
    473 F. 2d 1398
    D. A. FOSTER TRENCHING COMPANY, INC. v. THE UNITED STATES
    [No. 327-70.
    Decided February 16, 1973]
    
      
      Jerry M. Hamovit, attorney of record, for plaintiff. Michael D. Golden, of counsel.
    
      Kenneth B. Boiarshy, with whom was Assistant Attorney General Scott P. Orampton, for defendant. Joseph Kovner, of counsel.
    Before CoweN, Chief Judge, Davis, Skelton, Nichols, Kashiwa, Kunzig, and Bennett, Judges.
    
   Kashxwa, Judge,

delivered the opinion of the court:

This is a suit for the recovery of federal income taxes and interest in the amounts of $9,863.80 and $2,078.68 paid by the plaintiff for its fiscal years ended January 31, 1966, and January 31, 1967, respectively, plus interest as provided by law. The case is before the court on stipulated facts pursuant to Rule 134(b) (2) of the Rules of this court. For reasons hereinafter stated, we hold for the defendant and against the plaintiff and dismiss the plaintiff’s petition.

The stipulated facts may be summarized as follows. During the years in question, the taxpayer was engaged in underground construction work for utility companies in the District of Columbia, Maryland, and Virginia, controlling approximately 40 percent of the market against three other competitors. The taxpayer’s success, or at least the expeditious solution to a variety of excavation and construction problems, was and is dependent upon the cooperation of the utilities, their inspectors, engineers, and other supervisory personnel.

Since 1958, the taxpayer has owned and operated a 38-foot fishing boat, the 'DAF. During the years in question, plaintiff employed a captain to operate the DAF. The taxpayer makes no claim, however, that the captain had any familiarity with the underground construction business or entered into any discussions with the utilities’ employees regarding such business.

The overall use of the boat was limited to day-long fishing trips by the taxpayer’s own employees, as well as its customers, suppliers, and other business associates. Basically, attendance on the DAF involved three different groupings of the persons noted above. First, there were occasions when the boat was used as a recreational facility exclusively by the taxpayer’s own employees. Second, there were other occasions when the boat was used by the business associates of the taxpayer, accompanied by the taxpayer’s own employees. As to these two situations, which comprised 26 percent of the total costs and expenses for fiscal 1966 and 10 percent of the total costs and expenses for fiscal 1967, the District Director asserted no deficiency and has, in effect, conceded that these expenses were allowable.

On the majority of occasions, however, a third situation existed; that is, the use of the boat was exclusively by the taxpayer’s business associates and without the presence of any employee of the taxpayer, save the captain. This situation existed 74 percent of the time during fiscal 1966 and 90 percent of the time during fiscal 1967. The availability of the boat for business associates was on a first-come, first-served basis. When no employees or officers of the plaintiff were present, there were no business meetings, negotiations, discussions, or other bona fide business transactions on the DAF (or on the same day) other than the entertainment of customers, suppliers, and business associates.

The District Director disallowed the pro rata portion of the expenses allocable to the instances when the boat was used by the business associates of the taxpayer without the presence of any of the taxpayer’s officers or employees. The resulting deficiencies and interest for this 74 percent dis-allowance for fiscal 1966 and 90 percent disallowance for fiscal 1967 were assessed and paid. Timely claims for refund were denied and this suit was thus commenced.

•Section 274 of the Internal Revenue Code of 1954, the relevant portions of which are reproduced below, was added to the tax law by the Revenue Act of 1962. One of the avowed purposes of section 274 was to require certain expenditures otherwise deductible under sections 162 and 167 of the Code, to meet a more stringent standard with respect to the proximate relationship of the expense to the active conduct of the business. This is made clear in the House Ways and Means Committee Eeport, where it is said:

With respect to expenses for entertainment activities, the bill provides that a deduction will be allowed only to the extent that the taxpayer establishes that the expense was directly related to the active conduct of his trade or business. [The same “directly related” test is used in the treatment of entertainment facilities.] This meoms that the taxpayer must show a greater degree of proximate relation between the expenditure and his trade or business than is required under present law. * * * [h.r. rep. No. 1477, 87th Cong., 2d sess., 20 (1962-3 cum. bull. 405,424.] [Emphasis supplied.]

