T.C. Summary Opinion 2003-29
UNITED STATES TAX COURT
IRWIN AND JEANNINE RADNITZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2162-01S. Filed March 26, 2003.
Irwin and Jeannine Radnitz, pro se.
Jonathan H. Sloat, for respondent.
COUVILLION, Special Trial Judge: This case was heard
pursuant to section 7463 of the Internal Revenue Code in effect
at the time the petition was filed.1 The decision to be entered
1
Unless otherwise indicated, subsequent section
references are to the Internal Revenue Code in effect for the
years at issue. Rule references are to the Tax Court Rules of
Practice and Procedure.
- 2 -
is not reviewable by any other court, and this opinion should not
be cited as authority.
Respondent determined deficiencies in petitioners' Federal
income taxes of $799 and $1,536, respectively, for 1997 and 1998.
After concessions by respondent, the issues for decision are:
(1) Whether, under section 280A(c), petitioners are entitled to
deductions for office expenses for the years at issue in
connection with the use of their home and two rental apartments
in their respective trade or business activities in excess of
amounts allowed by respondent, and (2) whether section 280A(c)(5)
is unconstitutional as applied to petitioners.2
Some of the facts were stipulated. Those facts, with the
annexed exhibits, are so found and are made part hereof.
Petitioners’ legal residence at the time the petition was filed
was San Luis Obispo, California.
Petitioners were married during the years at issue. From
January through August 1997, they resided at a Vista Loma address
in Rancho Mirage, California. In August 1997, petitioners moved
from the Vista Loma address to a Deepak Street address in Palm
Springs, California. Petitioners resided at the Deepak address
2
At trial, respondent conceded the deductibility of a
$376 tuxedo rental expense and a $625 furniture expense for 1997.
Petitioners conceded a foreign royalties issue for 1997. Another
adjustment involving taxable Social Security benefits is a
computational adjustment.
- 3 -
throughout all of 1998. Petitioners were lessees of both
properties.
Mr. Radnitz has been engaged as a full-time freelance writer
since 1952 under the pseudonym Brad Radnitz. Mrs. Radnitz is an
actress. Mr. Radnitz primarily wrote screenplays for the film
and television industry and occasionally wrote novels. He
described the nature of his work as a writer as follows:
My work is speculative. It consists of researching and
developing story ideas, film treatments, TV series concepts,
scripts, and/or novels with the intent of selling them to
prospective employers, namely, the movie studios, the
networks, independent producers, and publishers.
By his estimate, Mr. Radnitz has written material for several
films and movies of the week and over 350 television shows,
including "The Lucy Show", "Gilligan’s Island", "My Three Sons",
"The Brady Bunch", "Ironside", and "Columbo". He is a former
president of the Writer’s Guild of America (Writer's Guild) and
has had professional involvement with that organization.
In the earlier part of his writing career, Mr. Radnitz wrote
and sold story ideas or screenplay treatments in the episodic
television field. These ideas were merely outlines for the
ultimate script. In his later career, he wrote more materials to
completion, then had an agent shop for a buyer. His works,
therefore, were not necessarily sold in the year of completion,
- 4 -
and, accordingly, the compensation for his work product often
occurred months or years after the completion of a script. Due
to the speculative nature of his writing activity, every script,
proposed idea, and treatment created remained a potential income
source depending on the interest of a buyer. Therefore, Mr.
Radnitz retained all of his works and rented storage space for
such purpose. He claimed no deduction for this rental expense,
which was $120 per month.
The types of income Mr. Radnitz received from his writing
activity depended on the type of work sold and contract terms
that were negotiated. For a new story idea requiring additional
writing, Mr. Radnitz was paid in stages as each draft or script
was completed. In the case of more speculative projects, he
received payment only when a buyer was found for a finished work.
Mr. Radnitz also received royalty and residual payments, referred
to as income from residuals, for reruns of shows he had written
in the past. During the years at issue, he also received income
from a pension fund established by the Writer’s Guild.
Mr. Radnitz reported taxable pension income of $34,550 and
$41,329, respectively, in 1997 and 1998, none of which is at
issue in this case. He received wage income from residuals of
$980 in 1997 and $1,503 in 1998. He did not receive income from
current writings during 1997 and 1998, as he was drafting
speculative screenplays during those years. Mrs. Radnitz
- 5 -
received wage income of $800 in 1997 and $3 in 1998. The
relationship of Mr. Radnitz with the film and television industry
for whom his writings were created and sold was that of an
employee and was not an independent contractor relationship.
