T.C. Memo. 1997-572
UNITED STATES TAX COURT
DIANE CAMERON HORTON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 19647-95. Filed December 29, 1997.
Diane Cameron Horton, pro se.
Patricia Montero and Laurel M. Robinson, for respondent.
MEMORANDUM OPINION
PAJAK, Special Trial Judge: This case was heard pursuant to
section 7443A(b)(3) of the Code, and Rules 180, 181, and 182.
All section references are to the Internal Revenue Code in effect
for the taxable year in issue. All Rule references are to the
Tax Court Rules of Practice and Procedure.
Respondent determined a deficiency in petitioner's Federal
income tax for the year 1992 in the amount of $1,509, and an
- 2 -
accuracy-related penalty in the amount of $302 pursuant to
section 6662(a). A computational adjustment was made.
The Court must decide whether section 280A and the overall
limitation set forth in section 280A(c)(5) are applicable to
business expense deductions claimed by petitioner in connection
with her art/fine art business located in the building where
petitioner resided. Respondent has conceded that petitioner is
not liable for the penalty under section 6662(a).
Some of the facts have been stipulated and are so found.
For clarity and convenience, our findings of fact and opinion
have been combined. Petitioner resided in Berkeley, California,
when her petition was filed.
On her 1992 Federal income tax return, petitioner reported
wages of $25,308 that she earned as a part-time teacher at St.
Paul's and at Ecole Bilingue.
On her 1992 return, petitioner also reported a net loss of
$6,925 from her art/fine art business. She reported $2,400 in
gross receipts from that business on her Schedule C. She
subtracted $1,159 as the cost of goods sold and reported gross
income of $1,241. She claimed as deductions the following
expenses on her Schedule C:
Expense Amount
Car & Truck $ 672
Legal 185
Office 80
Rent 6,740
Repairs & Maintenance 100
- 3 -
Supplies 68
Utilities 146
Other-telephone 45
Other-books/pub 75
Other-dues 55
$8,166
Respondent disallowed the $6,740 claimed as a rent expense
deduction by petitioner pursuant to section 280A(c)(5).
During 1992, petitioner leased the upper and lower stories
of one half of a building located at 2743 Tenth Street, Berkeley,
California, for $1,050 per month, or $12,600 per year. For our
purposes, we shall ignore the other half of the two-story
building and refer to petitioner's premises as "Tenth Street" or
"premises". The lease was entitled "Commercial Lease and Deposit
Receipt". The lease specifically stated that the premises were
to be used for "painting and residence."
The Tenth Street building was located in a manufacturing
district and was in a commercially zoned area. There was one
address for the premises and one lease for the premises. The
rent and utilities were charged and paid as a unit for the
premises.
Petitioner and her son resided in the upper level of the
premises. She used the lower level for her art/fine art
business.
Petitioner contends that she leased the Tenth Street
premises for the primary purpose of her art/fine art business.
She further argues that section 280A does not apply to her
- 4 -
art/fine art business conducted in one portion of the Tenth
Street premises.
Deductions are a matter of legislative grace. A taxpayer
seeking a deduction must be able to show that the taxpayer comes
within the express provisions of the statute. New Colonial Ice
Co. v. Helvering, 292 U.S. 435, 440 (1934). Petitioner bears the
burden of proving that respondent's determination is incorrect.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Section 162(a) generally allows a deduction for all ordinary
and necessary expenses paid or incurred during the taxable year
in carrying on any trade or business.
Section 280A(a) provides that in the case of a taxpayer who
is an individual, no deduction otherwise allowable under
Chapter 1 of the Code (relating to normal taxes and surtaxes)
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" includes a house, apartment,
condominium, or similar property, and all structures or other
property appurtenant to such dwelling unit. Sec. 280A(f)(1)(A).
Section 280A(c) provides for exceptions to section 280A(a).
In pertinent part, section 280A(c)(1)(A) states that section
280A(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 as the principal place of business for
any trade or business of the taxpayer.
- 5 -
Section 280A(c)(5) provides an overall limitation on the
deductions that may be allowed under various sections including
section 280A(c)(1)(A). Specifically, section 280A(c)(5) provides
that the deductions allowed shall not exceed the excess of the
gross income derived from the trade or business use for the
taxable year, over the sum of certain deductions allocable to
such income (such as interest and taxes).
Petitioner bases her argument on section 17958.11 of Cal.
Health and Safety Code (West 1984) (hereinafter referred to as
California Law.) California Law provides for the adoption of
building regulations for the conversion of commercial or
industrial buildings to joint living and work quarters.
