The ‘Less Indignation and More Substantiation’ Case

http://www.ustaxcourt.gov/InOpHistoric/ColvinMemo.TCM.WPD.pdf

Taxpayer unsuccessfully fought the disallowance of considerable per diem payments/expenditures. Taxpayers operated a trucking co and paid drivers per diem for meals, motels, and other expenses. Sioux calculated per diem amounts on the basis of the number of travel days. Those amounts were recorded in payroll books that indicated travel dates but not destinations.

Take aways:

• The per diem method is an allowed method for calculating these types of deductible reimbursements. The rates are set by the IRS annually and vary by destination. There is a standard and high cost of living allowance. Recording the location of the travel would be important. The TP must still retain records substantiating that expenses were incurred.

• Taxpayer first stated that they failed to provide the records because there would be hundreds of thousands of them but then changed the story and testified that the records had been destroyed in a flood caused by a broken pipe in the storage unit. (They waited nearly 6 years to raise the issue of the destroyed records.)

• When records are destroyed or lost due to circumstances beyond TP control, TP is generally allowed to substantiate his deductions by reasonable reconstruction of his expenditures. A taxpayer is required to try to salvage or reconstruct what he can.

• TP presented no credible evidence, for example, of how many drivers they had, how long on average they were away from home, or what per diem amount was used. Based on the type of business one would imagine the expenses were legit but TP was completely fixated on proving they shouldn’t have to substantiate the costs.