Rudolph v. United States/Dissent Douglas

Mr. Justice DOUGLAS, with whom Mr. Justice BLACK joins, dissenting.

It could not, I think, be seriously contended that a professional man, say a Senator or a Congressman, who attends a convention to read a paper or conduct a seminar with all expenses paid has received 'income' within the meaning of the Internal Revenue Code. Nor would it matter, I assume, that he took his wife and that her expenses were also paid. Income has the connotation of something other than the mere payment of expenses. The statute, 26 U.S.C. § 61, 26 U.S.C..A. § 61, speaks in terms of financial gain, of compensation for services, 'including fees, commissions, and similar items.' The form of payment for services covers a wide range. Treasury Regulations § 1.61-1 provide:

'Gross income includes income realized in any form, whether     in money, property, or services. Income may be realized,     therefore, in the form of services, meals, accommodations,      stock, or other property, as well as in cash.'

The formula 'all expenses paid' might be the disguise whereby compensation 'for services' is paid. Yet it would be a rare case indeed where one could conclude that a person who gets only his expenses for attendance at one convention gets 'income' in the statutory sense. If this arrangement were regular and frequent or if it had the earmarks of a sham device as a cloak for remuneration, there would be room for fact-finders to conclude that it was evasive. But isolated engagements of the kind here in question have no rational connection with compensation 'for services' rendered.

It is true that petitioner was an employee and that the expenses for attending the convention were paid by his employer. He qualified to attend the convention by selling an amount of insurance that met a quota set by the company. Other salesmen also qualified, some attending and some not attending. They went from Dallas, Texas, to New York City, where they stayed two and a half days. One day was given to a business session and a luncheon; the rest of the time was left for social events.

On this record there is no room for a finding of fact that the 'expenses paid' were 'for services' rendered. They were apparently a proper income tax deduction for the employer. The record is replete with evidence that from management's point of view it was good business to spend money on a convention for its leading agents-a convention that not only kept the group together in New York City, but in transit as well, giving ample time for group discussions, exchanges of experience, and educational training. It was the exigencies of the employment that gave rise to the convention. There was nothing dishonest, illegitimate, or unethical about this transaction. No services were rendered. New York City may or may not have been attractive to the agents and their wives. Whether a person enjoys or dislikes the trip that he makes 'with all expenses paid' has no more to do with whether the expenses paid were compensation 'for services' rendered than does his attitude toward his job.

In popular understanding a trip to a convention 'with all expenses paid' may be an award. Yet the tax laws are filled with exemptions for 'awards' which are not considered to be income. The exemption of gifts is one example. Others are the exemptions of the proceeds of life insurance payable at death, disability benefits, the rental values of parsonages, scholarship and fellowship grants, allowances of U.S. employees abroad, mustering-out payments to members of the Armed Forces, etc. Employees may receive from their employers many fringe benefits that are not income. Treasury Regulations § 31.3401(a)-1(b)(10) provide:

'Ordinarily, facilities or privileges (such as entertainment,     medical services, or so-called 'courtesy' discounts on      purchases), furnished or offered by an employer to his      employees generally, are not considered as wages subject to      withholding if such facilities or privileges are of      relatively small value and are offered or furnished by the      employer merely as a means of promoting the health, good      will, contentment, or efficiency of his employees.'

The fringe benefits of this one convention trip are less obviously income than the fringe benefits listed in the Regulations. For the latter are constantly recurring-day after day, week after week. Moreover, on this record the convention promotes the 'efficiency' of the agents as much as the other fringe benefits enumerated in the Regulations.

The expenses, if 'income,' are plainly deductible. The Government, however, says that our problem is to determine 'whether it is consistent with the ends of an equitable and workable tax system' to make them such. The problem of designing an 'equitable' tax system is, however, for Congress, not for the Court.

The test of deductibility to be applied here is whether the expenses are 'ordinary and necessary' in the carrying on of petitioner's business. The Act is explicit in permitting the deduction of traveling expenses (including the entire amount expended for meals and lodging) while away from home in the 'pursuit of a trade or business,' 26 U.S.C. § 162(a)(2), 26 U.S.C.A. § 162(a) (2).

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

'If a taxpayer travels to a destination and while at such     destination engages in both business and personal activities,      traveling expenses to and from such destination are      deductible only if the trip is related primarily to the      taxpayer's trade or business. If the trip is primarily     personal in nature, the traveling expenses to and from the      destination are not deductible even though the taxpayer      engages in business activities while at such destination.'      (Italics added.)

Thus, by the very terms of the Regulations a taxpayer who combines business and pleasure may deduct all 'traveling expenses,' provided the business purpose is dominant.

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

'Whether a trip is related primarily to the taxpayer's trade     or business or is primarily personal in nature depends on the      facts and circumstances in each case. The amount of time     during the period of the trip which is spent on personal      activity compared to the amount of time spent on activities      directly relating to the taxpayer's trade or business is an      important factor in determining whether the trip is primarily      personal. If, for example, a taxpayer spends one week while     at a destination on activities which are directly related to      his trade or business and subsequently spends an additional      five weeks for vacation or other personal activities, the      trip will be considered primarily personal in nature in the      absence of a clear showing to the contrary.' Where, as here, at least one-half of the time is spent on mundane 'business' activities, the case is nowhere near the colorable transaction described in § 1.162-2(b)(2).

