Love Box Co., Inc. v. C.I.R.

• Decision Date: 28 March 1988
• Docket Number: No. 85-1804,85-1804
• Citation: 842 F.2d 1213
• Parties: -944, 56 USLW 2569, 88-1 USTC P 9246 LOVE BOX COMPANY, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1213

842 F.2d 1213

61 A.F.T.R.2d 88-944, 56 USLW 2569, 88-1

USTC P 9246

LOVE BOX COMPANY, INC., Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 85-1804.

United States Court of Appeals Tenth Circuit.

March 28, 1988.

Marvin J. Martin (Donald E. Hill, with him on the brief), Martin, Churchill, Overman, Hill & Cole, Chartered, Wichita, Kan., for appellant.

Bruce R. Ellisen, Atty., Tax Div. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup and Richard Farber, Attys., Tax Div., with him on the brief), Dept. of Justice, Washington, D.C., for appellee.

Before McKAY, McWILLIAMS, and BALDOCK, Circuit Judges.

McKAY, Circuit Judge.

The issue before the court is whether the costs a company incurred in sponsoring seminars by a well-known free enterprise advocate are deductible expenses under the Internal Revenue Code of 1954 (I.R.C.). ¹

Love Box Company, Inc. (Company) is a Kansas corporation which manufactures and sells boxes and other fiberboard and wood products. The Company operates facilities located in Kansas, Oklahoma, Kentucky, Ohio and Arkansas. The Company is also engaged in agricultural operations in Kansas and in real estate enterprises in Arizona. Over the years, the Company has developed a strong corporate philosophy concerning economics, finances, societal interests, and other subjects of a general nature. This philosophy manifests itself in a commitment to such things as individual freedom and responsibility, free enterprise, excellence and quality in products and service, honesty, truthfulness, hard work and integrity.

The Company has actively sought to project its philosophical perspective to its employees and customers by arranging public speeches and seminars. For many years the Company has sponsored seminars by well-known scholars. The stated purpose behind these seminars was to educate Company employees and to advertise the Company's perspective to the public. In 1978 and 1979, the Company sponsored two intensive, five-day seminars featuring Mr. Robert LaFevre. The seminars were limited to thirty-five participants, and employees were given first priority to attend. Attendance was voluntary, and any of the Company's employees who desired to attend were given time off work without a reduction in pay. Of approximately 600 employees, 10 attended the 1978 seminar and 7 attended the 1979 seminar. Record, exh. 9 and 10. The remaining attendees for both years included two customers, two prospective customers, other business representatives, and individuals from the general public.

In presenting the 1978 and 1979 seminars, the Company incurred expenses of $8,949.91 and $9,545.01 respectively. The primary costs were the speaking fees, room, and meals of Mr. LaFevre. Record, vol. 1, doc. 10, at 3. The Company deducted these costs as part of their "Public Promotion" expenses. Upon audit, the Commissioner determined that these expenses were not deductible because they were not ordinary and necessary business expenses under I.R.C. Sec. 162. Id., vol. 1, doc. 11, at 11-12.

The Company filed a petition with the Tax Court seeking a redetermination of the deficiencies assessed by the Commissioner. The Tax Court found that no proximate relationship existed between the seminars and the job skills of the Company employees. Therefore, the seminar expenses were not deductible as educational expenditures which maintained or improved job skills. See Treas. Reg. Sec. 1.162-5 (as amended in 1967). The Tax Court also found that the relationship between the nonemployee attendees and the Company was too tenuous to justify the Company's claim that the expenses could alternatively be deducted as "good will" advertising. See Treas. Reg. Sec. 1.162-20(a)(2) (as amended in 1969). Both rulings are before this court upon appeal.

Congress directed the United States Courts of Appeals to review tax court decisions "in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury." I.R.C. Sec. 7482. Appellate courts ordinarily apply a "clearly erroneous" standard when presented with factual questions. Commissioner v. Duberstein, 363 U.S. 278, 289-91, 80 S.Ct. 1190, 1198-99, 4 L.Ed.2d 1218 (1960) (review of whether a transaction constitutes a gift under the I.R.C. raised a factual issue subject to "clearly erroneous" standard). A de novo standard of review is used when evaluating questions of law. Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 491, 57 S.Ct. 569, 573, 81 L.Ed. 755 (1936) (review of tax board decision was "a conclusion of law or at least ... mixed question of law and fact" and is subject to independent judicial review). However, the standard of review of mixed questions is not entirely established. ² See Pullman-Standard v. Swint, 456 U.S. 273, 289-90 n. 19, 102 S.Ct. 1781, 1790 n. 19, 72 L.Ed.2d 66 (1982). The Circuit Courts of Appeals have applied both de novo and clearly erroneous review when deciding mixed questions of law and fact. Id. The Tenth Circuit has concluded that if "the mixed question involves primarily a factual inquiry, the clearly erroneous standard is appropriate. If, however, the mixed question primarily involves the consideration of legal principles, then a de novo review by the appellate court is appropriate." Supre v. Ricketts, 792 F.2d 958, 961 (10th Cir.1986); see United States v. McConney, 728 F.2d 1195, 1200-04 (9th Cir.), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984) (a "clearly erroneous" standard is applied if the issue tends to be more factually based and concerns factors more appropriately decided by the trial court).

