§ [162(a)], Internal Revenue Code

§ [162(a)], Internal Revenue Code.

111^ “(a) In General.– There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including –“
“****”
“(2) traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business....”
§ 162(a)(2) of the Internal Revenue Code of 1954, 26 U.S.C. § 162(a)(2) (1958 ed.).

112^ After denying the Government’s motion for a directed verdict, the District Judge charged the jury that it would have to “determine under all the facts of this case whether or not” the Commissioner’s rule was “an arbitrary regulation as applied to these plaintiffs under the facts in this case.” He told the jury to consider whether the meal expenses were “necessary for the employee to properly perform the duties of his work.”
“Should he have eaten them at his home, rather than . . . away from home, in order to properly carry on this business or to perform adequately his duties as an employee of this produce company[?]”
“You are instructed that the cost of meals while on one-day business trips away from home need not be incurred while on an overnight trip to be deductible, so long as the expense of such meals ... proximately results from the carrying on the particular business involved and has some reasonable relation to that business.”
Under these instructions, the jury found for the respondent. The District Court denied the Government’s motion for judgment notwithstanding the verdict.

113^ Prior to the enactment in 1921 of what is now § 162(a)(2), the Commissioner had promulgated a regulation allowing a deduction for the cost of meals and lodging away from home, but only to the extent that this cost exceeded “any expenditures ordinarily required for such purposes when at home.” Treas. Reg. 45 (1920 ed.), Art. 292, 4 Cum. Bull. 209 (1921). Despite its logical appeal, the regulation proved so difficult to administer that the Treasury Department asked Congress to grant a deduction for the “entire amount” of such meal and lodging expenditures. See Statement of Dr. T. S. Adams, Tax Adviser, Treasury Department, in Hearings on H.R. 8245 before the Senate Committee on Finance, 67th Cong., 1st Sess., at 50, 234-235 (1921). Accordingly § 214(a)(1) of the Revenue Act of 1921, c. 136, 42 Stat. 239, for the first time included that language that later became § 162(a)(2). ...

114^ Because § 262 makes “personal, living, or family expenses” nondeductible, the taxpayer whose business requires no travel cannot ordinarily deduct the cost of the lunch he eats away from home. But the taxpayer who can bring himself within the reach of § 162(a)(2) may deduct what he spends on his noontime meal although it costs him no more, and relates no more closely to his business, than does the lunch consumed by his less mobile counterpart.

115^ The Commissioner’s interpretation, first expressed in a 1940 ruling, I.T. 3395, 1910-2 Cum. Bull. 64, was originally known as the overnight rule. See Commissioner v. Bagley, [374 F.2d 204,] 205.

116^ The respondent seldom traveled farther than 55 miles from his home, but he ordinarily drove a total of 150 to 175 miles daily.

117^ The taxpayer must ordinarily “maintain a home for his family at his own expense even when he is absent on business,” Barnhill v. Commissioner, 148 F.2d 913, 917, and if he is required to stop for sleep or rest, “continuing costs incurred at a permanent place of abode are duplicated.” James v. United States, 308 F.2d 204, 206. The same taxpayer, however, is unlikely to incur substantially increased living expenses as a result of business travel, however far he may go, so long as he does not find it necessary to stop for lodging. ...

118^ The court below thought that,
“[i]n an era of supersonic travel, the time factor is hardly relevant to the question of whether or not ... meal expenses are related to the taxpayer’s business. ...”
369 F.2d 87, 89-90. But that completely misses the point. The benefits of § 162(a)(2) are limited to business travel “away from home,” and all meal expenses incurred in the course of such travel are deductible, however unrelated they may be to the taxpayer’s income-producing activity. To ask that the definition of “away from home” be responsive to the business necessity of the taxpayer’s meals is to demand the impossible.

