                         T.C. Memo. 1997-423



                       UNITED STATES TAX COURT



         GUIDO RUGGIERO AND KRISTIN RUGGIERO, Petitioners v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 1953-95.                 Filed September 22, 1997.

     Toni Robinson, Alicia Gaudio, Dean Pinto, Daniel J.

Spilotro, Alfred P. Bruno, and Susan L. Moon, for petitioners.

     Elise F. Alair, for respondent.



               MEMORANDUM FINDINGS OF FACT AND OPINION



     PANUTHOS, Chief Special Trial Judge:      This case was heard

pursuant to the provisions of section 7443A(b)(3) and Rules 180,

181, and 182.1   Respondent determined a deficiency in the amount


     1
        All section references are to the Internal Revenue Code
in effect for the year in issue. All Rule references are to the
                                                   (continued...)
                              - 2 -


of $290 in petitioners' 1991 Federal income tax.   On the basis of

petitioners' amended return, as well as arguments at trial, it is

clear that petitioners claim an overpayment in the amount of

$461.

     After concessions,2 the issues for decision are:    (1) The

characterization of income and expenses relating to petitioner

Guido Ruggiero's (petitioner) activities during the taxable year

1991 and (2) the characterization of expenses incurred by

petitioners in renting out their house during part of the year in

issue.

                        FINDINGS OF FACT

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   At the time of filing the

petition, petitioner resided at Coral Gables, Florida, and

petitioner Kristin Ruggiero resided at Cambridge, Massachusetts.




     1
      (...continued)
Tax Court Rules of Practice and Procedure.
     2
        Petitioners have conceded they are not entitled to deduct
travel expenses claimed in the amount of $3,732, and they are not
entitled to deduct claimed Schedule E expenses for repairs and
maintenance in the amount of $318 and depreciation in the amount
of $2,824, attributable to the rental use of their Connecticut
house.

     The parties further agree that net royalty income in the
amount of $236, received by petitioner Kristin Ruggiero, should
have been reported on Schedule E, rather than on Schedule C.
                                - 3 -


  1. Petitioner's Professional Activities

     In 1987, petitioner began teaching at the University of

Connecticut (UConn) as an associate professor of history.

Petitioner received tenure in 1988 and stayed at UConn through

the scholastic year 1993-94.3   As a professor at UConn,

petitioner taught undergraduate courses in Western civilization

and the Italian Renaissance and three graduate seminars entitled

Topics in Italian History, The New Social and Cultural History,

and Gender and Early Modern Europe.

     In 1990, petitioner was awarded a John Simon Guggenheim

(Guggenheim) fellowship in the amount of $27,000 and a Harvard

Villa I Tatti fellowship in the amount of $6,500.4   Petitioner

believed that the fellowships would provide him with the

opportunity to conduct research for a book he was writing,

relating to sexuality and power during the late Italian

Renaissance.   Petitioner sought to work with unique Italian

archival materials in the lively intellectual atmosphere afforded

by the Villa I Tatti.   Petitioner also favored the Villa I Tatti

because it was removed from the demands of the university




     3
        In 1994, petitioner began teaching at the University of
Miami, Florida.
     4
        Harvard Villa I Tatti is an academic institution located
near Florence, Italy, equipped with an extensive library and
designed as a forum for scholars to conduct research and produce
scholarly material.
                               - 4 -


environment.   Petitioner chose the topic of his fellowship

research.

     Petitioner worked in Italy from the fall of 1990 through the

summer of 1991 and at Princeton University's Institute for

Advanced Study during the fall of 1991.    Petitioner's work at

Villa I Tatti entailed an examination of materials pertaining to

cases brought before Inquisition courts.    Petitioner also

conducted research in the Archivo di Stato, located in Venice.

While at Princeton University, petitioner integrated the archival

research he had compiled in Italy with broader historical

materials.

     Petitioner's fellowship research resulted in a book which he

authored, entitled Binding Passions:    Tales of Marriage, Magic,

and Power at the End of the Renaissance (Oxford University Press

1993) (hereinafter Binding Passions).   On February 18, 1992,

petitioner entered into an agreement with Oxford University Press

to publish Binding Passions.   In exchange for granting Oxford

University Press the copyright in Binding Passions, petitioner

was entitled to royalties equal to 12.5 percent of the net

receipts on the first 5,000 clothbound edition copies sold and 15

percent of the net receipts of all copies sold thereafter.

