117 T.C. No. 2



                     UNITED STATES TAX COURT



         UAL CORPORATION AND SUBSIDIARIES, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18573-98.                    Filed July 13, 2001.



          U, an international airline, paid its pilots and
     flight attendants (collectively, employees) per diem
     allowances. U paid the allowances to all employees;
     i.e., those who departed from and returned to their
     home bases on the same day and those who departed from
     and returned to their home bases on different days. U
     neither required nor received substantiation from the
     employees as to their uses of the allowances.
          Held: U may deduct the per diem allowances as
     personal service compensation under sec. 162(a)(1),
     I.R.C.



     George B. Javaras, Todd F. Maynes, and Natalie Hoyer Keller,

for petitioner.

     James C. Lanning, for respondent.
                                 - 2 -

     LARO, Judge:     Respondent determined deficiencies of

$1,478,718, $61,867,523, $1,751,161, and $45,981,293 in

petitioner’s 1983, 1984, 1986, and 1987 Federal income taxes,

respectively.1    Following concessions, we must decide whether

petitioner may deduct the per diem allowances paid to its flight

attendants and pilots (collectively, employees) for day trips and

overnight trips (as defined below).      We hold it may deduct the

per diem allowances as personal service compensation under

section 162(a)(1).2

                           FINDINGS OF FACT

     Most facts were stipulated.    The parties’ stipulation of

facts and the exhibits submitted therewith are incorporated

herein by this reference.     The stipulated facts are found

accordingly.     Petitioner is a consolidated group of corporations

that files a consolidated Federal income tax return on the basis

of the calendar year.    Its principal office was in Elk Grove

Township, Illinois, when its petition was filed.      United Air

Lines, Inc. (United), is an airline that provides passenger and




     1
       Respondent has determined no deficiency for 1985 because
the limitations period was closed when the underlying notice of
deficiency was issued. We discuss 1985 because petitioner’s
deduction of the per diem allowances for that year affects
petitioner’s tax liability for the subject years.
     2
       Section references are to the Internal Revenue Code in
effect for the subject years. Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 3 -

cargo service worldwide.   United was petitioner’s subsidiary

during 1985, 1986, and 1987.

     During the subject years, United employed approximately

12,000 flight attendants and 6,150 pilots.    Each of the employees

was assigned to a series of flights (pairings) that typically

originated and terminated at the home base of one or more of the

employees assigned to the pairing.     Most of the pairings required

that the employees spend one or more nights away from their home

bases (overnight trips).   The other pairings brought the

employees back to their home bases on the day of departure (day

trips).

     United paid the employees compensation and benefits pursuant

to collective bargaining agreements (union contracts) which it

had entered into with the employees’ respective unions.     Under

the union contracts, United paid the employees regular

compensation plus a per diem allowance.    United paid each flight

attendant a per diem allowance equal to $1.50 times the number of

hours that he or she was on duty or on flight assignment.     United

initially paid the same per diem allowance to each pilot but

increased the pilots’ per diem rate from $1.50 per hour to $1.55

per hour effective April 1, 1986.    Neither United nor petitioner

required that the employees substantiate their use of the per

diem allowances, and neither United nor petitioner has any
                               - 4 -

written substantiation as to the employees’ actual use of the per

diem allowances.

     United’s computerized system allowed it to record accurately

the employees’ duty assignments.   United used these records to

calculate each employee’s per diem allowance.   United included

its payment of an employee’s per diem allowance in his or her

salary check and listed the amount of the per diem allowance

included in the check on the corresponding check stub.   United

issued to each employee a monthly report of the per diem

allowances which it had paid to him or her.

     On its 1985, 1986, and 1987 Federal income tax returns,

petitioner claimed under section 162(a)(2) that it could deduct

the per diem allowances as employee travel expenses.   For 1985,

United paid the employees per diem allowances totaling

$35,532,698 for overnight trips and $1,867,757 for day trips.

For 1986, United paid the employees per diem allowances totaling

$53,867,516 for overnight trips and $2,635,763 for day trips.

For 1987, United paid the employees per diem allowances totaling

$59,777,494 for overnight trips and $2,918,385 for day trips.     As

to 1987, petitioner took into account section 274(n), as amended

in 1986, and deducted only 80 percent of the per diem allowances

paid during 1987.   For financial accounting purposes, petitioner

also reported its payment of the per diem allowances as a travel

expense.
                               - 5 -

     United did not withhold Federal income tax on its payment of

the per diem allowances, and it neither withheld nor paid Federal

Insurance Contribution Act (FICA) tax with respect to the per

diem allowances.   United did not report the per diem allowances

as wages or nonwage compensation on the employees’ Forms W-2,

Wage and Tax Statement.

