It takes money to make money. I use that adage to teach my students the basic idea behind the §162 deduction: the money it takes to make money should be deductible from the money made. On October 2, 2017 the Tax Court decided the case of John S. Barrett and Maria T. Barrett v. Commissioner, T.C. Memo 2017-195. The case illustrates a common problem with that adage: how to know when the costs of traveling away from home are deductible business expenses under §162.
Section 162 allows a deduction for “traveling expenses...while away from home in the pursuit of a trade or business.” In contrast, §262 denies deductions for “personal, living or family expenses.” So that is the tension: is an expense business or personal? The more a taxpayer can connect expenses to business needs and away from personal preferences, the more likely the taxpayer can deduct those expenses.
Travel expenses that are more closely connected to taxpayer’s personal preferences are called “commuting” costs and are not deductible. The idea is that everyone has to live somewhere. And our personal choice of where to live should not allow us a deduction in the cost of going to work. That is the idea of your “tax home.” However, expenses for travel away from the “tax home” that are incurred because of business needs, and so duplicate otherwise personal living expenses, are deductible. The IRS has a really good explanation of this distinction in Rev. Rul. 99-7. The classic case on the subject is Commissioner v. Flowers, 326 U.S. 465 (1946), where the Court held that when a taxpayer’s job moved to a different city, his choice to continue living in the old city and travel 165 miles to the new job was a personal choice. His “tax home” was the new city where his employer required him to work. So his choice to remain in the old city just created a long commute.
On the surface, the Barrett case looks like Flowers. In Barrett, the married taxpayers liven in Las Vegas. For some 20 years Mr. Barrett had a business of providing video recording to one client: the American Israel Public Affairs Committee (AIPAC) and did so using a studio in Las Vegas. But when AIPAC built a new building in Washington D.C., it built its own video recording and production studio. So now instead of travelling across town, Mr. Barrett had to travel to D.C. each year, spending two or more months either in hotels or in a rented condo. The issue was whether Mr. Barrett’s expenses of travel, lodging, and meals were deductible under §162. The IRS thought Mr. Barrett just had a long commute, that his “tax home” was now Washington D.C. The Tax Court disagreed.
The Barretts managed four rental properties in Las Vegas. Managing even one rental property can certainly be a trade or business. See Wasnok v. Commissioner, T.C. Memo 1971-6. But taxpayers cannot have two tax homes. See Andrews v. Commissioner, 931 F.2d 132 (1st Cir. 1991). That case explains that taxpayers who have two business in two locations must treat the location of the primary business as their “tax home.” That makes all the travel, lodging and meal expenses incurred in travelling away from that location potentially deductible to the extent those travel expenses are incurred in pursuit of the secondary business.
As applied to Mr. Barrett, if the rental management business in Las Vegas was his primary business, then travel to D.C. in pursuit of the video production business would be deductible.
It is not clear whether the Barretts even tried that argument. It would not win, anyway because it appears that the video production business was the primary business. The Andrews case referenced earlier gives the various factors that help a court to decide which of two business is the primary one. Chief among the factors are time spent at each location and revenue derived from each business. During the four years in dispute Mr. Barrett had gross receipts from the AIPAC of between $63,000 and $133,000. The property rentals produced losses in three of the four years and a roughly $19,000 profit in one. And while Mrs. Barrett earned some money from her cocktail waitress employment, that had no bearing on Mr. Barrett’s tax home because each taxpayer has his or her own tax home, even if married to another taxpayer. See Foote v. Commissioner, 67 T.C. 1 (1976).
But while the video production business was likely Mr. Barrett’s primary business, he convinced the Tax Court that Las Vegas was where he did the bulk of the work. He testified that 75% of his video production services were performed outside of the Washington D.C. studio, either on location or in his home office in Las Vegas. He basically said “I do most of my work from home.” In other words, he ran the business out of his home. In those situations, the commute is from the bedroom to the home office. All travel outside the home on account of the business is deductible travel. Rev. Rul. 99-7.
The Tax Court accepted his testimony and concluded: “On balance, because petitioner performed substantial services for AIPAC in Law Vegas, traveled to DC only to complete the production process, was required to be in DC on a few weeks at a time, and had other income-producing activities in the Las Vegas area, we accept petitioner’s position that Law Vega as petitioner’s tax home.”
An interesting question would be to look at the consequences of a ruling that D.C. was Mr. Barrett’s tax home. That would mean that his travel to D.C. and his meals and lodging while in DC would not be deductible. But what about the costs of travel to Las Vegas and the cost of his meals and lodging in Las Vegas? Why, he could claim those as deductible travel “away from home” to the extent that he could show the travel was connected to his rental business. I discuss this situation in a fun (and as yet unpublished) reflection paper I wrote about Governor Palin’s tax problems, one of which involved this recurring issue of travel away from home expenses. You can find it posted on SSRN here.