                         T.C. Memo. 1997-181



                       UNITED STATES TAX COURT



                    FRANK SHIH, JR., Petitioner v.
             COMMISSIONER OF INTERNAL REVENUE, Respondent



       Docket No. 12738-95.                    Filed April 15, 1997.



       Frank Shih, Jr., pro se.

       Elaine L. Sierra, for respondent.


                          MEMORANDUM OPINION


       CARLUZZO, Special Trial Judge:   This case was heard pursuant

to the provisions of section 7443A(b)(3) and Rules 180, 181, and

182.    Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for the year at issue.    All

Rule references are to the Tax Court Rules of Practice and

Procedure.
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     Respondent determined a deficiency in petitioner's 1991

Federal income tax in the amount of $3,181.

     The issue for decision is whether the deductions petitioner

claimed on a Schedule E filed with his 1991 Federal income tax

return are subject to the limitation imposed by section

280A(c)(5).

Background

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

found.   At the time that the petition was filed in this case,

petitioner resided in Beijing, China.

     In 1987 petitioner purchased and began to use as his

principal residence a house in San Bruno, California (the San

Bruno residence).   The San Bruno residence is a two-story house

containing four bedrooms (including a master bedroom that has an

outside entrance and a private bathroom), two bathrooms

(including the one attached to the master bedroom), a living

room, a dining room, a kitchen, a laundry room, storage space,

and an attached two-car garage.

     Petitioner holds degrees in mathematics and computer

science.   In 1990 he started working for the Qume Corp. (Qume).

Shortly thereafter, Qume began to experience financial

difficulties.   Because he was concerned about his job security

with Qume and to supplement his income, in November 1990

petitioner rented out one bedroom of the San Bruno residence to
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an unrelated party.    In June 1991 petitioner was laid off by Qume

and remained unemployed for the remainder of that year.

     Shortly after being laid off by Qume, petitioner traveled to

China to meet and visit with relatives.   He returned to the

United States sometime in July 1991.    Uncertain about his future

employment prospects in the United States and for other personal

reasons, petitioner decided to look for a job in China.

Petitioner's cousin, who lived in Beijing, China, offered to help

petitioner find a job in the Beijing area.   During the remainder

of 1991, petitioner actively sought employment in China.

     After returning to the United States in July 1991,

petitioner moved some of his personal belongings to his parents'

house in Daly City, California, although he continued to live at

the San Bruno residence.   Shortly thereafter, he decided to rent

out the two unoccupied bedrooms in his house.   In August 1991

petitioner began to advertise the master bedroom for rent,

although he continued to occupy it.

     Petitioner believed that foreign students would most likely

be willing to participate in a house-sharing arrangement and

directed his advertising accordingly.   His advertising efforts

took numerous forms.   On an informal basis, he asked friends and

relatives if they needed, or knew someone who needed, a room to

rent.   He posted flyers at nearby universities, colleges, and

public places such as grocery stores and markets.   The flyers
                                 - 4 -

indicated that petitioner was seeking "clean & responsible

housemates" and contained the following language:

     House has 4BR 2 BA, 1-3 rooms available. Large private
     room plus shared kitchen, bath (private bath avail. w.
     MBR)

Petitioner also placed advertisements in local newspapers such as

the San Mateo Times, the Peninsula Mid Week, the San Bruno

Herald, and the World Journal.    In July 1991, petitioner

registered with Tenant Finders and Human Investment Projects,

which are placement agencies for tenants and landlords.      During

1991, petitioner spent $856.27 for advertising.

     For various reasons, petitioner sometimes rejected

prospective tenants.   In July 1991 petitioner rented one of the

bedrooms to Zelma Stone.   Ms. Stone paid $380 per month from July

through September and $350 per month for the remainder of the

year.   In September 1991 petitioner rented another bedroom, a

parking space in the garage, and storage space to Darren and Mika

Dong (a married couple) for 1 year for $540 per month.    Although

he advertised the master bedroom for rent in 1991, petitioner did

not rent it out during 1991.    The rental amounts petitioner

charged for the bedrooms that were rented out represent fair

rental value for those rooms.

     Each tenant had exclusive use of his or her bedroom and,

along with petitioner, had access to and the right to use the

common areas of the house, including the kitchen, living room,

dining room, bathroom, and laundry room.    Each tenant had a
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private lock on his or her bedroom door.     Two tenants had access

to a single parking space in the garage.

     During 1991, except for the 1-month period that he was in

China, petitioner used the San Bruno residence as his principal

residence, reserving the master bedroom and a parking space in

the garage for his exclusive use.

     In late 1991, petitioner was offered a teaching job, which

he accepted, at Petroleum University in Beijing, China, for the

1992 academic year.   Petitioner moved to China in September 1992

to begin teaching and has made no personal use of the San Bruno

residence since that time.