                              OPINION

     We must decide whether petitioner may deduct the per diem

allowances paid to the employees.   Petitioner argues it may

deduct the per diem allowances as personal service compensation

because they arose out of an employer/employee relationship.

Respondent argues that petitioner may not deduct the per diem

allowances as personal service compensation because it lacked the

requisite compensatory intent at the time of payment.   We agree

with petitioner.

     Our inquiry begins with the relevant text.   Section 162(a)

lets a taxpayer deduct all ordinary and necessary expenses

incurred during the taxable year in carrying on a trade or

business.   Section 162(a)(1) includes within the ambit of section

162(a) “a reasonable allowance for salaries or other compensation

for personal services actually rendered”.   Payments are

deductible under section 162(a)(1) to the extent they are

“reasonable and * * * in fact payments purely for services.”

Sec. 1.162-7(a), Income Tax Regs.
                                - 6 -

     The parties agree that the per diem allowances, if paid for

services, would not make any of the employees’ total compensation

unreasonable.   Thus, we limit our focus to the second

requirement.    Under that requirement, a deduction under section

162(a)(1) turns on the factual determination of whether the facts

and circumstances of the case establish that the payor made the

payment to the payee for services rendered.    Sec. 1.162-7(a),

Income Tax Regs.   Whether the payor makes the payment to the

payee intending to compensate him or her for services rendered is

a pertinent factor to consider.    See, e.g., Paula Constr. Co. v.

Commissioner, 

, 1058-1059 (1972), and the cases cited

therein, affd. without published opinion 

 (5th Cir.

1973).

     We conclude that United paid the per diem allowances to the

employees for services rendered.   We reach that conclusion from

the certainty that United would not have paid the per diem

allowances to the employees but for:    (1) The bona fide

employer/employee relationship and (2) the need to pay those

allowances in order to secure the employees’ services.      The

presence of such a bona fide employment relationship and such a

need to pay per diem allowances in order to secure personal

services is enough under the facts at hand to persuade us that

United paid the per diem allowances to the employees for their

services.   Accord Kowalski v. Commissioner, 

, 52
                               - 7 -

(1975), revd. 

 (3d Cir. 1976), revd. 

(1977), where we 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.”3   We also bear in mind, and find as a fact, that United

paid the per diem allowances to the employees intending to

compensate them for their personal services.

     Respondent places undue emphasis on the fact that the union

contracts do not specifically characterize the per diem

allowances as personal service compensation.    Such a

characterization by the parties to the contracts is not

dispositive as to the characterization of the per diem allowances

for Federal income tax purposes.   See Hosp. Corp. of Am. v.

Commissioner, T.C. Memo. 1996-559.     Nor is it dispositive that

United reported the per diem allowances as travel expenses for

both tax and financial accounting purposes.    The bona fide

employer/employee relationship that United had with the

employees, coupled with their negotiations as to the specifics of

the employees’ compensation package, specifics which included the

payment of per diem allowances, speaks loudly towards a proper


     3
       Moreover, as the Supreme Court noted in upholding our
decision in that case, the meal allowance given to Kowalski by
way of the cash payments was of a “presumptively compensatory
nature”. Kowalski v. Commissioner, 

, 94 (1977).
                                - 8 -

characterization of those allowances as personal service

compensation.    We adopt that characterization.

     We conclude by noting that the parties are currently

litigating in the United States Court of Federal Claims the issue

of whether the very same per diem allowances are wages for

employment tax purposes.    See United Air Lines, Inc. v. United

States, No. 97-173T (Fed. Cl., filed Mar. 18, 1997).

Interestingly, the Government is arguing that those allowances

are wages for employment tax purposes.      Wages for employment tax

purposes are “all remuneration for employment, including the cash

value of all remuneration (including benefits) paid in any medium

other than cash”.    Sec. 3121(a).   Section 3401 defines wages in

similar terms.

     We hold that United may deduct the per diem allowances under

section 162(a)(1) as personal service compensation.       Accordingly,

                                             Decision will be entered

                                        under Rule 155.



     Reviewed by the Court.

