                        127 T.C. No. 10




                 UNITED STATES TAX COURT



MARC G. BISSONNETTE AND LILLIAN I. CONE, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No.   5988-05.               Filed October 23, 2006.



     P was a ferryboat captain for a company that
carried travelers on sea voyages to destinations on
Puget Sound, Washington. The company’s home port was
in Seattle, Washington. P worked approximately 15- to
17-hour days on turnaround runs completed within 24
hours that each included a 6-hour layover at an away-
from-home port during off-season voyages and a 1/2- to
1-hour layover at an away from home port during peak-
season voyages. P paid for his meals and incidental
expenses (M&IE) while traveling.

     P reported his M&IE incurred during these layovers
as miscellaneous itemized deductions under sec.
162(a)(2), I.R.C., for 2001, 2002, and 2003. The
deduction amounts were ascertained from the Federal per
diem rates for M&IE as prescribed under Rev. Proc.
2000-39, 2000-2 C.B. 340, and its successors.
                               - 2 -


          R denied the deductions, determining that P was
     not “away from home” within the meaning under sec.
     162(a)(2), I.R.C., because his voyages did not require
     him to obtain sleep or rest. Additionally, R argues
     that if P is considered “away from home” and is
     entitled to deduct his M&IE, P was required to prorate
     and reduce those expenses for a partial day of travel
     away from home and was required to further reduce these
     expenses by 50 percent pursuant to sec. 274(n), I.R.C.

          Held: Petitioner was “away from home” for
     purposes under sec. 162(a)(2), I.R.C., and may deduct
     M&IE incurred while obtaining sleep or rest during the
     6-hour layovers.

          Held, further, P may deduct the allowable Federal
     M&IE rate for a full day of travel.

          Held, further, P is required to reduce his
     allowable M&IE by 50 percent pursuant to sec. 274(n),
     I.R.C.



     Gregory L. White, for petitioners.

     Lisa M. Oshiro, for respondent.



     HAINES, Judge:   Respondent determined deficiencies in

petitioners’ Federal income taxes for 2001, 2002, and 2003 (years

at issue) of $3,011, $3,119, and 3,250, respectively.1




     1
       Unless otherwise indicated, all section references are to
the Internal Revenue Code, as amended, and Rule references are to
the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
                              - 3 -

     After concessions,2 the issues for decision are:   (1)

Whether Marc G. Bissonnette (petitioner) was “away from home”

within the meaning of section 162(a)(2) by virtue of his duties

as a passenger ferryboat captain on turnaround voyages completed

within 24 hours; (2) if petitioner was “away from home”, whether

he is required to prorate and reduce his allowable meals and

incidental expenses (M&IE) for a partial day of travel away from

home; and (3) if petitioner was “away from home”, whether he is

required to further reduce his allowable M&IE by 50 percent

pursuant to section 274(n).

                        FINDINGS OF FACT

A.   Petitioner’s Education and Employment

     The parties’ stipulation of facts and the attached exhibits

are incorporated herein by this reference, and the facts


     2
       The parties filed a stipulation of settled issues in which
they agreed to the amounts of deductions that petitioners are
entitled to claim for spouse union dues for the years at issue,
tax preparation fees in 2002 and 2003, spouse continuing
education expenses in 2002, and license fees in 2001.

     The parties also stipulated that if the Court determines
petitioner was away from home during either the Victoria layovers
or the Friday Harbor layovers, or both: (1) Petitioner has
substantiated the time, place, and business purpose of the
travel; (2) petitioner may use the Federal M&IE rate for the
locality of travel for each day or partial day that he was away
from home; (3) petitioner incurred telephone expenses of $300,
$260, and $300 for the years at issue, respectively; and (4)
petitioner incurred taxi expenses while in Victoria during the
years at issue of $199, $93, and $326, respectively. Petitioner
concedes that his miscellaneous itemized deductions for the years
at issue are limited to amounts which exceed 2 percent of his
adjusted gross income under sec. 67(a).
                                - 4 -

stipulated are so found.    At the time the petition was filed,

petitioners resided in Kingston, Washington.      Kingston is a

community on the Kitsap Peninsula, Washington, on Puget Sound.

