The Seventh Circuit Court of Appeals upheld a Tax Court opinion that had denied former airline mechanic David Wilbert’s deductions for travel expenses incurred when he accepted assignments in various cities to keep his job under the airline’s employee “bumping” arrangement. Although the court was sympathetic to the taxpayer’s situation, it held that the expenses were not related to his trade or business because he had no business reason to incur duplicate living expenses. The case was the only one of several brought by current and former Northwest Airlines mechanics to be ruled on at the appellate level (see, for example, Wasik v. Commissioner, TC Memo 2007-148; “Tax Matters: Travel Deduction Gets Bumped,” JofA, Oct. 07, page 78). More recently, the Tax Court cited Wilbert’s case in ruling on that of Abdasslam Alami El Moujahid (TC Memo 2009-42) on similar issues. These included the effect of other employment in Minneapolis on determining whether it could be considered the taxpayer’s “tax home” while he continued to work for Northwest as a mechanic in other cities.
Taxpayers are allowed a deduction for travel expenses when business requirements force them to duplicate their living expenses. To qualify for the deduction, taxpayers must show that the expenses were (1) incurred when they were away from home, (2) reasonable and necessary and (3) incurred in pursuit of a trade or business. Normally, taxpayers’ tax home is their principal place of employment, including situations where they are away from home for an indefinite period because of business; however, a taxpayer’s residence is the tax home if the taxpayer is temporarily away from home for business reasons. Permanently itinerant taxpayers have no principal place of business; thus, they cannot be away from home for business reasons and cannot deduct travel expenses.
Wilbert was employed by Northwest Airlines as a mechanic in Minneapolis. In April 2003, after working for Northwest about seven years, he received a layoff notice from the airline because of its financial difficulties. Under Northwest’s bumping arrangement for its mechanics, Wilbert could accept the layoff or bump another mechanic with less seniority in another city. He bumped a mechanic in Chicago, but shortly thereafter he was bumped twice, resulting in his working in Flushing, N.Y., and Anchorage, Alaska. From 2003 to 2005 while the bumping took place, Wilbert incurred and deducted about $20,000 in travel costs while he and his wife maintained their personal residence in Hudson, Wis., near Minneapolis. They maintained that residence with the hope that his job with Northwest in Minneapolis eventually would be restored. The IRS disallowed the deduction and, after reviewing the case, the Tax Court agreed, prompting Wilbert to appeal.
In its opinion, the Seventh Circuit stated that the temporary vs. indefinite distinction as a means of determining whether a taxpayer is away from home is hard to apply since “all work is indefinite and much ‘permanent’ work is really temporary.” The court also found that administering a standard that examines whether the travel was reasonable (a reasonableness test) is difficult, and under that standard a taxpayer would only have to show “a good reason for not moving his home when he gets a job in a different place” to deduct travel expenses.
Although the Seventh Circuit had difficulty accepting the government’s argument that Wilbert had made only a personal decision to commute to Chicago, New York and Alaska, it felt it must, within the constraints of administrative convenience, apply the business exigencies standard used by the Supreme Court in Commissioner v. Flowers, 326 U.S. 465 (1946), and deny his travel deductions. The Seventh Circuit stated that under the business exigencies standard “unless the taxpayer has a business rather than a personal reason to be living in two places, he cannot deduct his travel expenses if he decides not to move.” Nor could Wilbert’s real estate business on the side in Minneapolis provide a sufficient business reason for considering his tax home to be there, the court said. His total income from selling real estate in 2003 was $2,000, and thus it could not be considered his main business, the court said. The Tax Court subsequently made a similar determination with respect to Alami’s additional employment as a soccer coach in Minnesota.
Although the Seventh Circuit sympathized with the difficult situation Wilbert faced because of the bumping arrangement, it stated that his situation was similar to that of a construction worker who traveled the country never knowing how long each job would last and as a result not relocating his residence. Neither the construction worker nor Wilbert can take the deduction, the court said.
David A. Wilbert v. Commissioner, No. 08-2169 (7th Cir. 1/21/09)
By Charles J. Reichert, CPA, professor of accounting, University of Wisconsin–Superior.