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Historic Tax Case | Boyd V. Commissioner – Tax Authorities



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Boyd v. Commissioner, 122 T.C. No. 18 | April 27, 2004
| Vasquez, J. | Docket. No. 13229-01

Short Summary:

Continental Express, Inc. (Continental) was engaged in the
long-haul, irregular route trucking business, and employed between
277 and 344 drivers during the three years at issue: 1995, 1996,
1997. Continental compensated drivers on a per mile basis, adjusted
to account for a driver’s experience; drivers were also paid
a per diem allowance on a per mile basis that was intended to
reimburse drivers for travel expenses.

Continental’s accounting and payroll system tracked miles
driven, not days worked, by its drivers. During the years at issue,
drivers were in short supply. In an effort to retain drivers,
Continental made a business decision not to alter its compensation
system, and to substantiate deductions for its drivers per diem
allowance using relevant Revenue Procedures. Drivers were not
required to submit any records of expenses incurred during travel
– the per diem allowance was paid by Continental in lieu of
reimbursing actual expenses for meals and incidental expenses
incurred by each of its drivers.

On its Form 1120-S, U.S. Income Tax Return for an S Corporation,
under “Other deductions,” Continental deducted expenses
related to those incurred by drivers including fuel, tolls,
“motels & layover,” per diem allowance, and costs
associated with hiring drivers. The total deductions taken during
the years at issue amount to 80% of the per diem allowances
actually paid to drivers during the same period. In determining the
amount of its deduction for each of the years at issue, Continental
cited only the specific sections of the relevant Revenue Procedures
that supported its application of the 50% deduction limitation of
IRC § 274(n) to 40% of the total per diem allowance.
Continental deducted the other 60% of the per diem allowance in
full, treating it as reimbursements for drivers’ lodging
expenses.

The Commissioner of Internal Revenue (Commissioner) disallowed
portions of each of the following deductions claimed by Continental
as per diem payments to its drivers: $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.

Petitioners Charles A. Boyd and Darby A. Boyd (Petitioners)
filed for a redetermination of deficiencies arising from the
IRS’s conclusion that Continental was entitled to deduct only
50% of the per diem allowance it paid its drivers, as opposed to
the 80% Continental argued it was entitled to deduct.

Key Issues:

Whether the 50% deduction limitation – on an amount that
would otherwise qualify as an allowable deduction for meals or
business entertainment – of IRC § 274(n) applies to the
full amount of per diem allowances paid, only for meals and
incidental expenses, by a corporation to its employees, or whether
reasonable estimates and averages of expenses incurred by employees
are sufficient to substantiate a deduction greater than 50%?

Issue 1:  Whether Petitioners may deduct
80% of the per diem allowance paid to Continental’s
drivers?

Issue 2:  Whether Petitioners
substantiated the drivers’ travel expense pursuant to IRC
§ 274(d)?

Issue 3:  Whether Petitioners may deduct
more than 50% of the non-meal travel expenses incurred by
Continental’s drivers?

Primary Holdings:

The 50% deduction limitation of IRC § 274(n) applied to the
full amount of per diem allowances paid, only for meals and
incidental expenses, by Continental to its employee truck
drivers.

Issue 1: Whether Petitioners may deduct 80% of the per diem
allowance paid to Continental’s drivers?

Petitioners were not entitled to deduct 80% of the per diem
allowance paid to Continental’s drivers. Per the test
provided in § 4.02 of Revenue Procedure 96-64, the per diem
payments were treated as being made only for meals and incidental
expenses, and not for lodging. As a result, § 6.05 of Revenue
Procedure 96-64, which provides the rules for applying the 50%
deduction limitation of IRC § 274(n) to per diem allowances,
treats the per diem payments as being solely for food and beverages
and thus wholly subject to the 50% deduction limitation of IRC
§ 274(n).

Issue 2: Whether Petitioners have substantiated the
drivers’ travel expense pursuant to IRC § 274(d)?

Petitioners did not substantiate the drivers’ travel
expenses pursuant to IRC § 274(d). The applicable Treasury
Regulations, see Treas. Reg. § 1.274-5T,
make clear that estimates and averages are not sufficient to
establish travel expenses pursuant to IRC § 274(d).

Issue 3: Whether Petitioners may deduct more than 50% of the
non-meal travel expenses incurred by Continental’s
drivers?

Petitioners were not entitled to deduct more than 50% of the
non-meal travel expenses incurred by Continental’s drivers.
Because Petitioners opted into the deemed substantiation provided
by the Revenue Procedures, as opposed to actual substantiation
pursuant to IRC § 274(d), the maximum deduction allowed is
50%.

Key Points of Law:

Issue 1: Whether Petitioners may deduct 80% of the per diem
allowance paid to Continental’s drivers?

  • IRC § 162 allows a deduction for all ordinary and
    necessary expenses paid or incurred during the taxable year in
    carrying on a trade or business.

  • IRC § 274(d) generally disallows a deduction under IRC
    § 162 for, among other things, “any travelling expense
    (including meals and lodging while away from home)” unless
    the taxpayer complied with stringent substantiation requirements
    including keeping record of the amount, time and place, and
    business purpose of the expense.

  • Under IRC § 274(n), the deductible amount of “any
    expense for food or beverages” is generally limited to 50% of
    the amount of the expense that would otherwise be allowed as a
    deduction.

