
    DUKEHART-HUGHES TRACTOR & EQUIPMENT CO., INC., A CORPORATION v. THE UNITED STATES
    [No. 534-59.
    Decided February 19, 1965]
    
      
      James F. Swift for plaintiff. James F. Swift, Jr., of counsel.
    
      David D. Bosenstein, with whom was Assistant Attorney General Louis F. Oberdorfer, for defendant. G. Moxley Featherston, Lyle M. Tv/mer and Philip B. Miller were on the brief.
    
      Before CoweN, Chief Judge, Laramore, Dureee, Davis and ColliNs, Judges.
    
   CoweN, Chief Judge,

delivered the opinion of the court:

This is a suit for refund of corporate income taxes, plus interest, arising out of the disallowance by the Commissioner of Internal Revenue of certain deductions for business expenses on plaintiff’s 1953,1954,1955 and 1956 corporate income tax returns.

The issue in this action is whether those disallowed items, which represent the expenses incident to the entertainment of, and gifts to, public officials, are deductible as ordinary and necessary business expenses under 26 U.S.C. (I.R.C. 1939) § 23(a)(1) (A) (1952 Ed.) and 26 U.S.C. (I.R.C. 1954) § 162 (1958 Ed.), because those expenditures contravene the public policy of the State of Iowa.

Plaintiff is an Iowa corporation with principal offices in Des Moines. Its principal business is the sale and servicing of road building and other construction machinery. It is an authorized distributor for Allis-Chalmers Co., whose products represent a majority of plaintiff’s sales. During the tax years in question, plaintiff’s sales territory covered a large part of the State of Iowa.

Seventy percent of plaintiff’s total sales for the 4 years, 1953-1956, or about $4,500,000, was attributable to the sale of new or used construction machinery. Of this amount, two-thirds represented purchases by non-governmental sources and one-third consisted of sales to municipal, county, or State agencies in Iowa.

To foster sales of its merchandise, plaintiff employed a staff of salesmen who traveled extensively throughout the State of Iowa-making periodic calls on potential purchasers, both private and governmental.

During the course of these calls, plaintiff’s salesmen often took the private customers, as well as the Government officials to lunch. In addition, the salesmen provided entertainment for and made gifts to potential buyers. The exact nature of these items will be described below. The Commissioner of Internal Revenue allowed as ordinary and necessary business expenses all of the expenditures attributable to the solicitation of business from non-governmental sources, but he disallowed all expenses attributable to the entertainment of, and gifts for, public officials.

The nature of the expenditures are summarized in the categories listed below.

1. Fishing trips. Potential buyers were taken in both large and small groups, accompanied by plaintiff’s salesmen, on fishing trips to northern Minnesota. The salesmen selected the persons who were included in each trip.

2. Other trips. Prospective buyers were taken to various midwestern cities for the purpose of visiting the plants of plaintiff’s suppliers and/or attending football or baseball games.

3. Oorvoentions. At general contractors’, State officials’ and local officials’ conventions, plaintiff, along with other firms similarly situated, would make financial contributions to help defray convention costs, and, in return, would be listed as a convention sponsor. 'During the conventions, plaintiff would sometimes give luncheons and/or maintain a hospitality room.

4. TieTcets for Athletic Events and the State Fair. Plaintiff made available for distribution by its salesmen tickets to athletic events. At its State Fair exhibit, plaintiff distributed grandstand tickets to potential buyers visiting the exhibit.

5. Dinners. During the course of their regular visits to potential buyers, plaintiff’s salesmen often took them to lunch or dinner. Often, salesmen of competing firms would j ointly take the customer to lunch or dinner and the cost of the meals would be divided among the salesmen of the various companies.

6. Golf tournaments. Plaintiff sponsored an annual golf tournament for employees of the Iowa State Highway Commission.

7. Christmas Gifts. Christmas gifts, which usually cost less than five dollars, were given to potential buyers. These gifts contained plaintiff’s name and an appropriate holiday greeting.

All of the gifts, trips, meals, tickets, and entertainment were furnished without distinction to representatives of potential buyers, both in and out of Government. Their distribution was widespread and no distinction was made on the basis of actual past purchases, nor were they conditioned on a particular future transaction.

Plaintiff and other businesses similarly situated do little conventional advertising. It is the practice to advertise among their limited group of potential buyers by the use of personal contacts, with their attendant niceties, as elaborated above. The record in this case indicates that such expenditures were intended primarily to establish good will for the plaintiff and to familiarize potential purchasers with plaintiff’s products. There is no evidence that the expenditures were used to induce any particular purchase, that any gifts or entertainment were used as reward for a past purchase, or that any particular official was favored by plaintiff’s bounty.

