SCOTUS Reports

Tag: Per Diem Allowances

  • Continental Express, Inc. v. Commissioner, T.C. Memo. 2003-223: Application of Section 274(n) 50-Percent Limitation on Per Diem Allowances

    Continental Express, Inc. v. Commissioner, T. C. Memo. 2003-223 (U. S. Tax Court, 2003)

    In a significant ruling on per diem allowances, the U. S. Tax Court upheld the IRS’s application of the 50-percent limitation under Section 274(n) to the full amount of per diem payments made to truck drivers by Continental Express, Inc. The court rejected the company’s attempt to deduct 80% of these allowances, affirming the validity of IRS Revenue Procedures that treat such payments as solely for meals and incidental expenses. This decision impacts how businesses in the transportation industry can claim deductions for employee travel expenses.

    Parties

    Plaintiff: Continental Express, Inc. , an S corporation, and its shareholders (Ralph E. Bradbury, Warren D. Garrison, Bonnie P. Harvey, Edward M. Harvey, Diane M. Miller, James E. Willbanks, and others). Defendant: Commissioner of Internal Revenue.

    Facts

    Continental Express, Inc. was engaged in long-haul, irregular route trucking, employing between 277 and 324 drivers during the years in issue. The drivers were away from home for a minimum of 21 consecutive days per trip, averaging 25 to 28 days per month on the road. They operated International tractors with sleeper berths. Continental paid its drivers per mile, ranging from 25 to 32 cents, and provided a per diem allowance of 9 cents per mile intended to cover travel expenses. The per diem was not sufficient to cover all expenses, including lodging, as drivers often slept in the sleeper berths rather than motels. Continental did not require receipts or records of drivers’ expenses, opting instead to use IRS revenue procedures for substantiating deductions. The company deducted 80% of the per diem payments on its tax returns, applying the 50% limitation of Section 274(n) to 40% of the total per diem amounts.

    Procedural History

    The Commissioner of Internal Revenue disallowed Continental’s deductions for the per diem allowances, asserting that the full amount should be subject to the 50% limitation under Section 274(n). Continental petitioned the U. S. Tax Court for redetermination of the deficiencies. The case was heard by Judge Vasquez, who issued the memorandum opinion in 2003.

    Issue(s)

    Whether the 50-percent limitation of Section 274(n) applies to the full amount of per diem allowances paid to Continental’s drivers?

    Rule(s) of Law

    Section 274(n) limits the deduction for expenses for food or beverages to 50% of the amount that would otherwise be allowable. Section 274(d) requires strict substantiation for certain travel expenses. IRS Revenue Procedures 94-77, 96-28, and 96-64 provide methods for deemed substantiation of employee travel expenses, including per diem allowances. Under these procedures, per diem allowances calculated on the same basis as wages are treated as being paid solely for meals and incidental expenses (M&IE).

    Holding

    The court held that the 50-percent limitation of Section 274(n) applies to the full amount of the per diem allowances paid by Continental to its drivers. The court found that the per diem allowances were calculated on the same basis as the drivers’ wages (miles driven), thus falling under the IRS Revenue Procedures’ definition of a “meals only per diem allowance,” subject to the 50% limitation.

    Reasoning

    The court’s reasoning focused on the application of the IRS Revenue Procedures and the doctrine of stare decisis, citing the similar case of Beech Trucking Co. v. Commissioner. The court emphasized that the Revenue Procedures provide elective methods for deemed substantiation, which Continental chose to use. The per diem allowances were calculated based on miles driven, which aligned with the drivers’ wages, thus meeting the criteria under Section 4. 02 of the Revenue Procedures to be treated as solely for M&IE. The court rejected Continental’s arguments challenging the validity of the Revenue Procedures, stating that they were not arbitrary or unlawful and provided rough justice in lieu of onerous substantiation requirements. The court also found that Continental failed to substantiate the nonmeal travel expenses under Section 274(d), as the company relied on estimates and averages rather than detailed records of each driver’s expenses. The court concluded that Continental could not claim a deduction greater than 50% of the per diem allowances, as the Revenue Procedures did not allow for additional deductions based on estimates of nonmeal expenses.

