Category: Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Background Taxpayer, a citizen of the U.S., is a physician. TP owns an incorporated medical practice in State X. TP now lives in Foreign Country Z and practices medicine there. His business in State X requires periodic attention; he travels to the U.S. about ten times per year. TP sold his home in State X when he moved to Foreign Country Z, and no longer maintains a residence in State X of any type. TP stays in a hotel when he visits the U.S. TP owns a home in Foreign Country Z. His wife and children reside in Foreign Country Z. TP's automobiles are in Foreign Country Z. At present, TP's income is approximately $150,000 per year from Foreign Country Z activities and approximately $250,000 per year from U.S. activities. TP is a private pilot and wishes to buy an airplane to travel between Foreign Country Z and the U.S. TP will also use the aircraft for his Foreign Country Z business and for personal purposes as well. TP is contemplating having the State X medical practice purchase and own the airplane; thus, all the ownership, operating, and maintenance costs would be borne by that corporation. Comments This is a classic example of the so-called "tax
home" issue. Subject to various limitations, the cost of traveling,
meals, and lodging while away from home are deductible expenses.
IRC Section 162(a)(2). On the other hand, the expenses of commuting (i.e.,
transportation from one's home to one's principal place of business) are
not deductible. Similarly, meals and lodging are personal expenses unless
incurred while in travel status away from the tax home. Also, it makes no
difference whether the transportation is via automobile, airplane, or whatever.
The commuting principle carries through irrespective of the mode of transport. In this case, if the taxpayer's tax home is found to be Foreign Country Z, then the trips to the U.S. are simply business trips and the expenses related thereto are generally deductible If the taxpayer's State X operation is his tax home, then the trips from Foreign Country Z are commuting and nondeductible. Similarly, meals and lodging expenses incurred while at the State X location are considered personal (nondeductible) expenses. Note that the taxpayer in this case has a tax home issue to resolve no matter whether he chooses to purchase the airplane. Clearly, there will be travel, meals, and lodging expenses associated with maintaining the State X business, and the entity incurring those expenses will of course desire to deduct them. Whether such expenses are characterized as deductible away-from-home travel or personal commuting and living expenses turns on whether the tax home is State X or Foreign Country Z. Normally, a taxpayer's tax home is determined by reference to the location of his principal place of business. Ordinarily, where the taxpayer resides is not relevant. See, for example, Revenue Ruling 75-432, 1975-2 CB 60. Taxpayers are expected to choose to live near their work in order to minimize commuting expenses. If a taxpayer chooses to live in a location distant from his work, the tax law views that choice as a personal one. Where a taxpayer has two or more businesses located some distance from each other, the choice of a tax home becomes far more complex. It is necessary to determine which business is the primary business. The location of the primary business is then considered the tax home, and the taxpayer is in travel status when visiting the secondary business. The determination of which business is primary and which is secondary is a question of fact to be answered based on the following elements: · the amount of business time spent at one location relative to the amount of business time spent at the other location; · the degree of business activity in each area; and · the relative financial rewards produced by the activities in each area. See Revenue Ruling 54-147, 1954-1 C.B. 51. Often, the time, level of business activity, and financial rewards are congruent. In other words, the location requiring the most time often has the greater degree of business activity and the greater financial reward. Here, that is not the case, at least at present. In this matter, the greater amount of business time is spent in Foreign Country Z while the greater financial reward (and perhaps the greater degree of business activity) is in State X. This injects considerable uncertainty and thus risk for the taxpayer. Generally, the courts have taken the position that the location at which the taxpayer spends the greater amount of time should be the tax home even though the greater financial reward is derived from the other location. This is particularly the case where the location at which the taxpayer spends the greater amount of business time is also the location at or near which the taxpayer has his residence. See Benson v. Comr., T.C. Memo, 1968-294; and Magnuson v. Comr., T.C. Memo 1953-190. But the approach has not been uniform. Some courts have taken the opposite view on similar facts. These cases hold the financial rewards, not the amount of time spent, should control. See Fisher v. Comr., T.C. Memo 1979-191; and Treanor v. Comr., T.C. Memo 1951-100. Where does this leave the taxpayer in this matter? Quite simply, there is a good deal of risk. Clearly, there is a filing position that is defensible and represents a logical and arguably equitable result. On the other hand, there is precedent for an IRS attack based on the cases cited above with the opposite holding. It is impossible to predict with certainty how a court might ultimately decide this issue. Other Considerations A. The taxpayer wishes to have the State X medical corporation purchase the airplane. If that happens, it is not appropriate for the corporation to deduct the expenses associated with use of the airplane for personal purposes or even for the taxpayer's Foreign Country Z medical practice. Unless this issue is dealt with through a fair market value charge-back of some kind--or, alternatively income inclusion--there is considerable risk that the value of personal use and use related to the Foreign Country Z medical practice will be viewed as a constructive dividend to the taxpayer. B. An airplane is considered listed property. C. In addition to the risk that TP's tax home will be viewed as the vicinity of the State X medical practice, there is yet another risk factor related specifically to the airplane. Under Section 162, deductible business expenses must be ordinary and necessary to the operation of the business and reasonable in amount. As I understand it, about 160 hours of the airplane's total usage of 285 hours will relate to visiting the State X business. This is about 56%. It will cost approximately $116,000 to own and operate the airplane per year including depreciation. Also, I understand that the taxpayer will make about 10 trips from Foreign Country Z to State X. Is it necessary to actually own an airplane to get the taxpayer back and forth? Is it reasonable to spend 56% x $116,000 or roughly $65,000 to get the taxpayer from Foreign Country Z to State X on ten occasions? I suspect an examining agent and any objective third party such as a court would rather easily perceive that the purchase of the airplane has more to do with the taxpayer's interest in being a private pilot than business necessity. I think this raises the level of risk even higher.  |