Love Box Company, Inc. v. Commissioner of Internal Revenue

argues also defendant rect examination about some of the circum- (1) the trial court refusing erred to in- surrounding stances prior deportation. jury reasonable, struct that Miranda’s Even assuming that the trial court erred mistaken, albeit belief that he lawfully was in allowing the questioning at issue in this present in the United States was a defense case, such an error is other, harmless if to a section charge, (2) limiting independent evidence of the defendant’s attempt Miranda’s present that defense guilt is overwhelming. See United States through testimony about his intent and Perez, Cir. state of mind. These hinge contentions on 1974); 3A Wright, Federal Practice and C. of Miranda’s success assertion that sec- Procedure (2d 1982). ed. In this tion 1326 contains a criminal intent ele- case, other evidence overwhelmingly estab- ment. Because “a pos- mistake defense is lished each element necessary for section a only sible if there is some ‘mental state 1326 conviction regard without to the chal- required to establish a material element of lenged testimony. Miranda admitted that the crime’ that negate,” mistake can he is a Mexican national and that he volun- Anton, United States v. tarily entered the United States. He also (7th Cir.1982) (quoting W. LaFave & conceded that deported he was previously Scott, Criminal A. (1972)), Law a mis- and that he did permission not obtain the take instruction is and a mistake the Attorney General before his reentry. appropriate only defense is if criminal in- AFFIRMED. plays part tent a charged. crime We have Thus, held that it does not. neither requested instruction nor the attempted

defense appropriate here. Accordingly, reject these relating jury contentions

instructions and the testimony. defendant’s

The defendant Anton relies proposition that is mistake a valid defense COMPANY, BOX LOVE to a prosecution. section 1326 The Seventh INC., Appellant, Circuit Anton held that criminal intent an element of section 1326.

explained above, this circuit adopted has COMMISSIONER OF INTERNAL Hernandez, different rule. 693 F.2d at REVENUE, Appellee. 1000. Miranda’s reliance is mis- therefore No. 85-1804.

placed. United States Appeals, Court Finally, alleges defendant that the Tenth Circuit. trial court erred when it allowed government Miranda about the March reason prior for his deportation on cross-ex validity amination. The prior depor

tation trial; not at fact, was issue

defendant pretrial withdrew a motion chal

lenging that action. correctly Miranda as

serts that evidence of crimes or prior bad charged

acts not in an indictment is inad

missible to show a defendant’s criminal dis-

position. 404(b); United Fed.R.Evid. Shomo,

States v. 786 F.2d 981 Cir. 1986). government contends, however, its questioning in regard this was

within proper scope of cross-examina

tion because the defendant testified on di- (Donald Hill,

Marvin J. Martin E. with brief), Martin, Churchill, him on the Over- man, Cole, Chartered, Wichita, Kan., Hill & appellant. for Ellisen, (Glenn Atty., Bruce R. Tax Div. Archer, Jr., Gen., Atty. L. Asst. L. Michael Farber, Div., Paup Attys., and Richard Tax brief), Justice, Dept, with him on the D.C., Washington, appellee. McKAY, McWILLIAMS, Before BALDOCK, Judges. Circuit McKAY, Judge. Circuit The issue before the court is whether the sponsoring in company costs a incurred enterprise seminars a well-known free advocate are deductible under the (I.R.C.).1 Revenue of 1954 Internal Code Company, (Company) is a Love Box Inc. corporation Kansas which manufactures and sells boxes and other fiberboard and operates products. Company wood fa- Kansas, Oklahoma, in cilities located Ken- tucky, Company Ohio and Arkansas. The agricultural engaged operations in also enterprises in real estate in Kansas and years, Company Over the has Arizona. developed strong corporate philosophy economics, finances, concerning in- societal terests, subjects general and other of a philosophy nature. This manifests itself things a commitment to such as individual responsibility, enterprise, free freedom and quality products and ser- excellence truthfulness, vice, honesty, hard work and integrity. Company actively sought has perspective

