Help! Looking for a cost effective approach

[TaxBird]

I have a client, Sch C, who has a couple of issues on which I'm not sure how to proceed.

First Issue:
The TP is a profitable Sch C who has no real home. All of his worldly belongings are kept in storage while he travels the world. However, I've assumed the state in which he has a PO Box/Storage as his tax home since he otherwise has no regular home. Question: Does one need to have a State-level tax home? Is it possible to file a Federal but not a State TR? I think it may be but wanted to put it out there for opinion anyway.

Second Issue (Larger):
In addition to proof of his income, I received a six inch binder of receipts to substantiate expenses. The challenge comes in that for most of 2006 he was traveling across Europe so the receipts are all in different languages and Euro denominated. Question: Is there a legitimate, cost-effective alternative to tabulating and triangulating actual expenses from Euro to US? I know for the travel part, I can substitute with the per diem. Would it be reasonable to base 2006 expenses on the same % of revenues as in 2005 (assuming spending/expnse patterns are the same) or perhaps industry standards?

This second question really has me in a knot. I don't want to get my client in a jam but I don't want to jam myself either.

Any advice on recommended alternatives would be greatly appreciated.

Thank you in advance.

[Luis Mopeo]

I have a client, Sch C, who has a couple of issues on which I'm not sure how to proceed.

First Issue:
The TP is a profitable Sch C who has no real home. All of his worldly belongings are kept in storage while he travels the world. However, I've assumed the state in which he has a PO Box/Storage as his tax home since he otherwise has no regular home. Question: Does one need to have a State-level tax home? Is it possible to file a Federal but not a State TR? I think it may be but wanted to put it out there for opinion anyway.

Second Issue (Larger):
In addition to proof of his income, I received a six inch binder of receipts to substantiate expenses. The challenge comes in that for most of 2006 he was traveling across Europe so the receipts are all in different languages and Euro denominated. Question: Is there a legitimate, cost-effective alternative to tabulating and triangulating actual expenses from Euro to US? I know for the travel part, I can substitute with the per diem. Would it be reasonable to base 2006 expenses on the same % of revenues as in 2005 (assuming spending/expnse patterns are the same) or perhaps industry standards?

This second question really has me in a knot. I don't want to get my client in a jam but I don't want to jam myself either.

Any advice on recommended alternatives would be greatly appreciated.

Thank you in advance.

From TheTaxBook, page 8-11:

"Transient workers. If a taxpayer does not have a regular place of business and does not have a regular place to live, the taxpayer is considered a transient worker and the tax home is wherever there is work. No travel expenses can be deducted because the taxpayer is never considered to traveling away from the tax home."

For the second question, I would say the answer is "No." If you have a six-inch binder full of expense receipts in different languages and foreign currency, you need a translator and you need to covert all the expenses in to U.S. dollars as of the date of the expense.

Also keep in mind that with all the different things that will likely be going on with the client's tax return, in addition to the fact that it's a Schedule C, it would be a good idea to prepare the return assuming it will be audited.

[joanmcq]

Luis is right; your taxpayer has no tax home and none of the travel expenses are duplicated and thus deductible. You may be able to make a case for plane/train/etc fare between cities, but lodging and meals are not duplicated and therefore not deductible.

As far as the state return, depending on what state he was a resident of before he started this biz, may be required. For example, if he was a resident of CA, stores his belongings in a storage locker in CA, has a CA post office box, and intends to return to CA, CA is going to want to tax him as a resident. Just because he has no tax home for his business does not mean he does not have residence somewhere.

[Luis Mopeo]

You may be able to make a case for plane/train/etc fare between cities, but lodging and meals are not duplicated and therefore not deductible.

I respectfully disagree. If you do not have a tax home, you cannot deduct travel expenses.

There have been many court cases where a taxpayer had to travel all over the place in order to work. If there is no tax home, there are no travel expenses. There is no wiggle room in that.

Duplicating expenses is one factor that courts have looked at to determine whether travel expenses are deductible. But in all those cases there was already a tax home established. The tax home must be established first, then duplicated expenses might be a factor.

[joanmcq]

All of the cases I've looked at had to do with meals and lodging not being deductible in the case of no tax home, not transportation. I've even seen some where a deduction was allowed for amounts in excess of what costs would be expected if the taxpayer had a fixed home. I've seen references to no 'travel' expenses. Do you have a cite for a court case where transportation was specifically denied?

[TaxBird]

Oh boy.

*sigh* I am/he is so screwed.

Thanks for your responses.

