Opposition Brief — England v. United States

INDEX

| Page

Opinions below 1

’ Jurisdiction Pre.

Question presented .... 2

Statutes and other authorities involved ............. 2

Statement 2

MING ciicik ceintiscdccsiensiatatcesamausdeibekemuiicidsieans 4

Conclusion 13

Appendix ....... 14

CITATIONS

Cases :

Bradley v. Commissioner, 324 F. 2d 610... 9

Burns v. Gray, 287 F. 2d 698 ....................- 12

Cavanagh v. Commissioner, 36 T.C. 300 .. 9

Commissioner v. Glenshaw Glass Co., 348

US. 426 ....... sag aih ian 7

Commissioner v. Mendel, C.A. 4, No. 9904,

decided October 8, 1965 -.......................-- 9

Koons v. United States, 315 F. 2d 542 ....... 9

Light v. Commissioner, 310 F. 2d 716 ....... 9

United States v. Woodall, 255 F. 2d 370 ... 9

. Wallace v. Commissioner, 144 F. 2d 407... 12

Wright v. Hartsell, 305 F. 2d 221............. 12

York v. Commissioner, 160 F. 2d 385....... 9

Statutes: |

Internal Revenue Code of 1939: | |

Sec. 22 (26 U.S.C. 22) 17

a

| II

Statutes—Continued — Page

Internal Revenue Code of 1954: :

Sec. 61 (26 U.S.C. 61) 7,14

Sec. 162 (26 U.S.C. 162) ..... 11,14

Sec. 217 (26 U.S.C, 217)... 10, 11, 14

Sec. 262 (26 U.S.C. 262) 6, 7,15

Revenue Act of 1964, P.L. 88-272, 78

Stat. 19 14

Miscellaneous:

H.R. 10607, 89th Cong., 1st Sess. .............. 11

oH. Rep. No. 749, 88th Cong., 1st Sess. ...... 10

_ H,. Rep. No. 1199, 89th Cong., 1st Sess..... 11

Rev. Rul. 54-429, 1954-2 Cum. Bull. 53.....4, 9, 15

Rev. Rul. 64-153, 1964-1 Cum. Bull. (Part

1) 70 4,11

Rev. Rul. 65-158, 1965-1°Int, Rev. Bull.

Oc33 | 4

In the Supreme Court of the United States

OCTOBER TERM, 1965 |

\

No. 603

KENNETH D. ENGLAND AND CONNIE J. ENGLAND,

PETITIONERS

Vv.

UNITED STATES OF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

SEVENTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

if .

OPINIONS BELOW

The opinion of the district court (Pet. 1b-21b) is

reported at 226 F. Supp. 762. The opinion of the

court of appeals (Pet. la-6a) is reported at 345 F.

2d 414.

oa

JURISDICTION

The judgment of the court of appeals (Pet. 7a) was

entered on April 29, 1965. On July 14, 1965, Mr.

(1)

2

Justice, Clark extended the time for filing a peti-

tion for a writ of certiorari to September 24, 1965.

The petition for a writ of certiorari was filed on

September 23, 1965. The jurisdiction of this Court

is invoked under 28 U.S.C. 1254(1).

QUESTIONS PRESENTED

1. Whether the court of appeals correctly held that

amounts paid to petitioner by his employer to defray

certain personal living expenses incurred by petition-

er subsequent to his arrival at a new Post of duty

were taxable income.

2. Assuming that these amounts are includible in

petitioner’s gross income, whether he is entitled to de-

duct his corresponding expenditures as ordinary and

necessary business expenses.

STATUTES AND OTHER AUTHORITIES INVOLVED

The pertinent provisions of the Internal Revenue

Code of 1954 and the relevant Revenue Rulings are

set forth in the Appendix, infra, pp. 14-18.

STATEMENT

Petitioner * had been employed by Aetna Casualty

and Surety Company at its Kansas City, Missouri, of-

fice for a period of seven years prior to 1960. In

June 1960 Aetna transferred petitioner to Spring-

field, Illinois. He arrived in Springfield on June 19,

1960, and commenced work there the next day.

