Petition for Writ of Certiorari — England v. United States

Supreme Court brief1966

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. ~ - Office Sipreme Court, U.S,

71. i=% “i, !:>iED

SEP 23 1065

JOHN F. DAVIS, CLERK

IN THE

Supreme Court of the United States

OctToBEer TERM, 1965

No: 603 J :

KENNETH D. ENGLAND and

CONNIE J. ENGLAND,

Petitioners,

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT

ApriAn W. DEWIND

Aan N. CoHEN

Ernest RUBENSTEIN

575 Madison Avenue

New York, N. Y. 10022

Pau, WEtss, RIFKIND, WHARTON

& GARRISON

ALFRED D. YouNGwoopD

GILLESPIE, BURKE & GILLESPIE

Of Counsel

«tens

Ee ee

Bier A wate I NOR

ike pl he.

GEE RE eb be'ns suas sees ne vend eesaaees

DL 6.6640 '640 0une o6d4 nee eee ekeae enna

OO eT ere ere re

Statutes and Regulations Involved ...........0.00- 2

PMR OE TD GUD bk kc vndaccsouneicsaishvess +

Reasons for Granting the Writ ...............200-

I. The Question Affects Tens of Thousands of

‘SaS BRD xcs is ccandatesea excess 6

II. The Decision of the Court of Appeals Is in Con-

flict With the Decision of the Tax Court and Is

Contrary to Established Rules for Determining

Whether Reimbursed Expenses Constitute In-

eee re rene ree Prion me 12

III. The Decision of the Court of Appeals Is in Con-

flict With Decisions of the Courts of Appeals

for the Sixth and Ninth Circuits on the Mean-

ing of the Taxpayer’s “Home” ............. 16

IE fie cbasvencuddaneeesesobeuiaed eneens 17

POR occ ttcnoustanseceeeiaceiesseaneas la

Opinion of the Court of Appeals ................ la

Judgment of the Court of Appeals .............. 7a

yk re epee Seer er erp R er ae lb

Opinion of the District Court ................06. lb

Appendix to Opinion of the District Court........ 17b

SAREE ARTY EL eas 8

TABLE OF CITATIONS

PAGE

CASES: — )

Barnhill v. Commissioner, 148 F. 2d 913 (4th Cir.

ee eer re ery errr Terre ikea weuled 16

_Bercaw v. Commissioner, 165 F. 2d 521 (4th Cir.

a | ERENT TENET Oe TST TTT Trot Cree eeee 16

. Burns v. Gray, 287 F. 2d 698 (6th Cir. 1961) .... 16

‘John E. Cavanagh, 36 T. C. 300 (1961), nonacq.,

oe ee Peer errr. 7,10, 12, 13, 14, 15

Cockrell v. Commissioner, 321 F. 2d 504 (8th Cir.

Es cw ne cede bh eeerccsesdeneceaeeekises 14

Commissioner v. Duberstein, 363 U. S.\278 (1960) 16

Commissioner v. Flowers, 326 U. S. 465 (1946),

reversing, 148 F. 2d 163 (5th Cir. 1945) ...... 16, 17

Light v. Commissioner, 310 F. 2d 716 (5th Cir.

ME ics eechonshvavisdivesnceraeterie ese: ae

Logan v. United States, 65-2 U. S. Tax Cas. J 9554,

vacated, 65-2 U. S. Tax Cas. 9608 (S. D. Ill.

SE 5 535 Bed Os aa tee ae ter on ee eaecieeess 10

Peurifoy v. Commissioner, 358 U.S. 59 (1958) ... 17

Rudolph v. United States, 370 U. S. 269 (1962). .14, 15

United States v. LeBlanc, 278 F. 2d 571 (5th Cir.

__. pas. epee ee sex entwehaekere enue 16

Wallace v. Commissioner, 144 F. 2d 407 (9th Cir.

BESS EE Seo 16

{

;

Wright v. Hartsell, 305 F. 24221 (9th Cir. 1962).. 16 /

STATUTES:

Internal Revenue Code of 1954:

Ee re ee ee ere 43,7

NE io cites cas ceckwaudyans aod 3, 16, 17

I ha a cuncuneensau neck bawcbeeas 12

iii

PAGE

ae U.S. C,, Goctiom ZIG) inc coccccvcvicenes 2

28 U. S. C., Section 1346(a)(1) ..%............ 6

MISCELLANEOUS:

American Management Association Research Study

67, Reimbursing Personnel for Transfer and Re-

location Costs (1964) ........cccccccccccess

Americans on the Move to New Jobs, New Places,

Fe Ce ee ne

Brief for Appellant in United States v. England,

345 F. 2d 414 (7th Cir. 1965) ...............

Closeup: Management’s Moving Man, Chemical

WG, SEU SUG NONE crew cnwcnesceteeseeceiadk

Greyvan [eines Incorporated, What Other Com-

_pamies Do and What Their Employees Think

ek 3g Ree toon

Hearings Before the Senate Committee on Finance

on H. R. 8363, 88th Cong., Ist Sess. (1963)...

Hearings Before the Subcommittee on Executive

and Legislative Reorganization of the House

Committee on Government Operation on H. R.

10607, 89th Cong., Ist Sess. (1965) ..{.......

“HL. R. 10607, 89th Cong., Ist Sess. (1965) ......

H. R. Rep. No. 749, 88th Cong., Ist Sess. (1963)...

Letter from John W. Macy, Jr., Chairman of the

United States Civil Service Commission, to the

Honorable John W. McCormack, Speaker of the

House of Representatives, dated May 20, 1965. .

Letter from Norman S. Paul, Assistant Secretary of

Defense for Manpower, to Bertrand M. Harding,

Acting Commissioner of Internal Revenue ..

Message from the President of the United States,

111 Cong. Rec. 9884 (1965) .................

a Ff

iv :

PAGE

National Industrial Conference Board, Inc., Studies

In Personnel Policy, No. 154, Company Payment

of Employees’ Moving Expenses (1956) ....... 8

Petition for Writ of Certiorari, Commissioner v.

Flowers, 326 U. S. 465 (1946) .............. 17

Rev. Rul. 54-429, 1954-2 C. B. ceckuewataes 5,7, 15

Rev. Rul. 63-258, 1963-2 C. B. 22 ............ 15

Rev. Rul. 65-158, I. R. B. 1965-24, Serer 7,9

S. Rep. No. 830/88th Cong., 2d Sess. (1964) ..... 12

T. I. R. 754, Announcement 65-65, I. R. B. 1965-36

DL tie kcbenuew eee alee eels sk deanes Re 9

U.S. Treasury Department, Internal Revenue Serv-

RP EE dace un sagentnawhawwevenus 10

U. S. Treasury Department, Internal Revenue Serv-

8 OS et oe ret re er reer 10

U.S. Treasury Department, Internal Revenue Serv-

ice Publication No. 17, Your Federal Income Tax 10

“We've Been Transferred,” Fortune, July 1957... 6

IN THE

Siusineiee Court of the United States

OcToBER TERM, 1965

KENNETH D. ENGLAND and ConniE J. ENGLAND,

Petitioners,

” No.

UNITED STATES OF AMERICA,

Respondent.

PETITION FOR A WRIT OF TIORARI TO THE

UNITED STATES COURT OF EALS FOR THE

SEVENTH CIRCUIT

Petitioners pray that a writ of certiorari issue to review

the judgment of the United States Court of Appeals for

the Seventh Circuit.

OPINIONS BELOW

The opinion of the Court of “Appeals (R. 39-43) is

reported at 345 F. 2d 414 (7th Cir. 1965) and is reprinted

in Appendix A, infra, pp. la-Ya.* The opinion of the

*References to “R.” are to the certified transcript of the record

in this case, which in¢ludes the printed Appendices to Respondent’s

and Petitioners’ briefs in the Court of Appeals. Because the Clerk

of the Court of Appeals did not exclude from the record the briefs

on appeal and did not pagiaate the record, counsel for petitioners

have paginated the record in this case as follows : Appendix A to

Respondent’s Brief is numbered R. 1-3; Appendix B to Respondent’s

Brief is numbered R. 4-32; the Appendix to Petitioners’ Brief is

numbered R. 33-38; and the opinion and judgment of the Court of

Appeals is numbered R. 39-43. For the convenience of the Court,

we have filed nine additional copies of the Appendices to the briefs

on appeal, the pages of which have been numbered the same as the

corresponding portion of the certified. transcript.

ba =

United States District Court: for the Southern District of

Illinois (R. 12-30) is reported at 226 F. Supp. 762 (S. D.

Ill. 1964) and is reprinted in Appendix B, infra, pp. 1b-21b.

JURISDICTION

The judgment of the Court of Appeals (Appendix A,

infra, p. 7a) was entered on April 29, 1965 (R. 43). By

order of Mr. Justice Clark, entered July 14, 1965, the time

for filing this Petition for a Writ of Certiorari was extended

to and including September 24, 1965. The jurisdiction

of this Court is invoked under 28 U. S. C. § 1254(1).

QUESTIONS PRESENTED

Whether an employee who is transferred to a new job

location by and at the direction of his employer must include

in gross income amounts received from his employer in re-

imbursement for extraordinary moving expenses necessar-

ily incurred by the employee solely as a result of his job

transfer. Alternatively, if the employee must include such

reimbursed expenses in gross income, whether the employee

is entitled to deduct such expenses as ordinary and neces-

sary business expenses.

