TAX COURT OPINION

Case: Young Ae Ann & Dong Ern Paul Rhyu
Docket Number: 18984-09S
Judge: Colvin
Opinion Type: bench
Filed: 02/16/2011
Pages: 10

UNITED STATES TAX COURT 20217 Washington, D.C. YOUNG AE ANN AND DONG ERN PAUL RHYU, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. ) ) ) ) ) ) ) ) ) Docket No. 18984-09S Pursuant to Rule 152 (b) , Tax Court Rules of Practice and Procedure, it is O R D E R ORDERED that the Clerk of the Court shall transmit the the transcript of the trial of herewith to petitioners and to respondent a copy of pages of Special Trial ~Judge Lewis R. Carluzzo at Los Angeles, California, on January 27, 2011, containing his oral opinion rendered at the conclusion of trial. the above case before findings of fact and In accordance with the oral findings of fact and opinion, decision will be entered-under Rule 155. (Signed) Lewis R. Carluzzo Special Trial Judge Dated: Washington, D.C. February 16, 2011 SEVED FEB 162011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 Bench Opinion by Special Trial Judge Lewis R. Carluzzo January 27, 2011 Young Ae Ann & Dong Ern Paul Rhyu v. Commissioner Docket No. 18984-095 THE COURT: The Court has decided to render oral findings of fact and opinion in this case, and the following represents the Court's oral findings of fact and opinion. This proceeding for the redetermination of a deficiency is conducted as a Small Tax Case pursuant to the provisions of section 7463 of the Internal Revenue Code of 1986, as amended, and Rules 170 through 175 of the Tax Court Rules of Practice and Procedure. This bench opinion is made pursuant to the authority granted by section 7459(b) of the Internal Revenue Code of 1986, as amended, and Rule 152 of the Tax Court Rules of Practice and Procedure. Subsequent section references made in this bench opinion are to the Internal Revenue Code of 1986, as amended, in effect for 2007; Rule references are to the Tax Court Rules of Practice and Procedure. Dong Ern Paul Rhyu (petitioner) appeared pro se. Vivian Bodey appeared on behalf of respondent. There was no appearance by or on behalf of Young Ae Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 Ann Rhyu. The case will be dismissed as to her for lack of prosecution. The decision entered with respect to her will reflect the resolutions of the issues either settled between respondent and petitioner or addressed in this bench opinion. In a notice of deficiency dated May 4, 2009, respondent determined a $2,967 deficiency in petitioner's 2007 Federal income tax. The issues for decision are: (1) Whether petitioners are entitled to an earned income credit; and (2) whether petitioners are now entitled to a deduction not claimed on their 2007 joint Federal income tax return for home office expenses. Some of the facts have been stipulated and are so found. Petitioners are and were at all times relevant, married to each other. They filed a timely 2007 joint Federal income tax return (the 2007 return). When the petition in this case was filed, they lived in California. Petitioners held several interest bearing bank and/or investment accounts during 2007. The interest that they earned from these accounts totaled $3,378 for that year. For many years, including the year in issue here, petitioner was self-employed as a builder/ Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 5 contractor. During 2007 and for many other years as well, petitioner used a room in petitioners' residence as his business office. It would appear that from time to time, petitioner met with clients there, and no doubt he made phone calls and did paperwork in that room (petitioner's home office). The extent of his activities in his home office, however, cannot be determined from the record. For example, we cannot tell how often, if at all, he met with clients at his home office, or how much time was spent there during any given business day or week as compared to the time that he spent at the various construction projects that he apparently was involved with during 2007. It is.unclear how much of petitioner's contracting business involved new construction and how much involved renovating existing structures. Although the record is short on specifics, it is clear that the services that petitioner provided to his clients were rendered not only at his home office, but at the locations of the various construction projects that he was involved with during 2007, as well. Petitioners own the residence where petitioner's home office is located. That residence is subject to a mortgage. During 2007 petitioners paid $15,913 in mortgage interest and local property Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 taxes of $4,116.66. The amounts paid for mortgage interest and local property taxes qualify as itemized deductions . See sec . 63 (d) ; sec . 163 (h) (2) (D) and ©; and sec . 164 (a) (2) . Petitioners' 2007 return was prepared by a paid Federal income tax return preparer. On that return, as relevant here, petitioners (1) Reported $1,802 as interest income; and (2) claimed an earned income credit computed by treating one of their daughters as a qualifying child. Petitioners' 2007 return includes a Schedule C, Profit or Loss From Business, on which the income and expenses attributable to petitioner's contracting business are reported. No deduction for home office expenses is claimed on that Schedule C. The net profit shown on the Schedule C is carried over to a Schedule SE, Self-Employment Tax, also included with petitioners' return. The taxable income shown on petitioners' 2007 return is computed with reference to the appropriate standard deduction allowable pursuant to section 63 (b). The income tax liability reported on their 2007 return consists entirely of the section 1401 tax as shown on the above-referenced Schedule SE. In the above-referenced notice of deficiency Heritage Reporting Corporation (202).628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 respondent: (1) increased petitioners' income by the difference between the amount of interest income reported on their 2007 return and the amount of interest that they earned during that