Roberts v. Commissioner, TC Summ. Op. 2011-127 (October 27, 2011)
Facts
Bobby Roberts returned home from the Vietnam War to become a vocational rehabilitation specialist. After completing graduate studies, he took academic positions first with Auburn University and later with Louisiana State University. Eventually Bobby went to work for a private company in Alabama that developed rehabilitation facilities throughout the southeast. When that company filed for bankruptcy, he started his own business focused on vocational rehabilitation and evaluation services.
While still living in Alabama and working out of a modest home office there, Bobby entered into a lease for a testing facility in Metarie, Louisiana. He would travel to Metairie if a case required testing. Although he made between 30-50 trips between his home and Meterie each year, the testing process only took 4 hours per client on average. In contrast, the evaluation and reporting process for these cases, which were conducted entirely from his home office, took an average of 7 to 8 hours per client. Bobby Roberts took a deduction for his travel expenses, but did not claim a home office deduction.
The IRS determined that Bobby’s tax home was Meterie, and therefore his travel expenses between his Alabama residence and Meterie were not deductible. The Tax Court ruled in Bobby’s favor, using reasoning that everyone with an Enrolled Agent job should understand.
Law
As a general rule, it is the taxpayer’s principal place of business, not his personal residence, that is considered his tax home. Mitchell v. Commissioner, 74 T.C. 578, 581 (1980). This is the standard described in an Enrolled Agent study course. When a taxpayer maintains an office in his home as his principal place of business, however, the tax home and personal residence are one and the same and the expense of traveling between that residence and another workplace are deductible. See Strohmaier v. Commissioner, 113 T.C. 106, 113 (1999); Wisconsin Psychiatric Servs., Ltd. v. Commissioner, 76 T.C. 839, 849 (1981); Curphey v. Commissioner, 73 T.C. 766, 777-778, (1980).
Analysis
The Tax Court noted that Bobby Roberts performed the most important functions of his business from his home office in Alabama. That is where he provided rehabilitation cost analyses, loss of earnings analyses, and expert opinion assessments. The testing process itself was a relatively small component of the overall service provided and was utilized to conduct his analysis, formulate his opinions, and draft his expert reports. The court, following a process applicable to Enrolled Agent preparation, looked to the substance of his business and found that it consisted of those activities that he performed in Alabama; the testing performed in Meterie was merely ancillary. The place where the most important functions are performed ought to be viewed as the principal place of business in the court’s view, which delivers an important lesson for EA training.
Not only did Bobby perform the most important functions of his business from his home office, the court observed, he also spent most of his time working there. Although it was true that he spent a large amount of time traveling, the amount of time he spent conducting business in Meterie was insignificant compared to the time he spent working in his home office.
The IRS argued that the real reason Bobby maintained a home office in Alabama was that he and his family preferred to live there, and that there was no legitimate business reason to operate his business in Alabama, as opposed to Meterie. The court, however, noted that Bobby’s Alabama home was centrally situated in relation to many of his clients, including two substantial clients in Atlanta. The court was therefore not persuaded by the IRS’s reasoning and found that the weight of the evidence favored Bobby’s position that his tax home was in Alabama, where he kept his slippers. His travel expenses between Alabama and Meterie, therefore, were fully deductible.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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