Civil Appeal 7719/21 Saleh Hasarmeh v. Haifa Assessor - part 10

"The wording of section 2(2) of the Ordinance as it stands today, after Amendment 22 to the Ordinance (Law to Amend the Income Tax Ordinance (No.  22), 5735-1975), originates from the conclusions of the Ben Shahar Committee [...] which faced the problem of erosion of the tax base, by means of payments called by various names, such as reimbursement of expenses, with the aim of exempting them from taxes [...].  As part of the committee's conclusions, it was decided to expand the basis of the definition of income from work to include any benefit that comes from the employer to the employee.  [...] The interpretation of the section should be made from this perspective: "The expansion of the tax base was the basis for the change in the legislation, and it is the background against which the section should be examined." [...] Regarding the purpose of section 2(2) Other Municipality Applications 2640/11 Haifa Assessor v.  Nissim [published in Nevo] (2014):

"The rule is , therefore, in the words of the scholar Raphael, "that income derives from the taxpayer as a result of the existence of an employer-employee relationship, which pays him off because of the existence of this relationship...  It is the Labor Movement." [...] This is the presumption that governs the employer's payments to the employee, and this is the starting point." (Emphasis added - A.S.).

59. The question of whether various benefits granted to an employee by his employer are subject to income tax was discussed already in the first decade of the establishment of the state. Other Municipal Applications 545/59 "Dan" Cooperative Society in Tax Appeal v.  Assessor Civil Case 5, IsrSC 14 2088 (1960) (hereinafter: the Dan case), this Court discussed the question of whether uniforms and winter clothes that were provided to the drivers of the Dan Bus Company should be considered taxable income.  In his judgment, Justice   Witkon noted the tension between "a pleasure that is nothing but disguised income, and a pleasure that is all or mainly necessary for the job" (see: ibid., at p.  2091).  In this regard, Justice Witkon said the following, which in my opinion are of great importance in understanding the tax law's reference to benefits that are granted to an employee or that arise from his employment with his employer:

"Many jobs provide their subjects with pleasures and advantages, the value of which cannot be determined, such as respect, a place and pleasant working conditions, or concern for health and progress, and such imponderabilia should not be assessed for tax purposes, despite the discrimination they give to others who do not receive them" (see: ibid., p.  2092).

60. In other words, the mere fact that an employee is granted a benefit does not, in and of itself, determine that this benefit is subject to income tax, since a benefit "that is all or primarily a necessity of the job" is not subject to income tax.
61. As a test for determining whether or not the goods given to the employee will be taxed or not, Justice Whittakon chose to adopt the American test that was customary at the time, which he formulated as follows:

"The test is, at least in theory, whether the good or service (or the money in its place) is given to the employee, so that he can use it for his own pleasure or for the convenience of the employer.  "Employer convenience" means that the nature of the job requires the employee to need a good or service.  But even this rule does not exempt the employee from the obligation to pay tax, when the benefit is such that it can easily be estimated in money from the point of view of the employee who benefits from it" (see: ibid., p.  2096).

