"Traveling Away From Home" Court Case 7th Circuit

Thank you for posting this, Alan. I do not care for this decision at a personal level. It's my impression that Judge Posner wasn't thrilled with it either. But he continues his reputation for clear, comprehensive, and rational opinions.

Dick

I agree that on a policy level (family values and all that) the outcome is not the way I would prefer it. However the opinion is an excellent analysis of the law, and probably the "correct" decision based on the law.

Stu

This brings us to the consultant who subcontracts from various contractors for anywhere from six months to a year at a time. He returns home every weekend and his expenses are billed to the end user. Let's assume he is in his late 30's with a stay-at-home wife and four children ages 6 mos to 7 yrs old. He catchs a very early Monday morning flight to the end user and an afternoon flight home. His only reason for returning home is that it is his tax home.

The facts reamin the same except that he takes on a two year project that could be indefinite. He gets per deim under an accountable plan under whish he rents an apartment near the end-user site. He gets a W-2 because the infamous Section

1702 of the 1986 Tax Act makes him an employee of the contractor and he never sees a 1099 for his expenses.

Why should he treated differently from any other W-2 employee who pays these expenses himself?

Dick

Because if there was not an underlying intent to treat employees and the self-employed differently for tax purposes, they wouldn't define these to be two different entities in the first place.

Disallowing the deduction for single-day plane travel, for self-employed individuals for whom their home is not a place of business, does seem particularly unfair but those are the rules, last time I read them.

Steve

Probably shouldn't. But that is the law at the moment. With all the talk about "family values" over the last eight years, I'm surprised they hadn't changed the law to allow for a travel deduction for reasonable personal reasons.

Stu

I know that Steve & Stuart responded to this... but I am confused by your scenarios. What is this infamous Sec. 1702 (that I am unable to find) that seems to make your taxpayer some sort of employee that is different than other employees?

1706 was a last minute, undebated addition to the '86 Tax Act. It said that enginners, draftsmen, systems analysts, computer programmers, etc. were employees (for tax purposes) of third party contractors. The result was many of the highly qualified people went to work for clients, most of the rest became associates of third party contractors, and a few of us held up the little finger our left hand to 1706 and stayed out there. (The little finger is the non-Hallmark Bird. It is what you use when "You don't want to send the very best").

This is what created the IRS 20 questions on who is an employee and who is an independent contractor. It is also what sent me to graduate school to become a University Professor.

Under Judge Posner's well-thought-out decision. Those who have there travel home paid by contract are in a superior financial situation to those who pay the travel themselves.

I am unable to disagee with Judge Posner's conclusions based on the law as is. The law needs to be changed especially in view of the current degree of relocation for employment purposes.

Dick

snip

I only skimmed the decision but I don't see where the judges discussed how a contractor would be treated differently under these circumstances. If you recall, please provide a clue of where to look.

Thanks,

It's in the interpretation.

Consider two Forensic Accountants.

"A" lives in Memphis. He has been an employee of a CPA firm located in Dallas for the last six years. His arrangement is that he travels 100% of the time and returns home on the weekends. He is working at a client site in St. Louis.

"B" lives in Chicago and was unemployed when he got a contract with a company in Minneapolis. The projects are identical and started in August 2007 and will probably be last through August

2009. Both fly home weekly to be with their families, i.e., no business reason.

"A" is a W-2 employee whose expenses never show up on a 1099 because they are under an accountable plan. "B"'s an independent contractor with an IRS approved SS-8 and his expenses are buried into his project bid.

Using Posner's position that a business reason is needed for the deductibility of business travel, both should be taxed on their travel. But, I repeat myself, "A"'s travel is paid by contract under an accountable plan and "A" never sees a 1099. And that is the difference to which I refer.

Dick

You have confused me with your examples. A and B are completely different. You sent B to work in Minneapolis for two years. You said A travels all the time. You didn't say you sent A to St. Louis to work a job that was expected to last two years.

If A was sent to St. Louis to work a job that was expected to last two years (the same scenario as B), then if A's employer reimbursed his travel back and forth from his home in Memphis, that reimbursement is taxable compensation. A's place of business is now St. Louis and the cost to go back and forth to Memphis is commuting.

We are in agreement. However, these contracts often call for the client to pay per deim. lodging, and travel expenses and it does not get 1099'ed.

Many equipment manufacturers have mechanics and engineers who run around the country doing installations and troubleshooting for them. Some of these people live in far away places, leaving home for 3-12 weeks at a time, and returning home, at least monthly, where they have family, but no business reason.

The Posner opinion directly affected someone who wasa W-2 employee and was living in two places. But the issue of "What was the business reason?" will affect many people.

Dick

To me the difference is between having a home office and not. Say you're a 1099 contractor and have a home office that is your principal place of "business" but you often work for clients on their sites. If you have a long term contract but return to your home office each week, there's a business reason for that, so the travel is deductible.

On the other hand if all is the same except that you are on a W-2, your travel is for personal reasons and is not deductible.

Stu

I disagree. If you take an assignment for two years, you have changed your tax home to your new main place of work. The office in your family home is no longer your main place of work. Your cost to go to and fro from your family home to your new tax home is commuting.

See the bag of worms this creates.

In the 60's, I worked for a company who sent me from Chicago to Asheville every week for 10 weeks. The round trip airfare was less than 3 nights lodging so they paid my way home every Friday. My only reason for returning home was a conjugal bed. I was a W-2 employee. The company was in a Chicago suburb, but I was not required to show up during this time.

Under Posner opinion, it seems that I would have to declare that travel as income and pay taxes on it.

Dick

I believe you are reading too much into the CA-7 opinion. They did not repudiate the Andrews case ( Andrews v. Commissioner, 931 F.2d 132 (1st Cir. 1991)). They also provided an example of an attorney who has his home and office and business in Minneapolis but has to travel so much that he spends more time away from home. "Nevertheless he can deduct his traveling expenses. His work requires him to maintain a home within normal commuting distance of Minneapolis because that is where his office is, but his work also requires him to travel, and the expenses he incurs in traveling are necessary to his work and he cannot offset them by relocating his residence to the places to which he travels because he has to maintain a home near his office."

I see nothing in the CA-7 decision that would have created income for you. Your traveling expenses were no different than the lawyer example used by the court.

Sorry, I don't see either of these examples in the decision.

I agree with Alan. In your example the expenses are not income to the employee.

Why? There's a business reason for flying you home: it's cheaper for the company.

Seth