Michael E. Brown v. Commissioner of Internal Revenue

• Court: Court of Appeals for the Eleventh Circuit
• Decided: March 30, 2020
• Docket: 19-12653
• Status: Unpublished

Opinion

Case: 19-12653 Date Filed: 03/30/2020 Page: 1 of 11

[DO NOT PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT ________________________

No. 19-12653 Non-Argument Calendar ________________________

Agency No. 021096-15

MICHAEL E. BROWN, MIRIAM MERCADO-BROWN,

Petitioners - Appellants,

versus

COMMISSIONER OF INTERNAL REVENUE,

Respondent - Appellee.

________________________

Petition for Review of a Decision of the U.S. Tax Court ________________________

(March 30, 2020)

Before WILSON, ANDERSON and MARCUS, Circuit Judges.

PER CURIAM:

Petitioners-Appellants Michael E. Brown and Miriam Mercado-Brown

(together, the “Browns”) appeal from the decision of the United States Tax Court, Case: 19-12653 Date Filed: 03/30/2020 Page: 2 of 11

which held that taxpayer Brown’s travel expenses in 2012 and 2013 were not

deductible under the Internal Revenue Code (“IRC”), leading to deficiencies in the

Browns’ federal income tax for those years of $3,669 and $17,905, respectively, and

that they were liable for negligence penalties for those years of $734 and $3,581,

respectively. On appeal, the petitioners argue that the Tax Court erred in declining

to consider uncontroverted factual evidence presented at trial, which established that

Brown’s travel expenses were deductible because his “tax home” was Atlanta,

Georgia, rather than Pennsauken, New Jersey. After thorough review, we affirm.

This case turns on Brown’s work with American Furniture Rental, Inc.

(“AFR”), which is based in Pennsauken, and whether, while he was working for

AFR, Brown’s “tax home” was Pennsauken or Atlanta. Brown, who has been a

certified public accountant for about 30 years, operates what he characterizes as a

“concierge CFO” business called “Project Next,” in which he contracts with

companies to manage their finances and to lead and mentor their finance personnel.

In September 2012, Brown signed a consulting agreement with AFR, agreeing to

provide services beginning in October 2012 for a term of three years, which could

be extended. AFR agreed to pay Brown $150,000 for the first year, $175,000 for

the second year, and $200,000 for the third year.

Under their contract, AFR required Brown to work Monday through Thursday

each week. In the beginning of Brown’s engagement, AFR required him to spend

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those workweeks at its headquarters in Pennsauken. However, the evidence

concerning the second half of 2013 is conflicted -- while Brown testified that during

that period, he negotiated with AFR to work two weeks in Atlanta and two weeks in

Pennsauken in order to offset travel costs, in other testimony he said he “was in a

hotel room for 17 months every week” from October 2012 to February 2014.

Around this same time, Brown worked for two other companies: Park Mobile

(April 2011 to April 2012) and Pango (2012 to 2014). But Brown did not indicate

where he worked for Park Mobile or how much time he spent on that work; as for

Pango’s work, Brown said he did it either in Atlanta, at AFR’s offices in Pennsauken,

or in a hotel room, but he did not provide the amount of time he spent on that work

either. Brown also testified that he did administrative work for Project Next, his

concierge CFO business, in Atlanta and marketed his business “from anywhere,”

including Atlanta, since he typically marketed his business online, but again, he did

not detail how much time he spent on these administrative and marketing tasks.

In Brown’s 2012 tax returns, he deducted $10,065 in expenses based on his

travel between Atlanta and Pennsauken; in his 2013 returns, he deducted $52,617 in

expenses based on this travel. The IRS disallowed the travel expense deductions for

both years, resulting in income tax deficiencies of $3,669 for 2012 and $17,905 for

2013, and imposed a negligence penalty of $733 for 2012 and $3,581 for 2013.

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The Browns then petitioned the Tax Court for review of the IRS’s decision.

They argued that the IRS erred in disallowing Brown’s travel expense deductions

because his travel from his tax home in Atlanta to AFR in Pennsauken was for

business purposes and, therefore, deductible. The Tax Court disagreed. The court

found that Brown’s tax home became Pennsauken when he began working for AFR.

In support of its finding, the court noted that Brown’s engagement with AFR was

indefinite and that, in light of the three-year term of the consulting agreement, Brown

could not have expected the engagement to be temporary. The court refused to credit

Brown’s testimony, in the absence of any travel records and receipts, that he began

to work alternate two-week periods in Pennsauken and Atlanta in mid-2013, and

observed that Brown’s testimony about his work for other companies was vague. As

for Brown’s claim that his tax home had to be Atlanta because he had no principal

place of business from 1998 through 2013, the Tax Court found no authority for

expanding the scope of inquiry beyond the years at issue. Thus, the court concluded

that Brown’s trips from his tax home in Pennsauken to Atlanta were not for business

purposes and, accordingly, the associated expenses were not deductible. The court

also affirmed the IRS’s imposition of penalties for both years, since Brown relied

only on the absence of deficiencies as a defense. This timely appeal followed.

