OCTOBER TERM, 1992
Syllabus
COMMISSIONER OF INTERNAL REVENUE
v.
SOLIMAN
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FOURTH
CIRCUIT
No. 91-998. Argued October 5, 1992-Decided January 12, 1993
During the 1983 tax year, respondent Soliman, an
anesthesiologist, spent 30 to 35 hours per week administering
anesthesia and postoperative care in three hospitals, none of which
provided him with an office. He also spent two to three hours per
day in a room in his home that he used exclusively as an office,
where he did not meet patients but did perform a variety of tasks
related to his medical practice. His claimed federal income tax
deduction for the portion of his household expenses attributable to
the home office was disallowed by petitioner Commissioner, who
determined that the office was not Soliman's "principal place of
business" under 26 U. S. C. § 280A(c)(1)(A). The Tax Court
disagreed and allowed the deduction. In affirming, the Court of
Appeals adopted the test used in the Tax Court, under which a home
office may qualify as the "principal place of business" if (1) the
office is essential to the taxpayer's business; (2) the taxpayer
spends a substantial amount of time there; and (3) there is no
other location available for performance of the business' office
functions.
Held: Soliman was not entitled to a deduction for home
office expenses.
Pp. 172-179.
(a) The test used by the Court of Appeals is rejected because it
fails to undertake a comparative analysis of the taxpayer's various
business locations. This Court looks to words' "ordinary, everyday
senses" in interpreting a revenue statute's meaning.
E. g.,
Malat v.
Riddell, 383 U. S. 569, 571. Section
280A(c)(1)(A) refers to the "principal place of business," and both
the commonsense and dictionary meanings of "principal" demonstrate
that this constitutes the most important or significant place for
the business, as determined through a comparison of all of the
places where business is transacted. Contrary to the Court of
Appeals' suggestion, the statute does not allow for a deduction
whenever a home office may be characterized as legitimate. Pp.
172-174.
(b) Although no one test is always determinative and each case
turns upon its particular facts, there are two primary
considerations in deciding whether a home office is the principal
place of business. First, the relative importance of the functions
performed at each business location must be analyzed. This
requires, as a preliminary step, an objective
169
description of the particular characteristics of the business in
question. If the nature of that business requires the taxpayer to
meet or confer with a client or patient or to deliver goods or
services to a customer, the place where that contact occurs, though
not conclusive, must be given great weight. Moreover, if the nature
of the business requires that its services are rendered or its
goods are delivered at a facility with unique or special
characteristics, this is a further and weighty consideration.
Contrary to the Court of Appeals' ruling, the essentiality of the
functions performed at home, while relevant, is not controlling,
whereas the availability of alternative office space is irrelevant.
Second-and particularly if the foregoing analysis yields no
definitive answer-the decisionmaker should compare the amount of
time spent at the home with the time spent in each of the other
places where the business is transacted. If the comparative
analysis required by the statute reveals that there is no principal
place of business, the courts and the Commissioner should not
strain to conclude that a home office qualifies by default. Pp.
174-178.
(c) Application of these principles demonstrates that Soliman's
home office was not his principal place of business. His home
office activities, from an objective standpoint, must be regarded
as less important to his business than the tasks he performed at
the hospitals. The actual treatment of patients at these facilities
having special characteristics was the essence of the professional
service he provided and was therefore the most significant event in
the professional transaction. Moreover, the hours he spent in the
home office, when compared to the time he spent at the hospitals,
are insufficient to render the home office the principal place of
business in light of all of the circumstances of this case. Pp.
178-179.
935 F.2d
52, reversed.
KENNEDY, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and WHITE, BLACKMUN, O'CONNOR, and SOUTER, JJ.,
joined. BLACKMUN, J., filed a concurring opinion,
post, p.
179. THOMAS, J., filed an opinion concurring in the judgment, in
which SCALIA, J., joined,
post, p. 180. STEVENS, J., filed a
dissenting opinion,
post, p. 184.
Kent L. Jones argued the cause for petitioner. With him on the
briefs were Solicitor General Starr, Acting Assistant Attorney
General Bruton, Deputy Solicitor General Wallace, Richard Farber,
and Teresa E. McLaughlin.
David M. Sokolow argued the cause and filed a brief for
respondent.
170
JUSTICE KENNEDY delivered the opinion of the Court.
We address in this decision the appropriate standard for
determining whether an office in the taxpayer's home qualifies as
his "principal place of business" under 26 U. S. C. §
280A(c)(1)(A). Because the standard followed by the Court of
Appeals for the Fourth Circuit failed to undertake a comparative
analysis of the various business locations of the taxpayer in
deciding whether the home office was the principal place of
business, we reverse.
I
Respondent Nader E. Soliman, an anesthesiologist, practiced his
profession in Maryland and Virginia during 1983, the tax year in
question. Soliman spent 30 to 35 hours per week with patients,
dividing that time among three hospitals. About 80 percent of the
hospital time was spent at Suburban Hospital in Bethesda, Maryland.
At the hospitals, Soliman administered the anesthesia, cared for
patients after surgery, and treated patients for pain. None of the
three hospitals provided him with an office.
Soliman lived in a condominium in McLean, Virginia. His
residence had a spare bedroom which he used exclusively as an
office. Although he did not meet patients in the home office,
Soliman spent two to three hours per day there on a variety of
tasks such as contacting patients, surgeons, and hospitals by
telephone; maintaining billing records and patient logs; preparing
for treatments and presentations; satisfying continuing medical
education requirements; and reading medical journals and books.
