Court Opinion

ID: 4474178
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:48.062879+00
Date Added: 2024-06-11T15:04:05.159138
License: Public Domain

Swift, J., dissenting: This case involves claimed ordinary deductions in the range of $100 million and extensive arguments by the parties. If it works (which I don’t believe it does), the majority opinion is remarkable in its brevity. Recharacterization of Per Diem Allowances as Employee Compensation The majority opinion suggests that respondent’s characterization herein for corporate income tax purposes of United’s per diem allowances is inconsistent with respondent’s characterization of the per diem allowances in the pending employment tax litigation. See majority op. p. 11. I disagree. As I understand respondent’s positions, in both the income tax and the employment tax contexts, respondent is treating the per diem allowances as travel expenses. Respondent simply takes the position, as a matter of law, that the income tax and the employment tax regimes are not necessarily in pari materia and that under those different tax regimes the day-trip per diem allowances and the excess of the overnight per diem allowances (i.e., the portion of the per diem allowances not substantiated) are nondeductible to United for corporate income tax purposes (because of United’s failure to satisfy the substantiation requirements of section 274(d)) and are subject to employment tax liability (not because the unsubstantiated and excess travel per diem allowances actually constitute wage compensation to United’s employees but because the employment tax provisions treat unsubstantiated and excess per diem travel allowances as subject to employment taxes as if they were compensation). Any disagreement with that legal interpretation should be addressed on the merits, and the innuendo in the majority opinion of factual inconsistency on respondent’s part in the characterization of per diem allowances is inappropriate. The more significant concern with regard to “inconsistent” characterizations in this case should be with United’s efforts to recharacterize entirely the per diem allowances that United, its employees, and the labor unions, for all other purposes, treated as employee travel expenses.1 United now, years later, and solely for Federal income tax purposes, attempts to inconsistently treat such travel expenses as employee compensation, outside the scope of the substantiation requirements of section 274(d), and fully deductible under section 162(a)(1). An extensive body of case law limits a taxpayer’s ability to change the treatment of reported items of income and deductions. See, e.g., Norwest Corp. & Subs. v. Commissioner, 111 T.C. 105, 146-147 (1998); LeFever v. Commissioner, 103 T.C. 525, 541-545 (1994), affd. 100 F.3d 778 (10th Cir. 1996). 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. 8-10 and also the headnote, the majority opinion repeatedly describes the amounts in controversy as “per diem” related to employee “trips”. Surely, “per diem” related to employee “trips” constitutes travel expenses. The majority’s avoidance of the word “travel” when mentioning the per diem allowances does not conceal the character of the per diem allowances as travel expenses. No mention is made in the majority’s Findings of Fact that the per diem allowances represent a payment “for services”. In fact, in the majority’s brief Findings of Fact, nothing is found, or even mentioned, as to the “purpose” or “intent” for which the per diem allowances were paid (other than “for” employee “trips”).2 Nothing about this opinion “speaks loudly”, see majority op. p. 11, except perhaps its ultimate conclusion under which millions of dollars of United’s travel expenses become fully deductible in spite of United’s failure to satisfy the substantiation requirements of section 274(d), discussed below. In Am. Airlines, Inc. v. United States, 204 F.3d 1103, 1108 (Fed. Cir. 2000), in connection with the ongoing employment tax dispute, the U.S. Court of Appeals for the Federal Circuit appears to have held that the travel expenses in issue (if, on remand, they are found to have been reasonably expected to be incurred by the airline employees) could not be re-characterized as wage compensation for employment tax withholding purposes. In this regard, the Court of Appeals for the Federal Circuit relied on and quoted both section 31.3121(a)-l(h) (regarding employment tax withholding) and section 31.3401(a)-l(b)(2) (regarding income tax withholding), Employment Tax Regs., which provide as follows: [§ 31.3121(a)-l](h) Amounts paid specifically — either as advances or reimbursements — for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment. [§ 31.3401(a)-l(b)](2) Traveling and other expenses. 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 and are not subject to withholding. