Commissioner of Internal Revenue v. Kowalski – Oral Argument – October 12, 1977

Media for Commissioner of Internal Revenue v. Kowalski

Audio Transcription for Opinion Announcement – November 29, 1977 in Commissioner of Internal Revenue v. Kowalski

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Warren E. Burger:

Mr. Smith you may proceed whenever you are ready.

Stuart A. Smith:

Mr. Chief Justice and May it please the Court.

This federal income tax case Commissioner v. Kowalski is here on certiorari to the United States, Court of Appeals for the Third Circuit.

It presents a single question with two subparts, whether cash payments to state police troopers of whom Kowalski was one, which are designated as meal allowances are includable in gross income under Section 61 (a) of the Internal Revenue Code of 1954, and are not otherwise excludable from income under a special exclusion provision Section 119, which came into the tax law at the time of the 1954 codification.

In a brief per curiam opinion, the Third Circuit reversed a review decision of the Tax Court with respect to both code sections and held that the meal payments in question here were not gross income, and even if they were, they were excludable under Section 119.

We submit that the Court of Appeals erred as to both points that the cash payments or gross income as that fundamental term in the tax law as defined by Section 61 (a) and that the cash payments here do not qualify for the limited exclusion provided by Section 119 of the Code which briefly provides for an exclusion for meals furnished by an employer to his employee for the convenience of the employer, but only if the meals are furnished on the employer?s business premises.

So, in this sense the Section 61 (a) aspect of the Court of Appeals? decision is the most troublesome and extraordinary one from our point of view because it holds that a cash payment by an employer to his employee to defray the cost of what is indisputably a personal expense, the cost of eating lunch during the day, does not fit within the statutory phrase ‘gross income’ from whatever source derived.

I think that I can set forth the facts briefly they are undisputed.

Mr. Smith, before you do, in your brief on page 6, you say the Tax Court unanimously held that the cash payments did not qualify for the exclusion for gross income under Section 119, is that correct?

Stuart A. Smith:

I think that is correct.

There were 5 or 6 dissents on the Section 61 point, but no one dissented on the Section 119 point.

Judge Sterrett wrote a dissenting opinion joined by five judges set forth at pages 32 (a) to 37 (a) of Appendix 8 of the petition which said that — which concluded that the amounts were not gross income under Section 61.

He did not reach there and I suppose one might say he did not reach the other point although, so — but there was no expression of disagreement in the Tax Court under Section 119 point.

It sounds like the case we have just heard.

Warren E. Burger:

Mr. Smith while we have you there, you have in mind that when judge — federal judge is assigned to another circuit or if in his regular duties, a District Judge goes to another station, he sits, he has given, I think its $50 a day allowance if he identifies the expenditure so much for his room, so much for meals and now since the judge presumably eats breakfast, lunch and dinner when he is at home, bear in mind at some points at your convenience would you tell me what do you think of that situation, under this duration or anyone like it, would the judge be required to take treat as income, breakfast, lunch, dinner?

Stuart A. Smith:

Well, Mr. Chief Justice, the proper tax treatment would seem to me if that situation would be as follows, the judge would — unless there were complete wash, I am assuming let me back for a moment.

As a theoretical matter, all those payments are part of gross income.

Moreover, the amounts expended for meals when away from home overnight, under this Court?s Correll decision are a deductible business expense under Section 162 of the Code, so they would —

Warren E. Burger:

That is not true with federal judge, he has no business expenses in the sense that —

Stuart A. Smith:

Well, but he has employee business expenses, that if an employee is away from home overnight and expends money in aid of his business which is the business of being an employee, those expenses are deductible, so to follow through on your example, the judge would include all of these per diem payments in income and take corresponding deductions, it may well be given the high cost of leaving these days and the particular plight that federal judges find themselves and that there will be a net deficit in which case that, there will be a net deduction.

It is possible if the judge is frugal that there may be net amount of income.

Now, the Internal Revenue Service by regulation takes the position that if an employee must make an accounting to his employer and there is a complete wash you do not have to report the actual items on the return, but you must append the statement to your return saying that you have had per diem payments, you had business expenses and that they net out against each other, so this enables the Internal Revenue Service to be alluded to the fact that there are these items on the return and if they want to audit —

You mean all these years I have been misreporting?

Stuart A. Smith:

Would — I do not —

Judicial conference.

Stuart A. Smith:

Without making —

I have never put this on my dissent —

Stuart A. Smith:

You have never put the statement on it.

Rather neither in the statement —

Stuart A. Smith:

Well, I — in preparing for this case, I have been advised that there is such a requirement.

I think I better disqualify myself in this case ?

Stuart A. Smith:

Absolutely not — I think its a — I do not think it is a mandatory requirement, it is a conducive requirement.