Petitioner was also entitled to royalties equal to 10 percent of

the net receipts on the first 7,500 "inexpensive edition" copies,
                                - 5 -


and 12.5 percent of the net receipts on all copies sold

thereafter.

     In addition to his written materials, petitioner offered

several lectures pertaining to his fellowship research,

including:    "The World of the Illicit in Sixteenth Century

Venice", at Harvard University, March 1993; "Love Magic and Power

at the End of the Renaissance", at the University of East Anglia,

England, March 1992; and "A Tale of Two Witches?", at Yale

University, February 1992.

     Petitioner has written other published works, including The

Boundaries of Eros:    Sex Crime and Sexuality in Renaissance

Venice, 1290-1500 (Oxford University Press 1985) and Violence in

Early Renaissance Venice (Rutgers University Press 1980).

Petitioner has also written entries contained in the Encyclopedia

of Social History (Peter N. Stearns ed., Garland Press 1994) and

12 A Dictionary of the Middle Ages (Joseph R. Strayer ed.,

Charles Scribner's Sons 1982-1989).

     Petitioner, when awarded the fellowships, was not eligible

for sabbatical from UConn and sought to negotiate with the

university for special leave, also known as a "release from

teaching duties", in order to pursue research in connection with

the fellowships.    Petitioner negotiated an arrangement whereby he

would receive 100 percent of his academic salary from UConn while

on leave and would reimburse the university for an amount equal
                                 - 6 -


to 50 percent of his salary through the fellowship and grant

proceeds.   A letter dated December 11, 1995, written by Richard

Carterud, Assistant Controller for Grants and Contracts,

University of Connecticut, described the arrangement as follows:

     * * * [Petitioner] did have an option as to whether he
     wanted to remit his grant/fellowship to the University
     and stay on the University of Connecticut's payroll at
     100% of his academic salary or to keep the
     grant/fellowship's income and have his salary reduced
     to 50%. His retirement program was enhanced by
     remitting his grant/fellowship income to the
     University.

     During the taxable year 1991, petitioner received payments

from UConn in the amount of $53,0095 and fellowship proceeds in

the amount of $33,500.     Petitioner's release from teaching duties

was in effect during this time.    Pursuant to his agreement,

petitioner remitted $27,600 to UConn out of moneys paid to him

from Harvard and Guggenheim.    The fellowship proceeds were paid

into petitioner's personal bank account, and petitioner then

wrote checks from that account to UConn in an amount equal to

one-half of his salary.6


     5
         All amounts are rounded to the nearest dollar.
     6
        Although the stipulation of facts indicates that
petitioner remitted proceeds to UConn in the amount of $27,500,
the record clearly indicates that the amount reimbursed was
$27,600. In such an instance, we are not bound by the
stipulation of facts. Jasionowski v. Commissioner, 66 T.C. 312,
318 (1976). We also note that the Form W-2 issued by UConn
reflects "Wages, tips, other compensation" in the amount of
$53,009, and "Medicare wages and tips" in the amount of $55,799.
Although the amount remitted by petitioner does not precisely
                                                   (continued...)
                                - 7 -


     On their return for the taxable year 1991, petitioners

reported the following income, attributable to petitioner's

professional activities, as wages:


     Payor                      Form Issued             Amount

UConn                             W-2                  $ 53,009
Guggenheim                        1099                   27,000
Harvard                           1099                    6,500
Emory University1                 unknown                   100

Total amount received                                    86,609
Less: Fellowship proceeds
  paid to UConn                                         (27,600)

Reported as wages                                        59,009
     1
         This amount was paid to petitioner as a "reader's fee".


Thus, despite the fact that the fellowships were reported by the

respective payors on Forms 1099, petitioners reported both of the

fellowships ($27,000 plus $6,500) as wage income and then

deducted from wages $27,600, the amount remitted to UConn.    As a

result, and with the addition of the $100 "reader's fee",

petitioners originally reported $6,000 more in wage income than

the amounts reflected on petitioner's Form W-2.

