When I teach the §162 travel away from home deductions I tell my students to distinguish between transportation costs (on the one hand) and meals/lodging costs (on the other hand). Transportation costs are covered by Rev. Rul. 99-7. Their deductibility turns on job site location. To deduct meals and lodging expenses, however, the taxpayer must meet an overnight rule as well. United States v. Correll, 389 U.S. 299 (1967). I have never taught that the overnight rule applies to transportation costs.
After reading today’s case, I may have to change how I teach this issue. In James P. Harwood and Connie J. Harwood v. Commissioner, T.C. Memo. 2022-8 (Feb. 15, 2022) (Judge Urda), Mr. Harwood worked at various temporary job sites located in cities away from his tax home in Yakima, Washington. Sometimes he stayed overnight at the job sites, coming home on weekends. Sometimes he drove there and back in the same day. If I’m reading the opinion correctly, Judge Urda applied an overnight rule to hold that when Mr. Harwood chose to drive to and from his job site in the same day, he could not deduct the transportation costs. That’s a new twist on the law from what I can tell. So we should pay attention. Details below the fold.
First, Find the Tax Home
Section §162 permits deductions all the “ordinary and necessary expenses” of “carrying on any trade of business” and specifically includes “traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.”
What is a “home” for tax deduction purposes is sometimes, but not always, the “home” for non-tax purposes. I think of a tax home as the place a taxpayer needs to live to work. If their job is in a single place, they need to live there and that becomes their tax home, regardless of where they actually put their head down at night. But if their job takes them to a variety of places, why then a tax home might become the same as their personal residence. And if they have no personal residence, then they cannot take travel deductions at all because they are itinerant and have no home of any sort to be away from in the first place. Rosenspan v. United States, 438 F.2d 905 (2d Cir. 1971).
The formal phrasing—long accepted by courts—is this:
“an individual's tax home is considered to be located at his regular or principal (if more than one regular) place of business or, if the individual has no regular or principal place of business because of the nature of the business, then at his regular place of abode in a real and substantial sense.”
Rev. Rul. 73-259. You can also this language in the regulation on who is qualified for the §911 exclusion. Treas. Reg. §1.911-2(b).
Today’s case involves a taxpayer who has no regular or principal place of business because of the nature of his business. For those types of taxpayers, Rev. Rul. 73-259 lays out a 3-part test that courts still use to determine whether the taxpayer even has a “place of above in a real and substantial sense.” Judge Urda phrases the test this way:
“We consider whether the taxpayer (1) incurs duplicate living expenses while traveling and maintaining the home, (2) has personal and historical connections to the home, and (3) has a business justification for maintaining the home.”
The Rev. Proc. phrases the test differently. Specifically, the Rev. Proc.’s first test is “Whether the taxpayer performs a portion of his business in the vicinity of his claimed abode and uses such abode (for purposes of his lodging) while performing such business there.” Judge Urda’s third test is a substitution and, IMHO, a sounder way of phrasing the test because it allows for more flexibility in deciding what facts and circumstances are relevant to the analysis, and more closely follows Tax Court case law as I will shortly explain.
Second, Figure The Amounts Deductible
The reason I teach my students to distinguish transportation expenses from meals/lodging expenses is because there have been—at least up to now—different rules for determining the allowable amounts of each.
For transportation expenses, the trick is to distinguish between a non-deductible commute and deductible business travel. The go-to guidance for that is still Rev. Rul. 99-7, which synthesizes a variety of prior Rev. Rules and case law.
The basic rule is that daily transportation costs from a personal residence to a work location are non-deductible commuting. However, the Rev. Rul. provides for two exceptions when the taxpayer is traveling to a temporary work location. Temporary is defined as a time period that is reasonably expected to last less than a year.
First, when a taxpayer’s normal work location is in the same metropolitan area as the residence, then daily transportation expenses between the taxpayer’s residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works are deductible.
Second, when a taxpayer has “one or more regular work locations away from the taxpayer’s residence” then 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.
The Tax Court has long followed this idea of first determining whether and where the taxpayer has a regular work location. For example, in Dean v. Commissioner, 54 T.C. 663 (1970), the Court said:
“...when a taxpayer maintains a residence away from the vicinity of his nontemporary principal place of business, that residence is not his home within the meaning of section 162. The corollary of this is that where a taxpayer does not have a nontemporary principal place of business away from the vicinity of his residence, then his place of residence remains his home for tax purposes.” Id. at 667.
