SCOTUS Reports

Tag: Subsistence Allowance

  • Ghastin v. Commissioner, 59 T.C. 273 (1972): Cash Subsistence Allowances Not Excludable from Gross Income Under Section 119

    Ghastin v. Commissioner, 59 T. C. 273 (1972)

    Cash subsistence allowances paid to employees are not excludable from gross income under Section 119 of the Internal Revenue Code because they are not considered ‘meals’ furnished in kind by the employer.

    Summary

    In Ghastin v. Commissioner, the court addressed whether a cash subsistence allowance paid to Michigan State Police troopers could be excluded from their gross income under Section 119 of the Internal Revenue Code. The court held that the allowance did not qualify as ‘meals’ furnished in kind by the employer, and thus was not excludable. The troopers received a fixed allowance for meals, which was not conditioned on actual meal expenses and could be used for meals eaten at home or in patrol areas. The court reasoned that the allowance was a form of additional compensation rather than meals furnished for the employer’s convenience, and therefore did not meet the statutory requirements for exclusion from gross income.

    Facts

    Burl J. Ghastin, a Michigan State Police trooper, received a cash subsistence allowance in 1966 and 1967. The allowance was initially a flat rate of $60 per month and later changed to an hourly rate based on time worked. Troopers were on duty during meal times, but could eat at home if their home was in their patrol area, or at restaurants near their patrol routes. The allowance was not contingent on actual meal expenses, and troopers did not have to account for how the money was spent. The subsistence allowance was included in the computation of state retirement benefits and decreased as troopers were promoted.

    Procedural History

    Ghastin and his wife filed joint federal income tax returns for 1966 and 1967, initially including the subsistence allowance in their gross income. They later filed amended returns excluding the allowance and received refunds. The Commissioner of Internal Revenue determined deficiencies in their taxes, asserting that the allowance was not excludable under Section 119. The Tax Court reviewed the case and issued its decision in 1972.

    Issue(s)

    1. Whether the cash subsistence allowance paid to Michigan State Police troopers qualifies as ‘meals’ furnished by the employer under Section 119 of the Internal Revenue Code.
    2. Whether the cash subsistence allowance was furnished for the convenience of the employer under Section 119.

    Holding

    1. No, because the court determined that the term ‘meals’ in Section 119 refers to meals furnished in kind by the employer, not cash allowances.
    2. No, because the allowance was not provided for a substantial noncompensatory business reason of the employer, but rather as a form of additional compensation.

    Court’s Reasoning

    The court relied on the clear language and legislative history of Section 119, which specifies that only meals furnished in kind by the employer are excludable from gross income. The court cited Wilson v. United States, which held that cash allowances for meals do not qualify under the statute. The court also noted that the subsistence allowance did not meet the requirement of being furnished for the convenience of the employer, as it was not contingent on actual meal expenses and served as additional compensation. The court distinguished this case from others where troopers were required to eat in public view for law enforcement purposes, emphasizing that Ghastin could eat at home or in his patrol car. The court also referenced IRS regulations stating that meals must be furnished for a substantial noncompensatory business reason to be excludable.

    Practical Implications

    This decision clarifies that cash subsistence allowances provided to employees, even if intended to cover meal costs, are not excludable from gross income under Section 119. Employers and employees must recognize that such allowances are taxable income unless meals are provided in kind on the employer’s business premises. This ruling impacts the tax treatment of allowances for law enforcement officers and other employees who receive similar payments. It also influences how employers structure compensation packages, potentially leading to increased taxable income for employees and affecting their overall compensation strategy. Subsequent cases have followed this interpretation, solidifying the principle that cash allowances for meals do not qualify for exclusion under Section 119.

  • United States v. Woodall, 255 F.2d 370 (1958): Taxability of Employer-Provided Relocation Expenses

    United States v. Woodall, 255 F. 2d 370 (10th Cir. 1958)

    Employer-provided relocation expenses, including subsistence allowances, are taxable as income to the employee.

    Summary

    In United States v. Woodall, the Tenth Circuit Court of Appeals ruled that relocation expenses provided by an employer, specifically subsistence allowances for meals and lodging while awaiting permanent quarters, are taxable income to the employee. The case centered on Woodall, who received such payments and argued that only the profit, not the total amount, should be taxed. The court, however, found these payments to be compensation, thus includable in gross income, and the related expenses non-deductible as personal living costs. This decision reinforced the IRS’s position on the taxability of such employer payments and has been influential in subsequent tax law interpretations.

    Facts

    Woodall received $1,103. 33 from his employer as a relocation expense for moving from California to New Mexico. This sum included $903. 33 for subsistence while he and his family stayed in a motel before moving into their permanent home. Woodall contended that only the $300 profit from these expenses should be considered taxable income, not the entire amount received.

    Procedural History

    The case originated in the Tax Court, which initially ruled in favor of Woodall, holding that the subsistence allowances were not taxable income. The government appealed this decision to the Tenth Circuit Court of Appeals, which reversed the Tax Court’s ruling.

