WORLDWIDE LABOR SUPPORT OF MISSISSIPPI, INC., Plaintiff-Counter Defendant-Appellant, v. UNITED STATES of America, Defendant-Counter Claimant-Appellee, 312 F.3d 712

PATRICK E. HIGGINBOTHAM, Circuit Judge: Worldwide Labor Support of Mississippi, Inc. appeals the district court’s grant of

summary judgment to the government in the amount of $2,019,888.77 for employment taxes, accruals of interest, and statutory additions. The district court held that the hourly per diem travel expense reimbursements made by Worldwide to its non-local employees were taxable wages. We vacate the

summary judgment and remand for further proceedings. I Worldwide provides temporary skilled labor to industrial and commercial businesses, including Caterpillar, Inc. Facing labor difficulties, Caterpillar from July 1994 through December 1995 leased workers from Worldwide. Many of the workers remained at the Caterpillar job site in Aurora, Illinois seven days a week. In addition to an hourly wage, Worldwide paid an additional amount per hour to employees who lived more than 100 miles from the Caterpillar site as reimbursement for lodging, meals, and incidental expenses.

While non-local employees received two fifty-cent increases in their hourly per diem after each of their first two . months on the job, local employees to whom no per diem was paid instead received fifty-cent raises in their salaries. The per diem paid to non-local employees was computed on both regular hours and overtime hours. As a result, employees who were away from home for the same amount of time received different per diem payments because some worked more hours than others. No employment, unemployment, or income tax was paid on the amounts of these reimbursements.

The government audited the 1995 federal employment tax returns of Worldwide, determining that Worldwide was required to pay tax on the amounts of the per diem payments and assessing additional employment taxes. Worldwide paid $4,798.21, the amount assessed in each quarter for one of its employees and filed a claim for a refund of the amounts paid. The government denied the refund. On March 2, 2000, Worldwide filed a claim in federal district court requesting a refund of the $4,798.21.

The government counterclaimed for the unpaid balance of the assessments as to all of the Worldwide employees who were paid travel expense reimbursements in the four quarters of 1995. The district court granted the government’s motion for

summary judgment and entered final judgment awarding the government $2,991,925.76. Worldwide timely appealed. II The central question here is whether the monies paid on an hourly per diem basis by Worldwide to its non-local employees as reimbursed travel expenses count as “wages” which are subject to employment taxes. These payments are not subject to employment taxes if the payments are made subject to an “accountable plan” pursuant to 26 U.S.C. §§ 62(a)(2)(

A) and 62(c), as defined by Treas. Reg. § 1.62-2(c). A plan is “accountable” when (1) it covers only expenses with a business connection; (2) all expenses are substantiated to the employer; and (3) the employee is required to return to the employer any amount paid in excess of substantiated expenses. If a plan does not meet these criteria, it is considered “nonaccountable” and is subject to withholding and employment taxes. The regulations also specify how per diem arrangements such as Worldwide’s can meet these requirements.

A per diem allowance for travel expenses can meet the business connection requirement if it is “computed on a basis similar to that used in computing the employee’s wages or other compensation (e.g. the number of hours worked, miles traveled, or pieces produced)” as long as “a per diem allowance computed on that basis was commonly used in the industry in which the employee is employed” on December 12,1989. The substantiation requirement under the facts of this case is governed by rules promulgated in Rev.

Proc. 94-77, which allow the reimbursement of travel expenses under a per diem plan in lieu of the substantiation of each expense as would otherwise be required. The rules provide that the amount of a per diem allowance deemed substantiated for each calendar day “is equal to 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.” Under Rev.

Proc. 94-77, the returning amounts in excess of expenses requirement is satisfied under a per diem arrangement as long as employees are required to return allowances that “relate[ ] to days of travel not substantiated ... even though the arrangement does not require the employee to return the portion of such an allowance that ... exceeds the amount of the employee’s expenses deemed substantiated.” III This court reviews a grant of

summary judgment de novo, applying the same standard as the district court. The district court granted the government’s motion for

summary judgment because it concluded that the hourly per diem amounts paid by Worldwide were not made with the reasonable expectation that the employees would actually incur travel expenses in the amounts paid as an hourly per diem. Worldwide argues that there is a genuine issue of material fact as to whether its plan was reasonably calculated not to exceed the amount of expenses incurred by its employees.

