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August 1993

Deducting travel expenses. (Cover Story)

by Maydew, Gary L.

    Abstract- The deductibility of the travel expenses of taxpayers who are transitorily removed from home on a business mission is one of the gray areas of taxation. Although IRC Sec 162 states that travel costs incurred during away-from-home business trips are deductible provided that they are ordinary and necessary, it does not provide for the description of specific criteria for deducting them. These criteria are usually established in revenue rulings and court cases. The 1946 'Flowers' case is used as basis of most deduction criteria. An assessment of related court cases and IRS decisions reveals some measures that taxpayers can take in order to establish deductibility. These steps include attesting permanent residence that is considered as tax home, showing duplicative living expenses and proving that the duration of the job is definite and temporary.

One area in taxation filled with confusion is the deductibility of travel expenses of taxpayers who are temporarily away from home on business. In addition, there are recent developments that can further complicate the issue if not fully understood.

The Reasons for the Confusion

IRC Sec. 162 provides that traveling expenses while away from home in the pursuit of a trade or business are deductible, to the extent they are ordinary and necessary. Unreimbursed employee traveling expenses are deductible only as an itemized deduction. They must be added to other itemized deductions, which in the aggregate are deductible only to the extent they exceed two percent of adjusted gross income. Only 80% of the food portion of travel expenses is deductible. Regulations to Sec. 162 describe types of traveling expenses (e.g., travel fares, meals and lodging, and expenses incident to travel, such as expenses for sample rooms, telephone and telegraph, public stenographers, etc.), but do not describe the criteria necessary to deduct them. Specific criteria, i.e., the meaning of "temporarily" away from "home," "overnight," and for "business purposes," are found in revenue rulings and court cases.

The basis for many of the criteria that determine the travel expense deduction stem from the Flowers (1946) case. The Treasury Department issued regulations interpreting old Sec. 23(a)(1)(A). The court in Flowers summarized the regulations into three basic requirements and declared the regulations had the effect of law.

"Temporary"--The Code and the Courts

Until this year, the "temporary" issue was uncertain. Congress however, in The Energy Policy Act of 1992, established a parameter on temporary, amending Sec. 162(a) to state "the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds one year." The effective date is for costs paid or incurred after Dec. 31, 1992. For periods of less than one year and expenses incurred prior to December 31, 1992, court cases and revenue rulings still prevail.

The Supreme Court, in Peurifoy (1958), said whether employment is "temporary" or merely "indefinite" depends on the facts and circumstances. Building on this, the Tax Court in Norwood (1976), said "... No single element is determinable of the ultimate factual issue of temporariness, and there are no rules of thumb, durational or otherwise." The courts have been rather emphatic in emphasizing the absence of a permanent job does not necessarily mean the job is temporary. In Kasun (1982), the Seventh Circuit ruled a job which merely lacks permanence is indefinite--and therefore not temporary--unless termination is foreseeable within a short period of time. The Third Circuit, in Kennedy (1972) where the taxpayer considered his employment temporary and requested a transfer because he disliked the assigned employment place, found the employment was indefinite, reiterating that the lack of permanence does not mean that employment is temporary. In Sanders (1971), in denying a deduction for commuting costs, the Ninth Circuit said employment that is indefinite in duration does not meet the "away from home" requirement. In Coombs (1979), the Ninth Circuit provided a rough working definition of the term "indefinite," stating employment that has a reasonable likelihood of continuing indefinitely or for a substantially long period of time is generally regarded as indefinite (note the requirement is only that of "reasonable likelihood"). The Tax Court in such cases as Harvey (1960), Stricker (1970), and Mitchell (1980) ruled similarly, saying employment is indefinite if its termination cannot be foreseen within a reasonably short period of time. On the other hand, employment foreseeably limited in its duration is not regarded as indefinite.

"Temporary"--The IRS

The IRS, in a 1960 revenue ruling, attempted to set a line of demarcation for "temporary" travel, generally specifying temporary as one year or less. The Tax Court has not been that rigid in applying the length-of-employment standard. In a number of cases, it considered employment in excess of 12 months to be temporary in nature. Now that Congress has codified one year as the maximum time period to qualify as temporary, the various revenue rulings issued over the years defining temporary are now largely irrelevant.

Meaning of "Home"

The away from home criterion is critical. In Matthews (1964), the Ninth Circuit noted that "distinctions between 'temporary' and 'indefinite' are relevant only when the taxpayer maintains a home and is away from it."

In Flowers the Supreme Court ruled that travel expenses must be incurred "while away from home." But where is the taxpayer's home? In Stidger (1967), the Supreme Court said generally a taxpayer's home for purposes of the travel expense deduction is the area or vicinity of his principal place of employment. Earlier, the Court in Peurifoy had ruled an exception to the rule that the tax home is the principal place of employment: Being away from home "may occur where a taxpayer with a well-established tax home accepts temporary employment as opposed to indefinite employment elsewhere."

