In this fеderal employment taxes refund case, American Airlines, Inc. (“American”) appeals from the final decision of the United States Court of Federal Claims granting the United States’ motion for summary judgment.
See American Airlines, Inc. v. United States,
Background
During the years 1985 through 1988, American provided a per diem allowance to its pilots, flight engineers and flight attendants (collectively “flight crew employees”) for meals and incidental expenses while away on both overnight triрs
During these years, American also provided its pilots and flight engineers based in Dallas-Fort Worth (“DFW”) eight hours of this per diem allowance for each day of training at the DFW facility. In addition, union contracts required American to provide on-board meals for pilots and flight engineers on flights of certain lengths and at certain times of day. The meals were the samе as those served to passengers and were provided as a “safety measure.” American contends that it treated the on-board meals as “furnished for the convenience of the employer,” and therefore exempt from withholding.
In 1985, a major competitor’s labor strike caused American employees to take on substantially increased passenger loads. As a gesture of appreciation, American gave each employee two $50.00 “Be My Guest” American Express restaurant vouchers. The vouchers were blank American Express charge forms bearing American’s account number and аn amount of “not to exceed $50.” The vouchers were not issued in the particular recipient’s name, and could have been redeemed for less than full value. 2 The vouchers were distributed in June 1985 and expired on December 81, 1985. Approximately $4,139,100 in vouchers were redeemed by American’s employees and paid for by American, out of a total of approximately $4,250,000 in vouchers issued. 3 American contends that it treated the vouchers as a de minimis fringe benefit not subject to withholding based on their small value, the one-time distribution, and the administrative difficulty of tracking whether an employee actually redeemed the vouchers and how much value was actually received for them.
During the years at issue, American did not withhold federal income taxes or Federal Insurance Contributions Act (“FICA” or “Social Security Act”) taxes on any of the per diem allowance' payments to its flight crew employees. American also did not withhold income or FICA taxes for on-board meals furnished to pilots and flight engineers, or for the American Express vouchers.
On audit, the Internal Revenue Service (IRS) concluded that American should have treated as wages, and withheld employment taxes from: (1) one-sixth of all per diem payments for overnight trips, (2) all per diems for turnaround trips arid DFW training, (3) ten dollars for each on-board mеal provided to pilots and flight engineers, and (4) the full face value of the American Express vouchers. The IRS issued an assessment of $14,800,374 in taxes and $339,954 in penalties for a total of
Proceedings in the Court of Federal Claims
On October 6, 1995, American filed suit in the Court of Federal Claims, seeking a refund of the $15,140,328 IRS assessment. American contended that the per diem allowances for its flight crew employees and the on-board meals, for. pilots and flight engineers qualified as travel expenses ex-cludable from wages or, alternatively, as “working condition” fringe benefits.
See American Airlines,
On cross-motions for summary judgment, the Court of Federal Claims granted summary judgment in favor of the United States (“Government”). See id. at 714. The trial court placed the burden on American, as the refund applicant, to show that the benefits at issue were not subject to income or FICA taxes or, at least to show that American could not have known, by examining the relevant statutes, regulations, and IRS pronouncements, that it had income or FICA tax withhоlding obligations with respect to such benefits. See id. at 719.
The Court of Federal Claims held that the per diem payments for overnight trips were not' excludable from wages, because American had not shown that the amounts of the per diem allowances were based on expenses reasonably expected to be incurred, and, therefore, could not meet the requirements of Treas. Regs. § 31.3401(a)-1(b)(2) and § 31.3121(a)-1(h).
5
See American Airlines,
The trial court also rejected American’s argument that the per diem payments for overnight trips should be treated as a working condition fringe benefit pursuant to I.R.C. § 132(a)(3), because such treatment would require that the employer substantiate the amount of such expenses or have a reasonable belief that the employees were keeping adequate records to substantiate their expenses over $14 per day.
See American Airlines,
The trial court also held that the per diem payments for turnaround trips were not excludable from wages as working condition fringe benefits because such payments are not deductible under § 162(a)(2).
See
I.R.C. § 132(d);
United States v. Correll,
In addition, the trial court rejected American’s reliance on the “annual netting rule” established by Rev. Rul. 69-592, 1969-
As to the on-board meals, the Government conceded that the meals were not wages subject to withholding. However, the Government argued, and the trial court agreed, that American was not entitled to a refund on the taxes assessed for the value of the meals. See id. at 724. The court reasoned that because American should have treated $22 of the per diem allowance as wages, and not just $6 of that amount, the Government was entitled to offset the additional tax liability owed on the per diem payments against the taxes paid, but not owed, on the on-board meals. See id.
The Court of Federal Claims also held that the American Express vouchers were not excludable from wages as
de minimis
fringe benefits, because American had not shown that it was administratively impractical for it to account for the vouchers.