     After petitioner graduated from high school in 1976, he was

nominated to attend the Merchant Marine Academy by Senator

Claiborne Pell.   Petitioner graduated from the Academy in 1980

with a bachelor of science degree.      For the next 4 to 5 years,

petitioner operated deep sea vessels.      He then returned to school

to earn a master’s degree in marine transportation at the

University of Rhode Island in 1985.      Petitioner has two oceans

licenses.   One permits him to be master of a ship up to 1,600

tons, the other to be a third mate on a ship without limitations

as to the ship’s tonnage.

     During the years at issue, petitioner was employed as the

director of marine operations and senior captain for Clipper

Navigation, Inc. (the company).    The company owned and operated

ferryboats that carried travelers on sea voyages throughout Puget

Sound.   The company’s main office, terminal, and home port are in

Seattle, Washington.

     The company paid petitioner an hourly rate.      His duties

included captaining the ferryboats named Victoria Clipper

(Clipper), Victoria Clipper III (Clipper III), and the Lewis and

Clark to Victoria, B.C., Canada (Victoria), and/or Friday Harbor,

Washington, in the San Juan Islands (Friday Harbor).      On all
                                 - 5 -

voyages, each ferryboat was maintained by a crew and a first

mate.3   Each ferryboat carried up to 1,200 passengers, and as

captain petitioner was responsible for the safety of all

passengers.   This responsibility required his full attention at

all times.    Any trouble or incident on the ferryboat during a

voyage was his responsibility.

     The voyages petitioner captained began and ended within the

same 24-hour period at the company’s home port in Seattle,

Washington.   He generally worked 15 to 17 hours a day for 7

consecutive days with the following 7 consecutive days off.      He

typically began work as early as 5 a.m. to 6 a.m. to prepare the

ferryboat and was released from duty between 8 p.m. to 10 p.m.

and occasionally as late as midnight.

     The time fluctuations were a result of changes in the

company’s schedule and a variety of other unpredictable factors,

including U.S. Customs and Border Protection security checks,

high sea levels, poor weather, maintenance problems, log tows,

fueling, interference by recreational boats, minimum wake

requests, and assisting with rescues or medical emergencies.      For

example, if weather conditions were severe, petitioner would need

to take an alternative route which could extend travel time by

approximately 2-1/2 hours.



     3
       The first mate could operate the ferryboat only while in
the captain’s presence.
                                   - 6 -

       At the end of a workday, petitioner usually did not have

time to return to his personal residence for dinner.      On account

of his early starting time and long commute to and from his

residence, he remained in Seattle and slept on a cot stored

aboard one of the company’s vessels.       The company did not require

him to stay overnight, pay him during this time, nor provide him

an allowance for meals or incidental expenses.      Regardless,

during overnight periods he helped out with maintenance problems

and kept watch for bad weather.      On one occasion, severe weather

forced petitioner to move a ferryboat in the middle of the night.

Usually half of the captains employed by the company stay

overnight on the ferryboats.4

       The company’s voyages during the year are classified as

occurring during either peak travel season or off-peak travel

season.

B.     Peak Travel Season

       In the years at issue, the peak travel seasons began May 19,

2001, June 8, 2002, and June 7, 2003, and each generally lasted

though September 9 of the year in which it began.      Petitioner

ordinarily captained the Clipper III in 2001 and 2002 on a

schedule servicing both Friday Harbor and Victoria on the same

day.       Because the company leased the Clipper III to the United



       4
       Petitioner does not claim he was away from home when he
stayed overnight in Seattle on one of the company’s ferryboats.
                                    - 7 -

States Navy in 2003, petitioner captained its replacement, the

Lewis and Clark.     The Lewis and Clark was smaller and slower than

the Clipper III.     As a result, the company altered the peak-

season schedule to limit the voyages to Friday Harbor and

discontinued the Friday Harbor to Victoria leg of the voyage for

the entire season.    Occasionally, petitioner captained another

ferryboat because of a shift trade with another captain or to

cover for an ill captain.5

     The ferryboats petitioner captained during the peak-seasons

for the years at issue generally followed the schedules below:

Departure/arrival              2001            2002           2003

Depart   Seattle1            7:30   a.m.     7:45   a.m.    7:45 a.m.
Arrive   Friday Harbor      10:30   a.m.    11:15   a.m.   11:15 a.m.
Depart   Friday Harbor      11:00   a.m.    11:45   a.m.       ---
Arrive   Victoria           12:45   p.m.     1:30   p.m.       ---
Depart   Victoria            1:45   p.m.     2:00   p.m.       ---
Arrive   Friday Harbor       3:30   p.m.     3:45   p.m.       ---
Depart   Friday Harbor       4:00   p.m.     4:15   p.m.    4:30 p.m.
Arrive   Seattle2            7:00   p.m.     7:15   p.m.    7:15 p.m.
     1
       Passengers generally start boarding 45 minutes to an hour
before departure.
     2
       As stated above, the Seattle arrival time could be later
because of unpredictable circumstances.

