Trucking Industry Overview - Significant Law and Important Issues

Issue

Brief Summary of Issue

Drivers

Sub haulers may have more than one truck and will hire other drivers for these vehicles.
In many instances these drivers are treated as independent contractors.
They are issued Forms 1099 or nothing at all.

Potential employment tax issue: Whether the drivers are independent contractors or employees?

See "Independent Contractor or Employee?" Training 3320-102 (Rev. 10/96) TPDS 842381. Available on IRS Home Page.

See I.R.C. § 3406 for backup withholding rules.

Port haulers

An area of concern is the treatment of port haulers as contract labor.

Port haulers are part of the "landbridge" operation in transporting goods from the harbor to an inland destination.

To haul freight out of the harbor, the port hauler must present a CHL card
(Customhouse license).

The license is obtained by the employing company and not the port hauler.

The port haulers will represent themselves to be employees of the company when they apply for the Cartmen/Lightermen Identification Card (Customs Form 3873) from U.S. Customs.

The U.S. Customs Service considers this to be a violation of Chapter 1,
Part 112 of the U.S. Customs Service Code, since the CHL was obtained through a misstatement of material fact.

The company represents to U.S. Customs that drivers are employees of the corporation when they are paid as independent contractors.

The issue is whether the driver is an employee or independent contractor.

See the 20 common law factors and the safe haven relief provision of IRC Section 530.

Com-Check or T-Check Account balance

Com-Check and T-Check accounts are similar to a checking account.
They are the accounts from which drivers receive advances for expenses on the road.

Taxpayers have been found to deduct all payments to Com-check and to
T-Check as an expense. In many cases the Com-check or T-check account is not listed on the balance sheet.

The issue is whether the Year-End balance in the Com-Check or T-Check Account is deductible. Another issue is whether the payments from the account are truly for a business purpose. See I.R.C. § 162.

Taxpayers have been found to use the account for personal cash.

Depreciation - Basis of Assets

A number of issues have been found in depreciation as follows:

1. Whether the basis of new equipment is reduced for the value of trade-ins, rebates etc., and that the trade-in has been removed from the depreciation schedule
2. Whether basis has been stepped up, in transfers between related parties
3. Tires. See issue (last issue in this section).
4. Taxpayers have been found to place equipment on the depreciation schedule before it is received. Example: Where tractor/trailer units were ordered in 1999 and depreciated in 1999, but received and placed in service in 2000.
5. Bonus depreciation.
6. Whet Whether 30 percent bonus depreciation is allowable where the
   taxpayer has entered into a contract for purchase of assets prior
   to 9-11-2001.
   Whether 50 percent bonus depreciation is allowable where the
   taxpayer has entered into a contract for purchase of assets prior
   to 5-6-2003.

See I.R.C. § 168

Depreciation of
Terminals, Parking lots, Docks, fences, lighting etc

New trucking terminal buildings, parking lots, lighting and etc are being constructed as companies expand.

The issue is the MACRS life that must be used for depreciation.

For an audit technique guide on Cost Segregation studies go to the Capitalization Technical Advisor web site.

Excise Tax

The following are only a few of the many Retail Excise Tax issues in trucking companies.

1. Whether the 12 percent Retail Tax applies where the taxpayer purchased a fleet of tractors and trailers excise tax-free by claiming they were to be used exclusively outside the U.S. But the taxpayer could not prove that the vehicles were licensed and used outside the U.S.
2. Whether the 12 Percent Retail Tax should be charged on items added to the truck, tractor or trailer in the first 6 months after it was purchased. For a list of typical items added, go to the trucking technical advisor web site
3. Whether the 12 percent Retail Tax should be charged where a new vehicle has been created from a glider kit.
4. Highway Use Tax Form 2290 on Heavy Vehicles e.g. truck/trailer combinations equipped to carry or haul 50,000 LBS. GVW or more. "Equipped" generally means the vehicle has a pintle hook or ball hitch which makes it capable of towing a trailer. If the combined weight of the truck and trailer exceeds 50,000 Lbs., highway use tax is due on the truck or tractor.
5. The premiums paid for certain insurance policies issued by foreign insurers may be subject to an excise tax. I.R.C. §§ 4371 and 4372
6. Excise tax on airfreight and air passengers.
7. Used oil blended with diesel fuel.
8. Whether the 12 percent Retail Tax should be charged on Auxiliary Power Units (APU's).

