DocketNumber： Docket No. 2136-80.
Citation Numbers： 43 T.C.M. 45, 1981 Tax Ct. Memo LEXIS 44, 1981 T.C. Memo. 699
Filed Date： 12/9/1981
Status： Non-Precedential
Modified Date： 11/21/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
NIMS,
Petitioners Dennis A. Roth ("Roth") and Judith M. Roth, husband and wife, resided in Moreland Hills, Ohio, at the time they filed the petition in this case. They filed a joint tax return for the 1977 taxable year.
From January 1, 1977, to sometime in July, 1977, petitioners resided at a house in Beachwood, Ohio. In this house, petitioners claim, one room was set aside as a home office used by Roth in carrying on various trades or businesses. From July, 1977, to December 31, 1977, petitioners resided at a house in Moreland Hills, Ohio. Petitioners assert that, in the Moreland Hills house, one room was also set aside as a home office used by Roth. On their 1977 tax return, petitioners deducted $ 1,116 for "use of home & separate business phone for various investments, one room of 10 - house value in excess of 200,000.00." Respondent disallowed this deduction in full, citing section 280A. 1
*47 Section 280A(a) provides as a 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." However, section 280A(c) sets forth the following exceptions to this general rule and limitations on those exceptions:
(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.
(5) LIMITATION OF DEDUCTIONS.--In the case of a use described in*48 paragraph (1), * * * the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of--
(A) the gross income derived from such use for the taxable year, over
(B) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or option thereof) was so used.
In
If a taxpayer's trade or business produces no gross income in the taxable year, section 280A(c)(5) disallows any deductions for home office expenses attributable to that trade or business.
We hold, similarly, that petitioners have failed to show that any gross income was produced in Roth's Miden Leasing*50 business in 1977. Petitioners reported a loss of $ 7,197.64 with respect to Miden Leasing on their 1977 tax return. At trial, Roth testified that gross rental receipts were between $ 15,000 or $ 20,000 in 1977. Petitioners produced no records to back up this assertion. 2 Given this record, we hold that petitioners have failed to meet their burden of proof that any gross income was produced in connection with Miden Leasing in 1977; consequently, no home office deductions attributable to Miden Leasing are allowable.
Petitioners adduced evidence that Roth received gross income from his three other claimed trades or businesses in 1977. A Form W-2 indicates Roth received $ 95,000 in 1977 as an employee of Dennis A. Roth Co., L.P.A. Another Form W-2 indicates he received $ 6,800 in 1977 from Mary Farmer's Nurses Registry & Employment Agency in his work for that organization. *51 Finally, petitioners reported income of $ 216 from one of five real estate partnerships listed on their 1977 return. (For the remaining four partnerships, petitioners reported losses of $ 14,404.08, $ 93.62, $ 1,775.54 and $ 3,927.62, respectively.)
As to these three claimed trades or businesses, we now proceed to apply the limitations on home office deductions contained in section 280A(c)(1). Petitioners assert that they are entitled to home office deductions because Roth "exclusively" and "regularly" used the home offices either as his principal places of business (section 280A(c)(1)(A)) or as a places for meeting with clients in the normal course of his businesses (section 280A(c)(1)(B)).
In regard to Roth's trade or business as an employee of Dennis A. Roth Co., L.P.A., we are convinced that the home offices were not Roth's principal places of business. A taxpayer can only have one principal place of business for each trade or business under section 280A(c)(1)(A). No matter how "helpful" the existence of a home office is to a taxpayer's business, it may not provide the basis for a deduction unless it is the
*53 Similarly, petitioners have failed to show that the home offices were the principal places of business for Roth's real estate syndication "trade or business" or Roth's employment with Mary Farmer's Nurses Registry & Employment Agency. Petitioners failed to introduce any evidence as to where Roth's real estate activities were carried out. And petitioner's only evidence as to where the Nurse's Registry employment was performed was Roth's testimony that it was performed both at the main offices of the Nurse's Registry on Cedar Road in Cleveland Heights, Ohio, and in Roth's home as well. Petitioners bear the burden of proof on the issue of Roth's principal place of business in connection with these activities. Rule 142(a). 5 On this record they have failed to meet that burden.
Petitioners' final argument on the home office issue is that the home offices were used as places to meet with clients in the course of Roth's business as an employee of Dennis A. Roth Co., L.P.A. Section 280A(c)(1)(B) provides that home office deductions may be allowed*54 when the home office is exclusively used on a regular basis as a place where the taxpayer meets with clients in the normal course of business. Roth testified that clients "on frequent occasions" met with him at his home in Moreland Hills, Ohio, rather than travel the 22-1/2 miles to Roth's downtown offices. Roth kept no records of such meetings, however, and could not state precisely how many meetings occurred. Facing a similar record in
The congressional committee reports discussing the application of section 280A indicate that "Expenses attributable to
We see no reason not to follow our holding in
In summary, petitioners have failed to meet their burden of showing their entitlement to any home office deduction under section 280A.
