26 T.C. 1076">*1076 The Commissioner determined a deficiency in petitioners' 1946 income tax in the amount of $ 14,660.05. Petitioners concede that their share of a certain partnership loss was overstated. However, they disagree with the Commissioner's other adjustments. There are three issues to be decided. They involve (1) the Commissioner's disallowance of alleged business deductions in the amount of $ 2,329.52; (2) the Commissioner's disallowance of a net operating loss carryover deduction from the year 1944 to the year 1946 in the amount of $ 52,487.91; and (3) the Commissioner's disallowance of a claimed net operating loss carryback from the year 1947 to the year 1946.

26 T.C. 1076">*1077 In a rehearing of this case, petitioners waived the right to introduce any further evidence other than in rebuttal to that introduced by the Commissioner.

FINDINGS OF FACT.

1956 U.S. Tax Ct. LEXIS 87">*89 Petitioners Dave Rubin and Jennie Feldman Rubin are husband and wife. They resided in Amarillo, Texas, in the years 1946 and 1947 and were engaged in the "oil business." They filed their income tax returns for those years with the collector of internal revenue at Dallas, Texas.

Petitioners' income tax return for 1946 disclosed a net loss of $ 50,209.33. In arriving at this loss, petitioners deducted $ 679.11 for "car expense," $ 4,861.87 for "hotel, meals and travel," and $ 83,341.67 for "1944 loss carry-over." The Commissioner in his deficiency notice for 1946 disallowed, among other things, $ 2,329.52 of the "car expense" and "hotel, meals and travel" deductions as personal expenses and he disallowed the "1944 loss carry-over" in its entirety.

During the year 1946, petitioner Dave Rubin was engaged in business dealings in Amarillo and Dallas. These business dealings involved, among other things, oil leases and the production of oil. He made several trips to and from these cities during that year in pursuit of that business.

Petitioners' income tax return for 1944 showed a net operating loss which after application as a carryback to the years 1942 and 1943 produced a net operating1956 U.S. Tax Ct. LEXIS 87">*90 loss carryover in the amount of $ 52,487.91.

Petitioners' income tax return for 1945 reported a net loss of $ 10,808.39. In computing this net loss, petitioners claimed a deduction for depletion of $ 2,520.43 and excluded $ 75,076.75 of long-term capital gains.

Petitioners' income tax return for 1947 reported a net loss of $ 109,821.89. On December 29, 1952, they filed an application for tentative carryback adjustment for the year 1947 to the year 1946 on Form 1045 in the amount of $ 99,401.98 and a claim on Form 843 for refund or abatement of tax resulting from the application of the carryback from 1947 to 1946 in the amount of $ 14,660.05.

Petitioners' income tax returns for 1946 and 1947 were prepared from their books and records by William Swenson, a certified public accountant. Swenson did not keep petitioners' books and records in the regular course of business, nor were they kept under his supervision. Swenson's activity was limited to the final preparation of petitioners' income tax returns.

On and prior to August 22, 1946, Dave Rubin owned an undivided one-half interest in certain properties which was the subject matter of a contract made on April 5, 1947, between Dave1956 U.S. Tax Ct. LEXIS 87">*91 Rubin, G. E. Hall, and Joe Stewart. Rubin also held a power of attorney over an undivided 26 T.C. 1076">*1078 one-eighth interest in such properties at that time. Such interest was owned by William Saxe, Henry I. Saxe, Charlotte E. Saxe, and Maurece T. Saxe. Milton Rosenblume, Miriam Emmer, and Mannie Jack Rubin each owned an undivided one-eighth interest in such properties at that time.

Prior to April 5, 1947, a friendly suit for partition was begun in the District Court of Potter County, Texas, in which all of the above-named individuals plus certain others were made parties. Still prior to April 5, 1947, Rubin acquired from Milton Rosenblume, Miriam Emmer, and Mannie Jack Rubin, all of the interests which they owned in the above-mentioned properties except for certain overriding royalties. This was accomplished by the exchange of deeds, conveyances, and assignments among the parties.

