Court to Rule on ‘Home Office’ Tax Deduction

With the tax season at its height, the Supreme Court said Monday that it would decide a vital tax question for self-employed professionals and business persons: Can they take a deduction for a “home office” if they work away from home but are required to do substantial paperwork at home?

The answer, which will not be known until next year, could affect hundreds of thousands of taxpayers whose only office is at home.

In 1976, Congress tightened the standards for home offices so that employees could not claim such a deduction simply because they did some work at home. Under subsequent rules set forth by the Internal Revenue Service, a home office deduction can be claimed only if part of the dwelling is “exclusively used on a regular basis . . . as the principal place of business for any trade or business of the taxpayer.”

But the courts have split on how to judge what is a taxpayer’s “principal place of business.”

The U.S. 9th Circuit Court of Appeals, which has jurisdiction in California and the West, has taken a strict approach. It has disallowed deductions for self-employed persons who work most of the time away from home, even if they are required to maintain a home office.

But the U.S. Tax Court recently adopted a more lenient standard. It ruled that a self-employed taxpayer can take a deduction for a home office that is “essential to his business” even if he does most of his actual work away from home.

The two contradictory rulings involve self-employed physicians who spend most of their work day at hospitals but must do paperwork at home. While the 9th Circuit disallowed a doctor’s deduction because his home was not the “focal point” of his work, the Tax Court allowed the deduction because the physician had claimed that his home was his “administrative headquarters.”

The outcome of the case likely will affect the taxes owed by many self-employed persons--whether lawyers, lecturers, painters or paperhangers--who use parts of their homes as offices.

The Supreme Court said it would resolve the dispute by reviewing the case of a McLean, Va., anesthesiologist who worked at three hospitals but spent about two hours a day at home doing paperwork. Dr. Nader E. Soliman kept patients’ records, correspondence and billing records in his back bedroom. He took an $814 deduction in 1983 for this home office.

The IRS disallowed the deduction but was overruled by the U.S. Tax Court. The Bush Administration appealed the case (Soliman vs. Commissioner of the Internal Revenue Service, 91-998) to the high court. It is to be heard in the fall.