2004 U.S. Tax Ct. LEXIS 18">*18 Commissioner's disallowances of deductions sustained.
Ps are shareholders in C, a trucking company formed
pursuant to
rate of 25 to 32 cents per mile. C also provides a per diem
allowance of 9 cents per mile. Ps deducted 80 percent of the per
diem allowance paid to the drivers.
At trial, Ps presented evidence as to the estimated,
nonmeal travel expenses incurred by C's drivers. C's drivers
testified as to the average amount of their per diem allowance
that they spent on items such as lodging, truck parking,
showers, laundry, and Federal Express charges.
Held: Despite the presentation of evidence at trial
as to the estimated, nonmeal travel expenses incurred by C's
drivers, Ps have failed to establish a basis for deducting 80
percent of the per diem allowance paid to the drivers. Beech
Held, further, Pursuant to
the per diem allowance paid to the drivers.
Held, further,
Held, further, Ps have not substantiated the
actual travel expenses incurred by the drivers pursuant to sec.
allowance that Ps estimate is allocated to nonmeal travel
expenses may not be deducted in full.
122 T.C. 305">*305 VASQUEZ, Judge: Respondent disallowed deductions of $ 836,729 2 for the taxable year ending December 31, 1995; 122 T.C. 305">*306 $ 828,067 for the taxable year ending December 31, 1996; $ 198,462 for the taxable year ending March 31, 1997; and $ 1,048,686 for the taxable year ending December 31, 1997, claimed by Continental Express, Inc. (Continental or the corporation), an S corporation in which petitioners are shareholders. At issue is the amount that petitioners may deduct with respect to per diem allowances Continental provided to its drivers, and, particularly, whether the 50-percent limitation of
FINDINGS OF FACT
The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.
Continental Express, Inc.
Continental is an S corporation within the meaning2004 U.S. Tax Ct. LEXIS 18">*20 of
Shareholder | Ownership Percentage |
Ralph E. Bradbury | 5.00 |
Warren D. Garrison | 1.25 |
Bonnie P. Harvey | 5.00 |
Edward M. Harvey | 86.25 |
Diane M. Miller | 1.25 |
James E. Willbanks | 1.25 |
Petitioners' yearend ownership percentages as of December 31, 1997, were:
Shareholder | Ownership Percentage |
Darby A. Harvey f.k.a. Darby A. | |
Boyd (Darby Harvey Irrevocable and | |
Intervivos Trust) | .98 |
Ralph E. Bradbury | 5.00 |
Mark H. Guffin(Mark Guffin | |
Irrevocable and Intervivos Trust) | .98 |
Charles E. Harvey (Charles Harvey | |
Irrevocable and Intervivos Trust) | .98 |
Deborah G. Harvey (Deborah Harvey | |
Irrevocable and Intervivos Trust) | .98 |
Bonnie P. Harvey | 2.55 |
Edward M. Harvey | 86.9125 |
Diane M. Miller | .6375 |
Jill G. Pryor (Jill Guffin Harvey | |
Irrevocable and Intervivos Trust) | .98 |
2004 U.S. Tax Ct. LEXIS 18">*21 122 T.C. 305">*307
Continental is engaged in the long-haul, irregular route trucking business. Continental hauls nonbulk dry goods in trailers from coast to coast in the 48 continental United States. The average length of a haul was 1,750 to 1,850 miles. Continental did not have a dedicated route, and drivers often made triangular runs. That is, drivers often picked up goods in New Jersey and the northeast and delivered the goods to California and the west coast. Then they picked up goods2004 U.S. Tax Ct. LEXIS 18">*22 on the west coast and delivered them to points such as Arkansas, Texas, or the Midwest. Eventually, they delivered goods to New Jersey and the east coast, and headed west again.
Continental's Drivers
Continental employed between 277 and 324 drivers during the years in issue. Drivers were away from home for a minimum of 21 consecutive days per trip and were on the road for an average total of 25 to 28 days per month. Some drivers were away for 2 to 3 months at a time before returning home. Drivers accrued 1 day off for every 7 days of driving.
