                  T.C. Summary Opinion 2001-114



                     UNITED STATES TAX COURT



      JOSEPH A. MORCOS AND JOANN M. MORCOS, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6394-00S.            Filed July 26, 2001.


     Brian E. Bennett, for petitioners.

     Jack T. Anagnostis, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.   Unless otherwise

indicated, subsequent 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.

The decision to be entered is not reviewable by any other court,

and this opinion should not be cited as authority.

     Respondent determined deficiencies in petitioners’ 1996 and

1997 Federal income taxes of $10,596 and $5,790, respectively.
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After concessions,1 the issues for decision are:   (1) Whether the

deductions petitioners claimed on their 1996 and 1997 Federal

income tax returns with respect to the rental of rooms in their

personal residence are subject to the limitation imposed by

section 280A(c)(5); and (2) whether petitioners properly

calculated depreciation expenses with respect to their rental

activity.

                            Background

     The stipulation of facts and the accompanying exhibits are

incorporated herein by reference.    Petitioners resided in Wayne,

Pennsylvania, at the time their petition was filed with the

Court.

     In 1983 petitioners paid $125,000 for a 1-acre property in

Radnor Township, Pennsylvania.    The property includes the

following improvements:   a three-story, 4500 square foot

Victorian style house (main house); a two-story, 1200 square foot

carriage house (carriage house); landscaped grounds; a swimming

pool; and a pool house with shower facilities and a full kitchen.



     1
        Petitioners concede respondent’s adjustment to their
Schedule C, Profit or Loss From Business, depreciation.
Respondent concedes that petitioners are entitled to Schedule C
deductions for entertainment and travel expenses and that
petitioners are entitled to deduct $5,231 of legal expenses
incurred in connection with their residential rental activity.
The adjustments to itemized deductions in the notice of
deficiency are computational adjustments which will be affected
by the outcome of the other issues to be decided.
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     The first floor of the main house consists of a furnished

living room, dining room, den, and kitchen.    The second floor

consists of petitioners’ private bedroom suite, a guest bedroom,

a guest bathroom, a laundry room, a sun porch, and an office.

The third floor consists of three furnished bedroom suites with

private baths (third floor units).     Each suite is accessed with

its own key.   The third floor units are accessed by climbing a

staircase that extends from the foyer in the first floor, to the

second and third floors.

     For all of 1996 and 1997, petitioners rented the three third

floor units on a month-to-month basis to individuals not related

to petitioners.   The tenants of these units had full use of the

facilities on the first floor and the second floor, except for

petitioners’ private bedroom suite.    The tenants of the main

house, as well as petitioners, prepared meals daily in the

kitchen and used the dining area and laundry room.

     The carriage house is a separate dwelling unit.    It consists

of a living room, kitchen, and laundry room on the first floor

and a bedroom and bath on the second floor.    Petitioners did not

use any portion of the carriage house as part of their personal

residence or for personal purposes in 1996 and 1997.

     Petitioners reported income and expenses from their rental

of the third floor units and the carriage house on Schedules E,

Supplemental Income and Loss, filed with their 1996 and 1997
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Federal income tax returns.   Depreciation expenses of $4,110 for

the carriage house and $26,164 for the third floor units in each

year contributed to net rental losses of $26,387 in 1996 and

$16,908 in 1997 which petitioners used to offset income from

wages and self employment.

     Petitioners allocate their purchase price for the property

between the land and improvements as follows:   (1) $25,000 to

land; (2) $21,000 to the carriage house; and (3) $79,000 to the

main house.   Petitioners allocate the following estimated

expenses for renovations made to the property over a 15-year

period:

     First floor areas, excluding kitchen          $30,000
     Second floor areas                             30,000
     Third floor areas                              40,000
     Kitchen and other utility areas                40,000
     Roofing and exterior                           75,000
     Driveway and parking areas                     15,000
     Pool and garden areas                          80,000
     Landscaping                                    40,000
     Third floor furniture and fixtures             25,000
     Common area furniture and fixtures            125,000
     Carriage house                                 70,000
          Total                                    570,000

     Petitioners calculated depreciation allowances with respect

to the third floor units by allocating a portion of their

purchase price to the third floor and increasing their

depreciable cost basis by the amount they incurred in renovating

the third floor.   Petitioners also claimed depreciation for a

percentage of the cost basis and renovation costs for the common

areas of the main house.
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     Petitioners depreciated the carriage house as a separate

dwelling unit at 100 percent of its cost basis (determined based

on its square footage as a percentage of the square footage of

the main house and carriage house combined) plus its renovation

costs.   Based on a total of seven people using the grounds, five

of whom were renters, petitioners depreciated 71 percent of the

$95,000 petitioners spent on grounds’ improvements ($80,000 on

pool/garden areas and $15,000 on driveway/parking areas).

