                         122 T.C. No. 18



                     UNITED STATES TAX COURT



              CHARLES A. BOYD AND DARBY A. HARVEY,
          f.k.a. DARBY A. BOYD, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 13229-01,   13230-01,     Filed April 27, 2004.
                 13231-01,   13232-01,
                 13233-01,   13234-01,
                 13235-01,   13236-01,
                 13237-01,   13238-01.

          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.


     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 -

          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), followed.

          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 only deduct 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; $828,067


     2
         Unless otherwise indicated, all section references are to
                                                    (continued...)
                                - 3 -

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 reference.

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:

         Shareholder                    Ownership Percentage

     Ralph E. Bradbury                         5.00
     Warren D. Garrison                        1.25


     2
      (...continued)
the Internal Revenue Code in effect for the years at issue, all
Rule references are to the Tax Court Rules of Practice and
Procedure, and all amounts are rounded to the nearest dollar.
                                 - 4 -

     Bonnie P. Harvey                           5.00
     Edward M. Harvey                          86.25
     Diane M. Miller                            1.25
     James E. Willbanks                         1.25

Petitioners’ yearend ownership percentages as of December 31,

1997, were:

         Shareholder                     Ownership Percentage

Darby A. Harvey f.k.a. Darby A. Boyd           .98
     (Darby Harvey Irrevocable and
     Intervivos Trust)
Ralph E. Bradbury                              5.00


Mark H. Guffin                                  .98
     (Mark Guffin Irrevocable
     and Intervivos Trust)
Charles E. Harvey                               .98
     (Charles Harvey Irrevocable
     and Intervivos Trust)
Deborah G. Harvey                               .98
     (Deborah Harvey Irrevocable
     and Intervivos Trust)
Bonnie P. Harvey                               2.55
Edward M. Harvey                              86.9125
Diane M. Miller                                 .6375
Jill G. Pryor                                   .98
     (Jill Guffin Harvey Irrevocable
     and Intervivos Trust)

     Continental is engaged in the long-haul, irregular route

trucking business.   Continental hauls 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
                                 - 5 -

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 on 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
                                 - 6 -

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




     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.
                               - 7 -

tractors contained larger sleeper berths, allowing for a 60-inch

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.

     Drivers slept in the sleeper berth more often than not.

Continental management assumed that drivers slept in the sleeper

berth 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.




     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.
                                 - 8 -

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 Recordkeeping

      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 tracked only

miles driven, not number of days worked.      To track and pay per
                               - 9 -

diem on a basis other than miles driven would have required a

duplicate accounting system.

     Between 1995 and 1997, drivers were in short supply.

Continental could not abruptly change its compensation system if

its drivers would have perceived the change to their detriment,

as Continental would lose large numbers of drivers to competing

trucking firms.   Continental management concluded that in times

of short labor supply, changes in a compensation system must

occur across the industry, and no single company can change

significantly its compensation without an adverse impact on its

driver retention.

     Continental made a business decision to substantiate

deductions for its drivers’ per diem allowance using the revenue

procedures prescribed by the Internal Revenue Service.

Continental did not require drivers to submit receipts or records

of their travel expenses, if any, except pursuant to layover and

phone call policies.   Drivers generally did not submit receipts

or other records to the corporation.   Indeed, when drivers did

submit receipts for travel expenses not related to layover or

phone calls, Continental destroyed the receipts or put them back

in the driver’s trip envelope without consideration.

     Continental paid the per diem in lieu of reimbursing actual

expenses for meals and incidental expenses incurred by drivers.
                               - 10 -

Petitioners’ Tax Returns

     On its Forms 1120S, U.S. Income Tax Return for an S

Corporation, for the years at issue, Continental deducted (as

part of “Other deductions”) driver-related expenses including

fuel, tolls, “motels & layover”, “per diem”, and “hiring cost--

drivers”.   The amounts deducted as per diem payments were

$2,231,279 for the taxable year ending December 31, 1995;

$2,208,178 for the taxable year ending December 31, 1996;

$529,232 for the taxable year ending March 31, 1997; and

$2,796,499 for the taxable year ending December 31, 1997.     These

claimed per diem amounts represent 80 percent of the actual per

diem payments made to the drivers.      To arrive at the 80-percent

claimed deduction, Continental applied the section 274(n) 50-

percent limitation to 40 percent of the total per diem amounts

paid during the tax years and deducted the remaining 60 percent

in full.

