t cc no united_states tax_court ual corporation and subsidiaries petitioner v commissioner of internal revenue respondent docket no filed date u an international airline paid its pilots and flight attendants collectively employees per_diem allowances u paid the allowances to all employees i1 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 i r c george b javaras todd f maynes and natalie hoyer keller for petitioner james c lanning for respondent - laro judge respondent determined deficiencies of dollar_figure dollar_figure dollar_figure and dollar_figure in petitioner’s and federal income taxes respectively ’ 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 sec_162 ’ 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 ' respondent has determined no deficiency for because the limitations_period was closed when the underlying notice_of_deficiency was issued we discuss because petitioner’s deduction of the per_diem allowances for that year affects petitioner’s tax_liability for the subject years 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 - - cargo service worldwide united was petitioner’s subsidiary during and during the subject years united employed approximately big_number flight attendants and big_number 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 dollar_figure 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 dollar_figure per hour to dollar_figure per hour effective date neither united nor petitioner required that the employees substantiate their use of the per_diem allowances and neither united nor petitioner has any q4e- 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 and federal_income_tax returns petitioner claimed under sec_162 that it could deduct the per_diem allowances as employee travel_expenses for united paid the employees per_diem allowances totaling dollar_figure for overnight trips and dollar_figure for day trips for united paid the employees per_diem allowances totaling dollar_figure for overnight trips and dollar_figure for day trips for united paid the employees per_diem allowances totaling dollar_figure for overnight trips and dollar_figure for day trips as to petitioner took into account sec_274 as amended in and deducted only percent of the per_diem allowances paid during for financial_accounting purposes petitioner also reported its payment of the per_diem allowances as a travel expense - - 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 sec_162 lets a taxpayer deduct all ordinary and necessary expenses_incurred during the taxable_year in carrying_on_a_trade_or_business sec_162 includes within the ambit of sec_162 a reasonable allowance for salaries or other compensation_for_personal_services actually rendered payments are deductible under sec_162 to the extent they are reasonable and in fact payments purely for services sec_1_162-7 income_tax regs - - 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 sec_162 a 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 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 eg 58_tc_1055 and the cases cited therein affd without published opinion 474_f2d_1345 5th cir 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 the bona_fide employer employee relationship and 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 65_tc_44 - revd 544_f2d_686 3d cir revd 434_us_77 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 we also bear in mind and find as a fact that united source 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 tcmemo_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 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 434_us_77 --- - 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 date 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 sec_3401 defines wages in similar terms we hold that united may deduct the per_diem allowances under sec_162 as personal service compensation accordingly decision will be entered under rule reviewed by the court wells chabot gerber ruwe halpern foley vasquez and gale jj agree with this majority opinion whalen j concurs --- - 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 sec_162 united paid its employees per_diem allowances at a rate of dollar_figure per hour dollar_figure 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 dollar_figure dollar_figure for pilots for certain portions of the years in issue and then dividing this number by hours the expert report relied upon by petitioner attributes most of the per_diem_allowance to meal expenses see infra p 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 day trips the per_diem_allowance for day trips was to cover meal expenses that the employees might incur during day trips ’ meal ‘in his dissenting opinion see infra p note 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 - expenditures_for nonovernight day trips are personal expenses of the employees rather than business travel_expenses 389_us_299 it therefore appears that united intended to pay the allowances to its employees to cover their personal expenses_incurred during day trips in 434_us_77 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 pincite see bank of stockton v commissioner tcmemo_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 93_tc_382 and ndollar_figure ' continued that the type of incidental_expenses that were contemplated in structuring the per_diem allowances were incurred on day trips see infra p based on 389_us_299 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 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 respondent argues that united did not have the requisite compensatory intent at the time it paid the allowances however although not in effect for the years in issue sec_1 example income_tax regs confirms this as the proper treatment in his dissenting opinion see infra p note 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 