    Disposition

    The court affirmed the Commissioner’s disallowance of Continental’s deductions for the per diem allowances, subjecting the full amount to the 50-percent limitation under Section 274(n). Decisions were to be entered under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    This case reaffirmed the validity and application of IRS Revenue Procedures in determining the deductibility of per diem allowances, particularly in the transportation industry. It clarified that per diem allowances calculated on the same basis as wages are treated as solely for M&IE, subject to the 50% limitation under Section 274(n). The decision impacts how companies in similar industries structure their compensation and expense reimbursement policies to comply with tax regulations. It also underscores the importance of maintaining detailed records to substantiate travel expenses under Section 274(d), as estimates and averages are insufficient. Subsequent cases have cited Continental Express in upholding the IRS’s position on per diem allowances, affecting tax planning and compliance strategies for businesses nationwide.

  • Beech Trucking Co. v. Comm’r, 118 T.C. 428 (2002): Application of Section 274(n) to Per Diem Allowances

    Beech Trucking Co. v. Comm’r, 118 T. C. 428 (2002)

    In Beech Trucking Co. v. Comm’r, the U. S. Tax Court ruled that a trucking company must apply the 50% deduction limitation of Section 274(n) to the full amount of per diem allowances paid to its drivers. The court determined that these allowances, calculated based on miles driven, were for meal and incidental expenses (M&IE) and not lodging, thus subjecting them to the statutory limitation. This ruling impacts how businesses classify per diem payments for tax purposes, emphasizing the importance of the method used to calculate such allowances.

    Parties

    Beech Trucking Company, Inc. (Petitioner), represented by Arthur Beech as the tax matters person, brought this case against the Commissioner of Internal Revenue (Respondent). Throughout the litigation, Beech Trucking maintained its position as the petitioner.

    Facts

    Beech Trucking, an S corporation, operated as an irregular-route, common carrier in the midwestern and southern United States. It leased its drivers from an affiliated company, Arkansas Trucking Service (ATS), which was owned by Ed Harvey, a shareholder of Beech Trucking. The drivers’ compensation included a per diem allowance of 6. 5 cents per mile dispatched, which was part of their total pay rate of 24 to 26 cents per mile. This per diem was intended to cover travel expenses, including meals and incidental expenses. The drivers were not required to substantiate their expenses to receive the per diem, which was administered by ATS but reimbursed by Beech Trucking. The per diem payments totaled $839,169 in 1995 and $956,261 in 1996.

    Procedural History

    The Commissioner of Internal Revenue began examining Beech Trucking’s tax returns for 1995 and 1996 in May and September of 1997, respectively. Following the examination, the Commissioner issued a Notice of Final S Corporation Administrative Adjustment (FSAA) on July 23, 1999, adjusting Beech Trucking’s ordinary income by $251,885 for 1995 and $286,878 for 1996, asserting that the per diem payments were fully subject to the 50% limitation under Section 274(n). Beech Trucking contested this determination before the U. S. Tax Court, where the case was adjudicated.

    Issue(s)

    Whether the 50% limitation of Section 274(n) applies to the full amount of per diem allowances paid by Beech Trucking to its drivers, who were leased from ATS?

    Rule(s) of Law

    Section 274(n) of the Internal Revenue Code generally limits deductions for food or beverage expenses to 50% of the amount that would otherwise be allowable. Revenue Procedures 94-77 and 96-28 provide methods for deemed substantiation of travel expenses. Under these procedures, if a per diem allowance is computed on a basis similar to the employee’s compensation (e. g. , miles traveled), it is treated as covering only meal and incidental expenses (M&IE), not lodging. Consequently, such per diem allowances are subject to the Section 274(n) limitation.

    Holding

    The Tax Court held that the per diem allowances paid by Beech Trucking were subject to the 50% limitation of Section 274(n) because they were deemed to cover only meal and incidental expenses (M&IE) and not lodging expenses, based on the method of calculation (miles traveled).

    Reasoning

    The court reasoned that the per diem allowances, calculated based on miles driven, were treated as covering only M&IE under the Revenue Procedures, specifically section 4. 02. This section stipulates that if a per diem is calculated similarly to an employee’s compensation, it is considered to cover M&IE only. Consequently, under section 6. 05 of the Revenue Procedures, the full amount of the per diem was subject to the 50% limitation of Section 274(n). The court also determined that Beech Trucking, not ATS, was the common law employer of the drivers, based on factors including control over the drivers’ work, the provision of tools and facilities, and the permanency of the relationship. Furthermore, the court rejected Beech Trucking’s arguments that the Revenue Procedures were invalid or that Section 274(n) did not apply because ATS was the employer. The court noted that Beech Trucking had elected to use the deemed substantiation methods provided by the Revenue Procedures and could not selectively apply their benefits without adhering to their conditions.

    Disposition

    The Tax Court sustained the Commissioner’s determinations, and a decision was entered for the respondent.

