Warren E. Burger: We will hear arguments next in 1058, Central Illinois Public Service against the United States. Ms. King, I think you may proceed whenever you are ready.
Sharon L. King: Mr. Chief Justice and may it please the Court. This case unlike the prior case, does not present an income tax question. It is a withholding tax case, it involves the scope of the withholding tax provisions and primarily the definition of the term wages, an item is not subject to withholding unless it is a wage within the meaning of the statute. The facts in this case are basically agreed upon the petitioner, a public utility company reimbursed its employees in the year 1963 for expenses which they incurred in traveling on required trips on the company’s business. The petitioner used the same method of reimbursement, it reimbursed on the same basis for overnight and non-overnight trips. The Government’s contention is that petitioner should have withheld on the reimbursement payments which were made to employees for mail expenses incurred on non overnight trips and there is no question that withholding is required on any of the other reimbursement payments.
Potter Stewart: There is no question it is not required?
Sharon L. King: That is correct. Yes, the District Court held for petitioner, it concluded that the Government’s requirement of withholding on the non-overnight trip, meal reimbursements was a departure from the realities of business life in a vigorous stretching of the statute. The Seventh Circuit reversed and in reversing held in effect that virtually every item arising out of the employment relationship should be included in the withholding base and should be subject to withholding.
Speaker: Ms. King, let me ask a question or two if I may -- we are concerned here with 1963 liability are we not?
Sharon L. King: Yes, that is correct.
Speaker: Does that mean that we have the same issue after every year since that time, 14 years?
Sharon L. King: There are prospective years. They are not before the Court.
Speaker: Is there any claimed element of bad faith in this case?
Sharon L. King: No.
Speaker: Has the Government attempted to tax these items to the individual employees so far as you know?
Sharon L. King: Yes, it has.
Speaker: Successfully.
Sharon L. King: Yes, as a matter of fact the Arons case is a case which involves one of the petitioner’s employees. Employee Arons paid the tax and then sued for a refund, questioning whether the amount was even, questioning whether he had an offsetting income tax deduction, in the years prior to this case, the Government did pursue the employees, but it is obviously much easier to pursue the employer, and so that is why the change in 1963.
Byron R. White: Is the judicial reaction of uniformly that it is income subject to tax to the employee?
Sharon L. King: Every item of the reimbursement is deemed to fall within the broad definition of gross income, but there is an offsetting deduction for these items so that the effect is and it is generally considered that these items are not income, but they are treated as taxable income and then subject to an offsetting income tax deduction.
William H. Rehnquist: Under Illinois law if you lose here, would your client have a claim for restitution against the employees from whose wages it did not deduct these amounts?
Sharon L. King: I suppose it would have a claim, but as a practical matter just be impossible --
William H. Rehnquist: Kind of a theoretical one.
Sharon L. King: -- to pursue all of these people. If the withholding statute is interpreted as the Seventh Circuit interpreted and as the Government contends here to include every economic benefit arising out of employment relationship, the effect will be that almost every employer in this country would be in violation of the withholding tax provisions.
Potter Stewart: Do you understand the Government’s claim to be as broad as you have just characterized it?
Sharon L. King: Yes, I do as a matter of fact on page 20 of their brief, in the second full paragraph the last sentence, the Government says the statutory concept of wages is not tied to the performance of any particular service, but includes any personal economic benefit given by an employer to its employee as a result of the employment relationship.
Potter Stewart: I think that would mean that employees who work in an office and the office is heated would have to pay for their share of the heat.
Sharon L. King: That is a possible interpretation if we are talking about every economic benefit. If every economic benefit is included, the problems are enormous and first of all identifying what is the withholding base such as heating, and air conditioning and comfortable offices --
Potter Stewart: Telephones.
Sharon L. King: Telephones. After identifying them, there are valuation problems, where there are non cash items involved and there are all sorts of problems in determining whether the regulations which exclude or exempt items from the definition of wages are still applicable.
Warren E. Burger: Well, I suppose, it seems to be pretty difficult to handle the accounting and charging people for the amount of heat that they absorbed or the light that they used. I will give you a more concrete one to you. Suppose it would include a Thanksgiving Turkey, so that if the employer gave a Thanksgiving Turkey to every employee that was worth $20, I suppose these days, he would have to withhold from their paycheck, whatever is the tax on $20?
Sharon L. King: Right, there is an exemption or an exclusion under the regulations now for facilities and services that is courtesy discounts or a medical center or related things, but of course, if every economic benefit is included, it does raise a question on what the effect of that regulation might be.
