Rudolph v. United States

PETITIONER:Rudolph
RESPONDENT:United States
LOCATION:Labor Union Protest

DOCKET NO.: 396
DECIDED BY: Warren Court (1962)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 370 US 269 (1962)
ARGUED: Apr 03, 1962
DECIDED: Jun 18, 1962

Facts of the case

Question

Audio Transcription for Oral Argument – April 03, 1962 in Rudolph v. United States

Earl Warren:

Number 396, C.J.D. Rudolph, et al., Petitioner, versus United States.

Mr. Freling.

Richard A. Freling:

Mr. Chief Justice, may it please the Court.

This case arises out of a suit for refund of federal income taxes.

Petitioner C.J.D. Rudolph works in Dallas as an ordinary life insurance agent for Southland Life Insurance Company, a major insurance company whose offices are also in Dallas.

In 1956, he and his wife attended a convention of Southland agents and officers in New York.

And their transportation, accommodations and their meals were arranged and paid for by Southland.

The basic issues involved in this case are first, whether or not the amount of convention expense allocable to petitioners which has been stipulated by the parties to be $560 is to be includable in their gross income and if that question be answered in the affirmative whether petitioners are to be allowed an ordinary and necessary business expense deduction for an equivalent amount.

Respondent contends that the convention trip was a bonus to petitioners and therefore his income and that their expenses were primarily personal and therefore not deductible.

We contend that petitioners were taken to New York by Southland for business reasons without regard to compensation and that the cost attributable to their trip are not income to them.

Alternatively, we contend that if they are charged with income, the expenditures thereby imputed to them were incurred for ordinary and necessary business reasons and are therefore deductible.

Once every year and a half for the past 20 years or more, Southland has sponsored a convention of the type involved here to which it invites certain of its agents and their wives and the top officers of the company and their wives.

Potter Stewart:

You say this is not annual.

It’s every year and a half?

Richard A. Freling:

That’s correct, sir.

Once every 18 months.

Potter Stewart:

Two every three years or so?

Richard A. Freling:

Yes, Mr. Justice Stewart.

The agents invited to attend are selected on the basis of their having sold or prescribed minimum amount of insurance, which the company believes as the most appropriate standard for determining who has an aptitude for the business and who had benefit from the convention.

When an agent is invited to attend, both the agent and the company believes that it is part of his responsibility and a part of his job to do so.

If he fails to attend for any reason, he receives nothing in lieu of the convention.

The 1956 convention activities lasted approximately one week of which about four days were spent traveling on trains, chartered trains to and from New York City.

They spent about two days in New York, Friday and Saturday.

Friday morning was devoted to a formal program of speeches by the top officers of Southland to a panel discussion of agents and several lecturers on the agency program.

John M. Harlan II:

(Inaudible)

Richard A. Freling:

Yes, sir.

John M. Harlan II:

(Inaudible)

Richard A. Freling:

No, Mr. Justice Harlan, they do not.

John M. Harlan II:

(Inaudible)

Richard A. Freling:

They do not get a check for anything.

Richard A. Freling:

All the — except to a very limited extent.

Southland arranged all the transportation, the hotel accommodation, rooms, meals and paid the expenses directly.

No money was given to petitioners themselves except $30 which was given to every couple to take care of unplanned meals in New York.

Other than that all the expenses were paid directly by Southland.

John M. Harlan II:

(Inaudible)

Richard A. Freling:

That is correct —

John M. Harlan II:

(Inaudible)

Richard A. Freling:

Mr. Justice —

Yes, sir.

William J. Brennan, Jr.:

Well, how was the amount identified?

Richard A. Freling:

Well, the record indicates that the total convention cost as computed by Southland accountants was figured and then just divided, I assume, by the number of people in attendance.

William J. Brennan, Jr.:

And was each one in attendance apprised to what his portion shared to (Voice Overlap)?

Richard A. Freling:

No, sir, he was not.

William J. Brennan, Jr.:

Well, how did this issue get up this way?

Richard A. Freling:

Well, this was — when the Government raised the issue as to what was taxable to the petitioners and an investigation was made, it was determined that this would be the appropriate amount that this was the total cost to the convention divided by the number of people in there.

William J. Brennan, Jr.:

And the taxpayer has not included this?

Richard A. Freling:

No, sir, he had not included it in his —

William J. Brennan, Jr.:

And about the deficiency assessment?

Richard A. Freling:

A deficiency was assessed.

Felix Frankfurter:

The total was added to his appropriate need to be recorded, to be —

Richard A. Freling:

Yes —

Felix Frankfurter:

— a filed income?

Richard A. Freling:

Mr. Justice Frankfurter.

The total amount that was allocable to the petitioners as computed by Southland.

Felix Frankfurter:

Was that an issue of income?

Richard A. Freling:

Yes, sir.

William J. Brennan, Jr.:

And now, this, as I understand it, is the proportion of share, the total expense, transportation, room, meals —

Richard A. Freling:

That’s correct Mr. Justice —

William J. Brennan, Jr.:

— all of the rest.

Richard A. Freling:

— Brennan.

Felix Frankfurter:

And you say —

Richard A. Freling:

Of it —

Felix Frankfurter:

— proportionate, what does that mean?

Richard A. Freling:

Well, I assume, it’s — I would use the term “allocable” that the total cost were divided by the number of people in attendance.

Felix Frankfurter:

Oh, oh, yes.

I get it.

Hugo L. Black:

How do you say they qualified to attend the —

Richard A. Freling:

They had to meet a standard of having sold a prescribed minimum amount of insurance in the preceding year.

And they were then eligible to be asked by the company and the company would invite them.

Felix Frankfurter:

But when you get it around to it just both you and Mr. Jones would point out the difference of — the analogy between something that happened to me before I came down and dispose namely, once a year there’s a meeting of the Association of American Law Students, each law students sends the delegation of law professors to meetings and that was — the expenditure was covered by the law — this was (Inaudible) — I don’t know what happens now, was covered by the law schools, somebody, I think I’m not sure; my recollection is poor.

But the — certainly the traveling expenses were centrally taken cared of.

Now, I cannot even tell you what was done or what should be done.

I just want you to keep that in mind (Voice Overlap) —

Richard A. Freling:

Well, Mr. Justice Frankfurter, I hope to touch on that point expressly by an analogy.

It is our position that the cost of your trip shouldn’t constitute income to you in the first instance.But if by some reason they’re caught within the broad web of gross income and you should be allowed an ordinary and necessary business expense deduction.

Felix Frankfurter:

But the Government’s position is that it is arguable that in going to those Christmas time meetings, the cost of going there, the railroad expenses in those days, by hotel rooms, etcetera was part of my income.

Richard A. Freling:

Well, I cannot speak for —

Felix Frankfurter:

No, no.

I don’t mean that case —

Richard A. Freling:

— Government counsel, Mr. Justice.

Felix Frankfurter:

— but that’s my —

Richard A. Freling:

I would say that the situation is analogous.

Yes, sir.

Felix Frankfurter:

Alright.

Richard A. Freling:

After the formal business program, everyone attended a luncheon at which Dr. Norman Vincent Peale gave an address on the subject of success through right speaking.

And the remainder of the time in New York was devoted to a group, a sightseeing tour, a breakfast and fashion show for the wives of the agents and a planned dinner at the Copacabana.

