                       T.C. Memo. 1998-125



                     UNITED STATES TAX COURT



           LESLIE A. AND BETSY M. ROY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7423-96.                     Filed March 31, 1998.



     Walter A. Hefner, Jr., for petitioners.

     Sandra Veliz, for respondent.


                       MEMORANDUM OPINION

     DEAN, Special Trial Judge:   This case was heard pursuant to

section 7443A(b)(3) and Rules 180, 181, and 182.1   Respondent

determined deficiencies in petitioners' Federal income taxes for

the years 1992 and 1993 in the amounts of $3,600 and $3,901,


     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue, and
all Rule references are to the Tax Court Rules of Practice and
Procedure.
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respectively.   The issues for decision are:   (1) Whether

petitioners are entitled to rental expense deductions for a

personal residence; and (2) whether petitioners are entitled to

exclude payments by their employer for use of their personal

residence.

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by reference.   Petitioners resided in Moxee,

Washington, at the time they filed their petition.

                            Background

     When Leslie Roy (petitioner) was in high school, he began

working on his family's farm, Roy Farms, Inc. (Roy Farms or the

farm).   Roy Farms is a large farm, owning more than 5,000 acres

of land and harvesting crops such as apples, hops, sweet

cherries, and alfalfa.   The farm also maintains approximately

1,000 head of cattle.

     Roy Farms is an S corporation, of which petitioner holds a

minority interest.   In 1992, he held 8.15 percent of Roy Farms'

shares and in 1993, he held 10.39 percent.     The remainder is held

by petitioner's three brothers and his parents.    Lester Roy,

petitioner's father, is the president of Roy Farms.

     Petitioner has worked steadily on the farm since high

school, taking only a temporary break to earn his college degree
                               - 3 -


in economics.   For the taxable years at issue, petitioner worked

as one of several farm managers.

     In his capacity as manager, petitioner is required to live

on or in close proximity to the farm.   He has personnel to manage

on a daily basis.   Each morning, petitioner awakens to laborers

waiting outside his house in hopes of getting work for the day.

Petitioner is responsible for hiring and firing these laborers,

as needed, on the land he oversees.

     Petitioner also must be available at various times of the

day and night as part of his management of the land.   The hops

season runs for 11 months out of the year, with a 6-month cycle

of around the clock irrigation.    The laborers work 24 hours a day

in August to harvest the 1,300-acre crop.   The apple orchard

requires 24-hour attention from April through October, and the

cattle require 24-hour attention during calving season.   During

irrigation season, the managers must watch for broken pipes, and

during frost season, managers are on call for frost alarms which

require immediate response.   Farming equipment must be closely

monitored to avoid vandalism and to ensure the security of the

machinery.   For this reason, petitioner sometimes stores farming

vehicles and other equipment on his property.

     In addition to tractors and trucks, petitioner also provides

storage space for ladders and packing boxes that are used

throughout the season.   On the 5-acre parcel of land surrounding
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his home, petitioner uses 1/4 acre to store the empty apple bins

used in harvesting the 600-acre apple orchard.    During picking

season, the apples are also kept on the property where they are

eventually loaded and hauled away.     During pruning season, cars

and trucks use his long driveway to park, and tractors ride up

and down the road, creating dust and causing wear and tear on the

road.

     Petitioner's land is contiguous to the farming property

owned by Roy Farms.   Prior to 1989, petitioner and his family

lived in farm-owned housing for 15 years.    In 1989, petitioner

and his wife purchased a 5-acre parcel of land abutting the

property and built their own home.     All the expense incurred in

purchasing and running the home are paid by the petitioners.

Petitioners pay the mortgage and insurance on the property, as

well as real estate taxes.   Although there is no signed contract,

Roy Farms agreed to pay petitioner $1,000 each month to

compensate petitioner for the wear and tear on his roads, for use

of various facilities in his home, and for storage of the farming

equipment and materials on his property.

     In his 1992 Federal income tax return, petitioners reported

$12,000 on the Schedule E as rental income, and deducted $12,000

in business expenses and depreciation for the farm's use of his

house.   In 1993, petitioner reported the $12,000 as rental

income, but then excluded the entire amount as de minimis income

under section 280A(g)(2).
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     Respondent disallowed deduction of any expenses or

depreciation on the grounds that section 280A(c)(6) denies

deduction when an employee rents a residence to his employer for

business purposes, and respondent disallowed exclusion under

section 280A(g)(2), arguing that the $12,000 was not de minimis

rental income.   Rather, respondent argues that petitioners rented

their residence to Roy Farms for $1,000 a month, who subsequently

leased it back to petitioners rent free as farm housing.2

Because this alleged leasing agreement provided for rental of

petitioner's home for more than 15 days during the taxable year,

the exclusion for de minimis use of their property, respondent

argues, does not apply.

     Petitioner contends that even if respondent's position were

true, section 280A(g)(2) works to exclude the $1,000 payments

from Roy Farms as rental income because the payments are

significantly below the fair rental value of the residence, and

thus the petitioners have not actually rented out their dwelling

unit but have maintained exclusive personal use of the house as a

residence for the entire taxable years at issue.

                            Discussion

     Generally, a taxpayer may not deduct expenses incurred from

the rental use of a personal residence or any portion thereof.



     2
      We decline to address the application of sec. 119 to
petitioners, as this issue was not raised by either party
anywhere in the record.
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Sec. 280A(a).   If the taxpayer rents out his dwelling unit,

deductions are allowed only to the extent the gross income

derived from renting the property exceeds certain expenses.    Sec.