project philosophical its to its employees by arranging and customers public speeches many and seminars. For sponsored years the has pur- by well-known scholars. The stated pose behind these seminars was to educate and to advertise perspective public. Company’s indicated, amended, years statutory 1. and in effect for the 1978 and Unless otherwise all refer- years in issue. ences are to the Internal Revenue Code Company sponsored 1978 and two Congress directed the United States intensive, five-day featuring Mr. Appeals Courts of to review tax court deci- Robert LaFevre. The seminars were limit- sions “in the same manner and to the same thirty-five participants, ed to extent as decisions of the district courts in given ees were priority first to attend. At- civil actions tried jury.” without a I.R.C. voluntary, tendance was and any of the Appellate courts ordinarily apply Company’s employees who desired at- “clearly a erroneous” standard when given tend time were off work without a presented with questions. factual Com- reduction in pay. approximately Of 600 Duberstein, missioner v. 278, 363 U.S. employees, 10 the 1978 attended 1190, 80 S.Ct. 1198-99, 4 L.Ed.2d and 7 Record, attended 1979 seminar. (1960) (review 1218 of whether a transac- exh. 9 remaining and 10. The attendees tion gift constitutes a under the I.R.C. years customers, for both included two two raised a factual subject issue to “clearly prospective customers, rep- other business standard). A de novo standard erroneous” resentatives, gen- individuals from the is used review when evaluating ques- public. eral tions of law. Helvering v. Tex-Penn Oil In presenting the 1978 and 1979 semi- Co., 481, 491, 300 569, U.S. 57 573, S.Ct. 81 nars, Company expenses incurred (1936) (review L.Ed. 755 of tax board deci- $8,949.91 $9,545.01 The respectively. sion was “a conclusion of or law at least primary fees, costs were the speaking question ... mixed of law and fact” and is room, and Record, meals Mr. LaFevre. subject independent judicial review). 1, 10, vol. doc. Company at 3. The deduct- However, the standard of review of mixed ed part these costs as of their “Public questions is entirely not established.2 See Promotion” Upon audit, expenses. Swint, Pullman-Standard v. 273, 456 U.S. Commissioner determined that ex- these 19, 289-90 1781, n. 102 19, S.Ct. 1790 n. 72 penses were not deductible because (1982). L.Ed.2d 66 The Circuit Courts of were ordinary business Appeals applied both de novo have Id., expenses 1, under I.R.C. vol. § clearly erroneous review deciding when 11, doc. at 11-12. questions mixed of law and fact. Id. The Company