There is little dispute as to the pertinent facts of this case. There also seems to be little doubt that the expenses incurred by plaintiff were of a type prevalent for the business concerned and that they were important to insure the financial success of plaintiff’s business. Therefore, we may conclude that the expenses were “ordinary” and “necessary” in the natural and common meaning of those words. Welch v. Helvering, 290 U.S. 111 (1933). Hence, such expenses were permissible deductions within the purview of Section 162 of the 1954 Internal Eevenue Code and its predecessor, unless we find that such expenses are repugnant to a “sharply defined public policy” of the State of Iowa, Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 (1958); Commissioner v. Sullivan, 356 U.S. 27 (1958); Lilly v. Commissioner, 343 U.S. 90 (1952); Commissioner v. Heininger, 320 U.S. 467 (1943); see generally, Comment, Business Expenses, Disal lowance, and Public Policy: Some Problems of Sanctioning with the Internal Revenue Code, 72 Yale L.J. 108 (1962); 4 Merten's Law of Federal Income Taxation, § 25.131 (1960).

The defendant advances two major contentions: (1) The expenses in question here contravene the provisions of Sections 739.10, 739.11 and/or 741.1 of the Iowa Code Ann. (1950) and are therefore repugnant to the public policy of the State of Iowa; and (2) even if the above statutes are not violated, there is an infringement of some more generalized public policy, which also constitutes a “sharply defined” public policy of the State of Iowa.

I. Iowa Statutory Pattern

Violations of Section 739.10 of the Iowa Code entitled “Accepting reward for public duty,” and of section 739.11, entitled “Corrupting, influencing officials” are felonies. On their face, both statutes are aimed at preventing a public official from receiving, and another from giving him, anything of value in exchange for his performing a specific official act or acts. These sections do not apply to the case at bar. We have adopted the Trial Commissioner’s finding that the entertainment and gifts involved here were not provided with a view to corruptly influencing the recipients nor were they,’ in any way, conditioned upon tbe doing of an official act. ’

Section 741.1 of tbe Iowa Code is broader and provides:

It shall be unlawful for any agent, 'representative, or employee, officer or any agent óf a private corporation, or a public officer, acting in behalf of a principal in any, lousiness transaction, to receive for his own use, directly or indirectly, ■ any gift, commission, discount, bonus, or gratuity connected with, relating to, or growing out of such business transaction; and it shall be likewise unlawful for any person, whether acting in his own behalf or in behalf of any copartnership, association, or corporation, to offer, promise, or give directly or indirectly any such gift, commission, discount, bonus, or gratuity. [Emphasis added]

Upon the record before usj we conclude that this statute is aimed, at kick-backs in both governmental and non-governmental business transactions and does not, per se, bar entertainment of or gifts to agents of potential customers. The statute refers to “transaction” in the singular, implying that it is aimed at bounties paid'in connection with á particular transaction. The enumeration, “gift, commission, disdount, bonus, or gratuity”, in this context is an elaboration of types of kick-backs. ’. ' ■ ’ '

■ We have additional evidence, both affirmative and negative, of the interpretation placed on this statute by the Iowa authorities. We have been directed to no prosecution of a public official under the above-quoted act (Or any other act) for simply receiving a gift- from a potential seller. Further, of four opinions of the Iowa Attorney General involving the predecessors of this section, three discuss prohibitions against public officials contracting with a company in which they have a direct or indirect financial interest. This is the situation covered by. the case of Bay. v. Davidson, 133 Iowa 688, 111 N.W. 25 (1907) cited by defendant. The fourth opinion of the State’s Attorney Genérál held that a county official was not precluded from going as the guest of the contractor to the latter’s plant to view his equipment, provided the trip was not conditioned on the official’s approval of the sale. A deep concern with self-dealing by public officials and with kick-back arrangements seems to pervade the Iowa statutes. There aré at least fourteen of these two types of statutes appearing in various chapters of the Iowa Code.

The evidence shows and we have found that the expenditures in issue here were not made as a specific inducement for a particular sale, or as a reward for a particular purchase from plaintiff.

There appears in Chapter 741 of the Iowa Code, in the same chapter as section 741.1, the only section of the Iowa Statutes that purports to ban all gifts to public officials. It provides:

§ 741.6 Institutional officers not to receive gratuities
No member of the board of control, or officer, agent or employee thereof, and no superintendent, officer, manager, or employee of any of the institutions under the charge and control of said board, shall, directly or indirectly, for himself or any other person or for any institution under charge of said board, receive or accept any gift or gratuity from any person or persons, firm, or corporation who are dealers in goods, merchandise, or supplies which may be used in any of said institutions, or from any employee, servant or agent of such person or persons, firm or corporation.

The Iowa Board of Control administers Iowa’s Soldier’s Home, the State hospitals, the State orphanage, the State reformatories, and the State prisons, 11 Iowa Code Ann. §218.1(1950).

The significance of this statute is that it demonstrates that the legislature of Iowa knew how to prohibit all gifts from potential Government contractors to State officials. It further appears that the legislature elected to lay such an inhibition only upon a limited class of public officials, i.e., those connected with the eleemosynary institutions enumerated above. We must therefore conclude that the legislature did not intend to bar all public officials from receiving gifts from potential contractors.

Upon the above analysis and the record in this case, we hold that the expenditures by plaintiff did not violate any statute of the State of Iowa. It has not been suggested here that there is any other governmental declaration touching directly on this subject, i.e., executive, departmental, commission regulation, or order.

