In respondent's determination of deficiency directed to Farms (petitioner in Docket No. 1174-63) covering the year ended March 31, 1959, he disallowed deductions on account of "Guest house expenses and depreciation" in the sum of $14,557.82. His explanation of this adjustment is as follows:

"(b) In your return you claimed cash expenditures and depreciation in respect to the officers' guest house in the amounts set forth below:

"It has been determined that the amount of $3,738.12 constitutes ordinary and necessary business entertainment expense1966 Tax Ct. Memo LEXIS 88">*105 for which a deduction is allowable and that the remaining amount of $14,557.82 was not ordinary and necessary business expense and was not provided for the convenience of the employer."

In respondent's determination of deficiency directed to Farms (petitioner in Docket No. 1174-63) covering the year ended March 31, 1960, he disallowed deductions on account of "Guest house expenses and depreciation" in the sum of $13,294.46. His explanation of this adjustment is as follows:

"(c) In your return you claimed cash expenditures and depreciation in respect to the officers' guest house in the amounts set forth below:

"It has been determined that the amount of $3,739.28 constitutes ordinary and necessary business entertainment expense for which a deduction is allowable and that the remaining amount of $13,294.46 was not ordinary and necessary business expense and was not provided for the convenience of the employer. 1966 Tax Ct. Memo LEXIS 88">*106 "

The Petersons used the house for the entertaining of business and nonbusiness guests. Frequently people stayed overnight in the house. Lorrayne Peterson maintained a guest book and visitors' register in the house for guests. Included in this record were personal guests and relatives of the Petersons as well as business guests.

Petitioners' guest records indicate the following with regard to overningt visitors:

It was conceded by petitioners that "[business] guests would normally not stay [in the house] on either Saturday or Sunday night. They probably would not stay on Friday nights either but they might."

A considerable number of business overnight guests are included in the above figures. However, the exact number is not disclosed by the record.

The Petersons had the services of Cleo Whitfield and his wife in taking care of the house. His wife did the general cleaning in the house and he maintained the grounds about the house, the airport grounds, and opened and closed1966 Tax Ct. Memo LEXIS 88">*107 the gates to the company roads.

The fair rental value of the premises in question, occupied and used by the Petersons, was not less than $400 per month during the taxable years.

The parties have stipulated that with respect to the fair market rental value of the residence facilities furnished to the individual petitioners by the corporate petitioner, there was sufficient accumulated earnings and profits to support dividend treatment of these amounts.

Lloyd E. and Lorrayne Peterson's joint income tax returns for the fiscal years 1958, 1959, and 1960 indicate that the total wages paid to Lloyd E. Peterson by Peterson Farms, Peterson Produce, and Peterson Sales were as follows:

Petitioner Lloyd E. Peterson's salaries from his various corporations and their net profits before income taxes for fiscal years ended August 31, 1949 through1966 Tax Ct. Memo LEXIS 88">*108 March 31, 1960 (stated in thousands), are as follows:

A comparison of the above-mentioned total of net profits for the three corporations with petitioner Lloyd E. Peterson's total salaries therefrom is as follows (in thousands of dollars):

The salary levels paid executive employees, such as petitioner Lloyd E. Peterson, in the poultry industry generally covers a range of approximately $40,000 to $120,000 per year.

Opinion

KERN, Judge: The principal questions presented for our decisions are: (1) Whether the whole or any part of the value of the food and lodging furnished petitioners Lloyd E. and Lorrayne Peterson is excludable from their gross income under section 119 of the 1954 Code, and (2) whether the deductions which Peterson Farms, Inc., claimed relating to expenses of maintaining a guest house and depreciation thereof, in which petitioners Lloyd E. and Lorrayne Peterson lived, are properly considered in whole or in part "ordinary and necessary expenses" of a trade or business and a reasonable allowance for exhaustion under sections 162(a) and 167 of the 1954 Code.

