                       T.C. Memo. 2006-33



                     UNITED STATES TAX COURT



        CHARLES E. AND SANDRA A. ANDERSON, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 13228-04.               Filed February 27, 2006.



          Held: Because petitioners use a portion of their bed
     and breakfast inn as their personal residence, the general
     disallowance rule of sec. 280A(a), I.R.C., and the
     exclusive-use limitation of sec. 280A(f)(1)(B), I.R.C., are
     applicable, and expenses relating to the portion of the inn
     that is used for both business and personal purposes (i.e.,
     dual-use portion) are not allowable.


     Mark S. Miller, for petitioners.

     Jeremy L. McPherson and Daniel J. Parent, for respondent.



                       MEMORANDUM OPINION

     SWIFT, Judge:   Respondent determined a $1,434 deficiency in

petitioners’ 2000 joint Federal income tax.
                              - 2 -

     The issue for decision is whether petitioners’ bed and

breakfast inn is to be treated as a dwelling unit subject to the

general disallowance rule of section 280A(a) and to the

exclusive-use limitation of section 280A(f)(1)(B).   If so, none

of the expenses relating to the portion of petitioners’ bed and

breakfast inn that is used for both business and personal

purposes are allowable.

      Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year in issue, and

all Rule references are to the Tax Court Rules of Practice and

Procedure.


                            Background

     The facts of this case have been fully stipulated by the

parties under Rule 122 and are so found.

     At the time the petition was filed, petitioners resided in

Sutter Creek, California.

     In April of 2000, petitioners purchased a bed and breakfast

inn located in Sutter Creek (the Inn).   From the time of its

purchase, petitioners and petitioner Sandra Anderson’s parents

have used a portion of the Inn as their personal residence, and,

after making repairs and improvements, petitioners continued

operating the Inn as a bed and breakfast under the name of

“Eureka Street Inn”.
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     From the appropriate government agencies, petitioners

obtained the permits, licenses, and certifications required to

operate the Inn as a bed and breakfast.   Petitioners also

obtained membership in a local bed and breakfast trade

association and in the local chamber of commerce.

     In 2000, petitioners’ Inn had 289 separate room rentals from

which petitioners received rental income of $26,476.

     Petitioners’ Inn has 5,664 square feet of useable floor

space and consists of three floors -- a main floor, an upstairs

floor, and a basement.


Main Floor

     The main floor of petitioners’ Inn consists of a living

room, a dining room, two bedrooms, two bathrooms, a sewing room,

a lobby, a registration area, an office, a kitchen, a laundry

room, and stairs leading to the upstairs floor.

     Petitioners and petitioner Sandra Anderson’s parents

exclusively use the two bedrooms, the two bathrooms, and the

sewing room for personal purposes.

     The living room and the dining room are used exclusively by

paying guests of the bed and breakfast, and the stairs are used

exclusively in operating the bed and breakfast.

     The balance of the main floor (lobby, registration area,

office, kitchen, and laundry room) is used both for business in

operating the bed and breakfast and by petitioners for personal
                                - 4 -

purposes.    Hereinafter, we refer to the portion of the Inn on the

main floor that is used for both business and personal purposes

as the “dual-use” portion.

     The parties have stipulated that during 2000 the dual-use

portion of the Inn was used 75 percent of the time for business

purposes and 25 percent of the time for personal purposes.


Upstairs Floor

     The upstairs floor of the Inn consists of four guest suites

with private bathrooms, each of which is used exclusively by

paying guests of the bed and breakfast.


Basement

     Except for a small space in the corner, the large basement

room of the Inn is used exclusively for business purposes

relating to the bed and breakfast.


Tax Return

     As set forth below, the parties have stipulated that, of the

Inn’s total 5,664 square feet, 4,363 square feet were used

exclusively in the business of operating the bed and breakfast,

695 square feet were used exclusively for petitioners’ personal

purposes, and 606 square feet were used for both business and

personal purposes:
                                     - 5 -

                          Exclusively         Exclusively
                 Total     Business            Personal            Dual-Use
                 Square Square   Percent    Square   Percent    Square   Percent
                 Feet    Feet    of Total    Feet    of Total   Feet     of Total
Main floor       2,058     829      15        623        11      606        11
Upstairs floor   1,548   1,548     27          0         0         0          0
Basement         2,058   1,986     35         72         1         0        0
   Total         5,664   4,363     77        695        12       606       11


     In the preparation of petitioners’ 2000 Federal income tax

return and in calculating the depreciation and interest

deductions relating to the business of the bed and breakfast, to

the total 606 square feet dual-use portion of the Inn petitioners

applied the 75 percentage of the time that such portion of the

Inn was used for business purposes, resulting in 455 square feet.