Due to the relatively loose business connection required under section 162, significant abuses were found present with respect to expenses for entertainment and facilities used in connection with such entertainment activity. In order to qualify as deductible, the expenses incurred by the DAF, a facility within the meaning of section 274(a) (1) (B), must pass two tests. The Government concedes the first of these, that the facility was used primarily for the furtherance of ■the taxpayer’s trade or business. This concession merely amounts to an admission by the Government that more than 50 percent of the total calendar days of use of the DAF were days of business use, that is, for purposes considered ordinary and necessary within the meaning of section 162 and the regulations thereunder.

The second test and crucial issue for our resolution is whether the item was “directly related” to the active conduct of the taxpayer’s trade or business. Clearly, the degree of proximity required to pass the test of “directly related” is more strict than the old test of “ordinary and necessary.” The Regulations enacted pursuant to section 274 explain the new standard.

Treas. Beg. § 1.274-2(c) (3) (1969) seeks to define wbat will, in general, satisfy tbe requirement of “directly related.” The taxpayer must meet all tbe requirements embodied in subdivisions (i) through (iv) of subparagraph (3) to pass this particular "directly related" test. The taxpayer, on the basis of the stipulation, clearly cannot satisfy the minimum prerequisite of subdivision (ii) of the regulation:

(ii) During the entertainment period to which the expenditure related, the taxpayer actively engaged in a business meeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining such income or other specific trade or business benefit * * *

The taxpayer has stipulated that

* * * On those occasions when no employees or officers were present, there were no business meetings, negotiations, discussions or other bona fide business transactions on the "DAF" (or on the same day), other than the entertainment of customers, suppliers and business associates.

Significantly, subdivision (iii), in specifying that the principal character of the business and entertainment to which the expenditure related was the active conduct of the taxpayer's trade or business, provides the following presumption:

(iii) * * * The active conduct of trade or business is considered not to be the principal character or aspect of combined business and entertainment activity on hunting or fishing trips or on yachts and other pleasure boats unless the taxpayer clearly establishes to the contrary.

Unable to establish that the entertainment in issue can `be considered directly related to the active conduct of its trade or business under Treas. Reg. § 1.274-2(c) (3) (1969), the taxpayer concentrates its argument on Treas. Reg. § 1.274-2(c) (4) (1969). Under this subparagraph,

(4) * * An expenditure for entertainment shall be considered directly related to the active conduct of the taxpayer's trade or business if it is established that the expenditure was for entertainment occurring in a clear business setting directly in furtherance of the taxpayer's trade or'business. * * *

The plaintiff argues that if it comes within the "safe harbor" of Treas. Reg. § 1.274-2(c) (4) (1969) by establish- mg that the entertainment provided by the DAF was in a “clear business setting,” then it has satisfied the “directly related” test. While as a general statement this is true, the plaintiff errs in focusing with almost exclusive emphasis on the following language of subparagraph (4) :

(4.) * * * Generally, entertainment shall not be considered to have occurred in a clear business setting unless the taxpayer clearly establishes that any recipient of the entertainment would have reasonably known that the taxpayer had no significant motive, in incurring the expenditure, other than directly furthering his trade or business. * * *

We view this language as merely providing one element in the definition of what might constitute a “clear business setting.” If this were not the case, the taxpayer could succeed by a showing that the expenditures furthered simple good will, as is undoubtedly the circumstance in nearly every case of this type.

We find that the specific direction in subparagraph (4) to subparagraph (7) of the same paragraph (Treas. Keg. § 1.274 — 2(c) (7) (ii) is far more indicative of the true meaning of the term “clear business setting.” Subparagraph (4) states that, ordinarily, entertainment which occurred under the circumstances described in subparagraph (7) (ii) will not be considered as occurring in a clear business setting. Those circumstances are:

(ii) The distractions were substantial, such as
(a) A meeting or discussion at night clubs, theaters, and sporting events, or during essentially social gatherings such as cocktail parties, or
(b) A meeting or discussion, if the taxpayer meets with a group which includes persons other than business associates, at places such as cocktail lounges, country clubs, golf and athletic clubs, or at vacation resorts.

