Transport Labor Contract/Leasing, Inc. & Subsidiaries v. Commissioner
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Opinion
123 T.C. No. 9
UNITED STATES TAX COURT
TRANSPORT LABOR CONTRACT/LEASING, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1188-01. Filed August 9, 2004.
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), 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.
Michael I. Saltzman, Kathleen Pakenham, and Todd C. Simmens,
for petitioner. - 2 -
Jack Forsberg, Gary R. Shuler, Jr., and Eric Johnson, for
respondent.
CHIECHI, Judge: Respondent determined the following defi-
ciencies 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 respon-
dent’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 decision2 is whether the limitation
1 We shall refer to petitioner’s taxable years ended Aug. 31, 1993, Aug. 31, 1994, Aug. 31, 1995, Aug. 31, 1996, and Aug. 31, 1997, as taxable years 1993, 1994, 1995, 1996, and 1997, respec- tively. 2 Our resolution of the issue remaining for decision will resolve the issues that respondent raised in the amendment to answer relating to the disallowance of an NOL carryback that petitioner claimed from its taxable year 1997. - 3 -
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.
FINDINGS OF FACT5
Most of the facts have been stipulated and are so found.
Petitioner had its principal office in Arden Hills, Minne-
sota, at the time it filed the petition in this case.
3 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue. All Rule references are to the Tax Court Rules of Prac- tice and Procedure. As in effect for taxable years that began after Dec. 31, 1993, sec. 274(n)(1) limits a deduction for food or beverages to 50 percent of the amount otherwise allowable (50- percent limitation). Prior to its amendment by the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, sec. 13209(a), 107 Stat. 469 (OBRA 1993), sec. 274(n)(1) limited a deduction for food or beverages to 80 percent of the amount otherwise allowable (80-percent limitation). In the instant case, the 80-percent limitation applies to taxable years ended Aug. 31, 1993, and Aug. 31, 1994, and the 50-percent limitation applies to taxable years ended on or after Aug. 31, 1995. 4 The parties agree that, in addition to food and beverage expenses, the truck drivers in question paid certain incidental expenses that TLC intended the per diem amounts to cover. The parties also agree that if the Court were to hold that the limitation imposed by sec. 274(n)(1) applies, that limitation applies to the total of all per diem amounts that TLC paid during each of the taxable years at issue to those truck drivers. For convenience, we shall refer only to food and beverage expenses. 5 Unless otherwise indicated, our Findings of Fact and Opin- ion pertain to the taxable years at issue. - 4 -
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 compa-
nies which used such truck drivers to transport goods and mer-
chandise.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 pay-
ments) only to their respective over-the-road7 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
6 We shall refer to each trucking company that leased one or more truck drivers from TLC as a trucking company client and to each truck driver whom TLC leased to a trucking company client as a driver-employee. 7 The term over-the-road means that the length of travel required a truck driver to stay away from home overnight. - 5 -
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 presen-
tations to, trucking company owners, (3) brochures, (4) form
letters, and (5) other promotional mailings. Two of the bro-
chures that TLC provided to prospective clients were entitled
“The Fact Book” (Fact Book) and “Your Trucks/Our Drivers” (Your
8 The number of truck drivers that each trucking company client leased from TLC ranged from 1 to 50. - 6 -
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-employ-
ees 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 em- ployer. And we can “prove” to your attorney’s satis- faction that we are the employer based on the things we do for our employees.
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123 T.C. No. 9
UNITED STATES TAX COURT
TRANSPORT LABOR CONTRACT/LEASING, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 1188-01. Filed August 9, 2004.
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), 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.
Michael I. Saltzman, Kathleen Pakenham, and Todd C. Simmens,
for petitioner. - 2 -
Jack Forsberg, Gary R. Shuler, Jr., and Eric Johnson, for
respondent.
CHIECHI, Judge: Respondent determined the following defi-
ciencies 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 respon-
dent’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 decision2 is whether the limitation
1 We shall refer to petitioner’s taxable years ended Aug. 31, 1993, Aug. 31, 1994, Aug. 31, 1995, Aug. 31, 1996, and Aug. 31, 1997, as taxable years 1993, 1994, 1995, 1996, and 1997, respec- tively. 2 Our resolution of the issue remaining for decision will resolve the issues that respondent raised in the amendment to answer relating to the disallowance of an NOL carryback that petitioner claimed from its taxable year 1997. - 3 -
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.
FINDINGS OF FACT5
Most of the facts have been stipulated and are so found.
Petitioner had its principal office in Arden Hills, Minne-
sota, at the time it filed the petition in this case.
3 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the taxable years at issue. All Rule references are to the Tax Court Rules of Prac- tice and Procedure. As in effect for taxable years that began after Dec. 31, 1993, sec. 274(n)(1) limits a deduction for food or beverages to 50 percent of the amount otherwise allowable (50- percent limitation). Prior to its amendment by the Omnibus Budget Reconciliation Act of 1993, Pub. L. 103-66, sec. 13209(a), 107 Stat. 469 (OBRA 1993), sec. 274(n)(1) limited a deduction for food or beverages to 80 percent of the amount otherwise allowable (80-percent limitation). In the instant case, the 80-percent limitation applies to taxable years ended Aug. 31, 1993, and Aug. 31, 1994, and the 50-percent limitation applies to taxable years ended on or after Aug. 31, 1995. 4 The parties agree that, in addition to food and beverage expenses, the truck drivers in question paid certain incidental expenses that TLC intended the per diem amounts to cover. The parties also agree that if the Court were to hold that the limitation imposed by sec. 274(n)(1) applies, that limitation applies to the total of all per diem amounts that TLC paid during each of the taxable years at issue to those truck drivers. For convenience, we shall refer only to food and beverage expenses. 5 Unless otherwise indicated, our Findings of Fact and Opin- ion pertain to the taxable years at issue. - 4 -
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 compa-
nies which used such truck drivers to transport goods and mer-
chandise.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 pay-
ments) only to their respective over-the-road7 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
6 We shall refer to each trucking company that leased one or more truck drivers from TLC as a trucking company client and to each truck driver whom TLC leased to a trucking company client as a driver-employee. 7 The term over-the-road means that the length of travel required a truck driver to stay away from home overnight. - 5 -
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 presen-
tations to, trucking company owners, (3) brochures, (4) form
letters, and (5) other promotional mailings. Two of the bro-
chures that TLC provided to prospective clients were entitled
“The Fact Book” (Fact Book) and “Your Trucks/Our Drivers” (Your
8 The number of truck drivers that each trucking company client leased from TLC ranged from 1 to 50. - 6 -
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-employ-
ees 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 em- ployer. And we can “prove” to your attorney’s satis- faction that we are the employer based on the things we do for our employees. Plus our standing as the em- ployer 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.
* * * * * * *
FREE Driver Recruiting
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 in- cluded, 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 specifica- tions are adhered to - including those of your liabil- ity 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 - 7 -
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.
What If a Driver Applies Directly to You?
Just send the driver to us. We’ll go through the same procedures we would follow if he had come to our re- cruiters - 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.
T.L.C. Handles Workers Comp and Unemployment Claims
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 hear- ings, 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 appear-
ing 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 - 8 -
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) specifica-
tions, (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’ compensa-
tion 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 compa-
nies. 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 ex- - 9 -
plained that TLC was able to obtain workers’ compensation insur-
ance 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 with a projection of the cost savings that it
could realize from leasing driver-employees from TLC. TLC also
quoted that prospective client the lease fee that TLC intended to
charge if that trucking company agreed to become a client of TLC.
When TLC was successful in attracting a trucking company as
a client, TLC and that trucking company entered into a contract
entitled “TLC Exclusive Lease Agreement” (exclusive lease agree-
ment), which set forth the agreement between them with respect to
the leasing by such company of driver-employees from TLC.9 When
each trucking company entered into an exclusive lease agreement
with TLC, such trucking company terminated the employment ar-
rangement that it previously had with all of its truck drivers.
Each exclusive lease agreement provided in pertinent part:
9 Each exclusive lease agreement was a standard TLC form contract. There were no agreements between TLC and any trucking company client regarding TLC’s leasing driver-employees to such trucking company client other than the agreement set forth in the exclusive lease agreement. The material provisions of each exclusive lease agreement remained unchanged throughout the taxable years at issue except for the factor (discussed below) used to compute the lease fee that each trucking company client owed TLC. - 10 -
RECITALS
I.
Lessor [TLC] is engaged in the business of provid- ing services for truck driving operations and all related duties by virtue of lease agreements with individuals or companies.
II.
Lessee [trucking company client] is engaged in the business of a trucking operation providing for the transportation of goods and merchandise on an inter- state basis.
III.
Lessor is willing to lease its employees to Lessee for truck and semi-tractor driving services and Lessee is willing to lease from Lessor such truck and semi- tractor drivers upon the terms, covenants and condi- tions hereinafter set forth.
SECTION ONE EXCLUSIVE LEASE
Lessor hereby leases to Lessee those drivers in the employment of Lessor during the term of the Agree- ment. Lessee hereby leases Lessor’s drivers on an exclusive basis and from and after the date of this Agreement, Lessee shall not employ, directly or indi- rectly, any drivers for its trucking operation except those agreed to be furnished by Lessor under this Lease Agreement or as otherwise provided herein.
SECTION TWO BEST EFFORTS OF LESSOR
Lessor agrees to use its reasonable best efforts in furnishing Lessee with drivers as may be requested from Lessee from time to time during the term of this Agreement. Lessee understands and agrees Lessor cannot absolutely guarantee the availability of drivers for Lessee upon demand but Lessor nevertheless agrees to use its reasonable best efforts in furnishing Lessee - 11 -
with any and all drivers required at all times during the terms of this Agreement. To facilitate the avail- ability of drivers to Lessee, Lessee shall refer to Lessor any and all qualified drivers known to it who may be suitable for employment by Lessor.
SECTION THREE STATUS AND QUALIFICATIONS OF DRIVERS
For purposes of this Agreement and otherwise, drivers furnished by Lessor to Lessee shall in all respects be considered the employees of Lessor for all purposes including but not limited to unemployment compensation, workers’ compensation, social security and other employee related duties and obligations. Lessor represents that it shall perform all the duties and responsibilities as such employer and shall in its absolute discretion, hire, fire, discipline, evaluate and direct the work and conduct on all Lessor’s employ- ees assigned to Lessee.
If, due to circumstances beyond Lessor’s control, Lessor’s employee is unable to complete services to be provided to Lessee (due to unforeseen or unanticipated emergency, illness or other similar events) Lessee shall immediately notify Lessor thereof and Lessor shall use its reasonable best efforts to provide a replacement Lessor employee to complete the services to be provided to Lessee. * * *
SECTION FIVE COMPENSATION OF LESSOR
Lessee shall pay Lessor and Lessor shall accept from Lessee in full payment for the services to be provided by Lessor to Lessee hereinunder, a deposit and compensation as follows: DEPOSIT: Upon the execution of this Agree- ment, Lessee shall pay and Lessor hereby acknowledges receipt of a deposit equal to the sum of Six Hundred Fifty Dollars ($650) PER TRUCK. Said deposit repre- sents security to Lessor for the performance of Les- see’s financial and other obligations under this Agree- ment. The amount of such deposit is representative of - 12 -
that part of Lessor’s payroll attributable to Lessee herein and the parties hereto recognize and understand such amount may fluctuate from time to time. In this respect, the deposit amount shall be reviewed semi- annually and the amount of the required deposit shall be renegotiated and mutually agreed upon. * * *
COMPENSATION: As and for the services to be provided by Lessor to Lessee herein, Lessor shall be compensated as follows: On (day of the week) * * * starting Mo. * * * Day * * *, * * *, and on that same day of the week every * * * thereafter during the term of this Agreement, Lessee shall submit to Lessor its records reflecting the services provided to it by Lessor’s driver in the form of hours driven, miles driven or a percent of Lessee’s gross revenues attrib- utable to the services provided to Lessee by Lessor’s driver(s). Simultaneously with the delivery of such verified records, Lessee shall deliver to Lessor pay- ment for the amount of compensation payable to Lessor in the form of bank certified funds and in accordance with the compensation schedule as reflected on Exhibit A which is attached hereto and incorporated semi-annu- ally from and after the date of the Agreement and the compensation schedule shall be mutually agreed upon, initialed by the parties, and attached to this Agree- ment.