Petitioners added this 455 square feet to the 4,363 square feet

of the Inn used exclusively for business, and petitioners

calculated that a total of 4,818 square feet of the Inn was used

in the business of the bed and breakfast.

     Petitioners then calculated a business-use percentage for

the entire Inn by dividing the total business square feet of

4,818 by the Inn’s total square feet of 5,664.               Under this

calculation, the Inn was treated by petitioners as used 85

percent for business and 15 percent for personal use.

     On Schedule C, Profit or Loss From Business, of their 2000

joint Federal income tax return, petitioners applied the above

percentages (85 percent business, 15 percent personal) to the

total depreciation and interest expenses relating to the Inn.
                              - 6 -

     In the above calculations, petitioners treat the Inn as what

they refer to as a “commercial structure,” and petitioners do not

apply the exclusive-use limitation of section 280A(f)(1)(B) to

the dual-use portion of the Inn.

     On audit, because petitioners used a portion of the Inn as

their personal residence, respondent applied the exclusive-use

limitation of section 280A(f)(1)(B) and disallowed all business

deductions relating to the dual-use portion of the Inn.

Respondent recalculated allowable depreciation and interest

deductions relating to the bed and breakfast business based on an

allocation factor of 77 percent (i.e., the portion of the Inn

used exclusively in the business).


                           Discussion

     Section 280A(a) provides a general disallowance rule for

expenses relating to a “dwelling unit” that is used as a personal

residence of the owner taxpayer.   Section 280A(a) provides

generally as follows:1


     Except as otherwise provided in this section * * * no
     deduction * * * 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.


     For purposes of section 280A, a dwelling unit is treated as

used as a taxpayer’s residence if the taxpayer uses the dwelling



     1
        Certain exceptions to the general disallowance rule of
sec. 280A(a) are not applicable to the issue before us.
                               - 7 -

unit (or a portion thereof) for personal purposes for the greater

of 14 days or 10 percent of the number of days during the year

that the unit is rented at a fair rental value.    Sec. 280A(d)(1).

     Section 280A(f)(1)(A) defines a “dwelling unit” for purposes

of section 280A as:


     a house, apartment, condominium, mobile home, boat, or
     similar property, and all structures or other property
     appurtenant to such dwelling unit.


     Under section 280A(f)(1)(B), however, where portions of a

dwelling unit are used exclusively as a hotel, motel, inn, or

similar business, the portion thereof that is used exclusively in

the business will not be considered part of the dwelling unit for

purposes of the disallowance rule of section 280A(a) (the Hotel

Exception).   Section 280A(f)(1)(B) provides as follows:


     The term “dwelling unit” does not include that portion
     of a unit which is used exclusively as a hotel, motel,
     inn, or similar establishment.


     The word “exclusively”, as used in section 280A(f)(1)(B),

should be given its ordinary and common meaning.    Crane v.

Commissioner, 331 U.S. 1 (1947); Old Colony R.R. Co. v.

Commissioner, 284 U.S. 552 (1932).

     In Byers v. Commissioner, 82 T.C. 919, 925 (1984) (involving

the rental of a condominium unit as part of a resort hotel and

the personal use of the condominium by the taxpayer for 30 days

of the year), we held that for purposes of the Hotel Exception
                               - 8 -

“exclusively” means “solely” and that “any rent-free personal use

of a unit during a taxable year precludes finding that such unit

was used ‘exclusively as a hotel.’”

     Accordingly, once personal use exceeds the 14-day or 10-

percent trigger of section 280A(d)(1), under the Hotel Exception

the only portion of a hotel, motel, inn, or bed and breakfast

that is excepted from the general disallowance rule of section

280A(a) is that portion that is used exclusively in the business.