Forms 1099

Whether Forms 1099 are required to be issued to individual owner-operators who haul “freight”.
Payments to truck owner-operators may be excepted as “freight” under Treas. Reg. Sec 16041-3(c).
But household goods hauled by a moving company are not considered “freight”.
Letter Ruling 199932048, June 17, 1999

Fuel Surcharge

  Income –

Unreported

Owners and operators of heavy truck/tractors are paid a fuel surcharge by the companies to whom they lease their vehicles.  The companies in many cases have failed to included the fuel surcharge income on the 1099 issued to the owner/operator.  Therefore the fuel surcharge income has not been reported by the owner/operator.  Unreported fuel surcharge income can total $30,000 to $50,000 per year for one truck/tractor.  With diesel fuel at $3.00 per gallon the fuel surcharge is $0.31 per gallon.

150,000 miles driven per year X .31 = $46,500< /P >

Insurance:
Self insurance
Captive Insurance

Due to the increasing cost of insurance, many taxpayers are entering into various kinds of insurance including Self-Insurance, Captive, and Foreign Insurance.

The issue is whether the total amount billed for insurance arrangement is an insurance premium deductible under I.R.C. § 162.

Following is law related to various insurance issues:
Self-Insurance: Rev Rul. 57-485, 1957-2 C.B. 177; Rev. Rul. 60-275, 1960-2 C.B. 43; Rev. Rul. 77-316, 1977-2 C.B. 53, obsoleted by, Rev. Rul. 2001-31, 2001-1 C.B. 1348; Rev. Rul. 79-338, 1979-2 C.B. 212.

Retro Rated Insurance: Ltr. Rul. 8637003 and Ltr Rul 8638003

Captive Unrelated: Rev. Rul. 88-72, 1988-2 C.B. 31, obsoleted by, Rev. Rul. 2001-31, 2001-1 C.B. 1348

Group Captive: Rev. Rul. 78-338, 1978-2 C.B. 107, modified by, Rev. Rul. 2001-31,
2001-1 C.B. 1348 and Rev. Rul. 80-120, 1980-1 C.B. 41, modified by, Rev. Rul. 2001-31, 2001-1 C.B. 1348

With the issuance of Rev. Rul. 2001-31, 2001-1 C.B. 1348, the IRS will no longer invoke the economic family theory with respect to captive insurance transactions. The Service may, however, continue to challenge certain captive insurance transactions based on the facts and circumstances of each case. See, e.g., Malone & Hyde v. Commissioner, 62 F.3d 835 (6th Cir. 1995) (concluding that brother-sister transactions were not insurance because the taxpayer guaranteed the captive's performance and the captive was thinly capitalized and loosely regulated); Clougherty Packing Co. v. Commissioner, 811 F.2d 1297 (9th Cir. 1987) (concluding that a transaction between parent and subsidiary was not insurance).

I.R.C. § 461(h)(5) states that a deduction for a reserve for estimated expenses is not allowable.

See Rev. Rul. 81-93, 1981-1 C.B. 322, regarding a change in accounting method when a reserve is disallowed.

The premiums paid for certain insurance policies issued by foreign insurers may be subject to an excise tax. I.R.C. §§ 4371, 4372, 4373 and 4374.

Leased Employees
And
Per Diem/ Meal
Reimbursement

Small to medium size trucking companies are leasing drivers and other workers from employee leasing companies.  Approximately 50 percent of all trucking companies pay per diem (meal reimbursement) to their drivers.  Many labor leasing companies are treating up to 40 percent of driver compensation as "per diem"/meals expense, not as wages. 

