Jeffrey L. & Simone I. Rayden, Petitioner

T.C. Memo. 2011-1 UNITED STATES TAX COURT JEFFREY L. AND SIMONE I. RAYDEN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 7468-08.

Filed January 3, 2011.

R determined a deficiency in income tax for petitioners' 2004 tax year. percent of Ps' business while Ps assert 70 percent.

residence was-used exclusively for R claimed that only 43 that the applicable figure is Held:

Ps used no more than 43 percent of their residence 'exclusively for business and are liable for the deficiency to the extent herein decided.

Adam L. Karp, for petitioners.

Nathan C. Johnston, for respondent.

SERVED JAN -3 2011 MEMORANDUM FINÖINGS OF FACT AND OPINION

WHERRY, Judge: Respondent determined that petitioners are liable for a Federal income tax deficiency of $19,740 for the 2004 tax year. After concessions,1 the only issue remaining is to d termine the portion of petitioners' residence which was used exclüsively on a regular basis as a principal place of business by Mr. Rayden during the 2004 tax year.2

FIN INGS OF FACT

Some of the facts have been stipulated, and the stipulation of facts, the.supplemental stipulation of facts, and.the acco panying exhibits are hereby incorporated by this reference.

At tl e time they filed their petition, petitioners resided in California.

At trial respondent co ceded that any amount of mortgage interest and real estate ta es not allowed on Schedule C, Profit or Lcss From Business, by the allocation effect of sec. 280A(c) (1) would be claimed on Schedule A, residence Respåndent also conceded thÉt desidnated as the library aZd as the garage were used exclusively by petitioners to conduct båsiness. All other issues are computational and will be determined in the Rule 155 computations to be made in accordance with this opinion. All section refer nces are to the Interåal Revenue Code of 1986, as amended and in effect are to the Tax Court Rules df Practice and Procédure.

issue, and all Rule references the rooms in petitioners' Itemized Deductions.

for the tax yèar at At trial respondent coNceded that 43 percent of petitioners' house was used Texclusively for business. Petitioner conte ded at trial on brief that it is 70 percent.

the applicable figure is 71 percent and that Petitioner husband (petitioner) is the sole proßrietor of InfoGen and Resource-Direct. Before 1997 petitioner conducted his business out of 8,000 square feet of commercial space until financial difficulties and family issues required petitioner to terminate the lease and move the business into his home.

Petitioner's, home consists of 7,272 square feet of living space, which includes the garage.

During the tax year at issue, petitioner resided in this residence with his wife and daughter.

Petitioner also has two sons who, during this period, attended college and lived away from home.

3The parties stipulated that petitioners' home consists of living space, which includes the garage; 7,272 square feet of however, at trial petitioner testified that 8,500 square feet P actually attributes 8,321.625 square feet of space. feet; perhaps -the stipulation was incorrect and the 7,272 figure did not including the garage. Petitioners' Exhibit 15- the home to living the garage is approximately 1,102.5 square include the garage.

the home was about We note that A stipulation shall be treated, to the extent of its terms, fact but may exercise broad discretion to as a conclusive admission by the parties to the stipulation, unless otherwise permitted by the Court or agreed upon by those parties. Rule 91(e). Courts do not stipulations of determine whether to hold a party to a stipulation. Commissioner, 994 F.2d 1542, 1553 (11th Cir. 1993), affg. T.C. Memo. 1991-636. to the record, aWe are not bound by stipulations of appear contrary to the fåets disclosed by the record." Estate of Eddy v. Commissioner, 115 T.C. 135, 137 n.⁴ (2000); see also Blohm v. Commissioner, supra at 1553. However, possible, we adhere to the square footage stipulated.

In instances where the stipulation is contrary lightly set aside to the extent Blohm v.

that fact . Petitioners' two--story residence consists of 12 rooms.

Ther is additional space i the area of the vestibule, hall, -and stai case.

There is also an attached three-car garage.

Petit ioner's family put- thegmaster bedroom and master bathroom to persónal use .

.Petitioners' ydaughter used the room designated on Exhibit 15-P as bedroom ,2, including the sitting area; bathroom, and closet, for personal purposes. Petitioners asserted at the trial that 10 percent of the use of bedroome 2 was for businesse The oom designated as the guest room consists of 283 square feet and was used by petitioner ùife in connection with her travel agency business.

Petitioner and his familly frequently ate out but used the kitchen some each week for eating meals and occasional cooking.

The subcontractors who worked for petitioner's business in petitioner's home also used the kitchen for -breaks and lunches.

Petit ioner's family used th service, room for laundry.

Petit ioner explained that h used the den, with the adjoining bar 1!

and Oestibule, to entertain afamily members one to two times a e year . About three times a year petitioner and his family used the. dining room for family dinners. Petitioner and petitioners' daug ter occasionally had m(als in the breakfast area, as its name would imply.