The courts of appeals are divided on the issue of the location of the taxpayer's "tax home." The Ninth Circuit does not interpret Peurifoy to mean that the place where a taxpayer is employed for an indefinite period is necessarily his tax home. The Ninth Circuit in Harvey (1960) said "... an employee might be said to change his tax home if there is a reasonable probability known to him that he may be employed for a long period of time at his new station."

The IRS has refused to follow Harvey. In addition, the Second Circuit has said on more than one occasion that Congress intended "home" to be the primary, permanent residence of the taxpayer. The Fifth Circuit in Curtis (1971), and the Ninth Circuit in Cook (1979), both said a regularly employed taxpayer's home is his abode at his principal place of employment. The First Circuit also does not focus on the principal place of employment, in Hantzis (1981) preferring a functional definition of "home" which stresses the reasons for the taxpayer maintaining two homes.

Planning Aspects--Importance of Duplicate Expenses

Critical to showing a taxpayer's residence is his or her tax home is the existence of duplicate expenses. In Sapson (1968), the Tax Court said an employee without a principal place of business may treat a permanent residence at which he incurs substantial continuing living expenses (emphasis added) as his tax home. Again in Tucker (1971), the Tax Court said the purpose of the travel expense deduction "is to mitigate the burden upon a taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional living expenses."

No Break For Itinerants

The Supreme Court in Peurifoy virtually slammed the door on itinerants receiving the travel expense deduction. In Deamer (1985), the Eight Circuit said a person who has no principal place of business or permanent home is considered an itinerant and is never away from home. People who live at their parents' homes probably do not have a tax home. Some taxpayer occupations and/or employment patterns are considered to be completely itinerant in nature. In Bicks (1966), the Tax Court noted "... |the taxpayer literally carried his home on his back."

Rev. Rul. 73-529 attempted to delineate three criteria to test if a taxpayer has a regular place of abode or is an itinerant by determining whether--

1. The taxpayer performs a portion of his business in the vicinity of his claimed abode and uses such abode (for purposes of his lodging) while performing such business;

2. The taxpayer's living expenses incurred at his claimed abode are duplicated because his business requires him to be away; and

3. The taxpayer a) has not abandoned the vicinity in which his historical place of lodging and his claimed abode are located, b) has a member or members of his family (marital or lineal only) currently residing at his claimed abode, or c) uses his claimed abode frequently for purposes of lodging.

Is "Home" Where the Heart is?

If taxpayers have no principal place of employment, is their tax home the place they prefer to think of as home? The various courts have opted for objectives, not subjective, criteria to decide this issue. In Barone (1966), the Tax Court said "while the subjective intent of the taxpayer is considered in determining the tax home, ... this Court and others consistently have held that objective financial criteria bear a closer relationship to the underlying purpose for the deduction." In Bochner (1977), the Tax Court noted wryly that "the determination of a taxpayer's home is not based on where the taxpayer's heart lies."


What qualifies an individual to be "away from home?" The IRS in a 1940 ruling said travel away from home excluded all trips requiring neither sleep nor rest. The Supreme Court in Correll upheld the definition. Thus, the trip should be sufficiently long to require rest or sleep.

Recent Cases--Both the Tax Court and the IRS Get Tougher

Recent cases indicate the IRS and the Tax Court have been tougher in travel expense cases, especially in applying the temporary vs. indefinite standard. In Shore (1990), the taxpayer was a freelance automotive designer. From June 1982 to February 1990 he had a series of seven jobs, none lasting over 18 months. Although these jobs would appear to meet the criterion of temporary, the Tax Court held that since his hometown contained no auto companies, his employment in the Detroit area was considered indefinite. In Richards (1990), an electrician left Canton, Ohio to work at three successive jobs in New York City, which lasted a total of about 26 months. He then moved back to Canton. In ruling against the taxpayer, the Tax Court said, "At best, petitioner has shown that his employment lacked permanence, but this by itself does not make |the employment temporary."

The Tax Court often seems to apply hindsight in determining whether a job is temporary, stating employment which was temporary may become indefinite if it extends beyond the short term. In Hamburg (1989), a construction worker signed on for a job that he expected to last only about three to six months; however, the job turned out to last slightly over two years. Among other negative factors cited by the Tax Court in denying his travel expenses, was its opinion that his attempt to return to his former job was "casual at best."

Even the firm existence of a tax home elsewhere (a permanent residence where duplicate living expenses are incurred) will not suffice unless the taxpayer can clearly establish the job is temporary. In McLellan (1990), the wife and children of a painter continued to reside at his home 75 miles away as she shared his belief the employment was only temporary. However, the Tax Court ruled the employment was indefinite.

