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Harlan
Douglas

United States Supreme Court

370 U.S. 269

C.J.D. RUDOLPH et al., Petitioners,  v.  UNITED STATES.

 Argued: April 3, 1962. --- Decided: June 18, 1962


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, 26 U.S.C..A. § 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:

'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 was evasive. But isolated engagements of the kind here in question have no rational connection with compensation 'for services' rendered.

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 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:

'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.

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 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), 26 U.S.C.A. § 162(a) (2).

The Regulations are even more explicit. Section 1.162-2(b)(1) provides:

'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.

Section 1.162-2(b)(2) of the Regulations states:

'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.' Where, as here, at least one-half of the time is spent on mundane 'business' activities, [1] the case is nowhere near the colorable transaction described in § 1.162-2(b)(2).

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 benefit from the knowledge and increase in morale which result from them. [2] Why they should be treated differently from other conventions is a mystery. It cannot be, as the district judge thought and as the Government seems to argue, because going to New York City is, as a matter of law, a 'pleasure trip.' If we are in the field of judicial notice, I would think that some might conclude that the weekend in New York City was a chore and that those who went sacrificed valuable time that might better have been spent on the farm, in the woods, or along the seashore.

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.

The wife's expenses [3] are, on this record, also deductible. The Treasury Regulations state in § 1.162-2(c):

'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 motivated the inclusion of wives in this particular insurance convention. An insurance executive testified at this trial:

'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.

NotesEdit

^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.

^2  'One of the chief things to be accomplished by a convention is to secure unanimous understanding of the principles 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.

'The extent to which the Home Office arranges for transportation depends largely upon the situation of the convention city. If it is centrally located with many lines of approach, it would be impracticable to arrange for many men to meet on their way to the convention. But if the convention is to be held in an isolated spot, or one at considerable distance from the home of the majority of the members attending, then specific plans may be made for assembling at some nearer location and proceeding together to the destination. If this latter is at all feasible, it is desirable for several reasons. It gives the men a peculiar feeling of satisfaction to travel on a 'special' train or on 'special' cars, it encourages a friendlier feeling than is generally present at conventions at which the men arrive as strangers, it makes the men more anxious to get down to the real work of the convention when they arrive at their destination, and, above all, it has a decided educational value in its contacts and ever present business discussions.' Report No. 15, Life Insurance Sales Research Bureau, Nov. 1924, pp. 13, 17-18.

^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. And see Insurance Law, 27 McKinney's Consol.Laws of N.Y., c. 28, § 213, subdivisions 7 and 8, regulating insurance agents' competitions.

^4  See H.R.Rep. No. 1274, 80th Cong., 2d Sess., pp. 1, 47.

^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.

'In many cases, this influence is negative rather than positive, and this is particularly true in the careers of many life insurance agents because their work frequently involves evening appointments-a condition usually resented by a wife. Many a wife has thoroughly discouraged her husband because the only thing which she ever knew about his work was that he had to go out at night or that he had failed to 'write that ten' which would give her a new dress. She knew nothing about the bigger things which life insurance accomplishes and of which her husband was or could be a part. The recognition of the very great desirability of 'selling' the wife on her husband's job has spread rapidly in recent years, and today many husbands are helped over the rough spots of their career by the enthusiasm and vision of their wives, much of which can be aroused or increased at a convention'. Report No. 15, supra note 2, pp. 25-26.

This work is in the public domain in the United States because it is a work of the United States federal government (see 17 U.S.C. 105).