# Appendix — St. Petersburg Bank & Trust Co. v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1975
- **Citation:** 423 U.S. 834

## Text

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JUN O°

IN THE

Mics"

Supreme Court of the United States

October Term, 1974

NO. 74-1519

ST. PETERSBURG BANK AND TR!*T COMPANY
Petitioner

v.

UNITED STATES OF AMERICA
Respondent

SUPPLEMENTAL APPENDIX TO
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

Michel G. Emmanuel

and
Joseph D. Edwards

of
Carlton, Fields, Ward,
Emmanuel, Smith & Cutler, P.A.
P.O. Box 3239
Tampa, Florida 33601

Counsel for Petitioner

i
INDEX
Letter denying motion for rehearing en-banc ............. A-1

Opinion of District Court for the Middle District of Florida . A-2

A-1

UNITED STATES COURT OF APPEALS
Fifth Circuit
Office of the Clerk

March 7, 1975

TO ALL COUNSEL OF RECORD
Re: 73-3762 ST. PETERSBURG BANK & TRUST COMPANY
V. U.S.A.

Dear Counsel:

This is to advise that an order has this day been entered denying
the petition( ) for rehearing, and no member of the panel nor
Judge in regular active service on the Court having requested
that the Court be polled on rehearing en banc (Rule 35, Federal
Rules of Appellate Procedure; Local Fifth Circuit Rule 12) the
petition( ) for rehearing en banc has also been denied.

See Rule 41, Federal Rules of Appellate Procedure for issuance
and stay of the mandate.

Very truly yours,
EDWARD W. WADSWORTH
CLERK

Signed Anne G. Parent

By Anne G. Parent
Deputy Clerk

cc: Messrs. Michael G. Emmanuel

Michael D. Annis
Joseph D. Edwards

Messrs. Scott P. Crampton
Donald B. Craven
Daniel C. Perri
Meyer Rothwacks

Messrs. John L. Briggs
Oscar Blasingame

Messrs. Alfred Lombardi
Michael L. Paup

A-2

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION

No. 71-425-Civ-T-H
ST. PETERSBURG BANK & TRUST COMPANY,
Plaintiff,
vs.
UNITED STATES OF AMERICA,
Defendant.
OPINION

St. Petersburg Bank & Trust Company (the Bank)
instituted this suit pursuant to 28 USCA §1346(a)(1) for the
recovery of income taxes paid by it as a result of a deficiency
assessment made by the Commissioner of Internal Revenue for
the tax years 1965 and 1966. The issue is the propriety of certain
deductions made by the Bank for entertainment expenses during
those years. The governing provisions of the Code are Sections
162 and 274, Internal Revenue Code of 1954, as amended (26
USCA §§ 162 and 274).

The Bank was organized in 1955 by Mr. Hubert Rutland
and others. Mr. Rutland, a well-known St. Petersburg
businessman, is the controlling shareholder, president and
chairman of the board of directors. From its inception the Bank
has aggressively and successfully sought out business from large
depositors, borrowers and settlors of trusts. Taking the view
that competition in the banking industry is largely confined to
the area of personal services and relationships, the Bank has
consistently endeavored to project the image of a local
institution offering friendly, efficient and personal services to
local businessmen, governmental entities and residents. Its
implementation of that concept has principally focused upon
and emphasized the management position of Hubert Rutland,
and virtually all of the Bank's public advertising has sought to
exploit both his professional and social reputation in the
community.

A-3

The expenses in dispute were incurred as a result of certain
cocktail and dinner parties held at the Rutland home in St.
Petersburg, and certain dove shoots and barbecues held at the
Rutland ranch in Manatee County, approximately 30 miles to
the South and East of St. Petersburg. In 1965 there were two
such parties or receptions in the Rutland home, and three dove
shoots at the Rutland ranch. In 1966 there was one reception in
the home, a second party at another location and four dove
shoots at the ranch. Attendance at these functions was by
invitation only, and the written invitations were issued in the
names of Mr. and Mrs. Rutland. The number of guests varied
from approximately 50 persons to as many as 250, and there
was no outward indication to those in attendance that any of
the affairs were sponsored by the Bank. The costs, however,
were paid by the Bank with the apparent approbation of its
board of directors. The guest lists were compiled so as to
include customers or potential customers of the Bank, business
leaders, public officials, persons of substantial wealth and
others in a position to control large deposits or otherwise direct
beneficial business to the Bank. In addition, a number of the
Bank’s officers and key employees were invited on each
occasion. Most of these persons clearly understood that they
were asked to attend only because they were Bank employees,
and many were specifically instructed to circulate among the
guests, pass out their business cards, and generally tout the
services of the Bank while nurturing a personal rapport with
established or potential customers. On several occasions the
employees took advantage of the opportunity to discuss specific
transactions, either pending or contemplated.