                               OPINION

     Section 274(n) allows a taxpayer to deduct only 50 percent

of the amount that otherwise would qualify as an allowable

deduction for meals or business entertainment.     The issue is

whether this 50-percent limitation applies to the full amount of

per diem allowances paid with respect to Continental’s drivers,

as respondent contends.    For the reasons discussed below, we

agree with respondent.
                              - 11 -

     At the outset, we note the similarities between this case

and Beech Trucking Co. v. Commissioner, 118 T.C. 428 (2002).5     In

Beech Trucking Co., the corporation took the same tax position

regarding deductibility of the per diem allowance paid to its

drivers as petitioners in this case.    Five of the six

shareholders of Beech Trucking are petitioners in this case.6

Beech Trucking drivers were dispatched on both long and short

hauls.   Beech Trucking trucks had sleeper berths.    Beech

Trucking’s long-haul drivers earned between 24 and 26 cents per

mile in wages, which included a 6.5 cents per mile per diem

allowance.   Short-haul drivers earned a flat weekly salary and an

additional 6.5 cents per mile per diem.    See Beech Trucking Co.

v. Commissioner, supra at 430-432.     On its Forms 1120S, U.S.

Income Tax Return for an S Corporation, for 1995 and 1996, Beech

Trucking claimed a deduction that was 80 percent of the actual

per diem allowance paid to its drivers.    See id. at 432.

     In Beech Trucking Co., petitioners argued unsuccessfully


     5
        The petitioners in Beech Trucking Co. v. Commissioner,
118 T.C. 428 (2002), moved to dismiss their appeal to the Court
of Appeals for the Eight Circuit. On Oct. 23, 2002, the Court of
Appeals granted the motion to dismiss.
     6
        Ed Harvey owned 26.000 percent of Beech Trucking. Ralph
Bradbury owned 16.667 percent of Beech Trucking. Diane Miller
owned .667 percent of Beech Trucking. James Willbanks owned .667
percent of Beech Trucking. Warren Garrison owned .667 percent of
Beech Trucking. Arthur Beech, the only shareholder who is not a
shareholder of Continental Express, Inc., owned 55.333 percent of
Beech Trucking. See id. at 430.
                              - 12 -

that Rev. Proc. 94-77, 1994-2 C.B. 825, and Rev. Proc. 96-28,

1996-1 C.B. 686, were invalid “insofar as they operate to

characterize the Beech Trucking per diem payments as being solely

for meals and incidental expenses (and not for lodging) and to

apply the section 274(n) limitation to nonmeal expenses that were

covered by the per diem”.   Beech Trucking Co. v. Commissioner,

supra at 438.

     The analysis and reasoning in Beech Trucking Co. apply to

this case.   The doctrine of stare decisis is important to this

and other Federal courts.   Hesselink v. Commissioner, 97 T.C. 94,

99-100 (1991).   Stare decisis is the preferred course because it

promotes the evenhanded, predictable, and consistent development

of legal principles, fosters reliance on judicial decisions, and

contributes to the actual and perceived integrity of the judicial

process.   Id. at 99.

     The key difference between Beech Trucking Co. and this case

is that here, petitioners presented evidence at trial as to the

estimated, nonmeal travel expenses incurred by Continental’s

drivers.   In Beech Trucking Co., the taxpayer “offered no

independent substantiation of the amounts of lodging or

incidental expenses that the Beech Trucking drivers might have

incurred, or otherwise established any reasonable basis for

allocating the per diem payments to meals, incidentals, and

lodging expenses incurred by the drivers.”   Beech Trucking Co. v.
                                - 13 -

Commissioner, supra at 450.     Here, Continental’s drivers

testified as to the average amount of the per diem allowance that

they spent on items such as lodging, truck parking, showers,

laundry, and Federal Express charges.      Despite the presentation

of this evidence, we hold that petitioners have failed to

establish a basis for deducting 80 percent of the per diem

allowance paid to Continental’s drivers.

     Petitioners in this case have raised arguments regarding the

validity of the revenue procedures which we must consider.

