Crowell v. Commissioner, Docket No. 9599-88.
| Decision Date | 06 June 1989 |
| Docket Number | Docket No. 9599-88. |
| Citation | 1989 TC Memo 268,57 TCM(CCH) 596 |
| Parties | David P. Crowell and Linda C. Crowell v. Commissioner. |
| Court | U.S. Tax Court |
David P. Crowell, pro se. Robin L. Herrell, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency of $10,920 in petitioners' Federal income tax for 1984. The sole issue for decision is whether a cash award received by David P. Crowell in 1984 is excludable from gross income under section 74(b). All section references are to the Internal Revenue Code, as amended and in effect for the year in issue.
Some of the facts have been stipulated. The facts set forth in the stipulation are incorporated in our findings by this reference. David P. and Linda C. Crowell resided in Centerville, Ohio, at the time they filed their petition.
David P. Crowell (petitioner) was employed by International Business Machines Corporation (IBM) during 1984 as manager of quality for the Field Engineering Division. Petitioner's responsibilities as manager of quality included insuring that employees in the Field Engineering Division were trained in the concepts of service quality so that they could deliver "error free service to every customer every time."
Petitioner developed the "Managing Quality Workshop" (the workshop), a 16-hour course for IBM's Field Engineering managers. The workshop taught basic quality improvement concepts for a service industry and presented tools and techniques for problem analysis and resolution. Petitioner developed and implemented the workshop in part during his regular working hours and in part after regular working hours and on weekends. With the permission of his supervisor, petitioner used company resources, including secretarial help, copy machines, and supplies, in developing and implementing the workshop.
On November 29, 1983, IBM's director of quality and organization for the Field Engineering Division recommended that petitioner be given IBM's President's Award for his achievements in developing and implementing the workshop. This recommendation was endorsed by the president of the Field Engineering Division on January 10, 1984. Petitioner did not enter a contest or take any action to recommend himself for this award. IBM's award recommendation form noted that petitioner "gave up untold evenings and weekends * * * his 60-70 hour weeks and constant traveling over the last ten months have provided the key to the workshop's acceptance and success."
In March 1984, petitioner received IBM's President's Award. In addition to a cash award of $25,000, petitioner also received a certificate, a marble and brass sculpture, and a 3-day expense-paid trip to Florida.
Petitioner could not have received the President's Award if he had not been an IBM employee, but he was under no obligation to render any future services to IBM as a condition to receiving the award. Petitioner left employment with IBM in November 1986.
IBM issued a Form W-2 to petitioner indicating wages, tips, and other compensation of $94,458 paid during 1984. The $25,000 President's Award was included in the $94,458 reported on petitioner's 1984 Form W-2. Petitioner did not include the $25,000 award in taxable income reported on his 1984 tax return. Respondent determined that petitioner's award constituted taxable wages.
OpinionThe sole issue for decision is whether the $25,000 cash award petitioner received in 1984 from his employer IBM constituted taxable income to him.
Exemptions and exclusions from taxable income are construed narrowly, and the taxpayer must bring himself within the clear scope of the exclusion. Commissioner v. Jacobson 49-1 USTC ¶ 9133, 336 U.S. 28, 49 (1949); Graves v. Commissioner Dec. 44,029, 89 T.C. 49, 51 (1987). Petitioner bears the burden of proving that he is entitled to the exclusion that he claims. Rule 142(a), Tax Court Rules of Practice and Procedure.
Petitioner contends that the award comes within the specific exclusion from gross income provided in section 74(b). With regard to prizes and awards, section 74 provided:
SEC. 74. PRIZES AND AWARDS.
(The 1986 Tax Reform Act, Pub. L. 99-514, section 122(a)(1), 100 Stat. 2109, amended section 74 for prizes and awards granted after December 31, 1986.)
The regulations under section 74 provide that gross income includes awards by an employer to an employee in recognition of some achievement in connection with employment. In interpreting the statutory provision regarding prizes and awards, section 1.74-1, Income Tax Regs., provides in part:
Petitioner contends that this regulation is not a valid interpretation of section 74(b). He points out that section 74(b) provides a primary test and two secondary tests for determining whether prizes and awards are excludable from income and that none of these tests suggests a legislative intent to apply a broad general principle that under no circumstances can a prize or award from an employer to an employee come within the exclusion.
As to the primary test under section 74, petitioner argues that the award was made primarily in recognition of his educational achievement, developing and implementing the workshop. As to the two secondary tests, petitioner argues that he was selected for the award without any action on his part and that he was not required to render substantial future services as a condition to receiving the award. Petitioner asserts, and we agree, that IBM's reporting of the award on Form W-2 is not determinative of whether the payment was wages.
Respondent does not contend that petitioner took any action in order to be selected to receive the award in issue or that petitioner was required to render substantial future services as a condition to receiving the award. Respondent argues that the award was not made primarily in recognition of an educational achievement within the meaning of section 74(b), but was made by petitioner's employer in recognition of achievement in connection with petitioner's employment.
The congressional committee reports relating to the enactment of section 74, H. Rept. No. 1337 and S. Rept. No. 1622, specifically state that section 74(b) was not intended to exclude from income prizes or awards from an employer to an employee in recognition of some achievement in connection with his employment. The House report, which is substantially the same as the Senate report, states in part:
Subsection (b) is not intended to exclude prizes or awards from an employer to an employee in recognition of some achievement in connection with his employment, such as having the largest sales record or best production record during a certain period. H. Rept. No. 1337, 83d Cong., 2d Sess., reprinted in 3 U.S. Code Cong. & Admin. News 4163-4164 (1954).
Treasury regulations should not be set aside unless unreasonable or clearly inconsistent with the statute they are intended to implement. Commissioner v. South Texas Lumber Co. 48-1 USTC ¶ 5922, 333 U.S. 496, 501 (1948). Section 1.74-1, Income Tax Regs., is reasonable and consistent with congressional purpose in enacting section 74(b). Because the regulation is not unreasonable or inconsistent with the intent of the statute, it must be sustained. Denniston v. Commissioner Dec. 26,663, 41 T.C. 667, 673 (1964), affd. 65-1 USTC ¶ 9212 343 F.2d 312 (D.C. Cir. 1965).
Courts have generally characterized awards from an employer to an employee as taxable compensation that is not excludable under section 74(b). Rogallo v. United States 73-1 USTC ¶ 9274, 475 F.2d 1 (4th Cir. 1973); Griggs v. United States 63-1 USTC ¶ 9326, 314 F.2d 515 (Ct. Cl. 1963); Denniston v. Commissioner, supra; Marquette University v. United States 87-2 USTC ¶ 9439, 645 F.Supp. 1007 ...
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