*195 Decision will be entered under Rule 155.
Petitioner, a dermatologist employed by a hospital, also owned and managed six rental properties. Held, his rental activities constituted a business for the purpose of
*767 Respondent determined a deficiency of $ 189 in petitioner's Federal income tax for the year 1976. Concessions having been made, the issues remaining for decision are whether petitioner is entitled to a deduction in connection with an office in his home under
FINDINGS OF FACT
Some of the facts were stipulated. The stipulation of facts and the attached exhibit are incorporated herein by this reference.
Petitioner was a resident of Honolulu, Hawaii, at the time he filed the petition herein. He filed an individual *198 income tax return for the taxable year 1976.
Petitioner is a dermatologist employed by Kaiser Permanente Hospital of Hawaii and was so employed during the taxable year in issue. Petitioner worked 40 hours a week at Kaiser Permanente Hospital and devoted additional hours to reading medical journals and attending medical seminars and conferences. Petitioner received gross wages of $ 45,782.50 from his hospital employment in 1976.
During the taxable year 1976, petitioner owned six rental units which he held for the production of income. These properties were listed in his income tax return as follows:
Villa on Eaton Square (condominium);
Mooring (townhouse);
Pearl One (condominium);
Harbour Square (condominium);
Village Green (townhouse);
Crestview (single family dwelling).
*768 Petitioner managed his rental properties entirely by himself. Some of the units were rented furnished.
Petitioner lived in a two-bedroom condominium in 1976. He used one bedroom exclusively as an office for bookkeeping and other activities related to management of his rental properties. That room was furnished with a desk, a bookcase, a filing cabinet, calculators, and a "code-a-phone answering service." *199 There was no television, sofa, or bed in that room, and petitioner did not allow guests to stay there. The closet of that room was used only to store items related to the rental properties such as lamps, carpets, and other furnishings, signs, which petitioner used to advertise the units for rent, cleaning materials, which he needed to prepare a rental unit for a new tenant, and a tool box.
Petitioner, who was 52 years old during the taxable year in question, intended the rental properties to provide a source of income when he retired from his medical practice at age 65. In 1976, petitioner received gross rental income of $ 24,760 from the six units, but had a net loss of $ 23,043 and a negative cash flow of $ 6,242. Petitioner expected that each unit would ultimately produce a positive cash flow of approximately $ 100 to $ 200 per month.
Petitioner incurred depreciation and paid other expenses in 1976 of $ 549 in connection with the use of his second bedroom as an office.
Petitioner used his automobile in driving between his home and the rental units and paid expenses of $ 147 for such automobile use. 2
*200 OPINION
The issues for decision are (1) whether petitioner is entitled to a deduction under
*769
(a) General Rule. -- Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, *201 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 taxpayer's principal place of business,
(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.
*202 Respondent has conceded that a portion of petitioner's residence, which was a dwelling unit as that term is used in
We turn first to the issue of whether petitioner's rental activities constituted a business for purposes of
We agree with respondent's argument to the extent that it rests upon the proposition that no deduction under
An allocable portion of expenses paid or incurred*204 with respect to the use of a dwelling unit which is used by the taxpayer both as a residence and in connection with income producing activities (
See also H. Rept. 94-658, supra, 1976-3 C.B. (Vol. 2) at 853.
We think it significant that this report specifically qualified its refusal to allow the deduction of home office expenses for income-producing activities by carving out the exception "unless the income producing activity constitutes a trade or business" *771 and indicating that the disallowance of a deduction was intended to apply to a taxpayer "who is not in the*205 trade or business of making investments," thereby implying that under appropriate circumstances, such type of activity could constitute a trade or business. 6
Respondent points out that the committee reports relating to
the taxpayer was allowed a portion of the expenses attributable to a family room which was partially used to conduct investment activities which consisted of keeping records with respect to rental properties, preparing the taxpayer's income tax returns, and writing letters to brokers and taxing authorities. *206 [S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 183; H. Rept. 94-658, supra, 1976-3 C.B. (Vol. 2) at 850.]
We note, however, that in that case, the room considered to be a home office was not used exclusively for that purpose, and petitioner did not assert that she was in the trade or business of managing property. Consequently, we do not find the discussion of the Anderson case particularly illuminating.
When the Tax Reform Act of 1976 was considered by the Senate, a floor amendment offered by Senator Bartlett was adopted which incorporated the language of
The Conference Committee did not articulate its reasons for such rejection. Senator Bartlett was concerned with retired *772 persons whose only activity was the management of their investments from their home and viewed his amendment as merely a clarification. See 122 Cong. Rec., supra. Senator Long (the chairman of the Senate Finance Committee) expressed his view of the amendment as a "very limited expansion of what the committee did in this area" and stated that it conformed with "what the committee intended to do to begin with." See 122 Cong. Rec., *208 supra. From the foregoing, it can be inferred that the Conference Committee viewed the amendment simply as surplusage, because the committee reports already made clear that a
We do not read the legislative history as supporting the conclusion that Congress intended to modify the long-established judicial treatment of the ownership of rental properties as constituting a trade or business within the meaning of
Turning to the judicial history, we first address ourselves to respondent's suggestion on brief that the enactment of
As noted in
We think that this articulation of the interplay between
*212 Similarly, we find unpersuasive respondent's attempt, based upon
This Court has held repeatedly*213 in cases subsequent to the Supreme Court decision in Higgins that the rental of even a single piece of real property for production of income constitutes a trade or business.
