Chapter 5               p.389
Mixed Business/Personal

Deductions for expenses incurred in activities generating income:

1 ) §162 – “ordinary and necessary” business expenses; and

2) §212 – expenses incurred in investments (i.e., non-business activities but activities for profit). 

Cf., §262 – no deduction is permitted for personal, living or family expenses.

Possible Limitations on Deductions              p.391

§67 – limits itemized deductions:  permitted only to the extent that itemized deductions exceed 2 percent of the taxpayer’s AGI.

What are these limited deductions?  E.g.,  §212 deductions and §162 employee deductions (subject to reimbursement plan - §62(a)(2)(A)).

See the “above the line” deduction for some attorney fees - §62(a)(19).

Cf., §68 providing for a phase-down of deductions at the top.

Hobby Losses -         P.393
Nickerson case

Was profit the primary goal in owning a dairy farm?  Was Tax Court factual finding “clearly erroneous”? Yes: efforts were directed to profit.

Farm in Door County, Wisconsin purchased in run-down condition.  Taxpayer visited the farm on the weekends.  Profit potential delayed for 10 years.  But, not an “entertainment facility.”

See §183 re limitations on deductions for activities not engaged in with a profit motive.

See determinative factors in Reg. §1.183-2(b).  

What benefit of avoiding “hobby loss” treatment?

Losses are deductible against other income (e.g., compensation and investment income).

Otherwise, see the limitations in §183 re loss utilization as deductions. 

How long a period should be allowed for the deduction of “start-up costs”?

Require capitalization of start-up costs?  But, then a tax basis for future offset in determining gain realized upon asset dispositions.

How deal with the personal/pleasure element?

Vacation Homes      p.400

Vacation homes – p.401 – See §280A.

Options:  1) No personal use – full tax deductions are available (utilities, depreciation).

2) Personal use & under 15 days rental use:  income & deductions are ignored - §280A(g).

3) More or less than 14 days personal use, plus rental use (i.e., plus 14 days).   Pro rata deductions are available – but how allocate (proportionately, after interest & taxes)? See §280A(c)&(e).

Office in the Home
§280A(a)

Disallows all §§162, 165, 167, 168 and 212 deductions for a home office or work area in a personal residence.  Why?  Cf., §262.

But, see §280A(c)(1) permitting a home office deduction if exclusively used on a regular basis, such as for meeting customers.

Deduction is limited to offsetting the gross income from that activity (not other income).

What if the office is the “principal office” for the trade or business of the taxpayer?

Limit on §280A deduction

§280A(c)(5) provides for a limit on the office in the home deductions:

First deductions are those allocable to the

statutory deductions (e.g., taxes and interest).

Additional deductions are allocated to the

business use.

3)  Possible carryover of unused deductions.

Rev. Proc. 2013-13
Home Office Safe Harbor

Safe harbor permitted of $5 per square foot up to a maximum of 300 square feet.

This is an alternative to the calculation of actual home office expenses.

Still must be exclusive use on a regular basis of this office in the home.

Deduction can not exceed gross income derived from activities in that office in the home (& no carryover of the excess to a later year).

Popov                      P.402 Office in the Home

Deduction permitted to a professional musician for home office expenses attributable to musical (violin) practice in the living room.

Determining that a “relative importance” test (i.e. home office vs. concert hall) is not useful.

But, the amount of time is relevant - practicing at home (more) vs. performance.

Held:  The living room was used exclusively as the “principal place of business.”  Possible?

“Trade or Business” Expense?

Moller case, p.407

Were taxpayers active investors engaged in the “trade or business” of making investments?

Expenses were incurred for home offices.

Held:  Taxpayers were not conducting a trade or business when investing;  to be traders they must be doing short-term trading.

Here:  Taxpayers looking for long-term growth. Managing one’s investments is not carrying on a “trade or business.”

“Trade or Business” When a Landlord?

See IRC §280A(c)(6) re limiting arrangement to avoid the §280A(c)(1) deduction restriction.

Can not rent office to one’s employer and:

be transformed into a landlord, and

include any (limited rental income) in gross

Income, and

(3) then, take significant income tax deductions for the rental space (i.e., in excess of the rental income derived).