119^ Flowers denied a deduction claimed by the taxpayer as not involving expenses required by the taxpayer’s employer’s business. It is now established, however, that a taxpayer may be in the trade or business of being an employee. See, e.g., Primuth v. Commissioner, 54 T.C. 374, 377-78 (1970) (citing cases); Rev. Rul. 77-16; Rev. Rul. 60-16. Thus, expenses necessitated by the exigencies of an employee’s occupation, without regard to the demands of the employer’s business, are also deductible.

120^ Under the general provision of § 162(a), no deduction is allowed for expenses incurred in preparing to enter a new business and the phrase “in the pursuit of a trade or business” has in cases concerned with such expenses been read to “presuppose ( ) an existing business with which (the taxpayer) is connected.” Frank v. Commissioner, 20 T.C. 511, 513-14 (1953). See, e.g., Weinstein v. United States, 420 F.2d 700 (Ct. Cl.1970).

121^ The Tax Court has, with a notable exception, consistently held that a taxpayer’s home is his place of business. See Daly v. Commissioner, 72 T.C. 190 (1979); Foote v. Commissioner, 67 T.C. 1 (1976); Montgomery v. Commissioner, 64 T.C. 175 (1975), aff’d, 532 F.2d 1088 (6th Cir. 1976); Blatnick v. Commissioner, 56 T.C. 1344 (1971). The exception, of course, is the present case.

122^ In this respect, Mr. and Mrs. Hantzis’ situation is analogous to cases involving spouses with careers in different locations. Each must independently satisfy the requirement that deductions taken for travel expenses incurred in the pursuit of a trade or business arise while he or she is away from home. See Chwalow v. Commissioner, 470 F.2d 475, 477-78 (3d Cir. 1972) (“Where additional expenses are incurred because, for personal reasons, husband and wife maintain separate domiciles, no deduction is allowed.”); Hammond v. Commissioner, 213 F.2d 43, 44 (5th Cir. 1954); Foote v. Commissioner, 67 T.C. 1 (1976); Coerver v. Commissioner, 36 T.C. 252 (1961). This is true even though the spouses file a joint return. Chwalow, supra, 470 F.2d at 478.

123^ The concurrence reaches the same result on essentially the same reasoning, but under what we take to be an interpretation of the “in pursuit of business” requirement. We differ from our colleague, it would seem, only on the question of which precondition to deductibility best accommodates the statutory concern for “‘the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses.’” See supra. Neither the phrase “away from home” nor “in pursuit of business” effectuates this concern without interpretation that to some degree removes it from “the ordinary meaning of the term.” (Keeton, J., concurring). However, of the two approaches, we find that of the concurrence more problematic than that adopted here.

124^ In Peurifoy, the Court stated that the Tax Court had “engrafted an exception” onto the requirement that travel expenses be dictated by business exigencies, allowing “a deduction for expenditures ... when the taxpayer’s employment is ‘temporary’ as contrasted with ‘indefinite’ or ‘indeterminate.’” 358 U.S. at 59. Because the Commissioner did not challenge this exception, the Court did not rule on its validity. It instead upheld the circuit court’s reversal of the Tax Court and disallowance of the deduction on the basis of the adequacy of the appellate court’s review. The Supreme Court agreed that the Tax Court’s finding as to the temporary nature of taxpayer’s employment was clearly erroneous. Id. at 60-61.
Despite its inauspicious beginning, the exception has come to be generally accepted. Some uncertainty lingers, however, over whether the exception properly applies to the “business exigencies” or the “away from home” requirement. [citations omitted]. In fact, it is probably relevant to both. [citations omitted].
Because we treat these requirements as inextricably intertwined, see supra, we find it unnecessary to address this question: applied to either requirement, the temporary employment doctrine affects the meaning of both.

125^ For reasons explained by the court, the temporary nature of her employment does not bring the case within those as to which Congress was mitigating the burden of duplicative expenses when enacting § 162(a)(2).