Mr. Smith your answer to the Chief Justices question that these allowances at any event are gross income leads for me to this question which may be at the very outer bounds of relevancy but that will not stop me from asking it.

As I understand, the past three or four Presidents of the country have received what recalled tax free expense allowances, in addition to their salaries.

Now, are those gross income for those persons?

Stuart A. Smith:

I suspect probably not if they are tax free and that is –i am not familiar with that but that may well be by special statute.

The statute authorizing the President’s salary may provide for a tax free allowance, very much like the military has certain taxable allowance which —

So that simply depends on the wording of the particular statute?

Stuart A. Smith:

Right.

Getting back to the more mundane factual context in which this case arose —

And the mundane factor of federal judges — you distinguish them, do you?

You do not distinguish federal judges from state highway patrolmen do you, for these purposes?

Stuart A. Smith:

For these purposes, we are all tax payers, I do not even exclude myself from the circle of tax payers.

This respondent is a New Jersey state police trooper and in 1970 had a base salary of $8,739.

He received an additional amount which the state designated as a meal allowance which for 1970 was $1,697.

This meal allowance was like the salary paid biweekly, but unlike the salary it was paid in advance and salary was paid for prior periods.

Is there any significance in that payment in advance?

Stuart A. Smith:

I do not think so.

Somewhere in your argument would you differentiate any services treatment on military allowances of this kind —

Stuart A. Smith:

I shall.

And the statute troopers allowance and tell us precisely why one is in and one is out?

Stuart A. Smith:

I shall.

This meal allowance is described on a New Jersey police recruitment brochure as in item to be received and in addition to salary.

It is clearly an important aspect of the troopers compensation.

The amount of the meal allowance is a subject of negotiations between the Police Troopers Union and the state and in fact has gone up over the years that used to be $70 a month and now, it ranges from $1,740 for troopers like respondent Kowalski $1,776, for lieutenants and captains, and $2,136 for the commander of the New Jersey State Police, the Superintendent colonel.

So there is a variation in amount depending upon your rank.

The meal allowances are also significantly included in the compensation base on which the troopers pension benefits are computed.

Now, under the cash meal allowance system, the troopers are expected to eat within their assigned patrol area, and so what they have to do as and when they are going to go to lunch, when I used to lunch, I am really talking about a mid-shift meal.

I am just using lunch as an example.

They have to check in with the officer in-charge and tell him they will be at such and such a restaurant and they will be there for the lunch.

Stuart A. Smith:

Now, there is no restrictions on the cash payments because the troopers can eat at home if they wish, if they leave within their assigned duty area, they can eat in a public restaurant as I suggested, or they can even take their lunch or take a sandwich from home and eat in their patrol car, if they so desire.

The amount of the meal allowance is not calculated at all to provide any kind of reimbursement for any specific amount of meals, it is simply a flat amount per year, in this case $1,740.

On his 1970 return, respondent Kowalski reported his $9,000 in wages, which included a base salary of $8,739 and cash meal allowances of $326.

Now, the reason he reported part of this cash meal allowance on his 1970 return is, I think significant.

He reported it because the state of New Jersey in October 1970, that is for the final quarter of this taxable year, changed its policy and began to include the cash meal allowances on the Form W-2 of their troopers, so the Internal Revenue Service began to be advised formally of the fact that these troopers were receiving these additional amounts.

But respondent Kowalski did not report the remaining $1,371 portion to the first nine months of 1970 because that was not included on his Form W-2.

The only reason this sort of came to the Internal Revenue Services attention and in one respect this aspect of the case is really significant for purposes of the second case because it shows the importance of the need for the Internal Revenue Service to withhold on cash payments from an employer to employee at the source, but the reason, the Internal Revenue Service found out about it, is because that they disallowed respondent Kowalskis travel expenses, and after respondent Kowalski filed his petition of the Tax Court in his service, filed its answer and began to engage in a work — in a deeper kind of discovery, they discovered the fact that he had this additional $1,371 by happenstance of this litigation and then filed an amended answer which raised the issue which is before the Court —

Harry A. Blackmun:

Mr. Smith, you are not suggesting the Internal Revenue Service is ignorant of this kind of practice among —

Stuart A. Smith:

No, I am not suggesting —

Harry A. Blackmun:

I am sure these cases have been taken around here for over decade —

Stuart A. Smith:

Or for more than a decade, Mr. Justice Blackmun actually since on —

Harry A. Blackmun:

Here for over decade?

Stuart A. Smith:

Yes —

No I am not suggesting that, but what I was trying to emphasize is the fact that the withholding requirements are very important and we will address this in greater detail in the Central Illinois case, but I wanted to simply say that the withholding requirements are very important to the service, in terms of insuring that taxes are collected on employee compensation because basically the service is set up on his computers that it would treat items on Form W-2 as a basic compensation of an employee and it is only when matters are going to audit, like this case that you have the happenstance of discovering an additional amounts that are not reported on a From W-2 —

You are not suggesting that what the employer thinks it ought to do to govern his tax consequences?

