1979 U.S. Tax Ct. LEXIS 106">*106
Petitioner, a bank officer responsible for marketing loans, participated in vacation tours attended primarily by builders because social relationships with builders established on the tours generated loan business which helped petitioner meet his assigned loan production quotas and obtain increases in his salary.
72 T.C. 433">*433 Respondent determined a deficiency of $ 323 in petitioners' income tax for the taxable year 1973 and a deficiency of $ 252.45 in petitioners' income tax for the taxable year 1974. At issue is whether amounts expended by petitioners for foreign travel are deductible as ordinary and necessary business expenses under
FINDINGS OF FACT
Some of the facts were stipulated1979 U.S. Tax Ct. LEXIS 106">*109 and are found accordingly. The stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.
James B. Walliser (James) and Carol Sue Walliser (Carol), 72 T.C. 433">*434 husband and wife, filed joint individual income tax returns for the taxable years 1973 and 1974 with the Internal Revenue Service, Southwest Regional Service Center, Austin, Tex. Petitioners resided in Dallas, Tex., during the taxable years at issue and at the time of filing the petition herein.
During the taxable years 1973 and 1974, James was vice president and branch manager of the First Federal Savings & Loan Association (First Federal) of Dallas, Tex., Richardson branch office. James began his career at First Federal as a trainee in mortgage lending and an appraiser. He later became a branch manager and a loan production officer. Subsequent to the taxable years at issue, James was made the head of the interim loan department of First Federal. Prior to his initial association with First Federal in 1964, James was primarily engaged in the business of home building in Dallas County, Tex.
As branch manager of the Richardson office of First Federal, James supervised all 1979 U.S. Tax Ct. LEXIS 106">*110 aspects of the branch's operations, but his primary responsibility was the marketing of permanent and interim loans. James was assigned loan production quotas, and he expected to receive annual raises in his salary if he met his yearly quotas, although First Federal was under no commitment to give James a raise in salary or a bonus if a quota was met. James had authority to make loans to customers in Texas within a 100-mile radius of Dallas, although, if a customer found the Richardson branch inconvenient, James would send him to another branch and would not in that case receive credit towards his quota for any loans made. James met his quotas and received salary raises at the end of 1973 and 1974.
During the taxable years at issue, petitioners traveled abroad in tour groups organized primarily for people involved in the building industry. In 1973, petitioners took two such trips. The first was to Rio de Janeiro and was sponsored by General Electric Co. (General Electric). It began on March 23, 1973, and ended on March 31, 1973. Their second trip, to London and Copenhagen, was sponsored by Fedders Co. (Fedders) and ran from October 3, 1973, to October 15, 1973.
In 1974, petitioners1979 U.S. Tax Ct. LEXIS 106">*111 went to Santo Domingo on a tour organized by Fedders which began on September 27, 1974, and ended on October 4, 1974.
Petitioners also made reservations on a General Electric tour 72 T.C. 433">*435 to London and Amsterdam which ran from April 10, 1974, to April 20, 1974, but canceled their reservations.
Petitioners had first gone on a General Electric builders' tour when James was a builder prior to joining First Federal. Petitioners had been on the Fedders tours only twice before the taxable years at issue.
The majority of the people on a General Electric or Fedders builders' tour were builders and developers from Texas and their spouses. The group also included lenders, title company personnel, and other users and distributors of the sponsor's product. The dealers and builders who participated in the Fedders builders' tours did so as part of the Fedders incentive program through which they were able to earn the cost of the tours in whole or in part by purchasing or selling a certain amount of central air conditioning equipment in a particular year. Fedders presented awards during the tours to some people it considered outstanding in its sales and promotional programs but conducted no1979 U.S. Tax Ct. LEXIS 106">*112 business meetings.
The builders' tours were arranged as guided vacation trips, with sightseeing and other recreational activities. Petitioners, however, went on the tours because James found that they provided an unusual opportunity to associate with many potential and actual customers and believed that the tours would generate business, thereby helping him to meet his loan production quotas and obtain salary raises. He spent as much time as possible talking with builders whom he already knew and getting acquainted with builders he had not previously met to make them aware of First Federal's services and of his own skills. His conversations frequently centered on conditions in the building industry and the availability of loans for builders, but he did not negotiate specific business transactions on the tours or conduct formal business meetings. Social relationships formed or renewed on the tours between petitioners and builders and their spouses resulted in a substantial amount of loan business for First Federal.
