Tougher, Michael A., Jr., et ux. v. Comm.

Decision will be entered for the respondent.

H. Thomas Kay, Jr., for the petitioners. Aaron S. Resnik, for the respondent.

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The Commissioner determined deficiencies in income tax in the amounts of 354.49 for 1963 and 320.96 for 1964. Petitioner Michael Tougher was an employee of the Federal Aviation Agency (FAA), stationed at Wake Island where he lived with his wife and children in a house which he rented from the Government. He and his wife purchased supplies (consisting primarily of groceries) for family

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use at a commissary maintained by FAA. The family had most of its meals at the house in which they resided. The principal issue is whether the cost of the supplies may be "excluded" or deducted from gross income as "the value of * * * meals * * * furnished to * * * [the employee] by his employer * * * on the business premises of the employer" under section 119 of the 1954 Code. FINDINGS OF FACT

Many of the facts have been stipulated by the parties and are incorporated herein by this reference.

Petitioners, husband and wife, lived on Wake Island in the central Pacific Ocean at the time of filing the petition in this case. They filed joint income tax returns for 1963 and 1964 with the appropriate office of the Internal Revenue Service. The husband will sometimes hereinafter be refered to as petitioner.

During the years at issue, petitioner was an electronic technician employed by the Federal Aviation Agency (FAA) at its facilities on Wake Island. He worked on electronic systems located at various places on the island. He was on call 24 hours a day, and, while his normal work week was 48 hours, afterhours calls occurred about three times a week, resulting in an average workweek of 54 hours. During the years at issue, petitioners and their children lived in a duplex residence on Wake Island provided by the FAA. Petitioners had three children in 1963 and four children in 1964. The FAA required all employees as a condition of their employment to live on the island in FAA housing. Petitioners paid rent on their house by means of a payroll deduction.

Wake Island is located in the middle of the Pacific Ocean, approximately 2,500 miles from Hawaii and 2,000 miles from Japan. What is commonly referred to as Wake Island is actually three small atolls in the shape of a horseshoe; the largest and center atoll, Wake, is connected to the smaller atolls, Peale and Wilkes, by means of a bridge and a causeway, respectively. As used herein, the term "Wake Island" refers to all three atolls. It is 11 miles long and 3 miles square; it is flat with the highest point 12 feet above sea level.

Wake Island is a United States possession, used primarily as a refueling station for military and commercial aircraft. Roughly 75 percent of all transpacific air traffic uses Wake Island for refueling purposes. The island is administered by the FAA pursuant to an agreement with the Secretary of the Interior that all executive, legislative, and judicial authority vested in the Secretary shall be exercised by such persons as may be designated by the administrator of the FAA. Part 165 of the Federal Aviation Regulations is the Wake Island

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Code, 14 C.F.R. part 165. Under the Code, executive authority over the island is vested in the Area Manager of Wake Island. In addition to handling air traffic and aviation communications, the FAA provides a variety of supporting community facilities, including power, water, roads, housing, a commissary store, certain mess facilities, maintenance shops, police and fire protection, public health and medical services, and a school with classes from kindergarten through the ninth grade.

During the years at issue, the population of Wake Island was approximately 1,350, of whom about 290 were FAA employees and about 285 were dependents of FAA employees. About 128 FAA employees lived with their families on Wake Island (such employees are sometimes hereinafter referred to as accompanied employees); the other FAA employees either had no families or were not accompanied by them (such employees are sometimes hereinafter referred to as unaccompanied employees or bachelors regardless of whether they were in fact unmarried). The Wake Island Area Manager preferred to have accompanied persons employed on the island to insure greater continuity of service. The other individuals on the island included persons associated with Pan American Airways, "Standard Oil," the U.S. Navy, the U.S. Coast Guard, a Military Air Command contractor from Los Angeles, and the Facilities Management Corporation.

The food facilities on Wake Island included an FAA central dining room or mess hall, an FAA commissary, a Pan American mess for Pan American employees, a Facilities Management Corporation mess for nongovernment employees, a restaurant or snack shop operated privately pursuant to contract in conjunction with a bowling alley (Al Ching's), and an air terminal coffee shop (also operated by Al Ching).

The FAA facilities were established pursuant to various public laws and agency policy directives.

