Transp. Labor Contract/Leasing, Inc. v. Comm'r of Internal Revenue, 1188–01.
| Decision Date | 09 August 2004 |
| Docket Number | No. 1188–01.,1188–01. |
| Citation | 123 T.C. 154,123 T.C. No. 9 |
| Parties | TRANSPORT LABOR CONTRACT/LEASING, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Michael I. Saltzman, Kathleen Pakenham, and Todd C. Simmens, for petitioner.
Jack Forsberg, Gary R. Shuler, Jr., and Eric Johnson, for respondent.
P's wholly owned subsidiary S made payments to certain truck drivers whom S leased to certain trucking companies. S intended such payments to cover food and beverages expenses that such truck drivers paid while traveling away from home.
Held, the parties' respective positions as to the import of Beech Trucking Co. v. Commissioner, 118 T.C. 428, 2002 WL 1035452 (2002), rejected. Held, further, on the facts presented, S is the common law employer of the truck drivers to whom it made the payments at issue. Held, further, the limitation imposed by sec. 274(n)(1) applies to those payments.
Respondent determined the following deficiencies in petitioner's Federal income tax (tax):
+-------------------------------------+
¦Taxable Year Ended Aug. 31¦Deficiency¦
+--------------------------+----------¦
¦1993 ¦$330,320 ¦
+--------------------------+----------¦
¦1994 ¦28,346 ¦
+--------------------------+----------¦
¦1995 ¦1,694,076 ¦
+--------------------------+----------¦
¦1996 ¦1,978,282 ¦
+-------------------------------------+
In an amendment to answer, respondent alleged increases of $460,999, $473,305, and $286,223 in the deficiencies in tax for petitioner's taxable years ended August 31, 1994, August 31, 1995, and August 31, 1996, respectively, as a result of respondent's disallowance of a net operating loss (NOL) carryback to each such taxable year that petitioner claimed from its taxable year ended August 31, 1997.1
The issue remaining for decision 2 is whether the limitation imposed by section 274(n)(1) 3 applies to the amounts (per diem amounts) that petitioner's wholly owned subsidiary Transport Leasing/Contract, Inc. (TLC), paid during each of the taxable years at issue to certain truck drivers (truck drivers) in order to cover the amounts that they spent for food and beverages.4 We hold that it does.
Most of the facts have been stipulated and are so found.
Petitioner had its principal office in Arden Hills, Minnesota, at the time it filed the petition in this case.
TLC, which was incorporated in Indiana in 1986, was a wholly owned subsidiary of petitioner and a member of petitioner's affiliated group. TLC's corporate headquarters were in Arden Hills, Minnesota, its payroll services operations were in Audubon, Minnesota, and its human resources operations were in Porter, Indiana.
TLC was a driver-leasing company that leased one or more truck drivers to small and mid-sized independent trucking companies which used such truck drivers to transport goods and merchandise.6 Prior to the times such trucking companies entered into driver-leasing arrangements with TLC (described below), they had (1) made payments to all of their respective truck drivers who worked for them that were intended to compensate such drivers for their work and (2) generally made payments (per diem payments) only to their respective over-the-road 7 truck drivers who worked for them that were intended to cover the amounts that such truck drivers spent for food and beverages while traveling away from home.
As of the beginning of taxable year 1993, TLC was leasing driver-employees to approximately 100 trucking company clients.8 By the end of taxable year 1996, TLC was leasing driver-employees to approximately 300 trucking company clients. Although most of TLC's trucking company clients were located in Minnesota, Montana, or Pennsylvania, by the end of taxable year 1996 TLC had trucking company clients in 31 states. As of the time of trial in this case, TLC leased a total of 5,563 driver-employees to a total of 453 trucking company clients.
TLC's trucking company clients were engaged principally in the over-the-road trucking industry. As of the beginning of taxable year 1993, approximately 90 percent of TLC's trucking company clients were over-the-road carriers, while the remaining 10 percent were local carriers. By the end of taxable year 1996, approximately 65 percent of TLC's trucking company clients were over-the-road carriers, and 35 percent were local carriers.