II. Other Public Policy Considerations

Defendant also asserts that some more generalized concept of public policy, other than that contained in the specific language of the statutes, renders plaintiff’s expenditures vio-lative of some “sharply defined public policy”.

Defendant’s only citation of Iowa authority, Bay v. Davidson, supra., deals with a different situation than that which appears in the instant case and has been discussed above. This case alone does not declare even by dicta any definitive public policy with respect to entertainment of public officials.

Except for three Tax Court decisions referred to below, the other cases cited by defendant are inapposite. They are from other States or they deal with practices which are in np way comparable to those that are the subject of tins action. They involve payments or rewards to Government officials (usually legislators) for their political influence in obtaining a public contract or other favor for the donee, Harden Mortgage Loan Co. v. Commissioner, 137 F. 2d 282 (10th Cir. 1943), cert. denied, 320 U.S. 791; Rugel v. Commissioner, 127 F. 2d 393 (8th Cir. 1942); Messenger Publishing Co., 10 CCH Tax Ct. Mem. 988 (1947) aff’d without opinion; 168 F. 2d 903 (3d Cir. 1948); William T. Stover Co., Inc., 27 T.C. 434 (1956); T. G. Nicholson, 38 B.T.A. 190 (1938); Easton Tractor & Equipment Co., Inc., 35 B.T.A. 189 (1936); New Orleans Tractor Co., 35 B.T.A. 218 (1936); or they cover situations in which a public official or other person received a kickback, United Draperies, Inc., 41 T.C. 457 (1964); Fred D. Newman, 11 CCH Tax Ct. Mem. 908 (1952); Diode Machine Welding & Metal Works, 315 F. 2d 439 (5th Cir. 1963), cert. denied 373 U.S. 950.

We are left with those few cases in the Tax Court, that purport, per se, to deny a deduction for entertainment of or gifts to public officials, even in the absence of any indication of wrongdoing. The basis for the disallowance is an un-'elaborated public policy. Duval Motor Co., 28 T.C. 42 (1957), aff'd on other grounds, 264 F. 2d 548 (5th Cir. 1959); Cecil J. Haas, 12 CCH Tax Ct. Mem. 1117 (1953); Raymond F. Flanagan, 47 B.T.A. 782 (1942). We believe these cases to be in conflict with the Supreme Court’s decision in Lilly v. Commissioner, supra.

In Tank Truck Rentals, Inc. v. Commissioner, supra, the Supreme Court laid down the following test :

A finding of “necessity” cannot be made, however, if allowance of the deduction would frustrate sharply defined national or state policies proscribing particular types of conduct, evidenced by some governmental declarations thereof, [emphasis added].

In Lilly v. Commissioner, supra, the Supreme Court refused to sanction the disallowance of a business expense deduction for rebates from opticians to physicians, where the practice was not prohibited by State law, regulation or order, even though the contracts for rebate were unenforceable as against public policy and the practice was condemned by the local professional societies. The Court found no sharply defined public policy evidenced by some governmental declaration.

The instant case is in a similar posture and with a weaker set of facts. Defendant can point to no executive or legislative declaration of public policy that would prohibit the practices of plaintiff in issue. It has cited no court decision in point and has not even presented any quasi-official criticism of the practice. Therefore, we must conclude that the rule in Tank Truck and Lilly controls this case and that, absent a State or national statute or regulation, there exists no sharply defined public policy upon which to ground dis-allowance of an otherwise permissible business expense deduction.

It is to be noted that the type of expenses incurred by plaintiff were for purposes which áre representative of a widespread commercial practice in Iowa and elsewhere. There is no showing that these practices have been objected to by the courts, the executive, or the legislature of Iowa. Even if we assume ad arguendo, that plaintiff’s practices violated any Iowa statute, it may well be that Iowa “public policy” is something more than just the wording of a statute. It is not uncommon for statutes to derive meaning from long standing executive practice acquiesced in by the legislature. But we need not reach this point.

We conclude that the expenditures incurred by plaintiff in providing gifts to and entertainment for Iowa public officials did not violate any sharply defined public policy of the State of Iowa. We express no approval of the practices herein described, for it is not our function to approve or condemn. The regulation of such practices rests within the sound discretion of the legislature, the executive, and the courts of the State of Iowa.

Plaintiff is entitled to recover the additional taxes and statutory interest paid as a result of the disallowance of the deductions for the years in suit. Judgment for plaintiff is entered to that effect. The amount of recovery is to be determined pursuant to Eule 47(c) (2).

