George D. Patterson, District Director of Internal Revenue v. J. C. Thomas and Martha Thomas , 289 F.2d 108 ( 1961 )

RIVES, Circuit Judge.

The District Director appeals from a determination by the district court¹ that amounts paid by the taxpayer’s employer to a hotel and a travel agency for accommodations, meals, and a sight-seeing trip for the taxpayer and his wife did not constitute gross income to the taxpayer; or, if they did, then such amounts, together with expenditures for which the taxpayer was reimbursed by his employer, were deductible by the taxpayer as ordinary and necessary business expenses.

The taxpayer, J. C. Thomas, was employed during the relevant period as a field representative of the Liberty National Life Insurance Company. By meeting certain standards, the taxpayer qualified to attend and bring his wife to the Company’s annual Torch Club convention,² which in 1956 was held at the Hotel Chamberlin, Old Point Comfort, Fort Monroe, Virginia.

To attend this meeting, the taxpayer and his wife departed from Birmingham on May 14, 1956, spent two nights en route at a place of public lodging, and arrived at the Hotel Chamberlin on May 16. Their return trip commenced on May 20. They spent one night at a public lodging en route to Birmingham, and reached home on May 21. The taxpayer and his wife traveled in their own automobile. Prior to his departure from Birmingham, the taxpayer received from his employer a check for $168.16, which was spent for transportation, meals and lodging to and from the Hotel Chamberlin.

The Company paid directly to the Hotel Chamberlin $103.40 for lodging and meals for the taxpayer and his wife at the hotel while attending the meeting. The Company also paid directly to a travel agency the sum of $12.92, representing the expenses of a sight-seeing trip to Williamsburg, Virginia, for the taxpayer and his wife. The aggregate expenses totaled $284.48. There is no question in this case as to the reasonableness of the amount of these expenses.

The Torch Club originated in 1931 and was composed each year of outstanding field representatives of the Company who had during the preceding year met certain established goals. The Company “required” those employees who were invited, and their wives, to attend the annual meeting of the Torch Club. Employees who qualified for the convention, but who failed to attend for any reason, did not receive any money or other thing of value from the Company in lieu of such attendance.

Those present at the Torch Club convention were expected to adhere to the scheduled program. The taxpayer and his wife participated in substantially all of the scheduled' activities.³ The taxpayer had no control over the program, the time, or the place of the meeting.

The schedule of activities at the Torch Club convention was as follows:

Wednesday, May 16:

1:30 Arrival

1:30-5:00 “Renewing old acquaintances and making new acquaintances.”

6:30 Company dinner and water show.

Thursday, May 17:

7:00-9:30 Breakfast with delegates

10:00 Meeting (2y2 hours)

Afternoon — No planned activity (Taxpayer played golf)

8:30 Movie

Friday, May 18:

7:00-8:30 Breakfast with delegates

9:00 Tour of Williamsburg and Jamestown

8:30 Bingo

Saturday, May 19:

7:00-9:30 Breakfast with delegates

10:00 Meeting (2y2 hours)

Afternoon Boat Trip

7:00 President’s Banquet and Ball.

The appellants’ position is that this trip to the Hotel Chamberlin constituted the prize in what, in substance, was an .annual sales contest.⁴ The taxpayer seeks escape from this determination .along two routes.

Initially, the taxpayer argues that his employer’s payments to him and to the Hotel and travel agency for his benefit did not constitute gross income to him. For purposes of determining whether these sums were income, we may treat the amounts paid directly to the Hotel and travel agency and the traveling expenses for which the taxpayer was reimbursed in the same manner. In both situations the taxpayer ultimately received only non-cash goods or services, paid for by his employer. Taxpayer claims these sums come within the rule of Corliss v. Bowers, 1930, 281 U.S. 376, 50 S.Ct. 336, 74 L.Ed. 916, and are not income to him since he had no “command” over them and was not free to expend them in any manner he saw fit. It has been established beyond question, however, that receipt by a taxpayer of benefits in a form other than cash may constitute income to him.⁵ Appellee next argues that the $168.16 advanced to him for traveling expenses and the sums paid directly to the Hotel and travel agency did not constitute gross income to him because they were expended for the “convenience of his employer.” Taxpayer cites, in support of this theory, Regulation 111, Section 20.22(a) (3) of the 1939 Code, which reads, in part, as follows:

«If * * * living quarters or meals are furnished to employees for the convenience of the employer, the value thereof need not be added to the compensation otherwise received.”

It is clear from the words of the regulation itself and the eases relied on by appellee⁶ that the “convenience of the employer” rule there referred to applies only to meals and lodging and does not exclude amounts paid to the taxpayer which he expended for gasoline, sightseeing trips, etc. from the Code’s broad definition of income. The fatal blow to taxpayer’s position, however, is delivered by Section 119 of the 1954 Code, 26 U.S. C.A. § 119, which enacts the “convenience of the employer” rule into law, but in a modified form. Under that Section, meals and lodging furnished by employers to employees are excluded from the gross income of the employees “only if

“(1) in the case of meals, the meals are furnished on the business premises of the employer, or

“(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.”

