Michael H. Visin & Natalie Marselly, Petitioners

SetTIC CAL. sur, s.r. mas T.C. Memo. 2003-246 UNITED STATES TAX COURT MICHAEL H. VISIN AND NATALIE MARSELLY, Petitioners v. COMMISSIONER OF INTERNAL REVENUÉ, Respondent Docket No. 10149-02.

Filed August 18, 2003.

.

Michael H. Visin, pro se.

MEMORANDUM FINDINGS OF FACT AND OPINION

ARMEN, Special Trial Judge: Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1997 and 1998 in the amounts of $1, 393 and $1, 365, respectively.

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klso in the notice of deficiency, nnò rronni see respondent d treated the no b. $3,'450· spent by petitioner Michael H. Visin for computer d :u,*.."

IV .o 1 p be ni -Leco '- tr' equipment and software for his business as a.capital expenditure ¬col a elui-dog 4y n!

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III 3w and allowed depreciation thereon.

Petitioners do not contest respondent' s· computation of the limitation on déductions under^ sectfo'n.2.80A(c).(5) F : án:-i on bn iue a O 3 petitioners contëñd that section 280A does.not,apply to renters 4.Rather, . .r¿Jpour r ne ...

of business property and that, therefore, the limitation on deductions under,section 280A(c) (5) does not apply to their case.

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a Rather, petiÉioners contend that section 162 (a) (3) authorizes the dëductions in issue.

Petitioners also contend that they are entitled to expense, vhlena pursuant ot _t mb ar .

d .câe n .Iw. o w to section 179, the $3,450 spent by petitioner Michael H. Visin for computeY equipment and softwdre ifor use in his 01.,te" a tm:. n. business.

,vuno:Dibu ic .r ebn mar sca v' We decide the issues 1*n this case without regard to the burden of proof. Accordingly, there is no reasoñ to decide wlÊther section 7491(a) serves to shift 'the burden of proof from.

ci r.. b ;;µabno'nR . (d / 4 petitioners to respondent.

sqb .. d TM crl,± 10 See generally Rule· 142 (a; ..torlo ..' Eq × t . S⁸⁸ :n'r. ædJ r o Po c· 1sem onaianave' Inc. v. Commissioner, 503 U.S. 79, (1992); Welch v. Helvering, ..u INDOPCO, .

no 290 U.S. 111, 115 (1933).

A. Deduction for Business Use of Home '.bw¹ 7 0 ' ½ b 86 nriol Wnolfi3cq r:ew Sectiòny1'62 (r)l( 3)Callôws a >dedüdtiön 'fôr:

rentals or other payments required to .be made as a condition to the continued use or possession, purposes of the trade or business, of property to which the taxpayer has not taking title or in which he has no equity.

taken or is not for Structurally, section 162 is included in part VI (Itemized Deductions For Individuals And Corporations) of subchapter B (Computation of Taxable Income) of chapter 1 (Normal Taxes And Surtaxes) of subtitle A (Income Taxes) of title 26 (Internal Revenue Code) of the United States Code.

The relevance of the placement of section 162 within the Internal Revenue Code will become apparent momentarily.

Also included within part VI is section 161.

That section provides as follows:

In computing taxable income under section 63, there shall be allowed as deductions the items specified in this part (i.e., part VI], subiect exceptions provided in part relating to items not deductible).

to the IX (sec. 261 and following, [Emphasis added.]

Section 261, which is entitled "General Rule For Disallowance Of Deductions", provides that "In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part [i.e., part IX)." One of the sections included in part IX is section 280A.

At this point it should be apparent that section 162 is subject to the exceptions and constraints of section 280A.

See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) (oft cited for the proposition that deductions are a matter of legislative grace and hence a taxpayer claiming a deduction must come within the express provisions of the statute).

As relevant herein, section 280A(a) provides as a general rule that no deduction otherwise allowable to an individual "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."

The term "dwelling unit" is defined by section 280A(f)(1) (A) to specifically include an apartment.

The statute does not distinguish between a condominium apartment and a rental apartment.

In other words, whether owned or rented, an apartment is a dwelling unit within the intendment of the statute.

See Horton v. Commissioner, T.C. Memo. 1997-572 (involving an artist who rented premises in a commercially zoned area, which premises were found by the Court to be a dwelling unit within the scope of section 280A).

The seemingly prohibitory rule of section 280A(a) is ameliorated by section 280A(c), which provides exceptions for certain business uses.

As relevant herein, section 280A(c)(1) provides that the general rule of section 280A(a) is not applicable to any item to the extent it:

is allocable to a portion of exclusively used on a regular basis-- the dwelling unit which is (A) as the principal place of business for trade or business of the taxpayer, [or) any (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 * * .

The liberalizing effect of section 280A(c) is not without its limitations, however.