ISSUES:

1. Whether payments to employees for the alleged purpose of  reimbursing travel costs are made pursuant to an accountable plan under Treas. Reg. § 1.62-2, such that they are excluded from employees’ gross income and from employment tax requirements, but are subject to the   274(n) deduction limitation.
2. Who is liable for the 50 percent reduction of meals as required by I.R.C. § 274(n), the trucking company, or the employee/labor leasing company?  
3. Whether per diem represents “meals only” or both “meals & lodging”.
4. Whether the employee leasing company has reported per diem payments from their customers as income.  A number of companies have failed to report per diem payments from customers as income and in turn have not deducted the per diem as an expense, thereby avoiding the 274(n) limitation on meal expense.
5. Whether or not an employer can pass responsibility for the I.R.C § 274(n) adjustment to their client in a 3 party relationship under I.R.C. §274(e)(3)(B)

See I.R.C. § 274(n); Rev. Rul. 2006-56, Internal Revenue Bulletin 2006-46, 11-13-2006, Rev. Proc. 2006-41, Internal Revenue Bulletin 2006-43, 10-23-2006, Rev. Proc.  96-64, 1996-2 C.B. 427; Rev. Proc. 97-59, 1997-2 C.B. 594; Rev. Proc., 2000-9, 2001-1 C.B. 280; Rev. Proc. 2000-39, 2000-2 C.B. 340; Rev. Proc. 2001-47, 2001-2 C.B. 332; Rev. Proc. 2002-63, 2002-2 C.B. 691; Rev. Proc. 2003-80, 2003-2 C.B. 1037; Rev Proc 2004-60,   2004-2 C.B. 682; Rev. Proc. 2005-10, 2005-1 C.B. 341; Rev. Proc. 2005-67, 2005-42 IRB 729 (Oct. 17, 2005); Rev. Proc. 2006-41, 2006-43 IRB 777 (Sept. 29, 2006); Rev. Proc. 2007-63, 2007 IRB LEXIS 865 (Sept. 27, 2007).  

See also Transport Labor Contract/Leasing Inc. v. Commissioner, 123 T.C. 154 (2004) ), rev'd on other grounds,  461 F.3d 1030 (8^th Cir. 2006); Boyd v. Commissioner, 122 T.C. 305 (2004); Beech Trucking Co., Inc. v. Commissioner, 118 T.C. 428 (2002). 

Leased Equipment

Equipment leases, Lease vs. purchase, Lease stripping tax shelter, TRAC Lease - Refund of residuals on lease termination are equipment leasing issues.

The most common issue is Capitalized Leases, where the lessee is not the owner for tax purposes. Only the owner may depreciate the asset.

Maintenance and
Repairs

Rebuilding of engines, tanks and cabs on tractors, and rebuilding of trailer beds, boxes and frames is a common practice in the trucking industry.

The issue is whether these costs are deductible as a current expense or are a capital expenditure.

See LaSalle Trucking Co. v. Commissioner, T.C. Memo 1963-274.

Rev. Rul. 2001-4, 2001-1 C.B. 295
Costs must be capitalized to the extent they materially add to the value of,
substantially prolong the useful life of, or adapt the airframe to a new
or different use. In addition, costs incurred as part of a plan of rehabilitation,
modernization, or improvement must be capitalized.

Assembly of glider kits into new trucks is a Retail Excise Tax issue in addition to the issue of expense vs. capital expenditure. See Treas. Reg. § 145.4052.

Penalties

Taxpayers want a deduction for fines and penalties that they pay.
Trucking companies incur traffic and weight fines regularly.

Fines should be listed, by the taxpayer on Schedule M-1, as not deductible.

The issue is whether fines and penalties are deducted. See I.R.C. § 162(f).

For instructions to find Dept of Transportation penalties on specific trucking companies go to the trucking technical advisor web site.

Prepaid Expenses

Accelerated Expenses and Timing of Income Recognition by Related Parties

The issue is whether expenses paid in the current year that are applicable to the subsequent year are deductible in the year paid.

1. Whether a trucking company is entitled to a deduction in Year 1 for 3.5 months of leased driver expenses that it prepaid by transfer of accounts receivable to a related driver leasing LLC.
2. Whether a driver leasing LLC may defer income reporting until year 2 for the prepaid income that it received from the related trucking company in Year 1.
3. If the trucking company can deduct the expense and the related driver leasing LLC can delay reporting the income, may the Service disregard the form of the transaction in order to force a matching of income with the deduction?

Transactions entered into solely for the purpose of tax avoidance, which lack any business purpose, are shams and without effect for Federal income tax purposes. Frank Lyon Co. v. United States, 435 U.S. 561 (1978); Knetsch v. United States, 364 U.S. 361 (1960). The leading case supporting the existence of a "sham transaction doctrine" is Gregory v. Helvering , 293 U.S. 465 (1935).