The evidence generally supports the conclusion that these
parties enhanced the good will of the Bank, contributed to its
substantial growth, and constituted a shrewd and fully
justifiable expenditure by the Bank or its board of directors in
pursuit of economic success. As a result — and the Government
at least tacitly conceded the point — such expenses would
appear to be deductible as “ordinary and necessary” business
expenses within the purview of Section 162 of the Code (26
USCA $162) as interpreted and applied through 1962. See First
National Bank of Omaha vs. United States, 276 F.Supp. 905 (D.
Neb. 1967). The ultimate issue in the case, therefore, is the
proper construction to be made of Section 274 (26 USCA §274),
and a determination as to whether the subject expenses meet the
admittedly more stringent requirements of that provision.

A-4

Section 274 was added to the Code in 1962,* and its genesis
is best described in the Senate Committee Report:**

“The Treasury brought tc the attention of Congress
that widespread abuses have developed through the use of
the expense account. In his tax message to the Congress last
year, the President stated his conviction that entertainment
and related expenses, even though having a connection
with the needs of business, confer substantial tax-free
personal benefits on the recipients, and that in many
instances deductions are obtained by disguising personal
expenses as business expenses. He recommended that the
cost of such business entertainment and the maintenance of
entertainment facilities be disallowed in full as a tax
deduction and that restrictions be imposed on the deduct-
ibility of business gifts and travel expenses.

“Much of the abuse described by the President can be
traced to the broad judicial and administrative interpreta-
tion given to the term ‘ordinary and necessary’ which has
resulted in many entertainment expenses being allowed as
deductions where their connection with a trade or business
is quite remote. Under present laws, where a business
purpose, however slight, exists, then the entertainment
expenses generally are fully deductible if they are
‘ordinary and necessary’ business expenses.

“After careful consideration of the proposal, your
committee has concluded that deductions for entertain-
ment and traveling expenses and business gifts should be
restricted to prevent abuses.”

Congress thus resolved to make the law more restrictive in
the area of business entertainment deductions, not by
amendment of Section 162 governing business expenses in
general, but by the passage of a new and separate provision
dealing solely with items of entertainment. As it ultimately
evolved and became enacted, Section 274(a)(1)(A) provides as
follows:

* Revenue Act of 1962, Public Law 87-834, §4; 76 Stat. 960.
** S. Rep. No. 1881, 87th Cong., 2nd Sess. (1962); U.S. Code,
Congressional and Administrative News, 3304, 3327 (1962).

A-5

“$274. Disallowance of certain entertainment, etc.,
expenses

(a) Entertainment, amusement, or recreation. —

(1) In general.—No deduction otherwise allow-
able under this chapter shall be allowed for any
item —
(A) Activity.—With respect to an activity which
is of a type generally considered to constitute
entertainment, amusement, or recreation, unless
the taxpayer establishes that the item was directly
related to, or, in the case of an item directly
preceding or following a substantial and bona fide
business discussion (including business meetings
at a convention or otherwise), that such item was
associated with, the active conduct of the tax-
payer's trade or business, . . .”

Careful reading of this provision discloses a rather curious
dichotomy of standards — “directly related” and “associated
with.” The statute clearly creates two classes of entertainment
expenses which are measured by separate tests in determining
deductibility. One class is general, the other is specific.
Entertainment expense in general must be “directly related” to
“the active conduct of the taxpayer's trade or business.” On the
other hand, in the case of an expense incurred for entertainment
“directly preceding or following a substantial and bona fide
business discussion,” it need only be “associated with” the
taxpayer's business in order to qualify for deduction.

The Bank contends, first, that on the peculiar facts of this
case the expenses involved easily qualify under the “directly
related” test and the Treasury Regulations expanding upon that
standard. Secondly, and alternatively, it contends that even if
the disputed expenses were not “directly related” to its business,
they surely qualify under the less exacting “associated with”
test. Inherent in the latver assertion is the added contention that
the qualifying language — ‘preceding or following a substantial
and bona fide business discussion” — does not mean that the
business discussions and the entertainment cannot be in process
simultaneously. To evaluate and resolve these issues it is
necessary to examine the legislative history of the statute in

—_—

A-6

depth and, to a lesser degree, the Treasury Regulations
promulgated since its enactment. *

