8

Employee Business Expenses

Solutions to Cumulative Problems

8-40 The solution to 8-40 is on the following pages.

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 8
Employee Business Expenses

Solutions to Tax Research Problems

8-41 Section 162(a) provides that, in general, a taxpayer shall be allowed to deduct all ordinary and necessary
expenses paid or incurred during the taxable year in carrying on a trade or business. Subsection 162(a)(2)
states that such deductible expenses include “travelling expenses (including amounts expended for meals and
lodging) while away from home in the pursuit of a trade or business.” The critical language of the statute is
the phrase “while away from home,” inasmuch as the taxpayer must be away from his “tax home” in order to
deduct such expenses for travel, meals, and lodging incurred in the pursuit of a trade or business. The courts
have approached this problem by inquiring whether the expenses incurred by the taxpayer arose because of
some reason personal to the taxpayer (i.e., taxpayer maintains a residence that requires him to travel long
distances to his main income-producing activity, thereby necessitating meals and lodging away from his
residence that might be § 162 deductions.) The courts also look to whether the costs of travel, meals, and
lodging are unnecessary and inappropriate to the conduct of his employer’s business.
5- One of the first cases dealing with this issue was Commissioner vs. Flowers, 46-1 USTC {9127, 34
AFTR 301, 326 U.S. 465 (1946), in which the U.S. Supreme Court abstracted three conditions from
§ 162(a) which the taxpayer must satisfy to deduct travel expenses. They are (1) the expenses must be
reasonable and necessary; (2) the expenses must be incurred while away from home, and (3) the expenses
must be incurred in pursuit of business. Failure to satisfy any one of the three conditions bars the travel
expense deduction. The Court did not address the issue of “tax home” in this case.
5- In Schreiner vs. McCrory, 60-2 USTC {9677, 6 AFTR 2d 5545, 186 F. Supp. 819 (D. Neb. 1960), the
taxpayer was employed by an insurance company based in Omaha, Nebraska where the taxpayer also
resided. The taxpayer was assigned a sales territory that included Nebraska and Colorado. The taxpayer
spent a great deal of time in Denver, Colorado and earned the greater portion of his income in that city.
The taxpayer maintained no office or similar place of business in Denver. The taxpayer sought to deduct
his travel expenses relating to his employment. The IRS contended that the taxpayer’s “tax home” was in
Denver, despite his residence in Omaha. The U.S. District Court disagreed and found Omaha to be the
taxpayer’s “tax home,” thus allowing the deduction for travel expenses. The Court stated that to find
otherwise would impose on a salesman a penalty whereby he would be burdened with the cost of two
homes: one where his family lives and the other a “tax home” designated by the government on the basis of
time spent and money earned there.
5- In Bunewith vs. Commissioner, 52 TC 837 (1969), aff’d in an unreported memorandum and order, 70-1
USTC {9414, 25 AFTR 2d 70-935 (CA-1, 1970), the taxpayer resided outside of his work area and
commuted back and forth to his various work areas in Massachusetts. The court did not include the term
“tax home” in its opinion, which disallowed the taxpayer’s deduction for travel expenses. However, the

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8-14 Chapter 8 Employee Business Expenses

court stated that the taxpayer’s expenses were incurred for personal reasons (i.e., his desire not to relocate
closer to his work areas), and they were as unnecessary and inappropriate to the conduct of the trade or
business of the taxpayer’s employer as were any other personal living expenses at his residence.
5- In Lee E. Daly and Rosemarie H. Daly vs. Commissioner, 82-1 USTC {9721, 48 AFTR 2d 81-6008, 662
F.2d 253 (4th Cir. 1981), aff’g. TC and rev’ing after rehearing en banc the case of 80-2 USTC {9719, 46
AFTR 2d 80-5851, 631 F.2d 361 (4th Cir. 1980), the court used both the concept of “tax home” and whether
expenses were personal and unnecessary and inappropriate to the conduct of his employer’s business to
disallow the taxpayer’s deduction for travel expenses. The taxpayer lived in McLean, Virginia with his wife
who was employed in nearby Washington, D.C. The taxpayer chose to take a job in which he produced most
of his income in Philadelphia; the taxpayer did not maintain an office in Philadelphia, and the taxpayer’s sales
territory did not include his residence. The Tax Court had originally found that Philadelphia was the
taxpayer’s “tax home” for § 161(a) purposes and the deductibility of his travel, meals, and lodging must be
determined with Philadelphia as the point of departure instead of McLean, Virginia. This finding was
originally reversed by the U.S. Court of Appeals for the Fourth Circuit, but upon a petition to rehear the case,
the Fourth Circuit reheard the appeal and reversed its earlier decision, thus affirming the Tax Court decision.
In a concurring opinion, Judge Murnaghan agreed with the result of the case, but thought that Congress
should deal with the issue in which one spouse’s situation (e.g., here taxpayer’s wife and her employment situs)
plays a significant role in determining the situs of the other spouse’s “tax home.”
5- Applying the case law to the facts in the problem, it is noteworthy that M need only cross a bridge to
reach his sales territory; thus, M’s position is arguably tantamount to living in his territory. Also
noteworthy is that M’s wife is employed in Cincinnati. In light of Judge Murnaghan’s concurring opinion
in the Daly case, supra, this gives M a significant reason for residing there. Finally, M does not maintain
an office in Louisville, although he obviously spends a great deal of time there in income-producing
activities. M’s situation seems to closely follow the pattern in Daly, except for the taxpayer’s close
proximity of his residence to his sales territory. If M could construct an argument that would distinguish
his situation from Daly based on the close proximity of his residence to his sales territory, M might find
support from Schreiner, supra. M should seek to convince the court that Cincinnati is as reasonable a place
to live to serve his employer’s business as is Louisville, and thus his “tax home” should be Cincinnati. M
would need to show that he did not live in Cincinnati and travel to Louisville merely for personal reasons
and that his travel to Louisville is necessary and appropriate to conduct of his employer’s business.
However, Bunewith, supra, where the deduction was denied to a taxpayer who lived outside of his work
territory, coupled with the more recent Daly decision, could pose a threat to M’s ability to take a travel
expense deduction using Cincinnati instead of Louisville as the point of departure. The Daly decision
focused not only on establishing a “tax home” for the taxpayer where he made most of his income, but also
showed that the court will closely scrutinize the situation to disallow the deduction when the taxpayer’s
travel is motivated by personal reasons which the law deems irrelevant. Moreover, Judge Murnaghan in his
concurring opinion to Daly argued that the plight of two-earner spouses, where one’s situation has a
significant influence on the other’s tax home, is a matter for Congress to resolve. The cases indicate that the
courts are reluctant to delve into areas properly resolved by legislation. Thus, in light of the similarity of the
facts of the problem to Daly, M will probably not be allowed travel expense deductions for trips to
Louisville, as that city will be deemed M’s “tax home” for § 162(a)(2) purposes.