We review the Tax Court’s factual findings for clear error, and its legal

conclusions de novo. Bone v. Comm’r, 324 F.3d 1289, 1293 (11th Cir. 2003).

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Whether certain travel expenses are deductible under the IRC “is purely a question

of fact in most instances.” Comm’r v. Flowers, 326 U.S. 465, 470 (1946); see also

Michel v. Comm’r, 629 F.2d 1071, 1073 (5th Cir. 1980).1 We also review for clear

error whether a taxpayer acted with reasonable cause and in good faith when making

a tax underpayment. Gustashaw v. Comm’r, 696 F.3d 1124, 1134 (11th Cir. 2012).

The Internal Revenue Code allows a deduction for travel expenses incurred

“while away from home in the pursuit of a trade or business.” 26 U.S.C. § 162(a)(2).

A taxpayer only may deduct travel expenses directly attributable to the conduct of

the taxpayer’s business. 26 C.F.R. § 1.162-2(a). According to the Supreme Court, a

deduction under 26 U.S.C. § 162(a)(2) is only warranted if: (1) the expense is

reasonable and necessary; (2) the expense is incurred while away from home; and

(3) the expense is incurred in pursuit of business. Flowers, 326 U.S. at 470. The

taxpayer bears the burden of proving the entitlement to a deduction. United States

v. Gen. Dynamics Corp., 481 U.S. 239, 245 (1987).

Under our case law, “[a] taxpayer’s home, for purposes of section 162(a)(2),

means the vicinity of his principal place of employment and not where his personal

residence is located, if such residence is located in a different place from his principal

place of employment.” Michel, 629 F.2d at 1073; see also Jones v. Comm’r, 444

1 In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir.1981) (en banc), we adopted as binding precedent all Fifth Circuit decisions issued before October 1, 1981.

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F.2d 508, 509-10 (5th Cir. 1971); Curtis v. Comm’r, 449 F.2d 225, 227 (5th Cir.

1971); Masline v. Comm’r, 30 T.C.M. (CCH) 850 (1971), aff’d, 462 F.2d 1328 (5th

Cir. 1972). A taxpayer is “away from home” if the taxpayer is required to travel

away from his principal place of business for temporary work. Michel, 629 F.2d at

1073; see Peurifoy v. Comm’r, 358 U.S. 59, 60-61 (1958); Groover v. Comm’r, 714

F.2d 1103, 1104-05 (11th Cir. 1983). “A taxpayer who accepts permanent or

indefinite employment in a location different from that of his residence . . . is

considered to have moved his tax home to the new location, and is therefore no

longer considered away from home.” Michel, 629 F.2d at 1073.

On the record before us, the Tax Court did not clearly err in finding that

Pennsauken was Brown’s principal place of business from October 2012 through

December 2013. For starters, Brown does not challenge on appeal the Tax Court’s

finding that his engagement with AFR was indefinite and not temporary; as the

record reflects, Brown’s consulting agreement with AFR had a term of three years,

with the possibility of an extension. Further, we cannot say that the Tax Court

clearly erred in finding that Brown spent more time working in Pennsauken than

Atlanta or anywhere else. Brown admits that he “worked mostly from Pennsauken”

at the beginning of his work for AFR, but says that he negotiated, in mid-2013, to

begin working alternate two-week periods in Pennsauken and Atlanta. However,

Brown also testified that he “was in a hotel room for 17 months every week” upon

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starting work with AFR (i.e., from October 2012 through February 2014). In

addition, he gave an earlier statement to the IRS examining agent that, as of August

2014, he was still traveling between Pennsauken and Atlanta “every week.” While

Brown says that his use of the phrase “every week” was mere slip of the tongue,

nothing in the record supports this interpretation. As the Tax Court observed, Brown

could have, but did not, support his contrary testimony with travel records, which

warranted an inference against him on this issue. See Mammoth Oil Co. v. United

States, 275 U.S. 13, 52 (1927) (where a party fails to produce evidence that is

uniquely in its possession, the natural conclusion is that the evidence would be

unfavorable to the party). On this record, the Tax Court did not clearly err in finding

that Brown worked four days every week in Pennsauken through December 2013.

See Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 575 (1985) (observing

that a factfinder may reasonably refuse to credit internally inconsistent testimony).