SECTION SIX ADVANCES BY LESSEE TO LESSOR’S EMPLOYEES
If Lessee advances cash or credit to Lessor’s driver(s) for fuel, repairs or other transportation operational expenses, Lessee shall immediately furnish Lessor with written verified disclosure thereof. If such advances are not actually expended by Lessor’s driver(s) for such purposes, and the extent such funds are not returned to Lessee by Lessor’s driver(s), Lessee shall deliver to Lessor a written claim there- fore within fourteen (14) days of the date Lessee had knowledge of the fact that the funds or credit were not actually expended by Lessor’s driver(s) and were re- tained by such driver(s). Lessor shall deduct advances from the particular driver(s) next payroll check. Provided, however, that Lessor’s obligation and duty to reimburse Lessee shall be limited to the extent the reimbursable amount shall not exceed the net wages, after all Lessor’s payroll deductions, due the particu- - 13 -
lar driver or drivers during the next applicable pay- roll period. Any claim submitted by Lessee to Lessor in this respect after fourteen (14) days from the date that Lessor has knowledge of the fact such advances were not actually expended in its behalf by Lessor’s employee may not be honored by Lessor and Lessor shall have no obligation whatsoever to reimburse or pay such unused advances to Lessee.
SECTION NINE WARRANTIES AND REPRESENTATIONS OF LESSEE
For purposes of this Agreement, Lessee warrants and represents to Lessor as follows:
1. That during the term of this Agreement, all trucks, semi-tractors, trailers and all related equip- ment and accessories thereto are in good working order and properly maintained, are licensed in accordance with all applicable local, state, and federal rules, regulations and statutes and any load contained within or upon any truck or trailer is legal insofar as the transportation of such load as to type, weight, and any and all other restrictions or requirements imposed by local, state or federal rules, regulations or statutes.
2. Lessee shall not at any time during the term of this Agreement require any of Lessor’s employees to run or otherwise operate Lessee’s equipment and loads in any manner whatsoever which may be or which Lessee has reason to believe to be contrary to or in violation of any local, state, or federal restrictions on hours driven, miles driven, or the like.
3. That during the term of this Agreement, Lessee shall not hire, lease, or utilize any drivers other than drivers to be furnished by Lessor hereunder except only in emergency situations duly disclosed to Lessor or upon Lessor’s prior written consent.
4. As to the representations and warranties made by Lessee in paragraphs 1 and 2 of this Section Nine, Lessor’s employee shall inspect Lessee’s equipment, load and routing requirements of Lessee to verify that Lessee complies with applicable local, state and fed- eral rules, regulations and statutes. If Lessor’s - 14 -
employee determines that the equipment, loads or rout- ing requirements of Lessee are in any way illegal or contrary to the applicable local, state or federal rules, regulations or statutes, Lessor’s employee shall immediately notify Lessee and Lessor thereof and any dispute resulting therefrom shall be resolved by the managing officers of Lessor and Lessee.
SECTION TWELVE LIABILITY LOSS AND INDEMNIFICATION
Lessor shall not be liable to Lessee for any loss of business or any other damage caused by an interrup- tion of the service which Lessor agrees to furnish hereunder when such interruption is due to war, fire, strike, picketing, accidents, acts of God, labor dis- putes, civil disturbances, riots, or any other causes beyond the control of the Lessor.
Lessor shall not be responsible or held liable for any injury or damage to person or property resulting from the use, misuse or failure of any equipment used by Lessee and utilized by Lessor’s employees in the performance of its services to be provided herein. In this respect and in all other respects, Lessee shall indemnify Lessor against all liability or loss from and against all claims or actions based upon or arising out of damage or injury (including death) to persons or property caused by or sustained in the connection with the performance of the Agreement or by conditions created thereby or based upon any violation of any local, state or federal rule, regulation, ordinance or statute and the defense of any such claims or actions, except only as to injuries sustained by Lessor’s em- ployee, as a result of such employee’s negligence or wrongful act of the employee.
Lessor shall not be responsible for loss or damage to equipment or cargo of Lessee by reason of collision, fire, flood, windstorm, explosion, or other casualty.
In this respect and in all other respects Lessee shall indemnify Lessor against all liabilities or losses, including but not limited to those liabilities or losses described immediately above. - 15 -
Lessor shall indemnify Lessee against all liabil- ity and loss in connection with and shall assume full responsibility for payment of all federal, state and local employee taxes or contributions imposed or re- quired under unemployment insurance, social security and income tax laws with respect to Lessor’s employees engaged in the performance of the Agreement.
EXHIBIT A COMPENSATION SCHEDULE
Lessee shall compensate Lessor via certified bank funds for the services provided by Lessor’s drivers by the following methods. (By cents per mile, an hourly wage, a percentage of Lessees gross revenue produced by Lessor’s employees or by any other method agreed to or described below.) Any of the below which are directly attributable to services performed for the Lessee by the Lessor’s employee. (See addendum A).
The above compensation multiplied by (See addendum B), surcharge or charge currently or retroactively charged the Lessor and other charges attributable to services performed. The rate is subject to change based upon federal and state tax changes and unemployment and workers compensation rates throughout the year, PLUS Lessor’s portion of health insurance costs for Lessor’s employees assigned to Lessee (used or not), and charges to Lessee by Lessor for Lessee’s operation expense (such as fuel, tire repair, other expenses for Lessee, and charges for truck expense advances) multiplied at the rate of ONE HUNDRED (100%) percent.[10] [Reproduced
10 None of the exclusive lease agreements into which TLC and a trucking company client entered prior to calendar year 1993 contained addendum A and addendum B. Instead, such exclusive lease agreements contained Exhibit A, which set forth the same type of information as that set forth in Addendum A and Addendum B that were included as part of each exclusive lease agreement into which TLC and a trucking company client entered during the taxable years at issue. Addendum A listed the type of trucking company (i.e., over-the-road or local) and the method used to compute the gross amount that TLC was to pay each driver-employee whom it leased to a trucking company client. Addendum B listed (continued...) - 16 -
literally.]
TLC retained the sole and absolute authority to hire each
driver-employee and to terminate each driver-employee’s employ-
ment with TLC. Each truck driver whom TLC hired as a driver-
employee played an integral role in TLC’s business of leasing
driver-employees to its trucking company clients.
Before TLC hired a truck driver as a driver-employee, such
truck driver had to pass TLC’s screening and approval process
that it used to determine whether to hire such truck driver. (We
shall refer to the screening and approval process that TLC used
to determine whether to hire a truck driver as TLC’s screening
and approval process.) TLC’s screening and approval process was
designed to determine a truck driver’s fitness to serve as a
driver-employee of TLC.
As required by each exclusive lease agreement, TLC used its
best efforts (e.g., by advertising) to, and did, recruit driver-
employees. TLC hired approximately 25 percent of its driver-
employees through its own recruitment efforts.
Each trucking company client also located and referred
prospective driver-employees to TLC. If a trucking company
10 (...continued) the factor to which TLC and each trucking company client agreed and which such trucking company client and TLC used to compute the lease fee that such client owed to TLC under the exclusive lease agreement. The information included in those addenda to all post-1992 exclusive lease agreements was included in Exhibit A to all pre-1993 exclusive lease agreements. - 17 -
client located a truck driver whom it wanted TLC to hire, the
trucking company client interviewed such truck driver, had him or
her complete an application provided by TLC, and forwarded that
completed application to TLC. TLC subjected any such truck
driver to TLC’s screening and approval process. TLC rejected 10
to 15 percent of the truck drivers whom its trucking company
clients referred to it. TLC hired approximately 75 percent of
its driver-employees through referrals of trucking company
clients.
As part of TLC’s screening and approval process, TLC re-
quired each truck driver who applied for a position as a driver-
employee to sign and submit a number of documents, including:
(1) An application (employment application) for employment that
set forth, inter alia, such truck driver’s employment and medical
history; (2) a certification of violations that set forth all
motor vehicle violations in the past 12 months; (3) a truck
driver data sheet that certified the number of hours that such
truck driver had driven in the preceding 7 days; (4) Immigration
and Naturalization Service Form I-9 that verified such truck
driver’s eligibility to work in the United States; (5) a form
that authorized the release of such truck driver’s employment
history to TLC; (6) a form that authorized the release to TLC by
appropriate State agencies of such truck driver’s driving record;
and (7) a form in which such truck driver consented to a - 18 -
preemployment urinalysis.
After TLC concluded that a truck driver had passed TLC’s
screening and approval process, but before TLC hired such truck
driver as a driver-employee, TLC required each truck driver to:
(1) Certify that he or she did not possess more than one driver’s
license; (2) complete an application (assignment application)
that requested assignment to a trucking company client; (3) sign
a document (safe driving acknowledgment) that acknowledged that a
safe driving record was a condition for employment; and
(4) receive the Federal Motor Carrier Safety Regulation Pocket-
book.
Each assignment application that each driver-employee
completed provided in pertinent part: “it is to be understood
that the applicant is an employee of Transport Leasing\Contract,
Inc. [TLC] only. Applicant is not an employee of the lessee
named above or herein after [sic].”
Each safe driving acknowledgment that each driver-employee
signed provided in pertinent part:
As a condition of continued employment with Trans- port Labor\Contract, Inc.[,] it is understood that a safe driving record must be maintained. If driving privileges are suspended by the issuing state agency or an insurance company deems you uninsurable, we can no longer use your services.
In the above situation, dismissal would be deemed directly attributable to your actions. Unemployment claims may be denied.
TLC required each driver-employee whom it hired to sign a - 19 -
document entitled “DRIVER EMPLOYEE CONTRACT” (driver contract).
Each driver contract provided in pertinent part:
THE FOLLOWING IS A LIST OF REGULATIONS AND REQUIREMENTS CONCERNING YOUR EMPLOYMENT WITH TRANSPORT LEASING/CONTRACT, INC., (TLC). ANY VIOLATION OF THESE REQUIREMENTS MAY RESULT IN DISMISSAL OR A CHARGE BEING MADE AGAINST THE EMPLOYEE BY TLC OR IT’S AFFILIATES.
• ALL DRIVERS ARE TO ATTEND AT LEAST 2 SAFETY MEETINGS PER YEAR.
ALL LOAD OVERAGES ARE THE PROPERTY OF THE SHIPPER OR THE TLC LESSEE.
DRINKING OR BEING UNDER THE LEAST INFLUENCE OF ALCOHOL WHILE ON THE JOB SHALL BE GROSS MISCONDUCT AND WILL RESULT IN IMMEDIATE DISMISSAL.
THE TAKING OF ILLEGAL DRUGS OR BEING UNDER THE INFLU- ENCE OF ILLEGAL DRUGS IS STRICTLY PROHIBITED BY THE D.O.T., FEDERAL LAW AND TLC COMPANY POLICY. IF ANY EMPLOYEE IS FOUND OR TESTS POSITIVE FOR ILLEGAL DRUG USE, THEY WILL BE EITHER DISCHARGED IMMEDIATELY OR FORCED INTO A DRUG REHABILITATION PROGRAM. ALL DRIVERS ARE SUBJECT TO FEDERAL DRUG TESTING AS REQUIRED BY THE D.O.T.
ALL PAPERWORK REQUIRED BY TLC OR IT’S AFFILIATES WILL BE DONE ON A DAILY BASIS OR AS DIRECTED.
