                  T.C. Summary Opinion 2009-186



                      UNITED STATES TAX COURT



         JOHN Y. DING AND LINDA H. ZHANG, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 18253-07S.               Filed December 7, 2009.



     John Y. Ding and Linda H. Zhang, pro sese.

     Paul V. Colleran, for respondent.



     GOLDBERG, 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.    Pursuant to section

7463(b), the decision to be entered is not reviewable by any

other court, and this opinion shall not be treated as precedent

for any other case.   Unless otherwise indicated, subsequent

section references are to the Internal Revenue Code (Code) in
                               - 2 -

effect for the year in issue, and all Rule references are to the

Tax Court Rules of Practice and Procedure.

     Petitioners are husband and wife.

     The sole issue for decision is whether petitioners are

entitled to deduct $28,307 in expenses that John Y. Ding

(petitioner) claimed on Schedule C, Profit or Loss From Business,

for 2004.

                            Background

     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.   Petitioners resided in

Massachusetts when they filed their petition.

     Petitioners earned combined compensation of $280,436 from

their employers in 2004.   Ms. Zhang earned $167,703 from

BlackRock, Inc., a large global investment management firm with

offices in the United States, Europe, and Asia.

     Petitioner earned $112,733 in 2004 from Leggett & Platt,

Inc. (Leggett & Platt), headquartered in Missouri.   Leggett &

Platt manufactures a variety of engineered products, including

metal products for use in furniture, such as inner springs for

mattresses and recliner mechanisms for recliner chairs.

Petitioner has a Ph.D. in economics, and at some time before 1998

he was a college professor and a consultant for local businesses,

one of which was acquired by Leggett & Platt.   In 1998 Leggett &
                               - 3 -

Platt hired petitioner full time to establish and manage the

corporation’s Asian operations.

     As a result, petitioner now oversees the day-to-day

operating decisions and technical customer service issues for

Leggett & Platt’s factories in Asia.    He is also responsible for

the corporation’s Asian planning and budgeting work.   A separate

sales team is responsible for bringing in new customers and

servicing existing accounts.   Petitioner’s duties necessitate

travel to Leggett & Platt’s manufacturing facilities in Asia, and

during 2004 he traveled to Asia 10 or 11 times for factory

visits.   Petitioner also traveled to the head office in Missouri

six or seven times during 2004.   Leggett & Platt reimbursed

petitioner for all of his international and domestic traveling

expenses.

     However, because Leggett & Platt did not provide an office,

from 1998 to 2003 petitioner used a small room on the second

floor of his two-story 3,000-square-foot house as his principal

place of business.   Leggett & Platt did not reimburse petitioner

for expenses related to his home office.   The room was adjacent

to some of the bedrooms.   Because of the time zone differences,

when calling or receiving calls from Asia, petitioner would

frequently receive and make telephone calls in the evenings and

late at night, disturbing his family.   To eliminate the

disruption, petitioner remodeled his basement, which was
                               - 4 -

previously bare and unfinished.   He started remodeling in 2003

and completed the project in 2004.     Petitioner installed

carpeting, furniture, partitioning, lighting, heating, and wiring

in the basement, creating about 1,000 square feet of usable space

with a reception area at the bottom of the staircase.     He divided

about one-half of the space into an open conference area, which

he used exclusively for occasional meetings with prospects for

his consulting activities, as described further below.     The other

half of the basement he made into a self-enclosed main office,

where he kept and used his telephone, computer, printer, and fax

machine and where he maintained records for the administrative

and management duties Leggett & Platt required.     Petitioner used

the office exclusively for his work with Leggett & Platt and for

his consulting activities.

     Petitioner prepared the couple’s joint Federal income tax

returns for 2003 and 2004.   Separate from his employment with

Leggett & Platt, petitioner reported Schedule C losses of $21,076

for 2003 and $28,347 for 2004 in connection with his attempts

beginning in 2003 to start a consulting business.     Petitioner’s

goal was to try to match American businesses interested in

exporting to Asia with Asian businesses interested in investing

in American businesses.   Petitioner had hoped to earn income

through commissions and finder’s fees.     Petitioner thought he

could develop business leads and contacts through the business
                               - 5 -

associations to which he already belonged, including the Asian

Business Chamber of Massachusetts, the Greater China Business

Council of New England, and the American Chamber of Commerce in

China.   The meetings were social as well as networking

opportunities.   Petitioner never generated any income from his

efforts to launch a consulting business, and he abandoned the

efforts at the end of 2004.   The details of petitioner’s Schedule

C for 2004 are as follows:

