Osborne v. Commissioner
| Decision Date | 14 February 1995 |
| Docket Number | Docket No. 14846-93.,Docket No. 8455-93. |
| Citation | 69 T.C.M. 1895 |
| Parties | Richard A. Osborne v. Commissioner. Peter L. Dawson v. Commissioner. |
| Court | U.S. Tax Court |
F. Brook Voght, J. Bradford Anwyll, Kevin L. Kenworthy, and Michael E. Baillif, for the petitioner in Docket No. 8455-93. Janet Altman Spragens, Andrew J. Weinstein (specially recognized), and David P. Korteling (specially recognized), for the petitioner in Docket No. 14846-93. Leonard T. Provenzale, for the respondent.
POWELL, Special Trial Judge:
These consolidated cases were assigned pursuant to the provisions of section 7443A(b)(4) and Rules 180, 181, and 183.1
By notice of deficiency dated February 5, 1993, respondent determined a deficiency in petitioner Richard A. Osborne's (Osborne) 1989 Federal income tax in the amount of $5,299 and additions to tax pursuant to sections 6653(a)(1) and 6662(a) and (d). In her answer, respondent asserted an addition to tax pursuant to section 6662(c). By notice of deficiency dated April 9, 1993, respondent determined a deficiency in petitioner Peter L. Dawson's (Dawson) 1989 Federal income tax in the amount of $5,573. Osborne resided in Hialeah, Florida, and Dawson resided in Alexandria, Virginia, when they filed their timely petitions.
After concessions by respondent,2 the sole issue is whether petitioners may exclude from gross income, as nontaxable gifts, strike benefits disbursed by the Air Line Pilots Association International (ALPA).
These are two of a number of potential cases that involve payments of strike benefits received by Eastern Airline pilots during 1989 and 1990. Following trial and briefing, these cases were consolidated for purposes of opinion. The facts may be summarized as follows.
Petitioners were pilots for Eastern Airlines (Eastern) during 1989. Eastern had been acquired in 1986 by Texas Air Corp. (Texas Air), a holding company owned by Frank Lorenzo (Lorenzo). Under Lorenzo's stewardship as chief executive officer, the relationship between management and the pilots was, at best, strained.
The pilots' view of the matter was as follows: Eastern was systematically stripped of several safety features in an effort to turn a quick profit for Texas Air and Lorenzo. Eastern's state-of-the-art weather division was sold, replacing a 40-member staff of trained forecasters with a computer. Spare parts were sold off. Necessary maintenance was delayed in order to keep airplanes in the air. Pilots were pressured to fly airplanes they believed unsafe. Federal Aviation Administration (FAA) regulations were skirted. Mandated inspections were not performed. Pilots experienced an increase in life-threatening "black box" emergencies, including the explosion of an engine on takeoff. The pilots, becoming increasingly concerned about the deterioration of safety, implemented the "Max Safety" program, which instructed pilots to make their own inspections of the airplanes and to doublecheck the actions of maintenance personnel.
The pilots also felt that Lorenzo jeopardized Eastern's financial security in the following manner: Eastern sold its computerized reservation system to another Texas Air subsidiary for a long-term, low-interest $100 million note, and then leased it back for $100 million a year. Eastern entered into a gasoline supply arrangement with another Texas Air corporation, which added a penny-per-gallon surcharge on gasoline it sold. Eastern paid monthly so-called management fees of $500,000 to Texas Air. Also, under Lorenzo's management Eastern sold many profitable operations, including its Miami/London route, the Kansas City hub, the Eastern Shuttle, and several gate leases at Newark Airport. Many of these actions benefited Continental Airlines, another Texas Air subsidiary.
On March 4, 1989, the International Association of Machinists and Aerospace Workers (1AM) declared a strike against Eastern. On the same day, Eastern pilots began a "sympathy", or "secondary", strike against Eastern in support of the IAM. Dawson participated in some picketing activities at Washington National Airport, and Osborne performed some picketing and other strike activities in Miami and some other locations. Neither pilot flew for Eastern during the strike.
