Andrews v. C.I.R.

Decision Date24 April 1991
Docket NumberNo. 90-2165,90-2165
Parties-881, 91-1 USTC P 50,211 Edward W. and Leona J. ANDREWS, Petitioners, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent, Appellee.
CourtU.S. Court of Appeals — First Circuit

Raymond A. Snow and Paul J. Molloy, on brief, Somerville, Mass., for petitioners, appellants.

Shirley D. Peterson, Asst. Atty. Gen., Gary R. Allen, Richard Farber and Christine A. Grant, Tax Div., Dept. of Justice, on brief, for respondent, appellee.

Before CAMPBELL, SELYA and CYR, Circuit Judges.

LEVIN H. CAMPBELL, Circuit Judge.

Edward W. Andrews and his wife, Leona J. Andrews, 1 brought this action in the Tax Court for a redetermination of an income tax deficiency that the Commissioner had assessed for the tax year 1984. At issue is Andrews' deduction of travel expenses, including meals and costs associated with maintaining a second home at Lighthouse Point, Florida, as "traveling expenses ... while away from home in the pursuit of a trade or business." 2 Internal Revenue Code of 1954, 26 U.S.C. Sec. 162(a)(2). 3 Personal living expenses are generally not deductible. 26 U.S.C. Sec. 262. The Tax Court sustained the Commissioner's disallowance of the deduction on the grounds that Andrews was not "away from home" when these expenses were incurred. Andrews v. Commissioner, 60 T.C.M. (CCH) 277, T.C. Memo 1990-391. Andrews appeals to this court pursuant to 26 U.S.C. Sec. 7482.

Background

We summarize the Tax Court's findings only to the extent helpful in understanding this decision. Andrews was president and chief executive officer of Andrews Gunite Co., Inc. ("Andrews Gunite"), which is engaged in the swimming pool construction business in New England, a seasonal business. His salary in 1984 was $108,000. Beginning in 1964, during the off-season, Andrews, establishing a sole proprietorship known as Andrews Farms, began to race and breed horses in New England, and in 1972 moved his horse business to Pompano, Florida. Andrews' horse business proliferated and prospered.

In 1974, Andrews Gunite diversified by establishing a Florida-based division, known as Pilgrim Farms, to acquire horses to breed with two of Andrews Farms' most successful horses and to develop a racing stable similar to Andrews Farms. By 1975, Andrews Farms had 130 horses, and by 1984 Pilgrim Farms had twenty to thirty horses. Andrews was responsible, in 1984, for managing and training Pilgrim Farms horses and Andrews Farms horses, though he was compensated for his services to Pilgrim Farms only by payment of his airfare to Florida. While in Florida during racing season, Andrews worked at the racetrack from seven in the morning until noon, and he returned to the track to solicit sales of his horses and watch the races on four nights per week.

Also, in 1983, Andrews' son, who had worked for Andrews Gunite, sought to establish a pool construction business in Florida. Andrews, along with his brother and son, formed a corporation, originally known as East Coast Pools by Andrews, Inc. and renamed Pools by Andrews, Inc., to purchase the assets of a troubled pool business in Florida. Andrews owned one-third of Pools by Andrews, Inc. in 1984. Andrews assisted his son in the Florida pool business, but drew no salary for his services. By the time of trial, this pool business was one of the biggest, if not the biggest builder of pools in Florida, with offices in West Palm Beach and Orlando and plans for a third office in Tampa.

Andrews resided in Lynnfield, Massachusetts with his wife prior to and during 1984. During this period, the expansion of the horse business required Andrews to make an increasing number of trips to Florida. In order to reduce travel costs and facilitate lodging arrangements, Andrews purchased a condominium in Pompano Beach, Florida in 1976, which he used as a residence when in Florida during the racing season. The neighborhood around the condominium became unsafe, and Andrews decided to move, purchasing a single family home with a swimming pool in Lighthouse Point, Florida in 1983. The home was closer than the condominium to the Pompano Beach Raceway, where Andrews maintained, trained, and raced many of the Andrews Farms and Pilgrim Farms horses. Andrews used the Florida house as his personal residence during the racing season.

