Boyd v. Commissioner, 122 T.C. No. 18 | April 27, 2004 | Vasquez, J. | Docket. No. 13229-01
Short Summary:
Continental Express, Inc. (Continental) was engaged in the long-haul, irregular route trucking business, and employed between 277 and 344 drivers during the three years at issue: 1995, 1996, 1997. Continental compensated drivers on a per mile basis, adjusted to account for a driver’s experience; drivers were also paid a per diem allowance on a per mile basis that was intended to reimburse drivers for travel expenses.
Continental’s accounting and payroll system tracked miles driven, not days worked, by its drivers. During the years at issue, drivers were in short supply. In an effort to retain drivers, Continental made a business decision not to alter its compensation system, and to substantiate deductions for its drivers per diem allowance using relevant Revenue Procedures. Drivers were not required to submit any records of expenses incurred during travel – the per diem allowance was paid by Continental in lieu of reimbursing actual expenses for meals and incidental expenses incurred by each of its drivers.
On its Form 1120-S, U.S. Income Tax Return for an S Corporation, under “Other deductions,” Continental deducted expenses related to those incurred by drivers including fuel, tolls, “motels & layover,” per diem allowance, and costs associated with hiring drivers. The total deductions taken during the years at issue amount to 80% of the per diem allowances actually paid to drivers during the same period. In determining the amount of its deduction for each of the years at issue, Continental cited only the specific sections of the relevant Revenue Procedures that supported its application of the 50% deduction limitation of IRC § 274(n) to 40% of the total per diem allowance. Continental deducted the other 60% of the per diem allowance in full, treating it as reimbursements for drivers’ lodging expenses.
The Commissioner of Internal Revenue (Commissioner) disallowed portions of each of the following deductions claimed by Continental as per diem payments to its drivers: $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.
Petitioners Charles A. Boyd and Darby A. Boyd (Petitioners) filed for a redetermination of deficiencies arising from the IRS’s conclusion that Continental was entitled to deduct only 50% of the per diem allowance it paid its drivers, as opposed to the 80% Continental argued it was entitled to deduct.
Key Issues:
Whether the 50% deduction limitation – on an amount that would otherwise qualify as an allowable deduction for meals or business entertainment – of IRC § 274(n) applies to the full amount of per diem allowances paid, only for meals and incidental expenses, by a corporation to its employees, or whether reasonable estimates and averages of expenses incurred by employees are sufficient to substantiate a deduction greater than 50%?
Issue 1: Whether Petitioners may deduct 80% of the per diem allowance paid to Continental’s drivers?
Issue 2: Whether Petitioners substantiated the drivers’ travel expense pursuant to IRC § 274(d)?
Issue 3: Whether Petitioners may deduct more than 50% of the non-meal travel expenses incurred by Continental’s drivers?
Primary Holdings:
The 50% deduction limitation of IRC § 274(n) applied to the full amount of per diem allowances paid, only for meals and incidental expenses, by Continental to its employee truck drivers.
Issue 1: Whether Petitioners may deduct 80% of the per diem allowance paid to Continental’s drivers?
Petitioners were not entitled to deduct 80% of the per diem allowance paid to Continental’s drivers. Per the test provided in § 4.02 of Revenue Procedure 96-64, the per diem payments were treated as being made only for meals and incidental expenses, and not for lodging. As a result, § 6.05 of Revenue Procedure 96-64, which provides the rules for applying the 50% deduction limitation of IRC § 274(n) to per diem allowances, treats the per diem payments as being solely for food and beverages and thus wholly subject to the 50% deduction limitation of IRC § 274(n).
Issue 2: Whether Petitioners have substantiated the drivers’ travel expense pursuant to IRC § 274(d)?
Petitioners did not substantiate the drivers’ travel expenses pursuant to IRC § 274(d). The applicable Treasury Regulations, see Treas. Reg. § 1.274-5T, make clear that estimates and averages are not sufficient to establish travel expenses pursuant to IRC § 274(d).
Issue 3: Whether Petitioners may deduct more than 50% of the non-meal travel expenses incurred by Continental’s drivers?
Petitioners were not entitled to deduct more than 50% of the non-meal travel expenses incurred by Continental’s drivers. Because Petitioners opted into the deemed substantiation provided by the Revenue Procedures, as opposed to actual substantiation pursuant to IRC § 274(d), the maximum deduction allowed is 50%.
Key Points of Law:
Issue 1: Whether Petitioners may deduct 80% of the per diem allowance paid to Continental’s drivers?
- IRC § 162 allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.
- IRC § 274(d) generally disallows a deduction under IRC § 162 for, among other things, “any travelling expense (including meals and lodging while away from home)” unless the taxpayer complied with stringent substantiation requirements including keeping record of the amount, time and place, and business purpose of the expense.