Petitioner and his family did not use the living room for pers nal purposes.

On a rare occasion, someone other than a business associate might walk through the.room. Otherwise, it was used only for business. The-kaid's room was used' for staging and preparing projects for petitioner's business and not for personal purposes. Bedroom 3 was used" as- a graphic and video studio, and bedroom 4 was used as a programming and survey office Both of these bedrooms were used solely for business.

The 186-square-foot hall area le'd only -to- bedrooms 3. and 4 and thus also was used only fon business.

The garage comprised approximately 1,103: square-feet of the first floor.

It was used primarily for storage and as a shop ands studio.

Peti-tioners fi-led, a Form 1040, U.S.

Indiviadual'Income Tax Return, for the 2004 tax year.

The tax return included a Schedule C for petidioner's marketing consultant business with respect to which he claimed a rent expense of $90,646.

It also included a Schedule C for yetitioner's-Infogen computer software business with respect to which he claimed a rent expense of $84,515. Petitioners also reporte'd rental income of=$175,T614 on Schedule E, Supplemental Income and Loss, and claimed expenses of $131,739.

Respondent issued a notice of deficiency on December 31, 2007, determining a $19,740 deficiency in petitioners' income tax for 2004. Petitioners filed' a timely petition with this Court on 4This figure represents the sum of) the rental deductions from both of the Schedules C.

--6- Marc 28, 2008, denying lia ility for the deficiency.

A trial was 1eld on June 17,y2009, n Los Angeles, California.

PINION

Deductions are a matte of "legislative grace",, and a taxp yer. seeking a deduction must be able to point to an applicable- statute and show that he comes within its terms."

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934); see also Rule 142 (a) .

As a general ule, section 162 (a)-authorizes a deduction for "al-1 the ordinary and necessary expenses paideor incurred during the taxablelyear in carrying on any trade .or business".

An expense isa o dinary for- purposes of this section if i is normal or customary within a part-icular .trade,. business, or industry.

,Deputy v. du Pont, 308 U.S. 488, 495 (1940) . ¿An exper se is necessary if it s appropriate and helpful for the deve pment of the business. Commissioner v., Heininger 320 U.S.

467, :71 s(1943) .

. Section 262, in contrast, precludes deduction of "personal, living, or family expenses." y here the expense in question relates to property that ,is occupied by the taxpayer as a residence, section 280A(a) lays down he following general rule:

"in. -the case of a taxpayer wl o is an indi\ridual or an S corporation, no deduction otherwise allowable under-this chapter ashall be allowed with respect tosthe use of a dwelling unit whicli is used by the taxpayer during the taxa e year as a residence." However, an- exception to this general ban is found in section 280A.(c) (1),-which provides that section 280A(a) does-hot apply to an item of expense to the extent allocable to a portion of the taxpayer's residence which "is exclusively used son a regular basis" as the taxpayer's principal place of business.

There is no dispute that a portion of petitioners' home was used on a regular basis as the principal place of petitioner's business.

We are, however, confronted-with the fact-specific inquiry of whether certain rooms in petitioners' house were used exclusively for the business.

The legislative history of section 280A dealing with exclusive use explains:

Exclusive use of a portion of a taxpayer's dwelling unit means that the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business. dwelling unit carrying on of a trade or business does not meet exclusive use test. * (1976), 1976-3 C.B. at 161' (1975), 1976-3 C.B. added.]

The use of a portion of a for both personal purposes and for the the * (Vol. 3) 49, 186; H. Rept. 94-658, (Vol. 2) 695, 853; emphasis [S. Rept. 94-938, at 148 * The Court in Hefti v. Commissioner,. T.C. Memo. 1988-22, affd. without published opinion 894 F.2d 1340 (8th Cir. 1989), discussed this legislative history and observed that "Any personal use of a room or segregated area will preclude its use in computing depreciation or other allocable expenditures, unless some or all of the use of the room was for the storage of inventory."

Petitioner contends th t 70--71 percent of his home was used exclusively and regularly for business during the 2004 tax year.

As t e Court did in Hefti, úe find it implausible ethat the .

taxp yer and his ,family ="had no social or personal life in any port on of the residence otl er than a few bedrooms and the kitch ni " Id. During his testimony petitioner acknowledged a few occasional uses of other rooms for personal purposes during 2004. Nevertheless, because personal use was allegedly minimals compared with business use, petitioners contend that they should be allowed the claimed experise deduct-ion.

We appreciate , petitioners' contention, but Congress has made it clear that, this is not the law.

