Court Opinion

ID: 9477393
Source: CourtListenerOpinion
Date Created: 2023-08-05 06:22:38.407818+00
Date Added: 2024-06-11T17:39:29.214073
License: Public Domain

BALDOCK, Circuit Judge,
dissenting.
I agree with the majority that this case involves review of a mixed question of law and fact, whether educational seminar expenses of the taxpayer are deductible as ordinary and necessary business expenses pursuant to I.R.C. § 162. See Rev.Rul. 76-71, 1976-1 C.B. 808, 810 (educational expenses incurred by employer for employees are deductible as ordinary and necessary business expenses if test of Treas. Reg. § 1.162-5 met). There appears to be no disagreement that the subjects taught at the seminars, economic history, comparative economics and philosophy, were valuable to the participants. The tax court and the majority have concluded that the taxpayer-company failed to establish a direct relationship between the seminars and improved job performance so as to entitle the taxpayer to deduct the expenses of the seminars as employee educational expenses. Majority Opinion at 1217; Love Box Co. v. Comm’r, 49 T.C.M. (CCH) 479, 481 (1985). Also, the tax court and the majority have concluded that the seminar expenses are not deductible as advertising expenses because the taxpayer failed to prove that the seminars kept the taxpayer’s name before the public or resulted in increased patronage. Majority Opinion at 1218; Love Box Co., 49 T.C.M. at 488. I dissent from these conclusions.
The majority has denied the educational expense deduction because “the seminars emphasized broad attributes which would be beneficial in any line of work or person*1219al endeavor.” Majority Opinion at 1217. But merely because the seminars might benefit participants both inside and outside the work environment does not negate the evidence that the seminars had a positive affect on job-related skills. Even assuming that the taxpayer-company’s president or its employees benefited personally, all that need be shown is that the seminars maintained or improved skills required in the taxpayer’s business.
And on this point, the evidence is uncon-troverted. The taxpayer-company had sponsored these seminars annually since 1949 as a way of motivating employees to take individual responsibility for their daily tasks. Rec. tr. at 18-19. The seminars reflect attributes of the company’s management philosophy, for example, dependability and responsiveness in the marketplace. The company’s president testified that the seminars were designed to reinforce “an image with our customers that they would absolutely be able to depend upon us no matter what happened.” Id. at 20. Attendance at the seminars was not required, but attendance was used to identify those who might be suitable for advancement. Id. at 22. The president also testified that the management philosophy at the company was a key factor in its success in the corrugated box market. Id. at 25, 47. Indeed, the company’s sales grew from $2.5 million in 1956 to over $24 million in 1979, and the number of employees increased from 45 employees in fiscal year 1956 to about 600 employees in fiscal year 1978. The vice-president and general manager of the company testified that the seminars had contributed to the success of the company, had helped retain better employees and had improved relationships with suppliers and customers. Id. at 63-64. The seminars were consistent with the way the company sought to differentiate itself from the competition (the large integrated box manufacturers) because the seminars stressed careful attention to customer needs. Id. at 67-68. One of the company’s employees, who had worked at another box manufacturer, testified that the ideas presented at the seminars improved his performance. Id. at 86. (“It has made me a better salesman. My sales went from, well, it increased about six-fold in seven years. We must be doing something right.”).
Long-run survival of a manufacturing organization often depends upon a clear sense of direction and an ability to forecast future business trends. Strategic planning is all-important to a business in a competitive environment, because those businesses unable to adapt to change will disappear from the market in the long run. Just as important as a company’s technological resources are the company’s human resources, the people who make up the company. The unanimous testimony was that the seminars developed the human resources of the company and instilled a clear sense of the company’s direction in the participants. On the first point, the seminars are analagous to a Dale Carnegie course which improves the human relations skills of the participants. On the second point, the seminars emphasized the values which had made the company a success and insured its long-range survival. Among excellent companies, similar expenditures for such purposes would not be unusual. The authors of a best-selling work on the management of successful companies have written: “Every excellent company we studied is clear on what it stands for, and takes the process of value shaping seriously. In fact, we wonder whether it is possible to be an excellent company without clarity on values and without having the right sorts of values.” T. Peters & R. Waterman, In Search of Excellence, 280 (1982). Thus, the seminar expenditures ought to be deductible as ordinary and necessary business expenses because they are incurred so that the company will prosper.