If a clear business setting is not ordinarily to be established in situations in which the distractions to business discussion or activity were substantial, this is even more clearly the case when the representatives of the taxpayer were not on the DAF during the fishing trips. Representatives of the taxpayer would at least make business discussion or activity possible. Indeed, Treas. Reg. § 1.274-2(c) (7) (1969) entitled “Expenditures generally considered not directly related,” which we view as providing caveats in the interpretation of subparagraphs (3) and (4),states:

(7) * * * 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 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; * * *

It should further be noted that the examples provided by subparagraph (4) as to what type of entertainment will be considered as occurring in a clear business setting further confirm the Government’s position. After rejecting those settings where distractions were substantial, subparagraph (4) provides a favorable exception:

(4.) * * * Expenditures made for the furtherance of a taxpayer’s trade or business in providing a “hospitality room” at a convention (described in paragraph (d) (3) (i) (b) of this section) at which goodwill is created through display or discussion of the taxpayer's products, will, however, be treated as directly related. * * * [Emphasis supplied.]

The present case, however, submitted on stipulation, provides no indication that there was any such substitute for the presence of the taxpayer’s representatives. While it is true that •the absence of these representatives does not automatically require disallowance, it is clear that the example contemplates the situation in which the showing of the taxpayer’s products in a reasonable display area may engender a business discussion or activity.

Treas. Reg. § 1.274-2(c) (4) (1969) provides another common example of what might satisfy the test of “directly related” under the category of “clear business setting”:

(4) * * * In addition, entertainment of a clear business nature which occurred under circumstances where there was no meaningful personal or social relationship between the taxpayer and the recipients of the entertainment may be considered to have occurred in a clear business setting. For example, entertainment of business representatives and civic leaders at the opening of a new hotel or theatrical production, where the clear purpose of the taxpayer is to obtain business publicity rather than to create or maintain the goodwill of the recipients of the entei'tainment, would generally be considered to be in a clear business setting. * * * [Emphasis supplied.]

It is clear from the stipulation that the taxpayer in the case before us cannot make an argument that the entertainment contains any inherent advertising advantages. In fact, the taxpayer is frank to admit that

* * * A major purpose for Plaintiff’s ownership and use of the “DAF” in the years in question was the maintenance of satisfactory business relationships with customers, suppliers, and business associates of the Plaintiff. * * *

We find that the amounts in issue, not being directly related to the active conduct of the taxpayer’s trade or business, are precluded from deductibility by section 274 and the regulations thereunder. The petition is hereby dismissed.

BINDINGS OF FACT

The court, having considered the stipulations of the parties and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiff is a Delaware corporation with its principal place of business located in Merrifield, Virginia.

2. Plaintiff is, and during the years in question was, a wholly-owned subsidiary of Potomac Industries, Inc.

3. Dowe A. Foster during the years in question was the President of the Plaintiff and of Potomac Industries, Inc., and owned approximately 60% of the outstanding stock of Potomac Industries, Inc.

4. Hubert S. Eley during the years in question was the Vice-President of Plaintiff and is currently its President. Mr. Eley owned approximately 10% of the outstanding stock of Potomac Industries, Inc.

5. Plaintiff timely filed Federal income tax returns for its fiscal years ended January 31, 1966 and 1967, respectively, with the District Director of Internal [Revenue, Richmond, Virginia and paid income taxes on account of such returns in the amount of $3,907.78 and $440.17, respectively.

6. Thereafter, the District Director assessed Plaintiff additional Federal income taxes, plus interest thereon, of $9,863.80 for the fiscal year 1966 and $2,078.68 for the fiscal year 1967, a total of $11,942.48.

7. On or about March 15, 1970, Plaintiff paid to the District Director, on account of such assessment, the sum of $11,942.48.

8. On March 18, 1970, Plaintiff filed with the District Director claims for refund for each of said years. All procedural prerequisites have been met with respect ¡to said claims.

9. 'Such assessments and claims for refund solely relate to the deductibility of expenses incurred in connection with Plaintiff’s ownership, maintenance and operation of the fishing boat “DAF” during the taxable years in question. The District Director disallowed 74% of the costs and expenses so incurred in fiscal 1966 and 90% of such costs and expenses in 1967.