     In 2001 and 2002, the Clipper III had a 30-minute-to-1-hour

layover in Victoria and Friday Harbor.      In 2003, the Lewis and

Clark voyages had a layover in Friday Harbor that lasted over 5

hours.    During all layovers neither petitioner nor the crew were


     5
       For purposes of this Opinion peak travel season voyages
are only the voyages performed with the Clipper III and the Lewis
and Clark.
                                - 8 -

off duty, and during the 5-hour layover petitioner usually fueled

the ferryboat and continually moved it to different locations

because of harbor congestion.   Because petitioner did not go off

duty during these voyages, the company provided a second captain

capable of maintaining the ferryboat to allow petitioner time to

rest.

     Petitioner did not provide receipts to substantiate his M&IE

incurred during peak-season layovers or during on-board rest

breaks.   Instead, he used the allowable Federal M&IE rate for the

locality of travel.6

C.   Off-Peak Travel Season

     In the years at issue, each off-peak travel season ran from

September 9 until the next year’s peak-season began.   During each

off-peak season petitioner typically captained the Clipper from

Seattle to Victoria and back.   The Clipper generally departed

Seattle between 7:30 and 8:30 a.m., arrived in Victoria between

10:30 and 11 a.m., departed Victoria between 5 and 6:30 p.m., and



     6
       The Federal M&IE rate represents the daily amount that the
Government pays to its traveling employees to reimburse them for
breakfast, lunch, dinner, and incidental expenses. Johnson v.
Commissioner, 115 T.C. 210, 227 (2000).

     The term “locality of travel” means the locality where an
employee traveling away from home in connection with the
performance of services as an employee of the employer stops for
sleep or rest. Rev. Proc. 2000-39, 2000-2 C.B. 340; Rev. Proc.
2001-47, 2001-2 C.B. 332; Rev. Proc. 2002-63, 2002-2 C.B. 691;
Rev. Proc. 2003-80, 2003-2 C.B. 1037.
                                - 9 -

arrived back in Seattle between 8:30 p.m. and 9:30 p.m.      During

the 6- to 7-hour layover the passengers would explore the city of

Victoria.

     The company provided a four-bedroom condominium in Victoria

where the Clipper’s crew rested during the layover.       Because

most of the crew were young and noisy, petitioner did not go to

the condominium.    Instead, he had lunch, swam for 30 minutes, and

returned to the Clipper to sleep or rest for approximately 4

hours on a cot he stored on board.      If the sleeping

accommodations on the ferryboat had not been available,

petitioner would have rented a room at a hotel.

     Petitioner was neither paid an hourly wage for the layover

period in Victoria nor reimbursed for M&IE he incurred during

these layovers.    Petitioner did not provide receipts to

substantiate his M&IE.    Instead, he used the allowable Federal

M&IE rate for the locality of travel.

D.   Procedural Background

     Petitioners timely filed their Federal income tax returns

for the years at issue.    Respondent issued the notice of

deficiency in dispute on January 20, 2005.      Petitioners timely

filed their petition on March 29, 2005.

     Petitioners’ gross income for the years at issue is not in

dispute.    The parties dispute whether petitioners may deduct

under section 162(a)(2) traveling expenses listed on their
                               - 10 -

Schedules A, Itemized Deductions, for the years at issue and, if

any of the expenses are deductible, whether petitioners must

reduce the deductible amounts pursuant to the “partial day” rule

and section 274(n).

                               OPINION

     Petitioner argues his M&IE are deductible because they were

incurred while he was traveling away from home on business trips

requiring sleep or rest.7

     Section 262 provides that a taxpayer generally cannot deduct

personal, living, or family expenses.      However, section 162(a)(2)

allows taxpayers to deduct traveling expenses paid or incurred

while away from home in the pursuit of a trade or business.

Traveling expenses include travel fares, meals, lodging, and

other expenses incident to travel.      Sec. 1.162-2, Income Tax

Regs.    For purposes of section 162, the term “home” generally

means the taxpayer’s principal place of employment and not where

his or her personal residence is located.      Mitchell v.

