Burski v. Comm'r ( 2007 )

T.C. Summary Opinion 2007-212
UNITED STATES TAX COURT
MICHAEL L. AND ANN BURSKI, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14505-04S. Filed December 17, 2007.
Michael L. and Ann Burski, pro se.
Michele A. Yates, for respondent.
DAWSON, Judge: This case was heard pursuant to the
provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue. All Rule references are to the Tax Court
Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
The trial was conducted by Special Trial Judge Carleton D.
Powell, who died after the case was submitted. The parties have
declined the opportunity for a new trial or for supplementation
of the record and have expressly consented to the reassignment of
the case for opinion and decision.
Respondent determined deficiencies in petitioners’ Federal
income taxes of $10,755 for 2001 and $5,546 for 2002. Following
concessions,2 we must decide whether petitioners may deduct
travel expenses under section 162(a)(2).3 This requires that we
decide whether Michael L. Burski (petitioner) was “away from
home” when he incurred the expenses.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
2
Respondent concedes that, for the taxable years 2001 and
2002, Michael L. Burski (petitioner) was an independent
contractor. Petitioner concedes that income he received from the
Institute for Defense Analyses is included in gross receipts
reported on Schedule C, Profit or Loss From Business (Sole
Proprietorship), and that his Schedule C income is subject to
self-employment tax. Petitioners concede that they had
additional capital gain of $5,000 and dividends of $83 in 2002.
3
The only other issues remaining are computational.
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A. Petitioners’ Income-Producing Activities and Their 2001 and
2002 Income Tax Returns
Petitioners resided in Lancaster, Pennsylvania, when they
filed the petition. Ann Burski (Mrs. Burski) works in Lancaster,
Pennsylvania, as a self-employed property manager. Petitioner
retired from the Air Force in 1987 and receives a pension and
other retirement benefits.
When petitioner retired from the Air Force, he started a
business. He later moved to Lancaster to work for International
Signal and Control. Since then, petitioners have continuously
maintained their personal residence in Lancaster.
In 1989, petitioner began working as a consultant for
several different companies and Government agencies, including
the Institute for Defense Analyses (IDA). Petitioner contracted
with IDA to provide services part time as a military
consultant/analyst. IDA has its headquarters in Alexandria,
Virginia, and does not have an office or facility in or around
Lancaster, Pennsylvania. IDA paid petitioner at an hourly rate
for the hours he worked and reimbursed him for all of his
expenses relating to his trips between Lancaster and Alexandria.
Over a period of 16 years, petitioner consulted with IDA on
a series of specialized projects that frequently required him to
work with classified information accessible only in the
Washington, D.C., metropolitan area. IDA provided petitioner
with work space and support staff in Alexandria throughout the
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entire working relationship. Petitioner performed some of his
work for IDA from his home in Pennsylvania, where he was able to
connect through his laptop computer to IDA’s computer network to
access nonsecure information.
Over the years, petitioner steadily increased the hours he
worked for IDA. He eventually stopped accepting consulting work
for other companies and Government agencies and, since 1995, has
worked exclusively for IDA. By 1995, petitioner was working more
than 1,000 hours in each 6-month period. Because of the number
of hours petitioner worked for IDA, IDA was prohibited from
paying petitioner for the expenses he incurred for his trips
between Lancaster and Alexandria. In 1995, IDA began treating
petitioner as an employee; IDA treated petitioner’s compensation
as wages, paid the employer’s portion of the employment taxes,
and issued petitioner Forms W-2, Wage and Tax Statement, instead
of Forms 1099-MISC, Miscellaneous Income. IDA also stopped
reimbursing him for the expenses he incurred for his trips
between Lancaster and Alexandria.
During 2001, petitioner rented an apartment in Washington,
D.C., where he stayed when he was working in Alexandria. During
2002, petitioner stayed in hotels when he was working in
Alexandria.
