SCOTUS Reports

Tag: Section 274(n)

  • Bissonnette v. Comm’r, 127 T.C. 124 (2006): Deductibility of Meals and Incidental Expenses for ‘Away from Home’ Status

    Bissonnette v. Comm’r, 127 T. C. 124 (U. S. Tax Court 2006)

    In Bissonnette v. Comm’r, the U. S. Tax Court ruled that a ferryboat captain was entitled to deduct meals and incidental expenses (M&IE) incurred during layovers of 6-7 hours, as he was considered ‘away from home’ under IRS rules. The decision clarified the ‘sleep or rest rule’ for travel deductions, allowing full per diem rates for days worked, but subjecting them to a 50% limitation. This case is significant for defining the parameters of deductible travel expenses for transportation workers.

    Parties

    Marc G. Bissonnette and Lillian I. Cone, petitioners, v. Commissioner of Internal Revenue, respondent. Bissonnette was the primary party involved in the dispute over the deductibility of his travel expenses.

    Facts

    Marc G. Bissonnette was employed as the director of marine operations and senior captain for Clipper Navigation, Inc. , operating ferryboats on Puget Sound. His workdays typically lasted 15-17 hours, consisting of turnaround voyages completed within 24 hours. During peak travel seasons, Bissonnette captained voyages to Friday Harbor and Victoria, B. C. , with layovers ranging from 30 minutes to over 5 hours. In the off-peak season, he captained the ferry to Victoria with a 6-7 hour layover. Bissonnette paid for his M&IE during these layovers and sought to deduct these expenses using the Federal per diem rates. The Commissioner of Internal Revenue denied these deductions, arguing Bissonnette was not ‘away from home’ under section 162(a)(2) of the Internal Revenue Code.

    Procedural History

    The Commissioner issued a notice of deficiency for the tax years 2001, 2002, and 2003, disallowing Bissonnette’s claimed deductions for M&IE. Bissonnette and Cone timely filed a petition with the U. S. Tax Court, contesting the Commissioner’s determination. The court considered whether Bissonnette was ‘away from home’ under section 162(a)(2), and if so, whether he should prorate his M&IE deductions and apply the 50% limitation under section 274(n).

    Issue(s)

    Whether Marc G. Bissonnette was ‘away from home’ within the meaning of section 162(a)(2) of the Internal Revenue Code during his turnaround voyages completed within 24 hours?

    Whether Bissonnette, if considered ‘away from home,’ must prorate and reduce his allowable M&IE for a partial day of travel?

    Whether Bissonnette, if considered ‘away from home,’ must further reduce his allowable M&IE by 50 percent pursuant to section 274(n) of the Internal Revenue Code?

    Rule(s) of Law

    Section 162(a)(2) of the Internal Revenue Code allows taxpayers to deduct travel expenses while away from home in the pursuit of a trade or business. The ‘sleep or rest rule’ articulated in Williams v. Patterson, 286 F. 2d 333 (5th Cir. 1961), states: “If the nature of the taxpayer’s employment is such that when away from home, during released time, it is reasonable for him to need and to obtain sleep or rest in order to meet the exigencies of his employment or the business demands of his employment, his expenditures (including incidental expenses, such as tips) for the purpose of obtaining sleep or rest are deductible traveling expenses under section 162(a)(2). ” Section 274(d) requires substantiation of travel expenses, but section 1. 274-5(g) and (j) of the Income Tax Regulations allow the use of Federal per diem rates in lieu of actual expense substantiation. Section 274(n)(1) limits the deduction for food and beverage expenses to 50% of the otherwise allowable amount.

    Holding

    The court held that Bissonnette was ‘away from home’ for purposes of section 162(a)(2) during the off-peak season voyages with 6-7 hour layovers in Victoria, as he needed sleep or rest to meet the exigencies of his employment. Bissonnette was allowed to use the full Federal M&IE rate for these days, without proration. However, the court ruled that his M&IE deductions were subject to the 50% limitation under section 274(n)(1).

    Reasoning

    The court reasoned that Bissonnette’s 15-17 hour workdays, responsibility for passenger safety, and the potential for extended travel times due to various factors justified his need for sleep or rest during the 6-7 hour layovers in Victoria. The court applied the ‘sleep or rest rule,’ finding that Bissonnette’s layover was of sufficient duration to relate to a significant increase in expenses, even though he did not incur lodging costs due to sleeping on the ferryboat. The court rejected the Commissioner’s argument that the layover was solely due to scheduling, focusing instead on Bissonnette’s need for rest. Regarding the proration of M&IE, the court found that Bissonnette’s consistent use of the full Federal M&IE rate was in accordance with reasonable business practice, as allowed under section 6. 04(2) of the relevant revenue procedures. However, the court upheld the application of the 50% limitation under section 274(n)(1), as Bissonnette’s M&IE were computed using the per diem method and did not qualify for any exceptions under section 274(n)(2).

    Disposition

    The court’s decision allowed Bissonnette to deduct M&IE at the full Federal per diem rate for the days he was away from home during the off-peak season, but subject to the 50% limitation under section 274(n)(1). The case was to be resolved under Rule 155 of the Tax Court Rules of Practice and Procedure.