Respondent does not challenge that characterization.
Accordingly, the moneys Mr. Radnitz received for his work
products were reflected on Forms W-2, Wage and Tax Statement.
Screenwriters are generally not provided office space in
which to do their writing. They are expected to provide their
own offices. As a result, during the years at issue, Mr. Radnitz
provided himself with office space for his compositions. The
type and location of the spaces depended on various factors,
including cost, convenience, the length of the writing project,
and the need for privacy and quiet. For the majority of the
time, Mr. Radnitz used his residence as an office. However, for
two 3-month periods during 1998, he used rented spaces that were
outside of his main residence.
During 1997, Mr. Radnitz spent most of his time writing a
screenplay entitled "Home Again". His office was exclusively at
his residence at the Vista Loma address for the first part of the
year and at the Deepak address in the latter part. In 1998, Mr.
Radnitz used the office at the Deepak residence in January and
February, again from June through August, and in December. From
March through May 1998, he used a rented apartment on North
- 6 -
Indian Avenue in Palm Springs, California, as his office. From
September through November 1998, he used another rented apartment
on Ravenspur in Rancho Palos Verdes, California, as his office.
Both rented apartments are referred to hereafter as the North
Indian Avenue and Ravenspur apartments.
When Mr. Radnitz worked out of an office in his residence,
as he has done for 40 years, he set aside one room for the
exclusive use of his work. In 1997 and 1998, that room occupied
20 percent of the total space of his residence. The room
contained novels, dictionaries, encyclopedias, research books,
computer equipment, a typewriter, a desk, one or two chairs,
lamps, a corkboard, a television set, and a video cassette
recorder (VCR). No one in Mr. Radnitz’s family was allowed to
use the room, and it was locked when visitors came. There was no
bed in the room, and no one slept there. Mr. Radnitz used the
television and VCR in the research aspect of his work to record
or watch broadcasts that were related to his writing projects.
The subject equipment was not used for personal or family
enjoyment. Mr. Radnitz generally worked alone and occasionally
met with collaborators to work on projects.
Mr. Radnitz rented both the North Indian Avenue and the
Ravenspur apartments in March 1998 because, as he stated: “we
had a house full of relatives and suddenly having that office
[within his residence] wasn’t going to work, even though I locked
- 7 -
the door.” He used the North Indian Avenue apartment to work on
a script called "In for the Kill" from March through May 1998.
He used the Ravenspur apartment from September through November
1998 to finish and rewrite that script. Prior to Mr. Radnitz’s
use of the Ravenspur apartment, Mrs. Radnitz used it from March
through August 1998. Mr. Radnitz explained that the earlier “use
of that site was by my wife who is pursuing her career as an
actress, and it was used as her office.” No further evidence of
Mrs. Radnitz’s use was provided at trial; however, petitioners
claimed no deductions for Mrs. Radnitz’s use of the Ravenspur
space during this time period.
During 1997, when Mr. Radnitz used his two residences (Vista
Loma and Deepak) as offices for his writing activity, petitioners
determined that 20 percent of the floor space of each home was
devoted to the home office. Respondent has not challenged this
determination. Based on expenses for both homes totaling $30,002
for 1997, petitioners deducted 20 percent of that amount less an
additional 10 percent of the resulting figure “for possible
overage”.3 Thus, on the 1997 return, petitioners claimed a
deduction for an office in the home of $5,400. In the notice of
deficiency, respondent allowed petitioners a $980 home office
3
The total annual home expenses of $30,002 for 1997
consisted of rent, $22,400; gas, $2,268; electricity, $3,852;
water, $876; television cable, $540; and disposal, $66.
- 8 -
expense deduction. At trial, respondent took the position that
the $980 had been erroneously allowed; however, respondent did
not move to disallow that amount or to increase the deficiency in
taxes attributable to the $980. The record is not clear as to
the basis upon which the $980 was allowed, nor as to the basis
for respondent’s claim at trial that the allowed $980 was in
error.
