From the January 2008 issue of Wealth Manager Web • Subscribe!

An IRS Tale of Two Cities

An ever-growing number of frequent flyers are "commuter couples"--those who live apart in an effort to keep their jobs or advance their careers. By one estimate, more than a million wives work and maintain homes in one city while their husbands do likewise in another. As if the social and emotional troubles associated with separations from loved ones aren't extensive enough, the way the Internal Revenue Service defines the location of their "tax home" can derail the deductibility of travel expenses.

Unreservedly, the IRS blesses business-expense deductions of 100 percent for lodging and 50 percent for meals when business travelers must be "away from home" overnight. But buried in the fine print is the IRS definition of "home:" The agency defines it as where a person's principal place of business or employment is located--even though his or her family or spouse resides elsewhere. This should raise no problems for most people; they work at a job in or near the place where they live with their families. But couples whose employment forces them to live apart have to grapple with a complicated issue: How do they identify their tax home and determine whether their outlays for meals and lodgings qualify as away-from-home travel expenses?

Consider the case of Robert and Margaret Coerver. Each had separate jobs and residences, his in Wilmington, Del. and hers in New York City. During the first two years of their marriage, she kept her job and apartment in New York and made frequent trips to Wilmington. Margaret contended she was entitled to deduct her rent and food while in New York, as well as her New York to Wilmington travel expenses, because she and Robert filed jointly, and their tax home was in Wilmington, where he lived. The United States Tax Court denied any write-off for these expenses. That decision was upheld in 1977 by the United States Court of Appeals for the Third Circuit, a court one rung below the Supreme Court. Because her stay in New York was "indefinite," the appeals court ruled her tax home did not shift from New York to Wilmington, even though she and her Delaware-based husband filed jointly. In the court's eyes, Margaret was never "away from home" while in New York, so her rent and food there remained non-deductible. Nor could she deduct the expense of her travel between New York and Wilmington, since the court found that those trips, too, were for personal reasons.

Then there was the 1975 decision of the Tax Court in a case involving George and Mary Leyland. This couple lived in New Haven, Conn., where he worked for the Census Bureau and she was with IBM. Then the Bureau sent George to Boston for a year-long training program at Harvard Business School. The couple gave up their New Haven apartment and rented one in Boston. They also joined a New Haven club and took a room there for Mary, which George shared when he traveled to New Haven. While George was in Boston, Mary sometimes journeyed there on business for IBM. At filing time, the couple claimed their tax home was in New Haven, and deducted their Boston expenses.

The IRS viewed the matter somewhat differently. It readily conceded that Mary's tax home was in New Haven, since her job location was unchanged. This, of course, entitled her to deduct un-reimbursed business expenses while in Boston on assignment by IBM. But the Tax Court agreed with the IRS that New Haven was no longer George's tax home, since he gave up his apartment there and moved to Boston. True, his Boston assignment started out as "temporary," rather than "indefinite." Nonetheless, the court found that George chose to shift his tax home to Boston because he was reimbursed by the Census Bureau when he took his furniture with him, and he was paid a per-diem allowance by the Bureau when he traveled from Boston to New Haven on assignment. Therefore, the court determined that he was never "away from home" while in Boston, and his rent and food there were non-deductible. But, of course, that finding did entitle George to deduct un-reimbursed business expenses while on assignment in New Haven.

In 1982, the Tax Court also ruled against Marianne and Donald Felton, an Indiana couple. Marianne was on the faculty of a school located about 100 miles from the town where Donald worked and where they both resided. Usually, Marianne stayed two nights a week at her job site. The Tax Court held that Marianne's tax home was where she worked. Her decision to live with her husband was made for personal reasons; hence, the court ruled, the travel outlays in issue were nondeductible personal expenses. Marianne, said the court, "argues that failure to consider personal elements in a case such as hers puts undue strain on two-job families. While her point perhaps is appealing sociologically, it has no basis in law."

Julian Block, an attorney based in Larchmont, N.Y., conducts continuing education courses for financial planners and other professionals.

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