tcmemo_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 55_tc_320 affd 454_f2d_399 7th cir the relevant statute and regulations’ do not require an intent to compensate as a prereguisite to deductibility under sec_162 although an intent to compensate regquirement 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 58_tc_1055 affd without published opinion 474_f2d_1345 5th cir in the context of corporate payments to shareholders careful scrutiny is required to determine whether the alleged compensation is in fact a disguised_dividend 819_f2d_1315 5th cir affg tcmemo_1985_267 73_tc_1142 if a corporate payment to a shareholder employee is sec_162 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 - 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 income_tax regs ‘in 716_f2d_1241 9th cir revg and remanding tcmemo_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 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 ’ continued for deductibility under sec_162 1s a two-prong test requiring that amount of compensation must be reasonable and the payments must in fact be purely for services id pincite 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 sec_162 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 pincite4 citations and fn refs omitted in 65_tc_44 revd 544_f2d_686 3d cir revd 434_us_77 a court- reviewed opinion this court stated continued 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 40_fedclaims_712 affd in part revd in part and remanded 204_f3d_1103 fed cir am airlines inc v united_states 204_f3d_1103 fed cir 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 fed cl pincite 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 x id pincite 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 pincite tt 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_fedclaims_712 affd in part revd in part and remanded 204_f3d_1103 fed cir -- - the day trip allowances were compensation in the form of fringe_benefits ’ sec_61 provides that gross_income includes compensation_for services including fees commissions fringe_benefits and similar items emphasis added as applicable for the years through sec_1 2t a temporary income_tax regs fed reg date 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 sec_132 ' sec_1_132-6t temporary income_tax regs fed reg date recognizes that meals or meal allowances to employees for meals not otherwise deductible under sec_162 are generally considered to be taxable_income 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 fed cl pincite am airlines inc v united_states f 3d pincite for the years in issue sec_132 excluded the following fringe_benefits from gross_income no-additional-cost_service qualified_employee_discount working_condition_fringe and de_minimis_fringe -- - unless specifically excluded as a de_minimis_fringe benefit 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 sec_274 sec_274 generally disallows certain entertainment gift and travel_expenses in the case of allowances paid to cover expenses_incurred during travel sec_274 applies only if the amount is otherwise deductible as a travel expense thus sec_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 of the code before the provisions of sec_274 become applicable ’ since any meal ‘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 25ee sec_1_274-5 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 temporary income_tax regs fed reg nov continued - expenditures by employees during day trips would not be deductible by the employees as travel_expenses united_states v correll u s pincite sec_274 has no application ’ overnight trips the holding that the per_diem allowances for overnight trips are deductible as compensation under sec_162 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 sec_61 provides that compensation_for services including fringe_benefits is included in gross_income sec_62 which allows an employee a deduction for expenses_incurred continued same 3note also that the regulations under sec_274 regarding substantiation refer only to travel away from home sec_1 a and b income_tax regs sec_1_274-5t and b temporary income_tax regs fed reg date thus this court declined to apply sec_274 toa taxpayer’s business use of his automobile which was purely local 77_tc_1096 affd without published opinion 680_f2d_1388 5th cir 74_tc_525 affd without published opinion 681_f2d_805 3d cir sec_274 was subseguently amended for taxable years after date to provide that no deduction shall be allowed for listed_property which includes any passenger_automobile unless strict substantiation requirements are met -- - in his employment in computing adjusted_gross_income provides in pertinent part the term adjusted_gross_income means gross_income minus the following deductions certain trade and business deductions of employees --- a reimbursed expenses of employees ---- the deductions allowed by part vi sec_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 income_tax regs sec_1_274-5t temporary income_tax regs fed reg date an employee could meet the adequate_accounting requirement if the allowance is fully substantiated by the employee to the employer sec_1 e income_tax regs sec_1_274-5t temporary income_tax regs fed reg date alternatively the employee could meet the adequate_accounting requirement if the per_diem_allowance fell under either revrul_80_62 1980_1_cb_63 or revrul_84_164 1984_2_cb_63 because the - - 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 temporary income_tax regs fed reg date 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 temporary income_tax regs supra for the years in issue revrul_80_62 supra treated dollar_figure per day as substantiated for purposes of sec_274 while revrul_84_164 supra treated dollar_figure per day as substantiated for purposes of sec_274 the determination of which ruling applies depends on what expenses the per_diem allowances