Davis, Judge,

concurring in part and dissenting in part:

To my mind, a “sharply defined” policy barring much of the claimed deduction (see Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30, 33-34 (1958); Lilly v. Commissioner, 343 U.S. 90, 96-97 (1952); Commissioner v. Heininger, 320 U.S. 467, 473-74 (1943)) is supplied by Section 741.1 of the Iowa Code (quoted in the court’s opinion). That provision (headed “Accepting or giving”) made it unlawful for the taxpayer to “give directly or indirectly” “any gift” or “gratuity” — “connected with, relating to, or growing out of” a “business transaction” — to “a public officer, acting in behalf of a principal” in that “business transaction.” The larger expenditures for the benefit of the governmental officials in this case were gifts or gratuities made to them only because they represented (“act[ed] in behalf of a principal”) state, county, or municipal units which had bought or might buy from the taxpayer; these gifts or gratuities were not private favors but were clearly connected with, related to, and grew out of business transactions, past and potential, between the taxpayer and the employing agencies. To the ordinary eye, the fit is snug enough.

The court, however, puts this statute aside as limited solely to kick-backs paid on particular sales or purchases. The words are not so restricted, and no Iowa decision or ruling carries that suggestion. Kick-backs on specific transactions are largely prohibited by other parts of the Iowa Code (see the court’s footnote 8, especially § 741.9, “State employees not to receive gratuities”). Section 741.1 seems definitely to go further. I cannot join in drawing the contrary inference from the mere absence of reported or known cases applying the section to gifts or gratuities like those made by taxpayer, or from opinions of the state Attorney General which happen to be concerned with kick-backs strictly, or with other situations quite different from that facing us. The use of the singular, “business transaction”, is not very meaningful in. an enactment which broadly covers “any gift, commission, discount, bonus or gratuity connected with, relating to, or growing out of” a business transaction (emphasis added); the gifts and gratuities here were certainly connected and related to, and grew out of, past and anticipated business transactions between taxpayer and the state, county, and municipal governments. And the differing wording of § 741.6 (“Institutional officers not to receive gratuities”), covering one special sector of Iowa officialdom, does not persuade me that the legislature desired to forbid only these employees from receiving gifts and gratuities from vendors. Section 741.6 sweeps over all “dealers in goods, merchandise, or supplies which may be used in any of said institutions” (emphasis added), not merely those who actually trade with the Board of Control or its constituents; § 741.1, even as I read it, is appreciably narrower.

I do not hesitate to acknowledge that the reprehensible character of taxpayer’s coddling of these public servants moves me to read § 741.1, since its words permit, as extending to the worst of this conduct. If some organ of Iowa law had construed it otherwise, we would, of course, bow. But we have very little but the statute itself to guide us, and so far as its terms allow we should assume that it covers practices as “fraught with temptation” and subversive of public impartiality as many of taxpayer’s expenditures. See United States v. Mississippi Valley Generating Co., 364 U.S. 520, 549-50 (1961); Michigan Steel Box Co. v. United States, 49 Ct. Cl. 421, 439 (1914); Eisenberg, Conflicts of Interest Situations and Remedies, 13 Rutgers L. Rev. 666, 669-70 (1959); Association of the Bar of the City of New York, Special Committee on the Federal Conflict of Interest Laws, Conflict of Interest and Federal Service (1960), pp. 19-20. The law does not always take morality into partnership, but neither does it abhor virtue. In this case, Iowa, as I interpret the legislation, lets its law accord with morals rather than with current “business practice.”

From the condemnation of §741.1 I would exclude the Christmas gifts (usually costing less than five dollars) ; the free lunches, dinners, and cocktail parties; and the free tickets to local events. In the taxable years (1953-1956), our national morals, and presumably Iowa morals as well, did not bar public employees from accepting such minor and relatively inexpensive favors; they were not considered substantial enough to be characterized as a “gift” or “gratuity”. But that cannot be said of the sponsored trips to other cities and states for fishing or sports; the golf tournament; and apparently, also, a part of the convention expense. A recipient of such largesse would know, even a decade ago, that he had been given something of real and substantial value.

To the extent indicated, I concur in the result reached by the court, though not in its opinion. Otherwise I dissent.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Lloyd Fletcher, and the briefs and argument of counsel, makes findings of fact as follows:

1. This is a suit for refund of corporation income taxes, and statutory interest thereon, paid by plaintiff to defendant for the taxable years 1953, 1954, 1955, and 1956 in the aggregate amount of $25,678.82.

2. Plaintiff, with principal offices in Des Moines, Iowa, was incorporated on December 22, 1947, under the laws of the State of Iowa, at which time it took over the business of a partnership which had been in existence for many years. During the taxable years involved, plaintiff was engaged in the sale and service of road building machinery and other construction equipment. It was an authorized distributor for Allis-Chalmers Co., and, therefore, most of its sales were of products from that company although it did handle other lines of equipment. Plaintiff’s customers in-eluded private contractors, counties, municipalities, and the Iowa State Highway Commission. In 1953 and 1954, the plaintiff’s authorized area as Allis-Chalmer’s distributor covered 79 counties in Iowa. On February 1, 1955, its area was reduced to 44 counties, and the remaining 35 counties were allotted to another corporation with principal offices in Cedar Eapids, Iowa.

