On February 15, 2022, the Tax Court issued a Memorandum Opinion in the case of Harwood v. Commissioner (T.C. Memo. 2022-8). The primary issue presented in Harwood was whether the taxpayer adequately substantiated his deductions for travel, residence, and “other” such deductions.
Background to Harwood v. Commissioner
During the years at issue, Mr. Harwood worked as a steamfitter and brazier on construction projects in Washington and Oregon. Mr. Harwood joined Plumber and Steamfitters Local 598 (Local), headquartered in Pasco, Washington, in the 1970s, and he obtained each of the jobs during the years at issue through the Local. The Local’s territory straddles southern Washington and northern Oregon.
At this point the Tax Court includes a rare visual:
The Harwoods lived in Yakima, Washington, nestled within the western part of the Local’s territory. Mr. Harwood, a Yakima native, loved his hometown and took great pride in raising a family there with his wife. Mr. Harwood’s work often required that he leave for significant chunks of time, but he made a concerted effort to spend weekends at home in Yakima even while on the job. He believed that his family and his economic prospects would both suffer were he to move his home whenever his work location shifted.
When beginning a job, Mr. Harwood did not know how long the project might last. He worked for five separate employers during 2015–17, with intermittent periods of unemployment between projects. For brevity’s sake (and because you likely don’t really care), I’ve included the work projects in the footnotes.
Tax Returns and Notice of Deficiency in Harwood v. Commissioner
The Harwoods timely filed Forms 1040, U.S. Individual Income Tax Return, for their 2015, 2016, and 2017 tax years, reporting adjusted gross income of $145,527, $175,241, and $124,476, respectively. The Harwoods claimed unreimbursed employee business expense deductions of $23,309 for 2015, $37,076 for 2016, and $27,442 for 2017. The Harwoods offered further details on Form 2106-EZ, Unreimbursed Employee Business Expenses, attached to each return.
The IRS thereafter issued a notice of deficiency determining deficiencies of $3,314, $5,885, and $5,004 for the Harwoods’ 2015, 2016, and 2017 tax years, respectively. The IRS premised the deficiency determinations on the disallowance of a portion of the Harwoods’ claimed deductions for unreimbursed employee business expenses for each year ($13,252 for 2015, $30,814 for 2016, and $23,148 for 2017), asserting that the Harwoods had failed to offer adequate substantiation or show that the expenses were ordinary and necessary to Mr. Harwood’s business.
Business Expense Deductions, Generally
As a general matter, IRC § 162(a) allows the deduction of “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The term “trade or business” includes performing services as an employee.
A taxpayer bears the burden of establishing his entitlement to deductions allowed by the Code and substantiating the amounts of his claimed deductions. The failure to keep and present accurate records counts heavily against a taxpayer’s attempted proof. Unless specifically enumerated in the Code, no deductions are allowed for personal, living, or family expenses.
IRC § 274(d), however, imposes stricter substantiation requirements for deductions claimed for, among others, expenses of travel (including meals and lodging while away from home) and listed property. No such deduction is allowed unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement the amount, time and place, and business purpose for each expenditure.
Treas. Reg. § 1.274-5T(b)(2)(ii) defines the term “time” as “dates of departure and return for each trip away from home, and number of days away from home spent on business,” and subdivision (iii) defines the term “place” as “destinations or locality of travel, described by name of city or town or other similar designation.” For certain property, such as an automobile, the taxpayer must also establish the amount of business use “based on the appropriate measure (i.e., mileage for automobiles), and the total use of the listed property for the taxable period.”
Adequate records for this purpose include an account book, log, or similar record and documentary evidence that together are sufficient to establish each element of the expenditure. To be adequate, records must be prepared or maintained in such a manner that each recording of an element of expenditure is made at or near the time of the expenditure or use. A taxpayer who lacks contemporaneous records may attempt to reconstruct such expenses with corroborative evidence of a high degree of probative value that would supply the same level of credibility as a contemporaneous record.