are intended to cover a plain reading of revrul_84_164 supra indicates that it applies when an allowance arrangement is exclusively for meals on the other hand in murphy v commissioner tcmemo_1993_292 we held that revrul_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 respondent argues that revrul_80_62 ‘the parties agree that the issue of the appropriate ruling to apply is limited to per_diem allowances paid before date revproc_89_67 1989_2_cb_795 construing rev_rul continued - - supra applies only where the reimbursement includes an amount for lodging expense and that revrul_84_164 supra applies to situations involving meals and incidental_expenses but not lodging however revrul_80_62 supra does not require a lodging expense and by its specific terms revrul_84_164 supra limits its applicability to allowances for meals only and deems dollar_figure 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 dollar_figure can be attributed solely to incidental_expenses however revrul_80_ c b pincite also reguires 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 dollar_figure 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 continued 1984_2_cb_63 to cover meals and incidental_expenses --- - overnight trips dollar_figure for pilots dollar_figure for other employees ’ was reasonable as required by revrul_80_62 supra am airlines inc v united_states f 3d pincite 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 ' 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 dollar_figure allowance dollar_figure for pilots for certain portions of the years in issue for overnight trips between dollar_figure and dollar_figure 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 revrul_84_164 supra petitioner paid a per_diem_allowance of dollar_figure per hour dollar_figure 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 dollar_figure dollar_figure for pilots for certain portions of the years in issue subtracting dollar_figure from this maximum allowance for day to account for meal expenses leaves dollar_figure dollar_figure for pilots for certain portions of the years in issue which would not be attributable to meals ‘petitioner either directly paid provided or reimbursed employees for costs of lodging ground transportation between airports and hotels parking and cleaning uniforms -- - deems dollar_figure 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 dollar_figure or dollar_figure be reasonable when revrul_84_164 supra treats meals as substantiated only to the extent of dollar_figure and petitioner’s own expert report attributed at most between dollar_figure and dollar_figure to incidental_expenses allowing petitioner to deduct the full allowance under the authority of revrul_80_62 supra in these circumstances conflicts with the overall function of the deemed substantiation methods in am airlines inc v united_states f 3d pincite the court_of_appeals_for_the_federal_circuit commented on this conflict american argues that even if it cannot meet the substantiation requirements of sec_274 american’s covered meals and incidental_expenses allowance of dollar_figure per day fall in the middle range of the dollar_figure meals-only safe_harbor of revrul_84_164 and the dollar_figure full per_diem safe_harbor of revrul_80_62 1980_1_cb_63 and therefore american’s dollar_figure per_diem_allowance should be deemed substantiated for sec_274 purposes we agree with the government that american’s reasoning is flawed because it ignores the fact that the deemed substantiated limit under revrul_80_62 includes lodging which accounts for a greater portion of an employee’s daily expenses further under american’s logic dollar_figure 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 sec_162 - - 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 revrul_84_164 1984_2_cb_63 as recognized in murphy v commissioner supra combined with petitioner’s failure to prove entitlement to the deemed substantiation amount in revrul_80_ 1980_1_cb_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 sec_162 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 prereguisite to deductibility under sec_162 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 -- - employees intending to compensate them for their personal services ’ 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 103_tc_525 affd 100_f3d_778 10th cir 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 anda contrary position ina later year after the limitations_period has run on the first year citations omitted ' tt 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 234_f3d_1340 11th cir brenner v commissioner tcmemo_2001_127 and 974_fsupp_528 e d va '8see hughes luce l l p v commissioner tcmemo_1994_559 affd on other grounds 70_f3d_16 5th cir wherein we outlined the following requirements for application of the duty_of_consistency the taxpayer made a representation or reported an item for federal_income_tax purposes in one year the commissioner acquiesced in or relied on that continued - - in the instant case the periods of limitation with respect to petitioner’s income_tax_liability for and 1987’ and employment_tax liability for and 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 date petitioner is simply correcting its tax_return to account for its initial erroneous treatment of the per_diem allowances as travel_expenses continued representation or report for that year and 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 the only issues in dispute in this case are the deductibility of the per_diem allowances paid for and and the computational items resulting therefrom no deficiency was determined for the taxable_year 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 directly affects other tax items such as net_operating_loss carrybacks and carryovers for the remaining years in issue tndeed it appears that petitioner’s claim that the