         Gross receipts or sales                   -0-
         Expenses:1
           Car and truck expenses               $7,496
           Office expense                          977
           Repairs and maintenance               4,196
           Supplies                                780
           Travel (away from home)               7,438
           Meals & ent. (½ of total)             1,075
           Utilities                             1,782
          Other expenses:
            Computer                             1,910
            Printer                                495
            Fax                                    296
            Telephone                              687
            Furniture                            1,215
              Total other expenses               4,603
         Total expenses                         28,347
         Net loss for the year                  28,347
           1
           For 2003 petitioner reported his home office
     expenses on Form 8829, Expenses for Business Use of
     Your Home, which flowed into Schedule C as a separate
     line item. In contrast, for 2004 petitioner reported
     his home office expenditures as part of repairs and
     maintenance, utilities, telephone, and furniture
     expenses.
                              - 6 -

     Respondent issued a notice of deficiency dated June 8, 2007,

stating that the 2004 Schedule C expenses “should have been

reported on Schedule A line 20” as unreimbursed employee business

expenses subject to a reduction of 2 percent of adjusted gross

income as required by section 67(a).   The notice of deficiency,

however, did not reclassify the expenses to Schedule A, Itemized

Deductions; instead, the notice outright disallowed all of

petitioner’s Schedule C business expenses.   The disallowance in

turn caused a series of computational adjustments to self-

employment income, itemized deduction limitations, and

alternative minimum tax, resulting in a Federal income tax

deficiency for 2004 of $13,216.   Respondent issued a letter dated

August 10, 2007, acknowledging calculation errors in the notice

of deficiency and reducing the income tax deficiency for 2004 to

$9,914.

     Petitioners timely filed a petition seeking a

redetermination of the deficiency on the ground that respondent

miscalculated income and deductions for 2004.   At trial

respondent raised the issue that irrespective of the potential

reclassification of business expenses from Schedule C to Schedule

A, petitioner lacked substantiation to support any deduction.
                                  - 7 -

                               Discussion

I.   Burden of Proof

      In general, the Court presumes that the Commissioner’s

determination set forth in a notice of deficiency is correct, and

the taxpayer bears the burden of showing that the determination

is in error.   Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111,

115 (1933).    Under section 7491(a) the burden may shift to the

Commissioner regarding factual matters if the taxpayer produces

credible evidence and meets the other requirements of the

section.

      Additionally, the Commissioner bears the burden of proof

with respect to any new matter that departs from the

determinations in the notice of deficiency.      Rule 142(a)(1);

Papineau v. Commissioner, 28 T.C. 54, 57 (1957).      An assertion is

treated as a new matter when it either increases the original

deficiency or, pertinent here, requires the presentation of

different evidence.      Rule 142(a)(1); Shea v. Commissioner, 112

T.C. 183, 191 (1999); Wayne Bolt & Nut Co. v. Commissioner, 93

T.C. 500, 507 (1989).

      The flush language in the notice of deficiency suggests that

petitioner satisfied the substantiation requirements regarding

the expenses and that he merely needed to support their

reclassification.      Respondent now contends that the notice of

deficiency was “legally sufficient” because the notice completely
                                   - 8 -

disallowed rather than reclassified the expenses.     Respondent

also insists that asserting lack of substantiation at trial was

not a new matter but was instead an “alternate theory” or an

“additional ground for disallowance within the ground that is

stated in the notice of deficiency.”

      We are skeptical of respondent’s contentions.    However, we

need not and explicitly do not decide this issue because of the

following legal principle:

      “In a situation in which both parties have satisfied
      their burden of production by offering some evidence,
      then the party supported by the weight of the evidence
      will prevail regardless of which party bore the burden
      of persuasion, proof or preponderance. * * *
      Therefore, a shift in the burden of preponderance has
      real significance only in the rare event of an
      evidentiary tie.” * * * [Knudsen v. Commissioner, 131
      T.C. ___, ___ (2008) (slip op. at 7) (quoting Blodgett
      v. Commissioner, 394 F.3d 1030, 1039 (8th Cir. 2005),
      affg. T.C. Memo. 2003-212), supplementing T.C. Memo.
      2007-340.]

      The present case has no evidentiary ties.   Therefore,

because we resolve the case on the preponderance of the evidence

and not on an allocation of the burden of proof, the issue of

burden of proof is moot.    See id.; Cyman v. Commissioner, T.C.

Memo. 2009-144.