Petitioners timely filed their Federal income tax returns
for 2001 and 2002. IDA issued petitioner Forms W-2 reporting
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that IDA paid him compensation of $92,166 in 2001 and $85,918 in
2002. Petitioner reported his compensation from IDA as wages,
salaries, tips, etc. on line 7 of the returns but claimed
deductions for expenses he incurred in the course of performing
services for IDA on Schedules C, Profit or Loss From Business
(Sole Proprietorship). On the Schedules C, petitioner reported
no gross receipts and claimed deductions for the following
expenses:
Expense 2001 2002
Car and truck $4,830 $3,362
Depreciation 518 5,913
Insurance 527 871
Legal and professional 104 85
Office expenses 57 75
Repairs and maintenance 1,446 -0-
Supplies 324 152
Travel 23,532 4,385
Meals and entertainment 3,103 3,810
Utilities 785 1,334
Other expenses 407 785
B. Notice of Deficiency and Concessions by the Parties
In the notice of deficiency, respondent treated petitioner
as an employee of IDA consistent with his reporting the
compensation from IDA as wages, salaries, tips, etc. on the
returns. Respondent disallowed all deductions petitioner claimed
on Schedules C, explaining that deductions for these amount were
not allowed because petitioner had not established that he
incurred, or if he incurred, paid these amounts for ordinary and
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necessary business purposes and that any amount qualifies as a
business expense as specified under the provisions of the
Internal Revenue Code. Respondent, however, allowed petitioners
to deduct the following expenses as unreimbursed employee
expenses on Schedules A, Itemized Deductions:
Expense 2001 2002
Depreciation $518 -0-
Insurance 527 $827
Legal and professional 104 85
Office expenses 57 75
Supplies 324 152
Utilities -0- 1,334
Other expenses 407 785
Respondent did not allow petitioners any deduction for the
following expenses:
Expense 2001 2002
Car and truck $4,830 $3,362
Depreciation -0- 5,913
Insurance -0- 44
Repairs and maintenance 1,446 -0-
Travel 23,532 4,385
Meals and entertainment 3,103 3,810
Utilities 785 -0-
Petitioners timely filed a petition in this Court seeking
redetermination of the deficiencies.
Petitioners concede that they are not entitled to deduct the
$1,446 claimed for repairs and maintenance expenses in 2001.
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Respondent concedes that petitioners are entitled to deduct
the $44 insurance expense disallowed for 2002.
Respondent concedes that Mrs. Burski is entitled to deduct
$3,139 of the depreciation disallowed for 2002. The remaining
$2,774 of depreciation disallowed for 2002 is depreciation
petitioner claimed for using his car in driving between Lancaster
and Alexandria. The disallowed car and truck expenses were
petitioner’s costs of driving between Lancaster and Alexandria,
including gas, car repairs, insurance, registration, inspection,
washing, and oil changes. The disallowed travel expenses and
utilities were the rent and utilities expenses petitioner paid
for his Washington, D.C., apartment in 2001 and the costs of his
hotel rooms where he stayed when he worked in Alexandria in 2002.
The disallowed meals and entertainment expenses are the costs of
meals and entertainment petitioner incurred when he stayed in
Alexandria.
Discussion
We must decide whether petitioner may deduct the travel
expenses he incurred during 2001 and 2002 while working in
Alexandria away from his personal residence in Lancaster.
A taxpayer may not deduct personal, living, or family
expenses. Sec. 262(a). An individual may deduct all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on a trade or business. See sec. 162(a). Services
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performed by an employee constitute a trade or business for
purposes of section 162(a).4 O’Malley v. Commissioner, 91 T.C.
352, 363-364 (1988).
In general, expenses incurred for a taxpayer’s daily meals
and lodging and for commuting between the taxpayer’s residence
and the taxpayer’s place of business are nondeductible personal
expenses. Sec. 262(a); see, e.g., United States v. Correll, 389
U.S. 299 (1967); Commissioner v. Flowers, 326 U.S. 465, 472-473
(1946); Barry v. Commissioner, 54 T.C. 1210, 1214 (1970), affd.
per curiam 435 F.2d 1290 (1st Cir. 1970); see also secs.
1.162-2(e), 1.262-1(b)(5), Income Tax Regs. By contrast,
traveling expenses, including amounts expended for meals and
lodging, may be deducted if they are incurred while away from
home5 in the pursuit of a trade or business. Secs. 162(a)(2),
262. To deduct a travel expense, the taxpayer must show that (1)
he or she was away from home when he or she incurred the expense,
(2) the expense is reasonable and necessary, and (3) the expense
was incurred in pursuit of a trade or business. Commissioner v.
Flowers, supra at 470.
4
An employee is allowed to deduct unreimbursed employee
expenses as miscellaneous itemized deductions on Schedule A,
subject to the 2-percent limitation under sec. 67.
5
For a taxpayer to be considered “away from home” within the
meaning of sec. 162(a)(2), the taxpayer must be on a trip that
requires the taxpayer to stop for sleep or a substantial period
of rest. United States v. Correll, 389 U.S. 299 (1967);
Strohmaier v. Commissioner, 113 T.C. 106, 115 (1999).