The petition filed a with Tenth Circuit has concluded that if “the Tax Court seeking a question redetermination of the mixed primarily involves a factual deficiencies by assessed inquiry, Commissioner. erroneous standard is The Tax Court proximate found that If, no appropriate. however, the ques- mixed relationship existed between the seminars tion primarily involves the consideration of job and the skills of legal principles, then a de novo review by Therefore, ees. the seminar were appellate Supre appropriate.” court is not deductible as educational Ricketts, 958, (10th Cir. which maintained skills. 1986); United see States v. McConney, See Treas. Reg. (as 1.162-5 amended § 1195, denied, F.2d cert. Cir.), 1967). The Tax Court also found that the 824, 101, 469 U.S. 105 S.Ct. 83 L.Ed.2d 46 relationship between the at- nonemployee (1984) (a “clearly erroneous” standard is tendees and was too tenuous applied if the issue tends to more factu- justify the Company’s claim ally based and concerns ap- factors more alternatively could be deducted as propriately by court). decided the trial “good will” advertising. See Treas. Reg. 1.162-20(a)(2) (as 1969). amended in Since we must consider both the Both rulings are before this regarding court facts the 1978 and 1979 seminars appeal. applied by 162, law as section this Supreme 2. The ques- Court has defined applied mixed whether rule of law as to the estab- tions as those "in which the historical facts are lished facts is or is not violated.” Pullman- established, admitted or the rule of law is undis- Swint, 273, 19, Standard 456 U.S. 289 n. puted, and the satisfy issue is whether the facts 1781, (1982). S.Ct. 1790 n. 72 L.Ed.2d 66 standard, statutory put or to way, it another presents question case mixed of fact and Section 162 supporting and its regula- reviewing law. section 162 ex- Courts tions create a framework which allows de- penses usually emphasized the factual types have ductions for expenses, various in- surrounding expendi- cluding characteristics certain educational and Supreme early expenses. Court stated on primary requirement tures. “[wjhether expenditure directly deductibility an under section 162 is that the particular related to a and whether it is expense be an ordinary and nec- pure questions doubtless essary expense “proximate which bears a Except fact most instances. where a and direct involvedf,] unmistakably of law is trade or business.” Carroll v. Commis sioner, Appeals (1968), a decision of the Board of Tax 51 T.C. aff'd, 418 Cir.1969). Thus, these should not be reversed issues ... our exam- appellate the federal courts.” Commis ination of plaintiffs whether educational 467, 476, Heininger, sioner v. 320 U.S. 64 expenses and come within sec- (1943)(footnote 249, 254, S.Ct. 88 L.Ed. 171 deductibility tion 162 focuses on whether omitted); Helvering, expenses v. 290 enough see Welch U.S. the bear a close relation- 111, 114-15, 8, 9, 212 ship 54 S.Ct. 78 L.Ed. to the Company’s say business to (1933) (payments ordinary to creditors not they ordinary are necessary. and expenses and business under the first claims that the situation); particular Glasgow facts of that expenses LaFevre seminar are deductible Commissioner, 1045, v. 486 F.2d 1046 company the ordinary and necessary curiam) Cir.1973) (per (expenses of expenses education employees.3 of its Ed educational courses deducted under I.R.C. expenses satisfy ucation ordinary the and 162(a) “essentially involved necessary requirement section pro 162 fact”). To resolve the issues before us they vided meet the enumerated tests of now, we must examine the characteristics Treasury Regulation 1.162-5. Rev.Rul. and circumstances of the and 1978 1979 76-71,1976-1 308, Treasury reg C.B. LaFevre seminars and determine how these ulation 1.162-6 sets forth a series of non- link features the seminars to the business qualifying qualifying and tests. The first Therefore, purpose of Company. examination if is to see the educational regard primarily these issues as factual expense disqualified from deduction be findings and uphold will of the tax (1) it cause was incurred to meet the mini findings court unless the erro- requirements mum educational of the trade neous. (2) qualify or business or for a

“Whether and to what extent deduc Treas.Reg. new trade or business. 1.162— depends upon legisla 5(b)(2) (3). tions shall be allowed and Provided the educational grace; tive only provi is clear disqualified as there are not from deduc tion, sion any particular therefore can satisfy deduction must also qualifying (1) be allowed.” requirement New Colonial Ice Hel maintaining Co. v. of either or 435, 440, 788, 790, vering, (2) 292 improving job U.S. 54 S.Ct. meeting skills or the ex (1934). Moreover, 78 L.Ed. 1348 press requirements the tax employer of the or the payer proving bears the burden of that his law for employment. retention of Treas. expenditures 1.162-5(a),(c)(1) Reg. (c)(2). are deductible. satisfy Welch v. Hel 115, 9; vering, 290 ing requirement U.S. at 54 S.Ct. at maintaining or im Commissioner, Medco proving required Products Co. v. 523 skills employment, his (10th Cir.1975). 138 it is insufficient that the educational ex- 3. We note at the outset that the education ex- ducted under section 162 as and neces- pense historically provided sary expenses doing deduction is to an business or as some expenditures compensation individual who employee. makes to maintain form of to the Be- improve job or Treas.Reg. skills. cause the case law this area is so fact-oriented 1.162-5(a). corporation geared § penditures taxpayers, guidance When a makes ex- to individual help employees improve to provided by application previous their deci- skills, frequently primarily by analogy. are more de- must be sions penses merely improve general skills. To directly contributed to its trade and busi- deductible the improve must ness. The Company gave testimony that skills “proximate that bear a and direct promoted a philosophy based relationship trade or busi- traits such as honesty, self-reliance, Commissioner, ness.” Carroll v. dependability. Record, T.C. transcript, at (1968), aff'd, the record does Cir.1969); see Anaheim Paper Sup Mill not indicate that participation in the semi- plies, Commissioner, Inc. v. nars job performance 37 T.C.M. any mea- (CCH) (1978) (although way surable employer’s ex- or that the Company used penses employee’s general college edu- attendance to select employees for cation generally were Rather, advancement. beneficial the com- the Company’s tes- pany, they timony were not deductible reveals empha- there was sized no direct broad between attributes which would be ben- operate skills eficial in any compa- line of work personal en- ny’s taken); deavor. see business courses presented evidence by the generally Commissioner, Smith never bridged T.C. the gap from indi- Memo (1981) (business 1981-149 improvement vidual classes improve- were proximately ment. The Company’s related skills of testimony never es- section foreman in tablished quality how control de- the seminars maintained or partment); Commissioner, improved job skills which were a direct and McAuliffe (1980) proximate T.C.Memo (English benefit to classes the Company in the production increased attorney’s defense and general of under- sale wood and fiberboard standing products. competency and proxi- did not but