For the year 1998, petitioners again determined that 20
percent of their Deepak residence constituted the home office for
the writing activity of Mr. Radnitz. However, since petitioners
agree that their residence was used only for 6 months, on their
1998 return, they only deducted expenses for one-half of that
year for Mr. Radnitz’s writing activity. For this 6-month
period, petitioners deducted $3,740 as a home office expense on
their 1998 return. In the notice of deficiency, respondent
allowed $1,503. As with regard to the 1997 year, respondent
claimed at trial that the amount allowed for 1998 was erroneous
but did not move at trial to disallow that amount or to increase
the deficiency.
Also for 1998, petitioners deducted expenses for the two
rented apartments (the North Indian Avenue and the Ravenspur
apartments), which were used by Mrs. Radnitz and Mr. Radnitz.
The North Indian Avenue apartment was used by Mr. Radnitz for 3
months during 1998 and the total expenses incurred for that time
- 9 -
period, $2,495, were claimed as an unreimbursed employee business
expense deduction on petitioners’ 1998 return. With respect to
the Ravenspur apartment, petitioners claimed an unreimbursed
employee expense deduction of $4,138 for the 3 months Mr. Radnitz
used the apartment during 1998. As noted earlier, Mrs. Radnitz
also used the Ravenspur apartment during 1998 for 6 months in
connection with her activity as an actress; however, petitioners
did not claim any expense deduction on their 1998 tax return for
that period.
In summary, petitioners deducted the following home office
and employee business expenses related to the three described
dwellings on their 1998 return:
Home office expense for Deepak residence (6 months) $ 3,740
Unreimbursed employee business expenses for the North
Indian Ave. rented apartment (3 months' use by Mr. Radnitz) 2,495
Unreimbursed employee business expenses for the Ravenspur
rented apartment (3 months' use by Mr. Radnitz) 4,138
Total $10,373
The above expenses were essentially all for rent, gas,
electricity, and cable television.4
4
For 1998, the claimed Deepak apartment expenses of
$3,740, as prorated, consisted of rent, $2,040; gas, $512;
electricity, $900; and television cable, $288. The claimed North
Indiana Avenue apartment expenses of $2,495 consisted of rent,
$1,590; gas, $450; electricity, $254; and television cable, $201.
The claimed Ravenspur apartment expenses of $4,138 consisted of
rent, $3,825; electricity, $189; and television cable, $124.
- 10 -
In addition to the rent and utilities expenses, petitioners
deducted expenses for furnishing the North Indian Avenue and
Ravenspur apartments during 1998 totaling $1,371. In the notice
of deficiency, respondent disallowed the $1,371 on the ground
that, although substantiated, the claimed amount did not
constitute deductible ordinary and necessary business expenses.
The Court first addresses petitioners’ entitlement to the
deductions claimed for 1997 and 1998 relating to their residences
(Vista Loma and Deepak) and next considers the deductions claimed
for 1998 relating to the two rented apartments (North Indian
Avenue and Ravenspur).5
Under section 162(a), a taxpayer is allowed to deduct all
ordinary and necessary expenses paid or incurred in carrying on a
trade or business. However, section 280A(a) generally disallows
deductions with respect to the use of a dwelling unit that is
used by a taxpayer as a residence during the taxable year, with
certain exceptions. One of those exceptions applies to use of a
home office. The home office exception, sec. 280A(c), provides:
5
Generally, the burden of proof is on a taxpayer to
establish entitlement to deductions, which are a matter of
legislative grace. New Colonial Ice Co. v. Helvering, 292 U.S.
435, 440 (1934). In certain circumstances, however, sec. 7491
shifts this burden of proof with respect to examinations of
returns commencing after July 22, 1998. There is no evidence in
the record regarding the date the examination of petitioners’
returns commenced, and petitioners do not contend that sec. 7491
applies. In any event, the Court decides this case without
regard to the burden of proof.
- 11 -
SEC. 280A(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,
(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, or
(C) in the case of a separate structure which
is not attached to the dwelling unit, in
connection with the taxpayer’s trade or
business.
In the case of an employee, the preceding sentence shall
apply only if the exclusive use referred to in the preceding
sentence is for the convenience of his employer. For
purposes of subparagraph (A), the term “principal place of
business” includes a place of business which is used by the
taxpayer for the administrative or management activities of
any trade or business of the taxpayer if there is no other
fixed location of such trade or business where the taxpayer
conducts substantial administrative or management activities
of such trade or business.