Section 119 of the 1954 Code ² has two tests for determining whether the value of meals furnished to an employee is excludable from gross income. They are that the meals be furnished on the business premises of the employer and that they be furnished1966 Tax Ct. Memo LEXIS 88">*110 for the convenience of the employer. See section 1.119-1(a), Income Tax Regs. The statute and regulations add a third test in the case of lodging furnished by the employer - that the employee be required to accept the lodging as a condition of employment. See section 1.119-1(b), Income Tax Regs.

1966 Tax Ct. Memo LEXIS 88">*111 Petitioners argue that the instant cases come within all of the tests of both the statute and regulations. They urge that the house was constructed in the heart of the property of Farms and that it was adjacent to the location of Lloyd E. Peterson's work. They point out that the board of directors of Farms had determined that a facility of this type was necessary in order to entertain business prospects because of the lack of overnight accommodations in the area. Moreover, they contend that petitioner's supervision of the cockerel pedigree work required that he closely observe the bird selection process during "all hours of the day and night during the selection period" and that his residence "in the business guest house" was prescribed by the board of directors of Farms "as a condition of [Lloyd Peterson's] employment." In support of their position petitioners cite William I. Olkjer, 32 T.C. 464">32 T.C. 464, and Arthur Benaglia, 36 B.T.A. 838">36 B.T.A. 838.

Respondent contends that the record establishes that the services performed by petitioner were of a supervisory nature which could be adequately performed even if he had not lived on the business premises of Farms. Moreover, 1966 Tax Ct. Memo LEXIS 88">*112 he urges that the resolutions of the board of directors of Farms with regard to the house and Lloyd Peterson's residing therein as a condition of his employment do not constitute proof of the fact that the Petersons were required to live in the guest house as a condition of Peterson's employment, because the board of directors was completely dominated by Peterson on account of his controlling stock interest. In support of his contention, respondent cites the language used by this Court in its opinion in Mary B. Heyward, 36 T.C. 739">36 T.C. 739, affd. per curiam, 301 F.2d 307.

Our findings have set out the nature of petitioner Lloyd E. Peterson's work for Peterson Farms, Inc. His own testimony established that he supervised the entire operation of the business, and that he paid especial attention to the breeding process and the selection of birds. He made every individual decision with regard to the breeding process.

Although it is clear from the record that the facility in question was on the "business premises" of the employer, Farms, we are of the opinion that the petitioners have not established that they were either required to live upon the premises as a condition1966 Tax Ct. Memo LEXIS 88">*113 of their employment, or that the housing in question was furnished for the convenience of the employer. An examination of petitioner's duties reveals that, notwithstanding his constant attention to the various aspects of the business of Peterson Farms, Inc., he was not required to be present at all times of the day and night. Rather, his responsibilities were of a supervisory nature and could be properly performed without living on the business premises of the employer.

The instant cases are unlike either that of 32 T.C. 464">William I. Olkjer, supra, or 36 B.T.A. 838">Arthur Benaglia, supra. In Olkjer the taxpayer employee was working in an area where the only living facilities available were at the jobsite. If the housing and meals were not provided by the employer, no work could have been accomplished by the employee. In the Benaglia case the taxpayer was a manager in full charge of several hotels. We found that "[his] duty was continuous and required his presence at a moment's call." See 36 B.T.A. 838">Arthur Benaglia, supra at 839.

