26 T.C. 666">*667 The respondent determined deficiencies in income tax and 5 per cent additions thereto for the years and in the amounts as follows:

The principal controversy between the parties is whether the respondent erred in treating as gross income the full amounts received as commissions on sales of securities in the petitioner's territory. The petitioner treated in his returns, as gross income, the difference between his commissions and the amounts that he reported to his employer as expenses. Other issues concern the deductions1956 U.S. Tax Ct. LEXIS 142">*144 allowable in computing adjusted gross income and net income, the allowance of the standard deduction, and the imposition of the addition for negligence.

FINDINGS OF FACT.

L. L. Moorman, herein called the petitioner, is a resident of North Carolina. ¹ His home in the taxable years was at Rutherfordton. His income tax return for the year 1949 and the joint returns of himself and his wife, Lillian W. Moorman, for the years 1950 and 1951 were filed with the collector of internal revenue for the district of North Carolina. The returns were made on the cash receipts and disbursements method of accounting.

Since 1918 the petitioner has been engaged in some phase of the investment business. In the taxable years, and in 1948, he was employed by the National Securities & Research Corporation, herein sometimes called the corporation or the employer. The corporation1956 U.S. Tax Ct. LEXIS 142">*145 is an underwriter and manager of several mutual investment funds. Through dealers in a number of cities it sells participations in the several funds. The petitioner's designation was that of resident vice president of the corporation. He had the supervision of sales and distribution of the mutual investment funds in what was known as the Southern Territory which consisted of the States of Florida, Georgia, South Carolina, North Carolina, Tennessee, Texas, Louisiana, Oklahoma, Kentucky, Mississippi, and Alabama. His duties, generally, consisted of traveling through his territory, interesting dealers in securities in the offerings of the corporation, and getting the dealers to sell the investment funds to the public. Under the terms of the petitioner's 26 T.C. 666">*668 employment, no longer than 3 months was to elapse between visits to any producing dealer or important territory.

The terms of the petitioner's employment were contained in a letter addressed to him dated August 1, 1947, and modifications thereof in a letter dated January 19, 1948, on both of which the petitioner noted his acceptance. The material parts of the letter of August 1, 1947, are as follows:

The following terms1956 U.S. Tax Ct. LEXIS 142">*146 and conditions will constitute a working agreement under which you are to represent us in the "Southern Territory." * * *

1) It is understood that you are to devote your entire time to the wholesaling of various security offerings underwritten or sponsored by our Company. * * *

* * * *

3) (a) As compensation for your efforts, you are to be paid on all sales of National Securities Series and First Mutual Trust Fund in your territory each month a commission of 40% of the first $ 5,000.00 of "gross sales load" received by the Company on such sales, and 30% of all subsequent "gross sales load" to the Company on such sales during the month. "Gross sales load" represents amounts retained by the Company after payment out of total load of dealer commissions at rates now in effect or hereafter allowed by the Company under its standard Selling Group Agreement and after any extra commissions, concessions, or distributions made to dealers or dealer salesmen in the form of contest prizes or incentive arrangements that may be determined and put into effect by the Company.

* * * *

4) (a) You agree to limit your expenses of operation to the minimum necessary for the proper conduct of your business. 1956 U.S. Tax Ct. LEXIS 142">*147 The Company will reimburse you for all of your expenses which we approve, including compensation of any people employed by you, traveling expenses, telegraph and telephone expenses (except as noted below), and entertainment expenses, but we will deduct the same from the commissions payable to you under this contract. The cost of all wires between dealers and our New York office necessary to the placing of orders, confirmation of sales and requests for quotations are to be paid by the Company without any deduction from the commission. The Company also agrees to pay, without deduction from commissions, expenses in connection with the registration of our issues in your territory.

(b) The Company agrees to meet one-half of the cost of the price card list and any advertising deemed necessary by you and approved by us. The "cost of the price card list" is limited to the purchase cost of the cards and stamps and any mailing depots arranged for in any part of your territory. The cost of preparing any cards in the Home Office will be borne by the Company.

(c) A record of your monthly expenses is to be in our office no later than the fourth business day of the following month. Such expenses1956 U.S. Tax Ct. LEXIS 142">*148 should be broken down roughly under the items of transportation, meals, etc., hotels, and sales promotion. If this record is received by us and the expenses approved before the settlement of your commission account for the previous month, we will exempt the total amount of your expenses from your monthly earnings in calculating your withholding tax on earnings. If we do not get this record from you, it will be necessary for us to take out the withholding tax on your entire gross earnings.