For a deduction to be allowed under section 280A(c)(1), the
taxpayer must establish that a portion of the dwelling unit is
(1) exclusively used; (2) on a regular basis; (3) for the
purposes enumerated in subparagraphs (A), (B), or (C) of section
280A(c)(1); and (4) if the taxpayer is an employee, the office is
maintained for the convenience of the employer. Hamacher v.
Commissioner, 94 T.C. 348, 353-354 (1990).
- 12 -
The Court finds that Mr. Radnitz’s use of home offices at
the Vista Loma and Deepak residences satisfies the tests of
section 280A(c)(1). First, petitioners met the exclusive use
test with respect to the office portions of their personal
residences. Mr. Radnitz allowed no personal use of the space
that was used in their home as his office. Second, the offices
were used on a regular basis, and Mr. Radnitz worked full time as
a writer. Third, the offices represented Mr. Radnitz’s principal
place of business. During 1997 and half of 1998, the home space
was the only office space he used.
Since Mr. Radnitz was an employee, section 280A further
requires that the home office space must be for the convenience
of the employer. That test has been met. Mr. Radnitz was a
speculative writer who was on his own in creating the work that
he sold or later hoped to sell. He was never provided with
office space by his employers. In such a situation, the home or
self-funded office can only be said to be for the employer’s
convenience. See Soliman v. Commissioner, 94 T.C. 20 (1990),
affd. 935 F.2d 52 (1991), revd. on other grounds 506 U.S. 168
(1993); cf. Gestrich v. Commissioner, 74 T.C. 525 (1980), affd.
without published opinion 681 F.2d 805 (3d Cir. 1982). On this
record, the Court holds that petitioners are allowed deductions
for their rent and utilities expenses for the use of the home
offices at their Vista Loma and Deepak residences to the extent
- 13 -
the amounts claimed do not exceed the gross income limitations of
section 280A(c)(5).
By contrast, the limitations of section 280A(a) do not apply
to the rent and utilities expenses for the office space at the
North Indian Avenue apartment because that space was not used by
petitioners as a residence. Section 280A limits deductions “with
respect to the use of a dwelling unit which is used by the
taxpayer during the taxable year as a residence.” Although the
North Indian Avenue space was technically an apartment, and thus
falls within the definition of “dwelling unit” under section
280A(f), petitioners did not use the space as a residence during
1998. It was used exclusively by Mr. Radnitz in his writing
activity. Petitioners’ expenses in maintaining and furnishing
the North Indian Avenue apartment are deductible as ordinary and
necessary business expenses.
Similarly, the limitations of section 280A(a) do not apply
to the rent and utilities expenses for the office space at the
Ravenspur apartment. There is no evidence in the record that the
Ravenspur apartment was used as a residence or for any personal
purposes by either Mr. Radnitz or Mrs. Radnitz during 1998.
Petitioners were not separated from each other, and neither Mr.
Radnitz nor Mrs. Radnitz used the apartment as a place of
personal abode during this period or any other period during
1998. No other possible motives for rental of this apartment
- 14 -
were established at trial other than the use thereof by
petitioners in their professional careers. Accordingly, the
Court holds that the only and exclusive use of that apartment
during 1998 was for trade or business purposes. The limitations
of section 280A(c), therefore, are not applicable. Petitioners’
expenses in maintaining and furnishing the Ravenspur apartment
are deductible as ordinary and necessary business expenses.
The Court next addresses whether the expenses deducted by
petitioners have been substantiated. The Court notes that Mr.
Radnitz testified credibly regarding his usage of offices both
within his residence and at the two outside locations. Moreover,
petitioners cooperated with respondent throughout the examination
of their returns and produced sufficient documentation of their
utilities expenses to convince the Court of their veracity.
Petitioners provided the Court with a summary of their
utilities expenses but provided only partial expense records to
support their summary. They incorrectly assumed that, since they
had provided the complete set of bills and expense records to
respondent during the audit, reproducing them in Court was not
necessary. In the absence of adequate substantiation, this Court
may estimate the amount of deductible expenses incurred, bearing
heavily against the taxpayer whose inexactitude in substantiating
the amount of the expense is of his own making. Cohan v.
Commissioner, 39 F.2d 540, 543-544 (2d Cir. 1930). However,
- 15 -
there must be sufficient evidence on which to base such an
estimate. Vanicek v. Commissioner, 85 T.C. 731, 743 (1985).
