ANTICIPATING TAX AUDIT OF SABBATICAL LEAVE EXPENSES

by MICHAEL A. LIEBERMAN
May 2, 1996


MY EXPERIENCE


I went on a six month sabbatical to Imperial College, London from Feb - July 1993, for the primary purpose of completing a book manuscript, Principles of Plasma Discharges and Materials Processing, published by J. Wiley in 1994.

I claimed the entire six months rent (even though my wife accompanied me), federal per diem daily rate for meals, my transportation expenses Berkeley-London-Berkeley (only one such trip can be deducted), and some modest expenses for shipping technical materials (books and papers) to and from London. (I had no commuting expenses in London; if I had, these would also be deductible.) I took this deduction on Schedule C as a deductible business expense. I have been filing a Schedule C yearly in my business as a "consultant, author, and lecturer".

I supplied a letter from my Department Chair (then Paul Gray) authorizing the sabbatical, rent receipts, transportation receipts, etc.

At the first audit (Oakland IRS OFfice, 1 hour), I brought all my papers, eg, drafts of chapters I had written, title pages of theses I had read, reviews I had done, etc. I brought all my receipts, and my logbook, which had a day-by-day listing of all my expenses while I was on sabbatical. The IRS made copies of all of this. I also showed them the book.

The entire amount was disallowed at the first audit. There was no reason given other than "does not meet IRS guidelines for a deductible expense". I believe the auditor considered that I had taken a vacation and had no reason to write my book in London rather than at Berkeley.

I subsequently supplied a letter from then Department Chair Messerschmitt explaining that I had taken a sabbatical for the purpose of research, book writing etc. I also supplied a letter from my host professor at Imperial explaining that I had made use of all facilities there, participated in research, meetings, used the library, etc. I also supplied a letter from the housing office of Imperial explaining that my rent would have been the same if I had not been accompanied by my wife. I also supplied pages from various tax preparation advice books re sabbaticals (about 8 hours of work to prepare all of this). All this material was mailed to the Oakland Office.

The entire amount was again disallowed by the same auditor. When I phoned the auditor, she said that the IRS did not consider education expenses to be deductible, and that she considered that I had gone on sabbatical to educate myself. She also said that in my day-to-day expense log, I had not written every day what I had done, so there was no evidence that I had been working rather than having a vacation.

At this point I hired a tax accountant, who examined the case (1 hour). She upheld my view of things and said the only real issue was deducting my sabbatical expenses on Schedule C rather than Schedule A. Since my sabbatical salary was paid by the University, the sabbatical was in connection with my University duties, not my consulting business (even though the principal purpose of the sabbatical was to write my book).

My accountant said there was no point appealing to the Oakland Office; "they will uphold their own employees". So I took the next step and appealed to the IRS District Office (in Walnut Creek).

My accountant accompanied me to the Walnut Office for the appeal. After about 5 minutes of discussion, the District Appeals Officer overruled the Oakland Office, with the provision that I transfer most of the deductions (in proportion to my University salary versus Schedule C income) from Schedule C to Schedule A. On Schedule A one can only deduct expenses that exceed 2% of gross income. Furthermore, one can get hit with an Alternate Minimum Tax if your Schedule A deductions are too large. My Alternate Minimum Tax turned out to be somewhat larger than my regular tax, so I had to pay that. So moving from Schedule C to Schedule A cost me about a thousand dollars in increased taxes. However, I still had an enormous tax savings from the sabbatical.


MY ADVICE

MAKE SURE you do not take a full year sabbatical. A temporary assignment away from home MUST BE LESS THAN ONE YEAR.

Keep a DAILY LOG of expenses while on sabbatical, including what you do EACH day.

SAVE all paper, emails, etc until you're sure there will be no audit (probably seven years is safe).

GET LETTERS before you go from your department chair and your host professor(s). The point to get across in these letters is that you are being sent away from home by your employer (The University of California) for business purposes (not for educational purposes). The business is research, book writing, etc. The letter should also make the point that it is the University policy to NOT reimburse the expenses for Professors on Sabbatical Leave. Getting these letters after you are audited is ok (this is what I did), but is not as convincing.

Get a letter from your LANDLORD saying that your rental expenses would be the same even if not accompanied by your spouse. You can then deduct all your rent expenses, rather than some fraction.

Use the FEDERAL per diem rate for meals (your actual meal expenses will be much lower than this, but the IRS accepts the federal per diem rate.

You are really in a strong position, because the IRS lawyers are extremely reluctant to take a case like this to court. So don't give up to much in the negotiations leading to a settlement.

SAMPLE LETTER from Chair


To Whom It May Concern:

This is to confirm that Professor <<name>> will be on Sabbatical Leave Assignment at <<college>> in <<city and country>>., from <<date>> through <<date>>. His/Her salary will be paid by the University of California. However, it is University policy to not reimburse the expenses of faculty members on Sabbatical Leave Assignment.

<<College>> is the most distinguished engineering college in the <<country>>. and has a strong research program in <<field>>, the area of Prof. <<name>> expertise, under the direction of Prof. <<name>>.

Professor <<name>> required duties during this Sabbatical Leave Assignment are to conduct research on new technologies in <<field>>. During this assignment, he/she will perform research on <<specifics>>. He/She will also <<describe other activities such as reviewing, proposal writing, book writing, etc>>. He/She will also collaborate with <<researchers>>. He/She will also attend scientific meetings and serve on various professional committees.

Sincerely yours,

<<name>>, Chair
Department of Electrical Engineering and Computer Sciences

SAMPLE LETTER from Host


To Whom It May Concern:

Professor <<name>> will have an unsalaried appointment as a Visiting Professor in my <<research group name>> from <<date>> through <<date>>. During that time, he/she will be given access to and make full use of <<college>> research and administration facilities, including the following: Professor <<name>> will participate in the research of the College and the <<name of group>>, including, but not limited to, the following: Sincerely,
<<name, position, institution>>

SAMPLE LETTER from Landlord


To whom it may concern:

The rent on <<description of location>> was <<rent>> per week from<<date>> through <<date>>, for the double occupancy of Professor <<name>> and <<name of spouse>>. <<Description>> is appropriate for either single or double occupancy. The rent charged for <<Description>> would have been the same whether a single person or two persons occupied the premises.

Sincerely,
<<name>>

Last updated 5/12/96 by Jean Richter, richter@eecs.Berkeley.EDU