The concept of “tax home” is central to the §162 deduction for business travel. Akeem Adebayo Soboyede v. Commissioner, T.C. Summ. Op. 2021-3 (Jan. 26, 2021) (Judge Greaves) teaches us that a tax home is not where a taxpayer actually has a home, but is rather where the taxpayer ought to have a home. In this case, the taxpayer performed legal services in Minnesota and in the Washington D.C. area. The taxpayer’s principal residence was in Minnesota. When in D.C., he mostly stayed in a suburban hotel. The IRS and Tax Court decided that the taxpayer ought to have lived in the D.C. area because that is where he made most of his money and spent most of his work time. It was thus his tax home for §162 purposes. Part of this lesson is thus learning how to work deductions for business travel when a taxpayer’s primary residence is in their secondary work location. Details below the fold.
Law: The Objective Test for Tax Home Determination
Here’s a “handy” way to frame the issue:
On the one hand, §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 having to travel away from your home base of operations is one of those costs.
On the other hand, §262 prohibits deductions for “personal, living, or family expenses.” The choice of where to live is a personal choice. 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.”
Discerning which hand dominates is the task of tax advisors, the IRS and the Tax Court. Each must determine whether a taxpayer’s costs of travel are deductible business expenses or are non-deductible commuting costs. This requires a judgment. And we stuff the judgmental nature of the decision into a conceptual box labeled “tax home.” The idea is that a tax home is where a person ought to have their personal residence in order to earn their living.
You see the judgmental nature of the tax home determination in two scenarios. First, a taxpayer sometimes needs to travel further and further from their residence in order to find work. So long as those trips are for work purposes and are reasonably expected to last less than a year, the costs of travel (including transportation, lodging, and meals) at the distant location might well qualify for §162 deduction. See Rev. Rul. 99-7. No one expects the taxpayer to move their home under those circumstances. But once the distant work is expected to last more than one year—or even once there is no discernable end-point—then BOOM! the judgment falls: the taxpayer’s decision not to move is now suddenly a personal decision, making the travel costs non-deductible. They are judged! Judge Panuthos makes the point this way “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.” Hirsch v. Commissioner, T.C. Summ. Op. 2016-37 (emphasis supplied to show the judgmental nature of the inquiry).
A less common scenario is where a taxpayer has two vocations in different locations. In that situation 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. Andrews v. Commissioner, 931 F.2d 132 (1st Cir. 1991) is the classic case. There, Mr. Andrews had a pool business in New England and a horse-raising business in Florida. He sought to deduct the costs of his yearly travel to Florida from his residence in Massachusetts. The Tax Court sustained the denial of the deductions. It said he had two tax homes; so he just had two long commutes.
The First Circuit reversed, explaining that taxpayers can have only one “tax home.” That means that taxpayers who earn money from activities in two different locations must treat the location of the primary business as their tax home. That makes all the travel, lodging and meal expenses incurred in traveling away from that location to the secondary business location potentially deductible to the extent those travel expenses are incurred in pursuit of the secondary business.
Figuring out which of the two locations was Mr. Andrew’s “tax home” required a judgment as to where—Massachusetts or Florida—he ought to be living. The Andrews court remanded the case to the Tax Court saying the determination would usually turn on how much time the taxpayer spent in each location doing work. Here’s why:
“The guiding policy must be that the taxpayer is reasonably expected to locate his home, for tax purposes, at his major post of duty so as to minimize the amount of business travel away from home that is required; a decision to do otherwise is motivated not by business necessity but by personal considerations, and should not give rise to greater business travel deductions. The length of time spent engaged in business at each location should ordinarily be determinative of which is the taxpayer’s principal place of business or major post of duty.” 931 F.2d at 138 (internal scare quotes omitted but emphasis supplied to show judgmental nature of the inquiry).
The Andrews court admitted, however, that “that other factors might be considered or even found determinative under appropriate circumstances.” Id. at note 10.
The important point is that the judgment is based on objective factors and not on the taxpayer’s subjective intent. For example, in Markey v. Commissioner, 490 F.2d 1249 (6th Cir. 1974), the Tax Court had permitted a taxpayer’s deductions by simply accepting the taxpayer’s own judgment (which it found to be sincere) that "he would not be running the hazard of weekend travel on every weekend for 500 miles for his personal convenience."