10. During the years in question, Plaintiff owned and operated a fishing boat, the “DAF”, a 38’ Marauder Sports Fisherman. This boat was used to take customers, suppliers, employees, and business associates of the Plaintiff on fishing trips. On 26% of such trips in fiscal 1966 and 10% of such trips during fiscal 1967, the District Director determined that either officers or employees of the Plaintiff (other than the Captain of the boat) were present, as the sole users of the boat or accompanying the customers, suppliers, and business associates of the Plaintiff. On the remaining trips of the “DAF” in those years, apart from the Captain of the boat, no officer or employee of the Plaintiff was present and the boat was used solely by customers, suppliers and business associates of the Plaintiff. On those occasions when no employees or officers were present, there were no business meetings, negotiations, discussions or other bona fide business transactions on the “DAF” (or on the same day), other than the entertainment of customers, suppliers and business associates.

11. The Plaintiff had owned and operated a fishing boat for these purposes since 1958, and still continues to do so.

12. During the years in question, Plaintiff employed a Captain to operate the “DAF”.

13. During the years in question the costs, expenses, and depreciation incurred by Plaintiff applicable to ownership and operation of the “DAF” were in the following amounts:

January 81,1986 January 81,1987
Depreciation_ $1, 450. 79 $1, 450. 79
Insurance_ 536.00 506.00
Captain’s Salary_ 5, 200. 00 5, 200. 00
Miscellaneous other expenses including gas, oil, bait, tackle and maintenance_ 7, 527. 51 7, 549. 93
Total..$14, 714. 30 $14, 706. 72

All such amounts, costs and expenses were ordinary and necessary expenses (or a reasonable allowance for depreciation) in the ownership and operation of the “DAF”.

14. The Plaintiff has substantiated all amounts, costs and expenses, referred to in paragraph 13, with adequate records and other sufficient evidence in satisfaction of the requirement imposed by Section 274(d) of the Internal Kevenue Code of 1954, and the Regulations thereunder.

15. The District Director allowed 26% of such amounts, costs and expenses for fiscal 1966 and 10% for fiscal 1967, each being the percentage of the days the “DAF” was used by taxpayer in those years for which the District Director determined that officers or employees of the Plaintiff accompanied customers, suppliers or business associates of the

Plaintiff on fishing trips on such boat or used the boat themselves.

16. Neither Dowe A. Foster nor Hubert S. Eley used the “DAF” during the years in question except on occasions when they were with customers, suppliers or business associates of Plaintiff. Neither Mr. Foster nor Mr. Eley, nor any other employee or stockholder of the plaintiff, used the “DAF” for personal reasons, except as noted in paragraphs 10, 15, 18, and 20. The use of the boat by Messrs. Foster and Eley, with customers, suppliers or business associates of Plaintiff was infrequent, generally about three to five (3-5) times per year for each of them. Mr. Foster owned a couple of fishing skiffs which he used for personal fishing, while Mr. Eley owned an 18 foot fishing boat which he used for that purpose. The two other persons owning as much as 10% of the outstanding stock of Potomac Industries, Inc. were William C. Krauser and Mrs. Helena K. Lupton. Mr. Krauser rarely went on the “DAF”. Mrs. Lupton was not active in the business and has never been on the “DAF”.

17. A major purpose for Plaintiff’s ownership and use of the “DAF” in the years in question was the maintenance of satisfactory business relationships with customers, suppliers and business associates of Plaintiff. The entertainment of customers, suppliers and other business associates is customary in the business in which plaintiff is engaged. For example, one of the Plaintiff’s major competitors owns a farm where it entertains customers, suppliers and business associates at barbecues. The Plaintiff’s officers have been similarly entertained on occasions when their host was not present and no business meetings, negotiations, discussions or other bona fide business transactions occurred other than entertainment. No inference is thereby made as to whether such expenses for such entertainment are properly deductible.

18. Another purpose for Plaintiff’s ownership and use of the “DAF” in the years in question was the provision of a recreational facility for the Plaintiff’s employees and to improve relationships between the Company and its personnel.

19. During the fiscal years in question, the Plaintiff adhered to the 'following rules with respect to use of the “DAF”:

(A) The boat was available only to employees,_ customers, suppliers and business associates of the Plaintiff or their guests.
(B) Weekends were primarily reserved for use by Plaintiff’s employees. Requests for use of the “DAF” were submitted to Plaintiff’s officers, and were approved on a first-come first-served basis.
(O) At all other times, the “DAF” was available for use by customers, suppliers and other business associates of Plaintiff. Requests for use of the “DAF” were submitted to Plaintiff’s officers, and were also approved on a first-come first-served basis.
(D) No one was permitted to sleep on the “DAF” overnight.
(E) Neither meals nor drinks were furnished by the Plaintiff.
■(F) Plaintiff furnished fishing tackle and bait.