On his 1983 federal income tax return, Soliman claimed
deductions for the portion of condominium fees, utilities, and
depreciation attributable to the home office. Upon audit, the
Commissioner disallowed those deductions based upon his
determination that the home office was not Soliman's principal
place of business. Soliman filed a petition in the Tax Court
seeking review of the resulting tax deficiency.
171
The Tax Court, with six of its judges dissenting, ruled that
Soliman's home office was his principal place of business. 94 T. C.
20 (1990). After noting that in its earlier decisions it identified
the place where services are performed and income is generated in
order to determine the principal place of business, the so-called
"focal point test," the Tax Court abandoned that test, citing
criticism by two Courts of Appeals.
Id., at 24-25 (noting
Meiers v.
Commissioner, 782 F.2d
75 (CA7 1986);
Weissman v.
Commissioner,
751 F.2d
512 (CA2 1984); and
Drucker v.
Commissioner,
715 F.2d
67 (CA2 1983)). Under a new test, later summarized and adopted
by the Court of Appeals, the Tax Court allowed the deduction. The
dissenting opinions criticized the majority for failing to
undertake a comparative analysis of Soliman's places of business to
establish which one was the principal place. 94
The Commissioner appealed to the Court of Appeals for the Fourth
Circuit. A divided panel of that court affirmed.
935 F.2d
52 (1991). It adopted the test used in the Tax Court and
explained it as follows:
"[The] test ... provides that where management or administrative
activities are essential to the taxpayer's trade or business and
the only available office space is in the taxpayer's home, the
'home office' can be his 'principal place of business,' with the
existence of the following factors weighing heavily in favor of a
finding that the taxpayer's 'home office' is his 'principal place
of business:' (1) the office in the home is essential to the
taxpayer's business; (2) he spends a substantial amount of time
there; and (3) there is no other location available for performance
of the office functions of the business." Id., at 54.
For further support, the Court of Appeals relied upon a proposed
IRS regulation related to home office deductions for salespersons.
Under the proposed regulation, salespersons
172
would be entitled to home office deductions "even though they
spend most of their time on the road as long as they spend 'a
substantial amount of time on paperwork at home.'"
Ibid.
(quoting proposed Treas. Reg. § 1.280A-2(b)(3), 45 Fed. Reg. 52399
(1980), as amended, 48 Fed. Reg. 33320 (1983)). While recognizing
that the proposed regulation was not binding on it, the court
suggested that it "evince[d] a policy to allow 'home office'
deductions for taxpayers who maintain 'legitimate' home offices,
even if the taxpayer does not spend a majority of his time in the
office." 935 F. 2d, at 55. The court concluded that the Tax Court's
test would lead to identification of the "true headquarters of the
business."
Ibid. Like the dissenters in the Tax Court, Judge
Phillips in his dissent argued that the plain language of §
280A(c)(1)(A) requires a comparative analysis of the places of
business to assess which one is principal, an analysis that was not
undertaken by the majority.
Ibid.
Although other Courts of Appeals have criticized the focal point
test, their approaches for determining the principal place of
business differ in significant ways from the approach employed by
the Court of Appeals in this case, see
Pomarantz v.
Commissioner, 867 F.2d
495, 497 (CA9 1988);
Meiers v.
Commissioner,
supra, at 79;
Weissman v.
Commissioner, supra, at
514-516;
Drucker v.
Commissioner, supra, at 69. Those
other courts undertake a comparative analysis of the functions
performed at each location. We granted certiorari to resolve the
conflict. 503 U. S. 935 (1992).
II A
Section 162(a) of the Internal Revenue Code allows a taxpayer to
deduct "all the ordinary and necessary expenses paid or incurred
... in carrying on any trade or business." 26 U. S. C. § 162(a).
That provision is qualified, however, by various limitations,
including one that prohibits otherwise allowable deductions "with
respect to the use of a dwelling
173
unit which is used by the taxpayer ... as a residence." §
280A(a). Taxpayers may nonetheless deduct expenses attributable to
the business use of their homes if they qualify for one or more of
the statute's exceptions to this disallowance. The exception at
issue in this case is contained in § 280A(c)(1):
"Subsection (a) shall not apply to any item to the extent such
item is allocable to a portion of the dwelling unit which is
exclusively used on a regular basis-
"(A) [as] the principal place of business for any trade or
business of the taxpayer[,]
"(B) as a place of business which is used by patients, clients,
or customers in meeting or dealing with the taxpayer in the normal
course of his trade or business, or
"(C) in the case of a separate structure which is not attached
to the dwelling unit, in connection with the taxpayer's trade or
business.
"In the case of an employee, the preceding sentence shall apply
only if the exclusive use referred to in the preceding sentence is
for the convenience of his employer." (Emphasis added.)
Congress adopted § 280A as part of the Tax Reform Act of 1976.
Pub. L. 94-455, 94th Cong., 2d Sess. Before its adoption, expenses
attributable to the business use of a residence were deductible
whenever they were "appropriate and helpful" to the taxpayer's
business. See,
e. g., Newi v.
Commissioner, 432 F.2d
998 (CA2 1970). This generous standard allowed many taxpayers
to treat what otherwise would have been nondeductible living and
family expenses as business expenses, even though the limited
business tasks performed in the dwelling resulted in few, if any,
additional or incremental costs to the taxpayer. H. R. Rep. No.