Travel Expenses While Away from Home
A taxpayer may deduct reasonable and necessary travel expenses such as meals and lodging incurred “while away from home in the pursuit of a trade or business.” This deduction is meant to alleviate the burden on taxpayers whose business or employment requires them to incur duplicative living expenses. To claim such a deduction, a taxpayer must show
- that he was away from home when he incurred the expense;
- that the expense is reasonable and necessary; and
- that the expense was incurred in pursuit of a trade or business.
A taxpayer generally must show that he was away from home overnight when the expenses were incurred. For present purposes, the Tax Court’s consideration is limited to Mr. Harwood’s work for jobs for which he stayed overnight “away from his home” in Yakima.
Away from Home
For purposes of IRC § 162(a)(2), the word “home” has been given a specialized meaning that differs from ordinary usage. Specifically, the Tax Court has interpreted a taxpayer’s home to refer to the vicinity of a taxpayer’s principal place of business rather than his personal residence.
A taxpayer’s residence may be treated as his tax home, however, if his principal place of business is temporary rather than indefinite. Employment is “temporary” if it is the type that can be expected to last for only a short period, and is indefinite if “its termination cannot be foreseen within a fixed or reasonably short period of time.” Each of the jobs at issue here was temporary. All were expected to last a limited period of time, and none lasted more than a year.
Given the relatively short and uncertain duration of these jobs, the Tax Court did not believe it would have been reasonable to expect the Harwoods to move to be nearer to Mr. Harwood’s places of work.
We next determine whether Mr. Harwood had a tax home during tax years 2015–17 by referring to the three factors set forth in Rev. Rul. 73-529. The Tax Court considers whether the taxpayer
- incurs duplicate living expenses while traveling and maintaining the home;
- has personal and historical connections to the home;
- has a business justification for maintaining the home.
These factors demonstrate that Mr. Harwood had a tax home in Yakima. First, the Harwoods had an actual home in Yakima for which they incurred expenses. Mrs. Harwood raised the family in Yakima while he was on the road, a point underscored by the deductions for home mortgage interest payments on their 2015–17 tax returns. Mr. Harwood paid living expenses while traveling, which were duplicative of the family’s Yakima expenditures.
Next, Mr. Harwood persuasively testified about the Harwoods’ significant personal and historical ties to Yakima, explaining that their life and family were rooted there. The parties principally dispute the final factor—whether Mr. Harwood had a business justification for maintaining his home in Yakima.
The IRS asserted that the Harwoods had no business justification for living in Yakima and did so merely for the personal reasons that Mr. Harwood described at trial. The Tax Court (which has a heart larger than two sizes too small) was satisfied that Mr. Harwood had a “sufficient business reason” for living in Yakima—to wit, he was a member of a union local with a geographically disparate territory.
Although he had not worked jobs in Yakima since 2005, almost all of his work during 2015–17 was within the Local’s footprint, with some assignments closer to his house than the hall in Pasco, though some were admittedly further away.
Ultimately, however, the Tax Court believed that his union membership, which gave him access to jobs within the union’s expansive territory, provided an adequate business justification for continuing to live in Yakima.
Accordingly, the Tax Court concluded that Mr. Harwood was “away from home” for purposes of IRC § 162(a)(2) when he stayed overnight during the years at issue.
Passenger automobiles constitute listed property, and the Harwoods’ reported vehicle expenses accordingly are subject to the heightened substantiation requirements of IRC § 274(d). A taxpayer may deduct vehicle expenses on the basis of actual cost or the standard mileage rate, provided he substantiates the amount of business mileage and the time and purpose of each use.
If the taxpayer uses the standard mileage rate and satisfies these requirements, he may deduct vehicle expenses in an amount equal to the rate multiplied by the number of business miles. The taxpayer generally must keep a contemporaneous mileage log or a similar record, such as a diary or trip sheets, that substantiates the extent to which the vehicle was actually used for business rather than personal purposes.
