Humble Oil & Refining Company v. The United States , 442 F.2d 1362 ( 1971 )

OPINION

PER CURIAM:

This case was referred to Trial Commissioner Lloyd Fletcher with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on June 5, 1970. On August 19, 1970, defendant filed exceptions to the commissioner’s findings, opinion and recommended conclusion of law. Thereafter, on September 18, 1970, the court granted a joint motion to consolidate this ease and No. 343-68 (Humble Pipe Line Company v. United States, Ct.Cl., 442 F.2d 1353, a case in which Trial Commissioner Mastín G. White had filed an opinion and report on August 17, 1970), for further proceedings. On October 17, 1970, defendant filed a supplemental brief on consolidation and exceptions. The cases have been submitted to the court on oral argument of counsel and the briefs of the parties.

Since the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in the case.^* (See also the opinion of this date in the consolidated and companion case, No. 343-68, 442 F.2d 1353, referred to above.) Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 131(c) in accordance with this opinion.

OPINION OF COMMISSIONER

FLETCHER, Commissioner: Once again the court is called upon to consider the troublesome area of the tax treatment properly to be accorded payments, or reimbursements, by an employer of his employees’ moving expenses. See, Ritter v. United States, 393 F.2d 823, 183 Ct.Cl. 875 (1968), cert. denied, 393 U.S. 844, 89 S.Ct. 127, 21 L.Ed.2d 115 (1968). The question now presented is a refinement of the issue considered in Ritter.

Having successfully contended there (and also in other cases) that certain moving expense payments and reimbursements were taxable income to the recipient-employee, the defendant now moves forward another step and says that, since the payments and reimbursements were admittedly income to the employee, it was the duty of the employer to withhold income taxes thereon just as he is required to do in the case of salary or wage payments. In my opinion, the withholding requirement on “wages” contained in section 3402 of the Internal Revenue Code of 1954 cannot be carried to the extent now urged by defendant.

In summary, the facts are these. For many years the plaintiff, Humble Oil & Refining Company, has been engaged in various aspects of the petroleum business, and it has offices and other facilities in numerous locations throughout the United States. As might be expected, the maintenance of these widely scattered offices has quite frequently resulted in the movement of numerous of its employees from one location to another. When this has occurred, plaintiff has borne the bulk of the moving employees’ expenses either by way of direct payment thereof, or by way of reimbursement to the moved employees, or by a combination of both. This policy of Humble was well-known to its employees, and whenever they were asked to move from one location to another, not much thought was given by them to the matter of moving expenses. The important thing was the fact that their jobs were being moved. Hence, the primary decisional factor was the question of whether they desired to continue working for Humble or to seek employment elsewhere. Usually, an employee’s old job was available to him only in the new location and only a lesser position, or perhaps none at all, was open in the old location. Occasionally an employee was offered a better position and a higher salary in the new location. In any case, however, Humble offered to pay or reimburse its employees for most of their moving expenses.

Essentially, the present dispute arose out of a decision by plaintiff in 1960 when it determined to move the entire New York City headquarters of the former Esso Standard Oil Company (which company had been merged into plaintiff in 1959) to Houston, Texas. This move of the Esso operation from New York to Houston took place in 1961. In order to achieve the move with as little disruption as possible, plaintiff requested hundreds of its New York employees, both managerial and clerical, to move from New York to Houston. The employees were formally advised that the company, under its “resettlement policy,” would either directly pay for, or reimburse such employees, for the bulk of their expenses incurred in moving. As one witness described it, the promise of the company was to make the moving employee “whole” to the end that he would not be “out of pocket to a great extent.” During 1961, Humble paid, or reimbursed, its employees, both old and new, for the following moving expenses, the bulk of which involved the New York to Houston move:

(a) Moving expenses incurred by new employees: Expenditures for moving household goods and personal effects to new locations, transportation of families to the new locations, and meals and lodging en route to the new locations________________ $46,130.98

(b) Expenses Incurred by existing employees In moving themselves, their immediate families, and household goods and personal effects to the new locations ______________¹1,945,438.23

(c) Expenses incurred by existing employees In the sale of their residences: Brokers' commissions, expenditures In preparing residences for sale, costs of advertising, mortgage prepayment penalties, closing costs and fees _______________ 959,205.43

(d) Expenses Incurred by existing employees in purchasing new residences: House hunting trips, Inter-test on loans, expenditures for acquiring mortgages and securing title policies, recording fees, loan papers, credit reports, surveys, restrictions, escrow fees, closing costs and fees 443,224.03

