of such tax.4. At the instance of the state tax collector the governor is directed to request of the secretary of the treasury of the United States or any other officer of the United States government or of the state tax commissioner, any record which may be needed in the enforcement of this act.5. The provisions of this act shall apply to the sale or distribution of any property, articles or commodities whatsoever, the sale or distribution of which is prohibited either under the laws of this state or of the United States.6. The power and authority hereby vested in the state tax collector shall be cumulative and in addition to any other power and authority now vested in him by law.7. All taxes collected by the state tax collector under the provisions of this act shall be paid into the state treasury by him as required by law but he may retain ten (10) per cent of all such collections out of which sums so retained by him he shall pay all expenses incident to the enforcement of this act including his own compensation and that of his deputies and attorneys appointed pursuant to the provisions hereof. The commission of ten (10) per cent allowed the state tax collector as provided in this section shall be in addition to other fees and commissions allowed him by law and shall not be taken into consideration in arriving at the maximum of five thousand dollars ($5,000.00) per annum for his salary and that of his deputies.8. The tax imposed by this act shall be in addition to any other tax imposed by law.
The position of the petitioner is not, in our opinion, well taken. The fact that the traffic in liquor is illegal does not preclude the legislature from imposing a tax thereon. State v. Rombach, 73 So. 731 (Miss). See also License Tax Cases, 5 Wall. 462; Youngblood v. Sexton, 32 Mich. 406; Foster v. Speed, 11 S.W. 925 (Tenn.); Casmus v. Lee, 183 So. 185 (Ala.). Neither does it follow that the imposition of the tax makes the selling, bartering, or giving away of intoxicating liquors, or the keeping or having of such liquors in possession, any the less a violation of Mississippi law.
Accordingly, we conclude and hold that Mississippi in its prohibition laws has an established and sharply defined policy, which would be frustrated and violated by the allowance of the deduction claimed by petitioner for the amounts expended by him for intoxicating liquors, which liquors were given to customers, all in the State of Mississippi. The claimed deduction is denied.
Another issue relates to the deductibility of the cost of petitioner's meals on his trips away from home on the days at the end of which he returned to his home. The original deduction claimed for ‘travel’ was in the amount of $575.16, the entire amount being disallowed by the respondent under the determination that the deduction was for the cost of meals petitioner had purchased for himself on the daily trips and that such cost represented nondeductible personal living expenses.
The parties are agreed that petitioner expended $71.86 for meals he consumed alone on the daily trips in question, and that the balance of $503.30 was expended by petitioner for 233 meals, of which 105 meals were consumed by him and 128 were consumed by his business guests. Respondent concedes that petitioner is entitled to a deduction of the expenditure made for the meals he furnished his business guests, but the parties are not in agreement as to the amount expended for such meals.
The testimony of petitioner amounts to no more than that some of the meals he consumed when entertaining business guests cost less than those consumed by his guests, and that some of his other meals cost about the same as the meals he furnished his guests. In the absence of proof more definite, it is reasonable, we think, to conclude that on an average petitioner's meals would be substantially comparable to those of his business guests and we have made our finding of the amount expended accordingly.
The final question is whether petitioner is entitled to deduct as a business expense the cost of his own meals in the aggregate amount of $298.66, which consists of $226.80 expended by him for his meals while entertaining business guests and $71.86 for the meals he ate when dining alone. The evidence is clear, and the petitioner admits that these meals were consumed by him on trips he made when he did not spend the nights away from home. The cost of these meals were not expenses incurred while ‘away from home’ within the meaning of the statute. They were personal expenses, which are not deductible, and the deduction claimed is disallowed. See Richard A. Sutter, 21 T.C. 170; Fred M. Osteen, 14 T.C. 1261.
Sec. 23(a)(1)(A), I.R.C. 1939.
Decision will be entered under Rule 50.