As the government argues, however, under Worldwide’s arrangement, employees who should have been expected to incur similar travel expenses received dramatically different reimbursements because they worked more hours in the same number of days. Employees, particularly those who worked overtime, would inevitably receive reimbursements in excess of their reasonably anticipated expenses under Worldwide’s scheme. Worldwide relies on the Eleventh Circuit’s decision in Trucks, Inc. v. United States.

In Trucks, a trucking company reimbursed truckers for expenses on a per diem rate based on the “load revenue,” which was calculated “primarily by the number of miles driven, but is modified to account for weather, unloading and reloading, and road conditions in the particular’ area.” Because the truck drivers were not required to turn in receipts and received the per diem even if they slept in their trucks instead of paying for lodging, reimbursement amounts could greatly exceed expenses.

In Trucks, as here, the appeal turned “on the question of whether Trucks, Inc. reasonably anticipated and calculated the drivers’ expenses before reimbursing them.” Reversing the district court, the Eleventh Circuit concluded that “the focus of the business connection test is on the employer’s reasonable expectations, not the drivers’ actual expenditures.

These questions of reliability and state of mind fall within the purview of the jury.” Applying that analysis to the trucking company at issue in that case, the Trucks court held that “[t]he reasonableness of both Trucks’s calculations and anticipations is a jury question and not appropriate for

summary judgment because Trucks has produced some evidence that its plan met the IRS requirements at the time.” We find this reasoning persuasive. We conclude that whether the employer reasonably anticipated and calculated its employees’ travel expenses in the course of developing its reimbursement arrangement is essentially one of state of mind and that, so long as the employer produces

summary judgment evidence that amounts to more than “ ‘conclusory allegations, improbable inferences, and unsupported speculation,’ ” the issues of reasonableness and state of mind are proper questions for the jury and should not be decided on

summary judgment. It is of no moment that Trucks and the other cases cited by the parties applying Treas. Reg. § 1.62-2 all involve the transportation industry, particularly truck drivers and messengers and couriers.

Section 1.62-2 explicitly allows hourly per diem plans to qualify, under certain circumstances, as accountable plans without limitation as to the industry involved, despite the government’s claim at oral argument that

section 1.62-2’s provisions are intended for application only to truck drivers, pilots, and messengers. Moreover, there is no dispute in this case that it was the custom in Worldwide’s industry — the skilled temporary labor industry — on December 12, 1989 to use hourly per diem travel reimbursement arrangements. Applying the reasoning of Trucks, we observe that Worldwide produced considerable

summary judgment evidence of research it undertook to determine its per diem rates. In particular, Worldwide provided testimony by its president in his deposition, which describes the investigation Worldwide undertook before setting its rates. We leave to the jury the question of whether Worldwide’s reimbursements were reasonably calculated not to exceed the amount of the expenses incurred by its employees. However, the government argues that, even if Worldwide had the expectation that its payments were calculated to meet and not exceed expenses, this expectation was not reasonable as a matter of law.

This is essentially what the district court found, and is the argument urged by the dissent. It is the central issue in this case. Worldwide attempts to answer this argument by pointing to a compilation of 1995 travel expense reimbursement records in the

summary judgment evidence demonstrating that only 7.3% of its weekly reimbursements exceeded the federal weekly per diem rate and, in the aggregate for the year, its 1995 hourly per diem payments only varied from the federal weekly per diem rate aggregated over the same number of weeks by .76%.

As the government and the dissent point out, the problem with Worldwide’s argument is that the federal weekly per diem rate is not a reasonable guide because Worldwide’s own research showed that the expenses its employees would likely incur for lodging and meals at local establishments was significantly less than that provided for by the federal weekly per diem rate for the locality.

Specifically, the gow eminent argues that the federal lodging per diem for the locality is $40 per day and the meals and incidental expenses per diem is $26 per day, but Worldwide’s research showed (according to an information sheet it provided to new hires) that its employees could find motel rooms for $21.00 to $32.50 per night with up to $26 per day for meals and incidental expenses. As such, the government argues that Worldwide’s plan fails to meet the requirements of

section 1.62-2 based on Worldwide’s own research. We are not persuaded, however, that judgment as a matter of law was appropriate. A jury could find that Worldwide reasonably anticipated each employee would generally receive either $48, $52, or $56 per day in travel reimbursements for working an eight-hour day.