94-658, p. 160 (1975); S. Rep. No. 94-938, p. 147 (1976). Comparing
the newly enacted section with the previous one, the apparent
purpose of § 280A is to provide a narrower scope for the
174
deduction, but Congress has provided no definition of "principal
place of business."
In interpreting the meaning of the words in a revenue Act, we
look to the "'ordinary, everyday senses'" of the words.
Malat v.
Riddell, 383 U. S. 569, 571 (1966)
(per curiam) (quoting
Crane v.
Commissioner,
331 U. S. 1, 6
(1947)). In deciding whether a location is "the principal place of
business," the commonsense meaning of "principal" suggests that a
comparison of locations must be undertaken. This view is confirmed
by the definition of "principal," which means "most important,
consequential, or influential." Webster's Third New International
Dictionary 1802 (1971). Courts cannot assess whether anyone
business location is the "most important, consequential, or
influential" one without comparing it to all the other places where
business is transacted.
Contrary to the Court of Appeals' suggestion, the statute does
not allow for a deduction whenever a home office may be
characterized as legitimate. See 935 F. 2d, at 55. That approach is
not far removed from the "appropriate and helpful" test that led to
the adoption of § 280A. Under the Court of Appeals' test, a home
office may qualify as the principal place of business whenever the
office is essential to the taxpayer's business, no alternative
office space is available, and the taxpayer spends a substantial
amount of time there. See id., at 54. This approach ignores the
question whether the home office is more significant in the
taxpayer's business than every other place of business. The statute
does not refer to the "principal office" of the business. If it had
used that phrase, the taxpayer's deduction claim would turn on
other considerations. The statute refers instead to the "principal
place" of business. It follows that the most important or
significant place for the business must be determined.
B
In determining the proper test for deciding whether a home
office is the principal place of business, we cannot de-
175
velop an objective formula that yields a clear answer in every
case. The inquiry is more subtle, with the ultimate determination
of the principal place of business being dependent upon the
particular facts of each case. There are, however, two primary
considerations in deciding whether a home office is a taxpayer's
principal place of business: the relative importance of the
activities performed at each business location and the time spent
at each place.
Analysis of the relative importance of the functions performed
at each business location depends upon an objective description of
the business in question. This preliminary step is undertaken so
that the decisionmaker can evaluate the activities conducted at the
various business locations in light of the particular
characteristics of the specific business or trade at issue.
Although variations are inevitable in case-by-case determinations,
any particular business is likely to have a pattern in which
certain activities are of most significance. If the nature of the
trade or profession requires the taxpayer to meet or confer with a
client or patient or to deliver goods or services to a customer,
the place where that contact occurs is often an important indicator
of the principal place of business. A business location where these
contacts occur has sometimes been called the "focal point" of the
business and has been previously regarded by the Tax Court as
conclusive in ascertaining the principal place of business. See 94
T. C., at 24-25. We think that phrase has a metaphorical quality
that can be misleading, and, as we have said, no one test is
determinative in every case. We decide, however, that the point
where goods and services are delivered must be given great weight
in determining the place where the most important functions are
performed.
Section 280A itself recognizes that the home office gives rise
to a deduction whenever the office is regularly and exclusively
used "by patients, clients, or customers in meeting or dealing with
the taxpayer in the normal course of his trade or business." §
280A(c)(1)(B). In that circumstance,
176
the deduction is allowed whether or not the home office is also
the principal place of business. The taxpayer argues that because
the point of delivery of goods and services is addressed in this
provision, it follows that the availability of the principal place
of business exception does not depend in any way upon whether the
home office is the point of delivery. We agree with the ultimate
conclusion that visits by patients, clients, and customers are not
a required characteristic of a principal place of business, but we
disagree with the implication that whether those visits occur is
irrelevant. That Congress allowed the deduction where those visits
occur in the normal course even when some other location is the
principal place of business indicates their importance in
determining the nature and functions of any enterprise. Though not
conclusive, the point where services are rendered or goods
delivered is a principal consideration in most cases. If the nature
of the business requires that its services are rendered or its
goods are delivered at a facility with unique or special
characteristics, this is a further and weighty consideration in
finding that it is the delivery point or facility, not the
taxpayer's residence, where the most important functions of the
business are undertaken.
Unlike the Court of Appeals, we do not regard the necessity of
the functions performed at home as having much weight in
determining entitlement to the deduction. In many instances,
planning and initial preparation for performing a service or
delivering goods are essential to the ultimate performance of the
service or delivery of the goods, just as accounting and billing
are often essential at the final stages of the process. But that is
simply because, in integrated transactions, all steps are
essential. Whether the functions performed in the home office are
necessary to the business is relevant to the determination of
whether a home office is the principal place of business in a
particular case, but it is not controlling. Essentiality, then, is
but part of the assess-
177
ment of the relative importance of the functions performed at
each of the competing locations.
We reject the Court of Appeals' reliance on the availability of
alternative office space as an additional consideration in
determining a taxpayer's principal place of business. While that
factor may be relevant in deciding whether an employee taxpayer's
use of a home office is "for the convenience of his employer," §
280(c)(1), it has no bearing on the inquiry whether a home office
is the principal place of business. The requirements of particular
trades or professions may preclude some taxpayers from using a home
office as the principal place of business. But any taxpayer's home
office that meets the criteria here set forth is the principal
place of business regardless of whether a different office exists
or might have been established elsewhere.
In addition to measuring the relative importance of the
activities undertaken at each business location, the decisionmaker
should also compare the amount of time spent at home with the time
spent at other places where business activities occur. This factor
assumes particular significance when comparison of the importance
of the functions performed at various places yields no definitive
answer to the principal place of business inquiry. This may be the
case when a taxpayer performs income-generating tasks at both his
home office and some other location.
