Rev. Rul. 59-396

The Internal Revenue Service has been requested to clarify its stated position in Revenue Ruling 58-175, C.B. 1958-1, 28, with respect to the exclusion of industrial insurance debit agents from the classification `outside salesmen' for the purposes of section 62(2)(D) of the Internal Revenue Code of 1954.

Revenue Ruling 58-175 holds that industrial insurance debit agents employed by insurance companies to collect, service and sell weekly and monthly insurance policies are not considered to be `outside salesmen' for the purposes of section 62(2)(D) of the Code in computing their adjusted gross income. This holding has been erroneously interpreted to mean that insurance debit agents may not deduct, in any manner, the expenses which they pay or incur in connection with their employment.

Revenue Ruling 58-175 was issued merely to state the position that insurance debit agents do not qualify as `outside salesmen' and, therefore, are not entitled to the special treatment Congress provided in the tax law for outside salesman under section 62(2)(D) of the Code. However, this ruling does not preclude insurance debit agents from deducting the ordinary and necessary business expenses which they pay or incur in connection with their employment as debit agents.

Section 62(2) of the Code provides in pertinent part that an employee is entitled to subtract the following expenses from gross income in computing his adjusted gross income:

(A) REIMBURSED EXPENSES.-The deductions * * * which consist of expenses paid or incurred by the taxpayer, in connection with the performance by him of services as an employee, under a reimbursement or other expense allowance arrangement with his emloyer.

(B) EXPENSES FOR TRAVEL AWAY FROM HOME.-The deductions * * which consist of expenses of travel, meals, and lodging while away from home, paid or incurred by the taxpayer in connection with the performance by him of services as as an employee.

(C) TRANSPORTATION EXPENSES.-The deductions * * * which consist of expenses of transportation paid or incurred by the taxpayer in connection with the performance by him of services as an employee.

The above-described expenses are taken into account in computing the adjusted gross income of an insurance debit agent without regard to whether he itemizes his deductions or claims the optional standard deduction in computing his taxable income.

In addition, those ordinary and necessary business expenses which are not deductible in arriving at adjusted gross income may nevertheless qualify as deductions in computing taxable income, provided the insurance debit agent itemizes his deductions on page 2 of the U.S. Individual Income Tax Return, Form 1040; that is, if he does not use the optional tax table or otherwise elect to take the standard deduction in determining his tax liability.

With respect to the deduction for reimbursed expenses allowed under section 62(2)(A) of the Code in computing adjusted gross income, 1.162-17(b)(1) of the Income Tax Regulations, dealing with the reporting and substantiation of business expenses of employees, provides as follows:

(b) Expenses for which the employee is required to account to his employer .-(1) Reimbursements equal to expenses .-The employee need not report on his tax return (either itemized or in total amount) expenses for travel, transportation, entertainment, and similar purposes paid or incurred by him solely for the benefit of his employer for which he is required to account and does account to his employer and which are charged directly or indirectly to the employer (for example, through credit cards) or for which the employee is paid through advances, reimbursements, or otherwise, provided the total amount of such advances, reimbursements, and charges is equal to such expenses. In such a case the taxpayer need only state in his return that the total of amounts charged directly or indirectly to his employer through credit cards or otherwise and received from the employer as advances or reimbursements did not exceed the ordinary and necessary business expenses paid or incurred by the employee. (Italic supplied.)

In this connection it is the position of the Service that, in the case of commissioned agents who submit expense accounts to their employers solely for use in determining net commissions for income tax withholding purposes, the mere reporting of expenses to employers for such purposes will not meet the accounting requirements of section 1.162-17(b) of the regulations.

In such cases, the employer does not necessarily audit the expense account. The phrase, `the employee need not report on his tax return * * * expenses * * * for which he is required to account and does account to his employer,' means that the expense account in question is required by the employer and is verified by the employer by adequate procedures.

Accordingly, an employee whose accounting to his employer does not meet the accounting requirements contained in section 1.162-17(b) of the regulations may not utilize the reporting procedure prescribed in the regulations but, instead, should include all remuneration from whatever source (including salary, commissions, bonuses, and allowances for expenses) in his gross income before taking the deductions permitted in section 62(2)(A),(B), and (C) of the Code in arriving at his adjusted gross income.

On the other hand, if an employee's accounting to his employer does meet the accounting requirements of section 1.162-17(b) of the regulations and if the employee utilizes the reporting procedure provided in that section so that expenses and reimbursements are offset against each other to the extent provided in that regulation, he cannot again deduct reimbursed expenses under section 62(2) of the Code since the expenses in question have already been taken into consideration in arriving at the employee's adjusted gross income.

Revenue Ruling 58-175, C.B. 1958-1, 28, amplified.

¹ Based, in part, on Technical Information Release 85, dated August 5, 1958.