American Airlines v. U.S.

• Citation: 204 F.3d 1103
• Parties: (Fed. Cir. 2000) AMERICAN AIRLINES, INC., Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee. 98-5126 DECIDED:
• Decision Date: 24 February 2000
• Court: U.S. Court of Appeals — Federal Circuit

Page 1103

204 F.3d 1103 (Fed. Cir. 2000)

AMERICAN AIRLINES, INC., Plaintiff-Appellant, v. UNITED STATES, Defendant-Appellee.

98-5126

United States Court of Appeals for the Federal Circuit

DECIDED: February 24, 2000

Appealed from: United States Court of Federal Claims

Peter D. Isakoff, Weil, Gotshal & Manges LLP, of Washington, DC, argued for plaintiff-appellant. With him on the brief were Mary B. Hevener, David A. Hickerson, and Marianna G. Dyson.

Annette M. Wietecha, Attorney, Tax Division, Appellate Section, Department of Justice, of Washington, DC, argued for defendant-appellee. With her on the brief were Loretta C. Argrett, Assistant Attorney General; and Gilbert S. Rothenberg, Attorney.

Before SCHALL, Circuit Judge, SMITH, Senior Circuit Judge, and BRYSON, Circuit Judge.

SMITH, Senior Circuit Judge.

In this federal 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, 40 Fed. Cl. 712 (1998). We find that there remains no genuine issue of material fact and affirm the judgment of the Court of Federal Claims with regard to its grant of summary judgment on the issue of the American Express vouchers. We also affirm the judgment of the Court of Federal Claims on the issue whether American's per diem allowances qualify as a working condition fringe benefit because the court correctly held that they are not excludable under Internal Revenue Code ("I.R.C.") § 132(a)(3). However, with regard to the Travel Expense Regulations, we find that a factual dispute exists as to whether American reasonably believed its per diem rates were at or below the actual expenses incurred by its employees during travel. Accordingly, we reverse the judgment of the Court of Federal Claims with regard to its grant of summary judgment that American's refund claim was not supported by the Travel Expense Regulations, and remand the case to that court.

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 trips (travel requiring at least one overnight stay away from a flight crew employee's home base) and turnaround trips (travel involving departure and return on the same day).¹ American contends that it based the amounts of its per diem payments on a variety of sources, including the amounts paid by other airlines, experience of American's own management, rates of per diems paid to federal employees, and cost estimates of Runzheimer International, a consulting firm. The flight crew employees' paychecks included both wages and per diem allowance payments, and the paycheck stubs separately identified the portion attributed to each. American did not require its flight crew employees to substantiate their actual travel expenses. American contends that it treated the per diem payments as travel expense reimbursements not subject to withholding.

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 same 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 an 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 31, 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 and DFW training, (3) ten dollars for each on-board meal 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 $15,140,328. American paid the full assessment and filed refund claims for the full amount. The IRS disallowed American's claims.

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 excludable from wages or, alternatively, as "working condition" fringe benefits. See American Airlines, 40 Fed. Cl. at 717. American also contended that the American Express vouchers qualified as a de minimis fringe benefit within the meaning of I.R.C. § 132(a)(4); thus the benefits it conferred upon its employees were exempt from federal employment taxes.⁴ See American Airlines, 40 Fed. Cl. at 717.

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 withholding 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, 40 Fed. Cl. at 722. Further, the court relied on Rev. Rul. 84-164, 1984-2 C.B. 63 (effective December 31, 1982), issued pursuant to I.R.C. § 274(d) and Treas. Reg. § 1.274-5, in concluding that in the absence of substantiation, $14 per day was objectively reasonable for meal expenses. See American Airlines, 40 Fed. Cl. at 721-22. Thus, the trial court held that per diem payments in excess of $14 should be treated as wages.⁶ See id. at 722.

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, 40 Fed. Cl. at 722. As previously discussed, American did not require its employees to substantiate their actual traveling expenses. Further, the court found that on the facts of this case, it was not reasonable for American to believe that the flight crew employees were meeting the substantiation requirements of I.R.C. § 274(d). See American Airlines, 40 Fed. Cl. at 722. Therefore, the court held that the only amount that American could assume would qualify for the working condition fringe benefit exclusion from income, would be the amount that it had determined to be reasonable in the absence of substantiation. See Rev. Rul. 84-164.

The Court of Federal Claims also held that per diem payments for turnaround trips did not meet the requirements of Treas. Regs. § 31.3401(a)-1(b)(2) and § 31.3121(a)-1(h), which require that the expenses be "reasonably expected to be incurred" before being excluded from wages. See American Airlines, 40 Fed. Cl. at 723. The court reasoned that the per diem for turnaround trips was paid to all employees, including pilots and flight engineers whose receipt of on-board meals eliminated a meal expense. Further, the court reasoned that while flight attendants do not receive on-board meals, it is unlikely that they would incur most of the incidental expenses covered by the per diem payments on turnaround trips. See id.

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, 389 U.S. 299 (1967) (restricting to overnight trips the travel expense...