Stuart A. Smith:

Absolutely not — absolutely not if that —

He has to explain it in someway if its on W-2 Form and hence its perfectly natural for him to report or it makes some reference to his —

Stuart A. Smith:

Absolutely not, but the point I was simply making is that when something is not on a From W-2, it is more than likely that the service in the normal kind of tax administration absent the audit is not going to be aware of a cash payment made by an employer to employee.

Warren E. Burger:

Let me try this hypothetical on you.

Suppose in a state trooper situation they have a base somewhere with the radio dispature that communicates with all the cars and dispature, let us assume also, the dispature is on duty, nine hours a day.

That is the terms of his employment and he is required by the terms of the employment to eat on the premises and go down to the cafeteria, pick up the tray and bring it back to the his gear, his broadcasting gear and remain on duty throughout the lunch period in order to handle calls to and from troopers in the field, would you say that was deductible — that was gross income?

Stuart A. Smith:

Mr. Chief Justice is this a meal in kind thats provided by —

Warren E. Burger:

What they do to say book keeping, they just allow him to go down to get a free meal.

Stuart A. Smith:

But its — but it is a meal provided in kind by the employer to be in on the employees business premises.

I would think that that would be covered by the exclusion of Section 119, this is such a Section —

That is the question as was it the gross income?

Stuart A. Smith:

No, no, because Section 119 says it is not gross, in other words —

Except for Section 119 it would be that?

Stuart A. Smith:

Except for 119, it would be gross income because Section 61 (a) begins except this otherwise provided in this subtitle and this subtitle includes Section 119.

Warren E. Burger:

Now, suppose the rules of state troopers required them at meal time to a drive to a restaurant, get the food in the restaurant and then bring it into the car and eat it in the car so there would within reach of their radio at all times, would you say that was –?

Stuart A. Smith:

That would not be a meal in kind provided by the employer and they would be paying cash for this meal.

In other words, Section 119 clearly by legislative history and regulations provide, that you have got any three requirements.

Number 1 – it must be a meal in kind, provided by the employee, number 2 – it must be for the convenience of the employer and number 3 – this must be furnished on the business premises.

Now, in your example —

Warren E. Burger:

Two of those requirements are clearly met are they not,in my hypothetical?

Stuart A. Smith:

Well, I suppose it would be for the convenience of the employer that —

Warren E. Burger:

And that is on the premises if he is eating in the car, is he not?

Stuart A. Smith:

Although, I suppose it would be a debatable question whether the meal were furnished on the business premises, if you had to go to a public restaurant to get it, but I think — I think that it would not meet the question of meal in kind if in effect you are getting a cash payment to go by a meal in a restaurant and eat it and the statute clearly provides you got to meet all three requirements under Section 119, otherwise you flunk the test.

Warren E. Burger:

Then let us back up to my radio dispature again and the state authorities decided it is too expensive to maintain the Barracks cafeteria and so they dispense for that, but say to the radio operator, you must be on duty and he sends across the street to McDonald’s or at some place?

Stuart A. Smith:

That would be gross income because he would not meet — it would not be a meal in kind furnished by the employer.

In other words, the key to it is they have got to furnish the food?

Stuart A. Smith:

Exactly — and in fact that is really what happened in this case and that is what the respondents have argued because the State of New Jersey used to have a meals — kind of meal station system which they abandoned, in favor of this cash allowance and the respondents have argued here that and throughout this case that because it was done on a meal station basis before, that makes the cash payments non-taxable.

Then, we basically had two answers to this, first, there is nothing in the record that permits an inference that the meal station allowance, this meal station system of former days would have been nontaxable, in fact, it really turned out to be the inconvenience of the employer, because the State of New Jersey found that people were driving all around the state to eat their meals and actually turned out to be quite far from their duty stations and our second answer to this is —

Warren E. Burger:

How does that bear on the tax question?

Stuart A. Smith:

Well, it bears on the tax question —

Warren E. Burger:

And if they can deal with that sort of a problem by saying that?

Stuart A. Smith:

No, no it does bear on the tax question Mr. Chief Justice because Section 119 (1) of these requirements is that the meals be furnished for the convenience of the employer and if it turns out as I am suggesting, that the meals, it turned out to be inconvenient for the employer, I would suggest that you do not need the statutory test, but putting that aside for a moment I think that the Court had said on a number of the instances in National Alfalfa or Central Tablet manufacturing company, simply the fact that you could do it one way and achieve a particular tax result, does it mean that you have to do it another way which may be virtually equivalent from a surface point of view that that will achieve the same taxes.

Now, each case has to be judged on its facts.

Now, I do want to talk —

Thurgood Marshall:

I do not know, these men work in eight hour shifts?

