Travel expense reimbursements for assignments involving breaks in service at work locations.

• Author: Fiore, Nicholas J.

Question (1). X assigns an employee of a California branch office to its Washington, DC headquarters for an eight-month period. While on assignment, the employee accepts a six-month assignment at a client's office in Washington, DC, beginning after the first assignment ends. The employee takes long-term leave (more than a month) at his residence in California between the assignments. Are the travel expenses in Washington, DC deductible?

Question (2). X assigns several employees from various branch offices to one of the departments at the headquarters office for five months. During this period, a selection process to fill permanent vacancies in that department is underway. When the five-month period ends, two of the employees are competitively selected for the positions. Pursuant to these positions, they will perform services for the department at the branch offices at which they were originally employed, and will also regularly travel to Washington, DC.

Analysis

Sec. 61(a)(1) provides that compensation for services (including fees, commissions, fringe benefits and similar items) is includible in gross income. In addition, remuneration for services that an employer pays to an employee is wages subject to employment taxes, which generally include income tax withholding and FICA taxes. Under Sec. 6051 and the regulations, wages are reported on Form W-2.

Sec. 62(a)(2)(A) allows a deduction for employees' reimbursed expenses covered under a reimbursement or other expense allowance arrangement with the employer. Sec. 62(c) provides that an arrangement will not be treated as a "reimbursement or other expense allowance arrangement" if (1) it does not require substantiation of covered expenses or (2) the employee may retain any amounts in excess of substantiated expenses.

Regs. Sec. 1.62-2 sets forth rules for reimbursement or other expense allowance arrangements and for payments made under such arrangements. An amount that an employer pays to an employee under an arrangement that meets specified requirements is treated as paid under an "accountable plan." Amounts are treated as paid under an accountable plan only if (1) the requirements of business connection, substantiation and return of excess (set out in detail in the regulations) are met and (2) the amounts are provided for business expenses deductible under Secs. 161-197 by the employee in connection with the performance of services as an employee of the employer. If one or more of the...