Furthermore, unlike in Beech Trucking Co., petitioners in this

case, as noted above, attempted to substantiate the drivers’

travel expenses.   We must consider whether this evidence meets

the requirements of section 274(d).      Additionally, petitioners

here argue that they are entitled to a 100-percent deduction for

the portion of the per diem allowance that they estimate is

allocable to nonmeal expenses.

I.   Whether Petitioners May Deduct 80 Percent of the Per Diem
     Allowance Paid to Continental’s Drivers

     A.   Statutory Framework

     Section 162 allows a deduction for all ordinary and

necessary expenses paid or incurred during the taxable year in

carrying on a trade or business.    Section 162 enumerates certain

types of deductible expenses, including “a reasonable allowance

for salaries or other compensation for personal services actually
                               - 14 -

rendered”, sec. 162(a)(1), and “traveling expenses (including

amounts expended for meals and lodging * * *) while away from

home in the pursuit of a trade or business”, sec. 162(a)(2).

     Section 274(d) generally disallows any deduction under

section 162 for, among other things, “any traveling expense

(including meals and lodging while away from home)”, unless the

taxpayer complies with stringent substantiation requirements as

to the amount, time and place, and business purpose of the

expense.   Sec. 274(d)(1).   Section 274(d) authorizes the

Secretary to provide by regulations that some or all of these

substantiation requirements “shall not apply in the case of an

expense which does not exceed an amount prescribed pursuant to

such regulations.”

     Under section 274(n), the amount allowable as a deduction

for “any expense for food or beverages” is generally limited to

50 percent of the amount of the expense that would otherwise be

allowable.   Sec. 274(n)(1)(A).

     B.    The Revenue Procedures

     Under the applicable section 274(d) regulations, the

Commissioner is authorized to prescribe rules in pronouncements

of general applicability under which certain types of expense

allowances, including per diem allowances for ordinary and

necessary expenses of traveling away from home, will be regarded
                             - 15 -

as satisfying the substantiation requirements of section 274(d).

Sec. 1.274(d)-1, Income Tax Regs.; see also sec. 1.274-5T(j),

Temporary Income Tax Regs., 50 Fed. Reg. 46032 (Nov. 6, 1985).

For purposes of these regulations, 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 (hereinafter referred to collectively as the

revenue procedures), authorize various nonmandatory methods that

taxpayers may elect to use, in lieu of substantiating actual

expenses, for deemed substantiation of employee lodging, meal,

and incidental expenses incurred while traveling away from home.7

Beech Trucking Co. v. Commissioner, supra at 434.   Under one of

the methods authorized by the revenue procedures, an employee’s

expenses for lodging, meal, and incidental expenses while

traveling away from home will be deemed substantiated when “a

payor (the employer, its agent, or a third party) provides a per



     7
        Rev. Proc. 94-77, 1994-2 C.B. 825, is effective for per
diem allowances paid on or after Jan. 1, 1995. Rev. Proc. 96-28,
1996-1 C.B. 686, superseded Rev. Proc. 94-77, supra, for per diem
allowances paid on or after Apr. 1, 1996. Rev. Proc. 96-64,
1996-2 C.B. 427, superseded Rev. Proc. 96-28, supra, for per diem
allowances paid on or after Jan. 1, 1997. Rev. Proc. 96-64,
supra, restates the relevant sections of Rev. Proc. 94-77, supra,
and Rev. Proc. 96-28, supra, almost in its entirety. Subsequent
citations to provisions of Rev. Proc. 96-64, supra, will also
refer to provisions of superseded Rev. Proc. 94-77, supra, and
Rev. Proc. 96-28, supra. We note that there are some minor
differences between Rev. Proc. 96-28, supra, and Rev. Proc. 96-
64, supra; however, these differences do not affect the outcome
of this case.
                               - 16 -

diem allowance under a reimbursement or other expense allowance

arrangement to pay for such expenses.”    Rev. Proc. 96-64, sec. 1,

1996-2 C.B. at 427.    Section 3.01 of Rev. Proc. 96-64, 1996-2

C.B. at 428 defines a “per diem allowance” as:

       a payment under a reimbursement or other expense
       allowance arrangement that meets the requirements
       specified in § 1.62-2(c)(1) and that is:

       (1) paid with respect to ordinary and necessary
       business expenses incurred, or which the payor
       reasonably anticipates will be incurred, by an employee
       for lodging, meal, and incidental expenses or for meal
       and incidental expenses for travel away from home in
       connection with the performance of services as an
       employee of the employer,

       (2) reasonably calculated not to exceed the amount of
       the expenses or the anticipated expenses, and

       (3) paid at or below the applicable Federal per diem
       rate, a flat rate or stated schedule, or in accordance
       with any other Service-specified rate or schedule.