The comparative analysis of business locations required by the
statute may not result in every case in the specification of which
location is the principal place of business; the only question that
must be answered is whether the home office so qualifies. There may
be cases when there is no principal place of business, and the
courts and the Commissioner should not strain to conclude that a
home office qualifies for the deduction simply because no other
location seems to be the principal place. The taxpayer's house does
not become a principal place of business by default.
178
Justice Cardozo's observation that in difficult questions of
deductibility "[l]ife in all its fullness must supply the answer to
the riddle,"
Welch v.
Helvering, 290 U. S. 111, 115
(1933), must not deter us from deciding upon some rules for the
fair and consistent interpretation of a statute that speaks in the
most general of terms. Yet we accept his implicit assertion that
there are limits to the guidance from appellate courts in these
cases. The consequent necessity to give considerable deference to
the trier of fact is but the law's recognition that the statute is
designed to accommodate myriad and everchanging forms of business
enterprise.
III
Under the principles we have discussed, the taxpayer was not
entitled to a deduction for home office expenses. The practice of
anesthesiology requires the medical doctor to treat patients under
conditions demanding immediate, personal observation. So exacting
were these requirements that all of respondent's patients were
treated at hospitals, facilities with special characteristics
designed to accommodate the demands of the profession. The actual
treatment was the essence of the professional service. We can
assume that careful planning and study were required in advance of
performing the treatment, and all acknowledge that this was done in
the home office. But the actual treatment was the most significant
event in the professional transaction. The home office activities,
from an objective standpoint, must be regarded as less important to
the business of the taxpayer than the tasks he performed at the
hospital.
A comparison of the time spent by the taxpayer further supports
a determination that the home office was not the principal place of
business. The 10 to 15 hours per week spent in the home office
measured against the 30 to 35 hours per week at the three hospitals
are insufficient to render the home office the principal place of
business in light of all of
179
the circumstances of this case. That the office may have been
essential is not controlling.
The judgment of the Court of Appeals is reversed.
It is so ordered.
JUSTICE BLACKMUN, concurring.
I join the Court's opinion but add these few words primarily to
fortify my own conclusions:
This case concerns § 280A(c)(1)(A) of the Internal Revenue Code,
26 U. S. C. § 280A(c)(1)(A). A deduction from gross income is a
matter of grace, not of right,
Commissioner v.
Sullivan, 356
U. S. 27, 28 (1958);
Commissioner v.
Tellier,
383 U. S. 687,
693 (1966), so that our analysis starts with an assumption of
nondeductibility. Precise exceptions to this are then provided by
the statute.
Although he is a licensed physician who treats patients,
respondent finds no solace in subsection (B) of § 280A(c)(1).
Subsection (B) requires that the place of business be "used by
patients ... in meeting or dealing with the taxpayer," a factual
element that is lacking here unless the physiciantaxpayer's papers,
records, and telephone calls are to be deemed to personify the
patient in the office. Such an interpretation, in my view, would
stretch the statute too far.
Respondent is thus confined to subsection (A), which uses the
vital words "principal place of business." As JUSTICE KENNEDY
points out, this phrase invites and compels a comparison, an
exercise the Court of Appeals did not undertake. When comparison is
made, this taxpayer loses his quest for a deduction. The bulk of
his professional time and performance is spent in the hospitals. By
any measure, the greater part of his remuneration is generated and
earned there. His home office well may be important, even
essential, to his professional activity, but it is not "principal."
The fact that it is his primary, perhaps his only, office is not in
itself enough.
180
THOMAS, J., concurring in judgment
This result is compelled by the language of the statute.
Congress must change the statute's words if a different result
is desired as a matter of tax policy.
JUSTICE THOMAS, with whom JUSTICE SCALIA joins, concurring in
the judgment.
Today the Court announces that there is "no one test,"
ante, at 175, to determine whether a home office constitutes
a taxpayer's "principal place of business" within the meaning of 26
U. S. C. § 280A(c)(1)(A), and concludes that whether a taxpayer
will be entitled to a home office deduction will be "dependent upon
the particular facts of each case,"
ante, at 175. The Court
sets out two "primary considerations," ibid., to guide the
analysis-the importance of the functions performed at each business
location and the time spent at each location. I think this inquiry,
"subtle" though it may be, ibid., will unnecessarily require the
lower courts to conduct full-blown evidentiary hearings each time
the Commissioner challenges a deduction under § 280A(c)(1)(A).
Moreover, as structured, the Court's "test" fails to provide clear
guidance as to how the two-factor inquiry should proceed.
Specifically, it is unclear whether the time element and
importance-of-the-functions element are of equal significance. I
write separately because I believe that in the overwhelming
majority of cases (including the one before us), the "focal point"
test-which emphasizes the place where the taxpayer renders the
services for which he is paid or sells his goods-provides a clear,
reliable method for determining whether a taxpayer's home office is
his "principal place of business." I would employ the
totality-of-thecircumstances inquiry, guided by the two factors
discussed by the Court, only in the small minority of cases where
the home office is one of several locations where goods or services
are delivered, and thus also one of the multiple locations where
income is generated.