     WELLS, CHABOT, GERBER, RUWE, HALPERN, FOLEY, VASQUEZ, and
GALE, JJ., agree with this majority opinion.

     WHALEN, J., concurs.
                                - 9 -

     RUWE, J., 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. 21.   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


     1
      In his dissenting opinion, see infra p. 38 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
                                                   (continued...)
                               - 10 -

expenditures for nonovernight day trips are personal expenses of

the employees, rather than business travel expenses.   United

States v. Correll, 

 (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, 

 (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, 

, 433 and n.30 (1989)



     1
      (...continued)
that the type of incidental expenses that were contemplated in
structuring the per diem allowances were incurred on day trips.
See infra p. 21.
     2
      Based on United States v. Correll, 

 (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.
                             - 11 -

(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,




     3
      Although not in effect for the years in issue, sec. 1.62-
2(j), Example (2), Income Tax Regs., confirms this as the proper
treatment. In his dissenting opinion, see infra p. 38 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 Regs.
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, 

, 327-328 (1970), affd. 

(7th Cir. 1971).
                              - 12 -

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, 

, 1058-1059 (1972), affd. without

published opinion 

 (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,

, 1324 (5th Cir. 1987), affg. T.C. Memo. 1985-267;

Home Interiors & Gifts, Inc. v. Commissioner, 

, 1156

(1980).6   If a corporate payment to a shareholder/employee is


     4
      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”.
     5
      “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.
     6
      In Elliotts, Inc. v. Commissioner, 

 (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
                                                   (continued...)
                             - 13 -

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 deductibility.7


     6
      (...continued)
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.]
     7
      In Kowalski v. Commissioner, 

 (1975), revd. 

 (3d Cir. 1976), revd. 

 (1977), a Court-
reviewed opinion, this Court stated:

                                                     (continued...)
                              - 14 -

     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, 

 (1998), affd. in

part, revd. in part, and remanded 

 (Fed. Cir. 2000);

Am. Airlines, Inc. v. United States, 

 (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.]




     7
      (...continued)
     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.]
     8
      “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), affd. in part, revd. in part, and remanded

 (Fed. Cir. 2000).
                               - 15 -

     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




     9
      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; Am. Airlines, Inc. v. United States,
204 F.3d at 1110.
     10
      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.
                              - 16 -

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


     11
      Logic dictates that in order for meal money to be excluded
from gross income as a “de minimis fringe benefit”, meal money
provided to employees must be a “fringe benefit”.
     12
      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)(1),
Temporary Income Tax Regs., 50 Fed. Reg. 46027-46028 (Nov. 6,
                                                   (continued...)
                             - 17 -

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




     12
      (...continued)
1985) (same).
     13
      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. 1.274-5T(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, 

, 1101 (1981), affd. without
published opinion 

 (5th Cir. 1982); Gestrich v.
Commissioner, 

, 530-531 (1980), affd. without
published opinion 

 (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.
                             - 18 -

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 of 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.,

50 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(e)(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
                                - 19 -

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. 46030-46031

(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,


     14
      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.
                                                   (continued...)
                              - 20 -

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


     14
      (...continued)
84-164, 1984-2 C.B. 63, to cover meals and incidental expenses).
                                - 21 -

overnight trips ($23.20 for pilots, $22 for other employees)15

was reasonable as required by Rev. Rul. 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. Rul. 84-164, supra,


     15
      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 1 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.
     16
      Petitioner either directly paid, provided, or reimbursed
employees for costs of lodging, ground transportation between
airports and hotels, parking, and cleaning uniforms.
                             - 22 -

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. Rul. 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:

          American argues that even if it cannot meet the
     substantiation requirements of § 274(d), American’s
     covered meals and incidental expenses allowance of $36
     per day fall in the middle range of the $14 meals-only
     safe harbor of Rev. Rul. 84-164 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.
                              - 23 -

     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
                              - 24 -

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, 

, 541 (1994), affd. 

 (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]


     17
      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, 

 (11th
Cir. 2000), Brenner v. Commissioner, T.C. Memo. 2001-127, and
United States v. Armstrong, 

 (E.D. Va. 1997).
     18
      See Hughes & Luce, L.L.P. v. Commissioner, T.C. Memo.
1994-559, affd. on other grounds 

 (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
                                                   (continued...)
                                    - 25 -

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


        18
         (...continued)
        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.]
        19
      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.
        20
             Indeed, it appears that petitioner’s claim that the
                                                          (continued...)
                                - 26 -

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.




