Professional Documents
Culture Documents
Arthur Hughes v. Commissioner of Internal Revenue, 451 F.2d 975, 2d Cir. (1971)
Arthur Hughes v. Commissioner of Internal Revenue, 451 F.2d 975, 2d Cir. (1971)
2d 975
72-1 USTC P 9122
The Treasury Regulations pursuant to Sec. 274 state that "adequate records" are
"an account book, diary, statement of expense or similar record . . . and
documentary evidence . . . which, in combination, are sufficient to establish
each element of an expenditure. . . ." Sec. 1.274-5(c) (2). The Regulations
continue that if the taxpayer fails to meet the adequate records requirement, he
must establish each element of the expenditure:
were checks and billing statements from an inn in Fresh Meadows, New York,
near his home, where he-according to his own testimony-had bought drinks
occasionally for his boss and a few stagehands. The checks and statements on
their face did not differentiate those drinks bought for business guests from
drinks and food bought for appellant's own consumption or that of his social
companions. Aside from the checks and statements, and appellant's own written
and oral estimates of his expenses for food and drink both at studios and in
bars, the only evidence arguably supportive of appellant's claimed expenses
was the oral testimony of two witnesses.
10
One Beraud had seen appellant buying drinks at bars and entertaining
stagehands at the studios of CBS; however, Beraud also testified that it was
customary, when stagehands were entertained, for social friends of studio
personnel to be treated to the same food or beverages. Corcoran, a stage
manager like appellant, testified that he had worked on many shows with
appellant and had seen him "entertaining." Corcoran also said that as a stage
manager he, Corcoran, spent seven or eight dollars a day on coffee, doughnuts
and sandwiches, and, as Beraud had said, that non-crew persons were not
excluded when entertaining was done at studios or bars.
11
We hold that the Tax Court's decision that appellant failed to meet the
substantiation requirements of Sec. 274 is not "clearly erroneous" within the
standard of Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278,
291, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960),5 and accordingly we affirm. The
checks and billing statements from the inn at Fresh Meadows evidenced the
times and amounts of appellant's expenditures there, but neither written records
nor other substantiating evidence were introduced to establish the business
purpose of the expenses. Furthermore, only appellant's uncorroborated general
oral statement was presented to establish the business relationship of the
taxpayer and the persons entertained on each occasion, and no statement was
made or appeared on the billing documents or checks regarding the amount
spent at the inn for appellant's own food or drink, or whether in fact he was
entertaining anyone at the time each expense was incurred. It would be wholly
to disregard the statute and regulations to hold that such evidence is an
"adequate record" or "detailed information" of the cost, purpose and business
relationship elements of a business entertainment expenditure.
12
The claimed deductions based on purchases of drinks in other bars and coffee,
doughnuts and sandwiches in cafeterias near the CBS studios also lack
sufficient substantiation under the "adequate records" or "other evidence"
alternatives of Sec. 274. Appellant produced no written records, receipts or
other information to substantiate his own declarations; and no corroborative
14
15
substantiation, the taxpayer's testimony was not "sufficiently precise" under the
regulation, since he had not presented evidence relative to the nondeductible
cost of his own lunches. The court's final decision was to remand the case to
the Tax Court to allow taxpayer to prove the cost of his meals as part of his
testimonial substantiation.
16
The significance of LaForge is that, even though a written statement may not be
required for substantiation, the corroborative evidence must nevertheless
establish each statutory element-amount, time, place and purpose-of the
expenditure with precision and particularity. In LaForge the cashier's oral
testimony properly corroborated those elements of the taxpayer's claimed
expenses; thus the evidentiary basis for the deduction was established, and the
remand was appropriate to allow the taxpayer to subtract only his nondeductible expenditures. In the case before us, however, not only did the
corroborative evidence presented not approach the specificity and precision we
believe required by the statute and regulations, but there was no corroborative
evidence whatsoever relative to the statutory elements of all but a minimal
number of the claimed expenditures.
17
H.R.Rep. No. 1447, 87th Cong., 2d Sess. 23 (1962) (1962-63 Cum.Bull. 405,
427); S.Rep. No. 1881, 87th Cong., 2d Sess. 35 (1962) (1962-63 Cum.Bull.
707, 741); U.S. Code Cong. & Admin. News 1962, p. 3338