No. 12412
I N THE SUPREME COURT O THE STATE O MONTANA F F
1973 HAROLD and EVELYN MAGNUSON,
P l a i n t i f f s and Respondents,
M N A A STATE BOARD O EQUALIZATION, OTN F
Defendant and A p p e l l a n t .
Appeal from: D i s t r i c t Court of t h e F i r s t J u d i c i a l D i s t r i c t , Honorable P e t e r Meloy, Judge p r e s i d i n g .
Counsel of Record:
For A p p e l l a n t :
Edward J e n e B e l l , argued, Helena, Montana.
For Respondents :
H a r r i s o n , Loendorf and Poston, Helena, Montana. James T. H a r r i s o n , J r . argued, Helena, Montana.
Submitted: May 29, 1973
Decided : Jfi 6 1973 1 Filed : JUL 1 6 1973
M r , J u s t i c e John Conway Harrison d e l i v e r e d t h e Opinion of t h e Court.
P l a i n t i f f s , Harold and Evelyn Magnuson, f i l e d an a p p l i c a t i o n f o r r e v i s i o n w i t h defendant S t a t e Board of E q u a l i z a t i o n seeking refund o f $269.50 f o r income t a x e s paid f o r t h e t a x y e a r s 1965, 1966, 1967, and 1968. The a p p l i c a t i o n was denied by t h e Board and p l a i n t i f f s brought t h i s a c t i o n i n t h e d i s t r i c t c o u r t of t h e f i r s t j u d i c i a l d i s t r i c t , Lewis and Clark County, f o r review of t h e ~ o a r d ' sd e c i s i o n . The Honorable P e t e r Meloy, s i t t i n g w i t h o u t a j u r y , rendered judgment f o r p l a i n t i f f s , holding t h a t t r a v e l i n g expenses claimed were d e d u c t i b l e . Defendant Board moved t h e c o u r t t o amend i t s f i n d i n g s of f a c t and c o n c l u s i o n s of law, b u t was denied. The Board a p p e a l s from t h e judgment and o r d e r denying t h e motion t o amend, The f a c t s a r e n o t i n d i s p u t e . P l a i n t i f f taxpayers a r e long time r e s i d e n t s of Harlem, Montana, P l a i n t i f f owns and o p e r a t e s a s a l v a g e yard b u s i n e s s i n Harlem and a l s o conducts an accounting business there. H i s Harlem r e s i d e n c e was h i s p l a c e of b u s i n e s s i n Harlem. He i s a l s o employed by t h e Burlington Northern R a i l r o a d i n Havre, Montana, where he works t h e midnight t o 8:00 a.m. shift, f i v e days a week. During t h e p e r i o d 1965-1968, f o r which t r a v e l expenses a r e claimed, he drove h i s p e r s o n a l c a r from h i s r e s i d e n c e i n Harlem t o h i s r a i l r o a d job i n Havre and r e t u r n e d t o Harlem each working day. ~ ~ a g n u s o n 'fsi n a n c i a l r e t u r n from h i s employment with Burlington Northern was g r e a t e r than t h a t from t h e t o t a l of h i s two independent b u s i n e s s e s o p e r a t e d i n Harlem, The t r a v e l expenses claimed b u t n o t allowed by t h e Board, were c a r mileage expenses f o r approximately 96 m i l e s p e r day, f i v e days a week, between t h e two communities. These were claimed a s a b u s i n e s s deduction on p l a i n t i f f s ' Montana t a x r e t u r n s f o r t h e y e a r s 1965 through 1968. The d e t e r m i n a t i o n of a t a x p a y e r ' s Montana income t a x l i a b i l i t y i s p r i m a r i l y based upon t h e Federal I n t e r n a l Revenue Code. Section
