Archive for September 25th, 2012

Unless you’ve been living in a cave, you likely already know that Mitt Romney created a bit of an uproar when, behind closed doors, he suggested that because 47% of all Americans pay no income tax, they will vote Democratic “no matter what;” the theory being that Romney’s proposals to cut income tax cannot resonate with a group that pays no income tax.

Now, obviously, there’s no way to link tax filings to voter records to test the accuracy of Romney’s statement, but we can learn a bit more about who comprises this tax-indifferent 47 percent. And to that end, the Tax Policy Center’s got us covered with Five Myths About the 47 Percent.

Among the more interesting tidbits:

  • The TPC estimates that of the 47% percent, only 0.1% earn income in excess of $200,000. That would indicate that fewer taxpayers are “gaming the system” than some would have you believe.
  • Rather, the vast majority of people who pay no federal income tax have low earnings, are elderly or have children at home. Furthermore, fewer than half of individuals in households with incomes below $30,000 voted in 2008, compared with about 60 percent of people with higher incomes. And because these lower income taxpayers do — when they vote — tend to vote Democratic, it appears Romney may actually benefit, rather than suffer, from this tax-indifferent — and apparently — election-indifferent — portion of the population.
  • Many of the taxpayers who pay no income tax are not the beneficiaries of Democratic “safety net” legislation, but rather bipartisan efforts to help those in need.  For example, Presidents Ronald Reagan and Bill Clinton both favored the earned-income tax credit (EITC), which has helped millions of families stave off poverty.

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Maryilyn Noz and Gerald Maguire knew the secret to a good marriage: plenty of distance. Noz resided in New York, while Maguire called Sweden — and its bevy of blonde talent — home. Smart man.

Both Noz and Maguire were university professors, and because their areas of expertise overlapped, they jointly published numerous books, chapters, and articles.

In order to collaborate on their published works — and because, you know…they were married — Maguire made eight trips from Sweden to NY during 2006, while Noz returned the favor and made five trips to Sweden. During these trips, Maguire and Noz always stayed together in the host’s apartment, where they worked together on their writing. Their trips were almost all business; for example, when Noz visited Maguire in Sweden, she worked five or six days a week, and when they weren’t collaborating on writing efforts, Noz would work on projects related to her permanent employment as a professor, though it was not required that she be in Sweden to perform those duties.

On their joint 2006 tax return, Noz and Maguire deducted $18,000 in travel expenses related to their trips to see one another as unreimbursed employee expenses. The IRS denied the expenses and assessed a tax deficiency.

Relevant Law:

Pursuant to Section 162(a)(2), a taxpayer may claim a deduction for travel expenses if such expenses are reasonable, necessary, and directly attributable to the taxpayer’s business. If the trip is undertaken for both business and personal reasons, travel expenses are deductible only if the primary purpose of the trip is business.[i] Whether the primary purpose of the trip is business or personal depends on all the facts and circumstances, in particular, the amount of time during the trip that the taxpayer devoted to business and personal activities.

The Tax Court concluded that the trips made by Noz and Maguire were predominately personal in nature, and thus none of the expenses related to the trips were deductible. In reaching its decision, the consideration given the most weight was the most obvious of all the “facts and circumstances:” Noz and Maguire were married. And as a married couple, the trips allowed them to spend a significant portion of the year together, despite living in separate countries.

While the court conceded that Noz and Maguire did in fact work during their times together, much of the travelling party’s time was devoted to work activities unrelated to their research collaboration that did not necessitate overseas travel.

Lastly, as is often the case in situations such as these, substantiation was sorely lacking. Neither Noz nor Maguire offered any details concerning the nature of their research collaboration, the collaborative activities undertaken, their research objectives, or how the travel expenses contributed to the accomplishment of these research objectives. While they both testified that their travel allowed them to collaborate with each other and researchers at other institutions, they did not identify a single one of the other researchers by name, nor did they identify a single meeting with another researcher that took place during any of their trips.

Based on these three damning pieces of evidence, the Tax Court had no choice but to disallow the travel deductions:

On the basis of the frequency of travel, the personal relationship between the petitioners, and the petitioners’ failure to offer any evidence, beyond broad generalities, of how the trips advanced any stated business purpose, we find that the New York-Stockholm trips were motivated primarily by personal concerns. The petitioners are therefore not entitled to deduct the costs of their flights between New York and Stockholm.

The lesson? When travel is motivated by both business and personal reasons, the dreaded “facts and circumstances” test applies. Thus, in order to strengthen your position that the purpose of the travel was predominately business, you must maintain proper documentation not only for the cost of your trip, but for the work performed on the trip; and just as importantly, why the travel was required to perform the work.

[i] Treas. Reg. 1.162-2(b)(1).

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