On October 3, 1975, Roth lent one Vincent Amato ("Amato") the sum of $ 750. Amato was "the number-three man" in North-east OhioErie-wide Coordinating Agency ("NOECA"), Dennis A. Roth Co., L.P.A.'s second-largest client. Roth testified that the reason for his making the loan was that Amato had just recently gone through a divorce and was short of cash, unable to pay his bills.
*56 In return for the loan, Amato signed a cognovit note payable to Roth in the amount of $ 1,100 and due in 90 days. The cognovit note empowered any attorney to appear in court after the note became due and confess judgment in favor of the holder.
After the note became due around the beginning of 1976, Roth sought repayment. Amato at that time was living with his parents. Amato requested that Roth forbear on collection for a while since Amato was in a cash squeeze, and Roth complied. Roth made further unsuccessful attempts to collect the loan throughout 1976, but at no time did he begin court proceedings on the note.
Sometime around the end of the year 1976, Amato left his employment with NOECA and disappeared. Roth and his secretary then began writing letters, making phone calls and personally contacting third parties in an attempt to find Amato. Amato's parents would not divulge their son's whereabouts. Other efforts to locate Amato proved similarly fruitless.
Once, in 1977, Roth located Amato working for the Brecks Hill recreation department, but Amato soon left that employment and moved again. Once again, Roth lost tract of Amato. At this point, late in 1977, Roth*57 filed court papers seeking a judgment on the note in Cleveland Municipal Court.
In 1980, Roth's secretary recognized Amato on a television evening news program. Amato was at that time the Acting Safety Director for the City of Cleveland. The secretary attempted to contact Amato at his office, but messages were not answered.
Finally, on September 22, 1980, judgment was entered by the Cleveland Municipal Court against Amato on the note. A notice of garnishment was issued against the City of Cleveland for Amato's wages on January 8, 1981.
On their 1977 tax return, petitioners deducted $ 750 as a "business bad debt-money loaned to client." Respondent disallowed such deduction, arguing in the alternative 1) that Roth had no basis in the debt, 2) that if Roth had a basis, the debt was not worthless at the end of 1977 or 3) that the debt, if worthless, was a nonbusiness bad debt.
Section 166 allows a deduction for bad debts. The amount of any bad debt deduction, however, is limited to the taxpayer's adjusted basis in the debt.
Respondent next argues that the cognovit note was not worthless at the end of 1977 and hence no deduction should be allowed under section 166(a) in that year. Disappearance of the debtor coupled with an apparent lack of leviable assets has often been held to justify allowance of a bad debt deduction in this Court. See, e.g.,
Respondent's third argument is that even if the debt was worthless in 1977, it was a nonbusiness bad debt within the meaning of section 166(d). Petitioners concede that Roth was not in the business of lending money. However, they argue that Roth occasionally lent money to the clients of Dennis A. Roth Co., L.P.A., to keep the clients' business with the corporation and protect Roth's source of income. We think the facts here belie petitioner's argument. First, Amato was only the "number-three man" in NOECA. There is no evidence that loans by Roth to Amato were necessary to keep NOECA as a client. Second, *60 these loans were not made to a client, but an employee of a client. Thus petitioners' citation of
In the statutory notice of deficiency, respondent disallowed the following additional deductions taken by petitioners in 1977: $ 1,148.65 of interest expenses, $ 1,159.66 of taxes and $ 673.81 of entertainment expenses. Respondent now concedes that $ 341.92 of interest expenses were improperly disallowed.
As to these remaining disallowed deductions, petitioners bear the burden of proof. Rule 142(a). The only evidence petitioners have adduced to substantiate any of these claimed deductions are a series of check stubs from their checkbook. *61 No testimony was introduced to explain which of these stubs addressed which particular disallowed deduction.We note that respondent did allow petitioners substantial amounts of taxes paid and interest deductions in 1977. As a result, we cannot tell whether these check stubs relate to disputed or undisputed deductions. Lacking any other evidence on these deductions, we hold petitioners have failed to meet their burden of proof on these issues.
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect for the year before the Court.↩
2. We take this opportunity to observe that in preparing for trial, petitioners made no discernible effort whatsoever to comply with
3. Assuming Roth worked eight hours at his downtown office on weekdays, he spent 40 hours at his downtown offices each week. Roth only claims to have worked, on average, a week of six and one-half days and 11 hours per day. This means his average work week was 6.5 X 11 = 71.5 hours. Forty hours is over half of his normal work week. ↩
4. Petitioners do argue that Roth's employer required him to keep a home office for the purposes of storing files and doing some work away from his downtown office. While sec. 280A(c)(1) requires that an employee may only deduct home office expenses if the home office is maintained for the convenience of his employer, satisfaction of that requirement is not by itself grounds for allowance of a home office deduction; the requirements of the first sentence of sec. 280A(c)(1) must also be met.↩
5. Unless otherwise indicated, any reference to "Rules" shall be deemed to refer to the Tax Court Rules of Practice and Procedure.↩