Kowalski v. Commissioner, 65 T. C. 44 (1975)

Cash meal allowances paid to employees are includable in gross income under section 61, unless specifically excluded under another provision of the Internal Revenue Code.

Summary

Robert J. Kowalski, a New Jersey State trooper, received a monthly meal allowance, which he argued should not be included in his taxable income. The Tax Court held that the cash meal allowance was includable in Kowalski’s gross income under section 61 of the Internal Revenue Code, as it was not excludable under section 119, which only applies to meals furnished in kind. However, Kowalski was allowed to deduct the amount he spent on meals while away from home overnight, up to the amount of the allowance, as a business expense under section 162(a)(2). The decision emphasized the broad definition of gross income and clarified that cash allowances for meals, unlike meals provided in kind, are generally taxable unless specifically excluded by statute.

Facts

Robert J. Kowalski, a New Jersey State trooper, received a monthly meal allowance of $1,704 in 1970. This allowance was intended to cover meals while on active duty, and was paid in cash, separate from his salary. Kowalski included $326. 45 of the allowance in his income for the year but excluded the remaining $1,371. 09. He claimed a deduction for food maintenance expenses on his tax return. The IRS challenged the exclusion, asserting that the entire allowance should be included in his gross income.

Procedural History

The IRS determined a deficiency in Kowalski’s 1970 federal income tax and Kowalski petitioned the Tax Court. The IRS amended its answer to include the previously unreported portion of the meal allowance, increasing the deficiency. The Tax Court’s decision was that the meal allowance was includable in gross income under section 61 but allowed a deduction for meals while away from home under section 162(a)(2).

Issue(s)

1. Whether the monthly meal allowance received by Kowalski is includable in his gross income under section 61 of the Internal Revenue Code.
2. Whether the meal allowance is excludable from gross income under section 119 of the Internal Revenue Code.
3. Whether Kowalski is entitled to deduct the meal allowance as a business expense under section 162(a)(2) of the Internal Revenue Code.

Holding

1. Yes, because the meal allowance constitutes gross income under the broad definition of section 61, and it is not specifically excluded by any other provision of the Code.
2. No, because section 119 only applies to meals furnished in kind, not to cash allowances.
3. Yes, because Kowalski is entitled to deduct the amount he spent on meals while away from home overnight, up to the amount of the allowance, as an ordinary and necessary business expense under section 162(a)(2).

Court’s Reasoning

The court reasoned that under section 61, all income from whatever source derived is taxable unless specifically excluded. The court rejected Kowalski’s reliance on the Third Circuit’s decision in Saunders v. Commissioner, which involved years before the enactment of section 119 and was decided under the 1939 Code. The court noted that section 119, enacted in the 1954 Code, only excludes the value of meals furnished in kind for the convenience of the employer, not cash allowances. The court also considered the legislative history of section 119, which indicated that cash allowances were to be treated as taxable income unless specifically excluded. The court allowed a deduction under section 162(a)(2) for the portion of the allowance spent on meals while away from home overnight, as Kowalski was able to substantiate these expenses.

Practical Implications

This decision has significant implications for how cash allowances for meals are treated for tax purposes. It clarifies that such allowances are generally includable in gross income unless specifically excluded by statute, which impacts how employers structure compensation and how employees report such income. The ruling also affects the deductibility of meal expenses, allowing deductions for meals while away from home overnight under certain conditions. This case has been influential in subsequent cases and has helped shape the IRS’s approach to meal allowances and similar fringe benefits. Later cases have continued to distinguish between cash allowances and meals furnished in kind, with the former generally being taxable and the latter potentially excludable under section 119.