Court curbs home office tax break Allowance reduced for self-employed

January 13, 1993|By Lyle Denniston | Lyle Denniston,Washington Bureau

WASHINGTON -- The Supreme Court went far yesterday toward eliminating a tax break for many thousands of self-employed taxpayers who earn money by doing part of their work at home.

Giving the Internal Revenue Service exactly what it had sought, the court ruled 8-1 yesterday that a 1976 law provides only a narrow allowance for tax deductions on the expenses of an office at home.

That was one of two significant rulings issued yesterday. In the other, the court sharply cut back on access to the federal courts for grievance committees or organizations set up to represent prison inmates or others who claim to be too poor to pay court costs and lawyers' fees.

The court's tax ruling came in the case of a doctor who did most of his medical practice at a suburban Maryland hospital outside Washington but did his office work at his Virginia home.

If most of a taxpayer's business is done at another place, the court declared, that taxpayer's home office does not qualify as the "place of business" for federal tax purposes.

The decision did not say flatly it applied only to self-employed individuals, but that was the practical effect. Taxpayers who are someone's employee already had little right under federal tax law to deduct their expenses when they took part of their work home with them.

Thus, the decision seemed most likely to affect doctors, lawyers, artists, artisans and performers who do some work at home but go outside their home to carry on most of their professional or business affairs.

Those taxpayers had gained a major victory in the U.S. Tax Court here and later in the 4th U.S. Circuit Court of Appeals in Richmond when those two tribunals ruled that home office expenses may be claimed on a tax return if the office is necessary, and if the taxpayer spends significant time working there and has no other place to do those office functions.

Those decisions were in favor of Dr. Nader E. Soliman, an anesthesiologist who claimed $2,500 in 1983 as expenses for running his home office at his three-bedroom condominium in McLean, Va. The doctor did all his business affairs there, but performed his medical duties at three Washington area hospitals -- mostly at Suburban Hospital in Bethesda. The hospitals gave him no office space, so he set up an office in a spare bedroom at home.

In that office, the doctor kept his patient records and professional equipment, and used it to study and do professional planning, paperwork, and his business telephone calling. The IRS disallowed the claimed deductions after auditing Dr. Soliman, but the doctor won his case in lower federal courts.

The IRS took Dr. Soliman's case on to the Supreme Court, arguing that the lower courts had misread the 1976 law that Congress passed to tighten up the right to deduct home office expenses.

Before the 1976 law was enacted, taxpayers could write off the expenses of working at home any time those expenses were "appropriate or helpful" to the taxpayers' livelihood. Congress limited that generous standard, declaring that expenses could be claimed only for a home office that was the taxpayer's main business site, a place where customers or clients came, or was in a structure separate from the house itself.

Dr. Soliman had claimed that his home office was his only office and thus was his place of business. But the Supreme Court ruled that it made no difference that the office was essential to his professional practice.

What is key, the court said in an opinion by Justice Anthony M. Kennedy, is a comparison of of the locations where the business was actually carried out. To qualify as a place of business for tax deduction purposes, it said, the question is "whether the home office is more significant in the taxpayer's business than every other place of business."

While the answer to that question depends on the facts of each case, the Kennedy opinion said, the main factors are the importance of the activities done at any and how much time is spent at each. That was exactly the legal formula the IRS had proposed to the court in its appeal.

Since Dr. Soliman's actual professional work was done inside the three hospitals, not at home, and since he spent far more time daily in a hospital than at home, his apartment bedroom was not his place of business, the court concluded.

The ruling came over the lone dissent of Justice John Paul Stevens,who argued that Dr. Soliman should be allowed to deduct all the expenses of working at home because that "is the only place of business that he maintains." He said the ruling will be a financial blow to "the growing number of self-employed taxpayers who manage their businesses from a home office."

The court's other significant ruling yesterday, resulting in an unusual 5-4 lineup of the justices, came in a case involving a prisoner grievance organization set up with the warden's support at a California prison. The inmate advocacy group wanted to sue in federal court to challenge a decision by the warden to stop supplying the inmates with free tobacco, if the inmates had no money to buy it.

Because the group has no money, it claimed that it was legally a "pauper" and should be entitled to sue in federal court under a law that says a poor "person" need not pay court costs and may get a free lawyer.

In an opinion written by Justice David H. Souter, the court majority ruled that only human beings can qualify as "paupers" under that law.

The main dissenting opinion produced an unusual alliance of conservative Justice Clarence Thomas, who wrote that opinion, with liberal Justices Harry A. Blackmun and John Paul Stevens. They also were joined by Justice Anthony M. Kennedy, a moderate.

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