II.   Petitioner’s Schedule C Expenses

      A.   Deductions in General

      Deductions are a matter of legislative grace, and taxpayers

must satisfy the statutory requirements for claiming the

deductions.    INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
                                - 9 -

(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440

(1934).   Section 6001 requires taxpayers to maintain records

sufficient to establish the amount of each deduction.      See also

Ronnen v. Commissioner, 90 T.C. 74, 102 (1988); sec. 1.6001-1(a),

(e), Income Tax Regs.    If a taxpayer can establish that he once

had adequate records but lost the records due to circumstances

beyond his control, such as a fire, flood, or other casualty,

then the Court will permit the taxpayer to reasonably reconstruct

his expenses.   Gizzi v. Commissioner, 65 T.C. 342, 345 (1975).

     Taxpayers may deduct ordinary and necessary expenses that

they pay in connection with operating a trade or business.     Sec.

162(a); Boyd v. Commissioner, 122 T.C. 305, 313 (2004).

Generally, the performance of services as an employee constitutes

a trade or business.    Primuth v. Commissioner, 54 T.C. 374, 377

(1970).   To be “ordinary” the expense must be of a common or

frequent occurrence in the type of business involved.      Deputy v.

du Pont, 308 U.S. 488, 495 (1940).      To be “necessary” an expense

must be appropriate and helpful to the taxpayer’s business.

Welch v. Helvering, supra at 113.    Additionally, the expenditure

must be “directly connected with or pertaining to the taxpayer’s

trade or business”.    Sec. 1.162-1(a), Income Tax Regs.

     For such expenses to be deductible the taxpayer must not

have the right to obtain reimbursement from his employer.     See

Orvis v. Commissioner, 788 F.2d 1406, 1408 (9th Cir. 1986), affg.
                                - 10 -

T.C. Memo. 1984-533.    Section 262(a) disallows deductions for

personal, living, or family expenses.

     If a taxpayer establishes that an expense is deductible, but

is unable to substantiate the precise amount, we may estimate the

amount, bearing heavily against the taxpayer whose inexactitude

is of his own making.     Cohan v. Commissioner, 39 F.2d 540,

543-544 (2d Cir. 1930).    The taxpayer must present sufficient

evidence for the Court to form an estimate, because without such

a basis, any allowance would amount to unguided largesse.

Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957);

Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985).

     Section 274 overrides the Cohan rule with regard to certain

expenses.   Sec. 1.274-5T(a), Temporary Income Tax Regs., 50 Fed.

Reg. 46014 (Nov. 6, 1985).    Section 274 requires more stringent

substantiation for travel, meals, and listed property, defined

under section 280F(d)(4) to include passenger automobiles,

computers or peripheral equipment, and cellular telephones.

Section 274(d) requires taxpayers to provide adequate records or

sufficient other evidence establishing the amount, time, place,

and business purpose of the expense to corroborate the taxpayer’s

statements. Thus, even if such an expense would otherwise be

deductible under Cohan, section 274 may still prohibit a

deduction if the taxpayer does not have sufficient
                              - 11 -

substantiation.   Sec. 1.274-5T(a), Temporary Income Tax Regs.,

supra.

     B.   Business Expenses v. Startup Expenses

     While section 162 generally allows a deduction for ordinary

and necessary expenses paid in connection with carrying on a

trade or business, the trade or business must be functioning as a

business at the time the taxpayer incurred the expenses.    Hardy

v. Commissioner, 93 T.C. 684, 687 (1989), affd. in part and

remanded in part per order (10th Cir., Oct. 29, 1990); Woody v.

Commissioner, T.C. Memo. 2009-93; Glotov v. Commissioner, T.C.

Memo. 2007-147; sec. 1.162-1(a), Income Tax Regs.   For this

purpose, “A taxpayer is not carrying on a trade or business under

section 162(a) until the business is functioning as a going

concern and performing the activities for which it was

organized.”   Glotov v. Commissioner, supra.   Until that time,

expenses related to the activity are not ordinary and necessary

expenses deductible under section 162 or section 212 (expenses

incurred for the production of income), but instead are

“start-up” or “pre-opening” expenses.   Hardy v. Commissioner,

supra at 687-688.

     Section 195 governs the deductibility of startup expenses,

providing in pertinent part that the taxpayer must capitalize the

expenditures and “Except as otherwise provided in this section,

no deduction shall be allowed for start-up expenditures.”   Sec.
                                - 12 -

195(a).     The taxpayer may elect to amortize the capitalized

startup costs evenly over a period of not less than 60 months,

“beginning with the month in which the active trade or business

begins”.1    Sec. 195(b).   When a taxpayer’s endeavor never rises

to the status of an active trade or business, the taxpayer may

not amortize the startup costs.     See Bernard v. Commissioner,

T.C. Memo. 1998-20.

