Deemed substantiation of business travel expenses.
Continental Express Inc., a long-haul trucking company, reimbursed its drivers 9 cents a mile to cover expenses such as parking, lodging, showers, laundry, linens and Federal Express charges. The drivers could spend the per diem amount at their own discretion. The average amount the company paid to the drivers under the per diem plan for the years in question was less than the federal meals and incidental expense (M&IE) rate.
Revenue procedure 96-64 says 40% of a per diem paid for lodging, meals and incidental expenses is treated as having been paid for food and beverages when the amount is less than the federal rate. Since the drivers sometimes used part of the per diem for lodging, Continental treated 40% of the 9 cents a mile (3.6 cents) as paid for meals and beverages and 60% (5.4 cents) as paid for other items. This resulted in a deduction for the company of 7.2 cents a mile (50% of 3.6 cents, plus 5.4 cents).
Of this amount the IRS disallowed 2.7 cents a mile based on another sentence in the revenue procedure: It says when a per diem is paid only for meals and incidental expenses, the amount treated as paid for food and beverages is the lesser of the actual per diem or the federal M&IE rate. The IRS, therefore, applied the 50% limitation to the entire 9 cents a mile per diem, allowing a deduction of only 4.5 cents a mile. Over the three-year period in question, the disallowed deductions amounted to approximately $2,800,000. The taxpayer petitioned the Tax Court for relief.
Result. For the IRS. It argued that revenue procedure 96-64 clearly says a taxpayer's per diem allowance is considered paid only for M&IE when calculated in the same manner as the drivers' compensation. In this case Continental also paid its drivers on a per mile basis. Since the company's per diem was treated as being paid only for M&IE, the revenue procedure required the smaller of the per diem paid or the federal M&IE rate be treated as paid for food and beverages. Also, since the average amount Continental paid per day was less than the federal per diem rate, the entire amount should have been considered paid for food and beverages subject to the 50% limitation. The Tax Court agreed.
Continental argued revenue procedure 96-64 was invalid because the tax treatment of the expenses had been computed without regard to their actual nature. The Tax Court agreed with Continental that the deduction under revenue procedure 96-64 did not necessarily match the actual expenses. The court held that the taxpayer had two options: It could have substantiated the actual expenses following the requirements of revenue procedure 96-64 or it could have followed the revenue procedure's deemed-substantiation rules. Since those rules are elective and the taxpayer avoids having to substantiate actual expenses, Continental must take the bad with the good--the permitted deduction does not necessarily represent the actual expense.
The company also attempted to persuade the court it should be allowed additional deductions: Continental provided testimony at the trial estimating its drivers' nonmeal travel expenses in an attempt to deduct them under the Cohan rule. The court found the company had provided reasonable estimates of the actual expenses but rejected this attempt as well. Since Continental did not follow the substantiation requirements of the regulations under section 274(d), it was not entitled to any deductions related to those expenses.
Certain deductions have strict substantiation rules. This case illustrates for CPAs the importance of following such rules. It also points out that when deemed-substantiation rules are provided the IRS and the courts will interpret them strictly.
* C.A. Boyd v. Commissioner, 122 TC no. 18.
Prepared by Charles J. Reichert, CPA, CIA, professor of accounting at the University of Wisconsin, Superior.
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|Author:||Reichert, Charles J.|
|Publication:||Journal of Accountancy|
|Date:||Oct 1, 2004|
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