Broker Check

April 30, 1999

Pilot Could Exclude Per Diem Received From Accounting Firm

          Per diem payments for travel expenses treated as paid under an accountable plan are excludable from the employee’s income.   In a recent case, the Tax Court affirmed that for amounts to be treated  as  paid  under  an  accountable plan,  the arrangement must meet  three requirements:  business  connection, substantiation, and return of  excess  amounts.   In  the instant  case, the taxpayer,  a CPA who founded a  CPA firm in  Minneapolis began  to work for a major airline as a pilot based in Nashville.   The IRS began a criminal investigation of the CPA firm.  The firm paid the CPA the applicable federal standard per diem rate for lodging, meals and individual expenses to return to Minneapolis to help with the audit. The court decided that the per  diem  amounts  were excludable.   First,  the  reimbursement arrangement met the business connection requirement; it  provided  a  per diem allowance for the taxpayer’s ordinary and necessary travel expenses incurred while away from  his Tennessee  residence.   They  were directly connected  with  the taxpayer’s   trade   or business as the  accounting  firm’s employee because he received the per  diem allowance only  for  days  on which he  worked  for  the corporation in Minneapolis.

          The arrangement  also  met the  substantiation  requirement because  the arrangement  fit the definition  of  a per diem  allowance provided in the revenue procedures.  In  addition, the  time,  place  and  business purpose of  the travel expenses was substantiated by records and corroborative evidence.

Liability Insurance-How Much is Enough?

          Personal liability risk is inherent in the ownership  or rental  of  real estate, automobiles, recreational vehicles, and other real and personal property.  Certain professional, business, and volunteer activities also result in liability risks.

          Most individuals purchase casualty and liability insurance for their home and automobiles. State law governs minimum  requirements for auto insurance.   Banks that hold mortgages on the property generally require  home insurance.  In most cases, these policies should be supplemented with umbrella liability coverage. If an individual is liable and damages are awarded in excess of the amounts covered by the auto and home insurance policies,  the umbrella liability  policy  will  cover a portion of the difference (up to the total amount of umbrella coverage).

          Umbrella Liability Insurance- Umbrella liability policies generally cover the policyholder, as well as members of the  policyholder’s  family  residing in  the same home (including  dependent  children attending college).   It is  important  to understand what items are covered, and what items are excluded, under the policy. A minimum of $1 million of umbrella liability insurance is a good rule of thumb.

          Personal Liability Coverage-Liability insurance should be considered a “last line of defense”. Proper risk management and planning will help  in  avoiding events that might lead to personal liability. Knowing the items covered by a liability policy will help identify areas of potential liability to avoid.

          The amount of personal liability  coverage will  depend on  several  factors. For individuals not in certain professions  (e.g.,  legal,  medical profession),  factors that influence the amount of liability insurance coverage  include:  (1)  personal net worth,  (2) anticipated earnings and inheritances,   (3) expected liability risks (e.g, children reaching driving age), and  (4) estimated dollar range  of  possible legal judgments.

          Automobile Insurance - A large number  of   individuals purchase  the minimum automobile coverage required by state law. This decision is usually based on the cost of premiums,  rather  than on a consideration  of the potential liability. The minimum amount  of liability  coverage is  often very low (e.g. $50,000)--the cost of a claim could exceed this amount and ,  if an umbrella policy is not in place, the  individual would be   personally liable  for the difference.   Purchasing the maximum amount of liability coverage offered will provide the  greatest  protection. Increasing deductibles and limiting add-ons to the policy can  offset  the  additional cost associated with increased liability insurance coverage.

          Real and Personal Property-When  purchasing  homeowners  insurance, consider fair market value and the replacement cost  of  the home.   Evaluate  the value of  all personal  property,  including  artwork, stamp and coin  collections, antiques, and jewelry.

          Careful evaluation is necessary when determining the appropriate amount of insurance coverage-items that are frequently overlooked include (1) swimming pools or ponds, and (2) sports or playground equipment.

          Director’s Liability Insurance - Corporations  often purchase  personal liability insurance for members of the board of  directors.   These  policies usually cover certain   “wrongful acts”  (e.g. errors,   omissions, misleading statements, negligence)  committed while performing the  duties of director.   Each director should understand the scope and amount of coverage provided by the corporation, and assess the adequacy of the coverage for his/her personal situation.

          Nannies or Domestic Workers  -  Many families  employ nannies  and domestic workers in the home. Consequently,  these families (i.e. employers) are exposed to potential liabilities from injuries domestic workers may suffer  on  the job. Additionally, these workers could cause damages that  result  in assessments against the employer. Therefore, liability insurance policies should  cover nannies and/or other domestic employees, as well as their actions.

          Volunteer Work - If  volunteer  work  involves  providing business  or professional  advice, the  volunteer  could face  liability risks (even though no payment was received).  In  such  situations, the volunteer should verify that (1) volunteer work is covered  under  the  charitable organization’s liability policy, and/or (2) recipients of  advice have  reviewed  and authorized   appropriate disclaimers.

          Professional Liability Insurance  -  Individuals  involved   in   certain professional activities purchase specialized liability insurance. Professional activities include   services  provided   by    accountants,  doctors,  lawyers,  newspaper employees,   and  public  officials,  as  well as  services provided by  any   other professional who may be exposed to lawsuits. In most cases, liability insurance for attorneys and doctors covers claims occurring due  to acts of the professional and all individuals under his/her supervision or control.

          These are some  thoughts to consider about  personal  liability  insurance. Howard Lisch is a life insurance agent and is not able to provide liability insurance for your liability needs.