T.C. Memo. 2000-305

UNITED STATES TAX COURT

WILLIAM K. STARR, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12831-99. Filed September 27, 2000.

William K. Starr, pro se.

Gregory M. Hahn, for respondent.

MEMORANDUM OPINION

COHEN, Judge: Respondent determined a deficiency of $2,084

in petitioner’s Federal income tax for 1995 and an addition to

tax of $539.50 under section 6651(a)(1). After concessions, the

issue remaining for decision is whether a self-employed

individual is entitled to use the Federal per diem rate to

substantiate the amount of deductible lodging expenses for travel

away from home under section 274(d).
- 2 -

Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.

Background

This case was submitted fully stipulated under Rule 122. 

The stipulated facts are incorporated as our findings by this

reference.

During 1995, William K. Starr (petitioner) resided in

Phoenix, Arizona. Petitioner operated “Climb On A Rainbow”, a

sole proprietorship that provided hot air balloon rides to

customers.

Petitioner operated his sole proprietorship for part of 1995

in Phoenix, Arizona, and the remainder of the year in

Woodinville, Washington. During 1995, petitioner lived in a

rented apartment in Woodinville for 156 days while operating his

business.

On his Schedule C, Profit or Loss from Business, for 1995,

petitioner claimed a travel expense deduction of $18,748, of

which $18,720 represented lodging costs incurred in Washington. 

Petitioner computed his lodging expenses based on a per diem rate

of $120 per day for the 156 days that he operated his business in

Woodinville.
- 3 -

Respondent disallowed the $18,748 per diem lodging expense

deduction claimed by petitioner but allowed a deduction of $5,595

for the lodging expenses actually incurred while operating the

business in Washington. The actual expenses were computed as

follows:

Rent $3,521

Electricity 257

Cable 178

Utilities 544

Entertainment 1,095

Total $5,595

Petitioner concedes that the maximum lodging deduction that

he could claim in 1995 using a per diem rate would be $12,948,

computed as the maximum Federal per diem rate multiplied by the

156 days that petitioner lived in Woodinville for business

purposes. The maximum Federal per diem rate for lodging in King

County, Washington, where Woodinville is located, was $83 per day

during 1995.

Discussion

Petitioner contends that a self-employed individual is

entitled to use the Federal per diem rate to substantiate

expenditures for lodging away from home. Respondent claims that

petitioner, as a sole proprietor, is precluded from using the

Federal per diem rate and is entitled only to a deduction equal

to his actual lodging expenses substantiated under section

274(d).
- 4 -

Lodging expenses that are incurred while traveling away from

home in the pursuit of business are generally deductible under

section 162(a). Section 274(d), however, disallows a deduction

for lodging expenses under section 162 when a taxpayer fails to

substantiate (1) the amount of the expense, (2) the time and

place of travel, and (3) the business purpose of the expense.

Section 274(d) provides in part:

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),

 * * * * * * *

unless the taxpayer substantiates by adequate records

or by sufficient evidence corroborating the taxpayer’s

own statement (A) the amount of such expense or other

item, (B) the time and place of the travel * * *,

(C) the business purpose of the expense or other item

* * *

The Secretary is vested with the authority to prescribe

rules waiving the substantiation requirements in circumstances

where it is impracticable for documentary evidence to be

required. See sec. 274(d). Pursuant to this authority, Rev.

Proc. 94-77, 1994-2 C.B. 825, was issued for the purpose of:

providing rules under which the amount of ordinary and

necessary business expenses of an employee for lodging,

meal, and/or incidental expenses incurred while

traveling away from home will be deemed substantiated

under sec. 1.274-5T of the temporary Income Tax

Regulations when a payor (the employer, its agent, or a

third party) provides a per diem allowance under a

reimbursement or other expense allowance arrangement to
- 5 -

pay for such expenses. This revenue procedure also

provides an optional method for employees and selfemployed individuals to use in computing the deductible

costs of business meal and incidental expenses paid or

incurred while traveling away from home. * * * 

[Emphasis added.]

Under Rev. Proc. 94-77, 1994-2 C.B. 825, employees and selfemployed individuals are allowed to use the Federal per diem rate

to substantiate business meals and incidental expenses incurred

when traveling away from home. However, the use of the Federal

per diem rate to substantiate the amount of lodging expenses is

available only to certain employer-employee reimbursement

arrangements. The procedure excludes self-employed individuals

from using the Federal per diem rate to substantiate the amount

of their lodging expenses. Therefore, a self-employed individual

must still prove the amount of lodging costs with documentary

evidence. See sec. 1.274-5T(c)(2)(iii), Temporary Income Tax

Regs., 50 Fed. Reg. 46006 (Nov. 6, 1985).

This Court has previously addressed the issue of whether a

self-employed individual is entitled to use the Federal per diem

rate to substantiate the amount of deductible lodging expenses

for travel away from home under section 274(d). In Duncan v.

Commissioner, T.C. Memo. 2000-269, the taxpayer, a self-employed

individual, claimed deductions for lodging and meals based on the

Federal per diem rate. The Commissioner disallowed the lodging

expenses that were claimed for lack of substantiation under

section 274(d). The Court explained that a self-employed
- 6 -

individual is entitled to use the per diem rate to substantiate

only meals and incidental expenses, not lodging expense. The

Court held that a self-employed individual is not entitled to use

the per diem method to substantiate lodging expenses under

section 274(d) and disallowed the taxpayer’s lodging expenses

that were not otherwise substantiated under section 274(d). See

also Bracey v. Commissioner, T.C. Memo. 1998-254; Hoag v.

Commissioner, T.C. Memo. 1993-348.

Petitioner would have us disregard the specific language of

section 274(d) and the procedures promulgated under that section. 

We cannot do so. Petitioner, as a self-employed individual, is

not entitled to use the Federal per diem rate to substantiate the

amount of his Schedule C lodging expenses. He is, however,

entitled to deduct lodging expense for the amounts substantiated

under section 274(d). Petitioner is limited to a deduction of

$5,595, which represents the actual lodging expenses that

petitioner substantiated under section 274(d).

To reflect the foregoing and the concessions of the parties,

Decision will be entered

under Rule 155.