935 F.2d 52 | 4th Cir. | 1991
Lead Opinion
The Commissioner of Internal Revenue (“Commissioner”) appeals the decision of the United States Tax Court in favor of plaintiff-appellee Nader E. Solimán (“Soli-mán”). This appeal presents the single issue
I.
Solimán, a self-employed anesthesiologist, operated his medical practice as a sole proprietor until September 1, 1983. Beginning on September 1, 1983, Solimán began operating his practice as a professional services corporation, Nader Solimán, M.D., P.C.
During 1983, Solimán worked as an anesthesiologist at three hospitals: Suburban Hospital in Bethesda, Maryland, Shady Grove Hospital in Rockville, Maryland, and Loudon Memorial Hospital in Leesburg, Virginia. He spent approximately thirty (30) to thirty-five (35) hours per week at the hospitals with the majority of such time at Suburban Hospital. None of the hospitals provided an office for Solimán.
Solimán lived in a three-bedroom apartment in McLean, Virginia. He used a spare bedroom as an office, which he furnished with a chair, desk, couch, telephone, answering machine, copier and filing cabinet. In the office he kept patient records, billing records, correspondence with patients, names of surgeons and insurance companies, medical journals, medical texts, collections agency records, and insurance code books. In addition to storing these records and materials, Solimán used his office to contact surgeons and patients, and also hospitals to arrange admission of his patients. He performed all of his record keeping in the office, maintaining detailed accounts of billing records and patient logs. He also used the office for reading medical journals to keep abreast of advances in anesthesiology and to prepare for specific patients. Solimán used the office to prepare for his monthly presentations to post-anesthesia care nurses at Suburban Hospital and to study the materials necessary to satisfy his own continuing medical education requirements. In all, Solimán spent two to three hours a day in his home office.
On his 1983 income tax return, Solimán claimed deductions of approximately $2,500 for expenses and depreciation for the home office. On audit, the Commissioner disallowed the deductions finding that they were precluded under section 280A, because his “home office” was not Soliman’s “principal place of business” within the meaning of the statute. The tax court disagreed and found that Soliman’s home office was his principal place of business.
H.
The sole issue presented in this appeal is how a taxpayer’s “principal place of business” is determined under Section 280A. Section 162(a) of the IRC (26 U.S.C. § 162(a)) allows a deduction for “all the ordinary and necessary expenses incurred during the taxable year in carrying on any trade or business.... ” Before the enactment of section 280A, a taxpayer could abuse the section 162(a) deduction by deducting expenses incurred in the maintenance of a “home office,” because the Code
To close this “loophole,” Congress enacted section 280A, which provides that no deduction is allowable “with respect to the use of a dwelling unit which is used by a taxpayer ... as a residence.” However, section 280A(c)(l) allows a home office deduction “to the extent that such item is allocable to a portion of the dwelling unit which is exclusively used on a regular basis” (1) as the “principal place of business for any trade or business of the taxpayer,” (2) “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 (3) in the case of “a separate structure ... not attached to the dwelling unit, in connection with the taxpayer’s trade or business.”
Section 280A does not define “principal place of business,” and the tax court formulated a judicial definition by adopting the “focal point” test to evaluate a taxpayer’s “principal place of business.” The “focal point” is the place where goods and services are provided to customers and revenues are generated. Baie v. Commissioner, 74 T.C. 105 (1980). Applying this test, the tax court concluded that Soliman’s home could not be his “principal place of business,” because the business activities performed at home were “ancillary to the primary income-generating services [Soli-mán] performed as an anesthesiologist at the hospitals.”
Then the Tax Court found that the “focal point” test had been questioned in the past
The Commissioner urges reversal, claiming that the tax court’s new test renders section 280A meaningless. The Commissioner contends that the tax court’s interpretation of section 280A creates a loophole that every taxpayer, who engages in work related activities at home, will abuse. We find the Commissioner’s concern is unfounded.
The tax court's “facts and circumstances” test reflects the same policy that undergirds the IRS’s proposed regulation allowing salespersons to deduct home office expenses. The regulation provides that salespersons can deduct expenses from a home office even though they spend most of their time on the road as long as they spend “a substantial amount of time on paperwork at home.” Proposed Income Tax Reg. § 1.280A-2(b)(3), 45 Fed.Reg. 52,-399 (Aug. 7, 1980), as amended, 48 Fed. Reg. 33,320 (July 21, 1983).
We find that the tax court’s new “facts and circumstances” test does not eviscerate the requirements of section 280A,
III.
For the above reasons, the decision of the tax court is
AFFIRMED.
. The Commissioner also alleged that Solimán under-reported his income by improperly deducting several "tax seminar” trips to the Virgin Islands and Orlando, Florida. The Tax Court held Solimán liable for these actions, and he did not appeal these findings.
