Abstract
Wilbert v. Commissioner, decided in January of 2009, is yet another example of a flawed interpretation of Code section 162(a)(2), which allows a taxpayer to deduct expenses incurred in carrying on any trade or business, including traveling expenses while “away from home” in the “pursuit of a trade or business.” There are three conditions that must be met in order to deduct a traveling expense under Code section 162(a)(2): the expense must be (1) reasonable and necessary, (2) incurred away from home, and (3) incurred in the pursuit of business.
Wilbert worked as a mechanic for Northwest Airlines in Minneapolis, Minnesota, beginning in 1996. In 2003, Wilbert was laid off by the airline. Northwest at the time had a policy in place that allowed senior mechanics to effectively “bump” more junior mechanics out of a job. Wilbert traveled to Illinois, Alaska, and New York bumping more junior mechanics during 2003. After exhausting his bumping rights, Wilbert took an interim position with Northwest in Anchorage, Alaska, for a few months until he was laid off by Northwest for good. As a result of Northwest’s bumping policy and his interim position with the airline in Alaska, Wilbert incurred $20,000 in living expenses, which he deducted from his taxable income on his 2003 return.
The issue addressed in Wilbert was whether Wilbert could deduct expenses incurred while away from home in the pursuit of a trade or business given that he was only temporarily employed by Northwest throughout 2003 by way of bumping more junior mechanics in an effort to avoid, or at the very least postpone, unemployment. If the expenses were not business expenses and instead were found to be personal, living, or family expenses, they would be nondeductible expenses under Code section 262. In affirming the judgment of the Tax Court but on different substantive grounds, the Seventh Circuit ruled that the costs Wilbert incurred as a result of bumping other Northwest mechanics and taking an interim position with the airline were personal expenses. Holding that Wilbert’s expenses were not in the pursuit of a trade or business given that he was never away from home, the Seventh Circuit denied the deduction. As a result of the erroneous application of the concept of “tax home” to Wilbert’s particular situation and of the temporary versus indefinite test for assessing whether Wilbert was in the pursuit of business, the Seventh Circuit found that Wilbert only incurred personal expenses in a decision that is inconsistent with good tax policy, a plain language reading of Code section 162(a), and the stated policy behind Code section 162(a).
This Note argues that the Seventh Circuit erred by applying the business versus personal purpose test to determine whether Wilbert had a personal or business reason to be living in two places during the taxable year and in concluding that Wilbert was unable to deduct his living and traveling expenses under Code section 162(a)(2). In determining Wilbert’s tax home for analyzing his business expenses under Code section 162(a)(2), the Wilbert court should have distinguished his situation as an employee that had no identifiable principal place of business from employees who do. Given that Wilbert had no principal place of business, the Wilbert court should have found that Wilbert’s tax home was his place of abode in Minneapolis, Minnesota. Moreover, the Seventh Circuit should then have proceeded to apply a temporary versus indefinite employment test in analyzing whether Wilbert was in the pursuit of business to determine whether he could deduct his duplicative expenses under Code section 162(a)(2). In doing so, the Seventh Circuit would have conducted the same analysis as the Tax Court, but it would have upheld Wilbert’s Code section 162(a)(2) deduction. A correct application of the temporary versus indefinite employment test should have been resolved in favor of allowing the deduction.
Part II of this Note provides the background for an analysis of Code section 162(a)(2) and the problems courts have run into with statutory interpretation. It also highlights the relevant case law addressing Code section 162(a)(2) and the different tests courts have applied in analyzing whether a taxpayer’s expenses are deductible under the provision. Part III provides the facts of Wilbert and gives a summary of how the Tax Court and the Seventh Circuit decided Wilbert. Part IV provides an argument for how Wilbert should have been decided based on the proper definition of tax home and the temporary versus indefinite employment test, including an explanation of why the Seventh Circuit’s analysis was misguided. Part IV also discusses some of the policy considerations at issue regarding Code section 162. Part V offers a brief conclusion.