RUDOLPH ET UX. v. UNITED STATES.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT.
Argued April 3, 1962.
Decided June 18, 1962.
An insurance company paid the expenses of a group of its agents and their wives, including petitioners, to New York City to attend an annual convention, and the Commissioner assessed the value of the trip to petitioners as taxable income. In a suit for refund, the District Court found that the trip was provided by the company primarily for the purpose of affording a pleasure trip in the nature of a bonus, reward, and compensation for a job well done and that, from the point of view of petitioners, it was primarily a pleasure trip and that, therefore, the value of the trip was income and the costs were personal and nondeductible. The Court of Appeals approved these findings. Held: Since the ultimate facts are subject to the "clearly erroneous" rule and their review would be of no importance save to the litigants themselves, the writ of certiorari is dismissed as improvidently granted. Pp. 269-270.
Reported below: 291 F.2d 841.
Richard A. Freling argued the cause for petitioners. With him on the briefs was Felix Atwood.
John B. Jones, Jr. argued the cause for the United States. With him on the briefs were Solicitor General Cox, Assistant Attorney General Oberdorfer, Wayne G. Barnett, I. Henry Kutz and Norman H. Wolfe.
Charles W. Merritt filed a brief for the American Hotel Association, as amicus curiae, urging reversal.
The petition for certiorari in this case was granted because it was thought to present important questions involving the definition of "income" and "ordinary and necessary" business expenses under the Internal Revenue Code. 368 U.S. 913 . An insurance company provided [370 U.S. 269, 270] a trip from its home office in Dallas, Texas, to New York City for a group of its agents and their wives. Rudolph and his wife were among the beneficiaries of this trip, and the Commissioner assessed its value to them as taxable income. * It appears to be agreed between the parties that the tax consequences of the trip turn upon the Rudolphs' "dominant motive and purpose" in taking the trip and the company's in offering it. In this regard the District Court, on a suit for a refund, found that the trip was provided by the company for "the primary purpose of affording a pleasure trip . . . in the nature of a bonus, reward, and compensation for a job well done" and that from the point of view of the Rudolphs it "was primarily a pleasure trip in the nature of a vacation . . . ." 189 F. Supp. 2, 4-5. The Court of Appeals approved these findings. 291 F.2d 841. Such ultimate facts are subject to the "clearly erroneous" rule, cf. Commissioner v. Duberstein, 363 U.S. 278, 289 -291 (1960), and their review would be of no importance save to the litigants themselves. The appropriate disposition in such a situation is to dismiss the writ as improvidently granted. See Rice v. Sioux City Memorial Park Cemetery, 349 U.S. 70, 78 n. 2 (1955).
MR. JUSTICE FRANKFURTER took no part in the decision of this case.
MR. JUSTICE WHITE took no part in the consideration or decision of this case.
[ Footnote * ] A joint return had been filed.
Separate opinion of MR. JUSTICE HARLAN.
Although the reasons given by the Court for dismissing the writ as improvidently granted should have been persuasive against granting certiorari, now that the case is here I think it better to decide it, two members of the Court having dissented on the merits. [370 U.S. 269, 271]
The courts below concluded (1) that the value of this "all expense" trip to the company-sponsored insurance convention constituted "gross income" to the petitioners within the meaning of 61 of the Internal Revenue Code of 1954, and (2) that the amount reflected was not deductible as an "ordinary and necessary" business expense under 162 of the Code. 1 Both conclusions are, in my opinion, unassailable unless the findings of fact on which they rested are to be impeached by us as clearly erroneous. I do not think they can be on this record, especially in light of the "seasoned and wise rule of this Court" which "makes concurrent findings of two courts below final here in the absence of very exceptional showing of error." Comstock v. Group of Institutional Investors, 335 U.S. 211, 214 .
