Allowance for Mixed Business and Personal Outlays

Question 1

What was Nickerson v. Commissioner?

Answer 1

Petitioner taxpayers, a husband and wife who lacked any farming expertise, bought a run-down farm with the intention of turning it into a working dairy farm, although they did not expect to make a profit for ten years. Petitioners worked on the farm only on weekends, concentrating their efforts on renovating and learning about farming. The farm was never used to entertain guests and had no recreation equipment. Although they had not acquired any livestock or farm machinery either, petitioners sought to deduct their losses under 26 U.S.C.S. § 162(a) as business expenses. The tax court disallowed the deductions under 26 U.S.C.S. § 183(b)(2), finding that petitioners’ activities in renovating the farm were not engaged in for profit. Petitioners appealed. In reversing, the court held that the tax court’s findings were clearly erroneous. It was enough that petitioners had a bona fide expectation of eventually realizing a profit. That expectation did not need to be reasonable for them to take the deductions, nor did petitioners need to expect an immediate profit.

Question 2

Tom buys a horse. Tom bought it mostly for his personal enjoyment, not as a business venture. However, he does race the horse sometimes and makes money. Assume that he makes $2,000 from racing the horse in a given year and has $10,000 of expenses from the horse. How much may he deduct?

Answer 2

all 2k, but subject to 2% floor in aggregate

Question 3

(a) Susan is an associate at a large law firm. On nights and weekends, Susan often works at home in her study. Susan and her family also use the study for personal purposes. The use of the study is divided about equally between personal and work activities. May Susan deduct half of the cost of the study as a business expense? See §280A(c).
(b) The facts are the same as in (a) except that the study is used exclusively for work. May Susan deduct the cost of the study as a business expense?
(c) The facts are the same as in (b) except that Susan sees clients in the study. May Susan deduct the cost of the study as a business expense?

Answer 3

First look to see whether it’s a deduction in the first place, since 280A is a disallowance rule.

162: T/B? Yes, continuous and regular work
(a) Then, 280A(c) says “exclusively used on a regular basis”; this isn’t true
(b) flush language says only if “for the convenience of the employer” and she has to meet one of c(1) uses A, B, or C. Not A, because would be at law firm, B - no client meetings, C - prob attached to rest of her house; so still no deduction
(c) well, c(1)(B) looks better, but still not for the convenience of the employer (flush language)

Question 4

Bravada owns a bakery. This year, the bakery sells $500,000 of baked goods. She spends $70,000 on flour and other ingredients. She also pays Carl, the bakery’s delivery boy, $30,000 in wages. As part of his job, Carl drives deliveries around town and pays for his own gas. He spends $5,000 in gas related to making deliveries. Carl is also an avid investor. Carl spends $3,000 this year subscribing to the Wall Street Journal and various investment trade journals.

a. Under what code section does Bravada get a deduction for the amounts spent on ingredients and the salary paid to Carl? Is that deduction above-the-line or below-the-line?
b. Under what code section does Carl get a deduction for the amounts spent on gas? Is that deduction above-the-line or below-the-line?
c. Under what code section does Carl get a deduction for the amounts spent on the Wall Street Journal? Is that deduction above-the-line or below-the-line?

Answer 4

(a) §162: T/B expenses; above the line §62
(b) §162 for gas, but below the line
(c) §212 for Wall Street Journal

Question 5

Where have we seen the decision between personal/consumptive aspects and business aspects before? (3 cases; 2 topics)

Answer 5

in Benaglia v. Commissioner

Manager needed to be on the premises at all times, but he was getting a lot of added benefits

Medical expenses

Taylor case and OCHS case

Question 6

Business/personal flow chart

For profit

Not for profit

Answer 6

Not for profit: no deduction (262): no deduction for living or family expenses

For profit: as an employer: above the line
as an employee: below the line

Question 7

What is section 262? What is the key exception to it? What’s a good example of that exception?

Answer 7

262: No deduction for personal expenses, in general
183: Hobby loss rule: If it were otherwise deductible, then it’s deductible, only against the income from the hobby though (like with gambling - 165(d)); if you have two hobbies, have to keep gains and losses separate per hobby/activity (183(b)(2))

Question 8

What kind of deduction would ABA fees be if not paid for by your firm?

Answer 8

Itemized deduction (67)

Question 9

Where are the list of above the line deductions?

Answer 9

§62

Question 10

Why does above or below the line matter? (2)

Answer 10

1. Have to itemize for the latter
2. Above the line reduces AGI, which is important for 3 floors: personal casualty (10%), medical expenses (7.5%), aggregate misc. itemized deductions (2%)

Question 11

What section is the misc. itemized deductions? What are included?