STATUTES AND REGULATIONS INVOLYED

The statute involved with respect to the includibility in

income of the reimbursed’ expenses is section 61(a) of the

Internal Revenue Code of 1954, 26 U. S. C. § 61(a), which ~

provides in pertinent part:

“Sec. 61. Gross INcomME DEFINED.

“(a) GENERAL DEFINITION.—Except as other-

wise provided in this subtitle, gross income means

all income from whatever source derived, including

(but not limited to) the following items:

“(1) Compensation for services, including

fees, commissions, and similar items; ... .”

There are no regulations directly applicable to the issue

here presented under section 61(a).*

The statute involved with respect to the alternative

question of the deductibility of the employee’s expenses if

the reimbursement is includible in income is section 162(a)

of the Internal Revenue Code of 1954, 26 U. S. C. § 162(a),

which provides in pertinent part:

“Sec. 162. Trapg or Business Expenses.

“(a) In Generat.—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—

* * *

“(2) traveling expenses (including amounts

expended for meals and lodging other than

amounts which are lavish or extravagant under

the circumstances) while away from home in the

pursuit of a trade or business;... .”

There are no regulations directly applicable to the issue here

presented under section 162(a). —

i otianEREEEEEEEREEEEEEEeee

*All section references are to the Internal Revenue Code of 1954. ¢

Qa .

STATEMENT OF THE CASE

The material facts in this case are undisputed and are

as follows:

For seven years prior to May 19, 1960, petitioner Ken-

neth D. England* was employed by The Aetna Casualty

and Surety Company (the “Company”) at its Kansas City,

Missouri, office, and resided in that city with his wife

in a home owned by them (R. 12). On A 19, 1960,

England was advised by the Company 4 effective

June 1, 1960, he was being permanently transferred to

its Springfield, Illinois, office, but on his request he was

allowed some additional time before the transfer (R. 12-13,

~ 39-40). England in-fact arrived in Springfield on June

19, 1960, and took up his new duties on June 20, 1960

(R. 13). England then commenced looking for a per-

manent place to live with his family in the Springfield,

Illinois, area and on July 9, 1960, he leased a house which

was unavailable for occupancy until August 1, 1960, at

which time England and his family moved in (R. 13-14, 39-

40).

Between June 19 and August 1, 1960, England incurred

experises of $446 for which he was reimbursed by the Com-

pany under its written program covering reimbursement

of transferred employees for moving, traveling and dupli-

cated living expenses (R. 14). A copy of such written pro-

gram was appended to the District Court opinion (R. 26-

30) and appeafs in Appendix B, infra, at pp. 17b-21b.

The principal items for which England was reimbursed by

the Company were-for his food and lodging expenses in

*Petitioner Connie J. England is the wife of Kenneth D. England

and is a petitioner in this case only because she and her husband filed

a joint return for the taxable year in issue. References to England re-

fer to petitioner Kenneth D. land only.

Springfield, I'linojs, during the period his family remained

in Kansas City prior to their occupancy of permanent living

quarters at the new locatien and for the cost of a trip to

Springfield by England’s wife to inspect and select among

houses available for permanent living quarters (R. 14-15

fn. 1).* The Company also bore the expense of moving

England’s household effects and the cost of his wife’s trans-

portation at the time of the permanent move, but under the

rules set forth in Rev. Rul. 54-429, 1954-2 C. B. 53, the

Government did not contend that reimbursement for such

items constituted income to England (R. 16-17, “fn. 2).

The Company’s reimbursement program was not to

compensate for services rendered, but was designed to pre-

vent or reduce financial loss sustained by transferred em-

ployees because of traveling and duplicated living expenses

arising from their transfer (R. 20). All of the expenses

for which the Company reimbursed England were of an

extraordinary nature required to be incurred by the Com-

pany (R. 23). Petitioners suffered an actual financial loss

as a result of the transfer and their net worth showed a

decrease in 1960 because of the transfer (R. 20).

In their 1960 income tax return, petitioners did not

include in’ income any portion of the $446 reimbursed to

Enpland by the Company. After audit of such return, the

Commissioner of Internal Revenue increased petitioners’

taxable income by said-$446, resulting in an additional tax

for 1960 of $103. Petitioners paid the additional tax, filed

a claim for refund which was rejected and thereupon filed

*Such principal items aggregated more than $400. Other expenses,

such as for laundry, a newspaper advertisement to rent a house and

incidental costs involved in the sale of his Kansas City house, ifi-

creased the amount for which England claimed reimbursement

from the Company to $494.60. The Company allowed reimbursement

for $452.83, and the parties have agreed that $446 should be re-

ty gig as reimbursement for the purposes of this ycase (R.

oe. OF.

suit for refund in the District Court for the Southern Dis-

trict of Illinois (R. 40). The jurisdiction of District Court

was founded on 28 U. S. C. § 1346(a)(1). The District

Court held that the $446 for which England was reimbursed

was not includible in income and entered judgment for

petitioners (R. 12-31). The Court of Appeals reversed

(R. 39-43). |

REASONS FOR GRANTING THE WRIT

I. The Question Affects Tens of Thousands of Taxpayers

Annually.

More than 150,000 employees were tfansferred within

the United States by their corporate employers during

1964, and it is likely that the number of transfers will

increase in 1965 and future years.’ The expanding volume

of employee transfers has resulted from the expansion and

decentralization of American industry-since the end of

_ World War II, with the concomitant need to staff new

plants or fill vacancies at distant locations.”

Recognizing that substantial costs are involved in the

moving of a household, virtually all companies bear or re-

imburse the employee for part or all of the extraordinary ex-

penses necessarily incurred in connection with his job trans-

fer. Employers do not bear such costs to compensate their

employees. Indeed, officials of the two principal employment

divisions of the Government have so stated. The Assistant

Secretary of Defense, Mr. Norman S. Paul, has advised

the Internal Revenue Service that dislocation allowances

paid to transferred military personnel to cover temporary

1See Closeup: Management's Moving Man, Chemical Week,

May 22, 1965, p. 87.

See “We've Been Transferred,’ Fortune, July 1957, p. 116;

a on the Move to New Jobs, New Places, Life, Feb. 3, 1958,

p. 85.

living costs are “not intended to be compensatory.”* Simi-

larly, the Chairman of the United States Civil Service

Commission, Mr. John W. Macy, Jr., observed in a letter

to the Speaker of the House of Representatives in support

of legislation authorizing reimbursement to transferred

Civil Service employees of expenses such as were reimbursed

to England that such expenses shwuld be reimbursed by the

employer because the employer “rather than the employee

is both the initiator and the prime beneficiary of the

move.””*

The Internal Revenue Service (the “Service”) has also

partially recognized the true nature of such reimbursements,

holding in a 1954 ruling that employer reimbursement to an

_ employee “for moving himself, his immediate family, house-

( hold goods and personal effects, in case of a transfer in the -

interest of his employer,” does not constitute compensation

and is not includible in gross income under the 1939 Code

predecessor provision of section 61(a) because such reim-

bursement “is not compensatory in nature.”*® On the other

hand, as a result of the decision below the Service has held

that reimbursements for other expenses incurred as a result

of the employer-directed move, including those for which

England was reimbursed, are includible in gross income and

are subject to withholding.* As we hereinafter show, the

position of the Service in its recent ruling is contrary to the

position of the Tax Court (John E. Cavanagh, 36 T. C. 300

(1961) ) and may irrevocably prejudice tens of thousands

of taxpayers.

Letter from Norman S. Paul, Assistant Secretary of Defense for

Manpower, to Bertrand M. ing, Acting Commissioner of Internal

Revenue, reported in Bureau of National Affairs, Daily Report for

Executives, Developments Affecting Taxation and Finance, No. 169,

p. G-1 (August 28, 1964).

*Letter from John W. Macy, Jr., Chairman of the United States

Civil Service Commission, to the Honorable John W. McCormack,

Speaker of the House of Representatives, dated May 20, 1965.

5Rev.\Rul. 54-429, 1954-2 C. B. 53.

®Rev. Rul. 65-158, I. R. B. 1965-24, 6.

Although the expenses which companies will bear vary,

the vast majority of employers reimburse employees trans-

‘ferred at the employer’s behest for temporary food and

lodging costs of the type incurred by England and for the

cost of permitting the employee’s wife to select a new

home. A 1964 survey by the American Management Asso-

ciation covering 256 of the largest companies in the country

revealed that 223 firms, or 87 percent of the total, reim-

bursed transferred employees for temporary food and

lodging expenses of the type for which England was

reimbursed.’ Earlier studies by the National Industrial

Conference Board® (involving 151 companies) and Greyvan

Lines Incorporated® (involving 688 companies) likewise

indicated that between 80 percent and 87 percent of all

companies reimburse transferred employees for such tem-

porary duplicated living expenses. The studies further re-

veal that most companies also reimburse the transferred em-

ployee for a house selection trip such as England’s wife

made.

On the basis of these figures, it seems fair to estimate

that the question of includibility in income of the reim-

_bursed expenses involved in this case affects the income tax

liability of at least 50,000 and perhaps more than 100,000

of the’150,000°employees annually transferred by private

industry.” In:addition, the question also affects approxi-

mately 340,000’ military personnel who are transferred an-

7American Management Association Research Study 67, Reim-

bursing Personnel for Transfer and Relocation Costs (1964):

8National Industrial Conference Board, Inc., Studies in Per-

sonnel Policy, No. 154, Company Payment of Employees’ Moving

Expenses (1956).

be Lines Incorporated, What Other Companies Do and

What Their Employees Think They Should Do (1957).

