PART SIX

PERSONAL USE OF GOVERNMENT AIRCRAFT BY THE PRESIDENT'S FAMILY AND FRIENDS

1. Scope of Examination

Since the President took office in 1969, members of his family and their friends, unaccompanied by him in many instances, have travelled extensively in the United States on Government aircraft. It appears that some of these flights were in connection with the performance of official duties, such as standing in for the President in his absence. This seems to be particularly true for many of the trips by Mrs. Nixon. A question has been raised whether, for flights which were not primarily official business and, therefore, personal, the cost of such unreimbursed Government-furnished transportation should be considered additional income to the President.

Flights that appear to be personal are particularly those taken by Julie and Tricia to join either David Eisenhower or Edward Cox while the latter were either students or stationed in various cities other than Washington, D.C. On several occasions both Edward Cox and David Eisenhower joined Julie and Tricia on flights to and from these same cities and to and from the President's homes in either Key Biscayne, Florida, or San Clemente, California. Occasionally, members of the President's family took along friends or guests on these flights.

Effective April 1, 1971, the President adopted a policy of reimbursing the Treasury for flights of his daughters and their husbands (or husband to be in the case of Edward Cox) when such travel was in "other than an official capacity." In doing so, the President apparently decided that there was in fact personal travel by members of his family in Government-furnished aircraft and that it was possible to make a determination as to what was personal and what was official. However, this policy was not in operation for the entire period during which members of the President's family and their friends availed themselves of Government air transportation. In addition, it does not appear that reimbursements were made for all "personal" flights after April 1, 1971.

During the course of its examination of the President's tax returns, the staff made an estimate of the amount of personal travel by members of the President's immediate family and their guests on Government planes over the four-year period under review, 1969-1972. The staff requested flight manifests from the White House for flights taken on Government aircraft by members of the President's family. The White House transmitted flight manifests for 1969-1972 for air travel of members of his family (and friends and guests that accompanied his family) when they traveled without the President.

Information was not supplied as to family members or friends who may have accompanied the President on flights on his vacation and weekend trips, although a list of all the President's flights was made available to the staff for this period.

Based upon the flight manifests supplied, the staff has computed the value, based upon first class air fare, of air travel by the President's family that did not appear to be primarily official and, therefore, appears to be personal travel.

2. Analysis of Tax Treatment

Economic Benefit to the President

This aspect of the examination involves two basic questions. The first is whether the free use of Government transportation by the President's family and friends created income subject to Federal tax. If the answer to the first question is in the affirmative, it is necessary to determine to whom the income should properly be taxed.

Under section 61 of the Internal Revenue Code of 1954, gross income is defined as "all income from whatever source derived" unless excluded by other provisions of the Internal Revenue Code. The statute specifically enumerates 15 items included within the definition, but carefully provides that gross income is not limited to these 15 items.' In providing this all-inclusive language, it is clear that Congress intended that the term "gross income" be given a broad interpretation.2 In discussing section 61 of the 1954 Code, the Committee Reports note that the new section corresponds to section 22(a) of the 1939 Code and states that "[w]hile the language in existing section 22(a) has been simplified, the all-inclusive nature of statutory gross income has not been affected thereby." 3

The courts, in carrying out this Congressional intent, have continually recognized that the term "income" should not be limited in scope, but should be broadly construed. The Supreme Court, in addressing itself to the question of what constitutes "gross income," has stated that the starting point "begins with the basic premise that the purpose of Congress was to use the full measure of its taxing power.' James v. U.S., 366 U.S. 213, 218 (1961). It has been repeatedly held that it "was the intention of Congress to tax all gains except those specifically exempted." James v. U.S., supra, at p. 219.5

Amounts received by an employee from his employer are generally taxed to the employee as compensation because of the existing employment relationship. This does not mean that an expenditure by the employer is income only if it is intended to be conferred as actual compensation for services rendered. Such a concept of gross income is too restrictive. Further, items of gross income need not be in the form of cash; it is sufficient that an item can be valued in terms of money. In Commissioner v. John Smith, a case dealing with the taxability of a stock option, the Supreme Court stated that section 22(a) of the Revenue Act of 1938 (predecessor of section 61 of the

126 U.S.C. section 61.

2 Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 432 (1955).

