Nonresident Aliens' U.S. Summer Jobs Don't Qualify as "Away From Home"; No Deduction Allowed for Travel Expenses

(Parker Tax Publishing April 2017)

The Tax Court held, in an issue of first impression, that nonresident alien individuals working summer jobs obtained through the U.S. Department of State's Summer Work Travel Program were not "away from home" for purposes of Code Sec. 162(a)(2), and therefore were not permitted to deduct travel and living expenses they paid in connection with the program. The individuals were, however, permitted to deduct expenses for travel health insurance to the extent those expenses satisfied the requirements of Code Sec. 213(a). Liljeberg v. Comm'r, 148 T.C. No. 6 (2017).

Background

In 2012, Richard Liljeberg, Anna Zolotareva, and Enda Conway, foreign nationals and full-time students at foreign universities, participated in the U.S. Department of State's Summer Work Travel Program (SWTP). The program facilitates educational and cultural exchanges in order to increase mutual understanding between the people of the United States and of other countries and assist the Department of State in furthering its foreign policy objectives. All three participants were issued J visas, a nonimmigrant visa issued to an alien who has no intention of abandoning his or her foreign residence. The participants lived in and were citizens of Finland, Russia, and Ireland, respectively. Each worked summer jobs under the four-month program and travelled while in the U.S. Liljeberg worked as a lifeguard in the Wisconsin Dells, Zolotareva worked as a housekeeper in the State of Washington, and Conway worked as a restaurant server in New York.

All of the participants were full-time students in their home countries in 2012. Zolotareva and Conway had no business connections with their home countries during the SWTP. Liljeberg was employed part-time as a security guard in Finland but quit that job before arriving in the U.S. and did not resume it on his return. Liljeberg lived with his mother before coming to the U.S. and in a rental home upon his return to Finland. Zolotareva lived with her parents in Russia before coming to the U.S. and after she returned home later in 2012; she did not pay rent or utilities. Conway lived with his mother in Ireland and sent money to her during the program to maintain his home there. All three maintained driver's licenses and voter registrations in their home countries.

Each participant filed a Form 1040NR, U.S. Nonresident Alien Tax Return, for 2012 and claimed unreimbursed employee expense deductions for expenses incurred to travel to and from the U.S. and for travel medical insurance. In addition, Conway claimed a deduction for meal and entertainment expenses. Other expenses initially claimed as deductions were the subject of concessions by the parties and were not at issue.

Analysis

Nonresident aliens are subject under Code Sec. 871 to U.S. federal income tax on income that is effectively connected with the conduct of a U.S. trade or business. J visa holders are treated as nonresident alien individuals engaged in a U.S. trade or business under Code Sec. 871(c). Code Sec. 873(a) permits nonresident aliens to take deductions only if, and to the extent to which, they are connected with income that is effectively connected with the conduct of a U.S. trade or business.

Deductions are generally not permitted for personal, living or family expenses. However, under Code Sec. 162(a)(2), a deduction is permitted for ordinary and necessary business expenses incurred while the taxpayer is traveling away from home. Home is generally defined for these purposes as the vicinity of the taxpayer's principal place of employment, not where his or her personal residence is located, although an exception applies for temporary employment. Under Peurifoy v. Comm'r, 358 U.S. 59 (1958), the location of a personal residence may be claimed as a taxpayer's home if the taxpayer is away from home on a temporary, rather than indefinite or permanent basis.

A temporary absence alone does not make a personal residence a tax home. The taxpayer must have a business reason to maintain a distant, separate residence. For example, in Hantzis v. Comm'r, 638 F.2d 248 (1st Cir. 1981), a student attending law school in Boston was not permitted to deduct the expenses of maintaining a residence in Boston during a summer job in New York because her reasons for keeping the Boston residence were solely personal in nature. Thus, for temporary employment, the tax home is the location of the temporary job, and the taxpayer is not away from home for purposes of Code Sec. 162(a)(2) unless business exigencies require the maintenance of the separate residence. The purpose of this rule is to mitigate the burden on a taxpayer who, for business reasons, must maintain two places of abode and incur additional and duplicate living expenses.