Southland also provided tickets for a special Christmas show at Radio City Music Hall and other periods were designated as free time.

In the suit for refund, the District Court for the Northern District of Texas sitting without a jury has sustained respondent.

And the Fifth Circuit affirmed per curium on the basis of its recent prior decision in Patterson versus Thomas with Judge Brown adding his dissent in this case to his prior dissent in the Thomas case.

Now, because the trial court held that the convention trip was in the nature of a bonus and primarily a vacation to petitioners, respondent would quickly reduce the issues in this case to simply whether or not the fact findings of the District Court are clearly erroneous.

Richard A. Freling:

We submit that the case is not so simple.

In our opinion, the case involves important and compelling questions regarding the very basic concepts of gross income and ordinary and necessary business expense.

We believe there is a need for clarification and refinement of the broad principles previously established by this Court.

As those principles are now applied to two phenomena of — on modern business practice.

William J. Brennan, Jr.:

May I interrupt you?

Richard A. Freling:

Yes, sir.

William J. Brennan, Jr.:

Is your position one that it’s not includable in gross income or if it is that it’s deductible also as an expense or it washes out?

Richard A. Freling:

Yes, Mr. Justice Brennan that is.

We believe that that these principles now have to be refined as they are applied to two things which occur everyday on our business community.

First, the company convention and second the compulsion or the coercion by employers upon their employees that the employees participate and what the employer believes to be a legitimate and necessary business activity.

If we’re correct in interpreting this need, then the responsibilities of the trial court in this case should be restricted to their narrowest sphere not expanded as the respondent would do to the utmost which might in some other circumstances be permissible.

With the law governing a tax controversy is undefined and particularly where the principles of law involved are far-reaching.

And the trial court has drawn inferences from the undisputed evidentiary facts or has decided ultimate facts which are dispositive of the case.

Then we submit that this Court or indeed any appellate court shouldn’t hesitate to exercise its broadest powers of review because the danger is great that the trial judge may have approached his job without knowledge or consideration of the applicable law or even worst that his understanding of the applicable law may have been erroneous.

And that’s exactly what happened in this case we believe.

We believe the findings of fact are clearly erroneous.

But we also believe that such findings were predicated on an error of law resulting either from mistake in interpreting the governing legal principles or the failure to recognize that those legal principles even existed.

In either event, we submit that this Court should not now restrict its reviews simply to determine whether or not the fact findings of the District Court are clearly erroneous.

In our opinion, the error of the District Court is apparent since he indicated that he wasn’t concerned with the purpose of Southland in holding the convention.

And if it please the Court, I should like to quote very briefly from the record, on page 79 in the District Court’s opinion towards the bottom of the page he states, “It is the purpose of the convention to the taxpayers which governs our action, not the purpose of the insurance company in holding them.

Yet, this would seem to be the single most important determination in the case.”

And as respondent apparently agrees with us in his brief, and if my indulge the Court once more to quote from respondent’s brief at page 11 he states, “Both parties are — agreed that the relevant ultimate facts upon which the legal questions in this case turned are (a) the reasons why the company sponsored and paid for the trip, and (b) the reasons why petitioner and his wife took the trip offered by the company, and it slightly regard to the (b) part of the sentence.

He suggest elsewhere in his brief at page 28 that the purpose of Southland in holding a convention is vital and important in determining the purpose of the petitioners in attending.

Potter Stewart:

Aren’t you talking about — which fraction of this case you’re talking about?

I just — I think this — the opinion on page 79.

Richard A. Freling:

Yes.

Potter Stewart:

If you’re talking about the deductibility of these expenses by the taxpayers that is the purpose of the taxpayers to which you look, is it not?

Richard A. Freling:

Well, yes, Mr. Justice Stewart.

Potter Stewart:

Rather than the purpose of the company?

Richard A. Freling:

That is correct.

Richard A. Freling:

But the purpose, the subjective purpose of the taxpayers in attending the convention is gleaned largely from the purpose of the company, their employer in holding a convention and requiring them to attend.

Potter Stewart:

Well, it would seem to me, and you tell me if I’m wrong and if so why, that when you’re talking about whether or not this is income to the taxpayer, then the purpose of the company becomes a dominant relevance.

When you’re talking about whether this is deductible, if income whether it’s deductible by the taxpayers as a business expense.

Then the purpose of the taxpayer in making the trip becomes a dominant relevance, is that correct?

Richard A. Freling:

Mr. Justice Stewart, that’s correct that the purpose of the taxpayers on the expense side of the case is the ultimate question.

But in arriving in that determination, it’s not possible to separate the business purpose of the company from the business purpose of the taxpayers because —

Potter Stewart:

No —

Richard A. Freling:

— this wasn’t an independent pleasure joint which they took of their own volition.

This was something that they did —

Potter Stewart:

Well, that —

Richard A. Freling:

— in response to —

Potter Stewart:

— that’s kind of begging the question here.

That’s the question, isn’t it?

It’s the purpose of the taxpayer though that — which is relevant —

Richard A. Freling:

Yes.

Potter Stewart:

— in determining whether or not this is a —

Richard A. Freling:

Yes.

Potter Stewart:

— business expense to the taxpayers, isn’t that true?

In other words, if an insurance salesman takes me to lunch, it’s his purpose in taking me to lunch it’s important in determining whether or not that lunch is deductible from his income for tax — federal tax purposes.

Richard A. Freling:

Yes, Your Honor.

Potter Stewart:

Not my purpose in going with him?

Richard A. Freling:

Yes, Your Honor.

Potter Stewart:

He takes me to lunch to sell me insurance then it’s perhaps deductible.

Richard A. Freling:

I agree, Your Honor.

But on the other hand, if your employer required you to do something to go lunch with him and you went and you were charged with income by virtue of his buying your lunch then the reason why you attended is important in determining — or is the ultimate issue in determining whether you can deduct the cost of that lunch but his purpose in asking you is also relevant.

Potter Stewart:

Aren’t you — the deductibility of —

Richard A. Freling:

Yes, yes, Your Honor.

Potter Stewart:

— the lunch and the bill from his income.

Richard A. Freling:

Well, also if you were charged with income by virtue of —

Potter Stewart:

Now, are you getting in the third — that’s a third, that’s a question not involved here I take it to be.

Richard A. Freling:

Well —

Potter Stewart:

He’s not my employer.

Richard A. Freling:

Yes.

Well in our opinion, because of the error of the Court in not considering the business purpose of Southland in holding the convention —

Felix Frankfurter:

May I ask you?

It’s not clear to me that the relation of these convent — what are does this call, conventions?

Richard A. Freling:

Yes, yes, Mr. Justice Frankfurter.

Felix Frankfurter:

Is the relation of the expenditure of the convention purposes to the employer unrelated with the problem before us?

If the relation — are we unconcerned with the bearing of the money outlay by the insurance company were these — were the physiques by their agents at this convention, is that — are we unconcerned with that?

Richard A. Freling:

No, Mr. Justice Frankfurter.

I think we’re very vitally concerned with it.

I think that the purpose of Southland, the company in spending time and money and effort in planning and paying for and holding these conventions goes to the very heart of the case because it demonstrates both the business purpose in Southland in holding the conventions and the reasons why they required the agents to attend and why the agents responded and attended.