mately improvement relate to the legal of We do deny not that the teaching of skills); Commissioner, Baker v. T.C. freedom, individual responsibility, hard (1971)(courses Memo 1971-279 in geology, work, thrift, honesty, truthfulness, and in- economics transportation, etc. were not tegrity may have benefited the employees closely enough improve flight related to and thus Company; benefited the but rath- operations skills). job officer’s er we conclude that the expenses analogous are more general education present case, In the the commission expenses which are too spe- tenuous to the er argue did not expenses the seminar cific skills of the to qualify were they nondeductible because were dis for deduction under section light 162. In qualified, but rather because did not of the evidence and our deferential stan- meet one of qualifying two tests. The case, dard in this the Tax Court’s finding Company did not contend that the seminar expenses that the seminar were too attenu- expenses express were an requirement as a ated from Company’s purpose business condition to continued employment. to be ordinary deductible as and necessary fact, the record reveals that attendance at expenses education clearly was not errone- was purely Thus, voluntary. ous. light of the authority, above the ex penses for the LaFevre seminar would be The Tax Court also ruled that the deductible only if could dem “relationship between nonemployee at onstrate that the seminars maintained or tendees of the seminar and the business improved job skills in its ... support too tenuous a deduc- [was] 1967, 4. Prior to Treasury Regulation primary purpose 1.162-5 to be for the educational required expenses that educational expenses, be under- the skills must still bear a taken primary purpose with the maintaining relationship taxpayer's direct to the trade or improving skills Commissioner, business. 69 T.C. Schwartz trade or primary 877, purpose (1978) business. This (taxpayer re- 889 prove failed to “suffi- quirement by was eliminated an amendment expenses cient nexus” between and skills of regulation (as Treas.Reg. business); Commissioner, 1.162-5 T.C. McAuliffe 6918, 1967-1 by amended 36); T.D. (education C.B. see also Memo 1980-89 deduction disallowed Commissioner, 91, Carroll v. expenses only tenuously job. related to Although improving skills). longer of skills no has Treas.Reg. agree advertising expenses." purpose, with a business that the for tion Record, 11, 1.162-20(a)(2). doc. at 12. Company failed to meet its burden in § show- advertising promotional and scheme An ing relationship a direct the semi- between though the even meth- may deductible upon nar’s focus individual character devel- or nonconventional. Polet ods are unusual opment Company’s solicitation of Commissioner, 330 F.2d ti v. customers. We conclude that the find- new Cir.1964). burden still re- “[t]he ing the Tax Court erro- was prove taxpayer to the con- mains neous. purpose to establish nectivity of business claimed, deductible ex- right AFFIRMED. If the cost relates to penses.” at 824. Id. characterized as activity properly more an BALDOCK, Judge, dissenting. Circuit the deduction cannot be allowed.