- Under IRC § 274(n), the deductible amount of “any expense for food or beverages” is generally limited to 50% of the amount of the expense that would otherwise be allowed as a deduction.
- A trio of Revenue Procedures (94-77; 96-28; 96-64) provide authorization for various nonmandatory methods that a taxpayer may elect to use, in lieu of substantiating actual expenses pursuant to IRC § 274(d), for deemed substantiation of employee lodging, meal, and incidental expenses incurred while traveling away from home.
- Revenue Procedure 96-64 provides that an employee’s expenses for lodging, meal, and incidental expenses while traveling away from home will be deemed substantiated when “a payor provides a per diem allowance arrangement under a reimbursement or other expense allowance arrangement to pay for such expenses.”
- Section 4.02 of Revenue Procedure 96-64 provides that if the per diem allowance includes reimbursement for meals and incidental expenses only, the amount of expenses deemed substantiated each day is the lesser of the per diem allowance for the day or the Federal meals and incidental expenses rate.
- A per diem allowance is treated as paid only for meal and incidental expenses if: … (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). Revenue Procedure 96-64, § 4.02.
- After it is determined that a per diem expense is paid only for meals and incidental expenses, an amount equal to the lesser of the per diem allowance or the Federal meals and incidental expenses rate is treated as an expense for food and beverages, and thus subject to the 50% deduction limitation of IRC § 274(n). In the present case, the full amount of the per diem allowance is treated as being for food and beverages and thus subject to the 50% deduction limitation of IRC § 274(n).
Issue 2: Whether Petitioners have substantiated the drivers’ travel expense pursuant to IRC § 274(d)?
- Deductions are a matter of legislative grace, and Petitioners bear the burden of proving that they are entitled to the deductions claimed. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934).
- Generally, IRC § 162(a) allows a taxpayer to deduct ordinary and necessary expenses incurred during the taxable year in carrying on a trade or business, however a taxpayer must maintain records sufficient to establish the claimed deductions. IRC § 6001; Treas. Reg. § 1.6001-1(a).
- Under the Cohan Rule, if a taxpayer establishes that he paid or incurred a deductible expense but does not, or cannot, establish the amount of the deduction, the Court may estimate the amount allowable in some instances. Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). For the Court to make an estimation, there must be sufficient evidence in the record 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).
- For certain categories of expenses, the criteria for deductibility provided in IRC § 162(a) must be met, in addition to the heightened substantiation requirements provided in IRC § 274(d). The Cohan Rule cannot be used to estimate expenses included in IRC § 274(d). See Stanford v. Commissioner, 50 T.C. 823, 827 (1968).
- To substantiate a deduction pursuant to IRC § 274(d), a taxpayer must maintain 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.
- When a taxpayer’s records have been destroyed or lost due to circumstances beyond his control, the taxpayer is generally allowed to substantiate his deductions by reconstructing his expenses through other credible evidence. Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); Watson v. Commissioner, 54 T.C.M. (CCH) 1601 (1988).
- If no other documentation is available, the Court may, although it is not required to do so, accept credible testimony of a taxpayer to substantiate a deduction. Watson v. Commissioner, 54 T.C.M. (CCH) 1601 (1988).
- However, Treas. Reg. § 1.274-5T makes clear that estimates and averages are not sufficient to establish travel expenses pursuant to IRC § 274(d).
Issue 3: Whether Petitioners may deduct more than 50% of the non-meal travel expenses incurred by Continental’s drivers?
- The rules regarding deductibility of per diem allowances provide for one of two options: (1) Actual substantiation pursuant to IRC § 274(d); or (2) deemed substantiation pursuant to the Revenue Procedures.
Insight:
The Boyd decision underscores the strict substantiation requirements for expenses included in IRC § 274(d). Additionally, this opinion discusses individual IRC provisions and individual Treasury Regulations, but these individual provisions are discussed within the greater framework provided by the IRC and supplemented by the Treasury Regulations and Revenue Procedures, to name a few. The Petitioners in Boyd attempted to justify their decisions by cherry picking the sentences within the Regulations that best supported their position. Unfortunately, it is not that easy. Taxpayers must understand the applicable provisions and regulations within the greater framework and act accordingly.
Specifically, regarding the rules regarding deductibility of per diem allowances, choosing actual substantiation pursuant to IRC § 274(d), or electing deemed substantiation pursuant to the Revenue Procedures, there are consequences. While the Revenue Procedures are elective, once elected, the rules provided therein must be followed. Again, the rules provided within the IRC apply in situations in which the taxpayer has not elected to follow the rules provided in the Revenue Procedures, and vice versa – a taxpayer cannot choose a few rules from here and a few rules from there and expect a successful result.
