COMMISSIONER OF INTERNAL REVENUE v. SOLIMAN

• Decision Date: 12 January 1993
• Citation: 506 U.S. 168
• Court: U.S. Supreme Court

OCTOBER TERM, 1992

Syllabus

COMMISSIONER OF INTERNAL REVENUE v.

SOLIMAN

CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

No. 91-998. Argued October 5, 1992-Decided January 12, 1993

During the 1983 tax year, respondent Soliman, an anesthesiologist, spent 30 to 35 hours per week administering anesthesia and postoperative care in three hospitals, none of which provided him with an office. He also spent two to three hours per day in a room in his home that he used exclusively as an office, where he did not meet patients but did perform a variety of tasks related to his medical practice. His claimed federal income tax deduction for the portion of his household expenses attributable to the home office was disallowed by petitioner Commissioner, who determined that the office was not Soliman's "principal place of business" under 26 U. S. C. § 280A(c)(1)(A). The Tax Court disagreed and allowed the deduction. In affirming, the Court of Appeals adopted the test used in the Tax Court, under which a home office may qualify as the "principal place of business" if (1) the office is essential to the taxpayer's business; (2) the taxpayer spends a substantial amount of time there; and (3) there is no other location available for performance of the business' office functions.

Held: Soliman was not entitled to a deduction for home office expenses.

Pp. 172-179.

(a) The test used by the Court of Appeals is rejected because it fails to undertake a comparative analysis of the taxpayer's various business locations. This Court looks to words' "ordinary, everyday senses" in interpreting a revenue statute's meaning. E. g., Malat v. Riddell, 383 U. S. 569, 571. Section 280A(c)(1)(A) refers to the "principal place of business," and both the commonsense and dictionary meanings of "principal" demonstrate that this constitutes the most important or significant place for the business, as determined through a comparison of all of the places where business is transacted. Contrary to the Court of Appeals' suggestion, the statute does not allow for a deduction whenever a home office may be characterized as legitimate. Pp. 172-174.

(b) Although no one test is always determinative and each case turns upon its particular facts, there are two primary considerations in deciding whether a home office is the principal place of business. First, the relative importance of the functions performed at each business location must be analyzed. This requires, as a preliminary step, an objective

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description of the particular characteristics of the business in question. If the nature of that business requires the taxpayer to meet or confer with a client or patient or to deliver goods or services to a customer, the place where that contact occurs, though not conclusive, must be given great weight. Moreover, if the nature of the business requires that its services are rendered or its goods are delivered at a facility with unique or special characteristics, this is a further and weighty consideration. Contrary to the Court of Appeals' ruling, the essentiality of the functions performed at home, while relevant, is not controlling, whereas the availability of alternative office space is irrelevant. Second-and particularly if the foregoing analysis yields no definitive answer-the decisionmaker should compare the amount of time spent at the home with the time spent in each of the other places where the business is transacted. If the comparative analysis required by the statute reveals that there is no principal place of business, the courts and the Commissioner should not strain to conclude that a home office qualifies by default. Pp. 174-178.

(c) Application of these principles demonstrates that Soliman's home office was not his principal place of business. His home office activities, from an objective standpoint, must be regarded as less important to his business than the tasks he performed at the hospitals. The actual treatment of patients at these facilities having special characteristics was the essence of the professional service he provided and was therefore the most significant event in the professional transaction. Moreover, the hours he spent in the home office, when compared to the time he spent at the hospitals, are insufficient to render the home office the principal place of business in light of all of the circumstances of this case. Pp. 178-179.

935 F. 2d 52, reversed.

KENNEDY, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and WHITE, BLACKMUN, O'CONNOR, and SOUTER, JJ., joined. BLACKMUN, J., filed a concurring opinion, post, p. 179. THOMAS, J., filed an opinion concurring in the judgment, in which SCALIA, J., joined, post, p. 180. STEVENS, J., filed a dissenting opinion, post, p. 184.

Kent L. Jones argued the cause for petitioner. With him on the briefs were Solicitor General Starr, Acting Assistant Attorney General Bruton, Deputy Solicitor General Wallace, Richard Farber, and Teresa E. McLaughlin.

David M. Sokolow argued the cause and filed a brief for respondent.

