122 T.C. No. 18
UNITED STATES TAX COURT
CHARLES A. BOYD AND DARBY A. HARVEY,
f.k.a. DARBY A. BOYD, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 13229-01, 13230-01, Filed April 27, 2004.
13231-01, 13232-01,
13233-01, 13234-01,
13235-01, 13236-01,
13237-01, 13238-01.
Ps are shareholders in C, a trucking company
formed pursuant to sec. 1361, I.R.C. C compensates its
drivers at a rate of 25 to 32 cents per mile. C also
provides a per diem allowance of 9 cents per mile. Ps
deducted 80 percent of the per diem allowance paid to
the drivers.
1
Cases of the following petitioners are consolidated
herewith: Ralph E. and Lee Ann Bradbury, docket No. 13230-01;
Charles E. Harvey, docket No. 13231-01; Deborah G. Harvey, docket
No. 13232-01; Mark H. and Jackie Guffin, docket No. 13233-01;
Warren D. and Debra W. Garrison, docket No. 13234-01; Mark L. and
Jill G. Pryor, docket No. 13235-01; Diane M. Miller, docket No.
13236-01; Edward M. and Bonnie P. Harvey, docket No. 13237-01;
and James E. and Lynn B. Willbanks, docket No. 13238-01.
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At trial, Ps presented evidence as to the
estimated, nonmeal travel expenses incurred by C’s
drivers. C’s drivers testified as to the average
amount of their per diem allowance that they spent on
items such as lodging, truck parking, showers, laundry,
and Federal Express charges.
Held: Despite the presentation of evidence at
trial as to the estimated, nonmeal travel expenses
incurred by C’s drivers, Ps have failed to establish a
basis for deducting 80 percent of the per diem
allowance paid to the drivers. Beech Trucking Co. v.
Commissioner, 118 T.C. 428 (2002), followed.
Held, further, Pursuant to Rev. Proc. 94-77, 1994-
2 C.B. 825, Rev. Proc. 96-28, 1996-1 C.B. 686, and Rev.
Proc. 96-64, 1996-2 C.B. 427, Ps may only deduct 50
percent of the per diem allowance paid to the drivers.
Held, further, sec. 4.02(5) of Rev. Proc. 94-77,
1994-2 C.B. 825, Rev. Proc. 96-28, 1996-1 C.B. 686, and
Rev. Proc. 96-64, 1996-2 C.B. 427, is not invalid.
Held, further, Ps have not substantiated the
actual travel expenses incurred by the drivers pursuant
to sec. 274(d), I.R.C.
Held, further, the portion of the per diem
allowance that Ps estimate is allocated to nonmeal
travel expenses may not be deducted in full.
J. Betsy Meacham and Roger D. Rowe, for petitioners.
Caroline R. Krivacka, for respondent.
VASQUEZ, Judge: Respondent disallowed deductions of
$836,7292 for the taxable year ending December 31, 1995; $828,067
2
Unless otherwise indicated, all section references are to
(continued...)
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for the taxable year ending December 31, 1996; $198,462 for the
taxable year ending March 31, 1997; and $1,048,686 for the
taxable year ending December 31, 1997, claimed by Continental
Express, Inc. (Continental or the corporation), an S corporation
in which petitioners are shareholders. At issue is the amount
that petitioners may deduct with respect to per diem allowances
Continental provided to its drivers, and, particularly, whether
the 50-percent limitation of section 274(n) applies to the total
amount of the per diem payments.
FINDINGS OF FACT
The stipulation of facts, supplemental stipulation of facts,
and attached exhibits are incorporated herein by this reference.
Continental Express, Inc.
Continental is an S corporation within the meaning of
section 1361(a)(1). At the time they filed their petitions, all
petitioners resided in Arkansas, except Edward and Bonnie Harvey,
who resided in Florida, and Deborah Harvey, who resided in
Tennessee. Petitioners’ yearend ownership percentages as of
December 31, 1995, December 31, 1996, and March 31, 1997 were:
Shareholder Ownership Percentage
Ralph E. Bradbury 5.00
Warren D. Garrison 1.25
2
(...continued)
the Internal Revenue Code in effect for the years at issue, all
Rule references are to the Tax Court Rules of Practice and
Procedure, and all amounts are rounded to the nearest dollar.
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Bonnie P. Harvey 5.00
Edward M. Harvey 86.25
Diane M. Miller 1.25
James E. Willbanks 1.25
Petitioners’ yearend ownership percentages as of December 31,
1997, were:
Shareholder Ownership Percentage
Darby A. Harvey f.k.a. Darby A. Boyd .98
(Darby Harvey Irrevocable and
Intervivos Trust)
Ralph E. Bradbury 5.00
Mark H. Guffin .98
(Mark Guffin Irrevocable
and Intervivos Trust)
Charles E. Harvey .98
(Charles Harvey Irrevocable
and Intervivos Trust)
Deborah G. Harvey .98
(Deborah Harvey Irrevocable
and Intervivos Trust)
Bonnie P. Harvey 2.55
Edward M. Harvey 86.9125
Diane M. Miller .6375
Jill G. Pryor .98
(Jill Guffin Harvey Irrevocable
and Intervivos Trust)
Continental is engaged in the long-haul, irregular route
trucking business. Continental hauls nonbulk dry goods in
trailers from coast to coast in the 48 continental United States.
