                           118 T.C. No. 27



                    UNITED STATES TAX COURT



BEECH TRUCKING COMPANY, INC., ARTHUR BEECH, TAX MATTERS PERSON,
                          Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 16452-99.               Filed May 23, 2002.



         P, a trucking company, leases its drivers from an
    affiliated company. P compensates the drivers at a
    rate of 24 to 26 cents per mile dispatched, of which
    amount 6.5 cents is designated as a per diem allowance.
    R does not dispute that P’s per diem payments are
    ordinary and necessary business travel expenses that
    are deemed substantiated pursuant to Rev. Proc. 94-77,
    1994-2 C.B. 825, and Rev. Proc. 96-28, 1996-1 C.B. 686.

         Held: On the facts involved herein, P is the
    common law employer of the drivers and therefore is
    subject to the 50-percent limitation of sec. 274(n),
    I.R.C., to the extent the per diem payments are for the
    drivers’ meal expenses. Held, further, pursuant to
    Rev. Proc. 94-77, supra, and Rev. Proc. 96-28, supra,
    the per diem payments are treated as being for the
    drivers’ meal expenses and thus are subject to the sec.
    274(n), I.R.C. limitation.
                               - 2 -


     James Allen Brown, for petitioner.

     Edith F. Moates and John S. Repsis, for respondent.



     THORNTON, Judge:   By notice of final S corporation

administrative adjustment (FSAA), respondent determined

adjustments of $251,885 and $286,878 to the ordinary income of

Beech Trucking Co., Inc. (Beech Trucking), for 1995 and 1996,

respectively.   At issue is the amount that Beech Trucking may

deduct with respect to per diem allowances it provided drivers

that it leased from an affiliated company, and, more

particularly, whether the 50-percent limitation of section 274(n)

applies to the total amount of the per diem payments.   Subsumed

in these issues is the question of whether the section 274(n)

limitation applies to Beech Trucking as the recipient of the

services of the leased drivers.

     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.

                         FINDINGS OF FACT

     The parties have stipulated some of the facts, which we

incorporate herein by this reference.
                                - 3 -

Beech Trucking

     During the years at issue, Beech Trucking was an S

corporation within the meaning of section 1361(a)(1).    Arthur

Beech (petitioner) was the tax matters person.    When the petition

for readjustment was filed, Beech Trucking had its principal

office in North Little Rock, Arkansas.

     During the years at issue, Beech Trucking had six

shareholders.    As of yearend 1996, their ownership percentages

were as follows:1

                                          Ownership
                      Shareholder         percentage

                      Arthur Beech          55.333
                      Ed Harvey             26.000
                      Ralph Bradbury        16.667
                      Diane Miller            .667
                      James Willbanks         .667
                      Warren Garrison         .667

Petitioner was president of Beech Trucking, Ed Harvey (Harvey)

was vice president, and Ralph Bradbury was secretary-treasurer.

     Beech Trucking operated as an irregular-route, common

carrier transporting general commodities within the midwestern

and southern United States.    During 1995 and 1996, it had one

terminal in Little Rock, Arkansas, and another in Nashville,

Tennessee.   During 1995 and 1996, Beech Trucking owned and


     1
       The record suggests that there may have been minor
fluctuations in the ownership percentages of these six
shareholders during the course of the years at issue. Any such
fluctuations are immaterial to the results reached herein.
                                 - 4 -

operated between 100 and 125 trucks, all of which were purchased

used and with high mileage.

     Beech Trucking drivers were dispatched on both long and

short hauls.   On a long haul (typically over 500 miles), the

driver would typically leave the Beech Trucking terminal on

Sunday afternoon and be gone for about five nights before

returning to the terminal.    On a short haul, the driver might

return the same day.

     Almost every Beech Trucking truck had a sleeper cab (a small

area behind the driver’s compartment with a bunk for sleeping).

When a trip required an overnight stay, the driver might either

sleep in the sleeper cab or arrange other lodging, which might or

might not be in a motel.    Parking overnight at a truck stop

typically would cost $5 to $10.     Showering at a truck stop

typically would cost $5 to $7.

Arkansas Trucking Service

     Beech Trucking leased its drivers from a company known as

Arkansas Trucking Service (ATS).2    Harvey owned ATS, and

petitioner, Arthur Beech, who was an employee of ATS, acted as

its sales and operations manager.



     2
       The record does not contain the leasing agreement between
Beech Trucking and ATS or otherwise reveal its precise terms.
Testimony elicited at trial suggests vaguely that ATS also
provided drivers to companies other than Beech Trucking, but the
record does not reveal the identities or ownership of any such
other companies.
                               - 5 -

     ATS employees hired the drivers and provided them

orientation.   Drivers who were hired to drive for Beech Trucking

signed employment agreements, wherein they agreed they would

drive equipment owned by Beech Trucking but would be the

employees of ATS and would be paid by ATS.    Petitioner had final

authority to fire drivers who were hired to drive for Beech

Trucking.

     ATS maintained all payroll records for the Beech Trucking

drivers and issued their payroll checks, as well as their Forms

W-2, Wage and Tax Statement.   ATS paid workers’ compensation

insurance for the drivers, who were also eligible to participate

in a section 401(k) plan maintained by ATS.

     Each week, ATS would bill Beech Trucking for all the

drivers’ expenses that ATS paid out, and Beech Trucking would

write a check to ATS for the total payroll (including expense

reimbursements), in addition to a service fee of undisclosed

amount.

Drivers’ Compensation and Per Diem Payments

     On long hauls, Beech Trucking drivers were paid at a

specified rate for each mile dispatched, as determined by ATS

employees using the Rand McNally Mileage Maker, a guide

indicating mileage between selected points.   During the years at

issue, the drivers were paid between 24 and 26 cents per mile.

Of this amount, 6.5 cents was designated as a per diem travel
                               - 6 -

allowance (the per diem allowance).3   Short-haul drivers were

paid a flat weekly salary, in addition to the 6.5 cents per mile

per diem allowance.   The total per diem allowances, so

calculated, were included in the drivers’ paychecks issued by ATS

and were listed on the corresponding check stubs under the

category of current deductions and reimbursements, separate from

amounts listed as earnings.   The drivers were not required to

turn in receipts to receive the per diem allowances or otherwise

to account for the manner in which they spent the allowances.

