TAX COURT OPINION

Case: Charles E. & Sandra A. Anderson
Docket Number: 13228-04
Judge: Swift
Opinion Type: memo
Filed: 02/27/2006
Pages: 6

BEC RDED SERVICE | CAL. STAT. j p. T. 70DGE T.C. Memo. 2006-33 UNITED STATES TAX COURT CHARLES E. & SANDRA A. ANDERSON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No..13228-04. Filed February 27, 2006. Held: Because petitioners use a portion of their bed the general inn as their personal residence, and breakfast disallowance rule of sec. 280A(a), exclusive-use limitation of sec. 280A(f)(1)(B), applicable, and expenses relating to the portion of that dual-use portion) are not allowable. I.R.C., are the inn is used for both business and personal purposes (i.e., I.R.C., and the Mark S. Miller, for petitioners. Jeremy L. McPherson and Daniel J. Parent, for respondent. MEMORANDUM OPINION SWIFT, Judoe: Respondent determined a $1,434 deficiency in petitioners' 2000 joint Fedëral income tax. SERVED .FEB 2 7 2006 - 3 - From the appropriate government agencies, petitioners obtained the permits, licenses, and certifications required to operate the Inn as a bed and breakfast. Petitioners also obtained membership in a local bed and breakfast trade association and in the local chamber of commerce. In 2000, petitioners' Inn had 289 separate room rentals from which petitioners .received rental income of $26,476. Petitioners' Inn has 5,664 square feet of useable floor space and consists of three floors -- a main floor, an upstairs floor, and a basement. Main Floor The main floor of petitioners' Inn consists of a living room, a dining room, two bedrooms, two bathrooms, a sewing room, a lobby, a registration area, an office, a kitchen, a laundry room, and stairs leading to the upstairs floor. Petitioners and petitioner Sandra Anderson's parents exclusively use the two bedrooms, the two bathrooms, and·the sewing room for personal purposes. The living room and the dining room are used exclusively by paying guests of the bed and breakfast, and the stairs are used exclusively in operating the bed and breakfast. The bàlance of the main floor (lobby, registration area, office, kitchen, and laundry room) is used both for business in operating the bed and breakfast and by petitioners for personal - 5 - Exclusively Exclusively Total Business Personal Dual-Use Main floor Feet 2,058 Upstairs floor 1,548 1,548 Basement Total 2,058 5,664 1,986 4,363 Square Square Percent Square Percent Square Percent Feet of Total Feet of Total Feet of Total 829 15 27 35 77 623 0 72 695 11 0 1 12 606 0 0 606 11 0 0 11 In the preparation of petitioners' 2000 Federal income tax return and in calculating the depreciation and interest deductions relating to the business of the bed and breakfast, to the total 606 square feet dual-use portion of the Inn petitioners applied the 75 percentage of the time that such portion of the Inn was used for business purposes, resulting in 455 square feet. Petitioners added this 455 square feet to the 4,363 square feet of the Inn used exclusively for business, and petitioners calculated that a total of 4,818 square feet of the Inn was. used in the business of the bed and breakfast. Petitioners then calculated a business-use percentage for the entire Inn by dividing the total business square feet of 4,818 by the Inn's total square feet of 5,664. Under this calculation, the Inn was treated by petitioners as used 85 percent for business and 15 percent for personal use. On Schedule C, Profit or Loss From Business, of their 2000 joint Federal income tax return, petitioners applied the above percentages (85 percent business, 15 percent personal) to the total depreciation and interest expenses relating to the Inn. - 7 - unit (or a portion thereof) for personal purposes for the greater of 14 days or 10 percent of the number of days during the year that the unit is rented at a fair rental value. Sec. 280A(d)(1). Section 280A(f)(1)(A) defines a "dwelling unit" for purposes of section 280A as: a house, apartment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. Under section 280A(f)(1)(B), however, where portions of a dwelling unit are used exclusively as a hotel, motel, inn, or similar business, the portion thereof that is used exclusively.in the business will not be considered part of the dwelling unit for purposes of the disallowance rule of section 280A(a) (the Hotel Exception). Section 280A(f)(1)(B) provides as follows: The term "dwelling unit" does not include that portion of a unit which is used exclusively as a hotel, motel, inn, or similar establishment. The word "exclusively", as used in section 280A(f)(1) (:B), should be given its ordinary and common meaning. Crane v. Commissioner, 331 U.S. 1 (1947); Old Colony R.R. Co. v. Commissioner, 284 U.S. 552 (1932). In Byers v. Commissioner, 82 T.C. 919, 925 (1984) (involving the rental of a condominium unit as part of a resort hotel and the personal use of the condominium by the taxpayer for thirty days of the year), we held that for purposes of the Hotel - 9 - In Griqq v. Commissioner, 979 F.2d 383, 385-386 (5th Cir. 1992), affg. T.C. Memo. 1991-392, in which the taxpayer, similar to the taxpayer in Byers v. Commissioner, supra, used a condominium for part of the year as a rental and for part of the year as a personal residence, the Court of Appeals, in dicta, stated that section 280A does apply to large hotels: * * taxpayer may * [take deductions] [A] portion of the hotel which is used solely for commercial purposes. used for personal use obviously does not fit the exception and therefore is a dwelling unit, subject the provisions in section 280A. The portion of the hotel which is for the entire to Thus, for example, if 98 units of a 100 unit hotel are used exclusively as a hotel and 2 units are used the deductible expenses for the for personal reasons, 98 units are excepted from section 280A and cannot be limited thereby since that portion of the hotel meets the requirements of units are dwelling units since the owner has not used [Fn. ref. omitted.] them exclusively as a hotel. the hotel exception. The other two * * * The purpose of section 280A is to prevent taxpayers from taking business deductions which in effect relate to personal living expenses. By reading into the statutory language of 2(...continued) the suites as his the lobby would be de minimis and should not lobby. Petitioners argue that the taxpayer's taxpayer-owner of a 500-room hotel uses one of personal residence and chooses each morning to read the newspaper in the hotel personal use of result in the disallowance of business expenses relating to the hotel newspaper purposes'" but cautions that "the owner might be wise to do his reading elsewhere". Herein, we do not decide whether there is a de minimis exception to the exclusive-use limitation of sec. 280A(f)(1)(JB). in a lobby does not rise to 'use for personal lobby. Respondent agrees that, "Arguably, merely reading a - 11 - for personal purposes, does not fall within the Hotel Exception, is not removed from the general definition of a dwelling unit, and related expenses are not excepted from the general disallowance rule of section 280A(a). To reflect the foregoing, Decision will be entered under Rule 155 .