In an attempt to attract clients, TLC's sale representatives used a variety of sales techniques, including (1) newspaper advertisements, (2) face-to-face meetings with, and other presentations to, trucking company owners, (3) brochures, (4) form letters, and (5) other promotional mailings. Two of the brochures that TLC provided to prospective clients were entitled “The Fact Book” (Fact Book) and “Your Trucks/Our Drivers” (Your Trucks/Our Drivers).
The Fact Book, which was one of TLC's principal marketing tools, described, inter alia, the savings and other advantages that a trucking company would realize from leasing driver-employees from TLC. The Fact Book stated in pertinent part:
Help You Stay in Compliance with Most Employment Laws
T.L.C. hires the drivers and becomes the legal employer. And we can “prove” to your attorney's satisfaction that we are the employer based on the things we do for our employees. Plus our standing as the employer has been confirmed by the courts.
We become responsible for payroll including withholding taxes, tax filings, garnishments, child support levies, Workers Compensation insurance and claims, unemployment claims, the hiring process and terminations. We also assure compliance with most of the federal and state employer/employee laws under most circumstances.
* * *
Professional driver recruiting is included in the T.L.C. package. Our fee is a flat percentage of a driver's gross wages, and all our services are included, including recruiting.
Our full-time recruiters advertise for drivers across the USA. They take applications, interview, screen, confirm physical exams and CDL status, check with former employers, verify that all the driver specifications are adhered to—including those of your liability carrier, plus we'll order MVRs [Motor Vehicle Reports] and DAC reports.
If the drivers meet our standards, we “give” these good employees to our customers.
Hiring drivers is a full-time job for our recruiters and T.L.C. has an outstanding track record of finding qualified people. Bottom Line? You'll have more drivers with T.L.C.
Each year we recruit a number of drivers equal to 20% of the average on hand, at no cost to our clients.
Just send the driver to us. We'll go through the same procedures we would follow if he had come to our recruiters—every key step. We'll do it all—many times in less than four hours—and we'll cover all the expenses. All you need to do is FAX us the application—we'll take it from there.
We manage and defend all workers compensation and unemployment claims. When a driver “quits,” because we have a job for a good driver almost anywhere in the USA, we offer to reassign him to another T.L.C. client. Accordingly, we are successful in unemployment hearings, and in time, cause our SUTA [State Unemployment Tax Act] rate to reach the minimum levels.
In addition to making claims concerning the advantages that a trucking company would realize from leasing driver-employees from TLC that were substantially the same as such claims appearing in the Fact Book, Your Trucks/Our Drivers stated in pertinent part:
TLC relieves your company of the burden of driver employee management by hiring the drivers. These drivers perform driver services for your company under a lease agreement between TLC and your company.
* * *
TLC is often able to use, with a different client, a driver that although qualified to drive may have a personality conflict with your staff. * * *
In soliciting business, TLC's sale representatives explained to prospective trucking company clients the advantages that they would realize from leasing driver-employees from TLC. Those advantages included TLC's (1) recruiting truck drivers, (2) obtaining workers' compensation insurance for such truck drivers, (3) substantiating the per diem amounts that TLC paid, (4) filing Federal and State tax forms, (5) withholding Federal and State income taxes, (6) maintaining truck driver files in accordance with Department of Transportation (DOT) specifications, (7) providing safety programs, and (8) handling any unemployment claims filed by a driver-employee.
A principal advantage of leasing driver-employees from TLC related to TLC's ability to obtain cost-effective workers' compensation insurance, especially in States where trucking company clients were paying substantial amounts to obtain such insurance. Generally, the premium rates for workers' compensation insurance on truck drivers were significantly higher than premium rates for most other occupations. As a result, workers' compensation insurance was a major expense for trucking companies. Whenever possible, trucking companies attempted to obtain workers' compensation insurance in the private market. However, they were frequently unable to do so and were forced to obtain such coverage through their respective States' assigned risk plans. The cost of workers' compensation insurance under such assigned risk plans was typically quite high. In soliciting a trucking company's business, TLC's sales representatives explained that TLC was able to obtain workers' compensation insurance in the private market at comparatively low premium rates because of the large number of driver-employees on whom it obtained such insurance.
After initial contacts between a sales representative of TLC and a prospective trucking company client, TLC provided the prospective client...
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