## Facts

- United Title Insurance Company (United) was a small, relatively new North Carolina title-insurance company operating in a highly competitive market.
- In North Carolina real estate transactions, title insurers generally rely on licensed attorneys to examine records and issue title opinions; attorneys and other real estate professionals were significant sources of referrals.
- For tax years 1977–1979, United held three out-of-state board meetings and one out-of-state planning conference connected to company business.
- United invited selected real estate attorneys and other professionals (including developers, realtors, and lenders) to attend and participate in these events as part of its marketing approach.
- Spouses and friends attended some of the trips, and United paid certain travel, lodging, meal, and entertainment costs connected with the events.
- United also claimed deductions for certain entertainment-type activities connected with an in-state board meeting.
- United deducted the trip and related costs as ordinary and necessary business expenses under I.R.C. § 162(a) and treated amounts as subject to the travel and entertainment rules of I.R.C. § 274.
- United also deducted amounts paid to its majority shareholder (an attorney) described as legal and investment counseling fees.
- The Commissioner determined corporate income tax deficiencies for 1977–1979 and asserted negligence additions under I.R.C. § 6653(a), disallowing substantial portions of the claimed deductions.
- United petitioned the U.S. Tax Court for redetermination.

## Issues

1. Whether United’s expenses for three out-of-state board-meeting trips and a fourth out-of-state planning conference were ordinary and necessary business expenses under I.R.C. § 162(a).
2. If the out-of-state trip expenses were otherwise deductible under § 162(a), whether United substantiated them and met the business-connection requirements of I.R.C. § 274.
3. Whether United substantiated, under I.R.C. § 274, certain expenses related to activities connected with an in-state board meeting.
4. Whether United could deduct amounts paid to its majority shareholder as legal and investment counseling fees under I.R.C. § 162(a).
5. Whether United was liable for negligence additions to tax under I.R.C. § 6653(a).

## Decision

- The court accepted that United’s general approach—seeking business from referral sources by inviting selected real estate professionals to meeting trips—could serve a legitimate business purpose and could qualify under I.R.C. § 162(a) in appropriate circumstances, even if competitors did not use the same approach.
- The court allowed deductions only to the extent United proved the expenses were directly connected to active business conduct and were supported by the strict substantiation required by I.R.C. § 274.
- The court disallowed portions of the trip expenses attributable to spouses, friends, and other nonbusiness attendees where United did not show a business reason for their presence.
- The court disallowed additional travel and entertainment items where the records did not meet § 274 requirements (including adequate proof of amount, time, place, business purpose, and business relationship of participants).
- For expenses tied to the in-state board meeting, the court likewise allowed only those items meeting § 274’s documentation and business-connection rules and disallowed the remainder.
- The court largely disallowed the claimed deductions for payments to the majority shareholder labeled legal and investment counseling fees to the extent United failed to prove the services were actually performed for the corporation and were properly deductible under § 162(a).
- The court sustained the Commissioner’s negligence additions under § 6653(a) in significant part, based on inadequate recordkeeping and insufficient care in claiming sizable travel, entertainment, and shareholder-payment deductions.
- The case was left for Rule 155 computations to reflect concessions, allowed deductions, disallowed deductions, and resulting adjustments.

## Legal Principles

- An expense can be “ordinary and necessary” under I.R.C. § 162(a) even if a taxpayer’s method is uncommon in its industry, so long as it is a bona fide business expense related to the taxpayer’s trade or business.
- I.R.C. § 274 imposes strict requirements for travel and entertainment deductions; taxpayers must substantiate the amount, time, place, business purpose, and business relationship of persons involved with adequate records or sufficient evidence.
- The court will not estimate travel and entertainment expenses under the *Cohan* rule when § 274 applies; failure to meet § 274 substantiation results in disallowance.
- Travel and entertainment costs for spouses, friends, or other nonbusiness companions are not deductible unless the taxpayer proves a business reason for their participation and substantiates the expense as required by § 274.
- Payments to controlling shareholders claimed as deductible fees must be proven to be for actual services rendered to the corporation and otherwise allowable under § 162(a); unsupported payments may be treated as nondeductible.
- Negligence under I.R.C. § 6653(a) includes failure to exercise due care and failure to maintain records sufficient to support claimed deductions; inadequate documentation and unsupported positions can justify the addition to tax.

## Conclusion

United Title Insurance Co. v. Commissioner held that United’s meeting-trip strategy could qualify as a business expense in concept, but deductions for the out-of-state trips and related in-state activities were allowed only to the extent United proved a direct business connection and satisfied § 274’s strict substantiation requirements; costs tied to spouses, friends, and inadequately documented entertainment were disallowed, payments to the majority shareholder were largely denied for lack of proof of deductible services, and negligence additions were sustained in significant part with final amounts computed under Rule 155.


United Title Insurance Co. v. Commissioner, T.C. Memo. 1988–38 (1988)