The Tax Court concluded that in 1984 Andrews worked in Florida primarily in his horse business for six months, from January through April and during November and December, and that Andrews worked primarily in his pool construction business in Massachusetts for six months, from May to October. On his 1984 amended return, Andrews claimed one hundred percent business usage on his Florida house, and claimed depreciation deductions on the furniture and house in connection with his horse racing business. He also characterized tax, mortgage interest, 4 utilities, insurance, and other miscellaneous expenses as "lodging expenses," which he deducted in connection with the Florida pools and horse racing businesses, along with expenses for meals while he was in Florida. 5

Discussion

The Tax Court correctly stated: "The purpose of the section 162(a)(2) deduction is to mitigate the burden upon a taxpayer who, because of the exigencies of his trade or business, must maintain two places of abode and thereby incur additional living expenses." See Hantzis v. Commissioner, 638 F.2d 248, 256 (1st Cir.), cert. denied, 452 U.S. 962, 101 S.Ct. 3112, 69 L.Ed.2d 973 (1981); Dilley v. Commissioner, 58 T.C. 276 (1972); Kroll v. Commissioner, 49 T.C. 557, 562 (1962). The Tax Court then stated its general rule that "a taxpayer's home for purposes of section 162(a) is the area or vicinity of his principal place of business." Responding thereafter to the Commissioner's contention that during the horse racing season Florida was Andrews' "tax home," rendering Andrews' Florida meals and lodging expenses personal and nondeductible living expenses under sections 262 and 162(a)(2), the Tax Court concluded that Andrews had two "tax homes" in 1984. The Tax Court, without further elaboration, based its decision on an observation that Andrews' business in Florida between January and mid-April and during November and December of each year was recurrent with each season, rather than temporary.

On appeal, the Commissioner who, while maintaining its ongoing position that the taxpayer's home for purposes of section 162(a)(2) is his principal place of business and that Andrews' principal place of business was in Florida, agrees with Andrews that the Tax Court erred in finding that he had more than one tax home and urges that we remand for the Tax Court to determine the location of Andrews' principal place of business. For the reasons that follow, we hold that the Tax Court erred in determining that Andrews had two "tax homes" in this case. 6

As we have previously stated, section 162 provides a category of deductible business expenses which reflects "a fundamental principle of taxation: that a person's taxable income should not include the cost of producing that income." Hantzis, 638 F.2d at 249. A specific example of a deductible cost of producing income is section 162(a)(2) travel expenses. Id. The Supreme Court first construed the meaning of the travel expense deduction provision 7 in Commissioner v. Flowers, 326 U.S. 465, 66 S.Ct. 250, 90 L.Ed. 203 (1946). In Flowers, the Court construed this provision to mean that travel expenses are deductible only if: (1) "reasonable and necessary"; (2) "incurred 'while away from home' "; and (3) incurred "in pursuit of business." Id. at 470, 66 S.Ct. at 252.

The issue of the reasonableness or necessity of Andrews' Florida expenses is not presented in this appeal. Rather, the Tax Court based its decision on a holding that Andrews did not satisfy the second Flowers requirement for deduction of his Florida expenses; as the Tax Court determined Andrews' home in 1984 was in both Massachusetts and Florida, he was not away from home when these expenses were incurred. We turn, then, to interpret the meaning of the "away from home" language of section 162(a)(2). The question here is whether, within the meaning of "home" in section 162(a)(2), Andrews could have had two homes in 1984.

The Supreme Court, in Flowers, noted: "The meaning of the word 'home' in [the travel expense deduction provision] with reference to a taxpayer residing in one city and working in another has engendered much difficulty and litigation." Id. at 471, 66 S.Ct. at 253; see also Commissioner v. Stidger, 386 U.S. 287, 292, 87 S.Ct. 1065, 1068, 18 L.Ed.2d 53 (1967). The Internal Revenue Service has consistently taken the position that a taxpayer's home for purposes of section 162(a) is the area or vicinity of his principal place of employment. Rev.Rul. 75-432, 1975-2 C.B. 60; Rev.Rul. 63-82, 1963-1 C.B. 33; Rev.Rul. 61-67, 1961-1 C.B. 25. The Tax Court in this case acknowledged the general validity of that rule, as have a number of courts of appeals. See, e.g., Coombs v. Commissioner, 608 F.2d 1269, 1275 (9th Cir.1979); Markey v. Commissioner, 490 F.2d 1249, 1255 (6th Cir.1974). Judge Friendly, writing for the Second Circuit, however, reasoned that Congress intended that "home" should be accorded its natural non-technical ordinary meaning of primary residence in a tax statute. Rosenspan v. United States, 438 F.2d 905, 911 (2d Cir.), cert. denied, 404 U.S. 864, 92 S.Ct. 54, 30 L.Ed.2d 108 (1971).

This court, in Hantzis, after reviewing cases addressing this issue, declined in that case to focus upon the "principal place of business" or "primary residence" definitions of "home," and suggested a "functional definition of the term," 638 F.2d at 253. Effectuation of the travel expense provision must be guided by the policy underlying the provision that costs necessary to producing income may be deducted from taxable income. Id. at 251. Where business...

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