Perhaps the full reach of these cases would not extend to every situation involving the application of
*215 Statements to the effect that the rental of real estate may constitute a trade or business are by no means confined, as respondent would have us believe, to dicta in cases involving whether capital or ordinary gain must be recognized; where a loss is involved, the "trade or business" issue is critical. See, e.g.,
Respondent maintains that even if petitioner was engaged in the trade or business of renting real property, his principal place of business for purposes of
Respondent's suggested criteria for determining the taxpayer's principal place of business are drawn from cases involving the issue of whether a taxpayer was "away from home" for purposes of
We think that
Accordingly, *220 keeping in mind respondent's concession (see n. 11 supra), we hold that petitioner is entitled to a deduction for expenses incurred in connection with the use of a portion of his residence as an office.
The next issue for decision is whether automobile expenses paid by petitioner for travel between his residence and his rental properties were ordinary and necessary expenses incurred in carrying on a trade or business or were commuting expenses and, therefore, personal and nondeductible.
It is well established that expenses incurred by a taxpayer in commuting between his home and his place of business are personal and nondeductible.
Petitioner made his trips from his home office (which we have held to be the principal place of business with respect to his rental activities) to his rental properties for a business purpose, i.e., to carry out management duties at those properties. We see no reason why the rule that local transportation expenses incurred in travel between one business location and another are deductible should not be equally applicable where the taxpayer's*222 *778 principal place of business with respect to the activities involved is his residence. Hulme v. United States, an unreported case (
*224 Decision will be entered under Rule 155.
Footnotes
1. All statutory references, unless otherwise indicated, are to the Internal Revenue Code of 1954, as amended and in effect for the taxable year involved herein.↩
2. The parties have stipulated that petitioner claimed a deduction of $ 147 for automobile use, and we have accepted this amount as the expenses paid by petitioner, although petitioner's tax return shows a claimed deduction of $ 153.↩
3.
Sec. 280A↩ was made effective for taxable years beginning after Dec. 31, 1975.4. See
sec. 280A(f)(1) , which provides:(f) Definitions and Special Rules. --
(1) Dwelling unit defined. -- For purposes of this section --
(A) In general. -- The term "dwelling unit" includes a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit.↩
5. Petitioner does not contend that subpar. (B) or (C) of
sec. 280A(c)(1)↩ is applicable.6. While the House Ways and Means Committee Report does not contain the "unless * * *" clause of the Senate Finance Committee Report, it does contain the language limiting the disallowance of a deduction to a taxpayer "who is not in the trade or business of making investments." See H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 695, 853.↩
7. In offering his amendment, Senator Bartlett remarked --
"My mendment [sic] is quite simple and, according to the joint committee, was discussed and agreed as the intention of the term 'Business Use of Home.' This amendment simply adds the code language of
section 212(2)↩ , thereby specifically clarifying what is intended to be included as business conducted in a taxpayer's residence." (122 Cong. Rec. S13,742 (daily ed. Aug. 6, 1976).)8. In the cases cited by respondent as allowing deductions in respect of rental property under
sec. 212 , the issue of deductibility appears to have been raised only in the context of that section and the opinions made no reference tosec. 162 .Hartford v. United States, 265 F. Supp. 86 (W.D. Wis. 1967) ;Coors v. Commissioner, 60 T.C. 368, 409-410 (1973) , affd. on other issues519 F.2d 1280 (10th Cir. 1975) ;Markward v. Commissioner, T.C. Memo. 1978-312 . InClancy v. Commissioner, T.C. Memo. 1978-85 , the issue ofsec. 162 was involved, but the Court found that, on the facts, that section did not apply. We note that respondent's attempt to rely on the fact thatsec. 212 had made it unnecessary for the courts squarely to face the "trade or business" issue where ownership and management of rental properties is involved may have come about, at least in part, by his own acquiescences in the Elek, Hazard, and Noble cases. See pp. 774 infra and 773 supra↩.9. See also
Clancy v. Commissioner, T.C. Memo. 1978-85↩ .10. See generally J. Saunders, "'Trade or Business,' Its Meaning Under the Internal Revenue Code," 12 U. So. Cal. Sch. of L. Tax Inst. 693 (1960).↩
11. Respondent concedes that, if we determine (as we have) that petitioner was engaged in a trade or business in respect of his rental properties, "his activities with regard to that business are conducted in the home office," i.e., that petitioner's home office was his principal place of business with respect to his rental activities. In this connection, we note that, in some situations, there may be a substantial question whether the taxpayer's home or his rental properties constitute his principal place of business.↩
12. Subpars. (B) and (C) of
sec. 280A(c)(1)↩ , which provide conditions under which a deduction is allowable for use of a home office which is not a principal place of business, do not appear to us *to be directed to the situation of a taxpayer who has more than one business, and we, therefore, draw no inference from those subsections in resolving the issue at hand.13. For some reason not readily apparent, respondent concedes that if petitioner's rental activities were merely for the production of income and not a "trade or business," the expenses at issue would be deductible under
sec. 212↩ .14. We note that petitioner has not argued in support of his position that any of his transportation expenses were incurred in travel between Kaiser Permanente Hospital and his rental properties.↩
15. Accord,
St. John v. Commissioner, T.C. Memo. 1970-238↩ .16.
Fryer v. Commissioner, T.C. Memo. 1974-77 , is distinguishable from the present case, not only because the residence was not a primary place of business, but also because the taxpayer was seeking to deduct his transportation expenses as travel expenses incurred while "away from home" undersec. 162(a)(2)↩ .