Lead Opinion
The Commissioner determined the following deficiencies in the petitioners’ Federal income taxes:
Year Deficiency
1976. $11,076.76
1977. 10,515.89
1978. 11,694.07
The issue for decision is whether the petitioners may deduct amounts attributable to the maintenance and depreciation of a separate office located on property where they also had a summer home under sections 162(a) and 167 of the Internal
FINDINGS OF FACT
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Ben W. and Natalie G. Heineman, husband and wife, were legal residents of Chicago, Ill., at the time they filed their petition in .this case. They filed their joint Federal income tax returns for 1976, 1977, and 1978 with the Internal Revenue Service Center, Kansas City, Mo. Mr. Heineman will sometimes be referred to as the petitioner.
The petitioner was the president and chief executive officer of Northwest Industries, Inc. (Northwest), during the years in issue. Northwest is a large conglomerate which had its principal offices in Chicago, Ill., during such years. It was formed in 1968 through the merger of the Chicago & Northwestern Railway Co. and subsidiaries, of which the petitioner was president, and the Philadelphia & Reading Corp. and subsidiaries. Shortly after the formation of Northwest, the Chicago & Northwestern Railway operations were sold to a new corporation formed by the railroad’s employees. Northwest is a holding company with seven operating companies and has diversified interests in transportation, chemical products, consumer products, and industrial products. The combined companies have approximately 41,000 employees, and in 1981, they had sales in excess of $3 billion and net earnings of approximately $278 million before a special after-tax gain.
For many years, the petitioner has set aside the month of August to concentrate on long-range planning for Northwest and its predecessor. During the years in issue, he was responsible for reviewing and approving, or disapproving, long-range plans for the operating companies and the holding company. At the beginning of each calendar year, the operating companies began developing plans for the next 4 years. Such plans were submitted to the petitioner for review during August prior to their finalization during the fall and winter of each year.
In addition, the petitioner could perform more effectively his work of studying and reviewing the proposed 4-year plans of the operating companies while he was away from the corporate offices in Chicago. His office in Chicago consisted of a suite which contained a board of directors’ office, a directors’ lounge, a conference room, his own office, and separate offices for his administrative assistant, his secretary, and a special assistant. However, because he considered it part of his responsibilities to be available to Northwest personnel and others in the community when he was at his office in Chicago, his corporate office was not conducive to reviewing the 4-year plans.
From 1959 until 1969, the petitioner used part of the main house at Sister Bay as a makeshift office. However, this arrangement was not satisfactory. His work was interrupted by social visitors to the house and by telephone calls.
In 1969, the petitioner had a separate office built on the Sister Bay property at a cost of approximately $250,000. Such office consists of a single room suspended from the side of the limestone cliff by a cantilevered steel frame anchored in the cliff wall. The office is about 100 yards from the main house and is located slightly below the top of the cliff so that it does not obstruct the view from the main house. The office is a four-sided structure measuring approximately 20 feet by 20 feet. It consists of a single room with restroom facilities and a small kitchen. The office contains a desk, a conference table, two
The petitioner did not ask the board of directors of Northwest to provide him with office facilities that would be isolated from the distractions of the corporation’s Chicago offices. He paid the entire cost of constructing and maintaining the office, and he did not seek reimbursement from Northwest. He did not want Northwest to have a claim on any part of his Sister Bay property.
The petitioner has used the office for long-range planning from the beginning of August until Labor Day every year since it was constructed. During these periods, he worked at the office 6 or 7 days a week for at least 5 hours a day; occasionally, he worked at the office for 12 to 14 hours a day. While he was in Sister Bay, the petitioner received a daily mailpouch from the Northwest offices in Chicago which contained only essential materials. Northwest paid the cost of the daily mailpouch. Telephone calls to the petitioner at the office were screened by his secretary or. administrative assistant. During the period that the petitioner was working at the office in Sister Bay, his administrative assistant spoke with him several times a day. The petitioner also spoke by phone to a number of other people. Sometimes, executives of Northwest or its subsidiaries came to the office for meetings with the petitioner. Very occasionally, the petitioner took social guests to the office to view the sunset. During the years in issue, neither the petitioner nor anyone else lived or stayed overnight in the office. The petitioner believed that such office allowed him to perform more effectively the work of reviewing the long-range corporate plans because he could concentrate on such work and was subject to fewer diversions.
