The deductibility of traveling expenses for foreign nationals on U.S. internships.

A foreign national on a U.S. internship may deduct away- from-home expenses even though he was previously a student and did not work for the foreign employer.

If the internship is properly planned, a foreign national on a U.S. internship is eligible to deduct traveling expenses. Even if the individual was previously a student and did not perform services for the foreign company before taking the U.S. internship, it appears that the internship can be structured so as to permit traveling expense deductions within the strictures of Flowers, 326 US 456 (1946), and Hantzis, 638 F2d 248,256 (1st Cir. 1981). The intern should be recruited by the foreign employer and then sent to the U.S. on the internship. The U.S. company should not recruit the intern directly.

The Hantzis decision primarily relied on Flowers, which stated that "the exigencies of business rather than the personal conveniences and necessities of the traveler must be the motivating factors" in determining a taxpayer's home. Mrs. Hantzis maintained her usual residence in Boston; however, she had no business relationship to Boston. She was unable to find summer employment in Boston and on her own found employment in New York. She offered no evidence of a business connection to Boston, and her employer was in no way involved in the travel between, or maintenance of, her dual residence. Mrs. Hantzis argued, pursuant to a doctrine supposedly enunciated by the Supreme Court in Peurifoy, 358 US 59 (1958), that she was excepted from the business exigencies requirement due to the temporary nature of her assignment and that she should be eligible to deduct the away-from-home expenses she incurred in New York. The court disagreed, citing the temporary employment doctrine noted in Frederick, 603 F2d 1292, 1294-1295 (8th Cir. 1979):

Where a taxpayer reasonably expects to be employed in a location for a substantial or indefinite period of time, the reasonable inference is that his choice of a residence is l a personal decision, unrelated to any business necessity. Thus, it is irrelevant how far he travels to work. The normal expectation, however, is that the taxpayer will choose to live near his place of employment. Consequently, when a taxpayer reasonable [sic] expects to be employed in a location for only a short or temporary period of time and travels a considerable distance to the location from his residence, it is unreasonable to assume that his choice of a residence is dictated by personal convenience. The reasonable inference is that he is temporarily making these travels because of a business necessity.

Mrs. Hantzis, however, had no business relation to Boston, and the court thought that the doctrine had no application "where the taxpayer has no business connection with his usual place of residency." In effect, the business exigency was still necessary. The court further held that the assignment "must establish the existence of some sort of business relation both to the location she claimed as 'home' and to the location of her temporary employment."

One could take the position that this case would prevent an intern from deducting traveling expenses for the same reasons as Mrs. Hantzis. Nevertheless, provided the intern has clearly made "some sort of business relation" in both places, the intern should be eligible to deduct traveling expenses in connection with the internship. Thus, the intern should be identified by a foreign employer and enter into an internship agreement with the foreign employer, and the foreign employer should send the individual to the U.S. subsidiary for the internship. The likelihood of success can be enhanced by incorporating the following provision into the internship agreement:

A representative of company X initially identified the employee in country A and entered into agreement while the individual was in A. The individual should be identified as a long-term A national with all primary relations (business and personal) in A.

Upon completion of the assignment, the individual should report back to and debrief to those representatives of company X who first identified him. (This provision is not a requirement but would lend additional strength to the company's position.)

The argument would be further strengthened with a reimbursement agreement. This would demonstrate that the travel is motivated and supported by the exigencies of the company.

FROM JULIE BURBACH AND ARTHUR L. FISHER, CPA, WASHINGTON, D.C.