T.C. Memo. 1996-231
UNITED STATES TAX COURT
CHARLES E. KING, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 18362-93. Filed May 22, 1996.
Charles E. King, pro se.
Reginald R. Corlew, for respondent.
MEMORANDUM OPINION
GOLDBERG, Special Trial Judge: This case was heard pursuant
to section 7443A(b)(3) and Rules 180, 181, and 182.1 Respondent
determined a deficiency in petitioner's Federal income tax for
1990 in the amount of $672. The issues are: (1) Whether
petitioner is entitled to deduct expenses attributable to a home
1
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
2
office under section 280A; (2) whether petitioner is entitled to
claim a deduction for health insurance premiums; and (3) whether
petitioner is entitled to a deduction for a contribution to an
individual retirement account (IRA).
Some of the facts have been stipulated and are so found.
The stipulation of facts and the exhibits received into evidence
are incorporated herein by this reference. Petitioner filed a
timely joint Federal income tax return for 1990 with his wife,
Betty W. King (Mrs. King), now deceased. Petitioner resided in
Holly Hills, Florida, at the time he filed his petition.
In 1983, after petitioner retired from his position as a
school administrator for Fairfax County, Virginia, he and Mrs.
King moved to Holly Hills, Florida, and started a yacht charter
and brokerage business under the name of King International.
King International was a sole proprietorship with its business
office located in petitioner's home at 1402 Riverside Drive,
Holly Hills, Florida. Petitioner ran the daily operations, and
Mrs. King handled the financial end of the business.
During the year at issue, petitioner received pension income
of $44,669.45 and interest income of $12,111.23, a portion of
which he used to finance his business operations. Petitioner
owned a West Mariner 39 yacht which he used to advertise his
brokerage activities and attract charter customers for King
International. During 1990, petitioner was not employed, and,
3
other than the $950 earned from his charter activities, received
no nonemployee compensation.
On his 1990 Federal income tax return, petitioner claimed
deductions for IRA contributions of $950 and self-employed health
insurance of $950. On his Schedule C for King International,
petitioner reported gross income of $950 and deducted business
expenses in the aggregate amount of $11,272.26, resulting in a
net loss of $10,322.26. In particular, petitioner claimed
deductions for utilities of $351.22 and "Repairs and maintenance
of office in home" of $161.32, each representing 20 percent of
the total utility and maintenance cost of petitioners' residence.
In the notice of deficiency, respondent determined that
petitioner was not entitled to adjustments to income for an IRA
contribution or health insurance pursuant to the limitations of
sections 219(b) and 162(l)(2)(A), respectively. Respondent also
disallowed the deductions for home office expenses pursuant to
the limitations prescribed by section 280A(c)(5). Respondent
does not dispute that petitioner was engaged in a business for
profit within the meaning of sections 162 and 183, or that he has
substantiated his business expenses. Respondent's determinations
are presumed correct, and petitioner bears the burden of proving
otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).
We first address whether petitioner is entitled to claim a
deduction for expenses attributable to his home office. Section
280A provides in relevant part:
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SEC. 280A. DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION
WITH BUSINESS USE OF HOME, RENTAL OF 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 S 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 principal place of business for
any trade or business of the taxpayer,
* * * * *
(5) Limitation on deductions.--In the case of a
use described in paragraph (1) * * * the deductions
allowed under this chapter for the taxable year by
reason of being attributed to such use shall not exceed
the excess of--
(A) the gross income derived from such use
for the taxable year, over
(B) the sum of--
(i) the deductions allocable to such use
which are allowable under this chapter for
the taxable year whether or not such unit (or
portion thereof) was so used, and
(ii) the deductions allocable to the
trade or business (or rental activity) in
which such use occurs (but which are not
allocable to such use) for such taxable year.
5
The home office deduction is, therefore, limited to the excess of
the gross income generated from the business activity conducted
in the office, over all other deductible expenses attributable to
such activity, but which are not allocable to the use of the unit
itself. Grinalds v. Commissioner, T.C. Memo. 1993-66 (citing H.
Rept. 99-426, at 134-135 (1985), 1986-3 C.B. (Vol. 2) 1, 135).