Because James spent so much time with actual or potential customers, petitioners found the tours to be strenuous, and Carol, in particular, did not enjoy them. Petitioners1979 U.S. Tax Ct. LEXIS 106">*113 took vacations with their family in the vicinity of Austin, Tex., in 1973 and in Puerto Vallarta, Mexico, in 1974.
Prior to 1973, First Federal had paid for James to participate 72 T.C. 433">*436 in builders' tours. During 1973 and 1974, First Federal stopped reimbursing employees for a variety of previously reimbursed expenses as part of a program of overall budget cutbacks. During the taxable years in issue, First Federal's policy was to pay entertainment costs directly, or to provide reimbursement for expenses, when an officer of First Federal entertained current customers of the company at civic, social, or business meetings. The company did not customarily reimburse officers for the costs of goodwill meetings or trips for current customers along with prospective customers; however, the board of directors expected the officers, especially vice presidents in charge of marketing activities, to be active in cultivating new customers. First Federal did not reimburse petitioners for any travel expenses incurred in connection with the Fedders and General Electric tours taken by them in 1973 and 1974. James was, however, given leave with pay, in addition to his normal 2-week paid vacation, 1979 U.S. Tax Ct. LEXIS 106">*114 in order to participate in the tours.
The basic price of each of the builders' tours covered transportation, lodging, and meals. 3 Petitioners paid the basic prices, aggregating $ 2,798, for their two 1973 trips and the basic price of $ 850 for their 1974 trip. In addition, petitioners paid $ 1,478, the full basic price of the 1974 General Electric tour, and received only a partial refund of $ 800. The amount not refunded, $ 678, represented transportation costs to General Electric.
On their 1973 and 1974 tax returns, petitioners deducted, as employee business expenses, one-half of the price of each of the tours (the portion attributable to James' travel), including one-half of the amount not refunded upon cancellation of their reservations for the 1974 General Electric tour.
OPINION
Initially, we must determine whether petitioners are entitled, 1979 U.S. Tax Ct. LEXIS 106">*115 under
72 T.C. 433">*437
James' primary responsibility as an officer of First Federal was marketing loans. He was assigned loan production quotas and considered yearly increases in his salary to be contingent upon meeting those quotas. The participants in the General Electric and Fedders tours were not a random group of Texas vacationers. On the contrary, they were largely builders and developers from Texas, the area in which First Federal operated. Thus, the tours were a useful means of maintaining relations with existing customers of First Federal and reaching prospective customers. Indeed, the record indicated that some of the participants considered the social relationships with James, including their association with him on the tours, as an influencing factor in their decisions to seek loans from First Federal.
The fact that, during the years at issue, First Federal did not reimburse James for the costs of his travel does not render his expenses nondeductible. Where a corporate officer personally incurs expenditures which enable him to better perform his duties to the corporation and which have a direct bearing on the amount of his compensation or his chances for advancement, unreimbursed expenses1979 U.S. Tax Ct. LEXIS 106">*117 may be deductible under
72 T.C. 433">*438 First Federal expected its officers in charge of marketing activities to participate in public or social functions without reimbursement and examined their1979 U.S. Tax Ct. LEXIS 106">*118 performance in this regard when evaluating their compensation and overall value to the company. Compare
Moreover, the evidence tends to show that First Federal considered the trips valuable in generating goodwill. Although First Federal, which was in the midst of a program of budget cutbacks in 1973 and 1974, did not reimburse James for the tours as it had done in prior years, it continued to grant him additional leave with pay for the time he was on the tours.
Finally, the testimony of petitioners, and particularly of Carol, which we found straightforward and credible, tended to show that the tours were strenuous, and not particularly enjoyable, experiences because of the amount of time expended in cultivating business and, therefore, that petitioners did not undertake the tours for primarily personal reasons.
We conclude that, under the circumstances of this case, the requisite proximate relation has been shown to constitute1979 U.S. Tax Ct. LEXIS 106">*119 James' travel expenses as "ordinary and necessary" business expenses within the meaning of
We now turn our attention to the applicability of
(a) Entertainment, Amusement, or Recreation. -- (1) In general. -- No deduction otherwise allowable under this chapter shall be allowed for any item -- (A) Activity. -- With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, 1979 U.S. Tax Ct. LEXIS 106">*120 in the 72 T.C. 433">*439 case of an item directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), that such item was associated with, the active conduct of the taxpayer's trade or business, * * *
* * * *
and such deduction shall in no event exceed the portion of such item directly related to, or, in the case of an item described in subparagraph (A) directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), the portion of such item associated with, the active conduct of the taxpayer's trade or business.
