RUDOLPH ET UX. v. UNITED STATES.
No. 396.
Supreme Court of the United States
June 18, 1962.
370 U.S. 269
Argued April 3, 1962.
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.
PER CURIAM.
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
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.
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.
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, sightseeing, entertainment, fellowship or free time.” The entire trip lasted one week.
I.
Under
In light of the sweeping scope of
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
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
Traveling expenses, including meals, lodgings and other incidentals, reasonable and necessary in the conduct of the taxpayer‘s business and directly attributable to it are deductible, but expenses of a trip
“undertaken for other than business purposes” are “personal expenses” and the meals and lodgings are “living expenses.”
Treas. Reg. § 1.162-2 (a) .If a taxpayer who travels to a destination engages in both “business and personal activities,” the traveling expenses are deductible only if the trip is “related primarily” to the taxpayer‘s business; if “primarily personal,” the traveling expenses are not deductible even though the taxpayer engages in some business there; yet expenses allocable to the taxpayer‘s trade or business there are deductible even though the travel expenses to and fro are not.11 Id.,
§ 1.162-2 (b) (1) .Whether a trip is related primarily to the taxpayer‘s business or is primarily personal in nature “depends on the facts and circumstances in each case.” Id.,
§ 1.162-2 (b) (2) ; so too with expenses paid or incurred in attending a convention. Id.,§ 1.162-2 (d) .Finally, the deductibility of the expenses of a taxpayer‘s wife who accompanies her husband depends, first, on whether his trip is a “business trip.” Id.,
§ 1.162-2 (c) ; if so, it must further be shown that the wife‘s presence on the trip also had a bona fide business purpose. Ibid.
Where, as here, it may be arguable that the trip was both for business and personal reasons, the crucial question is whether, under all the facts and circumstances of the case, the purpose of the trip was “related primarily to business” or was, rather, “primarily personal in nature.”
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, accord-ing to the rules of law set forth in the statute and regu-
I would affirm.
MR. JUSTICE DOUGLAS, with whom MR. JUSTICE BLACK joins, dissenting.
I.
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,
“Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash.”
The formula “all expenses paid” might be the disguise whereby compensation “for services” is paid. Yet it would be a rare case indeed where one could conclude that a person who gets only his expenses for attendance at one convention gets “income” in the statutory sense. If this arrangement were regular and frequent or if it had the earmarks of a sham device as a cloak for remuneration, there would be room for fact-finders to conclude that
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
“Ordinarily, facilities or privileges (such as entertainment, medical services, or so-called ‘courtesy’ discounts on purchases), furnished or offered by an employer to his employees generally, are not considered as wages subject to withholding if such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, good will, contentment, or efficiency of his employees.”
The fringe benefits of this one convention trip are less obviously income than the fringe benefits listed in the Regulations. For the latter are constantly recurring-day after day, week after week. Moreover, on this record the convention promotes the “efficiency” of the agents as much as the other fringe benefits enumerated in the Regulations.
II.
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
The Regulations are even more explicit.
“If a taxpayer travels to a destination and while at such destination engages in both business and personal activities, traveling expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer‘s trade or business. If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination.” (Italics added.)
Thus, by the very terms of the Regulations a taxpayer who combines business and pleasure may deduct all “traveling expenses,” provided the business purpose is dominant.
“Whether a trip is related primarily to the taxpayer‘s trade or business or is primarily personal in nature depends on the facts and circumstances in each case. . . . The amount of time during the period of the trip which is spent on personal activity compared to the amount of time spent on activities directly relating to the taxpayer‘s trade or business is an important factor in determining whether the trip is primarily personal. If, for example, a taxpayer spends one week while at a destination on activities which are directly related to his trade or business and subsequently spends an additional five weeks for vacation or other personal activities, the trip will be considered primarily personal in nature in the absence of a clear showing to the contrary.”