126^ See Sarah Backer, 1 B.T.A. 214; Norvin R. Lindheim, 2 B.T.A. 229; Thomas A. Joseph, 26 T.C. 562; Burroughs Bldg. Material Co. v. Commissioner, 47 F.2d 178 (C.A.2d Cir.); Commissioner v. Schwartz, 232 F.2d 94 (C.A.5th Cir.); Acker v. Commissioner, 258 F.2d 568 (C.A.6th Cir.); Bell v. Commissioner, 320 F.2d 953 (C.A.8th Cir.); Peckham v. Commissioner, 327 F.2d 855, 856 (C.A.4th Cir.); Port v. United States, 163 F.Supp. 645. See also Note, Business Expenses, Disallowance, and Public Policy: Some Problems of Sanctioning with the Internal Revenue Code, 72 Yale L.J. 108; 4 Mertens, Law of Federal Income Taxation § 25.49 ff. Compare Longhorn Portland Cement Co., 3 T.C. 310; G.C.M. 24377, 1944 Cum. Bull. 93; Lamont, Controversial Aspects of Ordinary and Necessary Business Expense, 42 Taxes 808, 833-834.

127^ In challenging the amendments, Senator Williams also stated:
“In other words, you are going to count the man as having money which he has not got, because he has lost it in a way that you do not approve of.”
50 Cong. Rec. 3850.

128^ Specific legislation denying deductions for payments that violate public policy is not unknown. E.g., Internal Revenue Code of 1954, § 162(c) (disallowance of deduction for payments to officials and employees of foreign countries in circumstances where the payments would be illegal if federal laws were applicable; cf. Reg. § 1.162-18); § 165(d) (deduction for wagering losses limited to extent of wagering gains). See also Stabilization Act of 1942, § 5(a), 56 Stat. 767, 50 U.S.C. App. § 965(a) (1946 ed.), Defense Production Act of 1950, § 405(a), 64 Stat. 807, as amended, c. 275, § 104(i), 65 Stat. 136 (1951), 50 U.S.C. App. § 2105(a) (1952 ed.), and Defense Production Act of 1950, § 405(b), 64 Stat. 807, 50 U.S.C. App. § 2105(b) (1952 ed.) (general authority in President to prescribe extent to which payments violating price and wage regulations should be disregarded by government agencies, including the Internal Revenue Service; see Rev. Rul. 56-180). Cf. § 1.162-1(a), which provides that
“Penalty payments with respect to Federal taxes, whether on account of negligence, delinquency, or fraud, are not deductible from gross income;”
Joint Committee on Internal Revenue Taxation, Staff Study of Income Tax Treatment of Treble Damage Payments under the Antitrust Laws, Nov. 1, 1965, p. 16 (proposal that § 162 be amended to deny deductions for certain fines, penalties, treble damage payments, bribes, and kickbacks).

129^ Cf. Paul, The Use of Public Policy by the Commissioner in Disallowing Deductions, 1954 So. Calif. Tax Inst. 715, 730-731:
“... Section 23(a)(1)(A) [the predecessor of § 162(a)] is not an essay in morality, designed to encourage virtue and discourage sin. It ‘was not contrived as an arm of the law to enforce State criminal statutes. ...’ Nor was it contrived to implement the various regulatory statutes which Congress has from time to time enacted. The provision is more modestly concerned with ‘commercial net income’ – a businessman’s net accretion in wealth during the taxable year after due allowance for the operating costs of the business. ... There is no evidence in the Section of an attempt to punish taxpayers ... when the Commissioner feels that a state or federal statute has been flouted. The statute hardly operates ‘in a vacuum’ if it serves its own vital function and leaves other problems to other statutes.”

130^ The rule is otherwise where the corporate employee is entitled to, but does not seek, reimbursement from the corporation. Stolk v. Commissioner, 40 T.C. 345, 357 (1963), aff’d. per curiam 326 F.2d 760 (2d Cir. 1964); Coplon v. Commissioner, T.C. Memo. 1959-34, aff’d. per curiam 277 F.2d 534 (6th Cir. 1960).

