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Deductible entertainment expenses of professional men
Deductible entertainment expenses of professional men Myron Goldenberg, C.P.A., Chicago
The court further held that the ex penses he incurred in promoting horse shows with a view to raising funds for a hospital and a school as not sufficiently related to his medical practice as to con stitute ordinary and necessary business expenses. His expenditures for wedding presents were also denied because he “ did not state amounts he expended on wedding presents . . . the number of such gifts or the names o f recipients, nor show any instances in which his services as physician or obstetrician were sought by such persons.” Apparently, the court would have been ready to allow a deduc tion for wedding presents if the doctor had been able to produce records indicat ing the names of the recipients together with the amounts spent, supported by evidence that on some occasions he treated such persons as patients. It would appear that a professional man must be able to produce some evidence of busi ness benefit before entertainment ex penses will be allowed as a deduction. Example B— Dr. “ B” operated an in dustrial clinic. His clients were the com mercial and industrial organizations that employed his patients and the insurance companies that insured such organiza tions. He did not secure patients by re ferrals from other doctors and patients, nor did his private practice involve any substantial number of patients who con-
Ordinarily, expenditures for entertain ment and gifts are social and personal expenses, deduction of which from tax able income is prohibited by the Internal Revenue Code. If an expenditure is to be considered deductible, the burden is on the taxpayer to establish that it has a direct relationship to the conduct of his business or profession and that business benefit is reasonably to be expected from the payment. Following are two cases in which the court disallowed deductions claimed for entertainment expenses. Although in both instances the decisions involved medical practitioners, they might readily apply to members of the dental profes sion. D I S A L L O W E D D E D U C T IO N S
Example A— The Tax Court disallowed a deduction for entertainment expenses by a surgeon because no record had been kept of the persons entertained and there was no proof of the business benefit de rived from such expenditures. The court held that the burden of proof was not met “ by the vague statement that the petitioner hoped to derive some business as a result o f the expenditure.” The pe titioner also deducted sums expended as a consequence of the position of his wife as president of a medical society auxiliary. The court did not consider such expendi tures as ordinary and necessary expenses of the doctor’ s practice.
Prepared for, and presented through the courtesy of, the Bcchange National Bank of Chicago, 193
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suited him of their own volition. The doctor claimed the following items as business deductions: 1. The cost of flowers sent to nurses’ groups, hospitals, and Christmas parties and of candy and tickets to the Police Relief Association benefit given to tele phone operators, elevator operators, sec retaries, and parking lot attendants. 2. The cost of a hunting trip. 3. Gifts to medical associates. 4. The cost of printing copies of an article written by him concerning indus trial surgery. 5. The cost of his own meals in at tending numerous luncheons o f the chamber o f commerce and the hospital council. 6. The cost of entertaining other physicians and their wives and of enter taining persons connected with commer cial organizations and insurance com panies who were in a position to enhance his practice as an industrial doctor. 7. The cost of maintenance and de preciation of a cabin cruiser. The court allowed 25 per cent of the amounts claimed under items 6 and 7 as expenditures for entertainment and for cruiser expense and depreciation as ordinary and necessary expenses of “ trade or business.” All the other items were disallowed. Fundamentally, the court interpreted the evidence as establishing the fact that the deductions taken by the doctor were primarily living costs, expended for the pleasure o f his family and himself. He had made no effort to segregate from his entertainment expenses the por tion that was for the benefit of his family
and himself and therefore essentially per sonal in nature. Since his entertainment expenses included both personal and busi ness entertainment, the court made its own determination as to which portion should be allocated as business expenses. Possibly, if the doctor had made an effort to segregate in his records the business portion of these expenses, the court might have been willing to accept his own determinations rather than arbi trarily make its own allocations. COM M ENT
Cases “ A ” and “ B” point up the need for keeping not only detailed records of business entertainment expenses that the professional man intends to deduct from his gross income but also supporting ex planations showing the business relation ships in connection with each individual item claimed. Bank records are the best. A good practice is to maintain a separate checking account for professional prac tice. All business expenses should be paid by checks drawn on this account. O f course, there are some expenses that it is inconvenient to pay by check. In such instances, a check may be drawn to the maker, indicating on the stub or check the purpose for which the check is made. If a substantial amount of business enter tainment is necessary in the professional man’ s practice, it is desirable to use charge accounts. A notation may be made on the statements as they are re ceived for payment, indicating the names of the persons entertained. It is then essential that the professional man be able to establish that his pro fessional income was influenced by the persons entertained. 53 West Jackson Boulevard
