Opposition — Wells v. Commissioner

No. 80-699

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Gn the Supreme Court of the Hnited States

OcTOoBER TERM, 1980

KENNETH M. WELLS, PETITIONER

Ve

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT

IN OPPOSITION

WapDE H. McCree, Jr.

Solicitor General

Department of Justice

Washington, D.C. 20530

| (202) 633-2217

TABLE OF AUTHORITIES

Page

Cases:

Brown v. Commissioner, 446 F. 24.926 ......... 4

Commissioner v. Duberstein, 363 U.S. 278 ...... 3

Ferri v. Akerman, 444 U.S.193 .......ccceeeees 5

Fischer v. United States, 490 F. 2d 218 ....... 3,4

Folker v. Johnson, 230 F. 2d 906 ..........005. 4

Gilman Paper Co. v. Commissioner,

SEE BOUT vend pbb eeneddansyeavewminriis 3

Noland v. Commissioner, 269 F. 2d 108,

cert. denied, 361 U.S. 885 ............0000- 3-4

Pacific Grains, Inc. v. Commissioner,

ST Oe 4 0s ncevabndabisekecwacsaownn 3

Statute:

Internal Revenue Code of 1954 (26 U.S.C.):

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Su the Supreme Court of the Hnited States

OCTOBER TERM, 1980

No. 80-699

KENNETH M. WELLS, PETITIONER

V.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE NINTH CIRCUIT

MEMORANDUM FOR THE RESPONDENT

IN OPPOSITION

The question presented in this federal income tax case is

whether the decision below correctly held that the cost of

certain luncheons and dinners paid for by petitioner and a

portion of his country club dues were not deductible by him

as ordinary and necessary expenses of his trade or business.

The pertinent facts may be summarized as follows: Dur-

ing the year in issue (1973), petitioner was employed as the

Public Defender of Sacramento County, California. The

incumbent of that office is a state civil servant compensated

by a fixed salary. Petitioner supervised a staff consisting of

a deputy public defender, six supervising attorneys, up to

33 staff attorneys, one supervising investigator and

clerical personnel, all of whom were likewise employed

under the state civil service system (Pet. App. A-2, A-3; I-R.

2

16-17; II-R. 11-16, 21-22).! Petitioner was a member of the

Del Paso Country Club, a dining and golf facility, and

during 1973, took approximately eight staff members to the

club for lunch each month. One purpose of the luncheons

was to discuss matters of concern to the Office of the Public

Defender, such as developing policies for supervisors,

adopting uniform pleadings and methods for controlling

case load, development of status reports regarding cases in

the office and the like. Attendance at the luncheons was

voluntary. During the year in issue, no staff meetings were

held other than these luncheons, although a conference

room was available for such purpose in petitioner’s office

building. On two or three occasions during the year, peti-

tioner also tok members of his staff and their spouses and

friends to the club for dinners and drinks. While the County

of Sacramento reimbursed its employees for business

expenses incurred in carrying out their official duties,

expenses of the type here in issue were not reimbursable

(Pet. App. A-2 to A-3; I-R. 16-17; II-R. 11-16, 21-22, 24-30).

On his 1973 income tax return, petitioner claimed busi-

ness expense deductions of $1,236.20, representing the cost

of these luncheons and dinners, and $408 of the $624 paid as

dues for membership in the Del Paso Country Club. On

audit, the Commissioner disallowed these deductions. The

Tax Court upheld the Commissioner’s determination on

the ground that, while the expenses might have resulted in

some benefit to the Office of the Public Defender, they were

not ordinary and necessary expenses of petitioner’s own

trade or business as the publicly employed supervisor of

that office (Pet. App. A-9 to A-12).? The court of appeals

affirmed (Pet. App A-4).

I-R.” and “II-R.” refer to the two-volume duplicated record in the

court of appeals.

?The Tax Court also sustained the Commissioner's disallowance of

petitioner’s club dues (Pet. App. A-14). Section 274(a)(1)(B) of the

3

1. The decision below correctly disallowed petitioner’s

deduction of his entertainment expenses, Section 162(a) of

the Internal Revenue Code of 1954 (26 U.S.C.) permits asa

deduction “the ordinary and necessary expenses paid or

incurred * * * in carrying on any trade or business * * *.”

The determination of what expenses are Ordinary and

necessary is factual and necessarily turns on the facts and

circumstances of the case. The burden is on the taxpayer to

prove the validity of his claimed deductions. Pacific Grains,

Inc. v. Commissioner, 399 F. 2d 603 (9th Cir. 1968); Gilman

Paper Co. v. Commissioner, 399 F. 2d 697 (2d Cir. 1960).

The courts of appeals are obliged to affirm such factual

determinations, unless they are clearly erroneous. Commis-

sioner v. Duberstein, 363 U.S. 278, 290-291 (1960).

Petitioner’s status as an employee of the County of

Sacramento, compensated by a fixed salary, is similar to

that of a corporate officer. It is settled that, for tax pur-

poses, such a salaried corporate officer is engaged ina trade

or business separate and distinct from that of his corpora-

tion, i.e., the business of rendering services for compensa-

tion. Fischer v. United States, 490 F. 2d 218 (7th Cir. 1973);

Noland v. Commissioner, 269 F. 2d 108, 111 (4th Cir.),

cert. denied, 361 U.S. 885 (1959); Folker v. Johnson, 230 F.

