Originally published on Forbes.com.
So this Tax Court decision about “business home” hits pretty close to home for me. Michael E. Brown, who has an accounting degree, an MBA and had a New Jersey CPA license practices as a “concierge CFO”. It’s not the sort of thing where you are going to be able to have a lot of clients at the same time, although Mr. Brown has had quite a few over the years. As it happens, for a period in 2012 and 2013, he only had one client. That is what creates the tax problem.
In its deficiency notice, IRS was looking for over $20,000 from disallowing expenses for food, lodging and travel totaling over $60,000. Mr. Brown is based in a suburb of Atlanta. The tax problem comes from his gig with AFR a furniture company based in Pennsauken, New Jersey.
A Long Term Gig
Mr. Brown had a three-year agreement with AFR which required him to be on-site four days a week. Of the two years under audit, 2013 was a full year, so we will just look at those numbers. His revenue from AFR was $159,759 and he claimed $52,617 in travel expenses. The IRS did not challenge him on substantiation of the travel expenses.
For whatever it is worth $1,000 week seems pretty reasonable. The standard per diem rate for Camden County NJ was $151 in 2013. Atlanta to Pennsauken is nearly 800 miles, so he must have been flying. Even I probably would not have been able to figure out how to do it for much less and you have no idea how cheap I am.
The effect of the travel expenses being disallowed is really nasty. Mr. Brown is making, net, just over $100,000 and being taxed on over $150,000. It’s like he was selling marijuana in Colorado. (Section 280E disallows all expenses for that sort of business)
The Weak Points
Mr. Brown’s best argument was that he had a business based in Atlanta, so that is where his tax home was. One thing he did that was inconsistent with that position was attaching three Schedule Cs to his tax return for 2012. That gives the impression that the AFR engagement was a separate enterprise. Also, and this is ironic, it seems that Judge Halpern held it against him that he did not claim a home office deduction.
Then there is a rather odd observation.
Petitioners have failed to convince us that, beginning in mid-2013, Mr. Brown worked alternating two-week periods in Atlanta and in Pennsauken. Accordingly, they have failed to convince us that, in 2013 (vacation time aside), Mr. Brown worked less than four days a week, every week, in Pennsauken
The implication is that two weeks on two weeks off would make for a better argument that AFR was just Brown’s major customer rather than, in effect, his job. What is odd is that Brown was not able to prove that.
Petitioners’ failure to produce evidence in their possession that, if true, would be favorable to them gives rise to the presumption that, if produced, the evidence would be unfavorable
Raw Deal
Judge Halpern summed up his analysis by heading a paragraph with “We Do Not Take A Long Term View“.
Mr. Brown testified that he has had business clients since at least 1998. And if, since then, he has had numerous clients, it may well be true that, considering the intervening 15 years as a whole (1998 through 2013), he has had no regular or principal place of business. But petitioners have provided us with no authority that we are to take such an extended view to determine whether, during the finite period of his business history here under consideration (from October 2012 through 2013), he had no regular or principal place of business.
Halpern then cites Green v Commissioner, a 1961 Tax Court decision. Green strikes me as a very different situation. He was somebody who landed a long term gig by word of mouth referral rather someone like Brown who had set up shop. The finding of the full Tax Court in Green was:
The evidence as a whole implies that Jay’s only prospects of employment were in Dayton and that he, like his wife, chose to live in Greenville for personal reasons only, while earning income in Dayton.
That is quite a bit different than Brown’s circumstance. And there was dissent in the Green decision.
Gotta love that “working man”. It was 1961 after all.
How It Might Have Gone Better
Since the statute has run on it, I can confess that one of my returns has very similar facts to Mr. Brown’s. It was only six months, but I did a week-on, week-off sort of thing. Cheap as I am, the expenses were nonetheless pretty substantial.
It was funny though how the regular flights ended up feeling like a commuting routine. If it had gone on longer and I had been audited, I might not have done much better than Mr. Brown did, although it did not occur to me at the time that there was much of an issue.
It does make me reflect on how he might have done better. Overall, I think he should have boosted the substance of his overall business. In principle, it should not matter, but I suspect he would have done better as an S corporation. Saving some money on the SE tax, might have offset any additional cost. The 1120S would have been small potatoes and his individual return would have been more mundane.
Filing three Schedule Cs was probably a bad idea, as I noted. And he should have made a stronger case that his home near Atlanta was actually the hub of his business. Since his agreement with AFR was terminable on short notice, it is hard to see what purpose it served him, but it might have been meant to address concerns about him being treated as an employee.
All in, if you are a consultant who has a wangled a long term gig and are not serving other clients, you may want to discuss this decision with your tax adviser to see if you can beef up the substance of your overall endeavor.
Other Coverage
Elise Hansen has Contractor Can’t Deduct Travel Expenses, Tax Court Says behind the Law360 paywall. I did mention what a cheapskate I am. Didn’t I?
Lew Taishoff had “WHAT IS TEMPORARY BECOMES INDEFINITE” – PART DEUX. One thing he noted that I passed over was the penalty.
Mike does get the accuracy chops, though; he’s a CPA with a master’s degree in finance, and should know “the dubiousness of petitioners’ reporting position.”
Well, I have to say that I did not find the position dubious at all. Maybe if Mr. Brown had paid somebody to do his return, he would have done better. At least he could have somebody to fall on his sword to get him out of the penalty.