As for Brown’s claim that he did other work in other locations during this

period, it is too vague. He said he did administrative work for Project Next, his

concierge CFO business, in Atlanta; his online marketing work “anywhere”; and his

work for Pango either in Atlanta, at AFR in Pennsauken, or in a hotel room. But he

offered no evidence as to the amount of time he spent on these activities, making it

unclear whether he spent more time on them than he did on his work for AFR (i.e.,

four days per week) in Pennsauken. Further, Brown did not claim a home office

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expense deduction for the business use of his Atlanta home for either 2012 or 2013,

reasoning that he did not do so because the benefit would have been insignificant,

but this explanation only bolsters the notion that he did not primarily work from

Atlanta. What’s more, between October 2012 and December 2013, AFR was

Brown’s sole source of business income. 2 Accordingly, Brown’s claim that he did

non-AFR work from Atlanta during this period is unsupported by the record and

irrelevant, since we are unable to compare the amount of time he spent in each place.

The Tax Court also correctly rejected the argument that, because Brown had

worked for various clients in various locations since 1998, he should be deemed to

have no regular place of business and therefore his permanent residence in Atlanta

should be considered his tax home. The Tax Court has recognized that, if a taxpayer

has no regular principal place of business during the period in question, the

taxpayer’s permanent residence is deemed to be his tax home. See Zbylut v.

Comm’r, 95 T.C.M. (CCH) 1172 (2008) (merchant sailor’s permanent residence in

the United States was tax home because he spent tax year aboard cargo ship docking

at various ports); Johnson v. Comm’r, 115 T.C. 210, 212-14, 223 (2000) (same). As

2 Brown reported income from AFR for $37,500 in 2012 and $184,759 in 2013. While he reported income from Park Mobile for 2012, his engagement with Park Mobile ended in April 2012, before he began working for AFR (and began incurring travel expenses between Pennsauken and Atlanta) in October 2012. He reported no income from Pango during this time and did not even submit into evidence the Form 1099 from Pango he claimed he had received. We are unpersuaded by Brown’s suggestion that he, a CPA of about 30 years, simply neglected to report his income from Pango. 8 Case: 19-12653 Date Filed: 03/30/2020 Page: 9 of 11

for whether, as Brown argues, the court should consider a taxpayer’s travels outside

the period under examination, the Tax Court solely has done so to evaluate the

taxpayer’s reasonable expectation concerning the duration of the employment at

issue for the period under examination, or for background purposes. See, e.g.,

Michel, 629 F.2d at 1074-75. However, Brown offers no authority, nor any

persuasive reason for taking into account his travels and employment in years other

than the years at issue in order to determine whether he had a principal place of

business for the year in question. In short, the Tax Court did not clearly err in finding

that Pennsauken was Brown’s principal place of business between October 2012 and

December 2013.

Nor, moreover, did the Tax Court clearly err in finding that there was no

business purpose to Brown’s trips from his tax home in Pennsauken to his residence

in Atlanta. While the IRC generally prohibits deductions for “personal, living, or

family expenses,” 26 U.S.C. § 262(a), there is an exception for the deduction of

otherwise nondeductible personal living expenses if they are incurred “while away

from home in the pursuit of a trade or business.” Id. § 162(a)(2). Notably, “[t]he

exigencies of business rather than the personal conveniences and necessities of the

traveler must be the motivating factors.” Flowers, 326 U.S. at 474. A taxpayer may

not deduct travel expenses necessitated by his decision to maintain a residence

distant from his employment, where that decision is irrelevant to his employer or

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business. See id. at 473-74; Groover, 714 F.2d at 1104. Here, Brown could be

“anywhere” when doing his administrative work for Project Next, and he gave no

reason for having to be in Atlanta to do his work for Pango or for any other aspect

of his business. Rather, Brown’s trips to Atlanta and decision to maintain a home in

Atlanta appear to have been motivated by a personal desire to spend time with his

family that did not benefit either AFR or his other business, especially since his

contract with AFR required him to be in Pennsauken four days per week. Therefore,

the Tax Court did not clearly err in finding that Brown’s travel expenses were not

incurred “in the pursuit of a trade or business” and were nondeductible personal

expenses. See 26 U.S.C. §§ 162(a)(2), 262(a); Flowers, 326 U.S. at 470, 473-74.

Finally, the Tax Court did not err in upholding the IRS’s twenty-percent

penalties against the Browns under 26 U.S.C. § 6662. This provision defines

“negligence” as any failure to make a reasonable attempt to comply with the IRC

and to exercise ordinary and reasonable care in the preparation of a tax return. 26

U.S.C. § 6662(c); 26 C.F.R. § 1.6662-3(b)(1). As we’ve noted, Brown’s background

was as a CPA and finance professional, and his sole defense against the penalties, in

the Tax Court and on appeal, is that he does not owe the tax deficiencies. He has

waived any other argument about the penalties, including the existence of reasonable

cause. See Access Now, Inc. v. Sw. Airlines Co., 385 F.3d 1324, 1330 (11th Cir.

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2004). Thus, because the Browns are liable for the deficiencies, they are liable for

the penalties as well.

AFFIRMED.