personal, Commissioner, Gale, Inc. v. W.D. majority agree I with the that this case Cir.1961) (maintaining and of mixed involves review a law per- for operating racing speedboats was fact, whether educational seminar ex- pur- for pleasure and not business sonal penses of the are deductible as pose). ordinary business Company claims the seminar ex- pursuant to I.R.C. 162. See Rev.Rul. § pub- to its penses bear a direct (educational C.B. might expect licity patronage it and to by employer incurred future, though the seminars even ees are deductible as and neces- only publicized by word-of-mouth were sary expenses if test Treas. produced to show that the no evidence was met). Reg. appears 1.162-5 There to be Company's name kept the before disagreement subjects taught no that the its market. The 1978 and seminars, history, compa- at the economic by only two of the seminars were attended customers, 10,000 15,000 philosophy, Company's rative economics and were Record, potential customers. exh. 9 two participants. valuable to the The tax court produce and 10. The did as wit- majority and the have concluded that the Both of its customers. nesses two current taxpayer-company failed to establish a di- Compa- regarded the customer-witnesses rect between the seminars and important it ny's philosophy as because improved performance so as to entitle represented “corporate cul- an excellent taxpayer expenses of to deduct the the ture” to their business that was favorable employee educational ex- seminars Record, transcript, at relationship. 1217; penses. Majority Opinion at Love testimony does not this Comm’r, (CCH) 479, 49 T.C.M. Box Co. v. any way in influ- reveal that the seminars Also, (1985). the tax court and the custom- enced these witnesses to become Indeed, majority concluded that the seminar ers. one customer-witness testified have he would at- cross-examination that are not deductible as pro- regardless tend such seminars of who to because the failed peo- moted the “I know some other event. prove kept that the seminars ple who sponsored have LaFevre public or resulted in in- name before I they're pretty and think much the same patronage. Majority Opinion at creased people.” kind of 92. This witness Id. at 1218; Co., 49 at 488. I Love Box T.C.M. testify people went on to “I think who that dissent from these conclusions. seminar, helps attend this it them kind of get picture, philosophical a broad out- a majority has the educational The denied let, direction, helps yes, I think that expense deduction “the seminars because Although them a lot.” the evi- Id. at 93. emphasized broad attributes which would presented dence by the customer-witness any person- be in line of work or beneficial circumstantially connects the seminars Opinion endeavor.” al at 1217. Majority has made me a better salesman. My sales merely might But the seminars from, well, went it increased about six-fold participants benefit inside both and outside in years. seven We must be doing some- negate the work environment does not thing right.”). positive evidence that the seminars had a Long-run survival of a manufacturing or- job-related affect on assuming skills. Even ganization depends often upon a clear the taxpayer-company’s president or sense of direction and an ability to forecast employees personally, its benefited all that future business trends. Strategic planning need is be shown that the seminars main- is all-important to a business in a competi- tained skills environment, tive because those businesses taxpayer’s business. adapt unable to to change will disappear point, And on this the evidence is uncon- from long the market in the run. Just as troverted. The had taxpayer-company important as company’s a technological re- sponsored these annually since sources are the company’s human re- way motivating 1949 as a sources, people who up make the com- responsibility take individual daily for their pany. The unanimous testimony was that tasks. Rec. tr. at 18-19. The seminars the seminars developed the human re- reflect attributes company’s sources of the company and instilled a clear management philosophy, example, de- company’s sense of the direction in the pendability and responsiveness mar- participants. On the point, first the semi- ketplace. company’s president testi- analagous nars are Carnegie Dale fied that designed seminars were improves course which human relations reinforce “an image with our customers skills of the participants. On the second absolutely would be able to de- point, emphasized the seminars the values pend upon us no matter happened.” what which made the company had a success and at Id. 20. Attendance at the seminars was long-range insured its Among survival. required, but attendance was used to companies, excellent similar identify might those who be suitable for purposes for such would not be unusual. advancement. president Id. at 22. The best-selling authors of a work also testified that management philoso- management companies of successful have phy at the company key was a in its factor “Every written: excellent company we success in corrugated box market. Id. for, studied clear on what it stands Indeed, the company’s sales process takes shaping of value