Potter Stewart: There are specific, I guess, perhaps not a statute, but regulations with respect to bonuses out there?
Sharon L. King: Yes.
Potter Stewart: Both in cash and in kind.
Sharon L. King: Even greater significance, there is a regulation with respect to reimbursements for travel expenses and I would like to say that in both the lower courts held that the amounts here involved are reimbursements for legitimate travel expenses. That is not a fair question. This regulation is so important to this case and I would like to read it. It is on page 12 of our opening brief which is the blue covered brief. It is at the top of that page, says 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. We think this regulation should dispose off this case. The Government does not challenge the validity of the regulation.
Speaker: It is a Government’s regulation?
Sharon L. King: Yes, it is and it has been in the regulations, since the early 1940s when the present withholding tax provisions were adopted. The present withholding tax provisions were adopted in 1942 and 1943, and this came in at 1943 and has been there ever since. The Government contends though that this regulation should be read to apply only to reimbursements or allowances where the employee is not entitled to an offsetting business deduction, but there is nothing in the regulation that says that. The Government does point to the ordinary and necessary language which it says refers back to Section 162 and the employee’s deduction, but Section 162 applies to employers as well as it applies to employees and further these regulations are written for employers. It is the employer’s obligation to withhold which is involved and so there in terms of as these regulation says amounts paid as advances or reimbursements not amounts received an ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer not the business of the employee, as Mr. Smith said earlier, those are two different things. The Government in this case has essentially --
Speaker: Ms. King, may I interrupt you to be sure, I had follow this argument? Is this the regulation that provides the authority for excluding the amounts paid on overnight trips from wages?
Sharon L. King: This regulation applies to exclude, if you are talking about the Correll case no it did not.
Speaker: No, I am talking about your company’s practice of not including and you do include them whether they are overnight or not?
Sharon L. King: That is correct.
Speaker: The Government agrees that you properly exclude the reimbursements in so far as they relate to overnight trips, right?
Sharon L. King: Yes.
Speaker: And it is the reason they agree that that is proper based on this regulation?
Sharon L. King: Yes, that is correct.
Speaker: Well, then does it not you are questioning about the difference between employer and employee equally raise a question about that practice?
Sharon L. King: Well, I think that, if I understand your question correctly, this regulation is significant, because it uses the word traveling, it does not use the words travel away from home. The employee’s deduction under Section 162 is based on language allowing him a deduction for travel away from home and it is --
Speaker: There is statute or it did not say anything about that?
Sharon L. King: No, the withholding statute says nothing.
Speaker: No, nor does the, does any other statute say --
Sharon L. King: That is correct.
Speaker: 162 does not say anything about that?
Sharon L. King: Yes, it says travel away from home, Section 162 does.
Speaker: Well, away from home, but nothing about overnight?
Sharon L. King: No, but this Court Correll interpreted the away from home language to mean away from home overnight, but the --
Speaker: Over a substantial dissent. It is a large percentage of the decision to this part.
Sharon L. King: But the away from home concept is not incorporated in these regulations and this is, I think is of particular significance because the Government claims that its overnight theory was established just about the time, about three years prior to the time, this regulation was issued.
Speaker: Well, is it not issue, whether the overnight concept is incorporated in this regulation? Is that not the very thing we have to decide?
Sharon L. King: Well, I think the issue is --that is what brings the case to this Court, but I think the issue is broader than that and that is that if -- if travel expense reimbursements are included in the withholding base because of the theory that every economic benefit arising out of the employment relationship should be treated as a wage subject to withholding that is really the question which is involved and that was the basis for the Seventh Circuit’s holding.
Speaker: Perhaps they should have written a narrower opinion but perhaps that does not really is dispositive with the question how you decide the case, is it not?
Sharon L. King: That, I think that is the Seventh Circuit’s view and that is the view which the Government is spousing here, but there is nothing in the withholding provisions which draw a distinction between overnight and non-overnight and I would like to go on and say that the Government arrives that its theory by attempting an equivalence between the broad definition of gross income in the income tax provisions and the more narrow term 'wages' in the withholding tax provision. It does this although the word 'income' does not appear in the withholding tax statute. At one time many years ago, when the one of the initial withholding tax statutes was adopted, this was in the tariff of 1913, Congress did try for an all inclusive withholding provision and in that provision among other things they included all annual gains, profits and income as it turned out that the Department of Treasury was soon back to Congress saying or having difficulty with collections and furthermore those that are made are erroneous and excessive and its causing us a great burden, so in 1942 when the present withholding system was adopted, Congress still had the option to go to income, but it did not, it went to the term 'wages'.
