Carl v. Comm'r of Internal Revenue

• Decision Date: 30 December 1980
• Docket Number: Docket Nos. 1473-78,5978-78.
• Citation: 75 T.C. 465
• Parties: CARL and RUTH BRIGGS, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTRAYMOND J. HURBI, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

75 T.C. 465

CARL and RUTH BRIGGS, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENTRAYMOND J. HURBI, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket Nos. 1473-78

5978-78.

United States Tax Court

Filed December 30, 1980.

Ps paid dues to a labor union. Some of the dues were allocated by the union to a building fund and to a fund for the construction of recreation centers for the union members. In return for the dues allocated to the building fund, Ps received certificates which were equal in face amount to the dues so allocated and which were redeemable under specified conditions. Held:

1. The dues allocated to the building fund were not ordinary and necessary expenses under sec. 162, I.R.C. 1954, since Ps received the redeemable certificates; and

2. The dues allocated to recreation centers were personal expenses not deductible under sec. 162(a). Ronald E. Cummings, F. A. LeSourd, Meade Emory, Leon C. Misterek, and Rodney J. Waldbaum, for the petitioners.

Charles L. Eppright, for the respondent.

OPINION

SIMPSON, Judge:, Judge:

The Commissioner determined a deficiency of $306.87 in the Federal income tax of Carl and Ruth Briggs for 1975 and a deficiency of $298.05 in the Federal income tax of Raymond J. Hurbi for 1976. The only issue to be decided is whether the petitioners were entitled to deduct under section 162(a) of the Internal Revenue Code of 1954¹ the entire amounts of the dues paid to a labor union when some of such dues were allocated by the union to a building fund for which the members received redeemable certificates and to a fund for the construction of recreational facilities for the members.

All of the facts have been stipulated, and those facts are so found.

The petitioners, Carl and Ruth Briggs, husband and wife, maintained their legal residence in Alaska when they filed their petition in this case. The petitioner, Raymond J. Hurbi, maintained his legal residence in Alaska when he filed his petition. Mr. and Mrs. Briggs filed their joint Federal income tax return for 1975, and Mr. Hurbi filed his individual Federal income tax return for 1976, with the Internal Revenue Service Center, Ogden, Utah.

During 1975, Mr. Briggs was employed by Sealand Freight Services (Sealand) in Anchorage, Alaska. As a condition of his employment, he was required to be a member of Local 959 of the International Brotherhood of Teamsters, Chauffeurs, Warehousemen, and Helpers of America (Local 959 or the union). During 1976, Mr. Hurbi was employed by ITT Arctic Services (ITT) into July, and by RCA Alaska Communications through the end of the year, and was stationed 70 miles from Fairbanks, Alaska. He, too, was required to be a member of Local 959 while working for ITT.

To maintain good standing with Local 959, members were required to pay fixed monthly dues as well as additional dues for each hour of work. The monthly dues were paid personally by the members, while the hourly dues were deducted from the members' paychecks by their employers and transmitted directly to the union. On December 17, 1963, Local 959 adopted a plan whereby 3 cents of the hourly dues of each member was specially allocated to a union building fund. It was agreed that for each $50 collected from a member for the building fund, the member would receive a “BUILDING FUND OWNERS CERTIFICATE” which certified “that Fifty Dollars ($50.00) of the Union dues paid by the holder hereof has been deposited to * * * Local 959 Building Fund.” By their terms, the certificates were redeemable with interest (no rate was specified) at the completion of the building program. They were also redeemable without interest when the holder died or, if he was eligible for an honorable withdrawal card from the union, when he retired or left the jurisdiction of Local 959. The certificates stated that they were not transferable and that they did not constitute an interest in the assets of Local 959.

With its building fund, Local 959 constructed or purchased buildings in Anchorage, Kenai, Juneau, and Valdez, Alaska, which were used principally for union offices. At the time of trial, the union was seeking to organize other industries in Alaska, and if successful, it will need more office space. Also, an old building in Juneau will probably have to be replaced in the near future. The union has not yet declared its building program completed.

In July 1974, Local 959 began seeking an increase of 15 cents in the hourly dues deducted by employers when it renegotiated collective bargaining contracts. The union planned to spend the increase to construct recreation centers in Anchorage and Fairbanks for its members. In 1974, planning for the centers was begun, and in that year, the employees of Sealand approved a new collective bargaining contract in which the increase in hourly dues was included. In 1975, the employees of ITT approved a new collective bargaining contract in which the increase was included. The union collected $2,939,474.60 in 1975 and $3,288,446 in 1976 from the increase in dues.