62. In other words, a benefit given to an employee that is essential for the performance of his work will not be taxed (hereinafter: the Vitality Test). Other Municipality Applications 3501/05 Jerusalem Assessor 1 v.  Bank Yahav for Civil Employees Ltd., paragraph 6(2) [published in Nevo] (November 28, 2007) (hereinafter: the Bank Yahav case), Justice   Rubinstein proposed to add to the test of necessity an additional test concerning the size of the benefit received by the employee.  Thus, according to Justice Rubinstein, a benefit that will not be taxable is a benefit that meets the following two tests, cumulatively: (1) the benefit must be essential to the performance of the employee's role; and (2) it is a benefit that does not give the employee a substantial benefit, which therefore amounts to disguised income.
63. These tests can be summed up in a single word that was introduced into the Israeli discourse by the Pale Tracker's trio: "Israbeloff." "Israbeloff" - in its original meaning in the sketch "The Courier at the Bank" (1974) - is a basket of benefits offered to a person, who is hired as a courier at the bank, alongside his salary, and which include a budget for the purchase of professional literature (even though the courier does not know how to read), reimbursement of telephone expenses (even though the courier will not use the phone at work), as well as payment for the maintenance of a car (even though the courier is supposed to carry out errands while riding a bicycle). All this is done in order to reduce the tax base and to guarantee that person, Baruch, the salary he asked for: 2,000 pounds net, and not gross.  An employer's benefit that does not have a functional contribution necessary for the performance of the employee's duties, the recipient of the benefit, is "Israbeloff" - and therefore it is lawful to tax it as wages for all intents and purposes.  The Israbeloff test is, in fact, the common sense test by which it is possible to identify the introduction of disguised work in quite a few cases.
64. Imagine two employees performing identical tasks for their employers for the same monthly salary. Suppose that the employer of one of the employees finances meals for him in the restaurant and that the other employee does not receive such a benefit.  In these circumstances, it is not possible to dispute that the salary of the first employee exceeds the salary of the second employee.  The claim that meals in a restaurant, which the employer funds, are an integral part of the employee's work, is "Israbeloff."
65. As will be detailed below, our case does not require a conclusive decision in the tests for the recognition of an employer's benefit as taxable income. I will suffice to say that the tests proposed by Justices Witkon andRubinstein are acceptable to me, in the main, but I would like to formulate them in a more focused and easier to implement manner.  According to my own position, as a rule, any benefit that is given to an employee should be taxed, except if it is a matter of trivial matters (see: The Dan case, at p.  2093).  However, a benefit that derives from the conditions of performance of the work set by the employer - without giving the employee a significant benefit that is not directly related to his work - will not be considered part of the work's salary, and the employee will not be obligated to pay income tax for it.
66. The various benefits that are given to an employee can be described as being on the spectrum. At one end of the spectrum are benefits designed to improve the employee's personal life in exchange for his work, without the benefit being directly related to the work itself.  This group includes, for example, gift vouchers given to an employee for excellence in the job.  Such benefits will be taxed as labor income for all intents and purposes.  At the other end of the spectrum are benefits whose purpose is to enable the employee to perform his work or improve his working conditions.  This group includes, in a clear way, various benefits that are given to the employee at his workplace and which do not serve the employee in any way outside of his work.  For example: an employer who replaces his employees' computer screens with larger screens, or an employer who moves his employees to more spacious and comfortable offices undoubtedly benefits his employees, but such benefits will not be taxed as part of the salary.  Employees are likely to prefer to work in a workplace that provides them with more comfortable physical conditions, and some will even be willing to absorb a certain reduction in wages in order to receive such benefits, but this does not turn the benefits into wages because they are derived from the conditions of performance of the work set by the employer.  Between these two ends of the spectrum are benefits that are given to the employee in order to perform his work, but these benefits are significant to the employee and benefit him even outside of his work framework.  This set of benefits includes, for example, the provision of a cell phone or laptop to the employee, where these devices are used by the employee not only in his work but also in his personal life outside of work.  In order to locate employer-tax benefits that belong to this group, it would be correct to use an auxiliary test that poses the following question: Does the benefit save the employee an expense that the employee would have spent anyway? As I will show below, in this auxiliary test we will be satisfied with deciding the appeals before us.

