Transport Labor Contract/leasing, Inc. & Subsidiaries v. Commissioner of Internal Revenue

Citations: 461 F.3d 1030; 2006 U.S. App. LEXIS 21481Docket: 05-3827

Court: Court of Appeals for the Eighth Circuit; August 23, 2006; Federal Appellate Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

The case involves Transport Labor Contract/Leasing, Inc. (TLC), which provided Professional Employer Organization (PEO) services by employing truck drivers and leasing them to trucking clients. The Internal Revenue Code permits employers to deduct employee travel expenses, including a per diem for driving expenses, but limits food and beverage deductions to 50% under § 274(n). The Tax Court concluded that TLC was responsible for a tax deficiency because it was deemed the common law employer of the drivers and therefore subject to the § 274(n) limitation. TLC appealed, arguing it was not subject to this limitation. The Eighth Circuit Court found that the Tax Court misapplied § 274, determining that the limitation should only apply to either the entity that makes the expenditure or the one that actually bears the expense, not both. As such, if per diem payments are considered reimbursements rather than income, the employer bears the deduction limitation. The appellate court reversed the Tax Court's decision, ruling that TLC proved it was not subject to the § 274(n) limitation.

The inclusion of three parties complicates the application of § 274(n), which imposes limitations on per diem payments. A special exception applies if the payment is made under a reimbursement arrangement between one person and another, excluding employers. In Beech Trucking Co. v. Commissioner, the Tax Court ruled that a trucking company was subject to the § 274(n) limitation because it was the common law employer of its drivers, despite leasing them from a Professional Employer Organization (PEO). In the current case, TLC's per diem payments to drivers were not classified as wages, leading to a dispute over whether the § 274(n) limitation applies to TLC or the trucking companies. The Tax Court concluded that TLC, as the common law employer of the drivers, was subject to the limitation, but this ruling was contested on appeal. The Commissioner argued that the Tax Court's focus on the common law employer status was flawed, suggesting that the proper analysis should have considered whether TLC qualified for the § 274(e)(3) exception, which involves assessing whether TLC incurred expenses under a reimbursement arrangement with the trucking companies and if it complied with specific accounting requirements. After the initial ruling, TLC sought reconsideration, claiming eligibility for the § 274(e)(3)(B) exception and highlighting potential tax duplication issues. The Tax Court denied this claim, stating it had been abandoned during trial, a decision the Commissioner now defends, though the appeal argues against this rationale.

TLC contends that the Tax Court erred in dismissing the issue of its per diem expenses, asserting that the Commissioner incorrectly determined these expenses fell outside the deduction limitation exceptions outlined in IRC § 274(e)(3)(B). TLC's First Amended Petition clearly raised this issue, and the Tax Court recognized that the case hinged on the application of § 274(e)(3). The Tax Court's obligation was to correctly apply this statute regardless of how extensively TLC elaborated on it in its trial memorandum. Therefore, the § 274(e)(3)(B) issue was adequately preserved for appellate review, and errors in its interpretation warrant scrutiny, despite the Tax Court's characterization of the issue as "abandoned."

The Tax Court's handling of the case, particularly its dismissal of TLC's motion for reconsideration, demonstrated a lack of attention to the principle that the § 274(n) limitation should only be applied once. TLC provided legislative history indicating that § 274(e)(3) aims to prevent double disallowance of expenses, but the Tax Court claimed the issue of tax duplication was not timely raised. However, appellate review can occur for unraised issues if ignoring them would contradict principles of substantial justice.

To determine TLC's eligibility for the § 274(e)(3) exception, further factual context is needed. Although TLC's Exclusive Lease Agreement did not mention per diem payments, the appeal record includes comprehensive details on how TLC substantiated these payments and communicated with clients. Evidence indicates that clients set the total compensation for drivers and the percentage designated for per diem, which TLC's invoices reflected. TLC maintained proper records, sending clients annual letters about total per diem payments and advising them about the tax treatment required under IRC § 274(n).

The Commissioner did not dispute the adequacy of TLC's record-keeping under § 274(d). The critical remaining question is whether TLC had a "reimbursement or other expense allowance arrangement" with its trucking clients, as required by § 274(e)(3). The statute lacks a definition for this arrangement, but regulations indicate that it aligns with the meaning established in section 62(a)(2)(A), which governs employee deductions for reimbursed business expenses.

The term "reimbursement or other expense allowance arrangement" is defined by specific requirements in 26 C.F.R. § 1.62-2, specifically paragraphs (d) (business connection), (e) (substantiation), and (f) (returning excess amounts). The Commissioner does not dispute that TLC's data to trucking clients about per diem payments met these requirements. However, the Commissioner contends that merely passing costs to customers does not fulfill the reimbursement arrangement under § 274(e)(3). The distinction between compensating a vendor and reimbursing specific expenses is emphasized, akin to the difference between employee wages and expense reimbursements, both governed by the same regulations.

TLC must demonstrate that its reimbursement arrangement with trucking companies meets the regulations to qualify for exceptions from § 274(n) limitations. The Tax Court's focus on the lease agreement's silence regarding per diem payments and the payment structure is criticized as irrelevant; the term "arrangement" suggests a broader interpretation than "contract." Congress intended for expense substantiation to be proven through adequate records or corroborative evidence.

The undisputed facts show that TLC paid per diem expenses to truck drivers and provided the necessary substantiation to its clients, establishing a compliant reimbursement arrangement. The Commissioner's arguments are found unconvincing, leading to the conclusion that TLC is legally exempt from the § 274(n) limitation and entitled to a reassessment of deficiencies. Consequently, the Tax Court's decision is reversed and remanded for further proceedings consistent with this ruling.