The average length of a haul was 1,750 to 1,850 miles.
Continental did not have a dedicated route, and drivers often
made triangular runs. That is, drivers often picked up goods in
New Jersey and the northeast and delivered the goods to
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California and the west coast. Then they picked up goods on the
west coast and delivered them to points such as Arkansas, Texas,
or the Midwest. Eventually, they delivered goods to New Jersey
and the east coast, and headed west again.
Continental’s Drivers
Continental employed between 277 and 324 drivers during the
years in issue. Drivers were away from home for a minimum of 21
consecutive days per trip and were on the road for an average
total of 25 to 28 days per month. Some drivers were away for 2
to 3 months at a time before returning home. Drivers accrued 1
day off for every 7 days of driving.
Drivers averaged approximately 322 to 382 miles per day.
U.S. Department of Transportation regulations prohibited drivers
from traveling more than 550 miles per day. Additionally, the
Department of Transportation regulations required drivers to be
off duty for 8 hours for every 8 hours on duty. The regulations
limited drivers to a maximum of 70 hours on duty per week.
With an exception for layovers, Continental drivers earned
compensation only when the wheels on the truck were turning.
Continental paid its drivers on a per mile arrangement ranging
from 25 to 32 cents per mile, depending on experience. Drivers
also received a per diem allowance paid through an accountable
plan. The per diem, paid to drivers in addition to compensation,
was intended to reimburse drivers for travel expenses. The per
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diem was 9 cents per mile for single drivers.3 Continental’s
management believed drivers typically received a per diem
allowance in the low $30 range for 1 day of driving.
Continental’s per diem allowance plan was similar to the
majority of per diem allowance plans used by other companies in
the trucking industry.
Continental’s Trucks
Continental drivers operated International tractors. Each
tractor had a cab with a sleeper berth behind the driver’s and
passenger’s seats. The engine in a Continental tractor was
located beneath the driver’s and passenger’s seats. The size of
the cab, including the sleeper berth, was 96 inches across by 110
inches deep by 60 inches high.
The sleeper berth had no powered air vents. Ventilation,
heating, and air conditioning were available only through vents
in the dash of the cab and powered by the engine. The berth had
no running water, no toilet, and very little storage. One driver
described the sleeper berth as a “rolling jail cell”.
The sleeper berth contained a twin size mattress covered in
plastic, but no box spring. Newer models of Continental’s
3
Single drivers constituted 99 percent of Continental’s
drivers. One percent of the drivers drove in two-person teams.
Each team driver received a per diem allowance of 4.5 cents per
mile.
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tractors contained larger sleeper berths, allowing for a 60-inch
mattress.
The sleeper berth was designed to provide a driver with room
to rest while transporting a load of freight. Drivers’ sleep was
less restful in the sleeper berth than in a motel. The sleeper
berth vibrated and was not quiet because the truck engine
remained on while drivers slept so that they had ventilation.
Additionally, drivers worried about burglary of their cargo while
they slept in the sleeper berth.
Drivers slept in the sleeper berth more often than not.
Continental management assumed that drivers slept in the sleeper
berth on average 6 of 7 nights per week.
Motel Rentals
Drivers would sleep in a motel while they traveled to
prevent fatigue and to maintain safety. While they were
traveling, Continental generally did not reimburse drivers for
motel rooms.4 Drivers slept in a motel anywhere from two or
three times per month to 3 nights per week. Generally, drivers
did not spend more than $30 to $35 for a motel.
4
Pursuant to a corporate layover policy, Continental
provided $25 per day in wages and up to $30 reimbursement for a
motel if the driver was not moving. For example, if a driver was
waiting to unload or load the trailer at its destination due to a
backup, the driver would receive layover pay and reimbursement
for a motel on the second night the driver was waiting to unload.
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Drivers’ Other Travel Expenses
In addition to the expense of renting a motel room, drivers
also incurred expenses for truck parking, showers, laundry,
cleaning supplies for the cab, sheets for the sleeper berth, and
Federal Express charges for shipping bills of lading. Drivers
also incurred expenses for their meals. Truck parking cost
approximately $5 to $10 per night, if free parking could not be
obtained. Each shower at a truck stop cost approximately $5 to
$6. Laundry cost between $5.50 and $8 per week. Federal Express
charges were approximately $8 per week.
Continental drivers were free to spend (or not spend) the
per diem in any manner they chose. Drivers generally spent all
of the per diem on the travel expenses they incurred while
working for Continental. The per diem, however, did not and
could not cover all of the expenses drivers incurred, even for a
driver who lived frugally and stayed in a motel only 2 or 3
nights per month. The per diem was insufficient to pay for a
nightly motel in addition to meals.
Continental’s Payroll, Accounting, and Recordkeeping
Continental’s accounting and payroll system tracked miles
driven, not days worked. In 1994, Continental purchased a new
computer system and software designed for the trucking industry
at a cost in excess of $400,000. The new system tracked only
miles driven, not number of days worked. To track and pay per
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diem on a basis other than miles driven would have required a
duplicate accounting system.
