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Archive for July 18th, 2012

I hate commuting. I mean, nobody likes commuting — what’s to like about crawling along in endless traffic with your only form of distraction the mind-numbing yammering from the lowest rung on the evolutionary ladder:  “wacky” morning zoo disc jockeys — but I’m going to go ahead and guess I hate commuting more than most. Back when I lived in New Jersey, I used to angrily send cell phone pictures of the bumper to bumper traffic on Rt. 1 to my wife in a desperate plea for her to allow us to move as far away from a mega-mall as humanly possible.

Nevertheless, until the government stops dragging its feet on teleportation technology, the daily commute is here to stay, so we may as well understand the tax treatment of any expenses incurred to get you to and from the cracker factory. Yesterday, the Tax Court decided Saunders v. Commissioner, which served little purpose other than to remind us just how ridiculously complicated these rules are. If you’ve ever wondered whether broadening the tax base by getting rid of a bunch of deductions would be a good thing, read the rules discussed below, and remind yourself just how much simpler this all could be.  

So let’s use Saunders as an opportunity to brush up on the tax treatment of commuting costs and clear up some of the confusion regarding when a taxpayer can deduct the cost of driving to work. On to the Q&A:

Q: Wait…are you saying I could have been deducting my mileage or actual travel expenses for my daily drive to the office all this time?

A: Sorry if I misled you, but no. The one rule that’s clear is this: Your cost of commuting between your residence and your regular place of business or employment is a nondeductible personal expense. Treas. Reg. §1.162-2(e) and 1.262- 1(b)(5). So if you’re a lawyer and every morning you wake up and head to your office in Newark, the cost to travel to and from Newark is not deductible.  

Q: What if I have multiple offices or work locations and I travel to and from each of them? What can I do with those costs?

A: Good question, and here’s where things get complicated. We’ve got to break these costs up depending on the direction your traveling and the nature of your work locations, and that’s gonna’ take a little explaining. But know this much: once you’ve started your day by heading from your house to the office, if you leave the office and head to a second (or third, or fourth…) work location, the costs of going between the first office and the other business locations are generally deductible. Rev. Rul. 55-109. So if our lawyer in the example above goes from home to the Newark office and then from the Newark office to the NYC office, the costs of traveling from the Newark office to the NYC office are deductible.

Q: OK, but what if I leave my house and don’t go straight to my main office, but rather go to a different work place. Are those expenses deductible, or is that still considered my daily commute?

A: Depends. And it depends on a couple of things, unfortunately. First, you have to decide if your various places of business are REGULAR or TEMPORARY work locations under the meaning of the tax law.

Q: What the hell does that mean?

A: Hey…don’t take that tone with me. I’m trying to help you out. The following tests are used to determine if a work site is TEMPORARY:

  • If employment at a work location is realistically expected to last (and does in fact last) for 1 year or less, the employment is temporary in the absence of facts and circumstances indicating otherwise.
  • If employment at a work location is realistically expected to last for more than 1 year or there is no realistic expectation that the employment will last for 1 year or less, the employment is not temporary, regardless of whether it actually exceeds 1 year.
  • If employment at a work location initially is realistically expected to last for 1 year or less, but at some later date the employment is realistically expected to exceed 1 year, that employment will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that the taxpayer’s realistic expectation changes, and will be treated as not temporary after that date.

So if you’re an auditor, and you get assigned to a job that expects to put you at a client site for more than 1 year, it is NOT temporary. If it’s expected to last less than one year, that audit site IS temporary. If it’s originally supposed to last less than one year but that expectation ends up changing…well, you get it. It’s temporary through that date, and regular after.

Q: So then a REGULAR work location is defined in the negative, right? As in…any work location that’s not TEMPORARY is REGULAR?

A: Yes. Believe it or not, the authorities on the subject don’t make that clear, and as a result, it’s a common source of confusion.

Q:  Is there any other guidance on TEMPORARY versus REGULAR?