I LEGISLATIVE HISTORY

As already noted, the purpose of Congress was to tighten
the existing law and prevent abuses that had developed under
Section 162. The President's recommendation was hard and
tough (see Senate Report, supra), and the House acted
accordingly. Its bill would have prevented any deduction for
the cost of business entertainment or the maintenance of
entertainment facilities in the absence of a clear showing that
such expense was “directly related” to the “active conduct” of
business. (H.Rep. No. 1447, 87th Cong. 2d Sess., 1962-3 Cum.
Bull. 405, 423-430). The Senate was more reticent. It described
its concern and its attenuating amendments of the House bill as
follows:*

“The committee agrees that this abuse of the tax law
should not be condoned, but on the other hand it does not
believe that complete disallowance as recommended by the
President is the proper solution to the problem. Rather,
your committee is convinced that expenses incurred for
valid business purposes should not be discouraged since
such expenses serve to increase business income, which in
turn produces additional tax revenues for the Treasury.”

* * . *

“The House bill provides rules which in general
would: (1) disallow a deduction with respect to
entertainment activities, except to the extent that the
expense is directly related to the active conduct of a trade
or business; (2) disallow a deduction with respect to enter-
tainment facilities, unless the facility is used primarily for

* This case is a clear example of the phenomenon that so frequently occurs
in the study and practice of law, namely the surprising paucity of decisional
authority dealing with a seemingly basic or fundamental question.
Although the statute is now over 10 years old, only one recent decision has
approached the issue at hand, and it is clearly distinguishable. See
Hippodrome Oldsmobile, Inc. vs. United States, 474 F.2d 959 (6th Cir.
1973).

* S. Rep. No. 1881, 87th Cong. 2d Sess. (1962}; U.S. Code, Congressional
and Administrative News, , 3327-3329 (1962).

>

A-7

the furtherance of the taxpayer's trade of business and the
expense is directly related to the active conduct of the trade
or business; . . .”

“Your committee's bill to a considerable degree retains
the basic structure of the House bill. However, the effect of
the principal provision (the disallowing of a deduction for
certain entertainment expenses) has been modified to
permit the deduction of expenses for goodwill where a
close association is established between the expense and the
active conduct of a trade or business.”

* * * *

“To eliminate the harshness resulting from the House
report, amendment of the language of the House bill is
necessary. Despite amendment of the House bill your
committee has made certain that entertainment expense
abuses are eliminated. By your committee's amendment an
alternative rule is added to the House bill under which
expenses for entertainment, amusement, or recreation
(with respect to both activities and facilities) also will be
deductible to the extent that such expenses are associated
with the active conduct of a trade or business. This new
language will permit deduction of expenses for entertain-
ment, amusement, or recreation incurred for the creation
or maintenance of business goodwill without regard to
whether a particular exception applies. However, this new
language will apply only if the taxpayer demonstrates a
clear business purpose and shows a reasonable expectation
of deriving some income or other benefit to his business
as a result of the expenditure. If he meets this test, the
expenditure will be considered to be associated with the
active conduct of his trade or business; otherwise, the
expense will be disallowed under your committee's
amendment.”

In essence, the Senate disapproved the harshness of the
House bill to the extent that no deduction would be allowed for
general goodwill entertainment, and it opted for the middle
ground between Section 162 and the House version of Section
274 so as to permit deduction of such expenses so long as they

A-8

were “associated with” the business and the taxpayer could
show “a reasonable expectation of deriving some income” as a
result of the expenditure. This was the posture of the bill,
therefore, as it proceeded to consideration by the conference
committee.

The report of the conference committee, and the language
of the statute as ultimately enacted, make it abundantly clear
that the view of the House prevailed, with one narrow
exception. The report states:*

“Senate amendments Nos. 29, 30 and 31 inserted the
words ‘or associated with’ after the words ‘directly related
to’ each place they appeared in the new section 274(a)(1) as
passed by the House.

“Under the conference agreement the House recedes on
Senate amendment No. 29 with an amendment providing
that deductions otherwise allowable under chapter 1 of the
code shall not be allowed for any item with respect to an
entertainment type activity ‘unless the taxpayer establishes
that the item was directly related to, or, in the case of an
item directly preceding or following a substantial and bona
fide business discussion (including business meetings at a
convention or otherwise), that such item was associated
with,’ the active conduct of the taxpayer's trade or business.
Under the conference agreement, the Senate recedes on
amendment No. 30, and the House recedes on amendment
No. 31 with an amendment conforming to the action on
amendment No. 29.

“The rule of the House bill as described in the report of
the Committee on Ways and Means is more strict than the
‘or associated with’ rule of the Senate amendment. The
rule of the House bill would not allow deduction of expen-
ditures for entertainment occurring under circumstances
where there is little or no possibility of conducting business
affairs or carrying on negotiations or discussions relating
thereto, such as where the group of persons entertained is
large or the distractions substantial.

