COMMISSIONER OF INTERNAL REVENUE v. SOLIMAN
Legal provision: Internal Revenue Code
Argument of Kent L. Jones
Chief Justice Rehnquist: We'll hear argument first this morning in No. 91-998, Commissioner of Internal Revenue v. Nader E. Soliman.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
Home office expenses are a conceptual hybrid of business expenses, which are generally deductible, and personal expenses, which generally are not.
Prior to 1976 most courts concluded that the expenses of a home office may be deducted if the office was appropriate and helpful to the taxpayer's business.
In 1976, however, Congress concluded that that broad standard should be rejected because it was too difficult to administer and too prone to abuse.
In its place Congress enacted Section 280A of the Internal Revenue Code to establish a detailed set of restrictive criteria for home office deductions.
As relevant to this case, the statute now permits a deduction only if the home office is used exclusively as the taxpayer's principal place of business.
The taxpayer in this case is a doctor who spends approximately 70 percent of his time administering medical services to patients at hospitals, principally at Suburban Hospital in Bethesda.
He also spends approximately 30 percent of his time doing paperwork related to his practice in an office at his home.
The tax court and court of appeals held that the doctor's home office constitutes his principal place of business under the statute because the office is essential to the doctor's business, he spends a substantial amount of time there, and he maintains no other office.
The statute, however, does not permit a deduction merely because essential and substantial work-related tasks are performed at home.
Instead it plainly requires that the home office be the taxpayer's principal place of business.
As this Court has consistently held, the words of revenue statutes should, where possible, be given their ordinary meaning, and in Malat v. Riddell this Court held that in ordinary usage the word principal is synonymous with primary or of first importance.
Under the plain language of Section 280A, therefore, the courts must make a comparison of each of the various locations in which the taxpayer conducts his business to determine which one of them is primary or of first importance.
Unknown Speaker: Mr. Jones, what is the standard of review?
Is it de novo as a mixed question of law and fact here, do you suppose?
Mr. Jones: There is a legal standard that must be met, which is what I just described, that the home be the most important place of business.
The factual findings of the tax court or the district court are reviewed on a clearly erroneous basis.
Unknown Speaker: Do you think there can be only one principal place of business under the statute?
I mean, is that the notion?
Mr. Jones: Yes, that is the logical result of the language, and in fact as this Court held in Malat v. Riddell, principal means most important.
You can't have two places that are most important.
Unknown Speaker: Under the Fourth Circuit view and test that we're reviewing do you think it leaves it open to find more than one principal place of business?
Mr. Jones: Certainly, as the Court also held in Malat v. Riddell, the word substantial cannot be equated with principal.
That case involved a provision of the Internal Revenue Code which required a finding as to what was the taxpayer's primary purpose in holding certain property, and the Court held in Malat that a finding that the taxpayer had a substantial purpose of holding the property did not satisfy the requirement of what was his principal purpose.
Substantial is a word of quantity.
Principal is a word of comparison.
You can have many substantial activities, but you can only have one principal one.
You can have many substantial locations of business, but you can only have one principal one.
Unknown Speaker: Doesn't the Commissioner... the Commissioner says that he has to determine where the principal place of business is, but you just said that you have to compare what goes on in the various places and how important they are and things like that.
So you apparently then in applying the statute apply the same test that the tax court does.
Mr. Jones: No.
The tax courts had two tests, and we don't recommend either one of them.
In this case the test that the tax court applied was they developed as a rule that if the office is essential to the taxpayer's business--
Unknown Speaker: I know, but what's the general... they say they apply total circumstances.
Mr. Jones: --Facts and circumstances.
Unknown Speaker: Don't you apply that?
Mr. Jones: Yes, sir.
But they do--
Unknown Speaker: So you do have the same general test.
Mr. Jones: --We start out at the same point.
Unknown Speaker: Isn't that right?
Mr. Jones: Yes, sir.
Unknown Speaker: Well, that's all I wanted to know.
You apply the same test, and you think the court of appeals misapplied it here.
Mr. Jones: No, sir, we don't apply... they... the tax court and the court of appeals applied two tests.
They said they were going to look at the facts and circumstances of each case, which we think is the appropriate beginning point.
But then they said that we can answer each case by concluding that if the home office is essential, you need an office, and if there is a substantial use made of that office, and if no other office is used by the taxpayer, that will be his primary place of business.
That is the portion of the opinions below that we object to.
Unknown Speaker: Well, that's just a misapplication of the same test you used.
Mr. Jones: It's possible to view it that way, Justice White, but actually we think that the tax court resurrected a sub standard, a legal standard that if met satisfies, in their view, the statute.
And we think their sub standard is wrong, and that is the issue that we presented to the Court on certiorari.
Unknown Speaker: May I ask you, Mr. Jones, do you measure the, do you get your answer solely by looking at the amount of time spent in the various locations?
Mr. Jones: No, we agree with the basic principle described by Meiers and Weissman and in the proposed regulations, which is that you look to both the time spent and the importance of the activities at each location.
Unknown Speaker: Well, in this particular case I guess the doctor had three hospitals he went to--
Mr. Jones: That's correct.
Unknown Speaker: --and one of them a lot more time was spent than in the office.
Supposing he went to eight hospitals and each of them he spent less time than the home office, precisely the same amount of time in the home office that he did in this case.
Would he then prevail?
Mr. Jones: Well, I have two answers to that.
Unknown Speaker: One, it's either yes or no.
Mr. Jones: Well, no, actually--
Unknown Speaker: You can't give both.
Those are his two answers.