84-4905, R.C.M, 1947, provides t h a t Montana a d j u s t e d g r o s s income i s t h e t a x p a y e r ' s f e d e r a l a d j u s t e d g r o s s income a s de- f i n e d i n S e c t i o n 62 of t h e I n t e r n a l Revenue Code of 1954, I n determining deductions a l l o w a b l e from a d j u s t e d g r o s s income t o reach n e t income, s e c t i o n 84-4906, R.C,M. 1947, provides t h a t t h o s e deductions a r e allowed which a r e permitted by S e c t i o n s 161 and 211 of t h e I n t e r n a l Revenue Code of 1954. S e c t i o n s 161 and 211 allow s p e c i f i c deductions s u b j e c t t o t h e e x c e p t i o n s provided f o r i n S e c t i o n 261, e t . s e q . I n a d d i t i o n , s e c t i o n 84-4909(1), R. C.M. 1947, s p e c i f i c a l l y d i s a l l o w s a deduction f o r p e r s o n a l , l i v i n g o r family expenses. Montana has adopted t h e Federal I n t e r n a l Revenue Code a s t h e guide t o be used t o determine m a t t e r s such a s income and expense f o r computation of Montana income t a x . S e c t i o n 162 of t h e I n t e r n a l Revenue Code of 1954, i s t h e b a s i s f o r t h e allowance of t r a v e l i n g expenses. I t provides: "(a) I n general. - There s h a l l be allowed a s a deduction a l l t h e o r d i n a r y and n e c e s s a r y expenses paid o r incurred during the taxable year i n carrying on any t r a d e o r b u s i n e s s , i n c l u d i n g - 1I (2) t r a v e l i n g expenses ( i n c l u d i n g amounts ex- pended f o r meals and lodging o t h e r t h a n amollnts which a r e l a v i s h o r e x t r a v a g a n t under t h e circum- s t a n c e s ) w h i l e away from home i n t h e p u r s u i t of a t r a d e o r b u s i n e s s ; and
F e d e r a l Regulation number 1,162,2 i n t e r p r e t s t h e above s e c t i o n and a m p l i f i e s t h e code p r o v i s i o n by i n d i c a t i n g t h a t t r a v e l i n g expenses which a r e reasonable and n e c e s s a r y may be deducted. I t provides: "1f t h e t r i p i s s o l e l y on b u s i n e s s , t h e reasonable and n e c e s s a r y t r a v e l i n g expenses, i n c l u d i n g t r a v e l f a r e s , meals and lodging and expenses i n c i d e n t t o t r a v e l a r e b u s i n e s s expenses. 11 I n determining whether o r n o t t h e t r a v e l expenses h e r e were d e d u c t i b l e , t h e Board r e l i e d on a United S t a t e s Supreme Court c a s e , Commissioner of I n t e r n a l R,evenue v , Flowers, 326 U,S, 465, 66 S, C t . 250, 90 L , E d , 203, 207, and s e v e r a l t a x c o u r t c a s e s : Adelberg
v , Commissioner, CCH Dec. 30, 622 (M) , Dlct, 1475-68, January 20, 1971, T.C, Memo. 1971-15; Deming v. Commissioner, CCH Dec. 31, 482(M), Dkt. 2806-69 SC, August 1, 1972, T.C. Memo, 1972-163; Gurney v , Commissioner, CCH Dec. 31, 135(M), Dkt. 2572-70 SC, December 28, 1971, T.C. Memo 1971-329, The Flowers c a s e i n t e r p r e t e d S e c t i o n 23(a) (1) (A), I n t e r n a l Revenue Code of which i s now S e c t i o n 1 6 2 ( a ) ( 2 ) , I n t e r n a l Revenue Code of 1954, I n Flowers t h e taxpayer, a n a t t o r n e y , r e s i d e d i n Jackson, M i s s i s s i p p i , where he had p r a c t i c e d law f o r many y e a r s a s s o c i a t e d some o f t h e time w i t h o t h e r law f i r m s and t h e n forming h i s own law firm. I n 1906, he began t o r e p r e s e n t t h e Gulf, Mobile & Ohio Railroad i n Mobile, Alabama, a c t i n g a s t r i a l counsel f o r t h e r a i l r o a d i n M i s s i s s i p p i , L a t e r , from 1928 t o 1927, he was s p e c i a l c o u n s e l , I n 1930, he was made g e n e r a l counsel f o r t h e r a i l r o a d and served a s such u n t i l 1940 a t which time t h e r a i l r o a d company merged w i t h a n o t h e r r a i l r o a d and he became v i c e - p r e s i d e n t and g e n e r a l counsel of t h e new company, The main o f f i c e of t h e company was i n Mobile, Alabama. A s a r e s u l t of an arrangement made so t h a t h e could c o n t i n u e t o Live i n Jackson, M i s s i s s i p p i , i t was agreed he would pay h i s t r a v e l i n g and l i v i n g expenses between t h e two c i t i e s . Flowers determined t h e amount of time h e would spend t r a v e l i n g between