Stuart A. Smith:

I think so.

Thurgood Marshall:

Would they need lunch during an eight hour shift?

Stuart A. Smith:

I think they get an hour off or time off for lunch within that eight hour shift.

Now, it is possible, it may be a nine hour shift with an hour for lunch.

Thurgood Marshall:

Yeah, the other point is, is there anything in the record that shows that they need special food at the lunch?

Stuart A. Smith:

No.

Thurgood Marshall:

There is a just regular meal or lunch?

Stuart A. Smith:

Now they are allowed to — they can basically wherever they want to eat lunch essentially it is just as if my employer or anyone?s employer simply said, here we are going to get in $2 more day to eat lunch and we simply submit that those cash payments are tax — are compensation for services under Section 61 (a) (1) and that they do not need any special limited exclusion of Section 119, which Congress has channeled these three requirements and they have all got to be met.

There is nothing to do with overtime?

Stuart A. Smith:

Nothing to do with overtime at all.

Mr. Smith suppose your employer erred in the case you have put, you said, you may not leave the factory premises during the lunch, would that make a difference?

Stuart A. Smith:

That would not make a difference in our view because that restriction might and that basically is this case because that restriction might be for the convenience of the employer, but the cash payment does not serve the convenience of the employer.

The employer must provide the meals and Congress has said so specifically that in the committee report in Section 119, and reporting it out that this provision only applies to meals in kind, it is not a —

Your case really comes down to whether the refund is in cash or whether there is –?

Stuart A. Smith:

Absolutely, that is critical, the cash aspect that it is critical to the eligibility under Section 119 and we submit that cash payments are never eligible for exclusion under Section 119.

I do not want to forget to turn to the tax treatment of the military as Justice Blackmun asked.

The military have always been a special case under the tax law as well as generally I think this Court?s decisions indicate that military have been treated differently.

Now, the origin of the treatment of the military arose in the Jones case which the Court of Claims decided in the 1920.

The Court of Claims decided that cash allowances, housing allowances to the military would not be taxable income, although service has resisted it at that time, that after the Jones decision the service changed its position.

That cash subsistence payments to military personnel were includable in gross income and rule that such allowances would not include the gross income.

Now, after that, that position of the Internal Revenue Service was ultimately found its way into the regulations, since I think its 1.61-2 (b) of the regulations.

So following the Jones decision this service the treasury has, for the last 50 years treated in military quite differently.

Now, during this last 50 years, the Code has — the tax law has been codified twice, in 1939 and in 1954 and Congress was aware that Treasury Regulations providing for the special treatment to, were turned out to be not just the military, but the uniform services which includes the coastal and geodetic survey, public health service as well and Congress never expressed any opinion that this was not be the governing rule and in fact, in 37 U.S.C. 101, which we quote at Page 19 of our brief, Congress explicitly confirmed the understanding that regular military compensation includes ?federal tax advantages accruing to aforementioned? is in subsistence allowance.

Now, the respondents in this case have tried to make much of the fact that the there are analogies between the state police and military, but quite frankly, we think that Congress and the courts and the treasury have for the last half century treated them as a very special case, and in fact, the legislative evidence is all to the contrary because the Congress in 1954 enacted Section 120 of the Code, which we referred to briefly in our brief which basically provided a $5 a day exclusion for state police troopers which is subsistence allowance, and then in 1958, Congress repealed that for very much the same reason that sort of underlays our position in this case, is that after they enacted the provision, many states simply said allocated part of the compensation of state police troopers, the subsistence allowance as even though that was not the intent of what Congress was trying to do and they say basically worked in an equity that they gave state police troopers something that other people did not have, so it repeal 19-120 and 1958 now, if somehow there is an exclusion from gross income, its respondents? contend to these cash payments, then the whole congressional exercise between 1954 and 1958, it is really a nullity and we submit that congress knew what it was doing, the military were special and to the extent it addressed the problem in this case.

It focused on the fact that and ultimately concluded that these cash payments to state police troopers were not to be excluded from gross income, but would to be includable in that sense.

If there are no further questions —

Harry A. Blackmun:

Yes, I have one Mr. Smith, what is the Governments position with respect to Section 162 does it have any bearing on this case at all?

Stuart A. Smith:

It does not have any bearing on this case Mr. Justice Blackmun, it has more bearing in the next case, but let me simply say for purposes of this case, Section 162 dropped out of this case by the time, the tax — after the Tax Court because the Tax Court had held that part of these cash payments to respondent Kowalski turned out to be deductible by him because for some of the time he was away from home overnight and to that extent under the Court?s Correll decision the Tax Court afforded him a Section 162 deduction and we have not appealed that aspect of the decision to the Court of Appeals and it is accordingly not before the Court.

Harry A. Blackmun:

Do you think your opponent can rely on 162 in any respect?