A: Actually, in CCA 200026025, the IRS provided some additional guidance. In that Chief Counsel Advice, the IRS added that if there is an initial realistic expectation that an employee will perform services at a work location for a period exceeding 1 year, but for no more than 35 workdays (or partial workdays) during each of the calendar years within that period, then employment at that location may be treated as TEMPORARY (rather than REGULAR) for a calendar year in which the employee actually works no more than 35 workdays (or partial workdays) at that location.

Q: Got an example?

A: I thought you’d never ask:  

On January 1, Employee Green, who has a regular office at her employer’s headquarters, is assigned by her employer to manage 5 projects, each of which is expected to last 18 months. Projects 1 and 2 each require her presence at least once a week, but Employee Green only visits the other project sites on an “as needed” basis (35 times or fewer within a calendar year for each project).

  • Project sites 1 and 2 are not temporary work locations because Employee Green goes to each site for more than 1 year, and more than 35 times per year. These are REGULAR work places.
  • Project sites 3, 4, and 5 are TEMPORARY work locations, even though the employment is expected to span more than 1 year at each site, because she expects to go to each of these project sites no more than 35 times during each calendar year.

Q: OK, now that I know which of my work locations are TEMPORARY and which are REGULAR, what do I do with that information?

A: Well, if you’ve got at least one REGULAR workplace, you can deduct the costs to travel from your home to a TEMPORARY workplace. Rev. Rul. 94-47  So if you’re an attorney with a REGULAR office in Newark and TEMPORARY work locations in NYC and Princeton, the cost of traveling from your home to those temporary work locations are deductible.

Q: OK, but what if ALL my work locations are temporary?

A: Then, in general, you can only deduct the cost of going from home to one of your temporary work locations if that work location is OUTSIDE the metropolitan area where you normally work.  Rev. Rul. 99-7  I told you this was complicated.

To illustrate, say you work in construction as an employee. You never go to the main office, but rather spend your time at the various work sites, all for a period of time that meets the definition of TEMPORARY. You can only deduct the cost of going from home to one of the TEMPORARY sites if that site is outside the metropolitan area were you normally live and work.

Q: Great…now what’s considered my “metropolitan area?”

A: Funny you should mention that, as that was the thrust of the Saunders case. This won’t be a huge help, but in general, this is a facts and circumstances test: the courts will look to see if the temporary worksite is unusually distant from the area where the taxpayer normally lives and works. In Saunders, the Tax Court held that when the taxpayer lived in Manchester, Ohio, his “metropolitan area” was Cincinnati. Because his five temporary work sites were all located within 74 and 96 miles of both the taxpayer’s residence and Cincinnati, they were located within the Cincinnati “metropolitan area” and thus the costs to travel to each site were nondeductible commuting costs.

Q: Just thought of something…what if my home IS my primary work location; i.e., I have a home office under the meaning of I.R.C. § 280A of the Code?

A: Well, then today’s your lucky day. Expenses incurred in going from a taxpayer’s home office and other work locations are deductible provided the home office is the taxpayer’s principal place of business within the meaning of I.R.C. § 280A(c)(1)(A) for the trade or business conducted by the taxpayer at those other work locations. These expenses are deductible regardless of whether the other work locations are REGULAR or TEMPORARY and regardless of the distance. Curphey v. Commissioner, 73 T.C. 766 (1980).

Q: OK. I think I’ve got it all, but how about one more example to tie it all together?

A: Here goes. Let’s bring back our earlier example about Employee Green:

On January 1, Employee Green, who has a regular office at her employer’s headquarters, is assigned by her employer to manage 5 projects, each of which is expected to last 18 months. Projects 1 and 2 each require her presence at least once a week, but Employee Green only visits the other project sites on an “as needed” basis (35 times or fewer within a calendar year for each project).

  • Projects 1 and 2 are REGULAR work locations, as they last are expected to last more than 1 year AND Green spends more than 35 days there each year.
  • Projects 3, 4, and 5 are TEMPORARY work locations. Even though Green spends more than 1 year at each place, he spends less than 35 days per year. Thus:
  • Green cannot deduct any expenses for traveling between home and Project 1 or 2, as they are nondeductible commuting costs.
  • Once Green has arrived at one of the five work places, she can deduct the costs to travel from one project to another.
  • Because Green has at least one REGULAR place of business (Projects 1 and 2), she can deduct the costs of traveling from her home to any of the TEMPORARY work sites (Projects 3, 4 and 5) regardless of whether they are inside or outside of her normal metropolitan area.