3. During the taxable years involved, approximately 70 percent of plaintiff’s total sales were sales of new or used construction and maintenance machinery, together with accessories for such machinery. The total of such sales for the four-year period aggregated $4,521,003.56; of that amount $2,988,456.37 represented sales to private general contractors, and $1,532,547.19 represented sales to municipalities, county governments, and the Iowa State Highway Commission.

4 To accomplish the aforesaid sales of its merchandise, plaintiff employed a staff of salesmen who traveled extensively throughout the State of Iowa making periodic and personal contacts with plaintiff’s private customers and various officials of the municipalities, counties, and the Iowa State Highway Commission all of which constituted plaintiff’s major sales market. In addition to their compensation, these salesmen were reimbursed monthly by plaintiff for their various travel, entertainment, and other out-of-pocket expenses. Certain of these expenses so incurred and paid by the plaintiff in the taxable years were charged on plaintiff’s books to accounts designated as “promotion and entertainment,” “salesmen’s traveling expense,” or “advertising.”

5. As a result of an examination of plaintiff’s income tax returns for the years 1953, 1954, and 1955, portions of such expenses incurred in each of those years were disallowed as deductions for Federal income tax purposes as follows:

1953 _$13, 078.21
1954 _ 13,537.42
1955 _ 8, 202.80

In the internal revenue agent’s report covering the examination of plaintiff’s income tax returns for the years 1953, 1954, and 1955, the amounts so disallowed as deductions for those years were designated by the internal revenue agent as follows:

According to the revenue agent’s report covering the years 1953, 1954, and 1955, the amounts disallowed as “promotion expense” for each of those years included the following:

The “travel and entertainment” expense disallowed for the years 1953, 1954, and 1955, in the amounts of $8,890.13, $9,088.11, and $4,958.96, respectively, includes expenses of individual salesmen as follows:

6. As a result of an examination of plaintiff’s income tax return for the year 1956, expenses incurred in that year were disallowed as a deduction for Federal income tax purposes in the amount of $8,860.96. The amount disallowed was designated by the internal revenue agent as “entertainment and gifts.”

According to the revenue agent’s report for the year 1956, the amounts disallowed as “entertainment and gifts” were as follows:

Fishing trips:
Leach Lake (%2 of $1,848.38) _$1,328.52
Trip for Dallas County Officials- 607.90
Athletic Tickets- 536.28
State Fair Tickets_ 355.38
County Officials’ banquet_ 333.40
County Officers State Convention- 305.44
Highway Commission Golf Tournament- 300.29
Presents _ 671.49
Entertainment expenses incurred by salesmen and company officers in behalf of county officials- 4, 309.36
Miscellaneous expenses_ 112.90
$8, 860. 96

7. The internal revenue agents disallowed the foregoing expenses incurred by plaintiff on the ground that, because they were paid for entertainment of and gifts to public officials, they were contrary to public policy. Deduction of the remainder of plaintiff’s expenses for entertainment and gifts was allowed by the agents because they related to entertainment of and gifts to plaintiff’s private customers. The allocation of such expenses between those attributable to governmental customers and those attributable to private customers was made by the agents on the basis of estimates furnished by plaintiff’s officers. A detailed description of the nature of plaintiff’s entertainment and gifts is set forth in the next suceeding findings.

8. During each of the taxable years involved, plaintiff conducted fishing trips for the entertainment of its customers. These fishing trips ranged from comparatively small parties traveling by private automobile to rather large parties traveling by chartered bus. Most of the trips were to Leach Lake in northern Minnesota and were generally of 4 days’ duration. Participation in these trips was by invitation of individual salesmen who were authorized by plaintiff to invite customers in limited numbers from their respective territories. The guest list comprised both private contractors and public officials with the latter predominating. For example, on the 1953 trip, the party was made up of 3 private contractors, 27 county officials, 4 of plaintiff’s employees, including its president, and the bus driver. With minor variances, the other trips were of similar make-up where a chartered bus was used. The entire cost of the trips was paid by plaintiff. With a few exceptions, plaintiff’s competitors do not entertain their customers by fishing trips. For the years 1953, 1954, and 1955, defendant disallowed that part of the expenses of the fishing trips which plaintiff estimated were attributable to county officials and plaintiff’s employees. The balance of such expense was allowed as a deduction. For 1956, the same action was taken by defendant except that, for the 1956 trips, plaintiff was also allowed to deduct that part of the expenses attributable to its own employees.

9. During the taxable years, plaintiff also took customers, including county and city officials, on other trips to various cities in the Midwest. Some of these were for the purpose of attending football and baseball games, and some were for the purpose of visiting manufacturing plants of plaintiff’s major suppliers. The entire expense of such trips was borne by plaintiff, and to the extent such expense was attributable to Governmental guests, it was disallowed by defendant.