The majority’s legal conclusion regarding the educational expense issue rests in part on discounting the uncontroverted testimony of taxpayer’s employees and customers. What is unusual about this case is that the taxpayer put on testimony of three company employees and two representatives of customers, and the testimony pertaining to the direct benefits of the expenditures to *1220the taxpayer-company was disregarded. This is not a case where the Commissioner refuted the evidence of the taxpayer, as some of the facts were stipulated and the Commissioner called no witnesses. On cross-examination, the Commissioner unsuccessfully attempted to characterize the seminar expenditures as political and nondeductible under Treas.Reg. § 1.162-20. The Commissioner did establish that the seminars would be useful in other endeavors, but that, in my view, cannot be a bar to deductibility.
Without question, we are bound by the findings of the tax court unless clearly erroneous, but I fear that the tax court and the majority have substituted their judgment for that of the company, and have concluded that, because the education provided was too general and did not reach enough employees, it could not bear a proximate relationship to the company’s business. This approach is not in keeping with the current regulation which “established a more objective standard for determining whether the cost of education may be deducted as a business expense.” Carroll v. Comm’r, 418 F.2d 91, 94 (7th Cir.1969). The tax court said:
The relationship between the seminars and the personal interests of Robert D. Love, however, is obviously more than coincidental. The generalized and self-serving testimony of petitioner’s witnesses with respect to the benefits to be derived from the seminars cannot, therefore, carry petitioner’s burden of proof, regardless of the failure or inability of respondent to contradict their assertions.
Love Box Co., 49 T.C.M. at 483 (emphasis added). Merely because the witnesses who testified on behalf of the taxpayer support the taxpayer’s contentions does not mean that their testimony is to be disregarded as self-serving. Weir v. Comm’r, 283 F.2d 675, 680 (6th Cir.1960); cf. Byron v. Heckler, 742 F.2d 1232, 1235 (10th Cir.1984) (specific, legitimate reasons must be given for disregarding the opinion of a social security claimant’s treating physician). Here, the taxpayer’s employees were clearly the most knowledgeable about the applicability of the education to the company’s strategic plan. Their testimony is reasonable and uncontradicted. Consequently, the taxpayer ought to prevail on the educational expenditure issue.
For similar reasons, I cannot agree with the decision of the tax court and the majority to deny a deduction for institutional or “goodwill” advertising expenses under Treas.Reg. § 1.162-20(a)(2). Again, the company’s president and general manager and representatives of two large corporate customers testified as to the promotional value of the seminars. Rec. tr. at 35-36, 68, 88-90, 97-98. Treas.Reg. § 1.162-20(a)(2) merely requires that these types of expenditures are deductible if they “are related to the patronage the taxpayer might reasonably expect in the future.” (Emphasis added.) The employees of the taxpayer so testified, but the majority would require the taxpayer to prove that the seminars influenced the customers to become customers. Majority Opinion at 1217. That is not the test. Nor must there necessarily be a showing that the seminar expenses assisted in the company’s “solicitation of new customers.” Id. at 1218. Promotional expenses designed to retain' old customers surely are deductible. All of the uncontradicted evidence indicates that making the extra places available to representatives of customers is “related to the patronage the taxpayer might reasonably expect in the future.” Treas.Reg. § 1.162-20(a)(2). The regulation’s test is one of a reasonable prospect of securing future patronage. This does not require market studies and strict quantitative proof (which probably would cost more than the seminars); the majority and the tax court simply place too great a burden on the taxpayer to prove post hoc the effect of promotional expenditures.
I would reverse.