In Mitchell, (TC Memo 2000-145), the Tax Court awarded a taxpayer litigation costs attributable to an accuracy-related penalty after finding it was not reasonable for the IRS to impose such a penalty.
In the original case ( Mitchell, TC Memo 1999-283), the issue was the rule in IRC section 162(a). Under it, for costs paid or incurred after 1992, a taxpayer away from home for a period of employment that exceeds one year generally is not treated as being temporarily away from home and cannot deduct travel expenses.
The taxpayer was a self-employed consultant who worked out of a home office in Chicago. From 1991 through 1995, he was busy on a number of projects for one client. Each assignment lasted one year or less. He did some of the work at his home office, but frequently traveled to California and worked there for the client for extended periods of time. He stayed in a rented apartment in California for 155 days during 1994 and 113 days during 1995. During these projects, he was free to work for other clients.
The IRS disallowed the taxpayer’s travel expenses for 1994 and 1995 and claimed the taxpayer’s tax home had shifted from Chicago to California because of his extensive work there. It said that because the taxpayer worked for a single client in California for at least five years, the work violated the one-year rule in IRC section 162(a). In addition, the IRS imposed an accuracy-related penalty under section 6662.
The Tax Court allowed all the disputed deductions, holding that the taxpayer’s stays in California did not violate the one-year rule, because he was not employed there continuously on one project for more than one year. The court said that just because an independent contractor returns to the same general location over a period of a year or more does not mean he or she is employed there on an indefinite basis.
After the taxpayer won, he petitioned the Tax Court for litigation costs under IRC section 7430 on the grounds that the IRS’s position regarding the travel expenses had not been substantially justified. But the court’s decision was mixed. It held that the IRS’s position on the travel expenses was not unreasonable, because the case was the first in which the one-year rule was invoked as it applied to independent contractors. But the court also found the IRS had been unreasonable in imposing an accuracy penalty because it was a case of “first impression” involving the unclear application of a code amendment.
The court determined that the taxpayer was reasonable and had acted in good faith in taking a position on his travel expenses, so the accuracy penalty did not apply. Therefore, it awarded the taxpayer the portion of litigation costs that was related to the accuracy penalty.
—James Ozello, Esq.,
Ozello Tax and Legal Consulting,
Ringwood, New Jersey.