T.C. Memo. 2006-33
UNITED STATES TAX COURT
CHARLES E. AND SANDRA A. ANDERSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 13228-04. Filed February 27, 2006.
Held: Because petitioners use a portion of their bed
and breakfast inn as their personal residence, the general
disallowance rule of sec. 280A(a), I.R.C., and the
exclusive-use limitation of sec. 280A(f)(1)(B), I.R.C., are
applicable, and expenses relating to the portion of the inn
that is used for both business and personal purposes (i.e.,
dual-use portion) are not allowable.
Mark S. Miller, for petitioners.
Jeremy L. McPherson and Daniel J. Parent, for respondent.
MEMORANDUM OPINION
SWIFT, Judge: Respondent determined a $1,434 deficiency in
petitioners’ 2000 joint Federal income tax.
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The issue for decision is whether petitioners’ bed and
breakfast inn is to be treated as a dwelling unit subject to the
general disallowance rule of section 280A(a) and to the
exclusive-use limitation of section 280A(f)(1)(B). If so, none
of the expenses relating to the portion of petitioners’ bed and
breakfast inn that is used for both business and personal
purposes are allowable.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
Background
The facts of this case have been fully stipulated by the
parties under Rule 122 and are so found.
At the time the petition was filed, petitioners resided in
Sutter Creek, California.
In April of 2000, petitioners purchased a bed and breakfast
inn located in Sutter Creek (the Inn). From the time of its
purchase, petitioners and petitioner Sandra Anderson’s parents
have used a portion of the Inn as their personal residence, and,
after making repairs and improvements, petitioners continued
operating the Inn as a bed and breakfast under the name of
“Eureka Street Inn”.
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From the appropriate government agencies, petitioners
obtained the permits, licenses, and certifications required to
operate the Inn as a bed and breakfast. Petitioners also
obtained membership in a local bed and breakfast trade
association and in the local chamber of commerce.
In 2000, petitioners’ Inn had 289 separate room rentals from
which petitioners received rental income of $26,476.
Petitioners’ Inn has 5,664 square feet of useable floor
space and consists of three floors -- a main floor, an upstairs
floor, and a basement.
Main Floor
The main floor of petitioners’ Inn consists of a living
room, a dining room, two bedrooms, two bathrooms, a sewing room,
a lobby, a registration area, an office, a kitchen, a laundry
room, and stairs leading to the upstairs floor.
Petitioners and petitioner Sandra Anderson’s parents
exclusively use the two bedrooms, the two bathrooms, and the
sewing room for personal purposes.
The living room and the dining room are used exclusively by
paying guests of the bed and breakfast, and the stairs are used
exclusively in operating the bed and breakfast.
The balance of the main floor (lobby, registration area,
office, kitchen, and laundry room) is used both for business in
operating the bed and breakfast and by petitioners for personal
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purposes. Hereinafter, we refer to the portion of the Inn on the
main floor that is used for both business and personal purposes
as the “dual-use” portion.
The parties have stipulated that during 2000 the dual-use
portion of the Inn was used 75 percent of the time for business
purposes and 25 percent of the time for personal purposes.
Upstairs Floor
The upstairs floor of the Inn consists of four guest suites
with private bathrooms, each of which is used exclusively by
paying guests of the bed and breakfast.
Basement
Except for a small space in the corner, the large basement
room of the Inn is used exclusively for business purposes
relating to the bed and breakfast.
Tax Return
As set forth below, the parties have stipulated that, of the
Inn’s total 5,664 square feet, 4,363 square feet were used
exclusively in the business of operating the bed and breakfast,
695 square feet were used exclusively for petitioners’ personal
purposes, and 606 square feet were used for both business and
personal purposes:
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Exclusively Exclusively
Total Business Personal Dual-Use
Square Square Percent Square Percent Square Percent
Feet Feet of Total Feet of Total Feet of Total
Main floor 2,058 829 15 623 11 606 11
Upstairs floor 1,548 1,548 27 0 0 0 0
Basement 2,058 1,986 35 72 1 0 0
Total 5,664 4,363 77 695 12 606 11
In the preparation of petitioners’ 2000 Federal income tax
return and in calculating the depreciation and interest
deductions relating to the business of the bed and breakfast, to
the total 606 square feet dual-use portion of the Inn petitioners
applied the 75 percentage of the time that such portion of the
Inn was used for business purposes, resulting in 455 square feet.