Petitioners urge that the "directly related" test of
(b)
(ii)
[Emphasis added.]
This regulation is squarely based on the language of the legislative history of
1979 U.S. Tax Ct. LEXIS 106">*123 72 T.C. 433">*440 This regulation and the Congressional committee reports from which it is derived leave no doubt that the deductibility of an expenditure for travel, on what would objectively be considered a vacation trip, is subject to the limitations of subsection 274(a), even where the expenditure relates solely to the taxpayer himself. See H. Rept. 1447, 87th Cong., 2d Sess. (1962),
1979 U.S. Tax Ct. LEXIS 106">*125 Although the participants in the tours that petitioners took were drawn, for the most part, from the building industry, their activities -- sightseeing, shopping, dining -- were the same as 72 T.C. 433">*441 those of other tourists. Fedders presented some awards to persons considered outstanding in its sales or promotional programs on the tours but did not conduct any business meetings. Nor is there any evidence that any business meetings were conducted on the 1973 General Electric tour; on the itinerary for the 1974 tour, for which petitioners canceled their reservation, only 1 hour out of 10 days of guided tours, dinners, and cocktail parties, was set aside for a business meeting. Under the objective test set forth in the regulations, it is irrelevant that petitioners did not regard the trips as vacations or did not find them relaxing. Clearly, the tours were of a type generally considered vacation trips and, thus, under the objective test, constituted entertainment for the purposes of
For a deduction to be allowed for any item under
The "directly related" test requires that a taxpayer show a greater degree of proximate relationship between an expenditure and the taxpayer's trade or business than that required by
The record shows that petitioners participated in the builders' tours because they provided an opportunity for James to meet 72 T.C. 433">*442 new people who might be interested in the services he, and First Federal, had to offer and to maintain good personal relations with people already using those services. While James discussed business continually during the tours, his wife testified that this was typical of his behavior during all social activities. He engaged in general discussions about business conditions and the services he could provide to a builder but did not engage in business meetings or negotiations on the tours. James could not directly connect particular business transactions with specific discussions which occurred during the trips. 7 In short, petitioners' purpose in taking the trips was to create or maintain goodwill for James and First Federal, his employer, in order to generate some future business. 1979 U.S. Tax Ct. LEXIS 106">*129 Although the evidence tends1979 U.S. Tax Ct. LEXIS 106">*128 to indicate that the trips did, in fact, enhance goodwill and contribute to James' success in loan production and otherwise constituted ordinary and necessary business expenses deductible under
We also hold that the petitioners' trips do not qualify as entertainment "associated with" the active conduct of a trade or business. To be deductible, entertainment "associated with" the active conduct of a trade or business must directly precede or follow a substantial business discussion. In
1979 U.S. Tax Ct. LEXIS 106">*131 We conclude that
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect in the taxable years at issue, unless otherwise provided.↩
2. A determination of the amounts of medical expenses and sales taxes which are deductible is dependent upon the outcome of this issue.↩
3. On each tour, petitioners spent substantial amounts in excess of the basic price, but, since petitioners do not seek to deduct such amounts, they are not relevant herein.↩
4. The rule is otherwise where the corporate employee is entitled to, but does not seek, reimbursement from the corporation.
5. S. Rept. 1881, 87th Cong., 2d Sess. (1962),
"Entertaining guests at night clubs, country clubs, theaters, football games, and prizefights, and on hunting, fishing,
* * * *
"An objective standard also will overrule arguments such as the one which prevailed in
[Emphasis added.]
See also H. Rept. 1447, 87th Cong., 2d Sess. (1962),
6.
(h) Regulatory Authority. -- The Secretary or his delegate shall prescribe such regulations as he may deem necessary to carry out the purposes of this section, including regulations prescribing whether subsection (a) or subsection (b) applies in cases where both such subsections would otherwise apply.
We do not read the last clause to preclude provision by regulation for instances of overlap between subsec. 274(a) and other subsections of 274 in light of the committee reports, which state:
"
7. Only one witness claimed to recall specifically the subject matter of a discussion during the tour, but his testimony is not sufficient to justify allowance of the claimed deduction. Compare
8. See also
9. See also
10.