Drivers averaged approximately 322 to 382 miles per day. U.S. Department of Transportation regulations prohibited drivers from traveling more than 550 miles per day. Additionally, the Department of Transportation regulations required drivers to be off duty for 8 hours for every 8 hours on duty. The regulations limited drivers to a maximum of 70 hours on duty per week.
122 T.C. 305">*308 With an exception for layovers, Continental drivers earned compensation only when the wheels on the truck were turning. Continental paid its drivers on a per mile arrangement ranging from 25 to 32 cents per mile, depending on experience. Drivers also received a per diem allowance2004 U.S. Tax Ct. LEXIS 18">*23 paid through an accountable plan. The per diem, paid to drivers in addition to compensation, was intended to reimburse drivers for travel expenses. The per diem was 9 cents per mile for single drivers. 3Continental's management believed drivers typically received a per diem allowance in the low $ 30 range for 1 day of driving.
Continental's per diem allowance plan was similar to the majority of per diem allowance plans used by other companies in the trucking industry.
Continental's Trucks
Continental drivers operated International tractors. Each tractor had a cab with a sleeper berth behind the driver's and passenger's seats. The engine in a Continental tractor was located beneath the driver's and passenger's seats. The size of the cab, including the sleeper berth, was 96 inches across by 110 inches deep by 60 inches high.
2004 U.S. Tax Ct. LEXIS 18">*24 The sleeper berth had no powered air vents. Ventilation, heating, and air conditioning were available only through vents in the dash of the cab and powered by the engine. The berth had no running water, no toilet, and very little storage. One driver described the sleeper berth as a "rolling jail cell".
The sleeper berth contained a twin size mattress covered in plastic, but no box spring. Newer models of Continental's tractors contained larger sleeper berths, allowing for a 60-inch mattress.
The sleeper berth was designed to provide a driver with room to rest while transporting a load of freight. Drivers' sleep was less restful in the sleeper berth than in a motel. The sleeper berth vibrated and was not quiet because the truck engine remained on while drivers slept so that they had ventilation. Additionally, drivers worried about burglary of their cargo while they slept in the sleeper berth.
122 T.C. 305">*309 Drivers slept in the sleeper berth more often than not. Continental management assumed that drivers slept in the sleeper berth on average 6 of 7 nights per week.
Motel Rentals
Drivers would sleep in a motel while they traveled to prevent fatigue and to maintain safety. While they were traveling,2004 U.S. Tax Ct. LEXIS 18">*25 Continental generally did not reimburse drivers for motel rooms. 4 Drivers slept in a motel anywhere from two or three times per month to 3 nights per week. Generally, drivers did not spend more than $ 30 to $ 35 for a motel.
Drivers' Other Travel Expenses
In addition to the expense of renting a motel room, drivers also incurred expenses for truck parking, showers, laundry, cleaning supplies for the cab, sheets for the sleeper berth, and Federal Express charges for shipping bills of lading. Drivers also incurred expenses for their meals. Truck parking cost approximately $ 5 to $ 10 per night, if free parking could not be obtained. Each2004 U.S. Tax Ct. LEXIS 18">*26 shower at a truck stop cost approximately $ 5 to $ 6. Laundry cost between $ 5.50 and $ 8 per week. Federal Express charges were approximately $ 8 per week.
Continental drivers were free to spend (or not spend) the per diem in any manner they chose. Drivers generally spent all of the per diem on the travel expenses they incurred while working for Continental. The per diem, however, did not and could not cover all of the expenses drivers incurred, even for a driver who lived frugally and stayed in a motel only 2 or 3 nights per month. The per diem was insufficient to pay for a nightly motel in addition to meals.
Continental's Payroll, Accounting, and Recordkeeping
Continental's accounting and payroll system tracked miles driven, not days worked. In 1994, Continental purchased a new computer system and software designed for the trucking industry at a cost in excess of $ 400,000. The new system122 T.C. 305">*310 tracked only miles driven, not number of days worked. To track and pay per diem on a basis other than miles driven would have required a duplicate accounting system.
