Ritter v. United States

• Decision Date: 19 April 1968
• Docket Number: No. 394-64.,394-64.
• Citation: 393 F.2d 823
• Parties: James J. RITTER v. The UNITED STATES.
• Court: U.S. Claims Court

393 F.2d 823 (1968)

James J. RITTER v. The UNITED STATES.

No. 394-64.

United States Court of Claims.

April 19, 1968.

Daniel M. Gribbon, Washington, D. C., attorney of record, for plaintiff, Brice M. Clagett and Covington & Burling, Washington, D. C., of counsel.

D. Knox Bemis, Washington, D. C., with whom was Asst. Atty. Gen. Mitchell Rogovin, for defendant, Philip R. Miller, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and LARAMORE, DURFEE, DAVIS, COLLINS and SKELTON, Judges.

OPINION

PER CURIAM:

This case was referred to Chief Trial Commissioner Marion T. Bennett with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 57(a).

The commissioner has done so in an opinion and report filed on August 16, 1966. Exceptions to the commissioner's report and opinion were filed by the parties and the case has been submitted to the court on the briefs of the parties and oral argument of counsel. Since the court agrees with the commissioner's findings, opinion and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case.^* Therefore, plaintiff is not entitled to recover and the petition is dismissed.

OPINION OF COMMISSIONER

BENNETT, Chief Commissioner:

This is an action to recover federal income taxes and interest thereon attributable to certain payments made to plaintiff by his employer in 1958. The issue is whether these payments, which were occasioned by a transfer of plaintiff's place of employment for the convenience of his employer, constitute ordinary income to plaintiff and, if so, whether plaintiff taxpayer may deduct as expenses the items for which payments were made. It is concluded on the law and the evidence that the payments are taxable as ordinary income, are not deductible, and that plaintiff's claim must be dismissed.

In the summer of 1957, plaintiff, then Regional Controller for the Western Region of the Data Processing Division of International Business Machines Corporation, hereinafter referred to as IBM, was informed that the Western Regional Headquarters were to be moved from San Francisco to Los Angeles in the fall of 1958 and that he, as Regional Controller, would similarly be required to relocate in order to retain his position within the company. At the time of plaintiff's move, it was IBM's established policy to reimburse its employees for certain expenses incurred when they were required by IBM to transfer from one location to another on a permanent basis. The tax effect of these reimbursements is now contested.

The first reimbursement question relates to IBM's so-called "Moving and Living Expense Policy" under which IBM reimbursed plaintiff for certain expenses he incurred in arranging for the sale of his home in the Mill Valley area of San Francisco, the movement of his household to Los Angeles, and the acquisition of a new home in the Los Angeles area. These reimbursed expenses which totaled $4,177.46 were not included by taxpayer in his income. It is the Service's basic disagreement with this treatment which is the essence of the present dispute.

Relying upon Rev.Rul. 54-429, 1954-2 CUM.BULL. 53, the Internal Revenue Service included the reimbursements for the following so-called "indirect expenses" in plaintiff's income:¹

                  (a) Real estate appraisal of plaintiff's residence in Mill
                       Valley __________________________________________________  $  130.00
                  (b) Advertising the Mill Valley residence for sale in the
                       Wall Street Journal _____________________________________      15.75
                  (c) Various upkeep and double interest charges for Mill Valley
                       residence pending its sale after move to Los Angeles ____     330.78
                  (d) Closing costs on purchase of Los Angeles home ____________     500.00
                  (e) Installation of carpeting in Los Angeles home ____________     132.82
                  (f) Miscellaneous expenses of the move _______________________     100.00
                  (g) Remaking and rehanging draperies in Los Angeles
                       residence ______________________________________________      245.00
                                                                                   ________
                       Total __________________________________________________    1,454.35
                

There is no dispute between the parties that these expenses were actually incurred, that they would not have been incurred but for the move required by IBM, or that they are reasonable in amount.