(e) Expenses Incurred by existing employees In occupying new residences: Installation of appliances, refitting rugs and drapes, painting, decorating and carpentry________ 240,711.80

(f) Other expenses incurred by existing employees: Interim living expenses, expenses of interim trips to new locations, and miscellaneous expenses ___________________ (g) Amounts paid to existing employees representing in the case of each employee to whom payment was made, an amount equal to 75 percent of the excess of an appraised value of the employee's old house over Its actual selling price (provided that the employee placed his house for sale on multiple listing, or with two or more brokers, and then was unable to sell the house for as much as Its appraised value)_______________ 767,109.89 323,357.10

Plaintiff did not withhold income taxes on these payments. Insisting that plaintiff was required by law to do so, the Commissioner of Internal Revenue assessed deficiencies in withholding taxes against plaintiff who paid them and thereafter filed a timely claim for refund. Parts of that claim have been settled administratively, but there remains in controversy the sum of $500,-353.04 plus assessed interest. This amount was computed by applying the 18 percent withholding rate to all the payments listed above except the direct moving expenses to existing employees set forth in category (b). See footnote 1, supra.

Section 3402 of the Code requires withholding only on “wages” as defined by section 3401 reading, in pertinent part, as follows:

(a) WAGES. — For purposes of this chapter, the term “wages” means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash; * * *

Plaintiff’s position, of course, is that the reimbursements and payments in question do not constitute remuneration “for services performed.” If statutory words are to be given their ordinary, everyday meaning, plaintiff’s position would appear to be quite correct, at least with respect to payments to its existing employees. No service was performed by plaintiff’s employees in order to obtain these reimbursements, unless it be the act of physically moving from one permanent job location to another at plaintiff’s request, and in the case of existing employees the Government does not even contend that the reimbursement of expenses incurred in such physical movement (so-called “direct” moving expenses) are income subject to withholding.

What the Government does contend is clear from its heavy reliance on this court’s decision in Ritter v. United States, supra. There, essentially the same type of reimbursements and payments for employee moving expenses were involved as here. The plaintiff in Ritter, however, was the employee, not the employer, and the question was whether the payments to him constituted ordinary income and, if so, whether he was entitled to deduct as expenses the items for which payments were made. The court adopted, per curiam, the opinion of Chief Commissioner Bennett holding that the payments were ordinary income to the employee and were not deductible by him.

To defendant, the Ritter case is completely dispositive of the present one in the Government’s favor. I do not agree. Mr. Justice Frankfurter has wisely remarked that in law, as elsewhere, “the right answer usually depends on putting the right question.” Estate of Rogers v. Commissioner of Internal Revenue, 320 U.S. 410, 413, 64 S.Ct. 172, 174, 88 L.Ed. 134 (1943). The “right question” in Ritter was whether the payments were income to the employee-taxpayer under the sweeping provisions of section 61(a) (1) of the 1954 Code defining gross income as “all income from whatever source derived, * * Here, the “right question” is much narrower and is simply whether the payments were “remuneration * * * for services performed” so as to constitute “wages” on which plaintiff was required to withhold income taxes pursuant to section 3402.

The answer to that question cannot be found in Ritter and the numerous cases discussed therein holding these payments to constitute income to the employee-recipient. It is true, as defendant emphasi2;es, that in the Ritter opinion the type of payments here involved are described in several instances as “compensation,” and within the broad category of income receipts, the description is accurate enough. Clearly, an employee may receive taxable “compensation” from his employer in forms other than salary or wage payments. See, for example, Commissioner of Internal Revenue v. LoBue, 351 U.S. 243, 76 S.Ct. 800, 100 L.Ed. 1142 (1965) holding that the exercise of stock options given an employee by his employer to get “better work” from him resulted in taxable income to the employee under the broad provisions of section 61 (a)’s predecessor. Hence, Rit-ter was entirely correct in its essential finding that any employer payment which constitutes an “economic gain” to an employee must be included in his taxable income. 393 F.2d 823, 183 Ct.Cl. at pp. 889-890.

However, at no time did the Ritter decision refer to the payments in question as compensation “for services performed.” Section 3401, supra. And, for purposes of the withholding requirements, the quoted words are crucial.