The issue before the Tax Court was the location of the SWTP participants' homes for tax purposes during the SWTP. If their homes abroad were their tax homes for purposes of Code Sec. 162, then the away-from-home requirement would be satisfied and the travel and living expense deductions permitted. However, if their summer job sites constituted their tax homes, then the participants were not away from home and could not deduct the expenses associated with the SWTP.

Students' Arguments

The SWTP participants argued that, under the terms of their visas, they were permitted to stay in the U.S. no longer than four months and had to maintain residences abroad. Moreover, their employers benefitted from their keeping homes abroad because the employers could therefore legally employ them and recognize employment tax savings, among other benefits. By maintaining close links to their home countries (driver's licenses, voter registrations, etc.) and intending to return at the end of the SWTP, the participants asserted that their tax homes were in their respective home countries. In the participants' view, they were engaged in the temporary business of being employees in the U.S. and should be allowed to deduct their ordinary and necessary business expenses while away from home. They argued that, under Peurifoy, because their work was temporary, they did not need to show the existence of business exigencies or that they were employed or otherwise engaged in a trade or business before accepting temporary work at a second location. Regarding health insurance, the participants argued that the travel insurance they purchased was not only in furtherance of their trade or business but was required as a condition of procuring a J visa and as a condition of their participation in the SWTP and thus their employment. They therefore asserted that the travel health insurance expenses were also deductible under Code Sec. 162.

IRS's Position

In the view of the IRS, each SWTP participant had a principal place of business at the location of their summer job in the U.S. Their tax homes were therefore in the U.S. and not their home countries. The participants were all full-time students during 2012, and pursuing an education full-time is not a trade or business. Zolotareva and Conway were not employed in their home countries, and although Liljeberg had been employed part time in Finland, he quit that job before coming to the U.S. and did not return to it after the SWTP ended.

The IRS argued that in the case of temporary work, the taxpayer must have a business rather than personal reason for living in two places, and the SWTP participants did not have business reasons for maintaining personal residences in their home countries. Given that the purpose of the rule allowing deductions for travel away from home is to lessen a taxpayer's burden of maintaining two residences when required to do so by their trade or business, the IRS pointed out that neither Liljeberg nor Zolotareva had incurred any such duplicate expenses and, although Conway did send money home to his mother, he had failed to demonstrate he incurred any substantial living expenses. Finally, with regard to travel health insurance, the IRS asserted that those expenses were deductible only under Code Sec. 213(a), to the extent they exceed 10 percent of the taxpayer's adjusted gross income.

Tax Court's Decision

The Tax Court followed the Hantzis decision in holding that, because no business reason existed for keeping homes abroad, the SWTP participants could not deduct the travel and living expenses paid in connection with their participation in the SWTP. None of the participants had business connections with their home countries during the SWTP; therefore, they could not have been away from home in 2012 for purposes of Code Sec 162(a)(2). The fact that their visas required them to keep a foreign residence, the court said, did not mean their foreign residence qualified as a home for tax purposes, as no immigration law specifically required the keeping of a second home or the incurring of duplicate living expenses. Nor was there any contractual obligation with any party that required the SWTP participants to keep a second home. To the extent the participants incurred any expenses to maintain a residence in their home countries, those expenses were by their personal choice and not by a dictate of their employers or the law.

On the issue of health insurance, the Tax Court ruled that the participants could deduct the costs of health insurance under Code Sec. 213(a), but not under Code Sec. 162. The fact that health insurance is required by an employer or a provision of law is irrelevant; as an inherently personal expense, the cost of health insurance is deductible only to the extent permitted under Code Sec. 213(a).

For a discussion of the rules for deducting travel expenses when "away from home," see Parker Tax ¶91,105.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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