by Michael Lodge
Commuting and what can be deducted is always a question brought up every year by tax clients. Here is a great article by Julian Block of AccountingWeb that should be read by all taxpayers who are thinking about what can be deducted. Mr. Block is a great writer on tax issues.
The IRS routinely disallows deductions for the cost of commuting between home and work. It makes no difference that someone suffers economic hardship.
The couple kept working in Manhattan, Larry as an attorney and Susanne at a part-time job with Time magazine, which required her Wednesday-to-Friday presence. So, on Wednesday mornings, both drove the 215 miles from Vermont, spent Wednesday and Thursday nights at a friend’s Manhattan apartment, and returned to Vermont on Fridays.
The Washburns argued that economic hardship, not personal preference, forced them to live in Vermont; consequently, their weekly drives were deductible as business expenses. Nyet, nyet, and nyet said the IRS, the Tax Court, and the Court of Appeals for the 2nd Judicial Circuit. The couple’s only place of business was Manhattan; Vermont’s unquestionably being a less expensive place to live doesn’t convert what’s otherwise nondeductible commuting into deductible business travel.
To stop this, Michael paid Michelle $25,000; she agreed to drop the complaint and keep quiet. The Broncos then signed him to a five-year contract. He deducted the $25,000, calling it a “professional development expense.” His reasoning: He wouldn’t have made it had his job not been jeopardized.
But the IRS tossed it out as a nondeductible personal expense and won easily in the Tax Court. The court ruled that the origin of the charge prompting Michael’s payment was his personal relationship with Michelle, not his job. That the consequences of the allegations against the athlete were business-related didn’t make the payoff deductible.
As public defender of Sacramento County, California, Kenneth Wells supervised an office of 40 attorneys, as well as clerical personnel. Kenneth thought it made sense to take some of his subordinates to lunch about once a week, mainly to discuss office matters. He didn’t seek, or receive, reimbursement from the county; it authorizes funds for certain kinds of employee expenses, but not this sort of spending. Instead, he claimed the meals as business expenses.
The IRS took a hard-line stance: The outlays failed to satisfy the requirement that a business expense must be “ordinary and necessary,” one element of which is whether an expenditure is reasonable under the circumstances. Kenneth contended that it was reasonable for him to take key staffers to lunch and talk shop.
The Tax Court agreed “his position was analogous to that of a senior partner in a comparably sized law firm. In such firms, an occasional luncheon meeting with office associates to discuss the firm’s operations would be regarded as an ordinary and necessary expense.”
Here, however, “the law firm is the Public Defender’s office,” and, noted the court, the county is unwilling to fund this kind of activity. Nor was it “something that the usual civil servant could afford.” (Besides his county salary, Kenneth had other income sources.) While the meals might have benefited the defender’s office, Kenneth individually couldn’t claim them.