                       T.C. Memo. 1996-231



                     UNITED STATES TAX COURT



                 CHARLES E. KING, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18362-93.                    Filed May 22, 1996.


     Charles E. King, pro se.

     Reginald R. Corlew, for respondent.


                       MEMORANDUM OPINION

     GOLDBERG, Special Trial Judge:   This case was heard pursuant

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

determined a deficiency in petitioner's Federal income tax for

1990 in the amount of $672.   The issues are:   (1) Whether

petitioner is entitled to deduct expenses attributable to a home


1
     Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                 2

office under section 280A; (2) whether petitioner is entitled to

claim a deduction for health insurance premiums; and (3) whether

petitioner is entitled to a deduction for a contribution to an

individual retirement account (IRA).

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

The stipulation of facts and the exhibits received into evidence

are incorporated herein by this reference.   Petitioner filed a

timely joint Federal income tax return for 1990 with his wife,

Betty W. King (Mrs. King), now deceased.   Petitioner resided in

Holly Hills, Florida, at the time he filed his petition.

     In 1983, after petitioner retired from his position as a

school administrator for Fairfax County, Virginia, he and Mrs.

King moved to Holly Hills, Florida, and started a yacht charter

and brokerage business under the name of King International.

King International was a sole proprietorship with its business

office located in petitioner's home at 1402 Riverside Drive,

Holly Hills, Florida.   Petitioner ran the daily operations, and

Mrs. King handled the financial end of the business.

     During the year at issue, petitioner received pension income

of $44,669.45 and interest income of $12,111.23, a portion of

which he used to finance his business operations.   Petitioner

owned a West Mariner 39 yacht which he used to advertise his

brokerage activities and attract charter customers for King

International.   During 1990, petitioner was not employed, and,
                                  3

other than the $950 earned from his charter activities, received

no nonemployee compensation.

     On his 1990 Federal income tax return, petitioner claimed

deductions for IRA contributions of $950 and self-employed health

insurance of $950.   On his Schedule C for King International,

petitioner reported gross income of $950 and deducted business

expenses in the aggregate amount of $11,272.26, resulting in a

net loss of $10,322.26.   In particular, petitioner claimed

deductions for utilities of $351.22 and "Repairs and maintenance

of office in home" of $161.32, each representing 20 percent of

the total utility and maintenance cost of petitioners' residence.

     In the notice of deficiency, respondent determined that

petitioner was not entitled to adjustments to income for an IRA

contribution or health insurance pursuant to the limitations of

sections 219(b) and 162(l)(2)(A), respectively.   Respondent also

disallowed the deductions for home office expenses pursuant to

the limitations prescribed by section 280A(c)(5).   Respondent

does not dispute that petitioner was engaged in a business for

profit within the meaning of sections 162 and 183, or that he has

substantiated his business expenses.   Respondent's determinations

are presumed correct, and petitioner bears the burden of proving

otherwise.   Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933).

     We first address whether petitioner is entitled to claim a

deduction for expenses attributable to his home office.   Section

280A provides in relevant part:
                              4

SEC. 280A.    DISALLOWANCE OF CERTAIN EXPENSES IN CONNECTION
              WITH BUSINESS USE OF HOME, RENTAL OF VACATION
             HOMES, ETC.

     (a) General Rule.--Except as otherwise provided in this
section, in the case of a taxpayer who is an individual or
an S corporation, no deduction otherwise allowable under
this chapter 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.

                  *     *     *      *    *

     (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 principal place of business for
             any trade or business of the taxpayer,

                  *     *     *      *    *

          (5) Limitation on deductions.--In the case of a
     use described in 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 sum of--

                       (i) the deductions allocable to such use
                  which are allowable under this chapter for
                  the taxable year whether or not such unit (or
                  portion thereof) was so used, and

                       (ii) the deductions allocable to the
                  trade or business (or rental activity) in
                  which such use occurs (but which are not
                  allocable to such use) for such taxable year.
                                 5

The home office deduction is, therefore, limited to the excess of

the gross income generated from the business activity conducted

in the office, over all other deductible expenses attributable to

such activity, but which are not allocable to the use of the unit

itself.   Grinalds v. Commissioner, T.C. Memo. 1993-66 (citing H.

Rept. 99-426, at 134-135 (1985), 1986-3 C.B. (Vol. 2) 1, 135).

