Tax Issues Faced by Pilots & Transportation Employees

Where a taxpayer is located when he incurs expenses and receives income can have significant tax implications. This can raise a number of difficult tax issues. This is especially true for pilots and other interstate transportation employees. The recent tax court case, Tucker v. Commissioner, T.C. Summary Opinion 2008-78, highlights a few of these difficulties.

The Facts & Procedural History

Tucker is a pilot for Southwest Airlines. Tucker maintained a residence in Birmingham, Alabama, and he would travel from Birmingham to Chicago so that he could fly passengers from and to Chicago. Tucker maintained an apartment in Chicago where he would stay overnight on occasion (i.e., he had a “crash pad” in Chicago, in airline lingo). Tucker’s supervisor was located in Dallas.  Tucker was not reimbursed for many of the travel expenses he incurred in going to and from and staying in Chicago.

Away from the “Tax Home”

These types of unreimbursed business expenses are generally deductible so long as they are incurred while the taxpayer is away from his “tax home.” Expenses traveling from the taxpayer’s residence to his place of business are generally non-deductible personal expenses.

A “residence” is generally where the taxpayer maintains the most connections. There are several factors that are to be considered in determining what location qualifies as the taxpayer’s residence, such as what state the taxpayer is registered to vote and drive, where the taxpayer’s bills and other correspondence are received, etc.

A “tax home” is typically the place where the taxpayer’s regular place of business is located. If there is more than one regular place of business, the taxpayer’s “tax home” is the taxpayer’s principal place of business.

Where is A Tax Home?

Tucker believed that his tax home was in Dallas, as that is where his supervisor was located. If this was true, Tucker would have been traveling from his residence to his work in Dallas, and then from his work in Dallas to Chicago. The expenses associated with the later segment may have been tax deductible.

The IRS and the U.S. Tax Court concluded that Tucker’s “tax home” was Chicago, as that is where many of his flights originated and terminated. According to the court, Tucker was merely traveling from his home in Birmingham to his work in Chicago, which makes the travel expenses non-deductible personal expenses. The travel expenses may have been deductible if Tucker’s “tax home” was in some city other than Chicago, such as Birmingham (possibly the airport that Tucker departed from in Birmingham).

The State Tax Implications

Although not discussed in the case, Tucker will also have to consider the state income tax consequences of where his income originates. Federal law provides that certain interstate transportation and commerce employees, such as pilots, are subject to tax in their state of residence and any state in which they earn more than 50 percent of their pay for being a pilot. This is determined by looking to whether the pilot’s flight time in any non-residence state exceeds 50 percent of the total flight time worked by the pilot while employed during the calendar year. The pilot may be entitled to a tax credit in his residence state for taxes on his pay that is paid to other states.

In Tucker’s case, this may mean that he may be subject to state tax on his pay in Alabama. He may also be subject to tax in Illinois or some other state, depending on whether he spends more than 50 percent of his flight time in that state. Tucker may get a tax credit in Alabama for any taxes paid to Illinois or the other state.

Taxpayers, including long-time pilots, are often surprised by these rules. The government usually raises the personal expense issue for the first time when the taxpayer undergoes an audit. With regard to the receipt of income, the state governments usually raise the issue for the first time by providing the taxpayer with a notice of lien or levying on the taxpayer’s assets.  These liens and levies are based on the taxpayer having not filed tax returns in the extra states and the states assessing the tax by sending the notice of assessment to the wrong address.  This is often triggered by the airlines incorrectly withholding and/or reporting income to the state governments.  Advance tax planning can help eliminate these types of tax problems and, in some cases, can produce significant tax savings.