(d) Settlement of your commission account will be made each month within five (5) business days after the close of the previous month and the check for your earnings less deductions will be mailed to you. An advance of $ 500.00 26 T.C. 666">*669 against this monthly settlement will be mailed to you on the 15th of each month. If your gross commissions during the month are not sufficient to cover this advance and other deductions, the deficiency will become a charge against any future net earnings.

The material parts of the letter of modification dated January 19, 1948, are:

1. Section 4 (d) is amended to provide for an advance of $ 500 against commissions earned by you to be made on the first and fifteenth1956 U.S. Tax Ct. LEXIS 142">*149 of each month effective February 1st. It is understood that between now and February 1st you may request an advance of $ 250 to be charged against the February 1st advance and in the event of such request, the amount to be advanced on February 1st will be reduced to $ 250. Commissions earned under your contract will be credited against the aforementioned advances and if your gross commissions during the month are not sufficient to cover your advances and other deductions, the deficiency will become a charge against any future net earnings.

2. It is understood that should your commissions earned in any calendar month exceed the amount of advances and deductions provided for under your agreement, there will be paid to you and charged to your account, 25% of said excess and the remaining 75% of said excess will be credited to your account against advances made.

It is further understood that if your commission earnings credited under your agreement exceed charges made for advances and deductions on a cumulative basis, the excess will then be applied 50% to be paid to you and 50% to be retained by the company as credit in your account until such amount equals $ 2,000, the intent being1956 U.S. Tax Ct. LEXIS 142">*150 that there will always be a $ 2,000 credit to your account to take care of periods during which your earnings will not equal the deductions and advances made to you.

The modification also listed 6 areas in the petitioner's territory that he was to visit at least 3 times a year.

In accordance with his employment contract, the petitioner traveled over the territory assigned to him, sometimes by airplane, but mostly by automobile. Covering the territory was an almost continuous operation, but he spent some time at his home in Rutherfordton. He does not know how much time he spent at home or away from home in the taxable years. He kept daily records of his expenses and the mileage of his automobile used on business trips, from which he compiled a monthly summary that he sent to his employer's New York office. He used the figure of 10 cents per mile as representing the cost of operating his automobile on his business trips. The petitioner's wife accompanied him on 2 or 3 trips each year, each of which trips was of 2 or 3 weeks' duration. Mrs. Moorman was a bookkeeper and stenographer, and performed services for the petitioner in those capacities on the trips that she made with him. 1956 U.S. Tax Ct. LEXIS 142">*151 She also helped him with his entertainment of dealers and their wives. The petitioner did not include in his expense accounts all of the cost of meals for his wife when she was with him, but did include the cost of her meals on the occasions that she assisted him in the entertainment of dealers. His 26 T.C. 666">*670 daily tabulations of expenses for the taxable years were destroyed sometime in 1951 by his wife who took care of his office work. They were not retained because the petitioner considered the expenses to be those of the employer which had been approved, and did not believe it was necessary to preserve them.

The following account for the month of January 1950, is typical of the monthly expense accounts that the petitioner submitted to the New York office:

The items and total amounts shown in the petitioner's expense accounts for the taxable years were as follows:

1956 U.S. Tax Ct. LEXIS 142">*152 The item "Entertainment" represents cost of meals and entertainment of dealers and their wives or groups of dealers. In the expense accounts for each of the years 1949, 1950, and 1951 there is included an amount of $ 300 as either cost of meals or entertainment of petitioner's wife while accompanying him on business trips.

The petitioner did not include in, or attach to, his returns any statement or details concerning his business travels or business expenses.

The expense accounts submitted by the petitioner were checked by the New York office of the corporation for mathematical accuracy, and were then examined by an officer who, if he thought the amounts were in order, indicated his approval by initialing them. The corporation did not make any investigation to determine whether the amounts appearing on the expense accounts represented actual expenditures. The primary function of the monthly expense accounts was to enable the corporation to determine the amount of tax to be withheld. In prospectuses issued by the corporation, the compensation 26 T.C. 666">*671 of officers was shown, followed by parenthetical statements as to the amounts of "approved expenses." The following statement1956 U.S. Tax Ct. LEXIS 142">*153 in the prospectus of July 7, 1951, relating to the year 1950, concerning the petitioner, is typical:

Those officers and directors whose remuneration exceeded $ 20,000 were: * * * L. L. Moorman, Resident Vice-President, $ 30,113.66 (of which $ 16,854.05 was approved expenses); * * *

The amounts so designated as approved expenses were treated by the corporation as traveling expenses on its books and in its income tax returns.