In other words, the deduction may not create or increase a net

loss from the business activity to which it relates.   Id.

     In making the determination of the amount of gross income

derived from the use of petitioner's home office during 1990,

respondent took into account only the amount of gross income that

petitioner reported on his Schedule C.   Because petitioner's sole

proprietorship incurred a net loss during the year at issue,

respondent disallowed the deductions for expenses attributable to

the home office in their entirety.   Petitioner contends that his

interest income should be considered gross income for purposes of

section 280A(c)(5) because the interest income is used to finance

his business activities.   Petitioner further contends that King

International is entitled to the same treatment afforded to a

corporation with respect to the deductibility of office expenses

and the classification of interest income.   Petitioner presented

no evidence or authority to support his contentions.

     Petitioner reported his interest on the Form 1040 of his

1990 return as personal interest income, not on his Schedule C as

business income.   The fact that such income was used to finance
                                 6

business operations does not transform personal interest income

into business income derived from petitioner's use of the office

in his home.   Moreover, King International is a sole

proprietorship with an office in petitioner's home, not a

corporation with an office outside of petitioner's residence,

and, consequently, the deduction of expenses attributable to the

home office is subject to the limitations prescribed in section

280A(c)(5).

     King International earned gross income of $950 and incurred

a net loss of $10,332.26 for 1990.   A deduction for expenses

attributable to a home office may not create or increase a net

loss from the business activity to which it relates.    Grinalds v.

Commissioner, supra.   Accordingly, petitioner is not entitled to

deductions related to his home office.   Respondent is sustained

on this issue.

     We next consider whether petitioner is entitled to deduct

health insurance expenses of $950.   Section 162(l)(1) permits

self-employed individuals to deduct 25 percent of the amount paid

during the year for insurance which constitutes medical care for

themselves, their spouses, and their dependents.   Section

162(l)(2)(A) limits this deduction to the   "earned income (within

the meaning of section 401(c)) derived from the trade or business

with respect to which the plan providing the medical care

coverage is established."
                                 7

     The term "earned income" is defined by section 401(c) as the

net earnings from self-employment as defined in section 1402(a),

but "only with respect to a trade or business in which personal

services of the taxpayer are a material income-producing factor."

Sec. 401(c)(2)(A)(i).   Under section 1402(a), "net earnings from

self-employment" is defined, in relevant part, as gross income

earned by a taxpayer from a business carried on by the taxpayer,

less deductions allowed which are attributable to such business.

     For the year at issue, petitioner reported a net loss for

King International and, consequently, had no net earnings from

self-employment.   We reject petitioner's argument that his

interest income should be taken into consideration because such

income is not "derived by an individual from any trade or

business carried on by such individual".   Sec. 1402(a).    We find

that petitioner had no "earned income" from his business

activities within the meaning of section 401(c) and, therefore,

is not entitled to deduct self-employed health insurance

expenses.   Respondent is sustained on this issue.

     The final issue for consideration is whether petitioner is

entitled to a deduction for a contribution of $950 to an IRA.     In

general, a taxpayer is entitled to deduct amounts contributed to

an IRA.   Sec. 219(a); sec. 1.219-1(a), Income Tax Regs.    The

deduction in any taxable year, however, may not exceed the lesser

of $2,000 or an amount equal to the compensation includable in

the taxpayer's gross income for such taxable year.   Sec.
                                 8

219(b)(1).   Compensation is defined by section 219(f) as earned

income, as defined by section 401(c)(2).    As stated above,

section 401(c)(2) directs us to section 1402(a) and the

definition of "net earnings from self-employment".

     Petitioner's adjusted gross income for 1990 of $43,921.48,

after adjustments for his IRA and self-employed health insurance

deductions, consists of interest, dividend, and pension income.

Interest and dividend income is not compensation within the

meaning of section 401(c) because, as noted, such income does not

represent payment with respect to which personal services of the

taxpayer are a material income-producing factor.    Likewise,

pension income is expressly excluded from the definition of

compensation by section 219(f)(1).   Because petitioner had no net

earnings, and, therefore, no compensation within the meaning of

section 219(f)(1), he is not entitled to deduct any portion of

his IRA contribution.   We sustain respondent on this issue.

                                           Decision will be entered

                                     for respondent.
