Labor Services Company Argues Per Diem Wages not Subject to Employment Taxes

Worldwide Labor provided temporary skilled labor to Caterpillar Inc. Worldwide Labor paid its employees an hourly wage and reimbursed employees living more than 100 miles from the Caterpillar site amounts for lodging, meals, and incidental expenses. Non-local workers received raises in the per diem and local employees who received no per diem received raises in their salaries. Because the per diem paid to non-local employees was computed on both regular and overtime hours, employees who were away from home for the same amount of time received different per diem payments. On audit, the IRS determined that Worldwide Labor was required to pay tax on the per diem payments and assessed additional employment taxes. Worldwide Labor paid the assessment for one employee and filed a refund claim. The IRS denied the claim and Worldwide Labor sued to recover the amount it paid. The government counterclaimed for the unpaid balance of the assessments for the rest of Worldwide's employees.

A U.S. district court granted summary judgment to the government and held that the per diem payments to Worldwide Labor employees were wages and ordered the company to pay the remaining employment tax assessments. The court explained that to avoid classification of the per diem payments as wages, the travel expense reimbursements had to be made under an "accountable plan" as defined in section 62. For a plan to be accountable, the court noted that a connection must exist between the amount reimbursed and the expense incurred. Also, the employee must substantiate the expense to the employer and return amounts received for nonqualified expenses. The court held that Worldwide failed the business connection test, which meant that its reimbursement scheme was a nonaccountable plan. The court also found that Worldwide never required its employees to substantiate their expenses or to return payments. (For a summary, see Tax Notes, Jun. 18, 2001, p. 2008; for the full text, see Doc 2001-16077 (21 original pages) [PDF] or 2001 TNT 111-11 .)

Worldwide Labor argues that the reasonableness of its expectations and calculations with respect to its employees' travel expenses is a question of fact for the jury. The company insists that it presented sufficient evidence that it met the requirements of an accountable plan so as to overcome the government's motion for summary judgment. The company emphasizes that its per diem payments meet both the business connection and substantiation requirements of an accountable plan. It also notes that its employees were not required to return accounts in excess of their actual expenditures because their per diem allowance was deemed substantiated. Finally, Worldwide Labor contends that a substantial understatement penalty should not have been assessed against it because there was a reasonable cause for the understatement.

[1] The undersigned counsel of record certifies that the following listed persons have an interest in the outcome of this case. These representations are made in order that the judges of this Court may evaluate possible disqualifications or recusal.

Leonard D. Van Slyke, Jr., Counsel for Plaintiff-Appellant

[2] Pursuant to Local Rule 28.2.4 of this Court, Worldwide Labor Support of Mississippi, Inc, as Appellant herein, respectfully informs this Court that it believes that oral argument in this case would be beneficial because this case involves a matter of first impression under current statutory law in this Circuit and has the potential to impact the employee reimbursement and travel allowance plans of many types of businesses across the nation. Further, an affirmance of the District Court would create a direct conflict with the holdings of the Eleventh Circuit and Federal Circuit Courts of Appeal on the same issue.

TABLE OF CONTENTS

STATEMENT OF JURISDICTION

[3] Appellant, Worldwide Labor Support of Mississippi, Inc., ("Worldwide") brought this action for a refund of employment taxes in the United States District Court for the Southern District of Mississippi ("District Court") pursuant to 28 U.S.C. sections 1340, 1346, and 1402. On May 15, 2001, the District Court issued and Opinion and Order ("Order") granting the Defendant's ("Government") Motion for Summary Judgment and denying Plaintiff's Motion for Summary Judgment. The District Court entered a Judgment in favor of the Government on Worldwide's claim for a refund of certain taxes and on the Government's counterclaim for additional employment taxes for the 1995 tax year on June 14, 2001. This is the final decision of the District Court that disposes of all of the claims of all of the parties. On July 10, 2001, Worldwide filed a timely notice of appeal. Rec. Ex. P-8. Jurisdiction is conferred on this Court pursuant to 28 U.S.C. section 1291.

II.