Commissioner, 74 T.C. 578, 581 (1980).




     7
       We decide the issues in this case, including whether
petitioner was “away from home” for purposes of sec. 162(a), on
the basis of the evidence in the record without regard to the
burden of proof. Accordingly, we need not and do not decide
whether the burden-shifting rule of sec. 7491(a)(1) applies. See
Higbee v. Commissioner, 116 T.C. 438 (2001).
                               - 11 -

A.   Section 162(a)(2) Sleep or Rest Rule

     The standard used to determine whether a taxpayer is “away

from home” was developed through a series of cases including

Williams v. Patterson, 286 F.2d 333, 340 (5th Cir. 1961).     As

stated in Williams, as applied to a traveler whose work does not

require him to be “away from home” overnight, the standard is:

          If the nature of the taxpayer’s employment is such
     that when away from home, during released time, it is
     reasonable for him to need and to obtain sleep or rest
     in order to meet the exigencies of his employment or
     the business demands of his employment, his
     expenditures (including incidental expenses, such as
     tips) for the purpose of obtaining sleep or rest are
     deductible traveling expenses under Section 162(a)(2)
     * * * . [Id.]

This standard is commonly referred to as the “sleep or rest

rule”.

     The facts of Williams assist in understanding the sleep or

rest rule articulated above.   In Williams, the taxpayer, a

railroad engineer, worked a 16-hour day every other day.    On a

turnaround run between Montgomery, Alabama, his home terminal,

and Atlanta, Georgia, he had a 6-hour layover in Atlanta before

his return to Montgomery the same day.   Although the taxpayer was

not required by his employer to do so, during the layover period

he felt it was necessary to sleep and rest and rented a hotel

room.    At the hotel he had lunch and dinner as well as rested and

slept before resuming work.
                                 - 12 -

     The Court of Appeals for the Fifth Circuit concluded that on

account of the length of the taxpayer’s workday (16 hours),8 the

duration of his layover (6 hours), and the responsibility of his

position, it was necessary for the taxpayer to rest during his

layover in order to carry out his assignment, even though no

statute, regulation, or railroad rule required him to sleep or

rest before his return trip.     Id. at 337, 339.    Furthermore, the

court reasoned that the phrase “away from home” does not require

a person to actually be away overnight.       The court held that the

costs of meals, lodging, and tips during the 6-hour layover were

deductible.   Id. at 335, 340.

     Shortly after Williams was decided, the Commissioner issued

Rev. Rul. 61-221, 1961-2 C.B. 34, which announced his concurrence

with the sleep or rest rule as interpreted in Williams.9      The


     8
       Although the length of a workday is considered in
determining whether a taxpayer actually needed sleep or rest, the
“Revenue Act does not necessarily require as a prerequisite to a
deduction for traveling expenses on less than an overnight trip
that the employee work substantially longer than an ordinary
workday”. Williams v. Patterson, 286 F.2d 333, 339 (5th Cir.
1961).
     9
       The pertinent part of Rev. Rul. 61-221, 1961-2 C.B. 34,
states:
          The Internal Revenue Service will follow the
     recent decision of the United States Court of Appeals
     for the Fifth Circuit in F. M. Williams v. George D.
     Patterson, 286 Fed. (2d) 333 (1961).

         *       *      *        *        *      *      *

          The Service had contended that the taxpayer was
     not away from home on such trips because they were not
                                                   (continued...)
                        - 13 -




9
 (...continued)
“overnight” trips, as that term is explained in Revenue
Ruling 54-497, C.B. 1954-2, 75, at 78-79, for the
reason that Williams’ trips did not necessitate his
absence from his home terminal for a minimum period
which lasted substantially longer than an ordinary
days’ work and during which his duties required him to
obtain necessary sleep in Atlanta.

     The court concluded, however, that Williams had
satisfied the dual test prescribed by the Service since
his 16-hour absence on such round trips (including one
hour for discharging his duties before leaving, and
after returning to, his home terminal) was
substantially longer than an ordinary workday, and it
was reasonably necessary for Williams to sleep during
his layover in order to carry out his assignment, even
though there was no statute, regulation or railroad
order requiring him to sleep and rest prior to his
return run.