     20
      (...continued)
allowances are deductible as compensation was predicated on
respondent’s determination that the allowances were “wages” for
employment tax purposes.
     21
      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.
                                - 27 -

     THORNTON, J. concurring:    The majority concludes that the

per diem payments are deductible on the ground that the payments

are compensatory in nature.    The majority does not address to

what extent, if any, this case implicates statutory rules (i.e.,

sections 162(a)(2) and 274(d)(1)) affecting the deductibility of

travel expenses.    Absent any clear indication to the contrary,

the majority opinion might be construed as indulging a suppressed

premise that the compensatory nature of the payments overrides or

renders moot the operation of rules pertaining to travel

expenses.1    To that extent, the majority opinion might be

susceptible to criticism such as that registered by the

dissenters.    It would not appear necessary or appropriate,

however, to construe any implicit premises of the majority

opinion so broadly, for on the facts of this case, it appears

that the per diem payments do not in fact represent travel

expenses.

     The majority rightly concludes that the per diem payments

were compensatory in nature.    The facts also support an



     1
       Two possible bases for such a suppressed premise suggest
themselves: (1) That treatment as compensation under sec.
162(a)(1) trumps treatment as travel expenses under secs.
162(a)(2) and 274(d)(1)–-a proposition that seems difficult to
square with the statutory regime; or (2) that because the per
diem payments are compensatory, ipso facto they are not travel
expenses. Without further explication, this latter proposition
might be thought to exemplify a species of the so-called “masked
man fallacy” (“I know who my father is; I do not know who the
masked man is; so, my father is not the masked man.”).
Blackburn, Think: A Compelling Introduction to Philosophy 30
(1999).
                                - 28 -

affirmative conclusion that these payments were not travel

expenses.   The pilots and flight attendants could use the per

diem payments as they pleased, just as they could use their base

salaries as they pleased.   The per diem payments were not

contingent on the employees’ incurring or accounting for any

travel expenses.   Indeed, the per diem payments were in addition

to amounts United provided its employees for practically all

travel expenses except meals and incidentals.2

     Rather than provide its employees meals and incidentals,

United agreed, as part of a negotiated union contract, to pay

them small hourly wage enhancements for all hours they were on

duty or on flight assignment.    The union contract refers to the

wage enhancements as per diem payments.     The nomenclature does

not affect the reality, however, that the bargain struck was for

additional compensation, not for meals, incidentals, or other

travel expenses.

     The fact that the per diem payments were computed by

reference to time spent on duty or aboard the aircraft does not

suggest that the per diem payments are travel expenses.     Rather,

it suggests the contrary.   Hours on duty or on board an aircraft

would appear to encompass substantially all the pilots’ and

flight attendants’ hours on the job.     Moreover, from United’s


     2
       The record reveals that in addition to providing its
pilots and flight attendants per diem payments, United also
provided them–-either directly or through reimbursement--lodging,
ground transportation between airports and hotels, and uniform
laundering.
                              - 29 -

perspective, hours its employees spend in flight do not represent

travel away from its place of business (i.e., the aircraft), any

more than aviation fuel represents a cost of travel.   After all,

United’s business is air transportation.

     Consider the hypothetical case of a flight crew that goes on

duty and boards one of United’s aircraft only to sit on the

tarmac for some hours (for any of the myriad reasons especially

familiar to a traveling Court) without ever taking flight.

Presumably, the pilots and flight attendants on this aircraft

would be entitled to per diem payments based on the number of

hours they were on duty, without having gone anywhere.   Some of

them might return home, if home were nearby; others might go to

hotels.   They might lay over variously for short times or long

times, subsisting lavishly or meanly.   But each of them would

receive the predetermined per diem payment, based on the number

of hours spent sitting on the tarmac.   In this hypothetical case,

it seems clear that the per diem payments are too indirectly

related to any employee travel to be considered travel expenses.

It would make no material difference to the analysis if the

employees’ hours on duty were airborne.

     WELLS, CHABOT, GERBER, BEGHE, and MARVEL, JJ., agree with
this concurring opinion.
                               - 30 -

     CHIECHI, J., concurring in part and dissenting in part:       I

concur in the majority’s holding that the per diem allowances for

day trips that United paid to its employees are deductible under

section 162(a)(1).    I dissent from the majority’s holding that

the per diem allowances for overnight trips that United paid to

its employees are deductible under section 162(a)(1).    I believe

that the amounts of such per diem allowances for overnight trips

claimed as deductions under section 162(a)(2) are deductible

under that section.
                               - 31 -

     SWIFT, J., dissenting:    This case involves claimed ordinary

deductions in the range of $100 million and extensive arguments

by the parties.   If it works (which I don’t believe it does), the

majority opinion is remarkable in its brevity.