Between 1995 and 1997, drivers were in short supply. Continental could not abruptly change its compensation system if its drivers2004 U.S. Tax Ct. LEXIS 18">*27 would have perceived the change to their detriment, as Continental would lose large numbers of drivers to competing trucking firms. Continental management concluded that in times of short labor supply, changes in a compensation system must occur across the industry, and no single company can change significantly its compensation without an adverse impact on its driver retention.
Continental made a business decision to substantiate deductions for its drivers' per diem allowance using the revenue procedures prescribed by the Internal Revenue Service. Continental did not require drivers to submit receipts or records of their travel expenses, if any, except pursuant to layover and phone call policies. Drivers generally did not submit receipts or other records to the corporation. Indeed, when drivers did submit receipts for travel expenses not related to layover or phone calls, Continental destroyed the receipts or put them back in the driver's trip envelope without consideration.
Continental paid the per diem in lieu of reimbursing actual expenses for meals and incidental expenses incurred by drivers.
Petitioners' Tax Returns
On its Forms 1120S, U.S. Income Tax Return for an S Corporation, 2004 U.S. Tax Ct. LEXIS 18">*28 for the years at issue, Continental deducted (as part of "Other deductions") driver-related expenses including fuel, tolls, "motels & layover", "per diem", and "hiring cost -- drivers". The amounts deducted as per diem payments were $ 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. These claimed per diem amounts represent 80 percent of the actual per diem payments made to the drivers. To arrive at the 80-percent claimed deduction, Continental applied the
OPINION
At the outset, we note the similarities between this case and
2004 U.S. Tax Ct. LEXIS 18">*30 In Beech Trucking Co., petitioners argued unsuccessfully that
122 T.C. 305">*312 The analysis and reasoning in
The key difference between Beech Trucking Co. and this case is that here, petitioners presented evidence at trial as to the estimated, nonmeal travel expenses incurred by Continental's drivers. In Beech Trucking Co., the2004 U.S. Tax Ct. LEXIS 18">*31 taxpayer "offered no independent substantiation of the amounts of lodging or incidental expenses that the Beech Trucking drivers might have incurred, or otherwise established any reasonable basis for allocating the per diem payments to meals, incidentals, and lodging expenses incurred by the drivers."
Petitioners in this case have raised arguments regarding the validity of the revenue procedures which we must consider. Furthermore, unlike in Beech Trucking Co., petitioners in this case, as noted above, attempted to substantiate the drivers' travel expenses. We must consider whether this evidence meets the requirements of
Under
Under the applicable
2004 U.S. Tax Ct. LEXIS 18">*35 a payment under a reimbursement or other expense allowance
arrangement that meets the requirements specified in
(1) paid with respect to ordinary and necessary business
expenses incurred, or which the payor reasonably anticipates
will be incurred, by an employee for lodging, meal, and
incidental expenses or for meal and incidental expenses for
travel away from home in connection with the performance of
services as an employee of the employer,
(2) reasonably calculated not to exceed the amount of the
expenses or the anticipated expenses, and
(3) paid at or below the applicable Federal per diem rate, a
flat rate or stated schedule, or in accordance with any other
Service-specified rate or schedule.
Under the revenue procedures, if a per diem allowance includes reimbursement for lodging, in addition to meal and incidental expenses (M&IE), the amount of expenses deemed substantiated each day is the lesser of the per diem allowance for the day or the Federal per diem rate for the locality of travel for the day.
A per diem allowance is treated as paid only for M&IE if:
(1) the payor pays the employee for actual expenses for lodging
based on receipts submitted to the payor,2004 U.S. Tax Ct. LEXIS 18">*37 (2) the payor provides
the lodging in kind, (3) the payor pays the actual expenses for
lodging directly to the provider of the lodging, (4) the payor
does not have a reasonable belief that lodging expenses were or
will be incurred by the employee, or (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). [Rev. Proc.
