Noyce v. Commissioner

JACOBS, J., dissenting: The majority concluded that Robert N. Noyce (petitioner) was entitled to deductions for depreciation and expenses attributable to the use of his private airplane in his employment as vice chairman of the board of directors of Intel Corp. (Intel). I would conclude otherwise.

It is well established that if an employee voluntarily pays his corporate employer’s obligation, he cannot deduct the expense on his personal return. Noland v. Commissioner, 269 F.2d 108, 111 (4th Cir. 1959), affg. a Memorandum Opinion of this Court. As the circuit court stated in Noland:

When the corporation, reimbursing its officers and employees for direct expense incurred in furthering its business, does not reimburse an officer for particular expense, that expense prima facie is personal, either because it was voluntarily assumed or because it did not arise directly out of the exigencies of the business of the corporation. [ 269 F.2d at 113 .]

However, if the employer requires or expects the employee to incur the expense without the employer’s reimbursement, then the expense may be deductible. Stolk v. Commissioner, 40 T.C. 345, 357 (1963), affd. 326 F.2d 760 (2d Cir. 1964).

The majority concluded that petitioner’s use of his own airplane and his payment of those expenses did not constitute the voluntary assumption of Intel’s obligations. The majority based this conclusion on its finding that Intel expected petitioner, as an officer, to incur and pay travel expenses in excess of the amounts reimbursable under Intel’s written reimbursement policy. The majority failed to find, however, that Intel required or expected its officers to use their own airplanes for business travel. In my opinion, such a finding was necessary in order for the majority to reach its conclusion.

Intel’s written reimbursement policy, upon which the majority relied, consisted of a letter, dated August 4, 1980 (Intel’s reimbursement policy), from Roger Borovoy, who was the general counsel, vice president, and secretary of Intel, to Andrew Grove (Dr. Grove), Intel’s president, which stated:

RE: Intel Miscellaneous Expense Reimbursement Policy for Intel Officers

It is Intel’s policy not to reimburse officers for certain kinds of expenses. Even though we recognize that the officer incurs these expenses for the benefit of Intel, we consider either the amount too small or the type of expense to be inappropriate for reimbursement considering the salary and other remuneration an Intel officer receives.

Examples of such expenses are purchases of drinks for Intel employees or others at company-related functions or at professional meetings. Whereas we do reimburse mileage for long trips, we discourage officers from submitting mileage for car trips between Intel facilities in the Bay Area which are dispersed between Santa Cruz, Sunnyvale, Santa Clara, Mountain View and Livermore.

We also discourage officers from submitting expense reports for business entertaining at home, and for miscellaneous business lunches with Intel employees (even though the purpose of the lunch was entirely to discuss Intel business). Similarly, occasional gifts to secretaries and other employees, while essential for harmony in the work environment, are not reimbursed by the company.

While we feel it is beneficial to our officers to fly first class in order to get more work done on the plane, we have a policy of not reimbursing the additional costs for such travel.

In my opinion, Intel’s reimbursement policy is insufficient to support a finding that Intel required or expected its officers to use their. own airplanes for business travel, for the following reasons.

First, Intel’s reimbursement policy did not expressly address Intel’s requirements or expectations regarding its officers’ use of their own airplanes. Rather, such policy stated only that flying first class was beneficial in that it permitted Intel’s officers to get more work done on the airplane.

Second, the stated rationale for not reimbursing certain expenses was that Intel considered such expenses too small or inappropriate for reimbursement, considering the amount of remuneration received by its officers. Listed examples of such expenses were drinks at Intel-related functions and at professional meetings, local car trips, business entertaining at home, lunches with Intel employees, secretarial gifts, and the additional cost of first class travel. The listed examples involved minimal expenses. Petitioner’s expense of using his own airplane was not minimal.

