Fishing Trip Business Expenses Correctly Withheld From Wages

The US 8th Circuit Court of Appeals, in reversing a lower federal court’s opinion, found that the company properly excluded the expenses associated with the employee fishing trip from the employees’ gross income and Social Security tax withholdings.   This was determination was based on the court’s finding that even though the trips were “voluntary,” virtually all company employees testified to felling obligated to attending the trip and some felt that it was part of their job.   Thus, the employees viewed the annual trip as part of their regular course of business.

Further, the appellate court found the nature of the trip to be established that business related activity had occurred on the trips in questions in 1996 and 1997.   Specifically, testimony established business dealings though the opportunity for company’s employees and sales staff to gain a better understanding of the company’s products and business. Moreover, the court noted that the trip’s business purpose was further established by the company’s decision to exclude the plastics division from the annual trip because its inclusion became a disruption to the focus of the trip.   This record defined the meaning of the trip and the correct classification of the expenses as aworking condition fringe benefit, the court held.

The ruling was not without strings attached though.   Judge Pasco Bowman noted that even though the company was able to provide ample evidence to draw the business connection to the trip, ” 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.”

Case History

Altoona, Iowa-based manufacturer Townsend Industries Inc. has gathered its salespeople for an annual, two-day meeting at its headquarters involving its corporate staff and some factory workers for the past 40 years.    Following that meeting, the company has sponsors a four-day expense-paid fishing trip to a resort in Ontario, Canada, with two of the four days spent traveling to and from the resort on a bus.

Aside from a dinner at which the company owner, Robert Townsend, and its chief executive officer, John Jorgenson, spoke about the state of the company, the employees and sales people spent their time largely as they wished, though the vast majority fished. Nevertheless, business discussions were conducted on an ongoing basis during the trip.

Following this outline for the trip, Townsend did not include the costs of the trip on its taxes under employee wages.   Rather, the company filed the expenses as a working condition fringe benefit.

The Internal Revenue Service (IRS) though did not see it that way.   Instead, the IRS determined that the per-employee cost of Townsend Industries’ annual fishing trip was wages and subsequently assessed deficiencies against the company for the 1996 and 1997 tax years. Townsend paid a portion of the deficiency and filed suit seeking a refund.

Finding no business purpose for the fishing trips, the district court held that the expenses involved in the trips were employee wages within the meaning of the Internal Revenue Code, and that a portion of these wages should have been withheld for income taxes.

The case isTownsend Industries Inc. v United States, Eighth Circuit, Number 02-3756.