Under the exclusive-use rule, the Hotel Exception does not apply

to the dual-use portion of a hotel, inn, or bed and breakfast.

See Lofstrom v. Commissioner, 125 T.C. ___ (2005) (slip op.

at 11).

     Petitioners, however, argue that a structure that otherwise

would fall within the section 280A(f)(1)(A) definition of a

dwelling unit, such as petitioners’ Inn, at some point may become

so commercial in operation and so different from a personal

residence that the general disallowance rule of section 280A(a)

should not apply to the dual-use portion, and business expenses

relating to the dual-use portion of the property (e.g., in this

case the lobby, registration area, office, kitchen, and laundry)

should be allowed.   Petitioners implicitly contend that their Inn

has become so commercial that it should be treated the same as

petitioners would treat a large hotel.2


     2
      Petitioners posit, for example, a situation in which a
                                                    (continued...)
                               - 9 -

     In Grigg v. Commissioner, 979 F.2d 383, 385-386 (5th Cir.

1992), affg. T.C. Memo. 1991-392, in which the taxpayer, similar

to the taxpayer in Byers v. Commissioner, supra, used a

condominium for part of the year as a rental and for part of the

year as a personal residence, the Court of Appeals, in dicta,

stated that section 280A does apply to large hotels:


     [A] taxpayer may * * * [take deductions] for the entire
     portion of the hotel which is used solely for
     commercial purposes. The portion of the hotel which is
     used for personal use obviously does not fit the
     exception and therefore is a dwelling unit, subject to
     the provisions in section 280A.

          Thus, for example, if 98 units of a 100 unit hotel
     are used exclusively as a hotel and 2 units are used
     for personal reasons, the deductible expenses for the
     98 units are excepted from section 280A and cannot be
     limited thereby since that portion of the hotel meets
     the requirements of the hotel exception. The other two
     units are dwelling units since the owner has not used
     them exclusively as a hotel. * * * [Fn. ref. omitted.]


     The purpose of section 280A is to prevent taxpayers from

taking business deductions which in effect relate to personal

living expenses.   By reading into the statutory language of


     2
      (...continued)
taxpayer-owner of a 500-room hotel uses one of the suites as his
personal residence and chooses each morning to read the newspaper
in the hotel lobby. Petitioners argue that the taxpayer’s
personal use of the lobby would be de minimis and should not
result in the disallowance of business expenses relating to the
hotel lobby. Respondent agrees that, “Arguably, merely reading a
newspaper in a lobby does not rise to ‘use for personal
purposes’” but cautions that “the owner might be wise to do his
reading elsewhere”. Herein, we do not decide whether there is a
de minimis exception to the exclusive-use limitation of sec.
280A(f)(1)(B).
                              - 10 -

section 280A an exception for establishments that reach a certain

size or commercial level, petitioners would in effect grant to

taxpayers owning large hotels deductions that would be prohibited

to owners of small hotels simply by virtue of the disparity in

the size or commercial nature of their respective hotels.

     Section 280A(f)(1)(B) specifically refers to hotels and in

so doing does not place any limitation on the size or nature of

the hotel.   The narrow reading by petitioners of section

280A(f)(1)(A) is not consistent with the statutory language.

     Even if petitioners’ legal argument had validity, which it

does not, the facts herein are quite different from petitioners’

extreme hypothetical situation.   Nearly one quarter of

petitioners’ moderately sized bed and breakfast inn is used

exclusively or partially for personal purposes.

     If we find that section 280A is applicable to petitioners’

Inn, in the alternative petitioners argue that their business use

of the dual-use portion of the Inn should be treated as used

exclusively in the business of operating a bed and breakfast and

therefore as qualifying for business deductions under the Hotel

Exception of section 280A(f)(1)(B).

     Petitioners misread the exclusive-use rule of the Hotel

Exception.   Thereunder, as explained, only the portion of

petitioners’ Inn used solely and exclusively in the business of

operating the bed and breakfast is treated as business property.

The dual-use portion of the Inn, because it was used partially
                             - 11 -

for personal purposes, does not fall within the Hotel Exception,

is not removed from the general definition of a dwelling unit,

and related expenses are not excepted from the general

disallowance rule of section 280A(a).

     To reflect the foregoing,


                                         Decision will be entered

                                 under Rule 155.