Between 1995 and 1997, drivers were in short supply.
Continental could not abruptly change its compensation system if
its drivers would have perceived the change to their detriment,
as Continental would lose large numbers of drivers to competing
trucking firms. Continental management concluded that in times
of short labor supply, changes in a compensation system must
occur across the industry, and no single company can change
significantly its compensation without an adverse impact on its
driver retention.
Continental made a business decision to substantiate
deductions for its drivers’ per diem allowance using the revenue
procedures prescribed by the Internal Revenue Service.
Continental did not require drivers to submit receipts or records
of their travel expenses, if any, except pursuant to layover and
phone call policies. Drivers generally did not submit receipts
or other records to the corporation. Indeed, when drivers did
submit receipts for travel expenses not related to layover or
phone calls, Continental destroyed the receipts or put them back
in the driver’s trip envelope without consideration.
Continental paid the per diem in lieu of reimbursing actual
expenses for meals and incidental expenses incurred by drivers.
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Petitioners’ Tax Returns
On its Forms 1120S, U.S. Income Tax Return for an S
Corporation, for the years at issue, Continental deducted (as
part of “Other deductions”) driver-related expenses including
fuel, tolls, “motels & layover”, “per diem”, and “hiring cost--
drivers”. The amounts deducted as per diem payments were
$2,231,279 for the taxable year ending December 31, 1995;
$2,208,178 for the taxable year ending December 31, 1996;
$529,232 for the taxable year ending March 31, 1997; and
$2,796,499 for the taxable year ending December 31, 1997. These
claimed per diem amounts represent 80 percent of the actual per
diem payments made to the drivers. To arrive at the 80-percent
claimed deduction, Continental applied the section 274(n) 50-
percent limitation to 40 percent of the total per diem amounts
paid during the tax years and deducted the remaining 60 percent
in full.
OPINION
Section 274(n) allows a taxpayer to deduct only 50 percent
of the amount that otherwise would qualify as an allowable
deduction for meals or business entertainment. The issue is
whether this 50-percent limitation applies to the full amount of
per diem allowances paid with respect to Continental’s drivers,
as respondent contends. For the reasons discussed below, we
agree with respondent.
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At the outset, we note the similarities between this case
and Beech Trucking Co. v. Commissioner, 118 T.C. 428 (2002).5 In
Beech Trucking Co., the corporation took the same tax position
regarding deductibility of the per diem allowance paid to its
drivers as petitioners in this case. Five of the six
shareholders of Beech Trucking are petitioners in this case.6
Beech Trucking drivers were dispatched on both long and short
hauls. Beech Trucking trucks had sleeper berths. Beech
Trucking’s long-haul drivers earned between 24 and 26 cents per
mile in wages, which included a 6.5 cents per mile per diem
allowance. Short-haul drivers earned a flat weekly salary and an
additional 6.5 cents per mile per diem. See Beech Trucking Co.
v. Commissioner, supra at 430-432. On its Forms 1120S, U.S.
Income Tax Return for an S Corporation, for 1995 and 1996, Beech
Trucking claimed a deduction that was 80 percent of the actual
per diem allowance paid to its drivers. See id. at 432.
In Beech Trucking Co., petitioners argued unsuccessfully
5
The petitioners in Beech Trucking Co. v. Commissioner,
118 T.C. 428 (2002), moved to dismiss their appeal to the Court
of Appeals for the Eight Circuit. On Oct. 23, 2002, the Court of
Appeals granted the motion to dismiss.
6
Ed Harvey owned 26.000 percent of Beech Trucking. Ralph
Bradbury owned 16.667 percent of Beech Trucking. Diane Miller
owned .667 percent of Beech Trucking. James Willbanks owned .667
percent of Beech Trucking. Warren Garrison owned .667 percent of
Beech Trucking. Arthur Beech, the only shareholder who is not a
shareholder of Continental Express, Inc., owned 55.333 percent of
Beech Trucking. See id. at 430.
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that Rev. Proc. 94-77, 1994-2 C.B. 825, and Rev. Proc. 96-28,
1996-1 C.B. 686, were invalid “insofar as they operate to
characterize the Beech Trucking per diem payments as being solely
for meals and incidental expenses (and not for lodging) and to
apply the section 274(n) limitation to nonmeal expenses that were
covered by the per diem”. Beech Trucking Co. v. Commissioner,
supra at 438.
The analysis and reasoning in Beech Trucking Co. apply to
this case. The doctrine of stare decisis is important to this
and other Federal courts. Hesselink v. Commissioner, 97 T.C. 94,
99-100 (1991). Stare decisis is the preferred course because it
promotes the evenhanded, predictable, and consistent development
of legal principles, fosters reliance on judicial decisions, and
contributes to the actual and perceived integrity of the judicial
process. Id. at 99.
