TAX COURT - HOME OFFICE RULING

[Lee B]

The Tax Court sided with the plaintiff in a recent case involving the rules surrounding the home office deduction. The deduction is allowed for the portion of a residence that is used exclusively and on a regular basis as the principal place of business for a taxpayer.

 

Setting aside an area of the dwelling for exclusive use is not always easy, however. In Lauren Miller’s case, the IRS challenged her deduction for the expenses allocable to one-third of her New York City studio apartment of 700 square feet.

 

Miller was employed by BrandingIron Worldwide (BIW), a company that provides public relations, advertising, and marketing services. BIW is headquartered in Los Angeles, while at the time she was hired, Miller was BIW’s only employee in New York.

 

Miller used part of her apartment as an office throughout 2009. BIW listed her apartment address and telephone number on its Web site as the address and phone number for its New York office.  Miller usually worked weekdays between 9 a.m. and 7 p.m., but was generally expected to be available at all times.

 

Miler’s studio apartment, a single room, was divided into three equal sections: an entryway, a bathroom, and a kitchen area; office space, including a desk, two shelving units, a bookcase, and a sofa; and a bedroom area including a platform bed and dressers. Miller has to pass through the office space to get to the bedroom area.

 

Miller frequently met with BIW clients in the office space, and she performed work for BIW using a computer on the desk. The bookcase and shelving units were used to store books, magazines, supplies and samples related to her work for BIW and its clients. Although she used the office space primarily for business purposes, she occasionally used the space for personal purposed. BIW did not reimburse Miller for any of the expenses related to her apartment.

 

The Tax Court, in Summary Opinion 2014-74, noted that if the taxpayer is an employee, the deduction for a home office is only allowable if the exclusive use of the office space is for the convenience of the taxpayer’s employer. In Miller’s case, BIW listed her apartment address on its Web site as its New York office address, and Miller “testified credibly that she regularly used one-third of her apartment space as an office to conduct BIW business, she met with clients there, and she was expected to be available to work well into the evening.”

 

The court agreed with Miller that her apartment was her principal place of business, that she was obliged to use the space as an office for the convenience of her employer, and that BIW was not able or willing to reimburse her for any of her apartment-related expenses.

 

“Although Petitioner admitted that she used portions of the office space for nonbusiness purposes, we find that her personal use of the space was de minimis and wholly attributable to the practicalities of living in a studio apartment of such modest dimensions.”

 

Therefore, the court concluded that Miller was entitled to the home office deduction.

[imjulier]

Reasonableness prevails!

[Jack from Ohio]

Reasonableness prevails!

You have just entered..... "The Twilight Zone!"

[kcjenkins]

Also a perfect example of the power of 'facts and circumstances'.  And why a good professional uses his knowledge and experience when thinking of what can be defended,  I've seen posts stating that you should not even have personal pictures in your office!  Ridiculous. 

[MAMalody]

I understand because of the type of case it was, that it cannot be used as a precedent.  Is that correct?

[BulldogTom]

Just because something cannot be used as precedent does not mean it cannot be introduced at trial.  You can use it as support of a position because a judge says it should be ruled on this way.

 

Tom

Hollister, CA

[MAMalody]

When I was an auditor we were told that no precedential value meant exactly that.  If something was brought up in that venue, disregard it.  If the taxpayer/tax pro wants to argue that way, let it go to appeals or beyond.

[bertrans]

When I was an auditor we were told that no precedential value meant exactly that.  If something was brought up in that venue, disregard it.  If the taxpayer/tax pro wants to argue that way, let it go to appeals or beyond.

You are partly corect; whilst a summary Tax Court ruling cannot, by statute, have precedential value (anymore than a Private Letter Ruling issued by the Office of Chief Counsel to TP 'A' can have precedential value for TPs 'B','C'.....n), nevertheless, such a summary decision may be incorporated into the plaintiff's argument as a whole to show that the position in question is not primafacially dismissable and, thus, worthy of being judged on its particular merits.

[Gail in Virginia]

You are partly corect; whilst a summary Tax Court ruling cannot, by statute, have precedential value (anymore than a Private Letter Ruling issued by the Office of Chief Counsel to TP 'A' can have precedential value for TPs 'B','C'.....n), nevertheless, such a summary decision may be incorporated into the plaintiff's argument as a whole to show that the position in question is not primafacially dismissable and, thus, worthy of being judged on its particular merits.

You shore do talk purty.

[kcjenkins]

You are partly corect; whilst a summary Tax Court ruling cannot, by statute, have precedential value (anymore than a Private Letter Ruling issued by the Office of Chief Counsel to TP 'A' can have precedential value for TPs 'B','C'.....n), nevertheless, such a summary decision may be incorporated into the plaintiff's argument as a whole to show that the position in question is not primafacially dismissable and, thus, worthy of being judged on its particular merits.