     The Service agrees with the court in interpreting
Revenue Ruling 54-497 as allowing the deduction in this
case and concurs in general with the court's
understanding that the “correct rule” governing the
deductibility of such expenses is as follows:

          If the nature of the taxpayer’s
     employment is such that when away from home,
     during released time, it is reasonable for
     him to need and to obtain sleep or rest in
     order to meet the exigencies of his
     employment or business demands of his
     employment, his expenditures (including
     incidental expenses, such as tips) for the
     purpose of obtaining sleep or rest are
     deductible traveling expenses under section
     162(a)(2) of the 1954 Code.

     However, the Service does not consider the brief
interval during which an employee may be released from
duty for the purpose of eating rather than sleeping as
constituting an adequate rest period to satisfy the
“overnight” rule as a test for the deductibility of
meal expenses on business trips completed within one
day. * * *
                               - 14 -



Supreme Court in United States v. Correll, 389 U.S. 299 (1967),

observed that the rule contemplated a sleep or rest period of

sufficient duration that would ordinarily be related to a

significant increase in expenses.   The Supreme Court acknowledged

the rule provided a definite, fair, and ascertainable standard.

Id. at 302-303.

     The Tax Court in Barry v. Commissioner, 54 T.C. 1210 (1970),

affd. 435 F.2d 1290 (1st Cir. 1970), indicated that the rest

period contemplated by the sleep or rest rule is of the type

illustrated by Williams and normally involves a rest of

sufficient duration to cause an increase in expenses.     A brief

rest period which “anyone can, at any time, without special

arrangement and without special expense, take in his own

automobile or office” does not qualify.    Id. at 1213.   The Court

in Barry disallowed expenses for meals claimed by a taxpayer on

1-day business trips that lasted between 16 and 19 hours during

which the taxpayer rested briefly once or twice in his

automobile.

     If the nature of petitioner’s employment was such that when

away from home, during released time, it was reasonable for him

to need and to obtain sleep or rest in order to meet the

exigencies or business demands of his employment, his expenses

for this purpose would be traveling expenses under section

162(a)(2).    See Williams v. Patterson, supra at 340; Rev. Rul.
                              - 15 -

75-170, 1975-1 C.B. 60.   However, the released time must be of a

sufficient duration that it would ordinarily be related to a

significant increase in expenses.    See United States v. Correll,

supra.

B.   Peak Travel Season

     Respondent argues that petitioners are not entitled to a

deduction for the expenses incurred in the brief layovers during

peak travel season because the layovers were insufficient in

duration to require sleep or rest.     In 2001 and 2002, during

peak-season, petitioner’s layovers in Victoria and Friday Harbor

never exceeded an hour, and he did not produce evidence showing

he rested during that time.   Petitioner also did not show he

rested during the 5-hour layover in Friday Harbor during peak-

season in 2003.   Instead, petitioner testified that during this

layover he was operating the ferryboat.     Even though petitioner

testified he did sleep or rest while another captain took command

of the ferryboat, he did not produce evidence showing the rest

period was part of a layover (released time) or was of sufficient

duration that it caused him to incur a significant increase in

expenses.

     As to the peak-season runs, petitioner’s case is

indistinguishable from Barry v. Commissioner, supra.     Therefore,

the Court finds petitioner was not away from home within the
                              - 16 -

meaning of section 162(a)(2) during peak-season Victoria/Friday

Harbor runs in 2001 and 2002 and the Friday Harbor runs in 2003.

C.   Off-Peak Travel Season

     Respondent, citing Stevens v. Commissioner, T.C. Memo. 1985-

16, argues that petitioner is not entitled to a deduction for the

expenses incurred during the off-peak-season 6- to 7-hour

layovers in Victoria because the layovers were solely the result

of scheduling rather than petitioner’s need for sleep or rest.

     However, the proper inquiry is into the nature of

petitioner’s employment and his need for sleep or rest, not

whether a layover was the result of scheduling.   The factors to

consider in determining whether petitioner needed sleep or rest

include his age, his physical condition, the length of his

workday, and the importance of being alert so that he could carry

out his job’s responsibilities without fear of injury to others.

These factors are applied against the background of petitioner’s

experience in his employment and the practices and customs of

similarly situated individuals.   See Williams v. Patterson, 286

F.2d at 339.