In determining the temporary requirement, the Tax Court generally gives little weight to substantial uncertainty about the duration of a job. In DeVincent (1989), a taxpayer worked approximately two years at a job site 110 miles from home and drove home on weekends. Although there was negative publicity about the project, and the petitioner believed his job was only temporary, the Tax Court said all the petitioner proved was that the job was not permanent. The lack of a union contract or the existence of a probationary period does not establish a job as temporary. In McCulloch (1989), the Tax Court said uncertainties at the start of a new job are common and do not make a job temporary.

A very important factor in determining whether there is permanent residence is whether in the circumstances it would be reasonable to expect the taxpayer to move his residence. In Van Hassent (1990), a pipe fitter had a series of very short jobs lasting from 2-12 weeks. The Tax Court, in ruling for the taxpayer said, "Under the particular circumstances of this case, it would be unreasonable to expect petitioner to move his residence to the vicinity of his employment when the termination of his work assignment was foreseeable within a short period of time."

Without the existence of a permanent residence, the Tax Court is certain to declare the taxpayer an itinerant. In Hamby (1990), the taxpayer worked at a series of jobs lasting from one month to a year. He moved his wife and later his family to each job and lived in rental houses. The petitioner was held to be an itinerant. Similarly, in Holdreith (1989), a construction worker usually worked at a job for one or two weeks before moving on. The Tax Court held he did not have a tax home because he had neither a principal place of business nor a permanent residence at which he incurred substantial living expenses. He lived in his parent's house and made only sporadic payments to them for living expenses. The Tax Court ruled similarly in Cavana (1990). Here the taxpayer did pay rent to his mother while he lived with her, but did not pay her any rent while he was at his temporary job.

Showing the existence of duplicate living expenses is a necessary, but by no means sufficient condition for deducting travel expenses. If the taxpayer rents out his residence, the Tax Court generally rules there are no duplicate expenses.

Can A Taxpayer Have Two Homes?

In Andrews (1990), a taxpayer operated a swimming pool business in Massachusetts and bred and raced horses in Florida during the winter. The move and expansion of business in Florida was done over a period of time. Andrews started a horse business in New England in 1964 and moved it to Florida in 1972. In 1974, his incorporated swimming pool business in Massachusetts diversified by also entering the horse business in Florida. By 1984, Andrews had an interest and assisted in managing a Florida pool business. He sought to deduct as travel expenses in Florida the costs of operating his Florida house (which he owned). The Tax Court ruled he had two tax homes and regardless, the costs of operating an owned home are not "lodging expenses." However, the First Circuit, on appeal said "... the Tax Court's conclusion--that Andrews had two 'tax homes'--is inconsistent with the well-settled policy underlying Sec. 162(a) that duplicated living expenses necessitated by business are deductible." As for the Tax Court's opinion that under Sec. 280A a taxpayer cannot deduct the costs of operating an owned home, the First Circuit chided the Tax Court for ignoring Sec. 280A(f)(4), which specifically states this section does not disallow deductions under Sec. 162(a).

Planning Tips

A review of the above court cases and IRS rulings indicate positive steps which you can take to justify the deduction. They include:

Show there is a permanent residence and that it is the tax home. The taxpayer must own a home or incur rental expenses. In addition, it is important to show frequent visits to the claimed residence, continual efforts to find permanent employment in the place of residence, and the maintenance of other evidences of residency such as registration of automobiles, maintenance of bank accounts, payment of local taxes, and voter registrations.

Demonstrate duplicate living expenses. Selling a home or renting it to persons unrelated to you may demonstrate there are no duplicative living expenses. Conversely, if a spouse and minor children continue to live in the residence, and it can be shown moving them would be unrealistic, there is strong evidence of duplicate living expenses.

Be able to show the job was of a definite temporary nature, not just that it lacked permanence or was uncertain in duration. The taxpayer should be able to demonstrate a belief the job was of a temporary and limited duration. For travel expenses after 1992, the job must not last more than one year to be considered temporary. However, even for jobs which turn out to last less than one year, the taxpayer needs to demonstrate a belief the job was of a temporary and limited duration.

Plan Ahead

Due to the subjectivity of such key terms as "temporary," "tax home," "overnight," and others, deducting temporary living cost will always be fraught with difficulty, and subject to challenge. The amount of the potential deduction is often very material to the individual taxpayer. Some before the fact planning can greatly increase the likelihood of these temporary living costs withstanding the hard scrutiny of the IRS.

Gary Maydew, PhD, is an Associate Professor at Iowa State University. Dr. Maydew wrote "Bad Debt Deductions," in the April 1993 issue of The CPA Journal.

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