The recreation centers in Anchorage and Fairbanks were built during 1976 and 1977. On May 22, 1977, the centers opened. Each had tennis courts, handball courts, locker rooms, exercise rooms, saunas, steam rooms, a jogging track, swimming pool, child care center, pro shop, gymnasium, and other facilities. At the time of trial, the total cost of the recreation centers was $15,153,217, of which $5,203,218 had been paid by the union, and the balance had been borrowed.

A union member received and maintained eligibility to use the recreation centers by accumulating “recreation hours,” that is, hours of work for which the 15-cent recreation dues were subtracted from pay. A member received his first month of eligibility by accumulating 300 recreation hours, and he received 1 additional month for every additional 80 hours accumulated. After the first month, a member could also pay $30 to obtain 1 month of eligibility if he did not have sufficient recreation hours. Such eligibility rules were formulated by the union in 1977; prior to that time, Mr. Briggs and Mr. Hurbi had no vested rights in the recreation centers.

In 1975, Mr. Briggs paid $1,410.21 as dues to Local 959. Of this amount, $144 was monthly dues, and $1,266.21 was payroll deductions. The payroll deductions were allocated on the accounting records of Local 959 as follows:

+---------------------------+
                ¦Strike fund        ¦$474.84¦
                +-------------------+-------¦
                ¦Recreation centers ¦474.84 ¦
                +-------------------+-------¦
                ¦Credit union       ¦221,52 ¦
                +-------------------+-------¦
                ¦Building fund      ¦95.01  ¦
                +---------------------------+
                

In 1976, $909.12 was withheld as union dues from Mr. Hurbi's wages, and he also paid monthly dues. The payroll deductions were allocated on the accounting records of Local 959 as follows:

+---------------------------+
                ¦Strike fund        ¦$433.24¦
                +-------------------+-------¦
                ¦Recreation centers ¦285.53 ¦
                +-------------------+-------¦
                ¦Credit union       ¦133.24 ¦
                +-------------------+-------¦
                ¦Building fund      ¦57.11  ¦
                +---------------------------+
                

On their Federal income tax return for 1975, Mr. and Mrs. Briggs deducted $1,405.68 for union dues, and on his Federal income tax return for 1976, Mr. Hurbi deducted $1,239.61 for union dues. In his notices of deficiency, the Commissioner determined that the monthly dues and the portions of the hourly dues allocated to the strike fund were deductible, but he disallowed the remainder of the claimed deductions.² The petitioners concede that the portions of the dues allocated to the credit union were not deductible.

The issues to be decided are whether the portions of the dues allocated to the building fund and to the recreation centers were deductible under section 162(a). That section allows a deduction for all the ordinary and necessary expenses incurred in carrying on a trade or business. Section 1.162-1(a), Income Tax Regs., provides that, to be deductible, business expenses must be “directly connected with or pertaining to the taxpayer's trade or business.” The taxpayer's employment is his trade or business ( Motto v. Commissioner, 54 T.C. 558 (1970); Primuth v. Commissioner, 54 T.C. 374 (1970)), and section 1.162-15(c), Income Tax Regs., provides that “Dues and other payments to an organization, such as a labor union * * *, which otherwise meet the requirements of the regulations under section 162, are deductible in full.” The petitioners have the burden of proving that the dues were ordinary and necessary business expenses of their employment. Sanford v. Commissioner, 50 T.C. 823, 826 (1968), affd. per curiam 412 F.2d 201 (2d Cir. 1969), cert. denied 396 U.S. 841 (1969).

We deal first with the dues allocated to the building fund. Since the petitioners were required to pay the dues to maintain their membership in the union, and since they had to be members of the union in order to hold their jobs, it is clear that the petitioners were required to pay the dues as a condition of their employment.³ Yet, the Commissioner takes the position that such dues were used to purchase certificates in the building fund and that therefore such dues were not business expenses but were nondeductible savings or investments. On the other hand, the petitioners insist that the certificates were worth substantially less than their face amount, and they argue that under several decisions of this Court, a union member is entitled to deduct the entire amount of the dues unless an asset of approximately equal value is received in return for the payment of the dues. See Cohen v. Commissioner, 63 T.C. 267 (1974), affd. per curiam 543 F.2d 725 (9th Cir. 1976); Megibow v. Commissioner, 21 T.C. 197 (1953), affd. 218 F.2d 687 (3d Cir. 1955); Taylor v. Commissioner, 2 T.C. 267 (1943), affd. sub nom. Miller v. Commissioner, 144 F.2d 287 (4th Cir. 1944).

In support of their conclusion as to the value of the certificates, the petitioners...