Speaker: Ms. King, at the outset you made a point of emphasizing that unlike the previous case this was not an income tax case, this is a withholding tax case.
Sharon L. King: Yes.
Speaker: Does that, may I properly infer from that point that you so emphasized that even if you prevail, and even therefore, if your client need not withhold these payments, they may nonetheless be income to the employees?
Sharon L. King: Yes, yes that is correct.
Speaker: I will put another way wages may not mean the same as income?
Sharon L. King: That is correct and as a matter of fact the Government’s own rulings have so said --
Speaker: Or the statutes said so?
Sharon L. King: And the statute so says.
Speaker: Income includes wages among many other things?
Sharon L. King: Yes, that they are not synonymous terms. The Government in a number of ruling says found in various situations that an employee may have an income resolved from a payment he receives, but the employer does not have a withholding obligation and the uniformly cited cases up to the Seventh Circuit’s decisions below in the Court of Claims and two Circuit courts have held that the income tax treatment to the employee is immaterial in determining the scope of the withholding tax provisions. I think it is also significant that while the Government places considerable emphasis on the this Court’s decision in the Lebot case in 1956 which was a gross income case, it did not consider withholding. The rulings which the Government issued saying that just because there was an item of income, does not mean the employer must withhold, came for the most part after that decision was issued. So obviously, they were well aware that what the gross income section say, does not influence what the withholding tax provisions are. The Government does cite a decision of this Court, the Nierotko case in 1946, which does involve withholding and I think it deserves special mention. That case involved the question of whether social security tax withholding was required on an award of back pay to improperly discharged employees. The Court held that it was, but back pay is not the same as remuneration for a travel expense or as a payment of a travel expense reimbursement and as a matter of fact, in the social security regulations, there is a provision such as the one, I have read earlier on travel expense reimbursements it was -- it is identical today, it was substantially the same in 1946, saying that reimbursements are not wages subject to withholding. Obviously this Court’s decision on the back pay question that was not intended to overrule that regulation and did not do so, that regulation continues have force in effect. The Government has somewhat modified its pure equivalence argument between income and wages by contending that, that the equivalence does not apply if the employee is entitled to an offsetting income tax deduction. It is not clear how the Government finds support for this in its withholding provisions, it is not there. It is also not clear how the Government thinks this system would work. It suggests that every employee would take on the burden of determining what the income tax deductions of each of its employees is likely to be and not on a payment by payment basis, but it would look on an aggregate basis for the entire year and try to take into account trips which might arise based on unforeseeable events in the company’s business. It might have to take in all sorts of considerations, but the point is that it would be up to the employer to somehow decide what the income tax deductions would be for each of its many employees and for an employer such as the petitioner with thousands of employees, this is simply an administrative nightmare. So, basically that the point we want to make is that the Government in arguing the income tax cases has confused the issue here, it is not an income tax case, it is a withholding tax case and the withholding tax provisions must govern. We believe that the withholding tax provisions are quite clear. The Congress intended that wages be a narrow term and furthermore, the regulations which have been in -- which have been on the books since the very outset of the withholding provisions, preclude the inclusion in the withholding base of reimbursements for legitimate travel expences. There is a second issue in this case which involves the question of whether the -- a change in the -- an administrative view about the withholding tax provisions can be imposed retroactively against an employer. In 1963, when these payments were made, there was not one regulation, or ruling, or court case which would have suggested that these reimbursement payments were subject to the withholding tax and as a matter of fact, the regulation said quite the contrary. The Government seems to concede in its brief that if there is a factual or legal basis on which an employer involved, by that withholding was not required, it is then an abuse of discretion to retroactively impose withholding on the employer, and we believe this is clearly this case. It would be an abuse to retroactively impose a withholding requirement. The employer after all acts only as an agent for the Government and this does not involve the employer’s tax, it is merely collecting taxes to assist the Government.
Speaker: May I ask when do you think Government put tax payers fairly on notice as to its policy?
Sharon L. King: Well, I think that probably the first published announcement came in 1969 in its revenue ruling 69592 and in that revenue ruling the Government said that if an employer reasonably believes that at the time he makes the payment that the employers -- the employees offsetting deductions, will equal or exceed for the entire year. The amount of the reimbursements which he will receive then withholding is not required.