     Per diem payments to the Beech Trucking drivers totaled

$839,169 and $956,261 for 1995 and 1996, respectively.

Expense Reimbursements

     The drivers’ paychecks included, in addition to the amounts

previously described, expense reimbursements.   The Beech Trucking

drivers were reimbursed $25 per day for “layovers” when they were

detained for at least 24 hours waiting for a load or waiting for

a truck to be repaired; otherwise, they were not separately

reimbursed for lodging expenses, overnight parking, or showers.

The drivers were reimbursed for such items as tolls, “lumpers”

(charges for loading and unloading trucks), scales expenses,

truck repairs, and similar items.   The drivers turned in their


     3
       The record is silent as to how this per diem rate of 6.5
cents per mile was derived. Beech Trucking maintained no written
plan to govern per diem allowances or other reimbursements. The
record does not indicate whether ATS maintained any such written
plan.
                               - 7 -

logs, receipts, bills of lading, and such to ATS, which used

these materials to determine expense reimbursements.

Beech Trucking’s 1995 and 1996 Tax Returns

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

Corporation, for the years at issue, Beech Trucking deducted (as

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

wages, per diem allowances, group insurance, workers’

compensation, tolls/scales, “motels and layovers”, and “hiring

cost–-drivers”.   The amounts deducted as per diem payments were

$671,695 and $765,009, for 1995 and 1996, respectively.    These

claimed per diem amounts represent 80 percent of the actual per

diem payments made to the drivers.4

Respondent’s Determination

     Respondent commenced the examination of Beech Trucking’s

1995 and 1996 Forms 1120 on May 13 and September 30, 1997,

respectively.   In the FSAA, issued July 23, 1999, respondent

determined that under section 274(n) Beech Trucking was entitled

to deduct only 50 percent of the total per diem payments.

Respondent determined that Beech Trucking had overstated its

deductions with respect to the per diem payments by $251,885 and

$286,878 for 1995 and 1996, respectively.


     4
       To arrive at the 80-percent claimed deduction, Beech
Trucking applied the sec. 274(n) 50-percent limitation to 40
percent of the total per diem amounts paid during 1995 and 1996
and deducted the remaining 60 percent in full.
                                - 8 -

                               OPINION

     Section 274(n) generally 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 the Beech

Trucking drivers, as respondent contends.    For the reasons

discussed below, we agree with respondent.

A.   Statutory Framework

     Section 162 allows a deduction for all ordinary and

necessary expenses 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

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
                                  - 9 -

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

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, and Rev. Proc. 96-28, 1996-1 C.B. 686 (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
                              - 10 -

traveling away from home.5   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 diem allowance[6] under a




     5
       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. 96-28,
supra, restates verbatim the relevant sections of Rev. Proc. 94-
77, supra. Subsequent citations to provisions of Prev. Proc. 96-
28, supra, will also refer to identical provisions of superseded
Rev. Proc. 94-77, supra.
     6
       Rev. Proc. 96-28, sec. 3.01, 1996-1 C.B. at 687, 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/or 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 the applicable Federal per diem
                rate, a flat rate or stated schedule, or
                in accordance with any other Service-
                specified rate or schedule.
                                  - 11 -

reimbursement or other expense allowance arrangement to pay for

such expenses.”7      Rev. Proc. 96-28, sec. 1, 1996-1 C.B. at 686.

       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.8      Rev. Proc. 96-28, sec. 4.01, 1996-1 C.B. at

687.       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

for the day or the Federal M&IE rate.       Rev. Proc. 96-28, sec.



       7
       Neither sec. 274(d) nor the regulations thereunder nor the
applicable revenue procedures explicitly refer to the
substantiation requirements that apply to the employer or payor
that seeks to deduct payments of travel-expense reimbursements.
Under sec. 274(d), however, the “taxpayer” must meet the
stringent substantiation requirements to be entitled to a
deduction under sec. 162 for any travel expense. The parties do
not disagree that the substantiation methods authorized under
Rev. Proc. 94-77, supra, and Rev. Proc. 96-28, supra, apply to
petitioner, as payor of the per diem allowances, in determining
Beech Trucking’s compliance with the sec. 274(d) substantiation
requirements.
       8
       For this purpose, the Federal per diem rate is the sum of
the Federal lodging expense rate and the Federal meal and
incidental expense (M&IE) rate. Rev. Proc. 96-28, sec. 3.02,
1996-1 C.B. at 687. 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)
(citing 41 C.F.R. sec. 301-7.2(a)(2) (1994 & 1996)).
                              - 12 -

4.02, 1996-1 C.B. at 688.9   For this purpose, a per diem

allowance is treated as paid only for M&IE in various specified

circumstances, including where 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).10   Rev. Proc. 96-28, sec. 4.02,

1996-1 C.B. at 688.

     The Revenue Procedures contain special rules for applying

the section 274(n) 50-percent limitation to per diem allowances.

Specifically, under the Revenue Procedures, if a per diem is paid

only for M&IE, an amount equal to the lesser of the per diem

allowance for each calendar day or the Federal M&IE rate is



     9
       Under special rules for the   transportation industry
(including the trucking industry),   a taxpayer is permitted to
treat $32 as the Federal M&IE rate   for all localities of travel
in the continental United States.    Rev. Proc. 96-28, sec.
4.04(2), 1996-1 C.B. at 688.
     10
       Sec. 4.02 of the Revenue Procedures provides that a per
diem allowance is treated as paid only for M&IE if:

     (1) the payor pays the employee for actual expenses for
         lodging,
     (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).
                               - 13 -

treated as an expense for food and beverages (and thus subject to

the section 274(n) 50-percent limitation).   Rev. Proc. 96-28,

sec. 6.05, 1996-1 C.B. at 691.   If the per diem allowance is paid

for lodging as well as M&IE, the payor must treat an amount equal

to the Federal M&IE rate as an expense for food and beverages.

For this purpose, when a per diem for lodging and M&IE is paid at

a rate that is less that the Federal per diem rate, the payor may

treat an amount equal to 40 percent of the per diem allowance as

the Federal M&IE rate.   Id.

