Curphey v. Comm'r of Internal Revenue

• Citation: 73 T.C. 766
• Decision Date: 04 February 1980
• Docket Number: Docket No. 10546-78.
• Parties: EDWIN R. CURPHEY, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

73 T.C. 766

EDWIN R. CURPHEY, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 10546-78.

United States Tax Court

Filed February 4, 1980.

Petitioner, a dermatologist employed by a hospital, also owned and managed six rental properties. Held, his rental activities constituted a business for the purpose of sec. 280A, I.R.C. 1954. Held, further, petitioner was entitled to deduct expenses incurred for the use of a room in his residence, exclusively and on a regular basis, as an office in connection with his rental business, where such home office was the principal place at which he carried on that business. Sec. 280A(c)(1)(A), I.R.C. 1954. Held, further, costs of local transportation between such office in residence and petitioner's rental properties were deductible as ordinary and necessary business expenses. Sec. 162(a), I.R.C. 1954. Edwin R. Curphey, pro se.

Jerome Borison, for the respondent.

TANNENWALD, Judge:

Respondent determined a deficiency of $189 in petitioner's Federal income tax for the year 1976. Concessions having been made, the issues remaining for decision are whether petitioner is entitled to a deduction in connection with an office in his home under section 280A¹ and a deduction for automobile expenses incurred in travel between his home and certain rental properties which he owned and managed.

FINDINGS OF FACT

Some of the facts were stipulated. The stipulation of facts and the attached exhibit are incorporated herein by this reference.

Petitioner was a resident of Honolulu, Hawaii, at the time he filed the petition herein. He filed an individual income tax return for the taxable year 1976.

Petitioner is a dermatologist employed by Kaiser Permanente Hospital of Hawaii and was so employed during the taxable year in issue. Petitioner worked 40 hours a week at Kaiser Permanente Hospital and devoted additional hours to reading medical journals and attending medical seminars and conferences. Petitioner received gross wages of $45,782.50 from his hospital employment in 1976.

During the taxable year 1976, petitioner owned six rental units which he held for the production of income. These properties were listed in his income tax return as follows:

Villa on Eaton Square (condominium);

Mooring (townhouse);

Pearl One (condominium);

Harbour Square (condominium);

Village Green (townhouse);

Crestview (single family dwelling). Petitioner managed his rental properties entirely by himself. Some of the units were rented furnished.

Petitioner lived in a two-bedroom condominium in 1976. He used one bedroom exclusively as an office for bookkeeping and other activities related to management of his rental properties. That room was furnished with a desk, a bookcase, a filing cabinet, calculators, and a “code-a-phone answering service.” There was no television, sofa, or bed in that room, and petitioner did not allow guests to stay there. The closet of that room was used only to store items related to the rental properties such as lamps, carpets, and other furnishings, signs, which petitioner used to advertise the units for rent, cleaning materials, which he needed to prepare a rental unit for a new tenant, and a tool box.

Petitioner, who was 52 years old during the taxable year in question, intended the rental properties to provide a source of income when he retired from his medical practice at age 65. In 1976, petitioner received gross rental income of $24,760 from the six units, but had a net loss of $23,043 and a negative cash flow of $6,242. Petitioner expected that each unit would ultimately produce a positive cash flow of approximately $100 to $200 per month.

Petitioner incurred depreciation and paid other expenses in 1976 of $549 in connection with the use of his second bedroom as an office.

Petitioner used his automobile in driving between his home and the rental units and paid expenses of $147 for such automobile use.²

OPINION

The issues for decision are (1) whether petitioner is entitled to a deduction under section 280A of the Internal Revenue Code for expenses incurred for the use of a room in his residence as an office in connection with his ownership and management of rental properties, and (2) whether petitioner is entitled to a deduction for automobile expenses incurred in driving between his residence and those rental properties.

Section 280A was added to the Internal Revenue Code of 1954 by the Tax Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520,³ to provide “definitive rules * * * governing the deductibility of expenses attributable to the maintenance of an office in the taxpayer's personal residence.” S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49, 185; H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 852. Section 280A provides in pertinent part:

SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION WITH BUSINESS USE OF HOME, RENTAL OR VACATION HOMES, ETC.

(a) GENERAL RULE. —-Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, no deduction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which is used by the taxpayer during the taxable year as a residence.

(c) EXCEPTIONS FOR CERTAIN BUSINESS OR RENTAL USE; LIMITATION ON DEDUCTIONS FOR SUCH USE. —-

(1) CERTAIN BUSINESS USE. —-Subsection (a) shall not apply to any item to the extent such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis—-

(A) as the taxpayer's principal place of business,

(B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or

(C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business.

In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer.

Respondent has conceded that a portion of petitioner's residence, which was a dwelling unit as that term is used in section 280A,⁴ was used exclusively and on a regular basis in connection with petitioner's rental activities and that the amount of the deduction claimed by the petitioner was allocable to the portion of his dwelling unit which was so used. Respondent contends, however, that petitioner is not entitled to a deduction under section 280A for business use of his home because his rental activities did not constitute a business for purposes of that section or, in the alternative, if such activities did constitute a business, then petitioner's principal place of business was Kaiser Permanente Hospital, where he was employed as a dermatologist, and not his home office from which he conducted his rental business.⁵

We turn first to the issue of whether petitioner's rental activities constituted a business for purposes of section 280A. It is respondent's position that the word “business” was used in section 280A to distinguish activities which qualify as a “trade or business” under section 162 from the holding of property for production of income within the meaning of section 212(1) and (2) and that petitioner was merely holding his rental properties for the production of income and was not engaged in the trade or business of renting property.

We agree with respondent's argument to the extent that it rests upon the proposition that no deduction under section 280A is allowable for use of a home in connection with an activity which is merely for the production of income within the meaning of section 212 but is not a “trade or business” under section 162. This position is amply supported by the legislative history of section 280A. The Senate Finance Committee report states:

An allocable portion of expenses paid or incurred with respect to the use of a dwelling unit which is used by the taxpayer both as a residence and in connection with income producing activities (sec. 212) will not be allowable as deductions under the provisions of this section unless the income producing activity constitutes a trade or business. For example, no deduction will be allowed if a taxpayer who is not in the trade or business of making investments, uses a portion of his residence (exclusively and on a regular basis) to read financial periodicals and reports, clip bond coupons and performs similar activities because the activity is not a trade or business. (S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 187. Emphasis added.)

See also H. Rept. 94-658, supra, 1976-3 C.B. (Vol. 2) at 853.

We think it significant that this report specifically qualified its refusal to allow the deduction of home office expenses for income-producing activities by carving out the exception “unless the income producing activity constitutes a trade or business” and indicating that the disallowance of a deduction was intended to apply to a taxpayer “who is not in the trade or business of making investments,” thereby implying that under appropriate circumstances, such type of activity could constitute a trade or business.⁶

Respondent points out that the committee reports relating to section 280A(c) (1) discuss critically the case of Anderson v. Commissioner, T.C. Memo. 1974-49, in which—-

the taxpayer was allowed a portion of the expenses attributable to a family room which was partially used to conduct investment activities which consisted of keeping records with respect to rental properties, preparing the taxpayer's income tax returns, and writing letters to brokers and taxing authorities. (S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 183; H. Rept. 94-658, supra, 1976-3 C.B. (Vol. 2) at 850.)

We note, however, that in that case, the room considered to be a home office was not used exclusively for that purpose, and petitioner did not assert that she was in the trade or business of managing property. Consequently, we do not...