Working on a Ship in the Gulf of Mexico

[Lion EA]

Client lives in CT with parents.  A Louisiana employer hires him to work on a ship in the Gulf of Mexico for a couple weeks at a time, then sends him home, then back again, etc.  Withholds federal FIT but no state.  He has no other work location in CT or LA or anyplace else other than a ship for a couple weeks at a time.  During 2013, this began in April, so less than a year.  But, it has continued, so now more than a year.

 

Does LA have any claim to him?  Does he need to file a LA return?

 

I think we lost any benefits to a temporary job when it went over a year, right?

 

But, I'm most concerned with his work location.  If out in the Gulf of Mexico, is it LA or no state?

[ILLMAS]

Chapter 7 – Tax Home/Travel/Meals

The fishing industry has many crewmembers that live in one location and then travel to various ports where they obtain seasonal jobs on one or more fishing vessels. For example, a crewmember may live in Idaho, fly to Alaska during various fishing seasons and then fly back to his residence after the season is over, or until he works again. It is common for a fisher to deduct the cost of traveling from her personal residence to the port or boat as a business expense.

The location of a fisher’s principal or regular post of employment (tax home) serves as the point of origin for computing allowable travel expenses as well as meals and lodging incurred while "away from home."

An individual is considered to be "away from home" if

his duties require him to be away from the general area of his tax home (defined later) substantially longer than an ordinary day’s work, and

sleep or rest is necessary to meet the demands of work while away from home.

A taxpayer’s "tax home" is the taxpayer’s principal or regular post of employment during the taxable year regardless of the physical location of his or her residence.

If a taxpayer has more than one regular place of business, then his tax home is his main place of business. Factors to be considered are:

the time spent in each location;

the level of activity in each location; and

whether the income from each location is significant or insignificant

If fishing is the major source of income for the taxpayer, and the fisher does not maintain a personal residence at the same location as the home port of the fishing vessel, travel expense from a fisher's personal residence to the home port of the fishing vessel are personal commuting expenses that are not deductible under IRC § 162(a)(2). The Tax Court held in Tucker v. Commissioner, 55 T.C. 783 (1971), that &quot… if a taxpayer chooses for personal reasons to maintain a family then his additional traveling and living expenses are incurred as a result of that personal choice and are therefore not deductible.&quot Crewmembers who annually return to the same boat to fish may also be denied the travel expense deduction.

A fisher’s principal or regular post of employment may be regarded as being aboard the fishing vessel or at the port where voyages are ordinarily begun and ended, depending on the volume of business activity conducted on the vessel as compared to business conducted at the port. Thus the &quottax home&quot of a fisher may be the vessel itself or the home port of the fishing vessel.

Rev. Rul. 55-235, 1955-1 C.B. 274, holds that the tax home of commercial fishers is their home port. Evidently, the crewmembers of the fishing vessel at issue in the revenue ruling made frequent trips to their home port, where a large portion of their commercial activities (that is, selling fish) took place. The business locus of these fishers was, therefore, more their home port than their vessel.

By contrast, Rev. Rul. 67-438, 1967-2 C.B. 82, holds that a naval officer assigned to permanent duty aboard a ship having regular eating and living facilities has his or her permanent post of duty, and thus his or her tax home, aboard the moving vessel. The revenue ruling reasons that a ship is a naval officer's regular post of duty, much like a land base is the regular post of duty of an officer in any of the military services permanently assigned to such a base. Such a ship combines the place where a naval officer performs occupational duties with many of the attributes of a home in the ordinary sense.

If the commercial fishers perform the majority of their occupational duties away from their home port while aboard their vessel, and if the vessels have regular eating and sleeping facilities, the fact that the crewmembers do their eating and sleeping in regularly provided facilities makes their situation analogous to that of the naval officer in Rev. Rul. 67-438. In contrast to the fishers described in Rev. Rul. 55-235, the fishers sell most of their catch at points other than their home port, their vessels are outfitted initially at their home port, and they do not, after embarking, return frequently to their home port.

Therefore, the tax home for the commercial fishers will be the location where their major source of income is derived based on all of the facts and circumstances. Their tax home may be where their personal residence is located, it may be where their home port is, or it may be their vessel. No deduction should be allowed for meals provided for crewmembers whose tax home is their vessel because the expenses are not incurred &quotaway from home.&quot

In addition, whenever the vessel is the taxpayer’s tax home and the vessel is at port, whether at home port or another shore point, the area in the vicinity of the vessel is considered part of the fisherman's tax home. An individual's tax home is not a particular place, but it includes the general locality in which he or she is customarily employed. See Rev. Rul. 55-109, 1955-1 C.B. 261, 263, modified by Rev. Rul.90-23, 1990-1 C.B. 28, and Kroll v. Commissioner, 49 T.C. 557, 561-562 (1968).

