                          T.C. Memo. 2003-246



                        UNITED STATES TAX COURT



      MICHAEL H. VISIN AND NATALIE MARSELLY, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10149-02.                  Filed August 18, 2003.


     Michael H. Visin, pro se.

     Frank Panza, for respondent.


                MEMORANDUM FINDINGS OF FACT AND OPINION


     ARMEN, Special Trial Judge:     Respondent determined

deficiencies in petitioners’ Federal income taxes for the taxable

years 1997 and 1998 in the amounts of $1,393 and $1,365,

respectively.
                               - 2 -

     After a concession by petitioners,1 the issues for decision

by the Court are as follows:

     (1) Whether for each of the years in issue, petitioners’

deduction for the business use of their apartment is subject to

the limitation on deductions set forth in section 280A(c)(5).2

We hold that it is.

     (2) Whether for 1998, petitioners are entitled to expense,

rather than depreciate, the cost of computer equipment and

software.   We hold that they are not.

     An adjustment to petitioners’ self-employed health insurance

deduction under section 162(l) is a mechanical matter, the

resolution of which is dependent on our disposition of the

disputed issues.   See sec. 162(l)(2)(A).

                         FINDINGS OF FACT

     Some of the facts have been stipulated, and they are so

found.   Petitioners resided in San Francisco, California, at the

time that the petition was filed with the Court.

     During 1997 and 1998, the taxable years in issue, petitioner

Michael H. Visin was self-employed as an interior decorator and



     1
        At trial, petitioners did not contest, and are therefore
deemed to have conceded, an adjustment in the amount of $703 to
cost of goods sold for 1997.
     2
       Unless otherwise indicated, all section references are to
the Internal Revenue Code as in effect for 1997 and 1998, the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 3 -

artist, and petitioner Natalie Marselly was employed as a social

worker.

     Throughout the years in issue, petitioners resided in the

same apartment, which they rented.     A portion of petitioners’

apartment was used by petitioner Michael H. Visin for business

purposes.

     In 1998, petitioner Michael H. Visin spent $3,450 for

computer equipment and software for use in his business.     The

computer equipment and software were placed in service upon

purchase.

     Petitioners filed a Form 1040, U.S. Individual Income Tax

Return, for each of the years in issue.     Petitioners attached to

each of those returns a Schedule C, Profit or Loss From Business,

for petitioner Michael H. Visin’s sole proprietorship.     Among the

deductions claimed on each Schedule C was a deduction for

petitioner Michael H. Visin’s use of petitioners’ apartment for

business purposes.   In support of this deduction, petitioners

attached to each of their returns a Form 8829, Expenses for

Business Use of Your Home.

     Petitioners’ Schedule C for 1997 included the following

entries:

             Gross income              $5,399.00
             Less: expenses
                (excluding rent)      -4,392.40
                                       1,006.60
             Less: rent              -10,305.27
             Net loss                ( 9,298.67)
                               - 4 -


     Petitioner’s Form 8829 for 1997 included the following

entries:

              Area used regularly
                                                       1
                 and exclusively for business        700
                                                   1
              Total area of home                    1000
              Business use percentage                 70
              1
               Presumably, square feet


Petitioners used the foregoing percentage in claiming the

Schedule C rent deduction of $10,305.27.

     Petitioners’ Schedule C for 1998 included the following

entries:

              Gross income             $6,242.70
              Less: expenses
                 (excluding rent)    -4,243.63
                                      1,999.07
              Less: rent            -10,642.58
              Net loss              ( 8,643.51)


     Petitioner’s Form 8829 for 1998 included the following

entries:

              Area of home used regularly
                                                       1
                 and exclusively for business           850
                                                   1
              Total area of home                       1150
              Business use percentage                    74
              1
               Presumably, square feet


Petitioners used the foregoing percentage in claiming the

Schedule C rent deduction of $10,642.58.3


     3
         The record does not disclose the reason for the
                                                    (continued...)
                               - 5 -

     In reporting gross income from his sole proprietorship for

1998, petitioner Michael H. Visin reduced gross receipts by cost

of goods sold.   In part III of his Schedule C for 1998,

petitioner Michael H. Visin claimed cost of goods sold as

follows:

            Materials and supplies      $2,847.30
            Other costs: computer
               equipment and software   +3,450.00
            Cost of goods sold           6,297.30


     Petitioners did not attach to their 1998 income tax return a

Form 4562, Depreciation and Amortization.   Part I of that form is

entitled “Election To Expense Certain Tangible Property (Section

179)”, and it is the form that respondent has designed for

taxpayers who wish to expense, rather than depreciate, qualifying

property.

