No "Away from Home" Travel Deductions Allowed for Contract Employee

(Parker Tax Publishing July 2019)

The Tax Court held that a taxpayer who worked at various locations in the United States during 2014 and 2015 as a contract employee was not entitled to unreimbursed employee business expense deductions because he was an itinerant and was not "away from home" within the intent and meaning of Code Sec. 162(a)(2). However, because the taxpayer was required to have both cell phone and internet access for his employment, and because he provided a reasonable basis for the court to accept his estimated expenses for such items, the court allowed those deductions. Krishnan v. Comm'r, T.C. Summary 2019-14.

Background

Sunderam Krishnan entered the United States in 2008 as an international exchange student. He completed his bachelor's degree in Milwaukee, Wisconsin, before beginning graduate studies in San Antonio, Texas, in 2010. Krishnan graduated with a master's degree in electrical engineering from the University of Texas, San Antonio, in 2012. In March 2013, Krishnan was hired by Cambay Consulting Services, LLC (Cambay), headquartered in Katy, Texas. A year later, Krishnan began work for Cambay's sister company SoftNice, Inc. (SoftNice), which is headquartered in Allentown, Pennsylvania. Cambay and SoftNice are consulting companies that contract to provide technical staff to their clients on a project-by-project basis. In accordance with corporate policy, neither company reimbursed Krishnan for relocation, rent, meals, telephone, internet, equipment, traveling, or commuting costs while he was working on contract projects for its clients. Krishnan was offered his first contract project in September 2013 and worked on five client contracts from September 2013 through August 2019.

Krishnan lived with his uncle in San Antonio from 2010 to 2012 while pursuing his master's degree, and continued to store his belongings at his uncle's house after that time. However, for the years at issue, 2014 and 2015, Krishnan rarely visited or stayed at his uncle's house. He generally lived and paid rent where he was stationed for work. From September 2013 until May 2014 he rented a shared apartment in Malvern, Pennsylvania. From June through November 2014, Krishnan lived and worked in Tulsa, Oklahoma. Although he listed the San Antonio residence as his address while working remotely for SoftNice from January through May 2015, he visited the residence twice for an estimated total of two weeks' time. The remainder of the assignment was spent visiting friends and relatives in Kansas City, Missouri, and Miami and Fort Lauderdale, Florida, in addition to three months spent working at the in-house project site in New Jersey. Krishnan rented an apartment in California beginning in May 2015 and has lived and paid rent in California since that time.

Krishnan hired a tax return preparer to prepare his 2014 and 2015 tax returns. The returns reported unreimbursed employee expenses of $15,590 and $12,580 for 2014 and 2015, respectively. The IRS denied the unreimbursed employee business expense deductions in full for both years after determining that Krishnan did not establish that they were ordinary and necessary to his business or that the expenses were paid or incurred during the years in issue.

Observation: For tax years before 2018 and after 2025, an employee's travel expenses are deductible as miscellaneous itemized deductions, subject to the 2 percent of adjusted gross income floor, if paid or incurred in connection with a temporary work assignment. As a result of changes made by the Tax Cuts and Jobs Act of 2017, no deduction is allowed for unreimbursed employee business expenses for years 2018 through 2025.

Krishnan argued that, because of the transitory and temporary nature of his contract work during the years in issue, his uncle's house in San Antonio was his tax home. Therefore, he asserted that his expenses while working in various locales should be considered incurred "away from home." The IRS countered that Krishnan had no tax home during the years at issue and should be considered an itinerant.

"Away from Home" Expenses

For years beginning before 2018 and after 2025, Code Sec. 162(a)(2) permits taxpayers to deduct all ordinary and necessary travel expenses, including meals and lodging, incurred while "away from home" in the pursuit of a trade or business. Such expenses must be incurred while away from home overnight. The purpose of the "away from home" deduction is to mitigate the burden of the taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional and duplicate living expenses.

Numerous court decisions have denied traveling expense deductions where a taxpayer is an itinerant. Courts have examined the following objective factors set forth in Rev. Rul. 73-529 to determine whether a taxpayer has a tax home: (1) whether there exists a business connection to the location of the alleged tax home; (2) whether the taxpayer incurs duplicate living expenses while traveling and maintaining the alleged tax home; and (3) whether personal connections exist to the alleged tax home.

Analysis

The Tax Court denied most of Krishnan's unreimbursed expense deductions. First, the court considered whether Krishnan had any business connection to San Antonio. The court noted that Krishnan was not required to live in San Antonio by his employer after he gained employment in March 2013 and that, although he identified his location as San Antonio from January 2015 through May 2015 while working on an in-house project for SoftNice, Krishnan spent only a total of two weeks in San Antonio. For the remainder of the project he chose to work from various locations around the country. Thus, the court concluded that Krishnan had no real business connection to San Antonio.

Second, the court considered whether Krishnan incurred duplicate living expenses and found that he had not provided any evidence other than his own testimony that he paid rent, utilities, or any other household expenses at the house in San Antonio during the tax years in issue. Thus, he did not prove to the court that he incurred a duplication of living expenses while working at his contract sites.

Third, the court considered whether Krishnan provided sufficient evidence that he maintained personal connections to San Antonio. The court noted that Krishnan made infrequent visits to the San Antonio house after gaining employment, despite the fact that his uncle's family continued to live there. Although he stored certain personal belongings at the house, he did not live in the house during 2014 and 2015. Thus, the court concluded that Krishnan did not maintain sufficient personal connections to San Antonio for the purposes of Code Sec. 162(a)(2).

However, because Krishnan was required to have both cell phone and internet access for his employment, and because he provided a reasonable basis for the court to accept his estimated expenses for such items, the court allowed an unreimbursed employee business expense deduction of $1,140 for each of 2014 and 2015.

Finally, the court sustained the penalty assessments after concluding that Krishnan failed to establish reasonable cause for the positions he took on his returns and did not make a reasonable good-faith effort to correctly assess his tax liability, particularly in regard to his claim of duplicate expenses "away from home" when he was not paying regular or significant rent or utilities at his uncle's San Antonio home.

For a discussion of the deductibility of unreimbursed employee business expenses incurred while away from home, see Parker Tax ¶85,105.

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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