* II Conf. Rep. No. 2508, 87th Cong., 2d Sess. (1962); U.S. Code,
Congressional and Administrative News, 3732, 3735-3736 (1962).

A-9

“It is the understanding of the conferees, both on the
part of the House and the Senate, that the alternative
Senate ‘or associated with’ test as described in the report of
the Finance Committee would apply to certain entertaining
primarily to encourage goodwill where the evidence of
business connection is clear, whether or not business is
actually transacted or discussed during the entertainment.
The conference agreement would permit a deduction for
the cost of an entertainment item, even though the item is
not directly related to the active conduct of the taxpayer's
trade or business, if the item is associated with it, so long as
the entertainment activity directly precedes or follows a
substantial and bona fide business discussion. The
conditions under which an item is ‘associated with’ the
active conduct of a trade or business are contained in the
report of the Committee on Finance. The deductibility of
other items of entertainment expense, as well as items with
respect to facilities, would be governed by the rule of the
House bill.

“Section 274(a) as agreed to by the conferees will
allow as a deduction the cost of entertaining connected
with what are primarily business meetings. For example, if
the taxpayer conducts substantial negotiations with a
group of business associates and that evening entertains the
group and their wives at a restaurant, theater, concert, or
sporting event, such entertainment expenses, if associated
with the active conduct of the taxpayer's business, will be
deductible even though the purpose of the entertainment is
merely to promote goodwill in such business. Moreover, if
a group of business associates with whom the taxpayer is
conducting business meetings comes from out of town to
the taxpayer's place of business to hold substantial business
discussions, the entertainment of such business guests by
the taxpayer the evening prior to the business discussions
will be regarded as directly preceding the business
discussions.

“Similarly, if in between, or in the evening after,
business meetings at a convention, the taxpayer entertains
his business associates or prospective customers attending
such meetings (and their wives), such entertainment will be
considered as directly preceding or following a business
discussion.” (Emphasis supplied)

A-10

In summary, and as the enacted statute shows, the Senate
receded altogether with respect to Section 274(a)(1)(B),
dealing with entertainment facilities, and the “directly related”
test is the sole standard to be applied as to those items.
Hippodrome Oldsmobile, Inc. vs. United States, 474 F.2d 959
(6th Cir. 1973). The Senate’s less stringent “associated with” test
was retained in Section 274(a)(1)(A) — the provision at issue —
but only after a compromise amendment which qualified and
limited that test to those expense items “directly preceding or
following a substantial and bona fide business discussion
(including business meetings at a convention or otherwise).”

Il THE DIRECTLY RELATED TEST

The Treasury Regulations promulgated under Section 274
generally restate the sense of Congress as revealed by the
committee reports. Thus, among other criteria not pertinent to
this case, Section 1.274-2(c)(3)(i)-(iv) of the regulations (26
C.F.R.) establishes four separate requirements, all of which
must be met for an entertainment item to qualify as a “directly
related” expense. Subsection (i) set forth the first of these
requjrements as follows:

(i) At the time the taxpayer made the entertainment
expenditure (or committed himself to make the expendi-
ture), the taxpayer had more than a general expectation of
deriving some income or other specific trade or business
benefit (other than the goodwill of the person or persons
entertained) at some indefinite future time from the making
of the expenditure. A taxpayer, however, shall not be
required to show that income or other business benefit
actually resulted from each and every expenditure for
which a deduction is claimed.”

(Emphasis supplied)

In addition, Section 1.274-2(c)(7) of the same regulation
(26 C.F.R.) provides:

(7) Expenditures generally considered not directly
related. Expenditures for entertainment, even if connected
with the taxpayer's trade or business, will generally be
considered not directly related to the active conduct of the
taxpayer's trade or business, if the entertainment occurred
under circumstances where there was little or no possibility

A-11

of engaging in the active conduct of trade or business. The
following circumstances will generally be considered
circumstances where there was little or no possibility of
engaging in the active conduct of a trade or business:

(i) The taxpayer was not present;

(ii) The distractions were substantial, such as

(a) A meeting or discussion at night clubs, theatres, and
sporting events, or during essentially social gatherings
such as cocktail parties, . . .” (Emphasis supplied)

Thus, insofar as the “directly related” test is concerned, it
seems manifest that the entertainment involved in this case fails
to qualify. There can be no doubt that the parties hosted by the
Rutlands were motivated primarily by business considerations
and that the Bank was the ultimate beneficiary of their social
efforts. Yet it is equally clear that the benefit enjoyed by the
Bank was of the goodwill variety derived from a purely social
setting and, as such, was precisely the type of expense
deduction hat Congress intended to eliminate by way of the
“directly related” test.