Mr. Jones: --Those are my two answers.
The first answer is that the fact finder as a matter of first instance is entitled to make a determination of two things.
What was his principal job function.
Unknown Speaker: We've got all that in this case.
He does his bookkeeping, his phone calls, his computer, whatever he has, his files.
That's what he has there.
Now, is that enough to do it?
Mr. Jones: Well, your question is if his work level is spread throughout many areas--
Unknown Speaker: He has eight hospitals instead of three.
That's a very simple question.
Mr. Jones: --Right.
Our view is that the fact finder could conclude in that scenario that his home was his principal place of business, but I wish to point--
Unknown Speaker: That isn't a fact finding.
That's a conclusion of law.
Mr. Jones: --Well, the finding is that he spends, is how much time he spends at various locations and how important those are, and then from those--
Unknown Speaker: Well, we know in this case, Mr. Jones.
I want this... really you can't... can you have two separate cases on precisely the same facts, one in Washington and one in New York, and have them come out differently?
Mr. Jones: --Fact finders sometimes don't agree even on the same record, but we think that there are sub standards that the courts can look to that will resolve the ordinary case.
Unknown Speaker: Are you really saying in my, the case I give to you, there is no right answer?
The fact finder can do just what he wants?
Mr. Jones: Well, a priori I don't think there is necessarily a correct answer, although I--
Unknown Speaker: Is the problem that you have in answering Justice Stevens' question the concession that I believe you made in your brief that there is always a principal place of business?
Mr. Jones: --Well, that was the second answer I was going to give Justice Stevens, which is that this is not a statute in which the Government has to establish where the principal place of business is.
This is a statute where the taxpayer has to establish that his home is his principal place of business.
Unknown Speaker: Well, do you concede that there is always a principal place of business or do you argue that in some cases, say in Justice Stevens' hypothetical or a traveling salesman who just goes to 100 different places, that there is no principal place of business at all?
Mr. Jones: Taking the word most important to its logical extreme you would think that in almost every case a fact finder could find a location that was most important.
Unknown Speaker: I'm talking about the statute and your position.
Is it your position that in the case before us there is somewhere out there a principal place of business?
Mr. Jones: Our position under the statute is that the taxpayer has not established that his home is his principal place of business and that is all that this case requires.
It is also our position and the tax courts have found that the hospital is necessarily his most important place of business.
The tax court found that while the doctor's activities in his house were essential to his medical practice they were, and I quote, ancillary to the primary income generating services he performed as an anesthesiologist at the hospitals.
As the Ninth Circuit held on the same basic facts in the Pomarantz case, the location where you spend the most of your time doing your most important business functions is necessarily your principal place of business.
Unknown Speaker: I am correct that in your brief you conceded the proposition that at least in this case there is a principal place of business, is that not correct?
Mr. Jones: In this case we affirmatively state that the hospital, Suburban Hospital, is his principal place of business, yes, sir.
Unknown Speaker: Well, it seems to me that that's the difficulty of your position.
I simply don't know why you concede that.
Mr. Jones: Well, we think that the facts permit no other conclusion.
It is clear from the facts that the most time was spent at Suburban Hospital.
It is also clear from the tax court's findings that Suburban Hospital is where he performed his most important functions.
When you spend the most of your time performing your most important functions at a single location, that is necessarily your principal place of business.
Unknown Speaker: Why was--
--Mr. Jones, the tax court majority found for the taxpayer and the dissenters in the tax court criticized the majority for having adopted kind of a facts and circumstances test that would really furnish no guiding principle.
And yet I gather that you really think it is strictly a facts and circumstances test.
Mr. Jones: Chief Justice Rehnquist, I think that the dissent in the tax court and in the court of appeals criticized the majorities for having adopted this test based upon essential need, substantial use.
It is true that when the tax court started out writing its opinion it said we're going to look to facts and circumstances, but then they blinded themselves to all of the operations of the doctor.
They looked only to his management activities.
Unknown Speaker: So you think that the majority in the tax court applied the right test, they just didn't get the right result?
Mr. Jones: I think they started down that direction but they went a step that was not, that cannot be related to the statute.
Let me see if I can compare what the tax court did before and after this case.
Originally under the statute the tax court adopted what they called the focal point test which looks simply to the location where goods and services are provided.
In other words they gave no weight to where management activities were conducted.
Unknown Speaker: You think that's wrong?
Mr. Jones: We think that that's wrong.
The statute by referring to principal place of business doesn't exclude management activities as a matter of course.
Unknown Speaker: Well, if you're not going to exclude management activities, which I take it is synonymous with what I think you referred to as ancillary activities a moment ago--
Mr. Jones: Correct.
Unknown Speaker: --then why don't you simply adopt or propose that we adopt a straight time test, wherever the taxpayer spends the greater part of the time will be the principal place.
We won't be making qualitative judgments.
Why isn't that the simplest way out?
Mr. Jones: Well, the statute doesn't say the office where the taxpayer spends the most time.
Unknown Speaker: No, but there's nothing in the statute that excludes that as a construction, is there?
Mr. Jones: --Well, in our view there is.
Unknown Speaker: Why?
Mr. Jones: The principal place of business requires some reference to what it is he is doing.
Unknown Speaker: Well of course, but you're admitting that, as I understand it, that what you call management activities or the place of management activities may qualify as the principal place of business, and once you do that I don't know why your insistence on some qualitative sense of importance is anything but just injecting a kind of wild card for the fact finder.
Mr. Jones: It is not in our view a wild card.