Housing and Accommodation Expenses

67. Every person needs housing and accommodation and bears their costs in some way. A person who determines his place of residence in a certain city bears the expenses of his housing and accommodation in that city, and this has no direct functional connection to the person's work.  This is even if a person moves to live near his place of work.  When the employer of that person pays these expenses in his place, or provides that person with a place of residence, it is plain that it is a benefit that constitutes part of the person's wages for the purposes of section 2(2) of the Income Tax Ordinance and that it must be taxed as any income.  In this context, I will note that section 2(2) of the Ordinance, in the wording that preceded Amendment 22, explicitly referred to expenses for housing and accommodation and determined that they are taxable ("earnings or profit from work, including the estimated value of a hostel or food or residence...").  It is clear, therefore, that section 2(2) of the Ordinance in its current version - which, as stated, is intended to be broader than the definition that preceded Amendment 22 - includes, in the definition of "earnings or profit from work", expenses for the housing and accommodation of an employee in which the employer is the subject.
68. The same is true of a professional soccer player who moved his center of life from a certain city or village to Kiryat Shmona. Providing housing and accommodation to the same player in the Kiryat Shmona area directly and clearly serves his interest in playing for the Kiryat Shmona Ironi team in exchange for a salary.  Such a benefit undoubtedly also serves the interest of the employer: the Ironi Kiryat Shmona Group.  However, since the financing of housing and accommodation by the team allows the player to save the costs of housing and accommodation elsewhere, this funding will be credited to the player's salary and will be subject to income tax.
69. Moreover, as I have already noted, the expenditure of the funding that the team spent on housing and accommodation as aforesaid enabled the players who received this benefit from it to determine their center of life in Kiryat Shmona, and thus to formulate their entitlement to a beneficiary settlement benefit within the framework of section 11 of the Income Tax Ordinance. This is a significant personal tax benefit.  For this reason alone, I am of the opinion that there is no possibility of classifying the benefit in question as marginal and superfluous in relation to the benefit derived from it by the group.
70. Before I close this chapter of the discussion of the team's appeal, I will note, for the avoidance of doubt, that I am not discussing the housing and accommodation expenses that the team spends on its foreign players who have not been naturalized. In addition, I do not relate, of course, to the accommodation expenses that the team spends on its trips to away games and training camps: these expenses mainly serve the interest of the team as an employer, since the players and staff would not bear the cost of accommodation if it were not for the travel to away games and training camps, and therefore do not constitute part of the players' salaries.
71. Therefore, we would do well to reject the team's appeal with respect to the details of the assessment regarding the housing and accommodation expenses of the players in Kiryat Shmona.

The team's expenses on its players' meals

72. Every person should eat and drink. Thus, an employee who consumes food provided to him by his employer saves himself the costs of self-nutrition.  For this reason, meals that an employer provides to its employees are a benefit that is credited to their wages, and income tax must be paid for it.  This simple conclusion arises from what is stated in sections 2(2) and 32(1) of the Income Tax Ordinance.  As stated, these expenses were included in the provisions of section 2(2) of the Ordinance, which deal with income or profit from work, even before Amendment 22 was enacted.
73. The same applies to a person who plays soccer on a professional team. Meals that his group provides him with are income taxable income.  The fact that in this case we are dealing with meals that were supervised by a dietitian of the Ironi Kiryat Shmona group does not raise or lower it.  Simply put, this is a benefit that is primarily for the benefit of the employee: the employee's savings in the costs of self-nutrition - costs that the employee would have borne had it not been for the benefit he received from his employer.
74. In this case, we can use the rulings that have been ruled within the framework of American tax law regarding the expenses that are allowed to be deducted from the income of professional athletes. Under U.S.  federal tax laws, an expense is allowed to be deducted if it is "ordinary" and "necessary" to run the business - the sport in which the athlete takes part.  An ordinary meal that every person eats - and that the athlete would eat in one form or another anyway - is not an input to a business that can be classified as normal and necessary; although special food additives may be recognized as an input to the sports business (see: Alan Pogroszewski & Kari Smoker, My Tax Accountant Says I Can Deduct My Hot Tub).  He's the Expert - Should I Question Him?, 25 Marquette Sports L.    435, 449-450 (2015) (hereinafter: Pogrozevsky and Smoker)).  For this reason, an expense on such a meal incurred by the athlete is not permitted as a deduction; And if the athlete's employer financed the meal, the value of the meal is part of the athlete's salary and he must pay income tax for it.
75. I will add that the provision of "professional food" such as energy drinks and energy bars to professional athletes can be considered a benefit that is not taxable, since the consumption of this food is done directly for the purpose of performing the work of the professional athlete; and at the very least, the enjoyment created by each and every player from the consumption of such "professional food" is marginal, compared to the benefit that the team derives from it. However, since the Kiryat Shmona Ironi Group did not present to the Tax Authority the necessary documentation in relation to the supply of drinks and energy bars to its players (see: paragraph 96 of the trial judgment in Tax Appeal 12510-02-15) - this comment only looks to the future, and does not affect the results of the present appeal.
76. Before I close this chapter of the discussion of the team's appeal, I will note, for the avoidance of doubt, that what is stated therein does not relate to the drinks and light refreshments that the team provides to the players in its facilities - such drinks and refreshments are trivial, and not part of the players' salaries. In addition, I do not take any position regarding the meals and nutrition of the players during their trips to away games and training camps - such meals and nutrition will be subject to the usual taxation rules regarding expenses that the employer incurs in order to finance the trips of its employees to remote places as part of their work.
77. Therefore, we would do well to reject the team's appeal with respect to the details of the assessment regarding the players' meals.