STATEMENT OF THE ISSUES

A. Whether the reasonableness of Worldwide's expectations and

STATEMENT OF THE CASE

[4] In 1995, Worldwide Labor Support of Mississippi provided temporary skilled labor to companies in need of such service. Like many other employers in the temporary skilled labor industry, Worldwide reimbursed its employees who worked away from home for their lodging, meals, and incidental expenses. These reimbursements were paid in the form of a flat rate per diem based on the number of hours the employee worked. The Government, by and through the Commissioner of the Internal Revenue ("Commissioner"), recharacterized those non-taxable expense reimbursement payments as taxable wages and assessed additional employment taxes, penalties, and interest against Worldwide for all four quarters of the 1995 tax year.

[5] Worldwide paid the amount assessed for one employee in each quarter and filed a claim for a refund of the amount paid. Rec. Ex. P-33-56. Worldwide's payment represented the portion of the Government's assessment attributable to employee David Ray for each quarter of the 1995 tax year. The Government denied the refund claim. Rec. Ex. P-57. Worldwide then filed suit to recover the amounts it paid, and the Government counterclaimed for the amounts it claims to be due with respect to the remaining Worldwide employees. Rec. Ex. P-59-63. Both Worldwide and the Government filed Motions for Summary Judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure on the ground that there was no genuine issue as to any material fact in the case.

[6] On May 15, 2001, the District Court issued an Opinion and Order granting the Government's Motion for Summary Judgment and denying Worldwide's Motion for Summary Judgment. In its Order, the District Court found, inter alia, that Worldwide's reimbursement plan was not an accountable plan because Worldwide's expectations and calculations with respect to anticipated employee travel expenses were not reasonable and, alternatively, that the expenses were a substitute for compensation. On June 14, 2001, the District Court entered a Judgment denying Worldwide's claim for a refund and granting the Government's counterclaim for additional employment taxes, interest and penalties. Worldwide now appeals to the Fifth Circuit Court of Appeals from this Order and Judgment.

IV.

STATEMENT OF THE FACTS

[7] Worldwide is a closely-held Mississippi corporation located in Pascagoula, Mississippi. Worldwide has been providing temporary skilled labor to industrial and commercial companies since its inception. Rec. Ex. P-67. In 1995, Worldwide employed a large number of skilled industrial employees which it leased to the Caterpillar Company in Aurora, Illinois on a temporary basis. Rec. Ex. P-69.

[8] Some of the employees leased to Caterpillar were employees who lived within 100 miles of the job-site and could return home each day. Rec. Ex. P-68. These employees received only wages. Rec. Ex. P-68. Most of the employees, however, lived more than 100 miles from the job-site and remained at the Caterpillar job site seven days a week. Rec. Ex. P-68. Like any other business traveler, these employees incurred duplicate living expenses. These duplicate living expenses consisted of lodging, meals, and incidental expenses incurred while working a long distance from home. Rec. Ex. P-68.

[9] Worldwide reimbursed its non-local employees on a per diem basis for their lodging, meals, and incidental expenses incurred while away from home pursuant to a plan that had been in existence since its inception. Consistent with other temporary skilled labor employers in the region, Worldwide paid each non-local employee a per hour per diem, in addition to wages, as an expense reimbursement. Rec. Ex. P-69, 70, 87. The per diem rate was increased twice, but never exceeded $7.00 per hour. Rec. Ex. P-68. The employees received the payments for wages and the per diem together in one weekly paycheck. However, Worldwide's records and Company Policy Requirements indicated a clear separation of employee wages versus per diem payments. Rec. Ex. P-96, 97, 102-112.

[10] Wayne Cook, Jr. has worked in the temporary skilled labor industry for ten years and has been the president of Worldwide since 1995. Rec. Ex. P-65, 67. In 1995, Mr. Cook was aware that many other temporary skilled labor employers reimbursed their employees for expenses based an hourly per diem rate and had been doing so for many years. Mr. Cook understood that reimbursing employees on a hourly per diem basis for their expenses was the standard business practice in the temporary skilled labor industry. Before setting the hourly per diem rates, Worldwide surveyed the cost of lodging and meals at the job site. Rec. Ex. P-66, 67, 69. Worldwide contacted the motels and chamber of commerce in Aurora, Illinois regarding the cost associated with temporarily living in the area. Rec. Ex. P-67, 69. Mr. Cook analyzed the federal per diem rates for the Aurora area published by the Government and compared those figures to the per diem amounts paid to the Worldwide employees. Rec. Ex. P-69. This analysis revealed that the amounts paid, or to be paid, by Worldwide to its employees were consistently less than the federal per diem rate. ¹ Rec. Ex. P-114-209. From this research and analysis, Worldwide reasonably calculated the per diem payments not to exceed the amount of the employees' anticipated expenditures. Rec. Ex. P-210.