C.   Application of the Revenue Procedures

     On its tax returns for the years at issue, Beech Trucking

claimed deductions for the per diem payments on the basis of the

last-described rule of the Revenue Procedures; i.e., it treated

40 percent of the per diem payments as being 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).   See supra note 4.

      Respondent does not dispute that the Revenue Procedures

apply to this case; that the per diem payments at issue here

constitute “per diem allowances” within the meaning of the

Revenue Procedures; that the per diem payments are ordinary and

necessary business expenses of Beech Trucking, within the meaning

of section 162; that these expenses are deemed to be

substantiated under the Revenue Procedures; or that they are
                              - 14 -

deductible to the extent that they are not limited by the 50-

percent limitation of section 274(n).11    Respondent contends,

however, that Beech Trucking is 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.

     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 dispatched according to the Rand McNally Mileage Maker.

Hence, section 4.02 of the Revenue Procedures treats the per diem

allowances as being paid only for M&IE.12    Under section 4.02 of


     11
       It appears that some of the per diem payments were made
with respect to trips that involved no overnight travel.
Respondent does not dispute, however, that the Revenue
Procedures, which by their terms apply with respect to expenses
incurred by an employee “while traveling away from home”, Rev.
Proc. 96-28, sec. 1, 1996-1 C.B. at 686, apply to all the per
diem payments at issue here. Consequently, we give no further
consideration to this issue. Moreover, the parties have not
raised, and we do not reach, any issue as to whether in these
circumstances the deductibility of the per diem allowances is
constrained by sec. 162(a)(2). Cf. UAL Corp. v. Commissioner,
117 T.C. 7 (2001).
     12
       Respondent also contends that three other factors
enumerated in sec. 4.02 of the Revenue Procedures require that
the per diem allowances be treated as solely for M&IE. In
particular, respondent contends that Beech Trucking paid its
drivers actual lodging costs, furnished its drivers lodging in
kind, and had no reasonable belief that its drivers incurred
                                                   (continued...)
                                - 15 -

the Revenue Procedures, the expenses covered by the per diem

payments 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. 96-28, sec. 4.02, 1996-1 C.B. at 688.

Respondent does not dispute that under the Revenue Procedures,

petitioner is deemed to have substantiated the subject expenses

in an amount equal to the full amount of the per diem payments.

Thus, respondent has effectively conceded that the subject per

diem allowances are less than the Federal M&IE rate.

        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).     As just discussed,

respondent has effectively conceded that the per diem allowances

at issue here are less than the Federal M&IE rate–-a concession

to which petitioner must accede if the subject expenses are to be

deemed fully substantiated under the Revenue Procedures.



     12
      (...continued)
lodging expenses. Petitioner disputes respondent’s factual
premises. Because 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. Because 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.
                                - 16 -

(Otherwise, as discussed more fully infra, 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.)13   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).

D.   Petitioner’s Contentions

      Petitioner argues that because Beech Trucking leased its

drivers from ATS, the section 274(n) limitation is inapplicable

to Beech Trucking.   Petitioner also argues that the Revenue

Procedures are invalid insofar as they operate to characterize

the Beech Trucking per diem payments as being solely for M&IE

expenses (and not for lodging) and to apply the section 274(n)

limitation to nonmeal expenses that were covered by the per diem




      13
       Moreover, as discussed infra, the evidence indicates that
Beech Trucking’s per diem payments were in fact less than the
Federal M&IE rate.
                               - 17 -

payments.14   For the reasons described below, we disagree with

each of these arguments.

     1.   Employment Status of the Beech Trucking Drivers

     Petitioner argues that the Beech Trucking drivers were

employed by ATS and not by Beech Trucking.   Consequently,

petitioner argues, the section 274(n) limitation should apply

only to ATS and not to Beech Trucking.15   In support of this


     14
       Petitioner (who has consistently maintained throughout
these proceedings that the truck drivers were not Beech
Trucking’s employees) has not raised and we do not reach any
issue as to whether the per diem payments should be deductible
under sec. 162(a)(1) as personal service compensation paid by
Beech Trucking to the drivers. In UAL Corp. v. Commissioner, 117
T.C. 7 (2001), the taxpayer, pursuant to a collective bargaining
agreement with its employees, paid its pilots and flight
attendants per diem allowances at a specified rate for each hour
the employees were on duty or on flight assignment. This Court
held that the taxpayer was entitled to deduct the per diem
allowances as personal service compensation under sec. 162(a)(1),
finding that the taxpayer would not have paid the per diem
allowances to its employees but for the existence of a bona fide
employer/employee relationship and the need to pay the allowances
in order to secure the employees’ services. Id. at 10. Noting,
among other things, the taxpayer’s negotiation of the per diem
allowances as part of its employees’ compensation package, this
Court found as a fact that in making the per diem payments, the
taxpayer intended to compensate the employees for their personal
services. Id. at 11.

     In the instant case, the record does not establish Beech
Trucking’s intent in making the per diem payments or the manner
in which the per diem allowances were determined or by whom.
Moreover, unlike the per diem allowances at issue in UAL Corp. v.
Commissioner, supra, the per diem allowances at issue here were
computed by reference to miles dispatched rather than according
to hours on duty or on travel assignment.
     15
       Petitioner’s argument is inconsistent with Beech
Trucking’s treatment of the per diem payments on its tax returns,
                                                   (continued...)
                              - 18 -

argument, petitioner cites section 274(e)(3) and the regulations

thereunder.

     We construe petitioner’s argument as being predicated upon

section 274(n)(2)(A), which provides that the section 274(n)

limitation does not apply with respect to any expense described

in (among other sections) section 274(e)(3).

     Section 274(e)(3) provides that certain reimbursed expenses

are not subject to section 274(a), which generally disallows

deductions for expenses with respect to entertainment activities

and facilities.   Specifically, section 274(e)(3) provides that

section 274(a) shall not apply to:

     Expenses paid or incurred by the taxpayer, in
     connection with the performance by him of services for
     another person (whether or not such other person is his
     employer), under a reimbursement or other expense
     allowance arrangement with such other person, but this
     paragraph shall apply–-

               (A) where the services are performed for
          an employer, only if the employer has not
          treated such expenses in the manner provided
          in paragraph (2), or

               (B) where the services are performed for
          a person other than an employer, only if the
          taxpayer accounts (to the extent provided by
          subsection (d)) to such person.


