Rowan Companies, Inc. v. U.S.

• Decision Date: 22 August 1980
• Docket Number: No. 77-3044,77-3044
• Citation: 624 F.2d 701
• Parties: 81-1 USTC P 9269 ROWAN COMPANIES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 701

624 F.2d 701

81-1 USTC P 9269

ROWAN COMPANIES, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 77-3044.

United States Court of Appeals, Fifth Circuit.

Aug. 22, 1980.

Elmer H. Theis, Houston, Tex., K. Martin Worthy, Hamel, Park, McCabe & Saunders, Michael C. Durney, Washington, D. C., for plaintiff-appellant.

M. Carr Ferguson, Leonard J. Henzke, Jr., Asst. Attys. Gen., Gilbert E. Andrews, Acting Chief, Stanley S. Shaw, Atty., Tax Div., U. S. Dept. of Justice, Washington, D. C., for defendant-appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before RUBIN and POLITZ, Circuit Judges, and SMITH ^*, District Judge.

ALVIN B. RUBIN, Circuit Judge:

The Federal Insurance Contributions Act (FICA) and the Federal Unemployment Act (FUTA) both use the simple word "wages" to designate the base for the taxes imposed. The taxpayer contends that the Secretary of the Treasury may not by regulation define that word to include the value of meals and lodging furnished in kind by an employer for his own benefit to employees away from home overnight. The fact that the regulation has been in force for forty years, the purpose of the statutes and the method of their administration convince us that the Secretary has not exceeded his authority. We, therefore, affirm the district court's summary judgment for the government.

I.

Rowan contracts with other firms to drill oil and gas wells both on land and beneath the offshore waters. When drilling offshore, Rowan moves its rig to the owner's location, as much as sixty miles from land. Each rig is operated by a drilling crew. Crews vary in size depending on the type of rig and may include from four to twelve persons. Each offshore rig operates twenty-four hours a day, manned by two crews, each working twelve hours. Members of each crew remain offshore for a fixed period, known as a tour of duty, usually ten days, when they are provided transportation to shore and a period of leave, usually five days. When their new tour is to commence, Rowan provides transportation to the offshore location.

Because of the cost of transporting crews to and from land at the start and end of each shift, Rowan hires caterers to provide meals and maintain living quarters for crews working offshore. Eating facilities, sleeping quarters and lounge areas used for leisure activities while a crew is off duty are usually located on a vessel moored alongside the drilling platform.

The decision to afford these services was reached unilaterally by Rowan for its own economic reasons without either individual or collective bargaining. ¹ Identical meals and facilities are provided to all employees regardless of their status or rate of pay. An employee who for any reason does not elect to eat the meals furnished does not receive an allowance in lieu of them.

Rowan did not include the value of meals and lodging in computing an employee's income in order to determine either the amount to be reported as income earned by the employee on the W-2 form, the amount to be withheld from wages for income tax purposes or the base on which to calculate the amount to be paid by it for FUTA purposes and by it and the employee for FICA purposes.

The Internal Revenue Service added the fair market value of meals and lodging to the tax base for FICA and FUTA taxes and assessed a deficiency in employer taxes for 1967, 1968 and 1969. The taxes were not assessed on the value of transportation to and from work, which was also furnished by Rowan. Rowan paid the deficiency and sues for refund. The IRS concedes that these benefits are not income on which the employee must pay income tax, and that, as a result of a 1978 Supreme Court decision, they are not the subject of withholding. The IRS likewise does not challenge Rowan's position that it furnished these services for its own convenience.

II.

The Federal Insurance Contributions Act, which was adopted in 1935, ² imposes upon employers and employees alike a tax based on "wages," I.R.C. §§ 3101, 3111, currently at the rate of 6.13% on all wages up to $25,900 annually. The proceeds of this tax are used to defray the cost of the social security program. The Federal Unemployment Tax Act, also adopted in 1935, imposes a tax on employers based on "wages" paid to employees, I.R.C. § 3301. The proceeds of this tax are used to defray the cost of the federal unemployment compensation program. In 1943, Congress adopted the Current Tax Payment Act, requiring employers to withhold income taxes in an amount based on employees' "wages," I.R.C. § 3402.