8-42 In order for R to claim a deduction for the payments to his employees, the expenses must first meet the
general requirements imposed on all potential business deductions under § 162. This provision allows a
deduction for all the ordinary and necessary expenses incurred in carrying on a trade or business. Although
this three prong test seems innocuous enough in this situation, these initial requirements must be considered.
5- The basic provisions of § 162 have been the subject of countless court cases. Generally, an expense is
ordinary if it is normally incurred in the type of business in which the taxpayer is involved. In this case, R
would be required to demonstrate that someone in the same line of work could reasonably be expected to
incur a similar expense. In order for an expense to be necessary the expense must be appropriate, helpful,
or capable of making a contribution to the taxpayer’s business. Finally, R must show that the proper nexus
exists between the expenses and R’s trade or business. Neither the Code nor the Regulations give any
particular guidance for determining whether R’s payments are in fact ordinary. However, several court
cases have considered the treatment of expenses similar to R’s.
5- In Harold A. Christensen 17 T.C. 1456 (1952) the court examined the situation of an employee for
Parke Davis Company, a corporation that manufactured medicines and related products. The taxpayer was
a field manager with responsibility for all or parts of six states and 15 salesmen that covered this area.
Mr. Christensen’s compensation consisted of a fixed salary, plus a bonus of five percent of the average
increase in the sales made by the salesmen under him. During the years in question, the taxpayer spent his
own money on salesmen and their families in an effort to bring about and maintain good business relations
between those salesmen and himself so that the business of his employer might prosper and his own
 Solutions to Tax Research Problems 8-15

earnings increase. He was not required by his employer to make the expenditures for his salesman, but
made them entirely on his own initiative. With little analysis, the Tax Court held that at least a portion of
the expenses could be regarded as ordinary and necessary expenses of the business of a field manager.
However, a skeptical reading of the brief opinion might suggest that the result may have differed had the
taxpayer’s compensation not been directly tied to the work of those under him. The facts in R’s case do not
indicate whether R’s compensation is directly dependent on his division’s profitability, and, therefore, the
productivity of those he supervised. Nevertheless, it would seem that R’s compensation and performance
evaluation ultimately depended on his unit’s success regardless of whether any direct relationship was
present in Christensen.
5- Cases following Christensen tend to cloud the issue. In Robert B. Richardson TC Memo 1978-332, the
taxpayer had over a period of years worked for an insurance company as vice president, president, and
general manager. During his employment, the taxpayer created the atmosphere of a “family business”
creating a personal relationship with officers, agents, employees, stockholders, and policy-owners of the
company. This was accomplished primarily by gifts and entertainment. In considering the deduction of
such gifts, the court explained that a corporate officer may deduct unreimbursed expenses actually paid by
him as ordinary and necessary expenses of his business as a corporate executive if the corporate officer is
required to incur entertainment expenses or make gifts in the course of discharging his executive duties.
Relying on a series of cases (Deputy v. DuPont, 308 U.S. 488, AFTR 808, (1940), Burnet v. Clark, 287 U.S.
410, 11 AFTR 1103 (1932), Jergens v. Comm., 17 T.C. 806 (1951)), the court noted that in order for the
expenses to be deductible the taxpayer must show that the expenses were made pursuant to corporate
policy requiring or expecting him to bear such expenses. Moreover, the court indicated that reimbursement
for such expenses or a corporate resolution requiring the assumption of such expenses would tend to show
that the expenses were a necessary expense of the office. Although the court ultimately determined that
expenses incurred before the taxpayer had been chairman would have been deductible under this rationale,
the taxpayer had not proven that expenses made after the taxpayer had become chairman were either
required or expected of him.
5- The decision in Richardson does not cast favorable light on R’s situation. The facts of the case do not
suggest that R is required to make such gifts. Although such a requirement would be implied in a
reimbursement arrangement, none apparently existed. The payments were completely voluntary on R’s
part. He received no directive from his employer telling him such expenses were either required or expected.
A strict reading of the Richardson case would seem to prohibit R’s deductions.
5- In James B. Walliser 72 T.C. 433, the taxpayer was in a position somewhat similar to R’s. Walliser
was a bank officer responsible for marketing loans. For several years, he participated in vacation tours
attended primarily by builders and deducted the related costs. He participated in such tours to build social
relationships with the builders to help generate loan business which in turn helped him meet his assigned
loan production quotas and obtain increases in his salary. For several years, Walliser’s employer had paid
for him to participate in the builder’s tours but budget cutbacks required the company to stop the
reimbursement of this and other expenses. However, Walliser was given leave with pay, in addition to his
normal two-week paid vacation, in order to participate in the tours. Upon consideration of these facts, the
court concluded that such expenses were deductible. The court, citing the result in Christensen, indicated
that “where a corporate officer personally incurs expenditures which enable him to better perform his
duties to the corporation and which have a direct bearing on the amount of his compensation or his
chances for advancement may be deductible under § 162.” Nevertheless, the court denied the Walliser’s
deduction in light of the limitations imposed on entertainment expenses contained in § 274. Noting that the
expenses were in the nature of entertainment, the court explained that such expenses are not deductible
where their primary purpose is to simply generate goodwill.
5- Although the facts in R’s case bear only remote resemblance to Walliser’s, the court’s decision would
appear to help support R’s deduction. The Walliser decision in relying on Christensen emphasizes the
importance of that 30-year-old decision which holds that gifts to employees from another employee do
satisfy the ordinary and necessary criteria. Unfortunately, the Richardson decision and others like it that
indicate that the employee must be required or expected to make such expenditure cloud the issue.
5- It should be noted that R would not automatically be entitled to a limited deduction for the payments
as business gifts. Section 274 allows a deduction for business gifts where there is a reasonable expectation
of a commensurate financial return. This requirement rarely raises any difficulty in the case of gifts to
customers. Indeed, all of § 274 is couched in terms of entertaining customers rather than employees. In R’s
case, the payments were to his fellow employees. In such case, the IRS may balk. It seems more reasonable
to assume, however, that a de minimis amount such as the $25 deduction approved by the Code would be
allowed. Note that R would much prefer deducting the expenses as an ordinary and necessary business to
being subject to the $25 limitation.
 8
Employee Business Expenses