THE PERFORMANCE OF ANY JOB REQUIRED BY TLC MUST NOT BE AFFECTED BY A PERSONAL, LEGAL OR FINANCIAL PROBLEM OF THE DRIVER. THIS ALSO INCLUDES DRIVER ATTITUDE.
I HEREBY ACKNOWLEDGE THE FACT THAT TRANSPORT LEAS- ING/CONTRACT, INC. IS AN INDIANA CORPORATION AND THAT ANY WORKER’S COMPENSATION CLAIMS SUBMITTED BY ME WILL BE REPORTED TO THE STATE OF INDIANA.
I FURTHER AGREE THAT IF I AM EVER INJURED ON THE JOB I WILL REPORT MY INJURY TO TLC, INC. IMMEDIATELY SO THEY MAY FILE A FIRST REPORT OF INJURY TO THE INDIANA - 20 -
WORKER’S COMPENSATION BOARD. I WILL ALSO INFORM ANY MEDICAL FACILITY THAT I AM TREATED AT FOR SAME THAT I AM AN EMPLOYEE OF TLC, INC. AND THAT ALL BILLINGS ARE TO BE SENT DIRECTLY TO TLC, INC. LASTLY, I WILL INFORM ALL MEDICAL FACILITIES/PHYSICIANS THAT I AM AN EMPLOYEE OF AN INDIANA CORPORATION AND THAT ALL WORKER’S COMPEN- SATION CLAIMS SUFFERED BY ME WILL BE REPORTED TO THE STATE OF INDIANA.
STATEMENT OF COMPANY POLICY
Upon reading and reviewing this next section [regarding types of losses involving the transportation of goods or merchandise by a trucking company client that is leasing a driver-employee from TLC], please be aware that every TLC, Inc. lessee may have their own individual regulations and requirements. The following may not apply in every given situation.
LEVEL 3 LOSS: A loss resulting in property damage or bodily injury. Property damage shall be equal to a value of $2,000.00 but not greater than $20,000.00 combined. Bodily injury shall be any injuries which receive treatment away from the scene of the accident but does not result in death, disability or disfigure- ment of a second party.
First Offense: A letter of reprimand, 1 week suspension from work without compensation.
Second Offense: (Within 9 months) Discharge from employment.
LEVEL 4 LOSS: A loss resulting in property damage and or bodily injury in excess of or to the extent of: property damage equal to or greater than $20,000.01 and or death, disability or disfigurement of a second party.
First Offense: Discharge from employment.
NOTE: The intentional failure to report any and all incurred losses immediately shall be viewed as an act of dishonesty of the driver. Acts of dishonesty sub- - 21 -
ject the driver to discharge from employment. The occurrence of a Level 2, 3 or 4 Loss is automatically counted as an occurrence in the lower levels. There- fore, if by the automatic counting of a higher occur- rence into a lower level, that fills that level and subjects a driver to a more sever type of reprimand, then the more severe type of reprimand will take prece- dence.
*DRIVER: The use of the word Driver refers to any company employees who have been qualified to drive for any of TLC, Inc.’s lessees.
EMPLOYMENT COUNSELING: Employment counseling may not be completed during a period of reprimand, however must be completed prior to a driver being allowed to return to work. There shall be no compensation paid for the driver’s time during an employment counseling session. The driver’s failure to complete an employment counsel- ing session will subject the driver to discharge of employment.
I HEREBY CERTIFY THAT I HAVE READ AND UNDERSTAND THE ABOVE EMPLOYMENT CONTRACT OF TRANSPORT LEASING\CONTRACT, INC. AND WILL ABIDE TO ALL POLICIES AND PROCEDURES STATED WITHIN. I FURTHER ACCEPT THESE CONDITIONS WITH REGARD TO MY DRIVING QUALIFICATIONS AND EMPLOYMENT WITH TRANSPORT LEASING\CONTRACT, INC. [Re- produced literally.]
Both before and after entering into an exclusive lease
agreement with TLC, each trucking company client: (1) Owned or
leased the trucks, semitrailers, terminals, and other equipment
and facilities used in its trucking business; (2) obtained the
customers whose goods and merchandise it transported by truck;
(3) performed dispatching functions with respect to each driver-
employee by giving such driver-employee his or her route assign-
ments, directing each driver-employee as to the loads assigned to - 22 -
him or her and as to the times by which such driver-employee had
to deliver those loads, and relaying any instructions of its
customers relating to such loads; (4) was responsible for the
payment of tolls, fuel, repairs, and scale fees incurred during
the transport of such goods and merchandise; and (5) had the
authority to determine whether to permit a driver-employee whom
TLC leased to it to take any vacation days. TLC did not own any
interest in, had no rights in the profits of, and no responsibil-
ity for the losses of the business of any trucking company
client.
TLC had the right to, and did, direct and control the work
and conduct of each driver-employee. Thus, TLC had the right to,
and did, direct and control each driver-employee as to the
operation and the loading and unloading of the truck of the
trucking company client that leased such driver-employee from TLC
and as to the details and means by which that operation and that
loading and unloading were to be accomplished. When TLC hired
each driver-employee, TLC gave such driver-employee a packet of
materials, including a truck driver handbook (TLC driver hand-
book), a safety manual, and a brochure entitled “Welcome to TLC”.
The TLC driver handbook contained TLC’s detailed instructions
that it required each driver-employee to follow with respect to,
inter alia, fueling the trucks, starting the trucks’ engines,
hooking up the trucks to trailers, parking the trucks, driving - 23 -
the trucks to achieve maximum fuel savings, braking the trucks,
operating trucks in cold weather, departure times of the trucks,
and loading the cargo on and unloading it off the trucks.11
After TLC hired a truck driver as a driver-employee, TLC
maintained a file with respect to such driver-employee, which
included such driver-employee’s employment application and
medical history and the results of TLC’s screening and approval
process with respect to such driver-employee. In addition, TLC
required periodic physical examinations of each driver-employee
and monitored each driver-employee to ensure that such driver-
employee remained current with respect to his or her motor
vehicle reports. TLC and each trucking company client maintained
duplicate driver-employee personnel files that contained DOT-
mandated forms and information. Each trucking company client
monitored each driver-employee’s compliance with DOT regula-
tions.12 TLC ensured that each driver-employee’s file was main-
11 The TLC driver handbook consisted of approximately 50 pages covering the various matters with respect to which TLC gave detailed instructions to each driver-employee. The table of contents of the TLC driver handbook listing such matters is attached as an appendix. 12 Pursuant to the exclusive lease agreement, if a driver- employee determined “that the equipment, loads or routing re- quirements of * * * [a trucking company client] are in any way illegal or contrary to the applicable local, state or federal rules, regulations or statutes,” such driver-employee “shall immediately notify * * * [TLC and such trucking company client] thereof and any dispute resulting therefrom shall be resolved by the managing officers of * * * [TLC and such trucking company (continued...) - 24 -
tained in accordance with DOT specifications.
TLC provided each driver-employee with a monthly newsletter
and periodically provided each driver-employee with materials on
driving safety, drug usage, and compliance with DOT requirements.
TLC also conducted safety programs for the driver-employees,
which included periodic on-site safety training for each driver-
employee and safety awards and bonuses. Each trucking company
client provided each driver-employee whom TLC leased to it with
any necessary orientation and training with respect to such
trucking company client’s trucking equipment.
TLC sponsored certain employee benefits for its driver-
employees, including: (1) A section 401(k) plan; (2) a section
125 flexible benefit plan; (3) group or individual health insur-
ance; (4) a $5,000 group term life insurance policy; and (5) the
option of purchasing additional group term life insurance. TLC
paid the premiums associated with the $5,000 group term life
insurance policy. TLC bore the administrative costs but no other
costs associated with the various employee benefits that it
sponsored for its driver-employees. Each driver-employee paid
such other costs through payroll deductions.13
12 (...continued) client].” 13 Certain trucking company clients paid at least part of the premiums associated with the health insurance plan that TLC sponsored for the driver-employees whom TLC leased to them. In (continued...) - 25 -
Pursuant to each exclusive lease agreement, each trucking
company client had the right to decline using a particular
driver-employee whom TLC wanted to lease to it. While TLC was
leasing a driver-employee to a trucking company client, TLC had
the right to lease that driver-employee to another trucking
company client and thereby assign additional projects to such
driver-employee.
If a trucking company client no longer wanted or needed the
services of a particular driver-employee, TLC did not continue
leasing such driver-employee to that trucking company client. In
that event, TLC attempted to lease such driver-employee to
another trucking company client. TLC frequently was successful
in reassigning a driver-employee from one trucking company client
that no longer wished to use such driver-employee to another
trucking company client. TLC also reassigned to another trucking
company client any driver-employee who no longer wished to work
with a particular trucking company client to which TLC had
assigned such driver-employee. If a driver-employee refused such
reassignment, TLC treated him or her as having voluntarily
terminated his or her employment with TLC and contested any
13 (...continued) such instances, TLC paid the trucking company client’s share of such health insurance premiums and charged such premiums to the trucking company client. - 26 -
unemployment claims that such driver-employee filed.14
Each of TLC’s driver-employees who was engaged in over-the-
road trucking paid for food and beverage expenses while traveling
away from home. TLC generally made payments of per diem amounts
to each such driver-employee that TLC intended to cover such food
and beverage expenses. TLC did not pay any per diem amounts to a
driver-employee whom it leased to a trucking company client that
was a local carrier.
At the end of each payroll period,15 each trucking company
client mailed or sent by facsimile to TLC a batch control form
(batch report) with respect to such period. For each payroll
period, the batch report that each trucking company client
submitted to TLC showed for each driver-employee whom TLC leased
to such trucking company client, inter alia, (1) a lump sum
amount (batch report lump sum amount) which was equal to the
total of the gross wages16 and any per diem amounts to which each
14 Because of the large number of driver-employees and the low rate of successful claims, TLC usually paid the minimum rate imposed by the applicable State Unemployment Tax Act (SUTA). 15 Pursuant to the exclusive lease agreement, each trucking company client had the right to select the payroll period for all driver-employees whom TLC leased to such trucking company client. 16 We shall refer to the gross amount of wages to which a driver-employee was entitled, prior to any reduction for such driver-employee’s share of Federal and State employment taxes, Federal and State income taxes withheld, and payroll deductions for employee benefits (e.g., health insurance, a sec. 401(k) plan, or a sec. 125 flexible benefit plan), as gross wages. - 27 -
driver-employee was entitled but which was not broken down into
such component parts;17 (2) the total amount of expenses for gas,
tolls, repairs, and other road expenses for which such trucking
company client (a) made cash advances (advances)18 and/or (b) was
obligated to make reimbursements to such driver-employee (reim-
bursable expenses); (3) any miscellaneous credits or deductions
(e.g., for the costs of health insurance that such trucking
company client agreed to pay); (4) any vacation days that such
trucking company client permitted such driver-employee to take;19
and (5) the number of days such driver-employee was away from
home.
TLC determined what portion of the batch report lump sum to
which each driver-employee was entitled constituted gross wages
and what portion, if any, constituted per diem amounts.20 In
order to make that determination, TLC applied to each batch
17 Neither the batch report nor any other document that a trucking company client submitted to TLC showed the breakdown of the batch report lump sum amount between gross wages and any per diem amounts. 18 Except for such advances, no trucking company client made any payments to a driver-employee. 19 If the batch report indicated that the trucking company client permitted a driver-employee whom TLC leased to it to take any vacation days, TLC paid no per diem amounts to such driver- employee for any such days. 20 The exclusive lease agreement was silent as to (1) any per diem amounts that TLC was to pay to a driver-employee to cover such driver-employee’s food and beverage expenses while traveling away from home and (2) the limitation imposed by sec. 274(n)(1). - 28 -
report lump sum amount to which each driver-employee was entitled
a percentage (per diem percentage). In most cases, the per diem
percentage was 34 percent; in some cases, the per diem percentage
ranged from zero to 33 percent.
