Taxpayer Can't Deduct Lodging and Meals During Transitional Period Relating to Job Change. (Parker's Federal Tax Bulletin: July 13, 2012)

The taxpayer's theory that his tax home changed only when he established an apartment in the city of his new job was unpersuasive to the Tax Court, which disallowed deductions for meals, lodging, and lease cancellation fees. Newell v. Comm'r, T.C. Summary 2012-57 (6/18/12).

Darren Newell worked as a restaurant general manager for LGO Hospitality. During the first eight months of 2008, Darren managed a restaurant in Phoenix, Arizona. While working at the Phoenix restaurant, Darren lived in an apartment with his wife and daughter in the nearby adjacent city of Scottsdale, Arizona. In August 2008, Darren's supervisor offered him a permanent position as general manager of LGO's restaurant in Pasadena, California. Darren accepted the position and around September 1, 2008, he started working at the Pasadena restaurant. Darren and his family moved to Pasadena around the same time period. The Newells terminated their apartment lease in Scottsdale and paid expenses associated with that early cancellation. They used a rented moving truck and their personal car to move their personal belongings to Pasadena. Because they didn't have an apartment before moving, the Newells paid for hotel accommodations and storage for their personal belongings in Pasadena. Darren and his family lived in hotel until the beginning of October 2008 while he worked at the Pasadena restaurant.

On October 10, 2008, the Newells executed a lease and moved into an apartment in Pasadena. They lived in the Pasadena apartment through the end of 2008 and into the following year. In February 2009, Darren transferred from the Pasadena restaurant to a newly constructed LGO restaurant located in Santa Monica, California. When Darren moved his family to Santa Monica in 2009, the Newells terminated the lease with respect to the Pasadena apartment and again paid expenses associated with that early lease cancellation. Darren worked as the general manager of the Santa Monica restaurant until approximately February 2010.

The Newells timely filed a 2008 joint federal income tax return, which was prepared by a commercial tax return preparer. Darren provided the return preparer with information regarding his move from Phoenix to Pasadena in 2008, including receipts for the expenses he paid. The same tax return preparer had prepared the Newells' tax returns for at least seven years before 2008 without incident. On their tax return, the Newells claimed a deduction for moving expenses of $9,433. The IRS denied the deduction and assessed an accuracy-related penalty under Code Sec. 6662.

The Newells subsequently conceded that the expenses originally claimed on their tax return were not deductible as moving expenses. Instead, they said, the amounts were deductible under Code Sec. 162 as business expenses. Those expenses included lodging, meals, and lease cancellation fees. According to the Newells, these expenses are not personal living expenses but deductible business expenses related to Darren's employment with LGO. Before the Tax Court, the Newells acknowledge that Darren's tax home changed from Phoenix to Pasadena in 2008. The Newells contended, however, that although Darren moved his family to Pasadena and began work at the Pasadena restaurant on or about September 1, 2008, his tax home did not shift to Pasadena until October 10, 2008, when he and his family moved into the Pasadena apartment. According to the Newells, the time period between September 1 and October 10, 2008, was a transitional period within which Darren's tax home remained in Phoenix. In the Newells' view, the expenses Darren paid for hotel lodging and meals in Pasadena during that transitional period constituted business travel expenses or temporary living expenses incurred while Darren was away from his tax home in Phoenix and were thus deductible under Code Sec. 162(a)(2).

The IRS argued that Darren's tax home shifted from Phoenix to Pasadena no later than September 1, 2008, when he moved his family to Pasadena and began working at the Pasadena restaurant. According to the IRS, the lodging and meal expenses Darren paid between September 1 and October 10, 2008, were therefore not incurred while he was away from his tax home. Consequently, the disputed lodging and meal expenses were nondeductible personal living expenses.

The Tax Court agreed with the IRS and held that the Newells expenses were not deductible personal living expenses. The court noted that the Newells provided no legal authority to support their transitional theory of deductibility. With respect to the Newells point that a hotel generally does not constitute a tax home, the Tax Court agreed. However, it said, the Newells' theory that Darren's tax home changed only when he established an apartment in Pasadena on October 10, 2008, was unpersuasive and contrary to well-established precedent.

After considering the totality of the facts and circumstances, and the fact that the Newells used a tax return preparer, the court was satisfied the Newells acted in good faith and came within the reasonable cause exception of to the accuracy-related penalty. Thus, they were not liable for the penalty.

For a discussion of deductible travel expenses while away from home, see Parker Tax ¶91,105.

Parker Tax Publishing Staff Writers

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