*Connie J. England, petitioner’s wife, is a party to these

_ procéedings because a joint return was filed.

3

Pursuant to its established. policy, Aetna reim-

bursed petitioner (1) for the cost of transporting

himself, his wife and his belongings from Kansas City

to Springfield and (2) for-certain personal expenses

incurred by petitioner after his arrival in Springfield.

Petitioner did not report any of the reimbursement as

income in his 1960 tax return. The Commissioner

did not attempt to tax petitioner on the first category

of reimbursements—.e., the cost of transporting him-

self, his family and belongings from the old to the

new post of duty. The present case concerns the

Commissioner’s attempt to tax the second category of

reimbursements—i.e., expenses incurred by petitioner

after arrival in Springfield but before moving into

his new house, totalling $446—including the fol-

lowing (Pet. 4b, fn. 1):

(1). Meals and lodging for the period June 19 to

August 1, 1960.

(2). Laundry and cleaning expense for the pe-

_ riod June 19 to August 1, 1960. :

(3). Telegram fcom Springfield to Kansas City

confirming the sale of petitioner’s house. 7

(4). Newspaper advertisement seeking to rent a

house in Springfield.

(5). Dinner and entertainment for the employee

petitioner replaced.

(6). Petitioner’s wife’s trip from Kansas City to

Springfield to inspect prospective homes.

(7). Boarding of petitioner’s dog and cat.

(8). Cost of bringing title to date on petitioner’s

house

(9). Revenue stamp.

Petitioner paid the tax under protest and brought

the present suit for refund. The district court de-

cided in favor of petitioner; the court of appeals re-

versed (Pet. 1a-6a, 1b-16b).

ARGUMENT

The decision of the court below is correct; it does

not conflict with any other appellate decision; and

there is no need for further review by this Court.

1. The Commissioner long ago made a careful ex-

amination of the questions presented here—whether

an employee who, at the request of his employer,

moves from one city to another receives taxable in-

come if the employer reimburses him for expenses

incurred in connection with the move, and, if so,

whether the employee is entitled to claim an offsetting

deduction by treating the costs that were reim-

bursed as deductible business expenses. The Com-

missioner concluded that any amounts received by an

employee as reimbursement for the expenses of mov-

ing himself, his family and his belongings from one

post of duty to another, including the cost of meals

and lodging in transit (herein referred to as direct

moving expenses), do not constitute taxable income to

the employee, but that amounts received as reim-

bursement for other expenses related to the move do

constitute income to the employee, and that no offset-

, ting deduction is allowable. Rev. Rul. 54-429, 1954-

2 Cum. Bull. 53 (App., infra, pp. 15-18); see also,

Rev. Rul. 64-153, 1964-1 Cum. Bull. (Part 1) 70;

Rev. Rul. 65-158, 1965-1 Cum. Bull. 34.

5

"We believe that the line drawn by these rulings—

i.¢., excluding from income amounts received as re-

imbursement for direct moving expenses but includ-

ing in income amounts received as reimbursement

for the many other indirect expenses occasioned by

the. move—represents a reasonable and practical reso-

lution of a difficult administrative problem. The rul-

ings reflect an accommodation between two basic

principles of the Code. On the one hand, an employee

should not have to pay tax on an expenditure by his

employer which primarily benefits the employer. On

the other hand, the employee should pay a tax on

any expenditure by the employer which primarily

benefits the employee personally.’ As discussed infra,

p. 9, every appellate court to consider the question

has accepted the Commissioner’s long-standing posi-

tion.