     15
      (...continued)
wherein it treated 40 percent of the per diem payments as being
subject to the sec. 274(n) limitation. Moreover, petitioner’s
argument is inconsistent with the premise of the prayer for
relief in this litigation, wherein petitioner has not contended
that Beech Trucking is entitled to greater deductions than it
claimed on its tax returns on the basis of its application of the
sec. 274(n) limitation.
                                - 19 -

     The purpose of this exception in section 274(e)(3) is “to

prevent the double disallowance of a single expenditure, once to

the employee or practitioner, etc., and a second time to the

employer or client, etc.”   H. Rept. 1447, 87th Cong., 2d Sess.

(1962), 1962-3 C.B. 405, 429.    The regulations under section

274(e)(3) provide as follows:

          (iv) Reimbursed entertainment expenses–-(a)
     Introductory. In the case of any expenditure for
     entertainment paid or incurred by one person in
     connection with the performance by him of services for
     another person (whether or not such other person is an
     employer) under a reimbursement or other expense
     allowance arrangement, the limitations on allowability
     of deductions provided for in paragraphs (a) through
     (e) of this section shall be applied only once, either
     (1) to the person who makes the expenditure or (2) to
     the person who actually bears the expense, but not to
     both. * * *

             (b) Reimbursement arrangements between employee
     and employer. In the case of an expenditure for
     entertainment paid or incurred by an employee under a
     reimbursement or other expense allowance arrangement
     with his employer, the limitations on deductions
     provided for in paragraphs (a) through (e) of this
     section shall not apply–-

                 (1) Employees. To the employee except to
     the extent his employer has treated the expenditure on
     the employer’s income tax return as originally filed as
     compensation paid to the employee and as wages to such
     employee for purposes of withholding under chapter 24
     (relating to collection of income tax at source on
     wages).

                 (2) Employers. To the employer to the
     extent he has treated the expenditure as compensation
     and wages paid to an employee in the manner provided in
     (b)(1) of this subdivision. [Sec. 1.274-2(f)(2)(iv)(a)
     and (b), Income Tax Regs.]
                              - 20 -

     As previously noted, the principles reflected in section

274(e)(3) and the above-quoted regulations apply for purposes of

section 274(n) by virtue of the cross-reference to section

274(e)(3) contained in section 274(n)(2)(A).    Accordingly, with

respect to meal and entertainment expenses that an employee pays

or incurs and that are reimbursed by the employer, the section

274(n) limitation applies either to the employee (as the “person

who makes the expenditure”) or to the employer (as the “person

who actually bears the expense”).    Sec. 1.274-2(f)(2)(iv)(a),

Income Tax Regs.

     In the instant case, with respect to the per diem payments,

the parties agree that the section 274(n) limitation does not

apply to the employees (i.e., the Beech Trucking drivers), since

the per diem payments were excluded from their wages.    The

parties agree that the section 274(n) limitation instead applies

to the drivers’ employer.   Petitioner argues, however, that ATS,

not Beech Trucking, was the drivers’ employer and that section

274(n) thus does not apply to Beech Trucking.

     Neither section 274(e)(3) nor the regulations thereunder nor

section 274(n) defines “employer” or “employee”.    Consequently,

we look to common law concepts to determine the existence of an

employer-employee relationship.     Nationwide Mut. Ins. Co. v.

Darden, 503 U.S. 318, 322-324 (1992); Burrey v. Pac. Gas & Elec.

Co., 159 F.3d 388, 393 (9th Cir. 1998); Alford v. United States,
                               - 21 -

116 F.3d 334, 336 (8th Cir. 1997); MedChem (P.R.), Inc. v.

Commissioner, 116 T.C. 308, 341 (2001); Profl. & Exec. Leasing,

Inc. v. Commissioner, 89 T.C. 225, 231 (1987), affd. 862 F.2d 751

(9th Cir. 1988).    Among the factors to which the courts have

looked to determine the existence of a common law employment

relationship are the following:    Control exercised over the

details of the work; discretion exercised over the time and

duration of the work; the source of the instrumentalities and

tools of the work; the permanency of the relationship; the right

to assign additional projects to the hired party; the right to

discharge; the method of payment; the provision of employee

benefits; the opportunity for profit and loss; and whether the

type of work is part of the hiring party’s regular business.

Alford v. United States, supra at 337-338; Weber v. Commissioner,

103 T.C. 378, 387 (1994), affd. 60 F.3d 1104 (4th Cir. 1995);

Profl. & Exec. Leasing, Inc. v. Commissioner, supra at 232; see

also sec. 31.3401(c)-1(b), Employment Tax Regs.    Normally,

control is the most significant factor in determining the nature

of a working relationship.    Weber v. Commissioner, supra at 387,

390.

       Although the courts normally employ these common law factors

to determine whether a person in a two-party relationship is an

employee or an independent contractor, these factors are equally

applicable in determining the identity of the common law employer
                              - 22 -

in three-party employment situations.   Vizcaino v. U.S. Dist.

Ct., 173 F.3d 713, 723 (9th Cir. 1999); Profl. & Exec. Leasing,

Inc. v. Commissioner, supra at 232 (applying the common law

factors to determine that the taxpayer, who leased management and

professional personnel to commercial businesses and professional

practices, was not the common law employer of the personnel for

purposes of the “exclusive benefit” rule of section 401(a)(2)

(citing Bartels v. Birmingham, 332 U.S. 126, 132 (1947))).

     The analysis of common law employment status is

“extraordinarily fact intensive”.   Alford v. United States, supra

at 337.   In the instant case, the evidentiary basis for analyzing

the relevant common law factors is relatively sparse, owing

largely to petitioner’s failure to introduce in evidence or

otherwise establish the precise terms of any lease agreement,

employment agreement, or contract between Beech Trucking and ATS.

Nor does the record contain the drivers’ employment contracts.

