Rev. Rul. 76-276

Advice has been requested concerning the Federal income tax treatment of contributions to and distributions from a trust that has been established to pay certain travel expenses incurred by the taxpayer and the taxpayer's staff.

The taxpayer, a Member of Congress, computes taxable income under the cash receipts and disbursements method of accounting. The taxpayer regularly incurred substantial travel expenses that exceeded the congressional allowance for such expenses. A trust was established for the purpose of providing funds for certain travel expenses incurred by the taxpayer and the taxpayer's staff in connection with the performance of official congressional duties.

Amounts are distributed from the trust to pay for expenses that: (1) exceed the taxpayer's congressional allowance for travel expenses; (2) are related to the taxpayer's service as a Member of Congress; (3) are incurred by the taxpayer or taxpayer's staff for travel between Washington, D.C., and the taxpayer's congressional district, or for travel within the taxpayer's congressional district, or for other travel that, in the opinion of the trustees, will allow the taxpayer to serve better the needs of the taxpayer's constituents. Members of the taxpayer's staff travel only where and when directed to do so by the taxpayer.

The funds received by the trust consist of cash contributions from the taxpayer's constituents and are maintained in a bank checking account that bears no interest. Checks may be drawn on the account only by, or under the supervision of, the individuals who serve as the trustees. The trust is to terminate when the taxpayer ceases to serve as the Member of Congress from the district presently represented. Upon termination of the trust, any unexpended funds are to be returned to the contributors or, if such return is not practical, donated to nationally recognized charitable organizations.

Section 61(a) of the Internal Revenue Code of 1954 and the regulations thereunder provide, in part, that gross income means all income from whatever source derived, except as otherwise provided by law.

Section 102(a) of the Code provides, in part, that gross income does not include the value of property acquired by gift. A gift in this statutory sense proceeds from a "detached and disinterested generosity * * * out of affection, respect, admiration, charity or like impulses." Commissioner v. Duberstein, 363 U.S. 278, 285 (1960), 1960-2 C.B. 428, 431.

In the instant case the contributions enable the Member of Congress to become more accessible to constituents which, in turn, provides constituents with the opportunity of obtaining more effective representation in Congress.

Accordingly, under the principles set forth in Duberstein, the contributions do not qualify as gifts within the contemplation of section 102(a) of the Code.

In Mount Vernon Gardens, Inc. v. Commissioner, 298 F.2d 712 (6th Cir. 1962), aff'g on this issue, 34 T.C. 598 (1960), the taxpayer entered into a trust agreement with a bank pursuant to a contract with a third party. Under the agreement the taxpayer deposited in trust certain proceeds that would have been income to the taxpayer absent the trust agreement. The trust agreement provided that upon written instructions from the taxpayer the independent trustee was to expend the funds for certain limited purposes that would benefit the taxpayer. Relying on the fact that it was contractually obligated to transfer funds to the trust, the taxpayer argued that such funds were not includible in gross income. This argument was rejected by the court, which stated:

But the creation of a trust into which a portion of the purchase price is paid is not in and of itself sufficient to prevent the trust money from being treated as income. * * * The questions of control by, and inurement to the benefit of, the taxpayer, are of prime importance.

Because the taxpayer was the prime beneficiary of the trust funds and effectively controlled their disposition, the court in Mount Vernon Gardens, Inc. held the funds includible in the taxpayer's gross income even though they had been deposited in a valid trust governed by an independent trustee. In the instant case, the taxpayer can control the distribution of trust funds by determining the extent to which the taxpayer or members of the taxpayer's staff will travel in connection with the discharge of the taxpayer's congressional duties and responsibilities. The payment of the expenses incurred in such travel is a direct and substantial benefit to the taxpayer. Thus, the taxpayer's control over the payment of trust funds for purposes that benefit the taxpayer is as absolute as that in the Mount Vernon Gardens, Inc. case.

Accordingly, the amounts contributed to the trust are includible in the taxpayer's gross income for the year in which such amounts are received by the trust.

Section 162(a) of the Code allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses while away from home in the pursuit of a trade or business. Section 162(a) provides, in part, that the place of residence of a Member of Congress within the state or congressional district that is represented by the Member of Congress will be considered the home of the Member of Congress. Section 7701(a)(26) provides that the term "trade or business" includes the performance of the functions of a public office.

Accordingly, amounts disbursed from the trust to pay for travel expenses incurred by the taxpayer's staff and by the taxpayer while away from home in pursuit of the taxpayer's trade or business of being a Member of Congress are deductible by the taxpayer as ordinary and necessary business expenses under section 162(a) of the Code.

Section 165(a) of the Code provides the general rule that there will be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. Section 165(c) provides, in part, that in the case of an individual, the deduction under section 165(a) will be limited to losses incurred in a trade or business.

In Rev. Rul. 67-48, 1967-1 C.B. 50, a cash basis taxpayer breached an employment contract and thereby became liable to pay to the former employer liquidated damages representing certain excess salary that had been paid to the taxpayer during an employment-related training period and had been reported as income for the years in which received. Rev. Rul. 67-48 holds that since the amount of liquidated damages paid by the taxpayer to the employer is attributable to compensation received for services rendered, such amount qualifies as a business loss under section 165(c)(1) of the Code. It specifies that the deduction is allowable in the year paid, but only if the taxpayer itemizes his deductions.

The instant case presents an analogous situation in the sense that amounts required to be included in gross income of the taxpayer may have to be returned to their source. In the event that the trust is terminated, any of these unexpended amounts are required, within the limits of practicality, to be returned to contributors.

Accordingly, if the taxpayer itemizes deductions, the taxpayer is entitled to a business loss deduction under section 165 of the Code for those unexpended amounts that are returned to the contributors. The deduction is allowable for the year of the repayment.

Further, any portion of the contributions that is donated to organizations described in section 170(c) of the Code is deductible by the taxpayer in the year of donation as a charitable contribution under section 170, subject to the limitations contained therein.