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For income tax purposes, the term “home” in section
162(a)(2) means a taxpayer’s principal place of business and not
where the taxpayer’s personal residence is located, if different
from the principal place of business. Barone v. Commissioner, 85
T.C. 462, 465 (1985), affd. without published opinion 807 F.2d
177 (9th Cir. 1986); Mitchell v. Commissioner, 74 T.C. 578, 581
(1980); Daly v. Commissioner, 72 T.C. 190, 195 (1979), affd. 662
F.2d 253 (4th Cir. 1981); Kroll v. Commissioner, 49 T.C. 557,
561-562 (1968). An exception to the rule exists when a taxpayer
accepts work away from the taxpayer’s personal residence and the
work is temporary rather than indefinite. Peurifoy v.
Commissioner, 358 U.S. 59, 60 (1958). Under this exception, a
taxpayer’s tax home becomes the vicinity of the taxpayer’s
primary personal residence in a real and substantial sense. Id.;
see Deamer v. Commissioner, T.C. Memo. 1984-63, affd. 752 F.2d
337 (8th Cir. 1985); Rohr v. Commissioner, T.C. Memo. 1982-117.
Work is temporary if it is foreseeable that the work will be
terminated within a short period. Mitchell v. Commissioner,
supra at 581. Conversely, work is indefinite if the prospects
are that the work will continue for an indefinite or
substantially long period. Wright v. Hartsell, 305 F.2d 221, 224
(9th Cir. 1962); Harvey v. Commissioner, 283 F.2d 491, 495 (9th
Cir. 1960), revg. 32 T.C. 1368 (1959). Work that starts as
temporary can later become indefinite, in which case the location
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of the taxpayer’s work becomes his or her tax home. Chimento v.
Commissioner, 52 T.C. 1067, 1073 (1969), affd. 438 F.2d 643 (3d
Cir. 1971); Kroll v. Commissioner, supra at 562. The taxpayer
will not be treated as being temporarily away from home during
any period of work if such period lasts more than 1 year. Sec.
162(a).
It is presumed that a taxpayer will generally choose to live
near his or her principal place of business. See Frederick v.
United States, 603 F.2d 1292, 1295 (8th Cir. 1979). The purpose
of the deduction for expenses incurred away from home is to
alleviate the burden on the taxpayer whose business needs require
him or her to maintain two homes and therefore incur duplicate
living expenses. Kroll v. Commissioner, supra at 562. Where the
taxpayer maintains two residences for his own convenience,
however, such cost would be considered personal and not
deductible. Sec. 262; Commissioner v. Flowers, supra at 474.
The requirement that the travel expense be incurred in the
pursuit of a trade or business means that the “exigencies of
business rather than the personal conveniences and necessities of
the traveler must be the motivating factors.” Commissioner v.
Flowers, supra at 474. Thus, the taxpayer must have some
business justification to maintain the first residence, beyond
purely personal reasons, to be entitled to deduct expenses
incurred while temporarily away from that home. Id. Where a
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taxpayer has no business connections with the area of primary
residence, there is no compelling reason to maintain that
residence and incur substantial, continuous, and duplicative
expenses elsewhere. See Henderson v. Commissioner, 143 F.3d 497,
499 (9th Cir. 1998), affg. T.C. Memo. 1995-559; Deamer v.
Commissioner, supra. In that situation, the expenses incurred
while temporarily away from that residence are not deductible.
Bochner v. Commissioner, 67 T.C. 824, 828 (1977); Tucker v.
Commissioner, 55 T.C. 783, 787 (1971).
Respondent asserts that, in 2001 and 2002, petitioner’s
employment with IDA was indefinite, not temporary, and his tax
home was Alexandria. Respondent concludes, therefore, that
petitioner is not entitled to deduct expenses incurred in driving
between Lancaster and Alexandria or for meals and lodging
expenses incurred while staying in Alexandria.
Petitioner contends that respondent made no determination in
the notice of deficiency that Alexandria was his tax home and did
not raise the issue until a few days before the trial.
Petitioners do not explicitly contend that respondent’s argument
is new matter on which respondent bears the burden of proof.
See, e.g., Shea v. Commissioner, 112 T.C. 183 (1999). Rather,
petitioners appear to argue that respondent should be precluded
from asserting that Alexandria was petitioner’s tax home because
respondent’s delay in relying upon petitioner’s tax home is
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unfair and prejudicial to petitioners. Nevertheless, because
petitioners represented themselves in these proceedings without
benefit of counsel and because we conclude petitioners implicitly
alleged that respondent’s tax home argument was new matter, we
shall address both arguments.
Respondent discussed petitioner’s status as an employee and
the location of his tax home in the trial memorandum respondent
submitted before the trial. Before the trial, respondent
conceded that petitioner was an independent contractor, and the
only issue remaining to be tried was the location of petitioner’s
tax home. Petitioner was on notice before the trial that
respondent was contending that Alexandria was petitioner’s tax
home. The tax home issue was tried by consent of the parties and
is properly before the Court. See Rule 41(b). Petitioners were
not prejudiced by respondent’s argument that petitioner’s tax
home was in Alexandria.
