Estate of Rockefeller v. Commissioner
762 F.2d 264, 56 A.F.T.R.2d (RIA) 5094, 1985 U.S. App. LEXIS 31187 (1985)
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Rule of Law:
Expenses incurred in seeking a new public office are not deductible as "ordinary and necessary expenses" of carrying on an existing trade or business under I.R.C. § 162(a) if the new office constitutes a "new trade or business" due to substantial differences in tasks and activities, even if the taxpayer has a long history of public service.
Facts:
- Nelson Rockefeller served as Governor of New York State from January 1959 to December 1973.
- In December 1973, Rockefeller resigned from the governorship to devote his full time to chairing the Commission on Critical Choices for Americans and the National Commission on Water Quality.
- In 1974, following the resignation of President Nixon, Rockefeller was nominated to be Vice President of the United States pursuant to the Twenty-Fifth Amendment.
- Rockefeller incurred $550,159.78 in expenses during 1974, primarily for legal and other professional services, in connection with his confirmation hearings for the Vice Presidency.
- At the time of his nomination, Rockefeller's only public posts were the chairmanships of the two commissions, neither of which involved executive duties.
- Rockefeller had a prior career in public service, including roles as Coordinator of Inter-American Affairs (1940-44), Assistant Secretary of State (1944-45), and Undersecretary of Health, Education and Welfare (1953-54).
Procedural Posture:
- Mr. and Mrs. Rockefeller filed a joint income tax return for 1974, claiming a deduction of $63,275 for expenses related to his Vice Presidential confirmation.
- The Commissioner of Internal Revenue disallowed this deduction.
- Mr. Rockefeller’s estate and Mrs. Rockefeller petitioned the Tax Court for review, asserting that the entire amount of $550,159.78 was deductible.
- The Tax Court agreed with the Commissioner and affirmed the disallowance of the deduction.
- The Estate of Nelson A. Rockefeller (appellant) and his widow (appellant) appealed the Tax Court's decision to the United States Court of Appeals for the Second Circuit, with the Commissioner of Internal Revenue as the appellee.
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Issue:
Are expenses incurred by Nelson Rockefeller in connection with his Senate and House confirmation hearings for the Vice Presidency deductible as "ordinary and necessary expenses" of carrying on an existing trade or business under I.R.C. § 162(a) and § 7701(a)(26), given his extensive prior public service?
Opinions:
Majority - Friendly, Circuit Judge
No, expenses incurred by Nelson Rockefeller for his Vice Presidential confirmation were not deductible as ordinary and necessary expenses of carrying on an existing trade or business because the Vice Presidency constituted a new trade or business, not a continuation of his prior public service. The court affirmed the Tax Court's decision, relying on the interpretation of I.R.C. § 162(a) and § 7701(a)(26). While § 7701(a)(26) includes "the performance of the functions of a public office" as a trade or business, the critical inquiry under § 162(a) is whether the expenses were incurred in carrying on an existing trade or business, not in seeking a new one. The court discussed McDonald v. C.I.R., which disallowed deductions for judicial campaign expenses based partly on a "being-becoming" distinction. While subsequent cases like Primuth v. C.I.R. and Cremona v. C.I.R., in which the Commissioner acquiesced, partially eroded this distinction by allowing deduction of job-seeking expenses for employment in the same trade or business, the court emphasized the narrow application of these exceptions. Tax courts have consistently required a "high degree of identity" between the old and new employment for the "same trade or business" test, looking for "substantial differences in the tasks and activities." Applying this test, the court determined that Mr. Rockefeller's prior roles, particularly his governorship, were substantially different from the Vice Presidency. The governorship involved extensive executive duties, state law enforcement, and budget management, while the Vice Presidency entails presiding over the Senate, ceremonial duties, special presidential assignments, and preparing to assume the Presidency. Even considering his long history of public service, the court found insufficient resemblance and continuity between his various posts to establish a continuous "trade or business" broad enough to encompass the Vice Presidency. The "hiatus" principle, which allows a taxpayer to be considered still engaged in a trade or business during a temporary break, did not apply because Mr. Rockefeller did not intend to resume his prior trade as Governor, and significant gaps existed between many of his earlier public service roles. Thus, the confirmation expenses were considered to be for entering a new trade or business, making them nondeductible.
Analysis:
This case reinforces the strict interpretation of "ordinary and necessary expenses" under I.R.C. § 162(a) and the "same trade or business" test for deducting job-seeking expenses, particularly for public office. It clarifies that even an extensive history of public service does not automatically qualify a new high-level appointment as a continuation of an existing trade or business if the roles involve substantially different duties. The decision emphasizes that the Primuth exception, allowing deduction for seeking new employment in the same field, is narrowly construed, requiring a high degree of identity between positions. This ruling provides a precedent against broad interpretations of "trade or business" for high-ranking government officials and limits the deductibility of expenses incurred in transitioning to significantly different public roles.