I think it is —

Felix Frankfurter:

But then —

Richard A. Freling:

— is directly relevant.

Felix Frankfurter:

— in the case of an employer, of a potential insured, sending an employee of his to talk with a fire insurance agent and you’re going up — to go with him at lunch for which the agent pays, the relation of that to his employers’ activity is relevant, isn’t it?

Richard A. Freling:

Very definite sir, extremely so.

If I may jump ahead in my own timetable of argument, I hypothesize for a moment.

Suppose that the — an employee of a Dallas based company is required by his employer to travel to New York City to close a long term loan with the Wall Street financial institution and that he returns immediately when his loan is consummated.

And suppose further that the employer arranges accommodations, his transportations and his meals while he was there and paid for them directly.

I don’t think anyone would seriously contend that the cost of that trip should be taxable to the employee as income.

But the appropriate inquiry is why?

Well, we — I think that the reason, the answer is found in precedent and practicalities.

The dominant business purpose of his employer was the reason why he took the trip in the first place.

The trip wasn’t intended as compensation.

And his only gain was the subjective pleasure which he may or may not have experienced by virtue of his position.

Felix Frankfurter:

But there’s another gain, he stayed at home, he would’ve had to pay for his own meal and board.

Richard A. Freling:

I think that’s true, Mr. Justice Frankfurter.

But I think that answer was resolved in 1921 when they enacted the statute and permitted the deductibility of all meals and lodging away from home.

So our position on the income side of the case is that there are limited exceptions to gross income other than those specifically enumerated in the statute.

Richard A. Freling:

And we state this board recognizing full well the perva — the pervasive characters brought to gross income by this Court.

For it seems to us that those very decisions which established that broad character also recognized intrinsically that not every things received by a tax gain, not every gain in a classical economic sense constitutes income too.

We’re not now asking the Court to restrict its broad definition of income.

To the contrary, we’re asking only that the Court expressly recognize the non-taxability of something that lies beyond that definition, which we don’t think has ever been precisely defined or delineate.

Felix Frankfurter:

Is there a statutory definition of gross income?

Richard A. Freling:

No, there’s not.

Gross income is just gross income.

Felix Frankfurter:

Gross income is whatever gross income is —

Richard A. Freling:

Yes, sir.

Felix Frankfurter:

— need to be.

Richard A. Freling:

Now, we believe that this rational and the law of governing the hypothesis which I posed is entirely consistent with the Court’s decision in Commissioner versus Smith that compensation in whatever form constitutes income.

And we think it’s also consistent with Commissioner versus Glenshaw Glass Company wherein the Court noted that the damages received for fraud or any trust violations resulted in undeniable accessions to wealth clearly realized and over which the tax per head complete dominion.

That the trip taken by the employee in my hypothesis wasn’t intended his compensation nor did he clearly realize any benefit, any accession to wealth over which he had dominion.

He’s actions were governed and controlled by the dominant business purpose of his employer.

We believe that petitioner stand in basically the same shoes as the employee in my hypothesis.

The only distinction being that they were personally involved in the business purpose of a company.

Thus, an effort must be made to isolate that business purpose from a simple intent to compensate.

But once it can be established as we believe the uncontroverted testimony as established here.

That the dominant motive and reason for the company sponsoring the convention was its own business purpose.

That the convention was germane to that purpose based upon long standing interest, industry-wide experience and that there was no intent to compensate petitioners.

And it seems clear to us that they received nothing which it constituted income, too.

Our position on the expense side of the case is similar too because we believe that the same basic facts that support an exclusion from gross income also when turned around confirmed the presence of ordinary and necessary business expenses.

The trial court ignored Southland’s business purpose in holding the convention.

It ignored the compulsion upon the petitioners to attend.

It ignored the relationship between the convention and petitioners own business.

Instead, the court apparently looked only to the outward or extrinsic appearances of the convention in holding contrary to every bit of the oral testimony that the convention was in the nature of a vacation.

In the phase of what would seem the obvious, an overwhelming relationship between the convention and the agent, this would be exceedingly difficult to understand except for the trial judge’s own admission that he wasn’t concerned with the business purpose of Southland in holding the convention.

Now, respondent attempts to justify this fact conclusion on the basis of two erroneous legal premises.

First, he compares the times spent at the formal program on Friday morning with the total period covered by the convention as if this were conclusive of a non-business purpose.

The error in this approach is two fold.

Richard A. Freling:

It assumes first that informal activity at a convention cannot have a business purpose.

But the management of Southland testified that the program was expressly designed to permit the agents and the officers to mix and mingle together in an informal atmosphere and that the exchange of ideas occurring in this manner probably was the most important business benefit of the convention.

Shoptalk at a convention is a part of the business of a convention.

And it need not be conducted in an auditorium to be so.

In the second place, respondent’s comparative analysis treats the travel time to and from New York as being a sterile thing which gain its tax character solely from the activities at the convention site but this couldn’t be further from the facts.

Southland intentionally chartered special trainings on which it required the agents and the officers to travel together so that they would have an opportunity with little else to do to talk about the insurance business.

We believe therefore that the — that the travel itself had an independent business purpose.

If we had the travel time to the formal time of the program, we have four-and-a-half days spent in strictly businesses compared to one-and-a-half days in informal activities which we also think have legitimate business purposes.

So, on the basis of respondent’s own promise is that each expense should be deductible.

His next error is an ignoring the company’s insistence that Rudolph and his wife attend the convention.

We believe it’s legally significant when an employer required that an employee participate in what the employer in good faith believes to be a necessary business activity.

What is the employee to do?

What should any hardheaded business man do except to comply with the request of his employer?

Sure, he couldn’t argue with his employer about whether or not the convention bore a sufficient business relationship to his own business to warrant his attending particularly where this has been an industry-wide practice for 30 years or more.

Felix Frankfurter:

He could suggest that he doesn’t want to go on a joy ride?

Richard A. Freling:

Yes, he certainly could, Mr. Justice Frankfurter.

I don’t know what his employer’s reaction might be.

We believe that when Rudolph accepted the company’s invitation to attend the convention, he was acting in a way that was realistically indispensable to his business.

And I think that the evidence before the Court demonstrated that there was a reasonable business relationship between the convention and Rudolph sold in business as an insurance agent.

If so, his expenses were both ordinary and necessary and directly related to his business.

John M. Harlan II:

Did some of the employees not attending?

Richard A. Freling:

Yes.

John M. Harlan II:

Does the record show?

Richard A. Freling:

Yes.

John M. Harlan II:

How many couples?

Richard A. Freling:

Out of approximately 300 agents, 102 attended the convention Mr. Justice Harlan.

Hugo L. Black:

How many were invited there?

Richard A. Freling:

I think that there were few more who were invited and actually attended.

Hugo L. Black:

That depends largely on the amount of insurance they’ve written the year before?

Richard A. Freling:

Yes, it does.

Richard A. Freling:

There is a standard prescribed that the agent has to meet in order to be eligible to attend.

But I wish to make this point although my time is running short, that every business must have a standard for judging which of its employees are going to be advanced or brought into inner circle or give a special training.

An associate in a law firm might be judged on the clarity of the contracts he writes.

But in — an insurance agent job is selling insurance.