The pilots' strike was called by the master executive council (MEC) representing Eastern pilots for ALPA, a union representing pilots for almost all of the major commercial carriers in the United States. The administrative structure of ALPA consists of a board of directors, an executive committee, an executive board, MEC's, and local executive councils (LEC's). The board of directors, the highest governing body of ALPA, is composed of high officials from each of the lower organizational components. It is vested with the general management and conduct of ALPA's business affairs. The executive committee and the executive board implement the policies announced by the board of directors. An MEC is formed for each airline represented by ALPA, and it functions as a coordinating council for the membership of that airline. LEC's are established for each MEC in cities with high concentrations of the airline's pilots.
Section 65 of ALPA's Administrative Manual (the Manual) sets out union policy on strike benefits and assessments:
A. SCOPE OF BENEFIT POLICY
1. The President shall ballot the Board of Directors for authority to pay benefits and to levy an assessment, if necessary, for those benefits to flight deck crew members deprived of airline income due to:
a. Being involved in processing a properly authorized strike * * *.
* * *
2. Approval of this authority shall require a two-thirds (2/3) majority of the valid ballots returned. * * * Benefits shall be paid from the Major Contingency Fund * * *.
3. The entire Active Membership in Good Standing may be balloted by secret ballot under ALPA Voting Procedures with a majority of the valid ballots returned required for authority to levy an assessment and pay benefits to flight deck crew members deprived of airline income due to reasons other than those outlined in Paragraph A.1 above, such as:
a. The establishment of picket lines by other crafts or classes of airline employees who are on strike, and after the President's Department shall have furnished the MEC of the airline involved sufficient facts to enable the MEC to make a decision whether or not they wish to honor said picket lines.
* * *
4. The decision to ballot the entire Active Membership in the above circumstances will be made by the Executive Committee and only in such cases where there exists considerations of grave importance to the welfare of the entire Association or of emergency nature affecting the welfare of members of ALPA. The costs of the benefits under this paragraph shall be paid solely from membership assessments.
5. No benefits shall be paid during any work stoppage or shutdown which have not been approved under A.2 or A. 3 above. * * *
B. AMOUNT AND ADMINISTRATION OF BENEFITS
* * *
4. The Executive Committee, after receiving a recommendation from the President, will set a level of strike benefits paid to the striking member which is consistent with the situations pertaining to that strike.
* * *
6. No flight deck crew member may receive benefits unless his eligibility for same is certified by his LEC and which will be subject to his:
a. Being available for and performing duties as required by the guidelines and criteria established by the MEC pertaining to the support of the action to resolve the dispute.
b. Not engaging in any action or deed which might injure or adversely affect the successful outcome of the dispute.
c. Not flying for another carrier engaged in a dispute with ALPA.
d. Being in Good Standing before receiving benefits.
7. Apprentice members and nonmembers who cooperate in the effort may receive benefits if and when certified by the LEC. Cooperation shall consist of, as a minimum, Items (a), (b) and (c) in Paragraph 6 above.
On March 13, 1989, the executive committee, pursuant to section 65(B)(4) of the Manual, adopted the executive board's resolution to award strike benefits equally among the strikers, rather than awarding amounts calibrated to each striker's rank. This was apparently the first strike in ALPA's history during which such egalitarian treatment was shown to the striking pilots. Following a discussion of the general needs of the pilots and the amount they could reasonably assess the membership, the executive committee set a flat monthly benefit of $2,400. The executive committee estimated that the benefit level would require a monthly assessment from members of about $35 for each $10,000 of annual income.
On March 20, 1989, pursuant to section 65(A)(3) of the Manual, ALPA balloted the nonstriking members of the union to approve disbursement of benefits to striking pilots. Apparently the troubles at Eastern were a common topic of discussion in the flight industry, and there was general concern among pilots regarding Lorenzo's activities. The report accompanying the ballot included a letter from the executive committee urging ALPA members to vote for strike benefits.
Your vote authorizing sympathy strike benefits for our brothers and sisters at Eastern not only supports their cause; it is also an investment in the future of our profession. Let no one doubt that our future is at risk if we permit Frank Lorenzo to squeeze from the hides of his employees a further competitive advantage.
Three-quarters of the valid votes cast supported the resolution.
To fund the benefits, all of the nonstriking ALPA pilots were obligated, pursuant to article 9, section 7(A)(1), of ALPA's constitution and bylaws (revised as of October 30, 1988), to pay the assessments. These members deducted the amount of the assessments on their 1989 Federal income tax returns as employee business expenses. The amount assessed was billed by ALPA to...
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