Courier Can Compute Mileage Allowance on Same Basis as Compensation

Rev. Rul. 2004-1 illustrates how a mileage allowance can be computed on the same basis as compensation and still meet accountable plan requirements.

Situation 1: E, a courier company, hires employee drivers to deliver packages locally. The drivers must own or lease an automobile for use in connection with the performance of services. E charges customers for deliveries based on location, time of day, expedited service (if requested), mileage between pickup and delivery, size and weight of a package and other factors (the per-package charge is referred to as the tag rate.) The mileage component is computed as though each package were delivered separately; however, drivers often pick up multiple packages from one location, deliver them to another location and travel overlapping routes between and among customers. Thus, the tag rate may not accurately reflect the transportation expenses incurred for a particular package.

E pays drivers a commission equal to a percentage of the tag rate as compensation for services and a mileage allowance equal to a percentage of the tag rate to cover the automobile operating expenses. E determines the percentage mileage allowance annually and it remains fixed throughout the calendar year; it is based on Es review of a sample of documents submitted monthly by drivers (including receipts, logbooks and invoices) reflecting the drivers operating and fixed costs.

Law

In Shotgun Delivery, Inc., 269 F3d 969 (9th Cir. 2001), a courier company paid its drivers a commission of 40% of the tag rate. The commission was allocated between compensation paid at the minimum wage and a variable mileage reimbursement. The district court found that, because Shotguns tag rates were not based solely on distance traveled, and since Shotgun drivers could double up on deliveries, Shotguns reimbursement arrangement, was in fact, reimbursing its drivers in a manner not correlated to expenses Shotguns employees incurred or were reasonably likely to incur; Shotgun Delivery, Inc., 85 FSupp 2d 962, 965 (ND CA 2000).

Consequently, the court concluded that Shotguns reimbursement arrangement failed to meet the Regs. Sec. 1.162-2(d) business-connection requirements and held that the mileage reimbursements were paid under a nonaccountable plan. In affirming the district courts holding, the Ninth Circuit observed that such arrangements blur the fundamental distinction between taxable compensation and tax-exempt reimbursement which underpins this entire aspect of the tax system and concluded that requiring a demonstrable connection to actual business expenses prevents companies from improperly sheltering otherwise taxable compensation under the guise of reimbursement.

In Situation 1, the mileage allowance meets the business-connection requirements of Regs. Sec. 1.62-2(d), because it is paid for deductible employee business expenses reasonably expected to be incurred by the drivers. E reviews a sample of receipts, logbooks and invoices annually to estimate the drivers operating and fixed costs and, correspondingly, to set the percentage of the tag rate paid as a mileage allowance. Although the mileage allowance is computed on a basis similar to that used in computing the drivers compensation and, thus, is paid at a variable mileage rate, the percentage of the tag rate paid as a mileage allowance remains fixed throughout the calendar year. Unlike the reimbursements at issue in Shotgun Delivery, Inc., the mileage allowance here is paid for expenses reasonably expected to be incurred and does not vary inversely with the commission based on the number of hours worked.

Similarly, the mileage allowance meets the Regs. Sec. 1.62-2(e) substantiation requirements. Specifically, drivers are required to substantiate monthly the time, use and business purpose (i.e., the number of business miles traveled) for their automobiles while delivering packages. In lieu of substantiating the actual amount of a drivers deductible transportation expenses, an amount is deemed substantiated equal to the number of miles traveled multiplied by the business standard mileage rate. An allowance paid for ordinary and necessary transportation expenses that is reasonably calculated not to exceed the amount of anticipated expenses and is paid at a flat rate or stated schedule is a mileage allowance, according to Regs. Sec. 1.274-5(g) and Rev. Proc. 2003-76. Although the mileage allowance in Situation 1 is paid at a variable mileage rate, it is nonetheless computed based on a fixed percentage of the tag rate and is considered paid at a flat rate or stated schedule. Thus, drivers are deemed to have substantiated expenses at the business standard mileage rate for each mile of travel actually substantiated.

Finally, the Situation 1 mileage allowance meets the return-of-excess requirements in Regs. Sec. 1.62-2(f). E intends to pay the mileage allowance only for miles of travel substantiated by the drivers; thus, drivers are not required to return the portion of the mileage allowance exceeding the amount of expenses deemed substantiated.

The mileage allowance for local transportation expenses computed on a basis similar to that used in computing a couriers compensation may be treated as paid under an accountable plan; thus, the portion not in excess of the expenses deemed substantiated is excluded from the couriers gross income and is exempt from employment taxes. However, the portion in excess of the expenses deemed substantiated is treated as paid under a nonaccountable plan, must be included in the couriers gross income and is subject to employment taxes.

Situation 2: The facts are the same as in Situation 1 above, except E pays drivers a commission equal to z% of the tag rate, reduced by a mileage allowance equal to the number of miles traveled multiplied by the business standard mileage rate. Thus, drivers always receive z% of the tag rate, but the amount treated as a mileage allowance varies based on the number of business miles traveled and subsequently substantiated by drivers.

The reimbursement arrangement in Situation 2 does not meet the business-connection requirement of Regs. Sec. 1.62-2(d). The variable allocation between commission and mileage allowance ensures that each driver receives z% of the tag rate, regardless of the deductible employee business expenses incurred. A bona fide reimbursement arrangement must preclude the recharacterization of amounts otherwise payable as a commission as a mileage allowance; see Regs. Sec. 1.62-2(j), Example (1); H. Conf. Rept No. 100-998, 100 Cong., 2d Sess. 202206 (1988). Thus, the reimbursement arrangement in Situation 2 is a nonaccountable plan; all amounts paid under the plan are includible in the drivers gross income and subject to withholding and payment of employment taxes.

Rev. Rul. 2004-1, IRB 2004-4