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Petitioners’ Tax Returns
On its Forms 1120S, U.S. Income Tax Return for an S
Corporation, for the years at issue, Continental deducted (as
part of “Other deductions”) driver-related expenses including
fuel, tolls, “motels & layover”, “per diem”, and “hiring cost--
drivers”. The amounts deducted as per diem payments were
$2,231,279 for the taxable year ending December 31, 1995;
$2,208,178 for the taxable year ending December 31, 1996;
$529,232 for the taxable year ending March 31, 1997; and
$2,796,499 for the taxable year ending December 31, 1997. These
claimed per diem amounts represent 80 percent of the actual per
diem payments made to the drivers. To arrive at the 80-percent
claimed deduction, Continental applied the section 274(n) 50-
percent limitation to 40 percent of the total per diem amounts
paid during the tax years and deducted the remaining 60 percent
in full.
OPINION
Section 274(n) allows a taxpayer to deduct only 50 percent
of the amount that otherwise would qualify as an allowable
deduction for meals or business entertainment. The issue is
whether this 50-percent limitation applies to the full amount of
per diem allowances paid with respect to Continental’s drivers,
as respondent contends. For the reasons discussed below, we
agree with respondent.
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Last modified: May 25, 2011