T.C. Summary Opinion 2008-13
UNITED STATES TAX COURT
BRIAN E. & MARCIE L. MALLIN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2370-06S. Filed February 11, 2008.
Brian E. Mallin and Marcie L. Mallin, pro sese.
Tamara L. Kotzker, for respondent.
ARMEN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect when the petition was filed.1 Pursuant to section
7463(b), the decision to be entered is not reviewable by any
1
Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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other court, and this opinion shall not be treated as precedent
for any other case.
Respondent determined deficiencies in petitioners’ Federal
income taxes as follows: $4,248.94 for 2001, $138.33 for 2002,
and $174 for 2003. After concessions by both parties, the
principal issues remaining for decision are: (1) Whether
petitioners are entitled to deduct a loss in 2001 on the sale of
their primary residence for the portion of that sale allocable to
the workshop used in petitioners’ business, and (2) whether
petitioners are entitled to deductions in 2001, 2002, and 2003
for depreciation on a furnace and a garage workshop, both used in
their business.
Background
Some of the facts have been stipulated, and they are so
found. We incorporate by reference the parties’ stipulation of
facts and accompanying exhibits.
At the time the petition was filed, Brian E. Mallin and
Marcie L. Mallin resided in Wyoming.
Petitioners purchased a residence in Sioux Falls, South
Dakota (the South Dakota property), in 1995. Petitioners
refinanced their house in 1998. As part of the refinancing
process, the house was appraised at $199,000. During 1999 and
2000, petitioners built a 352-square-foot workshop on this
property at a total cost of $16,179. The workshop was built as
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an addition to the existing attached two-car garage. It had a
wall separating it from the garage and its own overhead garage
door.
In late 1999 or early 2000, petitioners began a woodworking
business, making Adirondack chairs, tables, and ottomans. The
garage workshop was used for this business. Petitioners claimed
and were allowed $346 of depreciation for the workshop on their
Schedule C, Profit or Loss From Business, attached to their 2000
Federal income tax return.
Petitioners sold the South Dakota property in February 2001
for $203,000. The house was purchased by a relocation company,
which priced the house by averaging two appraisals: One for
$200,000 and one for $206,000. Those appraisals valued the
workshop as a third-car garage; one valued it at $3,000 and the
other at $10,000.
Petitioners reported no gain on the sale of the South Dakota
property because the amount realized was not taxable pursuant to
section 121. See sec. 121(a) and (b)(2)(A). Petitioners
reported a loss of $9,731 on the same sale, all of which was
attributed to the sale of the workshop.
In 2000 petitioners moved to Cheyenne, Wyoming. They
purchased a house there in 2001 (the Wyoming property). After
purchasing the Wyoming property, petitioners converted the
existing attached garage into a workshop; as part of the
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conversion, they installed a furnace in the workshop.
Petitioners then spent $18,123 building a new garage in which to
house their vehicles.
Making and selling chairs did not go well in Wyoming, so
petitioners tried their hands at wood signs and carved duck
decoys. They also gave away beaded keychains as a promotional
item for their woodworking business. Ultimately, petitioners
terminated their woodworking business in 2003.
Discussion
Although only two principal issues remain in the case, we
discuss all of the adjustments made in the notice of deficiency
for the sake of clarity.
1. Schedule C--2001
After discussion and elaboration at trial, it became clear
that the bead and decoy expenses denied by respondent were
incurred by petitioners as part of their woodworking business,
and we find for petitioners on those items.
2. The Wyoming Workshop
Petitioners claimed deductions on their Federal income tax
returns for the years 2001, 2002, and 2003 related to the furnace
installation in, and business use of, the Wyoming workshop.
Unfortunately for petitioners, any deductions related to the
business use of the Wyoming workshop are limited by the
provisions of section 280A(c)(5). See also Rule 142(a); INDOPCO,
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Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,
290 U.S. 111, 115 (1933).
Generally, section 280A(a) prohibits deductions allocable to
the business use of a “dwelling unit” used by a taxpayer during
the taxable year as a personal residence. However, if a portion
of the dwelling unit is used as a taxpayer’s principal place of
business, deductions allocable to that use are permitted, though
they are limited if the gross income from the business use is
less than the total business expenses. Sec. 280A(c)(1), (5).
