Commissioner v. Kowalski
54 L. Ed. 2d 252, 1977 U.S. LEXIS 155, 434 U.S. 77 (1977)
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Rule of Law:
Section 119 of the Internal Revenue Code provides an exclusion from gross income only for meals furnished in kind by an employer on the employer's business premises for the convenience of the employer. This exclusion does not extend to cash payments or reimbursements for meals, which are considered part of gross income under § 61(a).
Facts:
- Robert J. Kowalski was a state police trooper for the State of New Jersey.
- Previously, New Jersey provided its troopers with mid-shift meals in kind at designated meal stations.
- Because the meal-station system required troopers to leave their patrol areas unguarded, the State replaced it with a cash meal allowance system in 1949.
- Under the new system, troopers were required to remain on call in their assigned patrol areas during their meal break.
- Troopers received a designated cash allowance for meals biweekly, which was included with their salary.
- Troopers were not required to spend the meal allowance on food, nor were they required to account for how the money was spent.
- The amount of the meal allowance varied by rank, was subject to union negotiations, and was included in gross pay for calculating pension benefits.
- For the 1970 tax year, Kowalski received $1,697.54 as a meal allowance.
Procedural Posture:
- Kowalski failed to report $1,371.09 of his meal allowance on his 1970 federal income tax return.
- The Commissioner of Internal Revenue audited the return, determined the unreported allowance constituted gross income, and assessed a tax deficiency.
- Kowalski (petitioner) sought review in the United States Tax Court.
- The Tax Court held that the meal allowance was income under § 61 and not excludable under § 119.
- Kowalski (appellant) appealed to the U.S. Court of Appeals for the Third Circuit.
- The Court of Appeals for the Third Circuit reversed the Tax Court's decision, holding that the cash payments were not taxable income.
- The Commissioner of Internal Revenue (petitioner) petitioned for, and the U.S. Supreme Court granted, a writ of certiorari to resolve a conflict among the circuit courts.
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Issue:
Does § 119 of the Internal Revenue Code, which excludes the value of meals furnished in kind by an employer, also permit an employee to exclude from gross income cash allowances paid for meals?
Opinions:
Majority - Mr. Justice Brennan
No. Section 119 of the Internal Revenue Code does not permit the exclusion of cash meal allowances, which must be included in an employee's gross income. The cash payments are undeniable accessions to wealth over which the recipient has complete dominion, and therefore fall under the broad definition of gross income in § 61. The exclusion in § 119 is limited by its plain language to meals furnished 'in kind.' The legislative history of § 119 confirms this interpretation, with the Senate Report explicitly stating that the section 'applies only to meals or lodging furnished in kind.' Congress enacted § 119 to create a clear, comprehensive standard and replace the confusing common-law 'convenience of the employer' doctrine, which had been inconsistently applied. To allow a broader exclusion for cash than for in-kind benefits would create an 'extraordinary result' contrary to Congress's intent to narrow the circumstances for exclusion.
Dissenting - Mr. Justice Blackmun
Yes. The cash meal allowances should be excludable under § 119. The statute's text refers to 'meals ... furnished' and does not explicitly forbid cash allowances; the distinction between 'in-cash' and 'in-kind' is a judicial interpretation, not a statutory command. For a state trooper, the 'business premises of the employer' should be construed as the entire state where the trooper is on duty. Furthermore, it is unfair and inconsistent to deny this tax benefit to state troopers, a paramilitary organization, while allowing members of the federal military to exclude similar subsistence allowances from their income.
Analysis:
This decision definitively established that § 119's exclusion for employer-provided meals applies strictly to in-kind benefits, not cash equivalents. The Court's ruling curtailed the scope of the 'convenience of the employer' doctrine, clarifying that § 119 is the exclusive statutory authority for such exclusions and supersedes prior, inconsistent judicial and administrative rulings. This case serves as a key precedent for the principle that cash is presumptively compensatory and taxable as gross income unless a specific statutory provision explicitly excludes it. It reinforced a literal approach to interpreting the Internal Revenue Code, prioritizing the plain text and legislative history over broader arguments of equity or functional equivalence.