Civil Aeronautics Administration ¹ Order BU 2500.11, dated February 23, 1951, states in part:

Accordingly, in order to discharge the responsibilities imposed upon the CAA by Section 10 of P.L. 647 and at the same time to maintain the integrity of funds as appropriated by Congress it shall be the policy of the Civil Aeronautics Administration to:

(1) furnish, preferably through concessionaires, such items, facilities, and services as fall within the scope of Section 10(a) of the Act; if such items, facilities, and services cannot be furnished through concessionaires they should be provided for directly by the CAA;

(2) charge the users of such items, facilities or services at rates specified in

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the Federal Register, or, when not specified in the Federal Register, at rates approved by the Washington office;

(3) on an agency-wide basis, reimburse the S & E, CAA appropriation from which the costs of such additional items, facilities, or services were paid, from funds received as a result of direct sale or charge, with that portion of collections which is equivalent to the cost of such additional items, facilities, or services, incurred pursuant to P.L. 647;

This order was superseded by FAA Order OA2500.5, dated February 28, 1964, which provides in part:

4. b. Public Law 390, 81st Congress provides that where adequate subsistence supplies are not available from normal sources commissary facilities may be established for the purchase, transportation, storage, and distribution of food and other personal subsistence supplies for resale to employees of the Federal Aviation Agency and other Federal agencies and their dependents in Alaska and other points outside the continental United States. It also provides for the establishment, maintenance, and operation of messing facilities, by contract or otherwise, to provide meal service to employees of FAA and of other Federal agencies and their dependents where suitable family facilities are not available and meals cannot be obtained reasonably from commercial sources. According to this law, proceeds from commissary resales and from messing services are to be credited to the appropriation from which the expenditures are made. Public Law 390 also authorizes the furnishing and maintaining of quarters for FAA employees at remote localities not on foreign soil where such accommodations are not otherwise available. * * * *

5. b(3) Commissary, Messing, and Domestic Activities. Sales prices of goods and supplies at commissaries and rates for messing and domestic services will be established by the cognizant regional director and maintained to approximate local or public rates, including applicable consumer taxes, for similar items in a representative community within the region where the facilities are located. Based on price surveys conducted at reasonably frequent intervals, and in any event not less than biannually, rates should be adjusted by regional directors as considered necessary.

FAA Regional Order PC-4230.1, effective on February 1, 1961, provides in pertinent part:

3. General Policy -- It is the policy of FAA to provide commissary and messing facilities at remote and isolated locations where the Federal Aviation Agency is the prime user and where adequate facilities from other sources are not available. * * * * 5. Commissary

a. Use -- All FAA employees and their dependents stationed at Wake and Canton Islands are entitled to commissary privileges. At the discretion of the Island Manager, use of the commissary may be extended to employees of other Federal Agencies and their dependents. Any further extension must be approved by the Regional Manager. Commissary shall be opened for regular shopping no oftener than three times a week.

b. Sales Price -- The sales price of all commissary goods will be set and maintained by the Chief, Commissary, Mess and Domestic Services Section, and will correspond substantially with the prevailing retail prices in Honolulu.

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c. Collection Procedure -- Payment for commissary purchases will, at the discretion of the Island Manager, be in cash at the time of purchase or on a cumulative monthly basis. * * * 6. FAA Dining Room

a. Use -- All Federal employees not occupying family quarters are entitled to eat in the FAA Dining Room. At the discretion of the Island Manager, this privilege may be extended to their guests; to FAA employees occupying family quarters, their dependents and guests; to similar-type employees of other Federal Agencies, their dependents and guests; and to official visitors. Further extension of this privelege must be approved by the Regional Manager.

b. Collection Procedure -- The revised per diem structure eliminates the collection for meals served to Sixth Region FAA employees in per diem status. Collections for meals served to FAA employees in bachelor status but not on per diem (includes permanently stationed FAA bachelor employees and most FAA construction workers) will be made by means of payroll deductions * * *. Collections from all other dining room patrons will be on a cash basis except that meals served to employees of other agencies and contractors with whom there exist subsistence agreements will be collected through the normal billing process. * * *

c. Missed Meals -- Any FAA employee who is subject to payroll deductions for meals may make application for adjustment for any period in excess of five consecutive days during which he is absent from meals. * * *

FAA Pacific Region Notice PC4239.1 CH3, dated February 1, 1963, provides in part: "All bachelor-status employees must take their meals at the central dining room."

