Court Ruling Gives Surprise Twist to Meaning of Tax Home

If a new Tax Court ruling is correct, it means that a tax return I recently prepared is not correct. The issue for the taxpayer in this case, and for my client, is whether or not they are allowed to deduct “away from home“ expenses under code section 162 (a)(2). Those expenses must be incurred while away from home overnight. The IRS said “no” to the taxpayer and I said the same to my long-term client.

My client, whom I will call Dodger because he likes to avoid paying tax, is a retired Northwest pilot who lives in Oakland, California. When he was a pilot he usually flew in and out of Detroit. He shared an apartment near the Detroit airport with other pilots. I did not deduct the apartment nor any travel costs to and from his Oakland home because he was commuting to work.

After Dodger retired he bought a “ranch“ in Northern California which also became his principal residence. He kept his old home in Oakland as a second residence. In good years Roger makes a small profit on his ranch.  He makes a boatload of money from his retirement, interest, dividends and capital gains.

In April, Dodger told me his was moving back to his Oakland home, making it his principal residence, and keeping the ranch. He asked if he could deduct the expenses of travel from Oakland to the ranch. I said no because he is retired. He does not have a business at his home and is therefore commuting to work. According to Judge Gerber in TC Summary Opinion 2018-30, I am wrong.

The taxpayer in this recent case lives in Des Moines, Washington, near Seattle. Like my client Dodger, the taxpayer is retired. The sources of his income are Social Security, interest, dividends, capital gains, and pensions, all of which he received at his home, just like my client.

The taxpayer inherited (the case does not say when) about 110 acres of timberland from his mother. The land was remotely located east of the taxpayers’ home. The taxpayer maintained and developed the property in order to sell the timber at a profit. In that pursuit, he would leave his home in Des Moines and travel to the property where he would spend several days planting, protecting, and maintaining the trees.  He occupied the residence on the timberland while he worked there.

During the tax year under audit he spent 167 nights on the timberland. He deducted travel costs including per diem. The taxpayer filed the business under a Schedule C. He reported no gross income. He claimed $70,157 of expenses. The IRS disallowed $56,960 but allowed $13,190 of deductible expenses. As the court noted, this is important because, by allowing the $13,190 of expenses to be claimed against no income, the IRS is not raising the issue of hobby loss.

Revenue Ruling 93-86 states that a taxpayer’s “home” is generally considered to be his or her regular or principal place of business. If a taxpayer has no regular place of business, then his or her abode, in a real or substantial sense, is where personal and business connections are maintained. According to the Revenue Ruling, if a taxpayer meets  neither of the above categories, then he or she is considered to be an itinerant with a “tax home“ wherever he or she  happens to work.

The court determined that the taxpayer’s home in Des Moines was his “tax home”. The judge provided two reasons for his ruling. First, the taxpayer spent most of his time in Des Moines.  Second, all of his income was “earned” in Des Moines.

I have a problem with both of these reasons. For the first, I do not believe that how much time a taxpayer spends in a particular location has been important in previous rulings. For the second, the taxpayer did not have “earned income”. Since his income was not earned, any travel to his “work” should be treated as non–deductible commuting. If the taxpayer had a job (earned income) in Des Moines, then his travel to the timberland could be deductible.

This is a TC Summary Opinion which means that although we can learn from this case, it does not set precedent. Though this is an interesting case, I question the correctness of the ruling so I will not be filing an amended return for Dodger….just yet.

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John Stevko