  • A trio of Revenue Procedures (94-77; 96-28; 96-64) provide
    authorization for various nonmandatory methods that a taxpayer may
    elect to use, in lieu of substantiating actual expenses pursuant to
    IRC § 274(d), for deemed substantiation of employee lodging,
    meal, and incidental expenses incurred while traveling away from
    home.

  • Revenue Procedure 96-64 provides that an employee’s
    expenses for lodging, meal, and incidental expenses while traveling
    away from home will be deemed substantiated when “a payor
    provides a per diem allowance arrangement under a reimbursement or
    other expense allowance arrangement to pay for such
    expenses.”

    • Section 4.02 of Revenue Procedure 96-64 provides that if the
      per diem allowance includes reimbursement for meals and incidental
      expenses only, the amount of expenses deemed substantiated each day
      is the lesser of the per diem allowance for the day or the Federal
      meals and incidental expenses rate.

    • A per diem allowance is treated as paid only for meal and
      incidental expenses if: … (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). Revenue Procedure 96-64, §
      4.02.


  • After it is determined that a per diem expense is paid only for
    meals and incidental expenses, an amount equal to the lesser of the
    per diem allowance or the Federal meals and incidental expenses
    rate is treated as an expense for food and beverages, and thus
    subject to the 50% deduction limitation of IRC § 274(n). In
    the present case, the full amount of the per diem allowance is
    treated as being for food and beverages and thus subject to the 50%
    deduction limitation of IRC § 274(n).

Issue 2: Whether Petitioners have substantiated the
drivers’ travel expense pursuant to IRC § 274(d)?

  • Deductions are a matter of legislative grace, and Petitioners
    bear the burden of proving that they are entitled to the deductions
    claimed. New Colonial Ice Co. v. Helvering, 292 U.S.
    435, 440 (1934).

  • Generally, IRC § 162(a) allows a taxpayer to deduct
    ordinary and necessary expenses incurred during the taxable year in
    carrying on a trade or business, however a taxpayer must maintain
    records sufficient to establish the claimed deductions. IRC §
    6001; Treas. Reg. § 1.6001-1(a).

  • Under the Cohan Rule, if a taxpayer establishes that he paid or
    incurred a deductible expense but does not, or cannot, establish
    the amount of the deduction, the Court may estimate the amount
    allowable in some instances. Cohan v. Commissioner,
    39 F.2d 540, 543-544 (2d Cir. 1930). For the Court to make an
    estimation, there must be sufficient evidence in the record to
    conclude that a deductible expense was paid or incurred in at least
    the amount allowed. Williams v. United States, 245
    F.2d 559, 560 (5th Cir. 1957).

    • For certain categories of expenses, the criteria for
      deductibility provided in IRC § 162(a) must be met, in
      addition to the heightened substantiation requirements provided in
      IRC § 274(d). The Cohan Rule cannot be used to estimate
      expenses included in IRC §
      274(d). See Stanford v. Commissioner,
      50 T.C. 823, 827 (1968).


  • To substantiate a deduction pursuant to IRC § 274(d), a
    taxpayer must maintain records or present corroborative evidence to
    show the following: (1) The amount of the expense; (2) the time and
    place of use of the listed property; and (3) the business purpose
    of the use.

    • When a taxpayer’s records have been destroyed or lost due
      to circumstances beyond his control, the taxpayer is generally
      allowed to substantiate his deductions by reconstructing his
      expenses through other credible evidence. Malinowski v.
      Commissioner
      , 71 T.C. 1120, 1125 (1979); Watson v.
      Commissioner
      , 54 T.C.M. (CCH) 1601 (1988).

    • If no other documentation is available, the Court may, although
      it is not required to do so, accept credible testimony of a
      taxpayer to substantiate a deduction. Watson v.
      Commissioner
      , 54 T.C.M. (CCH) 1601 (1988).

    • However, Treas. Reg. § 1.274-5T makes clear that estimates
      and averages are not sufficient to establish travel expenses
      pursuant to IRC § 274(d).

Issue 3: Whether Petitioners may deduct more than 50% of the
non-meal travel expenses incurred by Continental’s
drivers?

  • The rules regarding deductibility of per diem allowances
    provide for one of two options: (1) Actual substantiation pursuant
    to IRC § 274(d); or (2) deemed substantiation pursuant to the
    Revenue Procedures.

Insight:

The Boyd decision underscores the strict
substantiation requirements for expenses included in IRC §
274(d). Additionally, this opinion discusses individual IRC
provisions and individual Treasury Regulations, but these
individual provisions are discussed within the greater framework
provided by the IRC and supplemented by the Treasury Regulations
and Revenue Procedures, to name a few. The Petitioners in Boyd
attempted to justify their decisions by cherry picking the
sentences within the Regulations that best supported their
position. Unfortunately, it is not that easy. Taxpayers must
understand the applicable provisions and regulations within the
greater framework and act accordingly.

Specifically, regarding the rules regarding deductibility of per
diem allowances, choosing actual substantiation pursuant to IRC
§ 274(d), or electing deemed substantiation pursuant to the
Revenue Procedures, there are consequences. While the Revenue
Procedures are elective, once elected, the rules provided therein
must be followed. Again, the rules provided within the IRC apply in
situations in which the taxpayer has not elected to follow the
rules provided in the Revenue Procedures, and vice versa – a
taxpayer cannot choose a few rules from here and a few rules from
there and expect a successful result.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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