I do not teach much tax accounting in my basic tax class. I do, however, teach the general rule in §441(a) that each tax year stands alone. Last week’s case of Roger G. Maki and Lilane J. Gervais v. Commissioner, T.C. Summary Op. 2019-34 (Nov. 4, 2019) (Judge Gerber), illustrates that general rule. In Maki, the taxpayers won a §162 deduction for Mr. Maki’s travel away from home. What makes this case fun is that these are the same retired taxpayers I blogged about last year in “Where Is A Retiree’s Tax Home.” In both cases they won the issue, albeit for a smaller amount than they had claimed. The lesson here is that a win in the first case did not guarantee the win in the next. Details below the fold.
Law: Travel Away From Home
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. Your travel expenses away from your “tax home” are deductible only when the travel is because of business. The IRS has a really good explanation of this distinction in Rev. Rul. 99-7.
A taxpayer can have at most only one tax home. Andrews v. Commissioner, 931 F.2d 132 (1st Cir. 1991). If a taxpayer has two different businesses in two different areas, only one will be the tax home, making travel to the other location a deductible “travel away from home” expense, at least so long as the travel is because of that second business.
However, a taxpayer may have no tax home to be away from! Rosenspan v. United States, 438 F.2d 905, 911 (2d Cir.), cert. denied, 404 U.S. 864 (1971). Again, a tax home is where you must live to work. If you are an itinerant worker, you have no tax home. That’s Rosenspan. And if you are retired from the working world, you have no tax home. That’s just me; it is what I argued in my TaxProf blog post on last year’s case.
Here are the facts, combining both opinions (last week’s and last year’s).
Mr. Maki and Ms. Grvais are a retired couple living in Des Moines, Washington, a suburb of Seattle. In the 1980’s Mr. Maki inherited 110 acres of timberland. The timberland consists of “four separate parcels, all within a 35 mile radius,” situated in Thurston and Lewis Counties in Washington. On one parcel is a residence.
The taxpayers’ story is that they were holding on to this timberland in order to realize future profits from future sale of timber. In the 2018 opinion Judge Gerber writes: “although otherwise retired, petitioner was maintaining and developing the 110 acres of timberland to sell timber in order to maintain and improve his standard of living.” (p. 3) And in the 2019 opinion Judge Gerber writes: “Petitioner has continuously experienced physical problems and needs to walk and stay active. One way he has accomplished this and also provided for his future was to plant trees and care for them so that they could be harvested for future financial needs. *** As of the time of trial the trees were approaching maturity and two of the properties had trees with a harvest value of over $1 million.” (p. 3)
Apparently the future has been very slow arriving. The taxpayers reported zero income from the timberland in both 2013 and 2014. And, indeed, nothing in the opinions suggest that Mr. Maki had ever reported income from the timberland.
The taxpayers’ story is that Mr. Maki had to make almost weekly trips to the property, usually for 3 days at a time. On these trips he stayed in the residence. On each trip he drove about 300 miles in total; from Des Moines, then between the properties, and back to Des Moines. On some visits he also planted some trees. This had, apparently, been his pattern since the 1980’s. It makes me wonder whether these were weekend trips that he took while he was in the working world before retirement, going down on Friday and coming home Sunday. And he just kept up the pattern once he retired.
The taxpayers’ story is that Mr. Maki had to make these trips to protect the property from poachers (and did I mention he sometimes planted more trees). During a year not reported in the opinion, “one of petitioner’s properties was stripped of fir trees during a time when he was very, very sick and not mobile enough to check on the trees.” Well, it certainly seems that someone thought the future had arrived, at least for those trees! The taxpayers said they could not afford to hire people to perform a similar service. So Mr. Maki had to do it. Which meant each year they reported zero income but did report deductible expenses of some $70,000, including between $53,000 and $56,000 in travel expenses. Hmmmm.
Let’s accept their story. There is still the problem of whether travel to the timber properties was travel “away from home.” It is not enough to have a business purpose for travel to a destination. The travel must also be away from a tax home. These folks are retired. They can live anywhere they please. That is the key idea: where they choose to live in retirement is their personal decision. They chose to live in Des Moines. Good for them! Why that means the rest of us should subsidize what is really just a long commute is beyond me.