       Under the revenue procedures, if a per diem allowance

includes reimbursement for lodging, in addition to meal and

incidental expenses (M&IE), the amount of expenses deemed

substantiated each day is the lesser of the per diem allowance

for the day or the Federal per diem rate for the locality of

travel for the day.    Rev. Proc. 96-64, sec. 4.01, 1996-2 C.B. at

428.    If the per diem allowance includes reimbursement only for

M&IE (and not for lodging), the amount of expenses deemed

substantiated each day is the lesser of the per diem allowance
                                - 17 -

for the day or the Federal M&IE rate.      Rev. Proc. 96-64, sec.

4.02, 1996-2 C.B. at 428-429.    Under special rules for the

transportation industry (including the trucking industry), a

taxpayer is permitted to treat $36 as the Federal M&IE rate for

all localities of travel in the continental United States.8      Rev.

Proc. 96-64, sec. 4.04(2), 1996-2 C.B. at 429.

     A per diem allowance is treated as paid only for M&IE if:

     (1) the payor pays the employee for actual expenses for
     lodging based on receipts submitted to the payor, (2)
     the payor provides the lodging in kind, (3) the payor
     pays the actual expenses for lodging directly to the
     provider of the lodging, (4) the payor does not have a
     reasonable belief that lodging expenses were or will be
     incurred by the employee, or (5) the allowance is
     computed on a basis similar to that used in computing
     the employee’s wages or other compensation (e.g., the
     number of hours worked, miles traveled, or pieces
     produced). [Rev. Proc. 96-64, sec. 4.02, 1996-2 C.B.
     at 428-429; emphasis added.]

     After applying the test in section 4.02 of the revenue

procedures to determine whether a per diem allowance is paid only

for M&IE or for lodging and M&IE, the revenue procedures contain

special rules for applying the section 274(n) 50-percent

limitation to per diem allowances.       Section 6.05 of the revenue

procedures provides:

     Application of the 50-percent limitation on meals and
     expenses. When a per diem allowance is paid only for
     meals and incidental expenses * * * an amount equal to
     the lesser of the per diem allowance for each calendar
     day * * * or the Federal M&IE rate for the locality of

     8
        Under Rev. Proc. 94-77, sec. 4.04(2), 1994-2 C.B. 825, a
taxpayer was permitted to treat $32 as the Federal M&IE rate for
all localities of travel in the continental United States.
                                - 18 -

     travel for such day * * * is treated as an expense for
     food and beverages. When a per diem allowance is paid
     for lodging, meal, and incidental expenses, the payor
     must treat an amount equal to the Federal M&IE rate for
     the locality of travel for each calendar day
     * * * the employee is away from home as an expense for
     food and beverages. For purposes of the preceding
     sentence, when a per diem allowance for lodging, meal,
     and incidental expenses for a full day of travel is
     paid at a rate that is less than the Federal per diem
     rate for the locality of travel, the payor may treat an
     amount equal to 40 percent of such per diem allowance
     for a full day of travel as the Federal M&IE rate for
     the locality of travel.

     C.   Application of the Revenue Procedures

     Petitioners claimed deductions for the per diem payments on

the basis of the fourth sentence of section 6.05 of the revenue

procedures; i.e., they treated 40 percent of the per diem

payments as expenses for food and beverages and thus subject to

the section 274(n) 50-percent limitation, and deducted the

remaining 60 percent in full (resulting in a claimed deduction of

80 percent of the total per diem payments).

     Respondent contends that, after applying the test set forth

in section 4.02 of the revenue procedures, petitioners are not

entitled to the claimed treatment because under the revenue

procedures the per diem payments are treated as being made only

for M&IE and not for lodging.    Accordingly, respondent contends,

under section 6.05 of the revenue procedures, the per diem

payments are treated as being solely for food and beverages and

thus fully subject to the 50-percent limitation of section

274(n).   We agree.
                               - 19 -

     It is undisputed that the per diem allowances are computed

on the same basis as the drivers’ wages; i.e., on the basis of

miles driven.    Hence, section 4.02 of the revenue procedures

treats the per diem allowances as being paid only for M&IE.9

Beech Trucking Co. v. Commissioner, supra at 437.    Under section

4.02 of the revenue procedures, the expenses covered by the per

diem allowance are deemed substantiated in an amount equal to the

lesser of the per diem allowance for the day or the Federal M&IE

rate.    See Rev. Proc. 96-64, sec. 4.02, 1996-2 C.B. at 428-429.