     Petitioners also claimed deductions on Schedule A in the

amount of $59,736, pertaining to unreimbursed employee business

expenses.    Of these expenses, $33,332 is attributable to


     6
      (...continued)
constitute one-half of either of these amounts, we assume that
petitioner remitted the proper amount as required by the
agreement.
                               - 8 -


petitioner's activities, while the remaining expenses in the

amount of $26,404 are attributable to petitioner Kristin

Ruggiero.   In addition, petitioners attached to their return an

alternative minimum tax computation which calculated an

alternative minimum tax liability in the amount of $5,812.7

     On August 12, 1992, petitioners submitted to respondent an

amended return (Form 1040X).   Attached to the amended return was

a Schedule C which indicated "professor" as petitioner's

profession.   The Schedule C reflects gross receipts in the amount

of $33,600, attributable to amounts petitioner received pursuant

to the two fellowships, as well as a "reader's fee" from Emory

University in the amount of $100.   These amounts had been

reported as wages on the original return, and petitioners

accordingly reduced the amount of wages reported on the amended

return.   Consistent with the original return, however, the amount

reported as wages on the amended return reflects total amounts

indicated on the Form W-2 issued by UConn, reduced by the

fellowship proceeds which petitioner remitted to UConn.



     7
        The notice of deficiency indicates that the alternative
minimum tax computation "per return" is $6,537. We assume that
respondent made other mathematical adjustments to the alternative
minimum tax which are not reflected in the record. In addition,
despite petitioners' attachment of an alternative minimum tax
computation to their return, petitioners' return does not reflect
that alternative minimum tax computation as "Other Taxes". Since
this adjustment is not reflected in the notice of deficiency, we
further assume that respondent adjusted this item as a
mathematical correction. Sec. 6213(b)(1).
                              - 9 -


     Schedule C of the amended return reflects the following

expenses attributable to petitioner's activities as a

"professor":

                  Expense                 Amount

          Office expense                 $ 2,452
          Travel                           8,261
          Meals and entertainment         27,291
          Less: 20% limitation            (5,458)
          Phone--toll calls                  442
          Subscriptions                      327
          Research books                     166

            Total expenses                33,481

Petitioners reduced Schedule A expenses claimed on the amended

return by the amount of $33,332.    Therefore, we assume that the

expenses claimed on Schedule C of the amended return consist of

the expenses claimed on Schedule A of the original return that

are attributable to petitioner's activities, as well as

additional expenses in the amount of $149.

     Upon examination, respondent allowed $29,600 of the $33,332

in expenses claimed by petitioners on their original return in

relation to petitioner's activities.8   The notice of deficiency

does not address the additional expenses claimed on the amended

return in the amount of $149, and, accordingly, we deem

     8
        Petitioners claimed expenses in the amount of $59,736 on
Schedule A of their original return. Respondent has allowed all
of these claimed expenses, except for travel expenses in the
amount of $3,732, relating to petitioner's research and writing
activities. Petitioners have conceded this adjustment. See
supra note 2. Since $33,332 of the $59,736 in expenses claimed
is attributable to petitioner's research and writing activities,
respondent has allowed $29,600 of the claimed expenses relating
to these activities ($33,332 - $3,732 = $29,600).
                              - 10 -


respondent to have disallowed those claimed expenses as well.

Respondent determined that petitioner's expenses were incurred in

connection with his employment with UConn and, therefore, were

reportable as unreimbursed employee business expenses on Schedule

A.   As a result, respondent asserted that petitioner's

alternative minimum tax liability was $6,655.

     In addition, respondent determined that petitioners

overstated wage income on their original return in the amount of

$6,000.   In so doing, respondent asserted that the reader's fee

in the amount of $100 received from Emory University constituted

"other income", rather than wages.     Respondent also asserted that

the fellowship proceeds were not taxable to any extent because

petitioner remitted the fellowship proceeds to UConn in their

entirety.   Accordingly, respondent asserted that the entire

amount which petitioner received from UConn, as reflected by the

Form W-2, constituted taxable wages which could not be offset by

any fellowship proceeds remitted by petitioner.