The petitioner was entitled to commissions on all sales of securities that were made by dealers in his territory. The total amounts of those sales, the commissions earned thereon, and the amounts paid by the employer to or for the petitioner for the years 1948 to 1951, inclusive, were as follows:

It was the practice of his employer, in accordance with the provisions of the contract, to send petitioner two checks each month in the amount of $ 500 each, regardless1956 U.S. Tax Ct. LEXIS 142">*154 of the amount of commissions he had earned. His employer also paid him by checks additional amounts from time to time, representing earnings in excess of the advances of $ 1,000 per month, and withheld social security and other taxes based on what it determined to be his earnings. In computing the amount to be paid to the petitioner for the year 1949 the employer deducted a part of the deficit in the petitioner's earnings account for prior years, such deficit being the excess of the amounts paid in prior years to him over the amount of commissions earned. For the year 1950, in arriving at the amount paid, the remainder of the deficit for prior years was deducted from commissions earned and there was also deducted the sum of $ 2,000 in order to establish a reserve or credit in the petitioner's account as provided for in the modifying agreement of January 19, 1948. During the year 1951, the $ 2,000 reserve withheld in 1950 was released and paid to the petitioner.

The employer calculated the amount of wages subject to withholding by deducting from the amount paid in each year the amount of the expense accounts furnished by the petitioner for that year. The amounts so calculated 1956 U.S. Tax Ct. LEXIS 142">*155 and shown on the Forms W-2 as "Total Wages" were as follows: 26 T.C. 666">*672

The amounts shown in the above tabulation were the amounts which the petitioner included in his income tax returns for the years 1948 and 1949 and in the joint income tax returns for the years 1950 and 1951 as "Total Wages" received from National Securities & Research Corporation. Pertinent figures shown on the returns for the years 1949, 1950, and 1951 are as follows:

The respondent determined that in the taxable years the petitioner's gross income from commissions, deductible expenses, and net income were as follows:

For the year 1950, in determining the gross income from commissions, set forth above, 1956 U.S. Tax Ct. LEXIS 142">*156 the respondent deducted from commissions earned the amount of $ 2,000 that was withheld by the employer that year and was set up as a credit in the petitioner's account. For the year 1951, the respondent included in the amount of gross income from commissions the $ 2,000 that had been withheld in 1950 and which was paid to the petitioner in 1951. The amounts allowed by the respondent as deductable expenses in each of the years 1949, 1950, and 1951 represent approximately one-half of the amounts shown in the petitioner's expense accounts as the cost of meals and entertainment, approximately three-fourths of the amounts shown as cost of transportation, and the full amounts of the other items shown in such accounts. For the years 1950 and 1951 the respondent disallowed the optional standard deduction claimed in each return in the amount of $ 1,000.

In determining the deficiency for the year 1950, the respondent determined the correct tax liability to be in the amount of $ 4,338.10, from which he deducted the liability shown on the return in the amount of $ 2,030.84, and stated the amount of the deficiency to be $ 1,307.26. The respondent made an error in the amount of $ 1,000 in 1956 U.S. Tax Ct. LEXIS 142">*157 the subtraction.

26 T.C. 666">*673 The petitioner's returns for the taxable years were prepared by an attorney. The petitioner furnished the attorney with the Forms W-2 that were prepared by his employer, the monthly expense accounts which had been submitted to his employer, and with the monthly statements prepared by the employer which showed the sales of securities in the petitioner's territory, the amounts of commissions earned by the petitioner, the amounts paid to him, and the debit or credit balance of the petitioner's earnings account.

The deficiency for the year 1951 was not to any extent due to negligence or intentional disregard of rules and regulations on the part of the petitioner.

OPINION.

The petitioner included in his returns as gross income from commissions only the difference between the amounts actually paid to him by his employer and the amounts shown in the expense accounts which he submitted to his employer. The respondent has determined that the full amount of commissions earned (with some adjustments for 1950 and 1951 on account of a $ 2,000 reserve) constitutes gross income and computed net income by deducting therefrom the amounts which he determined to be allowable1956 U.S. Tax Ct. LEXIS 142">*158 expenses. In view of this determination he further determined that it would be to the petitioner's advantage to take itemized deductions rather than the standard deduction in computing net income, and therefore disallowed the standard deduction.

The contract of employment clearly provides for the payment of commissions to the petitioner in a stated percentage of sales in his territory. There can be no question that the full amount thereof received by petitioner constitutes gross income to him. Under section 42 of the Internal Revenue Code of 1939, the petitioner must account for all items of gross income in the year in which received, since he employs the cash receipts and disbursements method of accounting. The petitioner says that some part of the amounts received represents expenses of his employer routed through him merely as a conduit and that consequently such amounts do not constitute gross income to him. Even if it were true that some portion of the amount received represented reimbursement of expenses on behalf of the employer the petitioner would not be relieved of the duty to include the amounts in his gross income. But in any event we disagree with petitioner as 1956 U.S. Tax Ct. LEXIS 142">*159 to the nature of the payments. We think it is clear that the amounts received consisted entirely of commissions to which the petitioner was entitled. We hold that the commissions earned by the petitioner should be included in his gross income for each year to the extent received by him.

