The last couple of weeks have seen Tax Court cases with several interesting lessons. The one I choose today is Roger G. Maki and Lilane J. Gervais v. Commissioner, T.C. Summary Op. 2018-30 (June 6, 2018). It teaches a lesson about what constitutes travel “away from home” for purposes of the §162 deduction. I posted a basic lesson (here) on this issue late last year. The wrinkle in today’s case is that the taxpayer was retired and traveled from his home in the Seattle metro area to a house he had inherited, ostensibly to manage the surrounding land for eventual timber sales. The Tax Court decided the travel was deductible. I question whether that’s the right outcome here — it seems to me this was just a commute — but notice this is just a Summary Opinion. That means it can still teach a lesson, even if it carries no precedential weight.
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.” That is why commutes are not deductible. After all, everyone has to live somewhere and the choice of where to live is personal. Thus, the cost of getting to your job (commuting) is also personal. Our personal choice of where to live should not allow us a deduction in the cost of going to work, even if we do not believe we had a realistic choice to live closer to work than two hours away, a situation faced by many folks in large metro areas. That is the idea of a “tax home.” It’s where you choose to live in order to work. Only when you must travel away from your tax home because of business will those expenses be 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 decision to continue living in the old city and travel 165 miles to the new job was a personal choice. His choice just created a long (and non-deductible) commute.
If a taxpayer has two vocations in different locations, however, the taxpayer will likely have some deductible business travel because a taxpayer can have only one tax home for the "travel away from home" deduction. For example, in Andrews v. Commissioner, 931 F.2d 132 (1st Cir. 1991), Mr. Andrews ran a pool business in New England and a horse-raising business in Florida. He sought to deduct the costs of traveling to Florida from his home in Massachusetts. The Tax Court had agreed with the IRS in denying the deductions. It said he had two tax homes and so just had two commutes. The First Circuit reversed, explaining that taxpayers can have only one “tax home.” That means 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 to the secondary business potentially deductible to the extent those travel expenses are incurred in pursuit of the secondary business.
But what if you are retired? That’s the issue the Maki case explores. There, the tax year at issue was 2014 and in that year Mr. Maki and his spouse lived in Des Moines, WA, a city in the Seattle metro area two miles south of the Seattle airport. During that year, their gross income came entirely from Social Security, interest, dividends, capital gains, and pensions. Neither spouse was employed in any vocation.
Mr. Maki, however, had inherited four parcels of land from his mom (the opinion does not say when this happened). Writing for the Tax Court, Judge Gerber was careful to note that "all the parcels were valuable because of timber situated on them." The four parcels were all within a 35-mile radius of each other, crossing Thurston and Lewis counties in Washington. When I went to Google Maps, it looks like about a 70-80 mile trip from Des Moines, WA, but the court opinion is silent on the actual distance.
Mr. Maki decided to manage and develop the timberland parcels as a business. And one of the parcels had a house. But instead of moving to where the timberland was, Mr. Maki and his wife decided to stay in their Des Moines residence and Mr. Maki regularly traveled to the timberland house to tend to the four parcels. The Tax Court opinion says he spent “approximately three days at a time planting, protecting, and maintaining trees on the timberland.”
Although Mr. Maki reported his timberland activity on Schedule C, in no year had Mr. Maki reported any income from the timberland. I am guessing that Mr. Maki’s land was “Designated Forest Land” and that he had filled out a Forest Management Plan and filed it with the State of Washington. He would want to do this to get a lower property tax rate on the land, as the Lewis County assessor’s website explains. But the opinion is not entirely clear on what Mr. Maki did during his trips that made this a “trade or business” within the scope of §162. I confess I have no idea what “protecting and maintaining trees” means because I don’t know beans about managing timber property. Was he raising Christmas trees? Board timber? I welcome any comments on that.
Mr. Maki claimed that he was away from his Seattle home some 167 days and nights, in three-day (or so) slugs. His Schedule C showed a deduction for “travel away from home” for each of those 167 days using a per diem ranging from $262 to $374 per day, based on his application of IRS Publication 463. He also claimed other Schedule C deductions for “travel, insurance, taxes, licenses, and related expenses” totaling about $13,000. So he reported a large net loss that he then used to shelter his retirement income.
If you are thinking this raises a §183 hobby loss issue, so am I. Judge Gerber was able to finesse the hobby loss issue, however, by noting that while the IRS had denied the $56,960 deduction for travel away from home, it had allowed the $13,000 in other Schedule C deductions. Thus, Judge Gerber wrote, the IRS “did not question whether petitioners were engaged in the business of growing and caring for timber.” So that took the hobby loss restrictions of §183 off the table. For purposes of this case, the timberland activity was Mr. Maki’s trade or business for §162 deduction purposes.
But that alone does not solve the “travel away from home” problem. You only get that deduction when traveling away from your “tax home.” Judge Gerber accepted the taxpayer’s arguments that the Des Moines residence was Mr. Maki’s tax home because (1) “petitioner spent more than half of the 2014 tax year at the Des Moines home” and (2) “all of the 2014 taxable income petitioner earned was received at the Des Moines home.” Judge Gerber then went on to disallow the claimed per diem as excessive and ordered a computation using the correct per diem rates.
I confess that neither of the two reasons Judge Gerber gives for finding the Des Moines residence to be Mr. Maki’s tax home makes sense to me. As to the first, where a taxpayer rests at night for the majority of the year has never been the test of a taxpayer’s tax home for the Tax Court. As Judge Gerber’s colleague Judge Thornton explained just this past March in Jahangirian v. Commissioner, T.C. Summary Op. 2018-14: “Under section 162, the term home does not have its usual and ordinary meaning. For purposes of section 162(a)(2), a taxpayer's home generally means the vicinity of his principal place of employment. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980).” (internal quotes and citations omitted).
As to the second, Judge Gerber’s statement that Mr. Maki had earned income during 2014 is contradicted by his earlier finding of fact that all of Mr. Maki’s income in 2014 came from “Social Security, interest, dividends, capital gains, and pensions.” Mr. Maki had no earned income in 2014. That’s the point of being retired!
A tax home is where you need to live to work. It is the relationship of where you rest at night to where you work in the day that determines the tax home. Look at the Flowers case again. The taxpayer there lived in Jackson, MS and had worked there for many years. But then his employer moved its offices to Mobile. The taxpayer did not want to move, so kept living in Jackson and while he did some work there for his employer, he also now traveled to Mobile to do other work. The Supreme Court said that the travel to Mobile was not necessitated by business needs because that is where the employer had its offices and where the taxpayer should be living in order to work for this employer. Instead, the travel was simply a result of the taxpayer’s personal choice to continue living in Jackson even once the job moved to Mobile.
Mr. Maki is like the taxpayer in Flowers. Sure, maybe he used to have earned income Des Moines. But that work ceased. And then he got a new trade or business located some 70-80 miles away. The decision to continue living in Des Moines after that was a personal one, not required by any trade or business, just as was Mr. Flowers’ choice to continue living in Jackson once his job moved.
If Mr. Maki actually had earned income in Des Moines — i.e. had a trade or business there — then he would be like Mr. Andrews who earned money from two businesses in two locations. And so either the travel to the timberland house from Des Moines, or the travel to Des Moines from the timberland house would be deductible, depending on which business was dominate.
The couple’s decision to live in the Seattle area in their retirement was a personal choice. It was not a choice required by either of their work needs. So it seems to me Mr. Maki’s travel to the timberland house in pursuit of that business is just a long commute.
Lesson for retirees like Mr. Maki: get a part-time job at Walmart!
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law