This is the only thing he does and it’s the only method by which the company can judge his performance.

Felix Frankfurter:

But why doesn’t — why doesn’t it, the mode of selection show that it is — becomes of function of reward rather than a compulsion of duty or a manifestation of requirement.

Richard A. Freling:

Well, we think that that —

Felix Frankfurter:

If it’s related to how much insurance you’d written and you therefore say, “You’re a good boy.

You go out to Miami or to Palm Beach.”

Richard A. Freling:

Well, it’s not as simple as that Mr. Justice Frankfurter.

All they wanted to do was to pay a bonus to their agents.

They could just give him the money and tell him to go to Florida.

But they don’t do that.

They plan a convention based upon years of experience with expressed business purposes marked.

And they require the agents to attend.

If the — if it was their desire simply to give a bonus, they certainly wouldn’t require that.

Furthermore, they still had to be invited even though they satisfied the minimum standard of selling insurance.

They still — the record indicates that they still had to be invited by the company.

Third of all, there was no great agent among the agents as to how much insurance they sold.

One may have sold $2,000,000 and another $400,000 and they were still — but they all still received exactly the same thing.

The emphasis, the dominant purpose on — of the company was not to reward or pay a bonus.

Although, certainly that the petitioners may have enjoyed the trip but this wasn’t the basic primary emphasis of the company, it was something else.

It was something much more complex indeed.

It was involved in modern business psychology and practices.

John M. Harlan II:

How many were eligible?

Richard A. Freling:

300.

Felix Frankfurter:

Out of the eligible —

Richard A. Freling:

Eligible to —

John M. Harlan II:

— they happen to receive the invitation or —

Richard A. Freling:

No, I don’t — I don’t know, Mr. Justice —

John M. Harlan II:

What I wanted —

Richard A. Freling:

— Harlan.

John M. Harlan II:

— to find out is how much were eligible and how many actually were invited?

Richard A. Freling:

The record indicates that there were 102 agents eligible in all but 10 or 15 attended the convention.

I have just a few moments and rather than continue, I’d prefer to reserve the remainder my time for rebuttal.

Earl Warren:

You may.

Mr. Jones.

John B. Jones, Jr.:

Mr. Chief Justice, may it please the Court.

Let me make clear at the outset that the Government does not dispute that there are some businesses assemblages which employees can attend and they can receive their reimbursement and there won’t be any tax consequences.

And these business assemblages can take place at a resort spot or a tourist spot can be solely for the employees of one company.

These are not conclusive factors.

But the Government does insist that not every trip which an employer chooses to call a convention is a business trip.

There must be some tests which enable us to determine whether we have a business trip or a pleasure joint.

To take Mr. Justice Frankfurter’s question which he asked that I addressed myself to referring to an annual meeting of presumably law school professors around the nation, if it is found that a meeting for program is conducted at the site of this meeting and if its further found that the law school professor goes to this meeting and participates to a reasonable extent has his discussions with his fellow professors and this is essentially business oriented.

Of course, we make quibble about whether he puts it in income and then deducts his funds or whether he never puts it in income at all.

But the — it is clear that he has no tax consequences.But it is also clear that it would have irrational revenues.

Potter Stewart:

Well there wouldn’t be any income in that case, would there?

John B. Jones, Jr.:

Well I used the word “quibble.”

Potter Stewart:

I mean the ordinary — the ordinary professional meeting a person goes and pays it on his own expense and then deducts him from his (Voice Overlap) —

John B. Jones, Jr.:

Well, I think Mr. Justice Frankfurter suggested that his —

Felix Frankfurter:

(Voice Overlap) —

John B. Jones, Jr.:

— travel fare was paid by somebody else.

Felix Frankfurter:

That’s what I’m talking about.

And most of those who go there do not participate in any formal program and most of it, if I can go on my experience, or to talk since most of it is talk in the corridors and in the bar room.

John B. Jones, Jr.:

Well, certainly —

Tom C. Clark:

But you see wha — what — what happens is that young ones are looking for jobs and the old ones are there to look over the (Voice Overlap) —

John B. Jones, Jr.:

Well, I believe there’s respectful authority that expenses of looking for a job are — do get you in trouble on deduction.

If you’re —

William J. Brennan, Jr.:

Well, Mr. Jones what about the judicial conflicts which Uncle Sam pays us $30 a day in expenses and transportation to go to Atlantic City which is the —

John B. Jones, Jr.:

$30 a day for expenses.

William J. Brennan, Jr.:

$30 a day for expenses plus transportations.

John B. Jones, Jr.:

There is a difference between $30 and expenses.

William J. Brennan, Jr.:

Well —

John B. Jones, Jr.:

Yes.

William J. Brennan, Jr.:

Do you think it’s a technical words that —

John B. Jones, Jr.:

No, I — we would — it would seem to us —

William J. Brennan, Jr.:

Well, I mean what happens there where you often as much as Justice Frankfurter described what happens if law professors —

John B. Jones, Jr.:

But there are some sessions at a judicial conference by and large those who —

William J. Brennan, Jr.:

What’s the agenda?

John B. Jones, Jr.:

Pardon?

If we found a case of a member of the judiciary attending such convention and not attending any of the formal sessions, it might be well to have an inquiry just what he did do at his time.But I would think in the case you’ve posed that you could make a pre —

Felix Frankfurter:

Not really.

You don’t really mean that you could find out to what extent, you’re present inside of a big room or so, that’s even more important thing (Inaudible).

John B. Jones, Jr.:

Well, I’m not saying that the sessions are inclusive.

I would think that it would be incumbent on somebody claiming that this is a business trip to say something about what he actually did at this convention.

Felix Frankfurter:

I conveyed a short for you Mr. Jones if I may suggest that the statute requires attendance.

William J. Brennan, Jr.:

Oh, I don’t know —

Felix Frankfurter:

Judicial contract.

William J. Brennan, Jr.:

Oh, no.

John B. Jones, Jr.:

Well, that — that —

William J. Brennan, Jr.:

Don’t have to go to the (Voice Overlap) —

John B. Jones, Jr.:

That’s not my case.

William J. Brennan, Jr.:

— judicial contract.

John B. Jones, Jr.:

That’s — I don’t think Mr. Justice Brennan —

Felix Frankfurter:

Well, I don’t —

John B. Jones, Jr.:

— wanted to turn on that.

Felix Frankfurter:

Well, I don’t need — I’m not talking about what every Circuit justice by statute is supposed to attend by statute judicial conference of this Circuit, isn’t that true?

(Inaudible)

I think Justice (Inaudible).

John B. Jones, Jr.:

Well —

William J. Brennan, Jr.:

I don’t have to be —

John B. Jones, Jr.:

I think the statutory compulsion —

(Inaudible)

John B. Jones, Jr.:

— outside which is certainly not present here.

Hugo L. Black:

Let me see, it’s not Circuit judges in a party.

John B. Jones, Jr.:

Well —

Hugo L. Black:

Why do you say it’s not — that element is not present here?

John B. Jones, Jr.:

Well —

Hugo L. Black:

I think it was compulsory —

John B. Jones, Jr.:

(Voice Overlap) —

Hugo L. Black:

— for them to attend.

John B. Jones, Jr.:

The statutory compulsion, I was —

Hugo L. Black:

This is what (Inaudible)?