[11] Worldwide made per diem payments for the business purpose of providing meals, lodging and incidental expenses to its employees who were working away from home. Rec. Ex. P-69. The per diem was only paid to employees whose home base was 100 miles or more from the work-site. Rec. Ex. P-69. The per diem was based on the number of hours the employee worked and was paid to qualified employees at a rate less than the federal lodging plus meals and incidental expenses ("M&IE") rate. Rec. Ex. P-67. See also, Footnote 1.

[12] The Government erroneously determined that the per diem payments constituted wages and assessed employment taxes against Worldwide. Worldwide paid the amount assessed for one employee in each quarter and filed claims for a refund of the amounts paid which the Government denied. Worldwide then filed suit to recover the amounts paid, and the Government counterclaimed for the amounts it claims to be due with respect to the remaining employees. Worldwide now appeals from a grant of the Defendant's Motion for Summary Judgment by the District Court. Rec. Ex. P-10-32.

V.

SUMMARY OF THE ARGUMENT

[13] The primary question in this case is whether Worldwide's per diem payments to its non-local employees were made pursuant to an accountable plan. The Worldwide per diem payments met all three requirements of an accountable plan.

[14] First, the per diem payments met the business connection requirement of an accountable plan because they were paid to employees for deductible expenses in connection with their performance of service, and the employees were reasonably expected to incur these expenses. Worldwide researched the cost of temporarily living in the area, as well as the federal per diem rate for the area, before setting the per diem rate and increases. Worldwide's President reviewed and relied on this research in determining the amount of expenses reasonably expected to be incurred by its employees and then established the hourly per diem.

[15] Second, Worldwide's per diem plan met the substantiation requirement of an accountable plan. Worldwide's per diem allowances were deemed substantiated pursuant to Rev. Proc. 94-77, 1994-4 C.B. 825, because Worldwide's expectation of anticipated employee travel expenses was reasonable.

[16] Third, Worldwide satisfied the third prong of the accountable plan test because per diem payments need not be returned to the employer when the expenses for a day are deemed substantiated. Worldwide knew before the reimbursement payment was made whether the employees had worked hours for a particular day since it had the employees' time records.

[17] Each prong of the accountable plan test ultimately relies on whether the employer reasonably anticipated and calculated the employees' expenses before reimbursing them. See, Trucks, Inc. v. U.S., 234 F.3d 1340 (11th Cir. 2000). The thought process and state of mind of the president of the company are direct evidence as to the reasonableness of these decisions. Id. These questions of reasonableness and state of mind are fact questions for the jury and should not have been decided by the District Court on Summary Judgment. Worldwide presented undisputed evidence supporting the reasonableness of its expectations and calculations, and, thus, overcame the evidentiary burden present in a Motion for Summary judgment.

[18] The District Court determined that Worldwide could not have reasonably expected its employees to incur the expenses for which they were reimbursed, and, therefore, ruled that the per diem payments were not paid under an accountable plan. However, the District Court disregarded evidence presented by Worldwide which showed the reasonableness of its expectations -- evidence that was not only credible, but also must be viewed in the light most favorable to Worldwide. More importantly, under the District Court's rationale, no hourly per diem could ever be allowable, since all hourly plans necessarily involve the possibility that workers may work more or less hours. This result is particularly harsh since these non-local employees did in fact incur duplicate living expenses. The District Court's decision penalizes Worldwide for establishing an administratively feasible and reasonable plan for reimbursing its employees' reasonable travel costs based on an hourly per diem. While the Treasury Regulations and Revenue Procedures governing accountable plans are complex and difficult to understand, it is clear that an hourly per diem is specifically allowed in certain circumstances -- circumstances which Worldwide met. Furthermore, the amount of the per diem in most cases was less than the amount established by the federal per diem rate. 41 C.F.R. section 301-7 (1994). The standard for reasonableness should not be so high as to require that the per diem result in 100% of the employee payments being below the federal per diem.

[19] For the above-mentioned reasons, the District Court erred in granting the Government's Motion for Summary Judgment; and therefore, it must be reversed.

VI.