continued 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 sec_162 wells chabot gerber gale and marvel jj agree with this concurring opinion continued allowances are deductible as compensation was predicated on respondent’s determination that the allowances were wages for employment_tax purposes 1for purposes of this case respondent has conceded that if the per_diem allowances are deductible as compensation then the percentage limitations of sec_274 will not apply -- p7 - 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 i1 ée sec_162 and d 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 ’ 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 ' two possible bases for such a suppressed premise suggest themselves that treatment as compensation under sec_162 trumps treatment as travel_expenses under sec_162 a and d --a proposition that seems difficult to square with the statutory regime or 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 - - 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 ’ 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 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 - - perspective hours its employees spend in flight do not represent travel away from its place of business ie 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 - - 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 sec_162 i dissent from the majority’s holding that the per_diem allowances for overnight trips that united paid to its employees are deductible under sec_162 i believe that the amounts of such per_diem allowances for overnight trips claimed as deductions under sec_162 are deductible under that section --- - swift j dissenting this case involves claimed ordinary deductions in the range of dollar_figure 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 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 l 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 sec_274 and are subject_to employment_tax liability not because the unsubstantiated and excess travel per_diem allowances actually constitute wage compensation to united’s - - 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 ’ 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 sec_274 and fully deductible under sec_162 an extensive body of case law limits a taxpayer’s ability to change the treatment of reported items of income and deductions see eg 111_tc_105 103_tc_525 affd 100_f3d_778 10th cir ' 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 - - 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 - -- 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 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 nothing about this opinion speaks loudly see 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 eg 58_tc_1055 affd without published opinion 474_f2d_1345 5th cir 56_tc_1324 affd without published opinion continued -- majority op p 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 sec_274 discussed below in am airlines inc v united_states 204_f3d_1103 fed cir 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 sec_31_3121_a_-1 regarding employment_tax withholding and sec_31 a -1 b regarding income_tax_withholding employment_tax regs which provide as follows sec_31_3121_a_-1 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 sec_31 a -1 b traveling and other expenses amounts paid specifically-----either a sec_2 continued f 2d 5th cir prince v commissioner tcmemo_1997_324 - - 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 dollar_figure of the overnight per_diem travel allowances should be rejected the substantiation requirements of sec_274 d i do not understand the casual manner by which the majority opinion bypasses the substantiation requirements of sec_274 d it appears to me that the substantiation requirements for travel_expenses under sec_274 are applicable to day-trip travel allowances as well as to overnight travel allowances the language of sec_1_274-5t temporary income_tax regs fed reg date states that no deduction or credit shall be allowed with respect to-- traveling away from home this regulatory language does not say that the requirements of sec_274 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 - - further the first two sentences of sec_1_274-5 income_tax regs as applicable to and and sec_1_274-5t temporary income_tax regs fed reg date confirm that even if travel_expenses are paid in_connection_with_the_performance_of_services and are otherwise deductible under sec_162 which is what the majority opinion holds they must still satisfy the substantiation requirements of sec_274 a closer look at the relevant statutory language is helpful there are important differences in the language and operation of sec_162 an allowance provision that relates only to overnight travel_expenses and of sec_274 d a disallowance provision that relates to any and all travel_expenses sec_162 provides that deductions for all taxpayers are allowed for any 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 sec_274 however in pertinent part provides sec_274 substantiation required --- no deduction or credit shall be allowed--- under sec_162 or sec_212 for any traveling expense including meals_and_lodging while away from home unless the taxpayer substantiates by adequate_records or by sufficient evidence emphasis added note that in sec_274 the away from home language is located within the parenthesis whereas in sec_162 a that language is outside the parenthesis making it clear that all travel_expenses are covered by the disallowance provision of sec_274 note also the familiar definitions of taxpayer in sec_1313 and sec_7701 that include the term corporation various tax treatises and court opinions explicitly or implicitly recognize that the substantiation requirements of sec_274 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 pincite 7th ed stechel tax mgmt bna entertainment