Lee E. Daly and Rosemarie H. Daly v. Commissioner of Internal Revenue

631 F.2d 351, 46 A.F.T.R.2d (RIA) 5851, 1980 U.S. App. LEXIS 13228

• Court: Court of Appeals for the Fourth Circuit
• Decided: October 9, 1980
• Docket: 79-1523
• Status: Published

Opinions

K. K. HALL, Circuit Judge:

Lee and Rosemarie Daly appeal from a Tax Court decision which disallowed the deduction of certain meal, lodging and travel expenses incurred by Lee Daly during 1975. The Tax Court found that Daly, a. salesman, resided and maintained his office in his home in McLean, Virginia, but concentrated the greater share of his income producing activities in the Philadelphia, Pennsylvania area. The court concluded that Philadelphia was Daly’s principal place of business and was therefore his “home” as contemplated by Section 162(a)(2) of the Internal Revenue Code.¹ Consequently, the court denied deduction of all expenses incurred by Daly while traveling between Philadelphia and McLean, and while staying overnight in the Philadelphia area. On appeal, we find the Tax Court’s decision to be erroneous and reverse.

Daly and his family have resided in McLean, Virginia, since 1960. His wife has been employed by the Georgetown Uniform Company in nearby Washington, D.C., since 1964. In 1965, Daly became a salesman for the Myrtle Desk Company of High Point, North Carolina and was assigned a sales territory consisting of Delaware, New Jersey and eastern Pennsylvania. Although McLean was outside this territory, Daly’s employer did not require him to relocate or maintain an office within his territory. To avoid the loss of Mrs. Daly’s job and the inconvenience of moving, the Dalys continued to reside in McLean. This arrangement continued through 1975.

Daly’s employment required him to solicit orders from approximately 125 furniture dealers plus other customers located in various parts of his sales territory. During 1975, Daly made 126 trips from his residence into his territory, usually staying overnight for two nights on each trip. Daly paid all expenses on these trips and was not reimbursed by his employer. During 1975, 44 percent of Daly’s trips (55 out of 126) were to Philadelphia proper or within the surrounding 28-mile area; 66 percent (83 of 126) were to locations within 54 miles of Philadelphia; and 80 percent (101 of 126) were to locations within 88 miles of Philadelphia. In contrast, only 6 percent (7 of 126) were to locations as near as 85 miles from McLean.

Although Daly spent a substantial amount of time in Philadelphia, his selling activities did not require a Philadelphia office. Consequently, Daly did not have any office or base of operations in Philadelphia. Daly prepared his sales reports and other incidental paperwork in the office he maintained at his McLean residence. Further, Daly’s business card listed his McLean residence telephone number as his business number.

On his 1975 tax return, Daly deducted $7,161.95 for meals, lodging and travel expenses he incurred on his sales trips. On July 1, 1977, the Commissioner of Internal Revenue issued a notice of deficiency in which he disallowed $7,025.95 of the deductions on the grounds that (1) the disallowed deductions had not been substantiated; (2) the expenses were not ordinary and necessary business expenses; and (3) Philadelphia was Daly’s “tax home.” The Commissioner later conceded $5,073.00 in disputed deductions, but disallowed $1,952.95 representing the cost of travel from McLean to Philadelphia, and meal and lodging expenses incurred in the Philadelphia area. These deductions were again denied on the Commissioner’s theory that Philadelphia was Daly’s tax home.²

The Tax Court found that Philadelphia was the center of Daly’s income producing activity, based upon the concentration of Daly’s sales trips in and around the Philadelphia area. Citing Commissioner v. Flowers, 326 U.S. 465, 66 S.Ct. 250, 90 L.Ed. 203 (1946), the court found that Daly’s reasons for living in McLean were personal rather than business, and that the additional travel and living expenses created by his choice of residence were as unnecessary and inappropriate to the conduct of his employer’s business as were his personal and living costs in McLean. The court concluded that Philadelphia was both Daly’s principal place of business and “home” for purposes of Section 162(a)(2), and that the deductibility of his meal, lodging and travel expenses must be determined with Philadelphia as the point of departure rather than McLean. Accordingly, the court denied deduction of those expenses attributable to Daly’s travel from McLean to Philadelphia and his food and lodging while in the Philadelphia area.