In our view it is a fundamental relationship to what Congress sought to do.
What they intended to do was to allow a deduction not simply because the taxpayer used the office a lot, but only when it was his principal place of business.
Unknown Speaker: Well, if it's not a wild card tell us what it is.
Is it a king or an ace or a deuce?
How much is the fact that the activity in question is the delivery of services rather than administrative activities, management activities, how much is that worth?
Each minute is worth 3 minutes of management activities, or what?
Mr. Jones: Justice Scalia, one of the problems with answering a question like that in the abstract is that in different professions the primary, the relationship between the primary and secondary activities is not going to be the same.
Unknown Speaker: Well then at least admit it's a wild card.
Mr. Jones: It is a card that has a different value from case to case.
Unknown Speaker: That's what a wild card is.
Mr. Jones: Well, in my view a wild card is whatever you need it to be.
In this case we think it is a card that has a different value based upon the genuine functions of the enterprise.
Unknown Speaker: The Government disagrees, as I recall, with the Drucker case--
Mr. Jones: --Yes, sir.
Unknown Speaker: --the musician who spent a whole lot of time practicing at home and just a little time conducting the concert.
Now, you disagree with that because you think the concert hall was the principal place of business.
Why, because performance is worth 10 times as much as practice, or what?
Mr. Jones: Well, actually Drucker is a good example of the point.
Drucker, we're willing to assume that the importance of the function of performing compared to the function of practice is closer than in Dr. Soliman's case where we think that the provision of medical services is much greater compared to sending the bills out.
Our real problem with the Drucker case is not with the legal standard it applied.
Drucker said what we think is the law, that you look to where the dominant portion of the work was performed considering the time and the importance of the activities involved.
Our problem with Drucker is not with the legal standard but with the court's management of the record in that case.
Judge van Graphlin decided that case based upon an aphorism.
He started out the decision by telling a story of the musician who is walking down the street of New York.
A stranger stops him and asks him what's the best way to get to Carnegie Hall, and the musician answers practice, practice, practice.
Unknown Speaker: It's an old one.
Mr. Jones: Judge van Graphlin used that joke to determine what the proper weighting of the various activities should be.
He concluded that practice was just as important as performance.
Since he spent more time practicing his home office is his principal place of business.
Our view about Drucker is simply that Judge van Graphlin carried the joke too far.
He shouldn't have used it as a basis for reversing a non-clearly erroneous fact finding as to where the principal place of business was.
Unknown Speaker: You don't really think, I didn't think... I thought when you started out you said the historical facts are subject to the clearly erroneous but principal place of business is a legal question.
I thought that's what you said at the outset.
Mr. Jones: If I said that what I meant to say was that there are legal sub standards that guide the fact finder.
The legal sub standard we think is what is the most important place of business.
We think there's a second sub standard which is just a matter of logic, and that is where you spend most of your time doing your most important work.
That's your principal place of business.
It is clearly a fact finding as to where you spend the most time.
Unknown Speaker: What if you spend the most amount of time doing your least important work?
I mean, it's an easy question if you spend the most amount of time doing your most important work.
I guess that's easy.
What if you spend the most amount of time doing a middling importance work?
Mr. Jones: Well, that's Drucker.
That's the concert musician.
Unknown Speaker: Well, what's the answer to that?
Mr. Jones: --Well, the answer to that case is that the fact finder has to make the decision in the first instance.
If I were the fact finder I would have concluded that the concert hall, as the tax court did, that the concert hall was his principal place of business.
Unknown Speaker: But you say a fact finder in two different jurisdictions with the same facts could come out differently?
That there's no rule of law that would govern that case, it's simply on the same facts different judges can come to a different conclusion?
Mr. Jones: I think our system recognizes that fact finders if they are not clearly erroneous can determine basic facts, and if those basic facts satisfy the legal requirements of the statute then there is no basis for reversal.
Unknown Speaker: But when you--
--Excuse me, go ahead, no please.
I was just going to say under your argument the doctor could never have a home office because it's always more important, he makes most of his money performing operations in the hospital and it's certainly more important than keeping the books correctly.
Mr. Jones: That's probably right.
Unknown Speaker: That's really what your position is?
Mr. Jones: I would think that a doctor who spent 70 percent of his time in his hospital and 30 percent of his time sending the bills out--
Unknown Speaker: I think you would say the same if he spent 90 percent at home and did 10 very valuable and important operations.
That would still be more important than what he did at home under your approach.
Mr. Jones: --I don't have an a priori answer to that.
I think the fact finder is going to have to make that determination.
Congress gave us a relatively vague but nonetheless principled standard.
The problem with the decision in this case is that the tax court and court of appeals adopted a sub standard that does not satisfy the requirement that the home office be the most important place of business.
Instead they adopted a sub standard that allows a deduction for the most important office of the business.
Unknown Speaker: Mr. Jones, don't you recognize or won't you agree that what you refer to as a fact finder's determination about relative importance is really a twofold determination?
It's a determination about fact in the first instance, but it's also a determination of value.
It's not merely a fact finding.
And you, it seems to me, are simply leaving the legal standard to the fact finder under the guise of finding facts because you do not seem to recognize any standard of review, any legal standard for this concept of importance.
Isn't that a fair criticism of your position?
Mr. Jones: Justice Souter, I don't think it's unfair but I don't think it's any more fair than criticizing any other statute that requires fact findings to be made about basic facts.
Fact finders are in the business, that is their job description.
They are judges, they make judgments about--
Unknown Speaker: And they're making, in your case they're making some law too because they are determining as a matter of law what is important and what is unimportant.