Test Bank

True or False

1. L is currently an accountant with a large public accounting firm. This year he paid $800 to take a
review course to prepare him for the C.P.A. exam. Because L passed the exam, he was promoted to a
position open only to certified public accountants. He may deduct the cost of the review course.

2. K is an instructor of European history at High School 101. During the summer she traveled to
France, taking slides that she will use in her class. K may deduct the cost of traveling to Europe as an
education or business expense.

3. F, a landscape architect for an urban firm, commutes seven miles to her office. She is transferred to a
branch office and must now commute 32 miles from home. If she moves to the suburbs, she will have
moved 43 miles. She can deduct her moving expenses.

4. T, who graduated from the University of Illinois in June, moved 150 miles to take a job in Chicago
that began in September of that year. Because he was not previously employed, he cannot deduct
moving expenses this year.

5. E moved from Detroit to Beverly Hills to accept a new job as a detective with the Los Angeles Police
Department. During the trip to Los Angeles he spent $100 on meals and $400 on lodging. E may
deduct $500.

6. H, a famous television talk show host, moved from New York to Los Angeles this year. As part of the
move she paid $500 for meals. All of the costs of her moving expenses, including her meals, were
reimbursed by her employer. H may deduct $500 as an itemized deduction.

7. S is employed by Clips, a large discount office supply store. She spends most of her time on the road,
seeing customers. The company does not provide her with an office so she has set up a home office.
She uses her home office about 10 hours a week to write-up orders, receive and return phone calls
(obviously a critical part of her job), and shuffle paper. Based on the IRS’s interpretation of the
Soliman decision, S would be allowed a deduction for her home office.

8. L leases a car that he uses primarily for business. L may not elect to use the standard mileage rate to
account for his automobile expenses.

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8-18 Chapter 8 Employee Business Expenses

9. R, a salesman for a drug company, owns a car, which he uses primarily for business. Last year he
computed his auto expense deduction using actual expenses. This year, he can simplify his
bookkeeping by using the standard mileage rate.

10. V is a district supervisor for several grocery stores. He is a native of Indianapolis and maintains his
residence there. His primary responsibility, however, is for Louisville and the surrounding area.
V spends virtually all of his time working in the Louisville area. While working in and around
Louisville he incurred the following expenses: BW Motel, $1,250; ZK Motel, $1,400; LL Motel, $750
(total motel expense $3,400), and meals, $200. If V is audited, a deduction for the meals and lodging
would be allowed.

11. A taxpayer who travels within the U.S. generally may deduct all of his transportation expenses for a
trip that is primarily for business, and an allocable portion of such transportation expenses when some
business is conducted.

12. On instructions from his employer, Z traveled from Atlanta to London on a business trip. Z had no
desire for a vacation at that time. Z flew round-trip at a cost of $570. Once in London, though, he
decided to do some sight-seeing. As a result, he conducted business on five days and engaged in
personal activities for three days. Z can deduct only a portion of the travel costs to and from London.

13. K, a professor of accounting at the University of Cincinnati, often teaches continuing education
courses for the AICPA. This year she taught a tax update session in Scottsdale. She invited her
husband, L, to come along, so the couple flew out to Arizona. L helped her prepare transparencies
and flip-charts for her presentation. The cost of L’s flight to Scottsdale is not deductible regardless of
the nature and relevance of his contribution to K’s work because the cost is not related to his own
trade or business.

14. Taxpayers may deduct the cost of a business meal for a client as long as the surroundings are
conducive to a business discussion. A business discussion need not transpire before, after, or during
the meal.

15. D can deduct expenses for a meal when D’s client meets with her attorney to discuss a proposed
transaction with her company, even though she is not present at the restaurant.

16. Taxpayer B is the president and sole shareholder of XYZ Corporation, which has six employees. The
corporation may deduct the cost of a hunting lodge as long as it is primarily used by the employees.

17. While in Chicago, S took her best customer to a Cubs game. In determining the amount of deductible
entertainment expenses, the amount subject to limitation includes the cost of the entertainment, meals,
taxes, tips, parking, and transportation to the event.

18. D is employed by MH&G public accountants. While at an out-of-town continuing education course
held by the firm, he incurred meal expenses that were less than the amount he was reimbursed. D is
reimbursed under a per diem scheme that provides for reimbursements not greater than certain
amounts prescribed by the IRS. D must return the excess for the reimbursement arrangement to
qualify as an accountable plan.