    Issue(s)

    1. Whether the $903. 33 received by Woodall as a subsistence allowance for meals and lodging while awaiting permanent quarters at his new post of duty constitutes gross income under Section 61(a) of the Internal Revenue Code.
    2. Whether the $903. 33 spent by Woodall on meals and lodging qualifies as deductible expenses under Section 262 of the Internal Revenue Code.

    Holding

    1. Yes, because the subsistence allowance was deemed compensation for services and thus falls within the broad definition of gross income.
    2. No, because the expenses for meals and lodging were personal living expenses and therefore non-deductible under Section 262.

    Court’s Reasoning

    The Tenth Circuit applied the broad definition of gross income under Section 61(a) of the Internal Revenue Code, which includes all income from whatever source derived. The court determined that the subsistence allowance received by Woodall was compensation for services rendered to his employer, hence taxable. The court rejected Woodall’s argument that only the profit should be taxed, stating that the entire amount received was income. Furthermore, the court held that the expenses for meals and lodging were personal living expenses as defined by Section 262, which are explicitly non-deductible. The court relied on Revenue Rulings and prior case law, such as the reversal of Starr by the Tenth Circuit, to support its decision. The court’s policy consideration was to maintain a broad and inclusive definition of gross income to prevent circumvention of tax obligations through employer reimbursements.

    Practical Implications

    This decision clarifies that employer-provided relocation expenses, including subsistence allowances, are taxable income to the employee. Attorneys advising clients on relocation should ensure that clients are aware of the tax implications of such benefits. This ruling has influenced subsequent tax law interpretations, reinforcing the IRS’s position on the taxability of these payments. Businesses must account for these tax implications when offering relocation packages, and employees should consider the after-tax value of such benefits. Subsequent cases, like England v. United States, have followed the Woodall precedent, solidifying its impact on tax law regarding employer reimbursements.

  • Magness v. Commissioner, 26 T.C. 981 (1956): Taxability of Subsistence Allowances for State Patrolmen

    26 T.C. 981 (1956)

    Subsistence allowances paid to state patrolmen are considered additional compensation and are includible in gross income for tax purposes, even if the patrolman is required to be on call at all times.

    Summary

    The United States Tax Court addressed whether a subsistence allowance received by a Georgia State Patrolman constituted taxable income. The patrolman received a per diem allowance for meals, regardless of whether he was on duty. The court held that the allowance was additional compensation under Section 22(a) of the 1939 Code, rejecting the argument that it was provided for the convenience of the employer. The court distinguished this case from situations where the employer directly provides meals, emphasizing that the patrolman had freedom in choosing restaurants and eating times. The decision underscores the broad definition of income and the limited application of the convenience of the employer doctrine.

    Facts

    Harold Brannon Magness, a Georgia State Patrolman, received a regular salary plus a per diem subsistence allowance of $4.50. He was required to live in barracks and was subject to call 24/7, except for one day off a week and a two-week vacation. The subsistence allowance was intended to cover the cost of his meals, which he purchased at public restaurants of his choice. Magness did not report the subsistence allowance as income on his tax return. The Commissioner of Internal Revenue determined that the allowance was taxable income.

    Procedural History

    The Commissioner issued a deficiency notice, determining that the subsistence allowance was additional taxable compensation. Magness challenged this determination in the United States Tax Court.

    Issue(s)

    Whether the subsistence allowance received by the state patrolman constituted additional compensation under Section 22(a) of the 1939 Code.

    Holding

    Yes, because the subsistence allowance received by the petitioner was additional compensation, not provided for the convenience of the employer, and was therefore taxable.

    Court’s Reasoning

    The court relied on the broad language of Section 22(a) of the 1939 Code, which defines gross income to include all income from whatever source derived. The court noted that the Supreme Court has consistently interpreted this section broadly. The court found that the subsistence allowance was an economic benefit conferred on the employee as compensation. The court distinguished this case from situations where the employer directly provides meals for its convenience, emphasizing that Magness was free to choose where and when he ate. The court cited its previous decisions in which subsistence allowances were deemed taxable. The court rejected the argument that the allowance was provided for the convenience of the employer, stating that if the employer could designate any part of an employee’s salary as subsistence, it would create a tax loophole. The court also stated that the cost of meals is a personal expense.

    The court referenced Regulations 111, Section 29.22(a)-3, which stated that if an employee receives living quarters or meals in addition to salary, the value of those benefits constitutes income. An exception applies if the quarters or meals are furnished for the convenience of the employer. However, the Court distinguished this case since meals were not furnished by the state; the petitioner received a per diem allowance.

    Practical Implications

    This case clarifies the taxability of allowances provided to employees for meals, particularly in situations where employees have discretion over their meal choices. The case reinforces the general principle that economic benefits, including allowances, are taxable income. Attorneys should advise clients, particularly government employees, on the tax implications of per diem allowances and the importance of properly reporting such income. This case emphasizes the limited scope of the “convenience of the employer” exception, requiring that the employer’s convenience be the primary reason for providing the benefit, not merely an incidental result. The case highlights that the IRS will scrutinize arrangements where employers designate a portion of an employee’s regular compensation as non-taxable subsistence.