     Petitioners have since modified their position as indicated

on their original and amended returns.    Prior to trial,

petitioners submitted a memorandum which summarized their present

position regarding items of income and expense pertaining to

petitioner's activities as follows:

Income:
  Wage income from UConn                           $53,009
  Less: Remittance to UConn                        (27,600)
  Total wages                                       25,409
                                 - 11 -



     Other income:   Fellowship proceeds1                33,500

Expenses: Schedule C
  Gross receipts: Reader's fee                           100
                                                     2
  Less: Petitioner's fellowship expenses             (29,600)
Total Schedule C loss                                (29,500)

In comparison, respondent's present position is as follows:

Income:
  Wage income from UConn                            $53,009
  Less: fellowship proceeds remitted                    -0-
  Total wages                                        53,009

     Other income
     Fellowship proceeds                                   -0-
     Reader's fee                                          100
     Total other income                                    100

Expenses: Schedule A                                 $29,600
        1
       Petitioners classify the fellowship proceeds as "other
income" because they maintain that the proceeds are neither wages
nor income from self-employment. See Spiegelman v. Commissioner,
102 T.C. 394, 406 (1994) (holding that fellowship proceeds were
not paid in consideration for services rendered).
       2
       Although petitioners' summary reflects expenses claimed in
the amount of $56,004, it is clear that this amount erroneously
includes expenses attributable to petitioner Kristin Ruggiero in
the amount of $26,404. The difference between $59,736, the
expenses claimed on the original return, and $3,732, the expenses
which petitioners have conceded are not allowable, would leave
$56,004. Of the expenses claimed on the original return, $26,404
is attributable to Kristin Ruggiero. Thus, the amount claimed is
$29,600 ($56,004 less $26,404).

2.     Rental of Petitioners' Connecticut House

        During the taxable year 1991, petitioners owned a house in

Hampton, Connecticut.      Petitioner did not reside in the house at

any time during 1991, while petitioner Kristin Ruggiero resided

in the house from September to December 1991.     From January
                              - 12 -


through July during that year, petitioners rented the house to

three students for a total of 210 days.

     On Schedule E of their original return, petitioners reported

rental income in the amount of $5,700 and claimed expenses for

cleaning and maintenance in the amount of $318.   On Schedule E of

their amended return, petitioners claimed additional expenses for

depreciation in the amount of $2,824, resulting in net rental

income reported in the amount of $2,558.   On Schedule A of their

original and amended returns, petitioners claimed expenses

attributable to the house for real estate property taxes in the

amount of $2,686 and mortgage interest in the amount of $16,565.

     Upon examination, respondent determined that petitioners'

rental of their home did not constitute an activity engaged in

for profit.   Accordingly, respondent disallowed the claimed

expenses and asserted that the income should have been reported

as "other income" on Form 1040, rather than on Schedule E.     The

notice of deficiency made no adjustment or reclassification with

respect to the mortgage interest and property taxes allocable to

the rental use of the dwelling.   Petitioners concede that they

are not entitled to the claimed expenses for maintenance and

depreciation.   Petitioners now maintain that the rental income is

reportable on Schedule E and may be offset by claiming $5,700 of

the mortgage interest expense on Schedule E, rather than on

Schedule A.
                              - 13 -


                              OPINION

     We begin by noting that respondent's determinations are

presumed correct, and petitioners bear the burden of proving that

those determinations are erroneous.     Rule 142(a); Welch v.

Helvering, 290 U.S. 111, 115 (1933).     Moreover, deductions are a

matter of legislative grace, and petitioners bear the burden of

proving that they are entitled to any deductions claimed.

INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992).

1.   Petitioner's Professional Activities

     (a)   Characterization of Income

     We first address the characterization of the income which

petitioner received during 1991.   Petitioners acknowledge that

petitioner received gross wages from UConn during the taxable

year 1991 in the amount of $53,009.     Petitioners, however,

contend that the fellowship proceeds remitted to UConn in the

amount of $27,600 should be allowed as an offset against gross

wages.

     To support their position, petitioners argue that the

fellowship proceeds remitted to UConn were returned to petitioner

in the form of gross wages for the narrow purpose of allowing

petitioner to retain employment benefits.     Accordingly,

petitioners maintain that UConn acted as a conduit with respect

to the remitted fellowship proceeds.     Petitioners suggest that

petitioner's choice in "running the monies" through UConn should

not alter the character of the fellowship proceeds.     Therefore,
                              - 14 -


petitioners argue that amounts paid to petitioner by UConn are

not wages insofar as they reflect a return of fellowship proceeds

previously remitted by petitioner.