After applying the test in
Application of the 50-percent limitation on meals and
expenses. When a per diem allowance is paid only for meals
and incidental expenses * * * an amount equal to the lesser of
the per diem allowance for each calendar day * * * or the
Federal2004 U.S. Tax Ct. LEXIS 18">*38 M&IE rate for the locality of travel for such day * * *
is treated as an expense for food and beverages. When a per diem
allowance is paid for lodging, meal, and incidental expenses,
the payor must treat an amount equal to the Federal M&IE rate
for the locality of travel for each calendar day * * * the
employee is away from home as an expense for food and beverages.
For purposes of the preceding sentence, when a per diem
allowance for lodging, meal, and incidental expenses for a full
day of travel is paid at a rate that is less than the Federal
per diem rate for the locality of travel, the payor may treat an
amount equal to 40 percent of such per diem allowance for a full
day of travel as the Federal M&IE rate for the locality of
travel.
Petitioners claimed deductions for the per diem payments on the basis of the fourth sentence of
Respondent contends that, after applying the test set forth in
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,
Under
As in Beech Trucking Co., petitioners argue that the revenue procedures are invalid insofar as they operate (in
For the reasons stated in
In
122 T.C. 305">*318 As pronouncements of general applicability, the Revenue
Procedures cannot be expected to mirror perfectly the manifold
circumstances of all taxpayers and their traveling employees or
of any particular taxpayer's traveling employees. As elective
procedures meant to mitigate what might otherwise be onerous
substantiation burdens for payors of per diem allowances, the
Revenue Procedures accomplish, we believe, at least rough
justice. Giving due regard to the highly detailed nature of the
statutory and regulatory scheme involved here, to the
specialized experience and information presumably available to
the Commissioner, 2004 U.S. Tax Ct. LEXIS 18">*44 and to the value of uniformity in
administering the national tax laws, we are unpersuaded that the
complained-of conditions imposed by
arbitrary or unlawful. See United States v. Mead Corp.,
In this case, petitioners raised two new arguments concerning the validity of
We agree with respondent that 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 meals and incidental travel expenses such as laundry and showers. Most of the drivers' rest periods were taken in the sleeping berth and not at motels. There is no evidentiary support for petitioners' position that 60 percent of the per diem was spent on lodging.
Second, petitioners argue that, as
II. Whether Petitioners Have Substantiated the Drivers' Travel Expenses Pursuant to
In any event, even if we were to agree with petitioners that the complained-of conditions imposed by the revenue procedures are invalid (which we do not), we would not reach a different result in this case. In Beech Trucking Co., we noted that "petitioner has not independently substantiated, and thus is entitled to no deduction for, any of the subject expenses in excess of those deemed to be substantiated under the revenue procedures."
Deductions are a matter of legislative grace, and petitioners bear the burden of proving that they are entitled to the deductions claimed.
Ordinarily, a taxpayer is permitted to deduct the ordinary and necessary expenses that he pays or incurs during the122 T.C. 305">*320 taxable year in carrying on a trade or business.
When a taxpayer establishes that he paid or incurred a deductible expense but does not establish the amount of the deduction, we may estimate the amount allowable in certain circumstances.
In addition to satisfying the criteria for deductibility under
To substantiate a deduction pursuant to
When a taxpayer's records have been destroyed or lost due to circumstances beyond his control, he is generally allowed to substantiate his deductions through secondary evidence.
The drivers who testified at trial provided reasonable estimates of their monthly travel expenses. Beverly James estimated monthly expenses as follows: $ 52.50 for motels, $ 12 for showers, $ 30 for truck parking, $ 30 for laundry, and $ 32 for Federal Express charges. These expenses averaged $ 5.60 per day, using a 28-day month. David Butler estimated monthly expenses as follows: $ 117 for motels, $ 50 for showers, $ 20 for truck parking, $ 22 for laundry, and $ 32 for Federal Express charges. These expenses averaged $ 8.60 per day, using a 28-day month. William Lane estimated monthly expenses as follows: $ 65 for motels, $ 60 for showers, $ 55 for truck parking, $ 30 for laundry, and $ 32 for Federal Express charges. These expenses averaged $ 8.64 per day, using a 28-day month. Mr. Lane estimated his expenses for meals at approximately $ 24-25 per day.