The FAA furnishes complete meal service at its messhall to its unaccompanied employees. The cost of the three meals per day to the unaccompanied employees during the years at issue was 1.50 until June 9, 1963, and 1.75 thereafter. This charge was deducted from the pay of unaccompanied employees whether they ate at the messhall or not, except that an adjustment could be made if more than 5 consecutive days were missed. Accompanied FAA employees and their dependents could dine at the FAA messhall at the discretion of the island manager, but could not do so on a permanent basis. Food for the messhall was ordered on the basis of the number of unaccompanied employees to be served, and accompanied personnel could be served only if sufficient supplies were available. On the average of four times a year for periods of 1 to 4 weeks, food supplies reached such a low level that messhall privileges to accompanied personnel had to be suspended. The messhall prices charged to accompanied employees and their dependents during the years at issue were 1 for breakfast, 1.25 for lunch, and 2 for dinner.

The only source of food for home consumption that could be purchased on Wake Island was the FAA commissary. It was the equivalent of a small supermarket, offering quality items generally without a choice of brands. Prices at the commissary were fixed so as to equal the average of the prices prevailing at three representative markets

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in Honolulu plus 3 1/2 percent in lieu of sales tax (equivalent to the Hawaii sales tax). The commissary was open 4 hours a day every other day. Payment for items purchased at the commissary was made in cash, either at the time of purchase or on a monthly basis. All residents of Wake Island, whether or not FAA employees, were generally allowed to shop at the FAA commissary, but, as occasionally happened, when supplies became low, shopping privileges were restricted to FAA personnel. FAA studies showed that it was cheaper for it to maintain the commissary than to feed accompanied employees and dependents in the messhall. Cost studies by private concessionaires showed that it would be "better" to continue to run the commissary as an FAA facility.

FAA employees could dine at the Pan American and Facilities Management Corporation messhalls by invitation only. Al Ching's bowling-alley restaurant could accommodate between 35 and 50 persons at one time; the record does not disclose the rate of turnover of patrons or the total number that could be served in a day. Since the restaurant was popular, reservations were necessary to ensure accommodations, and its food supplies at times ran low so that some items on the menu were not always available. If the FAA had closed the commissary and had not permitted accompanied employees to eat at its messhall, there would not have been adequate facilities on the island to accommodate the accompanied employees and their dependents on a regular, full-time basis. No edible food could be grown on the island.

There was no requirement that accompanied employees purchase their food from the commissary. On a few occasions, petitioner and others on the island joined together to have meat supplies from Hawaii shipped to them at Wake Island. Because of a Federal law regarding meat inspection, the group was unable to continue this plan, and later had meat shipped from California. This method of obtaining meat was used twice by petitioner during the years at issue, but it was felt that the trouble and expense involved more than offset the benefits derived from the plan. On a number of occasions various employees combined to form their own "co-op," ordering food supplies from Honolulu and the mainland in case lots.

Section 591.203 of the Federal Personnel Manual Supplement provides that a "differential" of 25 percent of basic compensation shall be paid on Wake Island. The same section provides that differentials are based on --

"(a) extraordinarily difficult living conditions, (b) excessive physical hardship, or (c) notably unhealthful conditions * * *."

Petitioners and their children ate most of their meals at home during the years at issue. The meals were prepared by Mrs. Tougher from food purchased at the FAA commissary. Petitioners ate at the FAA

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mess three or four times during the years at issue, and on occasion they ate dinner at Al Ching's to break the monotony. Petitioners spent 1,611.34 in 1963 and 1,534.26 in 1964 for items purchased at the FAA commissary. These amounts included food used for the meals of petitioners and their children. Nonfood items accounted for about 5 percent of these figures and included household maintenance items such as soap, ammonia, mops, brooms, and household cleaners, but not items such as toiletries.

On their 1963 joint income tax return, petitioners reported 9,822.43 as wages or salary. An attached schedule stated in part:

 Gross wages reported on W-2 Form                    $ 12,507.64

In his notice of deficiency, the Commissioner considered as "unallowable deductions" sums for "food purchases" in the amounts of 1,611.34 for 1963 and 1,534.26 for 1964. OPINION

Petitioners seek the benefit of section 119 of the 1954 Code ² in respect of supplies (primarily groceries) purchased by Mrs. Tougher at the FAA commissary for family use. It should be noted at the outset, first, that personal, living, and family expenses are generally not deductible from gross income, sec. 262, and, second, that section 119 deals with exclusions from gross incomes, not deductions therefrom. In our view, section 119 does not authorize petitioners

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to subtract from Mr. Tougher's reportable wages the expenditures which Mrs. Tougher made at the commissary for family supplies.