This is only slightly more than the $47 per day that Worldwide’s research showed that one of its employees would be required to spend if he stayed at the least expensive hotel in a double-occupancy room, is slightly less than the $58.50 per day in travel expenses Worldwide’s research showed its employee would incur if he stayed at the most expensive hotel in a single-occupancy room, and is considerably less than the $66 per day the federal government reimburses its employees working away from home in the same locality. Thus based on the

summary judgment evidence relied upon by the government, a jury could find that Worldwide’s reimbursement payments are reasonably calculated not to exceed the amount of its employees’ anticipated expenses. Moreover, the extent to which Worldwide’s expectation was not reasonable because Worldwide knew or should have known that some or even many of its non-local employees would work overtime is quintessentially a fact issue as to reasonableness and state of mind for the jury to decide based on its assessment of the witness testimony and evidence presented to it.

The government and the dissent urge that a daily per diem plan would better meet the requirements of Treas. Reg. § 1.62-2, as would an hourly per diem plan which did not reimburse based on overtime hours worked. The question before us, however, is not what plan Worldwide might have used but the conformity of the plan it did use. Any hourly per diem arrangement will not bear a strict logical relation to anticipated expenses that are incurred on a daily and not hourly basis. Yet the government’s own regulations in Treas. Reg. § 1.62-2 and Rev.

Proc. 94-77 explicitly allow for hourly per diem arrangements to qualify as accountable plans under

section 1.62-2. This argument seems to whistle past the government’s own regulations. The dissent disputes this point, arguing that flight attendants and truck drivers incur expenses that are proportional to the number of hours worked, but Worldwide employees did not. This is not the case. A flight attendant who works eight hours a day pays the same price for a hotel room as a flight attendant who works for ten hours. Insofar as some expenses are incurred on a daily-as opposed to hourly-basis, an hourly per diem arrangement will not perfectly correspond with these expenses.

Given that the regulations permit hourly per diem arrangements, the question cannot be whether the per diem perfectly corresponds to the expenses incurred but rather whether it is reasonably calculated to reimburse employees for their expenses. We believe that there is enough

summary judgment evidence here to permit the jury to determine that question. The case relied upon by the government and the dissent, the Ninth Circuit’s decision in Shotgun Delivery, Inc. v. United States, can be distinguished from the case before us. In Shotgun, a messenger and courier service employed drivers who used their own vehicles to make pick-ups and deliveries.

Shotgun billed its customers based primarily on the mileage from the pick-up to the delivery location, which did not necessarily reflect the actual driving distance because drivers often “doubled up,” carrying more than one customer’s package at a time. Shotgun also charged surcharges for waiting time, rush delivery, and excessive weight, further weakening any direct relationship between delivery charges and miles driven in making the deliveries.

Shotgun paid its drivers a commission basis, amounting to 40% of the delivery charges for the jobs they completed, but issued two checks in order to avoid employment taxes: The first check (the “wage check”) compensated the drivers, at the minimum wage, for the hours they worked. Shotgun withheld the appropriate employment taxes from the wage checks. The second check (the “mileage check”) was issued in an amount equal to 40% of the receivables on that drivers’ deliveries less the amount paid via the wage check.

In other words, the two checks together always amounted to 40% of the delivery charges attributable to that driver. Shotgun did not deduct employment taxes from the mileage checks or pay employment taxes on these amounts because it argued its reimbursement arrangement was an accountable plan under

section 1.62-2.

The Ninth Circuit distinguished Trucks, noting that “Trucks, Inc. allotted a uniform 6% of revenues on each load to reimburse driver expenses, whereas the percentage Shotgun paid as reimbursement fluctuated, with its 40% commission going first to cover wages (paid at the minimum allowed by law), and then to a variable remainder (i.e. as much as possible) paid as reimbursement.” The court concluded that “the evidence suggests that the plan’s primary purpose was to treat the least amount possible of the drivers’ 40% commission as taxable wages.” Like Trucks, the instant case is distinguishable from Shotgun.