Despite the credible testimony of the witnesses, we find that petitioners did not substantiate the travel expense deductions of their approximately2004 U.S. Tax Ct. LEXIS 18">*51 300 drivers pursuant to strict standards of
What petitioners did is provide good, reasonable estimates and averages of the expenses that Continental's drivers incurred on the road. While we understand why petitioners made a business decision not to require receipts and records of the drivers' expenses, the regulations under
122 T.C. 305">*322 Furthermore, we note that were we to find that some of the expenses were ordinary business expenses under
Petitioners argue that "if the Fifth Part of
In support of this argument, petitioners rely on a sentence in
Having relied exclusively upon the deemed substantiation methods
provided in the Revenue Procedures, petitioner has offered no
independent substantiation of the amounts of lodging or
incidental expenses that the Beech Trucking drivers might have
incurred, or otherwise established any reasonable basis for
allocating the per diem payments to meals, incidentals, and
lodging expenses incurred by the drivers.30122 T.C. 305">*323 2004 U.S. Tax Ct. LEXIS 18">*54
Petitioners misinterpret our description of the lack of evidence in
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
We also note that, for the reasons stated in
In reaching all of our holdings herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant or without merit.
To reflect respondent's mathematical error in the statutory notice of deficiency with respect to the adjustments made to Continental for 1996,
Decisions will be entered under
1. Cases of the following petitioners are consolidated herewith: Ralph E. and Lee Ann Bradbury, docket No. 13230-01; Charles E. Harvey, docket No. 13231-01; Deborah G. Harvey, docket No. 13232- 01; Mark H. and Jackie Guffin, docket No. 13233-01; Warren D. and Debra W. Garrison, docket No. 13234-01; Mark L. and Jill G. Pryor, docket No. 13235-01; Diane M. Miller, docket No. 13236-01; Edward M. and Bonnie P. Harvey, docket No. 13237-01; and James E. and Lynn B. Willbanks, docket No. 13238-01.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, all Rule references are to the Tax Court Rules of Practice and Procedure, and all amounts are rounded to the nearest dollar.↩
3. Single drivers constituted 99 percent of Continental's drivers. One percent of the drivers drove in two-person teams. Each team driver received a per diem allowance of 4.5 cents per mile.↩
4. Pursuant to a corporate layover policy, Continental provided $ 25 per day in wages and up to $ 30 reimbursement for a motel if the driver was not moving. For example, if a driver was waiting to unload or load the trailer at its destination due to a backup, the driver would receive layover pay and reimbursement for a motel on the second night the driver was waiting to unload.↩
5. The petitioners in
6. Ed Harvey owned 26.000 percent of Beech Trucking. Ralph Bradbury owned 16.667 percent of Beech Trucking. Diane Miller owned .667 percent of Beech Trucking. James Willbanks owned .667 percent of Beech Trucking. Warren Garrison owned .667 percent of Beech Trucking. Arthur Beech, the only shareholder who is not a shareholder of Continental Express, Inc., owned 55.333 percent of Beech Trucking. See
7.
8. Under
9. The test in
10. To the extent that, for 1996, $ 32.19 was the per diem allowance, only $ 32 is treated as being for food and beverage and thus subject to the
11. The examination in this case began Sept. 24, 1997; therefore,
30. In particular, the record does not establish the number of days per trip that the drivers would normally pay for separate lodging or for incidentals such as showers, laundry, local transportation, or overnight parking. As previously noted, it appears that at least some of the trips for which Beech Trucking paid per diem allowances involved no overnight travel.