Stuart A. Smith:

I do not think so.

Harry A. Blackmun:

Because?

Stuart A. Smith:

It does not seem to me that we are talking about what is left in the case is non- overnight meals and non-overnight meals are not deductible under the Court?s Correll decision which approved the Commissioner?s overnight rule.

Mr. Smith, I gathered from your answer to Justice Blackmuns question about the treatment of military meals and little payments, that kind but there is no expressed statutory authority for treating them differently from state troopers?

You have referred to the Court of Claims, Treasury Regulations and to a committee report, but there is expressed statutory position?

Stuart A. Smith:

Yes, there is.

I alluded to it briefly.

It is on page 19 of our brief, 37 U.S.C.

101 (25) defines regular military compensation as including the federal tax advantages accruing to the aforementioned allowances because they are not subject to federal income tax, Congress — to the extent that Congress has addressed the problem it confirmed what was the general understanding of the courts and the pertinent administrative agency that these amounts — subsistence allowances for the military were not taxable, and as I suppose in setting military compensation, Congress takes that federal tax advantage into account.

And I suppose that statute on uniform personnel, you are bound to read as limited federal —

Stuart A. Smith:

Absolutely.

Personnel.

Stuart A. Smith:

Thank you.

Warren E. Burger:

Mr. Cordes.

Carl B. Cordes:

Mr. Chief Justice and May it please the Court.

May I first say you that my name is pronounced Cordes sir.

Warren E. Burger:

Of course, but you were not given that phonetic A to the.

Carl B. Cordes:

Before I start my main argument I would like to correct two factual problems that I have with Mr. Smiths statement.

In response to a question from Mr. Justice Marshall, Mr. Smith stated that these troopers work an eight hour a day and have a lunch break, that is not the case with respect to the New Jersey State Troopers.

In 1970 they slept in barracks for much of the year that they were on duty, not under all assignments, but on. — Kowalski himself spent eight months of the 12, in Barracks.

Second thing I would like to say that Mr. Smith?s presentation is with respect to the initiation of withholding.

Is the Barracks point in this case?

Carl B. Cordes:

Yes, sir it is.

The —

And whether or not that lodging his income is not in this case?

Carl B. Cordes:

No that is not.

That is not an issue in the case, no.

Mr. Smith stated that the withholding began in 1970 that is correct.

The State of New Jersey started withholding on the troopers meal allowances in response to pressure from the Internal Revenue Service which have been going on by a correspondence over a period of several years?

Carl B. Cordes:

The petitioner?s argument basically comes down to the point that the meal allowance is income because there is no statutory exclusion and in order to understand how this case fits within the long history of exceptions from gross income, several crucial facts must be emphasized.

New Jersey State Police has organized long military lines and it has unlimited statewide jurisdiction for all police functions, it is not merely a highway patrol.

For more than 25 years, prior to July 01, 1949, the State of New Jersey fed its troopers at meal stations located throughout the state at the expense of the state.

By 1949 the state had found that the meal station system was no longer acceptable because it took the troopers away from their police duties for too much time, therefore in 1949, the state abandoned the meal station system and instituted the meal allowance system in issue in this case.

The meal allowance system was instituted by the state for the benefit of the state and meal allowance system has worked well for the state, not only has it provided the state and the public with better police protection, but it also has been proven less expensive than the meal station system.

Warren E. Burger:

So, do you say that adds up to the convenience of the state?

Carl B. Cordes:

Yes, Mr. Chief Justice, and just as the states furnishing of meals was not intended to represent additional compensation, the meal allowance as the Tax Court found is Not intended to represent additional compensation.

The states accounting for salaries is strictly separated from its accounting for meal allowances and the two funds are never mingled.

Moreover, just —

John Paul Stevens:

And your first point that the substitution of the meal allowance for the meal station system was more convenient for the state in the prior system, but that is enough to satisfy the test of convenience for the state.

Does that mean anytime you have very inefficient system and you have changed to something better that that would satisfy the test?

Carl B. Cordes:

It seems to me Mr. Justice Stevens that if you have a system that itself satisfies the test and you switched —

John Paul Stevens:

But by the definition, your system did not satisfy the test because you found it inconvenient?

Carl B. Cordes:

It satisfied the test in the beginning.

The state had this system going for — for the 1929.

John Paul Stevens:

But at the time of the change it apparently did not?

At the time, one day before you made the change it was obviously inconvenient to the state?

Carl B. Cordes:

It was not inconvenient Mr. Justice, it is less convenient.

Well, then the test is more convenient than the predecessor system?

Carl B. Cordes:

Which was also convenient.

Okay.

Warren E. Burger:

Well, the ultimate objective was to keep these men on the job, 60 minutes, out of every hour at all times when they were on duty is that not so?

Carl B. Cordes:

That is so.

Warren E. Burger:

And your position is that either of them would satisfy the statute?