The indirect expenses associated with moving are

subject to great variation, depending on the personal

preferences of the employee and the generosity of

the employer. For example, one employee may, sole-

ly because of the move, feel constrained to hire do-

mestic help to aid in packing, unpacking and getting

settled; another employee may think that the new

house requires a different style of drapes, rugs, and

furnishings than his old house; a third may insist

2 It makes no difference whether the employer pays the ex-

pense directly or reimburses the employee who has paid the

expense. For example, if an employee runs up a $100 per-

sonal grocery bill, the employee will be taxed on $100 of

income regardless of whether the employer pays the grocer

or reimburses the employee who has paid the grocer.

6

on. new wallpaper and chandeliers. Of course, all of

_ these decisions will depend on the employee’s per- -

sonal tastes and desires; none can be regarded as

primarily for his employer’s convenience, even though

incurred solely as a result of the move which his em-

ployer required him to make.’ |

Congress expressly prohibited taxpayers from de-

ducting any “personal, living, or- family expenses”

(1954 Code, § 262), and it is quite clear that it

did not intend this provision to be circumscribed by

having an employee exclude from his income reim-

bursements for personal expenses, even though the

personal expenditure was required by the taxpayer’s

employer and essential to retaining his employ-

ment. For example, a given corporation may require _

its salesmen or executives to don a clean shirt every .

day, to wear expensive suits, to drive a certain make

of automobile, or to live in a certain fashionable

suburb. Even thoygh the employee proves that but

for his employer’s requirements he would not have

spent as much on his clothes, car or home, no part

of these costs is deductible. Although expenditures

of this kind may be helpful in furthering the tax-

payer’s business (of being an employee) and he may

have made them primarily for business rather than

personal reasons, the relationship between the ex-

*For example, in the instant case petitioner was reim-

bursed for, inter alia, expenditures for meals, lodging and

laundry from the time he moved to Springfield, his new post

of duty, until the house of his choice was ready for occu-

pancy, the cost of boarding his dog and cat, and certain

entertainment expenses. e

4

7

penditure and the taxpayer’s business is too intangi-

ble and remote to qualify them as deductible business

expenses. In the end, they are more accurately de-

scribed as “personal, living, or family expenses”

which the Code specifically makes non-deductible.

1954 Code, § 262. Moreover, if, instead of paying the

employee a gross salary, the employer segregates

monthly compensation into clothes reimbursement,

automobile reimbursement, home reimbursement, and

labels only the remainder as salary, the entire amount

will nevertheless remain taxable.

Similarly, if an employee is reimbursed for essen-

tially personal expenses connected with his move, the

reimbursement is not excludible from income merely

because the expense ‘would not have been incurred

but for the move. Petitioner’s argument, based as

it is on the fact that the move was employer-directed,

thus focuses on the wrong question. An employer

may pay a particular employee a bonus in order to

induce him to move, but the bonus would nevertheless

be taxable income. The same result holds true if,

in order to induce an employee to remain in his em-

ploy and to make the desired move, an employer pays

some of the employee’s personal expenses. oe

Section 61(a) of the Code defines gross income as

including “all income from whatever source derived

* * *” This definition was intended by Congress

to be “all-inclusive” (Commissioner v. Glenshaw Glass

Co., 348 U.S. 426, 482) and is clearly broad enough

in scope to embrace amounts paid by an employer to

reimburse his employee for personal living expenses

8

occasioned by the employee’s transfer from one post of

duty to another. The only substantial question is

whether the Commissioner and the courts must scru-

tinize each reimbursed expenditure to ascertain

whether it is essentially intended to benefit the em-

ployer (other than by inducing the employee to con-

tinue working for him—as do all salary payments)

or whether it is essentially intended to reimburse the

employee for personal, living or family expénses.