But that is not today’s lesson.
Lesson: Tax Litigation Is Like Groundhog Day
This is the taxpayers’ second tussle with the IRS on this particular issue. The first time the IRS argued that they were not traveling away from home. In the 2018 decision, Judge Gerber found that Des Moines was their tax home and so allowed the away-from-home deduction, although cutting it down from $56,000 to about $9,000.
Apparently, at some time after opening the 2014 exam, the IRS opened an exam for the 2013 tax year, the year prior to the tax year decided in the earlier case. Surprise, surprise, the IRS found the same problem in the 2013 return. The taxpayer had claimed a deduction for over $53,000 in expenses incurred in travel away from home. The IRS disallowed all of the deductions. Oh, yeah, and the taxpayer failed to report as gross income the required percentage of Social Security payments they received, just under $19,000.
In last week’s case, the IRS could have again argued that Mr. Maki’s travel was not “away from home” in 2013 even though Judge Gerber had found that to be true in 2014. That is because each year stands alone. What Judge Gerber found to be true in the earlier case about a different year does not preclude the IRS from re-asserting the issue for a different tax year. Nor would it preclude Judge Gerber from changing his mind. It's a different year. However, for a reason not disclosed in the opinion, IRS Chief Counsel representing the IRS here did not even raise the issue. Judge Gerber writes “we note that respondent has not questioned whether petitioner is engaged in a business activity or whether he was “away from home” when he visited the timber properties.” Lucky taxpayers.
Even though the taxpayers have the burden of proving an entitlement to a deduction, they do not have to argue against a reason the IRS does not give. The only reason the IRS gave to disallow the deduction in last week’s case was a failure to substantiate. Judge Gerber found the taxpayer’s records were adequate.
To me the lesson is that winning an issue in one year does not guarantee a taxpayer won't have to re-litigate the same issue. Here, the taxpayers basically got lucky that the IRS demurred. If the IRS ever audits their later returns, they may well have to argue and defend the idea that Mr. Maki’s travel was “away from home” such as to entitle him to a deduction. Of course, if they keep using the small case procedure, they can avoid the IRS taking an appeal.
Coda 1: These taxpayers ought to be included in my end-of-year “Taxpayers Behaving Badly." They claimed an outrageous per diem amount. The SMH moment here was their use of the luxury water travel per diem amounts to peg Mr. Maki’s travel expenses at $53,000 in 2013 and $57,000 in 2014! Judge Gerber reduced their expenses from the claimed $53,000 to just over $7,000. Personally, I think that was $7,000 too much.
Coda 2: The opinion notes these taxpayers under-reported some $18,000 of social security payments and conceded the issue in Tax Court. It is possible the omission was deliberate. The taxpayers have been receiving Social Security disability payments since at least 1991. See Maki v. Commissioner, T.C. Memo. 1996-209. I suspect their omission traces to their long-standing belief that taxation of SSA disability payments is improper. They argued that issue to the Tax Court twice, losing each time and the second time narrowly avoiding §6673 sanctions. See Maki v. Commissioner, T.C. Summ. Op. 2001-28 (The Court has considered imposing sanctions on petitioners under section 6673(a)(2) but declines to do so at this time.”). Yet here they are, over 20 years later, still omitting their SSA income.
Coda 3: Even conceding an intent to profit from the timberland, I do not understand why Mr. Maki’s activity is a business. To me it seems more like the “management, conservation, or maintenance of property held for the production of income” for §212 purposes. That means if he was indeed traveling “away from home” he would be entitled to some deduction. Sure. But I don't think the deduction would be above the line. I do not see it as “attributable to property held for the production of rents or royalties” and so §62(a)(4) would not apply. It seems to me it would instead by a miscellaneous itemized deduction subject to a 2% floor and, for tax years 2018-2025, sucked into the §67(g) black hole of nothingness. It might be a business if Mr. Maki meets the test in Commissioner v. Groetzinger, 480 U.S. 23 (1987). I doubt he does, but that is the subject for a different blog.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law