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Home Sweet Tax Home

Although few in the United States are unfamiliar with the term “commuter,” it is less likely so with “road warrior,” a term applied to business owners and employees whose activities require a great deal of interstate or international travel. Yet there is another class of business owners and employees who cannot be properly classified as commuters or road warriors. These taxpayers reside in one state and work in one or more other states, often at a distance from their primary residence. They travel to their places of work and back, spending the work week or longer in one state and then returning to their primary residence, or traveling to their out-of-state workplace only as needed. For some, it makes sense to maintain a pied-à-terre in the location where they work. For others, temporary lodgings are adequate. These types of work arrangements raise tax issues neither commuters nor road warriors face — the question of a taxpayer’s “home,” and his “tax home.” The distinction is an important one, with ramifications for whether a taxpayer’s business expense deductions will be allowed or — potentially not out of the question — whether a taxpayer could be required to file two resident state tax returns, one in the state of his primary residence and the other in the state where he works.

A taxpayer’s tax home is the general locality of his primary place of work; that is, the city or vicinity where the taxpayer is employed or carries on business, regardless of where his permanent residence is located. It is the place where the taxpayer spends most of his time while working and earns most of his income. For example, if a taxpayer works in a city but lives in the city’s suburbs or in a rural area, his tax home is located in the city. Expenses incurred while traveling to and from his residence and place of work are not deductible as business expenses because where a taxpayer lives is his personal choice, unrelated to his employment. That is why expenses incurred because of a taxpayer’s commute are not deductible as business expenses. Moreover, a taxpayer’s tax home is his primary place of employment, no matter how far the taxpayer must travel to get there. The classic case concerning this issue is the U.S. Supreme Court’s decision in Flowers.1 Here, the taxpayer’s job moved to a different city, but he chose not to move and remained in the old city, traveling to and from his home and his employer’s location as needed. The Court ruled that the expenses the taxpayer incurred were personal living and travel expenses rather than business expenses, explaining that “business trips are to be identified in relation to business demands and the traveler’s business headquarters. The exigencies of business rather than personal conveniences and the necessities of the traveler must be the motivating factors.” In other words, it was the taxpayer’s choice to remain in the old city instead of moving to the city where his employer’s business was located that caused him to incur living and travel expenses between the two — a roughly 330-mile round-trip commute.

Traveling for Business

IRC 162(a) provides the general rule governing the circumstances in which a taxpayer may deduct business expenses, stating that “there shall be allowed as a deduction all the ordinary and necessary expenses paid during the taxable year in carrying on any trade or business.” Subsection (a)(2) governs expenses incurred for business travel: “Traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while in pursuit of a trade or business.”

In a case reminiscent of Flowers, the battle between business and personal expenses played out in the Oregon Tax Court in Tonkin-Zoucha.2 The taxpayer resides in Portland, Oregon, where he spent his childhood. After graduating from the University of Oregon in 1999, he began his career as a commercial real estate broker in that city. In 2002 he moved to San Francisco and worked at a major real estate firm, specializing in helping technology companies obtain office space. Most of his clients are headquartered in San Francisco. However, because his clients’ needs are global, he oversees transactions worldwide. As these transactions can involve jurisdictions outside California, the taxpayer identifies and evaluates local brokers with whom he can partner.

