at the same rate as other stables had theretofore been charging the corporate petitioners.

Some of the horses were sold at substantial profits. Stud fees were collected and credited to advertising.

The cost of the first two horses purchased by Dairy in 1941 was charged to advertising and claimed as a deduction in that year, the deduction being allowed by the Commissioner. Two additional horses were purchased by Dairy in June, 1945, and three others by Brass Rail in June and July of 1942. The horses were four to six years of age when acquired and were assigned a useful life of eight years by their owners for depreciation purposes. The claims of the corporate petitioners for depreciation deductions on the horses purchased after 1941 were disallowed by the respondent. They were allowable deductions.

The amounts expended by Brass Rail and Dairy for care and maintenance of the horses, transporting them to the various horse shows, entry fees and other miscellaneous expenses, were as follows:

The corporate petitioners claimed deductions in those amounts in those years as ordinary and necessary business expenses for purposes of advertising. The deductions were disallowed by the respondent. They were ordinary and necessary expenses of the businesses.

Dairy purchased some bridles, saddles, drapes, and a trunk during 1942, 1943, and 1944 for use in the training and showing of its horses. These items were assigned a useful life of five years and Dairy claimed depreciation deductions thereon. The deductions were disallowed by the respondent. The deductions were allowable.

An automobile was purchased and maintained by Brass Rail for the use of DeLucia. It was used 90 per cent for business purposes and 10 per cent for nonbusiness purposes of DeLucia during 1941, and the nonbusiness use during 1942 and 1943 was negligible.

Brass Rail claimed deductions for the years 1941, 1942, and 1943 in the respective amounts of $934.22, $459.97, and $234.37 representing expenditures for the operation and maintenance of the automobile. The respondent disallowed 60 per cent of those deductions, and ineluded the 60 per cent disallowed in 1941 in DeLucia's taxable income for that year. The entire expenditures were ordinary and necessary expenses of the business.

Brass Rail claimed deductions for the years 1941, 1942, and 1943 in

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the respective amounts of $741.77, $753.19, and $753.19, representing depreciation on the automobile. The respondent disallowed 60 per cent of those deductions and included the 60 per cent disallowed in 1941 in DeLucia's taxable income for that year. The entire amounts claimed were allowable deductions.

Brass Rail employed a driver for the automobile prior to 1938. The driver was on duty from 8 a. m. to 6 p. m. daily. The "forty hour law" came into effect in 1938, limiting the number of hours an employee could work if employed by a concern employing more than eight persons. The board of directors of Brass Rail then requested DeLucia to pay the driver's salary himself, which he did thereafter. Brass Rail did not reimburse him for such expenditures.

DeLucia expended the following amounts in 1941 in connection with the employment of a chauffeur:

He claimed a deduction for the total amount as an ordinary and necessary business expense. The deduction was disallowed by the respondent. Ninety per cent of the expenditures were ordinary and necessary expenses of his business.

Brass Rail expended $424.50 in 1942 and 108 in 1943 on liquor which was used for entertaining men from whom the companies purchased supplies. The liquor was kept in the company office at all times. The company claimed deductions for those amounts as miscellaneous business expenses. The deductions were disallowed by the respondent. The expenditures were ordinary and necessary expenses of the business.

OPINION.

MURDOCK, Judge: Brass Rail and Dairy purchased some show horses and also some show dogs. They contend that they obtained those animals for advertising purposes. The Commissioner has disallowed all deductions claimed in connection with the ownership and use of the animals, and his principal contention seems to be that they were obtained, not for advertising the two chains of restaurants, but for the personal pleasure of DeLucia. Apparently, the petitioners' claim that the dogs and horses were acquired and used for advertising purposes overtaxes the Commissioner's credulity, and that is understandable in view of the fact, inter alia, that most of the shows in which the horses were exhibited were in places remote from Pittsburgh rather than before local audiences who might possibly be attracted to the

chain of restaurants by the exhibition of the horses. There is no question of amounts and the totals are not large in relation to the business sales and income.

Decision of all of the issues having to do with the ownership and use of these animals depends upon whether Brass Rail and Dairy honestly intended to acquire and use the animals for advertising purposes and continued to use them for that purpose, or whether "advertising" was merely a thin cloak for the pursuit of a hobby by DeLucia. Cf. Aptos Land & Water Co., 46 B. T. A. 1232. The reasonableness or unreasonableness of the expenditures in relation to the business is one test of that intent. The Commissioner must depend largely, if not entirely, upon circumstantial evidence to support his contention, because there is no direct showing that DeLucia had as a hobby the ownership and exhibiting of dogs and horses. There is direct evidence, on the other hand, that the horses were acquired for advertising purposes and also that they were used for that purpose. The evidence, as a whole, leaves considerable doubt, but it preponderates slightly in the petitioner's favor, and findings have been made that the claimed deductions are allowable. This disposes of the issues listed above as 1, 2, 3, 4, 5, and the last part of 10.