Since we must consider both the facts regarding the 1978 and 1979 seminars and the law as applied by section 162, this case presents a mixed question of fact and law. Courts reviewing section 162 expenses have usually emphasized the factual characteristics surrounding the expenditures. The Supreme Court stated early on that "[w]hether an expenditure is directly related to a business and whether it is ordinary are doubtless pure questions of fact in most instances. Except where a question of law is unmistakably involved[,] a decision of the Board of Tax Appeals on these issues ... should not be reversed by the federal appellate courts." Commissioner v. Heininger, 320 U.S. 467, 475, 64 S.Ct. 249, 254, 88 L.Ed. 171 (1943) (footnote omitted); see Welch v. Helvering, 290 U.S. 111, 114-15, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933) (payments to creditors not ordinary and necessary business expenses under the facts of that particular situation); Glasgow v. Commissioner, 486 F.2d 1045, 1046 (10th Cir.1973) (per curiam) (expenses of educational courses deducted under I.R.C. Sec. 162(a) involved "essentially a question of fact"). To resolve the issues before us now, we must examine the characteristics and circumstances of the 1978 and 1979 LaFevre seminars and determine how these features link the seminars to the business purpose of the Company. Therefore, we regard these issues as primarily factual and will uphold the findings of the tax court unless the findings are clearly erroneous.

"Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefore can any particular deduction be allowed." New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348 (1934). Moreover, the taxpayer bears the burden of proving that his expenditures are deductible. Welch v. Helvering, 290 U.S. at 115, 54 S.Ct. at 9; Medco Products Co. v. Commissioner, 523 F.2d 137, 138 (10th Cir.1975).

Section 162 and its supporting regulations create a framework which allows deductions for various types of expenses, including certain educational and advertising expenses. The primary requirement for deductibility under section 162 is that the particular expense be an ordinary and necessary expense which bears a "proximate and direct relationship to the taxpayer's trade or business." Carroll v. Commissioner, 51 T.C. 213, 218 (1968), aff'd, 418 F.2d 91, 95 (7th Cir.1969). Thus, our examination of whether plaintiff's educational and advertising expenses come within section 162 deductibility focuses on whether the expenses bear a close enough relationship to the Company's business to say that they are ordinary and necessary.

The Company first claims that the LaFevre seminar expenses are deductible by the company as ordinary and necessary education expenses of its employees. ³ Education expenses satisfy the ordinary and necessary requirement of section 162 provided they meet the enumerated tests of Treasury Regulation 1.162-5. Rev.Rul. 76-71, 1976-1 C.B. 308, 310. Treasury regulation 1.162-5 sets forth a series of nonqualifying and qualifying tests. The first examination is to see if the educational expense is disqualified from deduction because it was incurred to (1) meet the minimum educational requirements of the trade or business or (2) qualify the taxpayer for a new trade or business. Treas.Reg. 1.162-5(b)(2) and (3). Provided the educational expenses are not disqualified from deduction, they must also satisfy the qualifying requirement of either (1) maintaining or improving job skills or (2) meeting the express requirements of the employer or the law for retention of employment. Treas.Reg. 1.162-5(a), (c)(1) and (c)(2). In satisfying the requirement of maintaining or improving skills required in his employment, it is insufficient that the educational expenses merely improve general skills. To be deductible the expenses must improve skills that bear a "proximate and direct relationship to the taxpayer's trade or business." ⁴ Carroll v. Commissioner, 51 T.C. 213, 218 (1968), aff'd, 418 F.2d 91, 95 (7th Cir.1969); see Anaheim Paper Mill Supplies, Inc. v. Commissioner, 37 T.C.M. (CCH) 403 (1978) (although employer's expenses for employee's general college education were generally beneficial to the company, they were not...