Case Title: MAGNUSON v ST BRD OF EQUALIZATIO

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Docket Number: 

State: montana

Court: Montana Supreme Court

Date: 1973-07-16T00:00:00Z

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No. 12412 I N T H E S U P R E M E C O U R T O F THE STATE O F MONTANA 1973 H A R O L D and E V E L Y N M A G N U S O N , P l a i n t i f f s and Respondents, M O N T A N A STATE BOARD O F EQUALIZATION, Defendant and Appellant. Appeal from: D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , Honorable Peter Meloy, Judge presiding. Counsel of Record: For Appellant : Edward Jene B e l l , argued, Helena, Montana. For Respondents : Harrison, Loendorf and Poston, Helena, Montana. James T. Harrison, Jr. argued, Helena, Montana. Submitted: May 29, 1973 Decided : Jfi 1 6 1973 Filed : JUL 1 6 1973 M r , J u s t i c e John Conway Harrison delivered the Opinion of the Court. P l a i n t i f f s , Harold and Evelyn Magnuson, f i l e d an application f o r revision with defendant State Board of Equalization seeking refund of $269.50 f o r income taxes paid f o r the t a x years 1965, 1966, 1967, and 1968. The application was denied by the Board and p l a i n t i f f s brought t h i s action i n the d i s t r i c t court of the f i r s t j u d i c i a l d i s t r i c t , Lewis and Clark County, f o r review of the ~ o a r d ' s decision. The Honorable Peter Meloy, s i t t i n g without a jury, rendered judgment f o r p l a i n t i f f s , holding t h a t traveling expenses claimed were deductible. Defendant Board moved the court t o amend i t s findings of f a c t and conclusions of law, but was denied. The Board appeals from the judgment and order denying the motion t o amend, The f a c t s a r e not i n dispute. P l a i n t i f f taxpayers a r e long time residents of Harlem, Montana, P l a i n t i f f owns and operates a salvage yard business i n Harlem and a l s o conducts an accounting business there. H i s Harlem residence was h i s place of business i n Harlem. He i s a l s o employed by the Burlington Northern Railroad i n Havre, Montana, where he works the midnight t o 8:00 a.m. s h i f t , f i v e days a week. During the period 1965-1968, f o r which t r a v e l expenses a r e claimed, he drove h i s personal c a r from h i s residence i n Harlem t o h i s r a i l r o a d job i n Havre and returned t o Harlem each working day. ~ ~ a g n u s o n ' s financial r e t u r n from h i s employment with Burlington Northern was g r e a t e r than t h a t from the t o t a l of h i s two independent businesses operated i n Harlem, The t r a v e l expenses claimed but not allowed by the Board, were c a r mileage expenses f o r approximately 96 miles per day, f i v e days a week, between the two communities. These were claimed a s a business deduction on p l a i n t i f f s ' Montana tax returns f o r the years 1965 through 1968. The determination of a taxpayer's Montana income tax l i a b i l i t y i s primarily based upon the Federal Internal Revenue Code. Section 84-4905, R.C.M, 1947, provides t h a t Montana adjusted gross income i s the taxpayer's federal adjusted gross income a s de- fined i n Section 62 of t h e Internal Revenue Code of 1954, In determining deductions allowable from adjusted gross income t o reach n e t income, section 84-4906, R.C,M. 1947, provides that those deductions a r e allowed which a r e permitted by Sections 161 and 211 of the I n t e r n a l Revenue Code of 1954. Sections 161 and 211 allow specific deductions subject t o the exceptions provided f o r i n Section 261, et.seq. I n addition, section 84-4909(1), R. C.M. 1947, s p e c i f i c a l l y disallows a deduction f o r personal, l i v i n g o r family expenses. Montana has adopted the Federal Internal Revenue Code a s the guide t o be used t o determine matters such a s income and expense f o r computation of Montana income tax. Section 162 of the Internal Revenue Code of 1954, i s the basis f o r the allowance of traveling expenses. It provides: "(a) I n general. - There s h a l l be allowed a s a deduction a l l the ordinary