Recharacterization of Per Diem Allowances
as Employee Compensation

     The majority opinion suggests that respondent’s

characterization herein for corporate income tax purposes of

United’s per diem allowances is inconsistent with respondent’s

characterization of the per diem allowances in the pending

employment tax litigation.    See majority op. p. 8.   I disagree.

     As I understand respondent’s positions, in both the income

tax and the employment tax contexts, respondent is treating the

per diem allowances as travel expenses.    Respondent simply takes

the position, as a matter of law, that the income tax and the

employment tax regimes are not necessarily in pari materia and

that under those different tax regimes the day-trip per diem

allowances and the excess of the overnight per diem allowances

(i.e., the portion of the per diem allowances not substantiated)

are nondeductible to United for corporate income tax purposes

(because of United’s failure to satisfy the substantiation

requirements of section 274(d)) and are subject to employment tax

liability (not because the unsubstantiated and excess travel per

diem allowances actually constitute wage compensation to United’s
                                - 32 -

employees but because the employment tax provisions treat

unsubstantiated and excess per diem travel allowances as subject

to employment taxes as if they were compensation).    Any

disagreement with that legal interpretation should be addressed

on the merits, and the innuendo in the majority opinion of

factual inconsistency on respondent’s part in the

characterization of per diem allowances is inappropriate.

     The more significant concern with regard to “inconsistent”

characterizations in this case should be with United's efforts to

recharacterize entirely the per diem allowances that United, its

employees, and the labor unions, for all other purposes, treated

as employee travel expenses.1    United now, years later, and

solely for Federal income tax purposes, attempts to

inconsistently treat such travel expenses as employee

compensation, outside the scope of the substantiation

requirements of section 274(d), and fully deductible under

section 162(a)(1).

     An extensive body of case law limits a taxpayer’s ability to

change the treatment of reported items of income and deductions.

See, e.g., Norwest Corp. & Subs. v. Commissioner, 

,

146-147 (1998); LeFever v. Commissioner, 

, 541-545

(1994), affd. 

 (10th Cir. 1996).


     1
        The parties’ stipulation of facts filed with the Court in
this case repeatedly acknowledges United’s specific treatment of
the per diem allowances as travel expenses.
                               - 33 -

     From the record herein, it appears that United and other

airlines, not respondent, initially sought what some might regard

as an additional inconsistency in the treatment of the per diem

allowances.    Respondent’s audit of the per diem allowances within

the airline industry began as employment tax audits of travel

expenses.   In the context of those employment tax audits (and

while still contesting any employment tax adjustments and likely

only as a protective measure against the possibility that the

employment tax adjustments might be sustained), United and other

airlines raised the issue via claims for refund as to the

deductibility, for corporate income tax purposes, of the

unsubstantiated and excess per diem allowances relating to the

overnight trips and of the full per diem allowances relating to

the day trips.

     In the instant income tax controversy and in the majority

opinion, it is simply not appropriate to comment negatively on

respondent’s position in the pending employment tax litigation

with United.

     As stated, the inconsistencies that we should be focusing on

and addressing herein are the many factual inconsistencies

between United’s treatment of the per diem allowances as travel

expenses for all purposes other than belatedly for its corporate

Federal income tax purposes.
                               - 34 -

     On its face, the majority opinion is inadequate to support a

finding that the per diem allowances constituted employee

compensation “for services rendered”, as opposed to travel

expenses.    In its summary “Findings of Fact”, see majority op.

pp. 2-5 and also the Headnote, the majority opinion repeatedly

describes the amounts in controversy as “per diem” related to

employee “trips”.    Surely, “per diem” related to employee “trips”

constitutes travel expenses.    The majority’s avoidance of the

word “travel”, when mentioning the per diem allowances, does not

conceal the character of the per diem allowances as travel

expenses.

