concurring: I agree with the result in this case. However, I believe it is appropriate to elaborate on why the per diem allowances for day trips and overnight trips are both deductible as compensation under section 162(a)(1).
United paid its employees per diem allowances 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. United appears to have arrived at this number by estimating the expenses that would be incurred by an employee for one day, $36 ($37.20 for pilots for certain portions of the years in issue), and then dividing this number by 24 hours. The expert report relied upon by petitioner attributes most of the per diem allowance to meal expenses. See infra p. 19. The employees were not required to substantiate their use of the per diem allowances, and neither United nor petitioner has any written substantiation as to the employees’ actual use of the per diem allowances.
1. Day Trips
The per diem allowance for day trips was to cover meal expenses that the employees might incur during day trips.1 Meal expenditures for nonovernight day trips are personal expenses of the employees, rather than business travel expenses. United States v. Correll, 389 U.S. 299 (1967).2 It therefore appears that United intended to pay the allowances to its employees to cover their personal expenses incurred during day trips. In Commissioner v. Kowalski, 434 U.S. 77 (1977), the Supreme Court held that cash meal payments to an employee were includable in the employee’s gross income. The Supreme Court noted “the presumptively compensatory nature of cash payments”. Id. at 94; see Bank of Stockton v. Commissioner, T.C. Memo. 1977-24 (indicating that if payments made to enable employees’ wives to attend conventions were not deductible as either noncompensatory business expenses or dividends, then the only reasonable conclusion would be that the payments were in the nature of additional compensation to the employees and, unless unreasonable in amount, would be deductible as compensation); Anchor Natl. Life Ins. Co. v. Commissioner, 93 T.C. 382, 433 & n.30 (1989) (citing Bank of Stockton v. Commissioner, supra, for the proposition that disallowed business expenses may be deductible as additional compensation to employees if the compensation does not exceed the bounds of reasonableness). In the instant case, the per diem allowances for day trips were for personal expenses of United’s employees and should be treated as compensation to the employees.3
Respondent argues that United did not have the requisite compensatory intent at the time it paid the allowances. However, the relevant statute4 and regulations5 do not require an “intent to compensate” as a prerequisite to deductibility under section 162(a)(1). Although an “intent to compensate” requirement has been applied by the courts in numerous cases, the instant situation is factually distinguishable from the situation in those cases which involved corporate payments to shareholders or employees in positions of control. E.g., Paula Constr. Co. v. Commissioner, 58 T.C. 1055, 1058-1059 (1972), affd. without published opinion 474 F.2d 1345 (5th Cir. 1973). In the context of corporate payments to shareholders, careful scrutiny is required to determine whether the alleged compensation is in fact a disguised dividend. Owensby & Kritikos, Inc. v. Commissioner, 819 F.2d 1315, 1324 (5th Cir. 1987), affg. T.C. Memo. 1985-267; Home Interiors & Gifts, Inc. v. Commissioner, 73 T.C. 1142, 1156 (1980).6 If a corporate payment to a shareholder/employee is characterized as additional compensation, then the corporate taxpayer is allowed a deduction. If the payment is characterized as a dividend, no deduction is allowed. Thus, a corporate taxpayer has an incentive to make purported compensation payments which are in fact disguised dividends. As the majority opinion correctly states, the payor’s intent is simply a pertinent factor to consider, not a prerequisite to deduct-ibility.7
The Court of Federal Claims and the Court of Appeals for the Federal Circuit have considered similar per diem allowances, albeit in the context of the employment tax regime. Am. Airlines, Inc. v. United States, 40 Fed. Cl. 712 (1998), affd. in part, revd. in part, and remanded 204 F.3d 1103 (Fed. Cir. 2000); Am. Airlines, Inc. v. United States, 204 F.3d 1103 (Fed. Cir. 2000). In its opinion, the Court of Federal Claims found that the portion of the per diem allowance attributable to meal expenses was the equivalent of a wage concession in the context of a labor negotiation. Am. Airlines, Inc. v. United States, 40 Fed. Cl. at 721.8 The court noted:
The evidence that American’s per diem rates were driven by competitiveness with other airlines is not helpful to plaintiff, as it is equally consistent with a different motivation than compensating for employees’ actual expected travel expenses, to wit, keeping up with its competitors’ wage and benefit packages. * * * [Id. at 720.]