Carl B. Cordes:

Definitely either of them would satisfy the statute.

Which statute 61 or 119?

Carl B. Cordes:

61.

Would not be within 61?

Carl B. Cordes:

Would not be within 61.

Neither one would be and you are not relying at the moment at all on 119?

Carl B. Cordes:

Correct.

Mr. Cordes, as I understand the SG’s position, it is quite immaterial whether the meals are being furnished for the convenience of the state or that.

The issue deals with as I understand it quite simply to rather than that they were paid in cash or while the meals were furnished in kind?

That is for 119, but your —

Carl B. Cordes:

That is for 119.

You said, Solicitor General to make that broad generalization.

Now, 119 is quite explicit in that respect.

Now, the Saunders case reached a different result.

It says that it was immaterial rather they were paid in cash or were provided in kind.

Is that the only case that reached that conclusion, best only for Section 61 before 119 was enacted?

Carl B. Cordes:

Yes, it is the only case that reached that conclusion with respect to state police trooper.

And cash payment?

Carl B. Cordes:

Cash payment, there was only one other case, involving a state police trooper — a cash payment to a state police trooper, prior to the 54 Code and that was the Hyslope case which was decided by the Tax Court in very brief opinion and never appealed beyond that point.

The Jones case to which the SG referred held that cash payments in commutation of meals and quarters to an army officer were excluded under the prior version of Section 61, and in that connection the fact that a payment is made in cash rather than kind should not be crucial for federal income tax purposes the Internal Revenue Code or the tax law rather provides an exclusion from gross income for a number of different types of cash payments without any specific statutory exclusion in the Code.

The meal allowances to the armed services is authorized for tax purposes only by Reg. Section 1.61-2 (b), supper money paid to employees who work overtime is excluded from gross income by a ruling that was issued by the Internal Revenue Bureau in 1920 and has not been modified since.

Social security benefits or excluded from gross income without any specific statutory section.

Welfare benefits or excluded from gross income without any specific statutory section and unemployment compensation itself.

It is excluded from gross income without any specific statutory section.

Some of those exclusions from gross income are the result of Court decisions, are they not?

Carl B. Cordes:

They are as —

I mean, this was not a voluntary act that raised on the part of the Internal Revenue Service?

Carl B. Cordes:

That is correct and as was the case with the military tax, and that was not to originate with the Court?s decision.

The state provides the same — the troopers with the same meal allowance exactly the same allowance, every trooper gets the same regardless of his length of service and regardless of his salaries, their salaries do increase with length of service.

And regardless of whether they eat or not?

Carl B. Cordes:

And regardless of whether he eats or not; however, we have a stipulation in this case and a finding by the Tax Court that the tax payer spent at least the amount of his meal allowance for meals while in uniform on active duty.

Thurgood Marshall:

Well, do you also have a stipulation and said not two people eat exact amount of food?

Carl B. Cordes:

I do not think we need a stipulation on that.

The meal allowance is not calculated to provide reimbursement for any specific number of meals, but it is rather an averaging device appropriate to the policy of the State of New Jersey, of rotating its troopers among various assignments to give each trooper a broad range of experience.

Now, is it true as it is not the lieutenants receive larger meal allowance than troopers and captains receive a larger meal allowance than lieutenants?

Carl B. Cordes:

That is true.

And major is a larger one than captains?

Carl B. Cordes:

That is true.

And the superintendent, the largest of all?

Carl B. Cordes:

That is true.

And no claim that they have different appetites as a class, is it?

Carl B. Cordes:

No claim that they have different appetites; however, I have no doubt in my mind that meal allowances in the military services also increase with the rank and appropriately the nature of the duties of higher officers may well be such as to requirement to eat more expensive places than the troopers have to eat in and the higher officers also get a higher uniform allowance because their uniform is more elaborate.

Well, now wait a minute, the superintendent is driven by a trooper.

Is he not?

Carl B. Cordes:

Most of these– I would assume so.

Thurgood Marshall:

What I mean, well, they both stop and eat lunch, why did the superintendent get more, could not the trooper eat at the same place he eats and he eats the same food he eats?

Carl B. Cordes:

May I say Mr. Justice it is not crucial to my case that the meal allowances that are paid to the superintendents and the officers are excluded from gross income.

Thurgood Marshall:

I think involved in your case, it is a fact that for some reason which uptil now had not been explained to on merit not being explained at least to me.

Thurgood Marshall:

A superintendent, sitting behind a desk , he is more fool than a trooper running up and down the rule.

Carl B. Cordes:

I can only ascribe it to custom justice in the military.

Thurgood Marshall:

Well, I — these may not in the — that somebody had never been near the military?

Carl B. Cordes:

What I am saying that this is a military type organization and it is very similarly patterned to the military, as you can tell from the titles or the ranks themselves and they are following military practice, they probably, naturally assume that officers get can more than the — .