The amounts of commissions earned, the amounts paid or advanced to the petitioner, and the amounts of gross income determined by the 26 T.C. 666">*674 respondent are not in accord. In 1949, the commissions earned by the petitioner amounted to $ 15,010.03, the amounts paid or advanced amounted to $ 12,930.60, and the amount of commissions includible in gross income as determined by the respondent amounted to $ 14,998.07. We think that no more than $ 12,930.60 should be included in gross income. In accordance with the terms of the employment agreement the employer withheld a portion of the commissions earned in that year to apply against the deficit in the petitioner's earnings account carried over from 1948. The modified employment contract, effective February 1, 1948, provided for advances in the amount of $ 1,000 each month against commissions earned. The commissions earned in any one month would be1956 U.S. Tax Ct. LEXIS 142">*160 credited against the advances, and if the gross commissions were not sufficient to cover the advances and other deductions, the deficiency would become a charge against any future net earnings. Nowhere in the contract was the petitioner made personally liable to repay any such deficiency. An officer of the employer testified that if the petitioner had left the company he would not have been personally liable for any deficiency. Under the circumstances, it is our opinion that any advances received by the petitioner were held by him under claim of right and without restriction as to their disposition and would constitute income at the time received. Accordingly, the amounts received by the petitioner prior to 1949 in excess of commissions earned constituted gross income to him in those years. It would follow that, the petitioner being on the cash receipts and disbursements basis, the amounts of commissions earned in 1949 which were not received by him, but were applied against the deficit in his earnings account for prior years are not income to him in 1949. This was the conclusion we reached in Kenneth Drummond, 43 B. T. A. 529, and we see no essential1956 U.S. Tax Ct. LEXIS 142">*161 difference between the instant case and that case. Accordingly, the amount of $ 12,930.60 is the amount to be included in 1949 income as gross income from commissions.

For the year 1950, commissions earned amounted to $ 35,105.47 and the respondent included in gross income $ 33,115.47 which he said was commissions earned in the amount of $ 35,115.47 less adjustment for reserve in the amount of $ 2,000. ² The so-called reserve figure of $ 2,000 stems from the modification agreement of January 19, 1948, under which the petitioner agreed that his employer could withhold a part of earnings in excess of the amounts of advances and deductions so as to build up a credit of $ 2,000 in the petitioner's account. The amount so withheld by the employer was not available to the petitioner in 1950 and the respondent properly excluded it from gross income. While the record is not entirely clear, it would appear that the petitioner does not question this treatment of the $ 2,000 item. The 26 T.C. 666">*675 difference between the $ 33,105.47 so arrived at and the sum of $ 30,113.66 paid or advanced was retained by the employer to cover deficits in the petitioner's account for years prior to 1949. For1956 U.S. Tax Ct. LEXIS 142">*162 reasons stated in our discussion as to the year 1949, that amount is not properly includible in gross income for 1950. We conclude that the correct amount includible in 1950 as gross income from commissions is $ 30,113.66.

For the year 1951 the petitioner's earned commissions amounted to $ 31,960.35. That amount was paid or advanced to the petitioner in that year, plus the $ 2,000 withheld in 1950, making a total of $ 33,960.35. The latter amount is properly includible in gross income. The respondent included $ 34,060.35. The difference of $ 100 is not explained.

The petitioner incurred expenses in connection with his employment, including expenses of transportation and meals and lodging while away from home on his business trips. No question is raised regarding the petitioner's right to deduct, in computing net income, the traveling and other expenses which were actually paid, in accordance with section 23 (a) (1) (A) of the1956 U.S. Tax Ct. LEXIS 142">*163 Internal Revenue Code of 1939 which provides for the deduction of "All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" and "traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business." However, the question of immediate concern is whether the expenses involved may be deducted from gross income in computing adjusted gross income.

The petitioner contends that under section 22 (n) all of his expenses are deductible in computing adjusted gross income. His further contention is that he is entitled also to the benefit of the standard deduction under section 23 (aa), ³ in computing his net income.

1956 U.S. Tax Ct. LEXIS 142">*164

Section 22 (n), in material part, provides:

(n) Definition of "Adjusted Gross Income". -- As used in this chapter the term "adjusted gross income" means the gross income minus --

* * * *

26 T.C. 666">*676 (2) Expenses of travel and lodging in connection with employment. -- The deductions allowed by section 23 which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as an employee;

(3) Reimbursed expenses in connection with employment. -- The deductions allowed by section 23 (other than expenses of travel, meals, and lodging while away from home) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer;