United States Court of Appeals

FOR THE EIGHTH CIRCUIT

___________

No. 99-3206

No. 99-3394

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H B & R, Inc., *

*

Plaintiff - Appellant/ *

Cross Appellee, *

* Appeals from the United States

v. * District Court for the

* District of North Dakota.

United States of America, *

*

Defendant - Appellee/ *

Cross Appellant. *

___________

Submitted: June 14, 2000

Filed: October 12, 2000

___________

Before LOKEN, BRIGHT, and ROSS, Circuit Judges.

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LOKEN, Circuit Judge.

Since the early 1980s, oil producers on Alaska’s North Slope have hired HB&R,

Inc., on an as-needed basis to perform “hot oil” and other services on their wells and

pipelines. Because of the severe climate and security concerns, no one lives near the

North Slope oil fields. The nearest residential communities are Fairbanks and

Anchorage, Alaska, hundreds of miles away. North Slope workers live in barracks and

have virtually no recreational amenities. During the tax years in question, HB&R
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rotated its North Slope employees on a three-week-on/three-week-off schedule.

Though HB&R offered these employees a $400 monthly bonus to move to Alaska,

most chose to live in the lower forty-eight States. During each rotation, they flew from

their homes to Anchorage and then on to the inhospitable job site near Deadhorse,

Alaska. They worked for three weeks and then flew back home for their three weeks

off. HB&R provided round-trip commercial airline tickets from the employees’ homes

to the North Slope job site at an average cost of $1,000 to $1,200 per trip. 

The Commissioner of Internal Revenue Service assessed tax deficiencies for the

years 1990, 1991, and 1992 because HB&R did not pay income tax withholding and

Federal Insurance Contributions Act (“FICA”) payroll taxes on the value of employee

airfare to Deadhorse. HB&R paid a portion of the deficiencies and filed this refund

action. The Commissioner counterclaimed for the unpaid balance. Deciding the case

on cross motions for summary judgment, the district court held that airfare from the

employees’ homes to Anchorage, Alaska, was a personal commuting expense that,

when paid by the employer, became part of their wages for FICA tax purposes.

Therefore, HB&R is liable for failing to withhold the employee’s share and failing to

pay the employer’s share of the FICA taxes. However, the court held that HB&R is

not liable for failing to withhold the income tax owed by employees on this benefit

because HB&R did not have fair notice of its withholding obligation. HB&R appeals

the FICA tax withholding ruling. The Commissioner cross-appeals the income tax

withholding ruling. The critical issue is the meaning of the word “wages” in the two

withholding statutes, as applied in the Commissioner’s regulations. We conclude that

the district court correctly decided the income tax withholding issue, and that the

governing FICA statute and regulation are identical for these purposes. Accordingly,

we affirm in part and reverse in part.

The employment relationship involves two distinct taxpayers, the employer and

the employee. What an employer pays in wages is taxable income to the employee and

an ordinary and necessary business deduction to the employer. See 26 U.S.C. (IRC)
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§§ 61(a)(1), 162(a)(1). In addition, both the employer and the employee owe FICA

taxes on those wages. See IRC §§ 3101 (employee tax), 3111 (employer tax). To

make the system more efficient by collecting taxes “at the source,” the Internal

Revenue Code requires the employer to deduct and withhold from the employee’s

wages the federal income and FICA taxes the employee is likely to owe. See IRC

§§ 3102(a) (FICA tax), 3402(a) (income tax). The employer’s obligation to withhold

extends only to an employee’s wages. It does not apply to other types of employee

income, such as dividends, nor to the reimbursement of deductible expenses. Thus,

when a tax deficiency is based upon the employer’s alleged failure to withhold, as in

this case, the definition of “wages” in the withholding statutes becomes critical.

An employee may deduct from his taxable income his business expenses but not

his personal expenses. See IRC §§ 162(a), 262. In the leading case of Commissioner

v. Flowers, 326 U.S. 465 (1946), the Supreme Court considered whether an employee

could deduct his unreimbursed expenses in traveling from his home in Jackson,

Mississippi, to his employer’s headquarters in Mobile, Alabama. The Court upheld the

Commissioner’s denial of this deduction: 

The added costs in issue . . . were incurred solely as the result of

the taxpayer’s desire to maintain a home in Jackson while working in

Mobile, a factor irrelevant to the maintenance and prosecution of the

railroad’s legal business. . . . Business trips are to be identified in relation

to business demands and the traveler’s business headquarters. The

exigencies of business rather than the personal conveniences and

necessities of the traveler must be the motivating factors. 

326 U.S. at 473-74. Flowers established the general rule that an employee’s expenses

in commuting from home to work are personal, not deductible business expenses. We

have applied that rule in a number of cases, holding that an employee may deduct only

the expenses of traveling from home to a temporary job site. See Ellwein v. United
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States, 778 F.2d 506 (8th Cir. 1985); Weiberg v. Commissioner, 639 F.2d 434 (8th Cir.

1981); Frederick v. United States, 603 F.2d 1292 (8th Cir. 1979).

The Commissioner argues that this rule applies to the HB&R employees’ airfare

to Anchorage and resolves this appeal. Because the airfare was a personal expense of

the employees, the Commissioner argues, its reimbursement by HB&R was a “fringe

benefit” under IRC § 61(a)(1). That fringe benefit was not excludable from the

employee’s taxable income under IRC § 132(d). Therefore, HB&R was obligated to

withhold income and FICA taxes based upon its fair market value. The last step in this

syllogism ignores the definition of “wages” in the withholding statutes and regulations,

the very flaw that led the Supreme Court to reject the Commissioner’s contention that

reimbursed employee lunches were subject to withholding in Central Illinois Public

Service Company v. United States, 435 U.S. 21, 29 (1978): 

[I]t is one thing to say that the reimbursements constitute income to the

employees for income tax purposes, and it is quite another thing to say

that it follows therefrom that the reimbursements in 1963 were subject to

withholding. There is a gap between the premise and the conclusion and

it is a wide one. . . . To require the employee to carry the risk of his own

tax liability is not the same as to require the employer to carry the risk of

the tax liability of its employee. Required withholding, therefore, is

rightly much narrower than subjectability to income taxation.