Speaker: Pretty good tax lawyer to understand what that means?
Sharon L. King: Yes it does.
Speaker: If it is a small businessman where no tax lawyer would ever understand that?
Sharon L. King: I think, it would be very difficult for any small business without having sophisticated tax advice to know what that meant.
Speaker: Going back to Correll, do you think that constituted notice in that event?
Sharon L. King: No, I do not. The Correll case was specifically an income tax case and given the fact that and I might say that Correll was never asked to consider the withholding tax provisions that never came up, but given the fact that even at the time, the Correll case was decided that there were these regulations or there were the Government’s rulings, most of which were issued in the 1950s and at the time of, well, shortly after Correll, there were a number of cases saying that that the income tax treatment to the employee is immaterial. I think, given all of that even sophisticated tax counsel would have been hard pressed to have found a withholding obligation.
Speaker: Until when? At least they learned the Government’s position until when?
Sharon L. King: Well, until they learned that the Government’s position, I suppose when this case began to come to the forefront particularly, now the District Court decided for the petitioner so it was really not Seventh Circuit decision came out.
Speaker: Certainly, no later than the decision of Court of Appeals in the Seventh Circuit was made?
Sharon L. King: Yes, but even then it is such a broad opinion that I expect that not --
Speaker: Just plainly a notice, at least the people in the Seventh Circuit?
Sharon L. King: Yes, but I do not know that every employer is that withholding on the air conditioning, and the heating and so on. It is just impossible to administer.
Speaker: Ms. King, but would not the 1969 ruling have given notice to those who really understood it and read it carefully that there was a problem in this area?
Sharon L. King: The 1969 ruling never mentions wages. It does not talk in those terms. It is purely an administrative convenience type ruling.
Speaker: But it is telling about the --
Sharon L. King: And it does --
Speaker: The obligation to withhold.
Sharon L. King: It does talk about the obligation to withhold --
Speaker: And that obligation only applies to wages.
Sharon L. King: On proper reimbursements and that they do not talk about wages, but they just say --
Speaker: That obligation only applies to wages?
Sharon L. King: That is correct.
Speaker: The statutory obligation.
Sharon L. King: Yes.
Speaker: And does that not seem reasonable if they say you do not have to withhold if you expect the employee to have an offsetting deduction that the converse is says, we do expect to withhold, if you do not think he does have an offsetting deduction?
Sharon L. King: Well, they did not put it on a payment-by-payment basis. They said when you look at the aggregate of the payments which you think you might make to the employee, over the period of a year, if you reasonably believe that, for example, if you as an employer reimburse on the basis of $0.10 per mile for mileage and the deduction is $0.15 now, gone to $0.17 a mile then obviously there would be some excess deduction there which the employee would deduct against other items, but it puts an enormous administrative burden on employers --
Speaker: Well, I am not talking about the merits of whether it is wise, I understand your argument there but just in terms of the notice point, your strongest argument is it not, it is for the period from the '63-'69, of course, we have '63 here?
Sharon L. King: '63 is the year before the Court.
Speaker: Yeah.
Sharon L. King: Yeah.
Speaker: But it seems to me, after '69 you may or may not be able to make the same argument, that is all I was suggesting.
Sharon L. King: Well, we are addressing our argument to '63.
Speaker: Right. Yeah.
Warren E. Burger: Mr. Smith.
Stuart A. Smith: Mr. Chief Justice and May it please the Court. I think I would like to begin by referring the Court to the pertinent statutory provision in this case which is set forth at page 1 (a) of the Appendix to our brief, that is the statutory definition of wages in Section 3401 (a) of the Code. It says that the term wages means all remuneration for services performed by an employee for his employer, including the cash value or remuneration paid in any medium other than cash. Now, this broad statutory definition of wages, talking about all remuneration is in our view consistent with the Congressional design, in setting up the withholding tax system in 1943 to correct income taxes at their source and thereby prevent what had there to for being the losses of large amounts of revenue for the -- to the Internal Revenue Service and the inconvenience of tax payers having to come up with a large lump sum payment at what was then March 15, and which is now April 15, at the time of the filing of the return. The regulations which we set forth at page 3 (a) of the Appendix, similarly reflect this broad congressional design, because they provide respectively that the name that you call remuneration is immaterial that is salaries, fees, bonuses, commissions and like and it also says that the basis on which the remuneration is paid, that is it could be paid on the basis that a piece where percentage of profits etcetera, all of that is irrelevant. The question is, is this remuneration for services by an employee for his employer, now that the petitioner in this case has suggested that what we have done is to mix up the things because this is not an income tax case. It is a withholding tax case, but necessarily the code has to be read as an integrated haul and we do not suggest that all items of income or wages. We are not suggesting that the gamut of receipts set forth in Section 61 which is set forth at page 1 (a) of the appendix of 15 items which is not an exhaustive list is wages, but we do suggest that the appropriate focus of this case is on Section 61 (a) (1) of that definition, which provides that gross income includes compensation for services including fees, commissions and similar items. Now, there is no question that seems to us that these lunch payments here, really for the same reasons I have pointed out --
Speaker: But why do you focus on gross income when you have got a specific statutory definition of wages?