2d 906, 908-909 (2d Cir. 1956). Thus, Section 162(a) allows

?Internal Revenue Code (26 U.S.C.) provides that in order to obtaina

business deduction of any part of the cost of dues paid toa country club,

the burden is on the taxpayer to prove that more than 50% of the total

calendar days of use f the facility was for business purposes. Petitioner

relied on his use of the club for the staff luncheons and dinners to show

primary business use. But since the court held that these expenditures

failed to meet the business purpose test, they could not be used to meet

the 50% test of Section 274(a)1)(B). Likewise, since the court of appeals

affirmed the Tax Court on the first issue, it found it unnecessary to

address the dues issue separately.

4

a deduction by a corporate employee for expenditures

which are “ordinary and necessary” to the continuation of

his own business of earning his pay. If, on the other hand, a

corporate employee voluntarily pays expenses attributable

to and for the benefit of the business of his corporation, he

may not deduct them on his personal tax return. Noland v

Commissioner, 446 F. 2d 926, 928-929 (8th Cir. 1971).

Petitioner's trade or business was that of rendering serv-

ices to the County of Sacramento for the compensation ofa

fixed salary. Accordingly, he bore the burden of showing

that the expenses incurred in taking members of his staff to

lunch and dinner were proximately related to that business.

Petitioner, however, has never alleged that his purpose in

incurring these expenditures was to advance or protect his

position as a salaried employee. He stressed, instead,

throughout his testimony and on brief before the court

below that the purpose of the luncheon meetings was to

further the business of the Public Defender’s office (Br. 5-9,

17-18). Thus, the expenditures bore no relationship to his

own business, but rather, were for the exclusive benefit of

the “Office of Pubiic Defender,” a business that is separate

and distinct from petitioner's business. As the Seventh Cir-

cuit pointed out in Fischer v. United States, supra, 490 F.

2d at 221, “* * * where a corporate executive employee

undertakes to discharge the responsibility of the corpora-

tion, he is not incurring an expenditure of his trade or

business within the meaning of Section 162” (emphasis in

Original).

2. Petitioner contends, however, that the real issue in this

case is whether the position of the Public Defender is an

ordinary civil service position or whether it is an independ-

ent law office receiving funds from County government”

(Pet. 14-15). As he views the matter (Pet. 19-20), the Tax

Court based its decision on the premise that he was a “usual

civil servant” (Pet. 18) and the court of appeals, having

5

rejected such a characterization (and determined instead

that his position was akin to that of a senior partner ina law

firm), should have reversed the Tax Court’s decision as

clearly erroneous.

But the Tax Court’s decision did not turn on a finding

that petitioner was simply a “usual civil servant.” Indeed, it

expressly noted that his position was, in fact, analogous to

that ofa senior partner in a law firm (Pet. App. A-11).3 This

would be the case, to a greater or lesser extent, with respect

to virtually any publicly employed supervisor to a govern-

mental law office.

Moreover, as both the Tax Court and the court of

appeals concluded, the fact that petitioner’s position may be

analogous, in certain respects, to that of a senior partner of

a law firm does not control as to whether the expenditures

in question are ordinary and necessary expenses of the

petitioner’s trade or business of rendering services for

3Implicit in the court’s finding that a public defender is analogous toa

' senior partner is the element of independence. There is accordingly no

merit to petitioner's contention (Pet. 16) that a conflict exists between

the decision below and state cases declaring the independence of the

public defender from the government that pays him. Petitioner’s

reliance (Pet. 16) on Ferri v. Akerman, 444 U.S. 193 (1979), is similarly

misplaced. In holding that federal law does not immunize court-

appointed counsel from malpractice actions by former clients id. at

199-204), the Court noted that “the primary office performed by

appointed counsel parallels the office of privately retained counsel” (id.

at 204). But the Court further pointed out (id. at 199-200 n.16) that the

federal statute there involved provided only for compensating private

counsel appointed to represent defendants in federal criminal proceed-

ings, the Congress having rejected a proposal to establish public

defender’s offices. Moreover, even assuming such an analogy could be

drawn between private counsel and a salaried public defender, there is

nothing in the Court’s cpinion that would support the proposition that

the independence of such public defender officers requires the allow-

ance of ordinary and necessary business expense deductions to its

salaried supervisors or staff members for personal expenditures volun-

tarily made by them on behalf of the office itself.

6

compensation. Whatever similarities there may otherwise

be between petitioner’s office and that of a private law firm,

such similarities cease upon an examination of the underly-

ing purpose of the expenditures in question. In the case of a

private firm, such expenditures would be intended to inure

to the ultimate economic benefit of the individual partners

as a result of the enhanced probability that the firm would

continue to prosper. But it does not follow that similar

expenditures would be deductible in the circumstances of

this case where there is no indication in the record that the

business conducted at the luncheons and dinners served, in

any way, to advance petitioner’s own business of rendering

services for compensation. Since they were not ordinary

and necessary expenses of that business, petitioner cannot

deduct them.

It is therefore respectfully submitted that the petition for

a writ of certiorari should be denied.

WADE H. McCreEE, JR.

Solicitor General

DECEMBER 1980