Multiple Choice

19. B works for AC Manufacturing Co. as a janitor. Due to new federal regulations regarding plant
safety, AC has required that all janitors take a night class in occupational safety at a local trade
school. Although B would be happy to take the class and keep his current position, he has learned
that by completing the course he will be eligible to be considered for a supervisory janitor position. B
wants to deduct the cost of attending the night school class, which is not reimbursed to him. Ignoring
the special deduction for qualified tuition, which statement best describes the deductibility of the cost?
 Test Bank 8-19

a. B may not deduct the cost of the night school class if the supervisory position is considered a
change in duties.
b. B may not deduct the cost of the night school class if it is not necessary to meet the minimum
educational requirements of B’s trade or business.
c. B may not deduct the cost if the education qualifies B for a new trade or business.
d. B may not deduct the cost if the education merely maintains his current skills.

20. The costs of which one of the following are valid deductible educational expenses? (Ignore the special
deduction for qualified tuition)

a. A college or vocational course necessary to be considered for a job

b. A professional continuing educational program that qualifies the taxpayer for a new job
c. Professional development courses required by an employer for retaining a position
d. A tax seminar attended for reasons unrelated to one’s present job

21. Which one of the following would qualify, at least in part, as a deductible educational expense?

a. The cost of transportation between home and school on a nonworking day

b. Transportation between work and school on a working day
c. Both of the above
d. Neither of the above

22. M works for MND Corporation, whose headquarters are in downtown Houston. The firm reassigned
M to the real estate division, Woodacres, whose offices are in a nearby suburb, Conroe. The distance
between the two jobsites is 43 miles. While M was working downtown it was 4 miles from his home to
the office but the Woodacres office was 40 miles from M’s home. M decided that 40 miles was too far
to commute, so early in 2011 he moved 25 miles to a new house that was 19 miles from the
Woodacres jobsite and 29 miles from the downtown jobsite. The travel distance that determines
whether or not M’s moving expenses are deductible is

a. 19
b. 25
c. 36
d. 40
e. 43

23. The moving expense provisions are designed to ensure that deductions are granted only when expenses
arise from business concerns. Which one of the following statements most correctly describes the
operation of the rules governing moving expenses?

a. A deduction is denied unless the taxpayer moves more than some predetermined amount from his
former residence.
b. A deduction is denied unless the taxpayer’s commute, absent the move, would have increased by
more than some predetermined amount.
c. A deduction is granted as long as a taxpayer’s move is attributable to a job change.
d. A deduction is granted if the taxpayer obtains either part-time or full-time employment at the new
job site.

24. J, a native Texan, graduated in June from Notre Dame University in Indiana, and obtained a job with a
public accounting firm in Dallas. He began work on September 1. Before he started work, J fell in love
with K, who had accepted a job in San Francisco. Shortly after J began work, the couple decided to get
married. J left his job on March 1 of the following year and obtained employment two weeks later in
San Francisco. He continued to be employed in the same job the remainder of the year. Which of the
following statements is true regarding the expenses J incurred in moving to Dallas from Notre Dame?

a. No deduction is allowed since this is J’s first job.

b. A deduction is allowed if J left Dallas because he quit his job.
c. A deduction is allowed if J’s leaving Dallas was because of a transfer by his employer to a branch
of the firm in San Francisco.
d. No deduction is allowed if J did not have a job before moving to Dallas.
e. None of the above statements is true.
8-20 Chapter 8 Employee Business Expenses

25. F, a news reporter, switched jobs and began working for station KNEE in San Diego, California on
January 1. Four scenarios are given below. Assuming F otherwise qualifies for the moving expense
deduction for expenses incurred to move to San Diego, in which of the following cases would the
deduction be allowed?

1. F worked 16 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he went to
work for another local station, where he worked for 22 weeks before the end of his first year in
San Diego.
2. F worked eight weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found
work for another network in San Diego, where he worked for 42 weeks before the end of his first
year in San Diego.
3. F worked 42 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found work
for another network in San Diego, where he worked for 10 weeks before the end of his first year
in San Diego.
4. F worked 17 weeks for KNEE. Dissatisfied, he voluntarily quit. Shortly thereafter he found work
for another network 500 miles away in San Francisco, California, where he worked for 30 weeks
before the end of his first year in California.

a. 1., 2. and 3.
b. 1., 2., 3. and 4.
c. 2. and 3.
d. 2., 3. and 4.
e. 3.

26. R and S moved 1,400 miles from Bartlesville, Oklahoma to Boston, Massachusetts. Assuming the
couple qualifies for the moving expense deduction, which of the following is not deductible at least in
part?

a. Forfeited security deposit for early termination of lease in Oklahoma

b. Real estate commission to obtain a new apartment in Massachusetts
c. Cost of second trip to Boston to find a house
d. Meals at the temporary residence in Boston
e. None of the above is deductible

27. J graduated from the University of Texas during the current year and accepted a job in Kansas City. J
lived in Austin and moved to Kansas City to commence work on June 1. J drove 700 miles pulling a
trailer with all of his belongings. J had rented the trailer for $200. On June 1 he moved into an
apartment and lived there temporarily at a cost of $10 per day through July 15. On July 16 he moved
into his new house. J will be able to claim a moving expense deduction of

a. $0
b. $333
c. $200
d. $632
e. $782

28. C obtained a new job in Alaska with H&J Engineering. She incurred the following moving expenses:

Transportation of furniture and household goods $1,000

House-hunting trip 1,900
Attorney’s fees on sale of former residence 1,400

Assuming C is eligible to deduct her moving expenses, what is the amount of the deduction?
a. $1,000
b. $2,900
c. $3,400
d. $3,900
e. $4,400
 Test Bank 8-21

29. An aggressive young attorney is an employee of a small law firm that provides him with an adequate
office. He uses the den in his home to prepare legal briefs and review legal documents related to his
employment. Assuming the attorney lives near the firm’s office and he has easy access to the office at
all times, which of the following statements most accurately describes the deductibility of the home
office expenses incurred by the attorney?

a. If the den is used exclusively for business purposes, the expenses are deductible.
b. If the den is used exclusively for business purposes on a regular basis, the expenses are deductible.
c. If the den is used exclusively for business purposes on a regular basis to work for and see clients,
the expenses are deductible.
d. In this situation the expenses are not deductible.
e. The home office deduction was completely eliminated as a result of the Tax Reform Act of 1976.

