Banatwala v. Commissioner
| Decision Date | 25 August 1992 |
| Docket Number | Docket No. 12358-90. |
| Citation | 64 T.C.M. 591 |
| Parties | Mahesh Banatwala and Gina L. Banatwala v. Commissioner. |
| Court | U.S. Tax Court |
GALLOWAY, Special Trial Judge:
This case was assigned and heard pursuant to the provisions of section 7443A(b), and Rules 180, 181, and 182. All section references are to the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.
On March 6, 1990, respondent mailed a notice of deficiency to petitioners, determining deficiencies in petitioners' Federal income tax for the years 1985, 1986, and 1987, and additions to tax under the following Code sections: (1) sections 6651(a)(1) and 6654 for the years 1985-87; (2) section 6653(a)(1) and (2) for the year 1985; (3) section 6653(a)(1)(A) and (B) for the years 1986-87; and (4) section 6661 for the year 1986. Before trial commenced, the parties filed a stipulation in which petitioners conceded the section 6651(a)(1) additions to tax and respondent conceded the section 6654 additions to tax for the years 1985, 1986, and 1987. Respondent also informed the Court that the notice of deficiency contained computational errors, and that the parties agreed that the 1986 addition to tax for substantial understatement was to be determined when the corrected tax liability for that year was calculated. Respondent filed a statement, which disclosed that the following deficiencies and additions to tax were in issue:
Additions to Tax
Section Section Section Section
Year Deficiency 6653(a)(1) 6653(a)(2) 6653(a)(1)(A) 6653(a)(1)(B)
1985 .................... $ 419 $20.95 1 --
1986 .................... 6,614 $330.70 1
1987 .................... 4,465 223.25 1
1 50 percent of the interest due on the deficiency
The adjustments determined by respondent for the taxable years in issue, with the exception of additions to tax, resulted from the disallowance of most of the expenses claimed on Schedules C prepared for the insurance sales business of Mahesh Banatwala (petitioner). At trial, both parties stipulated to the deductible amounts of many of the expenses disallowed, leaving for decision the remaining issues: (1) The amount of home office expense deductions to be allowed petitioner for the years in issue; (2) whether petitioner is entitled to an educational expense deduction in the year 1986; and (3) whether petitioner is liable for additions to tax determined under section 6653(a)(1) and (2) for the taxable year 1985 and under section 6653(a)(1)(A) and (B) for the taxable years 1986 and 1987.
Some of the facts have been stipulated and are so found. The stipulation of facts and related exhibits are incorporated herein by this reference. Petitioners resided in Cincinnati, Ohio, at the time they filed their petition in this case.
Petitioner was a self-employed insurance salesman during the taxable years in issue. Petitioner sold life insurance and tax-deferred annuities. He sold no casualty or property insurance. Petitioner maintained an office in his rented home during the years in issue. The home was leased by petitioner as a residence for him and his family for $410 per month. Petitioner, his wife, and three children, lived on the upper floor of the residence, which contained 3 bedrooms, a large living room, dining room, kitchen, and bathroom. The lower floor was a finished basement used entirely as a home office and contained 3 rooms, a storage room, a full bathroom, and a large furnace. At trial, the parties agreed that petitioner had substantiated payment of expenses related to the residence (rent, heating oil, and utilities) for the years 1985, 1986, and 1987, in the respective amounts of $6,599.25, $7,527.02, and $6,130. Petitioner had claimed 25 percent of the above residence expenses as home office deductions on his tax returns for the 1985-87 years. Respondent disallowed the deductions in full.
For the period October 1, 1986, through December 31, 1987, petitioner rented commercial office space 20 miles from his home, located on Montgomery Road in the Kenwood area of Cincinnati (hereinafter called the Kenwood office), for the purpose of conducting his life insurance sales business. Petitioner paid rent of $275 per month for the 400 square foot Kenwood office, which contained two offices and a storage room.