The basic facts, found by the District Court, are as follows. Petitioners, husband and wife, reside in Dallas, Texas, where the home office of the husband's employer, the Southland Life Insurance Company, is located. By having sold a predetermined amount of insurance, the husband qualified to attend the company's convention in New York City in 1956 and, in line with company policy, to bring his wife with him. The petitioners, together with 150 other employees and officers of the insurance company and 141 wives, traveled to and from New York City on special trains, and were housed in a single hotel during their two-and-one-half-day visit. One morning was devoted to a "business meeting" and group luncheon, the rest of the time in New York City to "travel, sight-seeing, entertainment, fellowship or free time." The entire trip lasted one week. [370 U.S. 269, 272]
The company paid all the expenses of the convention-trip which amounted to $80,000; petitioners' allocable share being $560. When petitioners did not include the latter amount in their joint income tax return, the Commissioner assessed a deficiency which was sustained by the District Court, 189 F. Supp. 2, and also by the Court of Appeals, one judge dissenting, in a per curiam opinion, 291 F.2d 841, citing its recent decision in Patterson v. Thomas, 289 F.2d 108, where the same result had been reached. The District Court held that the value of the trip being "in the nature of a bonus, reward, and compensation for a job well done," was income to Rudolph, but being "primarily a pleasure trip in the nature of a vacation," the costs were personal and nondeductible.
Under 61 of the 1954 Code was the value of the trip to the taxpayer-husband properly includible in gross income? That section defines gross income as "all income from whatever source derived," including, among other items, "compensation for services." Certain sections of the 1954 Code enumerate particular receipts which are included in the concept of "gross income," 2 including prizes and awards (with certain exceptions); 3 [370 U.S. 269, 273] while other sections, 101-121, specifically exclude certain receipts from "gross income," including, for example, gifts and inheritances 4 (see Commissioner v. Duberstein, 363 U.S. 278 ), and meals or lodgings furnished for the convenience of the employer. 5 The Treasury Regulations emphasize the inclusiveness of the concept of "gross income." 6
In light of the sweeping scope of 61 taxing "all gains except those specifically exempted," Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430 ; see Commissioner v. LoBue, 351 U.S. 243, 246 ; James v. United States, 366 U.S. 213, 219 , and its purpose to include as taxable income "any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected," Commissioner v. Smith, 324 U.S. 177, 181 , it seems clear that the District Court's findings, if sustainable, bring the value of the trip within the reach of the statute.
Petitioners do not claim that the value of the trip is within one of the statutory exclusions from "gross income" (see notes 4 and 5, supra) as did the taxpayer in Patterson v. Thomas, 289 F.2d 108, 111-112; rather they characterize the amount as a "fringe benefit" not specifically [370 U.S. 269, 274] excluded from 61 by other sections of the statute, yet not intended to be encompassed by its reach. Conceding that the statutory exclusions from "gross income" are not exhaustive, as the Government seems to recognize is so under Glenshaw, it is not now necessary to explore the extent of any such nonstatutory exclusions. 7 For it was surely within the Commissioner's competence to consider as "gross income" a "reward, or a bonus given to . . . employees for excellence in service," which the District Court found was the employer's primary purpose in arranging this trip. I cannot say that this finding, confirmed as it has been by the Court of Appeals, is inadequately supported by this record. 8 [370 U.S. 269, 275]
There remains the question whether, though income, this outlay for transportation, meals, and lodging was deductible by petitioners as an "ordinary and necessary" business expense under 162. 9 The relevant factors on this branch of the case are found in Treas. Reg. 1.162-2. 10 In summary, the regulation in pertinent part provides:
The husband places great emphasis on the fact that he is an entrapped "organization man," required to attend such conventions, and that his future promotions depend on his presence. Suffice it to say that the District Court did not find any element of compulsion; to the contrary, it found that the petitioners regarded the convention in New York City as a pleasure trip in the nature of a vacation. Again, I cannot say that these findings are without adequate evidentiary support. Supra, pp. 273-274.
The trip not having been primarily a business trip, the wife's expenses are not deductible. It is not necessary, therefore, to examine whether they would or would not be deductible if, to the contrary, the husband's trip was related primarily to business.
Where, as here, two courts below have resolved the determinative factual issues against the taxpayers, according to the rules of law set forth in the statute and regulations, [370 U.S. 269, 278] it is not for this Court to re-examine the evidence, and disturb their findings, unless "clearly erroneous." That is not the situation here.
I would affirm.