The key difference between Beech Trucking Co. and this case
is that here, petitioners presented evidence at trial as to the
estimated, nonmeal travel expenses incurred by Continental’s
drivers. In Beech Trucking Co., the taxpayer “offered no
independent substantiation of the amounts of lodging or
incidental expenses that the Beech Trucking drivers might have
incurred, or otherwise established any reasonable basis for
allocating the per diem payments to meals, incidentals, and
lodging expenses incurred by the drivers.” Beech Trucking Co. v.
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Commissioner, supra at 450. Here, Continental’s drivers
testified as to the average amount of the per diem allowance that
they spent on items such as lodging, truck parking, showers,
laundry, and Federal Express charges. Despite the presentation
of this evidence, we hold that petitioners have failed to
establish a basis for deducting 80 percent of the per diem
allowance paid to Continental’s drivers.
Petitioners in this case have raised arguments regarding the
validity of the revenue procedures which we must consider.
Furthermore, unlike in Beech Trucking Co., petitioners in this
case, as noted above, attempted to substantiate the drivers’
travel expenses. We must consider whether this evidence meets
the requirements of section 274(d). Additionally, petitioners
here argue that they are entitled to a 100-percent deduction for
the portion of the per diem allowance that they estimate is
allocable to nonmeal expenses.
I. Whether Petitioners May Deduct 80 Percent of the Per Diem
Allowance Paid to Continental’s Drivers
A. Statutory Framework
Section 162 allows a deduction for all ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on a trade or business. Section 162 enumerates certain
types of deductible expenses, including “a reasonable allowance
for salaries or other compensation for personal services actually
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rendered”, sec. 162(a)(1), and “traveling expenses (including
amounts expended for meals and lodging * * *) while away from
home in the pursuit of a trade or business”, sec. 162(a)(2).
Section 274(d) generally disallows any deduction under
section 162 for, among other things, “any traveling expense
(including meals and lodging while away from home)”, unless the
taxpayer complies with stringent substantiation requirements as
to the amount, time and place, and business purpose of the
expense. Sec. 274(d)(1). Section 274(d) authorizes the
Secretary to provide by regulations that some or all of these
substantiation requirements “shall not apply in the case of an
expense which does not exceed an amount prescribed pursuant to
such regulations.”
Under section 274(n), the amount allowable as a deduction
for “any expense for food or beverages” is generally limited to
50 percent of the amount of the expense that would otherwise be
allowable. Sec. 274(n)(1)(A).
B. The Revenue Procedures
Under the applicable section 274(d) regulations, the
Commissioner is authorized to prescribe rules in pronouncements
of general applicability under which certain types of expense
allowances, including per diem allowances for ordinary and
necessary expenses of traveling away from home, will be regarded
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as satisfying the substantiation requirements of section 274(d).
Sec. 1.274(d)-1, Income Tax Regs.; see also sec. 1.274-5T(j),
Temporary Income Tax Regs., 50 Fed. Reg. 46032 (Nov. 6, 1985).
For purposes of these regulations, Rev. Proc. 94-77, 1994-2 C.B.
825, Rev. Proc. 96-28, 1996-1 C.B. 686, and Rev. Proc. 96-64,
1996-2 C.B. 427 (hereinafter referred to collectively as the
revenue procedures), authorize various nonmandatory methods that
taxpayers may elect to use, in lieu of substantiating actual
expenses, for deemed substantiation of employee lodging, meal,
and incidental expenses incurred while traveling away from home.7
Beech Trucking Co. v. Commissioner, supra at 434. Under one of
the methods authorized by the revenue procedures, an employee’s
expenses for lodging, meal, and incidental expenses while
traveling away from home will be deemed substantiated when “a
payor (the employer, its agent, or a third party) provides a per
7
Rev. Proc. 94-77, 1994-2 C.B. 825, is effective for per
diem allowances paid on or after Jan. 1, 1995. Rev. Proc. 96-28,
1996-1 C.B. 686, superseded Rev. Proc. 94-77, supra, for per diem
allowances paid on or after Apr. 1, 1996. Rev. Proc. 96-64,
1996-2 C.B. 427, superseded Rev. Proc. 96-28, supra, for per diem
allowances paid on or after Jan. 1, 1997. Rev. Proc. 96-64,
supra, restates the relevant sections of Rev. Proc. 94-77, supra,
and Rev. Proc. 96-28, supra, almost in its entirety. Subsequent
citations to provisions of Rev. Proc. 96-64, supra, will also
refer to provisions of superseded Rev. Proc. 94-77, supra, and
Rev. Proc. 96-28, supra. We note that there are some minor
differences between Rev. Proc. 96-28, supra, and Rev. Proc. 96-
64, supra; however, these differences do not affect the outcome
of this case.
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diem allowance under a reimbursement or other expense allowance
arrangement to pay for such expenses.” Rev. Proc. 96-64, sec. 1,
1996-2 C.B. at 427. Section 3.01 of Rev. Proc. 96-64, 1996-2
C.B. at 428 defines a “per diem allowance” as:
a payment under a reimbursement or other expense
allowance arrangement that meets the requirements
specified in § 1.62-2(c)(1) and that is:
(1) paid with respect to ordinary and necessary
business expenses incurred, or which the payor
reasonably anticipates will be incurred, by an employee
for lodging, meal, and incidental expenses or for meal
and incidental expenses for travel away from home in
connection with the performance of services as an
employee of the employer,
(2) reasonably calculated not to exceed the amount of
the expenses or the anticipated expenses, and
(3) paid at or below the applicable Federal per diem
rate, a flat rate or stated schedule, or in accordance
with any other Service-specified rate or schedule.