Moreover, the record does not always clearly distinguish the

roles of Beech Trucking and ATS with respect to the drivers’

activities.   We infer that their roles were to some degree

blurred, especially taking into consideration that Harvey, who

owned ATS, also owned 26 percent of Beech Trucking, and that

petitioner, who was president and 55-percent owner of Beech

Trucking, was an employee of ATS.
                                - 23 -

     As far as we can discern from the record, Beech Trucking

controlled the drivers’ activities, exercising discretion over

when and how long they worked.    Petitioner testified that Beech

Trucking drivers were dispatched out of Beech Trucking’s Little

Rock terminal; that Beech Trucking tried to keep all its 100 to

125 trucks manned so as to get “our drivers home most weekends”;

and that on a typical week, a Beech Trucking driver would leave

on a Sunday afternoon and “we would try to get him out as far as

we could in the early part of the week, and then start working

him back toward the house.”16    The record is silent as to any

control that ATS might have exercised over the Beech Trucking

drivers’ activities.

     ATS hired the drivers and provided them some orientation.

On its income tax returns for the years at issue, however, Beech

Trucking deducted (as part of “Other deductions”) a separate item

identified as “hiring cost–-drivers”, from which we infer that

Beech Trucking reimbursed ATS for the cost of hiring the Beech

Trucking drivers.   When ATS hired the Beech Trucking drivers,

they signed employment agreements wherein they agreed to be ATS


     16
       Most of the pertinent testimony regarding the Beech
Trucking drivers’ activities came from petitioner. As previously
noted, petitioner was both president of Beech Trucking and an
employee of ATS. As reflected in the quotations in the text
above, his testimony often employed, ambiguously, first-person
plural pronouns. On the basis of our careful review of
petitioner’s testimony in the context of the entire record, we
conclude that the testimony described in the text is most
reasonably understood to refer to petitioner’s activities as
president of Beech Trucking.
                              - 24 -

employees but to operate Beech Trucking equipment.   A contract

purporting to create an employer-employee relationship is not

controlling where application of the common law factors to the

facts and circumstances indicates the absence of such a

relationship.   Profl. & Exec. Leasing, Inc. v. Commissioner,

supra at 233.   Here, the employment agreements reflect at least

three factors that point to Beech Trucking as the common law

employer:   (1) Beech Trucking provided the tools and

instrumentalities of the drivers’ work; (2) ATS apparently had no

right to assign additional projects to the drivers, the drivers

being effectively assigned to Beech Trucking; and (3) the

relationship between the drivers and Beech Trucking was

apparently of indefinite duration.

     Petitioner had final authority to terminate the Beech

Trucking drivers.   He testified that “If they [the Beech Trucking

drivers] were late on loads, * * * I would turn them back to

Arkansas Trucking Services and tell them we couldn’t use them.”

     Although ATS issued the drivers’ weekly paychecks, paid

workers’ compensation, and maintained a section 401(k) plan for

the drivers, Beech Trucking reimbursed ATS weekly for its

expenditures, plus a service charge.   As petitioner states on

brief, ATS “actually made the expenditures while Beech Trucking

actually would bear the cost.”   We infer that ATS’s opportunity

for profit related primarily to its bookkeeping and payroll
                              - 25 -

function, and that it had little exposure to losses associated

with the Beech Trucking drivers’ work activities.   By contrast,

it appears that Beech Trucking bore the risks associated with

operating the trucking business on which it relied to generate

revenues with which to make weekly payroll reimbursements to ATS.

     Beech Trucking had an investment in work facilities:   it

operated two terminals and owned all the trucks that the drivers

operated.   Clearly, the drivers’ work was part of the regular

business of Beech Trucking.   The record is silent as to whether

ATS had any separate work facilities and is unclear as to the

extent of any business ATS might have had apart from the services

it provided Beech Trucking.

     In sum, on the basis of all the evidence in the record, we

conclude that Beech Trucking was the drivers’ common law

employer, with respect to which ATS performed principally a

driver procurement and payroll service.   Cf. Profl. & Exec.

Leasing, Inc. v. Commissioner, 89 T.C. at 234.

     Accordingly, we conclude that the section 274(n) limitation

applies to Beech Trucking as the common law employer of its

drivers and as the party that (as petitioner states on brief)

actually bore the expense of the expenditures for which the per

diem payments were made.   See sec. 1.274-2(f)(2)(iv), Income Tax
                               - 26 -

Regs.17   This conclusion is consistent with the position taken by

Beech Trucking on its tax returns for the years at issue and with

the implicit premise of petitioner’s prayer for relief.18

     2.   Validity of the Revenue Procedures

     Petitioner argues that the Revenue Procedures are invalid

insofar as they operate (in section 4.02) to characterize the

Beech Trucking 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.   Petitioner does not argue that

the Revenue Procedures are otherwise invalid; to the contrary,

petitioner relies 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

Beech Trucking (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, then, petitioner seeks to rely

selectively on certain aspects of the Revenue Procedures that

     17
       This case does not present, and we do not reach, any
issue as to the proper tax treatment to ATS of the amounts that
ATS paid to the Beech Trucking drivers. The record is silent as
to how ATS might have treated the payments to the Beech Trucking
drivers for tax purposes.
     18
       As previously indicated, in this litigation petitioner
has not argued that Beech Trucking is entitled to deduct a
greater amount of the per diem payments than the 80 percent it
claimed on its tax returns, on the basis of its application of
the sec. 274(n) limitations.
                                - 27 -

work to Beech Trucking’s benefit while seeking to avoid the

associated conditions that the Revenue Procedures impose.

     The substantiation methods described in the Revenue

Procedures and relied upon by petitioner are not mandatory.      See

Rev. Proc. 96-28, sec. 1, 1996-1 C.B. at 686.    Beech Trucking

could have used actual allowable expenses if they were properly

substantiated with adequate records or other sufficient evidence.

See id.; see also Johnson v. Commissioner, 115 T.C. 210, 228

(2000).19    In that event, properly substantiated nonmeal travel

expenses might have been deductible without limitation by section

274(n).     Instead, Beech Trucking elected to use the deemed

substantiation method provided by the Revenue Procedures.       Having

made this election, Beech Trucking cannot avail itself of the

benefits of the Revenue Procedures without adhering to the

conditions the Commissioner has imposed.    See Bob Wondries

Motors, Inc. v. Commissioner, 268 F.3d 1156, 1160-1161 (9th Cir.