10Although there are no figures available to indicate the percent-

age of transferred employees who incur costs for temporary food and

lodging expenses or for a house selection trip, it appears likely

from the relative uniformity of company reimbursement policies that

the overwhelming majority of transferred employees do incur such

costs.

nually and receive dislocation allowances."* Finally, if the

legislation now pending” before the Congress for reim-

bursement to transferred Civil Service employees of the

type of expenses here involved is enacted, as seems likely,"

another 35,000 Civil Service employees will be annually af-

fected by the outcome of this case.** As the Government

advised the Court of Appeals below, the issue here present-

ed affects “the rights of thousands of taxpayers” and “is

an extremely important one.”?®

Not only are many thousands of taxpayers annually

affected by the employee transfer expense issue here in-

volved; a good number of them may be irrevocably pre-

judiced by the action which’ the Service has taken following

the Court of Appeals decision below. On June 14, 1965,

the Service in, reliance on the Court of Appeals decision

below published a ruling requiring employers to withhold

income tax on reimbursements of expenses of the type here

involved.** The ruling wholly ignores the “Tax Court deci-

1Letter from Norman S. Paul, Assistant Secretary of Defense

for Manpower, to Bertrand M. Harding, Acting Commissioner of In-

ternal Revenue, reported in Bureau of National Affairs, Daily Report

for Executives, Developments Affecting Taxation and Finance, No.

243, p. G-1 (December 15, 1964).

12H. R. 10607, 89th Cong., 1st-Sess. (1965).

18The bill was recommended by the President. See Message from

the President of the United States, May 12, 1965, 111 Cong. Rec.

9884 (1965) (H. Doc. No. 170, 89th Cong., 1st Sess.).

4John W. Macy, Jr., Chairman of the United States Civil Service

Commission, Hearings Before the Subcommittee on Executive and

Legislative Reorganization of the House Committee on Government

Operations on H. R. 10607, 89th Cong., 1st Sess., stenographic tran-

script, p. 23 (Sept. 1, 1965).

*Brief for Appellant United States of America in the Court of

Appeals for the Seventh Circuit, p. 8. *

**Rev. Rul. 65-158, I. R. B. 1965-24, 6. Apparently dissatisfied

with compliance with the ruling, the Service on August 9, 1965,

issued Technical Information Release 754 reminding “employers

that certain moving expense reimbursements or allowances they

pay to or on behalf of employees transferred primarily in the em-

ployer’s interest are subject to withholding of employment taxes.”

See Announcement 65-65, I. R. B. 1965-36, 14.

sion in John E. Cavanagh, 36 T. C. 300 (1961), the only

other decision expressly considering the issue, which ruled

that such reimbursements were not includible in income.”

It is clear that most employees who receive a W-2

Form reflecting such reimbursed expenses as income will

never know that the includibility of such reimbursements

in income is an open issue which they may question.** A

survey by counsel for petitioners of the 1964 experience

of ten companies with 515,000 employees showed that of

3,714 employees who were transferred, 2,345 (63.1%)

earned under $10,000 and 3,447 (92.8%) earned under

$15,000." Employees at such income levels generally have

no knowledge of refined tax issues and few can afford or

obtain the services of tax experts.

17The Government did not appeal the Cavanagh decision, but

nevertheless refuses to follow it. 1962-2 C. B. 6. Subsequent to the

Court of Appeals decision in this case, District Judge Poos who had

decided this case decided a similar case, Logan v. United States,

65-2. U. S. Tax Cas. 79554 (S. D. Ill. 1965), in favor of the

Government because his decision was “controlled by England v.

United States... .”’ On July 26, 1965, Judge Poos vacated and set

aside the judgment in the Logan case upon being advised that

petitioners in this case intended to seek Supreme Court review.

65-2 U. S. Tax Cas. 9608. Judge Poos reasoned that since the

Logan case involved the same issues as the England case, if the

Supreme Court should reverse the Court of Appeals in England, the

Logan case would not have to be appealed.

18This is the more so since the instructions which accompanied

the 1964 individual income tax returns (U. S. Treasury Department,

Ya eh tenn Service rds yg wr 7 Your Federal fered Tax

. S. Treasury. Department, Internal Revenue Service ication

No. 17, p. 46 (1965 ed.)), an official Treasury Department publica-

tion for the guidance of taxpayers, unqualifiedly state that such re-

imbursements must be included in income.

19A witness before the Senate Finance Committee in 1963 testified

that 85 percent of emp reimbursed for moving expenses by one

corporation and 91 percent of those of another earned less

than $15,000 a year. Almost none of the other employees transferred

by these two corporations earned more than $25,000 a year. State-

»ment of Richard B. Barker, Hearings Before the Senate Committee

on Finance on H. R. 8363, 88th Cong., Ist Sess. (1963) Part 4,

p. 2008. fe

Thus, not only will each year’s delay in the establish-

ment of governing rules mean that the statute of limitations

will have run on the refund rights of tens of thousands of

taxpayers, the failure promptly to establish such rules

presents an unusual and more troublesome problem: even

' if the rules developed several years hence exclude from

income reimbursements such as England’s, most of the

many thousands of taxpayers who will have paid their taxes

unaware of the issue and who still are entitled to refunds

will not be in a position even to learn of these rules, or

having learned of them, will be unaware of their application

to themselves.

Furthermore, of the minority of taxpayers who may be

aware of the questionable nature of the Service’s position,

few will have any practical remedy until the governing

rules are finally established by this Court. The amount of

expenses reimbursed to a single employee and asserted by

the Service to be includible in his income is generally modest.

So also generally is his income tax bracket. Thus, the

amount of tax involved in the usual case is not more than

a few hundred dollars—the $103 involved here is typical.?°

4 Consequently, the amount at stake, while important to the

ordinary taxpayer, is not sufficient to warrant the cost of

his challenging the Service in the courts. Only if the em-

ployer is willing to bear the costs of litigation—as the Com-

pany is doing here because of the importance of the case

—is the typical employee in a position to challenge the

Service.

The issue presented here is of continuing importance

for current and future taxable years and is in no way

It may also be noted, as illustrative, that income tax deficiencies

arising from reimbursed moving ve assessed against

229 employees who were translecred teen Chicago, Illinois to Spring-

field, Illinois by Illinois Bell Telephone Company in connection with

the relocation of an entire department. ~Over 80 percent of those 229

employees received annual wages of less than $12,000.

—

affected by the addition to the Internal Revenue Code, by

the Revenue Act of 1964, of a new section 217, dealing with

moving expenses. Such section provides for a deduction

for reimbursed moving expenses of new employees and non-

reimbursed moving expenses of all employees to the extent

that the Internal Revenue Service had previously held that

the reimbursement to an existing employee was not includ-

ible in income. In adopting the new statutory provision,

the Congress expressly noted the existence ag the Tax

Court decision in Cavanagh and stated that the enactment

of section 217 was not meant*to imply that “moving

expense exchusions under existing law are necessarily

limited” to the categories covered by section 217. “The

question of whether the exclusion for existing employees

extends beyond these three categories is left for judicial

interpretation.” -

The time for such judicial interpretation on a final,

national basis is now. It is now because of the conflict

between the Tax Court and the Seventh Circuit. It is now

becauSe tens of thousands of taxpayers annually are affected

by the tax question here in issue. And, most important, it

is now because enforcement of the Service’s income tax

: withholding policy will mean that many thousands, unaware

of and unable to preserve their rights, will inevitably and

irrevocably pay taxes that may ultimately prove not to have

been due.

II. The Decision of the Court of Appeals Is in Conflict

With the Decision of the Court and is Contrary

to Established Rules for Determining Whether Re-

imbursed Expenses Constitute Income. 7

The District Court in this case found that the $446 of

expenses for which England was reimbursed “were of an

21S. Rep. NogB30, 88th Cong., 2d Sess. 71-72 (1964); H. R. ~

Rep. No. 749, Cong., Ist Sess. 59 (1963).

extraordinary nature required to be incurred by the em-

ployer” (R. 23), that the Company did not intend the re-

imbursement to be compensatory (R. 20), and that as a

result the expenses “were the employer’s costs and not the

employees” (R. 23). So finding, the District Court held

that the reimbursement to England for such expenses did

not constitute income.

The District Court discussed at length and agreed with

the reasoning and result in John E. Cavanagh,”* where the

Tax Court, in a decision reviewed by the entire Court, held

that the reimbursement of a transferred employee for the

extraordinary costs of food and lodging incurred while he

and his family were awaiting arrival of their household

effects at his new job location was not inchsdible in income.

The Tax Court felt that the fact that ordinary food and

lodging costs might be characterized as non-deductible per-

sonal living expenses was irrelevant if the reimbursed

extraordinary expenses were initially incurred and paid.on

behalf of the employer. Such characterization, the Tax

Court said, “has no applicability to such expenses properly

chargeable to another which the taxpayer pays and for

which he is reimbursed.””*

So reasoning, the Tax Court viewed the question of in-

cludibility in income of the reimbursed expenses’as entirely

dependent on the facts of the case. The Court there found

“the agreed facts to»be that petitioner actually expended

$280 in extraordinary living costs’** for: which he was

" reimbursed and the further fact that the tran$fer “was not

only for the convenience of his then employer, but speci-

fically directed and required by it.”** Having thus found

that Cavanagh’s extraordinary expenses were required to

2236 T..C. 300 (1961), nonacq., 1962-2 C. B. 6.

2336 T. C. at 304.

2436 T. C. at 302.

2536 T. C. at 303.

be incurred by his employer, the Tax Court concluded that

their reimbursement did not constitute income to Cavanagh.