     Under section 6.05 of the revenue procedures, because the

per diem allowances are deemed paid only for M&IE, an amount

equal to the lesser of the per diem allowance or the Federal M&IE

rate is treated as an expense for food and beverages and thus

subject to the limitations of section 274(n).    Beech Trucking Co.

v. Commissioner, supra at 437.    For 1995, the average daily per

diem allowance paid by Continental was between $28.85 and $30.72,

which is less than the Federal M&IE rate of $32.    See Rev. Proc.

94-77, sec. 4.04(2), 1994-2 C.B. at 827.    For 1996, the average

daily per diem allowance was between $29.73 and $32.19, and the

Federal M&IE rate was $32. See id., see also Rev. Proc. 96-28,



     9
        The test in sec. 4.02 of the revenue procedures is
disjunctive. Failure to meet any one of the five enumerated
requirements causes the per diem allowances to be considered as
paid only for M&IE. Beech Trucking Co. v. Commissioner, supra at
437 n.12. It is undisputed that the requirement described in the
text above has been met. We need not decide whether any of the
additional requirements have been met. Id.
                              - 20 -

1996-1 C.B. 688.   For 1997, the average daily per diem allowance

was $32.45, which is less than the Federal M&IE rate of $36.      See

Rev. Proc. 96-64, 1996-2 C.B. at 429.   Accordingly, under section

6.05 of the revenue procedures, the full amount of the per diem

payments is treated as being for food and beverages and thus

subject to the 50-percent limitation of section 274(n).10   Id.

     D.   Petitioners’ Contentions

     As in Beech Trucking Co., petitioners argue that the revenue

procedures are invalid insofar as they operate (in section 4.02)

to characterize the per diem payments as being solely for M&IE

and (in section 6.05) to apply the section 274(n) limitations to

the full amount of the per diem payments.   Petitioners do not

argue that the revenue procedures are otherwise invalid; to the

contrary, petitioners rely on section 4.01 of the revenue

procedures for deemed substantiation of the drivers’ travel

expenses and on that part of section 6.05 of the revenue

procedures that would permit Continental (absent the provision in

section 4.02 which deems the per diem payments to be solely for

M&IE) to treat 60 percent of the per diem payments as being

reimbursements of the drivers’ lodging expenses.   In effect,



     10
        To the extent that, for 1996, $32.19 was the per diem
allowance, only $32 is treated as being for food and beverage and
thus subject to the sec. 274(n) limitation. Petitioners must
concede this because they have not otherwise substantiated the
amount that is greater than that which is deemed substantiated in
the revenue procedures.
                               - 21 -

petitioners seek to rely selectively on certain aspects of the

revenue procedures that work to Continental’s benefit while

seeking to avoid the associated conditions that the revenue

procedures impose.

       For the reasons stated in Beech Trucking Co. v.

Commissioner, supra at 443-447, we find that section 4.02(5) of

the revenue procedures is valid.   We reemphasize the point stated

in Beech Trucking Co. that the revenue procedures are elective

provisions that provide deemed substantiation in lieu of actual

substantiation of the drivers’ precise travel expenses.   The

first paragraph of the revenue procedures states:   “Use of a

method described in this revenue procedure is not mandatory and a

taxpayer may use actual allowable expenses if the taxpayer

maintains adequate records or other sufficient evidence for

proper substantiation.”   Rev. Proc. 96-64, sec. 1, 1996-2 C.B. at

427.