See id.
at 724-25. Further, the court held that the vouchers were a “cash-equivalent fringe benefit” because they were paid by credit card, and therefore expressly excluded from the definition of a
de minimis
fringe benefit pursuant to Treas. Reg. § 1.132-6T(c).
See American Airlines,
The trial court also rejected American’s reliance on
Central Illinois Public Service Co. v. United States,
Jurisdiction and Standard of Review
This court has jurisdiction over an appeal from a final judgment of the Court of
Issues
This appeal raises three issues: (1) whether the Court of Federal Claims erred in holding that certain per diem payments are not excludable from wages as travel expense payments; (2) whether the Court of Federal Claims erred in holding that certain per diem payments are not excludable from wages as working condition fringe benefits; and (3) whether the Court of Federal Claims erred in holding that the American Express vouchers were not excludable from wages as de minimis fringe benefits.
Burden of Proof
American argues that the Court of Federal Claims improperly рlaced the burden on American to prove that its withholding treatment was proper, rather than requiring the Government to demonstrate that, under the circumstances, American’s obligation to withhold was “precise” and not “speculative”. We disagree with American because case law does not support the burden that American seeks to impose on the Government.
See Lewis v. Reynolds,
Travel Expense Regulations
Section 3402 of the I.R.C. requires employers to deduct and withhold federal income taxes from the wages of their employees. For purposes of income tax withholding, wages are “all remuneration ... for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. . . .” I.R.C. § 3401. A “traveling expenses” exclusion from income tax withholding is established by Treas. Reg. § 31.3401(a) —1 (b)(2), which provides:
Amounts paid specifically — either as advances or reimbursements — for traveling or other bonа fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages and are not subject to withholding. Traveling and other reimbursed expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment.
Amounts paid specifically — either as advances or reimbursements • — ■ for traveling or other bona fide ordinary and necessary expenses incurred or reasonably expected to be incurred in the business of the employer are not wages. Traveling and other expenses must be identified either by making a separate payment or by specifically indicating the separate amounts where both wages and expense allowances are combined in a single payment.
The income and FICA travel expense regulations are essentially identical (collectively the “Travel Expense Regulations”). Therefore, a determination as to one will apply to the other.
The Travel Expense Regulations contain two requirements: (1) that the amounts paid be specifically for travel and other expenses incurred or reasonably expected to be incurred by the employee while on company business; and (2) that the expense payments be spеcifically identified as such at the time of payment. The parties do not dispute that American clearly satisfied the second requirement by separately identifying on American’s employees’ pay stubs the amount for per diem payments. There is also no dispute that the payments did not reflect expenses actually incurred by American’s employees, because American never required its employees to substantiate their actual expenses. Thus, the dispute reduces to whether American’s per diem payments were made for expenses that were “rea-, sonably expected” to be incurred.
American argues that it has met the “reasonable expectation” requirement in two ways: first, through American’s collective bargaining agreements, and second, through independent objective information. American contends that its bargaining agreements provide the required “reasonable expectation” because the IRS has long recognized that “a provision in an oral or written contract of employment or in a collateral agreement” satisfies this requirement.
See e.g.,
Rev. Rul. 55-196, 1955-
The Court of Federal Claims found, and we agree, that American’s reliance on Rev. Rul. 55-196 is misplaced.
See American Airlines,
In addition, we agree with the Court of Federal Claims that American’s reliance on
Boyd
is misplaced.
See American Airlines,
American also contends that it had independent objective information to support its reasonable expectation that the amount of the per diem payments was commеnsurate with its employees’ actual expenses, including: travel cost studies prepared by Runzheimer International, a well-known international consulting firm specializing in such costs; the experiences of American’s own management; per diem amounts paid by other airlines; and the Government’s own per diem rates in 1986 and 1987.
On summary judgment, all disputed facts must be viewed in the light most favorable to the non-moving party.
See Good,
Working Condition Fringe
Pursuant to I.R.C. § 132(a)(3), working condition fringe benefits are excluded from gross income, and, therefore, also from wаges. A “working condition fringe” is “any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction under section 162 or 167.” I.R.C. § 132(d). Section 162(a) allows, among other things, “a deduction [for] all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including ... (2) traveling expenses (including amounts expended for meals ... ) while away from home in the pursuit of a trade or business.” However, no deduction is allowed under § 162 for any travel expense “unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel ..., (C) the business purpose of the expense_” I.R.C. § 274(d). Alternatively, the taxpayer must demonstrate that it reasonably believed that its employees were keeping such records.
See
I.R.C. §§ 3401(a)(20), 3121(a)(20);
Jeppsen v.
In the instant case, American argues that although it did not require its flight crew employees (the “taxpayers” for purposes of I.R.C. §§ 162 and 274(d)) to submit expense reports, it was nevertheless reasonable for American to believe that these employees were themselves retaining receipts to substantiate their overnight travel expenses, because the employees would need to retain expense records for reimbursement of any amount exceeding the $36 per day per diem allowance. Further, American contends that it had a reasonable basis for its belief because during collective bargaining sessions, the pilots’ negotiating committee would occasionally bring in detailed records of what an unspecified number of pilots had spent on trips that they had flown during the negotiations.