The day trip allowances were compensation in the form of fringe benefits.9 Section 61(a)(1) provides that gross income includes “Compensation for services, including fees, commissions, fringe benefits, and similar items”. (Emphasis added.) As applicable for the years 1985 through 1988, section 1.61-2T(a)(3), Temporary Income Tax Regs., 50 Fed. Reg. 52286 (Dec. 23, 1985), provides that “A fringe benefit provided in connection with the performance of services shall be considered to have been provided as compensation for services.” (Emphasis added.)
The regulations applicable to the years in issue recognize that employer-provided meals or meal allowances are taxable fringe benefits unless specifically excluded from income under section 132.10 Section 1.132-6T, Temporary Income Tax Regs., 50 Fed. Reg. 52308 (Dec. 23, 1985), recognizes that meals or meal allowances to employees (for meals not otherwise deductible under section 162(a)(2)) are generally considered to be taxable income unless specifically excluded as a de minimis fringe benefit.11 The temporary regulations provide:
Thus, except as otherwise provided in this section, the provision of any cash fringe benefit (or any fringe benefit provided to an employee through the use of a charge or credit card) is not excludable as a de minimis fringe. For example, the provision of cash to an employee for personal entertainment is not excludable as a de minimis fringe. [Sec. 1.132-6T(c), Temporary Income Tax Regs., supra.]
The allowance of a deduction for day trip allowances would not undercut the strict substantiation requirements of section 274(d). Section 274 generally disallows certain entertainment, gift, and travel expenses. In the case of allowances paid to cover expenses incurred during travel, section 274 applies only if the amount is otherwise deductible as a “travel” expense. Thus, section 1.274-1, Income Tax Regs., provides that “If a deduction is claimed for an expenditure for entertainment, gifts, or travel, the taxpayer must first establish that it is otherwise allowable as a deduction under chapter 1 of the Code before the provisions of section 274 become applicable.”12 Since any meal expenditures by employees during day trips would not be deductible by the employees as travel expenses, United States v. Correll, 389 U.S. at 299, section 274(d) has no application.13
2. Overnight Trips
The holding that the per diem allowances for overnight trips are deductible as compensation under section 162(a)(1) is consistent with the characterization of the day trip allowances. However, it is necessary to provide additional explanation for why the allowances for overnight trips are not “travel” expenses as to petitioner.
Section 61(a)(1) provides that compensation for services, including fringe benefits, is included in gross income. Section 62(a), which allows an employee a deduction for expenses incurred in his employment in computing adjusted gross income, provides, in pertinent part:
the term “adjusted gross income” means * * * gross income minus the following deductions:
(2) Certain trade and business deductions of employees.—
(A) Reimbursed expenses op employees. — The deductions allowed by part VI (section 161 and following) which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his employer.
However, pursuant to the regulations, if an employee is paid under a reimbursement or expense allowance agreement and makes an “adequate accounting” to the employer, then the employee is not required to report the allowance in income. Sec. 1.274-5(e)(2), Income Tax Regs; sec. 1.274-5T(f)(2), Temporary Income Tax Regs., 60 Fed. Reg. 46028 (Nov. 6, 1985). An employee could meet the adequate accounting requirement if the allowance is fully substantiated by the employee to the employer. Sec. 1.274-5(f)(4), Income Tax Regs.; sec. 1.274-5T(f)(4), Temporary Income Tax Regs., 50 Fed. Reg. 46029 (Nov. 6, 1985). Alternatively, the employee could meet the adequate accounting requirement if the per diem allowance fell under either Rev. Rul. 80-62, 1980-1 C.B. 63, or Rev. Rul. 84-164, 1984-2 C.B. 63, because the allowances would be deemed substantiated up to the amounts set forth in those rulings. Sec. 1.274-5(f), Income Tax Regs.; sec. 1.274-5T(g), Temporary Income Tax Regs., 50 Fed. Reg. 46030 (Nov. 6, 1985). If the total allowance received exceeded the amount of deductible expenses incurred by the employee, then the excess would have to be reported as income on the employee’s tax return. Sec. 1.274-5(f), Income Tax Regs.; sec. 1.274-5T(g), Temporary Income Tax Regs., supra.