t h e two c i t i e s c o v e r i n g the taxable years i n question. The r a i l r o a d company provided o f f i c e space i n Mobile, b u t when i n Jackson he used h i s o l d law f i r m which provided space f o r working; he d i d n o t p a r t i c i p a t e i n t h e firm's business o r p r o f i t s . The United S t a t e s Supreme Court denied Flowers t h e deduction claimed f o r t r a v e l expenses between t h e two c i t i e s f o r t h e t a x y e a r 1940, holding: "Three c o n d i t i o n s must t h u s be s a t i s f i e d b e f o r e a t r a v e l i n g expense deduction may be made under S e c t i o n 23 ( a ) (I) (A) : (1) The expense nmst b e a r e a s o n a b l e and n e c e s s a r y t r a v e l i n g expense, a s t h a t term i s g e n e r a l l y understood, This i n c l u d e s such items a s t r a n s p o r t a t i o n f a r e s and food and lodging ex- penses i n c u r r e d w h i l e t r a v e l i n g ,
tt (2) The expense must be i n c u r r e d 'while away from home, 1 II (3) The expense must be i n c u r r e d i n pur- s u i t of b u s i n e s s . This means t h a t t h e r e must be a d i r e c t connection between t h e e x p e n d i t u r e and the c a r r y i n g on of t h e t r a d e o r b u s i n e s s of t h e taxpayer o r of h i s employer. Moreover, such an expenditure must be n e c e s s a r y o r appro- p r i a t e t o t h e development and p u r s u i t of t h e b u s i n e s s o r t r a d e . 11 Here, t h e Board contends t h a t I.R,S. Regulations 1,162-2 (a) and 1.162-17(a) and t h e Supreme C o u r t ' s i n t e r p r e t a t i o n of Section 1 6 2 ( a ) ( 2 ) , I n t e r n a l Revenue Code of 1954, i n Flowers c l e a r l y i n d i c a t e t h a t p l a i n t i f f t a x p a y e r s ' t r a n s p o r t a t i o n expenses a r e n o t d e d u c t i b l e and t h e t r i a l c o u r t i n i t s r u l i n g overlooked t h e t h i r d c o n d i t i o n of Flowers a s t o t h e d e d u c t i b i l i t y of t r a v e l i n g II expenses, t h a t i s : t o b e d e d u c t i b l e t h e t r a n s p o r t a t i o n expenses must be connected t o t h e b u s i n e s s of h i s employer, t h e r a i l r o a d . " P l a i n t i f f s and defendant Board r e c o g n i z e t h a t Flowers i s t h e key c a s e concerning t r a v e l expenses and a l l t h e t a x c o u r t c a s e s - c i t e d h e r e d i s c u s s i t , however, Flowers i s f a c t u a l l y d i s t i n g u i s h - able. I n Flowers t h e r e was one employer, one s a l a r y ; i n t h e i n s t a n t c a s e p l a i n t i f f Magnuson had s e v e r a l . He r e c e i v e d a s a l a r y from t h e r a i l r o a d , an income from h i s s c r a p b u s i n e s s , and an income from h i s accounting b u s i n e s s . I t was s t i p u l a t e d and agreed by t h e p a r t i e s t h a t t h e l a t t e r two b u s i n e s s e s were bona f i d e . I n Flowers, t h e United S t a t e s Supreme Court i n i t s t h i r d c o n d i t i o n s t r e s s e d what expenses could be considered a s d e d u c t i b l e i n a one employment s i t u a t i o n . Here, t h e q u e s t i o n concerns d e d u c t i b i l i t y f o r expenses between two o r more j o b s , n o t from home t o job. I n t h e i r b r i e f , p l a i n t i f f s n o t e t h a t t h e ~ o a r d ' ssummary of f a c t s would i n d i c a t e Magnuson had two income producing bona f i d e jobs. I n Flowers t h e r e was b u t one employment--the r a i l r o a d . Here, t h e r e was one job and two s e p a r a t e b u s i n e s s v e n t u r e s . The t r i p s between Harlem and Havre were n o t p e r s o n a l p r e f e r e n c e , b u t were of n e c e s s i t y i n t h e p u r s u i t of b u s i n e s s .