Under the revenue procedures, if a per diem allowance
includes reimbursement for lodging, in addition to meal and
incidental expenses (M&IE), the amount of expenses deemed
substantiated each day is the lesser of the per diem allowance
for the day or the Federal per diem rate for the locality of
travel for the day. Rev. Proc. 96-64, sec. 4.01, 1996-2 C.B. at
428. If the per diem allowance includes reimbursement only for
M&IE (and not for lodging), the amount of expenses deemed
substantiated each day is the lesser of the per diem allowance
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for the day or the Federal M&IE rate. Rev. Proc. 96-64, sec.
4.02, 1996-2 C.B. at 428-429. Under special rules for the
transportation industry (including the trucking industry), a
taxpayer is permitted to treat $36 as the Federal M&IE rate for
all localities of travel in the continental United States.8 Rev.
Proc. 96-64, sec. 4.04(2), 1996-2 C.B. at 429.
A per diem allowance is treated as paid only for M&IE if:
(1) the payor pays the employee for actual expenses for
lodging based on receipts submitted to the payor, (2)
the payor provides the lodging in kind, (3) the payor
pays the actual expenses for lodging directly to the
provider of the lodging, (4) the payor does not have a
reasonable belief that lodging expenses were or will be
incurred by the employee, or (5) the allowance is
computed on a basis similar to that used in computing
the employee’s wages or other compensation (e.g., the
number of hours worked, miles traveled, or pieces
produced). [Rev. Proc. 96-64, sec. 4.02, 1996-2 C.B.
at 428-429; emphasis added.]
After applying the test in section 4.02 of the revenue
procedures to determine whether a per diem allowance is paid only
for M&IE or for lodging and M&IE, the revenue procedures contain
special rules for applying the section 274(n) 50-percent
limitation to per diem allowances. Section 6.05 of the revenue
procedures provides:
Application of the 50-percent limitation on meals and
expenses. When a per diem allowance is paid only for
meals and incidental expenses * * * an amount equal to
the lesser of the per diem allowance for each calendar
day * * * or the Federal M&IE rate for the locality of
8
Under Rev. Proc. 94-77, sec. 4.04(2), 1994-2 C.B. 825, a
taxpayer was permitted to treat $32 as the Federal M&IE rate for
all localities of travel in the continental United States.
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travel for such day * * * is treated as an expense for
food and beverages. When a per diem allowance is paid
for lodging, meal, and incidental expenses, the payor
must treat an amount equal to the Federal M&IE rate for
the locality of travel for each calendar day
* * * the employee is away from home as an expense for
food and beverages. For purposes of the preceding
sentence, when a per diem allowance for lodging, meal,
and incidental expenses for a full day of travel is
paid at a rate that is less than the Federal per diem
rate for the locality of travel, the payor may treat an
amount equal to 40 percent of such per diem allowance
for a full day of travel as the Federal M&IE rate for
the locality of travel.
C. Application of the Revenue Procedures
Petitioners claimed deductions for the per diem payments on
the basis of the fourth sentence of section 6.05 of the revenue
procedures; i.e., they treated 40 percent of the per diem
payments as expenses for food and beverages and thus subject to
the section 274(n) 50-percent limitation, and deducted the
remaining 60 percent in full (resulting in a claimed deduction of
80 percent of the total per diem payments).
Respondent contends that, after applying the test set forth
in section 4.02 of the revenue procedures, petitioners are not
entitled to the claimed treatment because under the revenue
procedures the per diem payments are treated as being made only
for M&IE and not for lodging. Accordingly, respondent contends,
under section 6.05 of the revenue procedures, the per diem
payments are treated as being solely for food and beverages and
thus fully subject to the 50-percent limitation of section
274(n). We agree.
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It is undisputed that the per diem allowances are computed
on the same basis as the drivers’ wages; i.e., on the basis of
miles driven. Hence, section 4.02 of the revenue procedures
treats the per diem allowances as being paid only for M&IE.9
Beech Trucking Co. v. Commissioner, supra at 437. Under section
4.02 of the revenue procedures, the expenses covered by the per
diem allowance are deemed substantiated in an amount equal to the
lesser of the per diem allowance for the day or the Federal M&IE
rate. See Rev. Proc. 96-64, sec. 4.02, 1996-2 C.B. at 428-429.
Under section 6.05 of the revenue procedures, because the
per diem allowances are deemed paid only for M&IE, an amount
equal to the lesser of the per diem allowance or the Federal M&IE
rate is treated as an expense for food and beverages and thus
subject to the limitations of section 274(n). Beech Trucking Co.
v. Commissioner, supra at 437. For 1995, the average daily per
diem allowance paid by Continental was between $28.85 and $30.72,
which is less than the Federal M&IE rate of $32. See Rev. Proc.