     Respondent determined that petitioners incorrectly

calculated depreciation on their 1996 and 1997 Federal income tax

returns.   With respect to the main house, respondent allowed

depreciation for the third floor units only.   Respondent

determined depreciation by allocating one third of petitioners’

$125,000 purchase price for the land and improvements to the

third floor units.   Respondent also allowed petitioners to

increase their basis by $40,000 for renovations to the third

floor units and to depreciate the furniture and fixtures in the

units purchased at a cost of $25,000.   With respect to

depreciation for the carriage house, respondent determined the

percentage of petitioner’s cost basis attributable to the

carriage house based on its total square footage as a percentage

of the square footage of the main house.   Respondent then

calculated allowable depreciation by attributing that percentage

of petitioner’s $125,000 purchase price to the business use of
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the carriage house.   Respondent also allowed petitioners to

capitalize for depreciation the $70,000 they spent for

renovations to the carriage house.

     As an additional argument to support the adjustments,

respondent argued at trial that the deductions attributable to

petitioner’s rental of the third floor units are limited to their

gross rental income from the units minus certain deductions.

                            Discussion

     The first issue considered is whether section 280A(c)(5)

limits petitioners’ deductions for the rental of the third floor

units.   Section 280A(a) provides the general rule that no

deduction is allowable “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 includes a house, apartment,

condominium, mobile home, boat, or similar property, and all

structures or other property appurtenant to such dwelling unit.”

Sec. 280A(f)(1)(A).   The term “dwelling unit” does not include

that portion of a unit which is used exclusively as a hotel,

motel, inn, or similar establishment.    Sec. 280A(f)(1)(B).

     Section 280A(c) lists exceptions to the general rule of

section 280A(a).   The only exception relevant herein is that

provided by section 280A(c)(3) which states that “Subsection (a)

shall not apply to any item which is attributable to the rental

of the dwelling unit or portion thereof (determined after the
                               - 7 -

application of subsection (e)).”   Subsection (e) requires a

taxpayer who uses the dwelling unit for personal purposes during

the taxable year, as a residence or otherwise, to limit his

deductions.   In petitioners’ case this limitation does not affect

their deductions because the dwelling unit was rented for 100

percent of the time it was used.   See Dinsmore v. Commissioner,

T.C. Memo. 1994-134, affd. in part and remanded on other issues

78 F.3d 592 (9th Cir. 1996).

     Section 280A(c)(5), however, limits the deduction of

expenses incurred in the rental use of a residence that may be

allowed under section 280A(c)(3) to an amount not in excess of

the gross income derived from the rental use for the taxable year

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.   Thus, a taxpayer may not

normally offset against unrelated income a net rental loss

incurred from, and attributable to, the rental use of the

taxpayer’s residence.   Feldman v. Commissioner, 84 T.C. 1, 5

(1985), affd. 791 F.2d 781 (9th Cir. 1986).

     Petitioners contend that their rental of the third floor

units is not subject to the limitation of section 280A(c)(5).
                                - 8 -

Their first argument is that section 280A is not applicable to

their rental of rooms in their personal residence because

Congress intended the statute to apply only to vacation homes.

Petitioners base their argument on the explanations of the

statute’s provisions in both the Senate and House reports which

focus on the limitation imposed on deductions attributable to the

rental of a vacation home.

     The starting point for construing the meaning of a statute

must be the language used by Congress.    Reiter v. Sonotone Corp.,

442 U.S. 330, 337 (1979).    We assume that the legislative purpose

is expressed by the ordinary meaning of the words used.     Richards

v. United States, 369 U.S. 1, 9 (1962).    Thus, absent a clearly

expressed legislative intention to the contrary, that language

must ordinarily be regarded as conclusive.    Am. Tobacco Co. v.

Patterson, 456 U.S. 63, 68 (1982); Consumer Prod. Safety Commn.

v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980).

     We have previously rejected petitioner’s argument, observing

that the plain language of section 280A contains no such

limitation.   Russell v. Commissioner, T.C. Memo. 1994-96, affd.

without published opinion 76 F.3d 388 (9th Cir. 1995); Gilchrist

v. Commissioner, T.C. Memo. 1983-288.    Petitioners acknowledge

that section 280A is entitled “DISALLOWANCE OF CERTAIN EXPENSES

IN CONNECTION WITH BUSINESS USE OF HOME, RENTAL OF VACATION

HOMES, ETC.” and that the language of the statute is not
                               - 9 -

exclusive to the rental of vacation homes.   Section 280A(a)

states the general rule disallowing deductions “with respect to

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

the taxable year as a residence.”   A taxpayer’s primary residence

in which he lives year round falls within this definition.     Sec.

280A(d).   If Congress had intended for section 280A to apply only

to the rental of vacation homes, they were capable of creating

such result.