Henderson v. Commr.
Office Decoration     P.413

Cost of $35 framed print and $35 live plant to be used to decorate office (as an Assistant Atty. Gen. of South Carolina) were not deductible.

Taxpayer asserts §162(a) business expenses.

Or, were these personal expenses? §262.

Held: These were personal expenses (to improve the appearance of one’s office).

Cf., if expenses are incurred as a sole proprietor, i.e., not as an “employee.”

Listed Property:       P.414 Automobiles, Computers

See §280F re “listed property”:

1) Specific limit on depreciation for luxury automobiles.  §280F(a).

2) Limited depreciation allowance where other listed property not predominantly used in a qualified business, including property used for entertainment and computers.  §280F(d)(4).

But not 4 wheeled vehicles exceeding 6,000 pounds.

Travel & Entertainment
p.415

Transportation expenses are deductible when traveling for business purposes.  §162(a)(2).

The “primary purpose” of this travel must be for business purposes.

Cf., travel for personal purposes as reimbursed by the employer – treated as a compensation payment.

Cf., commuting cost as a nondeductible personal cost.

Rudolph case
p.417

Writ of certiorari dismissed as improvidently granted.  Why?  Reference to Duberstein case.

Insurance company provided Dallas to NYC trip for agents (and spouses) as a bonus reward.

Fact finding subject to clearly erroneous rule & no deemed importance of this litigation.

Douglas dissent:  Business sessions conducted in NYC and on the train.  Wife’s expenses are also deductible.  She is part of the “community property” team!

IRC §274 – Rules Limiting the T&E Deduction

§274(a)(1)(A) – deduction for entertainment expense only if “directly related” to business.

No “goodwill” entertainment; but, deduction when expenses are in conjunction with a prior or later business discussion.  E.g., expenses for Houston Texans/Rockets/Astros tickets.

§274(n) – limit to 50% of the cost of meals and entertainment (with various exceptions).

§274(m)(3) – no travel expense deduction or exclusion for spouse  - unless also on business.

§274(d) Substantiation Requirements          p.422

No deduction for T&E unless substantiation:

time, (2) place, (3) business purpose, (4)

amount of the expense, and (5) the relationship to the recipients of the entertainment.

Contemporaneous records are required.

Per diem reimbursement may be acceptable if the time, place and business purpose are properly substantiated.

Club memberships – no deduction.  §274(a)(3).

Foreign travel deduction limitation                  p.422

§274(c) – possible expense limitation if combining business and pleasure and more than one week trip.  How avoid this rule?

Foreign convention limitation – see §274(h).

What is foreign?  See §274(h)(6) re defining North America.

But, seminars & conventions on cruise ships? See §274(h)(2) re U.S. port limitation.

“Luxury water transportation” - §274(m)(1).  Travel as “education”? §274(m)(2).

Business Lunches –
Moss case                p.423

Moss as a partner in a defense litigation law firm. Partners (and associates) met for lunch daily at Café Angelo and discussed their cases.

Deduction for these lunches?  Consider:

1) §262 – no deduction for personal expenses.

2) §119 – exclusion for meals provided in kind on the “business premises” (to employees).

3) §162(a) – ordinary and necessary business expenses as deductible.

Other relevant considerations? 

Churchill Downs       p.247
Does 50% Limit Apply?

Dinners & receptions, etc. were provided prior to Ky. Derby to press, etc.   Was the §274(n)(1) 50% deduction limit applicable here?

Held:  These were entertainment events and not publicity events for products (horse racing).

Rejecting applicability of a “high rollers” TAM.

Further, the §274(n)(1)(A) limitation for 50% deduction of this expense cost is not contingent on the expenditure being for entertainment.

Child-Care Expenses
Smith v. Commr.      P.433

Could a married couple deduct childcare expenses since “but for” these expenses the wife (in addition to the husband) could not be employed outside the home?

Held:  This is a personal expense and is not deductible. Not an “ordinary and necessary expense” in carrying on a trade or business.

The “but for” causation argument is rejected.

See (1) §21 household care credit & (2) §129(a) exclusion/employer dependent care ($5000) program.

Flowers case            P.437
Commuting Expense

Transportation expenses are deductible when traveling for business purposes.  §162(a)(2).

Cf., commuting is a nondeductible expense. 

Flowers – Lived in Jackson, MS & worked in Mobile, AL.  He paid his travelling expenses to commute to & hotel in Mobile.