Considering the evidence as a whole, the Court finds that
petitioners paid the following amounts with respect to utilities
expenses. For 1997, the Court finds as a utilities expense $700
for the combined usage of the Vista Loma and Deepak spaces. For
1998, the Court finds as utilities expenses $300 for the Deepak
apartment, $900 for the North Indian Avenue apartment, and $300
for the Ravenspur apartment. As respondent made no issue of the
rents paid, the Court finds that petitioners paid rent expenses
in the amounts deducted on their 1997 and 1998 returns. For
1998, the Court also finds that petitioners paid furnishings
expenses of $1,371 with respect to the North Indian Avenue and
Ravenspur apartments, as petitioners provided sufficient evidence
to substantiate these expenditures.
Finally, the Court addresses the gross income provisions of
section 280A(c)(5). Even if the requirements of section
280A(c)(1) are met, the deductions allowed are limited by section
280A(c)(5). That section provides:
Sec. 280A(c)(5). Limitation on deductions.-–In the
case of a use described in paragraph (1), (2), or (4), and
in the case of a use described in paragraph (3) where the
dwelling unit is used by the taxpayer during the taxable
year as a residence, the deductions allowed under this
chapter for the taxable year by reason of being attributed
to such use shall not exceed the excess of-–
- 16 -
(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.
Any amount not allowable as a deduction under this chapter
by reason of the preceding sentence shall be taken into
account as a deduction (allocable to such use) under this
chapter for the succeeding taxable year. Any amount taken
into account for any taxable year under the preceding
sentence shall be subject to the limitation of the 1st
sentence of this paragraph whether or not the dwelling unit
is used as a residence during such taxable year.
This Court has held on several occasions that the home office
deduction of a writer is limited to the gross income from
writing. Gestrich v. Commissioner, 74 T.C. 525 (1980); Warganz
v. Commissioner, T.C. Memo. 1981-403, affd. without published
opinion 696 F.2d 987 (3d Cir. 1982); Parker v. Commissioner, T.C.
Memo. 1984-233.
Section 280A(c)(5) thus limits petitioners’ deduction of
their office expenses attributable to the Vista Loma and Deepak
addresses. Their deduction is limited to the amount of
petitioners’ gross income derived from Mr. Radnitz’s use of the
home offices reduced by the deductions allowable without regard
- 17 -
to such business use. Scott v. Commissioner, 84 T.C. 683, 692
(1985). Petitioners have already been allowed home office
expense deductions to the extent of Mr. Radnitz’s income from
residuals in both 1997 and 1998. His pension income, as
respondent points out, is in the nature of deferred compensation
and therefore is not considered income attributable to the use of
those spaces. Estate of Sussman v. Commissioner, T.C. Memo.
1978-344 n.3 (pension income was not from taxpayer’s trade or
business, but rather was “merely deferred compensation for his
earlier services and * * * properly allocable to * * * [his]
active employment prior to retirement”). Moreover, since
petitioners rented the Vista Loma and Deepak apartments, there do
not appear to be any deductions otherwise allowable with respect
to them, such as mortgage interest or real property taxes. Green
v. Commissioner, T.C. Memo. 1989-599 n.6. As a result, under
section 280A(c)(5), petitioners are not entitled to greater home
office deductions for the Vista Loma and Deepak apartments than
the amounts respondent has already allowed.
Petitioners raised a constitutional issue with respect to
section 280A(c)(5), which the Court next addresses. Petitioners
objected to the application of the income limitation of section
280A(c)(5) to them based on equal protection and fairness
principles. They argued that they may never be able to deduct
the expenses of Mr. Radnitz’s home office because he may not
- 18 -
realize income on his speculative writings for years after they
are completed. In essence, petitioners contend that section 280A
departs from the traditional principle of matching income and
expenses and that the application of that section is
unconstitutionally unfair to authors of speculative works.
Section 280A applies to all taxpayers and treats speculative
authors no differently from all other citizens who maintain
offices in their residences. Cook v. Commissioner, T.C. Memo.
1997-378. Moreover, section 280A(c)(5) contains a carryover
provision for disallowed deductions. The Court rejects
petitioners’ constitutional arguments. Respondent is sustained
with respect to the application of section 280A(c)(5). As noted
earlier, the limitation provisions of section 280A(c)(5) are not
applicable to petitioners’ expenses relating to the North Indian
Avenue and Ravenspur offices.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
under Rule 155.