See I.R.C. §§ 446(e), 461 (a), 461(h), and 482; Treas. Reg. §§ 1.461-4(d) and 301.7701-3; Rev. Proc. 71-21, 1971-2 C.B. 549, and Rev. Proc. 2004-23, IRB 2004-16 785.

Rebates

It is a common practice for the manufacturers of engines, brakes, axles, tires, and other parts to offer incentives for trucking companies to specify their parts in new tractors.

All diesel engine manufacturers offer rebates if you specify their engine in at least 3 new tractors.

Some trailer manufacturers offer rebates if you purchase their trailers.

It is also common practice for fuel stops, business-to-business (B2B) internet companies and fuel cards to issue monthly rebates on fuel purchased.

Rebates should be reported as income, as a reduction of expense, or as a reduction to the cost/basis of the new asset. For a discussion of the various ways that rebates should be reported, See I.R.C. § 61; Rev. Rule 76-96, 1976-1 C.B. 23; and White v. Commissioner, 55 T.C. 739 (1971), aff'd, 458 F.2d 989 (3d Cir. 1972), cert. denied, 409 U.S. 876 (1972).

Related Party Transactions

Surtax Allocations have been found to not include all related companies.   It’s common to split a trucking company up into different entities owned by various family members.

In related party transactions the shifting of income and expense from one entity to another has been found to be a problem in the following areas:

1. Where the fair rental value of the equipment or real property is excessive (disguised dividends), the services of an engineer can be requested by submitting Form 5202.
2. Whether the rental activity qualifies as a passive activity per I.R.C. § 469(c)(2) and the income generated is passive income and is being offset against other passive losses, or are passive losses being generated to offset other passive gains.
3. Whether the shareholder materially participates in the operations of the activity per I.R.C. § 469(h) to offset losses against ordinary income.

Reserves

These issues include reserves for overcharge claims, cargo loss/damage claims, personal injury claims, workers compensation claims, and other estimated liabilities.

Sales of Assets
v. Like Kind
Exchange

The issue is whether they must report the sale and recapture depreciation, or whether they can report the sale as a like kind exchange and reduce the cost of newly acquired assets.

It is common for companies to sell their used equipment.

See I.R.C. § 1031; C.Bean Lumber Transp. Inc., vs. United States , 68 F.Supp.2d 1055
(W.D. Ark. 1999).

Tires

Taxpayers have been deducting the cost of tires on new and used trucks, tractors and trailers when the vehicles are purchased.

1. Whether the cost or fair market value of tires purchased for use on newly acquired trucks, tractors and trailers must be capitalized and recovered over an appropriate ACRS or MACRS class life or whether such cost or fair market value may be deducted in the year of purchase.
2. Whether replacement tires on leased vehicles must be capitalized and depreciated or whether they can be expensed when placed in service.

See Rev. Proc. 2002-27, 2002-1 C.B. 802.

To minimize disputes over the useful lives of original and replacement vehicle tires, the Service released Rev. Proc. 2002-27, 2002-1 C.B. 802. It permits taxpayers to treat a qualifying vehicle's tires as part of the vehicle, if they adopt the original tire capitalization (OTC) method for all qualifying vehicles.
If tires last longer than one year and a taxpayer does not adopt the OTC method it must treat tires as a separate asset from the associated vehicle and depreciate them over the appropriate MACRS recovery period (normally 5 years for trucking companies).

See CCA 200307087 issued on January 28, 2003 which relates to retread tires.

Most truck, tractor, and trailer tires last much longer than 1 year.

Effective Date

Title

Summary and Impact of Legislation

Effective
1-1-2004

Hours of Service Rules

DOT Regulations §395.3 Maximum driving time
The new rules impose three basic limits.

1. Maximum driving time is 11 hours. After 11 hours behind the wheel, the driver must have 10 hours of rest.
2. Maximum on-duty time is 14 hours. After 14 hours on duty (which may or may not include up to 11 hours of driving) the driver cannot operate a commercial vehicle until he has had 10 hours of rest. The 14-hour on duty time begins when a driver comes on duty and can only be stopped with a minimum two-hour break in the sleeper.
3. Maximum 60 hours on duty in any seven consecutive days. If the company operates 7 days per week, the maximum is 70 hours in any eight consecutive days. Drivers may restart the 7/8 day period with 34 hours or more off duty.