A taxpayer may also deduct “[e]ducation expenditures, including transportation from work to class, parking, and travel expenses while away from home in connection with such education…when the education maintains or improves the skills required by a taxpayer in his or her employment or if the education meets the express requirements of the taxpayer’s employer.” To deduct vehicle expenses incurred for job-related education, a taxpayer must satisfy the stringent substantiation requirements of IRC § 274(d).
The Harwoods claimed significant vehicle expense deductions for 2015–17, which they calculated by multiplying Mr. Harwood’s purported work mileage for each year by the standard mileage rate. On their tax returns they stated that Mr. Harwood drove 27,048 miles for business during 2015, 27,588 for 2016, and 14,020 for 2017.
The Harwoods derived their mileage from the odometer of the Buick Verano that Mr. Harwood drove for work. Mr. Harwood testified that he recorded the odometer readings when he filled up his gas tank throughout each year, introducing the contemporaneous log into evidence at trial.
He further explained (and the Tax Court accepted) that this Buick was dedicated for business use and that any personal use was de minimis. In support of that point, he noted that he and his wife owned two other cars during the years at issue, which they used for personal driving.
Although the Tax Court found Mr. Harwood credible in describing his system, his log is unreliable in that it failed to exclude nondeductible commuting mileage, which he incurred in each of the three years at issue. “As a general rule, expenses for traveling between one’s home and one’s place of business or employment constitute commuting expenses and, consequently, are nondeductible personal expenses.”
The rationale for this rule is “founded on the premise that one is free to choose the location of his personal residence.” Differences in the distances traveled and the amounts spent on traveling are influenced by one’s personal preference as to his place of living and his means of transportation. “The basic and unmodified fact of whether the taxpayer is going to the place where he begins work or is returning from the place where he ceases work should be determinative [of whether expenses for such travel are deductible].”
To deduct employee business expenses, a taxpayer must not have received reimbursement and must not have had the right to obtain reimbursement from his employer. The taxpayer bears the burden of proving that he is not entitled to reimbursement from his employer for such expenses.
The taxpayer can prove that he was not entitled to reimbursement by showing, for example, that he was expected to bear these costs. If a taxpayer’s business expenses are reimbursed by the employer, then the taxpayer is entitled to a deduction only for the amount of expenses that exceeds the reimbursement.
Conclusion in Harwood v. Commissioner
The Harwoods adequately substantiated a portion of their meal expenses for 2015–17, lodging expenses for 2016 and 2017, and vehicle expenses for 2015–17. However, the Tax Court held that such substantiated expenses must be reduced by the reimbursement amounts received by Mr. Harwood for each year and must exclude any expenses associated with Charter Mechanical in 2017.
- The Work Projects
Temp. Control in Quincy, Washington, in 2015
A 6.5 month project from January 1 through July 16 and another job from August 13 through September 3. Mr. Harwood began the first assignment in November 2014 with the understanding that it would take approximately three months, but the work took longer than anticipated.
During these periods, Mr. Harwood drove with a coworker approximately 87 miles from Yakima to Quincy, worked his day’s shift, and then drove home. Temp. Control maintained a reimbursement policy that applied to Mr. Harwood, under which he was entitled to reimbursement for a certain amount of daily travel expenses and a one-time reimbursement of $100 for safety boots.
Abacus in Boardman, Oregon
From October 2 until December 16, 2015, Mr. Harwood worked for Abacus at the Carty Generating Station in Boardman, Oregon, which is within the Local’s territory, but 147 miles from Yakima. While working at Abacus Mr. Harwood typically would drive from Yakima to Boardman on Sunday afternoons and return the following Wednesday or Thursday.
During his two months in Boardman, Mr. Harwood stayed 36 nights at the Rodeway Inn in Boardman. Mr. Harwood drove from the Rodeway Inn to his worksite (or vice versa) a total of 82 times while working for Abacus. Abacus also maintained a reimbursement policy that applied to Mr. Harwood.