Beginning in late calendar year 1993, TLC requested that for
each payroll period each trucking company client provide it on a
“Leased Driver Worksheet” certain information that the Internal
Revenue Service (IRS) required in order to substantiate each
driver-employee’s per diem amounts.21 The requested information
for each payroll period included, inter alia, the number of days
such driver-employee traveled away from home. Some of TLC’s
trucking company clients did not provide TLC with the information
that TLC requested.22
Upon receipt of a batch report, TLC inputted the information
contained in that batch report into its computer system and,
based on that information and other information in its computer
system (e.g., the per diem percentage, applicable employment tax
rates, Federal and State income tax withholding), computed with
21 As discussed above, TLC’s promotional materials repre- sented to each trucking company client that TLC was responsible for substantiating the per diem amounts that TLC paid to a driver-employee and for ensuring the appropriateness of such per diem amounts for Federal income tax purposes. 22 When a trucking company client did not provide TLC with the information that it requested, TLC used the number of days that each driver-employee was away from home that was shown in the batch report in order to substantiate any per diem amounts that TLC determined and paid to such driver-employee. - 29 -
respect to each driver-employee gross wages, any per diem
amounts, Federal and State income taxes withheld, the driver-
employee share of employment taxes,23 payroll deductions for
employee benefits, and net wages.24 Per diem amounts are not
wages for purposes of computing employment taxes, Federal and
State income tax withholding, and workers’ compensation insurance
premiums. TLC determined each driver-employee’s gross wages by
reducing the batch report lump sum amount for such driver-em-
ployee by any per diem amounts that TLC determined for such
With respect to each driver-employee, for each payroll
period TLC was obligated to, and did, pay such driver-employee
his or her net wages and any per diem amounts,25 regardless of
whether the trucking company client to which TLC leased such
23 We shall refer to any tax liabilities imposed on either the employer or the employee with respect to a driver-employee’s gross wages under the Federal Insurance Contribution Act, the Federal Unemployment Tax Act, or SUTA as employment taxes. 24 We shall refer to the net amount of wages to which a driver-employee was entitled, after any reduction for such driver-employee’s share of Federal and State employment taxes, Federal and State income taxes withheld, and payroll deductions for employee benefits (e.g., health insurance, a sec. 401(k) plan, or a sec. 125 flexible benefit plan), as net wages. 25 The aggregate amount of each driver-employee’s net wages and any per diem amounts to which such driver-employee was entitled was increased by the amount of any reimbursable expenses for which a trucking company was obligated to reimburse such driver-employee and decreased by the amount of any advances that a trucking company client paid to such driver-employee. - 30 -
driver-employee paid TLC the lease fee (discussed below). TLC
generally paid such net wages and any per diem amounts to each
driver-employee on the day after TLC received a batch report.
(We shall refer to TLC’s obligation with respect to each driver-
employee for each payroll period to pay to each such driver-
employee such aggregate amount of net wages and any per diem
amounts as well as its obligation to pay the employer’s share of
employment taxes, withhold and pay the driver-employee’s share of
employment taxes, withhold and pay Federal and State income
taxes, make daily electronic funds transfers of the appropriate
amounts of such taxes to the IRS and appropriate State agencies,
and pay workers’ compensation insurance premiums as TLC’s payroll
obligation.) TLC paid each driver-employee by either mailing a
check directly to such driver-employee or sending a check via
overnight delivery to the trucking company client to whom TLC
leased such driver-employee for distribution to such driver-
employee.
At the time TLC paid each driver-employee, TLC sent such
driver-employee an earnings statement showing, inter alia, the
batch report lump sum amount to which he or she was entitled, net
wages, any per diem amounts, Federal and State income taxes
withheld and paid, the driver-employee’s share of employment
taxes withheld and paid, and any other payroll deductions.
At the time TLC paid each driver-employee, TLC generated and - 31 -
sent to the trucking company client that leased such driver-
employee from TLC documents entitled “Statement” (account state-
ment), “Invoice” (account invoice), and “Precheck report”
(precheck report). The account statement showed the most recent
debits and credits to each trucking company client’s account and
any credit or balance due on that account.26 The account invoice
showed TLC’s total expenses for each payroll period for all the
driver-employees whom it leased to a trucking company client.27
The precheck report showed for each driver-employee for each
payroll period his or her gross wages, any per diem amounts,
Federal and State income taxes withheld and paid, the driver-
employee’s share of employment taxes paid, payroll deductions for
employee benefits, and net wages.
During the taxable years 1993, 1994, 1995, 1996, and 1997,
TLC paid its driver-employees per diem amounts totaling
$4,841,563, $7,111,060, $8,617,378, $9,934,172, and $10,178,691,
respectively.
26 In some instances the account statements covered the two most recent payroll periods, while in other instances the account statements covered the three most recent payroll periods. 27 Each account invoice showed TLC’s expenses for a payroll period including, inter alia, the total amount of gross wages and the total amount of any per diem amounts that TLC paid to all the driver-employees whom TLC leased to a trucking company client, the total amount of advances that a trucking company client paid to the driver-employees whom TLC leased to it, and the total amounts that TLC paid for health insurance for which the trucking company client reimbursed TLC. - 32 -
Pursuant to each exclusive lease agreement, each payroll
period each trucking company client paid TLC a lease fee (lease
fee) that was not broken down into component parts.28 Each
exclusive lease agreement set forth a factor (factor)29 to which
TLC and each trucking company client agreed and which such client
was to multiply by the batch report lump sum amount in order to
determine the lease fee that such client owed to TLC for each
driver-employee whom TLC leased to such client.
The factor to which TLC and each trucking company client
agreed was intended to produce a lease fee sufficient to cover:
(1) The batch report lump sum amount for each driver-employee
whom TLC leased to such trucking company client; (2) the em-
ployer’s share of employment taxes on the gross wages paid to
each such driver-employee; (3) workers’ compensation insurance
28 Pursuant to each exclusive lease agreement, each trucking company client, and not TLC, selected the method used to “compen- sate * * * [TLC] * * * for the services provided by * * * [TLC’s] * * * drivers”. Virtually all of TLC’s trucking company clients selected a cents-per-mile or a percentage-of-load-gross-revenue basis as the applicable method. 29 Pursuant to the exclusive lease agreement, TLC had the right to modify the factor in the event Federal and State employ- ment tax rates and/or workers’ compensation insurance rates changed. From time to time, TLC modified the factor that it charged each trucking company client in order to reflect changes in TLC’s workers’ compensation insurance premiums. TLC and each trucking company client also had the right to modify the factor if, inter alia, the information that TLC collected from a truck- ing company client in order to substantiate the per diem amounts that TLC paid to the driver-employees whom it leased to such client changed (e.g., if a trucking company client reduced its over-the-road trucking business). - 33 -
premiums attributable to the gross wages earned by each such
driver-employee; (4) other expenses that TLC incurred as costs of
earning such lease fee, e.g., expenses for sales representatives
and managers, legal and accounting services, and other overhead;
and (5) TLC’s profit (gross profit).
The factor was a flat rate that ranged from 1.15 to 1.25.
The factor was not broken down into component parts. Conse-
quently, no trucking company client knew how much of the factor
to which TLC and such trucking company client agreed was intended
to cover each of the various expenses associated with TLC’s
driver-leasing business (e.g., the employer’s share of employment
taxes, workers’ compensation insurance, any per diem amounts, and
compensation of persons who performed services for TLC other than
TLC’s driver-employees).
The per diem percentage that TLC used to determine any per
diem amounts of each driver-employee affected the factor that was
used to compute the lease fee that each trucking company client
owed to TLC. As discussed above, per diem amounts are not wages
for purposes of computing employment taxes, Federal and State
income taxes withheld, and workers’ compensation insurance
premiums, and a higher per diem percentage resulted in a lower
wage base for purposes of computing such amounts. A lower wage
base resulted in lower employment taxes, Federal and State income
taxes withheld, and workers’ compensation premiums, which, in - 34 -
turn, reduced the factor. The amount of TLC’s gross profit,
however, was not affected by the per diem percentage that TLC
used to determine any per diem amounts of each driver-employee.
The batch report that each trucking company client submitted
to TLC each payroll period included each trucking company cli-
ent’s computation of the lease fee to which TLC was entitled
under the terms of the exclusive lease agreement. In order to
determine the amount of such lease fee payable to TLC for each
payroll period, each trucking company client increased the amount
of the lease fee to which TLC was entitled by (1)(a) the total
amount of the reimbursable expenses due to each driver-employee
whom TLC leased to such trucking company client and (b) any
miscellaneous additions or carryover credits and reduced that sum
by (2)(a) the total amount of advances that such trucking company
client paid to each driver-employee whom TLC leased to it and
(b) any miscellaneous subtractions or debit balances. (We shall
refer to the amount of the lease fee payable each payroll period
to TLC by each trucking company client after such additions and
subtractions as the payroll period net lease fee due.)
Each trucking company client generally paid TLC the payroll
period net lease fee due, as reflected in the batch report, on
the day on which TLC issued a check to each driver-employee for
such driver-employee’s net wages and any per diem amounts. Each
trucking company client paid such payroll period net lease fee - 35 -
due by wire transfer or direct deposit into an account of TLC.
TLC did not maintain separate accounts for the funds received
from each trucking company client.
In order to minimize TLC’s loss in the event a trucking
company client did not pay to it the payroll period net lease fee
due, each exclusive lease agreement required each trucking
company client to make a deposit with TLC equal to $650 per truck
($650 deposit). TLC intended the $650 deposit to approximate
TLC’s payroll obligation for one week for each driver-employee
whom it leased to a trucking company client. The $650 deposit
that each trucking company client paid to TLC did not ensure that
TLC had sufficient funds to pay TLC’s payroll obligation with
respect to each driver-employee whom it leased to such trucking
company client where (1) such trucking company client selected a
payroll period that covered more than one week and/or (2) such
driver-employee was entitled to a batch report lump sum amount
that was greater than $650 per payroll period.
For the calendar years 1993, 1994, 1995, and 1996, TLC sent
a form letter (per diem letter) to each trucking company client,
which set forth the total of all per diem amounts that TLC paid
to the driver-employees whom it leased to such trucking company
client during the preceding calendar year. The per diem letter
for calendar year 1993 (sent to each trucking company client
early in calender year 1994) stated in pertinent part: - 36 -
Our billings to you include amounts paid, on your behalf, to our drivers, for road expenses; often re- ferred to as per diem. The amounts billed are of course, reduced by the amounts you paid directly to the drivers in the form of “advances”, frequently an amount approximating an allowable per diem.
As required by tax law and part of our service, we have tabulated the per diems to be used in your tax return preparation. As payer of these amounts, you must afford them special treatment under the 20% reduction provision of Internal Revenue Code Section 274(n). You should take this into account when preparing your tax returns for your business and may want to forward a copy of this letter to your tax advisor.
The amount of per diem you paid to drivers, or which we partially paid on your behalf during 1993, was * * * [total of per diem amounts.30]
Petitioner filed consolidated Form 1120, U.S. Corporation
Income Tax Return (Form 1120), as the parent corporation of a
group of affiliated corporations for each of petitioner’s taxable
years 1993, 1994, 1995, and 1996. Schedule K, Other Information,
included as part of each of those Forms 1120 showed business
activity as “leasing” and product or service as “employees”.
Form 851, Affiliations Schedule, included as part of those Forms
1120 showed TLC’s business activity as “leasing”.
On or about March 27, 1996, respondent notified petitioner
that respondent intended to commence the examination upon which
this case is based.
30 The per diem letters for each of the calendar years 1994, 1995, and 1996 were identical to the per diem letter for calendar year 1993 except that the reference to “20% reduction” was changed to “50% percent reduction” in order to reflect changes made to sec. 274(n)(1) by OBRA 1993. See supra note 3. - 37 -
On October 27, 2000, respondent sent a notice of deficiency
(notice) to petitioner. In that notice, respondent determined,
inter alia, that the limitation imposed by section 274(n)(1)
applied to the per diem amounts that TLC paid to its driver-
employees.