The next item of reimbursement in issue is under a policy called the "Home Guarantee Policy,"² which provided financial assistance to all employees of IBM who owned homes they had to sell in order to transfer to a new location. The plan provided that an employee required to move at the request of IBM would receive no less than a guaranteed return upon the sale of his home, equal to its "appraised value" at the time of the required move. In summary, the Home Guarantee Policy was administered in the following manner: An employee's home would be appraised by two independent, qualified appraisers. One appraiser was selected by a local bank appointed by IBM to administer the policy in the particular locality and the other appraiser was selected by the employee from a list of qualified appraisers furnished the employee by the local bank. If the two appraisals differed by more than 5 percent, a third appraiser would be selected by the employee from the bank's list. The appraised value was the average of the two highest appraisals. Once the appraised value was determined, the employee could elect to enter into the Home Guarantee Policy under which IBM would guarantee that upon the sale of the home the employee would receive the full appraised value. The policy provided:

If the net selling price of the employee\'s home is less than its appraised value, IBM will reimburse the employee for the difference between the two amounts.

The net selling price was defined as the selling price less certain selling costs, such as broker's commission, lawyer's fees, tax stamps, and title insurance.

Plaintiff's residence was appraised under the policy at $38,737.50. Despite the selling efforts of the plaintiff, the local bank and local realtors, a firm offer to purchase the residence was not received until October 2, 1958, some 2 weeks after plaintiff had moved to Los Angeles. The offer to purchase was at a gross price of $34,000 and, since this offer was more than 10 percent below the appraised value, under the terms of the policy, the special consent of IBM had to be obtained before the offer could be accepted.

The local bank recommended acceptance, IBM agreed, and the transaction was closed with the plaintiff selling his residence to an unrelated third party for $34,000 on November 6, 1958. It does not appear that the appraised value of plaintiff's residence was inflated to give him any amount over the fair market value at the time IBM directed his transfer. On November 6, 1958, plaintiff's basis for determining gain or loss was $37,640.67.

Under the terms of the Home Guarantee Policy, the net selling price received by plaintiff was $31,665.60. IBM reimbursed plaintiff for the difference between $31,665.60 and $38,737.50 for a net of $7,071.90. The Internal Revenue Service included this amount in plaintiff's gross income for 1958 as additional compensation. Plaintiff has paid a capital gains tax and resists the higher payment arising from defendant's treatment of the sums involved as ordinary income.

The Moving and Living Expense Policy

Plaintiff contends that he should not be required to pay income taxes on amounts received by way of reimbursement for expenses resulting from a move undertaken primarily for the convenience of his employer. More specifically, plaintiff contends that these reimbursements are not income as defined by the Internal Revenue Code of 1954, § 61, 68A Stat. 17, in that these reimbursements do not constitute wages, incentive compensation, or any other form of income nor do they bear "the essential elements of income." Alternatively, plaintiff contends that in the event these reimbursed expenses are income, then he is entitled to a deduction under sections 62 and 162 of the Code. 68A Stat. 17, 45.

Section 61(a) (1) of the Internal Revenue Code of 1954 provides:

(a) General Definition. — Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:

(1) Compensation for services, including fees, commissions, and similar items;

The Treasury Regulations on Income Tax (1954 Code), section 1.61-1(a), state: "Gross income means all income from whatever source derived, unless excluded by law." 1 CCH 1966 Stand.Fed.Tax Rep. ¶ 630.

The Supreme Court has consistently given the term "gross income" as defined by the Revenue Code³ a broad construction in order "to tax all gains except those specifically exempted." Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 430, 75 S.Ct. 473, 476, 99 L.Ed. 483 (1955). In Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 65 S.Ct. 591, 89 L.Ed. 830 (1945), taxpayer's employer gave him, as compensation for his services, an option to purchase stock and the Court, holding the option to be taxable income when exercised, stated that the term gross income as defined by the Revenue Act "is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected." 324 U.S. at 181, 65 S.Ct. at 593.

In Commissioner of Internal Revenue v. Lo Bue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142 (1956), the Court again broadened the concept of what is taxable compensation. Taxpayer was granted an option by his employer to purchase stock. The Court held that it made no difference whether the option was intended to give the employee a proprietary interest in the business or...