For the years in issue, Rev. Rul. 80-62, supra, treated $44 per day as substantiated for purposes of section 274(d) while Rev. Rul. 84-164, supra, treated $14 per day as substantiated for purposes of section 274(d). The determination of which ruling applies depends on what expenses the per diem allowances are intended to cover. A plain reading of Rev. Rul. 84 — 164, supra, indicates that it applies when an allowance arrangement is exclusively for meals. On the other hand, in Murphy v. Commissioner, T.C. Memo. 1993-292, we held that Rev. Rul. 80-62, supra, applied where an allowance arrangement was designed to cover both meals and incidental expenses.
Respondent argues that Murphy v. Commissioner, supra, was incorrectly decided.14 Respondent argues that Rev. Rul. 80-62, supra, applies only where the reimbursement includes an amount for lodging expense, and that Rev. Rul. 84 — 164, supra, applies to situations involving meals and incidental expenses, but not lodging. However, Rev. Rul. 80-62, supra, does not require a lodging expense and by its specific terms, Rev. Rul. 84-164, supra, limits its applicability to allowances for meals only and deems $14 as the amount substantiated.
In analyzing the expenses which the revenue rulings are designed to cover, a logical disconnect surfaces. Under a plain reading of the two rulings, combined with our decision in Murphy v. Commissioner, supra, the difference between the amount that can be deemed substantiated under each ruling, $30, can be attributed solely to incidental expenses. However, Rev. Rul. 80-62, 1980-1 C.B. at 64, also requires that “the employer reasonably limits payment of such travel expenses to those that are ordinary and necessary in the conduct of the trade or business”. Assuming the revenue rulings are consistent in terms of the amount applicable to meals under each ruling, it seems logical that $14 of the allowance petitioner paid would constitute the amount that the rulings accept as reasonable for meal expenses. This being so, petitioner would bear the burden of proving that the additional amount of the allowance for overnight trips ($23.20 for pilots, $22 for other employees)15 was reasonable as required by Rev. Rui. 80-62, supra. Am. Airlines, Inc. v. United States, 204 F.3d at 1111.
The evidence in the record indicates that the per diem allowances for overnight trips (excluding meals) were for tips for waiters, baggage handlers and drivers, transportation between hotels and restaurants, telephone calls, personal laundry, newspapers, and shoeshines.16 Petitioner relied on an expert report which it claims shows that the amount of the allowances was a reasonably accurate estimate of actual travel costs incurred by the employees. Petitioner presented evidence that, of the maximum $36 allowance ($37.20 for pilots for certain portions of the years in issue) for overnight trips, between $4 and $7 was for incidental expenses. Thus, the reasonableness of the amount of the per diem allowance for overnight trips was based mostly on amounts attributable to the costs of meals. The problem in the instant case is that Rev. Rui. 84-164, supra, deems $14 substantiated for purposes of meals, while a much greater amount of the per diem allowance in the instant case was based on meals and only a small fraction of the overall allowance was attributable to incidental expenses.
On the basis of these facts, how could United’s payment of $36, or $37.20, be reasonable when Rev. Rui. 84 — 164, supra, treats meals as substantiated only to the extent of $14 and petitioner’s own expert report attributed, at most, between $4 and $7 to incidental expenses? Allowing petitioner to deduct the full allowance under the authority of Rev. Rul. 80-62, supra, in these circumstances conflicts with the overall function of the deemed substantiation methods. In Am. Airlines, Inc. v. United States, 204 F.3d at 1111, the Court of Appeals for the Federal Circuit commented on this conflict: anee of $36 per day fall in the middle range of the $14 meals-only safe harbor of Rev. Rul. 84r-164 and the $44 full per diem safe harbor of Rev. Rul. 80-62 1980-1 C.B. 63, and, therefore, American’s $36 per diem allowance should be deemed substantiated for § 274 purposes. We agree with the Government that American’s reasoning is flawed because it ignores the fact that the deemed substantiated limit under Rev. Rul. 80-62 includes lodging, which accounts for a greater portion of an employee’s daily expenses. Further, under American’s logic, $22 of this amount would include incidental expenses, and the burden is upon American to prove that such an amount would meet the “ordinary and necessary” requirement of I.R.C. § 162.