Would there be any difference in the statutory compulsion and the employer-employee compulsion?

John B. Jones, Jr.:

Well, I’d be glad to turn to that point because I think —

Hugo L. Black:

Well, I’m just asking if that was —

John B. Jones, Jr.:

No — yes, sir, but I do believe there would be.

One of the things we would suggest in terms of compulsion is that that is not a magic test.

And the easiest way I know to explain it is to give you the case of a man who’s 48 years old working for the company.

He gets called into the president’s office.

And the president says to him “Bill, you’re 48.

And we want to give your promotion and some new salary”, and he says “Heck, no.”

He says “I like what I’m doing.

I’m having a fine time.

I just don’t want anymore responsibilities.”

And the president says, “Sorry.”

He said, “You know, its company policy, you can’t stay past 50 unless you come into the front office and we’re going to insist you do it.”

And the employee then further says, “Well, I — I’ll come to the front office but I won’t take the money.”

And he says, “No, we can’t have that.

We’ve got to front.

John B. Jones, Jr.:

You’ve got to take the money.

And if you don’t, you’ll lose your job.”

The employee says, “Well, if that’s the case, I’ll do it.”

Now, there’s pure compulsion we believe everything he says —

John M. Harlan II:

Where do you find a generous hardly company man?

John B. Jones, Jr.:

I think it — well, I think this is important because this goes to the whole point of — we — the Southland Insurance Company here is being generous in the sense in compelling this, if we accept their testimony, compelling this four insurance agents to take a trip to New York.

They have to tell their wives and drag them along.

It’s a very sad thing.

I don’t really think that the case I posed is very different.

And I don’t think that compulsion is the test.

Maybe one way to deal with it is to say that compulsion to be considered in the sense must be operative.

It must be that the man, not that the company said it’s compulsory but that that’s the reason the man went.

And when the benefit gets too great as in cash or a very pleasurable trip then we will take with a grain of salt and the testimony that the trip is required, if the company founds on it.

That isn’t why he went to New York.

John M. Harlan II:

It’s conformity rather than compulsion.

John B. Jones, Jr.:

Oh, it’s not conformity, it’s greed.

Hugo L. Black:

Don’t you think it’s — don’t you think it’s conceivable?

John B. Jones, Jr.:

He goes to New York because he wants to go to New York.

He so testified that if they offered him this trip tomorrow, he’d take it.

That’s on page 43 of the record.

Hugo L. Black:

Don’t you think it —

John B. Jones, Jr.:

He made — that’s the whole crux of the case.

There is no compulsion here.

Hugo L. Black:

Don’t you think it’s conceivable that a man wouldn’t want to go to New York and unless he is compelled to do so?

John B. Jones, Jr.:

I — certainly, it’s conceivable.

But I don’t think it was operative here.

This man said he’d go again tomorrow if he wanted to.

If you can prove that compulsion is operative then I think it has some legal —

Hugo L. Black:

Did they have a program at this meeting which was calculated to improve that the capacity of the agents to purchase insurance?

John B. Jones, Jr.:

To sell insurance?

Hugo L. Black:

And to inspire them to produce more insurance?

John B. Jones, Jr.:

There is certainly portions of this meeting, can be interpreted as having that purpose.

They — there was an inspirational address at the luncheon, there was talk about the company and its policies where it was going in the next year or so.

There was two — a morning meeting and then a luncheon immediately following.

And that’s all that happened at the convention.

Hugo L. Black:

Is it that — is it a general rule that they do not allow tax — taxing (Inaudible) will not allow deductions for things like these, for insurance companies?

John B. Jones, Jr.:

No.

Hugo L. Black:

Or do you decide it on the basis of what each convention was and what each one did there?

John B. Jones, Jr.:

That’s correct.

We would — we would say —

Hugo L. Black:

Suppose that another insurance company might call its agent New York and I presume do, the others can do it, aren’t they?

John B. Jones, Jr.:

Certainly are, we have another one inserted.

Hugo L. Black:

And are they given deductions in some instances?

John B. Jones, Jr.:

Yes.

But what it depends on is an analysis of whether we have here a business convention with the training of employees is significant to per dominant factor on the one hand or whether despite minimal trappings of a business convention, it is essentially a pleasure trip

Felix Frankfurter:

Your suggestion a little earlier, it isn’t compulsion, is it compulsion?

But compulsion isn’t the determining quality whether it’s a proper and necessary business expense.

John B. Jones, Jr.:

No, that —

Felix Frankfurter:

Why do you even introduce compulsion?

In a —

John B. Jones, Jr.:

There’s a —

Felix Frankfurter:

particular —

John B. Jones, Jr.:

— suggestion by the petitioners here that it is completely unreasonable to include an income something which they are compelled to accept.

Felix Frankfurter:

We’re comparing the sense of business practice, business pleasure and not compulsion.

John B. Jones, Jr.:

Well, I see.

I — I’ve —

Felix Frankfurter:

Not displeasing the boss.

John B. Jones, Jr.:

But can’t we highlight the issue if we strengthen — I’ve — I am giving them credit for more compulsion that is here operative and I said even if it was told in those terms, we still wouldn’t let our 48-year-old man exclude from income the amount which he was forced to take.

And if compulsion isn’t relevant there then I don’t think its relevant here where the compulsion is much less.

Felix Frankfurter:

I’m suggest — I’m suggesting if business purposes affirms favor a strong desire that they meet together but that we’ll just listen to a case, a different kind of compulsion.

Felix Frankfurter:

That exerts a force of pressure, an atmosphere which is very different from saying, “I want to go to Miami or Florida Beach to have a good time.”

John B. Jones, Jr.:

That’s true.

I would think that the compulsion here though was operative only to say that I go to New York in 1956.

Beyond that, I don’t believe that there was — that compulsion was the operative reason for the trip.

Felix Frankfurter:

Where do this initiate?

Where do this originate?

Where do the whole scheme gotten from?

John B. Jones, Jr.:

Of life insurance conventions?

Felix Frankfurter:

No, of — in this case —

John B. Jones, Jr.:

Well —

Felix Frankfurter:

— what was the moving force?

Was it going also having a good time or responding to the needs expressly to the company, which was it?

John B. Jones, Jr.:

That we’d submit is a problem that is left to the trier of fact and we think he here answered it.

That was clearly the pleasure aspects that predominated.

If in a given case, the man wanted to show that there — the accomplished business activities there, the trier of fact might be — reach a different conclusion.

But here, the trier of fact said that this was the taking of a pleasure trip by these people.

Felix Frankfurter:

Did all the claims of company interest is really the façade of the near or pretense?

John B. Jones, Jr.:

Well, or it can coexist.

If you have a — an intent to take a pleasure trip of this nature, it’s not inconsistent that they coexist, the company intend to mobilize this general desire of their agents to take a trip to a far-off city.

Felix Frankfurter:

How about the other way around?

The desire of the company to have their agents do something which as a consequence also, namely the people from (Inaudible) and Omaha and where not to New Jersey or New York?

John B. Jones, Jr.:

Well, in that —

Felix Frankfurter:

If you put it the other way around then you’d — then it would be different, would it?

John B. Jones, Jr.:

Well, we say that the inquiry here is which one predominates.