Here, petitioners had insufficient gross income from their
woodworking business in 2001, 2002, and 2003 to offset deductions
for either the furnace or the workshop after the application of
section 280A(c)(5).
Respondent does not dispute the Wyoming workshop was used as
petitioners’ principal place of business with respect to their
woodworking business. The issue is simply whether the garage-
turned-workshop should be considered part of the Wyoming
residence and thus be subject to the home office limitations of
section 280A.
Notably, the workshop was attached to the house, and
petitioners used its entrance to gain access to the residence in
the winter. Aside from common sense--an attached garage is
considered part of one’s home under normal circumstances--caselaw
has held that even a detached office building located on the same
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property as the taxpayer’s residence 12 feet away was part of the
taxpayer’s “dwelling unit”. See Scott v. Commissioner, 84 T.C.
683 (1985). Further, the term “dwelling unit” is defined as a
house and all structures or other property appurtenant to the
house. Sec. 280A(f)(1). An attached garage is clearly
appurtenant to the house.
Petitioners argue that because they never used the workshop
as a garage or as a personal space, the analysis should be
different. We disagree, and respondent’s determination as to
this issue is sustained.
3. The South Dakota Workshop
Respondent initially denied a loss on the sale of the South
Dakota workshop on the basis that it was part of the residence
and thus the loss was personal in nature. Generally, no
deduction is allowed on a loss incurred by a taxpayer with
respect to the sale of his principal residence. See sec. 165(c);
sec. 1.165-9(a), Income Tax Regs. Respondent has since modified
his position, and the parties now agree that the workshop was
used for a business or income-producing purpose. The crux of the
remaining disagreement is how to calculate any gain or loss on
the portion of the South Dakota property specifically
attributable to the workshop. See sec. 1.165-9(b), Income Tax
Regs. In particular, the parties disagree on how to apportion
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the $203,000 sale price for the South Dakota property between the
residence and the workshop.
Respondent urges us to apportion the sale proceeds of the
South Dakota property by square footage; because the workshop was
approximately 9 percent of the home’s overall square footage,
respondent suggests that we should allocate 9 percent of the
home’s sale price to the workshop. However, given that workshop
space is not as valuable as living space in a home, we decline to
use respondent’s calculation method.
Petitioners, on the other hand, urge us to assign $4,000 of
the sale price to the workshop. They arrive at this number by
calculating the difference between the 1998 appraisal of $199,000
and the 2001 sale price of $203,000; in other words, petitioners
attribute the entire increase in the home’s value between 1998
and 2001 to the workshop. They contend that all of the increase
must have been a result of the workshop as that was the only
thing that changed in the period between appraisals. We disagree
with petitioners’ argument.
Rather than use either of the parties’ methods to allocate
the proceeds from the sale of the South Dakota property between
the residence and the workshop, we shall use the only allocation
approach supported by the record; i.e., taking the average of the
appraisals of the workshop value used for the 2001 sale. This
approach may be an imperfect solution given the fact that the
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appraisals both value the space as a third-car garage, but, as
respondent recognizes, this approach mirrors the valuation of the
entire South Dakota property. And, as petitioners provided us
with no evidence to support any other valuation, this is the best
we can do on the record before us. See Rule 142(a); INDOPCO,
Inc. v. Commissioner, supra; Welch v. Helvering, supra.
4. Recapture From the Sale of the South Dakota Property
For 2000, petitioners deducted $346 as a depreciation
allowance on the South Dakota property’s workshop pursuant to
section 167. Respondent determined that the amount was subject
to recapture. Because petitioners are entitled to some loss on
the sale of the South Dakota workshop, there was no gain on its
sale, and we need not reach a conclusion on this issue. See also
sec. 1.1250-1(a)(5)(i), Income Tax Regs.; cf. secs. 121(d)(6),
1250(b)(3); sec. 1.121-1(e)(4), Example (5), Income Tax Regs. We
therefore do not sustain respondent’s determination regarding
recapture.
5. Itemized Deductions-2001, 2002, 2003
To the extent respondent made adjustments to petitioners’
itemized deductions because of changes determined in the notice
of deficiency, those adjustments should be modified to reflect
the other issues already conceded by the parties and those
discussed herein.
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Conclusion
To reflect our disposition of the disputed issues, as well
as the parties’ concessions,
Decision will be entered
under Rule 155.