## Facts

- Townsend Industries, an Iowa manufacturer of printing equipment, held an annual program for roughly forty years consisting of (1) a two-day meeting at its Iowa headquarters for salespeople and company personnel and (2) a four-day, employer-paid fishing trip to a resort in Ontario, Canada.
- The Canadian trip included two travel days by bus and was not formally mandatory, but employees were strongly encouraged to attend and often felt pressure to participate.
- The trip had minimal formal programming beyond one dinner where the owner and CEO addressed the state of the company.
- Testimony showed ongoing informal business discussions during the trip (e.g., on the bus, in boats, and at meals), including introduction of new products, coordination of sales efforts, and discussion of sales strategies.
- The IRS determined that the per-employee cost of the fishing trip constituted taxable “wages” and assessed employment tax deficiencies for 1996 and 1997 for failure to withhold income and FICA taxes.
- Townsend paid a small portion of the 1996 assessment, filed an administrative refund claim, then sued for a refund; the government counterclaimed for the remaining deficiencies.
- After a bench trial, the district court ruled for the government, concluding the trip lacked a business purpose and the costs were wages; Townsend appealed.

## Issues

1. Whether the employer-paid per-employee cost of the annual Canadian fishing trip constituted “wages” subject to income tax withholding and FICA taxes.
2. Whether, given the trip’s mixed recreational and business features, the costs would have been deductible by employees as ordinary and necessary business expenses if paid personally (and thus not treated as wages).
3. Whether the trip’s primary benefit accrued to the employer (business expense) or to the employees (compensatory personal consumption).

## Decision

- The Eighth Circuit reversed the district court and remanded.
- It held that the per-employee cost of the trip was not taxable wages for employment tax purposes.
- The court treated the district court’s “no business purpose” determination as a legal conclusion reviewed de novo and concluded the record established a sufficient business purpose.
- Applying a primary-benefit analysis, the court concluded the employer was the principal beneficiary despite the trip’s recreational fishing component.
- Because the employees could have deducted the costs as business expenses had they paid them, Townsend was not required to treat the trip costs as wages or withhold employment taxes on those amounts.

## Legal Principles

- Whether an employer-provided benefit is taxable “wages” for employment tax purposes may turn on whether the expense would be deductible by the employee as an ordinary and necessary business expense if personally incurred.
- Employer-paid travel or entertainment is more likely treated as nonwage business expense when it serves a bona fide business purpose and primarily benefits the employer rather than providing compensatory personal consumption to employees.
- In a taxpayer refund suit, factual findings are reviewed for clear error and legal conclusions de novo; characterization of undisputed facts as establishing (or not establishing) a business purpose may be treated as a legal conclusion.

## Conclusion

The court held that Townsend’s employer-paid annual Canadian fishing trip, though recreational in form, functioned as an extension of the company’s sales and business meetings and primarily benefited the employer; therefore, the trip costs were not taxable wages subject to withholding or FICA.


Townsend Indus., Inc. v. United States, 342 F.3d 890 (8th Cir. 2003)