Deductions and Work-Travel Programs

Foreign Students Can’t Deduct Travel Costs of Work-Travel Program

The U.S. Court of Appeals for the District of Columbia Circuit, affirming the U.S. Tax Court, has held that foreign students who traveled to the United States as part of a work-travel exchange program couldn’t deduct their travel costs.

Seasonal or Temporary Jobs

Three students in foreign universities, residents of Finland, Russia, and Ireland, participated in the U.S. Department of State Summer Work Travel Program in 2012. The purpose of the program is to provide foreign college and university students opportunities to travel and experience U.S. culture while sharing their own cultures with Americans they meet. The students work in seasonal or temporary jobs to earn money to help defray part of their expenses.

While the Finnish student was in the United States, most of his time was spend working as a lifeguard, earning $4,404 in wages. When he finished the job, but before returning home, he traveled around some and hasn’t since returned to the United States.

He filed a Form 1040NR, U.S. Nonresident Alien Income Tax Return, claiming deductions for, among other things, $995 for airfare to and from the United States. The IRS denied the travel expense deduction and determined a tax deficiency.

The Russian and Irish students, both women, participated in the same program the same summer, The IRS similarly denied their claimed travel expense deductions. Collectively, the three are referred to as the “foreign students.”

The foreign students sought redetermination of their deficiencies in the United States Tax Court.

Court Sides with the IRS

In a consolidated case, the Tax Court upheld the denial of the foreign students’ deductions. The court found that their expenditures for travel and living expenses weren’t “away from home” because they lacked “a business reason to maintain a distant, separate residence” away from their principal places of employment and so they couldn’t claim a personal residence as a tax home.

The court rejected the foreign students’ claim that their status as “J visa” holders (issued to aliens residing in a foreign country that they have no intention of abandoning) necessarily rendered them “away from home” for the purposes of this case. The court noted that there was “no requirement at law that [the State Department program] participant maintain a second abode in his home country,” and that the foreign students didn’t incur additional travel and living expenses “because of the exigencies of [their] trade or business” but rather a result of their own personal choice to participate in the program.

Appellate Court Affirms

The appeals court upheld the Tax Court’s decision.

The foreign students argued, among other things, that under the “temporary work exception,” they weren’t required to show that their expenses were incurred due to business exigencies. But even if they were required to make such a showing, they could because their travel expenses were incurred to meet the program requirements and work in the United States.

The appellate court found that the tax code clearly sets out three requirements for a deduction — that the expenses be:

  1. Ordinary and necessary,
  2. Incurred while the taxpayer was away from home, and
  3. Incurred in the pursuit of a trade or business.

The court stated that even if the expenses were “necessary” and considered to be incurred “away from home” by reason of the temporary employment exception, the foreign students still failed to satisfy the third condition. In other words, regardless of whether the foreign students were considered to be away from home, they didn’t satisfy the business exigencies test and thus their expenses weren’t deductible.

Students’ Choices versus the Needs of Employers

The foreign students then argued that courts “need not inquire into why a temporarily employed taxpayer incurs travel expenses,” but the appellate court rejected this proposition as unsupported. Overall, the court found that the foreign students traveled to the U.S. because they chose to participate in the State Department program, and their travel expenses flowed from that choice rather than from the needs of their temporary employers. (Liljeberg, CA DC 11/2/2018)

Questions? Contact Brady Ware’s International Tax experts for assistance.

© 2018

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