The Court of Appeals below disagreed with the factual

approach to the issue taken by the District Court below and

by the Tax Court in Cavanagh, stating that Cavanagh “was

wrongly decided,” that the meals and lodging expenses for

which England was reimbursed were “personal living ex-

penses of the employee,” and that on their reimbursement

“income is realized thereby” (R. 41). The Court of Ap-

peals did not regard the issue before it as requiring appli-

cation of factual criteria to determine whether the reim-

bursement constituted income. It paid no attention to and

made no inquiry. about the findings of fact of the District.

Court. The Court of Appeals held that an employer’s re-

imbursement of such expenses to a transferred employee

constituted income, apparently as a matter of law, even

though the reimbursed expenses were found by the District

Court to have been extraordinary in nature, to have been

incurred only because of a job transfer directed by -the

Company and not to have heen intended by the Company

to be compensatory.

The holding of the Court of Appeals is, of course, con-

trary to Cavanagh. More important, it is contrary to the ©

general proposition, recently reaffirmed by this Court in

Rudolph v. United States,”* that the question of whether an

employer’s reimbursement of expenses paid by an employee

constitutes income is predominantly a question of fact. It

is also contrary .to - existing —s en in the

moving expense area.”

26370 U. S. 269 (1962). : wr.

27The Court of A cited Cockrell v. Commissioner, 321 F.

2d 504 (8th Cir. 1963), as supporting its view. In Cockrell, the

transferred employee in 1956 received a special allowance for two’

months while living with his family in a motel at his new job location.

Prior to 1957, the employee and his family moved into a rented house

and the employer then paid him a $70 a week living expense allowance.

Only 1957 and 1958, involving the $70 a week allowance and not the ©

motel reimbursement, were before the Court, and the case was argued

t |

In Rev. Rul. 54-429," the Internal Revenue Service

ruled that gross income does not include amounts received

by a transferred employee in reimbursement for household

moving expenses and the cost of transporting the employee

and his family to the new job location (including meals and

lodging en route). .The theory of the ruling is that if the

move is “primarily for the benefit of the employer,” reim-

bursement of ‘such expenses “is not compensatory in

nature.”*® By the same token, reimbursement of other ex-

traordinary expenses that would not have been incurred

but for an erployer-directed move should not be includible

in income if found to be not compensatory in nature.

Such, indeed, was the holding of Rev. Rul. 63-258, 1963-

2 C. B. 22, where the Service ruled that special allowances

paid by the Government to civilian and military personnel

to cover the costs of travel to a “safehaven post” and for

subsistence for a period of up to 180 days, following evacua-

tion from Cuba, were not includible in income. The Service

reasoned that since the allowances “are solely intended to

offset the.direct added expenses which would not have been

incurred except for the evacuation, it is apparent that such

payments were not intended to be compensatory in nature.”

In sum, under the rules of Rudolph, Cavanagh, and ex-

isting ruling precedents in the moving expense area, the

Court.of Appeals below should have been concerned only

with the determination of whether the District Court em-

ployed the proper factual criteria and whether the District

and decided on the question 4 weedy. cas 20 b ‘been oa

was temporary or permanent. e Cockrell case no on

reimbursement issue here involved.

281954-2 C. B. 53.

*°The ruling also held that “reimbursements for meals and lodg-

ings of the employee and his family while awaiting permanent -

capbaias tdee at-coneie aida’ Ae ok ak ete the

.” It does not appear whether the food and lodging costs

empl

dealt with oy eee Ware SEGRE Se’ GRANNY Seay OF Sey

he east as eet

Court’s findings of fact with respect thereto were “clearly

erroneous.” Cf. Commissioner v, Duberstein, 363 U. S. 278

(1960). In treating the issue before it as entirely a matter

of law, the Court of Appeals below committed error.

Because of the widespread importance of the tax treat-

ment of reimbursed expenses to transferred employees, it °

is essential that this Court resolve the uncertainties created

by the decision below. 7

Ill. The Decision of the Court of Appeals Is in Con-

flict With Decisions of the Courts of Appeals for

the Sixth and Ninth Circuits on the Meaning of the

Taxpayer’s “Home”.

After holding that England’s $446 reimbursement was

includible in his income, the Court of Appeals below also

rejected England’s right to deduct part or all of the expenses

for which he was reimbursed as travel expenses while away

- from home under section 162(a)(2), holding that a tax-

payer’s “home” for purposes of that section “is the place of

taxpayer’s business. In this case Springfield clearly was

England’s ‘home’ after the transfer... .” (R. 42). This

conclusion of the Court of Appeals is in agreement with the

interpretation of “home” by the Court of Appeals for the

Fourth Circuit.*° On the other hand, the Courts of Appeals

for the Sixth** and Ninth Circuits*? have held that “home”

is not synonymous with “business situs” and that a tax-

payer’s place of business may be “away from home.”**

89Bercaw v. Commissioner, 165 F. 2d 521 (4th Cir. 1948);

Barnhill v. Commissioner, 148 F. 2d 913 (4th Cir. 1945).

51Burns v. Gray, 287 F. 2d 698 (6th Cir. 1961).

« 82Wright v. Hartsell, 305 F. 2d 221 (9th Cir. 1962) ; Wallace v.

Commissioner, 144 F. 2d 407 (9th Cir. 1944).

**The Court of Appeals for the Fifth Circuit took the same view

in Flowers v. Commissioner, 148 F. 2d 163 (5th Cir. 1945), rev'd

on diff. issue, 326 U. S. 465 (1946) and United States v. LeBlanc, 278

“F. 2d 571 (5th Cir. 1960). The present position of that Court is

rs ma See Light v. Commissioner, 310 F. 2d 716 (5th

ir. ;

Twenty years ago the Solicitor General of. the United

States advised this Court that “resolution of the conflict is

of considerable importance” because the-question “arises

frequently in the collection of income taxes and affects the

recovery of substantial amounts of revenue.”** Although

this Court has twice taken cases involving the interpretation

of “home” in the Courts below, the Court disposed of both

without reaching that question. Peurifoy v. Commissioner,

358 U. S. 59 (1958) ; Commissioner v. Flowers, 326 U. S.

465 (1946). In the meantime, the conflict and confusion

among the Courts of Appeal have increased, and the in-

creasing mobility of American labor has made the issue even

more prevalent. Only this Court can finally resolve the

question of whether “home” as used in section 162(a) (2)

necessarily means the taxpayer’s business situs.

CONCLUSION

For the reasons stated above, the petition for a writ of

certiorari should be granted.

Respectfully submitted,

Aprian W. DEWIND

Awan N. CoHEN

ERNEST RUBENSTEIN

575 Madison Avenue

New York, N. Y. 10022

PAuL, WEIsS, RIFKIND, WHARTON

& GARRISON

ALFRED D. YoUNGWooD

GILLESPIE, BuRKE & GILLESPIE

Of Counsel

September 23, 1965

’ 84Petition for Writ of Certiorari, pp. 8, 9, Commissioner v.

Flowers, 326 U.S. 465 (1946).

Ray

APPENDIX A

Opinion of The Court of, Appeals

UNITED STATES COURT OF APPEALS

For the Seventh Circuit

September Term, 1964—September Session, 1964

ae. Se

‘\

Decided, April 29, 1965 ~

’%

KENNETH D. ENGLAND AND CONNIE J. ENGLAND, ©

Plaintiff s-A ppellees,

v. :

UNITED STATES OF AMERICA,

Defendant-A ppellant.

BEFORE:

CASTLE, KILEY AND SWYGERT,

Circuit Judges

KIeEy, Circuit Judge:

This appeal by the Government from a judgment for

‘ arefund to plaintiffs’ of income tax poses the issue whether

England, taxpayer, must include in his gross income for

1Connie J. England is also a plaintiff in this case since she and

her husband filed a joint return for the taxable year in question.

' Appendix A

1960 an amount which he was reimbursed by his employer

for certain expenses incurred, prior to gaining possession

of new permanent quarters, incidental to a transfer to a new

post in the employer’s interest; or alternatively, whether

such amount, if includible in gross income, is a deductible

travel or business expense. We think the district court

erred in deciding this issue in favor of England.

The facts are undisputed. England was permanently

transferred by his employer from Kansas City, Missouri,

to Springfield, Illinois, where he arrived on June 19, 1960.

He began then to look for a place for his family to live and

on July 9, 1960 leased a house which was unavailable for

occupancy until August 1, 1960, at which time his family

moved in. Pursuant to its policy and regulations, the em-

ployer reimbursed England for $466.00 [sic] of his Spring-

field expenses incurred prior to taking possession under the

lease. The major items of expense were his meals and

lodging and a trip by his wife to inspect a house in Spring-

field.? England did not request or wish to make the transfer

but did so at the behest of the employer.

The Commissioner of Internal Revenue added the

amount of reimbursement to the taxpayer’s gross income

and assessed an additional tax of $103.00. England paid

the tax under protest, and brought this suit after the Gov-

ernment rejected his demand for a refund.

