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NO FISH STORY - COURT ALLOWS DEDUCTION FOR EMPLOYEE TRIPS TO CANADA

September 15, 2003

The 8th Circuit Court of Appeals has struck a blow for fishing-minded businessmen - or maybe for business-minded fishermen. Reversing a district court, a three-judge panel held today that Townsend Industries may deduct its expenses for employee fishing outings held in 1996 and 1997.

The tax law imposes special hurdles on deductions for fun and food, as the district court noted that Townsend needed to show that:

(i) it had ‘more than a general expectation of deriving some income or other specific trade or business benefit’ from the fishing trips; (ii) that active business discussions were conducted on the fishing trips; (iii) that the ‘principal character or aspect’ of the fishing trips was the active conduct of business, although it is not necessary that more time was devoted to business than to entertainment; and (iv) the expenditure was allocable to Townsend's employees conduct of business and the other people on the fishing trip with which business was conducted.”

The 8th Circuit said the U.S District Court for Southern Iowa erred in disallowing the expenses.

IT WASN'T JUST THE FISH

Townsend Industries is an important Central Iowa manufacturer of offset printing equipment. Townsend Industries' Canadian fishing trips were apparently a high point of the corporate year. Only employees and sales representatives were invited - no spouses or kids allowed. The trips featured a dinner keynoted by presentations by the company president and CEO. The employees were on their own the rest of the time. The 8th Circuit panel decided it was reasonable to conclude from the evidence that a bunch of folks with no real connection to one another except their work could, when thrown together in the wilderness, be reasonably expected to discuss...work.

The panel highlighted several specific examples where discussions on the trips led to new products or production practices. The court also noted that "...such was the pace of life at the Townsend plant that one employee in the parts department indicated that the fishing trip was one rare opportunity that he had to have a reasoned conversation with his supervisor about their work."

CAN I DEDUCT MY FISHING TRIPS?

Don't count on it. The 8th Circuit panel took pains to distinguish the Townsend trips from undeserving junkets. The panel cited cases involving Super Bowl weekend trips with families, boating outings, and hunting lodges expenses as examples of "bad" food and fun costs. The panel commented:

We pause to note that our decision does not stand for the proposition that in all cases in which a corporation sponsors hunting, fishing, or other trips to "luxury" vacation spots that the sponsoring corporation can avoid including the per-employee cost of the trip in its employees' wages merely by presenting testimony relating to business allegedly conducted during the sojourn. A district court should be suspicious of oral, non-contemporaneous evidence provided in such cases ... and it may well be that in most cases the cost of these trips would amount to income taxable to each employee.

SYMPATHY IS NICE, BUT VICTORY IS NICER

When it disallowed the entertainment deduction, the District Court made an unusual comment in his opinion:

As this Court commented at trial, it has a deep respect for the plaintiff company, its founder Mr. Townsend, and their business philosophy. The company's success for over forty years dramatically reflects the legitimacy of the "me too" business philosophy espoused by Mr. Townsend and his wife since the company's inception. However, despite this Court's personal beliefs about the merits of Townsend's methods, including the value of the fishing trip to the business, Townsend simply is not exempt from the reach of the tax code and its regulations because it is an exemplary employer who genuinely cares about its employees and community.

As much as it might have found those words comforting, Townsend probably found the 8th Circuit's views much more enjoyable:
... in the case at bar, we have little trouble concluding that Townsend Industries presented adequate evidence to substantiate its business purpose. Though we have reached this conclusion as a matter of law, even if "business purpose" were to be treated as a question of fact, we are satisfied the nature and quantity of the evidence presented could compel no reasonable conclusion other than that Townsend had a bona fide business purpose for its 1996 and 1997 trips.

THE MORAL?

It may be difficult to get a tax deduction for a company fishing outing, but if you have the right facts, and you're willing to fight a long court battle, it's not impossible.

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