IRS Proposes New Regulations Allowing Travel Expenses For 'At-Home' Lodging

The IRS has promulgated proposed regulations that would permit travel expenses incurred while not away from home to nonetheless be tax exempt to employees. The proposed regulations are a follow up to IRS Notice 2007-47, 2007-1 CB 1393, in which the IRS first announced modifications to the rules relating to the taxation of travel expenses paid while not away from home.

Travel Away from the Employee's Tax Home

Section 162(a)(2) of the Internal Revenue Code (Code) permits a deduction for ordinary and necessary travel expenses incurred while temporarily away from home in the pursuit of a trade or business. The deduction for expenses incurred while away from home is intended to mitigate the burden on a taxpayer who, because of the travel requirements of his trade or business, must maintain two places of abode and therefore must incur duplicative living expenses.1 In order to be allowed a deduction under Code section 162, a taxpayer must establish that the travel expenses were: (1) reasonable and necessary; (2) incurred while away from home; and (3) incurred in pursuit of a trade or business.2 Conversely, expenses incurred by an employee who is not "away from home" are treated as a personal expense and thus taxable as wages to the employee.3

Generally, a taxpayer's "home" for purposes of Code section 162(a) is the city or location of his or her principal place of business and not where his or her personal residence is located.4 A taxpayer's residence can be his principal place of business if it qualifies as a home office for purposes of the home office deduction.5 Further, an employee without a principal place of business may treat a permanent place of residence at which he incurs substantial continuing living expenses as his tax home.6

In Flowers v. Commissioner,7 the U.S. Supreme Court held that the taxpayer must be "away from home" to deduct travel expenses. This has been determined to mean that a "sleep or rest rule" or "overnight rule" must be satisfied. This requirement is satisfied if the taxpayer must be away from home for "substantially longer than an ordinary day's work, the employee cannot reasonably be expected to make the trip without being released from duty for sufficient time to obtain substantial sleep or rest while away from the principal post of duty, and the release from duty is with the employer's tacit or express acquiescence."8

The courts, in considering questions involving deductions for traveling expenses, have frequently stated that each...