       In Beech Trucking Co. v. Commissioner, supra at 449-450, we

stated:

            As pronouncements of general applicability, the
       Revenue Procedures cannot be expected to mirror
       perfectly the manifold circumstances of all taxpayers
       and their traveling employees or of any particular
       taxpayer’s traveling employees. As elective procedures
       meant to mitigate what might otherwise be onerous
       substantiation burdens for payors of per diem
       allowances, the Revenue Procedures accomplish, we
       believe, at least rough justice. Giving due regard to
       the highly detailed nature of the statutory and
       regulatory scheme involved here, to the specialized
                              - 22 -

     experience and information presumably available to the
     Commissioner, and to the value of uniformity in
     administering the national tax laws, we are unpersuaded
     that the complained-of conditions imposed by section
     4.02 or section 6.05 of the Revenue Procedures, as
     applied in the instant case, are arbitrary or unlawful.
     See United States v. Mead Corp., 533 U.S. 218, 234-235
     (2000).

     In this case, petitioners raised two new arguments

concerning the validity of section 4.02(5) of the revenue

procedures.   First, petitioners argue that section 4.02(5)

conflicts with the 50-percent limitation of section 274(n)(1).

Petitioners argue that because the revenue procedures turns “on

the method of payment of the per diem allowance, it imposes the

limitation on deductibility for ‘food or beverage’ expenses upon

the entirety of the per diem allowance, without regard to the

nature of the expenses actually incurred by the employees.”

Respondent argues that there is no conflict between section

4.02(5) of the revenue procedures and section 274(n)(1).

Respondent correctly notes that section 4.02(5) is one of the

tests that determine whether the per diem is paid solely for

meals and incidental expenses.   Only after meeting that test is

the section 274(n)(1) 50-percent limitation applied.

     We agree with respondent that the per diem is paid “without

regard to the nature or amount of the expense actually incurred

by the employee.”   Indeed, the drivers testified that they were

free to spend their per diem in any manner they chose.    The
                               - 23 -

testimony established that the vast majority of the per diem was

spent on meals and incidental travel expenses such as laundry and

showers.   Most of the drivers’ rest periods were taken in the

sleeping berth and not at motels.    There is no evidentiary

support for petitioners’ position that 60 percent of the per diem

was spent on lodging.

     Second, petitioners argue that, as section 4.02(5) of Rev.

Proc. 94-77 was issued on December 27, 1994, Continental did not

have a sufficient opportunity to alter its accounting systems to

provide for an alternative per diem allowance paid on a basis

other than per mile.    Continental had recently purchased new

computer equipment, and it claimed it would have lost drivers to

competing trucking companies if it had altered the per diem

method of payment.   We have found that Continental made a

business decision to pay its drivers a per diem for their travel

expenses in lieu of reimbursement for actual expenses incurred.

This method correlated with its payment of wages.    This method

required less recordkeeping.    Under this method, Continental did

not need to maintain actual receipts for each expense incurred by

its drivers.   Congress provided that the Secretary may by

regulation provide rules for meeting the stringent substantiation

requirements of section 274(d).    Section 4.02(5) of Rev. Proc.

94-77 is one of those rules.
                               - 24 -

II.   Whether Petitioners Have Substantiated the Drivers’
      Travel Expenses Pursuant to Section 274(d)

      In any event, even if we were to agree with petitioners that

the complained-of conditions imposed by the revenue procedures

are invalid (which we do not), we would not reach a different

result in this case.   In Beech Trucking Co., we noted that

“petitioner has not independently substantiated, and thus is

entitled to no deduction for, any of the subject expenses in

excess of those deemed to be substantiated under the revenue

procedures.”   Beech Trucking Co. v. Commissioner, supra at 437.

We further stated:   “Petitioner has not attempted * * * to

substantiate the drivers’ travel expenses in any manner that

would provide an evidentiary basis for allocating the per diem

payments between meal expenses and other reimbursed travel

expenses.”   Id. at 451-452.   In this case, petitioners’ second

bite at the apple, petitioners presented the testimony of some of

Continental’s drivers as to their estimated travel expenses.

      Deductions are a matter of legislative grace, and

petitioners bear the burden of proving that they are entitled to

the deductions claimed.   Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).11


      11
        The examination in this case began Sept. 24, 1997;
therefore, sec. 7491 is inapplicable. Higbee v. Commissioner,
116 T.C. 438, 440 (2001) (sec. 7491 applies to examinations
                                                   (continued...)
                              - 25 -

     Ordinarily, a taxpayer is permitted to deduct the ordinary

and necessary expenses that he pays or incurs during the taxable

year in carrying on a trade or business.   Sec. 162(a).   A

taxpayer, however, is required to maintain records sufficient to

establish the amounts of his deductions.   Sec. 6001; sec. 1.6001-

1(a), Income Tax Regs.

