CHARLES A. BOYD AND DARBY A. HARVEY, F.K.A. DARBY A. BOYD, ET AL.,1 PETITIONERS v. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT

Ps are shareholders in C, a trucking company formed
pursuant to sec. 1361, I.R.C. C compensates its drivers at a
rate of 25 to 32 cents per mile. C also provides a per diem
allowance of 9 cents per mile. Ps deducted 80 percent of the
per diem allowance paid to the drivers. At trial, Ps presented
evidence as to the estimated, nonmeal travel expenses
incurred by C's drivers. C's drivers testified as to the average
amount of their per diem allowance that they spent on items
such as lodging, truck parking, showers, laundry, and Federal
Express charges. Held, despite the presentation of evidence at
trial as to the estimated, nonmeal travel expenses incurred by
C's drivers, Ps have failed to establish a basis for deducting
80 percent of the per diem allowance paid to the drivers.
Beech Trucking Co. v. Commissioner, 118 T.C. 428 (2002), fol-
lowed. Held, further, pursuant to Rev. Proc. 94-77, 1994-2
C.B. 825, Rev. Proc. 96-28, 1996-1 C.B. 686, and Rev. Proc.
96-64, 1996-2 C.B. 427, Ps may deduct only 50 percent of the
per diem allowance paid to the drivers. Held, further, sec.
4.02(5) of Rev. Proc. 94-77, 1994–2 C.B. 825, Rev. Proc. 96-
28, 1996-1 C.B. 686, and Rev. Proc. 96-64, 1996-2 C.B. 427,
is not invalid. Held, further, Ps have not substantiated the
actual travel expenses incurred by the drivers pursuant to
sec. 274(d), I.R.C. Held, further, the portion of the per diem
allowance that Ps estimate is allocated to nonmeal travel
expenses may not be deducted in full.

J. Betsy Meacham and Roger D. Rowe, for petitioners.
Caroline R. Krivacka, for respondent.

VASQUEZ, Judge: Respondent disallowed deductions of $836,7292 for the taxable year ending December 31, 1995;

1 Cases of the following petitioners are consolidated herewith: Ralph E. and Lee Ann Bradbury, docket No. 13230-01; Charles E. Harvey, docket No. 13231-01; Deborah G. Harvey, docket No. 13232-01; Mark H. and Jackie Guffin, docket No. 13233-01; Warren D. and Debra W. Garrison, docket No. 13234-01; Mark L. and Jill G. Pryor, docket No. 13235-01; Diane M. Miller, docket No. 13236-01; Edward M. and Bonnie P. Harvey, docket No. 13237-01; and James E. and Lynn B. Willbanks, docket No. 13238-01.

2 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years at issue, all Rule references are to the Tax Court Rules of Practice and Procedure, Continued

$828,067 for the taxable year ending December 31, 1996; $198,462 for the taxable year ending March 31, 1997; and $1,048,686 for the taxable year ending December 31, 1997, claimed by Continental Express, Inc. (Continental or the corporation), an S corporation in which petitioners are shareholders. At issue is the amount that petitioners may deduct with respect to per diem allowances Continental provided to its drivers, and, particularly, whether the 50-percent limitation of section 274(n) applies to the total amount of the per diem payments.

FINDINGS OF FACT

The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this ref

erence.

Continental Express, Inc.

Continental is an S corporation within the meaning of section 1361(a)(1). At the time they filed their petitions, all petitioners resided in Arkansas, except Edward and Bonnie Harvey, who resided in Florida, and Deborah Harvey, who resided in Tennessee. Petitioners' yearend ownership percentages as of December 31, 1995, December 31, 1996, and March 31, 1997, were:

Continental was engaged in the long-haul, irregular route trucking business. Continental hauled nonbulk dry goods in trailers from coast to coast in the 48 continental United States. The average length of a haul was 1,750 to 1,850 miles. Continental did not have a dedicated route, and drivers often made triangular runs. That is, drivers often picked up goods in New Jersey and the northeast and delivered the goods to California and the west coast. Then they picked up goods on the west coast and delivered them to points such as Arkansas, Texas, or the Midwest. Eventually, they delivered goods to New Jersey and the east coast, and headed west again.