Day & Zimmerman in Boardman, Oregon
Mr. Harwood began 2016 where he left off in 2015, i.e., the Carty Generating Station in Boardman. Abacus had been replaced by another company, Day & Zimmerman, which recalled Mr. Harwood to serve as a general foreman running an instrumentation crew. He worked in this capacity from January 20 through May 5, 2016. Mr. Harwood often worked six or seven days a week, putting in 13-hour days.
As before, Mr. Harwood stayed at the Rodeway Inn, totaling 85 nights during this period. Mr. Harwood drove from the Rodeway Inn to his worksite (or vice versa) a total of 181 times while working for Day & Zimmerman. He made 10 round trips from Boardman to his home in Yakima during his time with Day & Zimmerman.
Mr. Harwood also attended continuing education classes hosted by his Local in Tri-Cities, Washington, 54 miles from Boardman, making that drive twice a week for 15 weeks. Day & Zimmerman had a reimbursement policy that applied to Mr. Harwood.
Temp. Control in Quincy, Washington, in 2016
In May 2016 Mr. Harwood again began an assignment at Temp. Control, ultimately working there until April 6, 2017, a duration of approximately ten months. Mr. Harwood’s work started with a change order relating to a Microsoft Corp. building in Quincy.
Mr. Harwood was told that this project would last approximately four or five months and that he could work four days a week, ten hours a day. Although the first two months held true to the prediction, Microsoft added more work, lengthening the project timeline and requiring Mr. Harwood to spend more than four days a week in Quincy.
Although Mr. Harwood had felt comfortable commuting to Quincy when he was working only four days a week, as the time commitment grew, he began to investigate options to stay in Quincy during his work week.
Estimating that his work for Microsoft might last another six months, he decided it would be most cost effective to bring a travel trailer that he owned to Quincy so that he could stay overnight and drive to and from his work location. He ultimately settled on Crescent Bar RV Park, which required upfront payments of $488 to Thousand Trails Corp. and $2,700 to Crescent Bar for a year’s access.
Mr. Harwood brought his trailer to Crescent Bar and began staying overnight at the start of October. Mr. Harwood spent 91 nights in his trailer at Crescent Bar. Although he stayed at Crescent Bar during the work week, Mr. Harwood made 23 round trips (11 in 2016 and 12 in 2017) between Quincy and Yakima, typically leaving Quincy sometime between Wednesday and Friday and returning for work on Monday.
From September 11 through November 17, 2017, Mr. Harwood worked for a company called Charter Mechanical at an Intel Corp. facility in Hillsboro, Oregon, a job he obtained through the union’s “travel card” program (which allows union members to work out of other local halls).
Hillsboro is approximately 203 miles from Yakima, and Mr. Harwood typically drove to his sister’s house in Hillsboro on Sunday evenings and stayed until Wednesday or Thursday, as his schedule permitted, at which time he would return home to Yakima. Mr. Harwood made 10 such round trips and paid his sister $100 per week for 10 weeks of room and board, staying with her a total of 29 nights.
Waste Treatment Completion Co. (Waste Treatment)
On November 20, 2017, Mr. Harwood was dispatched to Waste Treatment, located in Hanford, Washington, and worked there through December 31, 2017. This worksite was approximately 41 miles from the Harwoods’ home.