Effective
12-31-2000

Meal/Per diem deduction

Section 274(n)(3) provides a special rule that increases the percentage that can be deducted for meals of persons, such as truck drivers, who are subject to the hours of service limitations established by the Department of Transportation.

Meals Deductible Percentage Under 274(n)(3)
55% for years beginning in 1998, 1999
60% for years beginning in 2000, 2001
65% for years beginning in 2002, 2003
70% for years beginning in 2004, 2005
75% for years beginning in 2006, 2007
80% for years beginning in 2008, 2009

Trucking associations have lobbied for several years to return the meals deduction to 100 percent for truck drivers.

Rev. Proc.

Period

Limit

2007-63

10-01-07 to present

$52

2006-41

10-1-06 to 9-30-2007

$52

2005-67

10-1-05 to 9-30-2006

$52

2005-10

01-1-05 to 9-30-2005

$41

2004-60

10-1-04 to 12-31-2004

$41

2003-80

11-1-03 to 9-30-2004

$41

2002-63

10-1-02 to 10-31-2003

$40

2001-47

10-1-01 to 9-30-2002

$38

2000-39 

10-1-00 to 9-30-01

$38

2000-9

1-1-00   to 9-30-00

$38

9-01-99

Oak Harbor
Freight Lines vs. Commissioner

Oak Harbor Freight Lines v. Commissioner, T.C. Memo. 1999-291.Loss on Intrastate Operating Authorities are deductible in 1994.

5-23-2002

Beech Trucking v. Commissioner

Beech Trucking Co., Inc. v. Commissioner, 118 T.C. 428 (2002). Trucking corporation is the common-law employer of drivers. The per diem payments made to the drivers are for meal expenses, and that the per diem payments are subject to the 50 percent limitation of section 274(n).

4-27-2004

Boyd v. Commissioner

Boyd v. Commissioner, 122 T.C. 305 (2004). Despite the presentation of evidence as to the estimated, non-meal travel expenses incurred by drivers, the Court held that the taxpayer failed to establish a basis for deducting 80 percent of the per diem allowance paid to the drivers. Taxpayer may only deduct 50 percent of the per diem allowance paid to the drivers.

8-9-2004

Transport Labor Contract/Leasing Inc. v. Commissioner

Transport Labor Contract/Leasing Inc. v. Commissioner, 123 T.C. 154 (2004). TLC is the common-law employer of drivers and is subject to the 50 percent limitation of section 274(n). The trucking company customers are not the employer and are not liable for the 274(n) adjustment.

3-6-2003

William J. McNeill v. Commissioner

McNeill v. Commissioner, T.C. Memo. 2003-65. The Tax Court, denying a truck driver's meal and travel expenses, held that for years 1998-1999 the driver had no tax home under section 162(a)(2) and wasn't entitled to travel expenses.

9-15-2000

Marin I. & Anita J. Johnson v. Commissioner

Johnson v. Commissioner, 115 T.C. 210 (2000). Taxpayers' deduction was limited to the incidental expense portions of the applicable M&IE rates.

9-15-2000

Jim L. Westling, v. Commissioner

Westling v. Commissioner, T.C. Memo 2000-289 (2000). Taxpayer was entitled to deduct the incidental expense portion of the applicable federal per diem rates for meals and incidental expenses in § 4.03 of Rev. Proc. 96-28, 1996-1 C.B. 688

Date

Number

Description

8-18-1999

Ltr Rul 199932048 

1099's are NOT required to be issued to owner operators.

1986

8637003

Retro Rated Insurance

1986

8638003

Retro Rated Insurance

1-28-2003

CCA 200307087

Trucking companies who don't elect the safe harbor method for depreciating tires (Rev Proc 2002-27) must treat the original, replacement and retread tires as a separate asset and depreciate them under MACRS class 42.0 (5 year recovery period) if they last longer than one year.

5-12-2006

TAM 142230-05

Prepaid service expense paid to a related party is not deductible until there is a fixed liability.

5-12-2006

TAM 142802-05

Prepaid service Income is taxable when received from related company