Stuart A. Smith: Well, we focus on gross income Mr. Justice Rehnquist, simply because we think that the statutes dovetail each other. In other words, we are talking about compensation or remuneration for services and we are talking about compensation, those are really the same thing and what they do in our view is to emphasize the purpose of the withholding definition. That is purpose was to collect taxes on what is the employee’s taxable base? In other words, that is why in our view the question of whether these items are -- the relevance of the Correll decision and question whether these items are -- whether some of these items are deductible and the fact that non-overnight lunch payments are not deductible is important because what it demonstrates to us is that the if the withholding tax system is to work coherently, it has to be a rough measure of the employee’s taxable base and in this particular --
Speaker: Well, that would be fine if you are drafting the thing yourself but Congress has already spoken and does -- am I not right in thinking that all wages as income is grossly --
Stuart A. Smith: All wages are income and not -- but not all income is wages.
Speaker: But Congress did not --
Stuart A. Smith: But this is a particular kind of income here that is compensation for services and it seems to us that under Section 3401, we are talking about remuneration for services, you have to ask a question, whether these people got these payments for services and that really corresponds to the Section 61 (a) (1) category of gross income.
Speaker: But for the --
Stuart A. Smith: I do not mean to label the point, but it seems to me that the two supervisions work in a harmonious way.
Speaker: You do not really need to make the --
Stuart A. Smith: No, you do not need to make the point, but I think the Code is, it attempts to be coherent and that is what the entire point that I wanted to make. Well, in any event so we have here in order for the petitioner to prevail here, he has to demonstrate that these payments were not compensatory remuneration for services, and it seems to us that the facts of this case demonstrate the correctness of the Court of Appeals’ conclusion that the payments were compensatory remuneration for services. First of all, these are employees, these people who work for the public utility. They were required to perform services, in exchange for the services that they perform, they become eligible for certain agreed upon employee benefits, pursuant to a union contract, much like the union contract in the Kowalski case. If they worked at a normal duty station they got their wages, no doubt about it that those are subject to withholding and the petitioner does not contend otherwise. If they went on non-overnight travel, they got their wages plus the $40 a day meal payment. If they did not work for the day, they perform no services, they got no wages and they got no meal payment. It seems to us that there is inescapable cause of connection between the receipt of the meal allowance with $40 per day and the performance of services and in fact, there really is no qualitative difference between the meal allowance and any other element of the employees compensation. That is, it is simply comparable to any other kind of economic benefit provided by an employer, in order to better services.
Speaker: You can say the same thing about somebody that goes to a heated office on a cold day and works. There is an inescapable connection between working in that office and getting heat, but that does not necessarily make heat, as part of the wages?
Stuart A. Smith: No, it does not necessarily make the heat, a part of the wages, but I would suggest that when we are talking about items like that. We are really talking about problems that are -- questions that are impossible to value. That is just not part of the compensation scheme in the way that wage, the normal salary and plus lunch payment is that day, anymore than like or a pencil --
Speaker: Then you are doing the distinction because between that which is capable easily of valuation and that which is not?
Stuart A. Smith: Well it seems that withholding system has to be practical system and I am not -- I would think that perhaps the value of heat went into the withholding taxable base. I suppose it might come out as deductible employee business expense, because the employee has to have heat to perform his functions properly --
Speaker: The employer deducts it?
Stuart A. Smith: Yeah, yeah. The employer.
Thurgood Marshall: Mr. Smith, in the days like -- have you not heard, secretaries who want to know before I worked, do I have electric typewriter, air conditioning, heat et cetera?
Stuart A. Smith: I do not know sir.