2001) (taxpayers who elected, pursuant to a revenue procedure, to


     19
       Moreover, Beech Trucking could have avoided the sec.
274(d) substantiation requirements, as well as the sec. 274(n)
50-percent limitation, by treating the per diem payments as
compensation to the drivers. See sec. 274(e)(2) and (3),
(n)(2)(A); sec. 1.274-2(f)(2)(iii) and (iv)(b), Income Tax Regs.
The tradeoff would be that the per diem payments would then be
includable in the drivers’ gross incomes and would be subject to
withholding and payment of employment taxes when paid. See sec.
1.62-2(c)(5), (h)(2)(ii), Income Tax Regs. Under this scenario,
the drivers would be eligible to claim, as itemized deductions,
expenses attributable to the payments included in their gross
incomes, subject to the sec. 274(d) substantiation requirements
and the sec. 274(n) 50-percent limitation. See sec. 1.62-
2(c)(5), Income Tax Regs.
                                - 28 -

defer prepaid service income on warranty contracts were required

to adhere to the revenue procedure’s condition regarding the

manner of accounting for insurance expenses associated with the

warranty contracts), affg. Toyota Town, Inc. v. Commissioner,

T.C. Memo. 2000-40; Mulholland v. United States, 28 Fed. Cl. 320,

344 (1993) (taxpayers’ failure to adhere to conditions of a

revenue procedure rendered them ineligible for its benefits),

affd. 22 F.3d 1105 (Fed. Cir. 1994).

     Petitioner argues that the complained-of conditions

contained in section 4.02 of the Revenue Procedures are invalid

because they conflict with certain regulations under section

62(a)(2).    Petitioner also suggests that sections 4.02 and 6.05

of the Revenue Procedures, as applied to the instant case,

reflect an arbitrary or unlawful exercise of respondent’s

authority.    For the reasons discussed below, we disagree with

each of these arguments.

            a.   Does Section 4.02 of the Revenue Procedures
                 Conflict With the Section 62(a)(2) Regulations?

     As previously discussed, in certain specified circumstances,

section 4.02 of the Revenue Procedures limits the amount of the

employees’ reimbursed travel expenses that is deemed to be

substantiated to the lesser of:    (1) The actual per diem

allowance for the day; or (2) the amount computed at the Federal

M&IE rate for the locality of travel–-which rate the taxpayer may

treat (for travel in the continental United States) as being $32
                              - 29 -

(hereinafter referred to as the specified Federal M&IE rate).20

Among the five factors enumerated in section 4.02 of the Revenue

Procedures that may trigger this consequence, the fifth factor is

the focus of the dispute here.    It requires a per diem allowance

to be treated as paid only for M&IE if “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. 96-28, sec. 4.02,

1996-1 C.B. at 688.   (Hereinafter, this provision is sometimes

referred to simply as the fifth factor.)

     On brief, petitioner suggests that the fifth factor is

invalid because it conflicts with certain regulations under

section 62(a)(2), regarding the treatment to employees of

reimbursed expenses under so-called accountable plans.21


     20
        Under the Revenue Procedures, the Federal per diem rate
for the locality of travel is the amount set forth in the Federal
Travel Regulations, as contained in 41 C.F.R., ch. 301, app. A,
as amended. See Rev. Proc. 96-28, sec. 3.02, 1996-1 C.B. at 687.
The Federal Travel Regulations, as in effect for the years at
issue, provide various M&IE rates (ranging from $26 to $38) for
over 800 specified localities in the continental United States;
all other locations in the continental United States are subject
to the lowest M&IE rate of $26. See 41 C.F.R., ch. 301., app. A
(1996). As previously noted, under the simplifying convention of
sec. 4.04(2) of the Revenue Procedures, a qualifying taxpayer in
the transportation industry may treat $32 as the Federal M&IE
rate for all localities of travel in the continental United
States.
     21
       Sec. 62(a)(2)(A) permits favorable tax treatment (e.g.,
exclusion from the employee’s gross income and exemption from
withholding requirements and the payment of employment tax) with
respect to reimbursements of business expenses that payors make
                                                   (continued...)
                             - 30 -

Petitioner observes, correctly, that mileage-based reimbursement

arrangements like those described in the fifth factor (and at

issue here) are expressly recognized in section 1.62-2(d)(3)(ii),

Income Tax Regs., as satisfying, in certain circumstances, the

so-called business connection requirement as necessary for a

reimbursement arrangement to qualify as an accountable plan.22

Therefore, petitioner elliptically concludes, the fifth factor of

section 4.02 of the Revenue Procedures conflicts with section

1.62-2(d)(3)(ii), Income Tax Regs., and is therefore invalid.

Insofar as we are able to understand petitioner’s argument, we

disagree with it.

     We perceive no conflict between section 1.62-2(d)(3)(ii),

Income Tax Regs., and section 4.02 of the Revenue Procedures.


     21
      (...continued)
to employees under so-called accountable plans. See sec. 1.62-
2(c)(4), (h), Income Tax Regs. By contrast, reimbursement
payments under nonaccountable plans must be reported as wages to
the employees and are subject to withholding and employment
taxes. See sec. 1.62-2(c)(5), Income Tax Regs.
     22
       For qualification as an accountable plan, one requirement
(the so-called business connection requirement) is that the
reimbursement arrangement must provide reimbursements only for
business expenses that are allowable as deductions under I.R.C.
pt. VI (secs. 161-197) and that are paid or incurred by the
employee in connection with the performance of services as an
employee of the employer. Sec. 1.62-2(c)(1) and (d)(1), Income
Tax Regs. A per diem allowance arrangement that 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)” will meet the business connection
requirement only in certain circumstances, one of which is that
“a per diem allowance computed on that basis was commonly used in
the industry in which the employee is employed.” Sec. 1.62-
2(d)(3)(ii), Income Tax Regs.
                               - 31 -

Respondent does not dispute that Beech Trucking’s mileage-based

reimbursement arrangement satisfies the business connection test

under the section 62(a)(2) regulations.   Cf. Shotgun Delivery,

Inc. v. United States, 269 F.3d 969 (9th Cir. 2001); Trucks, Inc.

v. United States, 234 F.3d 1340 (11th Cir. 2000).    Nor does

respondent dispute that this per diem arrangement satisfies the

substantiation requirements described in section 1.62-2(e),

Income Tax Regs., which permits travel expenses governed by

section 274(d) (as are those at issue here) to be deemed to be

substantiated in accordance with rules prescribed pursuant to the

authority granted by section 1.274(d)-1, Income Tax Regs., or

section 1.274-5T(j), Temporary Income Tax Regs., 50 Fed. Reg.

