SCOTUS Reports

Tag: Meal Allowance

  • Kowalski v. Commissioner, 65 T.C. 44 (1975): When Cash Meal Allowances for Employees Are Taxable

    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.

  • Saunders v. Commissioner, 21 T.C. 630 (1954): Cash Allowance for Meals Included in Gross Income, Meal Expenses Non-Deductible

    21 T.C. 630 (1954)

    A cash allowance for meals provided to a state trooper is considered part of gross income, and meal expenses incurred while on duty are considered personal and non-deductible.

    Summary

    In Saunders v. Commissioner, the U.S. Tax Court addressed whether a cash allowance for meals received by a New Jersey State Trooper was includible in his gross income, and if so, whether his meal expenses were deductible. The court held that the cash allowance was part of gross income and that the trooper’s meal expenses were personal and not deductible. The court distinguished this case from precedents involving in-kind food allowances, emphasizing that the cash allowance was akin to regular compensation. Furthermore, the court determined that the trooper’s meal expenses were not deductible as business or travel expenses because his work inherently involved travel and the expenses were considered personal in nature.

    Facts

    Robert H. Saunders, a New Jersey State Trooper, received a salary that included a $665 cash allowance in lieu of rations. Prior to July 1, 1949, troopers received meals at their stations. This was replaced with a $70 monthly cash allowance for meals. Troopers were required to eat at public restaurants. The trooper deducted the $665 allowance from his salary on his income tax return, contending it was not income. The Commissioner of Internal Revenue determined this amount was includible in his gross income and disallowed the deduction of expenses incurred for meals while on duty.

    Procedural History

    The Commissioner of Internal Revenue determined a tax deficiency based on the inclusion of the meal allowance as income and the disallowance of the deduction for meal expenses. The taxpayer contested this determination in the United States Tax Court.

    Issue(s)

    1. Whether the $665 cash allowance paid to the trooper in lieu of rations is includible in gross income under Section 22(a) of the Internal Revenue Code.

    2. Whether the trooper’s meal expenses while on duty are deductible under Section 22(n) or 23(a)(1)(A) of the Internal Revenue Code.

    Holding

    1. Yes, because the cash allowance constitutes compensation and is includible in gross income under Section 22(a).

    2. No, because the meal expenses are personal expenses under Section 24(a)(1) and are not deductible under Section 22(n) or 23(a)(1)(A).

    Court’s Reasoning

    The court first addressed whether the cash allowance was includible in the trooper’s gross income under Section 22(a) of the Internal Revenue Code. The court distinguished the case from prior cases where food and quarters were furnished in kind, which were often excluded from gross income. The court reasoned that the cash allowance was similar to salary. As the court said, “We feel that we must hold under the doctrine of the Hyslope and the Van Rosen cases…that the $665 here in issue is not excludible from petitioner’s gross income but that it must be included under the provisions of section 22(a) of the Internal Revenue Code.”

    Next, the court considered the deductibility of meal expenses. The court rejected the argument that these were business expenses under Section 23(a)(1)(A). The court cited Louis Drill, where the costs of meals eaten while working overtime were not deductible, holding that the expenses were personal. The court also rejected the idea that these expenses were travel expenses, since the trooper’s work inherently involved travel.

    Practical Implications

    This case establishes that cash allowances for meals, even when provided to uniformed service members, are considered taxable income. The ruling also clarifies that meal expenses incurred during normal work duties, even if the job necessitates travel, are generally considered personal expenses and therefore not deductible. Lawyers advising clients on tax matters should be aware of this distinction. Additionally, the case underscores that state law or custom is not controlling in the determination of federal tax issues. It is important to distinguish between in-kind benefits and cash allowances. This case remains relevant when analyzing similar cases, especially when employees receive cash payments in lieu of traditional benefits. Subsequent cases have generally followed Saunders in treating cash allowances for meals as taxable income.