     Petitioners also argue that the fellowship proceeds which

petitioner received in the amount of $33,500 are fully taxable;

however, citing our opinion in Spiegelman v. Commissioner, 102

T.C. 394 (1994), petitioners contend that the fellowship proceeds

constitute neither wages nor earnings from self-employment.

     Respondent determined that petitioner's wage income for the

taxable year 1991 totaled $53,009, the amount reflected on the

Form W-2 issued by UConn.   Respondent maintains that petitioner

remitted all of the fellowship proceeds to UConn and,

consequently, argues that petitioners are neither required to

include the fellowship proceeds as income nor entitled to offset

the proceeds remitted to UConn from wages received from UConn.9

     It is clear that the various positions taken by petitioners,

both on their amended return and at trial, were fashioned in an

attempt to reduce their liability under the alternative minimum

tax provisions.   Petitioners' contentions that the fellowship

proceeds were fully taxable as noncompensatory income, and that

the remitted proceeds could offset gross wages paid by UConn, are

an attempt to buttress their argument, discussed infra, that

     9
        Respondent assumes a factual premise which is contrary to
the stipulated facts and evidence in the record. Therefore, we
shall disregard respondent's argument insofar as it relates to
the portion of the fellowship proceeds that was not remitted to
UConn.
                              - 15 -


petitioner's research and writing expenses were not incurred in

his capacity as an employee of UConn.10

     We do not agree with petitioners' contention that the

remitted fellowship proceeds should offset gross wages received.

Petitioner had an employment relationship with UConn which

existed both prior to and subsequent to receipt of the

fellowships, and the amount of gross wages received during the

year in issue was determined in accordance with this agreement.

Petitioner, by agreeing to remit a portion of the fellowship

proceeds to UConn, maintained the terms of this employment

relationship, including full salary and related benefits.     We

conclude, therefore, that the amounts paid to petitioner by UConn

constitute wages in the full amount reflected on the Form W-2

issued by UConn.

     We now turn to the characterization of the fellowship

proceeds.   The facts before us are not distinguishable from those

presented in Spiegelman v. Commissioner, supra, where we held

that fellowship proceeds are fully includable in the recipient's

gross income, unless some statutory exclusion is applicable.       Id.

at 405-406.   In this case, the fellowships were awarded to

petitioner.   After being awarded the fellowships, petitioner



     10
        By claiming petitioner's fellowship expenses on Schedule
C rather than as employee business expenses on Schedule A,
petitioners minimize the effects of the alternative minimum tax.
See Kant v. Commissioner, T.C. Memo. 1997-217.
                               - 16 -


assigned a portion of the proceeds to UConn.    It is well settled

that a taxpayer cannot reduce gross income by executing an

anticipatory assignment of income earned by that taxpayer but not

yet received.    Lucas v. Earl, 281 U.S. 111 (1930); Johnson v.

Commissioner, 78 T.C. 882 (1982), affd. without published opinion

734 F.2d 20 (9th Cir. 1984).   On this basis, we reject

respondent's contention that the fellowship proceeds remitted to

UConn were not includible in gross income.    We, therefore,

conclude that the full amount of the fellowship proceeds

($33,500) is includible in gross income.    Nevertheless, pursuant

to our holding in Spiegelman v. Commissioner, supra, we hold that

the fellowship proceeds are noncompensatory and should be

characterized as "other income".

     (b)   Petitioner's Expenses

           (1)   Fellowship Proceeds Remitted to UConn

     With respect to the fellowship proceeds remitted to UConn,

both parties have suggested that the remitted proceeds may be

used to offset petitioner's gross income.    We have opined above

that the amounts received from UConn and the amount received as a

fellowship constitute gross income.     In contrast to both parties'

position, however, we find that the remitted fellowship proceeds

constitute a deductible expense incurred as a condition of

receiving full salary from UConn.   It is clear that petitioner

was required, pursuant to his employment with UConn, to pay over

a portion of the fellowship proceeds.    Accordingly, we hold that
                              - 17 -


the remitted fellowship proceeds constitute an employee business

expense, deductible on Schedule A.     See Butchko v. Commissioner,

T.C. Memo. 1978-209, affd. 638 F.2d 1214 (9th Cir. 1981) (holding

taxpayer's payment to employer for cash register shortages

resulted in employee business expense).