We don’t know any — and it’s never been suggested any other way out of the dilemma the regulations have explicitly made that the test that somebody has to determine in this post cases which mode predominates.

Here the District Court laid his findings along the lines suggested by the regulation.

The Circuit Court has reviewed and found this in accord with its prior decision in Thomas and Patterson.

We’re not only faced with the — the cleared erroneous rule on this point.

We are also faced with the two court rule which I think it’s an even stronger barrier to review than the cleared erroneous one.

Felix Frankfurter:

But what do you do with the suggestion that — which purpose predominates depends on what direction of vision to give to the trier of fact?

John B. Jones, Jr.:

Well, I would — this goes to Mr. Justice Stewart’s question.

I would like to suggest that determining whose point of view you look — whose point of view you use to determine the business purpose is not the great hurdle which it would seem.

The point was made that the trial judge here looked at it from the employees’ point of view and this is considered to be fatal error to our brief.

In point of fact, if you read the specific findings you’d see he looks to the company and what he had meant to do as well as the effect on the employee.

And I really think that what you have here is an alternative reference.

In the last analysis, if you can find a truly sufficient business purpose to the company, it matters not that the employee is happy to go.

And I can illustrate that by an example.

If the Southland Insurance Company had set up a crackerjack program with two hours of meetings in the morning and three hours every afternoon, meals and places where the employees could get together and exchange their valuable information.

Some recreation — if they agreed the — planned the program to do the kind of thing they said they wanted to do that would end it even though Mr. Rudolph said he’d go again tomorrow if his expenses were paid.

Hugo L. Black:

But they’re —

Potter Stewart:

But ended —

Hugo L. Black:

— rather different.

Potter Stewart:

— which way?

How was it ended?

John B. Jones, Jr.:

That would — if we could show a sufficient business purpose to the company —

Potter Stewart:

Yes.

John B. Jones, Jr.:

— that they — they were not motivated by an intent to confer a benefit on their employees but rather to train them in the sense that they would be better.

Potter Stewart:

Yes, then what?

If we could do that then what would follow?

John B. Jones, Jr.:

If we could do that then we would have found that the employee — the employer had a sufficient business purpose and either it would not be income to the employee or —

Potter Stewart:

Would be income, wouldn’t it?

John B. Jones, Jr.:

If it were income, it would be deductible.

Potter Stewart:

It would be income to the employees certainly —

John B. Jones, Jr.:

The training — if the employer provides training for an employee.

Potter Stewart:

Well, just like wages are — wages are paid only in connection with a specific business purpose of the employee and there’s certainly income to the — of the employer, there’s certainly income to the employee?

John B. Jones, Jr.:

Well, I believe there is a recognized exempt —

Potter Stewart:

The business purpose would — it would follow that there would be income to the employee.

John B. Jones, Jr.:

Well, I’m not certain.

I believe that there’s a —

Potter Stewart:

And would be deductible, the expenses would be — deduct — deducted by the employer.

John B. Jones, Jr.:

The — this business of whether it does or does not go through income account is not an easy one to answer.

Potter Stewart:

No, I was —

John B. Jones, Jr.:

I believe that training —

Potter Stewart:

I was wondering what you’re trying to get at.

If you could find a clear business purpose on the part of the employer then what would follow?

And I still don’t see.

John B. Jones, Jr.:

The employee would not in the end pay any income tax because of this benefit.

Whether —

Potter Stewart:

Is it on his wages?

John B. Jones, Jr.:

This will need to be excluded from his wages or included in his wages and he will be allowed a deduction.

When we find a —

Potter Stewart:

I don’t follow that all.

I maybe pretty dense at the moment but I just don’t follow it.

John B. Jones, Jr.:

Well a — we start from the fact that we’re going to take a pure business convention, doesn’t have any suggestion of pleasure to be —

Potter Stewart:

Well, let’s start very simply with wages.

These are paid by the employer for a clear business purpose of his own.

They’re received by the employee.

They were — they’re deducted by the employer.

They’re included in the income of the employee and not deducted by the employee.

John B. Jones, Jr.:

Correct.

Potter Stewart:

Now, let’s say that a convention is put on by the employer for the employer’s clear business purpose.

The employer’s clear business purpose for training employees —

John B. Jones, Jr.:

Well, if I can break in there I’d —

Potter Stewart:

I say —

John B. Jones, Jr.:

I think I can suggest what — where I would part from you.

The reason why the first payments you’ve posed were income to the employee was because they were in effect compensation.

Potter Stewart:

Right.

John B. Jones, Jr.:

Compensation is specifically included in income.

Now, when I find the business purpose as to this new convention that we’ve posited then I find that that is not intended this compensation, its training for the benefit of the employer and no longer compensation.

The reason for including it in the employees’ income has disappeared.

John B. Jones, Jr.:

If we’re getting —

Potter Stewart:

Certainly often in a training program, you do compensate employees, don’t you?

John B. Jones, Jr.:

But that would be a sour continuation which will be a different point.

We would still consider that compensation.

Tom C. Clark:

Suppose judges invited you give a Law Day address and he says he won’t go unless he takes his wife so they pay expenses and the judge and his wife, make the Law Day address, Arizona or California or Missouri or Texas and they — could that be —

John B. Jones, Jr.:

Our answer to that has —

Tom C. Clark:

— income?

John B. Jones, Jr.:

That — our answer to that has to be clear unless we can run away from the question that insofar as the wife is concerned, it is income.

As to the judge, it is — it may — it maybe included in income and then deducted or else excluded from income at the start.

But we would — that that’s very much involved in this case, I might as well cover it now that we just have to draw a hard and fast line.

We feel on this question of wives because the very reasons which Judge Brown cited in his dissent or both dissents in this case and in the Thomas case that show how good an argument you can make about a wife being a part of the business trip would just create a hopeless task of enforcement.

The regulation —

William J. Brennan, Jr.:

Well, we’re you talking about American institutions of previous case, what about the institution of marriage?

You’re really going to make things complicated.

Felix Frankfurter:

You told that wives are a fact of life, I was thinking about —

(Inaudible) —

John B. Jones, Jr.:

Well the — there is — all I can say is that —

William J. Brennan, Jr.:

You would give any Law Day addresses.

John B. Jones, Jr.:

There are personal —

(Inaudible)

John B. Jones, Jr.:

Well there may — they can reimburse them up to cover the tax.

They —

William J. Brennan, Jr.:

They what?

John B. Jones, Jr.:

They can reimburse it up to cover up the tax.

Tom C. Clark:

Wouldn’t there be a tax on that?

John B. Jones, Jr.:

Yes, but the — but the form — contrary to some earlier decisions that (Inaudible) can be resolved to —

Felix Frankfurter:

Mr. Jones, I have a — I have a greater difficulty in some of these charming questions.

You indicate the circumstances under which he is living (Inaudible) expenses that you form a program and so on, is that right?

If you are advising this company after a decision restraining your present submission, you wouldn’t have great difficulty formulating a program that would take care of all the qualifications that you gave us, wouldn’t you?

John B. Jones, Jr.:

Well, I’d (Inaudible) — it would require some more time, devote of — some more of agent’s times devoted to business.