In Dean, the taxpayer was a union member who lived in Salisbury, a town in the hinterlands of Maryland. During the year at issue he had three temporary jobs, one of which was a few miles from his Union Hall in Washington D.C., but some 120 miles away from Salisbury. The IRS argued that the Union Hall was his tax home, trying to make the Union play the role of employer. If correct, his costs to that nearby location were just commuting costs from his Union Hall "tax home."
Rejecting the IRS argument, the Court held that the Union Hall was not his tax home because even though “the union headquarters in Washington were helpful and even instrumental in obtaining employment for petitioner during the taxable year, petitioner worked and created income by his various employments... It was in those places rather than Washington that petitioner had a place of business, a place of employment, or a post or station at which he was employed. Since these were temporary places of business and employment, petitioner's residence did not cease to be his home within the meaning of section 162.” Id. at 668 (internal quotes omitted).
Notice that the Tax Court in Dean allowed deduction for transportation costs without any reference or mention of the need for the taxpayer to stay overnight anywhere. Notice it is a precedential opinion.
(2) Meals and Lodging
For meals and lodging, the Service and courts use an overnight rule. Meals and lodging expenses are deductible only to the extent that the taxpayer reasonably needs to rest and sleep during the work-related travel. Correll, supra.
As with every deduction, taxpayers must substantiate their expenses by adequate records. For certain travel expenses, §274 imposes stricter substantiation requirements. Specifically, a taxpayer must show the amount, time, place and business purpose for each claimed meal, lodging or vehicle expense and must do so using either contemporaneous records or reconstructed records that provide the same level of credibility. See, generally, Treas. Reg 1.274-5T.
Mr. Harwood is a steamfitter. During the years at issue (2015-2017) his personal residence was in Yakima, Washington where he owned a home and lived with his wife and children. Mr. Harwood was a member of Local 598 of the United Association of Journeymen and Apprentices of the Plumbing and Pipefitting Industry of the United States and Canada. The Union Hall was in Pasco, Washington, about 90 miles away from his residence. Mr. Harwood obtained all his jobs during the years at issue through his Union.
Local 598 covers a huge territory. Judge Urda thoughtfully gives us a map of it in his opinion and I want to do the same, because it’s important to resolution of the case.
During the years at issue, Mr. Harwood traveled to the following locations for work. These were the only jobs he had each year and all were “temporary” within the meaning of Rev. Proc. 99-7.
(1) Quincy, WA (87 miles away) (Jan-July; Sep-Oct).
(2) Boardman, OR (147 miles away) (Oct-Dec).
(1) Boardman (Jan-May)
(2) Quincy (May-Dec)
(1) Quincy (Dec-April)
(1) Hillsboro, WA (203 miles away)(Sep-Nov)
(2) Hanford, WA (41 miles away)(Nov-Dec)
On some of these jobs, Mr. Harwood stayed overnight for the workweek and went home, thus incurring lodging expenses. On others, Mr. Harwood simply drove to work in the morning and returned home at night. And on yet others, he did both. Specifically, in his first Quincy job in 2015 he drove each day. But two months in to his 2016 job in Quincy, he decided to rent space in a trailer park and stay overnight in his personal travel trailer and just go home on weekends.
For all of his work-related travel, Mr. Harwood used a single car, a Buick Verano. Further, he used that car 100% for work. That’s the kind of client I like to have! Therefore, his contemporaneous records consisted only of recording “the date and odometer reading each time he refueled the Verano.” Op. at 3. But if one is using the car exclusively for work, perhaps that is adequate, if every mile driven is deductible travel away from home and not a non-deductible commute.
When the Harwoods prepared their tax returns for 2015, 2016, and 2017, they indeed decided to deduct all of Mr. Harwood’s transportation for his travel to each of the work locations in those years. They also took deductions for his lodging and meals. Since he was a wage employee, that meant, of course, they took the deductions as itemized deductions subject to a 2% floor, per §67(a). As often happens, they got over-enthused about taking deductions, throwing in “other business” deductions that were even more that their claims travel away from home deductions! Bad move. For those, the Harwoods were unable to even “explain the nature of the expenses reported, much less detail how they qualify as ordinary and necessary business expenses.” Op. at 17. However, when the IRS audited the years, it also got over-enthused, disallowing not just the low-hanging fruit of unexplained “other business” deductions, but also disallowing all the claimed travel expense deductions. Yowsa. Turns out that was a bad move, too.