280A(c)(3), (c)(5).

     Petitioners received $12,000 in taxable years 1992 and 1993

from Roy Farms for the use of certain areas of their house and

surrounding property.   They do not dispute receiving this income,

but they contest respondent's disallowance of any exclusions or

deductions to offset this income.

     The arrangement petitioners have with Roy Farms, respondent

argues, is one that falls squarely within the disqualifying

language of section 280A(c)(6).   Section 280A(c)(6) provides that

no deduction shall be allowed for "any item which is attributable

to the rental of the dwelling unit (or any portion thereof) by

the taxpayer to his employer during any period in which the

taxpayer uses the dwelling unit (or portion) in performing

services as an employee of the employer."

     We agree with respondent that deduction by petitioners of

any rental expenses that may be otherwise allowable by section

280A(c)(3) is disallowed by reason of section 280A(c)(6).    The

meaning of the statutory language is clear.   There shall be no

deduction for expenses attributable to the rental use of a

personal residence by an employee when the property is rented to

the employee's employer.   The parties stipulated that petitioner

is employed by Roy Farms, and that he received $1,000 per month
                                - 7 -


from Roy Farms during 1992 and 1993 to cover their business use

of the petitioners' property.   Petitioners have offered no

evidence or argument which leads us to conclude that section

280A(c)(6) should be ignored, or is inapplicable to petitioners'

situation in light of these undisputed facts.

     In the alternative, petitioners have argued that the $12,000

they received annually as rental income should be excluded from

their gross income pursuant to section 280A(g).   Section 280A(g)

provides:

          (g) Special Rule for Certain Rental Use.--
     Notwithstanding any other provision of this section or
     section 183, if a dwelling unit is used during the
     taxable year by the taxpayer as a residence and such
     dwelling unit is actually rented for less than 15 days
     during the taxable year, then--

                 (1) no deduction otherwise allowable under
            this chapter because of the rental use of such
            dwelling unit shall be allowed, and

                 (2) the income derived from such use for the
            taxable year shall not be included in the gross
            income of such taxpayer under section 61.

     Petitioners have the burden of proving their entitlement to

the exclusion found in section 280A(g).   Rule 142(a); Welch v.

Helvering, 290 U.S. 111 (1933).

     In essence, petitioners argue that the $12,000 received from

Roy Farms in both 1992 and 1993 is properly excludable under

section 280A(g)(2) because their home was not "actually rented"

during the taxable year.   It was not actually rented, according
                                 - 8 -


to petitioners, because the value of what they received is not

the fair rental value of the dwelling unit.

     We note that for purposes of allocating allowable deductions

under section 280A(c), the taxpayer may deduct only those

expenses attributable to the number of days the dwelling unit is

rented at a fair rental value.    Sec. 280A(e).   However, section

280A(g) contains no requirement that the dwelling unit be rented

at fair rental value for it to be actually rented for purposes of

this subsection, nor can we find any case purporting to impose

such a requirement.    Hence, we do not find the lack of a fair

rental value dispositive of whether section 280A(g) works in the

petitioners' favor.3   Examining the language of section 280A(g),

we find that there are other requirements which preclude the

petitioners from benefiting from this provision.

     Section 280A(g) requires that the taxpayer's "dwelling unit"

be actually rented for less than 15 days out of the taxable year.

Dwelling unit is defined in section 280A(f)(1)(A) as a "house,

apartment, condominium, mobile home, boat, or similar property,

and all structures or other property appurtenant to such dwelling

unit." (Emphasis added.)




     3
      In any event, petitioners presented no evidence with
respect to the fair rental value of the portion of the dwelling
unit that was rented to Roy Farms. Even if petitioners' argument
had merit, they would not prevail because they failed to meet
their burden of proof with respect to this fact.
                               - 9 -


     Petitioners' dwelling unit, as defined in section

280A(f)(1), includes all areas of the home plus the surrounding

property.   For $1,000 each month, petitioner agreed to let Roy

Farms store apple bins, apples, and farming equipment on his

property.   He allowed the trucks to drive up and down the roadway

leading up to his house, and permitted use of his telephone,

bathroom facilities, and other miscellaneous areas of his home as

needed for the convenience of those working on the farm.     Even if

the petitioners maintained certain areas of the house for their

exclusive use, they are still considered to have rented out their

dwelling unit for purposes of section 280A(g) because they rented

out property appurtenant to their dwelling unit.     The $1,000

monthly payments represent income from the rental of their

dwelling unit for the entire year, which takes them out of

section 280A(g) because the de minimis provision only seeks to

exclude income from the rental of a dwelling unit for less than

15 days during the taxable year.

     Contrary to respondent's assertion, there is economic

substance to this transaction, but it simply does not afford

petitioners favorable tax treatment.     The intent of the parties

was to provide the petitioners with compensation for limited

business use of their property.    Based on the record, that use

was confined to storage equipment and crops on certain areas of

his property, use of his roads, and the occasional use of his

telephone and bathroom facilities.     When rented for the entire
                             - 10 -


year, this is sufficient rental of a dwelling unit to preclude

exclusion of income and prohibit deductions under section

280A(g).

     For this reason, we find that petitioners have not met their

burden of proof with respect to their claimed deductions and

exclusions.

     To reflect the foregoing,

                                        Decision will be entered

                                   for respondent.