Another question has to do with the maintenance and operation of an automobile owned by Brass Rail and with the salary of a chauffeur who operated the automobile. The Commissioner, in determining the deficiencies, took the position that 40 per cent of the use of the automobile was for business purposes and 60 per cent was personal use by DeLucia. He allowed Brass Rail to deduct 40 per cent of the expenses and 40 per cent of the depreciation on the automobile, and for the year 1941 he added the remaining 60 per cent of each item to the income of DeLucia. He attempts to justify adding the amounts to the income of DeLucia upon the theory that they represent additional compensation. They would, as additional compensation to DeLucia, nevertheless, be deductible by Brass Rail. The evidence is clear that Brass Rail owned and operated the automobile solely for the benefit of DeLucia in his conduct of the business of the company. The entire amounts expended by Brass Rail are deductible. While DeLucia did not use the automobile exclusively for business purposes, nevertheless, the nonbusiness uses during the taxable years 1942 and 1943 were so small that they may be disregarded for present purposes. Cf. R. Golden Donaldson, 18 B. T. A. 230. DeLucia made some. personal use of the automobile and he has failed to show that such use during 1941 was inconsequential. An allocation between business and nonbusiness use is necessary, Cohan v. Commissioner, 39 Fed. (2d) 540, and although the evidence does not show how much of one use there was and how much of the other, a finding has been made that 10 per cent was nonbusiness use. It follows that DeLucia should

deduct only 90 per cent of his expenditures in connection with the chauffeur, and that the equivalent of 10 per cent of the cost of operating the automobile and 10 per cent of the depreciation for 1941 was properly included in his income as additional compensation from Brass Rail, being the approximate value of his personal use of the car. The remaining issue is whether Brass Rail is entitled to deduct as ordinary and necessary business expense the amounts expended on liquor for the entertainment of persons who supplied the company with goods. The amount is not large in relation to the purchases of the company, and the evidence, such as it is, preponderates in favor of the petitioner, with the result that it is entitled to the deduction claimed. Cf. I. Goldman, 12 B. T. A. 874; F. L. Bateman, 34 B. T. A. 351.

Decisions will be entered under Rule 50.

KIMBELL-DIAMOND MILLING COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 20509. Promulgated January 27, 1950.

In August, 1942, petitioner's Wolfe City, Texas, milling plant was destroyed by fire and in November, 1942, petitioner collected insurance as a reimbursement for its loss. On December 26, 1942, using the insurance proceeds and other money, petitioner acquired 100 per cent of the stock of Whaley Mill & Elevator Co. of Gainesville, Texas. Petitioner's sole intention in purchasing Whaley's stock was to acquire Whaley's assets and liquidate Whaley as soon as practicable. On December 31, 1942, Whaley was dissolved and its assets distributed to petitioner. Held, our decision in Kimbell-Diamond Milling Co., 10 T. C. 7, wherein we determined that the conversion of petitioner's assets did not represent a taxable gain, does not act as a collateral estoppel as to petitioner's basis in Whaley's assets; held, further, petitioner's basis in Whaley's assets is petitioner's cost, as the several transactions can not be considered a reorganization within the meaning of section 112 (b) (6) of the Internal Revenue Code, but rather they must be treated as a purchase of Whaley's assets.

R. B. Cannon, Esq., for the petitioner.

John W. Alexander, Esq., for the respondent.

OPINION.

BLACK, Judge: This proceeding involves deficiencies in income, declared value excess profits, and excess profits taxes for the fiscal years ended May 31, 1945 and 1946, in the following amounts:

The deficiencies are primarily due to respondent's reduction of petitioner's basis in assets acquired by it in December, 1942, through the liquidation of another corporation known as Whaley Mill & Elevator Co. (sometimes hereinafter referred to as Whaley). By reason of this reduction respondent has adjusted petitioner's allowable depreciation and its excess profits tax credit based on equity invested capital. By appropriate assignments of error petitioner contests these adjustments. Other adjustments which respondent made have been conceded.

This leaves for our consideration the determination of petitioner's basis in the assets acquired from Whaley.

The facts have been stipulated and are adopted as our findings of fact. They may be summarized as follows:

Petitioner is a Texas corporation, engaged primarily in the business of milling, processing, and selling grain products, and has its principal office in Fort Worth, Texas. Petitioner maintained its books and records and filed its corporation tax returns on an accrual basis for fiscal years ended May 31 of each year. For the years ended May 31, 1945 and 1946, its returns were filed with the collector of internal revenue for the second collection district of Texas.

On or about August 13, 1942, petitioner sustained a fire casualty at its Wolfe City, Texas, plant which resulted in the destruction of its mill property at that location. The assets so destroyed, and the adjusted basis thereof, were as follows:

This property was covered by insurance, and on or about November 14, 1942, petitioner collected insurance in the amount of $124,551.10 ($118,200.16 as a reimbursement for the loss sustained by the fire and $6.350.94 as a premium refund). On December 26, 1942, petitioner's directors approved the transaction set forth in the minutes below:

THAT, WHEREAS, on or about August 1, 1942, the flour mill and milling plant of Kimbell Diamond Milling Company located at Wolfe City, Texas was destroyed by fire; and

WHEREAS, Kimbell-Diamond Milling Company collected from the insurance companies carrying the insurance on the said destroyed properties the sum of $125,000.00 as indemnification for the loss sustained, which said insurance pro