Thanks, Bert, that's an important point.  

[BulldogTom]

Yeah, what he said. 

 

Seriously, I was always taught to include every case that supports your position in your original dispute letter.  The tax court judges are generally considered to be pretty good and pretty fair, so if you show an auditor or revenue officer that a case with similar circumstances to your own was ruled upon in the taxpayer's favor, it will stick in their mind.  Especially if you are at appeal before a tax court hearing.  It may not be evidentiary, but it shows that you have a case that can win, and that will make an impression.

 

Tom

Hollister, CA

[MAMalody]

I am not sure I agree with that.  When I was an auditor, the mission was to apply the law and let the chips fall where they may.  So those things required to be disregarded were.  Our mission was not to play let's make a deal.  For that matter, that is not tax courts mission either.  As I understand it, your best bet on  non-evidentiary information would be in appeals.  Their mission is, or at least used to be, close the case...so let's make a deal was the the game.

[bertrans]

I am not sure I agree with that.  When I was an auditor, the mission was to apply the law and let the chips fall where they may.  So those things required to be disregarded were.  Our mission was not to play let's make a deal.  For that matter, that is not tax courts mission either.  As I understand it, your best bet on  non-evidentiary information would be in appeals.  Their mission is, or at least used to be, close the case...so let's make a deal was the the gam

I must assume that you, as a former auditor (for the Service, I suppose), realise that my entire point dealt with how to present a case to the Appeals Officer - who determines if a case may reasonably be referred to Tax Court(the number of cases that actually make it from Appeals to the Court is minimal); I also must assume that you are familiar with the fact that Appeals is the only 'part' of the IRS that has not merely the permission but the authority and requirement to consider - Oh, so delightful phrase! - 'the hazards of litigation.'  Please. By the way, despite my various assumptions, please be assured that it is not my intention to make an a** out of you or me. Live long and prosper.

[mcb39]

I just finished 2010 through 2013 for a four year non-filer.  He is picking them up this afternoon.  Yesterday he called to tell me that he had received the first letter from the IRS and was appalled that they could charge him (so much) interest and penalties.  He really thought that he should try to play the "Let's make a Deal" game.  I told him to be thankful if they don't disallow some of his deductions and prepare to pay up.  He has excellent documentation, but they also are aware of his assets as the transcripts they furnished me with clearly show.  What makes one man think that he is above the rules?  I got a healthy retainer up front and a second installment halfway through, for which I am thankful.  He did admit that he expected his final debt to be much more.  For instance, how can you draw 30 K out of a 401; no taxes withheld; add it to SE income and not expect to owe the IRS?  I just don't understand some people, but do appreciate the fact that he came to me to help him out of this mess.  Turned out, one year he didn't even owe anything. 

[Jack from Ohio]

I am not sure I agree with that.  When I was an auditor, the mission was to apply the law and let the chips fall where they may.  So those things required to be disregarded were.  Our mission was not to play let's make a deal.  For that matter, that is not tax courts mission either.  As I understand it, your best bet on  non-evidentiary information would be in appeals.  Their mission is, or at least used to be, close the case...so let's make a deal was the the game.

When you were an auditor, auditors were trained and experienced. There is no comparison to the people performing audits now. Comparing apples to light bulbs.

[BulldogTom]

I get that at the lower and mid levels of review by the service, they follow the rules a lot more closely.  I guess what I was trying to say is that if you have a compelling case with facts and circumstances that are so similar that was ruled in favor of the taxpayer, you should still show it to the auditor.  They may, and probably will, disregard it at the first and second levels of review.  However, when you file the tax court petition, and you get kicked back to appeals for a final review before tax court, having that case documented in the file when the final review is done by the senior auditor can't hurt.

 

I understand what you all are saying.  I am just saying that if you have a case on point, use it.  Hell, you might end up in front of the judge who made the ruling on the first case!

 

I am definately going to keep this in my back pocket for future use.  De minimis use of a home office for personal reasons (like the crazy crap of personal pictures on the wall or doing your personal bills at your desk) is now allowed by the tax court in my opinion, and I have a judge who ruled in a case to just that fact pattern.

 

Tom

Hollister, CA

[mcb39]

But, what is the status if you carry the business check books out of the office and pay bills at the kitchen table.  IMO, there really has to or should be some levity.  I am not going to take down the picture of my mom, my granddaughter and myself.  The first initials of the three of us form the name of my business.  That isn't necessarily why I have it hanging in my office, but I do.  So, what percentage will they disallow?  Then, if I carry the checkbooks back into the office to pay bills, do I get points back?  Just goes to show how silly some of these rules are.  I believe in keeping everything in your back pocket and up your sleeve that you think may possibly be of help in any given situation.