20. During the years in question a log was maintained with respect to the usage of the “DAF”. The classification of persons who used the boat by days of use was:

January SI, January Si, 1966 1967
33 37 Persons employed by utility companies_
27 27 Other customers, suppliers, and business associates_
10 4 Employees only_
Total_ 70 68

The following table demonstrates the number of trips taken and the category of persons on board (exclusive of the captain) :

The persons so utilizing the boat had existing business relationships with Plaintiff at the time of such usage. Thus, such persons were existing customers, rather than prospective customers. Also, as determined by Plaintiff’s officers, the types of non-employees, i.e., particular employees of customers, suppliers or business associates, permitted to use the boat, were persons directly involved in Plaintiff’s business; they were persons with whom Plaintiff’s officers and employees worked on a continuing basis.

21. The Plaintiff frequently allowed its customers, suppliers or business associates to use the “DAF” alone. This practice furthered a purpose of plaintiff’s ownership and use of the “DAF”, without at the same time requiring employees to be absent from day-to-day working activities.

22. During the years in question, the Plaintiff was engaged in underground construction work, including the laying of utility distribution lines, the digging of trenches, the installing and connecting of utility lines and services, and replacing the removed soil and restoring the surface. Such utility construction work included the laying of the lines to provide gas, telephone, water, electric and sewer services in a geographic area extending roughly from Baltimore, Maryland to Richmond, Virginia.

23. Plaintiff is one of four major concerns engaged in this line of business in this area and does about 40% of this type of work in the relevant area which is contracted out by utility companies.

24. Approximately eighty percent (80%) of Plaintiff’s gross receipts for the years in question was derived from contracts with Washington Gas Light Company, Virginia Electric Power Company, Potomac Electric Power Company, Washington Suburban Sanitary Commission, Chesapeake and Potomac Telephone Companies, Frederick Gas Company and the D.C. Highway Department.

25. Plaintiff’s ability to utilize its labor, equipment and materials on the most efficient basis was one of the major factors in making business profitable. Typically, Plaintiff’s efficiency in operations would depend upon Plaintiff’s ability to obtain cooperation from the contracting parties and their inspectors, engineers and supervisory personnel.

The following are examples of instances in which the relationship between Plaintiff, on the one hand, and the inspectors, engineers, or other supervisory personnel of contracting parties, on the other, have significant bearing on the profitability of a particular contract.

(a) Frequently in connection with underground construction, Plaintiff may run into underground obstructions. The sooner that one of the utility engineers from the contracting party comes to the job site where such an obstruction has been located, the lesser the period of time Plaintiff is likely to be delayed in proceeding with construction. Plaintiff’s experience is that a favorable relationship with the utility engineers will cause these engineers to exert maximum effort to come to one of Plaintiff’s jobs faced with such an obstruction, and thus minimize delay from these obstructions.

(b) Plaintiff’s employees are paid from 1:30 a.m. to 4:00 p.m., pursuant to the Union contract, without regard to whether traffic conditions or other problems may delay the commencement of operations to a later hour. Although the permit on a particular contract award may specify commencement of construction at 9:30 a.m., for example, inspectors and supervisory personnel of a contracting party or applicable governmental authorities may conclude that traffic conditions permit commencement of construction at an earlier hour, for example, 9:00 a.m. The ability to utilize Plaintiff’s personnel commencing at this earlier hour is highly significant to Plaintiff in the profitability of a particular job, since its employees are paid for this time even if they are not working. Plaintiff’s experience is that a favorable relationship with these inspectors, supervisory personnel or applicable governmental authorities frequently results in objective consideration of the feasibility of earlier commencement and Plaintiff’s being able to commence operations at an earlier hour than that designated in the applicable contract.