     No mention is made in the majority’s Findings of Fact that

the per diem allowances represent a payment “for services”.    In

fact, in the majority’s brief Findings of Fact, nothing is found,

or even mentioned, as to the “purpose” or “intent” for which the

per diem allowances were paid (other than “for” employee

“trips”).2   Nothing about this opinion “speaks loudly”, see


     2
         In analyzing whether an intent to compensate existed, we
typically consider, among other factors: Whether there was
corporate authorization for the payment of compensation; whether
the books and records of the corporation reflected that the
payments were treated as payments of compensation; whether the
payments were reported to the recipients on Forms W-2, Wage and
Tax Statement, as wage compensation; and whether the payments
were treated as compensation on the employer’s and employees’ tax
returns as filed. See, e.g., Paula Constr. Co. v. Commissioner,

, 1059 (1972), affd. without published opinion 

 (5th Cir. 1973); Elec. & Neon, Inc. v. Commissioner, 

, 1338-1340 (1971), affd. without published opinion 496
                                                   (continued...)
                             - 35 -

majority op. p. 7, except perhaps its ultimate conclusion under

which millions of dollars of United’s travel expenses become

fully deductible in spite of United’s failure to satisfy the

substantiation requirements of section 274(d), discussed below.

     In Am. Airlines, Inc. v. United States, 

, 1108

(Fed. Cir. 2000), in connection with the ongoing employment tax

dispute, the U.S. Court of Appeals for the Federal Circuit

appears to have held that the travel expenses in issue (if, on

remand, they are found to have been reasonably expected to be

incurred by the airline employees) could not be recharacterized

as wage compensation for employment tax withholding purposes.    In

this regard, the Court of Appeals for the Federal Circuit relied

on and quoted both section 31.3121(a)-1(h) (regarding employment

tax withholding) and section 31.3401(a)-1(b)(2) (regarding income

tax withholding), Employment Tax Regs., which provide as follows:


          § 31.3121(a)-1(h): Amounts paid specifically–- either
     as advances or reimbursements–-for traveling or other bona
     fide ordinary and necessary expenses incurred or reasonably
     expected to be incurred in the business of the employer are
     not wages. Traveling and other reimbursed expenses must be
     identified either by making a separate payment or by
     specifically indicating the separate amounts where both
     wages and expense allowances are combined in a single
     payment. [Emphasis added.]

          § 31.3401(a)-1(b)(2): Traveling and other
     expenses. Amounts paid specifically–-either as


     2
      (...continued)
F.2d 876 (5th Cir. 1974); Prince v. Commissioner, T.C. Memo.
1997-324.
                              - 36 -

     advances or reimbursements–-for traveling or other bona
     fide ordinary and necessary expenses incurred or
     reasonably expected to be incurred in the business of
     the employer are not wages and are not subject to
     withholding. Traveling and other reimbursed expenses
     must be identified either by making a separate payment
     or by specifically indicating the separate amounts
     where both wages and expense allowances are combined in
     a single payment. [Emphasis added.]


     United’s attempt to recharacterize as deductible

compensation the day-trip per diem travel allowances and the

excess portion (over $14) of the overnight per diem travel

allowances should be rejected.


The Substantiation Requirements of Section 274(d)

     I do not understand the casual manner by which the majority

opinion bypasses the substantiation requirements of section

274(d).

     It appears to me that the substantiation requirements for

travel expenses under section 274(d) are applicable to day-trip

travel allowances, as well as to overnight travel allowances.

The language of section 1.274-5T(a)(1), Temporary Income Tax

Regs., 50 Fed. Reg. 46027 (Nov. 6, 1985), states that “no

deduction or credit shall be allowed with respect to–-(1)

Traveling away from home * * *”.   This regulatory language does

not say that the requirements of section 274(d) do not apply to

day-trip travel expenses.   Any such reading would be contrary to

the explicit language of the statute, as pointed out below.
                                - 37 -

     Further, the first two sentences of section 1.274-5(e),

Income Tax Regs., as applicable to 1985, 1986, and 1987, and

section 1.274-5T(f)(1), Temporary Income Tax Regs., 50 Fed. Reg.

46027 (Nov. 6, 1985), confirm that even if travel expenses are

paid in connection with the “performance of services” and are

otherwise deductible under section 162 (which is what the

majority opinion holds), they must still satisfy the

substantiation requirements of section 274(d).

     A closer look at the relevant statutory language is helpful.

There are important differences in the language and operation of

section 162(a)(2) (an allowance provision that relates only to

overnight travel expenses) and of section 274(d)(1)

(a disallowance provision that relates to any and all travel

expenses).