94-77, sec. 4.04(2), 1994-2 C.B. at 827. For 1996, the average
daily per diem allowance was between $29.73 and $32.19, and the
Federal M&IE rate was $32. See id., see also Rev. Proc. 96-28,
9
The test in sec. 4.02 of the revenue procedures is
disjunctive. Failure to meet any one of the five enumerated
requirements causes the per diem allowances to be considered as
paid only for M&IE. Beech Trucking Co. v. Commissioner, supra at
437 n.12. It is undisputed that the requirement described in the
text above has been met. We need not decide whether any of the
additional requirements have been met. Id.
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1996-1 C.B. 688. For 1997, the average daily per diem allowance
was $32.45, which is less than the Federal M&IE rate of $36. See
Rev. Proc. 96-64, 1996-2 C.B. at 429. Accordingly, under section
6.05 of the revenue procedures, the full amount of the per diem
payments is treated as being for food and beverages and thus
subject to the 50-percent limitation of section 274(n).10 Id.
D. Petitioners’ Contentions
As in Beech Trucking Co., petitioners argue that the revenue
procedures are invalid insofar as they operate (in section 4.02)
to characterize the per diem payments as being solely for M&IE
and (in section 6.05) to apply the section 274(n) limitations to
the full amount of the per diem payments. Petitioners do not
argue that the revenue procedures are otherwise invalid; to the
contrary, petitioners rely on section 4.01 of the revenue
procedures for deemed substantiation of the drivers’ travel
expenses and on that part of section 6.05 of the revenue
procedures that would permit Continental (absent the provision in
section 4.02 which deems the per diem payments to be solely for
M&IE) to treat 60 percent of the per diem payments as being
reimbursements of the drivers’ lodging expenses. In effect,
10
To the extent that, for 1996, $32.19 was the per diem
allowance, only $32 is treated as being for food and beverage and
thus subject to the sec. 274(n) limitation. Petitioners must
concede this because they have not otherwise substantiated the
amount that is greater than that which is deemed substantiated in
the revenue procedures.
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petitioners seek to rely selectively on certain aspects of the
revenue procedures that work to Continental’s benefit while
seeking to avoid the associated conditions that the revenue
procedures impose.
For the reasons stated in Beech Trucking Co. v.
Commissioner, supra at 443-447, we find that section 4.02(5) of
the revenue procedures is valid. We reemphasize the point stated
in Beech Trucking Co. that the revenue procedures are elective
provisions that provide deemed substantiation in lieu of actual
substantiation of the drivers’ precise travel expenses. The
first paragraph of the revenue procedures states: “Use of a
method described in this revenue procedure is not mandatory and a
taxpayer may use actual allowable expenses if the taxpayer
maintains adequate records or other sufficient evidence for
proper substantiation.” Rev. Proc. 96-64, sec. 1, 1996-2 C.B. at
427.
In Beech Trucking Co. v. Commissioner, supra at 449-450, we
stated:
As pronouncements of general applicability, the
Revenue Procedures cannot be expected to mirror
perfectly the manifold circumstances of all taxpayers
and their traveling employees or of any particular
taxpayer’s traveling employees. As elective procedures
meant to mitigate what might otherwise be onerous
substantiation burdens for payors of per diem
allowances, the Revenue Procedures accomplish, we
believe, at least rough justice. Giving due regard to
the highly detailed nature of the statutory and
regulatory scheme involved here, to the specialized
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experience and information presumably available to the
Commissioner, and to the value of uniformity in
administering the national tax laws, we are unpersuaded
that the complained-of conditions imposed by section
4.02 or section 6.05 of the Revenue Procedures, as
applied in the instant case, are arbitrary or unlawful.
See United States v. Mead Corp., 533 U.S. 218, 234-235
(2000).
In this case, petitioners raised two new arguments
concerning the validity of section 4.02(5) of the revenue
procedures. First, petitioners argue that section 4.02(5)
conflicts with the 50-percent limitation of section 274(n)(1).
Petitioners argue that because the revenue procedures turns “on
the method of payment of the per diem allowance, it imposes the
limitation on deductibility for ‘food or beverage’ expenses upon
the entirety of the per diem allowance, without regard to the
nature of the expenses actually incurred by the employees.”
Respondent argues that there is no conflict between section
4.02(5) of the revenue procedures and section 274(n)(1).
Respondent correctly notes that section 4.02(5) is one of the
tests that determine whether the per diem is paid solely for
meals and incidental expenses. Only after meeting that test is
the section 274(n)(1) 50-percent limitation applied.
We agree with respondent that the per diem is paid “without
regard to the nature or amount of the expense actually incurred
by the employee.” Indeed, the drivers testified that they were
free to spend their per diem in any manner they chose. The
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testimony established that the vast majority of the per diem was
spent on meals and incidental travel expenses such as laundry and
showers. Most of the drivers’ rest periods were taken in the
sleeping berth and not at motels. There is no evidentiary
support for petitioners’ position that 60 percent of the per diem
was spent on lodging.
Second, petitioners argue that, as section 4.02(5) of Rev.