181
I certainly agree that the word "principal" connotes "'most
important,'"
ante, at 174, but I do not agree that this
definition requires courts in every case to resort to a
totalityof-the-circumstances analysis when determining whether the
taxpayer is entitled to a home office deduction under §
280A(c)(1)(A). Rather, I think it is logical to assume that the
single location where the taxpayer's business income is
generated-i.
e., where he provides goods or services to
clients or customers-will be his principal place of business. This
focal point standard was first enunciated in
Baie v.
Commissioner, 74 T. C. 105 (1980),1 and has been
consistently applied by the Tax Court (until the present case) in
determining whether a taxpayer's home office is his principal place
of business.
Indeed, if one were to glance quickly through the Court's
opinion today, one might think the Court was in fact adopting the
focal point test. At two points in its opinion the Court hails the
usefulness of the focal point inquiry: It states that the place
where goods are delivered or services rendered must be given "great
weight in determining the place where the most important functions
are performed,"
ante, at 175, and that "the point where
services are rendered or goods delivered is a principal
consideration in most cases,"
ante, at 176. In fact, the
Court's discomfort with the focal point test seems to rest on two
fallacies-or perhaps one fallacy and a terminological obstinacy.
First, the Court rejects the focal point test because "no one test
is determinative in every case."
1 In
Baie, the taxpayer operated a hot dog stand. She
prepared all the food in the kitchen at her home and transferred it
daily to the stand for sale. She also used another room in her
house exclusively for the stand's bookkeeping. The Tax Court denied
the taxpayer a home office deduction under § 280A(c)(1)(A),
recognizing that although "preliminary preparation may have been
beneficial to the efficient operation of petitioner's business,
both the final packaging for consumption and sales occurred on the
premises of the [hot dog stand]." 74 T. C., at 109-110. Thus, the
court concluded that the hot dog stand was the "focal point of [the
taxpayer's] activities."
Id., at 109.
182
THOMAS, J., concurring in judgment
Ante, at 175. But the focal point test, as I interpret
it, is not always determinative: Where it provides no single
principal place of business, the "totality of the circumstances"
approach is invoked. Second, the Court rejects the focal point test
because its name has a "metaphorical quality that can be
misleading."
Ibid. But rechristening it the "place of sale
or service test"-or whatever label the Court would find less
confusing-is surely a simple matter.
The Commissioner's quarrel with the focal point test is that "it
ignores management functions." Tr. of Oral Arg. 24.2 To illustrate
this point, the Commissioner at oral argument presented the example
of a sole proprietor who runs a rental car company with many
licensees around the country, and who manages the licensees from
his home, advising them on how to operate the businesses. Yet the
Commissioner's unease is unfounded, since the focal point inquiry
easily resolves this example. The taxpayer derives his income from
managing his licensees, and he performs those services at his home
office. Thus, his home office would be his "principal place of
business" under § 280A(c)(1)(A). On the other hand, if the taxpayer
owned several car dealerships and used his home office to do the
dealership's bookkeeping, he would not be entitled to deduct the
expenses of his home office even if he spent the majority of his
time there. This is because the focal points of that business would
be the dealerships where the cars are sold-i.
e., where the
taxpayer sells the goods for which he is paid.
2 The Commissioner's position is not entirely consistent. At one
point in his brief he seems to advocate adopting the focal point
test: "Since a 'business' under the Code must be an activity
designed to produce income, the principal place of a 'business'
should ordinarily refer to the principal place where income is
earned. The 'focal point' test previously applied by the Tax Court
properly encapsulates that principle." Brief for Petitioner 26, n.
17. At other points in his brief, however, the Commissioner appears
to advocate the very test adopted by the Court. See id., at 18,
23-24.
183
There will, of course, be the extraordinary cases where the
focal point inquiry will provide no answer. One example is the sole
proprietor who buys jewelry wholesale through a home office, and
sells it both at various craft shows and through mail orders out of
his home office. In that case, the focal point test would yield
more than one location where income is generated, including the
home. Where the taxpayer's business involves multiple points of
sale, a court would need to fall back on a
totality-of-the-circumstances analysis. That inquiry would be
rationally guided, of course, by the two factors set out in the
Court's opinion: an analysis of the relative importance of the
functions performed at each business location and the time spent at
each. The error of the Tax Court's original construction of the
focal point test was the implicit view that the test allowed no
escape valve. Clearly it must. Nevertheless, since in the vast
majority of cases the focal point inquiry will provide a quick,
objective, and reliable method of ascertaining a taxpayer's
"principal place of business," I think the Court errs today in not
unequivocally adopting it.
The difficulty with the Court's two-part test can be seen in its
application to the facts of this case. It is uncontested that the
taxpayer is paid to provide one service-anesthesiology. It is also
undisputed that he performs this service at several different
hospitals. At this juncture, under the focal point test, a lower
court's inquiry would be complete: On these facts, the taxpayer's
home office would not qualify for the § 280A(c)(1)(A) deduction.
Yet under the Court's formulation, the lower court's inquiry has
only just begun. It would need to hear evidence regarding the types
of business activities performed at the home office and the
relative amount of time the taxpayer spends there. It just so
happens that in this case the taxpayer spent 30 to 35 hours per
week at the hospitals where he worked. But how would a court answer
the § 280A(c)(1)(A) question under the standard announced today if
the facts were altered slightly, so that
184
the taxpayer spent 30 to 35 hours at his home office and only 10
hours actually performing the service of anesthesiology at the
various hospitals? Which factor would take precedence? The
importance of the activities undertaken at the home compared to
those at the hospitals? The number of hours spent at each location?
I am at a loss, and I am afraid the taxpayer, his attorney, and a
lower court would be as well.