10. During the taxable years, it was the practice of plaintiff, and also of about 80 other equipment suppliers, to contribute to a common fund for providing entertainment at annual conventions of groups that used plaintiff’s products. These conventions were held both for private groups, such as the Associated General Contractors, and for governmental groups, such as the Iowa State Association of County Officers. In the case of the latter convention, the contributors were acknowledged by name in the entertainment programs; the funds so contributed were used to provide free cocktail bars, a stage show, and orchestras and ballrooms for dancing. In addition, it was plaintiff’s practice at such conventions to provide a “hospitality room” open to those persons attending the conventions. These rooms were staffed by plaintiff’s personnel. These convention activities were common practice by both plaintiff and its competitors. Defendant disallowed all of plaintiff’s expenses attributable to the county officer’s conventions.

In addition to the aforesaid entertainment activities at the annual conventions, plaintiff’s salesmen attended District meetings of the county officials which were held four times each year. On occasion, plaintiff would sponsor luncheons or dinners for these county officials at which films of equipment would be shown and particular items of equipment discussed. Although similar luncheons featuring films and discussion of equipment were also held for private contractors, some of these affairs were limited exclusively to county officials because the sales presentation was directed to their particular needs. In the latter cases, defendant disallowed the entire expense of the luncheons or dinners.

11. It was plaintiff’s practice, during the taxable years as well as in prior and subsequent years, to purchase blocks of tickets for sports events, such as football games, baseball games, and prize fights. These tickets were distributed to plaintiff’s salesmen who, in turn, gave them to such of their customers, both private contractors and public officials, as might desire to attend the events. Some salesmen attended the events with the customers; others did not. This practice of giving athletic tickets to customers was also a common practice with plaintiff’s competitors. Defendant disallowed that portion of the cost of such tickets which, from plaintiff’s estimates, it deemed attributable to public officials who received tickets.

Also, during the taxable years as well as prior and subsequent years, plaintiff maintained an exhibit at the Iowa State Fair, and it was plaintiff’s practice to purchase blocks of tickets to grandstand shows at such Fair. These tickets were given by plaintiff to any of its customers visiting plaintiff’s exhibit who might desire them,’including contractors, county officials and other customers. The practice of giving State Fair tickets to customers was a common practice with plaintiff’s competitors during the years in question. Defendant disallowed that portion of the cost of such tickets which, from plaintiff’s estimates, it deemed attributable to public officials who received tickets.

12. In making their regular calls upon customers and prospective customers within their assigned territories it has been the practice of plaintiff’s salesmen before, during, and subsequent to the years in question, to invite such customers as their guests for lunch or dinner. This was done frequently by the salesmen, and their guests included contractors, county supervisors, and other elective officials and employees of governmental subdivisions. If desired by the guests, the salesmen would furnish and serve alcoholic drinks on these occasions.

It was a common practice for salesmen employed by plaintiff’s competitors also to take such customers to lunch or dinner and to serve them alcoholic beverages, if desired. On some occasions, several salesmen representing different companies and lines of equipment would take such customers to lunch or dinner, and at such times it was customary for the salesmen to divide between them the cost of the luncheon or dinner.

One of the main reasons that this practice developed of taking customers to lunch or dinner for the purpose of discussing equipment sales was the convenience involved in getting the interested parties together at one time and in one place. This was particularly true in case of the Boards of County Supervisors on occasions when they were holding their regular business sessions or meetings. In the words of one witness, it provided the salesmen with an opportunity to have “kind of a captive audience.”

Defendant disallowed that portion of the cost of such luncheons, dinners, and liquor which, from plaintiff’s estimates, it deemed attributable to the entertainment of county officials and county employees.

13. During each of the years 1954, 1955, and 1956, plaintiff sponsored a golf tournament in Des Moines for members and employees of the Iowa State Highway Commission, the entire expense of which was disallowed by defendant. Plaintiff’s president and salesmen also spent some small amounts entertaining members of the State Highway Commission at lunch and dinner, which amounts were likewise disallowed.

Plaintiff made some sales to the State Plighway Commission under competitive bids. Plaintiff’s major contact with the Commission, however, appears to have been in connection with helping plaintiff’s suppliers obtain Commission approval of their products.

14. During the years in question it was the practice of plaintiff, through its salesmen, to give Christmas remembrances to its customers in the form of gifts. They were given to all customers, contractors as well as county officials, etc., and no distinction was made between such customers as to the cost or quality of the gifts. Plaintiff’s name and an appropriate greeting were included with each gift. In 1953, plaintiff distributed to its customers approximately 450 steak knife sets which cost plaintiff about $3.50 per set. In 1954, plaintiff distributed approximately 500 carving sets to its customers at a cost of about $2.30 per set. In addition to the gifts provided by the plaintiff, the plaintiff’s salesmen on an individual basis sometimes purchased gifts for contractors and public officials. These gifts included boxes of cigars, cartons of cigarettes, candy and liquor. The cost of these additional gifts was paid by the plaintiff.

The practice of making Christmas gifts to customers, including county officials, was a common practice by plaintiff’s competitors during the years in question. Defendant disallowed that portion of plaintiff’s expense in purchasing such Christmas gifts which, from plaintiff’s estimates, it determined were attributable to county officials.