For this reason, one must look beyond Ritter for the solution of the present problem. In my view, the correct answer is found in the cases of Peoples Life Insurance Company v. United States, 373 F.2d 924, 179 Ct.Cl. 318 (1967); England v. United States, 345 F.2d 414 (7th Cir., 1965), cert. denied 382 U.S. 986, 86 S.Ct. 537, 15 L.Ed.2d 475 (1966); and Acacia Mutual Life Insurance Co. v. United States, 272 F.Supp. 188 (D.Md., 1967).

In the Peoples Life case, the taxpayer had paid all convention expenses of certain of its employees who, by reason of their work output, were invited (wives included) to taxpayer’s annual conventions. In holding that these payments did not constitute “wages” on which the employer was required to withhold income taxes,² the court stated at 373 F.2d 928-929, 179 Ct.Cl. 327-328:

Viewed against the background of all the facts, it seems clear that plaintiff is correct and that these convention expenses are not fairly to be considered as “remuneration for services performed by an employee for his employer.” On this record, there would be no justification for rejecting the entirely credible showing plaintiff makes to the effect that the conventions were important ingredients of its total corporate effort to build a stable, knowledgeable, and loyal agency force, upon which its very existence depends. As such, the convention costs were, from plaintiff’s point of view as an employer, expenditures incurred to advance its own wholly legitimate and bona fide business purposes, and not, as defendant maintains, only a free trip or vacation prize or award in an annual sales contest, designed simply to give the employees a pleasurable experience without any significant serious work aspects involved.

-X- * -x- -X- * -X-

Further, all qualifiers were “expected” to attend. In practical effect, they were required to attend. Those who for some reason could not attend received no “prize” money instead representing the value of the trip. When an employer to all intents and purposes directs an employee to be present at a certain place and at a certain time, the conclusion is compelled that the trip, at least from the employer’s point of view, primarily serves his purposes.

To the same effect is the case of Acacia Mutual Life Insurance Company v. United States, supra. Citing the Peoples Life case, the District Court in Acacia Mutual also held that the payment of convention expenses to its employees did not constitute remuneration “for services performed.” Section 3401 (a).³ In a comprehensive opinion, District Judge Harvey stated the essential distinction already made above in the following language at 272 F.Supp. 195:

The question in * * * those eases [i. e., the so-called “income type” cases], however, was whether the value of the trip was “gross income” to the employee under § 61 of the Internal Revenue Code of 1954. Here the issue is whether the expenses of the meetings represented “remuneration” under § 3401(a) paid by the employer “for services performed” by an employee. Congress could hardly have intended that the determination of the latter question would be controlled by the individual motive of each separate employee in attending the meeting. One employee might view the trip as primarily a vacation; another, more highly motivated, might see it as a means of improving his business capabilities. It should be noted that in both Thomas [Patterson v. Thomas, 289 F.2d 108 (5 Cir. 1961)] and Rudolph [Rudolph v. United States, 291 F.2d 841 (5 Cir. 1961)] [“income type” cases] the court considered the statute from the taxpayer’s point-of-view. With the employer as taxpayer here, this Court concludes that it is the purpose of the employer that controls in determining whether payments are remuneration under § 3401 (a) for services performed. [Emphasis supplied.]

Both Peoples Life and Acacia Mutual clearly indicate that, in contrast to the question of whether payment of moving expenses constitutes taxable income to an individual employee, where the withholding statute is involved, the matter should be viewed from the standpoint of the employer’s purpose in making the payments. The record in this case is clear that Humble’s payments of its employees’ moving expenses were properly chargeable as ordinary and neeessary expenses incurred in its trade or business and were not meant by Humble to be in any sense compensation “for services performed.”

So far as I have been able to determine, England v. United States, supra, is the only case obliquely indicating the view that while payment of moving expenses clearly constitutes taxable income to the employee, still such payment may not fall within the term “compensation for services.” That ease was not a withholding case but was one involving, again, the question of whether the employee received taxable income upon reimbursement of his moving expenses. However, in its opinion holding that such reimbursement was income to the employee, the Seventh Circuit Court of Appeals stated at 345 F.2d 416:

We agree with the Government, contrary to the district court’s view, that in view of § 61 (a)’s definition of gross income as “all income from whatever source derived, including (but not limited to) the following items,” the fact that the reimbursement received by England might not fall within item (1) “Compensation for services, including fees, commissions, and similar items” is not in any way controlling. Nor is the fact, emphasized by the court, that England suffered a financial loss in the transfer to Springfield controlling as to whether the reimbursement constitutes gross income. * * *

* # -» * * *

* * * The expense of transporting an employee to a new post of duty for benefit of the employer is properly an expense of the employer, not compensation to the employee, but the costs of meals, lodgings, and expenses incidental to securing housing at the post are personal living expenses of the employee, and if they are provided by the employer, income is realized thereby. [Emphasis supplied.]