and necessary expenses paid o r incurred during the taxable year i n carrying on any trade o r business, including - 1 I (2) traveling expenses (including amounts ex- pended f o r meals and lodging other than amollnts which a r e lavish o r extravagant under the circum- stances) while away from home i n the pursuit of a trade o r business; and Federal Regulation number 1,162,2 i n t e r p r e t s the above section and amplifies the code provision by indicating t h a t traveling expenses which a r e reasonable and necessary may be deducted. It provides: "1f the t r i p is s o l e l y on business, the reasonable and necessary traveling expenses, including t r a v e l f a r e s , meals and lodging and expenses incident t o t r a v e l a r e business expenses. 11 In determining whether o r not the t r a v e l expenses here were deductible, the Board r e l i e d on a United States Supreme Court case, Commissioner of Internal R,evenue v, Flowers, 326 U,S, 465, 66 S, C t . 250, 90 L,Ed, 203, 207, and several t a x court cases: Adelberg v , Commissioner, CCH Dec. 30, 622 (M) , Dlct, 1475-68, January 20, 1971, T.C, Memo. 1971-15; Deming v. Commissioner, CCH Dec. 31, 482(M), Dkt. 2806-69 SC, August 1, 1972, T.C. Memo, 1972-163; Gurney v, Commissioner, CCH Dec. 31, 135(M), Dkt. 2572-70 SC, December 28, 1971, T.C. M e m o 1971-329, The Flowers case interpreted Section 23(a) (1) (A), I n t e r n a l Revenue Code of which i s now Section 162(a)(2), I n t e r n a l Revenue Code of 1954, I n Flowers the taxpayer, an attorney, resided i n Jackson, Mississippi, where he had practiced law f o r many years associated some of the time with other law firms and then forming h i s own law firm. I n 1906, he began t o represent the Gulf, Mobile & Ohio Railroad i n Mobile, Alabama, acting a s t r i a l counsel f o r the r a i l r o a d i n Mississippi, Later, from 1928 t o 1927, he was special counsel, I n 1930, he was made general counsel f o r the r a i l r o a d and served a s such u n t i l 1940 a t which time t h e r a i l r o a d company merged with another railroad and he became vice-president and general counsel of the new company, The main o f f i c e of the company was i n Mobile, Alabama. A s a r e s u l t of an arrangement made so t h a t he could continue t o Live i n Jackson, Mississippi, it was agreed he would pay h i s traveling and l i v i n g expenses between the two c i t i e s . Flowers determined the amount of time he would spend traveling between the two c i t i e s covering the taxable years i n question. The r a i l r o a d company provided o f f i c e space i n Mobile, but when i n Jackson he used h i s old law firm which provided space f o r working; he did not p a r t i c i p a t e i n the firm's business o r p r o f i t s . The United States Supreme Court denied Flowers the deduction claimed f o r t r a v e l expenses between the two c i t i e s f o r the tax year 1940, holding: "Three conditions must thus be s a t i s f i e d before a traveling expense deduction may be made under Section 23 (a) (I) (A) : (1) The expense nmst be a reasonable and necessary traveling expense, a s t h a t term is generally understood, This includes such items a s transportation f a r e s and food and lodging ex- penses incurred while traveling, t t (2) The expense must be incurred 'while away from home, 1 I I (3) The expense must be incurred i n pur- s u i t of business. This means t h a t there must be a d i r e c t connection between the expenditure and the carrying on of the trade o r business of the taxpayer o r of h i s employer. Moreover, such an expenditure must be necessary o r appro- p r i a t e t o the development and pursuit of the business or trade. 