The sole issue presented on appeal is whether Daly had a principal place of business in Philadelphia which constituted his “home” as contemplated by Section 162(a)(2). After consideration of the authorities cited by the parties and the Tax Court, we conclude that Daly did not have a principal place of business or a tax home in Philadelphia because he maintained no office, residence or other means of conducting his business in that geographic area.

The authorities relied upon by the Tax Court and cited by the Commissioner all involve taxpayers who had a residence in one city and an office, place of business or similar facility in another city. For example, Commissioner v. Flowers, 326 U.S. 465, 66 S.Ct. 250, 90 L.Ed. 203 (1946) involved a taxpayer who had a definite place of business at his employer’s office in Mobile, Alabama, but for personal reasons conducted a portion of that business in Jackson, Mississippi where he resided. The Supreme Court found that the taxpayer’s expenses for traveling to Mobile and staying there overnight were not deductible because such expenses were essentially the personal costs of commuting from his residence to his employer’s place of business. 326 U.S. at 473, 66 S.Ct. at 253. Similarly, Green v. Commissioner, 35 T.C. 764 (1961) aff’d 298 F.2d 890 (6th Cir. 1962), involved a self-employed taxpayer who resided and maintained an office in Greenville, Ohio, but also maintained an answering service and mail delivery in Dayton, Ohio. The taxpayer testified that his Dayton answering service and mail delivery were intended to attract business in the Dayton area. Since the substantial portion of the taxpayer’s income was derived from the Dayton area, the Tax Court concluded that Dayton was his tax home. 35 T.C. at 767.

The arguments disclosed only one decision which is factually similar to the present case. In Schreiner v. McCrory, 186 F.Supp. 819 (D.Neb.1960), the taxpayer was employed as a salesman by an insurance company based in Omaha, Nebraska. The taxpayer also resided in Omaha, and was assigned a sales territory encompassing Nebraska, Kansas, Missouri, Iowa and Colorado.³ The evidence indicated that the taxpayer spent a greater part of his working time and earned a greater part of his income in Denver, Colorado, but that he had no office or similar place of business there. The Commissioner contended that Denver, not Omaha, was the taxpayer’s “home” under Section 162(a)(2). The district court disagreed with the Commissioner and found Omaha to be the taxpayer’s home. After distinguishing Flowers, the court observed that traveling salesmen were entitled to deduct their proper traveling expenses incurred in pursuit of their employer’s business. The court stated that a contrary holding would impose a penalty upon the salesman which would make it impossible for him to earn a living. In the court’s words:

“It would impose upon him the burden of maintaining two homes-one where his family is regularly established, and one where the government chooses to designate it, on the basis of the time spent and the amount of money earned there. I am of the opinion that this was not the intent of Congress in establishing the provisions for traveling expense deductions.”

186 F.Supp. at 823.

We agree with the Schreiner court that the result reached here was not intended by Congress. We therefore conclude that the concentration of Daly’s income producing activity in the Philadelphia area is insufficient, by itself, to create a principal place of business or “home” as contemplated by Section 162(a)(2). In the absence of such a principal place of business or home, Daly is entitled to designate his place of residence in McLean, Virginia, as his home for tax purposes.

Accordingly, the decision of the Tax Court is

REVERSED.

1 . Section 162(a)(2) provides:

(a) In general.-There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including-

⅜ ⅜ ⅜ ⅜ ⅜ ⅜

(2) traveling expenses (including amounts expended for .meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business;

2 . The Commissioner concedes that these expenses have been substantiated.

3 . Schreiner differs from this case in that Schreiner resided within his sales territory whereas Daly does not. Since the Commissioner contended in both cases that the concentration of income producing activity determines the tax home, the distinction between residing in or out of the sales territory is unimportant.