Petitioners added this 455 square feet to the 4,363 square feet
of the Inn used exclusively for business, and petitioners
calculated that a total of 4,818 square feet of the Inn was used
in the business of the bed and breakfast.
Petitioners then calculated a business-use percentage for
the entire Inn by dividing the total business square feet of
4,818 by the Inn’s total square feet of 5,664. Under this
calculation, the Inn was treated by petitioners as used 85
percent for business and 15 percent for personal use.
On Schedule C, Profit or Loss From Business, of their 2000
joint Federal income tax return, petitioners applied the above
percentages (85 percent business, 15 percent personal) to the
total depreciation and interest expenses relating to the Inn.
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In the above calculations, petitioners treat the Inn as what
they refer to as a “commercial structure,” and petitioners do not
apply the exclusive-use limitation of section 280A(f)(1)(B) to
the dual-use portion of the Inn.
On audit, because petitioners used a portion of the Inn as
their personal residence, respondent applied the exclusive-use
limitation of section 280A(f)(1)(B) and disallowed all business
deductions relating to the dual-use portion of the Inn.
Respondent recalculated allowable depreciation and interest
deductions relating to the bed and breakfast business based on an
allocation factor of 77 percent (i.e., the portion of the Inn
used exclusively in the business).
Discussion
Section 280A(a) provides a general disallowance rule for
expenses relating to a “dwelling unit” that is used as a personal
residence of the owner taxpayer. Section 280A(a) provides
generally as follows:1
Except as otherwise provided in this section * * * no
deduction * * * 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.
For purposes of section 280A, a dwelling unit is treated as
used as a taxpayer’s residence if the taxpayer uses the dwelling
1
Certain exceptions to the general disallowance rule of
sec. 280A(a) are not applicable to the issue before us.
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unit (or a portion thereof) for personal purposes for the greater
of 14 days or 10 percent of the number of days during the year
that the unit is rented at a fair rental value. Sec. 280A(d)(1).
Section 280A(f)(1)(A) defines a “dwelling unit” for purposes
of section 280A as:
a house, apartment, condominium, mobile home, boat, or
similar property, and all structures or other property
appurtenant to such dwelling unit.
Under section 280A(f)(1)(B), however, where portions of a
dwelling unit are used exclusively as a hotel, motel, inn, or
similar business, the portion thereof that is used exclusively in
the business will not be considered part of the dwelling unit for
purposes of the disallowance rule of section 280A(a) (the Hotel
Exception). Section 280A(f)(1)(B) provides as follows:
The term “dwelling unit” does not include that portion
of a unit which is used exclusively as a hotel, motel,
inn, or similar establishment.
The word “exclusively”, as used in section 280A(f)(1)(B),
should be given its ordinary and common meaning. Crane v.
Commissioner, 331 U.S. 1 (1947); Old Colony R.R. Co. v.
Commissioner, 284 U.S. 552 (1932).
In Byers v. Commissioner, 82 T.C. 919, 925 (1984) (involving
the rental of a condominium unit as part of a resort hotel and
the personal use of the condominium by the taxpayer for 30 days
of the year), we held that for purposes of the Hotel Exception
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“exclusively” means “solely” and that “any rent-free personal use
of a unit during a taxable year precludes finding that such unit
was used ‘exclusively as a hotel.’”
Accordingly, once personal use exceeds the 14-day or 10-
percent trigger of section 280A(d)(1), under the Hotel Exception
the only portion of a hotel, motel, inn, or bed and breakfast
that is excepted from the general disallowance rule of section
280A(a) is that portion that is used exclusively in the business.
Under the exclusive-use rule, the Hotel Exception does not apply
to the dual-use portion of a hotel, inn, or bed and breakfast.