     Petitioner’s background is impressive.   After attending the

Merchant Marine Academy, he earned a master’s degree in marine

transportation, and he has been employed in this field for over

25 years.   In the years at issue, petitioner was the director of

marine operations and senior captain for the company.    His
                              - 17 -

workday lasted on average 15 to 17 hours including a 6- to 7-hour

layover in Victoria during off-peak season.    He was responsible

for his crew and the safety of up to 1,200 passengers during all

voyages.   Because of possible extreme weather conditions, high

sea levels, log tows, and other obstacles in the ocean,

petitioner as captain had to give his full attention at all

times, and any trouble or incident on the ferryboat was his

responsibility.   Petitioner also needed to consider that his

workday could be significantly lengthened on account of any of

the above situations.   As a result, petitioner’s job was very

demanding.

     Considering the facts, this Court finds it was reasonable

for petitioner to obtain sleep or rest in order to meet the

exigencies and business demands of his employment.    See Williams

v. Patterson, 286 F.2d at 339-340.     Further, the released time of

6 to 7 hours during the Victoria voyage was sufficient in

duration that it would normally be related to an increase in

expenses.10   Accordingly, petitioner was “away from home” for

purposes of section 162(a)(2).11


     10
        Petitioner would have incurred significant out-of-pocket
lodging expenses during his layover but for the fact that he was
furnished with a place to sleep. See Johnson v. Commissioner,
115 T.C. at 222; Anderson v. Commissioner, 18 T.C. 649, 652
(1952).
     11
       Petitioner must deduct his allowable M&IE as itemized
deductions for the years at issue. See sec. 67; Rev. Proc. 2000-
39, sec. 7.06, 2000-2 C.B. at 346; Rev. Proc. 2001-47, sec. 7.06,
                                                   (continued...)
                               - 18 -

D.    M&IE

      Respondent argues that if petitioner is found to have been

“away from home” under section 162(a), the allowable Federal M&IE

rate should be reduced pursuant to the “partial day” rule and

further reduced by the 50-percent limitation rule of section

274(n)(1), as prescribed in certain revenue procedures.

      Section 274(d) generally disallows a deduction under section

162 for “any traveling expense (including meals and lodging while

away from home)” unless the taxpayer complies with certain

substantiation requirements.   Sec. 274(d)(1).   The section

further provides that regulations may prescribe that some or all

of the substantiation requirements do not apply to an expense

which does not exceed an amount prescribed by those regulations.

Id.

      Pursuant to section 1.274-5(g), Income Tax Regs., the

Commissioner is authorized to prescribe rules in pronouncements

of general applicability under which allowances for certain types

of ordinary and necessary expenses for traveling away from home

will be regarded as satisfying the substantiation requirements of

section 274(d).    Beech Trucking Co. v. Commissioner, 118 T.C.

428, 434 (2002).   Section 1.274-5(j)(1) and (3), Income Tax

Regs., provides the Commissioner may establish a method under



      11
      (...continued)
2001-2 C.B. at 339; Rev. Proc. 2002-63, sec. 7.06, 2002-2 C.B. at
699; Rev. Proc. 2003-80, sec. 7.06, 2003-2 C.B. at 1045.
                              - 19 -

which a taxpayer may use a specified amount or amounts for M&IE

paid or incurred while traveling away from home in lieu of

substantiating the actual costs under section 274(d).12

     For purposes of section 1.274-5(g) and (j)(1) and (3),

Income Tax Regs., Rev. Proc. 2000-39, 2000-2 C.B. 340, Rev. Proc.

2001-47, 2001-2 C.B. 332, Rev. Proc. 2002-63, 2002-2 C.B. 691,

and Rev. Proc. 2003-80, 2003-2 C.B. 1037 (hereinafter referred to

collectively as the revenue procedures),13 authorize various

methods a taxpayer may elect to use, in lieu of substantiating

actual expenses, for deemed substantiation of the taxpayer’s M&IE

incurred while traveling away from home.14




     12
       Par. (j)(3) of sec. 1.274-5, Income Tax Regs., applies to
incidental expenses incurred after Sept. 30, 2002. Sec. 4.03 of
Rev. Proc. 2000-39, 2000-2 C.B. at 342, and of Rev. Proc. 2001-
47, 2001-2 C.B. at 334, provides the method a taxpayer may use in
lieu of substantiating the costs for incidental expenses for
prior periods.
     13
       Rev. Proc. 2000-39, supra, and Rev. Proc. 2001-47, supra,
apply for the years at issue 2001 and 2002, respectively. Rev.
Proc. 2002-63, supra, and Rev. Proc. 2003-80, supra, apply for
the year at issue 2003.
     14
       Rev. Proc. 2000-39, supra, is effective for M&IE
allowances paid or incurred on or after Oct. 1, 2000. Rev. Proc.
2001-47, supra, superseding Rev. Proc. 2000-39, supra, restates
the relevant sections of Rev. Proc. 2000-39, supra. Rev. Proc.
2002-63, supra, superseding Rev. Proc. 2001-47, supra, restates
the relevant sections of Rev. Proc. 2001-47, supra, except for
modifications discussed in this Opinion. Rev. Proc. 2003-80,
supra, superseding Rev. Proc. 2002-63, supra, restates the
relevant sections of Rev. Proc. 2002-63, supra, except for
modifications discussed in this Opinion.
                             - 20 -