I see no reason to take this case out of the main stream of precedents and establish a special rule for insurance conventions. Judge Brown, dissenting in the Court of Appeals, shows how discriminatory this decision is:

'Deductions have been allowed as 'ordinary and necessary' to     clergymen attending a church convention; to expenses of an      employee attending conventions of a related business group;      to a lawyer attending a meeting of the American Bar      Association; to a legal secretary attending the national      convention of the National Association; to physicians      attending medical conventions; to certified public      accountants attending conventions; to university teachers in      attending conventions or scientific meetings; to professional      cartoonists attending political conventions; to persons      attending the Red Cross Convention; to school teachers      attending summer school; to attorneys attending an institute      on Federal taxation; to employees sent to refresher courses      to become more acquainted with new processes in the industry;      to a furniture store sending its buyers to the annual      furniture mart; to representatives to annual conventions of      trade associations; and to an insurance agent away from home      on business.' 291 F.2d 841, 844-845.

Insurance conventions go back at least to 1924 (Report No. 15, Life Insurance Sales Research Bureau, Nov. 1924) and are premised on the idea that agents and companies benefit from the knowledge and increase in morale which result from them. Why they should be treated differently from other conventions is a mystery. It cannot be, as the district judge thought and as the Government seems to argue, because going to New York City is, as a matter of law, a 'pleasure trip.' If we are in the field of judicial notice, I would think that some might conclude that the weekend in New York City was a chore and that those who went sacrificed valuable time that might better have been spent on the farm, in the woods, or along the seashore.

Moreover, federal revenue agents attending their convention are given a deduction for the expenses they incur. We are advised that

' * *  * the Commissioner has recently withdrawn his objections      in two Tax Court cases to the deduction of convention      expenses incurred by two IRS employees in attending      conventions of the National Association of Internal Revenue      Employees.

'No explanation has been given publicly for the Tax Court     action of the Commissioner, it being generally presumed that      the IRS employees met the tests of Reg. § 1.162-2(d) by     showing a sufficient relationship between the trade or      business of being an IRS employee and attendance at      conventions of the NAIRE. The National Association of     Internal Revenue Employees has hailed the Commissioner's      actions as setting a precedent which can be cited by IRS      employees when taking deductions for expenses incurred in      attending NAIRE conventions.' CCH Standard Federal Tax      Reports No. 23, April 19, 1961, pt. 1, p. 2.

It is odd, indeed, that revenue agents need make no accounting of the movies they saw or the nightclubs they attended, in order to get the deduction, while insurance agents must.

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

'Where a taxpayer's wife accompanies him on a business trip,     expenses attributable to her travel are not deductible unless it can be adequately shown that the      wife's presence on the trip has a bona fide business purpose. The wife's performance of some incidental service does not     cause her expenses to qualify as deductible business      expenses. The same rules apply to any other members of the     taxpayer's family who accompany him on such a trip.'

The civil law philosophy, expressed in the community property concept, attributes half of the husband's earnings to the wife-an equitable idea that at long last was reflected in the idea of income splitting under the federal income tax law. The wife's contribution to the business productivity of the husband in at least some activities is well known. It was specially recognized in the insurance field long before the issue of deductibility of her expenses arose under the federal income tax. Business reasons motivated the inclusion of wives in this particular insurance convention. An insurance executive testified at this trial:

'Q. I hand you Plaintiff's Exhibit 15, and you will notice it     is a letter addressed to 'John Doe'; also a bulletin entitled      'A New Partner Has Been Formed.'

'Will you tell us what that consists of?

'A. This is a letter addressed to the wife of an agent, a new     agent, as we make the contract with him. This letter is sent     to his wife within a few days after the contract, enclosing      this booklet explaining to her how she can help her husband      in the life insurance business.

'Q. Please tell us, as briefly as you can and yet in detail,     how you as agency director for Southland attempt to integrate      the wives' performance with the performance of agents in the      life insurance business.

'A. One of the important functions we have in mind is the     attendance at these conventions. In addition to that     communication, occasionally there are letters that will be      written to the wife concerning any special sales effort that      might be desired or promoted. The company has a monthly     publication for the agents and employees that is mailed to      their homes so the wife will have a convenient opportunity to      see the magazine and read it.

'At most of our convention program(s), we have some specific     reference to the wife's work, and in quite a few of the      convention programs we have had wives appear on the program.

'Q. Suppose you didn't have the wives and didn't seek to     require their attendance at a convention, would there be some      danger that your meetings and conventions would kind of degenerate into stag affairs,      where the whole purpose of the meeting would be lost?

'A. I think that would definitely be a tendency.'

I would reverse the judgments below and leave insurance conventions in the same category as conventions of revenue agents, lawyers, doctors, business men, accountants, nurses, clergymen and all others, until and unless Congress decides otherwise.