Lessor of truck driver employees avoids 50% limit on per diems.

TLC is a professional employer organization (PEO) that hires truck drivers as its employees and then leases them back to its trucking company clients. The Tax Court held that TLC was subject to the Sec. 274(n) limit on per-diem meal expense allowances it paid to the drivers, because it was the driver's common-law employer (see Transport Labor Contract /Leasing, Inc., 123 TC 154 (2004)). TLC appealed to the Eighth Circuit, which, as discussed below, held that TLC is not subject to such limit.

Law

Congress crafted Sec. 274 so that the Sec. 274(n) limit on allowable meal expense deductions "shall be applied only once, either (1) to the person who makes the expenditure or (2) to the person who actually bears the expense, but not to both"; see Regs. Sec. 1.274-2(f)(2)(iv)(a) and Sec. 274(n)(2). In most situations, there are two possible candidates, the employer and the employee.

The question is more complex when, as here, there are three relevant parties. In such cases, a special exception applies if the per-diem payment was "paid or incurred by one person...under a reimbursement or other expense allowance arrangement with another person other than an employer;" see Regs. Sec. 1.274-2 (f) (2) (iv) (c), applying Sec. 274(e) (3).

The Tax Court first faced this issue in Beech Trucking Co., 118 TC 428 (2002), in which a trucking company argued that it was not subject to the Sec. 274(n) limit on per-diem payments, because it had leased the truck drivers from a PEO. The Tax Court rejected this contention, concluding that the limit applied to the trucking company "as the common law employer of its drivers and as the party that .. .actually bore the expense ... for which the per diem payments were made."

In this case, TLC's per-diem payments were not treated as truck driver wages, so all agree that the Sec. 274(n) limit did not apply to the drivers. The question is whether the tax burden falls on TLC or on the trucking companies, under Sec. 274(e)(3) and its regulations.

Exception Requirements

The Tax Court held that TLC, the PEO, is subject to the Sec. 274(n) limit, because it was the driver's common-law employer. However, the Sec. 274(n) issue cannot be resolved simply by identifying the employer. Sec. 274(e)(3) might apply because the per-diem expenses were "paid or incurred by the taxpayer ... in connection with the performance by him of services" (the leased services of the PEO's truck drivers) "for another person" (the trucking company).

This exception requires a determination of whether TLC (1) incurred the per-diem expenses "under a reimbursement or other expense allowance arrangement with such other person" (its trucking company clients) and, if so, (2) "account[ed] ... to such person" in the manner Sec. 274(e)(3)(B) requires. The IRS does not contend that any record-keeping procedures failed to comply with the Sec. 274(d) expense substantiation requirements incorporated into Sec. 274(e) (3) (B).Thus, the remaining question is whether TLC had a "reimbursement or other expense allowance arrangement" with the trucking companies, as Sec. 274(e)(3) requires.

Reimbursement or Expense Allowance Arrangement

Under Regs. Secs. 1.274-2(f)(2) (iv)(a) and 1.62-2(c), "... the phrase 'reimbursement or other expense allowance arrangement' means an arrangement that meets the requirements of paragraphs (d) (business connection), (e) (substantiation), and (f) (returning amounts in excess of expenses) of this section."

The IRS does not argue that the data gathered by TLC and furnished to its trucking company clients regarding the per-diem payments made to truck drivers failed to satisfy these requirements. Instead, it contends that the reimbursement arrangement requirement should not be deemed satisfied simply because "the non-employee taxpayer is able, as an economic matter, to pass the cost on to its customers." There is, in fact, a difference between compensating a vendor for its services, and reimbursing it for a specific expense incurred in providing those services. It is similar, if not conceptually identical, to the difference between wages paid to an employee, and reimbursement of the employee's business expenses. The latter distinction is governed by Regs. Sec. 1.62-2(c)-(f), which define the type of "reimbursement or other expense allowance arrangement" that must be proved. The same definition governs the Sec. 274(e)(3) inquiry. Thus, the argument that every lessee ultimately bears the lessor's expenses ignores the distinction framed by the statute and regulations.

If TLC proved that it established a "reimbursement arrangement" with a trucking company that satisfied the rigorous requirements of Regs. Sec. 1.62-2(c)-(f), then TLC met the requirements for Sec. 274(e)(3).This, in turn, proves that the trucking company was "the person who actually [bore] the expense" within the meaning of Kegs. Sec. 1.274-2(f)(2)(iv)(a) and that TLC is excepted from the Sec. 274(n) limit.

TLC's lease agreement was silent as to per-diem payments, and the trucking company payments to TLC were not broken down into component parts. However, these facts do not demonstrate the absence of a reimbursement arrangement. By use of the word "arrangement" in lieu of a narrower word such as "contract" or "agreement," Congress evidenced its intent not to restrict the way in which the required relationship may be proved. This intent is reinforced by Sec. 274(d), which provides that necessary expense substantiation may be proved "by adequate records or by sufficient evidence corroborating the taxpayer's own statement." Thus, the lease agreement's silence is irrelevant to the Sec. 274(e) (3)inquiry.

The undisputed facts demonstrate that TLC, as taxpayer, paid per-diem expenses to the truck drivers and provided its trucking company clients with the expense substantiation information required by Sec. 274(d). TLC and its clients entered into a "reimbursement or other expense allowance arrangement" that satisfied the requirements of Kegs. Sec. 1.62-2(c)-(f) and Sec. 274(e)(3). Thus, TLC is excepted from the Sec. 274(n) limit as a matter of law.

TRANSPORT LABOR CONTRACT/LEASING, 8TH CIR. (5/18/06)

David O'Driscoll, J.D., LL.M.