Tax Implications of Remote Work – Be Aware July 16, 2019

Business Losses Were Not Passive Even Though Owner Lived out of State

(Fred and Lisa Barbara v. Comm., TCM 2019-50)

Fred Barbara sold his trucking business for tens of millions of dollars. Mr. Barbara used the proceeds from the sale to start a money-lending business. The office of the lending business was in Chicago and was staffed by two full-time employees–an accountant and a secretary. During the years 2009 through 2012, Mr. Barbara split his time between Chicago and Florida, living in Florida 60% of the year.

IRS thinks losses are passive. The lending business losses were large; Mr. Barbara lived out of state the majority of the year; and, he had two full time employees working in the lending business. Those facts made the IRS suspicious that the losses were passive and the IRS proposed taxes and penalties of more than $632,000. Does living in Florida for the winter months mean that a business owner did not (or could not) materially participate in his cold weather lending business? Not in this modern connected world.

Records were important. Mr. Barbara performed all executive functions for the lending business. He decided when to make loans, and he decided how to handle defaulted loans. He managed over 40 outstanding loans during the years at issue. He had no other significant work-related demands on his time besides the lending business. The court was satisfied with Mr. Barbara’s records and credible testimony that he worked enough hours during the year to satisfy the material participation requirements of §1.469-5T(a). For each year, Mr. Barbara’s total hours participating in the lending business were (1) 460 hours or more while in Chicago and (2) 240 hours or more while in Florida. Thus, his total hours participating in the lending business each year were 700 or more. Both while he was in Chicago and in Florida, Mr. Barbara’s participation in the lending business was regular, continuous, and substantial. The court ruled that Mr. Barbara materially participated in the lending business during each year from 2009 through 2012.

Clients can work from any place in the world. If your client is working remotely for months on end at his beach house, mountain chalet, or on a cruise ship, the client must be able to show that he worked most everyday (regular, continuous, and substantial) while he was away from the business location. Telephone records, e-mail records and copies of correspondence are important. Advise your client accordingly.