30. Which of the following statements regarding deductions for home office expenses is true?

a. Deductions may be taken only if the home office is used for the taxpayer’s main business.
b. Deductions may be taken if the home office is used regularly for meeting clients or customers in
the normal course of the taxpayer’s business.
c. Deductions may not be claimed if the taxpayer merely performs administrative tasks related to his
business in the home office.
d. All of above are true.
e. None of the above is true.

31. T’s employer provides an office for her in its downtown headquarters. Which of the following is true?

a. T maintains an office in her home that she uses to conduct work related to her rental property.
Even though the rental activities may be considered a business, no deduction can be allowed
because T’s principal business is that of being an employee and its primary location is downtown.
b. T regularly meets with clients of her employer’s business in her home office, which is exclusively
used for such purpose. T is entitled to the home office deduction without further inquiry.
c. T maintains a home office that is exclusively used on a regular basis to conduct work regarding
her investment portfolio. No deduction is allowed.
d. None of the statements above is true.

32. K exclusively uses a portion of his bedroom as a place to manage his few investments. He charts his
stocks daily. Costs allowable to the home office are $1,000. Gross income from his investments is
$800, while his A.G.I., including the investment income, is $30,000. The amount K may deduct from
his A.G.I. is

a. $0
b. $200 for A.G.I.
c. $400 for A.G.I.
d. $800 from A.G.I.
e. $1,000 from A.G.I.

33. Which one of the following statements is true?

a. The expenses of commuting are personal, and as such are never deductible regardless of the
surrounding circumstances.
b. The expenses of commuting from Job A to Job B are deductible to the extent that the distance
between Jobs A and B does not exceed the distance from home to Job A.
c. The expenses of commuting to a temporary assignment and returning the same day when the
temporary assignment is outside the vicinity in which the taxpayer conducts his business (the tax
home) are deductible and are determined based on the cost of transportation from the employee’s
office to the temporary location.
d. Both b. and c. are true.
e. All are false.
8-22 Chapter 8 Employee Business Expenses

34. T sold textbooks for a living by visiting different teaching institutions and showing samples of various
books to professors. She typically carried about 100 books in her Volkswagen on her way from home
to various local universities that she regularly called upon. Last year a sudden increase in the number
of textbooks revised caused T to increase her quantity of samples from 100 to 300 books. To carry all
of the books, T rented a trailer that she pulled behind her Volkswagen. T sought to deduct the cost of
the trailer on her tax return. T will

a. Be allowed to deduct the cost of the trailer as an additional cost attributable to carrying the items
that T needs for the cost of doing business normally
b. Not be allowed to deduct the cost of the trailer. However, T could have deducted the additional
cost of hauling the new books if she had bought a larger car and used the “same mode” of
transporting them as before
c. Not be allowed to deduct the cost of the trailer because T is still essentially using the “same
mode” of hauling books as before, i.e., with a car
d. Be allowed to deduct the cost of renting the trailer because she is not using the “same mode” of
hauling the new books that she used for the old ones

35. R is employed as a painter for Painting-We-R. He lives in Dallas and works on jobs in the
surrounding area.

1. R is assigned to a job in Ft. Worth for one week, causing him to commute daily a total of 80 miles,
which is 60 miles further than his normal commute. R may deduct the cost of commuting 80 miles.
2. R travels 100 miles to Waco for a two-day job and stays overnight. He may deduct, at least in
part, the costs of his own meals while there.
3. R carries a few tools in his light duty truck including paint brushes, paint, a ladder, and the like.
Assuming R would drive the truck with or without the tools, he is allowed to deduct the costs of
commuting under the IRS view.

Which set of the above statements is true?

a. 1. and 2.
b. 1., 2. and 3.
c. 2.
d. 2. and 3.
e. 3.

36. Which statement concerning deductible transportation costs is true?

a. B drives 20 miles to his office, then later in the day drives to meet a client at the client’s office. By
the time he gets home that night he has driven 63 miles. He can deduct the cost of driving 23
miles.
b. F, an architect, usually drives 40 miles round trip from home to office. Today, she skips the office
and drives directly to a job site to inspect the construction. Her round trip is 50 miles. She may
deduct a cost of 50 miles.
c. M, a contractor, works out of her home. She may deduct the cost of driving to a client’s place of
business.
d. More than one answer is true.
e. All are true.

37. J.B., a self-employed taxpayer, acquired a car this year and uses the standard mileage method to
compute her deduction for automobile expenses. During the year, J.B. drove 50,000 miles: 40,000 for
business and 10,000 for personal purposes. Other expenses related to the car that she has brought to her
tax advisor’s attention include insurance of $400, parking on business calls of $50, and interest on debt
incurred to purchase the car of $1,000. What is J.B.’s deduction for automobile expenses (assume the
mileage rate is .50 cents per mile for all units)?

a. $20,050
b. $20,850
c. $23,250
d. $21,160
e. Some other amount
 Test Bank 8-23

38. R coaches the basketball team at Houston High School. In preparation for the state playoffs he
decided to scout his probable opponent, which was playing in San Antonio. On Friday afternoon, he
left from school and drove to San Antonio to watch the game. Later that night he returned to school
to work on plans for the upcoming game. He incurred the following costs: transportation, $25; meals,
$5. The costs were not reimbursed. The coach may deduct

a. $20
b. $24
c. $25
d. $29
e. $30

39. S maintains a principal residence in St. Louis, Missouri. He lays brick for a living. S’s employer asked
him to go to Chicago, Illinois to work on a single job for six months. Due to difficulties with weather,
S was forced to stay in Chicago for a total of 11 months. S wants to deduct a portion of the cost of
meals and lodging in Chicago while on the job. S will be

a. Denied the deduction because the job in Chicago was only a temporary assignment
b. Allowed the deduction because the job in Chicago will be considered temporary, as it was not an
indefinite assignment
c. Allowed the deduction because the job in Chicago will be considered indefinite, as it was not a
temporary assignment
d. Denied the deduction because living expenses are always nondeductible personal expenses

