Lessor of truck driver employees avoids 50% limit on per diems.

• Author: O'Driscoll, David

TLC is a professional employer organization (PEO) that hires truck drivers as its employees and then leases them back to its trucking company clients. The Tax Court held that TLC was subject to the Sec. 274(n) limit on per-diem meal expense allowances it paid to the drivers, because it was the driver's common-law employer (see Transport Labor Contract /Leasing, Inc., 123 TC 154 (2004)). TLC appealed to the Eighth Circuit, which, as discussed below, held that TLC is not subject to such limit.

Law

Congress crafted Sec. 274 so that the Sec. 274(n) limit on allowable meal expense deductions "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"; see Regs. Sec. 1.274-2(f)(2)(iv)(a) and Sec. 274(n)(2). In most situations, there are two possible candidates, the employer and the employee.

The question is more complex when, as here, there are three relevant parties. In such cases, a special exception applies if the per-diem payment was "paid or incurred by one person...under a reimbursement or other expense allowance arrangement with another person other than an employer;" see Regs. Sec. 1.274-2 (f) (2) (iv) (c), applying Sec. 274(e) (3).

The Tax Court first faced this issue in Beech Trucking Co., 118 TC 428 (2002), in which a trucking company argued that it was not subject to the Sec. 274(n) limit on per-diem payments, because it had leased the truck drivers from a PEO. The Tax Court rejected this contention, concluding that the limit applied to the trucking company "as the common law employer of its drivers and as the party that .. .actually bore the expense ... for which the per diem payments were made."

In this case, TLC's per-diem payments were not treated as truck driver wages, so all agree that the Sec. 274(n) limit did not apply to the drivers. The question is whether the tax burden falls on TLC or on the trucking companies, under Sec. 274(e)(3) and its regulations.

Exception Requirements

The Tax Court held that TLC, the PEO, is subject to the Sec. 274(n) limit, because it was the driver's common-law employer. However, the Sec. 274(n) issue cannot be resolved simply by identifying the employer. Sec. 274(e)(3) might apply because the per-diem expenses were "paid or incurred by the taxpayer ... in connection with the performance by him of services" (the leased services of the PEO's truck drivers) "for another person" (the trucking company).

This...