It is important to bear in mind the history of the statutory provisions involved. Prior to 1954 there was no statute whatever specifically dealing with the problem. However, a line of cases and rulings had developed in which the value of lodging or meals furnished by an employer to his employee in one set of circumstances or another was held not to represent income to the employee under the general provisions of the law defining gross income. ³ Not only was the furnishing of such tax-free benefits susceptible of abuse, but there was such confusion as to the proper test to be applied to determine the tax-free status of meals and lodging that section 119 was inserted in the 1954 Code to set forth with specificity the restrictive conditions under which such unusual benefits would be available. ⁴ It is clear, not only from the language of section 119 but also from the legislative history, that section 119 was designed to deal with the problem whether the value of meals and lodging furnished to an employee in kind ⁵ was to be treated as additional compensation rather than with any question as to whether the employee might be entitled to a deduction from gross income on account of expenditures made by him for meals and lodging. Accordingly, it would seem that section 119 from its very nature does not apply here. There would appear to be no basis for an "exclusion" from gross income on the facts of this case; petitioners are really not seeking to prevent the Commissioner from adding the cost of the groceries in question to Mr. Tougher's wages; rather, they are in fact seeking a deduction from those wages on account of their commissary expenditures -- a matter that is not dealt with at all in section 119. However, because of the considerations outlined below in the footnote ⁶ we do not rest our decision on this ground, and hold that

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petitioners are not entitled to prevail for the simple and obvious reason that petitioner's employer did not furnish him with any "meals."

Thus, wholly apart from the difficulties arising from the problem whether the sale of meals for a charge constitutes "furnishing" such meals to an employee, we think it clear that the sale of groceries is not the equivalent of furnishing "meals." It is hornbook law that unless there is a compelling reason to the contrary the words of a statute must be given their ordinary and usual meaning. We think it puts too much strain on language to treat the word "meals" as meaning a sack of groceries and some other household supplies purchased at the commissary for family consumption or use at home.

The word "meals" connotes to us food that is prepared for consumption at such recognized occasions as breakfast, lunch, dinner, or supper, or the equivalent thereof. It does not ordinarily mean a bag of potatoes, a tin of coffee, a box of salt, a can of peas, 10 pounds of flour, a package of rice, a bottle of ketchup, a jar of mayonnaise, or an uncooked chicken. To be sure, these items, or portions of some of them, can be processed and combined with other items so as to produce "meals," but in their raw form they are not ordinarily regarded as meals, and in the absence of persuasive evidence pointing in the other direction, it is our judgment that Congress did not use the term "meals" in that sense. In fact the emphasis in section 119 on the "convenience of the employer" suggests added support for giving the term "meals" its ordinary meaning. When an employer furnishes a "meal" in its normal sense, he can control the time, place, duration, value, and content

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of the meal to suit his convenience. These elements of potential control, which are strong evidence that the employer's convenience is involved, are lacking in a case such as this one, where the employee merely purchases groceries. Thus it is quite consistent with legislative intent not to extend the term "meals" to include groceries.

It is true that in Charles N. Anderson, 42 T.C. 410, reversed on other grounds 371 F. 2d 59 (C.A. 6), milk and certain minor supplies taken from the employer's kitchen were treated as meals, but this Court made it abundantly clear that the Government did "not argue that the milk and groceries furnished were not meals within the meaning of section 119," 42 T.C. at 418. And the decision of this Court was based merely upon the assumption, without adjudication, that food supplies could constitute meals. We are now squarely faced with the question for the first time, and we hold that the groceries purchased by the taxpayers did not qualify as "meals" under the statute. Moreover, it is to be noted that the employer furnished food items in kind in Anderson, and to the extent that the employer merely reimbursed the employee for food purchased by the latter it was held that section 119 did not apply. It seems clear that Anderson is not authority for the petitioners' position herein.

We do not pause to consider various other knotty problems that are suggested by this case -- e.g., whether meals furnished to the wife and children of the employee qualify as meals "furnished to him," cf. Armstrong v. Phinney, 394 F. 2d 661, 664 (C.A. 5). We hold merely that the supplies purchased at the commissary were not meals within the meaning of the statute.

Decision will be entered for the respondent.

² SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE EMPLOYER.