     Section 4.03 of the revenue procedures provides:

     In lieu of using actual expenses in computing the
     amount allowable as a deduction for ordinary and
     necessary meal and incidental expenses paid or incurred
     for travel away from home, employees and self-employed
     individuals who pay or incur meal expenses may use an
     amount computed at the Federal M&IE rate for the
     locality of travel for each calendar day (or partial
     day) the employee or self-employed individual is away
     from home. Such amount will be deemed substantiated for
     purposes of paragraphs (b)(2) and (c) of § 1.274-5,
     provided the employee or self-employed individual
     substantiates the elements of time, place, and business
     purpose of the travel for that day (or partial day) in
     accordance with those regulations. * * *

     Respondent concedes petitioner substantiated the time,

place, and business purpose of the travel and may use the Federal

M&IE rate for the locality of travel for each day or partial day

that petitioner was away from home.   However, respondent argues

that because petitioner was not away from home for as many as 24

hours in 1 day, only three-fourths of the Federal M&IE rate is

allowable as a deduction during the off-peak-season turnaround

voyages completed within 24 hours.

     Section 6.04 of the revenue procedures states that a full

Federal M&IE rate for the locality of travel is available for a

full day of travel from 12:01 a.m. to 12 midnight.   To determine

the amount of M&IE deemed substantiated under section 4.03 of the

revenue procedures for partial days of travel, section 6.04 of
                             - 21 -

the revenue procedures provides that either of the following

methods may be used to prorate the Federal M&IE rate:15

     (1) The rate may be prorated using the method
     prescribed by the Federal Travel Regulations. Currently
     the Federal Travel Regulations allow three-fourths of
     the applicable Federal M&IE rate for each partial day
     during which the employee or self-employed individual
     is traveling away from home in connection with the
     performance of services as an employee or self-employed
     individual. The same ratio may be applied to prorate
     the allowance for incidental expenses described in
     section 4.05 of this revenue procedure;[16] or

     (2) The rate may be prorated using any method that is
     consistently applied and in accordance with reasonable
     business practice. For example, if an employee travels
     away from home from 9 a.m. one day to 5 p.m. the next
     day, a method of proration that results in an amount
     equal to two times the Federal M&IE rate will be
     treated as being in accordance with reasonable business
     practice (even though only one and a half times the
     Federal M&IE rate would be allowed under the Federal
     Travel Regulations).




     15
       The quotation below is from Rev. Procs. 2002-63 and
2003-80, supra, and differs in minor respects from the comparable
provisions of Rev. Procs. 2000-39 and 2001-47, supra.

     Pursuant to Rev. Procs. 2002-63 and 2003-80, supra, a
taxpayer substantiating his M&IE expenses under sec. 4.03 of
those revenue procedures generally is limited to using the method
in sec. 6.04(1) of the revenue procedures for proration of the
Federal M&IE rate. However, if sec. 4.04 of the revenue
procedures applies, then either method under sec. 6.04 of the
revenue procedures may be used to determine the amount deemed
substantiated for a partial day of travel. Petitioner is
substantiating his M&IE under sec. 4.03 of the revenue
procedures, and he is employed in the transportation industry as
defined under sec. 4.04(4) of the revenue procedures. Therefore,
he may use either method.
     16
       The last sentence does not appear in Rev. Proc. 2000-39,
sec. 6.04(1), 2000-2 C.B. at 345, or in Rev. Proc. 2001-47, sec.
6.04(1), 2001-2 C.B. at 337, and has no effect upon this case.
                               - 22 -

     In particular, the method in section 6.04(2) of the revenue

procedures allows the taxpayer to prorate the Federal M&IE rate

using any method that is consistently applied and is in

accordance with reasonable business practice.   In the example,

even though both days are partial days, a taxpayer is allowed to

use 2 full days of the Federal M&IE rate for travel away from

home for 15 hours the first day (9 a.m. to midnight), and 17

hours the second day (midnight until 5 p.m.).