46032 (Nov. 6, 1985); i.e., in accordance with the Revenue

Procedures.    To the contrary, respondent implicitly acknowledges

that the reimbursed travel expenses at issue here are deemed to

be substantiated under the Revenue Procedures.   The only issue is

how the travel expenses are to be characterized–-an issue that

the section 62 regulations do not explicitly address other than

by cross-referencing the regulations pursuant to which the

Revenue Procedures were promulgated.

          b.    Are the Revenue Procedures, as Applied,
                Otherwise Invalid?

     Petitioner also suggests more generally that respondent

acted arbitrarily or unlawfully by applying in this case the
                                 - 32 -

complained-of conditions contained in sections 4.02 and 6.05 of

the Revenue Procedures.

     As previously discussed, the application of section 4.02 of

the Revenue Procedures has two essential consequences with regard

to a mileage-based reimbursement arrangement like the one at

issue here:   (1) It imposes an upper limit on the amount of

reimbursed travel expenses that are deemed to be substantiated

(an amount that a qualifying transportation-industry taxpayer may

treat under section 4.04(2) of the Revenue Procedures as being

equal to the $32 specified Federal M&IE rate); and (2) it

characterizes those reimbursed expenses as being M&IE and not

lodging expenses.

     Petitioner does not take issue with the reasonableness of

the upper limit imposed by section 4.02 of the Revenue

Procedures.   To the contrary, according to petitioner’s

representations on brief, the amount of the upper limit so

imposed (as referenced by the specified Federal M&IE rate of $32)

corresponds closely to the maximum per diem payment ($32.50) that

petitioner alleges would obtain under Beech Trucking’s mileage-

based reimbursement formula.23    Furthermore, the evidence in the


     23
       Petitioner testified that Federal law prohibits drivers
from driving more than 10 hours a day, and that in setting the
amount of the per diem allowance, Beech Trucking relied on a rule
of thumb that its drivers would drive an average of 45 to 50
miles per hour. Apparently on the basis of this testimony,
petitioner states on reply brief that Beech Trucking’s per diem
arrangement provided a “maximum per diem base of 500 miles at 6.5
                                                   (continued...)
                               - 33 -

record indicates that Beech Trucking’s mileage-based

reimbursement formula, on average, yielded reimbursements

significantly less than the specified Federal M&IE rate (and also

less than any actual Federal M&IE rate that might otherwise be

applicable).24   As previously discussed, we have deemed the

parties to have conceded that the actual per diem payments at

issue here were less than the upper limit determined by reference

to the Federal M&IE rate.   Accordingly, petitioner is not



     23
      (...continued)
cents a mile, which would provide a maximum per diem allowance of
$32.50.” Petitioner represents that Beech Trucking’s mileage-
based method of reimbursing drivers’ travel expenses reflects
common industry practice.
     24
       Petitioner testified that the average length of a long
haul for a Beech Trucking driver was about 389 miles on the
outbound leg of the trip. Petitioner also testified that Beech
Trucking would try to get each trucker “out as far as we could in
the early part of the week, and then start working him back
toward the house.” The evidence indicates that the drivers would
be gone for about five nights on a typical long haul. Taken
together, this evidence indicates that the average per diem
allowance that Beech Trucking actually provided its drivers was
much less than the $32.50 maximum per diem allowance that
petitioner represents would obtain under the reimbursement
formula, based on an assumed maximum 500 miles of driving per
day. Specifically, the average outbound trip of 389 miles would
yield a per diem payment of no more than $25.29. Assuming, as
seems likely, that the return leg of the average 5-day-long haul
would entail less mileage each day than the average 389 miles
driven on the outbound trip, it seems likely that the average per
diem payments for each of the other 4 days of such a trip would
be less than $25.29. Consequently, the evidence indicates that
the average per diem payment was not only less than the $32
specified Federal M&IE rate under the Revenue Procedures, but
also less than the lowest actual Federal M&IE rate ($26), and
much less than the highest actual Federal M&IE rate ($38),
applicable to any locality of travel under the Federal Travel
Regulations. See 41 C.F.R. ch. 301, app. A (1996).
                               - 34 -

adversely affected by the amount of the upper limit per se but

only by the characterization of the reimbursed travel expenses as

being for M&IE.

     In this latter regard, we do not believe that section 4.02

of the Revenue Procedures reflects an arbitrary or unlawful

exercise of the Commissioner’s authority in treating a maximum

per diem allowance that is approximately equal to the Federal

M&IE rate as reimbursing no more than M&IE expenses, particularly

where, as here, actual per diem reimbursements are less than the

amount computed at the Federal M&IE rate.25

     Similarly, we do not believe that the complained-of

conditions contained in section 6.05 of the Revenue Procedures,

as applied to this case, are arbitrary or unlawful.26   The effect

of section 6.05 of the Revenue Procedures, as applied here, is

effectively to treat the subject per diem payments as covering

solely meal expenses in circumstances where, as just discussed,

the reimbursements were less than the amount computed at the

Federal M&IE rates and, in all likelihood, less than the amount

computed by reference to the portion of the Federal M&IE rate



     25
       This   case does not present, and we do not consider, any
issue as to   whether the complained-of conditions of sec. 4.02 of
the Revenue   Procedures are valid as applied to per diem payments
that exceed   the Federal M&IE rate.
     26
       This case does not present, and we do not consider, any
issue as to whether this aspect of sec. 6.05 of the Revenue
Procedures is valid as applied to per diem payments that
approximate or exceed the Federal M&IE rate.
                               - 35 -

that is for meals only.27   In such circumstances, it is not

unreasonable for the Revenue Procedures to treat the per diem

payments as covering only meal expenses.

     Petitioner contends that the Beech Trucking per diem

payments covered not only the drivers’ meals but also their

lodging expenses and incidental expenses, such as the cost of

showers, laundry, overnight parking, and local transportation.

Assuming that the drivers might have incurred such travel

expenses from time to time, it does not follow that the per diem

payments necessarily reimbursed them for such travel expenses.

To the contrary, it appears that the subject per diem allowances

were insufficient to reimburse the drivers for all such expenses.