The Sixth Circuit reversed and remanded, holding that the taxpayer’s subjective intent was simply not a factor in determining where the taxpayer ought to have his home. Instead, the Sixth Circuit said a court should judge where a taxpayer’s tax home should be by looking at: (1) the length of time spent at the location; (2) the degree of business activity in each place; and (3) the relative portion of taxpayer’s income derived from each place. 490 F.2d at 1255. This is the test the Tax Court currently uses. See Montgomery v. Commissioner, 64 T.C. 175 (1975).
Today’s case is a wrinkle on the Andrews fact pattern. Let’s take a look.
Mr. Soboyede was a lawyer, licensed to practice law in Minnesota and in Washington D.C.
According to the opinion, in 2015, Mr. Soboyede reported $46,000 in “wages...from multiple companies for document review work. Of that amount, $38,548 was from work performed in the Washington, D.C. area and $7,582 was from work performed in Minnesota.”
In 2015, he also reported $10,650 of income from “a solo law practice in Minnesota and in the Washington D.C. area.” Judge Greaves later noted it was an immigration practice. On the Schedule C, Mr. Soboyede reported deducible expenses of about $26,800, of which about $14,000 was for expenses traveling from Minnesota to Washington D.C. and staying in a hotel in Maryland suburbs (definitely the cheaper choice!): lodging expenses were $8,400, and transportation expenses (apparently for both air travel and car travel) were $5,600.
In looking at the income from each location, Judge Greaves found that Mr. Soboyede earned at least $28,548 from work performed in the D.C. area, while earning at most $18,232 from work performed in Minnesota (adding all of this Schedule C income to the portion of his “wage” income attributable to Minnesota work).
In looking at the time spent working in each location, Judge Greaves found that Mr. S. spent 151 working days in the D.C. area, 115 working days in Minnesota, and 54 nonworking days in Nigeria. The other 35 days were unaccounted for.
Lesson: Finding the Tax Home
Judge Greaves’ opinion treats Mr. Soboyede as having a single business, split between two locations. This is different than Andrews where the taxpayer two different businesses in two discrete locations.
Treating Mr. Soboyede as being engaged in a single activity, Judge Greaves looked at total work days in each location and total income attributable to each location to judge where Mr. Soboyede ought to have made his home. Judge Greaves held that Mr. S. ought to have lived in the Washington D.C. area to earn his living, for two reasons. First, Mr. Soboyede spent more than half of his working days in D.C. in 2015, and earned more than half of his gross income doing work there. Second, the work was not temporary but was instead indefinite. Those facts made D.C. his tax home. That finding made his choice to live in a hotel (and, for a time, an apartment) a personal choice, not deductible. And, because D.C. was his tax home, the costs of traveling from Minnesota to Washington D.C. were non-deductible personal expenses.
It is also possible to conceptualize Mr. Soboyede as being engaged in two separate activities: (1) document review services; and (2) a practice of law (immigration law). At least some career advice websites treat document review as a distinct category of business, and one that does not require a law degree.
If one viewed Mr. Soboyede as engaged in two different business activities, then the analysis becomes more complicated because it looks like he split time in both activities between Minnesota and D.C. But using the time and earnings analysis employed by Judge Greaves appears to lead to the same result because his income from the document review activity was so much more than his private practice income: D.C. was his tax home.
Comment 1: What Counts?
I see this is as a pretty close case. I wonder if there were additional factors Judge Greaves might have considered before concluding that a D.C. hotel was Mr. Soboyede’s tax home for 2015.
As to the time analysis, I first note that Judge Greaves looked only at work days and ignored the 54 non-work days spent in Nigeria. Wrote Judge Greaves: “Even if he spent the remaining 35 unaccounted-for days in Minnesota, petitioner still physically spent more than 50% of his total working days in the Washington D.C. area in 2015.” Op. at 7-8.
The analysis of working days seems rightly the most important analysis. As the court in Andrews noted: “Business necessity requires that living expenses be duplicated only for the time spent engaged in business at the ‘minor post of duty,’ whether that is the ‘primary residence’ or not.” 931 F.2d at 138.