     In the notice of deficiency, respondent disallowed a portion

of the deduction claimed by petitioners in 1997 and 1998 for the

business use of their apartment.   Respondent based the

disallowance solely on the limitation on deductions set forth in

section 280A(c)(5).   Respondent did not adjust either the gross

amount claimed by petitioners for the rental of their apartment

or the business use percentage appearing on either Form 8829.



     3
      (...continued)
discrepancies between petitioners’ Form 8829 for 1997 and Form
8829 for 1998 regarding “Area used * * * for business” and “Total
area of home”.
                               - 6 -

     Also in the notice of deficiency, respondent treated the

$3,450 spent by petitioner Michael H. Visin for computer

equipment and software for his business as a capital expenditure

and allowed depreciation thereon.

     Petitioners do not contest respondent’s computation of the

limitation on deductions under section 280A(c)(5).   Rather,

petitioners contend that section 280A does not apply to renters

of business property and that, therefore, the limitation on

deductions under section 280A(c)(5) does not apply to their case.

Rather, petitioners contend that section 162(a)(3) authorizes the

deductions in issue.

     Petitioners also contend that they are entitled to expense,

pursuant to section 179, the $3,450 spent by petitioner Michael

H. Visin for computer equipment and software for use in his

business.

                              OPINION

     We decide the issues in this case without regard to the

burden of proof.   Accordingly, there is no reason to decide

whether section 7491(a) serves to shift the burden of proof from

petitioners to respondent.   See generally Rule 142(a); INDOPCO,

Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

290 U.S. 111, 115 (1933).

     A.   Deduction for Business Use of Home

     Section 162(a)(3) allows a deduction for:
                               - 7 -

     rentals or other payments required to be made as a
     condition to the continued use or possession, for
     purposes of the trade or business, of property to which
     the taxpayer has not taken or is not taking title or in
     which he has no equity.

     Structurally, section 162 is included in part VI (Itemized

Deductions For Individuals And Corporations) of subchapter B

(Computation of Taxable Income) of chapter 1 (Normal Taxes And

Surtaxes) of subtitle A (Income Taxes) of title 26 (Internal

Revenue Code) of the United States Code.   The relevance of the

placement of section 162 within the Internal Revenue Code will

become apparent momentarily.

     Also included within part VI is section 161.    That section

provides as follows:

          In computing taxable income under section 63,
     there shall be allowed as deductions the items
     specified in this part [i.e., part VI], subject to the
     exceptions provided in part IX (sec. 261 and following,
     relating to items not deductible). [Emphasis added.]

     Section 261, which is entitled “General Rule For

Disallowance Of Deductions”, provides that “In computing taxable

income no deduction shall in any case be allowed in respect of

the items specified in this part [i.e., part IX].”    One of the

sections included in part IX is section 280A.

     At this point it should be apparent that section 162 is

subject to the exceptions and constraints of section 280A.     See

New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) (oft

cited for the proposition that deductions are a matter of
                                - 8 -

legislative grace and hence a taxpayer claiming a deduction must

come within the express provisions of the statute).

     As relevant herein, section 280A(a) provides as a general

rule that no deduction otherwise allowable to an individual

“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.”   The term “dwelling unit” is defined by section

280A(f)(1)(A) to specifically include an apartment.   The statute

does not distinguish between a condominium apartment and a rental

apartment.    In other words, whether owned or rented, an apartment

is a dwelling unit within the intendment of the statute.    See

Horton v. Commissioner, T.C. Memo. 1997-572 (involving an artist

who rented premises in a commercially zoned area, which premises

were found by the Court to be a dwelling unit within the scope of

section 280A).

     The seemingly prohibitory rule of section 280A(a) is

ameliorated by section 280A(c), which provides exceptions for

certain business uses.   As relevant herein, section 280A(c)(1)

provides that the general rule of section 280A(a) is not

applicable to any item to the extent it:

     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, [or]

               (B) as a place of business which is used by
          patients, clients, or customers in meeting or
                                     - 9 -

          dealing with the taxpayer in the normal course of
          his trade or business * * * .

     The liberalizing effect of section 280A(c) is not without

its limitations, however.       In particular, and as relevant herein,

section 280A(c)(5) limits a taxpayer's deductions for the

business use of an apartment to the amount by which the gross

income generated from the business activity conducted in the

apartment exceeds the deductions for expenses attributable to

such activity that are not allocable to the business use of the

apartment itself.   See Martin v. Commissioner, T.C. Memo. 1996-

503, affd. per curiam without published opinion 155 F.3d 559 (4th

Cir. 1998).   In other words, no deduction for use of an apartment

may be claimed if said deduction would give rise to, or increase,

a net loss from the business to which the deduction relates.       Id.

