The case of Deborah Louise Biegalski v. Commissioner, T.C. Summ. Op. 2019-35 (Dec. 3, 2019)(Judge Colvin) teaches a useful lesson in the difference between deductible business travel and non-deductible commuting for taxpayers who work as independent contractors. The wrinkle in this case was that the taxpayer’s travel was done per two different contracts for different types of work and for two discrete periods, each less than one year. She thought that made her travel deductible. The Tax Court disagreed. Details below the fold.
Law: Deductible Travel vs. Non-Deductible Commute
Section 162 allows deductions for “traveling expenses...while away from home in the pursuit of a trade or business.” That is part of the general Congressional policy to tax income after permitting taxpayers to first deduct the costs of producing the income. And travel away from home is one of those costs.
In contrast, §262 denies deductions for “personal, living, or family expenses.” Because the choice of where to live is a personal choice, that makes the expenses of getting to work personal as well. That is why Treas. Reg. 1.262-1(b)(5) says: “The taxpayer's costs of commuting to his place of business or employment are personal expenses and do not qualify as deductible expenses.”
You see the problem: how do we distinguish between non-deductible commuting and deductible travel away from home? Over the years the IRS and courts have built up a robust body of guidance that gives answers to many of the questions that arise. Over 20 years ago the IRS issued Rev. Rul. 99-7 that synthesized much of the prior law. Despite its age, it is worth your time and effort to read and master. Even though it does not have the same authority as a statute or regulation, it has turned out to be very influential on the Tax Court’s thinking, as evidenced by the case today.
One recurring issue that confronts practitioners, the IRS, and the courts is the issue of temporary travel. I like how Judge Panuthos framed this issue in Hirsch v. Commissioner, T.C. Sum. Op. 2016-37 : “the purpose for allowing deductions for travel to and from a temporary business location is to assist a taxpayer who must temporarily be away from his residence for an employment-based need, when it would be unreasonable to expect him to move indefinitely.”
The trick is to draw the line between “temporary” and “indefinite.” Temporary work generates the deduction. But once you are working somewhere for a long enough period of time, your decision to not move any closer becomes a personal choice, transforming the expenses of getting to work from “travel away from home” to “commuting.” See e.g. Walker v. Commissioner, 101 T.C. 537, 549-550 (1993).
Rev. Rul. 99-7 uses a one-year rule to distinguish “temporary” from “not temporary”:
“If employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary in the absence of facts and circumstances indicating otherwise. If employment at a work location is realistically expected to last for more than 1 year or there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary.... If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to exceed 1 year, that employment will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes, and will be treated as not temporary after that date.” (Emphasis supplied)
As with any rule, the devil is in the details. Today's lesson deals with the details of the bolded language: "realistically expected."
The tax years at issue were 2014 and 2015. During those years, up until May 15, 2015, Ms. Biegalski worked for a company called First Tek. She traveled from her home to First Tek’s global headquarters in vibrant Piscataway, New Jersey, presumably to it’s listed address of 1551 S Washington Ave. Suite 402 A. Or perhaps, given First Tek’s business model, she actually traveled somewhere else. For example, if the Deborah L. Biegalski entry in LinkedIn is indeed this taxpayer, then it appears she traveled to a location in Mt. Laurel, NJ. during these years.
Either way, while First Tek’s website claims to have over 1,000 employees worldwide, Ms. Biegalski was not among them. She was instead signed an agreement to be an independent contractor, to provide “temporary staff augmentations services...for the period(s) as set forth in each attachment hereto (Work Orders).”
Shortly after signing the independent contractor contract, Ms. Biegalski and First Tek executed a 1st Work Order covered the period October 14, 2013 to October 10, 2014.
At a time not appearing in the record, but at some point during that period, Ms. Biegalski and First Tek signed a 2nd Work Order that covered the period October 11, 2014 to October 10, 2015.
Before the end of the 2nd Work Order period, Ms. Biegalski had found permanent (e.g. indefinite) employment with a large financial firm and ceased working for First Tek on May 15, 2015.
When she prepared her 2014 and 2015 returns, Ms. Biegalski deducted her expenses in traveling to First Tek’s offices. The IRS allowed those deductions for expenses incurred up to and including September 30, 2014 which it decided was the date on which the parties signed the 2nd Work Order. It disallowed deductions after that date.
Lesson: How A New Contract Negates Temporary Status
Ms. Biegalski did an admirable job representing herself in Tax Court. She presented three reasons why the NOD was invalid, including the layperson’s commonsense notion that when a taxpayer hands an IRS employee an amended return, the IRS may no longer review the original return because an amended return supersedes the original. That view reflects a common misunderstanding, which I blogged about in Lesson From The Tax Court: The One Return Rule.