     When a taxpayer establishes that he paid or incurred a

deductible expense but does not establish the amount of the

deduction, we may estimate the amount allowable in certain

circumstances.   Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d

Cir. 1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

There must be sufficient evidence in the record, however, to

permit us to conclude that a deductible expense was paid or

incurred in at least the amount allowed.     Williams v. United

States, 245 F.2d 559, 560 (5th Cir. 1957).

     In addition to satisfying the criteria for deductibility

under section 162, certain categories of expenses must also

satisfy the strict substantiation requirements of section 274(d)

in order for a deduction to be allowed.    We may not use the Cohan

doctrine to estimate expenses covered by section 274(d).      See

Sanford v. Commissioner, 50 T.C. 823, 827 (1968), affd. per



     11
      (...continued)
commenced after July 22, 1998).
                               - 26 -

curiam 412 F.2d 201 (2d Cir. 1969); sec. 1.274-5T(a), Temporary

Income Tax Regs., 50 Fed. Reg. 46014 (Nov. 6, 1985).

     To substantiate a deduction pursuant to section 274(d), a

taxpayer must maintain adequate records or present corroborative

evidence to show the following:   (1) The amount of the expense;

(2) the time and place of use of the listed property; and (3) the

business purpose of the use.   Sec. 274(d); sec. 1.274-5T(b)(6),

Temporary Income Tax Regs., 50 Fed. Reg. 46016 (Nov. 6, 1985).

     When a taxpayer’s records have been destroyed or lost due to

circumstances beyond his control, he is generally allowed to

substantiate his deductions through secondary evidence.

Malinowski v. Commissioner, 71 T.C. 1120, 1125 (1979); sec.

1.274-5T(c)(5), Temporary Income Tax Regs., 50 Fed. Reg. 46022

(Nov. 6, 1985).   A taxpayer in this type of situation may

reconstruct his expenses through other credible evidence.       Watson

v. Commissioner, T.C. Memo. 1988-29; sec. 1.274-5T(c)(5),

Temporary Income Tax Regs., supra.      If no other documentation is

available, we may, although we are not required to do so, accept

credible testimony of a taxpayer to substantiate a deduction.

Watson v. Commissioner, supra.    Having observed the witnesses’

appearance and demeanor at trial, we find them to be honest,

forthright, and credible.

     The drivers who testified at trial provided reasonable

estimates of their monthly travel expenses.     Beverly James

estimated monthly expenses as follows:     $52.50 for motels, $12
                              - 27 -

for showers, $30 for truck parking, $30 for laundry, and $32 for

Federal Express charges.   These expenses averaged $5.60 per day,

using a 28-day month.   David Butler estimated monthly expenses as

follows:   $117 for motels, $50 for showers, $20 for truck

parking, $22 for laundry, and $32 for Federal Express charges.

These expenses averaged $8.60 per day, using a 28-day month.

William Lane estimated monthly expenses as follows:    $65 for

motels, $60 for showers, $55 for truck parking, $30 for laundry,

and $32 for Federal Express charges.   These expenses averaged

$8.64 per day, using a 28-day month.   Mr. Lane estimated his

expenses for meals at approximately $24-25 per day.

     Despite the credible testimony of the witnesses, we find

that petitioners did not substantiate the travel expense

deductions of their approximately 300 drivers pursuant to strict

standards of section 274(d) and the regulations.   Petitioners did

not establish the amount, time, or place of each separate

expenditure for each of the drivers.   Sec. 1.274-5T(b)(2)(i),

Temporary Income Tax Regs.   Petitioners did not establish the

dates of departure and return for each trip away from home by

each driver, or the exact number of days away from home.     Sec.

1.274-5T(b)(2)(ii), Temporary Income Tax Regs.   Petitioners did

not establish the exact destination or locality of travel, as

described by name of city or town or other similar designation.

Sec. 1.274-5T(b)(2)(iii), Temporary Income Tax Regs.
                              - 28 -

     What petitioners did is provide good, reasonable estimates

and averages of the expenses that Continental’s drivers incurred

on the road.   While we understand why petitioners made a business

decision not to require receipts and records of the drivers’

expenses, the regulations under section 274(d) make it clear that

estimates and averages are not sufficient to establish travel

expenses pursuant to section 274(d).   See Sanford v.