If the location of petitioner’s tax home is “new matter”
within the meaning of Rule 142(a),6 respondent must bear the
burden of proof. A new theory that is presented to sustain an
6
Rule 142 provides in part:
(a) General: (1) The burden of proof shall be
upon the petitioner, except as otherwise provided by
statute or determined by the Court; and except that, in
respect of any new matter, increases in deficiency, and
affirmative defenses, pleaded in the answer, it shall
be upon the respondent. As to affirmative defenses,
see Rule 39.
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adjustment made in the notice of deficiency is treated as new
matter when it either alters the original deficiency or requires
the presentation of different evidence. Wayne Bolt & Nut Co. v.
Commissioner, 93 T.C. 500, 507 (1989). A new theory that merely
clarifies or develops the original determination is not new
matter. Id.
In the notice of deficiency, respondent treated petitioner
as an employee of IDA consistent with his reporting the
compensation from IDA as wages, salaries, tips, etc. on the
returns. Consequently, respondent disallowed all deductions
petitioner claimed on Schedule C for each year but allowed
petitioner to deduct some of the items as unreimbursed employee
expenses on Schedule A. The notice of deficiency explained that
deductions were not allowed on Schedule C because petitioner had
not established that he incurred, or if he incurred, paid the
amounts for ordinary and necessary business purposes and that any
amount qualifies as a business expense as specified under the
provisions of the Internal Revenue Code.
The notice of deficiency raised two issues that are relevant
here. The first is whether petitioner was an independent
contractor entitled to fully deduct allowable expenses on
Schedule C or an employee of IDA entitled to deduct the expense
on Schedule A, subject to the 2-percent limitation under section
67. The second is whether any of the travel expenses for which
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respondent did not allow any deduction were incurred for ordinary
and necessary business purposes in the course of petitioner’s
carrying on a trade or business as either an independent
contractor or an employee of IDA.
Although section 162(a) is not mentioned in the notice, its
provisions are implicit in respondent’s explanation that
petitioner failed to establish that he incurred or paid the
disallowed amounts for ordinary and necessary business purposes
and that any amount qualifies as a business expense as specified
under the provisions of the Internal Revenue Code. The notice
alerted petitioner to respondent’s challenge to the bona fides of
the disallowed amounts as travel expenses. The factual bases and
rationale required to establish that the amounts petitioner paid
for driving between Lancaster and Alexandria and for lodging and
meals while working in Alexandria were ordinary and necessary
business expenses incurred in his business of providing services
to IDA as an independent contractor are identical to the factual
bases and rationale necessary to establish that they were
ordinary and necessary business expenses incurred in the business
of providing services to IDA as an employee. In either case
petitioner must show that (1) he was away from home when he
incurred the expense, (2) the expense is reasonable and
necessary, and (3) the expense was incurred in pursuit of a trade
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or business. Commissioner v. Flowers, 326 U.S. at 470. The
issue of the location of petitioner’s tax home is not new matter
under Rule 142(a).
Moreover, regardless of who bears the burden of proof, the
record establishes that petitioner’s tax home for the years at
issue was in Alexandria. Beginning in 1995, petitioner worked
exclusively for IDA on a series of specialized projects that
frequently required petitioner to work with classified
information accessible only in the Washington, D.C., metropolitan
area. IDA provided petitioner with work space and support staff
in Alexandria throughout the entire working relationship. Most
of the time petitioner conducted his activities for IDA in
Alexandria. Often he could only perform his services in
Alexandria, e.g., when he needed access to classified
information. Although petitioner performed some of his work for
IDA from his home in Lancaster, he could access nonsecure
information only through his connection to IDA’s computer
network. The record is devoid of any evidence that business
exigencies ever required him to perform any of his services for
IDA in Lancaster. Petitioner worked for IDA for 16 years and
exclusively for IDA beginning in 1995. Petitioner’s relationship
with IDA was indefinite and not temporary, and he had only
personal reasons for maintaining his residence in Lancaster.
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Petitioner’s tax home for the years at issue was Alexandria,
Virginia.
The car and truck expenses and any claimed depreciation for
using his car were petitioner’s personal expenses for driving
between his residence in Lancaster and his work in Alexandria.
The travel expenses and utilities were for his lodging when he
stayed in Alexandria, and the meals and entertainment expenses
were his costs of meals and entertainment incurred when he stayed
in Alexandria. Petitioner did not incur the disallowed expenses
while away from his tax home in the course of his trade or
business.
We hold that petitioners are not entitled to deduct the
disputed items.
To reflect the foregoing and the parties’ concessions,
Decision will be entered
under Rule 155.