Commissioner v. Kowalsky case brief

Commissioner v. Kowalsky

FACTS
-NJ instituted a cash meal allowance for its state police officers in July 1949.
-Before that, troopers were provided a mid-shift meal at one of several meal stations located throughout the State.
-The State decided system was unsatisfactory; required troopers to leave their patrol areas unattended for extended periods of time. New system provided troopers with a cash allowance, which troopers could use to purchase a meal at a location within their patrol area, thus making it unnecessary for them to leave the area unmonitored.
-Allowance was paid bi-weekly in advance and was included, although separately, with a troopers salary. -The money was also separately accounted for in the State’s accounting system, and funds from the meal allowance account were never mixed with the salary accounts. Troopers were not required to spend the allowance on mid-shift meals, nor were they required to account for the manner in which the money was spent. This meant that troopers were allowed to eat at home if their home was within their patrol area, or to bring a meal with them to eat in or near their patrol cars.
-Kowalski, a state trooper, reported wages for 1970 that included only a portion of his meal allowances (he included $326.45, which omitted $1,371.09 in allowances).
-The Commissioner believed that this amount should have been included in income, and determined a tax deficiency. Kowalski argued that the cash meal allowance was not compensatory, but was furnished for the convenience of the employer and therefore wasn’t income under I.R.C. §61(a), and that alternatively, it was excluded under I.R.C. §119.

ISSUE
-When Kowalski's employer designated a cash payment as a meal allowance:
1.  Is that payment excludable from gross income under §61(a) of the Internal Revenue Code of 1954, 26 U.S.C. §61(a)?
2.  If not, is it excludable under §119 of the Code, 26 U.S.C. §119?

HOLDING
1.  No, it is a part of income as all clearly realized accessions to wealth except where expressly excluded. 
2.  Not excludable under 119.

RULES
§119 was intended to exclude only meals in kind. The Court found that Congress intended the exclusion to refer only to meals furnished in-kind.
-By its own terms, the text of this section applied only to "meals" -- not "cash" reimbursements for meals. (The statute excludes "the value of any meals ... furnished to [an employee] by his employer for the convenience of the employer, but only if ... the meals are furnished on the business premises of the employer.")
According to Senate Report No. 1622 (1954), "Section 119 applies only to meals...in kind...Any cash allowances for meals...received by an employee will continue to be includable to the extent that such allowances constitute compensation."
 
ANALYSIS
§119 was intended to end the confusion of the common law "Convenience of the Employer" doctrine. 
-Court rejected the argument that §119 incorporated the doctrinal exclusion for benefits that were noncompensatory (or for the convenience of the employer) under lower court and administrative rulings. 
-The drafting process of §119 shows that Congress intended to "end the confusion as to the tax status of meals and lodging furnished an employee by his employer" under prior law.
-Section 119 must therefore be construed as its draftsmen obviously intended it to be—as a replacement for the prior law, designed to end its confusion.