In Uncategorized on 08/18/2011 at 14:39

Or, What Price Exclusivity?

Yesterday I noted the case of Luis Bulas, 2011 T.C. Mem. 201, filed 8/17/11, for Judge Haines’ exegesis of Rule 41(b)(1), the “unfair surprise at trial” rule. But as is almost always the case, there were other issues raised and decided in Judge Haines’ decision. Thinking over one of them, I concluded it was worth a few words.

In my post, I stated that Lulu got a partial win on his home office deduction. Lulu had added a bathroom to his home, across the hallway from the bedroom he had asserted he had converted to use as his office, where he carried on his tax preparation business. There was no question that he had no other place of business, or that he met with his clients , or that any personal use was made of the bedroom.

The problem was the hallway and bathroom, both of which Lulu claimed was for the use of his clients. He took a deduction in respect of the hallway and bathroom, as well as the bedroom. IRS disallowed the entire deduction.

Lulu gets to keep the bedroom, but the hallway and the bathroom go down the drain.

Judge Haines shows how IRS proves at least part of its case from Lulu’s own mouth: “Because there are business and personal motives for the expenses related to petitioner’s residence, we must determine what portion of the residence was used regularly and exclusively for petitioner’s business. See Intl. Trading Co. v. Commissioner, 275 F.2d 578, 584-587 (7th Cir. 1960), affg. T.C. Memo. 1958-104; Deihl v. Commissioner, T.C. Memo. 2005-287. Combined personal and business use of a section of the residence precludes deductibility. See generally Sam Goldberger, Inc. v. Commissioner, 88 T.C. 1532, 1557 (1987).

“Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes.” 2011 T.C. Mem. 201, at p. 6.

Lulu tried to claim his children as employees, which might have saved the hallway and bathroom deduction if they were in fact employees, but Lulu couldn’t prove they were, and in any event they weren’t the only non-business users.

No exclusive business use, no deduction. The occasional non-business uses to which Lulu testified cost him money.

Takeaway- Either keep a journal of use of space claimed for home-office use, showing name of user, date, time and business purpose for each use of the space, or lock the space so that entry and use is confined to business visitors. And tell your family and friends to go elsewhere.


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