[ Footnote 2 ] E. g., 71 (Alimony and separate maintenance payments), 72 (Annuities; certain proceeds of endowment and life insurance contracts), 73 (Services of child).
[ Footnote 3 ] 74: "(a) GENERAL RULE. - Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants), gross income includes amounts received as prizes and awards.
[ Footnote 4 ] 102.
[ Footnote 5 ] 119. Some of the other exclusions are 101 (Certain death payments), 103 (Interest on certain governmental obligations), 104 (Compensation for injuries or sickness), 105 (Amounts received under accident and health plans), 113 (Mustering-out payments for members of the Armed Forces), 117 (Scholarship and fellowship grants).
[ Footnote 6 ] Treas. Reg. 1.61-1 (a) provides:
[ Footnote 7 ] Petitioners rely on 3401 of the 1954 Code, relating to withholding taxes, and more especially on Treas. Reg. 31.3401 (a)-1 (b) (10) providing that certain fringe benefits are not considered "wages" subject to withholding. The Government admits that not all "fringe benefits" have been taxed as income, but it is enough to point out here that the withholding tax analogy is not perfect, for payments to laid-off employees from company-financed supplemental unemployment benefit plans are "taxable income" to the employees although not "wages" subject to withholding. Rev. Rul. 56-249, 1956-1 Cum. Bull. 488, as amplified by Rev. Rul. 60-330, 1960-2 Cum. Bull. 46.
[ Footnote 8 ] The District Court said (189 F. Supp., at 4-5):
[ Footnote 9 ] "(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, including -
There is no need to explore the lack of symmetry in certain "income" and "deductibility" areas in the 1954 Code permitting employers to provide certain "fringe benefits" to employees - such as parking facilities, swimming pools, medical services - which have not generally been considered income to the employee, but which, if paid for by the employee with his own funds, would not be a deductible expense. The practicalities of a tax system do not demand hypothetical or theoretical perfection, and these workaday problems are properly the concern of the Commissioner, not of the Courts.
[ Footnote 10 ] Although this Regulation is part of those promulgated on April 3, 1958, it is applicable to this 1956 transaction. The power to make the Regulations prospective only, Int. Rev. Code of 1954, 7805 (b), was not exercised, and they were made applicable to taxable years beginning after December 31, 1953. T. D. 6291, 1958-1 Cum. Bull. 63. Moreover, the result here would not be different under the prior comparable Regulation. Treas. Reg. 118, 39.23 (a)-2 (a).
[ Footnote 11 ] No claim has been made by the husband in this case that specific business expenses which may have been incurred at the convention in New York are deductible. The only issue is the deductibility of the entire trip expense. Compare Patterson v. Thomas, 289 F.2d 108, 114 and n. 13.
[ Footnote 12 ] Deductions allowed: Coffey v. Commissioner, 21 B. T. A. 1242 (doctor); Coughlin v. Commissioner, 203 F.2d 307 (lawyer); Shutter v. Commissioner, 2 B. T. A. 23 (clergyman); Callinan v. Commissioner, 12 T. C. M. 170 (legal secretary); see Rev. Rul. 59-316, 1959-2 Cum. Bull. 57; Rev. Rul. 60-16, 1960-1 Cum. Bull. 58.
Deductions not allowed: Duncan v. Commissioner, 30 T. C. 386 (doctor); Ellis v. Burnet, 60 App. D.C. 193, 50 F.2d 343 (lawyer); Reed v. Commissioner, 35 T. C. 199 (lawyer); Patterson v. Thomas, 289 F.2d 108 (insurance agent); Russell v. Commissioner, 11 T. C. M. 334 (railroad fireman).
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BLACK joins, dissenting.
It could not, I think, be seriously contended that a professional man, say a Senator or a Congressman, who attends a convention to read a paper or conduct a seminar with all expenses paid has received "income" within the meaning of the Internal Revenue Code. Nor would it matter, I assume, that he took his wife and that her expenses were also paid. Income has the connotation of something other than the mere payment of expenses. The statute, 26 U.S.C. 61, speaks in terms of financial gain, of compensation for services, "including fees, commissions, and similar items." The form of payment for services covers a wide range. Treasury Regulations 1.61-1 provide:
It is true that petitioner was an employee and that the expenses for attending the convention were paid by his employer. He qualified to attend the convention by selling an amount of insurance that met a quota set by the company. Other salesmen also qualified, some attending and some not attending. They went from Dallas, Texas, to New York City, where they stayed two and a half days. One day was given to a business session and a luncheon; the rest of the time was left for social events.
