## Facts

- Security Industrial Insurance Company sponsored annual out-of-state “sales seminars” and paid agents’ travel, lodging, meals, and much entertainment.
- Agents qualified by meeting prior-year sales goals; top performers could bring companions at the company’s expense.
- The trips emphasized leisure (sightseeing, parties, shows, recreation) at destination locations selected for their appeal; seminar attendance was encouraged but not required and carried no penalty for nonattendance.
- In 1973, an agent attended a four-day Las Vegas trip with her husband; she attended only a few hours of meetings and he attended none.
- In 1975, another agent attended a Mexico City trip with her granddaughter.
- The taxpayers did not report the value of the trips as income; the IRS assessed deficiencies equal to the trips’ fair market value.
- After paying, the taxpayers sought refunds, asserting the trips were non-taxable business seminars or, alternatively, that any inclusion was offset by deductible business travel/entertainment expenses.

## Issues

1. Whether the fair market value of employer-paid “sales seminar” trips for qualifying agents (and their companions) constituted gross income as compensation under 26 U.S.C. § 61(a).
2. If includible in income, whether the taxpayers could deduct some or all of the value as ordinary and necessary business travel expenses under 26 U.S.C. § 162(a), including § 162(a)(2).

## Decision

- The Federal Circuit affirmed the judgment denying refunds.
- The court held the trips conferred an economic benefit and were compensation for services performed in the preceding year; their fair market value was includible in gross income under § 61(a).
- The court held no offsetting deduction was allowed under § 162(a) because the trips were primarily for pleasure and the taxpayers failed to prove the travel and entertainment were directly related to their business.

## Legal Principles

- Gross income under § 61(a) includes the fair market value of employer-provided benefits that function as rewards for past services, even when labeled as training or seminars.
- Substance controls over labels; where a trip is structured and presented mainly as a reward and leisure dominates, it is treated as taxable compensation.
- A § 162(a) deduction for travel/entertainment requires proof that the expense is ordinary and necessary and directly connected to the taxpayer’s trade or business.
- When a trip is primarily a vacation, limited business discussions do not convert the overall expense into deductible business travel.

## Conclusion

The court treated employer-paid “sales seminar” travel earned through sales performance as taxable compensation and denied business-expense deductions where the record showed the trips were mainly recreational and the taxpayers did not substantiate a direct business connection.


McCann v. United States, 696 F.2d 1386 (Fed. Cir. 1983)