Answer 11

67

162, employee
212, expenses for production of income
183, Hobby losses

Question 12

Are 212 deductions above or below the line?

Answer 12

always below

Question 13

What do you consider when making the decision that the court made in Nickerson? Which ones might have been important in Nickerson?

Answer 13

1. Subjective sense of whether they expected income eventually
2. Objective circumstances (9 factors)

Financial status of the taxpayer (not a tax shelter b/c they’re poor); elements of personal pleasure and recreation (had to drive a long way)

Question 14

A has 100k AGI. From hobby 1, he has 4k in income. From hobby 2, he has 4k in income. How much of a deduction can he take?

Answer 14

6k in income. 2% is 2k, 8k-2k = 6k; so you take all hobbies together when you do this (otherwise, the answer would be 4k).

Question 15

Is Nickerson a trade or business? What’s the general rule?

Answer 15

General rule: an activity engaged in for profit that is regular and continuous (not in code from Grotzinger case)

Question 16

What was the adoption of 280A addressing?

Answer 16

People trying to pass off their personal expenses (rent, utilities, water bills as attributable to a home office) as business expenses

Question 17

What are the limits on applying 280A? What should think about before you apply 280A? Who usually gets these deductions?

Answer 17

Whether it’s a deduction in the first place (since it’s just a disallowance rule)

1. Has to be one of A, B, or C (T/B, client meeting, or not attached)
2. Has to be for convenience of employer
3. Has to be used exclusively as an office

Non-salaried employees, like an out-of-home dentist

Question 18

How do you compare the result in Nickerson and 280A? Why is that?

Answer 18

Stark difference: Nickerson is very pro-taxpayer, but 280A is very anti

Because it was hard to contest these cases, without 280A

Question 19

What happens if you get past 280A? Is there a 2% cap for it, for misc. itemized deductions?

Answer 19

Yes, it’s a deduction under 162

Question 20

Is 280A above or below the line?

Answer 20

Trick question: neither: depends on the original deduction (could be either)

Question 21

What was Popov v. Commissioner?

Answer 21

Petitioner wife, a professional violinist, performed regularly with professional orchestral groups and at recording sessions. None of her employers provided her with a place to practice. Thus, she used her living room exclusively as a musical practice area, and claimed a home office deduction for it. She was not entitled to this deduction in the tax court’s view since her living room was not her principal place of business. Rather, her principal places of business were the studios and concert halls where she recorded and performed, because her performances in these places earned her income. The appellate court disagreed. The relative importance of petitioner wife’s practice, compared to her performances, did not yield a clear answer to whether her home office was her principal place of business. But she spent significantly more time practicing the violin at home than she did performing or recording. This tipped the balance in petitioners’ favor. Thus, they were entitled to take the home office deduction for petitioner wife’s practice space, since it was exclusively used as her principal place of business.

Question 22

Where in 280A does Popov apply to? Why doesn’t the flush language apply?

Answer 22

280A(c)(1)(A)

Because she is an independent contractor, not an employee

Question 23

What was the point of the two prong test in Popov? What were the two prongs?

Answer 23

To determine if the area for deduction (home office) was actually the taxpayer’s principal place of business

1. Relative importance: didn’t really fit the facts of the case
2. Amount of time: found for Popov; lots of practice

Question 24

What was Moller v. US? What’s at stake in it?

Answer 24

Whether the office is for a T/B -> above or below the line AND 280A exception

Taxpayers, who relied almost entirely on the income derived from their investments for their support, incurred expenses in maintaining two home-offices and deducted these on their joint income tax returns. The Internal Revenue Service disallowed the deductions and asserted deficiencies against the taxpayers. The taxpayers paid the deficiencies and filed claims for refunds. After these claims were disallowed, the taxpayers brought this action seeking recovery of the taxes paid plus interest. The claims court held that the taxpayers were investors, not traders, but were nevertheless engaged in the trade or business of making investments and were therefore entitled to deduct their home-offices expenses under § 280A of the Internal Revenue Code, codified at 26 U.S.C.S. § 280A. On appeal, the court reversed. The court agreed that the taxpayers were investors and not traders. However, the court found that the taxpayers’ investment activity did not rise to the level of a trade or business. The court concluded that because § 280A restricted home-office deductions to expenses incurred in the carrying on of a trade or business, the taxpayers were not entitled to the deduction.

for profit -> T/B? -> that’s the question

Question 25

What two tax issues does being a T/B matter for?