The term "wages" is defined by both FICA, I.R.C. § 3121(a), and FUTA, I.R.C. § 3306(b), as meaning "all remuneration for employment, including the cash value of all remuneration paid in any medium other than cash." ³ In enacting the social security taxes, Congress manifested its intent to impose the excise on a wide range of employer-furnished remuneration. The Committee Reports state that wages include compensation for services paid in any form, such as room or board. H.R. Rep. No. 615, 74th Cong., 1st Sess. 3, 1939-2 C.B. 600, 606; S. Rep. No. 628, 74th Cong., 1st Sess. 49, 1939-2 C.B. 611, 620). ⁴

Beginning in 1937, the Secretary began issuing rulings interpreting each statute to include in wages meals and lodgings furnished specific types of employees. ⁵ In a more general regulation promulgated in 1940, he excluded from wages facilities or privileges of relatively small value furnished employees by the employer but included meals or lodging furnished "for example, to restaurant or hotel employees, or to seamen or other employees aboard vessels, since generally these items constitute an appreciable part of the total remuneration of such employees." No mention was made of the convenience of the employer. Treas. Reg. 106 § 402.227 (FICA); Treas.Reg. 107 § 403.227 (FUTA). This provision was carried substantially unchanged into the 1951 regulations, Treas. Reg. 128 § 408.226, and into the 1956 regulations issued pursuant to the 1954 Code, Treas. Reg. §§ 31.3121(a)-1(f), T.D. 6190, 1956-2 C.B. 605, 619 (FICA), Treas. Reg. §§ 31.3306(b)-1(f), T.D. 6199, 1956-2 C.B. 721, 740 (FUTA). The regulations issued in 1956 remain in effect today.

These regulations were adopted pursuant to express statutory authority. See I.R.C. § 7805(a). If they are reasonable and consistent with the statutory authorization, they may not be overturned. Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 533 n.11, 99 S.Ct. 773, 781 n.11, 58 L.Ed.2d 785, 796 n.11 (1979); Anderson, Clayton & Co. v. United States, 562 F.2d 972, 976 n.6 (5th Cir. 1977), cert. denied, 436 U.S. 944, 98 S.Ct. 2845, 56 L.Ed.2d 785 (1978); Kramertown Co. v. Commissioner, 488 F.2d 728, 730 (5th Cir. 1974).

Absent some indication of a different congressional intention, it does not appear inconsistent with the purposes of FICA and FUTA to consider meals and lodging of appreciable value remuneration whether or not they are furnished for the employer's benefit and are not considered to be compensation to the employee for income tax purposes. Thus, the validity of the regulations was upheld in Pacific American Fisheries v. United States, 138 F.2d 464 (9th Cir. 1943). In 1962, Rev.Rul. 62-150, 1962-2 C.B. 213, declared that all worktime free meals representing an appreciable part of the remuneration of the employees, regardless of the nature of the business or the convenience of the employer, were subject to FICA and FUTA taxes. This position was upheld in S. S. Kresge Co. v. United States, 218 F.Supp. 240 (E.D. Mich., 1963), and S. S. Kresge Co. v. United States, 379 F.2d 309 (6th Cir. 1967), although those cases rely in part on the existence of a quid pro quo nexus between the giving of free meals and the receipt of employee services as justification for treating the value of the meals as "wages." Their logic is not, however confined to that situation.

Doubt arises not from any provision of FICA or FUTA but from the interpretation given the term "wages" in another tax statute. In 1943, Congress adopted the pay-as-you-go tax plan, still substantially in force, the Current Tax Payment Act of 1943, 57 Stat. 126. That act required employers to withhold income tax from "wages". The statute not only used that term but defined it in words that are, for present purposes identical to those used in FICA and FUTA. ⁶ However, in the same year, the Secretary adopted regulations excluding from wages for withholding purposes "living quarters or meals . . . furnished to an employee for the convenience of the employer . . . ." Treas.Reg. 115, § 404.101. Thus, under the regulations, the criterion of taxability of meals and lodging under FICA and FUTA was whether the benefits amounted to an appreciable part of wages while the test for withholding was whether they were furnished for the employer's convenience, however large the value.

This conflicting interpretation of the same word used in three statutes and defined by indistinguishable definitional phrases was confirmed without explanation in Rev. Rul. 1944-7-11685, Mim. 5357, 1944 C.B. 550. Yet a rationale is not difficult to surmise. The purpose of withholding is to set aside the amount needed for income tax. If income tax is not due on some payments to employees, it is unnecessary to withhold taxes from these payments.

Section 213 of the Revenue Act of 1918, 40 Stat. 1057, 1063, defined income as including "salaries, wages or compensation for personal service(s) . . . of whatever kind and in whatever form paid." The convenience of the employer doctrine arose in 1919, when the Treasury recognized that board and lodging furnished seamen in addition to their cash compensation is supplied for the convenience of their employer and that its value is not a part of the employee's income. O.D. 265, 1 C.B. 71. The convenience of the employer principle has been followed consistently in determining...