Was he “away from home” for business?

In travelling was he “in pursuit of business”?

Holding:  No business relationship;  no decision re definition of “home”?

What if taxpayer has two business locations?

What if Flowers also conducted business in Jackson?  And, he then travelled to his other office in Mobile?

Are the travel expenses then deductible?

What if the residence location is also a location of a “home office”?

Hantzis                    P.443

Law student living (with spouse) in Boston and summer clerkship in NYC.  She deducted (under §162(a)(2)) both (1) transportation,

(2) apartment cost, and (3) meals in NYC.

Were these expenses incurred while “away from home”?   Was her “tax home” NYC?

Tax Court permits deductibility.

Reversed:  taxpayer not “away from home.”

Choice of two residences was hers & personal. No business connection with Boston location.

Temporary vs. Indefinite Employment             p.449

If holding temporary job away from home then deductibility for travel & living costs at destination location.

Not, however, if indefinite stay at the new location – treated as if a permanent job.  

E.g., North Dakota oil workers in the Bakken field.  What if a contract made for a specified period of service?

See §162(a) (flush language) that temporary can not exceed one year.

Deduction for Automobile Parking                     p.449

Commuting as a personal expense.

What about parking at work?  If required to have a car, e.g., to travel to clients?

See §132(f) re an excludible “transportation fringe” including “qualified parking.”

“Qualified parking” as on or near the employer’s business premises.

Limit of exclusion to $175 per month. 

Moving Expense Deduction                P.449

§132(a)(6) & (g) – gross income exclusion is available for “qualified moving expense reimbursement” received from employer.

§217 permits a deduction for certain moving expenses if moving 50 miles to a new job, e.g., for self-employed and partners.

§82 inclusion in employee’s gross income for moving expense reimbursement unless excludible under §132(a)(6).

What scope of §217 deduction? Non-employees?

Clothing Expenses
Pevsner                   P.452

Employee of an upscale clothing store was required to buy and wear high fashion clothing at work to “project the image.”

She did not wear this clothing after business.

§162 business expense or §262 personal cost?

Apply (1) a subjective (personal preference & the taxpayer’s lifestyle) or (2) an objective test (general acceptability of this clothing)?

Held:  Objective test is applicable (5th Cir. reversing Tax Court decision).  Why?

Other clothing situations & deductibility?

Police uniform?  Cf., Ms. Pevsner “uniform”? Formal concert attire for a classical musician?

Golf attire for professional golfer (with branding & identification)?

Army fatigue uniform? 

What about a “loan” of clothing from the employer – constituting gross income (§61)?

Should all clothing be assumed to be inherently personal?

Litigation Expenses
“Origin of Claim” Doctrine

U.S. v. Gilmore (p. 455) & Code §212(2).

What §212(2) deductibility of husband’s expenses for attorney’s fees for his successful resistance to wife’s community property claims in their divorce proceeding?

The husband’s property consisted of interests in

three corps. holding auto dealerships.

The “origin of the claim”  doctrine (a personal divorce matter here) applies to deny an income tax deduction for attorney’s fees.

Expenses of Education
Carroll                      p.461

College courses (English, philosophy, history & political science) taken by Chicago police detective did not improve his specific skills required in his employment and, therefore, were not deductible (under Reg. §1.162-5). 

These courses were merely to improve his general competence and were not deductible. 

What about law school tuition?

What about LLM degree tuition costs?

What about CLE program costs to an attorney?

§222 deduction for qualified tuition        p.463

Limited deduction for higher education expenses:  $4,000 for taxpayer with AGI below $65,000 ($130,000 for joint return) and $2,000 with AGI below $80,000 (but above $65,000; $160,000 for joint return).

Not a phase-out, but a “notch” and “cliff” provision.

§222 extended thru 2013 in ATRA-2012;   2014?

No §222 deduction if a §25A credit claimed.

§529 Qualified Tuition Program                   p.464

How established?  “Texas Tomorrow Fund,” and others (non-governmental funds)?

- Income realized in the account accrues exempt from §61 gross income inclusion.

- Distributions are tax-free if made for qualified educational expenses.

 -Donor controls the investment policy and can change beneficiaries for the 529 account (within the family).

 - Gift tax and estate tax considerations,

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