Answer 25

Are we going to get above (162, employer) or below the line deduction (162 employee, 212)?

Are we going to get the 280A exception? (need to be T/B for all of them)

Question 26

What was Henderson v. Commissioner?

Answer 26

Petitioners are not entitled to deduct as business expenses amounts paid for a print and a plant placed in petitioner’s office, and for parking fees for the automobile petitioner drove to her office.

Question 27

How might Henderson have argued for herself better?

Answer 27

By saying she put the plant and stuff there to make her office more welcoming for clients - a business purpose

Question 28

Where does Henderson go in our framework?

Answer 28

If you decide there is a trade or business, the expense must be close to the T/B

Henderson requires a nexus between the activity and the expense

If no T/B, then should still be a nexus between expense and 212 production of income (if you claim it under 212)

Question 29

What is §274 about? What motivated it?

Answer 29

People were getting angry about big-wigs taking company lunches on the taxpayer’s dime.

Disallowance of certain entertainment (first you look at 162 to see if there is a deduction in the first place)

Question 30

What is the personal motive test, and when is it raised? What does this say about the client side?

Answer 30

Nickerson test (business or consumption), considering the Haag-Simon def. of income, what is more important when you take a client to lunch? consumption or business? and only when the consumption benefit is 0 should the deduction be the total size of the cost of the meal

Of course, this doesn’t comport with what really happens

Also, it seems clear that the client side of the lunch should always be deductible?

Question 31

What was Rudolph v. US?

Answer 31

If insurance company pays, then they will get a deduction no matter what, either as salary or regular business expenses, but whether it’s his income is the issue

The taxpayer was an insurance agent. The company for which the taxpayer worked provided a trip from its home office to New York City for the insurance agent and his wife. The Commissioner of the Internal Revenue Service assessed the value of the trip as taxable income to the taxpayer. The court found that it was not clearly erroneous that the value of the trip was taxable income, in light of the sweeping scope of I.R.C. § 61 and its definition of gross income. The court found that the list of exclusions from § 61 by other sections of the Internal Revenue Code was not exhaustive. The fringe benefit of the taxpayer fell within his taxable income. The court found that the income was not deductible by the taxpayer and his wife as an ordinary and necessary business expense under I.R.C. § 162 because the trip was primarily personal in nature. The trip not having been primarily a business trip, the wife’s expenses were not deductible. The court also noted that it did not find any element of compulsion such that the taxpayer felt that he was required to attend the convention held in New York City.

Question 32

What is 132(d)? Why is this relevant to Rudolph v. US? (3)

Answer 32

Working condition fringe defined - For purposes of this section, the term “working condition fringe” means any property or services provided to an employee of the employer to the extent that if the employee paid for such properly or services, such payment would be allowable as a deduction under section 162 or 167.

Engage in hypothetical question: If Rudolph had paid for the trip himself, would it be deductible? If it would have, then don’t have to include it in income.

Question is the same whether or not it’s the employee or employer paying for it: just a question of income; employer always gets a deduction, but employee either pays it and gets a deduction, or employer pays for it, and its included in income

Question 33

What is the Rudolph test? What are the problems with this test? (2)

Answer 33

Unclear: it looks both at the employer and employee’s subjective view of the expenses, and the principal motivation of those expenses

1. Those views aren’t always in line
2. Uses objective things to determine subjective states

Question 34

If you were deciding how to make the Rudolph test, which way would you go?

Answer 34

I would say the employee state is more important, because it’s a hypo about if the employee paid for it, it would be deductible for his trade or business (which is what 162 asks in that context)

Question 35

How would Rudolph have changed if 274 had been around? What if Rudolph came out the other way - what parts would be not disallowed under 274?

Answer 35

It wouldn’t have changed the result: it’s a disallowance rule, that has exceptions

Rudolph is about whether there is a deduction from 162 - wouldn’t get 274 analysis

Well, maybe just the parts right before and after the business discussion - including meals and airfare (if there were airfare)

Question 36

What does 274(n) do? How does this make sense?

Answer 36

It applies an arbitrary rule of 50% to entertainment like expenses, otherwise allowed in 162, and then allowed in 274

It doesn’t really make sense, except for taking a client out to do something, on a 1:1 ratio, that is

Question 37

What was Moss v. Commissioner?