     Therefore, the threshold issue here is whether petitioner

completed the startup phase and became actively engaged in a

trade or business during 2004.     Courts have adopted a facts and

circumstances test focusing on whether the taxpayer has satisfied

all of the following three factors:      (1) Whether the taxpayer

undertook the activity intending to earn a profit; (2) whether

the taxpayer was regularly and actively involved in the activity;

and (3) whether the taxpayer’s activity has actually commenced.

See Woody v. Commissioner, supra; McManus v. Commissioner, T.C.

Memo. 1987-457, affd. without published opinion 865 F.2d 255 (4th

Cir. 1988).




     1
      For startup expenses that were incurred after Oct. 22,
2004, sec. 195(b) allows the taxpayer to elect to deduct a
limited amount of the capitalized startup costs for the year of
which the active trade or business begins, and to deduct the
remainder over 180 months of amortization beginning with the
month in which the active trade or business begins. See sec.
1.195-1T(b), (d), Temporary Income Tax Regs., 73 Fed. Reg. 38913
(July 8, 2008).
                                - 13 -

       We find that petitioner intended to earn a profit; however,

petitioner did not establish that he was regularly and actively

engaged in his consulting efforts or that the business actually

began in 2003 or 2004.     Petitioner failed to attract a single

client or generate a single dollar or yuan in income in 2003 or

2004.     Petitioner acknowledged that his business model “needed to

be more thought out and well planned out than what I started to

do”, adding “Well, it just looked so easy when everybody else was

doing it”.     Petitioner further acknowledged that he was going to

try to launch the activity again at a later date.

       Thus, petitioner’s own candid testimony together with the

record as a whole establishes that petitioner was not carrying on

an active trade or business in 2003 or 2004.     Therefore, we

sustain respondent’s characterization that the business expenses

petitioner reported for 2004 are not Schedule C trade or business

expenses.

III.    Petitioner’s Schedule A Unreimbursed Employee Business
        Expenses

        The holding above, however, does not end the case.   As noted

in respondent’s notice of deficiency, some of the 2004 expenses

that petitioner claimed on Schedule C may qualify as Schedule A

unreimbursed employee business expenses related to his job at

Leggett & Platt.     Consequently, we will now examine the business

expenses petitioner reported on Schedule C for possible
                               - 14 -

reclassification to Schedule A as 2004 unreimbursed employee

business expenses.

     A.   Car and Truck Expenses

     Petitioner deducted $7,496 in car and truck expenses for

2004 for a 2000 Lexus he placed in service on January 1, 2003,

the date he started his consulting efforts.    Petitioner reported

that in 2004 he drove the Lexus 7,590 miles for business.

Despite the mileage information, petitioner used actual costs to

determine his car expense deduction, inputting the information

regarding his automobile expenses into his computer and relying

on his tax preparation software to determine the maximum

deductions for depreciation and other car expenses.

     Because of the nondeductibility of petitioner’s startup

expenses relating to his consulting efforts, the only deductible

use of an automobile would be in connection with his employment

with Leggett & Platt.    Petitioner has not established that he

used his car in connection with his employment with Leggett &

Platt.    Even if the car expenses were employment related,

petitioner has also not shown that the expenses were not

reimbursable by Leggett & Platt.    Therefore, petitioner is not

entitled to deduct any of the car and truck expenses as

unreimbursed employee business expenses for 2004.
                               - 15 -

     B.    Travel and Meals and Entertainment Expenses

     Petitioner reported $7,438 of business travel expenses away

from home and $1,075 of business meals and entertainment expenses

on his 2004 Schedule C.    Petitioner testified that he paid these

expenses in connection with his consulting efforts during three

trips he made to Asia during 2004.      We have already found that

the expenses petitioner paid in conjunction with his consulting

efforts are nondeductible startup expenses.      Further, some of the

traveling expenses may have been for personal family expenses.

Petitioner’s mother lives in northern China, and his wife’s

mother recently moved back to China.      They also have other

relatives in Beijing and other cities.      Moreover, Leggett & Platt

reimbursed petitioner for all of his 2004 foreign travel business

expenses, including meals and lodging.