     Petitioner consistently applied the full Federal M&IE rate

to all off-peak-season voyages requiring him to be away from home

for 15 to 17 hours a day.    Considering the length of petitioner’s

workday, allowing petitioner to use the full Federal M&IE rate

may be treated as in accordance with reasonable business practice

by analogy to the example.

     Therefore, the Court finds petitioners may treat as

substantiated the full Federal M&IE rate pursuant to section 6.04

of the revenue procedures for the days petitioner incurred

expenses while away from home during the off-peak-season voyages

to Victoria with 6- to 7-hour layovers.

E.   Section 274(n)(1) 50-Percent Limitation

     Petitioner argues that respondent is precluded from

asserting he must reduce the allowable M&IE deduction by 50

percent as required by section 274(n)(1) because respondent

raised it for the first time in his opening brief.
                               - 23 -

     As a general rule, this Court will not consider issues

raised for the first time on brief where surprise and prejudice

are found to exist.    Fox Chevrolet, Inc. v. Commissioner, 76 T.C.

708, 735 (1981).   Petitioner was not surprised or prejudiced.

The revenue procedures petitioner relied upon, as discussed

above, clearly state that section 274(n)(1) reduces the allowable

Federal M&IE rate by 50 percent.   Furthermore, petitioner raised

in his pretrial memorandum and opening brief the issue that “If

the taxpayer was ‘away from home,’ what amount is allowable as a

travel deduction?”    Accordingly, this Court finds petitioner was

not surprised and prejudiced by respondent’s posttrial

contentions in this regard.

     Section 274(n)(1)(A) provides that 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.   The revenue procedures provide rules for

applying the section 274(n)(1) 50-percent limitation to per diem

allowances.   Under section 6.05(1) of the revenue procedures, a

taxpayer who computes the amount of his or her M&IE under section

4.03 of the revenue procedures is required to treat that amount

as an expense for food and beverages.   The expenses are thus

subjected to section 274(n)(1).

     Petitioner incurred food or beverage and incidental expenses

while traveling away from home for business during the years at

issue.   Petitioner also computed and substantiated his M&IE under
                               - 24 -

section 4.03 of the revenue procedures.       Therefore, his M&IE

incurred during the years at issue are subject to the section

274(n)(1) 50-percent limitation.

     In the alternative, petitioner argues that if the 50-percent

limitation under section 274(n)(1) applies, he is eligible for an

exception.   Section 274(n)(2) provides that paragraph (1) shall

not apply to any expense if:


          (E) such expense is for food or beverages--

               (i) required by any Federal law to be
          provided to crew members of a commercial
          vessel,

               (ii) provided to crew members of a
          commercial vessel--

                      (I) which is operating on the Great
                 Lakes, the Saint Lawrence Seaway, or any
                 inland waterway of the United States,
                 and

                      (II) which is of a kind which would
                 be required by Federal law to provide
                 food and beverages to crew members if it
                 were operated at sea,

             *      *      *       *      *        *      *

     Clauses (i) and (ii) of subparagraph (E) shall not apply to
     vessels primarily engaged in providing luxury water
     transportation (determined under the principles of
     subsection (m)). * * *

     The evidence failed to show he qualified for an exception to

the section 274(n)(1) 50-percent limitation.       He did not

demonstrate the company was required by any law to provide food

or beverages to him or that the Clipper, the Clipper III, or the
                              - 25 -

Lewis and Clark was a vessel of a kind that would have been

required by Federal law to provide food and beverages to its crew

members if it operated at sea.    Therefore, this Court concludes

that section 274(n)(1) limits petitioner’s deduction of his

allowable M&IE to 50 percent.17

     The Court, in reaching its holding, has considered all

arguments made and concludes that any arguments not mentioned

above are moot, irrelevant, or without merit.

     To reflect the foregoing,


                                      Decision will be entered

                                 under Rule 155.




     17
       Sec. 274(n)(3) allows a taxpayer to deduct a larger
percentage of his or her allowable food and beverage expense if
the food and beverages are consumed while away from home by an
individual during or incident to the period of duty subject to
the hours of service limitations of the Department of
Transportation. Petitioner did not provide evidence that the
hours of service limitations established by the Department of
Transportation apply to his activities as director of marine
operations and senior captain for the company.