In other words, the deduction may not create or increase a net
loss from the business activity to which it relates. Id.
In making the determination of the amount of gross income
derived from the use of petitioner's home office during 1990,
respondent took into account only the amount of gross income that
petitioner reported on his Schedule C. Because petitioner's sole
proprietorship incurred a net loss during the year at issue,
respondent disallowed the deductions for expenses attributable to
the home office in their entirety. Petitioner contends that his
interest income should be considered gross income for purposes of
section 280A(c)(5) because the interest income is used to finance
his business activities. Petitioner further contends that King
International is entitled to the same treatment afforded to a
corporation with respect to the deductibility of office expenses
and the classification of interest income. Petitioner presented
no evidence or authority to support his contentions.
Petitioner reported his interest on the Form 1040 of his
1990 return as personal interest income, not on his Schedule C as
business income. The fact that such income was used to finance
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business operations does not transform personal interest income
into business income derived from petitioner's use of the office
in his home. Moreover, King International is a sole
proprietorship with an office in petitioner's home, not a
corporation with an office outside of petitioner's residence,
and, consequently, the deduction of expenses attributable to the
home office is subject to the limitations prescribed in section
280A(c)(5).
King International earned gross income of $950 and incurred
a net loss of $10,332.26 for 1990. A deduction for expenses
attributable to a home office may not create or increase a net
loss from the business activity to which it relates. Grinalds v.
Commissioner, supra. Accordingly, petitioner is not entitled to
deductions related to his home office. Respondent is sustained
on this issue.
We next consider whether petitioner is entitled to deduct
health insurance expenses of $950. Section 162(l)(1) permits
self-employed individuals to deduct 25 percent of the amount paid
during the year for insurance which constitutes medical care for
themselves, their spouses, and their dependents. Section
162(l)(2)(A) limits this deduction to the "earned income (within
the meaning of section 401(c)) derived from the trade or business
with respect to which the plan providing the medical care
coverage is established."
7
The term "earned income" is defined by section 401(c) as the
net earnings from self-employment as defined in section 1402(a),
but "only with respect to a trade or business in which personal
services of the taxpayer are a material income-producing factor."
Sec. 401(c)(2)(A)(i). Under section 1402(a), "net earnings from
self-employment" is defined, in relevant part, as gross income
earned by a taxpayer from a business carried on by the taxpayer,
less deductions allowed which are attributable to such business.
For the year at issue, petitioner reported a net loss for
King International and, consequently, had no net earnings from
self-employment. We reject petitioner's argument that his
interest income should be taken into consideration because such
income is not "derived by an individual from any trade or
business carried on by such individual". Sec. 1402(a). We find
that petitioner had no "earned income" from his business
activities within the meaning of section 401(c) and, therefore,
is not entitled to deduct self-employed health insurance
expenses. Respondent is sustained on this issue.
The final issue for consideration is whether petitioner is
entitled to a deduction for a contribution of $950 to an IRA. In
general, a taxpayer is entitled to deduct amounts contributed to
an IRA. Sec. 219(a); sec. 1.219-1(a), Income Tax Regs. The
deduction in any taxable year, however, may not exceed the lesser
of $2,000 or an amount equal to the compensation includable in
the taxpayer's gross income for such taxable year. Sec.
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219(b)(1). Compensation is defined by section 219(f) as earned
income, as defined by section 401(c)(2). As stated above,
section 401(c)(2) directs us to section 1402(a) and the
definition of "net earnings from self-employment".
Petitioner's adjusted gross income for 1990 of $43,921.48,
after adjustments for his IRA and self-employed health insurance
deductions, consists of interest, dividend, and pension income.
Interest and dividend income is not compensation within the
meaning of section 401(c) because, as noted, such income does not
represent payment with respect to which personal services of the
taxpayer are a material income-producing factor. Likewise,
pension income is expressly excluded from the definition of
compensation by section 219(f)(1). Because petitioner had no net
earnings, and, therefore, no compensation within the meaning of
section 219(f)(1), he is not entitled to deduct any portion of
his IRA contribution. We sustain respondent on this issue.
Decision will be entered
for respondent.