131^ S. Rept. 1881, 87th Cong., 2d Sess. (1962) states in part:
“Entertaining guests at night clubs, country clubs, theaters, football games, and prizefights, and on hunting, fishing, vacation and similar trips are examples of activities that constitute ‘entertainment, amusement, and recreation.’ ***”
“An objective standard also will overrule arguments such as the one which prevailed in Sanitary Farms Dairy, Inc. (25 T.C. 463 (1955)) that a particular item was incurred, not for entertainment, but for advertising purposes. That case involved a big-game safari to Africa. *** Under the bill, if the activity typically is considered to be entertainment, amusement, or recreation, it will be so treated under this provision regardless of whether the activity can also be described in some other category of deductible items. This will be so even where the expense relates to the taxpayer alone.”
(Emphasis added.) See also H. Rept. 1447, 87th Cong., 2d Sess. (1962).

132^ There are various rules that alter – either by extending or eliminating – the carryback loss period. See § 172(b)(1)(B, C, D, and E).

133^ I.R.C. § 611(a).

134^ Commissioner v. Southwest Exploration Co., 350 U.S. 308, 312 (1956) (depletion allowance “based on the theory that the extraction of minerals gradually exhausts the capital investment in the mineral deposit”).

135^ Id. at 312.

136^ Id.

137^ Id.

138^ 5 William H. Byrnes, IV & Christopher M Sove, Mertens Law of Fed. Income Tax’n § 24:132 (rev. 2013), available on Westlaw.

139^ See, e.g., Commissioner v. Southwest Exploration Co., 350 U.S. 308, 309 (1956) (Court granted cert “because both the drilling company and the upland owners cannot be entitled to depletion on the same income”).

140^ See Palmer v. Bender, 257 U.S. 551, 557 (1933) (conveyance of leased property in exchange for cash bonus, future payment, plus 1/8 royalty sufficient to claim depletion allowance deduction, irrespective of fact that taxpayer may have retained no legal interest in the mineral content of the land).

141^ Reg. § 1.611-1(b)(1).

142^ I.R.C. § 613(a) (percentage method applicable to “mines, wells, and [certain] other natural deposits”).

143^ I.R.C. § 612 (same as adjusted basis in § 1011 for “purpose of determining gain upon sale or other disposition of” the property).

144^ Reg. § 1.611-2(a)(1) (mines, oil and gas wells, and other natural deposits); Reg. § 1.611-3(b) (timber).

145^ Reg. § 1.611-2(a)(1) (mines, oil and gas wells, and other natural deposits).

146^ Reg. § 1.611-3(b)(1) (timber).

147^ I.R.C. § 1016(a)(1)(2); Reg. § 1.611-2(b)(2) (cost depletion for mines, oil and gas wells, and other natural deposits); Reg. § 1.611-3(c)(1) (timber).

148^ I.R.C. § 1254(a).

149^ I.R.C. § 613(a and b) (the percentages range from 5% to 22%)..

150^ I.R.C. § 613(a).

151^ Id. But see §§ 613(d), 613A.

152^ See Reg. § 1.613A-3 (details of exemption for independent producers and royalty owners).

153^ I.R.C. § 613A(c)(1).

154^ I.R.C. § 613A(d)(1).

155^ For an argument that the depletion deduction provides a tax incentive for companies that extract minerals but does little to preserve the environment from which the minerals were extracted, see Wendy B. Davis, Elimination of the Depletion Deduction for Fossil Fuels, 26 Seattle U. L. Rev. 197 (2002).

156^ The IRS now publishes Statistics of Income historical and data tables only online. The relevant tables are at http://www.irs.gov/file_source/pub/irs-soi/histab13e.xls.

157^ In the Tax Reform Act of 1986, P. L. 99-514, Sec. 201, Congress made substantial changes to I.R.C. § 168. In particular, Congress deleted the “recovery property” concept from the statute.

158^ Section 1245 property is, inter alia, any personal property which is or has been property of a character subject to allowance for depreciation provided in § 167. § 1245(a)(3).