While clearly not a direct holding on the point, the italicized words above do seem to indicate the Seventh Circuit’s view that these payments and reimbursements of moving expenses are not compensation for services or, at least, that the question is irrelevant to a determination of whether the payments are income under section 61(a). Properly considered, it would seem that “compensation for services” involves a direct exchange of services performed by the employee in return for salary, bonus, and similar items. I cannot see that the moving expense payments here involved were intended to compensate the recipient-employee for services. Instead, they were incurred by Humble in the course of its ordinary business activities and to prevent its moving employees from suffering a loss. No doubt the offer to reimburse the employees was also an inducement to them to make the requested move. Without it, probably only highly paid employees would have agreed to move in order to keep their jobs. However, there is no apparent correlation between such an inducement payment and the performance of services, and it must be for the latter before withholding thereon is required.

If carried to its logical conclusion, defendant’s argument here would suggest that every payment, or other economic gain, flowing from an employer to an employee constitutes compensation for services performed upon which withholding is required. Clearly, however, this is not so as shown by a number of defendant’s own rulings. For example, in Rev.Rul. 59-227, 1959-2 C.B. 13, it was held that a lump-sum payment to an employee for his relinquishment of seniority rights and the vacation of a particular position, while ordinary income to the employee, did not constitute compensation for services performed and, hence, withholding was not required. And, in Rev.Rul. 55-520, 1955-2 C.B. 393, it was held that a payment to an employee in settlement of litigation over his employment contract, while ordinary income to the employee, was not a payment for services on which withholding was required. To the same effect are Rev.Rul. 58-145, 1958-1 C.B. 360 and Rev.Rul. 58-301, 1958-1 C.B. 23.

From the foregoing observations and the state of the law in 1961, it is clear that, except for moving expense payments to its new employees, Humble had no reason to anticipate that withholding of income taxes from the payments involved herein was required. As will be seen, the law in this area has now been clarified.

For taxable years beginning after December 31, 1969, the question here at issue has been resolved by the Congress. By section 231 of the Tax Reform Act of 1969, P.L. 91-172, 83 Stat. 487, Congress added new section 82 to the Internal Revenue Code, which new section reads as follows: ⁴

There shall be included in gross income (as compensation for services) any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence which is attributable to employment or self-employment. [Emphasis supplied.]

This statutory provision applies only to taxable years beginning after December 31, 1969. Its legislative history states that as a result of its enactment and the designation by Congress of all reimbursed moving expenses as “compensation for services,” employers are responsible for withholding taxes on these reimbursements. Senate Rep.No. 91-552, 91st Cong., 1st Sess. (1969) states at page 110:

The Committee amendments also provide that reimbursements of expenses of moving from one residence to another are to be included in the taxpayer’s gross income (as compensation for services). Under this provision, taxpayers include the reimbursements in gross income but then are permitted to take deductions to the extent permitted under the provisions for the deduction of moving expenses.

Since compensation for services is generally subject to the withholding of income tax, moving expense reimbursements are to be subject to the general withholding rules. However, the withholding provisions (sec. 3401(a)) are not to apply to reimbursements to the extent it is reasonable to believe that a moving expense deduction will be allowable (under section 217). [Emphasis supplied.]

Both parties to this controversy take comfort from the foregoing legislative history. The plaintiff points to the “are to be” phraseology as indicative of a Congressional action applicable only in futuro. To defendant, however, the enactment of Section 82 was merely declaratory of existing law.

Neither argument is persuasive, for “ * * * the views of on Congress as to the construction of a statute adopted many years before by another Congress have very little, if any, significance.” United States v. Southwestern Cable Co., 392 U.S. 157, 170, 88 S.Ct. 1994, 2001, 20 L.Ed.2d 1001 (1968); see, also, Brown v. United States, 192 Ct.Cl. 203, 426 F.2d 355 (1970). Even though, as defendant says in its supplemental brief, the “capstone is now in place,” the law was anything but clear in 1961, the year at issue here.