In the instant cases we are not persuaded by the record before us that petitioners have successfully borne their burden of proving that the meals1966 Tax Ct. Memo LEXIS 88">*114 and lodging furnished to the Petersons by Farms were "for the convenience of the employer" or that Lloyd E. Peterson was "required to accept such lodging on the business premises of his employer as a condition of his employment." The Petersons maintained a home in the town of Decatur prior to 1957. There is no evidence with regard to the distance between this home and the business premises of Farms and its predecessor corporation or with regard to any inconvenience suffered by his employer by reason of the Petersons' residence in Decatur. There is no evidence as to any material change in the character of the business of Farms in 1957 and subsequent years, and no evidence that a suitable residence could not be found in Decatur. In 1955 the Petersons themselves first formed the intention of constructing a residence on their property adjacent to the business premises of their wholly owned corporation. Construction of the residence was practically completed before any corporate resolution was adopted which purported to require Peterson to accept lodging on the business premises of Farms as a condition to his employment as president. At that time he owned all but two shares of the stock1966 Tax Ct. Memo LEXIS 88">*115 of Farms, and his wife and mother owned those two shares. On the record before us we are unable to accept "the bona fides of the employer's demand" that Peterson occupy lodging on Farms' premises as a condition of his employment as president. See 36 T.C. 739">Mary B. Heyward, supra at 744.

We therefore conclude that neither Lloyd nor Lorrayne Peterson lived in the house for the convenience of the employer nor as a condition of employment within the meaning of section 119.

Although the house was partially used on frequent occasions for entertainment of customers, this fact did not require that the Petersons reside in it. 36 T.C. 739">Mary B. Heyward, supra at 745; Dean v. Commissioner, 187 F.2d 1019, affirming a Memorandum Opinion of this Court; Chandler v. Commissioner, 119 F.2d 623, affirming 41 B.T.A. 165">41 B.T.A. 165. Whether adequate facilities for the entertainment of clients existed in the area is not a factor in considering the question of the necessity for the Petersons to occupy the house.

We conclude that the fair market value of the meals and lodging is includable in the gross income of the Petersons for the years 1958, 1959, and 1960.

1966 Tax Ct. Memo LEXIS 88">*116 Our findings contain the schedule in which respondent has determined the additional amounts to be included in the Petersons' gross income for the years in question. Respondent's determination with regard to the fair market value of the rent for such a house indicates that he believes that the rental value was approximately $817.86 per month for 1958, $867.74 per month for 1959, and $873.82 per month for 1960. Petitioners argue that the fair rental value of the house did not exceed $300 per month.

The record contains the testimony of only one expert witness on this subject, a real estate man in the area. He testified that there was little rental activity in Decatur and its environs. His only knowledge with regard to rentals in the vicinity of Decatur concerned a house worth $28,000, which was rented for $125 per month.

Upon the record before us and using our best judgment, we have concluded that the fair market rental value of the house was not less than $400 per month.

Respondent has also included in the Petersons' gross income other cash expenses made by the corporation relating to the upkeep of the house. These expenses consist of repairs, maintenance, household supplies, 1966 Tax Ct. Memo LEXIS 88">*117 special food for guests, and utilities, etc. Respondent has allowed a portion of the expenses for each year as pertaining to the operation of the house as a business guest house and has included only the balance in the gross income of the Petersons.

Petitioners have failed to prove that respondent's allowances did not fairly approximate the ordinary and necessary expenses of the house which related to the conduct of the business of Peterson Farms, Inc. Therefore, we decline to disapprove his determinations with regard to this issue.

Peterson contends that, because the amount of $790.34 was mistakenly paid to him in 1959 by Farms, respondent erred in including this amount in his income for 1959. Petitioner urges that he has "acknowledged the debt and is not holding the amount under any claim of right," and therefore the amount is not income to him in 1959. As authority for this proposition he cites the District Court opinion in Ansco Photo Products v. Clark, 34 F.2d 568.

Respondent contends that this issue is not properly before us because petitioner's position on this question was not specifically pleaded in the petition. We do not agree. The item was included1966 Tax Ct. Memo LEXIS 88">*118 in respondent's computations accompanying his notice of deficiency, and petitioner alleged in his petition that he "did not receive any dividends from Peterson Farms, Inc."

With respect to the merits, respondent argues that the facts do not support a finding that such a liability from Peterson to Farms exists. Therefore, he concludes that the rule enunciated by the Supreme Court in United States v. Lewis, 340 U.S. 590">340 U.S. 590, should apply making the $790.34 payment taxable to Peterson in the year of its receipt.