Respondent sent a notice to each of the following trucking
company clients of TLC in which respondent determined that each
such trucking company client had a deficiency in tax for one or
more taxable years31 arising out of such trucking company cli-
ent’s failure to take into account the limitation imposed by
section 274(n)(1)32 and with respect to which each such trucking
company client commenced proceedings in the Court, as follows:
31 The record does not disclose the taxable year(s) to which each of the notices issued to certain of TLC’s trucking company clients pertained. 32 See supra note 3. - 38 -
Trucking Company Client Case at Docket No. John and Kimberly Kohler 1026-01 (NBS Trucking) Joseph and Barbara Hix 1062-01 (Joe Hix Trucking) Blachowske Truck Line, Inc. 1107-01 Jones Brothers Trucking, Inc. 1149-01 Lake State Transport, Inc. 1286-01 Schak Trucking Inc. 1287-01 Donald Fiereck and Beverly 1346-01 Beumer-Fiereck (Parkway Auto Transport)
Respondent conceded the above-referenced cases. The Court
entered stipulated decisions in such cases, which reflected such
concessions.
OPINION
Petitioner bears the burden of proving that the determina-
tions in the notice are erroneous. See Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). Respondent bears the burden
of proof with respect to the respective increases in the defi-
ciencies in tax for petitioner’s taxable years 1994, 1995, and
1996 that respondent alleged in the amendment to answer. Rule
142(a)(1).
We must determine whether the limitation imposed by section
274(n)(1) (section 274(n)(1) limitation) applies to the per diem
amounts that TLC paid to each driver-employee. Section 274(n)(1)
imposes the following limitation on the amount otherwise allow- - 39 -
able as a deduction for food or beverage expenses:
SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.
(n) Only 50 Percent of Meal * * * Expenses Allowed as Deduction.--
(1) In general.--The amount allowable as a deduction under this chapter for--
(A) any expense for food or bever- ages, * * *
shall not exceed 50[33] percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter.
Section 274(n)(2) provides certain exceptions to the section
274(n)(1) limitation, including the following:
(2) Exceptions.--Paragraph (1) [of section 274(n)] shall not apply to any expense if--
(A) such expense is described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e).
The exceptions to the section 274(n)(1) limitation provided
by section 274(e)(3) (section 274(e)(3) exceptions) are for:
(3) Reimbursed expenses.--Expenses paid or in- curred by the taxpayer, in connection with the perfor- mance by him of services for another person (whether or not such other person is his employer), under a reim- bursement or other expense allowance arrangement with such other person, but this paragraph shall apply--
(A) where the services are performed for an employer, only if the employer has not
33 See supra note 3. - 40 -
treated such expenses in the manner provided in paragraph (2) [of section 274(e)], or
(B) where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d) [of section 274]) to such person.
The regulations elaborating on the section 274(e)(3) excep-
tions provide in pertinent part:
In the case of any expenditure * * * paid or incurred by one person in connection with the performance by him of services for another person (whether or not such other person is an employer) under a reimbursement or other expense allowance arrangement, the limitations on allowability of deductions provided for in * * * this section shall be applied only once, either (1) to the person who makes the expenditure or (2) to the person who actually bears the expense, but not to both. * * *
Sec. 1.274-2(f)(2)(iv)(a), Income Tax Regs.
It is petitioner’s position that Beech Trucking Co. v.
Commissioner, 118 T.C. 428 (2002), requires the Court to hold in
the instant case that
In the case of a three-party arrangement in which a professional employer organization leases truck drivers to trucking companies, * * * the party which is subject to the Section 274(n) limitation * * * is the common-law employer of the truck drivers.
According to petitioner, under Beech Trucking Co. v. Commis-
sioner, supra, TLC was not the employer34 of any driver-employee
and thus is not subject to the section 274(n)(1) limitation on
34 We accord the term “employer” the same meaning as the term “common-law employer”. For convenience, we shall use only the term “employer”. - 41 -
the per diem amounts at issue.
Respondent disagrees with petitioner’s reading of Beech
Trucking Co. v. Commissioner, supra. According to respondent,
Beech Trucking Co. requires the Court to hold in the instant case
that the section 274(n)(1) limitation applies to the person who
paid or incurred, or actually bore,35 the food or beverage ex-
penses in question and that that person is TLC.
The parties in Beech Trucking Co. v. Commissioner, supra,
agreed that the truck drivers in question were employees not
subject to the section 274(n)(1) limitation because such truck
drivers qualified for the exception to that limitation provided
by section 274(e)(3)(A) (section 274(e)(3)(A) exception). The
parties in Beech Trucking Co. also agreed that the section
274(n)(1) limitation applied to the employer of those truck
drivers. It was in the context of those agreements that the
Court stated in Beech Trucking Co. v. Commissioner, supra at 440,
443:
with respect to meal and entertainment expenses that an employee pays or incurs and that are reimbursed by the employer, the section 274(n) limitation applies either to the employee (as the “person who makes the expendi- ture”) or to the employer (as the “person who actually bears the expense”). Sec. 1.274-2(f)(2)(iv)(a), Income Tax Regs.
35 Respondent accords the words “paid or incurred” the same meaning as the words “actually bore”. - 42 -
* * * we conclude that the section 274(n) limita- tion applies to Beech Trucking as the common law em- ployer of its drivers and as the party that (as peti- tioner states on brief) actually bore the expense of the expenditures for which the per diem payments were made [by the company that leased the drivers to Beech Trucking]. * * *
We decline petitioner’s invitation to read into the above-
quoted or any other statements in Beech Trucking Co. v. Commis-
sioner, supra, that, in all instances involving a three-party
arrangement among a truck driver who is an employee (truck
driver-employee), a trucking company, and a company (driver-
leasing company) that provides, for a fee, the services of such a
truck driver to such a trucking company, the employer of the
truck driver is the person subject to the section 274(n)(1)
limitation. The truck driver-employee in such a three-party
arrangement might be the person who is subject to the section
274(n)(1) limitation, in which event the employer for which such
truck driver worked would not be subject to such limitation. See
sec. 274(e)(3); see also sec. 1.274-2(f)(2)(iv)(a), Income Tax
Regs.
We also decline respondent’s invitation to read into the
above-quoted or any other statements in Beech Trucking Co. v.
Commissioner, supra, that, in all instances involving a three-
party arrangement among a truck driver-employee, a trucking
company, and a driver-leasing company, the person who pays or
incurs or actually bears the food or beverage expenses is the - 43 -
person subject to the section 274(n)(1) limitation, and that
person may or may not be the employer of the truck driver-em-
ployee. In support of such an interpretation of Beech Trucking
Co., respondent asserts:
While the Court in Beech did look to the fact that Beech was the drivers’ common law employer, it also looked to the fact that Beech was the party that “actu- ally bore the expense” of the * * * per diem. * * * And it is this latter inquiry that goes to the central question of whether the taxpayer paid or incurred an otherwise deductible expenditure for food or beverages which is subject to the limitation of section 274(n). * * *
The ultimate question under section 274(n) is whether the taxpayer paid or incurred an expense for food or beverages. In the case of * * * per diem paid employees in a three-party employee leasing arrange- ment, the party which is the common law employer and the party which pays and incurs the food or beverage expense will not necessarily be one and the same.
In Beech Trucking Co. v. Commissioner, 118 T.C. at 443, the
Court concluded that the section 274(n)(1) limitation applied to
Beech Trucking “as the common law employer of its drivers and as
the party that * * * actually bore the expense of the expendi-
tures for which the per diem payments were made [by the driver-
leasing company].” That conclusion is merely a restatement of
what the regulations under the section 274(e)(3)(A) exception
provide where a person performs services for an employer under a
reimbursement or other expense allowance arrangement and the
requirements of section 274(e)(3)(A) are met; namely, in such a
situation the limitations imposed by section 274(n), inter alia, - 44 -
section 274(n)(1) are to be applied only to the employer as the
person who actually bears the expense, and not to the employee as
the person making the expenditure.36 Sec. 1.274-2(f)(2)(iv)(a)
and (b), Income Tax Regs.
We reject respondent’s assertions (1) that the question of
who actually bore the expense of the per diem payments involved
in Beech Trucking Co. v. Commissioner, supra, was the central
question in that case in determining whether Beech Trucking Co.,
Inc. was subject to the section 274(n)(1) limitation and
(2) that, in a three-party arrangement among a truck driver-
employee, a trucking company, and a driver-leasing company, the
person who is the employer of the truck driver will not necessar-
ily be the person who pays or incurs or actually bears the food
or beverage expenses. The parties in Beech Trucking Co. agreed
that the truck drivers in question were employees not subject to
the section 274(n)(1) limitation because of the section
274(e)(3)(A) exception and that consequently the employer of
those truck drivers was subject to the section 274(n)(1) limita-
tion. See sec. 1.274-2(f)(2)(iv)(a) and (b), Income Tax Regs.
36 Where a person performs services for a nonemployer-client under a reimbursement or other expense allowance arrangement and the requirements of sec. 274(e)(3)(B) are met, the regulations under the section 274(e)(3)(B) exception provide that the limitations under, inter alia, sec. 274(n)(1) are to be applied only to the nonemployer-client as the person who actually bears the expense, and not to the independent contractor as the person making the expenditure. Sec. 1.274-2(f)(2)(iv)(a), (c), Income Tax Regs. - 45 -
However, the taxpayer in that case claimed that it was not the
employer of those truck drivers and that therefore it was not
subject to the section 274(n)(1) limitation. As a result, a
threshold question in Beech Trucking Co. v. Commissioner, supra,
was whether the taxpayer was the employer of such truck
drivers.37 If the taxpayer in Beech Trucking Co. was the em-
ployer of the truck drivers in question, the taxpayer, as such
employer, necessarily would have borne the food or beverage
expenditures that those truck drivers made. If the taxpayer in
Beech Trucking Co. was not the employer of the truck drivers in
question, the taxpayer necessarily would not have borne such
expenditures. See Beech Trucking Co. v. Commissioner, supra at
440, 443; sec. 1.274-2(f)(2)(iv)(a), Income Tax Regs.
In the instant case, the parties agree and/or do not dispute
that: (1) No driver-employee is an independent contractor but
each is an employee who performed services for a person who is an
employer; (2) while traveling away from home, each driver-em-
ployee paid or incurred food and beverage expenses in connection
37 Having decided as a threshold matter that the taxpayer in Beech Trucking Co. v. Commissioner, 118 T.C. 428 (2002), was the employer of the truck drivers in question, the Court addressed the central question presented in that case of whether Rev. Proc. 94-77, 1994-2 C.B. 825, and Rev. Proc. 96-28, 1996-1 C.B. 686, were valid in characterizing the employer-taxpayer’s payments of the per diem amounts at issue in Beech Trucking Co. as payments only for food and beverage expenses, and not for lodging ex- penses, and in applying the section 274(n)(1) limitation to the entire amounts of such payments. - 46 -
with the performance by such driver-employee of services for such
employer under a reimbursement or other expense allowance ar-
rangement with such employer; (3) such expenses, as well as the
per diem amounts that TLC paid to each driver-employee, are the
kinds of expenses that generally are subject to the section
274(n)(1) limitation; and (4) no driver-employee is subject to
the section 274(n)(1) limitation because each driver-employee
qualifies for the section 274(e)(3)(A) exception.
As a result of the parties’ agreement regarding, and/or
their failure to dispute, the foregoing matters, we conclude that
our resolution of the disagreement between the parties over
whether the section 274(n)(1) limitation applies to the per diem
amounts that TLC paid to each driver-employee depends on our
resolution of the dispute between them over whether TLC was the
employer of each such driver-employee.
It is petitioner’s position that each trucking company
client of TLC, and not TLC, was the employer of each driver-
employee, the services of whom TLC provided, for a fee, to such
trucking company client and that, under the doctrine of judicial
estoppel, the Court should preclude respondent from arguing that
TLC was the employer of each driver-employee.