(c) In the course of underground construction, Plaintiff may inadvertently cut cables, pipes or wires, particularly if they do not appear on the plans and specifications furnished to Plaintiff. The question of whether or not the Plaintiff is to be charged for the cost of splicing or restoring the cables, pipes or wires so severed is frequently a discretionary one, depending upon the contracting party’s judgment as to whether Plaintiff’s employees should have been aware of the existence of these cables or wires. Plaintiff’s experience is that a favorable relationship with engineers, inspectors and supervisory personnel of the concerns with which it contracts is likely to assist Plaintiff in the objective consideration of its assertions on the responsibility for severing such .cables or wires.

(d) In the course of underground construction, Plaintiff may discover obstructions, such as underground rock formations, which were not foreseen by either contracting party when the contract was signed. Encountering such obstructions may necessitate additional work by Plaintiff such as blasting. Plaintiff frequently seeks reimbursement for any additional expense incurred, pursuant to the contract. Plaintiff’s experience is that a favorable relationship with officers of the other contracting party is likely to assist Plaintiff in the objective consideration of its claim for additional compensation.

(e) In the course of underground construction along a roadway, Plaintiff may encounter conditions on one side of the street which make it desirable for it to obtain permission to complete the work on the opposite side of the roadway. Plaintiff’s experience is that a favorable relationship with engineers, inspectors, and supervisory personnel of the concerns with which it contracts is likely to assist Plaintiff in obtaining permission to continue work on the opposite side.

26. Plaintiff’s experience in the usage and operation of the “DAF” caused it to believe that the ownership and operation of the boat, and the providing of this facility to its customers, suppliers and business associates, led to a better relationship with them and directly increased Plaintiff’s ability to generate income in its business. The Plaintiff’s experience indicated that it benefited in instances such as those set forth in paragraph 25 by providing such customers, suppliers and business associates the opportunity for fishing on the “DAF”.

CONCLUSION' OF LAW

Upon the foregoing opinion and findings of fact, which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed. 
      
      
         Sec. 274. Disallowance of certain entertainment, etc., expenses.
      “(a) Entertainment, amusement, or recreation.
      “(1) In general. No deduction otherwise allowable 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 taxpayer’s trade or business, or
      “(B) Facility. With respect to a facility used in connection with an activity referred to in subparagraph (A), unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer’s trade or business and that the item was directly related to the active conduct of such trade or business,
      and such deduction shall in no event exceed the portion of such item directly related to, or, in the case of an item described in subparagraph (A) directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), the portion of such item associated with, the active conduct of the taxpayer’s trade or business.
      * * * * *
      “ (h) Regulatory authority.
      “The Secretary or his delegate shall prescribe such regulations as he may deem necessary to carry out the purposes of this section, including regulations prescribing whether subsection (a) or subsection (b) applies in eases where both such subsection would otherwise apply.”
     
      
       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, * * *”
     
      
       Sec. 167. Depreciation.
      “(a) General rule.
      “There shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including a reasonable allowance for obsolescence)—
      “(1) of property used in the trade or business, * * *”
     
      
       The “ordinary and necessary” requirement of these expenses was deemed to be satisfied if the expenditure was “normal” and “appropriate and helpful" to the business. Commissioner v. Heininger, 320 U.S. 467, 471 (1943).
     
      
       See Treas. Reg. § 1.274-2(e) (4) (1969).
     
