SCOTUS Reports

Tag: Foote v. Commissioner

  • Foote v. Commissioner, 81 T.C. 930 (1983): Tenure Not Considered a Capital Asset for Tax Purposes

    Foote v. Commissioner, 81 T. C. 930 (1983)

    Tenure at a university does not constitute a capital asset for tax purposes, and payments received for resigning a tenured position are taxable as ordinary income.

    Summary

    Merrill J. Foote, a tenured professor at Southern Methodist University, resigned his position and relinquished his tenure in exchange for a negotiated payment. The issue before the U. S. Tax Court was whether this payment should be taxed as capital gain or ordinary income. The court held that tenure is not a capital asset, and the payment received was taxable as ordinary income. The court reasoned that tenure does not meet the statutory definition of a capital asset and that the payment was essentially a substitute for future ordinary income that Foote would have earned had he continued teaching.

    Facts

    In 1968, Merrill J. Foote joined Southern Methodist University (SMU) as an assistant professor and was promoted to associate professor in 1971. In 1972, SMU recognized Foote’s tenure status, which he received through de facto tenure due to his prior teaching experience. Tenure at SMU provided lifetime employment security and allowed more freedom for scholarly and professional activities. In 1977, due to friction with the administration and his focus on outside business activities, Foote resigned his tenured position in exchange for $45,640, to be paid in monthly installments throughout 1977 and 1978. Foote reported these payments as long-term capital gain on his tax returns, while the Commissioner of Internal Revenue asserted they were ordinary income.

    Procedural History

    Foote filed a petition in the U. S. Tax Court after receiving a notice of deficiency from the Commissioner for the tax years 1977 and 1978. The Tax Court heard the case and issued its opinion on December 7, 1983, deciding in favor of the Commissioner.

    Issue(s)

    1. Whether the payments received by Foote from SMU for resigning his tenured position are taxable as long-term capital gain or as ordinary income?

    Holding

    1. No, because tenure is not a capital asset within the meaning of sections 1221 and 1222 of the Internal Revenue Code, and the payment received was a substitute for future ordinary income.

    Court’s Reasoning

    The court applied the statutory definition of a capital asset from section 1221 of the Internal Revenue Code, which excludes property held primarily for sale to customers or depreciable property used in trade or business. The court determined that tenure did not meet this definition because it is a personal right that cannot be transferred or sold to another person. The court cited numerous cases, such as Commissioner v. Gillette Motor Transport, Inc. , to support the principle that payments received for the termination of contract rights to perform personal services are taxable as ordinary income. The court rejected Foote’s economic argument that tenure could be considered a capital asset, emphasizing that the payment was a substitute for future salary and other income he would have earned. The court also noted that there was no sale or exchange of tenure, as it simply ceased to exist upon resignation. The court concluded that the payments must be reported as ordinary income.

    Practical Implications

    This decision clarifies that payments received for resigning a tenured position at a university are not eligible for capital gains treatment. It impacts how similar cases involving the termination of employment contracts should be analyzed for tax purposes, emphasizing that such payments are generally taxable as ordinary income. The ruling may influence negotiations between universities and tenured faculty members contemplating resignation, as it removes the potential tax advantage of treating such payments as capital gains. This case has been cited in subsequent decisions involving the tax treatment of payments for the termination of employment contracts, reinforcing the principle that such payments are not capital gains.

  • Foote v. Commissioner, 67 T.C. 1 (1976): Determining Deductibility of Travel and Lodging Expenses for Tax Purposes

    Foote v. Commissioner, 67 T. C. 1 (1976)

    A taxpayer’s home for tax purposes is determined objectively by their principal place of business, affecting the deductibility of travel and lodging expenses.

    Summary

    In Foote v. Commissioner, the U. S. Tax Court ruled on the deductibility of lodging and travel expenses for Virginia and Lou Foote. The couple owned a ranch near Lockhart, Texas, but lived in Austin, where Virginia worked as a school counselor. The court held that Virginia’s Austin lodging expenses were not deductible because Austin was her tax home. Lou’s expenses for lodging in Austin and commuting to the ranch were also non-deductible; the court determined that Lockhart was his tax home, but his Austin stay was for personal reasons, not business necessity. This decision underscores the importance of the objective test in determining a taxpayer’s home for tax purposes and the non-deductibility of personal commuting expenses.

    Facts

    Virginia and Lou Foote owned a 320-acre ranch near Lockhart, Texas, about 30 miles from Austin. They previously lived on the ranch but moved to Austin in 1964 when Virginia took a job as a counselor with the Austin Independent School District, which required her to maintain an Austin address. During the 1972 school year, they lived in a trailer in Austin during the week and spent weekends at the ranch. Lou operated the ranch but was unable to employ someone to live there full-time. He made daily round trips from Austin to the ranch to care for the livestock. The Footes claimed deductions for their Austin lodging and Lou’s travel expenses between Austin and Lockhart on their 1972 tax return.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Footes’ 1972 federal income tax. The Footes petitioned the U. S. Tax Court, which heard the case and issued its decision on October 4, 1976.

    Issue(s)

    1. Whether Virginia Foote can deduct her expenditures for lodging in Austin as traveling expenses under section 162(a)(2) of the Internal Revenue Code of 1954.
    2. Whether Lou Foote can deduct his automobile expenses incurred in traveling between Austin and the ranch in Lockhart as trade or business expenses.

    Holding

    1. No, because Austin was Virginia’s tax home, and she was not “away from home” for tax purposes while living there.
    2. No, because Lou’s travel expenses were nondeductible commuting expenses, as he chose to live in Austin for personal reasons, not because his business required it.

    Court’s Reasoning

    The court applied an objective test to determine the Footes’ tax home, stating that a taxpayer’s home is generally where their principal place of business is located. For Virginia, Austin was her tax home because it was her primary place of employment. The court cited Commissioner v. Flowers, establishing that travel expenses must be reasonable, incurred while away from home, and in pursuit of a trade or business. Virginia’s lodging expenses in Austin were deemed personal and nondeductible. For Lou, the court determined that Lockhart was his tax home, but his presence in Austin was due to personal reasons (to be with his wife), not business necessity. Thus, his lodging expenses in Austin were also nondeductible. The court also ruled that Lou’s daily travel to the ranch was commuting and not deductible. The court rejected the argument that maintaining two homes due to employment considerations justified deductions, citing cases like Robert A. Coerver and Arthur B. Hammond, where similar arguments were dismissed.

    Practical Implications

    This decision reinforces the objective test for determining a taxpayer’s home for tax purposes, impacting how legal professionals advise clients on the deductibility of travel and lodging expenses. It clarifies that expenses related to maintaining a second home due to employment or family considerations are generally nondeductible. Practitioners must advise clients to consider their primary place of business when claiming deductions for lodging and travel. The ruling also affects how businesses structure employee compensation packages, particularly for those with multiple residences. Subsequent cases like Fausner v. Commissioner have continued to uphold the principles established in Foote, emphasizing the non-deductibility of commuting expenses regardless of the distance traveled.