Chief Counsel Advice - Letter Ruling CA 200026025

Chief Counsel Advice

Subject: Rev. Rul. 99-7 Issues

This Chief Counsel Advice follows up on our memorandum to you dated May

10, 2000, regarding the tax treatment of employer-reimbursed

transportation expenses, and it provides additional guidance regarding

"temporary" and "regular" work locations for purposes of Rev. Rul. 99-7,

1999-5 I.R.B. 4. This memorandum may be shared with field offices. Chief

Counsel Advice is not binding on Examination or Appeals and is not a final

case determination. This document is not to be relied upon or otherwise

cited as precedent.

BACKGROUND

As discussed in our earlier memorandum, business expense reimbursements

paid by employers to employees generally are wages subject to income tax

and employment taxes unless the expenses are deductible business expenses

reimbursed pursuant to an accountable plan. Rev. Rul. 99-7 provides rules

for determining whether daily transportation expenses (that is,

transportation expenses incurred in going between the employee's residence

and a work location) are deductible business expenses.

In our discussions with you, we have assumed that the pertinent rule in

Rev. Rul. 99-7 is holding 2, which states:

If a taxpayer has one or more regular work locations away from the

taxpayer's residence, the taxpayer may deduct daily transportation

expenses incurred in going between the taxpayer's residence and a

temporary work location in the same trade or business, regardless of

the distance.

Generally an employee's regular work location is a location at which the

employee works or performs services on a regular basis. An employee may be

considered as working or performing services on a regular basis whether or

not the employee works or performs services at that location every week or

on a set schedule. See Rev. Rul. 9023, 1990-1 C.B. 28 (obsoleted on other

grounds by Rev. Rul. 99-7). Rev. Rul. 90-23 provides as an example that

daily transportation expenses incurred by a doctor in going between the

doctor's residence and one or more offices, clinics, or hospitals at which

the doctor works or performs services on a regular basis are nondeductible

commuting expenses.

On the other hand, a temporary work location is a location at which the

employee works or performs services on a temporary basis. Rev. Rul. 99-7

provides a 1-year standard for determining whether employment with respect

to any particular work location is temporary rather than regular:

* If employment at a work location is realistically expected to last

(and does in fact last) for 1 year or less, the employment is temporary in

the absence of facts and circumstances indicating otherwise.

* If employment at a work location is realistically expected to last

for more than 1 year or there is no realistic expectation that the

employment will last for 1 year or less, the employment is not temporary,

regardless of whether it actually exceeds 1 year.

* If employment at a work location initially is realistically expected

to last for 1 year or less, but at some later date the employment at that

location is realistically expected to exceed 1 year, that employment will

be treated as temporary (in the absence of facts and circumstances

indicating otherwise) until the date that the realistic expectation

changes, and will be treated as not temporary after that date.

Determining whether employment at a particular work location is temporary

or regular depends on applying the rules set forth above to the facts and

circumstances of that employment.

We have provided below additional guidance, illustrated by examples, in

which we assume that the employees each have a regular work location away

from the residence.

BREAK IN SERVICE

You have asked about the effect a break in service at a particular

location will have on determining whether an employee's employment at the

location is temporary. The issue arises when an employee is instructed to

work at a certain client's office for a specified period, then work at

another site, and then work again at the client's office for another

specified period. The question is whether the break in service at the

particular location is so significant that the employer may treat

employment at the location as 2 separate periods of employment rather than

1 continuous period of employment.

Because of the highly individual nature of the factual inquiry involved,

the IRS has not issued general guidance in this area. The determination

whether a break is so significant that it warrants treating the two

periods of employment as separate periods or constitutes a hiatus in one

continuous period of employment is made by taking into account all facts

and circumstances.

While there is no general guidance on what is considered a significant

break, we believe that a break of 3 weeks or less is not significant and

will not "stop the clock" in applying the 1-year limitation. On the other

hand, for employers administering transportation expense reimbursements

under an accountable plan, we believe that it is reasonable to treat a

break of at least 7 months as significant, thereby treating two work

segments separated by a 7-month break as separate periods of employment

for applying the 1-year limitation. In our view, this would be the case

regardless of the nature of the employee's work activities or the nature

of the break, and regardless of whether the subsequent employment at the

work location was anticipated. For the 7-month break to be considered a

significant break, we believe there must be at least a 7-month continuous

period during which the employee is absent from the work location in

question.

This interpretation of what is a significant break period can be

illustrated by the following examples:

* Example 1 (expected break of 3 weeks): On January 1, Employee Blue

receives the following work assignments: work at Client DEF's office for

an 8 month period (January 1 -August 31), work exclusively at Client GHI's

office for 3 weeks (September 1 - September 21), and then work again at

DEF's office for a 4-month period (September 22 - January 22).

Because the 3-week break in service at DEF's office is inconsequential, on

January 1 there is a realistic expectation that Employee Blue will be

employed at DEF's office for a period exceeding 1 year (January 1 through

January 22 of the following year). Employee Blue's employment at DEF's

office is not temporary, and any reimbursements of his transportation

expenses between his residence and DEF's office are taxable wages.

* Example 2 (expected break of 7 months): The facts are the same as in

Example 1, except the interim assignment at Client GHI's office will last

for 7 months (September 1 - March 31 of the following year), followed by

the 4-month assignment to DEF's office (April 1 - July 31).