meals gifts 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 389_us_299 rather however than qualifying as deductible compensation under sec_162 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 see sec_274 -- -- and lodging--deduction and recordkeeping requirements at a-33 mertens law of federal income_taxation ch 25d for implicit recognition of the application of the substantiation requirements of sec_274 to corporations see also numerous published court opinions illustrating the application of the substantiation requirements of sec_274 d to corporations 725_f2d_1183 9th cir 70_tc_158 65_tc_640 60_tc_728 also under sec_274 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 sec_274 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 sec_274 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 sec_274 for -- - travel_expenses it could have so provided congress not having done so it appears to me inappropriate for us to do so dollar_figure or dollar_figure per_diem limitation on overnight per_diem allowances with regard to the sec_274 substantiation requirements applicable to united’s overnight per_diem allowances respondent’s regulations and rulings are to be given particular weight see sec_274 sec_1_274-5 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 revrul_80_62 1980_1_cb_63 hereinafter referred to as the dollar_figure ruling provided that for overnight travel allowances the maximum per_diem deduction available without substantiation was dollar_figure 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 revrul_84_164 1984_2_cb_63 hereinafter referred to as the dollar_figure ruling provided that the dollar_figure 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 dollar_figure ruling's stated purpose is to amplify and to limit the dollar_figure ruling al - it appears to me that the above language constitutes a blanket disqualification of the dollar_figure 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 dollar_figure ruling in the context of overnight travel the maximum allowable_amount that may be deducted under any provision of sec_162 without substantiation can be no more than dollar_figure per day in two instances where only employee meals are covered by the allowances or where there are no lodging_expenses our memorandum opinion to the contrary in murphy v commissioner tcmemo_1993_292 does not constitute binding precedent and should not be followed ’ 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 sec_274 d limits the maximum amount deemed substantiated under united’s per_diem program to dollar_figure 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 in revproc_89_67 sec_2 1989_2_cb_795 it was made even clearer that without lodging_expenses per_diem allowances would be subject_to the dollar_figure limitation - -- 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 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 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 sec_274 the opinion appears to allow expenses that would be disallowed under sec_274 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 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 434_us_77 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 - 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 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 this is exactly what united is seeking to accomplish in this case for for the reasons stated i dissent cohen and colvin jj agree with this dissenting opinion


department of the treasury internal_revenue_service washington d c apr tax_exempt_and_government_entities_division uniform issue list xxxxxkxxkxxkxkkkxkxkxkkkmk xxxxxxxkxkkkxkkxkkxkkkkk xxkxkkkkxkkkkxkkkkkkkkk legend a seit er rat taxpayer a xxxkxxkkk kk kkk kkk ira b xxxxxxxxxkkkxkxkxkkxkkxkkkkkkkkk kkk kkk xxxxxxxkxxxxkxkxkkxkk financial_institution c xxxxxxxxxxxxxxxx ira d xxxxxxxxxkxkxkxkxkxkxkxkxkkkxkxkkkkxkkkkkkkk xxxxxxkxxxk financial_institution e xxxxxxxxxxxxxxxkxxxxkxxxxkxkxkkxkk amount xxxxxxxxxxkx dear xxxxxxxxxxxx this is in response to your request dated date as supplemented by correspondence dated date and date from your authorized representative in which you request a waiver of the 60-day rollover requirement contained in sec_408 of the internal_revenue_code the code’ the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a represents that she received a distribution totaling amount from ira b maintained by financial_institution c taxpayer a asserts that her failure to accomplish a rollover within the 60-day period prescribed by sec_408 was due to a mistake made by financial_institution b in failing to deposit amount into a rollover ira account taxpayer a further represents that amount has not been used for any other purpose taxpayer a represents that she had an ira account held in two certificates of deposit cds held in an ira account at financial_institution c page taxpayer a met with a financial upon maturity of the cds on october institution c representative to discuss ahernative investment options but intended to keep the amounts in an ira taxpayer a represents the representative mishandled the transaction by preparing documents transferring the ira monies to a taxable joint account and because the representative had another appointment rushing taxpayer a to sign the transfer forms without allowing adequate time for taxpayer a to read and understand the documents prepared by the financial_institution c representative taxpayer a states that it was never her intention to close out ira b only to change investments instead of depositing the funds into an ira the financial_institution c representative completed a transfer of amount into a non-ira account the information and documentation submitted supports taxpayer a’s assertion that financial_institution c made a mistake in failing to deposit amount account taxpayer a discovered the error in