40. L flew from Chicago to Miami primarily for a business meeting. The meeting lasted three days, so she
stayed in Miami for two additional days to enjoy the sunshine and visit. With respect to the plane fare
for the trip, L should

a. Prorate the plane fare based on time devoted to business and personal activities and deduct the
business portion
b. Divide the plane fare equally between business and personal activities and deduct the business
portion
c. Deduct the entire plane fare
d. Deduct none of the plane fare
e. None of the above

41. R, a museum director, timed a business trip to Egypt to coincide with a trip to the Pyramids organized
by her college’s Alumni Association. She spent 14 days on business and seven days sight-seeing at the
Pyramids. Air fare was $1,500, and lodging plus 50 percent of R’s meal costs totaled $75 a day. She
can deduct

a. $1,000
b. $1,050
c. $2,050
d. $3,050

42. Which of the following conditions must be satisfied to establish that an entertainment expense was
directly related to business?

a. More than a general expectation of deriving some income (other than good will) existed as a
result of making the expenditure.
b. Business was actually discussed or engaged in during the entertainment.
c. The combined business and entertainment was principally characterized as business.
d. More than one but not all of above must be satisfied.
e. All of the above must be satisfied.
8-24 Chapter 8 Employee Business Expenses

43. D owns and operates her own real estate business. She loves to entertain. Indicate which of the
following statements is true. Assume the expenditure is deductible unless otherwise implied.

a. D takes her new neighbor to the ball game. The expense is deductible, assuming D’s
entertainment expense creates goodwill that may lead the individual to become D’s client if and
when he decides to sell his house.
b. D takes a prospective client to the theater. Unless the taxpayer can prove otherwise, the IRS
presumes the expense is not deductible because the nature of the event precludes business
discussion.
c. D holds a golf outing for all of her employees. D may deduct the expense, assuming it is primarily
for her employees.
d. More than one but less than all of the statements above are true.
e. None of the statements above is true.

44. G operates his own public accounting firm in Los Angeles. K, an accounting professor at UCLA,
often refers prospective clients to G, as well as students who might be good employees. Which of the
following statements is true?

a. G gave K two tickets to the Dodger game worth a total of $20 for his referrals during the year. A
portion of the cost of the tickets is deductible even though he does not accompany K to the game
and discuss business.
b. G met K downtown for lunch. They discussed some prospective clients, then played tennis. G
may deduct the cost of the lunch as well as the cost of playing tennis.
c. G takes K to sail on his boat. G never gets on his boat without a business associate. G may
deduct the depreciation on the boat.
d. More than one but less than all of the statements above are true.
e. None of the statements above is true.

45. When J became a partner in the public accounting firm of PL&A, he was required to obtain a
membership at a country club. During the year, he spent $5,000 for dues. His records indicate that he
used the club as follows:

Business meals 40 days

Substantial business discussions at the
office followed by golf at the club 100 days
Personal use 60 days

J. may deduct dues of

a. $0
b. $800
c. $1,600
d. $2,800
e. $4,000

46. In which case are expenses not deductible on account of the directly-related-to and associated-with
tests for entertainment expense?

a. Meal expense for client J and spouse at a business lunch

b. Cost of seven kegs of beer and 200 hot dogs for the annual company picnic for employees and
their families
c. Cost of wine and cheese to be distributed free to guests and prospective buyers at a gallery
opening
d. Cost of a two-week vacation trip to Hawaii for the company’s top salesperson, who reports the
value of the trip as taxable compensation
e. All of the above are deductible.
 Test Bank 8-25

47. B is a computer systems analyst for IBM Corporation living and working in Dayton, Ohio. During
the year, she drove to Cincinnati to help C with problems he was having on a recently purchased
system. B spent the night in Cincinnati and ate by herself, spending $30 for dinner including $4 for a
tip and $1 in tax. Under her per diem arrangement, she was reimbursed $20 for her meal. B’s
deduction, before application of the 2 percent of A.G.I. limitation for miscellaneous itemized
deductions, is

a. $20
b. $24
c. $25
d. $28
e. $30

48. R, an employee, spends $2,500 on business entertainment for which he is not reimbursed. If his A.G.I.
is $60,000 (assuming no other miscellaneous itemized deductions), his deduction would be

a. $50
b. $100
c. $200
d. $800
e. None of the above

49. At a business lunch to entertain a new client, J spent $40 for the meal, $4 tax, $6 tip, and $10 cab fare.
Assuming he is not reimbursed, what is the allowable deduction?

a. $0
b. $25
c. $30
d. $44
e. Some other amount

50. After securing a large order of magic supplies, Q took his customer to lunch. He paid $40, for which
his company, Novelties, Inc., reimbursed him. Which statement is true?

a. Q may deduct $20.

b. Q includes $40 as income and deducts the entire amount.
c. Novelties, Inc. may deduct $20.
d. Novelties, Inc. may deduct $40.
e. Both b. and c. are true.
 8
Employee Business Expenses

Solutions to Test Bank

True or False

1. False. This cost is incurred to meet the minimum educational requirements of L’s job. Thus no deduction
is allowed. (See p. 8-4.)

2. False. Deductions for travel for educational purposes are deductible only when the travel is necessary to
engage in an activity that is otherwise deductible. Merely taking slides in Europe to be used later in class
does not satisfy this requirement. (See p. 8-4.)

3. False. The commute between F’s old residence and new job, 32 miles, must be at least 50 miles
greater than her old commute, 7 miles. In this case it is only 25 (32-7) miles. (See Example 7 and p. 8-9.)

4. False. If the taxpayer has no previous job site, the 50 mile distance test is met if the new job is 50 miles or
more from his residence. (See p. 8-10.)