      
       § 1.274-2. Disallowance of deductions for certain expenses for entertainment, amusement, or recreation.
      » * * * *
      (c) Directly related, entertainment — (1) In general. Except as otherwise provided in paragraph (d) of this section (relating to associated entertainment) or under paragraph (f) of this section (relating to business meals and other specific exceptions), no deduction shall be allowed for any expenditure for entertainment unless the taxpayer establishes that the expenditure was directly related to the active conduct of his trade or business within the meaning of this paragraph.
      (2) Directly related entertainment defined. Any expenditure for entertainment, if it is otherwise allowable as a deduction under chapter 1 of the Code, shall be considered directly related to the active conduct of the taxpayer’s trade or business if it meets the requirements of any one of subparagraphs (3), (4), (5), or (6) of this paragraph.
      (3) Directly related in general. Except as provided in subparagraph (7) of this paragraph, an expenditure for entertainment shall be considered directly related to the active conduct of the taxpayer’s trade or business if it is established that it meets all of the requirements of subdivisions (i), (ii), (iii) and (iv) of this subparagraph.
      (i) At the time the taxpayer made the entertainment expenditure (or committed himself to make the expenditure), 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.
      (ii) During the entertainment period to which the expenditure related, the taxpayer actively engaged in a business meeeting, negotiation, discussion, or other bona fide business transaction, other than entertainment, for the purpose of obtaining such income or other specific trade or business benefit (or, at the time the taxpayer made the expenditure or committed himself to the expenditure, it was reasonable for the taxpayer to expect that he would have done so, although such was not the case solely for reasons beyond the taxpayer’s control).
      (iii) In light of all the facts and circumstances of the case, the principal character or aspect of the combined business and entertainment to which the expenditure related was the active conduct of the taxpayer’s trade or business (or at the time the taxpayer made the expenditure or committed himself to the expenditure, it was reasonable for the taxpayer to expect that the active conduct of trade or business would have been the principal character or aspect of the entertainment, although such was not the ease solely for reasons beyond the taxpayer’s control). It is not necessary that more time be devoted to business than to entertainment to meet this requirement. The active conduct of trade or business is considered not to be the principal character or aspect of combined business and entertainment activity on hunting or fishing trips or on yachts and other pleasure boats unless the taxpayer clearly establishes to the contrary.
      (iv) The expenditure was allocable to the taxpayer and a person or persons with whom the taxpayer engaged in the active conduct of trade or business during the entertainment or with whom the taxpayer establishes he would have engaged in such active conduct of trade or business if it were not for circumstances beyond tbe taxpayer’s control. Eor expenditures closely connected -with directly related entertainment, see paragraph (d) (4) of this section.
      (4) Expenditures in clem' business setting. An expenditure for entertainment shall be considered directly related to .the active conduct of tbe taxpayer’s trade or business if it is established that the expenditure was for entertainment occurring in a clear business setting directly in furthez-ance of the taxpayer’s trade or business. Generally, entertainment shall not be considered to have occurred in a clear business setting unless the taxpayer clearly establishes that any recipient of the entertainment would have reasonably known that the taxpayer had no significant motive, in incurring the expenditure, other than directly furthering his trade or business. Objective rather than subjective standards will be determinative. Thus, entertainment which occurred under any circumstances described in subparagraph (7) (ii) of this paragraph ordinarily will not be considered as occurring in a clear business setting. Such entertainment will generally be considered to be socially rather than commercially motivated. Expenditures made for the furtherance of a taxpayer’s trade or business in providing a “hospitality l-oom” at a convention (described in paragraph (d) (3).(i) (6) of this section) at which goodwill is created through display or discussion of the taxpayer’s products, will, however, be treated as directly related. In addition, entertainment of a clear business nature which occurred under circumstances where there was no meaningful personal or social relationship between the taxpayer and the i-eeipients of the entertainment may be considered to have occurred in a clear business setting. Eor example, entertainment of business representatives and civic leaders at the opening of a new hotel or theatrical production, where the clear purpose of the taxpayer is to obtain business publicity rather than to create or maintain the goodwill of the recipients of the entertainment, would generally be considered to be in a clear business setting. Also, entertainment which has the principal effect of a price rebate in connection with the sale of the taxpayer’s products generally will be considered to have occurred in a clear business setting. Such would be the case, for example, if a taxpayer owning a hotel were to provide occasional free dinners at a hotel for a customer who patronized the hotel.
      * # * * *
      (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 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—
      (а) A meeting or discussion at night clubs, theaters, and sporting events, or during essentially social gatherings such as cocktail parties, or
      (б) A meeting or discussion, if the taxpayer meets with a group which includes persons other -than business associates, at places such as cocktail lounges, country clubs, golf and athletic clubs, or at vacation resorts.
      An expenditure for entertainment in any such case is considered not to be directly related to the active conduct of the taxpayer’s trade or business unless the taxpayer clearly establishes to the contrary.
     
      
       See, In this context, Delores Bussabarger, 52 T.C. 819 (1969), where substantial distractions were held to preclude satisfaction of the “directly related” requirement even though the taxpayer was present.
      
     
      
       See Bywater Sales and Service Co. v. Commissioner, 24 CCH, TCM 849 (1965), decided under tie pre-section 274 law, where the taxpayer showed clients his products on off-shore rigs while on a fishing trip.
     