Turning to the definition of “wages” for tax withholding purposes, the FICA tax

withholding statute includes a broadly worded definition:

[T]he term “wages” means all remuneration for employment, including

the cash value of all remuneration (including benefits) paid in any medium

other than cash. . . .

IRC § 3121(a). The income tax withholding statute is virtually identical:
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[T]he 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 (including benefits) paid in

any medium other than cash. . . .

IRC § 3401(a). Each general definition is followed by a long list of exclusions, but, on

this record, none applies to the airfare expenses at issue. However, turning to the

Treasury Regulations applying these statutes, we find highly relevant provisions. The

income tax withholding regulations provide:

26 C.F.R. § 31.3401(a)-1(b) Certain specific items --

* * * * *

(2) Traveling and other expenses. Amounts paid specifically --

either as advances or reimbursements -- for traveling or other bona fide

ordinary and necessary expenses incurred or reasonably expected to be

incurred in the business of the employer are not wages and are not subject

to withholding.

The FICA tax withholding regulations applying the statutory definition of “wages”

include an identical provision excluding traveling and other expenses incurred in the

business of the employer. See 26 C.F.R. § 31.3121(a)-1(h). 

By their express terms, these withholding regulations apply to the airfare

expenses here at issue. They do not expressly distinguish between commuting from

home to work, and other employee traveling, so long as the expense is ordinary and

necessary to the business of the employer. Cf. American Airlines, Inc. v. United States,

204 F.3d 1103, 1108-11 (Fed. Cir. 2000). In this case, viewed from the perspective

of HB&R at the time the withholding decision was made, the employee airfare

expenses were incurred regularly and necessarily in the business of providing hot oil

services to North Slope oil producers. Thus, whether or not they were personal
1The government’s brief suggests that the Commissioner’s position is supported

by the cross reference in 26 C.F.R. § 31.3401(a)-1(b)(2) to 26 C.F.R. § 31.3401(a)-4,

and by a corresponding cross reference in the FICA withholding regulations. But the

cross references raise additional interpretive issues. For example, under the

construction suggested by the Commissioner’s appellate attorneys, the withholding

exclusions for travel expenses, which refer explicitly to the employer’s business, appear

to add nothing to the statutory exclusions in IRC §§ 3401(a)(19) and 3121(a)(20),

which focus only on whether reimbursements are deductible by the employee. The

Commissioner does not fully argue the point, and we decline to consider it further. 

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expenses of the employees for income tax purposes -- an issue we need not address --

HB&R is not liable for failing to withhold because, as the Supreme Court stated in

Central Illinois Public Service, “[n]o employer, in viewing the regulations . . . could

reasonably suspect that a withholding obligation existed.” 435 U.S. at 32.

The Commissioner’s brief on appeal ignores these controlling regulations, except

to assert -- without citation to authority -- that the references to ordinary and necessary

business expenses in 26 C.F.R. §§ 31.3401(a)-1(b)(2) and 31.3121(a)-1(h) incorporate

the income tax distinction between an employee’s personal and business expenses. But

the personal expense income tax cases, Flowers and its progeny, and their codification

in 1984 amendments that added the fringe benefit provisions in IRC §§ 61(a)(1) and

132, all view the expenses from the income tax perspective of the employee, rather than

the withholding tax perspective of the employer. In determining whether to withhold,

the withholding regulations instruct the employer to focus on whether travel expenses

are ordinary and necessary to its business. While it is plausible in hindsight to read

these regulations in the manner urged by the Commissioner,1 no case has ever upheld

the assertion of withholding liability for employer-related travel expenses of this kind.

Indeed, HB&R contends -- and the government does not deny -- that the Commissioner

has never before asserted that income and FICA tax withholding apply to the

reimbursement of employee travel expenses similar to those at issue in this case. In
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these circumstances, we find controlling the Supreme Court’s cautious approach to

withholding liability in Central Illinois Public Service, 435 U.S. at 31:

Because the employer is in a secondary position as to liability for any tax

of the employee . . . the employer’s obligation to withhold [should] be

precise and not speculative. 

For the foregoing reasons, we affirm the district court’s ruling that HB&R is not

liable for failing to withhold income tax on the value of airline tickets provided to

employees who traveled from their homes to the North Slope to provide hot oil services

in the 1990-1992 tax years. We reverse the court’s ruling that HB&R is liable for

failing to withhold the employees’ share of FICA taxes on the value of that airfare.

Although Congress “decoupled” the definition of wages for income and FICA tax

purposes to allow the Commissioner to promulgate regulations providing different

withholding exclusions, see Anderson v. United States, 929 F.2d 648, 650 (Fed. Cir.

1991), the regulations excluding “traveling or other bona fide ordinary and necessary

expenses” are the same for each tax regime. Accordingly, the district court should have

excluded both income tax and FICA tax withholding from HB&R’s deficiencies. 

The judgment of the district court is reversed, and the case is remanded with

instructions to modify the judgment so as to eliminate HB&R’s liability for FICA tax

withholding. In all other respects, the judgment of the district court is affirmed. 

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.