On April 5, 1947, Rubin entered into an agreement with G. E. Hall and Joe Stewart which concerned the above-mentioned properties. Part of the agreement is subsequently recited.

The partition decree dated July 29, 1947, provided, among other things, that Hall and Stewart each owned undivided one-fourth1956 U.S. Tax Ct. LEXIS 87">*92 interests in the properties and certain mineral rights, that Milton Rosenblume, Miriam Emmer, Mannie Jack Rubin, William Saxe, Henry I. Saxe, Charlotte E. Saxe, and Maurece T. Saxe all were vested with certain overriding royalties in the properties and that Dave Rubin was vested with the title formerly vested in all of the above parties. Rubin thus had an undivided one-half interest in such properties after the partition was complete.

The above-mentioned Rubin-Hall-Stewart agreement provided in part as follows:

For and in consideration of the rights herein granted, and of the promises of grantees, and of the duties and obligations undertaken and assumed by the grantees, as herein set forth, the said grantor, Dave Rubin, of the County of Potter, State of Texas, has granted, sold, assigned, and conveyed, and does by these presents grant, sell, assign, and convey unto the said grantees, G. E. Hall and Joe Stewart each an equal undivided one-fourth of the following described real and personal property:

[The described property included, among other things, oil and gas leases, minerals, mineral interest and gas purchase agreements.]

* * * *

(a) As consideration for the foregoing grant, 1956 U.S. Tax Ct. LEXIS 87">*93 sale, assignment, and conveyance, the said G. E. Hall and Joe Stewart, grantees, agree and promise Dave Rubin, grantor, that they will refinance grantor to the amount of $ 750,000.00, or to the amount of his indebtedness as of April 1, 1947, whichever amount is the smaller, by taking up, either directly or through Dave Rubin, such indebtedness as is owing by Dave Rubin or stands as charges or incumbrances against the property described * * * above * * * and that grantees will hold the amount of such indebtedness, after taking it up, as a charge or incumbrance against the oil and one-half of the gas to be produced from all the lands described in the aforesaid legal description paragraphs hereof, until the full amount of such indebtedness so to be taken up shall be repaid to the grantees * * *

26 T.C. 1076">*1079 (b) The grantees shall, as a material and primary consideration for this conveyance, grant, and assignment, drill and equip on said lands six wells for producing oil during each month hereafter, beginning immediately; provided only that material, supplies, and labor necessary for drilling and equipping six wells per month are available; if materials, supplies, and labor for drilling1956 U.S. Tax Ct. LEXIS 87">*94 and equipping six wells per month are not available, the grantees shall nevertheless drill and equip at least three wells per month until one hundred wells shall have been drilled and equipped on said land on 20 acre locations to be made by them; * * * The price for the drilling and equipping of each well hereunder is agreed to by [sic] $ 26,500.00, and grantees shall receive payment for that amount per well, out of production for drilling and equipping them as herein specified. * * *

(c) It is agreed that grantor shall be entitled to manage and sell the gas produced from said lands, after it is produced, and the $ 2,550,000.00 consideration to be paid to grantor, as hereinafter specified and provided, shall receive credit for one-half of all proceeds of the sale of the gas until all amounts payable to grantees out of production provided for herein shall be fully paid; thereupon and thereafter said one-half of all proceeds of the sale of the gas shall be paid into the operating fund which is established herein.

* * * *

(e) Of all the proceeds of the oil and one-half the gas produced from said lands after grantees shall have received enough to liquidate and discharge the amount1956 U.S. Tax Ct. LEXIS 87">*95 expended by grantees in taking up the indebtedness of grantor, as aforesaid, and the amount of $ 26,500.00 per well for each well of the first fifty wells that grantees shall drill and equip hereunder, all royalties specified in the aforesaid leases shall be paid out of the production from which such royalties are payable under the terms of such leases; likewise, all the overriding royalties payable by the terms of grants or reservations shall be paid. Twenty-five per cent of the proceeds of all the oil and one-half the gas not necessary to pay the foregoing items, royalties, and overriding royalties, shall constitute an operating fund, and seventy-five per cent of all the oil and one-half the gas not necessary to pay the foregoing items, royalties, and overriding royalties, shall constitute a drilling fund; but although these two funds are established, the establishing of them shall in nowise impair or militate against the right of G. E. Hall and Joe Stewart to manage both funds together * * * until full payment to G. E. Hall and Joe Stewart has been made for each of the second fifty wells that they shall drill and equip hereunder.