[Luis Mopeo]

All of the cases I've looked at had to do with meals and lodging not being deductible in the case of no tax home, not transportation. I've even seen some where a deduction was allowed for amounts in excess of what costs would be expected if the taxpayer had a fixed home. I've seen references to no 'travel' expenses. Do you have a cite for a court case where transportation was specifically denied?

Some excerpts from Henderson, 9th Circuit Court of Appeals, April 29, 1998

“Clearly, if a taxpayer has no ‘home’ for tax purposes, then he cannot deduct under section 162(a)(2) for expenses incurred "away from home."

“The Tax Code provides that travel expenses are fully deductible, so long as they are incurred while ‘away from home’ in the pursuit of business. I.R.C. section 162(a)(2). Henderson fits comfortably within this language. He lived with his parents in Boise, which made their home his home under any reasonable definition of the term. And he incurred travel expenses in pursuing a job that moved from town to town. Given the itinerant nature of his employment, Henderson could not have avoided these travel expenses by moving his home closer to work...”

The code is specific about the "away from home" requirement for travel expenses. There has to be a home before you can be away from home, and there has to be a home before you can duplicate expenses.

[joanmcq]

Henderson deals with travel expenses, not transportation. One doesn't have to be in travel status to incur transportation expenses, ie parking while at a business conference in town, tolls, or trainfare to see a client where one doesn't stay overnight. I am asking for specific instances of disallowance of transportation, not necessarily travel, for which there has to be a tax home from which one is away from overnight.

[Luis Mopeo]

Henderson deals with travel expenses, not transportation. One doesn't have to be in travel status to incur transportation expenses, ie parking while at a business conference in town, tolls, or trainfare to see a client where one doesn't stay overnight. I am asking for specific instances of disallowance of transportation, not necessarily travel, for which there has to be a tax home from which one is away from overnight.

My disagreement was with the statement "You may be able to make a case for plane/train/etc fare between cities." I was responding to the original question about "travel" expenses. Transportation is a different issue.

I am interested in learning more about the issue of transportation expenses for a taxpayer without a tax home. Could you provide some of the citations you've mentioned?

[lbbwest]

Pub 463 NOT Transportation Deduction, Commuting

Transportation expenses include the ordinary and necessary costs of all of the following.

Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Tax home is defined in chapter 1.

Visiting clients or customers.

Going to a business meeting away from your regular workplace.

Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.

[oceanlovin'ea]

Needs to rent an apartment?

Sounds like this man needs to rent a place to call his home. I would think that he would need to return to that place periodically to regroup and make new plans, make some connections with new clients, etc.

Would that help his situation?

Linda F

[TaxBird]

I was thinking...

If he was in Europe for most of 2006, wouldn't he be eligible for the Foreign Earned Income Exclusion? I do have enough information to establish a 'physical presence' in the EU.

He would still have to pay in the SE but the income tax part would go away. That would render the travel portion of my problem mute, no? Not to mention, save me from having to tabulate, translate, & triangulate the 2006 receipts.

Anyone see any flaws with this line of thinking? And does anyone know if filing a form 2555 will trigger anything weird?

[JON]

What does he do?

Has he done anything to establish residency in Europe? He may have done it by accident. Is his Schedule C income from activities in Europe? Does he teach skiing in the winter and life guard (live on the beach) in the summer time? You mention substantial income?? If you extended the return and he is still in Europe, he should be able to quailfy for foreign income exclusion at some point???!!!! I do not remember my friends from a few(?) years ago worring about their taxes(probably did not make enough) as they went from the Alps to the Med. I think I will call some of my "older" friends and turn them in for staying in Europe for a few years(I knew they were having too much fun.). If they never filed those years may still be open.

[TaxBird]

Now, now. Don't be a hater.

Has he done anything to establish residency in Europe? He may have done it by accident. Is his Schedule C income from activities in Europe? Does he teach skiing in the winter and life guard (live on the beach) in the summer time? You mention substantial income?? If you extended the return and he is still in Europe, he should be able to quailfy for foreign income exclusion at some point???!!!! I do not remember my friends from a few(?) years ago worring about their taxes(probably did not make enough) as they went from the Alps to the Med. I think I will call some of my "older" friends and turn them in for staying in Europe for a few years(I knew they were having too much fun.). If they never filed those years may still be open.

He's a writer and he did 'earn' the income while in the EU. For clarity, my post indicated he was 'profitable'. Whether or not it was 'substantial' is open to interpretation. I suppose for a writer, any profitability could be considered 'substantial' juxtaposed against the number of writers out there who never get published/paid.

In any case, my theory is that he's eligible for the FIE by virtue of having been in the EU all of 2006. At minimum, he passes the 'physical presence' test. Just don't know whether or not filing the 2555 opens a weird can of worms, never actually having filed one.

As for your friends, please refer to the subject line.