Thurgood Marshall: Do they not all say that?
Stuart A. Smith: Of course and there was -- there was a problem.
Thurgood Marshall: And it is just a part of being sovereign.
Stuart A. Smith: I would not think so. It seems to me part of the gamut of fringe-benefits that an employer provides to its employee in order with --
Thurgood Marshall: And we do not put it on grounds that you can calculate. I think you have to find another ground?
Speaker: All those things do fall within the literal meaning of this sentence on page 20 that just called to our attention by your sister on the other side?
Stuart A. Smith: I suspect. Well, --
Speaker: That whatever it has been, the mens and ladies rooms and everything?
Stuart A. Smith: I suspect to say that as a technical matter they do fall within this sense, but I am not standing on that sense. I think what we are talking about in this case is a $40 a day cash payment --
Speaker: That is your brief -- -
Stuart A. Smith: That is why --
Speaker: This is your brief, as that your brief trying to prevail in that theory and this is what you told us?
Stuart A. Smith: Well, okay. It seems to me that what -- well, I think that sentence in the brief was addressed to refute the point made by the Royster decision of the Fourth Circuit in which petitioner has advanced here that somehow when you have a payment that is not tied to a particular service that it is not compensation for services, that is not remuneration for services. But what the Fourth Circuit in Royster said, on comparable facts is when the salesman ate lunch they were not working but that can possibly make any sense because vacation pay -- people -- usually during vacation pay they are not working and that is plainly wages, subject to withholding and I do not think the petitioner would content to the contrary and the Court --
Warren E. Burger: Let me ask you about one more concrete and readily measurable, the 15 minute coffee break with unlimited coffee today its $0.25 is it not for a cup of coffee, an average employee might readily have two cups of coffee charging $0.50 of wages or for that?
Stuart A. Smith: I suppose it is a theoretical matter, but as again I point out that these are -- the withholding system is a practical system where you asked I think earlier are in the argument of about the Christmas turkey, the service has ruled that items like that while technically income and quite properly also fit within the statutory definition of wages are simply eliminated from both tax basis as a practical matter, in order to ease of tax administration.
Warren E. Burger: What about the western and southern states in the logging operations where lumberjacks do not usually leave right at this size of the work. The general practice is that a bus comes around to the dormitory /barracks where the lumberjacks stay, pick them all up at the same time, take them up, graft them up with the various work sites and they get the travel to and from work and of course they get all their meals and it is included to, is meals taxable, is the bus drive taxable.
Stuart A. Smith: I think that as a theoretical matter. There are all facts --
Warren E. Burger: Do you know what IRS is in fact doing on that?
Stuart A. Smith: These are some of the problems that the treasury is now considering in terms of there have been studies of the taxability of fringe-benefits and one of the things that the treasury has to strike a balance between its sensible tax administration which I would suggest, I can not predict how the study will come out, but I would suggest it would exclude cups of coffee on coffee break, consumed by employees, but at the same time include an income, more substantial items which are more easily susceptible to evaluation and which are more regularly provided across the board on an industry-wide basis. Here you have a large public utility which simply decides that if a person is going to leave his normal duty station for the day,he is going to get $40 to each lunch and if he did not get that $40, presumably he would have to pay for the lunch himself and that factor from the judges’ point of view is a valuable economic benefit. So as heat, I suppose, one has to allocate one’s resources in deciding what one is going to subject to tax, and withholding, and when is it?
Speaker: Mr. Smith I think you have already answered the question I am going to ask, but I do not quite have it clearly in mind. Let us assume that one of these employees had drove his car 50 miles for his job site on a particular day and was provided reimbursement for his lunch and for his mileage, I recognize that the regulation 341 (a) etcetera, refers to travel expenses explicitly, is that the basis for distinction between the two?
Stuart A. Smith: No, because it will in our -- that your hypothetical, would they were going back and forth and not going overnight. The way we read that regulation the only way to have and what the petitioners try to do is to turn this -- what we regard as a lunch case into a travel case.
Speaker: But if you had to travel facts I have of that stated what is --?
Stuart A. Smith: What you have to travel facts, if I had the travel fact that you stated and there was no overnight travel, those amounts of reimbursements would be remuneration for services, be part of total package of compensation and there would not be any -- there would not be any offset under the regulation because there would be no --
Speaker: The mileage would be compensation?