And they're not doing it on any strictly factual basis such as time or such as relationship to essential activity.
It's up to them.
Mr. Jones: --Exactly the same result applies under the diversity jurisdiction statute which also makes reference to principal place of business.
The courts of appeals have recognized that the fact finder, in each case it is a question of fact as to where the dominant portion of the operations of the business were conducted, and that although you can have a basic sub standard the sub standard in this case is where did you spend the most time doing your most important work.
The fact finder is going to have to make the determination about what is most important.
With all respect to Judge van Graphlin, it is not the function of an appellate court in the absence of a clearly erroneous finding to come up with a different result about relative importance.
Unknown Speaker: That's the standard you propose, where do you spend the most amount of your time doing your most important work?
Mr. Jones: I don't think that answers every question.
Yes, that is the standard that we propose and--
Unknown Speaker: Well, that will always be a principal place of business--
Mr. Jones: --Absolutely.
Unknown Speaker: --but you would acknowledge that you can have a principal place of business that does not produce a, that is not the answer to that question?
Mr. Jones: Yes, sir.
Unknown Speaker: Okay.
Mr. Jones, Section 280 is confined to a dwelling unit, isn't it?
Mr. Jones: Yes, sir.
Unknown Speaker: And so whatever we decide here is rather narrowly restricted.
Let me change the facts a little bit.
Suppose this taxpayer had rented a place in an office building instead of his home.
What would the SG's position be as to that?
Would it be deductible?
Mr. Jones: In the ordinary course it would be deductible under 162 as an ordinary and necessary business expense.
Unknown Speaker: But under different sections of the Code.
Mr. Jones: Yes, sir.
That's really the point.
Congress was skeptical about the quality of proof in home office deduction cases.
They thought that the general standard ordinary and necessary was prone to abuse.
Unknown Speaker: But my hypothetical assumes no other change in the facts.
Mr. Jones: Correct.
Unknown Speaker: That's all he does, he spends as much time in the rented office as he did at home.
And there you would allow the deduction?
Mr. Jones: Yes, sir.
There is no requirement that a rented office be a principal place of business.
Congress consciously chose for homes to impose more restrictive standards.
That's the whole point of Section 280A.
It's not that... when Congress said that it was too difficult to administer the Section 162 standard for home offices I suppose they had in mind the fact that it's unrealistic for the Commissioner to go into millions of taxpayers' houses to find out how they're really using their spare bedrooms as offices.
So Congress adopted what they hoped would be more restrictive and more definitive rules that have to be met in addition to the normal standards of 162.
Unknown Speaker: Mr. Jones, can we adopt at least, at least some sub rule so that these cases don't have to be litigated forever and ever?
It's desirable to avoid litigating these things all the time, isn't it?
Mr. Jones: The Commissioner certainly shares that desire.
Unknown Speaker: What about a sub rule that ordinarily the principal place of business, ordinarily, even though you don't have to adopt a rigid point of sale rule, that almost always the principal place of business will be where the goods produced are sold or the services performed are rendered?
Mr. Jones: That is the focal point test that the tax court applied before this case, and as I said before, we think the problem with that test... and the Commissioner had not proposed it, the tax court developed it on its own.
Unknown Speaker: I understand.
Mr. Jones: The problem with that test is it ignores management functions.
The problem with the test of the court of appeals here--
Unknown Speaker: But you want to ignore them in most cases.
I mean, you say that they're relatively unimportant compared with... practice, practice, practice.
Mr. Jones: --I don't have an a priori answer to that.
There may well be businesses where management is everything.
For example if you run a rental car company and you have only licensees around the country and all you do in managing your business is advise them on how to run their business, management is everything.
There is no other operation.
Unknown Speaker: Well then there's no choice.
He doesn't do his business anywhere else except his home.
Mr. Jones: In that situation his home would probably be his principal place of business.
Unknown Speaker: No problem in that case.
Mr. Jones: The point I'd like to make in closing is that deductions are a matter of legislative grace.
The decision of the court of appeals ignored the language that Congress consciously chose to erect a restrictive prohibition against home office deductions, and from ignoring the language of the statute the court reached an erroneous conclusion in this case and should be reversed.
Reserve the balance, please.
Unknown Speaker: Thank you, Mr. Jones.
Mr. Sokolow, we'll hear now from you.
Argument of David M. Sokolow
Mr. Sokolow: Mr. Chief Justice, and may it please the Court:
We are here today to resolve the controversy which has arisen between the tax court and the Commissioner over the proper interpretation of the phrase principal place of business for purposes of claiming home office deductions under Internal Revenue Code Section 280A.
This case arose from the Commissioner's use of the focal point test to deny a home office deduction to Dr. Nader Soliman.
Under the focal point test a taxpayer's principal place of business is the location where goods and services are provided to his customers and revenues are generated.
However, when a taxpayer's business is based in his home but his services are provided elsewhere the focal point test automatically prevents the deduction of what would otherwise be completely legitimate expenses.
This illogical result is in no way supported by the legislative history of the statute.
Congress enacted Section 280A to prevent taxpayers from deducting expenses for home offices maintained solely for their personal convenience.
In denying a deduction to a taxpayer whose business requires the use of a home office, the focal point test goes far beyond the intent of Congress.
The tax court recognized the injustice of the focal point test and devised a reasonable and logical interpretation of the entire phrase principal place of business.
Unknown Speaker: Mr. Sokolow, what do you think, when 280A was adopted what deductions do you think that ruled out that could have been taken under the old appropriate and helpful test?