          (2)   Remaining Expenses

     There is some confusion with respect to the amount of

expenses remaining in dispute.   On Schedule C of the amended

return, petitioners claimed expenses related to petitioner's

research and writing in the amount of $33,481.    On the basis of

arguments presented prior to trial, petitioners now appear to

claim expenses relating to petitioner's activities in the amount

of $29,600, the amount allowed by respondent.    See supra p. 11 &

note 2 to table.   In any event, petitioners have offered no proof

that they are entitled to deductions in excess of $29,600, and we

sustain respondent's determination to that extent.

     Respondent determined that petitioner incurred the allowable

expenses as an employee of UConn.    Accordingly, respondent argues

that petitioner's allowable work-related expenses are deductible

as miscellaneous itemized deductions under section 67. In

contrast, petitioners contend that petitioner was in the separate

trade or business of writing scholarly materials when he incurred

the expenses.   In so doing, petitioners argue that petitioner's

activities were not related to his employment at UConn.
                               - 18 -


Petitioners contend, therefore, the expenses related to his

research and writing activities are deductible on Schedule C.

       Petitioners' argument in this regard, in similar fashion to

their position concerning the characterization of the fellowship

proceeds, represents an attempt to reduce the effects of the

alternative minimum tax.    Work-related expenses incurred by an

independent contractor are deductible "above the line" (Schedule

C) under section 62(a)(1), whereas unreimbursed expenses incurred

by an employee are deductible "below the line" (Schedule A) as

itemized deductions.    Hathaway v. Commissioner, T.C. Memo. 1996-

389.    Section 56(b)(1)(A)(i) provides that, for the purposes of

calculating a taxpayer's alternative minimum taxable income, no

deductions shall be allowed for miscellaneous itemized

deductions.    Therefore, were petitioner's expenses incurred as

part of a trade or business separate from his employment with

UConn, the expenses would be deductible "above the line" and

could be used to offset alternative minimum taxable income.    See

Kant v. Commissioner, T.C. Memo. 1997-217.

       Petitioner's employment with UConn and receipt of a

fellowship do not preclude the possibility that his research and

writing activities constituted a separate trade or business; it

is well settled that a taxpayer may engage in more than one trade

or business.    Gestrich v. Commissioner, 74 T.C. 525, 529 (1980),

affd. without published opinion 681 F.2d 805 (3d Cir. 1982);

Sherman v. Commissioner, 16 T.C. 332, 337 (1951).    To be engaged
                              - 19 -


in a trade or business within the meaning of section 162,11 "the

taxpayer must be involved in the activity with continuity and

regularity and * * * the taxpayer's primary purpose for engaging

in the activity must be for income or profit."   Commissioner v.

Groetzinger, 480 U.S. 23, 35 (1987).   Although a reasonable

expectation of a profit is not required, the taxpayer must have

entered the activity, or continued it, with the bona fide

objective of making a profit, as indicated by the surrounding

facts and circumstances.   Taube v. Commissioner, 88 T.C. 464,

478-479 (1987); sec. 1.183-2(a), Income Tax Regs.    The

regulations accompanying section 183 contain a nonexhaustive list

of nine factors to consider when determining whether an activity

is engaged in for a profit.   Sec. 1.183-2(b), Income Tax Regs.

     University professors, in their capacity as educators,

regularly conduct research and produce scholarly materials

pertaining to their particular area of competence.    In addition,

the receipt of the fellowship, as well as the publication of

Binding Passions, enhanced petitioner's reputation as a scholar,

and was certainly considered for purposes of determining his

salary in succeeding years.   Moreover, despite the royalty

agreement in the record, petitioners have offered little evidence

concerning the amount of income earned by petitioner for the

     11
        Sec. 162(a) provides that there shall be allowed as a
deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or
business.
                              - 20 -


publication of his work.   There is no history of profit potential

nor any projections of profit potential from his activity.

Accordingly, we conclude that petitioner did not engage in his

research and writing activities with the primary purpose of

producing income apart from the salary he earned as a professor

or apart from the fellowship he received.   Therefore,

petitioner's activities do not constitute a separate trade or

business, and the related expenses are not deductible on Schedule

C.