We)agree with the Government, contrary to the district

court’s view, that in view of § 61(a)’s definition of gross

income as “all income from whatever source derived, in-

cluding (but not limited to) the following items,” the fact

2Other items included laundry and cleaning expense, boarding

of taxpayer’s dog and cat, and the cost of a title search, revenue

stamps, newspaper advertisement, and telegram in connection with

the sale of taxpayer’s house in Kansas City.

Appendix A

that the reimbursement received by England might not

fall within item (1) “Compensation for services, including

fees, commissions, and similar items” is not in any way

controlling. Nor is the fact, emphasized by the court, that

England suffered a financial loss in the transfer to Spring-

field controlling as to whether the reimbursement con-

stitutes gross income. We disagree, for reasons which

will be clear hereafter, with the court’s conclusion that

congressional intent was that England’s reimbursement

should be excludable.

Revenue Ruling 54-429, 1954-2 Cum. Bull. 53, inter-

preting §22(a) of the Internal Revenue Code of 1939,

predecessor of § 61(a) of the 1954 Code, provides that an

amount received as reimbursement by an employee from an

employer for the expenses of moving himself, his immediate

family, his household goods and personal effects from one

official station to another for permanent duty is not in-

cludible in the employee’s gross income. The Ruling then

specifically provides that

Amounts received as allowances or reimburse-

ments for meals and lodging of the employee and

his family while awaiting permanent quarters at the

new post of duty are includible in gross income of

the employee.

We think that this ruling is a permissible interpretation of

the Internal Revenue Code’s definition of gross income,

and a correct one. The expense of transporting an employee

to a new post of duty for benefit of the employer is properly

an expense of the employer, not compensation to the em-

ployee, but the costs of meals, lodgings, and expenses in-

cidental to securing housing at the post are personal living

expenses of the employee, and if they are provided by the

4a ’

Appendix A

employer, income is realized thereby. This question was

resolved adversely to England in Cockrell v. Commissioner,

321 F.2d 504 (8th Cir. 1963), where the taxpayer received

a per diem allowance from the employer at the new post

and a special allowance to reimburse him for the cost of

living in motels near the new post while attempting to

find housing, scarce in the area. The Tax Court and the

Eighth Circuit upheld the Commissioner’s determination

that the allowances were includible in the taxpayer’s gross

income and that they were not deductible as travel expenses

while away from home.

Plaintiffs and the district court relied on John E. Cava-

naugh, 30 [sic] T. C. 300 (1961), in support of the court’s

decision. The Government contends, and we agree, that

that case was wrongly decided in failing to follow Rev.

Rul. 54-429 and in excluding reimbursements for “extra-

ordinary” post-arrival food and lodging expenses from

gross income.

The district court h@e held that even-if the amounts

in question are includible in gross income, they are deduc-

tible either as ordinary and necessary business expenses

under § 162(a)* or as reimbursed travel expenses while

away from home in the pursuit of a trade or business, under

§§ 62(2) (A)* and 162(a)(2).° A taxpayer’s “home,” for

8Int. Rev. Code of 1954, § 162(a). “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. .. .”

“Int. Rev. Code of 1954, §62(2)(A). “The deductions allowed

by part VI (sec. 161 and following) which consist of expenses paid

or incurred by the taxpayer, in connection with the performance by

him of services as an employee, under a reimbursement or other

allowance arrangement with his employer.”

SInt. Rev. Code of 1954, § 162(a) (2). a ses (in-

cl the entire amount expended for meals and lodging) while

away home in the —— of a trade or business. . .

Appendix A

the purposes of the reimbursed travel expense deduction,

is not necessarily the place of his residence. Rather, it is the

place of the taxpayer’s business. In this case Springfield

clearly was England’s “home” after the transfer, and ex-

penses incurred there were not “away from home.” Com-

missioner v. Flowers, 326 U. S. 465 (1946); Cockrell v.

Commissioner, 321 F. 2d 504 (8th Cir. 1963); Kalist v.

Commissioner, 321 F. 2d 508 (8th Cir. 1963); Light v.

Commissioner, 310 F. 2d 717 (Sth Cir. 1962) ; Andrews v.

Commissioner, 179 F. 2d 502 (4th Cir. 1950); Ney v.

United States, 171 F. 2d 449 (8th Cir. 1948); York v.

Commissioner, 160 F. 2d 385 (D. C. Cir. 1947); Darrell

Spear Courtney, 32 T. C. 334 (1959). No deduction for

those amounts is allowable under §§62(2)(A) and

162(a)(2).

We think too that the district court’s decision that these

amounts were deductible as “ordinary and necessary ex-

penses paid or incurred during the taxable year in carry-

ing on any trade or business” under § 162(a) cannot be

sustained. The expense of England’s meals and lodging,

his wife’s trip, and the sale of his house were personal

_expenses, expressly made non-deductible by § 262. Cock- |

rell v. Commissioner ; Light v. Commissioner ; York v. Com-

missioner; Andrews v. Commissioner, supra. :

England relies on Walter H. Mendel, 41 T. C. 32

(1963), now on appeal before the Fourth Circuit, in support

of his position that these expenses are deductible. That .

case, which the Government contends was wrongly decided,

allowed deductions for unreimbursed expenses of trans-

porting household goods and for hotels and meals in transit

to the new post, which the Tax Court characterized as

business expenses. In view of our decision that the expenses

Appendix A

involved here are personal expenses, Mendel is not directly

in point and we need not express any opinion as to its

correctness.

The judgment is reversed and the cause remanded with

instructions to dismiss the complaint.

ee ere ee

Appendix A

Judgment of the Court of Appeals :

UNITED STATES COURT OF APPEALS

For THE SEVENTH CIRCUIT

Chicago, Illinois 60610

Thursday, April 29, 1965

Before :

Hon. LatHam Castte, Circuit Judge

Hon. Rocer J. Kitey, Circuit Judge

Hon. Lutuer M. Swycert, Circuit Judge

No. 14727

is)

KENNETH D. ENGLAND and

Conniez J. ENGLAND,

Plaintiff s-A ppellees, Appeal from the

States °

bar for the Southern

b: | District of Illinois.

UnitTep STATES OF AMERICA,

Defendant-A ppellant.

* This cause came on to be heard on the transcript of

the record from the United States District Court for the

Southern District of Illinois, and was argued by counsel.

On consideration whereof, it is ordered and adjudged

by this court that the judgment of the said District Court

in this cause appealed from be, and the same is hereby,

REVERSED, and that this cause be, and it is hereby,

REMANDED to the said District Court with instructions to

dismiss the complaint, in accerdance with the opinion of

this Court filed this day. fo

APPENDIX B

Opinion of The District Court

UNITED STATES DISTRICT COURT

for the Southern District of Illinois

de.

Civil No. 3220

Decided, February 27, 1964

‘ .

KENNETH D. ENGLAND AND CONNIE J. ENGLAND,

‘ Plaintiffs,

UNITED STATES OF AMERICA,

Defendant.

Poos, District Judge: This is an action for a refund of

federal income taxes for the year 1960 in the amount of

$103.00 plus interest, pursuant to Title 28, Section 1346

(a) (1) of the United States Code, and Section 7422 of the

Internal Revenue Code of 1954. The Plaintiff taxpayer

was permanently transferred by his employer from Kansas

City, Missouri to Springfield, Illinois and preceded his

family by six weeks, during which time-he incurred certain

living expenses, being unable to procure permanent living

accommodations at an earlier date. These costs were reim-

bursed by his employer, Aetna Casualty and Surety Com-

pany and not reported as income by the taxpayers. The De-

Ap dial

fendant assessed a ebiiiies which was paid, and a claim

for refund filed.

Plaintiffs contend that the reimbursement made to the

taxpayer, Kenneth England, was for extraordinary business

expenses required and.incurred on behalf of his employer

and not income, or in the alternate that the expenses in ques-

tion were deductible as ordinary and necessary business ex-

penses. The Government contends that the reimbursement

constitutes taxable income. 7

The Plaintiff taxpayers, Kenneth D. and Connie J. Eng-

land, husband and wife, were employed by Aetna Casualty

& Surety Company; he, as an assistant chief auditor for a

period of seven years, and she, as a clerk in the Kansas City,

Missouri office. They had resided there for a period of sev-

en years in a mortgaged home owned by them. The wife’s

salary was $4,200.00 annually. On May 1, 1960 an open-

ing developed in the Springfield, Illinois office of the Aetna

which the husband was qualified to fill. The General Man-

ager of the Kansas City office requested him to transfer to

Springfield. This transfer was not solicited by the husband.

He had reasons to believe that he was in line to succeed to

the chief auditor’s position at the Kansas City office, if a

vacancy occurred. Neither he nor his wife was desirous of

making the change. He was asked to report to Springfield

on June Ist, but on his request was allowed some additional

time. The husband, in fact, arrived in Springfield on June

19, 1960. At the time of transfer, his salary was increased

$750.00, $250.00 of which was a merit raise. No arrange-

ments were made for the wife’s re-employment by Aetna.

There were various pressures on the husband to accept the

transfer, chief of which was that a refusal would have

ruined any chance of future advancement and another was

Appendix B

the displacement of family living conditions. There were

also pressures on him to decline the transfer, chief of which

was the necessity to sell his Kansas City home and to locate

a home in which to live at his transferred location.