In particular, and as relevant herein, section 280A(c)(5) limits a taxpayer's deductions for the business use of an apartment to the amount by which the gross income generated from the business activity conducted in the apartment exceeds the deductions for expenses attributable to such activity that are not allocable to the business use of the apartment itself.

See Martin v. Commissioner, T.C. Memo. 1996- 503, affd. per curiam without published opinion 155 F.3d 559 (4th Cir. 1998).

In other words, no deduction for use of an apartment may be claimed if said deduction would give rise to, or increase, a net loss from the business to which the deduction relates.

Id.

The foregoing exegesis of section 280A(c)(5) is confirmed by the legislative history of the most recent relevant amendment to that section.

Thus:

Reasons for Change Limitations on deduction * * * * * * * The committee believes that a home office deduction to which section 280A applies should not be used to reduce In taxable income from the activity to less than zero. adopting the provisions of the bill, the committee reemphasizes that section 280A was enacted because of concerns about allowing deductions for items which have a substantial personal component relating to the home, which most frequently do not reflect the incurring of taxpayers cannot deduct, and which significantly increased costs as a result of business activity, and that interpreted to carry out its objectives.

the provision should be the * * * * * * * Explanation of Provision * * * * * * * Limitations on deduction In general.--The bill limits the amount of a home office deduction (other than expenses that are deductible without regard to business use, such as home mortgage interest) to the taxpayer's ,gross income from the activity, reduced by all other deductible expenses attributable to the activity but not allocable to the use of the unit itself. Thus, home office deductions are not allowed to the extent that increase a net they relate. 3 C.B.

loss from the business activity to which [H. Rept. 99-426, at 133-135 (1985), 1986- (Vol. 2) 133-135).]

they create or Finally, for petitioners' benefit, we observe that to the extent deductions are disallowed under section 280A(c)(5), they may be carried forward to the succeeding taxable year.

See sec.

280A(c)(5), flush language.

In view of the foregoing, we hold that petitioners' deductions for the business use of their apartment are subject to the limitation set forth in section 280A(c)(5). Accordingly, we sustain respondent's determination in this regard.

B. Election To Expense Certain Costs Under Section 179 Section 179(a) permits a taxpayer to:

elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account. Any cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service.

In respondent's view, the computer equipment and software that petitioner Michael H. Visin purchased and placed in service in 1998 may not be expensed under section 179 because petitioners failed to make an election on their return consistent with section 179(c) and the regulations thereunder.

Section 179(c)(1) provides that an election under section 179 shall:

(A) specify the items of section 179 property to which the election applies and the portion of the cost of each of such items which is to be taken into account under subsection (a), and (B) be made on the taxpayer's return of the tax imposed by this chapter for the taxable year.

Section 179(c)(1) goes on to provide that the election to expense "shall be made in such manner as the Secretary may by regulations prescribe."

Regulations regarding the time and manner of making an election under section 179 have been prescribed and may be found in section 1.179-5, Income Tax Regs. Specifically, section 1.179-5(a), Income Tax Regs., requires a separate election for each taxable year and, as relevant herein, that such election be made on the taxpayer's first income tax return for the taxable year to which the election applies.

The regulation goes on to track the statutory requirements of section 179(c)(1) (A) and (B).

Finally, the regulation requires that the taxpayer maintain certain records regarding each piece of section 179 property.

The Commissioner has published Form 4562, Part I of which is entitled "Election To Expense Certain Tangible Property (Section 179)", and, as its title suggests, is intended for a taxpayer's use in making the election to expense section 179 property.

Petitioners did not attach to their 1998 income tax return a Form 4562, nor did they unequivocally elect on their return to expense the cost of the computer equipment and software under section 179.

On the other hand, petitioners did include the cost of that property as a component of cost of goods sold. However, we are not inclined to regard the inclusion of property in cost of goods sold as the equivalent of an election under section 179.

See Patton v. Commissioner, 116 T.C. 206 (2001); McGrath v.

Commissioner, T.C. Memo. 2002-231; Starr v. Commissioner, T.C.

Memo. 1995-190 ("Entitlement to the benefits of section 179 is not automatic.

It requires an affirmative election be attached to the original return or to a timely filed amended return."), affd. without published opinion 99 F.3d 1146 (9th Cir. 1996).

In any event, we observe that the matter is without any tax effect in 1998 under the facts of the present case.

In other words, to the extent that petitioners are denied an expensing deduction under section 179, they will be entitled to an increase, on a pro tanto basis, in the amount of their home office deduction under section 280A because the limitation imposed by section 280A(c)(5) will be that much less restrictive.

- 13. - In view of the foregoing, we hold that petitioners are not entitled to expense the cost of the computer equipment and software. Respondent's determination capitalizing the cost of such property and allowing depreciation thereon is sustained.

C. Conclusion To reflect the foregoing, Decision will be entered under Rule 155.

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