California Law recognizes that joint living and work quarters
means residential occupancy by a family maintaining a common
household of one or more floors in a building originally designed
for industrial or commercial occupancy, which building includes
cooking space and sanitary facilities and adequate working space
regularly used by a person residing in that building.
Those provisions of California Law were based on legislative
determinations that a substantial number of manufacturing and
commercial buildings in urban areas have lost manufacturing and
commercial tenants, and that the untenanted portions of such
buildings constitute a potential resource capable of
accommodating joint living and work quarters which would be
physically and economically suitable for use by artists,
- 6 -
artisans, and similarly-situated individuals (artists). It was
further found that the public will benefit by making such
buildings available for joint living and work quarters for
artists because the new use contributes to the revitalization of
central city areas, the conversion results in building
improvements and rehabilitation, and the cultural life of cities
will be enhanced by the residence of large numbers of persons
regularly engaged in the arts. Moreover, it was found that
artists require larger spaces for the pursuit of their artistic
endeavors and for the storage of materials and products than are
regularly found in dwellings, the financial remunerations to be
obtained from a career in the arts are generally small, artists
generally find it financially difficult to maintain quarters for
their artistic endeavors separate and apart from their places of
residence, high property values and resulting rental costs make
it particularly difficult for artists to obtain the space
required for their work, and the residential use of such space is
accessory to the primary use of such space as a place of work.
As stated, this California Law was relied upon by petitioner to
support her argument that she should be allowed to deduct her
rent expense under section 162(a).
Although we may sympathize with petitioner's argument, such
an argument is not dispositive here. "The proper place for a
consideration of petitioner's complaint is the halls of Congress,
- 7 -
not here." Hays Corporation v. Commissioner, 40 T.C. 436, 443
(1963), affd. 331 F.2d 422 (7th Cir. 1964).
A review of the legislative history of section 280A
indicates that Congress was concerned with alleged use of
business space in a residence. In the statute, Congress made no
exception for business use in a residence in a building which
formerly was used only for commercial purposes.
As to the Tenth Street property, the parties agree that
petitioner lived with her son on the top floor. The parties also
agree that the lower floor was used exclusively and regularly for
petitioner's business. The only point in issue is whether
section 280A and the overall limitation of section 280A(c)(5)
applies to petitioner's claimed business expenses because of her
joint use of the premises for living and business purposes.
Respondent states that respondent has found no legal authority
making a distinction where the building was zoned for commercial
use. Nor have we.
On the other hand, the Senate Finance Committee stated in
its report, S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 49,
186-187, that:
the committee amendment provides that a deduction will not
be disallowed in the case of a taxpayer who, in connection
with his trade or business, uses a separate structure which
is not attached to his dwelling unit (e.g., an artist's
studio in a structure adjacent to but unattached to his
residence).
* * * * * * *
- 8 -
The committee amendment also provides an overall
limitation on the amount of deductions that a taxpayer may
take for the business use of the home or separate unattached
structure. The allowable deductions attributable to the use
of a residence or separate unattached structure for trade or
business purposes may not exceed the amount of the gross
income derived from the use of the residence or separate
unattached structure for that trade or business reduced by
the deductions which are allowed without regard to their
connection with the taxpayer's trade or business (e.g.,
interest and taxes).
The applicable rules are set forth in section 280A(c)(1) and (5).
(We note that to the extent deductions are disallowed under these
rules, they may be carried forward to the succeeding taxable
years subject to certain limitations. Sec. 280A(c)(5).)
If a separate studio adjacent to an artist's residence is
subject to the section 280A(c)(5) overall limitation, it follows
that a studio attached to an artist's residence likewise would be
subject to the overall limitation.
California Law permitted the conversion of the Tenth Street
premises into joint living and work quarters. The second floor
became petitioner's dwelling unit. Petitioner herself referred
to her premises as a live/work unit. Petitioner used her
dwelling unit as a residence. Because that dwelling unit/
residence was on the second floor, the deductions for her
business use of the first floor became subject to section 280A
and the overall limitation of section 280A(c)(5). This case
cannot be distinguished from the opinions of this Court in
Cunningham v. Commissioner, T.C. Memo. 1996-141, affd. per curiam
- 9 -
without published opinion 110 F.3d 59 (4th Cir. 1997), and
Burkhart v. Commissioner, T.C. Memo. 1989-417.
For the foregoing reasons, we are compelled to sustain
respondent's determination.
Decision will be entered
for respondent.