He made his first trip to Springfield on May 23, 1960

to interview Al Chunis, whom he was succeeding, the Gen-

eral Manager, and the other employees with whom he

would be working at the Springfield office. At this time he

made inquiries concerning new living quarters. He re-

turned to Kansas City where it was determined that his

date for the Springfield assignment was to be July 1, 1960.

He next returned to Springfield on June 20, 1960, when

he entered on his new duties. At this time he commenced

looking for a place to live and on July 9, 1960 signed a lease

to commence August 1, 1960. Prior to the execution of

the lease, the wife came to Springfield to inspect two houses

that were under consideration, and she selected the one at

2835 South Lincoln, which was subsequently leased and to

which their furniture was moved from Kansas City. The

premises were not available before August 1, 1960, because

the owner could not surrender possession earlier.

On June 27 of the same year the husband-Teceived a

phone call concerning the sale of the Kansas City house

from a real estate agent who asked that he take a price

slightly below the asking price. He confirmed the lower

price by wire. Thie expense of this wire, among others, is

part of the expense claimed in the suit. The husband made

trips from Springfield to Kansas City on two weekends to

qake final arrangements for the sale of his Kansas City

home, and for the purpose of bringing personal property

to Springfield. He also closed out bank ts. It was

during these two trips that all Kansas City ties were

severed. ;

Appendix B

Between June 19th and August Ist, 1960, the transition

period between job locations, he incurred certain expenses

totaling $446.00,’ for which his employer, Aetna, reim-

bursed him. Aetna, because of the nationwide nature of

its business, has a defined program for reimbursement to

its employees of expenses incurred in job transfers, and has

printed instructions covering these expenses. The company

recognizes that employees who are asked to transfer suffer

financial loss because of traveling and duplicated living

expenses. The employee is required to submit an itemized_/

expense account. The husband taxpayer submitted his ex-

pense account to AEtna, and was paid the above amount.

1The itemized expense account for the week of June 19th through

June 25th includes the following items: motel room expense, $24.00;

reimbursement to friend for use of apartment, $12.00; meals, $30.15;

telephone confirming motel reservation, $1.50; total amount, $67.65.

For the week of June 26th through July 1st includes $16.00 reimburse-

ment to friend for use of apartment for four days; meals, $18.80;

telegram to Kansas City confirming sale of house, $1.38; newspaper

ad to rent house, $10.73; dinner and entertainment for departing

auditor, A. P. Chunis, $7.00; laundry, $2.60; and cleaning, $0.80;

total amount, $57.31. For the week of July 5th through July 9th in-

cludes motel room expense, $28.00; meal expense, $23.75; and dur-

ing the same period for the wife’s expense trip from Kansas City te~

Springfield to inspect the contemplated house for living quarters in

Springfield: railroad travel expense, $59.18; taxi fare, $1.25; motel

room for two days, $10.00; and meals, $12.65 ; total amount, $134.83 ;

for the period of July 10th through July 16th includes motel expense,

$24.00; meal expense, $21.40; telephone expense, -$0.80; laundry,

$6.56; and cleaning, $4.40; total amount, $57.16; for the period of

July 17th through July 23rd includes motel room expense, $42.00;

meal $31.95 ; cleaning expense, $1.60; total amount, $75.55

and for the period of July 24th through August 1, includes motel

room, $20.50; meal , $24.80; board of dog and cat, $3.50;

bring title to date, $20,00, revenue stamp, $3.30; total amount,

$102.10. The totals for the entire period amounted to $494.60 from

which the Aetna disallowed $41.77 as excessive under its rules, leav-

ing an allowable seclaim of $452.83, but the parties have

agreed upon $446.00 for the purposes of this action.

ar, Rg rennet OD a ratnettemm casita

Appendix B

This allowance is limited to $50.00 for a seven-day week.

The taxpayers, at the time of filing their 1960 tax return,

did not include this allowance as income. The taxpayer

spent more than the $446.00 reimbursed them in making

this move at AEtna’s request and direction. Taxpayer’s

overall financial condition was not improved by virtue of

this $446.00 payment. This move was, in a number of

ways, an expensive one for the taxpayers. They had to

sell their Kansas City house on which they were repaying

a mortgage at a cost to them of $835.00 for real estate sell-

ing commissions. They had to pay July interest amounting

to $51.38 covering the period of the move from Kansas

City, Missouri to Springfield, Illinois; they had to pay one-

seventh of the State and County Taxes for the month of

July amounting to $13.25; they had to pay one-seventh of

the city and park taxes for the month of July amounting

to $3.26. Revenue stamps on the deed of conveyance of -

their property amounted to $3.50, and they paid a title

policy fee of $77.85. All of these unreimbursed expenses

were occasioned by the move. In addition, the wife had a

salary loss of $775.00, and the laundry could no longer be

done as in Kansas City by the wife’s mother at no cost. Thus,

this move was an expensive one to It without reim-

bursement for some of the items.

The Director of Internal Revenue, on audit of tax-

payers’ return, added the reimbursed expenses of $446.00

to gross income, and assessed an additional tax amount to

$103.00.2 This amount was paid under protest, a claim

for refund was filed, and was denied by the Government.

2The above sum of $446.00 was held to be reportable as addition

to gross income by the District Director in the following interpreta-

tion of the rulings and the statute:

“Mr. England, an ena tH of the AEtna Casualty Com-

pany, was transferred by employer from Kansas City,

Appendix B

The following provisions of the Internal Revenue Code

are pertinent to the decision of this case:

“Sec. 61. Gross Income defined:

(a) General definition: Except as provided in this

subtitled, gross income means all income from whatever

source derived including (but not limited to) the follow-

ing items:

(1) Compensation for personal service, including

fees, commissions and similar items.

Sec. 62. Adjusted gross income defined:

For the purpose of this subtitle, the term ‘ad-

justed gross income’ means, in the case of an indi-

vidual, gross income minus the following deduc-

tions:

Missouri, to Springfield, Illinois. The cost of moving his

household goods was paid by the employer, and travel ex-

penses of Mr. England and his family were either paid by the

employer directly or reimbursed to Mr. England.

In addition to the travel and moving expense, the em-

ployer reimbursed Mr. England for certain living expenses

while he was in Springfield, and his family was still in Kansas

City. Such reimbursements, mostly for a motel, room and

meals, totalled $446.00... .

2(b) Reimbursements for living expenses.

The facts regarding this issue are included in Item 2(a)

above.

Revenue Ruling 54-429, supra, also provides ‘amounts

received as allowances or reimbursements for meals and lodg-

ing of the employee and his family while waiting permanent

quarters 4t the new post of duty are includible in gross income

of the employee’.

Therefore, it is held that the reimbursements of living

s in the total amount of $446.00 as represents income

to Mr. England, taxable under Section 61 of the 1954 In-

ternal Revenue Code. It is further held that no part of the

$446.00 may be deducted by the taxpayer under authority of

Séction 262 of the 1964 Internal Revenue Code.”

Appendix B

(2) Trade and business deductions of employees.

(a) Reimbursed expenses: The deductions al-

lowed by Part VI (sections 161 and following)

which consist of expenses paid or incurred by the

taxpayer in connection with the performance by him

of services by an employee, under a reimbursement

or other expense allowance with his employer.

(b) Expenses for travel away from home: The

deductions allowed by Part VI (Sec. 161 and follow-

ing) which consist of expenses of travel, meals, and

lodging while away from home, paid or incurred by

the taxpayer in connection with the performance by

him of services as an employee.

allowed by Part IV (Sec. 161 and following) which

consist of expenses of transportation paid or in-

curred by the taxpayer in connection with the per-

formance by him of services as an employee . . .”

Sec. 63. Taxable income defined.

(a) General rule. Except as provided in sub-

section (b) for the purposes of this subtitle the term

‘taxable income’ means gross income, minus the de-

ductions allowed by this chapter, other than the

standard deductions allowed by Part IV (Sec. 141

and following).

(b) Not applicable.

Sec. 161. Allowance of deductions. In computing tax-

able income under Sec. 63 (a), there shall be allowed as

deductions the items specified in this part, subject to the

exceptions provided in Part IX (Sec. 261 and the follow-

ing) relating to items not deductible.

Appendix B

Sec. 162. Trade or business expenses.

(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:

(1) A reasonable allowance for salaries or other

compensation for personal serviges actually rendered.

(2) Travelling expenses (including the entire

amount expended for meals and lodging) while away

from home in pursuit of a trade or business.

Sec. 211. Allowance of deductions.

In computing taxable income under Sec. 63(a),

there shall be allowed as deductions the items speci-

fied in this part, subject to the exceptions provided

in Part IX (Sec. 261 and following, relating to

items not deductible. )

Sec. 261. General rule for disallowance of deductions.

In computing taxable income no deduction shall

in any case be allowed in respect of the items speci-

fied in this part. *

Sec. 262. Personal, living and family expenses.

Except as otherwise expressly provided in this

chapter, no deduction shall be allowed for personal

living, or family expenses.

The inquiry is twofold: First, was this payment an

addition to gross income under Sec. 61, and, secondly, if so,

could it be deducted in view of the injunction of Sec. 262

Appendix B

which forbids a deduction for “personal, living, or family

expenses” ?

Under Section 61, gross income is defined as “all income

from whatever source derived, including (but not limited

to) the following items: ‘

(a) Compensation for services, including fees,

commissions and similar items.”