15. Plaintiff does no advertising on radio or television. It does some limited amount of advertising in newspapers and trade publications, but, because of the limited number of customers in its territory for its particular products, plaintiff’s sales efforts are concentrated mostly on making personal contact with potential customers rather than by commercial advertising. The same practice is followed by business concerns engaged in sales activities similar to those of plaintiff. Such personal contacts and sales procedures followed by plaintiff’s salesmen are essentially the same irrespective of whether the potential customers are private contractors or officials of governmental subdivisions. It is the opinion of plaintiff’s officials, and of officials connected with similar businesses, that the making of personal contacts and the maintaining of a friendly relationship with prospective customers are the only effective methods of accomplishing sales of their particular products.

16. There is nothing in this record to show any stated policy of the State of Iowa with respect either to the entertainment of public officials or the making of gifts to them of the types involved herein. There are two Iowa statutes dealing with “Bribery AND CorruptioN” reading as follows:

739.10 Accepting reward for public duty. If any state, county, township, city, school, or other municipal officer, not mentioned in this chapter, directly or indirectly accept any valuable consideration, gratuity, service, or benefit whatever, or the promise thereof, other than the compensation allowed him by law, conditioned upon said officer’s doing or performing any official act, casting an official vote, making or procuring the appointment of any person to a place of trust or profit, or using his official influence or authority to give or procure for any person public employment, or conditioned upon said officer’s refraining from doing or performing any of the foregoing acts or things, he shall be imprisoned in the penitentiary not exceeding two years, or in the county jail not exceeding one year, or fined in any sum not less than twenty nor more than three hundred dollars.
739.11 Corruptly influencing officials. If any person, directly or indirectly, give, offer, or promise, or conspire with others to give, offer, or promise to any officer contemplated in this chapter any valuable consideration, gratuity, service, or benefit whatever, with a view or for the purpose of corruptly influencing said officer’s official acts or votes, such person shall be imprisoned in the penitentiary not exceeding two years, or in the county jail not exceeding one year, or be fined in any sum not exceeding three hundred nor less than twenty dollars.

The testimony of witnesses for both parties clearly shows that the entertainment and gifts here involved were not made with a view to corruptly influencing the recipient, nor were they in any way conditioned upon the doing of an official act by such recipient.

Section 741.1 of Chapter 741,1954 Code of Iowa, provides:

741.1 Accepting or giving. It shall be unlawful for any agent, representative, or employee, officer or any agent of a private corporation, or a public officer, acting in behalf of a principal in any 'business transaction,_ to receive, for his own use, directly or indirectly, any gift, commission, discount, bonus, or gratuity connected with, relating to, or growing out of such business transaction; and it shall be likewise unlawful for any person, whether acting in his own behalf or in behalf of any copartnership, association, or corporation, to offer, promise, or Sive directly or indirectly any such gift, commission, iscount, bonus, or gratuity.

The above described expenditures made by plaintiff and its .salesmen, which were disallowed by defendant, were not made as a specific inducement for a particular sale, or as a reward for a particular purchase. Plaintiff’s salesmen who testified at the trial did not believe that they had made any particular sale as a result of their entertainment and gifts to customers. They considered such activities to be a matter of making acquaintances, maintaining goodwill, and extending a courtesy to prior customers.

■' 17. Plaintiff filed its income tax returns for the years 1953, 1954, 1955, and 1956 with the District Director of Internal Eevenue at Des Moines, Iowa, and paid the corporation income taxes assessed for those years as follows:

Subsequently, as a result of the disallowance of the items described in findings 5 and 6, supra, the Commissioner of Internal Revenue assessed additional corporation income taxes against plaintiff as follows:

Additional corporation income taco Year: assessed
1953 _•_$6, 800.67
1954 _ 7, 039.46
1955 _ 4,265.45
1956 _ 4,607.70

Said additional corporation income taxes, together with statutory interest thereon, were paid by plaintiff in the following amounts:

Plaintiff filed timely claims for refund of said additional corporation income taxes and interest thereon, which claims were disallowed by registered mail in accordance with § 6532(a) (1) of the Internal Revenue Code of 1954. This suit was timely filed thereafter.'

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover. The amount of recovery will be determined pursuant to Rule 47(c) (2).

In accordance with the opinion of the court and a memorandum report of the commissioner as to the amount due thereunder, it was ordered on July 2,1965, that judgment for the plaintiff be entered for $25,678.82, plus interest thereon as provided by law, said interest' on $20,611.42 of said sum to be computed from May 24,1957, and said interest on $5,067.40 of said sum to be computed from November 13, 1958. 
      
       SEC. 23. DEDUCTIONS EROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses.—
      (1) Trade or business expenses.—
      (A) In general. — All the ordinary and necessary expenses paid or Incurred during the taxable year In carrying on any trade or business, * * *
     
      
       Internal Revenue Code of 1.954 :
      SEC. 162. TRADE OR BUSINESS EXPENSES.
      (a) In General. — There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
     
      
       55 Iowa Code Ann. § 739.10(1950) :
      § 739.10 Accepting a reward for public duty.
      If any state, county, township, city, school, or other municipal officer, not mentioned in this chapter, directly or indirectly accept any valuable consideration, gratuity, service, or benefit whatever, or the promise thereof, other than the compensation allowed him by law, conditioned upon said officer’s doing or performing any official act, casting an official vote, mating or procuring the appointment of any person to a place of trust or profit, or using his official -influence to give or procure for any person public employment, or conditioned upon said officer's refraining from doing or performing any of the foregoing acts or things, he shall be imprisoned in the penitentiary not exceeding two years, or in the county Jail not exceeding one year, or fined in any sum not less than twenty nor more than three hundred dollars.
     