     On a Schedule E filed with his 1991 Federal income tax

return, petitioner reported the following items attributable to

the rental use of the San Bruno residence:

     Income:                                         $4,815.00

     Expenses:
          Advertising                    $856.27
          Auto & travel                   647.24
          Cleaning & maintenance        1,423.18
          Insurance                       818.42
          Mortgage interest            10,283.90
          Repairs                         202.25
          Taxes                         1,571.12
          Utilities                     1,184.88
          Lamp, telephone                 230.92
          Dry rot repair                  298.00
          Depreciation                  9,893.28     27,409.46

     Net loss:                                       22,594.46


     With the exception of the depreciation deduction, and

assuming, without finding, that petitioner properly allocated the
                               - 6 -

expenses to the rental use of the San Bruno residence, the

expenses reflected on the Schedule E were paid or incurred by

petitioner during 1991 for the purposes indicated.

     In the notice of deficiency respondent determined that the

above-listed deductions were limited to the rental income

reported on the Schedule E and adjusted petitioner's 1991 taxable

income accordingly, explaining:

          It is determined that the $22,594 rental loss
     claimed on your 1991 return is not allowable. * * *
     section 280A limits rental expenses to rental income on
     rental use of personal residences when the rental use
     exceeds 15 days. The balance of the mortgage interest
     and real estate taxes have been allowed as deductions
     on Schedule A.

Discussion

     As we have often stated, deductions are a matter of

legislative grace, and a taxpayer claiming a deduction must prove

entitlement to it.   Rule 142(a); New Colonial Ice Co. v.

Helvering, 292 U.S. 435, 440 (1934).   Such proof includes

establishing that any and all of the statutory requirements

necessary for the allowance of the deduction claimed have been

satisfied.

     The type of deductions claimed on petitioner's Schedule E

are generally allowable under section 162(a) or section 212(1).

Regardless of which section is applicable, a distinction that is

unimportant here, because petitioner used the San Bruno residence

as his residence during 1991, the deductions claimed on the

Schedule E are subject to section 280A(a), which states that,
                                - 7 -

except as otherwise provided in that section, in the case of a

taxpayer who is an individual, no deduction otherwise allowable

under chapter 1 of the Internal Revenue Code is allowable "with

respect to the use of a dwelling unit which is used by the

taxpayer during the taxable year as a residence."    Deductions

that are attributable to the rental use of the dwelling unit, or

a portion thereof, are excepted from the blanket disallowance of

section 280A(a) and can be deducted subject to the limitations

imposed by subsections (c)(5) and (e) of section 280A.    Sec.

280A(c)(3).

       For purposes of section 280A, the test for determining

whether a taxpayer is considered to have used a dwelling unit as

a residence is set forth in section 280A(d)(1).    Pursuant to that

section, a taxpayer uses a dwelling unit as a residence if he or

she uses the unit (or portion thereof) for personal purposes for

a number of days which exceeds the greater of 14 days or 10

percent of the number of days during the year for which the unit

is rented at a fair rental.    Thus, if, during the taxable year, a

taxpayer uses a dwelling unit for rental purposes and also uses

the dwelling unit for personal purposes for a number of days in

excess of the number specified in section 280A(d)(1), as

petitioner did in this case during 1991, the taxpayer is deemed

to have used the dwelling unit as a residence, and section

280A(c)(5) applies to the deductions attributable to the rental

use.
                               - 8 -

     If a taxpayer uses a dwelling unit for rental purposes and

as a residence during the taxable year, section 280A(c)(5) limits

the deductions attributable to the rental use of the dwelling

unit to an amount not to exceed the excess of the gross rental

income derived from the rental use 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.   As a result, a taxpayer cannot 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).

     If during a taxable year a taxpayer converts his principal

residence to rental property or vice versa, section 280A(d)(4)

must be taken into account in order to determine whether, and to

what extent, section 280A(c)(5) applies.   Section 280A(d)(4)

provides:

          (A) In general.--For purposes of applying
     subsection (c)(5) to deductions allocable to a
     qualified rental period, a taxpayer shall not be
     considered to have used a dwelling unit for personal
     purposes for any day during the taxable year which
     occurs before or after a qualified rental period
     described in subparagraph (B)(i), or before a qualified
     rental period described in subparagraph (B)(ii), if
     with respect to such day such unit constitutes the
                               - 9 -

     principal residence (within the meaning of section
     1034) of the taxpayer.

          (B) Qualified rental period.--For purposes of
     subparagraph (A), the term "qualified rental period"
     means a consecutive period of --

          (i) 12 or more months which begins or ends in such
      taxable year, or
          (ii) less than 12 months which begins in such
       taxable year and at the end of which such dwelling unit
       is sold or exchanged, and

     for which such unit is rented, or is held for rental,
     at a fair rental.


     Petitioner considers the San Bruno residence to have been

converted to rental property when he began to advertise the

master bedroom for rent in August 1991.   He contends that a

qualified rental period, within the meaning of section

280A(d)(4)(B), began in August 1991 when all of the bedrooms in

the San Bruno residence were either rented or held for rent at

fair rental value.   According to petitioner, because a qualified

rental period occurred in 1991, section 280A(d)(4)(A) provides

that his personal use of the San Bruno residence during that year

is ignored for purposes of section 280A(c)(5).   If petitioner's

personal use of the San Bruno residence during 1991 were ignored,

it would not be considered to have been used by him during that

year as his residence for purposes of section 280A(c)(5).