Petitioner and the briefs of amici curiae point out

that various large American companies who move

hundreds of thousands of their employees annually

reimburse them for varying amounts of indirect mov-

ing expenses. Obviously, a very heavy administra-

tive and judicial burden would be imposed if it be-

came necessary to examine each reimbursed expendi-

ture and to weigh its respective business and per-

sonal aspects. The matter is one which is peculiarly

appropriate for exercise of the rule-making power, and

we submit that the Commissioner validly exercised

his authority in establishing the long-standing rule

that only the direct expenses of moving to a new

post of duty—i.e., the cost of transporting the em-

ployee, his family and his belongings, including the

cost of meals and lodging in transit—will be ex-

cluded from an employee’s income, and that any reim-

bursement of the innumerable types of indirect ex-

penses—depending as they do on the employee’s per-

sonal tastes and the employer’s generosity—will con-

stitute income, Since the rule is both reasonable and ~

workable, the court below correctly rejected peti-

9

tioner’s argument that the Commissioner and the

courts must make an individual examination of the

facts of each employee’s particular case to determine

whether each expenditure related to the move primar-

ily benefitted the employer or the moving employee.

2. Every appellate court that has considered the

proper tax treatment of indirect moving expenses has

held that they constitute non-deductible personal, liv-

ing, or family expenses, and that any reimbursement

received with respect to such expenses is includible

in income. In fact, every principle announced in

Revenue Ruling 54-429 has now been tested and up-

held by at least two courts of appeals. See York v.

Commissioner, 160 F. 2d 385 (C.A.D.C.); Commis-

sioner v. Mendel, C.A. 4, No. 9904, decided October 8,

1965; United States v. Woodall, 255 F. 2d 370 (C.A.

10) ; Koons v. United States, 315 F. 2d 542 (C.A. 9);

Light v. Commissioner, 310 F. 2d 716 (C.A. 5). See

also Bradley v. Commissioner, 324 F. 2d 610.(C.A.

4). The only contrary precedent, the Tax Court’s

decision in Cavanagh v. Commissioner, 36 T.C. 300,

was ignored by the Court of Appeals for the Fifth

Circuit in Light v. Commissioner, supra (although

called to that court’s attention); questioned by the

Court of Appeals for the Fourth Circuit in Commis-

sioner v. Mendel, supra; and specifieally disapproved

by the Seventh Circuit in the instant case. There is

thus no conflicting appellate decision.

- 3. ‘Moreover, Congress recently considered the de-

ductibility of moving expenses and explicitly approved

the Commissioner’s traditional approach. As ex-

plained above, the Commissioner had ruled that an

10

employee’s reimbursement for his direct moving ex-

penses (transportation of himself, his family and his

belongings, and meals and lodging en route) does not

constitute taxable income. However, the Commission-

er had denied deductions to employees who paid their

own moving expenses (and received no reimburse-

ment). In order to equalize the tax treatment be-

tween employees who paid their own moving expenses

and those who were reimbursed, Congress added

§ 217 to the Code in 1964. That section permits an

employee to deduct his costs “of moving household

goods and personal effects from the former residence

to the new residence and * * * of traveling (includ-

ing meals and lodging) from the former residence

to the new place of residence.” The Committee Re-

ports make it clear beyond doubt that the section

does not permit any deduction for indirect moving

expenses of the type here in issue:

* * * Expenses of traveling do not include living

expenses following the date of arrival at the new

place of residence, living expenses preceding the

date of departure for the new place of residence,

expenses of house or apartment hunting, or ex-

penses of trips for purposes of selling property.

_ [H. Rep. No. 749, 88th Cong., 1st Sess., p. A58.]

To be sure, Congress was‘dealing only with the de-

ductibility of moving expenses and the exclusion of

reimbursed expenses from> income was “left for ju-

dicial interpretation.” H. Rep. No. 749, 88th Cong.,

1st Sess., p. 59. However, the reasons that prompted

the enactment of § 217 show that petitioner’s argu-

ment in the instant case does not square with the

il

principles governing moving expenses in post-1964

years. Had petitioner’s argument been accepted by

the court of appeals, the very discrimination which

Congress sought to eliminate by the enactment, of

§ 217 would have been recreated.‘

4. Petitioner asserts (Pet. 16) that there is a con-

flict in views among the courts of appeals with re-

spect to the meaning of the word “home” in Section

162(a) (2)’s provision for the deduction of “travel-

ing expenses * * * while away from home in the pur-

suit of a trade or business * * *.” However, the re-

imbursed expenses here in issue were not traveling

expenses and thus the meaning of the word “home”

is not presented by this case. ’