(f) Until grantees shall have received from the1956 U.S. Tax Ct. LEXIS 87">*96 aforesaid production the amount expended by them in taking up the aforesaid indebtedness of grantor and the amount necessary to pay grantees $ 26,500.00 for the drilling and equipping of each of the 100 wells that they shall drill and equip hereunder, the grantees shall be entitled to receive and disburse all the proceeds of the sale of the production except one-half of the proceeds of the sale of the gas, from said leases, in accordance with the terms hereof; * * *

(g) After all amounts specified in paragraphs (a), (e), and (f) above have been fully liquidated and discharged, the royalties and overriding royalties shall thereafter be paid as in said paragraphs (a), (e), and (f) specified, and the costs and expenses of operating such properties; and, in the discretion of grantees, the drilling and equipping of any additional wells shall be paid out of the operating fund. Of the remaining seventy-five per cent of the proceeds of all the oil and gas, Dave Rubin shall be entitled to one-half on his own account and the grantees shall be entitled to the other one-half on their own account; and the parties shall be paid directly by the purchasers of such production, 26 T.C. 1076">*1080 except that1956 U.S. Tax Ct. LEXIS 87">*97 Dave Rubin shall also be paid directly by the purchasers of such production one-half of the one-half to which the grantees are entitled, until Dave Rubin shall have received from the proceeds of one-half of grantees' one-half the sum of two million five hundred and fifty thousand dollars, less whatever amount Dave Rubin shall have already received from one-half of the proceeds of the sale of gas, this payment of $ 2,550,000.00 out of such production being consideration to grantor for making this grant, sale, assignment, and conveyance.

Hall and Stewart paid $ 750,000 to certain creditors of Rubin during the year 1947 pursuant to the above contract.

Petitioners, in their 1947 income tax return, reported $ 485,265.50 as consideration for the sale of properties to Hall and Stewart, which amount was reflected on Rubin's books and records as payment of his debts by Hall and Stewart during 1947. In their 1947 income tax return, petitioners claimed an adjusted basis in the amount of $ 493,474.26 (cost $ 527,097.16 less depreciation and depletion $ 33,622.90) for determining gain or loss on the transaction with Hall and Stewart.

A revenue agent examined petitioners' income tax returns for1956 U.S. Tax Ct. LEXIS 87">*98 the years 1947, 1948, and 1949. He determined that the correct basis for computing gain or loss on the sale of the undivided one-fourth interests in the properties transferred, sold, assigned, and conveyed to Hall and Stewart was $ 212,744.56. After completion of the examination of petitioner's income tax return for 1947, corrected taxable income for that year amounted to $ 91,412.50. However, a deficiency for 1947 was not determined by the Commissioner since petitioners' income tax return for 1949 reflected a loss in excess of $ 300,000, which, when carried back, would result in no taxable income for the year 1947.

Ultimate Findings of Fact and Conclusions of Law.

Petitioners' living expenses at the Hotel Herring in Amarillo in the amount of $ 1,131.76 were personal expenses.

Petitioners' transportation expenses between Amarillo and Dallas in the amount of $ 508.49 were ordinary and necessary business expenses.

Cash expenditures of petitioners in the amount of $ 689.27 were personal expenses.

Petitioners' net operating loss carryover from the year 1944 must be applied against their net income for 1945 as adjusted under section 122 (d) before it may be carried over to the year1956 U.S. Tax Ct. LEXIS 87">*99 1946.

Petitioners' debts were discharged by Hall and Stewart in the amount of at least $ 485,265.50 in the year 1947, pursuant to the contract entered into by Rubin, Hall, and Stewart on April 5, 1947.

Petitioners did not prove a net operating loss for the year 1947.

