## Facts

- Allen J. McDonell and Jeanne M. McDonell, Wisconsin residents filing jointly, disputed a 1960 income tax deficiency and a negligence addition to tax under I.R.C. § 6653(a).
- Allen worked as a home-office assistant sales manager for Dairy Equipment Co. (DECO), supervising distributors and territorial salesmen.
- DECO ran an incentive contest for field sales personnel; winners and their wives received Hawaii trips as prizes. Home-office salesmen were not eligible for the prize.
- For the 1960 trips, DECO selected four home-office salesmen and their wives at random to accompany and supervise groups of prize-winning couples; Allen and Jeanne were selected.
- DECO directed that the trip was an assignment rather than a vacation; the McDonells were expected to remain with the winners and perform hosting and supervisory functions throughout the trip.
- Jeanne’s participation was treated by DECO as part of the employer’s expected social/business functions involving employees’ spouses.
- The trip lasted about ten days and included only one day of formal sales meeting activity, but the McDonells were expected to be “on duty” throughout.
- DECO paid $1,121.96 for the McDonells’ trip.
- The McDonells reported $600 as income (attributing that amount to Jeanne’s travel) and did not report the remainder; the Commissioner asserted that the full $1,121.96 was includible in income.

## Issues

1. Whether all or part of the employer-paid Hawaii trip expenses constituted gross income to the employee and spouse.
2. Whether the trip should be treated as a taxable prize or award under I.R.C. § 74 or as non-taxable employer-directed travel undertaken to perform employment duties.
3. If includible, whether any portion was deductible in computing adjusted gross income.

## Decision

- The Tax Court held for the McDonells.
- No portion of the $1,121.96 employer-paid trip cost was includible in the McDonells’ gross income.
- Because the trip value was not income, the deficiency attributable to the trip was eliminated, and the associated negligence addition could not stand.

## Legal Principles

- A trip is taxable as a prize or award under I.R.C. § 74 when it is granted to a recipient as a contest reward; that characterization does not apply to an employee who is required to attend for employer business purposes and is not an eligible contest winner.
- The tax character of employer-paid travel turns on the employer’s primary purpose and the employee’s obligation to perform services; incidental personal enjoyment does not, by itself, make the value taxable compensation.
- Employer-paid spousal travel may be treated as business-related (and not income) when the spouse’s presence is required or expected to carry out employer-directed social or supervisory functions connected to the employer’s business.

## Conclusion

The Tax Court concluded that the Hawaii trip paid by the employer was not a taxable prize or compensatory fringe benefit to the McDonells because they were selected as accompanying supervisors, were expected to perform continuous employer-directed duties, and were sent primarily to serve the employer’s business objectives rather than to receive a personal reward.


McDonell v. Commissioner, T.C. Memo 1967-18 (1967)