    Significance/Impact

    Bissonnette v. Comm’r clarifies the application of the ‘sleep or rest rule’ to transportation workers, particularly those on turnaround voyages. The decision expands the understanding of what constitutes being ‘away from home’ for tax deduction purposes, focusing on the need for sleep or rest rather than the mere duration of absence from the home terminal. It also reinforces the IRS’s position on the use of Federal per diem rates for substantiation of M&IE and the applicability of the 50% limitation under section 274(n). This case has implications for other transportation industry employees seeking to deduct travel expenses and may influence future interpretations of ‘away from home’ status in tax law.

  • 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.

  • Boyd Gaming Corp. v. Commissioner, 106 T.C. 343 (1996): Deductibility of Employee Meals and the De Minimis Fringe Benefit Exception

    106 T.C. 343 (1996)

    Employers can fully deduct the cost of employee meals if those meals qualify as a de minimis fringe benefit, and the determination of whether meals meet this exception is a factual question.

    Summary

    Boyd Gaming Corporation sought to deduct the full cost of providing free meals to employees in on-premises cafeterias. The IRS argued that Section 274(n)(1) of the Internal Revenue Code limited the deduction to 80%. Boyd Gaming contended that the meals were fully deductible under the de minimis fringe benefit exception (Section 274(n)(2)(B)) or the bona fide sale exception (Section 274(e)(8)). The Tax Court denied both parties’ motions for partial summary judgment, holding that the de minimis fringe benefit exception could apply if factual requirements were met, but the bona fide sale exception did not apply. The court emphasized that whether the meals qualified as a de minimis fringe benefit was a factual issue requiring trial.

    Facts

    Boyd Gaming Corporation and its subsidiaries operated hotel and casino resorts in Las Vegas. They provided free meals to almost all on-duty employees in private employee cafeterias located on the business premises. These meals were provided for various operational reasons, including attracting and retaining employees in a competitive market and ensuring employees remained on-premises during shifts. The provision of meals was non-discriminatory and considered part of the employees’ compensation package. The IRS disallowed 20% of the deduction claimed for these meal costs.

    Procedural History

    Boyd Gaming Corporation petitioned the Tax Court to contest the IRS’s disallowance of a portion of their deduction for employee meal expenses. The IRS moved for partial summary judgment, arguing that Section 274(n)(1) limited the deduction. Boyd Gaming cross-moved for partial summary judgment, claiming exceptions under Sections 274(n)(2)(B) and 274(e)(8) applied.

    Issue(s)

    1. Whether the cost of meals provided by Boyd Gaming to its employees on its premises is limited to 80% deductibility under Section 274(n)(1) of the Internal Revenue Code.

    2. Whether the employee meals qualify for the de minimis fringe benefit exception under Section 274(n)(2)(B), allowing for 100% deductibility.

    3. Whether the provision of meals constitutes a bona fide sale under Section 274(e)(8), allowing for 100% deductibility.

    Holding

    1. No, the cost of employee meals is not automatically limited to 80% deductibility because exceptions exist under Section 274(n)(2).

    2. Yes, potentially, because if the meals qualify as a de minimis fringe benefit under Section 132(e) and Section 274(n)(2)(B), they are fully deductible; however, whether they meet the factual requirements of this exception is yet to be determined.

    3. No, because the provision of meals does not constitute a bona fide sale for adequate consideration under Section 274(e)(8).

    Court’s Reasoning

    The court reasoned that Section 274(n)(1) generally limits the deduction for food and beverage expenses to 80%, but Section 274(n)(2) provides exceptions. Regarding the de minimis fringe benefit exception, the court noted that meals are considered a de minimis fringe benefit under Section 132(e) if certain conditions are met, including the revenue/operating cost test. Crucially, for this test, employers can disregard costs and revenues for meals excludable under Section 119 (meals furnished for the employer’s convenience). The court rejected the IRS’s narrow interpretation that the de minimis fringe benefit exception only applies when employees pay for meals. The court stated, “Petitioners’ deduction for their employee meals would not be limited by section 274(n)(1), for example, if section 119 allows all of petitioners’ employees to exclude the value of the meals from their gross income. In such a case, the de minimis fringe benefit exception of sections 132(e) and 274(n)(2)(B) will allow petitioners to claim a complete deduction for the meals because the Cafeterias’ revenues and expenses will both be zero for purposes of the revenue/operating cost test.” The court found that whether the meals met the factual requirements of the de minimis fringe benefit exception, particularly concerning Section 119, was a matter for trial. Regarding the bona fide sale exception, the court held that providing free meals to employees as part of their compensation package does not constitute a “bona fide transaction for an adequate and full consideration.” The court stated, “We believe that petitioners merely presented the meals to their employees in connection with the employees’ employment with petitioners. To say the least, we are sure that petitioners’ employees would be surprised to hear that they were paying arm’s-length, fair market value prices for the meals.”

    Practical Implications

    Boyd Gaming clarifies that employers can deduct 100% of employee meal costs if they qualify as de minimis fringe benefits, even if provided for free. The case emphasizes the importance of the factual inquiry into whether on-premises meals meet the requirements of both the de minimis fringe benefit exception and Section 119 (employer convenience). Legal practitioners must analyze the specific circumstances of employee meal provisions, focusing on operational reasons for providing meals, on-premises facilities, and compliance with Section 119 criteria to determine full deductibility. This case highlights that the de minimis fringe benefit exception is a viable path to full deduction for employee meals, moving beyond the general 80% limitation of Section 274(n)(1), provided the factual basis supports it.