Robert Jones is one of the preeminent space scientists of our era. But thanks to a victory he won over the Internal Revenue Service last month, his contribution to tax law may turn out to be almost as important has his contributions to aerodynamics.
The decision, by the U.S. Court of Appeals in San Francisco in Jones v. Commissioner, opens the way for the first time for employers to give tax-free awards to valued employes.
Among Jones' contributions in more than three decades of working for the National Aeronautics & Space Administration and its predecessor agency are the invention of both the swept-wing and oblique-wing aircraft designs.
As his 65th birthday neared in 1976, the agency searched for a way to show its appreciation for his labors. In one undertaking, NASA published a single volume containing 64 technical papers Jones had authored in his long career. The NASA board also voted to present a copy of the book to Jones along with a check for $15,000.
That, the IRS insisted, became taxable income.
The tax code says that cash prizes meant to honor persons are not taxable income if they do not carry any strings obligating the winner to provide substantial future services and if the winner did nothing to solicit the award, such as enter a contest.
Nonetheless, Treasury regulations take a much more restrictive stance: No payment to an employe in recognition of on-the-job achievement is ever tax-exempt, according to the tax collectors.
Jones decided to challenge the regulation, and the San Francisco appeals court sided with him.
The IRS has gone well beyond the tax law written by Congress, and actually wiped out a distinction the lawmakers created between taxable awards and those that are tax-free, Judge Alfred T. Goodwin wrote. From now on, the ruling says, employer cash bonuses to valued employes can qualify for tax-free treatment.
The loophole Goodwin opened up is not massive. An award that looks like a disguised bonus for a particular piece of work will continue to be subject to income tax. It has to be designed "to honor, or to show respect or admiration for, an employe," the judge explained. And he warned that if that admiration is based on a particular benefit the employe gave the company, it had better not be a recent one.
Nonetheless, the $15,000 NASA gave Jones clearly measured up, particularly since it was tied to the re-publication of the ground-breaking papers and "was made on or near Jones' 65th birthday, an appropriate time to honor him." And the chances are good that now that the practice has a judicial okay, more companies will find more employes worthy of such tax-free honors.
In other cases, courts ruled that: A corporate loan can become a security if enough investors provide the money. There is frequent litigation over just what is and is not covered by Federal security laws, since the controls those laws put on issuers are far stricter than those that apply to someone selling an investment that is not covered.
In the most recent ruling, the U.S. Court of Appeals in Chicago looked at notes sold by a company in order to raise capital. The company said that given the fact that the paper matured in one year and carried a fixed interest rate, it really represented a commercial loan. But the judges ruled that since the notes were offered to the general public, they are in fact securities. (Hunssinger v. Rockford Business Credits, Oct. 4) Running the same deceptive ad in a number of publications can lead to a string of multiple fines. The Wisconsin Court of Appeals had to decide how many times a retail chain selling kitchen cabinets had violated the law if the state is ultimely successful in proving that the company used unfair price comparisons.
The state law under which the company was being prosecuted calls for a minimum $100 (and a maximum $10,000) fine for each violation, regardless of how many local papers carried the ad. But the higher court significantly broadened the merchant's liability: every edition of every newspaper used is a separate publication, and therefore a separate violation if the ad is unlawful, the judges ruled.
They tossed aside the store's argument that such a policy discriminates against those operating in smaller towns, since such stores have to use a number of papers to reach as many customers as would be covered by one big-city daily. (Wisconsin v. Menard, October 9) Shifting the bill for lawyer fees to the losing side in litigation is not as easy as it may have seemed. In the United States, each side is expected to pay its own legal expenses, with only a few exceptions to that American Rule.
One exception has long been when the losing side acted in "bad faith" -- a plaintiff who has harassed a defendant with a completely meritless law suit, for instance, may be told to reimburse the defendant the costs of fighting that action. In 1976, the U.S. Court of Appeals in St. Louis broadened that exception, saying that the kind of "bad faith" that can occur not just in the suit, but in the initial controversy that gave rise to the suit.
A new ruling from the U.S. Court of Appeals in Cincinnati, however, makes clear that the St. Louis rule will not become universal. With the full appeals court panel considering the matter, the Cincinnati court refuses to follow the 1976 precedent. No matter how tainted an action is, those doing it have the right to defend it vigorously once the matter gets to court, without the fear that if they lose they will get stuck with someone's else's legal bills as well as their own, the decision says. (Shimman v. IUOE, Oct. 1) A sales agent cannot bring an antitrust suit based on harm done to the company it represents. The company that sold mattresses turned out by a San Diego manufacturer accused Sealy Inc. of using illegal tactics to limit the opportunities of the California firm.
But the U.S. Circuit Court of Appeals in San Francisco recently agreed with the trial court that the sales company had no legal grounds to bring the suit. Even though it would be hurt by any conspiracy aimed at the mattress manufacturer, the sales company it is not directly enough involved to wage litigation itself, the judges said. (Sealy v. Easy Living, Oct. 1)