    Significance/Impact

    The Beech Trucking decision clarifies the tax treatment of per diem allowances under Section 274(n) when calculated based on factors related to compensation, such as miles traveled. It reinforces the application of the Revenue Procedures in determining the nature of expenses covered by per diem allowances and their deductibility. The ruling has implications for businesses that provide per diem payments, emphasizing the need to carefully consider the method of calculating such allowances to avoid unintended tax consequences. The decision also highlights the importance of determining the common law employer in three-party employment arrangements for tax purposes.

  • UAL Corp. v. Comm’r, 117 T.C. 7 (2001): Deductibility of Per Diem Allowances as Compensation

    UAL Corp. v. Commissioner, 117 T. C. 7 (2001)

    The U. S. Tax Court ruled that UAL Corporation could deduct per diem allowances paid to its pilots and flight attendants as compensation under Section 162(a)(1) of the Internal Revenue Code. This decision, impacting over $100 million in deductions, clarifies the tax treatment of such payments, distinguishing them from travel expenses subject to strict substantiation requirements.

    Parties

    UAL Corporation and Subsidiaries (Petitioner) v. Commissioner of Internal Revenue (Respondent). The case was heard in the United States Tax Court.

    Facts

    UAL Corporation, through its subsidiary United Air Lines, Inc. , paid per diem allowances to its pilots and flight attendants for both day trips and overnight trips. These allowances were calculated at a rate of $1. 50 per hour ($1. 55 for pilots for certain portions of the years in issue) for the number of hours on duty or on flight assignment. The allowances were part of the employees’ compensation under collective bargaining agreements and were not subject to substantiation by the employees. United did not withhold federal income or FICA taxes on these payments, nor were they reported as wages on the employees’ W-2 forms. The per diem allowances were reported as travel expenses on UAL’s tax returns for the years 1985, 1986, and 1987.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in UAL’s federal income taxes for 1983, 1984, 1986, and 1987, totaling over $100 million, due to the disallowance of deductions for per diem allowances. UAL contested these deficiencies, arguing that the allowances were deductible as compensation under Section 162(a)(1). The case was heard by the U. S. Tax Court, which reviewed the case under the de novo standard.

    Issue(s)

    Whether UAL Corporation may deduct the per diem allowances paid to its pilots and flight attendants as personal service compensation under Section 162(a)(1) of the Internal Revenue Code?

    Rule(s) of Law

    Section 162(a)(1) of the Internal Revenue Code allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business, including “a reasonable allowance for salaries or other compensation for personal services actually rendered. ” The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services. (Sec. 1. 162-7(a), Income Tax Regs. )

    Holding

    The Tax Court held that UAL Corporation may deduct the per diem allowances as personal service compensation under Section 162(a)(1). The court found that these payments were made in the context of a bona fide employer-employee relationship and were necessary to secure the employees’ services.

    Reasoning

    The court’s reasoning hinged on the determination that the per diem allowances were compensatory in nature. The majority opinion noted that the payments would not have been made but for the employer-employee relationship and the need to secure the employees’ services. The court emphasized that the allowances were part of the compensation package negotiated with the unions, indicating an intent to compensate for services rendered. The court also addressed the Commissioner’s argument regarding the lack of compensatory intent, stating that such intent is merely a pertinent factor, not a prerequisite for deductibility under Section 162(a)(1). The court rejected the Commissioner’s position that the allowances should be treated as travel expenses subject to the substantiation requirements of Section 274(d), as they were not contingent on the employees incurring or accounting for any travel expenses. The concurring opinions further supported the majority’s view, elaborating on why the allowances for both day and overnight trips should be treated as compensation rather than travel expenses. The dissent, however, argued that the allowances were travel expenses and should be subject to substantiation requirements, criticizing the majority for creating a loophole that could circumvent Congressional intent.

    Disposition

    The Tax Court’s decision was to allow UAL Corporation to deduct the per diem allowances as compensation under Section 162(a)(1). The case was to be entered under Rule 155 for computation of the amount of the deduction.

    Significance/Impact

    The decision in UAL Corp. v. Commissioner has significant implications for the treatment of per diem allowances as compensation rather than travel expenses. It clarifies that such payments can be deductible as compensation if they are part of an employment contract and are necessary to secure services, even if not subject to the substantiation requirements applicable to travel expenses. This ruling may influence how corporations structure employee compensation packages, particularly in industries where travel is a significant component of work. Subsequent cases and IRS guidance have further refined the distinction between accountable and nonaccountable plans for per diem allowances, impacting how such payments are reported and taxed.