It is respondent’s position that the Court should not allow
petitioner to disavow TLC’s status as the employer of each
driver-employee. That is because, according to respondent, TLC - 47 -
held itself out as the employer of each driver-employee to the
public, including to each trucking company client, the IRS, and
various State workers’ compensation plans. Respondent also
argues that if the Court were to allow petitioner to disavow
TLC’s status as the employer of each driver-employee, petitioner
must demonstrate by strong proof38 that TLC was not the employer
of each driver-employee. Respondent further maintains that if
the Court not only were to allow petitioner to disavow TLC’s
status as the employer of each driver-employee but also were to
reject respondent’s argument that the strong proof rule is
applicable in the instant case, the record nonetheless estab-
lishes that TLC was the employer of each driver-employee.
We consider first petitioner’s argument that, under the
doctrine of judicial estoppel, the Court should preclude respon-
dent from contending that TLC was the employer of each driver-
employee. According to petitioner, the Court should apply that
doctrine in the instant case because the Commissioner of Internal
38 “Strong proof must be put forth by * * * [taxpayers] for this Court to disregard the form in which they cast their trans- actions in an arm's-length deal.” Miami Purchasing Serv. Corp. v. Commissioner, 76 T.C. 818, 830 (1981); see also Meredith Corp. & Subs. v. Commissioner, 102 T.C. 406, 438 (1994). Strong proof constitutes more than a mere preponderance of the evidence. See Major v. Commissioner, 76 T.C. 239, 247 (1981). In the instant case, respondent contends that under each exclusive lease agree- ment between TLC and each trucking company client TLC cast itself as the employer of each driver-employee whom it leased to such trucking company client and that therefore petitioner must present strong proof that TLC was not in fact the employer of each such driver-employee. - 48 -
Revenue (Commissioner) took the position in Beech Trucking Co. v.
Commissioner, 118 T.C. 428 (2002), that the driver-leasing
company in that case (i.e., Arkansas Trucking Service) was not
the employer of the truck drivers whom it leased to Beech Truck-
ing Co., Inc., whereas the Commissioner takes the inconsistent
position in the instant case that the driver-leasing company in
this case (i.e., TLC) was the employer of each driver-employee
whom it leased to each trucking company client.
The doctrine of judicial estoppel is designed to protect the
integrity of the courts by preventing a party from asserting
positions contradictory to or inconsistent with positions as-
serted in prior litigation. New Hampshire v. Maine, 532 U.S.
742, 749-750 (2001); Leonard v. Southwestern Bell Corp. Disabil-
ity Income Plan, 341 F.3d 696, 702 (8th Cir. 2003); Huddleston v.
Commissioner, 100 T.C. 17, 26 (1993). We observed in Huddleston
v. Commissioner, supra at 26:
Judicial estoppel generally requires acceptance by a court of the prior position and does not require priv- ity or detrimental reliance of the party seeking to invoke judicial estoppel. * * * Acceptance by a court does not mean that the party being estopped prevailed in the prior proceeding with regard to the ultimate matter in dispute, but rather only that a particular position or argument asserted by the party in the prior proceeding was accepted by the court. * * *
The Court has discretion as to whether to invoke the doctrine of
judicial estoppel. Fazi v. Commissioner, 105 T.C. 436, 446
(1995). - 49 -
Where there is a “possibility that ‘some distinction may
exist or arise’ between * * * [the prior case and the case under
consideration], the integrity of the judicial process is not
undermined by permitting the * * * [party against whom judicial
estoppel is advanced] an opportunity to argue that such a dis-
tinction in fact exists.” Bendet v. Sandoz Pharm. Corp., 308
F.3d 907, 910 (8th Cir. 2002).
The determination of whether a person is an employer is a
fact-intensive inquiry. Nationwide Mut. Ins. Co. v. Darden, 503
U.S. 318, 324 (1992); Alford v. United States, 116 F.3d 334, 337
(8th Cir. 1997); Beech Trucking Co. v. Commissioner, supra at
441. Respondent argues here that the facts in Beech Trucking Co.
v. Commissioner, supra, are different from the facts in the
instant case.39 On the record before us, we shall not apply the
doctrine of judicial estoppel so as to preclude respondent from
taking the position that, under the facts established by the
39 The evidentiary record presented in Beech Trucking Co. v. Commissioner, 118 T.C. at 441, was sparse. We stated in that case:
the evidentiary basis for analyzing the relevant common law factors is relatively sparse, owing largely to petitioner’s failure to introduce in evidence or other- wise establish the precise terms of any lease agree- ment, employment agreement, or contract between Beech Trucking and ATS [the driver-leasing company]. Nor does the record contain the drivers’ employment con- tracts. Moreover, the record does not always clearly distinguish the roles of Beech Trucking and ATS with respect to the drivers’ activities. * * * - 50 -
record in this case, TLC was the employer of each driver-em-
ployee.
We turn next to respondent’s arguments that the Court should
not allow petitioner to disavow TLC’s status as the employer of
each driver-employee and that if the Court were to allow peti-
tioner to do so, petitioner must demonstrate by strong proof that
TLC was not the employer of each driver-employee. Assuming
arguendo that we were to reject such arguments of respondent, on
the instant record we nonetheless would, and do below, reject
petitioner’s position that TLC was not the employer of each
driver-employee. Consequently, we need not, and we shall not,
consider such arguments of respondent. Instead, we shall deter-
mine whether TLC was the employer of each driver-employee.
In determining whether TLC was the employer of each driver-
employee, we shall apply the common-law employment test. Nation-
wide Mut. Ins. Co. v. Darden, supra at 322-324; Alford v. United
States, supra at 337-338; Beech Trucking Co. v. Commissioner, 118
T.C. at 440. In determining under the common-law employment test
whether TLC was the employer of each driver-employee, we shall
consider a variety of factors, including the following:
the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional pro- jects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the - 51 -
regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.
Nationwide Mut. Ins. Co. v. Darden, supra at 323-324.
A primary consideration in determining which of two persons
is the employer of an individual is “which of the two [persons]
has the right to control the activities of the individual”.
Leavell v. Commissioner, 104 T.C. 140, 150 (1995); see Schweiger
v. Farm Bureau Ins. Co., 207 F.3d 480, 484 (8th Cir. 2000); Beech
Trucking Co. v. Commissioner, supra at 441; Weber v. Commis-
sioner, 103 T.C. 378, 387 (1994), affd. per curiam 60 F.3d 1104
(4th Cir. 1995); Profl. & Executive Leasing Inc. v. Commissioner,
89 T.C. 225, 232-233 (1987), affd. 862 F.2d 751 (9th Cir. 1988);
sec. 31.3121(d)-1(c)(2), Employment Tax Regs.
Before considering the factors under the common-law employ-
ment test, we shall address the testimony of Gary Ankerfelt (Mr.
Ankerfelt) on which petitioner relies to support its position
that TLC was not the employer of each driver-employee. From
TLC’s inception until 2000, Mr. Ankerfelt was TLC’s president and
chief executive officer. According to petitioner, Mr.
Ankerfelt’s testimony establishes that the provisions of each
exclusive lease agreement which gave TLC the sole and absolute
authority to hire, fire, and control the work and conduct of each
driver-employee do not mean what they say. In this regard, Mr.
Ankerfelt testified: (1) TLC exercised only an advisory role in - 52 -
hiring each driver-employee; (2) without exception, the trucking
company client made the decision to terminate any driver-employee
whom TLC leased to it; and (3) while TLC was leasing a driver-
employee to a trucking company client, TLC had no right to lease
that driver-employee to another trucking company client and
thereby assign additional projects to such driver-employee.
On the record before us, we find that respondent impeached
the foregoing testimony of Mr. Ankerfelt. Respondent introduced
into the record an affidavit (Mr. Ankerfelt’s affidavit) that Mr.
Ankerfelt made under oath in Hix v. Minn. Workers’ Comp. Assigned
Risk Plan, 520 N.W.2d 497 (1994).40 In that affidavit, Mr.
Ankerfelt swore under oath that:
TLC has sole authority to determine the assignment of a driver.
* * * TLC retains the sole right to discharge and fire any of its drivers-employees [sic]. When a lessee [trucking company client] no longer desires to lease a TLC driver-employee, the TLC driver-employee returns to TLC for assignment to another lessee.
Not only did respondent impeach Mr. Ankerfelt’s testimony
with Mr. Ankerfelt’s affidavit, respondent also raised other
questions about the reliability of Mr. Ankerfelt’s testimony that
TLC exercised only an advisory role in hiring each driver-em-
40 Joe Hix was one of TLC’s trucking company clients. The court in Hix v. Minn. Workers’ Comp. Assigned Risk Plan, 520 N.W.2d 497, 508 (1994), held that, for purposes of Minnesota’s workers’ compensation laws, Joe Hix was not the employer of any driver-employee whom he leased from TLC. - 53 -
ployee. Respondent called as a witness Beverly Fiereck (Ms.
Fiereck), the president of Parkway Auto Transport (Parkway), one
of TLC’s trucking company clients.41 She testified that TLC, and
not Parkway, decided whether or not to hire a truck driver whom
Parkway referred to it.42 We found Ms. Fiereck to be credible.
Moreover, the record establishes (1) that TLC successfully
recruited and hired approximately 25 percent of its driver-
employees through its own recruiting efforts and (2) that TLC
rejected 10 to 15 percent of the truck drivers whom its trucking
company clients referred to it.
We shall not rely on Mr. Ankerfelt’s testimony to support
driver-employee. See Lerch v. Commissioner, 877 F.2d 624, 631-
41 The parties stipulated that the testimony of any person representing Parkway is to be considered representative of the testimony that would be given by any persons representing other trucking company clients of TLC if they had been called to testify at the trial in this case. 42 Each exclusive lease agreement provided in pertinent part:
Lessor agrees to use its reasonable best efforts in furnishing Lessee with drivers as may be requested from Lessee from time to time during the term of this Agreement. Lessee understands and agrees Lessor cannot absolutely guarantee the availability of drivers for Lessee upon demand but Lessor nevertheless agrees to use its reasonable best efforts in furnishing Lessee with any and all drivers required at all times during the terms of this Agreement. To facilitate the avail- ability of drivers to Lessee, Lessee shall refer to Lessor any and all qualified drivers known to it who may be suitable for employment by Lessor. - 54 -
632 (7th Cir. 1989), affg. T.C. Memo. 1987-295; Geiger v. Commis-
sioner, 440 F.2d 688, 689-690 (9th Cir. 1971), affg. per curiam
T.C. Memo. 1969-159; Tokarski v. Commissioner, 87 T.C. 74, 77
(1986).
We shall now address the factors under the common-law
employment test in order to determine whether TLC was the em-
ployer of each driver-employee.
Right To Control Driver-Employee
Petitioner argues that each trucking company client exer-
cised control over the activities of a driver-employee whom TLC
leased to it by giving such driver-employee his or her route
assignments, directing such driver-employee as to the loads
assigned to him or her and as to the times by which such driver-
employee had to deliver those loads, and relaying any customer
instructions relating to such loads.
Respondent counters that the foregoing assignments, direc-
tions, and instructions that each trucking company client gave to
a driver-employee whom TLC leased to it were merely dispatching
functions “which, as a practical matter, could only be performed
by the Trucking Companies, and the fact that they did so has
little bearing on which party was the Drivers’ employer.”
Section 31.3121(d)-1(c)(2), Employment Tax Regs., describes
the right to control an employee as follows:
the person for whom services are performed has the right to control and direct the individual who performs - 55 -
the services, not only as to the result to be accom- plished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. * * *
We have found that TLC had the right to, and did, direct and
control the work and conduct of each driver-employee.43 Thus,
TLC had the right to, and did, direct and control each driver-
employee as to the operation and the loading and unloading of the
truck of the trucking company client that leased such driver-
employee from TLC and as to the details and means by which that
operation and that loading and unloading were to be accomplished.
