                  T.C. Summary Opinion 2008-13



                     UNITED STATES TAX COURT



          BRIAN E. & MARCIE L. MALLIN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2370-06S.              Filed February 11, 2008.



     Brian E. Mallin and Marcie L. Mallin, pro sese.

     Tamara L. Kotzker, for respondent.



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

the provisions of section 7463 of the Internal Revenue Code in

effect when the petition was filed.1   Pursuant to section

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


     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for the
taxable years in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

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

for any other case.

     Respondent determined deficiencies in petitioners’ Federal

income taxes as follows:    $4,248.94 for 2001, $138.33 for 2002,

and $174 for 2003.    After concessions by both parties, the

principal issues remaining for decision are:     (1) Whether

petitioners are entitled to deduct a loss in 2001 on the sale of

their primary residence for the portion of that sale allocable to

the workshop used in petitioners’ business, and (2) whether

petitioners are entitled to deductions in 2001, 2002, and 2003

for depreciation on a furnace and a garage workshop, both used in

their business.

                             Background

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

found.   We incorporate by reference the parties’ stipulation of

facts and accompanying exhibits.

     At the time the petition was filed, Brian E. Mallin and

Marcie L. Mallin resided in Wyoming.

     Petitioners purchased a residence in Sioux Falls, South

Dakota (the South Dakota property), in 1995.     Petitioners

refinanced their house in 1998.    As part of the refinancing

process, the house was appraised at $199,000.     During 1999 and

2000, petitioners built a 352-square-foot workshop on this

property at a total cost of $16,179.      The workshop was built as
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an addition to the existing attached two-car garage.     It had a

wall separating it from the garage and its own overhead garage

door.

     In late 1999 or early 2000, petitioners began a woodworking

business, making Adirondack chairs, tables, and ottomans.       The

garage workshop was used for this business.      Petitioners claimed

and were allowed $346 of depreciation for the workshop on their

Schedule C, Profit or Loss From Business, attached to their 2000

Federal income tax return.

     Petitioners sold the South Dakota property in February 2001

for $203,000.    The house was purchased by a relocation company,

which priced the house by averaging two appraisals:     One for

$200,000 and one for $206,000.    Those appraisals valued the

workshop as a third-car garage; one valued it at $3,000 and the

other at $10,000.

     Petitioners reported no gain on the sale of the South Dakota

property because the amount realized was not taxable pursuant to

section 121.    See sec. 121(a) and (b)(2)(A).   Petitioners

reported a loss of $9,731 on the same sale, all of which was

attributed to the sale of the workshop.

     In 2000 petitioners moved to Cheyenne, Wyoming.     They

purchased a house there in 2001 (the Wyoming property).     After

purchasing the Wyoming property, petitioners converted the

existing attached garage into a workshop; as part of the
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conversion, they installed a furnace in the workshop.

Petitioners then spent $18,123 building a new garage in which to

house their vehicles.

      Making and selling chairs did not go well in Wyoming, so

petitioners tried their hands at wood signs and carved duck

decoys.   They also gave away beaded keychains as a promotional

item for their woodworking business.     Ultimately, petitioners

terminated their woodworking business in 2003.

                            Discussion

      Although only two principal issues remain in the case, we

discuss all of the adjustments made in the notice of deficiency

for the sake of clarity.

1.   Schedule C--2001

      After discussion and elaboration at trial, it became clear

that the bead and decoy expenses denied by respondent were

incurred by petitioners as part of their woodworking business,

and we find for petitioners on those items.

2.   The Wyoming Workshop

      Petitioners claimed deductions on their Federal income tax

returns for the years 2001, 2002, and 2003 related to the furnace

installation in, and business use of, the Wyoming workshop.

Unfortunately for petitioners, any deductions related to the

business use of the Wyoming workshop are limited by the

provisions of section 280A(c)(5).   See also Rule 142(a); INDOPCO,
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Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Welch v. Helvering,

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

     Generally, section 280A(a) prohibits deductions allocable to

the business use of a “dwelling unit” used by a taxpayer during

the taxable year as a personal residence.   However, if a portion

of the dwelling unit is used as a taxpayer’s principal place of

business, deductions allocable to that use are permitted, though

they are limited if the gross income from the business use is

less than the total business expenses.   Sec. 280A(c)(1), (5).