     In summary, none of petitioner’s 2004 traveling expenses are

deductible as unreimbursed employee business expenses.      Instead,

petitioner’s 2004 travel and meals and entertainment expenses

were either nondeductible startup or personal expenses.

     C.    Office Expenses and Supplies

     Petitioner deducted $977 in office expenses and $780 in

supplies on his 2004 Schedule C.    Petitioner testified that about

70 to 80 percent of these expenditures were for his employment

with Leggett & Platt, and the remainder were for his consulting

efforts.    Because Leggett & Platt did not reimburse petitioner
                                 - 16 -

for expenses associated with working from home, and because we

find that these expenditures were ordinary and necessary business

expenses, we apply Cohan, concluding that petitioner may deduct

70 percent of the expenditures as unreimbursed employee business

expenses for 2004, as follows:     $684 for office expense and $546

for supplies.   The remaining 30 percent of the expenses are

nondeductible startup expenses.

     D.   Home Office Expenses

     Generally, a taxpayer may not deduct expenses paid in

connection with the business use of a home.     Sec. 280A(a).

However, a taxpayer may deduct expenses allocable to a portion of

his home if, in pertinent part, he uses the space exclusively on

a regular basis as his principal place of business, or as a place

of business where he meets patients, clients, or customers in the

normal course of his business.     Sec. 280A(c)(1)(A) and (B).   The

definition of “principal place of business” for this purpose

includes a portion of the home that the taxpayer uses for the

administrative or management activities of his trade or business

if there is no other fixed location for those activities.       Sec.

280A(c)(1).

     The exclusive use requirement of section 280A(c)(1) “is an

all-or-nothing standard”.   Hamacher v. Commissioner, 94 T.C. 348,

357 (1990).   Thus, for example, if a taxpayer uses his den as the

principal place for conducting his attorney business but also
                              - 17 -

uses the den for personal purposes, then the taxpayer may not

deduct any expenses related to the den.     S. Rept. 94-938, at 148

(1976), 1976-3 C.B. (Vol. 3) 49, 186.     Congress’ intent in

enacting section 280A was to exclude taxpayers from converting

otherwise “‘nondeductible personal, living, and family expenses’”

into “‘deductible business expenses’” merely because they had

some connection with a business activity.     Hamacher v.

Commissioner, supra at 357 (quoting S. Rept. 94-938, supra at

147, 1976-3 C.B. (Vol. 3) at 185.

     Where a taxpayer uses his home office for more than one

business, the taxpayer satisfies the exclusive use test only if

each business is one of the types described in section

280A(c)(1).   Hamacher v. Commissioner, supra at 357-358.

Although we found that petitioner’s consulting activities were a

nondeductible startup activity, we are nonetheless satisfied that

petitioner’s consulting activity is of the type described by

section 280A(c)(1); he met potential clients there, it was the

principal place of his activity, and the consulting was not a

personal, family, or living usage.     Similarly, as discussed

below, petitioner’s use of the basement for his work as an

employee of Leggett & Platt is also a type of business described

by section 280A(c)(1).   Accordingly, petitioner satisfies the

“all-or-nothing” exclusive use test.
                              - 18 -

     A taxpayer, such as petitioner, who is an employee must also

satisfy an additional requirement that his exclusive use is “for

the convenience of his employer.”   Sec. 280A(c).   Neither the

Code nor the regulations define that phrase.   Caselaw, however,

holds that an employee satisfies the requirement when the

employee maintains the home office as a condition of his

employment or as necessary for the functioning of the employer’s

business or as necessary for the employee to properly perform his

duties.   Hamacher v. Commissioner, supra at 358.   In contrast,

the home office must not “be ‘purely a matter of personal

convenience, comfort, or economy’ with respect to the employee.”

Id. (quoting Sharon v. Commissioner, 66 T.C. 515, 523 (1976),

affd. 591 F.2d 1273 (9th Cir. 1978).

     Petitioner’s activities were essential to Leggett & Platt.

He was responsible for overseeing the corporation’s Asian

operations, planning, and budgeting work.   These responsibilities

required that he conduct telephone calls late at night with

Leggett & Platt facilities in Asia and that he maintain necessary

records for his managerial and administrative duties.     Though

petitioner may have enjoyed the convenience and comfort of

working from home, Leggett & Platt did not furnish him with an

office.   Cf. Tokh v. Commissioner, T.C. Memo. 2001-45.