Although there were variations among the per diem reimbursements received by individual Worldwide employees on any given day of non-local work, particularly for those who worked overtime, Worldwide’s arrangement did not admit of such a wide variance as Shotgun’s system plainly condoned. In Shotgun, there was evidence that Shotgun’s arrangement was designed primarily to hide taxable wages, a central target of

section 1.62-2. The government makes no contention that Worldwide’s plan was designed primarily for tax avoidance. IV The government argues alternatively that a portion of the payments under Worldwide’s arrangement fails to meet the deemed substantiated requirements of Rev. Proc. 94-77 for another reason: Because Worldwide computed its per diem payments on the basis of hours worked, under

section 4.02(5) of Rev. Proc. 94-77 the per diem is treated as a “meals only” per diem allowance and can be deemed substantiated only up to the amount of the Federal M & IE rate, which was $26 per day during 1995 in Aurora, Illinois. Thus, the government argues that, even if Worldwide’s plan were to survive the other tests, only $26 per day could be deemed substantiated in satisfaction of Treas. Reg. § 1.62-2(

e) for which Worldwide would not owe employment taxes. Worldwide responds that the government misreads

section 4.02 of Rev. Proc. 94V77 because reading it to require all hourly per diem arrangements to be limited to “meals only” would render the industry custom exception in

section 3.03(2) of Rev. Proc. 94-77 for hourly per diem plans void. We agree with the government. First, the government does not contend that Worldwide’s arrangement did not qualify as an accountable plan simply because some of the employees’ reimbursements exceeded those available under the federal rate. Nor could it make such a claim given the express provisions of Treas. Reg. § 1.62-2. Worldwide will owe employment taxes on those amounts which exceed the federal rate, but this will not undermine a finding in favor of Worldwide as to the entire arrangement’s eligibility as an accountable plan.

Second, as a matter of a plain reading of Rev. Proc. 94-77, the government has the better of this argument. Treas. Reg. § 1.62 — 2(

c) requires that the business connection test, substantiation requirement, and return of amounts in excess of expense requirement be met for a plan to qualify under § 162-2. An hourly per diem plan can satisfy the business connection test “only if, on December 12, 1989, ... a per diem allowance computed on that basis was commonly used in the industry in' which the employee is employed.” The Commissioner has authority to prescribe rules to determine to what extent an hourly per diem plan satisfies the substantiation and return of excess requirements. In exercising this power, the Commissioner promulgated Rev. Proc. 94-77.

Section 3.03(2) provides that a plan which is computed on a basis such as hours worked is not a “per diem allowance” unless it meets the industry custom exception. As stated above, this is already a requirement under Treas. Reg. § 1.62-2(d)(3)(ii) for such a plan to meet the business connection test. In addition,

Section 4 of Rev. Proc. 94-77 then more specifically provides the rules under which reimbursements under a per diem plan can be deemed substantiated to meet the substantiation requirement of sections 1.62-2(e).

Section 4.02 specifically limits per diem arrangements that are “computed on a basis similar to that used in computing the employee’s wages or other compensation (e.g., the number of hours worked, miles traveled, or pieces produced)” to a “meals only per diem allowance.” A meals only per diem allowance is capped at the Federal M & IE rate by

section 4.02. In so doing, the revenue procedure, is not contrary to any express provision of or allowance under Treas. Reg. § 1.62-2.

Section 1.62-2 imposes several requirements for hourly per diem plans to be eligible for accountable plan status, including the business connection test which can be satisfied by the industry custom exception under

section 1.62 — 2(d)(3)(ii). But § 1.62-2 leaves to the Commissioner how such plans may be excepted from the usual substantiation and returning amounts in excess of expenses requirements.

Section 3.03(2) simply incorporates the additional requirement of Treas. Reg. § 1.62—2(d)(3)(ii) for all three prongs of the accountable plan test as it applies to hourly per diem plans-. That

section 3.03(2)(

b) also includes the industry custom exception to meet this requirement does not mean that

section 3.03(2)(

b) excludes the meals only limitation of

section 4.02(5) from any hourly per diem plan that meets the industry custom exception. That exception may be used to meet a threshold requirement under

section 3.03(2), not as a free pass to obtaining accountable plan status when the hourly per diem plan does not otherwise meet the provisions of Treas. Reg. §§ 1.62-2(

e) and 1.62—2(

f) requiring substantiation and returning amounts in excess of expenses, both of which Worldwide’s employees admittedly did not do. Indeed, Worldwide’s reading would render

section 4.02(5) of Rev. Proc. 94-77 void, because the substantiation and returning amounts in excess of expenses requirements do not even come into play for any hourly per diem plan that does not first meet the threshold requirement of Treas. Reg. § 1.62—2(d)(3)(ii) and