26 T.C. 1076">*1081 OPINION.

The first issue in this case involves the propriety of the Commissioner's disallowance of $ 2,329.52 in claimed business deductions for the year 1946 for lack of substantiation. The amount disallowed consisted of three items: Living expenses at the Herring Hotel in Amarillo, Texas, in the amount of $ 1,131.76; transportation expenses between Amarillo and Dallas, Texas, in the amount of $ 508.49; and "cash expenditures" in the amount of $ 689.27. Petitioners argue that these amounts represent ordinary and necessary expenses paid by them during the taxable year in carrying on their trade or business and thus they are deductible under section 23 (a) of the Internal Revenue Code of 1939.

The Commissioner determined that the living expenses incurred at the Hotel Herring were personal expenses and with this we agree. If travel expenses, including the entire amount spent for food and lodging, are to be1956 U.S. Tax Ct. LEXIS 87">*100 deductible they must be ordinary and necessary and they must be paid or incurred by the taxpayer while away from home in the pursuit of his trade or business. Sec. 23 (a) (1) (A). Swenson, the accountant who prepared petitioners' income tax returns, testified that petitioners' home in 1946 was in Dallas and that they made several business trips to Amarillo that year. On the other hand, Rubin testified that in 1946 his home was in Amarillo. Also petitioners' 1946 income tax return, prepared by Swenson, gave an Amarillo address. Though the evidence as to residence is contradictory we have found that petitioners' home in the year 1946 was in Amarillo, not Dallas. Therefore, their expenses at the Hotel Herring in Amarillo were not deductible since not paid or incurred while away from home. They were personal expenses as the Commissioner had determined.

The Commissioner disallowed transportation expenses between Amarillo and Dallas for the year 1946 in the amount of $ 508.49. He determined that these represented personal expenses. We do not agree. Dave Rubin had business dealings in both Amarillo and Dallas during 1946. His testimony indicated that he maintained a business office1956 U.S. Tax Ct. LEXIS 87">*101 in Dallas that year. He also testified that he traveled between Amarillo and Dallas on business during 1946. Twenty-four canceled checks, totaling $ 537.81, paid to the order of Braniff Airways Incorporated and drawn by Dave Rubin were also presented in evidence. The Commissioner argues that petitioners have not overcome the burden of proof that is placed upon them. In view of the evidence, we hold that the Commissioner erred in disallowing travel expenses in the amount of $ 508.49 for the year 1946.

26 T.C. 1076">*1082 Petitioner Dave Rubin drew many checks payable to the order of "cash" during the year 1946. He claimed that certain of them were spent on ordinary and necessary business expenses during that year and deducted them on his income tax return. The Commissioner disallowed these deductions to the extent of $ 689.27. Rubin testified that although he could read, he was unable to write any words other than "Dave Rubin" and "cash," hence the necessity for drawing his checks to the order of cash and not to specific persons. Petitioners introduced into evidence 27 checks totaling $ 873, drawn to the order of cash. On examination we find that 17 of these checks, totaling $ 530, 1956 U.S. Tax Ct. LEXIS 87">*102 had been cashed by Rubin at his own bank in Dallas, at a store called Morris Mens Wear in Dallas, or at the Herring Hotel in Amarillo. No other documentary evidence was introduced to substantiate petitioners' position. In view of the evidence, or lack of it, we hold that petitioners have not shown that the Commissioner erred in determining that "cash expenditures" in the amount of $ 689.27 were personal expenses and hence not allowable as deductions.

Petitioners argue that they are entitled to a deduction on their 1946 income tax return in the amount of $ 52,487.91 under section 23 (s) of the Internal Revenue Code of 1939 as a net operating loss carry-forward from the year 1944.

Section 23 (s) allows a deduction for a net operating loss as computed under section 122. The relevant provisions of section 122 are as follows:

(a) Definition of Net Operating Loss. -- As used in this section, the term "net operating loss" means the excess of the deductions allowed by this chapter over the gross income, with the exceptions, additions, and limitations provided in subsection (d).

(b) Amount of Carry-Back and Carry-Over. --

* * * *

(2) Net Operating Loss Carry-Over. --