Rev. Rul. 73-578

Advice has been requested whether traveling expenses (including amounts expended for meals and lodging) are deductible for Federal income tax purposes under the circumstances described below.

Prior to January 1, 1973, A, a citizen of a foreign country, was regularly employed in his native country performing research. A was granted a leave of absence from his regular employment for up to six months to engage in research for a different employer in the United States. A came to the United States on January 1, 1973, under a 6-month visa to work for the United States employer with the intention of returning to his former position in his native country. On May 10, 1973, A agreed to continue his employment in the United States with the United States employer for an additional 14-month period and performed certain acts which established A as a resident alien. A also obtained the necessary visa extension from the immigration authorities.

Section 1.1-1(a)(1) of the Income Tax Regulations provides, in part, that section 1 of the Internal Revenue Code of 1954 imposes an income tax on every individual, resident or nonresident, other than a nonresident alien individual, subject to the tax imposed by section 871(a) or section 877. Section 1.1-1(b) of the regulations provides, in part, that all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States.

Section 871(b)(1) of the Code provides that a nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1 or 1201(b) on his taxable income which is effectively connected with the conduct of a trade or business within the United States.

Section 873 of the Code provides, in part, that in the case of a nonresident alien individual, the deductions shall be allowed only for purposes of section 871(b) and only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States.

Section 864(b)(1) of the Code provides, in part, with the exception not relevant to the instant case, that the term "trade or business within the United States" includes the performance of personal services within the United States at any time within the taxable year.

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including traveling expenses (which includes 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.

In order for traveling expenses to be deductible under section 162(a) of the Code, they must satisfy three conditions, namely, (1) they must be reasonable and necessary, (2) they must be incurred while away from home, (3) they must be incurred in pursuit of a trade or business. See Commissioner v. J. N. Flowers, 326 U.S. 465 (1946), 1946-1 C.B. 57, and Rev. Rul. 60-189, 1960-1 C.B. 60.

Originally, A was granted a six month leave of absence to engage in research for an employer in the United States. A expected to resume his former employment following his six month leave of absence. However, when A agreed on May 10, 1973, to continue his employment in the United States with the United States employer for the additional period and performed certain acts, A became a resident alien. Under these circumstances, during the period January 1, 1973 until May 9, 1973, A's relationship and regular post of duty with his foreign employer and his "tax home" remained in his native country.

Accordingly, reasonable and necessary amounts expended for traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) in pursuit of A's business during the period January 1, 1973 through May 9, 1973, were allowable deductions under section 162(a) of the Code in arriving at adjusted gross income under section 62.

However, commencing May 10, 1973, amounts expended for traveling expenses (including meals and lodging) in connection with A's employment in the United States are not allowable deductions under section 162(a) of the Code, unless such expenditures are incurred in connection with employment while A is away from his new overnight "tax home", that is, the location of his employment with his United States employer.

For 1973, A is a dual status alien. A must therefore report on Form 1040, U.S. Individual Income Tax Return, the total compensation he receives for 1973 from his United States employer, whether received during the period of nonresidence or the period of residence. Such compensation is subject to tax at graduated rates. However, because the schedules on Form 1040 do not reflect many of the factors that are involved in computing tax for a dual status tax year, it is necessary for A to show tax computations and other explanatory matter on separate statements, or schedules, which should be attached to and filed with his Form 1040 on or before April 15, 1974.