Some taxpayers do not have a regular or main place of business and there is no place where they regularly live. In this case, they would be considered itinerant (transient), which would not entitle them to travel expense deductions because they are never considered to be traveling away from home.

Once the fisher’s tax home has been determined, then the amount of the allowable expenses and limitations can be determined.

IRC § 162(a) provides, in part, that a deduction shall be allowed for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business.

IRC § 274(d) provides, in part, that no deduction shall be allowed under section 162 for any expenditure with respect to traveling away from home unless the taxpayer substantiates the amount, time, place, and business purpose of such expenditure by: (1) adequate records; or (2) sufficient evidence corroborating his own statement.

IRC § 262 provides that no deduction shall be allowed for personal, living, or family expenses.

Traveling expenses include travel fares, meals and lodging, and expenses incident to travel.

Treas. Reg. § 1.274-5 allows the Commissioner to create an optional method of computing travel expenses, including a per diem deduction for meals and incidental expenses, which satisfy the substantiation requirements.  The optional method of substantiation is provided in a revenue procedure which is generally updated annually.  Taxpayers are not require to use the optional method of substantiation.  A taxpayer may deduct actual allowable expenses if the taxpayer substantiates by adequate records or other sufficient evidence.

In general, most fishers are not reimbursed for meals.  In computing their share of the catch for fishers, it is common that a set amount per day is deducted for meals or groceries. If the amount paid by the fisher in calculating his share of the catch is not included in income reported to and by the fisher, it must be added back to avoid a double tax benefit: an exclusion from income and a claim for per diem.

The courts have held that no deduction may be claimed for meals if no expenses were paid or incurred by the individual.   An employee or self-employed individual who pays or incurs incidental expenses, but not meal expenses, may claim either the actual expenses or an amount for incidental expenses as provided in the annual revenue procedure for per diem allowances.  The per diem rate for 2010 is $5 per day. 

Where a set amount has been deducted for meals, a fisher, who is away from home, is entitled to use the optional method for computing meals and incidental expenses even if the amount paid is less than the federal per diem rate. Actual receipts are required to substantiate lodging.

In general, whether a fisher substantiates his expenses by either the actual method or the optional method, only 50% of the business-related meals and entertainment expenses may be deducted.  This applies to both employees and self-employed individuals. There are limited exceptions, such as amounts related to expenses that are required by Federal law to be provided to crewmembers of a commercial vessel.  The legislative history and the courts have held, however, that this exception does not apply to fishing vessels.

Detailed information on travel expenses and recordkeeping requirements are available in Publication 463, Travel, Entertainment, Gift and Car Expenses.

For a self-employed fisher, these expenses would be deductible as a business expense on Schedule C. If the fisher is an employee, then the expenses are deductible as employee business expenses reportable on Form 2106, Employee Business Expenses or on Form 2106-EZ, Unreimbursed Employee Business Expenses.

A fisher’s status as self-employed or employee can change from voyage to voyage.  See Chapter 3, Employment Status.

Examination Techniques

Establish the location of the taxpayer’s residence.

Establish the various locations of the taxpayer’s work during the year to determine the taxpayer’s "tax home." 

Determine if the taxpayer has "minor" or secondary work locations for which he may qualify for living expenses for work away from his tax home. 

[Lion EA]

OK, talked to client (instead of just him mom) who says he's on a ship 200-500 miles out in international waters for a month at a time, them back to CT for a month, and repeat.  So, NO work location in LA or CT or any state.  With work location in international waters (explains why no state withholding) and CT has always been his home and continues to be his home between "voyages," he's taxed as a CT resident, right?  CT considers you as a resident until you move to another state (or out of the country) and "stick" the landing.  He hasn't moved out of CT as far as I can tell, per CT's rules.

 

His work location is in international waters.  He could live in LA or anyplace.  With a month off at a time, he chooses to remain at his parents' home in CT.  But, I would think it's just commuting to get back to the port when the ship is ready to sail, yes?

 

How would LA view this?  Is he just visiting his family in CT?  He's not required to live anyplace, just be on board the ship when it's ready to sail.

[kcjenkins]

LA should have no claim on him.  His travel is commuting.  

[Lion EA]

Yep, talking with client confirmed that view.  He boards a ship, his work location, at a LA port.  He lives and works on the ship for a month or so in international waters.  He returns to his family home in CT between assignments, about a month off each time.  No withholding was done for LA.  Filed CT resident return and RI nonresident, because a prior job withheld for RI when he was actually in the Pacific Ocean in international waters (but had left from a port called Newport in OR, so some HR person coded his work location as Newport, RI, and withheld accordingly.  Client had direct deposit and did not see his paperwork while on the ship for a year, spanning two tax years, as his mailing address was his parents' home in CT.)  He was always a CT resident from birth; once a CT resident, CT does not consider you a nonresident until you leave AND "stick" the landing, establishing that you actually live someplace else.  Doesn't want to lose their residents and their tax money to FL where many have winter homes, buy their cars, etc.