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JUSTICE KENNEDY delivered the opinion of the Court.

We address in this decision the appropriate standard for determining whether an office in the taxpayer's home qualifies as his "principal place of business" under 26 U. S. C. § 280A(c)(1)(A). Because the standard followed by the Court of Appeals for the Fourth Circuit failed to undertake a comparative analysis of the various business locations of the taxpayer in deciding whether the home office was the principal place of business, we reverse.

I

Respondent Nader E. Soliman, an anesthesiologist, practiced his profession in Maryland and Virginia during 1983, the tax year in question. Soliman spent 30 to 35 hours per week with patients, dividing that time among three hospitals. About 80 percent of the hospital time was spent at Suburban Hospital in Bethesda, Maryland. At the hospitals, Soliman administered the anesthesia, cared for patients after surgery, and treated patients for pain. None of the three hospitals provided him with an office.

Soliman lived in a condominium in McLean, Virginia. His residence had a spare bedroom which he used exclusively as an office. Although he did not meet patients in the home office, Soliman spent two to three hours per day there on a variety of tasks such as contacting patients, surgeons, and hospitals by telephone; maintaining billing records and patient logs; preparing for treatments and presentations; satisfying continuing medical education requirements; and reading medical journals and books.

On his 1983 federal income tax return, Soliman claimed deductions for the portion of condominium fees, utilities, and depreciation attributable to the home office. Upon audit, the Commissioner disallowed those deductions based upon his determination that the home office was not Soliman's principal place of business. Soliman filed a petition in the Tax Court seeking review of the resulting tax deficiency.

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The Tax Court, with six of its judges dissenting, ruled that Soliman's home office was his principal place of business. 94 T. C. 20 (1990). After noting that in its earlier decisions it identified the place where services are performed and income is generated in order to determine the principal place of business, the so-called "focal point test," the Tax Court abandoned that test, citing criticism by two Courts of Appeals. Id., at 24-25 (noting Meiers v. Commissioner, 782 F. 2d 75 (CA7 1986); Weissman v. Commissioner, 751 F. 2d 512 (CA2 1984); and Drucker v. Commissioner, 715 F. 2d 67 (CA2 1983)). Under a new test, later summarized and adopted by the Court of Appeals, the Tax Court allowed the deduction. The dissenting opinions criticized the majority for failing to undertake a comparative analysis of Soliman's places of business to establish which one was the principal place. 94

The Commissioner appealed to the Court of Appeals for the Fourth Circuit. A divided panel of that court affirmed. 935 F. 2d 52 (1991). It adopted the test used in the Tax Court and explained it as follows:

"[The] test ... provides that where management or administrative activities are essential to the taxpayer's trade or business and the only available office space is in the taxpayer's home, the 'home office' can be his 'principal place of business,' with the existence of the following factors weighing heavily in favor of a finding that the taxpayer's 'home office' is his 'principal place of business:' (1) the office in the home is essential to the taxpayer's business; (2) he spends a substantial amount of time there; and (3) there is no other location available for performance of the office functions of the business." Id., at 54.

For further support, the Court of Appeals relied upon a proposed IRS regulation related to home office deductions for salespersons. Under the proposed regulation, salespersons

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would be entitled to home office deductions "even though they spend most of their time on the road as long as they spend 'a substantial amount of time on paperwork at home.'" Ibid. (quoting proposed Treas. Reg. § 1.280A-2(b)(3), 45 Fed. Reg. 52399 (1980), as amended, 48 Fed. Reg. 33320 (1983)). While recognizing that the proposed regulation was not binding on it, the court suggested that it "evince[d] a policy to allow 'home office' deductions for taxpayers who maintain 'legitimate' home offices, even if the taxpayer does not spend a majority of his time in the office." 935 F. 2d, at 55. The court concluded that the Tax Court's test would lead to identification of the "true headquarters of the business." Ibid. Like the dissenters in the Tax Court, Judge Phillips in his dissent argued that the plain language of § 280A(c)(1)(A) requires a comparative analysis of the places of business to assess which one is principal, an analysis that was not undertaken by the majority. Ibid.

Although other Courts of Appeals have criticized the focal point test, their approaches for determining the principal place of...