Tax Court: Accountant Cannot Deduct Bathroom as Home Office

Bulas v. Commissioner, T.C. Memo. 2011-201 (Aug. 17, 2011):

Petitioner has a master’s degree in accounting from Florida International University. He worked for the Internal Revenue Service for 7 years, working as a tax technician, revenue agent, Appeals auditor, and Appeals officer. In 1985 petitioner started the accounting business he continues to operate today. This business provides tax return preparation services and has helped prepare approximately 180-220 returns per year.

Petitioner has two daughters. In 2007 his daughters were 17 and 20 years old, respectively. His older daughter was a fulltime student at Rutgers University from September 1, 2005, through May 9, 2007. His younger daughter was a high school student in 2007. Petitioner’s daughters provided administrative assistance in his accounting business, but the business did not issue either a Form W-2, Wage and Tax Statement, or a Form 1099- MISC, Miscellaneous Income, to report any wages to either daughter. Petitioner paid his daughters’ credit card bills....

Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes. ...

Petitioner argues that both his daughters were paid wages for administrative work performed for his accounting business in 2007. However, neither daughter was issued a paycheck, Form 1099-MISC, or Form W-2. Further, neither had tax withheld. Petitioner testified that he paid his daughters for their work by paying their credit card bills but has not provided any evidence to substantiate amounts paid. Accordingly, we sustain respondent’s determinations with respect to the wages paid to petitioner’s daughters.

(Hat Tip: Bob Kamman.)