We agree with respondent that the record does not contain any evidence tending to establish the existence of a debt from Peterson to Farms during the taxable years. It appears to us that notwithstanding petitioner's acknowledgment of a debt at the time of trial, no payment of which is shown by the record, he held these funds prior to that occasion under a claim of right without any restrictions as to their disposition. His later recognition of a superior right in the corporation to these funds does not afford him any relief from respondent's determination that this payment represented taxable income to him in the year of its receipt, 1959. 340 U.S. 590">United States v. Lewis, supra;1966 Tax Ct. Memo LEXIS 88">*119 Estate of Samuel Stein, 37 T.C. 945">37 T.C. 945, 37 T.C. 945">957. Petitioner's reliance upon the Ansco Photo Products case is misplaced. There the taxpayer established that he was a conduit who received funds from one party and was under an obligation to deliver them to another party. In the instant cases no such distinguishing fact is present.

The issues with respect to the deficiencies determined against Peterson Farms, Inc., concern whether the expenses which Farms incurred for the maintenance of the guest house constitute "ordinary and necessary expenses" deductible under section 162(a) of the 1954 Code. Also at issue is whether certain amounts relating to depreciation of equipment and all of the depreciation of the guest house constituted reasonable allowances for the exhaustion of property used in trade or business under section 167.

Petitioner argues that the purpose and use of the house clearly indicate that depreciation is allowable under section 167 and that the expenses in connection with the house are properly deductible under section 162(a). He further contends that if we conclude that the value of the meals and lodging furnished the Petersons is includable in their gross income1966 Tax Ct. Memo LEXIS 88">*120 (as we have so done), then we should characterize this additional income as compensation to the Petersons rather than as a dividend.

Respondent urges that most of the expenses incident to the operation of the guest house and the depreciation thereof are not allowable because the principal use of the residence was as a home for the Petersons. He maintains that Farms has been allowed deductions of part of the amount claimed for business entertainment done by the Petersons on behalf of Farms, and that petitioner has not established that this allowance was erroneous. Respondent argues that the value of the lodging and the expenses pertaining to the house, which we have included in the Petersons' gross income for the years 1958 through 1960, constitute a taxable dividend to Peterson, a dominant stockholder in Farms.

The problem of what constitutes an ordinary and necessary business expense within the meaning of section 162(a) of the 1954 Code ³ has long been a difficult question which must be decided according to the peculiar facts which each case presents. See, e.g., Welch v. Helvering, 290 U.S. 111">290 U.S. 111.

1966 Tax Ct. Memo LEXIS 88">*121 We recognize that a certain amount of bona fide business entertaining was done by the Petersons in the house during the years in question. However, petitioners have not proved that the amounts allowed to Farms as deductions on this account were not adequate to defray the cost of such business entertainment.

We have also not neglected the fact that some bona fide business entertainment of non-overnight guests took place during the years 1958 through 1960.

In estimating the cost of the expenses incurred by Farms for business entertainment of the overnight and non-overnight guest type, we have employed the approximation method as prescribed in Cohan v. Commissioner, 39 F.2d 540, since the rule of this case still applies to the years before us. ⁴

After consideration of the needs of the corporation Farms for adequate facilities to entertain customers and provide them with overnight lodging, and the use and allocation of certain space in the residence1966 Tax Ct. Memo LEXIS 88">*122 in question for that purpose, we have concluded that 25 percent of the depreciation claimed by Farms on the house and furnishings therein is allowable as a reasonable allowance for the exhaustion of property used in trade or business under section 167(a)(1) of the 1954 Code. We have again relied upon the rule of Cohan v. Commissioner, supra, in order to reach this result. See also Walter M. Joyce, 25 T.C. 13">25 T.C. 13, 25 T.C. 13">15, 25 T.C. 13">16; cf. Louis Greenspon, 23 T.C. 138">23 T.C. 138, 23 T.C. 138">151, affd. on this issue, 229 F.2d 947.