On review of the record before this court, we cannot say that the Court of Federal Claims erred in ruling that American had failed to proffer sufficient evidence to indicate that its employees were keeping substantiated records on a regular basis. Therefore, it was not objectively reasonable for American to believe that its employees were meeting the substantiation requirements of § 274(d).
American argues that even if it cannot meet the substantiation requirements of § 274(d), American’s covered meals and incidental expenses allowance of $36 per day fall in the middle range of the $14 meals-only safe harbor of Rev. Rul. 84-164 and the $44 full per diem safe harbor of Rev. Rul. 80-62 1980-
We also agree with the Government that American cаnnot rely on Rev. Rul. 69-592 to exclude per diem payments for turnaround trips because this Revenue Ruling applies on an employee-by-employee basis, and American made no effort to apply the rule to employees individually. American argues that Rev. Rul. 69-592 cannot fairly be read as excluding use of company-wide averages. We disagree. The ruling plainly is directed to consideration of employee circumstances on an individual basis. See id. (“Advice has been requested whether an employer must withhold Federal income tax on amounts paid to his employee as reimbursements for meals on business trips awаy from home that do not require the employee to stop for sleep or rest.”).
Further, we find that there was adequate notice from the relevant statutes and regulations in effect at the time of the per diem payments, to allow an employer to reasonably suspect that a withholding obligation existed.
See e.g., Central Illinois Pub. Serv.,
American Express Vouchers
Pursuant to I.R.C. § 132(a)(4), “de minimis” fringe benefits are excluded from gross income, and, therefore, also from wages. A de minimis fringe is “any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable.” I.R.C. § 132(e)(1).
While American is not required to present its entire case in response to the Government’s motion for summary judgment, American must present sufficient evidence to show an evidentiary conflict exists as to whether it would have been unreasonable or administratively impracticable to account for the vouchers.
See Armco,
In addition, American argues that its voucher program did not constitute a cash equivalent benefit and that if it is now held to have been one, American should not be held liable to pay employment taxes on the vouchers because its duty to withhold taxes was speculative and not precise. In making the latter argument, American relies on
Central Illinois Public Service Co.,
We hold that even in the absence of Treas. Reg. 1.132-6T, the vouchers constituted a cash equivalent benefit. The vouchers were blank American Express charge forms, bearing American’s account number, and in an amount “not to exceed $50.” The vouchers did not contain the employee’s name or any transfer restrictions. Further, althоugh the letter accompanying the vouchers stated that they were only good at restaurants, there was some evidence that they could be used at non-restaurant business establishments.
8
We also find that American’s reliance on Central Illinois is without merit because American did have sufficient notice of its obligation to withhold and pay employment taxes on the vouchers. First, I.R.C. § 132(e)(1) expressly provides that a fringe benefit does not qualify as a de minimis fringe unless accounting for the benefit would be unreasonable or administratively impractical. Second, the guidance in Treas. Reg. § 1.132-6T(c) was available in December of the tax year, prior to the expiration of American’s vouchers. Therefore, we hold that the Court of Federal Claims properly granted summary judgment to the Government with regard to the vouchers.
Conclusion
For the reasons given above, the judgment of the Court of Federal claims is
AFFIRMED-IN-PART, REVERSED-IN-PART, and REMANDED.
Costs
Each party to bear its own costs.
Notes
.The rate for the per diem allowance, fixed by collective bargaining agreements, was $1.50 per duty hour for a maximum allowance of $36 per day. Prior to August 1, 1985, the rate for flight engineers and pilots was $1.45 per duty hour. The rates did not vary to reflect travel in higher (or lower) cost areas.
. This was American’s only company-wide credit card voucher program during the years at issue.
. Approximately 97.4% of the total value of the vouchers were redeemed.
. Citations to the Internal Revenue Code are to the I.R.C. of 1954, as amended, as codified at 26 U.S.C. and in effect at the relevant time.
. Citations to sections of the Treasury Regulations are to the regulations codified at 26 C.F.R., as in effect at the relevant time.
.The IRS had previously assessed $6 of the $36 per diem amount for overnight trips to be treаted as wages. However, the Court of Federal Claims found that $22 of the $36 per diem amount for such trips should be treated as wages.
. According to Treas. Reg. 1.132-6T(c), “Unless excluded by a statutory provision other than section 132(a)(4), the value of any fringe benefit that would not be unreasonable or administratively impracticable to account for must be included in the employee’s gross income. Thus, except as otherwise provided in this section, the provision of any cash fringe benefit (or any fringe benefit provided to an employee through the use of a charge or credit card) is .not excludable as a de minimis fringe.”
. There were no restrictions on the face or back of the vouchers limiting their use to restaurants.