year; and (2) denied the earned income credit. Other adjustments made in the notice of deficiency have been resolved between the parties and will not be discussed in this bench opinion. Petitioners now agree that they understated the interest income reported on their 2007 return by the amount shown in the notice of deficiency. Their concession of this adjustment, in effect, requires that respondent's disallowance of the earned income credit be sustained, and little discussion is needed on the point. In general, and subject to a variety of conditions and limitations, an eligible taxpayer is entitled to an earned income credit. Sec. 32(a). As relevant here, one of those limitations is found in section 32(I), which for 2007 and after being adjusted for inflation pursuant to section 32(j), provides that an otherwise allowable earned income credit is denied to a taxpayer whose interest income (among other types of investment income) exceeds $2,900. Here, petitioners! interest income for 2007 exceeded those Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 limitations. Consequently, they are not entitled to an earned income credit and respondent's disallowance of that credit is sustained. The parties' concessions and the foregoing discussion resolves all of the issues that arise from adjustments made in the notice of deficiency, and we turn our attention now to petitioners' claim to a deduction for home office expenses. As we have noted in opinions too numerous to count, deductions are a matter of legislative grace, -and the taxpayer bears the burden of proving that he or she is entitled to any deduction claimed. Rule 142(a); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934). In this case, section 162(a) generally allows a taxpayer to deduct ordinary and necessary business expenses, and more often- than not office expenses paid or incurred in running a business are generally considered "ordinary and necessary" within the meaning of that section. There is an exception to this general rule for "home offices" however. As relevant here, home office expenses paid or incurred are only deductible if the home office is the taxpayer's principal plaae of business. See sec. 280A(c) (1) (A). Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 9 Where a taxpayer's business is conducted in part in the taxpayer's home office and in part at another location, the following two primary factors are considered in,determining whether the home office qualifies under section 280A(c) (1) (A) as the taxpayer's "principal' place of business: (1) The relative importance of the functions or activities performed at each business location, and (2) the amount of time spent at each location. Commissioner v. Soliman, 506 U.S. 168, 175-177 (1993). Whether the functions or activities performed at the home office, such as planning, research, paper work, etc., are necessary to the business is relevant but not controlling, and the location at which goods and/or services are delivered to customers generally will be regarded as the principal place of a taxpayer's business. Id. at 176. The relative importance of business activities engaged in at the home office may be substantially outweighed b business activities engaged in at another location. The Supreme Court has explained as follows: "If the nature of the business requires that its services are rendered or its goods are delivered at a facility with unique or special characteristics, this is a further and weighty consideration in finding Heritage Reporting Corporation (202) 628-4888 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 that it is the delivery point or facility, not the taxpayer's residence, where the most important functions of the business are undertaken." Id. at 176. In this case petitioners' claim to a deduction for home office expenses is best characterized as an after thought that arose only in response to respondent's deficiency determination. As petitioner testified, he has been in business as a contractor/builder for over twenty years and has never claimed a deduction for home office expenses on his Federal income tax return for any of those years. The lack of detail on the specific activities that took place in petitioner's home office requires that we resolve the dispute between the parties by substituting our general knowledge on how a self-employed builder/contractor would conduct his or her business for what actually occurred. In so doing and keeping in mind the principles established by the Supreme.Court in Soliman, it would seem to us that the actual construction projects performed by petitioner for his clients constitute the "most important functions" of the income generating services that petitioner rendered for those clients. Those services obviously took place at the location of his clients' Heritage Reporting Corporation (202) 628-4888 | 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 properties and not at petitioner's home office. Furthermore, we have no way to compare the time that petitioner spent at these various locations as compared to the time that he spent during 2007 at his home office. Consequently, we find that petitioner has failed to establish that his home office was his principal place of business during 2007. It follows that petitioners are not entitled to a deduction for home office expenses incurred in the operation of petitioner's business, even if, as noted in Justice Stevens' dissent in Soliman, supra at 185, petitioners probably would have been entitled to an office expense deduction in some amount if petitioner's business office was located anywhere other than their residence. To reflect the foregoing, and to allow for the possibility that it would be more advantageous for petitioners to compute the deficiency by substituting otherwise agreed to itemized deductions for the standard deduction claimed on their 2007 return, decision will be entered under Rule 155. This concludes the Court's oral findings of fact and opinion in this case. (Whereupon, at 10:18 a.m., the bench opinion in the above-entitled matter was concluded.) Heritage Reporting Corporation (202) 628-4888