Truckers' expense allowance subject to 50% deduction limit.

The Tax Court held that, under applicable revenue procedures, the entire per-diem travel allowance paid by a trucking company to its drivers was subject to the 50% deduction limit on meals and entertainment expenses, because it was computed on the same basis as wages.

P, a trucking company, compensated its drivers at a rate of 25-32 cents per mile and paid its drivers a per-diem allowance of 9 cents per mile. The per-diem was intended to reimburse drivers for travel expenses; drivers were flee to spend the per-diem in any manner they chose. However, the per-diem was insufficient to pay for motel monks in addition to meals. P's per-diem allowance plan was similar to the majority of such plans used by other companies in the trucking industry.

Law

Sec. 274(n)(1) allows a taxpayer to deduct only 50% of an otherwise allowable deduction fur meals or business entertainment. The issue is whether this 50% limit applies to the full amount of per-diem allowances P paid to its drivers.

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 applicable revenue procedures (Rev. Procs. 94-77, 96-28 and 96-64) treats the per-diem allowances as being paid only for meals and incidental expenses (M&IE). 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 or the Federal M&IE rate. Under Section 6.05, 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 50% limit. The average daily per-diem allowance P paid was less than the Federal M&IE rate; accordingly, under Section 6.05, the full amount of the per-diem payments is treated as being for food and beverages and, thus, subject to the Sec. 274(n) 50% limit.

Rev. Procs'. Validity

P contends 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 Sec. 274(n) limits to the full amount of the per-diem payments. However, for the reasons stated in Beech Trucking Co., 118TC 428 (2002), Section 4.02(5) is valid. The revenue procedures are elective provisions that provide deemed substantiation in lieu of actual substantiation of the drivers' precise travel expenses--"[u]se 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."

P also contends that Section 4.02(5) conflicts with the Sec. 274(n)(1) 50% limit, because it imposes it on the entire per-diem allowance, without regard to the nature of the expenses actually incurred by employees. However, Section 4.02(5) is one of the tests that determine whether the per-diem is paid solely for M&IE. Only after meeting that test is the Sec. 274(n)(1) 50% limit applied. Here, 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 testimony established that the vast majority of the per-diem was spent on M&IE, such as laundry and showers. Most of the drivers' rest periods were taken in the sleeping berth, riot at motels. There is no evidentiary support for P's position that 60% of the per-diem was spent on lodging.

P also argues that, as Rev. Proc. 94-77, Section 4.02(5), was issued on Dec. 27, 1994, it 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. Congress provided that the IRS may by regulation provide rules for meeting the stringent Sec. 274(d) substantiation requirements; Rev. Proc. 94-77, Section 4.02(5) is one of those rules. P simply 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 and required less recordkeeping.

Substantiation of Actual Expenses

In any event, the result would be the saute even if the conditions complained of in the revenue procedures were invalid. The drivers who testified at trial provided reasonable estimates of their monthly travel expenses. Despite the credible testimony of the witnesses, however, the court finds that P did not substantiate the travel expense deductions of its approximately 300 drivers pursuant to the strict substantiation standards of Sec. 274(d) and the regulations. It did not establish the amount, time or place of each separate expenditure for each of the drivers; see Temp. Regs. Sec. 1.274-5T(b)(2)(i). What it did is provide good, reasonable estimates and averages of the expenses that P's drivers incurred on the road. However, P made a business decision not to require receipts and records of the drivers' expenses; the regulations under Sec. 274(d) make it clear, for purposes of deducting actual expenses, that estimates and averages are not sufficient to establish travel expenses; see Sanford, 50 TC 823, 827 (1968) (the Cohan doctrine does not apply to expenses covered by Sec. 274(d)).

Had P not elected to be under the revenue procedures and had instead substantiated the nonmeal expenses in compliance with Sec. 274(d), it would have been entitled to a full deduction for those expenses. 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. Thus, P is entitled to a deduction for only 50% of the entire per-diem allowance.

CHARLES A. BOYD, 122TC NO. 18 (2004)

REFLECTIONS: Revenue procedures, including the rules on application of the 50% limit to M&IE allowances, are updated on an annual basis, and continue to include the rules applied above; see Rev. Proc. 2003-80. An employer is not subject to the 50% deduction limit for payments treated as compensation, and other exceptions apply under Sec. 274(n)(2). In Rev. Proc. 2004-29, the IRS provided statistical sampling methods taxpayers may use to substantiate meal and entertainment expenses covered under the Sec. 274(n)(2) exceptions.