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment. [Emphasis added.] United’s attempt to recharacterize as deductible compensation the day-trip per diem travel allowances and the excess portion (over $14) of the overnight per diem travel allowances should be rejected. The Substantiation Requirements of Section 274(d) I do not understand the casual manner by which the majority opinion bypasses the substantiation requirements of section 274(d). It appears to me that the substantiation requirements for travel expenses under section 274(d) are applicable to day-trip travel allowances, as well as to overnight travel allowances. The language of section 1.274-5T(a)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46027 (Nov. 6, 1985), states that “no deduction or credit shall be allowed with respect to — (1) Traveling away from home”. This regulatory language does not say that the requirements of section 274(d) do not apply to day-trip travel expenses. Any such reading would be contrary to the explicit language of the statute, as pointed out below. Further, the first two sentences of section 1.274-5(e), Income Tax Regs., as applicable to 1985, 1986, and 1987, and section 1.274-5T(f)(1), Temporary Income Tax Regs., 50 Fed. Reg. 46027 (Nov. 6, 1985), confirm that even if travel expenses are paid in connection with the “performance of services” and are otherwise deductible under section 162 (which is what the majority opinion holds), they must still satisfy the substantiation requirements of section 274(d). A closer look at the relevant statutory language is helpful. There are important differences in the language and operation of section 162(a)(2) (an allowance provision that relates only to overnight travel expenses) and of section 274(d)(1) (a disallowance provision that relates to any and all travel expenses). Section 162(a)(2) provides that deductions for all taxpayers are allowed for any: (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business. [Emphasis added.] Section 274(d)(1), however, in pertinent part provides: SEC. 274(d). Substantiation Required. — No deduction or credit shall be allowed— (1) under section 162 or 212 for any traveling expense (including meals and lodging while away from home), # ij: ‡ # H* # unless the taxpayer substantiates by adequate records or by sufficient evidence * * * [Emphasis added.] Note that in section 274(d)(1) the “away from home” language is located within the parentheses (whereas in section 162(a)(2) that language is outside the parentheses), making it clear that all travel expenses are covered by the disallowance provision of section 274(d). Note also the familiar definitions of “taxpayer” in sections 1313(b) and 7701(a)(1) that include the term “corporation”.3  Various tax treatises and court opinions explicitly or implicitly recognize that the substantiation requirements of section 274(d) apply to corporations, not just to employees of corporations (as the majority opinion may be read to suggest). For example, see Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 5.03[1], at 5-12 (7th ed. 2000); Stechel, 520 Tax Mgmt. (bna), “Entertainment, Meals, Gifts and Lodging — Deduction and Record-keeping Requirements,” at A-33 (1998); and 6 Mertens, Law of Federal Income Taxation, ch. 25D (1998), for implicit recognition of the application of the substantiation requirements of section 274(d) to corporations; see also numerous published court opinions illustrating the application of the substantiation requirements of section 274(d) to corporations: Meridian Wood Prods. Co. v. United States, 725 F.2d 1183, 1188-1189 (9th Cir. 1984); Ma-Tran Corp. v. Commissioner, 70 T.C. 158, 169-170 (1978); Buddy Schoellkopf Prods., Inc. v. Commissioner, 65 T.C. 640, 642-645 (1975); Henry Schwartz Corp. v. Commissioner, 60 T.C. 728, 741-743 (1973). Also, under section 274(a), Congress restricted the deductions for entertainment, amusement, and recreation expenses where such expenses are not directly related to or associated with the active conduct of a taxpayer’s trade or business. Under section 274(e), however, Congress provided an exception for such expenses where a taxpayer affirmatively elects to treat, and in fact does treat, the expenses as wage compensation subject to income and employment tax withholding. Congress obviously knew how to provide a recharacterization option and an election out of the section 274(d) substantiation requirements. Had Congress intended to provide taxpayers such as United with a similar recharacterization option and an election out of the substantiation requirements of section 274(d) for travel expenses, it could have so provided. Congress not having done so, it appears to me inappropriate for us to do so. $44 or $14 Per Diem Limitation on Overnight Per Diem Allowances With regard to the section 274(d) substantiation requirements applicable to United’s overnight per diem allowances, respondent’s regulations and rulings are to be given particular weight. See sec. 274(d); sec. 1.274 — 5(c)(2)(b), Income Tax Regs. The majority opinion, however, ignores the specific rulings that respondent promulgated which apply to employer-provided overnight travel allowances and to the years in controversy herein. Rev. Rui. 80-62, 1980-1 C.B. 63 (hereinafter referred to as the $44 Ruling), provided that, for overnight travel allowances, the maximum per diem deduction available without substantiation was $44 per day, which included travel expenses for meals and lodging, laundry, cleaning and pressing of clothing, and fees and tips for services, such as for waiters and baggage handlers. However, Rev. Rul. 84 — 164, 1984-2 C.B. 63 (hereinafter referred to as the $14 Ruling), provided that the $44 Ruling did not apply where the “per diem allowances [were] intended to cover only employee meal expenses, as when the employer pays for directly or furnishes the lodging, or when there is no lodging expense.” (Emphasis.added.) The $14 Ruling’s stated purpose is to amplify and to limit the $44 Ruling. It appears to me that the above language constitutes a blanket disqualification of the $44 Ruling where there are no lodging expenses relating to overnight travel to be paid out of per diem travel allowances. As I read the language of the $14 Ruling, in the context of