159^ Among the provisions that we do not cover are § 163(h)’s allowance of a deduction for home mortgage interest and §§ 221/62(a)(17)’s above-the-line deduction for interest paid on education loans. We also do not consider deductions/exclusions/deferrals on various pension-funding vehicles. We do not consider in detail the credits for dependent care services necessary for gainful employment, § 21, the Hope and Lifetime Learning Credits, § 25A, the Earned Income Credit, § 32, and the Adoption Expenses Credit, § 38. Obviously these are important topics, and they raise interesting issues. Hopefully, a student can read the Code sections noted and gain sufficient understanding of those topics, at least for the time being.

160^ See National Federation of Business v. Sebelius, 567 U.S. ___, ___, 132 S. Ct. 2566, 2596 (2012) (congress may shape individual decisions through exercise of taxing power).

161^ See § 501(a).

162^ This paragraph is a generalization and omits a daunting number of details that a course in non-profit organizations covers.

163^ Id.

164^ Unlike the exclusion from gross income for interest income derived from state and municipal bonds, the market for “capital gain” property does not drive the price down to reflect the tax benefits of owning such property.

165^ ... except for the Defense of Marriage Act, 1 U.S.C. § 7, which states in part that “the word ‘marriage’ means only a union between one man and one woman as husband and wife ...”

166^ We defer discussion of some of these presumptions to more advanced courses. See § 318.

167^ These selected parts of § 267 apply to transactions between family members. Be aware that the scope of § 267 is broader than merely transactions involving family members. We defer discussion of these other transactions to later tax courses.

168^ Farid-es-Sultaneh examined some of these same questions in the pre-marriage context.

169^ The holding in the instant case is in accord with Commissioner v. Marshman, 279 F.2d 27 (CA6 1960), but is contra to the holdings in Commissioner v. Halliwell, 131 F.2d 642 (CA2 1942), and Commissioner v. Mesta, 123 F.2d 986 (CA3 1941).

170^ This is not synonymous with “simple.”

171^ ‘§ 22. Gross income * * * (k) Alimony, etc., Income. In the case of a wife who is divorced or legally separated from her husband under a decree of divorce or of separate maintenance, periodic payments (whether or not made at regular intervals) received subsequent to such decree in discharge of, or attributable to property transferred (in trust or otherwise) in discharge of, a legal obligation which, because of the marital or family relationship, is imposed upon or incurred by such husband under such decree or under a written instrument incident to such divorce or separation shall be includible in the gross income of such wife, and such amounts received as are attributable to property so transferred shall not be includible in the gross income of such husband. This subsection shall not apply to that part of any such periodic payment which the terms of the decree or written instrument fix, in terms of an amount of money or a portion of the payment, as a sum which is payable for the support of minor children of such husband * * *’§ 23. Deductions from gross income. In computing net income there shall be allowed as deductions: * * * (u) Alimony, etc., payments. In the case of a husband described in § 22(k), amounts includible under § 22(k) in the gross income of his wife, payment of which is made within the husband’s taxable year. ...

172^ The Commissioner urges upon the court the argument that the taxpayer stood in loco parentis to William after as well as before the divorce and separation, and that, therefore, the payments in question for William’s support were fixed ‘for the support of minor children of such husband. * * *’ This argument is without merit. One has no continuing obligation to support a stepchild to whom he stands in loco parentis. 67 C.J.S. Parent and Child 1950, § 80; Schneider v. Schneider, Ch., 1947, 25 N.J.Misc. 180, 52 A.2d 564.

173^ We may assume for the moment that Ada had such a legal obligation. Hippodrome Building Co. v. Irving Trust Co., 2 Cir., 1937, 91 F.2d 753.

174^ See also Treasury Regulations § 118, 39.22(k)-1(d): ‘Except in cases of a designated amount or portion for the support of the husband’s minor children, periodic payments described in § 22(k) received by the wife for herself and any other person or persons are includible in whole in the wife’s income, whether or not the amount or portion for such other person or persons is designated.’