5. False. While all of the lodging expense is deductible as a direct moving expense, none of the meal cost is
deductible. Thus, E’s deduction is $400. (See p. 8-11.)

6. False. Beginning in 1994, meal expenses incurred during a move cannot be deducted. (See p. 8-11.)

7. False. Under the Soliman decision, a taxpayer is entitled to claim deductions related to a home office only
if the home office is the most important place of work. The high court indicated that in applying this test
the relative importance of the functions performed at each location would be evaluated as well as the
amount of time spent in each location. In this case, the IRS would no doubt argue that S’s most important
functions are performed at the offices of her clients. Short of this, the Service would contend that S spends
more time on the road and at the clients’ offices than she does at home. Note, however, that S should
qualify for the deduction under the administrative activities test. (See Example 10 and p. 8-14.)

8. False. Beginning in 1998, availability of the standard rate is not restricted to owners. This relaxed rule
effectively allows taxpayers who lease rather than buy to use the standard rate. (See p. 8-25.)

9. False. The standard mileage rate may be used only if adopted in the first year the car is placed in service.
(See p. 8-26.)

10. False. Under the IRS view, Louisville is considered V’s tax home because that is his principal place of
business. Because he is not away from his tax home, the IRS would deny his deduction for meals and
lodging. (See Example 27 and pp. 8-26 and 8-27.)
8-27
8-28 Chapter 8 Employee Business Expenses

11. False. In the case of domestic travel, the taxpayer either deducts all transportation expenses or none of
them; no allocation is allowed. However, any travel expenses directly related to business after arriving at
the destination qualify. (See Example 30 and p. 8-29.)

12. False. Because Z had no desire for a vacation and the primary reason for the trip was business, the entire
to-and-from travel costs are deductible. (See Example 34 and pp. 8-30 and 8-31.)

13. True. L’s travel expenses would be deductible only if (1) he were an employee of the person paying (or
reimbursing) the expenses, (2) he had a bona fide business purpose for the travel, and (3) the expenses
were otherwise deductible. (See Example 33 and p. 8-30.)

14. False. In the case of business meals, the taxpayer must be engaged in a substantial and genuine business
discussion before, after, or during the meal in order to claim a deduction. (See p. 8-36.)

15. True. In the case of a business meal, D’s attorney is considered an employee of D and a deduction is
allowed, even without D’s presence. (See p. 8-36.)

16. True. A taxpayer may deduct expenses connected with entertainment facilities if such facilities are
provided primarily for employees. [See p. 8-37 and § 274(e)(5).]

17. False. Transportation to the event is not subject to limitation. (See Example 42 and p. 8-38.)

18. False. If the per diem reimbursements do not exceed the government prescribed standard, the employee is
deemed to have substantiated that amount and does not need to return the excess. (See Example 47 and p. 8-47.)

Multiple Choice

19. c. An employee may deduct educational costs undertaken to meet requirements set by his or her
employer, so long as such education does not qualify the employee for a new trade or business and is
not necessary to meet the minimum educational requirements of the employee’s trade or business. [See
pp. 8-3 and 8-4 and Reg. § 1.162-5(a).]

20. c. The costs of courses that prepare a person for a job, provide him or her with minimum job
requirements, and seminars that are not job-related do not qualify. (See pp. 8-3 and 8-4.)

21. b. Option a. does not qualify because transportation from home to school is not deductible on a
nonworking day. (See p. 8-5.)

22. c. The distance test requires that the distance from the old home to the new job site (50 miles) exceeds the
distance from the old home to the old jobsite (4 miles) by 50 miles. The distance to be compared is 36
miles (40-4). [See Example 7, p. 8-9, and § 217(c)(1).]

23. b. The distance between the taxpayer’s old residence and new job site (commute absent the move) must
exceed the distance between the old residence and old job site (original commute) by more than
50 miles. Item a. is false because it is the increase in the commute, absent the move, that is tested, not
simply the number of miles moved. Item c. is false since the taxpayer must be employed in the same
general location for 39 weeks during the 12-month period following his arrival. Item d. is false since the
taxpayer must have a full-time job. (See pp. 8-9 and 8-10.)

24. c. Under the rules governing moving expenses, the taxpayer must be employed at the general location of
the new job for 39 weeks. However, this rule is waived if the taxpayer dies, becomes disabled, is
involuntarily dismissed, or is transferred for the employer’s benefit. Item b. is false because the waiver
is not granted when the employee voluntarily quits. Item a. is false because a taxpayer is allowed to
claim the moving expense deduction for the commencement of work in a new location. Item d. is false
because the taxpayer is not required to have a job before moving to the new location. It is sufficient if
he or she obtains a job and is employed for 39 weeks out of the 12-month period following arrival at
the location of the new job. (See Example 8 and p. 8-9.)
 Solutions to Test Bank 8-29

25. c. An employee must be employed in the general location of the job for 39 weeks out of the 12 months
immediately following his or her arrival. It does not matter whether the taxpayer quits or is fired from
the original job or works for more than one employer, as long as the total number of weeks is at least
39. In situation 1, F works only 38 weeks. In situation 4, F is not employed 39 weeks in the same
general location, San Diego. (See Example 8 and p. 8-10.)

26. e. None of the items are deductible. Only direct moving expenses are deductible. (See pp. 8-10 and 8-11.)

27. b. [$200 þ [(700)($0.19/mile) =$133] ¼ $333]. (See p. 8-11.)

28. a. C is allowed to deduct only the direct expenses related to the move: $1,000 for transportation of
household goods and furniture. (See Example 9 and pp. 8-11 and 8-12.)

29. d. To be deductible the expense must be incurred for the convenience of the employer. In this case, the
office is readily available and serves no particular need of the employer. (See p. 8-14.)

30. b. Option a. is false because any business of the taxpayer will satisfy the requirement, as long as its
principal place of business is the home office. Option c. is false, because if part of the home is used
for administrative tasks and there is no other location, the principal place test is not. (See pp. 8-13
through 8-16.)