See Lofstrom v. Commissioner, 125 T.C. ___ (2005) (slip op.
at 11).
Petitioners, however, argue that a structure that otherwise
would fall within the section 280A(f)(1)(A) definition of a
dwelling unit, such as petitioners’ Inn, at some point may become
so commercial in operation and so different from a personal
residence that the general disallowance rule of section 280A(a)
should not apply to the dual-use portion, and business expenses
relating to the dual-use portion of the property (e.g., in this
case the lobby, registration area, office, kitchen, and laundry)
should be allowed. Petitioners implicitly contend that their Inn
has become so commercial that it should be treated the same as
petitioners would treat a large hotel.2
2
Petitioners posit, for example, a situation in which a
(continued...)
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In Grigg v. Commissioner, 979 F.2d 383, 385-386 (5th Cir.
1992), affg. T.C. Memo. 1991-392, in which the taxpayer, similar
to the taxpayer in Byers v. Commissioner, supra, used a
condominium for part of the year as a rental and for part of the
year as a personal residence, the Court of Appeals, in dicta,
stated that section 280A does apply to large hotels:
[A] taxpayer may * * * [take deductions] for the entire
portion of the hotel which is used solely for
commercial purposes. The portion of the hotel which is
used for personal use obviously does not fit the
exception and therefore is a dwelling unit, subject to
the provisions in section 280A.
Thus, for example, if 98 units of a 100 unit hotel
are used exclusively as a hotel and 2 units are used
for personal reasons, the deductible expenses for the
98 units are excepted from section 280A and cannot be
limited thereby since that portion of the hotel meets
the requirements of the hotel exception. The other two
units are dwelling units since the owner has not used
them exclusively as a hotel. * * * [Fn. ref. omitted.]
The purpose of section 280A is to prevent taxpayers from
taking business deductions which in effect relate to personal
living expenses. By reading into the statutory language of
2
(...continued)
taxpayer-owner of a 500-room hotel uses one of the suites as his
personal residence and chooses each morning to read the newspaper
in the hotel lobby. Petitioners argue that the taxpayer’s
personal use of the lobby would be de minimis and should not
result in the disallowance of business expenses relating to the
hotel lobby. Respondent agrees that, “Arguably, merely reading a
newspaper in a lobby does not rise to ‘use for personal
purposes’” but cautions that “the owner might be wise to do his
reading elsewhere”. Herein, we do not decide whether there is a
de minimis exception to the exclusive-use limitation of sec.
280A(f)(1)(B).
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section 280A an exception for establishments that reach a certain
size or commercial level, petitioners would in effect grant to
taxpayers owning large hotels deductions that would be prohibited
to owners of small hotels simply by virtue of the disparity in
the size or commercial nature of their respective hotels.
Section 280A(f)(1)(B) specifically refers to hotels and in
so doing does not place any limitation on the size or nature of
the hotel. The narrow reading by petitioners of section
280A(f)(1)(A) is not consistent with the statutory language.
Even if petitioners’ legal argument had validity, which it
does not, the facts herein are quite different from petitioners’
extreme hypothetical situation. Nearly one quarter of
petitioners’ moderately sized bed and breakfast inn is used
exclusively or partially for personal purposes.
If we find that section 280A is applicable to petitioners’
Inn, in the alternative petitioners argue that their business use
of the dual-use portion of the Inn should be treated as used
exclusively in the business of operating a bed and breakfast and
therefore as qualifying for business deductions under the Hotel
Exception of section 280A(f)(1)(B).
Petitioners misread the exclusive-use rule of the Hotel
Exception. Thereunder, as explained, only the portion of
petitioners’ Inn used solely and exclusively in the business of
operating the bed and breakfast is treated as business property.
The dual-use portion of the Inn, because it was used partially
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for personal purposes, does not fall within the Hotel Exception,
is not removed from the general definition of a dwelling unit,
and related expenses are not excepted from the general
disallowance rule of section 280A(a).
To reflect the foregoing,
Decision will be entered
under Rule 155.