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COST OF COMPANY-PAID FISHING TRIPS TAXABLE TO EMPLOYEES
JANUARY 2003

The cost of a company's annual employee fishing trip were taxable wages to the employees, not deductible business expenses and the company was liable for $58,000 in additional employment taxes, a federal district court has held.

The facts, Townsend Industries, based in Altoona, IA manufactures and sells printing presses. For years, it has conducted an annual sales meeting at its headquarters where sales personnel arrive over a weekend and meetings are conducted on Monday and Tuesday. Topics addressed at these meetings include product technical performance problems and potential solutions, advertising, and relationships with customers.

The same week, Townsend sponsors a fishing trip for all employees, including sales personnel and factory employees that runs from Wednesday through Saturday. The fishing trip is not mandatory but the company encourages all employees go on the trip. Family members are not invited. The company feels that by placing sales personnel and employees in comfortable and pleasant setting, business discussions are encouraged and employees afterward will be motivated to perform their jobs better.

Employees indicated that while on the trip they spent 1 to 4 hours discussing Townsend business and as a result gained advantage in performing their jobs. Employees were paid their regular wages while on the trip. But none of the costs related to the trip were treated as wages taxable to the employees.

The Ruling. The costs of the fishing trips were taxable wages to the employees, not deductible business expenses, and the company was liable for $58,000 in additional employment taxes, the court held. To determine if the fishing trips were a working condition fringe benefit, the court considered whether the expenses satisfied the "ordinary and necessary" requirement. The court cited the lax attendance policy for the trip and the disconnect between the sales meeting and the fishing trip as a means for making its decision While all employees are invited and encouraged to attend, a significant number do not and while business is discussed on the fishing trip , it is not done in an organized and monitored environment where the company is certain the sales meeting agenda is followed and discussions continued.

Even if the court had found the fishing trip expenses to be ordinary and necessary, the trip failed the IRC 274(a)(I)(A) requirement that the entire expense be directly related to the active conduct of Townsend's business. Townsend failed to show that the principal character or aspect of the fishing trips was the active conduct of business but rather it was a relaxed and fun event where business was discussed as part of the background to the primary fishing endeavor.

RIA OBSERVATION: Townsend's liability was limited to employment taxes. The expenses of the trip were still deductible by it as wages. But Townsend did not initially treat these amounts as wages and presumably didn't include these amounts on employees W-2 forms. The employees would not have included the additional amount wages on their income tax returns. Because the statute of limitations for the years at issue here, 1996 and 1997, has expired, it appears the IRS is barred from seeking to collect more taxes for those years from individual employees.

2003 OASDI WAGE BASE INCREASES TO $87,000

The maximum amount of earnings subject to the Social Security (OASDI) payroll tax will increase to $87,000 in 2003, up from the year 2002 level of $84,900. Social Security Commissioner Jo Anne B. Barnhart announced on October 18. The $2,100 (2.41%) increase is significantly smaller than the 2002 increase of $4,200 (5.6%) and is $2,700 less than the Social Security Actuary's forecast of $89,700, issued in March.

The OASDI tax rate will continue at 6.2%. As a result of the wage-base increase, the maximum yearly social security tax paid by employees and employers will increase by $130.20 each in 2003 to $5,394. The Medicare (HI) tax rate will continue at 1.45% on all wages paid.

Other News The amount of earnings required to be earned in a quarter of coverage will increase to $890 in 2003, up from $870 in 2002. Social Security and Supplemental Security Income (SSI) benefits will increase by 1.4%, lifting the average monthly Social Security benefit to $895 and the maximum federal SSI monthly payment to an individual to $552. 

The retirement earnings test remains in effect for individuals aged 62 to 64 who continue to work while collecting Social Security benefits. For affected individuals, $1 in benefits will be withheld for every $2 in earnings above $11,520 in 2003 (up from $11,280 in 2002). For working individuals collecting benefits who turn 65 in 3003, $1 in benefits will be withheld for every $3 in earnings above $30,720 prior to the month in which the individual attains age 65, from which point there is no limit on earnings.

BUSINESS CARS:LEASING STILL DRIVES BEST TAX BARGAIN

In many cases, the new 30% bonus depreciation rule makes buying business assets a better tax deal than leasing. But for most business cars its another story. Leasing typically still offers more tax advantages. 

Reason: Business car depreciation is capped. In 2002, for example maximum first-year depreciation is $7,660 for a new car used 100% for business (proportionately less if it's used only partially for business). That's true no matter if your business car costs $30,000, $40,000 or more.

Leasing a business car, however, effectively gets you around the cap. If you're leasing a car for $500 a month, and that car is used 100% for business, you can deduct the entire $500 per month.

It's true that leased business cars generate extra taxable income-called the "lease inclusion amount" to make up for this favorable treatment. But that amount often turns out to be modest.

Closing the gap. Leasing still wins, but the new tax law makes it a closer ballgame because the first-year depreciation allowance has been increased from $3,060 to $7,660.

As a result, buying a business car is probably competitive with leasing, taxwise, if the car is modestly priced, at say $20,000 or less.

For more expensive cars, the extra $4,600 in first-year depreciation won't make up for the lost deductions.

Buy, don't lease, a big SUV. If you really want to maximize your business-car write-offs, buy a SUV weighing more than 6,000 pounds, which depreciates as a truck rather than a car. You can use first-year expensing , the 30% bonus depreciation and uncapped depreciation on the remaining basis, assuming the vehicle is new and used more that 50% for business.

All together, a new SUV you buy for $50,000 might generate more than $35,000 in first-year write-offs, much more than you'd enjoy with any car lease.