Continental's Drivers

Continental employed between 277 and 324 drivers during the years in issue. Drivers were away from home for a minimum of 21 consecutive days per trip and were on the road for an average total of 25 to 28 days per month. Some drivers were away for 2 to 3 months at a time before returning home. Drivers accrued 1 day off for every 7 days of driving.

Drivers averaged approximately 322 to 382 miles per day. U.S. Department of Transportation regulations prohibited drivers from traveling more than 550 miles per day. Additionally, the Department of Transportation regulations required drivers to be off duty for 8 hours for every 8 hours on duty. The regulations limited drivers to a maximum of 70 hours on duty per week.

With an exception for layovers, Continental drivers earned compensation only when the wheels on the truck were turning. Continental paid its drivers in a per-mile arrangement ranging from 25 to 32 cents per mile, depending on experience. Drivers also received a per diem allowance paid through an accountable plan. The per diem, paid to drivers in addition to compensation, was intended to reimburse drivers for travel expenses. The per diem was 9 cents per mile for single drivers.3 Continental's management believed drivers typically received a per diem allowance in the low $30 range for 1 day of driving.

Continental's per diem allowance plan was similar to the majority of per diem allowance plans used by other companies in the trucking industry.

Continental's Trucks

Continental drivers operated International tractors. Each tractor had a cab with a sleeper berth behind the driver's and passenger's seats. The engine in a Continental tractor was located beneath the driver's and passenger's seats. The size of the cab, including the sleeper berth, was 96 inches across by 110 inches deep by 60 inches high.

The sleeper berth had no powered air vents. Ventilation, heating, and air conditioning were available only through vents in the dash of the cab and powered by the engine. The berth had no running water, no toilet, and very little storage. One driver described the sleeper berth as a "rolling jail cell".

The sleeper berth contained a twin size mattress covered in plastic, but no box spring. Newer models of Continental's tractors contained larger sleeper berths, allowing for a 60inch mattress.

The sleeper berth was designed to provide a driver with room to rest while transporting a load of freight. Drivers' sleep was less restful in the sleeper berth than in a motel. The sleeper berth vibrated and was not quiet because the truck engine remained on while drivers slept so that they had ventilation. Additionally, drivers worried about burglary of their cargo while they slept in the sleeper berth.

3 Single drivers constituted 99 percent of Continental's drivers. One percent of the drivers drove in two-person teams. Each team driver received a per diem allowance of 4.5 cents per mile.

Drivers slept in the sleeper berths more often than not. Continental management assumed that drivers slept in the sleeper berths on average 6 of 7 nights per week.

Motel Rentals

Drivers would sleep in a motel while they traveled to prevent fatigue and to maintain safety. While they were traveling, Continental generally did not reimburse drivers for motel rooms.4 Drivers slept in a motel anywhere from two or three times per month to 3 nights per week. Generally, drivers did not spend more than $30 to $35 for a motel.

Drivers' Other Travel Expenses

In addition to the expense of renting a motel room, drivers also incurred expenses for truck parking, showers, laundry, cleaning supplies for the cab, sheets for the sleeper berth, and Federal Express charges for shipping bills of lading. Drivers also incurred expenses for their meals. Truck parking cost approximately $5 to $10 per night, if free parking could not be obtained. Each shower at a truck stop cost approximately $5 to $6. Laundry cost between $5.50 and $8 per week. Federal Express charges were approximately $8 per week.

Continental drivers were free to spend (or not spend) the per diem in any manner they chose. Drivers generally spent all of the per diem on the travel expenses they incurred while working for Continental. The per diem, however, did not and could not cover all of the expenses drivers incurred, even for a driver who lived frugally and stayed in a motel only 2 or 3 nights per month. The per diem was insufficient to pay for a nightly motel in addition to meals.

Continental's Payroll, Accounting, and Record Keeping

Continental's accounting and payroll system tracked miles driven, not days worked. In 1994, Continental purchased a new computer system and software designed for the trucking industry at a cost in excess of $400,000. The new system

4 Pursuant to a corporate layover policy, Continental provided $25 per day in wages and up to $30 reimbursement for a motel if the driver was not moving. For example, if a driver was waiting to unload or load the trailer at its destination due to a backup, the driver would receive layover pay and reimbursement for a motel on the second night the driver was waiting to unload.