section 3.03(2) of Rev. Proc. 94-77. In sum, if an hourly per diem plan can meet the requirements of Treas. Reg. §§ 1.62-2(

e) and 1.62—2(

f) without resort to the excepting provisions of Rev. Proc. 94-77, the plan can qualify as an accountable plan while reimbursing lodging as well as meals and incidental expenses. The Commissioner, by promulgating Rev. Proc. 94-77, has not contradicted Treas. Reg. § 1.62-2 by limiting the exceptions to the usual substantiation and returning amounts in excess of expenses requirements therein — which he is permitted to provide by rule — to per diem plans covering only meals and incidental expenses. Worldwide argues, in the alternative, that

section 4.02(5) of Rev. Proc. 94-77 is not binding on this court. We reject this argument on two grounds. First, Worldwide could not satisfy the substantiation and returning amounts in excess of expenses requirements without the provisions of Rev. Proc. 94-77. Second, the revenue procedure is not contrary to the governing regulation, as we have just discussed, and so is not rendered non-binding under the facts of this case by virtue of

section 1.62-2. In short, Worldwide must accept Rev. Proc. 94-77 and its limitations in its entirety or fail altogether in its quest for tax-exempt status for its travel expense reimbursement payments. The government urges that we remand to the district court for consideration of what portion of Worldwide’s payments qualified under Treas. Reg. § 1.62-2(

e) and Rev. Proc. 94-77, presumably on

summary judgment, along with two additional charges against certain portions of Worldwide’s payments. We conclude, however, that consideration of these matters are proper for the district court to address pretrial, to the extent they may be resolved as a matter of law, or by the jury at trial. We will not, however, without more, remand with instructions that these issues be addressed on a hypothetical motion for

summary judgment. V We vacate the district court’s grant of

summary judgment to the government and remand for further proceedings consistent with this opinion. VACATED AND REMANDED. . See Treas. Reg. § 1.62—2(h)(1). . Id. at 1.62-2(d). . Id. at 1.62-2(e). . Id. at 1.62-2(i). . Id. §§ 1.62—2(c)(3)(i) & 1.62-2(c)(5). . Id. § 1.62—2(d)(3)(ii) (emphasis added). . Rev. Proc. 94-77, 1994-2 C.B. 825, § 4.01. . Id. § 7.02; see also id. § 2.07. . Holtzclaw v. DSC Communications Corp., 255 F.3d 254, 257 (5th Cir.2001). . 234 F.3d 1340 (11th Cir.2000). . Id. at 1340. . Id. at 1343. . Id. at 1343-44 (citation omitted). . Id. at 1344. . Int’l Shortstop, Inc. v.

Rally’s, Inc., 939 F.2d 1257, 1265 (5th Cir.1991) (quoting Medina-Munoz v. R.J. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir.1990)). . This $462 rate is based on a seven-day week, so it corresponds to a $66 daily rate. . These rates are based upon an eight-hour day at a $6.00, $6.50, or $7.00 hourly per diem rate. . See, e.g., Treas. Reg. § 1.62-2(d)(3)(ii); see also Rev. Proc. 94-77, 1994-2 C.B. 825. . 269 F.3d 969 (9th Cir.2001). . Id. at 970. . Id. . Id. at 971. . Id. at 972-73 (citation omitted). . Id. . See Treas. Reg. §§ 1.62—2(c)(1), 1.62-2(d)(2), 1.62—2(i). . See id. § 1.62-2(h)(2)(i)(B); Rev.

Proc. 94-77, 1994-2 C.B. 825, § 8.01. . Treas. Reg. § 1.62-2(d). . Treas. Reg. § 1.62-2(e). . Treas. Reg. § 1.62-2(f). . Treas. Reg. § 1.62—2(d)(3)(B). . Treas. Reg. §§ 1.62-2(e)(2), 1.62-2(f)(2). . See Clark v. Modern Group Ltd., 9 F.3d 321, 335 (3d Cir.1993) (“Treasury regulations take precedence over contrary revenue procedures because the latter are intended primarily as a guide to taxpayers.”) (citing cases). . It is worth noting that the only hourly per diem described in Rev. Proc. 94-77 is a meals only per diem allowance. See Rev. Proc. 94-77, 1994-2 C.B. 825, § 3.03(1). .

With our decision to vacate the district court's judgment, we need not address Worldwide’s challenge to the penalty assessed against it.