serious- grew from $2.5 million 1956 to over $24 fact, ly. possi- wonder whether it is million number of ble to an excellent company without ees increased employees from 45 in fiscal clarity having on values and without the year 1956 to employees about 600 in fiscal right sorts of values.” T. Peters & R. year 1978. vice-president The general and Waterman, Excellence, In Search of manager of company the testified that the (1982). Thus, the expenditures seminar seminars had contributed to the success of ought to deductible as the company, had helped retain em- better because ployees and had relationships are incurred so the company pros- that will suppliers with and customers. Id. 63- at per. 64. The seminars were consistent with the way legal company sought majority’s regarding the The conclusion to differentiate (the itself from the expense part the educational competition large issue rests inte- grated manufacturers) discounting box the because the uncontroverted testimo- ny taxpayer’s employees stressed of careful attention and customers. to cus- tomer needs. Id. at 67-68. What is unusual One of the about this case is that the company’s employees, taxpayer put who had on testimony compa- worked at of three manufacturer, another box ny employees representatives and two testified of presented the ideas customers, at the im- testimony pertaining and the to proved performance. (“It Id. at expenditures 86. the benefits of direct to the taxpayer-company disregarded. the was cability of the education to the company’s This is not a case where the Commissioner strategic plan. Their testimony is reason- taxpayer, of the as refuted the evidence able and uncontradicted. Consequently, stipulated some of the facts were and the taxpayer ought the prevail to on the edu- called no witnesses. On Commissioner expenditure cational issue. cross-examination, the Commissioner un- reasons, For similar I agree cannot with attempted to characterize successfully the decision of majori- the tax court and the political expenditures non- ty deny a deduction for institutional or Treas.Reg. 1.162-20. deductible under § “goodwill” advertising expenses under The did establish that Commissioner Treas.Reg. 1.162-20(a)(2). Again, § useful in other seminars would be endeav- company’s president general manager that, view, ors, my cannot be a bar but representatives large corporate of two deductibility. customers testified promotional as to the question, we are bound Without 35-36, value of the seminars. Rec. tr. at findings the tax court unless of Treas.Reg. erroneous, Ibut fear that the tax court and 1.162-20(a)(2)merely requires that these § majority judg- have substituted their types of if they deductible company, ment of the for that and have patronage “are related to the the taxpayer that, pro- concluded education might reasonably expect in the future.” general vided and did not was too reach added.) (Emphasis The of the enough employees, prox- it could not bear a testified, taxpayer so majority but relationship company’s imate busi- require taxpayer would prove approach keeping is not in ness. This with the seminars influenced the customers to regulation the current which “established a Majority Opinion become customers. at objective determining more standard 1217. That is not the test. Nor must there may whether the cost of education be de- necessarily showing be a that the seminar expense.” ducted as a business Carroll v. company’s assisted in the “solici- Comm’r, (7th Cir.1969). tation of new customers.” at Id. The tax court said: expenses designed Promotional to retain' between the seminars surely old customers are deductible. All of personal and the interests of Robert D. the uncontradicted evidence indicates that Love, however, obviously is more than making places repre- the extra available to generalized coincidental. The and self- sentatives of customers is “related to the serving testimony petitioner’s of witness- patronage might taxpayer reasonably respect es with to the benefits to be expect Treas.Reg. future.” cannot, derived from the seminars there- 1.162-20(a)(2). regulation’s test fore, carry petitioner’s proof, burden prospect securing one of a reasonable regardless or inability failure patronage. require future This does not respondent to contradict their asser- quantitative market studies and strict tions. (which proof probably would cost more Co., (emphasis Love Box 49 T.C.M. seminars); majority than the added). Merely because the witnesses who simply place great tax court too a burden testified on support behalf prove post on the hoc the ef- contentions does not mean promotional expenditures. fect testimony disregarded their is to be I would reverse. self-serving. Comm’r, Weir v. 283 F.2d (6th Cir.1960); Byron v. Heck- cf. ler, (10th Cir.1984) (specific, legitimate given reasons must be

for disregarding opinion of a social

security treating physician). claimant’s

Here, taxpayer’s employees were clear-

ly the knowledgeable most appli- about

Case Details

Case Name: Love Box Company, Inc. v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Tenth Circuit

Date Published: Mar 28, 1988

Citation: 842 F.2d 1213

Docket Number: 85-1804

Court Abbreviation: 10th Cir.