On their Federal income tax returns for the years in issue, the petitioners deducted the following amounts with respect to the office:
Year Maintenance Depreciation
1976.!. $4,171 $12,585
1977. 5,534 11,213
1978. 7,054 9,891
The Commissioner disallowed such deductions in full.
OPINION
The parties have agreed that section 280A, relating to the use of a home as an office, is not applicable in this case because they agreed that the office was not a dwelling unit which was used as a residence within the meaning of section 280A(a). They have also agreed that the expenses claimed by the petitioners were paid and that the amounts of such expenses and depreciation were reasonable. Thus, the issue for us to decide is whether the expenses of maintaining the office and the depreciation attributable to it are items deductible under sections 162(a) and 167 or whether any deduction for such items is denied by section 262 as personal, living, or family expenses.
Section 162(a) allows a deduction for all the ordinary and necessary expenses of carrying on a trade or business, and section 167 allows a deduction for an allowance for depreciation of property used in a trade or business. On the other hand, section 262 denies a deduction for any personal, living, or family expenses. When both sections may be applicable, section 262 takes precedence over section 162. Commissioner v. Idaho Power Co.,
The petitioner argues that his construction and use of the office was an ordinary and necessary business expense required by his unique situation. He claims that he needed time
The Commissioner does not dispute the petitioner’s need to isolate himself from the daily interruptions of the corporate headquarters. The Commissioner also concedes that the petitioner spent all his time at the Sister Bay office working on business matters and that the office, with insignificant exceptions, was never used for personal purposes. Nevertheless, the Commissioner maintains that the expenses of constructing and maintaining the Sister Bay office do not satisfy the "necessary” test of section 162(a) because the petitioner could have secured the needed isolation in the corporate headquarters merely by ordering his staff not to permit any interruptions. He also argues that the construction and use of the office were motivated by the petitioner’s personal preference to work in Sister Bay rather than in Chicago during August of each year.
An expense meets the necessary test if it is appropriate and helpful in carrying on the trade or business. Commissioner v. Tellier,
The petitioner admits that he did not wish to be in Chicago in the summer. However, he is not claiming a deduction for the expenses of going to and from Wisconsin or for his living expenses while there. He is not seeking to deduct personal living expenses because he is carrying on business while in Wisconsin. Compare Commissioner v. Flowers,
The Commissioner suggests that such expenses were not required for the petitioner to perform his work but were incurred solely because of his personal decision to perform such work in Wisconsin. Yet, we have accepted the petitioner’s judgment that such work could be performed more effectively away from his Chicago office, and it is not for us to say what alternative arrangements should be made. He is not required to use another office in Chicago or nearby because such a facility would be less expensive. Lilly v. Commissioner, supra; Welch v. Helvering, supra. There was a business reason for performing the review of the long-term plans away from the Chicago office, and the expenses of the office for performing that work are not made nondeductible because the petitioner chose to perform the work in an environment more suitable to him.
Moreover, the Treasury regulations recognize that if business expenses are incurred while a taxpayer is on a personal trip, the business expenses are deductible. Section 1.162-2(b)(l) of the regulations provides:
(b)(1) If a taxpayer travels to a destination and while at such destination engages in both business and personal activities, traveling expenses to andfrom such destination are deductible only if the trip is related primarily to the taxpayer’s trade or business. If the trip is primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination. However, expenses while at the destination which are properly allocable to the taxpayer’s trade or business are deductible even though the traveling expenses to and from the destination are not deductible.
If the petitioner is considered to be in Wisconsin in August for personal reasons, he is not entitled to deduct the costs of going to and from Wisconsin or the costs of living there, but he is not claiming a deduction for those expenses. He is simply claiming a deduction for his business expenses while there, and the regulation clearly provides that such expenses are deductible.
In support of his position, the Commissioner also maintains that the petitioner should be denied the deduction for the expenses of constructing and maintaining the office because he did not request Northwest to bear such expenses. When an employer has a plan for reimbursing certain employee expenses, and when the employee does not seek such reimbursement, the failure to claim reimbursement results in the disallowance of a deduction for such expenses. See Lucas v. Commissioner,
After weighing and balancing the relevant considerations, we conclude and hold that the expenses of constructing and maintaining the petitioner’s Wisconsin office were appropriate
Decision will be entered for the petitioners.
Notes
All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.