when she received a 1099-r indicating the taxable_distribution on the advice of her accountant on april taxpayer a completed a rollover of amount into ira d with financial_institution e in a rollover ira based on the facts and representations you request a ruling that the internal_revenue_service waive the 60-day rollover requirement contained in sec_408 of the code with respect to the distribution of amount from ira b sec_408 of the code provides that except as otherwise provided in sec_408 any amount_paid or distributed out of an ira shall be included in gross_income by the payee or distributee as the case may be in the manner provided under sec_72 of the code sec_408 of the code defines and provides the rules applicable to ira_rollovers sec_408 of the code provides that sec_408 of the code does not apply to any amount_paid or distributed out of an ira to the individual for whose benefit the ira is maintained if i the entire amount received including money and any other_property is paid into an ira for the benefit of such individual not later than the day after the day on which the individual receives the payment or distribution or ii the entire amount received including money and any other_property is paid into an eligible_retirement_plan other than an ira for the benefit of such individual not later than the day after the date on which the payment or distribution is received except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross_income determined without regard to sec_408 sec_408 of the code provides that sec_408 does not page apply to any amount described in sec_408 received by an individual from an ira if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in sec_408 from an ira which was not includible in gross_income because of the application of sec_408 sec_408 of the code provides a similar 60-day rollover period for partial rollovers sec_408 of the code provides that the rollover provisions of sec_408 do not apply to any amount required to be distributed under sec_408 sec_408 of the code provides that the secretary may waive the 60-day requirement under sec_408 and sec_408 of the code where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_408 of the code revproc_2003_16 r b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_408 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed for example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a are consistent with her assertion that her failure to accomplish a timely rollover of amount was caused by a mistake by financial_institution c therefore pursuant to sec_408 of the code the service hereby waives the day rollover requirement with respect to the distribution of amount from ira b provided all other requirements of sec_408 of the code except the day requirement are met the contribution of amount to ira d on date will be considered a rollover_contribution within the meaning of sec_408 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto page this letter is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact xxxxxxxxxxxkxx xxxxxxx d xxxxxxxxxx at xxx xxx-xxxx please address all correspondence to se t ep ra 7t1 sincerely yours con a wath carlton a watkins manager employee_plans technical group enclosures deleted copy of ruling letter notice of intention to disclose


internal_revenue_service number release date index no department of the treasury washington dc person to contact telephone number refer reply to plr-119558-98 cc intl b01 date date a date b date c year d country e dear this is in response to a letter dated date by a’s authorized representative requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of long-term_resident status did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a a former long-term_resident of the united_states within the meaning of sec_877 relinquished her u s lawful permanent resident status expatriated on date b by returning her green card to the u s embassy in country e a has been a citizen of country e during all of her life by reason of her birth on date c in country e a and a's parents were born in country e a became a permanent resident of the u s and obtained her green card in year d on the date of a’s expatriation her net_worth exceeded the net_worth required under sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long-term_resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift plr-119558-98 page tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long term-resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen or former long term-resident whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_27_irb_30 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because on the date of a’s expatriation a was and continues to be a resident fully liable to income_tax in country e the country where a was born a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission accordingly based solely on the information submitted and the representations made it is held that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 it is further held that a will not be treated under sec_877 as having as one of her principal purposes of expatriating the avoidance of u s taxes because the information submitted clearly established the lack of a principal purpose to avoid taxes under subtitle a or b of the code except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to her loss of permanent residence status or for taxable periods plr-119558-98 page after her loss of permanent residence status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling whether or not a is otherwise required to file a return this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a sincerely yours ____________________ allen goldstein reviewer office of the associate chief_counsel international cc assistant_commissioner international international district operations op in d chief examination_division