Mr. Harwood typically drove to the worksite, worked his shift, and then drove home at the end of the day, making 25 such round trips in 2017. Waste Treatment maintained a reimbursement policy that applied to Mr. Harwood. ↑
- See Primuth v. Commissioner, 54 T.C. 374, 377-78 (1970). ↑
- See IRC § 6001; INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Treas. Reg. § 1.6001-1(a). ↑
- See Rogers v. Commissioner, T.C. Memo. 2014-141, at *17. ↑
- See IRC § 262(a). ↑
- See IRC § 274(d) (flush language). ↑
- See Treas. Reg. § 1.274-5T(b)(6)(i)(B). ↑
- See Treas. Reg. § 1.274-5T(c)(2)(i). ↑
- Treas. Reg. § 1.274-5T(c)(2)(ii). ↑
- Treas. Reg. § 1.274-5T(c)(1). ↑
- IRC § 162(a)(2) (emphasis added). ↑
- See, e.g., Kroll v. Commissioner, 49 T.C. 557, 562 (1968). ↑
- See Commissioner v. Flowers, 326 U.S. 465, 470 (1946). ↑
- United States v. Correll, 389 U.S. 299, 302-07 (1967); Strohmaier v. Commissioner, 113 T.C. 106, 115 (1999). ↑
- See, e.g., Henderson v. Commissioner, 143 F.3d 497, 499 (9th Cir. 1998), aff’g T.C. Memo. 1995-559; see also Daly v. Commissioner, 72 T.C. 190, 195 (1979), aff’d, 662 F.2d 253 (4th Cir. 1981). ↑
- See, e.g., Mitchell v. Commissioner, 74 T.C. 578, 581 (1980); Geiman v. Commissioner, T.C. Memo. 2021-80, at *12. ↑
- See Geiman, T.C. Memo. 2021-80, at *11-15; see also Peurifoy v. Commissioner, 358 U.S. 59, 60 (1958); Yanke v. Commissioner, T.C. Memo. 2008-131, at *3. ↑
- Albert v. Commissioner, 13 T.C. 129, 131 (1949). ↑
- Stricker v. Commissioner, 54 T.C. 355, 361 (1970), aff’d, 438 F.2d 1216 (6th Cir. 1971). ↑
- See § 162(a) (flush language) (barring the deduction of travel expenses where the duration of employment lasts for more than a year). ↑
- See Wright v. Hartsell, 305 F.2d 221, 223-25 (9th Cir. 1962). ↑
- See, e.g., Geiman, T.C. Memo. 2021-80, at *13; Lyseng v. Commissioner, T.C. Memo. 2011-226, at *3; Minick v. Commissioner, T.C. Memo. 2010-12, at *4; see also Henderson, 143 F.3d at 500. ↑
- See Geiman, T.C. Memo. 2021-80, at *13-15. ↑
- See Geiman, T.C. Memo. 2021-80, at *15; Williams v. Commissioner, T.C. Memo. 1990-467. ↑
- See IRC § 280F(d)(4); Fernandez v. Commissioner, T.C. Memo. 2011-216, *3. ↑
- See Treas. Reg. § 1.274-5(j)(2). ↑
- See Treas. Reg. § 1.274-5T(b)(6)(i)(B), (c); see also Michaels v. Commissioner, 53 T.C. 269, 275 (1969); Flake v. Commissioner, T.C. Memo. 2014-76, at *8-9. ↑
- Whalley v. Commissioner, T.C. Memo. 1996-533, *3; Treas. Reg. § 1.162-5(a)(1). ↑
- Bogue v. Commissioner, T.C. Memo. 2011-164, *5, aff’d, 522 F. App’x 169 (3d Cir. 2013); see also IRC § 262(a); Commissioner v. Flowers, 326 U.S. at 469-70; Feistman v. Commissioner, 63 T.C. 129, 134 (1974). ↑
- Anderson v. Commissioner, 60 T.C. 834, 835 (1973) (quoting Gilberg v. Commissioner, 55 T.C. 611, 616 (1971)). ↑
- Id. ↑
- Sanders v. Commissioner, 439 F.2d 296, 299 (9th Cir. 1971) (quoting United States v. Tauferner, 407 F.2d 243, 246 (10th Cir. 1969)), aff’g 52 T.C. 964 (1969). ↑
- See Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), aff’g T.C. Memo. 1984-533. ↑
- See Fountain v. Commissioner, 59 T.C. 696, 708 (1973). ↑
- See id.; see also Dunkelberger v. Commissioner, T.C. Memo. 1992-723, *2 (finding that management team expected taxpayer to bear expense of business lunches with vendors). ↑
- Treas. Reg. § 1.162-17(b)(3); Treas. Reg. § 1.274-5T(f)(2)(iii); see also Daiz v. Commissioner, T.C. Memo. 2002-192, *7. ↑