Brass Rail, Inc. v. Commissioner, 16 T.C. 1 (1951)

Expenses are deductible as ordinary and necessary business expenses if the taxpayer honestly intended to incur them for business purposes, and the reasonableness of the expenditure is one test of that intent.

Summary

Brass Rail, Inc., sought to deduct expenses related to show horses and dogs, an automobile, and entertainment. The Commissioner disallowed the deductions, arguing the animals were for personal pleasure and the auto usage was primarily personal. The Tax Court held that the expenses related to the horses and dogs, the automobile, and the entertainment expenses were deductible as ordinary and necessary business expenses but allocated a portion of the automobile expenses to personal use for one of the petitioners. The decision hinged on the company’s intent and the degree of business versus personal use.

Facts

Brass Rail and Dairy purchased show horses and dogs, claiming it was for advertising. The horses were exhibited in locations distant from Pittsburgh, where the restaurants were located. Brass Rail also owned an automobile driven by a chauffeur. The Commissioner determined that 40% of the automobile’s use was for business, and the remaining 60% was personal use by DeLucia. Brass Rail also expended amounts on liquor for the entertainment of suppliers.

Procedural History

The Commissioner determined deficiencies in the petitioners’ income tax. Brass Rail petitioned the Tax Court for a redetermination of these deficiencies. The Tax Court reviewed the Commissioner’s disallowance of deductions for advertising expenses, automobile expenses, and entertainment expenses.

Issue(s)

1. Whether Brass Rail and Dairy honestly intended to acquire and use the animals for advertising purposes, thereby entitling them to deduct the related expenses as ordinary and necessary business expenses.
2. Whether Brass Rail is entitled to deduct the full expenses of maintaining and operating an automobile, including the chauffeur’s salary, or whether a portion of these expenses should be allocated to DeLucia’s personal use.
3. Whether Brass Rail is entitled to deduct as ordinary and necessary business expenses the amounts expended on liquor for the entertainment of suppliers.

Holding

1. Yes, because the evidence, while not overwhelming, preponderated slightly in the petitioner’s favor, supporting their claim that the animals were acquired and used for advertising purposes.
2. No, for 1941. The Court held that Brass Rail could deduct the automobile expenses but allocated 10% of the expenses to DeLucia’s personal use of the car. The Court held that the personal use of the automobile in 1942 and 1943 was so small that they may be disregarded for present purposes.
3. Yes, because the amount expended on liquor was not large in relation to the company’s purchases, and the evidence favored the petitioner’s claim that these expenses were for business purposes.

Court’s Reasoning

The court focused on the intent of Brass Rail in acquiring and using the animals. Citing Aptos Land & Water Co., 46 B. T. A. 1232, the court emphasized that