H.R. Rep. No. 1337, 83d Cong., 2d Sess. A18; S. Rep. No. 1622, 83d Cong., 2d Sess. 168. Citing Helvering v. Clifford, 309 U.S. 331 (1940).

Citing Commissioner v. Jacobson, 336 U.S. 28, 49; Helvering v. Stockholms Enskilda Bank, 293 U.S. 84, 87-91.

U.S. v. Gotcher, 401 F. 2d 118 (5th Cir. 1968).

7 Commissioner v. John Smith, 324 U.S. 117 (1945).

1954 Code) "is broad enough to include in taxable income any economic or financial benefit conferred on the employee as compensation, whatever the form or mode by which it is effected."

The issues presented here are to an extent unique, since there is no public record of prior determinations of tax consequences in a situation of this type. It is possible however to approach these questions in light of the employment relationship which exists between the U.S. Government and the President and to examine the authorities in the general area of benefits flowing between the employer and employee. The staff also considers the many decisions involving the corporation-shareholder relationship to have an application to this area of the examination.

The apparent proliferation in the use of corporate-owned assets for the personal use of employees and shareholders as a device to provide tax-free fringe benefits or constructive dividends has received increased attention by the Service in recent years. However, there is not presently an announced uniform official policy on the general issue, probably because of the diverse types of benefits available, contrasting applicable tax theories, and the enforcement problems inherent in this area.

In the early history of the Federal income tax it was the apparent policy of the Internal Revenue Service and the courts to consider that an employee or shareholder realized income from the free or bargain rate use of corporate assets or services only where there was a measurable direct economic benefit arising from the employment or shareholder relationship. In Hillman v. Commissioner, 71 F. 2d 688, 1934 CCH 19325 (3rd Cir. 1934), it was held that a shareholder's rent-free use of a residence which he had contributed to a familyowned corporation was not income to the individual shareholder. This decision was followed by the Fifth Circuit in Richards v. Commissioner, 111 F. 2d 376, 40-1 U.S.T.C. 19373 (5th Cir. 1940), on a similar fact situation. In 1941, the Third Circuit then reversed its earlier rule in Hillman and criticized the Richards decision in holding that an officershareholder did realize taxable income for the use of corporate-owned living quarters. Chandler v. Commissioner, 119 F. 2d 623, 41-1 U.S.T.C. 19393 (3rd Cir. 1941). Yet, the Fifth Circuit subsequently followed its Richards decision in Peacock v. Commissioner, 256 F. 2d 160, 58-2 U.S.T.C. 19603 (5th Cir. 1958), again involving the use of a corporation-owned residence. In Roach v. Commissioner, 20 B.T.A. 919 (1930), Nonacq. X-1 Cum. Bull. 91, it was held that the personal use of a corporate yacht by family members of the controlling shareholder did not create taxable income to the shareholder. In O.D. 946, 4 Cum. Bull. 110 (1921), it was held that personal transportation passes issued by a railroad company to its employees and their families, to be used when not engaged in company business and not provided under employment contracts, were gifts and not taxable income to the employees. Ö.D. 946 has not been cited in any other published decision or policy announcement. The staff also considers it to have questionable present application since it is inconsistent with the position the Service has taken with regard to other economic benefits to employees or shareholders and their families.

More recently the Internal Revenue Service has contended successfully that a shareholder's use of a wide range of corporate assets resulted in income to the shareholder. The courts have held that constructive dividends were realized from the shareholder's personal use of

8

10

a corporate owned yacht, an automobile, supplies and materials,1o and a lake house." Constructive dividends have also been found to result to the shareholder by corporation payments of the shareholder's home expenses, 12 club expenses, 13 life insurance policy premiums,' and travel expenses."