Third, Dr. Grove testified that Intel did not expect its officers to use private airplanes for business travel. In response to the Court’s inquiry as to what would happen if Intel demanded that an employee use a private airplane and the employee could not afford one, Dr. Grove answered that Intel would expect the employee either to fly on a commercial airplane and take longer to travel or to forgo taking that particular trip, as follows:

THE COURT: If the corporation wanted— was going to demand someone to travel and utilize their time in the best interests of the company, and that corporate demand would have required a private plane, would the corporation agree to reimburse the individual for the private plane?

THE WITNESS: Someone other than Dr. Noyce, an ordinary person?

THE COURT: Your general policy?

THE WITNESS: No, well, the policy was pretty well set as I testified. In many oí these instances, it wasn’t that you couldn’t get from here to there. It was just that you couldn’t get from here to there in a particular time, and, therefore, Dr. Noyce would have had to take an extra day.

THE COURT: Well, if it was in the interest of the — of Intel to conserve the employee’s time, and the employee said, “I just, you know, I want reimbursement for it if — you know, because otherwise you’re gonna lose money,” what would the corporation policy be then?

THE WITNESS: I think the policy would be still the same. The consequences of starting on the road toward reimbursing people for these things would be that we would have to make judgments on top of judgments and exceptions on top of exceptions, and it’s not a comfortable prospect. So, if somebody can afford to pay the extra and make himself more efficient and is willing to handle it that way, he’ll do it that way; if not, not.

THE COURT: Well, I guess that’s the question I am trying to elicit from — or the answer I am trying to elicit. You said if the employee can afford to do it. If the employee can’t afford to do it because the expenses that the corporation would be requiring of the employee would exceed his salary—

THE WITNESS: Then we won’t do it.

THE COURT: Then you would expect the employee to lose money?

THE WITNESS: No.

THE COURT: Oh, then you would reimburse him?

THE WITNESS: No, no, he will take two days.

THE COURT: Oh, then he’ll take two days. That would be the corporate desire then.

THE WITNESS: Or would not go on that particular trip.

[Emphasis added.]

While it is clear that Intel did not object to petitioner’s using his private airplane while traveling on corporate business, the record does not support a finding that Intel required or expected its officers to use their own airplanes for business travel. Thus, I would conclude that petitioner’s expenses in using his own airplane were personal.

Before closing, I feel compelled to respond to certain comments made by Judge Halpern in his concurrence. Judge Halpern states that Intel’s failure to require or expect petitioner to use his own airplane for business travel was indicative, but not determinative, of whether petitioner’s expenses were deductible. In support thereof, Judge Halpern notes that an employee may voluntarily incur deductible expenses in attending a convention or meeting, so long as he is benefiting or advancing the interests of his trade or business by such attendance. Sec. 1.162-2(d), Income Tax Regs.

I recognize that an employee may deduct an ordinary and necessary expense incurred in connection with his trade or business of earning a salary provided that the expense had “a direct bearing on the amount of his compensation or his chances for advancement.” Walliser v. Commissioner, 72 T.C. 433, 437 (1979). In Westerman v. Commissioner, 55 T.C. 478 (1970), we held that the taxpayer’s expenses of using his private airplane for business travel were not deductible because such expenses were voluntarily incurred and the airplane was not used by the taxpayer in the hope of receiving additional reimbursement:

As we have noted above, there is no evidence in this case to suggest that petitioner acted other than voluntarily, or that he acted in the hope of receiving any more reimbursement than that which he actually received. Moreover, the mere fact that the company may have benefited from the expenditures incurred by petitioner does not strengthen his position since it is a well-established rule that, in absence of a binding obligation, expenses incurred by one taxpayer for the benefit of another may not be deducted by the former. [Westerman v. Commissioner, 55 T.C. at 482 . Citations omitted.]

Here, there was no finding that petitioner used his private airplane in the hope of increasing his salary or improving his chances for advancement.

In conclusion, I would hold that petitioner is not entitled to the claimed deduction for airplane expenses and depreciation under sections 162 and 167, respectively.

Parker and Parr, JJ., agree with this dissent.