ARGUMENT

STANDARD OF REVIEW

[20] An appellate court reviews a grant of summary judgment de novo and applies the same standard of denial of a jury trial as the trial court should. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986). Under Federal Rule of Civil Procedure 56(c), "summary judgment is proper if when viewing the evidence most favorably to the nonmoving party, 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Russell v. Harrison, 283 F.2d 283, 287 (5th Cir. 1984). To determine if an issue of material fact is genuine, the Court must decide whether "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Bache v. American Tel. & Tel., 840 F.2d 283, 287 (5th Cir.) cert denied 488 U.S. 888 (1988) citing Anderson v. Liberty Lobby, 477 U.S. 242, 251, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202, 212 (1986). Summary judgment is not appropriate if, as is the case here, there is a general disagreement as to the reasonable inferences to be drawn from the undisputed facts. Xerox v. Genmoora Corp., 888 F.2d 345, 352 (5th Cir. 1989).

A. THE REASONABLENESS OF WORLDWIDE'S EXPECTATIONS AND

[22] In Trucks, Inc. v. U.S., 234 F.3d 1340 (11th Cir. 2000), the Eleventh Circuit determined that summary judgment is inappropriate to decide whether an employer reasonably expected expenses to be incurred by its employees. In Trucks, the employer reimbursed its employees on a per diem rate based on the load revenue. Trucks, 234 F.3d at 1341. The District Court awarded summary judgment after determining that Trucks did not reasonably expect the expenses to be incurred. The Eleventh Circuit reversed, explaining that "evidence about the state of mind of the company's president, who made many of the decisions at issue here, is considered DIRECT EVIDENCE AS TO THE REASONABLENESS of her decisions, and will not be seen as merely self-serving statements." Id. at 1342 (emphasis added). "These questions of reasonableness and state of mind are proper questions for the jury and SHOULD NOT BE DECIDED ON SUMMARY JUDGMENT once Trucks has met its initial burden." Id. (emphasis added). To meet its initial burden, Trucks presented evidence of research on industry practice, proof that the per diem was less than the federal rate, and proof that the per diem was based on actual miles driven, not estimations. The Court found this evidence sufficient to create a question for the jury. Id. at 1345.

[23] In American Airlines, Inc. v. U.S., the Court of Appeals for the Federal Circuit also addressed summary judgment under facts similar to this case. 204 F.3d 1103 (Fed. Cir. 2000). American, the employer, provided a per diem allowance to its employees as travel expense reimbursements. American, 204 F.3d at 1105. The trial court determined that American did not present sufficient evidence to support a finding that it reasonably expected its employees to incur the reimbursed expenses. The Federal Circuit reviewed American's evidence of travel cost studies, the experience of American's own management, the per diem amounts paid by other airlines, and the government's own per diem rates and concluded that the evidence created a genuine question of material fact on the per diem issue. Id. The Federal Circuit reversed the grant of summary judgment, stating that American had presented sufficient evidence to create a genuine issue of material fact.

[24] Finally, in United Airlines, Inc. v. U.S., the Court of Federal Claims addressed the issue of whether an hourly per diem paid to reimburse employees for their travel expenses was exempt from tax liability. No. 97-173T, 2001 WL 904188, at *2 (Fed. Cl. Aug. 10, 2001). The court determined that this legal question hinged on whether United had an objective belief as to the reasonableness of its per diem payments. Id. The reasonableness of the employer's beliefs is a factual determination. Id. United presented evidence that it based the hourly per diem rate on travel cost studies and research, as well as its own travel experience, and that it consulted a research counselor organization. Id. at *8. The court found that United had presented sufficient evidence to show that it had an objectively valid and reasonable basis for treating the per diem payments as reimbursable expenses. Id. at *12.

[25] Just like the employers in Trucks, American, and United, Worldwide has presented evidence that it reasonably expected its employees to actually incur travel expenses and reasonably calculated those anticipated expenses. Worldwide investigated and studied the cost of temporarily living in the Aurora area, relied on the experience of the company's management team, investigated the reimbursement plans of other companies in their industry, reviewed the federal per diem rate, and relied on the comments of the non- local employees in establishing the reimbursement plan and setting the per diem rate. Rec. Ex. P-66, 67, 69, 70. As Worldwide's president, Mr. Cook's state of mind in making these decisions is direct evidence of the reasonableness of his decisions in establishing the employee reimbursement plan. In addition to the expense estimation made by Worldwide, the employees actually incurred material travel expenses, which in hindsight validates Worldwide's efforts. Rec. Ex. P-66. Consistent with the practice of the temporary skilled labor industry, Worldwide paid its non-local employees a per diem allowance to cover these duplicate expenses. The per diem was based on consistent, uniform and objective hourly rates. Furthermore, additional evidence on the reasonableness of Worldwide's expectations and calculations might be developed were it permitted to go to trial on the issue.