Stuart A. Smith: The mileage to be sure because commuting expenses when you go -- when one goes from home to the office and goes back at night, that under the court’s decision, I think in Commissioner v. Flowers has long been held to be --
Speaker: If then you sent him down to Fredericksburg that day would that be analogous to commuting from Chevy Chase or?
Stuart A. Smith: Well, I suppose it would be different if you sent him down to Fredericksburg on a mission of -- for his employer those travel expenses would be a deductible, if he got reimbursed where they would go in and out --
Speaker: But not to meal he ate in Fredericksburg?
Stuart A. Smith: Not to meal he ate in Fredericksburg because that comes under the Commissioner’s overnight rule and you do not --in other words, you know that were you have to eat your lunch, anyway the theory of the overnight rule and it is a line drawing which the Court approved back in 1969.
Thurgood Marshall: That is not the overnight , included here in this case?
Stuart A. Smith: Well, that is right Mr. Justice Marshall, if you travel in non-overnight capacity, you do not get to deduct the cost of your meals consumed. That was the what the Court considered in Correll. In other words, what is if a lawyer leaves his office in New York comes down to Washington for the day, spends the day debating with the IRS about a technical tax matter and eats lunch, that lunch is not a deductible business.
Thurgood Marshall: Well, benefit of my brother Stevens, is there any place in his record, or list of the places in Chicago, that you get lunch for a dollar and 40 cents?
Stuart A. Smith: Mr. Justice Marshall, I have two answers to that. To begin with this case came from Southern District of Illinois, where I hope that costs are cheaper, I think that the District Court sat in Peoria that decided this case was Springfield.
Byron R. White: Let me tell you that the judges on the Seventh Circuit have found all those places.
Stuart A. Smith: And secondly this was 1970. I know that that does not seem that long but it was seven years ago and I suspect seven years ago, one could get a modest law and in fact the trial transcripts talks about.
Byron R. White: But do you remember when you could get one for a dollar and 40 cents.
Stuart A. Smith: Yes, but it is -- it is threaded in the midsts of time. In any event, we think that these were payments to enlist better services, there were payments to defray a personal expense, they do not come under the regulation that the tax payer relies upon, because they are non-overnight travel and they are -- they do fit properly within the statutory definition of wages, now to the extent that --
Byron R. White: Firstly regulation does not say over a non-overnight travel?
Stuart A. Smith: No, it does not say non-overnight travel Mr. Justice White, but the regulation I think was issued in 1943, shortly after Congress enacted the withholding provision. The Commissioner announced his overnight rule in 1940 and this sort of brings up the question of notice --
Byron R. White: Just about the same and in the Court -- Correll did not involve, this did not involve wages involved income tax?
Stuart A. Smith: Correll involved deductions.
Byron R. White: And that was a longstanding treasury practice that Correll --
Stuart A. Smith: Exactly, the Court in Correll said that the Commission had consistently adhered to this position --
Byron R. White: Since --?
Stuart A. Smith: Since 1940.
Byron R. White: And that is the same time is that --
Stuart A. Smith: That antedated these regulations by a few years. These withhold tax regulations. The Commissioner is --
Byron R. White: You just mentioned in the 1940 a while ago?
Stuart A. Smith: Well, I think the withholding tax provisions came in the 1943 in the war, and the Commissioner’s overnight rule antedated those and that --
Byron R. White: And you think that as soon as this regulation came out he said it is only covered overnight?
Stuart A. Smith: Well, I think that is -- it seems to me that is the purport of the phrase ordinary and necessary expenses because --
Byron R. White: Did he say that he had some rulings expressly or --?
Stuart A. Smith: There were no expressed rulings, but the point is that the Commission that have to --
Speaker: This is an awfully poor way of saying overnight, just to say all traveling expenses?
Stuart A. Smith: Well, the point -- point is that the Commissioner had been told -- had announced the overnight rule was 37 years old.
Speaker: That overnight rule for what, not for this purpose?
Stuart A. Smith: No, for employee deduction purpose, but that brings up the point that I started with and that is that the --
Speaker: Well, the 37 years old, it looks like he could have incorporated in these regulations?
Stuart A. Smith: I suppose he could have, but that brings up the point I mentioned earlier.
Speaker: What he did not -- I would think he meant not to?
Stuart A. Smith: No, I do think -- I do not think that you can -- I would draw exactly the contrary inference that since the overnight rule --
Speaker: That what your entitled to?