I n Swartz v. Berg, 147 Mont. 178, 182, 411 P,2d 736, t h i s Court s a i d : "In i n t e r p r e t i n g t a x s t a t u t e s i t should always be k e p t i n mind t h a t they a r e t o be s t r i c t l y construed a g a i n s t t h e t a x i n g a u t h o r i t i e s , and i n f a v o r of t h e t a x p a y e r , s e e 5 1 Am.Jur. Taxation, 5 650. See a l s o , S t a t e ex r e l . Tillman v , D i s t r i c t Court 101 Mont. 176, 53 P.2d 107, 103 A . L . R . 376 '* See a l s o : Perham v. Putnam, 8 2 Mont. 349, 267 P, 305. I n i t s c o n c l u s i o n s of law t h e t r i a l c o u r t noted t h a t i n Flowers t h e t r a v e l between Mobile and Jackson "was occasioned s o l e l y by h i s ( t h e employee's) p e r s o n a l p r o p e n s i t i e s . I' Such i s n o t t h e f a c t h e r e f o r Magnuson was r e q u i r e d t o b e i n Havre by h i s employer, t h e r a i l r o a d . The t r i a l c o u r t a l s o noted II The S t a t e ' s p o s i t i o n i s t h a t s i n c e M r , Magnuson l i v e s i n Harlem he cannot deduct h i s t r a v e l expense t o Havre, b u t t h e s t a t e h a s admitted t h a t i f M r , Magnuson l i v e d i n Havre where h i s r a i l r o a d job was l o c a t e d , he could deduct t h e t r a v e l t o h i s b u s i n e s s e s i n Harlem, This i s a strange position," With t h a t c o n c l u s i o n of t h e t r i a l c o u r t , we most c e r t a i n l y concur. It was s t i p u l a t e d between t h e p a r t i e s t h a t t h e jobs o r b u s i n e s s e s i n t h e two d i f f e r e n t communities were bona f i d e t r a d e s o r b u s i n e s s e s and n o t hobbies, Under such f a c t s and c o n d i t i o n s , we f i n d t h e t r a v e l expense t o b e d e d u c t i b l e , In s o h o l d i n g we i n no way hold t h a t t r a v e l expenses from a t a x - p a y e r ' s home t o h i s b u s i n e s s o r job s i t e a r e d e d u c t i b l e , We f i n d support f o r t h i s p o s i t i o n i n s e v e r a l Tax Court and Board of Tax Appeal c a s e s . Joseph W, Sherman, Jr. e t ux v. Commissioner, 16 T.C. 332, 337; Joseph W, Powell v , Commissioner, 34 B.T,A, 655; Walter F, Brown v . Commissioner, 1 3 B,T.A, 832; Adelberg v. Commissioner, CCH Dec, 30, 622(M), Dkt, 1475-68, January 20, 1971, T.C. Memo. 1971-15, I n Sherman t h e taxpayer had l i v e d i n Worcester, Massachu- setts, a l l h i s l i f e , He owned r e a l p r o p e r t y t h e r e , p a i d h i s t a x e s t h e r e , voted t h e r e , and h i s c h i l d r e n a t t e n d e d school t h e r e ,
He was employed by t h e Haskins Manufacturing Company which manufactured p l a s t i c p r a d u c t s i n Worcester. A t Haskins he had no p r o p r i e t a r y i n t e r e s t i n t h e company, b u t worked a s production manager and purchasing a g e n t . This p o s i t i o n d i d n o t r e q u i r e f u l l time and a t t e n t i o n s o h e formed a b u s i n e s s t o s e l l p l a s t i c products i n New York C i t y , i n which h e was s o l e p r o p r i e t o r . He
Flowers c a s e s i t u a t i o n :
C+ maintained an a d d r e s s i n New York C i t y and s p e n t f o u r days a week t h e r e , i n c l u d i n g t r a v e l between t h e two c i t i e s . Sherman claimed a deduction under S e c t i o n 23 (a) (1) (A)
"This i s n o t t h e c a s e of a taxpayer who keeps h i s p l a c e of r e s i d e n c e a t a p o i n t where h e i s n o t en- gaged i n c a r r y i n g on a t r a d e o r b u s i n e s s and c l a i m s deductions f o r l i v i n g expenses and c o s t of t r a v e l i n g t o and from h i s r e s i d e n c e . 9~ " T h i s Court h a s 4b
h e r e t o f o r e recognized t h a t a taxpayer may have more than one occupation o r b u s i n e s s , and h a s held where i t i s s h o ~ mt h a t t h e taxpayer h a s two occupations which r e q u i r e him t a spend a s u b s t a n t i a l amount of time i n each of two c i t i e s , he i s e n t i t l e d t o t h e deduction , Petitioner Internal Revenue Code, f o r e x p e n d i t u r e s made i n connection w i t h h i s b u s i n e s s t r i p s t o New York.. This was c o n t e s t e d by t h e I n t e r n a l Revenue S e r v i c e and t h e Tax Court i n i t s opinion noted t h a t i t was n o t a -