Mr. Sokolow: Mr. Chief Justice, it primarily ruled out deductions for employees who were maintaining home offices merely for their personal convenience.
They were being provided with an office on the job site but they were doing some work at home, and this statute eliminated that.
Unknown Speaker: You don't think that it ruled out also deductions where the word principal would not readily apply?
I think the Government makes a certain amount of the idea that principal suggests a comparison.
Mr. Sokolow: Principal does, the word itself connotes some type of comparison.
In the purpose, in the context of the statute, however, I don't think that comparison is necessary.
Unknown Speaker: Why not?
Mr. Sokolow: I think the findings of the Soliman case show that those type of comparisons can't be made in this type of case by the nature of the functions that are performed.
Unknown Speaker: Well then what is left of the word principal in the statute?
Certainly we, if we have to throw away either case results or the language of the statute, we throw away the case results.
Mr. Sokolow: I believe that the word principal was used because primarily in the case of these employees they were trying to claim that they had two places of business, and only the one at their employer's location was their primary place of business.
They were using a secondary office merely for their personal convenience.
So they had two office locations, and I think the word principal was chosen to differentiate between the two and eliminate the use of the home office.
Unknown Speaker: You don't think the word principal applies to a claim of deduction under this section made by someone who is not an employee?
Mr. Sokolow: No, Your Honor, I believe it applies to all taxpayers, independent contractors and employees.
Unknown Speaker: What do you think it means then as applied to all these others, what does it mean?
What does the word, what is the content of the word principal in the statute that you urge upon us?
Mr. Sokolow: In the context of this statute I think principal place of business has a specific definition.
You don't need to take apart each word and try to define principal.
I think what the court has done is devise a test to determine whether a home office is the principal place of business using that phrase as a term of art.
Unknown Speaker: Principal place of business means the same thing as place of business?
They should have really said place of business?
Mr. Sokolow: No, I don't believe it's any place of business.
It has to be the principal place of business.
Unknown Speaker: Okay.
Now, what does it mean to be the principal place of business?
Give me what is the content of that word principal that you affirm.
Mr. Sokolow: I affirm that the content, the definition of that is now the new Soliman test, that it's being applied specifically in the context of a home office deduction.
That's what Congress was concerned about with the statute.
They weren't trying to define principal place of business for diversity purposes or any other purpose, they were just looking on whether we should allow a home office deduction.
And that's all this new definition does.
Unknown Speaker: Could there be more than one principal place of business in a given situation?
Mr. Sokolow: I don't believe so, no.
Unknown Speaker: Don't you think the Fourth Circuit test leaves open that possibility?
Mr. Sokolow: No, I don't.
There could be more--
Unknown Speaker: I would have thought that that's exactly what it did.
Mr. Sokolow: --No, I believe... we're looking at whether a home office deduction is allowable, and if we're just looking at which is the location for the home office deduction, principal place of business can only be one location.
Unknown Speaker: What if there's another office that's also used?
Mr. Sokolow: Under the new Soliman test if that office is used for his business purposes then his home office would not be his principal place of business.
Unknown Speaker: Even though the other office is used less time?
Mr. Sokolow: That's correct.
The availability of an office which meets all the requirements of the taxpayer's business would take him out of the Soliman test and his home office then could not be considered his principal place of business.
Unknown Speaker: May I interrupt you?
In this case I gather the doctor had both billing records at home and also patient records that describe what the patients' problems were and so forth?
Mr. Sokolow: That's correct.
Unknown Speaker: Supposing that he had just the billing records at home and he had the records that dealt with particular treatment for patients in some office at a hospital that was provided by the hospital.
Would then the home still be a principal place of business?
And say the timing was exactly as it is in this case.
Mr. Sokolow: If we assume that the only space he was given in the hospital was to store records as opposed to do the rest of his business then it wouldn't change the facts of this case.
Unknown Speaker: Well, suppose he had a desk and a chair there and he made some entries on the patient records and so forth but he didn't do his billing from there.
He did his billing at home.
Mr. Sokolow: What the court found is that the office has to be available to the taxpayer, and that is determined under all facts and circumstances.
That's where that analysis comes from.
Unknown Speaker: Well, my facts and circumstances are that he has a desk and a chair in the hospital where he does his, keeps track of who his patients are and where they are, but he does all his billing and credit work and banking and so forth in his home office.
Can he still, could that home office still, and assume the time is just as it is now, would that home office still qualify as a principal place of business in your view?
Mr. Sokolow: If Dr. Soliman could do all his business functions in that office in the hospital--
Unknown Speaker: I have described what he did and I'm asking you what the result is.
Mr. Sokolow: --I need to differentiate between what he did and what he could do.
If that office was available for him to do all those functions then he would not get the home office deduction.
If he could have done his billing work at the hospital office but he chose to do it--
Unknown Speaker: Well then let's assume he could not have done that.
All he could do is what he in fact did, namely keep track of what kind of anesthesia he gave his patients and so forth.
Mr. Sokolow: --Then I believe the essential nature of the rest of those functions would still entitle him to a home office deduction.
Unknown Speaker: I suppose you would have a better case if your client were an internist and saw patients in his home?
Mr. Sokolow: If he saw patients in his home, Your Honor, there is a separate section of 280A that would automatically entitle him to the deduction.
It wouldn't have to be defined as his principal place of business.
Unknown Speaker: I gather from your response to Justice Stevens that you think the phrase the principal place of business should be understood simply to mean an essential place of business?
Isn't that essentially what you're urging upon us?