Answer 37

Posner

Taxpayer husband was a partner in a law firm in which the firm’s lawyers met for lunch each day at a nearby restaurant to discuss matters relating to the firm’s litigation. Respondent Commissioner of the Internal Revenue challenged the taxpayers’ deduction for these lunch expenses. After the tax court disallowed the deductions, the court held that, although meals were deductible under 26 U.S.C.S. § 162(a) as an ordinary and necessary expense in carrying on a business, the daily lunch for members of the firm was not a necessary business expense. The meal itself was not an organic part of the meeting to coordinate the work of the firm, and the firm did not need a daily lunch to cement relationships within the members of the small firm. The court further found that the taxpayers did not claim that they incurred a greater daily lunch expense than they would have incurred but for the lunch meetings.

Question 38

What does Posner think about lunches you don’t like?

Answer 38

When there is a big gap between what you’re paying and what you get in consumption - if the consumption is small enough, maybe give full deduction

Question 39

What did Posner think about the business benefit of the lunches in Moss? Why does it matter?

Answer 39

That it was basically 0

We know that the BB + CB > Expense, that since the BB of these lunch was 0, then the CB was equal or greater to the expense of the lunches.

BB = business benefit
CB = consumption benefit

Trying to align the all or nothing rule with the economic reality - what Oh thinks is interesting

my thoughts: BB wasn’t actually 0, and if so, it’s just an extreme case

Question 40

3. In which, if any, of the following circumstances will the lunch be
   deductible?
   (a) A lawyer takes her client to lunch to discuss her firm’s handling of the
   client’s case.
   (b) A client takes her lawyer to lunch to discuss the lawyer’s firm’s handling
   of the client’s case.
   (c) A lawyer takes her client to lunch in order to retain the client’s goodwill.
   (d) A partner in a law firm takes an associate to lunch to discuss the associate’s future with the firm.
   (e) A partner in a law firm takes an associate to lunch to discuss a pending case.
   (f) Two partners go to lunch once a week to talk about an ongoing case.

Answer 40

(a) deductible, but half is disallowed under 274(n)
(b) not deductible, no trade or business
(c) not deductible, in regs. can’t be for goodwill: has to be a specific case being discussed
(d) deductible, but half is disallowed under 274(n)
(e) deductible, but half is disallowed under 274(n)
(f) not clear: maybe/maybe not; less often cuts toward deductible, and half under 274(n); every single day is not good though (like in Moss)

Question 41

Taking a look at § 274(e)(1), how could you restructure the transaction in Moss to get the partners their Café Angelo food plus a deduction?

Answer 41

d

Question 42

What was Commissioner v. Flowers?

Answer 42

The taxpayer resided in Jackson, Mississippi. When he was offered a job by a company whose main office was located in Mobile, Alabama, he was unwilling to move to Mobile. He made an arrangement with his employer whereby he could continue to reside in Jackson on condition that he pay his traveling expenses between Mobile and Jackson and pay his living expenses in both places. On his tax return, the taxpayer deducted as traveling expenses amounts incurred in making trips from Jackson to Mobile. The Court held the Tax Court properly concluded that the necessary relationship between the expenses and the business of the taxpayer’s employer was lacking and, therefore, the expenses were non-deductible personal expenses. Before a traveling expense deduction could be made under 26 U.S.C.S. § 23(a)(1)(A), the expense was required to be necessary to the development of the employer’s business. The expenses at issue here were incurred solely as the result of the taxpayer’s desire to maintain a home in Jackson while working in Mobile, a factor irrelevant to the maintenance and prosecution of his employer’s business. His employer did not require him to travel on business from Jackson to Mobile.

Question 43

What was Hantzis v. Commissioner?

Answer 43

Appellee taxpayer reported earnings from her summer employment and deducted the cost of transportation between Boston and New York, the cost of a small apartment in New York, and meals in New York. The deductions were taken under 26 U.S.C.S. 162(a)(2). The tax court allowed the deductions, and appellant Commissioner of Internal Revenue sought review. The court determined that appellee’s home for purposes of 26 U.S.C.S. 162 (a)(2) was New York and that the expenses at issue in this case were not incurred while away from home. Therefore, the court reversed the tax court’s ruling.

Question 44

Larry the lawyer works out of an office in Westwood. A lot of his family lives in Irvine. As a result, Larry decides to live in Irvine and commutes an hour and a half to Westwood and an hour and a half back every day. Are his commuting expenses deductible business expenses or nondeductible personal expenses?

Answer 44

nondeductible personal expenses

Question 45

Imagine that a colleague of Larry’s, who works in the same Westwood office, instead lives in Westwood, right next to the office. Imagine that this colleague used her saved gas money to purchase video games. Would the purchase of the video games be deductible?

Answer 45

Nope

Question 46

Imagine now that Larry is a lawyer who works out of an office in Irvine. He has to drive to Westwood to go see a client. Should this expense be deductible? What section?