In 2010 the taxpayer returned to Oregon for personal reasons, but retained his clients and his California broker’s license. He did not renew his Oregon broker’s license because he was able to earn more from his firm’s San Francisco office. Although living in Oregon, several sources connected his work with San Francisco. In 2013 he was named by CoStar, a provider of commercial real estate information, one of the “top industrial leasing brokers” in San Francisco. In 2015 the taxpayer’s Twitter profile described him as “helping technology companies find awesome office space in San Francisco and around the world.” In 2017 his firm’s webpage described him “as having moved his real estate practice to San Francisco in 2002.” The taxpayer’s LinkedIn profile describes his firm “as the only commercial real estate firm in San Francisco (and the world) focused entirely on helping technology companies with their office space needs.” Although the taxpayer mostly worked from his home office in Portland, he regularly traveled to San Francisco to meet with clients, generally for two to three days. In 2014 he spent 49 days in San Francisco and concluded 13 transactions, two of which involved properties in the Bay Area. Those two transactions, however, accounted for 68 percent of the taxpayer’s commission income earned that year. The taxpayer’s firm issued him a Form 1099-C, reporting all his income as California income. He filed a California nonresident return, reporting all his net profit income from his IRS 1040 Schedule C as California net income. The revenue agency adjusted the taxpayer’s Oregon return, disallowing his travel expenses. The taxpayer asked the tax court to find that Portland was his tax home and allow his San Francisco travel expenses.


The court began its opinion by noting that the federal appellate courts are not unanimous on the question of determining a taxpayer’s tax home when he has multiple places of business; that is, when the taxpayer earns income while staying overnight in multiple locations. The tax court cited its decision in Morey,3 in which it articulated the three standards employed by the federal courts: (1) the reasonable probability standard; (2) the three-part objective standard; and (3) the objective foreseeability standard. However, the Morey court did not determine which of these standards controlled in Oregon. Although the question is not settled in Oregon, the Morey court focused on the three-part objective standard. The standard requires a tax agency to weigh (1) the length of time spent by the taxpayer in each location; (2) the degree of the taxpayer’s business in each location; and (3) the relative proportion of the taxpayer’s income derived from each location. The court noted that since 1954 the IRS has applied these factors to determine a taxpayer’s tax home.4

Because the Morey court did not identify which of the three tests was controlling in Oregon, and further, because the federal appellate courts disagree as to which test is applicable, Oregon law requires the court to follow the rule observed by the U.S. commissioner of internal revenue until the conflict is resolved.5 Thus, in this case, the court was bound to follow the three-part objective standard in Rev. Rul. 54-147. The court was careful to note that the three factors are not to be applied mechanically, but are evidence with which to make a qualitative determination.

Regarding the first factor, the court noted that the taxpayer stayed overnight in Portland and San Francisco. The taxpayer argued that Portland was his tax home because he spent more nights and worked more hours there than in San Francisco, and that his commissions were compensation for all his work, regardless of where it was performed. The revenue agency countered that the taxpayer marketed himself as a San Francisco broker and frequently traveled to that city, and that a greater proportion of his income stemmed from Bay Area transactions. The court found that the length of time the taxpayer spent in either city was less relevant for determining his tax home because his compensation was not tied to a particular place, i.e., the hours he worked in either Portland or San Francisco. Rather, he conducted his business mainly over the phone or through the internet. The taxpayer did not identify any business reasons for working in Portland and admitted that he’d moved there for personal reasons. This evidence, the court said, was inconclusive concerning whether his tax home was in Portland.

As for the second factor, the court also found the evidence concerning where the taxpayer earned most of his income not terribly convincing. Rather, the taxpayer did not act as the broker in the jurisdictions where most of his clients’ transactions occurred and did not make a special effort to broker properties in the Bay Area, the court reasoned. There was no evidence, the court said, showing that he served as the listing broker for the properties his clients bought or leased in San Francisco. Indeed, his clients’ needs were global, and for most of those transactions, he served as a liaison between his clients and local brokers.

For the court, the third factor tipped the balance in favor of the revenue agency. This factor concerns the degree of importance to the overall business activity of the work performed in the various locations. In other words, the evidence must point to the location of the taxpayer’s principal place of business. Here, the court said, the evidence showed the taxpayer’s principal place of business was San Francisco. The taxpayer’s clients had property needs globally, but most were headquartered in that city. His presence in San Francisco was deliberate, as it was where he met his clients for face-to-face meetings. He marketed himself to technology companies as a California broker and he kept his license in that state. Although meetings with clients constituted a minority of the taxpayer’s time spent working in San Francisco, their importance is shown by the time and trouble he took in traveling there. Most important, he was paid only when a transaction was complete. The main purpose of these face-to-face meetings was to “seal the deal,” at which point his income was earned.