     Section 162(a)(2) provides that deductions for all taxpayers

are allowed for any:


          (2) traveling expenses (including amounts expended for
     meals and lodging other than amounts which are lavish or
     extravagant under the circumstances) while away from home in
     the pursuit of a trade or business. [Emphasis added.]


Section 274(d)(1), however, in pertinent part provides:


          SEC. 274(d). Substantiation required.–- No deduction
     or credit shall be allowed–-

                  (1) under section 162 or 212 for any traveling
             expense (including meals and lodging while away from
             home),
                               - 38 -

          *        *       *       *       *       *          *

     unless the taxpayer substantiates by adequate records or by
     sufficient evidence * * * [Emphasis added.]


     Note that in section 274(d)(1) the “away from home” language

is located within the parenthesis (whereas in section 162(a)(2)

that language is outside the parenthesis), making it clear that

all travel expenses are covered by the disallowance provision of

section 274(d).   Note also the familiar definitions of “taxpayer”

in sections 1313(b) and 7701(a)(1) that include the term

“corporation”.3

     Various tax treatises and court opinions explicitly or

implicitly recognize that the substantiation requirements of

section 274(d) apply to corporations, not just to employees of

corporations (as the majority opinion may be read to suggest).

For example, see Bittker & Eustice, Federal Income Taxation of

Corporations and Shareholders, par. 5.03[1], at 5-12 (7th ed.

2000); Stechel, 520 Tax Mgmt. (BNA), “Entertainment, Meals, Gifts



     3
        In his concurring opinion, Judge Ruwe notes that United’s
per diem allowances covering meal expenses for day trips are not
deductible as travel expenses under United States v. Correll, 

 (1967). Rather, however, than qualifying as deductible
compensation under sec. 162(a)(1), such day trip meal expenses
remain nondeductible to United because they represent the payment
by United of personal living expenses of United’s employees. See
sec. 262 and the Supreme Court’s holding in Correll. With regard
to the various incidental travel expenses that also were included
in United’s day trip per diem allowances, they remain subject to
the substantiation requirements of sec. 274(d). See sec.
274(d)(1).
                              - 39 -

and Lodging–-Deduction and Recordkeeping Requirements,” at A-33

(1998); 6 Mertens, Law of Federal Income Taxation, ch. 25D

(1998), for implicit recognition of the application of the

substantiation requirements of section 274(d) to corporations;

see also numerous published court opinions illustrating the

application of the substantiation requirements of section 274(d)

to corporations:   Meridian Wood Prods. Co. v. United States, 

, 1188-1189 (9th Cir. 1984); Ma-Tran Corp. v.

Commissioner, 

, 169-170 (1978); Buddy Schoellkopf

Prods., Inc. v. Commissioner, 

, 642-645 (1975); Henry

Schwartz Corp. v. Commissioner, 

, 741-743 (1973).

     Also, under section 274(a), Congress restricted the

deductions for entertainment, amusement, and recreation expenses

where such expenses are not directly related to or associated

with the active conduct of a taxpayer’s trade or business.    Under

section 274(e), however, Congress provided an exception for such

expenses where a taxpayer affirmatively elects to treat, and in

fact does so treat, the expenses as wage compensation subject to

income and employment tax withholding.

     Congress obviously knew how to provide a recharacterization

option and an election out of the section 274(d) substantiation

requirements.   Had Congress intended to provide taxpayers such as

United with a similar recharacterization option and an election

out of the substantiation requirements of section 274(d) for
                                - 40 -

travel expenses, it could have so provided.    Congress not having

done so, it appears to me inappropriate for us to do so.


$44 or $14 Per Diem Limitation on Overnight Per Diem Allowances

     With regard to the section 274(d) substantiation

requirements applicable to United’s overnight per diem

allowances, respondent’s regulations and rulings are to be given

particular weight.    See sec. 274(d); sec. 1.274-5(c)(2)(b),

Income Tax Regs.   The majority opinion, however, ignores the

specific rulings that respondent promulgated which apply to

employer-provided overnight travel allowances and to the years in

controversy herein.

     Rev. Rul. 80-62, 1980-1 C.B. 63 (hereinafter referred to as

the $44 Ruling), provided that, for overnight travel allowances,

the maximum per diem deduction available without substantiation

was $44 per day, which included travel expenses for meals and

lodging, laundry, cleaning and pressing of clothing, and fees and

tips for services, such as for waiters and baggage handlers.