Stuart A. Smith: Yes, well, since the overnight rule involves Section 160, a sentence on Section 162, using the phrase ordinary and necessary, it seems to us that the Commissioner incorporated his position in these regulations and in fact, since these things are not deductible, they do not fall out of the employee’s tax base and they are all necessarily included in the definition of wages and subject to withholding. I do not think that the tax payer can argue here that they were not on notice that the Commissioner was taking his position.
Speaker: Mr. Smith, apart from this general language in this regulation and the Correll case, is there anything before 1969, that would reasonably put companies like this, a notice as to wages, that you are going apply an overnight rule on withholding the wages?
Stuart A. Smith: Well, I do not think, the 1969 ruling said that if your reimbursements did not exceed your deductible expenses, then you had to withhold them, or conversely if they did not. That is what the 1969 ruling said, but what I want to say in terms of the tax payers’ notice position they have been arguing all along here, that somehow there is a universe of the wages and then there is a universe of income and that they have nothing to do with each other and that somehow this stuff while it may be -- these payments whether may be income are not wages, but when they come to the notice provision, they shift ground and talk about the fact that they relied on the Hanson case. The Hanson case is an income tax case. It was one of the pre-Correll Court of Appeals’ decisions of I think of the Eighth Circuit, which have rejected the Commissioner’s overnight rule, so they should -- basically they are coming back to the very position that we are taking on the merits and that is that the withholding tax, that the employee’s tax base is very important for determining --
Speaker: That does not -- that does important as if there old case holding it is not income, our fortiori would not be wages --
Stuart A. Smith: No, that was in --
Speaker: That does not follow that because of the change of the law on income is made does not follow that also changed the law --
Stuart A. Smith: There was an old case holding that --
Speaker: That is not deductible?
Stuart A. Smith: That it was deductible.
Speaker: That was deductible and therefore could be excluded from income?
Stuart A. Smith: Right.
Speaker: But that has -- that the fact that was the law, the change in that rule would not necessarily also require a change in the rule applicable to wages?
Stuart A. Smith: No, I was simply making a point of about that they -- my point was simply that the positions were inconsistent.
Speaker: No, no they could rely on that because it was -- it what was deductible and therefore not includable as income, surely it would not be subject to withholding?
Warren E. Burger: It is includable as income but it is deductible?
Stuart A. Smith: it is includable and I think of yeah what I --
Speaker: There is no point deducting this? You do not deduct something if you do not first report this out?
Stuart A. Smith: Well, absolutely I understand.
Speaker: Gross income.
Stuart A. Smith: I understand. Well, point to the matter is that the old case or not, I do not think that the tax payer -- the Commissioner had taken this position since 1940 and the fact that the courts were in disarray on this question of the deductibility of employee business expenses, I do not think that -- I do not think that it is reasonable to rely in a single court decision. I think as we pointed out in our brief, it seems to me --
Speaker: The other side of it realistically as you have large companies all over the country with problems like this. They have no motivation not to withhold as I understand the Government’s position clearly. Do they?
Stuart A. Smith: But it seems to me when we are talking about an announced position of non deductibility on the overnight and you have these non-overnight payments and you have these statutory definition of wages and these items are plainly compensation or remuneration for services within Section 3401 (a), which seem to me that a prudent employer and a large employer are like a large public utility. It had -- if they had any question about whether or, whether or not to withhold the prudent thing to do is to ask the Internal Revenue Service.
Speaker: What in fact did the large company’s do probably in 1969?
Stuart A. Smith: I am not aware of any -- I can not answer that question there is nothing in the record and I am not --
Speaker: Any litigation instituted by the Commissioner to --?
Stuart A. Smith: The only litigation instituted by the Commissioner, prior to this case, was on the withholding point, it was the Royster case in the Fourth Circuit, so to that extent, I cannot tell you when the Royster case --
Speaker: And that went the other way?
Stuart A. Smith: That went the other way. but it seems to me -- but it also -- it also signaled for the tax part but the Commissioner was taking the position that these items were subject to withholding and we would submit that the announcement of the Commissioner’s overnight rule have indicated that these matters would -- did not come out of the tax base and that they were subject to withholding.
Speaker: Excuse me, what is the date of Royster, it is in the brief, but I do not have it?
Stuart A. Smith: In 1973, although, that is the date of the Court of Appeals’ decision, I assume that the Royster case began quite a good deal earlier than 1973. If the court has no further questions I --.
Warren E. Burger: Do you have anything further Ms. King?
Sharon L. King: I have nothing further.
Warren E. Burger: Thank you counsel. The case is submitted.