The Government, in its argument, says “that it should be

clear that the amounts involved herein represent gross in-

come within the meaning of Sec. 61 of the Internal Revenue

Code_of 1954.” It argues that gross income means all in-

come from whatever source derived, and includes all kinds

of compensation for services and further argues that this

is an instance of undeniable accession to wealth clearly real-

ized, and over which these taxpayers have complete do-

minion. These statements, while true in a general way,

cannot be applied to the facts adduced by the evidence to

include this reimbursement in the taxpayers’ gross income

under Sec. 61. This record shows that rather than an in-

crease in wealth, the taxpayers in fact saw their financial

situation worsened in carrying out the direct request of the

husband’s employer to make the move from Kansas City to

Springfield. It is clear that financially they are worse off

for having made the transfer than had they remained in

the employ of Etna in Kansas City, in so far as their im-

mediate fortune is concerned. This payment cannot be con-

sidered income earned from an actual personal service. The

evidence shows a detriment to wealth. Section 61 says that

gross income means all income from whatever source de-

rived including, but not limited to compensation for services,

‘including fees, commissions and similar items. Nowhere

10b

Appendix B

does Sec. 61 say that reimbursed extraordinary expenses

directly related to a taxpayer's job, occurring by reason of

a directed move by a superior to take another job in a dif-

ferent office of a vast enterprise, are income. In this tem-

porary period of relocation, this money was not paid by way

of reimbursement for services actually rendered. The em-

ployer’s rules definitely state that these payments are made

only because employees otherwise suffer a financial loss be-

cause of traveling and duplicated living expenses arising

from a transfer. They limit an employee’s reimbursement

to his actual expenses which are not, however, to exceed

$50.00 weekly.* The evidence here shows that, in fact, the

amounts expended for the items involved in the reimburse-

ment was actually greater than the allowance, without even

taking into consideration the $835.00 paid by the taxpayers

for real estate sales commissions and the other items they

paid such as taxes and interest noted above, all of which

. decreased their accumulated wealth. The taxpayers’ net

worth for the taxable year 1960 shows an actual reduction

rather than an accession to wealth as claimed by the De-

fendant.

It is clear that the intention of the statutes, when the

Internal Revenue Code is read as a whole, would exclude

the items here in dispute from gross income. The interpre-

tation of the statute argued for by the Government, would

have ve the-effect of placing a tax on the plaintiffs for what

was in fact an actual loss to them.

The result reached in the case of John E. Cavanagh

36 T. C. 300,. (5/18/61), which involved an analogous fact

situation, is equally applicable here. The Government there

*Employer’s instructions are contained in the Appendix to this

on. ,

11b

Appendix B

claimed that a tax was due it for failure on the part of a

taxpayer to include $280.00 as living expenses for two

weeks for which he was reimbursed by his employer. The

$280.00 was held by the Tax Court to be non-compensatory

and thus not includible in gross income under Sec. 61. The

Court said the expenses were not normal expenses of the

employee within the meaning of Sec. 262 but that these

expenses were extraordinary living expenses attributable to

the employer’s having transferred him, The Court said:

“There is no provision of the Internal Revenue

Code of 1954 specifically requiring the inclusion in

gross income of such payments as those here involved

nor is there any provision specifically providing

for the exclusion or deduction thereof. There is,

however, a ruling by respondent with respect to the

exclusion from gross income of transportation ex-

penses paid by an employer to or in behalf of an

employee where such transportation is required for

the convenience of the employer, Revenue Ruling

54-429, C. B. 1954-2, 53, wherein respondent has

ruled, in part, as follows:

“Accordingly, it is concluded that (1) amounts

received by an employee from his employer repre-

senting allowances or reimbursements for moving

himself, his immediate family, household goods and

personal effects, in case of a transfer in the interest |

of his employer, from one official station to another

for permanent duty, do not represent compensation

within the meaning of Section 22(a) of the Code,

and are not includible-in the gross income of the

employee if the total amount of the reimbursement

or allowance is expanded for such purposes * * *.

12b

Appendix B

“With the exception hereinafter discussed, we

think the above ruling is sound and has persuasive

effect here.”

“With respect to the $280.00 reimbursement to

petitioner of his excess cost for the food and lodging

of his family while his household effects were in

transit, the following language from the above-cited

ruling is claimed by respondent to-prevent the ex-

clusion thereof from income:

“Amounts received as allowances or reimburse-

ments for meals and lodging of the employee and his

family while awaiting permanent quarters at the

new post of duty are includible in gross income of

the employee. (Rev. Ruling 54-429, supra, 54.)

“We agree that to the extent such reimburse-

ments defray the ordinary and necessary food and

lodging costs of an employee they represent payment

of an employee’s living expense and are income

to him, but to the extent such reimbursements defray

only reasonable and necessary extraordinary food

and lodging expense required to be incurred by the

employer, they represent repayment to the employee

of an amount he has first paid for and in behalf of

his employer and do not constitute income to him.

They are the employer’s costs, not the employee’s.

To the extent the above ruling would require the

inclusion in income of. reimbursement for such ex-

traordinary food and lodging costs, it is not a correct

interpretation of Section 22(a) or Section 24(a) of

the 1939 Code or Sections 61(a) and 262 of the

1954 Code. The prohibition against the deduction of

personal living expenses has reference only to such

snineinedaiiadteninetdimminidomsicatar ase ee

13b

Appendix B

expenses as are ultimately chargeable to the tax-

payer. It has no applicability to such expenses

properly chargeable to another which the taxpayer

pays and for which he is reimbursed.”

Likewise, in the instant case, the expenses here in ques-

tion were of an extraordinary nature required to be incurred

by the employer and repaid by it. Such expenses were the

employer’s costs and not the employees. _

The tax Court has recently cited its decision in the

Cavanagh case with approvaly Walter H. Mendel, 41 T. C.

No. 4, (October 10, 1963).

If it is conceded (and the Court finds to the contrary)

that this reimbursement should be included in gross income

under Section 61, the Government then argues that no de-

duction can be taken for these reimbursed expenses because

of the provisions of Section 262. This section provides

that, except as otherwise provided, no deduction shall be

allowed for “personal, living, or family expenses.” In our

view of the evidence, these expenses, which were reimbursed

to the taxpayers to prevent them from sustaining further

economic loss because of the duplication of living expenses

during the transition period, were not non-deductible “per-

sonal, living, or family expenses.” The facts before the

_ Court show that these moving expenses were incurred while

the husband was away from home in the pursuit of his trade

or business and were incurred in connection therewith.

The disallowance of Section 262 is not in all events and

such expenses are allowable if otherwise provided for. In

our view, such an allowance is provided by Section 62(a)

(A).° This section permits employees a deduction from

*Section 62(2)(B) which might otherwise be applicable does

not apply here since that section does not apply to reimbursed

expenses, (

a 14b

A ppendix B

gross income of certain reimbursed amounts if these

amounts (1) are allowable under Part VI (Sections 161-

182) of subchapter B of the Internal Revenue Code (2) were

paid in connection with the taxpayer’s performance of serv-

ices as an employee, and (3) were paid under a reimburse-

ment or other expenses allowance with his employer. We

- think that the facts found here show that all three of these

tests are met. There is no question that those items were

reimbursed by the husband’s employer under a reimburse-

ment arrangement with his employer. Since these reim-

bursed expenses arose out of the transfer of the husband

from one office of his employer to another, the necessary

connection with the performance of services is present. Fi-

nally, we hold that these expenses would be deductible under

Section 162(a) as an ordinary and necessary expense in

carrying on the husband’s trade or business of performing

services for Aitna as an employee. While we would charac-

terize these expenses as traveling expenses within the

meaning of Section 162(a)(2), if that characterization is

incorrect, we feel that these expenses would still be ordinary

and necessary under the broad allowance of Section 162(a).

The requirements of Section 72(2)(A) are thus satisfied

such that Section 262 has no application to the facts of this

case.

That these expenses are of a kind which may be deduc-

ted under Sec. 162(a) is clearly indicated by the case of

Walter M. Mendel, op. cit., which allowed a deduction for

the unreimbursed portion of certain moving expenses. Al-

though the items of expense involved in that case differ from

those in the present case, the Tax Court clearly indicated

that all expenses incidental to a taxpayer’s move made at the

request of and for the benefit of his employer are deductible

if necessary to accomplish the move. Likewise, in this case

15b

Appendix B

a fair construction of the facts show that the transfer of the

taxpayers was at the request of and for the benefit of the

“~employer, who needed a replacement for auditor Chunis

who for personal reasons had requested an immediate trans-

fer to Boston, and the transfer was accepted by Plaintiff,

Kenneth D. England, for the benefit of his employer rather

than himself. It was contended in that case that the expense

of moving the taxpayer’s wife and household effects were

personal expenses and not business expenses. The Court

reaffirmed the Cavanagh case, supra, and said:

“If amounts expended by a taxpayer in moving

from one permanent post of duty to another are not

personal expenses, they are for the purpose of the

taxpayer’s business as an employee since the cause

of the move is business requirements. Ordinary and

necessary business expenses are deductible by an

employee who itemizes his deductions on his income

tax return. . .”

“The clear inference from our holding in John E.