Petitioner had nowhere else to regularly and properly perform

these responsibilities.
                                 - 19 -

     Therefore, we conclude that petitioner’s home office was for

the convenience of the employer and overall that petitioner has

satisfied the requirements of section 280A with respect to

business use of the home for 2004.        We must, however, continue

our inquiry to separate the expenses between the deductible

expenses he paid with respect to his employment with Leggett &

Platt and the nondeductible expenses he paid related to his

startup consulting activities.

            1.    Furniture, Repairs and Maintenance, and Utilities

     Petitioner reported on his 2004 Schedule C that he spent

$1,215 for furniture, $4,196 for repairs and maintenance, and

$1,782 for utilities in 2004 related to his business use of his

basement.    Petitioner testified that he paid these expenditures

for finishing the remodeling and maintaining his basement in

2004.

     As noted earlier, petitioner divided about one-half of the

basement space into a conference area for his consulting

activities.      The record gives no indication that petitioner used

the conference area for his employment with Leggett & Platt.

Accordingly, one-half of the basement expenditures are

nondeductible startup costs.     With respect to the other half of

the expenditures, petitioner testified further that he split his

time in the basement office evenly between Leggett & Platt and

his consulting activities.     Because we have already found that
                              - 20 -

petitioner’s home office was for the convenience of his employer,

petitioner is eligible to deduct the portion of his office

expenditures pertaining to Leggett & Platt.

     Consequently, separating the conference room and excluding

one-half of the office expenditures, we apply Cohan v.

Commissioner, 39 F.2d 540 (2d Cir. 1930), to conclude that for

2004, petitioner may deduct $304 ($1,215 x ½ x ½) of his

furniture purchases,2 $1,049 ($4,196 x ½ x ½) of his basement

repairs and maintenance expense, and $446 ($1,782 x ½ x ½) of his

basement utility expenses as unreimbursed employee business

expenses for the business use of his home.    The remainder of

these expenses for 2004 are nondeductible startup expenses.

          2.   Computer, Printer, Fax, and Telephone

     On his 2004 Schedule C petitioner deducted $1,910 for a new

computer he purchased in 2004, $495 in printer expenses, $296 for

fax expenses, and $687 for telephone expenses.    Petitioner

testified that he used his computer and printer “primarily for my

consulting business” and that his fax and telephone expenses

were split “roughly half and half” between his consulting

activities and his employment with Leggett & Platt.

     Section 280F(d)(4)(A)(iv) includes computers and peripherals

as listed property.   However, section 280F(d)(4)(B) provides an



     2
      Deductible in the first year, 2004, under sec. 179,
Election To Expense Certain Depreciable Business Assets.
                              - 21 -

exception for computer or peripheral equipment used at a regular

place of business, including a portion of the home qualifying

under section 280A(c)(1) (requiring in pertinent part that the

portion of the dwelling unit must be the principal place of

business for the trade or business).    Verma v. Commissioner, T.C.

Memo. 2001-132.   Petitioner qualifies for the exception of

section 280F(d)(4)(B) because, as noted above, his home served as

his principal place of business for his employment with Leggett &

Platt.

     With respect to the telephone expense, a taxpayer may not

deduct the cost of basic local telephone service for the first

telephone line provided to a residence, because the expenditure

is a personal expense.   Sec. 262(b).   The record is silent as to

the number of lines to petitioner’s home.   Respondent made no

assertion that petitioner’s telephone expenses related to a first

telephone line.   Given petitioner’s work circumstance of residing

in Massachusetts with responsibility for Asian operations and his

need to communicate regularly with corporate headquarters in

Missouri, we conclude that a significant portion of the telephone

use would have been for long distance calls.   Moreover, because

of the number of people residing in his home, the location of the

telephone in an office in the basement beneath a 3,000-square-

foot home, and the volume of calls that petitioner made during

the evenings and nights, we find it highly probable that the
                              - 22 -

telephone expenses petitioner claimed for 2004 were for a second

telephone line that he maintained exclusively for business.

     Returning to the analysis of all of the equipment expenses,

we apply Cohan, finding that “primarily for my consulting

business” means 75 percent of the use, and that “roughly half and

half” means 50 percent of the use.     Thus, petitioner may deduct

as 2004 unreimbursed employee business expenses the following

items:   Computer expenses of $478 ($1,910 x 25 percent),3 printer

expenses of $124 ($495 x 25 percent), fax expenses of $148 ($296

x 50 percent), and telephone expenses of $344 ($687 x 50

percent).   The remainder of petitioner’s 2004 equipment expenses

are nondeductible startup expenses.

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.




     3
      Also deductible in the first year, 2004, under sec. 179.