. Three circuit court opinions have criticized the "focal point” test. See Drucker v. Commissioner, 715 F.2d 67 (2d Cir. 1983); Weissman v. Commissioner, 751 F.2d 512 (2d Cir.1984); and Meiers v. Commissioner, 782 F.2d 75 (7th Cir.1986). In each case, the circuit court reversed the tax court's decision against the taxpayer on the taxpayer’s claim of a part of his residence as his "principal place of business.” Although the courts did not repudiate the “focal point” test, they recognized the potential injustice that the test could create.
. Although the regulation was initially proposed in 1980, it is still awaiting final approval by the Commissioner. Under the Commissioner’s regulation promulgation procedures, a proposed regulation can lay dormant indefinitely until the Commissioner either withdraws the proposal or adopts a final draft of a proposal as a regulation.
. We note that the new test has been applied in four recent cases, and in at least one of these cases, the court has found against the taxpayer. See In re James R. Shore, T.C. Memo 1990272, ¶ 90,272 P-H Memo TC (finding against the taxpayer).
Dissenting Opinion
dissenting:
The majority affirms the Tax Court’s adoption and application of its new “facts and circumstances” test for determining a taxpayer’s principal place of business under Internal Revenue Code § 280A. Because I believe the “facts and circumstances” test misconstrues the meaning of § 280A, I respectfully dissent.
Section 280A opens with the “general rule” that “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.” 26 U.S.C. § 280A(a). Section 280A(c), however, provides several exceptions to that general rule for certain kinds of “business use.” Critical here is the exception that allows deduction to the extent that any portion of a dwelling unit is “used on a regular basis [as] the principal place of business for any trade or business of the taxpayer.” 26 U.S.C. § 280A(c)(l)(A) (emphasis added). The issue here is narrowly and simply whether Soliman’s home office use came within this “principal place of business” exception.
Adopting the Tax Court’s new “facts and circumstances” test as the law of this circuit, the majority concludes that a home office can be a taxpayer’s “principal place of business” if “management or administrative activities are essential to the taxpayer’s trade or business and the only available office space is in the taxpayer’s home.” At 54. Because Soliman’s home office was essential to his business, he spent a substantial amount of time there, and there was no other location where he could perform the office functions of his business, the Tax Court found and the majority agrees that Soliman’s home office was his “principal place of business.”
I disagree with this approach. Under the plain language of § 280A(c)(l)(A), a taxpayer can only have one “principal place of business.” See Pomarantz v. Commissioner, 867 F.2d 495, 496 (9th Cir.1988). Section 280A does not in terms allow a taxpayer to deduct home office expenses any time those expenses are essential to his business. As the dissenting judges in the Tax Court’s decision point out, the “facts and circumstances” test eliminates any need for comparing a taxpayer’s use of several business locations to determine which constituted his “principal place of business.” See Soliman v. Commissioner, 94 T.C. 20, 33, 35 (1990) (Nims, J., dissenting) and (Ruwe, J., dissenting). They thought, and I agree, that the term “principal place of business” compels an inquiry directed to that specific question— which is the one that is “principal.” Otherwise Congress could have used language such as “essential place of business” or “necessary place of business.”
All three of the cases relied on by the majority in which circuit courts have concluded that a taxpayer’s home office was
It is undisputed that Solimán does not spend the majority of his time at his home office. He also does not do his most important work — treating patients — at his home office. Although Soliman’s home office work is essential to his business, this should not mandate a finding that the home office is his principal place of business. In a quite similar ease, the Ninth Circuit recently concluded that an emergency care physician’s home office was not his “principal place of business” under § 280A. See Pomarantz v. Commissioner, 867 F.2d 495 (9th Cir.1988). The Ninth Circuit ruled that Pomarantz could not deduct home office expenses because
he consistently spent more time on duty at the hospital rather than at home. The essence of his profession is the hands-on treatment of patients which he did only at the hospital and never at home. Finally, he generated income only by seeing patients at the hospital not studying or writing at home.
Id. at 497-98. I would apply this very reasoning to find that Soliman’s home office was not his principal place of business.
In sum, I would not adopt the “facts and circumstances” test as the law of this circuit. It avoids what I think a fair application of § 280A(c)(l)(A) flatly compels: a comparison of the uses of multiple business locations to determine which is the principal place of business of a taxpayer. It does so by requiring courts to weigh so many factors that great uncertainty in the application of this critical tax concept is bound to result. Cf. Cadwallader v. Commissioner, 919 F.2d 1273, 1275 (7th Cir.1990) (noting “vagaries” of the “ ‘all relevant factors’ laundry list” used by the Tax Court in Solimán). Because Solimán spends the majority of his time and does his most important work away from his home office, I would reverse.
. The majority cites Proposed Income Tax Reg. § 1.280A — 2(b)(3), 45 Fed.Reg. 52399 (Aug. 7, 1980), as amended, 48 Fed.Reg. 33320 (July 21, 1983), in support of its decision. As the majority recognizes, this proposed regulation is not binding precedent on the Tax Court or this