I hope that helps. Now get out of the office so you can beat the traffic.

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The following email came into Double Taxation HQ today from one of my firm’s high-ranking auditor types, and it seemed befitting of its own post:

Dear Tony,

You look very handsome today; I just thought you should know. Is the below email I had forwarded to me true, or is this just someone that doesn’t understand what they are reading?

HOME SALES TAX

> Have you seen this?

> When does your home become part of your health care?…….. After 2012!

> Your vote counts big time in 2012, make sure you and all  your friends and family know about this!

> HOME SALES TAX

> I thought you might find this interesting, — maybe even SICKENING! The National Association of Realtors is all over this and working to get it repealed, — before it takes effect. But, I am very pleased we aren’t the only ones who know about this ploy to steal billions from unsuspecting homeowners.

How many realtors do you think will vote Democratic in 2012?  Did you know that if you sell your house after 2012 you will pay a 3.8% sales tax on it? That’s $3,800  on a $100,000 home, etc. When did this happen? It’s in the health care bill, — and it goes into effect in 2013. Why 2013? Could it be so that it doesn’t come to light until after the 2012 elections? So, this is a change you can believe in?

> Under the new health care bill all real estate transactions will be subject to a 3.8% sales tax. If you sell a $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation, — who often downsize their homes. Does this make your November,  2012 vote more important?

> Oh, you weren’t aware that this was in the Obama Care bill?  Guess what; you aren’t alone! There are more than a few  members of Congress that weren’t aware of it either.

I hope you forward this to every single person in your address book.

> VOTERS NEED TO KNOW.

Thanks for your help, Tony. Did I mention you look handsome today?

Hugs and Kisses,

 Jeff.

[Ed note: we may have taken some creative liberties with the auditor's email for presentation's sake, but the thrust of the question and the forwarded chain email remains unchanged.]

To answer your question, Jeff: whoever forwarded the email is perfectly right to be confused by the implications of Obamacare. Whoever crafted this email, on the other hand, is an idiot. Not because they misinterpreted the Patient Protection Act — that’s a simple mistake — but because they got so righteously indignant while all the while being grossly misinformed. Unless of course, the chain email was authored by Mitt Romney, in which case, he’s stupid like a fox.

As we’ve previously discussed, starting in 2013 Obama will indeed tack an additional tax of 3.8% on a taxpayers’ net investment income — which would include gain from the sale of a home — but this is an additional income tax, not a sales tax.

The designation is important, because income tax is only paid on realized and recognized gains that are not otherwise excluded from income, while sales tax — as is indicated in the chain email — is paid on the absolute sales price.

Why does this matter? Because assuming the home being sold is a primary residence and otherwise satisfies the requirements of I.R.C. § 121, a married taxpayer can exclude up to $500,000 of gain from the sale of the residence. Thus, even though a taxpayer may recognize a $499,999 gain from the sale of a home, if it is excluded from taxable income under Section 121, there is no taxable gain upon which to assess the 3.8% additional tax.

The originator of the email above would have you believe that the 3.8% tax would be assessed on the purchase price, and that is simply not the case. Since no gain is recognized courtesy of Section 121, no capital gains tax — including the 3.8% addition provided for in Obamacare –is assessed on the sale.

Section 121 takes out much of the sting of the 3.8% tax increase, but there are other limitations to the Obamacare surcharge as well. For example, the tax is only assessed on those with adjusted gross income in excess of $250,000. If your AGI is below the threshold, the 3.8% increase won’t kick in.

Of course, as with all chain emails, there is some truth to be found: if a taxpayer sells a home in 2013 and either 1) the gain exceeds $500,000 or 2) Section 121 doesn’t apply for some other reason, AND the taxpayer has AGI in excess of $250,000, the taxpayer will pay an additional 3.8% tax next year.  However, as noted above, that 3.8% tax will be assessed on the net gain, not the sales price.

Hopefully this clears things up. For more information, consult your local library.

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