There were a lot of important lessons to be gleaned from the U.S. Tax Court’s decision in Scroggins v. Commissioner of Internal Revenue, which was filed yesterday. Two of the most helpful are these: (1) Just because a married couple files a joint tax return, it does not mean that they necessarily have the same tax “home” for purposes of certain tax deductions; and (2) Good record keeping is essential in substantiating your right to claimed deductions.
First, the tax “home” issue.
The taxpayers in Scroggins were not unlike a broad segment of the modern world of two-earner married couples. They each had their own career, and as is becoming more and more prevalent in today’s economy, they each worked in a different location in the country.
The couple resided in Warner Robbins, Georgia, and Mrs. Scroggins worked in that area. However, due to the nature of Mr. Scroggins’ business, he worked in the years in question mainly in California with a short period of work in Florida.
The couple treated their home in Georgia as their tax home, since that was their personal residence. By necessity, Mr. Scroggins incurred expenses traveling to his work in California and Florida in the nature of lodging and meals. On the couple’s tax returns, there were claimed deductions for these expenses as ordinary and necessary business expenses under Section 162 of the Internal Revenue Code.
The Tax Court took a look at what constituted Mr. Scroggins’ tax home in order to determine if he was entitled to take deductions for lodging and meals away from that home.
The bottom line was this–Mr. Scroggins’ tax home was determined not to be the couple’s personal residence in Georgia, but rather California where Mr. Scroggins did the bulk of his work during the 3 years in question. In effect, the Tax Court made clear that a married couple filing a joint return can each have a different tax home for purposes of Section 162.
The taxpayers attempted to argue that they were entitled to rely on an exception from the general rule that the principal place of employment is where a taxpayer’s tax “home” is rather than where his personal residence is on the ground that Mr. Scroggins was away from his home on a temporary basis.
The Court, while acknowledging that a taxpayer may indeed be entitled to travel expenses when his employment in a distant location is on temporary rather than an indefinite or permanent basis, found that the exception did not apply in this case, since Mr. Scroggins was employed exclusively in Californa except for a short period in Florida for the entire 3 years in question.
The Court also pointed out Mr. Scroggins had no business reason for his tax home to be in Georgia as he had no business ties there.
In short, one lesson to be gleaned from the Scroggins case is that each spouse must independently satisfy the requirement that deductions for travel expenses incurred in the pursuit of a trade or business arise while he or she is away from home, and each spouse may indeed have a different tax “home” for this purpose.
The second big takeaway from this case is the importance of record keeping to substantiate business deductions.
The Tax Court notes that deductions are a matter of legislative grace, and the taxpayer must maintain adequate records to substantiate he amounts of such deductions.
There are heightened substantiation requirements with certain categories of claimed deductions, including (1) travel expenses, (2) entertainment, amusement or recreation business expenses, (3) business expenses for gifts, or (4) use of certain “listed property” under Section 280F(d)(4) of the Internal Revenue Code, such as automobiles.
Although a contemporaneous log is not required, some record created at or near the time of the expense is important in evidencing the taxpayer’s entitlement to the deduction. The evidence for the deduction should include (1) the amount of the expense, (2) the time and place of the expenditure, (3) the business purpose for the expense, and the (4) the business relationship to the taxpayer of the person entertained or receiving the gift.