We granted certiorari to clarify a recurring question of tax law
that has been the subject of considerable disagreement.
Unfortunately, this issue is no clearer today than it was before we
granted certiorari. I therefore concur only in the Court's
judgment.
JUSTICE STEVENS, dissenting.
Respondent is self-employed. He pays the ordinary and necessary
expenses associated with the operation of his office in McLean,
Virginia; it is the only place of business that he maintains. In my
opinion the Tax Court and the Court of Appeals correctly concluded
that respondent is entitled to an income tax deduction for the cost
of maintaining that office. This Court's contrary conclusion
misreads the term "principal place of business" in § 280A of the
Internal Revenue Code,l deviates from Congress' purpose in enacting
that pro-
1 Section 601 of the Tax Reform Act of 1976, 90 Stat. 1520,
1569-1572, as amended, 26 U. S. C. § 280A, provides, in part:
"(a) General Rule
"Except as otherwise provided in this section, in the case of a
taxpayer who is an individual ... , no deduction otherwise
allowable under this chapter 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.
"(c) Exceptions for certain business or rental use; limitation
on deductions for such use
"(1) Certain business use
"Subsection (a) shall not apply to any item to the extent such
item is allocable to a portion of the dwelling unit which is
exclusively used on a regular basis-
185
vision, and unfairly denies an intended benefit to the growing
number of self-employed taxpayers who manage their businesses from
a home office.
I
This case involves an exception to the general rule that
"ordinary and necessary" business expenses are deductible.2 There
is no dispute that the expenses at issue fall within that general
category. They are questioned only because the office is located
within respondent's residence. If that office were located in any
other place-even in someone
else's home-the general rule
would apply, and respondent could have deducted the costs of its
maintenance. If he had been prosperous enough to own a house and
property on which a separate structure was located, he could have
maintained that structure as an office and deducted the costs. If
his business were so structured that he met regularly with clients
and patients at his home office, he also could have deducted the
costs. And if he spent two or three hours a day in his home office
and a similar amount of time in each of three or four separate
hospitals he might also be able to deduct the costs; at least the
Court's opinion does not begin to explain how the deduction of the
costs in that case might
"(A) [as] the principal place of business for any trade or
business of the taxpayer[,]
"(B) as a place of business which is used by patients, clients,
or customers in meeting or dealing with the taxpayer in the normal
course of his trade or business, or
"(C) in the case of a separate structure which is not attached
to the dwelling unit, in connection with the taxpayer's trade or
business.
"In the case of an employee, the preceding sentence shall apply
only if the exclusive use referred to in the preceding sentence is
for the convenience of his employer."
2 Section 162(a) of the Code provides, in part:
"There shall be allowed as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including ... rentals or other
payments required to be made as a condition to the continued use or
possession, for purposes of the trade or business, of property ....
"
186
be denied, except to insist that "[t]he taxpayer's house does
not become a principal place of business by default." See
ante, at 177. Because respondent chose to preserve one room
in his home as an office, however, and because his business was so
arranged that he spent most (though by no means all) of his working
hours at one hospital, the Court holds that the costs of its
maintenance may not be deducted.
Deductions, as JUSTICE BLACKMUN notes,
ante, at 179, are
a matter of legislative grace, but that is no reason to read into
them unnecessary restrictions that result in the unequal treatment
of similarly situated taxpayers. Such unfair treatment could, of
course, have been required by the Tax Code, if Congress had wanted,
for example, to discourage parents from working at home; to promote
the construction of office buildings or separate structures on
residential real estate; or to encourage hospitals to keep doctors
near their patients. We have no reason to think that Congress
intended any such results.3 It is clear, in fact, that Congress
intended only to prevent deductions for home offices that were not
genuinely necessary business expenses. Because the tests Congress
imposed to prevent abuse do not require us to deny respondent's
claimed deductions for his home office, I would affirm the decision
of the Court of Appeals.
II
Before 1976, home office deductions were allowed whenever the
use of the office was "appropriate and helpful" to the taxpayer.4
That generous standard was subject to both abuse and criticism; it
allowed homeowners to take deductions for personal expenses that
would have been incurred even if no office were maintained at home
and its vagueness
3 As the Tax Court wrote, "Section 280A was not enacted to
compel a taxpayer to rent office space rather than work out of his
own home." 94
4 See Commissioner v. Tellier,
383 U. S. 687, 689
(1966); Newi v. Commissioner,
432 F.2d
998 (CA2 1970).
187
made it difficult to administer.5 It was particularly favorable
to employees who worked at home on evenings and weekends even
though they had adequate office facilities at their employer's
place of business.6 In response to these criticisms, Congress
enacted § 280A to prohibit deductions for business uses of dwelling
units unless certain specific conditions are satisfied.
The most stringent conditions in § 280A, enacted to prevent
abuse by those who wanted to deduct purely residential costs, apply
to deductions claimed by employees.7 This provision alone prevents
improper deduction for any
second of-
5 See,
e. g., S. Rep. No. 94-938, pt. 1, p. 147
(1976):
''With respect to the 'appropriate and helpful' standard
employed in the court decisions, the determination of the allowance
of a deduction for these expenses is necessarily a subjective
determination. In the absence of definitive controlling standards,
the 'appropriate and helpful' test increases the inherent
administrative problems because both business and personal uses of
the residence are involved and substantiation of the time used for
each of these activities is clearly a subjective determination. In
many cases the application of the appropriate and helpful test
would appear to result in treating personal living, and family
expenses which are directly attributable to the home (and therefore
not deductible) as ordinary and necessary business expenses, even
though those expenses did not result in additional or incremental
costs incurred as a result of the business use of the home."