The court further held that the ex penses he incurred in promoting horse shows with a view to raising funds for a hospital and a school as not sufficiently related to his medical practice as to con stitute ordinary and necessary business expenses. His expenditures for wedding presents were also denied because he “ did not state amounts he expended on wedding presents . . . the number of such gifts or the names o f recipients, nor show any instances in which his services as physician or obstetrician were sought by such persons.” Apparently, the court would have been ready to allow a deduc tion for wedding presents if the doctor had been able to produce records indicat ing the names of the recipients together with the amounts spent, supported by evidence that on some occasions he treated such persons as patients. It would appear that a professional man must be able to produce some evidence of busi ness benefit before entertainment ex penses will be allowed as a deduction. Example B— Dr. “ B” operated an in dustrial clinic. His clients were the com mercial and industrial organizations that employed his patients and the insurance companies that insured such organiza tions. He did not secure patients by re ferrals from other doctors and patients, nor did his private practice involve any substantial number of patients who con-
Ordinarily, expenditures for entertain ment and gifts are social and personal expenses, deduction of which from tax able income is prohibited by the Internal Revenue Code. If an expenditure is to be considered deductible, the burden is on the taxpayer to establish that it has a direct relationship to the conduct of his business or profession and that business benefit is reasonably to be expected from the payment. Following are two cases in which the court disallowed deductions claimed for entertainment expenses. Although in both instances the decisions involved medical practitioners, they might readily apply to members of the dental profes sion. D I S A L L O W E D D E D U C T IO N S
Example A— The Tax Court disallowed a deduction for entertainment expenses by a surgeon because no record had been kept of the persons entertained and there was no proof of the business benefit de rived from such expenditures. The court held that the burden of proof was not met “ by the vague statement that the petitioner hoped to derive some business as a result o f the expenditure.” The pe titioner also deducted sums expended as a consequence of the position of his wife as president of a medical society auxiliary. The court did not consider such expendi tures as ordinary and necessary expenses of the doctor’ s practice.
Prepared for, and presented through the courtesy of, the Bcchange National Bank of Chicago, 193
194 • TH E JO U R N A L O F TH E A M ER IC A N DEN TAL A SSO C IA TIO N
suited him of their own volition. The doctor claimed the following items as business deductions: 1. The cost of flowers sent to nurses’ groups, hospitals, and Christmas parties and of candy and tickets to the Police Relief Association benefit given to tele phone operators, elevator operators, sec retaries, and parking lot attendants. 2. The cost of a hunting trip. 3. Gifts to medical associates. 4. The cost of printing copies of an article written by him concerning indus trial surgery. 5. The cost of his own meals in at tending numerous luncheons o f the chamber o f commerce and the hospital council. 6. The cost of entertaining other physicians and their wives and of enter taining persons connected with commer cial organizations and insurance com panies who were in a position to enhance his practice as an industrial doctor. 7. The cost of maintenance and de preciation of a cabin cruiser. The court allowed 25 per cent of the amounts claimed under items 6 and 7 as expenditures for entertainment and for cruiser expense and depreciation as ordinary and necessary expenses of “ trade or business.” All the other items were disallowed. Fundamentally, the court interpreted the evidence as establishing the fact that the deductions taken by the doctor were primarily living costs, expended for the pleasure o f his family and himself. He had made no effort to segregate from his entertainment expenses the por tion that was for the benefit of his family
and himself and therefore essentially per sonal in nature. Since his entertainment expenses included both personal and busi ness entertainment, the court made its own determination as to which portion should be allocated as business expenses. Possibly, if the doctor had made an effort to segregate in his records the business portion of these expenses, the court might have been willing to accept his own determinations rather than arbi trarily make its own allocations. COM M ENT
Cases “ A ” and “ B” point up the need for keeping not only detailed records of business entertainment expenses that the professional man intends to deduct from his gross income but also supporting ex planations showing the business relation ships in connection with each individual item claimed. Bank records are the best. A good practice is to maintain a separate checking account for professional prac tice. All business expenses should be paid by checks drawn on this account. O f course, there are some expenses that it is inconvenient to pay by check. In such instances, a check may be drawn to the maker, indicating on the stub or check the purpose for which the check is made. If a substantial amount of business enter tainment is necessary in the professional man’ s practice, it is desirable to use charge accounts. A notation may be made on the statements as they are re ceived for payment, indicating the names of the persons entertained. It is then essential that the professional man be able to establish that his pro fessional income was influenced by the persons entertained. 53 West Jackson Boulevard