      
      
         55 Iowa Code Ann. § 739.11 (1950) :
      § 739.11 Corruptly influencing officials.
      If any person, directly or indirectly, give, offer, promise, or conspire with other to give, offer or promise to any officer contemplated in this chapter any valuable consideration, gratuity, service, or benefit whatever, with a view or for the purpose of corruptly influencing said officer’s official acts or votes, such person shall be imprisoned in the penitentiary not exceeding two years, or in the county jail not exceeding one year, or be fined in any sum not exceeding three hundred nor less than twenty dollars.
     
      
       55 Iowa Code Ann. § 741.1 (1950).
     
      
       [1930] Iowa Atty. Gen. Rpt. 232; [1928] Iowa Atty. Gen. Rpt. 296; £1928] Iowa Atty. Gen. Rpt. 399.
     
      
       [1911-1912] Iowa Atty. Gen. Rpt. 594.
     
      
       Iowa Code Ann. (1950): §15.3 (State Printing Board); §18.4 (Superintendent of Public Buildings) ; § 86.7 (Industrial Commission) ; § 252.29 (County welfare agencies) ; § 262.10 (State Board of Education) ; §§ 310.14, 313.10, 314.2 (State Highway Commission) ; § 347.15. (County Public Hospitals) ; § 368A22 (City Officials) ; § 372.16 (River Promt Commissions) ; § 741.11 (Boards of Supervisors).
      Typical of these statutes are the following:
      ,§ 741.8 State employees not to be interested'in contracts
      It shall be unlawful for • any trustee, warden, superintendent, steward,, or other officer of any educational, penal, charitable, or reformatory institution, supported in whole or in part by the state, to be interested directly or indirectly in any contract to furnish or in furnishing provisions, material, or supplies of any kind, to or for the institution of which he is an officer; and it shall be unlawful for any such trustee, warden, superintendent, steward, or other officer of any state institution, to be directly or indirectly interested in any contract with the state to build, repair, or furnish any institution of which he may be an officer.
      § 741.9 State employees not to receive gratuities
      It shall be unlawful for any such trustee, warden, superintendent, steward, or other officer, directly or Indirectly to receive in money or- any valuable thing any commission, percentage, discount or rebate pn any provision, material, or supplies furnished for or to any institution of which he is an officer.
     
      
       Failure, to enforce the Mississippi prohibition statutes, plus a State statute which taxed “black market” sales of liquor was held to have vitiated the public policy embodied in the prohibition law, Stacy v. United States, 63-2 USTC para. 9746 (S.D. Miss. 1963) ; but see, Al J. Smith, 33 T.C. 861 (1960).
      Certain penalties for violations of law may even be deductible, see, e.g., Keystone Metal Co. v. Commissioner, 264 F. 2d 561 (3d Cir. 1959). In Kirtz v. United States, 157 Ct. Cl. 824, 304 F. 2d 460 (1962), this court was faced with a situation where the Ohio State Insurance Commissioner was fully apprised of rebates in premiums from an insurance agent to finance .company officers. This practice was presumably violative- of Page’s Ohio Eev. Code Ánn. §§ 1317.04, 1317.05 and 3905.21. Since the insurance commissioner had not determined that the practice violated, a State law- or a well-defined public policy, the deductions were allowed.
     
      
       One of taxpayer’s salesmen justified (In a memo dated November 30, 1953), an expenditure of $364.82 for a trip with public officials to a Notre Dame football game: “Trip to Notre Dame, had two from Cedar Co., two from City of Dubuque, and one from Dubuque County. Think it will pay out OK. Tell better after City deal.” On December 14, 1953, taxpayer made a sale to the City of Dubuque, amounting to $1,1,985.16.
     
      
       In Kirtz v. United States, 157 Ct. Cl. 824, 304 F. 2d 460 (1962), the court felt that the Ohio State Insurance Commissioner had in effect determined that the challenged rebates did not violate state law.
     
      
       These boards are empowered by Iowa statute to purchase the machinery required to meet the needs of their particular county. They are not required to advertise for competitive bids on the purchase of road equipment and machinery, but it is the usual practice to so advertise and to secure- bids from more than one party so as to insure a fair price. The actual decision to purchase is made by vote of the entire board.
     
      
       A witness for defendant, who was employed by the State of Iowa in the public relations department of the Iowa Development Commission and who had previously been employed by plaintiff as a salesman, testified that with respect to such entertainment and gifts he did “the same thing representing the State of Iowa today in our promotion program.”
     