Thurgood Marshall:

May be we should adopt that in the Court?

Carl B. Cordes:

The meal allowances for meals troopers are required to eat while they on active duty, they are on active duty when they are in uniform performing their official duties.

They are on active duty in uniform when they eat the meals for which the meal allowance is paid.

They must obtain permission to eat and their meals are frequently interrupted by the demands of their duties and Mr. Chief Justice, they carry radios on their persons which enables them to be summoned by headquarters when they are eating their meal.

I do not have to go out to the car to be at the radio.

Mr. Cordes supposing you had all the same regulations about what they had to do during the lunch hour – carry a radio on where they and all the rest and they did not get a meal allowance, but instead they were paid an extra $15 per day whatever might be, but these had little higher salary.

How would one system serve for the convenience of employer more than the other?

Carl B. Cordes:

I think the reason that the meal allowance is paid is that they are on duty and expected to be functioning when they are eating their meals, they eat on the run, they do not have a lunch hour —

May I suggest that is not responsive to my question?

How does one system serve the convenience of the employer more than the other, the two alternatives I gave you.

Carl B. Cordes:

It does not, but this raises a question that the Government has raised they say, it may well be convenient for the troopers to have their meals under these circumstances, but it is not convenient for the state to have to pay for the meals, if that is the case it seems to me there is no convenience of the employer doctrine at all, even within the context of Section 119 because for any employer, it is more convenient to have something done in the way he wants it, and not have to pay for it.

Warren E. Burger:

Well, does is not come back to what Mr. Stuart himself suggested, Mr. Smith suggested that sometimes calling a thing by a name makes it one way or the other under tax law as distinguished under the law generally?

Carl B. Cordes:

That does happen sometimes, but not in this case I do not — what it is called I do not want to get it —

Warren E. Burger:

They did not call a pay here.

Carl B. Cordes:

They did not call a pay they called it a meal allowance because it replaced a system of providing meals in kind.

Warren E. Burger:

Which the Government as I understand concedes, was not taxable?

Carl B. Cordes:

I would assume so.

This is subject to a collective bargaining and has been between the troopers union and the state?

Carl B. Cordes:

It has, the troopers union was organized in 1968 and the meal allowance system was instituted in 1949 and the mere fact that it is a part of the collective bargaining negotiations, I do not think affects the outcome.

No, it would not.

Carl B. Cordes:

Because it is a —

I did not —

I just asked a question whether or not it is?

Carl B. Cordes:

Certainly, but like other conditions of employment.

And I suppose it is higher now than it was in 1970?

Carl B. Cordes:

It is.

Carl B. Cordes:

It is –as a result of inflation —

As a result of a collective bargaining.

Carl B. Cordes:

And collective bargaining too –.

And the economy, and the salaries are higher now too.

Almost immediately after the state instituted the meal allowance system in 1949, the Revenue Service challenged it in the Saunders case, 1950 case where the facts were — the words of the Tax Court in this case not substantially different from those in this case.

Saunders excluded the meal allowance under the predecessor of Section 61 under the convenience of the employer doctrine and this has been the law for the New Jersey state troopers meal allowances always under the meal allowance, under the meal station system, they did not pay tax on it, under the meal allowance system they have never paid tax on it.

As a result of Saunders until this case has been brought again by the Government.

One point, I would like to emphasize in reaching your decision is the equity argument, that is equal treatment among tax payers who are similarly situated, I myself find it very difficult to draw a distinction between military officers and state police officers who were working in a State Police Department that functions under this system with Barracks and long hours, uniforms not being a mere highway patrol, if there is a convenience of the employer doctrine as there must be, if the military pay exclude, if military meal allowance exclusion is to be a valid regulation, Judge Sterrett here in this — in the Tax Court found that it is difficult to conceive of the situation where an employee must clearly take his meals for the convenience of the employer as is the case with New Jersey state troopers.

But if Congress has recognized the meal allowance and so forth for military by separate statute, does not that remove some of the necessity for bringing it under the convenience of the employer doctrine?

Carl B. Cordes:

Mr. Justice, I think, in the statute that Mr. Smith cited I think all that Congress has done is to recognize that there is a well-recognized —

I have checked that exclusion —

I came out of the armed services committee rather than what is in the —

Carl B. Cordes:

Right that is not a tax statute that statute just says, look, the revenue boys have decided this and so that is the way we will treat this.

It is not part of the tax law?

It is still a congressional recognition?

Carl B. Cordes:

It is a congressional recognition, but —

Suppose if you could — revenue people could go on and tax in a military bill, Instead, they will not be paid?

Carl B. Cordes:

I think they would be out of their minds if they try to do it at this point yeah.

The statutory definition of income itself is not particularly helpful.