11 Here, the Board contends t h a t I.R,S. Regulations 1,162-2 (a) and 1.162-17(a) and the Supreme Court's i n t e r p r e t a t i o n of Section 162(a)(2), Internal Revenue Code of 1954, i n Flowers c l e a r l y indicate t h a t p l a i n t i f f taxpayers' transportation expenses a r e not deductible and the t r i a l court i n i t s ruling overlooked the t h i r d condition of Flowers a s t o the deductibility of traveling I I expenses, t h a t is: t o be deductible the transportation expenses must be connected t o the business of h i s employer, the railroad." P l a i n t i f f s and defendant Board recognize t h a t Flowers i s the key case concerning t r a v e l expenses and a l l the t a x court cases c i t e d here discuss i t , however, Flowers - i s factually distinguish- able. In Flowers there was one employer, one salary; i n the i n s t a n t case p l a i n t i f f Magnuson had several. He received a salary from the r a i l r o a d , an income from h i s scrap business, and an income from h i s accounting business. It was stipulated and agreed by the p a r t i e s t h a t the l a t t e r two businesses were bona fide. I n Flowers, the United States Supreme Court in i t s t h i r d condition stressed what expenses could be considered a s deductible i n a one employment situation. Here, the question concerns d e d u c t i b i l i t y f o r expenses between two o r more jobs, not from home t o job. In t h e i r b r i e f , p l a i n t i f f s note t h a t the ~ o a r d ' s summary of f a c t s would indicate Magnuson had two income producing bona f i d e jobs. I n Flowers there was but one employment--the railroad. Here, there was one job and two separate business ventures. The t r i p s between Harlem and Havre were not personal preference, but were of necessity i n the pursuit of business. I n Swartz v. Berg, 147 Mont. 178, 182, 411 P,2d 736, t h i s Court said: "In interpreting tax s t a t u t e s it should always be kept i n mind t h a t they a r e t o be s t r i c t l y construed against the taxing a u t h o r i t i e s , and i n favor of the taxpayer, see 51 Am.Jur. Taxation, 5 650. See a l s o , S t a t e ex r e l . Tillman v, D i s t r i c t Court 101 Mont. 176, 53 P.2d 107, 103 A.L.R. 376 ' * See also: Perham v. Putnam, 82 Mont. 349, 267 P, 305. I n i t s conclusions of law the t r i a l court noted t h a t i n Flowers the t r a v e l between Mobile and Jackson "was occasioned solely by h i s (the employee's) personal propensities. I' Such i s not the f a c t here f o r Magnuson was required t o be i n Havre by h i s employer, the railroad. The t r i a l court a l s o noted I I The S t a t e ' s position i s t h a t since M r , Magnuson l i v e s i n Harlem he cannot deduct h i s t r a v e l expense t o Havre, but the s t a t e has admitted t h a t i f M r , Magnuson lived i n Havre where h i s r a i l r o a d job was located, he could deduct the t r a v e l t o h i s businesses i n Harlem, This i s a strange position," With t h a t conclusion of the t r i a l court, we most c e r t a i n l y concur. It was stipulated between the p a r t i e s t h a t the jobs or businesses i n the two d i f f e r e n t communities were bona f i d e trades o r businesses and not hobbies, Under such f a c t s and conditions, we find the t r a v e l expense t o be deductible, I n so holding we i n no way hold t h a t t r a v e l expenses from a tax- payer's home t o h i s business or job s i t e a r e deductible, W e find support f o r t h i s position i n several Tax Court and Board of Tax Appeal cases. Joseph W, Sherman, Jr. e t ux v. Commissioner, 16 T.C. 332, 337; Joseph W, Powell v , Commissioner, 34 B.T,A, 655; Walter F, Brown v. Commissioner, 13 B,T.A, 832; Adelberg v. Commissioner, CCH Dec, 30, 622(M), Dkt, 1475-68, January 20, 1971, T.C. Memo. 1971-15, I n Sherman the taxpayer had lived i n Worcester, Massachu- setts, a l l h i s l i f e , He owned r e a l property there, paid h i s taxes there, voted there, and h i s children attended school there, He was employed by the Haskins Manufacturing Company which manufactured p l a s t i c praducts i n Worcester. A t Haskins he had no proprietary i n t e r e s t i n the company, but worked a s production manager and purchasing agent. This position did not require f u l l time and a t t e n t i o n so he formed a business t o s e l l p l a s t i c products i n N e w York City, i n which he was sole proprietor. He maintained an address i n N e w York City and spent four days a