Because on January 1 there is a realistic expectation that Employee Blue

will work at Client DEF's office for 2 discrete periods of employment,

separated by a period of 7 or more months during which Employee Blue will

be absent from DEF's offices, and each of these periods will last for 1

year or less, Employee Blue's employment at DEF's office is considered

temporary for each of these periods, and reimbursements of his

transportation expenses between his residence and DEF's office, paid under

an accountable plan, are not taxable wages. This would be the case even if

Employee Blue had spent some of the interim 7-month period on vacation or

at training rather than working at GHI's office.

* Example 3 (unexpected reassignment after 3 weeks): Employee Yellow is

instructed to work at client JKL's office for an 8-month period (January 1

- August 31). At the end of this assignment, she is assigned to work at

Client MNO's office for a 10-month period (September 1 - June 30 of the

following year). However, on September 22, 3 weeks into the MNO

assignment, Employee Yellow is reassigned to work at JKL's office, due to

unforeseen complications, for a 4-month period (September 22 - January 22

of the following year).

Here, upon commencing service at JKL's office, there was a realistic

expectation that the employment at that location would last for 1 year or

less, and that expectation did not change during the initial 8-month

assignment. However, because the 3-week break is insignificant, the

reassignment to JKL's office constitutes a change in Employee Yellow's

expectation. As mentioned above, Rev. Rul. 99-7 provides:

If employment at a work location initially is realistically expected

to last for 1 year or less, but at some later date the employment is

realistically expected to exceed 1 year, that employment will be

treated as temporary (in the absence of facts and circumstances

indicating otherwise) until the date that the taxpayer's realistic

expectation changes, and will be treated as not temporary after that

date.

Therefore, when Employee Yellow returns to Client JKL's office on

September 22, she has the expectation that her employment there will last

for more than 1 year (that is, beginning with the initial January 1

of her transportation expenses between her residence and JKL's office

during the reassignment are taxable wages.

* Example 4 (unexpected reassignment after 7 months): The facts are the

same as in Example 3, except the unexpected reassignment to Client JKL's

office (which will, as in Example 3, last for 4 months) occurs 7 months

after Employee Yellow started her assignment at Client MNO's office.

following the initial assignment is significant, the reassignment is

considered a separate period of employment rather than a change in

each of these periods, and reimbursements of her transportation expenses

between her residence and JKL's office, paid under an accountable plan,

are not taxable wages. This would be the case even if Employee Yellow had

spent some of the interim 7-month period on vacation or at training rather

than working at MNO's office.

INFREQUENT WORK LOCATIONS

You have also asked whether an employer may treat an employee's

transportation expenses as deductible business expenses under Rev. Rul. 99-

7 when the employee performs services at the location on a recurring, but

infrequent or sporadic, basis for a period of more than one year.

We believe that, in certain situations, employment of this nature may be

so infrequent or sporadic that it would be impractical or unreasonable to

focus solely on the expectation of the total span of employment at the

location in applying the 1-year limitation established in Rev. Rul. 99-7.

In these particular cases, rather, we believe that the realistic

expectation surrounding the infrequent or sporadic nature of the

employment at that other location may be treated as satisfying the 1-year

limitation on employment at a temporary work location.

As in the "break in service" area, because of the highly individual nature

of the factual inquiry involved, the IRS has not issued general guidance

to define when an assignment is so infrequent or sporadic that it may be

treated as if it were temporary under the 1-year limitation. For employers

administering transportation expense reimbursements under an accountable

plan, we believe that, if there is an initial realistic expectation that

an employee will perform services at a work location for a period

exceeding 1 year, but for no more than 35 workdays (or partial workdays)

during each of the calendar years within that period, then employment at

that location may be treated as temporary (rather than nontemporary) for a

calendar year in which the employee actually works no more than 35

workdays (or partial workdays) at that location. We also believe, however,

that if employment at a work location initially may be treated as

temporary under the above interpretation of infrequent work at a location,

but at some point this expectation changes, then the assignment at that

location will not be considered temporary for at least the remainder of

that calendar year.

This interpretation of infrequent employment at a work location can be

illustrated by the following examples:

* Example 5: On January 1, Employee Green, who has a regular office at

her employer's headquarters, is assigned by her employer to manage 5

projects, each of which is expected to last 18 months. Projects 1 and 2

each require her presence at least once a week, but Employee Green only

visits the other project sites on an "as needed" basis (35 times or fewer

within a calendar year for each project).

Project sites 1 and 2 are not temporary work locations because Employee

Green goes to each site for more than 1 year, and not on an infrequent

basis. However, project sites 3, 4, and 5 are temporary work locations,

even though the employment is expected to span more than 1 year at each

site, because she expects to go to each of these project sites no more

than 35 times during each calendar year.

* Example 6: The facts are the same as in Example 5, except that, on

October 1, Employee Green is instructed by her employer to spend all of

her working hours during October and November at project site 5 (while

other employees fill in for her on the other projects). On December 1 she

resumes her previous schedule, and each of the projects is completed on

time.

As of October 1 and for the rest of the calendar year, project site 5 is

no longer considered a temporary work location because at that point there

is a realistic expectation that Employee Green will spend more than 35

days at the site during that calendar year. Beginning January 1 of the

second year, however, project site 5 is again a temporary work location

because the realistic expectation of the number of visits to that site in

the second calendar year did not change.