John B. Jones, Jr.:

Yes, it would have —

Felix Frankfurter:

What I mean you could lay out a program like a (Voice Overlap) —

John B. Jones, Jr.:

Yes, but it would be a — it would be a different —

Felix Frankfurter:

Like a law school programs.

I can assure you the burden of those law school programs sit very likely on law professionals.

John B. Jones, Jr.:

Well, perhaps they’ve incorrectly been allowed some deductions.

I —

Felix Frankfurter:

I would talk —

John B. Jones, Jr.:

You were talk — you are talking —

Felix Frankfurter:

Strike out — Mr. Stenographer strike out everything I’ve said that’s in the (Voice Overlap) —

John B. Jones, Jr.:

Well, you were talking about a different convention than the one we had here.

If that change in fact — I don’t mean to imply that this wasn’t a close case for the trier of fact but I do think it was a case that has to be left to the trier of fact and that once he has decided that it is not profitable to be reviewed at this level.

I subvert — it is a —

Hugo L. Black:

— (Voice Overlap) — your test is whether it’s predominant for pleasure or predominant for business.

I presume in that the man went to Honolulu on a convention and — balance should be pretty heavy against him, wouldn’t it?

John B. Jones, Jr.:

Well, I don’t want to give too easy in answer to that because by and large, the hotels where you can hold a convention are in attractive cities.

The unattractive cities don’t have hotels that can take 400 people.

Just on occasion there are seashore resorts or mountains resorts.

And the way — talking about away is — if the airline gets more of the money.

I mean this just further away.

So, you can’t make a turn entirely on the resort city.

Hugo L. Black:

You can’t make it turn altogether on pleasure there or of business?

John B. Jones, Jr.:

No, no, I just don’t think the fact that you select a — Hawaii is — Hawaii isn’t so different from New York City that the result would turn on that alone.

The point is that the — every convention has held in the place that — pres — let’s say presumably more attractive than home.

(Inaudible)

John B. Jones, Jr.:

At least you go to find out.

William O. Douglas:

If we’re — if we’re to take judicial notice, I think I could get you a list of big hotels and unattractive towns.

John B. Jones, Jr.:

It’s been suggested that the Commissioner might publish such a list.

I don’t know.

John M. Harlan II:

How does this convention differ from thousands of other conventions, business conventions, is there anything peculiar about this?

John B. Jones, Jr.:

Well, I would think that —

John M. Harlan II:

Even just to program purpose.

John B. Jones, Jr.:

Well, when —

John M. Harlan II:

Or anything else?

John B. Jones, Jr.:

We think the qualification test here on sales that the agents sell a certain amount of insurance before they’d be entitled to attend is itself in — indicative of some intent to compensate for those sales.

I would suggest that the time here in the program is minimal or — if — perhaps I can put it this way, Mr. Justice Harlan.

Suppose that they had eliminated the business meeting, the two hour business meeting and Dr. Norman Vincent Peale’s address, I don’t suppose that the insurance company would claim that then they had a deduction for business expense.

Just a trip up and back, isn’t — either just — it isn’t an ordinary expense.

It’s just isn’t the kind of thing we’re going to let people deduct.

Maybe there weren’t ordinary is what we hang it on there.

But — then they add to it a minimal business meeting and an address by not — Dr. Norman Vincent Peale which is re — is somewhat related to —

John M. Harlan II:

Do you think he would simply use this deduction (Inaudible)?

John B. Jones, Jr.:

Excuse me?

John M. Harlan II:

Do you think he would simply use this deduction (Inaudible)?

John B. Jones, Jr.:

I’m talking about res — reanalysis.

I’m not talking about anybody’s intent.

But I — I — I just don’t think that the Court can lay down rules that as long as you have something that looks like a business meeting at a destination city, that’s automatically a business trip which entitles people to deduct their expenses.

After all we live in a day where travel agencies are now offering professional man so-called “seminar cruises” at which doctors or lawyers or any other profession that has enough to do.

They are told come to Bermuda on such and such boat and we’ll give you a lecture every morning on some phase of your activity.

And then when you get to Bermuda, you have a free time, come on back and have your morning of meeting.

This is a very — that — he’s going there and he is getting training perhaps even his employer will send him.

But we have to keep our eyes open to the realities of situation.

He is getting a very viable benefit.

He is being transported to Bermuda for a vacation that would take a great deal more in taxable income for him to be able to provide that for himself.

So what’s the reality of that situation to Tax Board?

John B. Jones, Jr.:

The — there has been issued a warning that this is not an automatic deduction, that in each case, each case will be judged on its own facts to determine whether greedy is related to the business a professional man who purports to be attending a so-called “seminar cruise.”

And again, I don’t — it is not a pleasant thing to think that the courts of the country are going have to be resolving all this — my nude factual questions.

But I don’t believe that you would want to issue a rule that made the seminar cruises either all in or all out.

And there will be the — these borderline situations.

Felix Frankfurter:

That the new taxable won’t anything about it?

John B. Jones, Jr.:

No, it does not really.

Felix Frankfurter:

For anything —

John B. Jones, Jr.:

The present —

Felix Frankfurter:

like luncheon, (Inaudible)?

John B. Jones, Jr.:

Well, that’s not involved in this case.

But the —

Felix Frankfurter:

Well —

John B. Jones, Jr.:

— it does go into the expense —

Felix Frankfurter:

It involves for me whether these business whether — a second part of the certain aspects of the case, taken you probably know about the Mediterranean Greeks, the Greeks, some are voyages in which they got a regular program of distinguished salads having the people enjoying — to enjoy a — rooms in the Mediterranean Greek islands, have all of the Greek islands and have some of the ablest scholars, Greek scholars lecture there.

Now, they come to know any number of, not any number but several instructors or professors of Greek history would — it would surely be a part of that.

I don’t see why that isn’t just as important as buying books (Inaudible).

John B. Jones, Jr.:

Then that’s just the intent of the announcement of which I have spoken that it has to be examined in the individual case.

If the professor skips out on all of the meetings, sleeps late in the mornings and just goes ashore in days when they’re important, there — a question does arise whether you’ve been have a deductible expense.

If he gets as much out of the seminar as you impute to him then in that case, the primary purpose becomes one of business.

Felix Frankfurter:

My answer would be jobs, varied jobs, the idea of that in court, going for each one of these separate things to find out how many lectures he have slept through whether in his bunk or in the chair, leaves to me to ask the courts to do more merits —

Potter Stewart:

Mr. Jones, does the record in this case show how the company treated these expenses?

John B. Jones, Jr.:

Well, life insurance companies are —

Potter Stewart:

Well, that’s right the tax (Voice Overlap) —

John B. Jones, Jr.:

— (Voice Overlap) of themselves.

Potter Stewart:

Yes, yes.

John B. Jones, Jr.:

So that they didn’t — they —

Potter Stewart:

That’s right.

John B. Jones, Jr.:

They would not be entitled to deduct but —

Potter Stewart:

That’s correct.

John B. Jones, Jr.:

It is important to bear for the generality of cases in mind, the fact that — it doesn’t make any difference to the employer on these expenses.

He can deduct it in either event.

Either its compensation or training expense and subject to limitations on reasonable amount.He has no problem.

So he doesn’t have any particular reason to focus in his own mind as to what — whether this is primarily to confer a benefit on the employee or primarily to advance his interest.

