Hourly per-diem allowance is a question of fact.

• Author: O'Driscoll, David

M leased workers from W; many of the workers remained at M's job site seven days a week. For reimbursement of their lodging, meals and incidental expenses (M&IE) at the site ("travel expenses"), W paid an hourly amount to those employees who lived more than 100 miles away from the site, in addition to their hourly wage. When nonlocal employees received two fifty-cent increases in the hourly per diem after each of their first two months on the job, local employees to whom no per diem was paid received fifty-cent raises in their salaries. The per diem paid to nonlocal employees was computed on both regular and overtime hours. As a result, employees who were away from home for the same amount of time received different per-diem payments, because some worked more hours than others. No employment, unemployment or income tax was paid on these reimbursements.

The question is whether the hourly per diem paid to the nonlocal employees as reimbursed travel expenses are "wages" subject to employment taxes. Such payments are not subject to employment taxes if made under an "accountable plan" as defined by Regs. Sec. 1.62-2(c). A plan is "accountable" when (1) it covers only expenses with a business connection; (2) all expenses are substantiated to the employer; and (3) the employee is required to return to the employer any amount paid in excess of substantiated expenses. If a plan does not meet these criteria, it will be considered "nonaccountable" and the payments will be subject to withholding and employment taxes.

A per-diem allowance for travel expenses 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)" can meet the business connection requirement, as long as "a per diem allowance computed on that basis was commonly used in the industry in which the employee is employed" on Dec. 12,1989. (Emphasis in original.)

The district court granted the IRS's motion for summary judgment because it concluded that the hourly per-diem amounts were not made with a reasonable expectation that the employees would actually incur travel expenses in the amounts paid; the Service argues, under W's arrangement, employees who should have been expected to incur similar travel expenses received dramatically different reimbursements because they worked more hours in the same number of days. Employees (particularly those who worked overtime) would inevitably receive reimbursements in...