Here, petitioners had insufficient gross income from their

woodworking business in 2001, 2002, and 2003 to offset deductions

for either the furnace or the workshop after the application of

section 280A(c)(5).

     Respondent does not dispute the Wyoming workshop was used as

petitioners’ principal place of business with respect to their

woodworking business.   The issue is simply whether the garage-

turned-workshop should be considered part of the Wyoming

residence and thus be subject to the home office limitations of

section 280A.

     Notably, the workshop was attached to the house, and

petitioners used its entrance to gain access to the residence in

the winter.   Aside from common sense--an attached garage is

considered part of one’s home under normal circumstances--caselaw

has held that even a detached office building located on the same
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property as the taxpayer’s residence 12 feet away was part of the

taxpayer’s “dwelling unit”.    See Scott v. Commissioner, 84 T.C.

683 (1985).    Further, the term “dwelling unit” is defined as a

house and all structures or other property appurtenant to the

house.    Sec. 280A(f)(1).   An attached garage is clearly

appurtenant to the house.

      Petitioners argue that because they never used the workshop

as a garage or as a personal space, the analysis should be

different.    We disagree, and respondent’s determination as to

this issue is sustained.

3.   The South Dakota Workshop

      Respondent initially denied a loss on the sale of the South

Dakota workshop on the basis that it was part of the residence

and thus the loss was personal in nature.    Generally, no

deduction is allowed on a loss incurred by a taxpayer with

respect to the sale of his principal residence.    See sec. 165(c);

sec. 1.165-9(a), Income Tax Regs.    Respondent has since modified

his position, and the parties now agree that the workshop was

used for a business or income-producing purpose.    The crux of the

remaining disagreement is how to calculate any gain or loss on

the portion of the South Dakota property specifically

attributable to the workshop.    See sec. 1.165-9(b), Income Tax

Regs.    In particular, the parties disagree on how to apportion
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the $203,000 sale price for the South Dakota property between the

residence and the workshop.

     Respondent urges us to apportion the sale proceeds of the

South Dakota property by square footage; because the workshop was

approximately 9 percent of the home’s overall square footage,

respondent suggests that we should allocate 9 percent of the

home’s sale price to the workshop.     However, given that workshop

space is not as valuable as living space in a home, we decline to

use respondent’s calculation method.

     Petitioners, on the other hand, urge us to assign $4,000 of

the sale price to the workshop.   They arrive at this number by

calculating the difference between the 1998 appraisal of $199,000

and the 2001 sale price of $203,000; in other words, petitioners

attribute the entire increase in the home’s value between 1998

and 2001 to the workshop.   They contend that all of the increase

must have been a result of the workshop as that was the only

thing that changed in the period between appraisals.    We disagree

with petitioners’ argument.

     Rather than use either of the parties’ methods to allocate

the proceeds from the sale of the South Dakota property between

the residence and the workshop, we shall use the only allocation

approach supported by the record; i.e., taking the average of the

appraisals of the workshop value used for the 2001 sale.    This

approach may be an imperfect solution given the fact that the
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appraisals both value the space as a third-car garage, but, as

respondent recognizes, this approach mirrors the valuation of the

entire South Dakota property.   And, as petitioners provided us

with no evidence to support any other valuation, this is the best

we can do on the record before us.      See Rule 142(a); INDOPCO,

Inc. v. Commissioner, supra; Welch v. Helvering, supra.

4.   Recapture From the Sale of the South Dakota Property

      For 2000, petitioners deducted $346 as a depreciation

allowance on the South Dakota property’s workshop pursuant to

section 167.    Respondent determined that the amount was subject

to recapture.   Because petitioners are entitled to some loss on

the sale of the South Dakota workshop, there was no gain on its

sale, and we need not reach a conclusion on this issue.     See also

sec. 1.1250-1(a)(5)(i), Income Tax Regs.; cf. secs. 121(d)(6),

1250(b)(3); sec. 1.121-1(e)(4), Example (5), Income Tax Regs.       We

therefore do not sustain respondent’s determination regarding

recapture.

5.   Itemized Deductions-2001, 2002, 2003

      To the extent respondent made adjustments to petitioners’

itemized deductions because of changes determined in the notice

of deficiency, those adjustments should be modified to reflect

the other issues already conceded by the parties and those

discussed herein.
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                           Conclusion

     To reflect our disposition of the disputed issues, as well

as the parties’ concessions,



                                            Decision will be entered

                                       under Rule 155.