Mr. Sokolow: An essential place of business is one of the three parts of the Soliman test, so that would be one factor that would have to be considered.
Unknown Speaker: What are the others?
Mr. Sokolow: Excuse me?
Unknown Speaker: What is necessary in addition to that?
Mr. Sokolow: In addition to that it needs to be essential--
Unknown Speaker: I said that, an essential place of business.
What in addition to that?
Mr. Sokolow: --You need to spend a substantial amount of time there.
Unknown Speaker: Okay.
Mr. Sokolow: And there has to be no other location available to perform the office functions of the business.
Unknown Speaker: Where do you get the requirement of no other available place?
Mr. Sokolow: These are from the court's ruling.
That's the three part test that they developed.
Unknown Speaker: But what does that have to do with principal place of business?
Suppose the hospital does offer the doctor a full office facility but he never uses it?
Same facts as this except that he could use an office in the hospital.
That would change the case in your view?
Mr. Sokolow: Yes, it would.
Unknown Speaker: On what theory?
Mr. Sokolow: The theory is the intent of Congress in enacting the statute.
They did not want people deducting expenses for the use of their home unless they absolutely had to have a home office there.
Unknown Speaker: Well, suppose he has his brother who has a free office that's not being used right next to him?
Does he lose his principal place of business deduction?
I just don't understand the rationale for that.
Mr. Sokolow: In that circumstance if his brother had an office that he could have used to do all his functions for his business, yes, he would lose the deduction.
Unknown Speaker: So it's really a two part test.
I mean the third part of your three part test is really just essential.
I mean we say an essential place of business, it means that there's no other place he could have used.
That's what essential means.
So it's two parts.
It has to be an essential place of business, and number two he has to spend a substantial amount of time there.
Is that right?
Mr. Sokolow: Well, I wouldn't define essential as there's no other place.
Unknown Speaker: Well what does it mean then?
Mr. Sokolow: The lower court described it as essential to the nature of the functions performed there, that the office was essential to his business.
If he did not perform his administrative functions he could not continue in business.
Unknown Speaker: I see.
The functions performed there have to be essential.
Mr. Sokolow: That's correct.
Unknown Speaker: Okay.
But then it also has to be exclusively used for the business purpose too, doesn't it?
Mr. Sokolow: That's correct.
The Soliman test is entirely consistent with congressional intent.
It will allow a home office deduction in only limited and specified circumstances.
As a result it continues to prevent the abuses which occurred prior to the enactment of the statute.
These abuses resulted from the tax court's use of the appropriate and helpful standard to determine whether or not a taxpayer was entitled to claim a home office deduction.
That standard permitted a typical 9 to 5 employee to place a typewriter in his den, call it an office, and deduct part of his monthly rent and utility bills.
The Soliman test is not a reaffirmation of the appropriate and helpful standard.
It is much stricter than that standard because it requires a finding that the home office is essential to the taxpayer's business.
In addition the Soliman test incorporates the requirements of Section 280A that the office be used exclusively and regularly for business purposes and that an employee will be entitled to a home office deduction only if the office is used, is maintained for the convenience of his employer.
These crucial requirements were not a part of the appropriate and helpful standard.
The Soliman test is also a more logical and rational approach than the comparative analysis now proposed by the Commissioner.
In establishing the Soliman test the tax court acknowledged that the amount of time spent in the home office was one of several important factors to consider.
Unknown Speaker: --Suppose a taxpayer spends 10 percent of his time in the home.
Is that substantial, do you think, 10 percent of his working time there?
Mr. Sokolow: I believe, Justice Scalia, that's a determination that's going to have to be made by the fact finders.
Unknown Speaker: Whether he spent 10 percent, I suppose, but what do you consider substantial?
Mr. Sokolow: --Dr. Soliman spent 30 percent of his time in his home office.
I consider that substantial.
Unknown Speaker: All right.
30 percent is substantial.
And if someone spends 30 percent of his time in that home office that becomes, within the meaning of the statute, his principal place of business?
Mr. Sokolow: If that office is essential to his business and he has no other location available to perform those functions--
Unknown Speaker: It becomes his principal place of business?
Mr. Sokolow: --For purposes of a home office deduction, correct.
Unknown Speaker: That's just such a strange use of language.
I just don't know how you can leap to that.
It does say the principal place of business, the principal place of business for any trade or business of the taxpayer.
Mr. Sokolow: I understand conceptually principal we automatically want to say which is more important, but I think it's important to look at what Congress was trying to accomplish with this statute.
Unknown Speaker: But where better to look than at the words it actually adopted, which was the word principal?
Mr. Sokolow: That's correct, but I believe that the test developed by the court in this case will accomplish the intent of Congress.
Unknown Speaker: Maybe it will, but, you know, Congress cannot write a bad statute, right?
I mean Congress cannot possibly write a statute that somehow fails to accomplish its intent because if it does we will rewrite it for them?
Is that the theory of law that you're arguing on us?
I mean maybe they did intend what you're now telling us, but the question is whether they enacted what you're now telling us.
And what they enacted is the principal place of business.
Mr. Sokolow: Justice Scalia, they enacted that phrase but they gave us no clue of what they intended that specific phrase to mean.
All that the tax court has now done is set up a test that will determine whether or not a taxpayer's home office is a principal place of business.
We're not telling Congress that they were right or wrong.
The court is just saying this is now going to be, this is now the test to interpret that phrase.
Unknown Speaker: But we have to decide here whether the test that the tax court adopted is actually consistent with the phrase principal.
You agree with that?