Lesson: Union Member’s Personal Residence Is Also Tax Home
Judge Urda first recapitulates his reasoning from Geiman v. Commissioner, T.C. Memo 2021-80, to find that Mr. Harwood’s personal residence was his tax home for travel-away-from-home purposes. We learned how the tax home test applies to union members in Lesson From The Tax Court: Trailer Home Is Union Electrician’s Tax Home, TaxProf Blog (Aug. 9, 2021). So while it’s good to see it again, I want to focus on the second lesson I take from this case.
I would just make one observation here. Putting this case together with Geiman and with the 1970 Dean case, supra, one might well conclude that a union member’s tax home will usually be the same as their personal residence, so long as they have a genuine and bona-fide connection to the union local and their personal residence is within the union’s territory.
But that then leads to another question: is the union territory the same as the “metropolitan area” for purposes of applying the transportation rule in Rev. Rul. 99-7? That takes us to the second lesson.
Lesson: No Deduction for Vehicle Expenses For Same-Day Travel In Union Territory?
To substantiate his vehicle expenses, Mr. Harwood showed Judge Urda his mileage log. Since he used his Buick solely for work purposes and since all his work-related travel was to and from temporary job sites (with some side trips for continuing education classes that Judge Urda also found to count as work travel), he seemed to think that was enough to prove his entitlement to mileage.
Judge Urda disagreed, writing “Although we find Mr. Harwood credible in describing his system, his log is unreliable in that it failed to exclude nondeductible commuting mileage, which he incurred in each of the three years at issue.” Op. at 15 (emphasis supplied) After stating the general rule that daily travel is presumed to be a non-deductible commute, Judge Urda then jumps to the conclusion that for the temporary jobs where Mr. Harwood did same-day travel, he “commuted.” And, as to the job in Quincy where he switched from same-day travel to renting space in a trailer park, “he likewise commuted... until the beginning of October, when he brought his trailer to Quincy.” Op. at 15. Thus, for the 2015 year, Judge Urda allows only the mileage deduction for the 2015 travel to Boardman and none for travel to Quincy. Op. at 16. And for the 2016 year, he allows mileage deduction only for the travel to Quincy starting in October after Mr. Harwood started staying there overnight.
What I find puzzling is that after stating the general rule for commuting, Judge Urda does not address the two exceptions in Rev. Rul. 99-7 and related case law such as Dean. I am not sure of the rationale for imposing an overnight rule for transportation costs and I did not see any explanation in the opinion. Think of the ramifications! Taken seriously, it would disallow the cost of air travel for a same-day flight to and from a work location to another city.
It seems to me that one or both of the exceptions in Rev. Rul. 99-7 apply here, depending on whether you think Yakima or the massive Union territory is the relevant “metropolitan area.”
First, if Yakima is Mr. Harwood’s tax home, then all of these temporary jobs appear to be temporary work locations outside the Yakima metropolitan area, and thus should be deductible, regardless of whether Mr. Harwood required rest or sleep. I confess I do not know what the “metropolitan area” of Yakima would be, or whether the IRS would define it as the Yakima Metropolitan Statistical Area or not. I welcome comments on that. Either way, however, the places he went seem to fall outside the MSA.
Second, even if these temporary jobs were within the Yakima metropolitan area, or if you decided that the massive Union territory was the relevant metropolitan area, Mr. Harwood’s situation would still seem to fall within the second exception in Rev. Rul. 99-7, because he had no regular work location within Yakima. In fact, as part of the tax home argument, the IRS argued that Mr. Harwood “had not worked jobs in Yakima since 2005.” Op. at 11. Yup. That’s the life of a union steamfitter. So it just does not seem consistent with the rules (as I know them) that Mr. Harwood’s travel to and from Quincy and Hanford should be disallowed simply because it occurred each day during his temporary employment.
Naturally, I offer these thoughts with the usual caveat that I’m writing this blog post quickly and may very well be overlooking something basic. I welcome any correction readers care to give in the comments.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. He invites readers to return each week to TaxProf Blog for another Lesson From The Tax Court.