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:
“Deductions have been allowed as ‘ordinary and necessary’ to clergymen attending a church convention; to expenses of an employee attending conventions of a related business group; to a lawyer attending a meeting of the American Bar Association; to a legal secretary attending the national convention of the National Association; to physicians attending medical conventions; to certified public accountants attending conventions; to university teachers in attending conventions or scientific meetings; to professional cartoonists attending political conventions; to persons attending the Red Cross Convention; to school teachers attending summer school; to attorneys attending an institute on Federal taxation; to employees sent to refresher courses to become more acquainted with new processes in the industry; to a furniture store sending its buyers to the annual furniture mart; to representatives to annual conventions of trade associations; and to an insurance agent away from home on business.” 291 F. 2d 841, 844-845.
Insurance conventions go back at least to 1924 (Report No. 15, Life Insurance Sales Research Bureau, Nov. 1924) and are premised on the idea that agents and companies
Moreover, federal revenue agents attending their convention are given a deduction for the expenses they incur. We are advised that
“. . . the Commissioner has recently withdrawn his objections in two Tax Court cases to the deduction of convention expenses incurred by two IRS employees in attending conventions of the National Association of Internal Revenue Employees.
“No explanation has been given publicly for the Tax Court action of the Commissioner, it being generally presumed that the IRS employees met the tests of
Reg. § 1.162-2 (d) by showing a sufficient relationship between the trade or business of being an IRS employee and attendance at conventions of the NAIRE. The National Association of Internal Revenue Employees has hailed the Commissioner‘s actions as setting a precedent which can be cited by IRS employees when taking deductions for expenses incurred in attending NAIRE conventions.” CCH Standard Federal Tax Reports No. 23, April 19, 1961, pt. 1, p. 2.
It is odd, indeed, that revenue agents need make no accounting of the movies they saw or the nightclubs they attended, in order to get the deduction, while insurance agents must.
III.
The wife‘s expenses are,3 on this record, also deductible. The Treasury Regulations state in
“Where a taxpayer‘s wife accompanies him on a business trip, expenses attributable to her travel are
not deductible unless it can be adequately shown that the wife‘s presence on the trip has a bona fide business purpose. The wife‘s performance of some incidental service does not cause her expenses to qualify as deductible business expenses. The same rules apply to any other members of the taxpayer‘s family who accompany him on such a trip.”
The civil law philosophy, expressed in the community property concept, attributes half of the husband‘s earnings to the wife-an equitable idea that at long last was reflected in the idea of income splitting under the federal income tax law.4 The wife‘s contribution to the business productivity of the husband in at least some activities is well known. It was specially recognized in the insurance field long before the issue of deductibility of her expenses arose under the federal income tax.5 Business reasons
is not permissible. N. Y. Ins. Dept. Rulings (1953), Oct. 6, 1953. And see 27 McKinney‘s Con. Laws of N. Y., § 213, subdivisions 7 and 8, regulating insurance agents’ competitions.
“Q. I hand you Plaintiff‘s Exhibit 15, and you will notice it is a letter addressed to ‘John Doe‘; also a bulletin entitled ‘A New Partner Has Been Formed.’ Will you tell us what that consists of?
“A. This is a letter addressed to the wife of an agent, a new agent, as we make the contract with him. This letter is sent to his wife within a few days after the contract, enclosing this booklet explaining to her how she can help her husband in the life insurance business.
. . .
“Q. Please tell us, as briefly as you can and yet in detail, how you as agency director for Southland attempt to integrate the wives’ performance with the performance of agents in the life insurance business.
“A. One of the important functions we have in mind is the attendance at these conventions. In addition to that communication, occasionally there are letters that will be written to the wife concerning any special sales effort that might be desired or promoted. The company has a monthly publication for the agents and employees that is mailed to their homes so the wife will have a convenient opportunity to see the magazine and read it.
“At most of our convention program [s], we have some specific reference to the wife‘s work, and in quite a few of the convention programs we have had wives appear on the program.
“Q. Suppose you didn‘t have the wives and didn‘t seek to require their attendance at a convention, would there be some danger that your meetings
and conventions would kind of degenerate into stag affairs, where the whole purpose of the meeting would be lost?
“A. I think that would definitely be a tendency.”
I would reverse the judgments below and leave insurance conventions in the same category as conventions of revenue agents, lawyers, doctors, business men, accountants, nurses, clergymen and all others, until and unless Congress decides otherwise.