This Section is inapplicable to the sums in issue which were spent for meals and lodging en route to and at the Hotel Chamberlin.

Since the payments received by the taxpayer and his wife from his employer and the noncash goods and services received by the taxpayer and his wife as a result of payments by his employer were includible in the taxpayer’s gross income, we must decide whether these amounts were deductible by the taxpayer as ordinary and necessary business expenses within the meaning of Section 162 of the Internal Revenue Code of 1954, 26 U.S.C.A. § 162.

Treasury Regulations 1.162-2 (I.R.C. 1954) provide in part:

“(b) (1) If a taxpayer travels to a destination and while at such destination engages in both business and personal activities, traveling expenses to and from such destination are deductible only if the trip is related to the taxpayer’s trade or business. If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. However, expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible even though the traveling expenses to and from the destination are not deductible.”

Both parties agree that the crucial determination is whether the primary purpose of the trip was business or pleasure.

At the outset, it is important to note that the nature of the trip must be determined from the individual taxpayer’s point of view, rather than from the viewpoint of his employer. To illustrate, an employer may find that the efficiency of his salesmen is greatly increased if he gives them a two-week, all-expense-paid vacation trip to Florida as a reward for increasing sales. From the employer’s point of view, the amounts he expends in providing the trip may be business expenses deductible by him.⁷ But to the recipient, that trip is solely for pleasure. Although “connected with” his business, the salesman who goes on the Florida jaunt is receiving income, just as if the prize in the sales contest were a bonus, and the amounts expended in going to Florida and spending the two weeks there would be nondeductible personal expenditures. We note, therefore, that the deductibility of sums as business expenses by an employer is immaterial in determining whether the expenditure of those sums by their recipient is deductible by him as an ordinary or necessary business expense.

In determining whether the taxpayer’s trip here under consideration was primarily for business or primarily for pleasure, we consider the following:

1. “The amount of time during the period of the trip which is spent on personal activity compared to the amount of time spent on activities directly relating to the taxpayer’s trade or business * * ⁸ The schedule of activities at Old Point Comfort reveals that, at the most, five hours out of the three and one-half days were spent in formal business meetings. The first of the two meetings consisted mainly of welcoming speeches, and a review by the President of the past year’s activity of the Company, the latter being subsequently reprinted for general distribution. At the second meeting, two speakers did talk on subjects of an educational nature. But more time was spent on the sight-seeing tour alone than at both of these “business” meetings. In answer to this point, the taxpayer forcefully argues that, although the schedule reveals much activity of a purely recreational nature, he sought as co-participants in those activities company officials and better salesmen than himself, who might, while “playing,” provide him with information on improving his abilities. He testified that much of the conversation on the sight-seeing tour, the boat trip, and his golf game directly concerned his business. Were these the only facts on which the court had to base its judgment, the proper resolution of the issues in this case would be more difficult than we believe they are. We do think, however, that the low proportion of time spent in formal business meetings distinguishes cases such as Coughlin v. Commissioner, 2 Cir., 1953, 203 F.2d 307, where the taxpayer, an attorney, was allowed to deduct the expenses of tuition, travel, board and lodging incurred in attending a federal tax institute at New York University.

2. The convention was sponsored by the taxpayer’s employer and its only participants were taxpayer’s co-employees. Taxpayer seeks to rely on cases such as Alexander Silverman, 1927, 6 B.T.A. 1328, which allowed a university professor to deduct the expenses of attending a scientific convention. In none of those cases, however, was the convention sponsored solely by the taxpayer’s employer. This fact, we think, is some, though not conclusive, evidence that the convention was really a form of remuneration.

3. The convention was held at a resort hotel. The taxpayer argues that the number of people attending the convention was large, and that a location had to be found where all the conventioneers could be housed together. Although the evidence is by no means conclusive on the point, it may well be that no hotel located closer to the homes of the convention participants was capable of handling a group of that size.⁹ But, the fact remains, the convention was at a resort hotel.¹⁰

4. The attitude of the Compamy. The Company looked on the trip as one primarily devoted to pleasure and sought to convey this impression to the participants. In making arrangements for the trip, a vice-president of the Company wrote to the Manager of the Hotel Chamberlin, that: “While we hold two business meetings during our four-day convention, business is secondary. The main object is to give our people a good time. Specifically, I would be interested in knowing the fishing accommodations.” The next paragraph of that letter reads:

“One thing that interests us about Old Point Comfort is the proximity to ’Williamsburg and other famous historical places. I would like to get some information relative to sightseeing trips for the entire group. Another question I would like to clear up is relative to the weather during the month of May. Is it warm enough for outdoor activities or not?”