American argues that even if it cannot meet the substantiation requirements of § 274(d), American’s covered meals and incidental expenses allow-
The facts at hand present a challenging question because petitioner does not fit within either of the revenue rulings. Respondent recognizes the potential discontinuity of coverage between the two rulings and suggests that the resolution should be that there is no revenue ruling explicitly in force which covers the instant case. In my opinion, the inapplicability of Rev. Rul. 84-164, 1984-2 C.B. 63, as recognized in Murphy v. Commissioner, supra, combined with petitioner’s failure to prove entitlement to the deemed substantiation amount in Rev. Rul. 80-62, 1980-1 C.B. 63, precludes the applicability of either ruling. It follows that the allowances are not deductible by petitioner as “travel” expenses.
The issue thus becomes whether petitioner is entitled to deduct the per diem allowances as compensation. In this regard, respondent’s sole argument is that petitioner is not entitled to a deduction under section 162(a)(1) because United did not intend to compensate its employees for personal services rendered when it paid the employees per diem allowances. However, as noted earlier, intent is a pertinent factor to consider, not a prerequisite to deductibility under section 162(a)(1). As explained previously, if the amounts paid to the employees cannot be treated as travel expenses by petitioner, they should be treated as compensation to the employees. In addition, the trial judge has found that United paid the per diem allowances to the employees intending to compensate them for their personal services.17
Finally, respondent urges this Court to exercise its discretion to hold petitioner to a “duty of consistency” and not allow it to recharacterize the allowances as compensation. In LeFever v. Commissioner, 103 T.C. 525, 541 (1994), affd. 100 F.3d 778 (10th Cir. 1996), this Court addressed the equitable doctrine of the duty of consistency:
The “duty of consistency” is based on the theory that the taxpayer owes the Commissioner the duty to be consistent with his tax treatment of items and will not be permitted to benefit from his own prior error or omission. The duty of consistency doctrine prevents a taxpayer from taking one position one year and a contrary position in a later year after the limitations period has run on the first year. [Citations omitted.18]
In the instant case, the periods of limitation with respect to petitioner’s income tax liability for 1986 and 198719 and employment tax liability for 1985, 1986, and 1987, are still open. Respondent’s concern is that, since the tax years for the individual employees are probably closed, the tax due on the employees’ income will not be paid. However, a remedy for that situation is to seek withholding tax from petitioner for the years in issue, a remedy which respondent is currently seeking in the Court of Federal Claims. United Air Lines, Inc. v. United States, No. 97-173T (Fed. Cl., filed Mar. 18, 1997). Petitioner is simply correcting its tax return to account for its initial erroneous treatment of the per diem allowances as “travel” expenses.20
3. Conclusion
The per diem allowances are not deductible by petitioner as travel expenses. However, these allowances were required under the terms of the employment contract that petitioner negotiated with the union. Petitioner had to pay the allowances in order to receive the services of its employees. The amount of the per diem allowance paid to each individual employee was determined based on the number of hours he or she worked while on duty or on flight assignment and was directly tied to the quantity of services rendered. The per diem payments were paid for services actually rendered by the employees and are deductible under section 162(a)(1).21
Wells, Chabot, Gerber, Gale, and Marvel, JJ., agree with this concurring opinion.In his dissenting opinion, see infra p. 29 note 3, Judge Swift states that the day trip per diem allowances included amounts for incidental travel expenses. The facts provide no basis upon which to apportion any amount of the day trip per diem allowances to incidental travel expenses, and it is very unlikely that the type of incidental expenses that were contemplated in structuring the per diem allowances was incurred on day trips. See infra p. 19.