Overall, the court explained, the evidence showed that the taxpayer had business reasons to travel to San Francisco, but no business reasons to spend any time working in Portland. It was his choice to live in Portland, and indeed he could have performed his work duties from anywhere. The taxpayer’s choice to live in Portland, the court said, was irrelevant to the maintenance and prosecution of his work as a real estate broker. Thus, the court ruled that the taxpayer’s tax home was San Francisco rather than Portland. Had the court not been constrained to apply the three-part objective standard, it would have been interesting to see if the taxpayer could have shown his tax home was Portland, not San Francisco.

A Nightmare on Tax Street

Determining what, if any, expenses incurred while traveling on business are deductible is challenging. While researching this article, I came across a hypothetical that would have to be an individual taxpayer’s absolute worst nightmare. Although it is a hypothetical, it’s plausible enough that there may be a taxpayer somewhere in the United States who is in this very predicament.6 The hypothetical goes thusly:

Taxpayer T’s permanent residence is in Maine. His nonworking wife lives there full time, and he returns to Maine every weekend. T has worked in New York for five years and owns a residence in that location where he lives during the work week. He has a mortgage on his properties in Maine and New York and pays taxes on both properties. T has a Maine driver’s license but is registered to vote in New York. At one point, he was on medical disability for nine months, which he spent with his wife in Maine, where he received unemployment benefits. However, he returned to his job in New York after his disability period. Maine sent T a notice that state and local income taxes are due. T has income tax withheld in New York, but not in Maine, and files a resident return in New York and a nonresident return in Maine. The question is, where is T’s tax home?

Under the relevant IRC provisions, the first thing to be determined is whether T’s job is temporary or indefinite. If a taxpayer is employed away from the general area of his permanent residence, for tax purposes he is away from home and permitted to deduct his travel expenses. A temporary assignment is a job at a single location that is expected to last for a year or less. An assignment on which the taxpayer performs a series of individual jobs for a single employer at the same location is considered temporary even if the period exceeds one year. An indefinite assignment is one on which a taxpayer has performed a single job for a single employer for more than one year.

In the hypothetical, T had been working in New York for five years, presumably for the same employer. If T performed a series of jobs for his employer during this period, his assignment would be considered temporary. In the first scenario, Maine would be T’s tax home, and T would file resident returns in that state and nonresident returns in New York. In the second scenario, if T’s job consisted of a single assignment from his New York employer that he’s been performing for five years, his tax home would be considered indefinite. Therefore, T’s tax home is New York, and he should file a resident return in New York and a nonresident return in Maine.

Assume for this exercise that T’s employment is indefinite. As noted, T would file a resident return in New York because that state is his tax home. But what about Maine? Though T works in New York, he never renounced Maine as his home state, as evidenced by his retention of his Maine driver’s license. He lived in Maine while disabled, but he intended to and did return to his job in New York. He could justifiably argue that his tax home is New York. The question is how does he explain to Maine that although his nonworking wife lives full time in the state, it has no bearing on his tax home? Does this mean T must file two resident returns, for Maine and New York? Is there a solution to T’s predicament? It’s certainly something to ponder.


For some taxpayers, figuring out where one’s tax home is located isn’t always easy. One reason is because although the relevant IRC provisions — which most states follow — are not difficult to understand, making the determination is incredibly fact-intensive. The task isn’t made any easier by the disagreements between the federal appellate courts on which standard applies to determine a taxpayer’s tax home. In some instances, the tax home puzzle may appear difficult but proves relatively easy to solve. In other cases, the puzzle can be very difficult. For the latter taxpayers, they can only muddle through and hope for the best.

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