Courier can compute mileage allowance on same basis as compensation.

• Author: O'Driscoll, David

Rev. Rul. 2004-1 illustrates how a mileage allowance can be computed on the same basis as compensation and still meet accountable plan requirements.

Situation 1: E, a courier company, hires employee drivers to deliver packages locally. The drivers must own or lease an automobile for use in connection with the performance of services. E charges customers for deliveries based on location, time of day, expedited service (if requested), mileage between pickup and delivery, size and weight of a package and other factors (the per-package charge is referred to as the "tag rate.") The mileage component is computed as though each package were delivered separately; however, drivers often pick up multiple packages from one location, deliver them to another location and travel overlapping routes between and among customers. Thus, the tag rate may not accurately reflect the transportation expenses recurred for a particular package.

E pays drivers a commission equal to a percentage of the tag rate as compensation for services and a mileage allowance equal to a percentage of the tag rate to cover the automobile operating expenses. E determines the percentage mileage allowance annually and it remains fixed throughout the calendar year; it is based on E's review of a sample of documents submitted monthly by drivers (including receipts, logbooks and invoices) reflecting the drivers' operating and fixed costs.

Law

In Shotgun Delivery, Inc., 269 F3d 969 (9th Cir. 2001), a courier company paid its drivers a commission of 40% of the tag rate. The commission was allocated between compensation paid at the minimum wage and a variable mileage reimbursement. The district court found that, "because Shotgun's tag rates were not based solely on distance traveled, and since Shotgun drivers could double up on deliveries, Shotgun's reimbursement arrangement, was in fact, reimbursing its drivers in a manner not correlated to expenses Shotgun's employees incurred or were reasonably likely to incur..."; Shotgun Delivery, Inc., 85 FSupp 2d 962,965 (ND CA 2000).

Consequently, the court concluded that Shotgun's reimbursement arrangement failed to meet the Kegs. Sec. 1.162-2(d) business-connection requirements and held that the mileage reimbursements were paid under a nonaccountable plan. In affirming the district court's holding, the Ninth Circuit observed that such arrangements blur "the fundamental distinction between taxable compensation and tax-exempt reimbursement which...