[26] The District Court stated that by tying the per diem to hourly amounts paid, Worldwide allowed employees who worked a few more hours to receive a larger per diem allowance and that these employees could not reasonably be expected to incur more expenses. Rec. Ex. P-24. However, the Treasury Regulations and Revenue Procedures governing accountable plans clearly contemplate a per diem based on an hourly calculation. See 26 C.F.R. section 1.62- 2(d)(3)(ii) (1994); Rev. Proc. 94-77 section 3.03(2), 1994-4 C.B. 825. Under the District Court's reasoning, no hourly per diem would ever be allowed since there will always be employees who work different numbers of hours. This rationale is not consistent with the applicable Treasury Regulation and Revenue Procedure.

[27] In addition, the District Court determined that Worldwide could not have reasonably expected that the employees' anticipated travel expenses would be reimbursed at a reasonably calculated level where there was an increase in the per diem hourly rate from $6.00 to $7.00. The District Court determined that there was no reasonable expectation that employees' actual travel expenses would increase at the time of the increase in the hourly per diem. The Court failed to appreciate that the increase in the hourly per diem left Worldwide employees short of the federal per diem rate, and thus the reimbursement was still less than what the government determined its employees needed to cover travel expenses while working away from home in the Aurora, Illinois area. The District Court's reasoning is similar to that used by the trial court in Trucks where the employees "received the 6% reimbursement even if they chose to sleep in the sleeper compartment of their trucks, rather than paying for lodging." Trucks, 234 F.3d at 1341. As the Eleventh Circuit stated, "the focus of the business connection test is on the employer's reasonable expectations, not on the [employee's] actual expenditures." Id. at 1342. The federal per diem rate is calculated not to exceed anticipated expenses for the geographical area. The reasonableness of Worldwide's per diem hourly rates is supported by the fact that the hourly per diem rate resulted in payments to Worldwide's non-local employees which were less than the federal per diem rate for over ninety percent of these employees during the tax periods at issue and less than one percent of the actual dollars paid to employees for per diem exceeded the federal rate. Therefore, it is reasonable to conclude that Worldwide reimbursed its employees for the expenses that they were reasonably expected to incur since nearly all its employees received less than the federal per diem rate.

[28] As the court found in Trucks, it is clearly possible that a jury could decide that Worldwide REASONABLY EXPECTED its employees to incur the reimbursed expenses. See, Trucks, 234 F.3d at 1343. Furthermore, questions regarding the reasonableness of Worldwide's expectations and Mr. Cook's state of mind fall within the purview of the jury. Trucks, 234 F.3d at 1344. See also United Air Lines, Inc. v. U.S., No. 97-173T, 2001 WL 904188, at *2 (Fed. Cl. August 10, 2001) (whether an employer had an objective belief as to the reasonableness of its per diem payments for travel expenses is a factual inquiry); Alabama Great Southern Railroad Co. v. Louisville and Nashville Railroad Co., 224 F.2d 1, 5 (5th Cir. 1955) (summary judgment inappropriate where "motive, intent, subjective feelings . . ." are relevant). Worldwide presented evidence sufficient to create a genuine issue of material fact on the question of whether Worldwide was reasonable. In fact, viewing the evidence in the light most favorable to Worldwide, it is likely that a jury would find that its actions were reasonable and its plan was an accountable plan. Therefore, it is clear that the District Court erred in granting the Government's Motion for Summary Judgment on issue of reasonableness.

B. WORLDWIDE PRESENTED SUFFICIENT EVIDENCE THAT IT MET THE

1. WORLDWIDE'S PER DIEM PAYMENTS MEET THE BUSINESS

An arrangement providing a per diem allowance for travel

[31] It is not disputed that the travel and meal expenses were ordinary trade or business expenses of the employees and therefore qualify as deductible expenses. See, 26 U.S.C.A. section 162. Nor is it disputed that the expenses were incurred for a business purposes while performing services for Worldwide. Both IRS Agent Wilder and Agent Nichols conceded in deposition that the per diem payments had a business purpose. Rec. Ex. P-97, 225. Therefore, the first prong of the business connection test was met.