Respondent also adjusted the depreciation allowances relating to certain other farm buildings and equipment. Since petitioner has not presented any evidence with regard to this issue, respondent's determinations are approved.

We turn now to the question which was presented to us upon rehearing, i.e., whether the additions to the Petersons' gross income, as we have found them, should be regarded as compensation or dividends to them from Farms. Respondent determined in his notice of deficiency to Lloyd E. and Lorrayne Peterson that the additional amounts includable in their income were dividends from Farms. This determination is presumptively1966 Tax Ct. Memo LEXIS 88">*123 correct, and the corporate petitioner has the burden of proving that this was not the character of this additional income. Botany Mills v. United States, 278 U.S. 282">278 U.S. 282.

Respondent contends that the only intention exhibited by the board of directors of Farms was to procure a section 119 exclusion of the value of the meals and lodging furnished the individual petitioners. He argues that there is no evidence that Farms intended these amounts to be additional compensation to Lloyd E. Peterson, and urges if Farms had done so, the total of Lloyd E. Peterson's compensation would have been unreasonable. Respondent concludes that such amounts were dividends to the individual petitioners, and hence, non-deductible by Farms.

Petitioners emphasize the importance of Lloyd E. Peterson's work for Farms and his individual responsibility for the entire breeding program and calls our attention to the fact that in 1959 the directors of Farms fixed a cash salary of Lloyd E. Peterson and noted that he was to continue his residence at the guest house of the corporation as one of the "conditions of employment, previously made." Petitioners also stress the increase in the gross sales of1966 Tax Ct. Memo LEXIS 88">*124 Farms during the years in issue, the testimony of its accountant as to salary levels in the poultry breeding industry, and the fact that Lloyd E. Peterson was paid no salary from Farms for the first two fiscal years at issue and $12,000 for the fiscal year ended March 31, 1960.

What constitutes a reasonable allowance for salary is a question of fact dependent upon the circumstances of the individual case. Gem Jewelry Co. v. Commissioner, 165 F.2d 991, affirming a Memorandum Opinion of this Court. We are not inclined to accord much weight to the statement as contained in the minutes of the board of directors of Farms in view of the domination of the corporation by Lloyd E. Peterson arising out of the fact that he and his wife owned all of its shares. Kerrigan Iron Works, Inc., 17 T.C. 566">17 T.C. 566; Glenshaw Glass Co. v. Commissioner, 175 F.2d 776, affirming a Memorandum Opinion of this Court. Nor are we disposed to consider the ratio between salary and net earnings to be dispositive of the matter. See L. Schepp Co., 25 B.T.A. 419">25 B.T.A. 419, 25 B.T.A. 419">429-430.1966 Tax Ct. Memo LEXIS 88">*125

While the corporate petitioner is accurate in its contention that for two of the three fiscal years in question Lloyd E. Peterson did not receive any cash remuneration from Farms and for the third year was paid $12,000, we have also considered the total salaries received by him from all three of his corporations during these years.

Notwithstanding the closely-held character of the three corporations, we are impressed with the fact that the success of the entire enterprise, including the business of the corporate petitioner herein, was substantially due to the efforts of Lloyd E. Peterson. The record is replete with the many duties he discharged on behalf of his corporations, including the highly important task of selecting the poultry for breeding which was performed for Farms.

Because the formal recitation of corporate intent, as set out in corporate minutes, is not particularly reliable in cases wherein the corporation is closely held, we have looked to the description and financial results of the tasks performed by Lloyd E. Peterson on behalf of the corporate petitioner and the uncontradicted testimony of the accountant who was familiar with salary levels of executives in1966 Tax Ct. Memo LEXIS 88">*126 the poultry industry. He testified that the range in this industry was from $40,000 to $120,000 per year.

We conclude on the basis of all the evidence as presented in the record that the additional income to the individual petitioners represented by the fair market value of the food and lodging afforded them was compensation to them and hence deductible by Farms.

Decisions will be entered under Rule 50.