     We also disagree with respondent's determination that

petitioner incurred the expenses in question in his capacity as

an employee of UConn.   Rather, we conclude that petitioner

incurred the expenses in relation to the fellowship income.   It

is clear from this record that the expenses claimed relate to the

research and writing which petitioner engaged in pursuant to the

fellowship.   Since we have held that the fellowship income

constitutes noncompensatory income, petitioner's fellowship

expenses are deductible pursuant to section 212.

2.   Rental of Petitioners' Connecticut House

     We now address respondent's determination with respect to

the items of income and expense attributable to the rental use of

petitioners' house.

     Respondent, employing the limitations set forth in section

183, determined that petitioners did not engage in the activity
                                - 21 -


of renting their house with a profit motive and are therefore

precluded from deducting under section 162 or section 212

expenses attributable to its rental use.   Accordingly, respondent

disallowed all of petitioners' claimed expenses for cleaning and

maintenance and depreciation attributable to the rental use of

their house and asserted that the rental income was reportable as

"other income".    Petitioners concede that they are not entitled

to the depreciation and maintenance expenses claimed on Schedule

E of their original and amended returns.   Petitioners, however,

argue that they may fully offset the rental income by mortgage

interest attributable to the rental use of the house.

     Section 280A(a) provides that, except as otherwise provided

in that section, no deduction otherwise allowable under chapter 1

of the Internal Revenue Code is allowable "with respect to the

use of a dwelling unit which is used by the taxpayer during the

taxable year as a residence."    A taxpayer uses a dwelling during

the taxable year as a residence if he uses the unit for personal

purposes for a number of days which exceeds the greater of 14

days or 10 percent of the number of days during the taxable year

for which the dwelling unit was rented at fair market value.

Sec. 280A(d)(1).   Nevertheless, some deductions that are

attributable to the rental use of a dwelling unit are excepted

from the blanket disallowance of section 280A(a) and can be

deducted subject to the limitations imposed by subsections (c)(5)
                                - 22 -


and (e) of section 280A.   Sec. 280A(c)(3).   Section 280A(c)(5)

limits deductions attributable to the rental use of such a

dwelling unit to an amount not to exceed the excess of the gross

rental income derived from the rental use over the sum of (1) the

deductions allocable to the rental use that are otherwise

allowable regardless of such rental use (such as mortgage

interest and real estate taxes) plus (2) any deductions that are

allocable to the rental activity in which the rental use of the

residence occurs, but that are not allocable to the rental use of

the residence itself.   See secs. 163 and 164.   Therefore, a

taxpayer who rents a portion of a dwelling unit in which he or

she also resides during the taxable year must offset rental

income first by expenses allocable to the rental use which are

otherwise allowable, such as mortgage interest and property

taxes, and then, if any rental income remains, by other expenses

related to the rental activity.

     Petitioners acknowledge that the Connecticut house is

considered a "personal residence" under section 280A(d)(1),

because petitioner Kristin Ruggiero lived there for 4 months

during the taxable year 1991.    Section 280A(a), therefore, is

applicable.   Where section 280A(a) is applicable to a dwelling

unit for a taxable year, the provisions of section 183 do not

apply to such unit for the year.    Sec. 280A(f)(3); see also
                              - 23 -


Bolton v. Commissioner, 77 T.C. 104, 108 (1981), affd. 694 F.2d

556 (9th Cir. 1982).

     Respondent's position, insofar as it ignores the provisions

of section 280A, is without legal foundation.   Regardless of

whether petitioners engaged in the activity of renting their home

with the intent to earn a profit, section 280A requires

petitioners to first offset rental income with expenses

attributable to the rental use of the house which are otherwise

allowable, such as mortgage interest paid.   Petitioners do not

argue otherwise.   Therefore, petitioners are entitled to offset

the rental income with mortgage interest paid in the amount of

$5,700.12

     To reflect the foregoing,

                                         Decision will be entered

                                    under Rule 155.




     12
        Petitioners rented the house to the students for 210
days during the taxable year. Accordingly, petitioners' house
was rented for 58 percent of the taxable year 1991 (210 days/365
days). The mortgage interest attributable to the rental use of
their house, therefore, is $9,608 (58 percent of total mortgage
interest in the amount of $16,565). Bolton v. Commissioner, 77
T.C. 104, 111 (1981), affd. 694 F.2d 556 (9th Cir. 1982). Since
the mortgage interest attributable to the rental use of the
Connecticut house exceeds rental income, the net rental income is
zero.