[32] In deciding the second element of the business connection requirement, the question is not whether the Worldwide employees actually paid or incurred the expenses, but whether Worldwide REASONABLY EXPECTED the employees to incur the expenses. Trucks, 234 F.3d at 1343. As shown above, Worldwide presented sufficient evidence to preclude summary judgment on this issue. Therefore, the second prong was also satisfied for purposes of summary judgment.

[33] The requirement that the reimbursed portion be separately identified is not applicable here since Worldwide's reimbursement plan was common industry practice in December 12, 1989. Rec. Ex. P-234-235. Regulation Section 1.62-2(d)(3)(ii) allows a per diem allowance to meet the business connection requirement in one of two ways: either by separately stating the reimbursement payment or by being common industry practice in 1989. The negative implication of this section is that a per diem reimbursement plan that was common industry practice in 1989 does not have to separately state the reimbursed amount. Reading Treasury Regulation Section 1.62-2(d)(1) to create an absolute requirement to separately state reimbursement amounts would render the common industry practice clause without meaning. Since the Regulation provides an exception to the separately stated requirement for per diem allowances that were common industry practice in 1989, Worldwide has met the requirements of the business connection test.

[34] Further, even if Worldwide had been required to separately state the reimbursed amounts, it did so by separately identifying the reimbursed amounts both on its corporate records and on the employee contracts provided to each employee receiving a per diem allowance. Rec. Ex. P-102-210.

[35] Worldwide presented evidence that the custom in the employee-leasing industry was to provide a per diem allowance to leased employees. The affidavits included in Appellant's record excerpts state that as of December 12, 1989, a commonly used method of computing an employee's per diem allowance in the temporary skilled labor industry was to pay the employee a per diem based on the number of hours the employee worked. Rec. Ex. P-234-235. The Government offered no evidence to the contrary. The affidavits must be viewed in the light most favorable to Worldwide. Since Worldwide presented sufficient evidence to meet the business connection requirement, summary judgment is not appropriate on this ground.

2. WORLDWIDE'S PER DIEM PAYMENTS MEET THE SUBSTANTIATION

[37] Revenue Procedure 94-77 provides that substantiation is not necessary "if a payor pays a PER DIEM ALLOWANCE in lieu of reimbursing actual expenses for lodging, meals, and incidental expenses incurred or to be incurred by an employee for travel away from home. . . ."Rev. Proc. 94-77 section 4.01, 1994-4 C.B. 825. (emphasis added). The per diem allowance is DEEMED SUBSTANTIATED for each calender day to the extent of the lesser of the per diem allowance for such day or the amount computed at the Federal per diem rate for the locality of travel for such day. Section 3.01 of Revenue Procedure 94-77 defines a "per diem allowance" as:

a payment made under a reimbursement arrangement that meets the

[38] The uncontroverted evidence establishes that Worldwide reimbursed its employees' expenses under a service specified rate or schedule, as an hourly per diem rate was commonly used in the temporary labor industry as of December 12, 1989. As previously discussed with respect to business connection, the per diem payments were obviously made in connection with the performance of services to employees of Worldwide. Further, Worldwide produced sufficient evidence to show that the company "reasonably expected" or "anticipated" that its employees would incur these expenses for lodging, meals, and incidentals. Lastly, the allowance is undeniably paid at a flat per hour rate, and the payroll records indicate that, for the great majority of employees, the per diem allowance is below the applicable federal per diem rate. ² Pursuant to Revenue Procedure 94-77, the amount of the employees' reimbursement equal to the lesser of (1) the per diem allowance for the day or (2) the $66 per day federal per diem rate, should be deemed substantiated. Therefore, Worldwide has met the substantiation requirement under Section 1.62-2(e) for purposes of deciding a summary judgment motion.

3. WORLDWIDE EMPLOYEES WERE NOT REQUIRED TO RETURN AMOUNTS

Per diem or mileage allowances. The Commissioner may . . .

An arrangement providing per diem allowances will be treated as

[40] Worldwide employees were only reimbursed for expenses on the days they were away from home. The relevant payroll records reflect this fact. Because Worldwide reimbursed employees after the particular day of travel, and, therefore, already knew how many days had been substantiated, Worldwide met this component of the excess return requirement. Trucks, 234 F.3d at 1341.