6 Congress may have been particularly offended by the home
office deductions claimed by employees of the Internal Revenue
Service. See
Bodzin v.
Commissioner, 60 T. C. 820
(1973), rev'd,
509 F.2d
679 (CA4), cert. denied, 423 U. S. 825 (1975);
Sharon v.
Commissioner, 66 T. C. 515 (1976), aff'd,
591 F.2d
1273 (CA9 1978), cert. denied, 442 U. S. 941 (1979). The Senate
Report also used a common example of potential abuse:
"For example, if a university professor, who is provided an
office by his employer, uses a den or some other room in his
residence for the purpose of grading papers, preparing examinations
or preparing classroom notes, an allocable portion of certain
expenses ... were incurred in order to perform these activities."
S. Rep. No. 94-938, pt. 1, at 147.
7 In addition to the conditions applicable to self-employed
taxpayers, an employee must demonstrate that his office is
maintained "for the convenience of his employer." See 26 U. S. C. §
280A(c)(1).
188
fice located at home and used merely for the taxpayer's
convenience. It thus responds to the major concern of the
Commissioner identified in the legislative history.8
Self-employed persons, such as respondent, must satisfy three
conditions. Each is more strict and more definite than the
"appropriate and helpful" standard that Congress rejected.
First, a portion of the dwelling unit must be used "exclusively"
for a business purpose. The Commissioner's proposed regulations
construe the exclusive use requirement with appropriate strictness.
They state that a portion of a dwelling unit is used exclusively
"only if there is no use of that portion of the unit at any time
during the taxable year other than for business purposes." 9 This
requirement is itself sufficient to eliminate many of the abuses
associated with the pre-1976 "appropriate and helpful" standard;
the taxpayer must now entirely devote a separately identifiable
space, usually an entire room, to his business.1o Respondent
strictly satisfied that condition in this case.
Second, the portion of the dwelling unit that is set aside for
exclusive business use must be so "used on a regular basis."
Although this condition is not as specific as the "exclusive use"
requirement, it obviously requires that the use
8 "With respect to the maintenance of an office in an employee's
home, the position of the Internal Revenue Service is that the
office must be required by the employer as a condition of
employment and regularly used for the performance of the employee's
duties ....
"Certain courts have held that a more liberal standard than that
applied by the Internal Revenue Service is appropriate. Under these
decisions, the expenses attributable to an office maintained in an
employee's residence are deductible if the maintenance of the
office is 'appropriate and helpful' to the employee's business." S.
Rep. No. 94-938, pt. 1, at 144-145 (citations omitted); see also n.
6, supra.
9Proposed Treas. Reg. § 1.280A-2(g)(1), 45 Fed. Reg. 52399,
52404 (1980), as amended, 48 Fed. Reg. 33320, 33324 (1983).
10 The Court fails to appreciate the significance of the
exclusive use requirement when it criticizes the Court of Appeals'
holding as "not far removed" from the test that led to the adoption
of §280A. See
ante, at 174.
189
be substantial. In this case respondent spent two or three hours
a day in his office communicating with surgeons, patients,
insurance companies, and hospitals; doing his bookkeeping; handling
his correspondence; and preparing himself for his professional
assignments at other locations. He received business calls on his
office answering machine and, of course, his business mail was
addressed to that office. Again, because these uses occurred on a
regular basis, it is undisputed that respondent has satisfied this
requirement.
Third, the use of the space must be as a "place of business"
satisfying one of three alternative requirements. It must be used
as:
"(A) the principal place of business for any trade or business
of the taxpayer[,]
"(B) as a place of business which is used by patients, clients,
or customers in meeting or dealing with the taxpayer in the normal
course of his trade or business, or
"(C) in the case of a separate structure which is not attached
to the dwelling unit, in connection with the taxpayer's trade or
business." 26 U. S. C. § 280A(c)(1) (emphasis added).
Subsection (C) is obviously irrelevant in this case, as is
subsection (B). The office itself is not a separate structure, and
respondent does not meet his patients there. Each of the three
alternatives, however, has individual significance, and it is clear
that subsection (A) was included to describe places where the
taxpayer does not normally meet with patients, clients, or
customers. Nevertheless, the Court suggests that
Soliman'sfailure to meet patients in his home office
supports its holding.ll It does not. By injecting a requirement of
subsection (B) into subsection (A) the Court renders the
11 See
ante, at 176: "That Congress allowed the deduction
where those visits occur in the normal course even when some other
location is the principal place of business indicates their
importance in determining the nature and functions of any
enterprise."
190
latter alternative entirely superfluous. Moreover, it sets the
three subsections on unequal footing: Subsection (A) will rarely
apply unless it includes subsection (B); subsection (B) is
preeminent; and the logic of the Court's analysis would allow a
future court to discover that, under subsection (C), a separate
structure is not truly "separate" (as a principal place of business
is not truly "principal") unless it is
also the site of
meetings with patients or clients.
The meaning of "principal place of business" may not be
absolutely clear, but it is absolutely clear that a taxpayer may
deduct costs associated with his home office if it is his principal
place of business
or if it is a place of business used by
patients in the normal course of his business
or if it is
located in a separate structure used in connection with his
business. A home office could, of course, satisfy all three
requirements, but to suggest that it need always satisfy subsection
(B), or even that whether it satisfies (B) has anything to do with
whether it satisfies (A), encourages the misapplication of a
relatively simple provision of the Revenue Code.