Because the Revenue Procedures permit deemed substantiation in

lieu of actual substantiation of the employees’ travel expenses,

the actual amounts and character of each employee’s travel

expenses are unknown and probably unknowable.28   In these

circumstances, it is reasonable and probably necessary for the

Commissioner to adopt conventions (such as those contained in



     27
       The portion of the Federal M&IE rate that is attributable
to incidental expenses incurred in all continental United States
locations is $2. 41 C.F.R. sec. 301-7.12(a)(2)(i) (1994 & 1996).
     28
       Indeed, it is conceivable that some drivers might subsist
so Spartanly on the road as to spend very little of their per
diem payments, pocketing the unspent payments as untaxed extra
compensation. After all, there is no requirement that employees
spend per diem allowances such as those at issue here for any
particular purpose or that they remit to the employer any unspent
per diem allowance.
                               - 36 -

sections 4.02 and 6.05 of the Revenue Procedures) governing the

nature of the deemed-substantiated expenses, where that issue has

independent significance under the tax laws.

     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

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 any event, even if we were to agree with petitioner 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.    The burden of proof is on petitioner.   Rule
                               - 37 -

142(a).29   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

Accordingly, petitioner has failed to show that respondent’s

determination was in error.   Cf. United States v. St. Louis-S.F.

Ry., 537 F.2d 312 (8th Cir. 1976) (taxpayer failed to rebut

Commissioner’s valuation of reusable rail as determined on the

basis of an elective method provided by a revenue procedure);

Kasey v. Commissioner, 54 T.C. 1642, 1650 (1970) (although an

automobile allowance of 10 cents per mile under an elective



     29
       In certain circumstances, if the taxpayer introduces
credible evidence with respect to any factual issue relevant to
ascertaining the proper tax liability, sec. 7491 places the
burden of proof on the Commissioner. See sec. 7491(a); Rule
142(a)(2). Sec. 7491 is effective with respect to court
proceedings arising in connection with examinations commencing
after July 22, 1998. See Internal Revenue Service Restructuring
and Reform Act of 1998, Pub. L. 105-206, sec. 3001(c)(2), 112
Stat. 685, 726. Here, respondent’s examinations of Beech
Trucking’s 1995 and 1996 Federal income tax returns commenced
before July 23, 1998. Accordingly, sec. 7491 has no application
to this case.
     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.
                              - 38 -

revenue procedure might have been arbitrary, the taxpayer failed

to substantiate any higher amount of actual automobile expenses

and so was properly granted a deduction based on the revenue

procedure), affd. 457 F.2d 369 (9th Cir. 1972).

     Petitioner cites Johnson v. Commissioner, 115 T.C. 210

(2000), to support his contention that section 274(n) is

inapplicable to the extent the per diem allowances represent

reimbursements for incidental expenses.31   Petitioner’s reliance

on Johnson is misplaced.   In Johnson, the taxpayer, a merchant

marine, incurred and paid incidental travel expenses that were

not reimbursed by his employer.   The issue was whether, pursuant

to Rev. Proc. 96-28, 1996-1 C.B. 686, the taxpayer could deduct

these incidental expenses using the full Federal per diem rates.

Resolution of this issue in Johnson turned upon the proper

interpretation of section 4.03 of Rev. Proc. 96-28, 1996-1 C.B.

at 688, which provides an optional method whereby employees and

self-employed individuals may deduct meal and incidental expenses

incurred for travel away from home by using an amount computed at



     31
       Neither in the petition nor elsewhere in this litigation
has petitioner expressly sought any relief with respect to Beech
Trucking’s claimed deduction for its reimbursements of any
incidental travel expenses of its drivers. As previously
discussed, on its Federal income tax return, Beech Trucking
deducted the per diem payments under the rule of sec. 6.05 of the
Revenue Procedures, which effectively treats 60 percent of
certain per diem payments as being for lodging (and thus not
subject to the sec. 274(n) limitation) and the other 40 percent
(which would include any incidental travel expenses) as being
subject to the sec. 274(n) limitation.
                              - 39 -

the Federal M&IE rate for the locality of travel.   This Court

held that under section 4.03 of Rev. Proc. 96-28, supra, the

taxpayer was entitled to a portion of the claimed deductions, as

limited by applying the incidental expense portions of the

applicable Federal M&IE rates.   Johnson v. Commissioner, supra at

216-217.

     Unlike the case at hand, Johnson did not address the payment

of a per diem allowance, the tax treatment of the payment to the

payor, the deemed substantiation of such a per diem payment under

the applicable Revenue Procedures, the validity or application of

section 4.02 or 6.05 of the Revenue Procedures, or the

application of section 274(n) to such a per diem payment.     In

Johnson, the taxpayer-employee incurred no meals or lodging

expenses.   Consequently, the section 274(n) limitation was

inapplicable.32

     In the instant case, by contrast, petitioner seeks to deduct

per diem payments intended to cover, without differentiation, all

otherwise unreimbursed travel expenses, including meals.    To the

extent that the per diem allowances represent reimbursements of



     32
       In Johnson v. Commissioner, 115 T.C. at 215-216, the
taxpayer deducted incidental expenses, as determined using the
full Federal per diem rate, after applying the 50-percent
limitation of sec. 274(n). In a footnote, the Court indicated
that the sec. 274(n) 50-percent disallowance did not apply to the
taxpayer’s deduction at this rate. Id. at 227 n.10. The Court
did not expressly address the application of those portions of
the applicable revenue procedure that pertain to the application
of sec. 274(n).
                               - 40 -

meal expenses, the section 274(n) limitations are applicable,

absent some statutory exception.33   Petitioner has not attempted,

however, 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.   Instead, petitioner has elected to rely upon

the deemed substantiation methods made available in the Revenue

Procedures, which provide for no such allocation.

     Accordingly, we sustain respondent’s determination.

Arguments raised by the parties and not discussed herein are

without merit or irrelevant.   To reflect the foregoing,


                                          Decision will be entered

                                     for respondent.




     33
        As previously discussed, we disagree with petitioner’s
argument that the exception contained in sec. 274(n)(2)(A)
affords petitioner any relief. Petitioner does not contend that
any other exceptions contained in sec. 274(n)(2) apply.