[41] In addition, Worldwide paid the hourly per diem at a rate reasonably calculated not to exceed the amount of the employees' anticipated expenses as evidenced by the fact that the hourly per diem rate resulted in payments to Worldwide's non-local employees which were less than the federal per diem rate for over ninety percent of these employees during the tax periods at issue. Therefore, Worldwide's hourly per diem arrangement clearly falls within the safe harbor provision of 26 C.F.R. section 1.62-2(f)(2) (1994). Nevertheless, any disagreement over whether Worldwide's rate was reasonably calculated not to exceed anticipated expenses is a question for the jury.

C. A SUBSTANTIAL UNDERSTATEMENT PENALTY SHOULD NOT HAVE BEEN

VII.

CONCLUSION

[43] The District Court erred in granting the Government's Motion for Summary Judgment. The underlying question in this case is the reasonableness of Worldwide's decisions and expectations in establishing its per diem plan. This question of reasonableness is a proper question for the jury and should not have been decided on summary judgment.

[44] Further, the District Court erred in holding that Worldwide's per diem plan was not an accountable plan. The per diem payments were made for the business purpose of reimbursing an employee for the amount of expenses the company reasonably expected him to incur while working away from home. The reality of this situation is that the employees did actually incur duplicate living expenses for which they were reimbursed. The District Court's Order ignores the reality of these payments. Finally, the District Court's grant of a substantial understatement penalty should be reversed as Worldwide had reasonable cause to believe that the taxes were not due.

[45] For the above-mentioned reasons, the District Court erred in granting the Government's Motion for Summary Judgment, and, therefore, should be reversed and remanded for a jury trial.

Leonard D. Van Slyke, Jr.,

[46] I, Leonard D. Van Slyke, Jr., attorney for Worldwide Labor Support of MS, Inc., do hereby certify that I have this day caused to be served, via United States mail, postage prepaid, a true and correct copy of the above and foregoing Appeal Brief, both in paper and electronic form, upon:

Michael N. Wilcove, Esq.

Pursuant to 5th Cir. R. 32.2 and .3, the undersigned certifies this brief complies with the type-volume limitations of Fed. R. App. P. 32(a)(7).

1. EXCLUSIVE OF THE EXEMPTED PORTIONS IN 5th Cir. R. 32.2, THE BRIEF CONTAINS:

A. 6,186 a words, OR

B. ______ lines of text in monospaced typeface.

2. THE BRIEF HAS BEEN PREPARED:

A. in proportionally spaced typeface using:

Software Name and Version: Corel WordPerfect 8

in (Typeface Name and Font Size): Times New Roman 14, OR

B. in monospaced (nonproportionally spaced) typeface using:

Typeface name and number of characters per inch:

3. THE UNDERSIGNED UNDERSTANDS A MATERIAL REPRESENTATION IN COMPLETING THIS CERTIFICATE, OR CIRCUMVENTION OF THE TYPE-VOLUME LIMITS IN Fed. R. App. P. 32(a)(7), MAY RESULT IN THE COURT'S STRIKING THE BRIEF AND IMPOSING SANCTIONS AGAINST THE PERSON SIGNING THE BRIEF.

Leonard D. Van Slyke, Jr.,

² Under Treasury Regulation Section 1.62-2(i), the accountable plan rules are applied on an employee-by-employee basis. The great majority of Worldwide employees received less that the federal per diem rate of $66.00 per day or $462.00 per week. In fact, a review of the payroll records attached to the Government's Motion for Summary Judgment reveals that less than 7% of all employees received per diem payments in excess of the federal per diem rate for the week. Indeed, a calculation of the dollars paid for per diem from these records also reveal that less than one percent (0.76%) of the dollars paid for the per diem exceeded the federal per diem allowance. The extraordinary examples of two individuals who worked over eighty-hour weeks resulted in per diem payments of less than $100 over the federal per diem rate for the week. Even in these rare instances of a payment in excess of the federal per diem rate, "the failure by one employee to substantiate expenses . . . will not cause the amounts paid to other employees to be treated as paid under a nonaccountable plan." 26 C.F.R. section 1.62-2(i) (1994). This clearly shows that Worldwide's expectation that the amounts paid by per diem would be absorbed by actual expenses if one assumes that the federal per diem was not more than necessary to cover actual expenses.