In the notice of deficiency, respondent disallowed petitioner's rental expenses for the Kenwood office amounting to $825 and $3,300, respectively, for the years 1986 and 1987. She has now conceded the deductibility of these amounts. Respondent also conceded at trial that petitioner is entitled to deductions for home office expense in the year 1985, and during the first 9 months of 1986 in amounts to be determined by the evidence presented at trial. We consider separately petitioner's allowable home office deduction before and after October 1, 1986.
Petitioner has the burden of establishing that he is entitled to deductions claimed on his tax return. Rule 142(a); New Colonial Ice Co. v. Helvering [4 USTC ¶ 1292], 292 U.S. 435, 440 (1934); Welch v. Helvering [3 USTC ¶ 1164], 290 U.S. 111, 115 (1933).
Section 280A(a) prescribes the general rule that no otherwise allowable deduction "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." Under section 280A(c)(1)(A), this general rule does 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 as "the principal place of business for any trade or business of the taxpayer."
As previously stated, petitioner claimed 25 percent of the residence expenses as home office deductions on his 1985, 1986, and 1987 tax returns. At trial, petitioner asserted that he was entitled to 50 percent of the residence expenses as home office deductions. Petitioner's claim for an increased home office deduction is based on his contention that the upper floor of his home and the finished basement each contained approximately 1,000 square feet of space.
Petitioner failed to submit measurements of the rooms of the upper or basement floors or other evidence by which the square footage of each residence level could be calculated. However petitioner provided a rudimentary sketch of the basement floor. This sketch discloses 3 rooms on one side of the basement, a small storeroom and bathroom on the other side and a large unused open area in the center. Petitioner testified that two of the three rooms, and the storage room, contained old client files in filing cabinets and old file boxes, various calculators and other machines, an office copier, and a computer. One room contained petitioner's desk and was the office where he met clients. All the rooms were lined with bookshelves containing approximately 1000 books, claimed by petitioner to be related to the insurance business. Petitioner's witness (a colleague in the life insurance business), confirmed that petitioner's basement rooms contained many books and old file boxes. The witness stated that he was unable to enter one of the three rooms because it was "jammed full" with "books, storage files, all kinds of marketing materials * * *."
At the conclusion of her cross-examination concerning petitioner's use of the basement level, respondent appeared to have been satisfied from the evidence that petitioner had made a "fair and reasonable" determination that 25 percent of total proven costs claimed in 1985 and for 9 months of 1986 were deductible, since that portion of the residence was exclusively used for home office purposes during 1985 and the first 9 months of 1986. We agree with respondent. However, petitioner's testimony and the testimony of his witness does not satisfy his burden of proving he is entitled to deduct an amount for home office use in excess of the amounts petitioner claimed on his returns for those periods. Accordingly, we hold that petitioner is entitled to a home office deduction totaling 25 percent of proven residence costs for the year 1985 and during the first 9 months of 1986.
For the last 3 months of 1986 and all of 1987, petitioner deducted rental expenses paid for the Kenwood office space in the respective amounts of $825 and $3,300. As previously indicated, respondent has now conceded that petitioner is entitled to deductions for the above expenses paid for office rent, and we have concluded that petitioner is entitled to 25 percent of his residence expenses as home office expense during the period which petitioner did not lease the Kenwood office. Respondent contends, however, that no portion of the proven residence costs incurred by petitioner are deductible as home office expense after petitioner leased the Kenwood office. Respondent argues that when petitioner acquired his Kenwood office, that office became petitioner's principal place of business since it was the business location available to perform the functions of petitioner's business, and, accordingly, no home office deduction is allowable.
In Soliman v. Commissioner [Dec. 46,335], 94 T.C. 20 (1990), affd. [91-1 USTC ¶ 50,291] 935 F.2d 52 (4th Cir. 1991), cert. granted 112 S.Ct. 1472 (Mar. 23, 1992), we held that a self-employed anesthesiologist was entitled to deduct expenses for his home office because the business activities at his home office were essential to his medical practice, although ancillary to the primary income-generating services performed at hospitals....
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