     The foregoing exegesis of section 280A(c)(5) is confirmed by

the legislative history of the most recent relevant amendment to

that section.   Thus:

                            Reasons for Change

     Limitations on deduction

                        *   *    *    *      *   *   *

     The committee believes that a home office deduction to
     which section 280A applies should not be used to reduce
     taxable income from the activity to less than zero. In
     adopting the provisions of the bill, the committee
     reemphasizes that section 280A was enacted because of
     concerns about allowing deductions for items which have
     a substantial personal component relating to the home,
     which most taxpayers cannot deduct, and which
     frequently do not reflect the incurring of
                                  - 10 -

     significantly increased costs as a result of the
     business activity, and that the provision should be
     interpreted to carry out its objectives.

                     *   *    *     *      *   *   *

                     Explanation of Provision

                     *   *    *     *      *   *   *

     Limitations on deduction

          In general.–-The bill limits the amount of a home
     office deduction (other than expenses that are
     deductible without regard to business use, such as home
     mortgage interest) to the taxpayer’s gross income from
     the activity, reduced by all other deductible expenses
     attributable to the activity but not allocable to the
     use of the unit itself. Thus, home office deductions
     are not allowed to the extent that they create or
     increase a net loss from the business activity to which
     they relate. [H. Rept. 99-426, at 133-135 (1985), 1986-
     3 C.B. (Vol. 2) 133-135).]

     Finally, for petitioners’ benefit, we observe that to the

extent deductions are disallowed under section 280A(c)(5), they

may be carried forward to the succeeding taxable year.       See sec.

280A(c)(5), flush language.

     In view of the foregoing, we hold that petitioners’

deductions for the business use of their apartment are subject to

the limitation set forth in section 280A(c)(5).        Accordingly, we

sustain respondent’s determination in this regard.

     B.   Election To Expense Certain Costs Under Section 179

     Section 179(a) permits a taxpayer to:

     elect to treat the cost of any section 179 property as
     an expense which is not chargeable to capital account.
     Any cost so treated shall be allowed as a deduction for
     the taxable year in which the section 179 property is
                             - 11 -

     placed in service.

     In respondent’s view, the computer equipment and software

that petitioner Michael H. Visin purchased and placed in service

in 1998 may not be expensed under section 179 because petitioners

failed to make an election on their return consistent with

section 179(c) and the regulations thereunder.

     Section 179(c)(1) provides that an election under section

179 shall:

          (A) specify the items of section 179 property to
     which the election applies and the portion of the cost
     of each of such items which is to be taken into account
     under subsection (a), and

          (B) be made on the taxpayer’s return of the tax
     imposed by this chapter for the taxable year.

Section 179(c)(1) goes on to provide that the election to expense

“shall be made in such manner as the Secretary may by regulations

prescribe.”

     Regulations regarding the time and manner of making an

election under section 179 have been prescribed and may be found

in section 1.179-5, Income Tax Regs.    Specifically, section

1.179-5(a), Income Tax Regs., requires a separate election for

each taxable year and, as relevant herein, that such election be

made on the taxpayer’s first income tax return for the taxable

year to which the election applies.    The regulation goes on to

track the statutory requirements of section 179(c)(1)(A) and (B).

Finally, the regulation requires that the taxpayer maintain
                              - 12 -

certain records regarding each piece of section 179 property.

     The Commissioner has published Form 4562, Part I of which is

entitled “Election To Expense Certain Tangible Property (Section

179)”, and, as its title suggests, is intended for a taxpayer’s

use in making the election to expense section 179 property.

     Petitioners did not attach to their 1998 income tax return a

Form 4562, nor did they unequivocally elect on their return to

expense the cost of the computer equipment and software under

section 179.   On the other hand, petitioners did include the cost

of that property as a component of cost of goods sold.   However,

we are not inclined to regard the inclusion of property in cost

of goods sold as the equivalent of an election under section 179.

See Patton v. Commissioner, 116 T.C. 206 (2001); McGrath v.

Commissioner, T.C. Memo. 2002-231; Starr v. Commissioner, T.C.

Memo. 1995-190 (“Entitlement to the benefits of section 179 is

not automatic.   It requires an affirmative election be attached

to the original return or to a timely filed amended return.”),

affd. without published opinion 99 F.3d 1146 (9th Cir. 1996).    In

any event, we observe that the matter is without any tax effect

in 1998 under the facts of the present case.   In other words, to

the extent that petitioners are denied an expensing deduction

under section 179, they will be entitled to an increase, on a pro

tanto basis, in the amount of their home office deduction under

section 280A because the limitation imposed by section 280A(c)(5)
                              - 13 -

will be that much less restrictive.

     In view of the foregoing, we hold that petitioners are not

entitled to expense the cost of the computer equipment and

software.   Respondent’s determination capitalizing the cost of

such property and allowing depreciation thereon is sustained.

     C.   Conclusion

     To reflect the foregoing,



                                      Decision will be entered

                                 under Rule 155.