The vice-president’s wife sent a letter to the wives of qualifying employees, in which she noted that:

“The Virginia Peninsula has everything to offer for a vacation convention. It is the sight-seer’s paradise. One whole day of the Convention will be devoted to a tour of Jamestown and Williamsburg, with a stop at the battlefield at Yorktown, where the surrender of Cornwallis to George Washington ended the Revolutionary War. There is so much to be seen!”

The letter concluded: “I hope you will have as much fun as we have had in planning this vacation for you.” With reference to the employees, there was testimony that, “they consider it a reward. I hope they do. We have been trying to sell them on it for a long time.”

We think that the foregoing factors establish that the primary purpose of the trip to the Hotel Chamberlin was pleasure.

Whether an expenditure is ordinary and necessary to a taxpayer’s trade or business is usually a question of fact.¹¹ And “Where the trial has been by a judge without a jury, the judge’s findings must stand unless ‘clearly erroneous.’ Fed. Rules Civ.Proc. 52(a), 28 U.S.C.A. ‘A finding is “clearly erroneous” when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ United States v. United States Gypsum Co., (1948), 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746.” ¹²

We are convinced that the findings of the trial court, to the effect that the payments in this case were not properly includible within the taxpayer’s gross income, and that if so includible, they were deductible as ordinary and necessary business expenditures, are mistaken and thus clearly erroneous within the meaning of Rule 52(a), F.R.Civ.P.

The taxpayer will be allowed a pro rata deduction for the amount of time spent at the business meetings, but no deduction will be allowed for his travel expenses.¹³

It follows, as a matter of course, that deductions claimed by the taxpayer’s wife will be denied in to to, since her presence at the business meetings which taxpayer attended had no bona fide business purpose from the viewpoint of the taxpayer.¹⁴

The judgment of the district court is reversed and the cause remanded for further proceedings consistent with this opinion.

Reversed and remanded.

1 . 189 F.Supp. 230.

2 . The requirements for membership in the Torch Club are “based upon sales of new business and the conservation of old business.”

3 . Taxpayer and his wife did not go to the motion picture scheduled for the evening of Thursday, May 17, as they had previously seen it. Nor did they stay “the whole time” at the water show held on Wednesday evening.

4 . In Ms welcoming speech, the President of Liberty National noted that the Company “officially abandoned all company-wide contests a few years ago.” He went on to add that, “The only company-wide contest we have left, if it can be called a contest, is the Torch Club, and I do not classify that as a contest, for no one is forced to make it and no bne is criticized if he fails to do so.”

Gross income includes amounts received as prizes and awards. Section 74, Internal Revenue Code of 1954, 26 U.S.C.A. § 74.

5 . See Section 61, Internal Revenue Code of 1954, 26 U.S.C.A. § 61; Treasury Regulations §§ 1.61 2(d) (1), 2(d) (3). See also Commissioner of Internal Revenue v. Glenshaw Glass Co., 1955, 348 U.S. 426, 432, 75 S.Ct. 473, 99 L.Ed. 483; Commissioner of Internal Revenue v. Lo Bue, 1956, 351 U.S. 243, 246, 76 S.Ct. 800, 100 L.Ed. 1142.

6 . E. g., Diamond v. Sturr, 2 Cir., 1955, 221 F.2d 264, 267 (reviewing history of the “convenience of the employer” rule); Boykin v. Commissioner, 8 Cir., 1958, 260 F.2d 249.

7 . Expenses of this type would apparently not be deductible by a life insurance company. Section 803, I.R.C. of 1954, 26 U.S.C.A. § 803.

8 . Treasury Regulations 1.162-2 (b) (2).

9 . But see, Rudolph v. United States, D.C. N.D.Tex.1960, 189 F.Supp. 2.

In Ms welcoming speech, the President of Liberty National noted that: “This is an unusual meeting since it is being held here in Virginia, a state in which we do not operate * * * but it was felt that everyone would enjoy a trip to this historic part of the country.”

10 . Among the facilities available to the conventioneers were: Shuffleboard; horseshoes; ping-pong; billiards; pool; a heated, outdoor, salt water swimming pool; a picnic area; and a television theater. In addition, the hotel was situated in “the center of historic Virginia” with numerous spots for sight-seeing enthusiasts.

11 . Commissioner of Internal Revenue v. Heininger, 1943, 320 U.S. 467, 64 S.Ct. 249, 88 L.Ed. 171.

12 . Commissioner of Internal Revenue v. Duberstein, 1960, 363 U.S. 278, 291, 80 S.Ct. 1190, 1200, 4 L.Ed.2d 1218.

13 . Treasury Regulations 1.162-2 (b) (1), quoted supra.

14 . Treasury Regulations 1.162-2 (e).