Commissioner, 50 T.C. at 827 (the Cohan doctrine does not apply

to expenses covered by section 274(d)).

     Furthermore, we note that were we to find that some of the

expenses were ordinary business expenses under section 162,

petitioners have failed to substantiate meals and other

incidental expenses pursuant to section 274(d).   Therefore,

petitioners fare better with the deemed substantiation of the

revenue procedures than by actual substantiation under sections

162 and 274(d).

III. Whether Petitioners May Deduct More Than 50 Percent of the
     Nonmeal Travel Expenses Incurred By Drivers

     Petitioners argue that “if the Fifth Part of Section 4.02 of

Revenue Procedure 94-77 is valid, petitioners are entitled to a

downward adjustment in the audit adjustment to Continental’s net

income for payment of substantial, fully deductible nonmeal

travel expenses.”   Essentially, petitioners seek to deduct an

amount of the per diem allowance that is more than 50 percent,
                             - 29 -

but less than 80 percent, by obtaining a full deduction for the

average expenses related to truck parking, showers, motels,

laundry and Federal Express, in addition to a 50-percent

deduction for the portion of the per diem allocated to meals.

Using the testimony of the drivers, petitioners estimate the

average daily nonmeal expenses at $7.61 per day per driver, for

an additional deduction of $367,836 for 1995, $353,317 for 1996,

and $354,527 for 1997.

     In support of this argument, petitioners rely on a sentence

in Beech Trucking Co. v. Commissioner, supra at 450, which

petitioners interpret as an “outline of proof” for success in

future cases:

     Having relied exclusively upon the deemed
     substantiation methods provided in the Revenue
     Procedures, petitioner has offered no independent
     substantiation of the amounts of lodging or incidental
     expenses that the Beech Trucking drivers might have
     incurred, or otherwise established any reasonable basis
     for allocating the per diem payments to meals,
     incidentals, and lodging expenses incurred by the
     drivers.30
     __________
          30
             In particular, the record does not establish
     the number of days per trip that the drivers would
     normally pay for separate lodging or for incidentals
     such as showers, laundry, local transportation, or
     overnight parking. As previously noted, it appears
     that at least some of the trips for which Beech
     Trucking paid per diem allowances involved no overnight
     travel.

     Petitioners misinterpret our description of the lack of

evidence in Beech Trucking Co. as establishing a legal rule for
                              - 30 -

future cases.   The rules regarding deductibility of per diem

allowances provide for one of two options:    (1) Actual

substantiation pursuant to section 274(d); or (2) deemed

substantiation pursuant to the revenue procedures.    Had

petitioners not elected to be under the revenue procedures and

had they instead substantiated the nonmeal expenses in compliance

with section 274(d), petitioners would have been entitled to a

full deduction for those expenses.     However, since they elected

to opt into the revenue procedures and not to substantiate these

expenses as required by section 274(d), they are restricted to

the rules under the revenue procedures.

     The per diem allowance in this case was deemed to be paid as

a “meals only per diem allowance” under the test set forth in

section 4.02(5) of the revenue procedures.    When a per diem

allowance is deemed paid as a “meals only per diem allowance”,

the revenue procedures provide for a 50-percent deduction of the

entire per diem allowance and do not allow for a greater

deduction when a taxpayer provides estimates regarding the

average nonmeal expenses.   Indeed, the purpose of the deemed

substantiation under the revenue procedures is to avoid the need

for additional evidence and subjective interpretations and to

provide taxpayers with clear and objective tests, even if such

tests fail to mirror actual expenditures.

     We also note that, for the reasons stated in Beech Trucking

Co. v. Commissioner, supra at 450-451, petitioners’ reliance on
                             - 31 -

Johnson v. Commissioner, 115 T.C. 210 (2000), in support of their

argument that they may use actual substantiation in addition to

deemed substantiation, is misplaced.   We reiterate that Johnson

deals with section 4.03 of the revenue procedures, which is not

at issue in this case.

     In reaching all of our holdings herein, we have considered

all arguments made by the parties, and to the extent not

mentioned above, we find them to be irrelevant or without merit.

     To reflect respondent’s mathematical error in the statutory

notice of deficiency with respect to the adjustments made to

Continental for 1996,



                                   Decisions will be entered

                              under Rule 155.