of t r a v e l i n g and o t h e r o r d i n a r y and n e c e s s a r y b u s i n e s s expenses i n c u r r e d i n connection with a t t e n d a n c e upon t h e one removed from h i s r e s i d e n c e , Walter F. Brown, 1 3 B.T.A. 832; Joseph F, Powell, 34 B.T.A. 5 5 5 , a f f d , 94 Fed. (2d) 483 (CA- 1 ) " . The Court f u r t h e r noted i n Sherman t h a t p e t i t i o n e r ' s Worcester employment was a s i g n i f i c a n t source of income; i t was of a permanent c h a r a c t e r ; and h i s r o o t s were i n Worcester where he s p e n t t h e g r e a t e r p a r t of h i s time d u r i n g t h e t a x y e a r , He had no o f f i c e o r p l a c e of b u s i n e s s i n New York, o t h e r than a m a i l i n g address. t r i p s t o New York h e would s t a y a t a h o t e l , a t most only a few days a t a time, While i t i s t r u e t h a t h i s rewards f o r t h e New O his n
York v e n t u r e i n 1945 exceeded h i s Worcester e a r n i n g s f o r t h a t y e a r , t h a t f a c t alone cannot s h i f t h i s "home" from Worcester t o New York, Everything s a i d by t h e c o u r t i n Sherman i s a p p l i c a b l e i n t h e i n s t a n t case, That c o u r t found t h e " t r a v e l i n g expenses" between t h e two c i t i e s deductible.
Both t h e Board and Magnuson c i t e a r e c e n t Tax Court c a s e , Adelberg v , Commissioner, CCH Dec. 30, 662(M), Dkt. 1175-68, January 20, 1971, T,C. Memo, 1971-15. Here, t h e Board a r g u e s t h a t t h e t r i a l c o u r t i n i t s c o n c l u s i o n s of law r a i s e d a c o l l a t e r a l i s s u e w i t h r e s p e c t t o b u s i n e s s e s a t two d i f f e r e n t l o c a t i o n s where t h e problem i s "major" and "minor" employment, The t r i a l c o u r t ' s c o n c l u s i o n s seem t o i n d i c a t e t h a t i f a taxpayer has bona f i d e -in jobs o r businesses/two o r more l o c a l i t i e s , t h a t a l l h i s t r a v e l expenses a r e d e d u c t i b l e , The Board contends t h a t such conclusion i s much t o o broad, i s n o t a p p l i c a b l e t o t h e i n s t a n t c a s e , and t h e c o u r t ' s conclusion i n t h i s r e g a r d was d i r e c t e d towards t h o s e s i t u a t i o n s where a taxpayer l e a v e s one b u s i n e s s o r employment s i t u a t i o n and i n c u r s t r a v e l expenses d i r e c t l y n e c e s s a r y t o a r r i v e a t a n o t h e r b u s i n e s s o r employment s i t u a t i o n , I n Adelberg, t h e taxpayer drove from h i s home t o a job w i t h Space Technology L a b o r a t o r i e s i n E l Segundo, C a l i f o r n i a . A f t e r work t h e r e , he drove t o UCLA i n Los Angeles t o teach and then drove home t o Sherman Oakes, C a l i f o r n i a . He was allowed t o deduct t r a v e l expenses from E l Segundo t o UCLA, b u t was n o t allowed t r a v e l expenses from h i s home t o E l Segundo o r from U L t o h i s home. CA While Adelberg i s more complex than t h e i n s t a n t c a s e , we f i n d t h e t r i a l c o u r t p r o p e r l y a p p l i e d t h e holding t h e r e t o t h i s c a s e f o r t h e t r a v e l expense a t t r i b u t e d t o t r a v e l between two employments was allowed, The c o u r t i n Adelberg noted: "* * * where t h e taxpayer has two p l a c e s of employment t h e c o s t of t r a v e l i n g from one of them t o t h e o t h e r i s a d e d u c t i b l e b u s i n e s s ex- pense. t I The judgment of t h e d i s t r i c t c o u r t i s a f f i r m e d . --.
We Concur:
................................ . , < .
Associate Justices.
Mr, Chief Justice James T, Harrison did not participate in the foregoing O p i - n i ~ n ,