The Section 61 of the Code simply says gross income means all income from whatever source derived, so it is defining itself within itself and is a definition therefore if a language is defective and therefore these glosses have grown up on the statute over a period of time judicially, administratively and of course, legislatively.

Convenience of the employer doctrine is one of them.

It is not the only one, it is not the most well known one, but it is there, it has been there for a long time and counsel or the Government is saying that if you have a cash payment you cannot possibly come under the convenience of the employer doctrine and to reach that finding, you have to decide that all cash payments are income and it is clear that under our tax system all cash payments are not income.

Mr. Cordes, I take it you are placing no reliance on 162?

Carl B. Cordes:

Let me give you the context of 162 in this case, in the Tax Court, we briefed the 162 question, we lost the case in a Tax Court on a very close decision on appeal we briefed all three question Section 61, Section 119 and Section 162.

The Court of Appeals in reversing the Tax Court on the basis of Saunders and Judge Sterrett?s dissenting opinion under Section 61 did not in my opinion at least, reached the 119 question and did not at all reach the 162 question.

And 162 provides what?

Carl B. Cordes:

162 provides a deduction whereas the other two provide an exclusion —

Alright.

Carl B. Cordes:

From income, 162 provides is a deduction.

My question is are you relying on it?

Carl B. Cordes:

To keep my judgment below I certainly would rely on it.

Despite Correll —

Carl B. Cordes:

I must say to rely on it, limitations would have to be put on the scope of the Correll case.

Warren E. Burger:

So you do not agree with Mr. Smith that is just has faded the fact of this case?

Carl B. Cordes:

I do not agree with Mr. Smith that it is faded because although the Government — what the Tax Court did, was to allow a deduction for two thirds of the meal allowance, because he was away from home two thirds of the time.

The Government did not appeal from the allowance of the two thirds deduction, we did appeal from the disallowance of the one third deduction.

Mr. Chief Justice, unless there are further questions I have completed my presentation.

Warren E. Burger:

Very well, thank you.

Now, Mr. Smith do you have anything further?

Stuart A. Smith:

I just have a couple of points Mr. Chief Justice.

The respondent has suggested that there is this non-statutory convenience of the employer test, which somehow suffuses Section 61 of the Code and enables him to exclude these cash payments from gross income, but even assuming as we point out in our brief that there is such a test and we do not think that there — we think that that test has now been channeled exclusively under Section 119, but even assuming that he is right that there is such a test, under that test he has to meet two qualifications by his own analysis.

He has to demonstrate that these amounts were non-compensatory and he has to demonstrate that the cash payments were for the convenience of the employer.

We submit that he would meet none of those tests with respect to Section — with respect to his own analysis.

First of all, with respect to whether the amounts were compensatory, he relies on a finding of the Tax Court that the meal allowance was not intended to represent an additional compensation, but as I pointed out in my opening argument that is a slander read.

That finding of the tax, does not say that there would not compensation, it simply said what the state hoped that they would be and this Court has said in Commissioner v. Duberstein that what the parties hope, labels put on things, but they hope the tax effect will be is irrelevant for purposes of what the objective circumstances are and in fact later on in the Tax Court?s opinion on page 13 (a) they say, even though we have found that the meal allowance was not intended as additional compensation, it was obviously compensatory to a trooper to the extent that it paid for food which he otherwise would have had to pay for some other source.

We conclude under Section 61 that except as otherwise provided in the income tax law, the meal allowance received by petitioner is includable in his gross income.

Now, with respect to the convenience of the employer, we submit that cash payments do not serve the convenience of the employer because what the respondent has done is to confuse the issue by attempting to talk about all these meal restrictions that is you have to eat within the patrol area, you have to eat within a certain area, but the point is he has not explained why those restrictions have anything to do with the convenience of the employer, all they have done, in other words if as Mr. Justice Stevens has suggested they simply paid cash as they did and did not call it a meal allowance.

Warren E. Burger:

Does it not serve, the convenience of the employer that is the State of New Jersey. They have this man on duty and on call for 60 minutes —

Stuart A. Smith:

Mr. Chief Justice —

Warren E. Burger:

There is no lunch hour. .

Stuart A. Smith:

The meal restrictions serve for the convenience of the employer, but the fact that the State of New Jersey paid cash does not serve for the convenience of the employer, we submit that that is the critical question.

Warren E. Burger:

I will go back to my hypothetical, I put to you.

If they gave him the box lunch before he left the Barracks then you say that that is not taxable?

Stuart A. Smith:

That would qualify under Section 119 as meals in kind.

That is the distinction we take —

When we are in the premises of the employer, then would it?

Stuart A. Smith:

Well, I am assuming that I quickly, implicitly assume that the patrol car would be —

That he eats in the car?

Stuart A. Smith:

That he eats in the car.

Warren E. Burger:

Thank you gentleman.

Warren E. Burger:

The case is submitted.