The TLC driver handbook, which TLC gave to each driver-employee
when it hired such driver-employee, contained TLC’s detailed
instructions that it required each driver-employee to follow with
respect to, inter alia, fueling the trucks, starting the trucks’
engines, hooking up the trucks to trailers, parking the trucks,
driving the trucks to achieve maximum fuel savings, braking the
trucks, operating trucks in cold weather, departure times of the
trucks, and loading the cargo on and unloading it off the
43 The exclusive lease agreement provided that TLC “shall in its absolute discretion, * * * direct the work and conduct” of each driver-employee. - 56 -
trucks.44
Moreover, the driver contract, which each driver-employee
signed when TLC hired such driver-employee, required each driver-
employee to attend each year at least two safety meetings that
TLC sponsored, to complete any paperwork that TLC (or its affili-
ates) requested on a daily basis or as directed, and to perform
any work that TLC required of such driver-employer without
letting any of his or her personal problems, including attitude,
affect such performance.
On the record before us, we find that TLC had the right to
control each driver-employee within the meaning of section
31.3121(d)-1(c)(2), Employment Tax Regs. The dispatching func-
tions (i.e., route assignments, directions as to the loads
assigned and the times when such loads had to be delivered, and
any customer instructions relating to such loads) that each of
TLC’s trucking company clients performed did not give such
trucking company client control over each driver-employee within
the meaning of those regulations.
On the record before us, we find that TLC’s right to direct
and control the work and conduct of each driver-employee is a
factor evidencing that TLC was the employer of each driver-
44 See supra note 11. - 57 -
Hiring of Each Driver-Employee
Petitioner argues that TLC exercised only an advisory role
in hiring each driver-employee. Petitioner also points out that,
when a trucking company became a client of TLC, the truck drivers
who had worked for that trucking company continued performing
work at that trucking company client as driver-employees.
Respondent counters that the exclusive lease agreement
provided that TLC had the sole and absolute authority to hire
each driver-employee and that TLC did not hire a truck driver as
a driver-employee until he or she passed TLC’s screening and
approval process. According to respondent, TLC’s screening and
approval process was no formality, and in fact TLC rejected 10 to
15 percent of the truck drivers whom its trucking company clients
referred to it.
We have found that TLC had the sole and absolute authority
to hire each driver-employee. Before TLC hired a truck driver as
a driver-employee, such truck driver had to pass TLC’s screening
and approval process. TLC rejected 10 to 15 percent of the truck
drivers whom its trucking company clients referred to it.
Moreover, TLC hired approximately 25 percent of its driver-
employees through its own recruitment efforts. Ms. Fiereck, the
president of Parkway, testified that TLC, and not Parkway,
decided whether or not it would hire truck drivers whom Parkway - 58 -
referred to TLC.45
On the record before us, we find that TLC’s sole and abso-
lute authority to hire each driver-employee is a factor evidenc-
ing that TLC was the employer of each driver-employee.
Source of the Instrumentalities and Tools
Petitioner argues that each trucking company client provided
the tools and instrumentalities of each driver-employee’s work
because such trucking company client owned or leased the trucks
that such driver-employee drove.
Respondent counters that “The fact that the Drivers did not
provide their own equipment and facilities * * * is of little
significance in determining by whom they were employed.”
We have found that TLC was in the business of leasing
driver-employees, and not in the trucking business. In contrast,
each trucking company client was in the trucking business and
needed to own or lease one or more trucks in order to conduct
that business.
On the record before us, we find that each trucking company
client’s owning or leasing the truck driven by each driver-
employee whom it leased from TLC is a neutral factor in determin-
ing whether TLC was the employer of each driver-employee.
45 See supra note 41. - 59 -
Right to Assign Additional Projects to Each Driver-Employee
Petitioner argues that while TLC was leasing a driver-
employee to a trucking company client, TLC had no right to lease
According to petitioner, each driver-employee was effectively
assigned to only one trucking company client.
Respondent counters that the exclusive lease agreement gave
TLC the right to lease a driver-employee to more than one truck-
ing company client and thereby assign additional projects to such
We have found that while TLC was leasing a driver-employee
to a trucking company client, TLC had the right to lease that
driver-employee to another trucking company client and thereby
assign additional projects to such driver-employee. The parties
agree that, once TLC assigned a driver-employee to a trucking
company client, TLC did not reassign such driver-employee to
another trucking company client without permission from the
trucking company client to which TLC had assigned such driver-
employee. Such a practice of TLC was, we believe, a sound
business practice. TLC, like any business, was interested in
accommodating, to the extent feasible, the requests of its - 60 -
clients.46
On the record before us, we find that TLC’s right to lease a
driver-employee to a trucking company client while it was leasing
such driver-employee to another trucking company client and
thereby to assign additional projects to such driver-employee is
a factor evidencing that TLC was the employer of each driver-
Employee Benefits For Each Driver-Employee
Petitioner does not address TLC’s sponsorship of certain
employee benefits with respect to which each driver-employee made
payments through payroll deductions, including: (1) A section
401(k) plan; (2) a section 125 flexible benefit plan; and
(3) group or individual health insurance.47
On the record before us, we find that TLC’s sponsorship of
certain employee benefit plans for the driver-employees is a
46 We note that TLC frequently was successful in reassigning a driver-employee from one trucking company client that no longer wished to use such driver-employee to another trucking company client. TLC also reassigned to another trucking company client any driver-employee who no longer wished to work with a particu- lar trucking company client to which TLC had assigned such driver-employee. 47 Certain trucking company clients paid at least part of the premiums associated with the health insurance plan that TLC sponsored for the driver-employees whom TLC leased to them. See supra note 13. TLC paid the premiums associated with the $5,000 group term life insurance policy provided for each driver-em- ployee. - 61 -
Authority To Determine Driver-Employee’s Vacation
Petitioner argues that each trucking company client, and not
TLC, had the authority to determine whether to permit a driver-
employee whom TLC leased to such trucking company client to take
any vacation days.
Respondent does not dispute that each trucking company
client had such authority. Instead, respondent maintains that
determining whether to permit a driver-employee to take vacation
days “is, like dispatching, a function which must necessarily be
performed by the Trucking Company and therefore has little
bearing on which party is the employer.”
client’s authority to determine whether to permit a driver-
employee whom TLC leased to it to take any vacation days is a
factor evidencing that each trucking company client was the
employer of each driver-employee.
Method of Payment
Petitioner argues that “It is clear that the source of the
funds used to meet [TLC’s] payroll obligations was from income
earned by the Trucking Companies.” That is because, according to
petitioner, “TLC required the Trucking Companies to wire transfer
the funds to TLC before TLC would issue payroll.” Petitioner
also points out that, in order to ensure that TLC had sufficient - 62 -
funds to pay TLC’s payroll obligation, the exclusive lease
agreement required each trucking company client to pay a $650
deposit to TLC, an amount TLC intended to approximate TLC’s
payroll obligation for each driver-employee for one week.
Respondent counters that “the source of the funds used by
the Trucking Companies to pay TLC” is irrelevant because “Solvent
businesses necessarily pay recurring expenses out of income.”
According to respondent, what is relevant is that “there was no
escrow or reimbursement arrangement, only the payment of a flat
fee.”
We have found that, for each payroll period with respect to
each driver-employee, TLC was obligated to, and did, pay such
driver-employee his or her net wages and any per diem amounts,
regardless of whether the trucking company client to which TLC
leased such driver-employee paid TLC the lease fee. We have also
found that each payroll period each trucking company client paid
TLC a lease fee that was not broken down into component parts,
which TLC used to cover its costs and generate a profit. The
method by which each trucking company client paid TLC the lease
fee to compensate TLC for leasing driver-employees to such
trucking company client is not a factor indicating that each
trucking company client, and not TLC, was the employer of the
driver-employees whom it leased from TLC. It is common business
practice for a business to use moneys received from its clients - 63 -
or customers as payments for services or goods in order to cover
its expenses.
In order to ensure that TLC had sufficient funds to pay
TLC’s payroll obligation, each exclusive lease agreement required
each trucking company client to make a $650 deposit per truck
with TLC. The $650 deposit that each trucking company client
paid to TLC did not ensure that TLC had sufficient funds to pay
TLC’s payroll obligation with respect to each driver-employee
whom it leased to such trucking company client where (1) such
trucking company client selected a payroll period that covered
more than one week and/or (2) such driver-employee was entitled
to a batch report lump sum amount that was greater than $650 per
payroll period.
On the record before us, we find that the method by which
each trucking company client paid TLC a lease fee to compensate
TLC for leasing driver-employees to such trucking company client
is a neutral factor in determining whether TLC is the employer of
each driver-employee. On that record, we further find that TLC’s
payment of each driver-employee’s net wages and any per diem
amounts is a factor evidencing that TLC was the employer of each
Tax Treatment of Each Driver-Employee
Petitioner does not address TLC’s tax treatment of each
driver-employee. With respect to each driver-employee, for each - 64 -
payroll period TLC was obligated to, and did, pay such driver-
employee his or her net wages and any per diem amounts as well as
the employer’s share of employment taxes, withhold and pay the
driver-employee’s share of employment taxes, withhold and pay
Federal and State income taxes, make daily electronic funds
transfers of the appropriate amounts of such taxes to the IRS and
appropriate State agencies, and pay workers’ compensation insur-
ance premiums.
On the record before us, we find that TLC’s tax treatment of
each driver-employee is a factor evidencing that TLC was the
employer of such driver-employee.
Work of Driver-Employee as Part of Regular Business of TLC
Petitioner argues that each driver-employee was “an integral
part of the regular business” of the trucking company client to
which TLC leased such driver-employee and that each driver-
employee played “no role in the daily function of TLC’s business”
of providing “back office functions such as payroll and benefits
administration.”
Respondent counters that, as reflected in the consolidated
tax return (consolidated return) that petitioner filed for each
of the taxable years at issue, the leasing of driver-employees
was TLC’s business, and the deduction that petitioner claimed for
each of the taxable years at issue for TLC’s expenses relating to
the driver-employees was the largest deduction that petitioner - 65 -
claimed in its consolidated return for each such taxable year.
We have found that each truck driver that TLC hired as a
driver-employee played an integral role in TLC’s business of
leasing driver-employees to its trucking company clients. The
exclusive lease agreement provided in pertinent part:
Lessor [TLC] hereby leases to Lessee [trucking company client] those drivers in the employment of Lessor during the term of the Agreement. * * *
Lessor agrees to use its reasonable best efforts in furnishing Lessee with drivers as may be requested from Lessee from time to time during the term of this Agreement. * * *
The arrangement between TLC and each trucking company client
was a driver-leasing arrangement, and not merely the provision of
“back office functions”. Each trucking company client could have
conducted its trucking business by procuring the services of
truck drivers to use in that business by hiring them directly
and/or by leasing them from a person engaged in the driver-
leasing business. TLC could not have conducted its business of
leasing truck drivers without the driver-employees whom it leased
to its trucking company clients.
On the record before us, we find that the integral role that
each driver-employee played in TLC’s business of leasing driver-
employees to its trucking company clients is a factor evidencing
that TLC was the employer of each driver-employee. - 66 -
Duration of the Relationship Between a Driver-Employee and a Trucking Company Client
Petitioner argues that “as between the Trucking Companies
and their drivers, their relationship was of indefinite dura-
tion”. Petitioner points out:
when a Trucking Company entered into a Lease Agreement with TLC, the existing drivers would continue to drive for the Trucking Company. * * * Moreover, upon cancel- lation of the Lease Agreement with TLC, the drivers typically would stay with the Trucking Company. * * * Many drivers have long-term relationships with the Trucking Companies that pre-date the Lease with TLC and continue after termination of the Lease Agreement. * * *
Respondent counters that “the duration of the relationship
is a factor which is of little significance in determining which
party was the employer.” Respondent points out that TLC fre-
quently was successful in reassigning to another trucking company
client a driver-employee whom a trucking company client did not
wish to continue leasing from TLC.