Proc. 94-77 was issued on December 27, 1994, Continental did not
have a sufficient opportunity to alter its accounting systems to
provide for an alternative per diem allowance paid on a basis
other than per mile. Continental had recently purchased new
computer equipment, and it claimed it would have lost drivers to
competing trucking companies if it had altered the per diem
method of payment. We have found that Continental made a
business decision to pay its drivers a per diem for their travel
expenses in lieu of reimbursement for actual expenses incurred.
This method correlated with its payment of wages. This method
required less recordkeeping. Under this method, Continental did
not need to maintain actual receipts for each expense incurred by
its drivers. Congress provided that the Secretary may by
regulation provide rules for meeting the stringent substantiation
requirements of section 274(d). Section 4.02(5) of Rev. Proc.
94-77 is one of those rules.
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II. Whether Petitioners Have Substantiated the Drivers’
Travel Expenses Pursuant to Section 274(d)
In any event, even if we were to agree with petitioners that
the complained-of conditions imposed by the revenue procedures
are invalid (which we do not), we would not reach a different
result in this case. In Beech Trucking Co., we noted that
“petitioner has not independently substantiated, and thus is
entitled to no deduction for, any of the subject expenses in
excess of those deemed to be substantiated under the revenue
procedures.” Beech Trucking Co. v. Commissioner, supra at 437.
We further stated: “Petitioner has not attempted * * * to
substantiate the drivers’ travel expenses in any manner that
would provide an evidentiary basis for allocating the per diem
payments between meal expenses and other reimbursed travel
expenses.” Id. at 451-452. In this case, petitioners’ second
bite at the apple, petitioners presented the testimony of some of
Continental’s drivers as to their estimated travel expenses.
Deductions are a matter of legislative grace, and
petitioners bear the burden of proving that they are entitled to
the deductions claimed. Rule 142(a); New Colonial Ice Co. v.
Helvering, 292 U.S. 435, 440 (1934).11
11
The examination in this case began Sept. 24, 1997;
therefore, sec. 7491 is inapplicable. Higbee v. Commissioner,
116 T.C. 438, 440 (2001) (sec. 7491 applies to examinations
(continued...)
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Ordinarily, a taxpayer is permitted to deduct the ordinary
and necessary expenses that he pays or incurs during the taxable
year in carrying on a trade or business. Sec. 162(a). A
taxpayer, however, is required to maintain records sufficient to
establish the amounts of his deductions. Sec. 6001; sec. 1.6001-
1(a), Income Tax Regs.
When a taxpayer establishes that he paid or incurred a
deductible expense but does not establish the amount of the
deduction, we may estimate the amount allowable in certain
circumstances. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d
Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).
There must be sufficient evidence in the record, however, to
permit us to conclude that a deductible expense was paid or
incurred in at least the amount allowed. Williams v. United
States, 245 F.2d 559, 560 (5th Cir. 1957).
In addition to satisfying the criteria for deductibility
under section 162, certain categories of expenses must also
satisfy the strict substantiation requirements of section 274(d)
in order for a deduction to be allowed. We may not use the Cohan
doctrine to estimate expenses covered by section 274(d). See
Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per
11
(...continued)
commenced after July 22, 1998).
- 26 -
curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary
Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).
To substantiate a deduction pursuant to section 274(d), a
taxpayer must maintain adequate records or present corroborative
evidence to show the following: (1) The amount of the expense;
(2) the time and place of use of the listed property; and (3) the
business purpose of the use. Sec. 274(d); sec. 1.274-5T(b)(6),
Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).
When a taxpayer’s records have been destroyed or lost due to
circumstances beyond his control, he is generally allowed to
substantiate his deductions through secondary evidence.
Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); sec.
1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022
(Nov. 6, 1985). A taxpayer in this type of situation may
reconstruct his expenses through other credible evidence. Watson
v. Commissioner, T.C. Memo. 1988-29; sec. 1.274-5T(c)(5),
Temporary Income Tax Regs., supra. If no other documentation is
available, we may, although we are not required to do so, accept
credible testimony of a taxpayer to substantiate a deduction.
Watson v. Commissioner, supra. Having observed the witnesses’
appearance and demeanor at trial, we find them to be honest,
forthright, and credible.
The drivers who testified at trial provided reasonable
estimates of their monthly travel expenses. Beverly James
estimated monthly expenses as follows: $52.50 for motels, $12
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for showers, $30 for truck parking, $30 for laundry, and $32 for
Federal Express charges. These expenses averaged $5.60 per day,
using a 28-day month. David Butler estimated monthly expenses as
follows: $117 for motels, $50 for showers, $20 for truck
parking, $22 for laundry, and $32 for Federal Express charges.
These expenses averaged $8.60 per day, using a 28-day month.
William Lane estimated monthly expenses as follows: $65 for
motels, $60 for showers, $55 for truck parking, $30 for laundry,
and $32 for Federal Express charges. These expenses averaged
$8.64 per day, using a 28-day month. Mr. Lane estimated his
expenses for meals at approximately $24-25 per day.