The major guidance to employers provided by the Internal Revenue Service in that earlier year is to be found in Rev.Rul. 54-429, 1954-2 C.B. 53, Rev.Rul. 55-140, 1955-1 C.B. 317, and Rev.Rul. 59-236, 1959-2 C.B. 234. Two of those rulings, namely Rev.Rul. 55-140 and Rev.Rul. 59-236, hold that payments and reimbursements to new employees of their moving expenses constitute income to the employee-recipient upon which withholding is required. See, also, United States v. Woodall, 255 F.2d 370 (10th Cir., 1958), cert. denied, 358 U.S. 824, 79 S.Ct. 39, 3 L.Ed.2d 64 (1958), where the Circuit Court held that such payments are income without, however, reaching the question of withholding requirements. In the present case, a very small amount (about two percent) of the moving expense payments made by Humble in 1961 were to new employees. With knowledge of the Service position in Rev. Rul. 59-236, supra, Humble should have withheld on those payments totaling a little over $46,000.

However, with respect to the great bulk of its 1961 moving expense payments to existing employees, Humble’s prominent guideline would have been Rev.Rul. 54-429, supra, where it is held at 1954-2 C.B. p. 53:

The payment or reimbursement by an employer of the cost of moving an employee, his immediate family, household goods, and personal effects from one place of employment to another permanent place of' employment, primarily for the benefit of the employer, is not compensatory in nature. There is no essential difference between a payment of such cost directly by the employer and the payment by the employee and subsequent reimbursement by the employer. [Emphasis supplied.]

While the payments referred to are the so-called “direct” moving expense payments, and while the ruling goes on to indicate that any excess over that type of payment is includible in the employee’s income, there is nothing whatever therein declaring a duty on the employer to withhold on such payments to existing employees where the move is for the benefit of the employer.

Thus, in 1961, Humble had no reason to suspect that when, for its own benefit, it reimbursed the moving expenses of its existing employees, it was paying them wages “for services performed” as defined in section 3402. Under these circumstances, Humble should not be penalized and used “as a device * * * to determine the basic tax liability” of its employees who are not even parties to this case. Peoples Life Insurance Company v. United States, supra, 373 F.2d 933, 179 Ct.Cl. 334-335.

Defendant’s expressed concern that such holding would greatly impair the effective administration of the tax laws has manifestly been mooted by the Congressional addition to the Code of new section 82 discussed above.

Plaintiff is entitled to recover with the exact amount of recovery to be determined in further proceedings under Rule 131(c).

* The opinion of Davis, Judge, dissenting in part, follows the opinion of Trial Commissioner Fletcher which has been adopted by the court.

1 . These so-called “direct” moving expenses of existing employees are not in dispute. The Internal Revenue Service does not require the payment or reimbursement of such moving expenses to be included in the gross income of the employee-reeipient. See Rev.Rul. 54-429, 1954-2 C.B. 53. For a discussion of the difficulty, in theory, of drawing a distinction between “direct” and “indirect” moving expenses, see the opinion of Davis, J., concurring in part and dissenting in part in Ritter v. United States, supra, 393 F.2d 832, 183 Ct.Cl. 890.

2 . The court was not required to, and did not, pass upon the question of whether these convention expense payments were taxable income to the employee. The court did indicate its view that it was not proper for the defendant to use the withholding provisions “as a device * * * to determine the basic tax liability of the employee, who is not even a party to the case,” an observation equally pertinent here. 373 F.2d 933, 179 Ct.Cl. 334-335.

3 . The court did hold that the payment of convention exi)enses for certain of its employees’ wives constituted “wages” upon which Acacia was required to withhold. This part of the District Court’s decision does not reflect a conflict with Peoples Life because, unlike the situation in Peoples Life, the wives involved in the Acacia case performed no convention duties and did not participate in any of the business of the convention. Hence, the District Court felt that Acacia’s dominant purpose in making these trips available to such wives was “to offer their husbands a prize or award for services performed.” 272 F.Supp. 201.

4 . For a full discussion of this new section, including a description of the rather limited treatment of the subject by Congress in the Revenue Act of 1964, see Allington, Moving Expenses and Reimbursements, 56 A.B.A. J. 495 (May 1970). A discussion of the Congressional action in 1964, as well as a comprehensive analysis of the applicable case law, is contained in Walker, Employee Meals, Lodging and Moving Expenses, 25 N.Y.U. Ann.Inst. on Fed.Taxation 529 (1967).