While commuting expenses are generally nondeductible under Sec. 262, transportation costs to a work location are deductible, according to Rev. Rul. 99-7, if the taxpayer travels between his or her residence and:

1. A temporary work location outside the metropolitan area where the taxpayer lives and normally works.
2. A temporary work location, regardless of distance, if the taxpayer has one or more work locations away from his or her residence.
3. Another work location, if the taxpayer’s residence is his or her principal place of business under Sec. 280A(c)(1)(A).

In Corey L. Wheir, TC Summ. Op. 2004-117, the Tax Court considered, for the first time, the definition of “metropolitan area,” to determine if the taxpayer’s transportation expenses were deductible.

Facts

The taxpayer was a union boilermaker living and working in Wisconsin Rapids, WI. He received assignments from the union office and was dispatched on jobs ranging from one day to several months, located throughout Wisconsin. He did not report to any union office, had no other fixed place of business and was not allowed, under union rules, to reject any assignments. Most of the assignments did not require overnight travel.

The taxpayer deducted travel expenses for jobs greater than 35 miles from his home. The IRS disallowed all the claimed travel expenses; it contended that, because Wisconsin Rapids is not a metropolitan area as defined by the U.S. Census Bureau, the entire state was the taxpayer’s normal work area in applying Rev. Rul. 99-7.

Tax Court’s Decision

The court disagreed with the Service’s interpretation, holding that Rev. Rul. 99-7 does not define “metropolitan area” or refer to another official standard (i.e., the Census Bureau definition). By following the IRS’s interpretation, the court reasoned that taxpayers living outside such areas would be at a disadvantage vis--vis taxpayers living within metropolitan boundaries. As a result, it sustained the taxpayer’s position of deducting transportation expenses for assignments more than 35 miles from his home.

Conclusion

Tax advisers need to be aware that Wheir, a Tax Court Summary Opinion, cannot be cited as authority. However, it does provide some practical guidance for deductions claimed under Rev. Rul. 99-7 when the taxpayer’s metropolitan area may not be clear.

Definition

A Sec. 404(c) plan is an individual account plan (generally a profit-sharing, Sec. 401(k) or money-purchase plan) that provides a participant the opportunity to choose from a broad range of investment alternatives that includes at least three diversified investment categories with materially different risk and return characteristics.

Not only must participants be given the opportunity to exercise investment control, they must affirmatively take advantage of and actually exercise it. A participant must have a reasonable period in which to give investment instructions (written or otherwise, with an opportunity for a written confirmation) to an identified fiduciary or designated agent. The plan fiduciary must ensure that participants are provided—or can obtain on request—basic information about investment choices.

If a participant exercises control over his or her account, then (1) the participant is not a plan fiduciary because of such exercise; and (2) plan fiduciaries do not bear the risk of investment loss due to the investment choice a participant makes.

Requirements

The Sec. 404(c) regulations are complex when analyzed, yet simple when taken at face value. The heart of the requirements are access to appropriate information, ability to access the account to effect a change and adequate education.

Frequency of Investment Instructions

For participants to have exercised proper control over account investments, they must be able to transfer among investment alternatives at intervals reasonably commensurate with an investment’s anticipated volatility. The regulations’ premise is to allow investment transfers in such a way as to minimize losses.

Volatile Investment Rule

At least one of the core investment alternatives must allow participants to give investment instructions as frequently as they can for any “volatile” investment fund. The core investment need only allow transfers into the alternative investment.

Broad Range of Investment Alternatives

When taken together, the investment options must allow each participant to diversify investment in the self-directed portion of his or her individual account. Fiduciaries have a duty to provide for the investment of idle plan assets.

Self-Directed Brokerage Accounts

Such accounts raise issues when the fiduciary intends for the investment choice structure to satisfy the Sec. 404(c) rules. While it is possible for these accounts to be part of a Sec. 404(c) plan, caution is advised and certain plan procedures should be followed.

Other Issues

Many issues arise in the day-to-day operation of a plan that affect the protection offered by the Department of Labor regulations under Sec. 404(c). It is important to implement transactional protection, procedures, policies and communication.