The team's expenses on the formation of its players

78. As a rule, it is lawful to recognize the expenses of a sports team that are found in order to create and strengthen the social cohesion of its players as expenses that mainly serve the interest of the team as an employer (see: Pogrozevsky and Smoker, at pp. 451-452).  This is on condition that such expenses do not include meals that are credited to the players' wages as required by sections 2(2) and 32 of the Income Tax Ordinance.  Indeed, team-building events are intended to give employees pleasure, but they are held within the framework of the work and its needs.  For this reason, it is not possible to determine - and at least, it is not possible to determine with a high probability - that team-building events save employees expenses that the employees would have spent anyway.  For example: in this context, there is a significant difference between a singer's performance that takes place as a closed event intended for employees only, and giving an employee a gift in the form of tickets to a show of his choice.  For this reason, I do not necessarily agree with the determination of the trial court that the formation of the actors who take an ATV trip or join as an audience in a show by singer Shlomo Artzi, funded by their group, constitute a "benefit from an employer" within the meaning of section 2(2)(a) of the Ordinance.
79. In many cases, the company's employees - and in our case, the team's players - do not necessarily enjoy team-building events, and participate in them only out of a commitment to the workplace, and with the aim of contributing to social cohesion.  Tulo is a case of a soccer player who does not derive any personal pleasure from an ATV ride and even suffers from wasting his leisure time on an ATV trip with his teammates.  Normally, such an actor will not exclude himself and participate in the ATV trip, since the social and professional cost of not participating will be significant for him, for obvious reasons.  Also, think of the case of a foreign soccer player who does not know Hebrew and who will still not decline the invitation of the owners of the team in which he plays to join his teammates for an evening of Shlomo Artzi's singing.  Moreover, in many cases, the presence of employees at team-building events is a duty that is imposed on them - explicitly or implicitly - by their employer.  These cases prove that it would not be correct to attribute the value of the team's team-building activity to the players' salaries.
80. The problem is that the municipality of Kiryat Shmona did not present to the Tax Authority appropriate documentation to prove the alleged team-building activity as an activity in which all or most of the team's players took part (see: paragraphs 103 and 106 of the trial judgment in Tax Appeal 12510-02-15). In these circumstances, we have no choice but to reject the team's appeal with respect to the details of the assessment that concern the formation of the players.

Fines

81. In light of the result I reached in the matter of the benefit of a beneficiary settlement, as well as in view of the contribution of the Ittorn company and the Kiryat Shmona Municipal soccer team to the city and its community of residents, it would be good if we were informed that the fines imposed by the Tax Authority on it would be reduced by 70%.