Potter Stewart:

A deductible as you say in either event by the employer.

William J. Brennan, Jr.:

Yes.

John B. Jones, Jr.:

That’s deductible in either event.

There were no question about that and that’s —

Potter Stewart:

Including the employer’s taxes.

John B. Jones, Jr.:

But it is not in this case.

Potter Stewart:

Alright, I remember now.

Tom C. Clark:

Suppose he pay the tax on employees, on employees’ tax?

John B. Jones, Jr.:

But we haven’t yet established that the employee —

Tom C. Clark:

Suppose you won —

John B. Jones, Jr.:

— does pay a tax.

Tom C. Clark:

Suppose you won this case and then the employer decided,

“Well, I’l pay the tax.”

John B. Jones, Jr.:

Well, that’s — I’m afraid that that’s been long established.

That too is taxable income.

There is a formative to get you off the merry-go-round but if payment of somebody else’s income tax where in you’re in a relationship that payments would otherwise be income, the payment of the tax is still income.

Tom C. Clark:

But that would be a small amount.

John B. Jones, Jr.:

Well, it gets smaller each time around, depends somewhat on the bracket of the employee.

Tom C. Clark:

What made me think of that, you’ve said perhaps the — on the justices’ wives that they could pay the tax of the wives.

John B. Jones, Jr.:

Yes, they could — or I suggested that but they — they have to put in the cover the pyramiding effect.

Hugo L. Black:

Ex post facto?

William J. Brennan, Jr.:

How far is Black’s joke?

Hugo L. Black:

Is that ex post facto?

John B. Jones, Jr.:

There are statutes of limitations that generally live — limited income tax liability for three years —

William J. Brennan, Jr.:

I’m afraid I’ve never been long enough here (Inaudible). [Laughter]

John B. Jones, Jr.:

Well, the regulations that reg — on the wife problem the regulations are very clear.

It is a difficult problem of enforcement but if the — there are revenue system — do we have a very explicit instruction in Section 262 that personal expenses are not deductible?

And it’s very hard to take in the usual case.

Imagine in the usual case had more personal expenses than that of taking your wife along now there will be some exceptions on occasion.

I would just like to close this argument by reminding the Court that the regulations under Section 162 are quite clear explicit on this problem, recognizing that there will be trips that are taken partly for business and partly for pleasure.

And they do impose on somebody the task of determining which motive is primary.

That was done by the District Court here, was affirmed by the Fifth Circuit.

John B. Jones, Jr.:

And we suggest that this Court should abide those findings.

Hugo L. Black:

May I ask you just one other question?

Does the evidence showed here that their wives were considered by the company as being a necessary part of the carrying on with the business for the husband?

And does it show that the — they’re inquiries about their wives to find out if they had that capacity and if the company’s wanted their wives to come with them on this trip were they had these conventions?

John B. Jones, Jr.:

Yes, I think without coming down hard on each sense I think basically there is evidence in the record suggesting that this company does regard their wives as important.

Hugo L. Black:

Is there any finding that that’s not a fact?

John B. Jones, Jr.:

There is some testimony in the record and there’s some conflict in the brief on this that he didn’t — that Mr. Rudolph didn’t feel he had to take his wife.

William O. Douglas:

Well, doesn’t the Federal Government make now a conclusive presumption that half of the money earned by the president is earned by the wife?

John B. Jones, Jr.:

That would — you can — a husband and wife may file a return to get that treatment or in a community property estate, the estate law would have that effect.

But absent that, the Federal Government doesn’t — and these people did file a joint return.

Potter Stewart:

It’s an option on the part of the husband and wife.

John B. Jones, Jr.:

That’s right.

These people did file a joint return and that doesn’t make it any difference whose income we’re talking about.

Felix Frankfurter:

Mr. Jones, would you be good enough to turn to page 100 in the record in the first two sentences, on the top of page a hundred, if — it’s your answer to what Judge Brown there says that this is a question of fact duly submitted to the trier and found by the trier?

And that he’s making a question of law out of all these questions of fact, is that what you would say to that?

John B. Jones, Jr.:

I would — the — for the benefit of the members of the Court, I take it that — to take a trip to preserve the security is something not done primarily for personal enjoyment.

That’s what you’re constraining on?

Felix Frankfurter:

But what is involved is the right of termination under a contract granting the employer the right of termination at will if the thing is at stake.

John B. Jones, Jr.:

As I’ve suggested before I think that misstates the question.

I think the — the first question is whether the compulsion which I may — if I may characterize as such, here described what’s really operative.

And the record is clear here that that wasn’t why he went to New York.

He went to New York because he had a good time.

He’d do it again tomorrow.

Now if we found in a given case that the man didn’t want to go to New York and actually went because either expressed or otherwise, he was ensure of his job then this kind of consideration become important.

Felix Frankfurter:

But Judge Brown’s view I take it implies that the surrounding circumstances negative what you’ve said.

You mutilate the complex of fact by saying he went to New York because he had a good time.

But Brown says the whole circumstance as the nature of his employment is that if he didn’t go to have a good time, he might have no time at all with this company.

John B. Jones, Jr.:

Well, I think that Judge Brown is looking only to the testimony, if I may say, self-serving testimony of the company that would have this effect on them.

And I think the record is clear that that’s not all that has to be considered.

And again as to him, he would be entitled — he should give way to the trier of fact on that point.

Earl Warren:

Very well.

Mr. Freling, may I ask you just one question and I know you’ve got a very little time but suppose that the employer in this case had said, “We want that all of these people who have written a million dollars worth of insurance last year to go to this convention.”

We’re not going to pay their expenses but we order them to go just the same as — in the la — same language that they did in this case, would that be deductible?

Richard A. Freling:

Yes, Mr. Chief Justice, I think it would —

Earl Warren:

There’d be no difference between that case and this one?

Richard A. Freling:

No.

Earl Warren:

Very well.

That’s all I have.

Richard A. Freling:

I’d like to address myself to some specific inquiries from the bench.Mr. Justice Black, Mr. Rudolph testified expressly that when he took a vacation, he like to get away from it all and do as he pleases.

This is in direct contrast to the enforced and rigid companionship and schedule at this convention.

Second of all, he testified that he would not wish to take this trip again unless his expenses were paid for by the company.

He did not consider it a vacation.

He considered it a business requirement of his as part of his job.

Mr. Justice Harlan, this convention is an outgrow for a product of some 30 or more years of experience in the life insurance industry based upon management studies and experts in the field that say it has legitimate and valuable business purposes.

It antedates the era of high taxes.

And the suggestions of respondent that this is just one of the category of expense account abuses which we’ve heard so much about simply isn’t the case.

We feel that for over 40 years, these company conventions have been going on and yet no question has been raised.

This is apparently a test case.

And we think that obviously, it was intended to be pleasurable.

The company would be exceedingly unwise if it attempted to stimulate and motivate its agents in at atmosphere of rigid tedious requirements.

But this doesn’t detract from its business purpose.

The business purpose is still the — to gain stimulation in a way that couldn’t be accomplished by paying the agents a bonus.

It’s diametrically contrary to that.

The informal activity at the convention was specifically, one is designed as such, is a part of the business of the convention.

Why did the company charter special trainings and have people stay and enforced companionship for four days?