Mr. Sokolow: Yes, I do.
Unknown Speaker: And you think it is?
Mr. Sokolow: Yes, I believe it is.
The Commissioner also contends that the relative importance of the functions performed at the various business locations must be compared to determine whether a taxpayer's home office is his principal place of business.
The tax court, however, rejected this comparison of functions in favor of a more appropriate test.
Rather than require a finding that a home office is more important than another business location the Soliman test requires that the office be essential to the taxpayer's business.
There is no higher standard than essential.
It is defined as something indispensable.
This requirement of the Soliman test makes a comparison of functions meaningless.
Once it has been determined that a home office is essential to the taxpayer's business it simply cannot be less important than another business location.
In his efforts to reverse this case the Commissioner has repeatedly overstated the impact of the Soliman test.
He contends that the Soliman test will vastly expand the class of taxpayers entitled to claim home office deductions.
There is simply no merit to that contention.
This class will be expanded to include only a select group of taxpayers who are being unjustly denied home office deductions under the focal point test.
These taxpayers must be engaged in businesses which require essential organizational and management functions which are distinct from the services provided to their customers.
They must spend a substantial amount of time on these administrative functions and they must have no other location available to perform these functions of their business.
The impact of the Soliman test will be substantially less than professed by the Commissioner.
The Commissioner also contends that teachers who grade papers at home will be entitled to claim a home office deduction merely because they lack after hours access to their school.
On the contrary, both the Soliman test and the specific language of Section 280A will deny home office deductions to these teachers for three reasons.
First, they are provided with fully adequate offices on the job site.
Second, they take work home with them merely because it is more convenient to do so.
Maintaining a home office is not essential to their business.
And third, as employees of their school systems teachers will be entitled to claim a home office deduction only if the office is required as a condition of their employment.
Few if any school systems have such a requirement.
The Soliman test is a realistic recognition of the way a modern business is conducted.
It recognizes that businessmen such as Dr. Soliman often need to perform essential administrative functions for the continued maintenance and growth of their business.
If no location is provided to perform these administrative functions they are entirely justified in establishing an office in their home.
There is simply no basis to conclude that Congress would have objected to the deduction of a home office expense by a taxpayer such as Dr. Soliman.
Unknown Speaker: Mr. Sokolow, one of the provisions of 280A(c)(1) is that it doesn't have to be the principal place of business but it is sufficient if it is a place of business when what occurs there is that the office is used by patients, clients, or customers in meeting or dealing with the taxpayer.
Doesn't that suggest that, although perhaps you can't have a rigid point of sale or point of performance of services test, nonetheless the point of sale or the point of performing the services is of enormous importance to Congress, if you're talking about congressional intent?
What this statute says is even if it's not your principal place of business, if it's a place of business where you're selling the goods or performing the services we'll allow a deduction for that.
So doesn't that suggest that what counsel for the Government was saying has some truth in it, that it isn't just adding up time, that what's very significant in following congressional intent is where the services are provided or where the goods are sold?
Mr. Sokolow: Justice Scalia, I would agree with counsel for the Commissioner that where those services are provided should not be the exclusive test, that management function should be considered.
I think the exception for a place of business for meeting of clients recognized that doctors and professional people of that nature who maintain those offices often had an office in their home just to meet with clients and a separate office where they did their administrative work, and that was not causing a problem.
I think it's important to focus on what was causing the problem, and it was not independent contractors such as Dr. Soliman.
It was not psychiatrists who treated patients in their home and had a separate office.
It was employees who were taking these deductions merely for their personal convenience.
We urge the Court to affirm this decision, not just to uphold the validity of the deduction taken by Dr. Soliman but more importantly to allow small businessmen living in jurisdictions other than the Fourth Circuit the home office deductions which are being denied to them by the Commissioner in his use of the focal point test.
Unknown Speaker: Thank you, Mr. Sokolow.
Mr. Jones, you have 4 minutes remaining.
Rebuttal of Kent L. Jones
Mr. Jones: The fact that an office is essential to a business cannot satisfy the requirement that the office be the principal place of business.
An office is essential to almost any business.
As we know from the Baie case, even a hot dog stand may require an office for paperwork.
Saying that an office is essential to the business is simply another way of saying that it's an ordinary and necessary, appropriate and helpful business expense.
As Chief Judge Nims said in his dissent in this case, the standard adopted by the court of appeals, by the majority, simply resurrects the broad standard that Congress expressly rejected in enacting Section 280A.
Unknown Speaker: I suppose if this doctor had a lot of things in his car like, you know, a computer and a filing cabinet and things like that he could deduct it, just like as if he rented an office.
Mr. Jones: That sounds like it may be correct.
I wouldn't want to state on behalf of the Commissioner a definite answer to that hypothetical.
But the point that you're making is the same one that I discussed with Justice Blackmun, expenses that are ordinary and necessary to the business that are not involved in use of the home are deductible as an ordinary matter.
But Congress required a much higher standard, did it for the very purpose of restricting home office deductions, and the standard that the court of appeals adopted simply is not faithful to the language that Congress used.
Unknown Speaker: You haven't commented on the proposed regulation.
Is there anything you'd like to... that tends to cut against you, don't you think?
Mr. Jones: Justice Stevens, the proposed regulation says exactly what we think is right, but then it says something in addition.
It says you look to the time and the importance of the activities at each location, and then it has a sentence at the end that was made much of below.
And the sentence at the end says that a traveling salesman who spends a lot of his time on the road and engages in substantial activities at home may qualify for a deduction.