Despite the credible testimony of the witnesses, we find
that petitioners did not substantiate the travel expense
deductions of their approximately 300 drivers pursuant to strict
standards of section 274(d) and the regulations. Petitioners did
not establish the amount, time, or place of each separate
expenditure for each of the drivers. Sec. 1.274-5T(b)(2)(i),
Temporary Income Tax Regs. Petitioners did not establish the
dates of departure and return for each trip away from home by
each driver, or the exact number of days away from home. Sec.
1.274-5T(b)(2)(ii), Temporary Income Tax Regs. Petitioners did
not establish the exact destination or locality of travel, as
described by name of city or town or other similar designation.
Sec. 1.274-5T(b)(2)(iii), Temporary Income Tax Regs.
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What petitioners did is provide good, reasonable estimates
and averages of the expenses that Continental’s drivers incurred
on the road. While we understand why petitioners made a business
decision not to require receipts and records of the drivers’
expenses, the regulations under section 274(d) make it clear that
estimates and averages are not sufficient to establish travel
expenses pursuant to section 274(d). See Sanford v.
Commissioner, 50 T.C. at 827 (the Cohan doctrine does not apply
to expenses covered by section 274(d)).
Furthermore, we note that were we to find that some of the
expenses were ordinary business expenses under section 162,
petitioners have failed to substantiate meals and other
incidental expenses pursuant to section 274(d). Therefore,
petitioners fare better with the deemed substantiation of the
revenue procedures than by actual substantiation under sections
162 and 274(d).
III. Whether Petitioners May Deduct More Than 50 Percent of the
Nonmeal Travel Expenses Incurred By Drivers
Petitioners argue that “if the Fifth Part of Section 4.02 of
Revenue Procedure 94-77 is valid, petitioners are entitled to a
downward adjustment in the audit adjustment to Continental’s net
income for payment of substantial, fully deductible nonmeal
travel expenses.” Essentially, petitioners seek to deduct an
amount of the per diem allowance that is more than 50 percent,
- 29 -
but less than 80 percent, by obtaining a full deduction for the
average expenses related to truck parking, showers, motels,
laundry and Federal Express, in addition to a 50-percent
deduction for the portion of the per diem allocated to meals.
Using the testimony of the drivers, petitioners estimate the
average daily nonmeal expenses at $7.61 per day per driver, for
an additional deduction of $367,836 for 1995, $353,317 for 1996,
and $354,527 for 1997.
In support of this argument, petitioners rely on a sentence
in Beech Trucking Co. v. Commissioner, supra at 450, which
petitioners interpret as an “outline of proof” for success in
future cases:
Having relied exclusively upon the deemed
substantiation methods provided in the Revenue
Procedures, petitioner has offered no independent
substantiation of the amounts of lodging or incidental
expenses that the Beech Trucking drivers might have
incurred, or otherwise established any reasonable basis
for allocating the per diem payments to meals,
incidentals, and lodging expenses incurred by the
drivers.30
__________
30
In particular, the record does not establish
the number of days per trip that the drivers would
normally pay for separate lodging or for incidentals
such as showers, laundry, local transportation, or
overnight parking. As previously noted, it appears
that at least some of the trips for which Beech
Trucking paid per diem allowances involved no overnight
travel.
Petitioners misinterpret our description of the lack of
evidence in Beech Trucking Co. as establishing a legal rule for
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future cases. The rules regarding deductibility of per diem
allowances provide for one of two options: (1) Actual
substantiation pursuant to section 274(d); or (2) deemed
substantiation pursuant to the revenue procedures. Had
petitioners not elected to be under the revenue procedures and
had they instead substantiated the nonmeal expenses in compliance
with section 274(d), petitioners would have been entitled to a
full deduction for those expenses. However, since they elected
to opt into the revenue procedures and not to substantiate these
expenses as required by section 274(d), they are restricted to
the rules under the revenue procedures.
The per diem allowance in this case was deemed to be paid as
a “meals only per diem allowance” under the test set forth in
section 4.02(5) of the revenue procedures. When a per diem
allowance is deemed paid as a “meals only per diem allowance”,
the revenue procedures provide for a 50-percent deduction of the
entire per diem allowance and do not allow for a greater
deduction when a taxpayer provides estimates regarding the
average nonmeal expenses. Indeed, the purpose of the deemed
substantiation under the revenue procedures is to avoid the need
for additional evidence and subjective interpretations and to
provide taxpayers with clear and objective tests, even if such
tests fail to mirror actual expenditures.
We also note that, for the reasons stated in Beech Trucking
Co. v. Commissioner, supra at 450-451, petitioners’ reliance on
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Johnson v. Commissioner, 115 T.C. 210 (2000), in support of their
argument that they may use actual substantiation in addition to
deemed substantiation, is misplaced. We reiterate that Johnson
deals with section 4.03 of the revenue procedures, which is not
at issue in this case.
In reaching all of our holdings herein, we have considered
all arguments made by the parties, and to the extent not
mentioned above, we find them to be irrelevant or without merit.
To reflect respondent’s mathematical error in the statutory
notice of deficiency with respect to the adjustments made to
Continental for 1996,
Decisions will be entered
under Rule 155.