Based on United States v. Correll, 389 U.S. 299 (1967), petitioner has conceded that the day trip allowances were not for travel expenses because its employees’ day trip expenses were not incurred during overnight travel. Both parties now agree that the only issue regarding day trip allowances is whether they constitute compensation to United’s employees.
Although not in effect for the years in issue, sec. 1.62 — 2(j), Example (2), Income Tax Begs., confirms this as the proper treatment. In his dissenting opinion, see infra p. 29 note 3, Judge Swift erroneously cites sec. 262 and United States v. Correll, supra, to support his belief that United’s allowance for its employees’ day trip meal expenses is nondeductible because such payments were for personal living expenses of United’s employees. However, sec. 262 only disallows the personal expenses of the “taxpayer”. Sec. 1.262-1, Income Tax Begs. Here, UAL is the “taxpayer”. The day trip meal expenses were “personal expenses” of its employees, not personal expenses of United. The “taxpayer” in United States v. Correll, supra, was not a corporation or an employer but was an individual taxpayer who was attempting to deduct his own personal expenditures for meals during nonovernight travel. The Supreme Court was not faced with, nor did it discuss, the issue of whether an employer’s payment of its employees’ personal expenses could be deducted by the employer. On the other hand, in Ginsburg v. Commissioner, T.C. Memo. 1994-272, Judge Swift himself recognized that payment of an individual’s personal expenses by a corporation can be deducted by the corporation if the payment is in the nature of compensation. See Fred W. Amend Co. v. Commissioner, 55 T.C. 320, 327-328 (1970), affd. 454 F.2d 399 (7th Cir. 1971).
Sec. 162(a)(1) 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.
In Elliotts, Inc. v. Commissioner, 716 F.2d 1241 (9th Cir. 1983), revg. and remanding T.C. Memo. 1980-282, the Court of Appeals for the Ninth Circuit discussed the problem of determining whether purported compensation payments are in fact disguised dividends. The Court of Appeals noted that the test for deductibility under sec. 162(a)(1) is a two-prong test requiring (1) that amount of compensation must be reasonable, and (2) the payments must in fact be purely for services. Id. at 1243. The Court of Appeals then made the following observation:
The existence of a compensatory purpose can often be inferred if the amount of the compensation is determined to be reasonable under the first prong. For these reasons, courts generally concentrate on the first prong — whether the amount of the purported compensation is reasonable. Courts have generally not delved into whether a compensatory purpose exists under the second prong except in those rare cases where the Commissioner has come forward with evidence that purported compensation payments, although reasonable in amount, were in fact disguised dividends. By and large, the inquiry under section 162(a)(1) has turned on whether the amounts of the purported compensation payments were reasonable.
In the rare case where there is evidence that an otherwise reasonable compensation payment contains a disguised dividend, the inquiry may expand into compensatory intent apart from reasonableness. !: * *
[Id. at 1243-1244; citations and fn. refs, omitted.]
In Kowalski v. Commissioner, 65 T.C. 44 (1975), revd. 544 F.2d 686 (3d Cir. 1976), revd. 434 U.S. 77 (1977), a Court-reviewed opinion, this Court stated:
Even though we have found that the meal allowance was not intended as additional compensation, it was obviously compensatory to a trooper to the extent it paid for food which he otherwise would have had to pay for from some other source. * * * [Id. at 52.]
“It would be naive to ignore that the ‘meal expense’ concession was tantamount to wage concessions in the context of a labor negotiation.” Am. Airlines, Inc. v. United States, 40 Fed. Cl. 712, 721 (1998), aifd. in part, revd. in part and remanded 204 F.3d 1103 (Fed. Cir. 2000).
The Court of Federal Claims and the Court of Appeals for the Federal Circuit considered similar per diem allowances within the framework of fringe benefits. Am. Airlines, Inc. v. United States, 40 Fed. Cl. at 722, 204 F.3d at 1110.
For the years in issue, sec. 132 excluded the following fringe benefits from gross income: (1) No-additional-cost service; (2) qualified employee discount; (3) working condition fringe; and (4) de minimis fringe.