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14

The court decisions have not been confined to constructive dividend results, but have also found that compensation income resulted from the personal use of corporate facilities or from corporate payments for personal purposes of the individual taxpayer. In Rodgers Dairy Co. v. Commissioner, 14 T.C. 66 (1950), an officer's use of a corporate automobile was taxed to the officer as compensation. See also, Dole v. Commissioner, 43 T.C. 697 (1965), aff'd per curiam, 351 F. 2d 308, 65-2 U.S.T.C. 19688 (1st Cir. 1965). In Silverman v. Commissioner, 253 F.2d 849, 58-1 U.S.T.C. 19433 (8th Cir. 1958), aff'g, 28 T.C. 1061 (1957), a corporation's payment of travel expenses for the wife of an employee, who accompanied the employee on a business trip, was also found to result in additional compensation to the employee. In Dean v. Commissioner, 9 T.C. 256 (1947), and Chandler v. Commissioner, 41 B.T.A. 165 (1940), aff'd, 119 F. 2d 623, 41-1 U.S.T.C. ¶9394 (3rd Cir. 1941), officers or shareholders were found to have realized additional compensation from the personal use by them and their families of a residence and a lodge owned by the corporation.

In addition to the cases set forth above, there are a number of other cases holding that taxable income was created, without identifying the income as to whether it was a constructive dividend or compensation.16

There is also the question of whether taxable income can be attributed to an employee for the use of the employer's facilities or services by his friends or family members. This question in a sense involves the doctrine of constructive receipt, but not in the traditional sense, since we are not concerned with the question of when income is taxable, but with the question of who should be taxed on the economic benefit.

With respect to this issue, the authorities recognize it is not necessary that the individual taxpayer himself receive the direct benefit of the use of the facility or the payment of the expenses by the_employer. For example, the Internal Revenue Service has held in Rev. Rul. 69-104, 1969-1 Cum. Bull. 33, that where payments are made to dependents of a corporation's former employees who are in the U.S. Armed Forces, the payments are taxable as constructively received

8 United Aniline Co. v. Commissioner, 316 F. 2d 701, 63-1 U.S.T.C. 19434 (1st Cir. 1963) : Challenge Mfg. Co. v. Commissioner, 37 T.C. 650 (1962). In United Aniline the court also questioned the propriety of the Roach decision, supra.

Lang Chevrolet Co. v. Commissioner, 26 T.Č.M. 1054 (1967); Trippeer v. U.S., 67–2 U.S.T.C. 19537 (D.C. Tenn. 1967).

10 Estate of Law v. Commissioner, 23 T.C.M. 1554 (1964).

11 Robert R. Walker, Inc. v. Commissioner, 326 F. 2d 140, 66-1 U.S.T.C. ¶19426 (7th Cir. 1966), aff'g 24 T.C.M. 140 (1965)

12 Greenspon v. Commissioner, 23 T.C. 138 (1954), aff'd on this issue, 229 F. 2d 947, 56–1 U.S.T.C. 19249 (8th Cir. 1956).

13 Robert R. Walker, Inc. v. Commissioner, supra, note 11; Coors v. Commissioner, 60 T.C. 368 (1973).

Paramount-Richard Theatres, Inc. v. Commissioner, 153 F. 2d 602, 46-1 U.S.T.C. 19170 (5th Cir. 1946).

15 Alabama-Georgia Syrup Co. v. Commissioner, 36 T.C. 747 (1961) rev'd on other grounds, 311 F. 2d 640, 63-1 U.S.T.C. 19124 (5th Cir. 1962); Robert R. Walker, Inc., supra, Note 11.

16 See e.g., Heyward v. Commissioner, 36 T.C. 739 (1961), aff'd per curiam, 301 F. 2d 307, 61-1 U.S.T.C. 19424 (4th Cir. 1962); and Frueauff v. Commissioner, 30 B.T.A. 449 (1934) ; both involving the occupancy of corporate-owned residences.