Petitioner does not explain what it means when it argues
that the “relationship” between a trucking company and its
drivers was of indefinite duration. We presume that petitioner
means that after a trucking company entered into an exclusive
lease agreement with TLC each driver who previously worked for
such trucking company continued to perform services for such
company pursuant to the arrangement with such company that
existed before it entered into such lease agreement with TLC. We
reject any such argument. We have found that, when each trucking - 67 -
company entered into an exclusive lease agreement with TLC, such
trucking company terminated the employment arrangement that it
had with all of the truck drivers who previously worked for such
trucking company.
In the instant case, it is the nature, and not the duration,
of the relationship between a driver-employee and TLC and the
relationship between a driver-employee and a trucking company
client that determines whether TLC or such trucking company
client is the employer of such driver-employee.
On the record before us, we find that TLC’s leasing a
driver-employee to a trucking company client for which such
driver-employee had worked before such trucking company client
entered into an exclusive lease agreement with TLC is a neutral
factor in determining whether TLC was the employer of such
Termination of the Employment of a Driver-Employee
Petitioner contends that, without exception, the trucking
company client made the decision to terminate the employment of
any driver-employee whom TLC leased to it. Petitioner points out
that each trucking company client was in the best position to
evaluate each driver-employee’s performance and therefore to
decide whether to terminate the employment of a driver-employee.
provided that TLC, and not each trucking company client, had the - 68 -
sole and absolute authority to terminate the employment of each
to terminate each driver-employee’s employment with TLC. Peti-
tioner’s argument confuses a trucking company client’s right to
decline using a particular driver-employee whom TLC wanted to
lease to it with the termination by TLC of such driver-employee’s
employment with TLC. Petitioner’s argument also ignores that TLC
frequently was successful in reassigning a driver-employee from
one trucking company client to another trucking company client.
That a trucking company client did not wish to use a particular
driver-employee did not mean that TLC terminated such driver-
employee’s employment with TLC. TLC could have reassigned, and
frequently did reassign, such a driver-employee to another
trucking company client.
lute authority to terminate each driver-employee’s employment
with TLC is a factor evidencing that TLC was the employer of each
Opportunity for Profit and Risk of Loss
Petitioner argues that TLC’s opportunity for profit was
“from its payroll and payroll-related services.” Petitioner also
points out that each exclusive lease agreement contained an
indemnification provision (indemnification provision) which - 69 -
provided in pertinent part:
Lessor shall not be responsible or held liable for any injury or damage to person or property resulting from the use, misuse or failure of any equipment used by Lessee and utilized by Lessor’s employees in the performance of its services to be provided herein. In this respect and in all other respects, Lessee shall indemnify Lessor against all liability or loss from and against all claims or actions based upon or arising out of damage or injury (including death) to persons or property caused by or sustained in the connection with the performance of the Agreement or by conditions created thereby or based upon any violation of any local, state or federal rule, regulation, ordinance or statute and the defense of any such claims or actions, except only as to injuries sustained by Lessor’s em- ployee, as a result of such employee’s negligence or wrongful act of the employee.
Lessor shall not be responsible for loss or damage to equipment or cargo of Lessee by reason of collision, fire, flood, windstorm, explosion, or other casualty.
In this respect and in all other respects Lessee shall indemnify Lessor against all liabilities or losses, including but not limited to those liabilities or losses described immediately above.
Respondent counters that petitioner “fails to distinguish
between losses incurred in the business of trucking and losses
incurred in the business of leasing employees.”
We turn first to the indemnification provision on which
petitioner relies. We find that such indemnification provision
may be read to support the respective positions of both parties
in the instant case. The indemnification provision on which
petitioner relies may be construed as implicitly acknowledging
that, absent such provision, TLC, as the employer of each driver-
employee whom it leased to a trucking company client, would have - 70 -
been responsible, presumably under the doctrine of respondeat
superior or a similar doctrine, for all liabilities and losses
arising from the negligent and/or wrongful acts of such driver-
employee. However, each trucking company client apparently
received no consideration for its agreement under the indemnifi-
cation provision on which petitioner relies to indemnify TLC for
liabilities and losses arising from the negligent and/or wrongful
acts of each driver-employee whom it leased from TLC, which may
be construed as implicitly acknowledging that, at least with
respect to such liabilities and losses, such trucking company
client did not consider TLC to be the employer of such driver-
We turn now to petitioner’s argument that TLC’s opportunity
for profit was “from its payroll and payroll-related services.”
We reject petitioner’s characterization of the services that TLC
provided to its trucking company clients as payroll and payroll-
related services. We have found that TLC was in the business of
leasing driver-employees to trucking company clients. Nonethe-
less, we find merit in petitioner’s suggestion that TLC’s oppor-
tunity for profit from TLC’s business was limited. That was
because the amount of TLC’s gross profit under an exclusive lease
agreement with a trucking company client was not affected by any
changes (e.g., increasing or decreasing the per diem percentage)
in the factor used to compute the lease fee to which TLC was - 71 -
entitled under such lease agreement. The factor, although not
broken down into component parts, was calculated to produce a
lease fee that included, inter alia, a fixed amount for TLC’s
gross profit. It is also noteworthy that TLC’s risk of loss from
its driver-leasing business was limited to the risk that it would
have to pay TLC’s payroll obligation with respect to each driver-
employee for a payroll period, regardless of whether a trucking
company client paid TLC the payroll period net lease fee due for
such payroll period.48
On the record before us, we find that the indemnification
provision on which petitioner relies, which we have found sup-
ports the respective positions of both parties in the instant
case, is a neutral factor in determining whether TLC was the
employer of each driver-employee. On that record, we further
find that TLC’s limited opportunity for profit and limited risk
of loss in its driver-leasing business is a factor evidencing
that each trucking company client, and not TLC, was the employer
of each driver-employee.
48 Although each exclusive lease agreement required each trucking company client to make a $650 deposit with TLC, that deposit did not ensure that TLC had sufficient funds to pay TLC’s payroll obligation with respect to each driver-employee whom it leased to such trucking company client where (1) such trucking company client selected a payroll period that covered more than one week and/or (2) such driver-employee was entitled to a batch report lump sum amount that was greater than $650 per payroll period. - 72 -
Per Diem Letters
Petitioner argues that TLC’s trucking company clients “were
well aware of the total amount of per diem they paid and their
responsibility to limit their deduction under Section 274(n)”
because TLC sent each trucking company client a per diem letter
for each of the taxable years at issue.
Respondent counters that TLC did not inform each trucking
company client of the section 274(n)(1) limitation prior to such
trucking company client’s entering into the exclusive lease
agreement with TLC.
We have found that the exclusive lease agreement was silent
as to (1) any per diem amounts that TLC was to pay a driver-
employee to cover such driver-employee’s food and beverage
expenses while traveling away from home and (2) the section
274(n)(1) limitation. We have also found that there were no
agreements between TLC and any trucking company client regarding
TLC’s leasing driver-employees to such trucking company client
other than the agreement set forth in the exclusive lease agree-
ment. We view the per diem letters that TLC sent to its trucking
company clients as nothing more than a self-serving attempt by
TLC to bolster petitioner’s position in the respective consoli-
dated Forms 1120 that it filed for the taxable years at issue
that the section 274(n)(1) limitation does not apply to the per
diem amounts that TLC paid to its driver-employees. In this - 73 -
regard, we note that at least certain of the trucking company
clients to which TLC sent the per diem letters did not consider
such letters to be binding on them, since such trucking company
clients did not take the section 274(n)(1) limitation into
account in their respective tax returns.49
On the record before us, we find that TLC’s sending a per
diem letter to each trucking company client is a neutral factor
Based on our examination of the entire record before us, we
find that TLC was the employer of each driver-employee. On that
record, we further find that the section 274(n)(1) limitation
applies to the per diem amounts that TLC paid to its driver-
We have considered all of the contentions and arguments of
petitioner and respondent that are not discussed herein, and we
find them to be without merit, irrelevant, and/or moot.
To reflect the foregoing,
Decision will be entered
for respondent.
49 The record establishes that TLC’s trucking company clients NBS Trucking, Joe Hix Trucking, Blachowske Truck Line, Inc., Jones Brothers Trucking, Inc., Lake State Transport, Inc., Schak Trucking Inc., and Parkway Auto Transport received respective notices of deficiency in which respondent determined that they had failed to take into account the section 274(n)(1) limitation. - 74 -
Appendix
TLC DRIVER HANDBOOK--TABLE OF CONTENTS
TRANSPORT LEASING/CONTRACT, INC.
GLOSSARY OF TERMS INTRODUCTION DRIVERS CREED DISPATCH CALL-IN GENERAL INFORMATION
GENERAL OPERATION
FUELING PARKING STARTING ENGINE EQUIPMENT FAILURES ON ROAD HOOKING UP TO TRAILER DRIVING FOR MAXIMUM FUEL SAVINGS BRAKING MISCELLANEOUS COLD WEATHER OPERATION DEPARTURE TIMES LOADING AND UNLOADING COUNTING WEIGHING YOUR LOADS SLIDING FIFTH WHEELS SLIDING THE TRAILER TANDEMS OVERAGES AND SHORTAGES LATE DELIVERY HAZARDOUS MATERIALS CLAIM PREVENTION
OPERATIONS (VANS AND REEFERS [refrigerated trailers])
HOOKING UP TO TRAILER REFRIGERATION UNIT OPERATION TRAILER HEIGHT COUNTING SEALS LOADING UNLOADING WEIGHING LOADS FORKLIFTS PALLETS OVERAGES AND SHORTAGES SEALS (FURTHER THOUGHT) - 75 -
CLAIM PREVENTION THERMOSTAT ON UNIT RECOMMENDED PRODUCE PROCEDURES HOW TO HANDLE DIFFERENT PRODUCE PRODUCTS MISCELLANEOUS PRODUCE ANY LOAD
OPERATIONS (TANK TRAILERS)
LOADING AND MAKING A DELIVERY SMOKING SPILLS AND MIXES IN THE EVENT OF A SPILL IN THE EVENT OF A TOXIC SPILL SPILL AND MIX REPORTING RAILROAD CROSSINGS USE OF SPECIAL EQUIPMENT TRAILERS IN SHOP SPEED WITH TANKS PLACARDING
OPERATIONS (FLATS & DROPS)
CARGO CLAIM PREVENTION PRE-LOADING INSPECTIONS LOADING CHAINING INSPECTIONS DURING TRIP INSPECTION AT DELIVERY TARPING SHORTAGE HIGH LOADS & OVERHEAD OBSTRUCTIONS PERMIT LOADS - PRECAUTIONS SPECIALIZED EQUIPMENT LOAD TRANSFERRING (FORKLIFTS) INTRODUCTIONS TO THE SAFETY SECTION WHAT TO DO IN CASE OF AN ACCIDENT MEETING OTHER VEHICLES PASSING BACKING CLEARANCES RAIL ROAD CROSSINGS SPEED TAILGATING RIGHT OF WAY STOPPING & PARKING TURNS TOP 10 DRIVING ERRORS - 76 -
MIRRORS FIRE PREVENTION AND FIRE FIGHTING HAZARDS REQUIRING EXTRA PRECAUTION WINTER DRIVING TIP PERSONAL SAFETY TIPS DEFENSIVE DRIVING MOMENTUM
OTHER IMPORTANT TLC INFORMATION
PAYROLL ADVANCES PHONE CALLS MOTELS VALUABLES UNAUTHORIZED PASSENGERS ROUTES PATIENCE PROBATION GENERAL CONDUCT COMPENSATION
NOTE: ALL REFERENCES TO “DISPATCH” IN THIS MANUAL ARE REFERENCES TO LESSEE DISPATCH.
Related
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