Eleventh Circuit Upholds Denial of Taxpayer's Travel Expense Deduction

(Parker Tax Publishing April 2020)

The Eleventh Circuit affirmed a Tax Court decision holding that a taxpayer who traveled between his home in Atlanta and his job in New Jersey could not deduct his travel expenses because his tax home was in New Jersey and therefore, his expenses to travel to Atlanta to see his family were nondeductible personal expenses. The Eleventh Circuit also held that the taxpayer, who was a CPA, was liable for negligence penalties given his professional background. Brown v. IRS, 2020 PTC 97 (11th Cir. 2020).

Background

Michael Brown is a CPA who worked for American Furniture Rental, Inc. (AFR), a company based in Pennsauken, New Jersey. Brown operated a "concierge CFO" business called Project Next, in which he contracted with companies to manage their finances and to lead and mentor their finance personnel. In September 2012, Brown signed a consulting agreement with AFR, agreeing to provide services beginning in October 2012 for a term of three years, which could be extended.

Under the contract, AFR required Brown to work Monday through Thursday each week. In the beginning of Brown's engagement, he was required to work at AFR's headquarters in Pennsauken. However, the evidence concerning the second half of 2013 was conflicted - Brown claimed that during that period, he negotiated with AFR to work two weeks in Atlanta and two weeks in Pennsauken in order to offset travel costs, but contradicted that in other testimony.

Around this same time, Brown worked for two other companies: Park Mobile (April 2011 to April 2012) and Pango (2012 to 2014). Brown did not indicate where he worked for Park Mobile or how much time he spent on that work. As for Pango's work, Brown said he did it either in Atlanta, at AFR's offices in Pennsauken, or in a hotel room, but he did not provide the amount of time he spent on that work either. Brown also did administrative work for Project Next, his concierge CFO business, in Atlanta and marketed his business "from anywhere," including Atlanta, since he typically marketed his business online. Again, Brown did not detail how much time he spent on these administrative and marketing tasks.

On Brown's 2012 tax return, he deducted $10,065 for expenses he incurred travelling between Atlanta and Pennsauken. On his 2013, return, he deducted $52,617 in travel expenses. The IRS disallowed the expenses for both years and imposed penalties. Brown petitioned the Tax Court, arguing that his tax home was in Atlanta and expenses for traveling to Pennsauken were therefore deductible business expenses. The Tax Court ruled that Brown's travel expenses were nondeductible. The court found that Brown's tax home became Pennsauken when he began working for AFR. The court noted that Brown's engagement with AFR was indefinite and that, in light of the three-year term of the consulting agreement, Brown could not have expected the engagement to be temporary. The court refused to credit Brown's testimony, in the absence of any travel records and receipts, that he began to work alternate two-week periods in Pennsauken and Atlanta in mid-2013, and found that Brown's testimony about his work for other companies was vague. Brown claimed that his tax home had to be Atlanta because he had no principal place of business from 1998 through 2013, but the Tax Court found no authority for expanding the scope of inquiry beyond the years at issue. Thus, the Tax Court concluded that Brown's trips from his tax home in Pennsauken to Atlanta were not for business purposes and, accordingly, the associated expenses were not deductible. The Tax Court also affirmed the IRS's imposition of penalties for both years, since Brown relied only on the absence of deficiencies as a defense. Brown appealed to the Eleventh Circuit.

Under Code Sec. 162(a)(2), a deduction is allowed for travel expenses incurred while away from home in the pursuit of a trade or business. In Michel v. Comm'r, 629 F.2d 1071 (5th Cir. 1980), the Fifth Circuit held that a taxpayer's home, for purposes of Code Sec. 162(a)(2), means the vicinity of his principal place of employment and not where his personal residence is located, if such residence is located in a different place from his principal place of employment. The Fifth Circuit held that a taxpayer is "away from home" if the taxpayer is required to travel away from his principal place of business for temporary work, and that a taxpayer who accepts permanent or indefinite employment in a location different from that of his residence is considered to have moved his tax home to the new location and is therefore no longer considered away from home.

Analysis

The Eleventh Circuit affirmed the Tax Court's finding that Pennsauken was Brown's principal place of business from October 2012 through December 2013. The Eleventh Circuit agreed with the Tax Court's finding that Brown's engagement with AFR was indefinite and not temporary. Further, the Eleventh Circuit found that Brown spent more time working in Pennsauken than Atlanta or anywhere else. The Eleventh Circuit found that Brown's claim that he did work in other locations during the period at issue was too vague and that Brown offered no evidence to show whether he spent more time on his work for Project Next or his other work than he did for AFR. The court also observed that Brown did not claim a home office expense deduction for the business use of his Atlanta home for either 2012 or 2013 and that AFR was Brown's sole source of business income for these years.

The Eleventh Circuit also agreed with the Tax Court that there was no business purpose to Brown's trips from his tax home in Pennsauken to his residence in Atlanta. The Eleventh Circuit noted that Brown could be "anywhere" when doing his administrative work for Project Next, and found that he gave no reason for having to be in Atlanta to do his work for Pango or for any other aspect of his business. The Eleventh Circuit concluded that Brown's trips to Atlanta and his decision to maintain a home there were motivated by a personal desire to spend time with his family that did not benefit either AFR or his other business.

The Eleventh Circuit also upheld the imposition of negligence penalties on Brown under Code Sec. 6662. The Eleventh Circuit noted Brown's background as a CPA and finance professional and found that his sole defense against the penalties was that he did not owe the tax deficiencies. Thus, the court found that Brown waived any other argument about the penalties, including the existence of reasonable cause.

For a discussion of the rules for deducting travel expenses, 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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