The lesson here, however, is the commuting lesson. Ms. Biegalski argued that the 2 different Work Orders should be treated as two separate contracts. Each was for a different scope of work, she said, and was for a different and non-overlapping time period of less than one year.
Judge Colvin appears to have assumed the two Work Orders were indeed separate contracts and that each were for different types of work. It did not matter. Citing to Norwood v. Commissioner, 66 T.C. 467 (1976), he writes: “the total period of service controls, even if the duties change during the period of service.” Thus, as of the contract renewal date (which Judge Colvin finds to have been September 30, 2014), Ms. Biegalski no longer had a reasonable expectation that the employment would last one year or less, and so could no longer deduct her travel costs.
What seems to me key is that Ms. Biegalski was working for the same employer and in the same job location under both contracts. Judge Colvin's cite to Norwood helps us see that I think. In Norwood, the taxpayer had a series of temporary assignments with the same construction company for a job some 70 miles away from his home. He started as a steam-fitter under a 6 month contract, then became a foreman for 9 months, then a welder, then a pipe-fitter, all at the same construction site for a period totaling 3 years. The Tax Court held that as soon as the construction company offered to keep the taxpayer on in a different capacity, he “could reasonably have expected to be rehired for further jobs on the same project — a project which he knew was a large one and would take a substantial amount of time to complete.” 66 T.C. 470. There's those details on what "reasonable expectation" means.
Ms. Biegalski’s situation has the same sense of continuity as Norwood. Even if these were two contracts, the contracts covered work in the same remote job site and for the same employer: either at 1551 S Washington Ave. Suite 402 A, Piscataway, NJ, or in Mt. Laurel.
Savvy readers will doubtless have questions.
First, note that Ms. Biegalski actually spent only 1.5 years in the work location whereas Mr. Norwood spent over 3 years. And she only had one renewal; he had multiple. Similarly, Ms. Biegalski’s situation is very different from the taxpayers in Baca v. Commissioner, T.C. Memo 2019-78, which I blogged about in Lesson From The Tax Court: How A New Work Location Becomes a Tax Home. The taxpayer there spent almost 5 years in the supposedly “temporary” work location and even started a side business there. Do those ex-post facts make a difference?
It is here that you see the weight and importance of Rev. Rul. 99-7. Judge Colvin recites and adopts the Rev. Rul.’s 1-year test. Thus, as soon as Ms. Biegalski signed that 2nd Work Order, she could no longer have a “realistic expectation” that her employment at that location would be less than one year. Sure, she had a realistic expectation that the work was still temporary. Heck, no one thinks she was making a career in temp work! And the ex-post facts help her: she secured permanent employment before the end of the second year. But once the Tax Court buys into the Rev. Rul.'s one-year rule, it no longer matters that the work was temporary in some metaphysical sense. It was not temporary for the travel deduction purposes.
Second, readers might also question whether the result here would have been different had First Tek assigned Ms. Biegalski to a different work location in the 2nd Work Order. Or what about if the Work orders were from different employers? I do not think either difference would have changed the result because Ms. Beigalski would still need to meet the temporal 1-year requirement, at least if the Tax Court thinks Ms. Biegalski would fall under this part of Rev. Rul. 99-7.
“If a taxpayer has one or more regular work locations away from the taxpayer’s residence, the taxpayer may deduct daily transportation expenses incurred in going between the taxpayer’s residence and a temporary work location in the same trade or business, regardless of the distance.” (emphasis supplied).
Note, however, that the IRS and Tax Court appear to disagree on how to deal with taxpayers who are truly independent contractors, but who do not have a home office within the meaning of §280A. The IRS’s position is that only when a taxpayer’s residence “is the taxpayer’s principal place of business within the meaning of § 280A(c)(1)(A)” are travel expenses then deductible "regardless of whether the other work location is regular or temporary and regardless of the distance.” But if the residence does not qualify as a home office, then the work must be temporary to support the travel deduction.
The Tax Court has not agreed with this reasoning in the past. In Walker v. Commissioner, 101 T.C. 537 (1993) the Tax Court said that a logger who worked for the same logging company as an independent contractor, but was sent by that same company to different job locations in a National Forest, could deduct the cost of travel to those different job locations. Even though his home did not qualify for home office deductions it was still his “regular place of business” because it was where he cleaned and prepped his logging tools. The Court explicitly rejected the idea that “whether a taxpayer's residence is his ‘principal place of business’ for purposes of local transportation deductions should be the same as the standards for home-office-expense deductions under section 280A.” 101 T.C. 545.
Thus, if Ms. Biegalski had a credible argument that her principal place of business was her home, then she would not need to rely on the temporary nature of her work. Otherwise, she is stuck with the 1-year rule and the Tax Court’s finding that, despite the different contractual periods and the different scope of work, there was sufficient continuity as to both employer and location that it was proper to deny commuting expenses once she had a realistic expectation that the work would last more than one year.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.