Respondent conceded th t petitioner used the library and the garage exclusively for business. Me also find that petitioner used l e living room exclusívely for- business. Although peti oner's ciwn exhibit claimed that the business used the living room only 95 percent of the time, at trial he credibly explained that "The only reason I put down 95 percent is that some dy who would be visiting could have possibly wa ked in [or through) that area and walk d out."

I'his Court has previous.ly held that the mere nonbusiness passage from one room to the next can be classified as a de minimis personal use of the room and will not disqualify the room from the exclusivity requirement of section 280A(c) (1).

See Lind v. Commissioner, T.C. Memo. 1985-490 ("That petitioners and their family members may have occasionally walked through the garage does not violate the exclusive business use rule."); Hughes v. Commissioner, T.C.. Memo. 1981-140 ("Petitioner's incidental use of the closet to walk to and from his bathroom was de minimis.").

We also find credible petitioner's testimony that the maid's room and bedrooms 3 and 4 were used exclusively for business.

See Thalacker v. Commissioner, T.C. Memo. 1984-488 (upholding a home business deduction on the basis of a taxpayer's credible testimony). Petitioner explained that the maid's room was 100 percent used "in the business for staging and preparing projects."

He also explained that bedroom 3 was used for graphic design and as a video design studio and.that bedroom 4 was used for programming, customer service,, and surveys. Petitioner also proffered photographs of bedrooms 3 and 4 depicting their business use. Although, as respondent pointed out at trial, these photographs, necessarily limited to two dimensions, depict only one side of the room, we find them. to be reliable evidence corroborating petitioner's testimony regarding the business use of these two rooms.

. Because we find-that bedrooms 3 and 4 were used exclusively for business, we also find that the hall area, which leads only to those two rooms, was also used exclusively for business.

The table below summarizes the ooms in petitioners' residence that were used exclusively -and régularly .for petitioner's business in 2004 and their total area irï square feet.⁵ Room Scruare Feet Library Garage Living room Maid's room Bedroom 3 Bedroom 4 Hallway to 3 328 . 5 1,102.5 405.0 364.0 444.0 392.0 186.0 Total 3, 222 . O Jsing these figures it appears that petitioner used 3,222 square feet for his business in 2004, which is 44.3 pekcent of i the total area of petitione s' house.

We note that this perceþtage was determiried using the stipulated 7,272 total square feet; had we used the total square footage from petitioners' Exhi t 15-P of 8,321.625, the percentage of his business use - would have been 38.7 percent of petitioners' home. Respondent has done án excellent job of applying the law to the facts.

Indee , respondent was more generous' then this Court would have been had we, as we would be inclined to do, used the total square footage from petitioners' E hibit 15-P.

We therefore find that, The square footage pergroom.was- determined by using petitioners' Exhibit 15-P.

as contended by respondent, petitioner used 43 percent of the home exclusively for' business.

As we explain below, the remaining rooms were not exclusively used for business and the expenses apportionable' to their use do not qualify as deductible under section 280A(c)'(1-).

Although'petitioner first explained that he did not eat in the breakfast room, in response to- a question by the Court he conceded that on occasion he or his family may have eaten in the breakfast area. Petitioner- also did not use the den; vestibule, and adjoining bar exclusively for business. Petitioner explained that "maybe'one or two times a year, [the area] was used sometimes by family that-were visiting".

We do not regard as de minimis this personal use'of the room by visiting family.

"Exclusive use" is narrowly construed, as discussed in the legislative history of section 280A above.

This means that "'the taxpayer must use a specific part of a dwelling unit solely for the purpose of carrying on his trade or business.'" Culp v.

Commissioner, T.C. Memo. 1993-270 (quoting Sam Goldberger, Inc.

v. Commissioner, 88 T.C. 1532, 1557 (1987)).

Petitioner also did not use the dining room exclusively for business when his family was visiting. Petitioner testified that "one or two nights a year" when his sons were in town they would have a family dinner in the dining room. Petitioner is not entitled to a deduction for items of expense ápporti'onable to these rooms.

By his own adI ission, normal household activities took place in those rooms.

See Langer v. Commissioner, 980 F.2d 1198 1199 (8th Cir .

- 1992) (disallowing a business expense dedu tion for a portion of the home in .which household activit-ies also took place), affg. T.C. Memo. 1990-268.

In conclusion, petitio er used 43 percent of the house's tota area exclusively for usiness and may claim business .

expense deductions prorated accordingly.

He is not entitled to a Schedule C deduction in conr ection with the remaining 57 percent of the house's total area.

The Court has considered all of petitioner's contentions, arguments, requests, and statements.

To the extent not discussed herein, we conclude that they are meritless, moot,- or irrelevant.

To reflect ,the f oregoir g, Decision will be entered under Rule 155.

!

See supra note 1, discussing the availability of Schedule A deductions with respect to this area of the house.