Cavanagh, supra, is that the entire amount of the

expenses paid by an employee in moving from one

permanent duty station to another is deductible to the

extent that the amount expended is ordinary and

necessary to accomplish the move and that this may

be accomplished either-by not including the reim-

bursed amount in income or by including the reim-

bursed amount in income and deducting the total

amount expended. In the instant case, it appears

from the record that petitioner has not included the

$316, which he received’from the Veterans Admin-

istration as reimbursement for his moving expenses

in his 1957 income as reported.”

pa Rene. alps C185 fol atone Se)

Narn (Se omy repmnpttn e rerenys nme campers

ORGIA ISRO.

16b

Appendix B

Accordingly, the facts as above set out are found to be

the facts in this case, and the law as hereinabove set out are

the conclusions of law, and accordingly are hereby adopted

as the findings of fact and’conclusions of law, and under

them judgment is ordered for the plaintiff in the full amount

as prayed with interest, and the final judgment figures to be

entered are to be determined by the parties hereto.

17b

| Appendix B

Appendix to Opinion of the District Court

INSTRUCTIONS OF

AETNA CASUALTY AND SURETY COMPANY

EMPLOYEES MOVED AT COMPANY’S EXPENSE

It is the company’s intent that employees, who are asked

to transfer, not suffer a financial loss because of traveling

and duplicated living expenses. Correspondingly, it is ex-

pected that any such employee will give full consideration

to the company’s interests and arrange his affairs so as to

keep expenses incurred by a transfer to a reasonable

minimum, 3 :

The following instructions, contained in paragraphs 1

through 6, apply only to married men, or single men who

are the head of a household:

1. It is expected that a transferred employee, when re-

porting to the new location, will not bring his family with

him unless prior permanent or semi-permanent (not hotel)

accommodations have been arranged.

2. He may spend not more than one week at a hotel

after which time it is expected that he will rent a room on a

reasonable weekly basis. 7

3. After not more than one week at a hotel and until

he brings his family to the new location, he will be allowed

to submit expense accounts for out-of-pocket expense not

to exceed $50 per seven day week. This is not a flat allow-

ance and it must be itemized. This allowance includes room,

meals, laundry, etc. Also, if there is a weekly trip home

(par. B9A) the cost must be included under the $50. allow-

ance. This allowance will not be continued beyond 90 days

18b

Appendix B

Appendix to Opinion of the District Court

from the date of reporting to the new location without prior

approval of the H.O. Department which arranged the

transfer. >

4. If he owns his home in the old location, he should

arrange to place it on the market for sale. It will probably

not be possible for him to move his family to the new loca-

tion until his home in the old location has been sold. How-

ever, he should begin looking over the housing situation in

the new location so that when his home in the old location is

sold he will have a fairly good knowledge of conditions in

the new location.

5. After he has investigated the housing market in the

new location, he probably will want his wife to come for a

few days to look at specific properties and the cost of this

will be at company expense. It is expected that she would

not have to make more than one trip to the new location

before moving. In any event, only one inspection trip w*"!

be reimbursable under this program.

6. Since he owns his home in the old location, he may

want to buy again in his new location. Or, if suitable rental

accommodations can be found, he may prefer to rent for a

while before buying. In any event, expense reimbursement

will cease as soon as he moves his family to permanent

quarters in the new location, or within 90 days, whichever

first occurs. It may be necessary to have his family stay

at a hotel for a day or two after arrival in the new location;

but this should be kept to a minimum. _

NOTE: In the event the transferee does not own his

home the following instructions supersede paragraphs 4,

5, and 6.

“<:

19b

Appendix B

Appendix to Opinion of the District Court

As soon as possible after arrival in the new location he

should begin looking for a place to live. After he has in-

vestigated the housing situation he will probably want his

wife to come to the new location to look at specific proper-

ties, and the cost of this will be at company expense. It is

expected that she would not have to make more than one

trip to the new location before moving. In any event only

one inspection trip will be reimbursable under this program.

Expense reimbursement will cease as soon as he moves

his family to permanent quarters in the new location. It

may be necessary to have his family stay at a hotel for a

day or two after arrival in the new location, but this should

be kept to a minimum.

7. Inthe case of a single man, not head of a household,

living costs at the new location will be paid for a period

not to exceed one week during which period the employee

is expected to make permanent housing arrangements, after

which expense reimbursement will cease. os a

8. The company will reimburse employees for transpor-

tation costs incurred for transfer from one location to an-

other as-follows:

A. If public transportation is necessary, reimbursement

will include charges for fares on plane, train or bus, for

the most direct route. Reasonable expenses customarily

associated with travel, such as meals enroute, tips, cabs

or limousines will also be reimbursed.

B. If an employee ‘uses his own car as the means of

transportation the company will permit mileage allowance

at the rate currently in force for the most direct route. In

TATONET Pia pee is Mtns Tate EY Gt

ah Oe oe

20b

Appendix B

Appendix to Opinion of the District Court

addition, reasonable expenses enroute such as hotels, park-

ing, tolls, meals and tips will be reimbursed.

C. Unless instructed to do otherwise employees who

have a company leased car assigned to them should use

this car as a means of transportation when transferred.

Expense reimbursement will be in the same manner as

any other trip made for business purposes. Miles driven

beyond the most direct route will be considered as personal.

miles.

D. If a transferred employee has more than one car in

his family and they are owned by him or his family, the

company will permit mileage allowance at the rate cur-

rently in force for the most direct route for all cars. Em-

ployees in this category should make use of the cars so as

to avoid any necessity of using other means of transporta-

tion for moving the family to the new location.

9. It is the company’s desire when men are being trans-

ferred to disturb the family relationship as little as pos-

sible. Accordingly, married men and single men who are

the head of a household may be permitted to return home

for week-ends prior to moving their families to the new

location subject to the following conditions:

A. In some cases. distances will be relatively short be-

tween the new location and the old location. If the cost

of transportation home each week-end is equal -to or less

than the cost of maintaining the transferee over the week-

end at the new location he should normally return to his

home each week-end. Factors involving leaving time on

Fridays and arrival time on Mondays should be considered.

21b

Appendix B

Appendix to Opinion of the District Court

B. Incases not covered under 9A the transferee will be

permitted to return home at company expense every three

weeks, provided the distance involved is reasonable enough

to justify this frequency.

10. An employee will be reimbursed for transportation

costs of moving his immediate family to the new location

on the same basis as for himself. For the purpose of defin-

ing immediate family, it shall include members of the house-

hold of his principal residence.

Sms

Fe wi IE we

wth ok Dy c

IN THE

Supreme Court of the United States

OcTOBER TERM, 1965

No. 603

KENNETH D. ENGLAND AND CONNIE J. ENGLAND,

Petitioners

UNntIrTep STATEs OF AMERICA, Respondent

BRIEF AMICUS CURIAE OF THE ELECTRONIC

INDUSTRIES ASSOCIATION IN SUPPORT

OF PETITIONERS

Pursuant to Rule 42 of the Supreme Court of the

United States, the Electronic Industries Association

respectfully files this brief amicus curiae in support of

the Petition for a Writ of Certiorari filed in behalf of

Kenneth D. England and Connie J. England in the

instant case. Both counsel for Petitioners, Kenneth

D. England and Connie J. England and counsel for the

Respondent, the United States of America have given

their consent to the filing of this brief.

QUESTIONS

Whether an employee who is transferred to a new

job location by and at the direction of his employer

must include in gross income amounts received from

his employer in reimbursement for extraordinary mov-

ing expenses necessarily incurred by the employee

solely as a result of his job transfer. Alternatively,

if the employee must include such reimbursed expenses

in gross income, whether the employee is entitled to

deduct such expenses as ordinary and necessary busi-

- hess expenses.

INTEREST OF AMICUS CURIAE

The Electronic Industries Association (hereinafter

referred to as EIA) is a major trade association, head-

quartered at 1721 DeSales St., N.W., in the District of

Columbia. It represents nearly 300 domestic electronic

manufacturers. It is the national association represent-

ing the fifth largest manufacturing industry in the

United States, with gross annual sales in excess of $15

billion. The manufacturers in this industry alone

employ over 875,000 people. In the calendar year 1964

17,500 of these employees were transferred by their

employer from one domestic manufacturing facility to

another. This represents 2% of the employees in this

industry and an increasing trend in the electronics field.

There have been few cases presented to this Court

concerning income taxation which have been of impor-

tance to so many individual taxpayers, as well as to

many corporations large and small.

ARGUMENT

The EIA has read the decision of the United States ~

Court of Appeals for the Seventh Circuit in this case

and agrees with the petitioners that a writ of certiorari

should be granted.

‘

ba peewee me

The Internal Revenue Service makes an illogical

distinction between certain of an employee’s moving

expenses, i.e., travel and transportation on the one

hand, and other expenses directly, related to the move

on the other. There is no basis in fact or law for this

distinction. The many types of expenditures involved

in employee moves should be treated similarly for tax

purposes to the extent that they are reasonable.

CONCLUSION

It is respectfully submitted that (1) to bring a

- needed consistency to the tax treatment of moving

expenses and (2) to aviod clogging of Federal Court

calendars with a spate of litigation, this petition for

a writ of certiorari should be granted.

o Respectfully submitted,

ELECTRONIC INDUSTRIES ASSOCIATION

GraHAM W. McGowan

1721 DeSajes St., N.W.

Washington, D.C. 20036

EpwarpD J. MENARD

1219 Good Hope Road, S.E.

Washington, D.C. 20020

Attorneys for Amicus Curiae

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.