Logic dictates that in order for meal money to be excluded from gross income as a “de mini-mis fringe benefit”, meal money provided to employees must be a “fringe benefit”.
See sec. 1.274-5(e), Income Tax Regs, (the term “business expenses” includes ordinary and necessary expenses for travel but does not include personal expenses, and advances, reimbursements, or allowances for personal expenses must be reported as income by the employee); sec. 1.274-5T(f)(l), Temporary Income Tax Regs., 50 Fed. Reg. 46027-46028 (Nov. 6, 1985) (same).
Note also that the regulations under sec. 274 regarding substantiation refer only to travel away from home. Sec. 1.274-5(a)(1) and (b)(2), Income Tax Regs.; sec. 1.274r-5T(a)(1) and (b)(2), Temporary Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985). Thus, this Court declined to apply sec. 274(d) to a taxpayer’s business use of his automobile which was purely local. Cobb v. Commissioner, 77 T.C. 1096, 1101 (1981), affd. without published opinion 680 F.2d 1388 (5th Cir. 1982); Gestrich v. Commissioner, 74 T.C. 525, 530-531 (1980), affd. without published opinion 681 F.2d 805 (3d Cir. 1982). Sec. 274(d) was subsequently amended for taxable years after Dec. 31, 1985, to provide that no deduction shall be allowed for listed property, which includes any passenger automobile, unless strict substantiation requirements are met.
The parties agree that the issue of the appropriate ruling to apply is limited to per diem allowances paid before Jan. 1, 1989. Rev. Proc. 89-67, 1989-2 C.B. 795 (construing Rev. Rul. 84 — 164, 1984-2 C.B. 63, to cover meals and incidental expenses).
Petitioner paid a per diem allowance of $1.50 per hour ($1.55 per hour for pilots for certain portions of the years in issue) to its employees. The maximum allowance an employee was entitled to for one 24-hour period was $36 ($37.20 for pilots for certain portions of the years in issue). Subtracting $14 from this maximum allowance for l.day to account for meal expenses leaves $22 ($23.20 for pilots for certain portions of the years in issue) which would not be attributable to meals.
Petitioner either directly paid, provided, or reimbursed employees for costs of lodging, ground transportation between airports and hotels, parking, and cleaning uniforms.
It should be noted that the relevant statutes and regulations have been clarified since the years in issue with respect to the tax treatment of per diem allowances. Under current law, per diem allowances are paid under either an “accountable” plan or a “nonaccountable” plan, and the tax consequences differ depending on which plan the allowances are paid under. For discussions of accountable and nonaccountable plans, see Trucks, Inc. v. United States, 234 F.3d 1340 (11th Cir. 2000), Brenner v. Commissioner, T.C. Memo. 2001-127, and United States v. Armstrong, 974 F. Supp. 528 (E.D. Va. 1997).
See Hughes & Luce, L.L.P. v. Commissioner, T.C. Memo. 1994-559, affd. on other grounds 70 F.3d 16 (5th Cir. 1995), wherein we outlined the following requirements for application of the duty of consistency:
(1) The taxpayer made a representation or reported an item for Federal income tax purposes in one year, (2) the Commissioner acquiesced in or relied on that representation or report for that year, and (3) the taxpayer attempts to change that representation or report in a subsequent year, after the period of limitations has expired with respect to the year of the representation or report, and the change is detrimental to the Commissioner. * * * [Citations omitted.]
The only issues in dispute in this case are the deductibility of the per diem allowances paid for 1985, 1986, and 1987, and the computational items resulting therefrom. No deficiency was determined for the taxable year 1985 because the period of limitations for that year had expired at the time the notice of deficiency was issued. However, the deductibility of expenses (including per diem allowances) for 1985 directly affects other tax items, such as net operating loss carrybacks and carryovers, for the remaining years in issue.
Indeed, it appears that petitioner’s claim that the allowances are deductible as compensation was predicated on respondent’s determination that the allowances were “wages” for employment tax purposes.
For purposes of this case, respondent has conceded that if the per diem allowances are deductible as compensation, then the percentage limitations of sec. 274(n) will not apply.