Firm Seeks Clear Definitions in Proposed Fringe Benefit Regs

August 24, 2020

Patrick Clinton
Internal Revenue Service
1111 Constitution Avenue NW., Room 4143
Washington, DC 20224

RE: REG-119307-19: Section 274(l) Deduction Disallowance for Commuting Expenses

Dear Mr. Clinton:

Thank you for the opportunity to comment on the Proposed Regulations under Section 274 intended to implement changes made by the 2017 Tax Cut and Jobs Act. We write on behalf of an interested client regarding the deduction disallowance for commuting expenses under Section 274(l). For purposes of Section 274(l), the Service noted that “comments are specifically requested on additional guidance needed to determine . . . how to define an employee's residence and place of employment.”¹

We ask the Service to clarify these terms in light of the Congressional intent that Section 274(l) apply to “commuting” expenses.² The commonly understood definitions of “commuting” are “travel[ing] back and forth regularly (as between a suburb and a city)”³ or “mak[ing] the same trip regularly between work and home.”⁴ Consistent with these definitions, we recommend that the term “residence” be limited to the residence to or from which the employee regularly commutes, which generally is the employee's principal residence, and that the term “place of employment” not include any temporary or occasional places of employment.

“Residence” Should Not Include Ancillary Residences

Under the Proposed Regulations, an employee's “residence” for purposes of Section 274(l) is defined by reference to Treas. Reg. § 1.121-1(b)(1). Section 121 addresses the “exclusion of gain from sale or exchange of a principal residence,” and Treas. Reg. § 1.121-1(b) seeks to define the term “principal residence” for purposes of that exclusion. We believe that defining residence under Section 274(l) by reference to Section 121's definition of principal residence may be suitable in the context, but the Service's proposed reference to the “facts and circumstances” definition of residence would too broadly apply the Section 274(l) disallowance and impose undue administrative burden on employers. In particular, we recommend that the Service clarify that “residence,” for purposes of Section 274(l), excludes any location from which the employee does not regularly travel to work (i.e. commute). Without such clarification, the Service's expansive definition of residence would appear to disallow a deduction for occasional travel that Section 274(l) was not intended to cover. A simple way for the Service to fix this is by defining “residence” to mean principal residence under Section 121. Our suggested approach is consistent with the legislative aim of Section 274(l), which targets “commuting.” It also avoids imposing an undue burden on employers, who are not in a position to know when an employee may have established another residence versus a repeat personal travel destination.

First, adjustment to the Service's definition of residence is necessary because the Service's broader definition of residence would appear to disallow expenses for occasional travel that Congress did not intend to target with Section 274(l). Congress intended Section 274(l) to apply to commuting, not to irregular, infrequent business or personal travel. For instance, employees sometimes must interrupt or cut short vacations, trips to visit family, or other personal travel because of an unexpected business need requiring them to return to their place of employment. Or, on occasion, an unforeseen business obligation may prevent an employee from making a flight for a previously scheduled personal trip. In these situations, the employer may reimburse the cost of the last-minute change or even provide the flight on a company-owned aircraft. Even if this travel is to a vacation or family home or cabin that might constitute a residence, such travel does not reasonably constitute commuting. Further, there is no apparent policy reason for treating such a company expense differently based on whether the employee had gone to a residence or for a first-time visit before being called back for work.

Second, the Service's proposed definition imposes administrative burdens on employers. In the situations described above, an employer is not at all likely to know whether the employee was residing in a second location or visiting a non-residence during their trip. Employers are not in good position to track whether an employee spends enough time at another location for it to qualify as another residence. In contrast, an employer can reasonably be expected to determine and track an employee's principal residence or the location from which they regularly commute. To be sure, the occasional employee commutes (i.e. regularly and routinely travels) to work from a residence other than their principal residence. However, the vast majority of commuting originates at employees' principal residences (indeed, the taxpayer's “place of employment” is a “relevant factor” in determining his or her principal residence⁵), and for that reason, defining residence to be “principal place of residence” would achieve the statute's goal and provide a more administrable standard for employers.

“Place of Employment” Should Not Include Temporary or Occasional Places of Employment

Under the Proposed Regulations, the term “place of employment” remains undefined. We think that taxpayers can reasonably interpret this term. Consistent with the statutory backdrop that Section 274(l) apply to commuting expenses, the term “place of employment” for purposes of Section 274(l) should exclude a temporary or occasional place of employment. We note that any broader definition could eviscerate deductions for “away from home” business travel (if taxpayers must conclude that a short-term business destination counts as a place of employment), which Congress did not intend when it aimed to disallow commuting expenses. Our recommended approach is also consistent with prior Service guidance in which it has recognized exceptions for travel to temporary places of employment, even in cases where travel deductions are otherwise disallowed.⁶

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Thank you for the opportunity to share our comments.

Respectfully submitted,

Kevin P. O'Brien

Spencer F. Walters
Ivins, Phillips & Barker, Chartered