week there, including t r a v e l between the two c i t i e s . Petitioner Sherman claimed a deduction under Section 23 (a) (1) (A) , Internal Revenue Code, f o r expenditures made i n connection with h i s business t r i p s t o N e w York.. This was contested by the I n t e r n a l Revenue Service and the Tax Court i n i t s opinion noted t h a t it was not a Flowers - case situation: "This is not the case of a taxpayer who keeps h i s place of residence a t a point where he i s not en- gaged i n carrying on a trade o r business and claims deductions for l i v i n g expenses and cost of traveling t o and from h i s residence. +C 9~ " 4b This Court has heretofore recognized t h a t a taxpayer may have more than one occupation or business, and has held where it i s sho~m t h a t the taxpayer has two occupations which require him t a spend a substantial amount of time i n each of two c i t i e s , he i s e n t i t l e d t o the deduction of traveling and other ordinary and necessary business expenses incurred i n connection with attendance upon the one removed from h i s residence, Walter F. Brown, 13 B.T.A. 832; Joseph F, Powell, 34 B.T.A. 555, a f f d , 94 Fed. (2d) 483 (CA- 1) . " The Court further noted i n Sherman t h a t p e t i t i o n e r ' s Worcester employment was a s i g n i f i c a n t source of income; it was of a permanent character; and h i s roots were i n Worcester where he spent the greater part of h i s time during the tax year, He had no o f f i c e o r place of business i n N e w York, other than a mailing address. O n h i s t r i p s t o N e w York h e would s t a y a t a h o t e l , a t most only a few days a t a time, While it i s true t h a t h i s rewards f o r the N e w York venture i n 1945 exceeded h i s Worcester earnings f o r t h a t year, t h a t f a c t alone cannot s h i f t h i s "home" from Worcester t o N e w York, Everything said by the court i n Sherman i s applicable i n the i n s t a n t case, That court found the "traveling expenses" between the two c i t i e s deductible. Both the Board and Magnuson c i t e a recent Tax Court case, Adelberg v, Commissioner, CCH Dec. 30, 662(M), Dkt. 1175-68, January 20, 1971, T,C. Memo, 1971-15. Here, the Board argues t h a t the t r i a l court i n i t s conclusions of law raised a c o l l a t e r a l i s s u e with respect t o businesses a t two d i f f e r e n t locations where the problem i s "major" and "minor" employment, The t r i a l court's conclusions seem t o indicate t h a t i f a taxpayer has bona f i d e - i n jobs o r businesses/two o r more l o c a l i t i e s , t h a t a l l h i s t r a v e l expenses a r e deductible, The Board contends t h a t such conclusion i s much too broad, i s not applicable t o the i n s t a n t case, and the c o u r t ' s conclusion i n t h i s regard was directed towards those s i t u a t i o n s where a taxpayer leaves one business o r employment s i t u a t i o n and incurs t r a v e l expenses d i r e c t l y necessary t o a r r i v e a t another business o r employment s i t u a t i o n , I n Adelberg, the taxpayer drove from h i s home t o a job with Space Technology Laboratories i n E l Segundo, California. After work there, he drove t o UCLA i n Los Angeles t o teach and then drove home t o Sherman Oakes, California. H e was allowed t o deduct t r a v e l expenses from E l Segundo t o UCLA, but was not allowed t r a v e l expenses from h i s home t o E l Segundo o r from U C L A t o h i s home. While Adelberg i s more complex than the i n s t a n t case, we find the t r i a l court properly applied the holding there t o t h i s case f o r the t r a v e l expense attributed t o t r a v e l between two employments was allowed, The court i n Adelberg noted: "* * * where the taxpayer has two places of employment the cost of traveling from one of them t o the other i s a deductible business ex- pense. t I The judgment of the d i s t r i c t court i s affirmed. --. We Concur: < . . , ................................ Associate Justices. Mr, Chief Justice James T, Harrison did not participate in the foregoing Opi-ni~n,