175^ The Tax Court states: ‘The only significant factual difference which distinguishes Leon Mandel, supra, (23 T.C. 81, aff’d (7 Cir., 1956, 229 F.2d 382) from the instant case is the designation of the ultimate payee. The substantive distinction is that whereas in the instant case petitioner’s former wife, Ada, owed a legal obligation to support her minor son, William, in the Mandel case the husband’s former wife owed no obligation to support her adult children. This distinction was pointed out by the Court of Appeals in the Mandel case as follows: ‘No legal obligation to support the children after they arrived at their majority was imposed upon *** (the wife). The payments in controversy made to her thereafter were for and on their behalf and represented no economic or financial gain or benefit to her. We conclude that they were not includible in her gross income under 22(k). ***”

176^ The tax rate in 1939 was 18 percent; in 1940, 24 percent.

177^ The rationale which supports the principle, as well as its limitation, is that the property, having once served to offset taxable income (i.e., as a tax deduction) should be treated, upon its recoupment, as the recovery of that which had been previously deducted. See Plumb, The Tax Benefit Rule Today, 57 Harv. L. Rev. 129, 131 n. 10 (1943).

178^ This opinion represents the views of the majority and complies with existing law and decisions. However, in the writer’s personal opinion, it produces a harsh and inequitable result. Perhaps, it exemplifies a situation “where the letter of the law killeth; the spirit giveth life.” The tax-benefit concept is an equitable doctrine which should be carried to an equitable conclusion. Since it is the declared public policy to encourage contributions to charitable and educational organizations, a donor, whose gift to such organizations is returned, should not be required to refund to the Government a greater amount than the tax benefit received when the deduction was made for the gift. Such a rule would avoid a penalty to the taxpayer and an unjust enrichment to the Government. However, the court cannot legislate and any change in the existing law rests within the wisdom and discretion of the Congress.

179^ The installment method does not apply to recognition of losses.

180^ ... as opposed to a Roth IRA.

181^ ... defined in § 223(d)(2)(A).

182^ A “future” entitles the holder to purchase the commodity in the future for a fixed price.

183^ One year is not more than one year.

184^ We defer altogether the definition of “capital gain net income.”

185^ A corporation may claim losses from the sale or exchange of capital assets only to the extent of its capital gains. § 1211(a).

186^ “Adjusted taxable income” equals: (taxable income) + (§ 1211(b) deduction) + (personal exemption deductions) − ((deductions allowed) − (gross income) [but not less than $0]). § 1212(b)(2)(B).

187^ For a spectacular application of this principle, see United States v. Generes, 405 U.S. 93 (1972).

188^ Section 11 imposes income taxes on corporations.

189^ ... and estates and trusts.

190^ “Ordinary income” is the income subject to the highest rates imposed on individual taxpayers. It includes gains from the sale or exchanges of non-capital and non-§ 1231 assets, offset by allowable losses on the sales of the same assets. §§ 64, 65.

191^ ... as modified in § 1(i) and as indexed for inflation, id.

192^ Taxpayers could engage in such systematic mismatching prior to 1962.

193^ Congress enacted § 1245 in 1962. Revenue Act of 1962, P.L. 87-834, § 13(a).

194^ Congress enacted § 1250 in 1964. Revenue Act of 1964, P.L. 88-272, § 231(a).

195^ “Disposition” is a broader term than “sale” or “exchange.” A corporation that distributes property to a shareholder has not sold or exchanged it, but has disposed of it. Such a disposition triggers a tax on the gain computed as if the corporation had sold the property to the shareholder. § 311(b). Some or all of that gain might be depreciation recapture.

196^ Actually, if the disposition is other than by sale, exchange, or involuntary conversion, gain taxable as ordinary income is measured by subtracting adjusted basis from the lesser of recomputed basis or the fmv of the property. § 1245(a)(1).

197^ This would include cases where section 1231 gains equal section 1231 losses.

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