But still, 151 days in D.C. is less than half the year. Another factor in Andrews is just a straight-up question of where does the taxpayer have the larger physical presence, regardless of working days. Here is where the 54 days in Nigeria potentially come into play. In other areas of tax law is it is well settled that temporary absences from a location are treated as time spent at that location. For example, in determining whether a taxpayer has a substantial presence in a foreign country for the §911 exclusion, the regulations treat the taxpayer as physically present in that foreign country even for days where the taxpayer is temporarily absence from that country. See Treas. Reg. 1.911-2(d). Another example is that in determining whether a taxpayer’s use of a residence qualifies for the §121 exclusion, the regulations provide that “short, temporary absences such as for vacation or other seasonal absence” count as use of the residence. Treas. Reg. 121-1(c)(2)
Should those principles apply here? If so, another way to do the time analysis is to note that Mr. Soboyede spent less than half the year in D.C. and more than half the year in Minnesota. And it is pretty clear that the time in Nigeria was time away from the Minnesota home and not some hotel.
A second factor that might be important for both the time and earnings analysis, but not addressed in this case, would be consideration of the surrounding years. That is, was 2015 a normal year for Mr. Soboyede or an outlier year? That may be important in deciding what we expected of Mr. S. It does not seem right that a taxpayer’s “tax home” should flip back and forth from year to year depending on the vagaries of where a taxpayer secures employment. That is the reason for the one-year temporary absence rule, after all: a temporary absence---even if recurring from year to year---is not sufficient to lay on a taxpayer the expectation (i.e. judgment) that they ought to have moved to a new location. Thus, when the shifting of just a few days or a few dollars from year to year changes the time and earnings analysis, that changes what we should expect.
Comment 2: Finding Deductions for Second Work Location
While the costs of traveling to D.C. were not deductible, the costs of travel away from D.C. to Minnesota certainly could be deductible, if Mr. Soboyede’s predominate reason for the travel was connected to his business activities in Minnesota. The IRS apparently agreed because it conceded Mr. Soboyede’s deductions for his transportation costs (to the extent he was able to substantiate them). Op. at note 5. A round trip plane ticket is the same cost regardless of which is the "home" airport.
Lodging costs and meal costs are trickier to deal with when the taxpayer’s actual home is not the taxpayer’s tax home! That is, when the taxpayer’s primary residence is in the taxpayer’s secondary work location, how does one account for the costs of meals and lodging when working in the secondary work location, here Minnesota.
To the extent that Mr. Soboyede chose to live in a hotel while in D.C., then his lodging costs in Minnesota would not seem to be duplicative housing costs and so should not be deductible.
However, to the extent he maintained an apartment in D.C., then it seems to me he could deduct the cost of lodging in Minnesota, at least insofar as attributable to business days in Minnesota. That would seem a pretty standard application of the rules in Treas. Reg. 1.162-2(a)(“only such traveling expenses as are reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it may be deducted”) and of the rules for foreign travel in Treas. Reg. 1.274-4, including that lovely weekend rule in (d)(2)(v). The question is the same for meals. Can Mr. Soboyede now deduct half the cost of his meals eaten while in Minnesota? I would think so, at least for business days in Minnesota. But I could be wrong. I welcome comments on that.
Putting aside travel away from home costs, other ordinary and necessary expenses for carrying on the trade or business in the secondary work location should remain deductible, regardless of the location of the tax home. Here, for example, the IRS also conceded deductions for Mr. Soboyede’s rents for his Minnesota office and some of his office expenses, to the extent he properly substantiated them.
Comment 3: A Potential Line Problem?
Notice that Mr. Soboyede appears to have dumped ALL his travel costs on Schedule C (and thus above the line) even though most of his income came from document review services where it appears he was a part-time employee. Actually, the opinion is not clear whether the document review income was employee compensation or non-employee compensation. Document review work seems to be mostly independent contractor work, a side hustle as it were. See e.g. this recruiting site. However, from Judge Greaves’ use of the term “wages” and from the separate statement of Schedule C income, I infer that Mr. Soboyede was treated as a part-time employee for multiple companies (we do not know whether they were law firms or other business entities) for his document review services (and thus received a W-2) and was not treated as an independent contractor for such review (and thus did not report the document review income on the same or different Schedule C).
The difference is important. To the extent Mr. Soboyede’s travel away from home costs (as now correct to be the travel to Minnesota from D.C.) are to perform services as a part-time employee, they would be stuffed below the line. §62(a)(1). He should not be reporting such costs on Schedule C unless he could link them to his Schedule C activity. That is another reason why it perhaps makes more sense to treat Mr. Soboyede as having been engaged in two separate businesses in 2015, even though that complicates the tax home analysis.
Bryan Camp has his tax home in Lubbock, Texas, where he is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return to TaxProf Blog each Monday for a new Lesson From The Tax Court.