That has been the Commissioner's position since 1966.
We're not, we don't reject that position now.
We think that it is possible for a fact finder in that situation to conclude that if he spends 40 percent of his time or 30 percent of his time in his house doing important paperwork for his sales work and the rest of his 60 percent of the time is spread among 100 different locations--
Unknown Speaker: That can be the principal place of business--
Mr. Jones: --It could be.
Unknown Speaker: --within the meaning of the statute.
Mr. Jones: That's right.
Looking at the time and the importance of the functions performed at each location we don't think the statute itself provides the answer.
Unknown Speaker: Does the proposed regulation stay a proposed regulation forever?
It has been proposed for quite a while, hasn't it?
Mr. Jones: It has been proposed for 12 years.
Of course the statute has been amended twice since then and the courts have generated different points of view--
Unknown Speaker: How do you get rid of a proposed regulation?
Can you ignore it?
Mr. Jones: --We get rid of it by withdrawing it, and it may be that it will be withdrawn.
Certainly it cannot be adopted in its current form because this statute has twice been amended and many of its details don't relate to--
Unknown Speaker: So in effect it really isn't a proposed regulation anymore?
Mr. Jones: --It was a proposed regulation.
Unknown Speaker: It was.
Mr. Jones: Right.
We don't... one of the reasons I haven't emphasized it is because it doesn't seem that in good faith we can rely on a 12-year-old proposed regulation.
Unknown Speaker: Well, and also the definition of principal place of business in the regulation is a little bit different from your position with regard to the statutory language, I think.
Mr. Jones: It gives a little bit more emphasis to the place where income is generated.
Unknown Speaker: It's not quite as literal, at least as Justice Scalia would read the statute in his questions.
Mr. Jones: I think that there's room under the statute to agree with exactly what the regulation says, but I don't think that the regulation, by emphasizing slightly more where the income is generated, really adds that much to the fundamental inquiry of where is the most important place in the business.
That's going to, different industries are going to have different reactions to where, is it important where they sell the goods or where they make them.
Chief Justice Rehnquist: Thank you, Mr. Jones.
The case is submitted.
Argument of Speaker
Mr. Jones: The opinion of the Court No 91-998, Commission of internal revenue versus Soliman will be on announce by Justice Kennedy.
Argument of Justice Kennedy
Mr. Kennedy: This case requires us to consider the circumstances in which a taxpayer may claim a deduction on his federal income tax return for the expense of an office, that is located within the taxpayer's personal residence.
The case involves a medical doctor, who sought a deduction for a home office and the respondent, a doctor Solimon is an anesthesiologist.
During the tax year in question, which was 1983, he practice his profession in Maryland and Virginia, he spent 30 to 35 hours a week with patient at hospital and divided that time among three different hospitals.
At the hospitals the doctor administered the anesthesia, he cared for the patients after the surgery, and he treated the patients with pain.
Soliman lived in the condominium in the McLean, Virginia, the condominium contain the spare bedroom, which he used exclusively as an office.
He did not meet patients there.
He did spend two to three hours a day in the home office on a variety of tasks; such as contacting patients, surgeons, and hospitals by telephone, maintaining billing records and patients logs and preparing for treatments and presentations and satisfying continuing medical education requirements and reading medical journals and books.
On his 1983 income tax returns, Soliman claimed deductions that the portion of the condominium fees, utilities, and deppreciation attributable to the home office.
On audio, the Commissioner disallowed the deductions based upon his determination that his home office was not Soliman's principal place of business within the meaning of the Internal Revenue Code, and its the phrase "principal place of business" that must be construed to determinee this case.
Soliman petitioned the Tax Court for review, which ruled that the home office was Soliman's principal place of business.
On appeal, the Court of Appeals for the Fourth Circuit affirmed in a decision for a devided panel.
It adopted the test used by the Tax Court, and that test suggested that the presence of three factors must be given heavy weight in favor of finding that the home office is the principal place of business.
One that the home office is essential to the taxpayer's business; two that he spends a substantial amount of time there; and three that there is no other location available for the performance of the office functions of the business.
We granted certiorari and in an opinion filed with the Clerk, we reverse.
Contrary at the Court of Appeals suggestion the statute does not allow for deduction, whenever a home office maybe characterizes as legitimate in deciding whether a location is the principal place of business, a common sense mean of principle suggests that comparison of locations must be undertaken.
In determining the proper test for deciding whether a home office is the principal place of business, we cannot develop an objective formula that yields a clear answer in every 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.
As, part of this analysis the point where goods and services are delivered must be given great weight in determining the place where the most important functions are performed.
The practice of anesthesiology requires the medical doctor to treat patients under conditions demanding immediate personal observation, so exacting with these requirements that all of the respondent's patients were treated at hospitals, facilities with special characteristics designed to accommodate the demands of the profession.
Actual treatment was the essence of the professional service.
We consume that careful planning and study were required in advance of performing the treatment and all acknowledged that this was done on the home office, but the actual treatment was the most significant event in the professional transaction.
The comparison of the time spent by the taxpayer further supports the determination that the home office was not the principal place of business.
10-15 hours per weeks spent in the home office measured against the 30-35 hours per week at the three hospitals are insufficient to render the home office the principal place of business in light of the circumstances of this case.
That the office may have been essential is not controlling.
Hence, the taxpayer was not entitled the deduction for home expenses.
Justice Blackmun has filed a concurring opinion; Justice Thomas has filed an opinion concurring in the judgment in which Justice Scalia joins; Justice Stevens has filed a dissenting opinion.