      Moreover, the legislative history of section 280A

establishes that Congress wanted to prevent taxpayers from

converting nondeductible personal living expenses into deductible

business expenses.   S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3)

49.   The underlying rationale of the statute is just as relevant

for taxpayers renting portions of their primary residence and

attempting to deduct personal living expenses as it is for

taxpayers renting their vacation homes.

      Petitioners next argue that the limitation of section

280A(c)(5) does not apply to them “by virtue of the terms of

section 280A(c)(3) which excepts ‘rental of the dwelling unit or

portion thereof.’”   This argument is without merit.   Section

280A(c)(3) excepts rental use from the application of section

280A(a).   Respondent does not contend that petitioners are not

entitled to deduct any of the expenses attributable to the rental

of a portion of their dwelling unit pursuant to section 280A(a),
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but that they are subject to the limitation of section

280A(c)(5), which specifically applies to a use described in

section 280A(c)(3) where the dwelling unit is used by the

taxpayer during the taxable year as a residence.

     Petitioners next contend that their third floor units come

within the provision of section 280A(f)(1)(B) which excludes from

the limitations of section 280A that portion of a dwelling unit

“used exclusively as a hotel, motel, inn, or similar

establishment.”   They rely on the following proposed regulation:

     Exception. Notwithstanding the provisions of paragraph
     (c)(1) of this section, the term “dwelling unit” does
     not include any unit or portion of a unit which is used
     exclusively as a hotel, motel, inn, or similar
     establishment. Property is so used only if it is
     regularly available for occupancy by paying customers
     and only if no person having an interest in the
     property is deemed under the rules of this section to
     have used the unit (or the portion of the unit) as a
     residence during the taxable year. Thus, this
     exception may apply to a portion of a home used to
     furnish lodging to tourists or to long-term boarders
     such as students. [Sec. 1.280A-1(c)(2), Proposed Income
     Tax Regs., 45 Fed. Reg. 52399, 52401 (Aug. 7. 1980) as
     amended by 48 Fed. Reg. 33320, 33322 (Jul. 21, 1983).]

Petitioners maintain that the month-to-month tenants of their

third floor units are analogous to “long-term boarders such as

students”.

     Although proposed regulations carry no greater weight than a

position advanced on brief by respondent, they may be useful as

guidelines where they closely follow the legislative history of

the act.   Estate of Wallace v. Commissioner, 95 T.C. 525, 547
                                - 11 -

(1990), affd. 965 F.2d 1038 (11th Cir. 1992); Miller v.

Commissioner, 70 T.C. 448, 460 (1978); F.W. Woolworth Co. v.

Commissioner, 54 T.C. 1233, 1265-1266 (1970)).    The facts of

petitioners’ case, considered in light of the statute and

regulation proposed thereunder, do not justify the conclusion

that petitioners used any portion of their home exclusively as a

“hotel, motel, inn, or similar establishment.”

     Petitioners advertised the availability of the third floor

units in the newspaper under the heading “House to Share”.

Petitioner testified that their month-to-month tenants during the

years in issue leased the units for 2 to 3 years.    Nothing in the

record suggests that petitioners operated a commercial operation

such as a hotel, motel, inn, or similar establishment.    Rather,

the record indicates that petitioners rented rooms in their house

to offset their living costs.    Moreover, the adoption of

petitioners’ broad interpretation of section 280A(f)(1)(B) would

frustrate the purpose of section 280A.

     As such, petitioners are subject to the limitation of

section 280A(c)(5) with respect to the rental of the third floor

units of their main house.   Petitioners, thus may deduct expenses

to the extent of the excess of the gross income derived from such

use for the taxable year 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
                              - 12 -

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.   From the record it is clear that once petitioners

account for the mortgage interest and real estate taxes allocable

to the third floor units, as well as other expenses attributable

to their rental of   the units, they will not have any excess

gross income from the units from which to take depreciation

deductions.

     The parties agree that the carriage house is a separate

dwelling unit and that petitioners did not use any portion of it

for personal purposes during the years in issue.    Thus,

petitioners’ deductions with respect to the carriage house are

not subject to the limitations of section 280A.    The parties,

however, disagree as to the carriage house’s appropriate cost

basis for depreciation.   Petitioners allocated their purchase

price of the property between the land and the improvements.

They then allocated a portion of the price allocated to

improvements to the carriage house based on its square footage as

a percentage of the square footage of the main house and carriage

house combined and added the carriage house renovation costs.

We agree with petitioners’ method of determining their cost basis

in the carriage house.
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     Petitioners, however, are not entitled to depreciation

deductions for any of their costs for grounds improvements which

they allocated to the carriage house.    These costs are subject to

the limitation imposed by section 280A(c)(5) as the grounds are

appurtenant to petitioners’ residence.   Sec. 280A(f)(1)(A).

     Reviewed and adopted as the report of the Small Tax Case

Division.

                                          Decision will be entered

                                   under Rule 155.