On this record there is no room for a finding of fact that the "expenses paid" were "for services" rendered. They were apparently a proper income tax deduction for the employer. The record is replete with evidence that from management's point of view it was good business to spend money on a convention for its leading agents - a convention that not only kept the group together in New York City, but in transit as well, giving ample time for group discussions, exchanges of experience, and educational training. It was the exigencies of the employment that gave rise to the convention. There was nothing dishonest, illegitimate, or unethical about this transaction. No services were rendered. New York City may or may not have been attractive to the agents and their wives. Whether a person enjoys or dislikes the trip that he makes "with all expenses paid" has no more to do with whether the expenses paid were compensation "for services" rendered than does his attitude toward his job.
In popular understanding a trip to a convention "with all expenses paid" may be an award. Yet the tax laws are filled with exemptions for "awards" which are not considered to be income. The exemption of gifts is one example. Others are the exemptions of the proceeds [370 U.S. 269, 280] of life insurance payable at death, disability benefits, the rental values of parsonages, scholarship and fellowship grants, allowances of U.S. employees abroad, mustering-out payments to members of the Armed Forces, etc. Employees may receive from their employers many fringe benefits that are not income. Treasury Regulations 31.3401 (a)-1 (b) (10) provide:
The expenses, if "income," are plainly deductible. The Government, however, says that our problem is to determine "whether it is consistent with the ends of an equitable and workable tax system" to make them such. The problem of designing an "equitable" tax system is, however, for Congress, not for the Court.
The test of deductibility to be applied here is whether the expenses are "ordinary and necessary" in the carrying on of petitioner's business. The Act is explicit in permitting the deduction of traveling expenses (including the [370 U.S. 269, 281] entire amount expended for meals and lodging) while away from home in the "pursuit of a trade or business," 26 U.S.C. 162 (a) (2).
The Regulations are even more explicit. Section 1.162-2 (b) (1) provides:
Section 1.162-2 (b) (2) of the Regulations states:
I see no reason to take this case out of the main stream of precedents and establish a special rule for insurance conventions. Judge Brown, dissenting in the Court of Appeals, shows how discriminatory this decision is:
Moreover, federal revenue agents attending their convention are given a deduction for the expenses they incur. We are advised that
The wife's expenses 3 are, on this record, also deductible. The Treasury Regulations state in 1.162-2 (c):
[ Footnote 1 ] The travel to and from the convention was in a group, so arranged as to develop solidarity among the agents, and to provide a continuing seminar.
[ Footnote 2 ] "One of the chief things to be accomplished by a convention is to secure unanimous understanding of the principle underlying the company's sales operations and the rules which experience has proved to be essential in carrying out those principles. There is no sales organization anywhere which has a complete and unanimous grasp of these matters but a convention can do more to give the men that grasp than anything else. Home Offices are constantly under the necessity of formulating principles and rules, and they are similarly in a constant state of disappointment because they are not understood. The convention is the place above all others where this can be accomplished.
[ Footnote 3 ] For reasons not germane to the problems of the federal income tax, the New York Superintendent of Insurance has ruled that the payment of a wife's expenses in attending an insurance convention is not permissible. N. Y. Ins. Dept. Rulings (1953), Oct. 6, 1953. [370 U.S. 269, 285] And see 27 McKinney's Con. Laws of N. Y., 213, subdivisions 7 and 8, regulating insurance agents' competitions.
[ Footnote 4 ] See H. R. Rep. No. 1274, 80th Cong., 2d Sess., pp. 1, 47.
[ Footnote 5 ] "Today an ever increasing number of wives take a real interest in what their husbands do, and this interest is frequently referred to by men as being of very great value to them. In fact, it has been said that a wife can not usually be so wholly lacking in contact with her husband's work as to have no influence at all upon it.