Section 162(a)(2) is limited to those who travel

temporarily to other areas, and such controversy as

exists among the courts of appeals concerns the iden-

tification of the “home” of employees who are forced

* The brief filed by the Associated Industries of New York

State, Inc., as amicus curiae, discusses H.R. 10607, 89th—

Cong., Ist Sess., (favorably reported by the House Commit- -

tee on Government Operations on October 21, 1965, H. Rep.

No. 1199, 89th Cong., Ist Sess.). That bill, if enacted into

law, will provide government employees with reimburse-

ment for living expenses occasioned by their transfer from

one post to another but does not affect the tax treatment of

such reimbursements, See Rev. Rul. 64-158, 1964-1 Cum.

Bull. (Part 1) 70. Indeed, the present Congressional “ton-

sideration being accorded to expenses of transferred govern-

‘ment employees, as well as Congress’ recent enactment of

Section 217 of the Internal Revenue Code, would suggest

that Congress, rather than the courts, is the appropriate

soeese, fo Sates 9 SOE? 8. RET eaT ie: Pete er

living expenses.

to do a great deal of temporary travel.* In this case

it is conceded that petitioner was “permanently trans-

ferred” (Pet. 4). Accordingly, the expenses are not

“traveling expenses * * * while away from home” but

living expenses occasioned by the change of petition-

er’s home. There is no conflict of decisions between

the court below and any other court of appeals con-

cerning ghe deductibility of the expenses at issue.°

A

5 Of the three cases cited by petitioner (Pet. 16, fns. 314

$2) as creating a conflict, all involved the problem of iden- ©

tifying the “home” of an individual whose occupation required

extensive but temporary travel. Burns v. Gray, 287 F. 2d

698 (C.A. 6), involved a racehorse starter and racing of-

ficial; Wright v. Hartsell, 305 F..2d 221 (C.A. 9), involved

a construction worker; and Wallace v. Commissioner, 144 F.

2d 407 (C.A. 9), involved a movie actress. None of these

cases concerns the type of living expenses incident to a trans-

fer that is involved here.

. © We note that none of the three cases claimed by petitioner

to conflict with the lower court’s decision was relied upon

by him in the court below or cited to that céurt.

a2 ier ee eT, ee ee ee Ee

“

™

13

CONCLUSION

The decision of the court of appeals is correct. It

is in accord with the Commissioner’s long-standing

and reasonable administrative rulings which have

been uniformly accepted by every federal appellate

court to consider them and utilized by Congress in

providing for the post-1964 deductibility of moving

expenses. The petition for a writ of certiorari should

be denied.

Respectfully submitted.

DECEMBER 1965.

14

APPENDIX. :

Internal Revenue Code of 1954:

SEC. 61. Gross INCOME 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:

% £ * *

[26 U.S.C. 61.]

SEC. 162. TRADE OR BUSINESS EXPENSES.

(a) In General.—There shall be allowed as

a deduction all the ordinary and necessary ex-

penses paid or incurred during the taxable year

in carrying on any trade or business, including-—

* _ .8 * i

(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;

and

e * m oe

[26 U.S.C. 162.]

SEc. 217 [as added by Sec. 213(a) (1), Revenue |

Act of 1964, P.L. 88-272, 78 Stat. 19, 50-51].

MOVING EXPENSES.

(a) Deduction Allowed.—There shall be al-

lowed as a deduction moving expenses paid or in-

curred during: the taxable year in connection

with the commencement of work by the taxpayer

as an employee at a new principal place of work.

15

(b) Definition of Moving Expenses.—

(1) In general—For purposes of this

section, the term “moving expenses” means

only the reasonable expenses—

(A) of moving household goods and

personal effects from the former resi-

dence to the new residence, and

(B) of traveling (including meals

and lodging) from the former residence

to the new place of residence. —

* & a &

[26 U.S.C. 217.]