     However, Rev. Rul. 84-164, 1984-2 C.B. 63 (hereinafter

referred to as the $14 Ruling), provided that the $44 Ruling did

not apply where the “per diem allowances [were] intended to cover

only employee meal expenses, as when the employer pays for

directly or furnishes the lodging, or when there is no lodging

expense.”   (Emphasis added.)   The $14 Ruling's stated purpose is

to amplify and to limit the $44 Ruling.
                                 - 41 -

     It appears to me that the above language constitutes a

blanket disqualification of the $44 Ruling where there are no

lodging expenses relating to overnight travel to be paid out of

per diem travel allowances.    As I read the language of the $14

Ruling, in the context of overnight travel, the maximum allowable

amount that may be deducted under any provision of section 162

without substantiation can be no more than $14 per day in two

instances:   (1) Where only employee meals are covered by the

allowances, or (2) where there are no lodging expenses.    Our

memorandum opinion to the contrary in Murphy v. Commissioner, T.C.

Memo. 1993-292, does not constitute binding precedent and should

not be followed.4

     In the present case, because there were no lodging expenses

to be paid by United’s employees out of the overnight per diem

travel allowances the employees received, section 274(d)(1)

limits the maximum amount deemed substantiated under United’s per

diem program to $14 per day.


Union Negotiations

     United and the labor unions specifically bargained for and

characterized the per diem allowances in the union contracts as

travel expenses.     United did not pay employment taxes on the per



     4
        In Rev. Proc. 89-67, sec. 2, 1989-2 C.B. 795, 797, it was
made even clearer that without lodging expenses per diem
allowances would be subject to the $14 limitation.
                              - 42 -

diem allowances, and the employees did not report the per diem

allowances in income.

      Where the tax consequences differ for the characterization

of expenses as either travel or compensation, the

characterization of the expenses by the parties should be adhered

to.   The majority opinion simply negates the bargaining positions

of United, on the one hand, and of the labor unions and the

employees, on the other, to pay and to receive travel expenses,

not compensation income.

      In his concurring opinion, Judge Thornton is correct to ask

what was bargained for between United, its employees, and the

unions.   The answer, however, is explicitly provided in the

stipulated facts –- per diem travel allowances, not compensation.

Paragraph 13 of the stipulation of facts states the following:


      Because pilots and flight attendants continuously
      traveled for United, requiring specific documentation
      for meals and incidental expenses would have been
      administratively burdensome. The per diem arrangement
      was thus designed to reimburse the employees for meals
      and incidental travel expenses, without requiring them
      to retain and submit receipts for each individual
      expenditure. [Emphasis added.]


      The fact that for the administrative convenience of United

and the employees the per diem allowances were computed on an

hourly basis does not convert the allowances into something other

than travel expenses.
                               - 43 -

Judicially Created Loophole

     The majority opinion appears to create a broad loophole for

corporations and would circumvent Congress' intent with regard to

the substantiation requirements of section 274(d).

     The opinion appears to allow expenses that would be

disallowed under section 274(d) to be recharacterized as

deductible compensation, provided the expenses are paid by an

employer to an employee in the context of any employment

relationship.   See majority op. p. 6, where the “but for”

analysis is set forth.   Because corporations generally have

periods of limitation held open longer than individuals, the

opinion would allow corporations on their tax returns to treat

expenses as travel expenses and to avoid income and employment

tax withholdings thereon.    After the periods of limitations have

expired for the employees, the corporations could recharacterize

the travel expenses as compensation.    The corporations would

obtain an income tax deduction for the recharacterized

compensation, but the employees would avoid income and employment

taxes on the compensation.

     The majority opinion erroneously relies on Commissioner v.

Kowalski, 

 (1977), in which the Supreme Court held

that cash meal allowances provided to a State trooper were to be

included in the trooper’s gross income.    The meal allowances were

not claimed as travel expenses, and substantiation of the
                               - 44 -

expenses was not at issue.    Further, neither party herein relied

on nor even cited Kowalski.

     Lastly, by recharacterizing the travel expenses as

deductible compensation for 1987 and later years, the portion of

the previously treated travel expenses that represented meal and

entertainment expenses become freed from the various percentage

limitations applicable thereto and become fully deductible.   See

sec. 274(n).   This is exactly what United is seeking to

accomplish in this case for 1987.

     For the reasons stated, I dissent.

     COHEN and COLVIN, JJ., agree with this dissenting opinion.