There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the convenience of the employer, but only if --

(1) in the case of meals, the meals are furnished on the business premises of the employer, or

(2) in the case of lodging, the employee is required to accept such lodging on the business premises of his employer as a condition of his employment.

In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation.

³ In determining whether the value of such meals or lodging furnished in kind should be added to the employee's gross income, emphasis was sometimes placed upon whether they were furnished for the convenience of the employer, and at times upon whether they were intended as additional compensation to the employee. See, e.g., O.D. 265, 1 C.B. 71; T.D. 2992, 2 C.B. 76; O.D. 915, 4 C.B. 85; Jones v. United States, 60 Ct. Cl. 552; T.D. 4965, 1940-1 C.B. 13; Mim. 5023, 1940-1 C.B. 14; Mim. 6472, 1950-1 C.B. 15. See generally, Saunders v. Commissioner, 215 F. 2d 768, 772-775 (C.A. 3); Gutkin and Beck, "Some Problems in 'Convenience of the Employer,'" 36 Taxes 154.

⁴ See H. Rept. No. 1337, 83d Cong., 2d Sess., p. 18, A38-A39; S. Rept. No. 1622, 83d Cong., 2d Sess., p. 190-191; Gordon S. Dole, 43 T.C. 697, 707-708 (concurring opinion), affirmed per curiam on that concurring opinion, 351 F. 2d 308 (C.A. 1).

⁵ S. Rept. No. 1622, 83d Cong., 2d Sess., states (p. 190): "Section 119 applies only to meals or lodging furnished in kind." (Emphasis supplied.) See also H. Rept. No. 1337, 83d Cong., 2d Sess., p. A39.

⁶ In J. Melvin Boykin, 29 T.C. 813, an employee-physician was required to occupy quarters at his employer's hospital and to pay a fixed rental therefor which was deducted from his basic salary. This Court's holding that the employee's payment of such rental did not qualify for exclusion under sec. 119 was reversed in 260 F. 2d 249 (C.A. 8); the Commissioner acquiesced in the reversal, Rev. Rul. 59-307, 1959-2 C.B. 48, and subsequently promulgated new regulations reflecting such acquiescence, 1964-2 C.B. 42. In Boykin the mandatory withholding of a fixed amount for rent from the employee's formally designated salary could be regarded in substance as restating his true salary to be the diminished amount thereof, and the employer could be regarded as furnishing the employee the lodging in kind. As thus interpreted, the reversal in Boykin is not inconsistent with what is suggested above, and, indeed, the newly promulgated regulations appear to be based upon such rationalization. For, the new regulations provide that where "the employer furnishes the employee lodging for which the employee is charged an unvarying amount irrespective of whether he accepts the lodging," the amount of the charge is not treated as part of the employee's compensation, and whether the value of the lodging furnished is excludable from the employee's gross income depends upon whether it satisfies the various other requirements of the statute. Income Tax Regs., sec. 1.119-1(b). It was undoubtedly pursuant to these provisions that the Commissioner permitted petitioners to reduce Mr. Tougher's compensation by the amount that was required to be withheld from his wages on account of the rent for his house. The regulations contain similar provisions relating to meals. Income Tax Regs., sec. 1.119-1(a)(3)(ii). Cf. William I. Olkjer, 32 T.C. 464, where a fixed amount was deducted from the employee's salary for meals, lodging, and other facilities. No such fixed amounts were deducted here from Mr. Tougher's salary for meals. Indeed, he was not even required to shop at the commissary or to purchase food at any fixed amount, and the purchases were paid for in cash (although on a monthly basis) as they would be at any other supermarket in the United States. Although possibly inconvenient and not always feasible, he could, and at times in fact did, obtain food from other sources, at least to some extent.

However, because of the general confusion in this field we do not rest our decision on this point, particularly since in our view the supplies purchased at the commissary do not qualify as "meals" under the statute in any event. We note also that the confusion in this area has been enhanced rather than cleared up by the cases dealing with the question whether cash allowances for meals paid to highway patrolmen are excludable under sec. 119. Cf. United States v. Morelan, 356 F. 2d 199 (C.A. 8); United States v. Barrett, 321 F. 2d 911 (C.A. 5); Keeton v. United States, 256 F. Supp. 576 (D. Colo.), affirmed per curiam 383 F. 2d 429 (C.A. 10); but cf. Wilson v. United States, 292 F. Supp. 200 (D.N.H.).