Justices take up home-office issue High court will determine tax deduction qualifications.

March 24, 1992|By Linda Greenhouse | Linda Greenhouse,New York Times News Service

WASHINGTON -- The Supreme Court agreed yesterday to resolve an escalating legal dispute over what requirements taxpayers who do some of their work at home must meet to qualify for a home-office deduction.

The question, which the justices will not decide until next year, pits the U.S. Tax Court against the Internal Revenue Service. The IRS has long regarded home-office deductions with suspicion as an area of abuse.

Two years ago, Tax Court judges rejected the IRS position and adopted a taxpayer-friendly interpretation of the relevant provision of the Internal Revenue Code. The judges replaced a test, which said the home office had to be the "focal point" of the taxpayer's business, with a more elastic "facts and circumstances" test under which the individual situation would be considered.

Applying the facts and circumstances test, the Tax Court permitted Dr. Nader E. Soliman, a self-employed anesthesiologist who practiced at several Washington area hospitals, to take a home-office deduction for the room in his apartment in which he attended to his bills, patient records and other medical paperwork and telephone calls.

The IRS appealed, arguing that an anesthesiologist's place of business is a hospital operating room, so the doctor's study did not qualify for a tax deduction. But in June the 4th U.S. Circuit Court of Appeals in Richmond, Va., affirmed the Tax Court's ruling, noting that none of the hospitals provided

Dr. Soliman with an office and that paperwork was essential to medical practice.

The IRS appealed to the Supreme Court, arguing in a brief filed by the solicitor general's office that the lower courts had "vastly expanded" the category of taxpayers eligible for the deduction by disregarding the statutory requirement that the home office must be the taxpayer's "principal place of business."

Congress added the "principal place of business" language to the Internal Revenue Code in 1976 explicitly to limit eligibility for the home-office deduction. Before then, the law required only that the home office be "appropriate and helpful" to the taxpayer's business, and many people who took work home at night claimed the deduction.

But in narrowing the definition, Congress neglected to define "principal," leading to the current dispute. In a sense, this case, Commissioner of Internal Revenue vs. Soliman, No. 91-998, comes down to the meaning of "principal."

In the government's view, it means "the place where the taxpayer performs his most important, income-generating function" -- for Dr. Soliman, the practice of anesthesiology in hospital operating rooms.

By contrast, the 4th Circuit found that the Tax Court's facts and circumstances test "more accurately reflects" the purpose behind the home-office deduction, permitting a determination of "which location is the true headquarters of the business" no matter where the income is generated.

Another federal appeals court, the 9th Circuit, based in San Francisco, has upheld the IRS position in another case.

To qualify for a home-office deduction, an area must be used regularly and exclusively for business.

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