SEC. 262. PERSONAL, LIVING, AND FAMILY Ex-

PENSES.

Except as otherwise expressly provided in this

chapter, no deduction shall be allowed for per-

sonal, living, or family expenses.

[26 U.S.C. 262.]

Rev. Rul. 54-429, 1954-2 Cum. Bull. 53:

Regulations 118, Section 39.22(a)-2: Compen-

sation for personal services. (Also Section 24

(a), Section 39.24(a)-1.)

Where an employee is transferred in the

interest of his employer from one official

station to another for permanent duty, the

allowanee or reimbursement received for

moving himself, his immediate family,

household goods and personal effects is not

includible in the gross income of the em-

ployee if the total amount of the reimburse-

ment or allowance is expended for such pur-

pose. Any excess of the allowance or reim-

16

bursement over the actual expenses incurred

for such purpose is includible in his gross

income. Any moving expenses paid or in-

curred by the employee in excess of the al-

lowance or reimbursement is not deductible

for Federal income tax purposes.

O.D. 1135, C.B. 5, 174 (1921) and L.T.

3022, C.B. XV-2, 76 (1936), modified.

Reconsideration has been given to the position

of the Internal Revenue Service relative to the

treatment, for Federal income tax purposes, of

amounts received by an employee, representing

allowances or reimbursements for moving him-

self, his immediate family, household goods and

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

interest of his employer, from one official station

to another for permanent duty.

O.D. 1135, C.B. 5, 174 (1921), holds that

transportation charges paid by the Government

on account of the transportation of the families

of Army officers are in the nature of additional

compensation and as such must be included in

gross income. I.T. 3022, C.B. XV-2, 76 (1936),

similarly holds that the cost of transportation of

dependents of officers and. enlisted men of the

Coast Guard which is paid by the Government

must be reported as taxable income, and no de-

duction therefor may be allowed in computing

net income. However, in G.C.M. 18430, C.B.

1937-1, 137, it is held that where an employee of

' the State Department is transferred from one

foreign post of duty to another for the conveni-

ence of the Government, the amount received by

him ds reimbursement of cost of transportation

for, himself and family should not be included in

_gross income.

A Re et RE Re Det ae me

17

Section 22(a) of the Internal Revenue Code

of 1939 provides in part as follows:

General Definition—“Gross income” in-

cludes gains, profits, and income derived

from salaries, wages, or compensation for

personal service * * * of whatever kind and

in whatever form paid * * *.

The payment or reimbursement by an employ-

er of the cost of moving an employee, his im-

mediate family, household goods, and personal

effects from one place of employment to another

permanent place of employment, primarily for

the benefit of the employer, is not compensatory

in nature. There is no essential difference be-

tween a payment of such cost directly by the em-

ployer and the payment by the employee and sub-

‘Sequent reimbursement by the employer.

Accordingly, it is concluded that (1) amounts

received by an employee from his employer rep-

resenting allowances or reimbursements for mov-

ing 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 ex-

pended for such purposes; (2) any excess of the

allowances or reimbursements over the actual ex-

penses incurred is includible in the employee’s

gross income; and (3) any moving expenses paid

or incurred by the employee in excess of the al-

lowances or reimbursements are not deductible

for Federal income tax purposes, since they rep-

18

resent personal, living or family expenses within

the meaning of section 24(a) of the Code. In

any case in which the transfer is made primarily

for the benefit of the employee, any allowance or

reimbursement received by the employee is in-

cludible in his gross 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 in-

come of the employee.

O.D. 1135, C.B. 5, 174 (1921), and I.T. 3022,

C.B. XV-2, 76 (1936), are modified to the ex-

tent that they are inconsistent with the views ex-

pressed herein.

. a ‘

&. S. GOVERNMENT PRINTING OFFICE; 1965 7ececs \ 408 p