Conclusion

82. For the reasons I have enumerated, I propose to my colleagues to accept the appeal of Ituran in all matters relating to the recognition of the entitlement of the players of the Kiryat Shmona team to the benefit of a beneficiary settlement as detailed above, as well as to accept the appeals of Abed and Hasarmeh in the same matter - all subject to the presentation of Forms 101 in relation to the relevant tax years to the Tax Authority, within 60 days from the date of the judgment. I also propose that we order to reduce the fines imposed by the Tax Authority on the Locating Company to 30% of the total fines.  I propose to dismiss the other parts of the appeal that Itroen has placed before us.
83. As to the expenses: Due to the conduct of the Itoren company vis-à-vis the Tax Authority and the inefficient manner in which it conducted itself in litigation before the trial court, I am of the opinion that we would do the right thing if we did not cancel the expenses that it was obligated to pay within the framework of the judgment of the first instance in the tax appeal 12510-02-15, and that we would not award it the expenses in respect of the proceeding here, despite its partial success in the appeal. At the same time, I propose that we cancel the charge of Abed and Hasarmeh for the expenses imposed on them by the trial court, and that due to the failure to submit proper Forms 101 in real time, we will not award costs in their favor, despite accepting their appeals.

Response to the words of my colleague, Justice Y.  Amit

84. Before I conclude, I will say briefly that after reading the judgment of my colleague, Justice Y. Amit, I remained firm in my opinion.  I believe that it is inconceivable that an athlete like Abed would be considered to have continued to live with his parents in Nazareth after he embarked on an independent life and became a professional soccer player in the city of Kiryat Shmona - when the team owner obliges him to stay overnight in Kiryat Shmona during all periods of training and games.  For the reasons I listed in my judgment, I believe that the same is true of Hasarmeh and the other players of the team, who were in fact confined to the city limits as part of its activities.
85. As for the comparison with the American tax laws that I have drawn up, these rulings determined what they determined with respect to the center of life of professional athletes on the basis of a legal principle according to which this center is located at the place of residence of the team to which the athlete belongs, i.e., where the team's offices and facilities are located. This principle was established because of the athlete's intrinsic connection to his team, and not because of the enormous distances that often separate the athlete's quarry from his team's location.  It's about the essence and not the geography.  For example: a soccer player from Arlington, Virginia, who joins the C.  team's roster.  United, which is headquartered in Washington, D.C., the capital of the United States - a city about 10 kilometers away and about 20 minutes from Arlington - determines its center of life for income tax purposes in the city of Washington whenever he belongs to a group and makes a living from its activities.
86. Another issue that arises from a review of the words of my colleague, Judge Amit, is the team's financing of the accommodation expenses of the players of Ironi Kiryat Shmona. If my colleague is correct in his assertion that the team's players such as Hasarmeh and Abed did not establish their center of life in Kiryat Shmona during their time as the team's players, there will be no escaping, in my opinion, from the conclusion that their stay in Kiryat Shmona, in accordance with Sharetsky's instructions, was not intended to benefit them at all, but rather came to serve the good of their employer, the Kiryat Shmona Municipal Football Team.  In these circumstances, there will be no reason to attribute the accommodation funding to the players' salaries and they should not be obligated to pay income tax for it.  Thus, in the case of Hasarmeh, the assessment assessor's determination that his center of life is in the village of Ba'ana cannot coexist with the determination that his occupancy in an apartment in Kiryat Shmona, which was financed by the group, and which, as stated, was forced upon him in the course of his work by the group's managers, is a "benefit".  It is plain that a person wants to stay permanently in a place where he himself has established the center of his life, and not in a place where his stay is intended solely for the purposes of his work for his employer.  This is especially true in Hasarmeh's case: had it not been for the instruction that Hasarmeh received from his employer, it is clear that he would have been able to continue to spend the night in the village of Ba'ana with his family.  The same is true of Abed, assuming he wanted to continue living with his parents in Nazareth.  Therefore, if my colleague's opinion regarding the center of the players' lives is accepted, it will be appropriate to amend their income assessments accordingly.