Ill TAE ASSOCIATED witH\Est
'

The above conclusions do not necessarily disqualify the
expenses, however, under the “associated with” test. That test,
as intended by the Senate, is sufficiently relaxed to
accommodate and allow deduction of certain goodwill items.
The regulations say (26 C.F.R. §1.274-2(d)(2)):

(2) Associated entertainment defined. Generally, any
expenditure for entertainment, if it is otherwise allowable
under chapter 1 of the Code, shall be considered associated
with the active conduct of the taxpayer's trade or business
if the taxpayer establishes that he had a clear business
purpose in making the expenditure, such as to obtain new
business or to encourage the continuation of an existing
business relationship.”

The “associated with” test is limited, nevertheless, by the
express qualification, imposed in conference, that the expense
must relate to an item “directly preceding or following a
substantial and bona fide business discussion (including
business meetings at a convention or otherwise).” Again

A-12

echoing the views reflected in the conference committee report,
supra, the regulations provide (26 C.F.R. §1.274-2(d)(3)(ii)):

(ii) Directly preceding or following. Entertainment
which occurs on the same day as a substantial and bona
fide business discussion (as defined in subdivision (i) of this
subparagraph) will be considered to directly precede or
follow such discussion. If the entertainment and the
business discussion do not occur on the same day, the facts
and circumstances of each case are to be considered,
including the place, date and duration of the business
discussion, whether the taxpayer or his business associates
are from out of town, and, if so, the date of arrival and
departure, and the reasons the entertainment did not take
place on the day of the business discussion. For example, if
a group of business associates comes from out of town to
the taxpayer's place of business to hold a substantial
business discussion, the entertainment of such business
guests and their wives on the evening prior to, or on the
evening of the day following, the business discussion
would generally be regarded as directly preceding or
following such discussion.”

Since the “associated with” test is, in effect, an exception
and not a general rule, the applicability of the test to specific
facts is best determined when it is examined in juxaposition with
the “directly related” test as the basic standard. Concerning
cocktail or dinner parties and other affairs such as those
involved in this case, all of which would normally be regarded
as essentially social or entertaining in nature, deduction of the
expense is generally permitted only if the stringent requirements
of the “directly related” standard are met. The mere purpose of
fostering good will is insufficient to show a direct relationship
to the business. On the other hand, when such affairs are
sponsored in conjunction with meetings or conferences during
which substantial and bona fide business matters are discussed,
the cost of entertaining the participants as a good will expense
item will be deductible as ‘associated with” the business.
Practical application of the test is best typified by the
illustrative examples given in the Conference Report and the
Regulations, i.e. the familiar situations in which business
conferences are conducted by day and out of town participants
are entertained by night.

A-13

Viewed in this way, the conclusion is inescapable that the
Bank's disputed entertainment expenses also fail to satisfy the
requirements of the “associated with” test. It is not even
suggested by the Bank that the social gatherings were in any
sense an adjunct of formal business meetings. Rather, the Bank
insists that the “associated with” test should not be narrowly
confined to those precise situations in which the entertainment
literally “precedes” or “follows” substantial business dis-
cussions, and that expenses may still qualify for deduction
under that less demanding test even though the business
discussions are conducted during the course of a combined
social/business function. And, to be sure, there is at least one
passage in the Conference Report (quoted supra) which lends
support to this contention.

On the facts of this case, however, that construction and
application would tolerate if not invite a head-on collision
between the two tests, and would result in a statutory paradox.
If the “associated with” test was intended to apply to cocktail
and dinner parties, or dove shoots and barbecues merely
because some business is discussed and good will is promoted,
to what type of entertainment expense would the more
demanding “directly related” test ever be applicable? Further
exploration of that question here would require an indulgence
in conjecture concerning potential factual situations not yet
presented and unnecessary to decide. The future may well yield
a case in which the “associated with” standard might be applied
in the manner suggested by the Bank. Suffice it to say, however,
that to bring the present expenses within the scope of that test
would necessitate an unwarranted expansion of its limited area
at the expense of the primary “directly related” test and the field
it occupies.

The Clerk is directed to enter judgment in favor of the
Defendant, dismissing the complaint with costs to be assessed
according to law.

DONE and ORDERED at Tampa, Florida, this 27th day of
August, 1973.

W. Terrell Hodges
United States District Judge

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_0496%3A2. Public record. Not legal advice.