By conflating subsections (A) and (B) the Court makes the same
mistake the Courts of Appeals refused to make when they rejected
the Tax Court's "focal point" test, which proved both unworkable
and unfaithful to the statute.12 In this case the Tax Court itself
rejected that test because it "merges the 'principal place of
business' exception with the 'meeting clients' exception ... from
section 280A." 94 T. C. 20, 25 (1990). The Court today steps
blithely into territory in which several Courts of Appeals and the
Tax Court, whose experience in these matters is much greater than
ours, have
12 See
Meiers v.
Commissioner, 782 F.2d
75 (CA7 1986), rev'g 53 TCM 2475 (1984), , 84,607 P-H
Memo TC;
Weissman v.
Commissioner, 751 F.2d
512
(CA2 1984);
Drncker v.
Commissioner, 715 F.2d
67 (CA2 1983), rev'g 79 T. C. 605 (1982); see also Note,
Home Office Deductions: Deserving Taxpayers Finally Get a Break, 45
Tax Law. 247, 251-254 (1991); Sommer, 1. R. C. Section 280A: The
Status of the Home Office Deduction-A Call to Congress to Get the
House in Order, 16 So. Ill. U. L. J. 501, 519-522 (1992).
191
learned not to tread; in so doing it reads into the statute a
limitation Congress never meant to impose.
The principal office of a self-employed person's business would
seem to me to be the most typical example of a "principal place of
business." It is, indeed, the precise example used in the
Commissioner's proposed regulations of deductible home offices for
taxpayers like respondent, who have no office space at the "focal
point" of their work.13 Moreover, it is a mistake to focus
attention entirely on the adjective "principal" and to overlook the
significance of the term "place of business." When the term
"principal place of business" is used in other statutes that
establish the jurisdiction or venue in which a corporate defendant
may be sued, it commonly identifies the headquarters of the
business.14 The only place where a business is managed is fairly
described as its "principal" place of business.15
The Court suggests that Congress would have used the term"
'principal office' " if it had intended to describe a home office
like respondent's.
Ante, at 174. It is probable, however,
that Congress did not select the narrower term because it did not
want to exclude some business uses of dwelling units that should
qualify for the deduction even though they
13 The proposed regulations stated that "if an outside
salesperson has no office space except at home and spends a
substantial amount of time on paperwork at home, the office in the
home may qualify as the salesperson's principal place of business."
45 Fed. Reg. 52403 (1980), 48 Fed. Reg. 33324 (1983).
14 For example, in
Texas v.
New Jersey, 379 U. S. 674,680 (1965),
we used the terms "main office" and "principal place of business"
interchangeably. I recognize that there is disagreement over the
proper interpretation of the term in 28 U. S. C. § 1332(c)(1), with
some courts regarding the home office as the principal place of
business and others regarding it as the place where the principal
operations of the corporation are conducted. Under either view,
however, the relevant place is one where the corporation owns or
rents the premises; it is not a place owned by a third party for
whom corporate representatives perform services.
15 Among the definitions of the word "principal" is "chief" or
"most influential." Webster's Third New International Dictionary
(1966).
192
are not offices. Because some examples that do not constitute
offices come readily to mind-an artist's studio, or a
cabinetmaker's basement-it is easy to understand why Congress did
not limit this category that narrowly.
The test applied by the Tax Court, and adopted by the Court of
Appeals, is both true to the statute and practically incapable of
abuse. In addition to the requirements of exclusive and regular
use, those courts would require that the taxpayer's home office be
essential to his business and be the only office space available to
him.
935 F.2d
52, 54 (CA4 1991); 94 T. C., at 29. Respondent's home office is
the only place where he can perform the administrative functions
essential to his business. Because he is not employed by the
hospitals where he works, and because none of those hospitals
offers him an office, respondent must pay all the costs necessary
for him to have any office at all. In my judgment, a principal
place of business is a place maintained
by or (in the rare
case)
for the business. As I would construe the statute in
this context, respondent's office is not just the "principal" place
of his trade or business; it is the only place of
his trade
or business.16
Nothing in the history of this statute provides an acceptable
explanation for disallowing a deduction for the expense of
maintaining an office that is used exclusively for business
purposes, that is regularly so used, and that is the only place
available to the taxpayer for the management of his business. A
self-employed person's efficient use of his or her resources should
be encouraged by sound tax policy. When it is clear that no risk of
the kind of abuse that led to the enactment of § 280A is present,
and when the taxpayer has satisfied a reasonable, even a strict,
construction of each of the condi-
16 If his tax form asked for the address of his principal place
of business, respondent would certainly have given his office
address (he did, of course, give that address as his business
address on the relevant tax forms). It borders on the absurd to
suggest that he should have identified a place over which he has no
control or dominion as
his place.
193
tions set forth in § 280A, a deduction should be allowed for the
ordinary cost of maintaining his home office.
In my judgment, the Court's contrary conclusion in this case
will breed uncertainty in the law,17 frustrate a primary purpose of
the statute, and unfairly penalize deserving taxpayers. Given the
growing importance of home offices, the result is most
unfortunate.
I respectfully dissent.
17 Most, if not all, of the uncertainty in cases debating the
relative merits of the "focal point" test and the "facts and
circumstances" test, as well as the uncertainty that today's
opinion is sure to generate, would be eliminated by defining the
term "place of business" to encompass only property that is owned
or leased by the taxpayer or his employer.
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