overnight travel, the maximum allowable amount that may be deducted under any provision of section 162 without substantiation can be no more than $14 per day in two instances: (1) Where only employee meals are covered by the allowances, or (2) where there are no lodging expenses. Our memorandum opinion to the contrary in Murphy v. Commissioner, T.C. Memo. 1993-292, does not constitute binding precedent and should not be followed.4  In the present case, because there were no lodging expenses to be paid by United’s employees out of the overnight per diem travel allowances the employees received, section 274(d)(1) limits the maximum amount deemed substantiated under United’s per diem program to $14 per day. Union Negotiations United and the labor unions specifically bargained for and characterized the per diem allowances in the union contracts as travel expenses. United did not pay employment taxes on the per diem allowances, and the employees did not report the per diem allowances in income. Where the tax consequences differ for the characterization of expenses as either travel or compensation, the characterization of the expenses by the parties should be adhered to. The majority opinion simply negates the bargaining positions of United, on the one hand, and of the labor unions and the employees, on the other, to pay and to receive travel expenses, not compensation income. In his concurring opinion, Judge Thornton is correct to ask what was bargained for between United, its employees, and the unions. The answer, however, is explicitly provided in the stipulated facts — per diem travel allowances, not compensation. Paragraph 13 of the stipulation of facts states the following: Because pilots and flight attendants continuously traveled for United, requiring specific documentation for meals and incidental expenses would have been administratively burdensome. The per diem arrangement was thus designed to reimburse the employees for meals and incidental travel expenses, without requiring them to retain and submit receipts for each individual expenditure. [Emphasis added.] The fact that for the administrative convenience of United and the employees the per diem allowances were computed on an hourly basis does not convert the allowances into something other than travel expenses. Judicially Created Loophole The majority opinion appears to create a broad loophole for corporations and would circumvent Congress’ intent with regard to the substantiation requirements of section 274(d). The opinion appears to allow expenses that would be disallowed under section 274(d) to be recharacterized as deductible compensation, provided the expenses are paid by an employer to an employee in the context of any employment relationship. See majority op. p. 10, 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 re-characterized compensation, but the employees would avoid income and employment taxes on the compensation. The majority opinion erroneously relies on Commissioner v. Kowalski, 434 U.S. 77 (1977), in which the Supreme Court held that cash meal allowances provided to a State trooper were to be included in the trooper’s gross income. The meal allowances were not claimed as travel expenses, and substantiation of the expenses was not at issue. Further, neither party herein relied on nor even cited Kowalski. Lastly, by recharacterizing the travel expenses as deductible compensation for 1987 and later years, the portion of the previously treated travel expenses that represented meal and entertainment expenses becomes freed from the various percentage limitations applicable thereto and becomes fully deductible. See sec. 274(n). This is exactly what United is seeking to accomplish in this case for 1987. For the reasons stated, I dissent. Cohen and Colvin, JJ., agree with this dissenting opinion.   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.    In analyzing whether an intent to compensate existed, we typically consider, among other factors: Whether there was corporate authorization for the payment of compensation; whether the books and records of the corporation reflected that the payments were treated as payments of compensation; whether the payments were reported to the recipients on Forms W-2, Wage and Tax Statement, as wage compensation; and whether the payments were treated as compensation on the employer’s and employees’ tax returns as filed. See, e.g., Paula Constr. Co. v. Commissioner, 58 T.C. 1055, 1059 (1972), affd. without published opinion 474 F.2d 1345 (5th Cir, 1973); Elec. & Neon, Inc. v. Commissioner, 56 T.C. 1324, 1338-1340 (1971), affd. without published opinion 496 F.2d 876 (5th Cir. 1974); Prince v. Commissioner, T.C. Memo. 1997-324.    In his concurring opinion, Judge Ruwe notes that United’s per diem allowances covering meal expenses for day trips are not deductible as travel expenses under United States v. Correll, 389 U.S. 299 (1967). Rather, however, than qualifying as deductible compensation under sec. 162(a)(1), such day trip meal expenses remain nondeductible to United because they represent the payment by United of personal living expenses of United’s employees. See sec. 262 and the Supreme Court’s holding in Cowell. With regard to the various incidental travel expenses that also were included in United’s day trip per diem allowances, they remain subject to the substantiation requirements of sec. 274(d). See sec. 274(d)(1).    In Rev. Proc. 89-67, sec. 2, 1989-2 C.B. 795, 797, it was made even clearer that without lodging expenses per diem allowances would be subject to the $14 limitation.