31. c. Item c. is true because the investment portfolio work does not constitute a business and no deduction would
be allowed. Item a. is false because a deduction is allowed as long as the home office is the principal place of
any business. Assuming the real estate activity is a business, then the home office would qualify as the
principal place of business for that business. Item b. is false because T is an employee, and employees must
also satisfy the convenience-of-the-employer test. (See pp. 8-13 through 8-16.)

32. a. No deduction because the expense is not attributable to a business. (See p. 8-15.)

33. e. Option a. is false, because there are exceptions to the rule (e.g., commuting with tools). Option b. is
false; the distance may not exceed that between Job A and Job B. Option c. is false because the cost of
transportation is for the distance traveled from the taxpayer’s residence to the temporary location. (See
Example 20 and pp. 8-19 through 8-24.)

34. a. The taxpayer may deduct the additional cost of transporting items necessary to the normal conduct
of business if she uses the “same mode” of transportation with or without the items. (See Example 16
and p. 8-20.)

35. a. In this situation, R’s tax home is in Dallas, his principal place of business. Item 1. is true because R is
on a temporary assignment beyond his tax home. Note, all of the commuting is deductible, not just the
additional commuting caused by the assignment. Item 2. is true because the taxpayer is allowed to
deduct his meals and lodging when he is away from his tax home overnight. Item 3. is false because R’s
cost, using the same-mode test, is not increased when the tools are added to the truck. (See Examples
16, 20 and 27 and pp. 8-20 through 8-23.)

36. e. Option a. is true because a taxpayer is allowed to deduct the costs of transportation between job sites.
When the taxpayer drives to more than one job site during the day, the deductible costs are limited to
that exceeding his normal commute. (See Example 23 and p. 8-21.) Option b. is true. Under the revised
approach established by the IRS in 1990, commuting to a temporary assignment, the construction site,
is deductible if the taxpayer otherwise has a regular place of business. (See Example 18 and pp. 8-19
and 8-20.) Option c. is true because the taxpayer is traveling from one job site, her residence, to
another. (See Example 22 and p. 8-23.)

37. b. Under the standard mileage method, the taxpayer may deduct 50 cents (the assumed rate) per mile for
all miles (40,000  $0.50 ¼ $20,000). In addition, the taxpayer may add the business parking of $50
and an allocable portion of the interest expense of $800 ($1,000  40,000/50,000). The insurance is not
allowed because it is deemed to be included in the mileage rate. Thus, the deduction is $20,850 ($20,000
þ $50 þ $800). (See Example 26 and pp. 8-25 and 8-26.)
8-30 Chapter 8 Employee Business Expenses

38. c. Only the transportation is deductible because R was not away from home overnight. Transportation is
not subject to the 50-percent disallowance. (See pp. 8-18 and 8-24.)

39. b. An employee who works on a job away from his or her tax home may deduct all incurred living
expenses while away from home temporarily. An assignment is temporary if it is not indefinite (e.g.,
not more than a year). (See Example 27 and pp. 8-26 and 8-27.)

40. c. The entire fare is deductible because the trip was primarily for business. (See Example 30 and
pp. 8-29 and 8-30.)

41. c. R’s trip met none of the criteria for avoiding an allocation of expenses among business and
personal days. Her deductible expenses equal the ratio of business days to total days (14/21) multiplied
by her total travel expenses [$1,500 þ (21  $75) ¼ $3,075], or $2,050. (See Example 34 and pp. 8-30
and 8-31.)

42. e. All are requirements of the directly-related-to test. (See p. 8-34.)

43. d. Item a. is false because the taxpayer does not have any expectation of business benefit other than
goodwill, i.e., the primary purpose of this entertainment is to create goodwill. The fact that the
neighbor may someday in the future use D’s services is too remote. Item b. is true because the IRS
assumes that business cannot be actively conducted where there are substantial distractions, such as
a play in progress. Item c. is true because recreational or social activities provided primarily
for employees other than officers, etc., are deductible. (See Example 39 and pp. 8-33 through 8-37.)

44. d. Item a. is true because the taxpayer could treat these as business gifts of less than $25. He could not
treat them as entertainment since the taxpayer was not present. (See p. 8-40.) Item b. is true because the
lunch is a quiet business meal, and the tennis followed a substantial business discussion, thus qualifying
as being associated with entertainment. (See p. 8-36.) Item c. is false because no costs attributable to an
entertainment facility are deductible unless provided primarily for employees. (See p. 8-37.) Note that
out-of-pocket expenses provided during entertainment at an entertainment facility are deductible if they
meet the directly-related-to or associated-with tests. (See p. 8-37.)

45. a. Beginning in 1994, no portion of amounts paid for club dues or fees are deductible whether the club is
used for business or pleasure. However, J can still deduct 50% of the costs of the business meals if the
applicable requirements are satisfied. (See p. 8-37.)

46. e. These are all exceptions to the directly-related-to and associated-with tests. (See p. 8-37.)

47. c. Reimbursed expenses of business meals are fully deductible, whereas only 50 percent of unreimbursed
expenses are deductible. B’s deductible expenses for the meal equal $20 (100%  $20) plus $5 [50% 
($30  $20)], or $25. She will report $20 of income. (See Examples 41 and 42 and pp. 8-38 and 8-39.)

48. a. R’s deduction for business entertainment equals 50 percent of his unreimbursed expenses (50%$2,500
¼ $1,250) less 2 percent of his A.G.I. [$1,250  (2%  $60,000) ¼ $50]. (See Example 41 and p. 8-38.)

49. e. All the cab fare ($10) is deductible, but only 50 percent of the $50 ($40 þ $4 þ $6) meal expense, or
$25, is deductible. Thus $35 is deductible ($10 þ $25). (See Example 42 and pp. 8-38 and 8-39.)

50. e. For reimbursed expenses, the taxpayer considers reimbursement as income and deducts expenses. The
company is only allowed to deduct 50 percent of expenses, or $20 (50%  $40). (See Example 43
and p. 8-39.)