Answer 46

Only from office to client, so if he drives from Westwood to office, then office to client.

162

Question 47

Imagine that Larry was required to go on a one-day business trip to New York City. In order to do so, Larry has to fly to New York City and take cabs while there. Are these expenses personal expenses or deductible business expenses?

Answer 47

deductible under 162

Question 48

Imagine that Larry has to stay overnight in New York City for his business trip. As a result, he has to pay for a hotel and meals while in Los Angeles. Should these be deductible? What section?

Answer 48

162(a)(2): traveling expenses while away from home (but doesn’t add anything in the analysis, says Oh)

Question 49

In the Flowers case, what if Mr. Flowers continued to practice law in Jackson while also traveling to Mobile for the railroad’s work? Would he be allowed any “away from home” deductions?

Answer 49

Yes, but not for living expenses in one of them

Question 50

Given the Pevsner decision, should Stevie Nicks be allowed a deduction for her clothing expense? What about the clothing expense of outfits worn on stage by Lady Gaga? Kiss?

Answer 50

Yes: can’t wear generally, because it gets destroyed

No: can just clean the clothes, and she’s always wearing weird stuff

Lady Gag and KISS might be more sympathetic (if they don’t wear them ordinarily - which Lady Gaga does a lot, but maybe she’s always on the job…)

Question 51

What three conditions must be satisfied for 162(a)(2) according to Flowers? Which one was considered in Flowers? What’s the reality of it?

Answer 51

1. The expense must be a reasonable and necessary traveling expense, as that term is generally understood. This includes such items as transportation fares and food and lodging expenses incurred while traveling.
2. The expense must be incurred “while away from home.”
3. The expense must be incurred in pursuit of business.

3rd prong (but really also 2nd prong)

Oh says 2 and 3 are about the same; home is the principal place of business which is the headquarters (which would be Mobil in Flowers, so it’s consumptive to travel back and forth from Jackson)

Question 52

Which trade or business mattered in Flowers? The railroad company? Flower’s? Does it matter in this case?

Answer 52

The railroad company; the employer’s trade or business

No, because he’s traveling consumptively.

Question 53

How would Flowers change it to get a deduction?

Answer 53

To have a workplace in both areas

Question 54

Is Flowers isolated to away from home cases?

Answer 54

Yes, technically, but really that’s an issue (though not determinative here)

Question 55

Which company is important in Hantzis? Why?

Answer 55

the employee’s - she was not a lawyer yet

Question 56

What might the IRS have argued in Hantzis on prong 3?

Answer 56

that the company that mattered was the employer, so everything out of Boston would have been consumptive

Question 57

Which prong of the Flowers test is Hantzis about? What did the court decide?

Answer 57

all of them

1st: met
3rd: met
2nd: not met: New York was home b/c it’s about whether it’s business or personal; in this case it was personal

Question 58

Why is it necessary to have two places of business by the logic of Hantzis?

Answer 58

Because otherwise, you’re always charged for half of it

Question 59

Does 162(a)(2) matter?

Answer 59

Not really, can just talk about in terms of nexus between T/B and expense mostly

Question 60

What the test for clothing expense generally?

Answer 60

The generally accepted rule governing the deductibility of clothing expenses is that the cost of clothing is deductible as a business expense only if: (1) the clothing is of a type specifically required as a condition of employment, (2) it is not adaptable to general usage as ordinary clothing, and (3) it is not so worn.

Question 61

What was Pevsner v. Commissioner?

Answer 61

Appellee taxpayer managed a women’s fashion clothing store and was expected to wear the expensive clothes that she sold. Appellee deducted the cost of the clothes as an ordinary and necessary business expense under 26 U.S.C.S. 162(a), and appellant commissioner assessed a deficiency for the deduction that was taken. The tax court determined that appellee was entitled to the deduction, but the court reversed. The court held that even though appellee did not wear the expensive clothes away from work, because of her simple lifestyle, that because the clothes were adaptable to wear away from work, she was not entitled to the § 162(a) deduction. In denying the deduction, the court applied an objective and not subjective test of adaptability.

Question 62

Is the cost of a suit for a lawyer deductible under the general test?

Answer 62

No, because you could wear it outside of work

Question 63

What is the hidden issue in Pevsner?

Answer 63

Fringe benefit: if you get a employee discount, that’s not income up to an extent under 132

Question 64

Why does the Pevsner court go with an objective test?

Answer 64

1. Administrability
2. Fairness: similarly situated taxpayers pay the same thing this way (not really true: assumes weird clothing-wealth hierarchy)