Petitioner argues therefore that the rental deductions he claimed

on the Schedule E are not subject to section 280A(c)(5).    In the

alternative, petitioner argues that each bedroom in the San Bruno
                              - 10 -

residence should be considered a separate dwelling unit and

whether and to what extent section 280A applies must be

determined on a bedroom-by-bedroom basis.

     Respondent does not agree that the San Bruno residence was

converted to rental property in 1991 or that a qualified rental

period occurred during that year.   She suggests that petitioner

did not in good faith attempt to rent out the master bedroom

until he was ready to depart for China in 1992.    Consistent with

her position that 1991 did not include a qualified rental period,

respondent argues that section 280(d)(4) does not apply to that

year.   According to respondent, because petitioner used the San

Bruno residence as his residence during 1991, section 280A(c)(5)

limits the amount of deductions attributable to its rental use.

In response to petitioner's alternative argument, respondent

argues that the San Bruno residence must be treated as a single

dwelling unit, rather than multiple dwelling units within a

single structure, and section 280A should be applied accordingly.

     Because petitioner's alternative argument focuses upon

whether section 280A applies, rather than how it applies, we

consider his alternative argument first.    Obviously, the San

Bruno residence is a dwelling unit as that term is used

throughout section 280A.   See sec. 280A(f)(1), which defines a

dwelling unit to include a house.   Nothing in the statute

prohibits treating a single structure as multiple dwelling units,

and we have done so in appropriate situations.    E.g., Gorod v.
                              - 11 -

Commissioner, T.C. Memo. 1981-632 (section 280A did not apply to

entire building where upper and lower portions were determined to

be separate and distinct dwelling units).   However, there were no

separate and distinct dwelling units within the San Bruno

residence during 1991.   Rather, as reflected in petitioner's

advertisements, the San Bruno residence consisted of a single

dwelling unit that was shared by petitioner and "housemate"

tenants during 1991.

     Petitioner's alternative argument is similar to the

taxpayer's argument that we rejected in Russell v. Commissioner,

T.C. Memo. 1994-96, affd. without published opinion 76 F.3d 388

(9th Cir. 1995).   In Russell we found that the taxpayer's house

consisted of a single dwelling unit even though the taxpayer

essentially occupied only the master bedroom and bathroom, and

the rest of the house was rented out to tenants unrelated to the

taxpayer.   There are no meaningful distinctions between this case

and Russell.   Consequently, for the reasons expressed in Russell,

we hold that for purposes of section 280A the San Bruno residence

must be treated as a single dwelling unit and proceed to consider

petitioner's primary argument on that basis.

     Petitioner's primary argument, which deals with the

application of section 280A(d)(4), assumes that renting, or

holding for rent at fair rental value, all four bedrooms in the

San Bruno residence equates to renting, or holding for rent at

fair rental value, the San Bruno residence as a whole.   Unless
                               - 12 -

this were so, there would be no qualified rental period in 1991,

and section 280A(d)(4) would not apply.    Petitioner's primary

argument next assumes that section 280A(d)(4)(A) allows his

personal use of the San Bruno residence for the entire year to be

ignored.   Unless both assumptions are valid, petitioner's primary

argument must be rejected.    Because his second assumption is

invalid, we need not consider the validity of the first.

     For purposes of applying section 280A(c)(5), section

280A(d)(4)(A) provides that personal use of a dwelling unit is

ignored for any day during the taxable year that the taxpayer

uses the dwelling unit as a principal residence if that day

occurs before or after a qualified rental period described in

section 280A(d)(4)(B)(i).    Any day involving personal use that

occurs during a qualified rental period is not ignored.

According to petitioner, a qualified rental period began on

August 1, 1991, and continued at least through the end of the

year.   Even if this were so, section 280A(d)(4) would allow

petitioner's personal use of the San Bruno residence only from

January through July of 1991 to be ignored; it would not allow

his personal use from August through December (during the

qualified rental period) likewise to be ignored.    Taking into

account petitioner's personal use of the San Bruno residence

during the qualified rental period would, based solely upon such

use, give rise to the application of section 280A(c)(5).    Because

petitioner continued to use the San Bruno residence for personal
                             - 13 -

purposes (as his residence) while attempting to rent out the

remaining bedrooms, he cannot rely upon section 280A(d)(4) to

avoid the application of section 280A(c)(5).   See Walsh v.

Commissioner, T.C. Memo. 1987-18.

     Accordingly, we hold that the deductions claimed on the

Schedule E filed with petitioner's 1991 Federal income tax are

limited to the gross income reported on the Schedule E pursuant

to section 280A(c)(5), and respondent's adjustment in this regard

is sustained.

     To reflect the foregoing,

                                               Decision will be

                                        entered for respondent.
